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FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the month of February No. 2 2007
TOWER SEMICONDUCTOR LTD.
(Translation of registrant's name into English)
RAMAT GAVRIEL INDUSTRIAL PARK
P.O. BOX 619, MIGDAL HAEMEK, ISRAEL 23105
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [_]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [_] No [X]
On February 7, 2007, the Registrant announced its financial results for the
fourth quarter and fiscal year ended December 31, 2006. Attached hereto are the
following exhibits:
Exhibit 99.1 Press release dated February 7, 2007
Exhibit 99.2 Registrant's consolidated financial statements as of
December 31, 2006 and 2005 and for the years ended December
31, 2006, 2005 and 2004, and the report thereon dated
February 7, 2007 of Brightman Almagor & Co.
Exhibit 99.3 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Exhibit 99.4 Consent of Independent Registered Accounting Firm
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. 333-140174 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: February 8, 2007 By: /s/ Nati Somekh Gilboa
--------------------------
Nati Somekh Gilboa
Corporate Secretary
EXHIBIT 99.1
TOWER SEMICONDUCTOR 2006 SALES DOUBLED YEAR-OVER-YEAR
MOVED TO POSITIVE CASH FLOW FROM OPERATIONS IN THE FOURTH QUARTER OF 2006;
REPORTED CONSECUTIVE RECORD REVENUE AND EBITDA GROWTH IN EACH QUARTER OF 2006
MIGDAL HAEMEK, Israel - February 7, 2007 - Tower Semiconductor Ltd. (Nasdaq:
TSEM, TASE: TSEM), a pure-play independent specialty foundry, today announced
fourth quarter and year-end 2006 results.
FINANCIAL HIGHLIGHTS:
o Reported revenues of $187.4 million in 2006, a 2X growth compared with
2005 (excluding $8 million income in 2005 from a technology-related
agreement)
o Reported fourth consecutive record revenue quarter at $55.5 million, a
78 percent increase year-over-year
o Recorded positive cash flow from operations in the fourth quarter of
2006, for the first time since Fab2 was established
o Achieved positive EBITDA in 2006 compared to a negative EBITDA in
2005; the fourth quarter of 2006 represents the fifth consecutive
quarter of positive EBITDA and EBITDA growth
o Reduced long-term debt by $158 million during the second half of 2006,
with shareholders equity turning positive
For the fourth quarter of 2006, the Company reported total revenues of $55.5
million, representing a 78 percent increase as compared to $31.1 million
reported in the fourth quarter of 2005, and an increase of 8 percent over the
$51.5 million reported in the third quarter of 2006. Net loss for the fourth
quarter was $38 million, or $0.40 per share, which included depreciation and
amortization expenses of $41 million, as compared to a loss for the fourth
quarter of 2005 of $45 million, or $0.68 per share, including $37 million of
depreciation and amortization expenses.
For the full year 2006, revenues doubled to $187.4 million over 2005 revenues of
$94 million (excluding $8 million income in 2005 from a technology-related
agreement). EBITDA was positive in 2006, and increased in every quarter during
the year, compared with negative EBITDA for the year 2005. Net loss for the year
was $87 million, or $1.05 per share, which included a one-time gain of $80.1
million, resulting from the debt restructuring with our banks, and depreciation
and amortization expenses of $155 million. 2005 loss was $203 million, or $3.06
per share, including $145 million of depreciation and amortization expenses.
Shareholder equity at the end of 2006 was $133 million compared to negative $30
million at the end of 2005.
"2006 represented a year of significant achievements and progress for Tower," said Russell Ellwanger, chief executive officer of Tower Semiconductor. "We doubled our yearly sales to $187 million and of the $93 million increase in sales, we improved our EBITDA by more than $60 million (excluding the effect of the above mentioned technology-related agreement in 2005). Additionally, we achieved our stated target of positive cash flow from operations in the fourth quarter. We enter 2007 in a stronger position, having tripled our base of large customers during 2006, having maintained greater than 90% utilization in both Fabs and continuing in our plan to ramp Fab2 to 24,000 wafer starts per month. This is demonstrated by our Q4 revenue growth over Q3, against a worldwide foundry revenue decrease. Driven by seasonality, this trend continues with a Q1 2007 worldwide foundry guided revenue decrease of up to 14%. However, we guide revenues for the first quarter of 2007 to be between $53 and $57 million, the same range as Q4 2006, which is an increase of 48% to 59% over Q1 2006. We expect that several multi-year large contracts will either begin to materialize into revenue from new products or enable substantial increases in revenue from existing customers in the second half of 2007, side by side to our capacity growth. We are confident that we will build upon 2006 and anticipate delivering further significant top line and bottom line growth for 2007". FOURTH QUARTER AND FISCAL YEAR 2006 FINANCIAL RESULTS CONFERENCE CALL AND WEB CAST: Tower will host a conference call to discuss these results on Wednesday, February 7, 2007, at 11:00 a.m. Eastern Standard Time / 6:00 p.m. Israel time. To participate, please call: 1-800-994-4498 (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 http://www.earnings.com and at www.towersemi.com and will be available thereafter on both Web sites for replay for 90 days, starting at 2:00 p.m. Eastern Standard 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 wafer foundry established in 1993. The company manufactures integrated circuits with geometries ranging from 1.0 to 0.13-micron; it also provides complementary technical services and design support. In addition to digital CMOS process technology, Tower offers advanced non-volatile memory solutions, mixed-signal & RF-CMOS, and CMOS image-sensor technologies. To provide world-class customer service, the company maintains two manufacturing facilities, each with standard and specialized process technology processes: Fab 1 ranging from 1.0 to 0.35 and Fab 2 featuring 0.18 and 0.13-micron. Tower's web site is located at http://www.towersemi.com.
SAFE HARBOR
This press release includes forward-looking statements, which are subject to
risks and uncertainties. Actual results may vary from those projected or implied
by such forward-looking statements. Potential risks and uncertainties include,
without limitation, risks and uncertainties associated with: (i) having
sufficient funds to operate the company in the short-term and the funding needs
for its ramp-up plan, (ii) the completion of the equipment installation,
technology transfer and ramp-up of production in Fab 2 and raising the funds
therefor, (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 defray the high level of fixed costs associated with
operating a foundry and reduce our losses, (v) our ability to satisfy the
covenants stipulated in our amended facility agreement, (vi) our ability to
capitalize on increases in demand for foundry services, (vii) meeting the
conditions to receive Israeli government grants and tax benefits approved for
Fab 2 and obtaining the approval of the Israeli Investment Center for a new
expansion program, (viii) attracting additional customers, (ix) not receiving
orders from our wafer partners, customers, (x) failing to maintain and develop
our technology processes and services, (xi) competing effectively, (xii) our
large amount of debt and our ability to repay our short-term and long-term debt
on a timely basis, (xiii) achieving acceptable device yields, product
performance and delivery times, (xiv) the timely development, internal
qualification and customer acceptance of new processes and products and (xv)
business interruption due to terror attacks, earthquakes, other acts of God and
the security situation in Israel.
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.
Contact:
Tower Semiconductor
Ilanit Vudinsky, +972 4 650 6434
ilanitvu@towersemi.com
or:
Shelton Group
Jim Mathias, , (972) 239-5119 ext. 115
jmathias@sheltongroup.com
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31,
-------------------------
2006 2005
--------- ---------
A S S E T S
CURRENT ASSETS
CASH, CASH EQUIVALENTS AND DEPOSITS (IN 2005
INCLUDED $31,661 DESIGNATED CASH AND DEPOSITS) $ 40,940 $ 38,998
TRADE ACCOUNTS RECEIVABLE 31,498 16,776
OTHER RECEIVABLES 5,425 9,043
INVENTORIES 41,101 24,376
OTHER CURRENT ASSETS 1,473 1,048
--------- ---------
TOTAL CURRENT ASSETS 120,437 90,241
--------- ---------
PROPERTY AND EQUIPMENT, NET 532,954 510,645
--------- ---------
INTANGIBLE ASSETS, NET 44,981 61,441
--------- ---------
OTHER ASSETS, NET 1,346 16,359
========= =========
TOTAL ASSETS $ 699,718 $ 678,686
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITIES OF LONG-TERM DEBT $ - $ 21,103
Current maturities of convertible debentures 6,632 6,453
TRADE ACCOUNTS PAYABLE 55,128 59,741
OTHER CURRENT LIABILITIES 22,096 8,972
--------- ---------
TOTAL CURRENT LIABILITIES 83,856 96,269
LONG-TERM DEBT FROM BANKS 356,947 497,000
CONVERTIBLE DEBENTURES 62,175 19,358
LONG-TERM CUSTOMERS' ADVANCES 46,042 59,621
OTHER LONG-TERM LIABILITIES 17,708 11,012
--------- ---------
TOTAL LIABILITIES 566,728 683,260
--------- ---------
CONVERTIBLE DEBENTURES -- 25,493
--------- ---------
SHAREHOLDERS' EQUITY (DEFICIT) 132,990 (30,067)
========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 699,718 $ 678,686
========= =========
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND PER SHARE DATA)
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
2006 2005 2006 2005
--------- --------- --------- ---------
REVENUES
SALES 187,438 93,991 55,505 31,063
REVENUES RELATED TO A JOINT DEVELOPMENT AGREEMENT - 8,000 - -
--------- --------- --------- ---------
187,438 101,991 55,505 31,063
COST OF SALES 267,390 238,358 72,724 58,760
--------- --------- --------- ---------
GROSS LOSS (79,952) (136,367) (17,219) (27,697)
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES
RESEARCH AND DEVELOPMENT 14,984 16,029 3,877 3,180
MARKETING, GENERAL AND ADMINISTRATIVE 24,512 17,418 6,406 3,937
--------- --------- --------- ---------
39,496 33,447 10,283 7,117
========= ========= ========= =========
OPERATING LOSS (119,448) (169,814) (27,502) (34,814)
FINANCING EXPENSE, NET (48,148) (35,651) (10,191) (10,223)
GAIN ON DEBT RESTRUCTURING 80,071 - - -
OTHER INCOME (EXPENSE), NET 597 2,383 - (135)
--------- --------- --------- ---------
LOSS FOR THE PERIOD $ (86,928) $(203,082) $ (37,693) (45,172)
========= ========= ========= =========
BASIC LOSS PER ORDINARY SHARE
LOSS PER SHARE (*) $ (1.05) $ (3.06) $ (0.40) (0.68)
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF ORDINARY
SHARES OUTSTANDING - IN THOUSANDS 82,581 66,371 94,373 66,905
========= ========= ========= =========
(*) BASIC LOSS PER SHARE IN ACCORDANCE WITH U.S. GAAP FOR THE YEAR AND THREE
MONTHS PERIODS ENDED DECEMBER 31, 2006 ARE $2.03 AND $0.38, RESPECTIVELY
AND ARE THE SAME AS THE ISR. GAAP DATA FOR THE YEAR AND THREE MONTHS
PERIODS ENDED DECEMBER 31, 2005.
EXHIBIT 99.2
TOWER SEMICONDUCTOR LTD.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2006
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
BALANCE SHEETS F-2
STATEMENTS OF OPERATIONS F-3
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F-4
STATEMENTS OF CASH FLOWS F-5
NOTES TO FINANCIAL STATEMENTS F-6-F-75
Brightman Almagor
1 Azrieli Center
Tel Aviv 67021
P.O.B. 16593, Tel Aviv 61164
Israel
Tel: +972 (3) 608 5555
Fax: +972 (3) 609 4022
info@deloitte.co.il
www.deloitte.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO BOARD OF DIRECTORS AND THE SHAREHOLDERS OF
TOWER SEMICONDUCTOR LTD.
We have audited the accompanying consolidated balance sheets of Tower
Semiconductor Ltd. and subsidiary ("the Company") as of December 31, 2006 and
2005, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2006. These financial statements are the responsibility of
the Company's Board of Directors and management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and subsidiary as of December 31, 2006 and 2005, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2006, in accordance with accounting principles
generally accepted in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The effect of the application of the latter on the financial position,
results of operations and cash flows as of the dates and for the years presented
is summarized in Note 19.
/s/ BRIGHTMAN ALMAGOR & CO.
BRIGHTMAN ALMAGOR & CO.
CERTIFIED PUBLIC ACCOUNTANTS
A MEMBER FIRM OF DELOITTE TOUCHE TOHMATSU
Tel Aviv, Israel
February 7, 2007
F - 1
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data and per share data)
AS OF DECEMBER 31,
--------------------------
NOTE 2006 2005
--------- --------- ---------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 39,710 $ 7,337
SHORT-TERM INTEREST-BEARING DEPOSITS 1,230 -
DESIGNATED CASH AND SHORT-TERM INTEREST-BEARING DEPOSITS - 31,661
TRADE ACCOUNTS RECEIVABLE: 13
RELATED PARTIES 13,625 5,309
OTHERS 17,873 11,467
OTHER RECEIVABLES 3 5,425 9,043
INVENTORIES 4 41,101 24,376
OTHER CURRENT ASSETS 1,473 1,048
--------- ---------
TOTAL CURRENT ASSETS 120,437 90,241
--------- ---------
PROPERTY AND EQUIPMENT, NET 5 532,954 510,645
--------- ---------
INTANGIBLE ASSETS, NET 6 44,981 61,441
--------- ---------
OTHER ASSETS , NET 1,346 16,359
========= =========
TOTAL ASSETS $ 699,718 $ 678,686
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITIES OF LONG-TERM DEBT 8 $ - $ 21,103
CURRENT MATURITIES OF CONVERTIBLE DEBENTURES 9 6,632 6,453
TRADE ACCOUNTS PAYABLE 55,128 59,741
OTHER CURRENT LIABILITIES 7 22,096 8,972
--------- ---------
TOTAL CURRENT LIABILITIES 83,856 96,269
LONG-TERM DEBT FROM BANKS 8 356,947 497,000
CONVERTIBLE DEBENTURES 9 62,175 19,358
LONG-TERM CUSTOMERS' ADVANCES 11A 46,042 59,621
OTHER LONG-TERM LIABILITIES 10 17,708 11,012
--------- ---------
TOTAL LIABILITIES 566,728 683,260
--------- ---------
CONVERTIBLE DEBENTURES 9 - 25,493
--------- ---------
SHAREHOLDERS' EQUITY (DEFICIT)
ORDINARY SHARES, NIS 1.00 PAR VALUE - AUTHORIZED
800,000,000 AND 500,000,000 SHARES, RESPECTIVELY;
ISSUED 102,052,767 AND 68,232,056 SHARES, RESPECTIVELY 11A, 12 24,187 16,548
ADDITIONAL PAID-IN CAPITAL 11A, 12 564,580 522,237
CAPITAL NOTES 12C 176,401 -
EQUITY COMPONENT OF CONVERTIBLE DEBENTURES AND CUMULATIVE
STOCK BASED COMPENSATION 9 23,576 (26)
ACCUMULATED DEFICIT (646,682) (559,754)
--------- ---------
142,062 (20,995)
TREASURY STOCK, AT COST - 1,300,000 SHARES 12D (9,072) (9,072)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 132,990 (30,067)
========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 699,718 $ 678,686
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 2
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data and per share data)
YEAR ENDED DECEMBER 31,
--------------------------------------------
Note 2006 2005 2004
--------- --------- --------- ---------
REVENUES 13
SALES $ 187,438 $ 93,991 $ 124,111
REVENUES RELATED TO A JOINT DEVELOPMENT AGREEMENT 11B(2) - 8,000 1,944
--------- --------- ---------
187,438 101,991 126,055
COST OF SALES 267,390 238,358 228,410
--------- --------- ---------
GROSS LOSS (79,952) (136,367) (102,355)
--------- --------- ---------
OPERATING COSTS AND EXPENSES
RESEARCH AND DEVELOPMENT 14,984 16,029 17,053
MARKETING, GENERAL AND ADMINISTRATIVE 24,512 17,418 21,297
--------- --------- ---------
39,496 33,447 38,350
========= ========= =========
OPERATING LOSS (119,448) (169,814) (140,705)
FINANCING EXPENSE, NET 14 (48,148) (35,651) (29,745)
GAIN ON DEBT RESTRUCTURING 11A(6) 80,071 - -
OTHER INCOME, NET 15 597 2,383 32,682
--------- --------- ---------
LOSS FOR THE YEAR $ (86,928) $(203,082) $(137,768)
========= ========= =========
BASIC LOSS PER ORDINARY SHARE
LOSS PER SHARE $ (1.05) $ (3.06) $ (2.13)
========= ========= =========
WEIGHTED AVERAGE NUMBER OF ORDINARY
SHARES OUTSTANDING - IN THOUSANDS 82,581 66,371 64,717
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 3
TOWER SEMICONDUCTOR LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(dollars in thousands, except share data and per share data)
EQUITY
COMPONENT
OF
CONVERTIBLE
PROCEEDS DEBENTURES
ON AND
ORDINARY SHARES ADDITIONAL ACCOUNT OF CUMULATIVE
--------------------------- PAID-IN SHARE CAPITAL STOCK BASED ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL CAPITAL NOTES COMPENSATION DEFICIT STOCK TOTAL
----------- ----------- ----------- -------- -------- -------- ------------ ---------- -----------
BALANCE - JANUARY 1, 2004 52,996,097 $ 13,150 $ 427,881 $ 16,428 $ - $ (26) $ (218,904) (9,072) $ 229,457
ISSUANCE OF SHARES 2,463,949 553 16,414 (16,428) 539
ISSUANCE OF SHARES, NET OF RELATED COSTS -
PUBLIC OFFERING 11,444,500 2,550 72,536 75,086
EXERCISE OF SHARE OPTIONS 95,250 21 645 666
LOSS FOR THE YEAR (137,768) (137,768)
----------- ----------- ----------- -------- -------- -------- ------------ ---------- -----------
BALANCE - DECEMBER 31, 2004 66,999,796 $ 16,274 $ 517,476 $ - $ - $ (26) $ (356,672) $ (9,072) $ 167,980
ISSUANCE OF SHARES 1,232,260 274 1,520 1,794
STOCK-BASED COMPENSATION RELATED TO THE
FACILITY AGREEMENT WITH THE BANKS, NOTE 12B(5) 2,793 2,793
STOCK-BASED COMPENSATION RELATED TO RIGHTS OFFERED
TO EMPLOYEES, NOTE 12I 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)
ISSUANCE OF SHARES 16,729,145 3,860 21,235 25,095
EQUITY COMPONENT OF CONVERTIBLE DEBENTURES 27,997 27,997
CONVERSION OF CONVERTIBLE DEBENTURES TO SHARES 16,734,316 3,696 14,681 (7,758) 10,619
ISSUANCE OF WARRANTS 1,803 1,803
EMPLOYEE STOCK-BASED COMPENSATION 3,363 3,363
EXERCISE OF OPTIONS 7,250 2 9 11
EXERCISE OF WARRANTS 350,000 81 469 550
STOCK-BASED COMPENSATION RELATED TO
THE FACILITY AGREEMENT WITH THE BANKS 4,146 4,146
CAPITAL NOTES 176,401 176,401
LOSS FOR THE YEAR (86,928) (86,928)
----------- ----------- ----------- -------- -------- -------- ------------ ---------- -----------
BALANCE - DECEMBER 31, 2006 102,052,767 $ 24,187 $ 564,580 $ - $176,401 $ 23,576 $ (646,682) $ (9,072) $ 132,990
=========== =========== =========== ======== ======== ======== ============ ========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 4
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, except share data and per share data)
YEAR ENDED DECEMBER 31,
------------------------------------------
2006 2005 2004
--------- --------- ---------
CASH FLOWS - OPERATING ACTIVITIES
LOSS FOR THE YEAR $ (86,928) $(203,082) $(137,768)
Adjustments to reconcile loss for the year
TO NET CASH USED IN OPERATING ACTIVITIES:
INCOME AND EXPENSE ITEMS NOT INVOLVING CASH FLOWS:
DEPRECIATION AND AMORTIZATION 154,794 144,852 121,067
EFFECT OF INDEXATION AND TRANSLATION ON CONVERTIBLE DEBENTURES 2,569 (1,031) 676
OTHER INCOME, NET (597) (2,383) (32,682)
CHANGES IN ASSETS AND LIABILITIES:
DECREASE (INCREASE) IN TRADE ACCOUNTS RECEIVABLE (14,722) 2,510 (7,655)
DECREASE (INCREASE) IN OTHER RECEIVABLES AND OTHER CURRENT ASSETS (2,662) 1,988 (413)
DECREASE (INCREASE) IN INVENTORIES (16,725) 1,293 (6,287)
INCREASE (DECREASE) IN TRADE ACCOUNTS PAYABLE (2,073) 3,082 404
GAIN ON DEBT RESTRUCTURING (80,071) - -
INCREASE (DECREASE) IN OTHER CURRENT LIABILITIES 6,551 (1,839) (970)
INCREASE (DECREASE) IN OTHER LONG-TERM LIABILITIES (3,285) (5,368) 9,344
--------- --------- ---------
(43,149) (59,978) (54,284)
INCREASE (DECREASE) IN LONG-TERM CUSTOMERS' ADVANCES, NET (2,306) (760) 19,384
--------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES (45,455) (60,738) (34,900)
--------- --------- ---------
CASH FLOWS - INVESTING ACTIVITIES
DECREASE (INCREASE) IN DESIGNATED CASH, SHORT-TERM AND LONG-TERM
INTEREST-BEARING DEPOSITS, NET 31,661 27,266 (10,037)
INVESTMENTS IN PROPERTY AND EQUIPMENT (145,165) (38,878) (154,975)
INVESTMENT GRANTS RECEIVED 5,219 7,496 32,636
PROCEEDS RELATED TO SALE AND DISPOSAL OF PROPERTY AND EQUIPMENT 600 2,179 2,626
INVESTMENTS IN OTHER ASSETS (5,074) (3,841) (702)
INCREASE IN SHORT-TERM INTEREST-BEARING DEPOSITS (1,230) - -
PROCEEDS FROM SALE OF LONG-TERM INVESTMENT - - 38,677
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (113,989) (5,778) (91,775)
--------- --------- ---------
CASH FLOWS - FINANCING ACTIVITIES
PROCEEDS FROM ISSUANCE OF CONVERTIBLE DEBENTURES, NET 58,766 25,086 -
PROCEEDS FROM LONG-TERM DEBT 18,295 21,103 66,000
PROCEEDS FROM ISSUANCE OF ORDINARY SHARES, NET 17,483 - 75,225
PROCEEDS ON ACCOUNT OF A WARRANT 550 - -
PROCEEDS FROM ISSUANCE OF WARRANTS 3,190 - -
PROCEEDS ON ACCOUNT OF SHARE CAPITAL 100,000 - -
REPAYMENT OF CONVERTIBLE DEBEBNTURE (6,476) - -
PROCEEDS FROM EXERCISE OF SHARE OPTIONS 9 666
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 191,817 46,189 141,891
========= ========= =========
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 32,373 (20,327) 15,216
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 7,337 27,664 12,448
--------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 39,710 $ 7,337 $ 27,664
========= ========= =========
NON-CASH ACTIVITIES
INVESTMENTS IN PROPERTY AND EQUIPMENT $ 39,913 $ 12,999 $ 47,675
========= ========= =========
STOCK-BASED COMPENSATION RELATED TO
THE FACILITY AGREEMENT WITH THE BANKS $ 4,146 $ 2,793 $ -
========= ========= =========
STOCK-BASED COMPENSATION RELATED TO RIGHTS OFFERED
TO EMPLOYEES, NOTE 12I $ - $ 448 $ -
========= ========= =========
INVESTMENTS IN OTHER ASSETS $ 433 $ 442 $ -
========= ========= =========
CONVERSION OF LONG-TERM CUSTOMERS' ADVANCES
TO SHARE CAPITAL $ 7,621 $ 1,794 $ 539
========= ========= =========
CONVERSION OF CONVERTIBLE DEBENTURES TO SHARES CAPITAL $ 10,619 $ - $ -
========= ========= =========
CONVERSION OF LONG TERM DEBT TO CAPITAL NOTES $ 76,401 $ - $ -
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR INTEREST $ 35,008 $ 32,805 $ 25,205
========= ========= =========
CASH PAID DURING THE YEAR FOR INCOME TAXES $ 134 $ 86 $ 130
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 5
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 1 - DESCRIPTION OF BUSINESS AND GENERAL
A. DESCRIPTION OF BUSINESS
Tower Semiconductor Ltd. ("the Company"), incorporated in Israel,
commenced operations in 1993. The Company is an independent wafer
foundry dedicated to the manufacture of semiconductor integrated
circuits on silicon wafers, strategically focused on complementary
metal oxide semiconductor (CMOS) image sensor, embedded non-volatile
memory, mixed signal and radio frequency CMOS (RFCMOS) technologies.
The Company manufactures integrated circuits in geometries ranging
between 1.0 and 0.35 microns at its 150-millimeter fabrication
facility ("Fab 1"), and in geometries ranging between 0.18 and 0.13
microns at its 200-millimeter fabrication facility ("Fab 2"). As a
foundry, the Company manufactures wafers using its advanced
technological capabilities and the proprietary integrated circuit
designs of its customers.
The industry in which the Company operates is characterized by wide
fluctuations in supply and demand. Such industry is also characterized
by the complexity and sensitivity of the manufacturing process, by
high levels of fixed costs, and by the need for constant improvements
in production technology.
The Company's Ordinary Shares are traded on the NASDAQ Global Market
and on the Tel-Aviv Stock Exchange.
B. ESTABLISHMENT AND OPERATIONS OF THE COMPANY'S SECOND FABRICATION
FACILITY (FAB 2)
In 2001, the Company's Board of Directors approved the establishment
of the Company's second wafer fabrication facility in Israel ("Fab
2"). In Fab 2, the Company manufactures semiconductor integrated
circuits on silicon wafers in geometries of 0.18 micron and below on
200-millimeter wafers. In connection with the establishment, equipping
and financing of Fab 2, the Company has entered into several related
agreements and other arrangements and since 2001 has completed public
and private financing deals, see Note 11A.
The Fab 2 project is a complex undertaking, which entails substantial
risks and uncertainties. For further details concerning the Fab 2
project and related agreements, some of which were amended several
times, see Note 11A.
F - 6
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 1 - DESCRIPTION OF BUSINESS AND GENERAL (cont.)
C. FINANCING OF THE COMPANY'S ONGOING OPERATIONS
In recent years, the Company has experienced significant recurring
losses, recurring negative cash flows from operating activities and an
increasing accumulated deficit. The Company is working in various ways
to mitigate its financial difficulties and among them are the
following:
During the second half of 2005 and during 2006, the Company increased
its customer base, mainly in Fab 2, modified its organizational
structure to better address its customers and its market positioning,
improved its sales and its EBITDA, reduced its losses, increased its
capacity level and utilization rates, raised funds totaling
approximately $209,000 in gross proceeds (see Notes 12C(2); 12I; 12J;
and 12K) and restructured its bank debt (see below).
In March 2006, the board of directors of the Company approved a plan
to ramp-up Fab 2 in order to meet customer needs and product
qualification needs, based on its customer pipeline and reinforced by
forecasted market conditions.
As part of the financing efforts for the ramp-up plan, in September
2006, the Company closed a definitive amendment (the "September 2006
amendment") to its facility agreement (the "Facility Agreement") with
two leading Israeli banks ("Banks"), for the restructuring of
approximately $527,000 in debt. Pursuant to the September 2006
amendment, among other things: (i) $158,000, representing
approximately 30% of the outstanding debt under the Facility
Agreement, was converted into capital notes of the Company; (ii) the
interest rate applicable for the quarterly actual interest payments on
the loans was decreased by 1.4%, from LIBOR plus 2.5% per annum to
LIBOR plus 1.1% per annum, effective from May 17, 2006; and (iii) the
repayment schedule of the outstanding loans was revised such that the
loans shall be repaid in 12 equal quarterly installments between
September 2009 and June 2012. For additional information, see Note
11A(6).
In connection with the Company's financing efforts for the ramp-up
plan and in connection with the September 2006 amendment to the
Facility Agreement, the Company entered into a securities purchase
agreement with The Israel Corporation Ltd ("TIC"), according to which
TIC invested $100,000 in the Company, see Note 11A(4).
The Company is currently examining alternatives for additional funding
sources in order to further ramp-up the equipping of Fab 2 and to fund
its short-term activities and liabilities.
F - 7
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 1 - DESCRIPTION OF BUSINESS AND GENERAL (cont.)
D. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's consolidated financial statements are presented in
accordance with generally accepted accounting principles ("GAAP") in
Israel. See Note 19 for the reconciliation of material differences
between GAAP in Israel and in the United States of America.
A. PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include the financial
statements of the Company and its wholly-owned marketing subsidiary in
the United States, after elimination of material inter-company
transactions and balances. The effect of the subsidiary's operations
on the Company's revenues, net loss and total assets was immaterial
for the dates and periods presented.
B. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of banks deposits and short-term
investments (primarily time deposits and certificates of deposit) with
original maturities of three months or less.
C. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is computed on the specific
identification basis for accounts whose collectibility, in
management's estimation, is uncertain.
D. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined for raw materials, spare parts and supplies on the basis of
the weighted moving average cost per unit. Cost is determined for work
in process and finished goods on the basis of actual production costs.
F - 8
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
E. PROPERTY AND EQUIPMENT
(1) Property and equipment are presented at cost, including interest
and other capitalizable costs. Capitalizable costs include only
incremental direct costs that are identifiable with, and related
to, the property and equipment and are incurred prior to its
initial operation. Identifiable incremental direct costs include
costs associated with acquiring, constructing, establishing and
installing property and equipment (whether performed by others or
by the Company), and costs directly related to preproduction test
runs of property and equipment that are necessary to get it ready
for its intended use. Those costs include payroll and
payroll-related costs of employees who devote time and are
dedicated solely to the acquiring, constructing, establishing and
installing of property and equipment. Allocation, when
appropriate, of capitalizable incremental direct costs is based
on management's estimates and methodologies including time sheet
inputs.
Cost is presented net of investment grants received or
receivable, and less accumulated depreciation and amortization.
The accrual for grants receivable is determined based on
qualified investments made during the reporting period, provided
that the primary criteria for entitlement have been met.
Depreciation is calculated based on the straight-line method over
the estimated economic lives commonly used in the industry of the
assets or terms of the related leases, as follows:
Prepaid long-term land lease and buildings
(including facility infrastructure) 14-25 years
Machinery and equipment 5 years
Transportation vehicles 7 years
(2) Impairment examinations and recognition are performed and
determined based on the accounting policy outlined in P below.
F - 9
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
F. INTANGIBLE ASSETS
TECHNOLOGY - The cost of Fab 2 technologies includes the technology
process cost, internal incremental direct costs, mainly
payroll-related costs of employees designated for integrating the
technologies in Fab 2, and incremental direct costs associated with
implementing the technologies until the technologies are ready for
their intended use. The costs in relation to Fab 2 technologies are
amortized over the expected estimated economic life of the
technologies, commonly used in the industry. Amortization phases
commence on the dates on which each of the Fab 2 manufacturing lines
is ready for its intended use.
Impairment examinations and recognition are performed and determined
based on the accounting policy outlined in P below.
G. OTHER ASSETS
DEFERRED FINANCING CHARGES - Deferred financing charges in relation to
funding the establishment of Fab 2 were included, through December 31,
2005, in other assets, as was the practice prior to the effectiveness
of Accounting Standard No. 22 "FINANCIAL INSTRUMENTS: DISCLOSURE AND
PRESENTATION", and since January 1, 2006, following the effectiveness
of the Standard, were offset from the related borrowings. The deferred
financing charges were amortized over the lives of the borrowings
based on the repayment schedule of such funding. During the
establishment period of Fab 2, amortized deferred financing charges
were capitalized to property and equipment. During 2003, in which the
building and infrastructures of Fab 2 were substantially completed and
became ready for their intended use, and in which the initial ramp-up
commenced, the deferred financing charges were amortized to financing
expenses, net. Pursuant to the September 2006 amendment to the
Facility Agreement described in Note 11A(6) the deferred financing
charges, as part of the outstanding loans, were considered to be
substantially modified and thus treated as debt extinguishment of the
outstanding debt and the incurrence of a new debt, and were fully
amortized to financing expenses.
H. CONVERTIBLE DEBENTURES
In January 2006, the company adopted Accounting Standard No. 22
"FINANCIAL INSTRUMENTS: DISCLOSURE AND PRESENTATION" (the "Standard"),
which supersedes Opinion No.53 "ACCOUNTING FOR CONVERTIBLE
LIABILITIES" and Opinion No.48 "ACCOUNTING FOR OPTIONS".
The Company issued three series of convertible debentures that are
considered compound instruments under the Standard. According to the
Standard, 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 proceeds over the fair value of the liability component.
See Note 19F for the presentation of convertible debentures in
accordance with U.S. GAAP.
F - 10
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
I. INCOME TAXES
The Company records deferred income taxes in accordance with Standard
No. 19 "INCOME TAXES" of the Israeli Accounting Standards Board, to
reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes and for tax purposes. Deferred taxes are computed based on
the tax rates anticipated (under applicable law as of the balance
sheet date) to be in effect when the deferred taxes are expected to be
paid or realized.
Deferred tax liabilities and assets are classified as current or
noncurrent based on the classification of the related asset or
liability for financial reporting, or according to the expected
reversal dates of the specific temporary differences, if not related
to an asset or liability for financial reporting. Deferred tax
liabilities are recognized for temporary differences that will result
in taxable amounts in future years. Deferred tax assets are
recognized, if it is probable that such assets would be realized, for
temporary differences, which will result in deductible amounts in
future years and for carryforwards. An allowance against such deferred
tax asset is recognized if it is probable that some portion or all of
the deferred tax assets will not be realized. Due to the material loss
carryforward of the Company as of December 31, 2006 and uncertainties
with regard to its utilization in the future, no deferred taxes were
recorded in the Company's results of operations.
J. REVENUE RECOGNITION
Revenues are recognized upon shipment or as services are rendered when
title has been transferred, collectibility is reasonably assured and
acceptance provisions criteria are satisfied, based on performing
electronic, functional and quality tests on the products prior to
shipment and customer on-site testing. Such testing reliably
demonstrates that the products meet all of the specified criteria
prior to formal customer acceptance, and that product performance upon
customer on-site testing can reasonably be expected to conform to the
specified acceptance provisions. An accrual for estimated returns,
computed primarily on the basis of historical experience, is recorded
at the time when revenues are recognized.
K. RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
Amounts received or receivable from the government of Israel and
others, as participation in research and development programs, are
offset against research and development costs. The accrual for grants
receivable is determined based on the terms of the programs, provided
that the criteria for entitlement have been met.
F - 11
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
L. LOSS PER ORDINARY SHARE
In January 2006, the company adopted Accounting Standard No. 21,
"Earnings Per Share" (the "Standard").
With the initial adoption of the Standard, Opinion No. 55 of the
Institute of Certified Public Accountants in Israel - Earnings per
share was cancelled.
Basic earnings per share is 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. Diluted earnings per share is
calculated by adjusting 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.
See Note 19E for disclosure of loss per share data in accordance with
U.S. GAAP.
M. DERIVATIVE FINANCIAL INSTRUMENTS
The Company, from time to time, enters into foreign exchange
agreements (primarily forward contracts and options) to hedge
non-dollar equipment purchases and other firm commitments. Gains and
losses on such agreements through the date that the equipment is
received or the commitment is realized are deferred and capitalized to
the cost of equipment or the commitment, while gains and losses
subsequent thereto, through the date of expiration of the foreign
exchange agreement, are included in financing expense, net.
In addition, the Company, from time to time, enters into agreements to
hedge interest rate exposure on long-term loans. Gains and losses on
such agreements are recognized as adjustment to the original interest
expenses, and expensed or capitalized in the same manner as the
corresponding interest costs.
See Note 19D for disclosure of the derivative financial instruments in
accordance with U.S. GAAP.
N. FUNCTIONAL CURRENCY AND TRANSACTION GAINS AND LOSSES
The currency of the primary economic environment in which the Company
conducts its operations is the U.S. dollar ("dollar"). Accordingly,
the Company uses the dollar as its functional and reporting currency.
Financing expenses, net in 2006 include net foreign currency
transaction losses of $3,659. Financing expenses, net in 2005 include
net foreign currency transaction gains of $1,398 and in 2004 include
net foreign currency transaction losses of $760.
F - 12
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
O. STOCK-BASED COMPENSATION
In January 2006, the company adopted Accounting Standard No. 24
"SHARE-BASED COMPENSATION" (the "Standard"), for the recognition in
the financial statements of share-based payments for employees and
directors. Costs associated with grants of shares and options to
employees and directors are expensed over the vesting period of each
grant. Said costs are determined based on the fair value of the grants
at each grant date.
As for the periods before the adoption of the Standard, the Company
accounted for employee and director stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB 25") and
authoritative interpretations thereof. Accordingly, the Company
accounted for share options granted to employees and directors based
on the intrinsic value of the options on the measurement date. The
compensation cost of options without "fixed terms" was remeasured at
each balance sheet date. Deferred compensation in respect of awards
with graded vesting terms was amortized to compensation expense over
the relevant vesting periods. In a manner consistent with FIN 28, the
vesting period over which compensation was expensed, was determined
based on the straight-line method, separately for each portion of the
award as if the grant were a series of awards.
In 2006, the Company accounted for stock-based compensation of
non-employees using the fair value method in accordance with the
Standard and in previous years in accordance with Financial Accounting
Standards Board Statement No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION" ("SFAS 123") and EITF 96-18: "Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services". The award cost of
warrants granted in connection with bank financing was amortized as
deferred financing charges over the terms of the loans, in a manner
described in G above. The award cost of warrants granted in connection
with the construction of Fab 2, is recorded as a depreciation expense
over the life of the prepaid perpetual land lease and buildings. The
award cost of warrants granted to consultants and a related party in
connection with equity transactions is offset against paid-in-capital.
See Note 12B(6) for pro forma disclosures required by SFAS 123 and
SFAS 148.
F - 13
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
P. IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Standard No.15, of the Israeli Accounting Standards
Board "IMPAIRMENT OF ASSETS" (the "Standard"), an asset's recoverable
value is the higher of the asset's net selling price and the asset's
value in use, the latter being equal to the asset's discounted
expected cash flows. Management reviews long-lived assets on a
periodic basis, as well as when such a review is required based upon
relevant circumstances, to determine whether events or changes in
circumstances indicate that the carrying amount of such assets may not
be recoverable. Management's review of possible impairment charges for
the periods presented, was performed based on management's business
plan and approved by the board of directors of the Company. The
business plan is based, among other things, on the 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.
Q. RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING STANDARDS
BOARD
(1) ACCOUNTING STANDARD NO. 29 "ADOPTION OF INTERNATIONAL FINANCIAL
REPORTING STANDARDS"
In July 2006, the Israeli Accounting Standards Board published
Accounting Standard No. 29 - "Adoption of International Financial
Reporting Standards" - IFRS ("the Standard"). According to the
Standard, an entity subject to the Israeli Securities Law and
authoritative Regulations thereunder (including dual listed
companies), excluding foreign corporations, that do not prepare
their financial statements in accordance with Israeli GAAP, as
defined by this Law, will be required to prepare financial
statements in accordance with the IFRS and related
interpretations published by the International Accounting
Standards Board, for the reporting periods commencing January 1,
2008, including interim periods.
An entity adopting IFRS as of January 1, 2008 and electing to
report comparative figures in accordance with the IFRS for only
2007, will be required to prepare opening balance-sheet amounts
as of January 1, 2007 based on the IFRS.
Reporting in accordance with the IFRS will be carried out based
on the provisions of IFRS No. 1, "First-time Adoption of IFRS
Standards", which establishes guidance on implementing and
transitioning from financial reporting based on domestic national
accounting standards to reporting in accordance with IFRS.
F - 14
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Q. RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING STANDARDS
BOARD (cont.)
(1) ACCOUNTING STANDARD NO. 29 "ADOPTION OF INTERNATIONAL FINANCIAL
REPORTING STANDARDS" (cont.)
IFRS No. 1 supersedes the transitional provisions established in
other IFRSs (including those established in former domestic
national accounting standards), stating that all IFRSs should be
adopted retroactively for the opening balance-sheet amounts.
Nevertheless, IFRS No. 1 grants exemptions on certain issues by
allowing the alternative of not applying the retroactive
application in respect thereof.
Management intends to examine the effect of the transition to
IFRS, yet at this stage, is unable to estimate the effect of such
conversion on the Company's financial position and results of
operations.
The Standard allows for earlier application in a manner by which
applicable entities may convert their financial statements
published subsequent to July 31, 2006 to the IFRS. Management has
not yet decided whether to early-adopt the IFRS.
(2) ACCOUNTING STANDARD NO. 26 "INVENTORY"
In August 2006 the Israeli Accounting Standards Board published
Accounting Standard No. 26 - "Inventory" ("the Standard"), which
outlines the accounting treatment for inventory.
The Standard applies to all types of inventory, other than
building earmarked for sale and addressed by Accounting Standard
No.2 ("Construction of Buildings for Sale"), inventory of work in
progress stemming from performance contracts, addressed by
Accounting Standard No.4 ("Work Based on Performance Contract"),
financial instruments and biological assets relating to
agricultural activity and agricultural production during harvest.
The Standard establishes, among other things, that inventory
should be stated at the lower of cost and net realizable value.
Cost is determined by the first in, first out (FIFO) method or by
average weighted cost used consistently for all types of
inventory of similar nature and uses. In certain circumstances
the standard requires cost determination by a specific
identification of cost, which includes all purchase and
production costs, as well as any other costs incurred in reaching
the inventory's present stage.
When inventory is acquired on credit incorporating a financing
component, the inventory should then be presented at cost
equaling the purchase cost in cash. The financing component is
recognized as a financing expense over the term of the credit
period.
F - 15
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Q. RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING STANDARDS
BOARD (cont.)
(2) ACCOUNTING STANDARD NO. 26 "INVENTORY" (cont.)
Any reduction of inventory to net realizable value following
impairment as well as any other inventory loss should be expensed
during the current period. Subsequent reversal of an impairment
write-down that stems from an increase in net realizable value
will be allocated to operations during the period in which the
reversal took place.
The standard will apply to financial statements covering periods
beginning January 1, 2007 and onwards and should be implemented
retroactively.
Management believes that the Standard will not affect the
Company's financial position, results of operations and cash
flows.
(3) ACCOUNTING STANDARD NO. 27 "FIXED ASSETS"
In September 2006 the Israeli Accounting Standards Board
published Accounting Standard No. 27 (the "standard"), which
establishes the accounting treatment for fixed assets, including
recognition of assets, determination of their book value, related
depreciation, as well as the disclosure required in the financial
statements.
The Standard states that a fixed-asset item will be measured at
the initial recognition date at cost which includes, in addition
to the purchase price, all the related costs incurred for
bringing the item to the position enabling it to operate in the
manner contemplated by management. The cost also includes the
initial estimate of costs required to dismantle and remove the
item, along with the expenses for restoration of the site on
which the item had been placed and in respect of which the entity
incurred that obligation when the item had been acquired or
following its use over a given period of time not in the
production of inventory during that period.
The Standard also states that when acquiring assets in exchange
for a non-monetary asset or a combination of monetary as well as
non-monetary assets, the cost will be determined at fair value
unless (a) the barter transaction has no commercial substance or
(b) it is impossible to reliably measure the fair value of the
asset received and the asset provided. Should the provided asset
not be measured at fair value, its cost would equal the book
value of the asset provided/transferred.
Following the initial recognition, the Standard permits the
entity to implement in its accounting policy the measurement of
the fixed assets by the cost method or by revaluation so long as
this policy is implemented in regard to all the items in that
group.
F - 16
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Q. RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING STANDARDS
BOARD (cont.)
(3) ACCOUNTING STANDARD NO. 27 "FIXED ASSETS" (cont.)
Cost method - an item will be presented at cost less accumulated
depreciation, less accumulated impairment losses.
Revaluation method - an item whose fair value can be measured
reliably will be presented at its estimated amount, which equals
its fair value at the revaluation date, net of depreciation
accumulated subsequently and less accumulated impairment losses.
Revaluations should take place on a current basis in order to
ensure that book value does not materially differ from the fair
value that would have been determined on the balance-sheet date.
The revaluation of a single item calls for the revaluation of the
entire group and if the asset's book value rises following this
revaluation, this increase should be allocated directly to
shareholders' equity ("revaluation reserve"). Nevertheless, this
increase will be recognized as an operating item up to the amount
offsetting the decrease from that asset's revaluation recognized
previously as income or loss. Should book value decline following
revaluation, this decline will be recognized as an operating item
yet allocated directly to shareholders' equity ("revaluation
reserve") up to the amount leaving any credit balance in that
reserve in respect of that asset.
Any fixed assets with a significant cost in relation to the
item's total cost should be depreciated separately. Moreover, the
depreciation method used will be reviewed at least once at
yearend and, if any meaningful change had taken place in the
estimated consumption of future economic benefits inherent in the
asset, the method should be modified to reflect such changes.
This change will be treated as a change in an accounting
estimate.
This new standard will apply to financial statements covering
periods beginning January 1, 2007 and onwards and implemented
retroactively.
The Company is currently examining this new standard; however, at
this stage, it is unable to estimate the standard's effect, if
any, on its financial position and results of operations. In
January 2007 the Israeli Accounting Standard Board published a
proposal for accounting standard no. 28 that amends standard
no.27 to allow, at transition, the alternatives allowed under
IFRS 1 regarding fixed assets.
F - 17
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Q. RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING STANDARDS
BOARD (cont.)
(4) STANDARD NO. 23, "ACCOUNTING FOR TRANSACTIONS BETWEEN AN ENTITY
AND A CONTROLLING PARTY" (cont.)
In December 2006 the Israeli Accounting Standards Board published
Accounting Standard No. 23, "Accounting for Transactions between
an Entity and a controlling party (hereinafter - the Standard).
The Standard applies to entities subject to the Israeli
Securities Law-1968.
The Standard establishes the requirements for accounting for
transactions between an entity and its controlling party which
involve the transposition of an asset, the taking on of a
liability, reimbursement or debt concession, and the receiving of
loans. The Standard does not apply to business combinations under
common control.
The Standard stipulates that transactions between an entity and a
controlling party will be measured based on fair value;
transactions which in nature are owner investment should be
reported directly in equity and not be recognized in the
controlled entity's profit and loss; the differences between the
consideration set in transactions between an entity and a
controlling party and their fair value will be allocated directly
to the equity; and current and deferred taxes pertaining to the
items allocated to equity due to transactions with controlling
parties will be allocated directly to equity as well.
The Standard is effective for transactions between an entity and
a controlling party taking place subsequent to January 1, 2007
and for loans granted from or given to a controlling party prior
to the Standard's coming into effect, starting on the Standard's
effective date.
The Company's management believes that the effect of this new
standard on the Company's financial position, results of
operations and cash flows is not expected to be material.
R. RECLASSIFICATION
Certain amounts in prior years' financial statements have been
reclassified in order to conform to the 2006 presentation.
F - 18
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 3 - OTHER RECEIVABLES
Other receivables consist of the following:
As of December 31,
------------------
2006 2005
------ ------
Government of Israel - investment grants receivable $1,530 $7,276
Other government agencies 3,847 1,706
Others 48 61
------ ------
$5,425 $9,043
====== ======
NOTE 4 - INVENTORIES
Inventories consist of the following (*):
As of December 31,
----------------------
2006 2005
------- -------
Raw materials $11,170 $ 6,777
Spare parts and supplies 6,402 3,738
Work in process 22,884 11,502
Finished goods 645 2,359
------- -------
$41,101 $24,376
======= =======
(*) Net of aggregate write-downs to net realizable value of $6,707 and
$3,259 as of December 31, 2006 and 2005, respectively.
NOTE 5 - PROPERTY AND EQUIPMENT, NET
A. COMPOSITION:
As of December 31,
----------------------------
2006 2005
---------- ----------
COST:
Prepaid perpetual land lease and buildings
(including facility infrastructure) $ 239,267 $ 237,401
Machinery and equipment 851,700 709,862
Transportation vehicles 307 425
---------- ----------
1,091,274 947,688
---------- ----------
ACCUMULATED DEPRECIATION AND AMORTIZATION:
Prepaid perpetual land lease and buildings
(including facility infrastructure) 61,937 47,841
Machinery and equipment 496,116 388,867
Transportation vehicles 267 335
---------- ----------
558,320 437,043
---------- ----------
$ 532,954 $ 510,645
========== ==========
F - 19
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 5 - PROPERTY AND EQUIPMENT, NET (cont.)
A. COMPOSITION (cont.)
Supplemental disclosure relating to cost of property and equipment:
(1) As of December 31, 2006 and 2005, the cost of property and
equipment included costs relating to Fab 2 in the amount of
$857,461 and $713,837, respectively. Said amounts are net of
investment grants of $164,587 and $165,222, respectively.
(2) As of December 31, 2006, the cost of buildings, machinery and
equipment was reflected net of investment grants in the aggregate
of $267,866 (as of December 31, 2005 - $268,688).
(3) Cost of property and equipment as of December 31, 2006 and 2005
includes capitalized interest costs in the aggregate of $18,480.
(4) Following the commencement of Fab 2 operations in 2003, in which
the building and infrastructures of Fab 2 were substantially
completed and became ready for their intended use, the Company
began to depreciate Fab 2 property and equipment, resulting in
depreciation expenses of $111,984, $109,283 and $93,457 in 2006,
2005 and 2004, respectively.
B. INVESTMENT GRANTS
In connection with the formation of the Company, the Investment Center
of the Ministry of Industry and Trade of the State of Israel
("Investment Center"), under its "approved enterprise" program,
approved an investment program for expenditures on buildings and
equipment in Fab 1 in the aggregate amount (as amended) of
approximately $96,850. The Company completed its investments under
this program, and received final approval from the Investment Center
in November 1997.
In January 1996, an investment program ("1996 program") for expansion
of Fab 1 in the aggregate amount (as amended in December 1999 and
2001) of $228,680, entitling the Company to investment grants, was
approved by the Investment Center. The Company completed its
investments under the 1996 program in December 2001 and invested
through such date approximately $207,000. In May 2002, the Company
submitted the final report in relation to the 1996 program. As of
December 31, 2006, the report has not yet received final approval from
the Investment Center.
See Note 11A(8) with respect to the Fab 2 program approved by the
Investment Center in December 2000.
F - 20
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 5 - PROPERTY AND EQUIPMENT, NET (cont.)
B. INVESTMENT GRANTS (cont.)
Entitlement to the above grants and other tax benefits is subject to
various conditions stipulated by the Israeli Law for the Encouragement
of Capital Investments - 1959 ("Investments Law") and the regulations
promulgated thereunder, as well as the criteria set forth in the
certificates of approval. In the event the Company fails to comply
with such conditions, the Company may be required to repay all or a
portion of the grants received plus interest and certain inflation
adjustments. In order to secure fulfillment of the conditions related
to the receipt of investment grants, floating liens were registered in
favor of the State of Israel on substantially all of the Company's
assets. See also Note 16A.
C. For liens, see Note 11A(6) Notes 11D(2) and (3) and 8F.
NOTE 6 - INTANGIBLE ASSETS, NET
Intangible assets consist mainly of technologies in relation to Fab 2, see
Note 11A(2). The technologies are presented net of accumulated amortization
as of December 31, 2006 and 2005 in the amounts of $53,741 and $32,806,
respectively. For amortization policy, see Note 2G.
NOTE 7 - OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
As of December 31,
----------------------
2006 2005
------- -------
Accrued salaries $ 8,730 $ 3,162
Vacation accrual 3,385 2,322
Interest payable (primarily in relation to
convertible debentures) 1,089 1,263
Due to related parties 5,895 188
Other 2,997 2,037
------- -------
$22,096 $ 8,972
======= =======
F - 21
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 8 - LONG-TERM DEBT FROM BANKS
A. COMPOSITION:
As of December 31,
Effective interest rate as of ----------------------
December 31, 2006 2006 2005
----------------------------- -------- --------
In U.S. Dollar 6.48% $288,693 $438,103
In U.S. Dollar 5.10% 80,000 80,000
-------- --------
Total long-term debt from
Banks 368,693 518,103
Less - current maturities - 21,103
-------- --------
368,693 497,000
Discount (see C below) 11,746 -
-------- --------
$356,947 $497,000
======== ========
B. All loans received under the Facility Agreement bear interest based on
the three-month USD LIBOR rate plus 1.1%, effective from May 17, 2006,
as revised under the September 2006 amendment to the Facility
Agreement (see details in Note 11A(6)). Prior to the closing of the
September 2006 amendment, in accordance with the November 2003
amendment to the Facility Agreement, the loans bore interest based on
the three-month USD LIBOR rate plus 2.5%, (described in Note 11A(6)),
and prior to the November 2003 amendment the loans bore interest based
on the three-month USD LIBOR rate plus 1.55%. The effective interest
rate as of December 31, 2006 of loans, the amount of which as of such
date was $207,000, including the terms of collar agreements with
knock-out and knock-in features described in Note 17A. Interest is
payable at the end of each quarter.
C. Following the September 2006 amendment to the Facility Agreement, the
long term debt is presented based on fair value on the refinancing
date, in accordance with IAS 39, described in Note 11A(6). The
discount resulting from adjustment of the debt to fair value is
amortized to financing expenses during the new repayment schedule.
D. For additional information regarding the Facility Agreement, as
amended, between the Company and the Banks for financing the
construction and equipping of Fab 2 including the refinancing of the
loans under the September 2006 amendment to the Facility Agreement see
Note 11A(6).
E. REPAYMENT SCHEDULE
The balance of the long-term debt as of December 31, 2006 is repayable
as follows:
2009 61,449
2010 122,898
2011 and thereafter 184,346
---------
$ 368,693
=========
F - 22
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 8 - LONG-TERM DEBT FROM BANKS (Cont.)
F. The agreement with the Company's Banks restricts the Company's ability
to place liens on its assets (other than to the State of Israel in
respect of investment grants - see Note 11A(8), to Siliconix - see
Note 11D(2) and to SanDisk see Note 11D(3)), without the prior consent
of the Banks. Furthermore, the agreements contain certain restrictive
financial ratios and covenants. For further details concerning the
Facility Agreement and its amendments, see Note 11A(6).
NOTE 9 - CONVERTIBLE DEBENTURES
A. COMPOSITION:
As of December 31,
Interest rate as of -----------------------
December 31, 2006 2006 2005
----------------------- ------- -------
2002 Convertible debentures series A 4.7% $19,894 $25,811
2005 Convertible debentures series B 5% 17,321 -
2006 Convertible debentures series C (*) 31,592 -
------- -------
68,807 25,811
Less - current maturities 6,632 6,453
------- -------
$62,175 $19,358
======= =======
(*) See D below
B. 2002 CONVERTIBLE DEBENTURES SERIES A
In connection with the sale of securities described in Note 12F, in
January 2002, the Company issued on the Tel-Aviv Stock Exchange, NIS
110,579,800 principal amount of convertible debentures, linked to the
Israeli Consumer Price Index ("CPI"). The debentures were issued at
96% of their par value, and bear annual interest at the rate of 4.7%,
payable in January of each year commencing in January 2003, see also
Note 12F. The principal amount is payable in four equal installments
in January of each year between 2006 and 2009. The outstanding
principal amount of convertible debentures as of December 31, 2006,
adjusted to the CPI was NIS 89,708,778, $21,233. The debentures may be
converted until December 31, 2008 into Ordinary Shares, at a
conversion rate of one Ordinary Share per each NIS 41.00 principal
amount of the debentures, linked to the CPI (subject to customary
adjustments) (adjusted to the CPI as of December 31, 2006 - NIS 44.35,
$10.50). The effective rate of interest on the convertible debentures,
taking into account the initial proceeds, net of the discount and the
related costs of issuance, is 7.26%.
For U.S. GAAP purposes, which require taking into account, in addition
to the discount and the related issuance costs, amounts attributed to
the options described in Note 19F, the effective rate of interest on
the convertible debentures is 9.88%. Subject to certain conditions and
the Company's Facility Agreement, the Company may announce the early
redemption of the debentures or part thereof, provided that the sum of
the last payment on account of the principal shall be no less than
approximately $700.
F - 23
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 9 - CONVERTIBLE DEBENTURES (cont.)
B. 2002 CONVERTIBLE DEBENTURES SERIES A (cont.)
If on a payment date of the principal or interest on the debentures
there exists an infringement of certain covenants and conditions under
the Facility Agreement, the dates for payment of interest and
principal on the debentures may be postponed, depending on various
scenarios under the Facility Agreement until such covenant or
condition is settled.
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, to the
government of Israel in connection with grants the Company received
under its approved enterprise programs, and to Siliconix and SanDisk.
See Note 19F for disclosure of the accounting treatment of the
convertible debentures in accordance with U.S. GAAP.
C. 2005 CONVERTIBLE DEBENTURES SERIES B
In connection with the rights offering described in Note 12I, the
Company issued $48,169 principal amount of convertible debentures. The
debentures are listed for trade on the Tel-Aviv Stock Exchange and on
the NASDAQ Capital Market. The debentures bear annual interest at the
rate of 5%. The principal of the debentures, together with accrued
interest, will be payable in one installment on January 12, 2012. The
effective interest rate on the convertible debentures, taking into
account the proceeds and related costs of issuance is 5.6%.
The debentures are convertible into the Company's Ordinary Shares at a
conversion price of $1.10 per share. The conversion price was subject
to downward adjustment under certain circumstances if the Company had
sold securities in future financings at a price per share which was
lower than the conversion price, provided that such financings closed,
or agreements for such financings were signed, through December 2006.
As of the balance sheet date, no such adjustment was or will be
required and the downward adjustment mechanism has expired.
During the year ended December 31, 2006, $18,408 in aggregate
principal amount of debentures was converted into 16,734,316 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.
Certain of the Company's Equity Investors and Wafer Partners invested
$27,811 in the framework of the rights offering.
F - 24
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 9 - CONVERTIBLE DEBENTURES (cont.)
C. 2005 CONVERTIBLE DEBENTURES SERIES B (cont.)
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, to the
government of Israel in connection with grants the Company received
under its approved enterprise programs and to Siliconix and SanDisk.
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 19F for the accounting for the rights offering in accordance
with U.S. GAAP.
D. 2006 CONVERTIBLE DEBENTURES SERIES C
In connection with the public offering described in Note 12J the
Company issued NIS 164,430,000 principal amount of convertible
debentures linked to the Israeli Consumer Price Index ("CPI"), for
gross proceeds of NIS 139,765,500 (approximately $31,219), and 391,500
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 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 $ 0.00199) 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 principal
value, linked to the CPI. The conversion price is subject to reduction
in certain limited circumstances.
The proceeds were allocated in accordance with Standard No. 22 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 September 2006, 391,500 options to purchase convertible debentures
described above were exercised resulting in proceeds of approximately
$7,700.
See Note 19F for the accounting for the public offering in accordance
with U.S. GAAP.
F - 25
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 10 - OTHER LONG-TERM LIABILITIES
A. COMPOSITION:
As of December 31,
-------------------------
2006 2005
-------- --------
Net liability for employee
termination benefits (see B below):
Gross obligation $ 16,816 $ 18,445
Amounts funded through deposits to severance pay funds and
purchase of insurance policies (13,535) (13,658)
-------- --------
3,281 4,787
Long-term liabilities in respect of license agreements 1,804 5,123
Long-term loans from related parties, net of current
maturity 8,096 1,102
Series 5 Warrants 3,088 -
Other, including $1,183 in respect of related parties 1,439 -
-------- --------
$ 17,708 $ 11,012
======== ========
B. EMPLOYEE TERMINATION BENEFITS
Israeli law and labor agreements determine the obligations of the
Company to make severance payments to dismissed employees and to
employees leaving employment under certain other circumstances. The
liability for severance pay benefits, as determined by Israeli Law, is
generally based upon length of service and the employee's monthly
salary. This liability is primarily covered by regular deposits made
each month by the Company into recognized severance and pension funds
and by insurance policies purchased by the Company, based on the
employee's salary for the relevant month. The amounts so funded are
not reflected separately on the balance sheets, since they are
controlled by the fund trustees and insurance companies and are not
under the control and management of the Company. For presentation of
employee termination benefits in accordance with U.S. GAAP, see Note
19C.
Costs relating to employee termination benefits were approximately
$2,807, $2,631 and $3,836 for 2006, 2005 and 2004, respectively.
F - 26
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2
(1) OVERVIEW
In 2001, the Company's Board of Directors approved the
establishment of the Company's second wafer fabrication facility
in Israel ("Fab 2"). In Fab 2, the Company manufactures
semiconductor integrated circuits on silicon wafers in geometries
of 0.18 micron and below on 200-millimeter wafers. In connection
with the establishment, equipping and financing of Fab 2, the
Company has entered into several related agreements and other
arrangements and has completed public and private financing
deals. The agreements and arrangements include those with
technology partners, Wafer Partners, Equity Investors, the
Company's Banks, the Government of Israel through the Investment
Center and others. The agreements with the Banks and the
Investment Center are subject to certain conditions, including
the achievement of performance and financing milestones, and the
securing of additional required financing. The Company has also
entered into agreements for the design and construction of Fab 2,
for equipping Fab 2 and for the transfer to the Company of
process technologies to produce wafers in Fab 2.
During 2003, in which Fab 2's construction was substantially
completed, the Company began commercial shipment of wafers to its
customers utilizing 0.18 micron process technology.
The construction and equipping of Fab 2 is a substantial project,
which requires extensive management involvement as well as timely
coordination of the activities of many participants. In addition,
this project is a complex undertaking which entails substantial
risks and uncertainties, including but not limited to those
associated with the following: obtaining additional commitments
to finance the equipping of Fab 2 and its ongoing operations (see
also Note 1C); achieving certain operational milestones and
complying with various significant conditions and financial
ratios and covenants provided by the Facility Agreement with the
Banks; compliance with the conditions under the Approval
Certificate for Fab 2 provided by the Investment Center;
obtaining approval of the Investment Center for a new expansion
program and the development and purchase of new technologies.
According to the Facility Agreement with the Banks complying with
all the conditions and financial ratios and covenants stipulated
in that agreement and in the Approval Certificate from the
Investment Center, are material provisions for the financing
provided.
F - 27
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(2) TECHNOLOGY TRANSFER AGREEMENTS
TOSHIBA - In 2000, the Company entered into a technology transfer
agreement with Toshiba Corporation ("Toshiba"), a Japanese
corporation. This agreement provided for the transfer by Toshiba
to the Company of advanced semiconductor manufacturing process
technologies to be installed in Fab 2 including related
technology transfer assistance in exchange for certain fees for
patent licenses, technology transfer and technical assistance.
The transfer of the technology was substantially completed during
2003. The Company's commitment under the Toshiba agreement to
reserve for Toshiba a certain portion of Fab 2 wafer
manufacturing capacity expired in December 2005.
FREESCALE - In 2002, the Company entered into a non-exclusive
technology transfer, development and licensing agreement with
Freescale. This agreement provides for the transfer by Freescale
to the Company of existing and newly developed versions of
advanced semiconductor manufacturing process technologies to be
installed in Fab 2, and for the provision by Freescale of related
technology transfer assistance, in exchange for certain fees for
patent and other licenses, technology transfer and development,
and technical assistance. Subject to prior termination for cause
by Freescale, the licenses under the agreement are perpetual.
(3) WAFER PARTNER AGREEMENTS
During 2000, the Company entered into various share purchase
agreements ("Wafer Partner Agreements") with SanDisk Corporation,
Alliance Semiconductor Corporation, Macronix International Co.,
Ltd. and QuickLogic Corporation (collectively, the "Wafer
Partners"; excluding QuickLogic, the "primary Wafer Partners") to
partially finance the construction and equipping of Fab 2.
Pursuant to the Wafer Partner Agreements, the Wafer Partners
agreed to invest an aggregate of $250,000 to purchase Ordinary
Shares of the Company. According to the Wafer Partner Agreements,
the Company agreed, subject to certain conditions, to reserve for
each Wafer Partner a certain portion, and collectively
approximately 50%, of Fab 2 wafer manufacturing capacity for a
period of 10 years ending January 2011.
F - 28
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(3) WAFER PARTNER AGREEMENTS (cont.)
Through December 31, 2004, the Wafer Partners completed their
commitment to invest under the Wafer Partner Agreements an
aggregate of $246,823. Of such amount, $201,059, was credited as
paid in capital and $45,764, was established as long-term
customers' advances which may be, subject to the terms and
conditions stipulated in the Wafer Partner Agreements, as
amended, utilized as credit against purchases to be made by the
Wafer Partners, or converted into paid-in-capital. Through
December 31, 2006, the Wafer Partners were issued an aggregate of
32,589,280 Ordinary Shares at an average price per share of
$7.57, which was determined based on the average closing sale
price of the Company's Ordinary Shares for the 15-30 trading days
prior to making any capital investment: see also (5) below.
For additional investments made by the primary Wafer Partners in
the aggregate amount of $19,089 in connection with the 2002 and
2005 rights offerings, see Notes 12G and 12I, respectively, and
(6) below.
(4) EQUITY INVESTOR AGREEMENTS
TIC, the principal shareholder of the Company, invested in the
Company, $50,000 for the purchase of an aggregate of 6,749,669
Ordinary Shares of the Company at an average price per share of
$7.41, which was determined based on the average closing sale
price of the Company's Ordinary Shares for the 15-30 trading days
prior to making any investment. The investment of TIC was made in
accordance with share purchase agreement the Company entered into
in December 2000.
For a description of an undertaking and additional investments
made by TIC in the aggregate amount of $29,152 in connection with
the 2002 and 2005 rights offerings, see Notes 12G and 12I,
respectively, and (6) below.
F - 29
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(4) EQUITY INVESTOR AGREEMENTS (cont.)
In regard to the Company's financing efforts for the ramp-up plan
and in connection with the September 2006 amendment to the
Facility Agreement, following TIC's commitment to invest
$100,000, the Company entered into a securities purchase
agreement with TIC (the "Securities Purchase Agreement"). The
Securities Purchase Agreement was approved by the Company's Audit
Committee, Board of Directors and the Company's shareholders. The
principal terms of the Securities Purchase Agreement were: (i) in
consideration for its $100,000 investment, the Company agreed to
issue to TIC capital notes convertible into 65,789,474 of the
Company's Ordinary Shares at a conversion price per share of
$1.52 (which equals the average closing price during the 10
consecutive trading days prior to signing the May 2006 Memorandum
of Understanding with the banks); (ii) the Company would be
deemed to have exercised the Call Option under the Equipment
Purchase Agreement described below; and (iii) the Company and TIC
would settle the amounts payable by TIC under the Securities
Purchase Agreement with the amounts payable by the Company under
the Equipment Purchase Agreement. The Securities Purchase
Agreement closed contemporaneously with the closing of the
September 2006 amendment.
In order to implement the ramp-up plan in a timely manner, in May
2006, the Company entered into an Equipment Purchase Agreement
with TIC according to which TIC will order up to approximately
$100,000 worth of equipment for Fab 2. Under the terms of the
Equipment Purchase Agreement: (i) TIC had the right to sell to
the Company the equipment at cost, plus related expenses; (ii)
the Company had the right to purchase the equipment from TIC at
cost, plus related expenses, subject to the Company having raised
$100,000; and (iii) upon the purchase of the equipment from TIC
the Company would assume TIC's obligations to the equipment
suppliers.
Upon the closing of the September 2006 amendment and the
Securities Purchase Agreement, TIC transferred ownership over the
purchased equipment to the Company and the Company assumed TIC's
obligations to the equipment suppliers.
(5) AMENDMENTS TO THE PRIMARY WAFER PARTNER AND EQUITY INVESTOR
AGREEMENTS
Pursuant to the primary Wafer Partner Agreements, as amended, the
primary Wafer Partners had an option to convert an aggregate of
up to $7,507 of the unutilized long-term customers' advances,
which they had as of December 31, 2005, into fully-paid Ordinary
Shares of the Company. In 2006, one of the primary Wafer Partners
converted $3,880 of its advances into paid-in equity entitling it
to 2,455,905 Ordinary Shares of the Company. The number of shares
was determined based on $1.58 per share, which was the average
closing sale price of the Company's Ordinary Shares for the 15
trading days prior to December 31, 2005.
F - 30
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(5) AMENDMENTS TO THE PRIMARY WAFER PARTNER AND EQUITY INVESTOR
AGREEMENTS (cont.)
Pursuant to the primary Wafer Partner Agreements, as amended,
each of the primary Wafer Partners has an option to convert, at
the end of each calendar quarter commencing 2004, that portion of
the long-term customers' advances which it is entitled to
utilize, based upon payments made by such primary Wafer Partner
and purchase orders received from the Wafer Partners through
December 31, 2006, (subject to the below amendment with one of
the Wafer Partners), into fully-paid Ordinary Shares of the
Company. The number of shares is to be determined based on the
average closing sale price of the Company's Ordinary Shares for
the 15 trading days preceding the end of the relevant quarter.
Accordingly, through December 31, 2006, two of the primary Wafer
Partners had converted an aggregate of $6,073 of long-term
customer advances into 4,007,663 fully-paid Ordinary Shares of
the Company, at an average share price of $1.52 per share.
Any quarterly amount, which the primary Wafer Partners have
elected not to so convert, will not be utilizable against
purchases made subsequent to that quarter, and shall bear
interest, payable at the end of each quarter, at an annual rate
equal to three-month LIBOR plus 2.5% through December 31, 2007,
subject to the below amendment with one of the Wafer Partners.
The aggregate principal of the unconverted long-term customers'
advances, which could have been utilized against purchases and
which the primary Wafer Partners elected not to convert into
fully-paid Ordinary Shares of the Company and shall be repaid on
December 31, 2007, is $1,691. Other than as described above in
this paragraph and the preceding paragraph, each of the primary
Wafer Partners agreed that long-term customer's advances could
not be utilized before December 31, 2006. Following December 31,
2006, the remaining long-term customer advances may be utilized
as credits against new purchase orders to be placed.
In 2006, the Company and one of the primary Wafer Partners,
entered into an agreement to extend the period in which long-term
customer's advances could not be utilized against purchases, to
December 31, 2009. According to the agreement, with respect to
certain orders placed until July 2006, and all orders placed
thereafter through December 2009, such unutilized advances will
bear interest at an annual rate equal to three-month LIBOR plus
1.1%, payable at the end of each quarter, through December 31,
2009. As of the balance sheet date an amount of $2,234 will be
repaid on December 31, 2009.
F - 31
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT
OVERVIEW - In January 2001, the Company entered into a Facility
Agreement with two leading Israeli banks ("Banks") entitling the
Company to borrow an aggregate, as amended in January 2002, of
$500,000 to finance the construction and equipping of Fab 2
("Facility Agreement"). Of that amount, the Company withdrew an
aggregate of $497,000. Under the original terms of the Facility
Agreement the loans bore interest at a rate of LIBOR plus 1.55%
per annum payable at the end of each quarter. The loans were
originally to be paid in 12 quarterly installments 3 years from
date of each loan drawn down. The loans were subject to certain
prepayment provisions. Unused amounts under the Facility
Agreement were subject to a quarterly commitment fee of 0.25% per
annum.
NOVEMBER 2003 AMENDMENT - In November 2003, the Company and its
Banks entered into an amendment to the Facility Agreement. The
amendment was based, among other things, on an updated plan for
the construction and equipping Fab 2 submitted to the Banks, and
was approved by the Company's shareholders' meeting held in
December 2003. Pursuant to the amendment, the Banks waived all
noncompliance or breach of covenants by the Company prior to the
date of amendment. The amendment further revised and updated the
covenants under the Facility Agreement according to which the
Company was obligated to comply with certain operational and
financial ratios. The interest rate of LIBOR plus 1.55% per annum
payable at the end of each quarter was increased to a rate of
LIBOR plus 2.5% per annum payable at the end of each quarter.
According to the amendment, the Company was to raise from
specified financial sources an aggregate of $152,000 through
December 2005.
JANUARY 2005 AMENDMENT - In January 2005, the Company and its
Banks signed a waiver letter agreement according to which the
Banks waived the Company's non-compliance with certain financial
ratios and covenants for the fourth quarter of 2004. The
agreement also amended certain of the financial ratios and
covenants with which the Company was to comply with during 2005,
and which were further revised in the framework of the July 2005
amendment to the Facility Agreement described below.
JULY 2005 AMENDMENT - In July 2005, the Company and its Banks
entered into a definitive amendment to the Facility Agreement,
which closed in August 2005. The amendment provided, among other
things, for the Banks to provide additional financing of up to
approximately $30,000, subject to the Company raising through the
issuance of shares or convertible debentures $23,500 by October
31, 2005 (which was subsequently extended to December 31, 2005)
and an additional $6,500 by March 31, 2006. In connection with
the amendment, certain of the Company's Equity Investors and
Wafer Partners committed to invest an aggregate of $23,500
towards such funding in the context of a rights offering.
F - 32
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT (cont.)
JULY 2005 AMENDMENT (CONT.)
The July 2005 amendment further provided that: (i) any amounts
raised in equity or in convertible debentures through March 31,
2006, up to $30,000, would not constitute financing from other
sources towards the $152,000 fundraising milestone; (ii) the last
date in which the Company was to comply with the $152,000
fundraising milestone was postponed from December 31, 2005 to
June 30, 2006; and (iii) certain of the financial ratios and
covenants through the third quarter of 2006 were revised.
As described in Note 12I, the Company raised through January 2006
$48,169 in a rights offering, thereby satisfying its obligations
to raise $23,500 and $6,500 by December 31, 2005 and March 31,
2006, respectively. Following the satisfaction of all the
Company's commitments under the July 2005 amendment, the Banks
provided the Company with $29,693 in additional loans.
MAY 2006 AMENDMENTS - In May 2006, the Company and its Banks
entered into amendments 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 on account of the $152,000 fund raising
milestone, was deferred from June 30, 2006 to September 30, 2006,
such fundraising requirement was satisfied with the completion of
the 2006 public offering described in Note 12J.
F - 33
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT (cont.)
SEPTEMBER 2006 AMENDMENT (CONT.)
SEPTEMBER 2006 AMENDMENT - As part of the financing for the
ramp-up plan, in September 2006, the Company closed a definitive
amendment to the Facility Agreement with its banks for the
refinancing of the approximately $527,000 of long-term debt under
its Facility Agreement. Pursuant to the amendment, among other
things: (i) $158,000, representing approximately 30% of the
outstanding debt under the Facility Agreement, was converted into
capital notes of the Company, which notes are convertible into
51,973,684 of the Company's Ordinary Shares, representing twice
the average closing price per share during the ten days prior to
signing the MOU; (ii) the interest rate applicable for the
quarterly actual interest payment on the loans was decreased by
1.4%, from LIBOR plus 2.5% per annum to LIBOR plus 1.1% per
annum, effective from May 17, 2006 (the "Decreased Amount");
subject to adjustment, in January 2011, the Banks will be issued
such number of shares (or equity equivalent capital notes or
convertible debentures) that equals the Decreased Amount divided
by the average closing price of the Company's Ordinary Shares
during the fourth quarter of 2010 (the "Fourth Quarter 2010
Price"). If during the second half of 2010, the closing price of
Company's Ordinary Shares on every trading day during this period
exceeds $3.49, then the Banks will only be granted such number of
shares (or equity equivalent capital notes or convertible
debentures) that equals half of the Decreased Amount divided by
the Fourth Quarter2010 Price. If during the period ending
December 31, 2010, the Banks sell a portion of the capital notes
or shares issuable upon the conversion of the capital notes
described in (i) above, at a price per share in excess of $3.49,
then the consideration payable for the interest rate reduction
will be reduced proportionately. The amounts payable in
securities of the Company may be payable in cash under certain
circumstances and the Decreased Amount may be reduced in the
event the Company prepays any part of the outstanding loans;
(iii) the commencement date for the repayment of the outstanding
loans, which following the conversion are approximately $369,000,
was postponed from July 2007 to September 2009, such that the
outstanding loans shall be repaid in 12 quarterly installments
between September 2009 and June 2012, for further details see
Note 8; (iv) the exercise periods of the warrants held by the
Banks immediately prior to the signing of the September 2006
amendment, were extended such that they are exercisable until
five years from the closing of the September 2006 amendment, for
further details see Note 12B(5)(a) ; and (v) the financial ratios
and covenants that the Company is to satisfy were revised to be
inline with the Company's May 2006 working plan.
The Company accounted for the September 2006 amendment in
accordance with provisions set forth in IAS 39 FINANCIAL
INSTRUMENTS: RECOGNITION AND MEASUREMENT Generally Accepted
Accounting Standards in Israel are silent in regards to the
accounting for debt modification. In addition, diversity in
practice was observed across companies such that no one approach
has been consistently applied to create practice in Israel for
the accounting for debt modification. In light of the lack of
guidance and considering that the Company has not previously
accounted for debt modification in the past the Company decided
to apply the guidance in IAS 39 regarding debt modification
mainly for the following reasons: (i) Israeli GAAP requires that
when there is no standard in Israel and no practice has evolved
IFRS has to be applied, (ii) the Israeli Accounting Standards
Board decided to adopt in full the IFRS starting in fiscal year
2008 with early adoption recommended, and the Israel Securities
Authority ("ISA") decided that, commencing from the second
quarter of 2007, Notes to financial statements shall state the
IFRS financial effect on such financial statements, (iii)
Standard No. 22, which is based on IAS 32 FINANCIAL INSTRUMENTS:
DISCLOSURE AND PRESENTATION, refers preparers of financial
statements to the guidance in IAS 39 for the purposes of
recognition and measurement of financial instruments (including
measurement of debt modification), (iv) the adoption of IAS 39
does not create inconsistencies with prior periods and (v)
recently adopted Israeli standards are all based on IFRS.
F - 34
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT (cont.)
SEPTEMBER 2006 AMENDMENT (CONT.)
Under IAS 39, the Company accounted for the debt modification
under the September 2006 amendment as follows:
1. The amount considered settled for shares and classified
to equity is based on the per share price as quoted at
the closing date; such amount totaled to $76,401.
2. The remaining balance, totaling $435,209, is considered
to be substantially modified and thus treated as debt
extinguishment of the outstanding debt and the
incurrence of a new debt.
3. The debt incurred is initially recognized at fair
value, totaling $355,138.
4. The difference between the fair value of the debt
incurred and the outstanding debt (exclusive of the
amount used as proceeds for the share issuance in 1
above), totaling $80,071, is recognized in the
consolidated statement of operations as a gain on debt
restructuring in the current period.
As described above the Banks will be issued such number of shares
(or equity equivalent capital notes or convertible debentures)
that equals the Decreased Amount divided by the Fourth Quarter
2010 Price. If during the second half of 2010, the closing price
of Company's Ordinary Shares on every trading day during this
period exceeds $3.49, then the Banks will only be granted such
number of shares that equals half of the Decreased Amount divided
by the Fourth Quarter 2010 Price. The Company accounted for its
obligation to issue shares initially, as an additional interest
expense and adjusted the effective interest rate on the debt to
the Banks. The Company will evaluate and, if required, adjust the
effective interest rate based on the per share price at the end
of each reporting period. As of the balance sheet date no such
adjustment was required. See Note 19I for the accounting of the
debt modification and the accounting of the Decreased Amount in
accordance with U.S. GAAP
F - 35
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT (cont.)
TIC'S UNDERTAKING - In connection with the November 2003
amendment to the Facility Agreement, TIC undertook to the Banks
to exercise all of the rights it received in a rights offering
through June 2006. In addition, as part of TIC's undertaking, it
agreed to purchase from the Company additional securities in a
private placement on the same terms as the rights offering, in an
amount equal to 50/93 of the difference between the amount the
Company was to raise in the rights offering and the amount raised
from shareholders other than TIC, less any amounts actually
invested in the rights offering by TIC in connection with the
exercise of its own rights. The July 2005 amendment provided that
TIC's undertaking shall be extended from June 30, 2006 to
December 31, 2006; (ii) such undertaking will be deemed to have
been fulfilled if TIC invests at least $14,000 in the context of
a rights offering. This undertaking was fulfilled following TIC's
$20,000 investment in the Company in the context of the 2005
rights offering (see Note 12I).
For details regarding 58,906 warrants issued to TIC in connection
with its undertaking described above, see Note 12B(5)(b).
The Company has agreed to indemnify TIC for any liabilities it
incurs with respect to these arrangements, up to a maximum of
$100,000 as follows: up to $25,000 in cash and any amount
exceeding such $25,000 limit will earn interest at LIBOR plus
2.5% and will be paid on the same terms that the Company repays
its loans to the Banks. As of the balance sheet date, no such
indemnification has been required.
WARRANTS ISSUED TO THE BANKS - For details regarding 9,161,060
outstanding warrants granted to the Banks in connection with the
Facility Agreement, see Note 12B(5)(a).
COMPLIANCE WITH FINANCIAL RATIOS AND COVENANTS - 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 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 approximately $369,000) plus
penalties, and the Banks would be entitled to exercise the
remedies available to them under the Facility Agreement,
including enforcement of their liens against all of the Company's
assets.
F - 36
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT (cont.)
LIENS - Under the Facility Agreement, the Company agreed to
register liens in favor of the Banks on substantially all its
present and future assets. If, as a result of any default under
the Facility Agreement, the Banks were to accelerate the
Company's obligations, the Company would be obligated to
immediately repay all loans made by the Banks (which as of the
approval date of the financial statements amounted to
approximately $369,000), plus penalties, and the Banks would be
entitled to exercise the remedies available to them under the
Facility Agreement, including enforcement of the liens against
the Company's assets.
OFFEROR BY THE BANKS - If one or more certain bankruptcy related
events occur, the Banks are entitled to bring a firm offer made
by a potential investor to purchase the Company's Ordinary Shares
("the Offer") at a price provided in the Offer. In such case, the
Company shall be required thereafter to procure a rights offering
to invest up to 60% of the amount of the Offer on the same terms.
If the Offer is conditioned on the offeror purchasing a majority
of the Company's outstanding share capital, the rights offering
will be limited to allow for this, unless TIC and the primary
Wafer Partners agree to exercise in a rights offering rights
applicable to their shareholdings and agree to purchase in a
private placement enough shares to ensure that the full amount of
the Offer is invested.
(7) FAB 2 CONSTRUCTION AGREEMENT
In August 2000, the Company entered into a fixed price turn-key
agreement with a contractor for the design and construction of
Fab 2 in consideration of approximately $200,000 subject to the
satisfaction of certain performance milestones stipulated in the
agreement. As of December 31, 2006, the Company has paid
approximately all the amounts payable to the contractor.
F - 37
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(8) APPROVED ENTERPRISE STATUS
In December 2000, the Investment Center approved an investment
program in connection with Fab 2 for expansion of the Company's
plant. The approval certificate for the program provided for a
benefit track entitling the Company to investment grants at a
rate of 20% of qualified investments of up to $1,250,000, or an
aggregate of up to $250,000, of which as of the balance sheet
date, an aggregate of $163,362 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 72% 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.
As of the approval date of the 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.
Any failure by the Company to meet the conditions of the 2000
approval certificate may result in the cancellation of all or a
portion of the grants to be received and tax benefits and in the
Investment Center requiring the Company to repay all or a portion
of grants already received. Under Israeli law, the Company's
non-completion of investments in an amount of $1,250,000 by
December 31, 2005 may permit the Investment Center to require the
Company to repay all or a portion of grants already received.
Management believes that it is improbable that the Investment
Center would demand the Company to repay all or a portion of
grants already received, or deny investment grants receivable as
of December 31, 2005, due to its non-completion of investments in
the amount of $1,250,000 by December 31, 2005 - see also Note
16A.
(9) AGREEMENT WITH THE ILA
In November 2000, the Company entered into a development
agreement with the Israel Land Administration ("ILA") with
respect to a parcel of land on which Fab 2 was constructed.
Following the completion of the construction of Fab 2 on the
land, in June 2003, the Company entered into a long-term lease
agreement with the ILA for a period ending in 2049. The lease
payments through 2049 relating to this lease have been paid in
advance.
F - 38
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(10) HEDGING ACTIVITIES
For hedging transactions and agreements of the Company, see Note
18C.
(11) OTHER AGREEMENTS
Through December 31, 2006, the Company had entered into several
additional agreements related mainly to the construction,
equipping and transfer of technology for Fab 2. The Company's
aggregate commitment in connection with these agreements which
were not supplied or rendered as of such date amounted to
approximately $20,000.
B. LICENSE AGREEMENTS
(1) In June 2000, the Company entered into a cross license
agreement with a major technology company. According to the
agreement, each party acquired a non-exclusive license to
certain of the other's patents. The Company agreed to pay an
annual royalty through July 2005. In July 2006, the Company
extended its cross license agreement with the major
technology company until December 2010. According to terms
of the new agreement, each party acquired a non-exclusive
license to certain of the other's patents, and the Company
agreed to pay an annual royalty through 2010.
(2) In May 2002, the Company entered into a joint development
and royalty-free, non-exclusive cross-license agreement with
a Japanese semiconductor manufacturer corporation, for the
joint development of certain technology to be used by the
Company in its Fab 2 and by the Japanese manufacturer in its
facilities. In April 2005, the Japanese semiconductor
manufacturer corporation elected, and the Company agreed, to
cease the joint development of certain technology and to
terminate the agreement. However, the license rights granted
to the parties continue pursuant to the terms of the May
2002 agreement. According to the terms of the termination
agreement, the Japanese manufacturer paid the Company an
amount of $2,500 in 2005. In addition, each party expressly
released the other party from any obligations or liabilities
of any nature in connection with the original agreement.
Revenues for 2005 and 2004 include $8,000 and $1,944,
respectively, in relation to this agreement.
F - 39
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
B. LICENSE AGREEMENTS (cont.)
(3) In October 1997 the Company and Saifun Semiconductors Ltd
("Saifun") entered into an agreement for certain exclusive
semiconductor manufacturing rights on certain licensed
technology. The agreement set certain limitations on Saifun
regarding future licensing of such technology. Pursuant to
certain provisions of the agreement, the Company and Saifun were
obligated to pay each other royalties. The agreement was
terminated in 2006, with the signing of a new agreement,
according to which, among other things, Saifun extended the term
of the license granted to the Company for certain licensed
technology. Pursuant to certain provisions of the agreement, the
Company and Saifun are obligated to pay each other royalties.
(4) The Company from time to time enters into intellectual property
and licensing agreements with third parties. The effect of each
of them on the Company's total assets and results of operations
is immaterial. Certain of these agreements call for royalties to
be paid by the Company to these third parties. See also Note 10A.
C. LEASES
(1) The Company's offices and engineering and manufacturing
operations are located in a building complex situated in an
industrial park in Migdal Ha'emek, in the northern part of
Israel. These premises are currently occupied under a long-term
lease from the Israel Lands Authority, which expires in 2032. The
Company has no obligation for lease payments related to this
lease through the year 2032.
(2) With respect to a long-term lease agreement of land on which Fab
2 was constructed, see paragraph A(9) above.
(3) The Company occupies certain other premises under various
operating leases. The obligations under such leases were not
material as of December 31, 2006.
D. OTHER PRINCIPAL AGREEMENTS
(1) The Company, from time to time in the ordinary course of
business, enters into long-term agreements with various entities
for the joint development of products and processes utilizing
technologies owned by both the other entities and the Company.
F - 40
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
D. OTHER PRINCIPAL AGREEMENTS (cont.)
(2) SILICONIX - In May 2004, the Company and chip maker Siliconix
incorporated ("Siliconix"), a wholly-owned subsidiary of Vishay
Intertechnology Inc., entered into a definitive long-term foundry
agreement for semiconductor manufacturing. Pursuant to the
agreement, Siliconix will place with the Company orders valued at
approximately $200,000 for the purchase of wafers to be
manufactured in the Company's Fab 1 over a seven to ten year
period. Approximately $53,000 of that amount will be delivered
over an initial three-year period commencing the second quarter
of 2005 (the date on which the transfer of Siliconix's technology
to Fab 1 was completed). According to the agreement, in August
2004 Siliconix advanced the Company $20,000 to be used primarily
for the purchase of additional equipment required to satisfy
Siliconix's orders. The advanced amount is credited towards the
purchase price of wafers. The unused remaining balance of the
$20,000 ($9,631 as of December 31, 2005, none as of December 31,
2006) was included as of December 31, 2005 in designated cash and
short-term interest-bearing deposits in the balance sheet. The
Company registered liens in favor of Siliconix on the bank
account in which the $20,000 was deposited and over the equipment
purchased in connection with the transaction.
(3) SANDISK CORPORATION - In August 2006, the Company signed an
agreement with SanDisk Corporation ("SanDisk"), one of its wafer
partners, to invest in the expansion of its 0.13 micron
manufacturing capacity. SanDisk committed to purchase, upon such
expansion, volume quantities of 0.13 micron wafers during 2007
and 2008 and will have a right of first refusal on the use of
this extra capacity in 2009. The Company and SanDisk also signed
a Loan Agreement under which the Company was entitled to borrow
funds not to exceed, in the aggregate, the principal amount of
approximately $10,000 from SanDisk for the purpose of financing
the purchase of the equipment needed for said expansion. The loan
will be repaid with interest on the amounts outstanding at any
time under the loan at LIBOR plus 1.1% over eight consecutive
quarters. Pursuant to the agreement, in order to secure the
repayment of the loan, SanDisk has been granted a first ranking
charge on the equipment purchased therewith. As of the balance
sheet date the entire approximately $10,000 loan was received.
E. ENVIRONMENTAL AFFAIRS
The Company's operations are subject to a variety of laws and
governmental regulations in Israel relating to the use, discharge and
disposal of toxic or otherwise hazardous materials used in the
production processes. Operating permits and licenses are required for
the operations of the Company's facilities and these permits and
licenses are subject to revocation, modification and renewal.
Government authorities have the power to enforce compliance with these
regulations, permits and licenses. As of the approval date of the
financial statements, the Company was in compliance with the terms of
the permits and licenses.
F - 41
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
F. 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.
G. AMENDMENT TO ISRAELI BANKING REGULATIONS
Pursuant to an amendment to a directive published by the Israel
Supervisor of Banks, effective March 31, 2004, the Company may be
deemed part of a group of borrowers comprised of the Ofer Brothers
Group, TIC, and other companies which are also included in such group
of borrowers pursuant to the directive, including companies under the
control or deemed control of these entities. The directive provides
for limits on amounts that banks may lend to borrowers or groups of
borrowers. Should the Company's Banks exceed these limitations, they
may limit the Company's ability to borrow other money in the future
and may require the Company to return some or all of the outstanding
borrowings (which were approximately $369,000 as of the approval date
of the financial statements). As of the approval date of the financial
statements, the Company had received no such request.
H. OTHER COMMITMENTS
Receipt of certain research and development grants from the government
of Israel is subject to various conditions. In the event the Company
fails to comply with such conditions, the Company may be required to
repay all or a portion of the grants received. In management's
opinion, the Company has been in full compliance with the conditions
through December 31, 2006. In regard to investment center grants see
Note 11A(8).
F - 42
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - SHAREHOLDERS' EQUITY
A. DESCRIPTION OF ORDINARY SHARES
As of December 31, 2006 and 2005, the Company had 800,000,000 and
500,000,000 authorized Ordinary Shares, respectively, par value NIS
1.00 each, of which 100,752,767 and 66,932,056, respectively, were
issued and outstanding (net of 1,300,000 Ordinary Shares held by the
Company as of such dates). As of the balance sheet date, there were
214,920,136 Ordinary Shares of the Company contingently issuable. This
amount includes Ordinary Shares to be issued under various agreements
according to their provisions related certain Wafer Partners, see Note
11A(3), Equity Investor warrants, see B(5)(b) below the exercise of
outstanding warrants, see J and K below, or options granted to
employees and non-employees, see B(1) below, the conversion of all
outstanding convertible debentures, see Note 9 above and the exercise
of all capital notes, see C below. Holders of Ordinary Shares are
entitled to participate equally in the payment of cash dividends and
bonus share (stock dividend) distributions and, in the event of the
liquidation of the Company, in the distribution of assets after
satisfaction of liabilities to creditors. Each ordinary share is
entitled to one vote on all matters to be voted on by shareholders.
B. SHARE OPTION PLANS
(1) EMPLOYEE, CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE
OFFICER AND DIRECTOR SHARE OPTIONS
(A) GENERAL - The Company has granted to its employees options
to purchase its Ordinary Shares under several option plans
adopted by the Company since 1995. The particular provisions
of each plan and grant vary as to vesting period, exercise
price, exercise period and other terms. Generally, the
options are granted at an exercise price which equals the
market value of the Ordinary Shares at the date of grant;
vest over a three to four-year period according to various
vesting schedules; and are not exercisable beyond ten years
from the grant date.
(B) OPTIONS TO THE NEW CHAIRMAN OF THE COMPANY'S BOARD OF
DIRECTORS - In December 2006, the Audit Committee and Board
of Directors of the Company approved the appointment of a
new Chairman to the Board of Directors of the Company and
approved to grant him options to purchase 3,158,090 Ordinary
Shares of the Company, which constituted one per cent (1.0%)
of the Company's issued and outstanding share capital on a
fully diluted basis as of December 20, 2006, the date the
Board of Directors approved the grant. The exercise price is
$1.88, which was the closing price of the Company's Ordinary
Shares on the NASDAQ Global Market on the trading day
immediately prior to the date of approval of the grant by
the Shareholders of the Company. The options shall vest over
4 years as follows: 25% will vest on the 12 month
anniversary of the shareholders approval date and 6.25% will
vest on each 3 month anniversary of the first vesting date
until fully vested. The options grant to the new chairman of
the Board of Directors was approved by the Shareholders of
the Company in January 2007. As of December 31, 2006, no
compensation expense was incurred by the Company in
connection with the option grant.
F - 43
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS
(1) EMPLOYEE, CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE
OFFICER AND DIRECTOR SHARE OPTIONS (cont.)
(C) OPTIONS TO THE COMPANY'S CHIEF EXECUTIVE OFFICER AND
DIRECTOR - In April 2005, the Company's Board of Directors
approved the grant of options to purchase up to 1,325,724
Ordinary Shares to the Company's Chief Executive Officer
("CEO"), who also serves as a director, which was further
approved by the Company's shareholders in October 2005.
These options are exercisable at an exercise price of $1.56,
which was the closing market price of the Company's shares
on the last trading day prior to the board approval of the
grant. These options will vest over a four-year period, with
25% vesting over each year of employment. The options
granted are exercisable for a period of ten years from the
date of grant.
In May 2006, the Company's Audit Committee and Board of
Directors approved the grant of options to the CEO, in
addition to the options granted to him in 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
the additional options was $1.45, the 90-day average closing
price of the Company's shares prior to the Board of
Directors' approval. In future dilutive events following May
2006, additional options will be granted to the CEO with an
exercise price equal to the price per share of the newly
issued securities. Under certain circumstances, the exercise
price will equal the 30-day average closing price of the
Company's shares prior to the dilutive event. The additional
options granted during the two-year period, will vest in
equal amounts over 4 years of employment commencing from May
2006. Any decrease in the Company's shares on a fully
diluted basis during the two-year period from the approval
of the Audit Committee will be followed by the cancellation
of the corresponding options granted to the CEO. The options
will be exercisable for a period of 10 years from the date
of grant. No additional options will be granted under the
CEO's 2005 option arrangement, which was approved by the
Company's shareholders in October 2005. The new grant of
options and its terms were approved by the Company's
shareholders in September 2006. As of the balance sheet
date, a total of 12,714,657 options were outstanding to the
CEO. The cost of the total options granted to the CEO was
determined based on the fair value at the grant dates in
accordance with Standard No. 24 and amounted to $10,309.
Such amount is expensed on an accelerated basis over the
vesting periods of the options.
F - 44
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(1) EMPLOYEE, CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE
OFFICER AND DIRECTOR SHARE OPTIONS (cont.)
(D) EMPLOYEE OPTIONS - In May 2006, the Company's board of
directors approved a plan to offer each of the Company's
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.
Accordingly 4,299,250 options were exchanged. The new
options were granted based on terms similar to the existing
employee option plan with new vesting periods, starting May
2006. The cost of the new options was determined based on
the fair value at the grant dates in accordance with
Standard No. 24 and amounted to $1,726. Such amount is
amortized as an expense on an accelerated basis over the
vesting periods of the new options.
The Board of Directors further approved that if the total
number of employee options, including the options to the
CEO, during the two-year period from May 2006 will represent
less than 8% of the Company's shares on a fully diluted
basis, additional options will be allocated for grants to
the Company's employees. As of the balance sheet date,
approximately 2,195,000 options are reserved for future
grant of options to employees.
(E) OPTIONS GRANTED TO DIRECTORS - During 2001, the Audit
Committee, the Board of Directors of the Company and the
shareholders of the Company approved a stock option plan
pursuant to which certain of the Company's directors will be
granted options to purchase up to 400,000 Ordinary Shares of
the Company (40,000 to each eligible director appointed to
the Board of Directors) at an exercise price equal to the
market price of the Company's shares on the grant dates. In
accordance with this option plan, 40,000 options were
granted in 2006 to one director who was appointed in 2006 at
exercise prices of $1.47, which equals the market price of
the Company's shares on the grant date. As of both December
31, 2006 and December 31, 2005, 280,000 options were
outstanding under the plan with a weighted average exercise
price of $4.33 and $5.39, respectively.
Options granted under the plan vest over a four-year period
according to various vesting schedules, and generally may
not be exercised beyond five years from the date they first
become exercisable. So long as the Independent Directors
Option Plan described below remains in effect, no new
independent director, following January 2007, will be
entitled to receive options under the 2001 director options
plan.
F - 45
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(1) EMPLOYEE, CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE
OFFICER AND DIRECTOR SHARE OPTIONS (cont.)
(E) OPTIONS GRANTED TO DIRECTORS (CONT.)
In addition, during 2000 and 2001, the Audit Committee, the
Board of Directors of the Company and the shareholders of
the Company approved the grant to a director of the Company
options to purchase up to 50,000 and 21,500 Ordinary Shares,
respectively, of the Company at an exercise price of $20.00
and $10.75, respectively, per share, the market price of the
Company's shares on the dates of grant. The options were
exercisable for a period of three years from the date on
which they have become vested. As of December 31, 2006, all
the options expired.
(F) INDEPENDENT DIRECTORS OPTION PLAN - In November 2006, the
Company's Board of Directors approved, following the
approval by the Audit Committee, the grant to each
independent director options to purchase Ordinary Shares
("Initial Options") that shall equal 150,000 less the number
of options to purchase Ordinary Shares held by such
independent director as of January 31, 2007, the date the
shareholders approved the grant (the "Initial Grant Date")
and which, as of the Initial Grant Date, have not vested.
The Initial Options shall vest over 3 years, one third will
vest on the 12 month anniversary of the Initial Grant Date,
and thereafter, the remaining two thirds will vest on a
monthly basis until fully vested. The exercise price per
Initial Option is $1.88, which was the closing price of the
Company's Ordinary Shares on the NASDAQ on the trading day
immediately prior to the Initial Grant Date. As of December
31, 2006 no compensation expense was incurred by the
Company.
Each new independent director appointed after the Initial
Grant Date shall be granted 150,000 options to purchase
Ordinary Shares ("Subsequent Options"), which, shall vest
over 3 years, one third on the 12 month anniversary of the
date on which such independent director shall have served on
the Board of Directors of the Company, the remaining two
thirds will vest on a monthly basis until fully vested. The
exercise price per Subsequent Option shall be the closing
price of the Company's Ordinary Shares on the NASDAQ on the
trading day immediately prior to the relevant date of
appointment.
Upon each 36 month anniversary of a previous grant of
options to an independent director (each a "Tenure Grant
Date"), each such independent director shall be granted an
additional 150,000 options to purchase Ordinary Shares
("Tenure Options"), which will vest over 3 years on a
monthly basis until fully vested. The exercise price per
Tenure Option shall be the closing price of the Company's
Ordinary Shares on the NASDAQ on the trading day immediately
prior to the relevant Tenure Grant Date.
F - 46
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(1) EMPLOYEE, CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE
OFFICER AND DIRECTOR SHARE OPTIONS (cont.)
(F) INDEPENDENT DIRECTORS OPTION PLAN (CONT.)
Subject to certain conditions, the Initial Options,
Subsequent Options and Tenure Options that have vested shall
be exercisable by an Independent Director for a period of
ten years following the date on which the Initial Options,
Subsequent Options or Tenure Options, as the case may be,
first vested.
So long as this option plan remains in effect, no future
grants will be made to independent directors under the plan
described in (1)(e) above.
The independent directors' option plan was approved by the
shareholders of the Company in January 2007.
(G) EXPIRATION OF OPTIONS GRANTED TO THE COMPANY'S FORMER
CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE
OFFICER - In March 2003, the Board of Directors of the
Company approved a share option plan, which was approved by
the Company's shareholders in May 2003, pursuant to which
the Company's former Chairman of the Board of Directors and
CEO was granted options to purchase up to 1,043,000 Ordinary
Shares of the Company at an exercise price of $2.98, the
average closing trading price for the Company's Ordinary
Shares during the 30 consecutive trading days preceding the
date of board approval of an amendment to the Fab 2
investment agreements. Due to his resignation in May 2005,
625,800 options granted to him were fully forfeited and
417,200 options were exercisable until May 2006. None were
exercised.
F - 47
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(2) SUMMARY OF THE STATUS OF ALL THE COMPANY'S EMPLOYEE AND DIRECTOR
SHARE OPTIONS
A summary of the status of all the Company's employee and
director share option plans as of December 31, 2006, 2005 and
2004, as well as changes during each of the years then ended, is
presented below (for options granted to the Banks, a related
party and a consultant, see B(5) below):
2006 2005 2004
------------------------------ ------------------------------ ------------------------------
Weighted Weighted Weighted
Number average Number average Number average
of share options exercise price of share options exercise price of share options exercise price
Outstanding as of
beginning of year 13,011,575 $ 4.19 10,212,920 $ 5.71 6,842,442 $ 7.93
Granted 17,414,268 1.52 5,000,224 1.54 4,364,954 2.69
Exercised (7,250) 1.58 - (95,250) 7.00
Terminated (132,176) 10.95 (77,214) 12.45 -
Forfeited (6,772,375) 5.23 (2,124,355) 4.99 (899,226) 7.89
----------- ----------- -----------
Outstanding as of end
of year 23,514,042 1.87 13,011,575 4.19 10,212,920 5.71
=========== =========== ===========
Options exercisable
as of end of year 2,849,132 $ 4.25 4,602,447 $ 7.77 3,010,870 $ 10.78
=========== =========== ===========
F - 48
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(3) SUMMARY OF INFORMATION ABOUT EMPLOYEE SHARE OPTIONS OUTSTANDING
The following table summarizes information about employee share
options outstanding as of December 31, 2006:
Exercisable as of
Outstanding as of December 31, 2006 December 31, 2006
-------------------------------------------------------------- ---------------------------
Weighted average Weighted
Range of exercise Number remaining average Number Weighted average
prices outstanding contractual life exercise price exercisable exercise price
----------- ---------- ---------- ---------- ---------- ----------
(in years)
$ 1.00-1.99 20,741,671 9.19 $ 1.50 1,066,253 $ 1.53
2.00-2.99 1,427,683 8.56 2.19 562,781 2.22
3.00-3.99 265,013 7.57 3.26 173,690 3.25
4.42-4.92 114,551 6.50 4.45 87,784 4.45
5.00-5.96 27,000 6.44 5.06 20,750 5.08
6.00-6.99 80,050 3.67 6.05 79,800 6.05
7.00-7.99 505,000 0.25 7.00 505,000 7.00
8.00-8.99 90,918 1.55 8.78 90,918 8.78
10.00-10.89 33,806 4.07 10.42 33,806 10.42
11.81-11.81 200,000 4.41 11.81 200,000 11.81
14.25-17.19 3,000 3.81 16.50 3,000 16.50
18.75-18.75 5,000 3.26 18.75 5,000 18.75
20.00-15.00 20,350 3.40 24.65 20,350 24.65
---------- ----------
23,514,042 2,849,132
========== ==========
(4) WEIGHTED AVERAGE GRANT-DATE FAIR VALUE OF OPTIONS GRANTED TO
EMPLOYEES
The weighted average grant-date fair value of the options granted
during 2006, 2005 and 2004 to employees and directors amounted to
$0.81, $0.83 and $1.53 per option, respectively. The Company
utilized the Binomial lattice model in 2006 and the Black-Scholes
option-pricing model in 2005 and 2004. The Company estimated the
fair value, utilizing the following assumptions for the years
2006, 2005 and 2004 (all in weighted averages):
2006 2005 2004
----------- ----------- -----------
Risk-free interest rate 4.44%-4.81% 3.69%-4.34% 2.84%-3.88%
Expected life of options 10 years 4.49 years 4.5 years
Expected annual volatility 65%-67% 54%-69% 65%-82%
Expected dividend yield None None None
F - 49
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(5) NON-EMPLOYEE WARRANTS
(A) BANKS WARRANTS - As of December 31, 2006, the Company
granted the Banks an aggregate of 9,561,060 warrants to
purchase Ordinary Shares of the Company, at terms described
below, of which 9,161,060 (4,580,530 each) were outstanding
and exercisable as of the approval date of the financial
statements, at a weighted average exercise price of $1.70
per share
WARRANTS ISSUED IN JANUARY 2001 - In January 2001, as part
of the Facility Agreement described in Note 11A(6), the
Banks received an aggregate of 400,000 warrants to purchase
Ordinary Shares of the Company (200,000 each) at an exercise
price, as amended in December 2001, of $6.20 per share. The
warrants expired in January 2006.
The cost of the warrants issued to the Banks, determined
based on the fair value at the grant and amendment dates in
accordance with SFAS 123, amounted to a total of $5,466.
Such amount was amortized as deferred financing charges over
the terms of the loans under the Facility Agreement.
WARRANTS ISSUED IN DECEMBER 2003 - In December 2003, as part
of an amendment to the Facility Agreement, the Banks
received an aggregate of 896,596 warrants to purchase
Ordinary Shares of the Company (448,298 each) at an exercise
price of $6.17 per share, the 15 day average closing price
of the Company's Ordinary Shares prior to the date the
amendment with the Banks was signed. All the warrants are
exercisable. The warrants were exercisable for a five-year
period ending December 2008. Under the terms of the
September 2006 amendment, the exercise period of the
warrants was extended to five years from the closing of the
September 2006 amendment, to September 2011.
The cost of the warrants issued to the Banks, determined
based on the fair value at the grant and amendment dates in
accordance with SFAS 123, amounted to a total of $4,168.
Such amount was amortized as deferred financing charges over
the terms of the loans under the Facility Agreement.
F - 50
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(5) NON-EMPLOYEE WARRANTS (cont.)
(A) BANKS WARRANTS (CONT.)
WARRANTS ISSUED IN JULY 2005 - In connection with the July
2005 amendment to the Facility Agreement detailed in Note
11A(6) above, the Company issued warrants to the Banks
exercisable into an aggregate of 8,264,464 Ordinary Shares
of the Company (4,132,232 each), with an exercise price of
$1.21. One-half, of the warrants was exercisable for five
years ending in August 2010, and one-half of the warrants
was to be exercisable for five years from the date on which
the Company and the Banks will agree to reschedule the loan
repayment dates. Under the terms of the September 2006
amendment, the exercise period of all of the July 2005
warrants was extended to five years from the closing of the
September 2006 amendment, to September 2011.
The cost of the 8,264,464 warrants, determined based on the
fair value at the grant and amendment dates in accordance
with SFAS 123, amounted to a total of $6,718. Such amount
was amortized as deferred financing charges over the term of
the loans under the Facility Agreement.
In lieu of paying the exercise price in cash, the Banks are
entitled to exercise all their warrants on a "cashless"
basis, i.e. by forfeiting part of the warrants in exchange
for Ordinary Shares equal to the aggregate fair market value
of the shares underlying the warrants forfeited less the
aggregate exercise price.
(B) WARRANTS GRANTED TO A RELATED PARTY - In consideration for
TIC's undertaking described in Note 11A(6), the Company
issued TIC warrants for the purchase of 58,906 of the
Company's Ordinary Shares. The exercise price for the
warrants is $6.17 per share, the 15-day average closing
price of the Company's Ordinary Shares prior to the date the
November 2003 amendment with the Banks described in Note
11A(6) was signed. All the warrants are fully vested and
none of them was exercised. The warrants are exercisable for
a five-year period ending December 2008.
The cost of the warrants award granted to TIC, determined
based on the fair value at the grant date in accordance with
SFAS 123, amounted to a total of $259. Such amount was
allocated to other assets as deferred financing charges and
was amortized as financing expense over the terms of the
loans under the Facility Agreement with the Banks.
F - 51
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(6) PRO FORMA LOSS PER SHARE ACCORDING TO SFAS 123 AND SFAS 148
Had compensation cost for the Company's share option plans been
determined based on the fair value at the grant dates for all
awards made through December 31, 2005 in accordance with SFAS
123, as amended by SFAS 148, the Company's pro forma loss per
share would have been as follows:
For the year ended
December 31,
--------------------------
2005 2004
--------- ---------
PRO FORMA LOSS
Loss for the year, as reported $(203,082) $(137,768)
Less - stock-based compensation
determined under APB 25 - -
Add - stock-based compensation
determined under SFAS 123 (4,229) (3,980)
--------- ---------
Pro forma loss $(207,311) $(141,748)
========= =========
BASIC LOSS PER SHARE
As reported $ (3.06) $ (2.13)
========= =========
Pro forma $ (3.12) $ (2.19)
========= =========
C. CAPITAL NOTES
(1) BANKS' CAPITAL NOTES
As part of the September 2006 Amendment to the Facility
Agreement, $158,000, representing approximately 30% of the
outstanding debt under the Facility Agreement, was converted into
capital notes of the Company, convertible into 51,973,684 of the
Company's Ordinary Shares, representing twice the average closing
price per share during the ten days prior to signing the MOU. For
additional information regarding the capital notes to the Banks
see Note 11A(6).
(2) TIC'S CAPITAL NOTES
Contemporaneous with the closing of the September 2006 Amendment
and as part of the Securities Purchase Agreement between the
Company and TIC, the Company issued TIC in consideration of its
$100,000 investment, capital notes convertible into 65,789,474 of
the Company's 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). For additional
information regarding the capital notes to TIC see Note 11A(6).
F - 52
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - SHAREHOLDERS' EQUITY (cont.)
D. TREASURY STOCK
During 1998, the Board of Directors of the Company authorized, subject
to certain conditions, the purchase of up to 1,400,000 Ordinary Shares
of the Company to facilitate the exercise of employee stock options
under the Company's share option plans. During 1999 and 1998, the
Company funded the purchase by a trustee of 142,500 and 1,157,500,
respectively, of the Company's Ordinary Shares.
E. DIVIDEND DISTRIBUTIONS
According to the Facility Agreement, as amended (see Note 11A(6)), the
Company undertook not to distribute any dividends prior to the date
that all amounts payable under the Facility Agreement have been paid
in full.
F. SALE OF SECURITIES - JANUARY 2002
In January 2002, the Company issued on the Tel Aviv Stock Exchange,
NIS 110,579,800 principal amount of convertible debentures, under
terms described in Note 9B. Together with the convertible debentures
the Company issued for no consideration an aggregate of 552,899
options and 2,211,596 Options (Series 1). As of the date of the
financial statements, all said options expired and none were
exercised.
The total initial proceeds raised were $23,200, and costs related to
the issuance of the securities and the prospectus were approximately
$1,750. See Note 19F for the presentation and the accounting treatment
of the sale of these securities under U.S. GAAP.
G. RIGHTS OFFERING - OCTOBER 2002
In October 2002, the Company issued in connection with a rights
offering done on the NASDAQ and on the Tel-Aviv Stock Exchange
4,097,964 Ordinary Shares of the Company and 1,844,070 warrants to
purchase Ordinary Shares of the Company, in consideration for
aggregate gross proceeds of $20,490. Of these amounts, 4,086,037
Ordinary Shares and 1,838,715 warrants were issued to Wafer Partners
and Equity Investors in consideration for an aggregate of $20,430.
Each warrant was exercisable for the purchase of one Ordinary Share at
an exercise price of $7.50 for a period ending on October 31, 2006.
None of the warrants were exercised. Costs in relation to the
prospectus and the issuance of the securities were approximately $800.
H. PUBLIC OFFERING - JANUARY 2004
In January 2004, the Company completed a public offering of its
Ordinary Shares in the U.S. at a price of $7.00 per share. Following
the offering, and including the partial exercise in February 2004 of
an over-allotment option the Company granted the underwriters, the
Company issued 11,444,500 of its Ordinary Shares, in consideration for
gross proceeds of $80,112 (net of related costs - $75,086).
F - 53
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - SHAREHOLDERS' EQUITY (cont.)
I. RIGHTS OFFERING - DECEMBER 2005
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 $0.1, 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 was subject to downward adjustment
under certain circumstances in which the Company would have sold
securities in financings at a price per share which was lower than the
conversion price, provided that such financings closed, or agreements
for such financings were signed, through December 2006. As of the
balance sheet date no such adjustment was or will be required and the
downward adjustment mechanism has expired.
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, to the
government of Israel in connection with grants the Company received
under its approved enterprise programs and to Siliconix and SanDisk.
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 19F for the presentation of the
rights offering in accordance with U.S. GAAP.
F - 54
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - SHAREHOLDERS' EQUITY (cont.)
J. 2006 PUBLIC OFFERING
In June 2006 the Company completed an underwritten public offering of
the Company's securities on the Tel-Aviv Stock Exchange resulting in
immediate 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 consisted
of (i) convertible debentures in the face amount of NIS 2,100
(approximately $0.47), (ii) five options each exercisable for the
three months ended 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 the three months ended September 27,
2006 for one ordinary share of the Company at a price of NIS 6.75
(approximately $0.00157, 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 $0.00175),
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 $0.00199) 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.
Through September 2006, 391,500 options to purchase convertible
debentures described in (ii) above were exercised and 350,000 short
term warrants described in (iii) above were exercised into Ordinary
Shares, totaling in proceeds of approximately $8,000.
See Note 19F for the accounting for the public offering in accordance
with U.S. GAAP.
F - 55
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - SHAREHOLDERS' EQUITY (cont.)
K. 2006 PRIVATE PLACEMENT
In November 2006, the Company received and accepted orders from
Israeli investors in private placements for (i) 58,150 units, each
comprised of 100 Ordinary Shares and 50 warrants ("Series 5
Warrants"), which were sold at a price of NIS 759 (approximately
$0.177) per unit and (ii) 58,000 units, each comprised of 100 Ordinary
Shares and 40 Series 5 Warrants, which were sold at a price of NIS 850
(approximately $0.198) per unit. The price of the Ordinary Shares
included in the units was equal to the closing price of the Company's
shares on the Tel-Aviv Stock Exchange prior to each of the relevant
private placements. Total immediate gross proceeds amounted to
approximately $22,000.
Under Israeli securities laws, the securities were subject to a
statutory lock-up. Further to the Company's undertaking to allow for
removal of the statutory lock-up, the Company filed a prospectus with
the Israel Securities Authority. Such prospectus was published in
December 2006.
Each of the Series 5 Warrants is exercisable at any time during a
period of four years ending in December 2010 at a price per share
equal to a 25% premium to the market price of the Company's shares at
the date the prospectus is published. As of December 28, 2006,
following the publication of the prospectus, the exercise price was
finalized and determined to be NIS 9.48 (approximately $0.0022) linked
to the CPI.
In accordance with Standard no. 22, Series 5 Warrants have been
classified as liability since it did not meet the equity
classification criteria in the issuance date. As a result of the
classification as liability, such warrants are marked to market to
their fair value, with changes in fair value recorded in earnings.
NOTE 13 - INFORMATION ON GEOGRAPHIC AREAS AND MAJOR CUSTOMERS
A. REVENUES BY GEOGRAPHIC AREA (as percentage of total sales)
Year ended December 31,
-------------------------------------
2006 2005 2004
------- ------- -------
United States 69% 64% 60%
Israel 7 7 20
Asia Pacific - primarily Taiwan 16 20 11
Europe 8 9 9
------- ------- -------
Total 100% 100% 100%
======= ======= =======
B. LONG-LIVED ASSETS BY GEOGRAPHIC AREA - Substantially all of the
Company's long-lived assets are located in Israel.
F - 56
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - INFORMATION ON GEOGRAPHIC AREAS AND MAJOR CUSTOMERS (cont.)
C. MAJOR CUSTOMERS (as percentage of total sales)
Year ended December 31,
----------------------------------------
2006 2005 2004
-------- -------- --------
Customer A (related party) 23% 22% 24%
Customer B 10 14 5
Customer C (related party) 10 7 1
Customer D 5 2 17
Other customers (*) 25 15 17
(*) Represents sales to five different customers each of whom
accounted for between 2% and 9% of sales during 2006; to four
different customers each of whom accounted for between 3% and 5%
of sales during 2005 and to three customers accounted for between
3% and 8% of sales during 2004.
As of December 31, 2006 and 2005, the above major customers
constituted the majority of the trade accounts receivable reflected on
the balance sheets.
NOTE 14 - FINANCING EXPENSES, NET
Financing expenses, net consist of the following:
Year ended December 31,
----------------------------------------
2006 2005 2004
-------- -------- --------
Financial expenses (primarily bank loans interest) $(39,917) $(36,103) $(28,257)
Expenses in relation to convertible debentures (primarily
interest and discount amortization expenses) (9,913) (741) (2,685)
-------- -------- --------
(49,830) (36,844) (30,942)
Financing income (primarily bank deposit interest) 1,682 1,193 1,197
-------- -------- --------
Financing expense, net $(48,148) $(35,651) $(29,745)
======== ======== ========
NOTE 15 - OTHER INCOME, NET
In December 2004, the Company entered into a definitive agreement to sell
all of its holdings in Saifun Semiconductors Ltd. ("Saifun"), an Israeli
company which designs and develops memory designs, to a U.S. based private
equity investor in consideration for $38,677. In December 2004,
shareholders of Saifun exercised their right of first refusal, and
accordingly purchased the shares from the Company for said amount. The net
gain from the sale of Saifun's shares amounted to $32,377.
F - 57
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 16 - INCOME TAXES
A. APPROVED ENTERPRISE STATUS
Substantially all of the Company's existing facilities and other
capital investments through December 31, 2005 have been granted
approved enterprise status, as provided by the Israeli Law for the
Encouragement of Capital Investments - 1959 ("Investments Law") (see
Note 5B).
The tax benefits derived from approved enterprise status relate only
to taxable income attributable to each approved enterprise investments
program. Pursuant to the Investments Law and the approval
certificates, the Company's income attributable to its various
approved enterprise investments is taxed at a rate of up to 25%
through 2012. Taxable income attributable to the Fab 2 approved
program shall be tax-exempt for the first two years it arises. The
portion of the Company's taxable income that is not attributable to
approved enterprise investments is taxed at a rate of 31% in 2006
(regular "Company Tax"). The regular Company Tax rate is to be
gradually reduced to 25% until 2010.
The tax benefits are also conditioned upon fulfillment of the
requirements stipulated by the Investments Law and the regulations
promulgated thereunder, as well as the criteria set forth in the
certificates of approval. In the event of a failure by the Company to
comply with these conditions, the tax benefits could be canceled, in
whole or in part, and the Company would be required to refund the
amount of the canceled benefits, plus interest and certain inflation
adjustments. In management's opinion, the Company has been in
compliance with the conditions through the approval date of the
financial statements. See also Notes 5B and 11A(8).
F - 58
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 16 - INCOME TAXES (cont.)
B. COMPONENTS OF DEFERRED TAX ASSET/LIABILITY
The following is a summary of the components of the deferred tax
benefit and liability reflected on the balance sheets as of the
respective dates:
As of December 31,
--------------------------
2006 2005
--------- ---------
DEFERRED TAX BENEFIT - CURRENT
Amounts relating to employees benefits $ 1,717 $ 522
Other 115 51
--------- ---------
1,832 573
Valuation allowance (1,832) (573)
--------- ---------
Total current deferred tax benefit $ - $ -
========= =========
NET DEFERRED TAX BENEFIT - LONG-TERM
Deferred tax assets -
Net operating loss carryforwards $ 174,000 $ 165,000
Research and development 2,063 2,427
Liability for employee rights upon severance 656 957
--------- ---------
176,719 168,384
Valuation allowance (128,707) (118,321)
--------- ---------
48,012 50,063
Deferred tax liability - depreciation and amortization (48,012) (50,063)
--------- ---------
Total net long-term deferred tax benefit $ - $ -
========= =========
C. EFFECTIVE INCOME TAX RATES
The reconciliation of the statutory tax rate to the Company's
effective tax rate is as follows:
Year ended December 31,
------------------------------------------
2006 2005 2004
-------- -------- --------
Israeli statutory rate (31)% (34)% (35)%
Reduced tax rate for approved enterprise 11 14 15
Tax benefits for which deferred taxes
were not recorded 13 21 23
Permanent differences and other, net 7 (1) (3)
-------- -------- --------
-% -% -%
======== ======== ========
D. NET OPERATING LOSS CARRYFORWARD
As of December 31, 2006, the Company had net operating loss
carryforwards for tax purposes of approximately $870,000, which may be
carried forward for an unlimited period of time.
F - 59
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 16 - INCOME TAXES (cont.)
E. FINAL TAX ASSESSMENTS
The Company possesses final tax assessments through the year 1998. In
addition, the tax assessments for the years 1999-2002 are deemed
final.
NOTE 17 - FINANCIAL INSTRUMENTS
A financial instrument is defined as cash, evidence of an ownership
interest in an entity, or a contract that imposes on one entity a
contractual obligation either to deliver or receive cash or another
financial instrument to or from a second entity. Examples of financial
instruments include cash and cash equivalents, trade accounts receivable,
loans, investments, trade accounts payable, accrued expenses, options and
forward contracts.
The Company makes certain disclosures with regard to financial instruments,
including derivatives. These disclosures include, among other matters, the
nature and terms of derivative transactions, information about significant
concentrations of credit risk, and the fair value of financial assets and
liabilities.
See Note 19D for disclosure related to the Company's derivatives financial
instruments in accordance with U.S. GAAP.
A. HEDGING ACTIVITIES
The Company, from time to time, enters into foreign currency
derivatives to hedge its foreign currency exposure to equipment
purchase commitments and other firm commitments denominated in foreign
currency (primarily Japanese Yen and Euro). In that regard, the
Company generally uses foreign currency forward contracts and options
(zero-cost cylinder) as hedging instruments for foreign currency
exposure. Accordingly, if the hedge is determined to be effective all
changes in value attributed to spot rate fluctuations as well as the
premium of forward contracts and the time value of options at
inception are deferred until the hedged item is recognized (i.e.,
receipt of the equipment). The time value of options at inception is
amortized on a straight-line basis.
In addition, the Company, from time to time, enters into agreements to
hedge variable interest rate exposure on long-term loans (see Note 8).
In order to hedge the cash flow related to this exposure, the Company
uses various types of derivative contracts, consisting primarily of
interest rate caps, floors and collars. If the hedge is determined to
be effective, the changes in the intrinsic value of the derivative
contracts are deferred and recognized in results of operations as
interest payments become due. The time value of options at inception
is recognized in the results of operations on a straight-line basis.
When the related debt is issued in connection with the acquisition of
assets not yet placed into operations, interest costs and gains and
losses on the derivative contracts are capitalized to the related
asset.
The Company does not hold or issue derivative financial instruments
for non-hedging purposes.
F - 60
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 17 - FINANCIAL INSTRUMENTS (cont.)
B. CREDIT RISK OF FINANCIAL INSTRUMENTS, INCLUDING DERIVATIVES
The face or contract amounts of derivatives do not represent amounts
exchanged by the parties and, accordingly, are not a measure of the
exposure of the Company through its use of derivatives.
The Company is exposed to credit-related losses in respect of
derivative financial instruments in a manner similar to the credit
risk involved in the realization or collection of other types of
assets. In management's estimation, due to the fact that derivative
financial instrument transactions are entered into solely with
financial institution counterparties, it is not expected that such
counterparties will fail to meet their obligations. Substantially all
remaining financial instruments held by the Company are due from
governmental entities and, accordingly, the Company's credit risk in
respect thereof is negligible.
C. PRESENTATION OF HEDGING ACTIVITIES IN THE FINANCIAL STATEMENTS
As of December 31, 2006 and 2005, the Company had outstanding
agreements to hedge interest rate exposure on loans drawn down under
the Facility Agreement, the aggregate amount of which was $207,000 and
$292,000 respectively, all of which is attributable to Fab 2. These
agreements resulted in 2006 in a gain of $880 and in 2005 and 2004, in
a loss of $1,756 and $5,629, respectively.
D. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments,
excluding the Company's agreements to hedge interest rate exposure on
long-term loans and long term convertible debentures did not
materially differ from their respective carrying amounts as of
December 31, 2006, 2005 and 2004. The fair value of the interest rate
hedging transactions as of December 31, 2006 and 2005 would have
resulted in an unrealized capitalizable gain of $1,790 and $1,767,
respectively (as of December 31, 2004, an unrealized capitalizable
loss of $2,406). The fair values of convertible debentures as of
December 31, 2006, 2005 and 2004 were $126,048, $22,750 and $15,889,
based on quoted market prices for the respective dates.
F - 61
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 18 - RELATED PARTIES BALANCES AND TRANSACTIONS
A. BALANCES
As of December 31,
-------------------------
2006 2005
--------- ---------
Trade accounts receivable $ 13,625 $ 5,309
========= =========
Current liabilities, including current maturity of
long-term loans $ 5,895 $ 188
========= =========
Convertible debenture $ 24,500 $ 25,493
========= =========
Long-term liability in respect of customers' advances $ 27,340 $ 37,785
========= =========
Other long-term liabilities, including long-term loans from
related parties, net of current maturity $ 9,279 $ 1,102
========= =========
Capital note $ 100,000 $ -
========= =========
B. TRANSACTIONS
Year ended December 31,
-----------------------------------------
2006 2005 2004
--------- --------- ---------
Revenues $ 64,055 $ 33,456 $ 37,521
========= ========= =========
Expenses paid $ 206 $ 57 $ 190
========= ========= =========
Royalties received - Note 11D(2) $ - $ - $ 875
========= ========= =========
Application of customer advances towards purchases $ - $ - $ 445
========= ========= =========
Equity conversion of customer advances - Note
11A(5) $ 7,621 $ 1,794 $ 539
========= ========= =========
Conversion of customer advances into Long-term
loans - Note 11A(5) $ 2,823 $ 936 $ 166
========= ========= =========
C. For commitments, contingencies and other transactions relating to Fab
2 Wafer Partner and Equity Investor agreements - see Note 11A.
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP
With regard to the Company's financial statements, the material differences
between GAAP in Israel and in the U.S. relate to the following. See J below
for the presentation of the Company's balance sheets as of December 31,
2006 and 2005 in accordance with U.S. GAAP.
F - 62
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
A. INITIAL ADOPTION OF NEW PRONOUNCEMENTS BY THE FASB
(1) SFAS NO. 151 - INVENTORY COSTS, AN AMENDMENT OF ARB NO. 43,
CHAPTER 4 - In November 2004, the FASB issued SFAS No. 151,
"INVENTORY COSTS, AN AMENDMENT OF ARB NO. 43, CHAPTER 4". SFAS
No. 151 amends the guidance in ARB 43, Chapter 4, "Inventory
Pricing", which provides guidance on the allocation of certain
costs to inventory. SFAS 151 clarifies that abnormal amounts of
idle facility expense, freight, handling costs, and wasted
material (spoilage) should be recognized as current-period
charges. In addition, SFAS 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the
normal capacity of the production facilities. The provisions of
this statement are effective for inventory costs incurred during
fiscal years beginning after June 2005. The provisions of this
statement shall be applied prospectively. This Statement does not
have a material effect on the Company's financial position or
results of operations.
(2) SFAS NO. 123 (REVISED 2004) "SHARE BASED PAYMENTS" - In December
2004, the FASB issued SFAS No. 123 (revised 2004) "SHARE BASED
PAYMENTS" ("SFAS 123(R)"). This Statement is a revision of FASB
Statement No. 123, "Accounting for Stock-Based Compensation",
which supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees" and its authoritative interpretations.
SFAS 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments
for goods or services; focuses primarily on accounting for
transactions in which an entity obtains employee and directors
services in share-based payment transactions; and does not change
the accounting guidance for share-based payment transactions with
parties other than employees.
SFAS 123(R) eliminates the alternative to use APB 25's intrinsic
value method of accounting that was provided in SFAS 123 as
originally issued and requires measuring the cost of employee
services received in exchange for an award of equity instruments
based on the grant-date fair value of the award. The
fair-value-based method in this Statement is similar to the
fair-value-based method in SFAS 123 in most respects. The costs
associated with the awards will be recognized over the period
during which an employee is required to provide services in
exchange for the award - the requisite service period (usually
the vesting period).
The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models
adjusted for the unique characteristics of those instruments
(unless observable market prices for the same or similar
instruments are available). If an equity award is modified after
the grant date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the
modified award over the fair value of the original award
immediately before the modification.
F - 63
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
A. INITIAL ADOPTION OF NEW PRONOUNCEMENTS BY THE FASB (cont.)
(2) SFAS NO. 123 (REVISED 2004) "SHARE BASED PAYMENTS" (CONT.)
The provisions of SFAS 123(R) apply to all awards to be granted
by the Company on or after January 1, 2006 and to awards
modified, repurchased, or cancelled after that date. When
initially applying the provisions of SFAS 123(R), in the first
quarter of 2006, the Company was required to elect between using
either the "modified prospective method" or the "modified
retrospective method". Under the modified prospective method, the
Company is required to recognize compensation cost for all awards
granted after the adoption of SFAS 123(R) and for the unvested
portion of previously granted awards that are outstanding on that
date. Under the modified retrospective method, the Company is
required to restate its previously issued financial statements to
recognize the amounts previously calculated and reported on a pro
forma basis, as if the original provisions of SFAS 123(R) had
been adopted. Under both methods, it is permitted to use either a
straight line or an accelerated method to amortize the cost as an
expense for awards with graded vesting. The Company elected the
modified prospective method using graded vesting amortization.
(3) SFAS 153, EXCHANGE OF NON-MONETARY ASSETS - In December 2004, the
FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets an
amendment of APB No. 29". This Statement amends Opinion 29 to
eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial
substance. The Statement specifies that a nonmonetary exchange
has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange.
This Statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005.
Retroactive application is not permitted. The adoption of this
Standard does not affect the Company's financial position or
results of operations.
(4) SFAS NO. 154, ACCOUNTING CHANGES AND ERROR CORRECTIONS - This
Statement, published in May 2005, replaces APB Opinion No. 20,
Accounting Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements, and changes
the requirements for the accounting for and reporting of a change
in accounting principles. This Statement applies to all voluntary
changes in accounting principles, and to changes required by an
accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions.
F - 64
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
A. RECENT ACCOUNTING PRONOUNCEMENTS BY THE FASB (cont.)
(5) 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.
(6) FIN NO. 48. ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES - On July
13, 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement
No. 109" ("FIN 48"), which clarifies the accounting for
uncertainty in tax positions. This Interpretation requires
recognition in the financial statements of the impact of a tax
position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the
position. The provisions of FIN 48 are effective for the 2007
fiscal year with the cumulative effect of the change in
accounting principle recorded as an adjustment to opening balance
of retained earnings. Management does not believe that FIN 48
will have a material effect on the financial condition, results
of operations, or liquidity of the Company.
(7) SFAS NO. 157. FAIR VALUE MEASUREMENT - In September 2006, the
FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157
requires companies to disclose the fair value of their financial
instruments according to a fair value hierarchy as defined in the
standard. Additionally, companies are required to provide
enhanced disclosure regarding financial instruments in one of the
categories (level 3), including a reconciliation of the beginning
and ending balances separately for each major category of assets
and liabilities. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The
Company's management believes that the adoption of SFAS No. 157
will not have a material impact on the Company's consolidated
financial statements.
F - 65
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
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 December 31, 2005, $31,661 was reclassified from current assets
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 December 31, 2006 an amount of $13,535 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)
(1) In 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and the related
statements and interpretations thereon (collectively, "SFAS
133"). A derivative is typically defined as an instrument whose
value is derived from an underlying instrument, index or rate,
has a notional amount, requires no or little initial investment
and can be net settled.
SFAS 133 requires that all derivatives be recorded in the
financial statements at their fair value at the date of the
financial statements. The changes in the fair value of the
derivatives are charged to the statement of operations or to
other comprehensive income, as appropriate in the circumstances.
The Company's derivatives consist mainly of foreign currency
forward transactions and options and interest rate instruments
(collars).
(2) The Company uses foreign exchange agreements (forward contracts
and options) to hedge its foreign currency exposure in
anticipated equipment purchases denominated in foreign currency.
All foreign exchange agreements are with underlying terms that
match or approximate the hedged transactions and thus are highly
effective. The Company measures the effectiveness of the forward
hedge contracts based on forward rates. The Company assesses and
measures the effectiveness of the options hedge, at inception and
throughout the hedge, based on total changes in cash flows. All
changes in fair value are reported in other comprehensive income.
The amounts accumulated in other comprehensive income are
expensed to results of operations concurrent with the recognition
of depreciation expenses on the equipment. As of December 31,
2006 and 2005, the Company had no outstanding foreign exchange
agreements.
F - 66
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
D. HEDGING ACTIVITIES IN ACCORDANCE WITH U.S. GAAP (SFAS 133) (cont.)
(2) (cont.)
The Company uses interest rate collars with a knock-out and
knock-in features to hedge its LIBOR-based variable long-term
debt cash flow exposure. The knock-out feature was set above the
cap level and the knock-in feature was set below the floor level.
The Company determined that the probability that the cap will be
knocked-out is remote and thus expected that the hedge will be
highly effective. The Company assessed and measured the
effectiveness of the hedge, at inception and throughout the
hedge, based on total changes in cash flows of the collar, and
reported changes in fair value in other comprehensive income.
Amounts presented in other comprehensive income are reclassified
to operations or capitalized to property and equipment, as
applicable (see Note 2M), as interest payment become due. For
outstanding contracts as of December 31, 2006 and 2005, see Note
17C.
(3) Following the commencement of operations of Fab 2 during 2003,
$6,641 of the aggregate comprehensive loss as of June 30, 2003,
which is attributable to property and equipment, is amortized on
a straight-line method over five years, in correspondence to the
estimated economic lives commonly used in the industry of the
machinery and equipment.
(4) Complying with SFAS 133 with respect to the Company's hedging
transactions as of December 31, 2006 would have resulted in: an
increase in other long-term investments in the amount of $1,790;
a decrease (for U.S. GAAP purposes only) in other comprehensive
loss for the year ended December 31, 2006 in the net amount of
$1,351; an accumulated other comprehensive loss component of
equity balance as of such date in the amount of $203; and in a
decrease of $1,993 in property and equipment, net as of December
31, 2006.
F - 67
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
E. IMPLEMENTATION OF SFAS 123 AND SFAS 148
Had compensation cost for the Company's share option plans been
determined based on fair value at the grant dates for awards made
through December 31, 2005 in accordance with SFAS 123, as amended by
SFAS 148, the Company's pro forma loss and loss per share would have
been as follows (for further information with regard to the Company's
share option plans and the assumptions for utilizing the Black-Scholes
pricing model, see Note 12B(4)):
Year ended December 31,
--------------------------
2005 2004
--------- ---------
PRO FORMA LOSS
Loss for the year, as reported according to
U.S. GAAP (see K below) $(203,082) $(137,768)
Add - stock-based compensation
determined under SFAS 123 (4,229) (3,980)
--------- ---------
Pro forma loss $(207,311) $(141,748)
========= =========
BASIC LOSS PER SHARE
As reported according to U.S.
GAAP (see M below) $ (3.06) $ (2.13)
========= =========
Pro forma $ (3.12) $ (2.19)
========= =========
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 additional
accumulated effect of amortization of the discount on the convertible
debentures under U.S.GAAP as of December 31, 2006 would have been
$1,142. 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 U.S. GAAP.
F - 68
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
F. ISSUANCE OF CONVERTIBLE DEBENTURES (Cont.)
Under U.S. 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 2H.
2002 DEBENTURES:
Under U.S. GAAP, the equity component, in the amount of $1,681,
classified in equity under Israeli GAAP was reclassified to liability.
2005 DEBENTURES:
Under U.S. GAAP, the equity component, in the amount of $12,520
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 U.S. GAAP, the equity component, in the amount of $6,018,
classified in equity under Israeli GAAP was reclassified to liability.
The conversion feature was bifurcated from the debt host and marked to
market through earnings. The amount allocated to the bifurcated
conversion feature was determined using the "with and without" method.
All the above resulted as of December 31, 2006 mainly in an increase
in convertible debentures in the amount of $21,688; a decrease in the
shareholder's equity in the amount of $20,876 and an increase in other
assets in the amount of $834. The company's loss for the year ended
December 31, 2006 would have increased in the amount of $3,973.
G. 2006 PRIVATE PLACEMENT
Under U.S. GAAP series 5 warrants were initially recorded as liability
due to the ratchet provision included in them. Upon registering such
warrants the ratchet expired and the series 5 warrants were eligible
for equity classification based on the criteria in EITF 00-19.
Complying with the above, would have resulted as of December 31, 2006
mainly in a decrease in other long term liabilities and an increase in
the shareholder's equity in the amount of $3,088.
F - 69
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
H. 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 year ending December 31, 2006 in the
amount of $1,513. The Company elected the modified prospective method
as its transition method. The adoption of SFAS 123R for U.S. GAAP
along with the adoption of Standard no. 24 for Israeli GAAP, decreased
the potential differences between U.S. GAAP and Israeli GAAP as it
related to stock based compensation.
I. FACILITY AGREEMENT
Under U.S. GAAP the debt modification under the September 2006
Amendment is considered troubled debt restructuring within the scope
of FASB No. 15 ACCOUNTING BY DEBTORS AND CREDITORS FOR TROUBLED DEBT
RESTRUCTURINGS which requires the following: (i) the amount considered
settled for shares and classified in equity is based on the price per
share as quoted at the closing date;(ii) the remaining balance after
deduction of the amount used as proceeds for the share issuance in 1
above, will remain outstanding;(iii) a new, lower effective interest
rate will be calculated as the interest rate that equates future
payments to the outstanding balance; and (iv) no gains or losses are
recognized in the current period.
Under U.S. GAAP the debt modification under the Amendment is
considered to include an embedded derivative that should be separately
accounted for. The Company considered the obligation to issue shares
as agreed with the Banks and determined that it contains two
components (i) a contingent component and (ii) an uncontingent
component. The contingent component is the obligation to issue shares
equal to half of the amount of the Decreased Amount if the Fourth
Quarter 2010 Price is less than $3.49. The uncontingent component is
the obligation to issue shares equal to half of the Decreased Amount
regardless of the Fourth Quarter 2010 Price. The Company accounted for
the uncontingent component as an additional interest expense and
calculated the effective interest rate to include such expense. The
Company treated the uncontingent component as an embedded derivative
that needs to be bifurcated and separately accounted for based on fair
value. Initial separation of the embedded derivative will be done
using the "with and without" method described in DIG Issue B6. Changes
in the fair value of the embedded derivative will be included in
financing expenses. All the above resulted in a decrease of $75,483 in
the shareholders equity for the year ended December 31, 2006 and an
increase of the same amount in the long-term loans from the banks as
of December 31, 2006.
F - 70
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
J. BALANCE SHEETS IN ACCORDANCE WITH U.S. GAAP
AS OF DECEMBER 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.
REMARK GAAP MENTS GAAP GAAP MENTS GAAP
--------- --------- --------- --------- --------- --------- ---------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 39,710 $ 39,710 $ 7,337 $ 7,337
SHORT-TERM INTEREST-BEARING DEPOSITS 1,230 1,230 - -
DESIGNATED CASH AND SHORT-TERM INTEREST -
BEARING DEPOSITS B - - 31,661 (31,661) -
TRADE ACCOUNTS RECEIVABLE :
RELATED PARTIES 13,625 13,625 5,309 5,309
OTHERS 17,873 17,873 11,467 11,467
OTHER RECEIVABLES 5,425 5,425 9,043 9,043
INVENTORIES 41,101 41,101 24,376 24,376
OTHER CURRENT ASSETS 1,473 1,473 1,048 1,048
--------- --------- --------- --------- --------- ---------
TOTAL CURRENT ASSETS 120,437 - 120,437 90,241 (31,661) 58,580
--------- --------- --------- --------- --------- ---------
LONG-TERM INVESTMENTS C,D - 15,325 15,325 - 15,425 15,425
--------- --------- --------- --------- --------- ---------
PROPERTY AND EQUIPMENT, NET D,F 532,954 (1,745) 531,209 510,645 (3,291) 507,354
--------- --------- --------- --------- --------- ---------
DESIGNATED CASH AND SHORT-TERM
INTEREST-BEARING DEPOSITS B - - - - 31,661 31,661
--------- --------- --------- --------- --------- ---------
INTANGIBLE ASSETS, NET 44,981 44,981 61,441 61,441
--------- --------- --------- --------- --------- ---------
OTHER ASSETS, NET F 1,346 834 2,180 16,359 (196) 16,163
========= ========= ========= ========= ========= =========
TOTAL ASSETS $ 699,718 $ 14,414 $ 714,132 $ 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 6,632 270 6,902 6,453 (640) 5,813
TRADE ACCOUNTS PAYABLE 55,128 55,128 59,741 59,741
OTHER CURRENT LIABILITIES 22,096 22,096 8,972 8,972
--------- --------- --------- --------- --------- ---------
TOTAL CURRENT LIABILITIES 83,856 270 84,126 96,269 (640) 95,629
LONG-TERM DEBT FROM BANKS I 356,947 75,483 432,430 497,000 497,000
CONVERTIBLE DEBENTURES F 62,175 21,688 83,863 19,358 23,574 42,932
LONG-TERM CUSTOMERS' ADVANCES 46,042 46,042 59,621 59,621
OTHER LONG-TERM LIABILITIES C,G 17,708 10,447 28,155 11,012 13,658 24,670
--------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES 566,728 107,888 674,616 683,260 36,592 719,852
--------- --------- --------- --------- --------- ---------
CONVERTIBLE DEBENTURES F - - - 25,493 (25,493) -
--------- --------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY (DEFICIT)
ORDINARY SHARES, NIS 1 PAR VALUE -
AUTHORIZED 800,000,000 AND 500,000,000
SHARES RESPECTIVELY; ISSUED 102,052,767
AND 68,232,056 SHARES, RESPECTIVELY 24,187 24,187 16,548 16,548
ADDITIONAL PAID-IN CAPITAL F,G 564,580 6,404 570,984 522,237 2,363 524,600
CAPITAL NOTES 176,401 176,401
EQUITY COMPONENT OF CONVERTIBLE DEBENTURES
AND CUMULATIVE STOCK BASED COMPENSATION F,H 23,576 (18,706) 4,870 (26) (26)
ACCUMULATED OTHER COMPREHENSIVE LOSS D - (203) (203) - (1,554) (1,554)
ACCUMULATED DEFICIT F,H,I (646,682) (80,969) (727,651) (559,754) 30 (559,724)
--------- --------- --------- --------- --------- ---------
142,062 (93,474) 48,588 (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) 132,990 (93,474) 39,516 (30,067) 839 (29,228)
========= ========= ========= ========= ========= =========
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 699,718 $ 14,414 $ 714,132 $ 678,686 $ 11,938 $ 690,624
========= ========= ========= ========= ========= =========
F - 71
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
K. STATEMENTS OF OPERATIONS IN ACCORDANCE WITH U.S. GAAP
Complying with FASB No. 15 (I above), SFAS 133 (D above), APB 14 (F
above) and SFAS 123R (H above) would have resulted in an increase in
the loss for the year ended December 31, 2006 in the amount of
$80,999, mainly due to the difference in accounting for the debt
modification under Israeli GAAP. Giving effect to all the above, the
loss for the year ended December 31, 2006 would be $167,927. No
material effect on the result of operation for the years ended
December 31, 2005 and 2004.
L. COMPREHENSIVE INCOME (LOSS) IN ACCORDANCE WITH U.S. GAAP (SFAS 130)
Comprehensive income (loss) represents the change in shareholder's
equity during a reporting period from transactions and other events
and circumstances from non-owner sources. It includes all changes in
equity during a reporting period except those resulting from
investments by owners and distributions to owners. Other comprehensive
income (loss) represents gains and losses that under U.S. GAAP are
included in comprehensive income but excluded from net income.
Following are statements of comprehensive loss in accordance with U.S.
GAAP:
Year ended December 31,
-------------------------------------------
2006 2005 2004
--------- --------- ---------
Loss for the year according to U.S. GAAP $(167,927) $(203,082) $(137,768)
Other comprehensive loss:
Amortization of unrealized
losses on derivatives 1,328 1,328 1,328
Unrealized gains on derivatives 23 4,173 7,514
--------- --------- ---------
Net comprehensive loss for the year $(166,576) $(197,581) $(128,926)
========= ========= =========
F - 72
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
M. LOSS PER SHARE DATA IN ACCORDANCE WITH U.S. GAAP (SFAS 128)
In accordance with U.S. GAAP, SFAS 128, the basic and diluted loss per
share would be:
Year ended December 31,
----------------------------------------
2006 2005 2004
-------- -------- --------
Basic loss per share $ (2.03) $ (3.06) $ (2.13)
======== ======== ========
Diluted loss per share $ (2.03) $ (3.06) $ (2.13)
======== ======== ========
The following tables provide the numerators and denominators of the
basic and diluted per share computations for 2006, 2005,and 2004 in
accordance with U.S. GAAP. The loss per share for 2006, 2005 and 2004
according to U.S. GAAP differs from the corresponding amount under
Israeli GAAP due to different methods for determining the loss used to
compute loss per share.
RECONCILIATION FOR 2006:
Year ended December 31, 2006
------------------------------------------
Shares
Loss (in thousands) Per-share
(Numerator) (Denominator) Amount
--------- --------- ---------
BASIC LOSS PER SHARE
Loss available to ordinary shareholders $(167,927) 82,581 $ (2.03)
EFFECT OF DILUTIVE SECURITIES
Convertible debentures - - -
Options and warrants - - -
--------- --------- ---------
DILUTED LOSS PER SHARE
Loss available to ordinary
shareholders after assumed conversions $(167,927) 82,581 $ (2.03)
========= ========= =========
Options and warrants to purchase 43,842,508 Ordinary Shares at an
average exercise price of $1.92 per share were outstanding as of
December 31, 2006 but were not included in the computation of diluted
loss per share because their effect was anti-dilutive. Convertible
debentures, convertible into 53,314,471 Ordinary Shares, were
outstanding as of December 31, 2006 but were not included in the
computation of diluted loss per share since their effect is
anti-dilutive. Capital notes, convertible into 117,763,158 Ordinary
Shares, were outstanding as of December 31, 2006 but were not included
in the computation of diluted loss per share since their effect is
anti-dilutive.
F - 73
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
M. LOSS PER SHARE DATA IN ACCORDANCE WITH U.S. GAAP (SFAS 128) (cont.)
RECONCILIATION FOR 2005:
Year ended December 31, 2005
---------------------------------------
Shares
Loss (in Thousands) Per-share
(Numerator) (Denominator) amount
--------- --------- ---------
BASIC LOSS PER SHARE
Loss available to ordinary shareholders $(203,082) 66,371 $ (3.06)
EFFECT OF DILUTIVE SECURITIES
Convertible debentures - - -
Options and warrants - - -
--------- --------- ---------
DILUTED LOSS PER SHARE
Loss available to ordinary shareholders after
assumed conversions $(203,082) 66,371 $ (3.06)
========= ========= =========
Options and warrants to purchase 28,437,207 Ordinary Shares at an
average exercise price of $4.23 per share were outstanding as of
December 31, 2005 but were not included in the computation of diluted
loss per share because their effect was anti-dilutive. Convertible
debentures, convertible into 25,872,523 Ordinary Shares, were
outstanding as of December 31, 2005 but were not included in the
computation of diluted loss per share since their effect is
anti-dilutive.
RECONCILIATION FOR 2004:
Year ended December 31, 2004
------------------------------------------
Shares
Loss (in Thousands) Per-share
(Numerator) (Denominator) amount
--------- --------- ---------
BASIC LOSS PER SHARE
Loss available to ordinary shareholders $(137,768) 64,633 $ (2.13)
EFFECT OF DILUTIVE SECURITIES
Convertible debentures - - -
Options and warrants - - -
--------- --------- ---------
DILUTED LOSS PER SHARE
Loss available to ordinary Shareholders after
assumed conversions $(137,768) 64,633 $ (2.13)
========= ========= =========
Options and warrants to purchase 17,374,088 Ordinary Shares at an
average exercise price of $6.61 per share were outstanding as of
December 31, 2004 but were not included in the computation of
diluted loss per share because their effect was anti-dilutive.
Convertible debentures, convertible into 2,697,068 Ordinary
Shares, were outstanding as of December 31, 2004 but were not
included in the computation of diluted loss per share since their
effect is anti-dilutive.
F - 74
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
N. 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 each of the years ended December 31, 2006,
2005 and 2004.
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 OUR
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2006 AND RELATED NOTES FOR
THE YEAR THEN ENDED. 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 19 TO OUR CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
2006.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated.
YEAR ENDED DECEMBER 31,
----------------------
2006 2005
------ ------
STATEMENT OF OPERATIONS DATA:
Total revenues 100.0% 100.0%
Cost of total revenues 142.66 233.7
------ ------
Gross loss (42.66) (133.7)
Research and development expenses, net 7.99 15.7
Marketing, general and administrative
expenses 13.08 17.1
------ ------
Operating loss (63.73) (166.5)
Financing expense, net (25.69) (35.0)
Gain on debt restructuring 42.72 -
------ ------
Other income, net 0.32 2.34
------ ------
Loss (46.38)% (199.1)%
====== ======
YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005
REVENUES. Revenues for the year ended December 31, 2006 increased by 83.8%
to $187.4 million from $102 million for the year ended December 31, 2005. This
$85.4 million increase was mainly attributable to an increase in our customer
base and higher volume of wafer shipments offset by $8 million recorded for the
year ended December 31, 2005 from a previously announced technology-related
agreement.
COST OF TOTAL REVENUES. Cost of total revenues for the year ended December
31, 2006 amounted to $267.4 million, compared with $238.4 million for the year
ended December 31, 2005. This 12% modest increase in cost of revenues, despite
the 84% increase in revenues, was achieved mainly due to previously announced
cost reductions and efficiency measures taken by the Company and the Company's
cost structure, according to which, the Company has reasonable margins for each
incremental dollar of revenue.
GROSS LOSS. Gross loss for the year ended December 31, 2006 was $80.0
million compared to a gross loss of $136.4 million for the year ended December
31, 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 and the Company's cost structure, according to which, the Company
has reasonable margins for each incremental dollar of revenue.
RESEARCH AND DEVELOPMENT. Research and development expenses for the year
ended December 31, 2006 decreased to $15.0 million from $16.0 million for the
year ended December 31, 2005. The decrease was mainly attributable to previously
announced cost reductions and efficiency measures taken by the Company as well
as higher grants received from the Israeli government, which are included
there-in.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses for the year ended December 31, 2006 increased to $24.5
million from $17.4 million for the year ended December 31, 2005, primarily due
to stock based compensation expenses recorded for the first time with the
adoption of Standard No. 24 and increased commissions and other expenses
resulted directly from the higher revenues mentioned above.
OPERATING LOSS. Operating loss for the year ended December 31, 2006 was
$119.4 million, compared to $169.8 million for the year ended December 31, 2005.
The decrease in the operating loss is attributable mainly to the decrease in the
gross loss described above and the Company's cost structure, according to which,
the Company has reasonable margins for each incremental dollar of revenue.
FINANCING EXPENSES, NET. Financing expenses, net for the year ended
December 31, 2006 were $48.1 million compared to financing expenses, net of
$35.7 million for the year ended December 31, 2005. This increase is mainly due
to an increase of $9.2 million in costs related to our convertible debentures
attributable mainly to the : (i) $5.9 million increase in the discount
amortization and interest expenses resulting mainly from the issuance of two new
series of convertible debentures (in December 2005 and June 2006) and (ii) the $
to NIS exchange rate weakening in 2006 caused an increase in the dollar amount
of the NIS denominated outstanding convertible debt, resulting in an annual
increase of $4.8 million in expenses (see below for more details on currency
fluctuations).
GAIN ON DEBT RESTRUCTURING. Gain on debt restructuring for the year ended
December 31, 2006 was $80.1 million. This one-time gain resulted from the
consummation of our debt restructuring with our banks, which was closed in the
third quarter of 2006.
OTHER INCOME, NET. Other income, net, for the year ended December 31, 2006
was $0.6 million compared to $2.4 million for the year ended December 31, 2005,
mainly due to lower capital gains, net, from sale and disposal of equipment.
LOSS. Our loss for the year ended December 31, 2006 was $86.9 million,
compared to $203.1 million for the year ended December 31, 2005. This decrease
is primarily attributable to the $80.1 million gain on debt restructuring and a
decrease of $50.4 million in the operating loss described above, offset by the
$12.5 million increase in financing expenses 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 year ended December 31, 2006, the exchange rate of the dollar
in relation to the NIS decreased by 8.2%, and the Israeli Consumer Price Index,
or CPI, decreased by 0.1% (during the year ended December 31, 2005 there was an
increase of 6.8% in the exchange rate of the dollar in relation to the NIS and
an increase of 2.4% 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 December 31, 2006, we had an aggregate of $40.9 million in cash, cash
equivalents and short term interest bearing deposits. This compares to $39.0
million we had as of December 31, 2005 in cash, cash equivalents, and short-term
interest-bearing deposits of which $22.0 million was contractually restricted
for Fab 2 use only and $9.6 million was contractually restricted for exclusive
use in the Siliconix project.
During the year ended December 31, 2006, we received $18.3 million from
long term loans, $100.0 million on account of share capital, $58.8 million in
proceeds from the issuance of convertible debentures, net, $3.7 million proceeds
from exercise of warrants, $17.5 million from issuance of ordinary shares, $5.2
million from Investment Center grants and $0.6 million in proceeds from the sale
and disposal of property and equipment. These liquidity resources financed our
operating activities (net amount of $45.5 million) and our investments made
during the year ended December 31, 2006, which aggregated to $150.2 million,
mainly in connection with the construction, purchase and installation of
equipment and other assets for Fab 2 and our repayment of convertible debentures
in the amount of $6.5 million.
As of December 31, 2006, we had long-term loans, at present value, in the amount
of $356.9 million which we obtained in connection with the establishment of Fab
2. As of such date, we had outstanding, in the aggregate, convertible debentures
with par value of $98.4 million, of which $6.6 million are presented as current
maturities and $20.2 million of the proceeds were allocated and are presented as
equity component of the convertible debentures as part of the shareholders'
equity.
EXHIBIT 99.4
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements Nos.
333-85090, 333-108896, 333-110486 333-131315, and 333-140174 on Form F-3, and
Nos. 33-80947, 333-06482, 333-11720, 333-83204, 333-107943 333-117565,
333-138837 on Form S-8, of our report dated February 7, 2007, relating to the
consolidated financial statements of Tower Semiconductor Ltd., appearing in this
Report on Form 6-K of Tower Semiconductor Ltd.
Brightman Almagor & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu
Tel Aviv Israel
February 8, 2007