UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2011 | |
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 of incorporation) | (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)
_____________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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.
Yes x No o
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).
Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K: Not Applicable
Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer x | Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
Aggregate market value of the common equity held by non-affiliates of the Registrant: Not Applicable
The number of shares outstanding of the registrant’s common stock: 100
DOCUMENTS INCORPORATED BY REFERENCE:
None.
* | Jazz Technologies, Inc. meets the conditions set forth in General Instruction I (1) (a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format. |
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JAZZ TECHNOLOGIES, INC.
FORM 10-K
Year Ended December 31, 2011
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FORWARD-LOOKING STATEMENTS
Some of the information contained or incorporated by reference in this current report constitutes forward-looking statements within the definition of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as “may,” “expect,” “anticipate,” “contemplate,” “believe,” “estimate,” “intends,” and “continue” or similar words. You should read statements that contain these words carefully because they:
· | discuss future expectations; |
· | contain projections of future results of operations or financial condition; or |
· | state other “forward-looking” information. |
We believe it is important to communicate our expectations to our noteholders. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risk factors and cautionary language discussed or incorporated by reference in this current report provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described by us in such forward-looking statements, including among other things:
· | outcomes of government reviews, inquiries, investigations and related litigation; |
· | continued compliance with government regulations; |
· | legislation or regulatory environments, requirements or changes adversely affecting the business in which we are engaged; |
· | fluctuations in customer demand; |
· | management of rapid growth; and |
· | general economic conditions. |
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this current report.
All forward-looking statements included or incorporated herein attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this annual report or to reflect the occurrence of unanticipated events.
You should be aware that the occurrence of the events described in the “Risk Factors” portion of this annual report, the documents incorporated herein and our other SEC filings could have a material adverse effect on our business, prospects, financial condition and operating results.
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Item 1. Business
Overview
Jazz Technologies, Inc., through its wholly owned subsidiaries, is an independent pure-play semiconductor foundry focused on specialty process technologies for the manufacture of analog and mixed-signal semiconductor devices. Typically, pure-play foundries do not offer products of their own, but focus on producing integrated circuits, or ICs, based on the design specifications of their customers. We manufacture semiconductors for our customers primarily based on third party designs and our own process technology and engineering support. We also provide design services and complementary technical services. ICs manufactured by us are incorporated into a wide range of products in diverse markets, including cellular phones, wireless local area networking devices, digital TVs, set-top boxes, gaming devices, switches, routers and broadband modems.
As used in this annual report, “we,” “us,” “our,” “Jazz,” the “Company” and words of similar import refer to Jazz Technologies, Inc. and “Jazz Semiconductor” refers solely to 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 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.
Organization
Jazz Technologies, Inc., formerly known as Acquicor Technology Inc. was incorporated in Delaware in August 2005 as a blank check company for the purpose of acquiring one or more domestic and/or foreign operating businesses in the technology, multimedia or networking sectors.
On February 16, 2007, we completed the acquisition of all of the outstanding capital stock of Jazz Semiconductor. Jazz Semiconductor’s business was originally created in March 2002 by the spin-off by Conexant Systems, Inc. of its Newport Beach, California semiconductor fabrication operations. The acquisition was accounted for under the purchase method of accounting in accordance with United States (U.S.) generally accepted accounting principles for accounting and financial reporting purposes with Jazz Semiconductor being treated as the acquired company. On September 19, 2008, we completed a merger under an Agreement and Plan of Merger and Reorganization (“Merger”) with Tower and its wholly-owned subsidiary under which such subsidiary merged with and into the Company, with the Company surviving the Merger as a wholly-owned subsidiary of Tower.
Under the terms of the Merger, Tower acquired all of our outstanding shares in a stock-for-stock transaction in which each share of the Company’s common stock not held by Tower or its subsidiary was automatically converted into 1.8 ordinary shares of Tower. As a result of the Merger, Tower became the sole 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, with Jazz being treated as the “acquired” company. In connection with this Merger, the Company adopted Tower’s fiscal year for reporting purposes.
As used in this annual report, “we,” “us,” “our,” “Jazz,” the “Company” and words of similar import refer to Jazz Technologies, Inc. and “Jazz Semiconductor” refers solely to Jazz Semiconductor, Inc.. The term “Successor” refers to the Company following the Merger, and the term “Predecessor” refers to the Company prior to the Merger.
Jazz’s Solution
Jazz is an independent semiconductor foundry, providing specialty process technologies, design solutions and application knowledge for the manufacture of analog and mixed-signal semiconductors. Key elements of its solution are as follows:
● | Jazz offers an independent and focused source for the manufacture of semiconductors using specialty process technologies. Most other independent foundries focus on standard process technologies, rather than specialty process technologies. Some vertically integrated semiconductor companies who internally design, fabricate, package, test and market their own semiconductors, known as integrated device manufacturers, or IDMs, offer specialty process foundry services but also manufacture their own semiconductor products, which may be competitive with the products of their potential customers who seek these services. Jazz combines the benefits of independence with a focus on specialty process technologies. |
● | Jazz offers a specialized design platform for analog and mixed-signal semiconductors. Jazz’s design engineering support team assists its customers with their advanced designs by leveraging Jazz’s application knowledge and experience to help guide their technology selection and design implementation. Jazz’s sophisticated design tools and services are specifically tailored to meet analog and mixed-signal design needs, and include specialized device modeling and characterization features that allow simulation of a variety of real world situations, including different temperatures, power levels and speeds. |
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● | Jazz offers a broad range of specialty process technologies. Jazz’s specialty process technology portfolio includes advanced analog CMOS, RF CMOS, high voltage CMOS, BiCMOS and SiGe BiCMOS processes. In addition to these specialty process technologies, we have recently begun to offer BCD processes optimized for analog semiconductors such as power management, high efficiency audio amplification, and optical driver integrated circuits. The breadth of Jazz’s portfolio allows it to offer its customers a wide range of solutions to address their high-performance, high-density, low-power and low-noise requirements for analog and mixed-signal semiconductors. |
● | Jazz is a leader in high-performance SiGe process technologies. Jazz offers high performance 200 GHz 0.18 micron SiGe BiCMOS technology, which Jazz believes is one of the most advanced SiGe process technologies in production today. Analog and mixed-signal semiconductors manufactured with SiGe BiCMOS process technologies can be smaller, require less power and provide higher performance than those manufactured with standard CMOS processes. Moreover, SiGe BiCMOS process technologies allow for higher levels of integration of analog and digital functions on the same mixed-signal semiconductor device. |
Jazz’s Strategy
Key elements of Jazz’s strategy are as follows:
● | Further strengthen Jazz’s position in specialty process technologies for the manufacture of analog and mixed-signal semiconductors. Jazz is continuing to invest in its portfolio of specialty process technologies to address the key product attributes that make its customers’ products more competitive. |
● | Target large, growing and diversified end markets. Jazz targets end markets characterized by high growth and high performance for which it believes its specialty process technologies have a high value proposition, including the wireless and high-speed wireline communications, consumer electronics, automotive and industrial markets. For example, Jazz believes that its specialty process technologies can provide performance and cost advantages over current CMOS solutions in the integration of power amplifiers with RF transceivers for wireless local area networking applications. |
● | Continue to diversify Jazz’s customer base. Jazz intends to continue to grow and diversify its business by attracting new customers and expanding its customer base. |
● | Maintain capital efficiency by leveraging its capacity and manufacturing model. Jazz seeks to maximize the utilization of its Newport Beach, California manufacturing facility to maintain cost-effective manufacturing. Jazz can typically increase its specialty process technology capacity and meet its customer performance requirements using adapted semiconductor process equipment sets that are typically one or two generations behind leading-edge digital CMOS process equipment. This typically allows Jazz to acquire lower-cost semiconductor process equipment to operate its Newport Beach, California fab. |
● | Leverage potential synergies from the merger with Tower. Since the merger with Tower, we have sought to leverage potential synergies by utilizing our combined purchasing power to negotiate more favorable pricing terms for goods and services, consolidating personnel and sharing services in areas including sales, marketing, research and developing, legal, human resources and utilization of key executives. |
Jazz’s Specialty Process Technologies
Jazz refers to its digital CMOS and standard analog CMOS process technologies as standard process technologies, and offers these standard process technologies in 0.5 micron, 0.35 micron, 0.25 micron, 0.18 micron and 0.13 micron.
Jazz refers to its advanced analog CMOS, RF CMOS, high voltage CMOS, BiCMOS, SiGe BiCMOS and BCD process technologies, as specialty process technologies. Most of Jazz’s specialty process technologies are based on CMOS processes with added features to enable improved size, performance and cost characteristics for analog and mixed-signal semiconductors. Products made with Jazz’s specialty process technologies are typically more complex to manufacture than products made using standard process technologies employing similar line widths. Generally, customers who use Jazz’s specialty process technologies cannot easily move designs to another foundry because the analog characteristics of the design are dependent upon its implementation of the applicable process technology. The relatively small engineering community with specialty process know-how has also limited the number of foundries capable of offering specialty process technologies. In addition, the specialty process design infrastructure is complex and includes design kits and device models that are specific to the foundry in which the process is implemented and to the process technology itself.
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Jazz’s advanced analog CMOS process technologies have more features than standard analog CMOS process technologies and are well suited for higher performance or more highly integrated analog and mixed-signal semiconductors, such as high-speed analog-to-digital or digital-to-analog converters and mixed-signal semiconductors with integrated data converters. These process technologies generally incorporate higher density passive components, such as capacitors and resistors, as well as improved active components, such as native or low voltage devices, and improved isolation techniques, into standard analog CMOS process technologies. Jazz currently has advanced analog CMOS process technologies in 0.5 micron, 0.35 micron, 0.25 micron, 0.18 micron and 0.13 micron. These advanced analog CMOS processes form the baseline for Jazz’s other specialty process technologies.
Jazz’s RF CMOS process technologies have more features than advanced analog CMOS process technologies and are well suited for wireless semiconductors, such as highly integrated wireless transceivers, power amplifiers, and television tuners. These process technologies generally incorporate integrated inductors, high performance variable capacitors, or varactors, and RF laterally diffused metal oxide semiconductors into an advanced analog CMOS process technology. In addition to the process features, Jazz’s RF offering includes design kits with RF models, device simulation and physical layouts tailored specifically for RF performance. Jazz currently has RF CMOS process technologies in 0.25 micron, 0.18 micron and 0.13 micron. These RF CMOS process technologies form the baseline for some of Jazz’s other specialty process technologies.
Jazz’s high voltage CMOS and BCD process technologies have more features than advanced analog CMOS processes and are well suited for power and driver semiconductors such as voltage regulators, battery chargers, power management products and audio amplifiers. These process technologies generally incorporate higher voltage CMOS devices such as 5V, 8V, 12V and 40V devices, and, in the case of BCD, bipolar devices, into an advanced analog CMOS process. Jazz currently has high voltage CMOS offerings in 0.5 micron, 0.35 micron, 0.25 micron and 0.18 micron, and BCD offerings in 0.5 micron. Jazz also offers high voltage options that include a 0.35 micron BCD process technology and 40V capabilities to enable higher levels of analog integration at voltage ranges that are suitable for automotive electronics and line power conditioning for consumer devices.
Jazz’s BiCMOS process technologies have more features than RF CMOS process technologies and are well suited for RF semiconductors such as wireless transceivers and television tuners. These process technologies generally incorporate high-speed bipolar transistors into an RF CMOS process. The equipment requirements for BiCMOS manufacturing are specialized and require enhanced tool capabilities to achieve high yield manufacturing. Jazz currently has BiCMOS process technologies in 0.35 micron.
Jazz’s SiGe BiCMOS process technologies have more features than BiCMOS processes and are well suited for more advanced RF semiconductors such as high-speed, low noise, highly integrated multi-band wireless transceivers, television tuners and power amplifiers. These process technologies generally incorporate a silicon germanium bipolar transistor, which is formed by the deposition of a thin layer of silicon germanium within a bipolar transistor. It is also possible to achieve higher speeds using SiGe BiCMOS process technologies equivalent to those demonstrated in standard CMOS processes that are two process generations smaller in line-width. For example, a 0.18 micron SiGe BiCMOS process is able to achieve speeds comparable to a 90 nanometer RF CMOS process. As a result, SiGe BiCMOS makes it possible to create analog products using a larger geometry process technology at a lower cost while achieving similar or superior performance to that achieved using a smaller geometry standard CMOS process technology. The equipment requirements for SiGe BiCMOS manufacturing are similar to the specialized equipment requirements for BiCMOS. We have developed enhanced tool capabilities in conjunction with large semiconductor tool suppliers to achieve high yield SiGe manufacturing. Jazz believes this equipment and related process expertise makes Jazz one of the few silicon manufacturers with demonstrated ability to deliver SiGe BiCMOS products. Jazz currently has SiGe BiCMOS process technologies at 0.35 micron and 0.18 micron and 0.13 micron SiGe BiCMOS process.
Jazz also has technologies that integrate micro-electro-mechanical-system (MEMS) devices with CMOS.
Jazz continues to invest in technology that helps improve the performance and integration level and reduce the cost of analog and mixed-signal products. This includes improving the density of passive elements such as capacitors and inductors, improving the analog performance and voltage handling capability of active devices, and integrating advanced features in Jazz’s specialty CMOS processes that are currently not readily available. Examples of such features currently under development include adding silicon-on-insulator (SOI) substrates to enable increased integration of RF and analog functions on a single die and scaling the features Jazz offers today in 0.18 micron to the 0.13 micron process technology.
Manufacturing
We have placed significant emphasis on achieving and maintaining a high standard of manufacturing quality. Jazz seeks to enhance its production capacity for its high-demand specialty process technologies and to design and implement manufacturing processes that produce consistently high manufacturing yields. Jazz’s production capacity in each of its specialty process technologies enables Jazz to provide its customers with volume production, flexibility and quick-to-market manufacturing services. Jazz’s process research and development is performed in its manufacturing facility in Newport Beach, California and in a design center in Netanya, Israel.
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General
Jazz currently has the capability in its Newport Beach, California fab to manufacture standard CMOS as well as specialty eight-inch wafers. We have the ability to rapidly change the mix of production processes in use in order to respond to changing customer needs and maximize utilization of the fab.
Raw Materials
Jazz’s manufacturing processes use highly specialized materials, including semiconductor wafers, chemicals, gases and photomasks. These raw materials are generally available from several suppliers. However, Jazz often selects one vendor to provide it with a particular type of material in order to obtain preferred pricing. In those cases, Jazz generally also seeks to identify, and in some cases qualify, alternative sources of supply.
We have agreements with several key material suppliers under which they hold certain levels of inventory at Jazz’s warehouse and fab. Jazz is not under any obligation under these agreements to purchase raw material inventory that is held by its vendors at its site until Jazz actually uses it, unless Jazz holds the inventory beyond specified time limits.
Jazz’s Services
Jazz primarily manufactures semiconductor wafers for its customers.
The processes required to take raw wafers and turn them into finished semiconductor devices are generally accomplished through circuit design, mask making, wafer fabrication, probe, assembly and test.
Sales Contracts
A few of Jazz’s major customers purchase services and products from it on a contract basis. Most other customers purchase from Jazz using purchase orders. Jazz prices its products for these customers on a per wafer or per die basis, taking into account the complexity of the technology, the prevailing market conditions, volume forecasts, the strength and history of its relationship with the customer and its current capacity utilization.
Most of its customers usually place their orders only two to four months before shipment; however a few of its major customers are obligated to provide Jazz with longer forecasts of their wafer needs.
Customers, Markets and Applications
Jazz’s customers use Jazz’s processes to design and market a broad range of digital, analog and mixed-signal semiconductors for diverse end markets including wireless and high-speed wireline communications, consumer electronics, automotive and industrial. Jazz manufactures products that are used for high-performance applications such as transceivers and power management for cellular phones; transceivers and power amplifiers for wireless local area networking products; power management, audio amplifiers and driver integrated circuits for consumer electronics; tuners for digital televisions and set-top boxes; modem chipsets for broadband access devices and gaming devices; serializer/deserializers, or SerDes, for fiber optic transceivers; focal plan arrays for imaging applications; and wireline interfaces for switches and routers.
Order Backlog
All of Jazz’s orders are subject to possible rescheduling by its customers. Rescheduling may relate to quantities or delivery dates, and sometimes relates to the specifications of the products it is shipping. Most customers do business with Jazz on a purchase order basis, and some of these orders may be cancelled by the customer without penalty. Jazz also may elect to permit cancellation of orders without penalty where management believes it is in its best interests to do so. Consequently, Jazz cannot be certain that orders on backlog will be shipped when expected or at all. For these reasons, as well as the cyclical nature of its industry, Jazz believes that its backlog at any given date is not a reliable indicator of its future revenues.
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Competition
Jazz competes internationally and domestically with dedicated foundry service providers such as Taiwan Semiconductor Manufacturing Company, United Microelectronics Corporation, Semiconductor Manufacturing International Corporation and Chartered Semiconductor Manufacturing Ltd., which, in addition to providing leading edge CMOS process technologies, also have capacity for some specialty process technologies. Jazz also competes with integrated device manufacturers that have internal semiconductor manufacturing capacity or foundry operations, such as IBM. In addition, several new dedicated foundries have commenced operations and may compete directly with Jazz. Many of Jazz’s competitors have higher capacity, longer operating history, longer or more established relationships with their customers, superior research and development capability and greater financial and marketing resources than Jazz. As a result, these companies may be able to compete more aggressively over a longer period of time than Jazz.
IBM competes in both the standard CMOS segment and in specialty process technologies. In addition, there are a number of smaller participants in the specialty process arena. Jazz believes that most of the large dedicated foundry service providers compete primarily in the standard CMOS segment, but they also have capacity for specialty process technologies. Prior to Jazz’s separation from Conexant, Conexant entered into a long-term licensing agreement with Taiwan Semiconductor Manufacturing Company under which Taiwan Semiconductor Manufacturing Company licensed from Conexant the right to manufacture semiconductors using Conexant’s then existing 0.18 micron or greater SiGe BiCMOS process technologies. Taiwan Semiconductor Manufacturing Company publicly announced in 2001 that it planned to use the licensed technology to accelerate its own foundry processes for the networking and wireless communications markets. Since Jazz’s formation, We have continued to make improvements in its SiGe BiCMOS process technology. We have not licensed any of these improvements to Taiwan Semiconductor Manufacturing Company. In the event Taiwan Semiconductor Manufacturing Company determines to focus its business on the SiGe BiCMOS market, it may use and develop the technology licensed to it in 2001 to compete directly with Jazz in the specialty market, and such competition may harm Jazz’s business.
As Jazz’s competitors continue to increase their manufacturing capacity, there could be an increase in specialty semiconductor capacity during the next several years. As specialty capacity increases there may be more competition and pricing pressure on Jazz’s services, and underutilization of its capacity may result. Any significant increase in competition or pricing pressure may erode its profit margins, weaken Jazz’s earnings or increase its losses.
Additionally, some semiconductor companies have advanced their CMOS designs to 90 nanometers or smaller geometries. These smaller geometries may provide the customer with performance and integration features that may be comparable to, or exceed, features offered by Jazz’s specialty process technologies, and may be more cost-effective at higher production volumes for certain applications, such as when a large amount of digital content is required in a mixed-signal semiconductor and less analog content is required. Jazz’s specialty process technologies will therefore compete with these advanced CMOS processes for customers and some of its potential and existing customers could elect to design these advanced CMOS processes into their next generation products. Jazz is not currently capable, and does not currently plan to become capable, of providing CMOS processes at these smaller geometries. If Jazz’s existing customers or new customers choose to design their products using these CMOS processes, Jazz’s business may suffer.
The principal elements of competition in the semiconductor foundry industry include:
· | technical competence; |
· | production speed and cycle time; |
· | time-to-market; |
· | research and development quality; |
· | available capacity; |
· | fab and manufacturing yields; |
· | customer service; |
· | price; |
· | management expertise; and |
· | strategic relationships. |
There can be no assurance that Jazz will be able to compete effectively on the basis of all or any of these elements. Jazz’s ability to compete successfully may depend to some extent on factors outside of its control, including industry and general economic trends, import and export controls, exchange controls, exchange rate fluctuations, interest rate fluctuations and political developments. If Jazz cannot compete successfully in its industry, its business and results of operations will be harmed.
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Research and Development
The semiconductor industry is characterized by rapid changes in technology. As a result, effective research and development is essential to Jazz’s success. Jazz plans to continue to invest significantly in research and development activities to develop advanced process technologies for new applications.
Jazz’s research and development activities seek to upgrade and integrate manufacturing technologies and processes. Jazz maintains a central research and development team primarily responsible for developing cost-effective technologies that can serve the manufacturing needs of its customers. A substantial portion of Jazz’s research and development activities are undertaken in cooperation with its customers and equipment vendors.
Intellectual Property
Jazz’s success depends in part on its ability to obtain patents, licenses and other intellectual property rights covering and relating to wafer manufacturing and production processes, semiconductor structures and other structures fabricated on wafers. To that end, We have acquired certain patents and patent licenses and intends to continue to seek patents. As of December 31, 2011, Jazz had 140 patents in force in the United States and 28 patents in force in foreign countries. Jazz also had 9 pending patent applications in the United States, 2 pending patent applications in foreign countries and no patent pending applications under the Patent Cooperation Treaty.
Jazz Semiconductor entered into a technology license agreement that grants to it worldwide perpetual license rights from PolarFab regarding certain process technologies that it intends to incorporate into its BCD process technologies for the manufacture of wafers by Jazz for its customers and customers of PolarFab. Jazz also entered into an associated technology transfer agreement for such processes. Jazz is able to adapt, prepare derivatives based on, or otherwise exploit the licensed technology; however, Jazz is restricted from using certain licensed BCD process technologies with respect to motor controllers for hard disk drives. Jazz is also able to sublicense the process technologies to any of its future manufacturing suppliers to manufacture for Jazz and its customers.
During 2004, Jazz Semiconductor entered into a cross license and release agreement with an unrelated third party. The license includes technology developed by the third party related to Jazz’s manufacturing process. In exchange for the license and release, Jazz agreed to make certain payments through 2007. During 2011, Jazz’s parent Tower entered into a cross license and release agreement with an unrelated third party under which some Jazz patents were licensed to the third party and Jazz received a license to some of the third party’s patents. Jazz may choose to obtain additional patent licenses or enter into additional patent cross-licenses in the future. However, there can be no assurance as to whether future agreements will be reached or as to the terms of any agreement that is consummated.
In connection with Jazz Semiconductor’s separation from Conexant, Conexant contributed to Jazz Semiconductor a substantial portion of its intellectual property, including software licenses, patents and intellectual property rights in know-how related to its business. Jazz Semiconductor agreed to license intellectual property rights relating to the intellectual property contributed to Jazz Semiconductor by Conexant back to Conexant and its affiliates. Conexant may use this license to have Conexant products produced by third-party manufacturers and to sell such products, but must obtain Jazz Semiconductor’s prior consent to sublicense these rights.
Jazz’s ability to compete depends on its ability to operate without infringing the proprietary rights of others. The semiconductor industry is generally characterized by frequent litigation regarding patent and other intellectual property rights. As is the case with many companies in the semiconductor industry. We have from time to time received communications from third parties asserting that their patents cover certain of Jazz’s technologies or alleging infringement of their other intellectual property rights. Jazz expects that it will receive similar communications in the future. Irrespective of the validity or the successful assertion of such claims, Jazz could incur significant costs and devote significant management resources to the defense of these claims, which could seriously harm the Company.
Environmental Matters
Semiconductor manufacturing processes generate solid, gaseous, liquid and other industrial wastes in various stages of the manufacturing process. We have installed various types of pollution control equipment in our fab to reduce, treat and, where feasible, recycle the wastes generated in our manufacturing process. Jazz’s operations are subject to strict regulation and periodic monitoring by the United States Environmental Protection Agency along with several state and local environmental agencies.
We have implemented an environmental management system that assists Jazz in identifying applicable environmental regulations, evaluating compliance status and establishing timely waste preventive measures. We have also obtained certification for implementing the standard requirements of ISO 14001:2004. ISO 14001 consists of a set of standards that provide guidance to the management of organizations to achieve an effective environmental management system.
Jazz believes that it has adopted pollution measures for the effective maintenance of environmental protection standards substantially consistent with U.S. federal, state and local environmental regulations. Jazz also believes that it is currently in material compliance with applicable environmental laws and regulations.
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Risk Management and Insurance
As part of its risk management program, Jazz surveyed its buildings and fab for resistance to potential earthquake damage. As a result of this survey, Jazz implemented additional measures to minimize its fab’s exposure to potential damage caused by future earthquakes and seismically qualified its fab for a high magnitude earthquake.
Jazz maintains industrial special risk insurance for its facilities, equipment and inventories that covers physical damage and consequential losses from natural disasters and certain other risks up to the policy limits and except for exclusions as defined in the policies. Jazz also maintains public liability insurance for losses to others arising from its business operations and carries insurance for business interruption resulting from such events and if its suppliers are unable to provide Jazz with supplies. While Jazz believes that its insurance coverage is adequate and consistent with industry practice, significant damage to any of its or its manufacturing suppliers’ production facilities, whether as a result of fire or other causes, could seriously harm its business and results of operations.
Properties
Our headquarters and manufacturing facilities are located in Newport Beach, California. Since 2002, the Company has leased its fabrication facilities, land and headquarters from Conexant. In December 2010, Conexant sold the Company’s fabrication facilities, land and headquarters to Uptown Newport LP (“Uptown”), a joint venture consisting of a fund controlled by New York-based DRA Advisors LLC and an affiliate of the Shopoff Group, a real estate investment firm based in Irvine, California. The leases are non-cancelable operating leases that expire March 12, 2017, and we have the unilateral option to extend the terms of each of these leases for two consecutive five-year periods. Under our amended leases with Uptown, the landlord may terminate the lease for the Company’s headquarters building, but not the Company’s fabrication facility, no earlier than January 2014. If Uptown terminates the lease for the Company’s headquarters building, it is obligated to pay the Company a lease termination fee equal to $3,000,000 if the lease is terminated in January 2014, with the lease termination fee declining by $22,000 per month if Uptown terminates the headquarters building lease after January 2014.
Item 1A. Risk factors
We have a large amount of debt which may have significant negative consequences, and there is no assurance that we will be able to obtain sufficient funding sources in a timely manner to allow us to fully or partially repay our debt obligations and other liabilities.
Our indebtedness as of December 31, 2011 are approximately $108.9 million, comprised of approximately $93.6 million par value of notes due December 2015 and $15.3 million borrowing under the Wachovia line of credit. Said indebtedness could have significant negative consequences, including:
· | requiring the dedication of a substantial portion of our expected cash flow from operations to service our indebtedness; |
· | increasing our vulnerability to general adverse economic and industry conditions; |
· | limiting our ability to obtain additional financing; |
· | limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; |
· | placing us at a competitive disadvantage to less leveraged competitors and competitors that have better access to capital resources; |
· | affecting our ability to make interest payments and other required debt service on our indebtedness; |
· | enforcement by the lenders under the Wachovia line of credit of their liens against our assets in the event of default; and/or |
· | limiting our ability to fulfill our debt obligations and other liabilities |
7
To service our indebtedness and meet our other cash needs, we will require a significant amount of cash, which may not be available to us. We will need to repay $93.6 million outstanding under our non-convertible notes on June 30, 2015 and $15.3 million borrowing under the Wachovia line of credit by September 2014. Our ability to make payments on, or repay or refinance, our indebtedness and to fund capital expenditures, working capital and other cash needs will depend largely upon our future operating performance and our ability to drawdown additional funds, if required, from Wachovia. Our future operating performance, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations, that future borrowings will be available to us under the credit facilities or from other sources in an amount and on terms and conditions sufficient to enable us to make payments on our indebtedness or to fund our other liquidity needs. In order to finance our short and long-term debt and other liabilities and obligations, we continue to explore measures to obtain funds from sources in addition to cash on hand and expected cash flow from our ongoing operations, including sales of assets; issuance of new securities; intellectual property licensing; improving operational efficiencies and sales; and exploring other alternatives to reduce our debt, including debt refinancing or restructuring. The Wachovia line of credit imposes certain limitations on our ability to repay the notes and/or to incur additional indebtedness without Wachovia’s consent. If we default on payment of the notes at maturity, such default would trigger a cross default under the Wachovia line of credit, which would permit the lenders to accelerate the obligations thereunder, potentially requiring us to repay or refinance the Wachovia credit line. There is no assurance that we will be able to obtain sufficient funding from the financing sources detailed above or other sources in a timely manner to allow us to fully or partially repay our indebtedness.
A default by us on any of our indebtedness could have a material adverse effect on our operations and the interests of our creditors, and may affect our ability to fulfill our debt obligations and other liabilities.
If we are unable to manage fluctuations in cash flow, our business, operating results and financial condition may be materially adversely affected.
Our working capital requirements and cash flows are subject to quarterly and yearly fluctuations, depending on a number of factors. If we are unable to manage fluctuations in cash flow, our business, operating results and financial condition may be materially adversely affected. Factors which could lead us to suffer cash flow fluctuations include:
· | the level of revenues from our operating activities; |
· | the collection of receivables; |
· | the timing and size of capital expenditures; and |
· | the debt service obligations under our short-term and long-term liabilities. |
In addition, we may need to devote a significant portion of our operating cash flow to pay principal and interest on our indebtedness. The use of cash to finance our indebtedness could leave us with insufficient funds to adequately finance our operating activities and capital expenditures, which could adversely affect our business.
The cyclical nature of the semiconductor industry and resulting periodic overcapacity may lead to erosion of sale prices; downward price pressure may seriously harm our business.
The semiconductor industry has historically been highly cyclical. Historically, companies in the semiconductor industry have expanded aggressively during periods of increased demand. This expansion has frequently resulted in overcapacity and excess inventories when demand decreases during a downturn, leading to rapid erosion of average sale prices. We expect this pattern to repeat itself in the future. The overcapacity and downward price pressure characteristic of a prolonged downturn in the semiconductor market may not allow us to operate at a profit, even at full utilization, and could seriously harm our financial results and business.
The lack of a significant backlog resulting from our customers not placing purchase orders far in advance makes it difficult for us to forecast our revenues in future periods.
Our customers generally do not place purchase orders far in advance, partly due to the cyclical nature of the semiconductor industry. As a result, we do not typically operate with any significant backlog. The lack of a significant backlog makes it difficult for us to forecast our revenues in future periods. Moreover, since our expense levels are based in part on our expectations of future revenues, we may be unable to adjust costs in a timely manner to compensate for revenue shortfalls. We expect that in the future our revenues in any quarter will continue to be substantially dependent upon purchase orders received in that quarter and in the immediately preceding quarter. We cannot assure you that any of our customers will continue to place orders with us in the future at the same levels as in prior periods. If orders received from our customers differ adversely from our expectations with respect to the product, volume, price or other items, our operating results and financial condition may be adversely affected.
8
We occasionally manufacture wafers based on forecasted demand, rather than actual orders from customers. If our forecasted demand exceeds actual demand, we may have obsolete inventory, which could have a negative impact on our results of operations.
We generally do not manufacture wafers unless we receive a customer purchase order. On occasion, we may produce wafers in excess of customer orders based on forecasted customer demand, because we may forecast future excess demand or because of future capacity constraints. If we manufacture more wafers than are actually ordered by customers, we may be left with excess inventory that may ultimately become obsolete and must be scrapped when it cannot be sold. Significant amounts of obsolete inventory could have a negative impact on our results of operations.
We have a history of operating losses and may not be able to achieve or maintain profitability on a consistent basis.
While we have achieved net income for some quarters in recent years, prior to the second half of 2009 we predominantly incurred net losses in our reported results of operations and we may incur net losses in the future. We cannot assure you that we will be profitable on a quarterly or annual basis in the future.
Our sales cycles are typically long and orders received may not meet our expectations, which may adversely affect our operating results.
Our sales cycles, which we measure from first contact with a customer to first shipment of a product ordered by the customer, vary substantially and may last as long as two years or more, particularly for new technologies. In addition, even after we make initial shipments of prototype products, it may take several more months to reach full production of the product. As a result of these long sales cycles, we may be required to invest substantial time and incur significant expenses in advance of the receipt of any product order and related revenue. If orders ultimately received differ from our expectations with respect to the product, volume, price or other items, our operating results and financial condition may be adversely affected.
Demand for our foundry services is dependent on the demand in our customers’ end markets.
In order for demand for our wafer fabrication services to increase, the markets for the end products using these services must develop and expand. Because our services may be used in many new applications, it is difficult to forecast demand. If demand is lower than expected, we may have excess capacity, which may adversely affect our financial results. If demand is higher than expected, we may be unable to fill all of the orders we receive, which may result in the loss of customers and revenue.
If we do not maintain our current customers and attract additional customers, our business may be adversely affected.
Collectively, our top two customers accounted for 27% of our revenues in 2011. We expect to continue to receive a significant portion of our revenue from a limited number of customers for the foreseeable future. Loss or cancellation of business from, or decreases in the sales volume or sales prices to, our significant customers, or our failure to replace them with other customers, could seriously harm our financial results, revenue and business. Since the sales cycle for our services typically exceeds one year, if our customers order significantly fewer wafers than forecasted, we will have excess capacity that we may not be able to fill within a short period of time, resulting in lower utilization of our facilities. We may have to reduce prices in order to try to sell more wafers in order to utilize the excess capacity. In addition to the revenue loss that could result from unused capacity or lower sales prices, we might have difficulty adjusting our costs to reflect the lower revenue in a timely manner, which could harm our financial results.
If we do not maintain and develop our technology processes and services, we will lose customers and may be unable to attract new ones.
The semiconductor market is characterized by rapid change, including the following:
· | rapid technological developments; |
· | evolving industry standards; |
· | changes in customer and product end user requirements; |
· | frequent new product introductions and enhancements; and |
· | short product life cycles with declining prices as products mature. |
Our ability to maintain our current customer base and attract new customers is dependent in part on our ability to continuously develop and introduce to production advanced specialized manufacturing process technologies and purchase the appropriate equipment. If we are unable to successfully develop and introduce these processes to production in a timely manner or at all, or if we are unable to purchase the appropriate equipment required for such processes, we may be unable to maintain our current customer base and may be unable to attract new customers.
9
The semiconductor foundry business is highly competitive; our competitors may have competitive advantages over us.
The semiconductor foundry industry is highly competitive. We compete with more than ten independent dedicated foundries, the majority of which are located in Asia-Pacific, including foundries based in Taiwan, China, Korea and Malaysia, and with over 20 integrated semiconductor and end-product manufacturers that allocate a portion of their manufacturing capacity to foundry operations. The foundries with which we compete benefit from their close proximity to other companies involved in the design and manufacture of integrated circuits, or ICs.
As our competitors continue to increase their manufacturing capacity, there could be an increase in specialty semiconductor capacity during the next several years. As specialty capacity increases there may be more competition and pricing pressure on our services, and underutilization of our capacity may result. Any significant increase in competition or pricing pressure may erode our profit margins, weaken our earnings or increase our losses.
In addition, some semiconductor companies have advanced their CMOS designs to 90 nanometer, 65 nanometer or smaller geometries. These smaller geometries may provide the customer with performance and integration features that may be comparable to, or exceed, features offered by our specialty process technologies, and may be more cost-effective at higher production volumes for certain applications, such as when a large amount of digital content is required in a mixed-signal semiconductor and less analog content is required. Our specialty processes will therefore compete with these processes for customers and some of our potential and existing customers could elect to design these advanced CMOS processes into their next generation products. We are not currently capable, and do not currently plan to become capable, of providing CMOS processes at these smaller geometries. If our potential or existing customers choose to design their products using these advanced CMOS processes, our business may suffer.
In addition, many of our competitors may have one or more of the following competitive advantages over us:
· | greater manufacturing capacity; |
· | multiple and more advanced manufacturing facilities; |
· | more advanced technological capabilities; |
· | a more diverse and established customer base; |
· | greater financial, marketing, distribution and other resources; |
· | a better cost structure; and/or |
· | better operational performance in cycle time and yields. |
If we do not compete effectively, our business and results of operations may be adversely affected.
If we experience difficulty in achieving acceptable device yields, product performance and delivery times as a result of manufacturing problems, our business could be seriously harmed.
The process technology for the manufacture of semiconductor wafers is highly complex, requires advanced and costly equipment and is constantly being modified in an effort to improve device yields, product performance and delivery times. Microscopic impurities such as dust and other contaminants, difficulties in the production process, defects in the key materials and tools used to manufacture a wafer and other factors can cause wafers to be rejected or individual semiconductors on specific wafers to be non-functional. We may experience difficulty achieving acceptable device yields, product performance and product delivery times in the future as a result of manufacturing problems. Any of these problems could seriously harm our operating results, financial condition and ability to maintain our operations.
If we are unable to purchase equipment and raw materials, we may not be able to manufacture our products in a timely fashion, which may result in a loss of existing and potential new customers.
To increase the production capability of our facility and to maintain the quality of production in our facility, we must procure additional equipment. In periods of high market demand, the lead times from order to delivery of manufacturing equipment could be as long as 12 to 18 months. In addition, our manufacturing processes use many raw materials, including silicon wafers, chemicals, gases and various metals, and require large amounts of fresh water and electricity. Manufacturing equipment and raw materials generally are available from several suppliers. In many instances, however, we purchase equipment and raw materials from a single source. Shortages in supplies of manufacturing equipment and raw materials could occur due to an interruption of supply or increased industry demand. Any such shortages could result in production delays that could result in a loss of existing and potential new customers. This may have a material adverse effect on our business and financial condition.
10
We depend on intellectual property rights of third parties and failure to maintain or acquire licenses could harm our business.
We depend on third party intellectual property in order for us to provide certain foundry and design services to our clients. If problems or delays arise with respect to the timely development, quality and provision of such intellectual property to us, the design and production of our customers’ products could be delayed, resulting in underutilization of our capacity. If any of our third party intellectual property vendors goes out of business, liquidates, merges with, or is acquired by, another company that discontinues the vendor’s previous line of business, or if we fail to maintain or acquire licenses to such intellectual property for any other reason, our business may be adversely affected. In addition, license fees and royalties payable under these agreements may impact our margins and operating results.
Failure to comply with the intellectual property rights of third parties or to defend our intellectual property rights could harm our business.
Our ability to compete successfully depends on our ability to operate without infringing on the proprietary rights of others and defending our intellectual property rights. Because of the complexity of the technologies used and the multitude of patents, copyrights and other overlapping intellectual property rights, it is often difficult for semiconductor companies to determine infringement. Therefore, the semiconductor industry is characterized by frequent litigation regarding patents, trade secrets and other intellectual property rights. We have been subject to intellectual property claims from time to time, some of which have been resolved through license agreements, the terms of which have not had a material effect on our business.
Because of the nature of the industry, we may continue to be a party to infringement claims in the future. In the event any third party were to assert infringement claims against us or our customers, we may have to consider alternatives including, but not limited to:
· | negotiating cross-license agreements; |
· | seeking to acquire licenses to the allegedly infringed patents, which may not be available on commercially reasonable terms, if at all; |
· | discontinuing use of certain process technologies, architectures, or designs, which could cause us to stop manufacturing certain integrated circuits if we were unable to design around the allegedly infringed patents; |
· | fighting the matter in court and paying substantial monetary damages in the event we lose; or |
· | seeking to develop non-infringing technologies, which may not be feasible. |
Any one or several of these alternatives could place substantial financial and administrative burdens on us and hinder our business. Litigation, which could result in substantial costs to us and diversion of our resources, may also be necessary to enforce our patents or other intellectual property rights or to defend us or our customers against claimed infringement of the rights of others. If we fail to obtain certain licenses or if litigation relating to alleged patent infringement or other intellectual property matters occurs, it could prevent us from manufacturing particular products or applying particular technologies, which could reduce our opportunities to generate revenues.
As of December 31, 2011, we had 140 patents in force in the United States and 28 patents in force in foreign countries. We also had 9 pending patent applications in the United States, 2 pending patent applications in foreign countries and no patent pending applications under the Patent Cooperation Treaty. We intend to continue to file patent applications when appropriate. The process of seeking patent protection may take a long time and be expensive. We cannot assure you that patents will be issued from pending or future applications or that, if patents are issued, they will not be challenged, invalidated or circumvented or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage. In addition, we cannot assure you that other countries in which we market our services and products will protect our intellectual property rights to the same extent as the United States. Further, we cannot assure you that we will at all times enforce our patents or other intellectual property rights or that courts will uphold our intellectual property rights, or enforce the contractual arrangements that we have entered into to protect our proprietary technology, which could reduce our opportunities to generate revenues.
Effective intellectual property enforcement may be unavailable or limited in some foreign countries. It may be difficult for us to protect our intellectual property from misuse or infringement by other companies in these countries. Our inability to enforce our intellectual property rights in some countries may harm our business and results of operations.
11
We could be seriously harmed by failure to comply with environmental regulations.
Our business is subject to a variety of federal, state and local laws and governmental regulations relating to the use, discharge and disposal of toxic or otherwise hazardous materials used in our production processes. If we fail to use, discharge or dispose of hazardous materials appropriately, or if applicable environmental laws or regulations change in the future, we could be subject to substantial liability or could be required to suspend or adversely modify our manufacturing operations.
We are subject to the risk of loss due to fire because the materials we use in our manufacturing processes are highly flammable.
We use highly flammable materials such as silane and hydrogen in our manufacturing processes and are therefore subject to the risk of loss arising from fires. The risk of fire associated with these materials cannot be completely eliminated. We maintain insurance policies to reduce potential losses that may be caused by fire, including business interruption insurance. If our fab was to be damaged or cease operations as a result of a fire, and if our insurance proves to be inadequate, it may reduce our manufacturing capacity and revenues.
Possible product returns could harm our business.
Products manufactured by us may be returned within specified periods if they are defective or otherwise fail to meet customers’ prior agreed upon specifications. Product returns in excess of established provisions, if any, may have an adverse effect on our business and financial condition.
We are subject to risks related to our international operations.
We have made substantial revenue from customers located in Asia-Pacific and in Europe. Because of our international operations, we are vulnerable to the following risks:
· | we price our products primarily in US dollars; if the Euro, Yen or other currencies weaken relative to the US dollar, our products may be relatively more expensive in these regions, which could result in a decrease in our revenue; |
· | the burdens and costs of compliance with foreign government regulation, as well as compliance with a variety of foreign laws; |
· | general geopolitical risks such as political and economic instability, international terrorism, potential hostilities and changes in diplomatic and trade relationships; |
· | natural disasters affecting the countries in which we conduct our business; |
· | imposition of regulatory requirements, tariffs, import and export restrictions and other trade barriers and restrictions including the timing and availability of export licenses and permits; |
· | adverse tax rules and regulations; |
· | weak protection of our intellectual property rights; |
· | delays in product shipments due to local customs restrictions; |
· | laws and business practices favoring local companies; |
· | difficulties in collecting accounts receivable; and |
· | difficulties and costs of staffing and managing foreign operations. |
In addition, the United States and foreign countries may implement quotas, duties, taxes or other charges or restrictions upon the importation or exportation of our products, leading to a reduction in sales and profitability in that country. The geographical distance between the United States, Asia and Europe also creates a number of logistical and communication challenges. We cannot assure you that we will not experience any serious harm in connection with our international operations.
Our business could suffer if we are unable to retain and recruit qualified personnel.
We depend on the continued services of our executive officers, senior managers and skilled technical and other personnel. Our business could suffer if we lose the services of some of these personnel because we may not be able to find and adequately integrate replacement personnel into our operations in a timely manner. We seek to recruit highly qualified personnel and there is intense competition for the services of these personnel in the semiconductor industry. Competition for personnel may increase significantly in the future as new fabless semiconductor companies as well as new semiconductor manufacturing facilities are established. Our ability to retain existing personnel and attract new personnel is in part dependent on the compensation packages we offer. As demand for qualified personnel increases, we may be forced to increase the compensation levels and to adjust the cash, equity and other components of compensation we offer our personnel.
12
Economic conditions may adversely affect our results.
The global economic downturn that commenced in 2008 and its effect on the semiconductor industry resulted in global decreased demand, downward price pressure, excess inventory and unutilized capacity worldwide which, in turn, impacted consumer and customer demand for our products and our customers’ products, as well as our commercial relationships with our customers, suppliers, and creditors, including our lenders. In the second half of 2009 and in 2010 we experienced business, financial and economic improvement, as was reflected by the improvement in the Company’s revenue, gross profit, operating profit, net profit/loss and cash flow from operating activities as compared to the period prior to mid 2009; However, following the recent economic slowdown in Europe and worldwide and following the conditions in the financial markets, the semiconductor industry experienced weakening customer demand and reduced rate of growth and we saw softening demand in 2011 that resulted in a decline in these same measures in 2011 compared to 2010. Market analysts are cautious regarding global economic conditions forecasted for 2012 and beyond, and there can be no assurance that another downturn in the semiconductor industry and/or in the global economy will not occur. The effects of another downturn in the semiconductor industry and/or in the global economy, may affect our future financial results and position, including our ability to fulfill our debt obligations and other liabilities, comprised mainly of bank loans and debentures. We are working in various ways to fulfill our debt obligations and other liabilities, including, among others, sales of assets; issuance of new securities intellectual property licensing or sales; and improving operational efficiencies and revenues. There is no assurance that we will be able to obtain sufficient funding from these or other sources to allow us to have sufficient cash to fulfill our debt obligations and other liabilities.
Our business plan is premised on the increasing use of outsourced foundry services by both fabless semiconductor companies and integrated device manufacturers for the production of semiconductors using specialty process technologies. Our business may not be successful if this trend does not continue to develop in the manner we expect.
We operate as an independent semiconductor foundry focused primarily on specialty process technologies. Our business model assumes that demand for these processes within the semiconductor industry will grow and will follow the broader trend towards outsourcing foundry operations. Although the use of foundries is established and growing for standard CMOS processes, the use of outsourced foundry services for specialty process technologies is less common and may never develop into a significant part of the semiconductor industry. If fabless companies and vertically integrated device manufacturers choose not to access independent specialty foundry capacity, the manufacture of specialty process technologies may not follow the trend of standard CMOS processes. If the broader trend to outsourced foundry services does not prove applicable to the specialty process technologies that we are focused on, our business, results of operations and cash flow may be harmed.
If we are not able to continue transitioning our product mix from standard CMOS process technologies to specialty process technologies, our business and results of operations may be harmed.
Since Jazz Semiconductor’s separation from Conexant, it has focused its research and development and marketing efforts primarily on specialty process technologies and adding new customers in the specialty field. These specialty process technologies include advanced analog, radio frequency, high voltage, bipolar and silicon germanium bipolar CMOS processes and double-diffused metal oxide semiconductor processes. To be competitive, reduce our dependence on standard process technologies and successfully implement our business plan, we will need to continue to derive a significant percentage of our revenues from specialty process technologies. In order to expand and diversify our customer base, we need to identify and attract customers who will use the specialty process technologies we provide. We cannot assure you that demand for our specialty process technologies will increase or that we will be able to attract customers who use them.
In addition, because we intend to continue to focus on specialty process technologies, we do not plan to invest in the research and development of more advanced standard CMOS processes. As standard CMOS process technologies continue to advance, we will not remain competitive in these process technologies. If Jazz’s current customers switch to another foundry for standard CMOS process technologies and we are unable to increase our revenues from our specialty process technologies, Jazz’s business, results of operations and cash flows will be harmed.
13
Our historical financial performance may not be indicative of our future results.
Since Jazz Semiconductor’s inception, a large percentage of its revenues have primarily been derived from products manufactured using standard CMOS processes that are no longer the focus of its business. As customers design their next generation products for smaller geometry CMOS processes, they may look to other foundries to provide their requisite manufacturing capacity. As a result, we may not continue to generate the same level of revenues from our standard CMOS processes in the future as it shifts our focus and operations to our more specialized processes: advanced analog, radio frequency, high voltage, bipolar and silicon germanium bipolar CMOS processes and double-diffused metal oxide semiconductor processes. If our potential or existing customers design their products using smaller geometry CMOS processes at other foundries, and we are unable to increase the revenues we derive from our specialty process technologies, our business, results of operations and cash flows may be harmed.
Failure to comply with governmental regulations by us, our manufacturing suppliers or our customers could reduce our sales or require design modifications.
The semiconductors we produce and the export of technologies used in our manufacturing processes may be subject to U.S. export control and other regulations as well as various standards established by authorities in other countries. Failure to comply with existing or evolving U.S. or foreign governmental regulation or to obtain timely domestic or foreign regulatory approvals or certificates could materially harm our business by reducing our sales, requiring modifications to our processes that we license to our foreign manufacturing suppliers, or requiring too extensive modifications to our customers’ products. Neither we nor our customers may export products using or incorporating controlled technology without obtaining an export license. In addition, when we face excess demand, it may be dependent on our manufacturing suppliers in China for a significant portion of our planned manufacturing capacity, and export licenses may be required in order for Jazz to transfer technology related to our manufacturing processes to our foreign manufacturing suppliers. These restrictions may make foreign competitors facing less stringent controls on their processes and their customers’ products more competitive in the global market than we or our customers. The U.S. government may not approve any pending or future export license requests. In addition, the list of products and countries for which export approval is required, and the regulatory policies with respect thereto, could be revised from time to time.
A significant portion of our workforce is unionized, and our operations may be adversely affected by work stoppages, strikes or other collective actions which may disrupt our production and adversely affect the yield of our fab.
A significant portion of our employees at our Newport Beach, California fab are represented by a union and covered by a collective bargaining agreement that is scheduled to expire in 2012. We cannot predict the effect that continued union representation or future organizational activities will have on our business. We cannot assure you that we will not experience a material work stoppage, strike or other collective action in the future, which may disrupt our production and adversely affect our customer relations and operational results.
If we are unable to collaborate successfully with electronic design automation vendors and third-party design service companies to meet our customers’ design needs, our business could be harmed.
We have established relationships with electronic design automation vendors and third-party design service companies. We work together with these vendors to develop complete design kits that our customers can use to meet their design needs using our process technologies. Our ability to meet our customers’ design needs successfully depends on the availability and quality of the relevant services, tools and technologies provided by electronic design automation vendors and design service providers, and on whether Jazz, together with these providers, is able to meet customers’ schedule and budget requirements. Difficulties or delays in these areas may adversely affect our ability to meet our customers’ needs, and thereby harm our business.
If the semiconductor wafers we manufacture are used in defective products, we may be subject to product liability or other claims and our reputation could be harmed.
We provide custom manufacturing to our customers who use the semiconductor wafers we manufacture as components in their products sold to end users. If these products are used in defective or malfunctioning products, we could be sued for damages, especially if the defect or malfunction causes physical harm to people. The occurrence of a problem could result in product liability claims as well as a recall of, or safety alert or advisory notice relating to, the product. We cannot assure you that our insurance policies will cover specific product liability issues or that they will be adequate to satisfy claims made against Jazz in the future. Also, we may be unable to obtain insurance in the future at satisfactory rates, in adequate amounts, or at all. Product liability claims or product recalls in the future, regardless of their ultimate outcome, could have a material adverse effect on our business, reputation, financial condition and on our ability to attract and retain customers.
14
Our production yields and business could be significantly harmed by natural disasters, particularly earthquakes.
Our Newport Beach, California fab is located in southern California, a region known for seismic activity. Due to the complex and delicate nature of our manufacturing processes, our facilities are particularly sensitive to the effects of vibrations associated with even minor earthquakes. Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel. We cannot be certain that precautions we have taken to seismically upgrade our fab will be adequate to protect our facilities in the event of a major earthquake, and any resulting damage could seriously disrupt our production and result in reduced revenues.
Our production may be interrupted if it cannot maintain sufficient sources of fresh water and electricity.
The semiconductor manufacturing process requires extensive amounts of fresh water and a stable source of electricity. Droughts, pipeline interruptions, power interruptions, electricity shortages or government intervention, particularly in the form of rationing, are factors that could restrict our access to these utilities in the area in which our fab is located. In particular, our Newport Beach, California fab is located in an area that is susceptible to water and electricity shortages. If there is an insufficient supply of fresh water or electricity to satisfy our requirements, it may need to limit or delay our production, which could adversely affect our business and operating results. Increases in utility costs would also increase our operating expenses. In addition, a power outage, even of very limited duration, could result in a loss of wafers in production, deterioration in our fab yield and substantial downtime to reset equipment before resuming production.
We are subject to U.S tax authority audit
In February 2012, the Company has been notified that the U.S. tax authority is commencing an audit of its 2009 and 2010 tax returns, and has asked the Company for certain reports and data in connection with these years’ tax returns. There is no assurance that we will not be required to pay additional tax in material amounts following said audit.
Jazz and Tower expect to enter into a Special Security Agreement with the United States Department of Defense which may limit the synergies and other expected benefits of the Merger.
In connection with our aerospace and defense business, our facility security clearance and trusted foundry status, we 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 Jazz 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 synergies and other benefits realized from the Merger. There is no assurance when, if at all, an SSA will be reached.
Risks relating to construction activities
We lease our fabrication facilities and headquarters, and in December 2010, the properties were sold by Conexant to Uptown, a joint venture consisting of a fund controlled by New York-based DRA Advisors LLC and an affiliate of the Shopoff Group, a real estate investment firm based in Irvine, California. In connection with the sale, we negotiated amendments to our operating leases that confirm our ability to remain in the fabrication facilities through 2017 and to exercise options to extend that lease through 2027. Uptown has expressed its intention to begin development of a portion of the property adjacent to our fabrication facility, with the first phase of development of mixed use townhouses, midrise and hi-rise condominium potentially beginning in 2014 or thereafter. In the amendments to our leases, we secured various contractual safeguards designed to limit and mitigate any adverse impact of construction activities on our fabrication operations. Although we do not anticipate a material adverse impact to our operations, it is possible that construction activities adjacent to our fabrication facility could result in temporary reductions or interruptions in the supply of utilities to the property and that a portion or all of the fabrication facility may need to be idled temporarily during development. If construction activities limit or interrupt the supply of water, gas or electricity to our fabrication facility or cause significant vibrations or other disruptions, it could limit or delay our production, which could adversely affect our business and operating results. In addition, an unplanned power outage caused by construction activities, even of very limited duration, could result in a loss of wafers in production, deterioration in our fab yield and substantial downtime to reset equipment before resuming production.
15
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Jazz’s headquarters and manufacturing facilities are located in Newport Beach, California. Jazz leases the use of these facilities from Uptown Newport LP under non-cancellable operating leases that expire March 12, 2017, and Jazz has the option to extend each lease for two consecutive five-year periods after March 12, 2017. Under a lease amendment, Uptown may terminate the lease for the Company’s headquarters building, but not the Company’s fabrication facility, no earlier than January 2014. If Uptown terminates the lease for the Company’s headquarters building, it is obligated to pay the Company a lease termination fee equal to $3,000,000 if the lease is terminated in January 2014, with the lease termination fee declining by $22,000 per month if Uptown terminates the headquarters building lease after January 2014.
The following table provides certain information as to Jazz’s principal general offices, manufacturing and warehouse facilities:
Property Location | Use | Floor Space | ||
Newport Beach, California | Headquarters office | 68,227 square feet | ||
Newport Beach, California | Manufacturing facility | 320,510 square feet |
Jazz expects these offices and warehouse facilities to be adequate for its business purposes through 2012 and expects additional space to be available to use on commercially reasonable terms as needed.
Item 3. 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. 5,227,335 (the ‘335 patent). Following the initial filing, LSI amended the ITC complaint in October 2008 to add the Company, Tower and three other corporations as additional respondents. In September, 2009, the ITC administrative law judge (“ALJ”) ruled against LSI and in favor of the respondents, determining that the ‘335 patent claims asserted by LSI are invalid. In November, 2009, in response to a Petition for Review filed by LSI, the ITC determined that it would review the ALJ’s determination on patent invalidity. In March 2010 the ITC iussed a notice of final determination that there was no violation of Section 337, ruling that the LSI ’335 patent claims were invalid, and terminated the ITC investigation. LSI appealed that determination to the U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”). While the appeal was pending, the ‘335 patent expired. The ITC moved to dismiss LSI’s appeal as moot, which LSI conceded. In November 2010 the Federal Circuit issued an order vacating the ITC’s final determination and remanding the investigation to the ITC with instructions to dismiss the investigation as moot.
LSI also previously filed an action for patent infringement of the ‘335 patent agains the Company and other corporations in the United States District Court for the Eastern District of Texas, which action was stayed pending the conclusion of the ITC investigation. On June 16, 2011, the District Court granted a motion by LSI to dismiss the Texas action without prejudice. As a result of that dismissal, there is no longer any legal proceeding currently pending by LSI against the Company or Tower.
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 DSS to develop an appropriate structure to mitigate any concern of foreign ownership, control or influence over the operations of Jazz 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 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 synergies and other benefits realized from the Merger. There is no assurance when, if at all, an SSA will be reached.
Item 4. Removed and Reserved
16
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Effective September 19, 2008, upon completion of the Merger, the Company’s common stock, warrants and units were delisted from the American Stock Exchange. As a result of the Merger, Tower is now the only registered holder of record of the Company’s common stock.
Dividends
We have not paid any dividends on our common stock to date and do not intend to pay dividends in the near future. It is our board’s current intention to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future. The payment of dividends, if and when paid, will be within the discretion of our then board of directors and will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition.
Item 6. Selected Financial Data
Omitted pursuant to General Instruction I (1) (a) and (b) of Form 10-K.
17
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
JAZZ TECHNOLOGIES, INC.
The following discussion and analysis of the financial condition and results of operations of Jazz Technologies, Inc. for the years ended December 31, 2011 and December 31, 2010, should be read in conjunction with the consolidated financial statements and related notes as well as other information contained in this Annual Report on Form 10-K, including the information in the section entitled “Risk Factors” of this report.
FORWARD LOOKING STATEMENTS
This report on Form 10-K 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:
· | 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. |
These forward-looking statements are subject to risks and uncertainties, including those risks and uncertainties described in this report on Form 10-K 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 years ended December 31, 2011 and 2010, we had net income of $4.4 million and $27.7 million, respectively.
The following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated.
Year Ended | ||||||||
December 31, 2011 | December 31, 2010 | |||||||
Net revenues | 100 | % | 100 | % | ||||
Cost of revenues | 77.4 | 61.1 | ||||||
Gross profit | 22.6 | 38.9 | ||||||
Operating expenses: | ||||||||
Research and development | 7.1 | 5.6 | ||||||
Selling, general and administrative | 9.0 | 7.3 | ||||||
Amortization of intangible assets | 0.5 | 0.3 | ||||||
Total operating expenses | 16.6 | 13.2 | ||||||
Operating income | 6.0 | 25.7 | ||||||
Financing expense, net | (9.7 | ) | (8.1 | ) | ||||
Other income, net | 8.1 | 0.0 | ||||||
Income tax expense | (1.8 | ) | (5.6 | ) | ||||
Net income | 2.6 | % | 12.0 | % |
18
Comparison of Years Ended December 31, 2011 and December 31, 2010
Revenues
Our net revenues for the year ended December 31, 2011 amounted to $168.5 million as compared to $230.8 million for the year ended December 31, 2010. While we maintained similar average selling price of our products as compared to 2010, our shipped quantities reduced by approximately 30% mainly due to the weakening customer demand in the semiconductor industry following the recent economic slowdown in Europe and worldwide and following the conditions in the financial markets, with the semiconductor industry experiencing weakening customer demand and reduced rate of growth.
Cost of Revenues
Our cost of revenues decreased by 8%, to $130 million for the year ended December 31, 2011 from $141 million for the year ended 2010. The relatively small reduction in cost of revenues as compared to the revenue decrease is due to the high portion of fixed costs associated with operating a foundry and due to higher depreciation expenses resulting from the fab capacity ramp-up.
Gross Profit
Gross profit decreased to $38.2 million in the year ended December 31, 2011 as compared to $89.8 million in the year ended 2010 mainly following the revenue decrease.
Operating Expenses
Operating expenses for the year ended December 31, 2011 decreased by $2.5 million to $28 million, as compared to $30.5 million in the year ended December 31, 2010. The decrease in operating expenses is mainly due to cost reduction actions and effects of the revenue decrease.
Financing expense, net
Financing expense, net for the year ended December 31, 2011 amounted to $16.4 million, as compared to $18.8 million for the year ended December 31, 2010. Financing expense net, mainly relate to our notes. Financing expense, net for the year ended December 31, 2010 include $2.4 million following the notes Exchange Agreement, detailed in Note 5.
Other Income, net
Other income, net for the year ended December 31, 2011 includes mainly gain from the sale of the investment in HHSL.
Income Tax Expense
Income tax expense amounted to $3.1 million in the year ended December 31, 2011, as compared to income tax expense of $12.8 million in the year ended December 31, 2010. The decrease in income tax expenses is due to the decrease in the profit before tax.
The Company’s effective tax rate for the year ended December 31, 2011 is higher than the statutory rate primarily due to interest expense on unrecognized tax benefits and state taxes.
Net Income
Net income for the year ended December 31, 2011 was $4.4 million as compared to $27.7 million for the year ended December 31, 2010. Such $23.3 million decrease in net income is a result of the revenue decrease and the other factors as detailed above, offset by the gain from the sale of our investment in HHSL.
19
Changes in Financial Condition
Liquidity and Capital Resources
As of December 31, 2011, we had cash and cash equivalents of $19.5 million compared to $29.0 million as of December 31, 2010. We had borrowings of $15.3 million under our line of credit with Wachovia out of a total availability of $22.4 million under this credit line. Of the borrowings of $15.3 million, we classify $10.0 million to be long-term as the repayment of that sum will be made beyond the one year period. During the year ended December 31, 2011 we generated an amount of $31 million from operating activities and received $31 million net from realization of our holdings in HHSL. These liquidity resources financed mainly the repayment of debt in the amount of $50 million and the capital investments, net in the amount of approximately $22 million.
As of December 31, 2011 our indebtedness are approximately $108.9 million, comprised of approximately $93.6 million par value of non-convertible notes and $15.3 million borrowing under the Wachovia line of credit. We will need a significant amount of cash, to satisfy our long-term indebtedness and meet our other cash needs, which may not be available to us. Our ability to make payments on, or repay or refinance, our indebtedness and to fund capital expenditures, working capital and other cash needs will depend largely upon our future operating performance. Our future operating performance, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations, that future borrowings will be available to us under the credit facilities or from other sources in an amount and on terms and conditions sufficient to enable us to make payments on our indebtedness or to fund our other liquidity needs. In order to finance our debt and other liabilities and obligations, we continue to explore measures to obtain funds from sources in addition to cash on hand and expected cash flow from our ongoing operations, including sales of assets; issuance of new securities; intellectual property licensing; and improving operational efficiencies and revenues. The Wachovia line of credit imposes certain limitations on our ability to make payments to the note holders and/or to incur additional indebtedness without Wachovia’s consent. If we are unable to refinance the notes, and/or raise funds through the issuance of other securities, and/or we default on any payment to our note holders, such default may trigger a cross default under the Wachovia line of credit, which would permit the lenders to accelerate the obligations thereunder, potentially requiring us to repay or refinance the Wachovia credit line. We cannot assure you that we would be able to refinance any of our indebtedness, including the notes and the Wachovia credit line, and/or raise funds through the issuance of other securities. There is no assurance that we will be able to obtain sufficient funding from the financing sources detailed above or other sources in a timely manner to allow us to fully or partially repay our indebtedness. A default by us on any of our indebtedness could have a material adverse effect on our operations, shareholders value and the interests of our creditors, and will affect our ability to fulfill our debt obligations and other liabilities.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, we are exposed to market risk from changes in interest rates, certain foreign currency exchange rate fluctuations, and certain commodity prices. Our exposure to market risk results primarily from fluctuations in interest rates that affect our variable-rate borrowings. Although we have international operating entities, our sales are primarily denominated in U.S. dollars, and our exposure to foreign currency rate fluctuations is not significant to our financial condition and results of operations. We have not used derivative financial instruments to manage foreign currency exchange risk exposure, to hedge credit/market risks or for speculative purposes.
We estimate that a 1.0% increase in interest rates would have an insignificant impact on our financial statements due to the structure of our investment portfolio.
As of December 31, 2011 and December 31, 2010, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
20
Item 8. Financial Statements
INDEX
JAZZ TECHNOLOGIES, INC.
Page | |
Consolidated Financial Statements | 21 |
22 | |
23 | |
24 | |
25 | |
26 | |
27-43 | |
21
Brightman Almagor Zohar 1 Azrieli Center Tel Aviv 67021 P.O.B. 16593, Tel Aviv 61164 Israel Tel: +972 (3) 608 5555 Fax: +972 (3) 609 4022 info@deloitte.co.il |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Jazz Technologies, Inc.
Newport Beach, CA
We have audited the accompanying consolidated balance sheets of Jazz Technologies, Inc. and subsidiaries, (the “Company”) (a wholly owned subsidiary of Tower Semiconductor Ltd.) as of December 31, 2011 and 2010 and the related consolidated statements of operations, stockholder’s equity, and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Jazz Technologies, Inc and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
Brightman Almagor Zohar & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu
Tel-Aviv, Israel
February 15, 2012
22
Jazz Technologies, Inc. (A Wholly Owned Subsidiary of
Tower Semiconductor, Ltd.) and Subsidiaries
Consolidated Balance Sheets
(in thousands)
December 31, 2011 | December 31, 2010 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 19,471 | $ | 29,031 | ||||
Receivables: | ||||||||
Trade receivables, net of allowance for doubtful accounts of $1,020 and $326 at December 31, 2011 and December 31, 2010, respectively | 17,032 | 29,687 | ||||||
Other receivables | 4,485 | 3,376 | ||||||
Inventories | 25,376 | 19,096 | ||||||
Deferred tax asset | 4,357 | 4,728 | ||||||
Prepaid expenses and other current assets | 4,147 | 3,768 | ||||||
Total current assets | 74,868 | 89,686 | ||||||
Property, plant and equipment, net | 101,537 | 96,908 | ||||||
Investments | -- | 17,100 | ||||||
Intangible assets, net | 43,760 | 48,394 | ||||||
Goodwill | 7,000 | 7,000 | ||||||
Other assets – related parties | 15,185 | 22,392 | ||||||
Other assets – others | 2,350 | 1,895 | ||||||
Total assets | $ | 244,700 | $ | 283,375 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Short-term bank debt and current maturities of debentures | $ | 5,300 | $ | 53,338 | ||||
Accounts payable | 12,050 | 13,023 | ||||||
Due to related parties | 2,049 | 3,389 | ||||||
Accrued compensation and benefits | 5,328 | 5,677 | ||||||
Deferred revenues | 2,597 | 1,834 | ||||||
Accrued interest | 3,764 | 5,393 | ||||||
Other current liabilities | 4,427 | 7,418 | ||||||
Total current liabilities | 35,515 | 90,072 | ||||||
Long term liabilities: | ||||||||
Long-term debt from banks | 10,000 | 10,000 | ||||||
Notes | 69,061 | 64,463 | ||||||
Deferred tax liability | 5,722 | 9,876 | ||||||
Accrued pension, retirement and medical plan obligations | 12,227 | 12,522 | ||||||
Other long-term liabilities | 15,699 | 5,533 | ||||||
Total liabilities | 148,224 | 192,466 | ||||||
Stockholder’s equity: | ||||||||
Additional paid-in capital | 63,576 | 63,531 | ||||||
Cumulative stock based compensation | 1,539 | 887 | ||||||
Accumulated other comprehensive loss (*) | (1,433 | ) | (1,903 | ) | ||||
Retained earnings | 32,794 | 28,394 | ||||||
Total stockholders' equity | 96,476 | 90,909 | ||||||
Total liabilities and stockholders’ equity | $ | 244,700 | $ | 283,375 |
(*) Accumulated other comprehensive loss includes mainly plan assets and benefit obligation, net of taxes.
See accompanying notes.
23
Jazz Technologies, Inc. (A Wholly Owned Subsidiary of
Tower Semiconductor, Ltd.) and Subsidiaries
Consolidated Statements of Operations
(in thousands)
Year ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Net revenues | $ | 168,511 | $ | 230,784 | $ | 159,209 | ||||||
Cost of revenues | 130,352 | 141,001 | 119,386 | |||||||||
Gross profit | 38,159 | 89,783 | 39,823 | |||||||||
Operating expenses: | ||||||||||||
Research and development | 11,936 | 12,942 | 14,626 | |||||||||
Selling, general and administrative | 15,239 | 16,770 | 14,911 | |||||||||
Amortization of intangible assets | 787 | 788 | 790 | |||||||||
Total operating expenses | 27,962 | 30,500 | 30,327 | |||||||||
Operating income | 10,197 | 59,283 | 9,496 | |||||||||
Financing expense, net | (16,380 | ) | (18,766 | ) | (16,039 | ) | ||||||
Other income, net | 13,708 | 14 | 2,065 | |||||||||
Net income (loss) before income taxes | 7,525 | 40,531 | (4,478 | ) | ||||||||
Income tax benefit (expense) | (3,125 | ) | (12,830 | ) | 5,022 | |||||||
Net income | $ | 4,400 | $ | 27,701 | $ | 544 |
See accompanying notes.
24
Jazz Technologies, Inc. (A Wholly Owned Subsidiary of
Tower Semiconductor, Ltd.) and Subsidiaries
Consolidated Statements of Stockholder’s Equity
(in thousands, except share data)
Common Stock | ||||||||||||||||||||||||
Shares | Amount | Additional paid-in capital | Accumulated other comprehensive income (loss) | Accumulated deficit | Total stockholder’s equity | |||||||||||||||||||
Balance at December 31, 2008 | 100 | $ | -- | $ | 50,166 | $ | (2,367 | ) | $ | 149 | $ | 47,948 | ||||||||||||
Stock compensation expense | -- | -- | 331 | -- | -- | 331 | ||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||
Change in plan assets and benefit obligation, net of taxes $550 | -- | -- | -- | 1,096 | -- | 1,096 | ||||||||||||||||||
Foreign currency translation adjustment | -- | -- | -- | (73 | ) | -- | (73 | ) | ||||||||||||||||
Net profit | -- | -- | -- | -- | 544 | 544 | ||||||||||||||||||
Total comprehensive income | -- | -- | -- | -- | -- | 1,567 | ||||||||||||||||||
Balance at December 31, 2009 | 100 | $ | -- | $ | 50,497 | $ | (1,344 | ) | $ | 693 | $ | 49,846 | ||||||||||||
Stock compensation expense | -- | -- | 460 | -- | -- | 460 | ||||||||||||||||||
Tax benefit relating to stock based compensation | -- | -- | 214 | 214 | ||||||||||||||||||||
Warrant contributed by Tower | -- | -- | 13,247 | -- | -- | 13,247 | ||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||
Change in plan assets and benefit obligation, net of taxes $301 | -- | -- | -- | (585 | ) | -- | (585 | ) | ||||||||||||||||
Foreign currency translation adjustment | -- | -- | -- | 26 | -- | 26 | ||||||||||||||||||
Net profit | -- | -- | -- | -- | 27,701 | 27,701 | ||||||||||||||||||
Total comprehensive income | -- | -- | -- | -- | -- | 27,142 | ||||||||||||||||||
Balance at December 31, 2010 | 100 | $ | -- | $ | 64,418 | $ | (1,903 | ) | $ | 28,394 | $ | 90,909 | ||||||||||||
Stock compensation expense | -- | -- | 652 | 652 | ||||||||||||||||||||
Tax benefit relating to stock based compensation | -- | 45 | 45 | |||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||
Change in plan assets and benefit obligation, net of taxes $174 | -- | -- | 518 | 518 | ||||||||||||||||||||
Foreign currency translation adjustment | -- | -- | (48 | ) | (48 | ) | ||||||||||||||||||
Net profit | -- | -- | 4,400 | 4,400 | ||||||||||||||||||||
Total comprehensive income | -- | -- | 4,870 | |||||||||||||||||||||
Balance at December 31, 2011 | 100 | $ | -- | $ | 65,115 | $ | (1,433 | ) | $ | 32,794 | $ | 96,476 |
.
25
Jazz Technologies, Inc. (A Wholly Owned Subsidiary of
Tower Semiconductor, Ltd.) and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Year ended December 31, 2011 | Year ended December 31, 2010 | Year ended December 31, 2009 | ||||||||||
Operating activities: | ||||||||||||
Net income | $ | 4,400 | $ | 27,701 | $ | 544 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Loss from notes exchange, net | -- | 2,350 | -- | |||||||||
Depreciation and amortization of intangible assets | 33,247 | 32,387 | 23,237 | |||||||||
Notes accretion and amortization of deferred financing costs | 6,992 | 5,878 | 5,314 | |||||||||
Other income, net | (13,708 | ) | (14 | ) | (2,065 | ) | ||||||
Stock based compensation expense | 652 | 460 | 331 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Trade receivables | 13,545 | (6,023 | ) | (2,240 | ) | |||||||
Inventories | (6,280 | ) | (7,268 | ) | 623 | |||||||
Prepaid expenses and other assets | (379 | ) | (450 | ) | 257 | |||||||
Deferred tax assets | 371 | 2,449 | (4,512 | ) | ||||||||
Accounts payable | (6,440 | ) | (4,310 | ) | (2,671 | ) | ||||||
Due to related parties, net | (2,748 | ) | (2,301 | ) | 5,675 | |||||||
Accrued compensation and benefits | (285 | ) | (185 | ) | 190 | |||||||
Deferred revenue | 763 | (672 | ) | 548 | ||||||||
Accrued interest | (1,629 | ) | 4,816 | (4,634 | ) | |||||||
Other current liabilities | (2,924 | ) | 1,448 | 1,533 | ||||||||
Deferred tax liability | (4,154 | ) | (1,319 | ) | (554 | ) | ||||||
Accrued pension, retirement medical plan obligations and long-term liabilities | 9,996 | 5,436 | (441 | ) | ||||||||
Net cash provided by operating activities | 31,419 | 60,383 | 21,135 | |||||||||
Investing activities: | ||||||||||||
Purchases of property and equipment | (28,011 | ) | (54,429 | ) | (16,198 | ) | ||||||
Investments in intangible assets and other assets | -- | (1,171 | ) | (1,600 | ) | |||||||
Proceeds related to property and equipment | 6,115 | 600 | -- | |||||||||
Proceeds from investment realization | 31,400 | -- | -- | |||||||||
Net cash provided by (used in) investing activities | 9,504 | (55,000 | ) | (17,798 | ) | |||||||
Financing activities: | ||||||||||||
Debt repayment | (43,735 | ) | -- | (2,216 | ) | |||||||
Short-term debt from bank | (6,700 | ) | (5,000 | ) | -- | |||||||
Net cash used in financing activities | (50,435 | ) | (5,000 | ) | (2,216 | ) | ||||||
Effect of foreign exchange rate change | (48 | ) | 26 | (73 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | (9,560 | ) | 409 | 1,048 | ||||||||
Cash and cash equivalents at beginning of the period | 29,031 | 28,622 | 27,574 | |||||||||
Cash and cash equivalents at end of the period | $ | 19,471 | $ | 29,031 | $ | 28,622 |
Supplemental disclosure of interest and taxes paid and non-cash investing and financing activities:
Year ended December 31, 2011 | Year ended December 31, 2010 | Year ended December 31, 2009 | ||||||||||
Interest paid | $ | 11,965 | $ | 5,926 | $ | 15,457 | ||||||
Warrant contributed by Tower, see Note 5 | $ | -- | $ | 13,247 | $ | -- | ||||||
Taxes paid | $ | (97 | ) | $ | 3,746 | $ | 1,996 | |||||
Investments in property, plant and equipment | $ | 3,443 | $ | 3,382 | $ | 6,263 |
See accompanying notes.
26
Jazz Technologies, Inc. (A Wholly Owned Subsidiary of
Tower Semiconductor, Ltd.) and Subsidiaries
Notes to Consolidated Financial Statements
Note 1: Business and Formation
Unless specifically noted otherwise, as used throughout these notes to the 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.
The Company
Since the merger with Tower in 2008, the Company is a 100% subsidiary of Tower.
The Company is based in Newport Beach, California and is 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 customer’s 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.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. They contain all accruals and adjustments that, in the opinion of management, are necessary to present fairly the Company’s consolidated financial position at December 31, 2011 and December 31, 2010, and the consolidated results of its operations and cash flows for the years ended December 31, 2011, December 31, 2010 and December 31, 2009. All intercompany accounts and transactions have been eliminated.
Reclassifications
Certain amounts in prior years’ financial statements have been reclassified in order to conform to the 2011 presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.
Revenue Recognition
The Company’s net revenues are generated principally from sales of semiconductor wafers. The Company also derives revenues from engineering services and other support services. The majority of the Company’s sales are achieved through the efforts of its direct sales force.
In accordance with ASC Topic 605 “Revenue Recognition”, the Company recognizes revenues from sale of products 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, hence, collection of payment for services is reasonably assured.
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.
27
Revenues for engineering and other services are recognized ratably over the contract term or as services are performed.
The Company’s arrangements do not include multiple elements delivery. In very limited instances, engineering services agreements may specify also a price for future production of a semiconductor wafer (price option). In these agreements, the Company examines the price option to conclude if a significant discount exists by comparing the price option to the selling price of such wafers when sold separately. To date, the Company concluded that no significant discount exists in its arrangements and hence only one element exists. In the beginning of 2011 the Company adopted ASU 2009-13-“Multiple Deliverable Revenue Arrangements”. The above adoption did not have any impact on the Company revenue recognition policy.
Advances received from customers towards future engineering services, product purchases and in some cases capacity reservation are deferred until services are rendered, products are shipped to the customer, or the capacity reservation period ends.
Cash and Cash Equivalents
Cash and cash equivalents consist of banks deposits and short-term investments (with original maturities of three months or less).
Allowance for Doubtful Accounts
The allowance for doubtful accounts is computed mainly on the specific identification basis for accounts whose collectability, in the Company’s estimation, is uncertain.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance with accounting principles generally accepted in the United States. For financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to their short maturities.
Foreign Currency Translation
The Company uses the U.S. dollar as its functional currency. All of the Company’s sales and a substantial majority of its costs are transacted in U.S. dollars.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined for raw materials and supplies mainly on the basis of the weighted moving average cost per unit. Cost is determined for work in process and finished goods on the basis of actual production costs.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from 3 to 12 years. Leasehold improvements are amortized over the life of the asset or initial term of the lease, whichever is shorter. Significant renewals and betterments are capitalized and any assets being replaced are written off. Maintenance and repairs are charged to expense as incurred. For impairment of assets tests see below.
Investment
In connection with the acquisition of Jazz Semiconductor in February 2007, the Company acquired an investment in Hua Hong Semiconductor Ltd (“HHSL”), which owns 100% of Shanghai Hua Hong NEC Electronics Company Ltd (also known as “HHNEC”). The investment represented a minority interest of approximately 10% in HHSL, hence the investment in HHSL was recorded at fair value as of the date of the Merger with Tower and subsequently carried using the cost method of accounting for investments, as the Company did not have the ability to exercise significant influence.
During 2011, the Company sold its 10% holdings in “HHSL”, in an HHSL buyback transaction for gross amount of approximately $32 million in cash, before tax and other payments and recorded a gross gain of approximately $15 million from this transaction.
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Impairment of Assets
The Company reviews long-lived assets and intangible assets on a periodic basis, as well as when such a review is required based upon relevant circumstances, to determine whether events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Impairment loss, if required is recognized based upon the difference between the carrying amount and the fair value of such assets, in accordance with ASC 360-10, “Property, Plant and Equipment”.
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 unit, to which the goodwill is ascribed, as against the underlying carrying value of its net assets, including goodwill. If the carrying amount of the unit 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 check as of December 31, 2011. 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. 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 December 31, 2011. Prior to its acquisition by Tower, the Company had no goodwill.
Accounting for Income Taxes
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. This topic prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities. Deferred taxes are computed based on the tax rates anticipated (under applicable law as of the balance sheet date) to be in effect when the deferred taxes are expected to be paid or realized.
We evaluate the realizability of our deferred tax assets and establish valuation allowances when it is more likely than not that all or a portion of our deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. We consider all available positive and negative evidence in making this assessment, including, but not limited to, the scheduled reversal of deferred tax liabilities and projected future taxable income. In circumstances where there is sufficient negative evidence indicating that our deferred tax assets are not more-likely-than-not realizable, we establish a valuation allowance.
The future utilization of the Company’s net operating loss carry forwards to offset future taxable income is subject to an annual limitation as a result of ownership changes that have occurred 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 merger with Tower.
We use a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate tax positions taken or expected to be taken in a tax return by assessing whether they are more-likely-than-not sustainable, based solely on their technical merits, upon examination and including resolution of any related appeals or litigation process. The second step is to measure the associated tax benefit of each position as the largest amount that we believe is more-likely-than-not realizable. Differences between the amount of tax benefits taken or expected to be taken in our income tax returns and the amount of tax benefits recognized in our financial statements, represent our unrecognized income tax benefits, which we either record as a liability or as a reduction of deferred tax assets. Our policy is to include interest and penalties related to unrecognized income tax benefits as a component of income tax expense.
Stock Based Compensation
The Company applies the provisions of ASC 718 Compensation-Stock Compensation, under which employee share-based equity awards accounted for under the fair value method. Accordingly, stock-based compensation to employees and directors is measured at the grant date, based on the fair value of the award. The Company estimates stock price volatility based on historical volatility of Tower’s stock price. The Company uses the straight-line attribution method to recognize stock-based compensation costs over the vesting period of the award.
The key assumptions used in the Black-Scholes model in determining the fair value of options granted during the years ended December 31, 2011, 2010 and 2009 are as follows:
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Year ended December 31, 2011 | Year ended December 31, 2010 | Year ended December 31, 2009 | |||
Expected life in years | 4.75 years | 4.7 years | 4.7 years | ||
Expected annual volatility | 50.84%-54.45% | 50.97%-53.37% | 63.01-76.06% | ||
Risk-free interest rate | 0.94%-2.3% | 1.14%-2.61% | 2.51-2.53% | ||
Dividend yield | 0.00% | 0.00% | 0.00% |
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 generally does not require collateral for insurance of receivables, however, in certain circumstances the Company maintains a customer’s credit insurance policy or may require letters of credit. An allowance for doubtful accounts is determined with respect to those amounts that were determined to be doubtful of collection. The Company performs ongoing credit evaluations of its customers.
Accounts receivable from significant customers representing 10% or more of the net accounts receivable balance as of December 31, 2011 and December 31, 2010 consists of the following customers:
December 31, 2011 | December 31, 2010 | |||||||
Customer 1 | 19 | % | 20 | % | ||||
Customer 2 | 9 | 15 | ||||||
Customer 3 | -- | 16 |
Net revenues from significant customers representing 10% or more of net revenues are provided by customers as follows:
Year ended December 31, 2011 | Year ended December 31, 2010 | Year ended December 31, 2009 | ||||||||||
Customer A | 17 | % | 15 | % | 13 | % | ||||||
Customer B | 10 | 24 | 32 | |||||||||
Customer C | * | 10 | * |
* 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
ASU No. 2009 - 13 - Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This standard modifies the revenue recognition guidance for arrangements that involve the delivery of multiple elements, such as product, software, services and support, to a customer at different times as part of a single revenue generating transaction. This standard provides principles and application guidance to determine whether multiple deliverables exist, how the individual deliverables should be separated and how to allocate the revenue in the arrangement among those separate deliverables. The standard is effective for revenue arrangements entered into or modified in fiscal years beginning on or after June 15, 2010 with earlier adoption permitted. The Company adopted this standard in the beginning of the first quarter of 2011. The adoption of this update did not have a significant impact on the Company's consolidated financial statements.
In May 2011, the Financial Accounting Standards Board (FASB) issued amended standards to achieve a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards. For assets and liabilities categorized as Level 3 and recognized at fair value, these amended standards require disclosure of quantitative information about unobservable inputs, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements. In addition, these amended standards require that we disclose the level in the fair value hierarchy for financial instruments disclosed at fair value but not recorded at fair value. These new standards are effective beginning in the first quarter of 2012; early adoption of these standards is prohibited. The Company does not expect these new standards to significantly impact its consolidated financial statements.
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In June 2011, the FASB issued amended standards to increase the prominence of items reported in other comprehensive income. These amendments eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and require that all changes in stockholders’ equity except investments by, and distributions to, owners be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, these amendments require that we present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. These new standards are effective beginning in the first quarter of 2012 and are to be applied retrospectively. These amended standards will impact the presentation of other comprehensive income but will not impact the Company's financial position or results of operations.
In September 2011, the FASB issued amended standards to simplify how entities test goodwill for impairment. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit in which goodwill resides is less than its carrying value. For reporting units in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform further goodwill impairment testing as outlined in the previously issued standards. These amended standards are effective beginning in the first quarter of 2012. The Company does not expect these new standards to significantly impact its consolidated financial statements.
Note 3: Other Balance Sheet Details
Inventories
Inventories, net of reserves, consist of the following at December 31, 2011and December 31, 2010 (in thousands):
December 31, 2011 | December 31, 2010 | |||||||
Raw material | $ | 3,856 | $ | 4,684 | ||||
Work in process | 9,359 | 11,821 | ||||||
Finished goods | 12,161 | 2,591 | ||||||
$ | 25,376 | $ | 19,096 |
Property, plant and equipment
Property, plant and equipment consist of the following at December 31, 2011 and December 31, 2010 (in thousands):
Useful life (In years) | December 31, 2011 | December 31, 2010 | ||||||||||
Building improvements | 10-12 | $ | 24,305 | $ | 24,230 | |||||||
Machinery and equipment | 7 | 145,047 | 115,790 | |||||||||
Furniture and equipment | 5-7 | 2,213 | 2,308 | |||||||||
Computer software | 3 | 3,138 | 850 | |||||||||
174,703 | 143,178 | |||||||||||
Accumulated depreciation | (73,166 | ) | (46,270 | ) | ||||||||
$ | 101,537 | $ | 96,908 |
Intangible Assets
Intangible assets consist of the following at December 31, 2011 (in thousands):
Weighted Average Life (years) | Cost | Accumulated Amortization | Net | |||||||||||||
Technology | 4;9 | $ | 2,300 | $ | 1,006 | $ | 1,294 | |||||||||
Patents and other core technology rights | 9 | 15,100 | 5,514 | 9,586 | ||||||||||||
In process research and development | -- | 1,800 | 1,800 | -- | ||||||||||||
Customer relationships | 15 | 2,600 | 570 | 2,030 | ||||||||||||
Trade name | 9 | 5,200 | 1,899 | 3,301 | ||||||||||||
Facilities lease | 19 | 33,500 | 5,951 | 27,549 | ||||||||||||
Total identifiable intangible assets | $ | 60,500 | $ | 16,740 | $ | 43,760 |
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Intangible assets consist of the following at December 31, 2010 (in thousands):
Weighted Average Life (years) | Cost | Accumulated Amortization | Net | |||||||||||||
Technology | 4;9 | $ | 2,300 | $ | 612 | $ | 1,688 | |||||||||
Patents and other core technology rights | 9 | 15,100 | 3,836 | 11,264 | ||||||||||||
In-process research and development | -- | 1,800 | 1,800 | -- | ||||||||||||
Customer relationships | 15 | 2,600 | 396 | 2,204 | ||||||||||||
Trade name | 9 | 5,200 | 1,321 | 3,879 | ||||||||||||
Facilities lease | 19 | 33,500 | 4,141 | 29,359 | ||||||||||||
Total identifiable intangible assets | $ | 60,500 | $ | 12,106 | $ | 48,394 |
The amortization related to technology, patents and other core technologies rights, and facilities lease is charged to cost of revenues. The amortization related to customer relationships and trade name is charged to operating expenses.
Note 4: Credit Facility
In September 2008, the Company entered into a loan and security agreement, with Wachovia (currently Wells Fargo) for a three-year secured asset-based revolving credit facility in the total amount of up to $55 million (the “Loan Agreement”).
In June 2010, the Company entered into an amendment to the Loan Agreement, pursuant to which, the maturity date of the revolving credit facility was extended to September 2014, with available credit under the facility of up to $45 million. The borrowing availability varies from time to time based on the levels of the Company’s accounts receivable, eligible equipment and other terms and conditions described in the Loan Agreement. Loans under the facility will bear interest at a rate equal to at the Company’s option, either the lender’s prime rate plus a margin ranging from 0.50% to 1.0% or the LIBOR rate (as defined in the Loan Agreement) plus a margin ranging from 2.25% to 2.75% per annum.
The facility is secured by all of the Company’s assets.
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, Wells Fargo 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.
Borrowing availability under the Loan Agreement as of December 31, 2011 was $7.1 million. Outstanding borrowings were $15.3 million and $1.3 million of the facility was supporting outstanding letters of credits on that date. The Company considers borrowings of $10 million to be long-term debt as of December 31, 2011. As of December 31, 2011, the Company was in compliance with all the covenants under this facility.
Note 5: Notes
Notes Issued in 2006
In 2006, the Company completed private placements of convertible notes. The convertible notes bore interest at a rate of 8% per annum payable semi-annually and were scheduled to mature in December, 2011 (“Old Notes”). In October 2011, the Company completed a voluntary transaction to redeem early the entire remaining outstanding amount of the Old Notes. As of December 31, 2010, approximately $43.7 million in principal amount of Old Notes was outstanding.
Notes Issued in 2010
In July, 2010, the Company, together with its domestic subsidiaries and its parent, Tower, entered into an exchange agreement (the “Exchange Agreement”) with certain note holders (the “Participating Holders”) holding approximately $79.6 million principal amount of the Old Notes. In the exchange, the participating holders exchanged their Old Notes for newly-issued 8% non-convertible notes of the Company due June 2015 (the “New Notes”) with an exchange ratio of $1.175 face amount of New Notes for each 1.000 Old Notes.
In addition, the Participating Holders received warrants to purchase approximately 25.3 million ordinary shares of Tower at an exercise price of $1.70 per share (“Warrants J”).
Interest on the New Notes at a rate of 8% per annum is payable semiannually. As of December 31, 2011 and 2010, approximately $93.6 million in principal amount of New Notes is outstanding.
The New Notes constitute unsecured obligations of the Company, rank on parity in right of payment with all other indebtedness of the Company, and are effectively subordinated to all secured indebtedness of the Company to the extent of the value of the collateral securing such indebtedness and are not guaranteed by Tower . The New Notes shall rank senior to all future indebtedness of the Company to the extent the future indebtedness is expressly subordinated to the New Notes. The New Notes are jointly and severally guaranteed on a senior unsecured basis by the Company’s domestic subsidiaries.
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Beginning July 1, 2013, the Company may redeem some or all of the New Notes for cash at a redemption price equal to par plus accrued and unpaid interest plus a redemption premium equal to 4% if redemption occurs prior to July 1, 2014 and 2% if redemption occurs between July 1, 2014 and maturity.
The Indenture contains certain covenants including covenants restricting the Company’s ability and the ability of its subsidiaries to, among other things, incur additional debt, incur additional liens, make specified payments and make certain asset sales.
Holders of the New Notes are entitled, subject to certain conditions and restrictions, to require the Company to repurchase the New Notes at par plus accrued interest and a 1% redemption premium in the event of certain change of control transactions.
If there is an event of default on the New Notes, all of the New Notes may become immediately due and payable, subject to certain conditions set forth in the Indenture. An event of default under the Indenture will occur if the Company (or in some cases certain of its subsidiaries) (i) is delinquent in making certain payments under the New Notes, (ii) engages in a merger, consolidation or sale of substantially all of the Company’s assets, except as permitted by the Indenture, (iii) fails to deliver certain required notices under the New Notes, (iv) fails, following notice, to cure a breach of any other default under the New Notes or Indenture, (v) incurs certain events of default with respect to other indebtedness, (vi) is subject to certain bankruptcy proceedings or orders or (vii) fails to pay certain judgments. An event of default will also occur upon the occurrence of certain events relating to the guarantees of the New Notes.
The Company’s obligations under the New Notes are guaranteed by the Company’s wholly owned domestic subsidiaries. The Company has not provided condensed consolidated financial information for such subsidiaries because the Company has no independent assets or operations, the subsidiary guarantees are full and unconditional and joint and several subsidiaries of the Company other than the subsidiary guarantors are minor. Other than the restrictions in the 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.
The Company applied the provisions of ASC 470-50 “Modifications and Extinguishments” to account for debt exchange. The Company first determined that the exchange is not considered troubled debt, mainly due to the fact that no concession was given by the creditor. Based on the provisions of the ASC 470-50 the Company determined that the exchange resulted in an extinguishment of the old debt and the issuance of a new debt. As described above, warrants and New Notes were issued to settle to Old Notes. The Company considered the transaction to be at arm’s length (the transaction was made between willing unrelated parties) and therefore evidence of fair value. Since the new debt was not traded and no quotes were available, the Company determined the fair value of the New Notes in a manner consistent with the manner used in the purchase price allocation in connection with the acquisition of the Company by Tower in September 2008, by using present value techniques. This, together with the fair value of the warrants were used to determine the value of the Old Notes on the date of the exchange and resulted in an expense of approximately $2.4 million, which has been recorded in the statement of operations for the year ended December 31, 2010.
The fair value of the warrants was calculated based on the Black-Scholes formula. This fair value was also confirmed by independent calculation made by the investors as evidenced by the contract. The following assumptions were used in the fair value calculation risk–free rate based on US Treasury bills of 1.79% per annum, term of the warrants of five years, Tower’s market share price immediately prior to closing date of $1.36, the exercise price of the warrants as agreed with the investors of $1.70 and the volatility of Tower Shares of approximately 50%.
In that regards, the Company accounted for the warrants to shares of Tower, as capital contribution of Tower to the Company. The fair value of the Warrants was recorded in equity and the corresponding entry was part of the overall expense in debt exchange described above.
For disclosure purpose, the New Notes fair value of $71.2 million is 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 following table presents the associated interest cost related to the Old Notes and New Notes for the periods presented which consists of both the contractual interest coupon and amortization of the discount on the liability component:
Year ended December 31, 2011 – Old Notes and New Notes | Year ended December 31, 2010 – Old Notes and New Notes | Year ended December 31, 2009 – Old Notes | ||||||||||
Contractual interest recognized | $ | 10,097 | $ | 10,319 | $ | 10,061 | ||||||
Discount amortization | 6,802 | 5,768 | 5,199 | |||||||||
Effective interest rate – Old Notes | 14 | % | 14 | % | 14 | % | ||||||
Effective interest rate – New Notes | 19 | % | 19 | % | -- |
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Note 6: Income Taxes
The Company’s effective tax rate differs from the statutory rate as follows (in thousands):
Year ended December 31, 2011 | Year ended December 31, 2010 | Year ended December 31, 2009 | ||||||||||
Tax provision (benefit) computed at the federal statutory rate | $ | 2,634 | $ | 14,182 | $ | (1,567 | ) | |||||
State tax, net of federal provision (benefit) | 96 | (302 | ) | (3,686 | ) | |||||||
Research Credits | (201 | ) | -- | -- | ||||||||
Domestic Production Activities Deduction | (1,136 | ) | -- | |||||||||
Unrecognized tax benefits | 447 | -- | -- | |||||||||
Permanent items & others | 149 | 86 | 231 | |||||||||
Income tax provision (benefit) | $ | 3,125 | $ | 12,830 | $ | (5,022 | ) |
The Company’s tax provision is as follows (in thousands):
Year ended December 31, 2011 | Year ended December 31, 2010 | Year ended December 31, 2009 | ||||||||||
Current tax expense: | ||||||||||||
Federal | $ | 6,687 | $ | 11,141 | $ | 4 | ||||||
State | 95 | 31 | 43 | |||||||||
Foreign | 59 | 16 | 3 | |||||||||
Total current | 6,841 | 11,188 | 50 | |||||||||
Deferred tax expense: | ||||||||||||
Federal | (3,716 | ) | 1,828 | 464 | ||||||||
State | -- | (186 | ) | (5,536 | ) | |||||||
Total deferred | (3,716 | ) | 1,642 | (5,072 | ) | |||||||
Income tax provision (benefit) | $ | 3,125 | $ | 12,830 | $ | (5,022 | ) |
The Company’s effective tax rate for the year ended December 31, 2011 is higher than the statutory rate primarily due to interest expense on unrecognized tax benefits and state taxes.
The Company establishes a valuation allowance for 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. The state deferred tax assets exceed the reversal of taxable temporary differences. Without other significant positive evidence, the Company has determined that the state deferred tax assets are not more likely than not to be realized.
Significant components of the Company’s deferred tax assets and liabilities from federal and state income taxes are as follows (in thousands):
December 31, 2011 | December 31, 2010 | |||||||
Deferred tax assets– current: | ||||||||
Net operating loss carryforwards | $ | 758 | $ | 758 | ||||
Employees benefits and compensation | 1,772 | 1,699 | ||||||
Accruals, reserves and others | 2,093 | 2,484 | ||||||
Total deferred tax assets | 4,623 | 4,941 | ||||||
Valuation allowance | (266 | ) | (213 | ) | ||||
Total current deferred tax benefit | $ | 4,357 | $ | 4,728 | ||||
Net deferred tax liability- long-term: | ||||||||
Deferred tax assets | ||||||||
Net operating loss carryforwards | $ | 10,904 | $ | 11,080 | ||||
Employees benefits and compensation | 5,180 | 4,943 | ||||||
Other | 621 | 472 | ||||||
16,705 | 16,495 | |||||||
Valuation allowance | (3,564 | ) | (3,157 | ) | ||||
13,141 | 13,338 | |||||||
Deferred tax liability - property, plant and equipment | (3,663 | ) | $ | (2,603 | ) | |||
Intangible assets | (13,063 | ) | (14,495 | ) | ||||
Investment basis difference | (927 | ) | (2,916 | ) | ||||
Other | -- | (927 | ) | |||||
Debt discount | (1,209 | ) | (2,273 | ) | ||||
Total deferred tax liabilities | (5,721 | ) | (9,876 | ) | ||||
Net deferred taxes | $ | (1,364 | ) | $ | (5,148 | ) |
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The future utilization of the Company’s net operating loss carry forwards to offset future taxable income is subject to an annual limitation as a result of ownership changes that have occurred. Additional limitations could apply if ownership changes 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 Merger with Tower. The Company concluded that the net operating loss limitation for the change in ownership which occurred in September 2008 will be an annual utilization of $2.1 million for the use in its tax return. Accordingly the Company had at December 31, 2011 federal net operating loss carry forwards of approximately $36.8 million that will begin to expire in 2021 unless previously utilized.
At December 31, 2011, the Company had state net operating loss carry forwards of approximately $119.1 million. The state tax loss carry forwards will begin to expire in 2016, unless previously utilized.
At December 31, 2011, the Company had combined federal and state alternative minimum tax credits of $0.6 million. The alternative minimum tax credits do not expire.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Unrecognized tax benefits | ||||
(in thousands) | ||||
Balance at January 1, 2011 | $ | 14,908 | ||
Additions for tax positions of current year | 50 | |||
Additions for tax positions of prior year | 9,730 | |||
Reductions for tax positions of prior year | (723 | ) | ||
Balance at December 31, 2011 | $ | 23,965 | ||
Unrecognized tax benefits | ||||
(in thousands) | ||||
Balance at January 1, 2010 | $ | 10,929 | ||
Additions for tax positions of current year | 4,937 | |||
Additions for tax positions of prior year | 249 | |||
Reductions for tax positions of prior year | (1,207 | ) | ||
Balance at December 31, 2010 | $ | 14,908 |
Unrecognized tax benefits | ||||
(in thousands) | ||||
Balance at January 1, 2009 | $ | 1,871 | ||
Additions for tax positions of prior year | 9,641 | |||
Reductions for tax positions of prior year | (583 | ) | ||
Balance at December 31, 2009 | $ | 10,929 |
The Company accounts for its uncertain tax provisions in accordance with ASC 740. 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 December 31, 2011, the Company had unrecognized tax benefits of $24.0 million. The amount of unrecognized tax benefit that, if recognized and realized, would affect the effective tax rate is $19.3 million as of December 31, 2011.
During the fourth quarter of 2010, the Company completed its tax analysis on how to account for the repurchase premium for tax purposes on its restructured notes. The Company determined that due to the uncertainties regarding the timing of the deduction of the premium that a gross unrecognized tax position of approximately $4.9 million was recorded in accordance with ASC 740.
During the third quarter of 2011, the Company completed an analysis on its ability to utilize net operating losses under Section 382 of the Internal Revenue Code. The conclusion reached in the analysis was based on authority that did not meet recognition threshold as provided for in ASC 740. This position relates to net operating losses that were incurred prior to September 19, 2008. The $9.7 million increase in the gross unrecognized tax benefit has been recorded as a change to a prior year urnecognized tax benefit in the tabular rollforward above.
The Company does not anticipate a significant increase or decrease in its uncertain tax benefits within the twelve months of the reporting date.
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 2008; state and local income tax examinations before 2007; and foreign income tax examinations before 2008. 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 carry forward amount.
In February 2012 the Company was notified that the US tax authority is commencing an audit of its 2009 and 2010 tax returns, and has asked the Company for certain reports and data in connection with these years’ tax returns.
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Note 7: Employee Benefit Plans
The following information provided recognizes the changes in 2011, 2010 and 2009 periodic expenses and benefit obligations due to the bargaining agreement effective December 19, 2009 entered into by the Company with its collective bargaining unit employees.
Postretirement Medical Plan
The components of the net periodic benefit cost and other amounts recognized in other comprehensive income (loss) for the Company’s postretirement medical plan expense are as follows (in thousands, except percentages):
Year Ended December 31, 2011 | Year Ended December 31, 2010 | Year Ended December 31, 2009 | ||||||||||
Net periodic benefit cost | ||||||||||||
Service cost | $ | 193 | $ | 177 | $ | 178 | ||||||
Interest cost | 573 | 512 | 463 | |||||||||
Expected return on plan assets | -- | -- | ||||||||||
Amortization of transition obligation/(asset) | -- | -- | ||||||||||
Amortization of prior service costs | 114 | -- | -- | |||||||||
Amortization of net (gain) or loss | 109 | 48 | 57 | |||||||||
Total net periodic benefit cost | $ | 989 | $ | 737 | $ | 698 | ||||||
Other changes in plan assets and benefits obligations recognized in other comprehensive income | ||||||||||||
Prior service cost for the period | $ | (990 | ) | $ | 376 | $ | -- | |||||
Net (gain) or loss for the period | (1,752 | ) | 643 | 19 | ||||||||
Amortization of transition obligation (asset) | -- | -- | ||||||||||
Amortization of prior service costs | (114 | ) | -- | -- | ||||||||
Amortization of net gain or (loss) | (109 | ) | (48 | ) | (57 | ) | ||||||
Total recognized in other comprehensive income | $ | (2,965 | ) | $ | 971 | $ | (38 | ) | ||||
Total recognized in net periodic benefit cost and other comprehensive income | $ | (1,976 | ) | $ | 1,708 | $ | 660 | |||||
Weighted average assumptions used: | ||||||||||||
Discount rate | 5.90 | % | 6.30 | % | 6.10 | % | ||||||
Expected return on plan assets | N/A | N/A | N/A | |||||||||
Rate of compensation increases | N/A | N/A | N/A | |||||||||
Assumed health care cost trend rates: | ||||||||||||
Health care cost trend rate assumed for current year (Pre-65/Post-65) | 10.0%/21.0 | % | 10.00 | % | 9.00 | % | ||||||
Ultimate rate (Pre-65/Post-65) | 5.00%/5.00 | % | 5.00 | % | 5.00 | % | ||||||
Year the ultimate rate is reached (Pre-65/Post-65) | 2021/2019 | 2017 | 2015 | |||||||||
Measurement date | December 31, 2011 | December 31, 2010 | December 31, 2009 |
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Impact of one-percentage point change in assumed health care cost trend rates as of December 31, 2011: | Increase | Decrease | ||||||
Effect on service cost and interest cost | $ | 133 | $ | (107 | ) | |||
Effect on postretirement benefit obligation | $ | 1,182 | $ | (958 | ) |
The components of the change in benefit obligation; change in plan assets and funded status for the Company’s postretirement medical plan are as follows (in thousands):
Year Ended December 31, 2011 | Year Ended December 31, 2010 | Year Ended December 31, 2009 | ||||||||||
Change in benefit obligation: | ||||||||||||
Benefit obligation at beginning of period | $ | 9,811 | $ | 8,232 | $ | 7,688 | ||||||
Service cost | 193 | 177 | 178 | |||||||||
Interest cost | 573 | 512 | 463 | |||||||||
Benefits paid | (86 | ) | (129 | ) | (116 | ) | ||||||
Change in plan provisions | (990 | ) | 376 | -- | ||||||||
Actuarial loss (gain) | (1,752 | ) | 643 | 19 | ||||||||
Benefit obligation end of period | $ | 7,749 | $ | 9,811 | $ | 8,232 | ||||||
Change in plan assets: | ||||||||||||
Fair value of plan assets at beginning of period | $ | -- | $ | -- | $ | -- | ||||||
Actual return on plan assets | -- | -- | -- | |||||||||
Employer contribution | 86 | 129 | 116 | |||||||||
Benefits paid | (86 | ) | (129 | ) | (116 | ) | ||||||
Fair value of plan assets at end of period | $ | -- | $ | -- | $ | -- | ||||||
Funded status | $ | (7,749 | ) | $ | (9,811 | ) | $ | (8,232 | ) | |||
Amounts recognized in statement of financial position: | ||||||||||||
Non-current assets | $ | -- | $ | -- | $ | -- | ||||||
Current liabilities | (137 | ) | (200 | ) | (199 | ) | ||||||
Non-current liabilities | (7,612 | ) | (9,611 | ) | (8,033 | ) | ||||||
Net amount recognized | $ | (7,749 | ) | $ | (9,811 | ) | $ | (8,232 | ) | |||
Weighted average assumptions used: | ||||||||||||
Discount rate | 5.20 | % | 5.90 | % | 6.30 | % | ||||||
Rate of compensation increases | N/A | N/A | N/A | |||||||||
Assumed health care cost trend rates: | ||||||||||||
Health care cost trend rate assumed for next year (Pre 65/Post 65) | 8.25%/57.0 | % | 10.0%/21.0 | % | 10.0%/10.0 | % | ||||||
Ultimate rate (Pre 65/ Post 65) | 5.00%/5.00 | % | 5.00%/5.00 | % | 5.00%/5.00 | % | ||||||
Year the ultimate rate is reached (Pre 65/ Post 65) | 2021/2019 | 2021/2019 | 2017/2017 |
The following benefit payments are expected to be paid in each of the next five fiscal years and in the aggregate for the five fiscal years thereafter (in thousands):
Fiscal Year | Other Benefits ($) | |||
2012 | $ | 137 | ||
2013 | 192 | |||
2014 | 223 | |||
2015 | 262 | |||
2016 | 300 | |||
2017-2021 | $ | 2,190 |
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Pension Plan
The Company has a pension plan that provides for monthly pension payments to eligible employees upon retirement. The pension benefits are based on years of service and specified benefit amounts. The Company uses a December 31 measurement date. The Company makes quarterly contributions in accordance with the minimum actuarially determined amounts.
The components of the change in benefit obligation, the change in plan assets and funded status for the Company’s pension plan are as follows (in thousands):
Year Ended December 31, 2011 | Year Ended December 31, 2010 | Year Ended December 31, 2009 | ||||||||||
Net periodic benefit cost | ||||||||||||
Service cost | $ | -- | $ | 106 | $ | 306 | ||||||
Interest cost | 736 | 729 | 679 | |||||||||
Expected return on plan assets | (810 | ) | (693 | ) | (537 | ) | ||||||
Amortization of transition obligation/(asset) | -- | -- | -- | |||||||||
Amortization of prior service costs | -- | -- | -- | |||||||||
Amortization of net (gain) or loss | -- | -- | 192 | |||||||||
Total net periodic benefit cost | $ | (74 | ) | $ | 142 | $ | 640 | |||||
Other changes in plan assets and benefits obligations recognized in other comprehensive income | ||||||||||||
Prior service cost for the period | $ | -- | $ | -- | $ | -- | ||||||
Net (gain) or loss for the period | 2,468 | (85 | ) | (1,415 | ) | |||||||
Amortization of transition obligation (asset) | -- | -- | -- | |||||||||
Amortization of prior service costs | -- | -- | -- | |||||||||
Amortization of net gain or (loss) | -- | -- | (192 | ) | ||||||||
Total recognized in other comprehensive income | $ | 2,468 | $ | (85 | ) | $ | (1,607 | ) | ||||
Total recognized in net periodic benefit cost and other comprehensive income | $ | 2,394 | $ | 57 | $ | (967 | ) | |||||
Weighted average assumptions used: | ||||||||||||
Discount rate | 5.70 | % | 6.20 | % | 6.20 | % | ||||||
Expected return on plan assets | 7.50 | % | 7.50 | % | 7.50 | % | ||||||
Rate of compensation increases | N/A | N/A | N/A | |||||||||
Estimated amounts that will be amortized from accumulated other comprehensive income in the next fiscal year ending December 31, 2012: | ||||||||||||
Transition obligation (asset) | $ | -- | $ | -- | $ | -- | ||||||
Prior service cost | -- | -- | -- | |||||||||
Net actuarial (gain) or loss | $ | 70 | $ | -- | $ | -- |
The components of the change in benefit obligation; change in plan assets and funded status for the Company’s pension plan are as follows (in thousands):
Year Ended December 31, 2011 | Year Ended December 31, 2010 | Year Ended December 31, 2009 | ||||||||||
Change in benefit obligation: | ||||||||||||
Benefit obligation at beginning of period | $ | 13,105 | $ | 11,939 | $ | 11,101 | ||||||
Service cost | -- | 106 | 306 | |||||||||
Interest cost | 736 | 729 | 679 | |||||||||
Benefits paid | (273 | ) | (265 | ) | (241 | ) | ||||||
Change in plan provisions | -- | -- | -- | |||||||||
Actuarial loss (gain) | 1,566 | 596 | 94 | |||||||||
Benefit obligation end of period | $ | 15,134 | $ | 13,105 | $ | 11,939 | ||||||
Change in plan assets | ||||||||||||
Fair value of plan assets at beginning of period | $ | 10,742 | $ | 9,253 | $ | 6,995 | ||||||
Actual return on plan assets | (92 | ) | 1,375 | 2,046 | ||||||||
Employer contribution | 465 | 379 | 453 | |||||||||
Benefits paid | (273 | ) | (265 | ) | (241 | ) | ||||||
Fair value of plan assets at end of period | $ | 10,842 | $ | 10,742 | $ | 9,253 | ||||||
Funded status | $ | (4,292 | ) | $ | (2,363 | ) | $ | (2,686 | ) | |||
Accumulated benefit obligation | $ | (15,134 | ) | $ | (13,105 | ) | $ | (11,939 | ) | |||
Amounts recognized in statement of financial position | ||||||||||||
Non-current assets | $ | -- | $ | -- | $ | -- | ||||||
Current liabilities | -- | -- | -- | |||||||||
Non-current liabilities | (4,292 | ) | (2,363 | ) | (2,686 | ) | ||||||
Net amount recognized | $ | (4,292 | ) | $ | (2,363 | ) | $ | (2,686 | ) | |||
Weighted average assumptions used | ||||||||||||
Discount rate | 5.10 | % | 5.70 | % | 6.20 | % | ||||||
Expected return on plan assets | 7.50 | % | 7.50 | % | 7.50 | % | ||||||
Rate of compensation increases | N/A | N/A | N/A |
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The following benefit payments are expected to be paid in each of the next five fiscal years and in the aggregate for the five fiscal years thereafter (in thousands):
Fiscal Year | Other Benefits | |||
2012 | $ | 434 | ||
2013 | 502 | |||
2014 | 572 | |||
2015 | 633 | |||
2016 | 684 | |||
2017-2021 | $ | 4,222 |
The Company has estimated the expected return on assets of the plan of 7.5% based on assumptions derived from, among other things, the historical return on assets of the plan, the current and expected investment allocation of assets held by the plan and the current and expected future rates of return in the debt and equity markets for investments held by the plan. The obligations under the plan could differ from the obligation currently recorded if management’s estimates are not consistent with actual investment performance.
The Company’s pension plan weighted average asset allocations at December 31, 2011 by asset category are as follows:
Asset Category: | December 31, 2011 | Target allocation 2012 | ||||||
Equity securities | 74 | % | 65%-75 | % | ||||
Debt securities | 26 | % | 25%-35 | % | ||||
Real estate | 0 | % | 0 | % | ||||
Other | 0 | % | 0 | % | ||||
Total | 100 | % | 100 | % |
The Company’s primary policy goals regarding plan assets are cost-effective diversification of plan assets, competitive returns on investment, and preservation of capital. Plan assets are currently invested in mutual funds with various debt and equity investment objectives. The target asset allocation for the plan assets is 25-35% debt, or fixed income securities, and 65-75% equity securities. Individual funds are evaluated periodically based on comparisons to benchmark indices and peer group funds and necessary investment decisions are made in accordance with the policy goals of the plan investments by management.
Note 8: Stockholders’ 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 million shares to 100 shares.
The number of outstanding shares of Jazz’s common stock at December 31, 2011 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 originally issued in 2006 and that were outstanding immediately prior to the effective date 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 date of the merger divided by the exchange ratio of 1.8. Fractional ordinary shares of Tower were rounded up to the nearest whole number. The warrants were fully expired in March 2011.
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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 date of the Merger, whether vested or unvested, became exercisable or will become exercisable for Tower ordinary shares. The Company recorded $ 942, $24,838 and $81,391 of compensation expenses for the years ended December 31, 2011 ,2010 and 2009, respectively for modifications of these existing options pursuant to the Merger.
On September 19, 2008, Tower awarded non-statutory stock options to employees of the Company to purchase 855,000 Tower’s ordinary shares. The stock option grants vest on the second anniversary from the date of grant. The exercise price of the options awarded is $0.46 per share. The Company recorded $100,060, $91,867 and $25,946 of compensation expense for the period ended December 31,2010 ,2009 and 2008 relating to this issuance of Tower’s non-qualified stock options to the Company’s employees.
During 2009, Tower awarded 2,690,000 non-qualified stock options to the Company employees that vest over a three year period from the date of grant. The weighted average exercise price was $0.29.
During 2010, Tower awarded 394,500 non-qualified stock options to the Company employees that vest over a three year period from the date of grant. The weighted average exercise price was $1.36.
During 2011, Tower awarded 1,510,000 non-qualified stock options to the Company employees that vest over a three year period from the date of grant. The weighted average exercise price was $1.41.
The Company recorded $652 thousands, $460 thousands and $331 thousands of compensation expenses relating to options granted to employees, for the years ended December 31, 2011, 2010 and 2009, respectively. Stock-based compensation expense was recognized in the following line items in the statement of operations (in thousands):
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Component of income (loss) before provision for income taxes: | ||||||||||||
Cost of revenue | $ | 346 | $ | 231 | $ | 124 | ||||||
Research and development, net | 153 | 109 | 75 | |||||||||
Selling, general and administrative | 153 | 120 | 132 | |||||||||
Stock-based compensation expense | 652 | 460 | 331 | |||||||||
Income tax benefits related to stock-based compensation (before consideration of valuation allowance) | (244 | ) | (173 | ) | (124 | ) | ||||||
Stock-based compensation, net of taxes | $ | 408 | $ | 287 | $ | 207 |
The following table summarizes stock option award activity:
Number of options | Weighted average exercise price per option | |||||||
(in thousands) | ||||||||
Outstanding at December 31, 2010 | 4,480 | $ | 0.88 | |||||
Granted | 1,510 | 1.41 | ||||||
Exercised | (240 | ) | 0.47 | |||||
Cancelled or expired | (284 | ) | 0.97 | |||||
Outstanding at December 31, 2011 | 5,466 | 1.04 | ||||||
Options exercisable at December 31, 2011 | 2,774 | $ | 1.03 |
Number of options | Weighted average exercise price per option | |||||||
(in thousands) | ||||||||
Outstanding at December 31, 2009 | 5,948 | $ | 0.76 | |||||
Granted | 395 | 1.36 | ||||||
Exercised | (783 | ) | 0.52 | |||||
Cancelled or expired | (1,080 | ) | 0.66 | |||||
Outstanding at December 31, 2010 | 4,480 | 0.88 | ||||||
Options exercisable at December 31, 2010 | 2,134 | $ | 1.32 |
Number of options | Weighted average exercise price per option | |||||||
(in thousands) | ||||||||
Outstanding at December 31, 2008 | 3,583 | $ | 1.12 | |||||
Granted | 2,690 | 0.29 | ||||||
Exercised | (3 | ) | 0.58 | |||||
Cancelled or expired | (322 | ) | 1.05 | |||||
Outstanding at December 31, 2009 | 5,948 | 0.76 | ||||||
Options exercisable at December 31, 2009 | 1,849 | $ | 1.44 |
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The aggregate pretax intrinsic value, weighted average remaining contractual life, and weighted average per share exercise price of options outstanding and of options exercisable as of December 31, 2011 were as follows:
Options Outstanding:
Range of Exercise Prices | Number of Shares (In thousands) | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (In years) | |||||||||
$ 0.29-0.84 | 2,483 | $ | 0.37 | $ | 5.08 | |||||||
$ 1.40-1.88 | 2,983 | $ | 1.59 | $ | 5.75 | |||||||
5,466 | $ | 1.04 | $ | 5.44 |
Options Exercisable:
Range of Exercise Prices | Number of Shares (In thousands) | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (In years) | |||||||||
$ 0.29-0.84 | 1,562 | $ | 0.41 | 5.35 | ||||||||
$ 1.40-1.88 | 1,212 | $ | 1.81 | 5.36 | ||||||||
2,774 | $ | 1.03 | 5.36 |
The following table summarizes key data points for exercised options (in thousands):
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
The intrinsic value of options exercised | $ | 186 | $ | 751 | $ | 1 | ||||||
Cash received from the exercise of stock options | 113 | 405 | 1 | |||||||||
The tax benefit realized from stock options exercised | 63 | 257 | -- | |||||||||
The fair value of options exercised | $ | 54 | $ | 131 | $ | -- |
Note 9: Related Party Transactions:
December 31, 2011 | December 31, 2010 | |||||||
Due from related party (included in the accompanying balance sheets) | $ | 20,560 | $ | 25,768 | ||||
Due to related parties (included in the accompanying balance sheets ) | $ | 2,049 | $ | 3,389 |
Related party balances are with Tower and are mainly for purchases and payments on behalf of the other party, tools sale, tools lease and service charges.
Note 10: Segment and Geographic Information
ASC Topic 280 “Segment Reporting”, requires the determination of reportable business segments (i.e., the management approach). This approach requires that business segment information used by the chief operating decision maker to assess performance and manage company resources be the source for segment information disclosure. The Company operates in one business segment: the manufacturing and process design of semiconductor wafers.
Revenues are derived principally from customers located within the United States.
Long-lived assets consisting of property, plant and equipment and intangible assets are primarily located within the United States.
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Note 11: Commitments and Contingencies
Leases
Since 2002, the Company has leased its fabrication facilities, land and headquarters from Conexant under non-cancelable operating leases through March 2017. In December 2010, Conexant sold the Company’s fabrication facilities, land and headquarters. In connection with the sale, the Company negotiated amendments to its operating leases that confirm the Company’s ability to remain in the fabrication facilities through 2017 and the Company’s unilateral options to extend the terms of each of these leases for two consecutive five-year periods. Under our amended leases with the new owner, the Company’s rental payments consist of fixed base rent and fixed management fees and our pro rata share of certain expenses incurred by the landlord in the ownership of these buildings, including property taxes, building insurance and common area maintenance. These lease expenses are included in operating expenses in the accompanying consolidated statements of operations. Under the lease amendments, the landlord may terminate the lease for the Company’s headquarters building, but not the Company’s fabrication facility, no earlier than January 2014.
Aggregate rental expense under operating leases, including amounts paid to Conexant and the current owner, was approximately $2.4 million for each of the years ended December 31, 2011, 2010 and 2009, respectively.
Future minimum payments under non-cancelable operating leases are as follows:
Payment Obligations by Year (in thousands) | ||||||||||||||||||||||||||||
2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Total | ||||||||||||||||||||||
Operating leases | $ | 2,260 | $ | 2,376 | $ | 2,376 | $ | 2,338 | $ | 2,222 | $ | 432 | $ | 12,004 |
.Environmental Matters
The Company’s operations are regulated under a number of federal, state and local environmental laws and regulations, which govern, among other things, the discharge of hazardous materials into the air and water as well as the handling, storage and disposal of such materials. Compliance with environmental law is a major consideration for all semiconductor manufacturers because hazardous materials are used in the manufacturing process. In addition, because the Company is a generator of hazardous waste, the Company, along with any other person with whom it arranges for the disposal of such waste, may be subject to potential financial exposure for costs associated with an investigation and remediation of sites at which it has arranged for the disposal of hazardous waste, if such sites become contaminated. This is true even if the Company fully complies with applicable environmental laws. In addition, it is possible that in the future, new or more stringent requirements could be imposed. Management believes it has materially complied with all material environmental laws and regulations. There have been no material claims asserted nor is management aware of any material unasserted claims for environmental matters.
Litigation and Claims
During 2008, an International Trade Commission (“ITC”) action was filed by Agere/LSI Corporation (“LSI”), alleging infringement of U.S. patent 5,227,335 (the ‘335 patent) under Section 337 of the Tariff Act of 1930 (Section 337) by seventeen corporations. Following that initial filing, in October 2008, LSI amended the ITC complaint requesting to add the Company, Tower and three other corporations as additional respondents. In September 2009, the administrative law judge (“ALJ”) ruled against LSI and in favor of the respondents, determining that the ‘335 patent claims asserted by LSI are invalid. In November 2009, in response to a Petition for Review filed by LSI, the ITC determined that it would review the ALJ’s determination on patent invalidity. In March 2010, the ITC issued a notice of final determination that there was no violation of Section 337, ruling that the LSI ‘335 patent claims were invalid, and terminated the ITC investigation.
LSI appealed the final determination to the U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”). While that appeal was pending, the ‘335 patent expired. The ITC moved to dismiss LSI's appeal as moot, which LSI conceded. In November, 2010, the Federal Circuit issued an order vacating the ITC’s final determination and remanded the investigation to the ITC with instructions to dismiss the investigation as moot.
LSI also previously filed an action for patent infringement of the ‘335 patent against the Company and other corporations in the United States District Court for the Eastern District of Texas, which action was stayed pending the conclusion of the ITC investigation. On June 16, 2011, the District Court granted a motion by LSI to dismiss the Texas action without prejudice. As a result of that dismissal, there is no longer any legal proceeding currently pending by LSI against the Company or Tower.
42
Indemnification
The Company has entered into contracts with customers in which the Company provides certain indemnification to the customer in the event of claims of patent or other intellectual property infringement resulting from the customer’s use of the Company’s intellectual property. The Company has not recorded a liability for potential obligations under these indemnification provisions and would not record such a liability unless the Company believed that the likelihood of a material obligation was probable and estimatable.
Note 12: Valuation Account
Dollars in thousands | Additions | |||||||||||||||
Balance at the beginning of the period | Charged to costs and expenses | Deductions (A) | Balance at the end of the period | |||||||||||||
Allowance for doubtful accounts receivable: | ||||||||||||||||
Year ended December 31, 2011 | $ | 326 | $ | 1,017 | (323 | ) | $ | 1,020 | ||||||||
Year ended December 31, 2010 | $ | 877 | $ | 293 | $ | (844 | ) | $ | 326 | |||||||
Year ended December 31, 2009 | $ | 852 | $ | 714 | $ | (689 | ) | $ | 877 |
(A) | Uncollectible accounts receivable written off, net of recoveries |
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of 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 chief executive officer and our chief 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.
Management’s Annual Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurances with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control — Integrated Framework. Based on its assessment using those criteria, management concluded that, as of December 31, 2011, the Company’s internal control over financial reporting is effective.
Changes in internal controls over financial reporting
There were no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Not Applicable.
44
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Omitted pursuant to General Instruction I (1) (a) and (b) of Form 10-K.
Item 11. Executive Compensation
Omitted pursuant to General Instruction I (1) (a) and (b) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Omitted pursuant to General Instruction I (1) (a) and (b) of Form 10-K.
Item 13. Certain Relationships and Related Transactions and Director Independence
Omitted pursuant to General Instruction I (1) (a) and (b) of Form 10-K.
Item 14. Principal Accountant Fees and Services
The following presents aggregate fees billed to us by Deloitte Touche Tohmatsu, our current principal accountants for the years ended December 31, 2011, December 31, 2010 and December 31, 2009. All of the fees described below were pre-approved by our audit committee.
Audit Fees. Audit fees billed by Brightman Almagor Zohar, a member of Deloitte Touche Tohmatsu were $ 48,000 for the year ended December 31, 2011 and $240,000 for the year ended December 31, 2010.
Audit-Related Fees. For the years ended December 31, 2011 and December 31, 2010 audit-related fees billed were nil and $86,463, respectively, in connection with Sarbanes Oxley compliance.
Tax Fees. Tax fees billed were $12,000 for the year ended December 31, 2011 and nil for the years ended December 31, 2010 and 2009.
All Other Fees. Fees related to transfer pricing study for the year ended December 31, 2011 were $26,465. Fees related to Notes Exchange for the year ended December 31, 2010 were $35,000. There were no other fees billed for the years ended December 31, 2011, 2010 or 2009.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) | Financial Statements Schedules and Exhibits. |
(1) | The following financial statements are included in Item 8: |
i) | Jazz Technologies, Inc. Reports of Independent Registered Public Accounting Firms Balance Sheets Statements of Operations Statement of Stockholder’s Equity Statements of Cash Flows Notes to Financial Statements |
(2) | Financial Statement Schedules: None |
(3) | Listing of Exhibits: |
Exhibit No. | Description | |
3.1 | Amended and Restated Certificate of Incorporation — Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on September 25, 2008. | |
3.2 | Amended and Restated Bylaws — Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on November 30, 2007. | |
4.1 | Specimen Unit Certificate — Incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-128058). | |
4.2 | Specimen Common Stock Certificate — Incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-128058). | |
4.3 | Specimen Warrant Certificate — Incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-128058). | |
4.4 | Form of Warrant Agreement between Continental Stock Transfer & Trust Company and the Registrant — Incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-128058). | |
4.5 | Warrant Clarification Agreement dated as of November 9, 2006 between the Registrant and Continental Stock Transfer & Trust Company — Incorporated by reference to Exhibit 4.6 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2006. | |
4.6 | Indenture, dated December 19, 2006, between the Registrant and U.S. Bank National Association, as trustee, including Form of 8% Convertible Note due 2011 — Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on December 22, 2007. | |
46
4.7 | Supplemental Indenture, dated April 3, 2007, among the Registrant, Jazz Semiconductor, Inc., Newport Fab, LLC, Jazz/Hua Hong, LLC, Jazz IT Holding, LLC and U.S. Bank National Association, as trustee — Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on April 5, 2007. |
4.8 | Registration Rights Agreement, dated December 19, 2006, among the Registrant, CRT Capital Group LLC and Needham & Company, LLC — Incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K filed on December 22, 2007. | |
4.9 | Limited Waiver, dated as of December 18, 2006, among Acquicor Management LLC, Harold L. Clark, John P. Kensey, Moshe I. Meidar, Paul Pittman, ThinkEquity Partners LLC, Wedbush Morgan Securities, Inc., CRT Capital Group LLC and Gunn Allen Financial, Inc. — Incorporated by reference to Exhibit 4.5 to the Registrant’s Current Report on Form 8-K filed on December 22, 2007. | |
4.10 | Consent between the Registrant and ThinkEquity Partners LLC dated February 14, 2007 — Incorporated by reference to Exhibit 99.9 to the Schedule 13D filed by Gilbert F. Amelio and Acquicor Management LLC Report on March 20, 2007. | |
4.11 | Consent between the Registrant and ThinkEquity Partners LLC dated September 4, 2007 — Incorporated by reference to Exhibit 99.11 to the Schedule 13D filed by Gilbert F. Amelio and Acquicor Management LLC Report on February 11, 2008. | |
4.12 | Waiver, dated September 4, 2007, among the Registrant, ThinkEquity Partners LLC and each of Acquicor Management LLC, Harold L. Clark, John P. Kensey and Moshe I. Meidar — Incorporated by reference to the Registrant’s Registration Statement on Form S-3 (Registration No. 333-146546) | |
4.13 | Second Supplemental Indenture by and among Jazz Technologies, Tower Semiconductor, Ltd., Jazz Semiconductor, Inc., Newport Fab, LLC and U.S. Bank National Association, dated as of September 19, 2008 — Incorporated by reference to Exhibit 4.1 to Jazz Technologies’ Current Report on Form 8-K filed on September 25, 2008. | |
4.14 | Assumption Agreement by and among Jazz Technologies, Tower Semiconductor, Ltd. and Continental Stock Transfer & Trust Company, dated as of September 19, 2008 — Incorporated by reference to Exhibit 4.2 to Jazz Technologies’ Current Report on Form 8-K filed on September 25, 2008. | |
4.15 | Indenture dated July 15, 2010 by and among Jazz Technologies, Jazz Semiconductor, Inc., Newport Fab, LLC and U.S. Bank National Association – Incorporated by reference to Exhibit 4.15 to Jazz Technologies’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 | |
4.16 | Registration Rights Agreement dated July 15, 2010 by and among Jazz Technologies, Jazz Semiconductor, Inc., Newport Fab, LLC and holders of the Registrant’s 8% Senior Notes due 2015 — Incorporated by reference to Exhibit 4.16 to Jazz Technologies’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2010. | |
10.1 | Agreement and Plan of Merger, dated as of September 26, 2006, by and among Acquicor Technology Inc., Joy Acquisition Corp., Jazz Semiconductor, Inc. and T.C. Group, L.L.C., as the stockholders’ representative — Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 29, 2006. | |
*10.2 | 2006 Equity Incentive Plan, as amended — Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 8, 2007. | |
*10.3 | Form of Option Agreement under the 2006 Equity Incentive Plan — Incorporated by reference to Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-143022). | |
*10.4 | Form of Restricted Stock Bonus Agreement under the 2006 Equity Incentive Plan — Incorporated by reference to Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-143022). | |
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10.5 | Half Dome Lease Agreement between Specialtysemi, Inc. and Conexant Systems, Inc. dated March 12, 2002 — Incorporated by reference to Exhibit 10.13 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
10.6 | First Amendment to Half Dome Lease Agreement between Newport Fab, LLC and Conexant Systems, Inc. dated May 1, 2004 — Incorporated by reference to Exhibit 10.14 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). |
10.7 | Second Amendment to Half Dome Lease Agreement between Newport Fab, LLC and Conexant Systems, Inc. dated December 31, 2005 — Incorporated by reference to Exhibit 10.15 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
10.8 | Third Amendment to Half Dome Lease Agreement between Newport Fab, LLC and Conexant Systems, Inc. dated as of September 26, 2006— Incorporated by reference to Exhibit 10.14 to Jazz Technologies’ Current Report on Form 8-K filed on February 23, 2007. | |
10.9 | Fourth Amendment to Half Dome Lease between Newport Fab, LLC and Conexant Systems, Inc. dated as of June 15, 2009 — Filed as Exhibit 10.21 to the initial filing of the Annual Report to which this Amendment No. 1 relates. | |
10.10 | Fifth Amendment to Half Dome Lease between Newport Fab, LLC and Uptown Newport LP dated as of December 8, 2010 — Filed as Exhibit 10.22 to the initial filing of the Annual Report to which this Amendment No. 1 relates. | |
10.11 | Sublease between Newport Fab, LLC and Conexant Systems dated as of December 22, 2010 — Filed as Exhibit 10.23 to the initial filing of the Annual Report to which this Amendment No. 1 relates. | |
10.12 | El Capitan Lease Agreement between Specialtysemi, Inc. and Conexant Systems, Inc. dated March 12, 2002 — Incorporated by reference to Exhibit 10.16 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
10.13 | First Amendment to El Capitan Lease Agreement between Newport Fab, LLC and Conexant Systems, Inc. dated October 1, 2004 — Incorporated by reference to Exhibit 10.17 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
10.14 | Second Amendment to El Capitan Lease Agreement between Newport Fab, LLC and Conexant Systems, Inc. dated November 31, 2005 — Incorporated by reference to Exhibit 10.18 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
10.15 | Third Amendment to El Capitan Lease Agreement between Newport Fab, LLC and Conexant Systems, Inc. dated September 1, 2006 — Incorporated by reference to Exhibit 10.18 to Jazz Technologies’ Current Report on Form 8-K filed on February 23, 2007. | |
10.16 | Fourth Amendment to El Capitan Lease Agreement between Newport Fab, LLC and Conexant Systems, Inc. dated September 26, 2006— Incorporated by reference to Exhibit 10.19 to Jazz Technologies’ Current Report on Form 8-K filed on February 23, 2007. | |
10.17 | Fifth Amendment to El Capitan Lease Agreement between Newport Fab, LLC and Conexant Systems, Inc. dated as of June 5, 2010 — Filed as Exhibit 10.29 to the initial filing of the Annual Report to which this Amendment No. 1 relates. | |
10.18 | Sixth Amendment to El Capitan Lease Agreement between Newport Fab, LLC and Uptown Newport LP dated as of December 22, 201 — Filed as Exhibit 10.30 to the initial filing of the Annual Report to which this Amendment No. 1 relates 0. |
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*10.19 | Form of Indemnity Agreement entered into between the Registrant and certain of its officers and directors — Incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 29, 2007. |
10.20 | Second Amended and Restated Loan and Security Agreement by and among Jazz Technologies, Jazz Semiconductor, Inc., Newport Fab, LLC, Wachovia Capital Markets, LLC, Wachovia Capital Finance Corporation (Western) and the lenders from time to time party thereto, dated as of September 19, 2008 — Incorporated by reference to Exhibit 3.1 to Jazz Technologies’ Current Report on Form 8-K filed on September 25, 2008. | |
10.21 | First Amendment dated March 17, 2009 to the Second Amended and Restated Loan and Security Agreement by and among Jazz Technologies, Jazz Semiconductor, Inc., Newport Fab, LLC, Wachovia Capital Markets, LLC, Wachovia Capital Finance Corporation (Western) and the lenders from time to time party thereto, dated as of September 19, 2008 – Incorporated by reference to Exhibit 10.1 to Jazz Technologies’ Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 | |
10.22 | Second Amendment dated July 16, 2009 to the Second Amended and Restated Loan and Security Agreement by and among Jazz Technologies, Jazz Semiconductor, Inc., Newport Fab, LLC, Wachovia Capital Markets, LLC, Wachovia Capital Finance Corporation (Western) and the lenders from time to time party thereto, dated as of September 19, 2008 – Incorporated by reference to Exhibit 10.1 to Jazz Technologies’ Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 | |
10.23 | Third Amendment dated as of April 21, 2010 to the Second Amended and Restated Loan and Security Agreement by and among Jazz Technologies, Jazz Semiconductor, Inc., Newport Fab, LLC, Wachovia Capital Markets, LLC, Wachovia Capital Finance Corporation (Western) and the lenders from time to time party thereto, dated as of September 19, 2008 – Incorporated by reference to Exhibit 10.46 to Jazz Technologies’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 | |
10.24 | Fourth Amendment dated as of June 29, 2010 to the Second Amended and Restated Loan and Security Agreement by and among Jazz Technologies, Jazz Semiconductor, Inc., Newport Fab, LLC, Wachovia Capital Markets, LLC, Wachovia Capital Finance Corporation (Western) and the lenders from time to time party thereto, dated as of September 19, 2008 – Incorporated by reference to Exhibit 10.47 to Jazz Technologies’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 | |
10.25 | Fifth Amendment dated as of July 19, 2010 to the Second Amended and Restated Loan and Security Agreement by and among Jazz Technologies, Jazz Semiconductor, Inc., Newport Fab, LLC, Wachovia Capital Markets, LLC, Wachovia Capital Finance Corporation (Western) and the lenders from time to time party thereto, dated as of September 19, 2008 — Filed as Exhibit 10.52 to the initial filing of the Annual Report to which this Amendment No. 1 relates. | |
10.26 | Sixth Amendment dated as of June 14, 2011 to the Second Amended and Restated Loan and Security Agreement by and among Jazz Technologies, Jazz Semiconductor, Inc., Newport Fab, LLC, Wachovia Capital Markets, LLC, Wachovia Capital Finance Corporation (Western) and the lenders from time to time party thereto, dated as of September 19, 2008 — Incorporated by reference to Exhibit 10.55 to Jazz Technologies’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2011. | |
10.27 | Agreement and Plan of Merger and Reorganization by and among Tower Semiconductor Ltd., Armstrong Acquisition Corp. and Jazz Technologies, dated as of May 19, 2008 — Incorporated by reference to Exhibit 2.1 to Jazz Technologies’ Current Report on Form 8-K filed on May 20, 2008. | |
10.28 | Exchange Agreement dated July 9, 2010 by and among Jazz Technologies, Inc., Tower Semiconductor, Ltd., Jazz Semiconductor, Inc., Newport Fab, LLC, Zazove Associates, LLC and certain holders of the Registrant’s 8% Senior Notes due 2011 – Incorporated by reference to Exhibit 10.48 to Jazz Technologies’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 | |
24.1 | Power of Attorney (included on the signature pages hereto) |
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31.1 | Principal Executive Officer 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). | |
32.1 | Section 1350 Certification | |
32.2 | Section 1350 Certification |
101.1 | Financial information from the registrant’s Annual Report on Form 10-K for the year ended December 31, 2011, formatted in XBRL. |
* | Denotes a management compensatory plan or arrangement. |
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.
JAZZ TECHNOLOGIES, INC. | |||
By: | /s/ RAFI MOR | ||
Rafi Mor | |||
Principal Executive Officer |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Rafi Mor and Susanna H. Bennett his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signatures | Title | Date |
/s/ RAFI MOR | Principal Executive Officer | March 30, 2012 |
Rafi Mor | (Principal Executive Officer) | |
/s/ SUSANNA H. BENNETT | Chief Financial Officer | March 30, 2012 |
Susanna H. Bennett | (Principal Financial and Accounting Officer) |
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