AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
SEPTEMBER 18, 2003 Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM F-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
TOWER SEMICONDUCTOR LTD.
(Exact name of Registrant as specified in its charter)
ISRAEL NOT APPLICABLE
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
P.O. Box 619
Migdal Haemek, Israel, 23105
972-4-650-6611
(Address and telephone number of Registrant's principal executive offices)
Tower Semiconductor USA
2350 Mission College Blvd., Suite 500
Santa Clara, California 95054
Tel: 408-327-8900
Facsimile: 408-969-9831
(Name, address and telephone number of agent for service)
Copies of all Correspondence to:
DAVID H. SCHAPIRO, ESQ. SHELDON KRAUSE, ESQ.
Yigal Arnon & Co. Ehrenreich Eilenberg & Krause LLP
1 Azrieli Center 11 East 44th Street
Tel Aviv, 67021 Israel New York, NY 10017
Tel: 972-3-608-7855 Tel: 212-986-9700
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this registration statement.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box:[_]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box: [x]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.[_]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box:[_]
CALCULATION OF REGISTRATION FEE
Title of Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Aggregate Price Aggregate Offering Registration Fee
Registered Per Security Price
Ordinary Shares, par
value NIS 1.00 per
share 7,086,037 $4.48 $31,745,445 $2,568.20 (1)
Warrants (2) 3,188,715 $1.30 $4,145,329.50 $335.36 (1)
Ordinary Shares, par
value NIS 1.00 per
share (3) 3,188,715 $7.50 $23,915,362 $1934.75 (4)
Ordinary Shares, par
value NIS 1.00 per
share (5) 5,367 $7.50 $40,252.50 $3.26 (4)
Ordinary Shares, par
value NIS 1.00 per
share (6) 400,000 $7.50 3,000,000 $242.70 (4)
Total $5,084.27
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933 on the basis of
(a) with respect to Registrant's ordinary shares, the average of the
high and low prices of the Registrant's ordinary shares as reported on
the Nasdaq National Market on September 17, 2003, and (b) with respect
to the warrants, the average of the bid and asked price as reported on
the Nasdaq SmallCap Market on September 17, 2003.
(2) Represents (1) 1,838,715 outstanding warrants issued to affiliates of
the Registrant pursuant to a private placement of rights to purchase
ordinary shares and warrants in October 2002 and (2) 1,350,000
outstanding warrants issued to an institutional investor in a private
placement which closed contemporaneous with the completion of the
rights offering. The warrants are currently exercisable for a like
number of ordinary shares at an exercise price of $7.50 per share and
expire on October 31, 2006. These warrants and the warrants described
in note 5, referred to herein as listed warrants, have been registered
under the Securities Exchange Act of 1934 and are listed on both the
Nasdaq SmallCap Market and the Tel Aviv Stock Exchange. This
Registration Statement covers the resale from time to time of these
listed warrants.
(3) Represents shares underlying the listed warrants described in note 2.
This registration statement covers both the offering by the Registrant
of ordinary shares underlying the listed warrants to persons to whom
the listed warrants may be sold or otherwise transferred by the
selling securityholders and the possible resale of shares which may
from time to time be issued by the Registrant to the selling
securityholders upon their exercise of listed warrants.
(4) Calculated based on the exercise price of the warrants in accordance
with the provisions of Rule 457(g).
(5) Represents 5,367 ordinary shares issuable upon the exercise of
outstanding listed warrants issued to non-affiliates of the Registrant
pursuant to a registration statement covering the issuance of rights
to purchase ordinary shares and warrants in October 2002.
(6) Represents 400,000 ordinary shares issuable upon the exercise of an
outstanding warrant issued to a contractor of the Registrant in a
private placement. This Registration Statement covers the possible
resale from time to time of such shares.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
DATED SEPTEMBER , 2003
PROSPECTUS
Tower Semiconductor Ltd.
10,680,119 Ordinary Shares
3,188,715 Warrants to Purchase Ordinary Shares
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This prospectus relates to the resale, from time to time, by the selling
securityholders named in this prospectus of up to
o 7,086,037 issued and outstanding ordinary shares;
o 3,188,715 issued and outstanding warrants listed for trading on
the Nasdaq SmallCap Market and the Tel Aviv Stock exchange;
o 3,188,715 ordinary shares issuable upon the exercise of the
listed warrants by the selling securityholders;
o 400,000 ordinary shares issuable upon the exercise of an
outstanding warrant issued to one of our contractors.
This prospectus also relates to the offer and sale by us of up to (i)
3,188,715 ordinary shares issuable upon the exercise of the listed warrants by
persons to persons to whom the listed warrants may be sold or otherwise
transferred by the selling securityholders and (ii) 5,367 shares issuable upon
the exercise of listed warrants issued in the rights offering to persons other
than the selling securityholders.
The selling securityholders may sell all or any portion of the shares and
listed warrants in one or more transactions through (i) Nasdaq, the Tel Aviv
Stock Exchange, in the over-the-counter market, in privately negotiated
transactions or otherwise; (ii) directly to purchasers or through agents,
brokers, dealers or underwriters; (iii) at market prices prevailing at the time
of sale, at prices related to such prevailing market prices, or at negotiated
prices; or (iv) or any other means described in the section entitled "Plan of
Distribution."
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Our ordinary shares currently trade on the Nasdaq National Market and on
the Tel Aviv Stock Exchange in Israel under the symbol "TSEM." On September 17,
2003, the last reported sale prices of our ordinary shares were $4.48 on Nasdaq
and NIS 20.58 on the Tel Aviv Stock Exchange. The listed warrants are quoted on
the Nasdaq SmallCap Market under the symbol "TSEMW" and on the Tel Aviv Stock
Exchange under the symbol "TSEM.W2" (and are identified on the Tel Aviv Stock
Exchange as Options (Series 2)). There is no active trading market for our
listed warrants on either the Nasdaq SmallCap Market or the Tel Aviv Stock
Exchange.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
This prospectus does not offer to sell or solicit an offer to buy any
security other than the ordinary shares and listed warrants offered by this
prospectus. In addition, this prospectus does not offer to sell or solicit any
offer to buy any securities to or from any person in any jurisdiction where it
is unlawful to make this offer to or solicit an offer from a person in that
jurisdiction.
NONE OF THE U.S. SECURITIES AND EXCHANGE COMMISSION, THE ISRAEL SECURITIES
AUTHORITY OR ANY STATE SECURITIES COMMISSION HAVE APPROVED OR DISAPPROVED OF
THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE UNDER THE LAWS OF THE
UNITED STATES AND THE LAWS OF THE STATE OF ISRAEL.
The date of this Prospectus is September ,2003.
TABLE OF CONTENTS
Page
----
Prospectus Summary 1
The Offering 5
Risk Factors 6
Specific Risks Related to Fab 2 6
General Risks Affecting Our Business 10
Risks Related to Our Ordinary Shares and Listed Warrants 18
Risk Factors Related to Operations in Israel 21
Special Note on Forward-Looking Statements 22
Capitalization 23
Use of Proceeds 23
Selling Securityholders 24
Plan of Distribution 27
Dividend Policy 29
Material Income Tax Considerations 29
Description of Share Capital 31
Foreign Exchange Controls and Other Limitations 31
Legal Matters 31
Experts 32
Enforceability of Certain Civil Liabilities and Agent for
Service of Process in the United States 32
The Israel Securities Authority Exemption 32
Where You Can Find More Information; Incorporation of
Certain Information By Reference 32
PROSPECTUS SUMMARY
You should read the entire prospectus carefully, especially the "Risk
Factors" section beginning on page 6. This prospectus contains figures in U.S.
Dollars and in New Israeli Shekels. Unless otherwise stated herein, the
representative exchange rate used in this prospectus of the $ and NIS was the
rate published by the Bank of Israel on September 17, 2003, which was NIS
4.503=$1.
Our Business
We are a pure-play independent wafer foundry established in 1993. We
manufacture integrated circuits or IC's, with geometries ranging from 1.0 to
0.35 microns and recently initiated manufacture in geometries of 0.18 microns.
In addition, we provide complementary manufacturing services and design support.
Our base technology is foundry standard digital CMOS process technology, and we
also offer value added advanced non-volatile memory solutions, mixed-signal and
CMOS image-sensor technologies. ICs manufactured by us are incorporated into a
wide range of products in diverse markets, including consumer electronics,
personal computer and office equipment, communication, automotive, professional
photography and medical products.
In January 2001, we commenced construction of a new, state-of-the-art
200-mm wafer fabrication facility, which we refer to as Fab 2, located adjacent
to our current facility in Migdal Haemek. Fab 2 will operate in geometries of
0.18 microns and below, using advanced materials and advanced CMOS technology
from Toshiba, Motorola and other technologies that we developed or might acquire
or develop independently. We have substantially completed the construction stage
of Fab 2 and have begun wafer production for our customers utilizing our 0.18
micron process technology. When the production ramp is completed, Fab 2 is
expected to have the capacity to produce up to 33,000 200-mm wafers per month
and employ approximately 1,100 people.
Manufacturing capacity is a function of the process technology and product
mix being manufactured, because certain processes require more processing steps
than others. All information in this prospectus with respect to the wafer start
capacity of our manufacturing facility 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 in this
prospectus to "wafers" in the context of capacity in our existing facility, Fab
1, are to 150-mm wafers and in Fab 2 are to 200-mm wafers.
RECENT DEVELOPMENTS
In May 2003, our shareholders approved an agreement reached in March 2003
with our Fab 2 investors to advance a substantial portion of their fifth and
final Fab 2 milestone payment prior to our meeting the milestone. Under the
terms of the amended fifth milestone payment agreements, SanDisk Corporation,
Alliance Semiconductor, Macronix (BVI), Israel Corporation Technologies and The
Challenge-Etgar II Fund, will pay the first installment of the fifth milestone
payment, $24.6 million in the aggregate following the completion of our
financing arrangements with our banks. The partners will pay the remainder of
the fifth milestone payment, $16.4 million, if we raise an aggregate of $26
million in additional funds for Fab 2 before the end of 2003.
In consideration for their $24.6 million payment, our partners will be
issued ordinary shares based on a $2.983 per-share price. For the $16.4 million
remainder of their committed fifth milestone payment, our partners will be
issued ordinary shares based on the price per share at which we raise the $26
million in additional funds for Fab 2. We have also agreed to allow our wafer
partners to convert up to an aggregate of $13.2 million unutilized wafer credits
which they may have as of December 31, 2005 into our ordinary shares based on
the market price of the ordinary shares at that time. If the wafer partners
exercise this right and are issued more than 5% in the aggregate of our shares
at that time, we have agreed to offer all of our other shareholders rights to
purchase our shares at the same price per share.
The amendment to the Fab 2 investors' investment agreements is subject to
the receipt of the consent of our banks (i) to the postponement of the December
31, 2002 deadline by which we were required to have raised an aggregate of $110
million in financing since January 2001 (of which we have raised $86.2 million
to date), and (ii) to recognize a portion of the proceeds from the initial
aggregate payment of $24.6 million in satisfaction of our obligation to raise
funds. The amendment further provides that the Investment Center shall not have
informed us that it is not continuing its funding of the Fab 2 project. Through
September 2003, the parties to the amendment advanced to us an aggregate amount
of $15.9 million of the initial $24.6 million payment to be paid in connection
with the amendment; however, the amendment will become effective only upon the
conclusion of a comprehensive agreement with our banks.
We recently reached an arrangement with our banks and equity and wafer
partners to amend our original credit facility agreement and provide us with
additional funding, if needed, for further ramp-up of production capacity in Fab
2. These arrangements currently contemplate the following:
o our banks will approve the updated business plan for the further ramp-up
of Fab 2 in accordance with the schedules contained in the plan following their
review of our updated business plan for Fab 2 and the findings of the
international consulting firm that also reviewed this plan;
o our updated business plan requires us to raise at least an additional $90
million over our additional financing obligations of $144 million. Accordingly,
we will undertake to our banks to raise by December 31, 2005, at milestone dates
yet to be agreed upon, an aggregate of $234 million, of which, $86.2 million has
been raised to date;
o our banks will demand from our major equity partner, Israel Corporation
Technologies (ICTech) Ltd., a written undertaking to underwrite up to $50
million in equity financing to be raised pursuant to the updated business plan
in the event that we do not raise this amount from other sources;
o if our banks exercise the written undertaking, we will be required to
offer securities to our shareholders through a rights offering and ICTech will
be required to exercise all of the rights issued to it, pro-rata to its holdings
in our company. In the event that we do not raise all of the equity contemplated
to have been raised under such rights offering, ICTech will purchase from us
additional securities in a private placement on the same terms as the rights
offering for a total commitment of $50 million (including any amounts purchased
in connection with its exercise of its own rights) and our banks will increase
the total amount which may be drawn under the credit facility by $43 million.
2
The parties are currently preparing the documentation for a new amendment
to the facility agreement and are continuing to negotiate the underlying
provisions for the implementation of the amendment, including commercial terms,
financial covenants and other provisions, as well as the final terms and
documentation for the final agreement relating to ICTech's commitment to
purchase securities in a rights offering which we may be required to conclude.
These revised terms may include the following revisions, among others, to the
facility agreement and to the Fab 2 investment agreements:
o a rise in the interest rates currently set forth in the facility
agreement;
o a rescheduling of the dates by which we are obligated to repay
the banks all outstanding amounts owed to the banks;
o an issuance of warrants to our banks in connection with this
amendment;
o an increase of the total amounts that we may draw down under the
credit facility;
o a commitment by our wafer partners not to utilize any of their
wafer credits until 2006 which we are currently discussing with
our wafer partners; and
o the completion by our Fab 2 investors of the final fifth
milestone payment without regard to whether we raise any further
capital in 2003, which we are currently discussing with our Fab 2
investors.
The revisions to the facility agreement and to the agreements with our
wafer and equity partners may increase the costs for the repayment of the loans
and change the price per share at which our Fab 2 investors will complete their
fifth milestone payments. Upon the effectiveness of the amendment to our credit
facility agreement following the conclusion of a comprehensive agreement and the
receipt of all requisite approvals, including the approval of our shareholders,
the parties to the aforementioned amendment to the Fab 2 investors' investment
agreements will be required to invest $8.7 million, which is the remainder of
the initial $24.6 million payment. During the discussion and negotiation period
with our banks to amend the facility agreement, our banks have limited the full
amount we may draw and accordingly have, since January 1, 2003, provided us with
a limited interim funding in the amount of $97 million in loans. There is no
certainty that we will successfully conclude this amendment to our credit
facility or that we will be able to repay the loans over a prolonged period due
to the expected increase in the costs of the loans that may arise out of this
amendment.
In July 2003, we and several of our directors and shareholders were named
as defendants in a securities class action complaint filed in the United States
District Court for the Southern District of New York. The plaintiffs have
asserted claims arising under the Securities Exchange Act of 1934, alleging
misstatements and omissions made by the defendants in materials sent to our
shareholders with respect to the approval of an amendment to the investment
agreements with our Fab 2 investors. The plaintiffs seek damages in unspecified
amounts, which could be substantial, and unspecified rescissory relief. We
believe the complaint is without merit and intend to defend ourselves
vigorously. Any liability we incur in connection with this complaint could
materially harm our business and financial position and, even if we defend
ourselves successfully, there is a risk that management distraction in dealing
with this complaint could harm our results.
3
CORPORATE INFORMATION
We were incorporated under the laws of Israel in 1993. Our manufacturing
facilities and executive offices are located in the Ramat Gavriel Industrial
Park, Post Office Box 619, Migdal Haemek, 23105 Israel, and our telephone number
is 972-4-650-6611. Our worldwide web site is located at www.towersemi.com. The
information on our web site is not incorporated by reference in this prospectus.
4
THE OFFERING
Securities offered by the selling
securityholders o 7,086,037 of our ordinary shares held
by the selling securityholders;
o 3,188,715 listed warrants held by the
selling securityholders;
o 3,188,715 ordinary shares issuable upon
the exercise of the listed warrants held
by the selling securityholders;
o 400,000 of our ordinary shares issuable
upon the exercise of an outstanding
warrant issued to one of our contractors.
Securities offered
by the Company o 3,188,715 ordinary shares issuable upon
the exercise of the listed warrants by
persons to persons to whom the listed
warrants may be sold or otherwise
transferred by the selling
securityholders; and
o 5,367 shares issuable upon the exercise
of listed warrants issued in the rights
offering to persons other than the
selling securityholders.
Ordinary securities outstanding as of
August 31,2003 48,779,146 shares (1)
Outstanding listed warrants as of August
31,2003 3,194,082 Warrants
NASDAQ National Market and Tel Aviv Stock
Exchange Symbols
(1) The number of outstanding shares excludes approximately 22,835,955 ordinary
shares issuable, as of August 31, 2003, issuable upon the exercise of listed
warrants, options granted under our share option plans, wafer and equity partner
agreements, subordinated convertible debentures, Options (Series 1), Options
(Series 2), and warrants issued to our banks and to our contractor, all at a
weighted average exercise price of $6.5 per ordinary share. As of the date of
this prospectus, approximately 428,080 additional ordinary shares were reserved
for issuance upon exercise of options that may be granted in the future under
our share options plans.
5
Ordinary shares (NASDAQ National Market and Tel
Aviv Stock Exchange) TSEM
Listed Warrants
NASDAQ SmallCap Market TSEMW
Tel Aviv Stock Exchange TSEMW.2
Use of Proceeds We will not receive any of the proceeds from
the sale of ordinary shares or listed warrants
by the selling securityholders, but we will
receive $7.50 per ordinary share from the
exercise price of any listed warrant and the
warrant held by our contractor that are
exercised; proceeds will be used for general
corporate purposes.
RISK FACTORS
AN INVESTMENT IN OUR SECURITIES IS SPECULATIVE AND INVOLVES A HIGH DEGREE
OF RISK. THEREFORE, YOU SHOULD NOT INVEST IN OUR SECURITIES UNLESS YOU ARE ABLE
TO BEAR A LOSS OF YOUR ENTIRE INVESTMENT. YOU SHOULD CAREFULLY CONSIDER THE
FOLLOWING FACTORS AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS
BEFORE DECIDING TO INVEST IN OUR ORDINARY SHARES. 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.
THIS PROSPECTUS 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. THE
INFORMATION IN THIS PROSPECTUS IS COMPLETE AND ACCURATE AS OF THIS DATE, BUT THE
INFORMATION MAY CHANGE AFTER THE DATE OF THIS PROSPECTUS. WE UNDERTAKE NO
OBLIGATION TO REVISE OR UPDATE ANY FORWARD-LOOKING STATEMENTS TO REFLECT ANY
EVENT OR CIRCUMSTANCE THAT MAY ARISE OR DEVELOP AFTER THE DATE OF THIS
PROSPECTUS.
SPECIFIC RISKS RELATED TO FAB 2
In addition to the risks and uncertainties that may affect our business
generally as described below, our plans to complete the ramp-up of Fab 2 are
subject to risks and uncertainties, including those discussed below.
WE WILL NEED TO SATISFY THE COVENANTS SET FORTH IN OUR CREDIT FACILITY
AGREEMENT. Our Fab 2 credit facility agreement, as currently in effect, requires
us to continue to raise minimum amounts from specified financial sources as
follows: $110 million by the end of December 2002 (of which we have raised $86.2
million to date) and an additional $34 million by the end of December 2003. Our
agreements with our banks also require that we achieve successful production at
Fab 2 of 5,000 wafer starts per month by November 2002 and 15,000 wafer starts
per month by September 2003. Each of these milestones provides for a seven and a
half month grace period. In addition, our Fab 2 credit facility agreement has
significant additional conditions and covenants. We have not met our milestone
for successful production at Fab 2 of 5,000 wafer starts per month nor will we
meet our additional milestone for production capacity at Fab 2 of 15,000 wafer
starts per month by its prescribed completion date; these milestone completion
dates have been revised in our updated business plan for the further ramp-up of
Fab 2. The updated plan calls for a slower ramp-up for Fab 2 than originally
planned and conforms the current fund-raising, production and capacity covenants
in the credit facility agreement to the revised ramp-up schedule. In addition,
we are obligated under the credit facility agreement to comply with certain
financial ratios, primarily total shareholders' equity to total assets. As of
June 30, 2003, we were in full compliance with these financial ratios. We expect
these financial ratios will be revised in accordance with the updated business
plan in light of the revised fundraising schedule and slower ramp-up, and their
approval is subject to the negotiations with our banks as described below.
6
We recently reached an arrangement with our banks and Fab 2 investors to
amend our original credit facility agreement and provide us with additional
funding, if needed, for further ramp-up of production capacity in Fab 2, and the
parties are currently negotiating the detailed commercial terms and revised
covenants in order to conclude a comprehensive amendment (see "Recent
Developments" above for a description of the terms of this arrangement and
ongoing discussions). Following the abovementioned understanding in August 2003,
we concluded a draw down of an additional $40 million in interim funding. While
in the past we have been successful in procuring from our banks extensions to
meet our additional financing obligations beyond the dates set forth in the
credit facility agreement, we cannot assure you that we will be successful in
concluding a comprehensive amendment to our credit facility or repaying all
amounts owed to our banks due to the expected increase in the costs of the loans
that will arise out of this amendment or that our banks will agree to waive any
future failure by us to observe covenants or satisfy conditions under the
facility agreement, some of which are not in our control, or that we will be
able to refinance our indebtedness if they do not waive such failure.
If, as a result of any default, our banks were to accelerate our
obligations, we would be obligated to immediately repay all loans made by the
banks plus penalties, and the banks would be entitled to exercise the remedies
available to them under the credit facility agreement, including enforcement of
their lien against all our assets. An event of default under the credit facility
and the subsequent enforcement by the banks of their remedies under the credit
facility may allow our wafer partners, financial investors and the Investment
Center of the State of Israel to declare a breach of our obligations to them
and, based on our current available cash position, would jeopardize Fab 2 and
our ability to continue our operations even in Fab 1.
FAILURE TO ACHIEVE MILESTONES AND COMPLY WITH VARIOUS CONDITIONS AND
COVENANTS UNDER OUR FINANCING AGREEMENTS FOR FAB 2 COULD JEOPARDIZE FAB 2 AND
OUR EXISTING OPERATIONS. Our receipt of the additional funds committed by our
wafer partners and financial investors depends upon our achievement of
conditions set forth in the share purchase agreements, including obtaining
additional financing, receiving governmental grants, adding an additional wafer
partner and meeting a milestone relating to the ramp-up of production at Fab 2.
As part of our Fab 2 investment agreements, we were required to raise a
cumulative total of $50 million from new wafer partners by March 31, 2003, or
our wafer partners will not be required to complete their investment for the
fifth milestone. As part of the pending amendment to our agreements described
below, we will be relieved of the obligation to raise an additional $50 million
from new wafer partners if we raise at least $24.6 million from our current
wafer and equity partners under the amended terms (of which we have raised $15.9
million to date).
Under their agreements, our major wafer and equity partners were to
complete their committed investments upon our satisfaction of the fifth
milestone, which is the successful production of 5,000 wafer starts per month
for two full consecutive months. The fifth milestone, which under our Fab 2
investment agreements was to have been achieved by mid July-2003, was not
achieved by its prescribed completion date. As part of the pending amendment to
our agreements described below, our major Fab 2 investors will complete this
investment despite the fact that the fifth milestone was not achieved by its
prescribed completion date.
7
In May 2003, our shareholders approved an agreement reached in March 2003
with our major Fab 2 investors to advance the fifth and final Fab 2 milestone
payment prior to our meeting the milestone and waive our requirement to raise
$50 million from new wafer partners. The amendment to the investment agreements
is subject to the conclusion of a final comprehensive agreement implementing the
arrangement reached with our banks for our additional financing obligations in
accordance with our updated Fab 2 business plan. Through September 2003, our
major Fab 2 investors advanced an aggregate amount of $15.9 million of the
initial $24.6 million payment they agreed to pay under the terms of the amended
fifth milestone payment agreements following our banks' agreement to provide us
with interim funding prior to their approval of the terms of this amendment (see
"Recent Developments" above for a discussion of these agreements, including an
amendment to the terms of credits given to our wafer partners). One of the Fab 2
investors, QuickLogic Corporation, did not exercise the amendment to its
investment agreement in connection with the fifth milestone payment and is not
obligated to exercise its fifth milestone payment as the prescribed completion
date for the fifth milestone has expired. In the event that QuickLogic does not
exercise its fifth milestone payment, the credit facility agreement requires us
to raise an amount equivalent to QuickLogic's fifth milestone payment, $3.67
million, from another investor by mid-October 2003.
Failure to achieve any of our milestones or other commitments, due to
either our failure to reach the minimum production capacity, or insufficient
demand for our products, and to satisfy or comply with the other applicable
conditions and covenants in our investment and Fab 2 credit facility agreement
on a timely basis, may, unless such failure is waived, result in cancellation or
delay of our Fab 2 funding arrangements and an event of default under the credit
facility. An event of default under the credit facility and the subsequent
enforcement by the banks of their remedies under the credit facility may allow
our wafer partners, financial investors and the Investment Center to declare a
breach of our obligations to them and would jeopardize Fab 2 and our ability to
continue our operations even in Fab 1.
DEFERRALS OF FAB 2 EQUIPMENT PURCHASES COULD HARM OUR ABILITY TO SATISFY
CUSTOMER ORDERS DUE TO INSUFFICIENT PRODUCTION CAPACITY. We are currently
deferring some Fab 2 equipment purchases in line with Fab 2's slower ramp-up
schedule as set forth in the updated Fab 2 business plan. Despite the recent
arrangement reached with our banks for the deferment of our current additional
financing obligations and milestone completion dates, we may further defer our
equipment purchase commitments in the event that market conditions do not
improve significantly and the utilization of Fab 2 is lower than forecasted.
However, in the event that our forecasts are inaccurate and market conditions
significantly recover more rapidly than we can purchase, install and qualify
necessary production equipment, we may not be able to fully meet customer demand
and we will not be in a position to fully capitalize on the increase in demand
for foundry services. Delays in purchasing equipment for the further ramp-up of
Fab 2 may also result in a loss of suppliers, a delay in equipment delivery
schedules and unfavorable payment terms. Consequently, any under-capacity will
negatively impact our financial results, and may result in our need to raise
additional funds to complete the ramp-up of Fab 2.
WE MAY FROM TIME TO TIME EXPERIENCE A SHORT-TERM LACK OF LIQUIDITY FOR FAB
2. In addition to the approximately $1.15 billion which has been raised or
committed to date, we will need an additional approximately $354 million to
complete the ramp-up of Fab 2. As a result, we may from time to time experience
a short-term lack of liquidity for Fab 2 or may not be able to raise the
required funding at all. If we foresee that we will be unable to secure
additional financing, we may have to reevaluate, or even cease our operations.
While we have been successful in the past at negotiating price reductions and
arrangements to slow down or postpone payments to our suppliers and service
providers when we had liquidity problems, we cannot assure you we will be able
to do so in the future and any postponement of payments may delay the increase
of capacity of Fab 2 and therefore harm our financial results.
8
Our Fab 2 business plan makes assumptions with respect to proceeds from the
sales of wafer products to Fab 2 customers; however, we are continuously
reevaluating our Fab 2 business plan to adapt it to the expected funds
availability and the anticipated Fab 2 revenues. If we are not successful in
generating sales of wafers to Fab 2 customers, our cash from operations will be
negatively affected and we will be required to raise additional funds or
decrease our level of purchases of new equipment for Fab 2.
WE MUST MEET CONDITIONS TO RECEIVE THE ISRAELI GOVERNMENT GRANTS AND TAX
BENEFITS APPROVED FOR FAB 2. In connection with Fab 2, we have received approval
for grants and tax benefits from the government of Israel under its Approved
Enterprise Program. Under the terms of the approval, we are eligible to receive
grants of 20% of up to $1.25 billion invested in Fab 2 plant and equipment, or
an aggregate of $250 million, over a period of time. We are also entitled to a
tax holiday on all taxable income related to Fab 2 for the first two years in
which we have taxable income. To continue to be eligible for these grants and
tax benefits, we must meet conditions provided in the applicable law and
contained in our approved enterprise certificate, including a requirement that
at least approximately $400 million of our Fab 2 funding consist of
paid-in-capital. If we fail to comply with these conditions in the future, some
of the benefits received could be canceled, and we could be required to refund
payments previously received under this program or pay increased taxes. In
addition, the funding commitments of our Fab 2 investors and our banks are
conditioned on our Fab 2 approved enterprise status remaining in effect. As of
June 30, 2003, we have received approximately $101.6 million in grants from the
Investment Center, and raised $274.4 million as paid in capital towards the $400
million.
Consistent with the requirements of Israeli law, our investment grant
requires that we complete our investment program within five years, and by no
later than the end of 2005. Due to the later than planned commencement of
construction of Fab 2 and prevailing market conditions, we do not currently
expect to complete our Fab 2 investments through 2005. Israeli law limits the
ability of the investment center to extend the 5-year investment limitation. We
have notified the Investment Center of our revised business plan, including our
investment schedule and it is currently being evaluated by the Investment
Center. We have also informed the Investment Center of our reduced rate of
annual investments and our lower than projected expectations for Fab 2 sales.
While we have always ultimately been successful in concluding arrangements with
the Investment Center, we cannot assure you that we will be successful in
reaching arrangements with the Investment Center with respect to the remaining
portion of our grants, which may result in the cancellation of all or a portion
of our grants.
Our Fab 2 business plan makes assumptions for our receipt of additional
government grants for total investments in Fab 2 in excess of $1.25 billion;
however, our government grants are currently limited to $250 million and there
is no assurance that we will be entitled to any additional grants in the future.
FAB 2 COSTS MAY EXCEED OUR ESTIMATES. We estimate the total cost of the
construction and equipping of Fab 2 will be approximately $1.5 billion,
including hiring and training personnel, purchasing and developing technology
and equipment and other general expenses. However, the actual cost of Fab 2 may
exceed our estimate as a result of several factors, including difficulties or
delays in the further ramp-up of production, higher insurance costs due to
widespread global acts of terror, increases in equipment prices, increases in
financing costs and currency exchange rate or interest rate fluctuations. We may
need to raise additional funds over the estimated total cost of approximately
$1.5 billion to cover those potential additional costs. There is no assurance
that these additional funds will be available on a timely basis and on
satisfactory terms.
9
WE ARE CURRENTLY OPERATING UNDER A TEMPORARY BUSINESS LICENSE. Prior to our
commencement of the construction of Fab 2, all of our operations were conducted
under a business license. The construction of our Fab 2 facility has required us
to renew this business license, and since our business license may only be
renewed following the commencement of Fab 2 operations, we are currently
operating under a temporary business license. In light of our recent
commencement of initial wafer productions at Fab 2, we are currently in the
process of discussing the terms and conditions for the receipt of a final
business license. While we expect to positively conclude these discussions, in
the event that we do not receive a final business license, we may be required to
cease our operations and this would have a material adverse effect on our
business, financial condition and results of operations.
GENERAL RISKS AFFECTING OUR BUSINESS
WE HAVE COMPLETED CONSTRUCTION OF OUR NEW FAB 2 FACILITY, HOWEVER WE STILL
NEED TO COMPLETE THE EQUIPMENT INSTALLATION AND RAMP UP OF PRODUCTION IN FAB 2
TO SUCCESSFULLY COMPETE OVER THE LONG TERM. The trend within the semiconductor
industry is toward ever-smaller features; state-of-the-art fabs are currently
using process geometries of 0.18 microns and below. Fab 1 is limited to
geometries of 0.35 microns and above and Fab 2 currently operates at process
geometries of 0.18 microns and produces 200-mm wafers. We must successfully
complete qualification of process technologies for Fab 2 and ramp up of
production to full capacity in Fab 2 to successfully compete over the long term.
WE HAVE A RECENT HISTORY OF OPERATING LOSSES AND EXPECT TO OPERATE AT A
LOSS THROUGH THE FORESEEABLE FUTURE PRIMARILY DUE TO UNDERUTILIZATION AND A HIGH
LEVEL OF DEPRECIATION AND AMORTIZATION; OUR FACILITIES MUST OPERATE AT OR CLOSE
TO CAPACITY AND WE MUST IMPROVE OUR PRODUCT MIX TO BE PROFITABLE. Fab 1 operated
at a loss for the last five years and is expected to operate at a loss through
the foreseeable future. Because fixed costs represent a substantial portion of
the operating costs of semiconductor manufacturing operations, we must operate
our facilities at or near full capacity to be profitable. Fab 1 operated
significantly below capacity from 1996 through 2002. Although utilization
improved significantly during 2000, we experienced a slowdown in demand in the
fourth quarter of 2000 that deepened in 2001 and continued into 2002. While our
sales increased in each of the first three quarters of 2002, in the fourth
quarter of 2002, we, again, experienced a slight reduction in sales. Though our
production sales improved in the first half of 2003, we expect a decrease in Fab
1 sales in the third quarter of 2003. In light of the slowdown in the worldwide
economy, which has and is expected to continue to negatively impact our
business, we expect to continue to experience overall underutilization of Fab 1
for the foreseeable future. We are currently operating Fab 1 at a capacity
utilization of approximately 35%. If we do not operate Fab 1 at or near full
capacity levels and make the transition to a higher mix of products manufactured
utilizing our higher-margin processes, we may not be able to achieve and
maintain profitable operations in Fab 1, which could in turn result in our
disposing of this facility. Following the completion of the construction of Fab
2, equipment installation, qualification of process technologies and the start
of ramp up of production as of the third quarter of 2003, these technologies and
other Fab 2 assets will start to incur significant operating expenses as well as
depreciation and amortization. Accordingly, even as we begin high utilization of
Fab 2, we need to achieve significant production volume in order to be
profitable. As a result, we expect to operate at an overall loss through at
least the end of 2004, even if we are able to achieve and maintain profitable
operations in Fab 1.
10
CREDITS GIVEN TO OUR WAFER PARTNERS WILL AFFECT CASH FLOW FROM FAB 2
OPERATIONS. We have credited our wafer partners with a portion of amounts that
they have previously paid to us as long-term customer advances to be credited
against future purchases by these partners. To date, these credits amount to
approximately $47.2 million, including the pending amendment made to our Fab 2
investment agreements in connection with the fifth milestone payment to allow
our wafer partners to convert up to an aggregate of $13.2 million unutilized
wafer credits which they may have as of December 31, 2005 into our ordinary
shares based on the market price of the ordinary shares at that time (see
"Recent Developments" above for a discussion of this amendment). While the
issuance of credits have improved our cash flow from operations, the utilization
of credits by our wafer partners will adversely impact our liquidity at such
time as our wafer partners begin to purchase wafers from Fab 2 since we will be
generating a lower level of cash from the sale of wafers to our wafer partners.
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY AND THE RESULTING
PERIODIC OVERCAPACITY AND PRESSURE TO REDUCE PRICES MAY SERIOUSLY HARM OUR
BUSINESS. The semiconductor industry has historically been highly cyclical and
has experienced significant economic downturns characterized by production
overcapacity and rapid erosion of average sale prices. 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 a new downturn. We expect this pattern to repeat
itself in the future. Our operating results for 1996 through 1999 were harmed by
a downturn in the semiconductor market that resulted in reduced orders,
underutilization of our facility and severe price erosion. Although utilization
and average sale prices improved during 2000, demand slowed in the overall
semiconductor market and in many of our end product markets beginning in the
fourth quarter of 2000. This slowing in demand deepened in 2001 and continued in
2002. While the semiconductor industry has to some extent recovered from the
2001 downturn, we cannot be assured that this overall recovery will continue or
that demand for our products, in particular, will improve; in fact, we expect a
decrease in Fab 1 sales in the third quarter of 2003.
While we are confident of the long-term growth prospects of the
semiconductor business, we believe that the cyclical market behavior will
continue. The overcapacity and price pressures characteristic of a prolonged
downturn may have an affect on all sectors of the market, and may not allow us
to operate at a profit, even at full utilization of our Fab facilities or with
an improved product mix. Therefore, the current downturn, and future downturns
in the semiconductor business cycle, could seriously harm our financial results
and business.
Fab 2 will give us significant additional manufacturing capacity and
state-of-the-art capabilities to better serve our customers. However, it also
significantly increases our cost structure and overall capacity and, therefore,
our exposure to market downturns.
11
WE DEPEND ON A SMALL NUMBER OF CUSTOMERS AND BUSINESS PARTNERS FOR A
SIGNIFICANT PORTION OF OUR REVENUES; WE MUST CONTINUE TO ATTRACT ADDITIONAL
CUSTOMERS AND BUSINESS PARTNERS TO SUBSTANTIALLY INCREASE OUR OVERALL CAPACITY
UTILIZATION IN BOTH OF OUR FACILITIES. For the first half of 2003, approximately
66% of our business was generated by three of our customers, National
Semiconductor Corporation (25%), Motorola, Inc. (22%) and FillFactory 19%, and
approximately 12% was generated by three additional customers. Although we have
expanded and are continuing to expand our customer base, we expect to continue
to receive a significant portion of our revenue from a limited number of
customers. Loss or cancellation of business from or decreases in the sales
prices to these customers could seriously harm our financial results and
business. Furthermore, our arrangements with certain large customers permit
these customers to reduce their orders, in some cases with little advance
notice. If these customers order significantly fewer wafers than forecasted, we
will have excess capacity that we may not be able to sell, resulting in lower
utilization of our facility. 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 revenues, which could harm our financial results.
We have also entered into wafer partner agreements and agreements with
technology providers under which we have committed a portion of our Fab 2
capacity for contemplated orders from these parties, and we recently received
first production orders from three of our four wafer partners. Although we
believe that our overall relationship with our wafer partners and technology
providers, including their ownership of equity and the credits against wafer
purchases which are established under the agreements, provide very strong
incentives for the wafer partners and technology providers to become significant
Fab 2 customers, they are not obligated to utilize all or any portion of their
allocated capacity. Although we are constantly making efforts to identify
additional wafer partners and customers to fill our new facility, there can be
no certainty that we will be able to do so in the short or the long term.
THE SEMICONDUCTOR MARKET IS SUBJECT TO RAPID CHANGE; WE MUST KEEP PACE TO
MAINTAIN AND DEVELOP OUR PRODUCTS AND SERVICES FOR THE MARKETS. The
semiconductor market is characterized by rapid change, including the following:
o rapid technological developments;
o evolving industry standards;
o changes in customer requirements;
o frequent new product introductions and enhancements; and
o short product life cycles with declining prices as products mature.
In order to maintain our current customer base and attract new customers,
we must continue to advance our manufacturing process technologies. We are
developing and/or introducing to production specialized process technologies. We
have also transferred 0.18 micron technology from Toshiba and begun the transfer
of 0.13 micron technology from Motorola and are working on independent and joint
development projects of technologies for Fab 2. Our ability to achieve and
maintain profitable operations depends on the successful development and
introduction to production of these processes.
The development and introduction to production and the successful
commercialization of these new processes is subject to risks, which could
seriously harm our business, including the following risks:
o technical problems or delays in the development of the new processes;
o competition in attracting and retaining customers for the new
processes;
o difficulty in recruiting and retaining qualified employees;
o failure of products that use our specialized processes to gain market
acceptance; and
o failures of our customers' designs.
12
We also need to invest in continued process and/or product development,
including the procurement of third party intellectual property in order to keep
pace with changing technologies and to fulfill our customers' requirements. We
may not have the required resources to make such procurements or invest in such
development or such development and procurement efforts may not be successful.
WE MUST SUCCESSFULLY COMPLETE DEVELOPMENT, INTRODUCTION TO PRODUCTION AND
PERFORMANCE ENHANCEMENT OF OUR MICROFLASH(R) MEMORY AND OTHER ADVANCED
PROCESSES. We have made a substantial investment in the development of our
MICROFLASH processes. We have introduced the first of our microFLASH processes
into production with the manufacture of a 2 megabit stand-alone memory device
and an embedded multi-time programming module, with a limited number of rewrite
cycles. We have also started development of our MICROFLASH process for
introduction in Fab 2. The long-term commercial success of our MICROFLASH
process is dependent on our success in developing next generation processes and
advances to this process, which will allow production of MICROFLASH products
rated for greater than 10,000 erase-rewrite cycles. There is no assurance that
we will successfully complete the planned development and introduction to
production and advancement of our MICROFLASH processes. If we do not
successfully complete the advancement of our MICROFLASH processes, we may not be
able to achieve the planned sales and/or gross margins. Furthermore, the
successful development of competing technologies may make our MICROFLASH
technology obsolete prior to its reaching market.
We are engaged in the co-development with one of our customers of a
specialized imaging process technology, for use of this technology in Fab 1 on
an exclusive basis. In addition, we have started to develop this process
technology in Fab 2 using process geometries of 0.18 microns. If these
development efforts are delayed or are not successful or if the customer is
unable to commercialize its products, this could result in a serious loss of
business and in our inability to recover our investments from these efforts.
WE MAY ENCOUNTER DIFFICULTIES AND DELAYS IN COMPLETING THE RAMP-UP OF FAB 2
AND IN THE TRANSFER AND IMPLEMENTATION OF THE TECHNOLOGIES FOR FAB 2. The
ramp-up of Fab 2 is a substantial and complex project, which requires the timely
participation by and coordination of the activities of many participants,
including our contractor, equipment vendors, technology providers outside
consultants and our own employees. We have completed the construction of Fab 2
but not the equipping necessary for production of 10,000 200-mm wafers per month
at Fab 2 and continue to install equipment to reach production capacity at this
level. We expect to continue the equipping necessary to reach the full
production capacity of 33,000 200-mm wafers per month in the future. Failures or
delays in obtaining or coordinating the necessary equipment and other resources
on a timely basis may delay the completion of the ramp-up of Fab 2 and add to
its cost. We need to complete development of the 0.18-micron industry standard
technology, transfer the 0.13 micron technology from Motorola and develop new
process technologies for Fab 2 to suit our customers' needs. Any failures or
delays in these processes could have an adverse affect on our ability to
complete the ramp up production at Fab 2 or bring new customers to Fab 2. We can
give no assurance that failures or delays in the ramp-up of the facility or in
the transfer and qualification of the technologies will not occur. Such failures
or delays may result in delays in funding, cash shortage or defaults under our
Fab 2 financing agreements, any of which may negatively impact our financial
results.
13
IF WE FAIL TO MEET CONDITIONS, WE MAY LOSE OUR EXCLUSIVE FOUNDRY LICENSE
WITH SAIFUN. Saifun Semiconductors Ltd. has granted us exclusive foundry
manufacturing rights to Saifun's proprietary N-ROM technology. Our agreement
with Saifun requires that we maintain minimum levels of annual sales of
products, which incorporate Saifun's technology through 2005. If we do not meet
these minimum sales levels, our foundry manufacturing rights will become
nonexclusive. As a result, if our Saifun manufacturing rights become
non-exclusive, other foundries may obtain licenses from Saifun, which will
enable them to manufacture semiconductor products for third parties using the
Saifun process technology in direct competition with us.
DEMAND FOR NEW PROCESSES AND PRODUCTS IS DIFFICULT TO PREDICT. The success
of our businesses depends on emerging markets and new products. In order for
demand for our processes to grow, the markets for the end products using these
processes must develop and grow. For example, the success of our imaging process
technologies will depend, in part, on the markets for digital photography and
video. Because our processes may be used in many new applications, it is
difficult to forecast demand. If demand is lower than expected, we may have
excess capacity, and if demand is higher than expected, we may be unable to fill
all of the orders we receive.
WE MAY EXPERIENCE DIFFICULTY IN ACHIEVING ACCEPTABLE DEVICE YIELDS, PRODUCT
PERFORMANCE AND DELIVERY TIMES AS A RESULT OF MANUFACTURING PROBLEMS. 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 productivity.
Microscopic impurities such as dust and other contaminants, difficulties in the
production process or defects in the key materials and tools used to manufacture
a wafer can cause a percentage of the 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. These problems may
result from, among other things, the introduction of new processes or the
expansion or upgrading of existing facilities. Any of these problems could
seriously harm our financial results and business.
WE NEED TO HIRE ADDITIONAL EMPLOYEES FOR FAB 2. Our future success depends
on our continuing ability to identify, hire, train and retain additional highly
qualified technical and managerial personnel. There has historically been a
shortage of qualified employees in the semiconductor industry and in Israel in
particular, and competition for such personnel has at times been intense. If we
fail to attract or retain the highly qualified technical and managerial
personnel we need now or in the future, our financial results and business may
be harmed.
WE DEPEND ON OUR KEY MANAGEMENT AND TECHNICAL EMPLOYEES; LOSS OF THE
SERVICES AND REPLACEMENT OF KEY EMPLOYEES COULD HARM OUR OPERATIONS. The loss of
key employees could diminish our ability to develop and maintain relationships
with customers and potential customers. The loss of technical personnel could
harm our ability to run production smoothly and to meet development and
implementation schedules. We do not maintain key man life insurance on any of
our executives or employees.
WE FACE COMPETITION; SOME COMPETITORS ARE BETTER POSITIONED TO WITHSTAND
MARKET DOWNTURNS. The semiconductor foundry industry is highly competitive. We
compete with other dedicated foundries and with integrated semiconductor and
end-product manufacturers that produce integrated circuits for their own use
and/or allocate a portion of their manufacturing capacity to foundry operations.
Many of our competitors have one or more of the following competitive advantages
over us:
14
o greater manufacturing capacity;
o multiple and more advanced manufacturing facilities;
o more advanced technological capabilities;
o a more diverse and established customer base;
o greater financial, marketing, distribution and other resources; and/or
o a better cost structure.
WE DEPEND ON A LIMITED NUMBER OF OUR SUPPLIERS OF RAW MATERIALS AND DO NOT
TYPICALLY HAVE LONG-TERM SUPPLY CONTRACTS WITH THEM. 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, however, we purchase raw materials from a single source due to
process requirements that make purchases from multiple sources impractical. If
any of the following occurs in the future, it may take a substantial period of
time for us to modify our production processes to allow the use of alternative
materials:
o raw materials are not available from our sources;
o we are unable to obtain sufficient quantities of raw materials
and other supplies in a timely manner;
o there is a significant increase in the costs of raw materials;
o we are required for other reasons to seek other sources for such
materials.
Although supplies for the raw materials that we use currently are adequate,
shortages could occur in various critical materials 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.
WE DEPEND ON A LIMITED NUMBER OF MANUFACTURERS AND VENDORS THAT MAKE AND
SELL THE COMPLEX EQUIPMENT WE USE IN OUR MANUFACTURING PROCESSES. In periods of
high market demand, the lead times from order to delivery of this equipment
could be as long as 12 to 18 months. The timing and cost of upgrades to Fab 1
and of equipping Fab 2 may be seriously affected by conditions in the equipment
market. If there are delays in the delivery of needed equipment or if there are
increases in the cost of this equipment, it could seriously delay the completion
of or otherwise harm the ramp-up of Fab and the upgrades to Fab 1 or harm our
financial results.
THE EXEMPTION ALLOWING US TO OPERATE OUR MANUFACTURING FACILITIES SEVEN
DAYS A WEEK IS TEMPORARY AND MAY NOT BE RENEWED. 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, which has been renewed several times in the past,
expires on December 31, 2003. In addition, a significant increase in the number
of employees permitted to work under this exemption will be needed as we ramp up
production at Fab 2. We expect the exemption to be renewed, but if the exemption
is not renewed and we are forced to close the facility for this period each
week, our financial results and business will be harmed.
CURRENCY EXCHANGE AND INTEREST RATE FLUCTUATIONS COULD INCREASE THE COST OF
OUR OPERATIONS. Almost all of our cash generated from operations and from our
financing and investing activities is denominated in dollars and NIS. Our
expenses and costs are denominated in NIS, dollars, Japanese Yen and Euros. We
are, therefore, exposed to the risk of currency exchange rate fluctuations.
15
Our borrowings, including the loans contemplated under our Fab 2 credit
facility, provide for interest based on a floating Libor rate, and we are
therefore subject to exposure 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 facility 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, which may increase the cost of our
activities, and following the ramp up of production in Fab 2, will increase our
financing expenses.
POTENTIAL INTELLECTUAL PROPERTY RIGHTS DISPUTES COULD MAKE OUR OPERATIONS
MORE EXPENSIVE OR REQUIRE US TO CHANGE OUR PROCESSES. Our ability to compete
successfully depends in part on our ability to operate without infringing on the
proprietary rights of others. Possible infringement claims could harm our
business by requiring us to pay royalties or to change our manufacturing
processes. There are no lawsuits currently pending against us regarding the
infringement of patents or intellectual property rights of others. However, we
have been a party to such claims in the past and recently received a notice from
a technology company claiming that we are infringing its patent rights. This
notice was followed by an offer to license the technology company's patents for
a one-time license payment. We are currently negotiating a license with this
technology company. All prior claims against us have been resolved through
license agreements the terms of which have not had a material effect on our
business. One of these agreements expires at the end of 2005 and we may be
unable to extend or renew it on similar terms.
WE DEPEND ON THE INTELLECTUAL PROPERTY OF THIRD PARTIES IN PROVIDING DESIGN
SERVICES TO OUR CLIENTS. We depend on third party intellectual property in order
for us to provide foundry and design services to our clients. We believe that we
are in compliance with the licensing agreements with the owners of these rights
and that the licensing agreements adequately protect our rights. If problems or
delays arise with respect to the timely development, quality and provision of
such intellectual property, our customers' design and production could be
delayed, resulting in underutilization of our capacity. Failure to maintain or
acquire licenses could harm our business. In addition, license fees and
royalties payable under these agreements may impact our margins.
WE DEPEND ON TECHNOLOGY PARTNERS TO BROADEN OUR PORTFOLIO OF PROCESS
TECHNOLOGIES. In order to compete in our market, we must continue to advance our
process technologies through our internal technology development efforts and
through technology alliances with leading semiconductor suppliers. Although we
have an internal process development team dedicated to developing new
semiconductor manufacturing process technologies, we depend on technology
partners to advance our portfolio of process technologies. If we are unable to
continue our technology alliances, or are unable to enter into new technology
alliances with other leading semiconductor suppliers, we may not be able to
continue providing our customers with leading-edge process technologies, which
could seriously harm us.
16
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. We are currently
operating under a conditional permit from the Israeli Ministry of Environmental
Affairs concerning the concentration of fluoride in our wastewater. We believe
that we are currently in compliance with the written terms of our permit with
the following one exception. We are monitoring the levels of fluoride in
accordance with an oral understanding with the Israeli Ministry of Environmental
Affairs concerning how often we monitor the levels of fluoride, resulting in our
monitoring the levels of fluoride less frequently than required by the written
terms of our permit. We are working towards getting this understanding with the
environmental authorities reduced to writing. There have been instances in the
past where we were not in compliance with these restrictions, and despite our
best efforts there may be future instances of non-compliance. We are also in
discussions with the Israeli Ministry of Environmental Affairs regarding the
possibility of easing of conditions set forth in our permit. If we cannot
maintain our compliance with the conditions set forth in our permit or in our
other understandings with the Ministry, we may be required to allocate financial
resources for the implementation of an infrastructure solution in order to be in
compliance with all the conditions. We estimate that such an infrastructure
solution would cost approximately $1 million. While we believe that we are
currently in compliance in all other material respects with applicable
environmental laws and regulations, 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.
POSSIBLE PRODUCT RETURNS COULD HARM OUR BUSINESS. Products manufactured by
us are subject to return for specified periods if they are defective or
otherwise fail to meet customers' specifications. Although we establish what we
believe to be reasonable provisions against possible product returns based on
our past experience, product returns in excess of such provisions may have an
adverse effect on our business and financial condition.
WE MAY BE REQUIRED TO REPAY GRANTS TO THE ISRAEL 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. In connection with our Fab 1 program, the Investment Center had taken the
position that our ability to receive Fab 1 grants was dependent on our meeting
specified forecasted levels of Fab 1 revenues and maintaining specified levels
of Fab 1 employees and that we may be required to refund the grants we received
if we do not meet specified forecasted levels of Fab 1 revenues and maintain
specified levels of Fab 1 employees. Although we believe that the Investment
Center's position is incorrect we have agreed 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. Fab 1
revenues in 2002 were $43.7 million. At June 30, 2003, we employed approximately
470 employees in Fab 1.
17
TERRORIST ATTACKS THAT OCCURRED IN NEW YORK AND WASHINGTON ON SEPTEMBER 11,
2001, THE WAR IN IRAQ AND OTHER ACTS OF VIOLENCE OR WAR MAY MATERIALLY AFFECT
THE MARKETS ON WHICH OUR SECURITIES TRADE, THE MARKETS IN WHICH WE OPERATE, OUR
OPERATIONS AND PROFITABILITY. In the aftermath of the September 11, 2001
terrorist attacks on the United States, the United States-led coalition of
nations commenced a series of retaliatory military strikes in Afghanistan upon
strategic installations of the Taliban regime, and governmental intelligence
authorities issue from time to time warnings of the imminent threat of further
attacks against civilian and military installations. On March 17, 2003, a
coalition of countries led by the United States and the United Kingdom commenced
large scale military action against Iraq which resulted in the toppling of the
Iraqi regime. These attacks and armed conflicts, as well as the uncertainty
surrounding these issues, have had, and we expect will continue for the
unforeseeable future to have, an adverse effect on the global economy, and the
semiconductor industry and could result in a disruption of our business or that
of our customers. In addition, these events may discourage foreign technical
experts and foreign employees, upon whom we rely for support and maintenance of
our specialized fabrication equipment and for consultation necessary for the
ongoing ramp-up of Fab 2 and related development activity, from traveling to our
facilities in Israel, which may result in delays to the Fab 2 deployment
timetable and could affect the performance of the equipment.
CORPORATE GOVERNANCE SCANDALS AND NEW LEGISLATION COULD INCREASE THE COST
OF OUR OPERATIONS. As a result of recent corporate governance scandals and the
legislative and litigation environment resulting from those scandals, the costs
of being a public company in general are expected to increase in the near
future. New legislation, such as the recently enacted Sarbanes-Oxley Act of
2002, will have the effect of increasing the burdens and potential liabilities
of being a public reporting company. This and other proposed legislation may
increase the fees of our professional advisors and our insurance premiums.
RISKS RELATED TO OUR ORDINARY SHARES AND LISTED WARRANTS
ISSUANCE OF ADDITIONAL SHARES PURSUANT TO FAB 2 RELATED EQUITY FINANCINGS
WILL DILUTE THE INTEREST OF CURRENT AND PROSPECTIVE SHAREHOLDERS. In connection
with the Fab 2 project, we have issued to date, 36,485,386 ordinary shares to
our wafer and equity partners. Upon the payment of the remaining $8.7 million of
the initial $24.6 million payment in connection with the fifth and final Fab 2
milestone payments by our wafer and equity partners, as amended, we will issue
2,331,885 additional ordinary shares and approximately another 3.4 million
additional ordinary shares (assuming a purchase price of $5.00 per share),
subject to fluctuations in the price of our ordinary shares in the future, in
connection with the second installment of the fifth milestone payment and
pursuant to our existing agreements with our wafer and equity partners. Up to
800,000 additional ordinary shares may be issued upon the exercise of warrants
held by our banks and our Fab 2 contractor. In January 2002, we sold units
comprised of convertible debentures, options to purchase our ordinary shares and
options to purchase additional convertible debentures. Up to 8,102,746
additional ordinary shares are potentially issuable pursuant to these units as
follows: (1) 2,697,068 shares would be issued assuming conversion of all the
outstanding convertible debentures and (2) 2,211,596 shares would be issued
assuming exercise of all the outstanding options to purchase ordinary shares. In
addition, 1,844,082 ordinary shares would be issued assuming exercise of all the
outstanding listed warrants in connection with the distribution of rights to our
shareholders in October 2002 and 1,350,000 ordinary shares upon exercise of
listed warrants issued to Ontario Teachers' Pension Plan Board ("OTPP"). We will
also need to issue ordinary shares or securities convertible into ordinary
shares in connection with new agreements or transactions with wafer and/or
equity partners or private or public offerings of ordinary shares to raise
required additional equity capital in connection with Fab 2. These issuances
will result in significant dilution of the interest of current shareholders.
18
THE MARKET PRICE OF OUR ORDINARY SHARES HAS BEEN, AND MAY CONTINUE TO BE,
VERY VOLATILE. The market prices of our ordinary shares and the securities of
other publicly traded companies have fluctuated widely. The following factors,
among others, may significantly impact the market price of our ordinary shares:
o announcements of technological innovations or new products by us or
our competitors;
o developments or disputes concerning patents or proprietary rights;
o publicity regarding actual or potential results relating to products
under development by us or our competitors;
o events or announcements relating to our collaborative relationship
with others;
o economic and other external factors;
o period-to-period fluctuations in our operating results; and
o volatility in the securities markets.
MARKET SALES OF LARGE AMOUNTS OF OUR SHARES ELIGIBLE FOR FUTURE SALE MAY
LOWER THE PRICE OF OUR ORDINARY SHARES. Of our 48,779,146 outstanding ordinary
shares, 8,476,416 are freely tradable and an additional 894,829 shares held by
non-affiliates are eligible for sale pursuant to Rule 144 under the Securities
Act of 1933, subject to the time, volume and manner of sale limitations of Rule
144. Of these shares, 418,616 and 476,213 shares will be freely tradable under
Rule 144(k) by September 2003 and April 2004, respectively. An additional
597,692 and 80,456 shares held by non-affiliates will be eligible for sale under
Rule 144(k) by October 2003 and May 2004, respectively.
In addition, our affiliates (Israel Corporation Technologies (ICTech) Ltd.,
SanDisk Corporation, Alliance Semiconductor Corporation and Macronix (BVI) Co.,
Ltd.) hold 35,729,753 of our outstanding shares, of which 20,851,910 are
currently eligible for sale subject to the time, volume and manner of sale
limitations of Rule 144. An additional 5,528,648, 4,425,076 and 838,082 shares
held by these affiliates will be eligible for sale under Rule 144 by October
2003, May 2004 and August 2004, respectively; however, the sale of shares held
by these affiliates are also subject to the share transfer restrictions set
forth in the shareholders agreement to which they are a party and which remain
in effect through January 2006. We also agreed with our affiliates to register
the resale of 4,086,037 ordinary shares that they purchased in our rights
offering in October 2002. The registration statement of which this prospectus
forms a part covers the resale of such securities.
We have agreed with OTPP to register for resale the 3,000,000 ordinary
shares and the 1,350,000 ordinary shares underlying the warrants that OTPP
purchased from us in October 2002.
We are unable to predict the effect that sales of our ordinary shares may
have on the then prevailing market price of our ordinary shares. It is likely
that market sales of large amounts of our ordinary shares (or the potential for
those sales even if they do not actually occur) will have the effect of
depressing the market price of our ordinary shares. This could impair our
ability to raise capital through the sale of our equity securities.
19
WE MAY FAIL TO MEET THE MAINTENANCE STANDARDS FOR THE NASDAQ NATIONAL
MARKET OR THE TEL AVIV STOCK EXCHANGE, WHICH WOULD NEGATIVELY IMPACT THE
LIQUIDITY OF OUR ORDINARY SHARES. If we fail to comply with the requirements for
continued listing on the NASDAQ National Market or the Tel Aviv Stock Exchange,
our ordinary shares, listed warrants and convertible debentures may be delisted
from trading on such market. Consequently, selling and buying our securities
would be more difficult because of delays in the timing of transactions and
greater difficulty in selling securities and obtaining accurate quotations.
These factors could result in lower prices and larger spreads in the bid and ask
prices for our ordinary shares than might otherwise be obtained.
If our ordinary shares are delisted from the NASDAQ National Market, we
cannot assure you that our securities will trade on the NASDAQ SmallCap Market.
In addition, even if we obtain such alternative listing, broker-dealers would be
subject to a SEC rule that imposes additional sales practice requirements on
broker-dealers who sell low-priced securities to persons other than established
customers and institutional accredited investors. For transactions covered by
this rule, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written agreement to the transaction
prior to sale. Consequently, this rule may affect the ability of broker-dealers
to sell our ordinary shares and may affect the ability of shareholders to sell
our ordinary shares in the secondary market.
UNDER OUR ARTICLES OF ASSOCIATION, TWO SHAREHOLDERS HOLDING TOGETHER 33% OF
OUR OUTSTANDING SHARES CONSTITUTE A QUORUM FOR CONDUCTING A SHAREHOLDERS
MEETING. Under our articles of association, two shareholders holding together
33% of our outstanding shares constitute a quorum for conducting a shareholders
meeting. We have several large shareholders who together hold in excess of 33%
of our outstanding shares and could constitute a quorum for purposes of
conducting a shareholders meeting. While we have always solicited proxies from
our shareholders prior to our shareholders meetings, we would have a sufficient
quorum with two large shareholders even if none of our other shareholders were
to participate in our shareholder meetings. If only two large shareholders were
to participate in one of our shareholder meetings, these shareholders would
determine the outcome of our shareholder meetings without the benefit of the
participation of our other shareholders.
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED FOR EXERCISING
THE LISTED WARRANTS. The listed warrants are not exercisable unless, at the time
of exercise, we have a current prospectus covering the ordinary shares issuable
upon the exercise of the listed warrants, and the ordinary shares have been
registered, qualified or deemed to be exempt under the securities or blue sky
laws of the state of residence of the exercising U.S. holder of the listed
warrants. Although we have undertaken to use our reasonable efforts to have all
of the ordinary shares issuable upon the exercise of the listed warrants so
registered and qualified on or before the exercise date and to maintain a
current prospectus relating thereto until the expiration of the listed warrants,
which will be primarily satisfied through our continuous compliance with the
reporting requirements of the Securities Exchange Act of 1934, there is no
assurance that we will be able to do so. The value of the listed warrants may be
greatly reduced if a current prospectus covering the ordinary shares issuable
upon the exercise of the listed warrants is not kept effective or if such
ordinary shares are not qualified or exempt from qualification in the states in
which U.S. holders of the listed warrants reside.
THERE HAS BEEN LIMITED TRADING IN THE LISTED WARRANTS. In October 2002, the
listed warrants were registered for trading on the Nasdaq SmallCap Market and
the Tel Aviv Stock Exchange. Since that time, no listed warrants have traded on
the Nasdaq SmallCap Market and there has been virtually no trading of the listed
warrants on the Tel Aviv Stock Exchange. To the extent the price of our ordinary
shares is less than $7.50, the exercise price of the listed warrants, it is
unlikely that a significant trading market in the listed warrants will develop
on either market. In addition, trading in the listed warrants will be limited
unless and until the selling securityholders begin to actively trade the listed
warrants covered by this prospectus. Excluding the listed warrants held by the
selling securityholders, there are only 5,367 listed warrants that outstanding.
20
THE EXERCISE PRICE OF THE LISTED WARRANTS IS NOT NECESSARILY AN INDICATION
OF OUR VALUE. Our board of directors determined the exercise price of the listed
warrants in accordance with the price at which they were sold to OTPP
immediately following the expiration of the rights offering. The exercise price
does not necessarily bear any relationship to the book value of our assets, past
operations, cash flow, earnings (or losses) or financial condition. You should
not consider the exercise price of the listed warrants as an indication of our
present or future value. We have neither sought nor obtained a valuation opinion
from an outside financial consultant or investment banker.
RISKS RELATED TO OUR OPERATIONS IN ISRAEL
INSTABILITY IN ISRAEL MAY HARM OUR BUSINESS; OUR OPERATIONS MAY BE
NEGATIVELY AFFECTED BY THE OBLIGATIONS OF OUR PERSONNEL TO PERFORM MILITARY
SERVICE. All our manufacturing facilities and our corporate and primary 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, there has been an increase in unrest and terrorist
activity which began in September 2000 and which has continued with varying
levels of severity into 2003. Parties with whom we do business have 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 contracts
claiming that they are not obligated to perform their commitments under those
agreements pursuant to force majeure provisions. We do not believe that the
political and security situation has had any material impact on our business to
date; however, we can give no assurance that security and political conditions
will have no such effect 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 is currently experiencing civil unrest, terrorist
activity and military action. Since we do not have a detailed disaster recovery
plan that would allow us to quickly resume manufacturing, we could experience
serious disruption of our manufacturing if acts associated with this conflict
result in any serious damage to our manufacturing facility. 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.
Many of our employees in Israel are obligated to perform military reserve
duty. In the event of severe unrest or other conflict, individuals could be
required to serve in the military for extended periods of time. Recently, there
has been a significant call up of military reservists, and it is possible that
there will be additional call-ups in the future. 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.
21
IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US, OUR OFFICERS AND
DIRECTORS AND SOME OF THE EXPERTS NAMED IN THIS PROSPECTUS OR TO ASSERT U.S.
SECURITIES LAW CLAIMS IN ISRAEL. We are incorporated in Israel. Substantially
all of our executive officers and directors and our Israeli accountants and
attorneys, are nonresidents of the United States, and a substantial portion 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. Additionally, it may be
difficult for you to enforce civil liabilities under U.S. Federal Securities
laws in original actions instituted in Israel.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
The statements incorporated by reference or contained in this prospectus
discuss our future expectations, contain projections of our results of
operations or financial condition, and include other forward-looking information
within the meaning of Section 27A of the Securities Act of 1933, as amended. Our
actual results may differ materially from those expressed in forward-looking
statements made or incorporated by reference in this prospectus. Forward-looking
statements that express our beliefs, plans, objectives, assumptions or future
events or performance may involve estimates, assumptions, risks and
uncertainties. Therefore, our actual results and performance may differ
materially from those expressed in the forward-looking statements.
Forward-looking statements often, although not always, include words or phrases
such as the following: "will likely result," "are expected to," "will continue,"
"is anticipated," "estimate," "intends," "plans," "projection" and "outlook."
You should not unduly rely on forward-looking statements contained or
incorporated by reference in this prospectus. Various factors discussed in this
prospectus, including, but not limited to, all the risks discussed in "Risk
Factors," and in our other SEC filings may cause actual results or outcomes to
differ materially from those expressed in forward-looking statements. You should
read and interpret any forward-looking statements together with these documents.
Any forward-looking statement speaks only as of the date on which that
statement is made. We will not update any forward-looking statement to reflect
events or circumstances that occur after the date on which such statement is
made.
CAPITALIZATION
The following table sets forth our short-term debt, long-term debt,
convertible debentures and capitalization as of June 30, 2003 on an actual
basis:
JUNE 30, 2003
-------------
(U.S. DOLLARS
IN THOUSANDS)
UNAUDITED
-------------
Short-term debt(1) 4,000
Long-term debt (1) 308,000
Convertible Debentures 26,549
Shareholders' equity, NIS1.00 par value; authorized
100,000,000 shares issued 49,241,064 shares 12,291
Treasury stock, 1,300,000 shares (9,072)
Total shareholders' equity 280,704
Total capitalization 761,642
(1) All of our long-term and short-term debt is secured by liens registered in
favor of our banks on substantially all of our present and future assets.
22
The foregoing information also excludes approximately 22,084,686 ordinary
shares issuable, as of June 30, 2003, upon the exercise of the listed warrants,
options granted under our share option plans, wafer and equity partner
agreements, subordinated convertible debentures and Options (Series 1), Options
(Series 2), and warrants issued to our banks and to our contractor, all at a
weighted average exercise price of $6.50 per ordinary share. As of such date,
approximately 2,021,000 additional ordinary shares were reserved for issuance
upon exercise of options that may be granted after such date under our share
option plans.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of ordinary shares
and listed warrants by our selling securityholders or from the sale by the
selling securityholders of the ordinary shares issuable upon exercise of the
listed warrants. However, we will receive the exercise price of any of the
listed warrants or the warrant held by our contractor that are exercised. We
will receive approximately $27.0 million if all 3,194,082 listed warrants and
400,000 warrants held by our contractor are exercised. We have agreed to bear
all expenses relating to the registration of the securities registered pursuant
to the registration statement, of which this prospectus is a part. The net
proceeds received from the exercise of the listed warrants and the warrants held
by our contractor will be used towards the further ramp-up and deployment of Fab
2 as well as for general corporate purposes.
SELLING SECURITYHOLDERS
BENEFICIAL OWNERSHIP AND OTHER INFORMATION
The securities covered by this prospectus were issued to the selling
securityholders pursuant to the following transactions.
On October 23, 2002, we completed a sale of ordinary shares and listed
warrants in connection with the distribution of rights to our shareholders and
employee option holders in September 2002, resulting in gross proceeds of
approximately $20.5 million. A total of 4,097,964 shares were issued at a price
of $5.00 per share in addition to listed warrants exercisable through October
31, 2006 into 1,844,082 ordinary shares at an exercise price of $7.50 per share
in connection with the rights offering.
Concurrent with the completion of the rights offering, we closed a $15
million investment in our ordinary shares made by OTPP pursuant to a share
purchase agreement. We issued to OTPP 3,000,000 ordinary shares at a price of
$5.00 per share in addition to listed warrants exercisable through October 31,
2006 into 1,350,000 ordinary shares at an exercise price of $7.50 per share in
connection with the share purchase agreement.
23
In February 2003, we issued to Meissner-Baran Ltd. a warrant exercisable
into an aggregate of 400,000 of our ordinary shares in connection with an
amendment to the construction contract between Meissner-Baran Ltd., M+W Zander
Holding GmbH and Baran Group Ltd. and us. The warrant issued to Meissner-Baran
Ltd. is exercisable through February 19, 2007 into 400,000 ordinary shares at an
exercise price of $7.50 per share.
The following table assumes that each selling securityholder will sell all
of the securities owned by it and covered by this prospectus. Information
included in the table is based upon information provided by the selling
securityholders. Our registration of these securities does not necessarily mean
that the selling securityholders will sell any or all of the securities.
Pursuant to the share purchase agreement between OTPP and us described
above, OTPP may use this prospectus to resell up to an aggregate of 4,350,000 of
our ordinary shares, including ordinary shares to be issued upon the exercise of
the 1,350,000 listed warrants that we issued to it under the share purchase
agreement. This prospectus also covers both the resale by OTPP of the listed
warrants and the offer by us of the ordinary shares issuable upon the exercise
of the listed warrants to persons to whom the listed warrants may be sold or
otherwise transferred by OTPP. OTPP has committed that it will not sell or
otherwise dispose of any of the ordinary shares, listed warrants or ordinary
shares issuable upon the exercise of the listed warrants that we issued to it
until the end of July 2003. As of the end of July 2003, OTPP committed that it
will only transfer, sell, offer for sale, pledge, hypothecate of otherwise
dispose of any of the ordinary shares, listed warrants or ordinary shares
issuable upon the exercise of the listed warrants in compliance with the
Securities Act of 1933, the Israel Securities Law - 1968 or any applicable
securities laws of any jurisdiction and the terms of this Agreement. OTPP has
not held any position or office or had a material relationship with us or any of
our affiliates within the past three years other than as a result of its
purchase and ownership of the securities covered by this prospectus.
Israel Corporation Technologies (ICTech) Ltd., SanDisk Corporation,
Alliance Semiconductor Corporation and Macronix (BVI) Co., Ltd. may use this
prospectus to resell up to an aggregate of 4,086,037 ordinary shares and up to
1,838,715 ordinary shares which may be issued upon the exercise of 1,838,715
listed warrants. These outstanding ordinary shares and listed warrants were
issued to them as part of the rights offering described above. This prospectus
also covers the resale by such securityholders of the listed warrants and the
offer by us of the ordinary shares issuable upon exercise of the listed warrants
by persons to whom the listed warrants may be sold or otherwise transferred by
ICTech Ltd., SanDisk, Alliance and Macronix. Pursuant to a shareholders
agreement, each of ICTech Ltd., SanDisk, Alliance and Macronix have agreed to
restrictions (subject to exceptions contained in the agreement, including a
right to sell up to 1.2 million of our ordinary shares under limited
circumstances and the right to sell holdings in excess of 5.4 million of our
shares) through January 2004 on the transfer of ordinary shares purchased by
them in connection with their investments in Fab 2. These restrictions are
thereafter gradually lifted through January 2006. We have granted each of ICTech
Ltd., SanDisk, Alliance and Macronix demand registration rights commencing in
January 2004. Our agreement with our banks also limits the number of ordinary
shares which SanDisk, Alliance, Macronix and ICTech Ltd. may sell while loans
under our facility agreement are outstanding. The limitations of the
shareholders agreement and our bank agreement do not apply to the securities
being registered pursuant to this prospectus.
Meissner-Baran Ltd. may use this prospectus to resell up to an aggregate of
400,000 of our ordinary shares issued pursuant to its exercise of the warrant
issued to it in connection with an amendment to the construction contract
described above.
24
Securities Securities
Beneficially Owned Beneficially Owned
Securities Being Prior to Upon Completion of
Names and Addresses Offered Offering (1) Offering (1)
------------------- ------------------- ------------------- -------------------
Percentage
Percentage of
of Class Class
Shares/ Shares/
Number Warrants Number Warrants
---------------------- ----------- ------------- ------------
Ontario Teacher's Pension 4,350,000 Shares(2) 4,350,000 Shares(2) 8.68% 0 0%
Plan Board 1,350,000 Warrants 1,350,000 Warrants 42.27% 0 0%
5650 Yonge Street
Toronto, Ontario
Canada M2M 4H5
SanDisk Corporation 1,161,007 Shares(2) 9,774,020 Shares(3) 19.16% 8,613,013 17.00%
140 Caspian Court 360,312 Warrants 360,312 Warrants 11.28% 0 0%
Sunnyvale, CA USA 94089
Alliance Semiconductor 1,152,742 Shares(2) 9,737,596 Shares(4) 19.09% 8,584,854 16.95%
Corporation 357,747 Warrants 357,747 Warrants 11.20% 0 0%
2575 Augustine Drive
Santa Clara, CA USA 95054
Macronix (BVI) Co., Ltd. 957,000 Shares(2) 9,541,854 Shares(5) 18.73% 8,584,854 16.95%
PO Box 957 297,000 Warrants 297,000 Warrants 9.30% 0 0%
Offshore Incorporations Centre
Road Town Tortola
British Virgin Islands
Israel Corporation 2,654,003 Shares(2) 15,398,446 Shares(6) 30.28% 12,744,443 25.47%
Technologies 823,656 Warrants 823,656 Warrants 25.79% 0 0%
(ICTech) Ltd.
23 Arania St.
Tel Aviv, Israel 61070
Meissner-Baran Ltd. 400,000 Shares 400,000 Shares 0.81% 0 0%
7 Hamarpe St.
Jerusalem, Israel
1. Beneficial ownership is calculated as of August 31, 2003 in accordance with
General Instruction F. to Form 20-F. and is based on 48,779,146 outstanding
ordinary shares and 3,194,082 outstanding listed warrants.
2. Includes shares underlying the listed warrants owned by such
securityholders and covered by this prospectus.
3. Represents 7,536,343 shares currently owned by SanDisk, 777,295 shares
issuable in connection with the initial installment under the amendment to
its fifth milestone payment and 1,100,070 shares issuable in connection
with the second installment under the amendment to its fifth milestone
payment assuming a purchase price of $4.00 per share, and 360,312 shares
issuable upon the exercise of listed warrants.
4. Represents 7,502,484 shares currently owned by Alliance, 777,295 shares
issuable in connection with the initial installment under the amendment to
its fifth milestone payment and 1,100,070 shares issuable in connection
with the second installment under the amendment to its fifth milestone
payment assuming a purchase price of $4.00 per share, and 357,747 shares
issuable upon the exercise of the listed warrants.
25
5. Represents 7,367,489 shares currently owned by Macronix, 777,295 shares
issuable in connection with the initial installment under the amendment to
its fifth milestone payment and 1,100,070 shares issuable in connection
with the second installment under the amendment to its fifth milestone
payment assuming a purchase price of $4.00 per share, and 297,000, shares
issuable upon the exercise of listed warrants.
6. Represents 13,323,436 shares currently owned by ICTech, 518,020 shares
issuable in connection with the initial installment under the amendment to
its fifth milestone payment and 733,334 shares issuable in connection with
the second installment under the amendment to its fifth milestone payment
assuming a purchase price of $4.00 per share, and 823,656 shares issuable
upon the exercise of listed warrants.
Pursuant to a consolidated shareholders agreement dated January 18, 2001,
by and among Israel Corp., Alliance Semiconductor Corporation, SanDisk
Corporation and Macronix International Co. Ltd., each of ICTech, Alliance
Semiconductor Corporation, SanDisk Corporation and Macronix International Co.
Ltd. may be deemed to have shared voting and dispositive control over 76.56% of
the outstanding shares of Tower. On January 31, 2001, Israel Corp. transferred
all its beneficial ownership of shares of Tower to ICTech. The beneficial
ownership described above with respect to the parties to the consolidated
shareholders agreement is expressly disclaimed with respect to any shares other
than the shares held directly by each party, as specified in the table above,
and the statement shall not be deemed to constitute an admission by any party
described in this paragraph that it is the beneficial owner of any shares of
Tower covered by the consolidated shareholders agreement, other than the shares
held directly by such party, for purposes of Section 13(d) of the Securities
Exchange Act of 1934, as amended, or for any other purpose. In addition, we have
entered into foundry agreements with each of Alliance Semiconductor Corporation,
SanDisk Corporation and Macronix International Co. Ltd. under which we have
committed a portion of our Fab 2 capacity for contemplated orders from these
parties. Also, a representative of each of ICTech, Alliance Semiconductor
Corporation, SanDisk Corporation and Macronix International Co. Ltd. is a member
of our board of directors.
PLAN OF DISTRIBUTION
This prospectus relates to the offer and sale of ordinary shares, listed
warrants and ordinary shares issuable upon the exercise of listed warrants and
the warrants held by our contractor, as the case may be, by the selling
securityholders named herein. As used herein, "selling securityholder" includes
donees, pledgees, transferees or other successors-in-interest selling securities
received after the date of this prospectus from the named selling
securityholders as a gift, pledge, partnership distribution or other non-sale
related transfer. We will bear all costs, expenses and fees in connection with
the registration of the securities offered by this prospectus, other than
brokerage commissions and similar selling expenses, if any, attributable to the
sale of securities offered hereby which will be borne by the selling
securityholders. Sales of the securities offered hereby may be effected by the
selling securityholders from time to time in one or more types of transactions
(which may include block transactions) on the Nasdaq National Market (or Nasdaq
SmallCap Market in the case of the listed warrants) and/or on the Tel Aviv Stock
Exchange at prevailing market prices, in the over-the-counter market, in
negotiated transactions, through put or call options transactions relating to
the shares offered hereby, through short sales of the shares offered hereby, or
a combination of such methods of sale, at market prices prevailing at the time
of sale, or at negotiated prices. Such transactions may or may not involve
brokers or dealers. The selling securityholders have advised us that they have
not entered into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of their securities, nor is
there an underwriter or coordinating broker acting in connection with the
proposed sale of the securities offered hereby by the selling securityholders.
26
The selling securityholders may enter into hedging transactions with
broker-dealers or other financial institutions. In connection with such
transactions, broker-dealers or other financial institutions may engage in short
sales of the securities offered hereby or of securities convertible into or
exchangeable for such securities in the course of hedging positions they assume
with the selling securityholders. The selling securityholders may also enter
into options or other transactions with broker-dealers or other financial
institutions which require the delivery to such broker-dealers or other
financial institutions of the securities offered by this prospectus, which
securities such broker-dealer or other financial institution may resell pursuant
to this prospectus (as amended or supplemented to reflect such transaction).
The selling securityholders may effect these transactions by selling the
securities offered hereby directly to purchasers or to or through
broker-dealers, which may act as agents or principals. Such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the selling securityholders and/or the purchasers of the securities offered
hereby for whom such broker-dealers may act as agents or to whom they sell as
principal, or both (which compensation as to a particular broker-dealer might be
in excess of customary commissions).
The selling securityholders and any broker-dealers that act in connection
with the sale of the securities offered hereby might be deemed to be
"underwriters" within the meaning of Section 2 (11) of the Securities Act, and
any commissions received by such broker-dealers and any profit on the resale of
the securities offered hereby sold by them while acting as principals might be
deemed to be underwriting discounts or commissions under the Securities Act. We
have agreed to indemnify OTPP against certain liabilities, including liabilities
arising under the Securities Act. The selling securityholders may agree to
indemnify any agent, dealer or broker-dealer that participates in transactions
involving sales of the securities offered hereby against certain liabilities,
including liabilities arising under the Securities Act and/or the Israeli
Securities Law.
Because the selling securityholders may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, the selling
securityholders will be subject to the prospectus delivery requirements of the
Securities Act. We have informed the selling securityholders that the
anti-manipulative provisions of Regulation M promulgated under the Exchange Act
may apply to their sales in the market.
Subject to the limitations on the transfer of their shares (see "Selling
Securityholders" above), the selling securityholders also may resell all or a
portion of the securities offered hereby in open market transactions in reliance
upon Rule 144 under the Securities Act, provided they meet the criteria and
conform to the requirements of Rule 144.
Upon our being notified by any of the selling securityholders that any
material arrangement has been entered into with a broker-dealer for the sale of
shares offered hereby through a block trade, special offering, exchange
distribution or secondary distribution or a purchase by a broker or dealer, a
supplement to this prospectus will be filed, if required, pursuant to Rule
424(b) under the Securities Act, disclosing:
o the name of the selling securityholder and of the participating
broker-dealer(s);
o the number and type of securities involved;
o the initial price at which such securities were sold;
27
o the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable;
o that such broker-dealer(s) did not conduct any investigation to verify
the information set out or incorporated by reference in this
prospectus; and
o other facts material to the transaction.
In addition, upon our being notified by any of the selling securityholders
that a donee, pledgee, transferee or other successor-in-interest intends to sell
more than 500 shares, a supplement to this prospectus will be filed.
This prospectus also relates to the offer and sale by us of ordinary shares
issuable upon the exercise of the listed warrants by any person other than the
selling securityholders.
To the extent required, we will use our best efforts to file one or more
supplements to this prospectus to describe any material information with respect
to the plan of distribution not previously disclosed in this prospectus or any
material change to such information.
EXPENSES OF THE OFFERING
We have incurred, or will incur, the following estimated expenses in
connection with the sale of the securities covered by this prospectus:
SEC Registration fee $ 5,084.27
Legal fees and expenses $ 23,000
Miscellaneous $ 1,500
Total $ 29,584.27
===========
DIVIDEND POLICY
Since 1998, we have not declared or paid cash dividends on any of our
shares and we have no current intention of paying any cash dividends in the
future. The facility agreement that we entered into with our banks prohibit the
payment of dividends prior to January 1, 2006 and before any such distribution,
we must have placed on deposit with our banks an amount equal to the debt
service for the quarter in which the distribution is to be made and charged such
deposit in favor of our banks, and we must have complied with certain financial
ratios. In addition, we may only declare and pay a dividend provided that:
o the dividend is only paid from excess cash flow from Fab 2;
o there is no event of default outstanding under the facility agreement;
and
o an event of default could not reasonably exist after such
distribution.
The Companies Law also restricts our ability to declare dividends. We can
only distribute dividends from profits (as defined in the law), provided that
there is no reasonable suspicion that the dividend distribution will prevent the
company from meeting its existing and future expected obligations as they come
due.
28
MATERIAL INCOME TAX CONSIDERATIONS
A. ISRAELI CAPITAL GAINS TAX
Until the end of the year 2002, 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 is 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 are deemed to
be business income.
As a result of the recent tax reform legislation in Israel, gains from the
sale of our ordinary shares and warrants to purchase our ordinary shares derived
from January 1, 2003 and on will in general be liable to capital gains tax of up
to 15%. This will be the case so long as our securities remain listed for
trading on the Tel Aviv Stock Exchange or on a designated foreign stock market
such as the NASDAQ. However, according to the tax reform legislation,
non-residents of Israel will be exempt from any capital gains tax from the sale
of our securities so long as the gains are not derived through a permanent
establishment that the non-resident maintains in Israel, and so long as our
securities remain listed for trading as described above. These provisions
dealing with capital gains are not applicable to a person whose gains from
selling or otherwise disposing of our securities are deemed to be business
income or whose taxable income is determined pursuant to the Israeli Income Tax
Law (Inflation Adjustments), 1985; the latter law would not normally be
applicable to non-resident shareholders who have no business activity in Israel.
In any event, under the US-Israel Tax Treaty, a US treaty resident cannot
be liable to Israeli capital gains tax from the sale of our warrants for the
purchase of our shares, and may only be liable to Israeli capital gains tax on
the sale of our ordinary shares (subject to the provisions of Israeli domestic
law as described above) if that US treaty resident holds 10% or more of the
voting power in our company.
B. ISRAELI TAX ON DIVIDEND INCOME
Israeli tax at a rate of 25% is generally withheld at source from dividends
paid to Israeli individuals and non-residents; in general, no withholding tax is
imposed on dividends paid to Israeli companies (subject to the provision of the
Israeli Income Tax Ordinance). The applicable rate for dividends paid out of the
profits of an Approved Enterprise is 15%. These rates are subject to the
provisions of any applicable tax treaty.
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.
C. PFIC RULES
A non-U.S. corporation will be classified as a PFIC for U.S. 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.
29
We do not believe that we satisfied either of the tests for PFIC status in
2002 or in any prior year. However, there can be no assurance that we will not
be a PFIC in 2003 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, rents 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. This
belief is supported by a private letter ruling issued by the IRS to a company
whose circumstances are substantially the same as ours, although such private
letter ruling would not be binding on the IRS in determining our status. In
addition, 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 U.S. holder's holding period,
such U.S. holder would be required to either: (i) pay an interest charge
together with tax calculated at maximum ordinary income 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
such 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. U.S. holders are strongly urged to consult their own tax advisers
regarding the possible application and consequences of the PFIC rules.
The above 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 Israeli tax authorities, and it is not meant to replace
professional advice in these matters. The above discussion is based on current
Israeli 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.
DESCRIPTION OF SHARE CAPITAL
The description of our share capital contained in Amendment No. 1 to our
registration statement on Form F-2, filed on September 27, 2002 under the
heading "Description of Share Capital" is hereby incorporated by reference.
30
FOREIGN EXCHANGE CONTROLS AND OTHER LIMITATIONS
Under Israeli law, non-residents of Israel who purchase ordinary shares
with certain non-Israeli currencies (including 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 Memorandum and Articles of Association
both residents and non-residents of Israel may freely hold, vote and trade
ordinary shares.
LEGAL MATTERS
Certain legal matters in connection with the offering with respect to
Israeli law will be passed upon for us by Yigal Arnon & Co., Tel Aviv, Israel,
our Israeli counsel. This opinion addresses the authorization and legality of
the issuance of the securities registered hereunder. Certain legal matters in
connection with this offering with respect to United States law will be passed
upon for us by Ehrenreich Eilenberg & Krause LLP, New York, New York, our United
States counsel.
EXPERTS
The consolidated financial statements incorporated in this prospectus by
reference from our Annual Report on Form 20-F for the year ended December 31,
2002 have been audited by Brightman Almagor & Co., a member of Deloitte Touche
Tohmatsu, independent auditors, as stated in their report, which is incorporated
herein by reference, and have been so incorporated in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES AND
AGENT FOR SERVICE OF PROCESS IN THE UNITED STATES
We are incorporated in Israel, most of our executive officers and directors
and the Israeli experts named herein are nonresidents of the United States, and
a substantial portion of the assets of such persons and of ours are located
outside the United States. For further information regarding enforceability of
civil liabilities against us and certain other persons, see "Risk
Factors--Service of Process and Enforcement of Judgments."
THE ISRAEL SECURITIES AUTHORITY EXEMPTION
Promptly following our consummation of a rights offering to our
shareholders in October 2002 to purchase ordinary shares and listed warrants,
implemented through a registration statement on Form F-2 prepared in accordance
with the requirements of the Securities Act of 1933 and a prospectus in
substantially identical form prepared in accordance with Israeli securities law,
we issued additional ordinary shares and warrants to OTPP. Prior to this
issuance to OTPP, NASDAQ and the Tel Aviv Stock Exchange approved the listing of
the securities to be issued to OTPP for trade on these stock exchanges. In
connection with the private placement to OTPP, we undertook to register the
securities issued to OTPP in order to release them from the resale restrictions
provided under Rule 144 of the Securities Act of 1933 and Section 15C of the
Israeli Securities Law, 1968.
31
Pursuant to guidelines published by the Israel Securities Authority in
December 2000 in connection with restrictions on the resale of securities issued
in a private placement outside of Israel, the Israel Securities Authority
confirmed to us in July 2003 that once this registration statement on Form F-3
is declared effective by the Securities Exchange Commission and the securities
issued to OTPP in October 2002 will thereby be released from the resale
restrictions under Rule 144 of the Securities Act of 1933, these securities will
automatically be released from the resale restrictions under Section 15C of the
Israeli Securities Law, 1968 with no requirement to publish a resale prospectus
in Israel.
On the first business day following the date of this registration
statement, we will file a copy of this registration statement with the Israeli
Registrar of Companies.
WHERE YOU CAN FIND MORE INFORMATION; INCORPORATION OF
CERTAIN INFORMATION BY REFERENCE
FOREIGN PRIVATE ISSUER. We are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended, as applicable to foreign
private issuers. Accordingly, we file annual and current reports and other
information with the SEC. You may read and copy any document we file with the
SEC at the SEC's public reference room at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on these public reference rooms. In addition, similar information
concerning Tower can be inspected and copied at the offices of the National
Association of Securities Dealers, Inc., 9513 Key West Avenue, Rockville,
Maryland 20850, at the offices of the Israel Securities Authority at 22 Kanfei
Nesharim St., Jerusalem Israel, at the offices of the Tel Aviv Stock Exchange at
54 Ahad Ha'am Street, Tel Aviv, Israel and at the offices of the Israeli
Registrar of Companies at 97 Jaffa Street, Jerusalem, Israel. All documents that
we have filed on the SEC's EDGAR system are available for retrieval on the SEC's
website at www.sec.gov.
We customarily solicit proxies by mail; however, as a "foreign private
issuer," we are exempt from the rules under the Exchange Act prescribing certain
disclosure and procedural requirements for proxy solicitations. Also, our
officers, directors and principal shareholders are exempt from the reporting and
"short-swing" profit recovery provisions contained in Section 16 of the Exchange
Act and the rules thereunder, with respect to their purchases and sales of
securities. In addition, we are not required under the Exchange Act to file
periodic reports and financial statements with the SEC as frequently or as
promptly as United States companies whose securities are registered under the
Exchange Act. Pursuant to an exemption granted to us by the Israeli Securities
Authority in connection with an offering of our convertible debentures in Israel
in January 2002, we committed that our future periodic reports shall be filed in
the timeframe required of domestic U.S. issuers and shall include additional
information required of domestic U.S. issuers, as required by the ISA.
A copy of this registration statement, our memorandum of association, our
articles of association and the documents filed as exhibits (see list below),
are available for inspection at our offices at Hamada Avenue, Ramat Gavriel
Industrial Park, Migdal Haemek, Israel.
32
You may request, at no cost, a copy of any documents incorporated by
reference herein, excluding all exhibits, unless we have specifically
incorporated by reference an exhibit, by writing or telephoning us at:
Tower Semiconductor Ltd.
P.O. Box 619
Migdal Haemek, Israel 23105
972-4-650-6611
Attention: Ms. Tamar Cohen, Corporate Secretary
33
10,680,119 ORDINARY SHARES
3,188,715 WARRANTS TO PURCHASE ORDINARY SHARES
-------------------------------------
PROSPECTUS
-------------------------------------
You should rely only on the information incorporated by
reference or provided in this prospectus. We have not
authorized anyone to provide you with different information.
We are not making any offer to sell or buy any of the
securities in any state where the offer is not permitted.
You should not assume that the information in this
prospectus is accurate as of any date other than the date
that appears below.
SEPTEMBER , 2003
34
INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Israeli Companies Law, or the Companies Law, provides that a company
may include in its articles of association provisions allowing it to:
1. partially or fully, exempt in advance, an office holder of the company from
his responsibility for damages caused by the breach of his duty of care to
the company.
2. enter into a contract to insure the liability of an office holder of the
company by reason of acts or omissions committed in his capacity as an
office holder of the company with respect to the following:
(a) the breach of his duty of care to the company or any other person;
(b) the breach of his fiduciary duty to the company to the extent he acted
in good faith and had a reasonable basis to believe that the act or
omission would not prejudice the interests of the company; and
(c) monetary liabilities or obligations which may be imposed upon him in
favor of other persons.
3. indemnify an office holder of the company for:
(a) monetary liabilities or obligations imposed upon him in favor of other
persons pursuant to a court judgment, including a compromise judgment
or an arbitrator's decision approved by a court, by reason of acts or
omissions of such person in his capacity as an office holder of the
company; and
(b) reasonable litigation expenses, including attorney's fees, actually
incurred by such office holder or imposed upon him by a court, in an
action, suit or proceeding brought against him by or on behalf of us
or by other persons, or in connection with a criminal action from
which he was acquitted, or in connection with a criminal action which
does not require criminal intent in which he was convicted, in each
case by reason of acts or omissions of such person in his capacity as
an office holder.
The Companies Law provides that a company's articles of association may
provide for indemnification of an office holder post-factum and may also provide
that a company may undertake to indemnify an office holder in advance, provided
such undertaking is limited to types of occurrences, which, in the opinion of
the company's board of directors, are, at the time of the undertaking,
foreseeable and to an amount the board of directors has determined is reasonable
in the circumstances.
The Companies Law provides that a company may not indemnify or exempt the
liabilities of an office holder or enter into an insurance contract which would
provide coverage for the liability of an office holder with respect to the
following:
35
o a breach of his fiduciary duty, except to the extent described
above;
o a breach of his duty of care, if such breach was done
intentionally, recklessly or with disregard of the circumstances
of the breach or its consequences;
o an act or omission done with the intent to unlawfully realize
personal gain; or
o a fine or monetary settlement imposed upon him.
Under the Companies Law, the term "office holder" includes a director,
managing director, general manager, chief executive officer, executive vice
president, vice president, other managers directly subordinate to the managing
director and any other person fulfilling or assuming any such position or
responsibility without regard to such person's title.
The grant of an exemption, an undertaking to indemnify or indemnification
of, and procurement of insurance coverage for, an office holder of a company
requires, pursuant to the Companies Law, the approval of the company's audit
committee and board of directors, and, in certain circumstances, including if
the office holder is a director, the approval of the company's shareholders.
Our Articles of Association have been amended to allow for indemnification
of, and procurement of insurance coverage for our officers and directors to the
maximum extent provided for by the Companies Law.
We have entered into an insurance contract for directors and officers and
have procured indemnification insurance for our office holders to the extent
permitted by our Articles of Association. We have never had the occasion to
indemnify any of our office holders.
36
EXHIBITS
EXHIBIT INDEX
EXHIBIT
NUMBERS DESCRIPTION OF DOCUMENT
*4.1 Memorandum of Association of Registrant
**4.2 Articles of Association of Registrant
***4.3 Form of Warrant Agreement between the Registrant and American Stock (including form
of Warrant Certificate)
5.1 Opinion of Yigal Arnon & Co.
23.1 Consent of Yigal Arnon & Co. (contained in their opinion constituting Exhibit 5.1)
23.2 Consent of Brightman Almagor & Co.
24 Power of Attorney (included on signature page hereof)
- ----------
*Incorporated by reference to Exhibit No. 3.1 of the Registrant's
Registration Statement on Form F-1, File No. 33-83126.
** Incorporated by reference to Exhibit 1.1 to the registrant's Annual
Report on Form 20-F for the year ended December 31, 2000.
*** Incorporated by reference to Exhibit 4.2 to the registrant's
registration statement on Form F-2 (SEC File No. 333-97043).
37
UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most
recent post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
38
(4) To file a post-effective amendment to the Registration Statement
to include any financial statements required by item 8.A. of Form 20-F at
the start of any delayed offering or throughout a continuous offering.
Financial statements and information otherwise required by Section 10(a)(3)
of the Act need not be furnished, PROVIDED, that the Registrant includes in
the prospectus, by means of a post-effective amendment, financial
statements required pursuant to this paragraph (a)(4) and other information
necessary to ensure that all other information in the prospectus is at
least as current as the date of those financial statements. Notwithstanding
the foregoing, with respect to Registration Statements on Form F-3, a
post-effective amendment need not be filed to include financial statements
and information required by Section 10(a)(3) of the Act or rule 3-19 of
Regulation S-X if such financial statements and information are contained
in periodic reports filed with or furnished to the Commission by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Form F-3.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the Registrant's annual reports pursuant to Section 13(a) or Section 15(d)
of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of
the Securities Exchange Act of 1934) that is incorporated by reference in
this Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in such Act and will be governed by the final
adjudication of such issue.
39
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Migdal Haemek, Israel, on September 18, 2003.
TOWER SEMICONDUCTOR LTD.
By: /s/Carmel Vernia
----------------
Carmel Vernia
Chairman of the Board of Directors and
Acting Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, each director and officer whose signature
appears below constitutes and appoints, Carmel Vernia, Idan Ofer and Amir Harel
or any of them, his true and lawful attorney-in-fact and agent, with full power
of substitution and re-substitution, to sign in any and all capacities any and
all amendments or post-effective amendments to this registration statement on
Form F-3 and to file the same with all exhibits thereto and other documents in
connection therewith with the Securities Exchange Commission, granting such
attorneys-in-fact and agents, and each of them, full power and authority to do
all such other acts and execute all such other documents as they, or any of
them, may deem necessary or desirable in connection with the foregoing, as fully
as the undersigned might or could do in person, hereby ratifying and confirming
all that such attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement on Form F-3 has been signed by the following persons in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/ IDAN OFER Director September 18 , 2003
- ----------------
Idan Ofer
/s/ AMIR HAREL Vice President and September 18 , 2003
- ----------------
Amir Harel Chief Financial Officer
/s/ EHUD HILLMAN Director September 18, 2003
- ----------------
Ehud Hillman
/s/ DR. ELI HARARI Director September 18, 2003
- ----------------
Dr. Eli Harari
/s/ MIIN WU Director September 18, 2003
- ----------------
Miin Wu
40
/s/N.D. REDDY Director September 18, 2003
- ----------------
N.D. Reddy
/s/ ZEHAVA SIMON Director September 18, 2003
- ----------------
Zehava Simon
/s/ HANS ROHRER Director September 18, 2003
- ----------------
Hans Rohrer
AUTHORIZED REPRESENTATIVE IN THE UNITED STATES September 18, 2003
Tower Semiconductor USA
By:/s/Harold Blomquist
----------------------
Harold Blomquist
Chief Executive Officer
41
EXHIBIT INDEX
EXHIBIT
NUMBERS DESCRIPTION OF DOCUMENT
------- -----------------------
*4.1 Memorandum of Association of Registrant
**4.2 Articles of Association of Registrant
***4.3 Form of Warrant Agreement between the Registrant and American Stock (including form
of Warrant Certificate)
5.1 Opinion of Yigal Arnon & Co.
23.1 Consent of Yigal Arnon & Co. (contained in their opinion constituting Exhibit 5.1)
23.2 Consent of Brightman Almagor & Co.
24 Power of Attorney (included on signature page hereof)
- ----------
* Incorporated by reference to Exhibit No. 3.1 of the Registrant's
Registration Statement on Form F-1, File No. 33-83126.
** Incorporated by reference to Exhibit 1.1 to the registrant's Annual
Report on Form 20-F for the year ended December 31, 2000.
*** Incorporated by reference to Exhibit 4.2 to the registrant's
registration statement on Form F-2 (SEC File No. 333-97043).
42
EXHIBIT 5.1
YIGAL ARNON & CO.
ADVOCATES AND NOTARY
TEL AVIV September 18, 2003
Ref. YA Opinion
Direct Dial: 972-3-608-7856
Direct Fax: 972-3-608-7713 or -7714
E-mail: DavidS@arnon.co.il
Tower Semiconductor Ltd.
P.O. Box 619
Migdal Haemek, Israel, 23105
Ladies and Gentlemen:
We have acted as Israeli counsel to Tower Semiconductor Ltd. (the
"Company"), a corporation organized under the laws of the State of Israel. As
such, we have participated in the preparation of the Company's registration
statement on Form F-3 (the "Registration Statement") relating to the
registration under the United States Securities Act of 1933, as amended, of (i)
7,086,037 Ordinary Shares, par value NIS 1.0 per share (the "Shares"); (ii)
warrants exercisable into 3,188,715 Ordinary Shares, par value NIS 1.0 per share
(the "Warrants"); (iii) 3,188,715 Ordinary Shares, par value NIS 1.0 per share
issuable upon the exercise of the Warrants (the "Warrant Shares"; (iv) 5,367
Ordinary Shares, par value NIS 1.0 per share issuable upon the exercise of the
warrants issued to public in connection with a rights offering (the "Public
Warrant Shares") and (v) 400,000 Ordinary Shares, par value NIS 1.0 per share
issuable upon the exercise of the warrants issued to a contractor of the Company
(the "Contractor Warrant Shares"; the Warrant Shares, Public Warrant Shares and
Contractor Warrant Shares, shall collectively be referred to as the "Warrants
Shares").
As counsel to the Company in Israel, we have examined copies of the
Memorandum of Association and the Articles of Association, as amended, of the
Company and such corporate records, instruments, and other documents relating to
the Company and such matters of law as we have considered necessary or
appropriate for the purpose of rendering this opinion. In such examination, we
have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, and the conformity to authentic
originals of all documents submitted to us as copies.
Based on the foregoing, we advise you that in our opinion:
1. The Shares and Warrants are duly authorized, legally issued, fully
paid and non-assessable.
YIGAL ARNON & CO. - 2 -
2. The Warrants Shares, if and when paid for and issued in accordance
with the terms and conditions of the exercise of the Warrants, will be
duly authorized, legal issued, fully paid and nonassesable.
We are members of the Israeli bar, and the opinions expressed herein are
limited to questions arising under the laws of the State of Israel, and we
disclaim any opinion whatsoever with respect to matters governed by the laws of
any other jurisdiction.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of our name in the Registration Statement under the
caption "Legal Matters."
Very truly yours,
/s/Yigal Arnon & Co.
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement of
Tower Semiconductor Ltd. (the "Company"), on Form F-3 for the registration of
10,680,119 of its ordinary shares and warrants for the purchase of 3,188,715 of
its ordinary shares, of our auditor's report dated February 24, 2003 relating to
the consolidated financial statements of the Company as of December 31, 2002 and
for the year then ended, appearing in the Company's Report on Form 20-F for the
year 2002, and to the reference to us under the heading "Experts" in any
prospectus included in such Registration Statement.
/s/Brightman Almagor & Co.
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Certified Public Accountants
A member of Deloitte Touche Tohmatsu
Tel Aviv, Israel
September 16, 2003