Form S-4
Table of Contents

As filed with the Securities and Exchange Commission on June 21, 2005.

Registration No. 333-          


SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


 

MAGNACHIP SEMICONDUCTOR S.A.

(Exact name of Registrants as specified in their charter)

 

Luxembourg   3674   Not Applicable

(State or Other Jurisdiction

of Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

10, rue de Vianden

L-2680 Luxembourg

Grand Duchy of Luxembourg

(352) 45-62-62

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 


 

MAGNACHIP SEMICONDUCTOR FINANCE COMPANY

 

Delaware   3674   84-1664144

(State or Other Jurisdiction

of Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 


 

c/o MagnaChip Semiconductor S.A.

10, rue de Vianden

L-2680 Luxembourg

Grand Duchy of Luxembourg

(352) 45-62-62

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 


 

John T. McFarland, Esq.

Vice President and General Counsel

MagnaChip Semiconductor, Ltd.

1 Hyangjeong-dong, Hungduk-gu

Cheongju-si 361-725

Korea

82-2-3459-3691

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 


 

See Table of Additional Registrants Below

 


 

Copies to:

Sang H. Park, Esq.

Eric S. Siegel, Esq.

Dechert LLP

30 Rockefeller Plaza

New York, NY 10112

(212) 698-3500

 


 

Approximate Date Of Commencement Of Proposed Sale to The Public:    As soon as practicable after this Registration Statement becomes effective.

 

If the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨                     

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨                     

 

CALCULATION OF REGISTRATION FEE


Title Of Each Class Of Securities To Be Registered   

Amount

To Be

Registered

  

Proposed Maximum
Offering Price

Per Note

    Proposed Maximum
Aggregate
Offering Price(1)
   Amount Of
Registration Fee
 

Floating Rate Second Priority Senior Secured Notes due 2011

   $ 300,000,000    100 %   $ 300,000,000    $ 35,310.00  

6 7/8% Second Priority Senior Secured Notes due 2011

   $ 200,000,000    100 %   $ 200,000,000    $ 23,540.00  

8% Senior Subordinated Notes due 2014

   $ 250,000,000    100 %   $ 250,000,000    $ 29,425.00  

Total

   $ 750,000,000    100 %   $ 750,000,000    $ 88,275.00  

Guarantees

   $ 750,000,000    —         —        (2 )

(1) Estimated pursuant to Rule 457(f) under the Securities Act of 1933, as amended, solely for the purpose of calculating the registration fee.
(2) Pursuant to Rule 457(n) under the Securities Act of 1933, no registration fee is required with respect to the Guarantees.

 


 

The registrants hereby amend this registration statement on such date or dates as may be necessary to delay its effective date until the registrants shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.



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Table of Additional Registrants

 

Exact Name of Additional Registrants


  

Jurisdiction of

Incorporation


  

I.R.S. Employer

Identification Number


MagnaChip Semiconductor LLC

   Delaware    83-0406195

MagnaChip Semiconductor B.V.

   The Netherlands    Not Applicable

MagnaChip Semiconductor, Ltd.

   Korea    Not Applicable

MagnaChip Semiconductor, Inc.

   Delaware    06-1732193

MagnaChip Semiconductor SA Holdings LLC

   Delaware    Not Applicable

MagnaChip Semiconductor Ltd.

   United Kingdom    98-0439386

MagnaChip Semiconductor Ltd.

   Taiwan    98-0439388

MagnaChip Semiconductor Ltd.

   Hong Kong    98-0439389

MagnaChip Semiconductor Inc.

   Japan    Not Applicable

ISRON Corporation

   Japan    Not Applicable

IC Media Corporation

   California    77-0478632

IC Media International Corporation

   Cayman Islands    Not Applicable

IC Media Holding Company Limited

   British Virgin Islands    Not Applicable

IC Media Technology Corporation

   Taiwan    Not Applicable

IC Media International Corporation, Taiwan Branch

   Taiwan    Not Applicable

 

The principal executive office address for each of the additional registrants is c/o MagnaChip Semiconductor S.A., 10, rue de Vianden, L-2680 Luxembourg, Grand Duchy of Luxembourg, telephone (352) 45-62-62. The primary industrial classifications number for each of the additional registrants is 3674.


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JUNE 21, 2005

 

PROSPECTUS

 

LOGO

 

MagnaChip Semiconductor S.A. MagnaChip Semiconductor Finance Company

 

OFFER TO EXCHANGE

 

$300,000,000 Floating Rate Second Priority Senior Secured Notes due 2011 and related Guarantees for all

outstanding Floating Rate Second Priority Senior Secured Notes due 2011 and related Guarantees

 

$200,000,000 6 7/8% Second Priority Senior Secured Notes due 2011 and related Guarantees for all

outstanding 6 7/8% Second Priority Senior Secured Notes due 2011 and related Guarantees

 

$250,000,000 8% Senior Subordinated Notes due 2014 and related Guarantees for all

outstanding 8% Senior Subordinated Notes due 2014 and related Guarantees

 


 

We are offering, upon the terms and subject to the conditions set forth in this prospectus and the accompanying letter of transmittal, to exchange up to $300,000,000 aggregate principal amount of our new Floating Rate Second Priority Senior Secured Notes due 2011 that we have registered under the Securities Act of 1933 for an equal principal amount of our outstanding Floating Rate Second Priority Senior Secured Notes due 2011, up to $200,000,000 aggregate principal amount of our new 6 7/8% Second Priority Senior Secured Notes due 2011 that we have registered under the Securities Act for an equal principal amount of our outstanding 6 7/8% Second Priority Senior Secured Notes due 2011 and up to $250,000,000 aggregate principal amount of our new 8% Senior Subordinated Notes due 2014 that we have registered under the Securities Act for an equal principal amount of our outstanding 8% Senior Subordinated Notes due 2014. We refer to the new notes you will receive in this exchange offer collectively as the “new notes,” and we refer to the old notes you will tender in this exchange offer collectively as the “old notes.” The new notes will represent the same debt as the corresponding old notes, and we will issue the new notes under the same applicable indenture.

 

The exchange offer expires at 5:00 p.m., New York City time, on                     , 2005, unless extended.

 

Terms of the Exchange Offer

 

    We will exchange all old notes that are validly tendered and not validly withdrawn prior to the expiration of the exchange offer.

 

    You may withdraw tendered old notes at any time prior to the expiration of the exchange offer.

 

    You are required to make the representations described on page 94 to us.

 

    The terms of the new notes are identical in all material respects (including principal amount, interest rate, maturity and redemption rights) to the old notes for which they may be exchanged, except that the new notes generally will not be subject to transfer restrictions or be entitled to registration rights and the new notes will not contain provisions relating to increased interest rates under circumstances related to our registration obligations. The terms of the exchange offer are more fully described in this prospectus.

 

    We will not receive any cash proceeds from the exchange offer.

 

    There is no existing market for the new notes to be issued, and we do not intend to apply for their listing or quotation on any securities exchange or market.

 

See “ Risk Factors” beginning on page 22 for a discussion of risks that should be considered by holders prior to tendering their old notes.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 


 

The date of this prospectus is                     , 2005.


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TABLE OF CONTENTS

 

     Page

Summary

   1

Risk factors

   22

Use of proceeds

   37

Capitalization

   38

Unaudited pro forma consolidated statements of operations

   39

Selected financial and other data

   45

Management’s discussion and analysis of financial condition and results of operations

   47

Industry overview

   60

Business

   62

Management

   72

Security ownership of certain beneficial owners and management

   82

Certain relationships and related transactions

   84

Description of the units

   86

Description of other obligations

   88

Exchange offer

   90

Description of the new second priority notes

   99

Description of the new senior subordinated notes

   163

Book-entry, delivery and form

   209

Certain tax considerations

   213

Plan of distribution

   218

Legal matters

   220

Experts

   220

Where you can find more information

   220

Index to financial statements

   F-1

Glossary of selected terms

   G-1

 

You should rely only on the information contained in this document and any supplement or to which we have referred you. See “Where you can find more information.” We have not authorized anyone to provide you with information that is different. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted, where the person making the offer is not qualified to do so, or to any person who cannot legally be offered the securities. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus or any supplement.

 

Each broker-dealer that receives new notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of new notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act of 1933, as amended, which we refer to as the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new notes received in exchange for old notes where the old notes were acquired by the broker-dealer as a result of market-making activities or other trading activities. We have agreed that, for a period of 180 days after the consummation of the exchange offer, we will make this prospectus available to any broker-dealer for use in connection with any such resale. See “Plan of distribution.”

 

This prospectus incorporates important business and financial information that is not included in or delivered with this document. This information is available without charge upon written or oral request.

 

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See “Where you can find more information.” To obtain this information in a timely fashion, you must request such information no later than five business days before                     , 2005, which is the date on which the exchange offer expires (unless we extend the exchange offer as described herein). See “Exchange offer—Expiration of the Exchange Offer; Extensions; Amendments.”

 

INDUSTRY AND MARKET DATA

 

In this prospectus, we rely on and refer to information regarding the semiconductor market from Gartner, the Semiconductor Industry Association, iSuppli and other third party sources. All semiconductor market data attributed to Gartner are from “Electronic Equipment Production and Semiconductor Consumption Forecast, Worldwide 2000-2008” report published January 7, 2005 and “Semiconductor Consumption Forecast by Device, Worldwide 2000-2008” report published December 7, 2004, except for the camera-equipped mobile handset market data which are from “Market Focus: Camera Phones, Worldwide, 2002-2008” report published October 20, 2004. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of the information and have not independently verified it. As a result, you should be aware that market and other similar data set forth herein, and estimates and beliefs based on such data, may not be reliable. We do not have any obligation to announce or otherwise make publicly available updates or revisions to these forecasts. In many cases, we have made statements in this prospectus regarding our industry and our position in the industry based on our experience in the industry and our own investigation of market conditions. We cannot assure you that any of these assumptions are accurate or that our assumptions correctly reflect our position in our industry.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus includes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements represent expectations or beliefs of ours concerning future events, and no assurance can be given that the results described in this prospectus will be achieved. These forward-looking statements can generally be identified by the use of statements that include words such as “estimate,” “project,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “may,” “will,” “should” or other similar words or phrases. All forward-looking statements are based upon information available to us on the date of this prospectus.

 

These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of our control, that could cause actual results to differ materially from the results discussed in the forward-looking statements, including, among other things, the matters discussed in this prospectus in the sections captioned: “Summary,” “Risk factors” and “Management’s discussion and analysis of financial condition and results of operations.” Such factors may include:

 

    general economic, business and political conditions;

 

    industry trends;

 

    restrictions contained in our debt agreements;

 

    increased competition in the markets in which we operate;

 

    changes in business strategy, development plans or cost savings initiatives;

 

    availability, terms and deployment of capital;

 

    our potential need for additional capital or the need for refinancing existing indebtedness;

 

    our limited operating history as an independent company;

 

    our dependence on certain services which we obtain from third parties;

 

    demand for products requiring our proprietary technologies and know-how;

 

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    our ability to protect our existing technologies, intellectual property and process know-how;

 

    changes or advances in technology;

 

    our ability to control costs;

 

    our ability to attract and retain skilled personnel;

 

    legal and regulatory proceedings and developments;

 

    our ability to successfully execute our business model;

 

    our ability to compete successfully against competitors;

 

    our leverage, including our ability to generate the necessary amount of cash to service our existing debt and the potential incurrence of additional indebtedness in the future;

 

    increases in our cost structure arising from our operation as an independent company;

 

    other risks associated with our structure, the notes and our indebtedness; and

 

    other factors over which we have limited or no control.

 

There may be other factors that could cause our actual results to differ materially from the results referred to in the forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this prospectus and are expressly qualified in their entirety by the cautionary statements included in this prospectus. We undertake no obligation to publicly update or revise forward-looking statements to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

 


 

“MagnaChip” is our trademark and trade name. All other trademarks, trade names, and service marks appearing in this prospectus are the property of their respective owners.

 


 

 

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Summary

 

This summary highlights selected information from this prospectus. The following summary is qualified in its entirety by the information contained elsewhere in this prospectus. This summary is not complete and may not contain all of the information that you should consider before exchanging your old notes for new notes. You should read the entire prospectus carefully, including the “Risk factors” section.

 

In this prospectus, unless the context otherwise requires:

 

    “MagnaChip,” “we,” “us” and “our” refers to MagnaChip Semiconductor LLC, the parent company of our consolidated group, MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, the co-issuers of the notes, their respective subsidiaries on a consolidated basis and our predecessor operations;

 

    “MagnaChip LLC” refers to MagnaChip Semiconductor LLC, the parent company of our consolidated group;

 

    “MagnaChip Korea” refers to MagnaChip Semiconductor, Ltd., our principal manufacturing subsidiary;

 

Our business was acquired by Citigroup Venture Capital Equity Partners, L.P., or CVC, Francisco Partners, L.P., or Francisco Partners, and funds advised by CVC Asia Pacific Limited, or CVC Asia Pacific, along with certain members of management and other investors, on October 6, 2004. Prior to that time, our business operated as the System IC division within Hynix Semiconductor Inc., or Hynix. Accordingly, the historical financial statements and summaries appearing in this prospectus have been derived from the audited consolidated financial statements of Hynix reflecting the System IC division on a carved-out basis.

 

We refer to CVC, Francisco Partners, CVC Asia Pacific and our other equity investors, collectively, as the “equity sponsors.” CVC and Asia Investors LLC, one of our equity sponsors advised by CVC Asia Pacific Limited, are affiliates of Citigroup Global Markets Inc., one of the initial purchasers of the notes, and of Citicorp North America, Inc., a lender under our senior secured credit facility.

 

For explanations of certain technical terms relating to our business described in this prospectus, see “Glossary of selected terms” which appears at page G-1.

 

OUR COMPANY

 

We are a leading designer, developer and manufacturer of mixed-signal and digital multimedia semiconductors addressing the convergence of consumer electronics and communications devices. We focus on CMOS image sensors and flat panel display drivers which are complex, high-performance mixed-signal semiconductors that capture images and enable and enhance the features and capabilities of both small and large flat panel displays. Our solutions are used in a wide variety of consumer and commercial mass market applications, such as mobile handsets, including camera-equipped mobile handsets, flat panel monitors and televisions, consumer home and mobile displays, portable and desktop computer displays, handheld gaming devices, personal digital assistants, or PDAs, and audio-visual equipment such as DVD players.

 

We serve consumer markets that we believe will have higher growth rates than that of the overall semiconductor industry.

 

We manufacture our products using our proprietary process technology, which we believe provides our products with significant feature and cost advantages over those of our competitors. We have approximately 12,500 registered and pending patents, which we believe is one of the largest patent portfolios in the

 

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semiconductor industry. Our proprietary CMOS image sensor technology provides brighter, sharper, more colorful picture quality in image-capture applications such as camera-equipped mobile handsets and fingerprint sensors. Our proprietary flat panel display drivers enable our customers to deliver higher image quality, thinner and more power-efficient small panel displays for use in mobile handsets, handheld gaming devices and PDAs and large panel displays for use in portable and desktop computer monitors and televisions. We are also a leading provider of specialty foundry services whereby we leverage our specialized process technologies and low cost manufacturing facilities to produce semiconductors for third parties using their product designs. In addition, we provide application processors that have been designed into a wide variety of products in consumer applications such as remote control devices, home appliances and consumer electronics.

 

We own and operate five wafer fabrication facilities, or fabs, which have a combined production capacity of over 115,000 eight-inch equivalent wafers per month. Our fabs provide us with large-scale, cost-effective and flexible capacity, enabling us to rapidly scale to high volume to meet shifts in demand by our end customers. Our fabs also provide us with the ability to further develop our differentiated process technologies for our own product development and manufacturing. The location of our manufacturing sites and research and development resources in Korea and Japan provide close geographical proximity to many of our largest Asia-based customers and to the core of the worldwide consumer electronics supply chain.

 

We sell our solutions to leading original equipment manufacturers, or OEMs, which include major branded customers as well as contract manufacturers. Our CMOS image sensors are currently designed into products offered by leading global mobile handset manufacturers. Our flat panel display drivers are currently incorporated into products offered by LG.Philips LCD and Samsung, the top two flat panel display manufacturers.

 

During the year ended December 31, 2004, we sold over 1,500 products to more than 200 customers. During the nine-month period ended September 30, 2004 and the three-month period ended December 31, 2004, we generated actual net sales of $841.6 million and $243.6 million, respectively, or $1.1 billion on an aggregate basis, and during the year ended December 31, 2004, we generated pro forma net sales of $1.0 billion. We generated actual net sales of $213.4 million for the three-month period ended April 3, 2005.

 

We operate in several distinct, but increasingly converging, end markets. Our CMOS image sensors primarily target the worldwide market for camera-equipped mobile handsets, as well as other image-capture markets such as the fingerprint sensor and surveillance camera markets. Our flat panel display drivers broadly address the worldwide flat panel display market, including displays for mobile handsets, flat panel televisions, portable and desktop computers and multiple types of other handheld consumer devices. Our wafer manufacturing facilities serve our own internal needs and allow us to provide specialty foundry services to the worldwide specialty outsourced semiconductor foundry market. Our application processors address a large number of diverse consumer end markets.

 

In recent years, consumer electronics manufacturers have enhanced image capturing and display capabilities to differentiate their products in the market and we believe this trend will continue. We believe our portfolio of products is positioned to address their needs and target these growing consumer electronics markets. We provide products and services in the following four principal areas:

 

   

CMOS image sensors. Our CMOS image sensors are used in image-capture applications such as camera-equipped mobile handsets, personal computer cameras, fingerprint sensors and surveillance cameras. Our highly integrated image sensors are designed to be cost-effective and to provide brighter, sharper, more colorful, and thus enhanced, image quality. We believe that the large OEMs who dominate the mobile handset industry are moving toward vertically integrated imaging suppliers for assurance of supply and the consistency that comes from process control and ownership. Our ability to leverage our large internal manufacturing capacity is a key advantage to meeting the needs of these customers, which, when coupled with our image quality, lower power consumption and ability to

 

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integrate our solutions into our customers’ modules and end systems, has helped us gain a leadership position for our VGA products. We believe these same advantages will allow us to form similar leadership positions for our megapixel products in the future. The CMOS image sensor market is primarily driven by sales of camera-equipped mobile handsets. According to Gartner, sales of camera equipped mobile handsets are predicted to grow from 158.9 million units in 2004 to 524.9 million units in 2008. This represents a compound annual growth rate of 34.9%. The CMOS image sensor market is expected to grow from $2.4 billion in 2004 to $5.1 billion in 2008, according to Gartner. This represents a compound annual growth rate of 20.2%.

 

    Flat panel display drivers. Our flat panel display drivers are used in several major types of large and small flat panel displays, including TFT-LCD, Color STN and OLED displays. Our flat panel display driver solutions are used in applications such as mobile handsets, flat panel televisions, portable and desktop computer displays, handheld gaming devices and PDAs. We produce highly integrated flat panel display driver solutions and have pioneered developments in the design and manufacturing of display drivers and embedded memory. We believe that our customers choose our flat panel display drivers for their superior performance in shaping image signals and transmitting those signals to flat panel displays. These superior technical features result in sharper, higher-quality, and brighter colored images in our customers’ end products. Furthermore, we focus on easy integration as a key feature of our product designs for our customers, which we believe is an advantage for them and is a key basis for our selection as a supplier versus competing solutions. According to Gartner, the LCD driver market is anticipated to grow from approximately $6.9 billion in 2004 to $10.0 billion in 2008. This represents a compound annual growth rate of 9.9%. Total flat panel display market unit shipments are projected to grow from 3.1 billion units in 2003 to 7.5 billion units in 2008, according to Frost and Sullivan. This represents a compound annual growth rate of 19.2%.

 

    Specialty foundry services. We use our process technology and manufacturing facilities to manufacture semiconductor wafers for third parties based on their designs. Our five fabs have a combined capacity of over 115,000 eight-inch equivalent wafers per month and are located in Cheongju and Gumi, Korea. We provide unique, advanced and stable process technologies offering high yields and focused on high voltage, analog power and embedded memory applications. We believe that our customers select us for foundry services based on our expertise in these advanced semiconductor manufacturing applications and processes. Our fabs provide us with large scale, cost-effective and flexible capacity enabling us to rapidly scale to high volume to meet shifts in demand by our end customers. According to iSuppli, the worldwide foundry service market is projected to grow from $21.3 billion in 2004 to $40.0 billion in 2009. This represents a compound annual growth rate of 13.4%.

 

    Application processors. Our application processors, which are also referred to as microcontrollers, are designed into a broad range of consumer applications, such as remote control devices, home appliances and consumer electronics. Our application processors are designed for applications requiring programmability, high performance, low-power and cost-effectiveness. The microcontroller market, according to Gartner, is anticipated to grow from $14.5 billion in 2004 to $22.5 billion in 2008. This represents a compound annual growth rate of 11.7%.

 

INDUSTRY OVERVIEW

 

Semiconductors are the key building blocks used to create electronic products and systems. Semiconductors perform a variety of functions, such as processing data, storing information and converting or controlling signals. With advances in technology, the functionality and performance of semiconductors have increased while the size, power requirements and unit costs have decreased. The result of these advances has been to increase the proliferation of electronic content in an increasing array of products, including in a wide variety of consumer mass market products, such as automobiles, mobile handsets, digital cameras and other consumer electronic equipment.

 

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According to the Semiconductor Industry Association, or SIA, the overall semiconductor market grew from $17.9 billion in 1983 to $213.8 billion in 2004, representing a compound annual growth rate of 12.5%. SIA expects that between 2004 and 2007, the overall semiconductor industry will grow from $213.8 billion to $259.4 billion, a compound annual growth rate of 6.7%.

 

We believe that we are focused on products and markets that have the potential to offer growth opportunities greater than those of the overall semiconductor market. According to Gartner, the CMOS image sensor market is forecasted to grow at a compound annual growth rate of 20.2% from 2004 to 2008. The market for LCD drivers is forecasted to grow at a compound annual growth rate of 9.9% from 2004 to 2008, according to Gartner. The foundry services market is forecasted to grow at a compound annual growth rate of 13.4% from 2004 to 2009, according to iSuppli. According to Gartner, the microcontroller market is forecasted to grow at a compound annual growth rate of 11.7% from 2004 to 2008.

 

COMPETITIVE STRENGTHS

 

We believe that our competitive strengths include:

 

    Leading Technology and Intellectual Property. We believe our advanced process technology and portfolio of approximately 12,500 registered and pending patents provide us with key competitive advantages in the following areas:

 

    CMOS image sensors: Our CMOS image sensors feature low-power consumption and currently up to 2.1 megapixel resolution with auto-focus and auto-zoom options; features which provide important benefits to products incorporating our solutions, including increased battery life, enhanced image quality and ease of use.

 

    Flat panel display drivers: We believe that our flat panel display drivers offer superior performance in shaping image signals and transmitting those signals to flat panel displays. These technical features result in sharper, brighter and higher-quality colored images in our customers’ end products. Furthermore, we believe that our flat panel display drivers enable thinner and more power-efficient flat panels that are easily integrated by our customers into their products.

 

    Specialty foundry services: We have developed high voltage, analog power and embedded memory, specialty manufacturing process technologies that enable us to manufacture differentiated, high-performance integrated semiconductor devices. For example, we developed the first high voltage, high-performance CMOS 0.18 µm process, which enables us to manufacture more integrated, and thus smaller and more cost efficient, semiconductor products. We believe that our proprietary process technology allows us to meet a wide variety of the specialty semiconductor manufacturing needs of our customers.

 

    Application processors: We are able to leverage our system knowledge and manufacturing capabilities to provide integrated solutions in adjunct with our image-capture and display driver products. Our application processors are designed to interface with and provide intelligence to consumer electronics devices and systems.

 

    Flexible In-House Manufacturing. Our in-house wafer manufacturing capacity allows us to provide dependable delivery and quality of integrated semiconductor products to our customers. We have the ability to ramp quickly to high volumes to meet the variable needs of our customers. We have significant wafer manufacturing capacity as a result of our former parent’s investments in our wafer fabrication facilities. Because we offer specialty process technologies that do not require expensive investment in leading edge technologies, we are able to keep our capital expenditures relatively low.

 

   

Significant Cost Advantages. We maintain price competitiveness on our products through our low operating cost structure. The Asian location of our primary manufacturing and research and

 

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development facilities provides us with a number of cost advantages relative to operating in other regions in the world. Additionally, we believe that our history of competing in the highly cost-sensitive markets in which we operated when we were a unit of Hynix, required us to refine our manufacturing processes for optimal cost efficiency.

 

    Established Relationships with Key Consumer Electronics OEMs. Asia Pacific is the core of the worldwide consumer electronics supply chain. According to Gartner, sales to Asia Pacific (excluding Japan) accounted for 46.5% of 2004 consumer electronic semiconductor sales. Our long history of operating in Asia and our proximity to leading communications and consumer OEMs including LG.Philips LCD, LG Electronics, Sharp and Samsung, facilitates our close and established customer relationships with leading innovators in the consumer electronics market. We have active local applications and engineering work support programs and collaborate closely with our customers in the design and manufacturing of their products.

 

    Significant Management and Board Expertise. Our management and board of directors have significant previous experience with advanced semiconductor companies both in Asia and worldwide. Our Chief Executive Officer, Dr. Youm Huh, was President of the System IC division of Hynix and has held management positions at Hynix and Hyundai Electronics since 1998. Prior to that, he was a Principal Researcher at Stanford Computer Systems Laboratory and Stanford University’s Center for Integrated Systems and worked at Samsung Electronics. Jerry Baker, our Chairman, has extensive industry experience, including serving as the former Executive Vice President of Global Operations of Fairchild Semiconductor. Our Executive Vice President, Strategic Operations and Chief Financial Officer, Robert Krakauer, was Executive Vice President of Corporate Operations and Chief Financial Officer of ChipPAC, a leading provider of semiconductor packaging, assembly, and test services. In addition, two of our equity sponsors, CVC and Francisco Partners, have a long history of investments in semiconductor companies. We believe that their understanding of semiconductor system solutions, relationships, and credibility with key customers provides us with a key competitive advantage.

 

BUSINESS STRATEGY

 

Our goal is to build upon our position as a leading provider of mixed-signal and digital multimedia semiconductors addressing the convergence of consumer electronics and communications devices. Our business strategy emphasizes the following key elements:

 

    Leverage Our Substantial Intellectual Property. We intend to use our broad patent portfolio and specific end market expertise to deliver system-level products with higher levels of integration and performance to customers in our existing and new markets. In CMOS image sensors, we intend to leverage our strong pixel design and manufacturing expertise to introduce higher resolution, more integrated and cost-effective solutions for camera-equipped mobile handsets and to penetrate emerging applications for image sensors in the automotive, medical and industrial markets over time. In flat panel display drivers, we intend to leverage our broad library of circuit building blocks, our embedded memory capabilities, our understanding of the major flat panel display types and our process technology to continue to reduce time to market and introduce new products that enhance image quality and operate with greater power efficiency. Our manufacturing process expertise and related intellectual property underlies and supports many of the advances in our technology.

 

   

Strengthen Collaboration With Key Customers. We intend to continue strengthening and deepening relationships with our key customers by collaborating on critical design and product development roadmaps. We believe such collaborative relationships will solidify our position with our customers, further our competitive differentiation and accelerate our drive for deeper customer and new market penetration. For example, close collaboration with our mobile handset customers has allowed us to

 

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deliver improved interfaces between baseband and image processors, which have resulted in solutions with smaller form factor and improved image quality.

 

    Increase Large Account Penetration. We have a global customer base consisting of leading consumer electronics OEMs and contract manufacturers. Many of our customers have multiple product variations that use image-capture and processing as well as applications processing solutions. We will seek to increase our customer penetration by taking advantage of our broad product portfolio and existing relationships to cross-sell existing products to our customers and to penetrate product variations where our solutions are currently not used.

 

    Broaden Our Customer Base. We intend to expand our customer base across various applications and geographic locations by leveraging our position as a supplier to many of the largest global consumer electronics companies and delivering to potential customers proven, innovative solutions. We also believe that as consumer electronics and communications applications converge and proliferate, we will increasingly have opportunities to sell our products into new markets such as the automotive, medical and industrial markets. We also intend to expand our global sales presence to penetrate new accounts worldwide and grow existing account relationships. We will leverage our sales representatives and distributors located in Korea, Japan, China, Taiwan, Hong Kong, Germany, the United Kingdom and the United States to further these goals.

 

    Develop a Platform for Ubiquitous Convergence of Consumer Electronics and Communications Applications. In order to serve our customers’ evolving needs, we intend to extend our technology leadership by developing new features and new products that are synergistic with our existing product portfolio. We are developing additional features in our applications processors, such as video processing capability that meets the MPEG-4 standard, in order to complement our image-capture and processing products and provide our customers a system-level platform solution. We believe that as consumer electronics and communications applications converge and become even more ubiquitous, customers will look to suppliers like us to provide additional system-level solutions to enable faster time to market and better integration in end products.

 

    Leverage Our Capital Light Business Model. We acquired significant proprietary process technologies and wafer manufacturing capacity from our former parent, Hynix. We intend to leverage these investments made by Hynix to drive our growth and margin improvement. Furthermore, we plan to continue to keep our capital expenditures relatively low by maintaining our focus on specialty process technologies that do not require expensive investment in leading edge technologies. If needed, we will access other foundries that provide such technology in the future. We believe this approach will lead to a higher return on invested capital.

 

THE ACQUISITION

 

Our business was named MagnaChip Semiconductor when it was acquired from Hynix on October 6, 2004 by CVC, Francisco Partners, CVC Asia Pacific, certain members of management and other investors, following discussions with Hynix that began in late 2001 and the execution of a definitive agreement in June 2004. Previously, we were the System IC division within Hynix which, in 1999, had been formed from the Hyundai Electronics and LG Semiconductor System IC businesses and can trace its history back to the late 1970s. Although we were previously part of Hynix, we had a history of operating autonomously within Hynix and had a separate global sales force and management structure.

 

In connection with the transaction, we entered into several definitive agreements with Hynix regarding key raw materials, campus facilities, research and development equipment and information technology, factory automation and wafer foundry services. We also entered into a non-exclusive cross license with Hynix which provides us with access to certain of Hynix’s intellectual property for use in the manufacture and sale of non-

 

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memory semiconductor products. We believe that these arrangements with Hynix provide significant mutual operational advantages, for example, allowing us to leverage the significant historical investments in our capital equipment, and providing for shared resources and other key benefits. All agreements with Hynix under which we obtain essential materials or services are multiyear contracts. We refer to the acquisition transaction, including the related definitive agreements with Hynix, as the “Acquisition.” See “Certain relationships and related transactions—The Acquisition.”

 

EQUITY SPONSORS

 

CVC, a private equity fund managed by Citigroup Venture Capital, is one of the world’s oldest and largest private equity firms. CVC was founded in 1968 and currently manages funds in excess of $8.0 billion. CVC invests in a broad range of industries and has significant expertise in technology investments, acquired over decades of investing in growth companies.

 

Francisco Partners is one of the world’s largest technology-focused private equity funds and currently manages $2.5 billion of committed capital. The firm was founded to pursue structured investments in technology companies undergoing strategic, technological, and operational inflection points. The principals of Francisco Partners have an extensive track record of technology investing, having invested in excess of $3.0 billion of equity capital in over 50 technology companies.

 

CVC and Francisco Partners are leading investors in the semiconductor industry and separately or together have served as the primary investors in industry leading semiconductor and semiconductor-related companies such as AMI Semiconductor, Inc., ChipPAC, Inc., Fairchild Semiconductor Corporation, Intersil Corporation, NPTest, Inc., Smart Modular Technologies, Inc., and Ultra Clean Technology Systems and Service, Inc.

 

CVC and Francisco Partners together acquired AMI Semiconductor from Japan Energy in December 2000. AMI Semiconductor completed a $200 million offering of senior subordinated notes in January 2003 and its holding company, AMIS Holdings, Inc., completed its initial public offering in September 2003. In addition, CVC acquired ChipPAC from Hyundai Electronics, the predecessor to Hynix, in March 1999. ChipPAC completed its initial public offering in August 2000 and recently completed a merger with ST Assembly Test Services Ltd. to form STATSChipPAC Ltd.

 

CVC Asia Pacific consists of funds established in connection with a joint venture between CVC Capital Partners and Citigroup. These funds have a leading private equity presence in the Asia Pacific region, with $2.7 billion of committed capital and investments focused on buyouts in developed economies across the region. Since 1999, CVC Asia Pacific has completed 17 transactions, including six investments in Korea.

 

See “Security ownership of certain beneficial owners and management” and “Certain relationships and related transactions.”

 

RECENT DEVELOPMENTS

 

On March 7, 2005, we acquired all of the capital stock of ISRON Corporation through our wholly owned Dutch subsidiary. ISRON is based in Osaka, Japan and designs, develops, and markets mixed-signal semiconductors primarily for the display driver IC market. We expect the acquisition to add key products and technology to our portfolio in the flat panel display driver market for mobile handset applications.

 

On April 14, 2005, we completed our acquisition of IC Media Corporation through a reverse merger with a newly formed subsidiary. Based in Santa Clara, California, IC Media is a leading developer and supplier of small pixel geometry, high-resolution CMOS image sensors for camera-equipped mobile handsets, digital still cameras,

 

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personal computer cameras and other mobile imaging applications. The company has offices in Arizona, Taiwan, China and Japan, which adds increased coverage to our global customers.

 

ORGANIZATIONAL STRUCTURE

 

The following chart shows a summary of our organizational structure as of the date of this prospectus. Our organizational structure has been designed for future financing flexibility and management of a global enterprise.

 

MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company are the co-issuers of the notes. MagnaChip LLC and its subsidiaries, except for IC Media Japan Kabushiki Kaisha and Shanghai Ximei Corporation, guarantee the second priority notes, and our senior secured credit facility. MagnaChip LLC and its subsidiaries, except MagnaChip Korea, our principal manufacturing subsidiary, and IC Media Japan Kabushiki Kaisha and Shanghai Ximei Corporation, guarantee the senior subordinated notes.

 

The ownership of MagnaChip LLC is as follows:

 

     Common
Units


    Series B
Preferred
Units


 

CVC

   34 %   36 %

Francisco Partners

   34 %   36 %

CVC Asia Pacific

   18 %   19 %

Other investors(1)

   14 %   9 %
    

 

Total

   100 %   100 %

(1)    Other investors, including certain members of management.

            

 

See “Capitalization” and “Security ownership of certain beneficial owners and management.”

 

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LOGO


(1) MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company are the co-issuers of the notes.
(2) Shanghai Ximei Corporation and IC Media Japan Kabushiki Kaisha, which were each acquired in the acquisition of IC Media Corporation on April 14, 2005, are not guarantors of the notes.
(3) MagnaChip Semiconductor, Ltd., our principal manufacturing subsidiary, is not a guarantor of the subordinated notes.

 

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THE COMPANY

 

MagnaChip Semiconductor LLC, which we refer to as MagnaChip LLC, is a Delaware limited liability company and parent guarantor of the notes. It functions as a holding and financing company for other Magnachip entities. On a stand-alone basis, MagnaChip LLC does not have any independent operations.

 

MagnaChip Semiconductor S.A., our Luxembourg subsidiary and one of the co-issuers of the notes, is a Luxembourg public limited liability company (société anonyme). It functions as a financing company. On a stand alone basis, MagnaChip Semiconductor S.A. does not have any independent operations.

 

MagnaChip Semiconductor Finance Company is a wholly-owned subsidiary of MagnaChip Semiconductor S.A., which was incorporated in Delaware for the purpose of serving as a co-issuer of the notes in order to facilitate the sale of the old notes. MagnaChip Semiconductor Finance Company does not have any independent operations or assets of any kind and will not have any revenues. You should not expect MagnaChip Semiconductor Finance Company to have the ability to service the interest and principal obligations on the notes.

 

Our principal executive offices are located at 1 Hyangjeong-dong, Hungduk-gu, Cheongju-si, 361-725, Korea. Our contact telephone number is 82-2-3459-3691.

 

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Summary terms of the exchange offer

 

On December 23, 2004, we completed the private offering of $300 million aggregate principal amount of Floating Rate Second Priority Senior Secured Notes due 2011, $200 million aggregate principal amount of 6 7/8% Second Priority Senior Secured Notes due 2011 and $250 million aggregate principal amount of 8% Senior Subordinated Notes due 2014, which we collectively refer to in this prospectus as the “old notes.” We entered into registration rights agreements with the initial purchasers of the old notes in which we agreed to deliver to you this prospectus and to use all commercially reasonable efforts to complete an exchange offer within the time period specified in the registration rights agreements. Below is a summary of the exchange offer. For a more detailed description of the exchange offer, see “Exchange offer.”

 

The Exchange Offer

We are offering to exchange:

 

    up to $300,000,000 aggregate principal amount of new Floating Rate Second Priority Senior Secured Notes due 2011 for an equal principal amount of old Floating Rate Second Priority Senior Secured Notes due 2011;

 

    up to $200,000,000 aggregate principal amount of new 6 7/8% Second Priority Senior Secured Notes due 2011 for an equal principal amount of old 6 7/8% Second Priority Senior Secured Notes due 2011; and

 

    up to $250,000,000 aggregate principal amount of new 8% Senior Subordinated Notes due 2014 for an equal principal amount of old 8% Senior Subordinated Notes due 2014.

 

 

The terms of the new notes and the old notes are identical in all material respects, except for transfer restrictions and registration rights relating to the old notes. Old notes may be exchanged only in integral multiples of $1,000. We intend by the issuance of the new notes to satisfy our obligations contained in the registration rights agreements.

 

Expiration of the Exchange Offer; Acceptance and Issuance of New Notes

The exchange offer will expire at 5:00 p.m., New York City time, on                     , 2005, or such later date and time to which we may extend it in our sole discretion. Subject to the conditions stated in “Exchange offer—Conditions,” we will accept for exchange any and all outstanding old notes that are validly tendered and not validly withdrawn before the expiration of the exchange offer. The new notes will be delivered promptly after the expiration of the exchange offer. Any old notes not accepted for exchange for any reason will be returned without expense to you promptly after the expiration or termination of the exchange offer.

 

Withdrawal Rights

You may withdraw your tender of old notes in the exchange offer at any time before the expiration of the exchange offer.

 

Conditions to the Exchange Offer

The exchange offer is not conditioned upon any minimum aggregate principal amount of old notes being tendered for exchange. The

 

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exchange offer is subject to customary conditions, which we may waive. Please read “Exchange offer—Conditions” for more information regarding the conditions to the exchange offer.

 

Procedures for Tendering Notes

To tender old notes held in book-entry form through the Depository Trust Company, or DTC, you must transfer your old notes into the exchange agent’s account in accordance with DTC’s Automated Tender Offer Program, or ATOP, system. In lieu of delivering a letter of transmittal to the exchange agent, a computer-generated message, in which the holder of the old notes acknowledges and agrees to be bound by the terms of the letter of transmittal (an “agent’s message”), must be transmitted by DTC on behalf of a holder of old notes and received by the exchange agent before 5:00 p.m., New York City time, on the expiration date. In all other cases, a letter of transmittal must be manually executed and received by the exchange agent before 5:00 p.m., New York City time, on the expiration date. By signing, or agreeing to be bound by, the letter of transmittal, you will represent to us that, among other things:

 

    any new notes to be received by you will be acquired in the ordinary course of your business;

 

    you are not engaged in, and do not intend to engage in, a distribution of the new notes, and you have no arrangement or understanding with any person to participate in a distribution of the new notes;

 

    you are not our “affiliate” (as defined in Rule 405 under the Securities Act) or, if you are such an affiliate, you will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable;

 

    if you are a broker-dealer that receives new notes for your own account in exchange for old notes that were acquired as a result of market-making activities or other trading activities, you must acknowledge that you will deliver a prospectus in connection with any resale of these new notes;

 

    if you are a broker-dealer, you did not purchase the old notes to be exchanged for the new notes from us in the initial offering of the old notes; and

 

    you are not acting on behalf of any person who could not truthfully and completely make the above representations.

 

Special Procedures for Beneficial Owners

If you are a beneficial owner whose old notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, and you want to tender old notes in the exchange offer, you should contact the registered holder promptly and instruct the registered holder to tender on your behalf. If you wish to tender on

 

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your own behalf, you must, before completing and executing the letter of transmittal and delivering your old notes, either make appropriate arrangements to register ownership of the old notes in your name or obtain a properly completed bond power from the registered holder.

 

Guaranteed Delivery Procedures

If you wish to tender your old notes, and time will not permit your required documents to reach the exchange agent by the expiration date, or the procedure for book-entry transfer cannot be completed on time, you may tender your old notes under the procedures described in “Exchange offer—Guaranteed Delivery Procedures.”

 

Failure to Exchange Your Old Notes

All untendered old notes will remain subject to the restrictions on transfer provided for in the old notes and in the indenture. Generally, the old notes that are not exchanged for new notes in the exchange offer will remain restricted securities, and may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws.

 

 

The old notes are currently eligible for trading in the Private Offerings, Resales and Trading through Automated Linkages (PORTAL) market. Following commencement of the exchange offer but prior to its completion, the old notes may continue to be traded in the PORTAL market. Following completion of the exchange offer, the new notes will not be eligible for PORTAL trading. See “Exchange offer—Consequences of Failure to Tender.”

 

Resales

Based on interpretations by the SEC’s staff in no action letters issued to third parties, we believe that new notes issued in exchange for old notes in the exchange offer may be offered for resale, resold or otherwise transferred by you after the exchange offer without further compliance with the registration and prospectus delivery requirements of the Securities Act (subject to certain representations required to be made by each holder of old notes, as set forth under “Exchange offer—Procedures for Tendering”), unless you are a broker-dealer receiving securities for your own account, so long as:

 

    you are not one of our “affiliates,” which is defined in Rule 405 of the Securities Act;

 

    you acquire the new notes in the ordinary course of your business;

 

    you do not have any arrangement or understanding with any person to participate in the distribution of the new notes; and

 

    you are not engaged in, and do not intend to engage in, a distribution of the new notes.

 

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If you are our affiliate, or you are engaged in, intend to engage in or have any arrangement or understanding with respect to, the distribution of new notes acquired in the exchange offer, you (1) should not rely on our interpretations of the position of the SEC’s staff and (2) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction.

 

 

If you are a broker-dealer and receive new notes for your own account in the exchange offer:

 

    you must represent that you do not have any arrangement with us or any of our affiliates to distribute the new notes;

 

    you must acknowledge that you will deliver a prospectus in connection with any resale of the new notes you receive from us in the exchange offer (the letter of transmittal states that by so acknowledging and by delivering a prospectus, you will not be deemed to admit that you are an “underwriter” within the meaning of the Securities Act); and

 

    you may use this prospectus, as it may be amended or supplemented from time to time, in connection with the resale of new notes received in exchange for old notes acquired by you as a result of market making or other trading activities.

 

 

For a period of up to 180 days after the consummation of the exchange offer, we will make this prospectus available to any broker-dealer for use in connection with any resale described above. See “Plan of distribution.”

 

Federal Income Tax Considerations

The exchange of notes pursuant to the exchange offer should not be a taxable event for U.S. federal income tax purposes. See “Summary of certain United States federal income tax considerations.”

 

Use of Proceeds

We will not receive any proceeds from the issuance of the new notes in the exchange offer.

 

Exchange Agent

The Bank of New York is the exchange agent for the exchange offer. The address and telephone number of the exchange agent are set forth in “Exchange offer—Exchange Agent.”

 

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Summary terms of the new notes

 

The following summary contains basic information about the Floating Rate Second Priority Senior Secured Notes due 2011, the 6 7/8% Second Priority Senior Secured Notes due 2011 and the 8% Senior Subordinated Notes due 2014 being offered in the exchange offer, which we collectively refer to in this prospectus as the “new notes.” It likely does not contain all the information that is important to you. For a more complete description of the new notes, see “Description of the new second priority notes.” and “Description of the new senior subordinated notes.”

 

The new notes will be identical in all material respects to the old notes for which they have been exchanged, except:

 

    the new notes will have been registered under the Securities Act;

 

    the new notes generally will not be subject to the restrictions on transfer applicable to the old notes or bear restrictive legends;

 

    the new notes will not be entitled to registration rights; and

 

    the new notes will not have the right to earn additional interest under circumstances relating to our registration obligations.

 

TERMS OF THE SECOND PRIORITY NOTES

 

Issuers

MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company.

 

Securities Offered

$300,000,000 aggregate principal amount of Floating Rate Second Priority Senior Secured Notes due 2011.

 

 

$200,000,000 aggregate principal amount of 6 7/8% Second Priority Senior Secured Notes due 2011.

 

Maturity

The second priority notes will mature on December 15, 2011.

 

Interest

Floating Rate Second Priority Notes: Interest will accrue at a rate that is reset at the beginning of each quarter to the applicable LIBOR Rate plus 3.25%. The term “LIBOR Rate” is defined in the “Description of the new second priority notes—Certain Definitions” section of this prospectus. Interest will be payable quarterly in arrears on each March 15, June 15, September 15 and December 15, commencing on March 15, 2005.

 

 

Fixed Rate Second Priority Notes: Interest will accrue at a rate of 6 7/8% per year. Interest will be payable semi-annually in arrears on each June 15 and December 15, commencing on June 15, 2005.

 

Ranking

Each series of second priority notes will be our senior secured obligations and will rank equally in right of payment with all of our existing and future senior debt. Each series of second priority notes will be effectively junior in right of payment to any indebtedness of the issuers or the guarantors that is secured by first priority liens on

 

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the assets securing the notes, including our senior secured credit facility, or secured by assets not securing the notes, and will be junior in right of payment to all indebtedness of any future non-guarantor subsidiaries of MagnaChip LLC.

 

Guarantees

MagnaChip LLC and its subsidiaries (other than IC Media Japan Kabushiki Kaisha and Shanghai Ximei Corporation) will jointly and severally guarantee each series of second priority notes on a senior secured basis. Under certain circumstances, the guarantees may be released.

 

Collateral

Each series of second priority notes will be secured by second priority liens on substantially all of the assets of the issuers and the other subsidiaries of MagnaChip LLC that secure our senior secured credit facility, subject to certain exceptions. The second priority notes indenture and the security documents relating to the second priority notes permit us to incur a significant amount of debt, including obligations secured (including on a first-priority basis) by the collateral, subject to compliance with certain conditions. No appraisal of any collateral has been prepared by us or on our behalf in connection with this offering. The value of the collateral at any time will depend on market and other economic conditions, including the availability of suitable buyers for the collateral.

 

Optional Redemption

At any time on or after December 15, 2005, with respect to the floating rate second priority notes, and December 15, 2008, with respect to the fixed rate second priority notes, we may redeem some or all of the applicable series of the second priority notes at the redemption prices as set forth in the “Description of new second priority notes—Optional Redemption” section of this prospectus, plus accrued and unpaid interest and liquidated damages, if any, to the redemption date.

 

 

At any time before December 15, 2005, with respect to the floating rate second priority notes, and December 15, 2008, with respect to the fixed rate second priority notes, we may redeem the applicable series of the second priority notes, in whole or in part, pursuant to a “make whole” call as specified in the “Description of the new second priority notes—Optional Redemption” section of this prospectus.

 

 

At any time before December 15, 2005, with respect to the floating rate second priority notes, and December 15, 2007, with respect to the fixed rate second priority notes, we may redeem up to 35% of the aggregate principal amount of the applicable series of the second priority notes, including all or a portion of any additional notes issued in such series, with the proceeds of certain equity offerings, so long as:

 

    we pay holders of the notes a redemption price equal to par plus (i) the LIBOR Rate then in effect with respect to the floating rate second priority notes plus 3.25% and (ii) 6 7/8% with respect to the fixed rate second priority notes, plus accrued and unpaid interest and liquidated damages, if any, to the redemption date;

 

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    with respect to each series of the second priority notes, at least 65% of the aggregate principal amount of each series of the second priority notes issued under the indenture, including the principal amount of any additional second priority notes, remains outstanding immediately after such redemption; and

 

    we redeem the second priority notes within 90 days of any such equity offering.

 

TERMS OF THE SENIOR SUBORDINATED NOTES

 

Issuers

MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company.

 

Securities Offered

$250,000,000 aggregate principal amount of 8% Senior Subordinated Notes due 2014.

 

Maturity

The senior subordinated notes will mature on December 15, 2014.

 

Interest

Interest will accrue at a rate of 8% per year. Interest will be payable semi-annually in arrears on each June 15 and December 15, commencing on June 15, 2005.

 

Ranking

The senior subordinated notes will be our senior subordinated, unsecured obligations and will rank junior in right of payment with all of our existing and future senior debt, including the second priority notes and our senior secured credit facility.

 

Guarantees

MagnaChip LLC and its subsidiaries (other than MagnaChip Korea, which is our principal manufacturing subsidiary, IC Media Japan Kabushiki Kaisha and Shanghai Ximei Corporation) will jointly and severally guarantee the senior subordinated notes on an unsecured, senior subordinated basis. Under certain circumstances, the guarantees may be released.

 

Optional Redemption

At any time on or after December 15, 2009 we may redeem some or all of the senior subordinated notes at the redemption prices as set forth in the “Description of new senior subordinated notes—Optional Redemption” section of this prospectus, plus accrued and unpaid interest and liquidated damages, if any, to the redemption date.

 

 

At any time before December 15, 2009, we may redeem the senior subordinated notes, in whole or in part, pursuant to a “make whole” call as specified in the “Description of the new senior subordinated notes—Optional Redemption” section of this prospectus.

 

 

At any time before December 15, 2007, we may redeem up to 35% of the aggregate principal amount of the senior subordinated notes, including all or a portion of any additional senior subordinated notes, with the proceeds of certain equity offerings, so long as:

 

    we pay holders of the senior subordinated notes a redemption price equal to par plus 8%, plus accrued and unpaid interest and liquidated damages, if any, to the redemption date;

 

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    with respect to any redemption, at least 65% of the aggregate principal amount of the senior subordinated notes issued under the senior subordinated notes indenture, including the principal amount of any additional senior subordinated notes, remains outstanding immediately after each such redemption; and

 

    we redeem the senior subordinated notes within 90 days of any such equity offering.

 

TERMS COMMON TO EACH SERIES OF THE NOTES

 

Change of Control

If we experience a change of control, we may be required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest and liquidated damages, if any, to the repurchase date. See “Description of the new second priority notes—Repurchase at the Option of Holders—Change of Control” and “Description of the new senior subordinated notes—Repurchase at the Option of Holders—Change of Control.”

 

Certain Covenants

Each indenture governing the notes contains covenants that limit the issuers’ ability and the ability of MagnaChip LLC’s restricted subsidiaries to, among other things:

 

    incur additional indebtedness;

 

    pay dividends or make other distributions on our capital stock or repurchase, repay or redeem our capital stock;

 

    make certain investments;

 

    incur liens;

 

    enter into certain types of transactions with affiliates;

 

    create restrictions on the payment of dividends or other amounts to the issuers by MagnaChip LLC’s restricted subsidiaries; and

 

    sell all or substantially all of our assets or merge with or into other companies.

 

 

These covenants are subject to important exceptions and qualifications which are described under the headings “Description of the new second priority notes—Certain Covenants” and “Description of the new senior subordinated notes—Certain Covenants” in this prospectus.

 

Absence of a Public Market

There is no public trading market for the new notes, and we do not intend to apply for listing of the new notes on any national securities exchange or for quotation of the new notes on any automated dealer quotation system. See “Risk factors—Risks Related to the Exchange Offer—There is no public trading market for the new notes and an active trading market may not develop for the new notes.”

 

RISK FACTORS

 

See “Risk factors” for a description of certain risks you should consider before deciding to tender your old notes in the exchange offer.

 

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Summary pro forma and actual consolidated financial data

 

The following table sets forth our summary pro forma and actual consolidated financial data as of the dates and for the periods indicated.

 

We have derived the summary pro forma statements of operations from the unaudited pro forma consolidated statements of operations included elsewhere in this prospectus, which give effect to the Acquisition and other related adjustments described in the “Unaudited pro forma consolidated statements of operations” section of this prospectus. The unaudited pro forma consolidated statements of operations are based on our actual consolidated financial statements included elsewhere in this prospectus, which, prior to October 1, 2004, were prepared on a carve-out basis in connection with the purchase of our business from Hynix; such carveout information is not intended to be a complete presentation of the operating results or financial position of our company on a stand-alone basis.

 

We have derived the actual statements of operations data for the years ended December 31, 2002, 2003, for the nine-month period ended September 30, 2004 and for the three-month period ended December 31, 2004 and the summary actual balance sheet data at December 31, 2003 and 2004 and at September 30, 2004 from our audited consolidated financial statements that are included elsewhere in this prospectus. We have derived the actual statements of operations data for the year ended December 31, 2001, and the summary actual balance sheet data at December 31, 2001, and 2002 from our audited consolidated financial statements that are not included in this prospectus. We have derived the actual statements of operations data and summary consolidated balance sheet data, as of and for each three-month period ended March 31, 2004 and April 3, 2005, from our unaudited consolidated financial statements that are included elsewhere in this prospectus.

 

As carve-out financial statements, the actual statements prior to October 1, 2004 include allocations of the costs of shared activities and overhead of Hynix and of intangible assets and property, plant and equipment shared with Hynix. These allocations are based upon various assumptions and estimates and actual results may differ from these allocations, assumptions and estimates. Also, as part of the Acquisition we did not acquire certain assets that were included in the carve-out financial statements and we assumed certain additional costs and obligations that are not reflected in the carve-out financial statements. Accordingly, the carveout financial statements should not be relied upon as being representative of our financial position or operating results had we operated on a stand-alone basis, nor may they be representative of our financial position or operating results following the Acquisition.

 

On October 6, 2004, MagnaChip Semiconductor LLC, completed its acquisition of the business from Hynix. For accounting purposes and consistent with our reporting periods, we have used October 1, as the effective date of the Acquisition since the financial results from October 1, 2004 onwards accrued to our benefit. As a result, we have reported our operating results and financial position for all periods from and after October 1, 2004, as those of the successor company. The predecessor company periods and the successor company periods have different bases of accounting and are therefore not comparable.

 

The pro forma statements of operations are not intended to represent what our results of operations would be after giving effect to the Acquisition, or to project our results of operations for any future period. Therefore, investors should not place undue reliance on the pro forma financial information.

 

For further information on the adjustments and assumptions relating to the pro forma statements of operations, see “Unaudited pro forma consolidated statements of operations.”

 

The summary consolidated statements of operations data for the year ended December 31, 2004 and for the three-month period ended March 31, 2004, are presented:

 

(i) on an actual basis; and

 

(ii) on a pro forma basis, to give effect to the Acquisition, and related adjustments, as if it had occurred on January 1, 2004.

 

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Table of Contents

You should read the information contained in this table in conjunction with the “Selected financial and other data,” “Management’s discussion and analysis of financial condition and results of operations,” “Unaudited pro forma consolidated statements of operations” and our consolidated financial statements and the accompanying notes thereto included elsewhere in this prospectus.

 

    Predecessor

    Successor

 
    For the year ended
December 31,


   

For the

three-month
period ended

March 31, 2004


   

For the

nine-month
period ended
September 30, 2004


    For the three-month period ended

   

For the

three-month
period ended
March 31, 2004


   

For the year
ended

December 31, 2004


 
    2001

    2002

    2003

        December 31, 2004

    April 3, 2005

     
    Actual

    Actual

    Actual

    Actual

    Actual

    Actual

    Actual

    Pro forma

    Pro forma

 
    (in millions of US dollars, except ratios and per unit data)  

Statement of Operations Data

                                                                       

Net Sales

                                                                       

Related parties(1)

  $ 396.6     $ 306.8     $ 260.7     $ 62.7     $ 163.8     $ —       $ —       $ —       $ —    

Others

    481.1       393.5       570.1       201.1       677.8       243.6       213.4       235.6       1,007.5  
   


 


 


 


 


 


 


 


 


      877.7       700.3       830.8       263.8       841.6       243.6       213.4       235.6       1,007.5  

Cost of sales

    768.9       691.0       752.5       207.8       654.6       204.5       187.4       163.5       705.6  
   


 


 


 


 


 


 


 


 


Gross profit

    108.8       9.3       78.3       56.0       187.0       39.1       26.0       72.1       301.9  
   


 


 


 


 


 


 


 


 


Selling, general and administrative expenses

    104.8       61.9       68.7       19.9       54.0       29.8       28.5       27.0       101.1  

Research and development expenses

    59.6       87.0       86.6       23.9       75.7       22.1       26.1       22.5       90.8  
   


 


 


 


 


 


 


 


 


Operating income (loss)

    (55.6 )     (139.6 )     (77.0 )     12.2       57.3       (12.8 )     (28.6 )     22.6       110.0  
   


 


 


 


 


 


 


 


 


Interest expense, net

    (90.9 )     (46.8 )     (37.8 )     (7.3 )     (17.7 )     (16.7 )     (13.9 )     (17.9 )     (58.0 )

Foreign currency gain

    19.9       19.1       9.9       7.9       12.4       43.3       22.1       7.9       55.7  

Foreign currency loss

    (29.7 )     (10.5 )     (8.5 )     (4.1 )     (7.1 )     (12.9 )     (8.5 )     (4.1 )     (20.0 )

Others, net

    1.4       1.3       1.1       0.4       1.1       —         —         0.4       1.1  
   


 


 


 


 


 


 


 


 


      (99.3 )     (36.9 )     (35.3 )     (3.1 )     (11.3 )     13.7       (0.3 )     (13.7 )     (21.2 )
   


 


 


 


 


 


 


 


 


Income (loss) before income taxes

    (154.9 )     (176.5 )     (112.3 )     9.1       46.0       0.9       (28.9 )     8.9       88.8  

Income tax expenses

    1.4       1.8       1.4       1.1       2.8       6.7       2.4       1.8       17.8  
   


 


 


 


 


 


 


 


 


Net income (loss)

  $ (156.3 )   $ (178.3 )   $ (113.7 )   $ 8.0     $ 43.2     $ (5.8 )   $ (31.3 )   $ 7.1     $ 71.0  
   


 


 


 


 


 


 


 


 


Dividends to preferred unitholders

    N/A       N/A       N/A       N/A       N/A     $ 13.4     $ 2.4     $ 13.4     $ 20.6  
                                           


 


 


 


Net income (loss) attributable to common units

    N/A       N/A       N/A       N/A       N/A     $ (19.2 )   $ (33.7 )   $ (6.3 )   $ 50.4  
                                           


 


 


 


Net income (loss) per common unit—basic and diluted

    N/A       N/A       N/A       N/A       N/A     $ (0.38 )   $ (0.64 )   $ (0.12 )   $ 0.96  
                                           


 


 


 


Weighted average number of units—basic and diluted

    N/A       N/A       N/A       N/A       N/A       50,061,910       52,533,003       52,533,003       52,533,003  
                                           


 


 


 


Balance Sheet Data

                                                                       

Cash and cash equivalents

  $ —       $ —       $ —       $ —       $ —       $ 58.4     $ 35.7       N/A       N/A  

Working capital(2)

    (43.7 )     3.1       21.7       49.7       75.9       129.3       96.6       N/A       N/A  

Total assets

    1,299.5       1,077.8       790.0       754.0       653.8       1,154.5       1,069.9       N/A       N/A  

Total indebtedness(3)

    705.2       631.7       468.1       413.8       252.6       750.7       750.0       N/A       N/A  

Preferred units

    —         —         —         —         —         96.5       98.9       N/A       N/A  

Owners’ equity

    412.1       268.3       155.3       172.6       206.7       N/A       N/A       N/A       N/A  

Unitholders’ equity

    N/A       N/A       N/A       N/A       N/A       55.9       27.0       N/A       N/A  

Other Data

                                                                       

EBITDA(4)

  $ 305.2     $ 217.1     $ 264.0     $ 97.5     $ 330.6     $ 63.5     $ 40.3     $ 67.5     $ 307.3  

Depreciation and amortization

    369.2       346.8       338.5       81.1       266.9       45.9       55.3       40.7       160.5  

Capital expenditures(5)

    51.0       63.5       25.2       17.2       86.7       23.5       13.0       17.2       110.2  

Ratio of EBITDA to interest expense(6)

    3.4x       4.6x       7.0x       13.4x       18.7x       3.8x       2.9x       3.8x       5.3x  

Ratio of earnings to fixed charges(7)

    —         —         —         2.2x       3.4x       —         —         N/A       N/A  

 

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Table of Contents

Footnotes:

(1) Primarily relates to the provision of wafer foundry contract manufacturing services to Hynix, Hyundai Display Technology and other related parties.
(2) Working capital is calculated as current assets less current liabilities, including the current portion of long term borrowings.
(3) Total indebtedness is calculated as long and short term borrowings.
(4) EBITDA is defined as net income (loss) plus depreciation and amortization of intangible assets, interest expense, net and provision for income taxes. EBITDA is a key financial measure but should not be construed as an alternative to operating income, cash flows from operating activities or net income, as determined in accordance with accounting principles generally accepted in the United States of America, or US GAAP. EBITDA is not a measure defined in accordance with US GAAP. We believe that EBITDA is a standard measure commonly reported and widely used by analysts and investors in our industry. However, the method of computation may or may not be comparable to other similarly titled measures of other companies. A reconciliation of net income (loss) to EBITDA is as follows:

 

    Predecessor

  Successor

    For the year ended
December 31,


    For the
three-month
period ended
March 31, 2004


 

For the

nine-month
period ended
September 30, 2004


 

For the three-month

period ended


    For the
three-month
period ended
March 31, 2004


 

For the year
ended

December 31, 2004


    2001

    2002

    2003

        December 31, 2004

    April 3, 2005

     
    Actual

    Actual

    Actual

    Actual

  Actual

  Actual

    Actual

    Pro forma

  Pro forma

    (in millions of US dollars, except ratios and per unit data)

Net income (loss)

  $ (156.3 )   $ (178.3 )   $ (113.7 )   $ 8.0   $ 43.2   $ (5.8 )   $ (31.3 )   $ 7.1   $ 71.0

Depreciation and amortization

    369.2       346.8       338.5       81.1     266.9     45.9       55.3       40.7     160.5

Interest expense, net

    90.9       46.8       37.8       7.3     17.7     16.7       13.9       17.9     58.0

Provision for income taxes

    1.4       1.8       1.4       1.1     2.8     6.7       2.4       1.8     17.8
   


 


 


 

 

 


 


 

 

EBITDA

  $ 305.2     $ 217.1     $ 264.0     $ 97.5   $ 330.6   $ 63.5     $ 40.3     $ 67.5   $ 307.3
   


 


 


 

 

 


 


 

 

(5) Capital expenditures include purchases of intangibles, net.
(6) Ratio of EBITDA to interest expense is calculated as EBITDA divided by interest expense, net.
(7) Earnings consist of income before income taxes and fixed charges. Fixed charges consist of interest expense on debt and amortization of deferred debt issuance costs and the portion of rental expense that we believe is representative of the interest component of rental expense. Where a dash appears, our earnings were negative and were insufficient to cover fixed charges during the period. Our deficiencies to cover fixed charges in each period presented were as follows:

 

    Predecessor

  Successor

    For the year ended
December 31,


  For the three-month
period ended


    2001

  2002

  2003

  December 31,
2004


  April 3,
2005


    Actual

  Actual

  Actual

  Actual

  Actual

    (in millions of US dollars)

Deficiencies

  $ 154.9   $ 176.5   $ 112.3   $ 12.5   $ 31.3

 

 

 

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Table of Contents

Risk factors

 

You should carefully consider the risk factors set forth below as well as the other information contained in this prospectus before deciding whether to exchange your old notes in the exchange offer. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to or unique to us or that we currently deem to be immaterial may also materially and adversely affect our business operations. Any of the following risks could materially adversely affect our business, financial condition or results of operations. In such case, there could be a material adverse effect on our ability to satisfy our obligations under the new notes and you may lose all or part of your original investment.

 

RISKS RELATED TO THE EXCHANGE OFFER

 

Failure to tender your old notes for new notes could limit your ability to resell the old notes.

 

The old notes were not registered under the Securities Act or under the securities laws of any state and may not be resold, offered for resale or otherwise transferred unless they are subsequently registered or resold under an exemption from the registration requirements of the Securities Act and applicable state securities laws. If you do not exchange your old notes for new notes under the exchange offer, you will not be able to resell, offer to resell or otherwise transfer the old notes unless they are registered under the Securities Act or unless you resell them, offer to resell or otherwise transfer them under an exemption from the registration requirements of, or in a transaction not subject to, the Securities Act. In addition, we will no longer be under an obligation to register the old notes under the Securities Act except in the limited circumstances provided under the registration rights agreements. In addition, if you want to exchange your old notes in the exchange offer for the purpose of participating in a distribution of the new notes, you may be deemed to have received restricted securities, and, if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction.

 

To the extent that old notes are tendered for exchange and accepted in the exchange offer, the trading market for the untendered and tendered but unaccepted old notes could be adversely affected.

 

There is no public trading market for the new notes and an active trading market may not develop for the new notes.

 

The old notes are currently eligible for trading in the PORTAL Market, a screen-based market operated by the National Association of Securities Dealers. The PORTAL Market is limited to qualified institutional buyers as defined by Rule 144A of the Securities Act. The new notes are new securities for which there is no established trading market. We do not intend to apply for listing or quotation of the notes on any securities exchange or stock market. UBS Securities LLC, J.P. Morgan Securities Inc. and Deutche Bank Securities Inc., which acted as initial purchasers in connection with the offer and sale of the old notes, have informed us that they intend to make a market in the new notes. However, the initial purchasers are not obligated to do so and they may cease their market-making at any time. In addition, the liquidity of the trading market in the new notes, and the market price quoted for the new notes, may be adversely affected by changes in the overall market for high yield securities and by changes in our financial performance or prospects or in the prospects for companies in our industry generally. As a result, we cannot assure you that an active trading market will develop for the new notes.

 

You must comply with the exchange offer procedures in order to receive new notes.

 

The new notes will be issued in exchange for the old notes only after timely receipt by the exchange agent of the old notes or a book-entry confirmation related thereto, a properly completed and executed letter of transmittal or an agent’s message and all other required documentation. If you want to tender your old notes in exchange for new notes, you should allow sufficient time to ensure timely delivery. Neither we nor the exchange agent are under any duty to give you notification of defects or irregularities with respect to tenders of old notes for exchange. Old notes that are not tendered or are tendered but not accepted will, following the exchange offer,

 

22


Table of Contents

continue to be subject to the existing transfer restrictions. In addition, if you tender the old notes in the exchange offer to participate in a distribution of the new notes, you will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. For additional information, please refer to the sections entitled “Exchange offer” and “Plan of distribution” in this prospectus.

 

RISKS RELATED TO EACH SERIES OF NEW NOTES

 

Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations under the notes.

 

As of April 3, 2005, our total indebtedness was $750 million. See “Capitalization” for additional information.

 

Our substantial debt could have important consequences for you, including:

 

    making it more difficult for us to make payments on the notes;

 

    increasing our vulnerability to general economic and industry conditions;

 

    requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;

 

    exposing us to the risk of increased interest rates because certain of our borrowings, including the floating second priority rate notes and borrowings under our senior secured credit facility, are at variable rates of interest;

 

    limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; and

 

    limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who have less debt.

 

Our senior secured credit facility provides for a commitment for up to $100 million of revolving credit borrowings. We may be able to incur substantial additional indebtedness in the future, including secured debt, subject to the restrictions contained in the credit agreement governing our senior secured credit facility and the indentures relating to the notes. See “Description of the new second priority notes,” “Description of the new senior subordinated notes” and “Description of other indebtedness.” If new debt is added to our current debt levels, the related risks that we now face could intensify.

 

We may not be able to generate sufficient cash to service all of our indebtedness, including the notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

 

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the notes.

 

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness, including the notes. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our

 

23


Table of Contents

debt service and other obligations. The credit agreement governing our senior secured credit facility and the indentures governing the notes restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or be able to obtain the proceeds which we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due.

 

If we default on our obligations to pay our indebtedness, we may not be able to make payments on the notes.

 

Any default under the agreements governing our indebtedness, including a default under our senior secured credit facility that is not waived by the required lenders under the senior secured credit facility, and the remedies sought by the holders of such indebtedness could preclude us from paying principal, premium, if any, and interest on the notes and substantially decrease the market value of the notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including covenants in the credit agreement governing our senior secured credit facility and each indenture), we could be in default under the terms of the agreements governing such indebtedness, including our credit agreement and the indentures. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the credit agreement that governs our senior secured credit facility could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets that are pledged as collateral to support our obligations under the credit agreement governing our senior secured credit facility, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under our senior secured credit facility to avoid being in default. If we breach our covenants under the credit agreement governing our senior secured credit facility and seek a waiver, we may not be able to obtain a waiver from the required lenders thereunder. If this occurs, we would be in default under our credit agreement, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.

 

We may be unable to purchase the notes upon a change of control.

 

Upon the occurrence of certain “change of control” events you may require us to purchase your notes at 101% of their principal amount, plus accrued and unpaid interest and liquidated damages, if any. The terms of our senior secured credit facility limit our ability to purchase any series of notes in those circumstances and the terms of the second priority notes indentures limit our ability to purchase the senior subordinated notes. Any of our future debt agreements may contain similar restrictions and provisions. Accordingly, we may not be able to satisfy our obligations to purchase your notes unless we are able to refinance or obtain waivers under the senior secured credit facility and other indebtedness with similar restrictions. In addition, we cannot assure you that we will have the financial resources to purchase your notes, particularly if that change of control event triggers a similar repurchase requirement for, or results in the acceleration of, other indebtedness. Our senior secured credit facility provides that certain change of control events will constitute a default and could result in the acceleration of our indebtedness thereunder.

 

Fraudulent conveyance and similar laws may adversely affect the validity and enforceability of the guarantees. The guarantors will guarantee the payment of the notes.

 

Although laws differ among various jurisdictions, in general, under fraudulent conveyance laws, a court could subordinate or void any guarantee if it found that:

 

    the guarantee was incurred with actual intent to hinder, delay or defraud creditors or shareholders of the company; or

 

    the guarantee was incurred voluntarily and all parties to the guarantee knew or should have known that the transaction would unfairly prejudice other creditors; or

 

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Table of Contents
    the guarantor did not receive fair consideration or reasonably equivalent value for the guarantee and the guarantor was any of the following:

 

    insolvent or was rendered insolvent because of the guarantee;

 

    engaged in a business or transaction for which its remaining assets constituted unreasonably small capital; or

 

    intended to incur, or believed that it would incur, debts beyond its ability to pay at maturity; or the guarantee was held not to be in the best interests or for the corporate benefit of the company.

 

The measure of insolvency for purposes of fraudulent transfer laws varies depending on the law applied.

 

Generally, however, a guarantor would be considered insolvent if:

 

    the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets;

 

    the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

 

    it could not pay its debts as they become due.

 

On the basis of historical financial information, recent operating history and other factors, we believe that at the time the guarantees of the new notes will be issued, each guarantor will not be insolvent, will not have unreasonably small capital for the business in which it engages, and (in part because of the payment limitations contained in such guarantees) will not have incurred debts beyond its ability to pay such debts as they mature. In addition, the boards of directors, general partners or managers, as the case may be, of certain guarantors have passed resolutions confirming that the entry into the guarantee is in the best interest of such guarantor and for its corporate benefit. We can give no assurance, however, that a court would agree with our conclusions in this regard or that such conclusions will be applicable to the guarantors in the future.

 

If a court voided any guarantee as a result of a fraudulent conveyance or similar laws, or held it unenforceable for any other reason, you would cease to have any claim in respect of such guarantee and would be the creditor of the issuers and the remaining guarantors.

 

Korea

 

MagnaChip Korea, a limited liability company (yuhan hoesa) and indirect wholly-owned subsidiary of MagnaChip LLC, will guarantee each series of new second priority notes on a senior secured basis. While the Corporate Reorganization Act of Korea does not currently apply to limited liability companies such as MagnaChip Korea, Korea’s new insolvency law, the Debtor Rehabilitation and Insolvency Law will replace the Corporate Reorganization Act as of April 1, 2006.

 

The New Insolvency Law will have preference avoidance provisions similar to the current provisions of the Corporate Reorganization Act. Under Korea’s Corporate Reorganization Act, certain acts occurring during the period between a “suspension of payment” and prior to an application for a reorganization proceeding under the Corporate Reorganization Act (which period may in no event exceed one year) are subject to avoidance as being preferential. The collateral in Korea will be held by one collateral trustee on behalf of the secured noteholders and the senior credit facility lenders, and one such act that could be subject to avoidance is a payment made to the Korean collateral trustee pursuant to the guarantee granted by MagnaChip Korea to the collateral agent. Payment received from the disposition of Korean collateral during this period could also potentially be avoided. If such an avoidance claim is successful, any payment received by the Korean collateral trustee pursuant to the guarantee would have to be disgorged to the trustee overseeing the reorganization proceeding. This may have the effect of reducing the total recovery obtained from the guarantee for the benefit of the second priority notes.

 

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Table of Contents

You may be unable to enforce judgments obtained in U.S. courts against MagnaChip Semiconductor S.A. or our subsidiary guarantors organized in jurisdictions other than the United States.

 

MagnaChip Semiconductor S.A. and all but four of the guarantors are organized or incorporated outside of the United States, and most of the assets of these companies are located outside of the United States. As a consequence, you may not be able to effect service of process on these non-U.S. entities in the United States or to enforce judgments against them outside of the United States. There is also uncertainty about the enforceability in the courts of certain jurisdictions of judgments obtained in the United States against MagnaChip Semiconductor S.A. and certain of the guarantors.

 

Restrictions on MagnaChip Korea’s ability to make payments on its intercompany loans from MagnaChip Semiconductor B.V., or on its ability to pay dividends in excess of statutory limitations, could hinder our ability to make payments on the notes.

 

Under the Korean Foreign Exchange Transactions Law (the FETL) payments in a foreign currency denominated loan, where the borrower is a “resident” of Korea and the lender is an offshore “nonresident” entity, requires prior approval of the Korean Ministry of Finance and Economy in the event (i) the average period of such loan is less than 12 months or (ii) repayment or prepayment of such loan within a 12-month period from the initial drawdown date (when aggregated with all other repayments or prepayments made during such 12 month period) is equal or greater to 20% of the original aggregate principal amount of such loan. MagnaChip Korea may not receive the Korean Ministry of Finance’s prior approval to prepay more than 20% of the intercompany loans between it and MagnaChip Semiconductor B.V. in the event that we have to redeem the notes within 12 months of the issue date.

 

In addition, under the Korean Commercial Code (the KCC) a company is permitted to make a dividend payment up to twice a year out of retained earnings (as determined in accordance with generally accepted accounting principles in Korea). Under the KCC, a limited liability company is permitted to make dividend payments to its unitholders at a ratio disproportionate to the ratio of their equity contribution. It is possible that we would not have sufficient funds to make payments on the notes if MagnaChip Korea has an insufficient amount of retained earnings under the KCC to make dividend payments to MagnaChip Semiconductor B.V. to allow us to make payments on the notes which could cause a default under the terms of the relevant indenture.

 

RISKS RELATED TO THE SECOND PRIORITY NOTES

 

If there is a default, proceeds from sales of the collateral will be applied first to satisfy amounts owed under our senior secured credit facility, and the value of the collateral may not be sufficient to repay the holders of the second priority notes.

 

Our obligations under the second priority notes and related guarantees are secured by a second priority lien on certain assets that are also pledged on a first-priority basis to the lenders under our senior secured credit facility. As a result, upon any foreclosure on the collateral, proceeds will be applied first to repay amounts owed under our senior secured credit facility, and only then to satisfy amounts owed to holders of the second priority notes. The value of the second priority notes in the event of a liquidation will depend on market and economic conditions, the availability of buyers and similar factors. You should not rely upon the book value of the assets underlying the collateral as a measure of realizable value for such assets. By its nature, some or all the collateral may be illiquid and may have no readily ascertainable market value. Likewise, there is no assurance that the assets underlying the collateral will be saleable or, if saleable, that there will not be substantial delays in its liquidation. Accordingly, there can be no assurance that the proceeds of any sale of the collateral following any acceleration of the maturity of the second priority notes would be sufficient to satisfy, or would not be substantially less than, amounts due on the second priority notes after satisfying the obligations secured by the first priority liens.

 

If the proceeds of any sale of the assets underlying the collateral are insufficient to repay all amounts due on the second priority notes, the holders of the second priority notes (to the extent the second priority notes are not

 

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repaid from the proceeds of the sale of the collateral) would have only an unsecured claim against our remaining assets, which claim will rank equal in priority to the unsecured claims of any unsatisfied portion of the obligations secured by the first-priority liens and our other unsecured senior indebtedness.

 

Your interest in the collateral may be adversely affected by the failure to record and/or perfect security interests in certain collateral.

 

The security interests in the collateral securing the second priority notes and our senior secured credit facility includes a second lien on substantially all of our assets, whether now owned or acquired or arising in the future. Applicable law requires that certain property and rights acquired after the grant of a general security interest can only be perfected at the time such property and rights are acquired and identified. Due to the number of individual mortgages and other security interests that were scheduled to be recorded in the various countries in which our assets are located, there was a time gap between the issuance of the old notes and the making of any loans under our senior secured credit facility and the recordation of the mortgages and other security interests. As a result, and even though it may have constituted an event of default under the indentures, a third party creditor of us may have gained priority over the lien of one or more of the mortgages and other security interests through the recordation of an intervening lien or liens. Although the indenture for the second priority notes contains customary further assurances covenants, the trustee under such indenture and the collateral trustee and collateral agents will not monitor the future acquisition of property and rights that constitute collateral, or take any action to perfect the security interest in such acquired collateral.

 

Insolvency and examinership laws could limit your ability to enforce your rights under the notes and the guarantees.

 

Any insolvency proceedings with regard to the issuers of the notes or any guarantor would most likely be based on and governed by the insolvency laws of the jurisdiction under which the relevant entity is organized. As a result, in the event of insolvency with regard to any of these entities, the claims of holders of the notes against the issuers or a guarantor may be subject to the insolvency laws of its jurisdiction of organization. The provisions of such insolvency laws differ substantially from each other including with regard to rights of creditors, priority claims and procedure and may contain provisions that are unfavorable to holders of notes. In addition, there can be no assurance as to how the insolvency laws of these jurisdictions will be applied in insolvency proceedings relating to several jurisdictions.

 

The lenders under our senior secured credit facility have first-ranking security over the majority of the tangible and intangible assets of the issuers and guarantors. In some jurisdictions after the occurrence of, among other things, an insolvency event, secured lenders have additional rights with respect to insolvency proceedings, including among other things, the right to direct the disposition of any security. As a result, your ability to realize claims against us with respect to your notes if the issuers, or any guarantor, become insolvent may be limited.

 

Under applicable insolvency laws, the issuers’ or any guarantor’s liabilities in respect of the notes may, in the event of insolvency or similar proceeding, rank junior to some of the issuers’ or any guarantor’s debts that are entitled to priority under such law of such jurisdiction. For example, debts entitled to priority may include (a) amounts owed in respect of occupational pension schemes, (b) certain amounts owed to employees, (c) amounts owed to governmental agencies and (d) expenses of an insolvency practitioner. In addition, in some jurisdictions, the examiner or administrator or similar party may be legally required to consider the interest of third parties (including, for example, employees) in connection with the proceedings.

 

In certain cases, under insolvency and examinership, your ability to collect interest accruing on the notes in respect of any period after the commencement of liquidation proceedings and your rights under the guarantees may be limited.

 

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The second priority notes and the related guarantees are effectively subordinated to other debt.

 

The second priority notes effectively rank junior to all amounts owed under our senior secured credit facility, to the extent of the value of the collateral, as the senior secured credit facility lenders have a first-priority lien on the collateral pledged for the benefit of the second priority notes. In addition, the senior secured credit facility is secured by liens on certain other collateral not pledged for the benefit of the holders of the second priority notes, including a pledge of the stock of our subsidiaries. As a result, the lenders under the senior secured credit facility will be paid in full from the proceeds of the collateral pledged to them before holders of second priority notes are paid from any remaining proceeds from the second lien collateral. In addition, subject to the restrictions contained in the indenture governing the second priority notes, we may incur additional debt that is secured by first-priority liens on the collateral or by liens on assets that are not pledged to the holders of second priority notes, all of which would effectively rank senior to the second priority notes to the extent of the value of the assets securing such debt. At April 3, 2005, the second priority notes and the related guarantees effectively ranked junior to $100 million of secured indebtedness secured on a first-priority basis by the collateral.

 

We may incur additional indebtedness ranking equal to the second priority notes or the related guarantees.

 

The indenture governing the second priority notes permits us to issue additional debt secured on an equal and ratable basis with the second priority notes, subject to satisfaction of a debt incurrence covenant. If we incur any additional debt that is secured on an equal and ratable basis with the second priority notes, the holders of that debt will be entitled to share ratably with the holders of the second priority notes in any proceeds distributed in connection with any foreclosure upon the collateral or an insolvency, liquidation, reorganization, dissolution or other winding-up of MagnaChip. This may have the effect of reducing the amount of proceeds paid to you.

 

RISKS RELATED TO THE SENIOR SUBORDINATED NOTES

 

The notes and the guarantees are effectively subordinated to other debt.

 

The senior subordinated notes and the related guarantees are subordinated to our senior indebtedness. The senior subordinated notes rank junior to all of our existing and future senior indebtedness, including all indebtedness under our senior secured credit facility and the second priority notes. As a result of the subordination of the senior subordinated notes, if we become insolvent or enter into a bankruptcy or similar proceeding, then the holders of our senior indebtedness must be paid in full before subordinated noteholders are paid. In addition, we cannot make any cash payments to subordinated noteholders if we have failed to make payments to holders of designated senior indebtedness. Under certain circumstances, we will be prohibited from making any payments to subordinated noteholders for a period of up to 179 days if we default, other than a payment default, under certain covenants of our designated senior indebtedness. The senior subordinated guarantees rank junior to all senior indebtedness of the guarantors, including their guarantees of our senior secured credit facility and second priority notes, to the same extent that the senior subordinated notes are subordinated to our senior indebtedness.

 

At April 3, 2005, the senior subordinated notes and the related guarantees ranked junior in right of payment to the full amount of the $100 million of commitments available under our senior secured credit facility and the second priority notes.

 

The senior subordinated notes are structurally subordinated to the creditors of our principal manufacturing subsidiary, MagnaChip Korea, which has accounted for a majority of our net sales and substantially all of our assets, and is not a guarantor of the senior subordinated notes.

 

Our principal manufacturing subsidiary, MagnaChip Korea, is not a guarantor of the senior subordinated notes. MagnaChip Korea has accounted for a majority of our net sales and substantially all of our assets.

 

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The senior subordinated notes are structurally subordinated to the obligations of MagnaChip Korea. Generally, claims of creditors of MagnaChip Korea, including trade creditors, will have priority with respect to the assets and earnings of MagnaChip Korea over claims of creditors of its parent entity. In the event of an insolvency, liquidation or other reorganization of MagnaChip Korea, holders of its debt and its trade creditors will typically be entitled to payment of its claims from the assets of MagnaChip Korea before any assets are made available for distribution to the issuers or any guarantor of the senior subordinated notes.

 

As of April 3, 2005, MagnaChip Korea had $841.5 million of liabilities, including the second priority notes, together with $63.2 million of trade payables outstanding. All of these liabilities and trade payables ranked effectively senior to the senior subordinated notes. The indenture governing the senior subordinated notes permits us and our restricted subsidiaries, including MagnaChip Korea, to incur additional debt in the future.

 

RISKS RELATING TO OUR BUSINESS

 

The cyclical nature of the semiconductor industry may limit our ability to maintain or increase net sales and profit levels during industry downturns.

 

The semiconductor industry is highly cyclical and periodically experiences significant economic downturns characterized by diminished product demand, production overcapacity and excess inventory, which can result in rapid erosion of average selling prices. The industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles of both semiconductor companies’ and their customers’ products and declines in general economic conditions.

 

We have experienced these conditions in our business in the past and may experience renewed, and possibly more severe and prolonged, downturns in the future as a result of such cyclical changes, which may reduce our profitability and the value of our business.

 

Customer demand is difficult to accurately forecast.

 

We make significant decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements, based on our estimates of customer requirements. The short-term nature of commitments by many of our customers and the possibility of rapid changes in demand for their products reduces our ability to accurately estimate future customer requirements. On occasion, customers may require rapid increases in production, which can challenge our resources and reduce margins. We may not have sufficient capacity at any given time to meet our customers’ demands. Conversely, downturns in the semiconductor industry may cause and have caused our customers to significantly reduce the amount of products ordered from us. Because many of our costs and operating expenses are relatively fixed, a reduction in customer demand may decrease our gross margins and operating income.

 

Our customers may cancel their orders, change production quantities or delay production.

 

We generally do not obtain firm, long-term purchase commitments from our customers. Customers may cancel their orders, change production quantities or delay production for a number of reasons. Cancellations, reductions or delays by a significant customer or by a group of customers, which we have experienced as a result of the recent downturn in the semiconductor industry, have adversely affected and may continue to adversely affect our results of operations. In addition, while we do not obtain long-term purchase commitments, we generally agree to the pricing of a particular product for the entire lifecycle of the product, which can extend over a number of years. If we underestimate our costs when determining the pricing, our margins and results of operations would be adversely affected.

 

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A significant portion of our sales comes from a relatively limited number of customers.

 

If we lose key customers or if customers cease to place orders for our high volume devices, our financial results will be adversely affected. While we served more than 200 customers in the year ended December 31, 2004, net sales to our 10 largest customers represented approximately 62.4% of our net revenue in the year ended December 31, 2004. In the year ended December 31, 2004, except for Hynix Semiconductor, Inc., our two largest customers, LG.Philips LCD and Sharp, represented 9.8% and 9.3% of our net sales, respectively. Significant reductions in sales to any of these customers, the loss of major customers or the curtailment of orders for our high-volume devices within a short period of time would adversely affect our business. See “Business—Customers.”

 

Our industry is highly competitive.

 

The semiconductor industry is highly competitive and includes hundreds of companies, a number of which have achieved substantial market share. Current and prospective customers for our products evaluate our capabilities against the merits of our direct competitors. Some of our competitors are well-established as independent companies and have substantially greater market share and manufacturing, financial, research and development and marketing resources than we do. We also compete with emerging companies that are attempting to sell their products in specialized markets, and with the internal capabilities of many of our significant customers. We expect to experience continuing competitive pressures in our markets from existing competitors and new entrants. Any consolidation among our competitors could enhance their product offerings and financial resources, further enhancing their competitive position. Our ability to compete successfully depends on a number of factors, including the following: our ability to offer cost effective products on a timely basis using our technologies; our ability to accurately identify and respond to emerging technological trends and demand for product features and performance characteristics; product introductions by our competitors; our ability to adopt or adapt to emerging industry standards; and the number and nature of our competitors in a given market. Many of these factors are outside of our control. In the future, our competitors may capture our existing or potential customers and our customers may satisfy more of their requirements internally. As a result, we may experience declining revenues and profits.

 

A decline in average selling prices could decrease our profits.

 

In the past, our industry has experienced a decline in average selling prices. A decline in average selling prices for our products, if not offset by reductions in the costs of producing such products, would decrease our gross profits and could have a material adverse effect on our business, financial condition and results of operations.

 

Growth in the consumer electronics and other end markets for our products is an important component in our success.

 

Our continued success will depend in part on the growth of various consumer electronics markets and other end markets that use our semiconductors and on general economic growth. To the extent that we cannot offset recessionary periods or periods of reduced growth that may occur in these markets through greater penetration of these markets, our sales may decline and our business, financial condition and results of operations may suffer as a result.

 

We may not be successful in establishing a brand identity.

 

Our business was historically conducted under the Hynix brand name and we are now marketing our products under the new MagnaChip brand name. We may need to devote considerable resources to establish the MagnaChip brand name for our business in the marketplace. This effort may not succeed, and our business, financial condition and results of operations may suffer as a result.

 

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We depend on successful technological advances for growth.

 

Our industry is subject to rapid technological change and product obsolescence as customers and competitors create new and innovative products and technologies. Products or technologies developed by other companies may render our products or technologies obsolete or noncompetitive and we may not be able to access leading edge process technologies or to license or otherwise obtain essential intellectual property required by our customers. Our inability to continue identifying new product opportunities, or manufacturing technologically advanced products on a cost-effective basis, may result in decreased revenues and a loss of market share to our competitors.

 

We may not be able to attract or retain the technical or management employees necessary to remain competitive in our industry.

 

We depend on our ability to attract and retain skilled technical and managerial personnel. Generally, with the exception of certain key executives, our employees are not bound by employment or noncompetition agreements. We could lose the services of, or fail to recruit, skilled personnel, which could hinder our research and product development programs or otherwise have a material adverse effect on our business.

 

If we encounter future labor problems, we may fail to deliver our products in a timely manner which could adversely affect our revenues and profitability.

 

As of May 31, 2005, approximately 60% of our employees were represented by the MagnaChip Semiconductor Labor Union, which is a member of the Federation of Korean Metal Workers Trade Unions. We cannot assure you that issues with the labor union and other employees will be resolved favorably for us in the future, that we will not experience significant work stoppages in future years or that we will not record significant charges related to those work stoppages.

 

Currently, the Korean Federation of Trade Unions, representing the employees of three of our subcontractors that also support Hynix, has and may continue to demonstrate at our joint campus in Cheongju, Korea. It is requesting that MagnaChip directly hire approximately 70 employees of the subcontractor. These demonstrations have required additional interim expenses and may have a continuing negative impact on our operations in the future.

 

We may incur costs to engage in future business combinations or strategic investments and the anticipated benefits of those transactions may never be realized.

 

As part of our business strategy, we may seek to enter into business combinations, investments, joint ventures and other strategic alliances with other companies in order to maintain and grow revenue and market presence as well as to provide us with access to technology, products and services. Those transactions would be accompanied by risks that may harm our business, such as difficulties in assimilating the operations, personnel and products of an acquired business or in realizing the projected benefits; disruption of our ongoing business; potential increases in our indebtedness and contingent liabilities; and charges if the acquired company or assets are later worth less than the amount paid for them in the acquisition. In addition, our senior secured credit facility and the indentures governing the notes may prohibit us from making acquisitions that we may otherwise wish to pursue.

 

We depend on high utilization of our manufacturing capacity.

 

As many of our costs are fixed, a reduction in capacity utilization, together with other factors such as yield and product mix, could reduce our profit margins and adversely affect our operating results. A number of factors and circumstances may reduce utilization rates, including periods of industry overcapacity, low levels of customer orders, operating inefficiencies, mechanical failures and disruption of operations due to expansion or relocation of operations, power interruptions, fire, flood or other natural disasters or calamities.

 

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The failure to achieve acceptable manufacturing yields could adversely affect our business.

 

The manufacture of semiconductors requires precision, a highly-regulated and sterile environment and expensive equipment. We may have difficulty achieving acceptable yields in the manufacture of our products. Slight impurities or defects in the masks used to print circuits on a wafer or other factors can cause significant difficulties, particularly in connection with the production of a new product, the adoption of a new manufacturing process or any expansion of our manufacturing capacity and related transitions.

 

We rely on packaging subcontractors.

 

The majority of our net sales are derived from semiconductor devices assembled in advanced packages. The packaging of semiconductors is a complex process requiring, among other things, a high degree of technical skill and advanced equipment. We outsource our semiconductor packaging to subcontractors, most of which are located in Korea and Southeast Asia. We rely on these subcontractors to package our devices with acceptable quality and yield levels. If our semiconductor packagers experience problems in packaging our semiconductor devices or experience prolonged quality or yield problems, our operating results could be adversely affected.

 

We depend on successful parts and materials procurement for our manufacturing processes.

 

We use a wide range of parts and materials in the production of our semiconductors, including silicon, processing chemicals, processing gases, precious metals and electronic and mechanical components. We procure materials and electronic and mechanical components from domestic and foreign sources and original equipment manufacturers. As a division of Hynix, we were able to take advantage of Hynix’s size and purchasing power in procuring parts and materials. As an independent company, we are smaller and less diversified than Hynix, and we may be unable to obtain parts and materials at prices and on terms as favorable as those available to us prior to the separation from Hynix in October 2004. If we cannot obtain adequate materials in a timely manner or on favorable terms for the manufacture of our products, either or both of our revenues or profits will decline.

 

We face product liability risks and the risk of negative publicity if our products fail.

 

Our semiconductors are incorporated into a number of end products, and our business is exposed to product liability risk and the risk of negative publicity if our products fail. Although we maintain insurance for product liability claims, the amount and scope of our insurance may not be adequate to cover a product liability claim that is asserted against us. In addition, product liability insurance could become more expensive and difficult to maintain and, in the future, may not be available on commercially reasonable terms or at all.

 

In addition, we are exposed to the product liability risk and the risk of negative publicity affecting our customers and suppliers. Our sales may decline if any of our customers are sued on a product liability claim. We may also suffer a decline in sales from the negative publicity associated with such a lawsuit or with adverse public perceptions in general regarding our customers’ products.

 

Our ability to compete successfully and achieve future growth will depend, in part, on our ability to protect our proprietary technology, as well as our ability to operate without infringing the proprietary rights of others.

 

We seek to protect our proprietary technologies and know-how through the use of patents, trade secrets, confidentiality agreements and other security measures. The process of seeking patent protection takes a long time and is expensive. We cannot assure you that patents will issue from pending or future applications or that, if patents issue, they will not be challenged, invalidated or circumvented, or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage. Some of our technologies are not covered by any patent or patent application. The confidentiality agreements on which we rely may be breached and may not be adequate to protect our proprietary technologies. We cannot assure you that other

 

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countries in which we market our services will protect our intellectual property rights to the same extent as the United States.

 

Our ability to compete successfully depends on our ability to operate without infringing the proprietary rights of others. We have no means of knowing what patent applications have been filed in the United States until they are published. In addition, the semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. Although we have never received any notices of infringement of a third-party patent, to our knowledge Hynix has received five notices of infringement from third parties regarding various technology transferred to us in the Acquisition. We cannot assure you that these or other third parties will not tender notices of patent infringement or assert infringement claims against us in the future. Litigation, which could result in substantial costs to us and diversion of our resources, may also be necessary to enforce our patents or other intellectual property rights or to defend against claimed infringement of the rights of others. In the event of an adverse outcome in any such litigation, we may be required to pay substantial damages, indemnify customers for damages they may suffer if the products they purchase from us violate the intellectual property rights of others, stop our manufacture, use, sale or importation of infringing products, expend significant resources to develop or acquire non-infringing technologies, discontinue processes or obtain licenses to the intellectual property we are found to have infringed. We cannot assure you that we would be successful in such development or acquisition or that such licenses would be available under reasonable terms, or at all.

 

As a business segment of Hynix, we were the beneficiary of some of Hynix’s intellectual property arrangements, including cross-licensing arrangements with other leading semiconductor companies and licenses from third parties of technology incorporated in our products and used to operate our business. We are no longer a beneficiary under some of these agreements and arrangements. There may be third parties who had refrained from asserting intellectual property infringement claims against our products or processes while we were a business segment of Hynix that elect to pursue such claims against us now that we are an independent company. In addition, some of our technologies have been sublicensed from Hynix on a non-exclusive basis and Hynix may sublicense such technologies to others. We have cross-licensed most of our technologies to Hynix. This cross-license is subject to the non-competition provision of the Hynix business transfer agreement. See “Certain relationships and related transactions—The Acquisition.” Our competitors may develop, patent or gain access to similar know-how and technology. Failure to protect our existing intellectual property rights may result in the loss of valuable technologies or having to pay other companies for infringing on their intellectual property rights.

 

We are subject to many environmental laws and regulations that could affect our operations or result in significant expenses.

 

We are subject to requirements of environmental, health and safety laws and regulations in each of the jurisdictions in which we operate, governing, among other things, air emissions, wastewater discharges, the generation, use, handling, storage and disposal of, and exposure to, hazardous substances (including asbestos) and wastes, soil and groundwater contamination and employee health and safety. These laws and regulations are complex, constantly changing and have tended to become more stringent over time. We cannot assure you that we have been, or will be at all times, in complete compliance with all these laws and regulations or that we will not incur material costs or liabilities in connection with these laws and regulations in the future. The adoption of new environmental, health and safety laws, the failure to comply with new or existing laws, or issues relating to hazardous substances could subject us to material liability (including substantial fines or penalties), impose the need for additional capital equipment or other process requirements upon us, curtail our operations, or restrict our ability to expand operations.

 

We could suffer adverse tax and other financial consequences as a result of changes in, or differences in the interpretation of, applicable tax laws.

 

Our company organizational structure is based, in part, on assumptions about the various tax laws, including withholding tax, and other laws of applicable non-U.S. jurisdictions. In addition, MagnaChip Korea was granted

 

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a limited tax-holiday under Korean law in October 2004, which provides for certain tax exemptions for corporate taxes, withholding taxes, acquisition taxes, property and land taxes and other taxes for varying number of years. Our interpretations and conclusions are not binding on any taxing authority, and, if our assumptions about tax and other laws are incorrect, if the authorities were to change or modify the relevant laws or if MagnaChip Korea were to lose its tax holiday, we could suffer adverse tax and other financial consequences or have the anticipated benefits of our company organizational structure materially impaired.

 

A limited number of persons indirectly control us and may exercise their control in a manner adverse to your interests.

 

CVC, Francisco Partners, and CVC Asia Pacific, own approximately 34%, 34% and 18%, respectively, of the outstanding voting interests in MagnaChip LLC. By virtue of their ownership of these voting interests, and the securityholders’ agreement among MagnaChip LLC and its securityholders, these entities have significant influence over our management and will be able to determine the outcome of all matters required to be submitted to the securityholders for approval, including the election of a majority of our directors and the approval of mergers, consolidations and the sale of all or substantially all of our assets. The interests of CVC, Francisco Partners and CVC Asia Pacific as equity owners of ours may differ from your interests, and, as such, they may take actions which may not be in your interest. See “Security ownership of certain beneficial owners and management,” “Management—Board Composition” and “Certain relationships and related transactions.”

 

We may need additional capital in the future and it may not be available on acceptable terms or at all.

 

We may require more capital in the future to fund our operations, finance investments in equipment and infrastructure, and respond to competitive pressures and potential strategic opportunities. Additional capital may not be available when needed or, if available, may not be available on satisfactory terms. If we are unable to obtain capital on favorable terms, or if we are unable to obtain capital at all, we may have to reduce our operations or forego opportunities and it may have a material adverse effect on our business, financial condition and results of operations.

 

Our international operations are subject to various risks that may lead to decreases in financial results.

 

We face risks inherent in international operations, such as unexpected changes in regulatory requirements, tariffs and other market barriers, political, social and economic instability, adverse tax consequences, war, civil disturbances and acts of terrorism, difficulties in accounts receivables collection, extended payment terms and differing labor standards, enforcement of contractual obligations and protection of intellectual property. These risks may lead to increased costs or decreased revenue growth, or both.

 

We are subject to risks associated with currency fluctuations.

 

Our revenues are denominated in various currencies, specifically, the Korean Won, Japanese Yen, Euro and U.S. dollar. As a result, changes in the exchange rates of these currencies or any other applicable currencies to the U.S. dollar will affect the translated price of products and therefore operating margins and could result in exchange losses.

 

The majority of our costs are denominated in Korean Won and to a lesser extent in Japanese Yen, U.S. dollar and Euro. Therefore, changes in the exchange rates of these currencies or any other applicable currencies to the U.S. dollar will affect cost of goods sold and operating margins and could result in exchange losses.

 

We cannot fully predict the impact of future exchange rate fluctuations on our profitability. From time to time, we may have engaged in, and may continue to engage in, exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. However, we cannot assure you that any hedging technique we implement will be effective. If it is not effective, we may experience reduced operating margins.

 

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Our historical and pro forma financial information may not be representative of our results as a separate company.

 

We have limited operating history as a stand-alone company due to our recent acquisition by the equity sponsors in October 2004. Prior to the Acquisition, we operated as a division of Hynix. Historical financial information we have included in this prospectus prior to September 30, 2004 has been derived from Hynix’s consolidated financial statements, is presented on a carve-out basis and does not necessarily reflect what our financial position, results of operations or cash flows would have been had we been a separate, stand-alone company during the periods presented. As carve-out financial statements, the financial statements include allocations of the costs of shared activities and overhead of Hynix and of intangible assets and property, plant and equipment shared with Hynix. These allocations are based upon various assumptions and estimates, some of which are subjective. Actual results of our operations had we operated on a stand-alone basis, may differ from those allocations and estimates. Also, as part of the Acquisition we did not acquire certain assets that were included in the carve-out financial statements and we assumed certain additional costs and obligations that are not reflected in the carve-out financial statements. Accordingly, the carve-out financial statements should not be relied upon as being representative of our financial position or operating results had we operated on a stand-alone basis, nor may they be representative of our financial position or operating results following the Acquisition. In addition, the pro forma statements of operations for the year ended December 31, 2004 and for the three-month period ended March 31, 2004 are not intended to represent what our results of operations would be after giving effect to the Acquisition and related adjustments, or to project our results of operations for any future period. Therefore, investors should not place undue reliance on the pro forma statements of operations. See “Unaudited pro forma consolidated statements of operations,” “Selected financial and other data” and “Management’s discussion and analysis of financial condition and results of operations” and our historical financial statements and the notes to those statements included elsewhere in this prospectus.

 

We depend on Hynix for services and our business and results of operations could be adversely affected if Hynix were unwilling or unable to provide such services or terminated the relationship.

 

Pursuant to agreements we entered into at the time we acquired our business, a number of services that are essential to our business are provided to us by or through Hynix. Some of these services include electricity, bulk gasses and de-ionized water, campus facilities, wastewater and sewage management and environmental safety and facility monitoring services. If any of our agreements with Hynix were terminated or if Hynix were unwilling or unable to fulfill its obligations to us under the terms of these agreements, we may experience a material decrease in our production capabilities and increase in our expenses.

 

In addition, we lease building and warehouse space from Hynix in Cheongju, Korea and Ichon, Korea and lease to Hynix some of the space we own in Cheongju, Korea. If Hynix were to become insolvent, we could lose our leases on some of our building and warehouse space.

 

Third parties may seek to hold us responsible for liabilities of Hynix that we did not assume in connection with the acquisition of our business from Hynix.

 

Third parties may seek to hold us responsible for Hynix’s retained liabilities. Under our agreements with Hynix, Hynix has agreed to indemnify us for claims and losses relating to such retained liabilities. However, if such liabilities are significant and we are ultimately held liable for them, we cannot assure you that we will be able to recover the full amount of our losses from Hynix.

 

Research and development investments may not yield profitable and commercially viable products and thus will not necessarily result in increases in revenues for us.

 

We invest significant resources in our research and development. However, research and development efforts may not yield commercially viable products. During each stage of research and development there is a

 

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substantial risk that we will have to abandon a potential product which is no longer marketable and in which we have invested significant resources. In the event we are able to develop viable new products, a significant amount of time will have elapsed between our investment in the necessary research and development effort and the receipt of any related revenues.

 

Investor confidence and the price of the notes may be adversely impacted if we are unable to comply with Section 404 of the Sarbanes-Oxley Act of 2002.

 

Following the exchange offer, we will become an SEC reporting company. As a reporting company, we will be subject to rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, which require us to include in our annual report on Form 10-K our management’s report on, and assessment of the effectiveness of, our internal controls over financial reporting. In addition, our independent auditors must attest to and report on management’s assessment of the effectiveness of our internal controls over financial reporting. If we fail to achieve and maintain the adequacy of our internal controls, there is a risk that we will not comply with all of the requirements imposed by Section 404. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which ultimately could harm our business and could negatively impact the market price of our securities.

 

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Use of proceeds

 

The exchange offer is intended to satisfy our obligations under the registration rights agreements we entered into with the initial purchasers of the old notes. We will not receive any proceeds from the exchange offer. In consideration for issuing the new notes, we will receive old notes of like principal amount, the terms of which are identical in all material respects to the new notes. We will retire and cancel all of the old notes tendered in the exchange offer. Accordingly, issuance of the new notes will not result in any increase in our indebtedness. We have agreed to bear the expenses of the exchange offer.

 

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Capitalization

 

The following table sets forth our capitalization as of April 3, 2005. This table should be read in conjunction with “Use of proceeds,” “Unaudited pro forma consolidated statements of operations,” “Management’s discussion and analysis of financial condition and results of operations,” “Description of other obligations,” “Description of the new second priority notes,” “Description of the new senior subordinated notes” and our consolidated financial statements included elsewhere in this prospectus.

 

     As of April 3, 2005

 
     (in millions of US dollars)  

Debt

        

Senior secured revolving credit facility(1)

   $ —    

Floating rate second priority senior secured notes

     300.0  

6 7/8% second priority senior secured notes

     200.0  

8% senior subordinated notes

     250.0  
    


Total debt

   $ 750.0  
    


Series B redeemable convertible preferred units; 550,000 units authorized, 450,693 units issued and 93,997 units outstanding

   $ 99.0  
    


Unitholders’ equity

        

Common units; 65,000,000 units authorized, 52,533,003 units issued and outstanding

   $ 52.5  

Additional paid-in-capital—warrants

     2.1  

Accumulated deficit

     (52.9 )

Accumulated other comprehensive income

     25.3  
    


Total unitholders’ equity

   $ 27.0  
    


          
    


Total capitalization

   $ 875.9  
    



Footnotes:

(1) Our total borrowing capacity under the senior secured credit facility is $100 million.

 

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Unaudited pro forma consolidated statements of operations

 

On October 6, 2004, MagnaChip LLC and its subsidiaries completed their purchase of the non-memory business of Hynix, as outlined in the Business Transfer Agreement, or BTA. We refer to the acquisition transaction, including the related definitive agreements with Hynix, as the “Acquisition.”

 

The following table sets forth our unaudited pro forma and actual consolidated statements of operations for the periods indicated. We have derived the actual statement of operations data for the nine-month period ended September 30, 2004 and for the three-month period ended December 31, 2004 from our audited consolidated financial statements, and we have derived the actual statement of operations data for the three-month period ended March 31, 2004 from our unaudited consolidated financial statements, all included elsewhere in this prospectus.

 

The unaudited pro forma consolidated statements of operations are based on our actual consolidated financial statements included elsewhere in this prospectus, which, prior to October 1, 2004 were prepared on a carve-out basis in connection with the purchase of our business from Hynix; such carve-out information is not intended to be a complete presentation of the operating results or financial position of our company on a stand-alone basis.

 

The carve-out financial statements include allocations of the costs of shared activities and overhead of Hynix and of intangible assets and property, plant and equipment shared with Hynix. These allocations are based upon various assumptions and estimates and actual results may differ from these allocations, assumptions and estimates. Also, as part of the Acquisition we did not acquire certain assets that were included in the carve-out financial statements and we assumed certain additional costs and obligations that are not reflected in the carve-out financial statements. Accordingly, the carve-out financial statements should not be relied upon as being representative of our financial position or operating results had we operated on a stand-alone basis, nor may they be representative of our financial position or operating results following the Acquisition.

 

The pro forma financial information is not intended to represent what our results of operations would be after giving effect to the Acquisition, or to project our results of operations for any future period. Therefore, investors should not place undue reliance on the pro forma statements of operations.

 

The accompanying consolidated statements of operations for the year ended December 31, 2004 and for the three-month period ended March 31, 2004, are presented:

 

(i) on an actual basis; and

 

(ii) on a pro forma basis, to give effect to the Acquisition, and related adjustments, as if it had occurred on January 1, 2004.

 

These unaudited pro forma consolidated statements of operations should be read with the other information contained under the captions “Capitalization,” “Selected financial data and other data,” “Management’s discussion and analysis of financial condition and results of operations” and with the audited and unaudited consolidated financial statements, all included elsewhere in this prospectus.

 

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Unaudited Pro Forma Consolidated Statement of Operations (in millions of US dollars, except unit data)

For the three-month period ended March 31, 2004

 

     Actual

    Pro Forma
Adjustments


    Pro Forma

 

Net sales

   $ 263.8     (29.6 )(f)   $ 235.6  
             1.4  (h)        

Cost of sales

     207.8     (45.4 )(a)     163.5  
             (1.5 )(g)        
             1.2  (h)        
             1.4  (j)        
    


       


Gross profit

     56.0             72.1  
    


       


Selling, general and administrative

     19.9     5.9  (a)     27.0  
             0.9  (b)        
             0.1  (h)        
             0.2  (j)        

Research and development

     23.9     (0.9 )(a)     22.5  
             0.4  (h)        
             0.0  (j)        
             (0.9 )(k)        
    


       


Operating income

     12.2             22.6  
    


       


Other income (expenses)

                      

Interest expense, net

     (7.3 )   (6.8 )(c)     (17.9 )
             (4.3 )(c)        
             0.5  (d)        

Foreign currency gain

     7.9             7.9  

Foreign currency loss

     (4.1 )           (4.1 )

Others, net

     0.4             0.4  
    


       


       (3.1 )           (13.7 )
    


       


Income before income taxes

     9.1             8.9  
    


       


Income tax expenses

     1.1     0.7  (i)     1.8  
    


       


Net income

   $ 8.0           $ 7.1  
    


       


Dividends to preferred unitholders

           13.4  (e)   $ 13.4  
                  


Net loss attributable to common units

                 $ (6.3 )
                  


Net loss per common unit—basic and diluted

              (l)   $ (0.12 )
                  


Weighted average number of units—basic and diluted

              (l)     52,533,003  
                  


 

 

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Unaudited Pro Forma Consolidated Statement of Operations (in millions of US dollars, except unit data)

For the year ended December 31, 2004

 

     Actual

    Actual

             
    

For the

nine-month

period ended
September 30,
2004


    For the
three-month
period ended
December 31,
2004


    Pro Forma
Adjustments


    Pro Forma

 

Net sales

   $ 841.6     $ 243.6     (81.9 )(f)   $ 1,007.5  
                     4.2  (h)        

Cost of sales

     654.6       204.5     (160.6 )(a)     705.6  
                     (1.7 )(g)        
                     3.7  (h)        
                     5.1  (j)        
    


 


       


Gross profit

     187.0       39.1             301.9  
    


 


       


Selling, general and administrative

     54.0       29.8     13.7  (a)     101.1  
                     2.8  (b)        
                     0.2  (h)        
                     0.6  (j)        

Research and development

     75.7       22.1     (5.4 )(a)     90.8  
                     1.1  (h)        
                     0.1  (j)        
                     (2.8 )(k)        
    


 


       


Operating income

     57.3       (12.8 )           110.0  
    


 


       


Other income (expenses)

                              

Interest expense, net

     (17.7 )     (16.7 )   (22.6 )(c)     (58.0 )
                     (2.6 )(c)        
                     1.6  (d)        

Foreign currency gain

     12.4       43.3             55.7  

Foreign currency loss

     (7.1 )     (12.9 )           (20.0 )

Others, net

     1.1                     1.1  
    


 


       


       (11.3 )     13.7             (21.2 )
    


 


       


Income before income taxes

     46.0       0.9             88.8  
    


 


       


Income tax expenses

     2.8       6.7     8.3  (i)     17.8  
    


 


       


Net income (loss)

   $ 43.2     $ (5.8 )         $ 71.0  
    


 


       


Dividends to preferred unitholders

           $ 13.4     7.2  (e)   $ 20.6  
            


       


Net income (loss) attributable to common units

           $ (19.2 )         $ 50.4  
            


       


Net loss per common unit—basic and diluted

                      (l)   $ 0.96  
                          


Weighted average number of units—basic and diluted

                      (l)     52,533,003  
                          


 

 

 

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Notes to Unaudited Pro Forma Consolidated Statements of Operations

 

a. At the date of the Acquisition, based on an independent valuation, MagnaChip recorded a fair value adjustment to increase the carrying value of property, plant and equipment and record acquired intangibles, at September 30, 2004. At that date, MagnaChip also re-assessed the remaining useful lives of the acquired property, plant and equipment, and commenced depreciation on a straight-line basis, using the remaining useful lives of the acquired property, plant and equipment and acquired intangibles. Adjustment to decrease (increase) depreciation and amortization for the year ended December 31, 2004 and for the three-month period ended March 31, 2004, is allocated to cost of goods sold, selling, general and administrative, and research and development expenses, based on the location, use and categorization of the underlying assets, as follows:

 

     For the year ended
December 31, 2004


   

For the

three-month period
ended March 31, 2004


 
     (in millions of US dollars)  

Cost of goods sold

   $ 160.6     $ 45.4  

Selling, general and administrative expenses

     (13.7 )     (5.9 )

Research and development expenses

     5.4       0.9  
    


 


     $ 152.3     $ 40.4  
    


 


 

The fair value adjustment of property, plant and equipment acquired, the addition of acquired intangibles, and the change in their estimated useful lives will have the effect of decreasing operating income in each of the years ended December 31, 2005 to 2009 as follows:

 

     2005

   2006

   2007

   2008

   2009

     (in millions of US dollars)

Decrease in operating income

   $ 76.1    $ 122.2    $ 26.3    $ 14.9    $ 9.1

 

b. For certain financial advisory and consulting services to us, parties related to CVC and Francisco Partners are each paid the greater of $1.4 million or 0.15% of annual consolidated revenue, and a party related to CVC Asia Pacific is paid the greater of $0.7 million or 0.08% of annual consolidated revenue. The accompanying pro forma consolidated statements of operations for the year ended December 31, 2004 and for the three-month period ended March 31, 2004 have been adjusted to reflect these additional costs of $2.8 million, and $0.9 million, respectively.

 

c. For the pro forma statement of operations for the year ended December 31, 2004, to remove the interest expense allocated to the accompanying historical US GAAP carve-out consolidated statement of operations for the nine-month period ended September 30, 2004, and replace with the interest expense, which would have been incurred if the $200 million Second Priority Senior Secured Notes, the $300 million Floating Rate Second Priority Senior Secured Notes and the $250 million Senior Subordinated Notes, had been in place from January 1, 2004 through September 30, 2004. For the pro forma statement of operations for the three-month period ended March 31, 2004, to remove the interest expense allocated to the accompanying historical US GAAP carve-out consolidated statement of operations for the nine-month period ended September 30, 2004, and replace with the interest expense which was incurred in the period from October 1, 2004 through December 31, 2004. The resulting impact is an increase to interest expenses of $22.6 million, and $6.8 million, for the year ended December 31, 2004 and for the three-month period ended March 31, 2004, respectively. The weighted average interest rate on the debt included in the accompanying pro forma consolidated statements of operations for the year ended December 31, 2004 and for the three-month period ended March 31, 2004 was 6.7% and 6.2%, respectively. In addition, to increase the amortization of capitalized debt issuance costs by $2.6 million, and $4.3 million, in the accompanying pro forma statements of operations for the year ended December 31, 2004 and for the three-month period ended March 31, 2004, respectively.

 

d. In connection with the Acquisition, MagnaChip did not assume certain capital leases which were included in the historical US GAAP carve-out consolidated financial statements for the nine-month period ended

 

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September 30, 2004. Adjustment to record the reduction in interest expenses of $1.6 million and $0.5 million for the year ended December 31, 2004 and for the three-month period ended March 31, 2004, respectively.

 

e. Adjustment to record additional dividends of $7.2 million for the year ended December 31, 2004, on Series B redeemable convertible preferred units, which were issued and outstanding after the refinancing on December 23, 2004, as if they had been outstanding from January 1, 2004, to September 30, 2004. Adjustment to record additional dividends of $13.4 for the three-month period ended March 31, 2004, to reflect the Series A and Series B redeemable convertible preferred units, which were issued and outstanding for the first quarter after the Acquisition.

 

f. The accompanying historical US GAAP carve-out consolidated statement of operations for the nine-month period ended September 30, 2004 includes net sales at cost plus a historical margin, from the contract manufacturing services related to the wafer foundry service for Hynix. In accordance with the BTA, and following the Acquisition, these sales are being made at cost. Accordingly an adjustment is made to eliminate this historical margin of $81.9 million, and $29.6 million, for the year ended December 31, 2004 and for the three-month period ended March 31, 2004, respectively.

 

g. The accompanying historical US GAAP carve-out consolidated statement of operations for the nine- month period ended September 30, 2004 includes cost of sales, at an amount of cost plus historical margin, from the Hynix’ contract manufacturing services related to the wafer foundry service for MagnaChip. In accordance with the BTA, and following the Acquisition, these purchases from Hynix are being made at Hynix’s cost. Accordingly an adjustment is made to eliminate this historical margin of $1.7 million, and $1.5 million, for the year ended December 31, 2004 and for the three-month period ended March 31, 2004, respectively.

 

h. In accordance with the BTA, MagnaChip has entered into a series of service agreements with Hynix for its use of certain Hynix facilities and services at costs different than those which have been assumed in the accompanying historical US GAAP carve-out consolidated statement of operations for the nine-month period ended September 30, 2004. The primary service agreements include the provision of utilities at the manufacturing facilities. In addition, in accordance with the BTA, MagnaChip has entered into agreements to provide Hynix use of its own facilities, and charges them a rental fee accordingly. The revenue and costs in the accompanying pro forma consolidated statements of operations for the year ended December 31, 2004 and for the three-month period ended March 31, 2004, have been increased as follows:

 

     For the year ended
December 31, 2004


   For the three-month
period ended
March 31, 2004


     (in millions of US Dollars)

Revenue

   $ 4.2    $ 1.4
    

  

Cost of goods sold

   $ 3.7    $ 1.2

Selling general and administrative expenses

     0.2      0.1

Research and development expenses

     1.1      0.4
    

  

     $ 5.0    $ 1.7
    

  

 

i. To reflect an adjustment for an estimated income tax provision as if MagnaChip LLC and its subsidiaries had operated as a stand alone corporate entity, at a pro forma tax rate of 20%. Pro forma as adjusted income tax expenses totaled $17.8 million, and $1.8 million, for the year ended December 31, 2004 and for the three-month period ended March 31, 2004, respectively.

 

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j. In accordance with the BTA, MagnaChip, entered into a contract with Hynix to obtain water services at an incremental cost than previously obtained from Hynix as follows:

 

     For the year ended
December 31, 2004


   For the three-month
period ended
March 31, 2004


     (in millions of US dollars)

Cost of sales

   $ 5.1    $ 1.4

Selling, general and administrative expenses

     0.6      0.2

Research and development expenses

     0.1      0.0
    

  

     $ 5.8    $ 1.6
    

  

 

k. Following the Acquisition, MagnaChip has entered into agreements to license certain intellectual property rights, previously shared with Hynix. The accompanying pro forma consolidated statements of operations for the year ended December 31, 2004 and for the three-month period ended March 31, 2004 have been adjusted to reflect a reduction in related costs of $2.8 million, and $0.9 million, respectively.

 

l. Pro forma earnings per unit for the year ended December 31, 2004 and for the three-month period ended March 31, 2004 are based on the assumption that units and unit equivalents outstanding as of December 31, 2004 were outstanding throughout the year. The weighted average units outstanding, basic and diluted were calculated based on:

 

     For the year ended
December 31, 2004


   For the three-month period
ended March 31, 2004


     Basic

   Diluted

   Basic

   Diluted

Units

                   

Common units

   52,533,003    52,533,003    52,533,003    52,533,003

Series A redeemable convertible preferred units

   —      —      —      —  

Series B redeemable convertible preferred units

   —      93,997    —      93,997

Options

   —      1,146,178    —      1,146,178

Warrants

   —      5,079,254    —      5,079,254
    
  
  
  

Weighted average units outstanding

   52,533,003    58,852,432    52,533,003    58,852,432
    
  
  
  

 

The following sets forth the computation of pro forma basic income (loss) per unit:

 

     For the year ended
December 31, 2004


   For the three-month
period ended
March 31, 2004


 
     (in millions of US dollars, except unit data)  

Net income

   $ 71.0    $ 7.1  

Dividends to preferred unitholders

     20.6      13.4  
    

  


Net income (loss) attributable to common units

   $ 50.4    $ (6.3 )
    

  


Weighted average common units outstanding

     52,533,003      52,533,003  
    

  


Net income (loss) per unit—basic

   $ 0.96    $ (0.12 )
    

  


 

The effects of the Series B redeemable preferred units, options and warrants are excluded from the calculation of pro forma diluted earnings per unit for the year ended December 31, 2004 and for the three-month period ended March 31, 2004, as their effects are anti-dilutive.

 

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Selected financial and other data

 

The following table sets forth our selected actual financial and other data as of the dates and for the periods indicated. We have derived the statement of operations data for the years ending December 31, 2002, 2003 and for the nine-month period ended September 30, 2004, and for the three-month period ended December 31, 2004 and the balance sheet data as of December 31, 2003 and 2004, and at September 30, 2004 from our audited consolidated financial statements and related notes that are included elsewhere in this prospectus. We have derived the statement of operations data for the year ended December 31, 2001, and the balance sheet data as of December 31, 2001, and 2002 from our audited consolidated financial statements and related notes that are not included in this prospectus. We have derived the actual statements of operations data and summary consolidated balance sheet data, as of and for each three-month period ended March 31, 2004 and April 3, 2005, from our unaudited consolidated financial statements that are included elsewhere in this prospectus. These audited and unaudited financial statements and the related notes thereto have been prepared in accordance with accounting principles generally accepted in the United States of America. The information set forth below is not necessarily indicative of results that should be expected for future periods.

 

On October 6, 2004, MagnaChip Semiconductor LLC, completed its acquisition of the business from Hynix. For accounting purposes and consistent with our reporting periods, we have used October 1, as the effective date of the Acquisition since the financial results from October 1, 2004 onwards accrued to our benefit. As a result, we have reported our operating results and financial position for all periods from and after October 1, 2004, as those of the successor company. The predecessor company periods and the successor company periods have different bases of accounting and are therefore not comparable.

 

You should read the information contained in this table in conjunction with “Management’s discussion and analysis of financial condition and results of operations” and our historical financial statements and the accompanying notes thereto included elsewhere in this prospectus.

 

    Predecessor

    Successor

 
    For the year ended
December 31,


   

For the
three-month

period ended
March 31, 2004


    For the nine-month
period ended
September 30, 2004


   

For the three-month

period ended


 
    2001

    2002

    2003

        December 31, 2004

    April 3, 2005

 
    Actual

    Actual

    Actual

    Actual

    Actual

    Actual

    Actual

 
    (in millions of US dollars, except ratios and unit data)  

Statement of Operations Data

                                                       

Net Sales

                                                       

Related parties(1)

  $ 396.6     $ 306.8     $ 260.7     $ 62.7     $ 163.8     $ —       $ —    

Others

    481.1       393.5       570.1       201.1       677.8       243.6       213.4  
   


 


 


 


 


 


 


      877.7       700.3       830.8       263.8       841.6       243.6       213.4  

Cost of sales

    768.9       691.0       752.5       207.8       654.6       204.5       187.4  
   


 


 


 


 


 


 


Gross profit

    108.8       9.3       78.3       56.0       187.0       39.1       26.0  

Selling, general and administrative

    104.8       61.9       68.7       19.9       54.0       29.8       28.5  

Research and development

    59.6       87.0       86.6       23.9       75.7       22.1       26.1  
   


 


 


 


 


 


 


Operating income (loss)

    (55.6 )     (139.6 )     (77.0 )     12.2       57.3       (12.8 )     (28.6 )
   


 


 


 


 


 


 


Interest expense, net

    (90.9 )     (46.8 )     (37.8 )     (7.3 )     (17.7 )     (16.7 )     (13.9 )

Foreign currency gain

    19.9       19.1       9.9       7.9       12.4       43.3       22.1  

Foreign currency loss

    (29.7 )     (10.5 )     (8.5 )     (4.1 )     (7.1 )     (12.9 )     (8.5 )

Others, net

    1.4       1.3       1.1       0.4       1.1       —         —    
   


 


 


 


 


 


 


Other income (expenses)

    (99.3 )     (36.9 )     (35.3 )     (3.1 )     (11.3 )     13.7       (0.3 )
   


 


 


 


 


 


 


Income (loss before income taxes)

    (154.9 )     (176.5 )     (112.3 )     9.1       46.0       0.9       (28.9 )

Income tax expenses

    1.4       1.8       1.4       1.1       2.8       6.7       2.4  
   


 


 


 


 


 


 


Net income (loss)

  $ (156.3 )   $ (178.3 )   $ (113.7 )   $ 8.0     $ 43.2     $ (5.8 )   $ (31.3 )
   


 


 


 


 


 


 


Dividends to preferred unitholders

    N/A       N/A       N/A       N/A       N/A     $ 13.4     $ 2.4  
                                           


 


Net loss attributable to common units

    N/A       N/A       N/A       N/A       N/A     $ (19.2 )   $ (33.7 )
                                           


 


Net income (loss) per common unit—basic and diluted

    N/A       N/A       N/A       N/A       N/A     $ (0.38 )   $ (0.64 )
                                           


 


Weighted average number of units—basic and diluted

    N/A       N/A       N/A       N/A       N/A       50,061,910       52,533,003  
                                           


 


Balance Sheet Data

                                                       

Cash and cash equivalents

  $ —       $ —       $ —       $ —       $ —       $ 58.4     $ 35.7  
 

Working capital(2)

    (43.7 )     3.1       21.7       49.7       75.9       129.3       96.6  

Total assets

    1,299.5       1,077.8       790.0       754.0       653.8       1,154.5       1,069.9  

Total indebtedness(3)

    705.2       631.7       468.1       413.8       252.6       750.7       750.0  

Preferred units

    —         —         —         —         —         96.5       98.9  

Owners’ equity

    412.1       268.3       155.3       172.6       206.7       N/A       N/A  

Unitholders’ equity

    N/A       N/A       N/A       N/A       N/A       55.9       27.0  
 

Other Data

                                                       

EBITDA(4)

  $ 305.2     $ 217.1     $ 264.0     $ 97.5     $ 330.6     $ 63.5     $ 40.3  

Depreciation and amortization

    369.2       346.8       338.5       81.1       266.9       45.9       55.3  

Capital expenditures(5)

    51.0       63.5       25.2       17.2       86.7       23.5       13.0  

Ratio of EBITDA to interest expenses(6)

    3.4x       4.6x       7.0x       13.4x       18.7x       3.8x       2.9x  

Ratio of earnings to fixed charges(7)

    —         —         —         2.2x       3.4x       —         —    

 

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Footnotes:

(1) Primarily relates to the provision of wafer foundry contract manufacturing services to Hynix Semiconductor, Inc., Hynix Display Technology and other related parties.
(2) Working capital is calculated as current assets less current liabilities.
(3) Total indebtedness is calculated as long and short term borrowings, including the current portion of long term borrowings.
(4) EBITDA is defined as net income (loss) plus depreciation and amortization of intangible assets, interest expense, net and provision for income taxes. EBITDA is a key financial measure but should not be construed as an alternative to operating income, cash flows from operating activities or net income, as determined in accordance with accounting principles generally accepted in the United States of America, or US GAAP. EBITDA is not a measure defined in accordance with US GAAP. We believe that EBITDA is a standard measure commonly reported and widely used by analysts and investors in our industry. However, the method of computation may or may not be comparable to other similarly titled measures of other companies. A reconciliation of net income (loss) to EBITDA is as follows:

 

    Predecessor

  Successor

 
    For the year ended
December 31,


   

For the

three-month

period ended
March 31, 2004


  For the nine-month
period ended
September 30, 2004


 

For the three-month

period ended


 
    2001

    2002

    2003

        December 31, 2004

    April 3, 2005

 
    Actual

    Actual

    Actual

    Actual

  Actual

  Actual

    Actual

 
    (in millions of US dollars)  

Net income (loss)

  $ (156.3 )   $ (178.3 )   $ (113.7 )   $ 8.0   $ 43.2   $ (5.8 )   $ (31.3 )

Depreciation and amortization

    369.2       346.8       338.5       81.1     266.9     45.9       55.3  

Interest expense, net

    90.9       46.8       37.8       7.3     17.7     16.7       13.9  

Provision for income taxes

    1.4       1.8       1.4       1.1     2.8     6.7       2.4  
   


 


 


 

 

 


 


EBITDA

  $ 305.2     $ 217.1     $ 264.0     $ 97.5   $ 330.6   $ 63.5     $ 40.3  
   


 


 


 

 

 


 


(5) Capital expenditures include purchases of intangibles, net.
(6) Ratio of EBITDA to interest expense is calculated as EBITDA divided by interest expense, net.
(7) Earnings consist of income before income taxes and fixed charges. Fixed charges consist of interest expense on debt and amortization of deferred debt issuance costs and the portion of rental expense that we believe is representative of the interest component of rental expense. Where a dash appears, our earnings were negative and were insufficient to cover fixed charges during the period. Our deficiencies to cover fixed charges in each period presented were as follows:

 

    Predecessor

  Successor

    For the year ended
December 31,


 

For the three-month

period ended


    2001

  2002

  2003

  December 31, 2004

  April 3, 2005

    Actual

  Actual

  Actual

  Actual

  Actual

    (in millions of US dollars)

Deficiencies

  $ 154.9   $ 176.5   $ 112.3   $ 12.5   $ 31.3

 

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Management’s discussion and analysis of financial condition and results of operations

 

The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, “Unaudited pro forma consolidated statements of operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. The discussions in this section contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below. See “Risk factors” for a discussion of some of the risks that could affect us in the future. Our consolidated financial statements have been prepared in accordance with United States GAAP.

 

Overview

 

We are a leading designer, developer and manufacturer of mixed-signal and digital multimedia semiconductors addressing the convergence of consumer electronics and communications devices. We focus on CMOS image sensors and flat panel display drivers, which are complex, high-performance mixed-signal semiconductors that capture images and enable and enhance the features and capabilities of both small and large flat panel displays. Our solutions are used in a wide variety of consumer and commercial mass market applications, such as mobile handsets, including camera-equipped mobile handsets, flat panel monitors and televisions, consumer home and mobile displays, portable and desktop computer displays, handheld gaming devices, PDAs and audio-visual equipment such as DVD players.

 

We derive our net sales from products and services in four principal areas: CMOS image sensors, flat panel display drivers, application processors and specialty foundry services.

 

    CMOS image sensors: Our CMOS image sensor solutions are used in image-capture applications such as camera-equipped mobile handsets, personal computer cameras, fingerprint sensors and surveillance cameras. Our highly integrated image sensors are designed to be cost-effective and to provide brighter, sharper, more colorful, and thus enhanced, image quality.

 

    Flat panel display drivers: Our flat panel display drivers are used in several major types of large and small flat panel displays, including TFT-LCD, Color-STN and OLED displays. Our flat panel display driver solutions are used in applications such as mobile handsets, flat panel televisions, displays for portable and desktop computers, handheld gaming devices and PDAs. We produce highly integrated flat panel display driver solutions and have pioneered developments in embedded memory and in the design and manufacturing of display drivers, enabling our customers to provide improved picture quality through thinner, smaller, more power efficient displays.

 

    Specialty foundry services: We use our process technology and manufacturing facilities to manufacture semiconductor wafers for third parties based on their designs. Our five fabs have a combined capacity of over 115,000 eight-inch equivalent wafers per month and are located in Cheongju and Gumi, Korea. Our fabs provide us with large scale, cost-effective and flexible capacity enabling us to rapidly scale to high volume to meet shifts in demand by our end customers.

 

    Application processor solutions: Our application processors, which are also referred to as microcontrollers, are designed into a broad range of consumer applications, such as remote control devices, home appliances, and consumer electronics. Our application processors are designed for applications requiring programmability, high-performance, low-power and cost-effectiveness.

 

Our business was named MagnaChip Semiconductor when it was acquired from Hynix on October 6, 2004 by CVC, Francisco Partners, CVC Asia Pacific, certain members of management and other investors, following discussions with Hynix that began in late 2001 and the execution of a definitive agreement in June 2004. Previously, we were the System IC division within Hynix which, in 1999, had been formed from the Hyundai Electronics and LG Semiconductor System IC businesses and can trace its history back to the late 1970s. Although we were previously part of Hynix, we had a history of operating autonomously within Hynix and had a separate global sales force and management structure.

 

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In connection with the transaction, we entered into several definitive agreements with Hynix regarding key raw materials, campus facilities, research and development equipment, information technology, factory automation and wafer foundry services. We also entered into a non-exclusive cross license with Hynix which provides us with intellectual property for use in the manufacture and sale of non-memory semiconductor products. We believe that these arrangements with Hynix provide significant mutual advantages, for example, allowing us to leverage the significant historical investments in our capital equipment and shared resources. All agreements with Hynix under which we obtain essential materials or services are multiyear contracts. See “Certain relationships and related transactions—the Acquisition.”

 

Basis of Presentation

 

Prior to October 1, 2004, our consolidated financial statements were prepared on a carve-out basis from the consolidated financial statements and accounting records of Hynix using the actual results of operations and actual basis of assets and liabilities of our business. The consolidated statements of operations include allocations of certain raw materials, other assets and accounts payable which our business has historically shared with Hynix, and allocations of certain manufacturing costs, general and administrative, sales and marketing, and other expenses. These allocations were made on a specifically identifiable basis or using the relative percentages, as compared to Hynix’s other businesses, of sales, headcount, raw material consumption or other reasonable methods. We and Hynix considered these allocations to be a reasonable reflection of the utilization of services provided. Our expenses as a separate, stand alone company may be higher or lower than the amounts reflected in the consolidated statements of operations.

 

We believe the assumptions underlying the consolidated financial statements are reasonable. However, the consolidated financial statements may not necessarily reflect our results of operations, financial position and cash flows in the future or what our results of operations, financial position and cash flows would have been had we been a separate, stand-alone company during the periods presented.

 

As part of the Acquisition, we did not acquire certain assets that were included in the carve-out financial statements and we assumed certain additional obligations that are not reflected in the carve-out financial statements. Accordingly, the carve-out financial statements should not be relied upon as being representative of our financial position or operating results had we operated on a stand alone basis, nor may they be representative of our financial position or operating results following the Acquisition.

 

State of the Semiconductor Industry

 

The semiconductor industry experienced a significant downturn beginning in late 2000 that lasted through early 2003. According to the Semiconductor Industry Association, total semiconductor revenues declined from $204.3 billion in 2000 to $166.4 billion in 2003. As a result of this industry downturn, our net sales declined during the period. In the second half of 2003, the semiconductor industry began to recover and we experienced an improvement in our net sales as well. As a result of the downturn in the semiconductor market between 2000 and 2003, we began implementing a strategy aimed at achieving improvements in future profitability and cash flow performance by:

 

    Exiting product areas where we did not have, or did not believe that we would have, a leading market position, and product areas that we did not believe would offer meaningful growth opportunities; specifically, we made a strategic decision to begin to exit the optical storage semiconductor market;

 

    Expanding our product offerings in markets with growth rates that are expected to be higher than those of the overall semiconductor industry such as the CMOS image sensor market and the flat panel display driver market;

 

    Leveraging further the significant capital investments made by our former parent in our wafer manufacturing facilities that reduced our capital expenditure requirements while at the same time increased our manufacturing capacity.

 

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Through these actions, since 2002, we have seen an improvement in our financial performance as net sales increased from $700.3 million to $1.1 billion from 2002 to 2004, on an aggregate basis, and our gross margin increased from 1.3% to 20.8% over the same period.

 

Net Sales

 

Our sales are derived from the sale of semiconductor products designed by us in three key areas: CMOS image sensors, flat panel display drivers, and application processors, as well as the manufacture of semiconductor wafers for third parties. We sell our products worldwide through a direct sales force and a network of sales representatives to original equipment manufacturers, or OEMs, and indirectly through distributors. Our sales offices are located in Hong Kong, Japan, Korea, Taiwan, the United Kingdom and the United States. We have several design centers in Korea, Japan and the United States strategically located to support customers in the earliest stages of product definition and design.

 

Key Factors Impacting Our Cost Structure

 

Utilization rate at our wafer fabrication facilities is based on the capacity of our installed equipment. As our utilization rate increases, there is significant operating leverage in our business as our fixed manufacturing costs are spread over increased output. We believe that our optimal utilization level is when utilization is above 85%. Given our expectations for long term growth in the large volume consumer end markets in which we participate, we believe that we will be able to achieve and maintain our target utilization levels.

 

Yield per wafer is the ratio of the number of functional dies on a wafer to the maximum number of dies that can be produced on that wafer. Improved yields result in reduced costs, which permits average selling price reductions. This in turn may enable us to achieve higher demand elasticity while maintaining our gross margin percentage. To the degree that yields increase or decrease, our contribution margins are either positively or negatively impacted. Our product design is highly integrated into our process technology, which we believe helps to improve yield rates to higher levels, earlier in a product’s lifestyle.

 

Depreciation is a key component of our cost structure and is included in cost of sales, selling, general and administrative expenses and research and development expenses. The actual depreciation on a carved-out basis reflects the actual cost of assets. The Acquisition was accounted for using purchase accounting which required the valuation of assets at fair value, which were then reduced through the allocation of significant negative goodwill. Due to the net increase in the carrying value of our depreciable assets as a result of purchase accounting adjustments associated with the Acquisition, depreciation for the historical periods presented on a carved-out basis may not be representative of our future depreciation expense.

 

The rapid technological change and product obsolescence that characterize our industry requires us to make regular investments in research and development. Product development time frames vary, but in general we incur research and development costs one to three years before generating sales from new products.

 

We conduct our semiconductor design and development activities primarily in Korea, the United States and Japan. This allows us to have a close proximity to our customers and work interactively for improved end system performance. We have over 600 research and development personnel, with more than half holding advanced degrees as of April 3, 2005. Going forward, we expect to expand our research and development headcount and make investments in advanced software and hardware design tools that increase our design engineer productivity. We plan on adding additional design centers in other key geographic locations near strategic customers globally.

 

Going forward, our business will be highly dependent on key consumer markets, including mobile handsets, electronic products with flat panel displays, handheld gaming devices, PDAs, laptop and desktop computers, flat panel televisions and other electronic devices. In addition, we operate in an industry that is highly cyclical and

 

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subject to constant and rapid technological change, product obsolescence, price erosion, evolving standards, short product life-cycles and fluctuations in product supply and demand. Through our balanced portfolio of products and the improvement in the utilization of our fixed cost structure through provision of semiconductor manufacturing services, we believe that we are better equipped to respond to changes in market conditions and improve our financial performance.

 

CRITICAL ACCOUNTING POLICIES

 

Revenue Recognition and Valuation

 

Our revenue is derived from the sale of semiconductor products we design and the manufacture of semiconductor wafers for third parties. We recognize revenue primarily upon shipment, when persuasive evidence of a sales arrangement exists, the price is fixed or determinable, title has transferred and collection of resulting receivables is reasonably assured or probable. For certain distributors, standard products are sold to the distributors without rights to return products or stock rotation or price protection rights. Generally we recognize revenue on shipment to the distributor or drop shipment to the end customer. Specialty foundry services are performed pursuant to manufacturing agreements and purchase orders. Standard products are shipped and sold based upon purchase orders from customers. All amounts billed to a customer related to shipping and handling are classified as sales, while all costs incurred by us for shipping and handling are classified as expenses. We currently manufacture a substantial portion of our products internally at our five wafer fabrication facilities. In the future, we expect to rely, to some extent, on outside wafer foundries for additional capacity and advanced technologies.

 

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make payment. If the financial condition of our customers were to deteriorate, additional allowances may be required. The establishment of reserves for sales discounts is based on management judgment that requires significant estimates of a variety of factors, including forecasted demand, returns and industry pricing assumptions. We record warranty liabilities for the estimated costs that may be incurred under our limited warranty. This warranty covers product defects based on compliance to our specifications and is normally applicable for twelve months from the date of purchase. These liabilities are accrued when revenues are recognized. Warranty costs include the costs to replace the defective product. Factors that affect our warranty liability include historical and anticipated rate of warranty claims on those repairs and cost per claim to satisfy our warranty obligation. As these factors are impacted by actual experience and future expectations, we periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.

 

Allowance for Inventory Valuation

 

Inventories are stated at the lower of cost or market, using the average method, which approximates the first in, first out method. If net realizable value is less than cost at the balance sheet date, the carrying amount is reduced to the realizable value, and the difference is recognized as a loss on valuation of inventories. We estimate the net realizable value for such finished goods and work-in-progress based primarily upon the latest invoice prices and current market conditions. Inventory reserves are established when conditions indicate that the net realizable value is less than cost due to physical deterioration, obsolescence, changes in price levels, or other causes. Reserves are also established for excess inventory based on inventory levels in excess of six months of demand, as judged by management, for each specific product.

 

As of year end 2002, 2003 and 2004 and as of April 3, 2005, we carried such reserves of $31.8 million, $6.7 million, $6.3 million and $17.4 million, respectively.

 

     December 31,

   April 3,

     2002

   2003

   2004

   2005

     (in millions of US dollars)

Reserves

   $ 31.8    $ 6.7    $ 6.3    $ 17.4

 

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As described above, in connection with the Acquisition and the application of purchase accounting, on October 1, 2004, we made adjustments to inventory to reflect fair value. As a result, the inventory and related reserves for historical periods presented on a carved-out basis, prior to October 1, 2004, are not representative of future levels of inventory and related reserves, after October 1, 2004.

 

Useful Lives of Tangible and Intangible Assets

 

We review property, plant and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability is measured by comparison of its carrying amount with the future net cash flows the assets are expected to generate. If such assets are considered to be impaired, the impaired amount is measured as the amount by which the carrying amount of the asset exceeds the present value of the future net cash flows generated by the respective long-lived assets. Our intellectual property assets represent rights under patents, trademarks and property use rights and are amortized over the periods of benefit, ranging up to 10 years, on a straight-line basis.

 

Intellectual Property

 

Our success and future sales growth will depend, in part, on our ability to protect our intellectual property. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods to protect our proprietary technologies. We have approximately 12,500 registered and pending patents. However, we cannot assure you that any patent will be issued as a result of any applications or, if issued, that any claims allowed will be sufficiently broad to protect our technology. In addition, it is possible that existing or future patents may be challenged, invalidated or circumvented.

 

RESULTS OF OPERATIONS

 

The following table shows information derived from our consolidated statements of income expressed as a percentage of net sales for the periods presented.

 

    Predecessor

   
  Successor

 
    Year Ended
December 31,


    Nine-month
period ended
September 30,
2004


   

Three-month
period ended

March 31,
2004


        Three-month
period ended
December 31,
2004


   

Three-month
period ended

April 3,
2005


 
   

2002


    2003

       
   

Net sales:

                                       

Related parties

  43.8 %   31.4 %   19.5 %   23.8 %       0.0 %   0.0 %

Others

  56.2     68.6     80.5     76.2         100.0     100.0  
   

 

 

 

 
 

 

    100.0     100.0     100.0     100.0         100.0     100.0  

Cost of sales

  98.7     90.6     77.8     78.8         83.9     87.8  

Gross profit

  1.3     9.4     22.2     21.2         16.1     12.2  

Selling, general and administrative

  8.8     8.3     6.4     7.5         12.2     13.4  

Research and development

  12.4     10.4     9.0     9.1         9.1     12.2  
   

 

 

 

 
 

 

Operating income (loss)

  (19.9 )   (9.3 )   6.8     4.6         (5.2 )   (13.4 )

Total other income (expense)

  (5.3 )   (4.2 )   (1.3 )   (1.2 )       5.6     (0.1 )
   

 

 

 

 
 

 

Income (loss) before income taxes

  (25.2 )   (13.5 )   5.5     3.4         0.4     (13.5 )

Income tax expenses

  0.3     0.2     0.3     0.4         2.8     1.1  
   

 

 

 

 
 

 

Net income (loss)

  (25.5 )%   (13.7 )%   5.2 %   3.0 %       (2.4 )%   (14.6 )%
   

 

 

 

 
 

 

Dividends to preferred unitholders

  N/A     N/A     N/A     N/A         5.5 %   1.1 %
                           
 

 

Net income (loss) attributable to common units

  N/A     N/A     N/A     N/A         (7.9 )%   (15.7 )%
                           
 

 

 

Comparison of Three-Month Periods Ended April 3, 2005 and March 31, 2004

 

Net Sales. Net sales for the three-month period ended April 3, 2005 were $213.4 million, a $50.4 million or 19.1% decrease from $263.8 million for the three-month period ended March 31, 2004. The significant reduction

 

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in year over year performance is primarily due to the reduction in DRAM foundry business with Hynix which declined by $41.1 million. Additionally, our Application Processor revenue decreased 46.3% as we have repositioned this product portfolio to de-emphasize optical storage device products and focus on consumer appliance and mobile application areas. Revenue from display driver IC’s was down year over year due to inventory adjustments in the supply chain. These declines were partially offset with 23% growth in revenue for CMOS Image Sensors.

 

Net sales to related parties for the three-month period ended April 3, 2005 decreased by $62.7 million from the prior year. Subsequent to the the Acquisition date, all sales made to Hynix were treated as sales to others. Net sales to others were $213.4 million for the three-month period ended April 3, 2005, a $12.3 million or 6.1% increase from the prior year.

 

Cost of Sales. Cost of sales were $187.4 million for the three-month period ended April 3, 2005, a $20.4 million or 9.8% decrease from $207.8 million for the three-month period ended March 31,2004. The decrease was due to reduced variable spending on lower revenue and lower depreciation. Included in cost of sales in the three months ended April 3, 2005 was $4.5 million in amortization of the fair market value of inventory in conjunction with the valuation of assets in purchase accounting for the period ended April 3, 2005. Cost of sales as a percentage of net sales increased to 87.8% in the three-month period ended April 3, 2005 compared to 78.8% in the prior year period due to lower average selling prices and factory utilization, partially offset by a reduction in total input costs.

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $28.5 million or 13.4% of net sales in the three-month period ended April 3, 2005, a $8.6 million or 43.2% increase from selling, general and administrative expenses of $19.9 million or 7.5% of net sales in the three-month period ended March 31, 2004. The increase in selling, general and administrative expense was primarily attributable to higher amortization of intangible assets due to purchase accounting and increased professional consulting and audit fees, partially offset by lower options expenses.

 

Research and Development Expenses. Research and development expenses were $26.1 million in the three-month period ended April, 2005, a $2.2 million or 9.2% increase from research and development expenses of $23.9 million in the quarter ended March 31, 2004. As a percentage of net sales, research and development expense increased to 12.2% in 2005 from 9.1% in 2004. The absolute dollar increase in research and development expenses was primarily attributable to our investment in improved development tools and platforms and associated maintenance contracts at our research and development centers as well as new product and process development to support next generation products.

 

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Operating Income (loss). Operating loss for the three-month period ended April 3, 2005 was $28.6 million, a $40.8 million decrease from the operating income of $12.2 million for the three-month period ended March 31, 2004. Operating loss as a percentage of net sales was 13.4% in 2005 compared to operating income as a percentage of net sale of 4.6% in 2004. The operating loss for the current year quarter was primarily due to a decrease in average selling prices on reduced volume from customers who were reducing their own inventory levels. The resulting under-utilization of our manufacturing facilities resulted in lower coverage of fixed costs and with increased operating expenses the operating loss expanded to 13.5% of revenue.

 

Net Interest Expense. Net interest expense was $13.9 million during the three-month period ended April 3, 2005, a $6.6 million or 90.4% increase from $7.3 million for the three-month period ended March 31, 2004. The increase in net interest expense was primarily due to the resulting interest expense from having outstanding debt of $750 million in the current year quarter versus $413.8 million in debt on a carve out basis at March 31, 2004.

 

Income Tax Expense. Income tax expense was $2.4 million in 2005, a $1.3 million increase from 2004 income tax expense of $1.1 million. This increase was principally attributable to the effect of the Korean withholding tax on the interest income paid to our Korean company’s Dutch parent company. Due to the uncertainty of utilization for foreign tax credits, the Korean withholding tax was treated as a current tax expense to the company. The income tax expense represents current income tax liability and the deferred income tax was not recorded due to uncertainty of realization.

 

Foreign Currency Gains and Losses. Foreign currency gains were $13.6 million during the three-month period ended April 3, 2005, a $9.8 million or 257.9% increase from gains of $3.8 million during the three-month period ended March 31, 2004 due to favorable currency fluctuation primarily between the Korean Won and the U.S. dollar.

 

Net Loss. Net loss was $31.3 million for the three-month period ended April 3, 2005 compared to a net income of $8.0 million for the three-month period ended March 31, 2004. This net loss was primarily due to reduced net sales and gross profit as well as increased operating expenses. Net loss as a percentage of net sales was 14.6% in 2005 compared to net income as a percentage of net sales of 3.0% in 2004.

 

Net Income (Loss) Attributable to Common Units. Net loss attributable to common units for the three months ended April 3, 2005 was $33.7 million or 15.8% of net sales reflecting $2.4 million of dividends payable to preferred unitholders. These dividends payable were accrued for the Series B redeemable convertible preferred units, which were outstanding during the current quarter. MagnaChip LLC issued Series A and B redeemable convertible preferred units during the quarter ended December 31, 2004. All of the Series A units were redeemed and most of the Series B units were redeemed during the same period.

 

Comparison of Years Ended December 31, 2004 and December 31, 2003

 

Net Sales. Net sales were $841.6 million for nine-month period ended September 30, 2004 and $243.6 million for the three-month period ended December 31, 2004, which on an aggregate basis totals $1,085.2 million in 2004, a $254.4 million or 30.6% increase compared to $830.8 million in 2003. This increase in net sales was primarily attributable to expansion of the camera-equipped mobile handset market and the increased demand for flat panel displays.

 

Revenue from CMOS image sensors and display driver IC’s grew 193.2% and 39.2%, respectively, in the current year period versus the prior year. Specialty foundry services also grew by 69%. Growth in our three largest product groups were offset by declining revenue in application processors and DRAM foundry revenue.

 

Net sales to related parties were $163.8 million for the year ended December 31, 2004, a $96.9 million or 37.2% decrease from the prior year sale of $260.7 million. This decrease was largely the result of executing our strategic plan to reduce our memory wafer production and realign capacity to address more profitable business opportunities.

 

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Net sales to others were $677.8 million for the nine-month period ended September 30, 2004 and $243.6 million for the three-month period ended December 31, 2004, which on an aggregate basis totals $921.4 million for the year ended December 31, 2004, a $351.3 million or 61.6% increase from the prior year net sales to others of $570.1 million. This increase was largely attributable to increased demand for camera-equipped mobile handsets and an increase in flat panel display market share.

 

Cost of Sales. Cost of sales were $654.6 million for the nine-month period ended September 30, 2004 and $204.5 million for the three-month period ended December 31, 2004, which on an aggregate basis totals $859.1 million for the year ended December 31, 2004, a $106.6 million or 14.2% increase from the prior year cost of sales of $752.5 million. Cost of sales as a percentage of net sales decreased to 79.2% for the year ended December 31, 2004 compared to 90.6% for the year ended December 31, 2003. The decrease in cost of sales as a percentage of net revenue was primarily attributable to increased volume and factory utilization, as well as improved product yields, that drove improved per unit costs. Depreciation costs were reduced for the three-month period ended December 31, 2004 as a result of the valuation of assets in purchase accounting. Improvements in the cost of procuring raw materials were partially offset by increases in labor and outsourcing costs.

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $54.0 million for the nine-month period ended September 30, 2004 and $29.8 million for the three-month period ended December 31, 2004, which on an aggregate basis totals $83.8 million for the year ended December 31, 2004, a $15.1 million or 22.0% increase from the prior year selling, general and administrative expenses of $68.7 million or 8.3% of net sales in the year ended December 31, 2003. The increase in SG&A expenses for the year ended December 31, 2004 was primarily attributable to increases in payroll and bonus expenses, infrastructure costs, professional fees, option expenses and amortization of intangible assets due to purchase accounting.

 

Research and Development Expenses. Research and development expenses were $75.7 million for the nine-month period ended September 30, 2004 and $22.1 million for the three-month period ended December 31, 2004, which on an aggregate basis totals $97.8 million for the year ended December 31, 2004, a $11.2 million or 12.9% increase compared to $86.6 million in 2003. This increase in research and development expenses was primarily attributable to the increase in labor costs, development tools and maintenance contracts. Research and development expenses as a percentage of net sales decreased to 9.0% in 2004 from 10.4% in 2003.

 

Operating Income (Loss). Aggregate operating income of $44.5 million for the year ended December 31, 2004 consisted of operating income of $57.3 million for the nine-month period ended September 30, 2004 and operating loss of $12.8 million for the three-month period ended December 31, 2004, a $121.5 million or 157.8% increase compared to $77.0 million operating loss in 2003. Operating income as a percentage of net sales increased to 4.1% for the year ended December 31, 2004 from (9.3)% for the year ended December 31, 2003. The increase in operating income and operating income as a percentage of net sales was principally due to improved net sales that helped absorb fixed costs and improvements in gross profit.

 

Net Interest Expense. Net interest expense was $17.7 million for the nine-month period ended September 30, 2004 and $16.7 million for the three-month period ended December 31, 2004, which on an aggregate basis totals $34.4 million for the year ended December 31, 2004, a $3.4 million or 9.0% decrease compared to $37.8 million in 2003. Net interest expense for the year ended December 31, 2004 included the allocation of debt and related expense of $17.7 million on a carve-out basis as well as the interest expense on the bank loan and others of $16.2 million plus interest incurred on $750 million debt of $1.3 million.

 

Income Tax Expense. Income tax expense was $2.8 million for the nine-month period ended September 30, 2004 and $6.7 million for the three-month period ended December 31, 2004, which on an aggregate basis totals $9.5 million for the year ended December 31, 2004, a $8.1 million increase from the year ended December 31, 2003 income tax expense of $1.4 million . The increase was principally attributable to the effect of the business transfer that occurred in the fourth quarter of fiscal year 2004. The Company decided not to recognize deferred

 

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tax assets for its temporary tax differences due to its uncertainty of realization, and this has led to higher income tax expense in the fiscal year.

 

Net Income (Loss). Aggregate net income for the year ended December 31, 2004 consisted of net income of $43.2 million for the nine-month period ended September 30, 2004 and net loss of $5.8 million for the three-month period ended December 31, 2004, a $151.1 million increase over a net loss of $113.7 million for the year ended December 31, 2003. Net income as a percentage of net sales increased to 3.4% for the year ended December 31, 2004 from net loss as a percentage of net sales of 13.7% for the year ended December 31, 2003. This increase was primarily a result of improved net sales and gross profit.

 

Net Income (Loss) Attributable to Common Units. On an actual basis, net loss attributable to common units for the year ended December 31, 2004 was $24.0 million or 2.2% of net sales reflecting $13.4 million of dividends payable to preferred unit holders. The dividends payable were accrued for the Series A and B redeemable convertible preferred units outstanding during the period. All of the Series A units and most of the Series B units were redeemed during the quarter ended December 31, 2004.

 

Comparison of Years Ended December 31, 2003 and December 31, 2002

 

Net Sales. Net sales were $830.8 million in 2003, a $130.5 million or 18.6% increase from 2002 net sales of $700.3 million. The increase in net sales was primarily attributable to the growth of camera equipped mobile handsets with growth of over 300% in this product group. Display driver IC growth of 34.1% was due to LCD television and flat panel monitor end market growth, the expansion of our product portfolio and the resulting increase in our sales of small display drivers for mobile handsets, portable game devices and other portable computing devices. Specialty foundry services increased 34.7% due to increased demand for our specialty manufacturing processes and capacity.

 

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Net sales to related parties were $260.7 million for the year ended December 31, 2003, a $46.1 million or 15.0% decrease from the prior year.

 

Net sales to others were $570.1 million for the year ended December 31, 2003, a $176.6 million or 44.9% increase from the prior year.

 

Cost of Sales. Cost of sales were $752.5 million in 2003, a $61.5 million or 8.9% increase from the prior year at $691.0 million. Cost of sales as a percentage of net sales decreased to 90.6% in 2003 compared to 98.7% in 2002, due to improved factory utilization. The average production cost per wafer in 2003 decreased over the previous year, principally due to an increase in production of our eight-inch equivalent wafers of approximately 22.4% versus the prior year while fixed costs remained relatively stable.

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $68.7 million or 8.3% of net sales in 2003, a $6.8 million or 11.0% increase from selling, general and administrative expenses of $61.9 million or 8.8% of net sales in 2002. The increase in SG&A expenses was primarily attributable to an increase in variable costs, such as increases in royalty payments and sales commissions.

 

Research and Development. Research and development expenses were $86.6 million or 10.4% of net sales in 2003, a $0.4 million or 0.5% decrease from research and development expenses of $87.0 million or 12.4% of net sales in 2002. This decrease in research and development expenses was primarily attributable to the expiration of royalty contracts with Motorola and Toshiba.

 

Operating Income (loss). Operating loss was $77.0 million in 2003, a $62.6 million or 44.8% decrease from the prior year operating loss of $139.6 million. Operating loss as a percentage of net sales decreased to 9.3% in 2003 from 19.9% in 2002. The decrease in operating loss as a percentage of net sales was primarily due to an increase in unit sales prices and a decrease in research and development costs.

 

Net Interest Expense. Net interest expense was $37.8 million in 2003, a $9.0 million or 19.2% decrease from 2002 net interest expense of $46.8 million. The decrease in net interest expense was primarily due to a decrease in outstanding debt on a carve out basis to $468.1 million at December 31, 2003 compared to $631.7 million at December 31, 2002.

 

Income Tax Expense. Income tax expense was $1.4 million in 2003, a $0.4 million or 22.2% decrease from 2002 income tax expense of $1.8 million. The decrease in income tax expense was principally due to a decrease in foreign subsidiaries’ taxable income. The income tax expense was all current income tax expense for overseas sales subsidiaries and the deferred income tax was eliminated due to realizability.

 

Net loss. Net loss was $113.7 million in 2003, a $64.6 million or 36.2% decrease over a 2002 net loss of $178.3 million. Net loss as a percentage of net sales decreased to 13.7% in 2003 from 25.5% in 2002. This decrease was primarily a result of an increase in unit sales price and an increase in operating margin and an associated decrease in income taxes.

 

Liquidity and Capital Resources

 

Our principal capital requirements are to fund working capital needs, meet required debt payments, including debt service payments on the notes and, if drawn upon, the senior credit facility, to invest in research and development and fund capital expenditures. We anticipate that operating cash flow, together with available borrowing capacity under our senior credit facility, will be sufficient to meet our working capital needs, fund our research and development and capital expenditures and service requirements on our debt obligations for the foreseeable future. As of April 3, 2005 we had total long-term debt outstanding of $750 million.

 

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We generated cash from operating activities of $10.9 million and $86.1 million for the three-month periods ended April 3, 2005 and March 31, 2004, respectively. The decrease in cash from operating activities between the two periods was due to 19.1% lower sales coupled with a 53.6% decrease in margin and increased accounts receivable. For the year ended December 31, 2004, total cash from operating activities were $329.5 million which included $312.2 million for the nine-month period ended September 30, 2004 and $17.3 million for the three-month period ended December 31, 2004, compared to $182.1 million in 2003. The significant increase was primarily attributable to the 30.6% increase in net sales and 188.8% increase in gross profit. For the years ended December 31, 2003 and 2002, the cash generated from operating activities were $182.1 million and 187.1 million, respectively. The $5.0 million decrease in 2003 was primarily due to an increase in the accounts receivable balance.

 

We had working capital balance of $96.6 million at April 3, 2005 and $129.3 million at December 31, 2004. The decrease of working capital balance was due to higher cash balance and inventory at December 31, 2004. As of December 31, 2003 and 2002, the working capital balances were $21.7 million and $3.1 million, respectively. The increase in 2003 was mainly due to higher accounts receivables as collection days increased from 27 to 40 days combined with a decrease in account payable days from 41 to 32 days.

 

For investing activities, we used cash of approximately $21.7 million for the three-month period ended April 4, 2005 and $611.3 million for the year ended December 2004 which consisted of $85.3 million for the nine months and $526.0 million for the three months. For years 2003 and 2002, the cash outflows from investing activities amounted to $21.5 million and $51.8 million, respectively.

 

There were cash outflows from financing activities for the preceding period the impact of carve-out accounting, which assumes that cash flows from all other activities were used to repay any outstanding borrowings. We used $13.9 million during the three-month period ended April 3, 2005 and $216.8 million in the year ended December 31, 2004 from financing activities. The $216.8 was composed of $226.8 million for the nine months and $10.0 million for the three months. For fiscal years 2003 and 2002, the cash outflows from financing activities were $160.6 million and $135.3 million, respectively.

 

On a historical basis, a portion of Hynix’s consolidated debt was allocated to MagnaChip (“Corporate Borrowings”) in addition to other short-term and long-term borrowings that were directly assignable.

 

The allocation of the Corporate Borrowings was estimated using our anticipated debt requirements in connection with the Acquisition, and this amount was applied as of December 31, 2003. The significant decrease in the total debt as of September 30, 2004 reflects the substantial cash flows generated during the period, much of which was assumed to have been applied toward the repayment of the outstanding debt.

 

In connection with the Acquisition, we assumed a total of $329.3 million in senior secured term loan facilities, which were repaid in connection with the offering of the old notes.

 

Capital Expenditures. Capital expenditures vary depending on the prevailing business factors, including current and anticipated market conditions. Capital expenditures in recent years have remained at relatively nominal levels in comparison to the operating cash flows generated during corresponding periods. We believe that this trend will continue given our existing facilities and investment plans, and our product portfolio and anticipated market conditions going forward. For the three-month period ended April 3, 2005, capital expenditures totaled $13.0 million. For the year ended December 31, 2004, capital expenditures consisted of $86.7 million for nine months and $23.5 million for three months, for an aggregate total of $110.2 million. For the years 2003 and 2002, capital expenditures totaled $25.2 million and $63.5 million, respectively. The increase in 2004 was primarily due procurement of equipment to support a turnaround in business conditions beginning in the second half of 2004. Unfavorable market conditions in 2002 and into 2003 had led to reduced capital expenditures in 2003. Consistent with previous spending patterns, future capital expenditures will focus on product line conversions, fab upgrades and continued investments in significant research and development activities.

 

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Future Financing Activities. Our primary future capital requirements on a recurring basis will be funding working capital needs, meeting required debt payments and funding research and development and capital expenditures. Specifically, going forward, we expect to expand our research and development headcount and make investments in advanced software and hardware design tools that increase our design engineer productivity. In addition, we plan to add design centers in key geographical locations near our strategic customers. We anticipate that operating cash flows, together with available borrowings under our senior credit facility, will be sufficient to meet these capital requirements for the foreseeable future. We may from time to time incur additional debt.

 

We may need to incur additional debt or issue equity to make strategic acquisitions of investments. We cannot assure you that such financing will be available to us on acceptable terms or that such financing will be available at all.

 

Contractual Obligations

 

Summarized in the table below are our obligations and commitments to make future payments under debt obligations and minimum lease payment obligations as of December 31, 2004.

 

     Payments Due by Period

 
     Total

   2005

   2006

   2007

   2008

   2009

   Thereafter

   Interest
expense


 
     (in millions of US Dollars)  

Revolving credit facility

   0.7    0.7                                

Secured notes and subordinated note

   750.0                             750.0       

Operating lease

   17.2    4.7    4.2    3.7    2.3    2.3            

Royalties payable

   3.9    1.5    1.5    1.5                   (0.6 )

Government grants payable(*)

   0.7                             0.7       

(*) The maturity of the government grant is not specified in the underlying agreements. However, for the purposes of this table its maturity was assumed to be greater than five years.

 

Unit/Stock-based Compensation Expense

 

For options granted to employees on or after October 6, 2004, we record a compensation charge equal to the excess, if any, of the deemed fair value of the stock at the measurement date over the option exercise price, in accordance with Accounting Principles Board Opinion No. 25. For all of our grants during this period, the exercise price equaled the fair value, therefore, no compensation expense resulted from these grants.

 

Options were previously granted by Hynix to our employees and the related compensation costs are reflected in the historical financials. For the year ended December 31 2003 and for the nine-month period ended September 30, 2004, we recorded costs of $0.2 million and $3.3 million, respectively. However, none of these options were transferred as part of the Acquisition, and therefore, no additional future charges will be taken relating to these previous option grants. On the other hand, we have established a new employee option plan and intend to make grants in the future.

 

Recent accounting pronouncements

 

In December 2004, FASB issued FAS 123(R), Share-Based Payment (revised 2004). This revision effects current practice in a number of ways, including the elimination of the alternative to use the intrinsic value method of accounting from Accounting Principles Board (“APB”) Opinion No. 25 that was provided in FASB Statement No. 123 as originally issued. This statement will be effective for us on January 1, 2006, and we are evaluating the impacts of this proposed FASB Statement on its financial statements.

 

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In November 2004, the FASB issued SFAS No. 151, Inventory Costs an amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage), and requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective date for us on January 1, 2005, and we are evaluating the impacts of this proposed FASB Statement on its financial statements.

 

In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This standard is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this standard will have no effect on our financial position and results of operations as no accounting changes or errors have occurred in the current period.

 

Quantitative and Qualitative Disclosures about Market Risk

 

Market risk is the risk that the value of a financial instrument will fluctuate due to changes in market conditions, including changes in interest rates and foreign exchange rates. In the normal course of our business, we are subject to market risk associated with interest rate movements and currency movements on our assets and liabilities.

 

Foreign Currency Risk. We have exposure to some foreign currency exchange-rate fluctuations on net income from our subsidiaries denominated in currencies other than U.S. dollars. We have foreign subsidiaries in Korea, Taiwan, Japan and Hong Kong. From time to time these subsidiaries have cash and financial instruments in local currency. The amounts held in Japan and Taiwan are not material in regards to foreign currency movements. However, based on the cash and financial instruments balance at December 31, 2004 for our Korean subsidiary, a 10% devaluation of the Korean Won against the U.S. dollar would have resulted in a decrease of $2.2 million in our U.S. dollar and financial instruments cash balance.

 

Interest Rate Risk. The $200 million 6 7/8% Second Priority Senior Secured Notes due 2011 and the $250 million 8% Senior Subordinated Notes due 2014 are subject to changes in fair value due to interest rate changes. If the market interest rate had decreased by 10% and all other variables were held constant from their levels at December 31, 2004, we estimate that we would have additional interest expense cost over market rate of $0.6 million (90 days basis). Our net loss for three-month period ended December 31, 2004 would have increased by 11.0% (90 days basis). The fair value on these fixed rate notes would have decreased by $12.3 million or increased by $11.7 million with a 10% increase or decrease in the interest rate, respectively.

 

Cash Flow Interest Rate Risk. We have cash flow interest rate risk related to our $300 million Floating Rate Second Priority Senior Secured Notes due 2011 as interest expense is subject to prevailing market interest rates at each balance sheet date. If the market interest rate had increased by 10% and all other variables were held constant from their levels at December 31, 2004, we estimate that we would have additional interest expense of $0.2 million (90 days basis) for these floating rate notes and our net loss for three-month period ended December 31, 2004 would have increased by 3.2% (90 days basis).

 

 

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Industry overview

 

Semiconductors, or “chips,” are the key building blocks used to create electronic products and systems. Semiconductors perform a variety of functions, such as processing data, storing information and converting or controlling signals. With advances in technology, the functionality and performance of semiconductors have increased while the size, power requirements and unit costs have decreased. The result of these advances has been to increase the proliferation of electronic content in an increasing array of products, including in a wide variety of consumer mass products, such as automobiles, mobile handsets, digital cameras, and other consumer electronic equipment.

 

According to the Semiconductor Industry Association, or SIA, the overall semiconductor market grew from $17.9 billion in 1983 to $213.8 billion in 2004, representing a compound annual growth rate of 12.5%. SIA expects that between 2004 and 2007, the overall semiconductor market will grow from $213.8 billion to $259.4 billion, a compound annual growth rate of 6.7%.

 

Classifications of Semiconductors

 

Semiconductors vary significantly depending upon the specific function or application of the end product in which the semiconductor is embedded. We view the semiconductor industry to be comprised of three broad product segments, as follows:

 

    Logic devices process data and range from complex semiconductors such as microprocessors to digital signal processors to application specific and standard logic products. These represent approximately 58.2% of 2004 total industry sales data (using the Gartner data for microcomponents, logic IC, and application specific semiconductors);

 

    Analog and mixed-signal devices interface with real world signals such as light and heat, or which process electronic signals and control electrical power. Mixed-signal products also process real-world signals but they contain some digital circuitry, although they contain more than 50% analog content. These represent 19.9% of 2004 total industry sales data (using the Gartner data for analog IC, discrete, optical and non-optical sensors), and

 

    Memory devices to store data. According to Gartner, memory devices represented 21.9% of total semiconductor consumption in 2004.

 

Our products generally fit within the first two categories above. Our CMOS image sensor products and our flat panel display drivers are mixed-signal devices, while our application processors are logic devices. Our specialty foundry services segment produces all three types of semiconductors.

 

Within these classifications, semiconductors vary significantly depending upon a number of technical characteristics. Examples of these characteristics include:

 

Level of Integration. “Integration” refers to the extent to which different functional elements are combined onto a single chip. Customers today are increasingly demanding higher degrees of integration from their semiconductor suppliers in order to reduce the size and cost of the semiconductors incorporated into the end product. This drive to greater integration has resulted in more semiconductor products that combine analog, digital, and memory circuitry onto a single chip. These types of semiconductors are often referred to as systems-on-a-chip.

 

Customization. “Customization” refers to the extent to which a semiconductor has been customized for a specific customer or application. Standard products are semiconductors that are not customized and can be used by a large number of customers for numerous applications. In addition, some standard products, such as microcontrollers, can be customized by using software rather than by changing device hardware. Changing the device hardware can be a time-intensive and costly process. Customized semiconductors, also referred to as application specific integrated circuits, are made to perform specific functions in specific applications, sometimes for a specific customer.

 

Process Technology. Semiconductors are manufactured by using different process technologies, which can be likened to “recipes.” The process technology utilized during manufacturing impacts a semiconductor’s performance for a given application. Since the 1970s, the two most common process technologies used were BiCMOS and CMOS. While BiCMOS and CMOS processes continue to be used today, new process technologies and new materials have also been introduced as semiconductor technology has advanced.

 

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Our Markets

 

We operate in several distinct, but increasingly related, end markets which we believe have the potential to offer growth opportunities higher than the overall semiconductor market. According to the SIA, the overall semiconductor market is expected to have a compound annual growth rate of 6.7% between 2004 and 2007.

 

Much of the growth in the markets that we serve can be attributed to the rapid adoption and convergence of consumer electronics and communication devices such as mobile handsets, including camera-equipped mobile handsets, handheld gaming devices, PDAs, flat panel monitors and televisions, consumer home and mobile displays, and portable and desktop computers equipped with advanced displays. In addition, technological advances are driving down the cost of these products and expanding their functionality, which further accelerates their proliferation.

 

According to Gartner, the CMOS image sensor market is forecasted to grow at a compound annual growth rate of 20.2% from 2004 to 2008. We believe this is driven in large part by advances in CMOS image sensor technology which have enabled CMOS image sensors to provide solutions that combine high-image quality, low power consumption, small size and low cost for consumer mass market applications such as camera-equipped mobile handsets.

 

According to Gartner, the market for flat panel display drivers is forecasted to grow at a compound annual growth rate of 18.5% between 2004 and 2008. This growth can be attributed to the availability of advanced mobile devices that permit feature-rich applications requiring more advanced display technologies than have previously been available. For example, while early mobile handsets were used primarily for voice communication, today their uses include visually-oriented data and content-driven applications such as internet access, gaming and streaming video. Similarly, until 2001, the market for larger flat panel display drivers depended primarily on end-product demand in the laptop computer market. However, today, the mainstream market for large-size displays has expanded from a notebook computer market to include desktop monitors and televisions. With improvements in product technology and display performance, products incorporating advanced flat panel technologies such as TFT-LCD have become a popular replacement to displays and monitors based on older cathode ray tube, or CRT, technology and have further driven growth in flat panel display driver solutions.

 

Our application processors are also referred to as microcontrollers. According to Gartner, the microcontroller market is forecasted to grow at a compound annual growth rate of 11.7% from 2004 to 2008. The market for application processors is largely driven by competitive pressures requiring manufacturers of a wide variety of products to expand product functionality and provide differentiation while maintaining or reducing the cost of their products. These products include remote control devices, handheld tools, home appliances, mobile handsets and consumer electronics, among many others.

 

Application processors meet the needs of electronics manufacturers by providing advanced control functions to their product offerings. The increasing demand for application processors that provide advanced control features has made the market for application processors one of the largest segments of the semiconductor industry.

 

The outsourced semiconductor manufacturing, or foundry, market is also expected to grow at a higher rate than that of the overall semiconductor market. According to iSuppli, the foundry market is forecasted to grow at a compound annual growth rate of 13.4% between 2004 and 2009. Much of this growth can be attributed to the growth of fabless semiconductor companies which are semiconductor companies that focus solely on the design, marketing and sale of semiconductors without internal wafer fabrication facilities. Fabless semiconductor companies opt to have their products manufactured by third parties. Similarly, many semiconductor companies that do own their own fabrication facilities (integrated device manufacturers, or IDMs) have chosen to outsource some of their fabrication requirements for complex and high-performance semiconductor devices in order to supplement their own capabilities and become more cost-competitive. In recent years, increasing competition, shortening of product lifecycles and pricing pressures have resulted in the need for fabless companies and IDMs to offer products that provide higher performance and greater functionality which often requires outsourcing to manufacturers with advanced design capabilities and manufacturing processes.

 

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Business

 

OVERVIEW

 

We are a leading designer, developer and manufacturer of mixed-signal and digital multimedia semiconductors addressing the convergence of consumer electronics and communications devices. We focus on CMOS image sensors and flat panel display drivers which are complex, high-performance mixed-signal semiconductors that capture images and enable and enhance the features and capabilities of both small and large flat panel displays. Our solutions are used in a wide variety of consumer and commercial mass market applications, such as mobile handsets, including camera-equipped mobile handsets, flat panel monitors and televisions, consumer home and mobile displays, portable and desktop computer displays, handheld gaming devices, PDAs and audio-visual equipment such as DVD players. We serve consumer markets that we believe will have higher growth rates than those of the overall semiconductor industry.

 

We manufacture our products using our proprietary process technology, which we believe provides our products with significant feature and cost advantages over those of our competitors. We have approximately 12,500 registered and pending patents, which we believe is one of the largest patent portfolios in the semiconductor industry. Our proprietary CMOS image sensor technology provides brighter, sharper, more colorful picture quality in image-capture applications such as camera-equipped mobile handsets and fingerprint sensors. Our proprietary flat panel display drivers enable our customers to deliver higher image quality, thinner and more power-efficient small panel displays for use in mobile handsets, handheld gaming devices and PDAs and large panel displays for use in portable and desktop computer monitors and televisions. We are also a leading provider of specialty foundry services whereby we leverage our specialized process technologies and low cost manufacturing facilities to produce semiconductors for third parties using their product designs. In addition, we provide application processors that have been designed into a wide variety of products in consumer applications such as remote control devices, home appliances and consumer electronics.

 

We own and operate five wafer fabrication facilities, or fabs, which have a combined production capacity of over 115,000 eight-inch equivalent wafers per month. Our fabs provide us with large-scale, cost-effective and flexible capacity, enabling us to rapidly scale to high volume to meet shifts in demand by our end customers. Our fabs also provide us with the ability to further develop our differentiated process technologies for our own product development and manufacturing. The location of our manufacturing sites and research and development resources in Korea and Japan provide close geographical proximity to many of our largest Asia-based customers and to the core of the worldwide consumer electronics supply chain.

 

We sell our solutions to leading original equipment manufacturers, or OEMs, which include major branded customers as well as contract manufacturers. Our CMOS image sensors are currently designed into products offered by leading global mobile handset manufacturers. Our flat panel display drivers are currently incorporated into products offered by LG.Philips LCD and Samsung, the top two flat panel display manufacturers.

 

During the year ended December 31, 2004, we sold over 1,500 products to more than 200 customers. During the nine-month period ended September 30, 2004 and the three-month period ended December 31, 2004, we generated actual net sales of $841.6 million and $243.6 million, respectively, or $1.1 billion on an aggregate basis, and during the year ended December 31, 2004, we generated pro forma net sales of $1.0 billion. We generated actual net sales of $213.4 million for the three-month period ended April 3, 2005.

 

THE ACQUISITION

 

Our business was named MagnaChip Semiconductor when it was acquired from Hynix on October 6, 2004 by CVC, Francisco Partners, CVC Asia Pacific, certain members of management and other investors, following discussions with Hynix that began in late 2001 and the execution of a definitive agreement in June 2004. Previously, we were the System IC division within Hynix which, in 1999, had been formed from the Hyundai Electronics and LG Semiconductor System IC businesses and can trace its history back to the late 1970s.

 

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Although we were previously part of Hynix, we had a history of operating autonomously within Hynix and had a separate global sales force and management structure.

 

In connection with the transaction, we entered into several definitive agreements with Hynix regarding key raw materials, campus facilities, research and development equipment and information technology and factory automation and wafer foundry services. We also entered into a non-exclusive cross license with Hynix which provides us with access to certain of Hynix’s intellectual property for use in the manufacture and sale of non-memory semiconductor products. We believe that these arrangements with Hynix provide significant mutual operational advantages, for example, allowing us to leverage the significant historical investments in our capital equipment and providing for shared resources and other key benefits. All agreements with Hynix under which we obtain essential materials or services are multiyear contracts. We refer to the acquisition transaction, including the related definitive agreements with Hynix, as the “Acquisition.” See “Certain relationships and related transactions—the Acquisition.”

 

RECENT DEVELOPMENTS

 

On March 7, 2005, we acquired all of the capital stock of ISRON Corporation through our wholly owned Dutch subsidiary. ISRON is based in Osaka, Japan and designs, develops, and markets mixed-signal semiconductors primarily for the display driver IC market. We expect the acquisition to add key products and technology to our portfolio in the flat panel display driver market for mobile handset applications.

 

On April 14, 2005, we completed our acquisition of IC Media Corporation through a reverse merger with a newly formed subsidiary. Based in Santa Clara, California, IC Media is a leading developer and supplier of small pixel geometry, high-resolution CMOS image sensors for camera-equipped mobile handsets, digital still cameras, personal computer cameras and other mobile imaging applications. The company has offices in Arizona, Taiwan, China and Japan, which adds increased coverage to our global customers.

 

COMPETITIVE STRENGTHS

 

We believe that our competitive strengths include:

 

    Leading Technology and Intellectual Property. We believe our advanced process technology and portfolio of approximately 12,500 registered and pending patents provide us with key competitive advantages in the following areas:

 

    CMOS image sensors: Our CMOS image sensors feature low power consumption and currently up to 2.1 megapixel resolution with auto-focus and auto-zoom options; features which provide important benefits to products incorporating our solutions, including increased battery life, enhanced image quality and ease of use.

 

    Flat panel display drivers: We believe that our flat panel display drivers offer superior performance in shaping image signals and transmitting those signals to flat panel displays. These technical features result in sharper, brighter and higher-quality colored images in our customers’ end products. Furthermore, we believe that our flat panel display drivers enable thinner and more power-efficient flat panels that are easily integrated by our customers into their products.

 

    Specialty foundry services: We have developed high-voltage, analog power and embedded memory specialty manufacturing process technologies that enable us to manufacture differentiated, high performance integrated semiconductor devices. For example, we developed the first high-voltage, high-performance CMOS 0.18 µm process, which enables us to manufacture more integrated, and thus smaller and more cost-efficient, semiconductor products. We believe that our proprietary process technology allows us to meet a wide variety of the specialty semiconductor manufacturing needs of our customers.

 

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    Application processors: We are able to leverage our system knowledge and manufacturing capabilities to provide integrated solutions in adjunct with our image-capture and display driver products. Our application processors are designed to interface with and provide intelligence to consumer electronics devices and systems. We focus on providing short turn around time for our customers in their development of specially designed products.

 

    Flexible In-House Manufacturing. Our in-house wafer manufacturing capacity allows us to provide dependable delivery and quality of integrated semiconductor products to our customers. We have the ability to ramp quickly to high volumes to meet the variable needs of our customers. We have significant wafer manufacturing capacity as a result of our former parent’s investments in our wafer fabrication facilities. Because we offer specialty process technologies that do not require expensive investment in leading edge technologies, we are able to keep our capital expenditures relatively low.

 

    Significant Cost Advantages. We maintain price competitiveness on our products through our low cost operating structure. The Asian location of our primary manufacturing and research and development facilities provides us with a number of cost advantages relative to operating in other regions in the world. Additionally, we believe that our history of competing in the highly cost-sensitive markets in which we operated when we were a unit of Hynix, required us to refine our manufacturing processes for optimal cost efficiency.

 

    Established Relationships with Key Consumer Electronics OEMs. Asia Pacific is the core of the worldwide consumer electronics supply chain. According to Gartner, sales to Asia Pacific (excluding Japan) accounted for 46.5% of 2004 consumer electronic semiconductor sales. Our long history of operating in Asia and our proximity to leading communications and consumer OEMs including LG.Philips LCD, LG Electronics, Sharp and Samsung facilitates our close and established customer relationships with leading innovators in the consumer electronics market. We have active local applications and engineering work support programs and collaborate closely with our customers in the design and manufacturing of their products.

 

    Significant Management and Board Expertise. Our management and board of directors have significant previous experience with advanced semiconductor companies both in Asia and worldwide. Our Chief Executive Officer, Dr. Youm Huh, was President of the System IC division of Hynix and has held management positions at Hynix and Hyundai Electronics since 1998. Prior to that, he was a Principal Researcher at Stanford Computer Systems Laboratory and Stanford University’s Center for Integrated Systems and worked at Samsung Electronics. Jerry Baker, our Chairman, has extensive industry experience, including serving as the former Executive Vice President of Global Operations of Fairchild Semiconductor. Our Executive Vice President, Strategic Operations and Chief Financial Officer, Robert Krakauer, was Executive Vice President of Corporate Operations and Chief Financial Officer of ChipPAC, a leading provider of semiconductor packaging, assembly, and test services. In addition, two of our equity sponsors, CVC and Francisco Partners, have a long history of investments in semiconductor companies. We believe that their understanding of semiconductor system solutions, relationships, and credibility with key customers provides us with a key competitive advantage.

 

BUSINESS STRATEGY

 

Our goal is to build upon our position as a leading provider of mixed-signal and digital multimedia semiconductors addressing the convergence of consumer electronics and communications devices. Our business strategy emphasizes the following key elements:

 

   

Leverage Our Substantial Intellectual Property. We intend to use our broad patent portfolio and specific end market expertise to deliver system-level products with higher levels of integration and performance to customers in our existing and new markets. In CMOS image sensors, we intend to leverage our strong pixel design and manufacturing expertise to introduce higher resolution, more integrated and cost-effective solutions for camera-equipped mobile handsets and to penetrate emerging applications for image sensors in the automotive, medical and industrial markets over time. In flat panel display drivers,

 

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we intend to leverage our broad library of circuit building blocks, our embedded memory capabilities, our understanding of the major flat panel display types and our process technology to continue to reduce time to market and introduce new products that enhance image quality and operate with greater power efficiency. Our manufacturing process expertise and related intellectual property underlies and supports many of the advances in our technology.

 

    Strengthen Collaboration With Key Customers. We intend to continue strengthening and deepening relationships with our key customers by collaborating on critical design and product development roadmaps. We believe such collaborative relationships will solidify our position with our customers, further our competitive differentiation and accelerate our drive for deeper customer and new market penetration. For example, close collaboration with our mobile handset customers has allowed us to deliver improved interfaces between baseband and image processors, which have resulted in solutions with smaller form factor and improved image quality.

 

    Increase Large Account Penetration. We have a global customer base consisting of leading consumer electronics OEMs and contract manufacturers. Many of our customers have multiple product variations that use image-capture and processing as well as applications processing solutions. We will seek to increase our customer penetration by taking advantage of our broad product portfolio and existing relationships to cross-sell existing products to our customers and to penetrate product variations where our solutions are currently not used.

 

    Broaden Our Customer Base. We intend to expand our customer base across various applications and geographic locations by leveraging our position as a supplier to many of the largest global consumer electronics companies and delivering to potential customers proven, innovative solutions. We also believe that as consumer electronics and communications applications converge and proliferate, we will increasingly have opportunities to sell our products into new markets such as the automotive, medical and industrial markets. We also intend to expand our global sales presence to penetrate new accounts worldwide and grow existing account relationships. We will leverage our sales representatives and distributors located in Korea, Japan, China, Taiwan, Hong Kong, Germany, the United Kingdom and the United States to further these goals.

 

    Develop a Platform for Ubiquitous Convergence of Consumer Electronics and Communications Applications. In order to serve our customers’ evolving needs, we intend to extend our technology leadership by developing new features and new products that are synergistic with our existing product portfolio. We are developing additional features in our applications processors, such as video processing capability that meets the MPEG-4 standard, in order to complement our image-capture and processing products and provide our customers a system-level platform solution. We believe that as consumer electronics and communications applications converge and become even more ubiquitous, customers will look to suppliers like us to provide additional system-level solutions to enable faster time to market and better integration in end products.

 

    Leverage Our Capital Light Business Model. We acquired significant proprietary process technologies and wafer manufacturing capacity from our former parent, Hynix. We intend to leverage these investments made by Hynix to drive our growth and margin improvement. Furthermore, we plan to continue to keep our capital expenditures relatively low by maintaining our focus on specialty process technologies that do not require expensive investment in leading edge technologies. If needed, we will access other foundries that provide such technology in the future. We believe this approach will lead to a higher return on invested capital.

 

PRODUCTS AND SERVICES

 

We are a leading designer, developer and manufacturer of mixed-signal and digital multimedia semiconductors addressing the convergence of consumer electronics and communications devices. We focus on CMOS image sensors and flat panel display drivers which are complex, high-performance mixed-signal semiconductors that capture images and enable and enhance the features and capabilities of both small and large

 

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flat panel displays. Our solutions are used in a wide variety of consumer and commercial mass market applications, such as mobile handsets, including camera-equipped mobile handsets, flat panel monitors and televisions, consumer home and mobile displays, portable and desktop computer displays, handheld gaming devices, PDAs and audio-visual equipment such as DVD players. We serve consumer market segments that we believe will have higher growth rates than those of the overall semiconductor industry.

 

We sell our solutions to leading original equipment manufacturers, or OEMs, which include major branded customers as well as contract manufacturers. Our CMOS image sensors are currently designed into products offered by leading global mobile handset manufacturers. Our flat panel display drivers are currently incorporated into products offered by LG.Philips LCD and Samsung, the top two flat panel display manufacturers. During the year ended December 31, 2004, we sold over 1,500 products to more than 200 customers.

 

We have a balanced portfolio of products that address many of the most rapidly growing consumer electronics markets. We provide products and services in the following four principal areas: CMOS image sensors, flat panel display drivers, semiconductor manufacturing services and application processors.

 

CMOS Image Sensors. Our highly integrated image sensors are designed to be cost effective and to provide brighter, sharper, more colorful and, thus enhanced, image quality for use primarily in applications that require small form factors, low power consumption, effective heat dissipation and high reliability. Our image sensors fully satisfy these key criteria and are used in image capture applications such as camera-equipped mobile handsets, personal computer cameras and fingerprint sensors. Our in-house manufacturing capabilities enable us to continuously fine tune our CMOS process technology to deliver improved image-capture sensitivity and accuracy.

 

CMOS image sensors are typically less expensive to produce and consume less power than other types of image sensors. Historically, CMOS image sensors were primarily used for low-cost applications for which high-image quality was not a priority. Recently, advances in semiconductor manufacturing processes and design techniques have led to improvements in CMOS image sensor performance and quality. As a result, CMOS image sensors have become useful, relatively low-cost solutions for use in applications such as camera-equipped mobile handsets and PDAs, where high-image quality, low power consumption, small size and low-cost are important considerations.

 

The CMOS image sensor market is primarily driven by sales of camera-equipped mobile handsets. According to Gartner, sales of camera equipped mobile handsets are predicted to grow from 158.9 million units in 2004 to 524.9 million units in 2008. This is a compound annual growth rate of 34.9%. The CMOS image sensor market is expected to grow from $2.4 billion in 2004 to $5.1 billion in 2008, according to Gartner. This represents a compound annual growth rate of 20.2%. Other markets for CMOS image sensors include industrial electronics, and data processing electronics. Industrial Electronics CMOS image sensors are forecasted by Gartner to grow from $188 million in 2004 to $841.0 million in 2008. This is a compound annual growth rate of 45.4%. Data Processing Electronics CMOS image sensors are forecasted by Gartner to grow from $625 million in 2004 to $1,108 million in 2008. This is a compound annual growth rate of 15.4%.

 

Our CMOS image sensors are characterized by a high level of integration. Most CMOS image sensors systems are made up of at least two integrated circuits: the CMOS image sensor itself and a separate image signal processor, or ISP. With the continuing demand for ever smaller camera-enabled devices, small size has become an increasingly important consideration for manufacturers of camera phones and similar products. Our products meet this demand for smaller form factors by integrating both our proprietary image sensor and image signal processor onto a single chip, thus occupying approximately half of the space required by multiple chip solutions, while providing equivalent or even superior image quality with lower power consumption and a lower overall cost.

 

We offer two CMOS image sensor product lines: a megapixel series and a VGA series. Our mega-pixel series provides higher-resolution images of currently up to 2.1 megapixels. Our megapixel solutions are used for

 

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higher-end applications requiring greater resolution. Our VGA series provides resolutions of less than 0.3 megapixels and is primarily used in lower cost applications not requiring maximum image resolution.

 

Flat Panel Display Drivers. Our flat panel display driver solutions are used in a wide variety of displays for mass market and commercial applications such as mobile handsets, handheld gaming devices, PDAs, displays for desktop and mobile computer monitors and flat panel televisions. We produce highly integrated flat panel display driver solutions and have pioneered developments in embedded memory and in the design and manufacturing of display drivers, enabling our customers to provide improved picture quality through thinner, smaller, more power-efficient displays.

 

Display drivers are the critical semiconductor components that enable the display’s functionality. A display driver operates by interfacing with the host processor to generate the precise analog voltages and currents required to create images on the display. The performance characteristics of a display driver are critical to the quality and visual appeal of the images and text generated on the display and, in mobile devices, the power efficiency of the device. Our display drivers are highly integrated semiconductors that are customized for the particular needs of our customers. We believe that our design engineering expertise, technology leadership, manufacturing process expertise and library of functional building blocks produce display drivers that enable a wide variety of display types with high-impact visual performance.

 

The overall end market for flat panel display drivers is composed of a multitude of consumer electronics device markets such as television, laptop and desktop computers and portable consumer devices, including mobile handsets. This overall market can be broken down into several distinct sub-markets which we serve. These sub-markets include large panel TFTs, typically used in flat panel televisions and computer displays, small panel TFTs, typically used in mobile handsets, OLEDs and Color STNs. According to Gartner, the LCD driver market is anticipated to grow from approximately $6.9 billion in 2004 to $10.0 billion in 2008. This represents a compound annual growth rate of 9.9%. Total flat panel display market unit shipments are projected to grow from 3.1 billion units in 2003 to 7.5 billion units in 2008, according to Frost and Sullivan. This represents a compound annual growth rate of 19.2%.

 

We provide display drivers for use in several different types of display technologies and for a variety of end-market applications as discussed below.

 

    TFT-LCD. TFT is an advanced active matrix LCD technology that uses a matrix of transistors embedded on a thin film of silicon to change the transparency of the LCD when voltage is applied. TFT-LCD technology is currently widely used for notebook computers and large scale flat panel monitors (Large TFT) as well as for displays for high-end mobile devices such as advanced mobile handsets (Small TFT). We currently provide Large TFT display drivers for use in mobile and desktop computer displays and in stand-alone flat panel television displays. We also provide Small TFT display drivers for use in mobile handsets, PDAs and in other consumer devices such as handheld gaming devices.

 

    Color STN. Color STN is a low-power, low-cost solution based on passive matrix LCD technology and is widely used in color mobile displays available in the market today. Our Color STN display drivers are used in mobile applications such as mobile handsets, PDAs and handheld gaming devices.

 

    Organic Light Emitting Diode or OLED. OLED is a relatively new display technology used in both mobile displays as well as in larger displays. OLED technology provides enhanced picture quality, low power consumption and long product life; it also has fast image response time, making it an ideal solution for displaying motion pictures on mobile devices. We currently offer display drivers for OLED displays used in mobile handsets and other mobile devices.

 

Specialty Foundry Services. We provide specialty foundry services primarily to semiconductor companies that do not have their own fabs. We target the market for diversified semiconductor products that require differentiated specialty process technologies for their manufacture including CMOS high-voltage, embedded memory, analog, power, and mixed-signal processes, which in general are not targeted by high-volume pure-play

 

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participants in the foundry market. We focus on specialty process technologies that do not require significant recurring capital investment, and we are able to better differentiate ourselves through the depth of our intellectual property portfolio and process technology skills.

 

The increasing trend toward the outsourcing of semiconductor manufacturing has resulted in a rapid increase in the size of this market. According to iSuppli, the worldwide foundry service market is projected to grow from in excess of $21.3 billion in 2004 to $40.0 billion in 2009, a compound annual growth rate of 13.4%.

 

Typical applications serviced by our semiconductor manufacturing services business are mixed-signal, high-voltage, power, and logic products for consumer, computer, network and communication, industrial and military end-markets. Our internal wafer fab facilities serve both our in-house product design groups and external foundry customers, allowing for both specialty process technology expertise and flexible manufacturing capacity. We believe we are typically the primary-source provider of semiconductor manufacturing services for specialty process technologies for our foundry customers.

 

Application Processors. We offer a broad family of application processors for end products requiring programmability, high-performance, low-power and cost-effectiveness. These end products are as diverse as home appliances such as washing machines, television remote control devices and consumer electronics and computer equipment.

 

Application processors typically incorporate a microcontroller as their principal active component. A microcontroller is a self-contained computer on a single semiconductor device and consists of a central processing unit, non-volatile program memory, random access memory for data storage and input/output peripheral capabilities. Because of the broad diversity of their end-product uses, the market for application processors is one of the largest semiconductor sub-markets. The microcontroller market, according to Gartner, is anticipated to grow from $14.5 billion in 2004 to $22.5 billion in 2008. This represents a compound annual growth rate of 11.7%.

 

Our application processor products are currently available in a variety of configurations for different end uses. Our most advanced application processors incorporate 32-bit architecture and are designed around ARM’s ARM7 system on a chip. They also incorporate our proprietary embedded memory technology as well as our advanced process technology and are designed into end products requiring specialized capabilities, such as camcorders and automotive telematics systems. Our 8-bit application processors provide a highly flexible and cost effective solution for a wide variety of applications such as remote controllers and home appliances. Many of our more advanced 8-bit application processors are based on our proprietary advanced CMOS control processing unit and are used in applications requiring greater control functionality such as home computing and electronics equipment.

 

We believe that our core application processor intellectual property and manufacturing expertise, together with our in-house mixed-signal semiconductor and processing semiconductor capabilities will enable us to extend our application processor solutions to other high-growth applications that are synergistic with our CMOS image sensors and flat panel display drivers. We believe this will allow us to provide our customers with complete system-level platform solutions that leverage our application processor capabilities as well as our CMOS image sensor and flat panel display driver capabilities. For example, we are developing features in our application processors such as MPEG-4 video processing capability in order to complement our existing image-capture and processing solutions.

 

CUSTOMERS

 

During the year ended December 31, 2004, we sold over 1,500 products to more than 200 customers. In the year ended December 31, 2004, our 10 largest customers accounted for approximately 57.5% of our net sales. In the year ended December 31, 2004, except for Hynix, our two largest customers, LG.Philips LCD and Sharp,

 

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represented 10.5% and 10.0% of our net sales, respectively. See “Risk Factors—A significant portion of our sales comes from a relatively limited number of customers.”

 

SALES, MARKETING AND DISTRIBUTION

 

We sell our products through a direct sales force and a network of authorized agents and distributors located throughout Asia, the United States, and Europe. We have strategically located our sales and technical support offices near concentrations of major customers.

 

Our direct sales force consists primarily of representatives located in our headquarters in Korea, as well as representatives located elsewhere throughout Asia, the United States, and Europe. Our network of authorized agents and distributors consists of agents in the United States and Europe and distributors and agents in the Asia Pacific region. During the year ended December 31, 2004, we derived approximately 63% of net sales through our direct sales force and 37% of net sales through our network of authorized agents and distributors.

 

Our product inventory is primarily located in Korea. Outside of Korea, we maintain limited amounts of product inventory, and our sales representatives generally relay orders to our headquarters for fulfillment. Some of the product inventory maintained by sales representatives is subject to return privileges or stock rotation. Our agreements with our authorized agents and distributors are usually terminable by either party on relatively short notice.

 

RESEARCH AND DEVELOPMENT

 

Our expenditures for research and development were $97.8 million, representing 9.0% of net sales, and $90.8 million, representing 9.0% of net sales, in the year ended December 31, 2004 on an actual basis and a pro forma basis, respectively, and $26.1 million, representing 12.2% of net sales, in the three-month period ended April 3, 2005 on an actual basis.

 

Our research and development efforts focus on process technology, design methodology and intellectual property for our semiconductor products and specialty foundry services. As a result, we have implemented improvements to our manufacturing processes, design software and design libraries, including releasing our 0.18 µm high-voltage process and library. We also work closely with our major customers in many research and development activities, including joint intellectual property development, to increase the likelihood that our products will be more easily designed into the customers’ products and consequently achieve rapid and lasting market acceptance. In CMOS image sensors, we are expanding into medical, industrial and automotive applications. In flat panel display drivers, we are focusing on further integration, especially for small displays and large displays over 40 inches. In application processors, we expect our future product portfolio to include integrated one-chip Smartcards, RFID, and 32-bit processors. In specialty foundry services, our research and development work allows us to add features such as mixed-signal, high voltage, embedded memory and power devices.

 

INTELLECTUAL PROPERTY

 

As of April 3, 2005 our portfolio of intellectual property assets included approximately 12,500 registered and pending patents.

 

Pursuant to the intellectual property license agreement that we entered into with Hynix in connection with the Acquisition, we obtained from Hynix a non-exclusive license to certain intellectual property of Hynix that is mostly patent-related, and we granted to Hynix a non-exclusive license to certain of our intellectual property. Additionally, we have entered into exclusive and non-exclusive licenses and development agreements with third parties relating to the use of intellectual property of the third parties in our products and our design processes,

 

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including licenses related to embedded memory technology, design tools, process simulation tools, circuit designs, and ARM’s ARM7 and ARM9 core-based System-on-Chip.

 

In addition, we rely on proprietary know-how, continuing technological innovation and other trade secrets to develop products and maintain our competitive position. We attempt to protect our proprietary know-how and our other trade secrets by executing, when appropriate, confidentiality agreements with our customers and employees. We cannot assure you that our competitors will not discover comparable or the same knowledge and techniques through independent development or other means.

 

OPERATIONS AND FACILITIES

 

Our semiconductor product groups are supported by our five wafer fabs. We have significant wafer manufacturing capacity as a result of investments in our fabs made by Hynix. The ownership of our wafer manufacturing assets is an important component of our business strategy that enables us to develop proprietary, differentiated products and maintain a high level of manufacturing control resulting in high production yields, shortened design and production cycles, adequate manufacturing capacity, and the capture of the wafer manufacturing profit margin.

 

We manufacture wafers at our two 8-inch fabs and our 6-inch fab located in Cheongju, Korea and our 8-inch fab and our 5-inch fab located in Gumi, Korea. The Cheongju facilities have three buildings totaling 200,544 square meters. The Gumi facilities have two buildings with 83,256 square meters devoted to manufacturing.

 

The table below sets forth information with respect to our manufacturing facilities and technologies:

 

Manufacturing

Facility


   Location

   Wafer Size

   Technology

CF-5

   Cheongju    8”    0.35 /0.18µm

CF-4

   Cheongju    8”    0.5 /0.35 /0.25µm

GF-3

   Gumi    8”    0.5 / .35µm

CF-2

   Cheongju    6”    0.8 / 0.6 / 0.5µm

GF-1

   Gumi    5”    1.2µm

 

Our manufacturing processes use many raw materials, including silicon wafers, copper lead frames, molding compounds, ceramic packages and various chemicals and gases. We obtain raw materials and supplies from a large number of sources. Although supplies of raw materials are currently adequate, shortages could occur in various essential materials due to interruption of supply or increased demand in the industry. See “Risk factors—We depend on successful parts and materials procurement for our manufacturing processes.”

 

We outsource most of our back-end manufacturing processes, including assembly, test and packaging to independent providers of these services.

 

COMPETITION

 

We operate in highly competitive markets. Although no one company competes with us in all of our product lines, we face significant competition in each of our market segments.

 

Our competitors include other manufacturers and designers of system semiconductors, standard products, and semi-standard programmable digital logic semiconductors products, as well as customers who design their own semiconductors that are manufactured at third party foundries.

 

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Our competitors include, among others: in CMOS image sensors, OmniVision, Micron, and Toshiba; in flat panel display drivers, Samsung Electronics, Renesas, and NEC Electronics; in application processors, Renesas, NEC, and Atmel; in specialty foundry services, Polar Fab, X-Fab and Supertex.

 

We compete with other semiconductor providers based on design experience, the ability to service customer needs from the design phase to the shipping of a completed product, length of design cycle, longevity of technology support and sales and technical support personnel. Our ability to successfully compete depends on internal and external variables, both within and outside of our control. These variables include, but are not limited to, the timeliness with which we can develop new products and technologies, product performance and quality, manufacturing yields and availability, customer service, pricing, industry trends and general economic trends. See “Risk factors—Our industry is highly competitive.”

 

EMPLOYEES

 

Our worldwide workforce consisted of 4,191 employees (full- and part-time) as of May 31, 2005, of which 433 were involved in sales, general and administrative, 608 were in research and development, 120 were in quality, reliability and assurance and 3,030 were in manufacturing (comprised of 520 in engineering and 2,510 in operations). As of May 31, 2005, 2,521 employees, or approximately 60% of our workforce, were represented by the MagnaChip Semiconductor Labor Union, which is a member of the Federation of Korean Metal Workers Trade Unions.

 

Currently, the Korean Federation of Trade Unions, representing the employees of three of our subcontractors that also support Hynix, has and may continue to demonstrate at our joint campus in Cheongju, Korea. It is requesting that MagnaChip directly hire approximately 70 employees of the subcontractor. These demonstrations have required additional interim expenses and may have a continuing negative impact on our operations in the future.

 

ENVIRONMENTAL MATTERS

 

Our operations are subject to a variety of environmental, health and safety laws and regulations in each of the jurisdictions in which we operate, governing, among other things, air emissions, wastewater discharges, the generation, use, handling, storage and disposal of, and exposure to, hazardous substances (including asbestos) and wastes, soil and groundwater contamination and employee health and safety. These laws and regulations are complex, constantly changing and have tended to become more stringent over time. We cannot assure you that we have been, or will be at all times, in complete compliance with all these laws and regulations or that we will not incur material costs or liabilities in connection with these laws and regulations in the future. The adoption of new environmental, health and safety laws, the failure to comply with new or existing laws, or issues relating to hazardous substances could subject us to material liability (including substantial fines or penalties), impose the need for additional capital equipment or other process requirements upon us, curtail our operations, or restrict our ability to expand operations.

 

LEGAL PROCEEDINGS

 

We are subject to lawsuits and claims that arise in the ordinary course of business and intellectual property litigation and infringement claims. Intellectual property litigation and infringement claims, in particular, could cause us to incur significant expenses or prevent us from selling our products. We are currently not involved in any legal proceedings, the outcome of which we believe would have a material adverse effect on our business, financial condition or results of operations. Although we have never received any notices of infringement of a third-party patent, to our knowledge Hynix has received five notices of infringement from third parties regarding various technology transferred to us in the Acquisition. We cannot assure you that these third parties will not tender notices of patent infringement or assert infringement claims against us in the future.

 

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Management

 

DIRECTORS AND EXECUTIVE OFFICERS

 

The following table is a list of the current directors and executive officers of MagnaChip LLC:

 

Name


   Age

  

Position


Dr. Youm Huh

   53    Chief Executive Officer, President and Director

Robert J. Krakauer

   39    Executive Vice President, Strategic Operations, Chief Financial Officer and Director

Chan Hee Lee

   51    Executive Vice President, Product Lines

Tae Young Hwang

   48    Executive Vice President, Manufacturing Operations

Jason Hartlove

   39    Senior Vice President and General Manager

Dong Chun Kim

   49    Senior Vice President, Global Sales, Asia Pacific

Hak Sung Kim

   53    Senior Vice President, Chief Administrative Officer

Dale Lindly

   46    Senior Vice President and Chief Accounting Officer

Victoria Miller Nam

   37    Senior Vice President of Strategic Planning

Jinwon Park

   50    Senior Vice President, Technology

John Radanovich

   49    Senior Vice President of United States and European Sales

John McFarland

   38    Vice President, General Counsel and Secretary

Jerry M. Baker

   53    Chairman of the Board of Directors

Dipanjan Deb

   36    Director

Roy Kuan

   38    Director

Phokion Potamianos

   41    Director

Paul C. Schorr IV

   38    Director

David F. Thomas

   55    Director

 

Dr. Youm Huh, Chief Executive Officer, President and Director. Dr. Hu