UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-32832
Jazz Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 20-3320580 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
4321 Jamboree Road | |
Newport Beach, California | 92660 |
(Address of principal executive offices) | (Zip Code) |
(949) 435-8000
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesx Noo
(Note: As a voluntary filer not subject to the filing requirements, the Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months).
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yeso Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer a non-accelerated filer or a “smaller reporting company”. See definitions of “large accelerated filer” and “accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero Accelerated filero Non-accelerated filerx Smaller reporting companyo
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Nox
The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format permitted by General Instruction H(2).
JAZZ TECHNOLOGIES, INC.
Table of Contents
i
PART I – FINANCIAL INFORMATION
Item 1. | Financial Statements |
Jazz Technologies, Inc. (A Wholly Owned Subsidiary of
Tower Semiconductor, Ltd.) and Subsidiaries
Consolidated Balance Sheets
(in thousands)
June 30, 2009 | December 31, 2008 | |||||||
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Successor (unaudited) | Successor | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 28,367 | $ | 27,574 | ||||
Receivables: | ||||||||
Trade receivables, net of allowance for doubtful accounts of $465 and $852 at June | ||||||||
30, 2009 and December 31, 2008, respectively | 15,669 | 21,424 | ||||||
Due from related party | 17 | 54 | ||||||
Inventories | 9,639 | 12,451 | ||||||
Deferred tax asset | 4,095 | 4,095 | ||||||
Prepaid expenses and other current assets | 1,850 | 3,175 | ||||||
Total current assets | 59,637 | 68,773 | ||||||
Property, plant and equipment, net | 92,811 | 93,928 | ||||||
Investments | 17,100 | 17,100 | ||||||
Intangible assets, net | 55,271 | 56,460 | ||||||
Goodwill | 7,000 | 7,000 | ||||||
Other assets | 263 | 317 | ||||||
Total assets | $ | 232,082 | $ | 243,578 | ||||
LIABILITIES AND STOCKHOLDER'S EQUITY | ||||||||
Current liabilities: | ||||||||
Short-term borrowings | 7,000 | 7,000 | ||||||
Accounts payable | $ | 10,536 | $ | 13,576 | ||||
Due to related party | 1,663 | 1,241 | ||||||
Accrued compensation and benefits | 5,258 | 5,672 | ||||||
Deferred revenues | 3,158 | 1,958 | ||||||
Accrued interest | 5,152 | 5,211 | ||||||
Other current liabilities | 6,491 | 4,470 | ||||||
Total current liabilities | 39,258 | 39,128 | ||||||
Long term liabilities: | ||||||||
Long-term debt from banks | 20,000 | 20,000 | ||||||
Convertible notes | 111,527 | 110,052 | ||||||
Deferred tax liability | 8,833 | 11,749 | ||||||
Accrued pension, retirement medical plan obligations and other long-term liabilities | 13,356 | 13,821 | ||||||
Total liabilities | 192,974 | 194,750 | ||||||
Stockholder's equity: | ||||||||
Additional paid-in capital | 50,260 | 50,166 | ||||||
Accumulated other comprehensive loss (*) | (2,473 | ) | (2,367 | ) | ||||
Accumulated deficit | (8,679 | ) | 1,029 | |||||
Total stockholder's equity | 39,108 | 48,828 | ||||||
Total liabilities and stockholder's equity | $ | 232,082 | $ | 243,578 | ||||
(*) Accumulated other comprehensive loss includes mainly plan assets and benefit obligation, net of taxes.
See accompanying notes.
1
Jazz Technologies, Inc. (A Wholly Owned Subsidiary of
Tower Semiconductor, Ltd.) and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(In thousands)
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| Three months ended |
| Six months ended |
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| June 30, 2009 |
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| June 27, 2008 |
| June 30, 2009 |
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| June 27, 2008 |
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| Successor |
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| Predecessor |
| Successor |
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| Predecessor |
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Net revenues |
| $ | 31,092 |
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| $ | 47,516 |
| $ | 60,271 |
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| $ | 98,346 |
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Cost of revenues |
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| 24,142 |
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| 41,052 |
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| 51,797 |
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| 84,437 |
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Gross profit |
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| 6,950 |
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| 6,464 |
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| 8,474 |
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| 13,909 |
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Operating expenses: |
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Research and development |
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| 3,441 |
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| 2,931 |
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| 5,898 |
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| 6,841 |
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Selling, general and administrative |
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| 3,534 |
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| 5,395 |
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| 7,576 |
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| 10,359 |
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Amortization of intangible assets |
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| 196 |
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| 346 |
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| 393 |
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| 692 |
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Total operating expenses |
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| 7,171 |
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| 8,672 |
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| 13,867 |
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| 17,892 |
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Operating loss |
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| (221 | ) |
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| (2,208 | ) |
| (5,393 | ) |
|
| (3,983 | ) |
Financing expense and other expense, net |
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| (3,279 | ) |
|
| (2,835 | ) |
| (7,225 | ) |
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| (6,076 | ) |
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Net loss before income taxes |
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| (3,500 | ) |
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| (5,043 | ) |
| (12,618 | ) |
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| (10,059 | ) |
Income tax benefit |
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| 1,633 |
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| 17 |
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| 2,910 |
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| 32 |
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Net loss |
| $ | (1,867 | ) |
| $ | (5,026 | ) | $ | (9,708 | ) |
| $ | (10,027 | ) |
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Net loss per share (basic and diluted) |
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| $ | (0.26 | ) |
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| $ | (0.53 | ) |
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Weighted average shares (basic and diluted) |
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| 19,031 |
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| 19,007 |
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See accompanying notes.
2
Jazz Technologies, Inc. (A Wholly Owned Subsidiary of
Tower Semiconductor, Ltd.) and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
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| Six months ended |
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| June 30, 2009 |
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| June 27, 2008 |
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| Successor |
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| Predecessor |
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Operating activities: |
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Net loss |
| $ | (9,708 | ) |
| $ | (10,027 | ) |
Adjustments to reconcile net loss for the period to net cash provided by operating activities: |
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Depreciation and amortization of intangible assets |
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| 9,420 |
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| 18,883 |
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Convertible notes accretion and amortization of deferred financing costs |
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| 2,529 |
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| 1,703 |
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Other expenses, net |
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| (650 | ) |
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| (593 | ) |
Stock compensation expense |
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| 94 |
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| 493 |
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Changes in operating assets and liabilities: |
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Receivables |
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| 5,755 |
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| 7,618 |
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Inventories |
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| 2,812 |
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| 2,865 |
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Prepaid expenses and other current assets |
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| 1,325 |
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| 354 |
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Accounts payable |
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| (3,040 | ) |
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| (8,483 | ) |
Due to related party, net |
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| 459 |
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Accrued compensation and benefits |
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| (414 | ) |
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| (739 | ) |
Deferred Revenue |
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| 1,200 |
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| (1,502 | ) |
Accrued interest |
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| (59 | ) |
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| (212 | ) |
Other current liabilities |
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| 2,021 |
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| (6,043 | ) |
Deferred tax liability |
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| (2,916 | ) |
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| (77 | ) |
Accrued pension, retirement medical plan obligations and long-term liabilities |
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| (465 | ) |
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| 288 |
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Net cash provided by operating activities |
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| 8,363 |
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| 4,528 |
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Investing activities: |
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Purchases of property and equipment |
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| (6,114 | ) |
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| (3,418 | ) |
Net proceeds from sale of equipment |
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| – |
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| 1,165 |
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Purchases of intangible assets |
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| (1,000 | ) |
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| – |
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Net cash used in investing activities |
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| (7,114 | ) |
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| (2,253 | ) |
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Financing activities: |
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Debt repayment |
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| (350 | ) |
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| (4,161 | ) |
Net borrowings from line of credit |
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| – |
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| 1,000 |
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Net cash used in financing activities |
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| (350 | ) |
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| (3,161 | ) |
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Effect of foreign currency on cash |
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| (106 | ) |
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| 70 |
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Net increase (decrease) in cash and cash equivalents |
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| 793 |
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| (816 | ) |
Cash and cash equivalents at beginning of period |
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| 27,574 |
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| 10,612 |
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Cash and cash equivalents at end of period |
| $ | 28,367 |
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| $ | 9,796 |
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Non-cash activities: |
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Investments in property, plant and equipment |
| $ | – |
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| $ | 1,365 |
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Supplement disclosure of cash flow information: |
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Interest paid |
| $ | 5,575 |
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| $ | 5,901 |
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Tax paid |
| $ | 214 |
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| $ | – |
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See accompanying notes.
3
Jazz Technologies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2009
1. | ORGANIZATION |
Unless specifically noted otherwise, as used throughout these notes to the unaudited condensed consolidated financial statements, “Jazz,” “Company” refers to the business of Jazz Technologies, Inc. and “Jazz Semiconductor” refers only to the business of Jazz Semiconductor, Inc. References to “the Company” for dates prior to September 19, 2008 mean the Predecessor which on September 19, 2008 was merged with and into a subsidiary of Tower Semiconductor Ltd., an Israeli company (“Tower”), and references to “the Company” for periods on or after September 19, 2008 are references to the Successor Tower subsidiary.
The Company
Jazz Technologies, Inc., formerly known as Acquicor Technology Inc. (the “Company”), was incorporated in Delaware on August 12, 2005. The Company was formed to serve as a vehicle for the acquisition of one or more domestic and/or foreign operating businesses through a merger, capital stock exchange, stock purchase, asset acquisition or other similar business combination.
The Company is based in Newport Beach, California and following the acquisition of Jazz Semiconductor, Inc., is now an independent semiconductor foundry focused on specialty process technologies for the manufacture of analog intensive mixed-signal semiconductor devices. The Company’s specialty process technologies include advanced analog, radio frequency, high voltage, bipolar and silicon germanium bipolar complementary metal oxide (“SiGe”) semiconductor processes, for the manufacture of analog and mixed-signal semiconductors. Its customers’ analog and mixed-signal semiconductor devices are used in cellular phones, wireless local area networking devices, digital TVs, set-top boxes, gaming devices, switches, routers and broadband modems.
Merger with Tower Semiconductor, Ltd.
On May 19, 2008, the Company entered into an Agreement and Plan of Merger and Reorganization (“Merger”) with Tower and its wholly-owned subsidiary, Armstrong Acquisition Corp., a Delaware corporation (“Merger Sub”), which provided for Merger Sub to merge with and into the Company, with the Company surviving the Merger as a wholly-owned subsidiary of Tower.
At a special meeting of the Company’s stockholders held on September 17, 2008, the requisite majority of the Company’s stockholders voted in favor of the Merger, which was effectively consummated on September 19, 2008. Under the terms of the Merger, Tower acquired all of the outstanding shares of Jazz in a stock-for-stock transaction. Each share of the Company’s common stock not held by Tower, Merger Sub or the Company was automatically converted into and represents the right to receive 1.8 ordinary shares of Tower. Cash was paid in lieu of fractional shares. In addition, on September 19, 2008, upon completion of the Merger, the Company’s common stock was delisted from the American Stock Exchange. As a result of the Merger, Tower is the only registered holder of the Company’s common stock and a change in control occurred. The Merger was accounted for under the purchase method of accounting in accordance with U.S. generally accepted accounting principles for accounting and financial reporting purposes. Under this method, Jazz was treated as the “acquired” company. In connection with this acquisition, the Company adopted Tower’s fiscal year for reporting purposes.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation and Consolidation
We prepare our consolidated financial statements in accordance with SEC and US GAAP requirements and include all adjustments of a normal recurring nature that are necessary to fairly present our consolidated results of operations, financial position, and cash flows for all periods presented. Interim period results are not necessarily indicative of full year results. This quarterly report should be read in conjunction with our most recent Annual Report on Form 10-K.
The condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring adjustments that, in the opinion of management, are necessary to present fairly the Company’s consolidated financial position at June 30, 2009 and December 31, 2008, and the consolidated results of its operations and cash flows for the three and six months ended June 30, 2009 and June 27, 2008. All intercompany accounts and transactions have been eliminated. Certain amounts have been reclassified to conform to the Successor presentation.
4
For purposes of presentation and disclosure, we refer to the Company as the Predecessor as of and for all periods up to September 19, 2008, the date of consummation of the Merger and as the Successor as of and for all periods thereafter. The financial statements also reflect “push-down” accounting in accordance with SEC Staff Accounting Bulletin No. 54 (“SAB 54”), with respect to Tower’s acquisition of the Company.
Fiscal Year
Effective as of September 19, 2008, the Company changed its fiscal year end to December 31 to conform to Tower’s fiscal year end. As a result of this change, all quarters will now end on the last day of each calendar quarter. Previously, beginning January 1, 2007, the Company had adopted a 52 or 53-week fiscal year. Each of the first three quarters of a fiscal year ended on the last Friday in each of March, June and September and the fourth quarter of a fiscal year ended on the Friday prior to December 31. As a result, each fiscal quarter consisted of 13 weeks during a 52-week fiscal year. During a 53-week fiscal year, the first three quarters consisted of 13 weeks and the fourth quarter consisted of 14 weeks.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Among the significant estimates affecting the financial statements are those relating to sales return allowances, the allowance for doubtful accounts, inventories and related reserves, valuation of acquired assets and liabilities, determination of asset lives for depreciation and amortization, asset impairment assumptions, income taxes, stock compensation, post-retirement medical plan and pension plan. On an ongoing basis, management reviews its estimates based upon currently available information. Actual results could differ materially from those estimates.
Revenue Recognition
The Company’s net revenues are generated principally from sales of semiconductor wafers. The Company derives the remaining balance of its net revenues from the resale of photomasks and other engineering services. The majority of the Company’s sales occur through the efforts of its direct sales force.
In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements” (“SAB No. 101”), and SAB No. 104, “Revenue Recognition” (“SAB No. 104”), the Company recognizes revenues when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting receivable is reasonably assured. These criteria are usually met at the time of product shipment. Revenues are recognized when the acceptance criteria are satisfied, based on performing electronic, functional and quality tests on the products prior to shipment. Such Company testing reliably demonstrates that the products meet all of the specified criteria prior to formal customer acceptance, and that product performance can reasonably be expected to conform to the specified acceptance provisions.
Revenues for engineering services are recognized ratably over the contract term or as services are performed. Revenues from contracts with multiple elements are recognized as each element is earned based on the relative fair value of each element and when there are no undelivered elements that are essential to the functionality of the delivered elements and when the amount is not contingent upon delivery of the undelivered elements. Advances received from customers towards future engineering services, product purchases and in some cases capacity reservation are deferred until products are shipped to the customer, services are rendered or the capacity reservation period ends.
The Company provides for sales returns and allowances relating to specified yield or quality commitments as a reduction of revenues at the time of shipment based on historical experience and specific identification of events necessitating an allowance. Actual allowances given have been within management’s expectations.
Impairment of Assets
The Company periodically reviews long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If an asset is considered to be impaired, the impairment loss is recognized immediately and is considered to be the amount by which the carrying amount of the asset exceeds its fair value.
5
The Company conducted an impairment review as of June 30, 2009, due to the global economic downturn and the prevailing conditions in the semiconductor industry. The Company used the income approach methodology of valuation that includes undiscounted cash flows to determine the fair value of its long-lived assets and intangible assets. Significant management judgment is required in the forecasts of future operating results used for this methodology. These estimates are consistent with the plans and forecasts the Company uses to conduct its business. As a result of this analysis, no assets were considered to be impaired and the Company has not recognized any impairment loss for any long-lived or intangible asset for the period ended June 30, 2009.
Impairment of Goodwill
Goodwill is subject to an impairment test on at least an annual basis or upon the occurrence of certain events or circumstances. Goodwill impairment is assessed based on a comparison of the fair value of the Company to the underlying carrying value of the Company’s net assets, including goodwill. When the carrying amount of the Company exceeds its fair value, the implied fair value of the Company’s goodwill is compared with its carrying amount to measure the amount of impairment loss, if any.
The Company conducted an impairment review as of June 30, 2009. The Company used the income approach methodology of valuation that includes discounted cash flows to determine the fair value of the Company. Significant management judgment is required in the forecasts of future operating results used for this methodology. These estimates are consistent with the plans and forecasts that the Company uses to conduct its business. As a result of this analysis, the carrying amount of the Company’s net assets, including goodwill were not considered to be impaired and the Company did not recognize any impairment of goodwill for the period ended June 30, 2009. Prior to its acquisition by Tower, the Company had no goodwill.
Accounting for Income Taxes
The Company utilizes the liability method of accounting for income taxes in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates.
Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The likelihood of a material change in the Company’s expected realization of these assets depends on its ability to generate sufficient future taxable income.
The future utilization of the Company’s net operating loss carry forwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future. The Company has had two “change in ownership” events that limit the utilization of net operating loss carry forwards. The second “change in ownership” event occurred on September 19, 2008, the date of the Company’s acquisition by Tower. As a result of this “change in ownership,” the estimated annual net operating loss utilization will be limited to $1.0 million.
The Company accounts for its uncertain tax positions in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). The Company recognizes interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense.
Net Loss Per Share
Net (loss) income per share (basic) is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Net (loss) income per share (diluted) is calculated by adjusting the number of shares of common stock outstanding using the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock results in a greater dilutive effect from outstanding warrants, options, restricted stock awards and convertible securities (common stock equivalents). Since the Company reported a net loss for the six and three months periods ended June 27, 2008, all common stock equivalents would be anti-dilutive and the basic and diluted weighted average shares outstanding are the same. On September 19, 2008, upon completion of the Merger, the Company’s common stock was delisted from the American Stock Exchange.
6
Comprehensive Loss
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| Six months ended |
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| June 30, 2009 |
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| June 27, 2008 |
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| Successor |
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| (In thousands) |
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Net loss |
| $ | (9,708 | ) |
| $ | (10,027 | ) |
Foreign currency translation adjustment |
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| (106 | ) |
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| 9 |
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Comprehensive loss |
| $ | (9,814 | ) |
| $ | (10,018 | ) |
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Concentrations
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history, age of the balance and the customer’s current credit worthiness, as determined by a review of the customer’s current credit information. The Company monitors collections and payments from its customers and maintains an allowance for doubtful accounts based upon historical experience and any specific customer collection issues that have been identified. A considerable amount of judgment is required in assessing the ultimate realization of these receivables. Customer receivables are generally unsecured.
Accounts receivable from significant customers representing 10% or more of the net accounts receivable balance as of June 30, 2009 and December 31, 2008 consists of the following customers:
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| June 30, 2009 |
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| December 31, 2008 |
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| Successor |
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| Successor |
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R F Micro Devices |
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| 23% |
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| 42% |
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Skyworks |
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| 14% |
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| 10% |
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Net revenues from significant customers representing 10% or more of net revenues for the three and six months ended June 30, 2009 and June 27, 2008 are provided by customers as follows:
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| Three Months Ended |
| Six Months Ended |
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| June 30, 2009 |
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| June 27, 2008 |
| June 30, 2009 |
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| June 27, 2008 |
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| Successor |
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| Predecessor |
| Successor |
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| Predecessor |
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R F Micro Devices |
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| 17% |
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| 15% |
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| 21% |
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| 17% |
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Skyworks |
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| 14% |
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| 14% |
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| 15% |
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| 14% |
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Conexant |
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| * |
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| 10% |
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| * |
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| 12% |
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Entropic |
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| * |
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| 12% |
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| * |
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| – |
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* Indicates less than 10%.
As a result of the Company’s concentration of its customer base, loss or cancellation of business from, or significant changes in scheduled deliveries of product sold to these customers or a change in their financial position could materially and adversely affect the Company’s consolidated financial position, results of operations and cash flows.
The Company operates a single manufacturing facility located in Newport Beach, California. A major interruption in the manufacturing operations at this facility would have a material adverse affect on the consolidated financial position and results of operations of the Company.
Initial Adoption of New Standards
EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”) mandates a two-step process for evaluating whether an equity-linked financial instrument or embedded feature is indexed to the entity’s own stock. It is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The adoption of EITF 07-5 did not have a significant impact on the consolidated results of operations or financial position of the Company.
7
Effective January 1, 2009, the Company adopted FSP No. APB 14-1, “Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB No. 14-1”). FSP APB No. 14-1 applies to any convertible debt instrument that may be wholly or partially settled in cash and requires the separation of the debt and equity components of cash-settleable convertibles at the date of issuance. The FSP is effective for the convertible debt issued by the Company, for the 8% convertible notes due 2011, which were originally recorded at face value of $166.8 million in December 2006 and requires retrospective application for all periods presented. The Company calculated a theoretical non-cash interest expense based on a similar debt instrument carrying a fixed interest rate but excluding the equity conversion feature and measured at fair value at the time the notes were issued. As a result, the debt component determined for these notes was $151.4 million with discount of $15.4 million and the equity component, recorded as additional paid-in capital, was $14.8 million, which represents the difference between the net proceeds from the issuance of the notes and the fair value of the liability, net of related issuance costs. A fixed interest rate was then applied to the debt component of the notes in the form of an original issuance discount and amortized over the life of the notes as a non-cash interest charge. The Merger on September 19, 2008 required the Company, as part of the purchase method, to fair value the convertible debt instrument. As a result, a new basis was determined to the convertibles of $108.6 million and debt discount of $19.6 million. Upon adoption of the FSP, the Company evaluated the effects of the FSP as of the Merger date and determined that it is inapplicable, as the convertibles are only convertible to the shares of Tower, the Parent. As such, there will be no impact of the FSP in the Successor’s period for the adoption of this FSP; however this resulted in a non-cash increase of our historical interest expense of $1.8 million and $5.9 million for 2008 and 2007 respectively. Our consolidated statement of operations for the six and three months ended June 27, 2008 was retroactively modified compared to previously reported amounts as follows (in thousands, except per share amounts):
Three Months Ended June 27, 2008 | Six Months Ended June 27, 2008 | |||||||
---|---|---|---|---|---|---|---|---|
Predecessor | Predecessor | |||||||
Interest and other expense | $ | 454 | $ | 1,411 | ||||
Change to basic and diluted earnings per share | $ | (0.02 | ) | $ | (0.08 | ) |
Effective January 1, 2009, the Company adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”, an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 expands disclosures but does not change accounting for derivative instruments and hedging activities. The adoption of SFAS No. 161 did not have any impact on the consolidated results of operations or financial position of the Company.
In December 2007, the FASB issued SFAS No. 160,“Non-controlling Interests in Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 160 improves the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report non-controlling (minority) interests in subsidiaries in the same way as equity in the consolidated financial statements. Moreover, SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and non-controlling interests by requiring they be treated as equity transactions. SFAS No. 160 is effective as of the start of fiscal years beginning after December 15, 2008. Early adoption is not allowed. Since the Company currently has no minority interest, the adoption of this standard did not have any impact on the consolidated results of operations or financial position of the Company.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1”) to require disclosures about fair value of financial instruments in interim period financial statements of publicly traded companies and in summarized financial information required by APB Opinion No. 28, “Interim Financial Reporting” (“APB 28-1”). FSP FAS 107-1 and APB 28-1 are effective for interim and annual reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. FSP FAS 107-1 and APB 28-1 relate to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. Prior to issuing this FSP, fair values for these assets and liabilities were only disclosed once a year. The FSP now requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value, see Note 11.
In April 2009 the FASB issued FASB staff position 115-2 and 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“OTTI”) for investment in debt securities. This FSP applies to all entities and is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Earlier adoption for periods ending before March 15, 2009, is not permitted.
8
Under the FSP, the primary change to the OTTI model for debt securities is the change in focus from an entity’s intent and ability to hold a security until recovery. Instead, an OTTI is triggered if (1) an entity has the intent to sell the security, (2) it is more likely than not that it will be required to sell the security before recovery, or (3) it does not expect to recover the entire amortized cost basis of the security. In addition, the FSP changes the presentation of an OTTI in the income statement if the only reason for recognition is a credit loss (i.e., the entity does not expect to recover its entire amortized cost basis). That is, if the entity has the intent to sell the security or it is more likely than not that it will be required to sell the security, the entire impairment (amortized cost basis over fair value) will be recognized in earnings.
However, if the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security, but the security has suffered a credit loss, the impairment charge will be separated into the credit loss component, which is recorded in earnings, and the remainder of the impairment charge, which is recorded in other comprehensive income (OCI). The adoption of FASB staff position 115-2 and 124-2 did not have any impact on the consolidated results of operations or financial position of the Company.
In April 2009 the FASB issued FASB staff position 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly” (“FSP FAS 157-4 “). This FSP applies to all assets and liabilities within the scope of accounting pronouncements that require or permit fair value measurements, except as discussed in paragraphs 2 and 3 of statement 157. The FSP is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. FSP FAS 157-4 relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms what Statement 157 states is the objective of fair value measurement – to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive.
FSP FAS 157-4 provides guidance on (1) estimating the fair value of an asset or liability (financial and nonfinancial) when the volume and level of activity for the asset or liability have significantly decreased and (2) identifying transactions that are not orderly. The adoption of FASB staff position 157-4 did not have any impact on the consolidated results of operations or financial position of the Company.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”). SFAS No. 165 establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this statement sets forth: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for the interim or annual financial periods ending after June 15, 2009. The adoption of this standard did not have any impact on the consolidated results of operations or financial position of the Company. The Company considered the provisions of this SFAS and disclosed all material events which occurred after the balance sheets date.
Recently Issued Accounting Standards
In June 2009 the FASB issued SFAS No.166 “Accounting for Transfers of Financial Assets” (“SAFS No. 166”). SAFS No. 166 is a revision to Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. SFAS No. 166 enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and a company’s continuing involvement in transferred financial assets. SFAS No. 166 will be effective at the start of a company’s first fiscal year beginning after November 15, 2009. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
9
In June 2009 the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)” (“SAFS No. 167”), which changes the way entities account for securitizations and special-purpose entities. SAFS No. 167 is a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS No. 167 will require a company to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A company will be required to disclose how its involvement with a variable interest entity affects the company’s financial statements. SFAS No. 166 will be effective at the start of a company’s first fiscal year beginning after November 15, 2009. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
3. | MERGER WITH TOWER |
On September 19, 2008, Tower acquired all of Jazz’s outstanding capital in a stock-for-stock transaction.
For accounting purposes, the purchase price for the Company’s acquisition was $50.1 million and reconciles to all consideration and payments made to date as follows (in thousands):
Stock consideration | $ | 39,189 | |||
Other equity consideration | 7,555 | ||||
Total Merger consideration | 46,744 | ||||
Transaction costs | 3,326 | ||||
Total purchase price | $ | 50,070 | |||
Pursuant to the Merger with Tower, each outstanding share of Jazz’s common stock was converted into the right to receive 1.8 ordinary shares of Tower, at an aggregate fair value of approximately $39.2 million. The fair value of the shares was determined based on Tower’s ordinary shares price on NASDAQ prevailing around May 19, 2008, the date of signing the definitive agreements of the Merger and announcing it, in accordance with provisions set forth in EITF 99-12 “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination” (“EITF 99-12”).
Pursuant to the Merger with Tower, the Company’s outstanding stock options immediately prior to the effective time of the Merger, whether vested or unvested, were converted to options to purchase Tower’s ordinary shares on the same terms and conditions as were applicable to such options under the Predecessor Company’s plan, with adjusted exercise prices and numbers of shares to reflect the exchange ratio of the common stock. This conversion was accounted for as a modification in accordance with SFAS No. 123R with the fair value of the outstanding options of $1.3 million being included as part of the purchase price.
Pursuant to the Merger with Tower, all outstanding warrants to purchase the shares of the Company’s common stock that were outstanding immediately prior to the effective time of the Merger, became exercisable for Tower ordinary shares with adjusted exercise prices and number of shares to reflect the exchange ratio of the common stock. The fair value of the outstanding warrants of $6.3 million was included as part of the purchase price.
Tower’s transaction costs of $3.3 million primarily consist of fees for financial advisors, attorneys, accountants and other advisors incurred in connection with the Merger.
The Company also incurred approximately $4.1 million in similar Merger costs which are included as part of operating expenses in the Predecessor’s statement of operations for the period from December 29, 2007 through September 18, 2008.
10
Purchase Price Allocation
The purchase price of $50.1 million, including the transaction costs of approximately $3.3 million, has been allocated to tangible and intangible assets and liabilities, based on their fair market values as of September 19, 2008, as follows (in thousands):
September 19, 2008 | ||||||||
---|---|---|---|---|---|---|---|---|
Fair value of the net tangible assets and liabilities: | ||||||||
Cash and cash equivalents | $ | 3,486 | ||||||
Receivables | 16,549 | |||||||
Inventories | 12,907 | |||||||
Deferred tax asset | 6,157 | |||||||
Prepaid expenses and other current assets | 2,936 | |||||||
Property, plant and equipment | 95,244 | |||||||
Investments | 17,100 | |||||||
Other assets | 66 | |||||||
Short-term borrowings | (7,000 | ) | ||||||
Accounts payable | (11,878 | ) | ||||||
Accrued compensation and benefits | (9,337 | ) | ||||||
Deferred tax liability | (14,883 | ) | ||||||
Deferred revenues | (3,135 | ) | ||||||
Other current liabilities | (8,285 | ) | ||||||
Convertible notes | (108,600 | ) | ||||||
Accrued pension, retirement medical plan obligations and other long-term liabilities | (7,757 | ) | ||||||
Total net tangible assets and liabilities | $ | (16,430 | ) | |||||
Fair value of identifiable intangible assets acquired: | ||||||||
Existing technology | 1,300 | |||||||
Patents and other core technology rights | 15,100 | |||||||
In-process research and development | 1,800 | |||||||
Customer relationships | 2,600 | |||||||
Trade name | 5,200 | |||||||
Facilities lease | 33,500 | |||||||
Goodwill | 7,000 | |||||||
Total identifiable intangible assets acquired | 66,500 | |||||||
Total purchase price | $ | 50,070 | ||||||
The fair values set forth above are based on a valuation of the Company’s assets and liabilities performed by the Company in accordance with SFAS No. 141, “Business Combinations” (“SFAS No. 141”) and reflect “push-down” accounting in accordance with SEC Staff Accounting Bulletin No. 54 (“SAB 54”), Topic 5J, with respect to the Tower’s acquisition of the Company. Currently, the net operating loss limitation for the change in ownership which occurred in September 2008 is in the process of being determined and accordingly, the amount of the Company’s net operating losses which may be available to offset future taxable income of the Company is not finalized. The Company expects it will not be able to utilize a significant portion of its net operating loss carry forwards, and has adjusted its net operating loss carryforwards to reflect their current estimated annual utilization of $1.0 million. However, the Company has currently not finalized its analysis of this matter. Once the final information is available, the purchase accounting impact on the deferred tax assets and liabilities will be recognized and disclosed.
11
Pro Forma Results of Operations
The following unaudited information for the six months ended June 30, 2009 and June 27, 2008 assumes the acquisition of the Company by Tower occurred on January 1, 2008:
Results of Operations (in thousands) Six Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|
June 30, 2009 | June 27, 2008 | |||||||
(Actual, unaudited) | (Pro Forma, unaudited) | |||||||
Net revenues | $ | 60,271 | $ | 98,346 | ||||
Net loss | $ | (9,708 | ) | $ | (267 | ) | ||
The Company derived the pro forma results from the unaudited condensed consolidated financial statements of the Predecessor for the period from January 1, 2008 to June 27, 2008 and the Successor for the period from January 1, 2009 to June 30, 2009. As of June 27, 2008, the pro forma EPS is not presented since the pro forma assumes the Merger occurred on January 1, 2008 and therefore no EPS exists for such date.
The pro forma results are not necessarily indicative of the results that may have actually occurred had the acquisition taken place on the date noted, or the future financial position or operating results of the Company. The pro forma adjustments are based upon available information and assumptions that the Company believes are reasonable. The pro forma adjustments include adjustments for reduced depreciation and amortization expense as a result of the application of the purchase method of accounting.
4. | OTHER BALANCE SHEET DETAILS |
Inventories
Inventories, net of reserves, consist of the following at June 30, 2009 and December 31, 2008 (in thousands):
June 30, 2009 | December 31, 2008 | |||||||
---|---|---|---|---|---|---|---|---|
Successor | Successor | |||||||
Raw material | $ | 1,181 | $ | 1,741 | ||||
Work in process | 6,523 | 6,693 | ||||||
Finished goods | 1,935 | 4,017 | ||||||
$ | 9,639 | $ | 12,451 | |||||
Change in Method of Accounting for Inventory Valuation
On April 1, 2009, the Company elected to change its method of valuing its inventories, mainly to include depreciation and amortization as part of the cost of inventory. In addition indirect raw material that previously was charged immediately to earnings is now being capitalized and presented as part of raw material inventory. The new method of accounting for inventory was adopted to align the valuation of the inventory with those methods of Tower. Following the Merger date, the Company and Tower have been working to align their reporting and information systems and concluded the process during the second quarter of 2009. Comparative financial statements attributed to the Successor, have been adjusted to apply the new method retrospectively. The financial statements for periods presented for the Predecessor were not retroactively adjusted as the push-down accounting effectively creates a new reporting entity. The following financial statement line items for fiscal year 2008, were affected by the change in accounting principle (in thousands).
As of December 31, 2008
As originally reported | As adjusted | Effect of change | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Inventories | $ | 10,281 | $ | 12,451 | $ | 2,170 | |||||
Stockholder's equity | $ | 46,658 | $ | 48,828 | $ | 2,170 |
12
Property, Plant and Equipment
Property, plant and equipment consist of the following at June 30, 2009 and December 31, 2008 (in thousands):
Useful life (In years) | June 30, 2009 | December 31, 2008 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Successor | Successor | ||||||||||
Building improvements | 10-12 | $ | 24,230 | $ | 24,230 | ||||||
Machinery and equipment | 7 | 70,464 | 64,097 | ||||||||
Furniture and equipment | 5-7 | 2,089 | 1,785 | ||||||||
Computer software | 3 | 763 | 763 | ||||||||
Construction in progress | - | 8,009 | 6,443 | ||||||||
105,555 | 97,318 | ||||||||||
Accumulated depreciation | (12,744 | ) | (3,390 | ) | |||||||
$ | 92,811 | $ | 93,928 | ||||||||
Investment
In connection with the acquisition of Jazz Semiconductor in February 2007, the Company acquired an investment in Shanghai Hua Hong NEC Electronics Company, Ltd. (“HHNEC”). As of June 30, 2009, the investment represented a minority interest of approximately 10% in HHNEC. Since the Merger with Tower, the investment in HHNEC is carried at cost determined to be the fair value of the investment at the Merger date.
Intangible Assets
Intangible assets consist of the following at June 30, 2009 (in thousands):
Weighted Average Life (years) | Cost | Accumulated Amortization | Net | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Technology | 4;9 | $ | 2,300 | $ | 113 | $ | 2,187 | |||||||
Patents and other core technology rights | 9 | 15,100 | 1,312 | 13,788 | ||||||||||
In-process research and development | - | 1,800 | 1,800 | - | ||||||||||
Customer relationships | 15 | 2,600 | 139 | 2,461 | ||||||||||
Trade name | 9 | 5,200 | 452 | 4,748 | ||||||||||
Facilities lease | 19 | 33,500 | 1,413 | 32,087 | ||||||||||
Total identifiable intangible assets | 14 | $ | 60,500 | $ | 5,229 | $ | 55,271 | |||||||
Intangible assets consist of the following at December 31, 2008 (in thousands):
Weighted Average Life (years) | Cost | Accumulated Amortization | Net | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Technology | 9 | $ | 1,300 | $ | 41 | $ | 1,259 | |||||||
Patents and other core technology rights | 9 | 15,100 | 475 | 14,625 | ||||||||||
In-process research and development | - | 1,800 | 1,800 | - | ||||||||||
Customer relationships | 15 | 2,600 | 49 | 2,551 | ||||||||||
Trade name | 9 | 5,200 | 163 | 5,037 | ||||||||||
Facilities lease | 19 | 33,500 | 512 | 32,988 | ||||||||||
Total identifiable intangible assets | 14 | $ | 59,500 | $ | 3,040 | $ | 56,460 | |||||||
13
The Company expects future amortization expense to be as follows (in thousands):
Charge to cost of revenues | Charge to operating expenses | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Fiscal year ends: | |||||||||||
Remainder of 2009 | $ | 1,937 | $ | 394 | $ | 2,331 | |||||
2010 | 3,847 | 787 | 4,634 | ||||||||
2011 | 3,847 | 787 | 4,634 | ||||||||
2012 | 3,847 | 787 | 4,634 | ||||||||
2013 | 3,721 | 787 | 4,508 | ||||||||
Thereafter | 30,221 | 4,309 | 34,530 | ||||||||
Total expected future amortization expense | $ | 47,420 | $ | 7,851 | $ | 55,271 | |||||
The amortization related to technology, patents and other core technologies, and facilities lease is charged to cost of revenues. The amortization related to customer relationships and trade name is charged to operating expenses.
5. | CREDIT FACILITY |
On September 19, 2008, the Company entered into a second amended and restated loan and security agreement, as parent guarantor, with Wachovia Capital Markets, LLC, as lead arranger, bookrunner and syndication agent, and Wachovia Capital Finance Corporation (Western), as administrative agent (“Wachovia”), and Jazz Semiconductor and Newport Fab, LLC, as borrowers, with respect to a three-year secured asset-based revolving credit facility for the total amount of $55 million, including up to $10 million for letters of credit. On December 31, 2008, Wells Fargo acquired all of Wachovia Corporation and its businesses and obligations.
The borrowing availability varies according to the levels of the borrowers’ eligible accounts receivable, eligible equipment and other terms and conditions described in the loan agreement. The maturity date of the facility is September 19, 2011, unless earlier terminated. Loans under the facility bear interest at a rate equal to, at borrowers’ option, either the lender’s prime rate plus a margin ranging from 0.25% to 0.75% or the LIBOR rate (as defined in the loan agreement) plus a margin ranging from 2% to 2.5% per annum. The facility is secured by all of the Company’s assets and the assets of the borrowers.
The loan agreement contains customary covenants and other terms, including covenants based on the Company’s EBITDA (as defined in the loan agreement), as well as customary events of default. If any event of default occurs, Wachovia may declare due immediately, all borrowings under the facility and foreclose on the collateral. Furthermore, an event of default under the loan agreement would result in an increase in the interest rate on any amounts outstanding.
No additional borrowing availability under the Company’s revolving credit facility existed as June 30, 2009. Outstanding borrowings were $27.0 million and $1.9 million of the facility supporting outstanding letters of credits on that date. The Company considers borrowings of $20.0 million to be long-term debt as of June 30, 2009. As of June 30, 2009, the Company was in compliance with all the covenants under this facility.
6. | CONVERTIBLE NOTES |
The Company has convertible notes at an interest rate of 8% per annum payable semi-annually and mature on December, 2011 (“Convertible Notes”). The Company may redeem the Convertible Notes for cash on or after December 31, 2009 at a redemption price equal to par plus accrued and unpaid interest plus a redemption premium equal to 2% in the year beginning December 31, 2009 until December 31, 2010 and 0% thereafter.
Pursuant to the Merger with Tower, each holder of the Convertible Notes immediately prior to the Merger, has the right to convert such holder’s note into Tower ordinary shares based on an implied conversion price of approximately $4.07 per Tower ordinary share. The Company’s obligations under the Convertible Notes are not being guaranteed by Tower. The Convertible Notes are settled by issuance of shares of Tower. As such, based on the provisions of SFAS No. 133, the conversion feature was bifurcated and carried at fair value.
In connection with the Merger of the Company with Tower, the Convertible Notes, with a face value of $128.2 million, were recorded at the fair value of $108.6 million on the date of the acquisition by Tower. The Company has accreted $2.5 million in interest for the six months ended June 30, 2009.
14
As of June 30, 2009, $127.2 million in principal amount of Convertible Notes remains outstanding.
The Company’s obligations under the Convertible Notes are guaranteed by the Company’s wholly owned domestic subsidiaries. The Company has not provided condensed consolidating financial information because the Company has no independent assets or operations, the subsidiary guarantees are full and unconditional and joint and several and any subsidiaries of the Company other than the subsidiary guarantors are minor. Other than the restrictions in the Wachovia Loan Agreement, there are no significant restrictions on the ability of the Company and its subsidiaries to obtain funds from their subsidiaries by loan or dividend.
Upon conversion, the Company has the right to deliver, in lieu of shares of Tower’s ordinary shares, cash or a combination of cash and shares of Tower’s ordinary shares to satisfy the conversion obligation. If the Company elects to deliver cash or a combination of cash and Tower ordinary shares to satisfy the conversion obligation, the amount of such cash and Tower ordinary shares, if any, will be based on the trading price of Tower’s ordinary shares during the 20 consecutive trading days beginning on the third trading day after proper delivery of a conversion notice.
Upon the occurrence of certain specified fundamental changes, the holders of the Convertible Notes will have the right, subject to various conditions and restrictions, to require the Company to repurchase the Convertible Notes, in whole or in part, at par plus accrued and unpaid interest to, but not including, the repurchase date. In addition, if the Company undergoes certain fundamental changes prior to December 31, 2009, the Company may be obligated to pay a make whole premium on Convertible Notes converted in connection with such fundamental change by issuing additional shares of common stock upon conversion of the Convertible Notes.
7. | INCOME TAXES |
The Company’s effective tax rate for the six months ended June 30, 2009 differs from the statutory rate primarily due to the establishment of a valuation allowance against federal deferred tax assets that the Company has determined does not meet the more likely than not threshold. The Company establishes a valuation allowance for federal deferred tax assets, when it is unable to conclude that it is more likely than not that such deferred tax assets will be realized. In making this determination the Company evaluates both positive and negative evidence as well as potential tax planning strategies. The annual losses are projected to exceed the reversal of taxable temporary differences. Without other significant positive evidence the Company has determined that the federal deferred tax assets are not more likely than not to be realized.
The future utilization of the Company’s net operating loss carry forwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future. The Company has had two “change in ownership” events that limit the utilization of net operating loss carry forwards. The first “change in ownership” event occurred in February 2007 upon our acquisition of Jazz Semiconductor. The second “change in ownership” event occurred on September 19, 2008, the date of the Company’s acquisition by Tower. Currently, the net operating loss limitation for the change in ownership which occurred in September 2008 is in the process of being determined and accordingly, the amount of the Company’s net operating losses which may be available to offset future taxable income of the Company is not finalized. The Company expects it will not be able to utilize a significant portion of its net operating loss carry forwards, and has adjusted its net operating loss carryforwards to reflect their current estimated annual utilization limited to $1.0 million. However, the Company has currently not finalized its analysis of this matter. Once the final information is available, the purchase accounting impact on the deferred tax assets and liabilities will be recognized and disclosed.
The Company adopted the provisions of FIN No. 48 on January 1, 2007. The Company’s policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense. At June 30, 2009 the Company had unrecognized tax benefits of $1.9 million. The unrecognized tax benefits were unchanged during the six months ended June 30, 2009. At June 30, 2009, it is reasonably likely that $1.1 million of the unrecognized tax benefits will reverse during the next twelve months. The reversal of uncertain tax benefits is related to net operating losses that will be abandoned when the Company liquidates its Chinese subsidiary in 2009.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for years before 2005; state and local income tax examinations before 2004; and foreign income tax examinations before 2005. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carryforward amount. The Company is not currently under Internal Revenue Service (“IRS”), state or local tax examination. In connection with the pending liquidation of the Company’s Chinese subsidiary, the Chinese tax authorities are conducting a review of the historic income tax filings. The tax authorities have not proposed any adjustments to the historic income tax filings as of June 30, 2009.
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8. | EMPLOYEE BENEFIT PLANS |
The pension and other post retirement benefit plans expenses for the three and six months ended June 30, 2009 were $0.3 million and $0.7 million, respectively. The amounts for the pension and other post retirement benefit plans expense for the corresponding period in 2008 were $0.6 million and $1.2 million, respectively.
9. | STOCKHOLDER’S EQUITY |
Common Stock
Pursuant to the Merger with Tower, each share of the Company’s common stock not held by Tower, Merger Sub or the Company was automatically converted into and represents the right to receive 1.8 ordinary shares of Tower. Cash was paid in lieu of fractional shares. In connection with the Merger with Tower, the Company amended its Certificate of Incorporation to decrease the authorized shares of the Company’s common stock from 200,000,000 shares to 100 shares.
The number of outstanding shares of Jazz’s common stock at June 30, 2009 was 100, all of which are owned by Tower.
Warrants
Pursuant to the Merger with Tower, all outstanding warrants to purchase the shares of the Company’s common stock that were outstanding immediately prior to the effective time of the Merger were assumed by Tower and became exercisable for Tower ordinary shares. Each such warrant formerly exercisable to purchase one share of the Company’s common stock became exercisable to purchase 1.8 Tower ordinary shares at an exercise price of $2.78 per Tower ordinary share, which is equal to the exercise price of $5.00 immediately prior to the effective time of the Merger divided by the exchange ratio of 1.8. Fractional ordinary shares of Tower were rounded up to the nearest whole number.
Tower may redeem the warrants: (i) in whole and not in part; (ii) at a price of $0.01 per warrant; (iii) upon a minimum of 30 days prior written notice of redemption; and if and only if, the last sales price of Tower’s ordinary shares equals or exceeds $4.72 per share for any 20 trading days within a 30 trading day period ending three business days before Tower sends the notice of redemption. Originally this threshold sales price was $8.50 per share of the Company’s common stock; $4.72 is equal to the original threshold for the sales price of the Company’s common stock divided by the exchange ratio of 1.8.
The number of outstanding warrants to purchase Tower’s ordinary shares at June 30, 2009 was 59.5 million.
Stock Options
Pursuant to the Merger with Tower, options to purchase shares of the Company’s common stock that were outstanding immediately prior to the effective time of the Merger, whether vested or unvested, became exercisable or will become exercisable for Tower ordinary shares. The Company recorded $21,835 and $49,679 of period compensation expense for the three and six months ended June 30, 2009 for modifications of these existing options pursuant to the Merger.
During the six months ended June 30, 2009 Tower awarded 10,000 non-qualified stock options to Company employees that vest over four year period from the date of grant. The exercise price was $0.32. The Company recorded $19,877 and $44,741 of compensation expenses relating to options granted to employees, for the three and six months ended June 30, 2009. The Company recorded $221,363 and $432,802 of compensation expenses relating to employees options, during the corresponding periods in 2008.
10. | RELATED PARTY TRANSACTIONS |
As of June 30, 2009 | As of December 31, 2008 | |||||||
---|---|---|---|---|---|---|---|---|
Due from related party (included in the accompanying balance sheets) | $ | 17 | $ | 54 | ||||
Due to related party (included in the accompanying balance sheets). | $ | 1,663 | $ | 1,241 |
Related party balances are with Tower and are mainly for purchases and payments on behalf of the other party, tools sale and service charges.
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11. | FAIR VALUE MEASUREMENTS |
The Company holds an investment in HHNEC, a non-public entity. This investment represents a minority interest of approximately 10% recorded at fair value of $17.1 million under the Guideline Company Method on September 19, 2008, the date of the Company’s acquisition by Tower.
The Convertible Notes’ fair value of $59.2 million determined by taking in consideration (i) the market approach, using the last quotations of the notes and (ii) the income approach utilizing the present value method at discount rate with credit worthiness appropriate for the Company.
The estimated fair values of the Company’s financial instruments, excluding the Company’s long-term Convertible Notes do not materially differ from their respective carrying amounts as of June 30, 2009 and December 31, 2008.
12. | LITIGATION |
During 2008, an International Trade Commission (“ITC”) action was filed by Agere/LSI Corporation (“LSI”), which alleged infringement by 17 corporations of LSI’s patent no. 5227335. Following the initial filing, LSI amended the ITC complaint to add the Company, Tower and three other corporations as additional respondents. The Company, Tower and the other three corporations were added as additional respondents in the ITC action in October 2008. The case was tried before an administrative law judge in July 2009, and the decision has not yet been rendered. The Company and Tower cannot provide an estimate of any possible losses or predict the outcome thereof, which could have a material and adverse effect on the company’s and tower’s businesses and financial position.
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis should be read in conjunction with the financial statements and related notes contained elsewhere in this report. See our Annual Report on Form 10-K and subsequent quarterly reports filed with the Securities and Exchange Commission for information regarding certain risk factors known to us that could cause reported financial information not to be necessarily indicative of future results.
FORWARD LOOKING STATEMENTS
This report on Form 10-Q may contain “forward-looking statements” within the meaning of the federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Report Act of 1995. These statements, which represent our expectations or beliefs concerning various future events, may contain words such as “may,” “will,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or other words indicating future results. Such statements may include but are not limited to statements concerning the following:
— | the potential benefits of the Merger with Tower Semiconductor Ltd.; |
— | anticipated trends in revenues; |
— | growth opportunities in domestic and international markets; |
— | new and enhanced channels of distribution; |
— | customer acceptance and satisfaction with our products; |
— | expected trends in operating and other expenses; |
— | purchase of raw materials at levels to meet forecasted demand; |
— | anticipated cash and intentions regarding usage of cash; |
— | changes in effective tax rates; and |
— | anticipated product enhancements or releases. |
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These forward-looking statements are subject to risks and uncertainties, including those risks and uncertainties described in our Annual Report on Form 10-K and subsequent quarterly reports filed with the Securities and Exchange Commission, that could cause actual results to differ materially from those anticipated as of the date of this report. We assume no obligation to update any forward-looking statements to reflect events or circumstances arising after the date of this report.
RESULTS OF OPERATIONS
For the three and six months ended June 30, 2009, we had a net loss of $1.9 million and $9.7 million, respectively compared to a net loss of $5.0 million and $10.0 million for the three and six months ended June 27, 2008.
Pro Forma Financial Information
We were acquired by Tower on September 19, 2008, and accordingly, we do not believe a comparison of the results of operations for the six months ended June 30, 2009 versus the six months ended June 27, 2008 is very meaningful. In order to assist users in better understanding the changes in our business between the six months ended June 30, 2009 and the six months ended June 27, 2008, we are presenting in the discussion below pro forma results for the six months ended June 30, 2008, as if our Merger with Tower occurred on January 1, 2008. We derived the pro forma results from our unaudited condensed consolidated financial statements for the six months ended June 27, 2008.
The pro forma results are not necessarily indicative of the results that may have actually occurred had the acquisition taken place on the dates noted, or the future financial position or operating results of us or Jazz Semiconductor. The pro forma adjustments are based upon available information and assumptions that we believe are reasonable. The pro forma adjustments include adjustments for reduced depreciation and amortization expense as a result of the application of the purchase method of accounting.
Under the purchase method of accounting, the total purchase price is allocated to the net tangible and intangible assets acquired and liabilities assumed, based on various estimates of their respective fair values. We performed the valuation of all the assets and liabilities in accordance with SFAS No. 141. The depreciation and amortization expense adjustments reflected in the pro forma results of operations are based on the preliminary valuation of our tangible and intangible assets described in Note 3 to our unaudited condensed consolidated financial statements.
Six Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|
June 30, 2009 (actual, unaudited) | June 27, 2008 (pro forma, unaudited) | |||||||
Net revenues | $ | 60,271 | $ | 98,346 | ||||
Cost of revenues | 51,797 | 76,824 | (*) | |||||
Gross profit | 8,474 | 21,522 | ||||||
Operating expenses: | ||||||||
Research and development | 5,898 | 6,220 | (*) | |||||
Selling, general and administrative | 7,576 | 8,354 | (*) | |||||
Amortization of intangible assets | 393 | 393 | (*) | |||||
Total operating expenses | 13,867 | 14,967 | ||||||
Income (loss) from operations | (5,393 | ) | 6,555 | |||||
Financing expense and other income, net | (7,225 | ) | (6,854 | )(**) | ||||
Income tax benefit | 2,910 | 32 | ||||||
Net income (loss) | $ | (9,708 | ) | $ | (267 | ) | ||
(*) The pro forma results for the six months ended June 27, 2008 were adjusted by $10.3 million, related to depreciation and amortization derived from the fair value changes in the plant, property and equipments and intangible assets, for the Merger and related to Merger related costs.
(**) The pro forma financing expense and other income, net for the six months ended June 27, 2008 include $2.0 million related to interest accretion derived from the fair value changes in the Convertible Notes following the Merger. Such impact was partially offset by the effect of FSP APB 14-1.
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Comparison of Six Months Ended June 30, 2009 and June 27, 2008
Revenues
The following table presents pro forma net revenues for the six months ended June 30, 2009 and June 27, 2008:
Net Revenues (in thousands, except percentages) | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Six Months Ended June 30, 2009 (actual, unaudited) | Six Months Ended June 27, 2008 (pro forma, unaudited) | |||||||||||||||||||
Amount | % of Net Revenues | Amount | % of Pro forma Net Revenues | Increase (Decrease) | % Change | |||||||||||||||
Net Revenues | $ | 60,271 | 100.0 | $ | 98,346 | 100.0 | $ | (38,075 | ) | (39 | ) | |||||||||
Our net revenues for the six months ended June 30, 2009 amount to $60.3 million as compared to $98.3 million for the corresponding period in 2008. Such $38.1 million or 39% decrease is mainly due to the current worldwide economic downturn and the prevailing adverse market conditions in the semiconductor industry, and is comparable to the decrease in the revenues in the industry generally. This decrease is the result of a $26.1 million or 35% decrease in specialty process net revenues to $48.2 million for the six months ended June 30, 2009 from $74.3 million of specialty process revenues for the corresponding period in 2008 and a $11.9 million or 50% decrease in standard process net revenues to $12.1 million for the six months ended June 30, 2009 from $24.0 million of standard process revenues for the corresponding period in 2008.
Specialty process revenues increased to 80% of total revenue for the six months ended June 30, 2009, as compared to 76% for the six months ended June 27, 2008. Standard process revenues for the six months ended June 30, 2009 decreased to 20% of total revenue, as compared to 24% in the corresponding period in 2008.
Cost of Revenues
The following table presents pro forma cost of revenues for the six months ended June 30, 2009 and June 27, 2008:
Cost of Revenues (in thousands, except percentages) | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Six Months Ended June 30, 2009 (actual, unaudited) | Six Months Ended June 27, 2008 (pro forma, unaudited) | |||||||||||||||||||
Amount | % of Net Revenues | Amount | % of Pro Forma Net Revenues | Increase (Decrease) | % Change | |||||||||||||||
Cost of revenues (excluding | ||||||||||||||||||||
depreciation & amortization of | ||||||||||||||||||||
intangible assets) | $ | 43,285 | 72 | $ | 67,620 | 69 | $ | (24,335 | ) | (36 | ) | |||||||||
Cost of revenues - depreciation & | ||||||||||||||||||||
amortization of intangible assets | 8,512 | 14 | 9,204 | 9 | (692 | ) | (7 | ) | ||||||||||||
Total cost of revenues | $ | 51,797 | 86 | $ | 76,824 | 78 | $ | (25,027 | ) | (33 | ) | |||||||||
On a pro forma basis, our cost of revenues decreased by $25.0 million or 33% to $51.8 million for the six months ended June 30, 2009 compared to $76.8 million for the corresponding period in 2008. The decrease in cost of revenues is mainly due to cost reduction efforts which have resulted in lower labor and overhead cost for the six months ended June 30, 2009 as well as due to the effect of the revenue decrease. We achieved such 33% decrease in cost of revenues as compared to 39% decrease in revenues, despite the high portion of fixed costs associated in operating a foundry, due to such cost reduction efforts. Cost reduction efforts included scaling the labor force to meet production demand and negotiating more favorable pricing for materials and supplies.
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Gross Profit
The following table presents pro forma gross profit for the six months ended June 30, 2009 and June 27, 2008:
Gross Profit (in thousands, except percentages) | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Six Months Ended June 30, 2009 (actual, unaudited) | Six Months Ended June 27, 2008 (pro forma, unaudited) | |||||||||||||||||||
Amount | % of Net Revenues | Amount | % of Pro Forma Net Revenues | Increase (Decrease) | % Change | |||||||||||||||
Gross profit | $ | 8,474 | 14 | $ | 21,522 | 22 | $ | (13,048 | ) | (61 | ) | |||||||||
On a pro forma basis, the decrease in gross profit was primarily attributed to the above mentioned $38.1 million decrease in revenues which was partially offset by $25.0 million lower cost of revenues mainly due to the cost reduction actions resulted in lower labor, overhead and material and supplies costs and due to the revenue decrease as described in the cost of revenues section above.
Operating Expenses
The following table presents operating expenses for the six months ended June 30, 2009 and June 27, 2008:
Operating Expenses (in thousands, except percentages) | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Six Months Ended June 30, 2009 (actual, unaudited) | Six Months Ended June 27, 2008 (pro forma, unaudited) | |||||||||||||||||||
Amount | % of Net Revenues | Amount | % of Pro Forma Net Revenues | Increase (Decrease) | % Change | |||||||||||||||
Research and development | $ | 5,898 | 10 | $ | 6,220 | 6 | $ | (322 | ) | (5 | ) | |||||||||
Selling, general and administrative | 7,576 | 12 | 8,354 | 9 | (778 | ) | 9 | |||||||||||||
Amortization of intangible assets | 393 | 1 | 393 | 0 | - | - | ||||||||||||||
Total operating expenses | $ | 13,867 | 23 | $ | 14,967 | 15 | $ | (1,100 | ) | (7 | ) | |||||||||
On a pro forma basis, operating expenses for the six months ended June 30, 2009 decreased by $1.1 million compared to the six months ended June 27, 2008. The decrease in operating expenses was mainly due to lower research and development and selling, general and administrative expenses due to the continued efforts for reducing the overhead costs compared to the corresponding period in 2008.
Financing expense and Other Income, Net
The following table presents financing expense and other income for the six months ended June 30, 2009 and June 27, 2008:
Financing expense and Other Income, Net (in thousands, except percentages) | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Six Months Ended June 30, 2009 (actual, unaudited) | Six Months Ended June 27, 2008 (pro forma, unaudited) | |||||||||||||||||||
Amount | % of Net Revenues | Amount | % of Pro Forma Net Revenues | Increase (Decrease) | % Change | |||||||||||||||
Financing expense, net | $ | 7,990 | 13 | $ | 8,215 | 8 | $ | (225 | ) | (3 | ) | |||||||||
Other income, net | 765 | 1 | 1,361 | 1 | 596 | 44 | ||||||||||||||
Financing expense and other income, net | $ | 7,225 | 12 | $ | 6,854 | 7 | $ | 371 | (5 | ) | ||||||||||
Other income, net for the periods presented represents mainly net gain realized from debt repayments.
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In connection with the Company’s aerospace and defense business, its facility security clearance and trusted foundry status, the Company and Tower are working with the Defense Security Service of the United States Department of Defense (“DSS”) to develop an appropriate structure to mitigate any concern of foreign ownership, control or influence over the operations of the Company specifically relating to protection of classified information and prevention of potential unauthorized access thereto. In order to safeguard classified information, it is expected that the DSS will require adoption of a Special Security Agreement (“SSA”). The SSA may include certain security related restrictions, including restrictions on the composition of the board of directors, the separation of certain employees and operations, as well as restrictions on disclosure of classified information to Tower. The provisions contained in the SSA may also limit the projected synergies and other benefits to be realized from the Merger. There is no assurance when, if at all, an SSA will be reached.
Item 4. | Controls and Procedures. |
Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by this report, our principal executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of the end of the period covered by this report.
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our principal executive officer and our principal financial officer have concluded that these controls and procedures are effective at the “reasonable assurance” level. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II – OTHER INFORMATION
Item 1. | Legal Proceedings |
During 2008, an International Trade Commission (“ITC”) action was filed by Agere/LSI Corporation (“LSI”), which alleged infringement by 17 corporations of LSI’s patent no. 5227335. Following the initial filing, LSI amended the ITC complaint to add the Company, Tower and three other corporations as additional respondents. The Company, Tower and the other three corporations were added as additional respondents in the ITC action in October 2008. The case was tried before an administrative law judge in July 2009, and the decision has not yet been rendered. The Company and Tower cannot provide an estimate of any possible losses or predict the outcome thereof, which could have a material and adverse effect on the company’s and tower’s businesses and financial position.
Item 1A. | Risk Factors |
In addition to the other information contained in this Form 10-Q, you should carefully consider the risk factors associated with our business previously disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. Additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations.
Item 6. | Exhibits. |
Number | Description |
18.1 | Letter re change in accounting policies |
31.1 | CEO Certification required by Rule 13a-14(a) or Rule 15d-14(a). |
31.2 | CFO Certification required by Rule 13a-14(a) or Rule 15d-14(a). |
32 | Section 1350 Certification. (Not provided as not required of voluntary filers) |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: August 14, 2009 | JAZZ TECHNOLOGIES, INC. By: /s/ Rafi Mor —————————————— Rafi Mor (Principal Executive Officer) |
By: /s/ SUSANNA H. BENNETT —————————————— Susanna H. Bennett Chief Financial Officer (Principal Financial and Accounting Officer) |
INDEX TO EXHIBITS
Number | Description |
18.1 | Letter re change in accounting policies |
31.1 | CEO Certification required by Rule 13a-14(a) or Rule 15d-14(a). |
31.2 | CFO Certification required by Rule 13a-14(a) or Rule 15d-14(a). |
32 | Section 1350 Certification. (Not provided as not required of voluntary filers) |
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