FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the month of May 2006 No. 3
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 May 17, 2006, the Registrant announced its financial results for the
three months ended March 31, 2006. Attached hereto are the following exhibits:
Exhibit 99.1 Registrant's unaudited condensed interim consolidated
financial statements as of March 31, 2006 and for the three
month period then ended.
Exhibit 99.2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Form 6-K, including all exhibits hereto, is hereby incorporated by
reference into (1) all effective registration statements filed by us under the
Securities Act of 1933 and (2) Registration Statement No. 333-131315 on Form
F-3, except that the information herein relating to EBITDA and related non-GAAP
financial measure disclosures is expressly excluded from such incorporation.
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: May 18, 2006 By: /s/ Nati Somekh Gilboa
--------------------------
Nati Somekh Gilboa
Corporate Secretary
EXHIBIT 99.1
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
UNAUDITED CONDENSED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2006
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
INDEX TO UNAUDITED CONDENSED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2006
Page
----
BALANCE SHEETS 1
STATEMENTS OF OPERATIONS 2
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 3
STATEMENTS OF CASH FLOWS 4
NOTES TO FINANCIAL STATEMENTS 5-18
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data and per share data)
AS OF MARCH 31, DECEMBER 31,
------------------------ ---------
2006 2005 2005
--------- --------- ---------
(UNAUDITED)
------------------------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 17,570 $ 34,507 $ 7,337
DESIGNATED CASH AND SHORT-TERM INTEREST-BEARING DEPOSITS 15,126 17,614 31,661
TRADE ACCOUNTS RECEIVABLE:
RELATED PARTIES 6,938 5,368 5,309
Others 11,944 6,773 11,467
OTHER RECEIVABLES 8,937 9,430 9,043
INVENTORIES 28,684 21,624 24,376
OTHER CURRENT ASSETS 1,350 861 1,048
--------- --------- ---------
TOTAL CURRENT ASSETS 90,549 96,177 90,241
--------- --------- ---------
LONG-TERM INVESTMENTS
LONG-TERM INTEREST-BEARING DEPOSITS
DESIGNATED FOR FAB 2 OPERATIONS -- 5,071 --
--------- --------- ---------
-- 5,071 --
--------- --------- ---------
PROPERTY AND EQUIPMENT, NET 484,289 587,707 510,645
--------- --------- ---------
OTHER ASSETS, NET:
TECHNOLOGY 59,724 76,750 61,441
OTHER 1,477 15,728 16,359
--------- --------- ---------
61,201 92,478 77,800
========= ========= =========
TOTAL ASSETS $ 636,039 $ 781,433 $ 678,686
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITIES OF LONG-TERM DEBT $ -- $ -- $ 21,103
CURRENT MATURITIES OF CONVERTIBLE DEBENTURES 5,734 6,575 6,453
TRADE ACCOUNTS PAYABLE 52,028 53,249 59,741
OTHER CURRENT LIABILITIES 8,913 9,625 8,972
--------- --------- ---------
TOTAL CURRENT LIABILITIES 66,675 69,449 96,269
LONG-TERM DEBT 514,966 497,000 497,000
CONVERTIBLE DEBENTURES 34,429 19,724 19,358
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMERS' ADVANCES 54,537 63,326 59,621
OTHER LONG-TERM LIABILITIES 10,238 19,274 11,012
--------- --------- ---------
TOTAL LIABILITIES 680,845 668,773 683,260
--------- --------- ---------
CONVERTIBLE DEBENTURES -- -- 25,493
--------- --------- ---------
SHAREHOLDERS' EQUITY (DEFICIT)
ORDINARY SHARES, NIS 1.00 PAR VALUE - AUTHORIZED
500,000,000, 250,000,000 AND 500,000,000
SHARES, RESPECTIVELY; ISSUED 76,946,189, 66,999,796
AND 68,232,056 SHARES, RESPECTIVELY 18,403 16,274 16,548
ADDITIONAL PAID-IN CAPITAL 531,123 517,476 522,237
EQUITY COMPONENT OF CONVERTIBLE DEBENTURES AND CUMULATIVE
STOCK BASED COMPENSATION 19,550 (26) (26)
ACCUMULATED DEFICIT (604,810) (411,992) (559,754)
--------- --------- ---------
(35,734) 121,732 (20,995)
TREASURY STOCK, AT COST - 1,300,000 SHARES (9,072) (9,072) (9,072)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (44,806) 112,660 (30,067)
========= ========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 636,039 $ 781,433 $ 678,686
========= ========= =========
SEE NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
- 1 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data and per share data)
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
------------------------ ---------
2006 2005 2005
--------- --------- ---------
(unaudited)
------------------------
REVENUES
Sales $ 35,875 $ 23,167 $ 93,991
Revenues related to a joint development agreement -- -- 8,000
--------- --------- ---------
35,875 23,167 101,991
COST OF SALES 61,280 61,214 238,358
--------- --------- ---------
GROSS LOSS (25,405) (38,047) (136,367)
--------- --------- ---------
OPERATING COSTS AND EXPENSES
RESEARCH AND DEVELOPMENT 3,354 4,763 16,029
MARKETING, GENERAL AND ADMINISTRATIVE 5,324 4,528 17,418
--------- --------- ---------
8,678 9,291 33,447
========= ========= =========
OPERATING LOSS (34,083) (47,338) (169,814)
FINANCING EXPENSE, NET (11,524) (8,175) (35,651)
OTHER INCOME, NET 551 193 2,383
--------- --------- ---------
LOSS FOR THE PERIOD $ (45,056) $ (55,320) $(203,082)
========= ========= =========
BASIC AND DILUTED LOSS PER ORDINARY SHARE
Loss per share $ (0.63) $ (0.84) $ (3.06)
========= ========= =========
WEIGHTED AVERAGE NUMBER OF ORDINARY
SHARES OUTSTANDING - IN THOUSANDS 71,872 65,700 66,371
========= ========= =========
SEE NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
- 2 -
TOWER SEMICONDUCTOR LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND PER SHARE DATA)
EQUITY
COMPONENT
OF
CONVERTIBLE
DEBENTURES
AND
CUMULATIVE
ORDINARY SHARES ADDITIONAL STOCK
----------------------- PAID-IN BASED ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT STOCK TOTAL
---------- ---------- --------- --------- ------------- ---------- ---------
BALANCE - JANUARY 1, 2006 68,232,056 $ 16,548 $ 522,237 $ (26) $ (559,754) $ (9,072) $ (30,067)
CHANGES DURING THREE-MONTH PERIOD
(UNAUDITED):
ISSUANCE OF SHARES 2,713,396 579 3,708 4,287
EQUITY COMPONENT OF CONVERTIBLE
DEBENTURES 21,979 21,979
CONVERSION OF CONVERTIBLE
DEBENTURES INTO SHARES 6,000,737 1,276 5,178 (2,782) 3,672
EMPLOYEE STOCK-BASED COMPENSATION 379 379
LOSS FOR THE PERIOD (45,056) (45,056)
---------- ---------- --------- --------- ------------- ---------- ---------
BALANCE - MARCH 31, 2006
(UNAUDITED) 76,946,189 $ 18,403 $ 531,123 $ 19,550 $ (604,810) $ (9,072) $ (44,806)
========== ========== ========= ========= ============= ========== =========
BALANCE - JANUARY 1, 2005 66,999,796 $ 16,274 $ 517,476 $ (26) $ (356,672) $ (9,072) $ 167,980
CHANGES DURING THREE-MONTH PERIOD
(UNAUDITED):
LOSS FOR THE PERIOD (55,320) (55,320)
---------- ---------- --------- --------- ------------- ---------- ---------
BALANCE - MARCH 31, 2005
(UNAUDITED) 66,999,796 $ 16,274 $ 517,476 $ (26) $ (411,992) $ (9,072) $ 112,660
========== ========== ========= ========= ============= ========== =========
BALANCE - JANUARY 1, 2005 66,999,796 $ 16,274 $ 517,476 $ (26) $ (356,672) $ (9,072) $ 167,980
CHANGES DURING 2005:
ISSUANCE OF SHARES 1,232,260 274 1,520 1,794
STOCK-BASED COMPENSATION
RELATED TO THE FACILITY
AGREEMENT WITH THE BANKS 2,793 2,793
STOCK-BASED COMPENSATION
RELATED TO RIGHTS OFFERED
TO EMPLOYEES 448 448
LOSS FOR THE YEAR (203,082) (203,082)
---------- ---------- --------- --------- ------------- ---------- ---------
BALANCE - DECEMBER 31, 2005 68,232,056 $ 16,548 $ 522,237 $ (26) $ (559,754) $ (9,072) $ (30,067)
========== ========== ========= ========= ============= ========== =========
- 3 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, except share data and per share data)
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
---------------------- ---------
2006 2005 2005
--------- --------- ---------
(UNAUDITED)
----------------------
CASH FLOWS - OPERATING ACTIVITIES
LOSS FOR THE PERIOD $ (45,056) $ (55,320) $(203,082)
ADJUSTMENTS TO RECONCILE LOSS FOR THE PERIOD
TO NET CASH USED IN OPERATING ACTIVITIES:
INCOME AND EXPENSE ITEMS NOT INVOLVING CASH FLOWS:
DEPRECIATION AND AMORTIZATION 38,076 34,594 144,852
EFFECT OF INDEXATION AND TRANSLATION ON
CONVERTIBLE DEBENTURES (257) (403) (1,031)
OTHER INCOME, NET (551) (193) (2,383)
CHANGES IN ASSETS AND LIABILITIES:
DECREASE (INCREASE) IN TRADE ACCOUNTS RECEIVABLE (2,106) 7,145 2,510
DECREASE (INCREASE) IN OTHER RECEIVABLES AND OTHER CURRENT ASSETS (477) 2,036 1,988
DECREASE (INCREASE) IN INVENTORIES (4,308) 4,045 1,293
INCREASE (DECREASE) IN TRADE ACCOUNTS PAYABLE 1,348 (1,051) 3,082
DECREASE IN OTHER CURRENT LIABILITIES (179) (1,263) (1,839)
DECREASE IN OTHER LONG-TERM LIABILITIES (1,206) (567) (5,368)
--------- --------- ---------
(14,716) (10,977) (59,978)
DECREASE IN LONG-TERM LIABILITY
IN RESPECT OF CUSTOMERS' ADVANCES, NET (415) (106) (760)
--------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES (15,131) (11,083) (60,738)
--------- --------- ---------
CASH FLOWS - INVESTING ACTIVITIES
DECREASE IN DESIGNATED CASH, SHORT-TERM AND LONG-TERM
INTEREST-BEARING DEPOSITS, NET 16,535 36,242 27,266
INVESTMENTS IN PROPERTY AND EQUIPMENT (13,404) (19,650) (38,878)
INVESTMENT GRANTS RECEIVED 872 3,488 7,496
PROCEEDS RELATED TO SALE AND DISPOSAL OF PROPERTY AND EQUIPMENT 551 346 2,179
INVESTMENTS IN OTHER ASSETS (3,507) (2,500) (3,841)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,047 17,926 (5,778)
--------- --------- ---------
--
CASH FLOWS - FINANCING ACTIVITIES
PROCEEDS FROM ISSUANCE OF CONVERTIBLE DEBENTURE, NET 22,203 -- 25,086
PROCEEDS FROM LONG-TERM DEBT 8,590 -- 21,103
REPAYMENT OF CONVERTIBLE DEBENTURES (6,476) -- --
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 24,317 -- 46,189
========= ========= =========
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,233 6,843 (20,327)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 7,337 27,664 27,664
--------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 17,570 $ 34,507 $ 7,337
========= ========= =========
NON-CASH ACTIVITIES
INVESTMENTS IN PROPERTY AND EQUIPMENT $ 1,901 $ 9,205 $ 12,999
========= ========= =========
STOCK-BASED COMPENSATION RELATED TO
THE FACILITY AGREEMENT WITH THE BANKS $ -- $ -- $ 2,793
========= ========= =========
STOCK-BASED COMPENSATION RELATED TO RIGHTS OFFERED
TO EMPLOYEES $ -- $ -- $ 448
========= ========= =========
INVESTMENTS IN OTHER ASSETS $ -- $ 1,283 $ 442
========= ========= =========
CONVERSION OF LONG-TERM LIABILITY IN RESPECT OF CUSTOMERS' ADVANCES
TO SHARE CAPITAL $ 4,287 $ -- $ 1,794
========= ========= =========
CONVERSION OF CONVERTIBLE DEBENTURES INTO SHARES $ 3,672 $ -- $ --
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR INTEREST $ 10,546 $ 8,316 $ 32,805
========= ========= =========
CASH PAID DURING THE PERIOD FOR INCOME TAXES $ 14 $ 4 $ 86
========= ========= =========
SEE NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2006
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL
A. BASIS FOR PRESENTATION
(1) The unaudited condensed interim consolidated financial statements
as of March 31, 2006 and for the three months then ended
("interim financial statements") of Tower Semiconductor Ltd. and
subsidiary ("the Company") should be read in conjunction with the
audited consolidated financial statements of the Company as of
December 31, 2005 and for the year then ended, including the
notes thereto. In the opinion of management, the interim
financial statements include all adjustments necessary for a fair
presentation of the financial position and results of operations
as of the date and for the interim periods presented. The results
of operations for the interim periods are not necessarily
indicative of the results to be expected on a full-year basis.
(2) The interim financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") in Israel
("Israeli GAAP"), for interim financial statement, which differ
in certain respects from GAAP in the United States of America
("U.S. GAAP"), as indicated in Note 6.
The accounting principles applied in the preparation of these
interim financial statements are consistent with those principles
applied in the preparation of the most recent annual audited
financial statements, except for the accounting principles
detailed in paragraph 3 below.
(3) RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING
STANDARDS BOARD
A. ACCOUNTING STANDARD NO. 21 "EARNINGS PER SHARE"
In February 2006, the Israeli Accounting Standards Board
approved for publication Accounting Standard No. 21,
"Earnings Per Share" ("Standard No. 21").
With the initial adoption of Standard No. 21, Opinion No. 55
of the Institute of Certified Public Accountants in Israel -
Earnings per share is cancelled.
Standard No. 21 prescribes that an entity shall calculate
basic earnings per share amounts for profit or loss
attributable to ordinary equity holders of the entity. The
basic earnings per share shall be calculated by dividing
profit or loss attributable to ordinary equity holders of
the entity (the numerator) by the weighted average number of
ordinary shares outstanding (the denominator) during the
reported period. For the purpose of calculating diluted
earnings per share, an entity shall adjust profit or loss
attributable to ordinary equity holders of the entity, and
the weighted average number of shares outstanding, for the
effects of all dilutive potential ordinary shares.
- 5 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2006
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (cont.)
A. BASIS FOR PRESENTATION (cont.)
(3) RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING
STANDARDS BOARD (cont.)
A. ACCOUNTING STANDARD NO. 21 "EARNINGS PER SHARE" (cont.)
Standard No. 21 is effective for financial statements for
periods commencing January 1, 2006 or thereafter. The
adoption of Standard No. 21 is accounted for retrospectively
and a comparative earnings per share data for prior periods
is adjusted. Accordingly, the loss per share presented in
the financial statements for the 12 months ended December
31, 2005 was adjusted from $2.55 to $3.06.
B. ACCOUNTING STANDARD NO. 22 "FINANCIAL INSTRUMENTS:
DISCLOSURE AND PRESENTATION"
In July 2005, the Israeli Accounting Standards Board
approved for publication Accounting Standard No. 22
"Financial Instruments: Disclosure and Presentation"
("Standard No. 22"). A financial instrument under Standard
No. 22 is defined, in general, as any contract that
establishes a financial asset of an entity, or a financial
liability or equity instrument of another entity. Standard
No. 22 establishes the requirements for presentation of
financial instruments in the financial statements and
indicates the information that should be disclosed in
relation thereto, and, in certain cases, the method to
measure their impact on the entity's financial statements.
The presentation requirements relate to the classification
of financial instruments as financial assets, financial
liabilities or equity instruments. It also deals with the
classification of related interest, dividends, losses and
gains and to the circumstances under which financial assets
and financial liabilities are to be offset. Standard No. 22
establishes requirements for disclosure of information
relating to factors affecting the amount, timing and
certainty of the entity's future cash flows relating to
financial instruments and accounting policy implemented in
respect of these instruments. Standard No. 22 also
establishes requirements for disclosure of information about
the nature and the extent of an entity's use of financial
instruments, the business purposes they serve, the risks
associated with them and management's policies for the
oversight of those risks.
Standard No. 22 is effective for financial statements for
periods commencing January 1, 2006 or thereafter. Financial
instruments issued before the effective date of Standard No.
22 will be classified and presented in accordance with its
provisions commencing from the effective date. Comparative
financial statements for prior periods are not to be
adjusted. The Company issued two series of convertible
debentures that are considered compound instruments under
Standard No. 22. A compound instrument has to be separated
to its components, the equity component and the liability
component. The equity component is classified as
shareholders' equity and is determined as the excess of the
total value over the fair value of the liability component.
- 6 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2006
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (cont.)
A. BASIS FOR PRESENTATION (cont.)
(3) RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING
STANDARDS BOARD (cont.)
C. ACCOUNTING STANDARD NO. 25 "REVENUES"
In February 2006, the Israeli Accounting Standards Board
approved for publication Accounting Standard No. 25,
"Revenues" ("Standard No. 25").
Standard No. 25 establishes the requirements for recognition
criteria, measurement, disclosure and presentation of
revenues arising from sale of goods, rendering of services
and from the use by others of entity assets yielding
interest, royalties and dividends. Standard No. 25
prescribes that revenue shall be measured at the fair value
of the consideration received or receivable.
Standard No. 25 is effective for financial statements for
periods commencing January 1, 2006 or thereafter.
The adoption of the standard had no material effect on the
financial statements.
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").
Fab 2 is designated 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 interim
financial statements, have provided an aggregate of approximately
$1,260,000 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, risks and uncertainties, see Note 11A to the 2005 audited
consolidated financial statements.
- 7 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2006
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (cont.)
C. FINANCING OF THE COMPANY'S ONGOING OPERATIONS
In the three months ended March 31, 2006 and in recent years, the
Company has experienced significant recurring losses from operations,
recurring negative cash flows from operating activities, an increasing
accumulated deficit and a deficit in shareholders equity. According to
the Company's approved short-term working plan, based on the current
prevailing semiconductor market conditions, the Company needs to raise
funds in order to finance its short-term activities and liabilities in
2006.
In May 2006 the Company signed an amendment to the Facility Agreement
with its Banks, according to which repayments of long-terms loans in
the amount of approximately $100,000, formerly scheduled to be paid
between October 2006 and June 2007, were deferred to July 2007.
In March 2006, the Company's Board of Directors approved the Company's
plan to ramp up Fab 2 in order to meet the Company's customer and
product qualification needs, based on its customer pipeline,
reinforced by forecasted market conditions. According to this plan,
the Company will need to raise approximately $130,000 during 2006,
which will take the current Fab 2 capacity to approximately 24,000
wafers per month.
As part of the financing efforts for that expansion plan, in May 2006,
the Company and its Banks signed a Memorandum of Understanding ("MOU")
for the refinancing of the $526,693 in long term debt, according to
which: (i) 30% of such debt will be converted to equity for 51,973,684
ordinary shares of the Company, based on a formula using the average
closing price during the 10-day period prior to signing the MOU; (ii)
the interest rate of the long-term loans will be decreased from LIBOR
plus 2.5% per annum to LIBOR plus 1.1% per annum; and (iii) the
commencement date for the repayment of principal shall be postponed
from July 2007 to September 2009. The terms of the MOU are subject to
a commitment of Israel Corporation Ltd. ("TIC") to the Company's Banks
to invest $100,000 in the Company's capacity expansion as described
below. The MOU is further subject to reaching a definitive amendment
to the Facility Agreement based on the terms of the MOU. In this
regard, TIC has committed to invest $100,000 in the Company for
65,789,474 ordinary shares of the Company, based on the base price
used in the formula under which the banks will be issued shares. Such
amount may include amounts that may be payable by the Company to TIC
in connection with the agreement for the ordering of equipment
described below. TIC's investment is subject to the signing of a
definitive investment agreement between the Company and TIC, the
approval of the Company's audit committee, board of directors and
shareholders and the closing of a definitive amendment to the Facility
Agreement with the Banks based on the terms of the MOU.
The Company is currently examining alternatives for additional funding
sources.
- 8 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2006
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (cont.)
C. FINANCING OF THE COMPANY'S ONGOING OPERATIONS (cont.)
In order to implement the acceleration plan in a timely manner, the
Company and TIC entered into an agreement according to which TIC will
order up to approximately $100,000 worth of equipment in connection
with the ramp-up of Fab 2. Under the terms of the agreement: (i) TIC
has the right to sell the equipment to the Company at cost, plus
related expenses; (ii) the Company has the right to purchase the
equipment from TIC at cost, plus related expenses, subject to the
Company having raised $100,000; (iii) upon the sale of the equipment
by TIC to the Company, the Company will assume TIC's obligations to
the equipment suppliers; and (iv) if after 5 months from the signing
of the agreement, the equipment has not been sold to the Company by
TIC, TIC may sell the equipment to a third party and the Company will
pay TIC the difference between the cost, plus related expenses, for
the purchase of the equipment by TIC and the net sale price. This
agreement was approved by the Audit Committee and the Board of
Directors of the Company in May 2006 and may require the approval of
the Company's shareholders if the Company shall have received by May
31, 2006 a written request by a shareholder or shareholders who hold
at least 1% of the Company's issued and outstanding shares to bring
the agreement to the Company's shareholders for approval.
NOTE 2 - INVENTORIES
Inventories consist of the following (*):
March 31, December 31,
----------------- -------
2006 2005 2005
------- ------- -------
(unaudited)
Raw materials $ 7,293 $ 8,941 $ 6,777
Spare parts and supplies 4,280 4,072 3,738
Work in process 14,552 7,502 11,502
Finished goods 2,559 1,109 2,359
------- ------- -------
$28,684 $21,624 $24,376
======= ======= =======
(*) Net of aggregate write downs to net realizable value of $ $4,018,
$2,895 and $3,259 as of March 31, 2006, March 31, 2005 and
December 31, 2005, respectively.
- 9 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2006
(dollars in thousands, except share data and per share data)
NOTE 3 - MAJOR CUSTOMERS
Revenues from major customers as a percentage of total revenues were
as follows:
Three months ended Year ended
March 31, December 31,
----------------- ----
2006 2005 2005
---- ---- ----
(unaudited)
Customer A 18% 42% 22%
Customer B 14 12 14
Customer C 12 2 7
Customer D 11 - 5
NOTE 4 - RECENT DEVELOPMENTS RELATING TO FAB 2
A. APPROVED ENTERPRISE STATUS
Under the terms of the approved enterprise program for Fab 2, the
Company was eligible to receive grants of 20% of up to $1,250,000
invested in Fab 2 plant and equipment, or an aggregate of up to
$250,000 for investments made by December 31, 2005, of which as of the
balance sheet date, an aggregate of approximately $159,000 has been
received from the Investment Center.
Under the terms of the program, investments in respect of Fab 2 were
to be completed by December 31, 2005, five years from the date the
approval certificate was obtained. Due to the later than planned
construction of Fab 2, market conditions and slower than planned
ramp-up, the Company completed approximately 73% of the investments
under the approved enterprise program. The Company has been holding
discussions with the Investment Center to achieve satisfactory
arrangements to approve a new expansion program commencing as of
January 1, 2006. During 2005, the Company received letters from the
Israeli Minister of Industry, Trade and Employment and from the
General Manager of the Investment Center stating that they will act
under Israeli law to support such expansion. In April 2005, at the
Investment Center's request, the Company submitted a revised business
plan to the Investment Center for the period commencing as of January
1, 2006. As of the approval date of the interim financial statements,
the Company's management cannot estimate when, if at all, the Company
will receive approval of its request for a new expansion program.
- 10 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2006
(dollars in thousands, except share data and per share data)
NOTE 4 - RECENT DEVELOPMENTS RELATING TO FAB 2 (cont.)
B. FACILITY AGREEMENT
In July 2005, the Company and its Banks entered into a definitive
amendment to the Facility Agreement. Pursuant to such amendment, the
Company borrowed $29,693 and was required to raise through the
issuance of shares or convertible debentures $23,500 by December 31,
2005 and an additional $6,500 by March 31, 2006. In January 2006, as
described in Note 5C below, the Company completed a rights offering of
convertible debentures in which it raised $48,169, $25,500 of which
was raised in December 2005, thereby satisfying the abovementioned
obligations to raise additional funds. Under the amended Facility
Agreement the Company is required to raise an additional approximately
$8,000 by June 30, 2006.
In addition, in May 2006, the Company and its Banks entered into an
amendment to the Facility Agreement, according to which the repayments
of long-term loans in the amount of approximately $100,000, formerly
scheduled to be paid between October 2006 and June 2007, were deferred
to July 2007.
As part of the financing efforts for the accelerated expansion plan,
in May 2006, the Company and its Banks signed an MOU for the
refinancing of the $526,693 in long term debt, according to which: (i)
30% of such debt will be converted to equity for 51,973,684 ordinary
shares of the Company, based on a formula using the average closing
price during the 10-day period prior to signing the MOU ; (ii) the
interest rate of the long-term loans will be decreased from LIBOR plus
2.5% per annum to LIBOR plus 1.1% per annum; and (iii) the
commencement date for the repayment of principal shall be postponed
from July 2007 to September 2009. The terms of the MOU are subject to
a commitment of TIC to the Banks to invest $100,000 in the Company's
capacity expansion as described above in Note 1C. The MOU is further
subject to reaching a definitive amendment to the Facility Agreement
based on the terms of the MOU.
As of the balance sheet date, the Company was in full compliance with
all of the financial ratios and covenants under the amended Facility
Agreement. As of the approval date of the financial statements, the
Company anticipates that it will be in compliance with all of the
financial ratios and covenants under the amended Facility Agreement
through the third quarter of 2006, however, under the current terms of
the Facility Agreement, if not amended, it will not be in compliance
with all of the financial ratios and covenants under the amended
Facility Agreement from the fourth quarter of 2006. According to the
Facility Agreement, satisfying the financial ratios and covenants is a
material provision. The amended Facility Agreement provides that if,
as a result of any default, the Banks were to accelerate the Company's
obligations, the Company would be obligated, among other matters, to
immediately repay all loans made by the Banks (which as of the balance
sheet date amounted to $526,693) plus penalties, and the Banks would
be entitled to exercise the remedies available to them under the
Facility Agreement, including enforcement of their lien against all of
the Company's assets.
- 11 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2006
(dollars in thousands, except share data and per share data)
NOTE 5 - OTHER RECENT DEVELOPMENTS
A. 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.
B. SHARE OPTION PLANS
(1) OPTIONS GRANTED TO THE CHIEF EXECUTIVE OFFICER ("CEO")
In May 2006, the Audit Committee and Board of Directors approved
the grant of options to the CEO of the Company, who also serves
as a director, in addition to the options granted to him in April
2005, such that in total, the CEO will hold options to purchase
shares that represent 4% of the Company's shares on a fully
diluted basis during the two-year period from the approval of the
Audit Committee. The exercise price of the initial grant of
additional options will be $1.45, the 90 day average closing
price of the Company's shares prior to the Board of Directors'
approval. In the event of a future equity financing, additional
options will be granted to the CEO as described above with an
exercise price equal to the price per share of such investment.
The vesting period of the new options will be identical to the
vesting period of the existing options. No additional options
will be granted under the CEO's employment agreement, which was
approved by the Company's shareholders in October 2005. The new
grant of options and its terms are subject to the approval of the
Company's shareholders.
(2) RE-PRICING OF EMPLOYEE OPTIONS
The Board of Directors approved a plan to re-price the exercise
price of existing options held by the Company's employees at each
employee's discretion. The new exercise price of the options will
be $1.45, which is the 90 day average closing price of the
Company's shares prior to the Board of Directors' approval. The
new options will be granted based on terms similar to the
existing option plan with new vesting periods. The Board of
Directors further approved that if the total number of employee
options, including the options to the CEO, during the coming 24
months will represent less than 8% of the Company's shares on a
fully diluted basis, additional options will be allocated for
grants to be made to the Company's employees.
No options have been granted under such plan as of the date of
the approval of the financial statements.
- 12 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2006
(dollars in thousands, except share data and per share data)
NOTE 5 - OTHER RECENT DEVELOPMENTS (cont.)
C. 2005 RIGHTS OFFERING
In December 2005, the Company filed in Israel and the U.S. a
prospectus for the distribution of transferable rights to purchase up
to $50,000 U.S. dollar denominated debentures that are convertible
into up to 45,454,545 of the Company's Ordinary Shares. The rights
were distributed to the shareholders of record of the Company on
December 20, 2005 (the record date), and to certain employees who on
the record date held options to purchase the Company's Ordinary Shares
under share option plans that entitle the option holders to
participate in a rights offering. Each 138.98 Ordinary Shares and/or
eligible employee options held on the record date entitled their
holder to one right. The rights were exercisable until January 12,
2006. Each right entitled its holder to purchase, at a subscription
price of $100.00, 100 U.S. dollar denominated convertible debentures.
In connection with the exercise of the rights, the Company issued
48,169,300 convertible debentures, with each debenture of $1.00 in
principal amount, or total of $48,169 principal amount of debentures,
which bear annual interest at the rate of 5%. The principal of the
debentures, together with accrued interest, is payable in one
installment on January 12, 2012.
The debentures are convertible into the Company's Ordinary Shares at a
rate of one ordinary share per $1.10 aggregate principal amount of
debentures. The conversion price is subject to downward adjustment
under certain circumstances in which the Company sells securities in
future financings at a price per share which is lower than the
conversion price, provided that such financings close through December
2006 (or under certain conditions, through June 2007).
During the first quarter of 2006, 6,600,812 convertibles debentures
were converted into 6,000,737 ordinary shares of the Company.
Subject to the Facility Agreement, the Company may at its option
announce the early redemption of the debentures, provided that the
outstanding aggregate balance of principal on account of the
debentures is equal to or less than $500.
The debentures are listed and quoted on the NASDAQ Capital Market and
the Tel Aviv Stock Exchange.
Certain of the Company's Equity Investors and Wafer Partners invested
$27,811 in the framework of the rights offering.
The debentures and interest thereon are unsecured and rank behind the
Company's existing and future secured indebtedness, including
indebtedness to the Banks under the Facility Agreement, as well as to
the government of Israel in connection with grants the Company
received under its approved enterprise programs and to Siliconix.
- 13 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2006
(dollars in thousands, except share data and per share data)
NOTE 5 - OTHER RECENT DEVELOPMENTS (cont.)
C. 2005 RIGHTS OFFERING (cont.)
If on the payment date of the principal and interest on the
debentures, there exists an infringement of certain covenants and
conditions under the Facility Agreement, the date for payment of the
interest and principal on the debentures may be postponed, depending
on various scenarios under the Facility Agreement until such covenant
or condition is settled.
See Note 6 for the presentation of the rights offering in accordance
with U.S. GAAP.
D. AUTHORIZED SHARES
In March 2006, the Board of Directors of the Company approved the
increase of the Company's authorized shares from 500,000,000 to
800,000,000. This increase is subject to the approval of the Company's
shareholders.
NOTE 6 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP
With regard to the Company's interim financial statements, the material
differences between GAAP in Israel and in the U.S. relate to the following.
See H below for the presentation of the Company's unaudited balance sheet
as of March 31, 2006 in accordance with U.S. GAAP.
A. RECENT ACCOUNTING PRONOUNCEMENTS BY THE FASB
SFAS NO. 155. ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS -
In February 2006, the FASB issued SFAS 155, "Accounting for Certain
Hybrid Financial Instruments". Key provisions of SFAS 155 include: (1)
a broad fair value measurement option for certain hybrid financial
instruments that contain an embedded derivative that would otherwise
require bifurcation; (2) clarification that only the simplest
separations of interest payments and principal payments qualify for
the exception afforded to interest-only strips and principal-only
strips from derivative accounting under paragraph 14 of FAS 133
(thereby narrowing such exception); (3) a requirement that beneficial
interests in securitized financial assets be analyzed to determine
whether they are freestanding derivatives or whether they are hybrid
instruments that contain embedded derivatives requiring bifurcation;
(4) clarification that concentrations of credit risk in the form of
subordination are not embedded derivatives; and (5) elimination of the
prohibition on a QSPE holding passive derivative financial instruments
that pertain to beneficial interests that are or contain a derivative
financial instrument. In general, these changes will reduce the
operational complexity associated with bifurcating embedded
derivatives, and increase the number of beneficial interests in
securitization transactions, including interest-only strips and
principal-only strips, required to be accounted for in accordance with
FAS 133. Management does not believe that SFAS 155 will have a
material effect on the financial condition, results of operations, or
liquidity of the Company.
- 14 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2006
(dollars in thousands, except share data and per share data)
NOTE 6 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (cont.)
B. PRESENTATION OF DESIGNATED CASH AND SHORT-TERM INTEREST-BEARING
DEPOSITS
In accordance with U.S. GAAP, the Company's designated cash and
short-term interest-bearing deposits should be excluded from current
assets and presented separately as a non-current asset. Accordingly,
as of March 31, 2006, $15,126 was reclassified from current assets to
a long-term asset (as of December 31, 2005 - $31,661, was reclassified
from current assets and long-term investments, respectively, to a
long-term asset).
C. 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 March 31, 2006, an amount of $13,587 was
reclassified from other long-term liabilities to long-term investments
(as of December 31, 2005 - $13,658).
D. HEDGING ACTIVITIES IN ACCORDANCE WITH U.S. GAAP (SFAS 133)
Complying with SFAS 133 as amended and the related interpretations
thereon with respect to the Company's hedging transactions as of March
31, 2006 would have resulted in: an increase in other long-term
investments in the amount of $2,493; a decrease in other comprehensive
loss for the three months ended March 31, 2006 in the net amount of
$1,058; an accumulated other comprehensive loss component of equity
balance as of March 31, 2006 in the amount of $496; and in a decrease
of $ 2,959 in property and equipment, net as of March 31, 2006.
E. DEFERRED FINANCING CHARGES
Under U.S. GAAP, deferred-financing charges are to be presented in
other assets, while according to Israeli GAAP effective January 1,
2006 such amount is required to be offset from the related long-term
debt. Accordingly, as of March 31, 2006, an amount of $11,727 was
reclassified from long-term debt to other assets.
F. SALE OF CONVERTIBLE DEBENTURES
Under Accounting Principles Board Opinion No. 14 ("APB 14"), the
proceeds from the sale of the securities in January 2002 are to be
allocated to each of the securities issued based on their relative
fair value, while according to Israeli GAAP such treatment was not
required. Complying with APB 14, based on the average market value of
each of the components issued in the first three days following their
issuance (in January 2002), would have resulted in an increase in
shareholders' equity as of the issuance date in the amount of $2,363
(net of $196 related issuance expenses), and a decrease in convertible
debentures as of such date in the amount of $2,559. The accumulated
effect of amortization of the discount on the convertible debentures
under U.S.GAAP as of March 31, 2006 would have been $2,099.
- 15 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2006
(dollars in thousands, except share data and per share data)
NOTE 6 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (cont.)
F. SALE OF CONVERTIBLE DEBENTURES (cont.)
Under US GAAP, convertible debentures have to be evaluated to
determine if they contain embedded derivative that warrant
bifurcation. Conversion feature embedded in convertible debentures
will need to be evaluated as to whether they can be classified as
equity based on the criteria established in EITF Issue 00-19 and 05-2.
The Company evaluated the conversion features embedded in both
debentures (i.e., sale of convertible debentures in 2002 - "2002
debentures" and sale of convertible debentures in 2005 and 2006- "2005
debentures") and concluded that the conversion feature embedded in the
2005 debentures warrant bifurcation while the conversion feature
embedded in the 2002 debentures is scoped out (for the discussion on
the accounting for the debentures under Israeli GAAP see Note 1A(3)b).
2002 DEBENTURES:
Under US GAAP, the equity component, in the amount of $1,681,
classified in equity under Israeli GAAP was reclassified to liability.
2005 DEBENTURES:
Under US GAAP, the equity component, in the amount of $17,517
classified as equity under Israeli GAAP was reclassified to liability
and the conversion feature was bifurcated from the debt host and
marked to market through earnings. The initial amount allocated to the
bifurcated conversion feature was determined using the "with and
without" method based on the fair value of the embedded derivative
prescribed in DIG Issue B6.
All the above resulted as of March 31, 2006 mainly in: an increase in
convertible debentures in the amount of $13,283; an increase in the
shareholder's deficit in the amount of $11,370 and an increase in
other assets in the amount of $1,561. The Company's loss for the three
months period ended March 31, 2006 would have decreased in the amount
of $5,434.
G. EMPLOYEE STOCK BASED COMPENSATION
The Company adopted effective January 1, 2006 SFAS 123R according to
which the compensation expense related to employee and directors share
option awards would have been resulted in an increase in the
compensations expenses for the period ending March 31, 2006 and an
increase in the unearned compensation as of such date in the amount of
$602. The Company elected the modified prospective method as its
transition method.
- 16 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENNTS AS OF MARCH 31, 2006
(dollars in thousands, except share data and per share data)
NOTE 6 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (cont.)
H. BALANCE SHEETS IN ACCORDANCE WITH U.S. GAAP
AS OF MARCH 31, 2006 AS OF DECEMBER 31, 2005
-------------------------------- -------------------------------
U.S. AS PER AS PER AS PER AS PER
GAAP ISRAELI ADJUST- U.S. ISRAELI ADJUST- U.S.
EMARK GAAP MENTS GAAP GAAP MENTS GAAP
------- --------- --------- --------- --------- --------- ---------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 17,570 $ $ 17,570 $ 7,337 $ $ 7,337
DESIGNATED CASH AND SHORT-TERM
INTEREST-BEARING DEPOSITS B 15,126 (15,126) -- 31,661 (31,661) --
TRADE ACCOUNTS RECEIVABLE:
RELATED PARTIES 6,938 6,938 5,309 5,309
OTHERS 11,944 11,944 11,467 11,467
OTHER RECEIVABLES 8,937 8,937 9,043 9,043
INVENTORIES 28,684 28,684 24,376 24,376
OTHER CURRENT ASSETS 1,350 1,350 1,048 1,048
--------- --------- --------- --------- --------- ---------
TOTAL CURRENT ASSETS 90,549 (15,126) 75,423 90,241 (31,661) 58,580
--------- --------- --------- --------- --------- ---------
OTHER LONG-TERM INVESTMENT C,D -- 16,080 16,080 -- 15,425 15,425
--------- --------- --------- --------- --------- ---------
-- 16,080 16,080 -- 15,425 15,425
--------- --------- --------- --------- --------- ---------
PROPERTY AND EQUIPMENT, NET D,F 484,289 (2,133) 482,156 510,645 (3,291) 507,354
--------- --------- --------- --------- --------- ---------
DESIGNATED CASH AND SHORT-TERM
INTEREST-BEARING DEPOSITS B -- 15,126 15,126 -- 31,661 31,661
--------- --------- --------- --------- --------- ---------
OTHER ASSETS, NET:
TECHNOLOGY 59,724 59,724 61,441 61,441
OTHER E,F 1,477 13,288 14,765 16,359 (196) 16,163
--------- --------- --------- --------- --------- ---------
61,201 13,288 74,489 77,800 (196) 77,604
========= ========= ========= ========= ========= =========
TOTAL ASSETS $ 636,039 $ 27,235 $ 663,274 $ 678,686 $ 11,938 $ 690,624
========= ========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY -- --
CURRENT LIABILITIES
CURRENT MATURITIES OF LONG-TERM DEBT $ -- $ $ -- $ 21,103 $ $ 21,103
CURRENT MATURITIES OF CONVERTIBLE DEBENTURES F 5,734 474 6,208 6,453 (640) 5,813
TRADE ACCOUNTS PAYABLE 52,028 52,028 59,741 59,741
OTHER CURRENT LIABILITIES 8,913 8,913 8,972 8,972
--------- --------- --------- --------- --------- ---------
TOTAL CURRENT LIABILITIES 66,675 474 67,149 96,269 (640) 95,629
LONG-TERM DEBT E 514,966 11,727 526,693 497,000 497,000
CONVERTIBLE DEBENTURES F 34,429 13,283 47,712 19,358 23,574 42,932
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMERS' ADVANCES 54,537 54,537 59,621 59,621
OTHER LONG-TERM LIABILITIES C 10,238 13,587 23,825 11,012 13,658 24,670
--------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES 680,845 39,071 719,916 683,260 36,592 719,852
--------- --------- --------- --------- --------- ---------
CONVERTIBLE DEBENTURES F -- -- -- 25,493 (25,493) --
--------- --------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY (DEFICIT)
ORDINARY SHARES, NIS 1.00 PAR VALUE -
AUTHORIZED 500,000,000 SHARES; ISSUED 76,946,189
AND 68,232,056 SHARES, RESPECTIVELY 18,403 18,403 16,548 16,548
ADDITIONAL PAID-IN CAPITAL F 531,123 2,394 533,517 522,237 2,363 524,600
EQUITY COMPONENT OF CONVERTIBLE DEBENTURES AND
CUMULATIVE STOCK BASED COMPENSATION F,G 19,550 (18,596) 954 (26) (26)
ACCUMULATED OTHER COMPREHENSIVE LOSS D -- (496) (496) -- (1,554) (1,554)
ACCUMULATED DEFICIT D,F,G (604,810) 4,862 (599,948) (559,754) 30 (559,724)
--------- --------- --------- --------- --------- ---------
(35,734) (11,836) (47,570) (20,995) 839 (20,156)
TREASURY STOCK, AT COST - 1,300,000 SHARES (9,072) (9,072) (9,072) (9,072)
--------- --------- --------- --------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (44,806) (11,836) (56,642) (30,067) 839 (29,228)
========= ========= ========= ========= ========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 636,039 $ 27,235 $ 663,274 $ 678,686 $ 11,938 $ 690,624
========= ========= ========= ========= ========= =========
- 17 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2006
(dollars in thousands, except share data and per share data)
NOTE 6 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (cont.)
I. STATEMENTS OF OPERATIONS IN ACCORDANCE WITH U.S. GAAP
Complying with SFAS 133, APB 14(F above) and SFAS 123R (G above) would
have resulted in a decrease in the loss for the three months period
ended March 31, 2006 in the amount of $4,861. Giving effect to all the
above, the loss for the three months period ended March 31, 2006 would
be $ 40,195. No material affect on the result of operation for the
three-month period ended March 31, 2005.
J. 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:
Three months ended
---------------------------
March 31,
---------------------------
2006 2005
-------- --------
(unaudited)
Loss for the period, according
to U.S. GAAP (see I above) $(40,195) $(55,320)
Other comprehensive loss:
Reclassification of unrealized 332 332
losses on derivatives
Unrealized gains on
derivatives 726 2,837
-------- --------
Net comprehensive loss
for the period $(39,137) $(52,151)
======== ========
K LOSS PER SHARE IN ACCORDANCE WITH U.S. GAAP (SFAS 128)
In accordance with SFAS 128, the basic and diluted loss per share for
the three-month periods ended March 31, 2006 and 2005 would be $0.56
and $0.84, respectively.
L. STATEMENTS OF CASH FLOWS IN ACCORDANCE WITH U.S. GAAP (SFAS 95)
Complying with SFAS 95 would not have materially affected the cash
flows of the Company for the three-month period ended March 31, 2006
and 2005.
- 18 -
EXHIBIT 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE INFORMATION CONTAINED IN THIS SECTION SHOULD BE READ IN CONJUNCTION WITH (1)
OUR UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH
31, 2006 AND FOR THE THREE MONTHS THEN ENDED AND RELATED NOTES INCLUDED IN THIS
REPORT AND (2) OUR CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND
RELATED NOTES FOR THE YEAR THEN ENDED AND (3) OUR REPORT OF FORM 6-K, FILED
FEBRUARY 2, 2006. OUR FINANCIAL STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") IN ISRAEL. DIFFERENCES BETWEEN
ISRAELI GAAP AND US GAAP AS THEY RELATE TO OUR FINANCIAL STATEMENTS ARE
DESCRIBED IN NOTE 6 TO OUR UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS AS OF MARCH 31, 2006 AND IN NOTE 20 TO OUR CONSOLIDATED FINANCIAL
STATEMENTS AS OF DECEMBER 31, 2005.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated.
THREE MONTHS ENDED
MARCH 31,
--------------------
2006 2005
------ ------
STATEMENT OF OPERATIONS DATA:
Total revenues 100.0% 100.0%
Cost of total revenues 170.8 264.2
------ ------
Gross loss (70.8) (164.2)
Research and development expenses, net 9.3 20.6
Marketing, general and administrative
expenses 14.8 19.5
------ ------
Operating loss (95.0) (204.3)
Financing expense, net (32.1) (35.3)
Other income, net 1.5 0.8
------ ------
Loss (125.6)% (238.8)%
====== ======
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31, 2005
REVENUES. Revenues for the three months ended March 31, 2006 increased by
54.7% to $35.9 million from $23.2 million for the three months ended March 31,
2005. This $12.7 million increase was mainly attributable to higher volume of
wafer shipments.
During the three months ended March 31, 2006, we had four significant
customers who contributed between 11% and 18% to our revenues.
COST OF TOTAL REVENUES. Cost of total revenues for the three months ended
March 31, 2006 amounted to $61.3 million, compared with $61.2 million for the
three months ended March 31, 2005. This similar cost of revenues despite the
54.7% increase in sales is attributed mainly to cost reductions and efficiency
measures taken by the Company.
GROSS LOSS. Gross loss for the three months ended March 31, 2006 was $25.4
million compared to a gross loss of $38.0 million for the three months ended
March 31, 2005. The decrease in gross loss was mainly attributable to the
increase in revenues and cost reductions and efficiency measures taken by the
Company.
RESEARCH AND DEVELOPMENT. Research and development expenses for the three
months ended March 31, 2006 decreased to $3.4 million from $4.8 million for the
three months ended March 31, 2005. The decrease was mainly attributable to cost
reductions and efficiency measures taken by the Company. Research and
development expenses are reflected net of participation grants received from the
Israeli government ($0.4 million and $0.1 million, for the three months ended
March 31, 2006 and 2005, respectively).
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses for the three months ended March 31, 2006 increased to
$5.3 million from $4.5 million for the three months ended March 31, 2005,
primarily due to increased activity.
OPERATING LOSS. Operating loss for the three months ended March 31, 2006
was $34.1 million, compared to $47.3 million for the three months ended March
31, 2005. The decrease in the operating loss is attributable mainly to the
decrease in the gross loss.
FINANCING EXPENSES, NET. Financing expenses, net for the three months ended
March 31, 2006 were $11.5 million compared to financing expenses, net of $8.2
million for the three months ended March 31, 2005. This increase is mainly due
to an increase of $2.6 million in connection with our Fab 2 credit facility
agreement with our banks attributable mainly to an increase in LIBOR from an
average of approximately 2.6% per annum for the three months ended March 31,
2005 to an average of approximately 4.5% per annum for the three months ended
March 31, 2006 (under the current Facility Agreement, our long-term loans bear
interest at a rate of LIBOR + 2.5% per annum).
OTHER INCOME, NET. Other income, net, for the three months ended March 31,
2006 was $0.6 million compared to $0.2 million for the three months ended March
31, 2005.
LOSS. Our loss for the three months ended March 31, 2006 was $45.1 million,
compared to $55.3 million for the three months ended March 31, 2005. This
decrease is primarily attributable to the decrease in the operating loss of
$13.3 million offset by the increase in financing expenses of $3.3 million.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
The dollar cost of our operations in Israel is influenced by the timing of
any change in the rate of inflation in Israel and the extent to which such
change is not offset by the change in valuation of the NIS in relation to the
dollar. During the three months ended March 31, 2006, the exchange rate of the
dollar in relation to the NIS increased by 1.4%, and the Israeli Consumer Price
Index, or CPI, increased by 0.6% (during the three months ended March 31, 2005
there was an increase of 1.2% in the exchange rate of the dollar in relation to
the NIS and a decrease of 0.6% in the CPI).
We believe that the rate of inflation in Israel has not had a material
effect on our business to date. However, our dollar costs will increase if
inflation in Israel exceeds the devaluation of the NIS against the dollar, or if
the timing of such devaluation lags behind inflation in Israel.
Almost all of the cash generated from our operations and from our financing
and investing activities is denominated in U.S. dollars and NIS. Our expenses
and costs are denominated in NIS, U.S. dollars, Japanese Yen and Euros. We are,
therefore, exposed to the risk of currency exchange rate fluctuations.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2006, we had an aggregate of $32.7 million in cash, cash
equivalents, and short-term interest-bearing deposits, of which $15.1 million
was contractually restricted for Fab 2 use only. This compares to $52.1 million
we had as of March 31, 2005 in cash, cash equivalents, and short-term
interest-bearing deposits, of which $5.0 million was contractually restricted
for Fab 2 use only and $12.6 million was contractually restricted for exclusive
use in the Siliconix project. In addition, as of March 31, 2005, we had $5.1
million in long-term interest-bearing deposits which was contractually
restricted for Fab 2 use only.
During the three months ended March 31, 2006, we received $8.6 million from
bank loans, $22.2 million in proceeds from the issuance of convertible
debentures, net, $0.9 million from Investment Center grants and $0.6 million in
proceeds from the sale and disposal of property and equipment. These liquidity
resources partially financed our operating activities (net amount of $15.1
million), our investments made during the three months ended March 31, 2006,
which aggregated to $16.9 million, mainly in connection with the construction,
purchase and installation of equipment and other assets for Fab 2 and repayment
of convertible debentures in the amount of $6.5 million.
As of March 31, 2006, we had long-term loans in the amount of $526.7
million we obtained in connection with the establishment of Fab 2 (presented in
the balance sheet net of $11.7 million deferred financing charges). As of such
date, we had convertible debentures in the aggregate of $59.4 million, of which
$5.7 million are presented as current maturities and $19.2 million are presented
as equity component of the convertible debentures as part of the shareholders'
equity.
