FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the month of February 2005
TOWER SEMICONDUCTOR LTD.
(Translation of registrant's name into English)
RAMAT GAVRIEL INDUSTRIAL PARK
P.O. BOX 619, MIGDAL HAEMEK, ISRAEL 23105
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [_]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [_] No [X]
On February 3, 2005, the Registrant announced that Carmel Vernia wishes to
step down as Chairman and CEO of Tower Semiconductor Board. Attached hereto as
Exhibit 99.1 is a copy of the press release.
On February 3, 2005, the Registrant announced its financial results for the
fourth quarter and fiscal year ended December 31, 2004. Attached hereto as
Exhibit 99.2 is the press release relating to such announcement and attached
hereto as Exhibit 99.3 are the Registrant's consolidated financial statements as
of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003
and 2002, and the report thereon dated February 3, 2005 of our independent
auditors Brightman Almagor & Co.
This Form 6-K is being incorporated by reference into all effective
registration statements filed by us under the Securities Act of 1933.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TOWER SEMICONDUCTOR LTD.
Date: February 4, 2005 By: /S/ Tamar Cohen
-------------------
Tamar Cohen
Corporate Secretary
EXHIBIT 99.1
CARMEL VERNIA TO STEP DOWN AS CHAIRMAN AND CEO OF
TOWER SEMICONDUCTOR BOARD
MIGDAL HAEMEK, Israel -- Feb. 3, 2005, -- Tower Semiconductor Ltd. (NASDAQ:
TSEM; TASE: TSEM), a pure-play independent wafer foundry, today announced that
Carmel Vernia, its chairman of the board and CEO, notified the board of
directors that he wishes to step down from his positions in order to pursue
other interests.
Mr. Vernia agreed to stay in his current positions while the board appoints his
replacements to ensure a smooth transition. Mr. Vernia will continue to serve on
the board of directors of Tower after stepping down as chairman and CEO.
ABOUT TOWER SEMICONDUCTOR LTD.
Tower Semiconductor LTD. is a pure-play independent wafer foundry established in
1993. The company manufactures integrated circuits with geometries ranging from
1.0 to 0.13 micron; it also provides complementary technical services and design
support. In addition to digital CMOS process technology, Tower offers advanced
non-volatile memory solutions, mixed-signal and CMOS image-sensor technologies.
To provide world-class customer service, the company maintains two manufacturing
facilities: Fab 1 has process technologies from 1.0 to 0.35 micron and can
produce up to 16,000 150mm wafers per month. Fab 2 features 0.18 micron and
below process technologies, including foundry-standard technology. When fully
equipped, Fab 2 is expected to offer full production capacity of 33,000 200mm
wafers per month. Tower's Web site is located at www.towersemi.com.
CONTACT:
Tower Semiconductor USA
Michael Axelrod, +1 408 330 6871
pr@towersemi.com
or
Pacifico Inc.
PR Agency Contact
Mary Curtis, +1 408 293 8600
mcurtis@pacifico.com
or
Fusion IR & Communications
Investor Relations Contact
Sheldon Lutch, +1 212 268 1816
sheldon@fusionir.com
EXHIBIT 99.2
TOWER SEMICONDUCTOR ANNOUNCES
FOURTH QUARTER AND FISCAL YEAR 2004 RESULTS
The Company More Than Doubled its Year-to-Year Revenues in 2004
Strong Pipeline of New Projects and Customers Expected to Yield Growth in Second
Half of 2005
MIGDAL HAEMEK, Israel -- Feb. 3, 2005, -- Tower Semiconductor Ltd. (NASDAQ:
TSEM; TASE: TSEM), a pure-play independent wafer foundry, today announced fourth
quarter and fiscal year 2004 results, with 105% higher revenues in 2004 compared
with 2003. Revenues were $126.1 million for the 12 months ended December 31,
2004 as compared with $61.4 million in 2003. Revenues for the quarter ended
December 31, 2004 were $30.1 million.
On a year-over-year basis, revenues for the fourth quarter of 2004 represented
an increase of 52 percent over revenues of $19.8 million in the fourth quarter
of 2003. In the third quarter of 2004, the company reported revenues of $35.1
million.
The 2004 fourth quarter loss was $23.3 million, or $0.36 per share, including a
net capital gain of $32 million from the previously announced sale of shares of
Saifun Semiconductor. This loss is compared with a loss of $46.0 million, or
$0.91 per share, for the fourth quarter of 2003, and a loss of $39.4 million, or
$0.60 per share, in the third quarter of 2004.
For the 12 months ended December 31, 2004 the company reported a loss of $137.8
million, or $2.13 per share, including a net capital gain of $32 million from
the previously announced sale of shares of Saifun Semiconductor. This is
compared with a loss of $114.3 million, or $2.40 per share in 2003. This loss
includes $117 million of depreciation expenses in 2004, compared to $54 million
in 2003.
The company experienced weaker demand due to inventory corrections by a range of
customers in late 2004, and in particular, by those in the consumer market.
Consumer products accounted for approximately 50 percent of Tower's revenues
during the past year. Moving forward, the company expects reduced dependence on
this market segment.
The company expects Q-1 2005 revenues to be in the range of $23 million to $26
million due to continuing softness in the foundry industry, while Q2-2005 is
expected to mark a turning point towards a stronger second half of 2005. The
company expects to reach positive EBITDA from operating activities in the second
half of 2005.
Tower's banks recently agreed to waive the company's non-compliance with certain
financial ratios and covenants for the fourth quarter of 2004 and it revised
certain financial ratios and covenants for 2005.
"We have a strong pipeline of new customers and projects, which we expect will
begin to add revenues in late 2005," said Carmel Vernia, chairman and chief
executive officer of Tower. "We see traction in key areas of our specialized
technology segments such as mixed-signal, CMOS image-sensor technologies and RF,
which could translate into higher revenues." Vernia cautioned that there might
be continued slowdown in the first half of the year but projected significant
revenue growth for the company during the second half of 2005.
Tower's management has been proactive bringing its expenditures in line with
current business conditions and has taken measures, in the fourth quarter, to
reduce expenses and improve cash flow, which could achieve savings totaling $20
million in 2005. The company implemented an across-the-board workforce cutback,
and also introduced other savings measures.
During the last quarter Tower announced its 0.16-micron technology offering,
which enables lower die cost to customers, while yielding higher wafer prices.
The $200 million, multi-year project with Vishay-Siliconix is progressing
according to schedule and production is planned to begin in the second quarter
of 2005.
At the same time, Tower is maintaining its level of investment in key process
development initiatives and is improving its unique technologies according to
its strategic roadmap. Tower continues to execute on the following key strategic
thrusts:
1. DIVERSIFYING CUSTOMER BASE
TOTAL CUSTOMER COUNT 2004 2003 INCREASE
- -------------------- ---- ---- --------
95% of revenue generated by: 24 customer 19 customers 26%
Fab 2 production customers 7 customers 4 customers 75%
Fab 2 pre-production customers 19 customers 6 customers 217%
2. CUSTOMER CLASSIFICATIONS
During 2004, Tower grew its fabless customer base to 75 percent of total
revenues*.
TYPE OF CUSTOMER 2004 2003
- ---------------- ---- ----
IDM 25% 50%
Fabless 75% 50%
* The above chart reflects Fab 2's increasing ramp up impact in 2004.
3. EXPANDING SALES BY GEOGRAPHY
While the US continues to be the main revenue market, Tower also added
significant revenues from Israel in 2004.
REGION REVENUES
- ------ --------
US 60%
Israel 20%
Pacific Rim (including Japan) 11%
Europe 9%
4. INCREASING SPECIALIZED TECHNOLOGY OFFERINGS
Tower continues to develop differentiated technologies, utilizing core technical
knowledge in embedded NVM, CMOS image sensors, mixed-signal and RF technologies,
according to its strategic roadmap.
During 2004, Tower:
o Entered the RFID market with technology development of unique
technology solution to low cost RFID tags with a leading RFID Tag
supplier.
o Provided prototype devices for a leading RF CMOS customer targeting
the wireless market.
o Fab 1, CMOS image sensors - Continued to develop processes targeting
advanced medical imaging as well as industrial and machine vision with
exceptional performance. In 2004 about 12 percent of Fab 1 revenues
were generated from those market segments.
o Fab 2, CMOS image sensors - Engaged in pre-production phases with
multiple customers developing more than 10 different products
targeting cell phone and consumer camera sensors, as well as
industrial, commercial, scientific and automotive applications.
o Embedded NVM - Tower completed the development of 0.18-micron embedded
NVM technology with initial successful customer design fully
functional in record time.
As can be seen in the below table, Tower's diversification to specialized
technologies continues to be apparent in Fab 1 percentages and is already
starting to be reflected in Fab 2 percentages. In Fab 2, Tower is initially
ramping its core CMOS technology platforms. However, at the 0.18-micron node
Tower's specialized technologies offering is leading edge in the industry, the
company expects the specialized technology effect to materialize in this fab in
the years to come.
TECHNOLOGY SEGMENT CONSOLIDATED FAB 1 FAB 2
- ------------------ ------------ ----- -----
Core CMOS 61% 24% 92%
Non volatile memory 16% 32% 3%
CMOS image sensor 8% 15% 2%
Mixed signal 15% 29% 3%
5. DIVERSIFYING REVENUES BY MARKET SEGMENT
The introduction of Fab 2 has increased Tower's presence in the consumer market.
Tower expects this trend to continue during 2005, although the company
anticipates that the consumer portion of its consumer segment will be reduced.
INDUSTRY SEGMENT REVENUES
- ---------------- --------
Consumer 50%
Communication 15%
PC 7%
Industrial, medical and automotive 10%
Multi market and others 18%
*****
Tower will host a conference call to discuss these results on Friday, February
4, 2005 at 11:00 a.m. Eastern time / 18:00 p.m. Israel time. To participate,
call 1-800-500-0177 (U.S. toll-free number) or 1-719-457-2679 (international)
and mention ID code: TOWER. Callers in Israel are invited to call local
03-925-5910. The conference call also will be webcast live at
www.companyboardroom.com and at www.towersemi.com and will be available
thereafter on both Web sites for replay for 90 days, starting at 2:00 p.m.
Eastern time on the day of the call and on 03-925-5947 for Israeli callers for 7
days after the call.
ABOUT TOWER SEMICONDUCTOR LTD.
Tower Semiconductor LTD. is a pure-play independent wafer foundry established in
1993. The company manufactures integrated circuits with geometries ranging from
1.0 to 0.13 micron; it also provides complementary technical services and design
support. In addition to digital CMOS process technology, Tower offers advanced
non-volatile memory solutions, mixed-signal and CMOS image-sensor technologies.
To provide world-class customer service, the company maintains two manufacturing
facilities: Fab 1 has process technologies from 1.0 to 0.35 micron and can
produce up to 16,000 150mm wafers per month. Fab 2 features 0.18 micron and
below process technologies, including foundry-standard technology. When fully
equipped, Fab 2 is expected to offer full production capacity of 33,000 200mm
wafers per month. Tower's Web site is located at www.towersemi.com.
SAFE HARBOR
THIS PRESS RELEASE INCLUDES FORWARD-LOOKING STATEMENTS, WHICH ARE SUBJECT TO
RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY VARY FROM THOSE PROJECTED OR IMPLIED
BY SUCH FORWARD-LOOKING STATEMENTS. POTENTIAL RISKS AND UNCERTAINTIES INCLUDE,
WITHOUT LIMITATION, RISKS AND UNCERTAINTIES ASSOCIATED WITH: (I) THE COMPLETION
OF THE EQUIPMENT INSTALLATION, TECHNOLOGY TRANSFER AND RAMP-UP OF PRODUCTION IN
FAB 2, (II) HAVING SUFFICIENT FUNDS TO COMPLETE THE FAB 2 PROJECT, (III) THE
CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY AND THE RESULTING PERIODIC
OVERCAPACITY, FLUCTUATIONS IN OPERATING RESULTS, FUTURE AVERAGE SELLING PRICE
EROSION THAT MAY BE MORE SEVERE THAN OUR EXPECTATIONS (IV) OPERATING OUR
FACILITIES AT SATISFACTORY UTILIZATION RATES, (V) OUR ABILITY TO MEET CERTAIN OF
THE COVENANTS STIPULATED IN OUR AMENDED FACILITY AGREEMENT, (VI) OUR ABILITY TO
CAPITALIZE ON INCREASES IN DEMAND FOR FOUNDRY SERVICES, (VII) MEETING THE
CONDITIONS TO RECEIVE ISRAELI GOVERNMENT GRANTS AND TAX BENEFITS APPROVED FOR
FAB 2 AND OBTAINING THE APPROVAL OF THE ISRAELI INVESTMENT CENTER TO EXTEND THE
FIVE-YEAR INVESTMENT PERIOD UNDER OUR FAB 2 APPROVED ENTERPRISE PROGRAM, (VIII)
ATTRACTING ADDITIONAL CUSTOMERS, (IX) NOT RECEIVING ORDERS FROM OUR WAFER
PARTNERS AND TECHNOLOGY PROVIDERS, (X) FAILING TO MAINTAIN AND DEVELOP OUR
TECHNOLOGY PROCESSES AND SERVICES, (XI) COMPETING EFFECTIVELY, (XII) OUR LARGE
AMOUNT OF DEBT, (XIII) ACHIEVING ACCEPTABLE DEVICE YIELDS, PRODUCT PERFORMANCE
AND DELIVERY TIMES, (XIV) THE TIMELY DEVELOPMENT, INTERNAL QUALIFICATION AND
CUSTOMER ACCEPTANCE OF NEW PROCESSES AND PRODUCTS, (XV) BUSINESS INTERRUPTION
DUE TO EARTHQUAKES, TERROR ATTACKS AND OTHER ACTS OF GOD.
A MORE COMPLETE DISCUSSION OF RISKS AND UNCERTAINTIES THAT MAY AFFECT THE
ACCURACY OF FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PRESS RELEASE OR WHICH
MAY OTHERWISE AFFECT OUR BUSINESS IS INCLUDED UNDER THE HEADING "RISK FACTORS"
IN OUR MOST RECENT ANNUAL REPORT ON FORMS 20-F AND 6-K, AS WERE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION AND THE ISRAEL SECURITIES AUTHORITY. FUTURE
RESULTS MAY DIFFER MATERIALLY FROM THOSE PREVIOUSLY REPORTED. WE DO NOT INTEND
TO UPDATE THE INFORMATION CONTAINED IN THIS RELEASE.
CONTACT:
Tower Semiconductor USA
Michael Axelrod, +1 408 330 6871
pr@towersemi.com
or
Pacifico Inc.
PR Agency Contact
Mary Curtis, +1 408 293 8600
mcurtis@pacifico.com
or
Fusion IR & Communications
Investor Relations Contact
Sheldon Lutch, +1 212 268 1816
sheldon@fusionir.com
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
AS OF DECEMBER 31,
-----------------------------
2004 2003
--------- ---------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 27,664 $ 12,448
DESIGNATED CASH AND SHORT-TERM INTEREST-BEARING DEPOSITS 53,793 44,042
TRADE ACCOUNTS RECEIVABLE 19,286 11,631
OTHER RECEIVABLES 11,365 11,073
INVENTORIES 25,669 19,382
OTHER CURRENT ASSETS 1,818 1,729
--------- ---------
TOTAL CURRENT ASSETS 139,595 100,305
--------- ---------
LONG-TERM INVESTMENTS
LONG-TERM INTEREST-BEARING DEPOSITS
DESIGNATED FOR FAB 2 OPERATIONS 5,134 4,848
OTHER LONG-TERM INVESTMENT -- 6,000
--------- ---------
5,134 10,848
--------- ---------
PROPERTY AND EQUIPMENT, NET 609,296 568,412
--------- ---------
OTHER ASSETS, NET 93,483 108,770
========= =========
TOTAL ASSETS $ 847,508 $ 788,335
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
TRADE ACCOUNTS PAYABLE $ 65,326 $ 40,249
OTHER CURRENT LIABILITIES 10,678 9,564
--------- ---------
TOTAL CURRENT LIABILITIES 76,004 49,813
LONG-TERM DEBT 497,000 431,000
CONVERTIBLE DEBENTURES 26,651 25,783
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMERS' ADVANCES 64,428 46,347
OTHER LONG-TERM LIABILITIES 15,445 5,935
--------- ---------
TOTAL LIABILITIES 679,528 558,878
--------- ---------
SHAREHOLDERS' EQUITY
ORDINARY SHARES 16,274 13,150
ADDITIONAL PAID-IN CAPITAL 517,476 427,881
PROCEEDS ON ACCOUNT OF SHARE CAPITAL -- 16,428
SHAREHOLDER RECEIVABLES (26) (26)
ACCUMULATED DEFICIT (356,672) (218,904)
--------- ---------
177,052 238,529
TREASURY STOCK (9,072) (9,072)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 167,980 229,457
========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 847,508 $ 788,335
========= =========
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- -----------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
SALES $ 126,055 $ 61,368 $ 30,065 $ 19,823
COST OF SALES 228,410 122,395 66,168 46,579
--------- --------- --------- ---------
GROSS LOSS (102,355) (61,027) (36,103) (26,756)
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES
RESEARCH AND DEVELOPMENT 17,053 20,709 5,845 8,158
MARKETING, GENERAL AND ADMINISTRATIVE 21,297 22,615 5,121 5,551
--------- --------- --------- ---------
38,350 43,324 10,966 13,709
========= ========= ========= =========
OPERATING LOSS (140,705) (104,351) (47,069) (40,465)
FINANCING EXPENSE, NET (29,745) (9,826) (8,838) (5,533)
OTHER INCOME (EXPENSE), NET 32,682 (84) 32,574 3
--------- --------- --------- ---------
LOSS FOR THE YEAR $(137,768) $(114,261) $ (23,333) $ (45,995)
========= ========= ========= =========
BASIC LOSS PER ORDINARY SHARE
LOSS PER SHARE (*) $ (2.13) $ (2.40) $ (0.36) $ (0.91)
========= ========= ========= =========
(*) BASIC AND DILUTED LOSS PER SHARE DATA IN ACCORDANCE WITH U.S. GAAP ARE THE
SAME AS THE ISR. GAAP DATA FOR THE YEAR AND THREE MONTHS PERIODS ENDED
DECEMBER 31, 2004 AND 2003
EXHIBIT 99.3
TOWER SEMICONDUCTOR LTD.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 1
BALANCE SHEETS 2
STATEMENTS OF OPERATIONS 3
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 4
STATEMENTS OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6-49
DELOITTE Brightman Almagor
1 Azrieli Center
Tel Aviv 67021
P.O.B. 16593, Tel Aviv 61164
Israel
Tel: +972 (3) 608 5555
Fax: +972 (3) 609 4022
info@deloitte.co.il
www.deloitte.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF
TOWER SEMICONDUCTOR LTD.
We have audited the accompanying consolidated balance sheets of Tower
Semiconductor Ltd. and subsidiary ("the Company") as of December 31, 2004 and
2003, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2004. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and subsidiary as of December 31, 2004 and 2003, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004, in accordance with accounting principles
generally accepted in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The effect of the application of the latter on the financial position
and results of operations as of the dates and for the years presented is
summarized in Note 19.
Brightman Almagor & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu
Tel Aviv, Israel
February 3, 2005
- 1 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data and per share data)
AS OF DECEMBER 31,
----------------------
NOTE 2004 2003
------ --------- ---------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 27,664 $ 12,448
DESIGNATED CASH AND SHORT-TERM INTEREST-BEARING DEPOSITS 53,793 44,042
TRADE ACCOUNTS RECEIVABLE 14 19,286 11,631
OTHER RECEIVABLES 3 11,365 11,073
INVENTORIES 4 25,669 19,382
OTHER CURRENT ASSETS 1,818 1,729
--------- ---------
TOTAL CURRENT ASSETS 139,595 100,305
--------- ---------
LONG-TERM INVESTMENTS
LONG-TERM INTEREST-BEARING DEPOSITS
DESIGNATED FOR FAB 2 OPERATIONS 5,134 4,848
OTHER LONG-TERM INVESTMENT 5 - 6,000
--------- ---------
5,134 10,848
--------- ---------
PROPERTY AND EQUIPMENT, NET 6 609,296 568,412
--------- ---------
OTHER ASSETS, NET 7 93,483 108,770
========= =========
TOTAL ASSETS $ 847,508 $ 788,335
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
TRADE ACCOUNTS PAYABLE $ 65,326 $ 40,249
OTHER CURRENT LIABILITIES 8 10,678 9,564
--------- ---------
TOTAL CURRENT LIABILITIES 76,004 49,813
LONG-TERM DEBT 9 497,000 431,000
CONVERTIBLE DEBENTURES 10 26,651 25,783
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMERS' ADVANCES 12A 64,428 46,347
OTHER LONG-TERM LIABILITIES 11 15,445 5,935
COMMITMENTS AND CONTINGENCIES 12
--------- ---------
TOTAL LIABILITIES 679,528 558,878
--------- ---------
SHAREHOLDERS' EQUITY
ORDINARY SHARES, NIS 1.00 PAR VALUE - AUTHORIZED
250,000,000 AND 150,000,000 SHARES, RESPECTIVELY;
ISSUED 66,999,796 AND 52,996,097 SHARES, RESPECTIVELY 12A, 13 16,274 13,150
ADDITIONAL PAID-IN CAPITAL 12A 517,476 427,881
PROCEEDS ON ACCOUNT OF SHARE CAPITAL 12A - 16,428
SHAREHOLDER RECEIVABLES (26) (26)
ACCUMULATED DEFICIT (356,672) (218,904)
--------- ---------
177,052 238,529
TREASURY STOCK, AT COST - 1,300,000 SHARES 13C (9,072) (9,072)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 167,980 229,457
========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 847,508 $ 788,335
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 2 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data and per share data)
YEAR ENDED DECEMBER 31,
-----------------------------------
NOTE 2004 2003 2002
------- --------- --------- ---------
SALES 12D, 14 $ 126,055 $ 61,368 $ 51,801
COST OF SALES 6A(4) 228,410 122,395 67,022
--------- --------- ---------
GROSS LOSS (102,355) (61,027) (15,221)
--------- --------- ---------
OPERATING COSTS AND EXPENSES
RESEARCH AND DEVELOPMENT 17,053 20,709 17,031
MARKETING, GENERAL AND ADMINISTRATIVE 21,297 22,615 17,091
--------- --------- ---------
38,350 43,324 34,122
========= ========= =========
OPERATING LOSS (140,705) (104,351) (49,343)
FINANCING EXPENSE, NET 15 (29,745) (9,826) (2,104)
OTHER INCOME (EXPENSE), NET 5 32,682 (84) 45
--------- --------- ---------
LOSS FOR THE YEAR $(137,768) $(114,261) $ (51,402)
========= ========= =========
BASIC LOSS PER ORDINARY SHARE
LOSS PER SHARE $ (2.13) $ (2.40) $ (1.63)
========= ========= =========
LOSS USED TO COMPUTE
BASIC LOSS PER SHARE $(137,768) $(114,114) $ (51,402)
========= ========= =========
WEIGHTED AVERAGE NUMBER OF ORDINARY
SHARES OUTSTANDING - IN THOUSANDS 64,717 47,608 31,523
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
TOWER SEMICONDUCTOR LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands, except share data and per share data)
PROCEEDS
ORDINARY SHARES ADDITIONAL ON
----------------------- PAID-IN ACCOUNT OF
SHARES AMOUNT CAPITAL SHARE CAPITAL
---------- ---------- ---------- ---------
BALANCE - JANUARY 1, 2002 26,297,102 $ 7,448 $ 307,865 $ -
ISSUANCE OF SHARES,
NET OF RELATED COSTS 18,438,430 3,846 92,943
AMORTIZATION OF UNEARNED COMPENSATION
LOSS FOR THE YEAR
---------- ---------- ---------- ---------
BALANCE - DECEMBER 31, 2002 44,735,532 $ 11,294 $ 400,808 $ -
STOCK-BASED COMPENSATION RELATED TO
THE FAB 2 CONSTRUCTOR 145
STOCK-BASED COMPENSATION RELATED TO THE
FACILITY AGREEMENT WITH THE BANKS, NOTE 13B(5) 4,205
ISSUANCE OF SHARES, NET OF RELATED COSTS 8,260,565 1,856 22,723
PROCEEDS ON ACCOUNT OF SHARE CAPITAL 16,428
AMORTIZATION OF UNEARNED COMPENSATION
LOSS FOR THE YEAR
---------- ---------- ---------- ---------
BALANCE - DECEMBER 31, 2003 52,996,097 $ 13,150 $ 427,881 $ 16,428
ISSUANCE OF SHARES 2,463,949 553 16,414 (16,428)
ISSUANCE OF SHARES, NET OF RELATED COSTS -
PUBLIC OFFERING 11,444,500 2,550 72,536
EXERCISE OF SHARE OPTIONS 95,250 21 645
LOSS FOR THE YEAR
---------- ---------- ---------- ---------
BALANCE - DECEMBER 31, 2004 66,999,796 $ 16,274 $ 517,476 $ -
========== ========== ========== =========
SHAREHOLDER
RECEIVABLES
AND
UNEARNED ACCUMULATED TREASURY
COMPENSATION DEFICIT STOCK TOTAL
------- ----------- --------- ----------
BALANCE - JANUARY 1, 2002 $ (195) $ (53,241) $ (9,072) $ 252,805
ISSUANCE OF SHARES,
NET OF RELATED COSTS 96,789
AMORTIZATION OF UNEARNED COMPENSATION 142 142
LOSS FOR THE YEAR (51,402) (51,402)
------- ----------- --------- ----------
BALANCE - DECEMBER 31, 2002 $ (53) $ (104,643) $ (9,072) $ 298,334
STOCK-BASED COMPENSATION RELATED TO
THE FAB 2 CONSTRUCTOR 145
STOCK-BASED COMPENSATION RELATED TO THE
FACILITY AGREEMENT WITH THE BANKS, NOTE 13B(5) 4,205
ISSUANCE OF SHARES, NET OF RELATED COSTS 24,579
PROCEEDS ON ACCOUNT OF SHARE CAPITAL 16,428
AMORTIZATION OF UNEARNED COMPENSATION 27 27
LOSS FOR THE YEAR (114,261) (114,261)
------- ----------- --------- ----------
BALANCE - DECEMBER 31, 2003 $ (26) $ (218,904) $ (9,072) $ 229,457
ISSUANCE OF SHARES 539
ISSUANCE OF SHARES, NET OF RELATED COSTS -
PUBLIC OFFERING 75,086
EXERCISE OF SHARE OPTIONS 666
LOSS FOR THE YEAR (137,768) (137,768)
------- ----------- --------- ----------
BALANCE - DECEMBER 31, 2004 $ (26) $ (356,672) $ (9,072) $ 167,980
======= =========== ========= ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, except share data and per share data)
YEAR ENDED DECEMBER 31,
-----------------------------------
2004 2003 2002
--------- --------- ---------
CASH FLOWS - OPERATING ACTIVITIES
LOSS FOR THE YEAR $(137,768) $(114,261) $ (51,402)
ADJUSTMENTS TO RECONCILE LOSS FOR THE YEAR
TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
INCOME AND EXPENSE ITEMS NOT INVOLVING CASH FLOWS:
DEPRECIATION AND AMORTIZATION 121,067 54,611 18,821
EFFECT OF INDEXATION AND TRANSLATION ON
CONVERTIBLE DEBENTURES 676 (878) -
OTHER EXPENSE (INCOME), NET (32,682) 84 (45)
CHANGES IN ASSETS AND LIABILITIES:
INCREASE IN TRADE ACCOUNTS RECEIVABLE (7,655) (4,175) (4,135)
DECREASE (INCREASE) IN OTHER RECEIVABLES AND OTHER CURRENT ASSETS (413) 1,264 (1,305)
INCREASE IN INVENTORIES (6,287) (6,221) (609)
INCREASE IN TRADE ACCOUNTS PAYABLE 404 801 4,686
INCREASE (DECREASE) IN OTHER CURRENT LIABILITIES (970) 1,467 2,764
INCREASE IN OTHER LONG-TERM LIABILITIES 9,344 529 2,822
--------- --------- ---------
(54,284) (66,779) (28,403)
INCREASE (DECREASE) IN LONG-TERM LIABILITY
IN RESPECT OF CUSTOMERS' ADVANCES, NET 19,384 (899) 29,336
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (34,900) (67,678) 933
--------- --------- ---------
CASH FLOWS - INVESTING ACTIVITIES
DECREASE (INCREASE) IN DESIGNATED CASH, SHORT-TERM AND LONG-TERM
INTEREST-BEARING DEPOSITS, NET (10,037) 14,341 (59,683)
INVESTMENTS IN PROPERTY AND EQUIPMENT (154,975) (179,310) (205,099)
INVESTMENT GRANTS RECEIVED 32,636 33,811 40,481
PROCEEDS RELATED TO SALE AND DISPOSAL OF PROPERTY AND EQUIPMENT 2,626 222 70
INVESTMENTS IN OTHER ASSETS (702) (22,098) (34,290)
DECREASE (INCREASE) IN DEPOSITS, NET - 10,500 (456)
PROCEEDS FROM SALE OF LONG-TERM INVESTMENT 38,677 - -
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (91,775) (142,534) (258,977)
--------- --------- ---------
CASH FLOWS - FINANCING ACTIVITIES
PROCEEDS FROM ISSUANCE OF SHARES, NET 75,225 24,375 96,751
PROCEEDS FROM LONG-TERM DEBT 66,000 - 142,000
PROCEEDS FROM EXERCISE OF SHARE OPTIONS 666 - -
PROCEEDS ON ACCOUNT OF SHARE CAPITAL - 16,428 -
DECREASE IN SHORT-TERM DEBT - - (10,000)
REPAYMENT OF LONG-TERM DEBT - (13,000) (4,000)
PROCEEDS FROM LONG-TERM DEBT, NET IN CONNECTION WITH
RE-BORROWING, NOTE 12A(6) - 187,000 -
PROCEEDS FROM SALE OF SECURITIES, NET - - 21,540
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 141,891 214,803 246,291
========= ========= =========
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,216 4,591 (11,753)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 12,448 7,857 19,610
--------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 27,664 $ 12,448 $ 7,857
========= ========= =========
NON-CASH ACTIVITIES
INVESTMENTS IN PROPERTY AND EQUIPMENT $ 47,675 $ 17,160 $ 49,419
========= ========= =========
STOCK-BASED COMPENSATION RELATED TO
THE FACILITY AGREEMENT WITH THE BANKS $ 4,205
=========
INVESTMENTS IN OTHER ASSETS $ 3,153 $ 4,304
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR CAPITALIZED AND EXPENSED INTEREST $ 25,205 $ 15,674 $ 11,594
========= ========= =========
CASH PAID DURING THE YEAR FOR INCOME TAXES $ 130 $ 239 $ 151
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 5 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 1 - DESCRIPTION OF BUSINESS AND GENERAL
A. DESCRIPTION OF BUSINESS
Tower Semiconductor Ltd. ("the Company"), incorporated in Israel,
commenced operations in March 1993. The Company is an independent
wafer foundry dedicated to the manufacture of semiconductor integrated
circuits on silicon wafers. The Company manufactures integrated
circuits in geometries from 1.0 to 0.35 microns at its 150-millimeter
fabrication facility ("Fab 1"), and in 0.18 microns and below at its
200-millimeter fabrication facility ("Fab 2"). As a foundry, the
Company manufactures wafers using its advanced technological
capabilities and the proprietary integrated circuit designs of its
customers.
The industry in which the Company operates is characterized by wide
fluctuations in supply and demand. Such industry is also characterized
by the complexity and sensitivity of the manufacturing process, by
high levels of fixed costs, and by the need for constant improvements
in production technology.
The Company's Ordinary Shares are traded on the Nasdaq National Market
and on the Tel-Aviv Stock Exchange.
B. ESTABLISHMENT AND OPERATIONS OF NEW FABRICATION FACILITY (FAB 2)
In January 2001, the Company's Board of Directors approved the
establishment of a new wafer fabrication facility in Israel ("Fab 2"),
at an expected cost of approximately $1,500,000. Fab 2 is designed to
manufacture semiconductor integrated circuits on silicon wafers in
geometries of 0.18 micron and below on 200-millimeter wafers. The
Company has entered into several related agreements and other
arrangements and has completed public and private financing deals,
which, as of the approval date of the financial statements, have
provided an aggregate of $1,267,000 of financing for Fab 2.
The Fab 2 project is a complex undertaking, which entails substantial
risks and uncertainties. For further details concerning the Fab 2
project and related agreements, some of which were amended several
times, see Note 12A. For details concerning non-compliance with
certain of the financial ratios and covenants under the Facility
Agreement as of December 31, 2004; and a letter agreement signed
between the Company and the Banks prior to the approval date of the
financial statements, in connection with a waiver of certain of the
financial ratios and covenants for the fourth quarter of 2004 and
revised financial ratios and covenants for 2005, see Note 12A.
During the third quarter of 2003, in which Fab 2's construction was
substantially completed, the Company began commercial production and
shipment of wafers to its customers utilizing the 0.18 micron process
technology. With the commencement of Fab 2 operations, the Company
began to depreciate and amortize Fab 2 assets, and to expense most of
the ongoing direct costs related to the construction and equipping of
Fab 2 and to the transfer of the Fab 2 technology that had been
previously capitalized. For further details concerning the
depreciation and amortization of Fab 2 assets, see Note 6A.
C. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
- 6 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's consolidated financial statements are presented in accordance
with generally accepted accounting principles ("GAAP") in Israel. See Note
19 for the reconciliation of material differences between GAAP in Israel
and in the United States of America.
A. PRINCIPLES OF CONSOLIDATION
The Company's financial statements include the financial statements of
the Company and its wholly-owned marketing subsidiary in the United
States, after elimination of material inter-company transactions and
balances. The effect of the subsidiary's operations on the Company's
revenues, net loss and total assets was immaterial for the dates and
periods presented.
B. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of deposits in banks and short-term
investments (primarily time deposits and certificates of deposit) with
original maturities of three months or less.
C. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is computed on the specific
identification basis for accounts whose collectibility, in
management's estimation, is uncertain.
D. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined for raw materials, spare parts and supplies on the basis of
weighted moving average cost per unit. Cost is determined for work in
process and finished goods on the basis of actual production costs.
E. LONG-TERM INVESTMENTS
Long-term investments in other entities, over whose operating and
financial policies the Company does not have the ability to exercise
significant influence, are presented at cost.
F. PROPERTY AND EQUIPMENT
(1) Property and equipment are presented at cost, including interest
and other capitalizable costs. Capitalizable costs include only
incremental direct costs that are identifiable with, and related
to, the property and equipment and are incurred prior to its
initial operation. Identifiable incremental direct costs include
costs associated with acquiring, constructing, establishing and
installing property and equipment (whether performed by others or
by the Company); and costs directly related to preproduction test
runs of property and equipment that are necessary to get it ready
for its intended use. Those costs include payroll and
payroll-related costs of employees who devote time and are
dedicated solely to the acquiring, constructing, establishing and
installing property and equipment. Allocation, when appropriate,
of capitalizable incremental direct costs is based on
management's estimates and methodologies including time sheet
inputs.
- 7 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
F. PROPERTY AND EQUIPMENT (cont.)
(1) (cont.)
Cost is presented net of investment grants received or
receivable, and less accumulated depreciation and amortization.
The accrual for grants receivable is determined based on
qualified investments made during the reporting period, provided
that the primary criteria for entitlement have been met.
Depreciation is calculated based on the straight-line method over
the estimated economic lives of the assets or terms of the
related leases, as follows:
Prepaid perpetual land lease and buildings 14-25 years
Machinery and equipment 5 years
Transportation vehicles 7 years
(2) Impairment examinations and recognition are performed and
determined based on the accounting policy outlined in P below.
G. OTHER ASSETS
The cost of Fab 2 technologies presented in other assets includes the
technology process cost, internal incremental direct costs, mainly
payroll-related costs of employees designated for integrating the
technologies in the Company's facilities, and incremental direct costs
associated with implementing the technologies until the technologies
are ready for their intended use. The costs in relation to Fab 2
technologies are amortized over the expected estimated economic life
of the technologies. Amortization phases in commencing on the dates on
which each of the Fab 2 manufacturing lines is ready for its intended
use, and is based on the straight-line method over a four-year period.
Deferred financing charges included in other assets in relation to
funding the establishment of Fab 2, are being amortized over the lives
of the borrowings based on the repayment schedule of such funding (in
general, 6 to 8 years). During the establishment period of Fab 2,
amortized deferred financing charges were capitalized to property and
equipment. Commencing the third quarter of 2003, in which the building
and infrastructures of Fab 2 were substantially completed and became
ready for their intended use, and in which the initial ramp-up
commenced, the deferred financing charges are being amortized to
financing expenses, net.
Impairment examinations and recognition are performed and determined
based on the accounting policy outlined in P below.
H. CONVERTIBLE DEBENTURES
Convertible debentures, the conversion of which is not anticipated as
of the balance-sheet date, are presented as long-term liabilities
based on their terms as of such date, net of discount. See Note 19E
for disclosure of convertible debentures in accordance with U.S. GAAP.
- 8 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
I. INCOME TAXES
The Company records deferred income taxes to reflect the net tax
effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and for tax
purposes. Deferred taxes are computed based on the tax rates
anticipated (under applicable law at the time the financial statements
are prepared) to be in effect when the deferred taxes are expected to
be paid or realized.
Deferred tax liabilities and assets are classified as current or
noncurrent based on the classification of the related asset or
liability for financial reporting, or according to the expected
reversal dates of the specific temporary differences, if not related
to an asset or liability for financial reporting. Deferred tax
liabilities are recognized for temporary differences that will result
in taxable amounts in future years. Deferred tax assets are recognized
for temporary differences, which will result in deductible amounts in
future years and for carryforwards. A valuation allowance against such
deferred tax asset is recognized if it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
J. REVENUE RECOGNITION
Revenues are recognized upon shipment or as services are rendered when
title has been transferred, collectibility is reasonably assured and
acceptance provisions criteria are satisfied, based on performing
electronic, functional and quality tests on the products prior to
shipment and customer on-site testing. Such testing reliably
demonstrates that the products meet all of the specified criteria
prior to formal customer acceptance, and that product performance upon
customer on-site testing can reasonably be expected to conform to the
specified acceptance provisions. An accrual for estimated returns,
computed primarily on the basis of historical experience, is recorded
at the time when revenues are recognized.
K. RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
Amounts received or receivable from the government of Israel and
others, as participation in research and development programs, are
offset against research and development costs. The accrual for grants
receivable is determined based on the terms of the programs, provided
that the criteria for entitlement have been met.
L. LOSS PER ORDINARY SHARE
Basic loss per ordinary share is calculated based on the weighted
average number of ordinary shares outstanding during each year
presented. The calculation includes retroactive effect from the
beginning of each year of shares issued upon exercise of options and
warrants ("Exercise") and upon conversion of convertible debentures
("Conversion"), outstanding at the beginning of each year, and giving
effect to shares issueable from probable Exercise and from probable
Conversion. Basic loss per ordinary share is calculated based on loss
for the period with the inclusion of imputed interest income on the
exercise price of options and warrants exercised or whose Exercise is
probable, and of financing expenses in relation to converted
debentures or on probable Conversion, as required under Israeli GAAP.
See Note 19J for disclosure of loss per share data in accordance with
U.S. GAAP.
- 9 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
M. DERIVATIVE FINANCIAL INSTRUMENTS
The Company, from time to time, enters into foreign exchange
agreements (primarily forward contracts and options) as a hedge
against non-dollar equipment purchase and other firm commitments.
Gains and losses on such agreements through the date that the
equipment is received or the commitment is realized are deferred and
capitalized to the cost of equipment or the commitment, while gains
and losses subsequent thereto, through the date of agreement
expiration, are included in financing income (expense), net.
In addition, the Company, from time to time, enters into agreements to
hedge interest rate exposure on long-term loans. Gains and losses on
such agreements are recognized on a current basis in accordance with
the terms of these agreements, and expensed or capitalized in the same
manner as the corresponding interest costs.
See Note 19C for disclosure of the derivative financial instruments in
accordance with U.S. GAAP.
N. FUNCTIONAL CURRENCY AND TRANSACTION GAINS AND LOSSES
The currency of the primary economic environment in which the Company
conducts its operations is the U.S. dollar ("dollar"). Accordingly,
the Company uses the dollar as its functional and reporting currency.
Financing expenses, net in 2004, 2003 and 2002 include net foreign
currency transaction losses of $760, $232 and $1,509, respectively.
O. STOCK-BASED COMPENSATION
The Company accounts for employee and director stock-based
compensation in accordance with Accounting Principles Board Opinion
No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB 25") and
authoritative interpretations thereof. Accordingly, the Company
accounts for share options granted to employees and directors based on
the intrinsic value of the options on the measurement date. The
compensation cost of options without a fixed measurement date is
remeasured at each balance sheet date. Deferred compensation in
respect of awards with graded vesting terms is amortized to
compensation expense over the relevant vesting periods. In a manner
consistent with FIN 28, the vesting period over which compensation is
expensed is determined, based on the straight-line method, separately
for each portion of the award as if the grant were a series of awards.
See Note 13B(6) for pro forma disclosures required by SFAS 123 and
SFAS 148.
The Company accounts for stock-based compensation of non-employees
using the fair value method in accordance with Financial Accounting
Standards Board Statement No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION" ("SFAS 123") and EITF 96-18: Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services. The award cost of
warrants granted in connection with bank financing is amortized as
deferred financing charges over the terms of the loans, in a manner
described in paragraph G above. The award cost of warrants granted in
connection with the construction of Fab 2, is recorded as depreciation
expense over the life of the prepaid perpetual land lease and
buildings. The award cost of warrants granted to consultants and a
related party in connection with equity transactions is offset against
paid-in-capital.
- 10 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
P. IMPAIRMENT OF LONG-LIVED ASSETS
Management reviews long-lived assets on a periodic basis, as well as
when such a review is required based upon relevant circumstances, to
determine whether events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. According to
the Israeli Accounting Standards Board No.15, "IMPAIRMENT OF ASSETS",
an asset's recoverable value is the higher of the asset's net selling
price and the asset's value in use, the latter being equal to the
asset's discounted expected cash flows. Prior to issuing Standard No.
15 in January 2003, the Company tested the recoverability of its
assets based on undiscounted expected cash flows, as applicable by
U.S. GAAP, a method that under Standard No. 15 is no longer
acceptable.
Q. RECENT ACCOUNTING PRONOUNCEMENTS BY THE FASB
(1) SFAS NO. 151 - INVENTORY COSTS, AN AMENDMENT OF ARB NO. 43,
CHAPTER 4 - In November 2004 the FASB issued SFAS No. 151,
"Inventory Costs, an Amendment of ARB No. 43, Chapter 4". SFAS
No. 151 amends the guidance in ARB 43, Chapter 4, "Inventory
Pricing", which provides guidance on the allocation of certain
costs to inventory. SFAS 151 clarifies that abnormal amounts of
idle facility expense, freight, handling costs, and wasted
material (spoilage) should be recognized as current-period
charges. In addition, SFAS 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the
normal capacity of the production facilities. The provisions of
this statement are effective for inventory costs incurred during
fiscal years beginning after June 2005. The provisions of this
statement shall be applied prospectively. The Company is
currently assessing the impact of the adoption of this Standard
on the Company's financial position and results of operations
under U.S. GAAP.
(2) SFAS NO. 123 (REVISED 2004) "SHARE BASED PAYMENTS" - In December
2004, the FASB issued SFAS No. 123 (revised 2004) "Share Based
Payments" ("SFAS 123(R)"). This Statement is a revision of FASB
Statement No. 123, "Accounting for Stock-Based Compensation",
which supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees" and its authoritative interpretations. SFAS 123(R)
will be implemented in the U.S. GAAP reconciliation Note.
According to Israeli GAAP, accounting for costs associated with
share-based payments is not required.
SFAS 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments
for goods or services; focuses primarily on accounting for
transactions in which an entity obtains employee and directors
services in share-based payment transactions; and does not change
the accounting guidance for share-based payment transactions with
parties other than employees.
SFAS 123(R) eliminates the alternative to use APB 25's intrinsic
value method of accounting that was provided in SFAS 123 as
originally issued and requires to measure the cost of employee
services received in exchange for an award of equity instruments
based on the grant-date fair value of the award. The
fair-value-based method in this Statement is similar to the
fair-value-based method in SFAS 123 in most respects. The costs
associated with the awards will be recognized over the period
during which an employee is required to provide service in
exchange for the award - the requisite service period (usually
the vesting period).
- 11 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Q. RECENT ACCOUNTING PRONOUNCEMENTS BY THE FASB (cont.)
(2) SFAS NO. 123 (REVISED 2004) "SHARE BASED PAYMENTS" (cont.)
The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models
adjusted for the unique characteristics of those instruments
(unless observable market prices for the same or similar
instruments are available). If an equity award is modified after
the grant date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the
modified award over the fair value of the original award
immediately before the modification.
The provisions of SFAS 123(R) apply to all awards to be granted
by the Company after June 30, 2005 and to awards modified,
repurchased, or cancelled after that date. When initially
applying the provisions of SFAS 123(R), in the third quarter of
2005, the Company will be required to elect between using either
the "modified prospective method" or the "modified retrospective
method". Under the modified prospective method, the Company is
required to recognize compensation cost for all awards granted
after the adoption of SFAS 123(R) and for the unvested portion of
previously granted awards that are outstanding on that date.
Under the modified retrospective method, the Company is required
to restate its previously issued financial statements to
recognize the amounts previously calculated and reported on a pro
forma basis, as if the original provisions of SFAS 123 had been
adopted. Under both methods, it is permitted to use either a
straight line or an accelerated method to amortize the cost as an
expense for awards with graded vesting.
Management has recently commenced identifying the potential
future impact of applying the provisions of SFAS 123(R),
including each of its proposed transition methods, yet is
currently unable to fully quantify the effect of this Standard on
the Company's future financial position and results of operations
in accordance with U.S. GAAP. Nonetheless, it is expected that
the adoption of SFAS 123(R) will increase the stock-based-award
expenses the Company is to record in the future in comparison to
the expenses recorded under the guidance currently applied by the
Company.
(3) SFAS 153, EXCHANGE OF NON-MONETARY ASSETS - In December 2004, the
FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets an
amendment of APB No. 29". This Statement amends Opinion 29 to
eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial
substance. The Statement specifies that a nonmonetary exchange
has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange.
This Statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges
occurring in fiscal periods beginning after the date this
Statement is issued. Retroactive application is not permitted.
The Company is assessing the impact of the adoption of this
Standard, and currently estimates that its adoption in not
expected to have a material effect on the Company's financial
position and results of operations.
- 12 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
R. RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING STANDARDS
BOARD
ACCOUNTING STANDARD NO. 19 "TAXES ON INCOME" - In July 2004, the
Israeli Accounting Standard Board published Accounting Standard No. 19
"Taxes on Income" (the "Standard"). The Standard established the
guidelines for recognizing, measuring, presenting and disclosing taxes
on income in the financial statements. The Standard is effective for
financial statements relating to reporting periods commencing on, or
after, January 1, 2005. The initial adoption of the Standard shall be
accounted for by the cumulative effect of change in accounting method,
for the beginning of the period in which the Standard is initially
adopted. The adoption of the Standard is not expected to have a
material effect on the Company's financial position and results of
operations.
NOTE 3 - OTHER RECEIVABLES
Other receivables consist of the following:
As of December 31,
-----------------
2004 2003
------- -------
Government of Israel - investment grants receivable $ 8,400 $ 8,143
Other government agencies 2,382 2,655
Others 583 275
------- -------
$11,365 $11,073
======= =======
NOTE 4 - INVENTORIES
Inventories consist of the following (*):
As of December 31,
------- -------
2004 2003
------- -------
Raw materials $ 9,260 $ 5,736
Spare parts and supplies 3,950 3,341
Work in process 10,085 9,520
Finished goods 2,374 785
------- -------
$25,669 $19,382
======= =======
(*) Net of aggregate write-downs to net realizable value of $2,665
and $1,228 as of December 31, 2004 and 2003, respectively.
NOTE 5 - OTHER LONG-TERM INVESTMENT
SAIFUN - Based on an agreement between the Company and Saifun
Semiconductors Ltd. ("Saifun"), an Israeli company which designs and
develops memory designs, the Company invested $6,000 in Saifun's share
capital. In December 2004, the Company entered into a definitive agreement
to sell all of its holdings in Saifun to a U.S. based private equity
investor in consideration for $38,677. In December 2004, shareholders of
Saifun exercised their right of first refusal, and accordingly purchased
the shares from the Company for the said amount. The agreement provides
that the Company may receive additional installments through August 2005,
at an amount equal to 10% of the difference by which the price to be
determined at a future IPO, exit or merger and acquisition transaction of
Saifun, is greater than the price per share under the agreement ($14.00 per
share). The net gain from the sale of Saifun's shares amounted to $32,377.
- 13 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 6 - PROPERTY AND EQUIPMENT, NET
A. COMPOSITION
As of December 31,
-----------------------
2004 2003
-------- --------
COST:
Prepaid perpetual land lease and buildings $235,632 $225,218
Machinery and equipment 688,691 555,989
Transportation vehicles 2,989 3,683
-------- --------
927,312 784,890
-------- --------
ACCUMULATED DEPRECIATION AND AMORTIZATION:
Prepaid perpetual land lease and buildings 33,960 20,698
Machinery and equipment 282,092 193,682
Transportation vehicles 1,964 2,098
-------- --------
318,016 216,478
======== ========
$609,296 $568,412
======== ========
SUPPLEMENTAL DISCLOSURE RELATING TO COST OF PROPERTY AND EQUIPMENT:
(1) As of December 31, 2004 and 2003, the cost of property and
equipment included costs relating to Fab 2 in the amount of
$701,982 and $560,304, respectively. Said amounts are net of
investment grants of $158,830 and $126,226, respectively.
Depreciation of Fab 2 assets commenced in the third quarter of
2003, in which the building and infrastructures of Fab 2 were
substantially completed and became ready for their intended use.
(2) As of December 31, 2004, the cost of buildings, machinery and
equipment was reflected net of investment grants in the aggregate
of $262,320 (as of December 31, 2003 - $232,187).
(3) Cost of property and equipment as of December 31, 2004 and 2003
includes capitalized interest costs in the aggregate of $18,480.
(4) Following the commencement of Fab 2 operations, in the third
quarter of 2003, the Company began to depreciate and amortize Fab
2 property and equipment and other assets, resulting in
depreciation and amortization expenses in the cost of sales of
$101,729 in 2004 and $37,302 in 2003.
B. INVESTMENT GRANTS
In connection with the formation of the Company, the Investment Center
of the Ministry of Industry and Trade of the State of Israel
("Investment Center"), under its "approved enterprise" program,
approved an investment program for expenditures on buildings and
equipment in Fab 1 in the aggregate amount (as amended) of
approximately $96,850. The Company completed its investments under
this program, and received final approval from the Investment Center
in November 1997.
In January 1996, an investment program ("1996 program") for expansion
of Fab 1 in the aggregate amount (as amended in December 1999 and
2001) of $228,680 was approved by the Investment Center. The approval
certificate provides for a benefit track entitling the Company to
investment grants at a rate of 34% of the investments included in such
certificate made through December 31, 2001. The Company completed its
investments under the 1996 program in December 2001 and invested
through such date approximately $207,000. In May 2002, the Company
submitted the final report in relation to the 1996 program. As of
December 31, 2004, the report has not yet received a final approval
from the Investment Center.
- 14 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 6 - PROPERTY AND EQUIPMENT, NET (cont.)
B. INVESTMENT GRANTS (cont.)
See Note 12A(8) with respect to the Fab 2 program approved by the
Investment Center in December 2000.
Entitlement to the above grants and other tax benefits is subject to
various conditions stipulated by the Investments Law and the
regulations promulgated thereunder, as well as the criteria set forth
in the certificates of approval. In the event the Company fails to
comply with such conditions, the Company may be required to repay all
or a portion of the grants received plus interest and certain
inflation adjustments. In order to secure fulfillment of the
conditions related to the receipt of investment grants, floating liens
were registered in favor of the State of Israel on substantially all
assets of the Company. See also Note 16A.
C. For liens see Note 12A(6).
NOTE 7 - OTHER ASSETS, NET
Other assets consist of the following:
As of December 31,
-----------------------
2004 2003
-------- --------
COST:
In relation to Fab 2:
Technologies - Note 12A(2) $ 90,747 $ 90,747
Deferred financing charges 20,915 20,864
Other 3,217 3,661
-------- --------
114,879 115,272
-------- --------
ACCUMULATED AMORTIZATION:
In relation to Fab 2 (*):
Technologies 13,797 2,793
Deferred financing charges 6,606 3,049
Other 993 660
-------- --------
21,396 6,502
======== ========
$ 93,483 $108,770
======== ========
(*) For amortization policy, see Note 2G.
NOTE 8 - OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
As of December 31,
---------------------
2004 2003
------- -------
Accrued salaries $ 3,902 $ 3,579
Vacation accrual 3,509 3,474
Interest payable on convertible debentures 1,208 1,168
Other 2,059 1,343
------- -------
$10,678 $ 9,564
======= =======
- 15 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 9 - LONG-TERM DEBT
A. COMPOSITION:
As of December 31,
Effective interest rate as of ----------------------------
December 31, 2004 2004 2003
----------------- -------- --------
In U.S. Dollar 6.78% $172,000 $172,000
In U.S. Dollar 5.30% 40,000 40,000
In U.S. Dollar 5.06% 285,000 219,000
-------- --------
$497,000 $431,000
======== ========
B. Loans received under the Facility Agreement bear interest based on the
three-month USD Libor rate plus 2.5%, as revised under the amendment
to the Facility Agreement described in detail in Note 12A(6). Prior to
the closing of this amendment in December 2003, the loans bore
interest based on the three-month USD Libor rate plus 1.55%. The
effective interest rate as of December 31, 2004 of loans, the amount
of which as of such date was $292,000, includes the terms of collar
agreements with knock-out and knock-in features described in Note 17A.
Interest is payable at the end of each quarter.
C. For additional information regarding the Facility Agreement, as
amended, between the Company and the Banks for financing the
construction and equipping of Fab 2, including re-borrowing terms, see
Note 12A(6).
D. REPAYMENT SCHEDULE
The balance of the long-term debt as of December 31, 2004 is repayable
as follows:
2007 $151,667
2008 165,667
2009 and thereafter 179,666
--------
$497,000
========
E. The agreement with the Company's Banks restricts the Company's ability
to place liens on its assets (other than to the State of Israel in
respect of investment grants) without the prior consent of the Banks.
Furthermore, the agreements contain certain restrictive financial
covenants (see also Note 12A(6)). For further details concerning
non-compliance with certain of the financial ratios and covenants
under the Facility Agreement as of December 31, 2004; and a letter
agreement signed between the Company and the Banks prior to the
approval date of the financial statements, in connection with a waiver
of certain of the financial ratios and covenants for the fourth
quarter of 2004 and revised financial ratios and covenants for 2005,
see Note 12A(6).
- 16 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 10 - CONVERTIBLE DEBENTURES
In January 2002, the Company issued on the Tel-Aviv Stock Exchange,
NIS 110,579,800 principal amount of convertible debentures, linked to
the Israeli Consumer Price Index ("CPI") (adjusted to the CPI as of
December 31, 2004 - NIS 116,821,927, $27,117). The debentures were
issued at 96% of their par value, and bear annual interest at the rate
of 4.7%, payable in January of each year commencing in January 2003.
The principal amount is payable in four installments in January of
each year between 2006 and 2009. The debentures may be converted until
December 31, 2008 into Ordinary Shares, at a conversion rate of one
Ordinary Share per each NIS 41.00 principal amount of the debentures,
linked to the CPI (subject to customary adjustments) (adjusted to the
CPI as of December 31, 2004 - NIS 43.31, $10.05). The effective rate
of interest on the convertible debentures, taking into account the
initial proceeds, net of the discount and the related costs of
issuance, is 7.26%. For U.S. GAAP purposes, which require taking into
account, in addition to the discount and the related issuance costs,
amounts attributed to the options described in Note 13E, the effective
rate of interest on the convertible debentures is 9.88%.
Subject to certain conditions, the Company may, commencing in July
2005, announce the early redemption of the debentures or part thereof,
provided that the sum of the last payment on account of the principal
shall be no less than approximately $700.
If on a payment date of the principal or interest on the debentures
there exists an infringement of certain covenants and conditions under
the Facility Agreement, the dates for payment of interest and
principal on the debentures may be postponed, depending on various
scenarios under the Facility Agreement until such covenant or
condition is settled.
Pursuant to a covenant in the Facility Agreement, the Company is to
deposit at least 20% of the principal amount (net of discounts) of the
unconverted debentures in favor of the Banks as security for payment
of the amounts the Company owes the Banks. The deposited amounts may
be released only as provided in the Facility Agreement, including for
payment of interest on the convertible debentures.
The debentures are unsecured and rank behind the Company's existing
and future secured indebtedness to the Banks under the Facility
Agreement, as well as to the government of Israel in connection with
grants the Company receives under the Fab 2 approved enterprise
program.
See Note 19E for disclosure of the accounting treatment of the
convertible debentures under U.S. GAAP.
NOTE 11 - OTHER LONG-TERM LIABILITIES
A. COMPOSITION
As of December 31,
---------------------------
2004 2003
-------- --------
Net liability for employee
termination benefits (see B below):
Gross obligation $ 20,938 $ 19,042
Amounts funded through deposits to severance
pay funds and purchase of insurance policies (16,350) (14,607)
-------- --------
4,588 4,435
Long-term advances (see Note 12B(3)) 5,500 1,500
Long-term liabilities in respect of license agreements 5,191 --
Other 166 --
-------- --------
$ 15,445 $ 5,935
======== ========
- 17 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - OTHER LONG-TERM LIABILITIES (cont.)
B. EMPLOYEE TERMINATION BENEFITS
Israeli law and labor agreements determine the obligations of the
Company to make severance payments to dismissed employees and to
employees leaving employment under certain other circumstances. The
liability for severance pay benefits, as determined by Israeli Law, is
based upon length of service and the employee's most recent monthly
salary. This liability is primarily covered by regular deposits made
by the Company into recognized severance and pension funds and by
insurance policies purchased by the Company. The amounts so funded are
not reflected separately on the balance sheets, since they are
controlled by the fund trustees and insurance companies and are not
under the control and management of the Company. For presentation of
employee termination benefits in accordance with U.S GAAP, see Note
19B.
Costs relating to employee termination benefits were approximately
$3,836, $2,828 and $2,070 for 2004, 2003 and 2002, respectively.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2
(1) OVERVIEW
In January 2001, the Company's Board of Directors approved the
establishment of a new wafer fabrication facility in Israel ("Fab
2"), at an expected cost of approximately $1,500,000. Fab 2 is
designed to manufacture semiconductor integrated circuits on
silicon wafers in geometries of 0.18 micron and below on
200-millimeter wafers. The Company has entered into several
related agreements and other arrangements, and has completed
public and private financing transactions, to provide an
aggregate, as of the approval date of the financial statements,
of $1,267,000 of financing for Fab 2. The agreements and
arrangements include those with technology partners, Wafer
Partners, Equity Investors, the Company's Banks, the Government
of Israel through the Investment Center and others. The
agreements with the Banks and the Investment Center are subject
to certain conditions, including the achievement of performance
and financing milestones, and the securing of additional required
financing. The Company has also entered into agreements for the
design and construction of Fab 2, for equipping Fab 2 and for the
transfer to the Company of process technologies to produce wafers
in Fab 2.
Through December 31, 2004, the Company has invested in the Fab 2
project an aggregate of approximately $1,185,000. Through such
date, the Wafer Partners, Equity Investor and technology partners
had invested in the Company through committed agreements an
aggregate of $306,823 ($47,246 of which was established as
long-term customers' advances); the Banks had made long-term
loans in the aggregate of $497,000; and the Investment Center
granted the Company an aggregate of $150,647. In addition,
through December 31, 2004, the Company has raised $209,858 from
other financial sources.
- 18 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(1) OVERVIEW (cont.)
During the third quarter of 2003, in which Fab 2's construction
was substantially completed, the Company began commercial
production and shipment of wafers to its customers utilizing the
0.18 micron process technology. With the commencement of Fab 2
operations, the majority of the ongoing direct costs related to
the construction and equipping of Fab 2 and to the transfer of
the Fab 2 technologies that previously had been capitalized, are
no longer capitalizable. Depreciation and amortization of Fab 2
assets in 2004 and 2003 amounted to $108,542 and $39,625,
respectively (see also Note 6A).
The construction and equipping of Fab 2 is a substantial project,
which requires extensive management involvement as well as a
timely coordination of the activities of many participants. In
addition, this project is a complex undertaking which entails
substantial risks and uncertainties, including but not limited to
those associated with the following: obtaining additional
commitments to finance the construction and equipping of Fab 2;
achieving certain operational milestones and complying with
various conditions and covenants in order to receive the
additional funds committed by the Investment Center, as well as
those provided by the Facility Agreement with the Banks, which
establishes significant conditions and covenants under the
Facility Agreement; and completing the complex processes of
transferring from Freescale (formerly Motorola) the manufacturing
technologies to be used at Fab 2 and development of new
technologies.
According to the Facility Agreement with the Banks, raising
certain required additional funding by the dates specified,
achieving the milestones as scheduled, as well as complying with
all the conditions and covenants stipulated in that agreement and
in the Approval Certificate from the Investment Center, are
material provisions for providing the Company with the required
financing. For details concerning non-compliance with certain of
the financial ratios and covenants under the Facility Agreement
as of December 31, 2004; and a letter agreement signed between
the Company and the Banks prior to the approval date of the
financial statements, in connection with a waiver of certain of
the financial ratios and covenants for the fourth quarter of 2004
and revised financial ratios and covenants for 2005, see
paragraph A(6) below.
(2) TECHNOLOGY TRANSFER AGREEMENTS
TOSHIBA - In April 2000, the Company entered into a technology
transfer agreement with Toshiba Corporation ("Toshiba"), a
Japanese corporation. This agreement provides for the transfer by
Toshiba to the Company of advanced semiconductor manufacturing
process technologies installed in Fab 2 including related
technology transfer assistance in exchange for certain fees for
patent licenses, technology transfer and technical assistance.
The transfer of the technology was substantially completed during
the first half of 2003. Under the Toshiba agreement, the Company
agreed, subject to certain conditions, to reserve for Toshiba a
certain portion of Fab 2 wafer manufacturing capacity for a
period ending in December 2005.
- 19 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(2) TECHNOLOGY TRANSFER AGREEMENTS (cont.)
FREESCALE (FORMERLY MOTOROLA) - In September 2002, the Company
entered into a non-exclusive technology transfer, development and
licensing agreement with Motorola, a U.S. corporation, which was
subsequently assigned to Freescale ("Freescale"). This agreement
provides for the transfer by Freescale to the Company of existing
and newly developed versions of advanced semiconductor
manufacturing process technologies to be installed in Fab 2, and
for the provision by Freescale of related technology transfer
assistance, in exchange for certain fees for patent and other
intellectual property licenses, technology transfer and
development, technical assistance and ongoing royalties based on
sales of products to be manufactured in Fab 2 with the
transferred technology. Subject to prior termination for cause by
Freescale, the licenses under the agreement are perpetual.
(3) WAFER PARTNER AGREEMENTS
During 2000, the Company entered into various share purchase
agreements ("Wafer Partner Agreements") with SanDisk Corporation,
Alliance Semiconductor Corporation, Macronix International Co.,
Ltd. and QuickLogic Corporation (collectively, the "Wafer
Partners"; excluding QuickLogic, the "primary Wafer Partners") to
partially finance the construction and equipping of Fab 2.
Pursuant to the Wafer Partner Agreements, the Wafer Partners
agreed to invest an aggregate of $250,000 to purchase Ordinary
Shares of the Company. According to the Wafer Partner Agreements,
the Company agreed, subject to certain conditions, to reserve for
each Wafer Partner a certain portion, and collectively
approximately 50%, of Fab 2 wafer manufacturing capacity for a
period of 10 years ending January 2011.
Through December 31, 2004, the Wafer Partners invested in the
Company, based on the Wafer Partner Agreements, an aggregate of
$246,823, of which $199,577, was credited as paid in capital and
$47,246, was established as long-term customers' advances which
may be, subject to the terms and conditions stipulated in the
Wafer Partner Agreements utilized as credit against purchases to
be made by the Wafer Partners, or converted into paid-in-capital.
Through December 31, 2004, the Wafer Partners were issued an
aggregate of 26,242,875 Ordinary Shares at an average price per
share of $7.63, which was determined based on the average closing
sale price of the Company's Ordinary Shares for the 15-30 trading
days prior to making any investment.
In December 2003, the primary Wafer Partners made their final
committed investment of $13,201. Said amount is presented on the
face of the balance sheet as of December 31, 2003 as proceeds on
account of share capital. For the classification of that amount
under U.S. GAAP, see Note 19F.
For additional investments made by the Wafer Partners in
connection with a rights offering, see Note 13F.
- 20 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(4) EQUITY INVESTOR AGREEMENTS
Through December 31, 2004, The Israel Corporation ("TIC"), the
principal shareholder of the Company, and Challenge Fund-Edgar II
LP, a Delaware limited partnership ("Challenge") (all together,
"Equity Investors") invested in the Company, an aggregate of
$55,000 for the purchase of an aggregate of 7,419,835 Ordinary
Shares of the Company at an average price per share of $7.41,
which was determined based on the average closing sale price of
the Company's Ordinary Shares for the 15-30 trading days prior to
making any investment. Said amount includes $3,227 the Equity
Investors made in December 2003 as their final committed
investment. The $3,227 amount is presented on the face of the
balance sheet as of December 31, 2003 as proceeds on account of
share capital. For the classification of that amount under U.S.
GAAP, see Note 19F. The investments of TIC and Challenge were
made in accordance with share purchase agreements the Company
entered into with them in December 2000 and February 2001,
respectively.
In 2002, Ontario Teachers' Pension Plan ("OTPP") invested in the
Company's equity $15,000 in consideration for 3,000,000 Ordinary
Shares of the Company for $5.00 per share, and a warrant to
purchase an additional 1,350,000 Ordinary Shares of the Company.
The warrant is exercisable for a four-year period ending in
October 2006, at an exercise price of $7.50 per share (subject to
customary adjustments).
(5) AMENDMENTS TO THE PRIMARY WAFER PARTNER AND EQUITY INVESTOR
AGREEMENTS
Pursuant to the primary Wafer Partner Agreements, as amended, the
primary Wafer Partners are entitled to convert an aggregate of up
to $13,201 of the unutilized long-term customers' advances, which
they may have as of December 31, 2005, into fully-paid Ordinary
Shares of the Company. The number of shares to be issued shall be
determined based on the average closing sale price of the
Company's Ordinary Shares for the 15 trading days prior to
December 31, 2005. The option is exercisable during January 2006.
In case such conversion occurs and the amount of shares issued is
equivalent to or greater than 5% of the Company's outstanding
share capital as of the conversion date, the Company has
undertaken to offer to all of its other shareholders rights to
purchase shares of the Company at the same price per share.
- 21 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(5) AMENDMENTS TO THE PRIMARY WAFER PARTNER AND EQUITY INVESTOR
AGREEMENTS (cont.)
Pursuant to the primary Wafer Partner Agreements, as amended,
each of the primary Wafer Partners has an option to convert, at
the end of each calendar quarter in 2004-2006, that portion of
the long-term customers' advances which it is entitled to
utilize, based upon purchases made by such primary Wafer Partner
during that quarter, into fully-paid Ordinary Shares of the
Company. The number of shares is to be determined based on the
average closing sale price of the Company's Ordinary Shares for
the 15 trading days preceding the end of each quarter.
Accordingly, during 2004, one of the primary Wafer Partners
converted an aggregate of $539 of long-term customer advances
into 117,163 fully paid Ordinary Shares of the Company, at an
average share price of $4.59 per share. Any quarterly amount,
which the primary Wafer Partners have elected not to so convert,
will not be utilizable against purchases made subsequent to that
quarter, and shall bear interest, payable at the end of each
quarter, at an annual rate equal to the three-month LIBOR plus
2.5% through December 31, 2007. The aggregate principal of the
unconverted long-term customers' advances, which could have been
utilized against purchases and which the primary Wafer Partners
elected not to convert into fully-paid Ordinary Shares of the
Company, shall be fully repaid on December 31, 2007. Other than
as described above in this paragraph and the preceding paragraph,
each of the primary Wafer Partners agreed that long-term
customer's advances could not be utilized before December 31,
2006. Following December 31, 2006, the remaining long-term
customer advances may be utilized as credits against purchases to
be made.
(6) FACILITY AGREEMENT
In January 2001, the Company entered into a credit facility
agreement with two leading Israeli banks ("Banks") entitling the
Company to borrow an aggregate, as amended in January 2002, of
$500,000 to finance the construction and equipping of Fab 2
("Facility Agreement"). Of that amount, as of December 31, 2004,
the Company withdrew an aggregate of $497,000. The loans bear
interest at a rate of Libor plus 2.5% per annum payable at the
end of each quarter (prior to the November 2003 amendment,
described below, the loans bore interest at a rate of Libor plus
1.55% per annum). The loans are subject to certain prepayment
provisions. Unused amounts under the Facility Agreement were
subject to a quarterly commitment fee of 0.25% per annum. In
accordance with the terms of the Facility Agreement, as of
December 31, 2004 the Company may no longer borrow thereunder.
Loans in the amount of $431,000 received by the Company through
December 31, 2003, were repaid on December 31, 2003 and,
concurrently, an equivalent amount was drawn down on such date at
an equivalent amount to be repaid in 12 equal consecutive
quarterly installments commencing on March 31, 2007 (the net
amount of long-term loans the Company received in 2003 in
connection with the abovementioned re-borrowing was $187,000).
Loans in the amount of $66,000 drawn down during 2004 are
repayable in 12 equal consecutive quarterly installments,
commencing three years from the draw down date of each loan,
which in no case shall be after the maturity date of the Facility
Agreement. For further details regarding loans drawn down under
the Facility Agreement, see Note 9.
- 22 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT (cont.)
Under the Facility Agreement and the terms of the Company's
long-term loans as of December 31, 2004, the Company agreed to
register liens in favor of the Banks on substantially all its
present and future assets. If, as a result of any default under
the Facility Agreement, the Banks were to accelerate the
Company's obligations, the Company would be obligated to
immediately repay all loans made by the Banks, plus penalties,
and the Banks would be entitled to exercise the remedies
available to them under the Facility Agreement, including
enforcement of the liens against the Company's assets.
In November 2003, the Company and its Banks entered into an
amendment to the Facility Agreement. The amendment was based,
among other things, on an updated plan for the construction and
equipping Fab 2 submitted to the Banks, and was approved by the
Company's shareholders' meeting held in December 2003. Pursuant
to the amendment, the Banks waived all noncompliance or breach of
covenants by the Company prior to the date of amendment. The
amendment further revised and updated the covenants under the
Facility Agreement according to which the Company is obligated to
comply with certain operational and financial ratios, primarily
total shareholders' equity to total assets, quarterly and annual
EBITDA, sales and production capacity milestones.
As of December 31, 2004, due mainly to the recent and current
slow-down in the semiconductor markets, the Company was not in
compliance with certain of the financial ratios and covenants
stipulated in the Facility Agreement. The Company has recently
prepared an updated working-plan for 2005 for Fab 2, which is
based on prevailing and the Company's forecast of market
conditions and requested its Banks to agree to amend the
financial ratios and covenants in order to align them with the
updated Fab 2 working-plan for 2005. Prior to the approval date
of the financial statements, the Company and its Banks signed a
waiver letter agreement according to which the Banks waived the
Company's non-compliance with certain financial ratios and
covenants for the fourth quarter of 2004. The agreement signed
also amended certain of the financial ratios and covenants the
Company is to comply with during 2005.
According to the amended Facility Agreement with the Banks, the
Company is to raise from specified financial sources an aggregate
of $79,000 by December 2004, an aggregate of $115,500 by June
2005 and an aggregate of $152,000 by December 2005. As of
December 31, 2004, the Company fully satisfied the December 2004
and June 2005 fund raising milestones. Accordingly, as of such
date, the Company's remaining obligation to raise financings from
specified financial sources is $28,300 to be raised by December
31, 2005.
The Facility Agreement provides that should the Company fail to
meet the above fundraising obligations towards the remaining
$28,300 by December 31, 2005, the Banks will have the option to
demand that the Company consummate within three months from the
failing raising date a rights offering of convertible debentures
and warrants to purchase the Company's Ordinary Shares to raise
the missing amount towards the required funding, all in
accordance with the terms prescribed in the Facility Agreement.
- 23 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT (cont.)
The Israel Corporation Ltd. ("TIC"), the current major
shareholder of the Company, has undertaken to the Banks to
exercise all of the rights it receives in the rights offering. In
addition, as part of TIC's undertaking, it agreed to purchase
from the Company additional securities in a private placement on
the same terms as the rights offering, in an amount equal to
50/93 of the difference between the amount the Company was to
raise in the rights offering and the amount raised from
shareholders other than TIC, less any amounts actually invested
in the rights offering by TIC in connection with the exercise of
its own rights. As a result of the Company satisfying certain of
its fund raising milestones, TIC's undertaking to the Banks as of
December 31, 2004 is limited to an aggregate of $15,215. If
certain of the Company's shareholders participate in the above
investment, then their investment will be deemed to be
investments made by TIC towards the $15,215 commitment. In the
event that the rights offering cannot be completed, TIC has
undertaken to purchase from the Company in a private placement
50/93 of the amount the Company was to raise in the rights
offering.
TIC's undertaking and the Company's obligation to consummate a
rights offering expires on the earlier of: (i) such time that the
Company will fulfill the fundraising obligation to raise an
aggregate of $28,300 as described above; (ii) such time as TIC
has invested an aggregate amount of $15,215 as described above;
or (iii) June 30, 2006.
Following the receipt of the above described investments from
TIC, the Banks will permit the Company to draw additional funds
under the Facility Agreement at a ratio of $43 for every $50
invested, up to $13,085 in the aggregate. Any drawn loan will be
repayable by December 2007. Should the Company draw down loans
from this additional amount, the Banks will be issued 30% warrant
coverage of the amount drawn down, based on the average closing
price of the Company's Ordinary Shares during the 15 consecutive
trading days prior to the time the Company draws down such loans.
For further details regarding 1,296,596 warrants issued to the
Banks in connection with the Facility Agreement, see Note
13B(5)(a).
For further details regarding 58,906 warrants issued to TIC in
connection with its undertaking described above, and additional
warrants issuable to TIC in the event the undertaking is
realized, see Note 13B(5)(b).
The Company has agreed to indemnify TIC for any liabilities it
incurs with respect to these arrangements, subject to making any
investment under its undertaking, up to a maximum of $100,000 as
follows: up to $25,000 in cash and any amount exceeding such
$25,000 limit will earn interest at LIBOR plus 2.5% and will be
paid on the same terms that the Company repays its loans to the
Banks.
- 24 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT (cont.)
Following certain bankruptcy related events, the Banks will be
able to bring a firm offer made by a potential investor to
purchase the Company's ordinary shares ("the Offer") at a price
provided in the Offer. In such case, the Company shall be
required thereafter to procure a rights offering to invest up to
60% of the amount of the Offer on the same terms. If the offeror
intends to purchase a majority of the Company's outstanding share
capital, the rights offering will be limited to allow for this,
unless TIC and the primary Wafer Partners agree to exercise in a
rights offering rights applicable to their shareholdings and
agree to purchase in a private placement enough shares to ensure
that the full amount of the Offer is invested.
(7) FAB 2 CONSTRUCTION AGREEMENT
In August 2000, the Company entered into a fixed price turn-key
agreement with a contractor for the design and construction of
Fab 2 in consideration of approximately $200,000 to be paid
according to certain performance milestones stipulated in the
agreement. As of December 31, 2004, approximately $190,000 of
that amount had already been paid by the Company.
(8) APPROVED ENTERPRISE STATUS
In December 2000, the Investment Center approved an investment
program in connection with Fab 2 for expansion of the Company's
plant. The approval certificate for the program provides for a
benefit track entitling the Company to investment grants at a
rate of 20% of qualified investments of up to $1,250,000, or an
aggregate of up to $250,000, of which as of the balance sheet
date, an aggregate of $150,647 has been already received from the
Investment Center. The remaining grants are to be made in
accordance with a timetable set forth in the approval certificate
for the program and are subject to the described below.
Under the terms of the Fab 2 approved enterprise program,
investments in respect of Fab 2 may be completed by December 31,
2005, five years from the date the approval certificate was
obtained. Due to the later than planned commencement of
construction of Fab 2, prevailing market conditions and slower
than planned ramp-up, as of December 31, 2004, the Company
completed approximately 70% of the investments under the approved
enterprise program. According to the original terms of the
program, had the Company completed as of December 31, 2004 80% of
the total investments under the approved enterprise program, then
the overall investment period would have been automatically
expanded through December 31, 2005. Currently, the Company does
not expect to complete Fab 2 investments by the end of 2005.
Accordingly, and as a result of the Company's actual investments
lagging behind the original terms of the program, the Company
notified the Investment Center of its revised investment schedule
contemplated in an updated plan for the construction and
equipping Fab 2. Such plan includes, among other matters, a
reduced rate of annual investments and lower than projected
expectations for Fab 2 sales. In July 2004, the Company received
from the Investment Center an approval to the revised investment
schedule. As of December 31, 2004, the Company was in compliance
with the revised investment schedule.
- 25 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(8) APPROVED ENTERPRISE STATUS (cont.)
While Israeli law currently limits the investment period to five
years (that is, through December 31, 2005), the Company's
management estimates, based on discussions held with the
Investment Center, that it is probable that satisfactory
arrangements will be made with the Investment Center to allow for
the extension of the investment period beyond the five-year
period (see also Note 16A).
(9) AGREEMENT WITH THE ILA
In November 2000, the Company entered into a development
agreement with the Israel Land Administration ("ILA") with
respect to a parcel of land on which Fab 2 was constructed.
Following the completion of the construction of Fab 2 on the
land, in June 2003, the Company entered into a long-term lease
agreement with the ILA for a period ending in 2049. The lease
payments through 2049 relating to this lease have been paid in
advance.
(10) HEDGING ACTIVITIES
For hedging transactions and agreements the Company has entered
into, see Note 17C.
(11) OTHER AGREEMENTS
Through December 31, 2004 the Company had entered into several
additional agreements related mainly to the construction,
equipping and transfer of technology for Fab 2. The Company's
aggregate commitment in connection with these agreements which
were not supplied or rendered as of such date, including the Fab
2 construction agreement described in paragraph (7) above,
amounted to $32,797.
B. LICENSE AGREEMENTS
(1) In June 2000, the Company entered into a cross license agreement
with a major technology company. According to the agreement, each
party acquired a non-exclusive license under the other's patents.
The Company agreed to pay an annual royalty through July 2005.
The licenses terminate on December 31, 2005.
(2) In December 2001, the Company and DSP Group Ltd. ("DSPG") entered
into a license agreement, pursuant to which DSPG granted the
Company a personal, non-exclusive, nontransferable license to use
certain technology in the Company's products, in exchange for
license fee and ongoing royalties to be paid by either the
Company or its customers based on sales of products manufactured
in Fab 2 based on the technology. In addition, the agreement
provides for technical support by DSPG in connection with using
the technology. The license terminates on December 31, 2007.
- 26 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - COMMITMENTS AND CONTINGENCIES (cont.)
B. LICENSE AGREEMENTS (cont.)
(3) In May 2002, the Company entered into a joint development and
royalty-free, non-exclusive cross-license agreement with a
Japanese semiconductor manufacturer corporation, for the joint
development of certain technology to be used by the Company in
its Fab 2 and by the Japanese manufacturer in its facilities. The
agreement calls for certain amounts to be paid by the Japanese
manufacturer to the Company following the signing of the
agreement and subject to achievement of certain milestones,
through a period ending 2005. Pursuant to the agreement, the
Japanese manufacturer may allocate, subject to certain conditions
stipulated in the agreement, part or all of the second half of
the total amounts paid by it to the Company as long-term customer
advances to be utilized against future purchases made by the
Japanese manufacturer through 2007. Sales for 2004 and 2002
included $1,944 and $8,056 revenues in relation to this
agreement, respectively. See also Note 11A.
(4) The Company from time to time enters into intellectual property
and licensing agreements with third parties, the effect of each
of them on the Company's total assets and results of operations
is immaterial. Certain of these agreements call for royalties to
be paid by the Company to these third parties. See also paragraph
F(2) below.
C. LEASES
(1) The Company's offices and engineering and manufacturing
operations are located in a building complex situated in an
industrial park in Migdal Ha'emek, in the northern part of
Israel. These premises are currently occupied under a long-term
lease from the Israel Lands Authority, which expires in 2032. The
Company has no obligation for lease payments related to this
lease through the year 2032.
(2) With respect to a long-term lease agreement of land on which Fab
2 was constructed, see paragraph A(9) above.
(3) The Company occupies certain other premises under various
operating leases. The obligations under such leases were not
material as of December 31, 2004.
D. PURCHASE AGREEMENTS
The Company from time to time enters into long-term purchase
agreements with customers. Pursuant to such agreements, the Company is
committed to sell, and the customer is committed to purchase (subject
to reductions in certain circumstances), a specific monthly output
derived from the start of processing of silicon wafers at prices which
are stipulated in the agreements and are subject to periodic
re-negotiations. From commencement of the Company's operations through
December 31, 2004, a substantial portion of the Company's production
has been sold under such agreements. For purchase agreements with
related parties, see paragraph A(3) above.
E. PROFIT SHARING PLAN
The Company maintains an employee profit sharing plan. No amounts were
provided for under this plan for periods presented in these financial
statements, since the Company did not record profits for these
periods.
- 27 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - COMMITMENTS AND CONTINGENCIES (cont.)
F. OTHER PRINCIPAL AGREEMENTS
(1) MACRONIX - In December 2000, the Company and Macronix entered
into an agreement according to which the Company waived in favor
of Macronix certain exclusive semiconductor manufacturing rights
it received from Saifun.
(2) SAIFUN - Pursuant to an agreement between the Company and Saifun
signed in October 1997, the Company has certain exclusive
semiconductor manufacturing rights for certain licensed
technology. The agreement also sets certain limitations on Saifun
regarding future licensing of such technology (see (1) above).
Pursuant to certain provisions of the agreement, the Company and
Saifun are obligated, under certain circumstances, to pay each
other royalties. For royalty amounts received and payable by the
Company under the agreement, see Note 18B. The agreement
terminates in October 2007, unless terminated earlier for cause.
(3) SILICONIX - In May 2004, the Company and chip maker Siliconix
incorporated ("Siliconix"), an 80% owned subsidiary of Vishay
Intertechnology Inc., entered into a definitive long-term foundry
agreement for semiconductor manufacturing. Pursuant to the
agreement, Siliconix will place with the Company orders valued at
approximately $200,000 for the purchase of wafers to be
manufactured in the Company's Fab 1 over a seven to ten year
period. Approximately $53,000 of that amount will be delivered
over an initial three-year period commencing after the completion
of the transfer of Siliconix's technology to Fab 1, which is
expected to be completed during the first half of 2005. According
to the agreement, in August 2004 Siliconix advanced the Company
$20,000 to be used primarily for the purchase of additional
equipment required to satisfy Siliconix's orders. The advanced
amount will be credited towards the purchase price of wafers. The
unused remaining balance of the $20,000 ($14,068 as of December
31, 2004) is included in designated cash and short-term
interest-bearing deposits in the balance sheet. The Company
registered liens in favor of Siliconix on equipment purchased in
connection with the transaction.
(4) OTHER - The Company, from time to time in the normal course of
business, enters into long-term agreements with various entities
for the joint development of products and processes utilizing
technologies owned by both the other entities and the Company.
G. ENVIRONMENTAL AFFAIRS
The Company's operations are subject to a variety of laws and
governmental regulations in Israel relating to the use, discharge and
disposal of toxic or otherwise hazardous materials used in the
production processes. Operating permits and licenses are required for
the operations of the Company's facilities and these permits and
licenses are subject to revocation, modification and renewal.
Government authorities have the power to enforce compliance with these
regulations, permits and licenses. The Company's current business
license requires that its manufacturing facilities achieve a maximum
fluoride level of 6 parts per million (PPM) in their wastewater. Under
the terms of the license, Fab 1 is permitted to achieve a maximum
fluoride level of 8 PPM, subject to the submission of certain
documents to the environmental authorities. The Company filed with the
authorities the required documents and accordingly Fab 1's current
fluoride level is in compliance with the terms of the license.
- 28 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - COMMITMENTS AND CONTINGENCIES (cont.)
H. CLASS ACTION
In August 2004, the United States District Court dismissed the class
action filed in July 2003 by certain of the Company's shareholders in
the United States against the Company and certain of its directors,
Wafer Partners and Equity Investors ("the Defendants"). The plaintiffs
had asserted claims arising under the Securities Exchange Act of 1934,
alleging misstatements and omissions made by the Defendants in
materials sent to the Company's shareholders in April 2002 with
respect to the approval of an amendment to the Company's investment
agreements with its Fab 2 investors. In December 2004, one of the lead
plaintiffs filed an appeal of the decision dismissing the complaint.
The Company believes that the complaint is without merit and is
vigorously contesting it.
I. AMENDMENT TO ISRAELI BANKING REGULATIONS
Pursuant to a amendment to a directive published by the Israel
Supervisor of Banks, which became effective on March 31, 2004, the
Company may be deemed part of a group of borrowers comprised of the
Ofer Brothers Group, The Israel Corporation (the latter being
currently the major shareholder of the Company), and other companies
which are also included in such group of borrowers pursuant to the
directive, including companies under the control or deemed control of
these entities. The directive provides that an entity will be subject
to limitations on the amount of bank financing available to it if such
entity is included within a group of borrowers, to which the amount of
debt financing that has been extended from such bank amounts to 30% of
such bank's capital, or is a member of one of the bank's six largest
borrowers or groups of borrowers to which, collectively, the amount of
debt financing that has been extended from that bank amounts to 150%
of such bank's capital (gradually reduced to 135% between April 2005
and June 2006). The directive also provides that a bank cannot extend
debt financing to any single borrower in amounts that exceed 15% of
such bank's capital. If any of the Company's Banks exceed these
limitations, it may require that the Company return some or all of the
Company's outstanding borrowings ($497,000 as of December 31, 2004)
and may limit the Company's ability to borrow additional funds in the
future.
J. STAMP DUTY
In October 2004, the Company has been approached by Israeli Tax
Authorities with a request to provide certain information relating the
stamping of commercial documents in Israel. This request was also sent
to other Israeli public companies and other entities, which oppose
such request by arguing it contradicts the common practice in Israel.
Management estimates that the Company's exposure, if any, in
connection with this request is not expected to have a material effect
on the Company's financial position and results of operations.
K. OTHER COMMITMENTS
Receipt of certain research and development grants from the government
of Israel is subject to various conditions. In the event the Company
fails to comply with such conditions, the Company may be required to
repay all or a portion of the grants received. In management's
opinion, the Company has been in full compliance with the conditions
through December 31, 2004.
- 29 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY
A. DESCRIPTION OF ORDINARY SHARES
As of December 31, 2004 and 2003, the Company had 250,000,000 and
150,000,000 authorized par value NIS 1.00 Ordinary Shares,
respectively, of which 65,699,796 and 51,696,097, respectively, were
issued and outstanding (net of 1,300,000 Ordinary Shares held by the
Company as of such dates). As of December 31, 2004, there were
9,858,236 Ordinary Shares of the Company contingently issuable. This
amount includes Ordinary Shares to be issued under various agreements
according to their provisions as of December 31, 2004 related to Fab 2
Wafer Partners and Equity Investors warrants, the exercise of all
options granted and issued to non-employees and the conversion of all
the convertible debentures.
Holders of Ordinary Shares are entitled to participate equally in the
payment of cash dividends and bonus share (stock dividend)
distributions and, in the event of the liquidation of the Company, in
the distribution of assets after satisfaction of liabilities to
creditors. Each ordinary share is entitled to one vote on all matters
to be voted on by shareholders.
B. SHARE OPTION PLANS
(1) EMPLOYEE AND DIRECTOR SHARE OPTIONS
(A) GENERAL - The Company has granted to its employees options
to purchase its Ordinary Shares under several option plans
adopted by the Company since 1994. The particular provisions
of each plan and grant vary as to vesting period, exercise
price, exercise period and other terms. Generally, the
options are granted at an exercise price which equals to not
less than 85% of the market value of the Ordinary Shares at
the date of grant (in mostly all cases, at an exercise price
equal to the market value of the underlying shares at the
date of grant); vest over a three to four-year period
according to various vesting schedules; and are not
exercisable beyond ten years from the grant date under each
plan.
(B) OPTIONS TO THE COMPANY'S CHAIRMAN OF THE BOARD OF DIRECTORS
- In March 2003, the Board of Directors of the Company
approved a share option plan, which was approved by the
Company's shareholders in May 2003, pursuant to which the
Company's Chairman of the Board of Directors ("Chairman") is
entitled to receive the right to purchase up to 1,043,000
Ordinary Shares of the Company at an exercise price of
$2.983, an exercise price which is higher than the Company's
share price at the date of the approval by the Board of
Directors, and is equivalent to the average closing trading
price for the Company's Ordinary Shares during the 30
consecutive trading days preceding the date of board
approval of the amendment to the Fab 2 investment agreements
described in Note 12A(5) above. Options granted under the
plan vest over a five-year period according to various
vesting schedules. The vesting of the options is subject to
the Chairman's serving as the Chairman or as the Company's
Chief Executive Officer or President on the relevant vesting
dates. The options granted are exercisable for a period of
five years from the date on which the options vest.
- 30 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(1) EMPLOYEE AND DIRECTOR SHARE OPTIONS (cont.)
(C) OPTIONS GRANTED TO DIRECTORS - During 2001, the Audit
Committee, the Board of Directors of the Company and the
general meeting of the Company's shareholders approved a
stock option plan pursuant to which the Company's directors
will be granted options to purchase up to 400,000 Ordinary
Shares of the Company (40,000 to each eligible director
appointed to the Board of Directors) at an exercise price
equal to the market price of the Company's shares on the
grant dates. As of December 31, 2004 and 2003, 240,000 and
280,000 options were outstanding under the plan,
respectively, with weighted average exercise price of $8.41
and $8.48, respectively. Options granted under the plan vest
over a four-year period according to various vesting
schedules, and generally may not be exercised beyond five
years from the date they first become exercisable.
In addition, during 2000 and 2001, the Audit Committee, the
Board of Directors of the Company and the general meeting of
the Company's shareholders approved the grant to a director
of the Company options to purchase up to 50,000 and 21,500
Ordinary Shares, respectively, of the Company at an exercise
price of $20.00 and $10.75, respectively, per share, the
market price of the Company's shares on the dates of grant.
The options may be exercised for a period of three years
from the date on which they have become vested. As of
December 31, 2004, all the options are vested.
(D) OPTIONS GRANTED TO FORMER CO-CEOS IN OCTOBER 1998 AND MAY
2001 - In October 1998 and May 2001, the Board of Directors
of the Company approved share option plans pursuant to which
each of the Company's two former Co-Chief Executive Officers
was granted the right to purchase up to 300,000 and 100,000,
respectively, Ordinary Shares of the Company at an exercise
price of $7.00 and $11.81, respectively, the market price of
the Company's shares on the dates of grant. In the framework
of the retirement of the former Co-Chief Executive Officers
in May 2003, based on their retirement provisions as
stipulated in the agreements, the 300,000 options are
available for exercise through April 2007. As of December
31, 2004, there were 705,000 options exercisable by the
former Co-Chief Executive Officers.
(E) OPTIONS AVAILABLE FOR GRANT - Under a provision approved in
September 2000, as amended in December 2003, by the
Company's Board of Directors, on January 1 of each year
commencing 2001 and ending 2003 and on each year commencing
November 1, 2003 and November 1, 2004, the total number of
options available for grant under all the Company's employee
share option plans is to be increased by an amount equal to
certain percentage of the outstanding Ordinary Shares of the
Company on each such dates, provided that the maximum number
of options available for grant at any time shall not exceed
12% of the outstanding Ordinary Shares of the Company, and
that additional options may not be granted if the total
number of unvested options outstanding under all the
Company's share option plans exceeds 12% of the outstanding
Ordinary Shares of the Company. The percentage of the
outstanding Ordinary Shares of the Company added for the
years 2001, 2002 and 2003 was 4%, and for the years 2004 and
2005 - 3.6%. Accordingly, as of December 31, 2004, an
aggregate of 2,365,193 options were added to the Company's
share option plans. An aggregate of 811,675 options had not
yet been designated for identified employees, and are
accordingly available for grant under the general terms
described in paragraph (a) above.
- 31 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(2) SUMMARY OF THE STATUS OF ALL THE COMPANY'S EMPLOYEE AND DIRECTOR
SHARE OPTIONS
A summary of the status of all the Company's employee and
director share option plans as of December 31, 2004, 2003 and
2002, as well as changes during each of the years then ended, is
presented below (for options granted to the Banks, a related
party and a consultant, see paragraph B(5) below):
2004 2003 2002
-------------------------- --------------------- ----------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Share Exercise of Share Exercise of Share Exercise
Options Price Options Price Options Price
------------- ----- ------- ----- ------- -----
Outstanding as of
beginning of year 6,842,442 $ 7.93 4,247,898 $10.79 3,717,770 $11.94
Granted 4,364,954 2.69 3,118,742 4.10 905,724 5.82
Exercised (95,250) 7.00 -- --
Terminated -- -- --
Forfeited (899,226) 7.89 (524,199) 8.25 (375,596) 10.27
----------- ----------- -----------
Outstanding as of
end of year 10,212,920 5.71 6,842,441 7.93 4,247,898 10.79
=========== =========== ===========
Options exercisable
as of end of year 3,010,870 10.78 2,008,674 11.60 1,299,531 10.49
=========== =========== ===========
(3) SUMMARY OF INFORMATION ABOUT EMPLOYEE SHARE OPTIONS OUTSTANDING
The following table summarizes information about employee share
options outstanding as of December 31, 2004:
Exercisable as of
Outstanding as of December 31, 2004 December 31, 2004
-------------------------------------------------------- ------------------------------
Weighted
Range Average Weighted
of Exercise Number Remaining Average Number Weighted Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------ ----------- ---------------- -------------- ----------- --------------
(in years)
2.05-3.96 5,234,304 9.20 2.67 9,497 3.51
4.42-4.92 1,290,237 8.38 4.43 349,856 4.43
5.00-5.96 148,700 8.06 5.27 47,808 5.37
6.00-6.99 853,856 7.48 6.13 271,613 6.08
7.00-7.99 621,000 2.12 7.04 615,541 7.03
8.06-8.99 465,918 3.39 8.56 413,250 8.52
9.06-9.81 48,013 0.54 9.21 48,013 9.21
10.00-10.89 725,887 6.01 10.42 505,291 10.42
11.81 200,000 6.41 11.81 133,332 11.81
12.13-13.00 52,125 4.24 12.56 43,789 12.63
14.25-17.19 30,750 5.29 15.79 30,750 15.79
18.75 76,500 4.12 18.75 76,500 18.75
20.00-25.00 465,630 4.99 24.39 465,630 24.39
---------- ----------
10,212,920 7.65 5.71 3,010,870 10.78
========== ==========
- 32 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(4) WEIGHTED AVERAGE GRANT-DATE FAIR VALUE OF OPTIONS GRANTED TO
EMPLOYEES
The weighted average grant-date fair value of the options granted
during 2004, 2003 and 2002 to employees and directors amounted to
$1.53, $2.18 and $2.83 per option, respectively. The Company
utilized the Black-Scholes option-pricing model to estimate fair
value, utilizing the following assumptions for the years 2004,
2003 and 2002 (all in weighted averages):
2004 2003 2002
---- ---- ----
Risk-free interest rate 2.84%-3.88% 2.88%-3.22% 2.80%
Expected life of options 4.5 years 4.75 years 4.82 years
Expected annual volatility 65%-82% 55%-74% 56%
Expected dividend yield None None None
(5) NON-EMPLOYEE WARRANTS
(A) BANKS - As of December 31, 2004, the Company granted the
Banks an aggregate of 1,296,596 warrants to purchase
Ordinary Shares of the Company, at an average exercise price
of $6.18 per share, at terms described below, all of which
were outstanding as of such date:
WARRANTS ISSUED IN JANUARY 2001 - In January 2001, as part
of the Facility Agreement described in Note 12A(6), the
Banks received an aggregate of 400,000 warrants to purchase
Ordinary Shares of the Company (200,000 each) at an exercise
price, as amended in December 2001, of $6.20 per share. As
of December 31, 2004, all of these warrants were fully
vested. The warrants are exercisable for a five-year period
ending January 2006.
In lieu of paying the exercise price in cash as described
below, the Banks are entitled to exercise the warrants on a
"cashless" basis, i.e. by forfeiting all or part of the
warrants in exchange for ordinary shares equal to the
aggregate fair market value of the shares underlying the
warrants forfeited less the aggregate exercise price.
The cost of the warrants issued to the Banks, determined
based on the fair value at the grant and amendment dates in
accordance with SFAS 123, amounted to a total of $5,466.
Such amount is amortized as deferred financing charges over
the terms of the loans under the Facility Agreement.
WARRANTS GRANTED IN DECEMBER 2003 - In December 2003, as
part of the amendment to the Facility Agreement described in
Note 12A(6), the Banks received an aggregate of 896,596
warrants to purchase Ordinary Shares of the Company (448,298
each) at an exercise price of $6.17 per share, the 15 day
average closing price of the Company's Ordinary Shares prior
to the date the amendment with the Banks described in Note
12A(6) was signed. As of December 31, 2004, all of the
warrants are fully vested. The warrants are exercisable for
a five-year period ending December 2008.
The cost of the warrants issued to the Banks, determined
based on the fair value at the grant and amendment dates in
accordance with SFAS 123, amounted to a total of $3,946.
Such amount is amortized as deferred financing charges over
the terms of the loans under the Facility Agreement.
- 33 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(5) NON-EMPLOYEE WARRANTS (cont.)
(A) BANKS (cont.)
WARRANTS TO BE GRANTED TO THE BANKS - In the event the Banks
increase the loans available to be drawn down by the Company
under the Facility Agreement, as described in Note 12A(6),
the Company will issue the Banks additional five-year
warrants equivalent to 30% of the amount drawn down based on
the average closing price of the Company's Ordinary Shares
during the 15 trading days prior to the time the Company
draws down such loans. As of December 31, 2004, no warrants
were issued under this commitment.
(B) WARRANTS GRANTED TO A RELATED PARTY - In consideration for
TIC's undertaking described in Note 12A(6), the Company
issued TIC warrants for the purchase of 58,906 of the
Company's Ordinary Shares. The exercise price for the
warrants is $6.17 per share, the 15-day average closing
price of the Company's Ordinary Shares prior to the date the
amendment with the Banks described in Note 12A(6) was
signed. As of December 31, 2004, all of the warrants are
fully vested and none of them was exercised. The warrants
are exercisable for a five-year period ending December 2008.
The cost of the warrants award granted to TIC, determined
based on the fair value at the grant date in accordance with
SFAS 123, amounted to a total of $259. Such amount was
allocated to other assets as deferred financing charges and
is amortized as financing expense over the terms of the
loans under the Facility Agreement with the Banks.
In addition, in the framework of TIC's undertaking described
in Note 12A(6), the Company undertook to issue additional
warrants to TIC as a subscription fee which will be 5% of
the total amount of money invested by TIC in case the TIC's
undertaking is realized in consideration for all of the
unsubscribed rights that it actually purchases. The exercise
price of these warrants shall be the 15-day average closing
price of the Company's Ordinary Shares prior to the date of
the rights offering prospectus, and they shall expire five
years from their date of issuance.
(C) WARRANTS ISSUED TO OTPP - See Note 12A(4).
The Company utilized the Black-Scholes option pricing model to
estimate fair values of options and warrants granted to
non-employees, utilizing the assumptions similar to those
presented in paragraph B(4) above.
- 34 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(6) PRO FORMA LOSS PER SHARE ACCORDING TO SFAS 123 AND SFAS 148
Had compensation cost for the Company's share option plans been
determined based on fair value at the grant dates for all awards
made through December 31, 2004 in accordance with SFAS 123, as
amended by SFAS 148, the Company's pro forma loss per share would
have been as follows:
2004 2003 2002
--------- --------- ---------
PRO FORMA LOSS
Loss for the year, as reported $(137,768) $(114,261) $ (51,402)
Less - stock-based compensation
determined under APB 25 -- 27 142
Add - stock-based compensation
determined under SFAS 123 (3,980) (8,437) (7,476)
--------- --------- ---------
Pro forma loss $(141,748) $(122,671) $ (58,736)
========= ========= =========
BASIC LOSS PER SHARE
As reported $ (2.13) $ (2.40) $ (1.63)
========= ========= =========
Pro forma $ (2.19) $ (2.57) $ (1.87)
========= ========= =========
C. TREASURY STOCK
During 1998, the Board of Directors of the Company authorized, subject
to certain conditions, the purchase of up to 1,400,000 Ordinary Shares
of the Company to facilitate the exercise of employee stock options
under the Company's share option plans. During 1999 and 1998, the
Company funded the purchase by a trustee of 142,500 and 1,157,500,
respectively, of the Company's Ordinary Shares.
D. DIVIDEND DISTRIBUTIONS
According to the Facility Agreement, as amended (Note 12A(6)), the
Company undertook not to distribute any dividends prior to January 1,
2008. Any dividend distributions after that date shall be subject to
provisions stipulated in such agreement, mainly the prior approval of
the Banks.
- 35 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
E. SALE OF SECURITIES
In January 2002, the Company issued on the Tel Aviv Stock Exchange,
Israel NIS 110,579,800 principal amount of convertible debentures,
under terms described in Note 10. Together with the convertible
debentures the Company issued for no consideration an aggregate of
552,899 options (all of which expired without being exercised) and
2,211,596 Options (Series 1) exercisable into one Ordinary Share of
the Company until January 20, 2006 at an exercise price of NIS 39.00
(subject to customary adjustments), linked to the Israeli Consumer
Price Index (as of December 31, 2004 - NIS 41.20, $9.56). The total
initial proceeds raised were $23,200, and costs related to the
issuance of the securities and the prospectus were approximately
$1,750. See Note 19E for the disclosure of the accounting treatment of
the sale of these securities under U.S. GAAP.
F. RIGHTS OFFERING
In October 2002, the Company issued in connection with a rights
offering done on the Nasdaq and on the Tel-Aviv Stock Exchange in
Israel 4,097,964 Ordinary Shares of the Company and 1,844,070
warrants, all of which were outstanding as of December 31, 2004, to
purchase Ordinary Shares of the Company, in consideration for an
aggregate of gross proceeds of $20,490. Of these amounts, 4,086,037
Ordinary Shares and 1,838,715 warrants were issued to Wafer Partners
and Equity Investors in consideration for an aggregate of $20,430.
Each warrant may be exercised for the purchase of one Ordinary Share
at an exercise price of $7.50 for a period ending on October 31, 2006.
Costs in relation to the prospectus and the issuance of the securities
were approximately $800.
G. PUBLIC OFFERING
During the first quarter of 2004, the Company completed a public
offering of its Ordinary Shares at a price of $7.00 per share.
Following the offering, and including the partial exercise of an
over-allotment option the Company granted the underwriters, the
Company issued 11,444,500 of its Ordinary Shares, in consideration for
gross proceeds of $80,112 (net of related costs - $75,086).
- 36 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - INFORMATION ON GEOGRAPHIC AREAS AND MAJOR CUSTOMERS
A. SALES BY GEOGRAPHIC AREA (as percentage of total sales)
Year ended December 31,
--------------------------
2004 2003 2002
---- ---- ----
United States 60% 73% 62%
Israel 20 2 2
Asia Pacific - in 2004, primarily Taiwan;
in 2003, Taiwan; in 2002, primarily Japan 11 10 25
Europe 9 15 11
--- --- ---
Total 100% 100% 100%
=== === ===
B. LONG-LIVED ASSETS BY GEOGRAPHIC AREA - Substantially all of the
Company's long-lived assets are located in Israel.
C. MAJOR CUSTOMERS (as percentage of total sales)
Year ended December 31,
------------------------
2004 2003 2002
---- ---- ----
Customer A 24% 20% --%
Customer B 17 1 --
Customer C 8 24 31
Customer D 6 11 13
Customer E 2 -- 16
Other customers (*) 22 20 21
(*) Represent sales to five different customers each of whom
accounted for between 1% and 8% of sales during 2004; to six
customers (0%-9%) during 2003; and to five customers (2%-7%)
during 2002.
As of December 31, 2004 and 2003, the above major customers
constituted the majority of the trade accounts receivable reflected on
the balance sheets.
NOTE 15 - FINANCING EXPENSE, NET
Financing income expense, net consist of the following:
Year ended December 31,
----------------------------------------
2004 2003 2002
-------- -------- --------
Financial expenses (primarily bank loan interest) $(29,709) $(16,073) $(11,669)
Interest expenses in relation
to convertible debentures (1,233) (1,198) (1,101)
Less capitalized interest - Note 6A(3) -- 6,892 10,260
-------- -------- --------
(30,942) (10,379) (2,510)
Financing income (primarily bank deposit interest) 1,197 553 406
-------- -------- --------
Financing expense, net $(29,745) $ (9,826) $ (2,104)
======== ======== ========
- 37 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 16 - INCOME TAXES
A. APPROVED ENTERPRISE STATUS
Substantially all of the Company's existing facilities as of December
31, 2004 have been granted approved enterprise status, as provided by
the Israeli Law for the Encouragement of Capital Investments - 1959
("Investments Law") (see Note 6B).
The tax benefits derived from approved enterprise status relate only
to taxable income attributable to each approved enterprise investments
programs. Pursuant to the Investments Law and the approval
certificates, the Company's income attributable to its various
approved enterprise investments is taxed at a rate of up to 25%
through 2012. Taxable income attributable to Fab 2 approved program
shall be tax-exempt for the first two years it arises. The portion of
the Company's taxable income that is not attributable to approved
enterprise investments is taxed at a rate of 35% in 2004 (regular
"Company Tax"). The regular Company Tax rate is to be gradually
reduced to 30% until 2007 (34% in 2005, 32% in 2006 and 30% in 2007).
The tax benefits are also conditioned upon fulfillment of the
requirements stipulated by the Investments Law and the regulations
promulgated there under, as well as the criteria set forth in the
certificates of approval. In the event of a failure by the Company to
comply with these conditions, the tax benefits could be canceled, in
whole or in part, and the Company would be required to refund the
amount of the canceled benefits, plus interest and certain inflation
adjustments. In management's opinion, the Company has been in
compliance with the conditions through the approval date of the
financial statements. See also Notes 6B and 12A(8).
B. COMPONENTS OF DEFERRED TAX ASSET/LIABILITY
The following is a summary of the components of the deferred tax
benefit and liability reflected on the balance sheets as of the
respective dates:
As of December 31,
--------------------------
2004 2003
--------- ---------
DEFERRED TAX BENEFIT - CURRENT
Accrued vacation pay $ 702 $ 695
Other 68 62
--------- ---------
770 757
Valuation allowance (770) (757)
--------- ---------
Total current deferred tax benefit $ -- $ --
========= =========
NET DEFERRED TAX BENEFIT - LONG-TERM
Deferred tax assets -
Net operating loss carryforwards $ 112,147 $ 58,048
Research and development 3,213 3,748
Liability for employee rights upon severance 918 887
--------- ---------
116,278 62,683
Valuation allowance (75,613) (43,861)
--------- ---------
40,665 18,822
Deferred tax liability - depreciation and amortization (40,665) (18,822)
--------- ---------
Total net long-term deferred tax benefit $ -- $ --
========= =========
- 38 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 16 - INCOME TAXES (cont.)
C. EFFECTIVE INCOME TAX RATES
The reconciliation of the statutory tax rate to the Company's
effective tax rate is as follows:
Year ended December 31,
----------------------------
2004 2003 2002
---- ---- ----
Israeli statutory rate (35)% (36)% (36)%
Reduced tax rate for approved enterprise 15 16 16
Tax benefits for which deferred taxes
were not recorded 23 23 10
Permanent differences and other, net (3) (3) 10
--- --- ---
-- % -- % -- %
=== === ===
D. NET OPERATING LOSS CARRYFORWARD
As of December 31, 2004, the Company had net operating loss
carryforwards for tax purposes of approximately $560,000, which may be
carried forward for an unlimited period of time.
E. FINAL TAX ASSESSMENTS
The Company possesses final tax assessments under agreement through
the year 1998. In addition, the tax assessments for the years 1999 and
2000 are deemed final.
NOTE 17 - FINANCIAL INSTRUMENTS
A financial instrument is defined as cash, evidence of an ownership
interest in an entity, or a contract that imposes on one entity a
contractual obligation either to deliver or receive cash or another
financial instrument to or from a second entity. Examples of financial
instruments include cash and cash equivalents, trade accounts receivable,
loans, investments, trade accounts payable, accrued expenses, options and
forward contracts.
The Company makes certain disclosures with regard to financial instruments,
including derivatives. These disclosures include, among other matters, the
nature and terms of derivative transactions, information about significant
concentrations of credit risk, and the fair value of financial assets and
liabilities.
See Note 19C for disclosure related to the Company's derivatives financial
instruments in accordance with U.S. GAAP.
A. HEDGING ACTIVITIES
The Company, from time to time, enters into foreign currency
derivatives to hedge its foreign currency exposure to equipment
purchase commitments and other firm commitments denominated in foreign
currency (primarily Japanese Yen and Euro). In that regard, the
Company generally uses foreign currency forward contracts and options
(zero-cost cylinder) as hedging instruments for foreign currency
exposure. Accordingly, if the hedge is determined to be effective all
changes in value attributed to spot rate fluctuations as well as the
premium of forward contracts and the time value of options at
inception are deferred until the hedged item is recognized (i.e.,
receipt of the equipment). The time value of options at inception is
amortized on a straight-line basis.
- 39 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 17 - FINANCIAL INSTRUMENTS (cont.)
A. HEDGING ACTIVITIES (cont.)
In addition, the Company, from time to time, enters into agreements to
hedge variable interest rate exposure on long-term loans (see Note 9).
In order to hedge the cash flow related to this exposure, the Company
uses various types of derivative contracts, consisting primarily of
interest rate caps, floors and collars. If the hedge is determined to
be effective, the changes in the intrinsic value of the derivative
contracts are deferred and recognized in results of operations as
interest payments become due. The time value of options at inception
is recognized in earnings on a straight-line basis. When the related
debt is issued in connection with the acquisition of assets not yet
placed into operations, interest costs and gains and losses on the
derivative contracts are capitalized to the related asset.
The Company does not hold or issue derivative financial instruments
for non-hedging purposes.
B. CREDIT RISK OF FINANCIAL INSTRUMENTS, INCLUDING DERIVATIVES
The face or contract amounts of derivatives do not represent amounts
exchanged by the parties and, accordingly, are not a measure of the
exposure of the Company through its use of derivatives.
The Company is exposed to credit-related losses in respect of
derivative financial instruments in a manner similar to the credit
risk involved in the realization or collection of other types of
assets. In management's estimation, due to the fact that derivative
financial instrument transactions are entered into solely with
financial institution counterparties, it is not expected that such
counterparties will fail to meet their obligations. Substantially all
remaining financial instruments held by the Company are due from
governmental entities and, accordingly, the Company's credit risk in
respect thereof is negligible.
C. PRESENTATION OF HEDGING ACTIVITIES IN THE FINANCIAL STATEMENTS
(1) As of December 31, 2004 and 2003, there were no outstanding
foreign exchange agreements (options) to hedge exposure related
to the purchase of machinery and equipment.
The loss resulted from these agreements in 2004 was immaterial.
The agreements resulted in 2003 in a gain of $2,357 of which
$1,663 was capitalized to fixed assets (in 2002 - $3,062 and
$2,770, respectively).
(2) As of December 31, 2004 and 2003, the Company had outstanding
agreements to hedge interest rate exposure on loans to be
withdrawn under the Facility Agreement, the aggregate amount of
which was $292,000 and $212,000 respectively all of which is
attributable to Fab 2. These agreements resulted in 2004 in a
loss of $5,629, of which $0 was capitalized to property and
equipment; in 2003 - $5,335 and $2,547, respectively; in 2002 -
$3,707 and $3,593, respectively.
D. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments,
excluding the Company's agreements to hedge interest rate exposure on
long-term loans, did not materially differ from their respective
carrying amounts as of December 31, 2004 and 2003. The fair value of
the interest rate hedging transactions as of December 31, 2004 would
have resulted in an unrealized capitalizable loss of $2,406 (as of
December 31, 2003 - $9,920).
- 40 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 18 - RELATED PARTIES BALANCES AND TRANSACTIONS
A. BALANCES
As of December 31,
-------------------
2004 2003
------ ------
Trade accounts receivable $9,054 $5,286
====== ======
Current liabilities $ 12 $ 23
====== ======
Other Long-Term Liabilities $ 166 $ --
====== ======
B. TRANSACTIONS
Year ended December 31,
--------------------------------------
2004 2003 2002
--------- --------- ------
Sales $ 37,521 $ 13,282 $3,836
========= ========= ======
Management fees $ 120 $ 240 $ 480
========= ========= ======
Expense reimbursements paid $ 60 $ 99 $ 101
========= ========= ======
Royalties received - Note 12F(2) $ 875 $ 225 $ --
========= ========= ======
Application of customer advances
towards purchases $ 445 $ 870 $ --
========= ========= ======
Equity conversion of customer advances -
Note 12A(5) $ 539 $ -- $ --
========= ========= ======
Purchases of raw materials $ -- $ -- $ 209
========= ========= ======
Development costs $ -- $ -- $ 102
========= ========= ======
Expense reimbursements received $ -- $ 282 $ 177
========= ========= ======
C. For commitments, contingencies and other transactions relating to Fab
2 Wafer Partner and Equity Investor agreements - see Note 12A.
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP
With regard to the Company's financial statements, the material differences
between GAAP in Israel and in the U.S. relate to the following. See G below
for the presentation of the Company's balance sheets as of December 31,
2004 and 2003 in accordance with U.S. GAAP.
A. PRESENTATION OF DESIGNATED CASH AND SHORT-TERM AND LONG-TERM
INTEREST-BEARING DEPOSITS
In accordance with U.S. GAAP, the Company's designated cash,
short-term and long-term interest-bearing deposits should be excluded
from current assets and long-term investments and presented separately
as a non-current asset. Accordingly, as of December 31, 2004, $53,793
and $5,134 were reclassified, respectively, from current assets and
long-term investments to a long-term asset (as of December 31, 2003 -
$44,042 and $4,848, respectively).
B. PRESENTATION OF NET LONG-TERM LIABILITIES IN RESPECT OF EMPLOYEES
Under U.S. GAAP, assets and liabilities relating to severance
arrangements are to be presented separately and are not to be offset,
while according to Israeli GAAP such an offset is required.
Accordingly, as of December 31, 2004 an amount of $16,350 was
reclassified from other long-term liabilities to long-term investments
(as of December 31, 2003-$14,607).
- 41 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
C. HEDGING ACTIVITIES IN ACCORDANCE WITH U.S. GAAP (SFAS 133)
(1) In 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and the related
statements and interpretations thereon (collectively, "SFAS
133"). A derivative is typically defined as an instrument whose
value is derived from an underlying instrument, index or rate,
has a notional amount, requires no or little initial investment
and can be net settled.
SFAS 133 requires that all derivatives be recorded in the
financial statements at their fair value at the date of the
financial statements. The changes in the fair value of the
derivatives are charged to the statement of operations or to
other comprehensive income, as appropriate in the circumstances.
The Company's derivatives consist mainly of foreign currency
forward transactions and options and interest rate instruments
(collars).
(2) The Company uses foreign exchange agreements (forward contracts
and options) to hedge its foreign currency exposure in
anticipated equipment purchases denominated in foreign currency.
All foreign exchange agreements are with underlying terms that
match or approximate the hedged transactions and thus are highly
effective. The Company measures the effectiveness of the forward
contracts hedges based on forward rates. The Company assesses and
measures the effectiveness of the options hedge, at inception and
throughout the hedge, based on total changes in cash flows. All
changes in fair value are reported in other comprehensive income.
The amounts accumulated in other comprehensive income are
expensed to results of operations concurrent with the recognition
of depreciation expenses on the equipment. As of December 31,
2004 and 2003, there were not any outstanding foreign exchange
agreements.
The Company uses interest rate collars with a knock-out and
knock-in features to hedge its Libor-based variable long-term
debt cash flow exposure. The knock-out feature was set above the
cap level and the knock-in feature was set below the floor level.
The Company determined that the probability that the cap will be
knocked-out is remote and thus expected that the hedge will be
highly effective. The Company assessed and measured the
effectiveness of the hedge, at inception and throughout the
hedge, based on total changes in cash flows of the collar, and
reported all changes in fair value in other comprehensive income.
Amounts presented in other comprehensive income are reclassified
to operations or capitalized to property and equipment, as
applicable (see Note 2M), as interest payment become due. For
outstanding contracts as of December 31, 2004 and 2003, see Note
17C(2).
(3) Following the commencement of operations of Fab 2 during the
third quarter of 2003, $6,641 of the aggregate comprehensive loss
as of June 30, 2003, which is attributable to property and
equipment, is amortized on a straight-line method over five
years, in corresponding to the economic useful lives of the
machinery and equipment.
- 42 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
C. HEDGING ACTIVITIES IN ACCORDANCE WITH U.S. GAAP (SFAS 133) (cont.)
(4) Complying with SFAS 133 and SFAS 138 and the related
interpretations thereon with respect to the Company's hedging
transactions as of December 31, 2004 would have resulted in: an
increase in other long-term liabilities in the amount of $2,406;
a decrease in other comprehensive loss for the year ended
December 31, 2004 in the net amount of $8,842; an accumulated
other comprehensive loss component of equity balance as of such
date in the amount of $7,055; and in a decrease of $4,619 in
property and equipment, net as of December 31, 2004.
D. IMPLEMENTATION OF SFAS 123 AND SFAS 148
Had compensation cost for the Company's share option plans been
determined based on fair value at the grant dates for awards made
through December 31, 2004 in accordance with SFAS 123, as amended by
SFAS 148, the Company's pro forma loss and loss per share would have
been as follows (for further information with regard to the Company's
share option plans and the assumptions for utilizing the Black-Scholes
pricing model, see Note 13B(4)):
Year ended December 31,
-------------------------------------------
2004 2003 2002
--------- --------- ---------
PRO FORMA LOSS
Loss for the year, as reported according to
U.S. GAAP (see H below) $(137,768) $(114,261) $ (51,402)
Less - stock-based compensation determined
under APB 25 -- 27 142
Add - stock-based compensation
determined under SFAS 123 (3,980) (8,437) (7,476)
--------- --------- ---------
Pro forma loss $(141,748) $(122,671) $ (58,736)
========= ========= =========
BASIC LOSS PER SHARE
As reported according to U.S.
GAAP (see J below) $ (2.13) $ (2.45) $ (1.63)
========= ========= =========
Pro forma $ (2.19) $ (2.63) $ (1.87)
========= ========= =========
- 43 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
E. SALE OF SECURITIES
Under Accounting Principles Board Opinion No. 14 ("APB 14"), the
proceeds from the sale of the securities described in Notes 10 and 13E
are to be allocated to each of the securities issued based on their
relative fair value, while according to Israeli GAAP such treatment is
not required. Complying with APB 14, based on the average market value
of each of the securities issued in the first three days following
their issuance, would have resulted in an increase in shareholders'
equity in the amount of $2,363 (net of $196 related issuance
expenses), and a decrease in convertible debentures in the amount of
$2,559. The effect of amortization of the discount on the convertible
debentures under U.S. GAAP for each of the years ended December 31,
2004, 2003 and 2002 would have been immaterial.
F. PRESENTATION OF PROCEEDS ON ACCOUNT OF SHARES IN ACCORDANCE WITH U.S.
GAAP (SFAS 150)
According to SFAS No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY", a
financial instrument that embodies an unconditional obligation (as
defined in that guidance), that the issuer must or may settle by
issuing a variable number of its equity shares, shall be classified as
a liability if, at inception, the monetary value of the obligation is
based solely or predominantly on, among other matters, a fixed
monetary amount known at inception. Accordingly, the $13,201 and
$3,227 amounts which are described in detail in Notes 12A(3) and (4),
respectively, and which according to Israeli GAAP are presented as of
December 31, 2003 as "Proceeds on account of share capital", were
reclassified as of December 31, 2003 under SFAS 150 as "Liability in
respect of variable number of shares to be issued". Such presentation
for U.S. GAAP purposes was required since as of December 31, 2003, the
amount of shares the Company was to issue in consideration of the
aggregate of $16,428 was not determined as of such date, and was
actually based on mechanisms that embody a variable number of shares.
Following the issuance of shares, as described in Note 12A(3) and (4),
the aggregate of $16,428 is presented for U.S. GAAP purposes as well
as paid in equity.
- 44 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
G. BALANCE SHEETS IN ACCORDANCE WITH U.S. GAAP
AS OF DECEMBER 31, 2004
-----------------------------------
U.S. AS PER AS PER
GAAP ISRAELI ADJUST- U.S.
REMARK GAAP MENTS GAAP
---- --------- --------- ---------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 27,664 $ $ 27,664
DESIGNATED CASH AND SHORT-TERM INTEREST-BEARING DEPOSITS A 53,793 (53,793) --
TRADE ACCOUNTS RECEIVABLE 19,286 19,286
OTHER RECEIVABLES 11,365 11,365
INVENTORIES 25,669 25,669
OTHER CURRENT ASSETS 1,818 1,818
--------- --------- ---------
TOTAL CURRENT ASSETS 139,595 (53,793) 85,802
--------- --------- ---------
LONG-TERM INVESTMENTS
LONG-TERM INTEREST-BEARING DEPOSITS
DESIGNATED FOR FAB 2 OPERATIONS A 5,134 (5,134) --
OTHER LONG-TERM INVESTMENT B -- 16,350 16,350
--------- --------- ---------
5,134 11,216 16,350
--------- --------- ---------
PROPERTY AND EQUIPMENT, NET C 609,296 (4,619) 604,677
--------- --------- ---------
DESIGNATED CASH AND SHORT-TERM AND
LONG-TERM INTEREST-BEARING DEPOSITS A -- 58,927 58,927
--------- --------- ---------
OTHER ASSETS, NET E 93,483 (196) 93,287
========= ========= =========
TOTAL ASSETS $ 847,508 $ 11,535 $ 859,043
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
TRADE ACCOUNTS PAYABLE $ 65,326 $ $ 65,326
OTHER CURRENT LIABILITIES 10,678 10,678
--------- --------- ---------
TOTAL CURRENT LIABILITIES 76,004 -- 76,004
LONG-TERM DEBT 497,000 497,000
CONVERTIBLE DEBENTURES E 26,651 (2,559) 24,092
LIABILITY IN RESPECT OF A VARIABLE
NUMBER OF SHARES TO BE ISSUED F -- -- --
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMERS' ADVANCES 64,428 64,428
OTHER LONG-TERM LIABILITIES B, C 15,445 18,756 34,201
--------- --------- ---------
TOTAL LIABILITIES 679,528 16,197 695,725
--------- --------- ---------
SHAREHOLDERS' EQUITY
ORDINARY SHARES, NIS 1.00 PAR VALUE - AUTHORIZED
250,000,000 AND 150,000,000 SHARES, RESPECTIVELY;
ISSUED 66,999,796 AND 52,996,097 SHARES, RESPECTIVELY 16,274 16,274
ADDITIONAL PAID-IN CAPITAL E 517,476 2,363 519,839
PROCEEDS ON ACCOUNT OF SHARE CAPITAL F -- -- --
SHAREHOLDER RECEIVABLES (26) (26)
ACCUMULATED OTHER COMPREHENSIVE LOSS C -- (7,055) (7,055)
ACCUMULATED DEFICIT (356,672) 30 (356,642)
--------- --------- ---------
177,052 (4,662) 172,390
TREASURY STOCK, AT COST - 1,300,000 SHARES (9,072) (9,072)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 167,980 (4,662) 163,318
========= ========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 847,508 $ 11,535 $ 859,043
========= ========= =========
AS OF DECEMBER 31, 2003
-----------------------------------
U.S. AS PER AS PER
GAAP ISRAELI ADJUST- U.S.
REMARK GAAP MENTS GAAP
---- --------- --------- ---------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 12,448 $ $ 12,448
DESIGNATED CASH AND SHORT-TERM INTEREST-BEARING DEPOSITS A 44,042 (44,042) --
TRADE ACCOUNTS RECEIVABLE 11,631 11,631
OTHER RECEIVABLES 11,073 11,073
INVENTORIES 19,382 19,382
OTHER CURRENT ASSETS 1,729 1,729
--------- --------- ---------
TOTAL CURRENT ASSETS 100,305 (44,042) 56,263
--------- --------- ---------
LONG-TERM INVESTMENTS
LONG-TERM INTEREST-BEARING DEPOSITS
DESIGNATED FOR FAB 2 OPERATIONS A 4,848 (4,848) --
OTHER LONG-TERM INVESTMENT B 6,000 14,607 20,607
--------- --------- ---------
10,848 9,759 20,607
--------- --------- ---------
PROPERTY AND EQUIPMENT, NET C 568,412 (5,947) 562,465
--------- --------- ---------
DESIGNATED CASH AND SHORT-TERM AND
LONG-TERM INTEREST-BEARING DEPOSITS A -- 48,890 48,890
--------- --------- ---------
OTHER ASSETS, NET E 108,770 (196) 108,574
========= ========= =========
TOTAL ASSETS $ 788,335 $ 8,464 $ 796,799
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
TRADE ACCOUNTS PAYABLE $ 40,249 $ $ 40,249
OTHER CURRENT LIABILITIES 9,564 9,564
--------- --------- ---------
TOTAL CURRENT LIABILITIES 49,813 -- 49,813
LONG-TERM DEBT 431,000 431,000
CONVERTIBLE DEBENTURES E 25,783 (2,559) 23,224
LIABILITY IN RESPECT OF A VARIABLE
NUMBER OF SHARES TO BE ISSUED F -- 16,428 16,428
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMERS' ADVANCES 46,347 46,347
OTHER LONG-TERM LIABILITIES B, C 5,935 24,527 30,462
--------- --------- ---------
TOTAL LIABILITIES 558,878 38,396 597,274
--------- --------- ---------
SHAREHOLDERS' EQUITY
ORDINARY SHARES, NIS 1.00 PAR VALUE - AUTHORIZED
250,000,000 AND 150,000,000 SHARES, RESPECTIVELY;
ISSUED 66,999,796 AND 52,996,097 SHARES, RESPECTIVELY 13,150 13,150
ADDITIONAL PAID-IN CAPITAL E 427,881 2,363 430,244
PROCEEDS ON ACCOUNT OF SHARE CAPITAL F 16,428 (16,428) --
SHAREHOLDER RECEIVABLES (26) (26)
ACCUMULATED OTHER COMPREHENSIVE LOSS C -- (15,897) (15,897)
ACCUMULATED DEFICIT (218,904) 30 (218,874)
--------- --------- ---------
238,529 (29,932) 208,597
TREASURY STOCK, AT COST - 1,300,000 SHARES (9,072) (9,072)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 229,457 (29,932) 199,525
========= ========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 788,335 $ 8,464 $ 796,799
========= ========= =========
- 45 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
H. STATEMENTS OF OPERATIONS IN ACCORDANCE WITH U.S. GAAP
Complying with SFAS 133 and SFAS 138 (C above) and APB 14 (E above)
would not have materially affected the results of operations for the
years ended December 31, 2004, 2003 and 2002.
I. COMPREHENSIVE INCOME (LOSS) IN ACCORDANCE WITH U.S. GAAP (SFAS 130)
Comprehensive income (loss) represents the change in shareholder's
equity during a reporting period from transactions and other events
and circumstances from non-owner sources. It includes all changes in
equity during a reporting period except those resulting from
investments by owners and distributions to owners. Other comprehensive
income (loss) represents gains and losses that under U.S. GAAP are
included in comprehensive income but excluded from net income.
Following are statements of comprehensive loss in accordance with U.S.
GAAP:
Year ended December 31,
-------------------------------------------
2004 2003 2002
--------- --------- ---------
Loss for the year according to U.S. GAAP $(137,768) $(114,261) $ (51,402)
Other comprehensive loss:
Amortization of unrealized
losses on derivatives 1,328 664 --
Unrealized gains (losses) on derivatives 7,514 1,276 (9,638)
--------- --------- ---------
Net comprehensive loss for the year $(128,926) $(112,321) $ (61,040)
========= ========= =========
- 46 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
J. LOSS PER SHARE DATA IN ACCORDANCE WITH U.S. GAAP (SFAS 128)
In accordance with U.S. GAAP (SFAS 128, including the implementation
of SFAS 133 and SFAS 138, and APB 14 as described above), the basic
and diluted loss per share would be:
Year ended December 31,
--------------------------------
2004 2003 2002
------ ------ ------
Basic loss per share $(2.13) $(2.45) $(1.63)
===== ===== =====
Diluted loss per share $(2.13) $(2.45) $(1.63)
===== ===== =====
The following tables provide a reconciliation of the numerators and
denominators of the basic and diluted per share computations for 2004,
2003 and 2002 in accordance with U.S. GAAP. The loss per share for
each year presented according to U.S. GAAP may differ from the
corresponding amount under Israeli GAAP due to different methods for
determining the weighted average number of ordinary shares outstanding
and the loss used to compute loss per share. According to Israeli
GAAP, the weighted average number of ordinary shares outstanding for
each year presented include retroactive effect from the beginning of
each year of shares issued upon exercise of share options and warrants
("Exercise") and upon conversion of convertible debentures
("Conversion"), outstanding at the beginning of each year and giving
effect to shares issuable from probable Exercise and from probable
Conversion. Israeli GAAP further provide that loss per ordinary share
is to be calculated based on loss for the year with the inclusion of
imputed interest income on the exercise price of options and warrants
exercised or of probable Exercise, and of financial expenses in
relation to converted debentures or on probable Conversion. According
to U.S. GAAP, the amount of shares underlying the options, warrants
and convertible debentures is accounted for according to the treasury
method, regardless of the probability of the exercise of the options
and warrants or the conversion into shares of the convertible
debentures. According to Israeli GAAP, the loss to compute loss per
share may include imputed interest income on the exercise price of
options and warrants exercised during the year and of probable
Exercise and probable Conversion, an inclusion which is not required
by U.S. GAAP.
- 47 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
J. LOSS PER SHARE DATA IN ACCORDANCE WITH U.S. GAAP (SFAS 128) (cont.)
RECONCILIATION FOR 2004:
Year Ended December 31, 2004
----------------------------
Shares
Loss (In Thousands) Per-share
(Numerator) (Denominator) Amount
----------- ------------- ------
BASIC LOSS PER SHARE
Loss available to ordinary shareholders $(137,768) 64,633 $(2.13)
=====
EFFECT OF DILUTIVE SECURITIES
Convertible debentures -- --
Options and warrants -- --
--------- ---------
DILUTED LOSS PER SHARE
Loss available to ordinary
shareholders after assumed conversions $(137,768) 64,633 $(2.13)
========= ========= =====
Options and warrants to purchase 17,374,088 Ordinary Shares at an
average exercise price of $6.61 per share were outstanding as of
December 31, 2004 but were not included in the computation of diluted
loss per share because their effect was anti-dilutive. The options and
warrants, which as of December 31, 2004 expire between January 2005
and December 2014 (weighted average remaining contractual life of 5.26
years), were still outstanding as of such date. Convertible
debentures, convertible into 2,697,068 Ordinary Shares, were
outstanding as of December 31, 2004 but were not included in the
computation of diluted loss per share since their effect is
anti-dilutive. The convertible debentures may be converted until
December 31, 2008 into Ordinary Shares.
- 48 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
J. LOSS PER SHARE DATA IN ACCORDANCE WITH U.S. GAAP (SFAS 128) (cont.)
RECONCILIATION FOR 2003:
Year Ended December 31, 2003
----------------------------------------
Shares
Loss (In Thousands) Per-share
(Numerator) (Denominator) Amount
----------- ------------- ------
BASIC LOSS PER SHARE
Loss available to ordinary shareholders $(114,261) 46,710 $(2.45)
=====
EFFECT OF DILUTIVE SECURITIES
Convertible debentures -- --
Options and warrants -- --
--------- ---------
DILUTED LOSS PER SHARE
Loss available to ordinary
shareholders after assumed conversions $(114,261) 46,710 $(2.45)
========= ========= =====
Options and warrants to purchase 14,003,621 Ordinary Shares at an
average exercise price of $7.87 per share were outstanding as of
December 31, 2003 but were not included in the computation of diluted
loss per share because their effect was anti-dilutive. The options and
warrants, which as of December 31, 2003 expire between April 2005 and
December 2013 (weighted average remaining contractual life of 5.02
years), were still outstanding as of such date. Convertible
debentures, convertible into 2,697,068 Ordinary Shares, were
outstanding as of December 31, 2003 but were not included in the
computation of diluted loss per share since their effect is
anti-dilutive. The convertible debentures may be converted until
December 31, 2008 into Ordinary Shares.
RECONCILIATION FOR 2002:
Year Ended December 31, 2002
---------------------------------------
Shares
Loss (In Thousands) Per-share
(Numerator) (Denominator) Amount
----------- ------------- ------
BASIC LOSS PER SHARE
Loss available to ordinary shareholders $(51,402) 31,523 $(1.63)
=====
EFFECT OF DILUTIVE SECURITIES
Convertible debentures -- --
Options and warrants -- --
-------- --------
DILUTED LOSS PER SHARE
Loss available to ordinary
Shareholders after assumed conversions $(51,402) 31,523 $(1.63)
======== ======== =====
Options and warrants to purchase 10,053,578 Ordinary Shares at an
average exercise price of $9.12 per share were outstanding as of
December 31, 2002 but were not included in the computation of diluted
loss per share because their effect was anti-dilutive. The options and
warrants, which as of December 31, 2002 expire between April 2005 and
December 2012 (weighted average remaining contractual life of 4.9
years), were still outstanding as of such date. Convertible
debentures, convertible into 2,697,068 Ordinary Shares, were
outstanding as of December 31, 2002 but were not included in the
computation of diluted loss per share since their effect is
anti-dilutive. The convertible debentures may be converted until
December 31, 2008 into Ordinary Shares.
- 49 -