Exhibit 99.2
TOWER SEMICONDUCTOR LTD.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 1
BALANCE SHEETS 2
STATEMENTS OF OPERATIONS 3
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 4
STATEMENTS OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6-58
[DELOITTE LOGO] Brightman Almagor
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
www.deloitte.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF
TOWER SEMICONDUCTOR LTD.
We have audited the accompanying consolidated balance sheets of Tower
Semiconductor Ltd. and subsidiary ("the Company") as of December 31, 2005 and
2004, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2005. These financial statements are the responsibility of
the Company's Board of Directors and 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 audit 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and subsidiary as of December 31, 2005 and 2004, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2005, in accordance 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,
results of operations and cash flows as of the dates and for the years presented
is summarized in Note 20.
BRIGHTMAN ALMAGOR & CO.
CERTIFIED PUBLIC ACCOUNTANTS
A MEMBER FIRM OF DELOITTE TOUCHE TOHMATSU
Tel Aviv, Israel
February 1, 2006
- 1 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data and per share data)
AS OF DECEMBER 31,
----------------------
Note 2005 2004
------- --------- ---------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 7,337 $ 27,664
DESIGNATED CASH AND SHORT-TERM INTEREST-BEARING DEPOSITS 31,661 53,793
TRADE ACCOUNTS RECEIVABLE: 14
RELATED PARTIES 5,309 9,054
OTHERS 11,467 10,232
OTHER RECEIVABLES 3 9,043 11,365
INVENTORIES 4 24,376 25,669
OTHER CURRENT ASSETS 1,048 1,818
--------- ---------
TOTAL CURRENT ASSETS 90,241 139,595
--------- ---------
LONG-TERM INVESTMENTS
LONG-TERM INTEREST-BEARING DEPOSITS
DESIGNATED FOR FAB 2 OPERATIONS -- 5,134
--------- ---------
PROPERTY AND EQUIPMENT, NET 5 510,645 609,296
--------- ---------
OTHER ASSETS, NET: 6
TECHNOLOGY 61,441 76,950
OTHER 16,359 16,533
--------- ---------
77,800 93,483
========= =========
TOTAL ASSETS $ 678,686 $ 847,508
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITIES OF LONG-TERM DEBT 8 $ 21,103 $ --
CURRENT MATURITIES OF CONVERTIBLE DEBENTURES 9 6,453 --
TRADE ACCOUNTS PAYABLE 59,741 65,326
OTHER CURRENT LIABILITIES 7 8,972 10,678
--------- ---------
TOTAL CURRENT LIABILITIES 96,269 76,004
LONG-TERM DEBT 8 497,000 497,000
CONVERTIBLE DEBENTURES 9 19,358 26,651
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMERS' ADVANCES 11A 59,621 64,428
OTHER LONG-TERM LIABILITIES 10 11,012 15,445
COMMITMENTS AND CONTINGENCIES 11
--------- ---------
TOTAL LIABILITIES 683,260 679,528
--------- ---------
CONVERTIBLE DEBENTURES 12 25,493 --
--------- ---------
SHAREHOLDERS' EQUITY (DEFICIT)
ORDINARY SHARES, NIS 1.00 PAR VALUE - AUTHORIZED
500,000,000 AND 250,000,000 SHARES, RESPECTIVELY;
ISSUED 68,232,056 AND 66,999,796 SHARES, RESPECTIVELY 11A, 13 16,548 16,274
ADDITIONAL PAID-IN CAPITAL 11A 522,237 517,476
SHAREHOLDER RECEIVABLES (26) (26)
ACCUMULATED DEFICIT (559,754) (356,672)
--------- ---------
(20,995) 177,052
TREASURY STOCK, AT COST - 1,300,000 SHARES 13C (9,072) (9,072)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (30,067) 167,980
========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 678,686 $ 847,508
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 2 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data and per share data)
YEAR ENDED DECEMBER 31,
-----------------------------------
NOTE 2005 2004 2003
------ --------- --------- ---------
REVENUES 14
SALES $ 93,991 $ 124,111 $ 61,368
REVENUES RELATED TO A JOINT DEVELOPMENT AGREEMENT 11B(3) 8,000 1,944 --
--------- --------- ---------
101,991 126,055 61,368
COST OF SALES 11A(1) 238,358 228,410 122,395
--------- --------- ---------
GROSS LOSS (136,367) (102,355) (61,027)
--------- --------- ---------
OPERATING COSTS AND EXPENSES
RESEARCH AND DEVELOPMENT 16,029 17,053 20,709
MARKETING, GENERAL AND ADMINISTRATIVE 17,418 21,297 22,615
--------- --------- ---------
33,447 38,350 43,324
========= ========= =========
OPERATING LOSS (169,814) (140,705) (104,351)
FINANCING EXPENSE, NET 15 (35,651) (29,745) (9,826)
OTHER INCOME (EXPENSE), NET 16 2,383 32,682 (84)
--------- --------- ---------
LOSS FOR THE YEAR $(203,082) $(137,768) $(114,261)
========= ========= =========
BASIC LOSS PER ORDINARY SHARE
LOSS PER SHARE $ (2.55) $ (1.79) $ (2.01)
========= ========= =========
LOSS USED TO COMPUTE
BASIC LOSS PER SHARE $(203,082) $(137,768) $(114,114)
========= ========= =========
WEIGHTED AVERAGE NUMBER OF ORDINARY
SHARES OUTSTANDING - IN THOUSANDS 79,675 77,071 56,696
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
TOWER SEMICONDUCTOR LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(dollars in thousands, except share data and per share data)
PROCEEDS
ORDINARY SHARES ADDITIONAL ON
--------------------- PAID-IN ACCOUNT OF
SHARES AMOUNT CAPITAL SHARE CAPITAl
---------- -------- --------- --------
BALANCE - JANUARY 1, 2003 44,735,532 $ 11,294 $ 400,808 $ --
STOCK-BASED COMPENSATION RELATED TO
THE FAB 2 CONSTRUCTOR 145
STOCK-BASED COMPENSATION RELATED TO THE
FACILITY AGREEMENT WITH THE BANKS, NOTE 13B(5) 4,205
ISSUANCE OF SHARES, NET OF RELATED COSTS 8,260,565 1,856 22,723
PROCEEDS ON ACCOUNT OF SHARE CAPITAL 16,428
AMORTIZATION OF UNEARNED COMPENSATION
LOSS FOR THE YEAR
---------- -------- --------- --------
BALANCE - DECEMBER 31, 2003 52,996,097 $ 13,150 $ 427,881 $ 16,428
ISSUANCE OF SHARES 2,463,949 553 16,414 (16,428)
ISSUANCE OF SHARES, NET OF RELATED COSTS -
PUBLIC OFFERING 11,444,500 2,550 72,536
EXERCISE OF SHARE OPTIONS 95,250 21 645
LOSS FOR THE YEAR
---------- -------- --------- --------
BALANCE - DECEMBER 31, 2004 66,999,796 $ 16,274 $ 517,476 $ --
ISSUANCE OF SHARES 1,232,260 274 1,520
STOCK-BASED COMPENSATION RELATED TO THE
FACILITY AGREEMENT WITH THE BANKS, NOTE 13B(5) 2,793
STOCK-BASED COMPENSATION RELATED TO RIGHTS OFFERED
TO EMPLOYEES, NOTE 13H 448
LOSS FOR THE YEAR
---------- -------- --------- --------
BALANCE - DECEMBER 31, 2005 68,232,056 $ 16,548 $ 522,237 $ --
========== ======== ========= ========
SHAREHOLDER
RECEIVABLES
AND
UNEARNED ACCUMULATED TREASURY
COMPENSATION DEFICIT STOCK TOTAL
----- ---------- -------- ---------
BALANCE - JANUARY 1, 2003 $ (53) $ (104,643) $ (9,072) $ 298,334
STOCK-BASED COMPENSATION RELATED TO
THE FAB 2 CONSTRUCTOR 145
STOCK-BASED COMPENSATION RELATED TO THE
FACILITY AGREEMENT WITH THE BANKS, NOTE 13B(5) 4,205
ISSUANCE OF SHARES, NET OF RELATED COSTS 24,579
PROCEEDS ON ACCOUNT OF SHARE CAPITAL 16,428
AMORTIZATION OF UNEARNED COMPENSATION 27 27
LOSS FOR THE YEAR (114,261) (114,261)
----- ---------- -------- ---------
BALANCE - DECEMBER 31, 2003 $ (26) $ (218,904) $ (9,072) $ 229,457
ISSUANCE OF SHARES 539
ISSUANCE OF SHARES, NET OF RELATED COSTS -
PUBLIC OFFERING 75,086
EXERCISE OF SHARE OPTIONS 666
LOSS FOR THE YEAR (137,768) (137,768)
----- ---------- -------- ---------
BALANCE - DECEMBER 31, 2004 $ (26) $ (356,672) $ (9,072) $ 167,980
ISSUANCE OF SHARES 1,794
STOCK-BASED COMPENSATION RELATED TO THE
FACILITY AGREEMENT WITH THE BANKS, NOTE 13B(5) 2,793
STOCK-BASED COMPENSATION RELATED TO RIGHTS OFFERED
TO EMPLOYEES, NOTE 13H 448
LOSS FOR THE YEAR (203,082) (203,082)
----- ---------- -------- ---------
BALANCE - DECEMBER 31, 2005 $ (26) $ (559,754) $ (9,072) $ (30,067)
===== ========== ======== =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, except share data and per share data)
YEAR ENDED DECEMBER 31,
-----------------------------------
2005 2004 2003
--------- --------- ---------
CASH FLOWS - OPERATING ACTIVITIES
LOSS FOR THE YEAR $(203,082) $(137,768) $(114,261)
ADJUSTMENTS TO RECONCILE LOSS FOR THE YEAR
TO NET CASH USED IN OPERATING ACTIVITIES:
INCOME AND EXPENSE ITEMS NOT INVOLVING CASH FLOWS:
DEPRECIATION AND AMORTIZATION 144,852 121,067 54,611
EFFECT OF INDEXATION AND TRANSLATION ON
CONVERTIBLE DEBENTURES (1,031) 676 (878)
OTHER EXPENSE (INCOME), NET (2,383) (32,682) 84
CHANGES IN ASSETS AND LIABILITIES:
DECREASE (INCREASE) IN TRADE ACCOUNTS RECEIVABLE 2,510 (7,655) (4,175)
DECREASE (INCREASE) IN OTHER RECEIVABLES AND OTHER CURRENT ASSETS 1,988 (413) 1,264
DECREASE (INCREASE) IN INVENTORIES 1,293 (6,287) (6,221)
INCREASE IN TRADE ACCOUNTS PAYABLE 3,082 404 801
INCREASE (DECREASE) IN OTHER CURRENT LIABILITIES (1,839) (970) 1,467
INCREASE (DECREASE) IN OTHER LONG-TERM LIABILITIES (5,368) 9,344 529
--------- --------- ---------
(59,978) (54,284) (66,779)
INCREASE (DECREASE) IN LONG-TERM LIABILITY
IN RESPECT OF CUSTOMERS' ADVANCES, NET (760) 19,384 (899)
--------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES (60,738) (34,900) (67,678)
--------- --------- ---------
CASH FLOWS - INVESTING ACTIVITIES
DECREASE (INCREASE) IN DESIGNATED CASH, SHORT-TERM AND LONG-TERM
INTEREST-BEARING DEPOSITS, NET 27,266 (10,037) 14,341
INVESTMENTS IN PROPERTY AND EQUIPMENT (38,878) (154,975) (179,310)
INVESTMENT GRANTS RECEIVED 7,496 32,636 33,811
PROCEEDS RELATED TO SALE AND DISPOSAL OF PROPERTY AND EQUIPMENT 2,179 2,626 222
INVESTMENTS IN OTHER ASSETS (3,841) (702) (22,098)
DECREASE IN DEPOSITS, NET -- -- 10,500
PROCEEDS FROM SALE OF LONG-TERM INVESTMENT -- 38,677 --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (5,778) (91,775) (142,534)
--------- --------- ---------
CASH FLOWS - FINANCING ACTIVITIES
PROCEEDS FROM ISSUANCE OF CONVERTIBLE DEBENTURES, NET 25,086 -- --
PROCEEDS FROM LONG-TERM DEBT 21,103 66,000 --
PROCEEDS FROM ISSUANCE OF SHARES, NET -- 75,225 24,375
PROCEEDS FROM EXERCISE OF SHARE OPTIONS -- 666 --
PROCEEDS ON ACCOUNT OF SHARE CAPITAL -- -- 16,428
REPAYMENT OF LONG-TERM DEBT -- -- (13,000)
PROCEEDS FROM LONG-TERM DEBT, NET IN CONNECTION WITH
RE-BORROWING, NOTE 11A(6) -- -- 187,000
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 46,189 141,891 214,803
========= ========= =========
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (20,327) 15,216 4,591
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 27,664 12,448 7,857
--------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 7,337 $ 27,664 $ 12,448
========= ========= =========
NON-CASH ACTIVITIES
INVESTMENTS IN PROPERTY AND EQUIPMENT $ 12,999 $ 47,675 $ 17,160
========= ========= =========
STOCK-BASED COMPENSATION RELATED TO
THE FACILITY AGREEMENT WITH THE BANKS $ 2,793 $ -- $ 4,205
========= ========= =========
STOCK-BASED COMPENSATION RELATED TO RIGHTS OFFERED
TO EMPLOYEES, NOTE 13H $ 448 $ -- $ --
========= ========= =========
INVESTMENTS IN OTHER ASSETS $ 442 $ -- $ 3,153
========= ========= =========
CONVERSION OF LONG-TERM LIABILITY IN RESPECT OF CUSTOMERS' ADVANCES
TO SHARE CAPITAL $ 1,794 $ 539 $ --
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR CAPITALIZED AND EXPENSED INTEREST $ 32,805 $ 25,205 $ 15,674
========= ========= =========
CASH PAID DURING THE YEAR FOR INCOME TAXES $ 86 $ 130 $ 239
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 5 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 1 - DESCRIPTION OF BUSINESS AND GENERAL
A. DESCRIPTION OF BUSINESS
Tower Semiconductor Ltd. ("the Company"), incorporated in Israel,
commenced operations in March 1993. The Company is an independent
wafer foundry dedicated to the manufacture of semiconductor integrated
circuits on silicon wafers. The Company manufactures integrated
circuits in geometries from 1.0 to 0.35 microns at its 150-millimeter
fabrication facility ("Fab 1"), and in 0.18 microns and below at its
200-millimeter fabrication facility ("Fab 2"). As a foundry, the
Company manufactures wafers using its advanced technological
capabilities and the proprietary integrated circuit designs of its
customers.
The industry in which the Company operates is characterized by wide
fluctuations in supply and demand. Such industry is also characterized
by the complexity and sensitivity of the manufacturing process, by
high levels of fixed costs, and by the need for constant improvements
in production technology.
The Company's Ordinary Shares are traded on the Nasdaq National Market
and on the Tel-Aviv Stock Exchange.
B. ESTABLISHMENT AND OPERATIONS OF NEW FABRICATION FACILITY (FAB 2)
In January 2001, the Company's Board of Directors approved the
establishment of a new wafer fabrication facility in Israel ("Fab 2"),
at an expected cost of approximately $1,500,000. Fab 2 is designed 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 financial statements, have
provided an aggregate of approximately $1,260,000 of financing for Fab
2.
The Fab 2 project is a complex undertaking, which entails substantial
risks and uncertainties. For further details concerning the Fab 2
project and related agreements, some of which were amended several
times, see Note 11A.
During the third quarter of 2003, in which Fab 2's construction 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, and to expense most of
the ongoing direct costs related to the construction and equipping of
Fab 2 and to the transfer of the Fab 2 technology that had been
previously capitalized. For further details concerning the
depreciation and amortization of Fab 2 assets, see Note 11A.
- 6 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 1 - DESCRIPTION OF BUSINESS AND GENERAL (cont.)
C. FINANCING OF THE COMPANY'S ONGOING OPERATIONS
In the year ended December 31, 2005 and in recent years, the Company
has experienced significant recurring losses from operations,
recurring negative cash flows from operating activities, an increasing
accumulated deficit and a deficit in shareholders equity. According to
the Company's approved short-term working plan, based on the current
prevailing semiconductor market conditions, the Company needs to raise
funds in order to finance its short-term activities and liabilities in
2006, including repayment of long-term loans to the extent to be
required (see the following paragraph). In addition, according to the
Facility Agreement with the Banks, in the fourth quarter of 2006 and
in 2007, the Company is to repay on account of long-term loans $21,103
and $160,257, respectively. For details concerning an amendment to the
Company's financial ratios and covenants through the third quarter of
2006 under the amended Facility Agreement with the Banks, which was
obtained subsequent to a waiver letter agreement signed between the
Company and the Banks in January 2005 following non-compliance of the
Company with certain of the financial ratios and covenants that were
applicable as of December 31, 2004, see Note 11A(6).
In light of the described above, the Company has been taking
comprehensive measures to obtain the needed funds for its near-term
ongoing operations, as well as to reduce its short-term liabilities.
The Company has also implemented cost reduction measures, including
measures to reduce expenses, cost structure and cash burn, and in
March 2005, the Company completed a workforce cutback, as part of an
across-the-board savings plan focused on operational efficiencies. In
this regard, the Company has held discussions with its Equity
Investors, Wafer Partners and its Banks to provide additional funding
for the Company of an aggregate amount of approximately $60,000.
Following an amendment to the Facility Agreement signed between the
Company and its Banks in July 2005, and the completion of a rights
offering in which in December 2005 and January 2006 the Company raised
$48,169 (of which $27,811 was received from certain of the Company's
Equity Investors and Wafer Partners), the Company was provided with
additional $29,693 from the Banks.
Further, the Company is currently examining alternatives for
additional funding sources, including raising funds in the capital
markets, private placements and other sources. In addition, as
provided in the July 2005 amendment, subsequent to the balance sheet
date the Company and the Banks commenced and are holding discussions
for rescheduling of the repayment dates of the $29,693 provided by the
Banks under this amendment, currently to be repaid through March 31,
2007 ($21,103 of which in the fourth quarter of 2006 and the reminder
in March 31, 2007). Management also intends to discuss with the Banks
the rescheduling of the repayment dates of all the remaining loans
obtained from the Banks.
The Company's management estimates that it is probable that additional
funds the Company will need in 2006 from the additional funding
sources the Company is currently examining, as described above, will
be achieved. Management also estimates, based on the discussions held
with the Banks subsequent to the balance sheet date, that reaching
satisfactory agreement with the Banks regarding the rescheduling of
the repayment dates of the $29,693 obtained under the July 2005
amendment is probable. Management further estimates that obtaining
satisfactory agreement with the Banks regarding the rescheduling of
all the remaining loans obtained from them is achievable, subject that
the discussions management intends to hold with the Banks are
concluded.
- 7 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 1 - DESCRIPTION OF BUSINESS AND GENERAL (cont.)
D. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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 from those estimates.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's consolidated financial statements are presented in accordance
with generally accepted accounting principles ("GAAP") in Israel. See Note
20 for the reconciliation of material differences between GAAP in Israel
and in the United States of America.
A. PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include the financial
statements of the Company and its wholly-owned marketing subsidiary in
the United States, after elimination of material inter-company
transactions and balances. The effect of the subsidiary's operations
on the Company's revenues, net loss and total assets was immaterial
for the dates and periods presented.
B. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of deposits in banks and short-term
investments (primarily time deposits and certificates of deposit) with
original maturities of three months or less.
C. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is computed on the specific
identification basis for accounts whose collectibility, in
management's estimation, is uncertain.
D. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined for raw materials, spare parts and supplies 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.
E. PROPERTY AND EQUIPMENT
(1) Property and equipment are presented at cost, including interest
and other capitalizable costs. Capitalizable costs include only
incremental direct costs that are identifiable with, and related
to, the property and equipment and are incurred prior to its
initial operation. Identifiable incremental direct costs include
costs associated with acquiring, constructing, establishing and
installing property and equipment (whether performed by others or
by the Company), and costs directly related to preproduction test
runs of property and equipment that are necessary to get it ready
for its intended use. Those costs include payroll and
payroll-related costs of employees who devote time and are
dedicated solely to the acquiring, constructing, establishing and
installing property and equipment. Allocation, when appropriate,
of capitalizable incremental direct costs is based on
management's estimates and methodologies including time sheet
inputs.
- 8 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
E. PROPERTY AND EQUIPMENT (cont.)
(1) (cont.)
Cost is presented net of investment grants received or
receivable, and less accumulated depreciation and amortization.
The accrual for grants receivable is determined based on
qualified investments made during the reporting period, provided
that the primary criteria for entitlement have been met.
Depreciation is calculated based on the straight-line method over
the estimated economic lives of the assets or terms of the
related leases, as follows:
Prepaid long-term land lease and buildings
(including facility infrastructure) 14-25 years
Machinery and equipment 5 years
Transportation vehicles 7 years
(2) Impairment examinations and recognition are performed and
determined based on the accounting policy outlined in O below.
F. OTHER ASSETS
(1) TECHNOLOGY
The cost of Fab 2 technologies includes the technology process
cost, internal incremental direct costs, mainly payroll-related
costs of employees designated for integrating the technologies in
the Company's facilities, and incremental direct costs associated
with implementing the technologies until the technologies are
ready for their intended use. The costs in relation to Fab 2
technologies are amortized over the expected estimated economic
life of the technologies. Amortization phases in commencing on
the dates on which each of the Fab 2 manufacturing lines is ready
for its intended use, and is based on the straight-line method
over a four-year period.
Impairment examinations and recognition are performed and
determined based on the accounting policy outlined in O below.
(2) DEFERRED FINANCING CHARGES
Deferred financing charges included in other assets in relation
to funding the establishment of Fab 2 are being amortized over
the lives of the borrowings based on the repayment schedule of
such funding (in general, 6 years). During the establishment
period of Fab 2, amortized deferred financing charges were
capitalized to property and equipment. Commencing the third
quarter of 2003, in which the building and infrastructures of Fab
2 were substantially completed and became ready for their
intended use, and in which the initial ramp-up commenced, the
deferred financing charges are being amortized to financing
expenses, net.
- 9 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
G. CONVERTIBLE DEBENTURES
Convertible debentures the future conversion of which is not probable
as of the balance-sheet date are presented as long-term liabilities
and current liabilities (with respect to the current maturities) based
on their terms as of such date, net of discount.
Convertible debentures denominated in dollar the future conversion of
which is probable as of the balance-sheet date, are presented as a
separate line-item between total liabilities and shareholders equity.
See P(1) below for the effect of the initial adoption of Standard No.
22 of the Israeli Accounting Standards Board "FINANCIAL INSTRUMENTS:
DISCLOSURE AND Presentation". See Notes 20F and 20G for presentation
of convertible debentures in accordance with U.S. GAAP.
H. INCOME TAXES
The Company records deferred income taxes in accordance with Standard
No. 19 "INCOME TAXES" of the Israeli Accounting Standards Board, to
reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes and for tax purposes. 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.
Deferred tax liabilities and assets are classified as current or
noncurrent based on the classification of the related asset or
liability for financial reporting, or according to the expected
reversal dates of the specific temporary differences, if not related
to an asset or liability for financial reporting. Deferred tax
liabilities are recognized for temporary differences that will result
in taxable amounts in future years. Deferred tax assets are recognized
for temporary differences, which will result in deductible amounts in
future years and for carryforwards. An allowance against such deferred
tax asset is recognized if it is probable that some portion or all of
the deferred tax assets will not be realized. Due to the material loss
carryforward of the Company as of December 31, 2005 and uncertainties
with regard to its utilization in the future, no deferred taxes were
recorded in the Company's results of operations.
I. REVENUE RECOGNITION
Revenues are recognized upon shipment or as services are rendered when
title has been transferred, collectibility is reasonably assured and
acceptance provisions criteria are satisfied, based on performing
electronic, functional and quality tests on the products prior to
shipment and customer on-site testing. Such testing reliably
demonstrates that the products meet all of the specified criteria
prior to formal customer acceptance, and that product performance upon
customer on-site testing can reasonably be expected to conform to the
specified acceptance provisions. An accrual for estimated returns,
computed primarily on the basis of historical experience, is recorded
at the time when revenues are recognized.
- 10 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
J. RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
Amounts received or receivable from the government of Israel and
others, as participation in research and development programs, are
offset against research and development costs. The accrual for grants
receivable is determined based on the terms of the programs, provided
that the criteria for entitlement have been met.
K. LOSS PER ORDINARY SHARE
Basic loss per ordinary share is calculated based on the weighted
average number of ordinary shares outstanding during each year
presented, adjusted retroactively to include the beneficial feature
contemplated in a rights offering. The calculation includes
retroactive effect from the beginning of each year (or the issuance
date, which is the earlier) of shares issued upon exercise of options
and warrants and upon conversion of convertible debentures outstanding
at the beginning of each year (or that were issued during the year).
The calculation further includes shares issuable from probable
exercise and from probable conversion. Basic loss per ordinary share
is calculated based on loss for the period with the inclusion of
imputed interest income on the exercise price of options and warrants
exercised or whose exercise is probable, and of financing expenses in
relation to conversion of convertible debentures or probable
conversion, as required under Israeli GAAP. See Note 20K for
disclosure of loss per share data in accordance with U.S. GAAP.
L. DERIVATIVE FINANCIAL INSTRUMENTS
The Company, from time to time, enters into foreign exchange
agreements (primarily forward contracts and options) to hedge
non-dollar equipment purchase and other firm commitments. Gains and
losses on such agreements through the date that the equipment is
received or the commitment is realized are deferred and capitalized to
the cost of equipment or the commitment, while gains and losses
subsequent thereto, through the date of expiration of the foreign
exchange agreement, are included in financing expense, net.
In addition, the Company, from time to time, enters into agreements to
hedge interest rate exposure on long-term loans. Gains and losses on
such agreements are recognized on a current basis in accordance with
the terms of these agreements, and expensed or capitalized in the same
manner as the corresponding interest costs.
See Note 20D for disclosure of the derivative financial instruments in
accordance with U.S. GAAP.
M. FUNCTIONAL CURRENCY AND TRANSACTION GAINS AND LOSSES
The currency of the primary economic environment in which the Company
conducts its operations is the U.S. dollar ("dollar"). Accordingly,
the Company uses the dollar as its functional and reporting currency.
Financing expenses, net in 2005 include net foreign currency
transaction gains of $1,398. Financing expenses, net in 2004 and 2003
include net foreign currency transaction losses of $760 and $232,
respectively.
- 11 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
N. STOCK-BASED COMPENSATION
The Company accounts for employee and director stock-based
compensation in accordance with Accounting Principles Board Opinion
No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB 25") and
authoritative interpretations thereof. Accordingly, the Company
accounts for share options granted to employees and directors based on
the intrinsic value of the options on the measurement date. The
compensation cost of options without a fixed measurement date is
remeasured at each balance sheet date. Deferred compensation in
respect of awards with graded vesting terms is amortized to
compensation expense over the relevant vesting periods. In a manner
consistent with FIN 28, the vesting period over which compensation is
expensed is determined, based on the straight-line method, separately
for each portion of the award as if the grant were a series of awards.
See P(2) below for the effect of the initial adoption of Standard No.
24 of the Israeli Accounting Standards Board "SHARE-BASED PAYMENTS".
See Note 13B(6) for pro forma disclosures required by SFAS 123 and
SFAS 148.
The Company accounts for stock-based compensation of non-employees
using the fair value method in accordance with Financial Accounting
Standards Board Statement No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION" ("SFAS 123") and EITF 96-18: Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services. The award cost of
warrants granted in connection with bank financing is amortized as
deferred financing charges over the terms of the loans, in a manner
described in paragraph F(2) above. The award cost of warrants granted
in connection with the construction of Fab 2, is recorded as
depreciation expense over the life of the prepaid perpetual land lease
and buildings. The award cost of warrants granted to consultants and a
related party in connection with equity transactions is offset against
paid-in-capital.
O. IMPAIRMENT OF LONG-LIVED ASSETS
Management reviews long-lived 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. According to
the Israeli Accounting Standards Board No.15, "IMPAIRMENT OF ASSETS",
an asset's recoverable value is the higher of the asset's net selling
price and the asset's value in use, the latter being equal to the
asset's discounted expected cash flows. Prior to issuing Standard No.
15 in January 2003, the Company tested the recoverability of its
assets based on undiscounted expected cash flows, as applicable by
U.S. GAAP, a method that under Standard No. 15 is no longer
acceptable.
- 12 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
P. RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING STANDARDS
BOARD
(1) ACCOUNTING STANDARD NO. 22 "FINANCIAL INSTRUMENTS: DISCLOSURE AND
PRESENTATION" - In July 2005, the Israeli Accounting Standards
Board approved for publication Accounting Standard No. 22
"FINANCIAL INSTRUMENTS: DISCLOSURE AND PRESENTATION" (the
"Standard"). A FINANCIAL INSTRUMENT under this Standard is
defined, in general, as any contract that establishes a financial
asset of an entity, or a financial liability or equity instrument
of another entity. This Standard establishes the requirements for
presentation of financial instruments in the financial statements
and indicates the information that should be disclosed in
relation thereto, and, in certain cases, the method to measure
their impact on the entity's financial statements. The
presentation requirements relate to the classification of
financial instruments as financial assets, financial liabilities
or equity instruments. It also deals with the classification of
related interest, dividends, losses and gains and to the
circumstances under which financial assets and financial
liabilities derived from financial instruments are to be offset.
The Standard establishes requirements for disclosure of
information relating to factors affecting the amount, timing and
certainty of the entity's future cash flows relating to financial
instruments and accounting policy implemented in respect of these
instruments. The Standard also establishes requirements for
disclosure of information about the nature and the extent of an
entity's use of financial instruments, the business purposes they
serve, the risks associated with them and management's policies
for the oversight of those risks.
The Standard is effective for financial statements for periods
commencing January 1, 2006 or thereafter. The initial adoption of
the Standard will be accounted for by the "prospective method",
i.e. financial instruments issued before the effective date of
the Standard will be classified and presented in accordance with
its provisions commencing from the effective date. Comparative
financial statements for prior periods are not to be adjusted.
The new Standard supersedes Opinion No.53 "ACCOUNTING FOR
CONVERTIBLE LIABILITIES" and Opinion No.48 "ACCOUNTING FOR
OPTIONS".
The initial adoption of the Standard is expected to affect
primarily the presentation of the Company's convertible
debentures (the bifurcation of the convertible debentures into
debt component and equity component, as these terms are defined
by the Standard). Consequently, on January 1, 2006, the Company's
shareholders equity will be recorded with a one-time increase of
approximately $17,000, while its total convertible debentures
will be decreased by same amount. Commencing from that date, said
amount will be amortized as financing expenses through 2011.
(2) ACCOUNTING STANDARD NO. 24 "SHARE-BASED PAYMENTS" - In September
2005, the Israeli Accounting Standards Board published Accounting
Standard No. 24 "SHARE-BASED COMPENSATION" (the "Standard"),
which calls for the recognition in the financial statements of
share-based payments, including transactions with employees,
which are to be settled by the payment of cash, by other assets,
or by equity instruments. Under Standard No. 24, amongst other
matters, costs associated with grants of shares and options to
employees will be expensed over the vesting period of each grant.
Said costs will be determined based on the fair value of the
grants at each grant date. The Standard establishes guidelines
for measuring the fair value of each grant based on the
settlement terms (either by cash or equity instrument), and
disclosure provisions.
- 13 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
P. RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING STANDARDS
BOARD (cont.)
(2) ACCOUNTING STANDARD NO. 24 "SHARE-BASED PAYMENTS" (cont.)
The Standard is effective for financial statements for periods
commencing January 1, 2006 or thereafter. The Standard provides
that with respect to Share-based payments to be settled by equity
instruments, its provisions should be applied to all grants made
after March 15, 2005, that are unvested as of December 31, 2005.
The Standard further provides that its provisions should be
applied to modifications that were made after March 15, 2005,
even if the underlying grants are not in the scope of the
Standard.
As of December 31, 2005, the award cost with respect to
outstanding employee and director options on which the Standard
will be applied amounts to approximately $2,000, to be amortized
over 2006-2009.
Q. RECLASSIFICATION
Certain amounts in prior years financial statements have been
reclassified in order to conform to the 2005 presentation.
NOTE 3 - OTHER RECEIVABLES
Other receivables consist of the following:
As of December 31,
-----------------
2005 2004
------- -------
Government of Israel - investment grants receivable $ 7,276 $ 8,400
Other government agencies 1,706 2,382
Others 61 583
------- -------
$ 9,043 $11,365
======= =======
NOTE 4 - INVENTORIES
Inventories consist of the following (*):
As of December 31,
-----------------
2005 2004
------- -------
Raw materials $ 6,777 $ 9,260
Spare parts and supplies 3,738 3,950
Work in process 11,502 10,085
Finished goods 2,359 2,374
------- -------
$24,376 $25,669
======= =======
(*) Net of aggregate write-downs to net realizable value of $3,259 and
$2,665 as of December 31, 2005 and 2004, respectively.
- 14 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 5 - PROPERTY AND EQUIPMENT, NET
A. COMPOSITION
As of December 31,
-----------------------
2005 2004
-------- --------
COST:
Prepaid perpetual land lease and buildings
(including facility infrastructure) $237,401 $235,632
Machinery and equipment 709,862 688,691
Transportation vehicles 425 2,989
-------- --------
947,688 927,312
-------- --------
ACCUMULATED DEPRECIATION AND AMORTIZATION:
Prepaid perpetual land lease and buildings
(including facility infrastructure) 47,841 33,960
Machinery and equipment 388,867 282,092
Transportation vehicles 335 1,964
-------- --------
437,043 318,016
======== ========
$510,645 $609,296
======== ========
SUPPLEMENTAL DISCLOSURE RELATING TO COST OF PROPERTY AND EQUIPMENT:
(1) As of December 31, 2005 and 2004, the cost of property and
equipment included costs relating to Fab 2 in the amount of
$713,837 and $701,982, respectively. Said amounts are net of
investment grants of $165,222 and $158,830, respectively.
(2) As of December 31, 2005, the cost of buildings, machinery and
equipment was reflected net of investment grants in the aggregate
of $268,688 (as of December 31, 2004 - $262,320).
(3) Cost of property and equipment as of December 31, 2005 and 2004
includes capitalized interest costs in the aggregate of $18,480.
(4) Following the commencement of Fab 2 operations in the third
quarter of 2003, in which the building and infrastructures of Fab
2 were substantially completed and became ready for their
intended use, the Company began to depreciate Fab 2 property and
equipment, resulting in depreciation expenses of $109,283,
$93,457 and $35,582 in 2005, 2004 and 2003, respectively.
- 15 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 5 - PROPERTY AND EQUIPMENT, NET (cont.)
B. INVESTMENT GRANTS
In connection with the formation of the Company, the Investment Center
of the Ministry of Industry and Trade of the State of Israel
("Investment Center"), under its "approved enterprise" program,
approved an investment program for expenditures on buildings and
equipment in Fab 1 in the aggregate amount (as amended) of
approximately $96,850. The Company completed its investments under
this program, and received final approval from the Investment Center
in November 1997.
In January 1996, an investment program ("1996 program") for expansion
of Fab 1 in the aggregate amount (as amended in December 1999 and
2001) of $228,680, entitling the Company to investment grants, was
approved by the Investment Center. The Company completed its
investments under the 1996 program in December 2001 and invested
through such date approximately $207,000. In May 2002, the Company
submitted the final report in relation to the 1996 program. As of
December 31, 2005, the report has not yet received final approval from
the Investment Center.
See Note 11A(8) with respect to the Fab 2 program approved by the
Investment Center in December 2000.
Entitlement to the above grants and other tax benefits is subject to
various conditions stipulated by the Israeli Law for the Encouragement
of Capital Investments - 1959 ("Investments Law") and the regulations
promulgated thereunder, as well as the criteria set forth in the
certificates of approval. In the event the Company fails to comply
with such conditions, the Company may be required to repay all or a
portion of the grants received plus interest and certain inflation
adjustments. In order to secure fulfillment of the conditions related
to the receipt of investment grants, floating liens were registered in
favor of the State of Israel on substantially all of the Company's
assets. See also Note 17A.
C. For liens see Note 11A(6).
NOTE 6 - OTHER ASSETS, NET
Other assets, net consist of the following:
As of December 31,
---------------------
2005 2004
------- -------
TECHNOLOGIES (in relation to Fab 2) - Note 11A(2)
Cost $94,247 $90,747
Accumulated amortization (*) 32,806 13,797
------- -------
$61,441 $76,950
======= =======
OTHER ASSETS (in relation to Fab 2)
COST - Deferred financing charges $24,049 $20,915
Other 4,448 3,217
------- -------
28,497 24,132
------- -------
ACCUMULATED AMORTIZATION (**):
Deferred financing charges 10,812 6,606
Other 1,326 993
------- -------
12,138 7,599
======= =======
$16,359 $16,533
======= =======
(*) For amortization policy, see Note 2F(1).
(**) For amortization policy, see Note 2F(2).
- 16 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 7 - OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
As of December 31,
---------------------
2005 2004
------- -------
Accrued salaries $ 3,162 $ 3,902
Vacation accrual 2,322 3,509
Interest payable (primarily in relation to convertible debentures) 1,263 1,208
Other 2,225 2,059
------- -------
$ 8,972 $10,678
======= =======
NOTE 8 - LONG-TERM DEBT
A. COMPOSITION:
As of December 31,
Effective interest rate as of -----------------------
December 31, 2005 2005 2004
----------------------------- -------- --------
In U.S. Dollar 7.06% $438,103 $417,000
In U.S. Dollar 6.5% 80,000 80,000
-------- --------
Total long-term debt 518,103 497,000
Less - current maturities 7.06% 21,103 --
-------- --------
$497,000 $497,000
======== ========
B. All loans received under the Facility Agreement bear interest based on
the three-month USD Libor rate plus 2.5%, as revised under the
amendment to the Facility Agreement described in detail in Note
11A(6). Prior to the closing of this amendment in December 2003, the
loans bore interest based on the three-month USD Libor rate plus
1.55%. The effective interest rate as of December 31, 2005 of loans,
the amount of which as of such date was $292,000, includes the terms
of collar agreements with knock-out and knock-in features described in
Note 18A. Interest is payable at the end of each quarter.
C. For additional information regarding the Facility Agreement, as
amended, between the Company and the Banks for financing the
construction and equipping of Fab 2, including re-borrowing terms and
including loans withdrawn under the July 2005 amendment to the
Facility Agreement, see Note 11A(6).
D. REPAYMENT SCHEDULE
The balance of the long-term debt as of December 31, 2005 is repayable
as follows:
2006 - current maturities $ 21,103
2007 151,667
2008 165,667
2009 165,666
2010 14,000
--------
$518,103
========
- 17 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 8 - LONG-TERM DEBT (cont.)
E. The agreement with the Company's Banks restricts the Company's ability
to place liens on its assets (other than to the State of Israel in
respect of investment grants - see Note 11A(8), and to Siliconix - see
Note 11E(3)) without the prior consent of the Banks. Furthermore, the
agreements contain certain restrictive financial covenants (see also
Note 11A(6)). For further details concerning amendments to the
Facility Agreement for revised financial ratios and covenants for 2005
and 2006, see Note 11A(6).
NOTE 9 - CONVERTIBLE DEBENTURES
A. COMPOSITION:
As of December 31,
Interest rate as of ---------------------
December 31, 2005 2005 2004
------------------- ------- -------
Convertible debentures 4.7% $25,811 $26,651
Less - current maturities 6,453 --
------- -------
$19,358 $26,651
======= =======
B. In January 2002, the Company issued on the Tel-Aviv Stock Exchange,
NIS 110,579,800 principal amount of convertible debentures, linked to
the Israeli Consumer Price Index ("CPI") (adjusted to the CPI as of
December 31, 2005 - NIS 119,960,426, $26,061). The debentures were
issued at 96% of their par value, and bear annual interest at the rate
of 4.7%, payable in January of each year commencing in January 2003.
The principal amount is payable in four equal installments in January
of each year between 2006 and 2009. The debentures may be converted
until December 31, 2008 into Ordinary Shares, at a conversion rate of
one Ordinary Share per each NIS 41.00 principal amount of the
debentures, linked to the CPI (subject to customary adjustments)
(adjusted to the CPI as of December 31, 2005 - NIS 44.48, $9.66). The
effective rate of interest on the convertible debentures, taking into
account the initial proceeds, net of the discount and the related
costs of issuance, is 7.26%. For U.S. GAAP purposes, which require
taking into account, in addition to the discount and the related
issuance costs, amounts attributed to the options described in Note
13E, the effective rate of interest on the convertible debentures is
9.88%.
Subject to certain conditions and the Company's Facility Agreement,
the Company may announce the early redemption of the debentures or
part thereof, provided that the sum of the last payment on account of
the principal shall be no less than approximately $700.
If on a payment date of the principal or interest on the debentures
there exists an infringement of certain covenants and conditions under
the Facility Agreement, the dates for payment of interest and
principal on the debentures may be postponed, depending on various
scenarios under the Facility Agreement until such covenant or
condition is settled.
The debentures and interest thereon are unsecured and rank behind the
Company's existing and future secured indebtedness, including
indebtedness to the Banks under the Facility Agreement, as well as to
the government of Israel in connection with grants the Company
received under its approved enterprise programs and to Siliconix.
See Note 20F for disclosure of the accounting treatment of the
convertible debentures in accordance with U.S. GAAP.
- 18 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 9 - CONVERTIBLE DEBENTURES (cont.)
C. Following the initial adoption of Accounting Standard No. 22
"FINANCIAL INSTRUMENTS: DISCLOSURE AND PRESENTATION" of the Israeli
Accounting Standards Board (see Note 2P(1)) in the first quarter of
2006, the Company's convertible debentures would be bifurcated in a
manner by which the Company's shareholders' equity would increase by
approximately $500 and the convertible debentures will be reduced by
the same amount. Said amount will be expensed as financing expenses
through 2009.
NOTE 10 - OTHER LONG-TERM LIABILITIES
A. COMPOSITION
As of December 31,
------------------------
2005 2004
-------- --------
Net liability for employee
termination benefits (see B below):
Gross obligation $ 18,445 $ 20,938
Amounts funded through deposits to severance
pay funds and purchase of insurance policies (13,658) (16,350)
-------- --------
4,787 4,588
Long-term advances (see Note 11B(3)) - 5,500
Long-term liabilities in respect of license agreements 5,123 5,191
Other 1,102 166
-------- --------
$ 11,012 $ 15,445
======== ========
B. EMPLOYEE TERMINATION BENEFITS
Israeli law and labor agreements determine the obligations of the
Company to make severance payments to dismissed employees and to
employees leaving employment under certain other circumstances. The
liability for severance pay benefits, as determined by Israeli Law, is
generally based upon length of service and the employee's monthly
salary. This liability is primarily covered by regular deposits made
each month by the Company into recognized severance and pension funds
and by insurance policies purchased by the Company, based on the
employee's salary for the relevant month. The amounts so funded are
not reflected separately on the balance sheets, since they are
controlled by the fund trustees and insurance companies and are not
under the control and management of the Company. For presentation of
employee termination benefits in accordance with U.S GAAP, see Note
20C.
Costs relating to employee termination benefits were approximately
$2,631, $3,836 and $2,828 for 2005, 2004 and 2003, respectively.
- 19 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2
(1) OVERVIEW
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
designed 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 transactions, to provide an
aggregate, as of the approval date of the financial statements,
of approximately $1,260,000 of financing for Fab 2. The
agreements and arrangements include those with technology
partners, Wafer Partners, Equity Investors, the Company's Banks,
the Government of Israel through the Investment Center and
others. The agreements with the Banks and the Investment Center
are subject to certain conditions, including the achievement of
performance and financing milestones, and the securing of
additional required financing. The Company has also entered into
agreements for the design and construction of Fab 2, for
equipping Fab 2 and for the transfer to the Company of process
technologies to produce wafers in Fab 2.
As of December 31, 2005, the Company had incurred costs
associated with the establishment of Fab 2 project of an
aggregate of approximately $1,000,000. As of the approval date of
the financial statements, the major shareholders of the Company
have invested an aggregate of $323,730; the Banks have made
long-term loans in the aggregate of $526,693; the Investment
Center grants at an aggregate of $165,419; the Company has raised
$243,370 from other financial sources.
During the third quarter of 2003, in which Fab 2's construction
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 majority of the ongoing direct costs related to
the construction and equipping of Fab 2 and to the transfer of
the Fab 2 technologies that previously had been capitalized, are
no longer capitalizable. Depreciation and amortization of Fab 2
assets in 2005, 2004 and 2003 amounted to $133,021, $108,542 and
$39,625, respectively (see also Note 5A), the majority of which
is included in cost of goods sold.
The construction and equipping of Fab 2 is a substantial project,
which requires extensive management involvement as well as timely
coordination of the activities of many participants. In addition,
this project is a complex undertaking which entails substantial
risks and uncertainties, including but not limited to those
associated with the following: obtaining additional commitments
to finance the construction and equipping of Fab 2 and its
ongoing operations (see also Note 1C); achieving certain
operational milestones and complying with various significant
conditions and financial ratios and covenants provided by the
Facility Agreement with the Banks; compliance with the conditions
under the Approval Certificate for Fab 2 provided by the
Investment Center; and completing the complex processes of
transferring from Freescale the manufacturing technologies to be
used at Fab 2 and development of new technologies.
- 20 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(1) OVERVIEW (cont.)
According to the Facility Agreement with the Banks, raising
certain required additional funding by the dates specified,
achieving the milestones as scheduled, as well as complying with
all the conditions and financial ratios and covenants stipulated
in that agreement and in the Approval Certificate from the
Investment Center, are material provisions for financing provided
and to be further obtained. For details concerning revising
certain of the financial ratios and covenants under the Facility
Agreement for 2005 and 2006, as were amended in the July 2005
amendment to the Facility Agreement, see paragraph A(6) below.
(2) TECHNOLOGY TRANSFER AGREEMENTS
TOSHIBA - In April 2000, the Company entered into a technology
transfer agreement with Toshiba Corporation ("Toshiba"), a
Japanese corporation. This agreement provided for the transfer by
Toshiba to the Company of advanced semiconductor manufacturing
process technologies installed in Fab 2 including related
technology transfer assistance in exchange for certain fees for
patent licenses, technology transfer and technical assistance.
The transfer of the technology was substantially completed during
the first half of 2003. The Company's commitment under the
Toshiba agreement to reserve for Toshiba a certain portion of Fab
2 wafer manufacturing capacity expired in December 2005.
FREESCALE - In September 2002, the Company entered into a
non-exclusive technology transfer, development and licensing
agreement with Freescale. This agreement provides for the
transfer by Freescale to the Company of existing and newly
developed versions of advanced semiconductor manufacturing
process technologies to be installed in Fab 2, and for the
provision by Freescale of related technology transfer assistance,
in exchange for certain fees for patent and other intellectual
property licenses, technology transfer and development, technical
assistance and ongoing royalties based on sales of products to be
manufactured in Fab 2 with the transferred technology. Subject to
prior termination for cause by Freescale, the licenses under the
agreement are perpetual.
(3) WAFER PARTNER AGREEMENTS
During 2000, the Company entered into various share purchase
agreements ("Wafer Partner Agreements") with SanDisk Corporation,
Alliance Semiconductor Corporation, Macronix International Co.,
Ltd. and QuickLogic Corporation (collectively, the "Wafer
Partners"; excluding QuickLogic, the "primary Wafer Partners") to
partially finance the construction and equipping of Fab 2.
Pursuant to the Wafer Partner Agreements, the Wafer Partners
agreed to invest an aggregate of $250,000 to purchase Ordinary
Shares of the Company. According to the Wafer Partner Agreements,
the Company agreed, subject to certain conditions, to reserve for
each Wafer Partner a certain portion, and collectively
approximately 50%, of Fab 2 wafer manufacturing capacity for a
period of 10 years ending January 2011.
- 21 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(3) WAFER PARTNER AGREEMENTS (cont.)
Through December 31, 2005, the Wafer Partners invested in the
Company, based on the Wafer Partner Agreements, an aggregate of
$246,823, of which as of such date $201,909, was credited as paid
in capital and $44,914, was established as long-term customers'
advances which may be, subject to the terms and conditions
stipulated in the Wafer Partner Agreements utilized as credit
against purchases to be made by the Wafer Partners, or converted
into paid-in-capital. Through December 31, 2005, the Wafer
Partners were issued an aggregate of 27,475,135 Ordinary Shares
at an average price per share of $7.35, which was determined
based on the average closing sale price of the Company's Ordinary
Shares for the 15-30 trading days prior to making any investment.
For additional investments made by the primary Wafer Partners in
the aggregate amount of $19,089 in connection with the 2002 and
2005 rights offerings, see Notes 13F and 13H, respectively, and
paragraph (6) below.
(4) EQUITY INVESTOR AGREEMENTS
Through December 31, 2005, The Israel Corporation ("TIC"), the
principal shareholder of the Company, and Challenge Fund-Edgar II
LP, a Delaware limited partnership ("Challenge") (together,
"Equity Investors") invested in the Company, an aggregate of
$55,000 for the purchase of an aggregate of 7,419,835 Ordinary
Shares of the Company at an average price per share of $7.41,
which was determined based on the average closing sale price of
the Company's Ordinary Shares for the 15-30 trading days prior to
making any investment. The investments of TIC and Challenge were
made in accordance with share purchase agreements the Company
entered into with them in December 2000 and February 2001,
respectively.
For additional investments made by TIC in the aggregate amount of
$29,152 in connection with the 2002 and 2005 rights offerings,
see Notes 13F and 13H, respectively, and paragraph (6) below.
In 2002, a Canadian pension fund invested in the Company's equity
$15,000 in consideration for 3,000,000 Ordinary Shares of the
Company for $5.00 per share, and a warrant to purchase an
additional 1,350,000 Ordinary Shares of the Company. The warrant
is exercisable for a four-year period ending in October 2006, at
an exercise price of $7.50 per share (subject to customary
adjustments).
(5) AMENDMENTS TO THE PRIMARY WAFER PARTNER AND EQUITY INVESTOR
AGREEMENTS
Pursuant to the primary Wafer Partner Agreements, as amended, the
primary Wafer Partners were entitled to convert an aggregate of
up to $7,507 of the unutilized long-term customers' advances,
which they had as of December 31, 2005, into fully-paid Ordinary
Shares of the Company. In January 2006, one of the primary Wafer
Partners notified the Company of its election to convert $3,880
of its advances into paid-in equity entitling it for 2,455,905
Ordinary Shares of the Company, constituting approximately 3.67%
of the Company's outstanding Ordinary Shares as of December 31,
2005. The number of shares was determined based on $1.58 per
share, which was the average closing sale price of the Company's
Ordinary Shares for the 15 trading days prior to December 31,
2005.
- 22 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(5) AMENDMENTS TO THE PRIMARY WAFER PARTNER AND EQUITY INVESTOR
AGREEMENTS (cont.)
Pursuant to the primary Wafer Partner Agreements, as amended,
each of the primary Wafer Partners has an option to convert, at
the end of each calendar quarter in 2004-2006, that portion of
the long-term customers' advances which it is entitled to
utilize, based upon payments made by such primary Wafer Partner
during that quarter, into fully-paid Ordinary Shares of the
Company. The number of shares is to be determined based on the
average closing sale price of the Company's Ordinary Shares for
the 15 trading days preceding the end of each quarter.
Accordingly, through December 31, 2005, two of the primary Wafer
Partners had converted an aggregate of $2,332 of long-term
customer advances into 1,349,423 fully paid Ordinary Shares of
the Company, at an average share price of $1.73 per share.
Any quarterly amount, which the primary Wafer Partners have
elected not to so convert, will not be utilizable against
purchases made subsequent to that quarter, and shall bear
interest, payable at the end of each quarter, at an annual rate
equal to three-month LIBOR plus 2.5% through December 31, 2007.
The aggregate principal of the unconverted long-term customers'
advances, which could have been utilized against purchases and
which the primary Wafer Partners elected not to convert into
fully-paid Ordinary Shares of the Company (as of December 31,
2005 - $1,102), shall be fully repaid on December 31, 2007. Other
than as described above in this paragraph and the preceding
paragraph, each of the primary Wafer Partners agreed that
long-term customer's advances could not be utilized before
December 31, 2006. Following December 31, 2006, the remaining
long-term customer advances may be utilized as credits against
purchases to be made.
(6) FACILITY AGREEMENT
OVERVIEW - In January 2001, the Company entered into a credit
facility agreement with two leading Israeli banks ("Banks")
entitling the Company to borrow an aggregate, as amended in
January 2002, of $500,000 to finance the construction and
equipping of Fab 2 ("Facility Agreement"). Of that amount, as of
December 31, 2005, the Company withdrew an aggregate of $497,000.
These loans bear interest at a rate of Libor plus 2.5% per annum
payable at the end of each quarter (prior to the November 2003
amendment, described below, the loans bore interest at a rate of
Libor plus 1.55% per annum). The loans are subject to certain
prepayment provisions. Unused amounts under the Facility
Agreement were subject to a quarterly commitment fee of 0.25% per
annum.
In July 2005, the Company and its Banks entered into a definitive
amendment to the Facility Agreement. The amendment provides,
among other things, for Bank financing of up to approximately
$30,000, subject to the Company raising a similar amount by March
31, 2006. Through the approval date of the financial statements,
the Banks provided the Company with the entire amount it was
entitled to borrow under the July 2005 amendment following the
consummation of a rights offering in January 2006 by the Company
(for additional details, see below).
- 23 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT (cont.)
REPAYMENT SCHEDULE - Loans in the amount of $431,000 received by
the Company through December 31, 2003, were repaid on December
31, 2003 and, concurrently, an equivalent amount was drawn down
on such date to be repaid in 12 equal consecutive quarterly
installments commencing March 31, 2007 (the net amount of
long-term loans the Company received in 2003 in connection with
the abovementioned re-borrowing was $187,000). Loans in the
amount of $66,000 drawn down during 2004 are repayable in 12
equal consecutive quarterly installments, commencing three years
from the draw down date of each loan, which in no case shall be
after the maturity date of the Facility Agreement. Loans drawn
down under the July 2005 amendment are repayable in a period
between twelve to fifteen months from each date any amount is
received by the Company.
The July 2005 amendment further provides that a rescheduling of
the repayment dates of the loans drawn down under it shall be
discussed following the closing date of the amendment. Subsequent
to the balance sheet date, the Company and the Banks commenced
and are holding discussions for rescheduling of the repayment
dates of the $29,693 provided by the Banks under this amendment.
For further details regarding loans drawn down under the Facility
Agreement see Note 8.
NOVEMBER 2003 AMENDMENT - In November 2003, the Company and its
Banks entered into an amendment to the Facility Agreement. The
amendment was based, among other things, on an updated plan for
the construction and equipping Fab 2 submitted to the Banks, and
was approved by the Company's shareholders' meeting held in
December 2003. Pursuant to the amendment, the Banks waived all
noncompliance or breach of covenants by the Company prior to the
date of amendment. The amendment further revised and updated the
covenants under the Facility Agreement according to which the
Company is obligated to comply with certain operational and
financial ratios, primarily total shareholders' equity to total
assets, quarterly and annual EBITDA, sales and production
capacity milestones.
During 2005, the Company and the Banks entered into the following
amendments to the Facility Agreement:
o JANUARY 2005 AMENDMENT - In January 2005, the Company and
its Banks signed a waiver letter agreement according to
which the Banks waived the Company's non-compliance with
certain financial ratios and covenants for the fourth
quarter of 2004. The agreement also amended certain of the
financial ratios and covenants with which the Company was to
comply with during 2005, and which were further revised in
the framework of the July 2005 amendment to the Facility
Agreement described below.
- 24 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT (cont.)
o JULY 2005 AMENDMENT - In July 2005, the Company and its
Banks entered into a definitive amendment to the Facility
Agreement, which closed in August 2005. The amendment
provides, among other things, for the Banks to provide
additional financing of up to approximately $30,000, subject
to the Company raising through the issuance of shares or
convertible debentures $23,500 by October 31, 2005 (which
was subsequently extended to December 31, 2005) and an
additional $6,500 by March 31, 2006. In connection with the
amendment, certain of the Company's Equity Investors, Wafer
Partners and other investors committed to invest an
aggregate of $23,500 towards such funding in the context of
a rights offering. Following the closing of the amendment to
the Facility Agreement described above and complying with
the above commitments, the Banks provided the Company with
the full amount of loans to which it was entitled to borrow
under the July 2005 amendment.
Under the July 2005 amendment, the $29,693 provided by the
Banks through January 2006 bear annual interest based on the
three-month LIBOR plus 2.5% and are repayable in a period
between twelve to fifteen months from each date any amount
was received by the Company. The amendment further provides
that a rescheduling of said repayment dates shall be
discussed following the closing date of the amendment. Such
discussions have been commenced subsequent to the balance
sheet date.
The July 2005 amendment further provides that: (i) The
Israel Corp. ("TIC") undertaking, as detailed below, shall
be extended from June 30, 2006 to December 31, 2006; (ii)
such undertaking will be deemed to have been fulfilled if
TIC invests at least $14,000 in the context of a rights
offering; (iii) any amounts raised in equity or in
convertible debentures through March 31, 2006, up to
$30,000, shall not constitute financing from other sources
towards the $152,000 fundraising milestone, as detailed
below; and (iv) the last date in which the Company is to
comply with the $152,000 fundraising milestone is postponed
from December 31, 2005 to June 30, 2006.
The amendment also revised certain of the financial ratios
and covenants through the third quarter of 2006 (primarily
quarterly EBITDA and sales).
As described in Note 13H, the Company raised $48,169 in the
form of a rights offering, thereby satisfying its
obligations to raise $23,500 and $6,500 by December 31, 2005
and March 31, 2006, respectively. In the context of such
rights offering, TIC invested $20,000, thereby terminating
its undertaking detailed below. In addition, the commitment
by one of the Company's Wafer Partners to invest an
aggregate of $3,500 in the rights offering was fulfilled.
Following the satisfaction of all the Company's commitments
under the July 2005 amendment, as of December 31, 2005,
$21,103 was drawn down in two installments and in January
2006, an additional $8,590 was drawn down.
- 25 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT (cont.)
FUNDRAISING MILESTONE - According to the amended Facility
Agreement with the Banks, the Company is to raise from specified
financial sources an aggregate of $152,000 by June 30, 2006. As
of the approval date of the financial statements, the Company had
raised $144,124 towards said amount. Accordingly, the Company's
remaining obligation to raise financings from specified financial
sources is $7,876 to be raised by June 30, 2006.
The Facility Agreement provided that should the Company fail to
meet its fundraising obligation towards the aggregate of $152,000
by June 30, 2006, the Banks will have the option to demand that
the Company consummate within three months from the failing
raising date a rights offering of convertible debentures and
warrants to purchase the Company's Ordinary Shares to raise the
missing amount towards the required funding, all in accordance
with the terms prescribed in the Facility Agreement.
TIC'S UNDERTAKING - In connection with the November 2003
amendment to the Facility Agreement, TIC undertook to the Banks
to exercise all of the rights it received in the above mentioned
rights offering. In addition, as part of TIC's undertaking, it
agreed to purchase from the Company additional securities in a
private placement on the same terms as the rights offering, in an
amount equal to 50/93 of the difference between the amount the
Company was to raise in the rights offering and the amount raised
from shareholders other than TIC, less any amounts actually
invested in the rights offering by TIC in connection with the
exercise of its own rights. Following TIC's investment in the
Company of $20,000 in the context of the 2005 rights offering
(see Note 13H), according to the July 2005 amendment, TIC's
undertaking has been fulfilled.
For further details regarding 58,906 warrants issued to TIC in
connection with its undertaking described above, see Note
13B(5)(b).
The Company has agreed to indemnify TIC for any liabilities it
incurs with respect to these arrangements, up to a maximum of
$100,000 as follows: up to $25,000 in cash and any amount
exceeding such $25,000 limit will earn interest at LIBOR plus
2.5% and will be paid on the same terms that the Company repays
its loans to the Banks.
WARRANTS ISSUED TO THE BANKS - For further details regarding
9,561,060 warrants issued to the Banks in connection with the
Facility Agreement, see Note 13B(5)(a).
COMPLIANCE WITH FINANCIAL RATIOS AND COVENANTS - As of the
balance sheet date, the Company was in full compliance with all
of the financial ratios and covenants under the amended Facility
Agreement. As of the approval date of the financial statements,
the Company anticipates that it will not be in compliance with
all of the financial ratios and covenants under the amended
Facility Agreement applicable for the fourth quarter of 2006.
According to the Facility Agreement, satisfying the financial
ratios and covenants is a material provision.
- 26 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT (cont.)
LIENS - Under the Facility Agreement, the Company agreed to
register liens in favor of the Banks on substantially all its
present and future assets. If, as a result of any default under
the Facility Agreement, the Banks were to accelerate the
Company's obligations, the Company would be obligated to
immediately repay all loans made by the Banks (which as of the
approval date of the financial statements amounted to $526,693),
plus penalties, and the Banks would be entitled to exercise the
remedies available to them under the Facility Agreement,
including enforcement of the liens against the Company's assets.
OFFEROR BY THE BANKS - If one or more certain bankruptcy related
events occur, the Banks are entitled to bring a firm offer made
by a potential investor to purchase the Company's ordinary shares
("the Offer") at a price provided in the Offer. In such case, the
Company shall be required thereafter to procure a rights offering
to invest up to 60% of the amount of the Offer on the same terms.
If the offeror offers a majority of the Company's outstanding
share capital, the rights offering will be limited to allow for
this, unless TIC and the primary Wafer Partners agree to exercise
in a rights offering rights applicable to their shareholdings and
agree to purchase in a private placement enough shares to ensure
that the full amount of the Offer is invested.
(7) FAB 2 CONSTRUCTION AGREEMENT
In August 2000, the Company entered into a fixed price turn-key
agreement with a contractor for the design and construction of
Fab 2 in consideration of approximately $200,000 to be paid
according to certain performance milestones stipulated in the
agreement. As of December 31, 2005, approximately $192,000 of
that amount had already been paid by the Company.
(8) APPROVED ENTERPRISE STATUS
In December 2000, the Investment Center approved an investment
program in connection with Fab 2 for expansion of the Company's
plant. The approval certificate for the program provided for a
benefit track entitling the Company to investment grants at a
rate of 20% of qualified investments of up to $1,250,000, or an
aggregate of up to $250,000, of which as of the balance sheet
date, an aggregate of $158,143 has been received from the
Investment Center. Since the Company's eligibility to receive
grants is with respect to investments in Fab 2 plant and
equipment made by December 31, 2005, five years from the date the
approval certificate was obtained, the Company is not to receive
grants under this program for investments made after that date.
Due to the later than planned commencement of construction of Fab
2, prevailing market conditions and slower than planned ramp-up,
as of December 31, 2005, the Company did not complete the program
and made investments constituting approximately 72% of the
eligible investments under the approved enterprise program.
- 27 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(8) APPROVED ENTERPRISE STATUS (cont.)
As a result of the Company's actual investments lagging behind
the original terms of the program, the Company notified the
Investment Center of its revised investment schedule contemplated
in an updated plan for the construction and equipping Fab 2. Such
plan includes, among other matters, a reduced rate of annual
investments and lower than projected expectations for Fab 2
sales. In July 2004, the Company received from the Investment
Center an approval to the revised investment schedule.
Since the approved investment period of five years ended on
December 31, 2005, the Company has been holding discussions with
the Investment Center to achieve satisfactory arrangements to
approve a new expansion program to commence on January 1, 2006.
During the first half of 2005, the Company received letters from
the Israeli Minister of Industry, Trade and Employment and from
the General Manager of the Investment Center stating that they
will act under Israeli law to support such expansion. In April
2005, at the Investment Center's request, the Company submitted a
revised business plan to the Investment Center for the period
commencing on January 1, 2006. As of the approval date of the
financial statements, although the Investment Center has
concluded its review of the revised business plan, the Company
has not received, and the Company's management cannot estimate
when the Company will receive, a formal response to its request
for a new expansion program to commence on January 1, 2006, or if
the Investment Center will approve the Company's request.
Any failure by the Company to meet the conditions of the 2000
approval certificate may result in the cancellation of all or a
portion of the grants to be received and tax benefits and in the
Investment Center requiring the Company to repay all or a portion
of grants already received. Under Israeli law, the Company's
non-completion of investments in an amount of $1,250,000 by
December 31, 2005 may permit the Investment Center to require the
Company to repay all or a portion of grants already received.
Management believes that it is improbable that the Investment
Center would demand the Company to repay all or a portion of
grants already received, or deny investment grants receivable as
of December 31, 2005, due to its non-completion of investments in
the amount of $1,250,000 by December 31, 2005 - see also Note
17A.
(9) AGREEMENT WITH THE ILA
In November 2000, the Company entered into a development
agreement with the Israel Land Administration ("ILA") with
respect to a parcel of land on which Fab 2 was constructed.
Following the completion of the construction of Fab 2 on the
land, in June 2003, the Company entered into a long-term lease
agreement with the ILA for a period ending in 2049. The lease
payments through 2049 relating to this lease have been paid in
advance.
(10) HEDGING ACTIVITIES
For hedging transactions and agreements the Company has entered
into, see Note 18C.
- 28 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(11) OTHER AGREEMENTS
Through December 31, 2005, the Company had entered into several
additional agreements related mainly to the construction,
equipping and transfer of technology for Fab 2. The Company's
aggregate commitment in connection with these agreements which
were not supplied or rendered as of such date, including the Fab
2 construction agreement described in paragraph (7) above,
amounted to $14,715.
B. LICENSE AGREEMENTS
(1) In June 2000, the Company entered into a cross license agreement
with a major technology company. According to the agreement, each
party acquired a non-exclusive license to certain of the other's
patents. The Company agreed to pay an annual royalty through July
2005. Though the licenses terminated on December 31, 2005, the
parties are currently negotiating the renewal of said agreement.
(2) In December 2001, the Company and DSP Group Ltd. ("DSPG") entered
into a license agreement, pursuant to which DSPG granted the
Company a personal, non-exclusive, nontransferable license to use
certain technology in the Company's products, in exchange for
license fee and ongoing royalties to be paid by either the
Company or its customers based on sales of products manufactured
in Fab 2 based on the technology. In addition, the agreement
provides for technical support by DSPG in connection with using
the technology. The license terminates on December 31, 2007.
(3) In May 2002, the Company entered into a joint development and
royalty-free, non-exclusive cross-license agreement with a
Japanese semiconductor manufacturer corporation, for the joint
development of certain technology to be used by the Company in
its Fab 2 and by the Japanese manufacturer in its facilities. In
April 2005, the Japanese semiconductor manufacturer corporation
elected, and the Company agreed, to cease the joint development
of certain technology and to terminate the agreement. However,
the license rights granted to the parties continue pursuant to
the terms of the May 2002 original agreement. According to the
terms of the termination agreement, the Japanese manufacturer
paid the Company an amount of $2,500 in April 2005. In addition,
each party expressly released the other party from any
obligations or liabilities of any nature in connection with the
original agreement. Revenues for 2005 and 2004 include $8,000 and
$1,944, respectively, in relation to this agreement, with the
$8,000 of 2005 received subsequent to the termination of the
agreement, and as a result of its termination. See also Note 10A.
(4) The Company from time to time enters into intellectual property
and licensing agreements with third parties, the effect of each
of them on the Company's total assets and results of operations
is immaterial. Certain of these agreements call for royalties to
be paid by the Company to these third parties. See also Note 10A
and paragraph E(2) below.
- 29 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
C. LEASES
(1) The Company's offices and engineering and manufacturing
operations are located in a building complex situated in an
industrial park in Migdal Ha'emek, in the northern part of
Israel. These premises are currently occupied under a long-term
lease from the Israel Lands Authority, which expires in 2032. The
Company has no obligation for lease payments related to this
lease through the year 2032.
(2) With respect to a long-term lease agreement of land on which Fab
2 was constructed, see paragraph A(9) above.
(3) The Company occupies certain other premises under various
operating leases. The obligations under such leases were not
material as of December 31, 2005.
D. PROFIT SHARING PLAN
The Company maintains an employee profit sharing plan. No amounts were
provided for under this plan for periods presented in these financial
statements, since the Company did not record profits for these
periods.
E. OTHER PRINCIPAL AGREEMENTS
(1) MACRONIX - In December 2000, the Company and Macronix entered
into an agreement according to which the Company waived in favor
of Macronix certain exclusive semiconductor manufacturing rights
it received from Saifun.
(2) SAIFUN - Pursuant to an agreement between the Company and Saifun
signed in October 1997, the Company has certain exclusive
semiconductor manufacturing rights for certain licensed
technology. The agreement also sets certain limitations on Saifun
regarding future licensing of such technology (see (1) above).
Pursuant to certain provisions of the agreement, the Company and
Saifun are obligated, under certain circumstances, to pay each
other royalties. For royalty amounts received and payable by the
Company under the agreement, see Note 19B. The agreement
terminates in October 2007, unless terminated earlier for cause.
(3) SILICONIX - In May 2004, the Company and chip maker Siliconix
incorporated ("Siliconix"), a wholly-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 commencing the second quarter
of 2005 (the date in which the transfer of Siliconix's technology
to Fab 1 was completed). According to the agreement, in August
2004 Siliconix advanced the Company $20,000 to be used primarily
for the purchase of additional equipment required to satisfy
Siliconix's orders. The advanced amount is credited towards the
purchase price of wafers. The unused remaining balance of the
$20,000 ($9,631 as of December 31, 2005) is included in
designated cash and short-term interest-bearing deposits in the
balance sheet. The Company registered liens in favor of Siliconix
on the bank account in which the $20,000 was deposited and over
the equipment purchased in connection with the transaction.
- 30 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
E. OTHER PRINCIPAL AGREEMENTS (cont.)
(4) OTHER - The Company, from time to time in the ordinary course of
business, enters into long-term agreements with various entities
for the joint development of products and processes utilizing
technologies owned by both the other entities and the Company.
F. ENVIRONMENTAL AFFAIRS
The Company's operations are subject to a variety of laws and
governmental regulations in Israel relating to the use, discharge and
disposal of toxic or otherwise hazardous materials used in the
production processes. Operating permits and licenses are required for
the operations of the Company's facilities and these permits and
licenses are subject to revocation, modification and renewal.
Government authorities have the power to enforce compliance with these
regulations, permits and licenses. As of the approval date of the
financial statements, the Company was in compliance with the terms of
the permits and licenses.
G. CLASS ACTION
In August 2004, the United States District Court dismissed the class
action filed in July 2003 by certain of the Company's shareholders in
the United States against the Company and certain of its directors,
Wafer Partners and Equity Investors ("the Defendants"). The plaintiffs
had asserted claims arising under the Securities Exchange Act of 1934,
alleging misstatements and omissions made by the Defendants in
materials sent to the Company's shareholders in April 2002 with
respect to the approval of an amendment to the Company's investment
agreements with its Fab 2 investors. In December 2004, one of the lead
plaintiffs filed an appeal of the decision dismissing the complaint.
The Company believes that the complaint is without merit and is
vigorously contesting it.
H. AMENDMENT TO ISRAELI BANKING REGULATIONS
Pursuant to an amendment to a directive published by the Israel
Supervisor of Banks, effective March 31, 2004, the Company may be
deemed part of a group of borrowers comprised of the Ofer Brothers
Group, Israel Corp., and other companies which are also included in
such group of borrowers pursuant to the directive, including companies
under the control or deemed control of these entities. The directive
provides for limits on amounts that banks may lend to borrowers or
groups of borrowers. Should the Company's Banks exceed these
limitations, they may limit the Company's ability to borrow other
money in the future and may require the Company to return some or all
of the outstanding borrowings (which were $526,693 as of the approval
date of the financial statements). As of the approval date of the
financial statements, the Company had received no such request.
I. OTHER COMMITMENTS
Receipt of certain research and development grants from the government
of Israel is subject to various conditions. In the event the Company
fails to comply with such conditions, the Company may be required to
repay all or a portion of the grants received. In management's
opinion, the Company has been in full compliance with the conditions
through December 31, 2005.
- 31 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - CONVERTIBLE DEBENTURE
A. In connection with the rights offering described in Note 13H, the
Company issued $48,169 principal amount of convertible debentures of
which $25,493 was fully paid as of December 31, 2005. The rights were
distributed to the Company's shareholders and eligible employees
holding options to purchase Ordinary Shares of the Company under share
option plans that entitle option holders to participate in a rights
offering. The debentures are listed for trade on the Tel-Aviv Stock
Exchange and on the NASDAQ Capital Market. The debentures bear annual
interest at the rate of 5% and are convertible into up to 43,790,272
of the Company's Ordinary Shares. The principal of the debentures,
together with accrued interest, will be payable in one installment on
January 12, 2012. The effective interest rate on the convertible
debentures, taking into account the proceeds and related costs of
issuance of approximately $1,300, is 5.48%.
The debentures are convertible into the Company's Ordinary Shares at a
conversion price of $1.10 per share. The conversion price is subject
to downward adjustment under certain circumstances in which the
Company sells securities in future financings at a price per share
which is lower than the conversion price, provided that such
financings close through December 2006 (or under certain conditions,
through June 2007).
Subject to the Facility Agreement, the Company may at its option
announce the early redemption of the debentures, provided that the
outstanding aggregate balance of principal on account of the
debentures is equal to or less than $500.
Certain of the Company's Equity Investors and Wafer Partners invested
$27,811 in the framework of the rights offering.
The debentures and interest thereon are unsecured and rank behind the
Company's existing and future secured indebtedness, including
indebtedness to the Banks under the Facility Agreement, as well as to
the government of Israel in connection with grants the Company
received under its approved enterprise programs and to Siliconix.
B. Subsequent to the balance sheet date and through the approval date of
the financial statements the nominee company acting on behalf of the
Tel Aviv Stock Exchange Clearing House has requested to convert,
3,351,854 of the convertible debentures, issued in connection with the
Company's recent rights offering, into 3,047,140 Ordinary Shares of
the Company.
C. The beneficial feature according to the provisions of Opinion No. 55
"EARNINGS PER SHARE" of the Institute of Certified Public Accountants
in Israel, determined based on the theoretical ex-price derived from
the Company's share price immediately prior to the issuance date of
the rights, was 19 %. According to Opinion No. 55, the number of
shares used in the computation of loss per share for the periods
presented has been adjusted retroactively according to that beneficial
feature.
D. Following the initial adoption of Accounting Standard No. 22
"FINANCIAL INSTRUMENTS: DISCLOSURE AND PRESENTATION" of the Israeli
Accounting Standards Board (see Note 2P(1)) in the first quarter of
2006, the Company's convertible debentures would be bifurcated in a
manner by which the Company's shareholders' equity would increase by
approximately $16,500 and the convertible debentures will be reduced
by the same amount. Said amount will be expensed as financing expenses
through 2011.
- 32 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY
A. DESCRIPTION OF ORDINARY SHARES
As of December 31, 2005 and 2004, the Company had 500,000,000 and
250,000,000 authorized Ordinary Shares, respectively, par value NIS
1.00 each, of which 66,932,056 and 65,699,796, respectively, were
issued and outstanding (net of 1,300,000 Ordinary Shares held by the
Company as of such dates). As of the approval date of the financial
statements, there were 67,189,547 Ordinary Shares issued and
outstanding and 58,627,109 Ordinary Shares of the Company contingently
issuable. This amount includes Ordinary Shares to be issued under
various agreements according to their provisions related to Fab 2
Wafer Partners and Equity Investors warrants, the exercise of all
options granted and issued to non-employees and the conversion of all
convertible debentures. Subsequent to the balance sheet date and
through the approval date of the financial statements, the nominee
company acting on behalf of the Tel Aviv Stock Exchange Clearing House
has requested to convert 3,351,854 of convertible debentures, issued
in connection with the Company's recent rights offering, into
3,047,140 Ordinary Shares of the Company, which as of the approval
date of the financial statements have not yet been issued. Holders of
Ordinary Shares are entitled to participate equally in the payment of
cash dividends and bonus share (stock dividend) distributions and, in
the event of the liquidation of the Company, in the distribution of
assets after satisfaction of liabilities to creditors. Each ordinary
share is entitled to one vote on all matters to be voted on by
shareholders.
B. SHARE OPTION PLANS
(1) EMPLOYEE, CHIEF EXECUTIVE OFFICER AND DIRECTOR SHARE OPTIONS
(A) GENERAL - The Company has granted to its employees options
to purchase its Ordinary Shares under several option plans
adopted by the Company since 1995. The particular provisions
of each plan and grant vary as to vesting period, exercise
price, exercise period and other terms. Generally, the
options are granted at an exercise price which equals to not
less than 85% of the market value of the Ordinary Shares at
the date of grant (in mostly all cases, at an exercise price
equal to the market value of the underlying shares at the
date of grant); vest over a three to four-year period
according to various vesting schedules; and are not
exercisable beyond ten years from the grant date under each
plan.
(B) OPTIONS TO THE COMPANY'S NEW CHIEF EXECUTIVE OFFICER AND
DIRECTOR - In April 2005, the Company's Board of Directors
approved the grant of options to purchase up to 1,325,724
Ordinary Shares to the Company's new appointed Chief
Executive Officer ("CEO"), who was also appointed as a
director, which was further approved by the Company's
shareholders in October 2005. These options are exercisable
at an exercise price of $1.56, which was the closing market
price of the Company's shares on the last trading day prior
to the board approval of the grant. These options will vest
over a four-year period, with 25% vesting over each year of
employment. The options granted are exercisable for a period
of ten years from the date of grant.
- 33 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(1) EMPLOYEE, CHIEF EXECUTIVE OFFICER AND DIRECTOR SHARE OPTIONS
(cont.)
(B) OPTIONS TO THE COMPANY'S NEW CHIEF EXECUTIVE OFFICER AND
DIRECTOR (CONT.)
If as a result of equity financings consummated after April
30, 2005 (excluding the exercise or conversion of warrants,
options, convertible debentures or other rights to acquire
the Company's securities outstanding on such date), the
CEO's total number of options granted to him through April
30, 2007 would represent less than 1.2% of the total number
of issued and outstanding shares of the Company as of April
30, 2007, additional options will be granted to the CEO to
result in a 1.2% holding of the total number of issued and
outstanding shares of the Company as of April 30, 2007.
(C) OPTIONS GRANTED TO DIRECTORS - During 2001, the Audit
Committee, the Board of Directors of the Company and the
general meeting of the Company's shareholders approved a
stock option plan pursuant to which the Company's directors
will be granted options to purchase up to 400,000 Ordinary
Shares of the Company (40,000 to each eligible director
appointed to the Board of Directors) at an exercise price
equal to the market price of the Company's shares on the
grant dates. In accordance with this option plan, 120,000
options were granted in 2005 to three directors who were
appointed in 2005 (40,000 options each) at exercise prices
of $1.87, $1.87 and $1.26, which equal the market price of
the Company's shares on the grant dates. As of December 31,
2005 and 2004, 280,000 and 240,000 options were outstanding
under the plan, respectively, with a weighted average
exercise price of $5.39 and $8.41, respectively.
Options granted under the plan vest over a four-year period
according to various vesting schedules, and generally may
not be exercised beyond five years from the date they first
become exercisable.
In addition, during 2000 and 2001, the Audit Committee, the
Board of Directors of the Company and the general meeting of
the Company's shareholders approved the grant to a director
of the Company options to purchase up to 50,000 and 21,500
Ordinary Shares, respectively, of the Company at an exercise
price of $20.00 and $10.75, respectively, per share, the
market price of the Company's shares on the dates of grant.
The options may be exercised for a period of three years
from the date on which they have become vested. As of
December 31, 2005, 16,666 and 14,334 options, respectively,
were expired.
- 34 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(1) EMPLOYEE, CHIEF EXECUTIVE OFFICER AND DIRECTOR SHARE OPTIONS
(cont.)
(D) EXPIRATION OF OPTIONS GRANTED TO THE COMPANY'S FORMER
CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE
OFFICER - In March 2003, the Board of Directors of the
Company approved a share option plan, which was approved by
the Company's shareholders in May 2003, pursuant to which
the Company's former Chairman of the Board of Directors and
CEO was granted options to purchase up to 1,043,000 Ordinary
Shares of the Company at an exercise price of $2.983, an
exercise price which is higher than the Company's share
price at the date of the approval by the Board of Directors,
and is equivalent to the average closing trading price for
the Company's Ordinary Shares during the 30 consecutive
trading days preceding the date of board approval of an
amendment to the Fab 2 investment agreements. Options
granted under the plan vest over a five-year period
according to various vesting schedules. Due to the
resignation of the Company's former Chairman of the Board of
Directors and Chief Executive Officer in May 2005, 625,800
options granted to him were fully forfeited and 417,200
options were exercisable until May 2006.
(E) OPTIONS GRANTED TO FORMER CO-CEOS IN OCTOBER 1998 AND MAY
2001 - In October 1998 and May 2001, the Board of Directors
of the Company approved share option plans pursuant to which
each of the Company's two former Co-Chief Executive Officers
was granted options to purchase up to 300,000 and 100,000
Ordinary Shares of the Company, respectively, at an exercise
price of $7.00 and $11.81, respectively, the market price of
the Company's shares on the dates of grant. In the framework
of the retirement of the former Co-Chief Executive Officers
in May 2003, based on their retirement provisions as
stipulated in the agreements, the 300,000 options are
available for exercise through April 2007. As of December
31, 2005, there were 705,000 options exercisable by the
former Co-Chief Executive Officers.
(F) OPTIONS AVAILABLE FOR GRANT - Under a provision approved in
September 2000, as amended in December 2003, by the
Company's Board of Directors, on January 1 of each year
commencing 2001 and ending 2003 and on each year commencing
November 1, 2003 and November 1, 2004, the total number of
options available for grant under all the Company's employee
share option plans is to be increased by an amount equal to
a certain percentage of the outstanding Ordinary Shares of
the Company on each such dates, provided that the maximum
number of options available for grant at any time shall not
exceed 12% of the outstanding Ordinary Shares of the
Company, and that additional options may not be granted if
the total number of unvested options outstanding under all
the Company's share option plans exceeds 12% of the
outstanding Ordinary Shares of the Company. The percentage
of the outstanding Ordinary Shares of the Company added for
the years 2001, 2002 and 2003 was 4%, and for the years 2004
and 2005 - 3.6%. As of December 31, 2005, an aggregate of
1,973,025 options had not yet been granted, and are
accordingly available for grant under the general terms
described in paragraph (a) above.
- 35 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(2) SUMMARY OF THE STATUS OF ALL THE COMPANY'S EMPLOYEE AND DIRECTOR
SHARE OPTIONS
A summary of the status of all the Company's employee and
director share option plans as of December 31, 2005, 2004 and
2003, as well as changes during each of the years then ended, is
presented below (for options granted to the Banks, a related
party and a consultant, see paragraph B(5) below):
2005 2004 2003
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
average Number average Number average
Number of exercise of share exercise of share exercise
share options price options price options price
----------- ----------- ----------- ----------- ----------- -----------
Outstanding as of
beginning of year 10,212,920 $ 5.71 6,842,442 $ 7.93 4,247,898 $10.79
Granted 5,000,224 1.54 4,364,954 2.69 3,118,742 4.10
Exercised -- (95,250) 7.00 --
Terminated (77,214) 12.45 -- --
Forfeited (2,124,355) 4.99 (899,226) 7.89 (524,199) 8.25
----------- ----------- -----------
Outstanding as of
end of year 13,011,575 4.19 10,212,920 5.71 6,842,441 7.93
=========== =========== ===========
Options exercisable
as of end of year 4,602,447 7.77 3,010,870 10.78 2,008,674 11.60
=========== =========== ===========
- 36 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(3) SUMMARY OF INFORMATION ABOUT EMPLOYEE SHARE OPTIONS OUTSTANDING
The following table summarizes information about employee share
options outstanding as of December 31, 2005:
Exercisable as of
Outstanding as of December 31, 2005 December 31, 2005
------------------------------------------------------------------ ------------------------------
Range of Weighted average Weighted
exercise Number remaining average Number Weighted average
prices outstanding contractual life exercise price exercisable exercise price
------ ----------- ---------------- -------------- ----------- --------------
(in years)
1.00-1.99 4,860,017 9.29 1.54 -- 0.00
2.00-2.99 2,723,059 7.64 2.33 991,621 2.54
3.00-3.99 1,317,600 8.59 3.26 344,220 3.26
4.42-4.92 1,051,350 7.55 4.43 530,396 4.43
5.00-5.96 118,000 7.11 5.23 72,412 5.35
6.00-6.99 714,889 6.50 6.13 437,138 6.09
7.00-7.99 579,750 1.17 7.01 579,750 7.01
8.00-8.99 344,887 2.36 8.51 344,887 8.51
9.063-9.812 8,250 1.09 9.37 8,250 9.37
10.00-10.89 612,109 5.23 10.41 612,109 10.41
11.81-11.81 200,000 5.41 11.81 200,000 11.81
12.00-13.00 38,350 4.67 12.40 38,350 12.40
14.25-17.1875 18,500 4.85 16.16 18,500 16.16
18.75-18.75 44,500 4.26 18.75 44,500 18.75
20.00-25.00 380,314 4.30 24.48 380,314 24.48
---------- ---------
13,011,575 4,602,447
========== =========
(4) WEIGHTED AVERAGE GRANT-DATE FAIR VALUE OF OPTIONS GRANTED TO
EMPLOYEES
The weighted average grant-date fair value of the options granted
during 2005, 2004 and 2003 to employees and directors amounted to
$0.83, $1.53 and $2.18 per option, respectively. The Company
utilized the Black-Scholes option-pricing model to estimate fair
value, utilizing the following assumptions for the years 2005,
2004 and 2003 (all in weighted averages):
2005 2004 2003
---- ---- ----
Risk-free interest rate 3.69%-4.34% 2.84%-3.88% 2.88%-3.22%
Expected life of options 4.49 years 4.5 years 4.75 years
Expected annual volatility 54%-69% 65%-82% 55%-74%
Expected dividend yield None None None
- 37 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(5) NON-EMPLOYEE WARRANTS
(A) BANKS - As of December 31, 2005, the Company had granted the
Banks an aggregate of 9,561,060 warrants to purchase
Ordinary Shares of the Company, at an average exercise price
of $1.88 per share, at terms described below, of which
9,161,060 were outstanding and 5,028,828 were exercisable as
of the approval date of the financial statements.
WARRANTS ISSUED IN JANUARY 2001 - In January 2001, as part
of the Facility Agreement described in Note 11A(6), the
Banks received an aggregate of 400,000 warrants to purchase
Ordinary Shares of the Company (200,000 each) at an exercise
price, as amended in December 2001, of $6.20 per share. As
of December 31, 2005, all of these warrants were fully
vested. The warrants expired in January 2006.
The cost of the warrants issued to the Banks, determined
based on the fair value at the grant and amendment dates in
accordance with SFAS 123, amounted to a total of $5,466.
Such amount is amortized as deferred financing charges over
the terms of the loans under the Facility Agreement.
WARRANTS GRANTED IN DECEMBER 2003 - In December 2003, as
part of an amendment to the Facility Agreement, the Banks
received an aggregate of 896,596 warrants to purchase
Ordinary Shares of the Company (448,298 each) at an exercise
price of $6.17 per share, the 15 day average closing price
of the Company's Ordinary Shares prior to the date the
amendment with the Banks was signed. As of December 31,
2005, all of the warrants are fully vested. The warrants are
exercisable for a five-year period ending December 2008.
The cost of the warrants issued to the Banks, determined
based on the fair value at the grant and amendment dates in
accordance with SFAS 123, amounted to a total of $3,946.
Such amount is amortized as deferred financing charges over
the terms of the loans under the Facility Agreement.
WARRANTS ISSUED IN JULY 2005 - In connection with the July
2005 amendment to the Facility Agreement detailed in Note
11A(6) above, the Company agreed to issue warrants to the
Banks exercisable into an aggregate of 8,264,464 ordinary
shares of the Company, with an exercise price of $1.21.
One-half, or 4,132,232, of the warrants are exercisable for
five years ending in August 2010, and one-half, or
4,132,232, of the warrants shall be exercisable for a
five-year period commencing on the date on which the Company
and its Banks will agree, if at all, upon the rescheduled
repayment dates of the new loans of $29,693, as described in
Note 11A(6) above.
The cost of the currently exercisable 4,132,232 warrants,
determined based on the fair value at the grant date in
accordance with SFAS 123, amounted to a total of $2,793.
Such amount is amortized as deferred financing charges over
the term of the new loans of $29,693.
- 38 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(5) NON-EMPLOYEE WARRANTS (cont.)
(A) BANKS (cont.)
In lieu of paying the exercise price in cash, the Banks are
entitled to exercise all their warrants on a "cashless"
basis, i.e. by forfeiting part of the warrants in exchange
for ordinary shares equal to the aggregate fair market value
of the shares underlying the warrants forfeited less the
aggregate exercise price.
(B) WARRANTS GRANTED TO A RELATED PARTY - In consideration for
TIC's undertaking described in Note 11A(6), the Company
issued TIC warrants for the purchase of 58,906 of the
Company's Ordinary Shares. The exercise price for the
warrants is $6.17 per share, the 15-day average closing
price of the Company's Ordinary Shares prior to the date the
November 2003 amendment with the Banks described in Note
11A(6) was signed. As of December 31, 2005, all of the
warrants are fully vested and none of them was exercised.
The warrants are exercisable for a five-year period ending
December 2008.
The cost of the warrants award granted to TIC, determined
based on the fair value at the grant date in accordance with
SFAS 123, amounted to a total of $259. Such amount was
allocated to other assets as deferred financing charges and
is amortized as financing expense over the terms of the
loans under the Facility Agreement with the Banks.
(C) WARRANTS ISSUED TO A CANADIAN PENSION FUND - See Note
11A(4).
The Company utilized the Black-Scholes option pricing model to
estimate fair values of options and warrants granted to
non-employees, utilizing the assumptions similar to those
presented in paragraph B(4) above.
(6) PRO FORMA LOSS PER SHARE ACCORDING TO SFAS 123 AND SFAS 148
Had compensation cost for the Company's share option plans been
determined based on the fair value at the grant dates for all
awards made through December 31, 2005 in accordance with SFAS
123, as amended by SFAS 148, the Company's pro forma loss per
share would have been as follows:
For the year ended December 31,
---------------------------------------
2005 2004 2003
--------- --------- ---------
PRO FORMA LOSS
Loss for the year, as reported $(203,082) $(137,768) $(114,261)
Less - stock-based compensation
determined under APB 25 -- -- 27
Add - stock-based compensation
determined under SFAS 123 (4,229) (3,980) (8,437)
--------- --------- ---------
Pro forma loss $(207,311) $(141,748) $(122,671)
========= ========= =========
BASIC LOSS PER SHARE
As reported $ (2.55) $ (1.79) $ (2.01)
========= ========= =========
Pro forma $ (2.60) $ (1.84) $ (2.16)
========= ========= =========
- 39 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
C. TREASURY STOCK
During 1998, the Board of Directors of the Company authorized, subject
to certain conditions, the purchase of up to 1,400,000 Ordinary Shares
of the Company to facilitate the exercise of employee stock options
under the Company's share option plans. During 1999 and 1998, the
Company funded the purchase by a trustee of 142,500 and 1,157,500,
respectively, of the Company's Ordinary Shares.
D. DIVIDEND DISTRIBUTIONS
According to the Facility Agreement, as amended (Note 11A(6)), the
Company undertook not to distribute any dividends prior to January 1,
2008. Any dividend distributions after that date shall be subject to
provisions stipulated in such agreement, mainly the prior approval of
the Banks.
E. SALE OF SECURITIES - JANUARY 2002
In January 2002, the Company issued on the Tel Aviv Stock Exchange,
Israel NIS 110,579,800 principal amount of convertible debentures,
under terms described in Note 9. Together with the convertible
debentures the Company issued for no consideration an aggregate of
552,899 options and 2,211,596 Options (Series 1). As of the approval
date of the financial statements, all said options were expired and
none were exercised.
The total initial proceeds raised were $23,200, and costs related to
the issuance of the securities and the prospectus were approximately
$1,750. See Note 20F for the presentation and the accounting treatment
of the sale of these securities under U.S. GAAP.
F. RIGHTS OFFERING - OCTOBER 2002
In October 2002, the Company issued in connection with a rights
offering done on the Nasdaq and on the Tel-Aviv Stock Exchange in
Israel 4,097,964 Ordinary Shares of the Company and 1,844,070
warrants, all of which were outstanding as of December 31, 2005, to
purchase Ordinary Shares of the Company, in consideration for
aggregate gross proceeds of $20,490. Of these amounts, 4,086,037
Ordinary Shares and 1,838,715 warrants were issued to Wafer Partners
and Equity Investors in consideration for an aggregate of $20,430.
Each warrant may be exercised for the purchase of one Ordinary Share
at an exercise price of $7.50 for a period ending on October 31, 2006.
Costs in relation to the prospectus and the issuance of the securities
were approximately $800.
G. PUBLIC OFFERING - JANUARY 2004
In January 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 in February 2004 of an
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).
- 40 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
H. RIGHTS OFFERING - DECEMBER 2005
In December 2005, the Company filed in Israel and the U.S. a
prospectus for the distribution of transferable rights to purchase up
to $50,000 U.S. dollar denominated debentures that are convertible
into up to 45,454,545 of the Company's Ordinary Shares. The rights
were distributed to the shareholders of record of the Company on
December 20, 2005 (the record date), and to certain employees who on
the record date held options to purchase the Company's Ordinary Shares
under share option plans that entitle the option holders to
participate in a rights offering. Each 138.98 Ordinary Shares and/or
eligible employee options held on the record date entitled their
holder to one right. The rights were exercisable until January 12,
2006. Each right entitled its holder to purchase, at a subscription
price of $100.00, 100 U.S. dollar denominated convertible debentures.
In connection with the exercise of the rights, the Company issued
48,169,300 convertible debentures, with each debenture of $1.00 in
principal amount, or total of $48,169 principal amount of debentures,
which bear annual interest at the rate of 5%. The principal of the
debentures, together with accrued interest, is payable in one
installment on January 12, 2012.
The debentures are convertible into the Company's Ordinary Shares at a
rate of one ordinary share per $1.10 aggregate principal amount of
debentures. The conversion price is subject to downward adjustment
under certain circumstances in which the Company sells securities in
future financings at a price per share which is lower than the
conversion price, provided that such financings close through December
2006 (or under certain conditions, through June 2007).
Subject to the Facility Agreement, the Company may at its option
announce the early redemption of the debentures, provided that the
outstanding aggregate balance of principal on account of the
debentures is equal to or less than $500.
The debentures are listed and quoted on the NASDAQ Capital Market and
the Tel Aviv Stock Exchange.
Certain of the Company's Equity Investors and Wafer Partners invested
$27,811 in the framework of the rights offering.
The debentures and interest thereon are unsecured and rank behind the
Company's existing and future secured indebtedness, including
indebtedness to the Banks under the Facility Agreement, as well as to
the government of Israel in connection with grants the Company
received under its approved enterprise programs and to Siliconix.
If on the payment date of the principal and interest on the
debentures, there exists an infringement of certain covenants and
conditions under the Facility Agreement, the date for payment of the
interest and principal on the debentures may be postponed, depending
on various scenarios under the Facility Agreement until such covenant
or condition is settled. See Note 20G for the presentation of the
rights offering in accordance with U.S. GAAP.
- 41 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - INFORMATION ON GEOGRAPHIC AREAS AND MAJOR CUSTOMERS
A. REVENUES BY GEOGRAPHIC AREA (as percentage of total sales)
Year ended December 31,
--------------------------
2005 2004 2003
---- ---- ----
United States 64% 60% 73%
Israel 7 20 2
Asia Pacific - in 2005 and 2004 -
primarily Taiwan; in 2003 - only
Taiwan 20 11 10
Europe 9 9 15
--- --- ---
Total 100% 100% 100%
=== === ===
B. LONG-LIVED ASSETS BY GEOGRAPHIC AREA - Substantially all of the
Company's long-lived assets are located in Israel.
C. MAJOR CUSTOMERS (as percentage of total sales)
Year ended December 31,
-------------------------
2005 2004 2003
---- ---- ----
Customer A 22% 24% 20%
Customer B 14 5 1
Customer C 2 17 1
Customer D 4 8 24
Customer E 3 6 11
Other customers (*) 27 17 20
(*) Represent sales to six different customers each of whom accounted
for between 1% and 8% of sales during 2005; to four customers (1%
-8%) of sales during 2004; and to six customers (0%-9%) during
2003.
As of December 31, 2005 and 2004, the above major customers
constituted the majority of the trade accounts receivable reflected on
the balance sheets.
- 42 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 15 - FINANCING EXPENSES, NET
Financing expenses, net consist of the following:
Year ended December 31,
----------------------------------------
2005 2004 2003
-------- -------- --------
Financial expenses (primarily bank loan interest) $(35,595) $(29,709) $(16,073)
Interest expenses in relation
to convertible debentures (1,249) (1,233) (1,198)
Less capitalized interest - Note 5A(3) -- -- 6,892
-------- -------- --------
(36,844) (30,942) (10,379)
Financing income (primarily bank deposit interest) 1,193 1,197 553
-------- -------- --------
Financing expense, net $(35,651) $(29,745) $ (9,826)
======== ======== ========
NOTE 16 - OTHER INCOME
In December 2004, the Company entered into a definitive agreement to sell
all of its holdings in Saifun Semiconductors Ltd. ("Saifun"), an Israeli
company which designs and develops memory designs, to a U.S. based private
equity investor in consideration for $38,677. In December 2004,
shareholders of Saifun exercised their right of first refusal, and
accordingly purchased the shares from the Company for said amount. The net
gain from the sale of Saifun's shares amounted to $32,377.
NOTE 17 - INCOME TAXES
A. APPROVED ENTERPRISE STATUS
Substantially all of the Company's existing facilities as of December
31, 2005 have been granted approved enterprise status, as provided by
the Israeli Law for the Encouragement of Capital Investments - 1959
("Investments Law") (see Note 5B).
The tax benefits derived from approved enterprise status relate only
to taxable income attributable to each approved enterprise investments
programs. Pursuant to the Investments Law and the approval
certificates, the Company's income attributable to its various
approved enterprise investments is taxed at a rate of up to 25%
through 2012. Taxable income attributable to Fab 2 approved program
shall be tax-exempt for the first two years it arises. The portion of
the Company's taxable income that is not attributable to approved
enterprise investments is taxed at a rate of 34% in 2005 (regular
"Company Tax"). The regular Company Tax rate is to be gradually
reduced to 25% until 2010.
The tax benefits are also conditioned upon fulfillment of the
requirements stipulated by the Investments Law and the regulations
promulgated thereunder, as well as the criteria set forth in the
certificates of approval. In the event of a failure by the Company to
comply with these conditions, the tax benefits could be canceled, in
whole or in part, and the Company would be required to refund the
amount of the canceled benefits, plus interest and certain inflation
adjustments. In management's opinion, the Company has been in
compliance with the conditions through the approval date of the
financial statements. See also Notes 5B and 11A(8).
- 43 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 17 - INCOME TAXES (cont.)
B. COMPONENTS OF DEFERRED TAX ASSET/LIABILITY
The following is a summary of the components of the deferred tax
benefit and liability reflected on the balance sheets as of the
respective dates:
As of December 31,
--------------------------
2005 2004
--------- ---------
DEFERRED TAX BENEFIT - CURRENT
Accrued vacation pay $ 464 $ 702
Other 109 68
--------- ---------
573 770
Valuation allowance (573) (770)
--------- ---------
Total current deferred tax benefit $ -- $ --
========= =========
NET DEFERRED TAX BENEFIT - LONG-TERM
Deferred tax assets -
Net operating loss carryforwards $ 165,000 $ 112,147
Research and development 2,427 3,213
Liability for employee rights upon severance 957 918
--------- ---------
168,384 116,278
Valuation allowance (118,321) (75,613)
--------- ---------
50,063 40,665
Deferred tax liability - depreciation and amortization (50,063) (40,665)
--------- ---------
Total net long-term deferred tax benefit $ -- $ --
========= =========
C. EFFECTIVE INCOME TAX RATES
The reconciliation of the statutory tax rate to the Company's
effective tax rate is as follows:
Year ended December 31,
----------------------------------
2005 2004 2003
------ ------ ------
Israeli statutory rate (34)% (35)% (36)%
Reduced tax rate for approved enterprise 14 15 16
Tax benefits for which deferred taxes
were not recorded 21 23 23
Permanent differences and other, net (1) (3) (3)
------ ------ ------
--% --% --%
====== ====== ======
D. NET OPERATING LOSS CARRYFORWARD
As of December 31, 2005, the Company had net operating loss
carryforwards for tax purposes of approximately $825,000, which may be
carried forward for an unlimited period of time.
E. FINAL TAX ASSESSMENTS
The Company possesses final tax assessments under agreement through
the year 1998. In addition, the tax assessments for the years
1999-2001 are deemed final.
- 44 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 18 - FINANCIAL INSTRUMENTS
A financial instrument is defined as cash, evidence of an ownership
interest in an entity, or a contract that imposes on one entity a
contractual obligation either to deliver or receive cash or another
financial instrument to or from a second entity. Examples of financial
instruments include cash and cash equivalents, trade accounts receivable,
loans, investments, trade accounts payable, accrued expenses, options and
forward contracts.
The Company makes certain disclosures with regard to financial instruments,
including derivatives. These disclosures include, among other matters, the
nature and terms of derivative transactions, information about significant
concentrations of credit risk, and the fair value of financial assets and
liabilities.
See Note 20D for disclosure related to the Company's derivatives financial
instruments in accordance with U.S. GAAP.
A. HEDGING ACTIVITIES
The Company, from time to time, enters into foreign currency
derivatives to hedge its foreign currency exposure to equipment
purchase commitments and other firm commitments denominated in foreign
currency (primarily Japanese Yen and Euro). In that regard, the
Company generally uses foreign currency forward contracts and options
(zero-cost cylinder) as hedging instruments for foreign currency
exposure. Accordingly, if the hedge is determined to be effective all
changes in value attributed to spot rate fluctuations as well as the
premium of forward contracts and the time value of options at
inception are deferred until the hedged item is recognized (i.e.,
receipt of the equipment). The time value of options at inception is
amortized on a straight-line basis.
In addition, the Company, from time to time, enters into agreements to
hedge variable interest rate exposure on long-term loans (see Note 8).
In order to hedge the cash flow related to this exposure, the Company
uses various types of derivative contracts, consisting primarily of
interest rate caps, floors and collars. If the hedge is determined to
be effective, the changes in the intrinsic value of the derivative
contracts are deferred and recognized in results of operations as
interest payments become due. The time value of options at inception
is recognized in the results of operations on a straight-line basis.
When the related debt is issued in connection with the acquisition of
assets not yet placed into operations, interest costs and gains and
losses on the derivative contracts are capitalized to the related
asset.
The Company does not hold or issue derivative financial instruments
for non-hedging purposes.
- 45 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 18 - FINANCIAL INSTRUMENTS (cont.)
B. CREDIT RISK OF FINANCIAL INSTRUMENTS, INCLUDING DERIVATIVES
The face or contract amounts of derivatives do not represent amounts
exchanged by the parties and, accordingly, are not a measure of the
exposure of the Company through its use of derivatives.
The Company is exposed to credit-related losses in respect of
derivative financial instruments in a manner similar to the credit
risk involved in the realization or collection of other types of
assets. In management's estimation, due to the fact that derivative
financial instrument transactions are entered into solely with
financial institution counterparties, it is not expected that such
counterparties will fail to meet their obligations. Substantially all
remaining financial instruments held by the Company are due from
governmental entities and, accordingly, the Company's credit risk in
respect thereof is negligible.
C. PRESENTATION OF HEDGING ACTIVITIES IN THE FINANCIAL STATEMENTS
(1) As of December 31, 2005 and 2004, there were no outstanding
foreign exchange agreements (options) to hedge exposure related
to the purchase of machinery and equipment. During 2005, the
Company did not enter into foreign exchange agreements (options)
and accordingly there were no results of such agreements during
that year. The loss resulted from these agreements in 2004 was
immaterial. The agreements resulted in 2003 in a gain of $2,357
of which $1,663 was capitalized to fixed assets.
(2) As of December 31, 2005 and 2004, the Company had outstanding
agreements to hedge interest rate exposure on loans drawn down
under the Facility Agreement, the aggregate amount of which was
$292,000, all of which is attributable to Fab 2. These agreements
resulted in 2005 and 2004 in a loss of $1,756 and $5,629,
respectively, and in 2003 in a loss of $5,335, out of which
$2,547 was capitalized to property and equipment.
D. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments,
excluding the Company's agreements to hedge interest rate exposure on
long-term loans, did not materially differ from their respective
carrying amounts as of December 31, 2005 and 2004. The fair value of
the interest rate hedging transactions as of December 31, 2005 would
have resulted in an unrealized capitalizable gain of $1,767 (as of
December 31, 2004 - an unrealized capitalizable loss of $2,406).
- 46 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - RELATED PARTIES BALANCES AND TRANSACTIONS
A. BALANCES
As of December 31,
-------------------
2005 2004
------- -------
Trade accounts receivable $ 5,309 $ 9,054
======= =======
Current liabilities $ 188 $ 12
======= =======
Convertible debenture $25,493 $ --
======= =======
Long-term liability in respect of customers' advances $37,785 $40,514
======= =======
Other long-term liabilities $ 1,102 $ 166
======= =======
B. TRANSACTIONS
Year ended December 31,
-------------------------------------
2005 2004 2003
-------- -------- -------
Sales $ 33,456 $ 37,521 $13,282
======== ======== =======
Management fees $ 120 $ 120 $ 240
======== ======== =======
Expenses paid $ 47 $ 60 $ 99
======== ======== =======
Royalties received - Note 11E(2) $ -- $ 875 $ 225
======== ======== =======
Application of customer advances
towards purchases $ -- $ 445 $ 870
======== ======== =======
Equity conversion of customer advances -
Note 11A(5) $ 1,794 $ 539 $ --
======== ======== =======
Expense reimbursements received $ -- $ -- $ 282
======== ======== =======
Conversion of customer advances into
Long-term loans - Note 11A(5) $ 936 $ 166 $ --
======== ======== =======
C. For commitments, contingencies and other transactions relating to Fab
2 Wafer Partner and Equity Investor agreements - see Note 11A.
- 47 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP
With regard to the Company's financial statements, the material differences
between GAAP in Israel and in the U.S. relate to the following. See H below
for the presentation of the Company's balance sheets as of December 31,
2005 and 2004 in accordance with U.S. GAAP.
A. RECENT ACCOUNTING PRONOUNCEMENTS BY THE FASB
(1) SFAS NO. 151 - INVENTORY COSTS, AN AMENDMENT OF ARB NO. 43,
CHAPTER 4 - In November 2004, the FASB issued SFAS No. 151,
"INVENTORY COSTS, AN AMENDMENT OF ARB NO. 43, CHAPTER 4". SFAS
No. 151 amends the guidance in ARB 43, Chapter 4, "Inventory
Pricing", which provides guidance on the allocation of certain
costs to inventory. SFAS 151 clarifies that abnormal amounts of
idle facility expense, freight, handling costs, and wasted
material (spoilage) should be recognized as current-period
charges. In addition, SFAS 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the
normal capacity of the production facilities. The provisions of
this statement are effective for inventory costs incurred during
fiscal years beginning after June 2005. The provisions of this
statement shall be applied prospectively. This Standard is not
expected to have a material effect on the Company's financial
position or results of operations.
(2) SFAS NO. 123 (REVISED 2004) "SHARE BASED PAYMENTS" - In December
2004, the FASB issued SFAS No. 123 (revised 2004) "SHARE BASED
PAYMENTS" ("SFAS 123(R)"). This Statement is a revision of FASB
Statement No. 123, "Accounting for Stock-Based Compensation",
which supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees" and its authoritative interpretations.
SFAS 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments
for goods or services; focuses primarily on accounting for
transactions in which an entity obtains employee and directors
services in share-based payment transactions; and does not change
the accounting guidance for share-based payment transactions with
parties other than employees.
SFAS 123(R) eliminates the alternative to use APB 25's intrinsic
value method of accounting that was provided in SFAS 123 as
originally issued and requires to measure the cost of employee
services received in exchange for an award of equity instruments
based on the grant-date fair value of the award. The
fair-value-based method in this Statement is similar to the
fair-value-based method in SFAS 123 in most respects. The costs
associated with the awards will be recognized over the period
during which an employee is required to provide service in
exchange for the award - the requisite service period (usually
the vesting period).
The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models
adjusted for the unique characteristics of those instruments
(unless observable market prices for the same or similar
instruments are available). If an equity award is modified after
the grant date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the
modified award over the fair value of the original award
immediately before the modification.
- 48 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
A. RECENT ACCOUNTING PRONOUNCEMENTS BY THE FASB (cont.)
(2) SFAS NO. 123 (REVISED 2004) "SHARE BASED PAYMENTS" (cont.)
In The provisions of SFAS 123(R) apply to all awards to be
granted by the Company on or after January 1, 2006 and to awards
modified, repurchased, or cancelled after that date. When
initially applying the provisions of SFAS 123(R), in the first
quarter of 2006, the Company will be required to elect between
using either the "modified prospective method" or the "modified
retrospective method". Under the modified prospective method, the
Company is required to recognize compensation cost for all awards
granted after the adoption of SFAS 123(R) and for the unvested
portion of previously granted awards that are outstanding on that
date. Under the modified retrospective method, the Company is
required to restate its previously issued financial statements to
recognize the amounts previously calculated and reported on a pro
forma basis, as if the original provisions of SFAS 123(R) had
been adopted. Under both methods, it is permitted to use either a
straight line or an accelerated method to amortize the cost as an
expense for awards with graded vesting.
Management has commenced identifying the potential future impact
of applying the provisions of SFAS 123(R), including each of its
proposed transition methods. Based on the outstanding options as
of December 31, 2005, the total compensation to be amortized in
the years 2006-2009 is expected to be approximately $4,200.
(3) SFAS 153, EXCHANGE OF NON-MONETARY ASSETS - In December 2004, the
FASB issued SFAS No. 153, "EXCHANGES OF NONMONETARY ASSETS AN
AMENDMENT OF APB NO. 29". This Statement amends Opinion 29 to
eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial
substance. The Statement specifies that a nonmonetary exchange
has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange.
This Statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005.
Retroactive application is not permitted. The adoption of this
Standard does not affect the Company's financial position or
results of operations.
(4) SFAS NO. 154, ACCOUNTING CHANGES AND ERROR CORRECTIONS - This
Statement, published in May 2005, replaces APB Opinion No. 20,
Accounting Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements, and changes
the requirements for the accounting for and reporting of a change
in accounting principles. This Statement applies to all voluntary
changes in accounting principles, and to changes required by an
accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions.
- 49 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
A. RECENT ACCOUNTING PRONOUNCEMENTS BY THE FASB (cont.)
(4) SFAS NO. 154, ACCOUNTING CHANGES AND ERROR CORRECTIONS (cont.)
Opinion 20 previously required that most voluntary changes in
accounting principles be recognized by including the cumulative
effect of changing to the new accounting principles in the net
income of the period of the change. This Statement requires
retrospective application to prior periods' financial statements
of changes in accounting principles, unless it is impracticable
to determine the specific effects or the cumulative effect of the
change. The Statement also provides guidance for cases in which
it is impracticable to determine the period-specific effects of
an accounting change on one or more individual prior periods
presented, and/or for cases in which it is impracticable to
determine the cumulative effect of applying a change in
accounting principles to all prior periods.
This Statement defines RETROSPECTIVE APPLICATION as (i) the
application of a different accounting principle to prior
accounting periods as if that principle had always been used, or
(ii) as the adjustment of previously issued financial statements
to reflect a change in the reporting entity. This Statement also
redefines RESTATEMENT as the revisiting of previously issued
financial statements to reflect the correction of an error.
This Statement also requires that a change in depreciation,
amortization, or depletion method for long-lived, non-financial
assets, be accounted for as a change in accounting estimate
effected by a change in accounting principles. This Statement
carries forward without change the guidance in Opinion 20 for
reporting the correction of an error in previously issued
financial statements and a change in accounting estimate. This
Statement also carries forward the guidance in Opinion 20
requiring justification of a change in accounting principles on
the basis of preferability.
The provisions of this Statement are effective for accounting
changes and corrections of errors made during fiscal years
beginning after December 15, 2005. The adoption of this Standard
is not expected to have a material effect on the Company's
financial position or results of operations.
B. PRESENTATION OF DESIGNATED CASH AND SHORT-TERM AND LONG-TERM
INTEREST-BEARING DEPOSITS
In accordance with U.S. GAAP, the Company's designated cash,
short-term and long-term interest-bearing deposits should be excluded
from current assets and long-term investments and presented separately
as a non-current asset. Accordingly, as of December 31, 2005, $31,661
was reclassified from current assets to a long-term asset (as of
December 31, 2004, $53,793 and $5,134 were reclassified, respectively,
from current assets and long-term investments to a long-term asset).
C. PRESENTATION OF NET LONG-TERM LIABILITIES IN RESPECT OF EMPLOYEES
Under U.S. GAAP, assets and liabilities relating to severance
arrangements are to be presented separately and are not to be offset,
while according to Israeli GAAP such an offset is required.
Accordingly, as of December 31, 2005 an amount of $13,658 was
reclassified from other long-term liabilities to long-term investments
(as of December 31, 2004 - $16,350).
- 50 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
D. HEDGING ACTIVITIES IN ACCORDANCE WITH U.S. GAAP (SFAS 133)
(1) In 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and the related
statements and interpretations thereon (collectively, "SFAS
133"). A derivative is typically defined as an instrument whose
value is derived from an underlying instrument, index or rate,
has a notional amount, requires no or little initial investment
and can be net settled.
SFAS 133 requires that all derivatives be recorded in the
financial statements at their fair value at the date of the
financial statements. The changes in the fair value of the
derivatives are charged to the statement of operations or to
other comprehensive income, as appropriate in the circumstances.
The Company's derivatives consist mainly of foreign currency
forward transactions and options and interest rate instruments
(collars).
(2) The Company uses foreign exchange agreements (forward contracts
and options) to hedge its foreign currency exposure in
anticipated equipment purchases denominated in foreign currency.
All foreign exchange agreements are with underlying terms that
match or approximate the hedged transactions and thus are highly
effective. The Company measures the effectiveness of the forward
contracts hedges based on forward rates. The Company assesses and
measures the effectiveness of the options hedge, at inception and
throughout the hedge, based on total changes in cash flows. All
changes in fair value are reported in other comprehensive income.
The amounts accumulated in other comprehensive income are
expensed to results of operations concurrent with the recognition
of depreciation expenses on the equipment. As of December 31,
2005 and 2004, the Company had no outstanding foreign exchange
agreements.
The Company uses interest rate collars with a knock-out and
knock-in features to hedge its Libor-based variable long-term
debt cash flow exposure. The knock-out feature was set above the
cap level and the knock-in feature was set below the floor level.
The Company determined that the probability that the cap will be
knocked-out is remote and thus expected that the hedge will be
highly effective. The Company assessed and measured the
effectiveness of the hedge, at inception and throughout the
hedge, based on total changes in cash flows of the collar, and
reported all changes in fair value in other comprehensive income.
Amounts presented in other comprehensive income are reclassified
to operations or capitalized to property and equipment, as
applicable (see Note 2L), as interest payment become due. For
outstanding contracts as of December 31, 2005 and 2004, see Note
18C(2).
(3) Following the commencement of operations of Fab 2 during the
third quarter of 2003, $6,641 of the aggregate comprehensive loss
as of June 30, 2003, which is attributable to property and
equipment, is amortized on a straight-line method over five
years, in correspondence to the economic useful lives of the
machinery and equipment.
- 51 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
D. HEDGING ACTIVITIES IN ACCORDANCE WITH U.S. GAAP (SFAS 133) (cont.)
(4) Complying with SFAS 133 with respect to the Company's hedging
transactions as of December 31, 2005 would have resulted in: an
increase in other long-term investments in the amount of $1,767;
a decrease (for U.S. GAAP purposes only) in other comprehensive
loss for the year ended December 31, 2005 in the net amount of
$5,501; an accumulated other comprehensive loss component of
equity balance as of such date in the amount of $1,554; and in a
decrease of $3,291 in property and equipment, net as of December
31, 2005.
E. 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 December 31, 2005 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 (for further information with regard to the Company's
share option plans and the assumptions for utilizing the Black-Scholes
pricing model, see Note 13B(4)):
Year ended December 31,
-------------------------------------------
2005 2004 2003
--------- --------- ---------
PRO FORMA LOSS
Loss for the year, as reported according to
U.S. GAAP (see I below) $(203,082) $(137,768) $(114,261)
Less - stock-based compensation determined
under APB 25 -- -- 27
Add - stock-based compensation
determined under SFAS 123 (4,229) (3,980) (8,437)
--------- --------- ---------
Pro forma loss $(207,311) $(141,748) $(122,671)
========= ========= =========
BASIC LOSS PER SHARE
As reported according to U.S.
GAAP (see K below) $ (3.06) $ (2.13) $ (2.45)
========= ========= =========
Pro forma $ (3.12) $ (2.19) $ (2.63)
========= ========= =========
- 52 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
F. SALE OF SECURITIES
Under Accounting Principles Board Opinion No. 14 ("APB 14"), the
proceeds from the sale of the securities described in Note 9 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, would have resulted in an increase in shareholders' equity
as of December 31, 2005 and 2004 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 each
of the years ended December 31, 2005, 2004 and 2003 would have been
immaterial.
G. CONVERTIBLE DEBENTURES
Under U.S. GAAP (SFAS No. 133), an embedded conversion option should
be bifurcated and accounted for separately as a derivative instrument,
unless the specific requirements for equity classification of the
embedded conversion option, as stated in EITF 00-19, are met. EITF
00-19 provides that an equity classification is appropriate if the
settlement criteria set forth therein for such classification are met
and that the additional conditions necessary for equity
classification, set forth therein, are also met. EITF 00-19 also
allows for the equity classification of the embedded conversion option
in case the necessary additional conditions are not met, only if the
contract is a conventional convertible debt instrument. In accordance
with EITFs 00-19 and 05-2, a conventional convertible debt instrument
is an instrument that provides the holder with an option to convert
into a fixed number of shares or the equivalent amount of cash (at the
discretion of the issuer), and the ability to exercise that option is
based on the passage of time or a contingent event. Convertible debt
is not considered conventional when the number of shares the holder
converts into is not fixed and can vary based on a contingent future
event (other than "standard" antidilution provisions).
As detailed in Note 13H, the conversion price of the convertible
debenture issued by the Company in December 2005 is subject to
downward adjustment under certain circumstances; i.e. the number of
shares to be issued is not fixed. In addition, the criteria set forth
in EITF 00-19 for classification as equity are not met. Accordingly,
for purposes of U.S. GAAP, these convertible debentures are to be
accounted for under SFAS No. 133 and to be bifurcated with the
embedded conversion option treated as a liability.
Under Israeli GAAP, convertible debentures the future conversion of
which is probable as of the balance-sheet date, are presented as a
separate line-item between total liabilities and shareholders equity,
while according to U.S. GAAP such presentation is not allowed as
detailed above.
Accordingly, as of December 31, 2005 an amount of $25,493 was
reclassified from that separate line-item to convertible debentures
(under total long-term liabilities).
- 53 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
H. Balance Sheets in Accordance with U.S. GAAP
AS OF DECEMBER 31, 2005
-----------------------------------
U.S. AS PER AS PER
GAAP ISRAELI ADJUST- U.S.
REMARK GAAP MENTS GAAP
------ --------- --------- ---------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 7,337 $ $ 7,337
DESIGNATED CASH AND SHORT-TERM INTEREST-BEARING DEPOSITS B 31,661 (31,661) --
TRADE ACCOUNTS RECEIVABLE:
RELATED PARTIES 5,309 5,309
OTHERS 11,467 11,467
OTHER RECEIVABLES 9,043 9,043
INVENTORIES 24,376 24,376
OTHER CURRENT ASSETS 1,048 1,048
--------- --------- ---------
TOTAL CURRENT ASSETS 90,241 (31,661) 58,580
--------- --------- ---------
LONG-TERM INVESTMENTS
LONG-TERM INTEREST-BEARING DEPOSITS
DESIGNATED FOR FAB 2 OPERATIONS B -- --
OTHER LONG-TERM INVESTMENT C, D -- 15,425 15,425
--------- --------- ---------
-- 15,425 15,425
--------- --------- ---------
PROPERTY AND EQUIPMENT, NET D 510,645 (3,291) 507,354
--------- --------- ---------
DESIGNATED CASH AND SHORT-TERM AND
LONG-TERM INTEREST-BEARING DEPOSITS B -- 31,661 31,661
--------- --------- ---------
OTHER ASSETS, NET:
TECHNOLOGY 61,441 61,441
OTHER F 16,359 (196) 16,163
--------- --------- ---------
77,800 (196) 77,604
========= ========= =========
TOTAL ASSETS $ 678,686 $ 11,938 $ 690,624
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY 0
CURRENT LIABILITIES
CURRENT MATURITIES OF LONG-TERM DEBT $ 21,103 $ $ 21,103
CURRENT MATURITIES OF CONVERTIBLE DEBENTURES F 6,453 (640) 5,813
TRADE ACCOUNTS PAYABLE 59,741 59,741
OTHER CURRENT LIABILITIES 8,972 8,972
--------- --------- ---------
TOTAL CURRENT LIABILITIES 96,269 (640) 95,629
LONG-TERM DEBT 497,000 497,000
CONVERTIBLE DEBENTURES F, G 19,358 23,574 42,932
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMERS' ADVANCES 59,621 59,621
OTHER LONG-TERM LIABILITIES C, D 11,012 13,658 24,670
--------- --------- ---------
TOTAL LIABILITIES 683,260 36,592 719,852
--------- --------- ---------
CONVERTIBLE DEBENTURES G 25,493 (25,493) --
--------- --------- ---------
SHAREHOLDERS' EQUITY (DEFICIT)
ORDINARY SHARES, NIS 1.00 PAR VALUE - AUTHORIZED
500,000,000 AND 250,000,000 SHARES, RESPECTIVELY;
ISSUED 68,232,056 AND 66,999,796 SHARES, RESPECTIVELY 16,548 16,548
ADDITIONAL PAID-IN CAPITAL F 522,237 2,363 524,600
SHAREHOLDER RECEIVABLES (26) (26)
ACCUMULATED OTHER COMPREHENSIVE LOSS D -- (1,554) (1,554)
ACCUMULATED DEFICIT (559,754) 30 (559,724)
--------- --------- ---------
(20,995) 839 (20,156)
TREASURY STOCK, AT COST - 1,300,000 SHARES (9,072) (9,072)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (30,067) 839 (29,228)
========= ========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 678,686 $ 11,938 $ 690,624
========= ========= =========
AS OF DECEMBER 31, 2004
-----------------------------------
U.S. AS PER AS PER
GAAP ISRAELI ADJUST- U.S.
REMARK GAAP MENTS GAAP
------ --------- --------- ---------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 27,664 $ $ 27,664
DESIGNATED CASH AND SHORT-TERM INTEREST-BEARING DEPOSITS B 53,793 (53,793) --
TRADE ACCOUNTS RECEIVABLE:
RELATED PARTIES 9,054 9,054
OTHERS 10,232 10,232
OTHER RECEIVABLES 11,365 11,365
INVENTORIES 25,669 25,669
OTHER CURRENT ASSETS 1,818 1,818
--------- --------- ---------
TOTAL CURRENT ASSETS 139,595 (53,793) 85,802
--------- --------- ---------
LONG-TERM INVESTMENTS
LONG-TERM INTEREST-BEARING DEPOSITS
DESIGNATED FOR FAB 2 OPERATIONS B 5,134 (5,134) --
OTHER LONG-TERM INVESTMENT C, D -- 16,350 16,350
--------- --------- ---------
5,134 11,216 16,350
--------- --------- ---------
PROPERTY AND EQUIPMENT, NET D 609,296 (4,619) 604,677
--------- --------- ---------
DESIGNATED CASH AND SHORT-TERM AND
LONG-TERM INTEREST-BEARING DEPOSITS B -- 58,927 58,927
--------- --------- ---------
OTHER ASSETS, NET:
TECHNOLOGY 76,950 76,950
OTHER F 16,533 (196) 16,337
--------- --------- ---------
93,483 (196) 93,287
========= ========= =========
TOTAL ASSETS $ 847,508 $ 11,535 $ 859,043
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY 0
CURRENT LIABILITIES
CURRENT MATURITIES OF LONG-TERM DEBT $ -- $ $ --
CURRENT MATURITIES OF CONVERTIBLE DEBENTURES F -- --
TRADE ACCOUNTS PAYABLE 65,326 65,326
OTHER CURRENT LIABILITIES 10,678 10,678
--------- --------- ---------
TOTAL CURRENT LIABILITIES 76,004 -- 76,004
LONG-TERM DEBT 497,000 497,000
CONVERTIBLE DEBENTURES F, G 26,651 (2,559) 24,092
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMERS' ADVANCES 64,428 64,428
OTHER LONG-TERM LIABILITIES C, D 15,445 18,756 34,201
--------- --------- ---------
TOTAL LIABILITIES 679,528 16,197 695,725
--------- --------- ---------
CONVERTIBLE DEBENTURES G -- -- --
--------- --------- ---------
SHAREHOLDERS' EQUITY (DEFICIT)
ORDINARY SHARES, NIS 1.00 PAR VALUE - AUTHORIZED
500,000,000 AND 250,000,000 SHARES, RESPECTIVELY;
ISSUED 68,232,056 AND 66,999,796 SHARES, RESPECTIVELY 16,274 16,274
ADDITIONAL PAID-IN CAPITAL F 517,476 2,363 519,839
SHAREHOLDER RECEIVABLES (26) (26)
ACCUMULATED OTHER COMPREHENSIVE LOSS D -- (7,055) (7,055)
ACCUMULATED DEFICIT (356,672) 30 (356,642)
--------- --------- ---------
177,052 (4,662) 172,390
TREASURY STOCK, AT COST - 1,300,000 SHARES (9,072) (9,072)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 167,980 (4,662) 163,318
========= ========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 847,508 $ 11,535 $ 859,043
========= ========= =========
- 54 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
I. STATEMENTS OF OPERATIONS IN ACCORDANCE WITH U.S. GAAP
Complying with SFAS 133 and SFAS 138 (D above) and APB 14 (F above)
would not have materially affected the results of operations for the
years ended December 31, 2005, 2004 and 2003.
J. COMPREHENSIVE INCOME (LOSS) IN ACCORDANCE WITH U.S. GAAP (SFAS 130)
Comprehensive income (loss) represents the change in shareholder's
equity during a reporting period from transactions and other events
and circumstances from non-owner sources. It includes all changes in
equity during a reporting period except those resulting from
investments by owners and distributions to owners. Other comprehensive
income (loss) represents gains and losses that under U.S. GAAP are
included in comprehensive income but excluded from net income.
Following are statements of comprehensive loss in accordance with U.S.
GAAP:
Year ended December 31,
-------------------------------------------
2005 2004 2003
--------- --------- ---------
Loss for the year according to U.S. GAAP $(203,082) $(137,768) $(114,261)
Other comprehensive loss:
Amortization of unrealized
losses on derivatives 1,328 1,328 664
Unrealized gains on derivatives 4,173 7,514 1,276
--------- --------- ---------
Net comprehensive loss for the year $(197,581) $(128,926) $(112,321)
========= ========= =========
- 55 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
K. LOSS PER SHARE DATA 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 above), the basic
and diluted loss per share would be:
Year ended December 31,
--------------------------------
2005 2004 2003
------ ------ ------
Basic loss per share $(3.06) $(2.13) $(2.45)
====== ====== ======
Diluted loss per share $(3.06) $(2.13) $(2.45)
====== ====== ======
For the purpose of U.S. GAAP, the beneficial feature attributed to the
rights offering that retroactively adjusted loss per share under
Israeli GAAP, as described in Note 12C, was eliminated since such
accounting treatment is not allowed by U.S. GAAP.
The following tables provide a reconciliation of the numerators and
denominators of the basic and diluted per share computations for 2005,
2004 and 2003 in accordance with U.S. GAAP. The loss per share for
each year presented according to U.S. GAAP may differ from the
corresponding amount under Israeli GAAP due to different methods for
determining the weighted average number of ordinary shares outstanding
and the loss used to compute loss per share. According to Israeli
GAAP, the weighted average number of ordinary shares outstanding for
each year presented include retroactive effect from the beginning of
each year of shares issued upon exercise of share options and warrants
("Exercise") and upon conversion of convertible debentures
("Conversion"), outstanding at the beginning of each year and giving
effect to shares issuable from probable Exercise and from probable
Conversion. Israeli GAAP further provide that loss per ordinary share
is to be calculated based on loss for the year with the inclusion of
imputed interest income on the exercise price of options and warrants
exercised or of probable Exercise, and of financial expenses in
relation to converted debentures or on probable Conversion. According
to U.S. GAAP, the amount of shares underlying the options and warrants
is accounted for according to the treasury method, regardless of the
probability of the exercise of the options and warrants, and the
amount of shares underlying convertible debentures is accounted for by
application of the if-converted method. According to Israeli GAAP, the
loss to compute basic loss per share should include imputed interest
income on the exercise price of options and warrants exercised during
the year and of probable Exercise and probable Conversion, an
inclusion which is not allowed under U.S. GAAP.
- 56 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
K. LOSS PER SHARE DATA IN ACCORDANCE WITH U.S. GAAP (SFAS 128) (cont.)
Reconciliation for 2005: Year Ended December 31, 2005
----------------------------------------
Shares
Loss (in thousands) Per-share
(Numerator) (Denominator) amount
----------- ------------- ------
BASIC LOSS PER SHARE
Loss available to ordinary shareholders $(203,082) 66,371 $(3.06)
======
EFFECT OF DILUTIVE SECURITIES
Convertible debentures - -
Options and warrants - -
--------- --------
DILUTED LOSS PER SHARE
Loss available to ordinary
shareholders after assumed conversions $(203,082) 66,371 $(3.06)
========= ======== ======
Options and warrants to purchase 28,437,207 Ordinary Shares at an
average exercise price of $4.23 per share were outstanding as of
December 31, 2005 but were not included in the computation of diluted
loss per share because their effect was anti-dilutive. The options and
warrants, which as of December 31, 2005 expire between January 2006
and November 2015 (weighted average remaining contractual life of 5.02
years), were still outstanding as of such date. Convertible
debentures, convertible into 25,872,523 Ordinary Shares, were
outstanding as of December 31, 2005 but were not included in the
computation of diluted loss per share since their effect is
anti-dilutive. Of that amount, 2,697,068 convertible debentures may be
converted into Ordinary Shares until December 31, 2008, and the
remaining 23,175,455 convertible debentures may be converted into
Ordinary Shares until December 2011.
Reconciliation for 2004: Year Ended December 31, 2004
----------------------------------------
Shares
Loss (in thousands) Per-share
(Numerator) (Denominator) amount
----------- ------------- ------
BASIC LOSS PER SHARE
Loss available to ordinary shareholders $(137,768) 64,633 $(2.13)
======
EFFECT OF DILUTIVE SECURITIES
Convertible debentures -- --
Options and warrants -- --
--------- ---------
DILUTED LOSS PER SHARE
Loss available to ordinary
shareholders after assumed conversions $(137,768) 64,633 $(2.13)
========= ========= ======
Options and warrants to purchase 17,374,088 Ordinary Shares at an
average exercise price of $6.61 per share were outstanding as of
December 31, 2004 but were not included in the computation of diluted
loss per share because their effect was anti-dilutive. The options and
warrants, which as of December 31, 2004 expire between January 2005
and December 2014 (weighted average remaining contractual life of 5.26
years), were still outstanding as of such date. Convertible
debentures, convertible into 2,697,068 Ordinary Shares, were
outstanding as of December 31, 2004 but were not included in the
computation of diluted loss per share since their effect is
anti-dilutive. The convertible debentures may be converted until
December 31, 2008 into Ordinary Shares.
- 57 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
K. LOSS PER SHARE DATA IN ACCORDANCE WITH U.S. GAAP (SFAS 128) (cont.)
Reconciliation for 2003: Year Ended December 31, 2003
----------------------------------------
Shares
Loss (in thousands) Per-share
(Numerator) (Denominator) amount
----------- ------------- ------
BASIC LOSS PER SHARE
Loss available to ordinary shareholders $(114,261) 46,710 $(2.45)
======
EFFECT OF DILUTIVE SECURITIES
Convertible debentures -- --
Options and warrants -- --
--------- ---------
DILUTED LOSS PER SHARE
Loss available to ordinary
shareholders after assumed conversions $(114,261) 46,710 $(2.45)
========= ========= ======
Options and warrants to purchase 14,003,621 Ordinary Shares at an
average exercise price of $7.87 per share were outstanding as of
December 31, 2003 but were not included in the computation of diluted
loss per share because their effect was anti-dilutive. The options and
warrants, which as of December 31, 2003 expire between April 2005 and
December 2013 (weighted average remaining contractual life of 5.02
years), were still outstanding as of such date. Convertible
debentures, convertible into 2,697,068 Ordinary Shares, were
outstanding as of December 31, 2003 but were not included in the
computation of diluted loss per share since their effect is
anti-dilutive. The convertible debentures may be converted until
December 31, 2008 into Ordinary Shares.
L. STATEMENTS OF CASH FLOWS IN ACCORDANCE WITH U.S. GAAP (SFAS 95)
Complying with SFAS 95 would not have materially affected the cash
flows of the Company for each of the years ended December 31, 2005,
2004 and 2003.
- 58 -