TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
UNAUDITED CONDENSED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
INDEX TO UNAUDITED CONDENSED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
Page
ACCOUNTANTS' REVIEW REPORT 1
BALANCE SHEETS 2
STATEMENTS OF OPERATIONS 3
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 4
STATEMENTS OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6-14
The Board of Directors
Tower Semiconductor Ltd.
Migdal Ha'emek
Gentlemen:
Re: Review of Unaudited Condensed Interim
Consolidated Financial Statements as of June 30, 2004
At your request, we have reviewed the condensed interim consolidated financial
statements ("interim financial statements") of Tower Semiconductor Ltd. ("the
Company") and its subsidiary, as follows:
- - Balance sheet as of June 30, 2004.
- - Statements of operations for the six months and three months ended June 30,
2004.
- - Statements of changes in shareholders' equity for the six months and three
months ended June 30, 2004.
- - Statements of cash flows for the six months and three months ended June 30,
2004.
Our review was conducted in accordance with procedures prescribed by the
Institute of Certified Public Accountants in Israel. The procedures included,
inter alia, reading the aforementioned interim financial statements, reading the
minutes of the shareholders' meetings and meetings of the board of directors and
its committees, and making inquiries with the persons responsible for financial
and accounting affairs.
Since the review that was performed is limited in scope and does not constitute
an audit in accordance with generally accepted auditing standards, we do not
express an opinion on the aforementioned interim financial statements.
In performing our review, nothing came to our attention which indicates that
material adjustments are required to the interim financial statements for them
to be deemed financial statements prepared in conformity with accounting
principles generally accepted in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The effect of the application of the latter on the financial position
and results of operations as of the date and for the periods presented is
summarized in Note 5.
Respectfully submitted,
Brightman Almagor & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu
Tel Aviv, Israel
July 21, 2004
- 1 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data and per share data)
As of June 30, December 31,
--------------------------- ------------
2004 2003 2003
--------- ----------- ------------
(unaudited)
---------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 19,115 $ 12,277 $ 12,448
Short-term interest-bearing deposits -- 5,000 --
Cash and short-term interest-bearing deposits
designated for investments relating to Fab 2 42,279 2,021 44,042
Trade accounts receivable (net of allowance for
doubtful accounts of $0, $71 and $0, respectively) 19,113 5,441 11,631
Other receivables 20,067 20,717 11,073
Inventories 25,712 13,275 19,382
Other current assets 2,112 2,455 1,729
--------- --------- ---------
Total current assets 128,398 61,186 100,305
--------- --------- ---------
LONG-TERM INVESTMENTS
Long-term interest-bearing deposits
designated for investments relating to Fab 2 4,918 12,437 4,848
Other long-term investments 6,000 6,000 6,000
--------- --------- ---------
10,918 18,437 10,848
--------- --------- ---------
PROPERTY AND EQUIPMENT, NET 589,271 574,196 568,412
--------- --------- ---------
OTHER ASSETS, NET 102,094 107,823 108,770
--------- --------- ---------
TOTAL ASSETS $ 830,681 $ 761,642 $ 788,335
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ -- $ 4,000 $ --
Trade accounts payable 51,082 79,810 40,249
Other current liabilities 8,853 9,322 9,564
--------- --------- ---------
Total current liabilities 59,935 93,132 49,813
LONG-TERM DEBT 461,000 308,000 431,000
CONVERTIBLE DEBENTURES 25,508 26,549 25,783
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMERS' ADVANCES 45,762 47,246 46,347
OTHER LONG-TERM LIABILITIES 8,209 6,011 5,935
--------- --------- ---------
Total liabilities 600,414 480,938 558,878
--------- --------- ---------
SHAREHOLDERS' EQUITY
Ordinary shares, NIS 1.00 par value - authorized 150,000,000,
100,000,000 and 150,000,000 shares, respectively;
issued 66,894,593, 49,241,064 and 52,996,097 shares, respectively 16,251 12,291 13,150
Additional paid-in capital 517,041 413,334 427,881
Proceeds on account of share capital -- -- 16,428
Shareholder receivables (26) (26) (26)
Accumulated deficit (293,927) (135,823) (218,904)
--------- --------- ---------
239,339 289,776 238,529
Treasury stock, at cost - 1,300,000 shares (9,072) (9,072) (9,072)
--------- --------- ---------
Total shareholders' equity 230,267 280,704 229,457
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 830,681 $ 761,642 $ 788,335
========= ========= =========
See notes to condensed interim consolidated financial statements.
- 2 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data and per share data)
Six months ended Three months ended Year ended
June 30, June 30, December 31,
------------------------- ------------------------- --------------
2004 2003 2004 2003 2003
--------- --------- --------- --------- --------------
(unaudited) (unaudited)
------------------------- -------------------------
SALES $ 60,899 $ 25,471 $ 33,652 $ 12,879 $ 61,368
COST OF SALES 104,399 37,268 54,250 19,334 122,395
--------- --------- --------- --------- ---------
GROSS LOSS (43,500) (11,797) (20,598) (6,455) (61,027)
--------- --------- --------- --------- ---------
OPERATING COSTS AND EXPENSES
Research and development 7,256 8,656 3,751 4,799 20,709
Marketing, general and administrative 11,021 10,764 5,430 5,120 22,615
--------- --------- --------- --------- ---------
18,277 19,420 9,181 9,919 43,324
--------- --------- --------- --------- ---------
OPERATING LOSS (61,777) (31,217) (29,779) (16,374) (104,351)
FINANCING EXPENSE, NET (13,340) (29) (6,809) (515) (9,826)
OTHER INCOME (EXPENSE), NET 94 66 56 59 (84)
--------- --------- --------- --------- ---------
LOSS FOR THE PERIOD $ (75,023) $ (31,180) $ (36,532) $ (16,830) $(114,261)
========= ========= ========= ========= =========
BASIC LOSS PER ORDINARY SHARE
Loss per share $ (1.16) $ (0.70) $ (0.55) $ (0.37) $ (2.40)
========= ========= ========= ========= =========
Loss used to compute
basic loss per share $ (75,009) $ (31,180) $ (36,525) $ (16,830) $(114,114)
========= ========= ========= ========= =========
Weighted average number of ordinary
shares outstanding - in thousands 64,812 44,481 66,632 45,515 47,608
========= ========= ========= ========= =========
See notes to condensed interim consolidated financial statements.
- 3 -
TOWER SEMICONDUCTOR LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands, except share data and per share data)
Proceeds
on Shareholder
account receivables
Ordinary shares Additional of and
------------------- paid-in share unearned Accumulated Treasury
hares Amount capital capital compensation deficit stock Total
-------- --------- -------- ---------- ------------- ----------- ----------- ----------
BALANCE - JANUARY 1, 2004 52,996,097 $ 13,150 $427,881 $ 16,428 $ (26) $ (218,904) $ (9,072) $ 229,457
Changes during six-month period
(unaudited):
Issuance of shares 2,358,746 530 15,979 (16,428) 81
Issuance of shares, net of
related costs
- public offering 11,444,500 2,550 72,536 75,086
Exercise of share options 95,250 21 645 666
Loss for the period (75,023) (75,023)
---------- --------- -------- --------- ----- ---------- ----------- ---------
BALANCE - JUNE 30, 2004
(unaudited) 66,894,593 $ 16,251 $517,041 $ -- $ (26) $ (293,927) $ (9,072) $ 230,267
========== ========= ======== ========= ===== ========== =========== =========
BALANCE - JANUARY 1, 2003 44,735,532 $ 11,294 $400,808 $ -- $ (53) $ (104,643) $ (9,072) $ 298,334
Changes during six-month period
(unaudited):
Stock-based compensation related
to the Fab 2 constructor 145 145
Issuance of shares, net of
related costs 4,505,532 997 12,381 13,378
Amortization of unearned
compensation 27 27
Loss for the period (31,180) (31,180)
---------- --------- -------- --------- ----- ---------- ----------- ---------
BALANCE - JUNE 30, 2003
(unaudited) 49,241,064 $ 12,291 $413,334 $ -- $ (26) $ (135,823) $ (9,072) $ 280,704
========== ========= ======== ========= ===== ========== =========== =========
BALANCE - APRIL 1, 2004 66,882,383 $ 16,248 $516,962 $ -- $ (26) $ (257,395) $ (9,072) $ 266,717
Changes during three-month
period (unaudited):
Issuance of shares 11,960 3 78 81
Exercise of share options 250 1 1
Loss for the period (36,532) (36,532)
---------- --------- -------- --------- ----- ---------- ----------- ---------
BALANCE - JUNE 30, 2004
(unaudited) 66,894,593 $ 16,251 $517,041 $ -- $ (26) $ (293,927) $ (9,072) $ 230,267
========== ========= ======== ========= ===== ========== =========== =========
BALANCE - APRIL 1, 2003 44,735,532 $ 11,294 $400,887 $ -- $ (34) $ (118,993) $ (9,072) $ 284,082
Changes during three-month
period (unaudited):
Issuance of shares, net of
related costs 4,505,532 997 12,447 13,444
Amortization of unearned
compensation 8 8
Loss for the period (16,830) (16,830)
---------- --------- -------- --------- ----- ---------- ----------- ---------
BALANCE - JUNE 30, 2003
(unaudited) 49,241,064 $ 12,291 $413,334 $ -- $ (26) $ (135,823) $ (9,072) $ 280,704
========== ========= ======== ========= ===== ========== =========== =========
BALANCE - JANUARY 1, 2003 44,735,532 $ 11,294 $400,808 $ -- $ (53) $ (104,643) $ (9,072) $ 298,334
Changes during 2003:
Stock-based compensation related
to the Fab 2 constructor 145 145
Stock-based compensation related
to the Facility Agreement with
the Banks 4,205 4,205
Issuance of shares, net of
related costs 8,260,565 1,856 22,723 24,579
Proceeds on account of share
capital 16,428 16,428
Amortization of unearned
compensation 27 27
Loss for the year (114,261) (114,261)
---------- --------- -------- --------- ----- ---------- ----------- ---------
BALANCE - DECEMBER 31, 2003 52,996,097 $ 13,150 $427,881 $ 16,428 $ (26) $ (218,904) $ (9,072) $ 229,457
========== ========= ======== ========= ===== ========== =========== =========
See notes to condensed interim consolidated financial statements.
- 4 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, except share data and per share data)
Six months ended Three months ended Year ended
June 30, June 30, December 31,
----------------------- ----------------------- ------------
2004 2003 2004 2003 2003
--------- --------- --------- --------- ------------
(unaudited) (unaudited)
----------------------- -----------------------
CASH FLOWS - OPERATING ACTIVITIES
Loss for the period $ (75,023) $ (31,180) $ (36,532) $ (16,830) $(114,261)
Adjustments to reconcile loss for the period
to net cash used in operating activities:
Income and expense items not involving cash flows:
Depreciation and amortization 55,406 8,878 28,477 4,207 54,611
Effect of indexation and translation on
convertible debentures (366) -- 534 -- (878)
Other expense (income), net (94) (66) (56) (59) 84
Changes in assets and liabilities:
Decrease (increase) in trade accounts receivable (7,482) 2,015 (3,558) 1,259 (4,175)
Decrease (increase) in other receivables
and other current assets (3,168) (649) (1,420) 1,898 1,264
Increase in inventories (6,330) (114) (4,128) (70) (6,221)
Increase in trade accounts payable 3,479 3,864 170 455 801
Increase (decrease) in other current liabilities (726) 1,225 640 1,733 1,467
Increase in other long-term liabilities 2,274 605 42 262 529
--------- --------- --------- --------- ---------
(32,030) (15,422) (15,831) (7,145) (66,779)
Increase (decrease) in long-term liability
in respect of customers' advances (504) -- 13 -- (899)
--------- --------- --------- --------- ---------
Net cash used in operating activities (32,534) (15,422) (15,818) (7,145) (67,678)
--------- --------- --------- --------- ---------
CASH FLOWS - INVESTING ACTIVITIES
Decrease in cash, short-term and long-term interest-bearing
deposits designated for investments relating to Fab 2 1,693 48,773 35,802 19,522 14,341
Investments in property and equipment (80,287) (103,664) (55,033) (55,631) (179,310)
Investment grants received 12,502 17,356 9,991 10,636 33,811
Proceeds from sale of equipment 104 64 66 57 222
Investments in other assets (702) (16,497) -- (10,737) (22,098)
Decrease in deposits, net -- 5,500 3,000 4,000 10,500
--------- --------- --------- --------- ---------
Net cash used in investing activities (66,690) (48,468) (6,174) (32,153) (142,534)
--------- --------- --------- --------- ---------
CASH FLOWS - FINANCING ACTIVITIES
Proceeds from (costs related to) issuance of shares, net 75,225 13,310 (240) 13,425 24,375
Proceeds from exercise of share options 666 -- 1 -- --
Proceeds on account of share capital -- -- -- -- 16,428
Repayment of long-term debt -- (2,000) -- (1,000) (13,000)
Proceeds from long-term debt, net
in connection with re-borrowing -- -- -- -- 187,000
Proceeds from long-term debt 30,000 57,000 30,000 27,000 --
--------- --------- --------- --------- ---------
Net cash provided by financing activities 105,891 68,310 29,761 39,425 214,803
--------- --------- --------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 6,667 4,420 7,769 127 4,591
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 12,448 7,857 11,346 12,150 7,857
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 19,115 $ 12,277 $ 19,115 $ 12,277 $ 12,448
========= ========= ========= ========= =========
NON-CASH ACTIVITIES
Investments in property and equipment $ 28,182 $ 39,774 $ 26,183 $ 30,468 $ 17,160
========= ========= ========= ========= =========
Stock-based compensation related to
the Facility Agreement with the Banks $ -- $ -- $ -- $ -- $ 4,205
========= ========= ========= ========= =========
Investments in other assets $ 19 $ 7,374 $ -- $ 2,528 $ 3,153
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 11,977 $ 7,879 $ 5,446 $ 3,462 $ 15,674
========= ========= ========= ========= =========
Cash paid during the period for income taxes $ 97 $ 102 $ 61 $ 49 $ 239
========= ========= ========= ========= =========
See notes to condensed interim consolidated financial statements.
- 5 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2004
(dollars in thousands, except share data and per share data)
NOTE 1 - BASIS OF PRESENTATION
A. The unaudited condensed interim consolidated financial statements as
of June 30, 2004 and for the six months and three months then ended
("interim financial statements") of Tower Semiconductor Ltd. ("the
Company") and subsidiary should be read in conjunction with the
audited consolidated financial statements of the Company and
subsidiary as of December 31, 2003 and for the year then ended,
including the notes thereto. In the opinion of management, the
interim financial statements include all adjustments necessary for a
fair presentation of the financial position and results of
operations as of the date and for the interim periods presented. The
results of operations for the interim periods are not necessarily
indicative of the results to be expected on a full-year basis.
B. The interim financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") in Israel,
which, as applicable to these interim financial statements, differ
in certain respects from GAAP in the United States of America ("U.S.
GAAP"), as indicated in Note 5.
The accounting principles applied in the preparation of these
interim financial statements are consistent with those principles
applied in the preparation of the most recent annual audited
financial statements.
C. Establishment and Operations of New Fabrication Facility
In January 2001, the Company's Board of Directors approved the
establishment of a new wafer fabrication facility in Israel ("Fab
2"), at an expected cost of approximately $1,500,000. Fab 2 is
designated to manufacture semiconductor integrated circuits on
silicon wafers in geometries of 0.18 micron and below on
200-millimeter wafers. The Company has entered into several related
agreements and other arrangements and has completed public and
private financing deals, which, as of the approval date of the
interim financial statements, have provided an aggregate of
$1,226,100 of financing for Fab 2.
During the third quarter of 2003, in which Fab 2 was substantially
completed, the Company began commercial production and shipment of
wafers to its customers utilizing the 0.18 micron process
technology. With the commencement of Fab 2 operations, the Company
began to depreciate and amortize Fab 2 assets, as well as to expense
most of the ongoing direct costs related to the construction and
equipping of Fab 2 and transfer of the Fab 2 technology that had
been previously capitalized.
The Fab 2 project is a complex undertaking, which entails
substantial risks and uncertainties. For further details concerning
the Fab 2 project and related agreements, which were amended several
times, risks and uncertainties, see Note 13A to the 2003 audited
consolidated financial statements.
- 6 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2004
(dollars in thousands, except share data and per share data)
NOTE 2 - MAJOR CUSTOMERS
Sales to major customers as a percentage of total sales were as follows:
Six months ended
June 30,
--------
2004 2003
---- ----
(unaudited)
Customer A 19 % -- %
Customer B 16 --
Customer C 14 25
Customer D 7 22
Customer E 3 19
Other customers (*) 16 12
(*) Represents sales to three different customers each of whom accounted for
between 1% and 9% of sales during the six months ended June 30, 2004, and
to three customers (2%-6%) during the six months ended June 30, 2003.
NOTE 3 - RECENT DEVELOPMENTS RELATING TO FAB 2
A. Ordinary Shares Issued to the Primary Wafer Partners and Equity
Investors
In January 2004, the primary Wafer Partners and Equity Investors
were issued an aggregate of 2,346,786 Ordinary Shares of the Company
in consideration for their final $16,428 committed investment made
in December 2003. The shares were issued at a per share price of
$7.00, a price equal to the offering price at the public offering
described in Note 4A.
B. Approved Enterprise Status
Under the terms of the Fab 2 approved enterprise program,
investments in respect of Fab 2 are to be completed by December 31,
2005, five years from the date the approval certificate was
obtained. Due to the later than planned commencement of construction
of Fab 2 and prevailing market conditions, the Company does not
currently expect to complete Fab 2 investments by the end of 2005.
Following the Company's notification to the Investment Center of its
revised investment schedule contemplated in an updated plan for the
construction and equipping of Fab 2, including, among others, its
reduced rate of annual investments and lower than projected
expectations for Fab 2 sales, the Company received from the
Investment Center, in July 2004, an approval to said revised
investment schedule.
- 7 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2004
(dollars in thousands, except share data and per share data)
NOTE 3 - RECENT DEVELOPMENTS RELATING TO FAB 2 (cont.)
B. Approved Enterprise Status (cont.)
While Israeli law currently limits the ability of the Investment
Center to extend the investment period beyond five years, the
Company's management estimates, based on discussions held with the
Investment Center, prior and subsequent to the balance sheet date,
that it is probable that satisfactory arrangements will be made to
enable the extension of the investment period.
Under the terms of the approved enterprise program, the Company is
eligible to receive grants of 20% of up to $1,250,000 invested in
Fab 2 plant and equipment, or an aggregate of up to $250,000, of
which as of the balance sheet date, an aggregate of $130,513 has
been already received from the Investment Center.
C. Hedging Activities
During the reported period, the Company entered into hedging
transactions as follows:
(1) Foreign exchange agreements (cylinder options, options and
forward contracts) to hedge exposure related to purchase of
machinery and equipment and salary and wage costs, the
aggregate outstanding amounts of which as of June 30, 2004 was
$4,071 and $3,000, respectively.
(2) Agreements to hedge interest rate exposure on long-term bank
loans under the Facility Agreement, in the aggregate amount as
of June 30, 2004 of $80,000. As of the balance sheet date, out
of the total $461,000 long-term bank loans under that
agreement, $292,000 is under hedging transactions.
NOTE 4 - OTHER RECENT DEVELOPMENTS
A. Public Offering Completed in the First Quarter of 2004
During the first quarter of 2004, the Company completed a public
offering of its Ordinary Shares at a price of $7.00 per share.
Following the offering, and including the partial exercise of
over-allotment option the Company granted the underwriters, the
Company issued 11,444,500 of its Ordinary Shares, in consideration
for gross proceeds of $80,112 (net of related costs - $75,086).
- 8 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2004
(dollars in thousands, except share data and per share data)
NOTE 4 - OTHER RECENT DEVELOPMENTS (cont.)
B. Siliconix
In May 2004, the Company and chip maker Siliconix incorporated, an
80% owned subsidiary of Vishay Intertechnology Inc., entered into a
definitive long-term foundry agreement for semiconductor
manufacturing. Pursuant to the agreement, Siliconix will place with
the Company orders valued at approximately $200,000 for the purchase
of wafers to be manufactured in the Company's Fab 1 over a seven to
ten year period. Approximately $53,000 of that amount will be
delivered over an initial three year period starting after the
completion of the transfer of Siliconix's technology to Fab 1. The
agreement provides that Siliconix will advance the Company $20,000
to be used primarily for the purchase of additional equipment
required to satisfy Siliconix's orders, which will be credited
towards the purchase price of the wafers. Management estimates that
the receipt of the $20,000 shall occur during the third quarter of
2004.
C. Class Action
In July 2003, certain shareholders of the Company filed a
shareholders' class action complaint in the United States against
the Company and certain of its directors, Wafer Partners and Equity
Investors (the "Defendants"). The plaintiffs have asserted claims
arising under the Securities Exchange Act of 1934, alleging
misstatements and omissions made by the Defendants in materials sent
to the Company's shareholders in April 2002 with respect to the
approval of an amendment to the Company's investment agreements with
its Fab 2 investors. The plaintiffs seek damages in unspecified
amounts, which could be substantial, and unspecified rescissory
relief. The Company believes that the complaint is without merit and
is vigorously contesting it. In January 2004, the Defendants filed
with the court a motion to dismiss the action, and in April 2004 the
plaintiffs filed an opposition to the motion to dismiss. In May
2004, the Defendants filed a reply brief and in July 2004, the
plaintiffs filed a sur-reply memorandum in further opposition to the
Defendants' motion to dismiss. As of the date of the interim
financial statements, the Court has not rendered a decision with
regard to the motion to dismiss.
- 9 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2004
(dollars in thousands, except share data and per share data)
NOTE 5 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP
With regard to the Company's interim financial statements, the material
differences between GAAP in Israel and in the U.S. relate to the
following. See G below for the presentation of the Company's unaudited
balance sheet as of June 30, 2004 in accordance with U.S. GAAP.
A. Presentation of Cash and Short-Term and Long-Term Interest-Bearing
Deposits Designated for Investments Relating to Fab 2
In accordance with U.S. GAAP, cash, short-term and long-term
interest-bearing deposits designated for investments relating to Fab
2 should be excluded from current assets and long-term investments
and presented separately as a non-current asset. Accordingly, as of
June 30, 2004, $42,279 and $4,918 were reclassified, respectively,
from current assets and long-term investments to a long-term asset
(as of December 31, 2003 - $44,042 and $4,848, respectively).
B. Presentation of Net Long-Term Liabilities in Respect of Employees
Under U.S. GAAP, assets and liabilities relating to severance
arrangements are to be presented separately and are not to be
offset, while according to Israeli GAAP such an offset is required.
Accordingly, as of June 30, 2004 an amount of $15,492 was
reclassified from other long-term liabilities to long-term
investments (as of December 31, 2003 - $14,607).
C. Hedging Activities in accordance with U.S. GAAP (SFAS 133)
Complying with SFAS 133 and SFAS 138 and the related interpretations
thereon with respect to the Company's hedging transactions as of
June 30, 2004 would have resulted in: an increase in other long-term
liabilities in the amount of $4,003; a decrease in other
comprehensive loss for the six months ended June 30, 2004 in the net
amount of $6,581; an accumulated other comprehensive loss component
of equity balance as of June 30, 2004 in the amount of $9,316; and
in a decrease of $5,283 in property and equipment, net as of June
30, 2004.
- 10 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2004
(dollars in thousands, except share data and per share data)
NOTE 5 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (cont.)
D. Implementation of SFAS 123 and SFAS 148
Had compensation cost for the Company's share option plans been
determined based on fair value at the grant dates for awards made
through June 30, 2004 in accordance with SFAS 123, as amended by
SFAS 148, the Company's pro forma loss and loss per share would have
been as follows:
Six months ended Three months ended
------------------------ ------------------------
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
-------- -------- -------- --------
(unaudited) (unaudited)
Pro forma loss
Loss for the period, as reported
according to U.S. GAAP
(see H below) $(75,023) $(31,180) $(36,532) $(16,830)
Less - stock-based compensation
determined under APB 25 -- 27 --
8
Add - stock-based compensation
determined under SFAS 123 (2,322) (5,690) (991) (4,079)
-------- -------- -------- --------
Pro forma loss $(77,345) $(36,843) $(37,523) $(20,901)
======== ======== ======== ========
Basic loss per share As reported according to U.S.
GAAP (see I below) $ (1.18) $ (0.70) $ (0.56) $ (0.37)
======== ======== ======== ========
Pro forma $ (1.22) $ (0.83) $ (0.57) $ (0.46)
======== ======== ======== ========
- 11 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2004
(dollars in thousands, except share data and per share data)
NOTE 5 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (cont.)
E. Sale of Securities
Under Accounting Principles Board Opinion No. 14 ("APB 14"), the
proceeds from the sale of the securities in January 2002 are to be
allocated to each of the securities issued based on their relative
fair value, while according to Israeli GAAP such treatment is not
required. Complying with APB 14, based on the average market value
of each of the securities issued in the first three days following
their issuance (in January 2002), would have resulted in an increase
in shareholders' equity as of June 30, 2004 and December 31, 2003 in
the amount of $2,363 (net of $196 related issuance expenses), and a
decrease in convertible debentures as of such dates in the amount of
$2,559. The effect of amortization of the discount on the
convertible debentures under U.S.GAAP for the six-month and
three-month periods ended June 30, 2004 would have been immaterial.
F. Presentation of Proceeds on Account of Shares in Accordance with
U.S. GAAP (SFAS 150)
According to SFAS No. 150, "Accounting For Certain Financial
Instruments with Characteristics of Both Liabilities and Equity", a
financial instrument that embodies an unconditional obligation (as
defined in that guidance), that the issuer must or may settle by
issuing a variable number of its equity shares, shall be classified
as a liability if, at inception, the monetary value of the
obligation is based solely or predominantly on, among others, a
fixed monetary amount known at inception. Accordingly, the $16,428
described in Note 3A, and which according to Israeli GAAP was
presented as of December 31, 2003 as "Proceeds on account of share
capital", were reclassified as of December 31, 2003 under SFAS 150
as "Liability in respect of variable number of shares to be issued".
Such presentation for the U.S. GAAP purposes was required since as
of December 31, 2003, the amount of shares the Company was to issue
in consideration of the aggregate of $16,428 was not determined as
of such date, and was actually based on mechanisms that embody a
variable number of shares. Following the issuance of shares, as
described in Note 3A, the $16,428 amount is presented for U.S. GAAP
purposes as well as paid in equity.
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TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2004
(dollars in thousands, except share data and per share data)
NOTE 5 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (cont.)
G. Balance Sheets in Accordance with U.S. GAAP
As of June 30, 2004 As of December 31, 2003
------------------------------ --------------------------------
U.S. As per As per As per As per
GAAP Israeli Adjust- U.S. Israeli Adjust- U.S.
remark GAAP ments GAAP GAAP ments GAAP
------ ------- ------- ------ ------- ------- ------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 19,115 $ $ 19,115 $ 12,448 $ $ 12,448
Cash and short-term interest-bearing deposits
designated for investments relating to Fab 2 A 42,279 (42,279) -- 44,042 (44,042) --
Trade accounts receivable 19,113 19,113 11,631 11,631
Other receivables 20,067 20,067 11,073 11,073
Inventories 25,712 25,712 19,382 19,382
Other current assets 2,112 2,112 1,729 1,729
--------- --------- --------- --------- --------- ---------
Total current assets 128,398 (42,279) 86,119 100,305 (44,042) 56,263
--------- --------- --------- --------- --------- ---------
LONG-TERM INVESTMENTS
Long-term interest-bearing deposits
designated for investments relating to Fab 2 A 4,918 (4,918) -- 4,848 (4,848) --
Other long-term investments B 6,000 15,492 21,492 6,000 14,607 20,607
--------- --------- --------- --------- --------- ---------
10,918 10,574 21,492 10,848 9,759 20,607
--------- --------- --------- --------- --------- ---------
PROPERTY AND EQUIPMENT, NET C 589,271 (5,283) 583,988 568,412 (5,947) 562,465
--------- --------- --------- --------- --------- ---------
CASH AND SHORT-TERM AND LONG-TERM
INTEREST-BEARING DEPOSITS DESIGNATED
FOR INVESTMENTS RELATING TO FAB 2 A -- 47,197 47,197 -- 48,890 48,890
--------- --------- --------- --------- --------- ---------
OTHER ASSETS, NET E 102,094 (196) 101,898 108,770 (196) 108,574
--------- --------- --------- --------- --------- ---------
TOTAL ASSETS $ 830,681 $ 10,013 $ 840,694 $ 788,335 $ 8,464 $ 796,799
========= ========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 51,082 $ $ 51,082 $ 40,249 $ 40,249
Other current liabilities 8,853 8,853 9,564 9,564
--------- --------- --------- --------- --------- ---------
Total current liabilities 59,935 -- 59,935 49,813 -- 49,813
LONG-TERM DEBT 461,000 461,000 431,000 431,000
CONVERTIBLE DEBENTURES E 25,508 (2,559) 22,949 25,783 (2,559) 23,224
LIABILITY IN RESPECT OF A VARIABLE
NUMBER OF SHARES TO BE ISSUED F -- -- -- 16,428 16,428
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMERS' ADVANCES 45,762 45,762 46,347 46,347
OTHER LONG-TERM LIABILITIES B,C 8,209 19,495 27,704 5,935 24,527 30,462
--------- --------- --------- --------- --------- ---------
Total liabilities 600,414 16,936 617,350 558,878 38,396 597,274
--------- --------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY
Ordinary shares, NIS 1.00 par value -
authorized 150,000,000 shares;
issued 66,894,593 and 52,996,097 shares, 16,251 16,251 13,150 13,150
respectively
Additional paid-in capital E 517,041 2,363 519,404 427,881 2,363 430,244
Proceeds on account of share capital F -- -- 16,428 (16,428) --
Shareholder receivables (26) (26) (26) (26)
Accumulated other comprehensive loss C -- (9,316) (9,316) -- (15,897) (15,897)
Accumulated deficit (293,927) 30 (293,897) (218,904) 30 (218,874)
--------- --------- --------- --------- --------- ---------
239,339 (6,923) 232,416 238,529 (29,932) 208,597
Treasury stock, at cost - 1,300,000 shares (9,072) (9,072) (9,072) (9,072)
--------- --------- --------- --------- --------- ---------
Total shareholders' equity 230,267 (6,923) 223,344 229,457 (29,932) 199,525
--------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 830,681 $ 10,013 $ 840,694 $ 788,335 $ 8,464 $ 796,799
========= ========= ========= ========= ========= =========
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TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2004
(dollars in thousands, except share data and per share data)
NOTE 5 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (cont.)
H. Statements of Operations in Accordance with U.S. GAAP
Complying with SFAS 133 and SFAS 138 (C above) and APB 14 (E above)
would not have materially affected the results of operations for the
six-month and three-month periods ended June 30, 2004 and 2003.
I. Loss Per Share in Accordance with U.S. GAAP (SFAS 128)
In accordance with U.S. GAAP (SFAS 128, including the implementation
of SFAS 133 and SFAS 138, and APB 14 as described in H above), the
basic and diluted loss per share for the six-month and three-month
periods ended June 30, 2004 would be $1.18 and $0.56, respectively
(during the corresponding periods - $0.70 and $0.37, respectively).
- 14 -