2. Restatement of Consolidated Financial Statements

These interim financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2013 contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (the “2013 Form 10-K”), which was filed on February 12, 2015.

Background and Scope of Investigation

In January 2014, the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) commenced an internal investigation into the Company’s accounting practices and procedures with outside professional advisors (the “Independent Investigation”). The Independent Investigation involved procedures that included forensic analysis and inquiry directed to aspects of the Company’s accounting and financial reporting practices, and evaluated aspects of its historical accounting and financial reporting practices since 2011. The Independent Investigation initially raised questions relating to numerous accounting transactions, most of which involved revenue recognition practices relating to distributor relationships.

Based on initial findings and observations from the Independent Investigation regarding errors in the Company’s revenue recognition practices related to sales through distributors, the Company announced on March 11, 2014 that the Audit Committee concluded that the Company’s previously issued financial statements for each of the years ended December 31, 2012 and December 31, 2011 and the quarters ended March 31, June 30 and September 30 in 2013 and 2012 should no longer be relied upon.

The Independent Investigation continued through October 2014 and identified numerous accounting errors, most of which involved revenue recognition, cost of goods sold, inventory reserves, fixed asset capitalization, and expense recognition and allocation. It also identified deficiencies regarding business practices related to distributors, non-distributor customers and vendors. Concurrently with the Independent Investigation, management conducted extensive internal review of its financial accounting and reporting practices and internal control over financial reporting. The Independent Investigation and management’s internal review identified evidence of errors in the Company’s accounting and deficiencies in its internal control over financial reporting.

Restatement Adjustments

As a result of the issues identified in the Independent Investigation and management’s internal review, the Company restated its previously reported consolidated financial statements for the three and nine months ended September 30, 2013 in order to correct certain previously reported amounts.

The impact of the errors to the previous statements of operations, statement of cash flows and statements of comprehensive income has been detailed in the tables below. A description of the nature of the errors follows.

Revenue Recognition

Sales through Distributors — The largest portion of revenue recognition adjustments relate to correcting the timing and amount of revenue recognized on the sale of products through certain distributors. During the course of the Independent Investigation and management’s internal review, it was determined that the application of its revenue recognition policy was not appropriate in these situations. Revenue had been recognized without persuasive evidence of an arrangement and the collectability of the sales price not being reasonably assured. Furthermore, in some circumstances, revenue was recognized prior to risk of loss being transferred.

Accordingly, related revenues and cost of sales were reversed in the period in which the accounting errors took place and recognized in subsequent periods when all of the revenue recognition criteria were met. These adjustments also include the impact of foreign currency exchange rate differences between periods of de-recognition and recognition of the revenue transactions.

Other — The other revenue recognition adjustments include transactions where the Company recognized revenue in an incorrect period or recognized an incorrect amount of revenue. The primary categories of other revenue recognition adjustments include the following:

•

Unfinished Products — The Company identified recognition of revenues on unfinished or semi-finished products. These products were completed and shipped to the distributor or end customer after the related revenues were recognized.

•

Gross to Net — The Company identified foundry service transactions in which the related wafers were provided by the customer. The revenue and cost related to such wafers were recognized on a gross basis when they should have been recognized on a net basis.

•

Cut-off — The Company identified certain sales transactions that were recognized prior to the transfer of inventory risk and title.

•

Non-recurring Engineering (“NRE”) — The Company provides NRE services to develop prototype wafers mainly for the Company’s foundry service customers. The Company identified revenue related to certain NRE arrangements recognized earlier or later than at the time that the required prototype wafer was delivered.

•

Concessions — The Company identified various types of unrecorded concessions provided to its distributors and customers, including future discounts, price adjustments, return rights, free products and others to incentivize distributors and customers to make purchases. Such concessions should be recorded as a deduction from revenues at the time when the related revenues are recognized.

•

Direct Customer Sales — The Company identified certain sales transactions to a customer that were recognized when the products were taken from the Company’s manufacturing facility to its warehouse, rather than when the products were delivered to the customer’s location. The arrangement related to these transactions did not have a fixed schedule for delivery to a customer’s location and were prematurely recognized as revenues.

Hedge Accounting — As a result of incorrect recognition of revenue discussed in Revenue Recognition – Sales through Distributors and Revenue Recognition – Other, the Company’s hedge accounting, related to the change in the effective portion of our derivative instrument’s gains and losses, was adjusted as key assumptions determining the amount are derived from revenues.

Reserves — As a result of incorrect recognition of revenue discussed in Revenue Recognition – Sales through Distributors and Revenue Recognition – Other, adjustments for reserves, related to estimated refunds, low yield compensation, and warranty liabilities, also required corrections as key assumptions in determining these amounts are derived from revenues.

Manufacturing Cost — The Company corrected certain fabrication and back-end processing costs that were not recorded consistently with the progression of its manufacturing activities. As a result, the Company’s cost of sales was decreased by approximately $800 thousand and approximately $6,500 thousand for the three and nine months ended September 30, 2013, to account for manufacturing costs during the period in which they were incurred.

Inventory Reserves

The Company corrected errors with respect to how the Company previously forecasted revenues for the purposes of determining inventory reserves. As a result, the Company performed a retrospective review of its inventory reserve calculation and revised the revenue forecast component of the reserve calculation. In addition, as a result of the correction of revenue for certain transactions discussed in Revenue Recognition – Sales through Distributors and Revenue Recognition – Other, a significant portion of the revenues were reversed rather than deferred. The failure of the anticipated orders from final customers materializing resulted in a significantly higher excess and obsolete reserves for the restatement and subsequent periods. In addition, the Company corrected errors with respect to obsolete and aged inventory reserves that were previously understated due to the misclassification or errors in certain inventory items.

Understated Employee Benefits

The Company identified that certain amounts of earned vacation that were not included in calculating its severance accrual, resulting in an understatement of accrued severance benefits.

The Company also identified that vested compensation claims by employees who have rendered long-term services were accounted for on a cash basis rather than on an accrual basis, resulting in an understatement of long-term service liabilities.

Settlement Obligations

The Company identified certain cash and in-kind payments to one customer since 2011 and in-kind payments to another customer since the second quarter of 2013. These payments relate to settling claims involving the Company’s product that may have caused a failure in the customer’s product. Although the Company does not agree with these claims, as its product met the customers’ specifications, the Company considered a number of factors and decided not to dispute these claims but make certain cash and/or in-kind payments as demanded by the customers. A number of cash and in-kind payments were recorded as cost of sales and/or reduction of revenues at the time that they were paid rather than accrued when each cash or in-kind payment became probable.

Tax Matters

Income Tax — Realization of the deferred tax assets is dependent on the Company’s ability to generate future taxable income. In the previously reported consolidated financial statements for the year ended December 31, 2012, the Company had released $64,749 thousand of valuation allowance against deferred tax assets of the Company’s Korean subsidiary and, consequently, a corresponding amount of income tax benefit was recognized.

During the management’s internal review, key assumptions and forecast of future taxable income were reassessed based on restated financial data as to whether deferred tax assets will ultimately be realized. In its reassessment, the Company concluded that the objective and verifiable negative evidence represented by recent actual operating losses outweighed more subjective positive evidence of anticipated future income over the periods in which the deferred tax assets are deductible. As a result, the Company determined that it was necessary to record a full valuation allowance on deferred tax assets of $64,749 thousand as of December 31, 2012 and for each subsequent quarter thereafter. The related expense was recorded in the Company’s statement of operations for the year ended December 31, 2012 as an income tax expense. In addition, the management’s review identified income tax adjustments attributable to certain foreign subsidiaries other than Korea and made an adjustment amounting to $112 thousand.

The restatement adjustments for the three and nine months ended September 30, 2013 impacted our temporary differences between our book income and taxable income, which resulted in an increase of our deferred tax assets for which a full valuation allowance was recorded for the fiscal periods then ended and thus there was no tax impact of the other restatement adjustments.

Other — The Company identified liabilities related to non-income-based taxes that the Company may be exposed to in connection with certain tax positions taken. We considered the period in which the underlying cause of action occurred, degree of probability of an unfavorable outcome and whether we could make a reasonable estimate.

Maintenance Costs

The Company identified certain maintenance expenses that were inappropriately capitalized and depreciated. As a result, the Company corrected these errors by reversing the related amounts in property, plant and equipment, and recorded them in cost of sales and research and development expense. In addition, the Company identified certain cash payments to a maintenance supplies vendor, that (i) the vendor used to purchase products from distributors; (ii) the distributors then paid to the Company for those products; and (iii) in turn were applied to the Company’s aged accounts receivable.

Account Classification

Revenue — The Company corrected the classification of rental income that was previously recorded as net sales when it should have been recorded in other income (expenses).

Expense — The Company identified errors in classification of expenses that were recorded as cost of sales when they should have been recorded as research and development for the three and nine months ended September 30, 2013.

Cost Center Allocation

The Company identified costs from certain cost centers that were not always allocated consistently with the nature of the Company’s business. As a result, the Company recorded adjustments to reclassify the related costs from cost of sales to selling, general and administrative expenses.

Other Adjustments

In addition to the restatement adjustments described above, the Company has identified other errors that are not material, individually or in the aggregate, but have been recorded in connection with the restatement.

Included in other adjustments are as follows:

•

Accrued Liabilities — The Company identified costs related to certain goods and services that were recorded at the time of receipt of invoice rather than when the goods were delivered or services were rendered. As a result, the Company recorded adjustments to cost of sales and research and development expense.

•

Stock-based Compensation — The Company identified incorrect application of assumptions in computation of stock-based compensation expenses. As a result, the Company recorded adjustments to increase compensation expenses.

The following table presents the impact of the restatement adjustments on the Company’s previously reported consolidated statement of operations for the three months ended September 30, 2013:


	Three Months Ended September 30, 2013
				Restatement Adjustments
	As Previously Reported			Revenue Recognition			Inventory Reserves			Understated Employee Benefits			Settlement Obligations			Tax Matters			Maintenance Cost			Cost Center Allocation			Account Classification			Other Adjustments			Total Adjustments			As Restated
Net sales	$	217,824		$	(46,474	)	$	—		$	—		$	—		$	—		$	—		$	—		$	(538	)	$	—		$	(47,012	)	$	170,812
Cost of sales		145,936			(26,884	)		17,825			14			(1,412	)		—			2,328			(834	)		(671	)		97			(9,537	)		136,399

Gross profit		71,888			(19,590	)		(17,825	)		(14	)		1,412			—			(2,328	)		834			133			(97	)		(37,475	)		34,413

Selling, general and administrative expenses		20,071			(173	)		—			(18	)		—			1,371			—			870			—			34			2,084			22,155
Research and development expenses		21,192			—			—			32			—			—			118			(36	)		671			501			1,286			22,478

Operating income (loss)		30,625			(19,417	)		(17,825	)		(28	)		1,412			(1,371	)		(2,446	)		—			(538	)		(632	)		(40,845	)		(10,220	)

Other income (expenses)
Interest expense, net		(4,548	)		—			—			—			—			—			—			—			—			—			—			(4,548	)
Foreign currency gain, net		43,350			3,763			—			—			—			—			—			—			—			2			3,765			47,115
Loss on early extinguishment of senior notes		(32,812	)		—			—			—			—			—			—			—			—			—			—			(32,812	)
Others		763			(110	)		—			—			—			—			—			—			538			—			428			1,191

		6,753			3,653			—			—			—			—			—			—			538			2			4,193			10,946

Income before income taxes		37,378			(15,764	)		(17,825	)		(28	)		1,412			(1,371	)		(2,446	)		—			—			(630	)		(36,652	)		726

Income tax expenses (benefits)		(9,293	)		—			—			—			—			9,768			—			—			—			—			9,768			475

Net income	$	46,671		$	(15,764	)	$	(17,825	)	$	(28	)	$	1,412		$	(11,139	)	$	(2,446	)	$	—		$	—		$	(630	)	$	(46,420	)	$	251

Earnings per common share—
Basic	$	1.32																																$	0.01
Diluted	$	1.24																																$	0.01

Weighted average number of shares—
Basic		35,443,820																																	35,443,820
Diluted		37,493,550																																	37,484,601

The following table presents the impact of the restatement adjustments on the Company’s previously reported consolidated statement of operations for the nine months ended September 30, 2013:


	Nine Months Ended September 30, 2013
				Restatement Adjustments
	As Previously Reported			Revenue Recognition			Inventory Reserves			Understated Employee Benefits			Settlement Obligations			Tax Matters			Maintenance Cost			Cost Center Allocation			Account Classification			Other Adjustments			Total Adjustments			As Restated
Net sales	$	638,411		$	(78,089	)	$	—		$	—		$	—		$	—		$	—		$	—		$	(1,655	)	$	—		$	(79,744	)	$	558,667
Cost of sales		429,732			(48,402	)		28,021			196			10,149			—			5,653			(2,559	)		(1,683	)		(329	)		(8,954	)		420,778

Gross profit		208,679			(29,687	)		(28,021	)		(196	)		(10,149	)		—			(5,653	)		2,559			28			329			(70,790	)		137,889

Selling, general and administrative expenses		59,571			(422	)		—			28			—			1,995			—			2,627			—			115			4,343			63,914
Research and development expenses		62,905			—			—			105			—			—			189			(68	)		1,683			304			2,213			65,118
Restructuring and impairment charges		2,446			—			—			—			—			—			—			—			—			—			—-			2,446

Operating income		83,757			(29,265	)		(28,021	)		(329	)		(10,149	)		(1,995	)		(5,842	)		—			(1,655	)		(90	)		(77,346	)		6,411

Other income (expenses)
Interest expense, net		(16,276	)		—			—			—			—			—			—			—			—			—			—			(16,276	)
Foreign currency gain, net		(186	)		1,674			—			—			—			—			—			—			—			24			1,698			1,512
Loss on early extinguishment of senior notes		(32,812	)		—			—			—			—			—			—			—			—			—			—			(32,812	)
Others		273			(57	)		—			—			—			—			—			—			1,655			—			1,598			1,871

		(49,001	)		1,617			—			—			—			—			—			—			1,655			24			3,296			(45,705	)

Income (loss) before income taxes		34,756			(27,648	)		(28,021	)		(329	)		(10,149	)		(1,995	)		(5,842	)		—			—			(66	)		(74,050	)		(39,294	)

Income tax expenses (benefits)		(8,946	)		—			—			—			—			11,658			—			—			—			—			11,658			2,712

Net income (loss)	$	43,702		$	(27,648	)	$	(28,021	)	$	(329	)	$	(10,149	)	$	(13,653	)	$	(5,842	)	$	—		$	—		$	(66	)	$	(85,708	)	$	(42,006	)

Earnings (loss) per common share—
Basic	$	1.23																																$	(1.18	)
Diluted	$	1.17																																$	(1.18	)

Weighted average number of shares—
Basic		35,485,395																																	35,485,395
Diluted		37,261,058																																	35,485,395

Statement of Cash Flows

The following table presents the impact of the restatement adjustments on the Company’s consolidated statement of cash flows for nine months ended September 30, 2013:


Nine Months Ended September 30, 2013
	As Previously Reported			Restatement Adjustments			As Restated
Cash flows from operating activities
Net income (loss)	$	43,702		$	(85,708	)	$	(42,006	)
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		25,629			(653	)		24,976
Provision for severance benefits		15,661			121			15,782
Bad debt expenses		214			(261	)		(47	)
Amortization of debt issuance costs and original issue discount		744			—			744
Loss (gain) on foreign currency translation, net		1,644			(1,698	)		(54	)
Restructuring and impairment charges		618			—			618
Stock-based compensation		1,398			160			1,558
Loss on early extinguishment of senior notes		32,812			—			32,812
Other		1,280			—			1,280
Changes in operating assets and liabilities
Accounts receivable		(59,311	)		71,801			12,490
Inventories, net		8,398			(9,320	)		(922	)
Other receivables		(284	)		(1,170	)		(1,454	)
Other current assets		8,168			112			8,280
Deferred tax assets		(10,038	)		11,629			1,591
Accounts payable		(2,314	)		(964	)		(3,278	)
Other accounts payable		(7,901	)		1,729			(6,172	)
Accrued expenses		1,004			3,795			4,799
Other current liabilities		(663	)		(4,194	)		(4,857	)
Other non-current liabilities		(1,465	)		9,407			7,942
Payment of severance benefits		(4,331	)		—			(4,331	)
Other		(349	)		1			(348	)

Net cash provided by operating activities		54,616			(5,213	)		49,403

Cash flows from investing activities
Purchase of plant, property and equipment		(45,703	)		5,110			(40,593	)
Payment for intellectual property registration		(401	)		—			(401	)
Payment of guarantee deposits		(941	)		—			(941	)
Other		345			—			345

Net cash used in investing activities		(46,700	)		5,110			(41,590	)

Cash flows from financing activities
Proceeds from issuance of common stock		9,676			—			9,676
Proceeds from issuance of senior notes		218,836			—			218,836
Repayment of long-term borrowings		(229,333	)		—			(229,333	)
Acquisition of treasury stock		(31,000	)		—			(31,000	)

Net cash used in financing activities		(31,821	)		—			(31,821	)
Effect of exchange rates on cash and cash equivalents		(65	)		103			38

Net decrease in cash and cash equivalents		(23,970	)		—			(23,970	)

Cash and cash equivalents
Beginning of the period		182,238			—			182,238

End of the period	$	158,268		$	—		$	158,268

Supplemental cash flow information
Cash paid for interest	$	16,266		$	—		$	16,266

Cash paid for income taxes	$	6,397		$	(180	)	$	6,217

Non-cash investing activities
Property, plant and equipment additions in other accounts payable	$	—		$	57		$	57

Comprehensive Income

The following table presents the impact of the restatement adjustments on the Company’s previously reported consolidated statements of comprehensive income for the three and nine months ended September 30, 2013:


	Three Months Ended September 30, 2013						Nine Months Ended September 30, 2013
	As Previously Reported			As Restated			As Previously Reported			As Restated
Net income (loss)	$	46,671		$	251		$	43,702		$	(42,006	)
Other comprehensive income (loss)
Foreign currency translation adjustments		(19,438	)		(31,300	)		(631	)		(3,094	)
Derivative adjustments
Fair valuation of derivatives		12,392			16,102			3,122			4,281
Reclassification adjustment for loss (gain) on derivatives included in net income (loss)		74			(34	)		(235	)		(289	)
Unrealized gain on investments		34			45			399			540

Total comprehensive income (loss)	$	39,733		$	(14,936	)	$	46,357		$	(40,568	)