Table
of Contents
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 27,
2008
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Or
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number: 001-32832
Jazz
Technologies, Inc.
(Exact name of registrant as specified in its
charter)
Delaware
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20-3320580
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(State or other
jurisdiction of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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4321
Jamboree Road
Newport Beach, California
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92660
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(Address of
principal executive offices)
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(Zip Code)
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(949) 435-8000
Registrants 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 Exchange
Act during the past 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large accelerated filer, accelerated filer, and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
o
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Accelerated
filer
o
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Non-accelerated
filer
o
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Smaller
reporting company
x
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(Do
not check if a smaller reporting company)
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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
As of August 4, 2008, 19,031,276 shares of the registrants common
stock, par value $0.0001 per share, were outstanding.
Table of Contents
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
JAZZ TECHNOLOGIES, INC.
Unaudited
Condensed Consolidated Balance Sheets
(in thousands)
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June 27, 2008
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December 28, 2007
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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9,796
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$
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10,612
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Receivables, net of allowance for doubtful
accounts of $609 and $793 at June 27, 2008 and December 28, 2007,
respectively
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25,690
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33,308
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Inventories
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9,325
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12,190
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Deferred tax asset
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2,015
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2,015
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Prepaid expenses and other current assets
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2,034
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2,379
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Total current assets
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48,860
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60,504
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Property, plant and equipment, net
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113,760
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127,488
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Investments
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19,300
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19,300
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Intangible assets, net
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51,176
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53,631
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Other assets
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4,212
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4,975
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Total assets
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$
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237,308
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$
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265,898
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LIABILITIES
AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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11,310
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$
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19,502
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Short-term borrowings
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9,000
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8,000
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Accrued compensation and benefits
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5,147
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5,886
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Deferred revenues
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3,845
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5,347
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Accrued interest
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5,216
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5,428
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Other current liabilities
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7,772
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13,815
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Total current liabilities
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42,290
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57,978
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Long term liabilities:
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Convertible senior notes
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128,200
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133,200
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Deferred tax liability
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3,350
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3,427
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Accrued pension, retirement medical plan
obligations and other long-term liabilities
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19,304
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19,015
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Total liabilities
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193,144
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213,620
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Stockholders equity
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Common stock
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2
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2
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Additional paid-in capital
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80,375
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79,882
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Other comprehensive income
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974
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965
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Accumulated deficit
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(37,187
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)
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(28,571
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)
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Total stockholders equity
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44,164
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52,278
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Total liabilities and stockholders equity
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$
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237,308
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$
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265,898
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See accompanying notes.
1
Table
of Contents
JAZZ TECHNOLOGIES, INC.
Unaudited
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
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Three months ended
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Six months ended
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June 27, 2008
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June 29, 2007
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June 27, 2008
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June 29, 2007
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Net revenues
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$
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47,516
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$
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52,360
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$
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98,346
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$
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74,883
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Cost of revenues
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41,052
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52,955
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84,437
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74,896
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Gross profit (loss)
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6,464
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(595
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)
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13,909
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(13
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)
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Operating expenses:
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Research and development
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2,931
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3,734
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6,841
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5,724
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Selling, general and administrative
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5,395
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4,533
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10,359
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9,137
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Amortization of intangible assets
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346
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378
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692
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553
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Write off of in-process research and development
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3,800
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Total operating expenses
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8,672
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8,645
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17,892
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19,214
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Loss from operations
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(2,208
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)
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(9,240
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)
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(3,983
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)
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(19,227
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)
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Interest and other expense, net
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(2,381
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)
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(3,294
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)
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(4,665
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)
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(4,880
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)
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Net loss before income taxes
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(4,589
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)
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(12,534
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)
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(8,648
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)
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(24,107
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)
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Income tax benefit (provision)
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17
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(151
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)
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32
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(259
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)
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Net loss
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$
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(4,572
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)
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$
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(12,685
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)
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$
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(8,616
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)
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$
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(24,366
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)
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Net loss per share (basic and diluted)
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$
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(0.24
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)
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$
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(0.53
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)
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$
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(0.45
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)
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$
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(0.90
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)
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Weighted average shares (basic and diluted)
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19,031
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23,869
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19,007
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27,005
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The amounts included in the three and six months ended June 29,
2007 reflect the acquisition of Jazz Semiconductor, Inc. on February 16,
2007 and the results of operations for Jazz Semiconductor, Inc. following
the date of acquisition.
See accompanying notes.
2
Table
of Contents
JAZZ TECHNOLOGIES, INC.
Unaudited
Condensed Consolidated Statement of Stockholders Equity
(in thousands)
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Other
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Total
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Common Stock
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Additional
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comprehensive
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Accumulated
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stockholders
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Shares
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Amount
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paid-in capital
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income
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deficit
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equity
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Balance at December 28, 2007
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19,031
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$
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2
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$
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79,882
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$
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965
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$
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(28,571
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)
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$
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52,278
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Restricted stock compensation expense
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60
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60
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Stock options compensation expense
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433
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433
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Comprehensive loss:
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Foreign currency translation adjustment
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9
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9
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Net loss
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(8,616
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)
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(8,616
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)
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Total comprehensive loss
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(8,607
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)
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Balance at June 27, 2008
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19,031
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$
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2
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$
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80,375
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$
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974
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|
$
|
(37,187
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)
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$
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44,164
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|
See accompanying notes.
3
Table
of Contents
JAZZ TECHNOLOGIES, INC.
Unaudited
Condensed Consolidated Statements of Cash Flows
(in thousands)
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Six months ended
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June 27, 2008
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June 29, 2007
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Operating
activities:
|
|
|
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Net loss
|
|
$
|
(8,616
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)
|
$
|
(24,366
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)
|
Adjustments to reconcile net loss for the
period to net cash provided by (used in) operating activities:
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Depreciation
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16,428
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11,996
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Amortization of deferred financing costs
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694
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791
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Provision for doubtful accounts
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(184
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)
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63
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(Gain)/loss on disposal of equipment
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(218
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)
|
2
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Net gain on purchase of convertible senior
notes
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(777
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)
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Amortization of purchased intangible assets
|
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2,455
|
|
2,986
|
|
Write-off of in-process research and
development
|
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|
|
3,800
|
|
Stock compensation expense
|
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493
|
|
248
|
|
Changes in operating assets and
liabilities, net of effects from acquisition of Jazz
Semiconductor, Inc.:
|
|
|
|
|
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Receivables
|
|
7,802
|
|
(7,910
|
)
|
Inventories
|
|
2,865
|
|
7,479
|
|
Prepaid expenses and other current assets
|
|
354
|
|
1,923
|
|
Restricted cash
|
|
|
|
2,681
|
|
Deferred tax assets
|
|
|
|
575
|
|
Accounts payable
|
|
(8,484
|
)
|
(10,368
|
)
|
Accrued compensation and other benefits
|
|
(739
|
)
|
(46
|
)
|
Deferred revenue
|
|
(1,502
|
)
|
(4,562
|
)
|
Accrued interest on convertible notes
|
|
(212
|
)
|
6,633
|
|
Other current liabilities
|
|
(6,043
|
)
|
(8,131
|
)
|
Pension and retiree medical benefits
|
|
491
|
|
|
|
Deferred tax liability
|
|
(77
|
)
|
(575
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)
|
Other long-term liabilities
|
|
(203
|
)
|
3,944
|
|
Net cash provided by (used in) operating
activities
|
|
4,528
|
|
(12,837
|
)
|
Investing
activities:
|
|
|
|
|
|
Jazz Semiconductor, Inc. purchase
price, net of cash acquired
|
|
|
|
(236,303
|
)
|
Purchases of property and equipment
|
|
(3,418
|
)
|
(2,278
|
)
|
Net proceeds from sale of equipment
|
|
1,165
|
|
|
|
Net proceeds from sale of short-term
investments
|
|
|
|
14,445
|
|
Release of funds from trust and escrow
accounts
|
|
|
|
334,465
|
|
Net cash (used in) provided by investing
activities
|
|
(2,253
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)
|
110,329
|
|
Financing
activities:
|
|
|
|
|
|
Redemption of founders common stock
|
|
|
|
(9
|
)
|
Conversion of common stock in connection
with acquisition
|
|
|
|
(33,159
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)
|
Repurchase of common stock
|
|
|
|
(14,363
|
)
|
Repurchase of warrants
|
|
|
|
(14,877
|
)
|
Repurchase of units
|
|
|
|
(2,180
|
)
|
Repurchase of unit purchase options
|
|
|
|
(735
|
)
|
Payment for purchase of convertible senior
notes
|
|
(4,100
|
)
|
|
|
Net borrowings from line of credit
|
|
1,000
|
|
|
|
Payment of debt and acquisition-related
liabilities
|
|
(61
|
)
|
(10,120
|
)
|
Net cash used in financing activities
|
|
(3,161
|
)
|
(75,443
|
)
|
Effect of foreign currency on cash
|
|
70
|
|
(23
|
)
|
Net
(decrease) increase in cash and cash equivalents
|
|
(816
|
)
|
22,026
|
|
Cash and cash equivalents at beginning of
period
|
|
10,612
|
|
633
|
|
Cash and cash equivalents at end of period
|
|
$
|
9,796
|
|
$
|
22,659
|
|
See accompanying notes.
4
Table of Contents
Jazz
Technologies, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
June 27, 2008
1.
ORGANIZATION
Unless
specifically noted otherwise, as used throughout these notes to the unaudited
condensed consolidated financial statements, Jazz, Company refers to the
business of Jazz Technologies, Inc. and Jazz Semiconductor refers only
to the business of Jazz Semiconductor, Inc.
The Company
Jazz Technologies, Inc., formerly known as Acquicor Technology
Inc. (the Company), 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, Inc., is now an independent
semiconductor foundry focused on specialty process technologies for the
manufacture of analog intensive mixed-signal semiconductor devices. The Companys
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.
Acquisition of Jazz Semiconductor, Inc.
On February 16, 2007, the Company completed the acquisition of all
of the outstanding capital stock of Jazz Semiconductor, for $262.4 million in
cash, and acquired, as part of the assets of Jazz Semiconductor, $26.1 million
in cash.
The accompanying unaudited condensed consolidated financial
statements include the results of operations for Jazz Semiconductor following
the date of acquisition.
The acquisition was accounted for under the
purchase method of accounting in accordance with U.S. generally accepted
accounting principles for accounting and financial reporting purposes. Under
this method, Jazz Semiconductor was treated as the acquired company. In
connection with the acquisition, the Company adopted Jazz Semiconductors
fiscal year. In July 2007, the Company entered into an agreement with the
former Jazz Semiconductor stockholders that reduced the purchase price by $9.3
million to $253.1 million. The reduction has been reflected in the accompanying
unaudited condensed consolidated financial statements following July 2007.
Prior to March 12, 2002, Jazz Semiconductors business was
Conexants Newport Beach, California semiconductor fabrication operations. Jazz
Semiconductors business was formed upon Conexants contribution of those
fabrication operations to its wholly-owned subsidiary, Newport Fab, LLC and
Conexants contribution of Newport Fab, LLC to Jazz Semiconductor, together
with a cash investment in Jazz Semiconductor by affiliates of The Carlyle
Group. Conexant and affiliates of The Carlyle Group continued to be the largest
stockholders of Jazz Semiconductor until its acquisition in February 2007.
Substantially all of Jazz Semiconductors business operation was conducted by
its wholly-owned subsidiary, Newport Fab, LLC. Since its formation in early
2002, Jazz Semiconductor has transitioned its business from a captive
manufacturing facility within Conexant to an independent semiconductor foundry.
2.
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Securities and Exchange Commission (SEC) Form 10-Q and Rule 8-03
of SEC Regulation S-X. They do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. These financial statements should be read in conjunction of the
Companys audited consolidated financial statements and notes thereto for the
year ended December 28, 2007, included in the Companys Annual Report on Form 10-K
filed with the SEC on March 24, 2008.
5
Table
of Contents
The condensed consolidated financial statements included herein are
unaudited; however, they contain all normal recurring accruals and adjustments
that, in the opinion of management, are necessary to present fairly the Companys
consolidated financial position at June 27, 2008 and December 28,
2007, and the consolidated results of its operations and cash flows for the
three and six months ended June 27, 2008 and June 29, 2007.
Fiscal Year
Effective with the fiscal year beginning January 1, 2007, the
Company adopted a 52- or 53- week fiscal year. Each of the first three quarters
of a fiscal year ends on the last Friday in each of March, June and September and
the fourth quarter of a fiscal year ends on the Friday prior to December 31.
As a result, each fiscal quarter consists of 13 weeks during a 52-week fiscal
year. During a 53-week fiscal year, the first three quarters consist of 13
weeks and the fourth quarter consists of 14 weeks. The Company previously
maintained a calendar fiscal year.
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 Companys net revenues are generated principally from sales of
semiconductor wafers. The Company derives the remaining balance of its net
revenues from the resale of photomasks and other engineering services. The
majority of the Companys sales occur through the efforts of its direct sales
force.
In accordance with SEC Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements (SAB No. 101), and SAB No. 104,
Revenue Recognition (SAB No. 104), the Company recognizes product
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.
However, the Company does not recognize revenues until all customer acceptance
requirements have been met, when applicable.
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
managements expectations.
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 does not have any intangible assets with indefinite useful
lives.
The
Company conducted an impairment review as of June 27, 2008, due to the
proposed merger offer and recent decline in the stock price. The Company used
the income approach methodology of valuation that includes undiscounted cash
flows to determine the fair value of its 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 that the
6
Table
of Contents
Company
uses to conduct its business. As a result of this analysis, no assets were
considered to be impaired and the Company has not recognized any impairment
loss for any long-lived or intangible asset as of June 27, 2008.
Accounting for Income Taxes
The Company utilizes the liability method of accounting for income
taxes in accordance with 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 Companys expected realization of these assets depends
on its ability to generate sufficient future taxable income. The Companys ability to generate enough
taxable income to utilize its deferred tax assets depends on many factors,
among which is the Companys ability to deduct tax loss carry-forwards against
future taxable income, the effectiveness of the Companys tax planning
strategies and reversing deferred tax liabilities.
A substantial portion of the valuation allowance relates to deferred
tax assets recorded in connection with the acquisition of Jazz Semiconductor (acquisition
deferred tax assets). SFAS No. 109 requires the benefit from the
reduction of the valuation allowance related to the acquisition deferred tax
assets to first be applied to reduce goodwill and then noncurrent intangible
assets to zero before the Company can apply any remaining benefit to reduce
income tax expense.
Included in the deferred tax assets are approximately $26.0 million of
pre-acquisition net deferred tax assets related to the acquisition of Jazz
Semiconductor. To the extent these assets are recognized, the tax benefit will
be applied first to reduce to zero any noncurrent intangible assets related to
the acquisition, and the excess, if any, as a reduction to income tax expense.
The future utilization of the Companys net operating loss carry
forwards to offset future taxable income may be subject to an annual limitation
as a result of ownership changes that may have occurred previously or that
could occur in the future. The Company has had one change in ownership event
that limits the utilization of net operating loss carry forwards. The change
in ownership event occurred in February 2007, upon the acquisition of
Jazz Semiconductor. As a result of this change
of ownership, the annual net operating loss utilization will be limited to
$6.8 million.
The Companys 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.
Stock Based
Compensation
The Company records equity compensation expense in accordance with SFAS
No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R).
SFAS No. 123R requires companies to estimate the fair value of stock
options on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense ratably over the requisite service periods. The Company has estimated
the fair value of stock options as of the date of grant using the Black-Scholes
option pricing model, which was developed for use in estimating the value of
traded options that have no vesting restrictions and that are freely
transferable. The Black-Scholes model considers, among other factors, the
expected life of the award and the expected volatility of the Companys stock price.
Although the Black-Scholes model meets the requirements of SFAS No. 123R
and SAB No. 107, Share-Based Payment (SAB No. 107), the fair
values generated by the model may not be indicative of the actual fair values
of the Companys equity awards, as it does not consider other factors important
to those awards to employees, such as continued employment, periodic vesting
requirements, and limited transferability. The Company estimates stock
price volatility based on historical volatility of its own stock price and its
peers. The Company recognizes compensation expense using the straight-line
amortization method for stock-based compensation awards with graded vesting.
The key assumptions used in the Black-Scholes model in determining the
fair value of options granted during the three months ended June 27, 2008
are as follows:
Expected life in years
|
|
6
|
|
Expected price volatility
|
|
48.50% 65.70
|
%
|
Risk-free interest rate
|
|
2.88% 3.84
|
%
|
Dividend yield
|
|
0.00
|
%
|
7
Table
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Net Loss Per Share
Net loss per share (basic) is calculated by dividing
net loss by the weighted average number of common shares outstanding during the
period. Net loss 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 Companys 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 three and six months ended June 27,
2008 and June 29, 2007, all common stock equivalents would be
anti-dilutive and the basic and diluted weighted average shares outstanding are
the same.
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 customers
current credit worthiness, as determined by a review of the customers 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 June 27, 2008 and December 28, 2007 consists of the
following customers:
|
|
June 27, 2008
|
|
December 28, 2007
|
|
Skyworks
|
|
13.8
|
%
|
15.1
|
%
|
Conexant
|
|
11.8
|
%
|
21.9
|
%
|
R F Micro Devices
|
|
13.4
|
%
|
26.9
|
%
|
Entropic
|
|
13.7
|
%
|
|
|
Net revenues from
significant customers representing 10% or more of net revenues for the three
and six months ended June 27, 2008 and June 29, 2007 is provided by
customers as follows:
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 27, 2008
|
|
June 29, 2007
|
|
June 27, 2008
|
|
June 29, 2007
|
|
Skyworks
|
|
14.1
|
%
|
23.0
|
%
|
13.5
|
%
|
26.3
|
%
|
Conexant
|
|
10.0
|
%
|
14.6
|
%
|
12.2
|
%
|
11.6
|
%
|
R F Micro Devices
|
|
14.7
|
%
|
|
|
17.1
|
%
|
|
|
Entropic
|
|
11.5
|
%
|
|
|
|
|
|
|
Toshiba
|
|
|
|
17.5
|
%
|
|
|
15.4
|
%
|
As a result of the Companys
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 Companys consolidated financial position, results of operations and cash
flows.
Recent Accounting Pronouncements
Effective January 1, 2008, the Company
adopted SFAS No. 159, The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115 (SFAS
No. 159), which permits entities to choose to measure many financial
instruments and certain other items at fair value. This Statement applies
to all entities, including not-for-profit organizations. Most of the provisions
of this Statement apply only to entities that elect the fair value option.
However, the amendment to SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, applies to all entities with
available-for-sale and trading securities. Some requirements apply differently
to entities that do not report net income. SFAS No. 159 is effective as of
the beginning of an entitys first fiscal year that begins after November 15,
2007 with respect to financial assets. With respect to non-financial assets,
this Statement is effective for the first fiscal year beginning after November 15,
2008. The adoption of SFAS No. 159 did not have any significant impact on
the consolidated results of operations or financial position of the Company.
Effective January 1, 2008, the Company
adopted SFAS No. 157, Fair Value Measurements (SFAS No. 157), to
eliminate the diversity in practice that exists due to the different
definitions of fair value and the limited guidance for
8
Table
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applying those definitions in GAAP that are dispersed among the many
accounting pronouncements that require fair value measurements. This Statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require
any new fair value measurements. However, for some entities, the application of
this Statement will change current practice. SFAS No. 157 is effective in
fiscal years beginning after November 15, 2007 with respect to financial
assets. With respect to non-financial assets, this Statement is effective for
the first fiscal year beginning after November 15, 2008. The adoption of
SFAS No. 157 did not have any significant impact on the consolidated
results of operations or financial position of the Company.
3.
ACQUISITION OF JAZZ SEMICONDUCTOR
On February 16, 2007, pursuant to the terms of a merger agreement
signed on September 26, 2006, the Company acquired all of Jazz
Semiconductors outstanding capital stock for approximately $262.4 million,
funded with existing cash resources as well as proceeds from the 8% Convertible
Senior Notes due 2011 (the Convertible Senior Notes) that were issued in the
fourth quarter of fiscal 2006. On July 1, 2007, a settlement agreement was
reached with former Jazz Semiconductors stockholders that amended the merger
agreement, released funds held in escrow and effectively reduced the purchase
price by $9.3 million to $253.1 million. The purchase price reduction of $9.3
million includes a $9.0 million release of escrow funds to the Company and an
additional reimbursement of $0.3 million for expenses incurred by Jazz
Semiconductor and the Company relating to the merger. This reduction has been
reflected in the accompanying condensed consolidated financial statements
following July 2007.
For accounting purposes, the revised purchase price for the Jazz
acquisition was $253.1 million and reconciles to all payments made to date as
follows (in thousands):
Acquisition
consideration
|
|
$
|
251,000
|
|
Estimated working
capital adjustment
|
|
4,500
|
|
Total acquisition consideration
|
|
255,500
|
|
Jazz
Semiconductor terminated IPO and acquisition transaction costs
|
|
(6,504
|
)
|
Company
transaction costs
|
|
4,134
|
|
Total purchase price
|
|
$
|
253,130
|
|
Jazz Semiconductors
transaction costs primarily consist of fees for financial advisors, attorneys,
accountants and other advisors incurred in connection with the acquisition and
Jazz Semiconductors terminated initial public offering. The Companys
transaction costs primarily consist of fees for financial advisors, attorneys,
accountants and other advisors directly related to the acquisition of Jazz
Semiconductor.
Payments made by
the Company included a $4.5 million working capital payment per the merger
agreement and a deduction for reimbursement of $6.5 million of transaction
costs incurred by Jazz Semiconductor in connection with the acquisition and its
terminated public offering. There was no change to the purchase price resulting
from the calculation of the closing working capital amount, as defined in the
merger agreement, which was calculated based on the closing balance sheet as of
February 16, 2007. However, as discussed above, there was a $9.3 million
reduction to the purchase price as a result of a settlement agreement reached
in July 2007 with the former Jazz Semiconductor stockholders.
In connection with the acquisition of Jazz Semiconductor, the Company
acquired an equity investment in Shanghai Hua Hong NEC Electronics Company,
Ltd. (HHNEC). Under the merger agreement relating to the acquisition of Jazz
Semiconductor, the Company is
obligated to pay additional amounts to former stockholders
of Jazz Semiconductor if the Company realizes proceeds in excess of $10 million
from its investment in HHNEC during the three-year period following the
completion of the acquisition of Jazz Semiconductor. In that event, the Company
will pay to Jazz Semiconductors former stockholders an amount equal to 50% of
the amount (if any) of the proceeds received that exceed $10 million.
Adjusted Purchase Price Allocation
The total adjusted purchase price of $253.1 million, including the
Companys transaction costs of approximately $4.1 million, and net of the
reduction of $9.3 million in purchase price, has been allocated to tangible and
intangible assets acquired and liabilities assumed, based on their fair market
values as of February 16, 2007, as follows (in thousands):
9
Table
of Contents
|
|
February 16, 2007
|
|
Fair value of the
net tangible assets acquired and liabilities assumed:
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
26,080
|
|
|
|
Short-term
investments
|
|
24,245
|
|
|
|
Restricted cash
|
|
3,154
|
|
|
|
Receivables
|
|
25,815
|
|
|
|
Inventories
|
|
19,094
|
|
|
|
Deferred tax asset
|
|
4,637
|
|
|
|
Other current
assets
|
|
2,520
|
|
|
|
Property, plant
and equipment
|
|
148,061
|
|
|
|
Investments
|
|
19,300
|
|
|
|
Other assets
|
|
522
|
|
|
|
Accounts payable
|
|
(23,087
|
)
|
|
|
Accrued
compensation, benefits and other
|
|
(5,454
|
)
|
|
|
Deferred tax
liability
|
|
(6,203
|
)
|
|
|
Deferred revenues
|
|
(10,051
|
)
|
|
|
Other current
liabilities
|
|
(23,619
|
)
|
|
|
Accrued pension,
retirement medical plan obligations and other long-term liabilities
|
|
(17,493
|
)
|
|
|
Total net
tangible assets acquired and liabilities assumed
|
|
|
|
$
|
187,521
|
|
|
|
|
|
|
|
Fair value of
identifiable intangible assets acquired:
|
|
|
|
|
|
Existing
technology
|
|
1,078
|
|
|
|
Patents and other
core technology rights
|
|
11,185
|
|
|
|
In-process
research and development
|
|
5,100
|
|
|
|
Customer
relationships
|
|
4,758
|
|
|
|
Customer backlog
|
|
2,630
|
|
|
|
Trade name
|
|
4,683
|
|
|
|
Facilities lease
|
|
36,175
|
|
|
|
Total
identifiable intangible assets acquired
|
|
|
|
65,609
|
|
Total purchase
price
|
|
|
|
$
|
253,130
|
|
|
|
|
|
|
|
|
|
The fair values set
forth above are based on a final valuation of Jazz Semiconductors tangible and
intangible assets and liabilities performed by the Company in accordance with
SFAS No. 141, Business Combinations (SFAS No. 141).
Inventories
Inventories consist of the following at June 27,
2008 and December 28, 2007 (in thousands):
|
|
June 27, 2008
|
|
December 28, 2007
|
|
Raw material
|
|
$
|
737
|
|
$
|
473
|
|
Work in process
|
|
6,903
|
|
10,866
|
|
Finished goods
|
|
1,686
|
|
851
|
|
|
|
$
|
9,325
|
|
$
|
12,190
|
|
Property, Plant and Equipment
Property, plant and equipment consist of the following
at June 27, 2008 and December 28, 2007 (in thousands):
|
|
Useful life
(In years)
|
|
June 27, 2008
|
|
December 28, 2007
|
|
Building improvements
|
|
7-12
|
|
$
|
42,927
|
|
$
|
42,916
|
|
Machinery and equipment
|
|
4-6
|
|
106,222
|
|
106,338
|
|
Furniture and equipment
|
|
3-5
|
|
1,927
|
|
1,829
|
|
Computer software
|
|
3
|
|
2,138
|
|
2,124
|
|
Construction in progress
|
|
|
|
4,590
|
|
2,206
|
|
|
|
|
|
157,804
|
|
155,413
|
|
Accumulated depreciation
|
|
|
|
(44,044
|
)
|
(27,925
|
)
|
|
|
|
|
$
|
113,760
|
|
$
|
127,488
|
|
10
Table
of Contents
Investment
In connection with the acquisition of Jazz
Semiconductor, the Company acquired an investment in HHNEC. As of June 27,
2008, the investment represented a minority interest of approximately 10% in
HHNEC. In accordance with the purchase method of accounting, this investment
was recorded at fair value on the date of acquisition.
Intangible Assets
Intangible assets consist of the following at June 27,
2008 (in thousands):
|
|
Weighted
Average Life
(years)
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Existing technology
|
|
7
|
|
$
|
1,078
|
|
$
|
(210
|
)
|
$
|
868
|
|
Patents and other core technology rights
|
|
7
|
|
11,185
|
|
(2,182
|
)
|
9,003
|
|
In-process research and development
|
|
|
|
5,100
|
|
(5,100
|
)
|
|
|
Customer relationships
|
|
7
|
|
4,758
|
|
(928
|
)
|
3,830
|
|
Customer backlog
|
|
<1
|
|
2,630
|
|
(2,630
|
)
|
|
|
Trade name
|
|
7
|
|
4,683
|
|
(913
|
)
|
3,770
|
|
Facilities lease
|
|
20
|
|
36,175
|
|
(2,470
|
)
|
33,705
|
|
Total identifiable intangible assets
|
|
|
|
$
|
65,609
|
|
$
|
(14,433
|
)
|
$
|
51,176
|
|
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 2008
|
|
$
|
1,762
|
|
$
|
693
|
|
$
|
2,455
|
|
2009
|
|
3,524
|
|
1,385
|
|
4,909
|
|
2010
|
|
3,525
|
|
1,385
|
|
4,910
|
|
2011
|
|
3,524
|
|
1,385
|
|
4,909
|
|
2012
|
|
3,525
|
|
1,385
|
|
4,910
|
|
Thereafter
|
|
27,042
|
|
2,041
|
|
29,083
|
|
Total expected future amortization expense
|
|
$
|
42,903
|
|
$
|
8,273
|
|
$
|
51,176
|
|
Pro Forma Results of Operations
The following unaudited information for the six months ended June 29,
2007 assumes the acquisition of Jazz Semiconductor occurred on January 1,
2007, (in thousands):
|
|
Pro Forma Results of
Operations
|
|
|
|
(in thousands, except
per share amounts)
|
|
|
|
Six months ended
June 29, 2007
|
|
|
|
|
|
Net revenues
|
|
$
|
100,457
|
|
Net loss
|
|
$
|
(33,460
|
)
|
Pro forma net loss per share basic and
diluted
|
|
$
|
(1.24
|
)
|
The accompanying unaudited condensed consolidated
statements of operations only reflect the operating results of Jazz
Semiconductor following the date of acquisition and do not reflect its
operating results prior to the acquisition. The Company derived the pro forma
information from the unaudited condensed consolidated financial statements of
the Company for the six months ended June 29, 2007 and of Jazz
Semiconductor for the period from January 1, 2007 to February 16,
2007 (the date of the acquisition). The pro forma results are not necessarily
indicative of the results that may have actually occurred had the acquisition
taken place on the date noted, or the future financial position or operating
results of the Company or Jazz Semiconductor. The pro forma adjustments are
based upon available information and assumptions that the Company believes are
reasonable. The pro forma adjustments include adjustments for interest expenses
(relating primarily to interest on the Convertible Senior Notes issued in December 2006)
and increased depreciation and amortization expense as a result of the
application of the purchase method of accounting based on the fair values set
forth above. The pro forma
11
Table
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information excludes the
write-off of in-process research and development that was expensed during the
six months ended June 29, 2007.
4. LOAN
AND SECURITY AGREEMENT
Borrowing availability under the facility as of June 27, 2008, was
$30.0 million. As of June 27, 2008, the Company had short-term borrowings
of $9.0 million outstanding and $1.9 million of the facility supporting
outstanding letters of credits.
5.
INCOME TAXES
The Company utilizes the liability method of accounting for income
taxes in accordance with 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 Companys
expected realization of these assets depends on its ability to generate
sufficient future taxable income. The Companys ability to generate enough
taxable income to utilize its deferred tax assets depends on many factors,
among which is the Companys ability to deduct tax loss carry-forwards against
future taxable income, the effectiveness of the Companys tax planning
strategies and reversing deferred tax liabilities. A substantial portion of the
valuation allowance relates to deferred tax assets recorded in connection with
the acquisition of Jazz Semiconductor (acquisition deferred tax assets). SFAS
No. 109 requires the benefit from the reduction of the valuation allowance
related to the acquisition deferred tax assets to first be applied to reduce
goodwill and then noncurrent intangible assets to zero before the Company can
apply any remaining benefit to reduce income tax expense.
Included in
the deferred tax assets are approximately $26.0 million of pre-acquisition net
deferred tax assets related to the acquisition of Jazz Semiconductor. To the
extent these assets are recognized, the tax benefit will be applied first to
reduce to zero any noncurrent intangible assets related to the acquisition, and
the excess, if any, as a reduction to income tax expense.
At December 28, 2007, the Company had unrecognized tax benefits of
$1.0 million, of which $0.6 million were tax benefits that, if
recognized at a time when the valuation allowance no longer exists, would
affect the Companys effective tax rate. The remaining $0.4 million, if
recognized, would reduce the non-current intangible assets. The Companys
unrecognized tax benefits increased by $0.5 million to $1.5 million during the
three months ended June 27, 2008 of which, $1.2 million were tax benefits
that if recognized at a time when the valuation allowance no longer exists,
would affect the Companys effective tax rate. The Company does not expect any
significant decreases to its unrecognized tax benefits within the next 12
months.
The Companys policy is to recognize interest and penalties that
would be assessed in relation to the settlement value of unrecognized tax
benefits as a component of income tax expense.
At December 28,
2007, the Company had federal and state net operating loss (NOL)
carryforwards of approximately $128.9 million and $105.2 million, respectively.
The federal and state tax loss carryforwards will begin to expire in 2021 and
2012, respectively, unless previously utilized. At December 28, 2007, the
Company had combined federal and state alternative minimum tax credit of $0.1
million. The alternative minimum tax credits do not expire. The future
utilization of the Companys net operating loss carry forwards to offset future
taxable income may be subject to an annual limitation as a result of ownership
changes that may have occurred previously or that could occur in the future.
The Company had one change in ownership event that limits the utilization of
net operating loss carry forwards. This change in ownership event occurred in
February 2007, the date of acquisition of Jazz Semiconductor, Inc. As
a result of this change of ownership, the annual net operating loss
utilization will be limited to $6.8 million.
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 2004; state and local income tax examinations
before 2003; and foreign income tax examinations before 2004. 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) tax
examination. The Company is not currently under examination by any other state,
local or foreign jurisdictions.
12
Table
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6.
CONVERTIBLE SENIOR
NOTES
During the first quarter of 2008, the Company purchased $5.0 million in
principal amount of its Convertible Senior Notes at a price of $4.1 million,
including $4,444 for prepayment of interest from the date of the last interest
payment to the date of purchase. The purchase price was 82.0% of the principal
amount of such notes and resulted in a net gain of $0.8 million, which is
included as part of interest and other (expense) income in the statement of operations.
The gain of $0.8 million is net of the write-off of prorated deferred loan
costs of $0.1 million. The Company did not purchase any Convertible Senior
Notes during the second quarter. As of June 27, 2008, $128.2 million in
principal amount of Convertible Senior Notes remains outstanding.
The Companys obligations under the Convertible Senior Notes are
guaranteed by the Companys domestic subsidiaries. The Company has not provided
condensed consolidating financial information 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
amended and restated loan and security agreement with Wachovia Capital
Markets, LLC and Wachovia Capital Finance Corporation (Western)
,
there are no significant restrictions on the ability of the Company and its
subsidiaries to obtain funds from their subsidiaries by loan or dividend.
7.
PENSION PLANS
The pension and other post retirement benefit plans
expenses for the three and six months ended June 27, 2008 were
$0.6 million and $1.2 million, respectively. The amounts for the
pension and other post retirement benefit plans expense for the corresponding
periods in 2007 were $0.5 million and $0.8 million, respectively.
8.
STOCKHOLDERS EQUITY
Common Stock
The number of outstanding shares of common stock at June 27, 2008
was 19,031,276.
Warrants
The number of outstanding warrants at June 27, 2008 was
33,033,013.
Stock Options
During the three and six months ended June 27, 2008, the Company
awarded non-statutory stock options to purchase 2,272 shares and 604,083 shares
of common stock that vest over a three-year period from the date of grant. The
stock option grants vest ratably over the next twelve quarters. The exercise
prices of the options awarded range from $0.56 - $1.22 per share. The Company
recorded $221,363 and $432,802 of compensation expense for the three and six months
ended June 27, 2008 relating to the issuance of non-qualified stock
options to employees. The Company recorded $83,820 of compensation expense for
stock options granted during each of the corresponding periods in 2007.
9.
PROPOSED
MERGER
On May 19,
2008, the Company entered into an Agreement and Plan of Merger and
Reorganization with Tower Semiconductor Ltd., an Israeli company (Tower), and
its wholly-owned subsidiary, Armstrong Acquisition Corp., a Delaware
corporation (Merger Sub), pursuant to which Merger Sub will merge with and
into the Company with the Company surviving the merger as a wholly-owned
subsidiary of Tower.
The merger is
subject to obtaining approval of the Companys stockholders and the
satisfaction of certain other conditions. If the merger is completed, each
share of the Companys common stock not held by Tower, Merger Sub or the
Company will automatically be converted into and represent the right to receive
1.8 ordinary shares of Tower. Cash will be paid in lieu of fractional shares.
Under the
merger agreement, Tower will assume all outstanding warrants to purchase the
shares of the Companys common stock that are outstanding immediately prior to
the effective time of the merger, and these warrants will become exercisable
for Tower ordinary shares. Each such warrant to purchase shares of the Companys
common stock will become a warrant to purchase 1.8 Tower ordinary shares at an
exercise price of $2.78 per Tower ordinary share, which is equal to the
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existing price
of $5.00 divided by the exchange ratio of 1.8. Fractional ordinary shares of
Tower will be rounded up to the nearest whole number.
Following the
effective time of the merger, each holder of the Convertible Senior Notes will
have the right to convert such holders note into Tower ordinary shares. Each
$1,000 in original principal amount of Convertible Senior Notes will be
convertible into 245.57 Tower ordinary shares, representing an implied
conversion price of approximately $4.07 per Tower ordinary share.
Under the
merger agreement, Tower will assume all options to purchase shares of the
Companys common stock that are outstanding immediately prior to the effective
time of the merger, whether vested or unvested, and these options will become
exercisable for Tower ordinary shares. Each option to purchase shares of the
Companys common stock outstanding at the effective time of the merger will
become an option to purchase a number of Tower ordinary shares equal to 1.8
multiplied by the number of shares of the Companys common stock that such
option was exercisable for prior to the effective time, rounded down to the
nearest whole number of Tower ordinary shares, and the per share exercise price
of each option will equal the exercise price of such option divided by 1.8,
rounded up to the nearest cent.
The merger will constitute a change in control for purposes of the
change in control severance agreements between the Company and each of Dr.
Amelio and Messrs. Pittman and Grogan.
Under his change of control severance agreement, Dr. Amelio will receive
2.99 times his annual base salary plus his target bonus, a total of $1,794,000,
and 18 months of continued COBRA coverage at an approximate cost of $14,000, if
a change of control occurs and he is terminated without cause or he terminates
his employment for good reason within one year of the change in control. Similarly,
Mr. Pittman will receive twice his annual base salary plus target bonus, a
total of $900,000, if a change of control occurs and he is terminated without
cause or he terminates his employment for good reason within one year of the
change of control. Mr. Grogan will
receive twice his annual base salary plus target bonus, a total of $700,000,
and 18 months of continued COBRA coverage at an approximate cost of $12,500, if
a change of control occurs and he is terminated without cause or he terminates
his employment for good reason within one year of the change in control. In
addition, if Dr. Amelio and Messrs. Pittman and Grogan are terminated without
cause or they terminate their employment for good reason within one year of a
change in control, all stock options grants or similar equity arrangements that
are otherwise subject to vesting over a period of 48 months following the
termination will immediately accelerate and vest. Pursuant to the merger
agreement, Tower has agreed to cause the surviving corporation of the merger to
assume the obligations under the change of control severance agreements to
which the Company is a party. The directors and officers of the Company
following the merger will be determined prior to the effective time of the
merger.
As of June 27,
2008, the Company had incurred approximately $1.5 million in merger costs,
which are included as part of selling, general & administrative
expenses in the statements of operations. It is anticipated that the Merger
will be consummated in the third quarter of 2008; until then both companies
will continue to operate independently.
10.
FAIR
VALUE MEASUREMENTS
Effective January 1, 2008, the Company adopted SFAS No. 157
for financial assets and liabilities. SFAS No. 157 defines fair value,
provides guidance for measuring fair value and requires certain disclosures.
SFAS No. 157 does not require any new fair value measurements in the
financial statements, but rather applies to all other accounting pronouncements
that require or permit fair value measurements.
SFAS No. 157 discusses valuation techniques, such as the market
approach (comparable market prices), the income approach (present value of
future income or cash flow), and the cost approach (cost to replace the service
capacity of an asset or replacement cost). The statement utilizes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value into three broad levels. The following is a brief description of
those three levels:
·
Level
1: Observable inputs such as quoted prices (unadjusted) in active markets for
identical assets or liabilities.
·
Level
2: Inputs, other than quoted prices that are observable for the asset or
liability, either directly or indirectly. These include quoted prices for
similar assets or liabilities in active markets and quoted prices for identical
or similar assets or liabilities in markets that are not active.
·
Level
3: Unobservable inputs that reflect the reporting entitys own assumptions.
The Companys population of financial assets and liabilities subject to
fair value measurements and the necessary disclosures are as follows (in
thousands):
|
|
Fair Value
As of
|
|
Fair Value Measurement at June 27, 2008
(Using Fair Value Hierarchy)
|
|
|
|
June 27, 2008
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,796
|
|
$
|
9,796
|
|
$
|
|
|
$
|
|
|
Investments
|
|
19,300
|
|
|
|
|
|
19,300
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
Convertible Senior Notes
|
|
$
|
89,099
|
|
$
|
|
|
$
|
89,099
|
|
$
|
|
|
The Company holds an equity investment in HHNEC, a non-public entity.
This investment represents a minority interest of approximately 10% recorded at
fair value on the date of acquisition of Jazz Semiconductor.
The Convertible Senior Notes fair value is based on a price quoted in a
thinly traded market for these Notes during the second quarter of 2008.
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Item 2.
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
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:
·
the
timing or potential benefits of the proposed merger with Tower Semiconductor
Ltd.;
·
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.
OVERVIEW
The Company
We were incorporated on August 12, 2005, for the purpose of
acquiring, through a merger, capital stock exchange, stock purchase, asset
acquisition or other similar business combination, one or more domestic and/or
foreign operating businesses in the technology, multimedia and networking
sectors, focusing specifically on businesses that develop or provide
technology-based products and services in the software, semiconductor, wired
and wireless networking, consumer multimedia and information technology-enabled
services segments.
We are based in Newport Beach, California and following the acquisition
of Jazz Semiconductor Inc. (Jazz Semiconductor), we are now an independent
semiconductor foundry focused on specialty process technologies for the
manufacture of analog and mixed-signal semiconductor devices. Our 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. Our
customers use the analog and mixed-signal semiconductor devices in products
they design that are used in cellular phones, wireless local area networking
devices, digital TVs, set-top boxes, gaming devices, switches, routers and
broadband modems.
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Acquisition of Jazz Semiconductor
On February 16, 2007, we completed the acquisition of all the
outstanding shares of capital stock of Jazz Semiconductor, Inc., a Delaware
corporation for $262.4 million in cash, and acquired, as part of the assets of
Jazz Semiconductor, $26.1 million in cash. The acquisition was accounted for
under the purchase method of accounting in accordance with U.S. generally
accepted accounting principles for accounting and financial reporting purposes.
Under this method, Jazz Semiconductor was treated as the acquired company for
financial reporting purposes. As a result, the accompanying unaudited condensed
consolidated financial statements include the results of operations for Jazz
Semiconductor following the date of acquisition. In July 2007, an
agreement was reached with former Jazz Semiconductor stockholders that reduced
the purchase price by $9.3 million to $253.1 million. This reduction has been
reflected in the accompanying unaudited condensed consolidated financial
statements following July 2007.
Prior to March 12, 2002, Jazz Semiconductors business was
Conexants Newport Beach, California semiconductor fabrication operations. Jazz
Semiconductors business was formed upon Conexants contribution of those
fabrication operations to its wholly-owned subsidiary, Newport Fab, LLC and
Conexants contribution of Newport Fab, LLC to Jazz Semiconductor, together
with a cash investment in Jazz Semiconductor by affiliates of The Carlyle
Group. Conexant and affiliates of The Carlyle Group continued to be the largest
stockholders of Jazz Semiconductor until its acquisition in February 2007.
Substantially all of Jazz Semiconductors business operation was conducted by
its wholly-owned subsidiary, Newport Fab, LLC. Since its formation in early
2002, Jazz Semiconductor has transitioned its business from a captive
manufacturing facility within Conexant to an independent semiconductor foundry.
The accompanying unaudited condensed consolidated statements of
operations reflect the operating results of the acquired Jazz Semiconductor
following the date of acquisition. However, in the results of operations
section below we have also presented pro forma unaudited revenues, cost of
revenues, gross margins and operating expenses assuming the acquisition of Jazz
Semiconductor had occurred on January 1, 2007. We present the pro forma
information in order to provide a more meaningful comparison of our operating
results with prior periods.
Merger with Tower Semiconductor, Ltd
On May 19,
2008, we entered into an Agreement and Plan of Merger and Reorganization with
Tower Semiconductor Ltd., an Israeli company (Tower), and its wholly-owned
subsidiary, Armstrong Acquisition Corp., a Delaware corporation (Merger Sub),
pursuant to which Merger Sub will merge with and into us, with us surviving the
merger as a wholly-owned subsidiary of Tower.
The merger is
subject to obtaining approval of our stockholders and the satisfaction of
certain other conditions. If the merger is completed, each share of our common
stock not held by Tower, Merger Sub or us will automatically be converted into
and represent the right to receive 1.8 ordinary shares of Tower. Cash will be
paid in lieu of fractional shares.
Under the
merger agreement, Tower will assume all outstanding warrants to purchase the
shares of our common stock that are outstanding immediately prior to the
effective time of the merger, and these warrants will become exercisable for
Tower ordinary shares. Each such warrant to purchase shares of our common stock
will become a warrant to purchase 1.8 Tower ordinary shares at an exercise
price of $2.78 per Tower ordinary share, which is equal to the existing price
of $5.00 divided by the exchange ratio of 1.8. Fractional ordinary shares of
Tower will be rounded up to the nearest whole number.
Following the
effective time of the merger, each holder of the Convertible Senior Notes will
have the right to convert such holders note into Tower ordinary shares. Each
$1,000 in original principal amount of Convertible Senior Notes will be
convertible into 245.57 Tower ordinary shares, representing an implied
conversion price of approximately $4.07 per Tower ordinary share.
Under the
merger agreement, Tower will assume all options to purchase shares of our
common stock that are outstanding immediately prior to the effective time of
the merger, whether vested or unvested, and these options will become
exercisable for Tower ordinary shares. Each option to purchase shares of our
common stock outstanding at the effective time of the merger will become an
option to purchase a number of Tower ordinary shares equal to 1.8 multiplied by
the number of shares of our common stock that such option was exercisable for
prior to the effective time, rounded down to the nearest whole number of Tower
ordinary shares, and the per share exercise price of each option will equal the
exercise price of such option divided by 1.8, rounded up to the nearest cent.
As of June 27, 2008, we have incurred approximately $1.5 million
in merger costs, which are included as part of selling, general &
administrative expenses in the statements of operations. It is anticipated that
the Merger will be consummated in the third quarter of 2008; until then both
companies will continue to operate independently.
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Critical
Accounting Policies and Estimates
Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
net revenues and expenses in the reporting period. We regularly evaluate
estimates and assumptions related to allowances for doubtful accounts, sales
returns allowances, inventory 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
. We base our estimates and assumptions on
current facts, historical experience and various other factors that we believe
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities and
the accrual of costs and expenses that are not readily apparent from other
sources. Accordingly, the actual results may differ materially and adversely
from our estimates. To the extent there are material differences between the
estimates and the actual results, future results of our operations will be
affected.
Revenue Recognition
Our net revenues are generated principally from sales of semiconductor
wafers. We derive the remaining balance of our net revenues from the resale of
photomasks and other engineering services. The majority of our sales occur
through the efforts of our direct sales force.
In accordance with SEC Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements (SAB No. 101), and SAB No. 104,
Revenue Recognition (SAB No. 104), the Company recognizes product
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. However, we do
not recognize revenues until all customer acceptance requirements have been
met, when applicable.
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.
We provide for
sales returns and allowances relating to specific yield or quality commitments
as a reduction of revenues at the time of shipment based on historical
experience and specific identification of an event necessitating an allowance. Actual
allowances given have been within managements expectations.
Accounts Receivable
We
perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customers current credit worthiness, as
determined by our review of their current credit information.
We monitor collections and
payments from our customers and maintain an allowance for doubtful accounts
based upon historical experience, industry norms and specific customer
collection issues that we have identified. While our credit losses have
historically been within our expectations and the allowance established, we may
not continue to experience the same credit loss rates as we have in the past. Our
accounts receivable are concentrated among a relatively small number of
customers. Should there be a significant change in the liquidity or financial position
of any one customer, resulting in an impairment of its ability to make
payments, we may be required to increase the allowance for doubtful accounts,
which could have a material adverse impact on our consolidated financial
position, results of operations and cash flows.
Inventories
We initiate production of a majority of our wafers once we have
received an order from a customer. We generally do not carry a significant
inventory of finished goods except in response to specific customer requests or
if we determine to produce wafers in excess of orders because we forecast
future excess demand and capacity constraints. We seek to purchase and maintain
raw materials at sufficient levels to meet lead times based on forecasted
demand. If forecasted demand exceeds
17
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actual
demand, we may need to provide an allowance for excess or obsolete quantities
on hand. We also review our inventories for indications of obsolescence or
impairment and provide reserves as deemed necessary. We scrap inventory that
has been written down after it is determined that it cannot be sold. If actual
market conditions are less favorable than those projected by management,
additional inventory reserves may be required. We state our inventories at the
lower of cost, using the first-in, first-out method, or market.
Impairment of Assets
The
amounts and useful lives assigned to intangible assets acquired impact the
amount and timing of future amortization. The value of our intangible assets
could be impacted by future adverse changes such as: (i) future declines
in our operating results, (ii) a decline in the valuation of our stock
price, (iii) a significant slowdown in the semiconductor industry, (iv) any
failure to meet our projected performance of future operating results. We
periodically review 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. We do not have
any intangible assets with indefinite useful lives.
We
conducted an impairment review as of June 27, 2008, due to our proposed
merger with Tower and the recent decline in our stock price. We used the income
approach methodology of valuation that includes undiscounted cash flows to
determine the fair value of our 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 we use
to conduct our business. As a result of this analysis, no assets were
considered to be impaired and we have not recognized any impairment loss for
any long-lived or intangible asset as of June 27, 2008.
Accounting for Income Taxes
Effective January 1, 2007, we adopted Financial Accounting
Standards Board (FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109
(FIN No. 48). We are subject to
U.S. federal income tax as well as income tax in multiple state and foreign
jurisdictions. We believe our tax return positions are fully supported, but tax
authorities may challenge certain positions, which may not be fully sustained. We
assess our income tax positions and record tax benefits for all years subject
to examination based upon our evaluation of the facts, circumstances, and
information available at the reporting date. For uncertain tax positions where
it is more likely than not that a tax benefit will be sustained, we record the
greatest amount of tax benefit that has a greater than 50 percent probability
of being realized upon effective settlement with a taxing authority that has
full knowledge of all relevant information. For uncertain income tax positions
where it is not more likely than not that a tax benefit will be sustained, no
tax benefit has been recognized in the financial statements. Our 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.
We account for income taxes under the provisions of Statement of
Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes, (SFAS No. 109). SFAS No. 109
requires that we recognize in our consolidated financial statements:
·
deferred
tax assets and liabilities for the future tax consequences of events that have
been recognized in our consolidated financial statements or our tax returns;
and
·
the
amount of taxes payable or refundable for the current year.
The tax consequences of most events recognized in the current years
financial statements are included in determining income taxes currently
payable. However, because tax laws and financial accounting standards differ in
their recognition and measurement of assets, liabilities, equity, revenues,
expenses and gains and losses, differences arise between the amount of taxable
income and pretax financial income for a year and between the tax bases of
assets or liabilities and their reported amounts in our financial statements. It
is assumed that the reported amounts of assets and liabilities will be
recovered and settled, respectively, in the future. Accordingly, a difference
between the tax basis of an asset or a liability and its reported amount on the
balance sheet will result in a taxable or a deductible amount in some future
years when the related liabilities are settled or the reported amounts of the
assets are recovered.
To determine the amount of taxes payable or refundable for the current
year, we are required to estimate our income taxes. Our effective tax rate may
be subject to fluctuations during the fiscal year as new information is
obtained, which may affect the assumptions we use to estimate our annual
effective tax rate, including factors such as valuation allowances against
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deferred tax assets, reserves for tax contingencies, utilization of tax
credits and changes in or interpretation of tax laws in jurisdictions where we
conduct operations
Utilization of net operating losses, credit carryforwards, and certain
deductions may be subject to a substantial annual limitation due to ownership
change limitations provided by the Internal Revenue Code and similar state
provisions. The tax benefits related to future utilization of federal and state
net operating losses, tax credit carryforwards, and other deferred tax assets
may be limited or lost if cumulative changes in ownership exceed 50% within any
three-year period. Additional limitations on the use of these tax attributes
could occur in the event of possible disputes arising in examinations from
various tax authorities. We are not currently under examination.
Pension Plans
We maintain a defined benefit pension plan for our employees covered by
a collective bargaining agreement. For financial reporting purposes, the
calculation of net periodic pension costs is based upon a number of actuarial
assumptions, including a discount rate for plan obligations, an assumed rate of
return on pension plan assets and an assumed rate of compensation increase for
employees covered by the plan. All of these assumptions are based upon
managements judgment, considering all known trends and uncertainties. Actual
results that differ from these assumptions would impact future expense
recognition and cash funding requirements of our retirement plans.
Stock Based
Compensation
We record equity compensation expense in accordance with SFAS No. 123
(revised 2004), Share-Based Payment (SFAS No. 123R). SFAS No. 123R
requires companies to estimate the fair value of stock options on the date of
grant using an option-pricing model. The value of the portion of the award that
is ultimately expected to vest is recognized as expense ratably over the
requisite service periods. We have estimated the fair value of stock options as
of the date of grant using the Black-Scholes option pricing model, which was
developed for use in estimating the value of traded options that have no
vesting restrictions and that are freely transferable. The Black-Scholes model
considers, among other factors, the expected life of the award and the expected
volatility of our stock price. Although the Black-Scholes model meets the
requirements of SFAS No. 123R and SAB No. 107, Share-Based
Payment (SAB No. 107), the fair values generated by the model may
not be indicative of the actual fair values of our equity awards, as it does
not consider other factors important to those awards to employees, such as
continued employment, periodic vesting requirements, and limited
transferability. We estimate stock price volatility based on historical
volatility of its own stock price and its peers. We recognize compensation
expense using the straight-line amortization method for stock-based
compensation awards with graded vesting.
The key assumptions used in the Black-Scholes model in determining the
fair value of options granted during the three months ended June 27, 2008
are as follows:
Expected life in years
|
|
6
|
|
Expected price volatility
|
|
48.5% - 65.7
|
%
|
Risk-free interest rate
|
|
2.88% - 3.84
|
%
|
Dividend yield
|
|
0.00
|
%
|
RESULTS OF OPERATIONS
For the three months ended June 27, 2008, we had
a net loss of $4.6 million compared to a net loss of $12.7 million for the
corresponding period in 2007.
For the six months ended June 27, 2008, we had a
net loss of $8.6 million compared to a net loss of $24.4 million for the
corresponding period in 2007. The results for the six months ended June 29,
2007 include the results of operations for Jazz Semiconductor only from February 17,
2007 through June 29, 2007. Our primary source of income prior to the
consummation of our initial business combination with Jazz Semiconductor on February 16,
2007, was interest earned on the funds held in our trust account.
Pro Forma Financial Information
The acquisition of Jazz is our first business
combination and accordingly, we do not think a comparison of the results of
operations and cash flows for the six months ended June 27, 2008 versus
the corresponding period in 2007 is very beneficial to our investors. In order
to assist investors in better understanding the changes in our business between
the six months ended June 27, 2008 and June 29, 2007, we are
presenting in the discussion below pro forma results for us and Jazz
19
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Semiconductor for the six
months ended June 29, 2007, as if the acquisition of Jazz Semiconductor
occurred on January 1, 2007. We derived the pro forma results from (i) the
unaudited condensed consolidated financial statements of Jazz Semiconductor for
the period from December 30, 2006 to February 16, 2007 (the date of
the Jazz acquisition) and our unaudited condensed consolidated financial
statements for the six months ended June 29, 2007.
The pro forma results are not necessarily indicative of the results
that may have actually occurred had the acquisition taken place on the date
noted, or the future financial position or operating results of us or Jazz
Semiconductor. The pro forma results exclude the write-off of in-process
research and development that was expensed during the six months ended June 29,
2007. The pro forma adjustments are based upon available information and
assumptions that we believe are reasonable. The pro forma adjustments include
adjustments for interest expenses (relating primarily to interest on the 8% Convertible
Senior Notes due 2011 (the Convertible Senior Notes) issued in December 2006)
and increased 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 a valuation of all the assets and liabilities in accordance with SFAS
No. 141, Business Combinations. The depreciation and amortization
expense adjustments reflected in the pro forma results of operations are based
on the final valuation of Jazz Semiconductors tangible and intangible assets
described in Note 3 to our unaudited condensed consolidated financial
statements.
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 27, 2008
|
|
June 29, 2007
|
|
June 27, 2008
|
|
June 29, 2007
|
|
|
|
(actual,
unaudited)
|
|
(actual,
unaudited)
|
|
(actual,
unaudited)
|
|
(pro forma,
unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
47,516
|
|
$
|
52,360
|
|
$
|
98,346
|
|
$
|
100,457
|
|
Cost of revenues
|
|
41,052
|
|
52,955
|
|
84,437
|
|
104,585
|
|
Gross profit (loss)
|
|
6,464
|
|
(595
|
)
|
13,909
|
|
(4,128
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
2,931
|
|
3,734
|
|
6,841
|
|
8,713
|
|
Selling, general and administrative
|
|
5,395
|
|
4,533
|
|
10,359
|
|
14,772
|
|
Amortization of intangible assets
|
|
346
|
|
378
|
|
692
|
|
919
|
|
Total operating expenses
|
|
8,672
|
|
8,645
|
|
17,892
|
|
24,404
|
|
Loss from operations
|
|
(2,208
|
)
|
(9,240
|
)
|
(3,983
|
)
|
(28,532
|
)
|
Net interest expense
|
|
(3,076
|
)
|
(3,315
|
)
|
(6,245
|
)
|
(4,685
|
)
|
Other expenses
|
|
712
|
|
(130
|
)
|
1,612
|
|
(243
|
)
|
Net loss
|
|
$
|
(4,572
|
)
|
$
|
(12,685
|
)
|
$
|
(8,616
|
)
|
$
|
(33,460
|
)
|
Pro forma net loss per share basic and
diluted
|
|
$
|
(0.24
|
)
|
$
|
(0.53
|
)
|
$
|
(0.45
|
)
|
$
|
(1.24
|
)
|
Comparison of Three Months Ended June 27, 2008 and June 29,
2007
Revenues
Our revenues are generated principally from the sale
of semiconductor wafers and in part from the sale of photomasks and other
engineering services. Net revenues are net of provisions for returns and
allowances. Revenues are categorized by technology group into specialty process
revenues and standard process revenues. Specialty process revenues include
revenues
from
wafers manufactured using our specialty process technologiesadvanced analog
CMOS, radio frequency CMOS or RF CMOS, high voltage CMOS, bipolar CMOS or
BiCMOS, SiGe BiCMOS, and bipolar CMOS double-diffused metal oxide semiconductor
or BCD, processes. Standard process revenues are revenues derived from wafers
employing digital CMOS and standard analog process technologies.
20
Table of Contents
The following table presents net revenues for the
three months ended June 27, 2008 and June 29, 2007:
|
|
Net Revenues (in thousands, except percentages)
|
|
|
|
Three Months Ended
June 27, 2008
|
|
Three Months Ended
June 29, 2007
|
|
|
|
|
|
|
|
Amount
|
|
% of Net
Revenues
|
|
Amount
|
|
% of Net
Revenues
|
|
Increase
(Decrease)
|
|
%
Change
|
|
Specialty Process Revenues
|
|
$
|
35,135
|
|
73.9
|
|
$
|
40,493
|
|
77.3
|
|
$
|
(5,358
|
)
|
(13.2
|
)
|
Standard Process Revenues
|
|
12,381
|
|
26.1
|
|
11,867
|
|
22.7
|
|
514
|
|
4.3
|
|
Net Revenues
|
|
$
|
47,516
|
|
100.0
|
|
$
|
52,360
|
|
100.0
|
|
$
|
(4,844
|
)
|
(9.3
|
)
|
Our net revenues decreased by $4.8 million or 9.3% to
$47.5 million for the three months ended June 27, 2008 compared to $52.4
million for the corresponding period in 2007. This decrease is the result of a
$5.4 million or 13.2% decrease in specialty process net revenues to $35.1
million for the three months ended June 27, 2008 from $40.5 million for
the corresponding period in 2007 partially offset by a $0.5 million or 4.3%
increase in standard process net revenues to $12.4 million for the three months
ended June 27, 2008 from $11.9 million for the corresponding period in
2007.
The decrease in specialty process revenues can be
attributed to the change of customer mix and lower overall demand related to
the weaker economy. Continued growth of demand from new smaller customers for
specialty process products helped offset some of the weaker demand from larger
customers.
The marginal increase in standard process revenues can
be attributed to increased revenues from a single customer which offset lower
revenues from other customers for the three months ended June 27, 2008
compared to the corresponding period in 2007.
The change in revenues mix of 74% specialty process
revenues and 26% standard process revenues for the three months ended June 27,
2008 compared to 77% and 23%, respectively, for the corresponding period in
2007, was largely the result of a decrease in specialty process revenues. While
we intend to continue to offer full service solutions to our customer base, we
believe our competitive advantage is to focus on specialty process revenues.
Cost of Revenues
Cost of revenues
consists
primarily of purchased manufactured materials, labor, manufacturing-related
overheads and engineering services. Purchased manufactured materials consist primarily of purchase price
of raw wafers and shipping costs incurred. Cost of revenues also includes the
purchase of photomasks, provision for test services and the cost of defective
inventory caused by fab and manufacturing yields as incurred. We review our
inventories for indications of obsolescence or impairment and provide reserves
as deemed necessary. Royalty expenses incurred in connection with certain of
our process technologies, and depreciation and amortization expense on assets
used in the manufacturing process are also included within the cost of
revenues.
The following table presents cost of revenues for the
three months ended June 27, 2008 and June 29, 2007:
|
|
Cost of Revenues (in thousands, except percentages)
|
|
|
|
Three Months Ended
June 27, 2008
|
|
Three Months Ended
June 29, 2007
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
% of Net
|
|
Increase
|
|
%
|
|
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
Revenues
|
|
(Decrease)
|
|
Change
|
|
Cost of revenues (not including
depreciation & amortization of intangible assets)
|
|
$
|
32,539
|
|
68.5
|
|
$
|
43,321
|
|
82.7
|
|
$
|
(10,782
|
)
|
(24.9
|
)
|
Cost of revenues depreciation &
amortization of intangible assets
|
|
8,513
|
|
17.9
|
|
9,634
|
|
18.4
|
|
(1,121
|
)
|
(11.6
|
)
|
Total cost of revenues
|
|
$
|
41,052
|
|
86.4
|
|
$
|
52,955
|
|
101.1
|
|
$
|
(11,903
|
)
|
(22.5
|
)
|
Our cost of revenues decreased by $11.9 million or
22.5% to $41.1 million for the three months ended June 27, 2008 compared
to $53.0 million for the corresponding period in 2007. Cost of revenues as a
percentage of revenues decreased to 86.4% for the three months ended June 27,
2008 compared to 101.1% for the corresponding period in 2007.
The decrease in cost of revenues as a percentage of
revenues was mainly due to higher fabrication capacity utilization and to a
lesser extent due to managements continued cost reduction efforts and lower
net revenues for the three months ended June 27, 2008 as compared to the
corresponding period in 2007. Higher fabrication capacity utilization resulted
in a lower allocation of fixed production costs per unit to inventory which
reduced the cost per unit sold and correspondingly, decreased the cost of
revenues. Cost reduction efforts, which included a two week factory shut down
and mandatory unpaid leave for all personnel in the second quarter of 2008,
resulted in lower labor and overhead costs for the three months ended June 27,
2008 compared to the corresponding period in 2007.
21
Table
of Contents
The amortization of acquired technology and backlog
has been allocated to cost of revenues and primarily relates to the developed
technology acquired from the acquisition of Jazz on February 16, 2007.
Gross Profit
The following table presents gross profit for the
three months ended June 27, 2008 and June 29, 2007:
|
|
Gross Profit (in thousands, except percentages)
|
|
|
|
Three Months Ended
June 27, 2008
|
|
Three Months Ended
June 29, 2007
|
|
|
|
|
|
|
|
Amount
|
|
% of Net
Revenues
|
|
Amount
|
|
% of Net
Revenues
|
|
Increase
(Decrease)
|
|
%
Change
|
|
Gross profit
|
|
$
|
6,464
|
|
13.6
|
|
$
|
(595
|
)
|
(1.1
|
)
|
$
|
7,059
|
|
(1186.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our gross profit for the
three months ended June 27, 2008, was $6.5 million or 13.6% of net
revenues compared to negative gross profit of $0.6 million or 1.1% of net
revenues for the corresponding period in 2007.
The increase in gross profit of $7.1 million
during the three months ended June 27,
2008 is primarily attributed to lower labor and overhead costs and
decreased cost per unit sold due to higher fabrication capacity utilization.
Operating Expenses
The following table presents operating expenses for
the three months ended June 27, 2008 and June 29, 2007:
|
|
Operating Expense (in thousands, except percentages)
|
|
|
|
Three Months Ended
June 27, 2008
|
|
Three Months Ended
June 29, 2007
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
% of Net
|
|
Increase
|
|
%
|
|
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
Revenues
|
|
(Decrease)
|
|
Change
|
|
Research and development
|
|
$
|
2,931
|
|
6.2
|
|
$
|
3,734
|
|
7.1
|
|
$
|
(803
|
)
|
(21.5
|
)
|
Selling, general and administrative
|
|
5,395
|
|
11.4
|
|
4,533
|
|
8.7
|
|
862
|
|
19.0
|
|
Amortization of intangible assets
|
|
346
|
|
0.7
|
|
378
|
|
0.7
|
|
(32
|
)
|
(8.5
|
)
|
Total operating expenses
|
|
$
|
8,672
|
|
18.3
|
|
$
|
8,645
|
|
16.5
|
|
$
|
27
|
|
0.3
|
|
Our operating expenses increased by less than $0.1
million or 0.3% to $8.7 million for the three months ended June 27, 2008,
compared to $8.6 million for the corresponding period in 2007. The change in operating expense was the net
effect of a $0.9 million increase in selling, general and administrative
expenses offset by a $0.8 million decrease in research and development expense.
Research & Development
Expenses
. Research and
development expenses consist primarily of salaries and wages for process and
technology research and development activities, fees incurred in connection
with the license of design libraries and the cost of wafers used for research
and development purposes. Our research
and development expenses decreased by $0.8 million or 21.5% to $2.9 million for
the three months ended June 27, 2008, compared to $3.7 million of research
and development expenses for the corresponding period in 2007. The decrease in expenses of $0.8 million is
mainly attributed to:
·
$0.4
million due to lower labor and benefits costs realized from lower head count
and cost reduction efforts;
·
$0.3
million due to lower spending and changes in allocated expenses;
·
$0.3
million decrease in other research and development expenditures as increased
costs were allocated to cost of revenues associated with billable engineering
services for the three months ended June 27, 2008 compared to the
corresponding period in 2007; offset by
·
$0.2
million increase in depreciation expense and photomask purchases.
22
Table of Contents
Selling, General and Administrative
Expenses
. Selling,
general and administrative expenses consist primarily of salaries and benefits
for selling and administrative personnel, which includes the human resources,
executive, finance, information technology and legal departments. These
expenses also include fees for professional services, legal services and other
administrative expenses associated with being a publicly-traded company. Our
selling, general and administrative expenses increased by $0.9 million or 19.0%
to $5.4 million for the three months ended June 27, 2008, compared to $4.5
million of selling, general and administrative expenses for the corresponding
period in 2007. The increase in expenses
of $0.9 million is mainly attributed to:
·
$1.5 million increase in legal and
professional fees associated with the merger efforts with Tower; offset by
·
$0.4 million due to lower head count
and cost reduction efforts;
·
$0.2 million due to lower spending on
advertising, business travel, contract labor and other expenses.
Amortization
of Intangible Assets.
Amortization of intangible assets of $0.3
million reflects the pre-acquisition amortization expenses.
Interest and Other (Expense) Income, Net
The following table presents interest and other income
for the three months ended June 27, 2008 and June 29, 2007:
|
|
Interest and Other Expense, Net (in thousands, except percentages)
|
|
|
|
Three Months Ended
June 27, 2008
|
|
Three Months Ended
June 29, 2007
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
% of Net
|
|
Increase
|
|
%
|
|
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
Revenues
|
|
(Decrease)
|
|
Change
|
|
Interest income
|
|
$
|
16
|
|
0.0
|
|
$
|
468
|
|
0.9
|
|
$
|
(452
|
)
|
(96.6
|
)
|
Interest expense
|
|
(3,092
|
)
|
(6.5
|
)
|
(3,783
|
)
|
(7.2
|
)
|
691
|
|
18.3
|
|
Interest expense, net
|
|
(3,076
|
)
|
(6.5
|
)
|
(3,315
|
)
|
(6.3
|
)
|
239
|
|
7.2
|
|
Other income (expense), net
|
|
712
|
|
1.5
|
|
(130
|
)
|
(0.2
|
)
|
842
|
|
647.7
|
|
Interest and other expense, net
|
|
$
|
(2,364
|
)
|
(5.0
|
)
|
$
|
(3,445
|
)
|
(6.5
|
)
|
$
|
1,081
|
|
31.4
|
|
Interest and other income for the three months ended June 27,
2008 represents $0.2 million of net gain from the sale of equipment and $0.5
million of interest and other non-operating income. Interest expense for the three months ended June 27,
2008 mainly represents interest on our Convertible Senior Notes. Interest and
other income for the three months ended June 29, 2007 mainly represents
interest earned on the net proceeds of our initial public offering and the
private placement of our Convertible Senior Notes for the period from January 1,
2007 until the consummation of our acquisition in February 2007. Interest
expense for the three months ended June 29, 2007 mainly represents
interest on our Convertible Senior Notes.
Comparison of Six Months Ended June 27, 2008 and June 29,
2007
Revenues
The following table presents net revenues for the six
months ended June 27, 2008 (actual) and June 29, 2007 (pro forma):
|
|
Net Revenues (in thousands, except percentages)
|
|
|
|
Six Months Ended
June 27, 2008
(actual, unaudited)
|
|
Six Months Ended
June 29, 2007
(pro forma, unaudited)
|
|
|
|
|
|
|
|
Amount
|
|
% of Net
Revenues
|
|
Amount
|
|
% of Pro forma
Net Revenues
|
|
Increase
(Decrease)
|
|
%
Change
|
|
Specialty Process Revenues
|
|
$
|
74,319
|
|
75.6
|
|
$
|
78,952
|
|
78.6
|
|
$
|
(4,633
|
)
|
(5.9
|
)
|
Standard Process Revenues
|
|
24,027
|
|
24.4
|
|
21,505
|
|
21.4
|
|
2,522
|
|
11.7
|
|
Net Revenues
|
|
$
|
98,346
|
|
100.0
|
|
$
|
100,457
|
|
100.0
|
|
$
|
(2,111
|
)
|
(2.1
|
)
|
23
Table of Contents
Our net revenues decreased by $2.1 million or 2.1% to
$98.3 million for the six months ended June 27, 2008 compared to $100.5
million of pro forma net revenues for the corresponding period in 2007. This decrease is the result of a $4.6 million
or 5.9% decrease in specialty process net revenues to $74.3 million for the six
months ended June 27, 2008 from $79.0 million of pro forma specialty
process revenues for the corresponding period in 2007 and a $2.5 million or
11.7% increase in standard process net revenues to $24.0 million for the six
months ended June 27, 2008 from $21.5 million of pro forma standard
process revenues for the corresponding period in 2007.
The decrease in specialty process revenues can be
attributed to the change of customer mix and lower overall demand related to
the weaker economy. Continued growth of
demand from new smaller customers for specialty process products helped offset
some of the weaker demand from larger customers.
The marginal increase in standard process revenues can
be attributed to increased demand from a single large customer as well as
consistent demand from other larger customers for the three months ended June 27,
2008 compared to the corresponding period in 2007.
The change in revenues mix of 76% specialty process
revenues and 24% standard process revenues for the six months ended June 27,
2008 compared to 79% and 21%, respectively, for the corresponding period in
2007, was largely the result of a decrease in specialty process revenues. While we intend to continue to offer full
service solutions to our customer base, we believe our competitive advantage is
to focus on specialty process revenues.
Cost of Revenues
The following table presents cost of revenues for the
six months ended June 27, 2008 (actual) and June 29, 2007 (pro
forma):
|
|
Cost of Revenues (in thousands, except percentages)
|
|
|
|
Six Months Ended
June 27, 2008
(actual, unaudited)
|
|
Six Months Ended
June 29, 2007
(pro forma, unaudited)
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
% of Pro Forma
|
|
Increase
|
|
%
|
|
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
Net Revenues
|
|
(Decrease)
|
|
Change
|
|
Cost of revenues (not including
depreciation & amortization of intangible assets)
|
|
$
|
67,432
|
|
68.6
|
|
$
|
85,894
|
|
85.5
|
|
$
|
(18,462
|
)
|
(21.5
|
)
|
Cost of revenues depreciation &
amortization of intangible assets
|
|
17,005
|
|
17.3
|
|
18,691
|
|
18.6
|
|
(1,686
|
)
|
(9.0
|
)
|
Total cost of revenues
|
|
$
|
84,437
|
|
85.9
|
|
$
|
104,585
|
|
104.1
|
|
$
|
(20,148
|
)
|
(19.3
|
)
|
Our cost of revenues decreased by $20.1 million or
19.3% to $84.4 million for the six months ended June 27, 2008, compared to
$104.6 million of pro forma cost of revenues for the corresponding period in
2007. Cost of revenues as a percentage of revenues decreased to 85.9% for the
six months ended June 27, 2008 compared to 104.1% (on a pro forma basis)
for the corresponding period in 2007.
The decrease in cost of revenues as a percentage of
revenues was mainly due to higher fabrication capacity utilization and cost
reduction efforts which have resulted in lower labor and overhead costs for the
six months ended June 27, 2008 as compared to the corresponding period in
2007. The higher fabrication capacity utilization resulted in a lower
allocation of fixed production costs per unit to inventory which reduced the
cost per unit sold and correspondingly decreased the cost of revenues for the
six months ended June 27, 2008 compared to the corresponding period in
2007.
The amortization of acquired technology and backlog
has been allocated to cost of revenues and primarily relates to the developed
technology acquired from the acquisition of Jazz on February 16, 2007.
24
Table of Contents
Gross Profit (Loss)
The following table presents gross profit (loss) for
the six months ended June 27, 2008 (actual) and June 29, 2007 (pro
forma):
|
|
Gross Profit (Loss) (in thousands, except percentages)
|
|
|
|
Six Months Ended
June 27, 2008
(actual, unaudited)
|
|
Six Months Ended
June 29, 2007
(pro forma, unaudited)
|
|
|
|
|
|
|
|
Amount
|
|
% of Net
Revenues
|
|
Amount
|
|
% of Pro
Forma
Net Revenues
|
|
Increase
(Decrease)
|
|
%
Change
|
|
Gross profit (loss)
|
|
$
|
13,909
|
|
14.1
|
|
$
|
(4,128
|
)
|
(4.1
|
)
|
$
|
18,037
|
|
(436.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our gross profit for the
six months ended June 27, 2008 was $13.9 million or 14.1% of net revenues
compared to pro forma gross loss of $4.1
million or (4.1%) of pro forma net revenues for the corresponding period in
2007. The increase in gross profit of
$18.0 million
during the six
months ended June 27, 2008 is primarily attributed to lower labor
and overhead costs as well as lower cost per unit sold which was the result of
higher fabrication capacity utilization.
Operating Expenses
The following table presents operating expenses for
the six months ended June 27, 2008 (actual) and June 29, 2007 (pro
forma):
|
|
Operating Expenses (in thousands, except percentages)
|
|
|
|
Six Months Ended
June 27, 2008
(actual, unaudited)
|
|
Six Months Ended
June 29, 2007
(pro forma, unaudited)
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
% of Pro Forma
|
|
Increase
|
|
%
|
|
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
Net Revenues
|
|
(Decrease)
|
|
Change
|
|
Research and development
|
|
$
|
6,841
|
|
7.0
|
|
$
|
8,713
|
|
8.7
|
|
$
|
(1,872
|
)
|
(21.5
|
)
|
Selling, general and administrative
|
|
10,359
|
|
10.5
|
|
14,772
|
|
14.7
|
|
(4,413
|
)
|
(29.9
|
)
|
Amortization of intangible assets
|
|
692
|
|
0.7
|
|
919
|
|
0.9
|
|
(227
|
)
|
(24.7
|
)
|
Total operating expenses
|
|
$
|
17,892
|
|
18.2
|
|
$
|
24,404
|
|
24.3
|
|
$
|
(6,512
|
)
|
(26.7
|
)
|
Our operating expenses decreased by $6.5 million or
26.7% to $17.9 million for the six months ended June 27, 2008 compared to
$24.4 million of pro forma operating expenses for the corresponding period in
2007. The expense decrease is mainly
attributed to lower selling, general and administrative expenses for the six
months ended June 27, 2008. This
reduction in cost is primarily the result of general and administrative costs
related to the acquisition of Jazz Semiconductor incurred during the
corresponding period in 2007 and managements continued efforts to reduce
operating expenses since 2007.
Research & Development
Expenses
. Research and
development expenses consist primarily of salaries and wages for process and
technology research and development activities, fees incurred in connection
with the license of design libraries and the cost of wafers used for research
and development purposes. Our research
and development expenses decreased by $1.9 million or 21.5% to $6.8 million for
the six months ended June 27, 2008 compared to $8.7 million of pro forma
research and development expenses for the corresponding period in 2007. The decrease in expenses of $1.9 million is
mainly attributed to:
·
$0.8
million due to lower labor and benefits costs realized from lower head count and
cost reduction efforts;
·
$0.6
million due to lower spending and changes in allocated expenses;
·
$0.5
million due to lower photomask purchases and engineering costs associated with
less engineering activity;
·
$0.2
million decrease due to expenses incurred in 2007 related to the Polar
Semiconductor, Inc. (formerly PolarFab) process qualification; offset by
·
$0.2
million increase in depreciation expenses.
25
Table of Contents
Selling, General and Administrative
Expenses
. Selling,
general and administrative expenses consist primarily of salaries and benefits
for selling and administrative personnel, which includes the human resources,
executive, finance, information technology and legal departments. These
expenses also include fees for professional services, legal services and other
administrative expenses associated with being a publicly-traded company. Our
selling, general and administrative expenses decreased by $4.4 million or 29.9%
to $10.4 million for the six months ended June 27, 2008, compared to $14.8
million of pro forma selling, general and administrative expenses for the
corresponding period in 2007. The
decrease in expenses of $4.4 million is mainly attributed to:
·
$2.5 million due to lower labor and benefits
costs associated with the reduction in personnel and the departure of the
former chief executive officer of Jazz Semiconductor during the first quarter
of 2007;
·
$1.5 million decrease due to $3.0 million of
acquisition-related expenses incurred by Jazz Semiconductor during the first
quarter of 2007 prior to the acquisition offset by $1.5 million increase in
legal and professional fees related to our merger efforts with Tower during the
second quarter of 2008;
·
$1.0 million due to lower spending on
contract labor, advertising, bad debt, business travel and other expenses;
offset by,
·
$0.6 million due to increase in stock
compensation expenses and changes in allocated expenses.
Amortization
of Intangible Assets.
Amortization of intangible assets of $0.7
million reflects the change in pre-acquisition amortization expenses.
Interest and Other (Expense) Income, Net
The following table presents interest and other income
for the six months ended June 27, 2008 and June 29, 2007:
|
|
Interest and Other Income (Expense), Net (in thousands, except percentages)
|
|
|
|
Six Months Ended
June 27, 2008
|
|
Six Months Ended
June 29, 2007
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
% of Pro Forma
|
|
Increase
|
|
%
|
|
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
Net Revenues
|
|
(Decrease)
|
|
Change
|
|
Interest income
|
|
$
|
53
|
|
0.0
|
|
$
|
2,876
|
|
2.9
|
|
$
|
(2,823
|
)
|
(98.2
|
)
|
Interest expense
|
|
(6,298
|
)
|
(6.4
|
)
|
(7,561
|
)
|
(7.5
|
)
|
1,263
|
|
(16.7
|
)
|
Interest expense, net
|
|
(6,245
|
)
|
(6.4
|
)
|
(4,685
|
)
|
(4.7
|
)
|
(1,560
|
)
|
(33.3
|
)
|
Other income, net
|
|
1,612
|
|
1.6
|
|
243
|
|
(0.2
|
)
|
1,369
|
|
563.4
|
|
Interest and other (expense) income, net
|
|
$
|
(4,633
|
)
|
(4.7
|
)
|
$
|
(4,660
|
)
|
(4.6
|
)
|
$
|
27
|
|
(0.6
|
)
|
Interest and other income for the six months ended June 27,
2008 represents $0.8 million of net gain realized from the purchase of $5.0
million in principal amount of our Convertible Senior Notes at a discount, $0.2
million of net gain from the sale of equipment and $0.6 million of interest and
other non-operating income. Interest
expense for the six months ended June 27, 2008 mainly represents interest
on our Convertible Senior Notes. Interest and other income for the six months
ended June 29, 2007 mainly represents interest earned on the net proceeds
of our initial public offering and the private placement of our Convertible
Senior Notes for the period from January 1, 2007 until the consummation of
our acquisition of Jazz Semiconductor in February 2007. Interest expense
for the six months ended June 29, 2007 mainly represents interest on our
Convertible Senior Notes.
CHANGES IN FINANCIAL CONDITION
Liquidity and Capital Resources
As of June 27, 2008, we had cash and cash equivalents of $9.8
million. Additionally, as of June 27, 2008, we had borrowed $9.0 million
under our line of credit with Wachovia and had $30.0 million of additional
availability under this credit line. As of December 28, 2007, we had cash
and cash equivalents of $10.6 million. Additionally, as of December 28,
2007, we had borrowed $8.0 million under our line of credit with Wachovia and
had $37.1 million of availability under this credit line.
26
Table
of Contents
Net cash provided by operating activities was $4.5 million during the
first six months of 2008. The primary categories of operating activities for
the six months ended June 27, 2008 include our net loss of $8.6 million,
non-cash operating expenses of $18.9 million and the net use of funds from the
changes in operating assets and liabilities of $5.8 million. Net cash used by
operating activities was $12.8 million during the first six months of
2007. The primary categories of
operating activities for the six months ended June 29, 2007 include our
net loss of $24.4 million, non-cash operating expenses of $19.9 million and the
net use of funds from the changes in operating assets and liabilities of $8.3
million.
Net cash used
by investing activities was $2.3 million for the first six months of 2008 and
primarily represents capital purchases of equipment, net of sales proceeds. Net
cash provided by investing activities was $110.3 million for the first six
months of 2007 and primarily represented the acquisition of Jazz
Semiconductor. On February 16,
2007, we completed the acquisition of all of the outstanding capital stock of
Jazz Semiconductor for a net adjusted preliminary purchase price of $236.3
million in cash (net of $26.1 million of cash that was acquired) which was paid
for by the release of $334.5 million held in trust and escrow accounts
that represented the proceeds of our initial public offering and the
convertible note private placement in December 2006. Capital purchases of equipment were $2.3
million for the first six months of 2007.
We also received net proceeds of $14.4 million from the sale of short
term investments, net of purchases, during the first six months of 2007.
Net cash used
by financing activities was $3.2 million for the first six months of 2008 and
includes $1.0 million of additional net borrowings from our line of credit,
$4.1 million paid to purchase $5.0 million in principal amount of Convertible
Senior Notes, and $0.1 million payment of fees associated with the line of
credit and debt offering. Net cash used by financing activities was $75.4
million for the first six months of 2007 and represents a combination of $33.2 million
of payments to common stockholders who elected to convert their shares into
cash in connection with our initial public offering and $32.2 million of funds
used to repurchase common stock, warrants, units and unit purchase options
during the first six months of 2007. In
addition, funds were also used for the payment of fees of $10.1 million
associated with the acquisition and the debt offering.
On January 11, 2007, we announced that our Board of Directors
authorized a stock and warrant repurchase program under which we could purchase
up to $50 million of our common stock and warrants through July 15, 2007.
On July 18, 2007, this program was extended until October 15, 2007.
On November 2, 2007, we announced that the amount had been increased to
$52 million and the stock and warrant repurchase program had been further
extended to January 15, 2008, on which date it expired. As of December 28,
2007, we had repurchased securities worth $50.3 million under this program.
There were no repurchases made during the first six months of 2008 or
subsequently to the date of this report.
As of June 27, 2008 and June 29, 2007, we
did not have any relationships with unconsolidated entities or financial
partners, such as entities often referred to as structured finance or special
purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. As such, we are not exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such relationships.
We believe,
based on our current plans and current levels of operations, that our cash from
operations, together with cash and cash equivalents, and available line of
credit, will be sufficient to fund our operations for at least the next 12
months. Poor financial results, unanticipated expenses, acquisitions of
technologies or businesses or strategic investments could give rise to
additional financing requirements sooner than we would expect.
We would
expect to raise funds for these purposes through debt or equity transactions as
appropriate.
There
can be no assurances that equity or debt financing will be available when
needed or, if available, that the financing will be on terms satisfactory to us
and not dilutive to our then current stockholders.
Lease
of Facilities
We lease our
headquarters and Newport Beach, California fabrication and probing facilities
from Conexant Systems, Inc. under non-cancelable operating leases through March 2017.
We have the unilateral option to extend the terms of each of these leases for
two consecutive five-year periods. Our rental payments under these leases
consist solely of our pro rata share of the expenses incurred by Conexant in
the ownership of these buildings and applicable adjustments for increases in
the consumer price index. We have estimated future minimum costs under these
leases based on actual costs incurred during 2007. We are not permitted to
sublease space that is subject to these leases without Conexants prior
approval.
27
Table of Contents
Convertible
Senior Notes
On December 19, 2006 and December 21, 2006, we completed
private placements of $166.8 million aggregate principal amount of Convertible
Senior Notes. The Convertible Senior Notes bear interest at a rate of 8% per
annum payable semi-annually on each June 30 and December 31,
beginning on June 30, 2007. We may redeem the Convertible Senior Notes on
or after December 31, 2009 at agreed upon redemption prices, plus accrued
and unpaid interest. The holders of the Convertible Senior Notes have the
option to convert the Convertible Senior Notes into shares of our common stock
at an initial conversion rate of 136.426 shares per $1,000 principal amount of
Convertible Senior Notes, subject to adjustment in certain circumstances, which
is equivalent to an initial conversion price of $7.33 per share.
During the first six months of 2008, we purchased on the open market
$5.0 million in principal amount of our Convertible Senior Notes for a total
purchase price of $4.1 million. The Convertible Senior Notes were purchased at
a discount to their face value, including prepayment of interest. As of June 27,
2008, $128.2 million in principal amount of Convertible Senior Notes remained
outstanding.
Wachovia
Line of Credit
On February 28, 2007, we entered into an 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
and Newport Fab, LLC, as borrowers, with respect to a three-year senior secured
asset-based revolving credit facility in an amount of up to $65 million,
including up to $5 million for letters of credit. The borrowing availability
varies according to the levels of the borrowers accounts receivable, eligible
equipment and other terms and conditions described in the loan agreement. The
maturity date of the facility is February 28, 2010, unless earlier
terminated. Loans under the facility will bear interest at a floating rate
equal to, at borrowers option, either the lenders prime rate plus 0.75% or
the adjusted Eurodollar rate (as defined in the loan agreement) plus 2.75% per
annum. The facility is secured by all of
our assets and the assets of the other borrowers. Borrowing availability under
the facility as of June 27, 2008 was $30.0 million. As of June 27,
2008, we had short-term borrowings of $9.0 million outstanding and $1.9 million
in letters of credit committed under the facility.
The loan agreement contains customary affirmative and negative covenants
and other restrictions. If the sum of excess availability plus qualified cash
is at any time during any fiscal quarter less than $10.0 million, the borrowers
will be subject to a minimum consolidated EBITDA financial covenant, such that
we and our subsidiaries (other than any excluded subsidiaries) shall be
required to earn, on a consolidated basis, consolidated EBITDA (as defined in
the loan agreement) of not less than the applicable amounts set forth in the
loan agreement.
In addition, the loan agreement contains customary events of default
including the following: nonpayment of principal, interest or other amounts;
violation of covenants; incorrectness of representations and warranties in any
material respect; cross default; bankruptcy; material judgments; ERISA events;
actual or asserted invalidity of guarantees or security documents; and change
of control. 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.
Acquisition
Contingent Payments
As part of the acquisition of Jazz Semiconductor, we acquired a 10%
interest in HHNEC (Shanghai Hau Hong NEC Electronics Company, Ltd.). The
investment is carried at $19.3 million which is the fair value based upon the
application of the purchase method of accounting.
We are obligated to pay
additional amounts to former stockholders of Jazz Semiconductor if we realize
proceeds in excess of $10 million from a liquidity event during the three-year
period following the completion of the acquisition of Jazz Semiconductor. In
that event, we will pay the former Jazz Semiconductor stockholders an amount
equal to 50% of the proceeds over $10 million.
Royalty
Obligations
We have agreed to
pay to Conexant Systems, Inc. a percentage of our gross revenues derived
from the sale of SiGe products to parties other than Conexant and its spun-off
entities through March 2012. Under our technology license agreement with
Polar Semiconductor, Inc., or PolarFab, we have also agreed to pay
PolarFab certain royalty payments based on a decreasing percentage of revenues
from sales of devices manufactured for PolarFabs former customers. We also
have an agreement with ARM Holdings plc to pay them royalties for using their
intellectual property library to manufacture our customers products.
28
Table of Contents
Leases
We also have
commitments consisting of software leases and facility and equipment licensing
arrangements.
Future minimum
payments under non-cancelable operating leases as of June 27, 2008 are as
follows:
|
|
Payment Obligations by Year
|
|
|
|
Remainder
of 2008
|
|
2009
|
|
2010
|
|
2011
|
|
Thereafter
|
|
Total
|
|
|
|
(in thousands)
|
|
Operating leases
|
|
$
|
1,326
|
|
$
|
2,468
|
|
$
|
2,300
|
|
$
|
2,300
|
|
$
|
11,959
|
|
$
|
20,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Based on their evaluation as of the end of the period
covered by this Quarterly Report on Form 10-Q, our chief executive officer
and chief financial officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the Exchange Act)) were
effective as of the end of the period covered by this report to ensure that
information that we are required to disclose in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms.
Our
disclosure controls and procedures are designed to provide reasonable assurance
of achieving their objectives, and our chief executive officer and our chief
financial officer have concluded that these controls and procedures are
effective at the reasonable assurance level. We believe that a control
system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the control system are met, and no evaluation
of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within a company have been detected.
Changes
In Internal Control Over Financial Reporting
There were no changes in our internal controls over
financial reporting that occurred during the period covered by this Quarterly
Report on Form 10-Q that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
29
Table
of Contents
PART II OTHER
INFORMATION
Item 1A. Risk Factors
We are subject to the
following additional risks as result of the proposed merger with Tower
Semiconductor Ltd. (Tower). These risk
factors are in addition to, and should be read in conjunction with, the other
risk factors related to our business included in our latest Annual Report on Form 10-K.
If any of these risks actually occur, our business,
operating results or financial condition could be adversely affected.
Any
failure to consummate the proposed merger with Tower could negatively impact
our stock price and future business and operations
.
If
we fail to consummate the proposed merger with Tower, our stock price and
future business and operations could be negatively affected. If the merger with
Tower is not consummated for any reason, we may be subject to a number of
material risks, including the following:
·
the price of our common stock may decline, as
the current market price of our common stock may reflect an assumption that the
proposed merger will be consummated;
·
we must pay certain expenses related to the
proposed merger, including substantial financial advisory, legal, accounting
and other merger-related fees even if the merger is not consummated, which
could affect our results of operations and cash liquidity, and potentially our
stock price;
·
significant management and other resources
have been diverted to efforts to consummate the proposed merger and, if the
merger is not consummated, such efforts will result in little or no benefit to
us;
·
current and prospective employees may
experience uncertainty about their future role with us, which may adversely
affect our ability to attract and retain key management, research and
development, manufacturing and other personnel; and
·
if the Agreement and Plan of Merger and
Reorganization with Tower is terminated and our Board of Directors decides to
seek another merger or business combination, it may not be able to find a
partner willing to pay an equivalent price to that which would have been
obtained in the proposed merger with Tower.
Because the market price of Tower ordinary
shares may fluctuate, the value of Tower ordinary shares to be issued in the
merger may fluctuate.
Upon
completion of the merger, each share of our common stock will be converted into
the right to receive 1.8 ordinary shares of Tower. There will be no adjustment to the exchange
ratio for changes in the market price of either shares of our common stock or
Tower ordinary shares. Accordingly, the market value of the Tower ordinary
shares that holders of our common stock will be entitled to receive upon
completion of the merger will depend on the market value of the Tower ordinary
shares at the time of the completion of the merger and could vary significantly
from the market value of Tower ordinary shares on the date of this document.
Any delay in completing the merger may
significantly reduce the benefits expected to be obtained from the merger.
The
merger is subject to a number of conditions that are beyond our control or
Towers and that may prevent, delay or otherwise materially adversely affect
its completion. Neither Tower nor we can predict whether and when these other
conditions will be satisfied. Further, the requirements for obtaining the
required clearances and approvals could delay the completion of the merger for
a significant period of time or prevent it from occurring. Any delay in
completing the merger may significantly reduce the synergies and other benefits
that Tower and we expect to achieve if we successfully complete the merger
within the expected time frame.
The pendency of the merger could materially
adversely affect our future business and operations.
In
connection with the pending merger, some of our customers and strategic
partners may delay or defer decisions, which could negatively affect our
revenues, earnings and cash flows, as well as the market price of our common
stock, regardless of whether the merger is completed.
30
Table
of Contents
The merger agreement restricts our ability
to pursue alternatives to the merger and requires us to pay a termination fee
under certain circumstances.
The
merger agreement prohibits us from soliciting, initiating, encouraging or
facilitating certain alternative acquisition proposals with any third party,
subject to exceptions set forth in the merger agreement. The merger agreement
also provides for the payment by us of a termination fee if the merger agreement
is terminated in certain circumstances in connection with a competing
third-party acquisition proposal for one of the companies, and in certain other
circumstances as well. These provisions limit our ability to pursue offers from
third parties that could result in greater value to our stockholders. The
obligation to make the termination fee payment also may discourage a third
party from pursuing an alternative acquisition proposal. If the merger is terminated and we determine
to seek another business combination, we cannot assure you that it will be able
to negotiate a transaction with another company on terms comparable to the
terms of the merger, or that we will avoid incurrence of any fees associated
with the termination of the merger agreement.
Item 4. Submission of Matters to a Vote of Security
Holders.
We held our Annual
Meeting of Stockholders on May 6, 2008.
At the meeting, stockholders re-elected current director Liad
Meidar. Stockholders also ratified the
appointment of Ernst & Young LLP as our independent registered public
accounting firm for the current fiscal year.
As certified by the duly appointed and sworn inspector of elections:
There
were present at said meeting, in person or by proxy, stockholders holding
14,043,956 shares of common stock, equal to 73.8% of all such shares
outstanding and entitled to vote, which constituted a quorum for the conduct of
business at the meeting.
The
vote on the election of one director to hold office until the 2011 Annual
Meeting of Stockholders was:
|
|
For
|
|
Withheld
|
|
|
|
|
|
|
|
Liad Meidar
|
|
13,472,097
|
|
571,859
|
|
The vote on the ratification of the selection by the
Audit Committee of our Board of Directors of Ernst & Young LLP as
our independent auditors for our fiscal year ending December 26, 2008 was
13,998,202
votes for to
23,562
votes
against with
22,192
votes abstaining.
Item 6. Exhibits.
Number
|
|
Description
|
2.1
|
|
Agreement
and Plan of Merger and Reorganization by and among Tower Semiconductor Ltd.,
Armstrong Acquisition Corporation and the Registrant, dated as of
May 19, 2008 - Incorporated by reference to Exhibit 2.1 to
Registrants Current Report on Form 8-K filed on May 20, 2008.
|
31.1
|
|
Certification
by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
31.2
|
|
Certification
by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
32
|
|
Certifications
of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
31
Table
of Contents
SIGNATURES
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.
Date:
August 11, 2008
|
JAZZ
TECHNOLOGIES, INC.
|
|
|
|
|
|
|
|
By:
|
/s/
GILBERT F. AMELIO
|
|
|
Gilbert
F. Amelio
Chairman and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
By:
|
/s/
PAUL A. PITTMAN
|
|
|
Paul
A. Pittman
Executive Vice President and, Chief Financial and
Administrative Officer
(Principal Financial and Accounting Officer)
|
INDEX TO EXHIBITS
Number
|
|
Description
|
31.1
|
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
|
Certification
by Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32
|
|
Certifications
of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
32
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