Attached files
file | filename |
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EX-10.1 - Tower US Holdings Inc. | exhibit_10-1.htm |
EX-31.1 - Tower US Holdings Inc. | exhibit_31-1.htm |
EX-31.2 - Tower US Holdings Inc. | exhibit_31-2.htm |
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
|
For
the quarterly period ended September 30, 2009
|
||
Or
|
||
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
Commission
file number: 001-32832
Jazz
Technologies, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
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20-3320580
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
4321
Jamboree Road
Newport
Beach, California
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92660
|
|
(Address
of principal executive offices)
|
(Zip
Code)
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(949) 435-8000
Registrant’s
telephone number, including area code
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
o
(Note: As
a voluntary filer not subject to the filing requirements, the Registrant has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months).
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes o No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer a non-accelerated filer or a “smaller reporting company”. See
definitions of “large accelerated filer” and “accelerated filer” in
Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer x
|
Smaller
reporting company o
|
Indicate
by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes o
No x
The
registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this
Form with the reduced disclosure format permitted by General Instruction
H(2).
JAZZ
TECHNOLOGIES, INC.
Table
of Contents
1
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1
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1
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2
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3
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4
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17
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21
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21
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21
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21
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21
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22
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22
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i
$ | 44,761 | $ | 8,633 | $ | 34,039 | |||||||
33,322 | 5,774 | 30,054 | ||||||||||
11,439 | 2,859 | 3,985 | ||||||||||
3,040 | 141 | 2,932 | ||||||||||
2,101 | 486 | 4,181 | ||||||||||
196 | 29 | 316 | ||||||||||
-- | 2,300 | -- | ||||||||||
-- | -- | 2,598 | ||||||||||
5,337 | 2,956 | 10,027 | ||||||||||
6,102 | (97 | ) | (6,042 | ) | ||||||||
(2,550 | ) | (573 | ) | (2,785 | ) | |||||||
3,552 | (670 | ) | (8,827 | ) | ||||||||
4,240 | -- | 2 | ||||||||||
$ | 7,792 | $ | (670 | ) | $ | (8,825 | ) | |||||
$ | (0.46 | ) | ||||||||||
19,031 |
Unaudited
Condensed Consolidated Statements of Cash Flows
(in
thousands)
Nine
months ended September 30, 2009
|
Period
from September 19, 2008 through September 30, 2008
|
Period
from December 29, 2007 through September 18, 2008
|
||||||||||
Successor
|
Successor
|
Predecessor
|
||||||||||
Operating
activities:
|
||||||||||||
Net
loss
|
$ | (1,916 | ) | $ | (670 | ) | $ | (18,853 | ) | |||
Adjustments
to reconcile net loss for the period to net cash provided by operating
activities:
|
||||||||||||
Depreciation
and amortization of intangible assets
|
15,990 | 773 | 27,200 | |||||||||
Convertible
notes accretion and amortization of deferred financing
costs
|
3,864 | 4 | 2,619 | |||||||||
Write-off
of in-process research and development
|
-- | 2,300 | -- | |||||||||
Other
income, net
|
(2,065 | ) | -- | (709 | ) | |||||||
Stock
based compensation expense
|
192 | 35 | 694 | |||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Accounts
receivables
|
(578 | ) | (7,465 | ) | 16,759 | |||||||
Inventories
|
1,472 | 1,010 | (717 | ) | ||||||||
Prepaid
expenses and other current assets
|
777 | 160 | (565 | ) | ||||||||
Accounts
payable
|
(2,088 | ) | 2,470 | (7,884 | ) | |||||||
Due
to related party, net
|
338 | -- | -- | |||||||||
Accrued
compensation and benefits
|
(540 | ) | (323 | ) | (545 | ) | ||||||
Deferred
Revenue
|
973 | (847 | ) | (2,211 | ) | |||||||
Accrued
interest
|
(2,724 | ) | 480 | (3,050 | ) | |||||||
Other
current liabilities
|
3,109 | 1,923 | (8,344 | ) | ||||||||
Deferred
tax liability
|
(7,159 | ) | -- | (110 | ) | |||||||
Accrued
pension, retirement medical plan obligations and long-term
liabilities
|
(319 | ) | 652 | (2,627 | ) | |||||||
Net
cash provided by operating activities
|
9,326 | 502 | 1,657 | |||||||||
Investing
activities:
|
||||||||||||
Purchases
of property and equipment
|
(8,198 | ) | (253 | ) | (4,798 | ) | ||||||
Net
proceeds from sale of equipment
|
-- | -- | 1,171 | |||||||||
Purchases
of intangible assets
|
(1,000 | ) | -- | -- | ||||||||
Net
cash used in investing activities
|
(9,198 | ) | (253 | ) | (3,627 | ) | ||||||
Financing
activities:
|
||||||||||||
Debt
repayment
|
(2,216 | ) | -- | (4,100 | ) | |||||||
Short-term
debt from bank
|
(2,560 | ) | 7,000 | (1,000 | ) | |||||||
Payment
of debt and acquisition-related liabilities
|
-- | (346 | ) | (63 | ) | |||||||
Net
cash provided by (used in) financing activities
|
(4,776 | ) | 6,654 | (5,163 | ) | |||||||
Effect
of foreign currency on cash
|
(75 | ) | 48 | 7 | ||||||||
Net
increase (decrease) in cash and cash equivalents
|
(4,723 | ) | 6,951 | (7,126 | ) | |||||||
Cash
and cash equivalents at beginning of period
|
27,574 | 3,486 | 10,612 | |||||||||
Cash
and cash equivalents at end of period
|
$ | 22,851 | $ | 10,437 | $ | 3,486 |
Non-cash
activities:
Investments
in property, plant and equipment
|
$ | 6,585 | $ | -- | $ | 755 | ||||||
Issuance
of common stock
|
$ | -- | $ | 50,545 | $ | -- | ||||||
Supplement disclosure of cash flow information: | ||||||||||||
Interest paid | $ | 10,865 | $ | -- | $ | 10,724 | ||||||
Tax paid | $ | 1,165 | $ | -- | $ | 1,230 |
See
accompanying notes.
3
Jazz
Technologies, Inc.
September
30, 2009
1.
|
ORGANIZATION
|
Unless specifically noted
otherwise, as used throughout these notes to the unaudited condensed
consolidated financial statements, “Jazz,” “Company” refers to Jazz
Technologies, Inc. and its subsidiaries, including Jazz Semiconductor, Inc.
and “Jazz Semiconductor” refers only to the business of Jazz
Semiconductor, Inc. References to the “Company” for dates prior to
September 19, 2008 mean the Predecessor which on September 19, 2008 was merged
with and into a subsidiary of Tower Semiconductor Ltd., an Israeli company
(“Tower”), and references to the “Company” for periods on or after
September 19, 2008 are references to the Successor Tower
subsidiary.
The
Company
Jazz, formerly known as
Acquicor Technology Inc., was incorporated in Delaware on August 12, 2005.
The Company was formed to serve as a vehicle for the acquisition of one or more
domestic and/or foreign operating businesses through a merger, capital stock
exchange, stock purchase, asset acquisition or other similar business
combination.
The Company is based in
Newport Beach, California and following the acquisition of Jazz
Semiconductor, became an independent semiconductor foundry focused on
specialty process technologies for the manufacture of analog intensive
mixed-signal semiconductor devices. The Company’s specialty process technologies
include advanced analog, radio frequency, high voltage, bipolar and silicon
germanium bipolar complementary metal oxide (“SiGe”) semiconductor processes,
for the manufacture of analog and mixed-signal semiconductors. Its customers'
analog and mixed-signal semiconductor devices are used in cellular phones,
wireless local area networking devices, digital TVs, set-top boxes, gaming
devices, switches, routers and broadband modems.
Merger
with Tower Semiconductor, Ltd.
On May 19, 2008, the
Company entered into an Agreement and Plan of Merger and Reorganization
(“Merger”) with Tower and its wholly-owned subsidiary, Armstrong Acquisition
Corp., a Delaware corporation (“Merger Sub”), which provided for Merger Sub to
merge with and into the Company, with the Company surviving the Merger as a
wholly-owned subsidiary of Tower.
At a special meeting of the
Company's stockholders held on September 17, 2008, the requisite majority of the
Company’s stockholders voted in favor of the Merger, which was effectively
consummated on September 19, 2008. Under the terms of the Merger, Tower acquired
all of the outstanding shares of Jazz in a stock-for-stock transaction. Each
share of the Company’s common stock not held by Tower, Merger Sub or the Company
was automatically converted into and represents the right to receive 1.8
ordinary shares of Tower. Cash was paid in lieu of fractional shares. In
addition, on September 19, 2008, upon completion of the Merger, the Company’s
common stock was delisted from the American Stock Exchange. As a result of the
Merger, Tower is the only registered holder of the Company’s common stock and a
change in control occurred. The Merger was accounted for under the purchase
method of accounting in accordance with U.S. generally accepted accounting
principles (“US GAAP”) for accounting and financial reporting purposes. Under
this method, Jazz was treated as the “acquired” company. In connection with this
merger, the Company adopted Tower’s fiscal year for reporting
purposes.
4
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation and Consolidation
We prepare our consolidated
financial statements in accordance with SEC and US GAAP requirements and include
all adjustments of a normal recurring nature that are necessary to fairly
present our condensed consolidated results of operations, financial position,
and cash flows for all periods presented. Interim period results are not
necessarily indicative of full year results. This quarterly report should be
read in conjunction with our most recent Annual Report on
Form 10-K.
The condensed consolidated
financial statements included herein are unaudited; however, they contain all
normal recurring adjustments that, in the opinion of management, are necessary
to present fairly the Company’s consolidated financial position at September 30,
2009 and December 31, 2008, and the consolidated results of its operations
and cash flows for the three and nine months ended September 30, 2009 and 2008.
All intercompany accounts and transactions have been eliminated. Certain amounts
have been reclassified to conform to the Successor
presentation.
For purposes of presentation
and disclosure, we refer to the Company as the Predecessor for all periods up to
September 19, 2008, the date of consummation of the Merger and as the Successor
as of and for all periods thereafter. The financial statements also reflect
“push-down” accounting in accordance with ASC 805-50-S99 (SEC Staff Accounting
Bulletin No. 54) with respect to the Company’s merger with
Tower.
Fiscal
Year
Effective as of September 19,
2008, the Company changed its fiscal year end to December 31 to conform to
Tower’s fiscal year end. As a result of this change, all quarters will now end
on the last day of each calendar quarter. Previously, beginning January 1,
2007, the Company had adopted a 52 or 53-week fiscal year. Each of the first
three quarters of a fiscal year ended on the last Friday in each of March,
June and September and the fourth quarter of a fiscal year ended on
the Friday prior to December 31. As a result, each fiscal quarter consisted
of 13 weeks during a 52-week fiscal year. During a 53-week fiscal year, the
first three quarters consisted of 13 weeks and the fourth quarter consisted of
14 weeks.
Use
of Estimates
The preparation of financial
statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Among the
significant estimates affecting the financial statements are those relating to
sales return allowances, the allowance for doubtful accounts, inventories and
related reserves, valuation of acquired assets and liabilities, determination of
asset lives for depreciation and amortization, asset impairment assumptions,
income taxes, stock compensation, post-retirement medical plan and
pension plan. On an ongoing basis, management reviews its estimates based upon
currently available information. Actual results could differ materially from
those estimates.
Revenue
Recognition
The Company’s net revenues
are generated principally from sales of semiconductor wafers. The Company
derives the remaining balance of its net revenues from engineering services and
other support services. The majority of the Company’s sales occur through the
efforts of its direct sales force.
In accordance with ASC
605-10-S99 (SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
Recognition”), the Company recognizes revenues when the following fundamental
criteria are met: (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred or services have been rendered, (iii) the
price to the customer is fixed or determinable and (iv) collection of the
resulting receivable is reasonably assured. These criteria are usually met at
the time of product shipment. Revenues are recognized when the acceptance
criteria are satisfied, based on performing electronic, functional and quality
tests on the products prior to shipment. Such Company testing reliably
demonstrates that the products meet all of the specified criteria prior to
formal customer acceptance, hence, product performance can reasonably be
expected to conform to the specified acceptance provisions.
Revenues for engineering
services are recognized ratably over the contract term or as services are
performed. Revenues from contracts with multiple elements are recognized as each
element is earned based on the relative fair value of each element and when
there are no undelivered elements that are essential to the functionality of the
delivered elements and when the amount is not contingent upon delivery of the
undelivered elements. Advances received from customers towards future
engineering services, product purchases and in some cases capacity reservation
are deferred until products are shipped to the customer, services are rendered
or the capacity reservation period ends.
The Company provides for
sales returns and allowances relating to specified yield or quality commitments
as a reduction of revenues at the time of shipment based on historical
experience and specific identification of events necessitating an allowance.
Actual allowances given have been within management’s
expectations.
5
Impairment
of Assets
The Company periodically
reviews long-lived assets and intangible assets for impairment whenever events
or changes in circumstances indicate that the carrying amounts may not be
recoverable. If an asset is considered to be impaired, the impairment
loss is recognized immediately and is considered to be the amount by which the
carrying amount of the asset exceeds its fair value. The Company uses the income
approach methodology of valuation that includes undiscounted cash flows to
determine the recoverable amount of its long-lived assets and intangible assets.
Significant management judgment is required in the forecasts of future operating
results used for this methodology. These estimates are consistent with the plans
and forecasts the Company uses to conduct its business. The Company has not
recognized any impairment loss for any long-lived or intangible
asset.
Impairment
of Goodwill
Goodwill is subject to an
impairment test on at least an annual basis or upon the occurrence of certain
events or circumstances. Goodwill impairment is assessed based on a comparison
of the fair value of the Company to the underlying carrying value of the
Company’s net assets, including goodwill. When the carrying amount of the
Company exceeds its fair value, the implied fair value of the Company’s goodwill
is compared with its carrying amount to measure the amount of impairment loss,
if any.
The Company conducted an
impairment review as of September 30, 2009. The Company used the income approach
methodology of valuation that includes discounted cash flows to determine the
fair value of the Company. Significant management judgment is required in the
forecasts of future operating results used for this methodology. These estimates
are consistent with the plans and forecasts that the Company uses to conduct its
business. As a result of this analysis, the carrying amount of the Company’s net
assets, including goodwill were not considered to be impaired and the Company
did not recognize any impairment of goodwill for the period ended September 30,
2009. Prior to its acquisition by Tower, the Company had no
goodwill.
Accounting
for Income Taxes
The Company utilizes the
liability method of accounting for income taxes in accordance with ASC 740
(formerly Statement of Financial Accounting Standard (“SFAS”) No. 109,
“Accounting for Income Taxes” (“SFAS No. 109”)). Under the liability
method, deferred taxes are determined based on the temporary differences between
the financial statement and tax bases of assets and liabilities using enacted
tax rates.
Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The likelihood of a material change in the Company’s
expected realization of these assets depends on its ability to generate
sufficient future taxable income.
The future utilization of the
Company’s net operating loss carry forwards to offset future taxable income is
subject to an annual limitation as a result of ownership changes that have
occurred or that could occur in the future. The Company has had two “change in
ownership” events that limit the utilization of net operating loss carry
forwards. The second “change in ownership” event occurred on September 19, 2008,
the date of the Company’s merger with Tower. The Company concluded that the net
operating loss limitation for the change in ownership which occurred in
September 2008 will be an annual utilization of $1.0
million.
The Company accounts for its
uncertain tax positions in accordance with ASC 740 sections codified from
Financial Accounting Standards Board (“FASB”) Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes – an interpretation of FASB
Statement No. 109” (“FIN 48”). The Company recognizes interest and
penalties that would be assessed in relation to the settlement value of
unrecognized tax benefits as a component of income tax
expense.
Net
Loss Per Share
Net (loss) income per share
(basic) is calculated by dividing net (loss) income by the weighted average
number of common shares outstanding during the period. Net (loss)
income per share (diluted) is calculated by adjusting the number of shares of
common stock outstanding using the treasury stock method. Under the
treasury stock method, an increase in the fair market value of the Company’s
common stock results in a greater dilutive effect from outstanding warrants,
options, restricted stock awards and convertible securities (common stock
equivalents). Since the Company reported a net loss for the periods ended
September 18, 2008, all common stock equivalents would be anti-dilutive and the
basic and diluted weighted average shares outstanding are the same. On September
19, 2008, upon completion of the Merger, the Company’s common stock was delisted
from the American Stock Exchange.
6
Comprehensive
Loss
Nine months ended
September
30, 2009
|
Period
from September 19, 2008 through September 30, 2008
|
Period
from December 29, 2007 through September 18, 2008
|
||||||||||
Successor
|
Successor
|
Predecessor
|
||||||||||
(In
thousands)
|
||||||||||||
Net
loss
|
$ | (1,916 | ) | $ | (670 | ) | $ | (18,853 | ) | |||
Foreign
currency translation adjustment
|
(75 | ) | 48 | 7 | ||||||||
Comprehensive
loss
|
$ | (1,991 | ) | $ | (622 | ) | $ | (18,846 | ) |
Concentrations
Financial instruments that
potentially subject the Company to concentration of credit risk consist
principally of cash and cash equivalents and trade accounts receivable. The
Company performs ongoing credit evaluations of its customers and adjusts credit
limits based upon payment history, age of the balance and the customer’s current
credit worthiness, as determined by a review of the customer’s current credit
information. The Company monitors collections and payments from its customers
and maintains an allowance for doubtful accounts based upon historical
experience and any specific customer collection issues that have been
identified. A considerable amount of judgment is required in assessing the
ultimate realization of these receivables. Customer receivables are generally
unsecured.
Accounts receivable from
significant customers representing 10% or more of the net accounts receivable
balance as of September 30, 2009 and December 31, 2008 consists of the
following customers:
September
30, 2009
|
December 31,
2008
|
|||||||
Successor
|
Successor
|
|||||||
R F
Micro Devices
|
47 | % | 42 | % | ||||
Skyworks
|
14 | % | 10 | % |
Net revenues from significant
customers representing 10% or more of net revenues are provided by customers as
follows:
Three
months ended September 30, 2009
|
Period
from September 19, 2008 through September 30, 2008
|
Period
from June 29, 2008 through September 18, 2008
|
||||||||||
Successor
|
Successor
|
Predecessor
|
||||||||||
R F
Micro Devices
|
36 | % | 33 | % | 15 | % | ||||||
Skyworks
|
12 | % | 12 | % | 15 | % | ||||||
Marvell
|
* | * | 10 | % |
Nine months
ended September 30, 2009
|
Period
from September 19, 2008 through September 30, 2008
|
Period
from December 29, 2007 through September 18, 2008
|
||||||||||
Successor
|
Successor
|
Predecessor
|
||||||||||
R F
Micro Devices
|
27 | % | 33 | % | 16 | % | ||||||
Skyworks
|
14 | % | 12 | % | 14 | % | ||||||
Conexant
|
* | * | 11 | % |
* Indicates less than
10%.
As a result of the Company’s
concentration of its customer base, loss or cancellation of business from, or
significant changes in scheduled deliveries of product sold to these customers
or a change in their financial position could materially and adversely affect
the Company’s consolidated financial position, results of operations and cash
flows.
7
The Company operates a single
manufacturing facility located in Newport Beach, California. A major
interruption in the manufacturing operations at this facility would have a
material adverse affect on the consolidated financial position and results of
operations of the Company.
Initial
Adoption of New Standards
In June 2008, the FASB
Emerging Issues Task Force reached a consensus on EITF Issue No. 07-5,
“Determining Whether an Instrument (or an Embedded Feature) is Indexed to an
Entity's Own Stock” (“ASC 815-40”) which mandates a
two-step process for evaluating whether an equity-linked financial instrument or
embedded feature is indexed to the entity's own stock. The consensus is an
amendment to ASC 815-40 Contract in Entity's Own Equity. It is effective for
fiscal years beginning after December 15, 2008 and interim periods within those
fiscal years. The adoption of ASC 815-40 did not have a significant
impact on the consolidated results of operations or financial position of the
Company.
Effective January 1,
2009, the Company applies the amendment to ASC 470-20 (FSP No. APB 14-1),
“Accounting for Convertible Debt Instruments that may be Settled in Cash upon
Conversion (Including Partial Cash Settlement)”. The provision of the amendment
applies to any convertible debt instrument that may be wholly or partially
settled in cash and requires the separation of the debt and equity components of
cash-settleable convertibles at the date of issuance. The amendment
is effective for the 8% convertible debt issued by the Company, due in 2011,
which were originally recorded at face value of $166.8 million in December 2006
and requires retrospective application for all periods presented. The
Company calculated a theoretical non-cash interest expense based on a
similar debt instrument carrying a fixed interest rate but excluding the equity
conversion feature and measured at fair value at the time the notes were issued.
As a result, the debt component determined for these notes was $151.4 million
with discount of $15.4 million and the equity component, recorded as additional
paid-in capital, was $14.8 million, which represents the difference between the
net proceeds from the issuance of the notes and the fair value of the liability,
net of related issuance costs. A fixed interest rate was then
applied to the debt component of the notes in the form of an original issuance
discount and amortized over the life of the notes as a non-cash interest charge.
The Merger on September 19, 2008 required the Company, as part of the purchase
price allocation, to fair value the convertible debt instrument. As a
result, a new basis was determined to the convertibles of $108.6 million and
debt discount of $19.6 million. Upon adoption of the amendment, the
Company evaluated the effects of the amendment as of the Merger date and
determined that it is inapplicable, as the convertibles are only convertible to
the shares of Tower, the Parent. As such, there will be no impact of
the amendment in the Successor's period for the adoption of this amendment;
however this resulted in a non-cash increase of our historical interest expense
of $1.8 million and $5.9 million for 2008 and 2007 respectively. Our
consolidated statement of operations for the periods ended September 18, 2008
was retroactively modified compared to previously reported amounts as follows
(in thousands, except per share amounts):
Period
from June 29, 2008 through September 18, 2008
|
Period
from December 29, 2007 through September 18,
2008
|
|||||||
Predecessor
|
Predecessor
|
|||||||
Financing
and other expense
|
$ | 401 | $ | 1,812 | ||||
Change
to basic and diluted earnings per share
|
$ | (0.02 | ) | $ | (0.10 | ) |
Effective January 1,
2009, the Company adopted the disclosure requirements in the amendment to ASC
815 (added by
SFAS No. 161), “Disclosures about Derivative
Instruments and Hedging Activities", which expands disclosures but does
not change accounting for derivative instruments and hedging activities.
The adoption of
the amendment did not have any impact on the consolidated results of operations
or financial position of the Company.
In April 2009, the FASB
amended the disclosure requirements in section 825-10-50 and 270-10-50 of the
ASC through the issuance of FASB staff position ASC 825-10 (FSP FAS 107-1 and
APB 28-1), “Interim Disclosures about Fair Value of Financial Instruments”. This
amendment applies to all financial instruments within the scope of ASC 825 held
by publicly traded companies, as defined by ASC 270-20 (Interim Reporting) and
are effective for interim reporting periods ending after June 15, 2009 with
early adoption permitted for periods ending after March 15, 2009. ASC
825-10 (Financial Instruments) requires fair value disclosures for any financial
instruments that are not currently reflected on the balance sheet of companies
at fair value. Prior to issuing of this amendment, fair values for these assets
and liabilities were only disclosed once a year. The amendment now requires
these disclosures on a quarterly basis, providing qualitative and quantitative
information about fair value estimates for all those financial instruments not
measured on the balance sheet at fair value, see Note 11.
8
In April 2009, the FASB
issued an amendment to ASC 320-10-65 (Investments – Debt and Equity Securities)
through the issuance of FASB staff position 115-2 and 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments” (“OTTI”) for investment in
debt securities. This amendment applies to all entities and is effective for
interim and annual reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. Under the amendment,
the primary change to the OTTI model for debt securities is the change in focus
from an entity’s intent and ability to hold a security until recovery. Instead,
an OTTI is triggered if (1) an entity has the intent to sell the security, (2)
it is more likely than not that it will be required to sell the security before
recovery, or (3) it does not expect to recover the entire amortized cost basis
of the security. In addition, the amendment changes the presentation of an OTTI
in the income statement if the only reason for recognition is a credit loss
(i.e., the entity does not expect to recover its entire amortized cost basis).
That is, if the entity has the intent to sell the security or it is more likely
than not that it will be required to sell the security, the entire impairment
(amortized cost basis over fair value) will be recognized in earnings.However,
if the entity does not intend to sell the security and it is not more likely
than not that the entity will be required to sell the security, but the security
has suffered a credit loss, then the impairment charge will be separated into
the credit loss component, which is recorded in earnings, and the remainder of
the impairment charge, which is recorded in other comprehensive income. The
adoption of ASC 320-10-65 did not have any impact on the consolidated results of
operations or financial position of the Company.
In April 2009, the FASB
issued an amendment to ASC 820 through the issuance of FASB staff position
157-4, “Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
that are Not Orderly”. This amendment applies to all assets and liabilities
within the scope of accounting pronouncements that require or permit fair value
measurements, except as discussed in ASC 820-10-15-2. The amendment is effective
for interim and annual reporting periods ending after June 15, 2009, and shall
be applied prospectively. ASC 820-10-65 relates to determining fair values when
there is no active market or where the price inputs being used represent
distressed sales. It reaffirms the objective of fair value measurement, as
stated in ASC 820, to reflect how much an asset would be sold for in an orderly
transaction (as opposed to a distressed or forced transaction) at the date of
the financial statements under current market conditions. Specifically, it
reaffirms the need to use judgment to ascertain if a formerly active market has
become inactive and in determining fair values when markets have become
inactive. The amendment provides
guidance on (1) estimating the fair value of an asset or liability (financial
and nonfinancial) when the volume and level of activity for the asset or
liability have significantly decreased and (2) identifying transactions that are
not orderly. The adoption of this
standard did not have any impact on the consolidated results of operations or
financial position of the Company.
In May 2009, the FASB issued
ASC 855 (SFAS No. 165), “Subsequent
Events”. ASC 855 establishes general standards of accounting for, and disclosure
of, events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. In particular,
this statement sets forth: (1) the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements, (2) the circumstances under which an entity should recognize events
or transactions occurring after the balance sheet date in its financial
statements and (3) the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. ASC 855 is
effective for the interim or annual financial periods ending after June 15,
2009. The adoption of this standard did not have any impact on the
consolidated results of operations or financial position of the
Company.
Recently
Issued Accounting Standards
In June 2009, the FASB issued
SFAS No.166 “Accounting for Transfers of Financial Assets” (not yet codified).
This SFAS is a revision to ASC 860 Transfer and Servicing (formerly Statement
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities"), and will require more information about
transfers of financial assets, including securitization transactions, and
continued exposure to the risks related to transferred financial assets. It
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional
disclosures. SFAS No. 166 enhances information reported to users of financial
statements by providing greater transparency about transfers of financial assets
and a company’s continuing involvement in transferred financial assets. SFAS No.
166 will be effective at the start of a company’s first fiscal year beginning
after November 15, 2009. The adoption of this standard is not expected to have a
material impact on the Company’s consolidated financial
statements.
9
In June 2009, the FASB issued
SFAS No. 167 “Amendments to ASC 810 Consolidation (formerly FASB Interpretation
No. 46(R))” (not yet codified) (“SAFS No. 167”), which changes the way entities
account for securitizations and special-purpose entities. SAFS No. 167 is a
revision to ASC 810, and changes how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a company is
required to consolidate an entity is based on, among other things, an entity’s
purpose and design and a company’s ability to direct the activities of the
entity that most significantly impact the entity’s economic performance. This
SFAS will require a company to provide additional disclosures about its
involvement with variable interest entities and any significant changes in risk
exposure due to that involvement. A company will be required to disclose how its
involvement with a variable interest entity affects the company’s financial
statements. SFAS No. 167 will be effective at the start of a company’s first
fiscal year beginning after November 15, 2009. The adoption of this standard is
not expected to have a material impact on the Company’s consolidated financial
statements.
In June 2009, the FASB issued
ASC 105 (SFAS No.168), “The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles”. ASC 105 establishes the
“FASB Accounting Standards Codification” (“Codification”), and was officially
launched on July 1, 2009, for the purpose of serving as the source of
authoritative U.S. generally accepted accounting principles (“GAAP”) recognized
by the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the Securities and Exchange Commission (“SEC”) under authority of
federal securities laws are also sources of authoritative U.S. GAAP for SEC
registrants. The subsequent issuances of new standards will be in the form of
Accounting Standards Updates that will be included in the Codification. In
general, the Codification is not expected to change U.S. GAAP. All other
accounting literature excluded from the Codification will be considered
non-authoritative. ASC 105 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009. Effective September
30, 2009, all references made to GAAP in our consolidated financial statements
include the new Codification numbering system along with original
references.
In October 2009, the FASB
issued the “Accounting Standards Update (“ASU”) 2009-13 Multiple Deliverable
Revenue Arrangements a consensus of EITF” (formerly topic 08-1) an amendment to
ASC 605-25. The update provides amendments to the criteria in Subtopic 605-25
for separating consideration in multiple-deliverable arrangements. The
amendments in this update establish a selling price hierarchy for determining
the selling price of a deliverable. The selling price used for each deliverable
will be based on vendor-specific objective evidence if available, third-party
evidence if vendor-specific objective evidence is not available, or estimated
selling price if neither vendor-specific objective evidence nor third-party
evidence is available. The amendments in this update also will replace the term
“fair value” in the revenue allocation guidance with the term “selling price” in
order to clarify that the allocation of revenue is based on entity-specific
assumptions rather than assumptions of a marketplace participant. The amendments
will also eliminate the residual method of allocation and require that
arrangement consideration be allocated at the inception of the arrangement to
all deliverables using the relative selling price method. The relative selling
price method allocates any discount in the arrangement proportionally to each
deliverable on the basis of each deliverable's selling price. The update will be
effective for revenue arrangements entered into or modified in fiscal year
beginning on or after June 15, 2010 with earlier adoption permitted. The
adoption of this standard is not expected to have material impact on the
Company’s consolidated financial statements.
3.
|
MERGER
WITH TOWER
|
On September 19, 2008,
Tower acquired all of Jazz’s outstanding capital in a stock-for-stock
transaction.
For accounting
purposes, the purchase price for the Company’s acquisition was $50.1 million and
reconciles to all consideration and payments made to date as follows (in
thousands):
Stock
consideration
|
$ | 39,189 | ||
Other
equity consideration
|
7,555 | |||
Total
Merger consideration
|
46,744 | |||
Transaction
costs
|
3,326 | |||
Total
purchase price
|
$ | 50,070 |
Pursuant to the Merger with
Tower, each outstanding share of Jazz’s common stock was converted into the
right to receive 1.8 ordinary shares of Tower, at an aggregate fair value of
approximately $39.2 million. The fair value of the shares was determined based
on Tower’s ordinary share price on NASDAQ prevailing around May 19, 2008, the
date of signing the definitive agreements of the Merger and announcing it, in
accordance with provisions set forth in EITF 99-12 “Determination of the
Measurement Date for the Market Price of Acquirer Securities Issued in a
Purchase Business Combination” (“EITF 99-12”).
10
Pursuant to the Merger with
Tower, the Company’s outstanding stock options immediately prior to the
effective date of the Merger, whether vested or unvested, were converted to
options to purchase Tower’s ordinary shares on the same terms and conditions as
were applicable to such options under the Predecessor’s plan, with adjusted
exercise prices and numbers of shares to reflect the exchange ratio of the
common stock. This conversion was accounted for as a modification in accordance
with provisions in ASC 718 with the fair value of the outstanding options of
$1.3 million being included as part of the purchase price.
Pursuant to the Merger with
Tower, all outstanding warrants to purchase the shares of the Company’s common
stock that were outstanding immediately prior to the effective date of the
Merger, became exercisable for Tower ordinary shares with adjusted exercise
prices and number of shares to reflect the exchange ratio of the common stock.
The fair value of the outstanding warrants of $6.3 million was included as part
of the purchase price.
Tower’s transaction costs of
$3.3 million primarily consist of fees for financial advisors, attorneys,
accountants and other advisors incurred in connection with the
Merger.
The Company
also incurred approximately $4.1 million in similar Merger costs which are
included as part of operating expenses in the Predecessor’s statement of
operations for the period from December 29, 2007 through September 18,
2008.
Purchase
Price Allocation
The purchase price of $50.1
million, including the transaction costs of approximately $3.3 million, has been
allocated to tangible and intangible assets and liabilities, based on their fair
market values as of September 19, 2008, as follows (in
thousands):
September
19, 2008
|
||||||||
Fair
value of the net tangible assets and liabilities:
|
||||||||
Cash
and cash equivalents
|
$ | 3,486 | ||||||
Receivables
|
16,549 | |||||||
Inventories
|
12,907 | |||||||
Deferred
tax asset
|
6,157 | |||||||
Prepaid
expenses and other current assets
|
2,936 | |||||||
Property,
plant and equipment
|
95,244 | |||||||
Investments
|
17,100 | |||||||
Other
assets
|
66 | |||||||
Short-term
borrowings
|
(7,000 | ) | ||||||
Accounts
payable
|
(11,878 | ) | ||||||
Accrued
compensation and benefits
|
(9,337 | ) | ||||||
Deferred
tax liability
|
(14,883 | ) | ||||||
Deferred
revenues
|
(3,135 | ) | ||||||
Other
current liabilities
|
(8,285 | ) | ||||||
Convertible
notes
|
(108,600 | ) | ||||||
Accrued
pension, retirement medical plan obligations and other long-term
liabilities
|
(7,757 | ) | ||||||
Total
net tangible assets and liabilities
|
$ | (16,430 | ) | |||||
Fair
value of identifiable intangible assets acquired:
|
||||||||
Existing
technology
|
1,300 | |||||||
Patents
and other core technology rights
|
15,100 | |||||||
In-process
research and development
|
1,800 | |||||||
Customer
relationships
|
2,600 | |||||||
Trade
name
|
5,200 | |||||||
Facilities
lease
|
33,500 | |||||||
Goodwill
|
7,000 | |||||||
Total
identifiable intangible assets acquired
|
66,500 | |||||||
Total
purchase price
|
$ | 50,070 |
11
The fair values set forth
above are based on a valuation of the Company’s assets and liabilities performed
by the Company in accordance with SFAS No. 141, “Business Combinations”
(“SFAS No. 141”) and reflect “push-down” accounting in accordance with ASC
805-50-S99 (SEC Staff Accounting Bulletin No. 54), with respect to Tower’s
merger with the Company. The Company concluded that, the net operating loss
limitation for the change in ownership which occurred in September 2008 will be
an annual utilization of $1.0 million.
Pro Forma Results of Operations
The following unaudited
information for the nine months ended September 30, 2009 and 2008 assumes the
merger of the Company with Tower occurred on January 1,
2008:
Results of
Operations (in thousands)
Nine Months Ended
|
||||||||
September
30, 2009
|
September
30, 2008
|
|||||||
(Actual,
unaudited)
|
(Pro
Forma, unaudited)
|
|||||||
Net
revenues
|
$ | 105,032 | $ | 141,018 | ||||
Net
income (loss)
|
$ | (1,916 | ) | $ | (2,933 | ) |
The Company derived the pro
forma results from the unaudited condensed consolidated financial statements of
the Predecessor for the period from January 1, 2008 to September 18, 2008 and
the Successor for the period from January 1, 2009 to September 30, 2009. As of
September 30, 2008, the pro forma EPS is not presented since the pro forma
assumes the Merger occurred on January 1, 2008 and therefore no EPS exists for
such date.
The pro forma results
are not necessarily indicative of the results that may have actually occurred
had the merger taken place on the date noted, or the future financial position
or operating results of the Company. The pro forma adjustments are based upon
available information and assumptions that the Company believes are reasonable.
The pro forma adjustments include adjustments for reduced depreciation and
amortization expense as a result of the application of the purchase method of
accounting.
4. OTHER
BALANCE SHEET DETAILS
Inventories
Inventories, net of reserves,
consist of the following at September 30, 2009 and December 31, 2008 (in
thousands):
September
30, 2009
|
December 31, 2008
|
|||||||
Successor
|
Successor
|
|||||||
Raw
material
|
$ | 1,660 | $ | 1,741 | ||||
Work
in process
|
8,361 | 6,693 | ||||||
Finished
goods
|
958 | 4,017 | ||||||
$ | 10,979 | $ | 12,451 |
Change in Method of
Accounting for Inventory Valuation
Following the Merger date,
the Company and Tower have been working to align their reporting and information
systems. During 2009, the process was concluded and the Company elected to
change its method of valuing its inventories, mainly to include depreciation and
amortization as part of the cost of inventory. In addition, indirect raw
material that had been previously immediately charged to earnings, is now being
capitalized and presented as part of raw material inventory until it is
consumed. The new method of accounting for inventory was adopted to
align the valuation of the inventory with those methods of Tower. Comparative
financial statements attributed to the Successor have been adjusted to apply the
new method retrospectively. The financial statements for periods
presented for the Predecessor were not retroactively adjusted as the push-down
accounting effectively creates a new reporting entity. The following financial
statement line items for fiscal year 2008, were affected by the change in
accounting principle (in thousands).
12
As of December
31, 2008
As
originally reported
|
As
adjusted
|
Effect
of change
|
||||||||||
Inventories
|
$ | 10,281 | $ | 12,451 | $ | 2,170 | ||||||
Stockholder’s
equity
|
$ | 46,658 | $ | 48,828 | $ | 2,170 |
Property,
Plant and Equipment
Property,
plant and equipment consist of the following at September 30, 2009 and
December 31, 2008 (in thousands):
Useful life
(In years)
|
September
30, 2009
|
December
31, 2008
|
||||||||||
Successor
|
Successor
|
|||||||||||
Building
improvements
|
10-12 | $ | 24,230 | $ | 24,230 | |||||||
Machinery
and equipment
|
7 | 87,146 | 70,540 | |||||||||
Furniture
and equipment
|
5-7 | 2,203 | 1,785 | |||||||||
Computer
software
|
3 | 850 | 763 | |||||||||
114,429 | 97,318 | |||||||||||
Accumulated
depreciation
|
(18,408 | ) | (3,390 | ) | ||||||||
|
$ | 96,021 | $ | 93,928 |
Investment
In connection with the
acquisition of Jazz Semiconductor in February 2007, the Company acquired an
investment in Shanghai Hua Hong NEC Electronics Company, Ltd. (“HHNEC”). As of
September 30, 2009, the investment represented a minority interest of
approximately 10% in HHNEC. Since the Merger with Tower, the
investment in HHNEC is carried at cost determined to be the fair value of the
investment at the Merger date.
Intangible
Assets
Intangible
assets consist of the following at September 30, 2009 (in
thousands):
Weighted
Average Life (years)
|
Cost
|
Accumulated
Amortization
|
Net
|
|||||||||||||
Technology
|
4;9 | $ | 2,300 | $ | 149 | $ | 2,151 | |||||||||
Patents
and other core technology rights
|
9 | 15,100 | 1,738 | 13,362 | ||||||||||||
In-process
research and development
|
-- | 1,800 | 1,800 | -- | ||||||||||||
Customer
relationships
|
15 | 2,600 | 179 | 2,421 | ||||||||||||
Trade
name
|
9 | 5,200 | 599 | 4,601 | ||||||||||||
Facilities
lease
|
19 | 33,500 | 1,875 | 31,625 | ||||||||||||
Total
identifiable intangible assets
|
14 | $ | 60,500 | $ | 6,340 | $ | 54,160 |
Intangible
assets consist of the following at December 31, 2008 (in
thousands):
Weighted
Average Life (years)
|
Cost
|
Accumulated
Amortization
|
Net
|
|||||||||||||
Technology
|
9 | $ | 1,300 | $ | 41 | $ | 1,259 | |||||||||
Patents
and other core technology rights
|
9 | 15,100 | 475 | 14,625 | ||||||||||||
In-process
research and development
|
-- | 1,800 | 1,800 | -- | ||||||||||||
Customer
relationships
|
15 | 2,600 | 49 | 2,551 | ||||||||||||
Trade
name
|
9 | 5,200 | 163 | 5,037 | ||||||||||||
Facilities
lease
|
19 | 33,500 | 512 | 32,988 | ||||||||||||
Total
identifiable intangible assets
|
14 | $ | 59,500 | $ | 3,040 | $ | 56,460 |
13
The
Company expects future amortization expense to be as follows (in
thousands):
Charge to
cost of revenues
|
Charge to
operating expenses
|
Total
|
||||||||||
Fiscal
year ends:
|
||||||||||||
Remainder
of 2009
|
$ | 970 | $ | 198 | $ | 1,168 | ||||||
2010
|
3,847 | 787 | 4,634 | |||||||||
2011
|
3,847 | 787 | 4,634 | |||||||||
2012
|
3,847 | 787 | 4,634 | |||||||||
2013
|
3,784 | 787 | 4,571 | |||||||||
Thereafter
|
30,211 | 4,308 | 34,519 | |||||||||
Total
expected future amortization expense
|
$ | 46,506 | $ | 7,654 | $ | 54,160 |
The amortization related to
technology, patents, other core technologies, and facilities lease is charged to
cost of revenues. The amortization related to customer relationships and trade
name is charged to operating expenses.
5. CREDIT
FACILITY
On September 19, 2008,
the Company entered into a second amended and restated loan and security
agreement, as parent guarantor, with Wachovia Capital Markets, LLC, as lead
arranger, bookrunner and syndication agent, and Wachovia Capital Finance
Corporation (Western), as administrative agent (“Wachovia”), and Jazz
Semiconductor and Newport Fab, LLC, as borrowers, with respect to a three-year
secured asset-based revolving credit facility for the total amount of up to $55
million, including up to $10 million for letters of credit. On December 31,
2008, Wells Fargo acquired all of Wachovia Corporation and its businesses and
obligations.
The borrowing availability
varies according to the levels of the borrowers’ eligible accounts receivable,
eligible equipment and other terms and conditions described in the loan
agreement. The maturity date of the facility is September 19, 2011, unless
earlier terminated. Loans under the facility bear interest at a rate equal to,
at borrowers’ option, either the lender’s prime rate plus a margin ranging from
0.25% to 0.75% or the LIBOR rate (as defined in the loan agreement) plus a
margin ranging from 2% to 2.5% per annum. The facility is secured by all of the
Company’s assets and the assets of the borrowers.
The loan agreement contains
customary covenants and other terms, including covenants based on the Company’s
EBITDA (as defined in the loan agreement), as well as customary events of
default. If any event of default occurs, Wachovia may declare due immediately,
all borrowings under the facility and foreclose on the collateral. Furthermore,
an event of default under the loan agreement would result in an increase in the
interest rate on any amounts outstanding.
Borrowing availability under
the facility as of September 30, 2009, was $1.1 million. Outstanding borrowings
were $24.4 million and $1.8 million of the facility supporting outstanding
letters of credits on that date. The Company considers borrowings of $20.0
million to be long-term debt as of September 30, 2009. As of September 30, 2009,
the Company was in compliance with all the covenants under this
facility.
6.
|
CONVERTIBLE
NOTES
|
Pursuant to the Merger with
Tower, each holder of the Convertible Notes immediately prior to the Merger, has
the right to convert such holder’s note into Tower ordinary shares based on an
implied conversion price of approximately $4.07 per Tower ordinary share. The
Company’s obligations under the Convertible Notes are not being guaranteed by
Tower.
In addition, according to the
terms of the notes, the Company has the right to deliver, in lieu of shares,
cash or a combination of cash and shares of Tower to satisfy the conversion
obligation. The amount of such cash and Tower ordinary shares, if any, will be
based on the trading price of Tower’s ordinary shares during the 20 consecutive
trading days beginning on the third trading day after proper delivery of a
conversion notice.
14
In connection with the Merger
of the Company with Tower, the Convertible Notes, with a face value of $128.2
million, were recorded at the fair value of $108.6 million on the date of the
merger with Tower. The Company has accreted $3.8 million in interest for the
nine months ended September 30, 2009.
As of September 30,
2009, $123.3 million in principal amount of Convertible Notes remains
outstanding.
The Company’s obligations
under the Convertible Notes are guaranteed by the Company’s wholly owned
domestic subsidiaries. The Company has not provided condensed consolidating
financial information for such subsidiaries because the Company has no
independent assets or operations, the subsidiary guarantees are full and
unconditional and joint and several and any subsidiaries of the Company other
than the subsidiary guarantors are minor. Other than the restrictions in the
Wachovia Loan Agreement, there are no significant restrictions on the ability of
the Company and its subsidiaries to obtain funds from their subsidiaries by loan
or dividend.
Upon the occurrence of
certain specified fundamental changes, the holders of the Convertible Notes will
have the right, subject to various conditions and restrictions, to require the
Company to repurchase the Convertible Notes, in whole or in part, at par plus
accrued and unpaid interest to, but not including, the repurchase date. In
addition, if the Company undergoes certain fundamental changes prior to December
31, 2009, the Company may be obligated to pay a make whole premium on
Convertible Notes converted in connection with such fundamental change by
providing additional shares of Tower upon conversion of the Convertible
Notes.
7.
|
INCOME
TAXES
|
The Company’s effective tax
rate for the nine months ended September 30, 2009 differs from the statutory
rate primarily due to the establishment of a valuation allowance against state
deferred tax assets and state tax planning which resulted in a benefit of $3
million. The Company establishes a valuation allowance for state deferred
tax assets, when it is unable to conclude that it is more likely than not that
such deferred tax assets will be realized. In making this determination the
Company evaluates both positive and negative evidence as well as potential tax
planning strategies. The annual state losses are projected to exceed the
reversal of taxable temporary differences. Without other significant
positive evidence, the Company has determined that the state deferred tax assets
are not more likely than not to be realized.
The future utilization of the
Company's net operating loss carry forwards to offset future taxable income is
subject to an annual limitation as a result of ownership changes that have
occurred or that could occur in the future. The Company has had two “change in
ownership” events that limit the utilization of net operating loss carry
forwards. The first “change in ownership” event occurred in February 2007 upon
our acquisition of Jazz Semiconductor. The second “change in ownership” event
occurred on September 19, 2008, the date of the Company’s merger with Tower. The
Company concluded that the net operating loss limitation for the change in
ownership which occurred in September 2008 will be an annual utilization of $1.0
million.
The Company accounts for its
uncertain tax provisions in accordance with ASC 740. The Company’s policy is to
recognize interest and penalties that would be assessed in relation to the
settlement value of unrecognized tax benefits as a component of income tax
expense. At September 30, 2009, the Company had unrecognized tax benefits of
$1.9 million. The unrecognized tax benefits were unchanged during the nine
months ended September 30, 2009. At September 30, 2009, it is reasonably likely
that $1.1 million of the unrecognized tax benefits will reverse during the next
twelve months. The reversal of uncertain tax benefits is related to net
operating losses that will be abandoned when the Company liquidates its Chinese
subsidiary in 2009.
The Company and its
subsidiaries are subject to U.S. federal income tax as well as income tax in
multiple state and foreign jurisdictions. With few exceptions, the Company is no
longer subject to U.S. federal income tax examinations for years before 2006;
state and local income tax examinations before 2004; and foreign income tax
examinations before 2005. However, to the extent allowed by law, the tax
authorities may have the right to examine prior periods where net operating
losses were generated and carried forward, and make adjustments up to the amount
of the net operating loss carryforward amount. The Company is not currently
under Internal Revenue Service (“IRS”), state or local tax examination. In
connection with the pending liquidation of the Company’s Chinese subsidiary, the
Chinese tax authorities are conducting a review of the historic income tax
filings. The tax authorities have not proposed any adjustments to the historic
income tax filings as of September 30, 2009.
8.
EMPLOYEE
BENEFIT PLANS
The pension and other post
retirement benefit plans expenses for the three and nine months ended September
30, 2009 were $0.4 million and $1.0 million, respectively. The amounts for the
pension and other post retirement benefit plans gain for the three months ended
September 30, 2008 were $1.0 million and the amounts for the pension and other
post retirement benefit plans expense for the nine months ended September 30,
2008 were $0.2 million.
15
9.
STOCKHOLDER’S
EQUITY
Common
Stock
Pursuant to the Merger with
Tower, each share of the Company’s common stock not held by Tower, Merger Sub or
the Company was automatically converted into and represents the right to receive
1.8 ordinary shares of Tower. Cash was paid in lieu of fractional shares. In
connection with the Merger with Tower, the Company amended its Certificate of
Incorporation to decrease the authorized shares of the Company’s common stock
from 200,000,000 shares to 100 shares.
The number of outstanding
shares of Jazz’s common stock at September 30, 2009 was 100, all of which are
owned by Tower.
Warrants
Pursuant to the Merger with
Tower, all outstanding warrants to purchase the shares of the Company’s common
stock that were outstanding immediately prior to the effective date of the
Merger were assumed by Tower and became exercisable for Tower ordinary shares.
Each such warrant formerly exercisable to purchase one share of the Company’s
common stock became exercisable to purchase 1.8 Tower ordinary shares
at an exercise price of $2.78 per Tower ordinary share, which is equal to the
exercise price of $5.00 immediately prior to the effective date of the Merger
divided by the exchange ratio of 1.8. Fractional ordinary shares of Tower were
rounded up to the nearest whole number.
Tower may redeem the
warrants: (i) in whole and not in part; (ii) at a price of $0.01 per
warrant; (iii) upon a minimum of 30 days prior written notice of
redemption; and if and only if, the last sales price of Tower’s ordinary
shares equals or exceeds $4.72 per share for any 20 trading days
within a 30 trading day period ending three business days before Tower
sends the notice of redemption. Originally this threshold sales price
was $8.50 per share of the Company’s common stock; $4.72 is equal to the
original threshold for the sales price of the Company’s common stock divided by
the exchange ratio of 1.8.
The number of outstanding
warrants to purchase Tower's ordinary shares at September 30, 2009 was 59.5
million.
Stock
Options
Pursuant to the Merger with
Tower, options to purchase shares of the Company’s common stock that were
outstanding immediately prior to the effective date of the Merger, whether
vested or unvested, became exercisable or will become exercisable for Tower
ordinary shares. The Company recorded $17,769 and $67,448 of compensation
expenses for the three and nine months ended September 30, 2009 for
modifications of these existing options pursuant to the
Merger.
During the nine months ended
September 30, 2009, Tower awarded 2,690,000 non-qualified stock options to
Company employees that vest over a four year period from the date of grant. The
weighted average exercise price was $0.29. The Company recorded $80,053 and
$124,794 of compensation expenses relating to options granted to employees, for
the three and nine months ended September 30, 2009. The Company recorded $0.2
million and $0.6 million of compensation expenses relating to employees options,
during the corresponding periods in 2008.
10. RELATED
PARTY TRANSACTIONS
As of
September
30,
2009
|
As of
December
31,
2008
|
|||||||
Due
from related party (included in the accompanying balance
sheets)
|
$ | 36 | $ | 54 | ||||
Due
to related party (included in the accompanying balance
sheets)
|
$ | 7,261 | $ | 1,241 |
Related party balances are
with Tower and are mainly for purchases and payments on behalf of the other
party, tools sale and service charges.
11.
FAIR
VALUE MEASUREMENTS
The Company holds an
investment in HHNEC, a non-public entity. This investment represents a minority
interest of approximately 10% recorded at fair value of $17.1 million under the
Guideline Company Method on September 19, 2008, the date of the Company’s merger
with Tower.
16
The Convertible Notes’ fair
value of $98.5 million determined by taking in consideration (i) the market
approach, using the last quotations of the notes and (ii) the income approach
utilizing the present value method at discount rate with credit worthiness
appropriate for the Company.
The estimated fair values of
the Company’s financial instruments, excluding the Company’s long-term
Convertible Notes do not materially differ from their respective carrying
amounts as of September 30, 2009 and December 31, 2008.
12.
LITIGATION
During 2008, an International
Trade Commission (“ITC”) action was filed by Agere/LSI Corporation (“LSI”),
which alleged infringement by 17 corporations of LSI’s patent no. 5227335.
Following the initial filing, LSI amended the ITC complaint to add the Company,
Tower and three other corporations as additional respondents. The Company, Tower
and the other three corporations were added as additional respondents in the ITC
action in October 2008. The case was tried before an administrative law judge
(“Judge”) in July 2009. In September, 2009, the Judge ruled against LSI and in
favor of the respondents, determining that the patent claims asserted by LSI are
invalid. LSI has filed a Petition for Review, seeking a reversal of the
Judge's decision.
The following discussion and
analysis should be read in conjunction with the financial statements and related
notes contained elsewhere in this report. See our Annual Report on
Form 10-K and subsequent quarterly reports filed with the Securities and
Exchange Commission for information regarding certain risk factors known to us
that could cause reported financial information not to be necessarily indicative
of future results.
FORWARD
LOOKING STATEMENTS
This report on Form 10-Q
may contain “forward-looking statements” within the meaning of the federal
securities laws made pursuant to the safe harbor provisions of the Private
Securities Litigation Report Act of 1995. These statements, which represent our
expectations or beliefs concerning various future events, may contain words such
as “may,” “will,” “expects,” “anticipates,” “intends,” “plans,” “believes,”
“estimates,” or other words indicating future results. Such statements may
include but are not limited to statements concerning the
following:
|
·
|
anticipated
trends in revenues;
|
|
·
|
growth
opportunities in domestic and international
markets;
|
|
·
|
new
and enhanced channels of
distribution;
|
|
·
|
customer
acceptance and satisfaction with our
products;
|
|
·
|
expected
trends in operating and other
expenses;
|
|
·
|
purchase
of raw materials at levels to meet forecasted
demand;
|
|
·
|
anticipated
cash and intentions regarding usage of
cash;
|
|
·
|
changes
in effective tax rates; and
|
|
·
|
anticipated
product enhancements or releases.
|
These forward-looking
statements are subject to risks and uncertainties, including those risks and
uncertainties described in our Annual Report on Form 10-K and subsequent
quarterly reports filed with the Securities and Exchange Commission, that could
cause actual results to differ materially from those anticipated as of the date
of this report. We assume no obligation to update any forward-looking statements
to reflect events or circumstances arising after the date of this
report.
17
RESULTS
OF OPERATIONS
For the
three months ended September 30, 2009, we had a net profit of $7.8 million
compared to a net loss of $8.8 million for the period from June 28, 2008 through
September 18, 2008 and a net loss of $0.7 million for the period from September
19, 2008 through September 30, 2008.
For the nine months ended
September 30, 2009, we had a net loss of $1.9 million compared to a net loss of
$18.9 million for the period from December 29, 2007 through September 18, 2008
and a net loss of $0.7 million for the period from September 19, 2008 through
September 30, 2008.
Pro
Forma Financial Information
We were merged with Tower on
September 19, 2008, and accordingly, we do not believe a comparison of the
results of operations for the nine months ended September 30, 2009 versus the
nine months ended September 30, 2008 is very meaningful. In order to assist
users in better understanding the changes in our business between the nine
months ended September 30, 2009 and the nine months ended September 30, 2008, we
are presenting in the discussion below pro forma results for the nine months
ended September 30, 2008, as if our Merger with Tower occurred on
January 1, 2008. We derived the pro forma results from our unaudited
condensed consolidated financial statements for the nine months ended September
30, 2008.
The pro forma results are not
necessarily indicative of the results that may have actually occurred had the
Merger taken place on the dates noted, or the future financial position or
operating results of us or Jazz Semiconductor. The pro forma adjustments are
based upon available information and assumptions that we believe are reasonable.
The pro forma adjustments include adjustments for reduced depreciation and
amortization expense as a result of the application of the purchase method of
accounting.
Under the purchase method of
accounting, the total purchase price is allocated to the net tangible and
intangible assets acquired and liabilities assumed, based on various estimates
of their respective fair values. We performed the valuation of all the assets
and liabilities in accordance with SFAS No. 141. The depreciation and
amortization expense adjustments reflected in the pro forma results of
operations are based on the valuation of our tangible and intangible assets
described in Note 3 to our unaudited condensed consolidated financial
statements.
Nine
Months Ended
|
||||||||
September
30, 2009
(actual,
unaudited)
|
September
30, 2008
(pro
forma, unaudited)
|
|||||||
|
||||||||
Net
revenues
|
$ | 105,032 | $ | 141,018 | ||||
Cost
of revenues
|
85,119 | 110,312 | (*)(**) | |||||
Gross
profit
|
19,913 | 30,706 | ||||||
Operating
expenses:
|
||||||||
Research
and development
|
8,938 | 9,035 | (*) | |||||
Selling,
general and administrative
|
9,673 | 13,312 | (*) | |||||
Amortization
of intangible assets
|
593 | 659 | (*) | |||||
Total
operating expenses
|
19,204 | 23,006 | ||||||
Income
- from operations
|
709 | 7,700 | ||||||
Financing
expense and other income, net
|
(9,775 | ) | (10,633 | )(***) | ||||
Income
tax benefit
|
7,150 | -- | ||||||
Net
income (loss)
|
$ | (1,916 | ) | $ | (2,933 | ) |
(*) The proforma results for
the nine months ended September 30, 2008 were adjusted by $22.8 million, related
to depreciation and amortization derived from the fair value changes in the
plant, property and equipments and intangible assets, for the Merger and related
to Merger related costs and write off of in process research and
development.
(**) The proforma results for
the nine months ended September 30, 2008 were adjusted by $4.8 million, related
to the application of the change in method of accounting for inventory
valuation.
(***) The proforma
financing expense and other income, net for the nine months ended September 30,
2008 include $3.8 million related to interest accretion derived from the fair
value changes in the Convertible Notes following the Merger. Such impact was
partially offset by the effect of ASC 470-20 (FSP APB 14-1).
18
Comparison
of Nine Months Ended September 30, 2009 and September 30, 2008
Revenues
The following table presents
pro forma net revenues for the nine months ended September 30, 2009 and
September 30, 2008:
Net Revenues (in thousands, except percentages)
|
||||||||||||||||||||||||
Nine Months Ended
September
30, 2009
(actual,
unaudited)
|
Nine Months Ended
September
30, 2008
(pro
forma, unaudited)
|
|||||||||||||||||||||||
Amount
|
% of
Net Revenues
|
Amount
|
% of Pro forma
Net Revenues
|
Increase
(Decrease)
|
%
Change
|
|||||||||||||||||||
Net
Revenues
|
$ | 105,032 | 100.0 | $ | 141,018 | 100.0 | $ | (35,986 | ) | (26 | ) |
Our net revenues for the nine
months ended September 30, 2009 amount to $105.0 million as compared to $141.0
million for the corresponding period in 2008. Such $36.0 million or 26% decrease
is mainly due to the worldwide economic downturn and the adverse market
conditions in the semiconductor industry that commenced in 2008, and
is comparable to the decrease in the revenues in the industry
generally.
Cost
of Revenues
The following table presents
pro forma cost of revenues for the nine months ended September 30, 2009 and
September 30, 2008:
Cost of Revenues (in thousands, except percentages)
|
||||||||||||||||||||||||
Nine Months Ended
September
30, 2009
(actual,
unaudited)
|
Nine Months Ended
September
30, 2008
(pro
forma, unaudited)
|
|||||||||||||||||||||||
Amount
|
% of Net
Revenues
|
Amount
|
% of Pro
forma Net Revenues
|
Increase
(Decrease)
|
%
Change
|
|||||||||||||||||||
Cost
of revenues (excluding depreciation & amortization of intangible
assets)
|
$ | 70,577 | 67 | $ | 99,931 | 71 | $ | (29,354 | ) | (29 | ) | |||||||||||||
Cost
of revenues - depreciation & amortization of intangible
assets
|
14,542 | 14 | 10,381 | 7 | 4,161 | 40 | ||||||||||||||||||
Total
cost of revenues
|
$ | 85,119 | 81 | $ | 110,312 | 78 | $ | (25,193 | ) | (23 | ) |
On a pro forma basis, our
cost of revenues decreased by $25.2 million or 23% to $85.1 million for the nine
months ended September 30, 2009 compared to $110.3 million for the corresponding
period in 2008. The decrease in cost of revenues is mainly due to cost reduction
efforts which have resulted in lower labor and overhead cost for the nine months
ended September 30, 2009 as well as due to the effect of the revenue decrease.
We achieved such 23% decrease in cost of revenues as compared to 26% decrease in
revenues, despite the high portion of fixed costs associated in operating a
foundry, due to such cost reduction efforts. Cost reduction efforts included
scaling the labor force to meet production demand and negotiating more favorable
pricing for materials and supplies.
Gross
Profit
The following table presents
pro forma gross profit for the nine months ended September 30, 2009 and
September 30, 2008:
Gross Profit (in thousands, except percentages)
|
||||||||||||||||||||||||
Nine Months Ended
September
30, 2009
(actual,
unaudited)
|
Nine Months Ended
September
30, 2008
(pro
forma, unaudited)
|
|||||||||||||||||||||||
Amount
|
% of
Net Revenues
|
Amount
|
% of Pro
forma
Net Revenues
|
Increase
(Decrease)
|
%
Change
|
|||||||||||||||||||
Gross
profit
|
$ | 19,913 | 19 | $ | 30,706 | 22 | $ | (10,793 | ) | (35 | ) |
On a pro forma basis, the
decrease in gross profit was primarily attributed to the above mentioned $36.0
million decrease in revenues which was partially offset by $25.2 million lower
cost of revenues mainly due to the cost reduction actions resulting in lower
labor, overhead and material and supplies costs and due to the revenue decrease
as described in the cost of revenues section above.
19
Operating
Expenses
The following table presents
operating expenses for the nine months ended September 30, 2009 and September
30, 2008:
Operating Expenses (in thousands, except percentages)
|
||||||||||||||||||||||||
Nine Months Ended
September
30, 2009
(actual,
unaudited)
|
Nine Months Ended
September
30, 2008
(pro
forma, unaudited)
|
|||||||||||||||||||||||
Amount
|
% of
Net Revenues
|
Amount
|
% of Pro forma
Net Revenues
|
Increase
(Decrease)
|
%
Change
|
|||||||||||||||||||
Research
and development
|
$ | 8,938 | 9 | $ | 9,035 | 6 | $ | (97 | ) | (1 | ) | |||||||||||||
Selling,
general and administrative
|
9,673 | 9 | 13,312 | 9 | (3,639 | ) | (27 | ) | ||||||||||||||||
Amortization
of intangible assets
|
593 | 1 | 659 | 1 | (66 | ) | (10 | ) | ||||||||||||||||
Total
operating expenses
|
$ | 19,204 | 18 | $ | 23,006 | 16 | $ | (3,802 | ) | (16 | ) |
On a pro
forma basis, operating expenses for the nine months ended September 30, 2009
decreased by $3.8 million compared to the nine months September 30, 2008. The
decrease in operating expenses was mainly due to lower selling, general and
administrative expenses mainly due to the continued efforts of reducing the
overhead costs compared to the corresponding period in 2008.
Financing
Expense and Other Income, Net
The following table presents
financing expense and other income for the nine months ended September 30, 2009
and September 30, 2008:
Financing
Expense
and Other Income, Net (in thousands, except percentages)
|
||||||||||||||||||||||||
Nine Months Ended
September
30, 2009
(actual,
unaudited)
|
Nine Months Ended
September
30, 2008
(pro
forma, unaudited)
|
|||||||||||||||||||||||
Amount
|
% of
Net Revenues
|
Amount
|
% of Pro
forma Net Revenues
|
Increase
(Decrease)
|
%
Change
|
|||||||||||||||||||
Financing
expense, net
|
$ | (11,840 | ) | (11 | ) | $ | (12,735 | ) | (9 | ) | $ | (895 | ) | (7 | ) | |||||||||
Other
income, net
|
2,065 | 2 | 2,102 | 2 | (37 | ) | (2 | ) | ||||||||||||||||
Financing
expense and other income, net
|
$ | (9,775 | ) | (9 | ) | $ | (10,633 | ) | (8 | ) | $ | (858 | ) | (8 | ) |
Other income, net for the
periods presented represents mainly net gain realized from debt
repayments.
In connection with the
Company’s aerospace and defense business, its facility security clearance and
trusted foundry status, the Company and Tower are working with the Defense
Security Service of the United States Department of Defense (“DSS”) to develop
an appropriate structure to mitigate any concern of foreign ownership, control
or influence over the operations of the Company specifically relating to
protection of classified information and prevention of potential unauthorized
access thereto. In order to safeguard classified information, it is expected
that the DSS will require adoption of a Special Security Agreement (“SSA”). The
SSA may include certain security related restrictions, including restrictions on
the composition of the board of directors, the separation of certain employees
and operations, as well as restrictions on disclosure of classified information
to Tower. The provisions contained in the SSA may also limit the projected
synergies and other benefits to be realized from the Merger. There is no
assurance when, if at all, an SSA will be reached.
20
During 2008, an International
Trade Commission (“ITC”) action was filed by Agere/LSI Corporation (“LSI”),
which alleged infringement by 17 corporations of LSI’s patent no. 5227335.
Following the initial filing, LSI amended the ITC complaint to add the Company,
Tower and three other corporations as additional respondents. The Company, Tower
and the other three corporations were added as additional respondents in the ITC
action in October 2008. The case was tried before an administrative law judge
(“Judge”) in July 2009. In September, 2009, the Judge ruled against
LSI and in favor of the respondents, determining that the patent claims asserted
by LSI are invalid. LSI has filed a Petition for Review, seeking a
reversal of the Judge's decision.
In addition to the other
information contained in this Form 10-Q, you should carefully consider the risk
factors associated with our business previously disclosed in Item 1A to Part I
of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
Our business, financial condition and or results of operations could be
materially adversely affected by any of these risks. Additional risks not
presently known to us or that we currently deem immaterial may also impair our
business and operations.
Item 6. Exhibits.
Number
|
Description
|
|
10.1
|
Second
amendment to second amended and restated loan and security agreement and
waiver
|
|
31.1
|
Principal
Executive Officer Certification required by Rule 13a-14(a) or Rule
15d-14(a).
|
|
31.2
|
CFO
Certification required by Rule 13a-14(a) or Rule
15d-14(a).
|
|
32
|
Section 1350 Certification. (Not
provided as not required of voluntary filers)
|
|
21
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
JAZZ
TECHNOLOGIES, INC.
|
|||
Date:
November 13, 2009
|
By:
|
/s/ Rafi Mor | |
Rafi Mor | |||
(Principal Executive Officer) | |||
|
By:
|
/s/ SUSANNA H. BENNETT | |
Chief Financial Officer | |||
(Principal
Financial and Accounting Officer)
|
Number
|
Description
|
|
10.1
|
Second
amendment to second amended and restated loan and security agreement and
waiver
|
|
31.1
|
Principal
Executive Officer Certification required by Rule 13a-14(a) or Rule
15d-14(a).
|
|
31.2
|
CFO
Certification required by Rule 13a-14(a) or Rule
15d-14(a).
|
|
32
|
Section
1350 Certification. (Not provided as not required of voluntary
filers)
|
|
22