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FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the month of August 2007 (No. 3)
TOWER SEMICONDUCTOR LTD.
(Translation of registrant's name into English)
RAMAT GAVRIEL INDUSTRIAL PARK
P.O. BOX 619, MIGDAL HAEMEK, ISRAEL 23105
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [_]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [_] No [X]
On August 15, 2007, the Registrant announced its financial results for the
six and three months ended June 30, 2007. Attached hereto are the following
exhibits:
Exhibit 99.1 Registrant's unaudited condensed interim consolidated
financial statements as of June 30, 2007 and for the six and
three months period then ended.
Exhibit 99.2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Form 6-K, including all exhibits hereto, is hereby incorporated by
reference into (1) all effective registration statements filed by us under the
Securities Act of 1933 and (2) Registration Statement No. 333-140174 on Form
F-3.
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: August 15, 2007 By: /s/ Nati Somekh Gilboa
--------------------------
Nati Somekh Gilboa
Corporate Secretary
EXHIBIT 99.1
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
UNAUDITED CONDENSED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2007
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
INDEX TO UNAUDITED CONDENSED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2007
PAGE
BALANCE SHEETS 1
STATEMENTS OF OPERATIONS 2
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 3
STATEMENTS OF CASH FLOWS 4
NOTES TO FINANCIAL STATEMENTS 5-22
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data and per share data)
AS OF JUNE 30, DECEMBER 31,
-------------------------- ---------
2007 2006 2006
--------- --------- ---------
(UNAUDITED)
--------------------------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 20,723 $ 8,581 $ 39,710
SHORT-TERM INTEREST-BEARING DEPOSITS -- -- 1,230
DESIGNATED CASH AND SHORT-TERM INTEREST-BEARING DEPOSITS -- 2,909 --
PROCEEDS RECEIVABLES RELATING PUBLIC OFFERING -- 31,479 --
TRADE ACCOUNTS RECEIVABLE:
RELATED PARTIES 22,955 8,538 13,625
OTHERS 22,521 13,088 17,873
OTHER RECEIVABLES 2,769 7,131 5,425
INVENTORIES 37,691 29,623 34,763
OTHER CURRENT ASSETS 1,465 1,616 1,473
--------- --------- ---------
TOTAL CURRENT ASSETS 108,124 102,965 114,099
--------- --------- ---------
PROPERTY AND EQUIPMENT, NET 507,414 465,106 539,292
--------- --------- ---------
INTANGIBLE ASSETS, NET 39,482 54,508 44,981
--------- --------- ---------
OTHER ASSETS , NET 1,303 1,371 1,346
========= ========= =========
TOTAL ASSETS $ 656,323 $ 623,950 $ 699,718
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITIES OF CONVERTIBLE DEBENTURES $ 6,611 $ 6,204 $ 6,632
TRADE ACCOUNTS PAYABLE 55,922 50,410 55,128
OTHER CURRENT LIABILITIES 20,907 11,517 22,096
--------- --------- ---------
TOTAL CURRENT LIABILITIES 83,440 68,131 83,856
LONG-TERM DEBT FROM BANKS 360,689 515,811 356,947
CONVERTIBLE DEBENTURES 58,609 53,272 62,175
LONG-TERM CUSTOMERS' ADVANCES 42,070 52,528 46,042
OTHER LONG-TERM LIABILITIES 19,441 10,104 17,708
--------- --------- ---------
TOTAL LIABILITIES 564,249 699,846 566,728
--------- --------- ---------
SHAREHOLDERS' EQUITY (DEFICIT)
ORDINARY SHARES, NIS 1.00 PAR VALUE - AUTHORIZED
800,000,000, 500,000,000 AND 800,000,000 SHARES,
RESPECTIVELY; ISSUED 123,495,958, 85,768,622
AND 102,052,767 SHARES, RESPECTIVELY 29,283 20,366 24,187
ADDITIONAL PAID-IN CAPITAL 586,265 540,885 564,580
CAPITAL NOTES 176,401 -- 176,401
EQUITY COMPONENT OF CONVERTIBLE DEBENTURES AND CUMULATIVE
STOCK BASED COMPENSATION 27,700 20,381 23,576
ACCUMULATED DEFICIT (718,503) (648,456) (646,682)
--------- --------- ---------
101,146 (66,824) 142,062
TREASURY STOCK, AT COST - 1,300,000 SHARES (9,072) (9,072) (9,072)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 92,074 (75,896) 132,990
========= ========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 656,323 $ 623,950 $ 699,718
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 1 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data and per share data)
SIX MONTHS ENDED THREE MONTHS ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMDER 31,
-------------------------- -------------------------- ---------
2007 2006 2007 2006 2006
--------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
-------------------------- --------------------------
REVENUES $ 112,666 $ 80,430 $ 57,062 $ 44,555 $ 187,438
COST OF SALES 142,878 126,422 71,384 65,142 267,390
--------- --------- --------- --------- ---------
GROSS LOSS (30,212) (45,992) (14,322) (20,587) (79,952)
--------- --------- --------- --------- ---------
OPERATING COSTS AND EXPENSES
RESEARCH AND DEVELOPMENT 6,952 6,928 3,355 3,574 14,984
MARKETING, GENERAL AND ADMINISTRATIVE 15,176 10,798 7,351 5,474 24,512
--------- --------- --------- --------- ---------
22,128 17,726 10,706 9,048 39,496
========= ========= ========= ========= =========
OPERATING LOSS (52,340) (63,718) (25,028) (29,635) (119,448)
FINANCING EXPENSE, NET (19,554) (25,575) (9,406) (14,051) (48,148)
GAIN ON DEBT RESTRUCTURING -- -- -- -- 80,071
OTHER INCOME, NET 73 591 4 40 597
--------- --------- --------- --------- ---------
LOSS FOR THE PERIOD $ (71,821) $ (88,702) $ (34,430) $ (43,646) $ (86,928)
========= ========= ========= ========= =========
LOSS PER ORDINARY SHARE
BASIC AND DILLUTED LOSS PER SHARE $ (0.63) $ (1.18) $ (0.28) $ (0.55) $ (1.05)
========= ========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF ORDINARY
SHARES OUTSTANDING - IN THOUSANDS 113,584 75,313 122,014 78,716 82,581
========= ========= ========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 2 -
TOWER SEMICONDUCTOR LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(dollars in thousands, except share data and per share data)
EQUITY
COMPONENT
OF
CONVERTIBLE
DEBENTURES
AND
ORDINARY SHARES ADDITIONAL CUMULATIVE
--------------------------- PAID-IN CAPITAL STOCK BASED ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL NOTES COMPENSATION DEFICIT STOCK TOTAL
----------- ----------- ----------- ----------- ----------- ------------- ---------- -----------
BALANCE - JANUARY 1, 2007 102,052,767 $ 24,187 $ 564,580 $ 176,401 $ 23,576 $ (646,682) $ (9,072) $ 132,990
CHANGES DURING THE SIX-MONTH PERIOD (UNAUDITED):
ISSUANCE OF SHARES AND WARRANTS 20,922,988 4,973 21,184 26,157
CONVERSION OF CONVERTIBLE DEBENTURES TO SHARES 498,828 119 475 (217) 377
EMPLOYEE STOCK-BASED COMPENSATION 4,341 4,341
EXERCISE OF SHARE OPTIONS 21,375 4 26 30
LOSS FOR THE PERIOD (71,821) (71,821)
----------- ----------- ----------- ----------- ----------- ------------- ---------- -----------
BALANCE - JUNE 30, 2007 (UNAUDITED) 123,495,958 $ 29,283 $ 586,265 $ 176,401 $ 27,700 $ (718,503) $ (9,072) $ 92,074
=========== =========== =========== =========== =========== ============= ========== ===========
BALANCE - JANUARY 1, 2006 68,232,056 16,548 522,237 -- (26) (559,754) (9,072) (30,067)
CHANGES DURING THE SIX-MONTH PERIOD (UNAUDITED):
ISSUANCE OF SHARES AND WARRANTS 3,438,076 737 6,353 7,090
EQUITY COMPONENT OF CONVERTIBLE DEBENTURES 26,361 26,361
CONVERSION OF CONVERTIBLE DEBENTURES INTO SHARES 14,098,490 3,081 12,295 (6,535) 8,841
EMPLOYEE STOCK-BASED COMPENSATION 581 581
LOSS FOR THE PERIOD (88,702) (88,702)
----------- ----------- ----------- ----------- ----------- ------------- ---------- -----------
BALANCE - JUNE 30, 2006 (UNAUDITED) 85,768,622 $ 20,366 $ 540,885 $ -- $ 20,381 $ (648,456) $ (9,072) $ (75,896)
=========== =========== =========== =========== =========== ============= ========== ===========
BALANCE - APRIL 1, 2007 122,182,946 28,965 584,400 176,401 25,218 (684,073) (9,072) 121,839
CHANGES DURING THE THREE-MONTH PERIOD (UNAUDITED):
ISSUANCE OF SHARES AND WARRANTS 1,192,443 289 1,746 2,035
CONVERSION OF CONVERTIBLE DEBENTURES TO SHARES 100,694 25 95 (47) 73
EMPLOYEE STOCK-BASED COMPENSATION 2,529 2,529
EXERCISE OF OPTIONS 19,875 4 24 28
LOSS FOR THE PERIOD (34,430) (34,430)
----------- ----------- ----------- ----------- ----------- ------------- ---------- -----------
BALANCE - JUNE 30, 2007 (UNAUDITED) 123,495,958 $ 29,283 $ 586,265 $ 176,401 $ 27,700 $ (718,503) $ (9,072) $ 92,074
=========== =========== =========== =========== =========== ============= ========== ===========
BALANCE - APRIL 1, 2006 76,946,189 18,403 531,123 -- 19,550 (604,810) (9,072) (44,806)
CHANGES DURING THE THREE-MONTH PERIOD (UNAUDITED):
ISSUANCE OF SHARES AND WARRANTS 724,680 158 2,645 2,803
EQUITY COMPONENT OF CONVERTIBLE DEBENTURES 4,382 4,382
CONVERSION OF CONVERTIBLE DEBENTURES INTO SHARES 8,097,753 1,805 7,117 (3,753) 5,169
EMPLOYEE STOCK-BASED COMPENSATION 202 202
LOSS FOR THE PERIOD (43,646) (43,646)
----------- ----------- ----------- ----------- ----------- ------------- ---------- -----------
BALANCE - JUNE 30, 2006 (UNAUDITED) 85,768,622 $ 20,366 $ 540,885 $ -- $ 20,381 $ (648,456) $ (9,072) $ (75,896)
=========== =========== =========== =========== =========== ============= ========== ===========
BALANCE - JANUARY 1, 2006 68,232,056 $ 16,548 $ 522,237 $ -- $ (26) $ (559,754) $ (9,072) $ (30,067)
CHANGES DURING 2006 :
ISSUANCE OF SHARES AND WARRANTS 16,729,145 3,860 23,038 26,898
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
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 INTERIM FINANCIAL STATEMENTS.
- 3 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, except share data and per share data)
SIX MONTHS ENDED THREE MONTHS ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
------------------------ ------------------------ ---------
2007 2006 2007 2006 2006
--------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
------------------------ ------------------------
CASH FLOWS - OPERATING ACTIVITIES
LOSS FOR THE PERIOD $ (71,821) $ (88,702) $ (34,430) $ (43,646) $ (86,928)
Adjustments to reconcile loss for the period
TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
INCOME AND EXPENSE ITEMS NOT INVOLVING CASH FLOWS:
DEPRECIATION AND AMORTIZATION 82,330 82,591 39,468 41,253 170,816
EFFECT OF INDEXATION AND TRANSLATION ON CONVERTIBLE DEBENTURES 178 1,096 (1,003) 1,353 2,569
OTHER INCOME, NET (73) (591) (4) (40) (597)
GAIN ON DEBT RESTRUCTURING -- -- -- -- (80,071)
CHANGES IN ASSETS AND LIABILITIES:
INCREASE IN TRADE ACCOUNTS RECEIVABLE (13,978) (4,850) (9,349) (2,744) (14,722)
DECREASE (INCREASE) IN OTHER RECEIVABLES AND OTHER CURRENT ASSETS 1,376 (1,856) 1,252 (1,379) (2,662)
DECREASE (INCREASE) IN INVENTORIES (2,928) (8,923) 554 (5,155) (14,064)
INCREASE (DECREASE) IN TRADE ACCOUNTS PAYABLE 17,119 2,481 7,719 1,673 (4,734)
INCREASE (DECREASE) IN OTHER CURRENT LIABILITIES (1,093) 2,113 305 2,292 6,551
DECREASE IN OTHER LONG-TERM LIABILITIES (778) (1,679) (257) (473) (3,285)
--------- --------- --------- --------- ---------
10,332 (18,320) 4,255 (6,866) (27,127)
DECREASE IN LONG-TERM CUSTOMERS' ADVANCES, NET (922) (814) (394) (399) (2,306)
--------- --------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 9,410 (19,134) 3,861 (7,265) (29,433)
--------- --------- --------- --------- ---------
CASH FLOWS - INVESTING ACTIVITIES
DECREASE IN DESIGNATED CASH, SHORT-TERM AND LONG-TERM
INTEREST-BEARING DEPOSITS, NET -- 28,752 -- 12,217 31,661
INVESTMENTS IN PROPERTY AND EQUIPMENT (49,788) (32,687) (25,952) (16,021) (161,187)
INVESTMENT GRANTS RECEIVED 1,437 3,298 1,437 2,426 5,219
PROCEEDS RELATED TO SALE AND DISPOSAL OF PROPERTY AND EQUIPMENT 89 591 20 40 600
INVESTMENTS IN OTHER ASSETS (911) (3,619) -- (112) (5,074)
DECREASE (INCREASE) IN SHORT-TERM INTEREST-BEARING DEPOSITS 1,230 -- 5,000 -- (1,230)
--------- --------- --------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (47,943) (3,665) (19,495) (1,450) (130,011)
--------- --------- --------- --------- ---------
CASH FLOWS - FINANCING ACTIVITIES
PROCEEDS FROM ISSUANCE OF CONVERTIBLE DEBENTURES, NET -- 21,929 -- (274) 58,766
PROCEEDS FROM LONG-TERM DEBT -- 8,590 -- -- 18,295
PROCEEDS FROM ISSUANCE OF ORDINARY SHARES AND WARRANTS, NET 26,604 -- (2,263) -- 20,673
PROCEEDS ON ACCOUNT OF A WARRANT -- -- -- -- 550
PROCEEDS ON ACCOUNT OF SHARE CAPITAL -- -- -- -- 100,000
REPAYMENT OF CONVERTIBLE DEBEBNTURE (7,088) (6,476) -- -- (6,476)
PROCEEDS FROM EXERCISE OF SHARE OPTIONS 30 -- 28 -- 9
--------- --------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 19,546 24,043 (2,235) (274) 191,817
========= ========= ========= ========= =========
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (18,987) 1,244 (17,869) (8,989) 32,373
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 39,710 7,337 38,592 17,570 7,337
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 20,723 $ 8,581 $ 20,723 $ 8,581 $ 39,710
========= ========= ========= ========= =========
NON-CASH ACTIVITIES
INVESTMENTS IN PROPERTY AND EQUIPMENT $ 9,943 $ 6,390 $ 7,600 $ 3,949 $ 42,575
========= ========= ========= ========= =========
STOCK-BASED COMPENSATION RELATED TO
THE FACILITY AGREEMENT WITH THE BANKS $ -- $ -- $ -- $ -- $ 4,146
========= ========= ========= ========= =========
INVESTMENTS IN OTHER ASSETS $ -- $ -- $ -- $ -- $ 433
========= ========= ========= ========= =========
CONVERSION OF LONG-TERM CUSTOMERS' ADVANCES
TO SHARE CAPITAL $ 3,705 $ 5,287 $ 2,039 $ 1,000 $ 7,621
========= ========= ========= ========= =========
PROCEEDS RECEIVABLES RELATED PUBLIC OFFERING $ -- $ 31,479 $ -- $ 31,479 $ --
========= ========= ========= ========= =========
CONVERSION OF CONVERTIBLE DEBENTURES TO SHARE CAPITAL $ 377 $ 8,841 $ 73 $ 5,169 $ 10,619
========= ========= ========= ========= =========
CONVERSION OF LONG TERM DEBT TO CAPITAL NOTES $ -- $ -- $ -- $ -- $ 76,401
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR INTEREST $ 13,376 $ 20,792 $ 6,155 $ 10,246 $ 35,008
========= ========= ========= ========= =========
CASH PAID DURING THE PERIOD FOR INCOME TAXES $ 25 $ 56 $ 21 $ 42 $ 134
========= ========= ========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL
A. BASIS FOR PRESENTATION
(1) The unaudited condensed interim consolidated financial statements
as of June 30, 2007 and for the six months and three months then
ended ("interim financial statements") of Tower Semiconductor
Ltd. and subsidiary ("the Company") should be read in conjunction
with the audited consolidated financial statements of the Company
as of December 31, 2006 and for the year then ended, including
the notes thereto. In the opinion of management, the interim
financial statements include all adjustments necessary for a fair
presentation of the financial position and results of operations
as of the date and for the interim periods presented. The results
of operations for the interim periods are not necessarily
indicative of the results to be expected on a full-year basis.
(2) The interim financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") in Israel
("Israeli GAAP"). The interim financial statements differ in
certain respects from GAAP in the United States of America ("U.S.
GAAP"), as indicated in Note 4. The accounting principles applied
in the preparation of these interim financial statements are
consistent with those principles applied in the preparation of
the most recent annual audited financial statements, except for
the accounting principles detailed in paragraph 3 below.
(3) RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING
STANDARDS BOARD
A. ACCOUNTING STANDARD NO. 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
the Israeli Securities 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.
- 5 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
A. BASIS FOR PRESENTATION (CONT.)
(3) RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING
STANDARDS BOARD (CONT.)
A. ACCOUNTING STANDARD NO. 29 "ADOPTION OF INTERNATIONAL
FINANCIAL REPORTING STANDARDS" (CONT.)
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, commencing in 2008, 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. 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.
The Company is in the process of examining the effect of the
transition to IFRS on the Company's financial position and
results of operations.
B. 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 buildings 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 applies to financial statements covering
periods beginning January 1, 2007 and onwards and should be
implemented retroactively. The Standard did not affect the
Company's financial position, results of operations and cash
flows.
- 6 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
A. BASIS FOR PRESENTATION (CONT.)
(3) RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING
STANDARDS BOARD (CONT.)
C. ACCOUNTING STANDARD NO. 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, losses from impairment 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. The cost should also
include the initial estimate of costs required to dismantle
and remove the item.
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.
Under the cost method, an item will be presented at cost
less accumulated depreciation net book value, less
accumulated impairment losses.
Under the 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. A resulting increase in an
asset's value due to the revaluation should be allocated
directly to shareholders' equity ("revaluation reserve").
The Standard applies to financial statements covering
periods beginning January 1, 2007 and onwards and is
implemented retroactively. The Standard did not affect the
Company's financial position or results of operations,
except for reclassification in the balance sheet and cash
flows report of spare parts from inventory to fixed assets.
In April 2007 the Israeli Accounting Standard Board
published Standard No. 28 that amends Standard No. 27 to
allow, at transition, the exemptions allowed under IFRS 1
regarding fixed assets.
- 7 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
A. BASIS FOR PRESENTATION (CONT.)
(3) RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING
STANDARDS BOARD (CONT.)
D. ACCOUNTING STANDARD NO. 23, "ACCOUNTING FOR TRANSACTIONS
BETWEEN AN ENTITY AND A CONTROLLING PARTY"
In December 2006 the Israeli Accounting Standards Board
published Accounting Standard No. 23, "Accounting for
Transactions between an Entity and a controlling party"
("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
disposition 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 investments 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
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 applies to 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 Standard did not affect the
Company's financial position, results of operations and cash
flows.
E. ACCOUNTING STANDARD NO. 30 - "INTANGIBLE ASSETS"
In March 2007, the Israeli Accounting Standards Board
published Accounting Standard No. 30, "Intangible Assets"
("the Standard"), which sets the accounting treatment for
intangible assets that are not covered by any other
standard, as well as the disclosure requirements in the
financial statements for the entity's intangible assets.
- 8 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
A. BASIS FOR PRESENTATION (CONT.)
(3) RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING
STANDARDS BOARD (CONT.)
E. ACCOUNTING STANDARD NO. 30 - "INTANGIBLE ASSETS" (CONT.)
According to the Standard:
An intangible asset shall be measured initially at cost.
Expenditures arising from research (or from the research
phase of an internal project) shall not be recognized as an
asset and should be expensed when incurred. An intangible
asset arising from development (or from the development
phase of an internal project) shall be recognized if, and
only if, the criteria for recognition as an intangible asset
in the Standard are met. Expenditure on an intangible item
that was not recognized initially, shall not be recognized
as part of the cost of an intangible asset at a later date.
After initial recognition, an entity may choose to measure
an intangible asset at its cost less any accumulated
amortization and any accumulated impairment losses, or for
an intangible asset that has an active market, as defined in
the Standard, the intangible asset may be carried at a
revalued amount, being its fair value at the date of the
revaluation less any subsequent accumulated amortization and
any subsequent accumulated impairment losses. An entity
shall assess whether the useful life of an intangible asset
is finite or indefinite. The amortization of an intangible
asset with a finite useful life shall be over its useful
life using a systematic basis. An intangible asset with an
indefinite useful life shall not be amortized. Instead, an
entity is required to test an intangible asset with an
indefinite useful life for impairment by comparing its
recoverable amount with its carrying amount annually, or
whenever there is an indication that the intangible asset
may be impaired.
This Standard shall apply to financial statements for annual
periods beginning on or after January 1, 2007. The Standard
did not affect the Company's financial position, results of
operations and cash flows.
(4) Certain amounts in prior years' financial statements have been
reclassified in order to conform to 2007 presentation.
- 9 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
A. BASIS FOR PRESENTATION (CONT.)
(5) During the second quarter of 2007, the Company reassessed the
estimated useful lives of its machinery and equipment and as a
result, with effect from April 1, 2007, machinery and equipment
is to be depreciated over estimated useful lives of 7 years
rather than 5 years prior to such date. The change reflects the
Company's best estimate of the useful lives of it equipment and
was also based on experience accumulated from Fab 1 and on recent
trends in industry practices. The Company believes that the
change better reflects the economics associated with the
ownership of the equipment. This change has been accounted for as
a change in estimate and was applied prospectively.
B. ESTABLISHMENT AND OPERATIONS OF NEW 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 to 0.13 micron 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 transactions. For additional information, see
Note 11A to the 2006 audited consolidated financial statements.
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 to
the 2006 audited consolidated financial statements.
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:
Since the second half of 2005, the Company increased its customer
base, mainly in Fab 2, modified its organizational structure to better
address its customers and its market positioning, increased its sales
and its EBITDA, reduced its losses, increased its capacity level and
utilization rates, raised funds totaling approximately $238,000 in
gross proceeds, excluding the amounts described in Note 3B below (see
Note 3 below and Notes 12C(2), 12I, 12J, and 12K to the 2006 audited
consolidated financial statements) and restructured its bank debt (see
Note 11A(6) to the 2006 audited consolidated financial statements).
- 10 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
C. FINANCING OF THE COMPANY'S ONGOING OPERATIONS (CONT.)
In March 2006, the board of directors of the Company approved a plan
to ramp up Fab 2's capacity to approximately 24,000 wafers per month
in order to help meet customer needs and product qualification needs,
based on the Company's customer pipeline and reinforced by forecasted
market conditions. As of June 30, 2007, the Company is in advanced
stages of the Fab 2 ramp-up plan.
For details regarding the financing efforts of the ramp-up plan,
including the definitive amendment to the Company's facility agreement
with two leading Israeli banks ("Banks") for the restructuring of its
debt and the securities purchase agreement with Israel Corporation
Ltd. ("TIC") according to which TIC invested $100,000 in the Company,
which both closed in September 2006, see Notes 11A(6) and 11A(4) to
the 2006 audited consolidated financial statements.
Further, the Company continues to examine alternatives for additional
funding sources in order to further ramp-up the equipping of Fab2,
including those described in Notes 3B and 3C below.
NOTE 2 - INVENTORIES
Inventories consist of the following (*):
June 30, December 31,
--------------------- -------
2007 2006 2006
------- ------- -------
(unaudited)
Raw materials $12,461 $ 8,287 $11,234
Work in process 24,573 19,956 22,884
Finished goods 657 1,380 645
------- ------- -------
$37,691 $29,623 $34,763
======= ======= =======
(*) Net of aggregate write downs to net realizable value of $1,989, $3,183
and $6,707 as of June 30, 2007, June 30, 2006 and December 31, 2006,
respectively.
- 11 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 3 - RECENT DEVELOPMENTS
A. MARCH 2007 PRIVATE PLACEMENT IN THE US - In March 2007, the Company
completed a private placement of its securities in which it sold
ordinary shares and warrants for the purchase of ordinary shares,
raising a total of approximately $29,000 in gross proceeds. In the
private placement, the Company issued approximately 18.8 million
shares, warrants exercisable into approximately 9.4 million shares at
an exercise price of $2.04 (subject to possible adjustments under
certain circumstances), exercisable until March 15, 2012 ("Series I
Warrants"), and short-term warrants exercisable into approximately
18.8 million shares at an exercise price of $1.70, which was identical
to the closing price of the Company's Ordinary Shares on the NASDAQ on
the trading day immediately prior to the closing of the private
placement ("Series II Warrants"), exercisable until December 31, 2007.
Subject to certain conditions, the Company can compel the exercise of
the Series II Warrants if during any 20 out of 30 consecutive trading
days the closing price of the Company's shares on NASDAQ exceeds
$2.12.
In accordance with Standard No. 22 of Israeli GAAP, Series I Warrants
have been initially classified as a liability and subsequently marked
to market through profit and loss.
See Note 4F for disclosure of the accounting treatment in accordance
with U.S. GAAP.
B. JUNE 2007 LONG-TERM BONDS FUND-RAISING IN ISRAEL - In June 2007, in a
private placement with Israeli institutions of long-term convertible
and non-convertible bonds and warrants, the Company received orders
totaling a gross amount of approximately $40,000. In the funding, 342
units were sold, each comprised of: (i) long-term
non-convertible-bonds, repayable in six equal annual installments
between the dates of December 2011 and December 2016, with a face
amount of NIS 250,000 (approximately $59.7) and carrying an annual
interest rate of 8 percent; (ii) long-term convertible-bonds repayable
in December 2012 with a 17.2 NIS conversion price (approximately
$4.11) with a face amount of NIS 262,500 (approximately $62.7),
carrying an annual interest of 8 percent, and (iii) 5,800 warrants,
each exercisable for four years, for one Tower ordinary share at a
price of $2.04 (approximately 8.54 NIS). The bonds are linked to the
Israeli Consumer Price Index (CPI) and were issued at 95.5% of par
value. The conversion and exercise prices are subject to reduction in
certain limited circumstances. All figures in dollars are presented
herein for convenience only, based on the exchange rate prevailing at
the time of the private placement. Under Israeli securities laws, the
securities were subject to a statutory lock-up. The Company undertook
to file a prospectus with the Israel Securities Authority to allow for
the unrestricted trade of the securities. The funds raised were held
in escrow to be released to the Company if the prospectus is declared
effective by the Israel Securities Authority within 90 days from the
date of the offering.
- 12 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 3 - RECENT DEVELOPMENTS (CONT.)
B. JUNE 2007 LONG-TERM BONDS FUND-RAISING IN ISRAEL (CONT.)
In the event the prospectus was not declared effective by the Israel
Securities Authority within such period, the investors would have had
the option to receive back their investment.
As of June 30, 2007, the proceeds were in escrow, and the Company was
not entitled to receive them, and as such, the proceeds are not
recorded in the Company's balance sheet as cash or deposit or accounts
receivable balances as of June 30, 2007, and likewise, no obligation
to make repayment on account of the convertible and non-convertible
bonds was recorded by the Company in its balance sheet as long-term
liabilities as of June 30, 2007. In July 2007, the Company's
prospectus was declared effective by the Israel Securities Authority
and as such the securities issued in the private placement are no
longer subject to the statutory lock-up and in August 2007 the
proceeds raised were released to the Company. The prospectus also
contemplated a public offering of the same securities issued in the
June 2007 private placement. The timing of and the amount and offering
prices of such securities has yet to be determined.
C. JULY 2007 LETTERS OF INTENT ("LOIS") - In July 2007, the Company
concluded the signatures of LOIs with its lender banks, Bank Leumi and
Bank Hapoalim, and with Israel Corporation, a major shareholder, to
provide credit lines totaling up to $60,000, in order to secure the
funding of equipment required for a ramp up plan the Company is
considering to execute for Fab 2. Loans to be borrowed, if at all,
under the credit lines will bear interest at an annual rate of LIBOR
plus 3% and will be repayable by no later than March 2010. The LOIs
are subject to the signing and closing of definitive agreements and
the receipt of corporate approvals. They also contemplate that the
Company will pay the banks and TIC customary fees, including issuing
warrants for an aggregate amount of approximately 1.5% of the
Company's fully diluted share capital with an exercise price of $2.04.
- 13 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 4 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP
With regard to the Company's interim financial statements, the material
differences between GAAP in Israel and in the U.S. relate to the following.
See Note 4(I) below for the presentation of the Company's unaudited balance
sheet as of June 30, 2007 in accordance with U.S. GAAP.
A. RECENT ACCOUNTING PRONOUNCEMENTS BY THE FASB
SFAS NO. 157, "FAIR VALUE MEASUREMENTS"
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" (SFAS No. 157). The purpose of SFAS No. 157 is to define
fair value, establish a framework for measuring fair value, and
enhance disclosures about fair value measurements.
The Company decided to early adopt the provisions of SFAS No. 157
effective January 1, 2007, concurrent with the adoption of FASB 159
"The Fair Value Option for Financial Assets and Financial Liabilities"
(SFAS No. 159) see H below.
Fair Value Measurements on earnings as of June 30, 2007:
Significant
Unobservable
Inputs
--------
Derivatives $ 20,342
Facility Agreement 358,904
--------
Total $379,246
========
Fair Value Measurements Using Significant Unobservable Inputs:
Facility
Derivatives Agreement Total
-------- -------- --------
Beginning balance $ 11,264 357,108 368,372
Unrealized gains or losses
included in earnings 9,078 1,796 10,874
-------- -------- --------
Ending balance $ 20,342 $358,904 $379,246
======== ======== ========
- 14 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 4 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
A. RECENT ACCOUNTING PRONOUNCEMENTS BY THE FASB (CONT.)
SFAS NO. 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND
FINANCIAL LIABILITIES"
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities" (SFAS No. 159). SFAS
No. 159 permits companies to choose to measure certain financial
instruments and certain other items at fair value. The standard
requires that unrealized gains and losses on items for which the fair
value option has been elected be reported in earnings. SFAS No. 159 is
effective for the Company beginning in the first quarter of fiscal
year 2008, although earlier adoption is permitted. The Company decided
to early adopt the provisions of SFAS No. 159 effective January 1,
2007, and elected to carry at fair value the Facility agreement, see H
below.
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. A tax position that meets the
more-likely-than-not recognition threshold shall initially and
subsequently be measured as the largest amount of tax benefit that is
greater than 50 percent likely of being realized upon ultimate
settlement with a taxing authority that has full knowledge of all
relevant information. Measurement of a tax position that meets the
more-likely-than-not recognition threshold shall consider the amounts
and probabilities of the outcomes that could be realized upon ultimate
settlement using the facts, circumstances, and information available
at the reporting date.
The provisions of FIN 48 are effective for the 2007 fiscal year with
the cumulative effect of the change in accounting principles recorded
as an adjustment to the opening balance of retained earnings. FIN 48
did not have a material effect on the financial condition results of
operations, of the Company.
B. PRESENTATION OF NET LONG-TERM LIABILITIES IN RESPECT OF EMPLOYEE
SEVERANCE PAY
Under U.S. GAAP, assets and liabilities relating to severance
arrangements are to be presented separately and are not to be offset,
while according to Israeli GAAP such an offset is required.
Accordingly, as of June 30, 2007, an amount of $12,849 was
reclassified from other long-term liabilities as long-term
investments.
- 15 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 4 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
C. HEDGING ACTIVITIES IN ACCORDANCE WITH U.S. GAAP (SFAS 133)
Complying with SFAS 133 as amended and the related interpretations
thereon as they apply to the Company's hedging transactions, as of
June 30, 2007, such transactions would have resulted in: an increase
in other long-term investments in the amount of $1,743; an accumulated
other comprehensive income component of equity balance as of June 30,
2007 in the amount of $414 (as of December 31, 2006, an accumulated
other comprehensive loss component of equity balance in the amount of
$203) ; and in a decrease of $1,329 in property and equipment, net as
of June 30, 2007.
D. ISSUANCE OF CONVERTIBLE DEBENTURES
Under Accounting Principles Board Opinion No. 14 ("APB 14"), the
proceeds from the sale of the securities in the Company's January 2002
Israeli public offering 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 June 30,
2007 would have been $780. Commencing with the adoption of Standard
No. 22 in January 2006, allocation of proceeds in a unit, to its
components, is based on relative fair values under Israeli GAAP as
well as under US GAAP.
Under US GAAP, convertible debentures have to be evaluated to
determine if they contain embedded derivative that warrant
bifurcation. Conversion features 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 Issues 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 need not be separated.
2002 DEBENTURES:
Under US GAAP, the equity component, in the amount of $1,681,
classified in equity under Israeli GAAP should have not been separated
and was required to be included as part of the carrying amount of the
debentures.
- 16 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 4 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
D. ISSUANCE OF CONVERTIBLE DEBENTURES (CONT.)
2005 AND 2006 DEBENTURES:
Under US GAAP, the equity component of the 2005 and 2006 debentures,
in the amounts of $12,312 and $6,030 respectively, as of June 30,
2007, classified as equity under Israeli GAAP were reclassified to
liabilities and the conversion features were bifurcated from the debt
host and marked to market through earnings. The initial amount
allocated to the bifurcated conversion features were determined using
the "with and without" method based on the fair value of the embedded
derivative prescribed in DIG Issue B6.
All the above would have resulted, as of June 30, 2007, mainly in a
decrease in convertible debentures in the amount of $5,987; an
increase in the shareholder's equity in the amount of $6,723; and an
increase in other assets in the amount of $736. The Company's loss for
the six month period ended June 30, 2007 would have increased in the
amounts of $1,156.
E. ISSUED WARRANTS PRESENTATION
Under U.S. GAAP the Company's series 5 warrants were initially
recorded as liability due to the ratchet provision included in them.
Upon the effective date of the prospectus filed in Israel 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 June 30, 2007
mainly in a decrease in other long term liabilities and an increase in
shareholder's equity in the amount of $1,817. The Company's loss for
the six month period ended June 30, 2007 would have increased in the
amount of $1,271.
F. MARCH 2007 PRIVATE PLACEMENT OF ORDINARY SHARES AND WARRANTS
Under US GAAP all components in the private placement should be
classified in equity. As of June 30, 2007 this difference will result
in a decrease in liabilities and increase in shareholders equity in
the amount of $3,074. The Company's loss for the six month period
ended June 30, 2007 would have increased in the amount of $796.
G. EMPLOYEE STOCK BASED COMPENSATION
The Company adopted, effective January 1, 2006, SFAS 123R according to
which the compensation expense related to employee and directors share
option awards would have resulted in an increase in the compensations
expenses for the six month period ending June 30, 2007 in the amount
of $618. The Company elected the modified prospective method as its
transition method. The adoption of SFAS 123R for US GAAP along with
the adoption of Standard no. 24 for Israeli GAAP, decreased the
potential differences between US GAAP and Israeli GAAP as it related
to stock based compensation.
- 17 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 4 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
H. FACILITY AGREEMENT
Under US GAAP the debt modification under the Amendment to the
Company's facility agreement, which closed in September 2006, 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 (i) 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.
During the first quarter of 2007 the Company decided to early adopt
the provisions of SFAS No. 159 THE FAIR VALUE OPTION FOR FINANCIAL
ASSETS AND FINANCIAL LIABILITIES. As required by the standard the
Company also adopted the provisions of FASB 157 FAIR VALUE
Measurements. The adoption of the standard is effective January 1,
2007. According to the standard the Company can choose to carry at
fair value eligible items as defined in the standard, from the date of
early adoption and accordingly the Company decided to apply the fair
value option to the Facility agreement.
The effect of applying the fair value option to the facility agreement
as of the January 1, 2007 was $65,207 which has been recorded as a
cumulative effect adjustment to retained earnings (no tax effects have
been recorded). The carrying amount of the facility agreement prior to
the adoption was $432,430 and immediately after was $367,223. The
Company reasoned it election of the fair value option for the facility
agreement on the fact that the application of FASB 15 to the facility
agreement did not reflect the economic benefits that has been achieved
with the consummation of the facility agreement and that the
application of the fair value reflect such benefits in more economic
way. Also the adoption of the fair value option will decrease the GAAP
difference that currently exist between Israeli GAAP and IFRS vs. the
US GAAP.
- 18 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 4 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
H. FACILITY AGREEMENT (CONT.)
Under US 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 $8,912 in the shareholders
equity and an increase of the same amount in the long-term loans from
the banks as of June 30, 2007. The decrease in the shareholders equity
includes cumulative effect as of December 31, 2006, which decreased
the accumulated deficit in the amount of $65,207. The Company's loss
for six month period ended June 30, 2007 would have decreased in the
amount of $1,364.
- 19 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30,2007
(dollars in thousands, except share data and per share data)
NOTE 4 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (Cont.)
I. Balance Sheets in accordance with U.S. GAAP
AS OF JUNE 30, 2007 AS OF DECEMBER 31, 2006
----------------------------------- -----------------------------------
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 $ 20,723 $ 20,723 $ 39,710 $ 39,710
SHORT-TERM INTEREST-BEARING DEPOSITS -- -- 1,230 1,230
TRADE ACCOUNTS RECEIVABLE :
RELATED PARTIES 22,955 22,955 13,625 13,625
OTHERS 22,521 22,521 17,873 17,873
OTHER RECEIVABLES 2,769 2,769 5,425 5,425
INVENTORIES 37,691 37,691 34,763 34,763
OTHER CURRENT ASSETS 1,465 1,465 1,473 1,473
--------- --------- --------- --------- --------- ---------
TOTAL CURRENT ASSETS 108,124 -- 108,124 114,099 -- 114,099
--------- --------- --------- --------- --------- ---------
LONG-TERM INVESTMENTS B,C -- 14,592 14,592 -- 15,325 15,325
--------- --------- --------- --------- --------- ---------
PROPERTY AND EQUIPMENT, NET C 507,414 (1,329) 506,085 539,292 (1,745) 537,547
--------- --------- --------- --------- --------- ---------
INTANGIBLE ASSETS, NET 39,482 39,482 44,981 44,981
--------- --------- --------- --------- --------- ---------
OTHER ASSETS, NET D 1,303 736 2,039 1,346 834 2,180
========= ========= ========= ========= ========= =========
TOTAL ASSETS $ 656,323 $ 13,999 $ 670,322 $ 699,718 $ 14,414 $ 714,132
========= ========= ========= ========= ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITIES OF CONVERTIBLE DEBENTURES D 6,611 246 6,857 6,632 270 6,902
TRADE ACCOUNTS PAYABLE 55,922 55,922 55,128 55,128
OTHER CURRENT LIABILITIES 20,907 20,907 22,096 22,096
--------- --------- --------- --------- --------- ---------
TOTAL CURRENT LIABILITIES 83,440 246 83,686 83,856 270 84,126
LONG-TERM DEBT FROM BANKS H 360,689 8,912 369,601 356,947 75,483 432,430
CONVERTIBLE DEBENTURES D 58,609 (6,233) 52,376 62,175 21,688 83,863
LONG-TERM CUSTOMERS' ADVANCES 42,070 42,070 46,042 46,042
OTHER LONG-TERM LIABILITIES B,E,F 19,441 7,958 27,399 17,708 10,447 28,155
--------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES 564,249 10,883 575,132 566,728 107,888 674,616
--------- --------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY
ORDINARY SHARES, NIS 1.00 PAR VALUE - AUTHORIZED
800,000,000, 500,000,000 AND 800,000,000 SHARES,
RESPECTIVELY; ISSUED 123,495,958, 85,768,622
AND 102,052,767 SHARES, RESPECTIVELY 29,283 29,283 24,187 24,187
ADDITIONAL PAID-IN CAPITAL D,E,F 586,265 38,834 625,099 564,580 6,404 570,984
CAPITAL NOTES 176,401 176,401 176,401 176,401
EQUITY COMPONENT OF CONVERTIBLE DEBENTURES
AND CUMULATIVE STOCK BASED COMPENSATION D,G 27,700 (17,893) 9,807 23,576 (18,706) 4,870
ACCUMULATED OTHER COMPREHENSIVE LOSS C -- 414 414 -- (203) (203)
ACCUMULATED DEFICIT D,E,F,G,H (718,503) (18,239) (736,742) (646,682) (80,969) (727,651)
--------- --------- --------- --------- --------- ---------
101,146 3,116 104,262 142,062 (93,474) 48,588
TREASURY STOCK, AT COST - 1,300,000 SHARES (9,072) -- (9,072) (9,072) -- (9,072)
--------- --------- --------- --------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 92,074 3,116 95,190 132,990 (93,474) 39,516
========= ========= ========= ========= ========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 656,323 $ 13,999 $ 670,322 $ 699,718 $ 14,414 $ 714,132
========= ========= ========= ========= ========= =========
- 20 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 4 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
J. STATEMENTS OF OPERATIONS IN ACCORDANCE WITH U.S. GAAP
Complying with FASB No. 159 (H above), SFAS 133 (C above), APB 14 (D
above) and SFAS 123R (G above) would have resulted in an increase in
the loss for the six month period ended June 30, 2007 in the amount of
$2,477. The loss for the six month period ended June 30, 2006 would
have decreased in the amount of $1,007
Giving effect to all the above, the loss for the six month periods
ended June 30, 2007 and June 30, 2006 would be $74,298 and $87,725,
respectively.
For the cumulative effect adjustment to retained earnings in the
amount of $65,207 following the early adoption of SFAS 159, See H
above
K. COMPREHENSIVE INCOME (LOSS) IN ACCORDANCE WITH U.S. GAAP (SFAS 130)
Comprehensive income (loss) represents the change in shareholder's
equity during a reporting period from transactions and other events
and circumstances from non-owner sources. It includes all changes in
equity during a reporting period except those resulting from
investments by owners and distributions to owners. Other comprehensive
income (loss) represents gains and losses that under U.S. GAAP are
included in comprehensive income but excluded from net income.
Following are statements of comprehensive loss in accordance with U.S.
GAAP:
Six months ended
------------------------
June 30,
------------------------
2007 2006
-------- --------
(unaudited)
Loss for the period, according to U.S.
GAAP (see J above) $(74,298) $(87,725)
Other comprehensive loss:
Reclassification of unrealized
losses on derivatives 664 664
Unrealized gains on derivatives (47) 1,245
-------- --------
Net comprehensive loss for the period $(73,681) $(85,816)
======== ========
- 21 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 4 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
L. LOSS PER SHARE IN ACCORDANCE WITH U.S. GAAP (SFAS 128)
In accordance with SFAS 128, the basic and diluted loss per share for
the six-month and the three-month periods ended June 30, 2007 would be
$0.65 and $0.28, respectively (during the corresponding periods -
$1.16 and $0.60, respectively).
M. STATEMENTS OF CASH FLOWS IN ACCORDANCE WITH U.S. GAAP (SFAS 95)
Complying with SFAS 95 would not have materially affected the cash
flows of the Company for the six-month period ended June 30, 2007 and
2006.
- 22 -
EXHIBIT 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE INFORMATION CONTAINED IN THIS SECTION SHOULD BE READ IN CONJUNCTION WITH (1)
OUR UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30,
2007 AND FOR THE SIX MONTHS THEN ENDED AND RELATED NOTES INCLUDED IN THIS
REPORT; AND (2) OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES
INCLUDED IN OUR ANNUAL REPORT ON FORM 20-F FOR THE YEAR ENDED DECEMBER 31, 2006
AND THE OTHER INFORMATION CONTAINED IN SUCH ANNUAL REPORT, PARTICULARLY THE
INFORMATION UNDER THE CAPTION "OPERATING AND FINANCIAL REVIEW AND PROSPECTS".
OUR FINANCIAL STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") IN ISRAEL. DIFFERENCES BETWEEN ISRAELI
GAAP AND US GAAP AS THEY RELATE TO OUR FINANCIAL STATEMENTS ARE DESCRIBED IN
NOTE 4 TO OUR UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS
OF JUNE 30, 2007 AND IN NOTE 19 TO OUR AUDITED 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:
SIX MONTHS ENDED
JUNE 30,
-----------------
2007 2006
----- -----
(UNAUDITED)
-----------------
STATEMENT OF OPERATIONS DATA:
Total revenues 100.0% 100.0%
Cost of total revenues 126.8 157.2
----- -----
Gross loss (26.8) (57.2)
Research and development expenses, net 6.2 8.6
Marketing, general and administrative
expenses 13.5 13.4
----- -----
Operating loss (46.5) (79.2)
Financing expense, net (17.3) (31.8)
Other income, net 0.1 0.7
----- -----
Loss (63.7)% (110.3)%
===== =====
SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO SIX MONTHS ENDED JUNE 30, 2006
REVENUES. Revenues for the six months ended June 30, 2007 increased by
40.1% to $112.7 million from $80.4 million for the six months ended June 30,
2006. This $32.3 million increase was mainly attributed to a higher volume of
wafer shipments.
COST OF TOTAL REVENUES. Cost of total revenues for the six months ended
June 30, 2007 amounted to $142.9 million, compared with $126.4 million for the
six months ended June 30, 2006. This increase of 13% in cost of revenues, which
is relatively low in relation to the 40% increase in sales, was mainly achieved
due to (i) the Company's cost structure, according to which the Company has
reasonable margins for each incremental dollar of revenue and (ii) a reduction
in depreciation and amortization expenses, as described as follows. During the
second quarter of 2007, the Company reassessed the estimated useful lives of its
machinery and equipment and as a result, with effect from April 1, 2007, its
machinery and equipment is to be depreciated over estimated useful lives of 7
years rather than 5 years prior to such date. The change reflects the Company's
best estimate of the useful lives of its machinery and equipment and was based
on experience accumulated from Fab 1 and recent trends in industry practices.
The Company believes that the change better reflects the economics associated
with the ownership of the equipment. This change has been accounted for as a
change in estimate and was applied prospectively. Total depreciation and
amortization expenses included in Cost of Total Revenues was approximately $70
million for the six months ended June 30, 2007, as compared to approximately $76
million for the six months ended June 30, 2006; said reduction was mainly
attributed to the aforementioned change, which was partially offset by
approximately $5 million of higher depreciation expenses relating to new capital
expenditure items for which depreciation commenced during 2007.
GROSS LOSS. Gross loss for the six months ended June 30, 2007 was $30.2
million, compared to a gross loss of $46.0 million for the six months ended June
30, 2006. The decrease in gross loss was mainly attributable to the 40% increase
in sales as compared to a 13% increase in Cost of Total Sales as described
above.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the six months ended June 30, 2007 amounted to $7 million, compared to a similar
amount for the six months ended June 30, 2006.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses for the six months ended June 30, 2007 amounted to $15.2
million, compared to $10.8 million for the six months ended June 30, 2006. The
increase is primarily due to stock based compensation expenses and increased
expenses deriving directly from the higher revenues mentioned above.
OPERATING LOSS. Operating loss for the six months ended June 30, 2007 was
$52.3 million, compared to $63.7 million for the six months ended June 30, 2006.
The decrease in the operating loss is attributable mainly to the decrease in the
gross loss described above.
FINANCING EXPENSES, NET. Financing expenses, net, for the six months ended
June 30, 2007 were $19.6 million, compared to financing expenses, net, of $25.6
million for the six months ended June 30, 2006. This decrease is mainly due to a
decrease of $7.2 million in connection with the consummation of the debt
restructuring with our banks in September 2006, pursuant to which, approximately
30% of our then outstanding loans were converted into capital notes and the
interest rate applicable to the interest payments was decreased to LIBOR + 1.1%,
compared to LIBOR + 2.5%, and due to the increase in the exchange rate of the
dollar in relation to the NIS which caused a decrease in the dollar amount of
our NIS denominated outstanding convertible debt (see below for more details on
currency fluctuations). This decrease was offset by an increase of $2.5 million
in the discount amortization on our convertible debentures which resulted mainly
from the issuance of a new series of convertible debentures in June 2006.
OTHER INCOME, NET. Other income, net, for the six months ended June 30,
2007 was $0.01 million, compared to $0.6 million for the six months ended June
30, 2006.
LOSS. Our loss for the six months ended June 30, 2007 was $71.8 million,
compared to $88.7 million for the six months ended June 30, 2006. This decrease
is primarily attributable to the decrease in the operating loss of $11.4 million
and a $6 million decrease in finance expenses.
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 a change in valuation of the NIS in relation to the
dollar. During the six months ended June 30, 2007, the exchange rate of the
dollar in relation to the NIS increased by 0.6%, and the Israeli Consumer Price
Index ("CPI") increased by 1%. (During the six months ended June 30, 2006, there
was a decrease of 3.5% in the exchange rate of the dollar in relation to the NIS
and an increase of 1.5% 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 our financing and
investing activities is denominated in U.S. dollars and NIS. Our expenses and
costs are denominated in NIS, U.S. dollars, Japanese Yen and Euros. We are,
therefore, exposed to the risk of currency exchange rate fluctuations.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2007, we had an aggregate of $20.7 million in cash and cash
equivalents. This compares to $11.5 million we had as of June 30, 2006 in cash,
cash equivalents and short-term interest-bearing deposits, of which $2.9 million
was contractually restricted for Fab 2 use only.
During the six months ended June 30, 2007, we received $26.6 million in net
proceeds from the issuance of ordinary shares and warrants, $1.4 million from
Investment Center grants and generated a net amount of $9.4 million from our
operating activities. These liquidity resources financed the capital expenditure
investments we made during the six months ended June 30, 2007, which aggregated
$50.7 million, mainly in connection with the purchase and installation of
equipment and other assets for the ramp up of Fab 2 and repayment of convertible
debentures in the amount of $7.1 million.
As of June 30, 2007, we had long-term bank loans, at present value, in the
amount of $360.7 million we obtained in connection with the establishment of Fab
2. As of such date, we also had outstanding convertible debentures in the
aggregate amount of $91.2 million, of which $6.6 million are presented as
current maturities and $20.0 million are presented as an equity component of the
convertible debentures as part of shareholders' equity. The amounts of cash and
cash equivalents and liabilities in regard of debentures and convertible
debentures described in this section entitled "Liquidity and Capital Resources"
do not include the approximately $40 million raised in our June 2007
fundraising, which were released to us in August 2007, all as described in Note
3B to our financial statements as of June 30, 2007.