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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007 COMMISSION FILE NUMBER: 0-24790
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TOWER SEMICONDUCTOR LTD.
(Exact name of registrant as specified in its charter and translation of
registrant's name into English)
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ISRAEL
(Jurisdiction of incorporation or organization)
RAMAT GAVRIEL INDUSTRIAL PARK
P.O. BOX 619, MIGDAL HAEMEK, ISRAEL 23105
(Address of principal executive offices)
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SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Ordinary Shares, par value New Israeli NASDAQ Global Market
Shekels 1.00 per share
Convertible Debentures NASDAQ Capital Market
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(D)
OF THE ACT: None
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report: 124,226,116 Ordinary Shares
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes [_] No [X]
If this report is an annual or transition report, indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934.
Yes [_] No [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]
Indicate by check mark which basis of accounting the registrant has used to
prepare the financial statements included in this filing:
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US GAAP [X] International Financial Reporting Other [_]
Standards as issued by the
International Accounting Standards
Board [_]
- ------------------- -------------------------------------- -------------------
If "Other" has been checked in response to the previous question,
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 [_] Item 18 [X]
If this is an annual report, indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
This annual report on Form 20-F includes certain "forward-looking"
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. The use of the words "projects," "expects," "may," "plans" or "intends,"
or words of similar import, identifies a statement as "forward-looking". There
can be no assurance, however, that actual results will not differ materially
from our expectations or projections. Factors that could cause actual results to
differ from our expectations or projections include the risks and uncertainties
relating to our business described in this annual report at "Item 3. Key
Information-Risk Factors".
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Beginning with the fourth quarter of 2007, we prepare our consolidated
financial statements in United States dollars and in accordance with accounting
principles generally accepted in the United States of America ("US GAAP"). We
recast the comparative amounts included in our financial statements and in this
report to US GAAP. Prior to the fourth quarter of 2007, we prepared our
financial reports in United States dollars and in accordance with generally
accepted accounting principles in Israel ("Israeli GAAP") and provided
reconciliation to US GAAP in the notes to the financial statements.
The transition to US GAAP was made as a result of Israel Accounting
Standard 29, which stipulates that Israeli public companies that previously
reported their financial results based on Israeli GAAP must begin reporting
their financial results in accordance with International Financial Reporting
Standards ("IFRS") for periods beginning on or after January 1, 2008. However,
Israeli public companies that are also listed on NASDAQ are allowed to report
utilizing US GAAP rather than IFRS. We elected to use US GAAP to increase
transparency and comparability of our financial reports and facilitate research
and analysis by shareholders, analysts and other participants in the U.S.
capital markets.
All references herein to "dollars" or "$" are to United States dollars, and
all references to "Shekels" or "NIS" are to New Israeli Shekels.
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Manufacturing or production capacity refers to installed equipment capacity
in our facilities and is a function of the process technology and product mix
being manufactured because certain processes require more processing steps than
others. All information herein with respect to the wafer capacity of our
manufacturing facilities is based upon our estimate of the effectiveness of the
manufacturing equipment and processes in use or expected to be in use during a
period and the actual or expected process technology mix for such period. Unless
otherwise specifically stated, all references herein to "wafers" in the context
of capacity in Fab 1 are to 150-mm wafers and in Fab 2 are to 200-mm wafers.
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MICROFLASH(R) is a registered trademark of Tower
(i)
TABLE OF CONTENTS
PART I 1
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS 1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 1
ITEM 3. KEY INFORMATION 1
ITEM 4. INFORMATION ON THE COMPANY 19
ITEM 4A. UNRESOLVED STAFF COMMENTS 32
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 32
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 49
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 58
ITEM 8. FINANCIAL INFORMATION 60
ITEM 9. THE OFFER AND LISTING 60
ITEM 10. ADDITIONAL INFORMATION 61
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 70
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 73
PART II 74
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 74
ITEM 15. CONTROLS AND PROCEDURES 74
ITEM 16. [RESERVED] 75
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 75
ITEM 16B. CODE OF ETHICS 75
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 76
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 76
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 76
PART III 76
ITEM 17. FINANCIAL STATEMENTS 76
ITEM 18. FINANCIAL STATEMENTS 76
ITEM 19. EXHIBITS 76
(ii)
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
This section presents our selected historical financial data. You should
carefully read the financial statements included in this annual report,
including the notes to the financial statements. The selected data in this
section is not intended to replace the financial statements.
We derived the selected statement of operations data and other financial
data for the years ended December 31, 2007, 2006 and 2005, and selected balance
sheet data as of December 31, 2007 and 2006 from the audited financial
statements in this annual report. Those financial statements were audited by
Brightman Almagor & Co., a member firm of Deloitte Touche Tohmatsu, independent
registered public accounting firm. We derived the selected statement of
operations data and other financial data for the years ended December 31, 2004
and 2003 and the selected balance sheet data as of December 31, 2005, 2004 and
2003 from our audited financial statements that are not included in this annual
report, which were recast to US GAAP. Our management believes that the financial
statements contain all adjustments needed to present fairly the information
included therein.
YEAR ENDED DECEMBER 31,
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2007 2006 2005 2004 2003
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS:
Revenues $ 230,853 $ 187,438 $ 101,991 $ 126,055 $ 61,368
Cost of Sales 284,771 267,520 238,358 228,410 122,395
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Gross loss (53,918) (80,082) (136,367) (102,355) (61,027)
Research and development 13,790 15,048 16,029 17,053 20,709
Marketing, general and administrative 31,604 25,831 17,418 21,297 22,615
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Operating loss (99,312) (120,961) (169,814) (140,705) (104,351)
Financing expense, net (34,976) (47,563) (35,651) (29,745) (9,826)
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Other income (expense), net 92 597 2,383 32,682 (84)
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Loss for the year $(134,196) $(167,927) (203,082) $(137,768) $(114,261)
========= ========= ========= ========= =========
Basic loss per ordinary share $ (1.13) $ (2.03) (3.06) $ (2.13) $ (2.45)
========= ========= ========= ========= =========
OTHER FINANCIAL DATA:
Depreciation and amortization $ 154,343 $ 171,743 153,189 $ 131,576 $ 59,198
YEAR ENDED DECEMBER 31,
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2007 2006 2005 2004 2003
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(IN THOUSANDS)
SELECTED BALANCE SHEET:
Cash and cash equivalents, including
short-term interest-bearing deposits
and designated cash $ 44,536 $ 40,940 $ 38,998 $ 86,591 $ 61,338
Working capital 46,711 29,973 (40,725) 5,848 3,109
Total assets 686,782 714,132 690,624 859,043 796,799
Current maturities of long-term debt and
other short-term debt -- -- 21,103 -- --
Current maturities of convertible
debentures 7,887 6,902 5,813 -- --
Long-term debt from banks 379,314 432,430 497,000 497,000 431,000
Convertible debentures 117,460 83,863 42,932 24,092 23,224
Long-term liabilities in respect of
customers' advances 27,983 46,042 59,621 64,428 46,347
Shareholders' equity (deficit) 44,709 39,516 (29,228) 163,318 199,525
Weighted average number of ordinary
shares outstanding (*) 118,857 82,581 66,371 64,633 46,710
Number of shares issued and outstanding (*) 124,226 100,752 66,932 65,700 51,696
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(*) Net of 1,300,000 treasury shares.
RISK FACTORS
This annual report and statements that we may make from time to time may
contain forward-looking information. There can be no assurance that actual
results will not differ materially from our expectations, statements or
projections. Factors that could cause actual results to differ from our
expectations, statements or projections include the risks and uncertainties
relating to our business described below.
RISKS AFFECTING OUR BUSINESS
IF THE INVESTMENT CENTER WILL NOT APPROVE OUR REQUEST FOR AN EXPANSION
PROGRAM, WE WOULD BE REQUIRED TO SEEK ALTERNATIVE FINANCING SOURCES TO CONTINUE
THE RAMP-UP OF FAB 2, WHICH MAY NOT BE AVAILABLE. OUR NOT COMPLETING INVESTMENTS
IN THE AMOUNT OF $1.25 BILLION BY THE END OF 2005 MAY RESULT IN THE INVESTMENT
CENTER REQUIRING US TO REPAY ALL OR A PORTION OF THE GRANTS ALREADY RECEIVED AND
IF WE ARE UNABLE TO REFUND SUCH GRANTS, WE WOULD LIKELY BE UNABLE TO FUND OUR
ON-GOING OPERATIONS.
- 2 -
In connection with Fab 2, we received approval for grants and tax benefits
from the Investment Center of the Israeli Ministry of Industry, Trade and Labor
(Investment Center) under its Approved Enterprise Program. Under the terms of
the approval, we were eligible to receive grants equal to 20% of up to $1.25
billion invested in Fab 2 plant and equipment, or an aggregate of up to $250
million. As of May 31, 2008, we received a cumulative amount of approximately
$165 million in grants from the Investment Center in relation to Fab 2. Our
eligibility to receive grants was with respect to investments in Fab 2 plant and
equipment made by the end of 2005. Any failure by us to meet the conditions of
our grants may result in the cancellation of all or a portion of the grants and
tax benefits and in the Investment Center requiring us to repay all or a portion
of grants already received. In 2007, we submitted the final report in relation
to the investments made through 2005 totaling $825 million out of the entire
investment plan of $1.25 billion. The investment plan has been spread over
additional years and was not completed through 2005 primarily due to the
external economic conditions of worldwide markets during 2001 through 2004 and
the semiconductor industry in particular following the September 11, 2001
terrorist attack as well as the outbreak of the Second Intifada
(Israeli-Palestinian conflict) in September 2000 which lasted until 2003. Under
Israeli law, our not completing investments in an amount of $1.25 billion by the
end of 2005 could result in a request from the Investment Center to repay all or
a portion of grants already received, which has not been made. Israeli law
limits the ability of the Investment Center to extend this time limitation,
unless approved through an expansion plan. We have therefore been holding
discussions with the Investment Center to achieve satisfactory arrangements to
approve an expansion plan to commence as of January 1, 2006. On numerous
occasions, we have received assurances and commitments from governmental
authorities that such an expansion plan will be approved pending positive
recommendation of an economical audit by the Industrial Bank of the Investment
Center. In 2005, at the Investment Center's request, we submitted a revised
business plan to the Investment Center and its Industrial Bank for the period
commencing January 1, 2006. While the Industrial Bank of the Investment Center
gave a positive recommendation, the governmental approval process has been
protracted and as a result, in May 2008, we filed a petition with the Israeli
High Court of Justice asking the Court to order that our expansion plan be
brought before the relevant Israeli governmental bodies for their respective
approvals without delay. During the period from January 1, 2006 through May 31,
2008, we invested approximately $230 million in Fab 2 plant and equipment.
Currently, we cannot estimate when we will receive a formal response to our
request for an expansion plan to commence as of January 1, 2006 or if the
Investment Center will approve our request. If the Investment Center does not
approve our request for an expansion plan, we would likely be required to obtain
alternative financing sources, which may not be available, in order to
successfully continue the ramp-up of Fab 2. While there can be no assurance that
we will obtain the Investment Center's approval for the expansion plan, we
believe that the likelihood that the Investment Center would demand that we
repay all or a portion of grants already received due to our not completing
investments in an amount of $1.25 billion by the end of 2005 is remote. If we
would have to repay the Investment Center all or a portion of the grants already
received, we would need to seek financing sources to refund the grants we
received and if we do not succeed in finding such financing sources, we would
likely be unable to fund our on-going operations.
IF WE DO NOT OBTAIN INVESTMENT CENTER APPROVAL FOR OUR EXPANSION PLAN OR OUR
FUTURE OPERATIONS DO NOT IMPROVE OR WE DO NOT GENERATE INCREASED LEVELS OF CASH
FROM OPERATIONS OR WE DO NOT RAISE ADDITIONAL FUNDING OR WE DO NOT OBTAIN FUNDS
FROM OTHER SOURCES OR MARKET CONDITIONS DO NOT IMPROVE SIGNIFICANTLY, WE WOULD
LIKELY BE UNABLE TO FUND OUR ON-GOING OPERATIONS.
There is no assurance that we will obtain Investment Center approval for
our expansion plan (see "Risk Factors" - "If the Investment Center will not
approve our request for an expansion program, we would be required to seek
alternative financing sources...") or that our future operations will improve
significantly or that we will generate increased levels of cash from operations
or that we will succeed in raising additional funding or that we will obtain
funds from other sources (including, for example, funds from a sale and
lease-back of a portion of our real estate assets and/or a sale of other assets)
or that market conditions (including our product prices) will improve
significantly. If a portion of the above does not occur sufficiently and in a
timely manner, we would likely be unable to continue the ramp up of Fab 2,
and/or fund our on-going operations and/or repay our short-term and long-term
debt and other liabilities, which consist mainly of banks debt, debentures,
trade accounts payable and other payables. Furthermore, we can not assure you
that the mitigation actions we are taking, such as cost reductions, employee
layoffs and price and payment term negotiations with suppliers, will be
satisfactory to overcome this position.
- 3 -
IF WE WILL NOT BE IN COMPLIANCE WITH THE REPAYMENT SCHEDULE UNDER THE AMENDED
FACILITY AGREEMENT AND WE ARE UNSUCCESSFUL IN NEGOTIATING A REVISED REPAYMENT
SCHEDULE, OR IF WE FAIL TO MEET ANY OF THE COVENANTS AND FINANCIAL RATIOS
STIPULATED IN OUR AMENDED FACILITY AGREEMENT AND OUR BANKS DO NOT WAIVE OUR
NONCOMPLIANCE, WE WOULD LIKELY BE UNABLE TO FUND OUR ON-GOING OPERATIONS.
Under our amended facility agreement with Bank Hapoalim B.M. and Bank Leumi
Le-Israel B.M., our banks, in the event that we will not be in compliance with
the repayment schedule and we are unsuccessful in negotiating a revised
repayment schedule, or if we fail to meet any of the covenants and financial
ratios stipulated in our amended facility agreement and our banks do not waive
our noncompliance, our banks may require us to immediately repay all loans made
by them to us, plus penalties, and they would be entitled to exercise the
remedies available to them under our amended credit facility, including
enforcement of their lien against our assets. There is no assurance that our
future operations will improve significantly or that we will generate increased
levels of cash from operations or that we will succeed in raising additional
funding or that we will obtain funds from other sources (including, for example,
funds from a sale and lease-back of a portion of our real estate assets and/or a
sale of other assets) or that market conditions (including our product prices)
will improve significantly. If a portion of the above does not occur
sufficiently and in a timely manner, we would likely be unable to comply with
the repayment schedule under the amended facility agreement and we would likely
fail to meet covenants and financial ratios stipulated in it. This would have a
material adverse effect on our company and we would likely be unable to fund our
on-going operations unless the banks agree to a revised repayment schedule or to
waive our non- compliance.
IF WE DO NOT FULLY EQUIP FAB 2 AND COMPLETE THE EQUIPMENT INSTALLATION, AND
RAMP-UP OF PRODUCTION IN FAB 2 TO ITS FULL CAPACITY, WE WILL NOT FULLY UTILIZE
THE SUBSTANTIAL INVESTMENT MADE IN THE CONSTRUCTION OF FAB 2.
Fab 2 production capacity as of December 31, 2007 was approximately 24,000
wafers per month. During 2008, we are implementing a capacity increase plan
targeting to reach up to approximately 30,000 wafers per month, which has not
yet been completed. Depending on the process technology and product mix, when
fully ramped-up, we estimate that Fab 2 will be able to achieve capacity levels
of approximately 44,000 wafers per month. Our determination as to the timing of
the implementation of the ramp-up of Fab 2 and the increase in Fab 2's
production levels is dependent on prevailing and forecasted market conditions
and our ability to fund these increases. There can be no assurance as to the
timing or our ability to achieve Fab 2 capacity levels of approximately 44,000
wafers per month. The ramp-up of Fab 2 is a substantial and complex project. If
we cannot fund the further ramp-up of Fab 2 or otherwise successfully complete
the ramp-up of Fab 2, we may be unable to meet our customers' production demands
and as a result we may lose customers and may not attract new ones. In addition,
if we do not acquire and install the equipment necessary to successfully
complete the ramp-up of Fab 2, we will not fully utilize the substantial
investment made in constructing Fab 2, which will adversely affect our financial
results. In order to fully ramp-up Fab 2, we will need to continue to develop
new process technologies in order to suit our customers' needs. In addition, we
have and may in the future experience difficulties that are customary in the
installation, functionality and operation of equipment during manufacturing.
Failures or delays in obtaining and installing the necessary equipment,
technology and other resources may delay the completion of the ramp-up of Fab 2,
add to its cost and result in us not fully utilizing the substantial investment
made in the construction of Fab 2, which would adversely affect our future
financial results.
- 4 -
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY AND THE RESULTING PERIODIC
OVERCAPACITY HAVE ADVERSELY AFFECTED OUR BUSINESS IN THE PAST, RESULTING IN A
HISTORY OF LOSSES; DOWNWARD PRICE PRESSURE MAY SERIOUSLY HARM OUR BUSINESS.
The semiconductor industry has historically been highly cyclical.
Historically, companies in the semiconductor industry have expanded aggressively
during periods of increased demand. This expansion has frequently resulted in
overcapacity and excess inventories, leading to rapid erosion of average sale
prices. We expect this pattern to repeat itself in the future. The overcapacity
and downward price pressure characteristic of a prolonged downturn in the
semiconductor market may not allow us to operate at a profit, even at full
utilization, and could seriously harm our financial results and business.
OUR OPERATING RESULTS FLUCTUATE FROM QUARTER TO QUARTER WHICH MAKES IT DIFFICULT
TO PREDICT OUR FUTURE PERFORMANCE.
Our revenues, expenses and operating results have varied significantly in
the past and may fluctuate significantly from quarter to quarter in the future
due to a number of factors, many of which are beyond our control. These factors
include, among others:
o The cyclical nature of both the semiconductor industry and the markets
served by our customers;
o Changes in the economic conditions of geographical regions where our
customers and their markets are located;
o Shifts by integrated device manufacturers (IDMs) and customers between
internal and outsourced production;
o Inventory and supply chain management of our customers;
o The loss of a key customer, postponement of an order from a key
customer. The rescheduling or cancellation of large orders
o The occurrence of accounts receivables write-offs, failure of a key
customer to pay accounts receivables in a timely manner or the
financial condition of our customers;
o The rescheduling or cancellation of planned capital expenditures;
o Our ability to satisfy our customers' demand for quality and timely
production;
o The timing and volume of orders relative to our available production
capacity;
o Our ability to obtain raw materials and equipment on a timely and
cost-effective basis;
o Environmental events or industrial accidents such as fires or
explosions;
o Our susceptibility to intellectual property rights disputes;
o Our ability to continue with existing and to enter into new
partnerships and technology and supply alliances on mutually
beneficial terms;
o Actual capital expenditures exceeding planned capital expenditures;
o Interest, price index and currency rate fluctuations that may not be
adequately hedged;
- 5 -
o Technological changes and short product life cycles;
o Timing for designing and the qualification of new products; and
o New accounting rules affecting our results including the accounting
treatment of our bank debt and convertible debentures.
Due to the factors noted above and other risks discussed in this section,
many of which are beyond our control, investors should not rely on
quarter-to-quarter comparisons to predict our future performance. Unfavorable
changes in any of the above factors may seriously harm our company, including
our operating results, financial condition and ability to maintain our
operations.
THE LACK OF A SIGNIFICANT BACKLOG RESULTING FROM OUR CUSTOMERS NOT PLACING
PURCHASE ORDERS FAR IN ADVANCE MAKES IT DIFFICULT FOR US TO FORECAST OUR
REVENUES IN FUTURE PERIODS.
Our customers generally do not place purchase orders far in advance, partly
due to the cyclical nature of the semiconductor industry. As a result, we do not
typically operate with any significant backlog. The lack of a significant
backlog makes it difficult for us to forecast our revenues in future periods.
Moreover, since our expense levels are based in part on our expectations of
future revenues, we may be unable to adjust costs in a timely manner to
compensate for revenue shortfalls. We expect that in the future our revenues in
any quarter will continue to be substantially dependent upon purchase orders
received in that quarter and in the immediately preceding quarter. We cannot
assure you that any of our customers will continue to place orders with us in
the future at the same levels as in prior periods. If orders received from our
customers differ from our expectations with respect to the product, volume,
price or other items, our operating results, financial condition and ability to
maintain our operations may be adversely affected.
WE OCCASIONALLY MANUFACTURE WAFERS BASED ON FORECASTED DEMAND, RATHER THAN
ACTUAL ORDERS FROM CUSTOMERS. IF OUR FORECASTED DEMAND EXCEEDS ACTUAL DEMAND IT
WE MAY HAVE OBSOLETE INVENTORY, WHICH COULD HAVE A NEGATIVE IMPACT ON OUR
RESULTS OF OPERATIONS
We initiate production of a majority of our wafers once we have received an
order from a customer. We generally do not manufacture wafers unless we receive
a customer purchase order. On occasion, we may produce wafers in excess of
customer orders based on forecasted customer demand, because we may forecast
future excess or because of future capacity constraints. If we manufacture more
wafers than are actually ordered by customers, we may be left with excess
inventory that may ultimately become obsolete and must be scrapped when it
cannot be sold. Significant amounts of obsolete inventory could have a negative
impact on our results of operations.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT TO OPERATE AT A LOSS FOR THE
FORESEEABLE FUTURE; OUR FACILITIES MUST OPERATE AT HIGH UTILIZATION RATES AND WE
MUST INCREASE OUR CAPACITY LEVELS IN ORDER TO REDUCE OUR LOSSES.
We have operated at a loss for the last number of years. Because fixed
costs represent a substantial portion of the operating costs of semiconductor
manufacturing operations, we must operate our facilities at high utilization
rates for us to reduce our losses. In addition, to reduce our losses, we must
increase our capacity levels. We began construction of Fab 2 in 2001 and Fab 2
operations began in 2003. Our losses since 2003 are due primarily to significant
depreciation and amortization expenses related mainly to Fab 2, as well as
financing and operating expenses that have not yet been offset by a sufficient
increase in the level of our revenues. If we do not succeed in operating our
facilities at high utilization rates and in increasing our capacity levels, we
expect to continue to operate at a loss for the foreseeable future, which may
adversely affect our business and company.
- 6 -
OUR SALES CYCLES ARE TYPICALLY LONG AND ORDERS RECEIVED MAY NOT MEET OUR
EXPECTATIONS, WHICH MAY ADVERSELY AFFECT OUR OPERATING RESULTS.
Our sales cycles, which we measure from first contact with a customer to
first shipment of product ordered by the customer, vary substantially and may
last as long as two years or more, particularly for new technologies. In
addition, even after we make initial shipments of prototype products, it may
take several more months to reach full production of the product. As a result of
these long sales cycles, we may be required to invest substantial time and incur
significant expenses in advance of the receipt of any product order and related
revenue. If orders ultimately received differ from our expectations with respect
to the product, volume, price or other items, our operating results, financial
condition and ability to maintain our operations may be adversely affected.
DEMAND FOR OUR FOUNDRY SERVICES IS DEPENDENT ON THE DEMAND IN OUR CUSTOMERS' END
MARKETS.
We are ramping-up Fab 2 based on our expectations of customer demand and
our financial resources. In order for demand for our wafer fabrication services
to increase, the markets for the end products using these services must develop
and expand. For example, the success of our imaging process technologies will
depend, in part, on the growth of markets for certain image sensor product
applications. Because our services may be used in many new applications, it is
difficult to forecast demand. If demand is lower than expected, we may have
excess capacity, which may adversely affect our financial results. If demand is
higher than expected, we may be unable to fill all of the orders we receive,
which may result in the loss of customers and revenue.
IF WE DO NOT MAINTAIN OUR CURRENT CUSTOMERS AND ATTRACT ADDITIONAL CUSTOMERS,
OUR BUSINESS MAY BE ADVERSELY AFFECTED.
During the three months ended March 31, 2008, approximately 66% of our
business was generated by five significant customers that contributed 20%, 18%,
15%, 7% and 6% of our revenue, respectively. We expect to continue to receive a
significant portion of our revenue from a limited number of customers for the
foreseeable future. Loss or cancellation of business from, or decreases in the
sales volume or sales prices to, our significant customers, could seriously harm
our financial results, revenue and business. Since the sales cycle for our
services typically exceeds one year, if our customers order significantly fewer
wafers than forecasted, we will have excess capacity that we may not be able to
sell in a short period of time, resulting in lower utilization of our
facilities. We may have to reduce prices in order to try to sell the excess
capacity. In addition to the revenue loss that could result from unused capacity
or lower sales prices, we might have difficulty adjusting our costs to reflect
the lower revenue in a timely manner, which could harm our financial results.
WE DEPEND ON A RELATIVELY SMALL NUMBER OF PRODUCTS FOR A SIGNIFICANT PORTION OF
OUR REVENUES.
From time to time, a significant portion of our revenue is generated from a
small number of very high volume products that are shipped to volatile
consumer-oriented markets. The volume of orders of such products may adversely
change or demand for such products may be abruptly discontinued. We expect that
for the foreseeable future we will continue to be dependent upon a relatively
limited number of products for a significant portion of our revenue due to the
nature of our business. A decrease in the price of, or demand for, any of these
products could negatively impact our financial results.
- 7 -
IF WE DO NOT RECEIVE ORDERS FROM OUR CUSTOMERS WITH WHOM WE HAVE SIGNED
LONG-TERM CONTRACTS, WE MAY HAVE EXCESS CAPACITY.
We have committed a portion of our capacity for future orders to our wafer
partners and customers with whom we have signed long-term contracts. Parties to
whom we have committed capacity are generally not obligated to utilize or pay
for all or any portion of their allocated capacity, and generally provide and
confirm their orders to us less than one month before the production start date.
If these parties do not place orders with us in accordance with their
contractual loading and purchase commitments, and if we are unable to fill such
unutilized capacity, our financial results may be adversely affected.
IF WE DO NOT MAINTAIN AND DEVELOP OUR TECHNOLOGY PROCESSES AND SERVICES, WE WILL
LOSE CUSTOMERS AND MAY NOT BE ABLE TO ATTRACT NEW ONES.
The semiconductor market is characterized by rapid change, including the
following:
o rapid technological developments;
o evolving industry standards;
o changes in customer and product end user requirements;
o frequent new product introductions and enhancements; and
o short product life cycles with declining prices as products mature.
Our ability to maintain our current customer base and attract new customers
is dependent in part on our ability to continuously develop and introduce to
production advanced specialized manufacturing process technologies. Since the
successful development and introduction to production of these processes may not
be achieved in a timely manner or at all, we may not be able to maintain our
current customer base and may not be able to attract new customers.
IF WE DO NOT COMPETE EFFECTIVELY, WE WILL LOSE BUSINESS TO OUR COMPETITORS.
The semiconductor foundry industry is highly competitive. We compete with
more than ten independent dedicated foundries, the majority of which are located
in Asia-Pacific, including foundries based in Taiwan, China, Korea and Malaysia,
and with over 20 integrated semiconductor and end-product manufacturers that
allocate a portion of their manufacturing capacity to foundry operations. The
foundries with which we compete benefit from their close proximity to other
companies involved in the design and manufacture of integrated circuits, or ICs.
In addition, many of our competitors may have one or more of the following
competitive advantages over us:
o greater manufacturing capacity;
o multiple and more advanced manufacturing facilities;
o more advanced technological capabilities;
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o a more diverse and established customer base;
o greater financial, marketing, distribution and other resources;
o a better cost structure; and/or
o better operational performance in cycle time and yields.
If we do not compete effectively, our business and results of operations may be
adversely affected.
WE HAVE A LARGE AMOUNT OF DEBT WHICH COULD HAVE SIGNIFICANT NEGATIVE CONSEQUENCES.
We have a large amount of long-term debt and may incur additional
indebtedness, which could have significant negative consequences. As of May 31,
2008, we had (i) approximately $399 million of bank debt under our amended
credit facility agreement and September 2007 credit lines with the banks, (ii)
$30 million outstanding under the September 2007 credit line with TIC and (iii)
approximately $180 million of debt in respect of outstanding convertible and
non-convertible debentures, including approximately $10 million short tern
convertible debt. Our current and future indebtedness could have significant
negative consequences, including:
o requiring the dedication of a substantial portion of our expected cash
flow from operations to service our indebtedness;
o increasing our vulnerability to general adverse economic and industry
conditions;
o limiting our ability to obtain additional financing;
o limiting our flexibility in planning for, or reacting to, changes in
our business and the industry in which we compete;
o placing us at a competitive disadvantage to less leveraged competitors
and competitors that have better access to capital resources; and/or
o affecting our ability to make interest payments and other required
debt service on our indebtedness.
o enforcement by the banks of their lien against our assets (in the
event of default).
WE MAY INCUR ADDITIONAL INDEBTEDNESS.
Although we are limited by the covenants in our amended credit facility
agreement with our banks, we could enter into certain transactions that would
increase the amount of our outstanding indebtedness. If new indebtedness is
added to our current indebtedness levels, the related risks, including the
negative consequences associated with our increased level of indebtedness, could
intensify.
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ISRAELI BANKING LAWS MAY IMPOSE RESTRICTIONS ON THE TOTAL DEBT THAT WE MAY
BORROW FROM OUR BANKS.
Pursuant to a directive published by the Israel Supervisor of Banks,
effective March 31, 2004, we may be deemed part of a group of borrowers
comprised of the Ofer Brothers Group, Israel Corp., and other companies which
are also included in such group of borrowers pursuant to the directive,
including companies under the control or deemed control of these entities. The
directive imposes limitations on amounts that banks may lend to borrowers or
groups of borrowers. Should our banks exceed these limitations, they may limit
our ability to borrow other money in the future and may require us to return
some or all of our outstanding borrowings (which, under our amended credit
facility agreement and our September 2007 credit lines with our banks, were
approximately $399 million in the aggregate as of May 31, 2008), which may have
a material adverse effect on our business, financial condition and results of
operations.
IF WE EXPERIENCE DIFFICULTY IN ACHIEVING ACCEPTABLE DEVICE YIELDS, PRODUCT
PERFORMANCE AND DELIVERY TIMES AS A RESULT OF MANUFACTURING PROBLEMS, OUR
BUSINESS WILL BE ADVERSELY AFFECTED.
The process technology for the manufacture of semiconductor wafers is
highly complex, requires advanced and costly equipment and is constantly being
modified in an effort to improve device yields, product performance and delivery
times. Microscopic impurities such as dust and other contaminants, difficulties
in the production process, defects in the key materials and tools used to
manufacture a wafer and other factors can cause wafers to be rejected or
individual semiconductors on specific wafers to be non-functional. We have from
time to time experienced production difficulties that have caused delivery
delays or returns and lower than expected device yields. We may also experience
difficulty achieving acceptable device yields, product performance and product
delivery times in the future as a result of manufacturing problems. Any of these
problems could seriously harm our operating results, financial condition and
ability to maintain our operations.
IF WE ARE UNABLE TO PURCHASE EQUIPMENT AND RAW MATERIALS, WE MAY NOT BE ABLE TO
MANUFACTURE OUR PRODUCTS IN A TIMELY FASHION, WHICH MAY RESULT IN A LOSS OF
EXISTING AND POTENTIAL NEW CUSTOMERS.
To complete the ramp-up of our Fab 2 facility and to maintain the quality
of production in our facilities, we must procure additional equipment. In
periods of high market demand, the lead times from order to delivery of
manufacturing equipment could be as long as 12 to 18 months. In addition, our
manufacturing processes use many raw materials, including silicon wafers,
chemicals, gases and various metals, and require large amounts of fresh water
and electricity. Manufacturing equipment and raw materials generally are
available from several suppliers. In many instances, however, we purchase
equipment and raw materials from a single source. Shortages in supplies of
manufacturing equipment and raw materials could occur due to an interruption of
supply or increased industry demand. Any such shortages could result in
production delays that could have a material adverse effect on our business and
financial condition.
OUR EXPOSURE TO INFLATION AND CURRENCY EXCHANGE AND INTEREST RATE FLUCTUATIONS
MAY INCREASE OUR COST OF OPERATIONS.
Almost all of our cash generated from operations and our financing and
investing activities is denominated in US dollars and New Israeli Shekels, or
NIS. Our expenses and costs are denominated in NIS, US dollars, Japanese Yen and
Euros. We are, therefore, exposed to the risk of currency exchange rate
fluctuations.
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The dollar amount of our operations, which is denominated in NIS, is
influenced by the timing of any change in the rate of inflation in Israel and
the extent to which such change is not offset by the change in valuation of the
NIS in relation to the US dollar. Outstanding principal and interest on some of
our debentures is linked to the Israeli consumer price index (CPI) and
therefore, our dollar costs will increase if inflation in Israel exceeds the
devaluation of the NIS against the US dollar, or if the timing of such
devaluation lags behind inflation in Israel. The recent devaluation of the US
dollar in relation to the NIS increased our dollar expenses related to our NIS
denominated debentures and our NIS denominated expenses.
Our borrowings under our Fab 2 credit facilities [and our and our September
2007 credit lines] provide for interest based on a floating LIBOR rate, thereby
exposing us to interest rate fluctuations. Furthermore, if our banks incur
increased costs in financing our Fab 2 credit facility due to changes in law or
the unavailability of foreign currency, our banks may exercise their right to
increase the interest rate on our Fab 2 credit facilities as provided for in the
credit facility agreement.
We regularly engage in various hedging strategies to reduce our exposure to
some, but not all, of these risks and intend to continue to do so in the future.
However, despite any such hedging activity, we are likely to remain exposed to
interest rate and exchange rate fluctuations and inflation, which may increase
the cost of our operating and financing activities.
WE DEPEND ON INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES AND FAILURE TO
MAINTAIN OR ACQUIRE LICENSES COULD HARM OUR BUSINESS.
We depend on third party intellectual property in order for us to provide
certain foundry and design services to our clients. If problems or delays arise
with respect to the timely development, quality and provision of such
intellectual property to us, the design and production of our customers'
products could be delayed, resulting in underutilization of our capacity. If any
of our third party intellectual property right vendors goes out of business,
liquidate, merge with, or are acquired by, another company that discontinues the
vendor's previous line of business, or if we fail to maintain or acquire
licenses to such intellectual property for any other reason, our business may be
adversely affected. In addition, license fees and royalties payable under these
agreements may impact our margins and operating results.
FAILURE TO COMPLY WITH THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES OR TO
DEFEND OUR INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR BUSINESS.
Our ability to compete successfully depends on our ability to operate
without infringing on the proprietary rights of others and defending our
intellectual property rights. Because of the complexity of the technologies used
and the multitude of patents, copyrights and other overlapping intellectual
property rights, it is often difficult for semiconductor companies to determine
infringement. Therefore, the semiconductor industry is characterized by frequent
litigation regarding patent, trade secret and other intellectual property
rights. There are no lawsuits currently pending against us regarding the
infringement of patents or intellectual property rights of others nor are we
currently a plaintiff in any such action against other parties. However, we have
been subject to such claims in the past, all of which have been resolved through
license agreements, the terms of which have not had a material effect on our
business.
- 11 -
Because of the nature of the industry, we may continue to be a party to
infringement claims in the future. In the event any third party were to assert
infringement claims against us or our customers, we may have to consider
alternatives including, but not limited to:
o negotiating cross-license agreements;
o seeking to acquire licenses to the allegedly infringed patents, which
may not be available on commercially reasonable terms, if at all;
o discontinuing use of certain process technologies, architectures, or
designs, which could cause us to stop manufacturing certain integrated
circuits if we were unable to design around the allegedly infringed
patents;
o fighting the matter in court and paying substantial monetary damages
in the event we lose; or
o seeking to develop non-infringing technologies, which may not be
feasible.
Any one or several of these developments could place substantial financial
and administrative burdens on us and hinder our business. Litigation, which
could result in substantial costs to us and diversion of our resources, may also
be necessary to enforce our patents or other intellectual property rights or to
defend us or our customers against claimed infringement of the rights of others.
If we fail to obtain certain licenses or if litigation relating to alleged
patent infringement or other intellectual property matters occurs, it could
prevent us from manufacturing particular products or applying particular
technologies, which could reduce our opportunities to generate revenues.
As of May 31, 2008, we held 67 patents worldwide. We intend to continue to
file patent applications when appropriate. The process of seeking patent
protection may take a long time and be expensive. We cannot assure you that
patents will be issued from pending or future applications or that, if patents
are issued, they will not be challenged, invalidated or circumvented or that the
rights granted under the patents will provide us with meaningful protection or
any commercial advantage. In addition, we cannot assure you that other countries
in which we market our services and products will protect our intellectual
property rights to the same extent as the United States. Further, we cannot
assure you that we will at all times enforce our patents or other intellectual
property rights or that courts will uphold our intellectual property rights, or
enforce the contractual arrangements that we have entered into to protect our
proprietary technology, which could reduce our opportunities to generate
revenues.
WE COULD BE SERIOUSLY HARMED BY FAILURE TO COMPLY WITH ENVIRONMENTAL
REGULATIONS.
Our business is subject to a variety of laws and governmental regulations
in Israel relating to the use, discharge and disposal of toxic or otherwise
hazardous materials used in our production processes. If we fail to use,
discharge or dispose of hazardous materials appropriately, or if applicable
environmental laws or regulations change in the future, we could be subject to
substantial liability or could be required to suspend or adversely modify our
manufacturing operations.
WE ARE SUBJECT TO THE RISK OF LOSS DUE TO FIRE BECAUSE THE MATERIALS WE USE IN
OUR MANUFACTURING PROCESSES ARE HIGHLY FLAMMABLE.
We use highly flammable materials such as silane and hydrogen in our
manufacturing processes and are therefore subject to the risk of loss arising
from fires. The risk of fire associated with these materials cannot be
completely eliminated. We maintain insurance policies to reduce losses caused by
fire, including business interruption insurance. If any of our fabs were to be
damaged or cease operations as a result of a fire, or if our insurance proves to
be inadequate, it would reduce our manufacturing capacity and revenues.
- 12 -
POSSIBLE PRODUCT RETURNS COULD HARM OUR BUSINESS.
Products manufactured by us may be returned within specified periods if
they are defective or otherwise fail to meet customers' prior agreed upon
specifications. Product returns in excess of established provisions, if any, may
have an adverse effect on our business and financial condition.
WE MAY BE REQUIRED TO REPAY GRANTS TO THE INVESTMENT CENTER THAT WE RECEIVED IN
CONNECTION WITH FAB 1.
We received grants and tax benefits for Fab 1 under the government of
Israel Approved Enterprise program. As of December 31, 2001, we completed our
investments under our Fab 1 program and are no longer entitled to any further
investment grants for future capital investments in Fab 1. We have agreed with
the Investment Center that if we do not achieve Fab 1 revenues of $90 million
for 2003 and $100 million for 2004 and maintain at Fab 1 at least 600 employees
for 2003 and 625 employees for 2004, subject to prevailing market conditions, we
will, if demanded by the Investment Center, be required to repay the Investment
Center up to approximately $2.5 million. Since our actual level of Fab 1
revenues and employees for 2003 and 2004 were not in compliance with the above
mentioned levels, we may be required to repay the Investment Center up to
approximately $2.5 million.
WE ARE SUBJECT TO RISKS RELATED TO OUR INTERNATIONAL OPERATIONS.
We have made substantial sales to customers located in Asia-Pacific and in
Europe. Because of our international operations, we are vulnerable to the
following risks:
o we price our products primarily in US dollars; if the Euro, Yen or
other currencies weaken relative to the US dollar, our products may be
relatively more expensive in these regions, which could result in a
decrease in our revenue;
o the need to comply with foreign government regulation;
o general geopolitical risks such as political and economic instability,
potential hostilities and changes in diplomatic and trade
relationships;
o natural disasters affecting the countries in which we conduct our
business;
o reduced sales to our customers in Asia Pacific that may arise from
regional issues in Asia;
o imposition of regulatory requirements, tariffs, import and export
restrictions and other barriers and restrictions;
o adverse tax rules and regulations;
o weak protection of our intellectual property rights; and
o delays in product shipments due to local customs restrictions.
- 13 -
OUR BUSINESS COULD SUFFER IF WE ARE UNABLE TO RETAIN AND RECRUIT QUALIFIED
PERSONNEL.
We depend on the continued services of our executive officers, senior
managers and skilled technical and other personnel. Our business could suffer if
we lose the services of some of these personnel and we cannot find and
adequately integrate replacement personnel into our operations in a timely
manner. We seek to recruit highly qualified personnel and there is intense
competition for the services of these personnel in the semiconductor industry.
Competition for personnel may increase significantly in the future as new
fabless semiconductor companies as well as new semiconductor manufacturing
facilities are established. Our ability to retain existing personnel and attract
new personnel is in part dependent on the compensation packages we offer. As
demand for qualified personnel increases, we may be forced to increase the
compensation levels and to adjust the cash, equity and other components of
compensation we offer our personnel.
WE MAY NOT BE ABLE TO CONSUMMATE AND INTEGRATE THE JAZZ TECHNOLOGIES, INC.
ACQUISITION.
We have entered into an agreement and plan of merger and reorganization to
acquire Jazz Technologies, Inc. The merger is subject to a number of conditions,
which are beyond our control and that may prevent, delay or otherwise materially
adversely affect its completion. We cannot predict whether and when these
conditions will be satisfied and we may fail to obtain the necessary approvals
to consummate the acquisition. 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 Jazz expect to achieve if they successfully complete the merger within the
expected time frame and integrate their respective businesses. In addition, the
acquisition involves other known and unknown risks that could adversely affect
our future revenues and operating results. For example:
o The acquisition may divert management's attention away from our
primary product offerings, resulting in the loss of key customers
and/or personnel and exposing us to unanticipated liabilities.
o We may fail to successfully integrate the acquisition in accordance
with our business strategy.
o We may not be able to retain the skilled employees and experienced
management that may be necessary to o operate the businesses we are
acquiring and, if we cannot retain such personnel, we may not be able
to attract new skilled employees and experienced management to replace
them.
o Jazz Technologies, Inc. may have undisclosed contingent liabilities,
including, among others, known or unknown intellectual property
infringement, environmental liabilities or product liability claims.
Before the merger with Jazz technologies, Inc. we, our independent
auditors and our legal counsel conducted due o diligence on Jazz
Technologies, Inc. customary and appropriate for a merger transaction.
However, the due diligence process may not have revealed all material
liabilities of Jazz technologies, Inc. currently existing or which may
be asserted in the future against us relating to Jazz technologies,
Inc. activities before the consummation of the merger.
RISKS RELATED TO OUR SECURITIES
OUR STOCK PRICE MAY BE VOLATILE IN THE FUTURE.
The stock market, in general, has experienced extreme volatility that often
has been unrelated to the operating performance of particular companies. In
particular, the stock prices for many companies in the semiconductor industry
have experienced wide fluctuations, which have often been unrelated to the
operating performance of such companies. These broad market and industry
fluctuations may adversely affect the market price of our ordinary shares,
regardless of our actual operating performance.
- 14 -
In addition, it is possible that in some future periods our operating
results may be below the expectations of public market analysts and investors.
In this event, the price of our securities may under perform or fall.
ISSUANCE OF ADDITIONAL SHARES PURSUANT TO OUR FAB 2 FINANCING PLANS AND
ARRANGEMENTS AND THE TERMS OF OUTSTANDING SECURITIES WHICH ARE EXERCISABLE OR
CONVERTIBLE INTO SHARES MAY DILUTE THE INTEREST OF OUR SHAREHOLDERS. WE MAY ALSO
ISSUE IN THE FUTURE ADDITIONAL SHARES AND/OR SECURITIES WHICH ARE EXERCISABLE OR
CONVERTIBLE INTO SHARES.
As of May 31, 2008, we had approximately 125.4 million ordinary shares
outstanding and have outstanding securities convertible or exercisable into up
to approximately 245.6 million ordinary shares including: (i) up to 25.3 million
ordinary shares issuable upon the conversion of our 2005 outstanding convertible
debentures held by some of our major shareholders and others at a conversion
rate of $1.10; (ii) 8.3 million warrants issued to our banks with an exercise
price of $1.21; (iii) up to 24.2 million ordinary shares issuable upon the
conversion of our 2006 outstanding convertible debentures at a conversion rate
of approximately $2.5; (iv) 17.5 million warrants with an exercise price of
$2.04; (v) 5.2 million warrants with an exercise price of approximately $2.8;
(vi) 32.7 million employee and director options with a weighted average exercise
price of $1.72; (vii) 5.5 million warrants with an exercise price of
approximately $2.2; and (viii) 7.4 million ordinary shares issuable upon the
conversion of our 2007 convertible debentures, at a conversion rate of
approximately $5.2. Additionally, in September 2006, we issued equity equivalent
capital notes to our banks and to Israel Corp., which are convertible for no
additional consideration, into approximately 52 million and 65.8 million of our
ordinary shares, respectively.
In May 2008 we entered into a definitive agreement with Jazz Technologies,
Inc. to acquire its shares in a stock-for-stock transaction in which we expect
to issue approximately 34.3 million shares and reserve for future issuance upon
the exercise or conversion of outstanding Jazz options, warrants and senior
convertibles notes, an additional approximately 96.5 million shares.
In January 2008, we filed a shelf registration statement on Form F-3 with
the U.S. Securities and Exchange Commission, which was declared effective in
February 2008, registering the possible offer and sale from time to time of up
to $40 million of securities.
Following the reduction of the interest rate applicable to the quarterly
actual interest payments on our outstanding loans to our banks following the
closing of the September 2006 amendment to our facility agreement, we have
agreed to issue shares or convertible securities to our banks in January 2011,
calculated based on the amount of decreased interest payments as set forth in
the amendment and our share price in the forth quarter of 2010.
We may undertake additional financings in the future and in connection
therewith we may issue shares or securities convertible into shares, which may
materially dilute the holdings of our current shareholders.
- 15 -
MARKET SALES OF LARGE AMOUNTS OF OUR SHARES ELIGIBLE FOR FUTURE SALE, OR EVEN
THE PERCEPTION THAT SUCH SALES MAY OCCUR, MAY LOWER THE PRICE OF OUR ORDINARY
SHARES.
Of our approximately 125.4 million outstanding ordinary shares as of May
31, 2008, approximately 86.5 million are held by non-affiliates and are freely
tradable under US securities laws. In addition, certain of our affiliates
(Israel Corp., SanDisk Corporation and Macronix International) hold
approximately 38.9 million of our outstanding shares, of which (i) approximately
3.3 million are registered for resale and are therefore freely tradable under US
securities laws, and (ii) approximately 35.6 million are currently eligible for
sale subject to the volume and manner of sale limitations of Rule 144
promulgated under the US Securities Act of 1933, as amended ("Rule 144"). As of
May 31, 2008, up to approximately 25.3 million additional shares issuable upon
the conversion of our 2005 convertible debentures beneficially owned by
non-affiliates or are registered for sale and are freely tradable under US
securities laws and approximately 5.4 million shares issuable upon exercise of
warrants issued to Israel Corp. and our banks will become eligible for sale
commencing six months after exercise of the warrants, subject, in the case of
Israel Corp. and, if deemed "affiliates" of our company, the banks, to the
volume and manner of sale limitations of Rule 144. Approximately 65.8 million
shares underlying Israel Corp.'s equity equivalent convertible capital notes are
freely tradable subject to volume and manner of sale requirements of Rule 144.
In addition, (i) approximately 9.2 million shares issuable upon the exercise of
warrants we granted to our banks and (ii) approximately 9.4 million shares
issuable upon exercise of warrants issued in our March 2007 private placement,
are registered for resale and are therefore freely tradable under US securities
laws. Additionally, up to: (i) approximately 29.7 million shares issuable upon
the conversion and/or exercise of the securities sold in our June 2006 public
offering in Israel, (ii) approximately 5.2 million shares issuable upon exercise
of warrants sold in private placements completed in November 2006 and (iii) the
additional up to approximately 10.1 million ordinary shares which are issuable
upon the conversion and/or exercise of warrants sold in our June 2007 private
placement and September 2007 public offering in Israel, would be freely tradable
in normal trading transactions in the United States. We have filed a
registration statement covering the resale of an additional up to approximately
52 million shares issuable upon the conversion of equity equivalent convertible
capital notes issued to our banks and if declared effective, such shares would
be freely tradable under US securities laws. In January 2008, we filed a shelf
registration statement, which was declared effective in February 2008,
registering the possible offer and sale from time to time of up to $40 million
of securities which we may elect to offer and sell during the three years
following February 2008. Furthermore, as part of the definitive merger agreement
with Jazz Technologies, Inc., we undertook to file a registration statement in
connection with the shares to be issued in the transaction and the shares that
may be issued in the future upon the exercise of Jazz options, warrants and
senior convertibles notes. The sales of large amounts of our ordinary shares (or
the potential for those sales even if they do not actually occur) may depress
the market price of our ordinary shares. This could also impair our ability to
raise capital through the sale of our equity securities.
OUR PRINCIPAL SHAREHOLDERS COLLECTIVELY OWN A CONTROLLING INTEREST IN US AND
WILL BE ABLE TO EXERCISE THEIR VOTING RIGHTS IN WAYS WHICH MAY BE ADVERSE TO THE
INTERESTS OF OUR OTHER SHAREHOLDERS.
As of May 31, 2008, our major wafer partners and Israel Corp. collectively
owned approximately 31% of our outstanding shares. In the event Israel Corp.
were to convert its equity convertible capital notes, our major wafer partners
and Israel Corp. would collectively own approximately 55% of our outstanding
shares. Under our articles of association, two shareholders holding together 33%
of our outstanding shares constitute a quorum for conducting a shareholders'
meeting. If Israel Corp. were to convert its equity convertible capital notes,
our wafer partners and Israel Corp. would constitute a quorum for purposes of
conducting a shareholders' meeting. If only two large shareholders, owning
collectively at least 33% of our shares, were to participate in one of our
shareholders' meetings, these shareholders would determine the outcome of our
shareholders' meeting without the benefit of the participation of our other
shareholders. The interests of these shareholders may not be consistent with the
interests of our other shareholders. As a result, these shareholders may
exercise voting rights or otherwise influence corporate action in ways that are
adverse to the interests of our other shareholders.
- 16 -
THE PAYMENT OF THE REDEMPTION AMOUNT ON ACCOUNT OF OUR OUTSTANDING DEBENTURES IS
SUBORDINATED TO OUR INDEBTEDNESS TO OUR BANKS AND OBLIGATIONS TO SECURED
CREDITORS.
The payment of the redemption amount on account of our outstanding
debentures is subordinated to the prior payment of approximately $399 million in
the aggregate payable by us to our banks under our amended credit facility
agreement and our September 2007 credit lines with them, to any obligations to
the Investment Center of the Israeli Ministry of Industry, Trade and Labor
related to approximately $165 million in grants received as of May 31, 2008
under the Investment Center's "Approved Enterprise" program in relation to Fab
2, and to a first ranking charge in favor of SanDisk Corporation, on
approximately $10 million of equipment purchased in connection with the
performance of our obligations under our agreement with SanDisk Corporation. As
a result, upon any distribution to our creditors in liquidation or
reorganization or similar proceedings, these secured creditors will be entitled
to be paid in full before any payment may be made with respect to our
outstanding debentures. In any of these circumstances, we may not have
sufficient assets remaining to pay amounts due on any or all of our debentures
then outstanding. In addition, we are not permitted under the terms of our
credit facility agreement to make a payment on account of the debentures if on
the date of such payment an "Event of Default" exists under our credit facility
agreement.
RISKS RELATED TO OUR OPERATIONS IN ISRAEL
INSTABILITY IN ISRAEL MAY HARM OUR BUSINESS.
All of our manufacturing facilities and our corporate and some of our sales
offices are located in Israel. Accordingly, political, economic and military
conditions in Israel may directly affect our business.
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, as well as
incidents of civil unrest. In addition, Israel and companies doing business with
Israel have, in the past, been the subject of an economic boycott. Although
Israel has entered into various agreements with Egypt, Jordan and the
Palestinian Authority, Israel has been and is subject to civil unrest and
terrorist activity, with varying levels of severity. Parties with whom we do
business have sometimes declined to travel to Israel during periods of
heightened unrest or tension, forcing us to make alternative arrangements where
necessary. In addition, the political and security situation in Israel may
result in parties with whom we have agreements claiming that they are not
obligated to perform their commitments under those agreements pursuant to force
majeure provisions. We can give no assurance that security and political
conditions will not adversely impact our business in the future. Any hostilities
involving Israel or the interruption or curtailment of trade between Israel and
its present trading partners could adversely affect our operations and could
make it more difficult for us to raise capital. Furthermore, our manufacturing
facilities are located exclusively in Israel, which has been experiencing civil
unrest, terrorist activity and military action. We could experience serious
disruption of our manufacturing if acts associated with this conflict result in
any serious damage to our manufacturing facilities. In addition, our business
interruption insurance may not adequately compensate us for losses that may
occur, and any losses or damages incurred by us could have a material adverse
effect on our business.
OUR OPERATIONS MAY BE NEGATIVELY AFFECTED BY THE OBLIGATIONS OF OUR PERSONNEL TO
PERFORM MILITARY SERVICE.
In the event of severe unrest or other conflict, individuals could be
required to serve in the military for extended periods of time. In response to
increases in terrorist activity, there have been periods of significant call-ups
of military reservists, and it is possible that there will be additional
call-ups in the future. A large part of male Israeli citizens, including our
employees, are subject to compulsory military reserve service through middle
age. Our operations could be disrupted by the absence for a significant period
of time of one or more of our key employees or a significant number of our other
employees due to military service. Such disruption could harm our operations.
- 17 -
OUR OPERATIONS MAY BE AFFECTED BY NEGATIVE ECONOMIC CONDITIONS IN ISRAEL.
Israel has experienced periods of recession in economic activity, resulting
in low growth rates and growing unemployment. Our operations could be adversely
affected if the economic conditions in Israel deteriorate. In addition, Israel
has experienced several general strikes and other work stoppages, affecting
banks, government offices, airports and ports. These strikes have had an adverse
effect on the Israeli economy and on businesses, including our ability to
deliver products to our customers or to receive raw materials from our suppliers
in a timely manner. From time to time, the Israeli trade unions threaten strikes
or work-stoppages, which may, if carried out, have a material adverse effect on
the Israeli economy and our business.
IF THE EXEMPTION ALLOWING US TO OPERATE OUR MANUFACTURING FACILITIES SEVEN DAYS
A WEEK IS NOT RENEWED, OUR BUSINESS WILL BE ADVERSELY AFFECTED.
We operate our manufacturing facilities seven days a week pursuant to an
exemption from the law that requires businesses in Israel to be closed from
sundown on Friday through sundown on Saturday. This exemption expires by its
terms on December 31, 2008. If the exemption is not renewed and we are forced to
close any or all of the facilities for this period each week, our financial
results and business will be harmed.
IF WE ARE CONSIDERED TO BE A PASSIVE FOREIGN INVESTMENT COMPANY, EITHER
PRESENTLY OR IN THE FUTURE, US HOLDERS WILL BE SUBJECT TO ADVERSE US TAX
CONSEQUENCES.
We will be a passive foreign investment company, or PFIC, if 75% or more of
our gross income in a taxable year, including our pro rata share of the gross
income of any company, US or foreign, in which we are considered to own,
directly or indirectly, 25% or more of the shares by value, is passive income.
Alternatively, we will be considered to be a PFIC if at least 50% of our assets
in a taxable year, averaged over the year and ordinarily determined based on
fair market value, including our pro rata share of the assets of any company in
which we are considered to own, directly or indirectly, 25% or more of the
shares by value, are held for the production of, or produce, passive income. If
we were to be a PFIC, and a US Holder does not make an election to treat us as a
"qualified electing fund," or QEF, or a "mark to market" election, "excess
distributions" to a US Holder, any gain recognized by a US Holder on a
disposition of our ordinary shares would be taxed in an unfavorable way. Among
other consequences, our dividends would be taxed at the regular rates applicable
to ordinary income, rather than the 15% maximum rate applicable to certain
dividends received by an individual from a qualified foreign corporation. The
tests for determining PFIC status are applied annually and it is difficult to
make accurate predictions of future income and assets, which are relevant to the
determination of PFIC status. In addition, under the applicable statutory and
regulatory provisions, it is unclear whether we would be permitted to use a
gross loss from sales (sales less cost of goods sold) to offset our passive
income in the calculation of gross income. In light of the uncertainties
described above, we have not obtained an opinion of counsel with respect to our
PFIC status and no assurance can be given that we will not be a PFIC in any
year. If we determine that we have become a PFIC, we will then notify our US
Holders and provide them with the information necessary to comply with the QEF
rules. If the IRS determines that we are a PFIC for a year with respect to which
we have determined that we were not a PFIC, however, it might be too late for a
US Holder to make a timely QEF election, unless the US Holder qualifies under
the applicable Treasury regulations to make a retroactive (late) election. US
Holders who hold ordinary shares during a period when we are a PFIC will be
subject to the foregoing rules, even if we cease to be a PFIC in subsequent
years, subject to exceptions for US Holders who made a timely QEF or
mark-to-market election.
- 18 -
IT MAY BE DIFFICULT TO ENFORCE A US JUDGMENT AGAINST US, OUR OFFICERS, DIRECTORS
AND ADVISORS OR TO ASSERT US SECURITIES LAW CLAIMS IN ISRAEL.
We are incorporated in Israel. Most of our executive officers and directors
and our Israeli accountants and attorneys are nonresidents of the United States,
and a majority of our assets and the assets of these persons are located outside
the United States. Therefore, it may be difficult to enforce a judgment obtained
in the United States, against us or any of these persons, in US or Israeli
courts based on the civil liability provisions of the US Federal securities
laws. Additionally, it may be difficult for you to enforce civil liabilities
under US Federal securities laws in original actions instituted in Israel.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
We are a pure-play independent specialty foundry dedicated to the
manufacture of semiconductors. Typically, pure-play foundries do not offer
products of their own, but focus on producing integrated circuits, or ICs, based
on the design specifications of their customers. We manufacture semiconductors
using advanced production processes for our customers primarily based on third
party designs and our own proprietary designs. We currently offer the
manufacture of ICs with geometries ranging from 1.0 to 0.13-micron. We also
provide design services and complementary technical services. ICs manufactured
by us are incorporated into a wide range of products in diverse markets,
including consumer electronics, personal computers, communications, automotive,
industrial and medical device products.
We are focused on establishing leading market share in high-growth
specialized markets by providing our customers with high-value wafer foundry
services. Our historical focus has been standard digital complementary metal
oxide semiconductor ("CMOS") process technology, which is the most widely used
method of producing ICs. We are currently focused on the emerging opportunities
in the fields of CMOS image sensors, mixed-signal, radio frequency CMOS
(RFCMOS), radio frequency identification (RFID) technologies and power
management. To better serve our customers, we have developed and are
continuously expanding our technology offerings for use in these fields. Through
our expertise and experience gained over fifteen years of operation, we
differentiate ourselves by creating a high level of value for our clients
through innovative technological processes, design and engineering support and
services, competitive manufacturing indices, and dedicated customer service.
Our company was founded in 1993, when we acquired National Semiconductor's
150-mm wafer fabrication facility, or Fab 1, and commenced operations as an
independent foundry with a production capacity of approximately 5,000 wafers per
month. Since then, we have significantly modernized our Fab 1 facility and
equipment, which has improved our process geometries to range from 1.0-micron to
0.35-micron and enhanced our process technologies to include CMOS image sensors,
embedded flash and mixed-signal technologies. Production capacity in Fab 1 as of
May 31, 2008 was approximately 16,000 wafers per month depending on process
technology and product mix.
In January 2001, we commenced construction of a new, state-of-the-art wafer
fabrication facility, which we refer to as Fab 2, located in Migdal Haemek,
Israel and adjacent to our first facility, Fab 1. In 2003, we completed the
infrastructure of Fab 2 and commenced production wafer shipments from this Fab.
Fab 2 is designed to operate in geometries of 0.18-micron and below, using
advanced materials and advanced CMOS technology licensed from Freescale and
Toshiba and other technologies that we developed and will develop independently
or with development partners. During 2008, we are implementing a capacity
increase plan targeting to reach up to approximately 30,000 wafers per month,
which has not yet been completed. Production capacity of Fab 2 as of December
31, 2007 was approximately 24,000 wafers per month. Depending on the process
technology and product mix, when fully ramped-up we estimate that Fab 2 will be
able to achieve capacity levels of up to approximately 44,000 wafers per month.
We have not yet made a decision as to the timing of the commencement of any
further ramp-up of Fab 2 capacity beyond approximately 30,000 wafer starts per
month. The timing of that decision and its implementation will depend upon
several factors, including, funding, and cost availability of equipment and
market conditions.
- 19 -
Our capital expenditures, net of Investment Center grants, for 2007, 2006
and 2005 of approximately $91 million, $163 million and $32 million,
respectively, were made principally in connection with the construction of, and
purchase of equipment and technology for, Fab 2.
Our legal and commercial name is Tower Semiconductor Ltd. We were
incorporated under the laws of Israel. Our manufacturing facilities and
executive offices are located in the Ramat Gavriel Industrial Park, Shaul Amor
Street, Post Office Box 619, Migdal Haemek, 23105 Israel, and our telephone
number is 972-4-650-6611. Our worldwide web site is http://www.towersemi.com.
Information on our web site is not incorporated by reference in this annual
report.
RECENT DEVELOPMENTS
On May 19, 2008 we entered into a definitive merger agreement with Jazz
Technologies, Inc., a leader in Analog-Intensive Mixed Signal (AIMS) foundry
solutions, by which we will acquire all of the outstanding shares of Jazz
Technologies, Inc. in a stock-for-stock transaction valuing Jazz at an equity
value of approximately $40 million, based on the closing price of our shares on
the date of the agreement. The total value of the transaction, including net
debt, is approximately $169 million. The transaction is subject to closing
conditions, which must all be met or waived (by the applicable party) in order
for the transaction to be consummated. Under the terms of the agreement, upon
the closing of the merger, Jazz will become our wholly-owned subsidiary and each
outstanding share of Jazz common stock will be converted into the right to
receive 1.8 Tower ordinary shares. We expect the transaction to close in the
second half of 2008.
B. BUSINESS OVERVIEW
INDUSTRY OVERVIEW
Semiconductor devices are responsible for the rapid growth of the
electronics industry over the past fifty years. They are critical components in
a variety of applications, from computers, consumer electronics and
communications, to industrial, military, medical and automotive applications.
The semiconductor industry is characterized by rapid changes in technology,
frequently resulting in the obsolescence of recently introduced products. As
performance has increased and size and cost have decreased, the use of
semiconductors and the number of their applications have grown significantly.
Historically, the semiconductor industry was composed primarily of
companies that designed and manufactured ICs in their own fabrication
facilities. These companies, such as Intel and IBM, are known as integrated
device manufacturers, or IDMs. In the mid-1980s, fabless IC companies, which
focused on IC design and used external manufacturing capacity, began to emerge.
Fabless companies initially outsourced production to IDMs, which filled this
need through their excess capacity. As the semiconductor industry continued to
grow, increasing competition forced fabless companies and IDMs to seek reliable
and dedicated sources of IC manufacturing services. This need has been met by
the development of independent companies, known as foundries, which focus
primarily on providing IC manufacturing services to semiconductor suppliers.
Foundry services are now used by nearly every major semiconductor company in the
world, including IDMs as part of a dual-source, risk-diversification and cost
effectiveness strategy.
- 20 -
Semiconductor suppliers face increasing demands for new products that
provide higher performance, greater functionality and smaller form factors at
lower prices, which require increasingly complex ICs. In addition to the
increased complexity of designs, there has also been a dramatic increase in the
number of applications for semiconductors. To compete successfully,
semiconductor suppliers must also minimize the time it takes to bring a product
to market. As a result, fabless companies and IDMs are focusing more on their
core competencies-design and intellectual property-and outsourcing
manufacturing to foundries.
The consumer sector is expanding worldwide with new applications and
multi-functional devices, including those that incorporate CMOS image sensors,
embedded flash and mixed-signal ICs. Increasingly, emerging applications, such
as camera-equipped cell phones, digital still cameras and flat panel displays,
are enabled by ICs manufactured using advanced process technologies.
The enormous costs associated with modern fabs, combined with the
increasing demand for complex ICs, has created an expanding market for
outsourced manufacturing offered by foundries. Foundries can cost-effectively
supply advanced ICs to even the smallest fabless companies by creating economies
of scale through pooling the demand of numerous customers. In addition,
customers whose IC designs require process technologies other than standard
digital CMOS have created a market for independent foundries that focus on
providing specialized process technologies, such as CMOS image sensors, embedded
flash and mixed-signal technologies. Foundries also offer competitive customer
service through design, testing, and other technical services, often at a level
previously found only at an IDM's internal facilities.
These trends have led to the rapid growth in demand in recent years for
advanced semiconductor manufacturing services provided by independent foundries.
MANUFACTURING PROCESSES AND SPECIALIZED TECHNOLOGIES
We manufacture ICs on silicon wafers, generally using the customer's
proprietary circuit designs. In some cases, we use third-party or our own
proprietary design elements. The end product of our manufacturing process is a
silicon wafer containing multiple identical ICs. In most cases, our customer
assumes responsibility for dicing, assembly, packaging and testing.
We provide wafer fabrication services to fabless IC companies and IDMs and
enable smooth integration of the semiconductor design and manufacturing
processes. By doing so, we enable our customers to bring high-performance,
highly integrated ICs to market rapidly and cost effectively. We believe that
our technological strengths and emphasis on customer service have allowed us to
develop unique positions in large, high-growth specialized markets for CMOS
image sensors, mixed signal and RF CMOS ICs. We serve as a sole source or
alternative provider of foundry services.
We manufacture ICs using CMOS process technology. CMOS is currently the
dominant semiconductor manufacturing process because it requires lower power
than other technologies and allows dense placement of components onto a single
IC. The low power consumption and high-density characteristics of the CMOS
process allow the continued development of high performance ICs that are smaller
and faster. We believe that our specialized process technology distinguishes our
IC manufacturing services and attracts industry-leading customers.
- 21 -
We believe that we are a trusted, customer-oriented service provider that
has built a solid reputation in the foundry industry over the last fifteen
years. We have built strong relationships with customers, who continue to use
our services, even as their demands evolve to smaller form factors and new
applications. Our consistent focus on providing high-quality, value added
services, including engineering and design support, has allowed us to attract
customers for both our Fab 1 and Fab 2 facilities who seek to work with a proven
provider of foundry services. Our emphasis on working closely with customers and
accelerating the time-to-market of our customers' next-generation products is
also reflected in our corporate structure. As a result, we have a high customer
retention rate and an increase in new customers and new products for production.
We derived approximately 48% of our revenues for the year ended December
31, 2007 from our target specialized markets: CMOS image sensors, embedded
flash, mixed-signal, RF and power ICs. We are highly experienced in these
markets, being an early entrant and having developed unique proprietary
technologies, primarily through licensing and joint development efforts with our
customers and other technology companies. The specific process technologies that
we currently focus on include:
CMOS IMAGE SENSORS
CMOS image sensors are ICs used to capture an image in a wide variety of
consumer, communications, medical, automotive and industrial market
applications, including camera-equipped cell phones, digital still and video
cameras, security and surveillance cameras and video game consoles. Our
dedicated manufacturing and testing processes assure consistently high
electro-optical performance of the integrated sensor through wafer-level
characterization. Our CMOS image sensor processes have demonstrated superior
optical characteristics, excellent spectral response and high resolution and
sensitivity. The ultra-low dark current, high efficiency and accurate spectral
response of our photodiode enable faithful color reproduction and acute detail
definition.
In addition, our innovative "stitching" technology enables semiconductor
exposure tools to manufacture single ultra high-resolution CMOS image sensors
containing millions of pixels at sizes far larger than their existing field. Our
0.5, 0.35-micron and 0.18-micron CMOS image sensor processes are designed to
permit the customer to create high-quality solutions and integrate a product's
CMOS analog and logic circuitry together with the sensor pixel array all on one
chip, thereby facilitating miniaturization, reducing power consumption and
increasing performance.
We are currently actively involved in this mass market as well as the
high-end sensor and applications specific markets, which include applications
such as industrial machine vision, medical X-Ray and automotive sensors. While
CMOS image sensors for advanced optical applications are an emerging technology,
we believe that they are becoming the preferred technology to traditional charge
coupled devices, or CCDs. CCDs have historically provided superior image
quality; however, advances in semiconductor manufacturing processes and design
techniques have led to significant improvements in CMOS image sensor performance
and image quality. These advances have resulted in smaller size circuits and
better power control, making it possible to design CMOS image sensors that
provide high image quality at a significantly lower cost.
As early as 1997, we recognized the market potential of using CMOS process
technology for a digital camera-on-a-chip, which would integrate a CMOS image
sensor, filters and digital circuitry. In entering the CMOS image sensor foundry
business, we utilized research and development work that had been ongoing since
1993. Our services include a broad range of turnkey solutions and services,
including pixel IP services, optical characterization of a CMOS process,
innovative stitching manufacturing technique and optical testing and packaging.
CMOS image sensors manufactured by us deliver outstanding image quality for a
broad spectrum of digital imaging applications.
- 22 -
During the last quarter of 2005, we commenced volume production of CMOS
image sensors for the cellular phone camera market in 0.18 micron process and
using a 3.6 micron pixel which we developed. In 2006, we commenced volume
production with our developed 2.8 micron pixel and in parallel we developed a
2.2 micron pixel which serves as the foundation for products for several of our
customers, and is being used in VGA, 1.3Mp, 2Mp and 3Mp and which we expect to
be used in the future for 5Mp sensors for both the cellular phone and PC camera
commodity market, and the low end DSC market.
During 2007, we ramped to production products with 2.8 micron, 3.2 micron
and 3.6 micron pixels, all developed by us and supplied to our customers as
pixel IP. In the end of 2006, we began prototyping of two image sensors in Fab 2
in 0.18 micron technology to be used in cellular phone and smart phone cameras.
Our Advanced Photo Diode (APD) technology used in these CMOS image sensors
enables improved optical and electrical performance of ultra-small pixels
utilizing deep sub-micron process technologies, thus enabling the manufacturing
of small, cost-effective camera module solutions. During 2007, four VGA products
for cell phone applications, a 1/7" and a 1/8", based on 3.2 micron and 2.8
micron pixels respectively, ramped into mass production.
We developed a new 2.2-micron pixel for which prototyping began during
2007. In addition, in the beginning of 2007, we were selected by e2v as its
supplier of choice for its CMOS image sensor devices. e2v's products target a
broad range of industrial and medical applications. The CMOS sensors will be
produced in Fab2, using the CIS 0.18 micron process and its advanced
capabilities, including our patented stitching technology that was successfully
developed for Fab 2 in 2006.
For the X-Ray market, we developed stitched technology in Fab2 on
0.18micron process and a variety of 20-micron pixels that are optimized for
X-Ray applications. These pixels are used by our customers in dental and other
medical X-Ray products.
The stitched technology that was developed for Fab 2 during 2006 provided
us with the ability to manufacture large sensors (up to one die per wafer) on 8"
wafers using state of the art, 0.18-micron CMOS image sensor technology. In
2007, we had several new orders from customers whose products are based on this
technology. For example, in December 2007, we established a partnership with CMT
Medical Technologies Ltd., a leading provider of advanced digital X-ray imaging
systems for medical diagnosis, to develop, market and sell X-ray detectors for
medical applications. The detectors' intended use is for
radiography/fluoroscopy, cardiology, angiography, mammography and similar
large-size X-ray modalities. Large size detectors require the manufacturing of
up to one die per 8" wafer, at high yields. Delivery of the first flat panel
detectors is expected to begin in 2009.
During the first quarter of 2008, Canesta Inc.'s revolutionary 3D image
sensors went into the qualification stage at Tower. These CanestaVision(TM)
sensors, now in final qualification stages for the automotive industry, are
being manufactured at Tower's advanced Fab2 facility, using its
state-of-the-art, CMOS Image Sensor (CIS) 0.18-micron technology process.
In March 2008, we ramped-up the production of N-trig's A-trig and D-trig -
the newest digitizer chipset to be integrated in OEMs computer systems.
EMBEDDED FLASH
Flash memory is a constantly powered nonvolatile memory that can be erased
and reprogrammed in units of memory called blocks. The IC of flash memory is
organized so that a section of memory cells may be erased in a single action, or
"flash". Applications for flash memory products range from most types of
portable electronic equipment devices to high volume mass storage of data. Flash
is particularly suitable for applications such as handheld devices, combining
the need for portability, high density, ruggedness and lower power requirements.
Flash memory products are also well-suited for audio products such as digital
answering machines and MP3 players, as well as other applications including
networking devices, digital cameras, personal computer motherboards and portable
memory devices.
- 23 -
Embedded flash is the combination of flash memory with other components,
such as other memory, logic and analog, on a single IC to provide speed,
functionality and form factor advantages and reduce system cost. Embedded flash
memory products are used in communications, consumer, industrial, military and
automotive applications. End products include networks, base stations, servers,
microcontrollers, toys, set-top boxes, DVD players, cell phones and smart cards.
The relative simplicity of our microFLASH manufacturing process offers cost
advantages over competing flash technologies for high density memories. Using
our 0.5-micron technology, we have introduced the first of our microFLASH
processes into production with the manufacture of a 2 megabit stand-alone memory
device and embedded multi-time programming modules, with a limited number of
rewrite cycles. Our 0.18-micron embedded flash technology was mutually developed
with a Japanese semiconductor manufacturer during 2004, with multiple flash
modules ranging in sizes from 0.5 megabit to 8 megabit, and is currently in
different stages of prototyping and production with a few customers.
MIXED SIGNAL, RF CMOS, AND RFID
Mixed-signal ICs are an essential part of any electronic system that
interacts with the real world. Analog ICs monitor and manipulate real world
signals such as sound, light, pressure, motion, temperature and electrical
current and are used in a wide variety of electronic products such as PCs, cell
phones, DVD players, automotive electronics and medical imaging equipment.
Digital ICs perform arithmetic functions on data represented by a series of ones
and zeroes, provide critical processing power and have enabled many of the
computing and communication advances of recent years. Mixed-signal ICs combine
analog and digital semiconductor functionality on a single IC to enable digital
systems to interface with the real world. As these digital systems proliferate,
there is a growing need for analog functionality to enable them to interface
with the real world. For 0.18-micron technology, we have developed design kits
optimized for mixed-signal and RFCMOS design. These design kits contain a
comprehensive characterization of a wide range of analog and RF devices to
provide our customers with the ability to design mixed-signal and RF ICs for
their specific needs.
In recent years, more and more designers opt to develop high frequency
products based on RF CMOS technologies. The superior cost structure of CMOS
technologies enables high volume, low cost production of such high frequency
products. We use our mixed signal expertise to leverage and develop processes
and provide services for customers utilizing CMOS technologies. We further
enhanced our mixed signal 0.18-micron platform technology offering by developing
RF CMOS product design kits. This allowed us to increase our customer base and
obtain new products for production as well as develop special capabilities with
RFID applications.
RFID. In 2004, we started a joint development program with Alien Technology
Corporation that targets the RFID tag market and utilizes a platform technology
of mixed signal, RF and non volatile memory function. Since 2006, we have been
the manufacturing supplier for Alien Technology's internally-designed Gen 2 RFID
ICs. Currently certain of Alien's products are in production at Fab 2 and the
next generation technology developments are in process.
CONVERGENCE OF TECHNOLOGIES
In response to the growing demand for a single chip to offer a wide array
of functions, we are leveraging a combination of some of the abovementioned
technologies by developing a single chip with multiple functions. The successful
development of this chip will allow us to provide additional value to our
customers and obtain a unique market position by offering our customers a unique
technology platform. We engage in projects merging CMOS, NVM and CIS for unique
solutions to customers' needs, as well as in a project targeting RFID tags
applications merging RF CMOS, mixed signal and NVM technologies onto a single
chip.
- 24 -
CUSTOMERS, MARKETING AND SALES
Our marketing and sales strategy seeks to aggressively expand our global
customer base. We have marketing, sales and engineering support personnel in the
United States, Taiwan and Israel. Our marketing and sales staff is supported by
independent sales representatives, located throughout the world, who have been
selected based on their understanding of the semiconductor marketplace. In
November 2007, we opened a representative office in Taiwan to support our
increasing presence throughout the Asia Pacific region. Our new representative
office provides applications and logistical support to our existing customers.
This representative office also performs marketing activities aimed at the local
market to increase our customer base.
Our sales cycle is generally 12-24 months or longer for new customers and
can be as short as 9-12 months for existing customers. The typical stages in the
sales cycle process from initial contact until production are:
o technical evaluation;
o product design to our specifications including integration of third
party intellectual property;
o photomask design and third party manufacturing;
o silicon prototyping;
o assembly and test;
o validation and qualification; and
o production.
The primary customers of our foundry services are fabless semiconductor
companies and IDMs. A substantial portion of our product sales are made pursuant
to long-term contracts with our customers, under which we have agreed to reserve
manufacturing capacity at our production facilities for such customers. Our
customers include many industry leaders, some of our shareholders and a number
of Taiwanese companies that preferred our solution to the solutions that were
offered locally. During the year ended December 31, 2007, we had seven
significant customers who contributed 29%, 13%, 11%, 7%, 5%, 5% and 5% of our
revenues, respectively. In 2006, we had seven significant customers who
contributed 23%, 11%, 10%, 9%, 6%, 5% and 5%of our revenues, respectively.
In addition to further developing our customer base, we have also made a
concentrated effort to maintain the geographical diversity of our sales. The
percentage of our sales from customers located outside the United States was
36%, 31 and 25% in the years ended December 31, 2005, 2006 and 2007,
respectively. We believe that although most of our sales are from US-based
customers a substantial portion of our sales will continue to come from
customers located outside the United States. The following table sets forth the
geographical distribution, by percentage, of our net sales for the periods
indicated:
- 25 -
YEAR ENDED DECEMBER 31,
----------------------------------
2007 2006 2005
------ ------ ------
United States 75% 69% 64%
Israel 7% 7% 7%
Asia-Pacific 10% 16% 20%(*)
Europe 8% 8% 9%
------ ------ ------
Total 100% 100% 100%
====== ====== ======
(*) Including payments made to us in connection with our May 2002 joint
development agreement for 0.18-micron embedded MICROFLASH technology.
COMPETITION
The global semiconductor foundry industry is highly competitive. The major
independent dedicated foundries include Taiwan Semiconductor Manufacturing
Corporation, United Microelectronics Corporation, Chartered Semiconductor
Manufacturing Ltd. and Semiconductor Manufacturing International Corp.; emerging
and existing Chinese, Korean and Malaysian foundries, including DongBu, He Jien
Technology, ASMC, MagnaChip, CSMC, Grace, HHNEC, and Silterra. In addition,
there are IDMs and end-product manufacturers that produce ICs for their own use
and/or allocate a portion of their manufacturing capacity to foundry operations.
Most of the foundries with which we compete are located in Asia-Pacific and
benefit from their close proximity to other companies involved in the design and
manufacture of ICs. We believe that the principal elements of competition in the
wafer foundry market are:
o technical competence;
o production quality;
o time-to-market;
o device and end-product price;
o available capacity;
o device yields;
o design and customer support services;
o access to intellectual property; and
o research and development capabilities.
Many of our competitors have greater manufacturing capacity, multiple
manufacturing facilities, more advanced technological capabilities, a more
diverse and established customer base, greater financial, marketing,
distribution and other resources and a better cost structure than ours.
We seek to compete primarily on the basis of technology, production
quality, device yields and services involving design, engineering support and
manufacturing. We believe we have a differentiated service offering and track
record in specialized markets, which enables us to effectively compete with
larger IC manufacturers.
- 26 -
WAFER FABRICATION SERVICES
Wafer fabrication is an intricate process that consists of constructing
layers of conducting and insulating materials on raw wafers in intricate
patterns that give the IC its function. IC manufacturing requires hundreds of
interrelated steps performed on different types of equipment, and each step must
be completed with extreme accuracy for finished ICs to work properly. The
process can be summarized as follows:
CIRCUIT DESIGN. IC production begins when a fabless IC company or IDM
designs the layout of a device's components and designates the interconnections
between each component. The result is a pattern of components and connections
that defines the function of the IC. In highly complex circuits, there may be
more than 35 layers of electronic patterns. After the IC design is complete, we
provide these companies with IC manufacturing services.
MASK MAKING. The design for each layer of a semiconductor wafer is
imprinted on a photographic negative, called a reticle or mask. The mask is the
blueprint for each specific layer of the semiconductor wafer.
IC MANUFACTURING. Transistors and other circuit elements comprising an IC
are formed by repeating a series of processes in which photosensitive material
is deposited on the wafer and exposed to light through a mask. Advanced IC
manufacturing processes consist of hundreds of steps, including
photolithography, oxidation, etching and stripping of different layers and
materials, ion implantation, deposition of thin film layers, chemical mechanical
polishing and thermal processing. The final step in the IC manufacturing process
is wafer probe, which involves electronically inspecting each individual IC in
order to identify those that are operable for assembly.
ASSEMBLY AND TEST. After IC manufacture, the wafers are transferred to
assembly and test facilities. In the assembly process, each wafer is cut into
dies, or individual semiconductors, and tested. Defective dies are discarded,
while good dies are packaged and assembled. Assembly protects the IC,
facilitates its integration into electronic systems and enables the dissipation
of heat or cold. Following assembly, the functionality, voltage, current and
timing of each IC is tested. After testing, the completed IC is shipped to the
IC supplier or directly to its final destination.
PROCUREMENT AND SOURCING
Our manufacturing processes use many raw materials, including silicon
wafers, chemicals, gases and various metals. These raw materials generally are
available from several suppliers. In many instances, we purchase raw materials
from a single source. In connection with our technology advancement plans, we
expect to continue to make purchases of semiconductor manufacturing equipment,
mainly for Fab 2.
RESEARCH AND DEVELOPMENT
Our future success depends, to a large degree, on our ability to continue
to successfully develop and introduce to production advanced process
technologies that meet our customers' needs. Our process development strategy
relies on CMOS process technologies that we primarily license and transfer from
third parties. We also develop these technologies on our own, at our own
initiative, our customers' request or in cooperation with our customers.
From time to time, at a customer's request, we develop a specialty process
module, which we use for such customer on an exclusive basis, and, if permitted
under our agreements with such customer, we then add it to our process offering.
Such developments are very common in all of our special process technologies
noted above. In 2004, in response to market demand, we introduced a 0.16-micron
optical shrink solution which represents a 10% linear shrink from our existing
0.18-micron offering while utilizing virtually the same 0.18-micron libraries
and IP. The shrink allows a 15 to 20 percent die size reduction and a
potentially higher wafer ASP and lower die cost. Applications include industry
standard CMOS logic and some mixed-signal technologies. This 0.16-micron
technology is currently in production.
- 27 -
Our research and development activities have related primarily to our
process development efforts and have been sponsored and funded by us with some
participation by the Israeli Office of the Chief Scientist, or OCS. Accordingly,
we are subject to restrictions set forth in Israeli law which limit the ability
of a company to manufacture products or to transfer technologies outside of
Israel, if such products or technologies were developed with OCS funding.
Research and development expenses for the years ended December 31, 2005, 2006
and 2007 were $16.0 million, $15.0 million and $13.8 million, net of government
participation of $1.0 million, $1.9 million and $2.61 million, respectively. As
of May 31, 2008, we employed 146 professionals in our research and development
department, 29 of whom have PhDs. In addition to our research and development
department located at our facilities in Migdal Haemek, we maintain a design
center in Netanya, Israel.
PROPRIETARY RIGHTS
INTELLECTUAL PROPERTY AND LICENSING AGREEMENTS
Our success depends in part on our ability to obtain patents, licenses and
other intellectual property rights covering our production processes. To that
end, we have acquired certain patents and patent licenses and intend to continue
to seek patents on our production processes. As of May 31, 2008, we held 67
patents. We have entered into various patent licenses and cross-licenses with
technology companies including Toshiba, Freescale, Synopsys, ARM, Chipidea
Microelectronics, Virage Logic, Impinj and others. We may choose to renew our
present licenses or obtain additional technology licenses in the future. There
can be no assurance that any such licenses could be obtained on commercially
reasonable terms.
We constantly seek to strengthen our technological expertise through
relationships with technology companies and silicon suppliers. We seek to expand
our core strengths in CMOS image sensors, embedded flash and mixed-signal
technologies by combining our proprietary technology with those of other
technology companies. A main component of our process development strategy is to
acquire licenses for standard CMOS technologies and cell libraries from leading
designers, such as Freescale and Toshiba, and further develop specialized
processes through our internal design teams. The licensing of these technologies
has enormously reduced our internal development costs.
CMOS PROCESS TECHNOLOGY PLATFORM
We have licensed an array of process technologies through the following
arrangements:
TOSHIBA. In April 2000, we entered into a technology transfer agreement
with Toshiba, pursuant to which Toshiba has transferred to us certain advanced
CMOS technologies for use in Fab 2. In exchange for certain license and
technology transfer fees and royalties, Toshiba has provided us with recipes,
know-how and patent licenses and has trained a group of our engineers and
managers. Subject to prior termination for cause by Toshiba, our licenses under
the agreement with Toshiba are perpetual. Based on Toshiba's 0.18-micron CMOS
process technology, we have internally developed an enhanced industry compatible
version of the process technology.
MOTOROLA (NOW FREESCALE). In September 2002, we entered into a technology
transfer and development agreement with Motorola, pursuant to which Motorola
transferred to us its 0.13-micron HiP MOS7 CMOS process technology for Fab 2 as
well as co-developed with us an industry-standard compatible version of the
process technology. Subject to prior termination for cause by Motorola, our
licenses under the technology transfer agreement with Motorola are perpetual. In
August 2004, Motorola assigned all of its rights and obligations under the
aforementioned agreement to Freescale.
- 28 -
FOUNDATION IP BLOCKS
To better serve our customers design needs using advanced CMOS processes
and mixed-signal, we have entered into a series of agreements with leading
providers of physical design libraries, mixed-signal and non volatile memory
design components. These components are basic design building blocks, such as
standard cells, interface input-output (I/O) cells, software compilers for the
generation of on-chip embedded memories arrays, mixed-signal and non-volatile
memory design blocks. To achieve optimal performance, all of these components
must be customized to work with our manufacturing process. These components are
used in most of our customers' chip designs. SYNOPSYS. In June 2001, we entered
into an agreement with Synopsys (formerly, Avant!) under which Synopsys
developed libraries for our 0.18-micron process technology. Multiple customers
use the Synopsys libraries in producing their ICs at our company. In 2004, we
entered into a set of comprehensive technology transfer and license agreements
with Synopsys that provide us with broad rights to use Synopsys' library
technology in multiple process technology generations including 0.18 micron and
0.13 micron. Under these agreements, we were given the right to develop,
customize, validate and characterize libraries based on Synopsys' library
technology and to distribute such libraries . These agreements place us in a
superior position of having in-house capability to serve our customers'
needs.Certain parts of the 2004 license agreementsrelating to support services
provided by Synopsys were terminated according to an agreement signed between
the parties in July 2007.
ARM LIMITED. In 2002 and subsequently in 2004 and 2006, we entered into
license agreements with ARM Limited (formerly, Artisan Components and ARM Inc.)
under which we received a license to a suite of library products for our
0.18-micron and 0.13-micron process technologies and ARM licenses its libraries
to our customers free of charge. Multiple customers are using the ARM libraries
in their chip design for manufacturing at our company. The ARM libraries
include, among others, standard cells, general purpose and specialty
input-output cells and memory generators.
VIRAGE LOGIC. In 2002 and subsequently in 2004 and in 2006, we entered into
license agreements with Virage Logic under which we received a license to a
suite of library products for our 0.18-micron and 0.13-micron process
technologies, respectively. These library products are available for licensing
by our customers, and with respect to most of the 0.13-micron library products,
free of a license charge. Virage offers a variety of SRAM and ROM memory
compilers on both process technologies, and also offers standard cells, general
purpose and specialty input-output cells libraries in the 0.13-micron
technology. Presently, multiple customers' products that use Virage Logic's
memory products are in production at Fab 2. In addition, our license agreements
with Virage Logic from 2002 and 2006 has also introduced Virage Logic's patented
Nonvolatile Electrically Alterable embedded memories for production on our
0.18-micron CMOS logic process. Currently, customers' products that use Virage
Logic's non-volatile memory products are in production at Fab 2. We have
selected and qualified these memories for our process to help our customers meet
their application requirements for cost-effective embedded non-volatile memory
for security, encryption, unique device identification, analog trimming, silicon
repair and flexible program store.
CHIPIDEA MICROELECTRONICS. (TODAY MIPS TECHNOLOGIES, INC). In 2003 and
subsequently in 2005 and 2006, we entered into a non-exclusive, perpetual,
royalty-free license and design agreement with Chipidea Microelectronics.
Further to this agreement, Chipidea has customized several of its mixed-signal
design blocks for manufacturing on our 0.18-micron and 0.13-micron process
technologies, such as USB 2.0 (Universal Serial Bus 2.0) and USB2.0 OTG (On The
Go), which are currently being utilized by several of our customers.
- 29 -
IMPINJ INC. In 2005, we entered into a development and license agreement
with Impinj Inc. under which Impinj is developing its AEON(R) non-volatile
memory (NVM), in parallel architecture, based on its patented Self-Adaptive
Silicon(R) technology, for production on our 0.13-micron CMOS logic process. We
chose Impinj's cost-effective NVM to help our customers' products meet their
application requirements for embedded non-volatile memories. Primary
applications for Impinj's AEON parallel architecture include analog trimming,
digital rights management and wireless controllers. In 2007, Impinj's
AEON(R)/MTP Parallel Architecture NVM cores became available in our 0.13-micron
logic process.
IMAGE SENSOR TECHNOLOGIES
We developed, both independently and together with our customers, basic
pixel intellectual property to be used by those customers in the manufacturing
of our CMOS image sensor products.
C. ORGANIZATIONAL STRUCTURE
The legal and commercial name of our company is Tower Semiconductor Ltd. We
were incorporated under the laws of the State of Israel in 1993. Tower
Semiconductor USA, Inc. is a wholly-owned subsidiary incorporated in the United
States.
On May 19, 2008 we entered into a definitive merger agreement with Jazz
Technologies, Inc., a leader in Analog-Intensive Mixed Signal (AIMS) foundry
solutions. The transaction is subject to closing conditions, which must all be
met or waived (by the applicable party) in order for the transaction to be
consummated. Under the terms of the agreement, upon the closing of the merger,
Jazz will become our wholly-owned subsidiary and each outstanding share of Jazz
common stock will be converted into the right to receive 1.8 Tower ordinary
shares. We expect the transaction to close in the second half of 2008. See also
- - "item 4-information on the Company - A, history and development of the Company
- - recent development."
D. PROPERTY, PLANTS AND EQUIPMENT
MANUFACTURING FACILITIES
FAB 1
We acquired our Fab 1 facility from National Semiconductor in 1993, which
had operated the facility since 1986. We occupy the facility pursuant to a
long-term lease from the Israel Lands Authority that expires in 2032.
Due to the sensitivity and complexity of the semiconductor manufacturing
process, a semiconductor manufacturing facility requires a special "clean room"
in which most of the manufacturing functions are performed. Our Fab 1 facility
includes an approximately 51,900 square foot clean room.
Since we commenced manufacturing at Fab 1, we increased its manufacturing
capacity from 5,000 wafers per month, using 1.25-micron and 1.0-micron
processes, to approximately 16,000 wafers per month as of May 31, 2008,
depending on process technology and product mix, using our 1.0 micron to
0.35-micron processes, including specialized processes. Fab 1 is also
manufacturing products for Siliconix Incorporated and Siliconix Technology C.V
under a long term foundry agreement that we entered into in May 2004 using
process technology that Siliconix transferred to us. During the first quarter of
2008, the parties amended the foundry agreement to revise the terms of the
purchase of trench products as well as transfer additional differentiated
product platforms to Tower for manufacturing.
- 30 -
Our exact capacity is variable and depends on the combination of the
processes being used and the product mix hence, it may be significantly lower at
certain times as a result of certain of our combinations. In general, our
ability to increase our manufacturing capacity has been achieved through the
addition of equipment, improvement in equipment utilization, the reconfiguration
and expansion of the existing clean room area and the construction of an
additional clean room area within the building shell of Fab 1.
FAB 2
In January 2001, we commenced construction of Fab 2, our advanced wafer fab
adjacent to Fab 1 in Migdal Haemek. The land on which Fab 2 is located is
subject to a long-term lease from the Israel Lands Authority that expires in
2049.
Fab 2 offers integrated circuits manufacturing services utilizing advanced
materials and a 0.18-micron process technology we licensed from Toshiba, as well
as 0.13-micron process technology we licensed from Freescale. Fab 2 is also
manufacturing products in 0.35-micron process technology that International
Rectifier Corporation ("IR") transferred to us under a long term foundry
agreement that we entered into in September 2006. During the fourth quarter of
2007, we began volume production of products for IR.
The overall clean room area in Fab 2 is approximately 100,000 square feet.
We began volume production at Fab 2 during the third quarter of 2003. Production
capacity as of December 31, 2007 was approximately 24,000 wafers per month.
Depending on the process technology and product mix, when fully ramped-up, we
estimate that Fab 2 will be able to achieve capacity levels of approximately
44,000 wafers per month.
Since 2000, we have invested significantly in the purchase of fixed assets,
primarily in connection with the construction of Fab 2, technology advancement
and capacity expansion. Capital expenditures in 2007, 2006 and 2005 were
approximately $91 million, $163 million and $38 million, respectively, before
related Investment Center grants of $0 million, $0 million and $6 million,
respectively.
We have registered liens in favor of the State of Israel and our banks on
substantially all of our present and future assets, including Fab 1 and Fab 2
(see "Item 5 - Operating and Financial Review and Prospects - B. Liquidity and
Capital Resources - Fab 2 Agreements - Credit Facility").
ENVIRONMENTAL, QUALITY MATTERS AND CERTIFICATIONS
Our operations are subject to a variety of laws and governmental
regulations relating to the use, discharge and disposal of toxic or otherwise
hazardous materials used in our production processes. Failure to comply with
these laws and regulations could subject us to material costs and liabilities,
including costs to clean up contamination caused by our operations.
We believe that we are currently in compliance in all material respects
with applicable environmental laws and regulations.
In November 2004, we received ISO 14001 certification from The Standards
Institution of Israel. A series of international standards on environmental
management, ISO 14000 provides a framework for the development of an
environmental management system and the supporting audit program. ISO 14001 is
the cornerstone standard of the ISO 14000 series. It specifies a framework of
control for an environmental management system pursuant to which an organization
can be certified by a third party. The ISO 14001 certification applies to all of
our manufacturing facilities. Our authorized design center in Netanya, Israel
also received certification.
- 31 -
In December 2004, we received the OHSAS 18001 certification from the
Standard Institution of Israel, which provides the framework of control for
Safety and Health. This certification covers all of our activities and
departments.
In November 2005, we achieved ISO/TS 16949 certification from the UK-based
National Quality Association pertaining to the manufacturing processes, work
procedures and product performance meeting the requirements of the automotive
industry. This quality management system standard certification covers all our
departments and activities.
In March 2006, we achieved ISO 17799 certification from The Standards
Institution of Israel for the high quality of our security technology and
implementations, covering all of our departments and activities.
In 2004, we achieved ISO 9000:2001 certification from The Standards
Institution of Israel for all quality systems and processes, covering all our
departments and activities This certification is renewed annually pursuant to
extensive audits performed by the SII.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE INFORMATION CONTAINED IN THIS SECTION SHOULD BE READ IN CONJUNCTION WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 AND
RELATED NOTES AND THE INFORMATION CONTAINED ELSEWHERE IN THIS ANNUAL REPORT. OUR
FINANCIAL STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH U.S. GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES ("US GAAP"). WE RECAST THE COMPARATIVE PRIOR YEAR
AMOUNTS INCLUDED IN OUR FINANCIAL STATEMENTS AND IN THIS REPORT TO US GAAP.
PRIOR TO THE FOURTH QUARTER OF 2007, WE PREPARED OUR FINANCIAL REPORTS IN
ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL. AND PROVIDED
RECONCILIATION TO US GAAP IN THE NOTES TO THE FINANCIAL STATEMENTS.
OVERVIEW
We are a pure-play independent specialty foundry dedicated to the
manufacture of semiconductors. Pure-play foundries do not offer any products of
their own, but focus on producing integrated circuits based on the design
specifications of their customers. We manufacture semiconductors using advanced
production processes for our customers primarily based on third party designs
and our own proprietary designs. We currently offer the manufacture of ICs with
geometries ranging from 1.0 to 0.13-micron.
Our primary source of our revenue is from the fabrication of ICs using CMOS
process technology. We are currently focused on the emerging opportunities
involving CMOS image sensors, mixed-signal, RFCMOS and RFID technologies. ICs
manufactured by us are incorporated into a wide range of products in diverse
markets, including consumer electronics, personal computer and office equipment,
communications, automotive, professional photography and medical device
products.
The primary customers for our products are fabless IC companies and IDMs. A
substantial portion of our product sales are made pursuant to long-term
contracts with our customers, under which we have agreed to reserve
manufacturing capacity at our production facilities. Our sales cycle is
generally 12-24 months for new customers and can be as short as 9-12 months for
existing customers. The typical stages in the sales process, from initial
contact until production are: technical evaluation; photomask design
specification; silicon prototyping; assembly and testing; validation and
qualification; and production.
- 32 -
During the year ended December 31, 2007, we had seven significant customers
who contributed between 5% to 29% of our revenues. In 2006, we had seven
significant customers who contributed between 5% to 23% of our revenues. In
2005, we had five significant customers who contributed between 5% to 22% of our
revenues. In these years SanDisk was a significant customer of FAB 2. During
2007 additional large customers increased their orders following the
qualification of their products in Fab 2.
In addition to further developing our customer base, we have also made a
concentrated effort to maintain the geographical diversity of our sales. The
percentage of our sales from customers located outside the United States was
25%, 31% and 36% in the years ended December 31, 2007, 2006 and 2005,
respectively. We believe that a substantial portion of our sales will continue
to come from customers located outside the United States.
Our company was founded in 1993, when we acquired National Semiconductor's
150-mm wafer fabrication facility, or Fab 1, and commenced operations as an
independent foundry. Since then, we have significantly modernized our Fab 1
facility, which has improved its process geometries from 1.0-micron to
0.35-micron and enhanced its process technologies to include CMOS image sensors,
embedded flash and mixed-signal technologies. We have also expanded our
production capacity in Fab 1 to approximately 16,000 wafers per month as of May
31, 2008, depending on process technology and product mix, to meet additional
customer demand. Fab 1 has been cash flow positive from operations since the
second quarter of 2002.
During the third quarter of 2003, we completed the construction of the
building and infrastructure of our second manufacturing facility Fab 2, and
commenced volume production at that facility.. Fab 2 is designed to operate in
geometries of 0.18-micron and below, using advanced materials and advanced CMOS
technology licensed from Freescale and Toshiba, as well as other technologies
that we might acquire or develop independently. Production capacity of Fab 2 as
of December 31, 2007 was approximately 24,000 wafers per month. During 2008, we
are implementing a capacity increase plan targeting to reach up to approximately
30,000 wafers per month, which has not yet been completed.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION. In accordance with generally accepted accounting
principles, our revenues are recognized when persuasive evidence of an agreement
exists with fixed or determinable prices, shipment has occurred or as services
are rendered when title has been transferred, collectibility is reasonably
assured and acceptance provisions criteria are satisfied, based on tests
performed prior to customer on-site testing. Prior to commencement of our
production, both our customers and our personnel test and pre-approve the
prototype, on the basis of which specifications and features the ordered
products will be produced. Electronic, functional and quality tests are
performed on the products prior to shipment and customer on-site testing. Such
testing reliably demonstrates that the products meet all of the specified
criteria prior to formal customer acceptance and that product performance upon
customer on-site testing can reasonably be expected to conform to the specified
acceptance provisions. Our revenue recognition policy is significant because our
revenues are a key component of our results of operations. We follow very
specific and detailed guidelines in measuring revenue; however an accrual for
estimated returns, which is computed primarily on the basis of historical
experience, is recorded. Any changes in assumptions for determining the accrual
for returns and other factors affecting revenue recognition may affect mainly
the timing of our revenue recognition and cause our operating results to vary
from quarter to quarter. Accordingly, our financial position and results of
operations may be affected.
- 33 -
DEPRECIATION AND AMORTIZATION. We are heavily capital oriented and the
amount of depreciation is a significant amount of our yearly expenses. Changes
to the useful lives assumption and hence the depreciation can have material
impact on our results of operations. Depreciation and amortization expenses in
2007 amounted to $154.3 million. During the third quarter of 2003, we commenced
depreciating the Fab 2 property and equipment and amortizing the 0.18-micron
technology, based on the straight-line method. During the second quarter of
2007, we reassessed the estimated useful lives of our machinery and equipment
and as a result, effective as of April 1, 2007, machinery and equipment is to be
depreciated over estimated useful lives of 7 years rather than 5 years as
estimated prior to such date. The change reflects our best estimate of the
useful lives of our equipment and is also based on experience accumulated from
Fab 1 and on recent trends in industry practices. We believe that the change
better reflects the economics associated with the ownership of the equipment.
This change has been accounted for as a change in estimate and has been applied
prospectively. Currently, we estimate that the expected economic life of our
assets will be as follows: (i) buildings (including facility infrastructure) -
14 to 25 years; (ii) machinery and equipment - seven years; and (iii) the
0.18-micron and 0.13 micron technology - four years, with each amortization
phases commencing on the date on which such Fab 2 manufacturing line became
ready for its intended use. We expect that depreciation and amortization
expenses relating to Fab 2 facilities will be approximately $120 million in
2008. Changes in our estimates regarding the expected economic life of Fab 2
assets, or a change in the dates on which each of the Fab 2 manufacturing lines
is ready for its intended use, might affect our depreciation and amortization
expenses.
IMPAIRMENT OF ASSETS. Management reviews long-lived assets on a periodic
basis, as well as when such a review is required based upon relevant
circumstances to ensure that assets are not presented in amounts exceeding their
recoverable value. The review of possible impairment charges was performed based
on our business plan, as was approved by our board of directors. The business
plan is based, among other things, on the future completion of the ramp up of
Fab 2. Application of SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144") resulted in no impairment charges.
According to SFAS 144 and SFAS 142 for those intangible assets that have
definite useful lives, recoverability tests are performed based on undiscounted
expected cash flows, SFAS 144 requires that when the asset is not recoverable an
impairment loss should be computed based on the difference between the carrying
amount of the assets (or asset group) and the fair value. The fair value in most
instances will be determined using present value techniques applied to expected
cash flows While applying the provisions of SFAS 144 had no effect on our
financial position and results of operations, the use of different assumptions
with respect to the expected cash flows from our assets and with respect to
other economic variables, primarily the discount rate, may lead to different
conclusions regarding the recoverability of our assets' carrying values and to
the potential need to record an impairment loss for our long-lived assets.
CONVERTIBLE DEBENTURES. According to Accounting Principles Board Opinion
No. 14 ("APB 14"), we are to allocate the proceeds from the sale of the
securities to each security issued based on their relative fair value. We are
required, according to SFAS 133, to determine whether the conversion option
embedded in the convertible debt should be bifurcated and accounted for
separately. Such determination is based on the determination whether on a stand
alone such conversion option would be classified in equity. If the option can be
classified as equity no bifurcation is required.
- 34 -
DEBT RESTRUCTURING. During the first quarter of 2007 we early adopted the
provisions of SFAS No. 159 "The Fair Value Option for Financial Assets and
Financial Liabilities". As required by the standard we concurrently adopted the
provisions of SFAS 157 Fair Value Measurements. The adoption of the standard is
effective January 1, 2007. According to the standard we can choose to carry at
fair value eligible items as defined in the standard, from the date of early
adoption and accordingly we decided to apply the fair value option to the
facility agreement. The effect of applying the fair value option to the facility
agreement as of January 1, 2007 has been recorded as a cumulative effect
adjustment to retained earnings (no tax effects have been recorded).
In 2006, prior to the fair value election, the debt modification under the
September 2006 Amendment was considered troubled debt restructuring within the
scope of SFAS No. 15 "Accounting by Debtors and Creditors for Troubled Debt
Restructurings" which requires the following: (i) the amount considered settled
for shares and classified in equity is based on the price per share as quoted at
the closing date; (ii) the remaining balance after deduction of the amount used
as proceeds for the share issuance in the first bullet above, will remain
outstanding; (iii) a new, lower effective interest rate will be calculated as
the interest rate that equates future payments to the outstanding balance; and
(iv) no gains or losses are recognized in the current period.
FAIR VALUE MEASUREMENTS. We decided to early adopt the provisions of SFAS
No. 157 effective January 1, 2007, concurrent with the adoption of FASB 159 "The
Fair Value Option for Financial Assets and Financial Liabilities" (SFAS No.
159):
o The income approach was applied using a present value technique.
o For Loans - The cash flows used in that technique reflect the income
stream expected to be used to satisfy the obligation over its economic
life.
o For Embedded Derivatives - we utilized the Black Scholes Merton
formula.
o For Over the Counter derivatives - we used the market approach using
quotation from dealer markets.
o For convertible debentures series E - The market approach was applied
using quoted prices for the same debentures.
RECENT ACCOUNTING PRONOUNCEMENTS AS THEY APPLY TO US
SFAS NO. 141 (REVISED 2007 ) "BUSINESS COMBINATIONS" - In December 2007,
the FASB issued FASB 141(R), "Business Combinations" of which the objective is
to improve the relevance, representational faithfulness, and comparability of
the information that a reporting entity provides in its financial reports about
a business combination and its effects. The new standard requires the acquiring
entity in a business combination to recognize all (and only) the assets acquired
and liabilities assumed in the transaction; establishes the acquisition-date
fair value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial
effect of the business combination. In December 2007, the FASB issued FASB 160
"Non-controlling Interests in Consolidated Financial Statements - an amendment
of ARB No.51" of which the objective is to improve the relevance, comparability,
and transparency of the financial information that a reporting entity provides
in its consolidated financial statements by establishing accounting and
reporting standards by requiring all entities to report non controlling
(minority) interests in subsidiaries in the same way - as equity in the
consolidated financial statements. Moreover, Statement 160 eliminates the
diversity that currently exists in accounting for transactions between an entity
and non-controlling interests by requiring they be treated as equity
transactions. Both FASB 141(R) and FASB 160 are effective for fiscal years
beginning after December 15, 2008. The Company is currently examining this new
standard; however, at this stage, it is unable to estimate the standard's
effect, if any, on its financial position and results of operations. Initial
Adoption of New Standards
- 35 -
SFAS NO. 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL
LIABILITIES" - In February 2007, the FASB issued SFAS No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities" (SFAS No. 159). SFAS No.
159 permits companies to choose to measure certain financial instruments and
certain other items at fair value. The standard requires that unrealized gains
and losses on items for which the fair value option has been elected be reported
in earnings. We adopted the provisions of this standard, together with the
adoption of FASB No. 157 FAIR VALUE MEASUREMENTS, starting with the first
quarter of 2007.
RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with the financial statements
and the related notes thereto included in this annual report. The following
table sets forth certain statement of operations data as a percentage of total
revenues for the years indicated.
YEAR ENDED DECEMBER 31,
----------------------------
2007 2006 2005
----- ----- -----
STATEMENT OF OPERATIONS DATA:
Total revenues 100.0% 100.0% 100.0%
Cost of total revenues 123.4 142.7 233.7
----- ----- -----
Gross loss (23.4) (42.7) (133.7)
Research and development 6.0 8.0 15.7
Marketing, general and administrative 13.7 13.8 17.1
----- ----- -----
Operating loss (43.0) (64.5) (166.5)
Financing expense, net (15.2) (25.4) (35.0)
Other income (expense), net 0.0 0.3 2.3
----- ----- -----
Loss (58.1)% (89.6)% (199.1)%
===== ===== =====
YEAR ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31, 2006
REVENUES. Revenues for the year ended December 31, 2007 increased by 23.2%
to $230.9 million from $187.4 million for the year ended December 31, 2006. This
$43.4 million increase was mainly attributable to a higher volume of wafer
shipments.
COST OF TOTAL SALES. Cost of total sales for the year ended December 31,
2007 amounted to $284.8 million, compared with $267.5 million for the year ended
December 31, 2006. This increase of 6.4% in cost of sales, which is relatively
low in relation to the 23.2% increase in sales, which is mainly attributable to
the Company's cost structure of high level of fixed costs according to which
with an increased volume of sales the Company can benefit and achieve reasonable
margins for each incremental dollar of revenue. In addition we had a reduction
in depreciation and amortization expenses as result of our reassessment of the
estimated useful lives of our machinery and equipment, as described above. This
change has been accounted for as a change in estimate and is applied
prospectively. Total depreciation and amortization expenses included in Cost of
Total Sales was approximately $137 million for the year ended December 31, 2007,
as compared to approximately $155 million for the year ended December 31, 2006.
Said reduction was mainly attributed to the aforementioned change.
- 36 -
GROSS LOSS. Gross loss for the year ended December 31, 2007 was $53.9
million compared to a gross loss of $80.1 million for the year ended December
31, 2006. The decrease in gross loss was mainly attributable to the 23.2%
increase in sales as compared to a 6.4% increase in Cost of Total Sales as
described above.
RESEARCH AND DEVELOPMENT. Research and development expenses for the year
ended December 31, 2007 decreased to $13.8 million from $15.0 million for the
year ended December 31, 2006 mainly attributed to decreased depreciation.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses for the year ended December 31, 2007 increased to $31.6
million from $25.8 million for the year ended December 31, 2006. The increase is
primarily due to stock based compensation expenses and increased sales expenses
deriving directly from the higher revenues mentioned above.
OPERATING LOSS. Operating loss for the year ended December 31, 2007 was
$99.3 million, compared to $121.0 million for the year ended December 31, 2006.
The decrease in the operating loss is attributable mainly to the decrease in the
gross loss described above.
FINANCING EXPENSES, NET. Financing expenses, net for the year ended
December 31, 2007 were $35.0 million compared to financing expenses, net of
$47.6 million for the year ended December 31, 2006. This decrease is mainly due
to the consummation of the debt restructuring with our banks which was closed in
the third quarter of 2006, pursuant to which, approximately 30% of our then
outstanding loans were converted into capital notes and the interest rate
applicable to the interest payments was reduced from the three month LIBOR rate
plus 2.5% to the three month LIBOR rate plus 1.1%. OTHER INCOME, NET. Other
income, net, for the year ended December 31, 2007 was $0.09 million compared to
$0.6 million for the year ended December 31, 2006.
LOSS. Loss for the year ended December 31, 2007 was $134.2 million,
compared to $167.9 million for the year ended December 31, 2006. This decrease
is primarily attributable to the decrease of $21.6 million in the operating loss
and to the $12.6 million decrease in financing expenses described above.
YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005
REVENUES. Revenues for the year ended December 31, 2006 increased by 83.8%
to $187.4 million from $102 million for the year ended December 31, 2005. This
$85.4 million increase was mainly attributable to an increase in our customer
base and higher volume of wafer shipments offset by $8 million recorded for the
year ended December 31, 2005 from a previously announced technology-related
agreement.
COST OF TOTAL REVENUES. Cost of total revenues for the year ended December
31, 2006 amounted to $267.5 million, compared with $238.4 million for the year
ended December 31, 2005. This 12.2% modest increase in cost of revenues, despite
the 83.8% increase in revenues, was achieved mainly due to previously announced
cost reductions and efficiency measures taken by the Company and the Company's
cost structure, according to which, the Company has high net margins for each
marginal additional sum of revenue.
GROSS LOSS. Gross loss for the year ended December 31, 2006 was $80.1
million compared to a gross loss of $136.4 million for the year ended December
31, 2005. The decrease in gross loss was mainly attributable to the increase in
revenues and previously announced cost reductions and efficiency measures taken
by the Company and the Company's cost structure, according to which, the Company
has high net margins for each marginal additional sum of revenue.
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RESEARCH AND DEVELOPMENT. Research and development expenses for the year
ended December 31, 2006 decreased to $15.0 million from $16.0 million for the
year ended December 31, 2005. The decrease was mainly attributable to previously
announced cost reductions and efficiency measures taken by the Company. Research
and development expenses are reflected net of participation grants received from
the Israeli government.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses for the year ended December 31, 2006 increased to $25.8
million from $17.4 million for the year ended December 31, 2005, primarily due
to stock based compensation expenses recorded for the first time and increased
sales commissions attributable to the higher revenues mentioned above.
OPERATING LOSS. Operating loss for the year ended December 31, 2006 was
$121.0 million, compared to $169.8 million for the year ended December 31, 2005.
The decrease in the operating loss is attributable mainly to the decrease in the
gross loss described above and the Company's cost structure, according to which,
the Company has high net margins for each marginal additional sum of revenue.
FINANCING EXPENSES, NET. Financing expenses, net for the year ended
December 31, 2006 were $47.6 million compared to financing expenses, net of
$35.7 million for the year ended December 31, 2005. This increase is mainly due
to an increase in costs related to our convertible debentures resulting mainly
from the issuance of two new series of convertible debentures (in December 2005
and June 2006) and the weakening in 2006 of the NIS/dollar exchange rate which
caused an increase in the dollar amount of the NIS denominated outstanding
convertible debt.
OTHER INCOME, NET. Other income, net, for the year ended December 31, 2006
was $0.6 million compared to $2.4 million for the year ended December 31, 2005,
mainly due to a lower capital gain, net, from sale and disposal of equipment.
LOSS. Our loss for the year ended December 31, 2006 was $167.9 million,
compared to $203.1 million for the year ended December 31, 2005. This decrease
is primarily attributable to the decrease of $48.8 million in the operating loss
described above, offset by the $11.9 million increase in financing expenses
described above.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
The dollar cost of our operations in Israel is influenced by the timing of
any change in the rate of inflation in Israel and the extent to which such
change is not offset by the change in valuation of the NIS in relation to the
dollar. During the year ended December 31, 2007, the exchange rate of the dollar
in relation to the NIS decreased by 9.0%, and the Israeli Consumer Price Index,
or CPI, increased by 3.4% resulting in an increase in our dollar costs,
including our dollar expenses related to our NIS dominated debts (during the
year ended December 31, 2006 there was a decrease of 8.2% in the exchange rate
of the dollar in relation to the NIS and a decrease of 0.1% in the CPI).
We believe that the rate of inflation in Israel has not had a material
effect on our business to date. However, our dollar costs will increase if
inflation in Israel exceeds the devaluation of the NIS against the dollar, or if
the timing of such devaluation lags behind inflation in Israel. Our dollar costs
will continue to increase if the exchange rate of the dollar in relation to the
NIS will continue decreasing,
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Almost all of the cash generated from our operations and from our financing
and investing activities is denominated in U.S. dollars and NIS. Our expenses
and costs are denominated in NIS, U.S. dollars, Japanese Yen and Euros. We are,
therefore, exposed to the risk of currency exchange rate fluctuations. The
devaluation of the US dollar in relation to the NIS since 2007 increased mainly
our dollar expenses related to our NIS denominated debentures and the dollar
amount of our NIS denominated expenses.
Our borrowings under our Fab 2 credit facility, which comprise the majority
of our long-term liabilities and our borrowings under the September 2007 credit
lines, provide for interest based on a floating LIBOR rate, and we are therefore
exposed to interest rate fluctuations. From time to time, we engage in various
hedging strategies to reduce our exposure to some, but not all, of these risks
and intend to continue to do so in the future. However, despite any such hedging
activity, we are likely to remain exposed to interest rate fluctuations, which
may increase the cost of our business activities, particularly our financing
expenses.
Our 2002, 2006 and 2007 debentures are denominated in NIS linked to the
Israeli CPI and therefore we are exposed to fluctuation in the NIS/dollar
exchange rate. The dollar amount of our financing costs (interest and currency
adjustments) related to these debentures will increase if the rate of inflation
in Israel is not offset (or is offset on a lagging basis) by the devaluation of
the NIS in relation to the dollar. In addition, the dollar amount of any
repayment on account of the principal of these debentures will also increase.
The recent devaluation of the US dollar in relation to the NIS increased our
dollar expenses related to our NIS denominated debentures.
The quantitative and qualitative disclosures about market risk are in Item
11 of this annual report.
B. LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2007, we had an aggregate of $44.5 million in cash and
cash equivalents. This compares to $40.9 million we had as of December 31, 2006
in cash, cash equivalents, and short-term interest-bearing deposits. During the
year ended December 31, 2007, we raised $77.2 million in net proceeds from the
issuance of debentures, ordinary shares and warrants, $28 million as long-term
loans, $1.7 million from Investment Center grants and generated a net amount of
$16.7 million from our operating activities. These liquidity resources financed
the capital expenditure investments we made during the year ended December 31,
2007, which aggregated $109.0 million, mainly in connection with the purchase
and installation of equipment and other assets for the ramp up of Fab 2,
repayment of convertible debentures in the amount of $7.1 million and repayment
of long-term debt in the amount of $3.2 million.
As of December 31, 2007, we had long-term loans from banks, in the amount
of $379.3 million, most of which are recorded at fair value, which we obtained
mainly in connection with the establishment of Fab 2. As of such date, we had
$125.3 million in debentures, of which $7.9 million are presented as current
maturities.
In recent years, the Company has experienced significant recurring losses,
recurring negative cash flows from operating activities and an increasing
accumulated deficit. The Company is working in various ways to mitigate its
financial difficulties. Since the second half of 2005, the Company has increased
its customer base, mainly in Fab 2, modified its organizational structure to
better address its customers and its market positioning, increased its sales,
recorded ten consecutive quarters of positive EBITDA commencing the fourth
quarter of 2005 and six consecutive quarters of positive cash flow from
operations commencing the fourth quarter of 2006, reduced its losses, increased
its capacity level and utilization rates, raised funds and restructured its bank
debt.
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In 2006, the board of directors of the Company approved a plan to ramp up
Fab 2's capacity to approximately 24,000 wafers per month in order to help meet
customer needs and product qualification needs, based on its customer pipeline
and reinforced by forecasted market conditions. This plan was completed during
2007. During 2008, we are implementing a capacity increase plan targeting to
reach up to approximately 30,000 wafers per month, which has not yet been
completed.
For details regarding the September 2007 Credit Line Agreements with each
of the Banks and TIC and the September 2007 Amendment to the facility agreement
with the banks, see - "Fab 2 Agreements" below. .
For details regarding the long term debentures issued in Israel in the
second half of 2007 see - "Fab 2 Agreements" below.
For implications on us if we do not obtain Investment Center approval or
generate increased levels of cash from operations or do not raise additional
funding and if we will not be in compliance with the repayment schedule under
the amended facility agreement and are unsuccessful in negotiating a revised
repayment schedule, see Item 3. Key Information - Risk Factors - Risks
Affecting Our Business - Risk Factors - "If we do not obtain Investment Center
approval for our expansion plan..." and "If we will not be in compliance with
the repayment schedule...".
In May 2008, we announced the commencement of a $40 million per annum cost
reduction plan pending synergies expected to occur following the Jazz
acquisition and including the reduction in workforce of approximately 170
employees and announced the filing of a petition with the Israeli High Court of
Justice targeting an approval for the receipt of grants under our requested
Investment Center expansion plan.
We continue to examine alternatives for additional funding sources in order
to fund our Fab 2 ramp-up, support our growth plans, including the Jazz
acquisition, and improve our shareholders' equity.
FAB 2 AGREEMENTS
WAFER PARTNER AGREEMENT.
During the years 2000 and 2001, we entered into various shares purchase
agreements ("Wafer Partner Agreements") with Wafer Partners to partially finance
the construction and equipping of Fab 2. Pursuant to the Wafer Partner
Agreements, the Wafer Partners agreed to invest an aggregate of $250 million to
purchase Ordinary Shares of the Company. According to the Wafer Partner
Agreements, we agreed, subject to certain conditions, to reserve for each Wafer
Partner a certain portion, and collectively approximately 50%, of Fab 2 wafer
manufacturing capacity for a period of 10 years ending January 2011.
In August 2006, we signed agreements with SanDisk in connection with the
expansion of our 0.13 micron manufacturing capacity. SanDisk committed to
purchase, upon such expansion, volume quantities of 0.13 micron wafers during
2007 and 2008 and has a right of first refusal on the use of this extra capacity
in 2009. We also borrowed approximately $10 million from SanDisk for the purpose
of financing the purchase of the equipment needed for the expansion. The loan
bears interest on the amounts outstanding at three-month USD LIBOR plus 1.1%. We
granted SanDisk a first ranking charge on the equipment purchased with the
amounts borrowed. In April 2008 we signed on an amendment, which postpones the
repayment schedule of the loan.
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WAFER CREDITS. In connection with their investments in Fab 2, we issued to
our wafer partners non-transferable credits that may be used to reduce the cash
amounts to be paid by them when paying for wafers manufactured in Fab 2. These
credits could generally be used at a rate of 7.5% for purchases made through
June 2005 and 15% for purchases made thereafter. Our wafer partners, SanDisk,
Alliance and Macronix, agreed that they will not utilize any of their credits,
for purchase orders of our wafer products until December 31, 2006. For orders
placed from January 1, 2004 to December 31, 2006, each major wafer partner was
entitled, every quarter, to convert into our ordinary shares its wafer credits
that could have been utilized by such wafer partner against the actual payment
of wafers manufactured at Fab 2 during such quarter; otherwise, these credits
will bear interest payable every quarter at three-month LIBOR plus 2.5%. As of
May 31, 2008, approximately $16 million of wafer credits had been converted into
an aggregate of 10.4 million ordinary shares.
In 2006, we and one of the primary wafer partners, entered into an
agreement to defer to December 31, 2009 the repayment of certain outstanding
wafer credits that were not converted into ordinary shares. According to the
agreement, with respect to certain orders placed before July 2006, and all
orders placed thereafter through December 2009, such wafer credits that could
have offset from payment by such wafer partner prior to the agreement, will bear
interest at an annual rate equal to three-month LIBOR plus 1.1%, payable at the
end of each quarter, through December 31, 2009.
In 2007 we decided to write-off the balance of wafer credits outstanding on
behalf of one of our wafer partners, due to changes in its operations and the
recent cessation of its semiconductor activities, we believe that no future
utilization is expected and determined that a full write-down of its outstanding
amount was appropriate.
All of the ordinary shares issued to our wafer partners and Israel Corp. in
connection with their committed investments are subject to registration rights
and pursuant to a shareholders agreement applicable to shares held by SanDisk,
Israel Corp. and Macronix.
CREDIT FACILITY
In January 2001, we entered into a credit facility with two leading Israeli
banks, Bank Hapoalim and Bank Leumi, pursuant to which the banks committed to
make available to us up to $550 million in loans for Fab 2. As a result of our
reduction of the total project cost of Fab 2 through the renegotiation of
equipment prices and a change of equipment suppliers, in January 2002, we and
our banks agreed to amend the credit facility such that the total amount of
loans committed by the banks was reduced to $500 million. Of that amount, we
withdrew an aggregate of $497 million. Under the original terms of the Facility
Agreement the loans bore interest at a rate of LIBOR plus 1.55% per annum
payable at the end of each quarter, which was later increased to LIBOR plus 2.5%
per annum. In July 2005, we entered into a definitive amendment to our facility
agreement with our banks which provided, among other things, for our banks to
provide additional financing of up to approximately $30 million. We borrowed
such additional $30 million pursuant to the July 2005 amendment.
2006 AMENDMENT TO OUR FACILITY AGREEMENT. As part of the financing efforts
for the ramp-up plan to increase Fab 2's capacity to 24,000 wafers per month, in
September 2006, we closed a definitive amendment to the credit facility with our
banks for the refinancing of the approximately $527 million of long-term debt
outstanding thereunder. Pursuant to the amendment, among other things: (i) $158
million, representing 30% of such debt, was converted into capital notes, with a
face amount of $79 million, that are convertible into 51,973,684 of our ordinary
shares, at a conversion price per share of $1.52; (ii) the interest rate
applicable to the quarterly actual interest payment on the loans was reduced by
1.4%, from LIBOR plus 2.5% per annum to LIBOR plus 1.1% per annum, effective May
2006; (iii) the commencement date for the repayment of the outstanding loans,
which following the conversion are approximately $369 million, was postponed
from July 2007 to September 2009, such that the loans shall be repaid in 12
quarterly installments between September 2009 and June 2012; (iv) the exercise
periods of the warrants held by the banks immediately prior to the signing of
the September 2006 amendment, were extended such that they are exercisable until
September 2011, five years from the closing of the September 2006 amendment; and
(v) the financial ratios and covenants that we are to satisfy were revised to be
inline with our working plan as of the time of the amendment.
- 41 -
To compensate the banks for the reduction in interest payments, we agreed
to issue to the banks an additional number of shares (or equity equivalent
capital notes or convertible debentures) on or about December 31, 2010,
calculated based on the amount of decreased interest payments as set forth in
the amendment. The amounts payable in securities of the Company may be payable
in cash under certain circumstances and may be reduced in the event the Company
prepays any part of the outstanding loans.
In connection with the amendment to the facility agreement, as part of the
financing efforts for the ramp-up plan to increase Fab 2's capacity to 24,000
wafers per month, Israel Corp. invested $100 million in consideration for a
capital note, convertible into 65,789,474 of our ordinary shares, at a price per
share of $1.52; See below.
SEPTEMBER 2007 CREDIT LINE AGREEMENTS WITH EACH OF THE BANKS AND TIC AND
SEPTEMBER 2007 AMENDMENT TO THE FACILITY AGREEMENT. In September 2007, we signed
and closed definitive agreements with the Banks and with TIC, providing for
credit lines totaling up to $60 million, 15 million from each bank and $30
million from TIC, to be used for the funding of equipment required for a ramp up
plan in Fab 2 to increase its capacity to beyond 24,000 wafers per month. As of
May 31, 2008 the entire amount had been borrowed under these credit lines. Loans
under the credit lines bear interest at an annual rate of three-month USD LIBOR
plus 3% and are repayable two years from the date any loan was
borrowed(commencing October 2009). We paid the banks and TIC customary fees in
connection with the credit line. Further, in September 2007 we signed and closed
a definitive amendment to the Facility Agreement to mainly reflect the credit
line agreements and to revise, based on the Company's operating plan at the
time, the financial ratios and covenants with which we are required to comply
(see below).
COMPLIANCE WITH FINANCIAL RATIOS AND COVENANTS.
Under the terms of the amended facility agreement, we must meet certain
financial ratios, including mainly financial covenants relating to our quarterly
sales, our quarterly earnings before interest, taxes, depreciation and
amortization (quarterly EBITDA), our "life of loan coverage ratio" (which is the
ratio of our Fab 2 net cash flow to our total debt related to Fab 2 in any
quarter), our ratio of debt to EBITDA and our ratio of equity to assets. Under
the terms of the amended facility agreement, satisfying these financial ratios
and covenants is a material provision.
As of May 31, 2008, the Company was in full compliance with all of the
financial ratios and covenants under the amended Facility Agreement.
The amended Facility Agreement provides that if, as a result of any
default, the Banks were to accelerate the Company's obligations, the Company
would be obligated, among other matters, to immediately repay all loans made by
the banks (which as of May 31, 2008 amounted to approximately $399 million) plus
penalties, and the banks would be entitled to exercise the remedies available to
them under the amended Facility Agreement, including enforcement of their liens
against all of the Company's assets.
- 42 -
Under the terms of the amended facility agreement, (i) there are
limitations on changes of ownership which generally require that, (a) until such
time that more than 50% of our current outstanding loans have been repaid,
Israel Corp. hold approximately 32.2 million of our ordinary shares (including
shares issuable upon conversion of our convertible debentures) and thereafter
hold approximately 14 million of our ordinary shares, and (b) our three largest
wafer partners together hold approximately 60% of the shares held by them in
January 2006 (with such amount being reduced under certain circumstances); (ii)
TIC and our three largest wafer partners nominate a majority of our board of
directors, subject to exceptions; and (iii) additional conditions and covenants,
including restrictions on incurring debt and a prohibition on the distribution
of dividends.
Our amended credit facility further provides that upon certain triggering
events (such as the commencement of bankruptcy or receivership, proceedings
against us ordered by a court of competent jurisdiction or the prior
determination of an arbitrator that bankruptcy or receivership proceedings would
be issued by a court against us were a petition to be filed with a court seeking
reorganization or arrangement under applicable bankruptcy law or our requesting
creditor protection), our banks will be able to bring a firm offer made by a
potential investor to purchase our shares at the price provided in the offer. In
such case, we shall be required thereafter to procure a rights offering to
invest up to 60% of the amount of this offer on the same terms. If the offeror
intends to purchase a majority of our outstanding share capital, the rights
offering will be limited to allow for this, unless Israel Corp. and the wafer
partners (excluding QuickLogic) agree to exercise in a rights offering rights
applicable to their shareholdings and agree to purchase in a private placement
enough shares to ensure that the full amount of the offer is invested.
BANK'S WARRANTS- In January 2001, we issued the banks warrants to purchase
an aggregate of 400,000 ordinary shares at a purchase price of $6.20 per share,
which expired in January 2006. In December 2003, pursuant to the November 11,
2003 amendment to the credit facility, we issued our banks additional five year
warrants to purchase an aggregate of 896,596 ordinary shares at a purchase price
of $6.17 per share, exercisable until December 2008. In connection with the July
2005 amendment to the credit facility, we issued our banks five year warrants to
purchase an aggregate of 8,264,464 ordinary shares at a purchase price of $1.21
per share. As described above, under the terms of the September 2006 amendment
to our facility agreement, the warrants issued to the banks in 2003 and 2005were
extended to be exercisable until September 2011. In connection with the
September 2007 credit lines we issued each of our banks and TIC warrants to
purchase an aggregate of 5,411,764 ordinary shares at an exercise price of $2.04
exercisable until March 2010.
INVESTMENT BY ISRAEL CORPORATION.
In order to implement the ramp-up plan to increase Fab 2's capacity to
24,000 wafers per MONTH in a timely manner, in May 2006, we entered into an
Equipment Purchase Agreement with Israel Corporation Ltd. ("TIC" or "Israel
Corporation") according to which TIC would order up to approximately $100
million worth of equipment for Fab 2. Under the terms of the Equipment Purchase
Agreement: (i) TIC had the right to sell to us the equipment at cost, plus
related expenses; (ii) we had the right to purchase the equipment from TIC at
cost, plus related expenses, subject to our having raised $100 million; and
(iii) upon the purchase of the equipment from TIC we would assume TIC's
obligations to the equipment suppliers.
In regard to our financing efforts for such ramp-up plan to increase Fab
2's capacity to 24,000 wafers per month and in connection with the September
2006 amendment to the Facility Agreement, in August 2006, we entered into a
securities purchase agreement with TIC. The principal terms of the Securities
Purchase Agreement were: (i) in consideration for its $100 million investment,
we issued to TIC capital notes convertible, for no additional consideration,
into 65,789,474 of our Ordinary Shares at a conversion price per share of $1.52;
(ii) we would be deemed to have exercised the call option under the Equipment
Purchase Agreement described above; and (iii) we and TIC would settle the
amounts payable by TIC under the Securities Purchase Agreement with the amounts
payable by us under the Equipment Purchase Agreement. The Securities Purchase
Agreement closed contemporaneously with the closing of the September 2006
amendment to our facility agreement.
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Upon the closing of the September 2006 amendment to our facility agreement
and the Securities Purchase Agreement, TIC transferred ownership of the
purchased equipment to us and we assumed TIC's obligations to the equipment
suppliers.
INVESTMENT CENTER GRANTS
In December 2000, the Israeli government's Investment Center approved an
investment program in connection with Fab 2. The approval certificate provides
for government grants equal to 20% of qualified investments up to $1.25 billion
(i.e., up to $250 million), subject to customary conditions and other
conditions, including a requirement that approximately 30% of our Fab 2 funding
consist of paid-in-capital and that $550 million of our Fab 2 funding be
obtained by way of a credit facility from commercial banks (which amount was
subsequently reduced to $500 million with the consent of the Investment Center).
We have registered a lien on our assets for the benefit of the Investment Center
which ranks subordinate to that of our banks. The approval certificate also
provides for a tax holiday on all taxable income related to Fab 2 for the first
two years of undistributed profitable operations. As of May 31, 2008, we had
received $165 million in grants from the Investment Center, and satisfied in
full the 30% requirement described above. As long as we comply with the terms of
our approval certificate, we are not required to make royalty payments or any
other payments under the terms of our Investment Center grants.
To be eligible to receive grants, we were required to invest minimum
amounts on an annual basis. We notified the Investment Center of our reduced
rate of annual investments and in July 2004, we received approval of our revised
investment schedule from the Investment Center. Under Israeli law, our not
completing investments in an amount of $1.25 billion by the end of 2005 could
result in a request from the Investment Center to repay all or a portion of
grants already received, which has not been made. Israeli law limits the ability
of the Investment Center to extend this time limitation, unless approved through
an expansion plan. In 2007, we submitted the final report in relation to the
investments made through 2005 totaling $825 million out of the entire investment
plan of $1.25 billion. The investment plan has been spread over additional years
and was not completed through 2005 primarily due to the external economic
conditions of the worldwide markets during 2001 through 2004 and the
semiconductor industry in particular following the September 11, 2001 terrorist
attack, as well as the outbreak of the Second Intifada (Israeli-Palestinian
conflict) in September 2000, which lasted until 2003. We have been holding
discussions with the Investment Center to achieve satisfactory arrangements to
approve an expansion program to commence as of January 1, 2006. On numerous
occasions we have received assurances and commitments from governmental
authorities that such an expansion plan will be approved pending positive
recommendation of an economical audit by the Industrial Bank of the Investment
Center. In 2005, at the Investment Center's request, we submitted a revised
business plan to the Investment Center and its Industrial Bank for the period
commencing January 1, 2006. While the Industrial Bank of the Investment Center
gave a positive recommendation, the governmental approval process has been
protracted and as a result, in May 2008, we filed a petition with the Israeli
High Court of Justice targeting an approval certificate from the Investment
Center for the expansion plan. During the period from January 1, 2006 through
May 31, 2008, we invested approximately $230 million in Fab 2 plant and
equipment. Currently, we cannot estimate when, if at all, we will receive
approval of its request for an expansion plan to commence as of January 1, 2006
or if the Investment Center will approve our request. While there can be no
assurance that we will obtain the Investment Center's approval for the expansion
plan, we believe that the likelihood that the Investment Center would demand
that we repay all or a portion of grants already received due to our not
completing investments in an amount of $1.25 billion by the end of 2005 is
remote. See Item 3. Key Information - Risk Factors - Risks Affecting Our
Business "Risk Factors - If the Investment Center will not approve our request
for an expansion program . . ."
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PUBLIC OFFERINGS AND PRIVATE PLACEMENTS
Set forth below is a description of public and private offerings of
securities completed by us since inception of our financing activity for Fab 2.
PUBLIC OFFERING IN ISRAEL. January 2002. In January 2002, we completed a sale of
units in Israel, composed of NIS 110,579,800 principal amount of convertible
unsecured subordinated debentures and 2,211,596 options, resulting in net
proceeds of approximately $21.5 million. Each debenture is NIS 1 in principal
amount, and is adjusted to reflect increases in the Israeli Consumer Price Index
and bears interest at a rate of 4.7% per annum, payable yearly commencing
January 20, 2003. Principal is payable in four installments beginning in January
of 2006 through 2009. Prior to December 31, 2008, the debentures are convertible
into ordinary shares at a conversion rate of one ordinary share per NIS 41
principal amount of debentures linked to the Israel Consumer Price Index. Each
option was exercisable into one ordinary share until January 20, 2006 at an
exercise price of NIS 39, linked to the Israel Consumer Price Index. All options
expired and none have been exercised.
As of May 31, 2008 the outstanding principal amount of the convertible
debentures was approximately, $10 million.
RIGHTS OFFERING 2002. In September 2002, we distributed to our shareholders
and certain of our employees in Israel and the United States rights to purchase
ordinary shares and warrants to purchase our ordinary shares. Substantially all
of the rights exercised in connection with the rights offering were exercised by
Israel Corp. and our major wafer partners. The rights offering resulted in net
proceeds of approximately $19.7 million.
PUBLIC OFFERING- JANUARY 2004. In January 2004, we completed an
underwritten public offering in the United States of 11.44 million of our
ordinary shares at a price to the public of $7.00 per share. The underwritten
public offering resulted in net proceeds of approximately $75.1 million.
RIGHTS OFFERING 2005. In December 2005, we distributed in the United States
and Israel transferable rights to purchase up to $50 million US dollar
denominated debentures that are convertible into up to approximately 45.5
million of our ordinary shares. In connection with the exercise of these rights,
through January 2006, we issued, in the aggregate, 48.2 million convertible
debentures, with each debenture of $1.00 in principal amount, or a total of
$48.2 million principal amount of debentures, which bear annual interest at the
rate of 5%. The principal of the debentures, together with accrued interest, is
payable in one installment on January 12, 2012. The debentures are convertible
into our ordinary shares at a rate of one ordinary share per $1.10 aggregate
principal amount of debentures. The debentures contained a price protection
anti-dilution provision, which expired in December 2006 without having been
triggered. Subject to the terms of our facility agreement, we may at our option
announce the early redemption of the debentures, provided that the outstanding
aggregate balance of principal on account of the debentures is equal to or less
than $500,000. The debentures and interest thereon are unsecured and rank behind
our existing and future secured indebtedness. As of May 31, 2008 the outstanding
principal amount of the convertible debentures was $27.9 million.
PUBLIC OFFERING IN ISRAEL 2006. In June 2006, we completed an underwritten
public offering of our securities on the TASE in Israel resulting in gross
proceeds of approximately NIS 140 million (approximately $31 million). In the
offering the following securities were issued, in the aggregate, (i) convertible
debentures in the face amount of NIS 163,800,000 (approximately $36.7 million),
(ii) 390,000 options each exercisable for three months ended September 27, 2006
for NIS 100 principal amount of convertible debentures at an exercise price
equal to 85% of their face amount linked to the Israeli Consumer Price Index
("CPI"), (iii) 10,920,000 warrants each exercisable for three months ended
September 27, 2006 for one ordinary share at a price of NIS 6.75 linked to the
CPI and (iv) 5,460,000 warrants each exercisable for three years ending June 30,
2009 for one ordinary share at a price of NIS 7.40 (approximately $2.2), linked
to the CPI. In addition, the Company sold the same securities through a private
placement to its market maker in connection with the offering in consideration
for NIS 526,000.
- 45 -
The options and warrants described in (ii) and (iii) above expired in
September 2006 and the warrants described in (iv) above expire on June 28, 2009.
The convertible debentures are convertible into ordinary shares at a conversion
rate of one ordinary share per NIS 8.40 (approximately $2.5) principal amount of
convertible debentures. The convertible debentures carry a zero coupon with
principal payable at maturity in December 2011, at a premium of 37% over face
value, linked to the Israeli Consumer Price Index (CPI). Under the terms of the
convertible debentures, to the extent that the weighted average of the closing
price of our shares on the Tel-Aviv Stock Exchange during the thirty trading
days preceding June 27, 2008 is below NIS 6.60, the conversion rate will be
decreased by the difference, expressed as a percentage, between NIS 6.60 and
such weighted average. As of May 31, 2008 the outstanding principal amount of
the convertible debentures was approximately $65.1 million.
PRIVATE PLACEMENT IN ISRAEL 2006. In the fourth quarter of 2006, we
received and accepted orders from Israeli investors in private placements for
11,615,000 Ordinary Shares and 5,227,500 warrants ("Series 5 Warrants") in the
aggregate. The price of the Ordinary Shares was equal to the closing price of
our shares on the Tel-Aviv Stock Exchange prior to the relevant private
placements and the warrants were issued for no consideration. Total immediate
gross proceeds amounted to approximately $22 million.
Each of the Series 5 Warrants is exercisable at any time during a period of
four years ending in December 2010 at a price per share equal to NIS 9.48
(approximately $2.9) linked to the CPI, reflecting a 25% premium to the market
price of the Company's shares at the date the prospectus was published.
PRIVATE PLACEMENT IN THE US - MARCH 2007. In March 2007, we completed a
private placement of our securities in which we sold ordinary shares and
warrants for the purchase of ordinary shares, raising a total of approximately
$29 million in gross proceeds. In the private placement, the Company issued
approximately 18.8 million shares, warrants exercisable for approximately 9.4
million shares at an exercise price of $2.04 (subject to downward adjustments),
exercisable until March 15, 2012 ("Series I Warrants"), and short-term warrants
exercisable for approximately 18.8 million shares at an exercise price of $1.70,
which was identical to the closing price of the Company's ordinary shares on the
NASDAQ on the trading day immediately prior to the closing of the private
placement ("Series II Warrants"), exercisable until December 31, 2007. All of
the Series II Warrants have expired by their terms without exercise.
LONG TERM DEBENTURES ISSUED IN ISRAEL - 2007. In the second half of 2007,
in a private placement with Israeli investors, we accepted orders for 342 units,
resulting in gross proceeds of approximately NIS 167 million (approximately $40
million). Each unit was comprised of: (i) long-term non-convertible bonds,
repayable in six equal annual installments between the dates of December 2011
and December 2016, with a face amount of NIS 250,000 (approximately $59,700) and
carrying an annual interest rate of 8 percent; (ii) long-term convertible bonds
repayable in December 2012 with a 17.2 NIS conversion price (approximately $5.2)
and with a face amount of NIS 262,500 (approximately $62,700), carrying an
annual interest rate of 8 percent, and (iii) 5,800 warrants, each exercisable
for four years from the date the below mentioned prospectus is published, for
one ordinary share at a price of $2.04). Principal and interest on the bonds,
including the convertible bonds, are linked to the Israeli consumer price index,
or CPI, and were issued at 95.5% of par value. The conversion and exercise
prices are subject to reduction in certain limited circumstances.
- 46 -
In September 2007, we expanded our series of long-term debentures and
warrants, by selling 12,118 units, each comprised of long-term non-convertible
debentures, with a face amount of NIS 2,500 (approximately $620), long-term
convertible debentures, with a face amount of NIS 2,625 (approximately $650),
and 58 warrants. The debentures were issued at 90% of par value and with the
same terms as the debentures and the warrants issued in the private placement.
In this expansion, we raised gross proceeds of approximately $14 million.
On January 4, 2008 we expanded our series of long-term convertible
debentures which were issued at 85% of par value in consideration for gross
proceeds of approximately $1.4 million. As of May 31, 2008 the outstanding
principal amount of the long-term convertible bonds amount was approximately
$40.9million and the amount of long-term non-convertible bonds was
(approximately $37million.
REGISTRATION STATEMENT In January 2008, we filed a shelf registration
statement on Form F-3 with the U.S. Securities and Exchange Commission,
registering the possible offer and sale from time to time of up to $40 million
of securities which we may elect to offer and sell during the three years
following the effective date of the registration statement. The registration
form was declared effective in February 2008.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
Our research and development activities have related primarily to our
process development, and have been sponsored and funded by us with some
participation by the Israeli government. Research and development expenses for
the years ended December 31, 2007, 2006 and 2005 were $13.8 million, $15.0
million and $16.0 million net of government participation of $2.6 million, $1.9
million and $1.0 million, respectively We have also incurred costs in connection
with the transfer of Toshiba and Freescale technology for use in Fab 2, some of
which have been amortized over the estimated economic life of the technology
following the commencement of production in Fab 2 during the third quarter of
2003 (see also in this Item "Critical Accounting Policies - Depreciation and
Amortization"). For a description of our research & development policies and our
patents and licenses, see "Item 4. Information on the Company-4.B. Business
Overview".
D. TREND INFORMATION
The semiconductor industry has historically been highly cyclical on a
seasonal and long-term basis. On a long-term basis, the market has fluctuated,
cycling through periods of weak demand, production overcapacity, excess
inventory and lower sales prices and periods of strong demand, full capacity
utilization, product shortages and higher sales prices.
There is a trend within the semiconductor industry toward ever-smaller
features and ever-growing wafer sizes. State-of-the-art fabs are currently using
process geometries of 90-nanometer and below and wafer sizes of 300-mm. As
demand for smaller geometries increases, there is downward pressure on the
pricing of larger geometry products and increasing underutilization of fabs that
are limited to manufacturing larger geometry products, which results in less
profitability for manufacturers of larger geometry products. Fab 1 is limited to
geometries of 0.35-micron and above on 150-mm wafers and Fab 2 currently offers
process geometries of 0.18 and 0.13-micron and produces 200-mm wafers.
E. OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any material off-balance sheet arrangements except
for purchase commitments, standby letters of credit and guarantees detailed in
section F below.
- 47 -
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations and commercial
commitments as of December 31, 2007:
PAYMENT DUE
-------------------------------------------------------------------------------------------
LESS THAN AFTER 5
TOTAL 1 YEAR 2 YEARS 3 YEARS 4 YEARS 5 YEARS YEARS
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
CONTRACTUAL OBLIGATIONS
Short Term Debt(1) 49,025 49,025
Other current liabilities(1) 10,797 10,797
Long term debt(2) 483,479 32,600 116,456 139,709 131,796 62,918
Convertible Debenture(3) 214,577 18,417 18,041 9,674 68,386 72,773 27,286
Operating leases 4,211 2,544 1,248 419
Construction & equipment purchase
agreements(4) 45,606 45,606
Other long-term liabilities 36,103 8,297 10,738 5,307 2,382 2,337 7,042
Purchase obligations 25,370 2,716 2,668 2,702 2,682 2,586 12,016
------- ------- ------- ------- ------- ------- -------
Total contractual obligations 869,168 170,002 149,151 157,811 205,246 140,614 46,344
======= ======= ======= ======= ======= ======= =======
(1) Short-term debt and Other current liabilities include our trade accounts
payable for equipment and services that have already been supplied.
(2) Long-term debt includes principal and interest payments in accordance with
the terms of the credit facility, as amended in September 2006, as well as
the impact of our hedging transactions.
(3) Total amounts include expected principal and interest payments for the
presented periods.
(4) These amounts primarily consist of ordered equipment that has not yet been
received. In addition to these contractual obligations, we have committed
approximately $7.4 million in standby letters of credit and guarantees to
secure our Fab 2 equipment obligations.
The above table does not include other contractual obligations or
commitments we have, such as undertakings pursuant to royalty agreements,
commissions and service agreements. We are unable to reasonably estimate the
total amounts or the time table for such payments to be paid under the terms of
these agreements, as the royalties, commissions and required services are a
function of future sales revenues, the volume of business and hourly-based fees.
In addition, the above table does not include our liability with respect to our
customers, which as of December 31, 2007, amounted to approximately $29.9
million that may be utilized by them against future purchases of products. We
are unable to reasonably estimate the total amounts that may be utilized by our
customers since we can not reasonably estimate their future orders in the
periods set forth in the above chart.
- 48 -
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Set forth below is information regarding the members of our administrative,
supervisory or management bodies and our directors.
SENIOR MANAGEMENT AGE TITLE
- -------------------- --- ---------------------------------------------------
Russell C. Ellwanger 53 Chief Executive Officer
Oren Shirazi 38 Acting Chief Financial Officer
Dr. Itzhak Edrei 48 Senior Vice President of Product Lines and Sales
Rafi Nave 58 Chief Technology Officer and Vice President of QA
and Reliability
Ephie Koltin 46 Vice President and Fab 1, Test and Facility Manager
Dalit Dahan 40 Vice President of Human Resources and IT
Shimon Dahan 45 Vice President and Fab 2 and Supply Chain and
Procurement Manager
Nati Somekh Gilboa 33 Corporate Secretary and General Counsel
Rafi Mor 44 Vice President of Business Development
DIRECTORS AGE TITLE
- -------------------- --- ---------------------------------------------------
Dov Moran 52 Chairman of the Board
Russell C. Ellwanger 53 Director
Miin Wu 59 Director
Ron Moskovitz 45 Director
Nir Gilad 51 Director
Kalman Kaufman 63 Independent Director
Miri Katz 57 Independent and External Director
RUSSELL C. ELLWANGER has served as our Chief Executive Officer since May
2005. From 1998 to 2005, Mr. Ellwanger served in various executive positions for
Applied Materials Corporation, including Group Vice President, General Manager
of the Applied Global Services (AGS), from 2004 to 2005, Group Vice President,
General Manager of the CMP and Electroplating Business Group, from 2002 to 2004.
Mr. Ellwanger also served as Corporate Vice President, General Manager of the
Metrology and Inspection Business Group, from 2000 to 2002, during which he was
based in Israel. From 1998 to 2000, Mr. Ellwanger served as Vice President of
Applied Materials' 300-mm Program Office, USA. Mr. Ellwanger served as General
Manager of Applied Materials' Metal CVD Division from 1997 to 1998 and from 1996
to 1997, Mr. Ellwanger served as Managing Director of CVD Business Development,
during which he was based in Singapore. In addition, Mr. Ellwanger held various
managerial positions in Novellus System from 1992 to 1996 and in Philips
Semiconductors from 1980 to 1992.
OREN SHIRAZI was appointed as our acting Chief Financial Officer in
November 2004. Mr. Shirazi joined us in October 1998 and served as our
controller since July 2000, after serving as vice controller since October 1998.
Prior to joining us, Mr. Shirazi was employed as an Audit Manager in the
accounting firm of Ratzkovski-Fried & Co., which merged into Ernst & Young
(Israel). Mr. Shirazi is a Certified Public Accountant in Israel (CPA). He has
an MBA from the Graduate School of Business of Haifa University with honors and
a BA in economics and accounting from the Haifa University.
- 49 -
DR. ITZHAK EDREI was appointed Senior Vice President of Product Lines and
Sales in August 2005 after serving as Vice President of Research and Development
since August 2001, having served as Director of Research and Development since
1996. From 1994 to 1996, Dr. Edrei served as our Device and Yield Department
Manager. Prior to joining Tower, Dr. Edrei was employed by National
Semiconductor as Device Section Head. Dr. Edrei earned his Ph.D. in physics from
Bar Ilan University and his post-doctorate from Rutgers University.
RAFI NAVE has served as our Chief Technology Officer since August 2005 and
was appointed as Vice President of QA and Reliability in January 2008, after
serving as a Vice President of Customer Services since August 2003. From 1996 to
2003, Mr. Nave served as Vice President of Research and Development for NDS
Group. From 1974 to 1995, Mr. Nave was employed by Intel Corporation in a
variety of positions of increasing responsibility, among them chip design
engineer and General Manager of Intel's design center in Israel. Mr. Nave earned
master and bachelor degrees in electrical engineering from the Technion - Israel
Institute of Technology.
EPHIE KOLTIN has served as Vice President Fab 1 since April 2007, and has
served as Test and Facility Manager since January 2008, after serving as Vice
President of Business Development since August 2005, as Vice President, General
Foundry and Mixed Signal Technology since 2003 and as Senior Director, FAB 2
Process Engineering since 2000. From 1996-1999, Mr. Koltin served in several
senior positions as Director, NVM Technology, CIS technology and ERS manager,
Fab 1. Prior to joining Tower, Mr. Koltin was employed at National Semiconductor
and the Technion - Israel Institute of Technology. Mr. Koltin holds a B.Sc. in
Mechanical Engineering and M.Sc. in Materials Engineering from the Technion -
Israel Institute of Technology.
DALIT DAHAN serves as Vice President of Human Resources and was appointed
IT Manager in January 2008, after serving as Vice President of Human Resources
since April 2004. Ms. Dahan joined us in November 1993 and served as Personnel
Manager since April 2000, after having served as Compensation & Benefits Manager
and in various other positions in the Human Resources Department. Prior to
joining us, Ms. Dahan served as Manager of the North Branch of O.R.S - Manpower
Company for 3 years. Ms. Dahan holds a bachelor's degree in social science from
Haifa University and an MBA from the University of Derby.
SHIMON DAHAN serves as Vice President and Supply Chain and Procurement
Manager as was appointed as Fab 2 Manager in January 2008, after serving as Vice
President of Manufacturing Services since January 2006, having served previously
as Test & MTG manager since August 2005 and prior to that as Research and
Development Operation Manager from November 2000. Prior to that, Mr. Dahan was
employed by National Semiconductor in various capacities. Mr. Dahan holds a
bachelors degree in Political Science from Haifa University, and an MBA from the
University of Derby.
NATI SOMEKH GILBOA was appointed as Corporate Secretary and General Counsel
in March 2005, has served as our Associate General Counsel since May 2004. From
2001 to 2004, Ms. Somekh Gilboa was employed by Goldsobel & Kirshen, Adv. Ms.
Somekh Gilboa holds an LL.M. and J.D. from Boston University and a B.A. from
Johns Hopkins University. She is a member of the Israeli Bar Association and the
New York bar.
RAFI MOR was appointed Vice President of Business Development since April
2007, having served previously as Vice President and Fab 2 Manager since August
2005, as Fab 1 Manager since August 2003 and Senior Director and Fab 1 Manager
since March 2003. From November 2000 to March 2003, Mr. Mor served as Senior
Director of Process Device & Yield of Fab 1. From 1998 to 2000, Mr. Mor served
as Director of Equipment Reliability & Support of Fab 1. Previously, Mr. Mor was
employed by National Semiconductor in various engineering and management
capacities. Mr. Mor earned master and bachelor degrees in chemical engineering
from Ben Gurion University.
- 50 -
DOV MORAN has served as Chairman of the Board since December 2006. Mr.
Moran was a founder of M-Systems and served as a director, President, Chief
Executive Officer and Chairman of the Board of Directors of M-Systems from 1989
until September 2006. From 1984 to 1989, Mr. Moran was an independent consultant
in the computer industry. Mr. Moran holds a B.Sc. in Computers and Electronic
Engineering from the Technion Israel Institute of Technology.
RON MOSKOWITZ has served as a director since October 2007. From July 2002
until November 2007, Mr. Moskovitz served as Senior Vice President and Chief
Financial Officer of Amdocs Limited. From 1998 until July 2002, Mr. Moskovitz
served as Vice President of Finance of Amdocs Limited. Between 1994 and 1998,
Mr. Moskovitz served in various senior financial positions in Tower
Semiconductor Ltd. Mr. Moskovitz is a certified public accountant in Israel. He
holds a B.A. in accounting and economics from Haifa University and an MBA from
Tel-Aviv University.
MIIN WU has served as a director since January 2001. Mr. Wu serves as
Chairman and Chief Executive Officer of Macronix International and has been an
executive officer of Macronix since its formation in 1989. Mr. Wu received both
a B.S. and an M.S. in Electrical Engineering from National Cheng-Kung University
in Taiwan as well as an M.S. in Material Science & Engineering from Stanford
University.
KALMAN KAUFMAN has served as a director and as a member of our Audit
Committee since August 2005 and as a members of our Stock Option and
Compensation Committee since May 2008. Mr. Kaufman also served as Corporate Vice
President at Applied Materials from 1994 to 2005. Between 1985 and 1994, Mr.
Kaufman served as President of KLA Instruments Israel, a company he founded, and
General Manager of Kulicke and Soffa Israel. Mr. Kaufman is currently the
Chairman of Solgel Nanotechnology and is a member of several boards of
directors. He holds engineering degrees from the Technion - Israel Institute of
Technology.
MIRI KATZ has served as a director and member of the Audit Committee and
the Stock Option and Compensation Committee since January 2007. Ms. Katz has
been a member of the board of directors of bank Leumi Le-Israel since June 2008.
Ms. Katz has been a member of the board of directors of Itamar Medical Ltd.
since 2007. Ms. Katz has been a member of the board of trustees of The Hebrew
University of Jerusalem and a member of its Committee for Academic Policy, the
Audit Committee and the Constitution Committee since 2004. Ms. Katz has been of
counsel at Ophir Katz &Co. and has served as a director of The Caesarea
Foundation and The Caesarea Edmond Benjamin de Rothschild Development
Corporation Ltd. since 2003. From 1997-2002, Ms. Katz served as the chairperson
of the Israel Securities Authority. Ms. Katz holds an LL.B. from The Hebrew
University of Jerusalem.
NIR GILAD has served as a director since May 2007. Mr. Gilad has served as
Chief Executive Officer of Israel Corp. since June 2007; he previously served as
Vice-Chief Executive Officer of the Israel Corporation from May 2006 to May
2007. From 2004-2006, Mr. Gilad served as vice-Chief Executive Officer of Migdal
Holdings Insurance and Financings Ltd., Chief Executive Officer of Migdal
Investment Management 2001 Ltd. and chairman of Migdal Capital Markets Ltd. In
addition, from 1999-2003, Mr. Gilad served as General Comptroller of the
Treasury Office of the State of Israel. Throughout the years, Mr. Gilad was a
member and chairman of several boards of directors. Mr. Gilad holds a B.A. in
Economics and Agricultural Management in Natural Sciences from the Hebrew
University of Jerusalem and an M.A. in business administration from Bar Ilan
University.
- 51 -
Pursuant to a shareholders agreement dated January 18, 2001, SanDisk,
Alliance Semiconductor, Israel Corp. and Macronix have agreed to vote all their
respective shares for nominees designated by each shareholder and for the
election of a nominee of Israel Corp. as Chairman of the Board, unless agreed to
otherwise.
B. COMPENSATION
For the year ended December 31, 2007, we paid to all our directors and
senior management, as a group, an aggregate of $2.7 million, in salaries, fees
and bonuses, excluding management fees paid to Israel Corp. The total amount set
aside or accrued in the year ended December 31, 2007 to provide for severance,
retirement and similar benefits for such persons was $0.3 million.
During 2001, the Audit Committee, Board of Directors and shareholders
approved a stock option plan which provides for the grant to our Board members
of options to purchase up to 400,000 ordinary shares. During 2007, we granted
80,000 options to our directors under this plan at a weighted average exercise
price of $1.74. As of December 31, 2007, 190,000 options to purchase ordinary
shares were outstanding under this plan, with a weighted average exercise price
of $3.68. These options vest over a four-year period, according to various
vesting schedules and are generally not exercisable following the fifth
anniversary of their vesting date.
Since October 2001, our directors have foregone their directors' fees,
except for fees required by law to be paid to our independent directors. The
aggregate amount payable to each of our external directors with respect to the
year ended December 31, 2007 was approximately $26,000. Each of these directors
also receives a per meeting fee.
On January 31, 2007, our shareholders approved, following our Board of
Directors' and Audit Committee approvals, the grant to each independent director
of the Company who is not affiliated with our major shareholders, and is not an
employee of the Company, initial options to purchase Ordinary Shares that equal
150,000 less the number of unvested options to purchase Ordinary Shares held by
such independent director as of the date of the shareholders' meeting. These
initial options vest over three years, one third on the first month anniversary
of the date the shareholders approved the grant, and thereafter, the remaining
two-thirds pro-rata on a monthly basis over the remaining two years until fully
vested. The exercise price per initial option is $1.88, which was the closing
price of our shares on the NASDAQ on the trading day immediately prior to the
date the shareholders approved the grant. On January 31, 2007, our shareholders
approved (i) the payment of annual fees and participation fees (per meeting) to
the Independent Directors; and (ii) the reimbursement of out-of-pocket expenses
of the independent directors, in both cases, to the maximum extent permitted
under applicable Israeli law and regulations.
Each new independent director appointed will be granted 150,000 options to
purchase Ordinary Shares, exercisable at the closing price of our shares on the
NASDAQ on the trading day immediately prior to the relevant date of appointment,
with the same vesting terms as the initial grants.
Upon each third anniversary of a previous grant of options to an
independent director, each such Independent Director shall be granted an
additional 150,000 options to purchase Ordinary Shares, which will vest over 3
years on a monthly basis until fully vested. The exercise price per each such
option shall be the closing price of our shares on the NASDAQ on the trading day
immediately prior to the relevant grant date. Subject to certain conditions, the
options that have vested shall be exercisable by an independent director for a
period of ten years following the date on which the relevant options, as the
case may be, first vested. So long as this option plan remains in effect, no
future grants will be made to independent directors under the 2001 plan
mentioned above. During 2007, we granted 430,000 options to our independent
directors under this plan at a weighted average exercise price of $1.91. As of
December 31, 2007, all such options were outstanding.
- 52 -
On January 31, 2007, our shareholders approved the appointment of Dov Moran
as Chairman of the Board of Directors and approved the grant to him of options
to purchase 3,158,090 Ordinary Shares, which represented 1.0% of our issued and
outstanding share capital on a fully diluted basis. The exercise price of these
options is $1.88, which was the closing price of our shares on the NASDAQ on the
trading day immediately prior to the date of the shareholder approval. These
options vest over four years as follows: 25% will vest on the 12 month
anniversary of the shareholders approval date and 6.25% will vest each three
months thereafter until fully vested.
In April 2005, our Board of Directors approved the grant of options to
purchase up to 1,325,724 of our ordinary shares (which represented 1.6% of our
issued and outstanding shares as of June 30, 2006) to Russell Ellwanger, our
then newly-appointed Chief Executive Officer, who was also appointed as a
director, which was further approved by our shareholders in October 2005. These
options are exercisable at an exercise price of $1.56, which was the closing
market price of our shares on the last trading day prior to the board approval
of the grant. These options vest over a four-year period, with 25% vesting over
each year of employment. The options granted are exercisable for a period of ten
years from the date of grant.
In addition, in May 2006, our Audit Committee and Board of Directors
approved the grant of options to Mr. Ellwanger in addition to the options
granted to him in April 2005, such that in total, he will hold options to
purchase shares that represent 4% of our issued and outstanding shares on a
fully diluted basis during the two-year period beginning May 16, 2006 (the date
of the approval of the Audit Committee). This was further approved by our
shareholders on September 28, 2006. The exercise price of the initial grant of
approximately 4.3 million additional options was $1.45, the 90 day average
closing price of our shares prior to May 17, 2006 (the date of the Board of
Directors' approval). In future dilutive events following May 2006, additional
options were granted to the CEO with an exercise price equal to the price per
share of the newly issued securities. The vesting period of the new options will
be identical to the vesting period of the existing options. Any decrease in the
Company's shares on a fully diluted basis during the two-year period from the
approval of the Audit Committee will be followed by the cancellation of the
corresponding options granted to the CEO. No additional options will be granted
to the CEO under the April 2005 option grant. As of May 31, 2008, a total of
14,861,812 options were outstanding to our CEO at a weighted average exercise
price of $1.65.
On January 31, 2007, our shareholders approved: (i) an eight percent (8%)
increase in Mr. Ellwanger's annual base salary from $350,000 to $378,000,
effective January 1, 2007; and (ii) a performance-based bonus of up to $525,000
for the year ending December 31, 2006.
In December 2007 our shareholders approved: (i) the procurement of a life
insurance policy for Mr. Ellwanger; (ii) the payment to Mr. Ellwanger of an
annual salary (together with social benefits) of approximately $505,950,
effective as of April 1, 2007; (iii) the reimbursement of Mr. Ellwanger for the
difference, if any, between: (a) payments made by him, or on his behalf, to the
Israeli tax authorities in respect of his aggregate base salary and
performance-based bonuses from the Company, and (b) the amount that he would
have been required to pay to the United States tax authorities had he been
subject to United States taxation in respect of such amounts; (iv) the
re-imbursement of Mr. Ellwanger for expenses associated with his relocation to
Israel of up to approximately $280,000 on an annual basis; and (v) a
performance-based bonus of up to $408,240 for the year ended December 31, 2007.
In May 2006, our board of directors approved a plan to offer each of our
current employees, including senior management, the opportunity to exchange
their existing options to purchase our ordinary shares for new options with an
exercise price of $1.45, which was the average closing price of our shares on
the NASDAQ during the 90 consecutive trading days prior to the board of
directors' approval in May 2006. The new options were granted based on terms
similar to our existing employee option plan with new vesting periods.
- 53 -
In May 2006, our board of directors further approved the allocation of
additional options to be made available for grant to our employees if the total
number of employee options, including the options to our CEO and senior
management, during the 24 months period ended May 2008, will represent less than
8% of our shares on a fully diluted basis
During 2007, we granted a total of 995,000 options to purchase ordinary
shares to our senior managers as a group (excluding the options granted to our
CEO described above). These options have a weighted average exercise price of
$1.71 per share with vesting periods over four years and expire in 2017.
As of May 31, 2008, options to purchase approximately 14,073,953 ordinary
shares held by our employees (excluding the options granted to our CEO and
directors described above), with exercise prices ranging from $1.06 to $25, with
weighted average exercise price of $1.72 were outstanding under employees share
options plans. Also as of such date, 787,000 options were available for future
grants under our share options plans.
C. BOARD PRACTICES
Our Articles of Association provide that the Board of Directors shall
consist of at least five and no more than 11 members. All directors, except for
external directors, hold office until their successors are elected at the next
annual general meeting of shareholders. Our officers are appointed by the Board
of Directors and (subject, in certain cases, to employment agreement provisions
that require 270 days notice of termination) continue to serve at the discretion
of the Board of Directors. The Board of Directors may grant the CEO the power to
appoint officers.
Our Articles of Association provide that any director may, by written
notice to us, appoint another person to serve as an alternate director, and may
cancel such appointment. Any person who is not already a director may act as an
alternate, and the same person may not act as the alternate for more than one
director at a time. The term of appointment of an alternate director may be for
one meeting of the Board of Directors or for a specified period or until notice
is given of the cancellation of the appointment.
None of the members of the Board are entitled to receive any severance or
similar benefits upon termination of service with the Board of Directors.
The Israeli Companies Law - 1999 (the "Companies Law") requires Israeli
companies with shares that have been offered to the public in or outside of
Israel to appoint no less than two external directors. No person may be
appointed as an external director if the person or the person's relative,
partner, employer or any entity under the person's control, has or had, on or
within the two years preceding the date of the person's appointment to serve as
external director, any affiliation with the company or any entity controlling,
controlled by or under common control with the company. The term "affiliation"
includes:
o an employment relationship;
o a business or professional relationship maintained on a regular basis;
o control; and
o service as an office holder.
- 54 -
A person shall be qualified to serve as an external director only if he or
she possesses accounting and financial expertise or professional qualifications.
At least one external director must possess accounting and financial expertise.
The conditions and criteria for possessing accounting and financial expertise or
professional qualifications were determined in regulations promulgated by the
Israeli Minister of Justice in consultation with the Israeli Securities
Authority. The regulations mandate that a person is deemed to have "expertise in
finance and accounting" if his or her education, experience and qualifications
provide him or her with expertise and understanding in business matters -
accounting and financial statements, in a way that allows him or her to
understand, in depth, the company's financial statements and to encourage
discussion about the manner in which the financial data is presented.
The company's board of directors must evaluate the proposed external
director's expertise in finance and accounting, by considering, among other
things, his or her education, experience and knowledge in the following: (i)
accounting and auditing issues typical to the field in which the company
operates and to companies of a size and complexity similar to such company; (ii)
a company's external public accountant's duties and obligations; (iii) preparing
company financial statements and their approval in accordance with the Companies
Law and the Israeli Securities Law.
A director is deemed to be "professionally qualified" if he or she meets
any of the following criteria: (i) has an academic degree in any of the
following professions: economics, business administration, accounting, law or
public administration; (ii) has a different academic degree or has completed
higher education in a field that is the company's main field of operations, or a
field relevant to his or her position; or (iii) has at least five years
experience in any of the following, or has a total of five years experience in
at least two of the following: (A) a senior position in the business management
of a corporation with significant operations, (B) a senior public position or a
senior position in public service, or (C) a senior position in the company's
main field of operations. The board of directors here too must evaluate the
proposed external director's "professional qualification" in accordance with the
criteria set forth above.
The declaration required by law to be signed by a candidate to serve as an
external director must include a statement by such candidate concerning his or
her education and experience, if relevant, in order that the board of directors
may properly evaluate whether such candidate meets the requirements set forth in
the regulations. Additionally, the candidate should submit documents and
certificates that support the statements set forth in the declaration.
No person may serve as an external director if the person's position or
other business activities create, or may create, a conflict of interest with the
person's responsibilities as an external director or may otherwise interfere
with the person's ability to serve as an external director. If, at the time
external directors are to be appointed, all current members of the board of
directors are of the same gender, then at least one external director must be of
the other gender.
External directors are to be elected by a majority vote at a shareholders'
meeting, provided that either:
o the majority of shares voted at the meeting, including at least
one-third of the shares held by non-controlling shareholders that
voted at the meeting, vote in favor of election of the director; or
o the total number of shares held by non-controlling shareholders voted
against the election of the director does not exceed one percent of
the aggregate voting rights in the company.
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The initial term of an external director is three years and may be extended
for additional three year terms, subject to certain conditions. External
directors may be removed only by the same percentage of shareholders as is
required for their election, or by a court, and then only if the external
directors cease to meet the statutory qualifications for their appointment or if
they violate their duty of loyalty to the company. Each committee of a company's
board of directors must include at least one external director.
Ms. Miri Katz currently serves as our external director. Ms. Katz was
appointed for an initial three-year term expiring in January 2010. Mr. Hans
Rohrer's term serving as an external director expired in April 2008 and we will
promptly call a shareholders' meeting to appoint an external director in his
place.
An external director is entitled to compensation, as provided in
regulations adopted under the Israeli Companies Law, and is otherwise prohibited
from receiving any other compensation, directly or indirectly, in connection
with service provided as an external director.
The Companies Law requires public companies to appoint an audit committee.
The responsibilities of the audit committee include reviewing the company's
financial statements, monitoring the company's independent auditors, identifying
irregularities in the management of the company's business and approving related
party transactions as required by law. An audit committee must consist of at
least three directors, including the external directors of the company. The
chairman of the board of directors, any director employed by or otherwise
providing services to the company, and a controlling shareholder or any relative
of a controlling shareholder, may not be a member of the audit committee. An
employee, executive officer or director of a controlling shareholder of an
Israeli company may serve as a member of an audit committee under Israeli law,
unless such individual controls more than 50% of the controlling shareholder.
Each of our external directors are members of our audit committee.
Under the Companies Law, the board of directors must appoint an internal
auditor, who is recommended by the audit committee. The role of the internal
auditor is to examine, among other matters, whether the company's actions comply
with the law and orderly business procedure. Under the Companies Law, the
internal auditor may be an employee of the company but not an office holder, an
affiliate, or a relative of an office holder or affiliate, and he may not be the
company's independent auditor or its representative.
Mr. Moran, Mr. Kalman and Ms. Katz serve on the stock option and
compensation committee. The committee meets at least once a year. The primary
function of this committee is to approve our employee compensation policy and
determine remuneration and other terms of employment for our officers. In
setting our remuneration policy, the committee considers a number of factors
including:
o the overall employment market environment;
o the basic salaries and benefits available to comparable officers at
comparable companies;
o the need to attract and retain officers of an appropriate caliber;
o the need to ensure such executives' commitment to the future success
of our company by means of incentive schemes;
o the performance of the officer; and
o financial and operating results of our company.
D. EMPLOYEES
The following table sets forth for the last three fiscal years, the number
of our employees engaged in the specified activities.
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AS OF DECEMBER 31,
--------------------------------
2007 2006 2005
------ ------ ------
Process and product engineering, R&D, design 308 343 293
Manufacturing, operations 904 879 734
Manufacturing support 82 113 115
Administration, marketing, finance 135 111 96
------ ------ ------
Total 1,429 1,446 1,238
====== ====== ======
- ----------
Except for an arrangement regarding pension contributions, we have no
collective bargaining agreements with any of our employees. However, by
administrative order, certain provisions of the collective bargaining agreements
between the Histadrut (General Federation of Labor in Israel) and the
Coordination Bureau of Economic Organizations, relating primarily to the length
of the work day, minimum wages, pension contributions, insurance for
work-related accidents, procedures for dismissing employees, determination of
severance pay and other conditions of employment are applicable to our
employees. In accordance with these provisions, the salaries of our employees
are partially indexed to the Consumer Price Index in Israel.
Under the special collective bargaining agreement to which we are party, we
are required to contribute funds to an employee's "Manager's Insurance" fund
and/or pension fund. Such funds generally provide a combination of savings
plans, insurance and severance pay benefits to the employee, securing his or her
right to receive pension or giving the employee a lump sum payment upon
retirement, under certain circumstances, if legally entitled, upon termination
of employment. To the Manager's Insurance fund, the employee usually contributes
an amount equal to 5% of his or her wages and the employer usually contributes
an additional 13.3% to 15.8%. To the pension fund the employee usually
contributes an amount equal to between 5% and 6% of his or her wages and the
employer usually contributes an additional 13.7% to 17.3%. Israeli law generally
requires severance pay upon the retirement or death of an employee or
termination of employment without due cause. Under our special collective
bargaining agreement, we are exempt from such payment as long as, and for period
during which, we contribute the above mentioned benefits to such employee's
pension fund and/or Manager's Insurance.
E. SHARE OWNERSHIP
All of the persons listed above under the caption "Directors and Senior
Management" own ordinary shares and/or options to purchase ordinary shares.
Except as described below, none of such persons own shares and/or options
amounting to 1% or more of the outstanding ordinary shares. Information
regarding our share option plans and warrants presented in Note 14B to our
consolidated financial statements is incorporated herein by reference.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
D. MAJOR SHAREHOLDERS
The following table and notes thereto set forth information, as of May 31,
2008, concerning the beneficial ownership (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended), and on a diluted basis, of
ordinary shares by any person who is known to own at least 5% of our issued and
outstanding ordinary shares. As of such date, 125,364,021 ordinary shares were
issued and outstanding. The voting rights of our major shareholders do not
differ from the voting rights of other holders of our ordinary shares. However,
certain of our shareholders have entered into a shareholders agreement pursuant
to which they may be able to exercise control over matters requiring shareholder
approval, including the election of directors and approval of significant
corporate transactions.
AMOUNT PERCENT OF PERCENT OF CLASS
IDENTITY OF PERSON OR GROUP OWNED (1) CLASS(1) (DILUTED)(2)
- --------------------------- ----------- ----------- -----------
Israel Corporation Ltd. (3) 101,231,883(4) 47.68% 27.29%
SanDisk Corporation (3) 19,060,790(5) 14.83% 5.14%
Macronix International Co. Ltd.(3) 9,682,485(6) 7.67% 2.61%
Bank Leumi Le-Israel, B.M 31,567,372(7) 20.12% 8.51%
Bank Hapoalim, B.M 32,037,960(8) 20.35% 8.64%
Prisma Investment House Ltd. 10,055,527(9) 7.81% 2.71%
- ----------
(1) Assumes the holder's beneficial ownership of all ordinary shares and all
securities that the holder has a right to purchase within 60 days.
(2) Assumes that all currently outstanding securities to purchase ordinary
shares, other than those which cannot be calculated as of the date of this
registration statement, have been exercised by all holders.
(3) Pursuant to a shareholders agreement among Israel Corp., SanDisk
Corporation and Macronix Co. Ltd., each of Israel Corp., SanDisk
Corporation and Macronix Co. Ltd. may be said to have shared voting and
dispositive control over approximately 31% of the outstanding shares of
Tower.
(4) Based on information provided by Israel Corp., represents 14,260,504 shares
currently owned by Israel Corp., 18,181,823 shares issuable upon conversion
of debentures, 65,789,474 shares issuable upon conversion of capital notes,
2,941,176 shares issuable upon the exercise of warrants at an exercise
price per share of $2.04 and 58,906 shares issuable upon the exercise of
warrants at an exercise price per share of $6.17.
(5) Based on information provided by SanDisk, represents 15,878,972 shares
currently owned by SanDisk and 3,181,818 shares issuable upon conversion of
debentures.
(6) Based on information provided by Macronix, represents 8,773,395 shares
currently owned by Macronix and 909,090 shares issuable upon conversion of
debentures.
(7) Based on information provided by Bank Leumi, represents 25,986,842 shares
issuable upon conversion of capital notes, 4,132,232 shares issuable upon
the exercise of warrants at an exercise price per share of $1.21, 1,000,000
shares issuable upon exercise of warrants at an exercise price per share of
$2.04 and 448,298 ordinary shares issuable upon exercise of warrants at an
exercise price per share of $6.17.
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(8) Based on information provided by Bank Hapoalim represents 25,986,842 shares
issuable upon conversion of capital notes, 4,132,232 shares issuable upon
the exercise of warrants at an exercise price per share of $1.21, 1,470,588
shares issuable upon exercise of warrants at an exercise price per share of
$2.04 and 448,298 ordinary shares issuable upon exercise of warrants issued
to Tarshish Hahzakot Vehashkaot Hapoalim Ltd at an exercise price per share
of $6.17.
(9) Based on information provided by Prisma represents 6,596,526 shares
currently owned by Prisma and 3,459,001 shares issuable upon conversion of
debentures.
Pursuant to a shareholders agreement dated January 18, 2001, among Israel
Corp., Alliance Semiconductor, SanDisk and Macronix, such parties have agreed,
among other things, to vote or cause to be voted all their respective shares for
the election to the Board of Directors of nominees designated by each party,
nominees recommended by the Board, the election of a designee of the Israel
Corp. to serve as Chairman of the Board, unless agreed to otherwise (as was
agreed in December 2006 with the appointment of Dov Moran as Chairman of the
Board of Directors), and against the election of any other persons to the Board
of Directors. In addition, subject to certain exceptions, each shareholder
agreed to restrictions on the transfer of its shares, including certain rights
of first refusal.
As of June 4, 2008, there were a total of 34 holders of record of our
ordinary shares, of which 21 were registered with addresses in the United
States. Such United States record holders were, as of such date, the holders of
record of approximately 63% of our outstanding ordinary shares. The number of
record holders in the United States is not representative of the number of
beneficial holders nor is it representative of where such beneficial holders are
resident since many of these ordinary shares were held of record by brokers or
other nominees (including one U.S. nominee company, CEDE & Co., which held
approximately 50% of our outstanding ordinary shares as of said date).
B. RELATED PARTY TRANSACTIONS
EXEMPTION AND INDEMNIFICATION AGREEMENTS WITH DIRECTORS. In December 2001,
we entered into exemption and indemnification agreements with the members of our
Board of Directors, pursuant to which, subject to the limitations set forth in
the Israeli Companies Law and our Articles of Association, they will be exempt
from liability for breaches of the duty of care owed by them to the Company or
indemnified for certain costs, expenses and liabilities with respect to events
specified in the exemption and indemnification agreements. In September 2005, we
entered into amended exemption and indemnification agreements with the members
of our Board of Directors to reflect certain amendments to the Companies Law
that came into effect in March 2005. Our shareholders approved these amended
exemption and indemnification agreements in October 2005.
AGREEMENTS WITH CERTAIN OF OUR WAFER PARTNERS AND ISRAEL CORP. We are party
to several agreements with our wafer partners, including SanDisk and Alliance,
and Israel Corp related to the financing of Fab 2 and manufacture of products as
described under the caption "Fab 2 Agreements" in "Item 5. Operating and
Financial Review and Prospects Reference" of this annual report and Note 11A to
the consolidated financial statements included in this annual report, which
discussions are incorporated by reference herein.
AGREEMENTS WITH ISRAEL CORP. Discussed under "Item 4. Information on the
Company -A. History and Development of the Company - Recent Developments" which
discussion is incorporated by reference herein.
GRANT OF OPTIONS TO OUR CEO AND DIRECTOR. Discussed under "Item 6 -
Directors, Senior Management and Employees - E. Share Ownership", which
discussion is incorporated by reference herein.
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C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Our consolidated financial statements are incorporated herein by reference
to pages following the signature page of this Annual Report.
LEGAL PROCEEDINGS
In May 2008, we filed a petition with the Israeli High Court of Justice in
which we asked the Court to order that our expansion plan be brought before the
relevant Israeli governmental bodies for their respective approvals without
delay. This petition was filed after making repeated requests over an extended
period of time and after we sent letters in March, April and May of 2008 to the
Israeli Ministry of Finance, the Israeli Ministry for Industry, Trade and Labor
and the Investment Center, in which we noted among other things, that absent the
expansion program being brought before the relevant governmental bodies within a
specified period of time, a petition would be filed with the Court to compel the
same. On May 29, 2008 the Court ordered that the respondents (the Israeli
Ministry of Finance, the Israeli Ministry for Industry, Trade and Labor and the
Investment Center) respond to our petition within 21 days of service of the
petition. See also Item 3. Key Information - Risk Factors - Risks Affecting
Our Business "Risk Factors - If the Investment Center will not approve our
request for an expansion program . . ."
From time to time we are a party to various litigation matters incidental
to the conduct of our business. There is no pending or threatened legal
proceeding to which we are a party, that, in the opinion of management, is
likely to have a material adverse effect on our future financial results or
financial condition.
B. SIGNIFICANT CHANGES
Not applicable.
ITEM 9. THE OFFER AND LISTING
Our ordinary shares are listed and traded on the NASDAQ Global Market under
the symbol "TSEM". In addition, in January 2001, our ordinary shares commenced
trading on the Tel Aviv Stock Exchange (TASE) under the symbol "TSEM".
The following table sets forth, for the periods indicated, the high and low
reported sales prices of the ordinary shares on the NASDAQ Global Market and Tel
Aviv Stock Exchange:
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NASDAQ GLOBAL MARKET TEL AVIV STOCK EXCHANGE
------------------ ------------------
HIGH ($) LOW ($) HIGH (NIS) LOW (NIS)
----- ----- ----- -----
PERIOD
May 2008 1.25 0.84 4.13 2.90
April 2008 1.07 0.83 3.89 2.93
March 2008 1.06 0.79 3.69 2.63
February 2008 1.19 1.00 4.28 3.65
January 2008 1.45 0.74 5.50 3.29
December 2007 1.58 1.35 6.17 5.25
First quarter 2008 1.45 0.74 5.50 2.63
Fourth quarter 2007 1.80 1.35 7.25 5.25
Third quarter 2007 1.87 1.20 7.97 5.38
Second quarter 2007 1.94 1.42 7.63 6.20
First quarter 2007 2.08 1.64 8.88 7.00
Fourth quarter 2006 2.18 1.41 9.14 6.16
Third quarter 2006 1.51 1.24 6.69 5.11
Second quarter 2006 1.75 1.22 7.91 6.00
First quarter 2006 1.93 1.22 8.54 6.03
2007 2.08 1.20 8.88 5.25
2006 2.18 1.22 9.14 5.11
2005 2.38 0.92 10.30 5.10
2004 10.80 1.62 46.39 7.70
2003 7.90 2.16 35.00 10.25
ITEM 10. ADDITIONAL INFORMATION
ARTICLES OF ASSOCIATION; ISRAELI COMPANIES LAW
ARTICLES OF ASSOCIATION
Our Articles of Association ("Articles") were adopted in November 2000, and
as amended most recently on September 26, 2006, provide for an authorized
capital of NIS 800 million divided into 800 million ordinary shares. The
objective stated in the Articles is to engage in any lawful activity.
We have currently outstanding only one class of equity securities, our
ordinary shares, par value NIS 1.00 per share. Holders of ordinary shares have
one vote per share, and are entitled to participate equally in the payment of
dividends and share distributions and, in the event of liquidation of the
Company, in the distribution of assets after satisfaction of liabilities to
creditors. No preferred shares are currently authorized.
- 61 -
Our Articles require that we hold our annual general meeting of
shareholders each year no later than 15 months from the last annual meeting, at
a time and place determined by the Board of Directors, upon at least 21 days'
prior notice to our shareholders. No business may be commenced until a quorum of
two or more shareholders holding at least 33% of the voting rights are present
in person or by proxy. Shareholders may vote in person or by proxy, and are
required to prove title to their shares as required by the Companies Law
pursuant to procedures established by the Board of Directors. Resolutions
regarding the following matters shall be passed by an ordinary majority of those
voting at the general meeting:
o amendments to our Articles;
o appointment and termination of our independent auditors;
o appointment and dismissal of directors;
o approval of acts and transactions requiring general meeting approval
under the Companies Law;
o increase or reduction of authorized share capital or the rights of
shareholders or a class of shareholders;
o any merger as provided in section 320 of the Companies Law; and
o the exercise of the Board of Directors' powers by the general meeting,
if the Board of Directors is unable to exercise its powers and the
exercise of any of its powers is essential for Tower's proper
management, as provided in section 52(a) of the Companies Law.
A special meeting may be convened by the request of two directors or by
written request of one or more shareholders holding at least 5% of our issued
share capital and 1% of the voting rights or one or more shareholders holding at
least 5% of the voting rights. Shareholders requesting a special meeting must
submit their proposed resolution with their request. Within 21 days of receipt
of the request, the Board must convene a special meeting and send out notices
setting forth the date, time and place of the meeting. Subject to exceptions,
such notice must be given at least 21 days but not more than 35 days prior to
the special meeting.
EXEMPTION AND INDEMNIFICATION AGREEMENTS WITH DIRECTORS
In December 2001, we entered into exemption and indemnification agreements
with the members of our Board of Directors, pursuant to which, subject to the
limitations set forth in the Israeli Companies Law and our Articles of
Association, they will be exempt from liability for breaches of the duty of care
owed by them to the Company or indemnified for certain costs, expenses and
liabilities with respect to events specified in the exemption and
indemnification agreements. In September 2005, we entered into amended exemption
and indemnification agreements with the members of our Board of Directors to
reflect certain amendments to the Companies Law that came into effect in March
2005. Our shareholders approved these amended exemption and indemnification
agreements in October 2005.
THE COMPANIES LAW
We are subject to the provisions of the Companies. The Companies Law
codifies the fiduciary duties that "office holders," including directors and
executive officers, owe to a company. An office holder, as defined in the
Companies Law, is a director, general manager, chief business manager, deputy
general manager, vice general manager, executive vice president, vice president,
another manager directly subordinate to the managing director or any other
person assuming the responsibilities of any of the foregoing positions without
regard to such person's title. Each person listed in the table in "Item 6.
Directors, Senior Management and Employees" above is an office holder. Under the
Companies Law, all arrangements as to compensation of office holders who are not
directors require approval of the board of directors. With the exception of
compensation of external directors in an amount specified in the regulations
adopted under the Companies Law, arrangements regarding the compensation of
directors also require audit committee and shareholder approval.
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The Companies Law requires an office holder to promptly disclose any
personal interest that he or she may have and all related material information
known to him or her, in connection with any existing or proposed transaction by
the company. In addition, if the transaction is an extraordinary transaction,
the office holder must also disclose any personal interest held by the office
holder's spouse, siblings, parents, grandparents, descendants, spouse's
descendants and the spouse of any of the foregoing, or any corporation in which
the office holder is a 5% or greater shareholder, holder of 5% or more of the
voting power, director or general manager or in which he or she has the right to
appoint at least one director or the general manager. An extraordinary
transaction is defined as a transaction not in the ordinary course of business,
not on market terms, or that is likely to have a material impact on the
company's profitability, assets or liabilities.
The Companies Law requires that specific types of transactions, actions and
arrangements be approved as provided for in a company's articles of association
and in some circumstances by the company's audit committee, board of directors
and shareholders. In the case of a transaction that is not an extraordinary
transaction, after the office holder complies with the above disclosure
requirements, only board approval is required, unless the Articles provide
otherwise. If the transaction is an extraordinary transaction, then, in addition
to any approval required by the Articles it must be approved first by the audit
committee and then by the board of directors, and, in specific circumstances, by
a meeting of the shareholders. Subject to exceptions set forth in the Companies
Law, an office holder who has a personal interest in a matter that is considered
at a meeting of the board of directors or the audit committee may not be present
during the relevant discussion at such meeting or vote on such matter.
The Companies Law applies the same disclosure requirements to a controlling
shareholder of a public company, which is defined as a shareholder who has the
ability to direct the activities of a company, other than if this power derives
solely from the shareholder's position on the board of directors or any other
position with the company and includes a shareholder that holds 25% or more of
the voting rights if no other shareholder owns more than 50% of the voting
rights in the company. Extraordinary transactions with a controlling shareholder
or in which a controlling shareholder has a personal interest, and agreements
relating to employment and compensation terms of controlling shareholders
require the approval of the audit committee, the board of directors and the
shareholders of the company. The shareholder approval must either include at
least one-third of the shares held by disinterested shareholders who are
present, in person or by proxy, at the meeting, or, alternatively, the total
shareholdings of the disinterested shareholders who vote against the transaction
must not represent more than one percent of the voting rights in the company.
In addition to approval by a company's board of directors, a private
placement in a public company requires approval by a company's shareholders in
the following cases:
o A private placement that meets all of the following conditions:
o 20 percent or more of the voting rights in the company prior to
such issuance are being offered;
o The private placement will increase the relative holdings of a
shareholder that holds five percent or more of the company's
outstanding share capital (assuming the exercise of all of the
securities convertible into shares held by that person), or that
will cause any person to become, as a result of the issuance, a
holder of five percent or more of the company's outstanding share
capital; and
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o All or part of the consideration for the offering is not cash or
registered securities, or the private placement is not being
offered at market terms.
o A private placement which results in anyone becoming a controlling
shareholder.
The above transactions must not be adverse to the company's interest.
Under the Companies Law, a shareholder has a duty to act in good faith
towards the company and other shareholders and refrain from abusing his power in
the company, including, among other things, vote in the general meeting of
shareholders on the following matters:
o any amendment to the Articles;
o an increase of the company's authorized share capital;
o a merger; or
o approval of interested party transactions that require shareholder
approval.
In addition, any controlling shareholder, any shareholder who knows that it
possesses power to determine the outcome of a shareholder vote and any
shareholder who has the power to appoint or prevent the appointment of an office
holder in the company is under a duty to act with fairness towards the company.
The Companies Law does not describe the substance of this duty.
TENDER OFFER. A person wishing to acquire shares or any class of shares of
a publicly traded Israeli company and who would as a result hold over 90% of the
company's issued and outstanding share capital or of a class of shares, is
required by the Companies Law to make a tender offer to all of the company's
shareholders for the purchase of all of the issued and outstanding shares of the
company. If the shares represented by the shareholders who did not tender their
shares in the tender offer constitute less than 5% of the issued and outstanding
share capital of the company, all of the shares that the acquirer offered to
purchase will be transferred to the acquirer by operation of law. If the
dissenting shareholders hold more than 5% of the issued and outstanding share
capital of the company, the acquirer may not acquire additional shares of the
company from shareholders who accepted the tender offer to the extent that
following such acquisition the acquirer would then own over 90% of the company's
issued and outstanding share capital. The Companies Law provides for an
exception regarding this threshold requirement for a shareholder that on
February 1, 2000 held over 90% of the public Israeli company's issued and
outstanding share capital. Shareholders may petition the court to alter the
consideration for the acquisition.
The Companies Law provides that, subject to certain exceptions, an
acquisition of shares of an Israeli public company must be made by means of a
tender offer if as a result of the acquisition the purchaser would become a
holder of 25% or more of the voting rights in the company. This rule does not
apply if there is already another shareholder of the company that holds 25% or
more of the voting rights in the company. Similarly, the Companies Law provides
that, subject to certain exceptions, an acquisition of shares in a public
company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a holder of more than 45% of the voting
rights in the company, if there is no shareholder that holds more than 45% of
the voting rights in the company.
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MERGER. The Companies Law permits merger transactions if approved by each
party's board of directors and the majority of each party's shares voted on the
proposed merger at a shareholders' meeting called on at least 35 days' prior
notice. Under the Companies Law, merger transactions may be approved by holders
of a simple majority of our shares present, in person or by proxy, at a general
meeting and voting on the transaction. In determining whether the required
majority has approved the merger, if shares of a company are held by the other
party to the merger, or by any person holding at least 25% of the outstanding
voting shares or 25% of the means of appointing directors of the other party to
the merger, then a vote against the merger by holders of the majority of the
shares present and voting, excluding shares held by the other party or by such
person, or anyone acting on behalf of either of them, is sufficient to reject
the merger transaction. If the transaction would have been approved but for the
exclusion of the votes of certain shareholders as provided above, a court may
still approve the merger upon the request of holders of at least 25% of the
voting rights of a company, if the court holds that the merger is fair and
reasonable, taking into account the value of the parties to the merger and the
consideration offered to the shareholders. Upon the request of a creditor of
either party to the proposed merger, the court may delay or prevent the merger
if it concludes that there exists a reasonable concern that, as a result of the
merger, the surviving company will be unable to satisfy the obligations of any
of the parties to the merger. In addition, a merger may not be consummated
unless at least 30 days have passed from the receipt of the shareholders'
approval and 50 days have passed from the time that a merger proposal has been
filed with the Israeli Registrar of Companies.
NASDAQ MARKETPLACE RULES AND HOME COUNTRY PRACTICES
NASDAQ's Marketplace Rule 4350 ("Rule 4350") was amended to permit foreign
private issuers to follow certain home country corporate governance practices
without the need to seek an individual exemption from NASDAQ. Instead, a foreign
private issuer must provide NASDAQ with a letter from outside counsel in its
home country certifying that the issuer's corporate governance practices are not
prohibited by home country law.
In July 2005, pursuant to this new exception, we provided a notice to
NASDAQ required by Rule 4350, with a letter from our outside Israeli counsel
informing it that in keeping with Rule 4350(a)(1) we had elected to follow the
practices of our home country in lieu of those set forth in Rule 4350, to the
extent permitted thereby, and provided a letter from our outside Israeli counsel
certifying that our the practices being followed of amending employee share
option plans that do not permit the grant of options to directors upon the
approval of our board of directors, and without seeking shareholder approval
(which approval is required for NASDAQ-listed companies under Marketplace Rule
4350(i)), is in place thereof were not prohibited by Israeli law.
As provided by Rule 4350(a)(1), in lieu of the requirements of Rule 4350 we
have chosen to follow the practices of our home country with respect to the
following:
o We do not supply an annual report as required by Rule 4350(b)(1)(A),
but makes our audited financial statements available to our
shareholders prior to our annual general meeting.
o The majority of our Board of Directors is not comprised of directors
who meet the definition of independence contained in NASDAQ
Marketplace Rule 4200(a)(15), as required by Rule 4350(c)(1). Under
the Companies Law a majority of the Board of Directors is not required
to be comprised of independent directors. In keeping with the
requirements of the Companies Law two of the members of our Board of
Directors are external directors, and are independent as defined under
Rule 10A-3 of the Securities Act.
o Our Board has not adopted a policy of conducting regularly scheduled
meetings at which only our independent directors are present, as
required by Rule 4350(c)(2). The Companies Law does not require our
external directors to conduct regularly scheduled meetings at which
only they are present.
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o The compensation of our chief executive officer and all other
executive officers is not determined, or recommended to the Board for
determination, in the manner required by Rule 4350(c)(3). In accord
with the Companies Law the compensation of the chief executive officer
and all other officers requires the approval of our Board of
Directors, however the compensation of our chief executive officer,
who also serves as a director, requires also the approval of our
shareholders.
o Director nominees are not selected, or recommended for the Board's
selection, as required by Rules 4350(c)(4)(A) and 4350(c)(4)(C).
o Our Board of Directors has not adopted a formal written charter or
board resolution addressing the nomination process and such related
matters as may be required under United States federal securities
laws, as required by Rule 4350(c)(4)(B).
o Although we have adopted a formal written audit committee charter,
there is no requirement under the Companies Law to do so and the
charter as adopted may not specify all the items enumerated in Rule
4350(d)(1).
o Our audit committee does not meet with all of the requirements of
Rules 4350(d)(2)(A)(i), 4350(d)(2)(A)(iii) and 4350(d)(2)(A)(iv).
Though all members are independent as such term is defined under Rule
10A-3 of the Exchange Act, the audit committee does not comply with
the foregoing Rule 4350 requirements, as permitted by the Companies
Law.
o Our articles of association do not provide for a quorum of not less
than 33 1/3% of the outstanding shares of our voting ordinary shares
for meetings of our ordinary shareholders, as required by Rule
4350(f). Our articles of association presently require a quorum
consisting of two shareholders holding a combined 33% of our ordinary
shares. Under the Companies Law a quorum consisting of two
shareholders holding a combined 25% of the company's voting shares is
required.
o We review and approve all related party transactions in accordance
with the requirements and procedures for approval of interested party
acts and transactions, set forth in the Companies Law, which do not
fully reflect the requirements of Rule 4350(h).
o We seek shareholder approval for all corporate action requiring such
approval, in accordance with the requirements of the Companies Law,
which does not fully reflect the requirements of Rule 4350(i).
We may in the future provide NASDAQ with an additional such letter or
letters notifying NASDAQ that we are following our own practices, consistent
with the Companies Law and practices in Israel in lieu of other requirements of
Marketplace Rule 4350.
MATERIAL CONTRACTS. Discussions of these agreements are incorporated herein
by reference to the discussion under the caption "Intellectual Property and
Licensing Agreements" in "Item 4".Information on the Company" and under the
caption "Fab 2 Agreements" in "Item 5. Operating and Financial Review and
Prospects" of this annual report.
FAB 2 AGREEMENTS. Since 2000, we have entered into several important Fab 2
agreements and arrangements with a key technology partner, wafer and equity
financing partners, the Israeli Investment Center and two leading Israeli banks.
Discussions of these agreements are incorporated herein by reference to the
discussion under the caption "Fab 2 Agreements" in "Item 5. Operating and
Financial Review and Prospects" of this annual report and to Note 11A to the
consolidated financial statements included in this annual report.
- 66 -
INTELLECTUAL PROPERTY AND LICENSING AGREEMENTS. Discussions of these
agreements are incorporated herein by reference to the discussion under the
caption "Intellectual Property and Licensing Agreements" in "Item 4".Information
on the Company" of this annual report.
EXCHANGE CONTROLS
Under Israeli law, non-residents of Israel who purchase ordinary shares
with certain non-Israeli currencies (including US dollars) may freely repatriate
in such non-Israeli currencies all amounts received in Israeli currency in
respect of the ordinary shares, whether as a dividend, as a liquidating
distribution, or as proceeds from any sale in Israel of the ordinary shares,
provided in each case that any applicable Israeli income tax is paid or withheld
on such amounts. The conversion into the non-Israeli currency must be made at
the rate of exchange prevailing at the time of conversion.
Under Israeli law and our company's Articles, both residents and
non-residents of Israel may freely hold, vote and trade our ordinary shares.
TAXATION
The below discussion does not purport to be an official interpretation of
the tax law provisions mentioned therein or to be a comprehensive description of
all tax law provisions which might apply to our securities or to reflect the
views of the relevant tax authorities, and it is not meant to replace
professional advice in these matters. The below discussion is based on current,
applicable tax law, which may be changed by future legislation or reforms.
Non-residents should obtain professional tax advice with respect to the tax
consequences under the laws of their countries of residence of holding or
selling our securities.
ISRAELI CAPITAL GAINS TAX
Until the end of the year 2002 and provided we maintained our status as an
"Industrial Corporation", capital gains from the sale of our securities were
generally exempt from Israeli Capital Gains Tax. This exemption did not apply to
a shareholder whose taxable income was determined pursuant to the Israeli Income
Tax Law (Inflationary Adjustments) 1985, or to a person whose gains from selling
or otherwise disposing of our securities were deemed to be business income.
On January 1, 2006 an amendment to the Israeli tax regime became effective
(the "2006 Tax Reform"). The 2006 Tax Reform significantly changed the tax rates
applicable to income derived from shares.
According to the 2006 Tax Reform, an individual is subject to a 20% tax
rate on real capital gains derived from the sale of shares, as long as the
individual is not a "substantial shareholder" (generally a shareholder with 10%
or more of the right to profits, right to nominate a director or voting rights)
in the company issuing the shares. The rate on the gains from publicly traded
shares applicable to gains that were realized between January 1, 2003 and
January 1, 2006 was 15%.
A substantial shareholder will be subject to tax at a rate of 25% in
respect of real capital gains derived from the sale of shares issued by the
company in which he or she is a substantial shareholder. The determination of
whether the individual is a substantial shareholder will be made on the date
that the securities are sold. In addition, the individual will be deemed to be a
substantial shareholder if at any time during the 12 months preceding this date
he or she had been a substantial shareholder.
Corporations will be subject to corporate tax rates in respect of total
income, including capital gains, with the corporate tax rate reduced gradually
from 29% in 2007 to 25% in 2010. However, between 2006 and 2009, corporations
whose taxable income was not determined, immediately before the 2006 Tax Reform
was published, pursuant to part B of the Israeli Income Tax Law (Inflationary
Adjustments), 1985 or pursuant to the Income Tax Regulations (Rules on
Bookkeeping by Foreign Invested Companies and Certain Partnership and
Determination of their Chargeable Income), 1984 will generally be taxed at a
rate of 25% on their capital gains from the sale of their securities.
- 67 -
Non-Israeli residents are exempt from Israeli capital gains tax on any
gains derived from the sale of shares in an Israeli corporation publicly traded
on the TASE and/or on a foreign stock exchange, provided such gains do not
derive from a permanent establishment of such shareholders in Israel and that
such shareholders did not acquire their shares prior to the issuer's initial
public offering. However, non-Israeli corporations will not be entitled to such
exemption if an Israeli resident (i) has a controlling interest of 25% or more
in such non-Israeli corporation, or (ii) is the beneficiary of or is entitled to
25% or more of the revenues or profits of such non-Israeli corporation, whether
directly or indirectly.
In some instances where our shareholders may be liable to Israeli tax on
the sale of their ordinary shares, the payment of the consideration may be
subject to the withholding of Israeli tax at the source.
Pursuant to the treaty between the Governments of the United States and
Israel with respect to taxes on income, or the US-Israel tax treaty, the sale,
exchange or disposition of our ordinary shares by a person who qualifies as a
resident of the United States under the treaty and who is entitled to claim the
benefits afforded to him by the treaty, will generally not be subject to Israeli
capital gains tax. This exemption shall not apply to a person who held, directly
or indirectly, shares representing 10% or more of the voting power in our
company during any part of the 12-month period preceding the sale, exchange or
disposition, subject to certain conditions. A sale, exchange or disposition of
our shares by a US resident qualified under the treaty, who held, directly or
indirectly, shares representing 10% or more of the voting power in our company
at any time during the preceding 12-month period would be subject to Israeli
tax, to the extent applicable; however, under the treaty, this US resident would
be permitted to claim a credit for these taxes against the US income tax with
respect to the sale, exchange or disposition, subject to the limitations in US
laws applicable to foreign tax credits.
ISRAELI TAX ON INTEREST INCOME AND ON ORIGINAL ISSUANCE DISCOUNT
Interest and Original Issuance Discount (OID) on our convertible debentures
will, in general, be subject to Israeli tax of up to 20% if received by an
individual. This reduced rate of tax will not apply if the interest and OID are
business income in the hands of the recipient, if the interest is recorded or
should be recorded in the individual's accounting books, if the recipient is a
substantial shareholder of our company, if financing expenses related to the
purchase of the debentures were deducted by the individual in the calculation of
the individual's Israeli taxable income, or if the individual is an employee,
supplier, or service provider of the company and the tax authorities have not
been persuaded that the payment of interest was not affected by the relationship
between the parties. In such cases the regular rate of tax on Interest and OID
of up to 47% will apply to the individual. Interest and OID paid to corporations
will be subject to corporate tax at the regular rates of 29% in 2007, 27% in
2008, 26% in 2009 and 25% in 2010 and thereafter. As a result of the provisions
related to tax withholding, as explained below, foreign resident individuals and
corporations will be subject to tax of 25% or less, according to the relevant
treaty relating to their domicile country.
Under regulations promulgated as part of the 2006 Tax Reform, withholding
tax at source from debenture interest and OID paid to resident individuals will,
in general, be at a rate of 20%. However, if the individual receiving the
interest and OID is a substantial shareholder, an employee, supplier or service
provider of the company, tax will be withheld at the marginal rates applicable
to individuals. Corporations will be subject to withholding tax at the
applicable rate of corporate tax as set out above. Withholding tax at source
from debenture interest and OID paid to non-resident individuals or corporations
will be at a rate of 25% or less, according to the relevant treaty relating to
their domicile country. In any event, under the US-Israel Tax Treaty, the
maximum Israeli tax withheld on interest and OID paid on our convertible
debentures due 2006 to a US treaty resident (other than a US bank, savings
institution or company) is 17.5%.
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ISRAELI TAX ON DIVIDEND INCOME
On distributions of dividends other than bonus shares, or stock dividends,
to Israeli individuals and foreign resident individuals and corporations we
would be required to withhold income tax at the rate of 20%. If the income out
of which the dividend is being paid is attributable to an Approved Enterprise
under the Law for the Encouragement of Capital Investments, 1959, the rate is
15%. A different rate may be provided for in a treaty between Israel and the
shareholder's country of residence.
Under the US-Israel Tax Treaty, Israeli withholding tax on dividends paid
to a US treaty resident may not, in general, exceed 25%, or 15% in the case of
dividends paid out of the profits of an Approved Enterprise. Where the recipient
is a US corporation owning 10% or more of the voting stock of the paying
corporation and the dividend is not paid from the profits of an Approved
Enterprise, the Israeli tax withheld may not exceed 12.5%, subject to certain
conditions.
PFIC RULES
A non-US corporation will be classified as a passive foreign investment
company, or a PFIC, for US federal income tax purposes if either (i) 75% or more
of its gross income for the taxable year is passive income, or (ii) on a
quarterly average for the taxable year by value (or, if it is not a publicly
traded corporation and so elects, by adjusted basis), 50% or more of its gross
assets produce or are held for the production of passive income.
We do not believe that we satisfied either of the tests for PFIC status in
2006 or in any prior year. However, there can be no assurance that we will not
be a PFIC in 2007 or a later year. If, for example, the "passive income" earned
by us exceeds 75% or more of our "gross income", we will be a PFIC under the
"income test". Passive income for PFIC purposes includes, among other things,
gross interest, dividends, royalties, rent and annuities. For manufacturing
businesses, gross income for PFIC purposes should be determined by reducing
total sales by the cost of goods sold. Although not free from doubt, if our cost
of goods sold exceeds our total sales by an amount greater than our passive
income, such that we are treated as if we had no gross income for PFIC purposes,
we believe that we would not be a PFIC as a result of the income test. However,
the tests for determining PFIC status are applied annually and it is difficult
to make accurate predictions of future income and assets, which are relevant to
the determination of PFIC status.
If we were to be a PFIC at any time during a US holder's holding period,
such US holder would be required to either: (i) pay an interest charge together
with tax calculated at maximum ordinary income tax rates on "excess
distributions," which is defined to include gain on a sale or other disposition
of ordinary shares, or (ii) so long as the ordinary shares are "regularly
traded" on a qualifying exchange, elect to recognize as ordinary income each
year the excess in the fair market value, if any, of its ordinary shares at the
end of the taxable year over such holder's adjusted basis in such ordinary
shares and, to the extent of prior inclusions of ordinary income, recognize
ordinary loss for the decrease in value of such ordinary shares (the "mark to
market" election). For this purpose, the NASDAQ National Market is a qualifying
exchange. US holders are strongly urged to consult their own tax advisers
regarding the possible application and consequences of the PFIC rules.
- 69 -
DOCUMENTS ON DISPLAY
We are required to file reports and other information with the SEC under
the Securities Exchange Act of 1934 and the regulations thereunder applicable to
foreign private issuers. Reports and other information filed by us with the SEC
may be inspected and copied at the SEC's public reference facilities described
below. Although as a foreign private issuer we are not required to file periodic
information as frequently or as promptly as United States companies, we
generally do publicly announce our quarterly and year-end results promptly and
file periodic information with the SEC under cover of Form 6-K. As a foreign
private issuer, we are also exempt from the rules under the Exchange Act
prescribing the furnishing and content of proxy statements and our officers,
directors and principal shareholders are exempt from the reporting and other
provisions in Section 16 of the Exchange Act.
You may review and copy our filings with the SEC, including any exhibits
and schedules, at the SEC's public reference room at 100 F Street N.E.,
Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for further
information on this public reference room. As a foreign private issuer, all
documents which were filed after November 4, 2002 on the SEC's EDGAR system will
be available for retrieval on the SEC's website at www.sec.gov. These SEC
filings are also available to the public on the Israel Securities Authority's
Magna website at www.magna.isa.gov.il and from commercial document retrieval
services. We also generally make available on our own web site
(www.towersemi.com) our quarterly and year-end financial statements as well as
other information.
Any statement in this annual report about any of our contracts or other
documents is not necessarily complete. If the contract or document is filed as
an exhibit to a registration statement, the contract or document is deemed to
modify the description contained in this annual report. We urge you to review
the exhibits themselves for a complete description of the contract or document.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss related to changes in market prices,
including interest rates and foreign exchange rates, of financial instruments
and derivatives that may adversely impact our consolidated financial position,
results of operations or cash flows.
Our primary market risk exposures relate to interest rate movements on
borrowings, fluctuations of the exchange rate of the US dollar, which is the
primary currency in which we conduct our operations, against the NIS, the
Japanese Yen and the Euro. To manage those risks and mitigate our exposure to
them, we from time to time use financial instruments, primarily, interest rate
collar agreements (with a knock-out and knock-in features for certain
agreements), and foreign currency forward contracts and options (including
zero-cost cylinders).
All financial instruments are managed and controlled under a program of
risk management in accordance with established policies. These policies are
reviewed and approved by our board of directors. Our treasury operations are
subject to an internal audit on a regular basis. We do not hold derivative
financial instruments for speculative purposes, and we do not issue any
derivative financial instruments for trading or speculative purposes.
RISK OF INTEREST RATE FLUCTUATION
We have market risk exposure to changes in interest rates on our long-term
debt obligations with floating interest rates. We have entered into debt
obligations to support our capital expenditures and needs. From time to time we
enter into interest rate collar agreements to modify our exposure to interest
rate movements and to reduce our borrowing costs. These agreements limit our
exposure to the risks of fluctuating interest rates by allowing us to convert a
portion of the interest on our borrowings from a variable rate to a limited
variable rate.
- 70 -
We are subject to interest rate exposure in connection with $369 million
long-term debt outstanding as of December 31, 2007 under the Fab 2 facility
agreement, as such debt bears interest at a rate of LIBOR plus 1.1% per annum
(as amended in the September 2006 amendment to the Facility Agreement, as
described above) and with $28 million long-term debt outstanding as of December
31, 2007 under the September 2007 credit lines with each of the banks and TIC as
such debt bears interest at a rate of LIBOR plus 3% per annum. The interest rate
as of December 31, 2007 on $317 million of the Fab 2 loans, not subject to the
results of our collar agreements, was as follows: $289 million - 5.98% and $28
million - 7.88%. Our remaining loans of $80 million, were covered by the collar
agreements as of December 31, 2007, and bore annual interest rate as of such
date of 5.1% including the results of our hedging activities described below.
Following the September 2006 amendment to the Facility Agreement, the loans are
repayable in 12 equal consecutive quarterly installments commencing September
30, 2009 and the $28 million loans under the September 2007 credit lines with
each of the banks and TIC are repayable two years from the date any loan was
borrowed (commencing October 2009).
As of December 31, 2007, we had collar agreements in the amount of $80
million which expire in 2009.
Our collar agreements resulted in a gain of $1.1 million in the year ended
December 31, 2007. As of December 31, 2007, the fair value of these agreements
was a $0.3 million gain.
During the first quarter of 2008 we entered into new collar agreements in
the amount of $290 million, effective June and September 2008. The terms of
these collar agreements are as follows: if the LIBOR is below the floor level of
2% we will pay total interest at the fixed rate of 3.1% (the 2.0% floor rate
plus 1.1% under the amended facility agreement); if the LIBOR is between 2.0%
and 3.74% (or 3.94% for part of the agreements), we will pay total interest at
the actual LIBOR plus 1.1%; if the LIBOR is higher than 3.74% (or 3.94%) we will
pay total interest at a fixed rate of 4.84% and 5.04% (the cap level plus 1.1%).
Assuming a 10% upward shift in the LIBOR rate at December 31, 2007 (from
4.88% to 5.37%), will increase our yearly interest payments. Such an increase in
the LIBOR rate will not affect our interest payments on our $80 million loans
hedged by the collar with a CAP level of 4% since the interest payments will
remain based on the CAP level + 1.1% and will not affect our interest payments
on our $290 million loans hedged by our new collar agreements effective
throughout 2008 with a CAP level of 3.74 and 3.94%, since the interest payments
will remain based on the CAP level + 1.1%. Giving effect to all the above,
assuming a 10% upward shift in the LIBOR rate at December 31, 2007 (from 4.88%
to5.37%), will increase our yearly interest payments in 2008 by $1.2 million.
Our cash equivalents and interest-bearing deposits are exposed to market
risk due to fluctuation in interest rates, which may affect our interest income
and the fair market value of our investments. We manage this exposure by
performing ongoing evaluations of our investments in those deposits. Due to the
short maturities of our investments, their carrying value approximates their
fair value.
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FOREIGN EXCHANGE RISK
We are exposed to the risk of fluctuation in the NIS/dollar exchange rate
with respect to our 2002, 2006 and 2007 debentures. As of December 31, 2007 the
adjusted outstanding principal amount of the these debentures was $132.8
million. The dollar amount of our finance costs (interest and currency
adjustments) related these debentures will be increased if the rate of inflation
in Israel is not offset (or is offset on a lagging basis) by the devaluation of
the NIS in relation to the dollar. In addition, the dollar amount of any
repayment on account of the principal of these debentures will be increased as
well. If the devaluation of the NIS against the dollar is greater than the rate
of inflation in Israel, the dollar amounts we may raise on the date of
exercising our NIS denominated options linked to the CPI will be decreased. The
recent devaluation of the US dollar in relation to the NIS increased our dollar
expenses related to our NIS denominated debentures.
From the date of the issuance of the 2002 convertible debentures in January
2002 until December 31, 2007, the Israel consumer price index increased by 11.8%
while the US dollar/NIS exchange rate decreased by 16.1%. From the date of the
issuance of the 2006 convertible debentures in June 2006 until December 31,
2007, the Israel consumer price index increased by 1.8% while the US dollar/NIS
exchange rate decreased by 14.1%. From the date of the issuance of the 2007
debentures in the second half of 2007 until December 31, 2007, the Israel
consumer price index increased by 2.9% while the US dollar/NIS exchange rate
decreased by approximately 8%.
The 2002 convertible debentures bear annual interest at a fixed rate of
4.7%. The debentures are payable in four annual installments commencing in
January 2006. The 2005 convertible debentures are denominated in USD and bear
annual interest at the rate of 5%. The principle of the debentures, together
with accrued interest, will be payable in one installment on January 12, 2012.
The 2006 convertible debentures carry a zero coupon with principal payable at
maturity in December 2011, at a premium of 37% over face value. The 2007
debentures bear annual interest at a fixed rate of 8.0% and repayable starting
2011. Therefore, we are not subject to exposure to interest rate fluctuations
with respect to the debentures. However, in case the actual market interest
rates are lower than the interest rate provided on the debentures, our actual
finance costs would be higher than in case our debentures bear floating interest
rate.
Our main foreign currency exposures other than debentures are associated
with exchange rate movements of the US dollar, our functional and reporting
currency, against the NIS, Japanese Yen andthe Euro. To protect against
reductions in value and the volatility of future cash flows caused by changes in
foreign exchange rates, we utilize foreign currency forward contracts and
options (including zero-cost cylinder options) in order to minimize part of the
impact of foreign currency fluctuations on our financial position and results of
operations. A cylinder option is a combination of a purchased call option and a
written put option. The exercise prices of the options may not be identical and
this effectively creates a synthetic range forward. The maturity dates of the
options coincide with the scheduled payments.
In order to mitigate our exposure to the risk of fluctuations in the
NIS/dollar exchange rate with respect to our NIS denominated expenses, mainly
payroll, we entered in 2008 into $15.8 million new option transactions, which
will expire throughout 2008.
We are exposed to currency risk in the event of default by the other
parties of the exchange transaction. We estimate the likelihood of such default
to occur is remote, as the other parties are widely recognized and reputable
Israeli banks.
- 72 -
Assuming a 10% revaluation of the NIS against the US dollar on December 31,
2007 (from 3.846 to 3.46), the effective fair value of our liabilities net of
assets denominated in NIS (mainly vendors, debentures and liabilities in regard
to employees ) would have increased in approximately $13 million.
IMPACT OF INFLATION
We believe that the rate of inflation in Israel has had a minor effect on
our business to date. However, our dollar costs in Israel will increase if
inflation in Israel exceeds the devaluation of the NIS against the dollar or if
the timing of such devaluation lags behind inflation in Israel.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and
our acting Chief Financial Officer, has evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Act")
as of the end of the period covered by this annual report on Form 20-F. Based on
this evaluation, our Chief Executive Officer and acting Chief Financial Officer
concluded that these disclosure controls and procedures were effective as of
such date, at a reasonable level of assurance, in ensuring that the information
required to be disclosed by our company in the reports we file or submit under
the Act is (i) accumulated and communicated to our management (including the
Chief Executive Officer and acting Chief Financial Officer) in a timely manner,
and (ii) recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and acting Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the criteria in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation, management has concluded that our internal
control over financial reporting was effective as of December 31, 2007.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risks that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM. The
attestation report of our registered public accounting firm is included in page
F-1 of our audited consolidated financial statements set forth in "Item 18.
Financial Statements," and is incorporated herein by reference.
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ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that a member of our audit committee,
Ms. Miri Katz, is an audit committee financial expert and is independent as
defined by NASDAQ Marketplace Rule 4350.
ITEM 16B. CODE OF ETHICS
We adopted a code of ethics that applies to all of our directors, officers
and employees, including our Chief Executive Officer, acting Chief Financial
Officer, controller, and persons performing similar functions. We have posted
our code of ethics on our website, www.towersemi.com under "About Tower".
- 75 -
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees for professional services rendered by our
independent registered public accounting firm for audit services, audit-related
services and for tax services:
2007 2006
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(US DOLLARS IN THOUSANDS)
-----------------
Audit fees (1) 217 235
Audit-related fees (2) 29 20
Tax fees (3) - 9
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246 264
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(1) Audit fees consist of fees for professional services rendered for the audit
of our consolidated financial statements, services in connection with
statutory and regulatory filings and engagements (including review of Forms
20-F, F-1, F-3 and S-8), and reviews of our unaudited interim consolidated
financial statements included in our quarterly reports.
(2) Audit related fees consist of accounting consultation and consultation on
financial accounting standards, not arising as part of the audit.
(3) Tax fees consist of fees for tax compliance services, tax planning and tax
advice.
Our audit committee's charter states that the audit committee is
responsible for receiving specific information on the independent auditor's
proposed services and for pre-approving all audit services annually and
separately approving any other permitted non-audit related services. All of the
non-audit services provided in 2006 and 2007 were pre-approved without reliance
on the Waiver Provisions in paragraph (c)(7)(i)(C)of Regulation S-X.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
Not Applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS.
Not Applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
See Index to Financial Statements following the signature page.
ITEM 19. EXHIBITS
1.1 Articles of Association of the Registrant, approved by shareholders on
November 14, 2000, as amended (incorporated by reference to Exhibit 3.1 of the
Registrant's Registration Statement on Form F-1, File No. 333-126909, "Form F-1
No. 333-126909").
- 76 -
1.2 Amendment to Articles of Association of the Registrant (incorporated by
reference to exhibit 4.2 to the Registration Statement on Form S-8 No.
333-117565 ("Form S-8 No. 333-117565").
1.3 Amendment to the Articles of Association of the Registrant (approved by
shareholders on September 28, 2006) (incorporated by reference to Exhibit 4.2 of
the Registrant's Registration Statement on Form S-8, File No. 333-138837 (the
"2006 Form S-8").
2.1 Bank Warrants, dated January 18, 2001, between the Registrant and Bank
Hapoalim B.M. and Bank Leumi Le-Israel B.M. (incorporated by reference to
exhibit 2.2 to the Registrant's Annual Report on Form 20-F for the year ended
December 31, 2000 (the "2000 Form 20-F")).
2.2 Registration Rights Agreement, dated January 18, 2001, by and between
SanDisk Corporation, Israel Corporation, Alliance Semiconductor Ltd. and
Macronix International Co., Ltd. (incorporated by reference to exhibit 2.2 to
the 2000 Form 20-F).
2.3 Terms of the Registrant's Convertible Debentures issued under an
Indenture, dated January 22, 2002, (incorporated by reference to the summary of
terms included under the caption "Description of the Debentures" in Exhibit C to
the Registrant's Report on Form 6-K for January 2002 (No. 2), filed January 16,
2002 ("January 2002 Form 6-K")).
2.4 Terms of the Registrant's Options (Series 1) (incorporated by reference
to the summary of terms included under the caption "Description of the Options"
in Exhibit C to the January 2002 Form 6-K).
2.5 Form of Indenture (incorporated by reference to exhibit 4.2 to the
Registrant's Amendment No. 6 to the Registration Statement on Form F-1/A No.
333-126909 (the "Form F-1 No. 333-126909").
2.6 Form of Note for the Debentures (incorporated herein by reference to
Exhibit A to the Indenture filed as exhibit 4.2 to Form F-1 No. 333-126909 ).
2.7 First Amendment to a Warrant Issued on December 11, 2003 to Tarshish
Hahzakot Vehashkaot Hapoalim Ltd., dated September 28, 2006 (incorporated by
reference to exhibit 99.14 of the November 2006 Form 6-K).
2.8 First Amendment to a Warrant Issued on December 11, 2003 to Bank Leumi
Le-Israel, dated September 28, 2006 (incorporated by reference to exhibit 99.15
of the November 2006 Form 6-K).
2.9 First Amendment to a Warrant Issued on August 4, 2005 to Bank Hapoalim
B.M., dated September 28, 2006 (incorporated by reference to exhibit 99.16 of
the November 2006 Form 6-K).
2.10 First Amendment to a Warrant Issued on August 4, 2005 to Bank Leumi
Le- Israel B.M., dated September 28, 2006 (incorporated by reference to exhibit
99.17 of the November 2006 Form 6-K).
2.11 Form of Series I Warrant (incorporated by reference to exhibit 99.6 of
the March 2007 Form 6-K).
2.12 Form of Series II Warrant (incorporated by reference to exhibit 99.7
of the March 2007 Form 6-K).
- 77 -
3.1 Consolidated Shareholders Agreement, dated January 18, 2001, by and
between SanDisk Corporation, Israel Corporation, Alliance Semiconductor Ltd. and
Macronix International Co., Ltd. (incorporated by reference to the
correspondingly-numbered exhibit to the 2000 Form 20-F).
4.1 Share Purchase Agreement, dated July 4, 2000, by and between SanDisk
Corporation and the Registrant (incorporated by reference to the
correspondingly-numbered exhibit to the 2000 Form 20-F).
4.2 Additional Purchase Obligation Agreement, dated July 4, 2000, by and
between SanDisk Corporation ("SanDisk") and the Registrant (incorporated by
reference to the correspondingly-numbered exhibit to the 2000 Form 20-F).
4.3 Share Purchase Agreement, dated August 29, 2000, by and between
Alliance Semiconductor Corporation ("Alliance") and the Registrant (incorporated
by reference to the correspondingly-numbered exhibit to the 2000 Form 20-F).
4.4 Share Purchase Agreement, dated December 11, 2000, by and between
QuickLogic Corporation ("QuickLogic") and the Registrant (incorporated by
reference to the correspondingly-numbered exhibit to the 2000 Form 20-F).
4.5 Share Purchase Agreement, dated December 12, 2000, by and between
Macronix International Co., Ltd. ("Macronix") and the Registrant (incorporated
by reference to the correspondingly-numbered exhibit to the 2000 Form 20-F).
4.6 Share Purchase Agreement, dated December 12, 2000, between Israel
Corporation and the Registrant (incorporated by reference to the
correspondingly-numbered exhibit to the 2000 Form 20-F).
4.7 Additional Purchase Obligation Agreement, dated December 12, 2000,
between Israel Corporation and the Registrant (incorporated by reference to the
correspondingly-numbered exhibit to the 2000 Form 20-F).
4.8 Share Purchase Agreement, dated February 11, 2001, between The
Challenge Fund - Etgar II and the Registrant (incorporated by reference to the
correspondingly-numbered exhibit to the 2000 Form 20-F).
4.9 Facility Agreement, dated January 18, 2001, among the Registrant, Bank
Hapoalim B.M. and Bank Leumi Le-Israel B.M. (the "Facility Agreement")
(incorporated by reference to the correspondingly-numbered exhibit to the 2000
Form 20-F).
4.10 Design and Construction/Turn-Key Contract, dated August 20, 2000,
among the Registrant, M+W Zander Holding GmbH, Meissner-Baran Ltd. and Baran
Group Ltd. (incorporated by reference to the correspondingly-numbered exhibit to
the 2000 Form 20-F).
4.11 Approval, dated December 31, 2000, of the Israeli Investment Center
(Hebrew language document; a summary of the terms is included in the 2000 Form
20-F under the caption "Fab 2 Agreements" in "Item 5. Operating and Financial
Review and Prospects") (incorporated by reference to the
correspondingly-numbered exhibit to the 2000 Form 20-F).
4.12 Agreement between the Registrant and Saifun, dated October 9, 1997
(incorporated by reference to exhibit 1.1 to the Registrant's Annual Report on
Form 20-F for the year ended December 31, 1997).
- 78 -
4.13 Registrant's Non-Employee Director Share Option Plan 2000/3
(incorporated by reference to exhibit 4.5 to the Registrant's Registration
Statement on Form S-8 No. 333-83204 ("Form S-8 No. 333-83204")).
4.14 Form of Grant Letter for Non-Employee Directors Share Option Plan
2001/4 (incorporated by reference to exhibit 4.9 to the Form S-8 No. 333-83204).
4.15 Form of Grant Letter for Non-Employee Directors Share Option Plan
2001/5 (incorporated by reference to exhibit 4.10 to the Form S-8 No.
333-83204).
4.16 Wafer Partner Conversion Agreements, dated September 2001, between the
Registrant and each of SanDisk, Alliance and Macronix (incorporated by reference
to exhibit 4.17 to the Registrant's Annual Report on Form 20-F for the year
ended December 31, 2001 (the "2001 Form 20-F)).
4.17 Letter Agreement, dated November 29, 2001, among SanDisk, Alliance,
Macronix, QuickLogic and the Registrant regarding the Utilization of Prepayments
(incorporated by reference to exhibit 4.18 to the 2001 Form 20-F).
4.18 Letter Agreements among Alliance, Macronix, QuickLogic, Israel Corp.
and the Registrant and between SanDisk and the Registrant regarding Additional
Wafer Partner Financing Date (incorporated by reference to exhibit 4.19 to the
2001 Form 20-F).
4.19 Letter Agreement, dated November 15, 2001, among SanDisk, Alliance,
Macronix, QuickLogic, ICTech and the Registrant regarding Amendment to Financing
Plan (incorporated by reference to exhibit 4.20 to the 2001 Form 20-F).
4.20 First Amendment, dated January 29, 2001, to the Facility Agreement
(incorporated by reference to exhibit 4.21 to the 2001 Form 20-F).
4.21 Second Amendment, dated January 10, 2002, to Facility Agreement
(incorporated by reference to exhibit 4.22 to the 2001 Form 20-F).
4.22 Third Amendment, dated March 7, 2002, to the Facility Agreement
(incorporated by reference to exhibit 4.23 to the 2001 Form 20-F).
4.23 Joint Development and Transfer and Cross License Agreement, dated May
2002, between the Registrant and a Japanese manufacturer (incorporated by
reference to exhibit 10.3 to the Registrant's Registration Statement on Form
F-2, No. 333-97043).
4.24 Technology License Agreement, dated April 7, 2000, between the
Registrant and Toshiba Corporation (incorporated by reference to exhibit 10.4 to
the Registrant's Registration Statement on Form F-2, No. 333-97043). (Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment.)
4.25 Technology Transfer License Agreement, dated September 2002, between
Registrant and Motorola, Inc. (incorporated by reference to exhibit 10.5 to the
Registrant's Registration Statement on Form F-2, No. 333-97043). (Portions of
this exhibit have been omitted pursuant to a request for confidential
treatment.)
4.26 Fourth Amendment, dated April 29, 2002, to the Facility Agreement
(incorporated by reference to exhibit 4.27 to the Registrant's Annual Report on
Form 20-F for the year ended December 31, 2002 (the "2002 Form 20-F)).
- 79 -
4.27 Fifth Amendment dated September 18, 2002 to the Facility Agreement
(incorporated by reference to exhibit 4.28 to the 2002 Form 20-F).
4.28 Amendment to Fifth Amendment to the Facility Agreement, dated October
22, 2002, to the Facility Agreement (incorporated by reference to exhibit 4.29
to the2002 Form 20-F).
4.29 Letter Agreement, dated March 2002, among SanDisk, Alliance, Macronix,
ICTech and Challenge Fund to advance Third and Fourth Milestone Payments
(incorporated by reference to exhibit 4.30 to the 2002 Form 20-F).
4.30 Letter Agreement, dated July 2002, among SanDisk, Alliance, Macronix,
and ICTech to exercise rights distributed in rights offering (incorporated by
reference to exhibit 4.31 to the 2002 Form 20-F).
4.31 Letter Agreement, dated March 2003, among SanDisk, Alliance, Macronix,
ICTech, and the Registrant (incorporated by reference to exhibit 4.32 to the
2002 Form 20-F).
4.32 Form of Rights Agent Agreement between the Registrant and American
Stock Transfer & Trust Company (including form of Rights Certificate)
(incorporated by reference to exhibit 4.1 to the Registrant's Registration
Statement on Form F-2, No. 333-97043).
4.33 Form of Warrant Agreement between the Registrant and American Stock
Transfer & Trust Company (including form of Warrant Certificate) (incorporated
by reference to exhibit 4.2 to the Registrant's Registration Statement on Form
F-2, No. 333-97043).
4.34 Reserved.
4.35 Investment Center Agreement related to Fab 1, dated November 13, 2001
(English translation of Hebrew original) (incorporated by reference to exhibit
10.2 to the Registrant's Registration Statement on Form F-2, No. 333-97043).
4.36 Development and License Agreement, dated March 31, 2002, between
Virage Logic Corporation and the Registrant (incorporated by reference to
exhibit 4.37 to the 2002 Form 20-F). (Portions of this exhibit have been omitted
pursuant to a request for confidential treatment.)
4.37 Master Services and License Agreement, dated June 2002, between
Artisan Components, Inc. and the Registrant (incorporated by reference to
exhibit 4.38 to the 2002 Form 20-F).
4.38 Seventh Amendment to the Facility Agreement, dated November 11, 2003,
(incorporated by reference to Exhibit 99.1 of the Registrant's Report on Form
6-K filed on December 17, 2003).
4.39 Undertaking of the Registrant, dated November 11, 2003 (incorporated
by reference to Exhibit 99.3 of the Registrant's Report on Form 6-K filed on
December 17, 2003).
4.40 Letter Agreement, dated November 11, 2003, by and among the
Registrant, Israel Corporation Technologies, SanDisk Corporation, Alliance
Semiconductor Corporation and Macronix International Co., Ltd. (incorporated by
reference to Exhibit 99.4 of the Registrant's Report on Form 6-K filed on
December 17, 2003).
4.41 Foundry Agreement, dated May 12, 2004, between the Registrant and
Siliconix incorporated (incorporated by reference to exhibit 4.42 to the
Registrant's Annual Report on Form 20-F for the year ended December 31, 2004
(the " 2004 Form 20-F)). (Portions of this exhibit have been omitted pursuant to
a request for confidential treatment.)
- 80 -
4.42 Share Purchase Agreement, dated December 8, 2004, between the
Registrant and the Purchasers named therein (incorporated by reference to
exhibit 4.43 to the 2004 Form 20-F).
4.43 Agreement, dated December 31, 2004, by and among the Registrant and
the Purchasers named therein (incorporated by reference to exhibit 4.44 to the
2004 Form 20-F).
4.44 Employee Share Option Plan 2004 (incorporated by reference to Exhibit
4.3 to the Registrant's Registration Statement on Form S-8 No. 333-117565 ("Form
S-8 No. 333-117565").
4.45 Form of Grant Letter to Israeli Employees (incorporated by reference
to Exhibit 4.4 to Form S-8 No. 333-117565).
4.46 Form of Grant Letter to US Employees (incorporated by reference to
Exhibit 4.5 to Form S-8 No. 333-117565).
4.47 Bank Warrants, dated August 2005, between the Registrant and Bank
Hapoalim B.M. and Bank Leumi Le-Israel B.M (incorporated by reference to
correspondingly-numbered exhibit to the Registrant's Annual Report on Form 20-F
for the year ended December 31, 2005 (the "2005 Form 20-F").
4.48 Ninth Amendment to the Facility Agreement, dated July 2005, dated July
24, 2005 (incorporated by reference to exhibit 4.5 to the Form F-1 No.
333-126909 ("Form F-1 No. 333-126909").
4.49 Tenth Amendment to the Facility Agreement, dated September 2005
(incorporated by reference to Exhibit 4.4 to Form F-1 No. 333-126909).
4.50 Eleventh Amendment to the Facility Agreement, dated October 2005
(incorporated by reference to Exhibit 4.3 to Form F-1 No. 333-126909).
4.51 Twelfth Amendment to the Facility Agreement, dated November 2005
(incorporated by reference to Exhibit 4.6 to Form F-1 No. 333-126909).
4.52 Thirteenth Amendment to the Facility Agreement, dated May 2006
(incorporated by reference to correspondingly-numbered exhibit to the
Registrant's Annual Report on Form 20-F for the year ended December 31,
2006"2006 Form 20-F").
4.53 Fourteenth Amendment to the Facility Agreement, dated May 2006
(incorporated by reference to correspondingly-numbered exhibit to the 2006 Form
20-F).
4.54 Fifteenth Amendment to the Facility Agreement, dated June 2006
(incorporated by reference to correspondingly-numbered exhibit to the 2006 Form
20-F).
4.55 Reserved.
4.56 Form of Rights Agent Agreement with Rights Certificate Attached
(incorporated by reference to Exhibit 4.1 to Form F-1 No. 333-126909).
4.57 Development and License Agreement, dated July 2005, between Impinj,
Inc. and the Registrant (incorporated by reference to correspondingly-numbered
exhibit to the 2005 Form 20-F). (Portions of this exhibit have been omitted
pursuant to a request for confidential treatment.)
4.58 License and Design Agreement, dated January 10, 2003 between Chipidea
Microelectronics S.A. and the Registrant (incorporated by reference to
correspondingly-numbered exhibit to the 2005 Form 20-F). (Portions of this
exhibit have been omitted pursuant to a request for confidential treatment.)
- 81 -
4.59 Amendment to Design Agreement of January 2003 between Chipidea
Microelectronics S.A. and the Registrant, dated June 2005 (incorporated by
reference to correspondingly-numbered exhibit to the 2005 Form 20-F). (Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment.)
4.60 License Agreement, dated April 29, 2004, between Synopsys, Inc. and
the Registrant (incorporated by reference to correspondingly-numbered exhibit to
the 2005 Form 20-F). (Portions of this exhibit have been omitted pursuant to a
request for confidential treatment.)
4.62 Employee Share Option Plan 2005 (incorporated by reference to Exhibit
4.3 of the 2006 Form S-8).
4.63 Form of Grant Letter to Israeli Employees (incorporated by reference
to Exhibit 4.4 of the 2006 Form S-8).
4.64 Form of Grant Letter to US Employees (incorporated by reference to
Exhibit 4.5 of the 2006 Form S-8).
4.65 CEO Share Option Plan 2005 (incorporated by reference to Exhibit 4.6
of the 2006 Form S-8).
4.66 Option Grant Letter Agreement - CEO Share Option Plan 2005 from the
Registrant to Russell Ellwanger, dated July 15, 2005 (incorporated by reference
to Exhibit 4.7 of the 2006 Form S-8).
4.67 Option Grant Letter Agreement - CEO Share Option Plan 2005 from the
Registrant to Russell Ellwanger, dated September 28, 2006 (incorporated by
reference to Exhibit 4.8 of the 2006 Form S-8).
4.68 Option Grant Letter Agreement - CEO Share Option Plan 2005 from Tower
Semiconductor USA, Inc. to Russell Ellwanger, dated July 15, 2005 (incorporated
by reference to Exhibit 4.9 of the 2006 Form S-8).
4.69 Equity Convertible Capital Note, dated September 28, 2006, issued to
Israel Corporation Ltd. (incorporated by reference to Exhibit 99.4 of the Form
6-K for the month of November 2006 No. 6 filed on November 7, 2006 (the
"November 2006 Form 6-K")).
4.70 Registration Rights Agreement, dated September 28, 2006, with Israel
Corporation Ltd. (incorporated by reference to Exhibit 99.5 of the November 2006
Form 6-K).
4.71 Amending Agreement, dated August 24, 2006, with Bank Hapoalim B.M. and
Bank Leumi Le-Israel B.M., to the Facility Agreement (incorporated by reference
to Exhibit 99.6 of the November 2006 Form 6-K).
4.72 Facility Agreement, as amended and restated by the parties through
August 24, 2006 (incorporated by reference to Exhibit 99.7 of the November 2006
Form 6-K).
4.73 Conversion Agreement, dated September 28, 2006, with Bank Hapoalim
B.M. (incorporated by reference to Exhibit 99.8 of the November 2006 Form 6-K).
- 82 -
4.74 Conversion Agreement, dated September 28, 2006, with Bank Leumi
Le-Israel B.M. (incorporated by reference to Exhibit 99.9 of the November 2006
Form 6-K).
4.75 Registration Rights Agreement, dated September 28, 2006, with Bank
Hapoalim B.M. (incorporated by reference to Exhibit 99.10 of the November 2006
Form 6-K).
4.76 Registration Rights Agreement, dated September 28, 2006, with Bank
Leumi Le-Israel B.M. (incorporated by reference to Exhibit 99.11 of the November
2006 Form 6-K).
4.77 Equity Convertible Capital Note, dated September 28, 2006, issued to
Bank Hapoalim B.M. (incorporated by reference to Exhibit 99.12 of the November
2006 Form 6-K).
4.78 Equity Convertible Capital Note, dated September 28, 2006, issued to
Bank Leumi Le-Israel B.M. (incorporated by reference to Exhibit 99.13 of the
November 2006 Form 6-K).
4.79 Form of Securities Purchase Agreement (incorporated by reference to
Exhibit 99.2 of the Form 6-K for the month of March 2007 No.1 filed on March 15,
2007 (the "March 2007 Form 6-K")).
4.80 Form of Registration Rights Agreement (incorporated by reference to
Exhibit 99.4 of the March 2007 Form 6-K).
4.81 Loan Agreement, dated August 2006, between the Registrant and SanDisk
Corporation (incorporated by reference to correspondingly-numbered exhibit to
the 2006 Form 20-F).
4.82 Credit Line Agreement, dated September 10, 2007, between the
Registrant and Bank Hapoalim, B.M.
4.83 Credit Line Agreement, dated September 10, 2007, between the
Registrant and Bank Leuim Le-Israel , B.M.
4.84 Credit Line Agreement, dated September 10, 2007, between the
Registrant and the Israel Corporation Ltd.
4.85 Amendment No. 1 to amended and restated Facility Agreement, dated
September 10, 2007.
4.86 Agreement and Plan of Merger and Reorganization, dated May 19, 2008,
between the Registrant, Jazz Technologies, Inc. and Armstrong Acquisition Corp.
(incorporated by reference to Exhibit 2.1 of the May 20, 2008 Form 6-K)
12.1 Certification by Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
12.2 Certification by Acting Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
13.1 Certification by Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
13.2 Certification by Acting Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
14.1 Consent of Brightman Almagor & Co.
- 83 -
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all the requirements for filing
on Form 20-F and has duly caused this Annual Report to be signed on its behalf
by the undersigned, thereunto duly authorized on this 18th day of June, 2008.
TOWER SEMICONDUCTOR LTD.
By: /s/ Russell C. Ellwanger
----------------------------
Russell C. Ellwanger
Chief Executive Officer
- 84 -
TOWER SEMICONDUCTOR LTD.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
BALANCE SHEETS F-2
STATEMENTS OF OPERATIONS F-3
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F-4
STATEMENTS OF CASH FLOWS F-5
NOTES TO FINANCIAL STATEMENTS F-6 - F-55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO BOARD OF DIRECTORS AND THE SHAREHOLDERS OF
TOWER SEMICONDUCTOR LTD.
We have audited the accompanying consolidated balance sheets of Tower
Semiconductor Ltd. and subsidiary ("the Company") as of December 31, 2007 and
2006, and the related consolidated statements of operations, changes in
shareholders' equity and comprehensive income, and cash flows for each of the
three years in the period ended December 31, 2007. These financial statements
are the responsibility of the Company's Board of Directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and subsidiary as of December 31, 2007 and 2006, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2007, in accordance with accounting principles
generally accepted in United States.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company and subsidiary's
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated February 6, 2008 expressed an unqualified opinion on the
effectiveness of the Company's internal control over financial reporting.
BRIGHTMAN ALMAGOR & CO.
CERTIFIED PUBLIC ACCOUNTANTS
A MEMBER FIRM OF DELOITTE TOUCHE TOHMATSU
Tel Aviv, Israel
February 6, 2008
F - 1.1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO BOARD OF DIRECTORS AND THE SHAREHOLDERS OF
TOWER SEMICONDUCTOR LTD.
We have audited the internal control over financial reporting of Tower
Semiconductors Ltd. and subsidiaries (the "Company") as of December 31, 2007,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in ITEM 15 CONTROLS AND PROCEDURES -
INTERNAL CONTROL OVER FINANCIAL REPORTING. Our responsibility is to express an
opinion on the Company's internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
F - 1.2
In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on the
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2007 of the Company and our
report February 6, 2008 expressed an unqualified opinion on those financial
statements.
BRIGHTMAN ALMAGOR & CO.
CERTIFIED PUBLIC ACCOUNTANTS
A MEMBER FIRM OF DELOITTE TOUCHE TOHMATSU
Tel Aviv, Israel
February 6, 2008
F - 1.3
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data and per share data)
AS OF DECEMBER 31,
--------------------------
NOTE 2007 2006
----------- ----------- -----------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 44,536 $ 39,710
SHORT-TERM INTEREST-BEARING DEPOSITS -- 1,230
TRADE ACCOUNTS RECEIVABLE: 15
RELATED PARTIES 12,823 13,625
OTHERS 32,154 17,873
OTHER RECEIVABLES 3 4,748 5,425
INVENTORIES 4 27,806 34,763
OTHER CURRENT ASSETS 1,580 1,473
----------- -----------
TOTAL CURRENT ASSETS 123,647 114,099
----------- -----------
LONG-TERM INVESTMENTS 5 15,093 15,325
----------- -----------
PROPERTY AND EQUIPMENT, NET 6 502,287 532,798
----------- -----------
INTANGIBLE ASSETS, NET 13A(2) 34,711 44,981
----------- -----------
OTHER ASSETS , NET 7 11,044 6,929
=========== ===========
TOTAL ASSETS $ 686,782 $ 714,132
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITIES OF CONVERTIBLE DEBENTURES 10 $ 7,887 $ 6,902
TRADE ACCOUNTS PAYABLE 49,025 55,128
OTHER CURRENT LIABILITIES 8 20,024 22,096
----------- -----------
TOTAL CURRENT LIABILITIES 76,936 84,126
LONG-TERM DEBT FROM BANKS (*) 9, 11 379,314 432,430
DEBENTURES (**) 10, 11 117,460 83,863
LONG-TERM CUSTOMERS' ADVANCES 13A 27,983 46,042
OTHER LONG-TERM LIABILITIES 12 40,380 28,155
----------- -----------
TOTAL LIABILITIES 642,073 674,616
----------- -----------
SHAREHOLDERS' EQUITY 10, 13A, 14 44,709 39,516
=========== ===========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 686,782 $ 714,132
=========== ===========
(*) OF WHICH $365,563 AT FAIR VALUE AS OF DECEMBER 31, 2007
(**) OF WHICH $28,484 AT FAIR VALUE AS OF DECEMBER 31, 2007
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 2
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data and per share data)
Year ended December 31,
-------------------------------------
Note 2007 2006 2005
--------- --------- --------- ---------
REVENUES
SALES 15 $ 230,853 $ 187,438 $ 93,991
REVENUES RELATED TO A JOINT DEVELOPMENT AGREEMENT 13B -- -- 8,000
--------- --------- ---------
230,853 187,438 101,991
COST OF SALES 284,771 267,520 238,358
--------- --------- ---------
GROSS LOSS (53,918) (80,082) (136,367)
--------- --------- ---------
OPERATING COSTS AND EXPENSES
RESEARCH AND DEVELOPMENT 13,790 15,048 16,029
MARKETING, GENERAL AND ADMINISTRATIVE 31,604 25,831 17,418
--------- --------- ---------
45,394 40,879 33,447
========= ========= =========
OPERATING LOSS (99,312) (120,961) (169,814)
FINANCING EXPENSE, NET 11, 16 (34,976) (47,563) (35,651)
OTHER INCOME, NET 92 597 2,383
--------- --------- ---------
LOSS FOR THE YEAR $(134,196) $(167,927) $(203,082)
========= ========= =========
BASIC LOSS PER ORDINARY SHARE
LOSS PER SHARE $ (1.13) $ (2.03) $ (3.06)
========= ========= =========
WEIGHTED AVERAGE NUMBER OF ORDINARY
SHARES OUTSTANDING - IN THOUSANDS 118,857 82,581 66,371
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 3
TOWER SEMICONDUCTOR LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(dollars in thousands, except share data and per share data)
Accumulated
Ordinary shares Additional Cumulative other
------------------------- paid-in Capital stock based Treasury comprehensive Accumulated Comprehensive
Shares Amount capital notes compensation stock gain (loss) deficit income (loss) Total
----------- ---------- ---------- ---------- -------- --------- -------- ------------ -------- ---------
BALANCE - JANUARY 1, 2005 66,999,796 $ 16,274 $ 519,839 $ -- $ (26) $ (9,072) $ (7,055) $ (356,642) $ 163,318
ISSUANCE OF SHARES 1,232,260 274 1,520 1,794
STOCK-BASED COMPENSATION RELATED TO THE FACILITY
AGREEMENT WITH THE BANKS, NOTE 14B(5) 2,793 2,793
STOCK-BASED COMPENSATION RELATED TO RIGHTS
OFFERED TO EMPLOYEES, NOTE 14I 448 448
OTHER COMPREHENSIVE GAIN 5,501 5,501 5,501
LOSS FOR THE YEAR (203,082) (203,082) (203,082)
--------
COMPREHENSIVE INCOME (LOSS) (197,581)
========
----------- ---------- ---------- ---------- -------- --------- -------- ------------ ---------
BALANCE - DECEMBER 31, 2005 68,232,056 $ 16,548 $ 524,600 $ -- $ (26) $ (9,072) $ (1,554) $ (559,724) $ (29,228)
ISSUANCE OF SHARES AND WARRANTS 16,729,145 3,860 26,126 29,986
CONVERSION OF CONVERTIBLE DEBENTURES TO SHARES 16,734,316 3,696 15,634 19,330
EMPLOYEE STOCK-BASED COMPENSATION 4,896 4,896
EXERCISE OF OPTIONS 7,250 2 9 11
EXERCISE OF WARRANTS 350,000 81 469 550
STOCK-BASED COMPENSATION RELATED TO THE FACILITY
AGREEMENT WITH THE BANKS, NOTE 14B(5) 4,146 4,146
CAPITAL NOTES 176,401 176,401
OTHER COMPREHENSIVE GAIN 1,351 1,351 1,351
LOSS FOR THE YEAR (167,927) (167,927) (167,927)
--------
COMPREHENSIVE INCOME (LOSS) (166,576)
========
----------- ---------- ---------- ---------- -------- --------- -------- ------------ ---------
BALANCE - DECEMBER 31, 2006 102,052,767 $ 24,187 $ 570,984 $ 176,401 $ 4,870 $ (9,072) $ (203) $ (727,651) $ 39,516
ISSUANCE OF SHARES AND WARRANTS 22,705,598 5,398 29,469 34,867
CONVERSION OF CONVERTIBLE DEBENTURES TO SHARES 591,520 142 674 816
EMPLOYEE STOCK-BASED COMPENSATION 8,731 8,731
EXERCISE OF OPTIONS 176,231 44 183 227
RECLASSIFICATION OF BIFURCATED CONVERSION
OPTION TO SHAREHOLDERS' EQUITY 28,377 28,377
STOCK-BASED COMPENSATION, NOTE 14B(5) 1,331 1,331
OTHER COMPREHENSIVE LOSS (167) (167) (167)
CUMULATIVE EFFECT ADJUSTMENT OF THE FACILITY
AGREEMENT TO RETAINED EARNINGS 65,207 65,207 65,207
LOSS FOR THE YEAR (134,196) (134,196) (134,196)
--------
COMPREHENSIVE INCOME (LOSS) (69,156)
========
----------- ---------- ---------- ---------- -------- --------- -------- ------------ --------
BALANCE - DECEMBER 31, 2007 125,526,116 $ 29,771 $ 631,018 $ 176,401 $ 13,601 $ (9,072) $ (370) $ (796,640) $ 44,709
=========== ========== ========== ========== ======== ========= ======== ============ ======== =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 4
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, except share data and per share data)
YEAR ENDED DECEMBER 31,
-------------------------------------
2007 2006 2005
--------- --------- ---------
CASH FLOWS - OPERATING ACTIVITIES
LOSS FOR THE YEAR $(134,196) $(167,927) $(203,082)
Adjustments to reconcile loss for the year
TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
INCOME AND EXPENSE ITEMS NOT INVOLVING CASH FLOWS:
DEPRECIATION AND AMORTIZATION 154,343 171,743 153,189
EFFECT OF INDEXATION AND TRANSLATION ON DEBENTURES 6,227 2,569 (1,031)
WRITE DOWN OF CUSTOMER ADVANCE (9,747) -- --
OTHER INCOME, NET (92) (597) (2,383)
CHANGES IN ASSETS AND LIABILITIES:
DECREASE (INCREASE) IN TRADE ACCOUNTS RECEIVABLE (13,479) (14,722) 2,510
DECREASE (INCREASE) IN OTHER RECEIVABLES AND OTHER CURRENT ASSETS 333 (2,662) 1,988
DECREASE (INCREASE) IN INVENTORIES 459 (14,064) 1,086
INCREASE (DECREASE) IN TRADE ACCOUNTS PAYABLE 15,435 (4,733) 3,289
INCREASE (DECREASE) IN OTHER CURRENT LIABILITIES (1,363) 6,551 (1,839)
INCREASE (DECREASE) IN OTHER LONG-TERM LIABILITIES 935 (3,285) (5,368)
--------- --------- ---------
18,855 (27,127) (51,641)
DECREASE IN LONG-TERM CUSTOMERS' ADVANCES, NET (2,172) (2,306) (760)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 16,683 (29,433) (52,401)
--------- --------- ---------
CASH FLOWS - INVESTING ACTIVITIES
DECREASE IN DESIGNATED CASH, SHORT-TERM AND LONG-TERM
INTEREST-BEARING DEPOSITS, NET -- 31,661 27,266
INVESTMENTS IN PROPERTY AND EQUIPMENT (107,485) (161,187) (47,215)
INVESTMENT GRANTS RECEIVED 1,654 5,219 7,496
PROCEEDS RELATED TO SALE AND DISPOSAL OF PROPERTY AND EQUIPMENT 108 600 2,179
INVESTMENTS IN OTHER ASSETS AND INTANGIBLE ASSETS (1,547) (5,074) (3,841)
DECREASE (INCREASE) IN SHORT-TERM INTEREST-BEARING DEPOSITS 1,230 (1,230) --
LONG-TERM INVESTMENTS (950) -- --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (106,990) (130,011) (14,115)
--------- --------- ---------
CASH FLOWS - FINANCING ACTIVITIES
PROCEEDS FROM ISSUANCE OF DEBENTURES AND WARRANTS, NET 50,690 58,766 25,086
PROCEEDS FROM LONG-TERM LOANS 28,000 18,295 21,103
PROCEEDS FROM ISSUANCE OF ORDINARY SHARES AND WARRANTS, NET 26,534 20,673 --
PROCEEDS FROM EXERCISE OF WARRANTS -- 550 --
PROCEEDS ON ACCOUNT OF CAPITAL NOTES -- 100,000 --
REPAYMENT OF DEBENTURE (7,088) (6,476) --
PROCEEDS FROM EXERCISE OF SHARE OPTIONS 227 9 --
DEBTS REPAYMENT (3,230) -- --
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 95,133 191,817 46,189
========= ========= =========
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,826 32,373 (20,327)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 39,710 7,337 27,664
--------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 44,536 $ 39,710 $ 7,337
========= ========= =========
NON-CASH ACTIVITIES
INVESTMENTS IN PROPERTY AND EQUIPMENT $ 17,982 $ 42,575 $ 12,792
========= ========= =========
STOCK-BASED COMPENSATION RELATED TO
THE FACILITY AGREEMENT WITH THE BANKS $ -- $ 4,146 $ 2,793
========= ========= =========
STOCK-BASED COMPENSATION (SEE NOTE 14B(5)) $ 1,331 $ -- $ --
========= ========= =========
STOCK-BASED COMPENSATION RELATED TO RIGHTS OFFERED
TO EMPLOYEES, (SEE NOTE 14I) $ -- $ -- $ 448
========= ========= =========
INVESTMENTS IN OTHER ASSETS $ -- $ 433 $ 442
========= ========= =========
CONVERSION OF LONG-TERM CUSTOMERS' ADVANCES
TO SHARE CAPITAL $ 6,414 $ 7,621 $ 1,794
========= ========= =========
CONVERSION OF CONVERTIBLE DEBENTURES TO SHARES CAPITAL $ 816 $ 19,330 $ --
========= ========= =========
CUMULATIVE EFFECT ADJUSTMENT OF THE FACILITY AGREEMENT TO RETAINED EARNINGS $ 65,207 $ -- $ --
========= ========= =========
RECLASSIFICATION OF BIFURCATED CONVERSION OPTION TO SHAREHOLDERS' EQUITY $ 28,377 $ -- $ --
========= ========= =========
CONVERSION OF LONG TERM DEBT TO CAPITAL NOTES $ -- $ 76,401 $ --
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR INTEREST $ 28,831 $ 35,008 $ 32,805
========= ========= =========
CASH PAID DURING THE YEAR FOR INCOME TAXES $ 55 $ 134 $ 86
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 5
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 1 - DESCRIPTION OF BUSINESS AND GENERAL
Tower Semiconductor Ltd. ("the Company"), incorporated in Israel, commenced
operations in 1993. The Company is an independent wafer foundry that
delivers customized solutions in a variety of advanced complementary metal
oxide semiconductor (CMOS) technologies, including digital CMOS,
mixed-signal and RF (radio frequency) CMOS, CMOS image sensors and power
management devices. The Company manufactures integrated circuits in
geometries ranging between 1.0 and 0.35 microns at its 150-millimeter
fabrication facility ("Fab 1"), and in geometries ranging between 0.18 and
0.13 microns at its 200-millimeter fabrication facility ("Fab 2"). As a
foundry, the Company manufactures wafers using its advanced technological
capabilities and the proprietary integrated circuit designs of its
customers.
The industry in which the Company operates is characterized by wide
fluctuations in supply and demand. Such industry is also characterized by
the complexity and sensitivity of the manufacturing process, by high levels
of fixed costs, and by the need for constant advancements in production
technology.
The Company's Ordinary Shares are traded on the NASDAQ Global Market and on
the Tel-Aviv Stock Exchange.
In recent years, the Company has experienced significant recurring losses,
recurring negative cash flows from operating activities and an increasing
accumulated deficit. The Company is working in various ways to mitigate its
financial difficulties. Since the second half of 2005, the Company
increased its customer base, mainly in Fab 2, modified its organizational
structure to better address its customers and its market positioning,
increased its sales and its EBITDA, reduced its losses, increased its
capacity level, utilization rates, raised funds and restructured its bank
debt. See also Note 9B and Notes 14I-M.
F - 6
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's consolidated financial statements are presented in accordance
with U.S. generally accepted accounting principles ("US GAAP"). The Company
recasted the comparative amounts included in this financial statements to
US GAAP. In prior years the Company prepared its financial reports in
accordance with generally accepted accounting principles in Israel. ("IL
GAAP") and provided reconciliation to US GAAP in the notes to the financial
statements.
A. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
B. PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include the financial
statements of the Company and its wholly-owned marketing subsidiary in
the United States, after elimination of material inter-company
transactions and balances. The effect of the subsidiary's operations
on the Company's revenues, net loss and total assets was immaterial
for the dates and periods presented.
C. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of banks deposits and short-term
investments (primarily time deposits and certificates of deposit) with
original maturities of three months or less.
D. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is computed on the specific
identification basis for accounts whose collectibility, in
management's estimation, is uncertain.
E. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined for raw materials and supplies on the basis of the weighted
moving average cost per unit. Cost is determined for work in process
and finished goods on the basis of actual production costs.
F - 7
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
F. PROPERTY AND EQUIPMENT
(1) Property and equipment are presented at cost, including financing
expenses and other capitalizable costs. Capitalizable costs
include only incremental direct costs that are identifiable with,
and related to, the property and equipment and are incurred prior
to its initial operation. Identifiable incremental direct costs
include costs associated with the funding, acquiring,
constructing, establishing and installing property and equipment
(whether performed by others or by the Company), and costs
directly related to preproduction test runs of property and
equipment that are necessary to get it ready for its intended
use. Those costs include payroll and payroll-related costs of
employees who devote time and are dedicated to the acquiring,
constructing, establishing and installing of property and
equipment. Allocation, when appropriate, of capitalizable
incremental direct costs is based on management's estimates and
methodologies including time sheet inputs.
Cost is presented net of investment grants received or
receivable, and less accumulated depreciation and amortization.
The accrual for grants receivable is determined based on
qualified investments made during the reporting period, provided
that the primary criteria for entitlement have been met.
During the second quarter of 2007, the Company reassessed the
estimated useful lives of its machinery and equipment and as a
result, effective as of April 1, 2007, machinery and equipment is
to be depreciated over estimated useful lives of 7 years rather
than 5 years as estimated prior to such date. The change reflects
the Company's best estimate of the useful lives of its equipment
and is also based on experience accumulated from Fab 1 and on
recent trends in industry practices. The Company believes that
the change better reflects the economics associated with the
ownership of the equipment. This change has been accounted for as
a change in estimate and was applied prospectively. For the
effect of this change, see Note 6A.
Depreciation is calculated based on the straight-line method over
the estimated economic lives commonly used in the industry of the
assets or terms of the related leases, as follows:
Building (including facility infrastructure) 14-25 years
Machinery and equipment 7 years (*)
Transportation vehicles 7 years
(*) 5 years through March 31, 2007.
(2) Impairment examinations and recognition are performed and
determined based on the accounting policy outlined in Q below.
F - 8
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
G. INTANGIBLE ASSETS
TECHNOLOGY - The cost of Fab 2 technologies includes the technology
process cost and incremental direct costs associated with implementing
the technologies until the technologies are ready for their intended
use. The costs in relation to Fab 2 technologies are amortized over
the expected estimated economic life of the technologies, commonly
used in the industry. Amortization phases commence on the dates on
which each of the Fab 2 manufacturing lines is ready for its intended
use. The technologies are presented net of accumulated amortization as
of December 31, 2007 and 2006 in the amounts of $63,911 and $53,741.
Impairment examinations and recognition are performed and determined
based on the accounting policy outlined in Q below.
H. OTHER ASSETS
DEFERRED FINANCING CHARGES
Deferred financing charges in relation to funding the ramp-up of Fab 2
are amortized over the lives of the borrowings as an adjustment to the
yield using the effective interest method. During the ramp up period
of Fab 2, amortized deferred financing charges are capitalized to
property and equipment.
PREPAID LONG-TERM LAND LEASE
Prepaid lease payments to the Israel Land Administration ("ILA") as
detailed in Notes 13A(8) and 13C are amortized during the lease
period.
I. CONVERTIBLE DEBENTURES
Under Accounting Principles Board Opinion No. 14 ("APB 14"), the
proceeds from the sale of the securities are allocated to each
security issued based on their relative fair value.
SFAS 133 generally provides three criteria that, if met, require
companies to bifurcate conversion options from their host instruments
and account for them as free standing derivative financial
instruments. These three criteria are (a) the economic characteristics
and risks of the embedded derivative instrument are not clearly and
closely related to the economic characteristics and risks of the host
contract, (b) the hybrid instrument that embodies both the embedded
derivative instrument and the host contract is not remeasured at fair
value under otherwise applicable generally accepted accounting
principles with changes in fair value reported in earnings and (c) a
separate instrument with the same terms as the embedded derivative
instrument would be considered a derivative instrument subject to the
requirements of SFAS 133. One scope exception provided by SFAS 133 and
relevant to convertibles is when the embedded conversion feature is
both indexed to and classified in the Company's equity based on the
criteria established in EITF 00-19 and other EITF's. Financing costs
are generally expensed as incurred unless directly related to the new
ramp-up of equipment. In such case the costs are capitalized to
property and equipment during the installation period until the
equipment ready for its intended use.
F - 9
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
J. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). This Statement
prescribes the use of the liability method whereby deferred tax asset
and liability account balances are determined based on differences
between financial reporting and tax bases of assets and liabilities.
Deferred taxes are computed based on the tax rates anticipated (under
applicable law as of the balance sheet date) to be in effect when the
deferred taxes are expected to be paid or realized.
Deferred tax assets are recognized, if it is probable that such assets
would be realized, for temporary differences, which will result in
deductible amounts in future years and for carryforwards. An allowance
against such deferred tax asset is recognized if it is probable that
some portion or all of the deferred tax assets will not be realized.
Due to the material loss carryforward of the Company as of December
31, 2007 and uncertainties with regard to its utilization in the
future, no deferred taxes were recorded in the Company's results of
operations.
K. REVENUE RECOGNITION
Revenues are recognized when persuasive evidence of an agreement
exists with fixed or determinable prices, shipment has occurred or as
services are rendered, when title has been transferred, collectibility
is reasonably assured and acceptance provisions criteria are
satisfied, based on performing electronic, functional and quality
tests on the products prior to shipment and customer on-site testing.
Such testing reliably demonstrates that the products meet all of the
specified criteria prior to formal customer acceptance, and that
product performance upon customer on-site testing can reasonably be
expected to conform to the specified acceptance provisions. An accrual
for estimated returns, computed primarily on the basis of historical
experience, is recorded at the time when revenues are recognized.
L. RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
Amounts received or receivable from the government of Israel and
others, as participation in research and development programs, are
offset against research and development costs. The accrual for grants
receivable is determined based on the terms of the programs, provided
that the criteria for entitlement have been met.
F - 10
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
M. LOSS PER ORDINARY SHARE
Basic earnings per share is calculated, in accordance with SFAS No.
128, "Earnings Per Share" ("SFAS No. 128"), by dividing profit or loss
attributable to ordinary equity holders of the entity (the numerator)
by the weighted average number of Ordinary Shares outstanding (the
denominator) during the reported period. Diluted earnings per share is
calculated by adjusting profit or loss attributable to ordinary equity
holders of the entity, and the weighted average number of shares
outstanding, for the effects of all dilutive potential Ordinary
Shares.
N. COMPREHENSIVE INCOME (LOSS)
In Accordance with SFAS 130, Comprehensive income (loss) represents
the change in shareholder's equity during a reporting period from
transactions and other events and circumstances from non-owner
sources. It includes all changes in equity during a reporting period
except those resulting from investments by owners and distributions to
owners. Other comprehensive income (loss) represents gains and losses
that are included in comprehensive income but excluded from net
income.
O. FUNCTIONAL CURRENCY AND TRANSACTION GAINS AND LOSSES
The currency of the primary economic environment in which the Company
conducts its operations is the U.S. dollar ("dollar"). Accordingly,
the Company uses the dollar as its functional and reporting currency.
Financing expenses, net in 2007 and 2006 include net foreign currency
transaction losses of $3,526, and $3,659, respectively. Financing
expenses, net in 2005 include net foreign currency transaction gains
of $1,398.
P. STOCK-BASED COMPENSATION
In January 1, 2006, the Company adopted the provisions of SFAS No. 123
(revised 2004), "Share-Based Payment" (SFAS No. 123(R)), under which
employee share-based equity awards accounted for under the fair value
method. Accordingly, stock-based compensation to employees and
directors is measured at the grant date, based on the fair value of
the award. The Company elected the modified prospective method as its
transition method. Under the modified prospective method the
compensation cost recognized by the Company beginning in 2006 includes
(a) compensation cost for all equity incentive awards granted prior
to, but not yet vested as of January 1, 2006, based on the grant-date
fair value estimated in accordance with the original provisions of
SFAS No. 123, and (b) compensation cost for all stock-based
compensations granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of
SFAS No. 123(R). The Company uses the straight-line attribution method
to recognize stock-based compensation costs over the service period of
the award.
F - 11
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
P. STOCK-BASED COMPENSATION (CONT.)
As for the periods before the adoption of the Standard, the Company
accounted for employee and director stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and
authoritative interpretations thereof. Accordingly, the Company
accounted for share options granted to employees and directors based
on the intrinsic value of the options on the measurement date.
PRO FORMA LOSS PER SHARE ACCORDING TO SFAS 123 AND SFAS 148
Had compensation cost for the Company's share option plans been
determined based on the fair value at the grant dates for all
awards made through December 31, 2005 in accordance with SFAS
123, as amended by SFAS 148, the Company's pro forma loss per
share would have been as follows:
For the year ended
December 31, 2005
---------
PRO FORMA LOSS
Loss for the year, as reported $(203,082)
Less - stock-based compensation
determined under APB 25 --
Add - stock-based compensation
determined under SFAS 123 (4,229)
---------
Pro forma loss $(207,311)
=========
BASIC LOSS PER SHARE
As reported $ (3.06)
=========
Pro forma $ (3.12)
=========
STOCK-BASED COMPENSATION IN FINANCING TRANSACTIONS
The Company calculates the fair value of stock-based compensation
included in its financing transactions. That fair value is
recognized in equity. The amount of fair value of the warrants is
considered a discount on the debt issued and adjust the yield on
the financing transaction.
F - 12
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Q. IMPAIRMENT OF LONG-LIVED ASSETS
Management reviews long-lived assets on a periodic basis, as well as
when such a review is required based upon relevant circumstances, to
determine whether events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. Management's
review of possible impairment charges for the periods presented was
performed based on management's business plan and approved by the
board of directors of the Company. The business plan is based, among
other things, on the future completion of the ramp-up of Fab 2.
Application of SFAS No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets" ("SFAS No. 144") resulted in no impairment
charges for the periods presented.
R. DERIVATIVES
The Company issues from time to time derivatives, whether embedded or
freestanding, that are denominated in currency other than its
functional currency (generally the NIS in which its shares are also
traded). The Company consider those instruments to be indexed only to
its own stock and not dual indexed. The Company considered the various
guidance on that issue and decided that pending the final consensus in
EITF 07-5 it will continue to consider such instruments as indexed
solely to its own shares.
S. INITIAL ADOPTION OF NEW STANDARDS
SFAS NO. 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND
FINANCIAL LIABILITIES" - In February 2007, the FASB issued SFAS No.
159, "The Fair Value Option for Financial Assets and Financial
Liabilities" (SFAS No. 159). SFAS No. 159 permits companies to choose
to measure certain financial instruments and certain other items at
fair value. The standard requires that unrealized gains and losses on
items for which the fair value option has been elected be reported in
earnings. The Company adopted the provisions of this standard,
together with the adoption of FASB No. 157 FAIR VALUE MEASUREMENTS,
starting with the first quarter of 2007.
F - 13
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
T. RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS NO. 141 (REVISED 2007 ) "BUSINESS COMBINATIONS" - In December
2007, the FASB issued FASB 141(R), "Business Combinations" of which
the objective is to improve the relevance, representational
faithfulness, and comparability of the information that a reporting
entity provides in its financial reports about a business combination
and its effects. The new standard requires the acquiring entity in a
business combination to recognize all (and only) the assets acquired
and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; and requires the acquirer to
disclose to investors and other users all of the information they need
to evaluate and understand the nature and financial effect of the
business combination. In December 2007, the FASB issued FASB 160
"Non-controlling Interests in Consolidated Financial Statements - an
amendment of ARB No.51" of which the objective is to improve the
relevance, comparability, and transparency of the financial
information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting
standards by requiring all entities to report non controlling
(minority) interests in subsidiaries in the same way - as equity in
the consolidated financial statements. Moreover, Statement 160
eliminates the diversity that currently exists in accounting for
transactions between an entity and non-controlling interests by
requiring they be treated as equity transactions. Both FASB 141(R) and
FASB 160 are effective for fiscal years beginning after December 15,
2008. The Company is currently examining this new standard; however,
at this stage, it is unable to estimate the standard's effect, if any,
on its financial position and results of operations.
U. RECLASSIFICATION
Certain amounts in prior years' financial statements have been
reclassified in order to conform to the 2007 presentation.
NOTE 3 - OTHER RECEIVABLES
Other receivables consist of the following:
As of December 31,
--------------------
2007 2006
-------- --------
Government of Israel - investment grants receivable $ 24 $ 1,530
Other government agencies 4,661 3,847
Others 63 48
-------- --------
$ 4,748 $ 5,425
======== ========
F - 14
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 4 - INVENTORIES
Inventories consist of the following (*):
As of December 31,
----------------------
2007 2006
-------- --------
Raw materials $ 12,351 $ 11,234
Work in process 14,964 22,884
Finished goods 491 645
-------- --------
$ 27,806 $ 34,763
======== ========
(*) Net of aggregate write-downs to net realizable value of $6,497 and
$5,948 as of December 31, 2007 and 2006, respectively.
NOTE 5 - LONG-TERM INVESTMENTS
Long-term investments consist of the following:
As of December 31,
----------------------
2007 2006
-------- --------
Severance pay funds, see Note 12B $ 13,848 $ 13,535
Investment in Limited partnership, see below 950 --
Others 295 1,790
-------- --------
$ 15,093 $ 15,325
======== ========
INVESTMENT IN LIMITED PARTNERSHIP:
In December 2007, the Company together with CMT Medical Technologies Ltd.,
a leading provider of advanced digital X-ray imaging systems for medical
diagnosis, establishment a limited partnership to develop and market X-ray
detectors for medical applications. The Company owns 38% of the limited
partnership and accounts for the investment in the limited partnership
using the equity method.
F - 15
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 6 - PROPERTY AND EQUIPMENT, NET
A. Composition:
As of December 31,
--------------------------
2007 2006
---------- ----------
COST:
Buildings (including facility infrastructure) $ 235,960 $ 233,781
Machinery and equipment 985,608 895,725
Transportation vehicles 304 307
---------- ----------
1,221,872 1,129,813
---------- ----------
ACCUMULATED DEPRECIATION AND AMORTIZATION
Buildings (including facility infrastructure) 75,227 61,200
Machinery and equipment 644,111 535,548
Transportation vehicles 247 267
---------- ----------
719,585 597,015
========== ==========
$ 502,287 $ 532,798
========== ==========
Supplemental disclosure relating to cost of property and equipment:
(1) As of December 31, 2007 and 2006, the cost of property and
equipment included costs relating to Fab 2 in the amount of
$966,164 and $879,413, respectively. Said amounts are net of
investment grants of $164,675 and $164,587, respectively.
(2) As of December 31, 2007, the cost of buildings, machinery and
equipment was reflected net of investment grants in the aggregate
of $267,922 (as of December 31, 2006 - $267,866).
(3) Cost of property and equipment as of December 31, 2007 and 2006
includes capitalized financing costs in the aggregate of $19,625
and $11,839, respectively.
(4) Depreciation expenses, in relation to Fab 2 property and
equipment were $113,393, $123,422 and $114,141 in 2007, 2006 and
2005 respectively.
(5) Had depreciation been calculated using five years of useful life
depreciation method (see Note 2F(1)), depreciation expenses for
2007 would have been $167,356 as compared to $122,647 recognized
in this financial statements.
F - 16
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 6 - PROPERTY AND EQUIPMENT, NET (CONT.)
B. INVESTMENT GRANTS
In January 1996, an investment program ("1996 program") for expansion
of Fab 1 in the aggregate amount (as amended in December 1999 and
2001) of $228,680, entitling the Company to investment grants, was
approved by the Investment Center. The Company completed its
investments under the 1996 program in December 2001 and invested
through such date approximately $207,000. In May 2002, the Company
submitted the final report in relation to the 1996 program. As of
December 31, 2007, the report has not yet received final approval from
the Investment Center.
See Note 13A(7) with respect to the Fab 2 program approved by the
Investment Center in December 2000.
Entitlement to the above grants and other tax benefits is subject to
various conditions stipulated by the Israeli Law for the Encouragement
of Capital Investments - 1959 ("Investments Law") and the regulations
promulgated thereunder, as well as the criteria set forth in the
certificates of approval. In the event the Company fails to comply
with such conditions, the Company may be required to repay all or a
portion of the grants received plus interest and certain inflation
adjustments. In order to secure fulfillment of the conditions related
to the receipt of investment grants, floating liens were registered in
favor of the State of Israel on substantially all of the Company's
assets, see also Note 17A.
C. For liens, see Note 13A(7) Notes 13D(1) and (2) and 9D.
NOTE 7 - OTHER ASSETS, NET
Other assets, net consist of the following:
As of December 31,
--------------------
2007 2006
------- -------
Prepaid expenses - long-term $ 1,270 $ 1,346
Deferred Financing Charges, net 1,734 --
Debentures issuance expenses, net (see Note 14) 3,418 834
Prepaid long-term Land Lease, net (see Note 13C) 4,622 4,749
------- -------
$11,044 $ 6,929
======= =======
F - 17
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 8 - OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
As of December 31,
----------------------
2007 2006
-------- --------
Accrued salaries $ 6,138 $ 8,730
Vacation accrual 3,574 3,385
Interest payable (primarily in relation to convertible debentures) 742 1,089
Due to related parties 7,459 5,895
Other 2,111 2,997
-------- --------
$ 20,024 $ 22,096
======== ========
NOTE 9 - LONG-TERM DEBT FROM BANKS
A. Composition:
As of December 31, 2007
-------------------------
Effective interest
rate (*)
--------- ---------
In U.S. Dollar 5.98% $ 288,693
In U.S. Dollar 5.10% 80,000
In U.S. Dollar 7.88% 14,000
---------
Total long-term debt from Banks- principle amount 382,693
Fair value adjustments (3,379)
---------
Total long-term debt from Banks $ 379,314
=========
As of December 31, 2006
----------------------
Effective interest
rate (*)
-------- --------
In U.S. Dollar 6.48% $288,693
In U.S. Dollar 5.10% 80,000
In U.S. Dollar --
--------
Total long-term debt from Banks- principle amount 368,693
Deferred gain on debt restructuring in accordance with SFAS No. 15 53,622
--------
Total carrying amount 422,315
Embedded feature 10,115
--------
Total long-term debt from Banks $432,430
========
(*) See E below
F - 18
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 9 - LONG-TERM DEBT FROM BANKS (CONT.)
B. FACILITY AGREEMENT
In January 2001, the Company entered into a Facility Agreement, as
amended to date, with two leading Israeli banks ("Banks") entitling
the Company to borrow an aggregate, of $500,000 to finance the
construction and equipping of Fab 2 ("Facility Agreement"). Of that
amount, the Company withdrew an aggregate of $497,000. Under the
original terms of the Facility Agreement the loans bore interest at a
rate of three-month USD LIBOR plus 1.55% per annum payable at the end
of each quarter. The loans were originally to be paid in 12 quarterly
installments 3 years from date of each loan drawn down. The loans were
subject to certain prepayment provisions. The Facility Agreement was
since amended in various instances. Prior to the closing of the
September 2006 Amendment, the loans bore interest based on the
three-month USD LIBOR rate plus 2.5%. For interest rates following
September 2006 Amendment, see below.
JULY 2005 AMENDMENT - In July 2005, the Company and its Banks entered
into a definitive amendment to the Facility Agreement, which closed in
August 2005. The Amendment provided, among other things, for the Banks
to provide additional financing of up to approximately $30,000,
subject to the Company raising through the issuance of shares or
convertible debentures $30,000 by March 31, 2006. In connection with
the Amendment, The Israel Corporation Ltd ("TIC" or "Equity Investor")
and SanDisk Corporation, Alliance Semiconductor Corporation and
Macronix International Co. Ltd. (collectively, the "primary Wafer
Partners") committed to invest an aggregate of $23,500 towards such
funding in the context of a rights offering. Following the
satisfaction of all the Company's commitments under the July 2005
Amendment, the Banks provided the Company with $29,693 in additional
loans.
F - 19
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 9 - LONG-TERM DEBT FROM BANKS (CONT.)
B. FACILITY AGREEMENT (CONT.)
SEPTEMBER 2006 AMENDMENT - As part of the financing for the ramp-up
plan, in September 2006, the Company closed a definitive amendment to
the Facility Agreement to refinance the approximately $527,000 of
long-term debt under its Facility Agreement. Pursuant to the
Amendment, among other things: (i) $158,000 of the debt under the
Facility Agreement was converted into capital notes of the Company,
which notes are convertible into 51,973,684 of the Company's Ordinary
Shares, representing twice the average closing price per share during
the ten days prior to signing on the Memorandum of Understanding
("MOU") that preceded the final Amendment; (ii) the interest rate
applicable for the quarterly actual interest payment on the loans was
decreased from three-month USD LIBOR plus 2.5% per annum to
three-month USD LIBOR plus 1.1% per annum, effective from May 17, 2006
(the "Decreased Amount"). As compensation for the Decreased Amount and
subject to adjustment, in January 2011, the Banks will be issued such
number of shares (or equity equivalent capital notes or convertible
debentures) that equals the Decreased Amount divided by the average
closing price of the Company's Ordinary Shares during the fourth
quarter of 2010 (the "Fourth Quarter 2010 Price"). If during the
second half of 2010, the closing price of Company's Ordinary Shares on
every trading day during this period exceeds $3.49, then the Banks
will only be granted such number of shares (or equity equivalent
capital notes or convertible debentures) that equals half of the
Decreased Amount divided by the Fourth Quarter 2010 Price. If during
the period ending December 31, 2010, the Banks sell a portion of the
capital notes or shares issuable upon the conversion of the capital
notes described in (i) above, at a price per share in excess of $3.49,
then the consideration payable for the interest rate reduction will be
reduced proportionately. The amounts payable in securities of the
Company may be payable in cash under certain circumstances and the
Decreased Amount may be reduced in the event the Company prepays any
part of the outstanding loans; (iii) the commencement date for the
repayment of the outstanding loans, which following the conversion are
approximately $369,000, was postponed from July 2007 to September
2009, such that the outstanding loans shall be repaid in 12 quarterly
installments between September 2009 and June 2012; (iv) the exercise
periods of the warrants held by the Banks immediately prior to the
signing of the September 2006 Amendment, were extended such that they
are exercisable until September 2011, see also Note 14B(5)(a); and (v)
the financial ratios and covenants that the Company is to satisfy were
revised to be inline with the Company's working plan as of the time of
the Amendment.
SEPTEMBER 2007 CREDIT LINE AGREEMENTS WITH THE BANKS AND TIC AND
SEPTEMBER 2007 AMENDMENT - In September 2007, the Company signed and
closed definitive agreements with the Banks and with TIC, providing
for credit lines totaling up to $60,000, 25% of which from each Bank
and 50% from TIC, to be used for the funding of equipment required for
a ramp up plan in Fab 2 to increase its capacity to beyond 24,000
wafers per month. As of December 31, 2007, $28,000 had been borrowed
under these credit lines and an additional $32,000 was borrowed during
January 2008, each drawdown comprised of 25% from each bank and 50%
from TIC. Loans under the credit lines are bearing interest at an
annual rate of three-month USD LIBOR plus 3% and are repayable 2 years
from the date any loan was borrowed. The Company paid the Banks and
TIC customary fees. For details regarding 5,411,764 warrants granted
to the Banks and TIC in connection with this agreement, see Note
14B(5). Further, in September 2007, the Company signed and closed a
definitive amendment to the Facility Agreement to mainly reflect into
it the Credit Line Agreements described above and to revise the
financial ratios and covenants that the Company is to satisfy to be
inline with the Company's working plan as of the time of the
Amendment.
F - 20
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 9 - LONG-TERM DEBT FROM BANKS (CONT.)
B. FACILITY AGREEMENT (CONT.)
ACCOUNTING FOR THE LOANS UNDER THE FACILITY AGREEMENT
Loans received under the Facility Agreement, as amended to date, are
presented commencing January 1, 2007 at fair value, with changes in
value reflected on the statement of operations, following an election
under FASB No. 159 "The Fair Value Option for Financial Assets and
Financial Liabilities". Such loans bear interest based on the
three-month USD LIBOR rate plus 1.1%, effective from May 17, 2006.
Prior to the fair value election, in 2006, the loans under the
Amendment of September 2006 was treated as a troubled debt
restructuring within the scope of FASB No. 15 which required the
following: (i) the amount considered settled for shares and classified
in equity is based on the price per share as quoted at the closing
date; (ii) the remaining balance after deduction of the amount used as
proceeds for the shares issuance in (i) above, will remain
outstanding; (iii) a new, lower effective interest rate will be
calculated as the interest rate that equates future payments to the
outstanding balance; and (iv) no gains or losses are recognized in the
current period.
The obligation to issue additional securities of the Company in
January 2011 under the restructuring in September 2006 Amendment as
compensation to the Decreased Amount, is considered to include an
embedded derivative that should be separately accounted for. The
Company considered the obligation to issue shares as agreed with the
Banks and determined that it contains two components: (i) a contingent
component and (ii) an uncontingent component. The contingent component
is the obligation to issue shares equal to half of the amount of the
Decreased Amount if the Fourth Quarter 2010 Price is less than $3.49.
The uncontingent component is the obligation to issue shares equal to
half of the Decreased Amount regardless of the Fourth Quarter 2010
Price. The Company accounted for the uncontingent component as an
additional interest expense and calculated the effective interest rate
to include such expense. The Company treated the uncontingent
component as an embedded derivative that needs to be bifurcated and
separately accounted for based on fair value. Initial separation of
the embedded derivative will be done using the "with and without"
method described in DIG Issue B6. Changes in the fair value of the
embedded derivative will be included in financing expenses.
In the first quarter of 2007, the Company adopted the provisions of
SFAS No. 159. As required by such Standard the Company also adopted
the provisions of FASB 157 FAIR VALUE MEASUREMENTS. The adoption of
the Standard is effective January 1, 2007. According to the Standard
the Company can choose to carry at fair value eligible items as
defined in the Standard, from the date of early adoption and
accordingly the Company decided to apply the fair value option to the
Facility Agreement.
F - 21
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 9 - LONG-TERM DEBT FROM BANKS (CONT.)
B. FACILITY AGREEMENT (CONT.)
ACCOUNTING FOR THE LOANS UNDER THE FACILITY AGREEMENT (CONT.)
The effect of the election of fair value option to the Facility
Agreement as of January 1, 2007 was a gain of $65,207 which has been
recorded as a cumulative effect adjustment to retained loss (no tax
effects have been recorded). The carrying amount of the Facility
Agreement prior to the adoption was $432,430 and immediately after was
$367,223. The Company reasoned it election of the fair value option
for the Facility Agreement on the fact that the application of
previous GAAP prescribed in FASB 15 Accounting by Debtors and
Creditors for Troubled Debt Restructurings to the Facility Agreement
did not reflect the economic benefits that were achieved with the
consummation of the Amendment to the Facility Agreement and that the
application of the fair value better reflects such benefits. For fair
value measurement, see Note 11D below.
C. REPAYMENT SCHEDULE
The principle amount of the long-term debt as of December 31, 2007 is
repayable as follows:
2009 $ 75,449
2010 122,898
2011 and thereafter 184,346
--------
$382,693
========
D. The Facility Agreement with the Banks restricts the Company's ability
to place liens on its assets (other than to the State of Israel in
respect of investment grants - see Note 13A(7), to Siliconix - see
Note 13D(1) and to SanDisk - see Note 13D(2)), without the prior
consent of the Banks. Furthermore, the agreements contain certain
restrictive financial ratios and covenants. For further details
concerning the Facility Agreement and its amendments, see Note 13A(6).
E. The effective interest rate as of December 31, 2007 and 2006 of loans,
the amount of which as of such dates was $80,000 and $207,000,
includes the terms of the collar agreements with knock-out and
knock-in features described in Note 11A. Interest is payable at the
end of each quarter.
F - 22
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 10 - DEBENTURES
A. Composition:
As of December 31, 2007
--------------------------------------------
Bifurcated
Interest Carrying embedded
rate amount feature Fair value Total
-------- -------- -------- --------
2002 Convertible debentures series A 4.7% $ 15,774 $ -- $ -- $ 15,774
2005 Convertible debentures series B 5% 9,547 -- -- 9,547
2006 Convertible debentures series C --(*) 36,602 7,313 -- 43,915
2007 Non-convertible debentures series D 8% 27,627 -- -- 27,627
2007 Convertible debentures series E, see Note 11 8% -- -- 28,484 28,484
-------- -------- -------- --------
89,550 7,313 28,484 125,347
Less - current maturities 7,887 -- -- 7,887
-------- -------- -------- --------
$ 81,663 $ 7,313 $ 28,484 $117,460
======== ======== ======== ========
As of December 31, 2006
--------------------------------
Bifurcated
Interest Carrying embedded
rate amount feature Total
-------- -------- --------
2002 Convertible debentures series A 4.7% $ 20,704 $ -- $ 20,704
2005 Convertible debentures series B 5% 4,790 28,377 33,167
2006 Convertible debentures series C --(*) 25,381 11,513 36,894
-------- -------- --------
50,875 39,890 90,765
Less - current maturities 6,902 -- 6,902
-------- -------- --------
$ 43,973 $ 39,890 $ 83,863
======== ======== ========
(*) See D below
If on a payment date of the principal or interest on the debentures there
exists an infringement of certain covenants and conditions under the
Facility Agreement, the dates for payment of interest and principal on the
debentures may be postponed, depending on various scenarios under the
Facility Agreement until such covenant or condition is settled. The
debentures and interest thereon are unsecured and subordinated to the
Company's existing and future secured indebtedness, including indebtedness
to the Banks under the Facility Agreement - see Note 13A(6), to Siliconix -
see Note 13D(1), to SanDisk- see Note 13D(2) and to the government of
Israel - see Note 6B.
F - 23
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 10 - DEBENTURES (CONT.)
B. 2002 CONVERTIBLE DEBENTURES SERIES A
In January 2002, the Company issued on the Tel-Aviv Stock Exchange,
NIS 110,579,800 (approximately $24,300) principal amount of
convertible debentures, linked to the Israeli Consumer Price Index
("CPI"). The debentures were issued at 96% of their par value, and
bear annual interest at the rate of 4.7%, payable in January of each
year commencing in January 2003. The principal amount is payable in
four equal installments in January of each year between 2006 and 2009.
The outstanding principal amount of convertible debentures as of
December 31, 2007, adjusted to the CPI was $15,984, half of which was
paid on January 2008 and the other half is due on January 2009. The
debentures may be converted until December 31, 2008 into Ordinary
Shares, at a conversion rate of one Ordinary Share per each NIS 41.00
principal amount of the debentures.
C. 2005 CONVERTIBLE DEBENTURES SERIES B
The Company issued $48,169 principal amount of convertible debentures
by way of rights offering based on a prospectus which became effective
on December 2005. The debentures are listed for trade on the Tel-Aviv
Stock Exchange and on the NASDAQ Capital Market ("Series B"). The
debentures accrue annual interest at the rate of 5% which will be
payable, together with the principal of the debentures, in one
installment on January 2012.
The debentures are convertible into the Company's Ordinary Shares at a
conversion price of $1.10 per share. The conversion price was subject
to downward adjustment under certain circumstances if the Company had
sold securities in future financings at a price per share which was
lower than the conversion price, provided that such financings closed,
or agreements for such financings were signed, through December 2006.
No such adjustment was or will be required and the downward adjustment
mechanism has expired.
The Equity Investors and the primary Wafer Partners, which were
considered related parties, invested $27,811 in the framework of the
rights offering.
Through December 31, 2007, $19,055 in aggregate principal amount of
debentures were converted into 17,322,575 Ordinary Shares of the
Company, hence the outstanding principal amount of convertible
debentures as of December 31, 2007 was $29,114.
F - 24
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 10 - CONVERTIBLE DEBENTURES (CONT.)
D. 2006 CONVERTIBLE DEBENTURES SERIES C
In a public offering the Company issued NIS 164,430,000 principal
amount of convertible debentures linked to the CPI, for gross proceeds
of NIS 139,765,500 (approximately $31,219), and 391,500 options each
exercisable for three months ending on September 27, 2006 for NIS 100
principal amount of convertible debentures at an exercise price equal
to 85% of their face amount, linked to the CPI. The convertible
debentures are convertible into the Company's Ordinary Shares at a
conversion rate of one ordinary share per NIS 8.40 principal amount of
convertible debentures. The convertible debentures carry a zero coupon
with principal payable at maturity in December 2011, at a premium of
37% over principal value, linked to the CPI. The conversion price is
subject to reduction in certain limited circumstances. The outstanding
principal amount of convertible debentures as of December 31, 2007 was
$53,570.
E. 2007 NON-CONVERTIBLE DEBENTURES SERIES D AND CONVERTIBLE DEBENTURES E
In the second half of 2007, the Company consummated a private
placement with Israeli institutions of long-term convertible and
non-convertible debentures and warrants, by which the Company raised a
gross proceeds of approximately $40,000. In the funding, 342 units
were sold, each comprised of: (i) long-term
non-convertible-debentures, repayable in six equal annual installments
between the dates of December 2011 and December 2016, with a face
amount of NIS 250,000 (approximately $59.7) and carrying an annual
interest rate of 8 percent ("series D"); (ii) long-term
convertible-debentures repayable in December 2012 with a 17.2 NIS
conversion price, with a face amount of NIS 262,500 (approximately
$62.7), carrying an annual interest of 8 percent("series E"), and
(iii) 5,800 warrants, each exercisable until 2011, for one Tower
ordinary share at a price of $2.04. The debentures are linked to the
CPI and were issued at 95.5% of par value. The conversion and exercise
prices are subject to reduction in certain limited circumstances.
In September 2007, the Company expanded its series of long-term
debentures and warrants, by selling 12,118 units, each comprised of
long-term non-convertible debentures, with a face amount of NIS 2,500
(approximately $0.62), long-term convertible debentures, with a face
amount of NIS 2,625 (approximately $0.65), and 58 warrants. The
debentures were issued at 90% of par value and with the other same
terms as the debentures and the warrants issued in the private
placement. In this expansion, the Company raised gross proceeds of
approximately $14,000.
The outstanding principal amount of series D and E as of December 31,
2007 was $30,865 and $32,408, respectively. The Company elected to
carry series E at fair value in accordance with provisions of SFAS No.
155.
F - 25
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - FINANCIAL INSTRUMENTS AND FAIR VALUE MEASURMENTS
The Company makes certain disclosures with regard to financial instruments,
including derivatives. These disclosures include, among other matters, the
nature and terms of derivative transactions, information about significant
concentrations of credit risk, and the fair value of financial assets and
liabilities.
A. HEDGING ACTIVITIES
A derivative is typically defined as an instrument whose value is
derived from an underlying instrument, index or rate, has a notional
amount, requires no or little initial investment and can be net
settled.
SFAS 133 requires that all derivatives be recorded in the financial
statements at their fair value at the date of the financial
statements. The changes in the fair value of the derivatives are
charged to the statement of operations unless designated as hedging
item in a cash flows hedge at which time changes are classified in
other comprehensive income, to the extent effective.
The Company, from time to time, enters into agreements to hedge
variable interest rate exposure on long-term loans. The Company uses
interest rate collar agreements with a knock-out and knock-in features
to hedge its LIBOR-based variable long-term debt cash flow exposure.
The knock-out feature was set above the cap level and the knock-in
feature was set below the floor level. The Company determined that the
probability that the cap will be knocked-out is remote and thus
expected that the hedge will be highly effective. The Company assessed
and measured the effectiveness of the hedge, at inception and
throughout the hedge, based on total changes in cash flows of the
collar, and reported changes in fair value in other comprehensive
income. Amounts presented in other comprehensive income are
reclassified to operations or capitalized to property and equipment,
as applicable, as interest payment become due.
As of December 31, 2007 and 2006, the Company had outstanding
agreements to hedge interest rate exposure on loans drawn down under
the Facility Agreement, the aggregate amount of which was $80,000 and
$207,000 respectively, all of which is attributable to Fab 2. These
agreements resulted in 2007 and 2006 in a gain of $1,074 and $880,
respectively and in 2005 in a loss of $1,756
The Company does not hold or issue derivative financial instruments
for non-hedging purposes.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, short-term bank deposits, trade receivables and
government agencies receivables. The Company's cash, cash equivalents
are maintained with high-quality banks, and the composition and
maturities of investments are regularly monitored by management.
Generally, these securities may be redeemed upon demand and bear
minimal risk.
F - 26
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - FINANCIAL INSTRUMENTS AND FAIR VALUE MEASURMENTS (CONT.)
B. CONCENTRATION OF CREDIT RISKS
The Company generally does not require collateral; however, in certain
circumstances, the Company maintains a credit insurance policy or may
require letters of credit. An allowance for doubtful accounts is
determined with respect to those amounts that the Company has
determined to be doubtful of collection. The Company performs ongoing
credit evaluations of its customers.
The Company is exposed to credit-related losses in respect of
derivative financial instruments in a manner similar to the credit
risk involved in the realization or collection of other types of
assets. In management's estimation, due to the fact that derivative
financial instrument transactions are entered into solely with
financial institution counterparties, it is not expected that such
counterparties will fail to meet their obligations.
C. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments,
excluding the Company's long-term debentures do not materially differ
from their respective carrying amounts as of December 31, 2007 and
2006. The fair value of the interest rate hedging transactions as of
December 31, 2007, 2006 and 2005 would have resulted in an unrealized
capitalizable gain of $295, $1,790 and $1,767, respectively. The fair
values of debentures as of December 31, 2007, 2006 and 2005 were
$157,683, $126,048 and $22,750, respectively, based on quoted market
prices for the respective dates.
D. FAIR VALUE MEASUREMENTS
The Company decided to early adopt the provisions of SFAS No. 157
effective January 1, 2007, concurrent with the adoption of FASB 159
"The Fair Value Option for Financial Assets and Financial Liabilities"
(SFAS No. 159)
The income approach was applied using a present value technique.
For Loans - The cash flows used in that technique reflect the income
stream expected to be used to satisfy the obligation over its economic
life.
For Embedded Derivatives - the Company utilized the Black Scholes
Merton formula.
For Over the Counter derivatives - the Company used the market
approach using quotation from dealer markets.
For convertible debentures series E - The market approach was applied
using quoted prices for the same debentures.
F - 27
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - FINANCIAL INSTRUMENTS AND FAIR VALUE MEASURMENTS (CONT.)
D. FAIR VALUE MEASUREMENTS (CONT.)
Recurring Fair Value Measurements Using:
Quoted prices
in active Significant
market for other
identical observable Significant
December 31, liability Inputs Unobservable
2007 (Level 1) (Level 2) Inputs (Level 3)
--------- --------- --------- ---------
Trading securities - convertible
debentures series E $ 28,484 $ 28,484 $ -- $ --
Long-term debt 365,563 -- -- 365,563
Derivatives 7,018 -- (295) 7,313
--------- --------- --------- ---------
$ 401,065 $ 28,484 $ (295) $ 372,876
========= ========= ========= =========
Asset Measurement on a Recurring Basis Using Significant Unobservable
Inputs (Level 3):
Long-term debt Derivatives
--------- ---------
As of January 1, 2007- at fair value $ 367,223 $ 11,513
Total gains unrealized in earnings (1,660) (4,200)
--------- ---------
As of December 31, 2007 - at fair value $ 365,563 $ 7,313
========= =========
Unrealized gain in earnings from liabilities still held at period end $ (1,660) $ (4,200)
========= =========
NOTE 12 - OTHER LONG-TERM LIABILITIES
A. Composition:
As of December 31,
------------------------
2007 2006
--------- ---------
Accrued Severance pay, see B below: $ 18,374 $ 16,816
Long-term liabilities in respect of license agreements -- 1,804
LONG-TERM LOANS FROM RELATED PARTIES, NET OF CURRENT MATURITY, SEE
NOTES 9B,13A(5) AND 13D(2) 19,073 8,096
Other (*) 2,933 1,439
--------- ---------
$ 40,380 $ 28,155
========= =========
(*) Includes $2,468 and $1,183 as of December 31, 2007 and 2006,
respectively, of interest payable to related parties in regard to
Series B, see also Note 10C.
F - 28
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - OTHER LONG-TERM LIABILITIES (CONT.)
B. EMPLOYEE TERMINATION BENEFITS
Israeli law and labor agreements determine the obligations of the
Company to make severance payments to dismissed employees and to
employees leaving employment under certain circumstances. Generally,
the liability for severance pay benefits, as determined by Israeli
Law, is based upon length of service and the employee's monthly
salary. This liability is primarily covered by regular deposits made
each month by the Company into recognized severance and pension funds
and by insurance policies purchased by the Company, based on the
employee's salary for the relevant month. The amounts so funded and
the liability are reflected separately on the balance sheets in
Long-term investments and Other Long-term Liabilities, respectively.
Commencing January 1, 2005 the Company is implementing a labor
agreement according to which, monthly deposits into recognized
severance and pension funds or insurance policies releases it from any
additional severance obligation to its employees and therefore incur
no liability or asset, since that date. Any net severance pay amount
as of such date will be released thereafter, as fixed amount on
employee termination date. Payments relating to employee termination
benefits were approximately $3,323, $2,807 and $2,631 for 2007, 2006
and 2005, respectively.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2
(1) OVERVIEW
In 2001, the Company's Board of Directors approved the
establishment of the Company's second wafer fabrication facility
in Israel ("Fab 2"). In Fab 2, the Company manufactures
semiconductor integrated circuits on silicon wafers in geometries
of 0.18 to 0.13 micron on 200-millimeter wafers. In connection
with the establishment, equipping and financing of Fab 2, the
Company has entered into several related agreements and other
arrangements and has completed several public and private
financing transactions. The agreements and arrangements include
those with technology partners, with SanDisk Corporation,
Alliance Semiconductor Corporation, Macronix International Co.,
Ltd. and QuickLogic Corporation (collectively, the "Wafer
Partners"), Equity Investors, Banks, the Government of Israel
through the Investment Center and others. The Company has also
entered into agreements for the design and construction of Fab 2,
for equipping Fab 2 and for the transfer to the Company of
process technologies to produce wafers in Fab 2.
F - 29
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (CONT.)
(1) OVERVIEW (CONT.)
In 2006, the board of directors of the Company approved a plan to
ramp up Fab 2's capacity to approximately 24,000 wafers per month
in order to help meet customer needs and product qualification
needs, based on its customer pipeline and reinforced by
forecasted market conditions. This plan was completed during
2007. During 2007, the Company announced an additional plan to
further ramp up to reach capacity beyond 24,000 wafers per month.
For details regarding the financing efforts of the ramp-up plans
to reach capacity of 24,000 wafers per month and beyond, see Note
13A(4) for TIC investment of $100,000; Note 9B for Facility
Agreement amendments with the Banks and for credit lines from TIC
and the Banks; Notes 14J-M for public and private fund raisings.
The Company continues to examine alternatives for additional
funding sources in order to fund its Fab2 ramp-up.
(2) TECHNOLOGY TRANSFER AGREEMENTS
TOSHIBA - In 2000, the Company entered into a technology transfer
agreement with Toshiba Corporation ("Toshiba"), a Japanese
corporation. This agreement provided for the transfer by Toshiba
to the Company of advanced semiconductor manufacturing process
technologies to be installed in Fab 2 including related
technology transfer assistance in exchange for certain fees for
patent licenses, technology transfer and technical assistance.
The transfer of the technology was substantially completed during
2003. The Company's commitment under the Toshiba agreement to
reserve for Toshiba a certain portion of Fab 2 wafer
manufacturing capacity expired in December 2005.
FREESCALE - In 2002, the Company entered into a non-exclusive
technology transfer, development and licensing agreement with
Freescale. This agreement provides for the transfer by Freescale
to the Company of existing and newly developed versions of
advanced semiconductor manufacturing process technologies to be
installed in Fab 2, and for the provision by Freescale of related
technology transfer assistance, in exchange for certain fees for
patent and other licenses, technology transfer and development,
and technical assistance. Subject to prior termination for cause
by Freescale, the licenses under the agreement are perpetual.
F - 30
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (CONT.)
(3) WAFER PARTNER AGREEMENTS
During the years 2000 and 2001, the Company entered into various
shares purchase agreements ("Wafer Partner Agreements") with
Wafer Partners to partially finance the construction and
equipping of Fab 2. Pursuant to the Wafer Partner Agreements, the
Wafer Partners agreed to invest an aggregate of $250,000 to
purchase Ordinary Shares of the Company. According to the Wafer
Partner Agreements, the Company agreed, subject to certain
conditions, to reserve for each Wafer Partner a certain portion,
and collectively approximately 50%, of Fab 2 wafer manufacturing
capacity for a period of 10 years ending January 2011.
Through December 31, 2004, the Wafer Partners invested under the
Wafer Partner Agreements an aggregate of $246,823. Of such
amount, $201,059, was credited as paid in capital and $45,764,
was established as long-term customers' advances which may be,
subject to the terms and conditions stipulated in the Wafer
Partner Agreements, as amended to date, utilized as credit
against purchases to be made by the Wafer Partners, primarily
through December 2010, or converted into paid-in-capital for
limited term. Through December 31, 2007, the Wafer Partners were
issued an aggregate of 36,489,681 Ordinary Shares at an average
price per share of $6.94, which was determined based on the
average closing sale price of the Company's Ordinary Shares for
the 15-30 trading days prior to making any capital investment:
see also (5) below.
Due to recent changes in one of the Company's primary Wafer
Partner's operations and its recent exit of its semiconductor
activities, the Company believes that no future utilization is
expected and determined that a full write-down of the its
outstanding amount is appropriate.
For additional investments made by the primary Wafer Partners in
the aggregate amount of $19,089 in connection with the 2002 and
2005 rights offerings, see Notes 14G and 14I, respectively.
In August 2006, the Company signed an agreement with SanDisk, one
of the Wafer Partners, to invest in the expansion of its 0.13
micron manufacturing capacity, see Note 13D(2).
For amendments to the Wafer Partner agreements, see (5) below.
F - 31
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (CONT.)
(4) EQUITY INVESTOR AGREEMENTS
During the years 2001-2004, TIC has invested in the Company
$50,000 for the purchase of an aggregate of 6,749,669 Ordinary
Shares of the Company at an average price per share of $7.41,
which was determined based on the average closing sale price of
the Company's Ordinary Shares for the 15-30 trading days prior to
making any investment. The investment of TIC was made in
accordance with shares purchase agreement the Company entered
into in January 2001. For a description of an undertaking and
additional investments made by TIC in the aggregate amount of
$29,152 in connection with the 2002 and 2005 rights offerings,
see Notes 14G and 14I, respectively.
In regard to the Company's financing efforts for the ramp-up plan
to reach capacity of 24,000 wafers per month and in connection
with the September 2006 Amendment to the Facility Agreement,
following TIC's commitment to invest $100,000, the Company
entered into a securities purchase agreement with TIC (the
"Securities Purchase Agreement"). The Securities Purchase
Agreement was approved by the Company's Audit Committee, Board of
Directors and the Company's shareholders. The principal terms of
the Securities Purchase Agreement were: (i) in consideration for
its $100,000 investment, the Company agreed to issue to TIC
capital notes convertible into 65,789,474 of the Company's
Ordinary Shares at a conversion price per share of $1.52 (which
equals the average closing price during the 10 consecutive
trading days prior to signing the May 2006 Memorandum of
Understanding with the Banks and TIC which was the basis of this
agreement); (ii) the Company would be deemed to have exercised
the Call Option under the Equipment Purchase Agreement described
below; and (iii) the Company and TIC would settle the amounts
payable by TIC under the Securities Purchase Agreement with the
amounts payable by the Company under the Equipment Purchase
Agreement. The Securities Purchase Agreement closed
contemporaneously with the closing of the September 2006
Amendment.
In order to implement the ramp-up plan in a timely manner, in May
2006, the Company entered into an Equipment Purchase Agreement
with TIC according to which TIC will order up to approximately
$100,000 worth of equipment for Fab 2. Under the terms of the
Equipment Purchase Agreement: (i) TIC had the right to sell to
the Company the equipment at cost, plus related expenses; (ii)
the Company had the right to purchase the equipment from TIC at
cost, plus related expenses, subject to the Company having raised
$100,000; and (iii) upon the purchase of the equipment from TIC
the Company would assume TIC's obligations to the equipment
suppliers.
F - 32
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (CONT.)
(4) EQUITY INVESTOR AGREEMENTS (CONT.)
Upon the closing of the September 2006 Amendment and the
Securities Purchase Agreement, TIC transferred ownership over the
purchased equipment to the Company and the Company assumed TIC's
obligations to the equipment suppliers.
For a credit line agreement signed with TIC in September 2007,
see Note 9B.
(5) AMENDMENTS TO THE PRIMARY WAFER PARTNER AGREEMENTS
Pursuant to the primary Wafer Partner Agreements, as amended to
date, each of the primary Wafer Partners had an option to
convert, at the end of each calendar quarter commencing 2004,
that portion of the long-term customers' advances which it is
entitled to utilize, based upon payments made by such primary
Wafer Partner and purchase orders received from the Wafer
Partners through December 31, 2006, (subject to the below
amendment with one of the Wafer Partners), into fully-paid
Ordinary Shares of the Company. The number of shares has been
determined based on the average closing sale price of the
Company's Ordinary Shares for the 15 trading days preceding the
end of the relevant quarter. Accordingly, through December 31,
2007, two of the primary Wafer Partners had elected to convert an
aggregate of $12,487 of long-term customer advances into
7,908,063 fully-paid Ordinary Shares of the Company, at an
average share price of $1.58 per share. Any quarterly amount,
which the primary Wafer Partners had elected not to so convert,
was utilizabled against purchases and was to be repaid on
December 2007 ("December 2007 Date"). The amounts bear interest,
payable at the end of each quarter, at an annual rate equal to
three-month USD LIBOR plus 2.5% through December 31, 2007,
subject to the below amendment with one of the Wafer Partners.
In 2006, the Company and one of the primary Wafer Partners,
entered into an agreement to defer the December 2007 Date to be
December 2009. Further, according to the agreement, with respect
to certain orders placed until July 2006, and all orders placed
thereafter through December 2009, such unutilized advances will
bear interest at an annual rate equal to three-month USD LIBOR
plus 1.1%, payable at the end of each quarter, through December
2009.
F - 33
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (CONT.)
(6) FACILITY AGREEMENT
COMPLIANCE WITH FINANCIAL RATIOS AND COVENANTS - As of the
balance sheet date, the Company was in full compliance with all
of the financial ratios and covenants under the Facility
Agreement, as amended to date. According to the Facility
Agreement, satisfying the financial ratios and covenants is a
material provision. The amended Facility Agreement provides that
if, as a result of any default, the Banks were to accelerate the
Company's obligations, the Company would be obligated, among
other matters, to immediately repay all loans made by the Banks
(which as of the approval date of the financial statements
amounted to approximately $400,000) plus penalties, and the Banks
would be entitled to exercise the remedies available to them
under the Facility Agreement, including enforcement of their
liens against all of the Company's assets.
LIENS - Under the Facility Agreement, the Company agreed to
register liens in favor of the Banks on substantially all its
present and future assets. If, as a result of any default under
the Facility Agreement, the Banks were to accelerate the
Company's obligations, the Company would be obligated to
immediately repay all loans made by the Banks (which as of the
approval date of the financial statements amounted to
approximately $400,000), plus penalties, and the Banks would be
entitled to exercise the remedies available to them under the
Facility Agreement, including enforcement of the liens against
the Company's assets.
OFFEROR BY THE BANKS - If one or more certain bankruptcy related
events occur, the Banks are entitled to bring a firm offer made
by a potential investor to purchase the Company's Ordinary Shares
("the Offer") at a price provided in the Offer. In such case, the
Company shall be required thereafter to procure a rights offering
to invest up to 60% of the amount of the Offer on the same terms.
If the Offer is conditioned on the offeror purchasing a majority
of the Company's outstanding share capital, the rights offering
will be limited to allow for this, unless TIC and the primary
Wafer Partners agree to exercise in a rights offering rights
applicable to their shareholdings and agree to purchase in a
private placement enough shares to ensure that the full amount of
the Offer is invested.
For further details in regard to the Facility Agreement, see Note
9B.
F - 34
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (CONT.)
(7) APPROVED ENTERPRISE STATUS
In December 2000, the Investment Center approved an investment
program in connection with Fab 2 for expansion of the Company's
plant. The approval certificate for the program provided for a
benefit track entitling the Company to investment grants at a
rate of 20% of qualified investments of up to $1,250,000, or an
aggregate of up to $250,000, of which as of the balance sheet
date, an aggregate of approximately $165,000 has been received
from the Investment Center. Under the terms of the program,
investments in respect of Fab 2 were to be completed by December
31, 2005, five years from the date the approval certificate was
obtained. Due to the later than planned construction of Fab 2,
market conditions and slower than planned ramp-up, the Company
completed approximately 72% of the investments under the approved
enterprise program. In December 2007, the Company submitted the
final report in relation to the program. The Company has been
holding discussions with the Investment Center to achieve
satisfactory arrangements to approve a new expansion program
commencing as of January 1, 2006. As of the approval date of the
financial statements, the Company's management cannot estimate
when, if at all, the Company will receive approval of its request
for a new expansion program.
Any failure by the Company to meet the conditions of the 2000
approval certificate may result in the cancellation of all or a
portion of the grants to be received and tax benefits and in the
Investment Center requiring the Company to repay all or a portion
of grants already received. Under Israeli law, the Company's
non-completion of investments in an amount of $1,250,000 by
December 31, 2005 may permit the Investment Center to require the
Company to repay all or a portion of grants already received.
Management believes that it is improbable that the Investment
Center would demand the Company to repay all or a portion of
grants already received, or deny investment grants receivable as
of December 31, 2005, due to its non-completion of investments in
the amount of $1,250,000 by December 31, 2005 - see also Note 17A
(8) AGREEMENT WITH THE ILA
In November 2000, the Company entered into a development
agreement with the Israel Land Administration ("ILA") with
respect to a parcel of land on which Fab 2 was constructed.
Following the completion of the construction of Fab 2 on the
land, in June 2003, the Company entered into a long-term lease
agreement with the ILA for a period ending in 2049. The lease
payments through 2049 relating to this lease have been paid in
advance and are expensed through the operational lease period.
F - 35
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (CONT.)
(9) HEDGING ACTIVITIES
For hedging transactions and agreements of the Company, see Note
11A.
(10) OTHER AGREEMENTS
Through December 31, 2007, the Company had entered into several
additional agreements related mainly to the construction,
equipping and transfer of technology for Fab 2. The Company's
aggregate commitment in connection with these agreements which
were not supplied or rendered as of such date amounted to
approximately $45,000.
B. LICENSE AGREEMENTS
(1) In June 2000, the Company entered into a cross license agreement
with a major technology company. According to the agreement, each
party acquired a non-exclusive license to certain of the other's
patents. The Company agreed to pay an annual license fee through
July 2005. In July 2006, the Company extended its cross license
agreement with the major technology company until December 2010.
According to terms of the new agreement, each party acquired a
non-exclusive license to certain of the other's patents, and the
Company agreed to pay an annual license fee through 2010.
(2) In May 2002, the Company entered into a joint development and
royalty-free, non-exclusive cross-license agreement with a
Japanese semiconductor manufacturer corporation, for the joint
development of certain technology to be used by the Company in
its Fab 2 and by the Japanese manufacturer in its facilities. In
April 2005, the Japanese semiconductor manufacturer corporation
elected, and the Company agreed, to cease the joint development
of certain technology and to terminate the agreement. However,
the license rights granted to the parties continue pursuant to
the terms of the May 2002 agreement. According to the terms of
the termination agreement, the Japanese manufacturer paid the
Company an amount of $2,500 in 2005. In addition, each party
expressly released the other party from any obligations or
liabilities of any nature in connection with the original
agreement. Revenues for 2005 include $8,000 in relation to this
agreement.
F - 36
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT.)
B. LICENSE AGREEMENTS (CONT.)
(3) In October 1997 the Company and Saifun Semiconductors Ltd
("Saifun") entered into an agreement for certain exclusive
semiconductor manufacturing rights on certain licensed
technology. The agreement set certain limitations on Saifun
regarding future licensing of such technology. Pursuant to
certain provisions of the agreement, the Company and Saifun were
obligated to pay each other royalties. The agreement was
terminated in 2006, with the signing of a new agreement,
according to which, among other things, Saifun extended the term
of the license granted to the Company for certain licensed
technology.
(4) The Company from time to time enters into intellectual property
and licensing agreements with third parties. The effect of each
of them on the Company's total assets and results of operations
is immaterial. Certain of these agreements call for royalties to
be paid by the Company to these third parties, see also Note 12A.
C. LEASES
(1) The Company's offices and engineering and manufacturing
operations are located in a building complex situated in an
industrial park in Migdal Ha'emek, in the northern part of
Israel. These premises are currently occupied under a long-term
lease from the ILA, which expires in 2032. The Company has no
obligation for lease payments related to this lease through the
year 2032.
(2) With respect to a long-term lease agreement of land on which Fab
2 was constructed, see A(8) above.
(3) The Company occupies certain other premises under various
operating leases. The obligations under such leases were not
material as of December 31, 2007.
F - 37
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT.)
D. OTHER PRINCIPAL AGREEMENTS
The Company, from time to time in the ordinary course of business,
enters into long-term agreements with various entities for the joint
development of products and processes utilizing technologies owned by
both the other entities and the Company.
(1) SILICONIX - In 2004, the Company and chip maker Siliconix
incorporated ("Siliconix"), a wholly-owned subsidiary of Vishay
Intertechnology Inc., entered into a definitive long-term foundry
agreement for semiconductor manufacturing. Pursuant to the
agreement, Siliconix will place with the Company orders for the
purchase of wafers to be manufactured in the Company's Fab 1.
According to the agreement, in 2004 Siliconix provided the
Company $20,000 to be used primarily for the purchase of
additional equipment required to satisfy Siliconix's production
wafer requests. The advanced amount is credited towards the
purchase price of wafers. Under the agreement, Siliconix is
entitled to register liens over the equipment purchased in
connection with the transaction.
(2) SANDISK CORPORATION - In 2006, in connection with Fab2 0.13
micron capacity expansion, the Company signed an agreement with
SanDisk Corporation ("SanDisk"), one of its wafer partners,
according to which, SanDisk is committed to purchase volume
quantities of 0.13 micron wafers during 2007 and 2008 and will
have a right of first refusal for a portion of the Company's 0.13
micron capacity in 2009. The Company and SanDisk also signed a
Loan Agreement under which the Company borrowed approximately
$10,000 from SanDisk for the purpose of financing the purchase of
a portion of the equipment needed for said expansion. The loan
bears interest on the amounts outstanding at three-month USD
LIBOR plus 1.1%. Pursuant to the agreement, SanDisk has been
granted a first ranking charge on the equipment purchased
therewith.
E. ENVIRONMENTAL AFFAIRS
The Company's operations are subject to a variety of laws and
governmental regulations in Israel relating to the use, discharge and
disposal of toxic or otherwise hazardous materials used in the
production processes. Operating permits and licenses are required for
the operations of the Company's facilities and these permits and
licenses are subject to revocation, modification and renewal.
Government authorities have the power to enforce compliance with these
regulations, permits and licenses. As of the approval date of the
financial statements, the Company was in compliance with the terms of
the permits and licenses.
F - 38
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONT.)
F. CLASS ACTION
In June 2006, the United States Court of Appeals for the Second
Circuit affirmed the August 2004 decision of the United States
District Court for the Southern District of New York to dismiss the
class action suit filed in July 2003 against the Company and certain
of its directors, Wafer Partners and Equity Investors (the
"Defendants"). The plaintiffs had asserted claims arising under the
Securities Exchange Act of 1934, alleging misstatements and omissions
made by the Defendants in materials sent to the Company's shareholders
in April 2002 with respect to the approval of an amendment to the
Company's investment agreements with its Fab 2 investors. The District
Court accepted the motion to dismiss filed on behalf of the defendants
and noted that the Company's status as a foreign private issuer
exempts the Company, its directors and controlling shareholders, from
liability under the proxy rules of Section 14(a) of the Securities
Exchange Act.
G. AMENDMENT TO ISRAELI BANKING REGULATIONS
Pursuant to an amendment to a directive published by the Israel
Supervisor of Banks, effective March 31, 2004, the Company may be
deemed part of a group of borrowers comprised of the Ofer Brothers
Group, TIC, and other companies which are also included in such group
of borrowers pursuant to the directive, including companies under the
control or deemed control of these entities. The directive provides
for limits on amounts that banks may lend to borrowers or groups of
borrowers. Should the Banks exceed these limitations, they may limit
the Company's ability to borrow other money in the future and may
require the Company to return some or all of the outstanding
borrowings (which were approximately $400,000 as of the approval date
of the financial statements). As of the approval date of the financial
statements, the Company had received no such request.
H. OTHER COMMITMENTS
Receipt of certain research and development grants from the government
of Israel is subject to various conditions. In the event the Company
fails to comply with such conditions, the Company may be required to
repay all or a portion of the grants received. In management's
opinion, the Company has been in full compliance with the conditions
through December 31, 2007. In regard to investment center grants, see
A(7) above.
F - 39
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY
A. DESCRIPTION OF ORDINARY SHARES
As of December 31, 2007 and 2006, the Company had 800,000,000
authorized Ordinary Shares, par value NIS 1.00 each, of which
124,226,116 and 100,752,767, respectively, were issued and outstanding
(net of 1,300,000 Ordinary Shares held by the Company as of such
dates). As of the balance sheet date, there were 243,905,535 Ordinary
Shares of the Company contingently issuable. This amount includes
Ordinary Shares to be issued under various agreements according to
their provisions: (i) Equity Investor warrants, see B(5)(b) below;
(ii) the exercise of outstanding warrants, see J,K,L and M below;
(iii) options granted to employees and non-employees, see B(1) below;
(iv) the conversion of all outstanding convertible debentures, see
Note 10 above; and (v) the exercise of all capital notes, see C below.
Holders of Ordinary Shares are entitled to participate equally in the
payment of cash dividends and bonus share (stock dividend)
distributions and, in the event of the liquidation of the Company, in
the distribution of assets after satisfaction of liabilities to
creditors. Each ordinary share is entitled to one vote on all matters
to be voted on by shareholders.
B. SHARE OPTION PLANS
(1) EMPLOYEE, CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE
OFFICER AND DIRECTOR SHARE OPTIONS
(A) GENERAL - The Company has granted to its employees options
to purchase its Ordinary Shares under several option plans
adopted by the Company since 1995. The particular provisions
of each plan and grant vary as to vesting period, exercise
price, exercise period and other terms. Generally, the
options are granted at an exercise price which equals the
market value of the Ordinary Shares at the date of grant;
vest over a three to four-year period according to various
vesting schedules; and are not exercisable beyond ten years
from the grant date.
F - 40
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (CONT.)
B. SHARE OPTION PLANS (CONT.)
(1) EMPLOYEE, CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE
OFFICER AND DIRECTOR SHARE OPTIONS (CONT.)
(B) OPTIONS TO THE CHAIRMAN OF THE COMPANY'S BOARD OF DIRECTORS
- In December 2006, the Audit Committee and Board of
Directors of the Company approved the appointment of a new
Chairman to the Board of Directors of the Company and
approved to grant him options to purchase 3,158,090 Ordinary
Shares of the Company, which constituted 1% of the Company's
issued and outstanding share capital on a fully diluted
basis as of December 2006, the date the Board of Directors
approved the grant. The exercise price is $1.88, which was
the closing price of the Company's Ordinary Shares on the
NASDAQ Global Market on the trading day immediately prior to
the date of approval of the grant by the Shareholders of the
Company. The options vest over 4 years, 25% on the 12 month
anniversary of the shareholders approval date and 6.25% on
each 3 month anniversary of the first vesting date until
fully vested. The options grant to the chairman of the Board
of Directors was approved by the shareholders of the Company
in January 2007. The compensation cost of the options
granted was determined based on the fair value at the grant
dates and amounted to $3,568. Such amount is expensed on an
accelerated basis over the vesting periods of the options.
(C) OPTIONS TO THE COMPANY'S CHIEF EXECUTIVE OFFICER AND
DIRECTOR - In April 2005, the Company's Board of Directors
approved the grant of options to purchase up to 1,325,724
Ordinary Shares to the Company's Chief Executive Officer
("CEO"), who also serves as a director, which was further
approved by the Company's shareholders in October 2005.
These options are exercisable at an exercise price of $1.56,
which was the closing market price of the Company's shares
on the last trading day prior to the board approval of the
grant. These options will vest over a four-year period, with
25% vesting over each year of employment. The options
granted are exercisable for a period of ten years from the
date of grant.
F - 41
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (CONT.)
B. SHARE OPTION PLANS (CONT.)
(1) EMPLOYEE, CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE
OFFICER AND DIRECTOR SHARE OPTIONS (CONT.)
(C) OPTIONS TO THE COMPANY'S CHIEF EXECUTIVE OFFICER AND
DIRECTOR (CONT.)
In May 2006, the Company's Audit Committee and Board of
Directors approved the grant of options to the CEO, in
addition to the options granted to him in 2005, such that in
total, the CEO will hold options to purchase shares that
represent 4% of the Company's shares on a fully diluted
basis during the two-year period from the approval of the
Audit Committee. The exercise price of the initial grant of
the additional options was $1.45, the 90-day average closing
price of the Company's shares prior to the Board of
Directors' approval. Future dilutive events following May
2006 and until May 2008 also entitles him for additional
options grants with an exercise price equal to the price per
share of the newly issued securities. Under certain
circumstances, the exercise price will equal the 30-day
average closing price of the Company's shares prior to the
dilutive event. The additional options granted during the
two-year period, will vest in equal amounts over 4 years of
employment commencing from May 2006. Any decrease in the
Company's shares on a fully diluted basis during the
two-year period from the approval of the Audit Committee
will be followed by the cancellation of the corresponding
options granted to the CEO. The options are exercisable for
a period of 10 years from the date of grant. No additional
options will be granted under the CEO's 2005 option
arrangement, which was approved by the Company's
shareholders in October 2005. The new grant of options and
its terms were approved by the Company's shareholders in
September 2006.
As of the balance sheet date, a total of 14,872,087 options
were outstanding to the CEO. The compensation cost of the
total options granted to the CEO was determined based on the
fair value at the grant dates and amounted to $11,723. Such
amount is expensed on an accelerated basis over the vesting
periods of the options.
F - 42
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (CONT.)
B. SHARE OPTION PLANS (CONT.)
(1) EMPLOYEE, CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE
OFFICER AND DIRECTOR SHARE OPTIONS (CONT.)
(D) EMPLOYEE OPTIONS - In May 2006, the Company's board of
directors approved a plan to offer each of the Company's
employees the opportunity to exchange their existing options
to purchase Ordinary Shares for new options with an exercise
price of $1.45, which is the average closing price of the
Company's shares on the NASDAQ during the 90 consecutive
trading days prior to the board of directors' approval.
Accordingly, 4,299,250 options were exchanged. The new
options were granted based on terms similar to the existing
employee option plan with new vesting periods, starting May
2006. The cost of the new options was determined based on
the fair value at the grant dates in and amounted to $1,726.
Such amount is amortized as an expense on an accelerated
basis over the vesting periods of the new options. The Board
of Directors further approved that if the total number of
employee options, including the options to the CEO, during
the two-year period from May 2006 will represent less than
8% of the Company's shares on a fully diluted basis,
additional options will be allocated for grants to the
Company's employees. As of the balance sheet date,
approximately 3,938,000 options are reserved for future
grant of options to employees.
(E) OPTIONS GRANTED TO DIRECTORS - During 2001, the Audit
Committee, the Board of Directors of the Company and the
shareholders of the Company approved a stock option plan
pursuant to which certain of the Company's directors will be
granted options to purchase up to 400,000 Ordinary Shares of
the Company (40,000 to each eligible director appointed to
the Board of Directors) at an exercise price equal to the
market price of the Company's shares on the grant dates. In
accordance with this option plan, 80,000 options were
granted in 2007 to two director who were appointed in 2007
at an average exercise prices of $1.74, which equals the
market price of the Company's shares on the grant date. As
of December 31, 2007, 190,000 options were outstanding under
the plan with a weighted average exercise price of $3.68.
Options granted under the plan vest over a four-year period
according to various vesting schedules, and generally may
not be exercised beyond five years from the date they first
become exercisable. So long as the Independent Directors
Option Plan described below remains in effect, no new
independent director, following January 2007, will be
entitled to receive options under the 2001 director options
plan.
F - 43
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (CONT.)
B. SHARE OPTION PLANS (CONT.)
(1) EMPLOYEE, CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE
OFFICER AND DIRECTOR SHARE OPTIONS (CONT.)
(F) INDEPENDENT DIRECTORS OPTION PLAN - In November 2006, the
Company's Board of Directors approved, following the
approval by the Audit Committee, the grant to each
independent director options to purchase Ordinary Shares
("Initial Options") that shall equal 150,000 less the number
of options to purchase Ordinary Shares held by such
independent director as of January 31, 2007, the date the
shareholders approved the grant (the "Initial Grant Date")
and which, as of the Initial Grant Date, have not vested.
The Initial Options shall vest over 3 years, one third will
vest on the 12 month anniversary of the Initial Grant Date,
and thereafter, the remaining two thirds will vest on a
monthly basis until fully vested. The exercise price of the
Initial Options was $1.88, which was the closing price of
the Company's Ordinary Shares on the NASDAQ on the trading
day immediately prior to the Initial Grant Date. Each new
independent director appointed after the Initial Grant Date
shall be granted 150,000 options to purchase Ordinary Shares
("Subsequent Options"), which, shall vest over 3 years, one
third on the 12 month anniversary of the date on which such
independent director shall have served on the Board of
Directors of the Company, the remaining two thirds will vest
on a monthly basis until fully vested. The exercise price
per Subsequent Option shall be the closing price of the
Company's Ordinary Shares on the NASDAQ on the trading day
immediately prior to the relevant date of appointment.
Upon each 36 month anniversary of a previous grant of
options to an independent director (each a "Tenure Grant
Date"), each such independent director shall be granted an
additional 150,000 options to purchase Ordinary Shares
("Tenure Options"), which will vest over 3 years on a
monthly basis until fully vested. The exercise price per
Tenure Option shall be the closing price of the Company's
Ordinary Shares on the NASDAQ on the trading day immediately
prior to the relevant Tenure Grant Date. Subject to certain
conditions, the Initial Options, Subsequent Options and
Tenure Options that have vested shall be exercisable by an
Independent Director for a period of ten years following the
date on which the Initial Options, Subsequent Options or
Tenure Options, as the case may be, first vested. So long as
this option plan remains in effect, no future grants will be
made to independent directors under the plan described in
(1)(e) above. The independent directors' option plan was
approved by the shareholders of the Company in January 2007.
F - 44
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (CONT.)
B. SHARE OPTION PLANS (CONT.)
(1) EMPLOYEE, CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE
OFFICER AND DIRECTOR SHARE OPTIONS (CONT.)
(F) INDEPENDENT DIRECTORS OPTION PLAN (CONT.)
The compensation cost of the total options granted to the
directors under the plan described in (1)(e) above and to
the independent directors under the plan described in this
section was determined based on the fair value at the grant
dates and amounted to $594. Such amount is expensed on an
accelerated basis over the vesting periods of the options.
(2) SUMMARY OF THE STATUS OF ALL THE COMPANY'S EMPLOYEE AND DIRECTOR
SHARE OPTIONS
A summary of the status of all the Company's employee and
director share option plans as of December 31, 2007, 2006 and
2005, as well as changes during each of the years then ended, is
presented below (for options granted to the Banks, a related
party and a consultant, see B(5) below):
2007 2006 2005
--------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Number average Number average Number average
of share exercise of share exercise of share exercise
options price options price options price
----------- ----------- ----------- ----------- ----------- -----------
Outstanding as of
beginning of year 23,514,042 $ 1.87 13,011,575 $ 4.19 10,212,920 $ 5.71
Granted 9,127,384 1.88 17,414,268 1.52 5,000,224 1.54
Exercised (176,231) 1.30 (7,250) 1.58 --
Terminated (525,000) 7.07 (132,176) 10.95 (77,214) 12.45
Forfeited (2,344,660) 1.81 (6,772,375) 5.23 (2,124,355) 4.99
----------- ----------- -----------
Outstanding as of end
of year 29,595,535 1.79 23,514,042 1.87 13,011,575 4.19
=========== =========== ===========
Options exercisable
as of end of year 7,827,743 $ 2.15 2,849,132 $ 4.25 4,602,447 $ 7.77
=========== =========== ===========
F - 45
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (CONT.)
B. SHARE OPTION PLANS (CONT.)
(3) SUMMARY OF INFORMATION ABOUT EMPLOYEE SHARE OPTIONS OUTSTANDING
The following table summarizes information about employee share
options outstanding as of December 31, 2007:
Exercisable as of
Outstanding as of December 31, 2007 December 31, 2007
- ------------------------------------------------------- -------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
PRICES outstanding life price exercisable price
- ------------- ---------- ---------- ---------- ---------- ----------
(in years)
$ 1.16-$1.30 401,203 7.35 $ 1.26 197,501 $ 1.26
1.37-1.40 922,332 8.52 1.40 232,333 1.40
1.45 7,990,416 8.37 1.45 2,010,515 1.45
1.46-1.58 9,355,391 8.11 1.54 3,168,731 1.55
1.60-1.98 7,817,044 9.05 1.83 479,952 1.82
2.02-2.28 2,071,492 8.28 2.13 971,921 2.17
3.25-3.70 239,687 6.47 3.26 199,328 3.26
4.11-4.56 416,269 8.40 4.23 185,761 4.33
5.00-10.75 158,601 2.89 7.18 158,601 7.18
11.81 200,000 3.41 11.81 200,000 11.81
$16.50-$25.00 23,100 2.62 $ 22.23 23,100 $ 22.23
---------- ----------
29,595,535 7,827,743
========== ==========
(4) WEIGHTED AVERAGE GRANT-DATE FAIR VALUE OF OPTIONS GRANTED TO
EMPLOYEES
The weighted average grant-date fair value of the options granted
during 2007, 2006 and 2005 to employees and directors amounted to
$0.87, $0.81 and $0.83 per option, respectively. The Company
utilized the Binomial lattice model since 2006 and the
Black-Scholes option-pricing model in 2005. The Company estimated
the fair value, utilizing the following assumptions for the years
2007, 2006 and 2005 (all in weighted averages):
2007 2006 2005
----------- ----------- -----------
Risk-free interest rate 3.61%-6.09% 4.44%-4.81% 3.69%-4.34%
Expected life of options 10 years 10 years 4.49 years
Expected annual volatility 55%-65% 65%-67% 54%-69%
Expected dividend yield None None None
F - 46
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (CONT.)
B. SHARE OPTION PLANS (CONT.)
(5) NON-EMPLOYEE WARRANTS
(A) BANKS WARRANTS - As of December 31, 2007, 11,631,648
warrants to purchase Ordinary Shares of the Company, at
terms described below, were outstanding and exercisable, at
a weighted average exercise price of $1.77 per share.
9,161,060 of the warrants are exercisable until September
2011 and 2,470,588 exercisable through March 2010
The cost of the 9,161,060 warrants issued to the Banks,
determined based on the fair value at the grant and
amendment dates in accordance with SFAS 123, amounted to a
total of $10,886. Such amount was amortized as deferred
financing charges over the terms of the loans under the
Facility Agreement.
In September 2007, as part of as part of the Company's
credit line agreement with the Banks described in Note 9B,
the Banks received an aggregate of 2,470,588 warrants to
purchase Ordinary Shares of the Company at an exercise price
of $2.04 per share. All the warrants are exercisable until
March 2010. The cost of the warrants, determined based on
the fair value at the grant and amendment dates in
accordance with SFAS 123, amounted to a total of $608. Such
amount was amortized as deferred financing charges over the
term of the loans under the Facility Agreement.
In lieu of paying the exercise price in cash, the Banks are
entitled to exercise their warrants on a "cashless" basis,
i.e. by forfeiting part of the warrants in exchange for
Ordinary Shares equal to the aggregate fair market value of
the shares underlying the warrants forfeited less the
aggregate exercise price.
(B) WARRANTS GRANTED TO TIC - The Company issued TIC warrants
for the purchase of 58,906 of the Company's Ordinary Shares.
The exercise price for the warrants is $6.17 per share, the
15-day average closing price of the Company's Ordinary
Shares prior to the date the November 2003 Amendment with
the Banks was signed. All the warrants are fully vested and
none of them was exercised. The warrants are exercisable for
a five-year period ending December 2008. The cost of the
warrants award granted to TIC, determined based on the fair
value at the grant date in accordance with SFAS 123,
amounted to a total of $259. Such amount was allocated to
other assets as deferred financing charges and was amortized
as financing expense over the terms of the loans under the
Facility Agreement with the Banks.
F - 47
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (CONT.)
B. SHARE OPTION PLANS (CONT.)
(5) NON-EMPLOYEE WARRANTS (CONT.)
WARRANTS ISSUED IN SEPTEMBER 2007 - In September 2007, as part of
the Company's credit line agreement with TIC described in Note
9B, TIC received an aggregate of 2,941,176 warrants to purchase
Ordinary Shares of the Company at an exercise price of $2.04 per
share. All the warrants are exercisable until March 2010. The
cost of the warrants, determined based on the fair value at the
grant and amendment dates in accordance with SFAS 123, amounted
to a total of $723. Such amount was amortized as deferred
financing charges over the term of the loans under the Facility
Agreement.
C. CAPITAL NOTES
(1) BANKS' CAPITAL NOTES
As part of the September 2006 Amendment to the Facility
Agreement, an amount of $158,000 of debt was converted into
capital notes of the Company, convertible into 51,973,684 of the
Company's Ordinary Shares, representing twice the average closing
price per share during the ten consecutive trading days prior to
signing the MOU underlying the September 2006 Amendment to the
Facility Agreement. The capital notes are instruments of equity
and not debt. The capital notes' holders may convert the face
amount of the capital notes, in whole or in part, without
additional consideration, into Ordinary Shares of the Company,
however, prior to such conversion, if at all, the capital notes
(i) do not grant their holders with any of the rights of the
Company's shareholders; (ii) have no maturity date, do not carry
interest, are not linked to any index and are not redeemable; and
(iii) are not registered. For additional information regarding
the capital notes to the Banks, see Note 9B.
(2) TIC'S CAPITAL NOTES
Contemporaneous with the closing of the September 2006 Amendment
and as part of the Securities Purchase Agreement between the
Company and TIC, the Company issued TIC in consideration of its
$100,000 investment, capital notes convertible into 65,789,474 of
the Company's Ordinary Shares, at a price per share of $1.52
(which equals the average closing price during the 10 consecutive
trading days prior to signing the MOU). The capital notes terms
are the same as in (1) above. For additional information
regarding the capital notes to TIC see Note 9B.
F - 48
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (CONT.)
D. TREASURY STOCK
During 1998, the Board of Directors of the Company authorized, subject
to certain conditions, the purchase of up to 1,400,000 Ordinary Shares
of the Company to facilitate the exercise of employee stock options
under the Company's share option plans. During 1999 and 1998, the
Company funded the purchase by a trustee of 142,500 and 1,157,500,
respectively, of the Company's Ordinary Shares.
E. DIVIDEND DISTRIBUTIONS
According to the Facility Agreement, as amended to date, the Company
undertook not to distribute any dividends prior to the date that all
amounts payable under the Facility Agreement have been paid in full.
F. PUBLIC OFFERING IN ISRAEL - JANUARY 2002
In January 2002, the Company issued on the Tel Aviv Stock Exchange,
NIS 110,579,800 principal amount of convertible debentures Series A,
under terms described in Note 10B. Together with the convertible
debentures the Company issued for no consideration an aggregate of
552,899 options exercisable into debentures and 2,211,596 Options
(Series 1). As of the date of the financial statements, all said
options expired and none were exercised. The total initial proceeds
raised were $23,200, and costs related to the issuance of the
securities and the prospectus were approximately $1,750.
G. RIGHTS OFFERING - OCTOBER 2002
In October 2002, the Company issued in connection with a rights
offering done on the NASDAQ and on the Tel-Aviv Stock Exchange
4,097,964 Ordinary Shares of the Company and 1,844,070 warrants to
purchase Ordinary Shares of the Company, in consideration for
aggregate gross proceeds of $20,490. Of these amounts, 4,086,037
Ordinary Shares and 1,838,715 warrants were issued to Wafer Partners
and Equity Investors in consideration for an aggregate of $20,430.
Each warrant was exercisable for the purchase of one Ordinary Share at
an exercise price of $7.50 for a period ending on October 31, 2006.
None of the warrants were exercised. Costs in relation to the
prospectus and the issuance of the securities were approximately $800.
H. PUBLIC OFFERING - JANUARY 2004
In January 2004, the Company completed a public offering of its
Ordinary Shares in the U.S. at a price of $7.00 per share. Following
the offering, and including the partial exercise in February 2004 of
an over-allotment option the Company granted the underwriters, the
Company issued 11,444,500 of its Ordinary Shares, in consideration for
gross proceeds of $80,112 (net of related costs - $75,086).
F - 49
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (CONT.)
I. RIGHTS OFFERING - DECEMBER 2005
In December 2005, the Company filed in Israel and the U.S. a
prospectus for the distribution of transferable rights to purchase up
to $50,000 U.S. dollar denominated debentures Series B that are
convertible into up to 45,454,545 of the Company's Ordinary Shares.
The rights were distributed to the shareholders of record of the
Company on December 20, 2005 (the record date), and to certain
employees who on the record date held options to purchase the
Company's Ordinary Shares under share options plans that entitle the
options holders to participate in a rights offering. Each 138.98
Ordinary Shares and/or eligible employee options held on the record
date entitled their holder to one right. The rights were exercisable
until January 12, 2006. Each right entitled its holder to purchase, at
a subscription price of $0.1, 100 U.S. dollar denominated convertible
debentures.
In connection with the exercise of the rights, the Company issued
48,169,300 convertible debentures under terms described in Note 10C.
For investment by primary Wafer Partners and Equity Investor see also
Note 10C.
J. PUBLIC OFFERING IN ISRAEL - JUNE 2006
In June 2006 the Company completed an underwritten public offering of
the Company's securities on the Tel-Aviv Stock Exchange resulting in
immediate gross proceeds of approximately NIS 140,000,000
(approximately $31,000). The units sold consisted of (i) convertible
debentures Series C in the face amount of NIS 163,800,000
(approximately $36,661), (ii) 390,000 options each exercisable for the
three months ended September 27, 2006 for NIS 100 principal amount of
convertible debentures at an exercise price equal to 85% of their face
amount, (iii) 10,920,000 warrants each exercisable for the three
months ended September 27, 2006 for one Ordinary Share of the Company
at a price of NIS 6.75 (approximately $0.00157, and (iv) 5,460,000
warrants each exercisable for three years ending on June 28, 2009 for
one Ordinary Share of the Company at a price of NIS 7.40
(approximately $0.00175). The convertible debentures are convertible
into the Company's Ordinary Shares at a conversion rate of one
Ordinary Share per NIS 8.40 (approximately $0.00199) principal amount
of convertible debentures. The convertible debentures carry a zero
coupon with principal payable at maturity in December 2011, at a
premium of 37% over face value, linked to the CPI. The conversion
price is subject to reduction in certain limited circumstances.
In addition, the Company issued similar units including principle
value of NIS 630,000 convertible debentures in consideration for NIS
526,000 through a private placement to its market maker in connection
with said offering.
Through September 2006, 391,500 options to purchase convertible
debentures described in (ii) above were exercised and 350,000 short
term warrants described in (iii) above were exercised into Ordinary
Shares, totaling in proceeds of approximately $8,000.
F - 50
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - SHAREHOLDERS' EQUITY (CONT.)
K. PRIVATE PLACEMENT IN ISRAEL - NOVEMBER 2006
In the fourth quarter of 2006, the Company received and accepted
orders from Israeli investors in private placements for 11,615,000
Ordinary Shares and 5,227,500 warrants ("Series 5 Warrants"). The
price of the Ordinary Shares was equal to the closing price of the
Company's shares on the Tel-Aviv Stock Exchange prior to the relevant
private placements and the warrants were issued for no consideration.
Total immediate gross proceeds amounted to approximately $22,000. Each
of the Series 5 Warrants is exercisable at any time during a period of
four years ending in December 2010 at a price per share equal to a 25%
premium to the market price of the Company's shares at the date the
prospectus is published. As of December 28, 2006, following the
publication of the prospectus, the exercise price was finalized and
determined to be NIS 9.48 (approximately $0.0022) linked to the CPI.
Series 5 Warrants have been classified to equity.
L. PRIVATE PLACEMENT IN THE US - MARCH 2007
In March 2007, the Company completed a private placement of its
securities in which it sold Ordinary Shares and warrants for the
purchase of Ordinary Shares, raising a total of approximately $29,000
in gross proceeds. In the private placement, the Company issued
approximately 18.8 million shares and warrants exercisable into
approximately 9.4 million shares at an exercise price of $2.04
(subject to possible adjustments under certain circumstances)
exercisable until March 15, 2012 ("Series I Warrants"). The Company
also issued short-term warrants at an exercise price of $1.70 ("Series
II Warrants"), however all Series II Warrants were not exercised and
were fully expired as of December 31, 2007.
M. LONG-TERM DEBENTURES ISSUED IN ISRAEL - 2007
In the second half of 2007, the Company consummated two private
placements with Israeli institutions of long-term convertible and
non-convertible debentures and warrants, see Note 10E.
N. U.S SHELF PROSPECTUS
In January 2008, the Company filed a shelf registration statement on
Form F-3 with the US Securities and Exchange Commission to allow for
the registration of a possible offer and sale of up to $30,000 of
securities of the Company, it may elect to execute during the three
years following the effective date of the registration statement. As
of the approval date of the financials statements, the registration
statement has not yet been declared effective. The Company has made no
decisions as to when, if at all, it will actually raise funds under
the shelf registration.
F - 51
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 15 - INFORMATION ON GEOGRAPHIC AREAS AND MAJOR CUSTOMERS
A. REVENUES BY GEOGRAPHIC AREA (as percentage of total sales)
Year ended December 31,
----------------------------------
2007 2006 2005
-------- -------- --------
United States 75% 69% 64%
Israel 7 7 7
Asia Pacific 10 16 20
Europe 8 8 9
-------- -------- --------
Total 100% 100% 100%
======== ======== ========
B. LONG-LIVED ASSETS BY GEOGRAPHIC AREA - Substantially all of the
Company's long-lived assets are located in Israel.
C. MAJOR CUSTOMERS (as percentage of total sales)
Year ended December 31,
----------------------------------
2007 2006 2005
-------- -------- --------
Customer A (*) 29% 23% 22%
Customer B 13 9 5
Customer C 11 2 1
Customer D 7 10 14
Customer E (*) (**) 5 11 8
Other customers (***) 11 21 20
(*) Related party
(**) Including its affiliates
(***) Represents sales to two different customers each of whom
accounted for between 5% and 6% of sales during 2007; to five
different customers each of whom accounted for between 2% and 6%
of sales during 2006 and to five customers accounted for between
2% and 8% of sales during 2005.
As of December 31, 2007 and 2006, the above major customers
constituted the majority of the trade accounts receivable reflected on
the balance sheets.
NOTE 16 - FINANCING EXPENSES, NET
Financing expenses, net consist mainly of Bank loans payable interest- see
Note 9, and interest and other financing expenses in relation to our
debentures- see Note 10.
F - 52
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 17 - INCOME TAXES
A. APPROVED ENTERPRISE STATUS
Substantially all of the Company's existing facilities and other
capital investments through December 31, 2005 have been granted
approved enterprise status, as provided by the Israeli Law for the
Encouragement of Capital Investments - 1959 ("Investments Law") see
Note 6B.
The tax benefits derived from approved enterprise status relate only
to taxable income attributable to each approved enterprise investments
program. Pursuant to the Investments Law and the approval
certificates, the Company's income attributable to its various
approved enterprise investments is taxed at a rate of up to 25%
through 2012. Taxable income attributable to the Fab 2 approved
program shall be tax-exempt for the first two years it arises. The
portion of the Company's taxable income that is not attributable to
approved enterprise investments is taxed at a rate of 29% in 2007
(regular "Company Tax"). The regular Company Tax rate is to be
gradually reduced to 25% until 2010.
The tax benefits are also conditioned upon fulfillment of the
requirements stipulated by the Investments Law and the regulations
promulgated thereunder, as well as the criteria set forth in the
certificates of approval. In the event of a failure by the Company to
comply with these conditions, the tax benefits could be canceled, in
whole or in part, and the Company would be required to refund the
amount of the canceled benefits, plus interest and certain inflation
adjustments. In management's opinion, the Company has been in
compliance with the conditions through the approval date of the
financial statements. See also Notes 6B and 13A(7).
F - 53
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 17 - INCOME TAXES (CONT.)
B. COMPONENTS OF DEFERRED TAX ASSET/LIABILITY
The following is a summary of the components of the deferred tax
benefit and liability reflected on the balance sheets as of the
respective dates:
As of December 31,
-----------------------
2007 2006
--------- ---------
DEFERRED TAX BENEFIT - CURRENT
Amounts relating to employees benefits
$ 797 $ 1,717
Other 438 115
--------- ---------
1,235 1,832
Valuation allowance (1,235) (1,832)
--------- ---------
Total current deferred tax benefit $ -- $ --
========= =========
NET DEFERRED TAX BENEFIT - LONG-TERM
Deferred tax assets -
Net operating loss carryforwards $ 200,000 $ 174,000
Research and development 1,851 2,063
Liability for employee rights upon severance 905 656
--------- ---------
202,756 176,719
Valuation allowance (151,844) (128,707)
--------- ---------
50,912 48,012
Deferred tax liability - depreciation and amortization (50,912) (48,012)
--------- ---------
Total net long-term deferred tax benefit $ -- $ --
========= =========
C. EFFECTIVE INCOME TAX RATES
The reconciliation of the statutory tax rate to the Company's
effective tax rate is as follows:
Year ended December 31,
------------------------------------
2007 2006 2005
-------- -------- --------
Israeli statutory rate (29)% (31)% (34)%
Reduced tax rate for approved enterprise 9 11 14
Tax benefits for which deferred taxes
were not recorded 17 13 21
Permanent differences and other, net 3 7 (1)
-------- -------- --------
--% --% --%
======== ======== ========
D. NET OPERATING LOSS CARRYFORWARD
As of December 31, 2007, the Company had net operating loss
carryforwards for tax purposes of approximately $1,000,000, which may
be carried forward for an unlimited period of time.
F - 54
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 17 - INCOME TAXES (CONT.)
E. FINAL TAX ASSESSMENTS
The Company possesses final tax assessments through the year 1998. In
addition, the tax assessments for the years 1999-2003 are deemed
final.
NOTE 18 - RELATED PARTIES BALANCES AND TRANSACTIONS
A. BALANCES
As of December 31,
--------------------
2007 2006
-------- --------
Trade accounts receivable $ 12,823 $ 13,625
======== ========
Long-term investment $ 950 $ --
======== ========
Current liabilities, including current maturity of long-term
loans $ 7,459 $ 5,895
======== ========
Convertible debentures $ 24,500 $ 24,500
======== ========
Long-term liability in respect of customers' advances $ 9,922 $ 27,340
======== ========
Other long-term liabilities, including long-term loans from
related parties, net of current maturity $ 21,541 $ 9,279
======== ========
Capital note $100,000 $100,000
======== ========
B. TRANSACTION
As of December 31,
--------------------------------
2007 2006 2005
-------- -------- --------
Revenue $ 78,870 $ 64,055 $ 33,456
======== ======== ========
Interest on loans and debentures $ 2,252 $ 1,632 $ 60
======== ======== ========
Expenses paid $ 289 $ 46 $ 47
======== ======== ========
Equity conversion of customer advances -
see Note 13A(5) $ 6,414 $ 7,621 $ 1,794
======== ======== ========
Conversion of customer advances into
Long-term loans - see Note 13A(5) $ 1,258 $ 2,823 $ 936
======== ======== ========
Long-term loan received $ 14,000 $ 9,705 $ --
======== ======== ========
Loans repayment $ 2,974 $ -- $ --
======== ======== ========
Stock-based compensation - see Note 14B(5) $ 723 $ -- $ --
======== ======== ========
C. For commitments, contingencies and other transaction relating to Fab 2
Wafer Partner and Equity Investor agreements, see Note 13A.
F - 55
EXHIBIT 4.82
EQUIPMENT FACILITY AGREEMENT
THIS EQUIPMENT FACILITY AGREEMENT ("THIS AGREEMENT") is made on the 10th day of
September, 2007,
BETWEEN:
(1) TOWER SEMICONDUCTOR LTD., a company incorporated under the laws of Israel
(company no. 52-004199-7), whose registered office is at P.O. Box 619,
Industrial Area, Migdal Haemek 23105, Israel ("THE BORROWER");
AND
(2) BANK HAPOALIM B.M. ("THE BANK")
WHEREAS: the Borrower carries on business as an independent "foundry"
manufacturer of semiconductor integrated circuits and a provider
of related design services and the Borrower wishes to purchase
the Ramp-Up Equipment (as defined in the Facility Agreement dated
January 18, 2001, as amended and restated on August 24, 2006, as
further amended on September 10, 2007 and as may be amended from
time to time ("THE FACILITY AGREEMENT")) and requires financing
for payment of the cost of acquisition of the Ramp-Up Equipment;
AND WHEREAS: the Bank, Bank Leumi le-Israel B.M. and the Borrower are parties
to the Facility Agreement;
AND WHEREAS: subject to the terms and conditions of this Agreement, including
the fulfilment of the conditions precedent set out below, the
Bank is willing to make available to the Borrower a secured US
Dollar credit facility in order to finance partially the cost of
acquisition of the Ramp-Up Equipment,
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. INTERPRETATION
1.1. DEFINITIONS
In this Agreement, the following terms have the meanings given to them
in this clause 1.1:
1.1.1. "AVAILABILITY PERIOD" - means the period commencing on the
Closing Date and ending on the Termination Date;
1.1.2. "AVAILABLE COMMITMENT" - means the Commitment less: (a) all
outstanding Equipment Facility Credits provided by the Bank; and
(b) any such Equipment Facility Credits that have been requested
and are due to be made under the Equipment Facility on or before
the proposed Drawdown Date or Issue Date, as the case may be;
1.1.3. "BANK" - means Bank Hapoalim B.M.;
1.1.4. "BORROWER" - means Tower Semiconductor Ltd.;
1.1.5. "CHARGED ACCOUNT" - means account number 545454 at the Bank,
Migdal Haemek Branch No. 728, in the name of the Borrower, into
which account:
(a) all Equipment Loans by the Bank will be paid in accordance
with clause 4.2.4 below;
(b) all repayments and prepayments of Equipment Loans to the
Bank will be made;
- 2 -
(c) all deposits (if any), made in respect of an Equipment L/C
issued by the Bank, as referred to in clause 4.3.2.4 below
will be deposited; and
(d) all other payments to the Bank under this Agreement are to
be made pursuant to this Agreement;
1.1.6. "CLOSING DATE" - means the second Business Day following the
date on which the Bank is satisfied that all of the conditions
precedent referred to in clause 3 below have been fulfilled;
1.1.7. "COMMITMENT" - means the amount of US $15,000,000 fifteen
million United States Dollars);
1.1.8. "DRAWDOWN DATE" - means, in respect of any Equipment Loan, the
date of the making of such Equipment Loan;
1.1.9. "DRAWDOWN REQUEST" - means a notice substantially in the form
of SCHEDULE 1.1.9 hereto;
1.1.10. "EQUIPMENT FACILITY" - means the US Dollar credit facility
granted to the Borrower by the Bank pursuant to clause 2.1 below;
1.1.10A. "EQUIPMENT FACILITY CREDITS" - means any Equipment Loans made
to the Borrower pursuant to the Equipment Facility and/or any
Equipment L/Cs issued by the Bank in lieu of all or part of the
Equipment Loans or, as the context requires, the principal amount
of such Equipment Loans at such relevant time and the Maximum
Drawing Amount of such Equipment L/Cs at such relevant time;
provided that, the maximum aggregate amount of all Equipment
Facility Credits shall not exceed US $15,000,000 (fifteen million
United States Dollars);
- 3 -
1.1.11. "EQUIPMENT FACILITY DEFAULT" - means any Equipment Facility
Event of Default or any event which with the giving of notice or
lapse of time, or the making of any determination hereunder, or
the satisfaction of any other condition (or any combination
thereof) would constitute an Equipment Facility Event of Default;
1.1.12. "EQUIPMENT FACILITY EVENT OF DEFAULT" - means any of the
events or circumstances described in clauses 12.2-12.9
(inclusive) below;
1.1.13. "EQUIPMENT L/C" - means a standby or documentary letter of
credit or bank guarantee issued, or to be issued, by the Bank
under the Equipment Facility for the account of the Borrower in
accordance with clause 4.3 below;
1.1.14. "EQUIPMENT LOAN" - means a loan made or to be made by the Bank
under the Equipment Facility pursuant to clause 4.2 below;
1.1.15. "EQUIPMENT LOAN MATURITY DATE" - means the earlier of:
(a) the Final Equipment Facility Maturity Date; and
(b) the Business Day immediately following the second
anniversary of the date on which the Equipment Loan was
made,
subject, in each case, to mandatory prepayment on an earlier date
pursuant to clause 6.2 below;
- 4 -
1.1.16. "FEE LETTER" - means the fee letter dated the date hereof
between the Bank and the Borrower in the form of SCHEDULE 1.1.16
hereto;
1.1.17. "FINAL EQUIPMENT FACILITY MATURITY DATE" - means March 31,
2010;
1.1.18. "ISSUE DATE" - means, in respect of any Equipment L/C, the
date of the issue of such Equipment L/C;
1.1.19. "L/C APPLICATION" - means an application by the Borrower for
the issue of an Equipment L/C in such form as may be agreed upon
by the Bank and the Borrower from time to time and which is to be
made pursuant to clause 4.3 hereof;
1.1.20. "SHARE WARRANTS" - means the warrants to acquire shares of the
Borrower to be issued by the Borrower to the Bank in the form of
SCHEDULE 1.1.20 hereto;
1.1.21. "TERMINATION DATE" - means the Business Day immediately
following the second anniversary of the Closing Date.
1.2. Unless otherwise defined in this Agreement, terms defined and
references construed in the Facility Agreement shall have the same
meaning and construction in this Agreement.
1.3. The recitals and schedules hereto form an integral part thereof.
2. THE EQUIPMENT FACILITY
2.1. GRANT OF EQUIPMENT FACILITY
Subject to the fulfilment of the conditions precedent set out in
clause 3 below and to compliance with the further conditions set out
in clause 4 below, the Bank, relying upon each of the representations
and warranties made or incorporated by reference in this Agreement,
agrees to grant to the Borrower, for application only in accordance
with clause 2.2 below and otherwise subject to the terms and
conditions of this Agreement, the Equipment Facility in the aggregate
amount of US $15,000,000 (fifteen million United States Dollars),
being a Dollar Facility.
- 5 -
2.2. PURPOSE
The Borrower shall apply all Equipment Facility Credits only towards
the payment of the cost of acquisition of the Ramp-Up Equipment.
2.3. NO OBLIGATION TO MONITOR
The Bank shall not be under any obligation to monitor or verify the
application of any Equipment Facility Credit made pursuant to this
Agreement. The Borrower shall promptly notify the Bank of the making
of any commitments to purchase or of any purchase order relating to
any acquisition of Ramp-Up Equipment.
3. CONDITIONS PRECEDENT
The obligations of the Bank under this Agreement are subject to the
condition that the Bank shall have received, by not later than December 31,
2007, the following documents, matters and things in form and substance
satisfactory to the Bank:
3.1. a copy, certified as a true copy by the external legal counsel of the
Borrower, of the Certificate of Incorporation, Memorandum of
Association and Articles of Association of the Borrower or, if
applicable, a certificate from external legal counsel as to the
absence of changes from the certified copies of the aforegoing
delivered to the Bank on or about September 5, 2006;
3.2. copies of resolutions of the Board of Directors of the Borrower
authorising named officers of the Borrower to execute, deliver and
perform this Agreement and each of the other Finance Documents entered
into in connection with this Agreement and to give all notices and
take all other action required to be given or taken by the Borrower
under this Agreement and under each other Finance Document;
3.3. no Material Adverse Effect shall have occurred;
- 6 -
3.4. there shall be no impediment, restriction, limitation or prohibition,
including impediments, restrictions, limitations or prohibitions
imposed under law or by any Governmental Body, as to the proposed
financing under this Agreement or as to the issuance of the Share
Warrants to the Bank or as to the security interests to be created
with respect to the Ramp-Up Equipment under the Security Documents or
as to any rights of any collateral thereunder or as to application of
the proceeds of the realisation of any such rights;
3.5. an opinion of Yigal Arnon & Co., Advocates, the Borrower's external
legal counsel, addressed to the Bank;
3.6. all of the Borrower's representations and warranties given by the
Borrower pursuant to this Agreement shall be accurate in all material
respects as of the Closing Date, as if made on the Closing Date;
3.7. execution of the Share Warrants;
3.8. execution of the Fee Letter and payment of all fees payable to the
Bank thereunder;
3.9. the Facility Agreement, including Amendment No. 1, dated September 10,
2007, to the Restated Facility Agreement, dated August 24, 2006, shall
be effective and in full force and effect;
3.10. all of the conditions precedent set forth in clause 1.1.115(l) of the
Facility Agreement shall have been fulfilled, including:
3.10.1. the closing under the definitive documentation between the
Borrower and TIC, with respect to the US $30,000,000 (thirty
million United States Dollars) of Permitted Subordinated TIC Debt
to be provided by TIC to the Borrower, shall have occurred or
shall occur simultaneously with the closing of this Agreement;
provided that, for the avoidance of doubt, the terms of such
Permitted Subordinated TIC Debt shall be in accordance with
clause 1.1.115(l) of the Facility Agreement;
3.10.2. the delivery to the Bank of an irrevocable and unconditional
undertaking by TIC, in the form attached hereto as SCHEDULE 3.10
("THE UNDERTAKING"), to provide Permitted Subordinated TIC Debt
to the Borrower in accordance with clause 4.1.2.2 below, such
that at no time shall the amount of principal of Permitted
Subordinated TIC Debt provided by TIC be in an amount less than
the principal of all Equipment Loans (as such term is defined in
the Facility Agreement) provided by all Equipment Lenders (as
such term is defined in the Facility Agreement) (including an
undertaking by TIC directly to make one-half of the payment to be
made to the beneficiary of the Equipment L/C (or immediately
reimburse the Bank for one-half of the payment to the beneficiary
so made by the Bank), which payment shall be deemed a portion of
the Permitted Subordinated TIC Debt required to be provided by
TIC to the Borrower); and
- 7 -
3.10.3. a net amount of at least US $40,000,000 (forty million United
States Dollars) shall have been: (a) unconditionally and
irrevocably invested in the Borrower by way of Paid-in-Equity,
Permitted Subordinated Debt, excluding (for the avoidance of
doubt) Permitted Subordinated TIC Debt (including a gross amount
of US $39,977,064 (thirty-nine million, nine hundred and
seventy-seven thousand and sixty-four United States Dollars)
already raised) or unsecured customer advances, in form and
substance satisfactory to the Banks; or (b) generated from Excess
Cash Flow, including as may be reflected in the Borrower's
Accounts for a Quarter commencing from the first Quarter of 2007,
provided that any such Excess Cash Flow is held by the Borrower
as cash in short term bank deposits.
3.11. the Borrower shall have received written confirmations of the receipt
of all requisite corporate and third party, including Israeli and
foreign Governmental Body, approvals to the transactions contemplated
by this Agreement;
3.12. the closing(s) under the definitive documentation between the
Borrower and the Equipment Lender(s), with respect to the remaining US
$15,000,000 (fifteen million United States Dollars) of Equipment Loans
(as such term is defined in the Facility Agreement) and/or Equipment
L/Cs (as such term is defined in the Facility Agreement) shall have
occurred or shall occur simultaneously with the closing of this
Agreement; provided that, the terms of such Equipment Loans (as such
term is defined in the Facility Agreement) and/or Equipment L/Cs (as
such term is defined in the Facility Agreement) shall be in accordance
with clause 1.1.115(l) of the Facility Agreement;
3.13. no Equipment Facility Default shall have occurred and the
consummation of this Agreement shall not cause an Equipment Facility
Default to occur; and
- 8 -
3.14. an officer's certificate signed by the CEO and CFO of the Borrower on
behalf of the Borrower indicating that all of the provisions of this
clause 3 have been complied with in their entirety.
In the event that the conditions precedent are not fulfilled by December
31, 2007 then this Agreement shall no longer be of any force or effect and
neither party shall have any claim against the other party arising out of
or in connection with this Agreement. The Bank undertakes that promptly
following the fulfilment to the satisfaction of the Bank of all the
conditions precedent referred to in this clause 3 above, the Bank shall
confirm to the Borrower in writing that the conditions precedent have been
fulfilled and the Bank is prepared to close.
4. AVAILABILITY OF EQUIPMENT FACILITY CREDITS
4.1. AVAILABILITY
Notwithstanding anything to the contrary in this Agreement:
4.1.1. the Bank shall not be obliged to make any Equipment Facility
Credit available to the extent that doing so would cause the
aggregate amount thereof to exceed the Commitment; and
4.1.2. Equipment Facility Credits shall be made during the
Availability Period only and then only if all the following
conditions for each specific type of Equipment Facility Credit
specified hereunder in this clause 4 are fulfilled;
4.1.2.1. the other Equipment Lender or Lenders providing, in
accordance with clause 1.1.115(l) of the Facility Agreement,
an equal amount of Equipment Loans (as such term is defined
in the Facility Agreement) and/or Equipment L/Cs (as such
term is defined in the Facility Agreement) having the same
purpose and the same maturity date as the Equipment Facility
Credit proposed to be provided by the Bank;
4.1.2.2. TIC simultaneously therewith, providing, in accordance
with clause 1.1.115(l) of the Facility Agreement, Permitted
Subordinated TIC Debt to the Borrower in an amount equal to
the aggregate amount of Equipment Loans (as such term is
defined in the Facility Agreement) to be provided by the
Bank and the other Equipment Lender or Lenders, such
Permitted Subordinated TIC Debt to have the same purpose as,
and the same or later maturity date than, such parallel
Equipment Loans (as such term is defined in the Facility
Agreement);
- 9 -
4.1.2.3. the proposed date for the making of such Equipment
Facility Credit is a Business Day which is or precedes the
Termination Date;
4.1.2.4. the Borrower shall have entered into a purchase contract
and/or submitted a purchase order for the Ramp-Up Equipment,
whereby upon payment therefor, the Borrower shall own the
Ramp-Up Equipment, free and clear of all Encumbrances (other
than Permitted Encumbrances); the Borrower shall not be in
default under its purchase obligations with respect to the
Ramp-Up Equipment and the Borrower shall not have
voluntarily or involuntarily sold, transferred, leased or
otherwise disposed of all, or any part of, or interest in,
the Ramp-Up Equipment to any person;
4.1.2.5. no Encumbrance over the Ramp-Up Equipment purchased by
the Borrower as aforesaid or any part thereof shall exist
(other than Permitted Encumbrances);
4.1.2.6. no Equipment Facility Default shall have occurred and be
continuing and no Equipment Facility Default shall occur as
a result of the making of such Equipment Facility Credit;
4.1.2.7. the amount of the Equipment Facility Credit requested
shall not exceed the total Available Commitment as at the
Drawdown Date or Issue Date, as the case may be;
4.1.2.8. the representations and warranties given by the Borrower
pursuant to this Agreement shall be true and accurate in all
material respects on and as at the proposed date for the
making of the Equipment Facility Credit; and
4.1.2.9. the Available Commitment as at the Termination Date
shall automatically be cancelled.
- 10 -
4.2. EQUIPMENT LOANS
Subject to the fulfilment of the conditions precedent, to compliance
with the conditions set out in clause 4.1 above and to compliance with
the following conditions, the Bank shall make an Equipment Loan under
the Equipment Facility during the Availability Period only if:
4.2.1. the Borrower shall have delivered to the Bank a Drawdown
Request for such Equipment Loan, specifying a date for making
such Equipment Loan, being at least 7 (seven) Business Days after
the date of delivery of such Drawdown Request. Any Drawdown
Request will upon delivery thereof be irrevocable;
4.2.2. the minimum amount of each Equipment Loan shall be a minimum
amount of US $1,000,000 (one million United States Dollars) and
an integral multiple of US $1,000,000 (one million United States
Dollars) (other than (i) in the case of an Equipment Loan
provided in connection with an Equipment L/C which shall not be
required to be in any minimum amount or in any integral multiple
or (ii) in the case of an Equipment Loan which shall be for the
balance of the Available Commitment);
4.2.3. all Equipment Loans made under this Agreement shall be in US
Dollars; and
4.2.4. all Equipment Loans shall be made by the Bank by credit of the
amount to be loaned by the Bank to the Charged Account.
4.3. LETTERS OF CREDIT
4.3.1. Subject to the fulfilment of the conditions precedent, to the
compliance with the conditions set out in clause 4.1 above and to
compliance with the following conditions (and subject to the
conditions that the Bank shall not be required to issue any
Equipment L/C until: (a) the terms of the Equipment L/C have been
agreed between the Bank and the beneficiary thereof; and (b) the
Bank is satisfied that the Undertaking is in full force and
effect), the Bank shall issue Equipment L/Cs under the Equipment
Facility during the Availability Period, if:
4.3.1.1. the Borrower shall have delivered to the Bank an L/C
Application, specifying the proposed Issue Date of such
Equipment L/C, being at least 5 (five) Business Days after
the date of delivery of such L/C Application, as well as the
name of the beneficiary of the Equipment L/C and the details
of the transaction in respect of which the Equipment L/C is
to be issued;
- 11 -
4.3.1.2. the Equipment L/C is denominated in US Dollars;
4.3.1.3. the L/C Application is accompanied by a copy of the
terms of the proposed Equipment L/C;
4.3.1.4. the expiry date of the Equipment L/C is a Business Day
falling no later than the Termination Date;
4.3.1.5. there is a maximum limit to the stated liability of the
Bank under the Equipment L/C; and
4.3.1.6. the Maximum Drawing Amount of such Equipment L/C, when
aggregated with the Maximum Drawing Amounts of all other
Equipment L/Cs outstanding or to be issued on such Issue
Date and the amount of Equipment Loans outstanding or to be
drawn down pursuant to a pending Drawdown Request, shall not
exceed US $15,000,000 (fifteen million United States
Dollars);
4.3.1.7 the Borrower shall have delivered to the Bank, at least 2
(two) Business Days prior to the proposed issuance date of
the proposed Equipment L/C, a confirmation from TIC that the
provisions of paragraph 2 of the Undertaking are fully
applicable to the Equipment L/C covered by such L/C
Application.
4.3.2. The Borrower shall pay to the Bank a commission in respect of
an Equipment L/C equal to the following percentage per annum of
the Maximum Drawing Amount of such Equipment L/C:
4.3.2.1. 0.75% (nought point seven five percent) per annum; or
4.3.2.2. in certain special cases, if so determined by the Bank,
1% (one percent) per annum; or
4.3.2.3. in the case where an advising, nominated or confirming
bank is required, the fees of such advising, nominated or
confirming bank, in addition to the commissions set forth in
clauses 4.3.2.1 or 4.3.2.2 above, as the case may be; or
- 12 -
4.3.2.4. in the event that the Borrower shall have placed funds
on deposit in the Charged Account at the Bank in an amount
equal at least to the Maximum Drawing Amount of the
Equipment L/C, which deposit is duly pledged in favour of
the Bank (or if all of the Equipment Lenders are the Banks,
in favour of the Banks) by a first-ranking fixed charge in
form and manner acceptable to the Bank as security for the
Borrower's obligations to the Bank under the Finance
Documents, including this Agreement, 0.25% (nought point two
five percent) per annum, provided that if prior to the
expiry date of such Equipment L/C, any part of the amount on
deposit pledged as aforesaid is, with the consent of the
Bank, released such that the amount on deposit is not equal
to the Maximum Drawing Amount with respect to such Equipment
L/C, the commission payable in respect of such Equipment
L/C, as the case may be as aforesaid, shall be such
percentage per annum as determined pursuant to clauses
4.3.2.1 and 4.3.2.2 above.
Commissions as aforesaid shall be paid in advance on the Issue
Date for such Equipment L/C on the Maximum Drawing Amount of such
Equipment L/C.
4.3.3. Each L/C Application shall be effective on actual receipt by
the Bank and once given shall be irrevocable.
4.3.4. The terms of the Equipment L/C must contain a clear procedure
for the making of claims under such Equipment L/C satisfactory to
the Bank which shall include a requirement that the beneficiary
gives at least 10 (ten) Business Days' notice of payment
(together with all documents required to accompany such notice,
in full compliance with the terms of such Equipment L/C) under
the relevant Equipment L/C.
4.3.5. For the removal of doubt, subject only to the terms of this
Agreement, each Equipment L/C shall be governed by the terms and
conditions customary at the Bank with respect to such an L/C.
- 13 -
4.3.6. The Bank shall, promptly after being notified by a beneficiary
under an Equipment L/C that the Bank is required to make payment
under such Equipment L/C (together with all documents required to
accompany such requirement in full compliance with the terms of
such Equipment L/C), notify the Borrower and TIC that such
payment is due, of the amount demanded and of the date for
payment thereof ("THE SETTLEMENT DATE").
On receipt of a notice from the Bank under this clause 4.3.6, the
Borrower shall either:
4.3.6.1. subject to the terms and conditions of this Agreement:
(a) incur Permitted Subordinated TIC Debt in an amount equal
to half of the relevant amount demanded through TIC's direct
payment to said beneficiary, on the date such amount is to
be paid by the Bank to said beneficiary under said Equipment
L/C, of one-half of the payment to be made to the
beneficiary of such Equipment L/C (or immediately, but no
later than the second Business Day after the making of such
payment, TIC's reimbursement of the Bank for one-half of the
payment to such beneficiary made by the Bank); and (b)
convert one-half of the relevant amount demanded into an
Equipment Loan. Each Equipment Loan and Permitted
Subordinated TIC Debt shall be denominated in US Dollars and
shall be in an aggregate amount (in US Dollars) equal to the
amount to be paid by the Bank on the Settlement Date. The
Borrower shall deliver to the Bank, by no later than the
close of business on the first Business Day following the
date of receipt of such notice ("THE CONVERSION DATE"), a
notice informing the Bank that this clause 4.3.6.1 shall
apply and in accordance therewith one-half of the relevant
amount demanded shall be converted into an Equipment Loan as
aforesaid on the Settlement Date. For the avoidance of
doubt, nothing in the aforegoing shall derogate from the
condition set out in clause 4.1.2.2 above; or
4.3.6.2. pay to the Bank, by no later than the close of business
on the Conversion Date, the full relevant amount demanded
under the Equipment L/C.
In the event that clause 4.3.6.1 above shall be applicable, the
Bank shall settle the amount demanded on the Settlement Date and
the Borrower shall be deemed to have received on the Settlement
Date an Equipment Loan from the Bank in an amount as determined
in accordance with clause 4.3.6.1 above.
- 14 -
In the event that clause 4.3.6.2 above shall be applicable, but
the Borrower shall fail to pay on the Conversion Date the full
relevant amount demanded on the Equipment L/C, the Bank shall
have the option to require TIC, pursuant to, and in accordance
with, the Undertaking, to pay to the Bank (such payment to be
Permitted Subordinated TIC Debt provided to the Borrower)
one-half of the amount payable thereunder by the Borrower and the
Borrower shall be deemed to have received on the Conversion Date
an Equipment Loan from the Bank in the remaining amount payable
pursuant to clause 4.3.6.2 above and not paid either by TIC or
the Borrower.
4.3.7. The Borrower unconditionally and irrevocably:
4.3.7.1. authorises and directs the Bank to pay any demand under
and in accordance with an Equipment L/C (which the Bank
believes, in its sole discretion, to be valid) without
requiring proof of the agreement of the Borrower that the
amounts so demanded or paid are or were due and
notwithstanding that the Borrower may dispute the validity
of any such request, demand or payment;
4.3.7.2. confirms that the Bank deals in documents only and shall
not be concerned with the legality of the claim or any other
underlying transaction or any set-off, counterclaim or
defence as between the Borrower and any beneficiary of an
Equipment L/C;
4.3.7.3. agrees that, subject to the last sentence of this clause
4.3.7, the Bank need not have regard to the sufficiency,
accuracy or genuineness of any such demand or any
certificate or statement in connection therewith or any
incapacity of or limitation upon the powers of any person
signing or issuing such demand, certificate or statement
which appears on its face to be in order and agrees that the
Bank shall not be obliged to enquire as to any such matters
and may assume, unless notified to the contrary, that any
such demand, certificate or statement which appears on its
face to be in order is correct and properly made;
- 15 -
4.3.7.4. without prejudice to the preceding clauses, agrees that
subject to the last sentence of this clause 4.3.7, if the
Bank pays any such demand in accordance with the terms of
the relevant Equipment L/C which is not legally payable,
that amount shall nevertheless be regarded as having been
properly paid for the purposes of this Agreement; and
4.3.7.5. agrees that subject to the last sentence of this clause
4.3.7, the Bank shall not be liable for any error, omission,
interruption or delay in transmission, despatch or delivery
of any message or advice, however transmitted, in connection
with any Equipment L/C. The Borrower agrees that subject to
the last sentence of this clause 4.3.7, any action taken or
omitted by the Bank under or in connection with each
Equipment L/C and the related drafts and documents, if done
in good faith, shall be binding upon the Borrower and shall
not result in any liability on the part of the Bank to the
Borrower.
Notwithstanding anything else herein, the Bank shall examine all
documents (if any) stipulated in an Equipment L/C with reasonable
care to ascertain whether or not they appear on their face to be
in compliance with the terms and conditions of the relevant
Equipment L/C.
4.3.8. The Borrower shall on demand indemnify and hold harmless the
Bank from and against all liabilities, costs, losses, damages and
expenses which the Bank incurs or sustains by reason of, or
arising in any way whatsoever in connection with, or by reference
to, the issue of any Equipment L/C or the Bank's performance of
the obligations expressed to be assumed by it under or in respect
of any Equipment L/C.
4.3.9. The Borrower's obligations under clause 4.3.8 above shall,
subject to the last sentence of clause 4.3.7 above, be absolute
and unconditional under any and all circumstances and
irrespective of the occurrence of any Equipment Facility Default
or Equipment Facility Event of Default or any condition precedent
whatsoever or any set-off, counterclaim or defence to payment
which the Borrower may have or have had against the Bank or any
beneficiary of an Equipment L/C.
- 16 -
4.3.10. The Bank shall subject to the last sentence of clause 4.3.7
above, be entitled to rely and shall be fully protected in
relying upon, any Equipment L/C, draft, resolution, written
notice, written consent, certificate, affidavit, letter,
cablegram, telegram, telecopy, telex or teletype message,
statement, Order or other document believed by it to be genuine
and correct and to have been signed, sent or made by the proper
person or persons, provided that any of the above may be
transmitted by facsimile or electronic transmission, if permitted
by the Equipment L/C.
4.3.11. The Borrower's obligations under clause 4.3.8 above shall,
subject to the last sentence of clause 4.3.7 above, not be
affected by any act, omission, matter or thing which, but for
this provision, might reduce, release or prejudice any of its
obligations under clause 4.3.8 above in whole or in part,
including and whether or not known to it:
4.3.11.1. any time or waiver granted to or composition with the
beneficiary of any Equipment L/C or any other person;
4.3.11.2. any taking, variation, compromise, exchange, renewal or
release of, or refusal or neglect to perfect, take up or
enforce, any rights, remedies or securities available to any
Bank or other person or arising under any Equipment L/C; and
4.3.11.3. any unenforceability, illegality or invalidity of any
Equipment L/C (so that the Borrower's obligations under
clause 4.3.8 above shall remain in full force and be
construed as if there were not such defect).
4.3.12. The indemnity under clause 4.3.8 above is a continuing
indemnity, extends to the ultimate balance of the Borrower's
obligations and liabilities under clause 4.3.8 above and shall
continue in force notwithstanding any intermediate payment in
whole or in part of those obligations or liabilities.
5. REPAYMENT
5.1. REPAYMENT OF LOANS
The Borrower shall repay each Equipment Loan in full upon the earlier
of: (a) the Final Equipment Facility Maturity date; and (b) the
Business Day immediately following, the second anniversary of the
making of such Equipment Loan, subject to mandatory prepayment in
accordance with clause 6 below.
- 17 -
5.2. PAYMENT OF ALL OTHER SUMS DUE ON THE FINAL MATURITY DATE
On the Final Equipment Facility Maturity Date, the Borrower
additionally shall pay to the Bank all other sums then outstanding
under this Agreement.
5.3. REPAYMENT IN CURRENCY OF LOAN
For the removal of doubt, each Equipment Loan, as well as all Interest
thereon, shall be repaid in US Dollars.
5.4. REPAYMENTS (INCLUDING PREPAYMENT) TO CHARGED ACCOUNT
All repayments as aforesaid and all prepayments (in accordance with
clause 6 below) shall be made by transfer to the Bank to the Charged
Account.
5.5. NO REBORROWING
The Borrower shall not be entitled to reborrow any part of an
Equipment Loan which is repaid. For removal of doubt: (a) the expiry
of an Equipment L/C (to the extent that it is not converted into an
Equipment Loan pursuant to clause 4.3.6 above) shall not reduce the
Commitment; and (b) the making of an Equipment Loan pursuant to clause
4.3.6 in respect of an Equipment L/C shall not constitute a
re-borrowing.
5.6. CANCELLATION OF COMMITMENT
For the removal of doubt and subject to the clarifications set forth
in clause 5.5 above with respect to Equipment L/Cs, the Commitment of
the Bank shall be cancelled by any amount repaid or prepaid under this
Agreement.
- 18 -
6. PREPAYMENT
6.1. VOLUNTARY PREPAYMENT
The provisions of clause 7 ("VOLUNTARY PREPAYMENTS") of the Facility
Agreement are hereby incorporated by reference and shall apply,
MUTATIS MUTANDIS, as if all references therein to the "Banks" and the
"Loans" were references to the "Bank" and "Equipment Loans",
respectively, each reference to a "Proportion" of a Loan shall be
deemed to refer to all of the Equipment Loans provided by the Bank,
and the reference in clause 7.1 of the Facility Agreement to "US
$10,000,000 (ten million United States Dollars)" shall be replaced
with "US $1,000,000 (one million United States Dollars)". For the
avoidance of doubt, the term "Total Outstanding" in clause 7.5 of the
Facility Agreement refers only to the Loans under the Facility
Agreement and not to the Equipment Loans that may be made hereunder.
6.2. MANDATORY PREPAYMENT
6.2.1. Upon the occurrence of a Triggering Quarter, the Borrower
shall, immediately and on a PRO RATA basis, prepay the Equipment
Loans and/or deposit funds in the Charged Account with respect to
the outstanding Equipment L/C's issued by the Bank at a rate of
US $3,750,000 (three million seven hundred and fifty thousand
United States Dollars) per Quarter, commencing on the last
Business Day of each Quarter following the Triggering Quarter
until the Equipment Loans are fully paid and until there shall
have been deposited in the Charged Account and duly pledged in
accordance with clause 4.3.2.4 above, an amount equal to the
Maximum Drawing Amounts of all outstanding Equipment L/C's issued
by the Bank.
For the avoidance of doubt and by way of illustration only, if
the Triggering Quarter is the Quarter ended March 31, 2008 and
the then outstanding Equipment Facility Credits aggregate US
$15,000,000 (fifteen million United States Dollars), consisting
of US $10,000,000 (ten million United States Dollars) in
Equipment loans and US $5,000,000 (five million United States
Dollars) in Equipment L/C's, the Borrower shall prepay US
$2,500,000 (two million five hundred thousand United States
Dollars) of Equipment Loans and deposit US $1,250,000 (one
million two hundred and fifty thousand United States Dollars) in
the Charged Account, duly pledged in accordance with clause
4.3.2.4 above, on the last Business Day of each of the Quarters
ended in June, September and December, 2008 and March, 2009.
- 19 -
6.2.2. Upon the occurrence of an Accelerated Trigger Quarter, the
Borrower shall, immediately and on a PRO RATA basis, prepay the
Equipment Loans to the Bank and/or deposit funds in the Charged
Account with respect to Equipment L/C's issued by the Bank at a
rate of US $6,250,000 (six million two hundred and fifty thousand
United States Dollars) per Quarter, commencing on the last
Business Day of each Quarter following the Accelerated Trigger
Quarter until the Equipment Loans are fully paid and until there
shall have been deposited in the Charged Account with the Bank
and duly pledged in accordance with clause 4.3.2.4 above, an
amount equal to Maximum Drawing Amounts of all outstanding
Equipment L/C's issued by the Bank.
For the avoidance of doubt and by way of illustration only, if
the Accelerated Trigger Quarter is the Quarter ended March 31,
2008 and the then outstanding Equipment Facility Credits
aggregate US $15,000,000 (fifteen million United States Dollars),
consisting of US $12,000,000 (twelve million United States
Dollars) of Equipment Loans and US $3,000,000 (three million
United States Dollars) in Equipment L/C's, the Borrower shall
prepay approximately US $5,000,000 (five million United States
Dollars) in Equipment Loans and deposit approximately US
$1,250,000 (one million two hundred and fifty thousand United
States Dollars) in the Charged Account, duly pledged in
accordance with clause 4.3.2.4 above, on the last Business Day of
each of the Quarters ended in June, September and December, 2008.
6.2.3. If and to the extent the Equipment L/C's in respect of which
deposits have been made pursuant to clauses 6.2.1 and 6.2.2 above
expire without any drawdown by the beneficiary thereof or any
other liability thereunder to the Bank and no Equipment Facility
Event of Default shall have occurred and be continuing, such
deposits shall be released to the Borrower.
6.2.4. Should the Borrower wish to make a voluntary prepayment with
respect to any Equipment Facility Credits to any other Equipment
Lender, the Borrower shall, simultaneously with such voluntary
prepayment, pay an amount equal to the amount of any such
voluntary prepayment to the Bank.
6.3. The provisions of clauses 8.2 ("NO REBORROWING OF MANDATORY
PREPAYMENT"), 8.4 ("MANDATORY PREPAYMENT TOGETHER WITH INTEREST AND
OTHER SUMS OWED"), 8.5 ("CURRENCY FOR MANDATORY PREPAYMENT") and 8.6
("SCHEDULE FOR MANDATORY PREPAYMENT") of the Facility Agreement are
hereby incorporated by reference and shall apply, mutatis mutandis, as
if all references to "Loans" were to "Equipment Loans".
- 20 -
7. INTEREST
7.1. INTEREST RATE
The rate of Interest applicable to the Equipment Loans in respect of
each Interest Period (provided that the first Interest Period in
respect of any Equipment Loan made other than on the first day of a
Quarter, shall commence on the date of the making of such Equipment
Loan and end on the last Business Day of the Quarter in which such
Equipment Loan is made) shall be the sum of: (a) the rate per annum
determined to be LIBOR in accordance with clause 1.1.94 of the
Facility Agreement on the Interest Determination Date for such
Interest Period; and (b) 3% (three percent) per annum.
7.2. ACCRUAL OF INTEREST
Interest as aforesaid in clause 7.1 above in respect of the Equipment
Loans shall accrue from day to day and shall be calculated on the
basis of the actual number of days elapsed and a 360 (three hundred
and sixty) day year.
7.3. PAYMENT OF INTEREST
All Interest accrued as aforesaid in clause 7.2 above on the Equipment
Loans shall be paid on each Interest Payment Date and on the Final
Equipment Facility Maturity Date. The Borrower shall pay to the Bank
all Interest payable as aforesaid into the Charged Account.
7.4. SUBSTITUTE INTEREST RATES
The provisions of clause 10 ("SUBSTITUTE INTEREST RATES") of the
Facility Agreement are hereby incorporated by reference and shall
apply, MUTATIS MUTANDIS, to this Agreement as if all references
therein to the "Banks" and the "Loans" were references to the "Bank"
and the "Equipment Loans".
- 21 -
8. COMMISSIONS, FEES AND EXPENSES
8.1. COMMITMENT COMMISSION
The Borrower shall, in respect of the Availability Period, pay to the
Bank a Commitment commission at the rate per annum of 0.25% (nought
point two five percent) on the Available Loan Commitment from time to
time as from the date of signature of this Agreement until the last
day of the Availability Period. Such fee shall accrue from day to day
and shall be calculated on the basis of the actual number of days
elapsed and a 360 (three hundred and sixty) day year and shall be paid
in arrears on each Interest Payment Date during the Availability
Period and on the Termination Date. "AVAILABLE LOAN COMMITMENT" means,
at any time, the Commitment at such time, less: (a) all Equipment
Loans outstanding at such time; and (b) the Maximum Drawing Amount of
all Equipment L/Cs outstanding at such time.
8.2. The provisions of clauses 11.3 ("LEGAL AND OTHER COSTS"), 11.5 ("STAMP
DUTIES AND LIKE TAXES"), 11.6 ("OTHER COMMISSIONS, FEES AND
EXPENSES"), 11.7 ("CURRENCY FOR PAYMENT") and 11.8 ("VAT") of the
Facility Agreement are hereby incorporated by reference and shall
apply, MUTATIS MUTANDIS, to this Agreement as if all references
therein to the "Banks" and the "Facility" were references to the
"Bank" and the "Equipment Facility".
9. TAXES; INCREASED COSTS; ILLEGALITY
The provisions of clauses 12 ("TAXES"), 13 ("INCREASED COSTS") and 14
("ILLEGALITY") of the Facility Agreement are hereby incorporated by
reference and shall apply, MUTATIS MUTANDIS, to this Agreement as if all
references to the "Banks", the "Loans" and the "Total Outstandings" therein
were references to the "Bank", the "Equipment Loans" and the "sum in
Dollars of the outstanding Equipment Loans at such time", respectively.
10. REPRESENTATIONS AND WARRANTIES
10.1. The provisions of clause 15 of the Facility Agreement, as amended by
Amendment No. 1, dated September 10, 2007, are hereby incorporated by
reference and shall apply, MUTATIS MUTANDIS, to this Agreement as if
all references to the "Banks" therein were references to the "Bank".
10.2. The Borrower confirms that this Agreement is a "Finance Document" as
defined in the Facility Agreement and that, for the avoidance of
doubt, all references to a Finance Document in the Facility Agreement
are, INTER ALIA, references to this Agreement.
- 22 -
11. UNDERTAKINGS
Without derogating from the Borrower's obligations under the Finance
Documents, including the Facility Agreement and the Debenture, the Borrower
undertakes to the Bank that, so long as any sum remains payable by the
Borrower under this Agreement or the Bank is under any obligation to
provide any Financial Indebtedness to the Borrower:
11.1. NEGATIVE PLEDGE
The Borrower shall not create or permit to subsist any Encumbrance on
the whole or any part of the Ramp-Up Equipment or the Charged Account,
save for Permitted Encumbrances.
11.2. DISPOSAL OF RAMP-UP EQUIPMENT
The Borrower will not and will procure that none of its Subsidiaries
will, either in a single transaction or in a series of transactions,
whether related or not and whether voluntarily or involuntarily, sell,
transfer, lease or otherwise dispose of all or any part of or interest
in the Ramp-Up Equipment to any person, except with the prior written
consent of the Bank.
11.3. INSUFFICIENCY IN CHARGED ACCOUNT
The Borrower acknowledges that neither any insufficiency of funds in
the Charged Account, nor any inability to apply any fund in the
Charged Account against any or all amounts owing under this Agreement,
shall at any time limit, reduce or otherwise affect the Borrower's
payment obligations under this Agreement.
11.4. FURTHER CHARGES
Without derogating from the Borrower's obligations under the Facility
Agreement and Debenture, the Borrower undertakes that it shall, from
time to time as requested by the Bank, execute:
11.4.1. a Supplement to the Debenture relating, INTER ALIA, to the
Ramp-Up Equipment and other assets and rights required under the
Debenture to be pledged by way of first-ranking fixed charge in
favour of the Banks, but not as yet specifically included in the
Debenture and shall cause such Supplement to be perfected and
duly registered with the Registrar of Companies and the Registrar
of Pledges and the Borrower shall deliver all documents as
referred to in clause 3.2 of the Debenture (MUTATIS MUTANDIS) and
shall sign all other documents and forms required for the
purposes of the aforegoing; provided that, if any Equipment
Lender is not a Bank, the Borrower undertakes promptly to execute
such further documents evidencing the pledge of the Ramp-Up
Equipment by way of first-ranking fixed charge in favour of the
Bank in such forms as shall be requested by the Bank from time to
time;
- 23 -
11.4.2. notices of assignment by way of charge of all Material
Contracts relating to the Ramp-Up Equipment (other than those
referred to in clauses 1.1.36(c)(i) and (ii) of the Facility
Agreement); and
11.4.3. notices to insurers and acknowledgements of such notices, as
referred to in clause 3.2 of the Debenture with respect to the
Ramp-Up Equipment (other than under Insurance Policies in respect
of liability of the Borrower to third parties or of liability of
the Borrower for damage to property of third parties or of the
type listed in Schedule 16.10.6(d) to the Facility Agreement).
11.5. EQUIPMENT L/CS
Upon the issuance of each Equipment L/C, the Borrower shall promptly
give TIC written notice of the terms and conditions thereof, including
the amount to be paid thereunder and the expiry date thereof, which
notification shall include a reference to the Undertaking and TIC's
responsibility to provide Permitted Subordinated TIC Debt in
connection therewith. The Borrower shall, at the same time as it gives
such notice to TIC, provide the Bank with a copy thereof.
12. DEFAULT
12.1. EVENTS OF DEFAULT
Each of the events set out in clause 12.2 to clause 12.9 is an event
of default ("AN EQUIPMENT FACILITY EVENT OF DEFAULT") (whether or not
caused by any reason outside the control of the Borrower or of any
other person). Promptly after the occurrence of an Equipment Facility
Event of Default, the Borrower will notify the Bank that such
Equipment Facility Event of Default has occurred.
- 24 -
12.2. NON-PAYMENT
The Borrower does not pay any amount payable by it under this
Agreement at the place and in the funds expressed to be payable,
within the earlier of: (a) 7 (seven) Business Days; or (b) 10 (ten)
days, of the due date for payment.
12.3. BREACH OF OBLIGATIONS
There is any breach of any undertaking by the Borrower in this
Agreement and, if such default is capable of remedy within such
period, within 7 (seven) days after receipt by the Borrower of written
notice from the Banks requiring the failure to be remedied, the
Borrower shall have failed to cure such default.
12.4. MISREPRESENTATION/BREACH OF WARRANTIES
Any representation or warranty made or repeated by or on behalf of the
Borrower in this Agreement (including through incorporation by
reference into this Agreement), or in any certificate or statement
delivered by or on behalf of the Borrower or under this Agreement is
incorrect or misleading in any material respect when made or deemed to
be made or repeated.
12.5. INVALIDITY
This Agreement shall cease to be in full force and effect in any
respect or shall cease to constitute the legal, valid, binding and
enforceable obligation of the Borrower or in the case of any Security
Document, fail to provide effective perfected security in favour of
the Bank over the Ramp-Up Equipment.
12.6. DEFAULT UNDER THE FACILITY AGREEMENT
A Default or Event of Default has occurred and is continuing. For the
avoidance of doubt, default under or a breach of the terms and
conditions of Permitted Subordinated Debt (including the Permitted
Subordinated TIC Debt) constitutes an Event of Default under clause
17.6.5 of the Facility Agreement.
12.7. NO ENCUMBRANCE
There shall exist no Encumbrance over the Ramp-Up Equipment other than
Permitted Encumbrances.
- 25 -
12.8. EXECUTION OR OTHER PROCESS
Any execution, attachment, sequestration or other process arising out
of any claim by any third party against the Borrower, save where: (a)
the Borrower is in good faith on reasonable grounds, contesting the
execution, attachment, sequestration or other process by appropriate
Proceedings diligently pursued; (b) the Bank is satisfied that the
ability of the Borrower to comply with its respective obligations
under this Agreement will not be adversely affected whilst such
distress, execution, attachment, diligence or other process is being
so contested; and (c) such process as aforesaid is cancelled or
withdrawn not later than 45 (forty-five) days after the institution
thereof.
12.9. TIC UNDERTAKING
12.9.1. Any of the representations and warranties by TIC in the
Undertaking are incorrect or misleading in any material respect
when made or deemed to be made or repeated.
12.9.2. TIC fails to comply with any undertaking or obligation
contained in the Undertaking and, if such default is capable of
remedy within such period, within 7 (seven) days after the
earlier of TIC becoming aware of such default and receipt by TIC
of written notice from the Bank requiring the failure to be
remedied, that TIC shall have failed to cure such default.
12.9.3. The Undertaking shall cease to be in full force and effect in
any material respect or shall cease to constitute the legal,
valid, binding and enforceable obligation of TIC or it shall be
unlawful for TIC to perform any of its material obligations under
the Undertaking, unless it expires in accordance with its terms.
12.9.4. TIC repudiates the Undertaking.
12.10. ACCELERATION
Upon the occurrence of an Equipment Event of Default and at any time
thereafter while the same is continuing, the Bank may, by notice to
the Borrower:
12.10.1. declare that an Equipment Facility Event of Default has
occurred; and/or
- 26 -
12.10.2. declare that the Equipment Loans together with all Interest
accrued on all Equipment Loans and all other amounts (including
amounts due under clause 14, to the extent applicable) payable by
the Borrower under this Agreement from time to time, shall
thenceforth be repayable on demand being made by the Bank (and in
the event of any such demand, the Equipment Loans, such Interest
and such other amounts shall be immediately due and payable);
and/or
12.10.3. declare the Equipment Loans immediately due and payable,
whereupon they shall become immediately due and payable, together
with all Interest accrued on the Equipment Loans and all other
amounts payable by the Borrower (including, amounts due under
clause 14, to the extent applicable); and/or
12.10.4. declare that the following amounts shall be payable on
demand, or demand that the Borrower immediately place on deposit
in the Charged Account, such deposit to be duly charged, by way
of a first-ranking fixed pledge and charge, to the satisfaction
of the Bank, an aggregate amount equal to the aggregate Maximum
Drawing Amounts of all Equipment L/Cs issued by the Bank.
12.11. EQUIPMENT LOANS DUE ON DEMAND
If, pursuant to clause 12.10.2 above the Bank declares the Equipment
Loans to be due and payable on demand, then and at any time
thereafter, so long as any Equipment Facility Event of Default is
continuing or has not been waived, the Bank may by written notice to
the Borrower require repayment of the Equipment Loans on such date as
the Bank may specify in such notice (whereupon the same shall become
due and payable on such date together with accrued Interest thereon
and any other sums then owed by the Borrower hereunder) or withdraw
such declaration with effect from such date as they may specify in
such notice.
12.12. COLLECTION
In the event of acceleration of the Equipment Loans pursuant to clause
12.10.3 above or of a written notice under clause 12.11 above, then,
without derogating from any other remedies or relief available to the
Bank under law or under this Agreement, the Bank shall be entitled to
take all steps as it deems fit in order to collect all sums owed by
the Borrower to the Bank under or in connection with this Agreement
(including all sums referred to in clause 12.10 above), including, to
realise all or any of the assets secured under the Security Documents
with respect to the Equipment Loans, all at the expense of the
Borrower and to utilise the sums received to repay in part or in full
all amounts owed by the Borrower hereunder.
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12.13. INDEMNITY
The Borrower shall indemnify the Bank against any losses, charges or
expenses which the Bank may sustain or incur as a consequence of:
12.13.1. the occurrence of any Equipment Facility Event of Default or
Equipment Facility Default; or
12.13.2. the operation of clauses 12.10, 12.11 or 12.12,
including, any losses, charges or expenses on account of funds
acquired, contracted for or utilised to fund any amount payable under
this Agreement or any amount repaid or prepaid. A certificate of the
Bank as to the amount of any such loss or expense shall be PRIMA FACIE
evidence in the absence of manifest error.
12.14. TERMINATION OF COMMITMENT
In the event of the operation of clause 12.10 above, the Bank shall be
entitled to terminate its Commitments. For the removal of doubt, such
termination shall not derogate from any obligations of the Borrower to
the Bank under this Agreement.
12.15. NO DEROGATION OF RIGHTS UNDER FACILITY AGREEMENT
For the avoidance of doubt, nothing in this Agreement shall derogate
from the rights of the Banks to declare, upon the occurrence of an
Equipment Facility Event of Default, that an Event of Default under
the Facility Agreement has occurred and to exercise any and all rights
of the Banks in connection therewith, including, INTER ALIA, to
declare all of the Loans under the Facility Agreement to be
immediately due and payable.
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13. DEFAULT INTEREST
13.1. DEFAULT RATE PERIODS
If any sum due and payable by the Borrower hereunder is not paid (or,
in the case of the sums referred to in clause 12.10.4 above, not paid
or deposited) on the due date therefor in accordance with the
provisions of this Agreement ("UNPAID SUM"), the period beginning on
such due date and ending on the date upon which the obligation of the
Borrower to pay the Unpaid Sum is discharged, shall be divided into
successive periods, each of which (other than the first) shall start
on the last day of such preceding period and the duration of each of
which shall (except as otherwise provided in this clause 13) be
selected by the Bank (such periods selected as aforesaid "INTEREST
PERIODS").
13.2. DEFAULT INTEREST
During each such Interest Period as is mentioned in clause 13.1 above,
an Unpaid Sum shall bear Interest at the rate per annum which is the
sum from time to time of: (a) 3% (three percent); and (b) the Interest
rate in respect of such Interest Period as would have been determined
in accordance with clause 7.1 above (provided that, if, for any such
Interest Period LIBOR cannot be determined, the rate of Interest
applicable to such Unpaid Sum shall be the rate per annum which is the
sum of: (i) 3% (three percent); and (ii) 3% (three percent) plus a
rate as certified by the Bank in accordance with clause 7.4 above.
13.3. PAYMENT OF DEFAULT INTEREST
Any Interest which shall have accrued under clause 13.2 above in
respect of an Unpaid Sum shall be due and payable and shall be paid by
the Borrower at the end of each Interest Period by reference to which
it is calculated or on such other dates as the Bank may specify by
written notice to the Borrower.
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14. BROKEN FUNDING INDEMNITY
14.1. BROKEN FUNDING
If the Bank receives or recovers all or any part of any Equipment Loan
otherwise than on the scheduled date of repayment of such amount
relating to such Equipment Loan, the Borrower shall on the first
Interest Payment Date following such repayment on demand pay to the
Bank an amount equal to the amount (if any) by which: (a) the
additional amount of Interest which would, in accordance with the
terms of this Agreement, have been payable on the amount so received
or recovered had it been received or recovered on the following
Interest Payment Date exceeds (b) the amount of Interest which, in the
opinion of the Bank, would have been payable to the Bank on the last
day of such Interest Period in respect of a deposit in the currency of
the relevant Loan, of an amount equal to the amount so received or
recovered, had such an amount been placed by it with a prime bank in
London for a period starting on the date of such receipt or recovery
and ending on the following Interest Payment Date. For the removal of
all doubt: (i) with respect to all or any part of any Equipment Loan
received or recovered otherwise than on the scheduled date of
repayment of such amount relating to such Equipment Loan, the payment
set forth above shall only be made once; and (ii) voluntary or
mandatory prepayments made in accordance with clause 6 above on an
Interest Payment Date shall not be subject to a payment of broken
funding in accordance with this clause 14.1.
14.2. FAILURE TO DRAW AN EQUIPMENT LOAN
In the event that the Borrower shall make any Drawdown Request, but
shall not be entitled to receive the relevant Equipment Loan by reason
of not having fulfilled all of the conditions therefor listed in
clauses 4.1 or 4.2 above, then, without derogating from any other
right of the Bank hereunder and under any applicable law, the Borrower
shall indemnify and compensate the Bank for any and all of the Bank's
costs and expenses in financing the amount requested by the Borrower,
the liquidation of any such funds and including loss of profit of the
Bank by reason of any such event.
15. PAYMENTS
15.1. PAYMENTS BY BORROWER
All payments to be made by the Borrower to the Bank shall be made in
same day funds to the Charged Account, which account shall be duly
charged in favour of the Bank (or if all of the Equipment Lenders are
the Banks, in favour of the Banks) by way of a first-ranking fixed
pledge and charge under the Debenture. All payments required to be
made by the Borrower under this Agreement shall be calculated without
reference to any set-off or counterclaim and shall be made free and
clear of and without any deduction for or on account of, any set-off
or counterclaim.
- 30 -
15.2. PAYMENTS BY BANK TO BORROWER
All payments to be made by the Bank to the Borrower in respect of
Advances shall be made by transfer of such payment to the Charged
Account.
16. SET-OFF; APPLICATION OF PAYMENTS;
CALCULATIONS AND EVIDENCE OF DEBT
The provisions of clause 21 ("SET-OFF"), clause 22 ("APPLICATION OF
PAYMENTS") and clause 23 ("CALCULATIONS AND EVIDENCE OF DEBT") of the
Facility Agreement are hereby incorporated by reference and shall apply,
MUTATIS MUTANDIS, as if all references therein to the "Banks" or any of
them were references to the "Bank".
17. MISCELLANEOUS
The provisions of clause 25 ("ASSIGNMENTS AND TRANSFERS"), clause 26
("REMEDIES AND WAIVERS"), clause 27 ("NOTICES") (other than clause 27.2.3),
clause 28 ("AMENDMENTS"), clause 29 ("COUNTERPARTS"), clause 30 ("GOVERNING
LAW AND JURISDICTION"), clause 31 ("ENTIRE AGREEMENT"), clause 32
("CONFIDENTIALITY") and clause 33 ("BANKS REPRESENTATION") of the Facility
Agreement are hereby incorporated by reference and shall apply, MUTATIS
MUTANDIS, as if all references therein to the "Banks" or any of them or the
"Loans" were references to the "Bank" and the "Equipment Loans".
- 31 -
IN WITNESS WHEREOF, THE PARTIES HAVE SIGNED THIS EQUIPMENT FACILITY AGREEMENT ON
THE DATE FIRST MENTIONED ABOVE.
for: TOWER SEMICONDUCTOR LTD.
By:
_____________________________
Title:
_____________________________
for: BANK HAPOALIM B.M.
By:
_____________________________
Title:
_____________________________
- 32 -
EXHIBIT 4.83
EQUIPMENT FACILITY AGREEMENT
THIS EQUIPMENT FACILITY AGREEMENT ("THIS AGREEMENT") is made on the 10th day of
September, 2007,
BETWEEN:
(1) TOWER SEMICONDUCTOR LTD., a company incorporated under the laws of Israel
(company no. 52-004199-7), whose registered office is at P.O. Box 619,
Industrial Area, Migdal Haemek 23105, Israel ("THE BORROWER");
AND
(2) BANK LEUMI LE-ISRAEL B.M. ("THE BANK")
WHEREAS: the Borrower carries on business as an independent "foundry"
manufacturer of semiconductor integrated circuits and a provider
of related design services and the Borrower wishes to purchase
the Ramp-Up Equipment (as defined in the Facility Agreement dated
January 18, 2001, as amended and restated on August 24, 2006, as
further amended on September 10, 2007 and as may be amended from
time to time ("THE FACILITY AGREEMENT")) and requires financing
for payment of the cost of acquisition of the Ramp-Up Equipment;
AND WHEREAS: the Bank, Bank Hapoalim B.M. and the Borrower are parties to the
Facility Agreement;
AND WHEREAS: subject to the terms and conditions of this Agreement, including
the fulfilment of the conditions precedent set out below, the
Bank is willing to make available to the Borrower a secured US
Dollar credit facility in order to finance partially the cost of
acquisition of the Ramp-Up Equipment,
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. INTERPRETATION
1.1. DEFINITIONS
In this Agreement, the following terms have the meanings given to them
in this clause 1.1:
1.1.1. "AVAILABILITY PERIOD" - means the period commencing on the
Closing Date and ending on the Termination Date;
1.1.2. "AVAILABLE COMMITMENT" - means the Commitment less: (a) all
outstanding Equipment Facility Credits provided by the Bank; and
(b) any such Equipment Facility Credits that have been requested
and are due to be made under the Equipment Facility on or before
the proposed Drawdown Date or Issue Date, as the case may be;
1.1.3. "BANK" - means Bank Leumi le-Israel B.M.;
1.1.4. "BORROWER" - means Tower Semiconductor Ltd.;
1.1.5. "CHARGED ACCOUNT" - means account number 13030062 at the Bank,
Haifa Branch, in the name of the Borrower, into which account:
(a) all Equipment Loans by the Bank will be paid in accordance
with clause 4.2.4 below;
(b) all repayments and prepayments of Equipment Loans to the
Bank will be made;
- 2 -
(c) all deposits (if any), made in respect of an Equipment L/C
issued by the Bank, as referred to in clause 4.3.2.4 below
will be deposited; and
(d) all other payments to the Bank under this Agreement are to
be made pursuant to this Agreement;
1.1.6. "CLOSING DATE" - means the second Business Day following the
date on which the Bank is satisfied that all of the conditions
precedent referred to in clause 3 below have been fulfilled;
1.1.7. "COMMITMENT" - means the amount of US $15,000,000 fifteen
million United States Dollars);
1.1.8. "DRAWDOWN DATE" - means, in respect of any Equipment Loan, the
date of the making of such Equipment Loan;
1.1.9. "DRAWDOWN REQUEST" - means a notice substantially in the form
of SCHEDULE 1.1.9 hereto;
1.1.10. "EQUIPMENT FACILITY" - means the US Dollar credit facility
granted to the Borrower by the Bank pursuant to clause 2.1 below;
1.1.10A. "EQUIPMENT FACILITY CREDITS" - means any Equipment Loans made
to the Borrower pursuant to the Equipment Facility and/or any
Equipment L/Cs issued by the Bank in lieu of all or part of the
Equipment Loans or, as the context requires, the principal amount
of such Equipment Loans at such relevant time and the Maximum
Drawing Amount of such Equipment L/Cs at such relevant time;
provided that, the maximum aggregate amount of all Equipment
Facility Credits shall not exceed US $15,000,000 (fifteen million
United States Dollars);
- 3 -
1.1.11. "EQUIPMENT FACILITY DEFAULT" - means any Equipment Facility
Event of Default or any event which with the giving of notice or
lapse of time, or the making of any determination hereunder, or
the satisfaction of any other condition (or any combination
thereof) would constitute an Equipment Facility Event of Default;
1.1.12. "EQUIPMENT FACILITY EVENT OF DEFAULT" - means any of the
events or circumstances described in clauses 12.2-12.9
(inclusive) below;
1.1.13. "EQUIPMENT L/C" - means a standby or documentary letter of
credit or bank guarantee issued, or to be issued, by the Bank
under the Equipment Facility for the account of the Borrower in
accordance with clause 4.3 below;
1.1.14. "EQUIPMENT LOAN" - means a loan made or to be made by the Bank
under the Equipment Facility pursuant to clause 4.2 below;
1.1.15. "EQUIPMENT LOAN MATURITY DATE" - means the earlier of:
(a) the Final Equipment Facility Maturity Date; and
(b) the Business Day immediately following the second
anniversary of the date on which the Equipment Loan was
made,
subject, in each case, to mandatory prepayment on an earlier date
pursuant to clause 6.2 below;
- 4 -
1.1.16. "FEE LETTER" - means the fee letter dated the date hereof
between the Bank and the Borrower in the form of SCHEDULE 1.1.16
hereto;
1.1.17. "FINAL EQUIPMENT FACILITY MATURITY DATE" - means March 31,
2010;
1.1.18. "ISSUE DATE" - means, in respect of any Equipment L/C, the
date of the issue of such Equipment L/C;
1.1.19. "L/C APPLICATION" - means an application by the Borrower for
the issue of an Equipment L/C in such form as may be agreed upon
by the Bank and the Borrower from time to time and which is to be
made pursuant to clause 4.3 hereof;
1.1.20. "SHARE WARRANTS" - means the warrants to acquire shares of the
Borrower to be issued by the Borrower to the Bank in the form of
SCHEDULE 1.1.20 hereto;
1.1.21. "TERMINATION DATE" - means the Business Day immediately
following the second anniversary of the Closing Date.
1.2. Unless otherwise defined in this Agreement, terms defined and
references construed in the Facility Agreement shall have the same
meaning and construction in this Agreement.
1.3. The recitals and schedules hereto form an integral part thereof.
2. THE EQUIPMENT FACILITY
2.1. GRANT OF EQUIPMENT FACILITY
Subject to the fulfilment of the conditions precedent set out in
clause 3 below and to compliance with the further conditions set out
in clause 4 below, the Bank, relying upon each of the representations
and warranties made or incorporated by reference in this Agreement,
agrees to grant to the Borrower, for application only in accordance
with clause 2.2 below and otherwise subject to the terms and
conditions of this Agreement, the Equipment Facility in the aggregate
amount of US $15,000,000 (fifteen million United States Dollars),
being a Dollar Facility.
- 5 -
2.2. PURPOSE
The Borrower shall apply all Equipment Facility Credits only towards
the payment of the cost of acquisition of the Ramp-Up Equipment.
2.3. NO OBLIGATION TO MONITOR
The Bank shall not be under any obligation to monitor or verify the
application of any Equipment Facility Credit made pursuant to this
Agreement. The Borrower shall promptly notify the Bank of the making
of any commitments to purchase or of any purchase order relating to
any acquisition of Ramp-Up Equipment.
3. CONDITIONS PRECEDENT
The obligations of the Bank under this Agreement are subject to the
condition that the Bank shall have received, by not later than December 31,
2007, the following documents, matters and things in form and substance
satisfactory to the Bank:
3.1. a copy, certified as a true copy by the external legal counsel of the
Borrower, of the Certificate of Incorporation, Memorandum of
Association and Articles of Association of the Borrower or, if
applicable, a certificate from external legal counsel as to the
absence of changes from the certified copies of the aforegoing
delivered to the Bank on or about September 5, 2006;
3.2. copies of resolutions of the Board of Directors of the Borrower
authorising named officers of the Borrower to execute, deliver and
perform this Agreement and each of the other Finance Documents entered
into in connection with this Agreement and to give all notices and
take all other action required to be given or taken by the Borrower
under this Agreement and under each other Finance Document;
3.3. no Material Adverse Effect shall have occurred;
- 6 -
3.4. there shall be no impediment, restriction, limitation or prohibition,
including impediments, restrictions, limitations or prohibitions
imposed under law or by any Governmental Body, as to the proposed
financing under this Agreement or as to the issuance of the Share
Warrants to the Bank or as to the security interests to be created
with respect to the Ramp-Up Equipment under the Security Documents or
as to any rights of any collateral thereunder or as to application of
the proceeds of the realisation of any such rights;
3.5. an opinion of Yigal Arnon & Co., Advocates, the Borrower's external
legal counsel, addressed to the Bank;
3.6. all of the Borrower's representations and warranties given by the
Borrower pursuant to this Agreement shall be accurate in all material
respects as of the Closing Date, as if made on the Closing Date;
3.7. execution of the Share Warrants;
3.8. execution of the Fee Letter and payment of all fees payable to the
Bank thereunder;
3.9. the Facility Agreement, including Amendment No. 1, dated September 10,
2007, to the Restated Facility Agreement, dated August 24, 2006, shall
be effective and in full force and effect;
3.10. all of the conditions precedent set forth in clause 1.1.115(l) of the
Facility Agreement shall have been fulfilled, including:
3.10.1. the closing under the definitive documentation between the
Borrower and TIC, with respect to the US $30,000,000 (thirty
million United States Dollars) of Permitted Subordinated TIC Debt
to be provided by TIC to the Borrower, shall have occurred or
shall occur simultaneously with the closing of this Agreement;
provided that, for the avoidance of doubt, the terms of such
Permitted Subordinated TIC Debt shall be in accordance with
clause 1.1.115(l) of the Facility Agreement;
3.10.2. the delivery to the Bank of an irrevocable and unconditional
undertaking by TIC, in the form attached hereto as SCHEDULE 3.10
("THE UNDERTAKING"), to provide Permitted Subordinated TIC Debt
to the Borrower in accordance with clause 4.1.2.2 below, such
that at no time shall the amount of principal of Permitted
Subordinated TIC Debt provided by TIC be in an amount less than
the principal of all Equipment Loans (as such term is defined in
the Facility Agreement) provided by all Equipment Lenders (as
such term is defined in the Facility Agreement) (including an
undertaking by TIC directly to make one-half of the payment to be
made to the beneficiary of the Equipment L/C (or immediately
reimburse the Bank for one-half of the payment to the beneficiary
so made by the Bank), which payment shall be deemed a portion of
the Permitted Subordinated TIC Debt required to be provided by
TIC to the Borrower); and
- 7 -
3.10.3. a net amount of at least US $40,000,000 (forty million United
States Dollars) shall have been: (a) unconditionally and
irrevocably invested in the Borrower by way of Paid-in-Equity,
Permitted Subordinated Debt, excluding (for the avoidance of
doubt) Permitted Subordinated TIC Debt (including a gross amount
of US $39,977,064 (thirty-nine million, nine hundred and
seventy-seven thousand and sixty four United States Dollars)
already raised) or unsecured customer advances, in form and
substance satisfactory to the Banks; or (b) generated from Excess
Cash Flow, including as may be reflected in the Borrower's
Accounts for a Quarter commencing from the first Quarter of 2007,
provided that any such Excess Cash Flow is held by the Borrower
as cash in short term bank deposits;
3.11. the Borrower shall have received written confirmations of the receipt
of all requisite corporate and third party, including Israeli and
foreign Governmental Body, approvals to the transactions contemplated
by this Agreement;
3.12. the closing(s) under the definitive documentation between the
Borrower and the Equipment Lender(s), with respect to the remaining US
$15,000,000 (fifteen million United States Dollars) of Equipment Loans
(as such term is defined in the Facility Agreement) and/or Equipment
L/Cs (as such term is defined in the Facility Agreement) shall have
occurred or shall occur simultaneously with the closing of this
Agreement; provided that, the terms of such Equipment Loans (as such
term is defined in the Facility Agreement) and/or Equipment L/Cs (as
such term is defined in the Facility Agreement) shall be in accordance
with clause 1.1.115(l) of the Facility Agreement;
3.13. no Equipment Facility Default shall have occurred and the
consummation of this Agreement shall not cause an Equipment Facility
Default to occur; and
- 8 -
3.14. an officer's certificate signed by the CEO and CFO of the Borrower on
behalf of the Borrower indicating that all of the provisions of this
clause 3 have been complied with in their entirety.
In the event that the conditions precedent are not fulfilled by December
31, 2007 then this Agreement shall no longer be of any force or effect and
neither party shall have any claim against the other party arising out of
or in connection with this Agreement. The Bank undertakes that promptly
following the fulfilment to the satisfaction of the Bank of all the
conditions precedent referred to in this clause 3 above, the Bank shall
confirm to the Borrower in writing that the conditions precedent have been
fulfilled and the Bank is prepared to close.
4. AVAILABILITY OF EQUIPMENT FACILITY CREDITS
4.1. AVAILABILITY
Notwithstanding anything to the contrary in this Agreement:
4.1.1. the Bank shall not be obliged to make any Equipment Facility
Credit available to the extent that doing so would cause the
aggregate amount thereof to exceed the Commitment; and
4.1.2. Equipment Facility Credits shall be made during the
Availability Period only and then only if all the following
conditions for each specific type of Equipment Facility Credit
specified hereunder in this clause 4 are fulfilled;
4.1.2.1. the other Equipment Lender or Lenders providing, in
accordance with clause 1.1.115(l) of the Facility Agreement,
an equal amount of Equipment Loans (as such term is defined
in the Facility Agreement) and/or Equipment L/Cs (as such
term is defined in the Facility Agreement) having the same
purpose and the same maturity date as the Equipment Facility
Credit proposed to be provided by the Bank;
4.1.2.2. TIC simultaneously therewith providing, in accordance
with clause 1.1.115(l) of the Facility Agreement, Permitted
Subordinated TIC Debt to the Borrower in an amount equal to
the aggregate amount of Equipment Loans (as such term is
defined in the Facility Agreement) to be provided by the
Bank and the other Equipment Lender or Lenders, such
Permitted Subordinated TIC Debt to have the same purpose as,
and the same or later maturity date than, such parallel
Equipment Loans (as such term is defined in the Facility
Agreement);
- 9 -
4.1.2.3. the proposed date for the making of such Equipment
Facility Credit is a Business Day which is or precedes the
Termination Date;
4.1.2.4. the Borrower shall have entered into a purchase contract
and/or submitted a purchase order for the Ramp-Up Equipment,
whereby upon payment therefor, the Borrower shall own the
Ramp-Up Equipment, free and clear of all Encumbrances (other
than Permitted Encumbrances); the Borrower shall not be in
default under its purchase obligations with respect to the
Ramp-Up Equipment; and the Borrower shall not have
voluntarily or involuntarily sold, transferred, leased or
otherwise disposed of all, or any part of, or interest in,
the Ramp-Up Equipment to any person;
4.1.2.5. the Borrower shall have provided to the Bank evidence
satisfactory to the Bank that the amount of Equipment
Facility Credit requested is then due to be paid to the
Equipment Seller under the relevant purchase contract and/or
purchase order;
4.1.2.6. no Encumbrance over the Ramp-Up Equipment purchased by
the Borrower as aforesaid or any part thereof shall exist
(other than Permitted Encumbrances);
4.1.2.7. no Equipment Facility Default shall have occurred and be
continuing and no Equipment Facility Default shall occur as
a result of the making of such Equipment Facility Credit;
4.1.2.8. the amount of the Equipment Facility Credit requested
shall not exceed the total Available Commitment as at the
Drawdown Date or Issue Date, as the case may be;
4.1.2.9. the representations and warranties given by the Borrower
pursuant to this Agreement shall be true and accurate in all
material respects on and as at the proposed date for the
making of the Equipment Facility Credit; and
- 10 -
4.1.2.10. the Available Commitment as at the Termination Date
shall automatically be cancelled.
4.2. EQUIPMENT LOANS
Subject to the fulfilment of the conditions precedent, to compliance
with the conditions set out in clause 4.1 above and to compliance with
the following conditions, the Bank shall make an Equipment Loan under
the Equipment Facility during the Availability Period only if:
4.2.1. the Borrower shall have delivered to the Bank a Drawdown
Request for such Equipment Loan, specifying a date for making
such Equipment Loan, being at least 7 (seven) Business Days after
the date of delivery of such Drawdown Request. Any Drawdown
Request will upon delivery thereof be irrevocable;
4.2.2. the minimum amount of each Equipment Loan shall be a minimum
amount of US $1,000,000 (one million United States Dollars) and
an integral multiple of US $1,000,000 (one million United States
Dollars) (other than (i) in the case of an Equipment Loan
provided in connection with an Equipment L/C which shall not be
required to be in any minimum amount or in any integral multiple
or (ii) in the case of an Equipment Loan which shall be for the
balance of the Available Commitment);
4.2.3. all Equipment Loans made under this Agreement shall be in US
Dollars; and
4.2.4. all Equipment Loans shall be made by the Bank by credit of the
amount to be loaned by the Bank to the Charged Account.
4.3. LETTERS OF CREDIT
4.3.1. Subject to the fulfilment of the conditions precedent, to the
compliance with the conditions set out in clause 4.1 above and to
compliance with the following conditions (and subject to the
conditions that the Bank shall not be required to issue any
Equipment L/C until: (a) the terms of the Equipment L/C have been
agreed between the Bank and the beneficiary thereof; and (b) the
Bank is satisfied that the Undertaking is in full force and
effect), the Bank shall issue Equipment L/Cs under the Equipment
Facility during the Availability Period, if:
- 11 -
4.3.1.1. the Borrower shall have delivered to the Bank an L/C
Application, specifying the proposed Issue Date of such
Equipment L/C, being at least 5 (five) Business Days after
the date of delivery of such L/C Application, as well as the
name of the beneficiary of the Equipment L/C and the details
of the transaction in respect of which the Equipment L/C is
to be issued;
4.3.1.2. the Equipment L/C is denominated in US Dollars;
4.3.1.3. the L/C Application is accompanied by a copy of the
terms of the proposed Equipment L/C;
4.3.1.4. the expiry date of the Equipment L/C is a Business Day
falling no later than the Termination Date;
4.3.1.5. there is a maximum limit to the stated liability of the
Bank under the Equipment L/C;
4.3.1.6. the Maximum Drawing Amount of such Equipment L/C, when
aggregated with the Maximum Drawing Amounts of all other
Equipment L/Cs outstanding or to be issued on such Issue
Date and the amount of Equipment Loans outstanding or to be
drawn down pursuant to a pending Drawdown Request, shall not
exceed US $15,000,000 (fifteen million United States
Dollars);
4.3.1.7 the Borrower shall have delivered to the Bank, at least 2
(two) Business Days prior to the proposed issuance date of
the proposed Equipment L/C, a confirmation from TIC that the
provisions of paragraph 2 of the Undertaking are fully
applicable to the Equipment L/C covered by such L/C
Application.
4.3.2. The Borrower shall pay to the Bank a commission in respect of
an Equipment L/C equal to the following percentage per annum of
the Maximum Drawing Amount of such Equipment L/C:
4.3.2.1. 0.75% (nought point seven five percent) per annum; or
4.3.2.2. in certain special cases, if so determined by the Bank,
1% (one percent) per annum; or
- 12 -
4.3.2.3. in the case where an advising, nominated or confirming
bank is required, the fees of such advising, nominated or
confirming bank, in addition to the commissions set forth in
clauses 4.3.2.1 or 4.3.2.2 above, as the case may be; or
4.3.2.4. in the event that the Borrower shall have placed funds
on deposit in the Charged Account at the Bank in an amount
equal at least to the Maximum Drawing Amount of the
Equipment L/C, which deposit is duly pledged in favour of
the Bank (or if all of the Equipment Lenders are the Banks,
in favour of the Banks) by a first-ranking fixed charge in
form and manner acceptable to the Bank as security for the
Borrower's obligations to the Bank under the Finance
Documents, including this Agreement, 0.25% (nought point two
five percent) per annum, provided that if prior to the
expiry date of such Equipment L/C, any part of the amount on
deposit pledged as aforesaid is, with the consent of the
Bank, released such that the amount on deposit is not equal
to the Maximum Drawing Amount with respect to such Equipment
L/C, the commission payable in respect of such Equipment
L/C, as aforesaid, shall be such percentage per annum as
determined pursuant to clauses 4.3.2.1 and 4.3.2.2 above.
Commissions as aforesaid shall be paid in advance on the Issue
Date for such Equipment L/C on the Maximum Drawing Amount of such
Equipment L/C.
4.3.3. Each L/C Application shall be effective on actual receipt by
the Bank and once given shall be irrevocable.
4.3.4. The terms of the Equipment L/C must contain a clear procedure
for the making of claims under such Equipment L/C satisfactory to
the Bank which shall include a requirement that the beneficiary
gives at least 10 (ten) Business Days' notice of payment
(together with all documents required to accompany such notice,
in full compliance with the terms of such Equipment L/C) under
the relevant Equipment L/C.
4.3.5. For the removal of doubt, subject only to the terms of this
Agreement, each Equipment L/C shall be governed by the terms and
conditions customary at the Bank with respect to such an L/C.
- 13 -
4.3.6. The Bank shall, promptly after being notified by a beneficiary
under an Equipment L/C that the Bank is required to make payment
under such Equipment L/C (together with all documents required to
accompany such requirement in full compliance with the terms of
such Equipment L/C), notify the Borrower and TIC that such
payment is due, of the amount demanded and of the date for
payment thereof ("THE SETTLEMENT DATE").
On receipt of a notice from the Bank under this clause 4.3.6, the
Borrower shall either:
4.3.6.1. subject to the terms and conditions of this Agreement:
(a) incur Permitted Subordinated TIC Debt in an amount equal
to half of the relevant amount demanded through TIC's direct
payment to said beneficiary, on the date such amount is to
be paid by the Bank to said beneficiary under said Equipment
L/C, of one-half of the payment to be made to the
beneficiary of such Equipment L/C (or immediately, but no
later than the second Business Day after the making of such
payment, TIC's reimbursement of the Bank for one-half of the
payment to such beneficiary made by the Bank); and (b)
convert one-half of the relevant amount demanded into an
Equipment Loan. Each Equipment Loan and Permitted
Subordinated TIC Debt shall be denominated in US Dollars and
shall be in an aggregate amount (in US Dollars) equal to the
amount to be paid by the Bank on the Settlement Date. The
Borrower shall deliver to the Bank, by no later than the
close of business on the first Business Day following the
date of receipt of such notice ("THE CONVERSION DATE"), a
notice informing the Bank that this clause 4.3.6.1 shall
apply and in accordance therewith one-half of the relevant
amount demanded shall be converted into an Equipment Loan as
aforesaid on the Settlement Date. For the avoidance of
doubt, nothing in the aforegoing shall derogate from the
condition set out in clause 4.1.2.2 above; or
4.3.6.2. pay to the Bank, by no later than the close of business
on the Conversion Date, the full relevant amount demanded
under the Equipment L/C.
- 14 -
In the event that clause 4.3.6.1 above shall be applicable, the
Bank shall settle the amount demanded on the Settlement Date and
the Borrower shall be deemed to have received on the Settlement
Date an Equipment Loan from the Bank in an amount as determined
in accordance with clause 4.3.6.1 above.
In the event that clause 4.3.6.2 above shall be applicable, but
the Borrower shall fail to pay on the Conversion Date the full
relevant amount demanded on the Equipment L/C, the Bank shall
have the option to require TIC, pursuant to, and in accordance
with, the Undertaking, to pay to the Bank one-half of the amount
payable thereunder by the Borrower and the Borrower shall be
deemed to have received on the Conversion Date an Equipment Loan
from the Bank in the remaining amount payable pursuant to clause
4.3.6.2 above and not paid either by TIC or the Borrower.
4.3.7. The Borrower unconditionally and irrevocably:
4.3.7.1. authorises and directs the Bank to pay any demand under
and in accordance with an Equipment L/C (which the Bank
believes, in its sole discretion, to be valid) without
requiring proof of the agreement of the Borrower that the
amounts so demanded or paid are or were due and
notwithstanding that the Borrower may dispute the validity
of any such request, demand or payment;
4.3.7.2. confirms that the Bank deals in documents only and shall
not be concerned with the legality of the claim or any other
underlying transaction or any set-off, counterclaim or
defence as between the Borrower and any beneficiary of an
Equipment L/C;
4.3.7.3. agrees that, subject to the last sentence of this clause
4.3.7, the Bank need not have regard to the sufficiency,
accuracy or genuineness of any such demand or any
certificate or statement in connection therewith or any
incapacity of or limitation upon the powers of any person
signing or issuing such demand, certificate or statement
which appears on its face to be in order and agrees that the
Bank shall not be obliged to enquire as to any such matters
and may assume, unless notified to the contrary, that any
such demand, certificate or statement which appears on its
face to be in order is correct and properly made;
- 15 -
4.3.7.4. without prejudice to the preceding clauses, agrees that
subject to the last sentence of this clause 4.3.7, if the
Bank pays any such demand in accordance with the terms of
the relevant Equipment L/C which is not legally payable,
that amount shall nevertheless be regarded as having been
properly paid for the purposes of this Agreement; and
4.3.7.5. agrees that subject to the last sentence of this clause
4.3.7, the Bank shall not be liable for any error, omission,
interruption or delay in transmission, despatch or delivery
of any message or advice, however transmitted, in connection
with any Equipment L/C. The Borrower agrees that subject to
the last sentence of this clause 4.3.7, any action taken or
omitted by the Bank under or in connection with each
Equipment L/C and the related drafts and documents, if done
in good faith, shall be binding upon the Borrower and shall
not result in any liability on the part of the Bank to the
Borrower.
Notwithstanding anything else herein, the Bank shall examine all
documents (if any) stipulated in an Equipment L/C with reasonable
care to ascertain whether or not they appear on their face to be
in compliance with the terms and conditions of the relevant
Equipment L/C.
4.3.8. The Borrower shall on demand indemnify and hold harmless the
Bank from and against all liabilities, costs, losses, damages and
expenses which the Bank incurs or sustains by reason of, or
arising in any way whatsoever in connection with, or by reference
to, the issue of any Equipment L/C or the Bank's performance of
the obligations expressed to be assumed by it under or in respect
of any Equipment L/C.
4.3.9. The Borrower's obligations under clause 4.3.8 above shall,
subject to the last sentence of clause 4.3.7 above, be absolute
and unconditional under any and all circumstances and
irrespective of the occurrence of any Equipment Facility Default
or Equipment Facility Event of Default or any condition precedent
whatsoever or any set-off, counterclaim or defence to payment
which the Borrower may have or have had against the Bank or any
beneficiary of an Equipment L/C.
- 16 -
4.3.10. The Bank shall subject to the last sentence of clause 4.3.7
above, be entitled to rely and shall be fully protected in
relying upon, any Equipment L/C, draft, resolution, written
notice, written consent, certificate, affidavit, letter,
cablegram, telegram, telecopy, telex or teletype message,
statement, Order or other document believed by it to be genuine
and correct and to have been signed, sent or made by the proper
person or persons, provided that any of the above may be
transmitted by facsimile or electronic transmission, if permitted
by the Equipment L/C.
4.3.11. The Borrower's obligations under clause 4.3.8 above shall,
subject to the last sentence of clause 4.3.7 above, not be
affected by any act, omission, matter or thing which, but for
this provision, might reduce, release or prejudice any of its
obligations under clause 4.3.8 above in whole or in part,
including and whether or not known to it:
4.3.11.1. any time or waiver granted to or composition with the
beneficiary of any Equipment L/C or any other person;
4.3.11.2. any taking, variation, compromise, exchange, renewal or
release of, or refusal or neglect to perfect, take up or
enforce, any rights, remedies or securities available to any
Bank or other person or arising under any Equipment L/C; and
4.3.11.3. any unenforceability, illegality or invalidity of any
Equipment L/C (so that the Borrower's obligations under
clause 4.3.8 above shall remain in full force and be
construed as if there were not such defect).
4.3.12. The indemnity under clause 4.3.8 above is a continuing
indemnity, extends to the ultimate balance of the Borrower's
obligations and liabilities under clause 4.3.8 above and shall
continue in force notwithstanding any intermediate payment in
whole or in part of those obligations or liabilities.
- 17 -
5. REPAYMENT
5.1. REPAYMENT OF LOANS
The Borrower shall repay each Equipment Loan in full upon the earlier
of: (a) the Final Equipment Facility Maturity date; and (b) the
Business Day immediately following the second anniversary of the
making of such Equipment Loan, subject to mandatory prepayment in
accordance with clause 6 below.
5.2. PAYMENT OF ALL OTHER SUMS DUE ON THE FINAL MATURITY DATE
On the Final Equipment Facility Maturity Date, the Borrower
additionally shall pay to the Bank all other sums then outstanding
under this Agreement.
5.3. REPAYMENT IN CURRENCY OF LOAN
For the removal of doubt, each Equipment Loan, as well as all Interest
thereon, shall be repaid in US Dollars.
5.4. REPAYMENTS (INCLUDING PREPAYMENT) TO CHARGED ACCOUNT
All repayments as aforesaid and all prepayments (in accordance with
clause 6 below) shall be made by transfer to the Bank to the Charged
Account.
5.5. NO REBORROWING
The Borrower shall not be entitled to reborrow any part of an
Equipment Loan which is repaid. For removal of doubt: (a) the expiry
of an Equipment L/C (to the extent that it is not converted into an
Equipment Loan pursuant to clause 4.3.6) shall not reduce the
Commitment; and (b) the making of an Equipment Loan pursuant to clause
4.3.6 in respect of an Equipment L/C shall not constitute a
re-borrowing.
5.6. CANCELLATION OF COMMITMENT
For the removal of doubt and subject to the clarifications set forth
in clause 5.5 above with respect to Equipment L/Cs, the Commitment of
the Bank shall be cancelled by any amount repaid or prepaid under this
Agreement.
- 18 -
6. PREPAYMENT
6.1. VOLUNTARY PREPAYMENT
The provisions of clause 7 ("VOLUNTARY PREPAYMENTS") of the Facility
Agreement are hereby incorporated by reference and shall apply,
MUTATIS MUTANDIS, as if all references therein to the "Banks" and the
"Loans" were references to the "Bank", and "Equipment Loans",
respectively, each reference to a "Proportion" of a Loan shall be
deemed to refer to all of the Equipment Loans provided by the Bank,
and the reference in clause 7.1 of the Facility Agreement to "US
$10,000,000 (ten million United States Dollars)" shall be replaced
with "US $1,000,000 (one million United States Dollars)". For the
avoidance of doubt, the term "Total Outstanding" in clause 7.5 of the
Facility Agreement refers only to the Loans under the Facility
Agreement and not to the Equipment Loans that may be made hereunder.
6.2. MANDATORY PREPAYMENT
6.2.1. Upon the occurrence of a Triggering Quarter, the Borrower
shall, immediately and on a PRO RATA basis, prepay the Equipment
Loans and/or deposit funds in the Charged Account with respect to
outstanding Equipment L/C's issued by the Bank at a rate of US
$3,750,000 (three million seven hundred and fifty thousand United
States Dollars) per Quarter, commencing on the last Business Day
of each Quarter following the Triggering Quarter until the
Equipment Loans are fully paid and until there shall have been
deposited in the Charged Account and duly pledged in accordance
with clause 4.3.2.4 above, an amount equal to the Maximum Drawing
Amounts of all outstanding Equipment L/C's issued by the Bank.
For the avoidance of doubt and by way of illustration only, if
the Triggering Quarter is the Quarter ended March 31, 2008 and
the then outstanding Equipment Facility Credits aggregate US
$15,000,000 (fifteen million United States Dollars), consisting
of US $10,000,000 (ten million United States Dollars) in
Equipment loans and US $5,000,000 (five million United States
Dollars) in Equipment L/C's, the Borrower shall prepay US
$2,500,000 (two million five hundred thousand United States
Dollars) of Equipment Loans and deposit US $1,250,000 (one
million two hundred and fifty thousand United States Dollars) in
the Charged Account, duly pledged in accordance with clause
4.3.2.4 above, on the last Business Day of each of the Quarters
ended in June, September and December, 2008 and March, 2009.
- 19 -
6.2.2. Upon the occurrence of an Accelerated Trigger Quarter, the
Borrower shall, immediately and on a PRO RATA basis, prepay the
Equipment Loans to the Bank and/or deposit funds in the Charged
Account with respect to Equipment L/C's issued by the Bank at a
rate of US $ 6,250,000 (six million two hundred and fifty
thousand United States Dollars) per Quarter, commencing on the
last Business Day of each Quarter following the Accelerated
Trigger Quarter until the Equipment Loans are fully paid and
until there shall have been deposited in the Charged Account with
the Bank and duly pledged in accordance with clause 4.3.2.4
above, an amount equal to Maximum Drawing Amounts of all
outstanding Equipment L/C's issued by the Bank.
For the avoidance of doubt and by way of illustration only, if
the Accelerated Trigger Quarter is the Quarter ended March 31,
2008 and the then outstanding Equipment Facility Credits
aggregate US $15,000,000 (fifteen million United States Dollars),
consisting of US $12,000,000 (twelve million United States
Dollars) of Equipment Loans and US $3,000,000 (three million
United States Dollars) in Equipment L/C's, the Borrower shall
prepay approximately US $5,000,000 (five million United States
Dollars) in Equipment Loans and deposit approximately US
$1,250,000 (one million two hundred and fifty thousand United
States Dollars) in the Charged Account, duly pledged in
accordance with clause 4.3.2.4 above, on the last Business Day of
each of the Quarters ended in June, September and December, 2008.
6.2.3. If and to the extent the Equipment L/C's in respect of which
deposits have been made pursuant to clauses 6.2.1 and 6.2.2 above
expire without any drawdown by the beneficiary thereof or any
other liability thereunder to the Bank and no Equipment Facility
Event of Default shall have occurred and be continuing, such
deposits shall be released to the Borrower.
6.3. The provisions of clauses 8.2 ("NO REBORROWING OF MANDATORY
PREPAYMENT"), 8.4 ("MANDATORY PREPAYMENT TOGETHER WITH INTEREST AND
OTHER SUMS OWED"), 8.5 ("CURRENCY FOR MANDATORY PREPAYMENT") and 8.6
("SCHEDULE FOR MANDATORY PREPAYMENT") of the Facility Agreement are
hereby incorporated by reference and shall apply, MUTATIS MUTANDIS, as
if all references to "Loans" were to "Equipment Loans".
- 20 -
7. INTEREST
7.1. INTEREST RATE
The rate of Interest applicable to the Equipment Loans in respect of
each Interest Period (provided that the first Interest Period in
respect of any Equipment Loan made other than on the first day of a
Quarter, shall commence on the date of the making of such Equipment
Loan and end on the last Business Day of the Quarter in which such
Equipment Loan is made) shall be the sum of: (a) the rate per annum
determined to be LIBOR in accordance with clause 1.1.94 of the
Facility Agreement on the Interest Determination Date for such
Interest Period; and (b) 3% (three percent) per annum.
7.2. ACCRUAL OF INTEREST
Interest as aforesaid in clause 7.1 above in respect of the Equipment
Loans shall accrue from day to day and shall be calculated on the
basis of the actual number of days elapsed and a 360 (three hundred
and sixty) day year.
7.3. PAYMENT OF INTEREST
All Interest accrued as aforesaid in clause 7.2 above on the Equipment
Loans shall be paid on each Interest Payment Date and on the Final
Equipment Facility Maturity Date. The Borrower shall pay to the Bank
all Interest payable as aforesaid into the Charged Account.
7.4. SUBSTITUTE INTEREST RATES
The provisions of clause 10 ("SUBSTITUTE INTEREST RATES") of the
Facility Agreement are hereby incorporated by reference and shall
apply, MUTATIS MUTANDIS, to this Agreement as if all references
therein to the "Banks" and the "Loans" were references to the "Bank"
and the "Equipment Loans".
- 21 -
8. COMMISSIONS, FEES AND EXPENSES
8.1. COMMITMENT COMMISSION
The Borrower shall, in respect of the Availability Period, pay to the
Bank a Commitment commission at the rate per annum of 0.25% (nought
point two five percent) on the Available Loan Commitment from time to
time as from the date of signature of this Agreement until the last
day of the Availability Period. Such fee shall accrue from day to day
and shall be calculated on the basis of the actual number of days
elapsed and a 360 (three hundred and sixty) day year and shall be paid
in arrears on each Interest Payment Date during the Availability
Period and on the Termination Date. "AVAILABLE LOAN COMMITMENT" means,
at any time, the Commitment at such time, less: (a) all Equipment
Loans outstanding at such time; and (b) the Maximum Drawing Amount of
all Equipment L/Cs outstanding at such time.
8.2. The provisions of clauses 11.3 ("LEGAL AND OTHER COSTS"), 11.5 ("STAMP
DUTIES AND LIKE TAXES"), 11.6 ("OTHER COMMISSIONS, FEES AND
EXPENSES"), 11.7 ("CURRENCY FOR PAYMENT") and 11.8 ("VAT") of the
Facility Agreement are hereby incorporated by reference and shall
apply, MUTATIS MUTANDIS, to this Agreement as if all references
therein to the "Banks" and the "Facility" were references to the
"Bank" and the "Equipment Facility".
9. TAXES; INCREASED COSTS; ILLEGALITY
The provisions of clauses 12 ("TAXES"), 13 ("INCREASED COSTS") and 14
("ILLEGALITY") of the Facility Agreement are hereby incorporated by
reference and shall apply, MUTATIS MUTANDIS, to this Agreement as if all
references to the "Banks", the "Loans" and the "Total Outstandings" therein
were references to the "Bank", the "Equipment Loans" and the "sum in
Dollars of the outstanding Equipment Loans at such time", respectively.
10. REPRESENTATIONS AND WARRANTIES
10.1. The provisions of clause 15 of the Facility Agreement, as amended by
Amendment No. 1, dated September 10, 2007, are hereby incorporated by
reference and shall apply, MUTATIS MUTANDIS, to this Agreement as if
all references to the "Banks" therein were references to the "Bank".
- 22 -
10.2. The Borrower confirms that this Agreement is a "Finance Document" as
defined in the Facility Agreement and that, for the avoidance of
doubt, all references to a Finance Document in the Facility Agreement
are, INTER ALIA, references to this Agreement.
11. UNDERTAKINGS
Without derogating from the Borrower's obligations under the Finance
Documents, including the Facility Agreement and the Debenture, the Borrower
undertakes to the Bank that, so long as any sum remains payable by the
Borrower under this Agreement or the Bank is under any obligation to
provide any Financial Indebtedness to the Borrower:
11.1. NEGATIVE PLEDGE
The Borrower shall not create or permit to subsist any Encumbrance on
the whole or any part of the Ramp-Up Equipment or the Charged Account,
save for Permitted Encumbrances.
11.2. DISPOSAL OF RAMP-UP EQUIPMENT
The Borrower will not and will procure that none of its Subsidiaries
will, either in a single transaction or in a series of transactions,
whether related or not and whether voluntarily or involuntarily, sell,
transfer, lease or otherwise dispose of all or any part of or interest
in the Ramp-Up Equipment to any person, except with the prior written
consent of the Bank.
11.3. INSUFFICIENCY IN CHARGED ACCOUNT
The Borrower acknowledges that neither any insufficiency of funds in
the Charged Account, nor any inability to apply any fund in the
Charged Account against any or all amounts owing under this Agreement,
shall at any time limit, reduce or otherwise affect the Borrower's
payment obligations under this Agreement.
11.4. FURTHER CHARGES
Without derogating from the Borrower's obligations under the Facility
Agreement and Debenture, the Borrower undertakes that it shall, from
time to time as requested by the Bank, execute:
- 23 -
11.4.1. a Supplement to the Debenture relating, INTER ALIA, to the
Ramp-Up Equipment and other assets and rights required under the
Debenture to be pledged by way of first-ranking fixed charge in
favour of the Banks, but not as yet specifically included in the
Debenture and shall cause such Supplement to be perfected and
duly registered with the Registrar of Companies and the Registrar
of Pledges and the Borrower shall deliver all documents as
referred to in clause 3.2 of the Debenture (MUTATIS MUTANDIS) and
shall sign all other documents and forms required for the
purposes of the aforegoing; provided that, if any Equipment
Lender is not a Bank, the Borrower undertakes promptly to execute
such further documents evidencing the pledge of the Ramp-Up
Equipment by way of first-ranking fixed charge in favour of the
Bank in such forms as shall be requested by the Bank from time to
time;
11.4.2. notices of assignment by way of charge of all Material
Contracts relating to the Ramp-Up Equipment (other than those
referred to in clauses 1.1.36(c)(i) and (ii) of the Facility
Agreement); and
11.4.3. notices to insurers and acknowledgements of such notices, as
referred to in clause 3.2 of the Debenture with respect to the
Ramp-Up Equipment (other than under Insurance Policies in respect
of liability of the Borrower to third parties or of liability of
the Borrower for damage to property of third parties or of the
type listed in Schedule 16.10.6(d) to the Facility Agreement).
11.5. EQUIPMENT L/CS
Upon the issuance of each Equipment L/C, the Borrower shall promptly
give TIC written notice of the terms and conditions thereof, including
the amount to be paid thereunder and the expiry date thereof, which
notification shall include a reference to the Undertaking and TIC's
responsibility to provide Permitted Subordinated TIC Debt in
connection therewith. The Borrower shall, at the same time as it gives
such notice to TIC, provide the Bank with a copy thereof.
12. DEFAULT
12.1. EVENTS OF DEFAULT
Each of the events set out in clause 12.2 to clause 12.9 is an event
of default ("AN EQUIPMENT FACILITY EVENT OF DEFAULT") (whether or not
caused by any reason outside the control of the Borrower or of any
other person). Promptly after the occurrence of an Equipment Facility
Event of Default, the Borrower will notify the Bank that such
Equipment Facility Event of Default has occurred.
- 24 -
12.2. NON-PAYMENT
The Borrower does not pay any amount payable by it under this
Agreement at the place and in the funds expressed to be payable,
within the earlier of: (a) 7 (seven) Business Days; or (b) 10 (ten)
days, of the due date for payment.
12.3. BREACH OF OBLIGATIONS
There is any breach of any undertaking by the Borrower in this
Agreement and, if such default is capable of remedy within such
period, within 7 (seven) days after receipt by the Borrower of written
notice from the Banks requiring the failure to be remedied, the
Borrower shall have failed to cure such default.
12.4. MISREPRESENTATION/BREACH OF WARRANTIES
Any representation or warranty made or repeated by or on behalf of the
Borrower in this Agreement (including through incorporation by
reference into this Agreement), or in any certificate or statement
delivered by or on behalf of the Borrower or under this Agreement is
incorrect or misleading in any material respect when made or deemed to
be made or repeated.
12.5. INVALIDITY
This Agreement shall cease to be in full force and effect in any
respect or shall cease to constitute the legal, valid, binding and
enforceable obligation of the Borrower or in the case of any Security
Document, fail to provide effective perfected security in favour of
the Bank over the Ramp-Up Equipment.
12.6. DEFAULT UNDER THE FACILITY AGREEMENT
A Default or Event of Default has occurred and is continuing. For the
avoidance of doubt, default under or a breach of the terms and
conditions of Permitted Subordinated Debt (including the Permitted
Subordinated TIC Debt) constitutes an Event of Default under clause
17.6.5 of the Facility Agreement.
- 25 -
12.7. NO ENCUMBRANCE
There shall exist no Encumbrance over the Ramp-Up Equipment other than
Permitted Encumbrances.
12.8. EXECUTION OR OTHER PROCESS
Any execution, attachment, sequestration or other process arising out
of any claim by any third party against the Borrower, save where: (a)
the Borrower is in good faith on reasonable grounds, contesting the
execution, attachment, sequestration or other process by appropriate
Proceedings diligently pursued; (b) the Bank is satisfied that the
ability of the Borrower to comply with its respective obligations
under this Agreement will not be adversely affected whilst such
distress, execution, attachment, diligence or other process is being
so contested; and (c) such process as aforesaid is cancelled or
withdrawn not later than 45 (forty-five) days after the institution
thereof.
12.9. TIC UNDERTAKING
12.9.1. Any of the representations and warranties by TIC in the
Undertaking are incorrect or misleading in any material respect
when made or deemed to be made or repeated.
12.9.2. TIC fails to comply with any undertaking or obligation
contained in the Undertaking and, if such default is capable of
remedy within such period, within 7 (seven) days after the
earlier of TIC becoming aware of such default and receipt by TIC
of written notice from the Bank requiring the failure to be
remedied, that TIC shall have failed to cure such default.
12.9.3. The Undertaking shall cease to be in full force and effect in
any material respect or shall cease to constitute the legal,
valid, binding and enforceable obligation of TIC or it shall be
unlawful for TIC to perform any of its material obligations under
the Undertaking, unless it expires in accordance with its terms.
12.9.4. TIC repudiates the Undertaking.
- 26 -
12.10. ACCELERATION
Upon the occurrence of an Equipment Event of Default and at any time
thereafter while the same is continuing, the Bank may, by notice to
the Borrower:
12.10.1. declare that an Equipment Facility Event of Default has
occurred; and/or
12.10.2. declare that the Equipment Loans together with all Interest
accrued on all Equipment Loans and all other amounts (including
amounts due under clause 14, to the extent applicable) payable by
the Borrower under this Agreement from time to time, shall
thenceforth be repayable on demand being made by the Bank (and in
the event of any such demand, the Equipment Loans, such Interest
and such other amounts shall be immediately due and payable);
and/or
12.10.3. declare the Equipment Loans immediately due and payable,
whereupon they shall become immediately due and payable, together
with all Interest accrued on the Equipment Loans and all other
amounts payable by the Borrower (including, amounts due under
clause 14, to the extent applicable); and/or
12.10.4. declare that the following amounts shall be payable on
demand, or demand that the Borrower immediately place on deposit
in the Charged Account, such deposit to be duly charged, by way
of a first-ranking fixed pledge and charge, to the satisfaction
of the Bank, an aggregate amount equal to the aggregate Maximum
Drawing Amounts of all Equipment L/Cs issued by the Bank.
12.11. EQUIPMENT LOANS DUE ON DEMAND
If, pursuant to clause 12.10.2 above the Bank declares the Equipment
Loans to be due and payable on demand, then and at any time
thereafter, so long as any Equipment Facility Event of Default is
continuing or has not been waived, the Bank may by written notice to
the Borrower require repayment of the Equipment Loans on such date as
the Bank may specify in such notice (whereupon the same shall become
due and payable on such date together with accrued Interest thereon
and any other sums then owed by the Borrower hereunder) or withdraw
such declaration with effect from such date as they may specify in
such notice.
- 27 -
12.12. COLLECTION
In the event of acceleration of the Equipment Loans pursuant to clause
12.10.3 above or of a written notice under clause 12.11 above, then,
without derogating from any other remedies or relief available to the
Bank under law or under this Agreement, the Bank shall be entitled to
take all steps as it deems fit in order to collect all sums owed by
the Borrower to the Bank under or in connection with this Agreement
(including all sums referred to in clause 12.10 above), including, to
realise all or any of the assets secured under the Security Documents
with respect to the Equipment Loans, all at the expense of the
Borrower and to utilise the sums received to repay in part or in full
all amounts owed by the Borrower hereunder.
12.13. INDEMNITY
The Borrower shall indemnify the Bank against any losses, charges or
expenses which the Bank may sustain or incur as a consequence of:
12.13.1. the occurrence of any Equipment Facility Event of Default or
Equipment Facility Default; or
12.13.2. the operation of clauses 12.10, 12.11 or 12.12,
including, any losses, charges or expenses on account of funds
acquired, contracted for or utilised to fund any amount payable under
this Agreement or any amount repaid or prepaid. A certificate of the
Bank as to the amount of any such loss or expense shall be PRIMA FACIE
evidence in the absence of manifest error.
12.14. TERMINATION OF COMMITMENT
In the event of the operation of clause 12.10 above, the Bank shall be
entitled to terminate its Commitment. For the removal of doubt, such
termination shall not derogate from any obligations of the Borrower to
the Bank under this Agreement.
12.15. NO DEROGATION OF RIGHTS UNDER FACILITY AGREEMENT
For the avoidance of doubt, nothing in this Agreement shall derogate
from the rights of the Banks to declare, upon the occurrence of an
Equipment Facility Event of Default, that an Event of Default under
the Facility Agreement has occurred and to exercise any and all rights
of the Banks in connection therewith, including, INTER ALIA, to
declare all of the Loans under the Facility Agreement to be
immediately due and payable.
- 28 -
13. DEFAULT INTEREST
13.1. DEFAULT RATE PERIODS
If any sum due and payable by the Borrower hereunder is not paid (or,
in the case of the sums referred to in clause 12.10.4 above, not paid
or deposited) on the due date therefor in accordance with the
provisions of this Agreement ("UNPAID SUM"), the period beginning on
such due date and ending on the date upon which the obligation of the
Borrower to pay the Unpaid Sum is discharged, shall be divided into
successive periods, each of which (other than the first) shall start
on the last day of such preceding period and the duration of each of
which shall (except as otherwise provided in this clause 13) be
selected by the Bank (such periods selected as aforesaid "INTEREST
PERIODS").
13.2. DEFAULT INTEREST
During each such Interest Period as is mentioned in clause 13.1 above,
an Unpaid Sum shall bear Interest at the rate per annum which is the
sum from time to time of: (a) 3% (three percent); and (b) the Interest
rate in respect of such Interest Period as would have been determined
in accordance with clause 7.1 above (provided that, if, for any such
Interest Period LIBOR cannot be determined, the rate of Interest
applicable to such Unpaid Sum shall be the rate per annum which is the
sum of: (i) 3% (three percent); and (ii) 3% (three percent) plus a
rate as certified by the Bank in accordance with clause 7.4 above.
13.3. PAYMENT OF DEFAULT INTEREST
Any Interest which shall have accrued under clause 13.2 above in
respect of an Unpaid Sum shall be due and payable and shall be paid by
the Borrower at the end of each Interest Period by reference to which
it is calculated or on such other dates as the Bank may specify by
written notice to the Borrower.
- 29 -
14. BROKEN FUNDING INDEMNITY
14.1. BROKEN FUNDING
If the Bank receives or recovers all or any part of any Equipment Loan
otherwise than on the scheduled date of repayment of such amount
relating to such Equipment Loan, the Borrower shall on the first
Interest Payment Date following such repayment on demand pay to the
Bank an amount equal to the amount (if any) by which: (a) the
additional amount of Interest which would, in accordance with the
terms of this Agreement, have been payable on the amount so received
or recovered had it been received or recovered on the following
Interest Payment Date exceeds (b) the amount of Interest which, in the
opinion of the Bank, would have been payable to the Bank on the last
day of such Interest Period in respect of a deposit in the currency of
the relevant Loan, of an amount equal to the amount so received or
recovered, had such an amount been placed by it with a prime bank in
London for a period starting on the date of such receipt or recovery
and ending on the following Interest Payment Date. For the removal of
all doubt: (i) with respect to all or any part of any Equipment Loan
received or recovered otherwise than on the scheduled date of
repayment of such amount relating to such Equipment Loan, the payment
set forth above shall only be made once; and (ii) voluntary or
mandatory prepayments made in accordance with clause 6 above on an
Interest Payment Date shall not be subject to a payment of broken
funding in accordance with this clause 14.1.
14.2. FAILURE TO DRAW AN EQUIPMENT LOAN
In the event that the Borrower shall make any Drawdown Request, but
shall not be entitled to receive the relevant Equipment Loan by reason
of not having fulfilled all of the conditions therefor listed in
clauses 4.1 or 4.2 above, then, without derogating from any other
right of the Bank hereunder and under any applicable law, the Borrower
shall indemnify and compensate the Bank for any and all of the Bank's
costs and expenses in financing the amount requested by the Borrower,
the liquidation of any such funds and including loss of profit of the
Bank by reason of any such event.
- 30 -
15. PAYMENTS
15.1. PAYMENTS BY BORROWER
All payments to be made by the Borrower to the Bank shall be made in
same day funds to the Charged Account, which account shall be duly
charged in favour of the Bank (or if all of the Equipment Lenders are
the Banks, in favour of the Banks) by way of a first-ranking fixed
pledge and charge under the Debenture. All payments required to be
made by the Borrower under this Agreement shall be calculated without
reference to any set-off or counterclaim and shall be made free and
clear of and without any deduction for or on account of, any set-off
or counterclaim.
15.2. PAYMENTS BY BANK TO BORROWER
All payments to be made by the Bank to the Borrower in respect of
Advances shall be made by transfer of such payment to the Charged
Account.
16. CALCULATIONS AND EVIDENCE OF DEBT
The provisions of clause 21 ("SET-OFF"), clause 22 ("APPLICATION OF
PAYMENTS") and clause 23 ("CALCULATIONS AND EVIDENCE OF DEBT") of the
Facility Agreement are hereby incorporated by reference and shall apply,
MUTATIS MUTANDIS, as if all references therein to the "Banks" or any of
them were references to the "Bank".
17. MISCELLANEOUS
The provisions of clause 25 ("ASSIGNMENTS AND TRANSFERS"), clause 26
("REMEDIES AND WAIVERS"), clause 27 ("NOTICES") (other than clause 27.2.2),
clause 28 ("AMENDMENTS"), clause 29 ("COUNTERPARTS"), clause 30 ("GOVERNING
LAW AND JURISDICTION"), clause 31 ("ENTIRE AGREEMENT"), clause 32
("CONFIDENTIALITY") and clause 33 ("BANKS REPRESENTATION") of the Facility
Agreement are hereby incorporated by reference and shall apply, MUTATIS
MUTANDIS, as if all references therein to the "Banks" or any of them or the
"Loans" were references to the "Bank" and the "Equipment Loans".
- 31 -
IN WITNESS WHEREOF, THE PARTIES HAVE SIGNED THIS EQUIPMENT FACILITY AGREEMENT ON
THE DATE FIRST MENTIONED ABOVE.
for: TOWER SEMICONDUCTOR LTD.
By:
_____________________________
Title:
_____________________________
for: BANK LEUMI LE-ISRAEL B.M.
By:
_____________________________
Title:
_____________________________
- 32 -
EXHIBIT 4.84
EQUIPMENT FACILITY AGREEMENT
THIS EQUIPMENT FACILITY AGREEMENT ("THIS AGREEMENT") is made on the 10th day of
September, 2007,
BETWEEN:
(1) TOWER SEMICONDUCTOR LTD., a company incorporated under the laws of Israel
(company no. 52-004199-7), whose registered office is at P.O. Box 619,
Industrial Area, Migdal Haemek 23105, Israel ("THE BORROWER");
AND
(2) ISRAEL CORPORATION LTD. ("TIC")
WHEREAS: the Borrower carries on business as an independent "foundry"
manufacturer of semiconductor integrated circuits and a provider
of related design services and the Borrower wishes to purchase
the Ramp-Up Equipment (as defined in Schedule 1.2) and requires
financing for payment of the cost of acquisition of the Ramp-Up
Equipment;
AND WHEREAS: Bank Hapoalim B.M. and the Borrower are parties to an Equipment
Facility Agreement, dated September 10, 2007 and Bank Leumi
le-Israel B.M. and the Borrower are parties to an Equipment
Facility Agreement, dated September 10, 2007 (collectively, "THE
BANKS' EQUIPMENT FACILITY AGREEMENTS");
AND WHEREAS: as a condition precedent to the respective obligations of the
Banks under each of the Banks' Equipment Facility Agreements, TIC
shall deliver to the Banks the irrevocable and unconditional
undertaking in the form attached hereto as ANNEX A ("THE
UNDERTAKING");
AND WHEREAS: subject to the terms and conditions of this Agreement, including
the fulfilment of the conditions precedent set out below, TIC is
willing to make available to the Borrower an unsecured US Dollar
credit facility, subordinate to the Banks as set forth in clause
6A below, in order to partially finance the cost of acquisition
of the Ramp-Up Equipment,
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. INTERPRETATION
1.1. DEFINITIONS
In this Agreement, the following terms have the meanings given to them
in this clause 1.1:
1.1.1. "AVAILABILITY PERIOD" - means the period commencing on the
Closing Date and ending on the Termination Date;
1.1.2. "AVAILABLE COMMITMENT" - means the Commitment less: (a) all
outstanding Equipment Facility Credits provided by TIC; (b) any
such Equipment Facility Credits that have been requested and are
due to be made under the Equipment Facility on or before the
proposed Drawdown Date (for the removal of doubt, Equipment
Facility Credits that have been requested in connection with
Equipment L/Cs (as such term is defined in the Banks' Equipment
Facility Agreements) which have expired or the Maximum Drawing
Amount thereof has been reduced (to the extent of such reduction)
shall not reduce the Commitment);
1.1.3. "BANKS" - means Bank Hapoalim B.M. and Bank Leumi le-Israel
B.M. and their permitted assigns under the Finance Documents;
- 2 -
1.1.4. "BORROWER" - means Tower Semiconductor Ltd.;
1.1.5. "BORROWER'S ACCOUNT" - means the account designated by the
Borrower in a Drawdown Request, into which account the
corresponding Equipment Loan by TIC will be paid in accordance
with clause 14.2 below;
1.1.6. RESERVED;
1.1.7. "COMMITMENT" - means the amount of US $30,000,000 thirty
million United States Dollars);
1.1.8. "DRAWDOWN DATE" - means, in respect of any Equipment Loan, the
date of the making of such Equipment Loan;
1.1.9. "DRAWDOWN REQUEST" - means a notice substantially in the form
of SCHEDULE 1.1.9 hereto;
1.1.10. "EQUIPMENT FACILITY" - means the US Dollar credit facility
granted to the Borrower by TIC pursuant to clause 2.1 below;
1.1.11. "EQUIPMENT FACILITY CREDIT" - means any Equipment Loans made
to the Borrower pursuant to the Equipment Facility or, as the
context requires, the principal amount of such Equipment Loans at
such relevant time; provided that, the maximum aggregate amount
of all Equipment Facility Credits shall not exceed US $30,000,000
(thirty million United States Dollars);
1.1.12. "EQUIPMENT FACILITY DEFAULT" - means any Equipment Facility
Event of Default or any event which with the giving of notice or
lapse of time, or the making of any determination hereunder, or
the satisfaction of any other condition (or any combination
thereof) would constitute an Equipment Facility Event of Default;
- 3 -
1.1.13. "EQUIPMENT FACILITY EVENT OF DEFAULT" - means any of the
events or circumstances described in clauses 11.2-11.7
(inclusive) below;
1.1.14. "EQUIPMENT LOAN" - means an unsecured, subordinated (as set
forth in clause 6A below) loan made or to be made by TIC under
the Equipment Facility pursuant to clause 4.2 below;
1.1.15. "EQUIPMENT LOAN MATURITY DATE" - means the earlier of:
(a) the Final Equipment Facility Maturity Date; and
(b) the Business Day immediately following the second
anniversary of the date on which the Equipment Loan was
made,
subject, in each case, to mandatory prepayment on an earlier date
pursuant to clause 6.2 below;
1.1.16. "FACILITY AGREEMENT" - the Facility Agreement originally made
on January 18, 2001, by and among the Borrower and the Banks, as
amended and restated on August 24, 2006 and further amended on
September 10, 2007;
1.1.16A. "FEE LETTER" - means the fee letter dated the date hereof
between TIC and the Borrower in the form of SCHEDULE 1.1.16A
hereto;
1.1.17. "FINAL EQUIPMENT FACILITY MATURITY DATE" - means March 31,
2010;
- 4 -
1.1.18. "SHARE WARRANTS" - means the warrants to acquire shares of the
Borrower to be issued by the Borrower to TIC in the form of
SCHEDULE 1.1.18 hereto;
1.1.19. "TERMINATION DATE" - means the Business Day immediately
following the second anniversary of the Closing Date;
1.1.20. "TIC" - means Israel Corporation Ltd.;
1.1.21. "TIC'S ACCOUNT" - means the account designated by TIC, into
which:
(a) all repayments and prepayments of Equipment Loans to TIC
will be made; and
(b) all other payments to TIC under this Agreement are to be
made pursuant to this Agreement.
1.2. Unless otherwise defined in this Agreement, terms defined in SCHEDULE
1.2 hereto are hereby incorporated by reference and shall have the
same meaning and construction, MUTATIS MUTANDIS, in this Agreement.
Notwithstanding the fact that such Schedule 1.2 includes terms from
the Facility Agreement, such terms, for the purposes of this
Agreement, shall not be affected by any amendment of the Facility
Agreement.
1.3. The recitals and schedules hereto form an integral part thereof.
2. THE EQUIPMENT FACILITY
2.1. GRANT OF EQUIPMENT FACILITY
Subject to the closing of this Agreement including but not limited to
the fulfilment of the conditions precedent set out in clause 3 below,
and compliance with the further conditions set out in clause 4 below,
TIC, relying upon each of the representations and warranties made or
incorporated by reference in this Agreement, agrees to grant to the
Borrower, for application only in accordance with clause 2.2 below and
otherwise subject to the terms and conditions of this Agreement, the
Equipment Facility in the aggregate amount of US $30,000,000 (thirty
million United States Dollars), being a Dollar facility.
- 5 -
2.2. PURPOSE
The Borrower shall apply all Equipment Facility Credits only towards
the payment of the cost of acquisition of the Ramp-Up Equipment.
2.3. NO OBLIGATION TO MONITOR
TIC shall not be under any obligation to monitor or verify the
application of any Equipment Facility Credit made pursuant to this
Agreement. The Borrower shall promptly notify TIC of the making of any
additional commitments to purchase or any other purchase orders
relating to any acquisition of Ramp Up Equipment.
2.4. TIC UNDERTAKING
Notwithstanding anything to the contrary in this Agreement, nothing
contained herein shall in any way derogate from the obligations of TIC
pursuant to the TIC Undertaking. Accordingly, and without limiting the
generality of the aforegoing, TIC shall, prior to or simultaneously
with the making of any Equipment Loans (as such term is defined in the
Banks' Equipment Facility Agreements) by any Bank, provide Equipment
Facility Credits to the Borrower in an amount equal to the aggregate
amount of all Equipment Loans (as such term is defined in the Banks'
Equipment Facility Agreements) to be provided by theBanks.
3. CLOSING AND CONDITIONS PRECEDENT
3.1. CLOSING
A closing shall take place after the conditions precedent set forth in
clauses 3.3 and 3.4 below have been satisfied or waived in accordance
with their terms ("THE CLOSING") at the offices of Yigal Arnon & Co.,
One Azrieli Center, Tel-Aviv, Israel, or at such other time and place
as the parties shall mutually agree ("THE CLOSING DATE").
3.2. CONDITIONS FOR CLOSING
The obligations of TIC under this Agreement are subject to the
condition that this Agreement has been closed (including the actual
delivery of all executed documents necessary to be delivered at
closing and the satisfaction or waiver of all other conditions
precedent to Closing) by not later than December 31, 2007.
- 6 -
3.3. Each of the following documents shall be duly delivered at Closing:
3.3.1. a copy, certified as a true copy by the external legal counsel
of the Borrower, of the Certificate of Incorporation, Memorandum
of Association and Articles of Association of the Borrower;
3.3.2. copies of resolutions of the Board of Directors of the Borrower
authorising named officers of the Borrower to execute, deliver
and perform this Agreement and to give all notices and take all
other action required to be given or taken by the Borrower under
this Agreement;
3.3.3. an opinion of Yigal Arnon & Co., Advocates, the Borrower's
external legal counsel, addressed to TIC in the form of SCHEDULE
3.3.3 attached hereto;
3.3.4. executed Share Warrants in the amount and in the form of
SCHEDULE 3.3.4 attached hereto;
3.3.5. executed Fee Letter and payment of all fees payable to TIC
thereunder;
3.3.6. written evidence of the receipt by the Borrower of a gross
amount of US $39,977,064 (thirty-nine million, nine hundred and
seventy-seven thousand and sixty-four United States Dollars) from
the issuance on or about June 13, 2007 of debentures (convertible
and non-convertible) and warrants by way of a private placement;
3.3.7. copies of the written confirmations received by the Borrower of
the receipt of all requisite corporate and third party, including
Israeli and foreign Governmental Body, approvals to the
transactions contemplated by this Agreement; and
3.3.8. an officer's certificate signed by the CEO and CFO of the
Borrower on behalf of the Borrower indicating that all of the
provisions of this clause 3.3 have been complied with in their
entirety.
- 7 -
3.4. In addition to each of the documents described in clause 3.3 above to
be delivered at Closing above, the closing of this Agreement shall be
subject to each of the conditions to closing below:
3.4.1. no Equipment Facility Default shall have occurred and the
consummation of this Agreement shall not cause an Equipment
Facility Default to occur;
3.4.2. all of the Borrower's representations and warranties given by
the Borrower pursuant to this Agreement shall be accurate in all
material respects as of the Closing Date, as if made on the
Closing Date;
3.4.3. no Material Adverse Effect shall have occurred;
3.4.4. there shall be no impediment, restriction, limitation or
prohibition, including impediments, restrictions, limitations or
prohibitions imposed under law or by any Governmental Body, as to
the proposed financing under this Agreement or as to the issuance
of the Share Warrants to TIC;
3.4.5. the Facility Agreement, including Amendment No. 1, dated
September 10, 2007, to the Restated Facility Agreement, dated
August 24, 2006, shall be effective and in full force and effect,
in the form of SCHEDULE 3.4.5 attached hereto, simultaneously
with the closing of this Agreement;
3.4.6. the closing of the Banks' Equipment Facility Agreements shall
occur simultaneously with the closing of this Agreement and
copies of the executed definitive documentation between the
Borrower and the Banks, with respect to, in the aggregate, US
$30,000,000 (thirty million United States Dollars) of Equipment
Loans (as such term is defined in the Banks' Equipment Facility
Agreements) and/or Equipment L/Cs (as such term is defined in the
Banks' Equipment Facility Agreements) are delivered to TIC; and
3.4.7. an officer's certificate signed by the CEO and CFO of the
Borrower on behalf of the Borrower indicating that all of the
provisions of this clause 3.4 have been complied with in their
entirety.
In the event that the conditions precedent are not fulfilled by
December 31, 2007 then this Agreement shall no longer be of any force
or effect and neither party shall have any claim against the other
party arising out of or in connection with this Agreement. TIC
undertakes that promptly following the fulfilment to the satisfaction
of TIC of all the conditions precedent referred to in clause 3.3
above, TIC shall confirm to the Borrower in writing that the
conditions precedent have been fulfilled and TIC is prepared to close,
subject to the fulfilment of the conditions set forth in clause 3.4.
- 8 -
4. AVAILABILITY OF EQUIPMENT FACILITY CREDITS
4.1. AVAILABILITY
Notwithstanding anything to the contrary in this Agreement:
4.1.1. TIC shall not be obliged to make any Equipment Facility Credit
available to the extent that doing so would cause the aggregate
amount of Equipment Facility Credits extended by TIC to exceed
the Commitment; and
4.1.2. Equipment Facility Credits shall be made during the
Availability Period only and then only if all the following
conditions for each Equipment Facility Credit specified hereunder
in this clause 4 are fulfilled:
4.1.2.1. the Banks, simultaneously therewith, providing, in
accordance with the Banks' Equipment Facility Agreements, an
equal amount, in the aggregate, of Equipment Loans (as such
term is defined in the Banks' Equipment Facility
Agreements), having the same purpose and the same maturity
date as the Equipment Facility Credit proposed to be
provided by TIC. For the purposes of this clause 4.1.2.1,
Equipment L/Cs (as such term is defined in the Banks'
Equipment Facility Agreements) shall be considered Equipment
Loans (as such term is defined in the Banks' Equipment
Facility Agreements) only to the extent such Equipment L/Cs
are converted into Equipment Loans (as such term is defined
in the Banks' Equipment Facility Agreements) under the
Banks' Equipment Facility Agreements following the
notification by a beneficiary under an Equipment L/C that
the Bank(s) are required to make a payment of funds, unless
the Borrower shall (without utilising any Equipment Loans
under any Bank Equipment Facility Agreement) have paid the
full relevant amount demanded on the Equipment L/C on or
prior to the date payment of the Equipment L/C is due. No
later than one (1) Business Day after delivering an
application for an Equipment L/C to a Bank, the Borrower
shall provide a copy thereof to TIC, together with a
Drawdown Request for an amount equal to one-half of the
maximum aggregate amount that the beneficiary of such
Equipment L/C may at any time draw thereunder, as such
aggregate amount may be reduced from time to time pursuant
to the terms of such Equipment L/C ("THE MAXIMUM DRAWING
AMOUNT"), and within two (2) Business Days from the receipt
thereof, TIC shall deliver to the Borrower (which may
provide a copy thereof to the Banks), written confirmation
that to the extent such Equipment L/C is converted into
Equipment Loans (as such term is defined in the Banks'
Equipment Facility Agreements) under the Banks' Equipment
Facility Agreements as aforesaid, TIC shall pay 50% of the
amount of such Equipment L/C which payment shall constitute
an Equipment Loan as contemplated by this Agreement (or,
subject to the terms of this Agreement, TIC shall deliver a
written statement setting forth the reasons why TIC is not
required to provide such confirmation). For the avoidance of
doubt, the confirmations shall not be deemed to be a waiver
of any right that TIC may have against Tower under this
Agreement;
- 9 -
4.1.2.2. the proposed date for the making of such Equipment
Facility Credit is a Business Day which is or precedes the
Termination Date;
4.1.2.3. the Borrower shall have entered into a purchase contract
and/or submitted a purchase order for the Ramp-Up Equipment,
whereby upon payment therefor, the Borrower shall own the
Ramp-Up Equipment (TIC hereby acknowledges and agrees that
it does not and shall not have or be granted hereby or by
operation of law any Encumbrance over any or all of the
Ramp-Up Equipment and that the Borrower shall not be
restricted under this Agreement to permit the imposition of
any Encumbrance on any or all of the Ramp-Up Equipment);
4.1.2.4. no Equipment Facility Default shall have occurred and be
continuing and no Equipment Facility Default shall occur as
a result of the making of such Equipment Facility Credit;
4.1.2.5. the amount of the Equipment Facility Credit requested
shall not exceed the total Available Commitment as at the
Drawdown Date;
- 10 -
4.1.2.6. the representations and warranties given by the Borrower
pursuant to this Agreement shall be true and accurate in all
material respects on and as at the proposed date for the
making of the Equipment Facility Credit;
4.1.2.7. none of the Ramp-Up Equipment or any part thereof has
been disposed or sold in the absence of TIC's prior consent;
and
4.1.2.8. the Available Commitment as at the Termination Date
shall automatically be cancelled.
4.2. EQUIPMENT LOANS
Subject to the fulfilment of the conditions precedent, to compliance
with the conditions set out in clause 4.1 above and to compliance with
the following conditions, TIC shall make an Equipment Loan under the
Equipment Facility during the Availability Period only if:
4.2.1. the Borrower shall have delivered to TIC a Drawdown Request for
such Equipment Loan executed by the CEO or CFO of the Borrower,
specifying a date for making such Equipment Loan, being at least
7 (seven) Business Days after the date of delivery of such
Drawdown Request, provided that a Drawdown Request in connection
with an Equipment L/C shall not specify a date for making such
Equipment Loan (it being understood that the Borrower shall not
be required to drawdown such Equipment Loan if the Borrower shall
have paid the full relevant amount demanded on the Equipment L/C
without utilising any Equipment Loans under any Bank Equipment
Facility Agreement). Any Drawdown Request will upon delivery
thereof be irrevocable;
4.2.2. the minimum amount of each Equipment Loan shall be a minimum
amount of US $1,000,000 (one million United States Dollars) and
an integral multiple of US $1,000,000 (one million United States
Dollars) (other than (i) in the case of an Equipment Loan
provided in connection with an Equipment L/C which shall not be
required to be in any minimum amount or in any integral multiple
or (ii) in the case of an Equipment Loan which shall be for the
balance of the Available Commitment); and
4.2.3. all Equipment Loans made under this Agreement shall be in US
Dollars.
- 11 -
5. REPAYMENT
5.1. REPAYMENT OF LOANS
The Borrower shall repay each Equipment Loan in full upon the earlier
of: (a) the Final Equipment Facility Maturity Date; and (b) the
Business Day immediately following the second anniversary of the
making of such Equipment Loan, subject to mandatory prepayment in
accordance with clause 6 below.
5.2. PAYMENT OF ALL OTHER SUMS DUE ON THE FINAL MATURITY DATE
On the Final Equipment Facility Maturity Date, the Borrower
additionally shall pay to TIC all other sums then outstanding under
this Agreement.
5.3. REPAYMENT IN CURRENCY OF LOAN
For the removal of doubt, each Equipment Loan, as well as all Interest
thereon, shall be repaid in US Dollars.
5.4. REPAYMENTS (INCLUDING PREPAYMENT) TO TIC'S ACCOUNT
All repayments as aforesaid and all prepayments (in accordance with
clause 6 below) shall be made by transfer to TIC to TIC's Account.
5.5. NO REBORROWING
The Borrower shall not be entitled to reborrow any part of an
Equipment Loan which is repaid.
5.6. CANCELLATION OF COMMITMENT
For the removal of doubt, the Commitment of TIC shall be cancelled by
any amount repaid or prepaid under this Agreement.
- 12 -
6. PREPAYMENT
6.1. VOLUNTARY PREPAYMENT
The Borrower may make a prepayment to TIC of any Equipment Loan, in
each case subject to the Borrower, simultaneously therewith, making a
voluntary prepayment with respect to equipment facility credits under
the Banks' Equipment Facility Agreements in an aggregate amount equal
to the amount of any such voluntary prepayment. A prepayment of any
Equipment Loan shall be made in the currency of the Equipment Loan.
The Borrower shall not be entitled to reborrow any amount prepaid on
account of any Equipment Loan. The Borrower shall pay to TIC, on the
date of prepayment a commission of 0.25% (nought point two five
percent) of the amount (principal) prepaid. All prepayments shall be
made together with all accrued Interest on the amount prepaid and all
other sums due in respect of the amount prepaid.
6.2. MANDATORY PREPAYMENT
6.2.1. Upon the occurrence of a Triggering Quarter, the Borrower
shall, prior to any prepayments to the Banks under their
mandatory prepayment option in clause 6.1 of the Facility
Agreement (such clause attached hereto in SCHEDULE 6.2.1),
immediately prepay the principal of the Equipment Loans at a rate
of US $7,500,000 (seven million five hundred thousand United
States Dollars) per Quarter, commencing on the last Business Day
of each Quarter following the Triggering Quarter until the
Equipment Loans under this Agreement are fully repaid.
For the avoidance of doubt and by way of illustration only, if
the Triggering Quarter is the Quarter ended March 31, 2008 and
the then outstanding Equipment Facility Credits aggregate US
$30,000,000 (thirty million United States Dollars), the Borrower
shall prepay US $7,500,000 (seven million five hundred thousand
United States Dollars) of Equipment Loans on the last Business
Day of each of the Quarters ended in June, September and
December, 2008 and March, 2009.
6.2.2. Upon the occurrence of an Accelerated Trigger Quarter, the
Borrower shall, prior to any prepayments to the Banks under their
mandatory prepayment option in clause 6.1 of the Facility
Agreement (such clause attached hereto in Schedule 6.2.1),
immediately prepay the principal of the Equipment Loans to TIC at
a rate of US $12,500,000 (twelve million five hundred thousand
United States Dollars) per Quarter, commencing on the last
Business Day of each Quarter following the Accelerated Trigger
Quarter until the Equipment Loans under this Agreement are fully
repaid.
- 13 -
For the avoidance of doubt and by way of illustration only, if
the Accelerated Trigger Quarter is the Quarter ended March 31,
2008 and the then outstanding Equipment Facility Credits
aggregate US $25,000,000 (twenty-five million United States
Dollars), the Borrower shall prepay US $12,500,000 (twelve
million five hundred thousand United States Dollars) in Equipment
Loans on the last Business Day of each of the Quarters ended in
June and September, 2008.
6.2.3. Should the Borrower wish to make a voluntary prepayment with
respect to any equipment facility credits under the Banks'
Equipment Facility Agreements, to the Banks, the Borrower shall,
simultaneously with such voluntary prepayment, pay an amount
equal to the aggregate amount of any such voluntary prepayment to
TIC.
6.3. The provisions of clauses 8.2 ("NO REBORROWING OF MANDATORY
PREPAYMENT"), 8.4 ("MANDATORY PREPAYMENT TOGETHER WITH INTEREST AND
OTHER SUMS OWED"), 8.5 ("CURRENCY FOR MANDATORY PREPAYMENT") and 8.6
("SCHEDULE FOR MANDATORY PREPAYMENT") of the Facility Agreement with
necessary changes, attached hereto in SCHEDULE 6.3, are hereby
incorporated by reference.
6A. SUBORDINATION
Notwithstanding anything to the contrary in this Agreement, TIC agrees, as
an obligation in favour of, and enforceable by, the Banks, as follows:
6A.1. the Indebtedness of the Borrower in respect of this Agreement is
subordinated to the rights of the Banks under the Facility Agreement
and under all other Finance Documents (as defined in the Facility
Agreement) in all respects, including with respect to payments of
principal and Interest and all other amounts payable to the Banks
under the Facility Agreement and under all other Finance Documents and
shall not be secured by any collateral whatsoever and, save in
accordance with the provisions of clauses 5 and 6 above and clause 7
and clause 8 below, no amount, whether in respect of principal,
Interest or any other amount, shall be payable by the Borrower on
account of such Indebtedness, prior to the date on which: (a) all
amounts payable by the Borrower under the Finance Documents shall have
been paid in full; and (b) no Bank shall be under any obligation under
any Finance Document to provide any Financial Indebtedness to the
Borrower;
6A.2. this Agreement shall not be amended in any way which may be adverse
in any manner to any interest or right of any Bank under any Finance
Documents, without the prior written consent of the Banks;
- 14 -
6A.3. in the event of any Equipment Facility Event of Default, no amount of
whatsoever nature shall be payable by the Borrower in respect of the
Equipment Facility Credits (whether in respect of principal, Interest
or any other amount), until all amounts owing by the Borrower under
the Finance Documents shall have been paid in full;
6A.4. any variation of the terms of the Finance Documents(save for
variations that purport to increase TIC's obligations to provide
Equipment Facility Credits to the Borrower or that purport to derogate
from the obligations of the Banks to provide Equipment Facility
Credits to the Borrower under the Banks' Equipment Facility
Agreements) shall not require the consent of TIC, nor shall it
constitute an Equipment Facility Default;
6A.5. no payment of principal or Interest shall be made in respect of the
Equipment Facility Credits under this Agreement, unless, as at the
date of any such payment no Default exists and is continuing under any
of the Finance Documents; and
6A.6. notwithstanding the foregoing provisions of this clause 6A, the
provisions of clause 1.1.118 of the Facility Agreement applicable to
"Equity Convertible Debentures" shall be applicable to the
Indebtedness under this Agreement, MUTATIS MUTANDIS.
6A.7 The subordination pursuant to this clause 6A shall apply only with
respect to (i) the existing Loans under and as defined in the Facility
Agreement and all other amounts (including Interest, fees,
commissions, costs and expenses) owed from time to time under the
Finance Documents (but, for the avoidance of doubt, excluding new
loans, if any, which may increase the principal amount of the Loans
outstanding as of the date hereof), (ii) the Equipment Facility
Credits under the Banks' Equipment Facility Agreements (in the
aggregate principal amount not to exceed $30 million US dollars) and
all other amounts (including Interest, fees, commissions, costs and
expenses) owed from time to time in connection therewith, and (iii)
standby or documentary letters of credit or bank guarantees, which
shall not in the aggregate exceed $10 million, issued and/or to be
issued from time to time by any Bank and all other amounts (including
Interest, fees, commissions, costs and expenses) owed from time to
time in connection therewith.
- 15 -
7. INTEREST
7.1. INTEREST RATE
The rate of Interest applicable to the Equipment Loans in respect of
each Interest Period (provided that the first Interest Period in
respect of any Equipment Loan made other than on the first day of a
Quarter, shall commence on the date of the making of such Equipment
Loan and end on the last Business Day of the Quarter in which such
Equipment Loan is made) shall be the sum of: (a) the rate per annum
determined to be LIBOR in accordance with clause 1.1.94 of the
Facility Agreement on the Interest Determination Date for such
Interest Period; and (b) 3% (three percent) per annum.
7.2. ACCRUAL OF INTEREST
Interest as aforesaid in clause 7.1 above in respect of the Equipment
Loans shall accrue from day to day and shall be calculated on the
basis of the actual number of days elapsed and a 360 (three hundred
and sixty) day year.
7.3. PAYMENT OF INTEREST
All Interest accrued as aforesaid in clause 7.2 above on the Equipment
Loans shall be paid on each Interest Payment Date and on the Final
Equipment Facility Maturity Date. The Borrower shall pay to TIC all
Interest payable as aforesaid into TIC's Account.
7.4. SUBSTITUTE INTEREST RATES
The provisions of clause 10 ("SUBSTITUTE INTEREST RATES") of the
Facility Agreement with necessary changes, attached hereto in SCHEDULE
7.4, are hereby incorporated by reference.
8. COMMISSIONS, FEES AND EXPENSES
The Borrower shall, in respect of the Availability Period, pay to TIC a
Commitment commission at the rate per annum of 0.25% (nought point two five
percent) on the Available Loan Commitment from time to time as from the
date of signature of this Agreement until the last day of the Availability
Period. Such fee shall accrue from day to day and shall be calculated on
the basis of the actual number of days elapsed and a 360 (three hundred and
sixty) day year and shall be paid in arrears on each Interest Payment Date
during the Availability Period and on the Termination Date. "AVAILABLE LOAN
COMMITMENT" means, at any time, the Commitment at such time, less all
Equipment Loans outstanding at such time.
- 16 -
9. TAXES
9.1 TAXES
All payments to be made by the Borrower to TIC shall be made free and
clear of and without deduction for or on account of Tax, unless the
Borrower is required by law to make such payment subject to the
deduction or withholding of Tax, in which case (save where such
deduction or withholding is in respect of Tax on Overall Net Income of
TIC and the Borrower shall have delivered to TIC a receipt as referred
to in clause 9.3 below, simultaneously with the making of the payment
from which such Tax deduction has been made) the sum payable by the
Borrower in respect of which such deduction or withholding is required
to be made shall be increased, to the extent necessary, to ensure that
after the making of the required deduction or withholding, TIC
receives and retains (free from any liability in respect of any such
deduction or withholding), a net sum equal to the sum which it would
have received and so retained had no such deduction or withholding
been made or required to be made, provided that the aforesaid shall
not apply with respect to any Taxes (including, for the removal of
doubt, Tax on Overall Net Income) of TIC in connection with the
issuance of any shares, warrants or capital notes of the Borrower or
the exercise or conversion thereof.
9.2 NOTIFICATION OF TAXES
If, at any time, the Borrower is required by law to make any deduction
or withholding from any sum payable by it hereunder, the Borrower
shall, as soon as reasonably practicable, notify TIC.
9.3 PAYMENT AND SUBMISSION OF RECEIPT
If the Borrower makes any payment hereunder in respect of which it is
required to make any deduction or withholding, it shall pay the full
amount required to be deducted or withheld to the relevant taxation or
other authority within the time allowed for such payment under
applicable law and shall deliver to TIC, as soon as reasonably
practicable after it has made such payment to the applicable
authority, an original receipt (or a certified copy thereof) issued by
such authority evidencing the payment to such authority of all amounts
so required to be deducted or withheld in respect of such payment.
- 17 -
9.4 TAX SAVING
9.4.1 In the event that following the imposition of any Tax on any
payment by the Borrower in consequence of which the Borrower is
required, under clause 9.1, to pay any additional amount in
respect thereof, TIC shall, in its sole opinion and based on its
own interpretation of any relevant laws or regulations (but
acting in good faith), receive or be granted a repayment of Tax,
or a credit against, or remission for, or deduction from, or in
respect of, any Tax payable by it (any of the aforegoing, to the
extent so reasonably identifiable and quantifiable, being
referred to as "A SAVING"), TIC shall, to the extent that it can
do so without prejudice to the retention of the relevant saving
and subject to the Borrower's obligation to repay the amount to
TIC, if the relevant saving is subsequently disallowed or
cancelled (which repayment shall be made promptly on receipt of
notice by the Borrower from such person of such disallowance or
cancellation), reimburse the Borrower promptly after receipt of
such saving by TIC with such amount equal to the lower of: (i)
the additional amount paid by the Borrower in respect of such Tax
under clause 9.1 as aforesaid; and (ii) such amount as TIC shall,
in its sole opinion but in good faith, have concluded to be the
finally determined amount or value of the relevant saving.
9.4.2 Nothing contained in this Agreement shall interfere with the
right of TIC to arrange its Tax and other affairs in whatever
manner it thinks fit and, in particular, TIC shall be under no
obligation to claim relief from Tax on its corporate profits, or
from any similar Tax liability, in respect of the Tax, or to
claim relief in priority to any other claims, reliefs, credits or
deductions available to it or to disclose details of its Tax
affairs. TIC shall not be required to disclose any confidential
information relating to the organisation of its affairs.
9.4.3. TIC will notify the Borrower promptly of the receipt by it of
any saving and of its opinion as to the amount or value of that
saving.
9.5 VAT
The Borrower shall add to any payment to be made by the Borrower to
TIC under this Agreement all VAT, if applicable. For the avoidance of
doubt, VAT will be added and paid by the Borrower to TIC pursuant to
payments of interest, fees, warrants and exchange rate differences, if
applicable.
10. REPRESENTATIONS AND WARRANTIES
10.1. ORGANIZATION
The Borrower is duly organized and validly existing under the laws of
the State of Israel and has full corporate power and authority to own,
lease and operate its properties and assets and to conduct its
business as now being conducted and to perform all its obligations
under this Agreement.
- 18 -
10.2. MEMORANDUM AND ARTICLES OF ASSOCIATION
The Borrower has made available for inspection by TIC complete and
correct copies of the Memorandum of Association and Articles of
Association of the Borrower, as amended to the date furnished. Such
Memorandum and Articles of Association are in effect as of the date
hereof and as will be in effect at the Closing Date.
10.3. AUTHORIZATION; APPROVALS
Prior to the Closing Date, all corporate action on the part of the
Borrower necessary for the execution, delivery and performance of this
Agreement shall have been taken. Except for the approval of the
Investment Centre and the Banks, no consent, approval or authorization
of, exemption by, or filing with, any governmental or regulatory
authority or any third party is required in connection with the
execution, delivery and performance of this Agreement. This Agreement
when executed and delivered by or on behalf of the Borrower, shall
constitute the valid and legally binding obligations of the Borrower,
legally enforceable against the Borrower in accordance with its terms,
subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other laws relating to creditor's
rights generally and general principles of equity.
10.4. NO CONFLICTS
Neither the execution and delivery of this Agreement by the Borrower,
nor the compliance with the terms and provisions of this Agreement on
the part of the Borrower, will: (i) violate any statute or regulation
of any governmental authority, domestic or foreign, affecting the
Borrower; (ii) require the issuance of any authorization, license,
consent or approval of any governmental agency, or any other person
other than the Investment Centre and the Banks; or (iii) conflict with
or result in a breach of any of the terms, conditions or provisions of
any judgment, order, injunction, decree, loan agreement or other
material agreement or instrument to which the Borrower is a party, or
by which the Borrower is bound, or constitute a default thereunder,
the effect of which might have a Material Adverse Effect on the
Borrower.
- 19 -
10.5. NO LITIGATION
There are no actions, suits, proceedings, or injunctive orders,
pending or threatened against or affecting the Borrower relating to
the subject matter of this Agreement.
10.6. BANKS' EQUIPMENT LOANS
The Equipment Loans under this Agreement have substantially the same
economic terms and conditions, including but not limited to any fees
or other compensation, as the equipment loans under the Banks'
Equipment Facility Agreements, except that the Equipment Loans are
unsecured, subordinated to the obligations of the Borrower to the
Banks under the Finance Documents in accordance with clause 6A above
and, under the Banks' Equipment Facility Agreements, the Banks may
issue Equipment L/Cs.
11. DEFAULT
11.1. EVENTS OF DEFAULT
Each of the events set out in clause 11.2 to clause 11.7 is an event
of default ("AN EQUIPMENT FACILITY EVENT OF DEFAULT") (whether or not
caused by any reason outside the control of the Borrower or of any
other person). Promptly after the occurrence of an Equipment Facility
Event of Default, the Borrower will notify TIC that such an Equipment
Facility Event of Default has occurred.
11.2. NON-PAYMENT
The Borrower does not pay any amount payable by it under this
Agreement at the place and in the funds expressed to be payable,
within the earlier of: (a) 7 (seven) Business Days; or (b) 10 (ten)
days, of the due date for payment.
11.3. BREACH OF OBLIGATIONS
There is any breach of any undertaking by the Borrower in this
Agreement and, if such default is capable of remedy within such
period, within 7 (seven) days after receipt by the Borrower of written
notice from TIC requiring the breach to be remedied, the Borrower
shall have failed to cure such default.
- 20 -
11.4. MISREPRESENTATION/BREACH OF WARRANTIES
Any representation or warranty made or repeated by or on behalf of the
Borrower in this Agreement (including through incorporation by
reference into this Agreement), or in any certificate or statement
delivered by or on behalf of the Borrower or under this Agreement is
incorrect or misleading in any material respect when made or deemed to
be made or repeated.
11.5. INVALIDITY
This Agreement shall cease to be in full force and effect in any
respect or shall cease to constitute the legal, valid, binding and
enforceable obligation of the Borrower.
11.6. DEFAULT UNDER THE FACILITY AGREEMENT
A Default or Event of Default (as distinguished from a Equipment
Facility Event of Default) under the Facility Agreement, as amended,
has occurred and is continuing.
11.7. CROSS ACCELERATION
Any amount in respect of Financial Indebtedness of the Borrower which
aggregates US $20,000,000 (twenty million United States Dollars) or
its equivalent, or more at any one time outstanding: (a) becomes
prematurely due and payable; (b) becomes due for redemption before its
normal maturity date; or (c) is placed on demand, in each such case by
reason of the occurrence of an event of default (howsoever
characterised) or any event having the same effect resulting from a
default by the Borrower.
11.8. EXECUTION OR OTHER PROCESS
Any execution, attachment, sequestration or other process arising out
of any claim by any third party against the Borrower, save where: (a)
the Borrower is in good faith on reasonable grounds, contesting the
execution, attachment, sequestration or other process by appropriate
Proceedings diligently pursued; (b) TIC is satisfied that the ability
of the Borrower to comply with its respective obligations under this
Agreement will not be adversely affected whilst such distress,
execution, attachment, diligence or other process is being so
contested; and (c) such process as aforesaid is cancelled or withdrawn
not later than 45 (forty-five) days after the institution thereof.
- 21 -
11.9. ACCELERATION
Upon the occurrence of an Equipment Facility Event of Default and at
any time thereafter while the same is continuing, TIC may, by notice
to the Borrower:
11.9.1. declare that an Equipment Facility Event of Default has
occurred; and/or
11.9.2. declare that the Equipment Loans together with all Interest
accrued on all Equipment Loans and all other amounts (including
amounts due under clause 13, to the extent applicable) payable by
the Borrower under this Agreement from time to time, shall
thenceforth be repayable on demand being made by TIC (and in the
event of any such demand, the Equipment Loans, such Interest and
such other amounts shall be immediately due and payable); and/or
11.9.3. declare the Equipment Loans immediately due and payable,
whereupon they shall, subject to clause 6A above, become
immediately due and payable, together with all Interest accrued
on the Equipment Loans and all other amounts payable by the
Borrower (including, amounts due under clause 13, to the extent
applicable).
11.10. EQUIPMENT LOANS DUE ON DEMAND
Subject to clause 6A above, If, pursuant to clause 11.9.2 above TIC
declares the Equipment Loans to be due and payable on demand, then and
at any time thereafter, so long as any Equipment Facility Event of
Default is continuing or has not been waived, TIC may by written
notice to the Borrower require repayment of the Equipment Loans on
such date as TIC may specify in such notice (whereupon the same shall
become due and payable on such date together with accrued Interest
thereon and any other sums then owed by the Borrower hereunder) or
withdraw such declaration with effect from such date as they may
specify in such notice.
11.11. COLLECTION
Subject to clause 6A above, in the event of acceleration of the
Equipment Loans pursuant to clause 11.9.3 above or of a written notice
under clause 11.10 above, then, without derogating from any other
remedies or relief available to TIC under law or under this Agreement,
TIC shall be entitled to take all steps as it deems fit in order to
collect all sums owed by the Borrower to TIC under or in connection
with this Agreement (including all sums referred to in clause 11.9
above), all at the expense of the Borrower and to utilise the sums
received to repay in part or in full all amounts owed by the Borrower
hereunder.
- 22 -
11.12. INDEMNITY
Subject to clause 6A above, the Borrower shall indemnify TIC against
any losses, charges or expenses which TIC may sustain or incur as a
consequence of:
11.12.1. the occurrence of any Equipment Facility Event of Default or
Equipment Facility Default; or
11.12.2. the operation of clauses 11.9, 11.10 or 11.11,
including, any losses, charges or expenses on account of funds
acquired, contracted for or utilised to fund any amount payable
under this Agreement or any amount repaid or prepaid. A
certificate of TIC as to the amount of any such loss or expense
shall be PRIMA FACIE evidence in the absence of manifest error.
11.13. TERMINATION OF COMMITMENT
In the event of the operation of clause 11.9 above, TIC shall be
entitled to terminate its Commitments. For the removal of doubt, such
termination shall not derogate from any obligations of the Borrower to
TIC under this Agreement.
12. DEFAULT INTEREST
12.1. DEFAULT RATE PERIODS
If any sum due and payable by the Borrower hereunder is not paid on
the due date therefor in accordance with the provisions of this
Agreement ("UNPAID SUM"), the period beginning on such due date and
ending on the date upon which the obligation of the Borrower to pay
the Unpaid Sum is discharged, shall be divided into successive
periods, each of which (other than the first) shall start on the last
day of such preceding period and the duration of each of which shall
(except as otherwise provided in this clause 12) be selected by TIC
(such periods selected as aforesaid "INTEREST PERIODS").
- 23 -
12.2. DEFAULT INTEREST
During each such Interest Period as is mentioned in clause 12.1 above,
an Unpaid Sum shall bear Interest at the rate per annum which is the
sum from time to time of: (a) 3% (three percent); and (b) the Interest
rate in respect of such Interest Period as would have been determined
in accordance with clause 7.1 above (provided that, if, for any such
Interest Period LIBOR cannot be determined, the rate of Interest
applicable to such Unpaid Sum shall be the rate per annum which is the
sum of: (i) 3% (three percent); and (ii) 3% (three percent) plus a
rate as certified by TIC in accordance with clause 7.4 above.
12.3. PAYMENT OF DEFAULT INTEREST
Any Interest which shall have accrued under clause 12.2 above in
respect of an Unpaid Sum shall be due and payable and shall be paid by
the Borrower at the end of each Interest Period by reference to which
it is calculated or on such other dates as TIC may specify by written
notice to the Borrower.
12.4. LIMIT ON DEFAULT INTEREST
Notwithstanding anything to the contrary in this clause 12, the
effective rate of Interest (having regard to the periods determined
above) payable on Unpaid Sums shall at no time exceed the lower rate
of Interest applicable at the same time under the Banks' Equipment
Facility Agreements. For the avoidance of doubt, VAT, Tax withholding
or other Tax required to be paid shall not be taken into account for
the purposes of comparing Interest rates.
13. FAILURE TO DRAW AN EQUIPMENT LOAN
In the event that the Borrower shall make any Drawdown Request, but shall
not be entitled to receive (and shall have not received) the relevant
Equipment Loan by reason of not having fulfilled all of the conditions
therefor listed in clauses 4.1 or 4.2 above, then, without derogating from
any other right of TIC hereunder and under any applicable law, the Borrower
shall indemnify and compensate TIC for any and all of TIC's costs and
expenses in financing the amount requested by the Borrower, the liquidation
of any such funds and including loss of profit of TIC by reason of any such
event.
- 24 -
14. PAYMENTS
14.1. PAYMENTS BY BORROWER
All payments to be made by the Borrower to TIC shall be made in same
day funds to TIC's Account. All payments required to be made by the
Borrower under this Agreement shall be calculated without reference to
any set-off or counterclaim and shall be made free and clear of and
without any deduction for or on account of, any set-off or
counterclaim.
14.2. PAYMENTS BY TIC TO BORROWER
All payments to be made by TIC to the Borrower in respect of Equipment
Loans shall be made by transfer of such payment to the Borrower's
Account.
15. MISCELLANEOUS
The provisions of clause 26 ("REMEDIES AND WAIVERS"), clause 27 ("NOTICES")
(other than clauses 27.2.2 and 27.2.3, which shall be replaced with:
"27.2.2. to TIC at:
Israel Coropration Ltd.
Milennium Tower
23 Aranha St.
Tel-Aviv, Israel 61070
ATTENTION: CHIEF FINANCIAL OFFICER
FACSIMILE: 972-3-684-457
WITH A COPY TO:
Gornitzky & Co.
45 Rothschild Blvd.
Tel Aviv, Israel 65784
ATTENTION: ZVI EPHRAT, ADV.
FACSIMILE: (03) 560 6555,
clause 28 ("AMENDMENTS"), clause 29 ("COUNTERPARTS"), clause 30 ("GOVERNING
LAW AND JURISDICTION"), clause 31 ("ENTIRE AGREEMENT") and clause 33
("BANKS REPRESENTATION") of the Facility Agreement with necessary changes,
attached hereto in SCHEDULE 15, are hereby incorporated by reference. This
Agreement may not be assigned by any party without the prior written
consent of the other party hereto.
- 25 -
IN WITNESS WHEREOF, THE PARTIES HAVE SIGNED THIS EQUIPMENT FACILITY AGREEMENT ON
THE DATE FIRST MENTIONED ABOVE.
for: TOWER SEMICONDUCTOR LTD.
By:
_____________________________
Title:
_____________________________
for: ISRAEL CORPORATION LTD.
By:
_____________________________
Title:
_____________________________
- 26 -
EXHIBIT 4.85
AMENDMENT NO. 1
TO RESTATED FACILITY AGREEMENT
Made and entered into on this 10th day of September, 2007, by and
between:
(1) TOWER SEMICONDUCTOR LTD. ("THE BORROWER")
and
(2) BANK LEUMI LE-ISRAEL B.M. and BANK HAPOALIM B.M. ("THE BANKS")
WHEREAS: the Borrower, on the one hand, and the Banks, on the other hand,
are parties to a Facility Agreement dated January 18, 2001, as
amended from time to time and as amended and restated on August
24, 2006 (the Facility Agreement, as amended as aforesaid,
hereinafter "THE FACILITY AGREEMENT"); and
WHEREAS: the Borrower proposes, as part of its "ramp up" of Fab 2 in
accordance with the Project, to purchase the bulk of a tool set
of the 130 nm-90 nm technology bought by Macquarie Bank Australia
or other persons from Advanced Micro Devices Dresden fabrication
facility and/or related tools owned by Advanced Micro Devices
Dresden ("THE AMD EQUIPMENT"), or such complementary and/or other
tool sets that have substantially similar purposes, comparable
economic terms and similar anticipated benefits as the AMD
Equipment, all as may be approved in advance and in writing by
the Banks ("THE ALTERNATE EQUIPMENT"); and
WHEREAS: the Borrower estimates the cost of the AMD Equipment, including
acquisition, installation, accessories, facility extension and
other related tool costs, to be approximately US $100,000,000
(one hundred million United States Dollars); and
WHEREAS: by consent, dated June 6, 2007, the Banks consented to the
issuance by the Borrower of up to US $60,000,000 (sixty million
United States Dollars) of Permitted Subordinated Debt partially
to finance the purchase of the AMD Equipment, of which gross
proceeds of US $39,977,064 (thirty-nine million, nine hundred and
seventy-seven thousand and sixty-four United States Dollars) were
raised on June 13, 2007; and
WHEREAS: the Borrower's plan for financing the purchase of the AMD
Equipment or the Alternate AMD Equipment also includes US
$30,000,000 (thirty million United States Dollars) of financing
from TIC and US $30,000,000 (thirty million United States
Dollars) of bank financing; and
WHEREAS: the Borrower and the Banks have agreed to amend the Facility
Agreement in the manner set out below ("THIS AMENDMENT NO. 1"),
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. INTERPRETATION
1.1. Terms and expressions defined in the Facility Agreement shall have the
same meanings when used in this Amendment No. 1.
1.2. References herein to clauses and paragraphs, are to clauses and
paragraphs of the Facility Agreement.
1.3. References herein to sections, are to sections of this Amendment No.
1.
2. AMENDMENT
Subject to the fulfilment of the conditions precedent referred to in
section 3 below, the Facility Agreement shall, with effect from the date
upon which the Banks shall, pursuant to section 3.2 below, have confirmed
in writing fulfilment of all of the conditions precedent set out in section
3 below (if fulfilled) (such date hereinafter being referred to as "THE
AMENDMENT NO. 1 CLOSING DATE"), be amended in the manner set out below:
- 2 -
2.1. Clause 1 (INTERPRETATION) shall be amended as follows:
2.1.1. the following new definitions shall be added:
2.1.1.1. as new clause 1.1.5A:
"`ALTERNATE EQUIPMENT' - means such complementary and/or
other tool sets that have substantially similar purposes,
comparable economic terms and similar anticipated benefits
as the AMD Equipment (as defined below), all as may be
approved in advance and in writing by the Banks;"
2.1.1.2. as new clause 1.1.5B:
"`AMD EQUIPMENT' - means all or a portion of the tool set of
the 130 nm-90 nm technology bought by Macquarie Bank
Australia from the Advanced Micro Devices Dresden
fabrication facility and/or bought by others, such as,
original equipment manufacturers (who bought such equipment
from the Advanced Micro Devices Dresden fabrication facility
for refurbishing or upgrading and resale) and/or related
tools owned by Advanced Micro Devices Dresden, in each case,
for use solely in Fab 2;"
- 3 -
2.1.1.3. as new clause 1.1.6A:
"`AMENDMENT NO. 1 CLOSING DATE' - means September 10, 2007;"
2.1.1.4. as new clause 1.1.49A:
"`EQUIPMENT FACILITY' - shall bear the meaning assigned to
such term in clause 1.1.115(l) below;"
2.1.1.5. as new clause 1.1.49B:
"`EQUIPMENT FACILITY CREDITS' - means any Equipment Loans
made to the Borrower pursuant to an Equipment Facility
and/or any Equipment L/Cs issued by an Equipment Lender in
lieu of all or part of the Equipment Loans or, as the
context requires, the principal amount of such Equipment
Loans at such relevant time and the Maximum Drawing Amount
of such Equipment L/Cs at such relevant time; provided that,
the maximum aggregate amount of all Equipment Facility
Credits shall not exceed US $30,000,000 (thirty million
United States Dollars);"
2.1.1.6. as new clause 1.1.49C:
"`EQUIPMENT L/CS' - shall bear the meaning assigned to such
term in clause 1.1.115(j) below;"
- 4 -
2.1.1.7. as new clause 1.1.49D:
"`EQUIPMENT LENDER' - means an Israeli bank or banks (which
need not be the Banks) that provides an Equipment Facility
to the Borrower;"
2.1.1.8. as new clause 1.1.49E:
"`EQUIPMENT LOANS' - means those parts of Equipment Facility
Credits consisting of any advance or loan or, as the context
defines, the principal amount of such advance or loan
outstanding at such relevant time;"
2.1.1.9. as new clause 1.1.49F:
"`EQUIPMENT SELLER' - means a seller of AMD Equipment or a
seller of the Alternate Equipment as may be approved in
advance and in writing by the Banks;"
2.1.1.10. as new clause 1.1.103:
"`MAXIMUM DRAWING AMOUNT' - means, in respect of any L/C
(including an Equipment L/C) at any time, the maximum
aggregate amount that the beneficiary of such L/C may at any
time draw thereunder, as such aggregate amount may be
reduced from time to time pursuant to the terms of such
L/C;"
- 5 -
and
2.1.1.11. as new clause 1.1.126A:
"`RAMP-UP EQUIPMENT' - shall mean the AMD Equipment, or if
the AMD Equipment is not being acquired by the Borrower, the
Alternate Equipment;"
2.1.2. clause 1.1.18 ("CHANGE OF OWNERSHIP") shall be amended by
adding in paragraph (b) thereof, after the word "Loans", the
following:
"and shall have repaid to the Banks in accordance with any
Finance Document, including any Equipment Facility provided
severally by any or both Banks to the Borrower, at least 50%
(fifty percent) of the credits made available pursuant to
such Finance Documents, including Equipment Facility Credits
that may be provided by a Bank pursuant to an Equipment
Facility;"
2.1.3. clause 1.1.37 ("DEBT SERVICE") shall be amended as follows:
2.1.3.1. paragraph (a) thereof shall be amended to delete the
words "and 1.1.115(f)" and substitute therefor, ",
1.1.115(f) and 1.1.115(l)"; and
2.1.3.2. paragraph (c) thereof shall be amended to delete the
words "and 1.1.115(d)" and substitute therefor, ",
1.1.115(d) and 1.1.115(l)";
2.1.4. clause 1.1.40 ("DISTRIBUTIONS") shall be amended to delete the
words "convertible securities" and substitute "Permitted
Subordinated Debt (save to the extent permitted under the
approved terms thereof in accordance with clause 1.1.118 below)"
therefor;
- 6 -
2.1.5. clause 1.1.60 ("FINAL MATURITY DATE") shall be amended to add
the words:
"or March 31, 2012, if the option set forth in clause 6.1
below is exercised by the Banks;"
2.1.6. clause 1.1.114 ("PERMITTED ENCUMBRANCES") shall be amended to
add the following:
"(e) a first-ranking fixed charge over the Ramp-Up Equipment that
may be granted by the Borrower in favour of the Equipment
Lender solely to secure Permitted Financial Indebtedness
described in clause 1.1.115(l) below; provided that, the
Ramp-Up Equipment is duly pledged to the Banks by way of
fixed charge (subordinate only to the first-ranking fixed
charge to be granted to secure said Permitted Financial
Indebtedness) under, and by way of supplement to, the
Debenture and otherwise perfected in accordance with its
terms. For the avoidance of doubt, in the event that the
only Equipment Lenders providing the Permitted Financial
Indebtedness described in clause 1.1.115(l) below are the
Banks, such Permitted Financial Indebtedness shall be
secured by a first-ranking fixed charge over the Ramp-Up
Equipment in favour of the Banks under, and by way of
supplement to, the Debenture and otherwise perfected in
accordance with its terms;"
2.1.7. clause 1.1.115 ("PERMITTED FINANCIAL INDEBTEDNESS") shall be
amended to:
2.1.7.1. delete in paragraph (j) thereof the words "all such
L/Cs" and substitute therefor, "L/Cs that are not Equipment
L/Cs";
2.1.7.2. add the following sentence to the end of paragraph (j):
"The aggregate Indebtedness in respect of L/C's issued in
favour of the Equipment Seller to acquire the Ramp-Up
Equipment pursuant to the Equipment Facility ("THE EQUIPMENT
L/CS") together with the aggregate of all other Equipment
Facility Credits, shall not exceed US $30,000,000 (thirty
million United States Dollars);"
- 7 -
and
2.1.7.3. insert the following new paragraph (l) at the end
thereof:
"(l) Financial Indebtedness in respect of a credit facility
or facilities with a maturity of not less than 2 (two)
years (subject to subparagraph (i)(3) below) obtained
from an Israeli bank or banks solely to finance the
purchase of the Ramp-Up Equipment (`THE EQUIPMENT
FACILITY") which shall at no time exceed US $30,000,000
(thirty million United States Dollars) in the
aggregate; provided that, as a condition to such
Financial Indebtedness being incurred, there shall have
prior thereto been unconditionally and irrevocably
invested or provided (or there shall have been
delivered to the Banks unconditional and irrevocable
undertakings, satisfactory in form and substance to the
Banks, so to invest or provide) a net aggregate amount
equal to at least US $70,000,000 (seventy million
United States Dollars) for purchase of the Ramp-Up
Equipment, consisting of the following:
- 8 -
(i) TIC shall have unconditionally and irrevocably invested
in, and/or provided to the Borrower (or there shall
have been delivered to the Banks an unconditional and
irrevocable undertaking, in favour of the Banks, in
form and substance satisfactory to the Banks, so to
invest or provide), at least US $30,000,000 (thirty
million United States Dollars) of Paid-in Equity and/or
unsecured non-convertible loans or L/Cs that are
subordinated to the rights of the Banks under this
Agreement and under all other Finance Documents
("PERMITTED SUBORDINATED TIC DEBT") having terms
substantially similar to that of the Equipment
Facility, including: (1) with respect to Permitted
Subordinated TIC Debt, Interest at a rate not in excess
of the lowest rate paid in any Equipment Facility; (2)
such Permitted Subordinated TIC Debt and/or Paid-in
Equity to be disbursed and/or paid by TIC to the
Borrower prior to, or simultaneously with, and in an
aggregate amount equal to, the aggregate amount of all
drawdowns of Equipment Loans, including any requested
or deemed drawdowns of Equipment Loans as a consequence
of a payment by an Equipment Lender of any L/C issued
by such Equipment Lender pursuant to such Equipment
Facility, by the Borrower (and the undertaking by TIC
shall, INTER alia, include its undertaking to make,
prior to or simultaneously with any such requested or
deemed drawdown, an investment in, or a provision of
funds to, the Borrower in an amount equal to each
payment of an Equipment L/C by an Equipment Lender)
(and such disbursements and/or payments by TIC to the
Borrower shall be a condition to any such drawdown by
the Borrower under an Equipment Facility); and (3)
repayments of any such Permitted Subordinated TIC Debt
shall only be made by the Borrower to TIC
simultaneously with, or subsequent to, repayment of an
equal amount of Equipment Facility Credits (including
Equipment Loans), including once: (A) a Triggering
Quarter (as defined in clause 6.1 below) shall have
occurred, the permitted prepayment by the Borrower of
1/4 (one-fourth) of the Equipment Facility Credits to
the Equipment Lender(s) and 1/4 (one-fourth) of such
Permitted Subordinated TIC Debt to TIC over each of the
four Quarters following the Triggering Quarter; and (B)
an Accelerated Trigger Quarter (as defined in clause
6.1 below) shall have occurred, the permitted
prepayment at an aggregate quarterly rate of US
$25,000,000 (twenty-five million United States
Dollars), of which US $12,500,000 (twelve million five
hundred thousand United States Dollars) shall be paid
to the Equipment Lender(s) on account of the Equipment
Facility Credits and of which US $12,500,000 (twelve
million five hundred thousand United States Dollars)
shall be paid to TIC on account of such Permitted
Subordinated TIC Debt to TIC until all such Equipment
Facility Credits and Permitted Subordinated TIC Debt
are paid in full;
- 9 -
(ii) a gross amount of US $39,977,064 (thirty-nine million,
nine hundred and seventy-seven thousand and sixty-four
United States Dollars) shall have been unconditionally
and irrevocably paid by investors in Permitted
Subordinated Debt in conformity with the terms of
Schedule 1.118 hereto; and
(iii) a net amount of at least US $40,000,000 (forty million
United States Dollars) shall have either been: (1)
unconditionally and irrevocably invested in the
Borrower by way of Paid-in Equity, Permitted
Subordinated Debt, including amounts already raised (as
described in (ii) above) and capable of being raised in
conformity with Schedule 1.118 hereto, or unsecured
customer advances in form and substance satisfactory to
the Banks; or (2) generated from Excess Cash Flow,
including as may be reflected in the Borrower's
Accounts for a Quarter commencing from the first
Quarter of 2007, provided that any such Excess Cash
Flow is held by the Borrower as cash in short term bank
deposits.
For the removal of doubt, except and to the extent set forth
in any Equipment Facility provided by a Bank as an Equipment
Lender, none of the Banks shall be under any obligation
whatsoever to provide such financing;"
- 10 -
2.1.8. clause 1.1.118 ("PERMITTED SUBORDINATED DEBT") shall be amended
to add the following paragraph thereto:
"All references in this clause 1.1.118 to `convertible
debentures' and `Equity Convertible Debentures' shall be deemed
to apply to (a) non-convertible debentures issued by the Borrower
in accordance with the consent, dated June 6, 2007, given by the
Banks, a copy of which is attached as SCHEDULE 1.1.118 hereto,
and (b) to any Permitted Subordinated TIC Debt provided to the
Borrower by TIC pursuant to clause 1.1.115(l)(i) above;"
2.1.9. clause 1.1.142 ("TOTAL DEBT") shall be amended to delete the
words "and (d)" and substitute therefor the words, ", (d) and
(l)"; and
2.1.10. clause 1.3.14 shall be amended to add the following to the
first sentence thereof:
"or, effective January 1, 2008, International Financial Reporting
Standards (`IFRS')."
2.2. Clause 6.1 (REPAYMENT OF LOANS) shall be amended to add the following
at the end thereof:
"provided, however, that once the Borrower's EBITDA for any Quarter
equals or exceeds US $35,000,000 (thirty-five million United States
Dollars) but equals less than US $50,000,000 (fifty million United
States Dollars) (`THE TRIGGERING QUARTER') and the Equipment Facility
Credits are paid in full by the Borrower, the Banks shall have the
option, by written notice to the Borrower by the Banks, to require the
Borrower, as a mandatory prepayment, as to which clause 8 below shall
apply, to repay the last instalment of the Loans otherwise payable in
June 2012 and (1)/2 (one-half) of the penultimate instalment otherwise
payable in March 2012 (such amounts, collectively, `THE AGGREGATE
TRIGGER PREPAYMENT AMOUNT'), at the end of 3 (three) earlier
consecutive Quarters following the Triggering Quarter, but no earlier
than (1)/3 (one-third) of the Aggregate Trigger Prepayment Amount on
the last Business Day in December 2008, (1)/3 (one-third) on the last
Business Day in March 2009 and (1)/3 (one-third) on the last Business
Day in June 2009, provided further, however, that once Borrower's
EBITDA for any Quarter equals or exceeds US $50,000,000 (fifty million
United States Dollars) (`THE ACCELERATED TRIGGER QUARTER'), the
mandatory quarterly prepayments shall be in a minimum amount of US
$25,000,000 (twenty-five million United States Dollars), in which case
the Aggregate Trigger Prepayment Amount would be paid in 2 (two)
quarterly instalments rather than in 3 (three). For the avoidance of
doubt and by way of illustration only, should the Equipment Facility
Credits be paid in full on or prior to June 30, 2009 and the
Triggering Quarter be the Quarter ended June 30, 2009, the Banks would
have the option to require said mandatory prepayments to be made on
the last Business Days in each of September 2009, December 2009 and
March 2010, respectively, and, should the Quarter ended June 30, 2009
be an Accelerated Trigger Quarter, the Banks would have the option to
require a mandatory prepayment in the amount of US $25,000,000
(twenty-five million United States Dollars) on the last Business Day
of September 2009 and the remainder of the Aggregate Trigger
Prepayment Amount on the last Business Day in December 2009, in each
case, in addition to the repayments of principal of the Loans also due
on such dates pursuant to this clause 6.1 above."
- 11 -
2.3. Clause 15 (REPRESENTATIONS AND WARRANTIES) shall be amended as
follows:
2.3.1. clause 15.5 (NO DEFAULT) shall be amended to read in its
entirety as follows:
"No Default is continuing which has not been waived."
2.3.2. clause 15.7 (SHARE CAPITAL) shall be amended to read in its
entirety as follows:
"The authorised share capital of the Borrower consists of
800,000,000 (eight hundred million) ordinary shares. The
Borrower's most recently filed Annual Report on Form 20-F (`THE
ANNUAL REPORT'), as filed with the United States Securities and
Exchange Commission (`THE SEC'), sets forth, as of the month
ended immediately prior to the filing of the Annual Report, the
number of shares issued and outstanding, the approximate
aggregate number of shares reserved for issuance upon exercise of
all outstanding warrants and options and conversion of all
convertible securities (without being required to take into
account options, warrants or convertible securities that are
substantially "out of the money") and sets forth the list of all
those persons which, to the Knowledge of the Borrower, as of the
month ended immediately prior to the filing of the Annual Report,
are the beneficial holders of 5% (five percent) or more of the
issued and outstanding shares of the Borrower. All of the
outstanding ordinary shares have been duly authorised and validly
issued."
- 12 -
2.3.3. clause 15.8 (SEC DOCUMENTS; FINANCIAL STATEMENTS) shall be
amended to read in its entirety as follows:
"15.8.1. The Borrower has furnished to the Banks copies of the
Borrower's most recent Annual Report as filed with the SEC.
The Borrower represents and warrants that: (a) the Annual
Report has been duly filed with the SEC and when filed was
in compliance in all material respects with the requirements
of the Exchange Act and the rules and regulations of the SEC
applicable to such Annual Report; and (b) the Annual Report
was complete and correct in all material respects as of its
date and, as of its date, did not contain any untrue
statement of material fact or omit to state a material fact
required to be stated therein or necessary in order to make
the statements made therein, in light of the circumstances
under which they were made, not misleading. The Borrower has
provided the Banks with a copy of each document submitted to
the SEC on Form 6-K since January 1, 2007 (`THE 6K
REPORTS'). The Borrower represents and warrants to the Banks
that: (i) the 6K Reports have been duly submitted to the SEC
and when submitted were in compliance in all material
respects with the requirements of law relating to the 6K
Reports; and (ii) the 6K Reports were complete and correct
in all material respects as of their respective dates and,
as of such dates, did not contain any untrue statement of
material fact or omit to state a material fact required to
be stated therein or necessary in order to make the
statements made therein, in light of the circumstances under
which they were made, not misleading.
- 13 -
15.8.2. The Borrower has delivered to the Banks: (a) audited
consolidated Accounts of the Borrower as at December 31 in
each of the 2 (two) years ended with the last Fiscal Year
included in the Annual Report (inclusive) (including the
audited consolidated balance sheets, consolidated statements
of income, changes in shareholders' equity and cash flow for
each of the Fiscal Years then ended, together with the
report thereon of the Auditors); and (b) unaudited reviewed
consolidated Accounts of the Borrower as at the Quarter
included in the most recently filed Report on Form 6-K
containing quarterly financial information (including the
consolidated balance sheets, consolidated statements of
income, changes in shareholders' equity and cash flow for
the period then ended, including in each case the notes
thereto). Such Accounts and notes truly and fairly present
the financial condition and the results of operations,
changes in shareholders' equity and cash flow of the
Borrower as at the respective dates of and for the periods
referred to in such Accounts, all in accordance with GAAP,
subject, in the case of interim Accounts, to normal
recurring year-end adjustments (the effect of which will
not, individually or in the aggregate, be materially
adverse); the Accounts referred to in this clause 15.8.2
reflect the consistent application of such accounting
principles throughout the periods involved, except as stated
in the Accounts and in the explanation provided pursuant to
clause 16.2.6 below."
and
2.3.4. clause 15.13 (PERMITTED SUBORDINATED DEBT) shall be amended to
delete the words "existing as at the Amendment Closing Date are
attached as SCHEDULE 15.13 hereto" and substitute therefor,
"issued since the Amendment Closing Date have been delivered to
the Banks".
- 14 -
2.4. Clause 16 (UNDERTAKINGS) shall be amended as follows:
2.4.1. clause 16.7 (DISTRIBUTIONS) shall be amended as follows:
2.4.1.1. clause 16.7.3 shall be amended to add the following:
"(x) payments to TIC with respect to Permitted Subordinated
TIC Debt provided by TIC to the Borrower partially to
finance the purchase of the Equipment (but only to the
extent such payments are permitted under the terms of
clause 1.1.115(l) above);"
and
2.4.1.2. to add a new clause 16.7.4 thereto, as follows:
"16.7.4 make or resolve to make any repayment, prepayment or
payment (in cash or in kind) of the principal of, or
Interest (whether or not capitalised) or other amount
on or in respect of the Equipment Facility, or any
purchase, redemption or retirement of any Equipment
Facility Credits, save to the extent permitted under
the terms of clause 1.1.115(l) above;
2.4.2. clause 16.10 (INSURANCE) shall be amended to add the following
at the end of clause 16.10.1:
"and the total outstandings under all other Finance Documents,
including the aggregate of all Equipment Facility Credits
outstanding under Equipment Facilities provided severally by a
Bank to the Borrower at such time;"
2.4.3. clause 16.31.1 (BANK ACCOUNTS) shall be amended to delete the
words "and 1.1.115(j)" in clause 16.31.1 and substitute therefor,
", 1.1.115(j) and 1.1.115(l)";
2.4.4. clause 16.27.3.3 shall be amended to add the following at the
end thereof:
"Notwithstanding anything to the contrary in this clause
16.27.3.3, no Paid-in Equity contributed or wafer prepayments
paid in order to meet the conditions set forth in clause
1.1.115(l) above so as to permit the incurrence by the Borrower
of Financial Indebtedness described in clause 1.1.115(l) above
may also be counted as Paid-in Equity or wafer prepayments to be
procured by the Borrower under this clause 16.27.3.3 above.";
- 15 -
and
2.4.5. clause 16.29 shall be amended to add the following paragraph
thereto:
"The attached SCHEDULE 16.29A, prepared in accordance with IFRS
shall replace and supersede Schedule 16.29 effective January 1,
2008 with respect to Quarters beginning on and after January 1,
2008 and all references in this clause 16.29 to `Schedule 16.29'
shall be references to `Schedule 16.29A'. Should the Borrower
voluntarily choose to adopt IFRS prior to January 1, 2008, the
Borrower shall notify the Banks in writing of same and Schedule
16.29A shall replace and supersede Schedule 16.29 as of the
Quarter in respect of which such early adoption is first applied
and with effect therefrom all references in this clause 16.29 to
`Schedule 16.29' shall be references to `Schedule 16.29A'. In
addition, with effect from the earlier of the first day of the
first Quarter in respect of which IFRS is fully adopted by the
Borrower as aforesaid or January 1, 2008, clause 1.1.65 shall be
deemed to be amended to read as follows:
`1.1.65 `GAAP' - means International Financial Reporting
Standards (`IFRS') in force from time to time;'
Should the Borrower voluntarily choose to adopt, with respect to
any Quarter prior to January 1, 2008, only partially IFRS, then
Schedule 16.29 shall continue to apply, provided that, if the
Borrower is with respect to any such Quarter as aforesaid not in
compliance with one or more of the ratios set out in Schedule
16.29, the Borrower shall be deemed not to be in default of this
clause 16.29 if such non-compliance is solely as a result of such
early and partial adoption and the Borrower's Auditors shall have
delivered (together with the Accounts at the times referred to in
clause 16.1.1(v) above) to the Banks a certificate, (confirmed as
being correct by the Bank Adviser), that had GAAP been applied in
its entirety in respect of such Quarter, the Borrower would have
been fully in compliance with this clause 16.29 and Schedule
16.29 hereto."
- 16 -
2.5. Clause 17 (DEFAULT) shall be amended to add the following new clause:
"17.3.4 the Borrower fails to comply with any undertaking or any
obligation contained in any Equipment Facility provided to the
Borrower by an Equipment Lender and, if such breach if capable of
remedy within such period, within 7 (seven) days after receipt by
the Borrower of written notice from such Equipment Lender
requiring the failure to be remedied, the Borrower shall have
failed to cure such default."
2.6. New Schedule 1.1.118 (JUNE 6, 2007 CONSENT OF THE BANKS) in the form
attached as APPENDIX A hereto shall be added to and form part of the
Facility Agreement.
2.7. Each of the following Schedules shall be replaced by the Amendment No.
1 Closing Date by updated Schedules as referred to in section 3.1.2
below (the updated Schedules, for the removal of doubt, to be in form
and substance acceptable to the Banks and to bear the same heading
(Schedule number) as those replaced): Schedule 1.1.16 (BUSINESS PLAN),
Schedule 16.29 (FINANCIAL COVENANTS-ISRAELI GAAP), Schedule 16.29A
(FINANCIAL COVENANTS-IFRS) and Schedule 1.1.106 (NET CASH FLOW).
3. CONDITIONS PRECEDENT
3.1. This Amendment No. 1 is subject to the conditions precedent that the
Banks shall have received, by not later than December 31, 2007 (or
such earlier date expressly set out with respect thereto below), the
following documents, information, matters and things in form and
substance satisfactory to the Banks:
3.1.1. an opinion of Yigal Arnon & Co., Advocates, the Borrower's
external legal counsel, addressed to the Banks;
- 17 -
3.1.2. each updated Schedule referred to in section 2.7 above;
3.1.3. payment by the Borrower of any and all fees payable to each
Bank on or prior to the Amendment No. 1 Closing Date; and
3.1.4. all of the Borrower's representations and warranties given
pursuant to this Amendment No. 1 shall be accurate in all
material respects as of the Amendment No. 1 Closing Date, as if
made on the Amendment No. 1 Closing Date.
3.2. In the event that the aforegoing conditions precedent are not all
fulfilled by December 31, 2007, then, save for section 5 below, this
Amendment No. 1 shall no longer be of any force or effect and the
Facility Agreement shall remain unaltered and in full force and effect
and, save as aforesaid, no party shall have any claim arising out of
or in connection with this Amendment No. 1. The Banks undertake that
promptly following the fulfilment to the satisfaction of the Banks of
all the conditions precedent referred to in section 3.1 above, the
Banks shall confirm to the Borrower in writing that the conditions
precedent have been fulfilled and this Amendment No. 1 has become
effective.
4. REPRESENTATIONS AND WARRANTIES
The Borrower acknowledges that the Banks have agreed to this Amendment No.
1 in full reliance on the representations and warranties set forth in
clause 15, as amended in this Amendment No. 1, subject to the disclosures
set out in Annex A hereto, which shall be deemed to have been repeated on
the date of signature of this Amendment No. 1 and on the Amendment No. 1
Closing Date, except that the representations and warranties set forth in
clause 15.9 shall be deemed to be repeated only on the Amendment No. 1
Closing Date and only with respect to the Business Plan to be delivered
pursuant to section 2.7.
For the removal of doubt, the term "Finance Documents" when referred to in
the representations and warranties set out in clause 15, includes also this
Amendment No. 1.
5. UNDERTAKINGS
The Borrower undertakes, by no later than November 30, 2007, that the Banks
shall have received all of the following documents, matters and things in
form and substance satisfactory to the Banks:
- 18 -
5.1. a Supplement to the Debenture shall be executed by the Borrower
relating to all equipment, Material Contracts, registered Intellectual
Property Assets and other assets and rights required under the
Debenture to be pledged by way of first-ranking fixed charge in favour
of the Banks, but not as yet specifically included in the Debenture
and such Supplement shall be perfected and duly registered with the
Registrar of Companies and the Registrar of Pledges and the Borrower
shall deliver all documents as referred to in clause 3.2 of the
Debenture (MUTATIS MUTANDIS) (including, without limitation, under
clause 3.2.7 of the Debenture, if any of the Existing ILA Leases has
been registered with the Israeli Lands Registry in the name of the
Borrower, which shall be confirmed by the Borrower, without derogating
from the Borrower's obligations under clause 8 of the Debenture) and
shall sign all other documents and forms required for the purposes of
the aforegoing;
5.2. notices of assignment by way of charge of all Material Contracts
(other than those referred to in clauses 1.1.36(c)(i) and (ii) of the
Facility Agreement); and
5.3. notices to insurers and acknowledgements of such notices, as referred
to in clause 3.2 of the Debenture (other than under Insurance Policies
in respect of liability of the Borrower to third parties or of
liability of the Borrower for damage to property of third parties or
of the type listed in Schedule 16.10.6(d) to the Facility Agreement).
6. FEES AND EXPENSES
Without derogating from the obligations of the Borrower to pay the Banks
commissions, fees and expenses pursuant to the Facility Agreement and
pursuant to any Equipment Facility that may be entered into severally by
any Bank with the Borrower and, in addition thereto, and for the removal of
doubt, the Borrower shall pay to the Banks on the date of signature of this
Amendment No. 1 and thereafter on demand legal fees for external counsel
(and out-of-pocket expenses incurred by such counsel) incurred by the Banks
in connection with the negotiation, preparation and execution of this
Amendment No. 1.
7. AMENDMENT TO THE FACILITY AGREEMENT
Subject to the fulfilment of the conditions precedent set out in section
3.1 above and with effect from the Amendment No. 1 Closing Date, the
Facility Agreement shall be amended as expressly set out in this Amendment
No. 1 above. This Amendment No. 1 shall be read together with the Facility
Agreement as one agreement and, save as expressly amended by this Amendment
No. 1, the Facility Agreement shall remain unaltered and in full force and
effect.
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