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FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the month of July 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 July 26, 2006, the Registrant announced its financial results for the
six month and three month periods ended June 30, 2006. Attached hereto are the
following exhibits:
Exhibit 99.1 Press release relating to such announcement.
Exhibit 99.2 Registrant's unaudited condensed interim consolidated
financial statements as of June 30, 2006 and for the
three month period then ended.
Exhibit 99.3 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: July 26, 2006 By: /s/ Nati Somekh Gilboa
--------------------------
Nati Somekh Gilboa
Corporate Secretary
EXHIBIT 99.1
TOWER SEMICONDUCTOR ANNOUNCES RECORD SALES
FOR Q2 2006
Q206 SALES UP 132% OVER Q205;
ACHIEVED CAPACITY UTILIZATION GREATER THAN 90%, AND HAS BEGUN THE
IMPLEMENTATION OF CAPACITY RAMP-UP
MIGDAL HAEMEK, Israel - July 26, 2006 - Tower Semiconductor Ltd. (NASDAQ: TSEM;
TASE: TSEM), a pure-play independent specialty foundry, today announced second
quarter 2006 results with a sequential record sales to $44.6 million in Q2 2006.
These sales represent an increase of 132% over the $19.2 million reported in the
second quarter of 2005, excluding $8 million from a previously announced
technology-related agreement, and an increase of 24% over the $35.9 million
reported in the first quarter of 2006. The 2006 second quarter loss was $43.6
million, or $0.55 per share, which included depreciation and amortization
expenses of $37.6 million, compared to a loss of $47.2 million, or $0.71 per
share, in the second quarter of 2005, which included $7.2 million net profit
from a previously announced technology-related agreement and depreciation and
amortization expenses of $36.6 million.
Tower expects further growth for the third quarter of 2006 and guides sal es of
$49 to $53 million.
"We are pleased to announce a second consecutive quarter of record sales, and
continued positive EBITDA growth. Both Fab 1 and Fab 2 realized record shipments
in Q2, at an average utilization greater than 90%, with approximately 50 new
revenue products and a total customer base of approximately 55. The Fab 2 ramp
plan is on track with the first tools in the process of being installed." said
Russell Ellwanger, chief executive officer, Tower Semiconductor. "Although the
State of Israel is facing a challenging situation, Tower continues with business
as usual and is well positioned to meet its manufacturing and engineering
commitments. We expect further record sales in the third quarter and are
encouraged by the outlook for the balance of 2006 and beyond".
Tower will host a conference call to discuss these results on Wednesday, July
26, 2006, at 11:00 a.m. Eastern Daylight Time /6 p.m. Israel time. To
participate, please call: 1-866-744-5399 (U.S. toll-free number) or
972-3-918-0609 (international) and mention ID code: TOWER. Callers in Israel are
invited to call locally 03-918-0609. The conference call will also be web cast
live at www.companyboardroom.com and at www.towersemi.com and will be available
thereafter on both websites for replay for 90 days, starting at 2:00 p.m.
Eastern Daylight Time on the day of the call.
As used in this release, the term EBITDA consists of loss, according to GAAP
(Generally Accepted Accounting Principles), excluding interest and financing
expenses (net), tax and depreciation and amortization expenses. EBITDA is not a
required GAAP financial measure and may not be comparable to a similarly titled
measure employed by other companies. EBITDA should not be considered in
isolation or as a substitute for operating income, net income or loss, cash
flows provided by operating, investing and financing activities, or other income
or cash flow statement data prepared in accordance with GAAP.
----------
ABOUT TOWER SEMICONDUCTOR LTD.
Tower Semiconductor Ltd. is a pure-play independent specialty 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 standard and specialized process technologies
and has a current capacity of up to 15,000 200mm wafers per month.Tower's
website is located at www.towersemi.com.
CONTACT:
Tower Semiconductor
Ilanit Vudinsky, +972 4 650 6434
ilanitvu@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 operate the company in the short-term and raising the funds required to implement the current ramp up plan and complete Fab 2, (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 which is critical in order to cover the high level of fixed costs associated with operating a foundry, (v) our ability to satisfy certain of the covenants stipulated in our amended facility agreement, (vi) the receipt of our banks' approval of the ramp up plan for Fab 2 and the entering into and consummation of a definitive agreement with our banks for the restructuring our debt, (vii) our ability to capitalize on increases in demand for foundry services, (viii) meeting the conditions to receive Israeli government grants and tax benefits approved for Fab 2 and obtaining the approval of the Israeli Investment Center for a new expansion program, (ix) attracting additional customers, (x) not receiving orders from our wafer partners, customers and technology providers, (xi) failing to maintain and develop our technology processes and services, (xii) competing effectively, (xiii) our large amount of debt and our ability to repay our debt on a timely basis, (xiv) achieving acceptable device yields, product performance and delivery times, (xv) the timely development, internal qualification and customer acceptance of new processes and products, (xvi) the receipt of shareholder and other approvals as required under applicable law or otherwise, including in connection with the proposed $100 million investment by Israel Corp., (xvii) business interruption due to terror attacks, including the current effect of the military situation, earthquakes, and other acts of God and (xviii) the entering into and the consummation of investment agreements, including the proposed $100 million investment by Israel Corp. 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 filings on Forms 20-F, F-1, F-3 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, and expressly disclaim any obligation to update, the information contained in this release.
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
--------- ---------
2006 2005
--------- ---------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 8,581 $ 7,337
DESIGNATED CASH AND SHORT-TERM INTEREST-BEARING DEPOSITS 2,909 31,661
PROCEEDS RECEIVABLES RELATING PUBLIC OFFERING 31,479 --
TRADE ACCOUNTS RECEIVABLE 21,626 16,776
OTHER RECEIVABLES 7,131 9,043
INVENTORIES 34,401 24,376
OTHER CURRENT ASSETS 1,616 1,048
--------- ---------
TOTAL CURRENT ASSETS 107,743 90,241
--------- ---------
PROPERTY AND EQUIPMENT, NET 460,328 510,645
--------- ---------
OTHER ASSETS, NET 55,879 77,800
========= =========
TOTAL ASSETS $ 623,950 $ 678,686
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITIES OF LONG-TERM DEBT $ -- $ 21,103
CURRENT MATURITIES OF CONVERTIBLE DEBENTURES 6,204 6,453
TRADE ACCOUNTS PAYABLE 50,410 59,741
OTHER CURRENT LIABILITIES 11,517 8,972
--------- ---------
TOTAL CURRENT LIABILITIES 68,131 96,269
LONG-TERM DEBT 515,811 497,000
CONVERTIBLE DEBENTURES 53,272 19,358
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMERS' ADVANCES 52,528 59,621
OTHER LONG-TERM LIABILITIES 10,104 11,012
--------- ---------
TOTAL LIABILITIES 699,846 683,260
--------- ---------
CONVERTIBLE DEBENTURES -- 25,493
--------- ---------
SHAREHOLDERS' DEFICIT (75,896) (30,067)
========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 623,950 $ 678,686
========= =========
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND PER SHARE DATA)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2006 2005 2006 2005
--------- --------- --------- ---------
REVENUES
SALES $ 80,430 $ 42,375 $ 44,555 $ 19,208
REVENUES RELATED TO A JOINT DEVELOPMENT AGREEMENT -- 8,000 -- 8,000
--------- --------- --------- ---------
80,430 50,375 44,555 27,208
COST OF SALES 126,422 122,468 65,142 61,254
--------- --------- --------- ---------
GROSS LOSS (45,992) (72,093) (20,587) (34,046)
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES
RESEARCH AND DEVELOPMENT 6,928 8,649 3,574 3,886
MARKETING, GENERAL AND ADMINISTRATIVE 10,798 8,766 5,474 4,238
--------- --------- --------- ---------
17,726 17,415 9,048 8,124
========= ========= ========= =========
OPERATING LOSS (63,718) (89,508) (29,635) (42,170)
FINANCING EXPENSE, NET (25,575) (15,528) (14,051) (7,353)
OTHER INCOME, NET 591 2,476 40 2,283
--------- --------- --------- ---------
LOSS FOR THE PERIOD $ (88,702) $(102,560) $ (43,646) $ (47,240)
========= ========= ========= =========
BASIC LOSS PER ORDINARY SHARE
Loss per share (*) $ (1.18) $ (1.56) $ (0.55) $ (0.71)
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF ORDINARY
SHARES OUTSTANDING - IN THOUSANDS 75,313 65,946 78,716 66,190
========= ========= ========= =========
(*) Basic and diluted loss per share in accordance with U.S. GAAP for the six
and three months periods ended June 30, 2006 are $1.16 and $0.60,
respectively, and are the same as the Isr. GAAP data for the six and three
months periods ended June 30, 2005.
EXHIBIT 99.2
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
UNAUDITED CONDENSED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
INDEX TO UNAUDITED CONDENSED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 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 JUNE 30, DECEMBER 31,
-------------------------- ---------
2006 2005 2005
--------- --------- ---------
(unaudited)
--------------------------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 8,581 $ 23,459 $ 7,337
DESIGNATED CASH AND SHORT-TERM INTEREST-BEARING DEPOSITS 2,909 16,953 31,661
PROCEEDS RECEIVABLES RELATING PUBLIC OFFERING 31,479 -- --
TRADE ACCOUNTS RECEIVABLE:
RELATED PARTIES 8,538 4,060 5,309
OTHERS 13,088 6,793 11,467
OTHER RECEIVABLES 7,131 8,862 9,043
INVENTORIES 34,401 17,058 24,376
OTHER CURRENT ASSETS 1,616 1,310 1,048
--------- --------- ---------
TOTAL CURRENT ASSETS 107,743 78,495 90,241
--------- --------- ---------
PROPERTY AND EQUIPMENT, NET 460,328 562,962 510,645
--------- --------- ---------
OTHER ASSETS, NET:
TECHNOLOGY 54,508 71,875 61,441
OTHER 1,371 14,644 16,359
--------- --------- ---------
55,879 86,519 77,800
========= ========= =========
TOTAL ASSETS $ 623,950 $ 727,976 $ 678,686
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITIES OF LONG-TERM DEBT $ -- $ -- $ 21,103
CURRENT MATURITIES OF CONVERTIBLE DEBENTURES 6,204 6,331 6,453
TRADE ACCOUNTS PAYABLE 50,410 59,640 59,741
OTHER CURRENT LIABILITIES 11,517 8,467 8,972
--------- --------- ---------
TOTAL CURRENT LIABILITIES 68,131 74,438 96,269
LONG-TERM DEBT 515,811 497,000 497,000
CONVERTIBLE DEBENTURES 53,272 18,992 19,358
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMERS' ADVANCES 52,528 62,007 59,621
OTHER LONG-TERM LIABILITIES 10,104 9,175 11,012
--------- --------- ---------
TOTAL LIABILITIES 699,846 661,612 683,260
--------- --------- ---------
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 85,768,622, 67,586,187
AND 68,232,056 SHARES, RESPECTIVELY 20,366 16,408 16,548
ADDITIONAL PAID-IN CAPITAL 540,885 518,286 522,237
EQUITY COMPONENT OF CONVERTIBLE DEBENTURES
AND CUMULATIVE STOCK BASED COMPENSATION 20,381 (26) (26)
ACCUMULATED DEFICIT (648,456) (459,232) (559,754)
--------- --------- ---------
(66,824) 75,436 (20,995)
TREASURY STOCK, AT COST - 1,300,000 SHARES (9,072) (9,072) (9,072)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (75,896) 66,364 (30,067)
--------- ========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 623,950 $ 727,976 $ 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)
SIX MONTHS ENDED THREE MONTHS ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
-------------------------- ------------------------- ---------
2006 2005 2006 2005 2005
--------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
-------------------------- --------------------------
REVENUES
SALES $ 80,430 $ 42,375 $ 44,555 $ 19,208 $ 93,991
REVENUES RELATED TO A JOINT DEVELOPMENT AGREEMENT - 8,000 - 8,000 8,000
--------- --------- --------- --------- ---------
80,430 50,375 44,555 27,208 101,991
---------
COST OF SALES 126,422 122,468 65,142 61,254 238,358
--------- --------- --------- --------- ---------
GROSS LOSS (45,992) (72,093) (20,587) (34,046) (136,367)
--------- --------- --------- --------- ---------
OPERATING COSTS AND EXPENSES
RESEARCH AND DEVELOPMENT 6,928 8,649 3,574 3,886 16,029
MARKETING, GENERAL AND ADMINISTRATIVE 10,798 8,766 5,474 4,238 17,418
--------- --------- --------- --------- ---------
17,726 17,415 9,048 8,124 33,447
========= ========= ========= ========= ---------
OPERATING LOSS (63,718) (89,508) (29,635) (42,170) (169,814)
FINANCING EXPENSE, NET (25,575) (15,528) (14,051) (7,353) (35,651)
OTHER INCOME, NET 591 2,476 40 2,283 2,383
--------- --------- --------- --------- ---------
LOSS FOR THE PERIOD $ (88,702) $(102,560) $ (43,646) $ (47,240) $(203,082)
========= ========= ========= ========= =========
BASIC AND DILUTED LOSS PER ORDINARY SHARE
LOSS PER SHARE $ (1.18) $ (1.56) $ (0.55) $ (0.71) $ (3.06)
========= ========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF ORDINARY
SHARES OUTSTANDING - IN THOUSANDS 75,313 65,946 78,716 66,190 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
ORDINARY SHARES ADDITIONAL CUMULATIVE
---------------------- PAID-IN STOCK 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 SIX-MONTH PERIOD (UNAUDITED):
ISSUANCE OF SHARES 3,438,076 737 4,550 5,287
EQUITY COMPONENT OF CONVERTIBLE DEBENTURES 26,361 26,361
CONVERSION OF CONVERTIBLE
DEBENTURES INTO SHARES 14,098,490 3,081 12,295 (6,535) 8,841
ISSUANCE OF WARRANTS 1,803 1,803
EMPLOYEE STOCK-BASED COMPENSATION 581 581
LOSS FOR THE PERIOD (88,702) (88,702)
---------- --------- --------- --------- ----------- -------- ---------
BALANCE - JUNE 30, 2006 (UNAUDITED) 85,768,622 $ 20,366 $ 540,885 $ 20,381 $ (648,456) $ (9,072) $ (75,896)
========== ========= ========= ========= =========== ======== =========
BALANCE - JANUARY 1, 2005 66,999,796 $ 16,274 $ 517,476 $ (26) $ (356,672) $ (9,072) $ 167,980
CHANGES DURING SIX-MONTH PERIOD (UNAUDITED):
ISSUANCE OF SHARES 586,391 134 810 944
LOSS FOR THE PERIOD (102,560) (102,560)
---------- --------- --------- --------- ----------- -------- ---------
BALANCE - JUNE 30, 2005 (UNAUDITED) 67,586,187 $ 16,408 $ 518,286 $ (26) $ (459,232) $ (9,072) $ 66,364
========== ========= ========= ========= =========== ======== =========
- - - - - -
BALANCE - APRIL 1, 2006 76,946,189 $ 18,403 $ 531,123 $ 19,550 $ (604,810) $ (9,072) $ (44,806)
CHANGES DURING THREE-MONTH PERIOD (UNAUDITED):
ISSUANCE OF SHARES 724,680 158 842 1,000
EQUITY COMPONENT OF CONVERTIBLE DEBENTURES 4,382 4,382
CONVERSION OF CONVERTIBLE
DEBENTURES INTO SHARES 8,097,753 1,805 7,117 (3,753) 5,169
ISSUANCE OF WARRANTS 1,803 1,803
EMPLOYEE STOCK-BASED COMPENSATION 202 202
LOSS FOR THE PERIOD (43,646) (43,646)
---------- --------- --------- --------- ----------- -------- ---------
BALANCE - JUNE 30, 2006 (UNAUDITED) 85,768,622 $ 20,366 $ 540,885 $ 20,381 $ (648,456) $ (9,072) $ (75,896)
========== ========= ========= ========= =========== ======== =========
BALANCE - APRIL 1, 2005 66,999,796 $ 16,274 $ 517,476 $ (26) $ (411,992) $ (9,072) $ 112,660
CHANGES DURING THREE-MONTH PERIOD (UNAUDITED):
ISSUANCE OF SHARES 586,391 134 810 944
LOSS FOR THE PERIOD (47,240) (47,240)
---------- --------- --------- --------- ----------- -------- ---------
BALANCE - JUNE 30, 2005 (UNAUDITED) 67,586,187 $ 16,408 $ 518,286 $ (26) $ (459,232) $ (9,072) $ 66,364
========== ========= ========= ========= =========== ======== =========
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)
========== ========= ========= ========= =========== ======== =========
SEE NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND PER SHARE DATA)
SIX MONTHS ENDED THREE MONTHS ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
---------------------- ---------------------- ---------
2006 2005 2006 2005 2005
--------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
---------------------- ----------------------
CASH FLOWS - OPERATING ACTIVITIES
LOSS FOR THE PERIOD $ (88,702) $(102,560) $ (43,646) $ (47,240) $(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 75,639 71,153 37,563 36,559 144,852
EFFECT OF INDEXATION AND TRANSLATION ON
CONVERTIBLE DEBENTURES 1,096 (1,427) 1,353 (1,024) (1,031)
OTHER INCOME, NET (591) (2,476) (40) (2,283) (2,383)
CHANGES IN ASSETS AND LIABILITIES:
DECREASE (INCREASE) IN TRADE ACCOUNTS RECEIVABLE (4,850) 8,433 (2,744) 1,288 2,510
DECREASE (INCREASE) IN OTHER RECEIVABLES AND OTHER CURRENT ASSETS (1,856) 2,660 (1,379) 624 1,988
DECREASE (INCREASE) IN INVENTORIES (10,025) 8,611 (5,717) 4,566 1,293
INCREASE (DECREASE) IN TRADE ACCOUNTS PAYABLE 3,583 (160) 2,235 891 3,082
INCREASE (DECREASE) IN OTHER CURRENT LIABILITIES 2,113 (1,465) 2,292 (202) (1,839)
DECREASE IN OTHER LONG-TERM LIABILITIES (1,679) (7,077) (473) (6,510) (5,368)
--------- --------- --------- --------- ---------
(25,272) (24,308) (10,556) (13,331) (59,978)
DECREASE IN LONG-TERM LIABILITY
IN RESPECT OF CUSTOMERS' ADVANCES, NET (814) (232) (399) (126) (760)
--------- --------- --------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES (26,086) (24,540) (10,955) (13,457) (60,738)
--------- --------- --------- --------- ---------
CASH FLOWS - INVESTING ACTIVITIES
DECREASE IN DESIGNATED CASH, SHORT-TERM AND LONG-TERM
INTEREST-BEARING DEPOSITS, NET 28,752 41,974 12,217 5,732 27,266
INVESTMENTS IN PROPERTY AND EQUIPMENT (25,735) (24,105) (12,331) (4,455) (38,878)
INVESTMENT GRANTS RECEIVED 3,298 4,358 2,426 870 7,496
PROCEEDS RELATED TO SALE AND DISPOSAL OF PROPERTY AND EQUIPMENT 591 1,708 40 1,362 2,179
INVESTMENTS IN OTHER ASSETS (3,619) (3,600) (112) (1,100) (3,841)
--------- --------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,287 20,335 2,240 2,409 (5,778)
--------- --------- --------- --------- ---------
CASH FLOWS - FINANCING ACTIVITIES
PROCEEDS FROM ISSUANCE OF CONVERTIBLE DEBENTURE, NET 21,929 -- (274) -- 25,086
PROCEEDS FROM LONG-TERM DEBT 8,590 -- - -- 21,103
REPAYMENT OF CONVERTIBLE DEBENTURES (6,476) -- - -- -
--------- --------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 24,043 -- (274) -- 46,189
========= ========= ========= ========= =========
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,244 (4,205) (8,989) (11,048) (20,327)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 7,337 27,664 17,570 34,507 27,664
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 8,581 $ 23,459 $ 8,581 $ 23,459 $ 7,337
========= ========= ========= ========= =========
NON-CASH ACTIVITIES
INVESTMENTS IN PROPERTY AND EQUIPMENT $ 5,288 $ 12,502 $ 3,387 $ 6,461 $ 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 $ - $ 187 $ $ -- $ 442
========= ========= ========= ========= =========
CONVERSION OF LONG-TERM LIABILITY IN RESPECT OF CUSTOMERS' ADVANCES
TO SHARE CAPITAL $ 5,287 $ 944 $ 1,000 $ 94 $ 1,794
========= ========= ========= ========= =========
CONVERSION OF CONVERTIBLE DEBENTURES INTO SHARES $ 8,841 $ -- $ 5,169 $ -- $ --
========= ========= ========= ========= =========
PROCEEDS RECEIVABLES RELATED PUBLIC OFFERING $ 31,479 $ -- $ 31,479 $ -- $ --
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR INTEREST $ 20,792 $ 15,904 $ 10,246 $ 7,588 $ 32,805
========= ========= ========= ========= =========
CASH PAID DURING THE PERIOD FOR INCOME TAXES $ 56 $ 83 $ 42 $ 79 $ 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 JUNE 30, 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 June 30, 2006 and for the six months and 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 5.
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 JUNE 30, 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 twelve months ended
December 31, 2005 was adjusted from $2.55 to $3.06. No
adjustments were required for the other periods presented.
B. ACCOUNTING STANDARD NO. 22 "FINANCIAL INSTRUMENTS:
DISCLOSURE AND PRESENTATION"
The Company adopted Accounting Standard No. 22 "Financial
Instruments: Disclosure and Presentation" ("Standard No.
22") approved by the Israeli Accounting Standards Board. The
Company issued three 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. The standard does not
require retroactive application to prior periods.
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
$1,300,000 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.
- 6 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 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 six months ended June 30, 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. The Company
is working in various ways to mitigate its financial difficulties
among them are the following:
In March 2006, the board of directors of the Company approved a plan
to ramp up Fab 2 in order to meet customer and product qualification
needs, based on its customer pipeline and reinforced by forecasted
market conditions. According to this plan, the Company will need to
raise approximately $130,000 during 2006, which will increase Fab 2
capacity by approximately 50%. The Company plans to raise this amount
by way of (i) $30,000 public offering (which was raised with the
completion of the TASE offering described in Note 4D) and (ii)
$100,000 investment by Israel Corp. (described below).
As part of the financing efforts for the ramp-up plan, in May 2006,
the Company signed a Memorandum of Understanding ("MOU") with its
banks for the refinancing of the approximately $527,000 of long-term
debt under its facility agreement, according to which: (i) $158,000,
representing 30% of such debt, will be converted to equity for
51,973,684 ordinary shares, at a price per share of $3.04, which is
equal to twice the average closing price of the ordinary shares during
the 10 consecutive trading days prior to signing the MOU; (ii) the
interest rate cash payments 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 no earlier than September 2009. The terms
of the MOU were subject to a commitment of Israel Corporation Ltd.
("Israel Corp.") to invest $100,000 in 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 which is
expected to also include arrangements to compensate the banks, under
certain conditions, for the reduction in the interest on the amount
borrowed from the banks (such compensation may include the issuance of
securities and/or the extension of the exercise period of the banks'
warrants), and revised financial ratios and covenants based on the
Company's updated working plan. In this regard, Israel Corp. has
committed to the banks to invest $100,000 in consideration for
65,789,474 ordinary shares, at a price per share of $1.52, which
equals the average closing price during the 10 consecutive trading
days prior to signing the MOU. Such amount may include amounts that
may be payable by the Company to Israel Corp. in connection with the
agreement for the ordering of equipment described below. Israel
Corp.'s investment is subject to the signing of a definitive
investment agreement, the approvals of the 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.
- 7 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 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 ramp-up plan in a timely manner, the Company
entered into an agreement with Israel Corp. according to which Israel
Corp. will order up to approximately $100,000 worth of equipment for
Fab 2. Under the terms of the agreement: (i) Israel Corp. has the
right to sell to the Company the equipment at cost, plus related
expenses; (ii) the Company has the right to purchase the equipment
from Israel Corp. at cost, plus related expenses, subject to the
Company having raised $100,000; (iii) upon the purchase of the
equipment from Israel Corp., the Company will assume Israel Corp.'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 Israel Corp., Israel Corp. may sell the equipment to a
third party and the Company will pay Israel Corp. the difference
between the cost, plus related expenses, of the purchase of the
equipment by Israel Corp. and the net sale price. This agreement was
approved by the Audit Committee and the Board of Directors of the
Company in May 2006.
The Company is currently examining alternatives for additional funding
sources in order to further ramp-up the equipping of Fab2.
NOTE 2 - INVENTORIES
Inventories consist of the following (*):
June 30, December 31,
--------------------- -------
2006 2005 2005
------- ------- -------
(unaudited)
Raw materials $ 8,220 6,354 $ 6,777
Spare parts and supplies 4,845 3,407 3,738
Work in process 19,956 5,709 11,502
Finished goods 1,380 1,588 2,359
------- ------- -------
$34,401 $17,058 $24,376
======= ======= =======
(*) Net of aggregate write downs to net realizable value of $3,183, $3,149
and $3,259 as of June 30, 2006, June 30, 2005 and December 31, 2005,
respectively.
- 8 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 3 - 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 $161,000 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.
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 4C 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.
In addition, in May 2006, the Company and its Banks entered into an
amendment to the Facility Agreement, according to which (i) repayments
of long-term loans in the amount of approximately $100,000, originally
scheduled to be paid between October 2006 and June 2007, were deferred
to July 2007 and (ii) the date on which the Company was required to
raise an additional approximately $8,000 was deferred from June 30,
2006 to September 30, 2006, such fundraising requirement was satisfied
with the completion of the TASE offering described below in Note 4D.
As part of the financing efforts for the ramp-up plan, in May 2006,
the Company and its Banks signed an MOU as described above in Note 1C.
- 9 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 3 - RECENT DEVELOPMENTS RELATING TO FAB 2 (cont.)
B. FACILITY AGREEMENT (cont.)
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. Under the current terms of the Facility Agreement, if not
amended, the Company does not expect to be in compliance with all of
the financial ratios and covenants under the amended Facility
Agreement commencing the fourth quarter of 2006. However, as of the
approval date of the financial statements, the Company anticipates,
based on discussions currently being held with the Banks, that it will
be in compliance with all of the financial ratios and covenants under
the amended Facility Agreement, which it expects will be amended in
accordance with the MOU described in Note 1C above. 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.
NOTE 4 - OTHER RECENT DEVELOPMENTS
A. CLASS ACTION
In June 2006, the United States Court of Appeals for the Second
Circuit affirmed the August 2004 decision of the United States
District Court for the Southern District of New York to dismiss the
class action suit filed in July 2003 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. The District
Court accepted the motion to dismiss filed on behalf of the defendants
and noted that the Company's status as a foreign private issuer
exempts the Company, its directors and controlling shareholders, from
liability under the proxy rules of Section 14(a) of the Securities
Exchange Act.
- 10 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 4 - OTHER RECENT DEVELOPMENTS (cont.)
B. SHARE OPTION PLANS
(1) OPTIONS GRANTED TO THE CHIEF EXECUTIVE OFFICER ("CEO")
In May 2006, the Company's 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 new options will vest in the same manner as the CEO's
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.
In accordance with provisions of Standard No. 24 the servicing
period toward the proposed grant has started with the approval by
the Board of Directors and Audit Committee. The Company evaluated
the compensation costs based on current information and will
adjust the compensation costs until the date that the
shareholders approve the grant, at which time compensation costs
will be finally determined. The amount for the services already
rendered as of June 30, 2006 was immaterial.
(2) RE-PRICING OF EMPLOYEE OPTIONS
The board of directors approved a plan to offer each of the
Company's current employees the opportunity to exchange their
existing options to purchase ordinary shares for new options with
an exercise price of $1.45, which is the average closing price of
the Company's shares on the Nasdaq during the 90 consecutive
trading days prior to the board of directors' approval. The new
options will be granted based on terms similar to the existing
employee option plan with new vesting periods, starting May 2006.
As of June 30, 2006, options to purchase approximately 8,440,000
ordinary shares held by current employees, with exercise prices
ranging from $1.46 to $25, were outstanding. The Board of
Directors further approved that if the total number of employee
options, including the options to the CEO, during the then
upcoming 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.
- 11 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 4 - 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). No such
adjustment is required following the 2006 public offering described
below in Note 4D below. During the six months ended June 30, 2006,
$15,508 in aggregate principal amount of debentures was converted into
14,098,490 ordinary shares of the Company.
Subject to the terms of 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.
If on the payment date of the principal and interest on the
debentures, there exists an infringement of the 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 5 for the accounting for the rights offering in accordance
with U.S. GAAP.
- 12 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 4 - OTHER RECENT DEVELOPMENTS (cont.)
D. 2006 PUBLIC OFFERING
In June 2006 the Company completed an underwritten public offering of
the Company's securities on the Tel-Aviv Stock Exchange (TASE) in
Israel resulting in gross proceeds of approximately NIS 140,000,000
(approximately $31,000). In the offering, 78,000 Units were sold at a
price per Unit of NIS 1,785 (approximately $0.4). Each Unit consists
of (i) convertible debentures in the face amount of NIS 2,100
(approximately $0.47), (ii) five options each exercisable for three
months ending on September 27, 2006 for NIS 100 principal amount of
convertible debentures at an exercise price equal to 85% of their face
amount, linked to the Israeli Consumer Price Index ("CPI"), (iii) 140
warrants each exercisable for three months ending on September 27,
2006 for one ordinary share of the Company at a price of NIS 6.75
(approximately $0.00151), linked to the CPI and (iv) 70 warrants each
exercisable for three years ending on June 28, 2009 for one ordinary
share of the Company at a price of NIS 7.40 (approximately $0.00166),
linked to the CPI. The convertible debentures are convertible into the
Company's ordinary shares at a conversion rate of one ordinary share
per NIS 8.40 (approximately $0.00189) principal amount of convertible
debentures. The convertible debentures carry a zero coupon with
principal payable at maturity in December 2011, at a premium of 37%
over face value, linked to the CPI. The conversion price is subject to
reduction in certain limited circumstances. In accordance with
Standard No. 22 the proceeds were allocated to each of the Unit's
components based on relative fair values in the first 2 days of
trading. After allocation, each of the components is classified as
either equity or liability based on the criteria prescribed in
Standard No. 22.
In addition, the Company issued 300 such units in consideration for
NIS 526,000 through a private placement to its market maker in
connection with said offering.
The offering was made in Israel to Israeli residents only. The
securities offered were not registered under the Securities Act and
may not be sold in the U.S. or to U.S. persons absent registration or
an applicable exemption.
See Note 5 for the accounting for the public offering in accordance
with U.S. GAAP.
E. 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.
- 13 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 5 - 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 June 30, 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.
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 June 30, 2006 $2,909 was reclassified from current assets to a
long-term asset (as of December 31, 2005 - $31,661, was reclassified
from current assets to a long-term asset).
- 14 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 5 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (cont.)
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 June 30, 2006, an amount of $13,613 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 June
30, 2006 would have resulted in: an increase in other long-term
investments in the amount of $3,011; a decrease in other comprehensive
loss for the six months ended June 30, 2006 in the net amount of
$1,908; an accumulated other comprehensive income component of equity
balance as of June 30, 2006 in the amount of $354; and in a decrease
of $2,627 in property and equipment, net as of June 30, 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 June 30, 2006, an amount of $10,882 was
reclassified from long-term debt to other assets.
F. ISSUANCE 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 June 30, 2006 would have been $1,637. Commencing
with the adoption of Standard No. 22 in January 2006, allocation of
proceeds in a unit, to its components, is based on relative fair
values under Israeli GAAP as well as under US GAAP.
- 15 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 5 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (cont.)
F. ISSUANCE 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 its
debentures (i.e., sale of convertible debentures in 2002 - "2002
debentures", sale of convertible debentures in 2005 "2005 debentures"
and sale of convertible debentures in 2006 "2006 debentures") and
concluded that the conversion feature embedded in the 2005 and 2006
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 $13,763
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.
2006 DEBENTURES:
Under US GAAP, the equity component, in the amount of $4,382,
classified in equity under Israeli GAAP was reclassified to liability.
The conversion feature will be bifurcated from the debt host and
marked to market through earnings. The amount to be allocated to the
bifurcated conversion feature would be determined using the "with and
without" method.
All the above resulted as of June 30, 2006 mainly in an increase in
convertible debentures in the amount of $19,925; an increase in the
shareholder's deficit in the amount of $18,906 and an increase in
other assets in the amount of $1,109. The Company's loss for the
six-month period ended June 30, 2006 would have decreased in the
amount of $1,795.
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 June 30, 2006 and an
increase in the unearned compensation as of such date in the amount of
$818. 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 JUNE 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 5 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (Cont.)
H. Balance Sheets in accordance with U.S. GAAP
AS OF JUNE 30, 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.
REMARK GAAP MENTS GAAP GAAP MENTS GAAP
------ --------- --------- --------- --------- --------- ---------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 8,581 $ -- $ 8,581 $ 7,337 -- $ 7,337
DESIGNATED CASH AND SHORT-TERM INTEREST -
BEARING DEPOSITS B 2,909 (2,909) -- 31,661 (31,661) --
PROCEEDS RECEIVABLES RELATING PUBLIC OFFERING 31,479 -- 31,479 -- --
TRADE ACCOUNTS RECEIVABLE :
RELATED PARTIES 8,538 -- 8,538 5,309 -- 5,309
OTHERS 13,088 -- 13,088 11,467 -- 11,467
OTHER RECEIVABLES 7,131 -- 7,131 9,043 -- 9,043
INVENTORIES 34,401 -- 34,401 24,376 -- 24,376
OTHER CURRENT ASSETS 1,616 -- 1,616 1,048 -- 1,048
--------- --------- --------- --------- --------- ---------
TOTAL CURRENT ASSETS 107,743 (2,909) 104,834 90,241 (31,661) 58,580
--------- --------- --------- --------- --------- ---------
LONG-TERM INVESTMENTS
OTHER LONG-TERM INVESTMENTS C,D -- 16,624 16,624 -- 15,425 15,425
--------- --------- --------- --------- --------- ---------
-- 16,624 16,624 -- 15,425 15,425
--------- --------- --------- --------- --------- ---------
PROPERTY AND EQUIPMENT, NET D,F 460,328 (2,297) 458,031 510,645 (3,291) 507,354
--------- --------- --------- --------- --------- ---------
DESIGNATED CASH AND SHORT-TERM
INTEREST-BEARING DEPOSITS B -- 2,909 2,909 -- 31,661 31,661
--------- --------- --------- --------- --------- ---------
OTHER ASSETS, NET :
TECHNOLOGY 54,508 -- 54,508 61,441 -- 61,441
OTHER E,F 1,371 11,991 13,362 16,359 (196) 16,163
--------- --------- --------- --------- --------- ---------
55,879 11,991 67,870 77,800 (196) 77,604
========= ========= ========= ========= ========= =========
TOTAL ASSETS $ 623,950 $ 26,318 $ 650,268 $ 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 DEBENTURE F 6,204 420 6,624 6,453 (640) 5,813
TRADE ACCOUNTS PAYABLE 50,410 -- 50,410 59,741 -- 59,741
OTHER CURRENT LIABILITIES 11,517 -- 11,517 8,972 -- 8,972
--------- --------- --------- --------- --------- ---------
TOTAL CURRENT LIABILITIES 68,131 420 68,551 96,269 (640) 95,629
LONG-TERM DEBT E 515,811 10,882 526,693 497,000 -- 497,000
CONVERTIBLE DEBENTURES F 53,272 19,925 73,197 19,358 23,574 42,932
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMERS' ADVANCES 52,528 -- 52,528 59,621 -- 59,621
OTHER LONG-TERM LIABILITIES C 10,104 13,613 23,717 11,012 13,658 24,670
--------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES 699,846 44,840 744,686 683,260 36,592 719,852
--------- --------- --------- --------- --------- ---------
CONVERTIBLE DEBENTURES F -- -- -- 25,493 (25,493) --
SHAREHOLDERS' EQUITY
ORDINARY SHARES, NIS 1 PAR VALUE - AUTHORIZED
500,000,000 SHARES; ISSUED
85,768,622 AND 68,232,056 SHARES 20,366 -- 20,366 16,548 -- 16,548
ADDITIONAL PAID-IN CAPITAL F 540,885 (875) 540,010 522,237 2,363 524,600
EQUITY COMPONENT OF CONVERTIBLE DEBENTURES
AND CUMULATIVE STOCK BASED COMPENSATION F,G 20,381 (19,008) 1,373 (26) -- (26)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) D -- 354 354 -- (1,554) (1,554)
ACCUMULATED DEFICIT D,F,G (648,456) 1,007 (647,449) (559,754) 30 (559,724)
--------- --------- --------- --------- --------- ---------
(66,824) (18,522) (85,346) (20,995) 839 (20,156)
TREASURY STOCK, AT COST - 1,300,000 SHARES (9,072) - (9,072) (9,072) -- (9,072)
--------- --------- --------- --------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY (75,896) (18,522) (94,418) (30,067) 839 (29,228)
========= ========= ========= ========= ========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 623,950 $ 26,318 $ 650,268 $ 678,686 $ 11,938 $ 690,624
========= ========= ========= ========= ========= =========
- 17 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 5 - 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 six months
period ended June 30, 2006 in the amount of $1,007 and an increase in
the loss for the three months period ended June 30, 2006 in the amount
of $3,854. Giving effect to all the above, the loss for the six-month
and three-month periods ended June 30, 2006 would be $87,725 and
$47,500 No material effect on the result of operation for the
six-month and three-month periods ended June 30, 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:
Six months ended Three months ended
June 30, June 30,
------------------------- ------------------------
2006 2005 2006 2005
-------- --------- -------- --------
(unaudited) (unaudited)
Loss for the period, according
to U.S. GAAP (see I above) $(87,725) $(102,560) $(47,500) $(47,240)
Other comprehensive loss:
Reclassification of unrealized
losses on derivatives 664 664 332 332
Unrealized gains on
Derivatives 1,245 1,985 518 (852)
-------- --------- -------- --------
Net comprehensive loss
for the period (85,816) $ (99,911) (46,650) $(47,760)
======== ========= ======== ========
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 six-month and the three-month periods ended June 30, 2006 would be
$1.16 and $0.60, respectively (during the corresponding periods -
$1.56 and $0.71, 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 six-month and three-month periods ended
June 30, 2006 and 2005.
- 18 -
EXHIBIT 99.3
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 JUNE 30,
2006 AND FOR THE SIX MONTHS THEN ENDED AND RELATED NOTES INCLUDED IN THIS REPORT
AND (2) OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED IN OUR
ANNUAL REPORT ON FORM 20-F FOR THE YEAR ENDED DECEMBER 31, 2005 AND THE OTHER
INFORMATION CONTAINED IN SUCH ANNUAL REPORT, PARTICULARLY THE INFORMATION UNDER
THE CAPTION "OPERATING AND FINANCIAL REVIEW AND PROSPECTS". 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 5 TO OUR UNAUDITED
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 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.
SIX MONTHS ENDED
JUNE 30,
-------------------
2006 2005
----- -----
STATEMENT OF OPERATIONS DATA:
Total revenues 100.0% 100.0%
Cost of total revenues(1) 157.2 243.1
----- -----
Gross loss (57.2) (143.1)
Research and development expenses, net 8.6 17.2
Marketing, general and administrative
expenses 13.4 17.4
----- -----
Operating loss (79.2) (177.7)
FINANCING EXPENSE, NET (31.8) (30.8)
Other income, net 0.7 4.9
----- -----
Loss (110.3)% (203.6)%
====== ======
SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005
REVENUES. Revenues for the six months ended June 30, 2006 increased by
59.7% to $80.4 million from $50.4 million for the six months ended June 30,
2005. This $30.0 million increase was mainly attributable to higher volume of
wafer shipments, offset by $8 million recorded for the six months ended June 30,
2005 from a previously announced technology-related agreement.
COST OF TOTAL REVENUES. Cost of total revenues for the six months ended
June 30, 2006 amounted to $126.4 million, compared with $122.5 million for the
six months ended June 30, 2005. This 3.2% modest increase in cost of revenues,
despite the 59.7% increase in sales, was achieved mainly due to previously
announced cost reductions and efficiency measures taken by the Company.
GROSS LOSS. Gross loss for the six months ended June 30, 2006 was $46.0
million compared to a gross loss of $72.1 million for the six months ended June
30, 2005. The decrease in gross loss was mainly attributable to the increase in
revenues and previously announced cost reductions and efficiency measures taken
by the Company.
RESEARCH AND DEVELOPMENT. Research and development expenses for the six
months ended June 30, 2006 decreased to $6.9 million from $8.6 million for the
six months ended June 30, 2005. The decrease was mainly attributable to
previously announced cost reductions and efficiency measures taken by the
Company. Research and development expenses are reflected net of participation
grants received from the Israeli government.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses for the six months ended June 30, 2006 increased to
$10.8 million from $8.8 million for the six months ended June 30, 2005,
primarily due to increased operational activity.
- ----------
(1) Management's review of possible impairment charges for the periods
presented, as required by Standard 15 of the Israeli Accounting Standards Board,
was performed based on management's business plan, approved by the board of
directors of the Company. The business plan is based, among other things, on
future completion of the construction and equipping of Fab 2 to reach full
capacity. Application of Standard 15 resulted in no impairment charges for the
periods presented.
OPERATING LOSS. Operating loss for the six months ended June 30, 2006 was
$63.7 million, compared to $89.5 million for the six months ended June 30, 2005.
The decrease in the operating loss is attributable mainly to the decrease in the
gross loss described above.
FINANCING EXPENSES, NET. Financing expenses, net for the six months ended
June 30, 2006 were $25.6 million compared to financing expenses, net of $15.5
million for the six months ended June 30, 2005. This increase is mainly due to
an increase of $5.0 million in connection with our Fab 2 credit facility
agreement with our banks attributable mainly to (i) an increase in the LIBOR
rate (to which our loans with our banks are linked) from an average of
approximately 3% per annum for the six months ended June 30, 2005 to an average
of approximately 5% per annum for the six months ended June 30, 2006 and (ii) an
increase in our outstanding loans from an average of $497 million to an average
of approximately $527 million.
OTHER INCOME, NET. Other income, net, for the six months ended June 30,
2006 was $0.6 million compared to $2.5 million for the six months ended June 30,
2005.
LOSS. Our loss for the six months ended June 30, 2006 was $88.7 million,
compared to $102.6 million for the six months ended June 30, 2005. This decrease
is primarily attributable to the decrease in the operating loss of $25.8 million
described above offset by the increase in financing expenses of $10.1 million
described above.
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 six months ended June 30, 2006, the exchange rate of the
dollar in relation to the NIS decreased by 3.5%, and the Israeli Consumer Price
Index, or CPI, increased by 1.5% (during the six months ended June 30, 2005
there was an increase of 6.2% in the exchange rate of the dollar in relation to
the NIS and a increase of 0.4% 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 June 30, 2006, we had an aggregate of $11.5 million in cash, cash
equivalents, and short-term interest-bearing deposits, of which $2.9 million was
contractually restricted for Fab 2 use only. This compares to $40.4 million we
had as of June 30, 2005 in cash, cash equivalents, and short-term
interest-bearing deposits, of which $5.5 million was contractually restricted
for Fab 2 use only and $11.4 million was contractually restricted for exclusive
use in the Siliconix project.
During the six months ended June 30, 2006, we received $8.6 million from
bank loans, $21.9 million in proceeds from the issuance of convertible
debentures, net, $3.3 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 $26.1
million), our investments made during the six months ended June 30, 2006, which
aggregated to $29.3 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 June 30, 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 $10.9 million deferred financing charges). As of such date,
we had total convertible debentures with par value of $90.2 million, of which
$6.2 million are presented as current maturities and $19.8 million of the
proceeds were allocated and are presented as equity component of the convertible
debentures as part of the shareholders' equity.