TOWER SEMICONDUCTOR LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(dollars in thousands, except share data and per share data)
EQUITY
COMPONENT
OF
CONVERTIBLE
DEBENTURES
AND
ORDINARY SHARES ADDITIONAL CUMULATIVE
------------------------- PAID-IN CAPITAL STOCK BASED ACCUMULATED TREASURY
SHARES AMAMOUNT CAPITAL NOTES COMPENSATION DEFICIT STOCK TOTAL
------------ --------- --------- --------- --------- -------- ------ ---------
BALANCE - JANUARY 1, 2006 68,232,056 $ 16,548 $ 522,237 $ -- $ (26) (559,754) (9,072) $ (30,067)
CHANGES DURING NINE-MONTH PERIOD (UNAUDITED):
ISSUANCE OF SHARES 3,910,514 842 5,130 5,972
EQUITY COMPONENT OF CONVERTIBLE DEBENTURES 27,985 27,985
CONVERSION OF CONVERTIBLE
DEBENTURES INTO SHARES 14,931,280 3,273 13,039 (6,920) 9,392
ISSUANCE OF WARRANTS 1,803 1,803
EMPLOYEE STOCK-BASED COMPENSATION 2,355 2,355
EXERCISE OF WARRANTS 350,000 81 469 550
STOCK-BASED COMPENSATION RELATED TO
THE FACILITY AGREEMENT WITH THE BANKS 4,146 4,146
CAPITAL NOTES 176,401 176,401
LOSS FOR THE PERIOD (49,235) (49,235)
------------ --------- --------- --------- --------- -------- ------ ---------
BALANCE - SEPTEMBER 30, 2006 (UNAUDITED) 87,423,850 $ 20,744 $ 546,824 $ 176,401 $ 23,394 (608,989) (9,072) $ 149,302
============ ========= ========= ========= ========= ======== ====== =========
BALANCE - JANUARY 1, 2005 66,999,796 $ 16,274 $ 517,476 $ -- $ (26) (356,672) (9,072) $ 167,980
CHANGES DURING NINE-MONTH PERIOD (UNAUDITED):
ISSUANCE OF SHARES 1,007,813 225 1,220 1,445
STOCK-BASED COMPENSATION RELATED TO
THE FACILITY AGREEMENT WITH THE BANKS 2,793 2,793
LOSS FOR THE PERIOD (157,910) (157,910)
------------ --------- --------- --------- --------- -------- ------ ---------
BALANCE - SEPTEMBER 30, 2005 (UNAUDITED) 68,007,609 $ 16,499 $ 521,489 $ -- $ (26) (514,582) (9,072) $ 14,308
============ ========= ========= ========= ========= ======== ====== =========
BALANCE - JULY 1, 2006 85,768,622 $ 20,366 $ 540,885 $ -- $ 20,381 (648,456) (9,072) $ (75,896)
CHANGES DURING THREE-MONTH PERIOD (UNAUDITED):
ISSUANCE OF SHARES 472,438 105 580 685
EQUITY COMPONENT OF CONVERTIBLE DEBENTURES 1,624 1,624
CONVERSION OF CONVERTIBLE
DEBENTURES INTO SHARES 832,790 192 744 (385) 551
EMPLOYEE STOCK-BASED COMPENSATION 1,774 1,774
EXERCISE OF WARRANTS 350,000 81 469 550
STOCK-BASED COMPENSATION RELATED TO
THE FACILITY AGREEMENT WITH THE BANKS 4,146 4,146
CAPITAL NOTES 176,401 176,401
INCOME FOR THE PERIOD 39,467 39,467
------------ --------- --------- --------- --------- -------- ------ ---------
BALANCE - SEPTEMBER 30, 2006 (UNAUDITED) 87,423,850 $ 20,744 $ 546,824 $ 176,401 $ 23,394 (608,989) (9,072) $ 149,302
============ ========= ========= ========= ========= ======== ====== =========
BALANCE - JULY 1, 2005 67,586,187 $ 16,408 $ 518,286 $ -- $ (26) (459,232) (9,072) $ 66,364
CHANGES DURING THREE-MONTH PERIOD (UNAUDITED):
ISSUANCE OF SHARES 421,422 91 410 501
STOCK-BASED COMPENSATION RELATED TO
THE FACILITY AGREEMENT WITH THE BANKS 2,793 2,793
LOSS FOR THE PERIOD (55,350) (55,350)
------------ --------- --------- --------- --------- -------- ------ ---------
BALANCE - SEPTEMBER 30, 2005 (UNAUDITED) 68,007,609 $ 16,499 $ 521,489 $ -- $ (26) (514,582) (9,072) $ 14,308
============ ========= ========= ========= ========= ======== ====== =========
BALANCE - JANUARY 1, 2005 66,999,796 $ 16,274 $ 517,476 $ -- $ (26) (356,672) (9,072) $ 167,980
CHANGES DURING 2005:
ISSUANCE OF SHARES 1,232,260 274 1,520 1,794
STOCK-BASED COMPENSATION RELATED TO
THE FACILITY AGREEMENT WITH THE BANKS 2,793 2,793
STOCK-BASED COMPENSATION RELATED TO RIGHTS OFFERED
TO EMPLOYEES 448 448
LOSS FOR THE YEAR (203,082) (203,082)
------------ --------- --------- --------- --------- -------- ------ ---------
BALANCE - DECEMBER 31, 2005 68,232,056 $ 16,548 $ 522,237 $ -- $ (26) (559,754) (9,072) $ (30,067)
============ ========= ========= ========= ========= ======== ====== =========
SEE NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, except share data and per share data)
NINE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
------------------------ ------------------------ ---------
2006 2005 2006 2005 2005
--------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
------------------------ ------------------------
CASH FLOWS - OPERATING ACTIVITIES
INCOME (LOSS) FOR THE PERIOD $ (49,235) $(157,910) $ 39,467 $ (55,350) $(203,082)
ADJUSTMENTS TO RECONCILE INCOME (LOSS) FOR THE PERIOD
TO NET CASH USED IN OPERATING ACTIVITIES:
INCOME AND EXPENSE ITEMS NOT INVOLVING CASH FLOWS:
DEPRECIATION AND AMORTIZATION 113,821 108,008 38,182 36,855 144,852
EFFECT OF INDEXATION AND TRANSLATION ON
CONVERTIBLE DEBENTURES 2,500 (1,205) 1,404 222 (1,031)
OTHER INCOME, NET (597) (2,518) (6) (42) (2,383)
CHANGES IN ASSETS AND LIABILITIES:
DECREASE (INCREASE) IN TRADE ACCOUNTS RECEIVABLE (8,860) 9,654 (4,010) 1,221 2,510
DECREASE (INCREASE) IN OTHER RECEIVABLES AND OTHER CURRENT ASSETS (9,496) 720 (7,640) (1,940) 1,988
DECREASE (INCREASE) IN INVENTORIES (14,143) 4,767 (4,118) (3,844) 1,293
INCREASE (DECREASE) IN TRADE ACCOUNTS PAYABLE (1,889) 5,320 (5,472) 5,480 3,082
GAIN ON DEBT RESTRUCTURING (80,071) -- (80,071) -- --
INCREASE (DECREASE) IN OTHER CURRENT LIABILITIES 3,736 (1,459) 1,623 6 (1,839)
DECREASE IN OTHER LONG-TERM LIABILITIES (1,752) (7,379) (73) (302) (5,368)
--------- --------- --------- --------- ---------
(45,986) (42,002) (20,714) (17,694) (59,978)
DECREASE IN LONG-TERM LIABILITY
IN RESPECT OF CUSTOMERS' ADVANCES, NET (1,504) (396) (690) (164) (760)
--------- --------- --------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES (47,490) (42,398) (21,404) (17,858) (60,738)
--------- --------- --------- --------- ---------
CASH FLOWS - INVESTING ACTIVITIES
DECREASE (INCREASE) IN DESIGNATED CASH, SHORT-TERM AND LONG-TERM
INTEREST-BEARING DEPOSITS, NET 31,661 40,955 2,909 (1,019) 27,266
INVESTMENTS IN PROPERTY AND EQUIPMENT (98,938) (32,251) (73,203) (8,146) (38,878)
INVESTMENT GRANTS RECEIVED 4,489 6,015 1,191 1,657 7,496
PROCEEDS RELATED TO SALE AND DISPOSAL OF PROPERTY AND EQUIPMENT 600 2,106 9 398 2,179
INVESTMENTS IN OTHER ASSETS (4,168) (3,732) (618) (132) (3,841)
--------- --------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (66,356) 13,093 (69,712) (7,242) (5,778)
--------- --------- --------- --------- ---------
CASH FLOWS - FINANCING ACTIVITIES
Proceeds on account of share capital 100,000 -- 100,000 -- --
PROCEEDS FROM ISSUANCE OF CONVERTIBLE DEBENTURE, NET 58,797 -- 36,937 -- 25,086
PROCEEDS FROM EXERCISE OF WARRANTS 550 -- 550 -- --
PROCEEDS FROM LONG-TERM DEBT 15,384 13,360 6,794 13,360 21,103
REPAYMENT OF CONVERTIBLE DEBENTURES (6,476) -- -- -- --
--------- --------- --------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 168,255 13,360 144,281 13,360 46,189
========= ========= ========= ========= =========
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 54,409 (15,945) 53,165 (11,740) (20,327)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 7,337 27,664 8,581 23,459 27,664
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 61,746 $ 11,719 $ 61,746 $ 11,719 $ 7,337
========= ========= ========= ========= =========
NON-CASH ACTIVITIES
INVESTMENTS IN PROPERTY AND EQUIPMENT $ 31,258 $ 11,313 $ 25,970 $ 1,243 $ 12,999
========= ========= ========= ========= =========
STOCK-BASED COMPENSATION RELATED TO
THE FACILITY AGREEMENT WITH THE BANKS $ 4,146 $ 2,793 $ 4,146 $ 2,793 $ 2,793
========= ========= ========= ========= =========
STOCK-BASED COMPENSATION RELATED TO RIGHTS OFFERED
TO EMPLOYEES $ -- $ -- $ -- $ -- $ 448
========= ========= ========= ========= =========
INVESTMENTS IN OTHER ASSETS $ -- $ 433 $ -- $ 366 $ 442
========= ========= ========= ========= =========
CONVERSION OF LONG-TERM LIABILITY IN RESPECT OF CUSTOMERS' ADVANCES
TO SHARE CAPITAL $ 5,972 $ 1,445 $ 685 $ 501 $ 1,794
========= ========= ========= ========= =========
CONVERSION OF CONVERTIBLE DEBENTURES TO SHARES $ 9,392 -- $ 551 $ -- $ --
========= ========= ========= ========= =========
CONVERSION OF LONG-TERM DEBT TO CAPITAL NOTES 76,401 -- 76,401 -- --
========= ========= ========= ========= =========
PROCEEDS RECEIVABLES RELATED PUBLIC OFFERING $ -- -- $ (31,479) $ -- $ --
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR INTEREST $ 28,611 $ 23,999 $ 7,819 $ 8,095 $ 32,805
========= ========= ========= ========= =========
CASH PAID DURING THE PERIOD FOR INCOME TAXES $ 126 $ 86 $ 70 $ 3 $ 86
========= ========= ========= ========= =========
SEE NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL
A. BASIS FOR PRESENTATION
(1) The unaudited condensed interim consolidated financial statements
as of September 30, 2006 and for the nine months and three months
then ended ("interim financial statements") of Tower
Semiconductor Ltd. and subsidiary ("the Company") should be read
in conjunction with the audited consolidated financial statements
of the Company as of December 31, 2005 and for the year then
ended, including the notes thereto. In the opinion of management,
the interim financial statements include all adjustments
necessary for a fair presentation of the financial position and
results of operations as of the date and for the interim periods
presented. The results of operations for the interim periods are
not necessarily indicative of the results to be expected on a
full-year basis.
(2) The interim financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") in Israel
("Israeli GAAP"), for interim financial statement, which differ
in certain respects from GAAP in the United States of America
("U.S. GAAP"), as indicated in Note 5.
The accounting principles applied in the preparation of these
interim financial statements are consistent with those principles
applied in the preparation of the most recent annual audited
financial statements, except for the accounting principles
detailed in paragraph 3 below.
(3) RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING
STANDARDS BOARD
A. ACCOUNTING STANDARD NO. 21 "EARNINGS PER SHARE"
In February 2006, the Israeli Accounting Standards Board
approved for publication Accounting Standard No. 21,
"Earnings Per Share" ("Standard No. 21").
With the initial adoption of Standard No. 21, Opinion No. 55
of the Institute of Certified Public Accountants in Israel -
Earnings per share is cancelled.
Standard No. 21 prescribes that an entity shall calculate
basic earnings per share amounts for profit or loss
attributable to ordinary equity holders of the entity. The
basic earnings per share shall be calculated by dividing
profit or loss attributable to ordinary equity holders of
the entity (the numerator) by the weighted average number of
ordinary shares outstanding (the denominator) during the
reported period. For the purpose of calculating diluted
earnings per share, an entity shall adjust profit or loss
attributable to ordinary equity holders of the entity, and
the weighted average number of shares outstanding, for the
effects of all dilutive potential ordinary shares.
- 5 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
A. BASIS FOR PRESENTATION (CONT.)
(3) RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING
STANDARDS BOARD (CONT.)
A. ACCOUNTING STANDARD NO. 21 "EARNINGS PER SHARE" (CONT.)
Standard No. 21 is effective for financial statements for
periods commencing January 1, 2006 or thereafter. The
adoption of Standard No. 21 is retrospectively applied and
comparative earnings per share data for prior periods were
adjusted. The loss per share presented in the financial
statements for the twelve months ended December 31, 2005 was
adjusted from $2.55 to $3.06. No adjustments were required
for the other periods presented.
B. ACCOUNTING STANDARD NO. 22 "FINANCIAL INSTRUMENTS:
DISCLOSURE AND PRESENTATION"
The Company adopted Accounting Standard No. 22 "Financial
Instruments: Disclosure and Presentation" ("Standard No.
22"). The Company issued three series of convertible
debentures that are considered compound instruments under
Standard No. 22. A compound instrument has to be separated
to its components, the equity component and the liability
component. The equity component is classified as
shareholders' equity and is determined as the excess of the
initial fair value over the fair value of the liability
component. The standard does not require retroactive
application to prior periods.
C. ACCOUNTING STANDARD NO. 29 "ADOPTION OF INTERNATIONAL
FINANCIAL REPORTING STANDARDS"
In July 2006, the Israeli Accounting Standards Board
published Accounting Standard No. 29 - "Adoption of
International Financial Reporting Standards" - IFRS ("the
Standard"). According to this Standard, the financial
statements of an entity subject to the Israeli Securities
Law and authoritative Regulations thereunder (including dual
listed companies), other than foreign corporations , that
prepares its financial statements in other than Israeli GAAP
as defined by this Law will be required to prepare financial
statements in accordance with the IFRS and related
interpretations published by the International Accounting
Standards Board, for the reporting periods commencing
January 1, 2008, including interim periods.
An entity adopting IFRS as of January 1, 2008 and electing
to report comparative figures in accordance with the IFRS
for only 2007, will be required to prepare opening
balance-sheet amounts as of January 1, 2007 based on the
IFRS.
- 6 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
A. BASIS FOR PRESENTATION (CONT.)
(3) RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING
STANDARDS BOARD (CONT.)
C. ACCOUNTING STANDARD NO. 29 "ADOPTION OF INTERNATIONAL
FINANCIAL REPORTING STANDARDS" (CONT.)
Reporting in accordance with the IFRS will be carried out
based on the provisions of IFRS No. 1, "First-time Adoption
of IFRS Standards", which establishes guidance on
implementing and transitioning from financial reporting
based on domestic national accounting standards to reporting
in accordance with IFRS.
IFRS No. 1 supersedes the transitional provisions
established in other IFRSs (including those established in
former domestic national accounting standards), stating that
all IFRSs should be adopted retroactively for the opening
balance-sheet amounts. Nevertheless, IFRS No. 1 grants
exemptions on certain issues by allowing the alternative of
not applying the retroactive application in respect thereof.
Management intends to examine the effect of the transition
to IFRS, yet at this stage, is unable to estimate the extent
of such conversion on the Company's financial position and
results of operations.
Standard No. 29 allows for earlier application in a manner
by which applicable entities may convert their financial
statements published subsequent to July 31, 2006 to the
IFRS. Management has not yet decided whether to early-adopt
the IFRS.
D. ACCOUNTING STANDARD NO. 26 "INVENTORY"
In August 2006 the Israeli Accounting Standards Board
published Accounting Standard No. 26 - "Inventory" ("the
Standard"), which outlines the accounting treatment for
inventory.
The standard applies to all types of inventory, other than
building earmarked for sale and addressed by Accounting
Standard No.2 ("Construction of Buildings for Sale"),
inventory of work in progress stemming from performance
contracts, addressed by Accounting Standard No.4 ("Work
Based on Performance Contract"), financial instruments and
biological assets relating to agricultural activity and
agricultural production during harvest.
- 7 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
A. BASIS FOR PRESENTATION (CONT.)
(3) RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING
STANDARDS BOARD (CONT.)
D. ACCOUNTING STANDARD NO. 26 "INVENTORY" (CONT.)
The standard establishes, among other things, that inventory
should be stated at the lower between cost and net
realizable value. Cost is determined by the first in, first
out (FIFO) method or by average weighted cost used
consistently for all types of inventory of similar nature
and uses. In certain circumstances the standard requires
cost determination by a specific identification of cost,
which includes all purchase and production costs, as well as
any other costs incurred in reaching the inventory's present
stage.
When inventory is acquired on credit incorporating a
financing component, the inventory should then be presented
at cost equaling purchase cost in cash. The financing
component is recognized as a financing expense over the term
of the credit period.
Any reduction of inventory to net realizable value following
impairment as well as any other inventory loss should be
expensed during the current period. Subsequent elimination
of an impairment write-down that stems from an increase in
net realizable value will be allocated to operations during
the period in which the elimination took place.
This standard will apply to financial statements covering
periods beginning January 1, 2007 and onwards and should be
implemented retroactively.
Management believes that the standard will not affect the
Company's financial position, results of operations and cash
flows.
E. ACCOUNTING STANDARD NO. 27 "FIXED ASSETS"
In September 2006 the Israeli Accounting Standards Board
published Accounting Standard No. 27 ("Fixed Assets"), which
establishes the accounting treatment for fixed assets,
including recognition of assets, determination of their book
value, related depreciation, losses from impairment as well
as the disclosure required in the financial statements.
- 8 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
A. BASIS FOR PRESENTATION (CONT.)
(3) RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING
STANDARDS BOARD (CONT.)
E. ACCOUNTING STANDARD NO. 27 "FIXED ASSETS" (CONT.)
The standard states that a fixed-asset item will be measured
at the initial recognition date at cost which includes, in
addition to the purchase price, all the related costs
incurred for bringing the item to the position enabling it
to operate in the manner contemplated by management. The
cost also includes the initial estimate of costs required to
dismantle and remove the item, along with the expenses
incurred in reconstructing the site on which the item had
been placed and in respect of which the entity incurred that
obligation when the item had been acquired or following its
use over a given period of time not in the production of
inventory during that period.
The standard also states that when acquiring assets in
exchange for a non-monetary asset or a combination of
monetary as well as non-monetary assets, the cost will be
determined at fair value unless (a) the barter transaction
has no commercial essence or (b) it is impossible to
reliably measure the fair value of the asset received and
the asset provided. Should the provided asset not be
measured at fair value, its cost would equal book value.
Following the initial recognition, the standard permits the
entity to implement in its accounting policy the measurement
of the fixed assets by the cost method or by revaluation so
long as this policy is implemented in regard to all the
items in that group.
Cost method - an item will be presented at net book value,
less accumulated impairment losses.
Revaluation method - an item whose fair value can be
measured reliably will be presented at its estimated amount,
which equals its fair value at the revaluation date, net of
depreciation accumulated subsequently and less accumulated
impairment losses. Revaluations should take place on a
current basis in order to ensure that book value does not
materially differ from the fair value that would have been
determined on the balance-sheet date. The revaluation of a
single item calls for the revaluation of the entire group
and if the asset's book value rises following this
revaluation, this increase should be allocated directly to
shareholders' equity ("revaluation reserve"). Nevertheless,
this increase will be recognized as an operating item up to
the amount offsetting the decrease from that asset's
revaluation recognized previously as income or loss. Should
book value decline following revaluation, this decline will
be recognized as an operating item yet allocated directly to
shareholders' equity ("revaluation reserve") up to the
amount leaving any credit balance in that reserve in respect
of that asset.
- 9 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
A. BASIS FOR PRESENTATION (CONT.)
(3) RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING
STANDARDS BOARD (CONT.)
E. ACCOUNTING STANDARD NO. 27 "FIXED ASSETS" (CONT.)
Any fixed assets with a meaningful cost in relation to the
item's total cost should be reduced separately. Moreover,
the depreciation method used will be reviewed at least once
at yearend and, if any meaningful change had taken place in
the estimated consumption of future economic benefits
inherent in the asset, the method should be modified to
reflect such changes. This change will be treated as a
change in an accounting estimate.
This new standard will apply to financial statements
covering periods beginning January 1, 2007 and onwards and
implemented retroactively, except for the following:
An entity which chooses on January 1, 2007 the revaluation
method will treat the difference between the asset's
estimated book value and its cost as a revaluation reserve
at that time.
An entity which did not include in the cost of an item, upon
initial recognition, the initial estimate of dismantling and
removing costs along with site reconstruction costs will be
required to:
1. Measure the liability on January 1, 2007 in conformity
with generally accepted accounting principles;
2. Compute the amount that would have been included in the
cost of the relevant asset, when the liability was
initially created, by capitalizing the amount of the
liability, as noted in item 1 above at the time when
that liability was initially created ("the Capitalized
Amount");
3. Compute the Capitalized Amount's accumulated
depreciation on January 1, 2007 on the basis of the
asset's useful life at that time;
4. The difference between the amount to be allocated to
the asset, in accordance with items 2 and 3 above and
the amount of the liability, based on item 1 above,
will be allocated to retained earnings.
The Company is currently examining this new standard,
including the election between the cost and the revaluation
methods; however, at this stage, it is unable to estimate
the standard's effect, if any, on its financial position,
results of operations and cash flows.
- 10 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
B. ESTABLISHMENT AND OPERATIONS OF NEW FABRICATION FACILITY ("FAB 2")
In January 2001, the Company's Board of Directors approved the
establishment of a new wafer fabrication facility in Israel ("Fab 2").
Fab 2 is designated to manufacture semiconductor integrated circuits
on silicon wafers in geometries of 0.18 micron and below on
200-millimeter wafers. The Company has entered into several related
agreements and other arrangements and has completed public and private
financing deals, which, as of the approval date of the interim
financial statements, have provided an aggregate of approximately
$1,400,000 of financing for Fab 2.
The Fab 2 project is a complex undertaking, which entails substantial
risks and uncertainties. For further details concerning the Fab 2
project and related agreements, some of which were amended several
times, risks and uncertainties, see Note 11A to the 2005 audited
consolidated financial statements.
C. FINANCING OF THE COMPANY'S ONGOING OPERATIONS
In the nine months ended September 30, 2006 and in recent years, the
Company has experienced significant recurring losses from operations,
recurring negative cash flows from operating activities, an increasing
accumulated deficit and a deficit in shareholders equity. The Company
is working in various ways to mitigate its financial difficulties and
among them are the following:
During the last number of months, the Company significantly increased
its customer base, mainly in Fab 2, modified its organizational
structure to better address its customers and its market positioning,
raised funds totaling approximately $187,000 of gross proceeds (see
also Notes 4C, 4D and 1C below) and restructured its bank debt (see
below).
In March 2006, the board of directors of the Company approved a plan
to ramp up Fab 2 in order to meet customer and product qualification
needs, based on its customer pipeline and reinforced by forecasted
market conditions.
- 11 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
C. FINANCING OF THE COMPANY'S ONGOING OPERATIONS (CONT.)
As part of the financing efforts for the ramp-up plan, in August 2006,
the Company signed a definitive amendment to the facility agreement
(the "Amendment") based on the terms of the May 2006 Memorandum of
Understanding ("MOU") with its banks for the refinancing of the
approximately $527,000 of long-term debt under its facility agreement.
Pursuant to the Amendment, which closed in September 2006: (i)
$158,000, representing 30% of the outstanding debt under the Credit
Facility, was converted into capital notes of the Company. Such notes
are convertible into 51,973,684 of the Company's ordinary shares
representing twice the average closing price per share during the ten
days prior to signing the MOU (see also Note 3B below); (ii) the
interest rate applicable for the quarterly actual interest payment on
the loans was decreased by 1.4%, from LIBOR plus 2.5% per annum to
LIBOR plus 1.1% per annum, effective from May 17, 2006 (the "Decreased
Amount"); subject to adjustment, in January 2011, the Banks will be
issued such number of shares (or equity equivalent capital notes or
convertible debentures) that equals the Decreased Amount divided by
the average closing price of 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 Amendment, were extended such that they are exercisable
until five years from the closing of the Amendment; and (v) the
financial ratios and covenants that the Company is to satisfy were
revised to be inline with the Company's current working plan.
- 12 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
C. FINANCING OF THE COMPANY'S ONGOING OPERATIONS (CONT.)
In this regard and in connection with Israel Corp.'s commitment to
invest $100,000, in August 2006, the Company entered into a securities
purchase agreement with Israel Corp. (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
shall issue to Israel Corp., at price per share of $1.52 (which equals
the average closing price during the 10 consecutive trading days prior
to signing the MOU), capital notes convertible into 65,789,474 of the
Company's ordinary shares; (ii) the Company shall be deemed to have
exercised the Call Option under the Equipment Purchase Agreement
described below; and (ii) the Company and Israel Corp. shall settle
the amounts payable by Israel Corp. under the Securities Purchase
Agreement with the amounts payable by the Company under the Equipment
Purchase Agreement. The Securities Purchase Agreement also closed in
September 2006.
In order to implement the ramp-up plan in a timely manner, in May
2006, the Company entered into an Equipment Purchase Agreement with
Israel Corp. according to which Israel Corp. will order up to
approximately $100,000 worth of equipment for Fab 2. Under the terms
of the Equipment Purchase Agreement: (i) Israel Corp. has the right to
sell to the Company the equipment at cost, plus related expenses; (ii)
the Company has the right to purchase the equipment from Israel Corp.
at cost, plus related expenses, subject to the Company having raised
$100,000; and (iii) upon the purchase of the equipment from Israel
Corp., the Company will assume Israel Corp.'s obligations to the
equipment suppliers. This agreement was approved by the Audit
Committee and the Board of Directors of the Company in May 2006.
Upon the closing of the Amendment and the Securities Purchase
Agreement, Israel Corp. transferred ownership over the purchased
equipment to the Company and the Company assumed Israel Corp.'s
obligations to the equipment suppliers.
The Company is currently examining alternatives for additional funding
sources in order to further ramp-up the equipping of Fab2.
- 13 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 2 - INVENTORIES
Inventories consist of the following (*):
September 30, December 31,
--------------------- -------
2006 2005 2005
------- ------- -------
(unaudited)
Raw materials $10,030 $ 6,445 $ 6,777
Spare parts and supplies 5,438 3,322 3,738
Work in process 22,277 8,638 11,502
Finished goods 774 2,497 2,359
------- ------- -------
$38,519 $20,902 $24,376
======= ======= =======
(*) Net of aggregate write downs to net realizable value of $2,543,
$3,973 and $3,259 as of September 30, 2006, September 30, 2005
and December 31, 2005, respectively.
NOTE 3 - RECENT DEVELOPMENTS RELATING TO FAB 2
A. APPROVED ENTERPRISE STATUS
Under the terms of the approved enterprise program for Fab 2, the
Company was eligible to receive grants of 20% of up to $1,250,000
invested in Fab 2 plant and equipment, or an aggregate of up to
$250,000 for investments made by December 31, 2005, of which as of the
balance sheet date, an aggregate of approximately $163,000 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. The Company has been holding
discussions with the Investment Center to achieve satisfactory
arrangements to approve a new expansion program commencing as of
January 1, 2006. During 2005, the Company received letters from the
Israeli Minister of Industry, Trade and Employment and from the
General Manager of the Investment Center stating that they will act
under Israeli law to support such expansion. In April 2005, at the
Investment Center's request, the Company submitted a revised business
plan to the Investment Center for the period commencing as of January
1, 2006. As of the approval date of the interim financial statements,
the Company's management cannot estimate when, if at all, the Company
will receive approval of its request for a new expansion program.
- 14 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 3 - RECENT DEVELOPMENTS RELATING TO FAB 2 (CONT.)
B. FACILITY AGREEMENT
In July 2005, the Company and its Banks entered into a definitive
amendment to the Facility Agreement. Pursuant to such amendment, the
Company borrowed $29,693 and was required to raise through the
issuance of shares or convertible debentures $23,500 by December 31,
2005 and an additional $6,500 by March 31, 2006. In January 2006, as
described in Note 4C below, the Company completed a rights offering of
convertible debentures in which it raised $48,169, $25,500 of which
was raised in December 2005, thereby satisfying the abovementioned
obligations to raise additional funds.
In addition, in May 2006, the Company and its Banks entered into an
amendment to the Facility Agreement, according to which (i) repayments
of long-term loans in the amount of approximately $100,000, originally
scheduled to be paid between October 2006 and June 2007, were deferred
to July 2007 and (ii) the date on which the Company was required to
raise an additional approximately $8,000 was deferred from June 30,
2006 to September 30, 2006, such fundraising requirement was satisfied
with the completion of the TASE offering described below in Note 4D.
As part of the financing efforts for the ramp-up plan, in September
2006, the Company and its Banks signed an amendment to the facility
agreement, as described above in Note 1C.
The Company accounted for the Amendment in accordance with provisions
set forth in IAS 39 FINANCIAL INSTRUMENTS: RECOGNITION AND
MEASUREMENT. Generally Accepted Accounting Standards in Israel are
silent in regards to the accounting for debt modification. In
addition, diversity in practice was observed across companies such
that no one approaches has been consistently applied to create
practice in Israel for the accounting for debt modification. In light
of the lack of guidance and considering that the Company has not
previously accounted for debt modification in the past the Company
decided to apply the guidance in IAS 39 regarding debt modification
mainly for the following reasons: (i) Israeli GAAP requires that when
there is no standard in Israel and no practice evolved IFRS has to be
applied, (ii) the Israeli Accounting Standard Board decided to adopt
in full the IFRS starting in fiscal year 2008 with early adoption
recommended, and the Israel Securities Authority ("ISA") decided that,
commencing from the second quarter of 2007, notes to financial
statements shall state the IFRS financial effect on such financial
statements, (iii) Standard No. 22, which is based on IAS 32 FINANCIAL
INSTRUMENTS: DISCLOSURE AND PRESENTATION, refers preparers of
financial statements to the guidance in IAS 39 for the purposes of
recognition and measurement of financial instruments (including
measurement of debt modification), (iv) the adoption of IAS 39 does
not create inconsistencies with prior periods and (v) recently adopted
Israeli standards are all based on IFRS.
- 15 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 3 - RECENT DEVELOPMENTS RELATING TO FAB 2 (CONT.)
B. FACILITY AGREEMENT (CONT.)
Under IAS 39, the accounting for the debt modification under the
Amendment is as follows:
1. The amount considered settled for shares and classified to
equity is based on the per share price as quoted at the
closing date; such amount totaled to $76,401.
2. The remaining balance, totaling $435,209, is considered to
be substantially modified and thus treated as debt
extinguishment of the outstanding debt and the incurrence of
a new debt.
3. The debt incurred is initially recognized at fair value,
totaling $355,138.
4. The difference between the fair value of the debt incurred
and the outstanding debt (exclusive of the amount used as
proceeds for the share issuance in 1 above), totaling
$80,071, is recognized in the consolidated statement of
operations as a gain on debt restructuring in the current
period.
See Note 5H for the accounting of the debt modification in accordance
with U.S. GAAP.
As descried in Note 1C above the Banks will be issued such number of
shares that equals the Decreased Amount divided by the Fourth Quarter
2010 Price. If during the second half of 2010, the closing price of
Company's ordinary shares on every trading day during this period
exceeds $3.49, then the Banks will only be granted such number of
shares that equals half of the Decreased Amount divided by the Fourth
Quarter 2010 Price. The Company accounted for its obligation to issue
shares initially, as an additional interest expense and adjusted the
effective interest rate on the debt to the Banks. The Company will
evaluate and, if required, adjust the effective interest rate based on
the per share price at the end of each reporting period. As of the
balance sheet date, the Company was in full compliance with all of the
financial ratios and covenants under the amended Facility Agreement
According to the Facility Agreement, satisfying the financial ratios
and covenants is a material provision. The amended Facility Agreement
provides that if, as a result of any default, the Banks were to
accelerate the Company's obligations, the Company would be obligated,
among other matters, to immediately repay all loans made by the Banks
(which as of the balance sheet date amounted to approximately
$369,000) plus penalties, and the Banks would be entitled to exercise
the remedies available to them under the Facility Agreement, including
enforcement of their lien against all of the Company's assets.
- 16 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 3 - RECENT DEVELOPMENTS RELATING TO FAB 2 (CONT.)
C. AGREEMENTS WITH SANDISK CORPORATION
In August 2006, the Company signed an agreement with SanDisk
Corporation ("SanDisk"), one of its wafer partners, to invest in the
expansion of its 0.13 micron manufacturing capacity. SanDisk committed
to purchase, upon such expansion, volume quantities of 0.13 micron
wafers during 2007 and 2008 and will have right of first refusal on
the use of this extra capacity in 2009. The Company and SanDisk also
signed a Loan Agreement under which the Company is entitled to borrow
funds not to exceed, in the aggregate, the principal amount of $10,000
from SanDisk for the purpose of financing the purchase of the
equipment needed for said expansion. The loan will be repaid with
interest on the amounts outstanding at any time under the loan at
Libor plus 1.1% over eight consecutive quarters. Pursuant to the
agreement, in order to secure the repayment of the loan, SanDisk has
been granted a first ranking charge on the equipment purchased
therewith. As of the balance sheet date $6,794 in loans was received
towards said $10,000.
NOTE 4 - OTHER RECENT DEVELOPMENTS
A. CLASS ACTION
In June 2006, the United States Court of Appeals for the Second
Circuit affirmed the August 2004 decision of the United States
District Court for the Southern District of New York to dismiss the
class action suit filed in July 2003 against the Company and certain
of its directors, Wafer Partners and Equity Investors (the
"Defendants"). The plaintiffs had asserted claims arising under the
Securities Exchange Act of 1934, alleging misstatements and omissions
made by the Defendants in materials sent to the Company's shareholders
in April 2002 with respect to the approval of an amendment to the
Company's investment agreements with its Fab 2 investors. The District
Court accepted the motion to dismiss filed on behalf of the defendants
and noted that the Company's status as a foreign private issuer
exempts the Company, its directors and controlling shareholders, from
liability under the proxy rules of Section 14(a) of the Securities
Exchange Act.
- 17 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 4 - OTHER RECENT DEVELOPMENTS (CONT.)
B. SHARE OPTION PLANS
(1) OPTIONS GRANTED TO THE CHIEF EXECUTIVE OFFICER ("CEO")
In May 2006, the Company's Audit Committee and Board of Directors
approved the grant of options to the CEO of the Company, who also
serves as a director, in addition to the options granted to him
in April 2005, such that in total, the CEO will hold options to
purchase shares that represent 4% of the Company's shares on a
fully diluted basis during the two-year period from the approval
of the Audit Committee. The exercise price of the initial grant
of additional options will be $1.45, the 90-day average closing
price of the Company's shares prior to the Board of Directors'
approval. In future dilutive events following May 2006,
additional options will be granted to the CEO as described above.
If the dilutive event is an equity financing, the exercise price
of such additional options will equal to the price per share of
such investment, otherwise, the exercise price will equal the
30-day average closing price of the Company's shares prior to the
dilutive event. The new options granted will vest in equal
amounts over 4 years of employment commencing from May 2006. The
options will be exercisable for a period of 10 years from the
date of grant. No additional options will be granted under the
CEO's employment agreement, 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. As of the
balance sheet date, a total of 12,068,988 options were granted to
the CEO. The cost of the total options granted to the CEO was
determined based on the fair value at the grant dates in
accordance with Standard No. 24 and amounted to $9,221. Such
amount is expensed on an accelerated basis over the vesting
periods of the options.
(2) EMPLOYEE OPTIONS
In May 2006, the Company's board of directors approved a plan to
offer each of the Company's current employees the opportunity to
exchange their existing options to purchase ordinary shares for
new options with an exercise price of $1.45, which is the average
closing price of the Company's shares on the NASDAQ during the 90
consecutive trading days prior to the board of directors'
approval. Accordingly 4,299,250 options were exchanged. The new
options were granted based on terms similar to the existing
employee option plan with new vesting periods, starting May 2006.
The cost of the new options was determined based on the fair
value at the grant dates in accordance with Standard No. 24 and
amounted to $1,726. Such amount is amortized as an expense on an
accelerated basis over the vesting periods of the new options.
The Board of Directors further approved that if the total number
of employee options, including the options to the CEO, during the
then upcoming 24 months will represent less than 8% of the
Company's shares on a fully diluted basis, additional options
will be allocated for grants to the Company's employees. As of
the balance sheet date, approximately 1,600,000 options are
reserved for future grant of options.
- 18 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 4 - OTHER RECENT DEVELOPMENTS (CONT.)
C. 2005 RIGHTS OFFERING
In December 2005, the Company filed in Israel and the U.S. a
prospectus for the distribution of transferable rights to purchase up
to $50,000 U.S. dollar denominated debentures that are convertible
into up to 45,454,545 of the Company's Ordinary Shares. The rights
were distributed to the shareholders of record of the Company on
December 20, 2005 (the record date), and to certain employees who on
the record date held options to purchase the Company's Ordinary Shares
under share option plans that entitle the option holders to
participate in a rights offering. Each 138.98 Ordinary Shares and/or
eligible employee options held on the record date entitled their
holder to one right. The rights were exercisable until January 12,
2006. Each right entitled its holder to purchase, at a subscription
price of $100.00, 100 U.S. dollar denominated convertible debentures.
In connection with the exercise of the rights, the Company issued
48,169,300 convertible debentures, with each debenture of $1.00 in
principal amount, or total of $48,169 principal amount of debentures,
which bear annual interest at the rate of 5%. The principal of the
debentures, together with accrued interest, is payable in one
installment on January 12, 2012.
The debentures are convertible into the Company's Ordinary Shares at a
rate of one ordinary share per $1.10 aggregate principal amount of
debentures. The conversion price is subject to downward adjustment
under certain circumstances in which the Company sells securities in
future financings at a price per share which is lower than the
conversion price, provided that such financings close through December
2006 (or under certain conditions, through June 2007).
As of the balance sheet date, no such adjustment was required. During
the nine months ended September 30, 2006, $16,424 in aggregate
principal amount of debentures was converted into 14,931,280 ordinary
shares of the Company.
Subject to the terms of the Facility Agreement, the Company may, at
its option, announce the early redemption of the debentures, provided
that the outstanding aggregate balance of principal on account of the
debentures is equal to or less than $500. The debentures are listed
and quoted on the NASDAQ Capital Market and the Tel Aviv Stock
Exchange.
Certain of the Company's Equity Investors and Wafer Partners invested
$27,811 in the framework of the rights offering.
The debentures and interest thereon are unsecured and rank behind the
Company's existing and future secured indebtedness, including
indebtedness to the Banks under the Facility Agreement, as well as to
the government of Israel in connection with grants the Company
received under its approved enterprise programs, and to Siliconix and
SanDisk.
- 19 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 4 - OTHER RECENT DEVELOPMENTS (CONT.)
C. 2005 RIGHTS OFFERING (CONT.)
If on the payment date of the principal and interest on the
debentures, there exists an infringement of the covenants and
conditions under the Facility Agreement, the date for payment of the
interest and principal on the debentures may be postponed, depending
on various scenarios under the Facility Agreement until such covenant
or condition is settled.
See Note 5 for the accounting for the rights offering in accordance
with U.S. GAAP.
D. 2006 PUBLIC OFFERING
In June 2006 the Company completed an underwritten public offering of
the Company's securities on the Tel-Aviv Stock Exchange (TASE) in
Israel resulting in immediate gross proceeds of approximately NIS
140,000,000 (approximately $31,000). In the offering, 78,000 Units
were sold at a price per Unit of NIS 1,785 (approximately $0.4). Each
Unit consists of (i) convertible debentures in the face amount of NIS
2,100 (approximately $0.47), (ii) five options each exercisable for
three months ending on September 27, 2006 for NIS 100 principal amount
of convertible debentures at an exercise price equal to 85% of their
face amount, linked to the Israeli Consumer Price Index ("CPI"), (iii)
140 warrants each exercisable for three months ending on September 27,
2006 for one ordinary share of the Company at a price of NIS 6.75
(approximately $0.00157), linked to the CPI and (iv) 70 warrants each
exercisable for three years ending on June 28, 2009 for one ordinary
share of the Company at a price of NIS 7.40 (approximately $0.00172),
linked to the CPI. The convertible debentures are convertible into the
Company's ordinary shares at a conversion rate of one ordinary share
per NIS 8.40 (approximately $0.00196) principal amount of convertible
debentures. The convertible debentures carry a zero coupon with
principal payable at maturity in December 2011, at a premium of 37%
over face value, linked to the CPI. The conversion price is subject to
reduction in certain limited circumstances. In accordance with
Standard No. 22, the proceeds were allocated to each of the Unit's
components based on relative fair values in the first 2 days of
trading. After allocation, each of the components is classified as
either equity or liability based on the criteria prescribed in
Standard No. 22.
In addition, the Company issued 300 such units in consideration for
NIS 526,000 through a private placement to its market maker in
connection with said offering. The offering was made in Israel to
Israeli residents only. The securities offered were not registered
under the Securities Act and may not be sold in the U.S. or to U.S.
persons absent registration or an applicable exemption.
As of September 30, 2006, 391,500 options to purchase convertible
debentures described in (ii) above were exercised and 350,000 short
term warrants described in (iii) above were exercised into ordinary
shares, totaling in proceeds of approximately $8,000.
See Note 5 for the accounting for the public offering in accordance
with U.S. GAAP.
- 20 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 4 - OTHER RECENT DEVELOPMENTS (CONT.)
E. 2006 PRIVATE PLACEMENT
In November 2006, the Company received and accepted orders from
Israeli investors in a private placement for 58,150 units, each
comprised of 100 ordinary shares and 50 warrants. Each unit was sold
at a price of NIS 759 (approximately $0.177). The price of the
ordinary shares included in the units was identical to the closing
price of the Company's shares on the Tel-Aviv Stock Exchange on
October 29, 2006 (NIS 7.59 per share). Total immediate proceeds
amounted to approximately $10,300.
Under Israeli securities laws, the securities are subject to a
statutory lock-up. The Company has undertaken to file a prospectus
with the Israel Securities Authority to allow for the unrestricted
trade of the securities.
Each warrant is exercisable at any time during a period of four years
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 or the first
date the securities may be sold under Israel's statutory lock-up
rules, but not higher than NIS 9.48 (approximately $0.0022).
In addition, the Company granted a green shoe option to the placement
agents for up to approximately $2,500, which is exercisable until the
earlier of December 1, 2006 or the date the prospectus is published,
unless agreed to otherwise.
F. AUTHORIZED SHARES
In March 2006, the Board of Directors of the Company approved the
increase of the Company's authorized shares from 500,000,000 to
800,000,000. This increase was approved by the Company's shareholders
in September 2006.
- 21 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 5 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP
With regard to the Company's interim financial statements, the material
differences between GAAP in Israel and in the U.S. relate to the following.
See I below for the presentation of the Company's unaudited balance sheet
as of September 30, 2006 in accordance with U.S. GAAP.
A. RECENT ACCOUNTING PRONOUNCEMENTS BY THE FASB
SFAS NO. 155. ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS -
In February 2006, the FASB issued SFAS 155, "Accounting for Certain
Hybrid Financial Instruments". Key provisions of SFAS 155 include: (1)
a broad fair value measurement option for certain hybrid financial
instruments that contain an embedded derivative that would otherwise
require bifurcation; (2) clarification that only the simplest
separations of interest payments and principal payments qualify for
the exception afforded to interest-only strips and principal-only
strips from derivative accounting under paragraph 14 of FAS 133
(thereby narrowing such exception); (3) a requirement that beneficial
interests in securitized financial assets be analyzed to determine
whether they are freestanding derivatives or whether they are hybrid
instruments that contain embedded derivatives requiring bifurcation;
(4) clarification that concentrations of credit risk in the form of
subordination are not embedded derivatives; and (5) elimination of the
prohibition on a QSPE holding passive derivative financial instruments
that pertain to beneficial interests that are or contain a derivative
financial instrument. In general, these changes will reduce the
operational complexity associated with bifurcating embedded
derivatives, and increase the number of beneficial interests in
securitization transactions, including interest-only strips and
principal-only strips, required to be accounted for in accordance with
FAS 133. Management does not believe that SFAS 155 will have a
material effect on the financial condition, results of operations, or
liquidity of the Company.
FIN NO. 48. ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES -
On July 13, 2006, the FASB issued Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement
No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in
tax positions. This Interpretation requires recognition in the
financial statements of the impact of a tax position, if that position
is more likely than not of being sustained on audit, based on the
technical merits of the position. The provisions of FIN 48 are
effective for the 2007 fiscal year with the cumulative effect of the
change in accounting principle recorded as an adjustment to opening
balance of retained earnings. Management does not believe that FIN 48
will have a material effect on the financial condition, results of
operations, or liquidity of the Company.
- 22 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 5 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
B. PRESENTATION OF DESIGNATED CASH AND SHORT-TERM INTEREST-BEARING
DEPOSITS
In accordance with U.S. GAAP, the Company's designated cash and
short-term interest-bearing deposits should be excluded from current
assets and presented separately as a non-current asset. Accordingly,
as of December 31, 2005 $31,661 was reclassified from current assets
to a long-term asset.
C. PRESENTATION OF NET LONG-TERM LIABILITIES IN RESPECT OF EMPLOYEES
Under U.S. GAAP, assets and liabilities relating to severance
arrangements are to be presented separately and are not to be offset,
while according to Israeli GAAP such an offset is required.
Accordingly, as of September 30, 2006, an amount of $13,933 was
reclassified from other long-term liabilities to long-term investments
(as of December 31, 2005 - $13,658).
D. HEDGING ACTIVITIES IN ACCORDANCE WITH U.S. GAAP (SFAS 133)
Complying with SFAS 133 as amended and the related interpretations
thereon with respect to the Company's hedging transactions as of
September 30, 2006 would have resulted in: an increase in other
long-term investments in the amount of $1,636; a decrease in other
comprehensive loss for the nine months ended September 30, 2006 in the
net amount of $865; an accumulated other comprehensive loss component
of equity balance as of September 30, 2006 in the amount of $689; and
in a decrease of $2,325 in property and equipment, net as of September
30, 2006.
E. DEFERRED FINANCING CHARGES
Under U.S. GAAP, deferred-financing charges are to be presented in
other assets, while according to Israeli GAAP effective January 1,
2006 such amount is required to be offset from the related long-term
debt. Accordingly, as of September 30, 2006, an amount of $15,083 was
reclassified from long-term debt to other assets.
- 23 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 5 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
F. ISSUANCE OF CONVERTIBLE DEBENTURES
Under Accounting Principles Board Opinion No. 14 ("APB 14"), the
proceeds from the sale of the securities in January 2002 are to be
allocated to each of the securities issued based on their relative
fair value, while according to Israeli GAAP such treatment was not
required. Complying with APB 14, based on the average market value of
each of the components issued in the first three days following their
issuance (in January 2002), would have resulted in an increase in
shareholders' equity as of the issuance date in the amount of $2,363
(net of $196 related issuance expenses), and a decrease in convertible
debentures as of such date in the amount of $2,559. The additional
accumulated effect of amortization of the discount on the convertible
debentures under U.S.GAAP as of September30, 2006 would have been
$1,375. Commencing with the adoption of Standard No. 22 in January
2006, allocation of proceeds in a unit, to its components, is based on
relative fair values under Israeli GAAP as well as under US GAAP.
Under US GAAP, convertible debentures have to be evaluated to
determine if they contain embedded derivative that warrant
bifurcation. Conversion feature embedded in convertible debentures
will need to be evaluated as to whether they can be classified as
equity based on the criteria established in EITF Issue 00-19 and 05-2.
The Company evaluated the conversion features embedded in its
debentures (i.e., sale of convertible debentures in 2002 - "2002
debentures", sale of convertible debentures in 2005 "2005 debentures"
and sale of convertible debentures in 2006 "2006 debentures") and
concluded that the conversion feature embedded in the 2005 and 2006
debentures warrant bifurcation while the conversion feature embedded
in the 2002 debentures is scoped out (for the discussion on the
accounting for the debentures under Israeli GAAP see Note 1A(3)b).
2002 DEBENTURES:
Under US GAAP, the equity component, in the amount of $1,681,
classified in equity under Israeli GAAP was reclassified to liability.
2005 DEBENTURES:
Under US GAAP, the equity component, in the amount of $13,377
classified as equity under Israeli GAAP was reclassified to liability
and the conversion feature was bifurcated from the debt host and
marked to market through earnings. The initial amount allocated to the
bifurcated conversion feature was determined using the "with and
without" method based on the fair value of the embedded derivative
prescribed in DIG Issue B6.
2006 DEBENTURES:
Under US GAAP, the equity component, in the amount of $6,006,
classified in equity under Israeli GAAP was reclassified to liability.
The conversion feature was bifurcated from the debt host and marked to
market through earnings. The amount allocated to the bifurcated
conversion feature was determined using the "with and without" method.
- 24 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 5 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
F. ISSUANCE OF CONVERTIBLE DEBENTURES (CONT.)
All the above resulted as of September 30, 2006 mainly in an increase
in convertible debentures in the amount of $20,013; a decrease in the
shareholder's equity in the amount of $19,132 and an increase in other
assets in the amount of $932. The Company's loss for the nine-month
period ended September 30, 2006 would have increased in the amount of
$1,154
G. EMPLOYEE STOCK BASED COMPENSATION
The Company adopted, effective January 1, 2006, SFAS 123R according to
which the compensation expense related to employee and directors share
option awards would have been resulted in an increase in the
compensations expenses for the period ending September 30, 2006 in the
amount of $1,140. The Company elected the modified prospective method
as its transition method.
H. FACILITY AGREEMENT
Under US GAAP the debt modification under the Amendment is considered
troubled debt restructuring within the scope of FASB No. 15 ACCOUNTING
BY DEBTORS AND CREDITORS FOR TROUBLED DEBT RESTRUCTURINGS which
requires the following: (i) the amount considered settled for shares
and classified in equity is based on the price per share as quoted at
the closing date;(ii) the remaining balance after deduction of the
amount used as proceeds for the share issuance in 1 above, will remain
outstanding, ;.(iii) a new, lower effective interest rate will be
calculated as the interest rate that equates future payments to the
outstanding balance; and (iv) no gains or losses are recognized in the
current period.
Under US GAAP the debt modification under the Amendment is considered
to include an embedded derivative that should be separately accounted
for. The Company considered the obligation to issue shares as agreed
with the Banks and determined that it contains two components (i) a
contingent component and (ii) an uncontingent component. The
contingent component is the obligation to issue shares equal to half
of the amount of the Decreased Amount if the Fourth Quarter 2010 Price
is less than $3.49. The uncontingent component is the obligation to
issue shares equal to half of the Decreased Amount regardless of the
Fourth Quarter 2010 Price. The Company accounted for the uncontingent
component as an additional interest expense and calculated the
effective interest rate to include such expense. The Company treated
the uncontingent component as an embedded derivative that needs to be
bifurcated and separately accounted for based on fair value. Initial
separation of the embedded derivative will be done using the "with and
without" method described in DIG Issue B6. Changes in the fair value
of the embedded derivative will be included in financing expenses. All
the above resulted in a decrease of $80,071 in the shareholders equity
for the nine months ended September 30, 2006 and an increase of the
same amount in the long-term loans from the banks as of September 30,
2006.
- 25 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 5 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
I. BALANCE SHEETS IN ACCORDANCE WITH U.S. GAAP
AS OF SEPTEMBER 30, 2006 AS OF DECEMBER 31, 2005
--------------------------------------- ---------------------------------------
U.S. AS PER AS PER AS PER AS PER
GAAP ISRAELI ADJUST- U.S. ISRAELI ADJUST- U.S.
REMARK GAAP MENTS GAAP GAAP MENTS GAAP
--------- --------- --------- --------- --------- --------- ---------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 61,746 $ -- $ 61,746 $ 7,337 -- $ 7,337
DESIGNATED CASH AND SHORT-TERM INTEREST -
BEARING DEPOSITS B -- -- -- 31,661 (31,661) --
TRADE ACCOUNTS RECEIVABLE :
RELATED PARTIES 8,928 -- 8,928 5,309 -- 5,309
OTHERS 16,708 -- 16,708 11,467 -- 11,467
OTHER RECEIVABLES 12,807 -- 12,807 9,043 -- 9,043
INVENTORIES 38,519 -- 38,519 24,376 -- 24,376
OTHER CURRENT ASSETS 1,737 -- 1,737 1,048 -- 1,048
--------- --------- --------- --------- --------- ---------
TOTAL CURRENT ASSETS 140,445 -- 140,445 90,241 (31,661) 58,580
--------- --------- --------- --------- --------- ---------
LONG-TERM INVESTMENTS C,D -- 15,569 15,569 -- 15,425 15,425
--------- --------- --------- --------- --------- ---------
PROPERTY AND EQUIPMENT, NET D,F 522,018 (2,036) 519,982 510,645 (3,291) 507,354
--------- --------- --------- --------- --------- ---------
DESIGNATED CASH AND SHORT-TERM
INTEREST-BEARING DEPOSITS B -- -- -- -- 31,661 31,661
--------- --------- --------- --------- --------- ---------
OTHER ASSETS, NET :
TECHNOLOGY 49,291 -- 49,291 61,441 -- 61,441
OTHER E,F 1,457 16,015 17,472 16,359 (196) 16,163
--------- --------- --------- --------- --------- ---------
50,748 16,015 66,763 77,800 (196) 77,604
========= ========= ========= ========= ========= =========
TOTAL ASSETS $ 713,211 $ 29,548 $ 742,759 $ 678,686 11,938 $ 690,624
========= ========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITIES OF LONG TERM DEBT $ -- $ -- $ -- $ 21,103 $ -- $ 21,103
CURRENT MATURITIES OF CONVERTIBLE DEBENTURE F 6,522 341 6,863 6,453 (640) 5,813
TRADE ACCOUNTS PAYABLE 59,687 -- 59,687 59,741 -- 59,741
OTHER CURRENT LIABILITIES 15,354 -- 15,354 8,972 -- 8,972
--------- --------- --------- --------- --------- ---------
TOTAL CURRENT LIABILITIES 81,563 341 81,904 96,269 (640) 95,629
LONG-TERM DEBT E 355,138 95,154 450,292 497,000 -- 497,000
CONVERTIBLE DEBENTURES F 61,657 20,013 81,670 19,358 23,574 42,932
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMERS' ADVANCES 50,004 -- 50,004 59,621 -- 59,621
OTHER LONG-TERM LIABILITIES C 15,547 13,933 29,480 11,012 13,658 24,670
--------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES 563,909 129,441 693,350 683,260 36,592 719,852
--------- --------- --------- --------- --------- ---------
CONVERTIBLE DEBENTURES F -- -- -- 25,493 (25,493) --
SHAREHOLDERS' EQUITY (DEFICIT)
ORDINARY SHARES, NIS 1 PAR VALUE - AUTHORIZED
800,000,000 AND 500,000,000 SHARES; ISSUED
87,423,850 AND 68,232,056 SHARES 20,744 -- 20,744 16,548 -- 16,548
ADDITIONAL PAID-IN CAPITAL F 546,824 3,086 549,910 522,237 2,363 524,600
CAPITAL NOTES 176,401 -- 176,401 -- -- --
EQUITY COMPONENT OF CONVERTIBLE DEBENTURES
AND CUMULATIVE STOCK BASED COMPENSATION F,G 23,394 (19,924) 3,470 (26) -- (26)
ACCUMULATED OTHER COMPREHENSIVE LOSS D -- (689) (689) -- (1,554) (1,554)
ACCUMULATED DEFICIT D,F,G (608,989) (82,366) (691,355) (559,754) 30 (559,724)
--------- --------- --------- --------- --------- ---------
158,374 (99,893) 58,481 (20,995) 839 (20,156)
TREASURY STOCK, AT COST - 1,300,000 SHARES (9,072) -- (9,072) (9,072) -- (9,072)
--------- --------- --------- --------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 149,302 (99,893) 49,409 (30,067) 839 (29,228)
========= ========= ========= ========= ========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 713,211 $ 29,548 $ 742,759 $ 678,686 $ 11,938 $ 690,624
========= ========= ========= ========= ========= =========
- 26 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 5 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
J. STATEMENTS OF OPERATIONS IN ACCORDANCE WITH U.S. GAAP
Complying with FASB No. 15 (H above), SFAS 133, APB 14 (F above) and
SFAS 123R (G above) would have resulted in an increase in the loss for
the nine months period ended September 30, 2006 in the amount of
$82,366 and an increase in the loss for the three months period ended
September 30, 2006 in the amount of $83,373 , mainly due to the
difference in accounting for the debt modification under Israeli GAAP
Giving effect to all the above, the loss for the nine-month and
three-month periods ended September 30, 2006 would be $131,631 and
$43,906. No material effect on the result of operation for the nine
-month and three-month periods ended September30, 2005.
K. COMPREHENSIVE INCOME (LOSS) IN ACCORDANCE WITH U.S. GAAP (SFAS 130)
Comprehensive income (loss) represents the change in shareholder's
equity during a reporting period from transactions and other events
and circumstances from non-owner sources. It includes all changes in
equity during a reporting period except those resulting from
investments by owners and distributions to owners. Other comprehensive
income (loss) represents gains and losses that under U.S. GAAP are
included in comprehensive income but excluded from net income.
Following are statements of comprehensive loss in accordance with U.S.
GAAP:
Nine months ended Three months ended
September 30, September 30,
-------------------------- --------------------------
2006 2005 2006 2005
--------- --------- --------- ---------
(unaudited) (unaudited)
Loss for the period, according
to U.S. GAAP (see I above) $(131,631) $(157,910) $ (43,906) $ (55,350)
Other comprehensive loss:
Reclassification of unrealized
losses on derivatives 996 996 332 332
Unrealizedgains (losses) on
Derivatives (130) 3,500 (1,375) 1,515
--------- --------- --------- ---------
Net comprehensive loss
for the period $(130,765) $(153,414) $ (44,949) $ (53,503)
========= ========= ========= =========
- 27 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2006
(dollars in thousands, except share data and per share data)
NOTE 5 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
L. LOSS PER SHARE IN ACCORDANCE WITH U.S. GAAP (SFAS 128)
In accordance with SFAS 128, the basic and diluted loss per share for
the nine-month and the three-month periods ended September 30, 2006
would be $1.67 and $0.52, respectively (during the corresponding
periods - $2.39 and $0.83, respectively).
M. STATEMENTS OF CASH FLOWS IN ACCORDANCE WITH U.S. GAAP (SFAS 95)
Complying with SFAS 95 would not have materially affected the cash
flows of the Company for the nine-month and three-month periods ended
September 30, 2006 and 2005.
- 28 -