FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the month of February 2004 (No. 2)
TOWER SEMICONDUCTOR LTD.
(Translation of registrant's name into English)
P.O. BOX 619, MIGDAL HAEMEK, ISRAEL 10556
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [_]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [_] No [X]
On February 2, 2004, we released our financial statements for the fiscal
year ended December 31, 2003. Our consolidated financial statements as of
December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and
2001, and the report thereon dated February 2, 2004 of our independent auditors
Brightman Almagor & Co., are included in this report on Form 6-K.
The consent of Brightman Almagor & Co. to the incorporation by reference of
their report dated February 2, 2004 into effective registration statements
previously filed by us under the Securities Act of 1933, is attached as Exhibit
23.1 to this Report.
This Report on Form 6-K is being incorporated by reference into all
effective registration statements filed by us under the Securities Act of 1933.
TOWER SEMICONDUCTOR LTD.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
INDEPENDENT AUDITORS' REPORT 1
BALANCE SHEETS 2
STATEMENTS OF OPERATIONS 3
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 4
STATEMENTS OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6-48
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF
TOWER SEMICONDUCTOR LTD.
We have audited the accompanying consolidated balance sheets of Tower
Semiconductor Ltd. (the "Company") and subsidiary as of December 31, 2003 and
2002, 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, 2003. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors and 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 present fairly, in all
material respects, the consolidated financial position of the Company and
subsidiary as of December 31, 2003 and 2002, and the consolidated results of
their operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2003, 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
and results of operations 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 2, 2004
- 1 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND PER SHARE DATA)
AS OF DECEMBER 31,
----------------------------------
NOTE 2003 2002
--------- --------------- ---------------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 12,448 $ 7,857
SHORT-TERM INTEREST-BEARING DEPOSITS -- 10,500
CASH AND SHORT-TERM INTEREST-BEARING DEPOSITS
DESIGNATED FOR INVESTMENTS RELATING TO FAB 2 44,042 51,338
TRADE ACCOUNTS RECEIVABLE (NET OF ALLOWANCE FOR
DOUBTFUL ACCOUNTS OF $0 AND $155, RESPECTIVELY) 15 11,631 7,456
OTHER RECEIVABLES 3 11,073 21,322
INVENTORIES 4 19,382 10,201
OTHER CURRENT ASSETS 1,729 1,407
---------- -----------
TOTAL CURRENT ASSETS 100,305 110,081
---------- -----------
LONG-TERM INVESTMENTS
LONG-TERM INTEREST-BEARING DEPOSITS
DESIGNATED FOR INVESTMENTS RELATING TO FAB 2 4,848 11,893
OTHER LONG-TERM INVESTMENT 5 6,000 6,000
----------- -----------
10,848 17,893
---------- -----------
PROPERTY AND EQUIPMENT, NET 6 568,412 493,074
---------- -----------
OTHER ASSETS, NET 7 108,770 95,213
=========== ===========
TOTAL ASSETS $ 788,335 $ 716,261
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
SHORT-TERM DEBT 8 $ -- $ 4,000
TRADE ACCOUNTS PAYABLE 40,249 76,083
OTHER CURRENT LIABILITIES 9 9,564 8,071
----------- -----------
TOTAL CURRENT LIABILITIES 49,813 88,154
LONG-TERM DEBT 10 431,000 253,000
CONVERTIBLE DEBENTURES 11 25,783 24,121
OTHER LONG-TERM LIABILITIES 12 5,935 5,406
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMERS' ADVANCES 13A 46,347 47,246
----------- -----------
TOTAL LIABILITIES 558,878 417,927
---------- -----------
SHAREHOLDERS' EQUITY
ORDINARY SHARES, NIS 1.00 PAR VALUE - AUTHORIZED
150,000,000 AND 70,000,000 SHARES, RESPECTIVELY;
ISSUED 52,996,097 AND 44,735,532 SHARES, RESPECTIVELY 13A, 14 13,150 11,294
ADDITIONAL PAID-IN CAPITAL 13A 427,881 400,808
PROCEEDS ON ACCOUNT OF SHARE CAPITAL 13A 16,428 --
SHAREHOLDER RECEIVABLES AND UNEARNED COMPENSATION (26) (53)
ACCUMULATED DEFICIT (218,904) (104,643)
----------- -----------
238,529 307,406
TREASURY STOCK, AT COST - 1,300,000 SHARES 14C (9,072) (9,072)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 229,457 298,334
=========== ===========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 788,335 $ 716,261
=========== ===========
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 2003 2002 2001
---- ---- ---- ----
SALES 13D, 15 $ 61,368 $ 51,801 $ 52,372
COST OF SALES 6A(4) 122,395 67,022 76,733
------------- ----------- ------------
GROSS LOSS (61,027) (15,221) (24,361)
------------- ----------- ------------
OPERATING COSTS AND EXPENSES
RESEARCH AND DEVELOPMENT 20,709 17,031 9,556
MARKETING, GENERAL AND ADMINISTRATIVE 22,615 17,091 14,489
------------- ----------- ------------
43,324 34,122 24,045
============= =========== ============
OPERATING LOSS (104,351) (49,343) (48,406)
FINANCING INCOME (EXPENSE), NET 16 (9,826) (2,104) 1,465
OTHER INCOME (EXPENSE), NET 5B, 5D (84) 45 8,419
------------- ----------- ------------
LOSS FOR THE YEAR $ (114,261) $ (51,402) $ (38,522)
============= =========== ============
BASIC LOSS PER ORDINARY SHARE
LOSS PER SHARE $ (2.40) $ (1.63) $ (1.92)
============= =========== ============
LOSS USED TO COMPUTE
BASIC LOSS PER SHARE $ (114,114) $ (51,402) $ (38,459)
============= =========== ============
WEIGHTED AVERAGE NUMBER OF ORDINARY
SHARES OUTSTANDING - IN THOUSANDS 47,608 31,523 20,020
============= =========== ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
TOWER SEMICONDUCTOR LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND PER SHARE DATA)
PROCEEDS PROCEEDS
ADDITIONAL ON ON ACCOUNT
ORDINARY SHARES PAID-IN ACCOUNT OF OF SHARE
SHARES AMOUNT CAPITAL A WARRANT CAPITAL
---------- --------- ------------ -------- ---------
BALANCE - JANUARY 1, 2001 13,562,606 $ 4,404 $ 144,538 $ 9,990 $ --
ISSUANCE OF SHARES,
NET OF RELATED COSTS 11,930,675 2,850 147,798
EXERCISE OF A WARRANT 772,667 187 9,813 (9,990)
EXERCISE OF SHARE OPTIONS 31,154 7 265
CANCELLATION OF UNEARNED COMPENSATION
IN RESPECT OF NON-VESTED OPTIONS, NET (15)
STOCK-BASED COMPENSATION RELATED TO THE
FACILITY AGREEMENT WITH THE BANKS, NOTE 14B(5) 5,466
AMORTIZATION OF UNEARNED COMPENSATION
LOSS FOR THE YEAR
---------- --------- ------------ -------- ---------
BALANCE - DECEMBER 31, 2001 26,297,102 $ 7,448 $ 307,865 $ -- $ --
ISSUANCE OF SHARES,
NET OF RELATED COSTS 18,438,430 3,846 92,943
AMORTIZATION OF UNEARNED COMPENSATION
LOSS FOR THE YEAR
---------- --------- ------------ -------- ---------
BALANCE - DECEMBER 31, 2002 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 14B(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
========== ========= ============ ======== =========
SHAREHOLDER
RECEIVABLES
AND
UNEARNED ACCUMULATED TREASURY
COMPENSATION DEFICIT STOCK TOTAL
------ ----------- -------- ------------
BALANCE - JANUARY 1, 2001 $ (493) $ (14,719) $ (9,072) $ 134,648
ISSUANCE OF SHARES,
NET OF RELATED COSTS 150,648
EXERCISE OF A WARRANT 10
EXERCISE OF SHARE OPTIONS 272
CANCELLATION OF UNEARNED COMPENSATION
IN RESPECT OF NON-VESTED OPTIONS, NET 15 --
STOCK-BASED COMPENSATION RELATED TO THE
FACILITY AGREEMENT WITH THE BANKS, NOTE 14B(5) 5,466
AMORTIZATION OF UNEARNED COMPENSATION 283 283
LOSS FOR THE YEAR (38,522) (38,522)
------ ----------- -------- ------------
BALANCE - DECEMBER 31, 2001 $ (195) $ (53,241) $ (9,072) $ 252,805
ISSUANCE OF SHARES,
NET OF RELATED COSTS 96,789
AMORTIZATION OF UNEARNED COMPENSATION 142 142
LOSS FOR THE YEAR (51,402) (51,402)
------ ----------- -------- ------------
BALANCE - DECEMBER 31, 2002 $ (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 14B(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
====== =========== ======== ============
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,
-----------------------
2003 2002 2001
----------- ----------- ------------
CASH FLOWS - OPERATING ACTIVITIES
LOSS FOR THE YEAR $ (114,261) $ (51,402) $ (38,522)
ADJUSTMENTS TO RECONCILE LOSS FOR THE YEAR
TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
INCOME AND EXPENSE ITEMS NOT INVOLVING CASH FLOWS:
DEPRECIATION AND AMORTIZATION 54,611 18,821 21,721
DEVALUATION OF CONVERTIBLE DEBENTURES (878) -- --
OTHER EXPENSE (INCOME), NET 84 (45) (8,419)
CHANGES IN ASSETS AND LIABILITIES:
DECREASE (INCREASE) IN TRADE ACCOUNTS RECEIVABLE (4,175) (4,135) 8,602
DECREASE (INCREASE) IN OTHER RECEIVABLES AND OTHER CURRENT ASSETS 1,264 (1,305) 649
DECREASE (INCREASE) IN INVENTORIES (6,221) (609) 8,402
INCREASE (DECREASE) IN TRADE ACCOUNTS PAYABLE 801 4,686 (5,190)
INCREASE (DECREASE) IN OTHER CURRENT LIABILITIES 1,467 2,764 (999)
INCREASE IN OTHER LONG-TERM LIABILITIES 529 2,822 105
----------- ----------- ------------
(66,779) (28,403) (13,651)
INCREASE (DECREASE) IN LONG-TERM LIABILITY
IN RESPECT OF CUSTOMERS' ADVANCES (899) 29,336 17,910
----------- ----------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (67,678) 933 4,259
----------- ----------- ------------
CASH FLOWS - INVESTING ACTIVITIES
DECREASE (INCREASE) IN CASH, SHORT-TERM AND LONG-TERM INTEREST-BEARING
DEPOSITS DESIGNATED FOR INVESTMENTS RELATING TO FAB 2 14,341 (59,683) (3,548)
INVESTMENTS IN PROPERTY AND EQUIPMENT (179,310) (205,099) (295,203)
INVESTMENT GRANTS RECEIVED 33,811 40,481 56,454
PROCEEDS FROM SALE OF EQUIPMENT 222 70 229
INVESTMENTS IN OTHER ASSETS (22,098) (34,290) (32,098)
DECREASE (INCREASE) IN DEPOSITS, NET 10,500 (456) (1,599)
PROCEEDS FROM SALE OF LONG-TERM INVESTMENTS -- -- 11,050
----------- ----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (142,534) (258,977) (264,715)
----------- ----------- ------------
CASH FLOWS - FINANCING ACTIVITIES
PROCEEDS FROM ISSUANCE OF SHARES, NET 24,375 96,751 152,586
PROCEEDS FROM EXERCISE OF SHARE OPTIONS -- -- 272
PROCEEDS ON ACCOUNT OF SHARE CAPITAL 16,428 -- --
PROCEEDS ON ACCOUNT OF AN EXERCISE OF A WARRANT -- -- 10
INCREASE (DECREASE) IN SHORT-TERM DEBT -- (10,000) 10,000
REPAYMENT OF LONG-TERM DEBT (13,000) (4,000) (15,064)
PROCEEDS FROM LONG-TERM DEBT, NET IN CONNECTION WITH
RE-BORROWING, NOTE 13A(6) 187,000 -- --
PROCEEDS FROM LONG-TERM DEBT -- 142,000 122,000
PROCEEDS FROM SALE OF SECURITIES, NET -- 21,540 --
----------- ----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 214,803 246,291 269,804
=========== =========== ============
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,591 (11,753) 9,348
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 7,857 19,610 10,262
----------- ----------- ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 12,448 $ 7,857 $ 19,610
=========== =========== ============
NON-CASH ACTIVITIES
INVESTMENTS IN PROPERTY AND EQUIPMENT $ 17,160 $ 49,419 $ 41,610
=========== =========== ============
EXERCISE OF A WARRANT $ 9,990
============
STOCK-BASED COMPENSATION RELATED TO
THE FACILITY AGREEMENT WITH THE BANKS $ 4,205 $ 5,466
=========== ============
INVESTMENTS IN OTHER ASSETS $ 3,153 $ 4,304 $ 4,357
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR CAPITALIZED AND EXPENSED INTEREST $ 15,674 $ 11,594 $ 3,143
=========== =========== ============
CASH PAID DURING THE YEAR FOR INCOME TAXES $ 239 $ 151 $ 1,819
=========== =========== ============
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 0.18 micron at its
recently-constructed 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 in the Tel-Aviv Stock Exchange.
B. ESTABLISHMENT OF NEW FABRICATION FACILITY
In January 2001, the Company's Board of Directors approved the
establishment of a new wafer fabrication facility in Israel ("Fab 2"),
at an expected cost of approximately $1,500,000. Fab 2 is 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 completed public and rights offerings all in
connection with Fab 2 to provide, as of the approval date of the
financial statements, an aggregate of $1,220,000 of financing for Fab
2. For further details concerning the related agreements, which were
amended several times, see Note 13A.
During the third quarter of 2003, in which Fab 2 was substantially
completed, the Company begun 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 begun to
depreciate and amortize Fab 2 assets, as well as to expense most of
the 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 6A.
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, risks and uncertainties, see Note 13A.
C. 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.
- 6 -
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
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 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 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
weighted moving average cost per unit. Cost is determined for work in
process and finished goods on the basis of actual production costs.
E. LONG-TERM INVESTMENTS
Long-term investments in other entities, over whose operating and
financial policies the Company does not have the ability to exercise
significant influence, are presented at cost.
F. 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. Directly identifiable costs include
incremental direct 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 them ready for their 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 direct costs is
based on management's estimates and methodologies including time
sheet inputs.
- 7 -
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.)
F. 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 primarily 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 perpetual land lease and buildings 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 P below.
G. OTHER ASSETS
The cost of Fab 2 technologies presented in other assets includes the
technology process cost, internal costs, mainly payroll-related costs
of employees designated for integrating the technologies in the
Company's facilities, and 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 their intended use, and is based on
the straight-line method over a four-year period.
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 to 8 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 the
financing expenses, net.
Impairment examinations and recognition are performed and determined
based on the accounting policy outlined in P below.
H. CONVERTIBLE DEBENTURES
Convertible debentures, the conversion of which is not anticipated as
of the balance-sheet date, are presented as long-term liabilities
based on their terms as of such date, net of discount. See Note 20E
for disclosure of convertible debentures in accordance with U.S. GAAP.
- 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.)
I. INCOME TAXES
The Company records deferred income taxes 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 to be in effect (under applicable law at the time the
financial statements are prepared) 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. A valuation allowance against such
deferred tax asset is recognized if it is more likely than not that
some portion or all of the deferred tax asset will not be realized.
J. 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.
K. 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.
L. 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. The calculation includes retroactive effect from the
beginning of each year of shares issued upon exercise of 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. Basic loss per ordinary share is 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 financing expenses in relation to converted
debentures or on probable Conversion, as required under Israeli GAAP.
See Note 20J for disclosure of loss per share data in accordance with
U.S. GAAP.
- 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.)
M. DERIVATIVE FINANCIAL INSTRUMENTS
The Company, from time to time, enters into foreign exchange
agreements (primarily forward contracts and options) as a hedge
against 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 agreement
expiration, are included in financing income (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 20C for disclosure of the derivative financial instruments in
accordance with U.S. GAAP.
N. 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 income (expenses), net in 2003, 2002 and 2001 include net
foreign currency transaction loss of $232, $1,509 and $263,
respectively.
O. 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 Note 14B(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 G 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
related party in connection with equity transactions is offset against
paid-in-capital.
- 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.)
P. 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. As of December 31, 2003 no impairment was recognized.
Q. RECENT ACCOUNTING PRONOUNCEMENTS BY THE FASB
(1) SFAS NO. 149 - AMENDMENT OF SFAS 133 - In May 2003, the FASB
issued SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments including certain
derivative instruments embedded in other contracts and hedging
activities under SFAS No. 133. It is effective for contracts
entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of
this Standard had no impact on the Company's financial position
or results of operations under U.S. GAAP.
(2) ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS
OF BOTH LIABILITIES AND EQUITY - In May 2003, the FASB issued
SFAS No. 150, "Accounting For Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" which establishes
standards for how an issuer of financial instruments classifies
and measures certain financial instruments with characteristics
of both liabilities and equity. SFAS 150 requires that an issuer
classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances) if, at inception,
the monetary value of the obligation (as defined in that
guidance) is based solely or predominantly on a fixed monetary
amount known at inception, variations in something other than the
fair value of the issuer's equity shares or variations inversely
related to changes in the fair value of the issuer's equity
shares. This Statement is effective in connections with
activities for financial instruments entered into at the
beginning of the third quarter of 2003. See Note 20F for
disclosure of proceeds on account of share capital in accordance
with U.S. GAAP under SFAS 150.
(3) SAB-104 - REVENUE RECOGNITION - In December 2003, the Securities
and Exchange Commission ("SEC") issued Staff Accounting Bulletin
104 ("SAB-104") - Revenue Recognition. This SAB revises or
rescinds portions of the interpretative guidance included in
Topic 13 of the codification of staff accounting bulletins in
order to make this interpretive guidance consistent with current
authoritative accounting guidance. The principal revisions relate
to the rescission of material no longer necessary because of
developments outside of the SEC in U.S. generally accepted
accounting principles, and the incorporation of certain sections
of the SEC's "Revenue Recognition in Financial Statements -
Frequently Asked Questions and Answers" document into Topic 13.
The adoption of SAB-104 had no impact on the Company's financial
position and results of operations.
- 11 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 3 - OTHER RECEIVABLES
Other receivables consist of the following:
As of December 31,
------------------
2003 2002
---- ----
Government of Israel - investment grants receivable $ 8,143 $14,200
Other government agencies 2,655 5,025
Others 275 2,097
------- -------
$11,073 $21,322
======= =======
NOTE 4 - INVENTORIES
Inventories consist of the following (*):
As of December 31,
------------------
2003 2002
---- ----
Raw materials $ 5,736 $ 3,815
Spare parts and supplies 3,341 3,509
Work in process 9,520 2,860
Finished goods 785 17
------- -------
$19,382 $10,201
======= =======
(*) Net of write-downs to net realizable value of $1,228 and $307 as of
December 31, 2003 and 2002, respectively.
NOTE 5 - OTHER LONG-TERM INVESTMENTS
A. SAIFUN - The investment in Saifun Semiconductor Ltd. ("Saifun"), an
Israeli company which designs and develops memory designs, is based on
an agreement between the Company and Saifun signed in October 1997.
The Company's investments in Saifun as of December 31, 2003 and 2002
amounted to $6,000, representing 11.8% of Saifun's share capital as of
such dates (on a fully-diluted basis - 10.3% and 10.5%, respectively).
B. AZALEA - In September 2000, the Board of Directors of the Company
approved the investment of $1,100 in Azalea Microelectronics
Corporation ("Azalea"), a California corporation that, inter-alia,
develops and designs microelectronics modules. This investment
represents 14.9% of Azalea's share capital as of December 31, 2003. In
addition, the Company and Azalea signed a development agreement for
the development by Azalea of certain modules based on the Company's
technologies. Due to management's estimate, based on certain
circumstances indicating that the carrying amount of the Company's
investment in Azalea may not be recoverable, the Company wrote off,
during the third quarter of 2001, its entire investment in Azalea.
C. Under certain provisions stipulated in the amended Facility Agreement
entered into by the Company in connection with Fab 2 (see Note
13A(6)), the Company might be obliged to dispose of some or all its
long-term investments, in order to comply with that agreement's
financing requirements. For liens, see Note 13A(6).
D. VIRAGE LOGIC CORP. - During the year ended December 31, 2001, the
Company sold all of its shareholdings in Virage Logic Corp. for an
aggregate of $11,050 and for a gain of $9,550. Virage Logic Corp. is a
Delaware corporation, which provides semiconductor companies with
memory designs for systems contained on silicon chips.
- 12 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 6 - PROPERTY AND EQUIPMENT, NET
A. COMPOSITION
As of December 31,
------------------
COST: 2003 2002
---- ----
Prepaid perpetual land lease and buildings $225,218 $215,240
Machinery and equipment 555,989 440,048
Transportation vehicles 3,683 4,198
-------- --------
784,890 659,486
-------- --------
ACCUMULATED DEPRECIATION AND AMORTIZATION:
Prepaid perpetual land lease and buildings 20,698 13,215
Machinery and equipment 193,682 151,191
Transportation vehicles 2,098 2,006
-------- --------
216,478 166,412
======== ========
$568,412 $493,074
======== ========
SUPPLEMENTAL DISCLOSURE RELATING TO COST OF PROPERTY AND EQUIPMENT:
(1) As of December 31, 2003 and 2002, the cost of property and
equipment included costs relating to Fab 2 in the amount of
$560,304 and $434,421, respectively. Said amounts are net of
investment grants of $126,226 and $99,365, respectively.
Depreciation of Fab 2 assets commenced 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.
(2) As of December 31, 2003, the cost of buildings, machinery and
equipment was reflected net of investment grants of $232,187 (as
of December 31, 2002 - $205,390).
(3) Cost of property and equipment as of December 31, 2003 includes
capitalized interest costs of $18,480 (as of December 31, 2002 -
$11,588).
(4) Following the commencement of operations of Fab 2, in the third
quarter of 2003, the Company began to depreciate and amortize Fab
2 property and equipment and other assets, resulting in
depreciation and amortization expenses of $37,302 which were
included in cost of sales of 2003.
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 was approved by the Investment Center. The approval
certificate provides for a benefit track entitling the Company to
investment grants at a rate of 34% of the investments included in such
certificate made through December 31, 2001. 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, 2003, the report has not yet received a final approval
from the Investment Center.
- 13 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 6 - PROPERTY AND EQUIPMENT, NET (cont.)
B. INVESTMENT GRANTS (cont.)
See Note 13A(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 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
assets of the Company.
C. For liens see Note 13A(6).
NOTE 7 - OTHER ASSETS
Other assets consist of the following:
As of December 31,
------------------
2003 2002
---- ----
COST:
In relation to Fab 2:
Technologies - Note 13A(2) $ 90,747 $ 78,572
Deferred financing charges 20,864 14,322
Other 3,001 3,052
Other -- 29
-------- --------
114,612 95,975
-------- --------
ACCUMULATED AMORTIZATION:
In relation to Fab 2 (*):
Technologies 2,793 --
Deferred financing charges 3,049 762
Other -- --
Other -- --
-------- --------
5,842 762
======== ========
$108,770 $ 95,213
======== ========
(*) For amortization policy, see Note 2G.
NOTE 8 - SHORT-TERM DEBT
The short-term debt as of December 31, 2002 consisted of current
maturities of long-term debt (see Note 10A).
NOTE 9 - OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
As of December 31,
------------------
2003 2002
---- ----
Accrued salaries $3,579 $2,858
Vacation accrual 3,474 2,910
Interest payable on convertible debentures 1,168 1,101
Other 1,343 1,202
------ ------
$9,564 $8,071
====== ======
- 14 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 10 - LONG-TERM DEBT
A. COMPOSITION:
Effective interest rate as of As of December 31,
------------------
December 31, 2003 2003 2002
----------------- ---- ----
In U.S. Dollar 6.78% $ 172,000 $ 172,000
In U.S. Dollar 3.69% 259,000 85,000
--------- -----------
Total long-term debt 431,000 257,000
Less - current maturities -- 4,000
--------- -----------
$ 431,000 $ 253,000
========= ===========
B. 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 more detail in Note 13A(6).
Prior to the closing of this amendment on December 2003, the loans
bore interest based on the three-month USD Libor rate plus 1.55%. The
effective annual interest rate of loans, the amount of which as of
December 31, 2003 was $172,000, includes the terms of collar
agreements with a knock-out feature 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, see
Note 13A(6).
Of the total amount of the long-term debt as of December 31, 2002,
$13,000 was designated for the Company's activities related to Fab 1,
and was fully repaid during 2003, resulting in the termination of the
Fab 1 facility agreement.
D. REPAYMENT SCHEDULE
The balance of the long-term debt as of December 31, 2003 is repayable
according to the November 2003 amendment to the Facility Agreement as
follows:
2007 $ 143,667
2008 and thereafter 287,333
---------
$ 431,000
=========
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) without the prior consent of the Banks.
Furthermore, the agreements contain certain restrictive financial
covenants (see also Note 13A(6)). As of December 31, 2003, in
management's opinion the Company was in full compliance with such
covenants.
- 15 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - CONVERTIBLE DEBENTURES
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, 2003 - NIS 115,775,760, $26,439). 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 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, 2003 - NIS 42.93,
$9.80). 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 14E, the
effective rate of interest on the convertible debentures is 9.88%.
Subject to certain conditions, the Company may, commencing in July 2005,
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.
Pursuant to a covenant in the amended Facility Agreement, the Company is to
deposit at least 20% of the principal amount (net of discounts) of the
unconverted debentures in favor of the Banks as security for payment of the
amounts the Company owes the Banks. The deposited amounts may be released
only as provided in the amended Facility Agreement, including for payment
of interest on the convertible debentures.
The debentures are unsecured and rank behind the Company's existing and
future secured indebtedness to the Banks under the Facility Agreement, as
well as to the government of Israel in connection with grants the Company
receives under the Fab 2 approved enterprise program.
See Note 20E for disclosure of the accounting treatment of the convertible
debentures under U.S. GAAP.
NOTE 12 - OTHER LONG-TERM LIABILITIES
A. COMPOSITION
As of December 31,
------------------
2003 2002
---- ----
Net liability for employee
termination benefits (see B below):
Gross obligation $ 19,042 $ 16,274
Amounts funded through deposits to severance
pay funds and purchase of insurance policies (14,607) (12,368)
-------- --------
4,435 3,906
Other 1,500 1,500
-------- --------
$ 5,935 $ 5,406
======== ========
- 16 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - OTHER LONG-TERM LIABILITIES (cont.)
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
based upon length of service and the employee's most recent monthly
salary. This liability is primarily covered by regular deposits made
by the Company into recognized severance and pension funds and by
insurance policies purchased by the Company. The amounts so funded are
not reflected 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 employees'
termination benefits in accordance with U.S GAAP, see Note 20B.
Costs relating to employee termination benefits were approximately
$2,828, $2,070 and $4,379 for 2003, 2002 and 2001, respectively.
NOTE 13 - 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 entered into several related
agreements and other arrangements, and completed public and
rights offerings, in connection with Fab 2, including agreements
and arrangements with technology partners, Wafer Partners, Equity
Investors, the Company's Banks, the Government of Israel through
the Investment Center and others, to provide an aggregate, as of
the approval date of the financial statements, of $1,220,000 of
financing for Fab 2. 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 the
process technologies to be utilized to produce wafers in Fab 2.
Through December 31, 2003 the Company has invested in the Fab 2
project an aggregate of approximately $900,000. Through such
date, the Wafer Partners, Equity Investors and technology
partners had invested in the Company through committed agreements
an aggregate of $306,823 ($47,246 of which was established as
long-term customers' advances); the Banks had made long-term
loans in the aggregate of $431,000; and the Investment Center
granted the Company an aggregate of $118,011. In addition,
through December 31, 2003, the Company has raised approximately
$86,600 from other financial sources, and in January 2004, the
Company raised additional $77,000 in connection with the public
offering described in Note 14G.
- 17 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(1) OVERVIEW (cont.)
During the third quarter of 2003, 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, most of the direct costs related to the construction
and equipping of Fab 2 and to the transfer of the Fab 2
technology that previously had been capitalized, are no longer
capitalizable. For the depreciation and amortization amounts in
2003 of Fab 2 assets, see Note 6A.
The construction and equipping of Fab 2 is a substantial project,
which requires extensive management involvement as well as the
timely participation by and 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; achieving certain operational milestones and
complying with various conditions and covenants under the current
financing agreements in order to receive the additional funds
committed by the Investment Center, as well as those provided by
the Facility Agreement with the Banks, which establishes
significant additional conditions and covenants for borrowing
loans under the Facility Agreement; and completing the complex
processes of transferring from Motorola the manufacturing
technologies to be used at Fab 2 and development of new
technologies. 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 covenants stipulated in
that agreement and in the Approval Certificate from the
Investment Center, are material provisions for providing the
Company with the required financing for completing and equipping
Fab 2. As of December 31, 2003 the construction and equipping of
Fab 2 is currently in process and, progressing according to the
revised agreed upon schedule.
(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 provides 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 and
ongoing royalties based on sales of products manufactured in Fab
2 with the transferred technology. The transfer of the technology
was substantially completed during the first half of 2003. Under
the Toshiba agreement, the Company agreed, subject to certain
conditions, to reserve for Toshiba a certain portion of Fab 2
wafer manufacturing capacity for a period of 10 years.
- 18 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(2) TECHNOLOGY TRANSFER AGREEMENTS (cont.)
MOTOROLA - In September 2002, the Company entered into a
non-exclusive technology transfer, development and licensing
agreement with Motorola Inc. ("Motorola"), a U.S. corporation.
This agreement provides for the transfer by Motorola 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 Motorola of related technology
transfer assistance, all 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
Motorola, 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, over a period of time, subject to the
achievement of certain milestones relating to the construction
and operation of Fab 2. 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.
Through December 31, 2003, the Wafer Partners invested in the
Company, based on the Wafer Partners Agreements, an aggregate of
$246,823, of which $199,577 was credited as paid in capital and
$47,246 was established as long-term customers' advances which
may be, subject to the terms and conditions stipulated in the
Wafer Partner Agreements, as amended, utilized as credit against
purchases to be made by the Wafer Partners, or converted into
paid-in-capital. Through December 31, 2003, the Wafer Partners
were issued an aggregate of 24,239,879 Ordinary Shares in
consideration for their aggregate committed investment of
$233,622. In January 2004, the primary Wafer Partners were issued
additional 1,885,833 Ordinary Shares in consideration for their
final $13,201 committed investment made in December 2003, at a
per share price equal to the offering price of the public
offering described in Note 14G. The $13,201 amount is presented
on the face of the balance sheet as of December 31, 2003 as
proceeds on account of share capital. For the classification of
that amount under U.S. GAAP, see Note 20F.
For additional investments made by the Wafer Partners in
connection with a rights offering, see Note 14F.
In addition to the Wafer Partner Agreements, in January 2002, the
Company entered into a share purchase agreement with another
wafer partner, pursuant to which that wafer partner invested
$2,000 in Fab 2 for the purchase of 332,945 Ordinary Shares of
the Company. The shares were issued in January 2002.
- 19 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(4) EQUITY INVESTOR AGREEMENTS
Through December 31, 2003, Israel Corporation Technologies
(IC-Tech) Ltd., a wholly owned subsidiary of Israel Corporation
Ltd. and the principal shareholder of the Company ("IC-Tech") and
Challenge Fund-Edgar II LP, a Delaware limited partnership
("Challenge") (all together, "Equity Investors") invested in the
Company, pursuant to agreements described below, an aggregate of
$51,773, for the purchase of an aggregate of 6,958,882 Ordinary
Shares of the Company. In January 2004, IC-Tech and Challenge
were issued additional 460,953 Ordinary Shares of the Company in
consideration for their final investments according to their
agreements in the amount of $3,227 made in December 2003. The
shares were issued at a per share price equal to the price at the
public offering described in Note 14G. The $3,227 amount is
presented on the face of the balance sheet as of December 31,
2003 as proceeds on account of share capital. For the
classification of that amount under U.S. GAAP, see Note 20F.
In December 2000, the Company entered into a share purchase
agreements pursuant to which IC-Tech agreed to invest $50,000 to
purchase Ordinary Shares of the Company over a period of time in
several mandatory closings contemporaneous with the closings
under the Wafer Partner Agreements and subject to the achievement
of the same milestones. For additional investments made by
IC-Tech in connection with a rights offering, see Note 14F. For
additional investments which IC-Tech or the Israel Corporation
Ltd. may be required to make in the Company, see A(6) below.
In February 2001, the Company entered into a share purchase
agreement with Challenge pursuant to which Challenge agreed to
invest $5,000 in Fab 2 for the purchase of Ordinary Shares of the
Company under terms substantially similar to those under the
Company's share purchase agreements with IC-Tech.
In July 2002, the Company entered into a definitive agreement
with Ontario Teachers' Pension Plan Board for an investment,
which was fully paid in October 2002, of $15,000 in the Company's
equity in consideration for 3,000,000 Ordinary Shares of the
Company for $5.00 per share (the same as the subscription price
per right in the rights offering described in Note 14F), and a
warrant, exercisable for a four-year period ending in October
2006, to purchase an additional 1,350,000 Ordinary Shares of the
Company, at an exercise price of $7.50 per share (subject to
customary adjustments).
(5) AMENDMENTS TO THE PRIMARY WAFER PARTNER AND EQUITY INVESTOR
AGREEMENTS
The agreements between the Company and its primary Wafer Partners
and Equity Investors have been amended several times since they
were originally signed. The major terms of the amendments,
including those recently made in the fourth quarter of 2003,
relate to: advancing the milestone installments regardless of
their achievements; updating the price per share of each advanced
installment to be based on the average closing sale price of the
Company's Ordinary Shares for the 15-30 trading days prior to
making any installment; and granting the Company with a waiver in
connection with the requirement to raise a cumulative of $50,000
from new wafer partners. The Company's shareholders approved all
these amendments.
- 20 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - 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.)
Following the approval of the fourth quarter of 2003 amendment by
the Company's shareholders, and obtaining in November 2003 an
agreement with the Banks for amending the Facility Agreement as
outlined in paragraph A(6) below, the primary Wafer Partners and
Equity Investors completed their committed investments.
Pursuant to an amendment to the primary Wafer Partner Agreements
entered into in the first quarter of 2003 and approved by the
Company's shareholders in May 2003, the primary Wafer Partners
are entitled to convert an aggregate of up to $13,201 of the
unutilized long-term customers' advances, which they may have as
of December 31, 2005, into fully-paid Ordinary Shares of the
Company, the amount of which shall be determined based on the
average closing sale price of the Company's Ordinary Shares for
the 15 trading days prior to such date. The option is exercisable
during January 2006. In case such conversion occurs and the
amount of shares issued is equivalent to or greater than 5% of
the Company's outstanding share capital as of the conversion
date, the Company has undertaken to offer to all of its other
shareholders rights to purchase shares of the Company at the same
price per share.
Pursuant to the fourth quarter of 2003 amendment, the Company
granted each one of the primary Wafer Partners an option to
convert, at the end of each quarter of the years 2004-2006, any
amount that may be utilized against the long-term customers'
advances, as derived from purchases made by each primary Wafer
Partner during that quarter, into fully-paid Ordinary Shares of
the Company. The amount of shares shall 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. 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, 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,
on a going forward basis to only utilize long-term customer's
advances after December 31, 2006.
(6) FACILITY AGREEMENT
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"). Following the amendment entered into
between the Company and the Banks in November 2003, which is
described in more detail below, the 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, the loans bore interest at
a rate of Libor plus 1.55% per annum payable at the end of each
quarter. The loans are available for withdrawal through December
31, 2004, and are subject to certain prepayment provisions.
Unused amounts under the Facility Agreement, in the amount of
$69,000 as of December 31, 2003, are subject to a quarterly
commitment fee of 0.25% per annum.
- 21 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT (cont.)
Loans in the amount of $431,000 received by the Company through
December 31, 2003 ($244,000 through December 31, 2002), were
repaid on December 31, 2003 and, concurrently, were drawn down on
such date at an equivalent amount to be repaid in 12 equal
consecutive quarterly installments commencing on 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 drawn down after December 31, 2003, 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. With regard to
further details regarding loans drawn down under the $500,000
credit facility, see Note 10.
Under the Facility Agreement and the terms of the Company's
long-term loans as of December 31, 2003, 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, 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.
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
amendments 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 to total assets and production and capacity
milestones.
- 22 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT (cont.)
As of December 31, 2003, the revised remaining aggregate amount
the Company is required to raise from specified financial sources
is $152,000. This amount is to be raised through the following
dates: by mid-March 2004, an aggregate of $28,000; by the end of
June 2004, an aggregate of $53,500; by the end of December 2004,
an aggregate of $79,000; by the end of June 2005, an aggregate of
$115,500; and by the end of December 2005, an aggregate of
$152,000. Out of the Company's aggregate fundraising to be made
by the end of December 2004, $77,000 was achieved by the proceeds
from the public offering described in Note 14G.
As of December 31, 2003, the Company was in full compliance with
the revised financial ratios and covenants under the amended
Facility Agreement.
The amended Facility Agreement provides that should the Company
fail to meet any of the above fundraising obligations towards the
$152,000 at the dates described above, 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 amended Facility
Agreement.
The Israel Corporation Ltd. ("TIC"), the parent company of the
Company's current major shareholder ("IC-Tech") has undertaken to
the Banks to exercise all of the rights IC-Tech receives in the
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 and/or IC-Tech, less any amounts
actually invested in the rights offering by TIC and/or IC-Tech in
connection with the exercise of their own rights. TIC's
undertaking to the Banks is limited to an aggregate of $50,000.
If certain of the Company's shareholders participate in the above
investment, then their investment will be deemed to be
investments made by TIC towards the $50,000 commitment. In the
event that the rights offering cannot be completed, TIC has
undertaken to purchase from the Company in a private placement
50/93 of the amount the Company was to raise in the rights
offering. TIC may fulfill its investment commitments through
IC-Tech.
TIC's undertaking and the Company's obligation to consummate a
rights offering expires on the earlier of: (i) such time that the
Company will fulfill the fundraising obligation to raise an
aggregate of $152,000 under the Facility Agreement as described
above; (ii) such time as TIC has invested an aggregate amount of
$50,000 as described above; or (iii) June 30, 2006.
Following the receipt of the above described investments from
TIC, the Banks will increase the total amount which the Company
may draw under the Facility Agreement at a ratio of $43 for every
$50 invested, up to $43,000 in the aggregate. Any drawn loan will
be repayable by the earlier of (i) December 2007 and (ii) three
years from the date the loan is drawn. Should the Company draw
down loans using this increased amount of facility, the Banks
will be issued 30% warrant coverage of the amount drawn down,
based on the average closing price of the Company's Ordinary
Shares during the 15 consecutive trading days prior to the time
the Company draws down such loans.
- 23 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT (cont.)
For further details regarding 896,596 warrants issued to the
Banks in connection with this amendment, and warrants granted to
the Banks in January 2001, see Note 14B(5)(a).
For further details regarding 58,906 warrants issued to TIC in
connection with its undertaking described above, and additional
warrants issuable to TIC in the event the undertaking is
realized, see Note 14B(5)(b).
The Company has agreed to indemnify IC-Tech and TIC for any
liabilities they incur with respect to these arrangements,
subject to them making any investment under their undertaking, 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.
Following certain bankruptcy related events, the Banks will be
able 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
intends to purchase a majority of the Company's outstanding share
capital, the rights offering will be limited to allow for this,
unless IC-Tech 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, over approximately two years. As of December 31, 2003,
approximately $180,000 of that amount had already been paid by
the Company.
- 24 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(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 provides for a
benefit track entitling the Company to investment grants at a
rate of 20% of qualified investments of up to $1,250,000. The
grants are to be made in accordance with a timetable set forth in
the approval certificate for the program.
Under the terms of the approval certificate, investments in
respect of the Fab 2 approved enterprise program are to be
completed by December 31, 2005, five years from the date the
approval certificate was obtained. Due to the later than planned
commencement of construction of Fab 2 and prevailing market
conditions, the Company does not currently expect to complete Fab
2 investments defined in the approval certificate by the end of
2005. The Company has notified the Investment Center of its
revised investment schedule contemplated in an updated plan for
the construction and equipping Fab 2, and has also informed the
Investment Center of the reduced rate of annual investments and
lower than projected expectations for Fab 2 sales.
As of December 31, 2003, the Company's revised investments plan
is currently being evaluated by the Investment Center. While
Israeli law currently limits the ability of the Investment Center
to extend the investment period beyond five years, the Company's
management estimates, based on discussions held with the
Investment Center, that it is probable that satisfactory
arrangements will be made to allow for the extension of the
reinvestment period.
(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.
(11) OTHER AGREEMENTS
Through December 31, 2003 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 as of
such date, including the Fab 2 construction agreement described
in paragraph (7) above, amounted to $99,035.
- 25 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (cont.)
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 under the other's patents.
The Company agreed to pay an annual royalty through July 2005.
The licenses terminate on December 31, 2005.
(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. The
agreement calls for certain amounts to be paid by the Japanese
manufacturer to the Company following the signing of the
agreement and subject to achievement of certain milestones,
through a period ending 2005. Pursuant to the agreement, the
Japanese manufacturer may allocate, subject to certain conditions
stipulated in the agreement, part or all of the second half of
the total amounts paid by it to the Company as long-term customer
advances to be applied against future purchases made by the
Japanese manufacturer through 2007. Sales for 2002 included a
$8,056 revenue in relation to this agreement.
(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 paragraph
F(2) below.
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) The Company occupies certain other premises under various
operating leases. The obligations under such leases were not
material as of December 31, 2003.
(3) With respect to a long-term lease agreement of land on which Fab
2 was constructed, see paragraph A(9) above.
- 26 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (cont.)
D. PURCHASE AGREEMENTS
The Company from time to time enters into long-term purchase
agreements with customers. Pursuant to such agreements, the Company is
committed to sell, and the customer is committed to purchase (subject
to reductions in certain circumstances), a specific monthly output
derived from the start of processing of silicon wafers at prices which
are stipulated in the agreements and are subject to periodic
re-negotiations. From commencement of the Company's operations through
December 31, 2003, a substantial portion of the Company's production
has been sold under such agreements.
E. 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.
F. 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.
(3) SILICONIX - In December 2003, the Company and chip maker
Siliconix incorporated, an 80% owned subsidiary of Vishay
Intertechnology Inc., entered into a memorandum of understanding
("MOU") for a long-term manufacturing and supply arrangement.
Pursuant to the MOU, Siliconix will place with the Company orders
valued at approximately $200,000 for the purchase of wafers to be
manufactured at the Company's Fab 1 over a seven to ten year
period, of which approximately $53,000 is guaranteed and will be
delivered over a three year period starting at the first
anniversary of the definitive agreement. Siliconix will advance
the Company with $20,000 to be used primarily for the purchase of
additional equipment required to satisfy Siliconix orders, which
will be credited towards the purchase price of the wafers. The
transaction is subject to the approval of both companies' board
of directors, the Company's Banks, the Investment Center and to
the negotiation of definitive documentation. A definitive
agreement is expected to be signed during the first quarter of
2004.
(4) OTHER - The Company, from time to time in the normal 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.
- 27 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (cont.)
G. 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 are required for the
operations of the Company's facilities and these permits are subject
to revocation, modification and renewal. Government authorities have
the power to enforce compliance with these regulations and permits. As
of December 31, 2003 the Company operated under a conditional permit
from the Ministry of Environmental Affairs concerning the
concentration of fluoride in the Company's wastewater. In management's
opinion, the Company is in compliance with the terms of this permit,
with one exception: the Company is monitoring the levels of fluoride
in accordance with an oral understanding with the Israeli Ministry of
Environmental Affairs, which is less frequent than required by the
written terms of the permit. In addition, management is of the opinion
that the Company is currently in compliance in all other material
respects with applicable laws and regulations.
H. CLASS ACTION
In July 2003, certain shareholders of the Company filed a
shareholders' class action complaint in the United States against the
Company and certain of its directors, Wafer Partners and Equity
Investors (the "Defendants"). The plaintiffs have asserted claims
arising under the Securities Exchange Act of 1934, alleging
misstatements and omissions made by the Defendants in materials sent
to the Company's shareholders in April 2002 with respect to the
approval of an amendment to the Company's investment agreements with
its Fab 2 investors. The plaintiffs seek damages in unspecified
amounts and unspecified rescissory relief. The Company believes that
the complaint is without merit and intends to vigorously contest it.
In January 2004, the Company filed with the court a motion to dismiss
the action.
I. AMENDMENT TO ISRAELI BANKING REGULATIONS
Pursuant to a recent amendment to a directive published by the Israel
Supervisor of Banks, which becomes effective on March 31, 2004, the
Company may be deemed part of a group of borrowers comprised of the
Ofer Brothers Group, The Israel Corporation (the later being currently
the indirect major shareholder of the Company), 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 that an entity will be subject
to limitations on the amount of bank financing available to it if such
entity is included within a group of borrowers, to which the amount of
debt financing that has been extended from such bank amounts to 30% of
such bank's capital, or is a member of one of the bank's six largest
borrowers or groups of borrowers to which, collectively, the amount of
debt financing that has been extended from a bank amounts to 150% of
such bank's capital (gradually reduced to 135% between April 2005 and
June 2006). If the Company's Banks exceed these limitations, they may
limit the Company's ability to draw down the remaining Fab 2 credits
of $69,000 and may require that the Company return some or all of the
Company's outstanding borrowings ($431,000 as of December 31, 2003).
J. 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, 2003.
- 28 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY
A. DESCRIPTION OF ORDINARY SHARES
As of December 31, 2003 and 2002, the Company had 150,000,000 and
70,000,000 authorized par value NIS 1.00 Ordinary Shares,
respectively, of which 51,696,097 and 43,435,532, 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, the Company had 65,137,883 issued and outstanding Ordinary
Shares (net of 1,300,000 Ordinary Shares held by the Company as of
such date). For shares issued in January 2004 following a public
offering, see Note 14G. As of December 31, 2003, the Company was
engaged in agreements and arrangements to issue 12,205,034 additional
Ordinary Shares of the Company. This amount includes Ordinary Shares
to be issued under various agreements according to their provisions as
of December 31, 2003 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 the convertible debentures.
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 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 1994 through 2003. 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 CHAIRMAN OF THE BOARD OF DIRECTORS
- 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 Chairman of the Board of Directors ("Chairman") is
entitled to receive the right 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 the amendment to the Fab 2 investment agreements
described in Note 13A(5) above. Options granted under the
plan vest over a five-year period according to various
vesting schedules. The vesting of the options is subject to
the Chairman's serving as the Chairman or as the Company's
Chief Executive Officer or President on the relevant vesting
dates. The options granted are exercisable for a period of
five years from the date on which the options vest.
- 29 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(1) EMPLOYEE AND DIRECTOR SHARE OPTIONS (cont.)
(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 (weighted average exercise price of
approximately $8.48). As of December 31, 2003 and 2002,
280,000 options were outstanding under the plan. 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, 2003, all the options are vested.
(D) 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 the right to purchase up to 300,000 and 100,000,
respectively, Ordinary Shares of the Company 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.
(E) 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
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 the percentage for the
years 2004 and 2005 will be 3.6%. Accordingly, as of
December 31, 2003, an aggregate of 5,583,353 options were
added to the Company's share option plans, of which
2,120,916 had not yet been designated for identified
employees, and are accordingly available for grant under the
general terms described in paragraph (a) above.
- 30 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - 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, 2003, 2002 and
2001, 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):
2003 2002 2001
Weighted Weighted Weighted
Number of average Number average Number average
share exercise of share exercise of share exercise
options price options price options price
------- ----- ------- ----- ------- -----
Outstanding as of
beginning of year 4,247,898 $ 10.79 3,717,770 $ 11.94 2,376,543 $ 13.34
Granted 3,118,742 4.10 905,724 5.82 1,583,722 10.20
Exercised -- -- (31,154) 8.76
Terminated -- -- --
Forfeited (524,199) 8.25 (375,596) 10.27 (211,341) 15.30
--------- --------- ---------
Outstanding as of
end of year 6,842,441 7.93 4,247,898 10.79 3,717,770 11.94
========= ========= =========
Options exercisable
as of end of year 2,008,674 11.60 1,299,531 10.49 1,080,867 7.79
========= ========= =========
(3) SUMMARY OF INFORMATION ABOUT EMPLOYEE SHARE OPTIONS OUTSTANDING
The following table summarizes information about employee share
options outstanding as of December 31, 2003:
Exercisable as of
Outstanding as of December 31, 2003 December 31, 2003
----------------------------------- -----------------
Weighted average Weighted
Range of exercise Number remaining AVERAGE Number Weighted average
prices outstanding contractual life exercise price exercisable exercise price
------ ----------- ---------------- -------------- ----------- --------------
(in years)
2.98 - 3.96 1,078,000 7.66 3.00 -- --
4.42 - 4.92 1,505,400 9.63 4.43 -- --
5.00 - 5.96 168,200 8.90 5.25 10,334 5.89
6.00 - 6.99 974,575 8.57 6.10 10,416 6.10
7.00 - 7.99 720,350 3.61 7.03 715,500 7.03
8.06 - 8.99 565,335 4.37 8.55 364,801 8.52
9.06 - 9.81 64,038 2.89 9.23 57,370 9.22
10.00 - 10.89 857,088 7.19 10.42 318,535 10.43
11.81 - 11.81 200,000 7.41 11.81 66,666 11.81
12.13 - 13.00 71,910 5.01 12.49 47,577 12.59
14.25 - 17.19 30,750 6.67 15.79 20,499 15.79
18.75 - 18.75 76,500 6.26 18.75 25,497 18.75
20.00 - 25.00 530,295 6.22 24.43 371,479 24.24
--------- ---------
Total 6,842,441 7.28 7.93 2,008,674 11.60
========= =========
- 31 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(4) WEIGHTED AVERAGE GRANT-DATE FAIR VALUE OF OPTIONS GRANTED TO
EMPLOYEES
The weighted average grant-date fair value of the options granted
during 2003, 2002 and 2001 to employees and directors amounted to
$2.18, $2.83 and $6.95 per option, respectively. The Company
utilized the Black-Scholes option pricing model to estimate fair
value, utilizing the following assumptions for the years 2003,
2002 and 2001 (all in weighted averages):
2003 2002 2001
---- ---- ----
Risk-free interest rate 2.88%-3.22% 2.80% 4.25%
Expected life of options 4.75 years 4.82 years 4.80 years
Expected annual volatility 55%-74% 56% 87%
Expected dividend yield None None None
(5) Non-Employee Warrants
(A) BANKS - As of December 31, 2003, the Company granted the
Banks an aggregate of 1,296,596 warrants to purchase
Ordinary Shares of the Company, at an average exercise price
of $6.18 per share, at terms described below:
WARRANTS ISSUED IN JANUARY 2001 - In January 2001, as part
of the Facility Agreement described in Note 13A(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, 2003, all of these warrants were fully
vested. The warrants are exercisable for a five-year period
ending January 2006.
In lieu of paying the exercise price in cash as described
below, the Banks are entitled to exercise the warrants on a
"cashless" basis, i.e. by forfeiting all or 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.
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 the amendment to the Facility Agreement described in
Note 13A(6), 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 described in Note
13A(6) was signed. As of December 31, 2003, 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.
- 32 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(5) NON-EMPLOYEE SHARE WARRANTS (cont.)
(A) BANKS (cont.)
WARRANTS TO BE GRANTED TO THE BANKS - In the event the Banks
increase the loans available to be drawn down by the Company
under the Facility Agreement, as described in Note 13A(6),
the Company will issue the Banks additional five-year
warrants equivalent to 30% of the amount drawn down based on
the average closing price of the Company's Ordinary Shares
during the 15 trading days prior to the time the Company
draws down such loan. As of December 31, 2003, no warrants
were issued under this commitment.
(B) WARRANTS GRANTED TO A RELATED PARTY - In consideration for
TIC's undertaking described in Note 13A(6), the Company
issued IC-Tech 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
amendment with the Banks described in Note 13A(6) was
signed. As of December 31, 2003, all of the warrants are
fully vested. The warrants are exercisable for a five-year
period ending December 2008.
The cost of the warrants award granted to IC-Tech,
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 to be amortized as financing expense over the terms
of the loans under the Facility Agreement with the Banks.
In addition, in the framework of TIC's undertaking described
in Note 13A(6), the Company undertook to issue additional
warrants to IC-Tech as a subscription fee which will be 5%
of the total amount of money invested by TIC in case the
TIC's undertaking is realized in consideration for all of
the unsubscribed rights that it actually purchases. The
exercise price of these warrants shall be the 15-day average
closing price of the Company's Ordinary Shares prior to the
date of the rights offering prospectus, and they shall
expire five years from their date of issuance.
(C) OPTIONS GRANTED TO CONSULTANT - In return for services
provided to the Company by a consultant in connection with
obtaining certain agreements relating to Fab 2, the Company
awarded the consultant with options, which were fully
expired in August 2001. The cost of the options award
granted to the consultant, determined based on the fair
value at the relevant measurement dates in accordance with
SFAS 123, amounted to $1,576. Of that amount, $524 was
attributed to the technology transfer agreement with Toshiba
and is being amortized in accordance with the other
technology transfer costs. The remaining $1,052 was
attributed to issuance of Ordinary Shares to certain Wafer
Partners and was included in paid-in capital.
(D) WARRANTS ISSUED TO OTPP - See Note 13A(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.
- 33 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(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 fair value at the grant dates for all awards
made through December 31, 2003 in accordance with SFAS 123, as
amended by SFAS 148, the Company's pro forma loss per share would
have been as follows:
2003 2002 2001
---- ---- ----
PRO FORMA LOSS
Loss for the year, as reported $(114,261) $ (51,402) $ (38,522)
Less - stock-based compensation
determined under APB-25 27 142 283
Add - stock-based compensation determined
under SFAS 123 (8,437) (7,476) (6,209)
--------- --------- ---------
Pro forma loss $(122,671) $ (58,736) $ (44,448)
========= ========= =========
PRO FORMA BASIC LOSS PER SHARE
As reported $ (2.40) $ (1.63) $ (1.92)
========= ========= =========
Pro forma $ (2.57) $ (1.87) $ (2.27)
========= ========= =========
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
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 13A(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.
- 34 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (cont.)
E. SALE OF SECURITIES
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 11. Together with the convertible
debentures the Company issued for no consideration an aggregate of
552,899 options (all of which expired without being exercised) and
2,211,596 Options (Series 1) exercisable into one Ordinary Share of
the Company until January 20, 2006 at an exercise price of NIS 39.00
(subject to customary adjustments), linked to the Israeli Consumer
Price Index (as of December 31, 2003 - NIS 40.83, $9.32). The total
initial proceeds raised were $23,200, and costs related to the
issuance of the securities and the prospectus in Israel were
approximately $1,750. See Note 20E for the disclosure of the
accounting treatment of the sale of these securities under U.S. GAAP.
F. RIGHTS OFFERING
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 1,844,082 warrants
to purchase Ordinary Shares of the Company, in consideration for an
aggregate of 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 IN JANUARY 2004
In January 2004, the Company completed a public offering of 11,000,000
of its Ordinary Shares. Gross proceeds received in January 2004 were
$77,000, and costs in relation to the prospectus and the issuance of
the securities were approximately $4,700. In addition, the Company
granted the underwriters a 30-day option to purchase up to an
additional 1,650,000 ordinary shares at the public offering price to
cover over-allotments.
- 35 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 15 - INFORMATION ON GEOGRAPHIC AREAS AND MAJOR CUSTOMERS
A. SALES BY GEOGRAPHIC AREA (as percentage of total sales)
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
United States 73% 62% 69%
Asia Pacific - in 2003, Taiwan; in 2002,
primarily Japan; in 2001, primarily
Taiwan 10 25 18
Europe 15 11 10
Israel 2 2 3
--- --- ---
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,
-----------------------
2003 2002 2001
---- ---- ----
Customer A 24% 31% 30%
Customer B 20 -- --
Customer C 11 13 17
Customer D -- 16 --
Other customers (*) 20 21 28
(*) Represent sales to six different customers each of whom accounted
for between 0% and 9% of sales during 2003; to five customers
(2%-7%) during 2002; and to five customers (2%-8%) during 2001.
As of December 31, 2003 and 2002, the above major customers
constituted the majority of the trade accounts receivable reflected on
the balance sheets.
NOTE 16 - FINANCING INCOME (EXPENSE), NET
Financing income (expense), net consist of the following:
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Financial expenses (primarily bank loan interest) $(16,073) $(11,669) $ (3,365)
Financial expenses in relation
to convertible debentures (1,198) (1,101) --
Less capitalized interest - Note 6A(3) 6,892 10,260 1,328
-------- -------- --------
(10,379) (2,510) (2,037)
Financing income (primarily bank deposit interest) 553 406 3,502
-------- -------- --------
Financing income (expense), net $ (9,826) $ (2,104) $ 1,465
======== ======== ========
- 36 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 17 - INCOME TAXES
A. APPROVED ENTERPRISE STATUS
Substantially all of the Company's existing facilities as of December
31, 2003 have been granted approved enterprise status, as provided by
the Israeli Law for the Encouragement of Capital Investments - 1959
("Investments Law") (see Note 6B).
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 periods ending between 2003 and 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 36% (regular "Company Tax").
The tax benefits are also conditioned upon fulfillment of the
requirements stipulated by the Investments Law and the regulations
promulgated there under, 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 Note 6B).
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,
------------------
2003 2002
---- ----
DEFERRED TAX BENEFIT - CURRENT
Accrued vacation pay $ 695 $ 582
Other 62 82
-------- --------
757 664
Valuation allowance (757) (664)
-------- --------
Total current deferred tax benefit $ -- $ --
======== ========
NET DEFERRED TAX BENEFIT - LONG-TERM
Deferred tax asset -
Net operating loss carryforward $ 58,048 $ 19,094
Research and development 3,748 2,759
Liability for employee rights upon severance 887 781
-------- --------
62,683 22,634
Valuation allowance (43,861) (17,229)
-------- --------
18,822 5,405
Deferred tax liability - depreciation and amortization (18,822) (5,405)
-------- --------
Total net long-term deferred tax benefit $ -- $ --
======== ========
- 37 -
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.)
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,
-----------------------
2003 2002 2001
---- ---- ----
Israeli statutory rate (36)% (36)% (36)%
Reduced tax rate for approved enterprise 16 16 16
Tax benefits for which deferred taxes
were not recorded 23 10 22
Permanent differences and other, net (3) 10 (2)
--- --- ---
--% --% --%
=== === ===
D. NET OPERATING LOSS CARRYFORWARD
As of December 31, 2003, the Company had net operating loss
carryforwards for tax purposes of approximately $300,000, 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 assessment for 1999 is deemed
final.
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 20C 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.
- 38 -
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.)
A. HEDGING ACTIVITIES (cont.)
In addition, the Company, from time to time, enters into agreements to
hedge variable interest rate exposure on long-term loans (see Note
10). 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 earnings 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.
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, 2002, the Company had an outstanding foreign
exchange agreements (options) to hedge exposure related to the
purchase of machinery and equipment in an aggregate of $44,032
(as of December 31, 2003 - $0). The agreements resulted in 2003
in a gain of $2,357 of which $1,663 was capitalized to fixed
assets; in 2002 -$3,062 and $2,770, respectively; in 2001 - in a
loss of $4,462 from forward transactions of which $4,564 was
capitalized to fixed assets.
(2) As of December 31, 2003 and 2002, the Company had an outstanding
agreements to hedge interest rate exposure on loans to be
withdrawn under the Facility Agreement, the aggregate amount of
which was $212,000, all of which is attributable to Fab 2. These
agreements resulted in 2003 in a loss of $5,335 of which $2,547
was capitalized to property and equipment; in 2002 - a loss of
$3,707 of which $3,593 was capitalized to property and equipment;
in 2001 - a loss of $463 of which $344 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, 2003 and 2002. The fair value of
the interest rate hedging transactions as of December 31, 2003 would
have resulted in an unrealized capitalizable loss of $9,920 (as of
December 31, 2002 - $11,952).
- 39 -
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,
------------------
2003 2002
---- ----
Trade accounts receivable $5,286 $ 583
====== ======
Current liabilities $ 23 $ 6
====== ======
B. Transactions
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Sales $13,282 $ 3,836 $ 4,339
======= ======= =======
Management fees $ 240 $ 480
======= =======
Purchases of raw materials $ -- $ 209 $ 2,460
======= ======= =======
Development costs - Note 5B $ -- $ 102 $ 225
======= ======= =======
Expense reimbursements paid $ 99 $ 101 $ 290
======= ======= =======
Expense reimbursements received $ 282 $ 177
======= =======
Royalties received - Note 13F(2) $ 225 $ 500
======= =======
Royalties paid/payable - Note 13F(2) $ 12 $ 300
======= =======
C. For commitments, contingencies and other transactions relating to Fab
2 Wafer Partner and Equity Investor agreements - see Note 13A.
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 G below
for the presentation of the Company's balance sheets as of December 31,
2003 and 2002 in accordance with U.S. GAAP.
A. PRESENTATION OF CASH AND SHORT-TERM AND LONG-TERM INTEREST-BEARING
DEPOSITS DESIGNATED FOR INVESTMENTS RELATING TO FAB 2
In accordance with U.S. GAAP, cash, short-term and long-term
interest-bearing deposits designated for investments relating to Fab 2
should be excluded from current assets and long-term investments and
presented separately as a non-current asset. Accordingly, as of
December 31, 2003, $44,042 and $4,848 were reclassified, respectively,
from current assets and long-term investments to a long-term asset (as
of December 31, 2002 - $51,338 and $11,893, respectively).
B. PRESENTATION OF NET LONG-TERM LIABILITIES IN RESPECT OF EMPLOYEES
Under U.S. GAAP, assets and liabilities relating to severance
arrangements are to be presented separately and are not to be offset,
while according to Israeli GAAP such an offset is required.
Accordingly, an amount of $14,607 and $12,368 as of December 31, 2003
and 2002, respectively, was reclassified from other long-term
liabilities to long-term investments.
- 40 -
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.)
C. 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).
Prior to the adoption of SFAS 133, the Company accounted for
hedging activities for U.S. GAAP purposes according to the policy
described in Notes 2M and 18A. Based on the hedging activities
the Company had prior to January 1, 2001, the financial
statements of the Company were not materially affected by the
initial adoption of SFAS 133.
(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,
2003, there were not any outstanding foreign exchange agreements.
For outstanding foreign exchange agreements as of December 31,
2002, see Note 18C(1).
The Company uses interest rate collars with a knock-out feature
to hedge its Libor-based variable long-term debt cash flow
exposure. The knock-out feature was set above the cap 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 2G), as interest payment become due. For
outstanding contracts as of December 31, 2003 and 2002, see Note
18C(2).
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 corresponding
to the economic useful lives of the machinery and equipment.
- 41 -
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.)
C. HEDGING ACTIVITIES IN ACCORDANCE WITH U.S. GAAP (SFAS 133) (cont.)
(3) Complying with SFAS 133 and SFAS 138 and the related
interpretations thereon with respect to the Company's hedging
transactions as of December 31, 2003 would have resulted in: an
increase in other long-term liabilities in the amount of $9,920;
a decrease in other comprehensive loss for the year ended
December 31, 2003 of $1,940 and in the accumulated other
comprehensive loss component of equity as of such date in the
amount of $15,897; and in a decrease of $5,947 in property and
equipment, net as of December 31, 2003.
D. IMPLEMENTATION OF SFAS 123 AND SFAS 148
Had compensation cost for the Company's share option plans been
determined based on fair value at the grant dates for awards made
through December 31, 2003 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 14B(4)):
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
PRO FORMA LOSS
Loss for the year, as reported according to
U.S. GAAP (see H below) $(114,261) $ (51,402) $ (38,522)
Less - stock-based compensation determined
under APB-25 27 142 283
Add - stock-based compensation
determined under SFAS 123 (8,437) (7,476) (6,209)
--------- --------- ---------
Pro forma loss $(122,671) $ (58,736) $ (44,448)
========= ========= =========
BASIC LOSS PER SHARE
As reported according to U.S.
GAAP (see J below) $ (2.45) $ (1.63) $ (1.92)
========= ========= =========
Pro forma $ (2.63) $ (1.87) $ (2.27)
========= ========= =========
- 42 -
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.)
E. SALE OF SECURITIES
Under Accounting Principles Board Opinion No. 14 ("APB 14"), the
proceeds from the sale of the securities described in Notes 11 and 14E
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 in the amount of $2,363 (net of $196 related issuance
expenses), and a decrease in convertible debentures 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,
2003 and 2002 would have been immaterial.
F. PRESENTATION OF PROCEEDS ON ACCOUNT OF SHARES IN ACCORDANCE WITH U.S.
GAAP (SFAS 150)
According to SFAS No. 150, "Accounting For Certain Financial
Instruments with Characteristics of Both Liabilities and Equity", a
financial instrument that embodies an unconditional obligation (as
defined in that guidance), that the issuer must or may settle by
issuing a variable number of its equity shares, shall be classified as
a liability if, at inception, the monetary value of the obligation is
based solely or predominantly on, among others, a fixed monetary
amount known at inception. Accordingly, the $13,201 and $3,227 amounts
which are described in detail in Notes 13A(3) and (4), respectively,
and which according to Israeli GAAP are presented as "Proceeds on
account of share capital", are reclassified under SFAS 150 as
"Liability in respect of variable number of shares to be issued". Such
presentation for the U.S. GAAP purposes is required since as of
December 31, 2003, the amount of shares the Company is to issue in
consideration of the aggregate of $16,428 is not determined as of such
date, and is actually based on mechanisms that embodies variable
number of shares.
- 43 -
TOWER SEMICONDUCTOR LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND PER SHARE DATA)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT.)
G. BALANCE SHEETS IN ACCORDANCE WITH U.S. GAAP
AS OF DECEMBER 31, 2003 AS OF DECEMBER 31, 2002
----------------------- -----------------------
U.S. AS PER AS PER AS PER AS PER
GAAP ISRAELI ADJUST- U.S. ISRAELI ADJUST- U.S.
REMARK GAAP MENTS GAAP GAAP MENTS GAAP
-------- --------- -------- --------- --------- --------- -----------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 12,448 $ $ 12,448 $ 7,857 $ $ 7,857
SHORT-TERM INTEREST-BEARING DEPOSITS -- -- 10,500 10,500
CASH AND SHORT-TERM INTEREST-BEARING DEPOSITS
DESIGNATED FOR INVESTMENTS RELATING TO FAB 2 A 44,042 (44,042) -- 51,338 (51,338) --
TRADE ACCOUNTS RECEIVABLE (NET OF ALLOWANCE FOR
DOUBTFUL ACCOUNTS OF $0 AND $155, RESPECTIVELY 11,631 11,631 7,456 7,456
OTHER RECEIVABLES 11,073 11,073 21,322 21,322
INVENTORIES 19,382 19,382 10,201 10,201
OTHER CURRENT ASSETS 1,729 1,729 1,407 1,407
--------- -------- --------- --------- --------- -----------
TOTAL CURRENT ASSETS 100,305 (44,042) 56,263 110,081 (51,338) 58,743
--------- -------- --------- --------- --------- -----------
LONG-TERM INVESTMENTS
LONG-TERM INTEREST-BEARING DEPOSITS
DESIGNATED FOR INVESTMENTS RELATING TO FAB 2 A 4,848 (4,848) -- 11,893 (11,893) --
OTHER LONG-TERM INVESTMENTS B 6,000 14,607 20,607 6,000 12,368 18,368
--------- -------- --------- --------- --------- -----------
10,848 9,759 20,607 17,893 475 18,368
--------- -------- --------- --------- --------- -----------
PROPERTY AND EQUIPMENT, NET C 568,412 (5,947) 562,465 493,074 (5,727) 487,347
--------- -------- --------- --------- --------- -----------
CASH AND SHORT-TERM AND LONG-TERM
INTEREST-BEARING DEPOSITS DESIGNATED
FOR INVESTMENTS RELATING TO FAB 2 A -- 48,890 48,890 -- 63,231 63,231
--------- -------- --------- --------- --------- -----------
OTHER ASSETS E 108,770 (196) 108,574 95,213 (196) 95,017
========= ======== ========= ========= ========= ===========
TOTAL ASSETS $ 788,335 $ 8,464 $ 796,799 $ 716,261 $ 6,445 $ 722,706
========= ======== ========= ========= ========= ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
SHORT-TERM DEBT $ -- $ $ -- $ 4,000 $ $ 4,000
TRADE ACCOUNTS PAYABLE 40,249 40,249 76,083 76,083
OTHER CURRENT LIABILITIES C 9,564 9,564 8,071 128 8,199
--------- -------- --------- --------- --------- -----------
TOTAL CURRENT LIABILITIES 49,813 49,813 88,154 128 88,282
LONG-TERM DEBT 431,000 431,000 253,000 253,000
CONVERTIBLE DEBENTURES E 25,783 (2,559) 23,224 24,121 (2,559) 21,562
OTHER LONG-TERM LIABILITIES B, C 5,935 24,527 30,462 5,406 24,320 29,726
LIABILITY IN RESPECT OF A VARIABLE NUMBER
OF SHARES TO BE ISSUED F -- 16,428 16,428 -- --
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMERS' ADVANCES 46,347 46,347 47,246 47,246
--------- -------- --------- --------- --------- -----------
TOTAL LIABILITIES 558,878 38,396 597,274 417,927 21,889 439,816
--------- -------- --------- --------- --------- -----------
SHAREHOLDERS' EQUITY
ORDINARY SHARES, NIS 1 PAR VALUE - AUTHORIZED
150,000,000 SHARES; ISSUED 52,996,097 AND
44,735,532 SHARES, RESPECTIVELY 13,150 13,150 11,294 11,294
ADDITIONAL PAID-IN CAPITAL E 427,881 2,363 430,244 400,808 2,363 403,171
SHAREHOLDER RECEIVABLES AND UNEARNED COMPENSATION (26) (26) (53) (53)
PROCEEDS ON ACCOUNT OF SHARE CAPITAL F 16,428 (16,428) -- -- --
ACCUMULATED OTHER COMPREHENSIVE LOSS C -- (15,897) (15,897) -- (17,837) (17,837)
ACCUMULATED DEFICIT H (218,904) 30 (218,874) (104,643) 30 (104,613)
--------- -------- --------- --------- --------- -----------
238,529 (29,932) 208,597 307,406 (15,444) 291,962
TREASURY STOCK, AT COST - 1,300,000 SHARES (9,072) (9,072) (9,072) (9,072)
--------- -------- --------- --------- --------- -----------
TOTAL SHAREHOLDERS' EQUITY 229,457 (29,932) 199,525 298,334 (15,444) 282,890
========= ======== ========= ========= ========= ===========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUIT $ 788,335 $ 8,464 $ 796,799 $ 716,261 $ 6,445 $ 722,706
========= ======== ========= ========= ========= ===========
- 44 -
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. STATEMENTS OF OPERATIONS IN ACCORDANCE WITH U.S. GAAP
Complying with SFAS 133 and SFAS 138 would not have affected the
results of operations for the years ended December 31, 2003 and 2002.
The effect on the results of operations for the year ended December
31, 2001 as a result of complying with SFAS 133 and SFAS 138 would be
additional financing income (and a reduction of the loss) in the
amount of $30. Accordingly, the Company's loss for the year ended
December 31, 2001 would have been $38,492.
I. COMPREHENSIVE INCOME 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,
-----------------------
2003 2002 2001
---- ---- ----
Loss for the year according to U.S. GAAP $(114,261) $ (51,402) $ (38,492)
Other comprehensive loss:
Realized gain on securities
arising during the year -- -- (9,550)
Adjustment of unrealized gain
on securities arising during previous year -- -- (3,013)
Amortization of unrealized
losses on derivatives 664 -- --
Unrealized gains (losses) on derivatives 1,276 (9,638) (8,199)
--------- --------- ---------
Net comprehensive loss for the year $(112,321) $ (61,040) $ (59,254)
========= ========= =========
- 45 -
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.)
J. 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 as described above), the basic and diluted
loss per share would be:
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Basic loss per share $ (2.45) $ (1.63) $ (1.95)
========= ========= =========
Diluted loss per share $ (2.45) $ (1.63) $ (1.95)
========= ========= =========
The following tables provide a reconciliation of the numerators and
denominators of the basic and diluted per share computations for 2003,
2002 and 2001 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. IL 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, warrants
and convertible debentures is accounted for according to the treasury
method, regardless of the probability of the exercise of the options
and warrants or the conversion into shares of the convertible
debentures. According to Israeli GAAP, the loss to compute loss per
share may 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 required
by U.S. GAAP.
- 46 -
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.)
J. 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
Basic Loss Per Share (Numerator) (Denominator) Amount
-------------------- ----------- ------------- ------
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.
- 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 (cont.)
J. LOSS PER SHARE DATA IN ACCORDANCE WITH U.S. GAAP (SFAS 128) (cont.)
RECONCILIATION FOR 2002:
Year ended December 31, 2002
----------------------------
Shares
Loss (in thousands) Per-share
(Numerator) (Denominator) Amount
----------- ------------- ------
BASIC LOSS PER SHARE
Loss available to ordinary shareholders $(51,402) 31,523 $ (1.63)
========
EFFECT OF DILUTIVE SECURITIES
Convertible debentures -- --
Options and warrants -- --
-------- ------
DILUTED LOSS PER SHARE
Loss available to ordinary
shareholders after assumed conversions $(51,402) 31,523 $ (1.63)
======== ====== ========
Options and warrants to purchase 10,053,578 Ordinary Shares at an
average exercise price of $9.12 per share were outstanding as of
December 31, 2002 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, 2002 expire between April 2005 and
December 2012 (weighted average remaining contractual life of 4.9
years), were still outstanding as of such date. Convertible
debentures, convertible into 2,697,068 Ordinary Shares, were
outstanding as of December 31, 2002 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.
RECONCILIATION FOR 2001:
Year ended December 31, 2001
----------------------------
Shares
Loss (in thousands) Per-share
(Numerator) (Denominator) Amount
----------- ------------- ------
BASIC LOSS PER SHARE
Loss available to ordinary shareholders $(38,492) 19,724 $ (1.95)
========
EFFECT OF DILUTIVE SECURITIES
Options and warrants -- --
-------- ------
DILUTED LOSS PER SHARE
Loss available to ordinary
Shareholders after assumed conversions $(38,492) 19,724 $ (1.95)
======== ====== ========
Options and warrants to purchase 4,117,770 Ordinary Shares at an
average exercise price of $11.39 per share were outstanding as of
December 31, 2001 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, 2001 expire between April 2005 and
December 2011 (weighted average remaining contractual life of 6.84
years), were still outstanding as of such date.
- 48 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TOWER SEMICONDUCTOR LTD.
Date: February 2, 2004 By: /s/ Tamar Cohen
-------------------
Tamar Cohen
Corporate Secretary &
General Counsel
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
Tower Semiconductor Ltd. (the "Company"), on Form F-3 (Nos. 333-85090,
333-108896 and 333-110486) and Form S-8 (Nos. 33-80947, 333-06482, 333-11720,
333-83204 and 333-107943), of our report dated February 2, 2004, relating to the
consolidated financial statements of the Company, appearing in the Company's
Report on Form 6-K for the month of February 2004 (No. 2) , and to the reference
to us under the heading "Experts" in any prospectus included in such
Registration Statements.
Brightman Almagor & Co.
Certified Public Accountants
Tel Aviv, Israel
February 2, 2004