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FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the month of November 2007 (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 November 6, 2007, the Registrant announced its financial results for the
nine and three months ended September 30, 2007 and on November 7, 2007 issued
unaudited condensed interim consolidated financial statements as of September
30, 2007 and for the nine and three months periods then ended .Attached hereto
are the following exhibits:
Exhibit 99.1 Registrant's unaudited condensed interim consolidated
financial statements as of September 30, 2007 and for the
nine and three months periods then ended.
Exhibit 99.2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Form 6-K, including all exhibits hereto, is hereby incorporated by
reference into (1) all effective registration statements filed by us under the
Securities Act of 1933 and (2) Registration Statement No. 333-140174 on Form
F-3.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TOWER SEMICONDUCTOR LTD.
Date: November 7, 2007 By: /s/ Nati Somekh Gilboa
--------------------------
Nati Somekh Gilboa
Corporate Secretar
Exhibit 99.1
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
UNAUDITED CONDENSED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2007
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
INDEX TO UNAUDITED CONDENSED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2007
Page
----
BALANCE SHEETS 1
STATEMENTS OF OPERATIONS 2
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 3
STATEMENTS OF CASH FLOWS 4
NOTES TO FINANCIAL STATEMENTS 5-22
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data and per share data)
AS OF SEPTEMBER 30, DECEMBER 31,
--------------------- --------
2007 2006 2006
-------- -------- --------
(UNAUDITED)
---------------------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 42,600 $ 61,746 $ 39,710
SHORT-TERM INTEREST-BEARING DEPOSITS -- -- 1,230
PROCEEDS RECEIVABLES RELATING PUBLIC OFFERING 13,932 -- --
TRADE ACCOUNTS RECEIVABLE:
RELATED PARTIES 13,785 8,928 13,625
OTHERS 26,513 16,708 17,873
OTHER RECEIVABLES 1,260 12,807 5,425
INVENTORIES 35,431 33,149 34,763
OTHER CURRENT ASSETS 1,040 1,737 1,473
-------- -------- --------
TOTAL CURRENT ASSETS 134,561 135,075 114,099
-------- -------- --------
PROPERTY AND EQUIPMENT, NET 494,361 527,388 539,292
-------- -------- --------
INTANGIBLE ASSETS, NET 36,386 49,291 44,981
-------- -------- --------
OTHER ASSETS , NET 1,286 1,457 1,346
======== ======== ========
TOTAL ASSETS $666,594 $713,211 $699,718
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITIES OF CONVERTIBLE DEBENTURES $ 7,340 $ 6,522 $ 6,632
TRADE ACCOUNTS PAYABLE 39,480 59,687 55,128
OTHER CURRENT LIABILITIES 20,041 15,354 22,096
-------- -------- --------
TOTAL CURRENT LIABILITIES 66,861 81,563 83,856
LONG-TERM DEBT FROM BANKS 362,162 355,138 356,947
DEBENTURES 116,865 61,657 62,175
LONG-TERM CUSTOMERS' ADVANCES 36,072 50,004 46,042
OTHER LONG-TERM LIABILITIES 15,397 15,547 17,708
-------- -------- --------
TOTAL LIABILITIES 597,357 563,909 566,728
-------- -------- --------
SHAREHOLDERS' EQUITY 69,237 149,302 132,990
======== ======== ========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $666,594 $713,211 $699,718
======== ======== ========
SEE NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS.
- 1 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data and per share data)
NINE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMDER 31,
------------------------ ------------------------ ---------
2007 2006 2007 2006 2006
--------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
------------------------ ------------------------
REVENUES $ 169,235 $ 131,933 $ 56,569 $ 51,503 $ 187,438
COST OF SALES 211,130 194,666 68,252 68,244 267,390
--------- --------- --------- --------- ---------
GROSS LOSS (41,895) (62,733) (11,683) (16,741) (79,952)
--------- --------- --------- --------- ---------
OPERATING COSTS AND EXPENSES
RESEARCH AND DEVELOPMENT 10,253 11,107 3,301 4,179 14,984
MARKETING, GENERAL AND ADMINISTRATIVE 22,929 18,106 7,753 7,308 24,512
--------- --------- --------- --------- ---------
33,182 29,213 11,054 11,487 39,496
========= ========= ========= ========= =========
OPERATING LOSS (75,077) (91,946) (22,737) (28,228) (119,448)
FINANCING EXPENSE, NET (30,249) (37,957) (10,695) (12,382) (48,148)
GAIN ON DEBT RESTRUCTURING -- 80,071 -- 80,071 80,071
OTHER INCOME, NET 73 597 -- 6 597
--------- --------- --------- --------- ---------
INCOME (LOSS) FOR THE PERIOD $(105,253) $ (49,235) $ (33,432) $ 39,467 $ (86,928)
========= ========= ========= ========= =========
BASIC EARNING (LOSS) PER ORDINARY SHARE
EARNING (LOSS) PER SHARE $ (0.90) $ (0.63) $ (0.27) $ 0.46 $ (1.05)
========= ========= ========= ========= =========
INCOME (LOSS) USED TO COMPUTE
BASIC EARNING (LOSS) PER SHARE (105,253) (49,235) (33,432) 39,467 (86,928)
========= ========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF ORDINARY
SHARES OUTSTANDING - IN THOUSANDS 117,084 78,607 123,970 85,087 82,581
========= ========= ========= ========= =========
DILUTED EARNING (LOSS) PER ORDINARY SHARE
EARNING (LOSS) PER SHARE $ (0.90) $ (0.63) $ (0.27) $ 0.30 $ (1.05)
========= ========= ========= ========= =========
INCOME (LOSS) USED TO COMPUTE
DILUTED EARNING (LOSS) PER SHARE (105,253) (49,235) (33,432) 41,433 (86,928)
========= ========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF ORDINARY
SHARES OUTSTANDING - IN THOUSANDS 117,084 78,607 123,970 139,214 82,581
========= ========= ========= ========= =========
SEE NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS.
- 2 -
TOWER SEMICONDUCTOR LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(dollars in thousands, except share data and per share data)
EQUITY
COMPONENT
OF
CONVERTIBLE
DEBENTURES
AND
ORDINARY SHARES ADDITIONAL CUMULATIVE
--------------------------- PAID-IN CAPITAL STOCK BASED ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL NOTES COMPENSATION DEFICIT STOCK TOTAL
----------- ----------- ----------- --------- -------- ---------- --------- -----------
BALANCE - JANUARY 1, 2007 102,052,767 $ 24,187 $ 564,580 $ 176,401 $ 23,576 $ (646,682) $ (9,072) $ 132,990
CHANGES DURING THE NINE-MONTH PERIOD (UNAUDITED):
ISSUANCE OF SHARES AND WARRANTS 22,705,598 5,398 28,345 33,743
CONVERSION OF CONVERTIBLE DEBENTURES INTO SHARES 549,184 131 523 (240) 414
EMPLOYEE STOCK-BASED COMPENSATION 5,977 5,977
EXERCISE OF SHARE OPTIONS 26,124 5 30 35
STOCK-BASED COMPENSATION (SEE NOTE 3C) 1,331 1,331
LOSS FOR THE PERIOD (105,253) (105,253)
----------- ----------- ----------- --------- -------- ---------- --------- -----------
BALANCE - SEPTEMBER 30, 2007 (UNAUDITED) 125,333,673 $ 29,721 $ 594,809 $ 176,401 $ 29,313 $ (751,935) $ (9,072) $ 69,237
=========== =========== =========== ========= ======== ========== ========= ===========
BALANCE - JANUARY 1, 2006 68,232,056 16,548 522,237 (26) (559,754) (9,072) (30,067)
CHANGES DURING THE NINE-MONTH PERIOD (UNAUDITED):
ISSUANCE OF SHARES AND WARRANTS 3,910,514 842 6,933 7,775
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
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 - JULY 1, 2007 123,495,958 29,283 586,265 176,401 27,700 (718,503) (9,072) 92,074
CHANGES DURING THE THREE-MONTH PERIOD (UNAUDITED):
ISSUANCE OF SHARES AND WARRANTS 1,782,610 425 7,161 7,586
CONVERSION OF CONVERTIBLE DEBENTURES INTO SHARES 50,356 12 48 (23) 37
EMPLOYEE STOCK-BASED COMPENSATION 1,636 1,636
EXERCISE OF OPTIONS 4,749 1 4 5
STOCK-BASED COMPENSATION (SEE NOTE 3C) 1,331 1,331
LOSS FOR THE PERIOD (33,432) (33,432)
----------- ----------- ----------- --------- -------- ---------- --------- -----------
BALANCE - SEPTEMBER 30, 2007 (UNAUDITED) 125,333,673 $ 29,721 $ 594,809 $ 176,401 $ 29,313 $ (751,935) $ (9,072) $ 69,237
=========== =========== =========== ========= ======== ========== ========= ===========
BALANCE - JULY 1, 2006 85,768,622 20,366 540,885 -- 20,381 (648,456) (9,072) (75,896)
CHANGES DURING THE 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 - JANUARY 1, 2006 68,232,056 $ 16,548 $ 522,237 $ -- $ (26) $ (559,754) $ (9,072) $ (30,067)
CHANGES DURING 2006 :
ISSUANCE OF SHARES AND WARRANTS 16,729,145 3,860 23,038 26,898
EQUITY COMPONENT OF CONVERTIBLE DEBENTURES 27,997 27,997
CONVERSION OF CONVERTIBLE DEBENTURES INTO SHARES 16,734,316 3,696 14,681 (7,758) 10,619
EMPLOYEE STOCK-BASED COMPENSATION 3,363 3,363
EXERCISE OF OPTIONS 7,250 2 9 11
EXERCISE OF WARRANTS 350,000 81 469 550
Stock-based compensation related to
THE FACILITY AGREEMENT WITH THE BANKS 4,146 4,146
CAPITAL NOTES 176,401 176,401
LOSS FOR THE YEAR (86,928) (86,928)
----------- ----------- ----------- --------- -------- ---------- --------- -----------
BALANCE - DECEMBER 31, 2006 102,052,767 $ 24,187 $ 564,580 $ 176,401 $ 23,576 $ (646,682) $ (9,072) $ 132,990
=========== =========== =========== ========= ======== ========== ========= ===========
SEE NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS.
- 3 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, except share data and per share data)
NINE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
------------------------ ------------------------ ---------
2007 2006 2007 2006 2006
--------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
------------------------ ------------------------
CASH FLOWS - OPERATING ACTIVITIES
INCOME (LOSS) FOR THE PERIOD $(105,253) $ (49,235) $ (33,432) $ 39,467 $ (86,928)
ADJUSTMENTS TO RECONCILE LOSS FOR THE PERIOD
TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
INCOME AND EXPENSE ITEMS NOT INVOLVING CASH FLOWS:
DEPRECIATION AND AMORTIZATION 120,048 124,655 37,718 42,064 170,816
EFFECT OF INDEXATION AND TRANSLATION ON DEBENTURES 3,883 2,500 3,705 1,404 2,569
WRITE DOWN OF CUSTOMER ADVANCE (3,000) -- (3,000) -- --
OTHER INCOME, NET (73) (597) -- (6) (597)
GAIN ON DEBT RESTRUCTURING -- (80,071) -- (80,071) (80,071)
CHANGES IN ASSETS AND LIABILITIES:
DECREASE (INCREASE) IN TRADE ACCOUNTS RECEIVABLE (8,800) (8,860) 5,178 (4,010) (14,722)
DECREASE (INCREASE) IN OTHER RECEIVABLES AND OTHER CURRENT ASSETS 3,180 (9,496) 1,804 (7,640) (2,662)
DECREASE (INCREASE) IN INVENTORIES (1,929) (12,449) 1,000 (3,526) (14,064)
INCREASE (DECREASE) IN TRADE ACCOUNTS PAYABLE 8,711 (3,583) (8,409) (6,064) (4,734)
INCREASE (DECREASE) IN OTHER CURRENT LIABILITIES (2,402) 3,736 (1,309) 1,623 6,551
INCREASE (DECREASE) IN OTHER LONG-TERM LIABILITIES (172) (1,752) 606 (73) (3,285)
--------- --------- --------- --------- ---------
14,193 (35,152) 3,861 (16,832) (27,127)
DECREASE IN LONG-TERM CUSTOMERS' ADVANCES, NET (1,222) (1,504) (300) (690) (2,306)
--------- --------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 12,971 (36,656) 3,561 (17,522) (29,433)
--------- --------- --------- --------- ---------
CASH FLOWS - INVESTING ACTIVITIES
DECREASE IN DESIGNATED CASH, SHORT-TERM AND LONG-TERM
INTEREST-BEARING DEPOSITS, NET -- 31,661 -- 2,909 31,661
INVESTMENTS IN PROPERTY AND EQUIPMENT (67,827) (109,772) (18,039) (77,085) (161,187)
INVESTMENT GRANTS RECEIVED 1,568 4,489 131 1,191 5,219
PROCEEDS RELATED TO SALE AND DISPOSAL OF PROPERTY AND EQUIPMENT 89 600 -- 9 600
INVESTMENTS IN OTHER ASSETS (911) (4,168) -- (618) (5,074)
DECREASE (INCREASE) IN SHORT-TERM INTEREST-BEARING DEPOSITS 1,230 -- -- -- (1,230)
--------- --------- --------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (65,851) (77,190) (17,908) (73,594) (130,011)
--------- --------- --------- --------- ---------
CASH FLOWS - FINANCING ACTIVITIES
PROCEEDS FROM ISSUANCE OF DEBENTURES AND WARRANTS, NET 37,410 58,797 37,410 36,937 58,766
PROCEEDS FROM LONG-TERM DEBT -- 15,384 -- 6,794 18,295
REPAYMENT OF LONG-TERM DEBT (1,125) -- (1,125) -- --
PROCEEDS FROM ISSUANCE OF ORDINARY SHARES AND WARRANTS, NET 26,538 -- (66) -- 20,673
PROCEEDS ON ACCOUNT OF A WARRANT -- 550 -- 550 550
PROCEEDS ON ACCOUNT OF SHARE CAPITAL -- 100,000 -- 100,000 100,000
REPAYMENT OF DEBEBNTURE (7,088) (6,476) -- -- (6,476)
PROCEEDS FROM EXERCISE OF SHARE OPTIONS 35 -- 5 -- 9
--------- --------- --------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 55,770 168,255 36,224 144,281 191,817
========= ========= ========= ========= =========
INCREASE IN CASH AND CASH EQUIVALENTS 2,890 54,409 21,877 53,165 32,373
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 39,710 7,337 20,723 8,581 7,337
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 42,600 $ 61,746 $ 42,600 $ 61,746 $ 39,710
========= ========= ========= ========= =========
NON-CASH ACTIVITIES
INVESTMENTS IN PROPERTY AND EQUIPMENT $ 15,313 32,952 7,817 26,562 $ 42,575
========= ========= ========= ========= =========
STOCK-BASED COMPENSATION RELATED TO
THE FACILITY AGREEMENT WITH THE BANKS $ -- 4,146 -- 4,146 $ 4,146
========= ========= ========= ========= =========
STOCK-BASED COMPENSATION (SEE NOTE 3C) $ 1,331 -- 1,331 -- $ --
========= ========= ========= ========= =========
INVESTMENTS IN OTHER ASSETS $ -- -- -- -- $ 433
========= ========= ========= ========= =========
CONVERSION OF LONG-TERM LIABILITY IN RESPECT OF CUSTOMERS' ADVANCES
TO SHARE CAPITAL $ 6,414 5,972 2,709 685 $ 7,621
========= ========= ========= ========= =========
PROCEEDS RECEIVABLES RELATED PUBLIC OFFERING $ 13,932 -- 13,932 -- $ --
========= ========= ========= ========= =========
CONVERSION OF CONVERTIBLE DEBENTURES TO SHARE CAPITAL $ 414 9,392 37 551 $ 10,619
========= ========= ========= ========= =========
CONVERSION OF LONG TERM DEBT TO CAPITAL NOTES $ -- 76,401 -- 76,401 $ 76,401
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR INTEREST $ 19,600 $ 28,611 $ 6,224 $ 7,819 $ 35,008
========= ========= ========= ========= =========
CASH PAID DURING THE PERIOD FOR INCOME TAXES $ 43 $ 126 $ 18 $ 70 $ 134
========= ========= ========= ========= =========
SEE NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS.
- 4 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL
A. BASIS FOR PRESENTATION
(1) The unaudited condensed interim consolidated financial statements
as of September 30, 2007 and for the nine months then ended
("interim financial statements") of Tower Semiconductor Ltd. and
subsidiary ("the Company") should be read in conjunction with the
audited consolidated financial statements of the Company as of
December 31, 2006 and for the year then ended, including the
notes thereto. In the opinion of management, the interim
financial statements include all adjustments necessary for a fair
presentation of the financial position and results of operations
as of the date and for the interim periods presented. The results
of operations for the interim periods are not necessarily
indicative of the results to be expected on a full-year basis.
(2) The interim financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") in Israel
("Israeli GAAP"). The interim financial statements differ in
certain respects from GAAP in the United States of America ("U.S.
GAAP"), as indicated in Note 4. The accounting principles applied
in the preparation of these interim financial statements are
consistent with those principles applied in the preparation of
the most recent annual audited financial statements, except for
the accounting principles detailed in paragraph 3 below.
(3) RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING
STANDARDS BOARD
A. ACCOUNTING STANDARD NO. 29 "ADOPTION OF INTERNATIONAL
FINANCIAL REPORTING STANDARDS"
In July 2006, the Israeli Accounting Standards Board
published Accounting Standard No. 29 - "Adoption of
International Financial Reporting Standards" - IFRS ("the
Standard"). According to the Standard, an entity subject to
the Israeli Securities Law and authoritative regulations
thereunder, excluding foreign corporations, that do not
prepare their financial statements in accordance with
Israeli GAAP, as defined by the Israeli Securities Law will
be required to prepare financial statements in accordance
with the IFRS and related interpretations published by the
International Accounting Standards Board, for the reporting
periods commencing January 1, 2008, including interim
periods.
- 5 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
A. BASIS FOR PRESENTATION (CONT.)
(3) RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING
STANDARDS BOARD (CONT.)
A. ACCOUNTING STANDARD NO. 29 "ADOPTION OF INTERNATIONAL
FINANCIAL REPORTING STANDARDS" (CONT.)
An entity adopting IFRS as of January 1, 2008 and electing
to report comparative figures in accordance with the IFRS
for only 2007, will be required to prepare opening
balance-sheet amounts as of January 1, 2007 based on the
IFRS. Reporting in accordance with the IFRS will be carried
out based on the provisions of IFRS No. 1, "First-time
Adoption of IFRS Standards", which establishes guidance on
implementing and transitioning from financial reporting
based on domestic national accounting standards to reporting
in accordance with IFRS. IFRS No. 1 supersedes the
transitional provisions established in other IFRSs
(including those established in former domestic national
accounting standards), stating that all IFRSs should be
adopted retroactively for the opening balance-sheet amounts.
Nevertheless, IFRS No. 1 grants exemptions on certain issues
by allowing the alternative of not applying the retroactive
application in respect thereof.
The Company, which as a dual listed company can
alternatively choose to adopt the US GAAP, is currently in
the process of examining the effect of the transition to
IFRS or to US GAAP on the Company's financial position and
results of operations, and has not yet made any decision in
this regard.
B. ACCOUNTING STANDARD NO. 26 "INVENTORY"
In August 2006, the Israeli Accounting Standards Board
published Accounting Standard No. 26 - "Inventory" ("the
Standard"), which outlines the accounting treatment for
inventory. The Standard applies to all types of inventory,
other than building earmarked for sale and addressed by
Accounting Standard No.2 ("Construction of Buildings for
Sale"), inventory of work in progress stemming from
performance contracts, addressed by Accounting Standard No.4
("Work Based on Performance Contract"), financial
instruments and biological assets relating to agricultural
activity and agricultural production during harvest.
The Standard applies to financial statements covering
periods beginning January 1, 2007 and onwards and should be
implemented retroactively.
The Standard did not affect the Company's financial
position, results of operations and cash flows.
- 6 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
A. BASIS FOR PRESENTATION (CONT.)
(3) RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING
STANDARDS BOARD (CONT.)
C. ACCOUNTING STANDARD NO. 27 "FIXED ASSETS"
In September 2006, the Israeli Accounting Standards Board
published Accounting Standard No. 27 ("the Standard"), which
establishes the accounting treatment for fixed assets,
including recognition of assets, determination of their book
value, related depreciation, losses from impairment as well
as the disclosure required in the financial statements. The
Standard states that a fixed-asset item will be measured at
the initial recognition date at cost. The cost should also
include the initial estimate of costs required to dismantle
and remove the item.
Following the initial recognition, the Standard permits the
entity to implement in its accounting policy the measurement
of the fixed assets by the cost method or by revaluation so
long as this policy is implemented in regard to all the
items in that group.
Under the cost method, an item will be presented at cost
less accumulated depreciation net book value, less
accumulated impairment losses.
Under the revaluation method, an item whose fair value can
be measured reliably will be presented at its estimated
amount, which equals its fair value at the revaluation date,
net of depreciation accumulated subsequently and less
accumulated impairment losses. A resulting increase in an
asset's value due to the revaluation should be allocated
directly to shareholders' equity ("revaluation reserve").
The Standard applies to financial statements covering
periods beginning January 1, 2007 and onwards and is
implemented retroactively. The Standard did not affect the
Company's financial position or results of operations,
except for reclassification in the balance sheet and cash
flows report of spare parts from inventory to fixed assets.
In April 2007, the Israeli Accounting Standard Board
published Standard No. 28 that amends Standard No. 27 to
allow, at transition, the exemptions allowed under IFRS 1
regarding fixed assets.
The Standard did not affect the Company's financial
position, results of operations and cash flows.
- 7 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
A. BASIS FOR PRESENTATION (CONT.)
(3) RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING
STANDARDS BOARD (CONT.)
D. ACCOUNTING STANDARD NO. 23, "ACCOUNTING FOR TRANSACTIONS
BETWEEN AN ENTITY AND A CONTROLLING PARTY"
In December 2006 the Israeli Accounting Standards Board
published Accounting Standard No. 23, "Accounting for
Transactions between an Entity and a Controlling Party ("the
Standard"). The Standard applies to entities subject to the
Israeli Securities Law-1968. The Standard establishes the
requirements for accounting for transactions between an
entity and its controlling party which involve the
disposition of an asset, the taking on of a liability,
reimbursement or debt concession, and the receiving of
loans. The Standard does not apply to business combinations
under common control. The Standard stipulates that
transactions between an entity and a controlling party will
be measured based on fair value; transactions which in
nature are owner investments should be reported directly in
equity and not be recognized in the controlled entity's
profit and loss; the differences between the consideration
set in transactions between an entity and a controlling
party and their fair value will be allocated directly to
equity; and current and deferred taxes pertaining to the
items allocated to equity due to transactions with
controlling parties will be allocated directly to equity as
well.
The Standard applies to transactions between an entity and a
controlling party taking place subsequent to January 1, 2007
and for loans granted by or given to a controlling party
prior to the Standard's coming into effect, starting on the
Standard's effective date.
The Standard did not affect the Company's financial
position, results of operations and cash flows.
E. ACCOUNTING STANDARD NO. 30 - "INTANGIBLE ASSETS"
In March 2007, The Israeli Accounting Standards Board
published Accounting Standard No. 30, "Intangible Assets"
("the Standard"), which sets the accounting treatment for
intangible assets that are not covered by any other
standard, as well as the disclosure requirements in the
financial statements for the entity's intangible assets.
- 8 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
A. BASIS FOR PRESENTATION (CONT.)
(3) RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING
STANDARDS BOARD (CONT.)
E. ACCOUNTING STANDARD NO. 30 - "INTANGIBLE ASSETS" (CONT.)
According to the Standard:
An intangible asset shall be measured initially at cost.
Expenditures arising from research (or from the research
phase of an internal project) shall not be recognized as an
asset and should be expensed when incurred. An intangible
asset arising from development (or from the development
phase of an internal project) shall be recognized if, and
only if, the criteria for recognition as an intangible asset
in the Standard are met. Expenditure on an intangible item
that was not recognized initially, shall not be recognized
as part of the cost of an intangible asset at a later date.
After initial recognition, an entity may choose to measure
an intangible asset at its cost less any accumulated
amortization and any accumulated impairment losses, or for
an intangible asset that has an active market, as defined in
the Standard, the intangible asset may be carried at a
revalued amount, being its fair value at the date of the
revaluation less any subsequent accumulated amortization and
any subsequent accumulated impairment losses. An entity
shall assess whether the useful life of an intangible asset
is finite or indefinite. The amortization of an intangible
asset with a finite useful life shall be over its useful
life using a systematic basis. An intangible asset with an
indefinite useful life shall not be amortized. Instead, an
entity is required to test an intangible asset with an
indefinite useful life for impairment by comparing its
recoverable amount with its carrying amount annually, or
whenever there is an indication that the intangible asset
maybe impaired.
This Standard shall apply to financial statements for annual
periods beginning on or after January 1, 2007.
The Standard did not affect the Company's financial
position, results of operations and cash flows.
(4) Certain amounts in prior years' financial statements have been
reclassified in order to conform to 2007 presentation.
- 9 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
A. BASIS FOR PRESENTATION (CONT.)
(5) During the second quarter of 2007, the Company reassessed the
estimated useful lives of its machinery and equipment and as a
result, with effect from April 1, 2007, machinery and equipment
is to be depreciated over estimated useful lives of 7 years
rather than 5 years as estimated prior to such date. The change
reflects the Company's best estimate of the useful lives of its
equipment and was also based on experience accumulated from Fab 1
and on recent trends in industry practices. The Company believes
that the change better reflects the economics associated with the
ownership of the equipment. This change has been accounted for as
a change in estimate and was applied prospectively.
B. ESTABLISHMENT AND OPERATIONS OF NEW FABRICATION FACILITY ("FAB 2")
In 2001, the Company's Board of Directors approved the establishment
of the Company's second wafer fabrication facility in Israel ("Fab
2"). In Fab 2, the Company manufactures semiconductor integrated
circuits on silicon wafers in geometries of 0.18 to 0.13 micron on
200-millimeter wafers. In connection with the establishment, equipping
and financing of Fab 2, the Company has entered into several related
agreements and other arrangements and since 2001 has completed public
and private financing transactions. For additional information, see
Note 11A to the 2006 audited consolidated financial statements.
The Fab 2 project is a complex undertaking, which entails substantial
risks and uncertainties. For further details concerning the Fab 2
project and related agreements, some of which were amended several
times, see Note 11A to the 2006 audited consolidated financial
statements.
- 10 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 1 - GENERAL (CONT.)
C. FINANCING OF THE COMPANY'S ONGOING OPERATIONS
In recent years, the Company has experienced significant recurring
losses, recurring negative cash flows from operating activities and an
increasing accumulated deficit. The Company is working in various ways
to mitigate its financial difficulties and among them are the
following:
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 and raised funds (see Note 3 below and Notes 12C(2);
12I; 12J; and 12K to the 2006 audited consolidated financial
statements) and restructured its bank debt (see Note 11A(6) to the
2006 audited consolidated financial statements).
In March 2006, the board of directors of the Company approved a plan
to ramp up Fab 2's capacity to approximately 24,000 wafers per month
in order to help meet customer needs and product qualification needs,
based on its customer pipeline and reinforced by forecasted market
conditions. This plan was completed as of the balance sheet date.
For details regarding the financing efforts of the ramp-up plan to
reach capacity of 24,000 wafers per month, including the definitive
amendment to the Company's facility agreement with two leading Israeli
banks ("Banks") for the restructuring of its debt and the securities
purchase agreement with Israel Corporation Ltd. ("TIC") according to
which TIC invested $100,000 in the Company, which both closed in
September 2006, see Notes 11A(6) and 11A(4) to the 2006 audited
consolidated financial statements.
For further ramp up and financing plan to reach capacity beyond the
24,000 wafers per month, see below Note 3B and 3C.
Further, the Company continues to examine alternatives for additional
funding sources in order to further ramp-up the equipping of Fab2.
- 11 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 2 - INVENTORIES
Inventories consist of the following (*):
September 30, December 31,
------------------- -------
2007 2006 2006
------- ------- -------
(unaudited)
Raw materials $11,323 $10,098 $11,234
Work in process 23,663 22,277 22,884
Finished goods 445 774 645
------- ------- -------
$35,431 $33,149 $34,763
======= ======= =======
(*) Net of aggregate write downs to net realizable value of $2,013, $2,543
and $6,707 as of September 30, 2007, September 30, 2006 and December
31, 2006, respectively.
NOTE 3 - RECENT DEVELOPMENTS
A. MARCH 2007 PRIVATE PLACEMENT IN THE US - In March 2007, the Company
completed a private placement of its securities in which it sold
ordinary shares and warrants for the purchase of ordinary shares,
raising a total of approximately $29,000 in gross proceeds. In the
private placement, the Company issued approximately 18.8 million
shares, warrants exercisable into approximately 9.4 million shares at
an exercise price of $2.04 (subject to possible adjustments under
certain circumstances), exercisable until March 15, 2012 ("Series I
Warrants"), and short-term warrants exercisable into approximately
18.8 million shares at an exercise price of $1.70, which was identical
to the closing price of the Company's Ordinary Shares on the NASDAQ on
the trading day immediately prior to the closing of the private
placement ("Series II Warrants"), exercisable until December 31, 2007.
Subject to certain conditions, the Company can compel the exercise of
the Series II Warrants if during any 20 out of 30 consecutive trading
days the closing price of the Company's shares on NASDAQ exceeds
$2.12.
See Note 4F for disclosure of the accounting treatment in accordance
with U.S. GAAP.
- 12 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 3 - RECENT DEVELOPMENTS (CONT.)
B. 2007 LONG-TERM BONDS ISSUED IN ISRAEL - In the second half of 2007,
the Company consummated a private placement with Israeli institutions
of long-term convertible and non-convertible bonds and warrants, by
which the Company raised a gross amount of approximately $40,000, 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 (see
also Note 3C). In the funding, 342 units were sold, each comprised of:
(i) long-term nonconvertible-bonds, repayable in six equal annual
installments between the dates of December 2011 and December 2016,
with a face amount of NIS 250,000 (approximately $59.7) and carrying
an annual interest rate of 8 percent; (ii) long-term convertible-bonds
repayable in December 2012 with a 17.2 NIS conversion price
(approximately $4.11) with a face amount of NIS 262,500 (approximately
$62.7), carrying an annual interest of 8 percent, and (iii) 5,800
warrants, each exercisable until 2011, for one Tower ordinary share at
a price of $2.04 (approximately 8.54 NIS). The bonds are linked to the
Israeli Consumer Price Index (CPI) and were issued at 95.5% of par
value. The conversion and exercise prices are subject to reduction in
certain limited circumstances.
In September 2007, the Company expanded its series of long-term bonds
and warrants, by selling 12,118 units, each comprised of long-term
non-convertible bonds, with a face amount of NIS 2,500 (approximately
$0.62), long-term convertible bonds, with a face amount of NIS 2,625
(approximately $0.65), and 58 warrants. The bonds were issued at 90%
of par value. In this expansion, the Company raised gross proceeds of
approximately $14,000.
In accordance with Standard No. 22, the allocation of the gross
proceeds to the unit components was based on the relative fair value
of each component. The warrants issued have been classified in equity.
No proceeds were allocated to the equity component of the convertibles
debenture as it was determined to be immaterial.
C. SEPTEMBER 2007 AGREEMENTS WITH THE COMPANY'S LENDER BANKS AND TIC - In
September 2007, the Company signed and closed definitive agreements,
based on the July letters of intent, with its lender banks, Bank Leumi
and Bank Hapoalim, and with Israel Corporation, one of its primary
shareholders, providing for credit lines totaling up to $60,000, 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 (see also
Note 3B). As of September 30, 2007, no amounts were borrowed under
these credit lines. Loans under the credit lines will bear interest at
an annual rate of 3-month LIBOR plus 3 percent and will be repayable
by the earlier of 2 years from the date a loan is borrowed and March
31, 2010. The Company paid the banks and TIC customary fees, and
issued to them an aggregate of approximately 5.4 million warrants with
an exercise price of $2.04.
D. LONG-TERM CUSTOMERS' ADVANCE - Due to recent changes in one of the
Company's Wafer Partner's operations and its recent exit of its
semiconductor activities, the Company evaluated the balance of
long-term customer advances and determined that a write-down of $3,000
in the outstanding amount is appropriate. The remaining balance of
long-term customer advances represents the Company's best estimate of
the maximum exposure of future utilizations.
- 13 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 4 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP
With regard to the Company's interim financial statements, the material
differences between GAAP in Israel and in the U.S. relate to the following.
See Note 4(I) below for the presentation of the Company's unaudited balance
sheet as of September 30, 2007 in accordance with U.S. GAAP.
A. RECENT ACCOUNTING PRONOUNCEMENTS BY THE FASB
SFAS NO. 157, "FAIR VALUE MEASUREMENTS"
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" (SFAS No. 157). The purpose of SFAS No. 157 is to define
fair value, establish a framework for measuring fair value, and
enhance disclosures about fair value measurements.
The Company decided to early adopt the provisions of SFAS No. 157
effective January 1, 2007, concurrent with the adoption of FASB 159
"The Fair Value Option for Financial Assets and Financial Liabilities"
(SFAS No. 159) see H below.
Fair Value Measurements on earnings as of September 30, 2007:
Significant
Unobservable
Inputs
--------
Derivatives $ 10,720
Facility Agreement 358,572
--------
Total $369,262
========
Fair Value Measurements Using Significant Unobservable Inputs:
Facility
Derivatives Agreement Total
-------- -------- --------
Beginning balance $ 11,264 357,108 $368,372
Unrealized gains or losses included in
earnings (544) 1,464 920
-------- -------- --------
Ending balance $ 10,720 358,572 $369,292
======== ======== ========
- 14 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 4 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
(A) RECENT ACCOUNTING PRONOUNCEMENTS BY THE FASB (CONT.)
SFAS NO. 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND
FINANCIAL LIABILITIES"
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities" (SFAS No. 159). SFAS
No. 159 permits companies to choose to measure certain financial
instruments and certain other items at fair value. The standard
requires that unrealized gains and losses on items for which the fair
value option has been elected be reported in earnings. SFAS No. 159 is
effective for the Company beginning in the first quarter of fiscal
year 2008, although earlier adoption is permitted. The Company decided
to early adopt the provisions of SFAS No. 159 effective January 1,
2007, and elected to carry at fair value the Facility agreement, see H
below.
FIN NO. 48. ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
On July 13, 2006, the FASB issued Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement
No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in
tax positions. This Interpretation requires recognition in the
financial statements of the impact of a tax position, if that position
is more likely than not of being sustained on audit, based on the
technical merits of the position. A tax position that meets the
more-likely-than-not recognition threshold shall initially and
subsequently be measured as the largest amount of tax benefit that is
greater than 50 percent likely of being realized upon ultimate
settlement with a taxing authority that has full knowledge of all
relevant information. Measurement of a tax position that meets the
more-likely-than-not recognition threshold shall consider the amounts
and probabilities of the outcomes that could be realized upon ultimate
settlement using the facts, circumstances, and information available
at the reporting date. The provisions of FIN 48 are effective for the
2007 fiscal year with the cumulative effect of the change in
accounting principles recorded as an adjustment to the opening balance
of retained earnings. FIN 48 did not have a material effect on the
financial condition, results of operations or liquidity of the
Company.
B. PRESENTATION OF NET LONG-TERM LIABILITIES IN RESPECT OF EMPLOYEE
SEVERANCE PAY
Under U.S. GAAP, assets and liabilities relating to severance
arrangements are to be presented separately and are not to be offset,
while according to Israeli GAAP such an offset is required.
Accordingly, as of September 30, 2007, an amount of $13,495 would be
reclassified from other long-term liabilities as long-term
investments.
- 15 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 4 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
C. HEDGING ACTIVITIES IN ACCORDANCE WITH U.S. GAAP (SFAS 133)
Complying with SFAS 133 as amended and the related interpretations
thereon as they apply to the Company's hedging transactions, as of
September 30, 2007, such transactions would have resulted in: an
increase in other long-term investments in the amount of $751; an
accumulated other comprehensive loss component of equity balance as of
September 30, 2007 in the amount of $246 (as of December 31, 2006, an
accumulated other comprehensive loss component of equity balance in
the amount of $203); and in a decrease of $997 in property and
equipment, net as of September 30, 2007.
D. ISSUANCE OF DEBENTURES
Under Accounting Principles Board Opinion No. 14 ("APB 14"), the
proceeds from the sale of the securities in the Company's January 2002
Israeli public offering are to be allocated to each of the securities
issued based on their relative fair value, while according to Israeli
GAAP such treatment was not required Complying with APB 14, based on
the average market value of each of the components issued in the first
three days following their issuance (in January 2002), would have
resulted in an increase in shareholders' equity as of the issuance
date in the amount of $2,363 (net of $196 related issuance expenses),
and a decrease in convertible debentures as of such date in the amount
of $2,559. The additional accumulated effect of amortization of the
discount on the convertible debentures under U.S. GAAP as of September
30, 2007 would have been $562. 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 an embedded derivative that warrant
bifurcation. Conversion features embedded in convertible debentures
will need to be evaluated as to whether they can be classified as
equity based on the criteria established in EITF Issues 00-19 and
05-2. The Company evaluated the conversion features embedded in its
debentures (i.e., sale of convertible debentures in 2002 - "2002
debentures", sale of convertible debentures in 2005 - "2005
debentures", sale of convertible debentures in 2006 - "2006
debentures" and the 2007 long-term bonds issued in Israel - "2007
debentures") and concluded that the conversion feature embedded in the
2005 and 2006 debentures warrant bifurcation while the conversion
feature embedded in the 2002 and 2007 debentures need not be
separated.
2002 DEBENTURES:
Under US GAAP, the equity component, in the amount of $1,681,
classified in equity under Israeli GAAP should have not been separated
and was required to be included as part of the carrying amount of the
debentures.
- 16 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 4 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
D. ISSUANCE OF DEBENTURES (CONT.)
2005 AND 2006 DEBENTURES:
Under US GAAP, the equity component of the 2005 and 2006 debentures,
in the amounts of $12,288 and $6,030 respectively, as of September 30,
2007, classified as equity under Israeli GAAP were reclassified as
liabilities and the conversion features were bifurcated from the debt
host and marked to market through earnings. The initial amount
allocated to the bifurcated conversion features were determined using
the "with and without" method based on the fair value of the embedded
derivative prescribed in DIG Issue B6.
2007 DEBENTURES:
The accounting treatment under US GAAP is the same as under Israeli
GAAP.
All the above would have resulted, as of September 30, 2007, mainly in
a decrease in debentures in the amount of $2,077; an increase in the
shareholder's equity in the amount of $2,771; and an increase in other
assets in the amount of $694. The Company's loss for the nine month
period ended September 30, 2007 would have increased in the amounts of
$5,144.
E. ISSUED WARRANTS PRESENTATION
Under U.S. GAAP, the Company's series 5 warrants were initially
recorded as a liability due to the ratchet provision included in them.
Upon the effective date of the prospectus filed in Israel registering
such warrants, the ratchet expired and the series 5 warrants were
eligible for equity classification based on the criteria in EITF
00-19.
Complying with the above would have resulted as of September 30, 2007
mainly in a decrease in other long-term liabilities and an increase in
shareholder's equity in the amount of $2,548. The Company's loss for
the nine month period ended September 30, 2007 would have increased in
the amounts of $540.
F. MARCH 2007 PRIVATE PLACEMENT OF ORDINARY SHARES AND WARRANTS
Under US GAAP, all components in the private placement should be
classified in equity.
G. EMPLOYEE STOCK BASED COMPENSATION
The Company adopted, effective January 1, 2006, SFAS 123R according to
which the compensation expense related to employee and directors share
option awards would have resulted in an increase in the compensation
expenses for the nine month period ending September 30, 2007 in the
amount of $908. The Company elected the modified prospective method as
its transition method. The adoption of SFAS 123R for US GAAP along
with the adoption of Standard No. 24 for Israeli GAAP, decreased the
potential differences between US GAAP and Israeli GAAP as they relate
to stock based compensation.
- 17 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 4 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
H. FACILITY AGREEMENT
Under US GAAP, the debt modification under the Amendment to the
Company's facility agreement, which closed in September 2006, is
considered troubled debt restructuring within the scope of FASB No. 15
ACCOUNTING BY DEBTORS AND CREDITORS FOR TROUBLED DEBT RESTRUCTURINGS
which requires the following: (i) the amount considered settled for
shares and classified in equity is based on the price per share as
quoted at the closing date; (ii) the remaining balance after deduction
of the amount used as proceeds for the share issuance in (i) above,
will remain outstanding; (iii) a new, lower effective interest rate
will be calculated as the interest rate that equates future payments
to the outstanding balance; and (iv) no gains or losses are recognized
in the current period.
During the first quarter of 2007, the Company decided to early adopt
the provisions of SFAS No. 159 THE FAIR VALUE OPTION FOR FINANCIAL
ASSETS AND FINANCIAL LIABILITIES. As required by 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.
The effect of applying the fair value option to the facility agreement
as of January 1, 2007 was $65,207 which has been recorded as a
cumulative effect adjustment to retained earnings (no tax effects have
been recorded). The carrying amount of the facility agreement prior to
the adoption was $432,430 and immediately after was $367,223. The
Company reasoned it election of the fair value option for the facility
agreement on the fact that the application of FASB 15 to the facility
agreement did not reflect the economic benefits that were achieved
with the consummation of the amendment to the facility agreement and
that the application of the fair value better reflects such benefits.
Also the adoption of the fair value option will decrease the GAAP
difference that currently exists between Israeli GAAP and IFRS vs.US
GAAP.
- 18 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 4 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
H. FACILITY AGREEMENT (CONT.)
Under US GAAP the debt modification under the September 2006 Amendment
to the facility agreement 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 $6,581 in shareholders equity
and an increase of the same amount in the long-term loans from the
banks as of September 30, 2007. The decrease in shareholders equity
includes the cumulative effect as of December 31, 2006, which
decreased the accumulated deficit in the amount of $65,207. The
Company's loss for nine month period ended September 30, 2007 would
have decreased in the amounts of $3,696.
- 19 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30,2007
(dollars in thousands, except share data and per share data)
NOTE 4 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (Cont.)
I. Balance Sheets in accordance with U.S. GAAP
AS OF SEPTEMBER 30, 2007 AS OF DECEMBER 31, 2006
------------------------------------ --------------------------------------
U.S. AS PER AS PER AS PER AS PER
GAAP ISRAELI ADJUST- U.S. ISRAELI ADJUST- U.S.
REMARK GAAP MENTS GAAP GAAP MENTS GAAP
------ --------- -------- --------- --------- --------- ---------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 42,600 $ 42,600 $ 39,710 $ 39,710
SHORT-TERM INTEREST-BEARING DEPOSITS -- -- 1,230 1,230
PROCEEDS RECEIVABLES RELATING PUBLIC OFFERING 13,932 13,932 -- --
TRADE ACCOUNTS RECEIVABLE :
RELATED PARTIES 13,785 13,785 13,625 13,625
OTHERS 26,513 26,513 17,873 17,873
OTHER RECEIVABLES 1,260 1,260 5,425 5,425
INVENTORIES 35,431 35,431 34,763 34,763
OTHER CURRENT ASSETS 1,040 1,040 1,473 1,473
--------- -------- --------- --------- --------- ---------
TOTAL CURRENT ASSETS 134,561 -- 134,561 114,099 -- 114,099
--------- -------- --------- --------- --------- ---------
LONG-TERM INVESTMENTS B,C -- 14,246 14,246 -- 15,325 15,325
--------- -------- --------- --------- --------- ---------
PROPERTY AND EQUIPMENT, NET C 494,361 (997) 493,364 539,292 (1,745) 537,547
--------- -------- --------- --------- --------- ---------
INTANGIBLE ASSETS, NET 36,386 -- 36,386 44,981 -- 44,981
--------- -------- --------- --------- --------- ---------
OTHER ASSETS, NET D 1,286 694 1,980 1,346 834 2,180
========= ======== ========= ========= ========= =========
TOTAL ASSETS $ 666,594 $ 13,943 $ 680,537 $ 699,718 $ 14,414 $ 714,132
========= ======== ========= ========= ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITIES OF CONVERTIBLE DEBENTURES D 7,340 166 7,506 6,632 270 6,902
TRADE ACCOUNTS PAYABLE 39,480 39,480 55,128 55,128
OTHER CURRENT LIABILITIES 20,041 20,041 22,096 22,096
--------- -------- --------- --------- --------- ---------
TOTAL CURRENT LIABILITIES 66,861 166 67,027 83,856 270 84,126
LONG-TERM DEBT FROM BANKS H 362,162 6,581 368,743 356,947 75,483 432,430
DEBENTURES D 116,865 (2,243) 114,622 62,175 21,688 83,863
LONG-TERM CUSTOMERS' ADVANCES 36,072 36,072 46,042 46,042
OTHER LONG-TERM LIABILITIES B,E 15,397 10,947 26,344 17,708 10,447 28,155
--------- -------- --------- --------- --------- ---------
TOTAL LIABILITIES 597,357 15,451 612,808 566,728 107,888 674,616
--------- -------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY 69,237 (1,508) 67,729 132,990 (93,474) 39,516
========= ======== ========= ========= ========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 666,594 $ 13,943 $ 680,537 $ 699,718 $ 14,414 $ 714,132
========= ======== ========= ========= ========= =========
- 20 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 4 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
J. STATEMENTS OF OPERATIONS IN ACCORDANCE WITH U.S. GAAP
Complying with FASB No. 159 (H above), SFAS 133 (C above), APB 14 (D
above) and SFAS 123R (G above) would have resulted in an increase in
the loss for the nine-month period ended September 30, 2007 in the
amount of $3,692. The loss for the nine-month period ended September
30, 2006 would have increased in the amount of $82,396 (mainly due to
the difference in accounting for the debt modification under Israeli
GAAP as of September 30, 2006, prior to the early adoption of SFAS 159
effective January 1, 2007 as detailed above). Giving effect to all the
above, the loss for the nine-month periods ended September 30, 2007
and 2006 would be $108,945 and $131,631.
For the cumulative effect adjustment to retained earnings in the
amount of $65,207 following the early adoption of SFAS 159, See H
above.
K. COMPREHENSIVE INCOME (LOSS) IN ACCORDANCE WITH U.S. GAAP (SFAS 130)
Comprehensive income (loss) represents the change in shareholder's
equity during a reporting period from transactions and other events
and circumstances from non-owner sources. It includes all changes in
equity during a reporting period except those resulting from
investments by owners and distributions to owners. Other comprehensive
income (loss) represents gains and losses that under U.S. GAAP are
included in comprehensive income but excluded from net income.
Following are statements of comprehensive loss in accordance with U.S.
GAAP:
Nine months ended
------------------------
September 30,
------------------------
2007 2006
--------- ---------
(unaudited)
Loss for the period, according to U.S. GAAP
(see J above) $(108,945) $(131,631)
Other comprehensive loss:
Reclassification of unrealized losses on
derivatives 996 996
Unrealized gains on Derivatives (1,039) (130)
--------- ---------
Net comprehensive loss for the period $(108,988) $(130,765)
========= =========
- 21 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
(dollars in thousands, except share data and per share data)
NOTE 4 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
L. LOSS PER SHARE IN ACCORDANCE WITH U.S. GAAP (SFAS 128)
In accordance with SFAS 128, the basic and diluted loss per share for
the nine-month and the three-month periods ended September 30, 2007
would be $0.93 and $0.28, respectively (during the corresponding
periods - $1.67 and $0.52, 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 periods ended September 30,
2007 and 2006.
- 22 -
Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE INFORMATION CONTAINED IN THIS SECTION SHOULD BE READ IN CONJUNCTION WITH (1)
OUR UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 2007 AND FOR THE NINE MONTHS THEN ENDED AND RELATED NOTES INCLUDED
IN THIS REPORT; AND (2) OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
RELATED NOTES INCLUDED IN OUR ANNUAL REPORT ON FORM 20-F FOR THE YEAR ENDED
DECEMBER 31, 2006 AND THE OTHER INFORMATION CONTAINED IN SUCH ANNUAL REPORT,
PARTICULARLY THE INFORMATION UNDER THE CAPTION "OPERATING AND FINANCIAL REVIEW
AND PROSPECTS. OUR FINANCIAL STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") IN ISRAEL. DIFFERENCES BETWEEN
ISRAELI GAAP AND US GAAP AS THEY RELATE TO OUR FINANCIAL STATEMENTS ARE
DESCRIBED IN NOTE 4 TO OUR UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS AS OF SEPTEMBER 30, 2007 AND IN NOTE 19 TO OUR AUDITED CONSOLIDATED
FINANCIAL STATEMENTS AS OF DECEMBER 31, 2006.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated:
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2007 2006
----- -----
(UNAUDITED)
----------------------
STATEMENT OF OPERATIONS DATA:
Total revenues 100.0% 100.0%
Cost of total revenues 124.8 147.5
----- -----
Gross loss (24.8) (47.5)
Research and development expenses, net 6.1 8.4
Marketing, general and administrative
expenses 13.5 13.7
----- -----
Operating loss (44.4) (69.7)
Financing expense, net (17.9) (28.8)
Gain on debt restructuring -- 60.7
Other income, net 0.0 0.5
----- -----
Loss (62.2)% (37.3)
===== =====
NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2006
REVENUES. Revenues for the nine months ended September 30, 2007 increased
by 28.3% to $169.2 million from $131.9 million for the nine months ended
September 30, 2006. This $37.3 million increase was mainly attributed to a
higher volume of wafer shipments.
COST OF TOTAL REVENUES. Cost of total revenues for the nine months ended
September 30, 2007 amounted to $211.1 million, compared with $194.7 million for
the nine months ended September 30, 2006. This increase of 8.4% in cost of
revenues, which is relatively low in relation to the 28.3% 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, its
machinery and equipment is to be depreciated over estimated useful lives of 7
years rather than 5 years prior to such date. The change reflects the Company's
best estimate of the useful lives of its machinery and equipment and was based
on experience accumulated from Fab 1 and recent trends in industry practices.
The Company believes that the change better reflects the economics associated
with the ownership of the equipment. This change has been accounted for as a
change in estimate and was applied prospectively. Total depreciation and
amortization expenses included in Cost of Total Revenues was approximately $102
million for the nine months ended September 30, 2007, as compared to
approximately $114 million for the nine months ended September 30, 2006, said
reduction was mainly attributed to the aforementioned change.
GROSS LOSS. Gross loss for the nine months ended September 30, 2007 was
$41.9 million, compared to a gross loss of $62.7 million for the nine months
ended September 30, 2006. The decrease in the gross loss was mainly attributable
to the 28% increase in sales as compared to a 8% increase in Cost of Total Sales
as described above.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the nine months ended September 30, 2007 amounted to $10.3 million, compared to
$11.1 million for the nine months ended September 30, 2006.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses for the nine months ended September 30, 2007 amounted to
$22.9 million, compared to $18.1 million for the nine months ended September 30,
2006. The increase is primarily due to stock based compensation expenses and
increased expenses deriving directly from the higher revenues mentioned above.
OPERATING LOSS. Operating loss for the nine months ended September 30, 2007
was $75.1 million, compared to $91.9 million for the nine months ended September
30, 2006. The decrease in the operating loss is attributable mainly to the
decrease in the gross loss described above.
FINANCING EXPENSES, NET. Financing expenses, net, for the nine months ended
September 30, 2007 were $30.2 million, compared to financing expenses, net, of
$38.0 million for the nine months ended September 30, 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 LIBOR plus 1.1%.
GAIN ON DEBT RESTRUCTURING. Gain on debt restructuring for the nine months
ended September 30, 2006 was $80.1 million. This one-time gain resulted from the
consummation of our debt restructuring with our banks, which was closed in the
third quarter of 2006.
OTHER INCOME, NET. Other income, net, for the nine months ended September
30, 2007 was $0.01 million, compared to $0.6 million for the nine months ended
September 30, 2006.
LOSS. Our loss for the nine months ended September 30, 2007 was $105.3
million, compared to $49.2 million for the nine months ended September 30, 2006.
This increase is primarily attributable to the $80.1 million one time gain on
debt restructuring with our banks which was closed in the third quarter of 2006
offset by the decrease in the operating loss of $16.8 million and a $7.8 million
decrease in finance expenses.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
The dollar cost of our operations in Israel is influenced by the timing of
any change in the rate of inflation in Israel and the extent to which such
change is not offset by a change in valuation of the NIS in relation to the
dollar. During the nine months ended September 30, 2007, the exchange rate of
the dollar in relation to the NIS decreased by 5%, and the Israeli Consumer
Price Index ("CPI") increased by 2.3%. (During the nine months ended September
30, 2006, there was a decrease of 6.5% in the exchange rate of the dollar in
relation to the NIS and an increase of 0.8% in the CPI.)
We believe that the rate of inflation in Israel has not had a material
effect on our business to date. However, our dollar costs will increase if
inflation in Israel exceeds the devaluation of the NIS against the dollar or if
the timing of such devaluation lags behind inflation in Israel.
Almost all of the cash generated from our operations, and our financing and
investing activities is denominated in U.S. dollars and NIS. Our expenses and
costs are denominated in NIS, U.S. dollars, Japanese Yen and Euros. We are,
therefore, exposed to the risk of currency exchange rate fluctuations.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2007, we had an aggregate of $42.6 million in cash and
cash equivalents. This compares to $61.7 million we had as of September 30, 2006
in cash and cash equivalents.
During the nine months ended September 30, 2007, we received $63.9 million
in net proceeds from the issuance of debentures, ordinary shares and warrants,
$1.6 million from Investment Center grants and generated a net amount of $13.0
million from our operating activities. These liquidity resources financed the
capital expenditure investments we made during the nine months ended September
30, 2007, which aggregated $68.7 million, mainly in connection with the purchase
and installation of equipment and other assets for the ramp up of Fab 2 and
repayment of convertible debentures in the amount of $7.1 million.
As of September 30, 2007, we had long-term bank loans, at present value, in
the amount of $362.2 million we obtained in connection with the establishment of
Fab 2. As of such date, we also had outstanding convertible debentures in the
aggregate amount of $156.5 million, of which $7.3 million are presented as
current maturities and $20.0 million are presented as an equity component of the
convertible debentures as part of shareholders' equity.