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FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the month of February 2008 (No. 2)
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 6, 2008, the Registrant announced its financial results for the
fourth quarter and fiscal year ended December 31, 2007 and on February 7, 2008
issued its consolidated financial statements as of December 31, 2007 and 2006
and for the years ended December 31, 2007, 2006 and 2005. Attached hereto are
the following exhibits
Exhibit 99.1 Registrant's consolidated financial statements as
of December 31, 2007 and 2006 and for the years ended
December 31, 2007, 2006 and 2005, and the report
thereon dated February 6, 2008 of Brightman Almagor & Co.
Exhibit 99.2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Exhibit 99.3 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. 333-148747 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: February 7, 2008 By: /s/ Nati Somekh Gilboa
--------------------------
Nati Somekh Gilboa
Corporate Secretary
EXHIBIT 99.1
TOWER SEMICONDUCTOR LTD.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007
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-55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
TOWER SEMICONDUCTOR LTD.
We have audited the accompanying consolidated balance sheets of Tower
Semiconductors Ltd. and subsidiaries (the "Company") as of December 31, 2007 and
2006, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2007. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Tower Semiconductors Ltd. and
subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2007, in conformity with accounting principles generally accepted
in the United States of America.
Brightman Almagor & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu
Tel Aviv, Israel
February 6, 2008
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 2007 2006
----------- ----------- -----------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 44,536 $ 39,710
SHORT-TERM INTEREST-BEARING DEPOSITS -- 1,230
TRADE ACCOUNTS RECEIVABLE: 15
RELATED PARTIES 12,823 13,625
OTHERS 32,154 17,873
OTHER RECEIVABLES 3 4,748 5,425
INVENTORIES 4 27,806 34,763
OTHER CURRENT ASSETS 1,580 1,473
----------- -----------
TOTAL CURRENT ASSETS 123,647 114,099
----------- -----------
LONG-TERM INVESTMENTS 5 15,093 15,325
----------- -----------
PROPERTY AND EQUIPMENT, NET 6 502,287 532,798
----------- -----------
INTANGIBLE ASSETS, NET 13A(2) 34,711 44,981
----------- -----------
OTHER ASSETS , NET 7 11,044 6,929
=========== ===========
TOTAL ASSETS $ 686,782 $ 714,132
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITIES OF CONVERTIBLE DEBENTURES 10 $ 7,887 $ 6,902
TRADE ACCOUNTS PAYABLE 49,025 55,128
OTHER CURRENT LIABILITIES 8 20,024 22,096
----------- -----------
TOTAL CURRENT LIABILITIES 76,936 84,126
LONG-TERM DEBT FROM BANKS (*) 9, 11 379,314 432,430
DEBENTURES (**) 10, 11 117,460 83,863
LONG-TERM CUSTOMERS' ADVANCES 13A 27,983 46,042
OTHER LONG-TERM LIABILITIES 12 40,380 28,155
----------- -----------
TOTAL LIABILITIES 642,073 674,616
----------- -----------
SHAREHOLDERS' EQUITY 10, 13A, 14 44,709 39,516
=========== ===========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 686,782 $ 714,132
=========== ===========
(*) OF WHICH $365,563 AT FAIR VALUE AS OF DECEMBER 31, 2007
(**) OF WHICH $28,484 AT FAIR VALUE AS OF DECEMBER 31, 2007
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 2007 2006 2005
--------- --------- --------- ---------
REVENUES
SALES 15 $ 230,853 $ 187,438 $ 93,991
REVENUES RELATED TO A JOINT DEVELOPMENT AGREEMENT 13B -- -- 8,000
--------- --------- ---------
230,853 187,438 101,991
COST OF SALES 284,771 267,520 238,358
--------- --------- ---------
GROSS LOSS (53,918) (80,082) (136,367)
--------- --------- ---------
OPERATING COSTS AND EXPENSES
RESEARCH AND DEVELOPMENT 13,790 15,048 16,029
MARKETING, GENERAL AND ADMINISTRATIVE 31,604 25,831 17,418
--------- --------- ---------
45,394 40,879 33,447
========= ========= =========
OPERATING LOSS (99,312) (120,961) (169,814)
FINANCING EXPENSE, NET 11, 16 (34,976) (47,563) (35,651)
OTHER INCOME, NET 92 597 2,383
--------- --------- ---------
LOSS FOR THE YEAR $(134,196) $(167,927) $(203,082)
========= ========= =========
BASIC LOSS PER ORDINARY SHARE
LOSS PER SHARE $ (1.13) $ (2.03) $ (3.06)
========= ========= =========
WEIGHTED AVERAGE NUMBER OF ORDINARY
SHARES OUTSTANDING - IN THOUSANDS 118,857 82,581 66,371
========= ========= =========
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)
Accumulated
Ordinary shares Additional Cumulative other
------------------------- paid-in Capital stock based Treasury comprehensive Accumulated Comprehensive
Shares Amount capital notes compensation stock gain (loss) deficit income (loss) Total
----------- ---------- ---------- ---------- -------- --------- -------- ------------ -------- ---------
BALANCE - JANUARY 1, 2005 66,999,796 $ 16,274 $ 519,839 $ -- $ (26) $ (9,072) $ (7,055) $ (356,642) $ 163,318
ISSUANCE OF SHARES 1,232,260 274 1,520 1,794
STOCK-BASED COMPENSATION RELATED TO THE FACILITY
AGREEMENT WITH THE BANKS, NOTE 14B(5) 2,793 2,793
STOCK-BASED COMPENSATION RELATED TO RIGHTS
OFFERED TO EMPLOYEES, NOTE 14I 448 448
OTHER COMPREHENSIVE GAIN 5,501 5,501 5,501
LOSS FOR THE YEAR (203,082) (203,082) (203,082)
--------
COMPREHENSIVE INCOME (LOSS) (197,581)
========
----------- ---------- ---------- ---------- -------- --------- -------- ------------ ---------
BALANCE - DECEMBER 31, 2005 68,232,056 $ 16,548 $ 524,600 $ -- $ (26) $ (9,072) $ (1,554) $ (559,724) $ (29,228)
ISSUANCE OF SHARES AND WARRANTS 16,729,145 3,860 26,126 29,986
CONVERSION OF CONVERTIBLE DEBENTURES TO SHARES 16,734,316 3,696 15,634 19,330
EMPLOYEE STOCK-BASED COMPENSATION 4,896 4,896
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, NOTE 14B(5) 4,146 4,146
CAPITAL NOTES 176,401 176,401
OTHER COMPREHENSIVE GAIN 1,351 1,351 1,351
LOSS FOR THE YEAR (167,927) (167,927) (167,927)
--------
COMPREHENSIVE INCOME (LOSS) (166,576)
========
----------- ---------- ---------- ---------- -------- --------- -------- ------------ ---------
BALANCE - DECEMBER 31, 2006 102,052,767 $ 24,187 $ 570,984 $ 176,401 $ 4,870 $ (9,072) $ (203) $ (727,651) $ 39,516
ISSUANCE OF SHARES AND WARRANTS 22,705,598 5,398 29,469 34,867
CONVERSION OF CONVERTIBLE DEBENTURES TO SHARES 591,520 142 674 816
EMPLOYEE STOCK-BASED COMPENSATION 8,731 8,731
EXERCISE OF OPTIONS 176,231 44 183 227
RECLASSIFICATION OF BIFURCATED CONVERSION
OPTION TO SHAREHOLDERS' EQUITY 28,377 28,377
STOCK-BASED COMPENSATION, NOTE 14B(5) 1,331 1,331
OTHER COMPREHENSIVE LOSS (167) (167) (167)
CUMULATIVE EFFECT ADJUSTMENT OF THE FACILITY
AGREEMENT TO RETAINED EARNINGS 65,207 65,207 65,207
LOSS FOR THE YEAR (134,196) (134,196) (134,196)
--------
COMPREHENSIVE INCOME (LOSS) (69,156)
========
----------- ---------- ---------- ---------- -------- --------- -------- ------------ --------
BALANCE - DECEMBER 31, 2007 125,526,116 $ 29,771 $ 631,018 $ 176,401 $ 13,601 $ (9,072) $ (370) $ (796,640) $ 44,709
=========== ========== ========== ========== ======== ========= ======== ============ ======== =========
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,
-------------------------------------
2007 2006 2005
--------- --------- ---------
CASH FLOWS - OPERATING ACTIVITIES
LOSS FOR THE YEAR $(134,196) $(167,927) $(203,082)
Adjustments to reconcile loss for the year
TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
INCOME AND EXPENSE ITEMS NOT INVOLVING CASH FLOWS:
DEPRECIATION AND AMORTIZATION 154,343 171,743 153,189
EFFECT OF INDEXATION AND TRANSLATION ON DEBENTURES 6,227 2,569 (1,031)
WRITE DOWN OF CUSTOMER ADVANCE (9,747) -- --
OTHER INCOME, NET (92) (597) (2,383)
CHANGES IN ASSETS AND LIABILITIES:
DECREASE (INCREASE) IN TRADE ACCOUNTS RECEIVABLE (13,479) (14,722) 2,510
DECREASE (INCREASE) IN OTHER RECEIVABLES AND OTHER CURRENT ASSETS 333 (2,662) 1,988
DECREASE (INCREASE) IN INVENTORIES 459 (14,064) 1,086
INCREASE (DECREASE) IN TRADE ACCOUNTS PAYABLE 15,435 (4,733) 3,289
INCREASE (DECREASE) IN OTHER CURRENT LIABILITIES (1,363) 6,551 (1,839)
INCREASE (DECREASE) IN OTHER LONG-TERM LIABILITIES 935 (3,285) (5,368)
--------- --------- ---------
18,855 (27,127) (51,641)
DECREASE IN LONG-TERM CUSTOMERS' ADVANCES, NET (2,172) (2,306) (760)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 16,683 (29,433) (52,401)
--------- --------- ---------
CASH FLOWS - INVESTING ACTIVITIES
DECREASE IN DESIGNATED CASH, SHORT-TERM AND LONG-TERM
INTEREST-BEARING DEPOSITS, NET -- 31,661 27,266
INVESTMENTS IN PROPERTY AND EQUIPMENT (107,485) (161,187) (47,215)
INVESTMENT GRANTS RECEIVED 1,654 5,219 7,496
PROCEEDS RELATED TO SALE AND DISPOSAL OF PROPERTY AND EQUIPMENT 108 600 2,179
INVESTMENTS IN OTHER ASSETS AND INTANGIBLE ASSETS (1,547) (5,074) (3,841)
DECREASE (INCREASE) IN SHORT-TERM INTEREST-BEARING DEPOSITS 1,230 (1,230) --
LONG-TERM INVESTMENTS (950) -- --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (106,990) (130,011) (14,115)
--------- --------- ---------
CASH FLOWS - FINANCING ACTIVITIES
PROCEEDS FROM ISSUANCE OF DEBENTURES AND WARRANTS, NET 50,690 58,766 25,086
PROCEEDS FROM LONG-TERM LOANS 28,000 18,295 21,103
PROCEEDS FROM ISSUANCE OF ORDINARY SHARES AND WARRANTS, NET 26,534 20,673 --
PROCEEDS FROM EXERCISE OF WARRANTS -- 550 --
PROCEEDS ON ACCOUNT OF CAPITAL NOTES -- 100,000 --
REPAYMENT OF DEBENTURE (7,088) (6,476) --
PROCEEDS FROM EXERCISE OF SHARE OPTIONS 227 9 --
DEBTS REPAYMENT (3,230) -- --
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 95,133 191,817 46,189
========= ========= =========
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,826 32,373 (20,327)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 39,710 7,337 27,664
--------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 44,536 $ 39,710 $ 7,337
========= ========= =========
NON-CASH ACTIVITIES
INVESTMENTS IN PROPERTY AND EQUIPMENT $ 17,982 $ 42,575 $ 12,792
========= ========= =========
STOCK-BASED COMPENSATION RELATED TO
THE FACILITY AGREEMENT WITH THE BANKS $ -- $ 4,146 $ 2,793
========= ========= =========
STOCK-BASED COMPENSATION (SEE NOTE 14B(5)) $ 1,331 $ -- $ --
========= ========= =========
STOCK-BASED COMPENSATION RELATED TO RIGHTS OFFERED
TO EMPLOYEES, (SEE NOTE 14I) $ -- $ -- $ 448
========= ========= =========
INVESTMENTS IN OTHER ASSETS $ -- $ 433 $ 442
========= ========= =========
CONVERSION OF LONG-TERM CUSTOMERS' ADVANCES
TO SHARE CAPITAL $ 6,414 $ 7,621 $ 1,794
========= ========= =========
CONVERSION OF CONVERTIBLE DEBENTURES TO SHARES CAPITAL $ 816 $ 19,330 $ --
========= ========= =========
CUMULATIVE EFFECT ADJUSTMENT OF THE FACILITY AGREEMENT TO RETAINED EARNINGS $ 65,207 $ -- $ --
========= ========= =========
RECLASSIFICATION OF BIFURCATED CONVERSION OPTION TO SHAREHOLDERS' EQUITY $ 28,377 $ -- $ --
========= ========= =========
CONVERSION OF LONG TERM DEBT TO CAPITAL NOTES $ -- $ 76,401 $ --
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR INTEREST $ 28,831 $ 35,008 $ 32,805
========= ========= =========
CASH PAID DURING THE YEAR FOR INCOME TAXES $ 55 $ 134 $ 86
========= ========= =========
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
Tower Semiconductor Ltd. ("the Company"), incorporated in Israel, commenced
operations in 1993. The Company is an independent wafer foundry that
delivers customized solutions in a variety of advanced complementary metal
oxide semiconductor (CMOS) technologies, including digital CMOS,
mixed-signal and RF (radio frequency) CMOS, CMOS image sensors and power
management devices. 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 advancements in production
technology.
The Company's Ordinary Shares are traded on the NASDAQ Global Market and on
the Tel-Aviv Stock Exchange.
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. 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, utilization rates, raised funds and restructured its bank
debt. See also Note 9B and Notes 14I-M.
F - 6
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's consolidated financial statements are presented in accordance
with U.S. generally accepted accounting principles ("US GAAP"). The Company
recasted the comparative amounts included in this financial statements to
US GAAP. In prior years the Company prepared its financial reports in
accordance with generally accepted accounting principles in Israel. ("IL
GAAP") and provided reconciliation to US GAAP in the notes to the financial
statements.
A. 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.
B. 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.
C. 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.
D. 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.
E. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined for raw materials 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 - 7
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
F. PROPERTY AND EQUIPMENT
(1) Property and equipment are presented at cost, including financing
expenses 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 the funding, 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 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.
During the second quarter of 2007, the Company reassessed the
estimated useful lives of its machinery and equipment and as a
result, effective as of April 1, 2007, machinery and equipment is
to be depreciated over estimated useful lives of 7 years rather
than 5 years as estimated prior to such date. The change reflects
the Company's best estimate of the useful lives of its equipment
and is 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. For the
effect of this change, see Note 6A.
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:
Building (including facility infrastructure) 14-25 years
Machinery and equipment 7 years (*)
Transportation vehicles 7 years
(*) 5 years through March 31, 2007.
(2) Impairment examinations and recognition are performed and
determined based on the accounting policy outlined in Q below.
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.)
G. INTANGIBLE ASSETS
TECHNOLOGY - The cost of Fab 2 technologies includes the technology
process cost 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. The technologies are presented net of accumulated amortization as
of December 31, 2007 and 2006 in the amounts of $63,911 and $53,741.
Impairment examinations and recognition are performed and determined
based on the accounting policy outlined in Q below.
H. OTHER ASSETS
DEFERRED FINANCING CHARGES
Deferred financing charges in relation to funding the ramp-up of Fab 2
are amortized over the lives of the borrowings as an adjustment to the
yield using the effective interest method. During the ramp up period
of Fab 2, amortized deferred financing charges are capitalized to
property and equipment.
PREPAID LONG-TERM LAND LEASE
Prepaid lease payments to the Israel Land Administration ("ILA") as
detailed in Notes 13A(8) and 13C are amortized during the lease
period.
I. CONVERTIBLE DEBENTURES
Under Accounting Principles Board Opinion No. 14 ("APB 14"), the
proceeds from the sale of the securities are allocated to each
security issued based on their relative fair value.
SFAS 133 generally provides three criteria that, if met, require
companies to bifurcate conversion options from their host instruments
and account for them as free standing derivative financial
instruments. These three criteria are (a) the economic characteristics
and risks of the embedded derivative instrument are not clearly and
closely related to the economic characteristics and risks of the host
contract, (b) the hybrid instrument that embodies both the embedded
derivative instrument and the host contract is not remeasured at fair
value under otherwise applicable generally accepted accounting
principles with changes in fair value reported in earnings and (c) a
separate instrument with the same terms as the embedded derivative
instrument would be considered a derivative instrument subject to the
requirements of SFAS 133. One scope exception provided by SFAS 133 and
relevant to convertibles is when the embedded conversion feature is
both indexed to and classified in the Company's equity based on the
criteria established in EITF 00-19 and other EITF's. Financing costs
are generally expensed as incurred unless directly related to the new
ramp-up of equipment. In such case the costs are capitalized to
property and equipment during the installation period until the
equipment ready for its intended use.
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.)
J. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). This Statement
prescribes the use of the liability method whereby deferred tax asset
and liability account balances are determined based on differences
between financial reporting and tax bases of assets and liabilities.
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 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, 2007 and uncertainties with regard to its utilization in the
future, no deferred taxes were recorded in the Company's results of
operations.
K. REVENUE RECOGNITION
Revenues are recognized when persuasive evidence of an agreement
exists with fixed or determinable prices, shipment has occurred 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.
L. 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 - 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.)
M. LOSS PER ORDINARY SHARE
Basic earnings per share is calculated, in accordance with SFAS No.
128, "Earnings Per Share" ("SFAS No. 128"), 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.
N. COMPREHENSIVE INCOME (LOSS)
In Accordance with 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 are included in comprehensive income but excluded from net
income.
O. 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 2007 and 2006 include net foreign currency
transaction losses of $3,526, and $3,659, respectively. Financing
expenses, net in 2005 include net foreign currency transaction gains
of $1,398.
P. STOCK-BASED COMPENSATION
In January 1, 2006, the Company adopted the provisions of SFAS No. 123
(revised 2004), "Share-Based Payment" (SFAS No. 123(R)), under which
employee share-based equity awards accounted for under the fair value
method. Accordingly, stock-based compensation to employees and
directors is measured at the grant date, based on the fair value of
the award. The Company elected the modified prospective method as its
transition method. Under the modified prospective method the
compensation cost recognized by the Company beginning in 2006 includes
(a) compensation cost for all equity incentive awards granted prior
to, but not yet vested as of January 1, 2006, based on the grant-date
fair value estimated in accordance with the original provisions of
SFAS No. 123, and (b) compensation cost for all stock-based
compensations granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of
SFAS No. 123(R). The Company uses the straight-line attribution method
to recognize stock-based compensation costs over the service period of
the award.
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.)
P. STOCK-BASED COMPENSATION (CONT.)
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.
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
---------
PRO FORMA LOSS
Loss for the year, as reported $(203,082)
Less - stock-based compensation
determined under APB 25 --
Add - stock-based compensation
determined under SFAS 123 (4,229)
---------
Pro forma loss $(207,311)
=========
BASIC LOSS PER SHARE
As reported $ (3.06)
=========
Pro forma $ (3.12)
=========
STOCK-BASED COMPENSATION IN FINANCING TRANSACTIONS
The Company calculates the fair value of stock-based compensation
included in its financing transactions. That fair value is
recognized in equity. The amount of fair value of the warrants is
considered a discount on the debt issued and adjust the yield on
the financing transaction.
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.)
Q. IMPAIRMENT OF LONG-LIVED ASSETS
Management reviews long-lived assets on a periodic basis, as well as
when such a review is required based upon relevant circumstances, to
determine whether events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. 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 ramp-up of Fab 2.
Application of SFAS No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets" ("SFAS No. 144") resulted in no impairment
charges for the periods presented.
R. DERIVATIVES
The Company issues from time to time derivatives, whether embedded or
freestanding, that are denominated in currency other than its
functional currency (generally the NIS in which its shares are also
traded). The Company consider those instruments to be indexed only to
its own stock and not dual indexed. The Company considered the various
guidance on that issue and decided that pending the final consensus in
EITF 07-5 it will continue to consider such instruments as indexed
solely to its own shares.
S. INITIAL ADOPTION OF NEW STANDARDS
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. The Company adopted the provisions of this standard,
together with the adoption of FASB No. 157 FAIR VALUE MEASUREMENTS,
starting with the first quarter of 2007.
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.)
T. RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS NO. 141 (REVISED 2007 ) "BUSINESS COMBINATIONS" - In December
2007, the FASB issued FASB 141(R), "Business Combinations" of which
the objective is to improve the relevance, representational
faithfulness, and comparability of the information that a reporting
entity provides in its financial reports about a business combination
and its effects. The new standard requires the acquiring entity in a
business combination to recognize all (and only) the assets acquired
and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; and requires the acquirer to
disclose to investors and other users all of the information they need
to evaluate and understand the nature and financial effect of the
business combination. In December 2007, the FASB issued FASB 160
"Non-controlling Interests in Consolidated Financial Statements - an
amendment of ARB No.51" of which the objective is to improve the
relevance, comparability, and transparency of the financial
information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting
standards by requiring all entities to report non controlling
(minority) interests in subsidiaries in the same way - as equity in
the consolidated financial statements. Moreover, Statement 160
eliminates the diversity that currently exists in accounting for
transactions between an entity and non-controlling interests by
requiring they be treated as equity transactions. Both FASB 141(R) and
FASB 160 are effective for fiscal years beginning after December 15,
2008. 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.
U. RECLASSIFICATION
Certain amounts in prior years' financial statements have been
reclassified in order to conform to the 2007 presentation.
NOTE 3 - OTHER RECEIVABLES
Other receivables consist of the following:
As of December 31,
--------------------
2007 2006
-------- --------
Government of Israel - investment grants receivable $ 24 $ 1,530
Other government agencies 4,661 3,847
Others 63 48
-------- --------
$ 4,748 $ 5,425
======== ========
F - 14
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 4 - INVENTORIES
Inventories consist of the following (*):
As of December 31,
----------------------
2007 2006
-------- --------
Raw materials $ 12,351 $ 11,234
Work in process 14,964 22,884
Finished goods 491 645
-------- --------
$ 27,806 $ 34,763
======== ========
(*) Net of aggregate write-downs to net realizable value of $6,497 and
$5,948 as of December 31, 2007 and 2006, respectively.
NOTE 5 - LONG-TERM INVESTMENTS
Long-term investments consist of the following:
As of December 31,
----------------------
2007 2006
-------- --------
Severance pay funds, see Note 12B $ 13,848 $ 13,535
Investment in Limited partnership, see below 950 --
Others 295 1,790
-------- --------
$ 15,093 $ 15,325
======== ========
INVESTMENT IN LIMITED PARTNERSHIP:
In December 2007, the Company together with CMT Medical Technologies Ltd.,
a leading provider of advanced digital X-ray imaging systems for medical
diagnosis, establishment a limited partnership to develop and market X-ray
detectors for medical applications. The Company owns 38% of the limited
partnership and accounts for the investment in the limited partnership
using the equity method.
F - 15
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 6 - PROPERTY AND EQUIPMENT, NET
A. Composition:
As of December 31,
--------------------------
2007 2006
---------- ----------
COST:
Buildings (including facility infrastructure) $ 235,960 $ 233,781
Machinery and equipment 985,608 895,725
Transportation vehicles 304 307
---------- ----------
1,221,872 1,129,813
---------- ----------
ACCUMULATED DEPRECIATION AND AMORTIZATION
Buildings (including facility infrastructure) 75,227 61,200
Machinery and equipment 644,111 535,548
Transportation vehicles 247 267
---------- ----------
719,585 597,015
========== ==========
$ 502,287 $ 532,798
========== ==========
Supplemental disclosure relating to cost of property and equipment:
(1) As of December 31, 2007 and 2006, the cost of property and
equipment included costs relating to Fab 2 in the amount of
$966,164 and $879,413, respectively. Said amounts are net of
investment grants of $164,675 and $164,587, respectively.
(2) As of December 31, 2007, the cost of buildings, machinery and
equipment was reflected net of investment grants in the aggregate
of $267,922 (as of December 31, 2006 - $267,866).
(3) Cost of property and equipment as of December 31, 2007 and 2006
includes capitalized financing costs in the aggregate of $19,625
and $11,839, respectively.
(4) Depreciation expenses, in relation to Fab 2 property and
equipment were $113,393, $123,422 and $114,141 in 2007, 2006 and
2005 respectively.
(5) Had depreciation been calculated using five years of useful life
depreciation method (see Note 2F(1)), depreciation expenses for
2007 would have been $167,356 as compared to $122,647 recognized
in this financial statements.
F - 16
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 6 - PROPERTY AND EQUIPMENT, NET (CONT.)
B. INVESTMENT GRANTS
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, 2007, the report has not yet received final approval from
the Investment Center.
See Note 13A(7) with respect to the Fab 2 program approved by the
Investment Center in December 2000.
Entitlement to the above grants and other tax benefits is subject to
various conditions stipulated by the 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 17A.
C. For liens, see Note 13A(7) Notes 13D(1) and (2) and 9D.
NOTE 7 - OTHER ASSETS, NET
Other assets, net consist of the following:
As of December 31,
--------------------
2007 2006
------- -------
Prepaid expenses - long-term $ 1,270 $ 1,346
Deferred Financing Charges, net 1,734 --
Debentures issuance expenses, net (see Note 14) 3,418 834
Prepaid long-term Land Lease, net (see Note 13C) 4,622 4,749
------- -------
$11,044 $ 6,929
======= =======
F - 17
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 8 - OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
As of December 31,
----------------------
2007 2006
-------- --------
Accrued salaries $ 6,138 $ 8,730
Vacation accrual 3,574 3,385
Interest payable (primarily in relation to convertible debentures) 742 1,089
Due to related parties 7,459 5,895
Other 2,111 2,997
-------- --------
$ 20,024 $ 22,096
======== ========
NOTE 9 - LONG-TERM DEBT FROM BANKS
A. Composition:
As of December 31, 2007
-------------------------
Effective interest
rate (*)
--------- ---------
In U.S. Dollar 5.98% $ 288,693
In U.S. Dollar 5.10% 80,000
In U.S. Dollar 7.88% 14,000
---------
Total long-term debt from Banks- principle amount 382,693
Fair value adjustments (3,379)
---------
Total long-term debt from Banks $ 379,314
=========
As of December 31, 2006
----------------------
Effective interest
rate (*)
-------- --------
In U.S. Dollar 6.48% $288,693
In U.S. Dollar 5.10% 80,000
In U.S. Dollar --
--------
Total long-term debt from Banks- principle amount 368,693
Deferred gain on debt restructuring in accordance with SFAS No. 15 53,622
--------
Total carrying amount 422,315
Embedded feature 10,115
--------
Total long-term debt from Banks $432,430
========
(*) See E below
F - 18
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 9 - LONG-TERM DEBT FROM BANKS (CONT.)
B. FACILITY AGREEMENT
In January 2001, the Company entered into a Facility Agreement, as
amended to date, with two leading Israeli banks ("Banks") entitling
the Company to borrow an aggregate, 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 three-month USD 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. The Facility Agreement was
since amended in various instances. Prior to the closing of the
September 2006 Amendment, the loans bore interest based on the
three-month USD LIBOR rate plus 2.5%. For interest rates following
September 2006 Amendment, see 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 $30,000 by March 31, 2006. In connection with
the Amendment, The Israel Corporation Ltd ("TIC" or "Equity Investor")
and SanDisk Corporation, Alliance Semiconductor Corporation and
Macronix International Co. Ltd. (collectively, the "primary Wafer
Partners") committed to invest an aggregate of $23,500 towards such
funding in the context of a rights offering. 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.
F - 19
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 9 - LONG-TERM DEBT FROM BANKS (CONT.)
B. FACILITY AGREEMENT (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 to refinance the approximately $527,000 of
long-term debt under its Facility Agreement. Pursuant to the
Amendment, among other things: (i) $158,000 of the 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 on the Memorandum of Understanding
("MOU") that preceded the final Amendment; (ii) the interest rate
applicable for the quarterly actual interest payment on the loans was
decreased from three-month USD LIBOR plus 2.5% per annum to
three-month USD LIBOR plus 1.1% per annum, effective from May 17, 2006
(the "Decreased Amount"). As compensation for the Decreased Amount and
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 Quarter 2010 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; (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 September 2011, see also Note 14B(5)(a); and (v)
the financial ratios and covenants that the Company is to satisfy were
revised to be inline with the Company's working plan as of the time of
the Amendment.
SEPTEMBER 2007 CREDIT LINE AGREEMENTS WITH THE BANKS AND TIC AND
SEPTEMBER 2007 AMENDMENT - In September 2007, the Company signed and
closed definitive agreements with the Banks and with TIC, providing
for credit lines totaling up to $60,000, 25% of which from each Bank
and 50% from TIC, to be used for the funding of equipment required for
a ramp up plan in Fab 2 to increase its capacity to beyond 24,000
wafers per month. As of December 31, 2007, $28,000 had been borrowed
under these credit lines and an additional $32,000 was borrowed during
January 2008, each drawdown comprised of 25% from each bank and 50%
from TIC. Loans under the credit lines are bearing interest at an
annual rate of three-month USD LIBOR plus 3% and are repayable 2 years
from the date any loan was borrowed. The Company paid the Banks and
TIC customary fees. For details regarding 5,411,764 warrants granted
to the Banks and TIC in connection with this agreement, see Note
14B(5). Further, in September 2007, the Company signed and closed a
definitive amendment to the Facility Agreement to mainly reflect into
it the Credit Line Agreements described above and to revise the
financial ratios and covenants that the Company is to satisfy to be
inline with the Company's working plan as of the time of the
Amendment.
F - 20
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 9 - LONG-TERM DEBT FROM BANKS (CONT.)
B. FACILITY AGREEMENT (CONT.)
ACCOUNTING FOR THE LOANS UNDER THE FACILITY AGREEMENT
Loans received under the Facility Agreement, as amended to date, are
presented commencing January 1, 2007 at fair value, with changes in
value reflected on the statement of operations, following an election
under FASB No. 159 "The Fair Value Option for Financial Assets and
Financial Liabilities". Such loans bear interest based on the
three-month USD LIBOR rate plus 1.1%, effective from May 17, 2006.
Prior to the fair value election, in 2006, the loans under the
Amendment of September 2006 was treated as a troubled debt
restructuring within the scope of FASB No. 15 which required 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 shares 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.
The obligation to issue additional securities of the Company in
January 2011 under the restructuring in September 2006 Amendment as
compensation to the Decreased Amount, 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.
In the first quarter of 2007, the Company adopted the provisions of
SFAS No. 159. As required by such 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.
F - 21
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 9 - LONG-TERM DEBT FROM BANKS (CONT.)
B. FACILITY AGREEMENT (CONT.)
ACCOUNTING FOR THE LOANS UNDER THE FACILITY AGREEMENT (CONT.)
The effect of the election of fair value option to the Facility
Agreement as of January 1, 2007 was a gain of $65,207 which has been
recorded as a cumulative effect adjustment to retained loss (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
previous GAAP prescribed in FASB 15 Accounting by Debtors and
Creditors for Troubled Debt Restructurings to the Facility Agreement
did not reflect the economic benefits that were achieved with the
consummation of the Amendment to the Facility Agreement and that the
application of the fair value better reflects such benefits. For fair
value measurement, see Note 11D below.
C. REPAYMENT SCHEDULE
The principle amount of the long-term debt as of December 31, 2007 is
repayable as follows:
2009 $ 75,449
2010 122,898
2011 and thereafter 184,346
--------
$382,693
========
D. The Facility Agreement with the 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 13A(7), to Siliconix - see
Note 13D(1) and to SanDisk - see Note 13D(2)), 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 13A(6).
E. The effective interest rate as of December 31, 2007 and 2006 of loans,
the amount of which as of such dates was $80,000 and $207,000,
includes the terms of the collar agreements with knock-out and
knock-in features described in Note 11A. Interest is payable at the
end of each quarter.
F - 22
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 10 - DEBENTURES
A. Composition:
As of December 31, 2007
--------------------------------------------
Bifurcated
Interest Carrying embedded
rate amount feature Fair value Total
-------- -------- -------- --------
2002 Convertible debentures series A 4.7% $ 15,774 $ -- $ -- $ 15,774
2005 Convertible debentures series B 5% 9,547 -- -- 9,547
2006 Convertible debentures series C --(*) 36,602 7,313 -- 43,915
2007 Non-convertible debentures series D 8% 27,627 -- -- 27,627
2007 Convertible debentures series E, see Note 11 8% -- -- 28,484 28,484
-------- -------- -------- --------
89,550 7,313 28,484 125,347
Less - current maturities 7,887 -- -- 7,887
-------- -------- -------- --------
$ 81,663 $ 7,313 $ 28,484 $117,460
======== ======== ======== ========
As of December 31, 2006
--------------------------------
Bifurcated
Interest Carrying embedded
rate amount feature Total
-------- -------- --------
2002 Convertible debentures series A 4.7% $ 20,704 $ -- $ 20,704
2005 Convertible debentures series B 5% 4,790 28,377 33,167
2006 Convertible debentures series C --(*) 25,381 11,513 36,894
-------- -------- --------
50,875 39,890 90,765
Less - current maturities 6,902 -- 6,902
-------- -------- --------
$ 43,973 $ 39,890 $ 83,863
======== ======== ========
(*) See D below
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 subordinated to the
Company's existing and future secured indebtedness, including indebtedness
to the Banks under the Facility Agreement - see Note 13A(6), to Siliconix -
see Note 13D(1), to SanDisk- see Note 13D(2) and to the government of
Israel - see Note 6B.
F - 23
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 10 - DEBENTURES (CONT.)
B. 2002 CONVERTIBLE DEBENTURES SERIES A
In January 2002, the Company issued on the Tel-Aviv Stock Exchange,
NIS 110,579,800 (approximately $24,300) 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. 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, 2007, adjusted to the CPI was $15,984, half of which was
paid on January 2008 and the other half is due on January 2009. The
debentures may be converted until December 31, 2008 into Ordinary
Shares, at a conversion rate of one Ordinary Share per each NIS 41.00
principal amount of the debentures.
C. 2005 CONVERTIBLE DEBENTURES SERIES B
The Company issued $48,169 principal amount of convertible debentures
by way of rights offering based on a prospectus which became effective
on December 2005. The debentures are listed for trade on the Tel-Aviv
Stock Exchange and on the NASDAQ Capital Market ("Series B"). The
debentures accrue annual interest at the rate of 5% which will be
payable, together with the principal of the debentures, in one
installment on January 2012.
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.
No such adjustment was or will be required and the downward adjustment
mechanism has expired.
The Equity Investors and the primary Wafer Partners, which were
considered related parties, invested $27,811 in the framework of the
rights offering.
Through December 31, 2007, $19,055 in aggregate principal amount of
debentures were converted into 17,322,575 Ordinary Shares of the
Company, hence the outstanding principal amount of convertible
debentures as of December 31, 2007 was $29,114.
F - 24
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 10 - CONVERTIBLE DEBENTURES (CONT.)
D. 2006 CONVERTIBLE DEBENTURES SERIES C
In a public offering the Company issued NIS 164,430,000 principal
amount of convertible debentures linked to the 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 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 outstanding
principal amount of convertible debentures as of December 31, 2007 was
$53,570.
E. 2007 NON-CONVERTIBLE DEBENTURES SERIES D AND CONVERTIBLE DEBENTURES E
In the second half of 2007, the Company consummated a private
placement with Israeli institutions of long-term convertible and
non-convertible debentures and warrants, by which the Company raised a
gross proceeds of approximately $40,000. In the funding, 342 units
were sold, each comprised of: (i) long-term
non-convertible-debentures, 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 ("series D"); (ii) long-term
convertible-debentures repayable in December 2012 with a 17.2 NIS
conversion price, with a face amount of NIS 262,500 (approximately
$62.7), carrying an annual interest of 8 percent("series E"), and
(iii) 5,800 warrants, each exercisable until 2011, for one Tower
ordinary share at a price of $2.04. The debentures are linked to the
CPI and were issued at 95.5% of par value. The conversion and exercise
prices are subject to reduction in certain limited circumstances.
In September 2007, the Company expanded its series of long-term
debentures and warrants, by selling 12,118 units, each comprised of
long-term non-convertible debentures, with a face amount of NIS 2,500
(approximately $0.62), long-term convertible debentures, with a face
amount of NIS 2,625 (approximately $0.65), and 58 warrants. The
debentures were issued at 90% of par value and with the other same
terms as the debentures and the warrants issued in the private
placement. In this expansion, the Company raised gross proceeds of
approximately $14,000.
The outstanding principal amount of series D and E as of December 31,
2007 was $30,865 and $32,408, respectively. The Company elected to
carry series E at fair value in accordance with provisions of SFAS No.
155.
F - 25
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - FINANCIAL INSTRUMENTS AND FAIR VALUE MEASURMENTS
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.
A. HEDGING ACTIVITIES
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 unless designated as hedging
item in a cash flows hedge at which time changes are classified in
other comprehensive income, to the extent effective.
The Company, from time to time, enters into agreements to hedge
variable interest rate exposure on long-term loans. The Company uses
interest rate collar agreements 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, as interest payment become due.
As of December 31, 2007 and 2006, the Company had outstanding
agreements to hedge interest rate exposure on loans drawn down under
the Facility Agreement, the aggregate amount of which was $80,000 and
$207,000 respectively, all of which is attributable to Fab 2. These
agreements resulted in 2007 and 2006 in a gain of $1,074 and $880,
respectively and in 2005 in a loss of $1,756
The Company does not hold or issue derivative financial instruments
for non-hedging purposes.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, short-term bank deposits, trade receivables and
government agencies receivables. The Company's cash, cash equivalents
are maintained with high-quality banks, and the composition and
maturities of investments are regularly monitored by management.
Generally, these securities may be redeemed upon demand and bear
minimal risk.
F - 26
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - FINANCIAL INSTRUMENTS AND FAIR VALUE MEASURMENTS (CONT.)
B. CONCENTRATION OF CREDIT RISKS
The Company generally does not require collateral; however, in certain
circumstances, the Company maintains a credit insurance policy or may
require letters of credit. An allowance for doubtful accounts is
determined with respect to those amounts that the Company has
determined to be doubtful of collection. The Company performs ongoing
credit evaluations of its customers.
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.
C. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments,
excluding the Company's long-term debentures do not materially differ
from their respective carrying amounts as of December 31, 2007 and
2006. The fair value of the interest rate hedging transactions as of
December 31, 2007, 2006 and 2005 would have resulted in an unrealized
capitalizable gain of $295, $1,790 and $1,767, respectively. The fair
values of debentures as of December 31, 2007, 2006 and 2005 were
$157,683, $126,048 and $22,750, respectively, based on quoted market
prices for the respective dates.
D. 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)
The income approach was applied using a present value technique.
For Loans - The cash flows used in that technique reflect the income
stream expected to be used to satisfy the obligation over its economic
life.
For Embedded Derivatives - the Company utilized the Black Scholes
Merton formula.
For Over the Counter derivatives - the Company used the market
approach using quotation from dealer markets.
For convertible debentures series E - The market approach was applied
using quoted prices for the same debentures.
F - 27
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - FINANCIAL INSTRUMENTS AND FAIR VALUE MEASURMENTS (CONT.)
D. FAIR VALUE MEASUREMENTS (CONT.)
Recurring Fair Value Measurements Using:
Quoted prices
in active Significant
market for other
identical observable Significant
December 31, liability Inputs Unobservable
2007 (Level 1) (Level 2) Inputs (Level 3)
--------- --------- --------- ---------
Trading securities - convertible
debentures series E $ 28,484 $ 28,484 $ -- $ --
Long-term debt 365,563 -- -- 365,563
Derivatives 7,018 -- (295) 7,313
--------- --------- --------- ---------
$ 401,065 $ 28,484 $ (295) $ 372,876
========= ========= ========= =========
Asset Measurement on a Recurring Basis Using Significant Unobservable
Inputs (Level 3):
Long-term debt Derivatives
--------- ---------
As of January 1, 2007- at fair value $ 367,223 $ 11,513
Total gains unrealized in earnings (1,660) (4,200)
--------- ---------
As of December 31, 2007 - at fair value $ 365,563 $ 7,313
========= =========
Unrealized gain in earnings from liabilities still held at period end $ (1,660) $ (4,200)
========= =========
NOTE 12 - OTHER LONG-TERM LIABILITIES
A. Composition:
As of December 31,
------------------------
2007 2006
--------- ---------
Accrued Severance pay, see B below: $ 18,374 $ 16,816
Long-term liabilities in respect of license agreements -- 1,804
LONG-TERM LOANS FROM RELATED PARTIES, NET OF CURRENT MATURITY, SEE
NOTES 9B,13A(5) AND 13D(2) 19,073 8,096
Other (*) 2,933 1,439
--------- ---------
$ 40,380 $ 28,155
========= =========
(*) Includes $2,468 and $1,183 as of December 31, 2007 and 2006,
respectively, of interest payable to related parties in regard to
Series B, see also Note 10C.
F - 28
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - OTHER LONG-TERM LIABILITIES (CONT.)
B. EMPLOYEE TERMINATION BENEFITS
Israeli law and labor agreements determine the obligations of the
Company to make severance payments to dismissed employees and to
employees leaving employment under certain circumstances. Generally,
the liability for severance pay benefits, as determined by Israeli
Law, is 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 and
the liability are reflected separately on the balance sheets in
Long-term investments and Other Long-term Liabilities, respectively.
Commencing January 1, 2005 the Company is implementing a labor
agreement according to which, monthly deposits into recognized
severance and pension funds or insurance policies releases it from any
additional severance obligation to its employees and therefore incur
no liability or asset, since that date. Any net severance pay amount
as of such date will be released thereafter, as fixed amount on
employee termination date. Payments relating to employee termination
benefits were approximately $3,323, $2,807 and $2,631 for 2007, 2006
and 2005, respectively.
NOTE 13 - 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 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 has completed several public and private
financing transactions. The agreements and arrangements include
those with technology partners, with SanDisk Corporation,
Alliance Semiconductor Corporation, Macronix International Co.,
Ltd. and QuickLogic Corporation (collectively, the "Wafer
Partners"), Equity Investors, Banks, the Government of Israel
through the Investment Center and others. 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.
F - 29
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (CONT.)
(1) OVERVIEW (CONT.)
In 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 its customer pipeline and reinforced by
forecasted market conditions. This plan was completed during
2007. During 2007, the Company announced an additional plan to
further ramp up to reach capacity beyond 24,000 wafers per month.
For details regarding the financing efforts of the ramp-up plans
to reach capacity of 24,000 wafers per month and beyond, see Note
13A(4) for TIC investment of $100,000; Note 9B for Facility
Agreement amendments with the Banks and for credit lines from TIC
and the Banks; Notes 14J-M for public and private fund raisings.
The Company continues to examine alternatives for additional
funding sources in order to fund its Fab2 ramp-up.
(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.
F - 30
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (CONT.)
(3) WAFER PARTNER AGREEMENTS
During the years 2000 and 2001, the Company entered into various
shares purchase agreements ("Wafer Partner Agreements") with
Wafer Partners to partially finance the construction and
equipping of Fab 2. Pursuant to the Wafer Partner Agreements, the
Wafer Partners agreed to invest an aggregate of $250,000 to
purchase Ordinary Shares of the Company. According to the Wafer
Partner Agreements, the Company agreed, subject to certain
conditions, to reserve for each Wafer Partner a certain portion,
and collectively approximately 50%, of Fab 2 wafer manufacturing
capacity for a period of 10 years ending January 2011.
Through December 31, 2004, the Wafer Partners invested 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 to date, utilized as credit
against purchases to be made by the Wafer Partners, primarily
through December 2010, or converted into paid-in-capital for
limited term. Through December 31, 2007, the Wafer Partners were
issued an aggregate of 36,489,681 Ordinary Shares at an average
price per share of $6.94, 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.
Due to recent changes in one of the Company's primary Wafer
Partner's operations and its recent exit of its semiconductor
activities, the Company believes that no future utilization is
expected and determined that a full write-down of the its
outstanding amount is appropriate.
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 14G and 14I, respectively.
In August 2006, the Company signed an agreement with SanDisk, one
of the Wafer Partners, to invest in the expansion of its 0.13
micron manufacturing capacity, see Note 13D(2).
For amendments to the Wafer Partner agreements, see (5) below.
F - 31
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (CONT.)
(4) EQUITY INVESTOR AGREEMENTS
During the years 2001-2004, TIC has 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 shares purchase agreement the Company entered
into in January 2001. 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 14G and 14I, respectively.
In regard to the Company's financing efforts for the ramp-up plan
to reach capacity of 24,000 wafers per month 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 and TIC which was the basis of this
agreement); (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.
F - 32
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (CONT.)
(4) EQUITY INVESTOR AGREEMENTS (CONT.)
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.
For a credit line agreement signed with TIC in September 2007,
see Note 9B.
(5) AMENDMENTS TO THE PRIMARY WAFER PARTNER AGREEMENTS
Pursuant to the primary Wafer Partner Agreements, as amended to
date, each of the primary Wafer Partners had 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 has been
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,
2007, two of the primary Wafer Partners had elected to convert an
aggregate of $12,487 of long-term customer advances into
7,908,063 fully-paid Ordinary Shares of the Company, at an
average share price of $1.58 per share. Any quarterly amount,
which the primary Wafer Partners had elected not to so convert,
was utilizabled against purchases and was to be repaid on
December 2007 ("December 2007 Date"). The amounts bear interest,
payable at the end of each quarter, at an annual rate equal to
three-month USD LIBOR plus 2.5% through December 31, 2007,
subject to the below amendment with one of the Wafer Partners.
In 2006, the Company and one of the primary Wafer Partners,
entered into an agreement to defer the December 2007 Date to be
December 2009. Further, 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 USD LIBOR
plus 1.1%, payable at the end of each quarter, through December
2009.
F - 33
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (CONT.)
(6) FACILITY AGREEMENT
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 Facility
Agreement, as amended to date. 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 approval date of the financial statements
amounted to approximately $400,000) 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.
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 $400,000), 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.
For further details in regard to the Facility Agreement, see Note
9B.
F - 34
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (CONT.)
(7) 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 approximately $165,000 has been received
from the Investment Center. Under the terms of the program,
investments in respect of Fab 2 were to be completed by December
31, 2005, five years from the date the approval certificate was
obtained. Due to the later than planned construction of Fab 2,
market conditions and slower than planned ramp-up, the Company
completed approximately 72% of the investments under the approved
enterprise program. In December 2007, the Company submitted the
final report in relation to the 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 17A
(8) 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 and are expensed through the operational lease period.
F - 35
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (CONT.)
(9) HEDGING ACTIVITIES
For hedging transactions and agreements of the Company, see Note
11A.
(10) OTHER AGREEMENTS
Through December 31, 2007, 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 $45,000.
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 license fee 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 license fee 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 include $8,000 in relation to this
agreement.
F - 36
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - 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.
(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 12A.
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 ILA, 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 A(8) above.
(3) The Company occupies certain other premises under various
operating leases. The obligations under such leases were not
material as of December 31, 2007.
F - 37
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT.)
D. OTHER PRINCIPAL AGREEMENTS
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.
(1) SILICONIX - In 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 for the
purchase of wafers to be manufactured in the Company's Fab 1.
According to the agreement, in 2004 Siliconix provided the
Company $20,000 to be used primarily for the purchase of
additional equipment required to satisfy Siliconix's production
wafer requests. The advanced amount is credited towards the
purchase price of wafers. Under the agreement, Siliconix is
entitled to register liens over the equipment purchased in
connection with the transaction.
(2) SANDISK CORPORATION - In 2006, in connection with Fab2 0.13
micron capacity expansion, the Company signed an agreement with
SanDisk Corporation ("SanDisk"), one of its wafer partners,
according to which, SanDisk is committed to purchase volume
quantities of 0.13 micron wafers during 2007 and 2008 and will
have a right of first refusal for a portion of the Company's 0.13
micron capacity in 2009. The Company and SanDisk also signed a
Loan Agreement under which the Company borrowed approximately
$10,000 from SanDisk for the purpose of financing the purchase of
a portion of the equipment needed for said expansion. The loan
bears interest on the amounts outstanding at three-month USD
LIBOR plus 1.1%. Pursuant to the agreement, SanDisk has been
granted a first ranking charge on the equipment purchased
therewith.
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 - 38
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - 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 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 $400,000 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, 2007. In regard to investment center grants, see
A(7) above.
F - 39
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY
A. DESCRIPTION OF ORDINARY SHARES
As of December 31, 2007 and 2006, the Company had 800,000,000
authorized Ordinary Shares, par value NIS 1.00 each, of which
124,226,116 and 100,752,767, 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 243,905,535 Ordinary
Shares of the Company contingently issuable. This amount includes
Ordinary Shares to be issued under various agreements according to
their provisions: (i) Equity Investor warrants, see B(5)(b) below;
(ii) the exercise of outstanding warrants, see J,K,L and M below;
(iii) options granted to employees and non-employees, see B(1) below;
(iv) the conversion of all outstanding convertible debentures, see
Note 10 above; and (v) 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.
F - 40
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (CONT.)
B. SHARE OPTION PLANS (CONT.)
(1) EMPLOYEE, CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE
OFFICER AND DIRECTOR SHARE OPTIONS (CONT.)
(B) OPTIONS TO THE 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 1% of the Company's
issued and outstanding share capital on a fully diluted
basis as of December 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 vest over 4 years, 25% on the 12 month
anniversary of the shareholders approval date and 6.25% on
each 3 month anniversary of the first vesting date until
fully vested. The options grant to the chairman of the Board
of Directors was approved by the shareholders of the Company
in January 2007. The compensation cost of the options
granted was determined based on the fair value at the grant
dates and amounted to $3,568. Such amount is expensed on an
accelerated basis over the vesting periods of the options.
(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.
F - 41
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (CONT.)
B. SHARE OPTION PLANS (CONT.)
(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 (CONT.)
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. Future dilutive events following May
2006 and until May 2008 also entitles him for additional
options grants 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 are 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 14,872,087 options
were outstanding to the CEO. The compensation cost of the
total options granted to the CEO was determined based on the
fair value at the grant dates and amounted to $11,723. Such
amount is expensed on an accelerated basis over the vesting
periods of the options.
F - 42
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - 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 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 3,938,000 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, 80,000 options were
granted in 2007 to two director who were appointed in 2007
at an average exercise prices of $1.74, which equals the
market price of the Company's shares on the grant date. As
of December 31, 2007, 190,000 options were outstanding under
the plan with a weighted average exercise price of $3.68.
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 - 43
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - 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 - 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 of the
Initial Options was $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. 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. 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.
F - 44
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - 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.)
The compensation cost of the total options granted to the
directors under the plan described in (1)(e) above and to
the independent directors under the plan described in this
section was determined based on the fair value at the grant
dates and amounted to $594. Such amount is expensed on an
accelerated basis over the vesting periods of the options.
(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, 2007, 2006 and
2005, 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):
2007 2006 2005
--------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Number average Number average Number average
of share exercise of share exercise of share exercise
options price options price options price
----------- ----------- ----------- ----------- ----------- -----------
Outstanding as of
beginning of year 23,514,042 $ 1.87 13,011,575 $ 4.19 10,212,920 $ 5.71
Granted 9,127,384 1.88 17,414,268 1.52 5,000,224 1.54
Exercised (176,231) 1.30 (7,250) 1.58 --
Terminated (525,000) 7.07 (132,176) 10.95 (77,214) 12.45
Forfeited (2,344,660) 1.81 (6,772,375) 5.23 (2,124,355) 4.99
----------- ----------- -----------
Outstanding as of end
of year 29,595,535 1.79 23,514,042 1.87 13,011,575 4.19
=========== =========== ===========
Options exercisable
as of end of year 7,827,743 $ 2.15 2,849,132 $ 4.25 4,602,447 $ 7.77
=========== =========== ===========
F - 45
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - 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, 2007:
Exercisable as of
Outstanding as of December 31, 2007 December 31, 2007
- ------------------------------------------------------- -------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
PRICES outstanding life price exercisable price
- ------------- ---------- ---------- ---------- ---------- ----------
(in years)
$ 1.16-$1.30 401,203 7.35 $ 1.26 197,501 $ 1.26
1.37-1.40 922,332 8.52 1.40 232,333 1.40
1.45 7,990,416 8.37 1.45 2,010,515 1.45
1.46-1.58 9,355,391 8.11 1.54 3,168,731 1.55
1.60-1.98 7,817,044 9.05 1.83 479,952 1.82
2.02-2.28 2,071,492 8.28 2.13 971,921 2.17
3.25-3.70 239,687 6.47 3.26 199,328 3.26
4.11-4.56 416,269 8.40 4.23 185,761 4.33
5.00-10.75 158,601 2.89 7.18 158,601 7.18
11.81 200,000 3.41 11.81 200,000 11.81
$16.50-$25.00 23,100 2.62 $ 22.23 23,100 $ 22.23
---------- ----------
29,595,535 7,827,743
========== ==========
(4) WEIGHTED AVERAGE GRANT-DATE FAIR VALUE OF OPTIONS GRANTED TO
EMPLOYEES
The weighted average grant-date fair value of the options granted
during 2007, 2006 and 2005 to employees and directors amounted to
$0.87, $0.81 and $0.83 per option, respectively. The Company
utilized the Binomial lattice model since 2006 and the
Black-Scholes option-pricing model in 2005. The Company estimated
the fair value, utilizing the following assumptions for the years
2007, 2006 and 2005 (all in weighted averages):
2007 2006 2005
----------- ----------- -----------
Risk-free interest rate 3.61%-6.09% 4.44%-4.81% 3.69%-4.34%
Expected life of options 10 years 10 years 4.49 years
Expected annual volatility 55%-65% 65%-67% 54%-69%
Expected dividend yield None None None
F - 46
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (CONT.)
B. SHARE OPTION PLANS (CONT.)
(5) NON-EMPLOYEE WARRANTS
(A) BANKS WARRANTS - As of December 31, 2007, 11,631,648
warrants to purchase Ordinary Shares of the Company, at
terms described below, were outstanding and exercisable, at
a weighted average exercise price of $1.77 per share.
9,161,060 of the warrants are exercisable until September
2011 and 2,470,588 exercisable through March 2010
The cost of the 9,161,060 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 $10,886. Such amount was amortized as deferred
financing charges over the terms of the loans under the
Facility Agreement.
In September 2007, as part of as part of the Company's
credit line agreement with the Banks described in Note 9B,
the Banks received an aggregate of 2,470,588 warrants to
purchase Ordinary Shares of the Company at an exercise price
of $2.04 per share. All the warrants are exercisable until
March 2010. The cost of the warrants, determined based on
the fair value at the grant and amendment dates in
accordance with SFAS 123, amounted to a total of $608. 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 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 TIC - 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 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 - 47
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (CONT.)
B. SHARE OPTION PLANS (CONT.)
(5) NON-EMPLOYEE WARRANTS (CONT.)
WARRANTS ISSUED IN SEPTEMBER 2007 - In September 2007, as part of
the Company's credit line agreement with TIC described in Note
9B, TIC received an aggregate of 2,941,176 warrants to purchase
Ordinary Shares of the Company at an exercise price of $2.04 per
share. All the warrants are exercisable until March 2010. The
cost of the warrants, determined based on the fair value at the
grant and amendment dates in accordance with SFAS 123, amounted
to a total of $723. Such amount was amortized as deferred
financing charges over the term of the loans under the Facility
Agreement.
C. CAPITAL NOTES
(1) BANKS' CAPITAL NOTES
As part of the September 2006 Amendment to the Facility
Agreement, an amount of $158,000 of debt 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 consecutive trading days prior to
signing the MOU underlying the September 2006 Amendment to the
Facility Agreement. The capital notes are instruments of equity
and not debt. The capital notes' holders may convert the face
amount of the capital notes, in whole or in part, without
additional consideration, into Ordinary Shares of the Company,
however, prior to such conversion, if at all, the capital notes
(i) do not grant their holders with any of the rights of the
Company's shareholders; (ii) have no maturity date, do not carry
interest, are not linked to any index and are not redeemable; and
(iii) are not registered. For additional information regarding
the capital notes to the Banks, see Note 9B.
(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). The capital notes terms
are the same as in (1) above. For additional information
regarding the capital notes to TIC see Note 9B.
F - 48
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - 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 to date, 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. PUBLIC OFFERING IN ISRAEL - JANUARY 2002
In January 2002, the Company issued on the Tel Aviv Stock Exchange,
NIS 110,579,800 principal amount of convertible debentures Series A,
under terms described in Note 10B. Together with the convertible
debentures the Company issued for no consideration an aggregate of
552,899 options exercisable into debentures 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.
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 - 49
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - 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 Series B 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 options plans that entitle the
options 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 under terms described in Note 10C.
For investment by primary Wafer Partners and Equity Investor see also
Note 10C.
J. PUBLIC OFFERING IN ISRAEL - JUNE 2006
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). The units sold consisted of (i) convertible
debentures Series C in the face amount of NIS 163,800,000
(approximately $36,661), (ii) 390,000 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, (iii) 10,920,000 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, and (iv) 5,460,000
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). 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 addition, the Company issued similar units including principle
value of NIS 630,000 convertible debentures in consideration for NIS
526,000 through a private placement to its market maker in connection
with said offering.
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.
F - 50
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (CONT.)
K. PRIVATE PLACEMENT IN ISRAEL - NOVEMBER 2006
In the fourth quarter of 2006, the Company received and accepted
orders from Israeli investors in private placements for 11,615,000
Ordinary Shares and 5,227,500 warrants ("Series 5 Warrants"). The
price of the Ordinary Shares was equal to the closing price of the
Company's shares on the Tel-Aviv Stock Exchange prior to the relevant
private placements and the warrants were issued for no consideration.
Total immediate gross proceeds amounted to approximately $22,000. 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.
Series 5 Warrants have been classified to equity.
L. PRIVATE PLACEMENT IN THE US - MARCH 2007
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 and 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"). The Company
also issued short-term warrants at an exercise price of $1.70 ("Series
II Warrants"), however all Series II Warrants were not exercised and
were fully expired as of December 31, 2007.
M. LONG-TERM DEBENTURES ISSUED IN ISRAEL - 2007
In the second half of 2007, the Company consummated two private
placements with Israeli institutions of long-term convertible and
non-convertible debentures and warrants, see Note 10E.
N. U.S SHELF PROSPECTUS
In January 2008, the Company filed a shelf registration statement on
Form F-3 with the US Securities and Exchange Commission to allow for
the registration of a possible offer and sale of up to $30,000 of
securities of the Company, it may elect to execute during the three
years following the effective date of the registration statement. As
of the approval date of the financials statements, the registration
statement has not yet been declared effective. The Company has made no
decisions as to when, if at all, it will actually raise funds under
the shelf registration.
F - 51
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 15 - INFORMATION ON GEOGRAPHIC AREAS AND MAJOR CUSTOMERS
A. REVENUES BY GEOGRAPHIC AREA (as percentage of total sales)
Year ended December 31,
----------------------------------
2007 2006 2005
-------- -------- --------
United States 75% 69% 64%
Israel 7 7 7
Asia Pacific 10 16 20
Europe 8 8 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.
C. MAJOR CUSTOMERS (as percentage of total sales)
Year ended December 31,
----------------------------------
2007 2006 2005
-------- -------- --------
Customer A (*) 29% 23% 22%
Customer B 13 9 5
Customer C 11 2 1
Customer D 7 10 14
Customer E (*) (**) 5 11 8
Other customers (***) 11 21 20
(*) Related party
(**) Including its affiliates
(***) Represents sales to two different customers each of whom
accounted for between 5% and 6% of sales during 2007; to five
different customers each of whom accounted for between 2% and 6%
of sales during 2006 and to five customers accounted for between
2% and 8% of sales during 2005.
As of December 31, 2007 and 2006, the above major customers
constituted the majority of the trade accounts receivable reflected on
the balance sheets.
NOTE 16 - FINANCING EXPENSES, NET
Financing expenses, net consist mainly of Bank loans payable interest- see
Note 9, and interest and other financing expenses in relation to our
debentures- see Note 10.
F - 52
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 17 - 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 6B.
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 29% in 2007
(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 6B and 13A(7).
F - 53
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 17 - 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,
-----------------------
2007 2006
--------- ---------
DEFERRED TAX BENEFIT - CURRENT
Amounts relating to employees benefits
$ 797 $ 1,717
Other 438 115
--------- ---------
1,235 1,832
Valuation allowance (1,235) (1,832)
--------- ---------
Total current deferred tax benefit $ -- $ --
========= =========
NET DEFERRED TAX BENEFIT - LONG-TERM
Deferred tax assets -
Net operating loss carryforwards $ 200,000 $ 174,000
Research and development 1,851 2,063
Liability for employee rights upon severance 905 656
--------- ---------
202,756 176,719
Valuation allowance (151,844) (128,707)
--------- ---------
50,912 48,012
Deferred tax liability - depreciation and amortization (50,912) (48,012)
--------- ---------
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,
------------------------------------
2007 2006 2005
-------- -------- --------
Israeli statutory rate (29)% (31)% (34)%
Reduced tax rate for approved enterprise 9 11 14
Tax benefits for which deferred taxes
were not recorded 17 13 21
Permanent differences and other, net 3 7 (1)
-------- -------- --------
--% --% --%
======== ======== ========
D. NET OPERATING LOSS CARRYFORWARD
As of December 31, 2007, the Company had net operating loss
carryforwards for tax purposes of approximately $1,000,000, which may
be carried forward for an unlimited period of time.
F - 54
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 17 - 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 1999-2003 are deemed
final.
NOTE 18 - RELATED PARTIES BALANCES AND TRANSACTIONS
A. BALANCES
As of December 31,
--------------------
2007 2006
-------- --------
Trade accounts receivable $ 12,823 $ 13,625
======== ========
Long-term investment $ 950 $ --
======== ========
Current liabilities, including current maturity of long-term
loans $ 7,459 $ 5,895
======== ========
Convertible debentures $ 24,500 $ 24,500
======== ========
Long-term liability in respect of customers' advances $ 9,922 $ 27,340
======== ========
Other long-term liabilities, including long-term loans from
related parties, net of current maturity $ 21,541 $ 9,279
======== ========
Capital note $100,000 $100,000
======== ========
B. TRANSACTION
As of December 31,
--------------------------------
2007 2006 2005
-------- -------- --------
Revenue $ 78,870 $ 64,055 $ 33,456
======== ======== ========
Interest on loans and debentures $ 2,252 $ 1,632 $ 60
======== ======== ========
Expenses paid $ 289 $ 46 $ 47
======== ======== ========
Equity conversion of customer advances -
see Note 13A(5) $ 6,414 $ 7,621 $ 1,794
======== ======== ========
Conversion of customer advances into
Long-term loans - see Note 13A(5) $ 1,258 $ 2,823 $ 936
======== ======== ========
Long-term loan received $ 14,000 $ 9,705 $ --
======== ======== ========
Loans repayment $ 2,974 $ -- $ --
======== ======== ========
Stock-based compensation - see Note 14B(5) $ 723 $ -- $ --
======== ======== ========
C. For commitments, contingencies and other transaction relating to Fab 2
Wafer Partner and Equity Investor agreements, see Note 13A.
F - 55
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 OUR
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2007 AND RELATED NOTES FOR
THE YEAR THEN ENDED. OUR FINANCIAL STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN UNITED STATES ("US GAAP").
TRANSITION TO U.S. GAAP
Beginning fourth quarter of 2007, the Company elected to present its financial
statements in accordance with U.S. GAAP. The Company elected to use U.S. GAAP to
increase transparency and comparability of the Company's financial reports and
facilitate research and analysis by shareholders, analysts and other
participants in the U.S. capital markets.
Commencing January 1, 2008 Israeli GAAP is no longer an alternative and can not
be used by public companies. Israel Accounting Standard 29 stipulates that
Israeli public companies that previously reported their financial results based
on Israeli GAAP must begin to report their financial results in accordance with
International Financial Reporting Standards, or IFRS, for periods beginning on
or after January 1, 2008. However, Israeli public companies that are listed in
the U.S. may elect to report using either U.S. GAAP or IFRS. We decided on the
change prior to the required deadline due to the importance of the year-end
reporting and our belief that this would be the best transition point.
The Company recasted the comparative amounts included in its financial
statements and in this report to US GAAP. In prior years the Company prepared
its financial reports in accordance with generally accepted accounting
principles in Israel ("IL GAAP") and provided reconciliation to US GAAP in the
notes to the financial statements.
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,
-------------------
2007 2006
----- -----
STATEMENT OF OPERATIONS DATA:
Total revenues 100% 100%
Cost of total revenues 123.4 142.7
----- -----
Gross loss (23.4) (42.7)
Research and development expenses, net 6.0 8.0
Marketing, general and administrative
expenses 13.7 13.8
----- -----
Operating loss (43.0) (64.5)
Financing expense, net (15.2) (25.4)
Other income, net 0.0 0.3
----- -----
Loss (58.1)% (89.6)%
===== =====
YEAR ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31, 2006
REVENUES. Revenues for the year ended December 31, 2007 increased by 23.2%
to $230.9 million from $187.4 million for the year ended December 31, 2006. This
$43.4 million increase was mainly attributable to a higher volume of wafer
shipments.
COST OF TOTAL SALES. Cost of total sales for the year ended December 31,
2007 amounted to $284.8 million, compared with $267.5 million for the year ended
December 31, 2006. This increase of 6.4% in cost of sales, which is relatively
low in relation to the 23.2% increase in sales, was mainly achieved due to the
Company's cost structure, according to which the Company has reasonable margins
for each incremental dollar of revenue and a reduction in depreciation and
amortization expenses, as described below. 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, the Company's 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 is 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 is applied prospectively. Total depreciation and amortization
expenses included in Cost of Total Sales was approximately $137 million for the
year ended December 31, 2007, as compared to approximately $155 million for the
year ended December 31, 2006. Said reduction was mainly attributed to the
aforementioned change.
GROSS LOSS. Gross loss for the year ended December 31, 2007 was $53.9
million compared to a gross loss of $80.1 million for the year ended December
31, 2006. The decrease in gross loss was mainly attributable to the 23% increase
in sales as compared to a 6% increase in Cost of Total Sales as described above.
RESEARCH AND DEVELOPMENT. Research and development expenses for the year
ended December 31, 2007 decreased to $13.8 million from $15.0 million for the
year ended December 31, 2006.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses for the year ended December 31, 2007 increased to $31.6
million from $25.8 million for the year ended December 31, 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 year ended December 31, 2007 was
$99.3 million, compared to $121.0 million for the year ended December 31, 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 year ended
December 31, 2007 were $35.0 million compared to financing expenses, net of
$47.6 million for the year ended December 31, 2006. This decrease is mainly due
to the consummation of the debt restructuring with our banks which was closed in
the third quarter of 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 reduced from the three month LIBOR rate
plus 2.5% to the three month LIBOR rate plus 1.1%.
OTHER INCOME, NET. Other income, net, for the year ended December 31, 2007
was $0.09 million compared to $0.6 million for the year ended December 31, 2006.
LOSS. Loss for the year ended December 31, 2007 was $134.2 million,
compared to $167.9 million for the year ended December 31, 2006. This decrease
is primarily attributable to the decrease of $21.6 million in the operating loss
and to the $12.6 million decrease 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, 2007, the exchange rate of the dollar
in relation to the NIS decreased by 9.0%, and the Israeli Consumer Price Index,
or CPI, increased by 3.4% (during the year ended December 31, 2006 there was a
decrease of 8.2% in the exchange rate of the dollar in relation to the NIS and a
decrease of 0.1% 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. The
recent devaluation of the US dollar in relation to the NIS increased mainly our
dollar expenses related to our NIS denominated debentures and the dollar amount
of our NIS denominated expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2007, we had an aggregate of $44.5 million in cash and
cash equivalents. This compares to $40.9 million we had as of December 31, 2006
in cash, cash equivalents, and short-term interest-bearing deposits.
During the year ended December 31, 2007, we raised $77.2 million in net
proceeds from the issuance of debentures, ordinary shares and warrants, $28
million as long-term loans, $1.7 million from Investment Center grants and
generated a net amount of $16.7 million from our operating activities. These
liquidity resources financed the capital expenditure investments we made during
the year ended December 31, 2007, which aggregated $109.0 million, mainly in
connection with the purchase and installation of equipment and other assets for
the ramp up of Fab 2, repayment of convertible debentures in the amount of $7.1
million and repayment of long-term debt in the amount of $3.2 million.
We continue to examine alternatives for additional funding sources in order to
fund our Fab2 ramp-up, support our growth plans and improve our shareholders'
equity, otherwise expected to become negative during 2008.
As of December 31, 2007, we had long-term loans from banks, at fair value, in
the amount of $379.3 million which we obtained mainly in connection with the
establishment of Fab 2. As of such date, we had outstanding, in the aggregate of
$125.3 million of debentures, of which $7.9 million are presented as current
maturities.
EXHIBIT 99.3
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, 333-140174, 333-141640 and 333-148747 on Form F-3, and Nos. 33-80947, 333-06482, 333-11720, 333-83204, 333-107943, 333-117565, 333-138837 and 333-147071 on Form S-8, of our report dated February 6, 2008, 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 7, 2008