UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005 Commission File number: 0-24790
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TOWER SEMICONDUCTOR LTD.
(Exact name of registrant as specified in its charter and translation of
registrant's name into English)
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ISRAEL
(Jurisdiction of incorporation or organization)
RAMAT GAVRIEL INDUSTRIAL PARK
P.O. BOX 619, MIGDAL HAEMEK, ISRAEL 23105
(Address of principal executive offices)
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SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Ordinary Shares, par value New Israeli Shekels 1.00 per share
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(Title of Class)
Warrants
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(Title of Class)
Convertible Debentures
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(Title of Class)
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO
SECTION 15(D) OF THE ACT: None
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report: 66,932,056 Ordinary Shares
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes [_] No [X]
If this report is an annual or transition report, indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934.
Yes [_] No [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One):
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 [_] Item 18 [X]
If this is an annual report, indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
ii
This annual report on Form 20-F includes certain "forward-looking"
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. The use of the words "projects," "expects," "may," "plans" or "intends,"
or words of similar import, identifies a statement as "forward-looking." There
can be no assurance, however, that actual results will not differ materially
from our expectations or projections. Factors that could cause actual results to
differ from our expectations or projections include the risks and uncertainties
relating to our business described in this annual report at "Item 3. Risk
Factors."
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We have prepared our consolidated financial statements in United States
dollars and in accordance with accounting principles generally accepted in
Israel ("Israeli GAAP"). Israeli GAAP varies in certain significant respects
from accounting principles generally accepted in the United States of America
("U.S. GAAP"). The effect of the application of the latter on the financial
position and results of operations as of the dates and for the years presented
herein is summarized in Note 20 to our consolidated financial statements
included herein. All references herein to "dollars" or "$" are to United States
dollars, and all references to "Shekels" or "NIS" are to New Israeli Shekels.
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Manufacturing or production capacity refers to installed equipment capacity
in our facilities and is a function of the process technology and product mix
being manufactured because certain processes require more processing steps than
others. All information herein with respect to the wafer capacity of our
manufacturing facilities is based upon our estimate of the effectiveness of the
manufacturing equipment and processes in use or expected to be in use during a
period and the actual or expected process technology mix for such period. Unless
otherwise specifically stated, all references herein to "wafers" in the context
of capacity in Fab 1 are to 150-mm wafers and in Fab 2 are to 200-mm wafers.
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MICROFLASH(R) is a registered trademark of Tower and N-ROM(TM) is a
trademark of Saifun Semiconductor Ltd.
i
TABLE OF CONTENTS
PART 1
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS 1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 1
ITEM 3. KEY INFORMATION 1
ITEM 4. INFORMATION ON THE COMPANY 21
ITEM 4A. UNRESOLVED STAFF COMMENTS 42
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 42
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 61
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 72
ITEM 8. FINANCIAL INFORMATION 74
ITEM 9. THE OFFER AND LISTING 75
ITEM 10. ADDITIONAL INFORMATION 76
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 86
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 93
PART II
ITEM 13. DEFAULTS, DIVIDEND AVERAGES AND DELINQUENCIES 90
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS 90
ITEM 15. CONTROLS AND PROCEDURES 90
ITEM 16. [RESERVED] 90
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 91
ITEM 16B. CODE OF ETHICS 91
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 91
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FROM AUDIT COMMITTEES 92
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PARTIES 92
PART III
ITEM 17. FINANCIAL STATEMENTS 92
ITEM 18. FINANCIAL STATEMENTS 92
ITEM 19. EXHIBITS 92
ii
PART I.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
This section presents our selected historical financial data. You should
carefully read the financial statements included in this annual report,
including the notes to the financial statements. The selected data in this
section is not intended to replace the financial statements.
We derived the selected statement of operations data and other financial
data for the years ended December 31, 2005, 2004 and 2003, and selected balance
sheet data as of December 31, 2005 and 2004 from the audited financial
statements in this annual report. Those financial statements were prepared in
accordance with Israeli GAAP and audited by Brightman Almagor & Co., a member
firm of Deloitte Touche Tohmatsu, independent registered public accounting firm.
We derived the selected statement of operations data and other financial data
for the years ended December 31, 2002 and 2001 and the selected balance sheet
data as of December 31, 2003, 2002 and 2001 from our audited financial
statements that are not included in this annual report, which were prepared in
accordance with Israeli GAAP. The differences between statements of operations
and balance sheet data in accordance with US GAAP and the respective data in
accordance with Israeli GAAP are presented below. See also note 20 to our
audited financial statements in this annual report. Our management believes that
the financial statements contain all adjustments needed to present fairly the
information included therein.
1
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2005 2004 2003 2002 2001
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STATEMENT OF (in thousands, except share data)
OPERATIONS DATA IN
ACCORDANCE WITH ISRAELI
GAAP:
Revenues $ 101,991 $ 126,055 $ 61,368 $ 51,801 $ 52,372
Cost of Sales 238,358 228,410 122,395 67,022 76,733
--------- --------- --------- --------- ---------
Gross loss (136,367) (102,355) (61,027) (15,221) (24,361)
Research and development 16,029 17,053 20,709 17,031 9,556
Marketing, general and
administrative 17,418 21,297 22,615 17,091 14,489
--------- --------- --------- --------- ---------
Operating loss (169,814) (140,705) (104,351) (49,343) (48,406)
Financing income
(expense), net (35,651) (29,745) (9,826) (2,104) 1,465
Other income (expense), net 2,383 32,682 (84) 45 8,419
--------- --------- --------- --------- ---------
Loss for the period $(203,082) $(137,768) $(114,261) $ (51,402) $ (38,522)
========= ========= ========= ========= =========
Basic loss per ordinary
share $ (3.06) $ (2.13) $ (2.45) $ (1.63) $ (1.92)
========= ========= ========= ========= =========
OTHER FINANCIAL DATA:
Depreciation and
amortization $ 144,852 $ 121,067 $ 54,611 $ 18,821 $ 21,721
Capital expenditures
excluding Investment
Center grants $ 30,239 $ 172,617 $ 164,187 $ 243,431 $ 364,347
2
AS OF DECEMBER 31,
----------------------------------------------------------
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
(in thousands)
SELECTED BALANCE SHEET DATA IN
ACCORDANCE WITH ISRAELI
GAAP:
Cash and cash equivalents,
including short-term
deposits and designated cash $ 38,998 $ 81,457 $ 56,490 $ 69,695 $ 33,202
Working capital (6,028) 63,591 50,492 21,927 (16,335)
Total assets 678,686 847,508 788,335 716,261 472,054
Current maturities of long-term
debt and other short-term
debt 21,103 -- -- 4,000 14,000
Current maturities of
convertible debentures 6,453 -- -- -- --
Long-term debt from banks 497,000 497,000 431,000 253,000 115,000
2002 convertible debentures and
2005 convertible debentures 44,851 26,651 25,783 24,121 --
Long-term liabilities in
respect of customers'
advances 59,621 64,428 46,347 47,246 17,910
Shareholders' equity (deficit) (30,067) 167,980 229,457 298,334 252,805
Weighted average number of
ordinary shares outstanding
(*) 66,371 64,717 46,710 31,523 20,020
Number of shares issued and
outstanding (*) 66,932 65,700 51,696 43,436 24,997
(*) Net of 1,300,000 Ordinary Shares held by us through a trustee as of each
date presented.
3
AS OF DECEMBER 31,
--------- --------- --------- --------- ---------
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
(in thousands)
RECONCILIATION TO US GAAP:
TOTAL ASSETS
According to Israel GAAP $ 678,686 $ 847,508 $ 788,335 $ 716,261 $ 472,054
The effect of:
Presentation of long-term
liabilities in respect
of employees 13,658 16,350 14,607 12,368 10,334
Hedging activities (1,524) (4,619) (5,947) (5,727) (4,564)
Sale of convertible
debentures (196) (196) (196) (196) --
--------- --------- --------- --------- ---------
According to US GAAP $ 690,624 $ 859,043 $ 796,799 $ 722,706 $ 477,824
========= ========= ========= ========= =========
SHAREHOLDERS' EQUITY
(DEFICIT)
According to Israel GAAP $ (30,067) $ 167,980 $ 229,457 $ 298,334 $ 252,805
The effect of:
Hedging activities (1,524) (7,025) (15,867) (17,807) (8,169)
Proceeds on account of
share capital -- -- (16,428) -- --
Sale of convertible
debentures(*) 2,363 2,363 2,363 2,363 --
--------- --------- --------- --------- ---------
According to US GAAP $ (29,228) $ 163,318 $ 199,525 $ 282,890 $ 244,636
========= ========= ========= ========= =========
(*) Including mainly the allocation of a portion of the total proceeds from the
sale of securities issued in January 2002.
4
RISK FACTORS
This annual report and statements that we may make from time to time may
contain forward-looking information. There can be no assurance that actual
results will not differ materially from our expectations, statements or
projections. Factors that could cause actual results to differ from our
expectations, statements or projections include the risks and uncertainties
relating to our business described below.
RISKS AFFECTING OUR BUSINESS
IF WE DO NOT CLOSE THE $100 MILLION INVESTMENT OF ISRAEL CORP. AND A DEFINITIVE
AMENDMENT TO OUR FACILITY AGREEMENT BASED ON THE TERMS OF THE MAY 2006 MOU WITH
OUR BANKS, WE MAY HAVE TO SUSPEND OUR PLAN TO RAMP-UP FAB 2 PRODUCTION CAPACITY,
WHICH WOULD MATERIALLY ADVERSELY AFFECT OUR COMPANY.
We currently expect to have sufficient liquidity at least until the end of
2006 to meet our short-term activities and liabilities. However, if we fail to
close in a timely manner the $100 million investment by Israel Corp. and a
definitive amendment to our facility agreement with our banks based on the May
2006 MOU, we may be required to suspend the implementation of our current plan
to ramp-up Fab 2 production capacity to approximately 24,000 wafers per month
(See "Item 4 - Information on the Company - A. History and Development of the
Company - Recent Developments"), which would materially adversely affect our
company and may cause us to cease our operations.
IF WE DO NOT COMPLETE THE EQUIPMENT INSTALLATION, TECHNOLOGY TRANSFER AND
RAMP-UP OF PRODUCTION IN FAB 2, OUR BUSINESS WILL BE MATERIALLY ADVERSELY
AFFECTED.
Fab 2 production capacity as of May 31, 2006 was approximately 15,000
200-mm wafers per month. In March 2006, our board of directors approved a plan
to ramp-up Fab 2 production capacity to a capacity of approximately 24,000
wafers per month. Depending on the process technology and product mix, when
fully ramped-up, we estimate that Fab 2 will be able to achieve capacity levels
of approximately 40,000 wafers per month. We have not completed the acquisition,
installation, equipping and financing necessary in order for production at our
Fab 2 facility to reach such levels. Our determination as to the timing of the
implementation of the ramp-up plan recently approved by our board of directors
and the increase in Fab 2's production levels is dependent on prevailing and
forecasted market conditions and our ability to fund these increases. We need to
continue to develop new process technologies for Fab 2 in order to suit our
customers' needs. The ramp-up of Fab 2 is a substantial and complex project. We
have and may in the future experience difficulties that are customary in the
installation, functionality and operation of equipment during manufacturing.
Failures or delays in obtaining and installing the necessary equipment,
technology and other resources may delay the completion of the ramp-up of Fab 2
and add to its cost, which would have a material adverse effect on our business
and results of operations.
5
IF WE DO NOT HAVE SUFFICIENT FUNDS TO FULLY EQUIP FAB 2, OUR BUSINESS WILL BE
MATERIALLY ADVERSELY AFFECTED.
Fab 2's cost is estimated to be approximately $1.5 billion, including costs
of construction, equipment, installation, libraries, intellectual property,
technology transfers and other related ramp-up and pre-operation costs. However,
the actual total cost of Fab 2 may exceed our estimates. If we cannot
successfully raise sufficient funding to complete the ramp-up and to fund other
related costs, we may be unable to meet our customers' production demands and as
a result we may lose customers and may not attract new ones. In addition, we
will be required to scale back our equipment purchases and capacity forecasts,
and, as a result, we will not fully utilize the substantial investment made in
constructing Fab 2, which will adversely affect our financial results.
IF THE INVESTMENT CENTER WILL NOT APPROVE OUR REQUEST FOR A NEW EXPANSION
PROGRAM, WE WOULD BE REQUIRED TO SEEK ALTERNATIVE FINANCING SOURCES TO COMPLETE
THE RAMP-UP OF FAB 2, WHICH MAY NOT BE AVAILABLE. OUR NOT COMPLETING INVESTMENTS
IN THE AMOUNT OF $1.25 BILLION BY THE END OF 2005 MAY RESULT IN THE INVESTMENT
CENTER REQUIRING US TO REPAY ALL OR A PORTION OF THE GRANTS ALREADY RECEIVED,
AND IF WE ARE UNABLE TO REFUND SUCH GRANTS, WE MAY HAVE TO CLOSE OUR OPERATIONS.
In connection with Fab 2, we received approval for grants and tax benefits
from the Investment Center of the Israeli Ministry of Industry, Trade and Labor
(Investment Center) under its Approved Enterprise Program. Under the terms of
the approval, we were eligible to receive grants of 20% of up to $1.25 billion
invested in Fab 2 plant and equipment, or an aggregate of up to $250 million. As
of May 31, 2006, we received approximately $161 million in grants from the
Investment Center. Our eligibility to receive grants is with respect to
investments in Fab 2 plant and equipment made by the end of 2005. Any failure by
us to meet the conditions of our grants may result in the cancellation of all or
a portion of our grants to be received and tax benefits and in the Investment
Center requiring us to repay all or a portion of grants already received. We did
not complete investments in the amount of $1.25 billion by the end of 2005,
mainly since we reduced our rate of annual investments as a result of our
decision to slow-down the ramp-up of our Fab 2 facility in order to align our
capital investments with market conditions in the semiconductor industry.
Israeli law limits the ability of the Investment Center to extend this time
limitation, unless approved through an expansion plan. Under Israeli law, our
not completing investments in an amount of $1.25 billion by the end of 2005 may
permit the Investment Center to require us to repay all or a portion of grants
already received. We have been holding discussions with the Investment Center to
achieve satisfactory arrangements to approve a new expansion program to commence
as of January 1, 2006. In 2005, at the Investment Center's request, we submitted
a revised business plan to the Investment Center for the period commencing
January 1, 2006. Currently, we cannot estimate when we will receive a formal
response to our request for a new expansion program to commence as of January 1,
2006 or if the Investment Center will approve our request. If the Investment
Center will not approve our request for a new expansion program, we would be
required to seek alternative financing sources to finance the ramp-up of Fab 2
and if we do not succeed in finding such alternative financing sources, we may
have to close our operations. While there can be no assurance that we will
obtain the Investment Center's approval for the new expansion program, we
believe that it is improbable that the Investment Center would demand that we
repay all or a portion of grants already received due to our not completing
investments in an amount of $1.25 billion by the end of 2005. If we would have
to repay the Investment Center all or a portion of grants already received, we
would need to seek alternative financing sources to refund the grants we
received and if we do not succeed in finding such alternative financing sources,
we may have to close our operations.
6
IF OUR FUTURE OPERATIONS DO NOT INCREASE OR IF WE FAIL TO RAISE ADDITIONAL
FUNDING, WE MAY BE UNABLE TO REPAY OUR DEBT ON A TIMELY BASIS.
There is no assurance that our future operations will increase or that we
will succeed in raising the additional funding required for the completion of
the ramp up of Fab 2 and the repayment of our short-term and long-term debt,
which consists mainly of bank debt, trade accounts payable and convertible
debentures and also includes moneys we may owe to Israel Corp. in connection
with the agreement we signed with it according to which Israel Corp. will order
up to approximately $100 million worth of equipment. As a result, our ramp-up of
Fab 2 may be delayed and we may be unable to repay on time or repay at all our
short-term and long-term debt, which may significantly harm our financial
results or cause us to cease our operations. In accordance with our amended
facility agreement with our banks, under which we have drawn down approximately
$526.7 million as of June 30, 2006, we are required to repay principal in the
amount of approximately $100 million in July 2007 and begin repaying the balance
of the principal amount on a quarterly basis commencing September 2007. We
anticipate that we will not be in compliance with the repayment schedule set
forth in our amended facility agreement. In the event that (i) a definitive
amendment to our facility agreement based on the May 2006 MOU with our banks
will not be signed and closed, (ii) we are otherwise unsuccessful in negotiating
a revised repayment schedule or (iii) our banks do not waive our non-compliance,
pursuant to the terms of our amended facility agreement, our banks may require
us to immediately repay all loans made by them to us, plus penalties, and they
would be entitled to exercise the remedies available to them under our credit
amended facility, including enforcement of their lien against all our assets.
This would have a material adverse effect on our company. In addition, we cannot
assure you we will be successful at negotiating price reductions and
arrangements to slow down or postpone payments to our suppliers and service
providers, or negotiating revised repayment schedules of our other debt, when we
have liquidity problems.
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY AND THE RESULTING PERIODIC
OVERCAPACITY HAVE ADVERSELY AFFECTED OUR BUSINESS IN THE PAST, RESULTING IN A
HISTORY OF LOSSES; DOWNWARD PRICE PRESSURE MAY SERIOUSLY HARM OUR BUSINESS.
The semiconductor industry has historically been highly cyclical.
Historically, companies in the semiconductor industry have expanded aggressively
during periods of increased demand. This expansion has frequently resulted in
overcapacity and excess inventories, leading to rapid erosion of average sale
prices. We expect this pattern to repeat itself in the future. The overcapacity
and downward price pressures characteristic of a prolonged downturn in the
semiconductor market may not allow us to operate at a profit, even at full
utilization, and could seriously harm our financial results and business.
7
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT TO OPERATE AT A LOSS FOR THE
FORESEEABLE FUTURE; OUR FACILITIES MUST OPERATE AT HIGH UTILIZATION RATES FOR US
TO BE PROFITABLE.
We have operated at a loss for the last number of years. Because fixed
costs represent a substantial portion of the operating costs of semiconductor
manufacturing operations, we must operate our facilities at high utilization
rates for us to be profitable. We began construction of Fab 2 in 2001 and Fab 2
operations began in 2003. Our losses since 2003 are due primarily to significant
depreciation and amortization expenses related mainly to Fab 2, as well as
financing and operating expenses which have not yet been offset by a sufficient
increase in the level of our sales. If we do not succeed in operating our
facilities at high utilization rates, we expect to operate at a loss for the
foreseeable future, which may adversely affect our business and company.
OUR OPERATING RESULTS FLUCTUATE FROM QUARTER TO QUARTER WHICH MAKES IT DIFFICULT
TO PREDICT OUR FUTURE PERFORMANCE.
Our revenues, expenses and operating results have varied significantly in
the past and may fluctuate significantly from quarter to quarter in the future
due to a number of factors, many of which are beyond our control. These factors
include, among others:
o The cyclical nature of both the semiconductor industry and the markets
served by our customers;
o Changes in the economic conditions of geographical regions where our
customers and their markets are located;
o Shifts by integrated device manufacturers (IDMs) and customers between
internal and outsourced production;
o Inventory and supply chain management of our customers;
o The loss of a key customer, postponement of an order from a key
customer, failure of a key customer to pay accounts receivables in a
timely manner or the financial condition of our customers;
o The occurrence of accounts receivables write-offs;
o The rescheduling or cancellation of large orders or planned capital
expenditures;
o Our ability to satisfy our customers' demand for quality and timely
production;
o The timing and volume of orders relative to our available production
capacity;
o Our ability to obtain raw materials and equipment on a timely and
cost-effective basis;
o Environmental events or industrial accidents such as fires or
explosions;
o Our susceptibility to intellectual property rights disputes;
o Our ability to continue with existing and to enter into new
partnerships and technology and supply alliances on mutually
beneficial terms;
o Actual capital expenditures exceeding planned capital expenditures;
8
o Interest and currency rate fluctuations that may not be adequately
hedged;
o Technological changes and short product life cycles; and
o Timing for designing and the qualification of new products.
Due to the factors noted above and other risks discussed in this section,
many of which are beyond our control, you should not rely on quarter to quarter
comparisons to predict our future performance. Unfavorable changes in any of the
above factors may seriously harm our company.
THE LACK OF A SIGNIFICANT BACKLOG RESULTING FROM OUR CUSTOMERS NOT PLACING
PURCHASE ORDERS FAR IN ADVANCE MAKES IT DIFFICULT FOR US TO FORECAST OUR
REVENUES IN FUTURE PERIODS.
Our customers generally do not place purchase orders far in advance, partly
due to the cyclical nature of the semiconductor industry. As a result, we do not
typically operate with any significant backlog. The lack of a significant
backlog makes it difficult for us to forecast our revenues in future periods.
Moreover, since our expense levels are based in part on our expectations of
future revenues, we may be unable to adjust costs in a timely manner to
compensate for revenue shortfalls. We expect that in the future our revenues in
any quarter will continue to be substantially dependent upon purchase orders
received in that quarter and in the immediately preceding quarter. We cannot
assure you that any of our customers will continue to place orders with us in
the future at the same levels as in prior periods.
OUR SALES CYCLES MAY BE LONG AND, AS A RESULT, ORDERS RECEIVED MAY NOT MEET OUR
EXPECTATIONS WHICH MAY ADVERSELY AFFECT OUR OPERATING RESULTS.
Our sales cycles, which measure the time between our first contact with a
customer and the first shipment of product orders to the customer, vary
substantially and may last as long as two years or more, particularly for new
technologies. In addition, even after we make initial shipments of prototype
products, it may take several more months to reach full production of the
product. As a result of these long sales cycles, we may be required to invest
substantial time and incur significant expenses in advance of the receipt of any
product order and related revenue. If orders ultimately received differ from our
expectations with respect to the product, volume, price or other items, our
operating results may be adversely affected.
DEMAND FOR OUR FOUNDRY SERVICES IS DEPENDENT ON THE DEMAND IN OUR CUSTOMERS' END
MARKETS.
We are ramping-up Fab 2 based on our expectations of customer demand and
our financial resources. In order for demand for our wafer fabrication services
to increase, the markets for the end products using these services must develop
and expand. For example, the success of our imaging process technologies will
depend, in part, on the growth of markets for certain image sensor product
applications. Because our services may be used in many new applications, it is
difficult to forecast demand. If demand is lower than expected, we may have
excess capacity, which may adversely affect our financial results. If demand is
higher than expected, we may be unable to fill all of the orders we receive,
which may result in the loss of customers and revenues.
9
IF WE DO NOT ATTRACT ADDITIONAL CUSTOMERS, OUR BUSINESS MAY BE ADVERSELY
AFFECTED.
During the three months ended March 31, 2006, approximately 55% of our
business was generated by four significant customers that contributed 18%, 14%,
12%, and 11% of our revenues, respectively. We expect to continue to receive a
significant portion of our revenue from a limited number of customers in 2006.
Loss or cancellation of business from, or decreases in, the sales volume or
sales prices to our significant customers, could seriously harm our financial
results, revenues and business. Since the sales cycle for our services typically
exceeds one year, if our customers order significantly fewer wafers than
forecasted, we will have excess capacity that we may not be able to sell in a
short period of time, resulting in lower utilization of our facilities. We may
have to reduce prices in order to try to sell the excess capacity. In addition
to the revenue loss that could result from unused capacity or lower sales
prices, we might have difficulty adjusting our costs to reflect the lower
revenues in a timely manner, which could harm our financial results.
WE DEPEND ON A RELATIVELY SMALL NUMBER OF PRODUCTS FOR A SIGNIFICANT PORTION OF
OUR REVENUES.
From time to time, a significant portion of our revenue is generated from a
small number of very high volume products that are shipped to volatile
consumer-oriented markets. The volume of orders of such products may adversely
change or demand for such products may be abruptly discontinued. We expect that
in the foreseeable future we will continue to be dependent upon a relatively
limited number of products for a significant portion of our revenue due to the
nature of our business. We cannot assure you that revenue generated from these
products, individually or in the aggregate, will reach or exceed historical
levels in any future period. A decrease in the price of, or demand for, any of
these products could negatively impact our financial results.
IF WE DO NOT RECEIVE ORDERS FROM OUR WAFER PARTNERS WE MAY HAVE EXCESS CAPACITY.
We have committed a portion of our Fab 2 capacity for future orders. During
the ramp-up of Fab 2, our capacity commitments to our wafer partners, which are
SanDisk Corporation, Alliance Semiconductor Corporation, Macronix International
Co. Ltd. and Quicklogic Corporation, are limited to approximately 50% of our Fab
2 capacity. Parties to whom we have committed capacity are generally not
obligated to utilize or pay for all or any portion of their allocated capacity,
and generally provide and confirm their orders to us less than one month before
the production start date. If these parties do not place orders with us, and if
we are unable to fill such unutilized capacity, our financial results may be
adversely affected.
IF WE DO NOT MAINTAIN AND DEVELOP OUR TECHNOLOGY PROCESSES AND SERVICES, WE WILL
LOSE CUSTOMERS AND MAY NOT BE ABLE TO ATTRACT NEW ONES.
The semiconductor market is characterized by rapid change, including the
following:
o rapid technological developments;
o evolving industry standards;
o changes in customer and product end user requirements;
10
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 introducing to production specialized process technologies. Our
ability to achieve and maintain profitable operations depends on the successful
development and introduction to production of these processes, which we may not
achieve in a timely manner or at all.
IF WE DO NOT COMPETE EFFECTIVELY, WE WILL LOSE BUSINESS TO OUR COMPETITORS.
The semiconductor foundry industry is highly competitive. We compete with
more than ten independent dedicated foundries, the majority of which are located
in Asia-Pacific, including new foundries based in Taiwan, China, Korea and
Malaysia, and with over twenty integrated semiconductor and end-product
manufacturers that allocate a portion of their manufacturing capacity to foundry
operations. The foundries with which we compete benefit from their close
proximity to other companies involved in the design and manufacture of
integrated circuits, or ICs. If we do not compete effectively, our business and
results of operations may be adversely affected. Many of our competitors may
have one or more of the following competitive advantages over us:
o greater manufacturing capacity;
o multiple and more advanced manufacturing facilities;
o more advanced technological capabilities;
o a more diverse and established customer base;
o greater financial, marketing, distribution and other resources;
o a better cost structure; and/or
o better operational performance in cycle time and yields.
WE HAVE A LARGE AMOUNT OF DEBT WHICH COULD HAVE SIGNIFICANT NEGATIVE
CONSEQUENCES.
We have a large amount of long-term debt, which could have significant
negative consequences. As of June 30, 2006, we had approximately $526.7 million
of bank debt and approximately $90 million of convertible debt (including
approximately $37 million of convertible debt issued on June 29, 2006). Our
current and future indebtedness could have significant negative consequences,
including:
o requiring the dedication of a substantial portion of our expected cash
flow from operations to service our indebtedness;
o increasing our vulnerability to general adverse economic and industry
conditions;
11
o limiting our ability to obtain additional financing;
o limiting our flexibility in planning for, or reacting to, changes in
our business and the industry in which we compete;
o placing us at a competitive disadvantage to less leveraged competitors
and competitors that have better access to capital resources; and/or
o affecting our ability to make interest payments and other required
debt service on our indebtedness.
IF WE FAIL TO SATISFY THE COVENANTS SET FORTH IN OUR AMENDED CREDIT FACILITY,
OUR BANKS WILL BE ABLE TO CALL OUR LOANS.
Our credit facility, under which we have drawn down approximately $526.7
million as of June 30, 2006, requires that we comply with certain financial,
capital raising and production milestone covenants. In the July 2005 amendment
to our credit facility agreement, our banks agreed to amend our financial ratios
and covenants through the third quarter of 2006. We anticipate that we will not
be in compliance with all of the financial ratios and covenants under the
amended facility agreement commencing in the fourth quarter of 2006. In the
event that (i) a definitive amendment to our facility agreement based on the May
2006 MOU with our banks will not be signed and closed, (ii) we are otherwise
unsuccessful in negotiating revised financial, capital raising and production
milestone covenants or (iii) our banks do not waive our non-compliance, pursuant
to the terms of our amended facility agreement our banks may require us to
immediately repay all loans made by them to us, plus penalties, and they would
be entitled to exercise the remedies available to them under the credit
facility, including enforcement of their lien against all our assets. This would
have a material adverse effect on our company.
ISRAELI BANKING LAWS MAY IMPOSE RESTRICTIONS ON THE TOTAL DEBT THAT WE MAY
BORROW FROM OUR BANKS.
Pursuant to an amendment to a directive published by the Israel Supervisor
of Banks, effective March 31, 2004, we may be deemed part of a group of
borrowers comprised of the Ofer Brothers Group, Israel Corp., and other
companies which are also included in such group of borrowers pursuant to the
directive, including companies under the control or deemed control of these
entities. The directive imposes limitations on amounts that banks may lend to
borrowers or groups of borrowers. Should our banks exceed these limitations,
they may limit our ability to borrow other money in the future and may require
us to return some or all of our outstanding borrowings (which were approximately
$526.7 million as of June 30, 2006), which may have a material adverse effect on
our business, financial condition and results of operations.
12
IF WE EXPERIENCE DIFFICULTY IN ACHIEVING ACCEPTABLE DEVICE YIELDS, PRODUCT
PERFORMANCE AND DELIVERY TIMES AS A RESULT OF MANUFACTURING PROBLEMS, OUR
BUSINESS WILL BE ADVERSELY AFFECTED.
The process technology for the manufacture of semiconductor wafers is
highly complex, requires advanced and costly equipment and is constantly being
modified in an effort to improve device yields, product performance and delivery
times. Microscopic impurities such as dust and other contaminants, difficulties
in the production process, defects in the key materials and tools used to
manufacture a wafer and other factors can cause wafers to be rejected or
individual semiconductors on specific wafers to be non-functional. We have from
time to time experienced production difficulties that have caused delivery
delays or returns and lower than expected device yields. We may also experience
difficulty achieving acceptable device yields, product performance and product
delivery times in the future as a result of manufacturing problems. Any of these
problems could seriously harm our financial results and business.
IF WE ARE UNABLE TO PURCHASE EQUIPMENT AND RAW MATERIALS, WE MAY NOT BE ABLE TO
MANUFACTURE OUR PRODUCTS IN A TIMELY FASHION, WHICH MAY RESULT IN A LOSS OF
EXISTING AND POTENTIAL NEW CUSTOMERS.
To complete the ramp-up of our Fab 2 facility and to maintain the quality
of production in our facilities, we must procure new equipment. In periods of
high market demand, the lead times from order to delivery of manufacturing
equipment could be as long as 12 to 18 months. In addition, our manufacturing
processes use many raw materials, including silicon wafers, chemicals, gases and
various metals, and require large amounts of fresh water and electricity.
Manufacturing equipment and raw materials generally are available from several
suppliers. In many instances, however, we purchase equipment and raw materials
from a single source. Shortages in supplies of manufacturing equipment and raw
materials could occur due to an interruption of supply or increased industry
demand. Any such shortages could result in production delays that could have a
material adverse effect on our business and financial condition.
OUR EXPOSURE TO CURRENCY EXCHANGE AND INTEREST RATE FLUCTUATIONS MAY INCREASE
OUR COST OF OPERATIONS.
Almost all of our cash generated from operations and from our financing and
investing activities is denominated in U.S. dollars and New Israeli Shekels, or
NIS. Our expenses and costs are denominated in NIS, U.S. dollars, Japanese Yen
and Euros. We are, therefore, exposed to the risk of currency exchange rate
fluctuations.
Our borrowings under our Fab 2 credit facility provide for interest based
on a floating LIBOR rate, thereby exposing us to interest rate fluctuations.
Furthermore, if our banks incur increased costs in financing our Fab 2 credit
facility due to changes in law or the unavailability of foreign currency, our
banks may exercise their right to increase the interest rate on our Fab 2 credit
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
operating and financing activities.
13
WE DEPEND ON INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES AND FAILURE TO
MAINTAIN OR ACQUIRE LICENSES COULD HARM OUR BUSINESS.
We depend on third party intellectual property in order for us to provide
foundry and design services to our clients. If problems or delays arise with
respect to the timely development, quality and provision of such intellectual
property to us, our customers' design and production could be delayed, resulting
in underutilization of our capacity. If any of our third party intellectual
property right vendors go out of business, liquidate, merge with, or are
acquired by, another company that discontinues the vendor's previous line of
business, or if we fail to maintain or acquire licenses to such intellectual
property for any other reason, our business may be adversely affected. In
addition, license fees and royalties payable under these agreements may impact
our margins and operating results.
FAILURE TO COMPLY WITH THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES OR
DEFEND OUR INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR BUSINESS.
Our ability to compete successfully depends on our ability to operate
without infringing on the proprietary rights of others and defend our
intellectual property rights. Because of the complexity of the technologies used
and the multitude of patents, copyrights and other overlapping intellectual
property rights, it is often difficult for semiconductor companies to determine
infringement. Therefore, the semiconductor industry is characterized by frequent
litigation regarding patent, trade secret and other intellectual property
rights. There are no lawsuits currently pending against us regarding the
infringement of patents or intellectual property rights of others nor are we
currently a plaintiff in any such action against other parties. However, we have
been subject to such claims in the past, all of which have been resolved through
license agreements, the terms of which have not had a material effect on our
business. One of these agreements expired at the end of 2005, and we are
currently negotiating its renewal. If we are unable to renew it on similar
terms, we may have to agree to less favorable terms or consider other
alternatives, including designing around certain processes.
Because of the nature of the industry, we may continue to be a party to
infringement claims in the future. In the event any third party were to assert
infringement claims against us or our customers, we may have to consider
alternatives including, but not limited to:
o negotiating cross-license agreements;
o seeking to acquire licenses to the allegedly infringed patents, which
may not be available on commercially reasonable terms, if at all;
o discontinuing use of certain process technologies, architectures, or
designs, which could cause us to stop manufacturing certain integrated
circuits if we were unable to design around the allegedly infringed
patents;
o fighting the matter in court and paying substantial monetary damages
in the event we lose; or
o seeking to develop non-infringing technologies, which may not be
feasible.
Any one or several of these developments could place substantial financial
and administrative burdens on us and hinder our business. Litigation, which
could result in substantial costs to us and diversion of our resources, may also
be necessary to enforce our patents or other intellectual property rights or to
defend us or our customers against claimed infringement of the rights of others.
If we fail to obtain certain licenses and if litigation relating to alleged
patent infringement or other intellectual property matters occurs, it could
prevent us from manufacturing particular products or applying particular
technologies, which could reduce our opportunities to generate revenues.
14
As of March 31, 2006, we held 58 patents worldwide. We intend to continue
to file patent applications when appropriate. The process of seeking patent
protection may take a long time and be expensive. We cannot assure you that
patents will be issued from pending or future applications or that, if patents
are issued, they will not be challenged, invalidated or circumvented or that the
rights granted under the patents will provide us with meaningful protection or
any commercial advantage. In addition, we cannot assure you that other countries
in which we market our services and products will protect our intellectual
property rights to the same extent as the United States. Further, we cannot
assure you that we will at all times enforce our patents or other intellectual
property rights or that courts will uphold our intellectual property rights, or
enforce the contractual arrangements that we have entered into to protect our
proprietary technology, which could reduce our opportunities to generate
revenues.
WE COULD BE SERIOUSLY HARMED BY FAILURE TO COMPLY WITH ENVIRONMENTAL
REGULATIONS.
Our business is subject to a variety of laws and governmental regulations
in Israel relating to the use, discharge and disposal of toxic or otherwise
hazardous materials used in our production processes. If we fail to use,
discharge or dispose of hazardous materials appropriately, or if applicable
environmental laws or regulations change in the future, we could be subject to
substantial liability or could be required to suspend or adversely modify our
manufacturing operations.
WE ARE SUBJECT TO THE RISK OF LOSS DUE TO FIRE BECAUSE THE MATERIALS WE USE IN
OUR MANUFACTURING PROCESSES ARE HIGHLY FLAMMABLE.
We use highly flammable materials such as silane and hydrogen in our
manufacturing processes and are therefore subject to the risk of loss arising
from fires. The risk of fire associated with these materials cannot be
completely eliminated. We maintain insurance policies to reduce losses caused by
fire, including business interruption insurance. If any of our fabs were to be
damaged or cease operations as a result of a fire, or if our insurance proves to
be inadequate, it would reduce our manufacturing capacity and revenues.
POSSIBLE PRODUCT RETURNS COULD HARM OUR BUSINESS.
Products manufactured by us may be returned within specified periods if
they are defective or otherwise fail to meet customers' prior agreed upon
specifications. Product returns in excess of established provisions may have an
adverse effect on our business and financial condition.
WE MAY BE REQUIRED TO REPAY GRANTS TO THE INVESTMENT CENTER THAT WE RECEIVED IN
CONNECTION WITH FAB 1.
We received grants and tax benefits for Fab 1 under the government of
Israel Approved Enterprise program. As of December 31, 2001, we completed our
investments under our Fab 1 program and are no longer entitled to any further
investment grants for future capital investments in Fab 1. We have agreed that
if we do not achieve Fab 1 revenues of $90 million for 2003 and $100 million for
2004 and maintain at Fab 1 at least 600 employees for 2003 and 625 employees for
2004, subject to prevailing market conditions, we will, if demanded by the
Investment Center, be required to repay the Investment Center up to
approximately $2.5 million. Since our actual level of Fab 1 revenues and
employees for 2003 and 2004 were not in compliance with the above mentioned
levels, we may be required to repay the Investment Center up to approximately
$2.5 million.
15
WE ARE SUBJECT TO RISKS RELATED TO OUR INTERNATIONAL OPERATIONS.
Since 2003, we have made substantial sales to customers located in
Asia-Pacific and in Europe. Because of our international operations, we are
vulnerable to the following risks:
o we price our products primarily in U.S. dollars; if the Euro, Yen or
other currencies weaken relative to the U.S. dollar, our products may
be relatively more expensive in these regions, which could result in a
decrease in our sales;
o the need to comply with foreign government regulation;
o general geopolitical risks such as political and economic instability,
potential hostilities and changes in diplomatic and trade
relationships;
o natural disasters affecting the countries in which we conduct our
business, such as the earthquakes experienced in China, Japan and
Taiwan;
o reduced sales to our customers or interruption in our manufacturing
processes in Asia Pacific that may arise from regional issues in Asia;
o imposition of regulatory requirements, tariffs, import and export
restrictions and other barriers and restrictions;
o adverse tax rules and regulations;
o weak protection of our intellectual property rights; and
o delays in product shipments due to local customs restrictions.
OUR BUSINESS COULD SUFFER IF WE ARE UNABLE TO RETAIN AND RECRUIT QUALIFIED
PERSONNEL.
We depend on the continued services of our executive officers, senior
managers and skilled technical and other personnel. Our business could suffer if
we lose the services of some of these personnel and we cannot find and
adequately integrate replacement personnel into our operations in a timely
manner. We seek to recruit highly qualified personnel and there is intense
competition for the services of these personnel in the semiconductor industry.
Competition for personnel may increase significantly in the future as new
fabless semiconductor companies as well as new semiconductor manufacturing
facilities are established. We may need to review employee compensation
competitiveness with the purpose of retaining our existing officers and
employees and attracting and retaining additional personnel, including granting
large packages of options to purchase our ordinary shares.
16
RISKS RELATED TO OUR SECURITIES
OUR STOCK PRICE MAY BE VOLATILE IN THE FUTURE.
The stock market, in general, has experienced extreme volatility that often
has been unrelated to the operating performance of particular companies. In
particular, the stock prices for many companies in the semiconductor industry
have experienced wide fluctuations, which have often been unrelated to the
operating performance of such companies. These broad market and industry
fluctuations may adversely affect the market price of our ordinary shares,
regardless of our actual operating performance.
In addition, it is possible that in some future periods our operating
results may be below the expectations of public market analysts and investors.
In this event, the price of our securities may under perform or fall.
ISSUANCE OF ADDITIONAL SHARES PURSUANT TO OUR FAB 2 FINANCING ARRANGEMENTS AND
OPTIONS GRANTED TO OUR FAB 2 BUILDING CONTRACTOR, EMPLOYEES AND DIRECTORS MAY
DILUTE THE INTEREST OF OUR SHAREHOLDERS.
In connection with Fab 2, we have issued as of May 19, 2006, approximately
65.3 million ordinary shares to our wafer and equity partners and other
shareholders. In December 2003, we issued to our banks and to one of our
shareholders warrants exercisable into 896,596 and 58,906 ordinary shares,
respectively, with an exercise price of $6.17. In addition, in connection with
the July 2005 amendment to our credit facility agreement, we issued warrants to
our banks exercisable into an aggregate 8,264,464 ordinary shares with an
exercise price of $1.21, one-half of which shall only be exercisable if our
banks agree to reschedule the repayment dates of the loans made to us under the
July 2005 amendment. As of May 19, 2006, up to approximately 51.4 million
additional ordinary shares may be issued upon the conversion of our 2002
outstanding convertible debentures, 2005 outstanding convertible debentures and
upon exercise of warrants held by some of our shareholders and others. With the
completion of the TASE offering described below, securities convertible into
and/or exercisable for the purchase of an additional approximately 41 million
ordinary shares have also been issued.
In addition, as of April 30, 2006, we had outstanding employee and
directors options to purchase up to approximately 13 million shares at a
weighted average exercise price of $4.15. We have also entered into a number of
agreements which may result in our issuing large numbers of shares, particularly
if we complete the transactions contemplated by these agreements at a time when
our share price is low. For example, we have agreed that our three major wafer
partners may elect to convert, on a quarterly basis through 2006, wafer credits
we have issued to them into our ordinary shares rather than use these credits to
reduce their cash payments for wafers manufactured in Fab 2, based on the
average trading price of our ordinary shares during the 15 consecutive trading
days preceding the relevant quarter. As of May 19, 2006, we had issued
approximately 2.2 million of our ordinary shares to SanDisk Corporation and
approximately 2.6 million ordinary shares to Alliance Semiconductor upon
conversion of approximately $7.6 million of wafer credits. Following such
conversions, an aggregate of approximately $30 million of credits issued to our
three major wafer partners were outstanding as of May 19, 2006.
17
The MOU we signed with our banks contemplates the issuance of 51,973,684 of
our ordinary shares and, in connection thereto, Israel Corp. committed to our
banks to invest $100 million in consideration for 65,789,474 of our ordinary
shares. Our audit committee and board of directors approved, subject to
shareholder approval, the grant of options to our CEO, in addition to the
options granted to him in April 2005, such that the CEO will hold options to
purchase shares that represent 4% of our shares on a fully diluted basis. Our
board of directors further approved a plan to offer our current employees the
opportunity to exchange their existing options to purchase our ordinary shares
for new options and approved the allocation of additional options to be made to
our employees if the total number of employee options, including the options to
our CEO, during a 24 month period will represent less than 8% of the our shares
on a fully diluted basis.
In addition to the proceeds we may raise in the contemplated investment by
Israel Corp., we will need to raise significant additional funds from other
sources to finance (i) the ramp-up of Fab 2, which we currently estimate to be
up to an additional approximately $150 million, and (ii) our payments on the
long-term loans from our banks and other debt. We are engaged in discussions
with potential investors in order to attract them to make investments in our
company. However, no understandings have been reached with respect to the amount
of any investment or the terms of any investment and there can be no assurance
that any investment will be made. These investments may be for shares or for
securities convertible into shares, which would materially dilute the holdings
of our current shareholders.
MARKET SALES OF LARGE AMOUNTS OF OUR SHARES ELIGIBLE FOR FUTURE SALE MAY LOWER
THE PRICE OF OUR ORDINARY SHARES.
Of our 77,561,979 outstanding ordinary shares as of May 19, 2006,
approximately 33.3 million are freely tradable and held by non-affiliates under
U.S. securities laws. In addition, certain of our affiliates (Israel Corp.,
SanDisk Corporation, Alliance Semiconductor, and Macronix International) hold
approximately 44.3 million of our shares, of which approximately 4.1 million are
registered for resale and are therefore freely tradable under U.S. securities
laws and approximately 35.5 million are currently eligible for sale subject to
the time, volume and manner of sale limitations of Rule 144 promulgated under
the U.S. Securities Act of 1933, as amended. An additional approximately 2.6
million shares held by Alliance Semiconductor and 2 million shares held by
SanDisk Corporation, will become eligible for sale subject to the time, volume
and manner of sale limitations of Rule 144 through 2007. Shares held by these
affiliates are 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 2008. As of May 19, 2006, up to 36,598,425 additional shares
issuable upon the conversion of our 2005 convertible debentures are held by
non-affiliates or are registered for resale and are therefore freely tradable
under U.S. securities laws. In addition, 9,161,060 shares issuable upon the
exercise of warrants we granted to our banks are registered for resale and are
therefore freely tradable under U.S. securities laws. The additional up to
approximately 41 million shares issuable upon the conversion and/or exercise of
the securities sold in our recently completed TASE offering, would be freely
tradeable in normal trading transactions in the United States. The sales of
large amounts of our ordinary shares (or the potential for those sales even if
they do not actually occur) may depress the market price of our ordinary shares.
This could also impair our ability to raise capital through the sale of our
equity securities.
18
OUR PRINCIPAL SHAREHOLDERS COLLECTIVELY OWN A CONTROLLING INTEREST IN US AND
WILL BE ABLE TO EXERCISE THEIR VOTING RIGHTS IN WAYS WHICH MAY BE ADVERSE TO THE
INTERESTS OF OUR SHAREHOLDERS.
As of May 19, 2006, our wafer partners and Israel Corp. collectively owned
approximately 57% of our outstanding shares. Under our articles of association,
two shareholders holding together 33% of our outstanding shares constitute a
quorum for conducting a shareholders meeting. Our wafer partners and Israel
Corp. 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
shareholders meetings. If only two large shareholders, owning collectively at
least 33% of our shares, were to participate in one of our shareholders
meetings, these shareholders would determine the outcome of our shareholders
meeting without the benefit of the participation of our other shareholders. In
addition, even if our other shareholders were to participate in our shareholders
meetings in person or by proxy, our wafer partners and Israel Corp. collectively
control our company and may exercise this control in a manner adverse to the
interests of our other shareholders.
THE PAYMENT OF THE REDEMPTION AMOUNT ON ACCOUNT OF OUR OUTSTANDING DEBENTURES IS
SUBORDINATED TO OUR INDEBTEDNESS TO OUR BANKS AND OBLIGATIONS TO SECURED
CREDITORS.
The payment of the redemption amount on account of our outstanding
debentures is subordinated to the prior payment of all amounts payable by us to
Bank Hapoalim B.M and Bank Leumi Le-Israel Ltd. under our credit facility
agreement with them, to any obligations to the Investment Center of the Israeli
Ministry of Industry, Trade and Labor related to $161 million in grants received
through May 31, 2006 under the Investment Center's "Approved Enterprise"
program, and to a first ranking charge in favor of Siliconix Technology C.V., on
approximately $20 million of equipment purchased in connection with the
performance of our obligations under our agreement with Siliconix. As a result,
upon any distribution to our creditors in liquidation or reorganization or
similar proceedings, these secured creditors will be entitled to be paid in full
before any payment may be made with respect to any of our outstanding
debentures. In any of these circumstances, we may not have sufficient assets
remaining to pay amounts due on any or all of the debentures then outstanding.
In addition, we are not permitted under the terms of our facility agreement to
make a payment on account of our outstanding debentures if on the date of such
payment an "Event of Default" exists under our facility agreement.
WE MAY INCUR ADDITIONAL INDEBTEDNESS, INCLUDING INDEBTEDNESS THAT WOULD BE
SENIOR TO OUR OUTSTANDING DEBENTURES.
Although we are limited by the covenants in the facility agreement, we
could enter into certain transactions that would increase the amount of our
outstanding senior indebtedness. It is possible that all or part of these
borrowings would be senior to our outstanding debentures. If new indebtedness is
added to our current indebtedness levels, the related risks that we now face
could intensify.
19
RISKS RELATED TO OUR OPERATIONS IN ISRAEL
INSTABILITY IN ISRAEL MAY HARM OUR BUSINESS.
All of our manufacturing facilities and our corporate and some of our sales
offices are located in Israel. Accordingly, political, economic and military
conditions in Israel may directly affect our business.
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, as well as
incidents of civil unrest. In addition, Israel and companies doing business with
Israel have, in the past, been the subject of an economic boycott. Although
Israel has entered into various agreements with Egypt, Jordan and the
Palestinian Authority, Israel has been and is subject to civil unrest and
terrorist activity, with varying levels of severity. Parties with whom we do
business have sometimes declined to travel to Israel during periods of
heightened unrest or tension, forcing us to make alternative arrangements where
necessary. In addition, the political and security situation in Israel may
result in parties with whom we have agreements claiming that they are not
obligated to perform their commitments under those agreements pursuant to force
majeure provisions. We can give no assurance that security and political
conditions will have no impact on our business in the future. Any hostilities
involving Israel or the interruption or curtailment of trade between Israel and
its present trading partners could adversely affect our operations and could
make it more difficult for us to raise capital. Furthermore, our manufacturing
facilities are located exclusively in Israel, which has been experiencing civil
unrest, terrorist activity and military action. We could experience serious
disruption of our manufacturing if acts associated with this conflict result in
any serious damage to our manufacturing facilities. In addition, our business
interruption insurance may not adequately compensate us for losses that may
occur, and any losses or damages incurred by us could have a material adverse
effect on our business.
OUR OPERATIONS MAY BE NEGATIVELY AFFECTED BY THE OBLIGATIONS OF OUR PERSONNEL TO
PERFORM MILITARY SERVICE.
In the event of severe unrest or other conflict, individuals could be
required to serve in the military for extended periods of time. In response to
increases in terrorist activity, there have been periods of significant call-ups
of military reservists, and it is possible that there will be additional
call-ups in the future. A large part of male Israeli citizens, including our
employees, are subject to compulsory military reserve service through middle
age. Our operations could be disrupted by the absence for a significant period
of time of one or more of our key employees or a significant number of our other
employees due to military service. Such disruption could harm our operations.
OUR OPERATIONS MAY BE AFFECTED BY NEGATIVE ECONOMIC CONDITIONS IN ISRAEL.
In recent years, Israel has experienced periods of recession in economic
activity, resulting in low growth rates and growing unemployment. Our operations
could be adversely affected if the economic conditions in Israel deteriorate. In
addition, Israel has experienced several general strikes and other work
stoppages, affecting banks, government offices, airports and ports. These
strikes have had an adverse effect on the Israeli economy and on business,
including our ability to deliver products to our customers or to receive raw
materials from our suppliers in a timely manner. From time to time, the Israeli
trade unions threaten strikes or work-stoppages, which may, if carried out, have
a material adverse effect on the Israeli economy and our business.
20
IF THE EXEMPTION ALLOWING US TO OPERATE OUR MANUFACTURING FACILITIES SEVEN DAYS
A WEEK IS NOT RENEWED, OUR BUSINESS WILL BE ADVERSELY AFFECTED.
We operate our manufacturing facilities seven days a week pursuant to an
exemption from the law that requires businesses in Israel to be closed from
sundown on Friday through sundown on Saturday. This exemption expires by its
terms on December 31, 2006. 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. If the exemption is not renewed and we are forced to close
any or all of the facilities for this period each week, our financial results
and business will be harmed.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
We are a pure-play independent specialty foundry dedicated to the
manufacture of semiconductors. Typically, pure-play foundries do not offer
products of their own, but focus on producing integrated circuits, or ICs, based
on the design specifications of their customers. We manufacture semiconductors
using advanced production processes for our customers primarily based on third
party designs and our own proprietary designs. We currently offer the
manufacture of ICs with geometries ranging from 1.0 to 0.13-micron. We also
provide complementary technical services and design support. ICs manufactured by
us are incorporated into a wide range of products in diverse markets, including
consumer electronics, personal computers, communications, automotive, industrial
and medical device products.
We are focused on establishing leading market share in high-growth
specialized markets by providing our customers with high-value wafer foundry
services. Our historical focus has been standard digital complementary metal
oxide semiconductor ("CMOS") process technology, which is the most widely used
method of producing ICs. We currently are focused on the emerging opportunities
surrounding CMOS image sensors, embedded flash, mixed-signal and radio frequency
CMOS (RFCMOS) technologies. In addition, we have commenced development of a new
technology that targets the radio frequency identification, or RFID, tags
market. Through our expertise and experience gained over a decade of operations,
we differentiate ourselves in these areas by creating a high level of value for
our clients through innovative technological processes, design support and
services, competitive manufacturing indices, such as cycle times and yields, and
dedicated customer service.
Our company was founded in 1993, when we acquired National Semiconductor's
150-mm wafer fabrication facility, or Fab 1, and commenced operations as an
independent foundry with a production capacity of approximately 5,000 wafers per
month. Since then, we have significantly modernized our Fab 1 facility and
equipment, which has improved our process geometries to range from 1.0-micron to
0.35-micron and enhanced our process technologies to include CMOS image sensors,
embedded flash and mixed-signal technologies. Production capacity in Fab 1 as of
June 30, 2006 was approximately 16,000 wafers per month, depending on process
technology and product mix.
21
We have completed the construction of the building and infrastructure and
are in the course of ramping our second manufacturing facility, or Fab 2. Fab 2
is designed to operate in geometries of 0.18-micron and below, using advanced
materials and advanced CMOS technology licensed from Freescale and Toshiba and
other technologies that we might acquire or develop independently or with
development partners. Production capacity as of June 30, 2006 was approximately
15,000 wafers per month. When fully ramped-up, we estimate that Fab 2 will be
able to achieve capacity of approximately 40,000 wafers per month.
Our capital expenditures net of Investment Center grants for 2005, 2004 and
2003 of $24 million, $142 million and $137 million, respectively, were made
principally in connection with the construction of, and purchase of equipment
and technology for, Fab 2.
Our legal and commercial name is Tower Semiconductor Ltd. We were
incorporated under the laws of Israel. Our manufacturing facilities and
executive offices are located in the Ramat Gavriel Industrial Park, Post Office
Box 619, Migdal Haemek, 23105 Israel, and our telephone number is
972-4-650-6611. Our worldwide web site is located at http://www.towersemi.com.
Information on our web site is not incorporated by reference in this annual
report.
RECENT DEVELOPMENTS
COMPLETION OF $31 MILLION TASE OFFERING
On June 29, 2006 we successfully completed an underwritten public offering
of our securities on the Tel-Aviv Stock Exchange (TASE) in Israel resulting in
gross proceeds of approximately NIS 140 million (approximately $31 million). In
the offering, 78,000 Units were sold at a price per Unit of NIS 1,785
(approximately $400). Each Unit consists of (i) convertible debentures in the
face amount of NIS 2,100 (approximately $470), (ii) five options each
exercisable for three months for NIS 100 principal amount of convertible
debentures at an exercise price equal to 85% of their face amount, (iii) 140
warrants each exercisable for three months for one Tower ordinary share at a
price of NIS 6.75 (approximately $1.51) and (iv) 70 warrants each exercisable
for three years for one Tower ordinary share at a price of NIS 7.40
(approximately $1.66). The convertible debentures are convertible into Tower's
ordinary shares at a conversion rate of one ordinary share per NIS 8.40
(approximately $1.89) principal amount of convertible debentures. The
convertible debentures carry a zero coupon with principal payable at maturity in
December 2011, at a premium of 37% over face value, linked to the Israeli
Consumer Price Index (CPI). The conversion price is subject to reduction in
certain limited circumstances.
The offering was made in Israel to Israeli residents only. The securities
offered were not registered under the Securities Act and may not be sold in the
U.S. or to U.S. persons absent registration or an applicable exemption.
22
AMENDMENT TO OUR FACILITY AGREEMENT
In May 2006, we signed amendments to the facility agreement with our banks,
according to which: (i) repayments of long-term loans in the amount of
approximately $100 million scheduled to be paid between October 2006 and June
2007, were deferred to July 2007; and (ii) the date on which we were required to
raise approximately $8 million was deferred from June 30, 2006 to September 30,
2006, which amount was raised with the completion of the TASE offering described
above.
RAMP-UP OF FAB 2
In March 2006, our board of directors approved a plan to ramp up Fab 2 in
order to meet our customer and product qualification needs, based on our
customer pipeline and reinforced by forecasted market conditions. According to
this plan, we will need to raise approximately $130 million during 2006, which
will take the current Fab 2 capacity to approximately 24,000 wafers per month.
We plan to raise this amount by way of (i) $30 million public offering (this
amount was raised with the completion of the TASE offering described above) and
(ii) $100 million investment by Israel Corp. (described below). In addition to
the aforementioned amount, in order to fully ramp-up the capacity of Fab 2 to
approximately 40,000 wafers per month, we currently estimate that we will
require the raising of an additional up to approximately $150 million.
As part of the financing efforts for the ramp-up plan, in May 2006, we
signed a Memorandum of Understanding (MOU) with our banks for the refinancing of
the approximately $526.7 million of long-term debt under our facility agreement,
according to which: (i) $158 million, representing 30% of such debt, will be
converted to equity for 51,973,684 of our ordinary shares, at a price per share
of $3.04, which is equal to twice the average closing price of our ordinary
shares during the 10 consecutive trading days prior to signing the MOU; (ii) the
interest rate of the long-term loans will be decreased from LIBOR plus 2.5% per
annum to LIBOR plus 1.1% per annum; and (iii) the commencement date for the
repayment of principal shall be postponed from July 2007 to no earlier than
September 2009. The terms of the MOU are subject to a commitment of Israel
Corporation Ltd. (Israel Corp.) to invest $100 million in our capacity expansion
as described below. The MOU is further subject to our reaching a definitive
amendment to the facility agreement based on the terms of the MOU which is
expected to also include arrangements to compensate the banks, under certain
conditions, for the reduction in the interest on the amount borrowed from the
banks (such compensation may include the issuance of our securities and/or the
extension of the exercise period of the banks' warrants), and revised financial
ratios and covenants based on our updated working plan. In this regard, Israel
Corp. has committed to invest $100 million in consideration for 65,789,474 of
our ordinary shares, at a price per share of $1.52, which equals the average
closing price during the 10 consecutive trading days prior to signing the MOU.
Such amount may include amounts that may be payable by us to Israel Corp. in
connection with the agreement for the ordering of equipment described below.
Israel Corp.'s investment is subject to the signing of a definitive investment
agreement, the approvals of our audit committee, board of directors and
shareholders and the closing of a definitive amendment to the facility agreement
with our banks based on the terms of the MOU.
23
In order to implement the ramp-up plan in a timely manner, we entered into
an agreement with Israel Corp. according to which Israel Corp. will order up to
approximately $100 million worth of equipment for Fab 2. Under the terms of the
agreement: (i) Israel Corp. has the right to sell us the equipment at cost, plus
related expenses; (ii) we have the right to purchase the equipment from Israel
Corp. at cost, plus related expenses, subject to us having raised $100 million;
(iii) upon our purchase of the equipment from Israel Corp., we will assume
Israel Corp.'s obligations to the equipment suppliers; and (iv) if after 5
months from the signing of the agreement, the equipment has not been sold to us
by Israel Corp., Israel Corp. may sell the equipment to a third party and we
will pay Israel Corp. the difference between the cost, plus related expenses, of
the purchase of the equipment by Israel Corp. and the net sale price.
OPTIONS GRANTED TO THE CHIEF EXECUTIVE OFFICER (CEO)
In May 2006, our audit committee and board of directors approved the grant
of options to our CEO, who also serves as a director, in addition to the options
granted to him in April 2005, such that in total, the CEO will hold options to
purchase shares that represent 4% of our shares on a fully diluted basis during
the two-year period from the approval of the audit committee. The exercise price
of the initial grant of additional options will be $1.45, the average closing
price of our shares on the Nasdaq during the 90 consecutive trading days prior
to the board of directors' approval. In the event of a future equity financing,
additional options will be granted to the CEO as described above with an
exercise price equal to the price per share of such investment. The vesting
period of the new options will be identical to the vesting period of the
existing options. The new grant of options and its terms are subject to the
approval of our shareholders. If the new grant of options is approved by our
shareholders, no additional options will be granted under the CEO's current
option agreement, which was approved by our shareholders in October 2005.
RE-PRICING OF EMPLOYEE OPTIONS
Our board of directors approved a plan to offer each of our current
employees the opportunity to exchange their existing options to purchase our
ordinary shares for new options with an exercise price of $1.45, which is the
average closing price of our shares on the Nasdaq during the 90 consecutive
trading days prior to the board of directors' approval. The new options will be
granted based on terms similar to our existing employee option plan with new
vesting periods. As of May 19, 2006, options to purchase approximately 9 million
ordinary shares held by our current employees, with exercise prices ranging from
$1.46 to $25, were outstanding. Our board of directors further approved that if
the total number of employee options, including the options to our CEO, during
the coming 24 months will represent less than 8% of the our shares on a fully
diluted basis, additional options will be allocated for grants to be made to our
employees. No options have been granted under such plan.
DISMISSAL OF CLASS ACTION
In June 2006, the United States Court of Appeals for the Second Circuit
affirmed the August 2004 decision of the United States District Court for the
Southern District of New York to dismiss the class action suit filed in July
2003 against us and certain of our directors and shareholders. The District
Court accepted the motion to dismiss filed on behalf of the defendants and noted
that our status as a foreign private issuer exempts us, our directors and
controlling shareholders, from liability under the proxy rules of Section 14(a)
of the Securities Exchange Act.
24
B. Business Overview
INDUSTRY OVERVIEW
Semiconductor devices are responsible for the rapid growth of the
electronics industry over the past fifty years. They are critical components in
a variety of applications, from computers, consumer electronics and
communications, to industrial, military, medical and automotive applications.
The semiconductor industry is characterized by rapid changes in technology,
frequently resulting in the obsolescence of recently introduced products. As
performance has increased and size and cost have decreased, the use of
semiconductors and the number of their applications have grown significantly.
Historically, the semiconductor industry was composed primarily of
companies that designed and manufactured ICs in their own fabrication
facilities. These companies, such as Intel and IBM, are known as integrated
device manufacturers, or IDMs. In the mid-1980s, fabless IC companies, which
focused on IC design and used external manufacturing capacity, began to emerge.
Fabless companies initially outsourced production to IDMs, which filled this
need through their excess capacity. As the semiconductor industry continued to
grow, increasing competition forced fabless companies and IDMs to seek reliable
and dedicated sources of IC manufacturing services. This need has been met by
the development of independent companies, known as foundries, which focus
primarily on providing IC manufacturing services to semiconductor suppliers.
Foundry services are now used by nearly every major semiconductor company in the
world, including IDMs as part of a dual-source, risk-diversification and cost
effectiveness strategy.
Semiconductor suppliers face increasing demands for new products that
provide higher performance, greater functionality and smaller form factors at
lower prices, which require increasingly complex ICs. In addition to the
increased complexity of designs, there has also been a dramatic increase in the
number of applications for semiconductors. To compete successfully,
semiconductor suppliers must also minimize the time it takes to bring a product
to market. As a result, fabless companies and IDMs are focusing more on their
core competencies -- design and intellectual property -- and outsourcing
manufacturing to foundries.
The consumer sector is expanding worldwide with new applications and
multi-functional devices, including those that incorporate CMOS image sensors,
embedded flash and mixed-signal ICs. Increasingly, emerging applications, such
as camera-equipped cell phones, digital still cameras and flat panel displays,
are enabled by ICs manufactured using advanced process technologies.
The enormous costs associated with modern fabs, combined with the
increasing demand for complex ICs, has created an expanding market for
outsourced manufacturing offered by foundries. Foundries can cost-effectively
supply the technologies involved in manufacturing advanced ICs to even the
smallest fabless companies by creating economies of scale through pooling the
demand of numerous customers. In addition, customers whose IC designs require
process technologies other than standard digital CMOS have created a market for
independent foundries that focus on providing specialized process technologies,
such as CMOS image sensors, embedded flash and mixed-signal technologies.
Foundries also offer competitive customer service through design, testing, and
information services, often at a level previously found only at an IDM's
internal facilities.
25
These trends have led to the rapid growth in demand in recent years for
advanced semiconductor manufacturing services provided by independent foundries.
SPECIALIZED TECHNOLOGIES
We provide wafer fabrication services and technologies to fabless IC
companies and IDMs and enable smooth integration of the semiconductor design and
manufacturing processes. By doing so, we enable our customers to bring
high-performance, highly integrated ICs to market rapidly and cost effectively.
We believe that our technological strengths and emphasis on customer service
have allowed us to develop unique positions in large, high-growth specialized
markets for CMOS image sensors, embedded flash memory, mixed signal and RF CMOS
ICs. We serve as a sole source or alternative provider of foundry services.
We believe that we are a trusted, customer-oriented service provider that
has built a solid reputation in the foundry industry over the last thirteen
years. We have built strong relationships with customers, who continue to use
our services, even as their demands evolve to smaller form factors and new
applications. Our consistent focus on providing high-quality, value added
services, including engineering and design support, has allowed us to attract
customers for both our Fab 1 and Fab 2 facilities who seek to work with a proven
provider of foundry services. As a result, we have a high customer retention
rate and an increase in new customers and new products for production.
In August 2005, we implemented changes in our organizational structure
focusing on establishing three product line units. The re-structuring reflects
our emphasis on working closely with customers and accelerating the
time-to-market of their next-generation products. The three distinct product
line units are: CMOS Image Sensors and embedded Non-Volatile Memory products
(CIS/NVM), Radio Frequency (RF)/Mixed Signal, and CMOS.
We derived approximately 45% of our revenues for the year ended December
31, 2005 from our target specialized markets: CMOS image sensors, embedded
flash, mixed-signal, RF and power ICs. We are highly experienced in these
markets, being an early entrant and having developed unique proprietary
technologies, primarily through licensing and joint development efforts with our
customers and other technology companies.
26
CMOS IMAGE SENSORS
CMOS image sensors are ICs used to capture an image in a wide variety of
consumer, communications, medical, automotive and industrial market
applications, including camera-equipped cell phones, digital still and video
cameras, security and surveillance cameras and video game consoles. We are
currently actively involved in this mass market as well as the high-end sensor
and applications specific markets, which include applications such as industrial
machine vision, medical equipment and automotive sensors. While CMOS image
sensors for advanced optical applications are an emerging technology, we believe
that they are becoming the preferred technology to traditional charge coupled
devices, or CCDs. CCDs have historically provided superior image quality;
however, advances in semiconductor manufacturing processes and design techniques
have led to significant improvements in CMOS image sensor performance and image
quality. These advances have resulted in smaller size circuits and better
current control, making it possible to design CMOS image sensors that provide
high image quality at a significantly lower cost.
As early as 1997, we recognized the market potential of using CMOS process
technology for a digital camera-on-a-chip, which would integrate a CMOS image
sensor, filters and digital circuitry. In entering the CMOS image sensor foundry
business, we utilized research and development work that had been ongoing since
1993. Our services include a broad range of turnkey solutions and services,
including sensor design services, optical characterization of a CMOS process,
innovative stitching manufacturing technique and optical testing and packaging.
CMOS image sensors manufactured by us deliver outstanding image quality for a
broad spectrum of digital imaging applications. As the market for these products
becomes more main stream, we expect that more competition will enter this high
growth market and some of those products will become commodities.
In the end of 2005, we began production of new products in Fab 2. For
example, in November 2005, we began manufacturing 2.0 and 1.3-megapixel CMOS
image sensors for Biomorphic Microsystems Corporation (Biomorphic) designed for
cellular phone applications. These image sensors are produced in 0.18-micron
process at Fab2, utilizing our pixel IP and our optically-optimized-multilayer
metallization, which achieves dramatically better optical sensitivity by
reducing stack height from silicon to micro-lens.
EMBEDDED FLASH
Flash memory is a constantly powered nonvolatile memory that can be erased
and reprogrammed in units of memory called blocks. The IC of flash memory is
organized so that a section of memory cells may be erased in a single action, or
"flash". Applications for flash memory products range from most types of
portable electronic equipment devices to high volume mass storage of data. Flash
is particularly suitable for applications such as handheld devices, combining
the need for portability, high density, ruggedness and lower power requirements.
Flash memory products are also well-suited for audio products such as digital
answering machines and MP3 players, as well as other applications including
networking devices, digital cameras, personal computer motherboards and portable
memory devices.
Embedded flash is the combination of flash memory with other components,
such as other memory, logic and analog, on a single IC to provide speed,
functionality and form factor advantages and reduce system cost. Embedded flash
memory products are used in communications, consumer, industrial, military and
automotive applications. End products include networks, base stations, servers,
microcontrollers, toys, set-top boxes, DVD players, cell phones and smart cards.
27
In 1997, we entered into a strategic investment and technology agreement
with Saifun Semiconductors Ltd., pursuant to which we obtained approximately a
10% equity stake in Saifun. Together we brought to market a new non-volatile
memory technology based on 0.5-micron, microFlash(TM)/NROM(TM). NROM technology
enables the implementation of ultra high-density flash arrays using CMOS
processes, and is particularly suitable for embedding flash arrays with standard
CMOS logic, as well as for commodity memories. Our microFLASH technology, based
on Saifun's patented NROM technology, provides greater memory cell density than
other currently available flash architectures for given design rule generation,
permitting an approximately four-fold reduction in the size of the memory cell
for stand-alone memories and embedded applications in a given geometry.
In December 2004, we sold our entire equity stake in Saifun for
approximately $39 million. This sale had no effect on our technology rights
under our agreement with Saifun.
MIXED SIGNAL AND RF CMOS
Mixed-signal ICs are an essential part of any electronic system that
interacts with the real world. Analog ICs monitor and manipulate real world
signals such as sound, light, pressure, motion, temperature and electrical
current and are used in a wide variety of electronic products such as PCs, cell
phones, DVD players, automotive electronics and medical imaging equipment.
Digital ICs perform arithmetic functions on data represented by a series of ones
and zeroes, provide critical processing power and have enabled many of the
computing and communication advances of recent years. Mixed-signal ICs combine
analog and digital semiconductor functionality on a single IC to enable digital
systems to interface with the real world. As these digital systems proliferate,
there is a growing need for analog functionality to enable them to interface
with the real world.
We focus on providing high-quality mixed-signal capabilities, as this
technology is a cornerstone to both CMOS image sensor and embedded flash
applications. For example, in May 2006, we began production of metro Wi-Fi
baseband controller for Wavion Ltd. for the communications industry, utilizing
our 0.18-micron mixed-signal technology. In addition, in June 2006, we began
production of a notebook embedded controller developed by Winbond Israel using
our 0.18-micron technology.
In recent years, more and more designers opt to develop high frequency
products based on RF CMOS technologies as opposed to exotic process
technologies, such as SiGe or GaAs. The superior cost structure of CMOS
technologies enables high volume, low cost production of such high frequency
products. We use our mixed signal expertise to leverage and develop processes
and provide services for customers utilizing CMOS technologies. We further
enhanced our mixed signal 0.18-micron platform technology offering by developing
RF CMOS product design kits. This allowed us to increase our customer base and
obtain new products for production as well as develop special capabilities with
RFID applications. For example, in February 2006, we began producing wireless
LAN products for Atheros Communications.
CONVERGENCE OF TECHNOLOGIES
In response to the growing demand for a single chip to offer a wide array
of functions, we are leveraging a combination of some of the abovementioned
technologies by developing a single chip with multiple functions. The successful
development of this chip will allow us to provide additional value to our
customers and obtain a unique market position by offering our customers a unique
technology platform. We engage in projects merging CMOS, NVM and CIS for unique
solutions to customers' needs, as well as in a project targeting RFID tags
applications merging RF CMOS, mixed signal and NVM technologies onto a single
chip.
28
CUSTOMERS, MARKETING AND SALES
Our marketing and sales strategy seeks to aggressively expand our global
customer base. To achieve this objective, we match our standard digital CMOS
technology to the industry benchmark and differentiate ourselves based on
customer service, design support and expertise in specialized technologies, such
as CMOS image sensors, embedded flash and mixed signal. We have marketing, sales
and engineering support personnel in the United States, Taiwan and Israel. Our
marketing and sales staff is supported by independent sales representatives,
located throughout the world, who have been selected based on their
understanding of the semiconductor marketplace.
Our sales cycle is generally 12-24 months or longer for new customers and
can be as short as 9-12 months for existing customers. The typical stages in the
sales cycle process from initial contact until production are:
o technical evaluation;
o product design to our specifications including integration of third
party intellectual property;
o photomask design and third party manufacturing;
o silicon prototyping;
o assembly and test;
o validation and qualification; and
o production.
The primary customers of our foundry services are fabless semiconductor
companies and IDMs. A substantial portion of our product sales are made pursuant
to long-term contracts with our customers, under which we have agreed to reserve
manufacturing capacity at our production facilities for such customers. Our
customers include many industry leaders, some of our shareholders and a number
of Taiwanese companies who preferred our solution to the solutions that were
offered locally. During the year ended December 31, 2005, we had five
significant customers who contributed 22%, 14%, 8%, 7% and 5% of our revenues,
respectively. In 2004, we had five significant customers who contributed 24%,
17%, 8%, 8% and 6% of our revenues, respectively.
In addition to further developing our customer base, we have also made a
concentrated effort to expand the geographical diversity of our sales. The
percentage of our sales from customers located outside the United States was
27%, 40% and 36% in the years ended December 31, 2003, 2004 and 2005,
respectively. We believe that a substantial portion of our sales will continue
to come from customers located outside the United States. The following table
sets forth the geographical distribution, by percentage, of our net sales for
the periods indicated:
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Year ended December 31,
------------------------
2005 2004 2003
---- ---- ----
United States 64% 60% 73%
Israel 7% 20% 2%
Asia-Pacific (in 2005 and 2004 - primarily
Taiwan, in 2003 - only Taiwan) 20% (*) 11% (*) 10%
Europe 9% 9% 15%
--- --- ---
Total 100% 100% 100%
=== === ===
(*) Including payments made to us in connection with our May 2002 joint
development agreement for 0.18-micron embedded MICROFLASH technology.
COMPETITION
The global semiconductor foundry industry is highly competitive. The major
independent dedicated foundries include Taiwan Semiconductor Manufacturing
Corporation, United Microelectronics and Chartered Semiconductor Manufacturing;
emerging and existing Chinese, Korean, Malaysian and Taiwanese foundries,
including Semiconductor Manufacturing International Corp., DongBu, He Jien
Technology, ASMC, MagnaChip, CSMC Grace, HHNEC, and Silterra; and other
specialized foundries, such as AMI Semiconductor, Jazz Semiconductor and X-Fab.
In addition, there are IDMs and end-product manufacturers that produce ICs for
their own use and/or allocate a portion of their manufacturing capacity to
foundry operations. Most of the foundries with which we compete are located in
Asia-Pacific and benefit from their close proximity to other companies involved
in the design and manufacture of ICs. We believe that the principal elements of
competition in the wafer foundry market are:
o technical competence;
o production quality;
o time-to-market;
o device and end-product price;
o available capacity;
o device yields;
o design and customer support services;
o access to intellectual property; and
o research and development capabilities.
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Many of our competitors have greater manufacturing capacity, multiple
manufacturing facilities, more advanced technological capabilities, a more
diverse and established customer base, greater financial, marketing,
distribution and other resources and a better cost structure than ours.
We seek to compete primarily on the basis of technology, production
quality, device yields and services involving design, support and manufacturing.
We believe we have a differentiated service offering and track record in
specialized markets, which enables us to effectively compete with larger IC
manufacturers.
WAFER FABRICATION SERVICES
Wafer fabrication is an intricate process that consists of constructing
layers of conducting and insulating materials on raw wafers in intricate
patterns that give the IC its function. IC manufacturing requires hundreds of
interrelated steps performed on different types of equipment, and each step must
be completed with extreme accuracy for finished ICs to work properly. The
process can be summarized as follows:
CIRCUIT DESIGN. IC production begins when a fabless IC company or IDM
designs the layout of a device's components and designates the interconnections
between each component. The result is a pattern of components and connections
that defines the function of the IC. In highly complex circuits, there may be
more than 35 layers of electronic patterns. After the IC design is complete, we
provide these companies with IC manufacturing services.
MASK MAKING. The design for each layer of a semiconductor wafer is
imprinted on a photographic negative, called a reticle or mask. The mask is the
blueprint for each specific layer of the semiconductor wafer.
IC MANUFACTURING. Transistors and other circuit elements comprising an IC
are formed by repeating a series of processes in which photosensitive material
is deposited on the wafer and exposed to light through a mask. Advanced IC
manufacturing processes consist of hundreds of steps, including
photolithography, oxidation, etching and stripping of different layers and
materials, ion implantation, deposition of thin film layers, chemical mechanical
polishing and thermal processing. The final step in the IC manufacturing process
is wafer probe, which involves electronically inspecting each individual IC in
order to identify those that are operable for assembly.
ASSEMBLY AND TEST. After IC manufacture, the wafers are transferred to
assembly and test facilities. In the assembly process, each wafer is cut into
dies, or individual semiconductors, and tested. Defective dies are discarded,
while good dies are packaged and assembled. Assembly protects the IC,
facilitates its integration into electronic systems and enables the dissipation
of heat or cold. Following assembly, the functionality, voltage, current and
timing of each IC is tested. After testing, the completed IC is shipped to the
IC supplier or directly to its final destination.
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MANUFACTURING PROCESSES
We manufacture ICs on silicon wafers, generally using the customer's
proprietary circuit designs. In some cases, we use third-party or our own
proprietary design elements. The end product of our manufacturing process is a
silicon wafer containing multiple identical ICs. In most cases, our customer
assumes responsibility for dicing, assembly and testing. Although we are an
independent foundry specializing in wafer fabrication, we offer our customers
the option to purchase from us finished semiconductor products that have been
assembled and tested. In these cases, we take responsibility for the production
and delivery of finished IC products to our customer on a turnkey basis and
subcontract some or all of the dicing, assembly and testing functions to third
parties. We also maintain limited assembly capabilities for manufacturing
prototype units to facilitate customer evaluation and thereby accelerate new
product introduction.
We manufacture ICs using CMOS process technology. CMOS is currently the
dominant semiconductor manufacturing process because it requires lower power
than other technologies and allows dense placement of components onto a single
IC. The low power consumption and high-density characteristics of the CMOS
process allow the continued development of high performance ICs that are smaller
and faster. We believe that our specialized process technology distinguishes our
IC manufacturing services and attracts industry-leading customers. The specific
process technologies that we currently focus on include:
CMOS IMAGE SENSORS. Our advanced CMOS image sensor process is intended to
meet the established growing demand for optical sensors used in consumer,
industrial, medical and automotive applications. Our dedicated manufacturing and
testing processes assure consistently high electro-optical performance of the
integrated sensor through wafer-level characterization. Our CMOS image sensor
processes have demonstrated superior optical characteristics, excellent spectral
response and high resolution and sensitivity. The ultra-low dark current, high
efficiency and accurate spectral response to our photodiode enable faithful
color reproduction and acute detail definition.
In addition, our innovative "stitching" technology enables semiconductor
exposure tools to manufacture single ultra high-resolution CMOS image sensors
containing millions of pixels at sizes far larger than their existing field. Our
0.5, 0.35-micron and 0.18-micron CMOS image sensor processes are designed to
permit the customer to create high-quality solutions and integrate a product's
CMOS analog and logic circuitry together with the sensor pixel array all on one
chip, thereby facilitating miniaturization, reducing power consumption and
increasing performance.
We have commenced volume production of CMOS Image Sensors for the cellular
phone camera market in its 0.18 micron process in the last quarter of 2005,
using its own developed 3.6um pixel. During the past two years, we have
developed an advanced pixel that allows very low temporal noise levels in a
variety of pixel sizes, from 3.6um to 2.7um. These pixels shall be ready for
production in the last quarter of 2006.
32
EMBEDDED FLASH. Our microFLASH technology, based on Saifun NROM patented
technology, provides greater memory cell density than other currently available
flash architectures for given design rule generation, permitting an
approximately four-fold reduction in the size of the memory cell for stand-alone
memories and embedded applications in a given geometry. The relative simplicity
of our microFLASH manufacturing process offers cost advantages over competing
flash technologies for high density memories. Using our 0.5-micron technology,
we have introduced the first of our microFLASH processes into production with
the manufacture of a 2 megabit stand-alone memory device and embedded multi-time
programming modules, with a limited number of rewrite cycles. Our 0.18-micron
embedded flash technology was mutually developed with a Japanese semiconductor
manufacturer during 2004, with multiple Flash modules ranging in sizes from 0.5
megabit to 8 megabit, and is currently in production with a few customers.
MIXED SIGNAL. We have developed the Tower 0.18-micron Mixed-Signal Design
and RFCMOS Kits, which contains a comprehensive characterization of a wide range
of analog and RF devices, some of which are specifically developed to provide
our customers with the ability to design mixed-signal and RF ICs for their
specific needs.
RFID. In 2004, we started a joint development program with Alien Technology
Corporation that targets the RFID tag market and utilizes a platform technology
of mixed signal, RF and non volatile memory function. In June 2006, we announced
that we are the manufacturing supplier for Alien Technology's
internally-designed Gen 2 RFID ICs.
PROCUREMENT AND SOURCING
Our manufacturing processes use many raw materials, including silicon
wafers, chemicals, gases and various metals. These raw materials generally are
available from several suppliers. In many instances, we purchase raw materials
from a single source. In connection with our technology advancement plans, we
expect to continue to make purchases of semiconductor manufacturing equipment,
mainly for Fab 2.
RESEARCH AND DEVELOPMENT
Our future success depends, to a large degree, on our ability to continue
to successfully develop and introduce to production advanced process
technologies that meet our customers' needs. Our process development strategy
relies on CMOS process technologies that we primarily license and transfer from
third parties. We also develop these technologies on our own, at our own
initiative, our customers' request or in cooperation with our customers.
From time to time, at a customer's request, we develop a specialty process
module, which we use for such customer on an exclusive basis, and, if permitted
under our agreements with our customers, we then add it to our process offering.
Such developments are very common in all of our value added process technologies
noted above. In 2004, in response to market demand, we introduced a 0.16-micron
optical shrink solution which represents a 10% linear shrink from our existing
0.18-micron offering while utilizing virtually the same 0.18-micron libraries
and IP. The shrink allows a 15 to 20 percent die size reduction and a
potentially higher wafer ASP and lower die cost. Applications include industry
standard CMOS logic and some mixed-signal technologies. This 0.16-micron
technology is ready for production.
Our research and development activities have related primarily to our
process development efforts and have been sponsored and funded by us with some
participation by the Israeli Office of the Chief Scientist, or OCS. Accordingly,
we are subject to restrictions set forth in Israeli law which limit the ability
of a company to manufacture products or to transfer technologies outside of
Israel, if such products or technologies were developed with OCS funding.
Research and development expenses for the years ended December 31, 2003, 2004
and 2005 were $20.7 million, $17.1 million and $16 million, net of government
participation of $1.1 million, $1.5 million and $1 million, respectively.
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As of June 30, 2006, we employed 164 professionals in our research and
development department, 30 of whom have PhDs. In addition to our research and
development department located at our facilities in Migdal Haemek, we maintain a
design center in Netanya, Israel.
PROPRIETARY RIGHTS
INTELLECTUAL PROPERTY AND LICENSING AGREEMENTS
Our success depends in part on our ability to obtain patents, licenses and
other intellectual property rights covering our production processes. To that
end, we have acquired certain patents and patent licenses and intend to continue
to seek patents on our production processes. As of March 2006, we held 58
patents. We have entered into various patent licenses and cross-licenses with
technology companies including Toshiba, Freescale, Synopsys, ARM, Chipidea
Microelectronics, Virage Logic, and others. We may choose to renew our present
licenses or obtain additional technology licenses in the future. There can be no
assurance that any such licenses could be obtained on commercially reasonable
terms. In addition, we cannot assure you that other countries in which we market
our services will protect our intellectual property rights to the same extent as
the United States or Israel.
We constantly seek to strengthen our technological expertise through
relationships with technology companies and silicon suppliers. We seek to expand
our core strengths in CMOS image sensors, embedded flash and mixed-signal
technologies by combining our proprietary technology with those of other
technology companies. A main component of our process development strategy is to
acquire licenses to standard CMOS technologies and cell libraries from leading
designers, such as Freescale and Toshiba, and further develop specialized
processes through our internal design teams. The licensing of these technologies
has enormously reduced our internal development costs.
CMOS PROCESS TECHNOLOGY PLATFORM
We have licensed an array of process technologies through the following
arrangements:
o TOSHIBA. In April 2000, we entered into a technology transfer agreement
with Toshiba, pursuant to which Toshiba has transferred to us certain
advanced CMOS technologies for use in Fab 2. In exchange for certain
license and technology transfer fees and royalties, Toshiba has provided us
with recipes, know-how and patent licenses and has trained a group of our
engineers and managers. Subject to prior termination for cause by Toshiba,
our licenses under the agreement with Toshiba are perpetual. Based on
Toshiba's 0.18-micron CMOS process technology, we have internally developed
an enhanced industry compatible version of the process technology.
34
o MOTOROLA (NOW FREESCALE). In September 2002, we entered into a technology
transfer and development agreement with Motorola, pursuant to which
Motorola transferred to us its 0.13-micron HiPerMOS7 CMOS process
technology for Fab 2 as well as co-developed with us an industry-standard
compatible version of the process technology. Subject to prior termination
for cause by Motorola, our licenses under the technology transfer agreement
with Motorola are perpetual. In August 2004, Motorola assigned all of its
rights and obligations under the aforementioned agreement to Freescale.
FOUNDATION IP BLOCKS
To better serve our customers design needs using advanced CMOS processes
and mixed-signal, we have entered into a series of agreements with leading
providers of physical design libraries, mixed-signal and non volatile memory
design components. These components are basic design building blocks, such as
standard cells, interface input-output (I/O) cells, software compilers for the
generation of on-chip embedded memories arrays, mixed-signal and non-volatile
memory design blocks. To achieve optimal performance, all of these components
must be customized to work with our manufacturing process and are used in most
of our customers' chip designs.
o SYNOPSYS. In June 2001, we entered into an agreement with Synopsys
(formerly, Avant!) under which Synopsys has developed libraries for our
0.18-micron process technology. Multiple customers use the Synopsys
libraries in producing their ICs at our company. In 2004, we entered into a
set of comprehensive technology transfer and license agreements with
Synopsys that provide us with broad rights to use Synopsys' library
technology in multiple process technology generations including 0.18 micron
and 0.13 micron. Under these agreements, we were given the right to
develop, customize, validate and characterize libraries, based on Synopsys'
library technology and to distribute such libraries through and have them
supported by Synopsys. These agreements place us in a superior position of
having in-house capability to serve our customers' needs. Certain parts of
the 2004 license agreements, relating to elements of distribution and
support by Synopsys, expire in October 2006, and we may be unable to extend
or renew them on similar terms.
o ARM (INCLUDING ITS WHOLLY-OWNED SUBSIDIARY, ARM PHYSICAL IP). In 2002 and
subsequently in 2004, we entered into license agreements with ARM
(formerly, Artisan Components) under which we received a license to a suite
of library products for our 0.18-micron and 0.13-micron process
technologies, respectively. ARM is licensing its libraries to our customers
free of charge. Multiple customers are using the ARM libraries in their
chip design for manufacturing at our company. The ARM libraries include,
among others, standard cells, general purpose and specialty input-output
cells and memory generators.
o VIRAGE LOGIC. In 2002 and subsequently in 2004, we entered into license
agreements with Virage Logic under which we received a license to a suite
of library products for our 0.18-micron and 0.13-micron process
technologies, respectively. These library products are available for
licensing by our customers, and with respect to most of the 0.13-micron
library products, free of a license charge. Virage offers a variety of SRAM
and ROM memory compilers on both process technologies, and also offers
standard cells, general purpose and specialty input-output cells libraries
in the 0.13-micron technology. Presently, multiple customers' products that
use Virage Logic's memory products are in production at Fab 2. In addition,
our license agreement with Virage Logic from 2002 has also introduced
Virage Logic's patented Nonvolatile Electrically Alterable embedded
memories for production on our 0.18-micron CMOS logic process. Currently
customers' products that use Virage Logic's non-volatile memory products
are in production at Fab 2. We have selected and qualified these memories
for our process to help our customers meet their application requirements
for cost-effective embedded non-volatile memory for security, encryption,
unique device identification, analog trimming, silicon repair and flexible
program store.
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o IMPINJ INC. In 2005, we entered into a development and license agreement
with Impinj Inc. under which Impinj is developing its AEON(R) non-volatile
memory (NVM), in parallel architecture, based on its patented Self-Adaptive
Silicon(R) technology, for production on our 0.13-micron CMOS logic
process. We chose Impinj's cost-effective NVM to help our customers'
products meet their application requirements for embedded non-volatile
memories. Primary applications for Impinj's AEON parallel architecture
include analog trimming, digital rights management and wireless
controllers.
o CHIPIDEA MICROELECTRONICS. In 2003 and subsequently in 2005, we entered
into a non-exclusive, perpetual, royalty-free license and design agreement
with Chipidea Microelectronics. Further to this agreement, Chipidea has
customized several of its mixed-signal design blocks for manufacturing on
our 0.18-micron and 0.13-micron process technologies, such asUSB 2.0
(Universal Serial Bus 2.0) and USB2.0 OTG (On The Go), which are currently
being utilized by several of our customers.
IMAGE SENSOR TECHNOLOGIES
We developed, both independently and together with our customers, basic
pixel intellectual property to be used by those customers in the manufacturing
of our CMOS image sensor products.
C. ORGANIZATIONAL STRUCTURE
The legal and commercial name of our company is Tower Semiconductor Ltd. We
were incorporated under the laws of the State of Israel in 1993. We have one
subsidiary, incorporated in the United States under the name Tower Semiconductor
USA, Inc. Our subsidiary is wholly-owned by us.
D. PROPERTY, PLANTS AND EQUIPMENT
MANUFACTURING FACILITIES
FAB 1
We acquired our Fab 1 facility from National Semiconductor in 1993, which
had operated the facility since 1986. We occupy the facility pursuant to a
long-term lease from the Israel Lands Authority that expires in 2032.
Due to the sensitivity and complexity of the semiconductor manufacturing
process, a semiconductor manufacturing facility requires a special "clean room"
in which most of the manufacturing functions are performed. Our Fab 1 facility
includes an approximately 51,900 square foot clean room.
36
Since we commenced manufacturing at Fab 1, we increased its manufacturing
capacity from 5,000 wafers per month, using 1.25-micron and 1.0-micron
processes, to approximately 16,000 wafers per month as of May 31, 2006 depending
on process technology and product mix, using our 1.0 micron to 0.35-micron
processes, including specialized processes.
Our exact capacity is variable and depends on the combination of the
processes being used and may be significantly lower at certain times as a result
of certain of our combinations. In general, our ability to increase our
manufacturing capacity has been achieved through the addition of equipment,
improvement in equipment utilization, the reconfiguration and expansion of the
existing clean room area and the construction of an additional clean room area
within the building shell of Fab 1.
We have completed the transfer of Siliconix technology to Fab 1 and started
wafer production for Siliconix in the second quarter of 2005.
FAB 2
In January 2001, we commenced construction of Fab 2, our new advanced wafer
fab adjacent to Fab 1 in Migdal Haemek. The land on which Fab 2 is located is
subject to a long-term lease from the Israel Lands Authority that expires in
2049.
Fab 2 offers integrated circuits manufacturing services utilizing advanced
materials and a 0.18-micron process technology we licensed from Toshiba, as well
as 0.13-micron process technology we licensed from Freescale.
The overall clean room area in Fab 2 is approximately 100,000 square feet.
We began volume production at Fab 2 during the third quarter of 2003. .
Production capacity as of May 31, 2006 was approximately 15,000 wafers per
month. Depending on the process technology and product mix, when fully
ramped-up, we estimate that Fab 2 will be able to achieve capacity levels of
approximately 40,000 wafers per month.
Since 2000, we have invested significantly in the purchase of fixed assets,
primarily in connection with the construction of Fab 2, technology advancement
and capacity expansion. Capital expenditures in 2005, 2004 and 2003 were
approximately $30million, $172 million and $164 million, respectively, before
related Investment Center grants of $6 million, $30 million and $27 million,
respectively.
We have registered liens in favor of the State of Israel and our banks on
substantially all of our present and future assets, including Fab 1 and Fab 2
(see "Item 5 - Operating and Financial Review and Prospects - B. Liquidity and
Capital Resources - Fab 2 Agreements - Credit Facility").
ENVIRONMENTAL MATTERS AND CERTIFICATIONS
Our operations are subject to a variety of laws and governmental
regulations relating to the use, discharge and disposal of toxic or otherwise
hazardous materials used in our production processes. Failure to comply with
these laws and regulations could subject us to material costs and liabilities,
including costs to clean up contamination caused by our operations.
37
We believe that we are currently in compliance in all material respects
with applicable environmental laws and regulations.
In November 2004, we received ISO 14001 certification from The Standards
Institution of Israel. A series of international standards on environmental
management, ISO 14000 provides a framework for the development of an
environmental management system and the supporting audit program. ISO 14001 is
the cornerstone standard of the ISO 14000 series. It specifies a framework of
control for an environmental management system pursuant to which an organization
can be certified by a third party. The ISO 14001 certification applies to all of
our manufacturing facilities. Our authorized design center in Netanya, Israel
also received certification.
In November 2005, we achieved ISO/TS 16949 certification from the UK-based
National Quality Association pertaining to the manufacturing processes, work
procedures and product performance meeting the requirements of the automotive
industry. This quality management system standard certification covers all our
departments and activities.
In March 2006, we achieved ISO 17799 certification from The Standards
Institution of Israel for the high quality of our security technology and
implementations, covering all our departments and activities.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE INFORMATION CONTAINED IN THIS SECTION SHOULD BE READ IN CONJUNCTION WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 AND
RELATED NOTES AND THE INFORMATION CONTAINED ELSEWHERE IN THIS ANNUAL REPORT. OUR
FINANCIAL STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") IN ISRAEL. DIFFERENCES BETWEEN ISRAELI GAAP AND
US GAAP AS THEY RELATE TO OUR FINANCIAL STATEMENTS ARE DESCRIBED IN NOTE 20 TO
OUR AUDITED ANNUAL CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER
31, 2005.
OVERVIEW
We are a pure-play independent specialty foundry dedicated to the
manufacture of semiconductors. Pure-play foundries do not offer any products of
their own, but focus on producing integrated circuits based on the design
specifications of their customers. We manufacture semiconductors using advanced
production processes for our customers primarily based on third party designs
and our own proprietary designs. We currently offer the manufacture of ICs with
geometries ranging from 1.0 to 0.13-micron.
38
Our primary source of revenue is from the fabrication of ICs using CMOS
process technology. We are currently focused on the emerging opportunities
involving CMOS image sensors, embedded flash, mixed-signal and RFID
technologies. ICs manufactured by us are incorporated into a wide range of
products in diverse markets, including consumer electronics, personal computer
and office equipment, communications, automotive, professional photography and
medical device products.
The primary customers for our products are fabless IC companies and IDMs. A
substantial portion of our product sales are made pursuant to long-term
contracts with our customers, under which we have agreed to reserve
manufacturing capacity at our production facilities. Our sales cycle is
generally 12-24 months for new customers and can be as short as 9-12 months for
existing customers. The typical stages in the sales process, from initial
contact until production are: technical evaluation; photomask design
specification; silicon prototyping; assembly and testing; validation and
qualification; and production.
During the year ended December 31, 2005, we had five significant customers
who contributed between 5% to 22% of our revenues. In 2004, we had five
significant customers who contributed between 6% to 24% of our revenues. In
2003, we had five significant customers who contributed between 6% and 24% of
our revenues. In 2004 and 2005, SanDisk was instrumental in ramping up our
business. While we currently expect that SanDisk will continue to be a
significant customer of Fab 2, additional customers are expected to commence or
increase their purchase orders following the qualification of their products in
Fab 2 during 2006.
In addition to further developing our customer base, we have also made a
concentrated effort to expand the geographical diversity of our sales. The
percentage of our sales from customers located outside the United States was
36%, 40% and 27% in the years ended December 31, 2005, 2004 and 2003,
respectively. We believe that a substantial portion of our sales will continue
to come from customers located outside the United States.
Our company was founded in 1993, when we acquired National Semiconductor's
150-mm wafer fabrication facility, or Fab 1, and commenced operations as an
independent foundry. Since then, we have significantly modernized our Fab 1
facility, which has improved its process geometries from 1.0-micron to
0.35-micron and enhanced its process technologies to include CMOS image sensors,
embedded flash and mixed-signal technologies. We have also expanded our
production capacity in Fab 1 to approximately 16,000 wafers per month as of June
30, 2006, depending on process technology and product mix, to meet additional
customer demand. Fab 1 has been cash flow positive from operations since the
second quarter of 2002. We completed the transfer of Siliconix technology to Fab
1 and started wafer production for Siliconix in the second quarter of 2005.
During the third quarter of 2003, we completed the construction of the
building and infrastructure of our second manufacturing facility, or Fab 2. Fab
2 is designed to operate in geometries of 0.18-micron and below, using advanced
materials and advanced CMOS technology licensed from Freescale and Toshiba, as
well as other technologies that we might acquire or develop independently. We
began volume production at Fab 2 during the third quarter of 2003. Production
capacity of Fab 2 as of June 30, 2006 was approximately 15,000 wafers per month.
39
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION. In accordance with generally accepted accounting
principles, our revenues are recognized upon shipment or as services are
rendered when title has been transferred, collectibility is reasonably assured
and acceptance criteria are satisfied, based on tests performed prior to
customer on-site testing. Prior to commencement of our production, both our
customers and our personnel test and pre-approve the prototype, on the basis of
which specifications and features the ordered products will be produced.
Electronic, functional and quality tests are performed on the products prior to
shipment and customer on-site testing. Such testing reliably demonstrates that
the products meet all of the specified criteria prior to formal customer
acceptance and that product performance upon customer on-site testing can
reasonably be expected to conform to the specified acceptance provisions. Our
revenue recognition policy is significant because our revenues are a key
component of our results of operations. We follow very specific and detailed
guidelines in measuring revenue; however an accrual for estimated returns, which
is computed primarily on the basis of historical experience, is recorded. Any
changes in assumptions for determining the accrual for returns may affect mainly
the timing of our revenue recognition and cause our operating results to vary
from quarter to quarter.
Accordingly, our financial position and results of operations may be
affected. That effect, if any, under Israel GAAP and US GAAP would be similar.
DEPRECIATION AND AMORTIZATION OF FAB 2 ASSETS. Depreciation and
amortization expense in 2005 amounted to $144.9 million. During the third
quarter of 2003, we commenced depreciating the Fab 2 property and equipment and
amortizing the 0.18-micron technology, based on the straight-line method.
Currently, we estimate that the expected economic life of the Fab 2 assets will
be as follows: (i) prepaid perpetual land lease and buildings (including
facility infrastructure) - 14 to 25 years; (ii) machinery and equipment - 5
years; and (iii) the 0.18-micron and 0.13 micron technology - 4 years, while
amortization phases in commencing on the dates on which each of the Fab 2
manufacturing lines is ready for its intended use. We expect that the
depreciation and amortization expenses relating to Fab 2 facilities will be
approximately $138 million in 2006. Changes in our estimates regarding the
expected economic life of Fab 2 assets, or a change in the dates on which each
of the Fab 2 manufacturing lines is ready for its intended use, might affect our
depreciation and amortization expenses. That effect, if any, under Israel GAAP
and US GAAP would be similar.
IMPAIRMENT OF ASSETS. Standard No. 15, "Impairment of Assets," of the
Israeli Accounting Standards Board addresses the accounting treatment and
presentation of impairment of assets, and establishes procedures to be
implemented in order to ensure that assets are not presented in amounts
exceeding their recoverable value. The review of possible impairment charges was
performed based on our business plan, as was approved by our board of directors.
The business plan is based, among other things, on the future completion of the
construction and equipping of Fab 2 to reach full capacity. Application of
Standard 15 resulted in no impairment charges. According to US GAAP, e.g. FASB
144 and FASB 142, recoverability tests are performed based on undiscounted
expected cash flows, Standard No. 15 indicates that an asset's recoverable value
is the higher of the asset's net selling price and the asset's value in use, the
latter being equal to the asset's discounted expected cash flows. While applying
the provisions of Standard No. 15 had no effect on our financial position and
results of operations, the use of different assumptions with respect to the
expected cash flows from our assets and with respect to other economic
variables, primarily the discount rate, may lead to different conclusions
regarding the recoverability of our assets' carrying values and to the potential
need to record an impairment loss for our long-lived assets.
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CONVERTIBLE DEBENTURES
As of December 31, 2005, convertible debentures the future conversion of
which is not probable as of the balance-sheet date are presented as long-term
liabilities and current liabilities (with respect to the current maturities)
based on their terms as of such date, net of discount.
As of December 31, 2005, under Israeli GAAP, convertible debentures
denominated in dollar the future conversion of which is probable as of the
balance-sheet date, are presented as a separate line-item between total
liabilities and shareholders equity.
Commencing January 1, 2006, we adopted Standard No. 22 of the Israeli
Accounting Standard Board "Financial Instruments: Disclosure and Presentation".
Under Standard No. 22, the three series of our convertible debentures are
considered compound instruments, therefore, are to be separated to its
components, the equity component and the liability component. The amount
attributed to the equity component is calculated as the excess in value of (i)
the carrying amount net of issuance costs and (ii) discounting the same cash
flows using the rate commensurate for non-convertible debt. The equity component
as calculated above is classified in equity. In applying the provisions of
Standard No. 22, the use of different assumptions with respect to the discount
rate may lead to different amounts allocated to the equity component.
Under US GAAP the Company is required to determine the conversion option
embedded in the convertible debt should be bifurcated and accounted for
separately. Such determination is based on the determination whether on a stand
alone such conversion option would be classified in equity. If the option can be
classified as equity no bifurcation is required.
NON-CAPITALIZABLE COSTS. In accordance with generally accepted accounting
principles, we capitalized through the third quarter of 2003 most of our costs
relating to the establishment of Fab 2, primarily for property and equipment and
other assets. Capitalizable Fab 2 costs were only incremental direct costs that
related to the establishment and equipping of Fab 2 and to the integration and
transfer of technology to be implemented in Fab 2. Following initial
commencement of operations of Fab 2 in the third quarter of 2003(equipping of
Fab 2 towards full capacity is still to be completed, most of the direct costs
related to the construction and equipping of Fab 2 and to the transfer of the
Fab 2 technologies that were capitalizable until Fab 2 came into production, are
no longer capitalizable.
Direct internal costs which were capitalized to Fab 2 consisted primarily
of payroll-related costs, and allocated payroll costs, on the basis of
management's estimates and assumptions and methodologies, including timesheet
inputs. Most of the capitalized payroll-related costs consisted of wages to
employees dedicated solely to the establishment of Fab 2. In addition, other
direct related expenses such as import costs, transportation, installation and
consulting fees were also capitalized. Under different assumptions relating to
these costs and their being attributable to Fab 2, the classification and
accounting recognition of these costs may have been different, which may
significantly affect our financial position and results of operations. The
effect, if any, under Israel GAAP and US GAAP would be similar.
41
RECENT ACCOUNTING PRONOUNCEMENTS UNDER US GAAP AS THEY APPLY TO US
SFAS No. 151 - Inventory Costs, an Amendment of ARB No. 43, Chapter 4 - In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an Amendment of
ARB No. 43, Chapter 4". SFAS No. 151 amends the guidance in ARB 43, Chapter 4,
"Inventory Pricing", which provides guidance on the allocation of certain costs
to inventory. SFAS 151 clarifies that abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) should be recognized as
current-period charges. In addition, SFAS 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The provisions of this statement are effective for
inventory costs incurred during fiscal years beginning after June 2005. The
provisions of this statement shall be applied prospectively. This Standard is
not expected to have a material effect on our financial position or results of
operations.
SFAS No. 123 (revised 2004) "Share Based Payments". In December 2004, the
FASB issued SFAS No. 123 (revised 2004) "Share Based Payments" ("SFAS 123(R)").
This Statement is a revision of FASB Statement No. 123, "Accounting for
Stock-Based Compensation", which supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and its authoritative interpretations.
SFAS 123(R) eliminates the alternative to use APB 25's intrinsic value
method of accounting that was allowed in SFAS 123 as originally issued and
requires to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award. The
fair-value-based method in this Statement is similar to the fair-value-based
method in SFAS 123 in most respects. The costs associated with the awards will
be recognized over the period during which an employee is required to provide
service in exchange for the award - the requisite service period (usually the
vesting period).
The provisions of SFAS 123(R) apply to all awards granted by us on or after
January 1, 2006 and to awards modified, repurchased, or cancelled after that
date. When initially applied the provisions of SFAS 123(R), in the first quarter
of 2006, we were required to elect between using either the "modified
prospective method" or the "modified retrospective method". Under the modified
prospective method, we were required to recognize compensation cost for all
awards granted after the adoption of SFAS 123(R) and for the unvested portion of
previously granted awards that are outstanding on that date. Under the modified
retrospective method, we were required to restate its previously issued
financial statements to recognize the amounts previously calculated and reported
on a pro forma basis, as if the original provisions of SFAS 123(R) had been
adopted. Under both methods, it is permitted to use either a straight line or an
accelerated method to amortize the cost as an expense for awards with graded
vesting.
Management has commenced identifying the potential future impact of
applying the provisions of SFAS 123(R), including each of its proposed
transition methods. Based on the outstanding options as of December 31, 2005,
the total compensation to be amortized in the years 2006-2009 is expected to be
approximately $4.2 million.
On March 29, 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 107 ("SAB 107"). This Staff Accounting Bulletin
expresses views of the staff regarding the interaction between SFAS 123(R) and
certain SEC rules and regulations and provides the SEC staff's views regarding
the valuation of share-based payment arrangements for public companies.
42
On April 14, 2005, the SEC adopted a new rule amending the compliance dates
for SFAS 123(R). Under the SEC rule, the provisions of SFAS 123(R) apply to all
awards to be granted after January 1, 2006 and to awards modified, repurchased,
or cancelled after that date.
SFAS 153, Exchange of Non-Monetary Assets - In December 2004, the FASB
issued SFAS No. 153, "Exchanges of Nonmonetary Assets an amendment of APB No.
29". This Statement amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. The
Statement specifies that a nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This Statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Retroactive
application is not permitted. The adoption of this Standard does not affect our
financial position or results of operations.
SFAS No. 154, Accounting Changes and Error Corrections - This Statement,
published in May 2005, replaces APB Opinion No. 20, Accounting Changes, and FASB
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements,
and changes the requirements for the accounting for and reporting of a change in
accounting principles. This Statement applies to all voluntary changes in
accounting principles, and to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions.
Opinion 20 previously required that most voluntary changes in accounting
principles be recognized by including the cumulative effect of changing to the
new accounting principles in the net income of the period of the change. This
Statement requires retrospective application to prior periods' financial
statements of changes in accounting principles, unless it is impracticable to
determine the specific effects or the cumulative effect of the change. The
Statement also provides guidance for cases in which it is impracticable to
determine the period-specific effects of an accounting change on one or more
individual prior periods presented, and/or for cases in which it is
impracticable to determine the cumulative effect of applying a change in
accounting principles to all prior periods.
This Statement defines retrospective application as (i) the application of
a different accounting principle to prior accounting periods as if that
principle had always been used, or (ii) as the adjustment of previously issued
financial statements to reflect a change in the reporting entity. This Statement
also redefines restatement as the revisiting of previously issued financial
statements to reflect the correction of an error.
This Statement also requires that a change in depreciation, amortization,
or depletion method for long-lived, non-financial assets, be accounted for as a
change in accounting estimate effected by a change in accounting principles.
This Statement carries forward without change the guidance in Opinion 20 for
reporting the correction of an error in previously issued financial statements
and a change in accounting estimate. This Statement also carries forward the
guidance in Opinion 20 requiring justification of a change in accounting
principles on the basis of preferability.
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The provisions of this Statement are effective for accounting changes and
corrections of errors made during fiscal years beginning after December 15,
2005. The adoption of this Standard is not expected to have a material effect on
our financial position or results of operations. SFAS No. 155. Accounting for
Certain Hybrid Financial Instruments -In February 2006, the FASB issued SFAS
155, "Accounting for Certain HybridFinancial Instruments". Key provisions of
SFAS 155 include: (1) a broad fair value measurement option for certain hybrid
financial instruments that contain an embedded derivative that would otherwise
require bifurcation; (2) clarification that only the simplest separations of
interest payments and principal payments qualify for the exception afforded to
interest-only strips and principal-only strips from derivative accounting under
paragraph 14 of FAS 133 (thereby narrowing such exception); (3) a requirement
that beneficial interests in securitized financial assets be analyzed to
determine whether they are freestanding derivatives or whether they are hybrid
instruments that contain embedded derivatives requiring bifurcation; (4)
clarification that concentrations of credit risk in the form of subordination
are not embedded derivatives; and (5) elimination of the prohibition on a QSPE
holding passive derivative financial instruments that pertain to beneficial
interests that are or contain a derivative financial instrument. In general,
these changes will reduce the operational complexity associated with bifurcating
embedded derivatives, and increase the number of beneficial interests in
securitization transactions, including interest-only strips and principal-only
strips, required to be accounted for in accordance with FAS 133. Management does
not believe that SFAS 155 will have a material effect on our financial
condition, results of operations, or liquidity.
RECENT ACCOUNTING PRONOUNCEMENTS UNDER ISRAELI GAAP AS THEY APPLY TO US
Accounting Standard No. 24 "Share-Based Payments" - In September 2005, the
Israeli Accounting Standards Board published Accounting Standard No. 24
"Share-Based Compensation" (the "Standard"), which calls for the recognition in
the financial statements of share-based payments, including transactions with
employees, which are to be settled by the payment of cash, by other assets, or
by equity instruments. Under Standard No. 24, amongst other matters, costs
associated with grants of shares and options to employees will be expensed over
the vesting period of each grant. Said costs will be determined based on the
fair value of the grants at each grant date. The Standard establishes guidelines
for measuring the fair value of each grant based on the settlement terms (either
by cash or equity instrument), and disclosure provisions.
The Standard is effective for financial statements for periods commencing
January 1, 2006 or thereafter. The Standard provides that with respect to
Share-based payments to be settled by equity instruments, its provisions should
be applied to all grants made after March 15, 2005, that are unvested as of
December 31, 2005. The Standard further provides that its provisions should be
applied to modifications that were made after March 15, 2005, even if the
underlying grants are not in the scope of the Standard.
44
As of December 31, 2005, the award cost with respect to outstanding
employee and director options on which the Standard will be applied amounts to
approximately $2.0 million, to be amortized over 2006-2009.
Accounting Standard No. 22 "Financial Instruments: Disclosure and
Presentation" - In July 2005, the Israeli Accounting Standards Board approved
for publication Accounting Standard No. 22 "Financial Instruments: Disclosure
and Presentation" ("Standard No. 22"). A financial instrument under Standard No.
22 is defined, in general, as any contract that establishes a financial asset of
an entity, or a financial liability or equity instrument of another entity.
Standard No. 22 establishes the requirements for presentation of financial
instruments in the financial statements and indicates the information that
should be disclosed in relation thereto, and, in certain cases, the method to
measure their impact on the entity's financial statements. The presentation
requirements relate to the classification of financial instruments as financial
assets, financial liabilities or equity instruments. It also deals with the
classification of related interest, dividends, losses and gains and to the
circumstances under which financial assets and financial liabilities are to be
offset. Standard No. 22 establishes requirements for disclosure of information
relating to factors affecting the amount, timing and certainty of the entity's
future cash flows relating to financial instruments and accounting policy
implemented in respect of these instruments. Standard No. 22 also establishes
requirements for disclosure of information about the nature and the extent of an
entity's use of financial instruments, the business purposes they serve, the
risks associated with them and management's policies for the oversight of those
risks.
Standard No. 22 is effective for financial statements for periods
commencing January 1, 2006 or thereafter. Financial instruments issued before
the effective date of Standard No. 22 will be classified and presented in
accordance with its provisions commencing from the effective date. Comparative
financial statements for prior periods are not to be adjusted. We issued three
series of convertible debentures that are considered compound instruments under
Standard No. 22. A compound instrument has to be separated to its components,
the equity component and the liability component. The equity component is
classified as shareholders' equity and is determined as the excess of the total
value over the fair value of the liability component.
The initial adoption of the Standard commencing 2006, affected primarily
the presentation of our convertible debentures (the bifurcation of the
convertible debentures into debt component and equity component, as these terms
are defined by the Standard). Consequently, on January 1, 2006, our shareholders
equity was recorded with a one-time increase of approximately $22.0 million,
while its total convertible debentures decreased by same amount. Commencing from
that date, said amount will be amortized as financing expenses through 2011.
Accounting Standard No. 21 "Earnings Per Share" - In February 2006, the
Israeli Accounting Standards Board approved for publication Accounting Standard
No. 21, "Earnings Per Share" ("Standard No. 21").
45
With the initial adoption of Standard No. 21, Opinion No. 55 of the
Institute of Certified Public Accountants in Israel - Earnings per share is
cancelled.
Standard No. 21 prescribes that an entity shall calculate basic earnings
per share amounts for profit or loss attributable to ordinary equity holders of
the entity. The basic earnings per share shall be calculated by dividing profit
or loss attributable to ordinary equity holders of the entity (the numerator) by
the weighted average number of ordinary shares outstanding (the denominator)
during the reported period. For the purpose of calculating diluted earnings per
share, an entity shall adjust profit or loss attributable to ordinary equity
holders of the entity, and the weighted average number of shares outstanding,
for the effects of all dilutive potential ordinary shares.
Standard No. 21 is effective for financial statements for periods
commencing January 1, 2006 or thereafter. The adoption of Standard No. 21 is
accounted for retrospectively and a comparative earnings per share data for
prior periods is adjusted. Accordingly, in the unaudited condensed interim
consolidated financial statements for the three months ended March 31, 2006, the
loss per share presented for the 12 months ended December 31, 2005 was adjusted
from $2.55 to $3.06.
Accounting Standard No. 25 "Revenues" - In February 2006, the Israeli
Accounting Standards Board approved for publication Accounting Standard No. 25,
"Revenues" ("Standard No. 25").
Standard No. 25 establishes the requirements for recognition criteria,
measurement, disclosure and presentation of revenues arising from sale of goods,
rendering of services and from the use by others of entity assets yielding
interest, royalties and dividends. Standard No. 25 prescribes that revenue shall
be measured at the fair value of the consideration received or receivable.
Standard No. 25 is effective for financial statements for periods
commencing January 1, 2006 or thereafter. The adoption of the standard had no
material effect on the unaudited condensed interim consolidated financial
statements for the three months ended March 31, 2006.
RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with the financial statements
and the related notes thereto included in this annual report. The following
table sets forth certain statement of operations data as a percentage of total
revenues for the years indicated.
46
Year Ended December (31,)
----------------------------------
2005 2004 2003
------- ------- -------
STATEMENT OF OPERATIONS DATA:
Cost of sales 100.0% 100.0% 100.0%
Cost of total revenues 233.7 181.2 199.4
------- ------- -------
Gross loss (133.7) (81.2) (99.4)
Research and development 15.7 13.5 33.7
Marketing, general and administrative 17.1 16.9 36.9
------- ------- -------
Operating loss (166.5) (111.6) (170.0)
Financing expense, net (35.0) (23.6) (16.1)
Other income (expense), net 2.34 25.9 (0.1)
------- ------- -------
Loss (199.1)% (109.3)% (186.2)%
======= ======= =======
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
TOTAL REVENUES. Total revenues for the year ended December 31, 2005
decreased by 19.1% to $102.0 million from $126.1 million for the year ended
December 31, 2004. This $24.1 million decrease was mainly attributable to lower
volume of wafer shipments, which was partly offset by increased revenues from a
joint development agreement for certain technology with a Japanese semiconductor
manufacturer.
During the year ended December 31, 2005, we had five significant customers
who contributed between 5% and 22% of our revenues.
COST OF TOTAL REVENUES. Cost of total revenues in the year ended December
31, 2005 amounted to $238.4 million, compared with $228.4 million for the year
ended December 31, 2004. This increase was mainly due to an increase in
depreciation and amortization expenses which was partly offset by cost
reductions and efficiency measures taken by us.
GROSS LOSS. Gross loss in the year ended December 31, 2005 was $136.4
million compared to a gross loss of $102.4 million for the year ended December
31, 2004. The increase in gross loss was mainly attributable to the decrease in
total revenues and to the increased cost of total revenues.
RESEARCH AND DEVELOPMENT. Research and development expenses for the year
ended December 31, 2005 decreased to $16.0 million from $17.1 million for the
year ended December 31, 2004. The decrease was mainly attributable to cost
reductions and efficiency measures taken by us. Research and development
expenses are reflected net of participation grants received from the Israeli
government ($1.0 million and $1.5 million, for the years ended December 31, 2005
and 2004, respectively).
MARKETING, GENERAL AND ADMINISTRATION. Marketing, general and
administrative expenses in the year ended December 31, 2005 decreased to $17.4
million from $21.3 million for the year ended December 31, 2004, primarily due
to cost reductions and efficiency measures taken by us.
47
OPERATING LOSS. Operating loss in the year ended December 31, 2005 was
$169.8 million, compared to $140.7 million for the year ended December 31, 2004.
The increase in the operating loss is attributable mainly to the increase in the
gross loss.
FINANCING EXPENSES, NET. Financing expenses, net in the year ended December
31, 2005 were $35.7 million compared to financing expenses, net of $29.8 million
for the year ended December 31, 2004. This increase is mainly due to an increase
of $7.6 million in connection with our Fab 2 credit facility agreement
attributable to (i) a higher amount of long-term loans which financed the
construction and equipping of Fab 2 during the year ended December 31, 2005 as
compared to the amount of such long-term loans during the year ended December
31, 2004, and (ii) an increase in the LIBOR rate from an average of
approximately 1.5% per annum for the year ended December 31, 2004 to an average
of approximately 3.3% per annum for the year ended December 31, 2005 (our
long-term loans bear interest at a rate of LIBOR + 2.5% per annum).
OTHER INCOME (EXPENSE), NET. Other income, net for the year ended December
31, 2005 was $2.4 million compared to $32.7 million for the year ended December
31, 2004. This decrease was mainly attributable to the $32.4 million gain from
the sale of the Saifun Semiconductor shares in 2004.
LOSS. Our loss in the year ended December 31, 2005 was $203.1 million,
compared to $137.8 million for the year ended December 31, 2004. This increase
is primarily attributable to the increase in the operating loss of $29.1
million, the increase in financing expenses, net of $5.9 million, and the
decrease in other income, net of $30.3 million.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
TOTAL REVENUES. Total revenues in the year ended December 31, 2004
increased by 105.4% to $126.1 million from $61.4 million in 2003. This $64.7
million increase was attributable to the ramp up of capacity of our Fab 2 wafer
fabrication and the increase in production levels.
COST OF TOTAL REVENUES. Cost of total revenues in the year ended December
31, 2004 totaled $228.4 million, compared with $122.4 million in 2003. This
increase was due mainly to Fab 2 operations, which in 2003 operated only for
half a year while in 2004 operated for a full year, resulting in an increase of
$61.6 million in depreciation and amortization expenses and an increase of $23.9
million in materials usage mainly related to Fab 2.
GROSS LOSS. Gross loss in the year ended December 31, 2004 was $102.4
million compared to a gross loss of $61.0 million in 2003. The increase in gross
loss was primarily attributable to the increased cost of total sales, which was
partially offset by the increase in revenues.
RESEARCH AND DEVELOPMENT. Research and development expenses in the year
ended December 31, 2004 decreased to $17.1 million from $20.7 million in 2003.
The decrease was primarily due to decreased expenses related to the Fab 2
0.13-micron technology agreement signed with Freescale in 2002. Research and
development expenses are reflected net of participation grants received from the
Israeli government ($1.5 million and $1.1 million, in 2004 and 2003,
respectively).
48
MARKETING, GENERAL AND ADMINISTRATION. Marketing, general and
administrative expenses in the year ended December 31, 2004 decreased to $21.3
million from $22.6 million in 2003, primarily due to decreased use of
outsourcing services.
OPERATING LOSS. Operating loss in the year ended December 31, 2004 was
$140.7 million, compared to $104.4 million in 2003, attributable primarily to
the ramp-up of Fab 2. This increase in the operating loss reflects an increase
in gross loss of $41.4 million, a decrease in research and development expenses
of $3.6 million and a decrease in marketing and sales, general and
administrative expenses of $1.3 million.
FINANCING EXPENSES, NET. Financing expenses, net in the year ended December
31, 2004 were $29.7 million compared to financing expenses, net of $9.8 million
in 2003. This increase is mainly due to an increase of $19.5 million in
connection with our Fab 2 facility agreement attributable to (i) an increase
during 2004 in the total amount of long-term loans which financed the
construction and equipping of Fab 2, (ii) the discontinuation of capitalization
of financing costs that had been capitalized prior to the commencement of
operations of Fab 2 in the third quarter of 2003 and (iii) the increase in the
interest rate from LIBOR plus 1.5% in 2003 to LIBOR plus 2.5% commencing from
January 2004 pursuant to the November 2003 amendment to our credit facility
agreement with our banks.
OTHER INCOME (EXPENSE), NET. Other income, net in 2004 was $32.7 million
compared to other expense, net of $0.1 million in 2003 due to the sale in 2004
of our shareholdings in Saifun Semiconductors Ltd. for a net capital gain of
$32.4 million.
LOSS. Our loss in the year ended December 31, 2004 was $137.8 million,
compared to $114.3 million in 2003. This increase is primarily attributable to
the increased operating loss of $36.3 million and the increase in financing
expenses, net, of $19.9 million offset by increased other income, net of $32.8.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
The dollar cost of our operations in Israel is influenced by the timing of
any change in the rate of inflation in Israel and the extent to which such
change is not offset by the change in valuation of the NIS in relation to the
dollar. During 2005, the dollar strengthened against the NIS by 6.8% and the
Israeli Consumer Price Index, or CPI increased by 2.4%. During 2004, the dollar
was devalued against the NIS by 1.6%, and the CPI increased by 1.2%. We believe
that the rate of inflation in Israel has had a non-material effect on our
business to date. However, our dollar costs will increase if inflation in Israel
exceeds the devaluation of the NIS against the dollar, or if the timing of such
devaluation lags behind inflation in Israel.
Almost all of our cash generated from operations and from our financing and
investing activities is denominated in U.S. dollars and NIS. Our expenses and
costs are denominated in NIS, U.S. dollars, Japanese Yen and Euros. We are,
therefore, exposed to the risk of currency exchange rate fluctuations.
49
Our borrowings under our Fab 2 credit facility, which comprise the majority
of our long-term liabilities, provide for interest based on a floating Libor
rate, and we are therefore exposed to interest rate fluctuations. From time to
time, we engage in various hedging strategies to reduce our exposure to some,
but not all, of these risks and intend to continue to do so in the future.
However, despite any such hedging activity, we are likely to remain exposed to
interest rate and currency exchange rate fluctuations, which may increase the
cost of our business activities, particularly our financing expenses.
Our 2002 and 2006 convertible debentures are denominated in NIS linked to
the Israeli CPI and therefore we are exposed to fluctuation in the NIS/dollar
exchange rate. The dollar amount of our financing costs (interest and currency
adjustments) related to the 2002 and 2006 convertible debentures will increase
if the rate of inflation in Israel is not offset (or is offset on a lagging
basis) by the devaluation of the NIS in relation to the dollar. In addition, the
dollar amount of any repayment on account of the principal of the 2002 and 2006
convertible debentures will increase as well.
The quantitative and qualitative disclosures about market risk are in Item
11 of this annual report.
B. LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2005, we had an aggregate of $39.0 million in cash, cash
equivalents, and short-term interest-bearing deposits, of which $22.0 million
was contractually restricted for Fab 2 use only and $9.6 million was
contractually restricted for use in the Siliconix project only. This compares to
$81.5 million in cash, cash equivalents, and short-term interest-bearing
deposits, of which $39.7 million was contractually restricted for Fab 2 use only
and $14.1 million was contractually restricted for use in the Siliconix project
only, as of December 31, 2004. In addition, as of December 31, 2004, we had $5.1
million (none as of December 31, 2005) in long-term interest-bearing deposits,
which were contractually serving as a security for our convertible debentures.
During the year ended December 31, 2005, we generated cash from the
following sources: $22.1 million from bank loans; $25.1 million in proceeds from
the issuance of convertible debentures, net; $7.5 million from Investment Center
grants and $2.2 million in proceeds from disposal of property. These liquidity
resources partially financed our operating activities (net amount of $60.7
million) and our investments made during the year ended December 31, 2005, which
aggregated $42.7 million mainly in connection with the construction, and
purchase and installation of equipment and other assets, for Fab 2.
As of December 31, 2005, we had loans in the amount of $518.1 million in
connection with the establishment of Fab 2. Of that amount, $21.1 million are
presented as current maturities as of December 31, 2005 in the financial
statements included in this annual report. In addition, as of such date, we had
convertible debentures in the aggregate of $51.3 million, of which $6.5 million
are presented as current maturities in the financial statements included in this
annual report.
50
During the third quarter of 2003, Fab 2, our new advanced wafer facility
adjacent to Fab 1 in Migdal Haemek, Israel had initially commenced operations.
Production capacity of Fab 2 as of May 31, 2006 was approximately 15,000 wafers
per month. The Fab 2 ramp up financing may be funded by additional grants from
the Investment Center, sales of our securities, wafer prepayments from our
customers and cash flow from operations or from other sources.
In recent years, we have experienced significant recurring losses from
operations and recurring negative cash flows from operating activities and an
increasing accumulated deficit and a deficit in shareholders equity. In order to
have adequate liquidity for our activities in 2005 and thereafter, we have taken
measures to reduce our short-term liabilities. We have implemented cost
reduction measures, including measures to reduce expenses, cost structure and
cash burn, and in March 2005, we completed a workforce cutback, as part of an
across-the-board savings plan focused on operational efficiencies. In addition,
in July 2005 we entered into a definitive amendment to our facility agreement
with our banks. The amendment provided, among other things, for our banks to
provide additional financing of up to approximately $30 million, subject to us
raising through the issuance of shares or convertible debentures $23.5 million
by October 31, 2005 (which was subsequently extended to December 31, 2005) and
an additional $6.5 million by March 31, 2006. In January 2006 we completed a
rights offering of convertible debentures in which we raised approximately $48.2
million, thereby satisfying the abovementioned obligation to raise additional
funds. For a description of the July 2005 amendment and the rights offering of
convertible debentures see "Fab 2 Agreements" below.
In May 2006 we signed an amendment to the Facility Agreement with its
Banks, according to which repayments of long-terms loans in the amount of
approximately $100 million, formerly scheduled to be paid between October 2006
and June 2007, were deferred to July 2007.
In March 2006, our Board of Directors approved the plan to ramp up Fab 2 in
order to meet our customer and product qualification needs, based on its
customer pipeline, reinforced by forecasted market conditions. According to this
plan, we will need to raise approximately $130 million during 2006 (of which
approximately $31 million was raised with the completion of the TASE offering in
June 2006 and additional $100 million is expected to be raised from Israel Corp
as described under "Item 4 - Information on the Company - A. History and
Development of the Company - Recent Developments), which will increase the
current Fab 2 capacity to approximately 24,000 wafers per month.
As part of the financing efforts for that expansion plan, in May 2006, we
signed a Memorandum of Understanding (MOU) with our banks for the refinancing of
the $526.7 million in long term debt, which is described above under "Item 4 -
Information on the Company - A. History and Development of the Company - Recent
Developments.
In June 2006 we successfully completed an underwritten public offering of
our securities on the TASE in Israel resulting in gross proceeds of
approximately NIS 140 million (approximately $31 million). See "Item 4 -
Information on the Company - A. History and Development of the Company - Recent
Developments".
51
We currently expect to have sufficient liquidity at least until the end of
2006 to meet our short-term activities and liabilities. However, if we fail to
close in a timely manner the $100 million investment by Israel Corp. and a
definitive amendment to our facility agreement with our banks based on the May
2006 MOU, we may be required to suspend the implementation of our current plan
to ramp-up Fab 2 production capacity to approximately 24,000 wafers per month
(See "Item 4 - Information on the Company - A. History and Development of the
Company - Recent Developments"), which would materially adversely affect our
company and may cause us to cease our operations.
In order to fully ramp-up the capacity of Fab 2 to approximately 40,000
wafers per month, we currently estimate that we will require the raising of up
to an approximately $150 million, in addition to funds already raised and the
$100 million committed by Israel Corp.
The following chart illustrates the various financial sources available to
us to fund the construction and ramp-up of Fab 2, the amounts received as of
March 31, 2006 and the amounts expected or required to be received from various
sources as of March 31, 2006. We cannot assure you that we will be able to
obtain funds from these sources as expected due to poor conditions in capital
markets, poor conditions in the semiconductor market, failure to benefit from
upswings in the semiconductor market or other factors, any or all of which may
affect our ability to raise funds. If we do not satisfy our need for funds for
Fab 2 or if the timing of the receipt of financing lags behind the timing of
expenses, we may from time to time experience lack of liquidity for our
activities.
AMOUNTS EXPECTED
OR REQUIRED TO
Financial Sources based on agreements and RECEIVED AS OF BE RECEIVED AFTER
arrangements completed through March 31, 2006 MARCH 31, 2006 MARCH 31, 2006 TOTAL (3)
(IN MILLIONS)
----------------------------------------
Major shareholders $323.7 $100 $423.7
Investment Center $159 (1) $ 91 $250
Credit facility $526.7(2) - $526.7
Other financing sources $243.4 - $243.4
52
(1) Under the requirements of Israeli Law, we were required to complete our
approved investment program for Fab 2 by the end of 2005 (see "-- Investment
Center Grants" below). Our not completing such investment program by the end of
2005 may result in the Investment Center requiring us to repay all or a portion
of the grants already received. See "Risk Factors -- If the Investment Center of
the Israeli Ministry of Industry, Trade and Labor, or Investment Center, will
not approve our request for a new expansion program, we would be required to
seek alternative financing sources to complete the ramp-up of Fab 2, which may
not be available. Our not completing investments in the amount of $1.25 billion
by the end of 2005 may result in the Investment Center requiring us to repay all
or a portion of the grants already received, and if we are unable to refund such
grants, we may have to close our operations".
(2) Under the amended credit facility agreement, we are required to comply
with minimum production capacity milestones and maintain certain financial
ratios and additional conditions and covenants. For a description of these
ratios and covenants, see below "Fab 2 Agreements-Credit Facility".
(3) We will be required to make capital investments and acquire and
implement advanced technologies in order to complete the ramp-up Fab 2. We will
also require additional cash to complete the full ramp-up of Fab 2.
FAB 2 AGREEMENTS
WAFER PARTNER AGREEMENTS. During 2000, we entered into a series of
agreements with four wafer partners: SanDisk Corporation, Alliance
Semiconductor, Macronix International and QuickLogic Corporation. The wafer
partners agreed to invest $250 million in us; SanDisk, Alliance and Macronix
each committed to invest $75 million, and QuickLogic committed to invest $25
million in exchange for our ordinary shares and credits towards the purchase of
wafers from Fab 2 under the terms set forth in the agreements. We also agreed to
reserve approximately 50% of Fab 2's capacity for our wafer partners for a
10-year period ending in January 2011, including during the ramp-up of Fab 2. In
addition, these agreements generally provide for a five percent discount on
wafer purchases made by the wafer partners of up to 80% of the maximum Fab 2
wafer fabrication capacity committed to the wafer partners, subject to minimum
holdings of our ordinary shares. These agreements (and the agreements with our
financial investors) were amended in April 2002, May 2003, and November 2003.
As of June 30, 2006, we have received an aggregate of approximately $245
million from our wafer partners, of which approximately $202 million was
invested in consideration for approximately 31.4 million of our ordinary shares,
approximately $8 million was invested in our 2005 rights offering (described
below), and the remaining approximately $35 million was established as wafer
credits.. Our wafer partners are not obligated to invest any more money in us.
See Note 11A(3) to our audited annual consolidated financial statements.
INVESTMENT BY ISRAEL CORPORATION AND OTHER FINANCIAL INVESTORS. In December
2000, Israel Corp., our current principal shareholder and one of Israel's major
holding companies, agreed to invest $50 million contemporaneous with the
investments by the wafer partners. In consideration of Israel Corp.'s
investment, we issued its wholly-owned subsidiary, Israel Corporation
Technologies (ICTech) Ltd., or ICTech, a total of 6,749,669 of our ordinary
shares through January 2004. In 2005, ICTech transferred these shares to Israel
Corp. TIC invested, in the aggregate, an additional approximately $29million in
connection with our 2002 and 2005 rights offerings (described below).
53
In February 2001, the Challenge Fund-Etgar II agreed to invest $5 million
in our company on substantially the same terms as Israel Corp. In consideration
of Challenge's investment, we issued Challenge a total of 670,166 of our
ordinary shares through January 2004.
See Note 11A(4) to our audited annual consolidated financial statements.
WAFER CREDITS. In connection with their investments in Fab 2, we issued to
our wafer partners non-transferable credits that may be used to reduce the cash
amounts to be paid by them when paying for wafers manufactured in Fab 2. These
credits could generally be used at a rate of 7.5% for purchases made through
June 2005 and 15% for purchases made thereafter. Our major wafer partners,
SanDisk, Alliance and Macronix, have agreed that they will not utilize any of
their credits, which amounted to approximately $36 million as of December 31,
2005, for purchase orders of our wafer products until December 31, 2006. From
January 1, 2004 to December 31, 2006, each major wafer partner is entitled,
every quarter, to convert into our ordinary shares its wafer credits that could
have been utilized by such wafer partner against the actual payment of wafers
manufactured at Fab 2 during such quarter; otherwise, these credits will bear
interest payable every quarter at three-month LIBOR plus 2.5% through December
31, 2007. On December 31, 2007, the remaining wafer credits that could have been
utilized during this period that have not been converted into shares will be
repaid to all our major wafer partners. Should the wafer partners elect to
convert their wafer credits into our ordinary shares, they will be issued
ordinary shares at the average trading price of our ordinary shares during the
15 consecutive trading days preceding the last day of the relevant quarter. For
example, if our major wafer partners purchase an amount of wafers which would
otherwise result in their using the full amount of credits available to them as
of March 31, 2006, and they elect to convert all of these credits into ordinary
shares, we will issue them an aggregate of 22.4 million shares, assuming the
average trading price of our ordinary shares during the 15 consecutive trading
days preceding the last relevant quarter is $1.38.
In February 2006, one of our wafer partners converted approximately $3.9
million of its advances into paid-in equity entitling it for 2,455,905 of our
ordinary shares. The number of shares was determined based on $1.58 per share,
which was the average closing sale price of our ordinary shares for the 15
trading days prior to December 31, 2005.
All the ordinary shares issued to our wafer partners and Israel Corp. in
connection with their committed investments are subject to (i) restrictions on
transfer and (ii) registration rights.
See Note 11A(5) to our audited annual consolidated financial statements.
JOINT DEVELOPMENT AGREEMENT. In May 2002, we entered into an agreement for
the joint development of 0.18-micron embedded microFLASH technology with a
Japanese manufacturer. The Japanese manufacturer granted to us the non-exclusive
right to utilize, on a royalty-free basis, our jointly developed technology,
which is based on its 0.18-micron process technology, for foundry services and
for the manufacture and sale of our own proprietary products. We granted the
Japanese manufacturer a royalty-free, non-exclusive license with respect to our
microFLASH technology for manufacturing semiconductor devices that utilize our
jointly developed technology for its own semiconductor business.
54
In April 2005, the Japanese manufacturer elected, and we agreed, to cease
the joint development of certain technology and to terminate the agreement.
According to the terms of the termination agreement, the Japanese manufacturer
paid us, net of deducted tax, $2.25 million. Revenues for 2005 include $8
million generated by the termination of the agreement. In addition, each party
expressly released the other party from any obligations or liabilities of any
nature in connection with the joint development agreement. The license rights
granted to the parties continue pursuant to the terms of the original agreement.
CREDIT FACILITY. In January 2001, we entered into a credit facility with
two leading Israeli banks, Bank Hapoalim and Bank Leumi, pursuant to which the
banks committed to make available to us up to $550 million in loans for Fab 2.
As a result of our reduction of the total project cost of Fab 2 through the
renegotiation of equipment prices and a change of equipment suppliers, in
January 2002, we and our banks agreed to amend the credit facility such that the
total amount of loans committed by the banks was reduced to $500 million. In
July 2005, we entered into a definitive amendment to our facility agreement with
our banks. The amendment provided, among other things, for our banks to provide
additional financing of up to approximately $30 million, subject to us raising
through the issuance of shares or convertible debentures $23.5 million by
October 31, 2005 (which was subsequently extended to December 31, 2005) and an
additional $6.5 million by March 31, 2006. The banks provided us with the entire
amount we were entitled to borrow under the amendment following the consummation
of the rights offering in January 2006 in which we raised approximately $48.2
million (described below).
Loans drawn down through December 2004 were repayable as of December 31,
2005, prior to the May 2006 amendment to the facility agreement (described
below), as follows: (i) with respect to loans received by us through December
31, 2003, we repaid our banks on December 31, 2003 all payments due by such
date, amounting to $431 million and, concurrently, drew down an equivalent
amount from our banks on such date to be repaid in 12 quarterly installments
commencing on March 31, 2007 and bearing interest, payable quarterly, at LIBOR
plus 2.5%, and (ii) with respect to loans received in 2004 (amounting to $66.0
million), we will repay our banks, in 12 quarterly installments, or before the
maturity date of the facility, commencing three years from the drawdown date of
each loan and bearing interest, payable quarterly, at LIBOR plus 2.5%. Loans
drawn down under the July 2005 amendment (amounting to $29.7 million as of
January 31, 2006) were repayable as of December 31, 2005, prior to the May 2006
amendment to the facility agreement, twelve to fifteen months from the drawdown
date of each loan and bear interest, payable quarterly, at LIBOR plus 2.5%.
In May 2006, we signed amendments to the facility agreement with our banks,
according to which: (i) repayments of long-terms loans in the amount of
approximately $100 million scheduled to be paid between October 2006 and June
2007, were deferred to July 2007; and (ii) the date on which we were required to
raise approximately $8 million was deferred from June 30, 2006 to September 30,
2006, which amount was raised with the completion of the recent TASE offering
described below.
55
As of June 30, 2006, we have drawn, in the aggregate, $526.7 million in
loans. We paid the banks an annual commitment fee of 0.25% on any unused portion
of the facility.
Under the terms of the amended facility agreement, (i) Fab 2 must have full
manufacturing capacity of 33,000 wafer starts per month by December 31, 2007;
(ii) there are limitations on changes of ownership which generally required
that, through January 2006, (a) our three largest wafer partners not sell the
shares they purchased in connection with each of their $75 million investments
in our shares other than a portion of their holdings which may be sold prior to
this date and (b) Israel Corp. hold during this period at least the higher of
(i) eight million of our ordinary shares or (ii) 16.5% of our issued share
capital less two million ordinary shares, with portions of the shares held by
our wafer partners being released from these restrictions through January 2008
and January 2009 with respect to Israel Corp.; and (iii) additional conditions
and covenants, including restrictions on debt and a prohibition on the
distribution of dividends prior to 2008.
Under the terms of the amended facility agreement, we must also meet
certain financial ratios. For any quarter, the "life of loan coverage ratio"
(which is the ratio of our Fab 2 net cash flow to our total debt related to Fab
2 in any quarter) is not permitted to be less than 1.3 at any time. In addition,
our ratio of equity to assets is not permitted to be less than 0% until the end
of 2006, 20% during 2007 and 30% thereafter, until the termination of the
facility agreement. The facility agreement also provides that we must comply
with additional financial covenants relating to quarterly sales and quarterly
earnings before interest, taxes, depreciation and amortization (quarterly
EBITDA). We anticipate that we will not be in compliance with all of the
financial ratios and covenants under the facility agreement commencing in the
fourth quarter of 2006. Under the terms of the amended facility agreement,
satisfying these financial ratios and covenants is a material provision.
Our amended credit facility further provides that upon certain triggering
events (such as the commencement of bankruptcy or receivership, proceedings
against us ordered by a court of competent jurisdiction or the prior
determination of an arbitrator that bankruptcy or receivership proceedings would
be issued by a court against us were a petition to be filed with a court seeking
reorganization or arrangement under applicable bankruptcy law or our requesting
creditor protection), our banks will be able to bring a firm offer made by a
potential investor to purchase our shares at the price provided in the offer. In
such case, we shall be required thereafter to procure a rights offering to
invest up to 60% of the amount of this offer on the same terms. If the offeror
intends to purchase a majority of our outstanding share capital, the rights
offering will be limited to allow for this, unless Israel Corp. and the wafer
partners (excluding QuickLogic) agree to exercise in a rights offering rights
applicable to their shareholdings and agree to purchase in a private placement
enough shares to ensure that the full amount of the offer is invested.
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, 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 result in the cancellation of all or a portion of our Fab 2 Investment
Center grants and tax benefits and in the Investment Center requiring us to
repay all or a portion of grants already received (approximately $161 million as
of May 31, 2006).
56
In January 2001, we also issued the banks warrants to purchase an aggregate
of 400,000 ordinary shares at a purchase price of $6.20 per share, which expired
in January 2006. In December 2003, pursuant to the November 11, 2003 amendment
to the credit facility, we issued our banks additional five year warrants to
purchase an aggregate of 896,596 ordinary shares at a purchase price of $6.17
per share, exercisable until December 2008. Moreover, in connection with the
July 2005 amendment to the credit facility, we issued our banks five year
warrants to purchase an aggregate of 8,264,464 ordinary shares at a purchase
price of $1.21 per share, one-half of which or 4,132,232 are exercisable until
August 2010 and one half shall only be exercisable when a definitive amendment
to our facility agreement based on the May 2006 MOU with our banks closes.
We have registered liens in favor of our banks on substantially all of our
present and future assets. The agreements with our banks restrict our ability to
place liens on our assets (other than to the State of Israel in respect of
investment grants and to Siliconix in respect of assets purchased under our
agreement with it) without the prior consent of the banks.
In May 2006, we signed an MOU with our banks for the refinancing of the
$526.7 million in long term debt, which is described above under "Item 4 -
Information on the Company - A. History and Development of the Company - Recent
Developments.
For more information on our credit facility, see Note 11A(6) to our audited
annual consolidated financial statements.
INVESTMENT CENTER GRANTS. In December 2000, the Israeli government's
Investment Center approved an investment program in connection with Fab 2. The
approval certificate provides for government grants equal to 20% of qualified
investments up to $1.25 billion (i.e., up to $250 million), subject to customary
conditions and other conditions, including a requirement that approximately 30%
of our Fab 2 funding consist of paid-in-capital and that $550 million of our Fab
2 funding be obtained by way of a credit facility from commercial banks (which
amount was subsequently reduced to $500 million with the consent of the
Investment Center). We have registered a lien on our assets for the benefit of
the Investment Center which ranks subordinate to that of our banks. The approval
certificate also provides for a tax holiday on all taxable income related to Fab
2 for the first two years of undistributed profitable operations. As of May 31,
2006, we had received $161 million in grants from the Investment Center, and
satisfied in full the 30% requirement described above. As long as we comply with
the terms of our approval certificate, we are not required to make royalty
payments or any other payments under the terms of our Investment Center grants.
To be eligible to receive grants, we are required to invest minimum amounts
on an annual basis. We notified the Investment Center of our reduced rate of
annual investments and in July 2004, we received approval of our revised
investment schedule from the Investment Center. In addition, we were required,
but were unable to complete our Fab 2 investments by the end of 2005. Israeli
law limits the ability of the Investment Center to extend this time limitation,
unless approved through an expansion plan. We have been holding discussions with
the Investment Center to achieve satisfactory arrangements to approve our
request for a new expansion program to commence as of January 1, 2006. In 2005,
at the Investment Center's request, we submitted a revised business plan to the
Investment Center for the period commencing on January 1, 2006. There can be no
assurance that we will obtain the Investment Center's approval for the new
expansion program and we cannot estimate the outcome of our efforts to obtain
such approval. See "Risk Factors -- If the Investment Center of the Israeli
Ministry of Industry, Trade and Labor, or Investment Center, will not approve
our request for a new expansion program, we would be required to seek
alternative financing sources to complete the ramp-up of Fab 2, which may not be
available. Our not completing investments in the amount of $1.25 billion by the
end of 2005 may result in the Investment Center requiring us to repay all or a
portion of the grants already received, and if we are unable to refund such
grants, we may have to close our operations".
57
Since the inception of our financing activity for Fab 2, we have completed
the following public offerings:
SALE OF UNITS 2002. In January 2002, we completed a sale of units in
Israel, composed of NIS 110,579,800 principal amount of convertible unsecured
subordinated debentures and 2,211,596 options, resulting in net proceeds of
approximately $21.5 million. Each debenture is NIS 1 in principal amount, and is
adjusted to reflect increases in the Israeli Consumer Price Index and bears
interest at a rate of 4.7% per annum, payable yearly commencing January 20,
2003. Principal is payable in four installments beginning in January of 2006
through 2009. Prior to December 31, 2008, the debentures are convertible into
ordinary shares at a conversion rate of one ordinary share per NIS 41 principal
amount of debentures linked to the Israel Consumer Price Index. Each option was
exercisable into one ordinary share until January 20, 2006 at an exercise price
of NIS 39, linked to the Israel Consumer Price Index. To date, all options
expired and none were exercised.
RIGHTS OFFERING 2002. In September 2002, we distributed to our shareholders
and certain of our employees in Israel and the United States rights to purchase
ordinary shares and warrants to purchase our ordinary shares. Substantially all
of the rights exercised in connection with the rights offering were exercised by
Israel Corp. and our major wafer partners. The rights offering resulted in net
proceeds of approximately $19.7 million.
UNDERWRITTEN PUBLIC OFFERING. In January 2004, we completed an underwritten
public offering in the United States of 11.44 million of our ordinary shares at
a price to the public of $7.00 per share. The underwritten public offering
resulted in net proceeds of approximately $75.1 million.
RIGHTS OFFERING 2005. In December 2005, we filed in Israel and the United
States a prospectus for the distribution of transferable rights to purchase up
to $50 million U.S. dollar denominated debentures that are convertible into up
to approximately 45.5 million of our ordinary shares. In connection with the
exercise of these rights, through January 2006, we issued, in the aggregate,
48.2 million convertible debentures, with each debenture of $1.00 in principal
amount, or a total of $48.2 million principal amount of debentures, which bear
annual interest at the rate of 5%. The principal of the debentures, together
with accrued interest, is payable in one installment on January 12, 2012. The
debentures are convertible into our ordinary shares at a rate of one ordinary
share per $1.10 aggregate principal amount of debentures. The conversion price
is subject to downward adjustment under certain circumstances in which we sell
securities in future financings at a price per share which is lower than the
conversion price, provided that such financings close through December 2006 (or
under certain conditions, through June 2007). Subject to the terms of our
facility agreement, we may at our option announce the early redemption of the
debentures, provided that the outstanding aggregate balance of principal on
account of the debentures is equal to or less than $500,000. The debentures and
interest thereon are unsecured and rank behind our existing and future secured
indebtedness, including indebtedness to our banks, as well as to the government
of Israel in connection with grants we received under its approved enterprise
programs and to Siliconix. For more information, see Note 13H to our audited
annual consolidated financial statements.
58
SALE OF UNITS 2006. In June 2006, we completed an underwritten public
offering of our securities on the TASE in Israel resulting in gross proceeds of
approximately NIS 140 million (approximately $31 million). In the offering,
78,000 Units were sold at a price per Unit of NIS 1,785 (approximately $400).
Each Unit consists of (i) convertible debentures in the face amount of NIS 2,100
(approximately $470), (ii) five options each exercisable for three months for
NIS 100 principal amount of convertible debentures at an exercise price equal to
85% of their face amount, (iii) 140 warrants each exercisable for three months
for one Tower ordinary share at a price of NIS 6.75 (approximately $1.51) and
(iv) 70 warrants each exercisable for three years for one Tower ordinary share
at a price of NIS 7.40 (approximately $1.66). The convertible debentures are
convertible into Tower's ordinary shares at a conversion rate of one ordinary
share per NIS 8.40 (approximately $1.89) principal amount of convertible
debentures. The convertible debentures carry a zero coupon with principal
payable at maturity in December 2011, at a premium of 37% over face value,
linked to the Israeli Consumer Price Index (CPI). The conversion price is
subject to reduction in certain limited circumstances. The offering was made in
Israel to Israeli residents only. The securities offered were not registered
under the Securities Act and may not be sold in the U.S. or to U.S. persons
absent registration or an applicable exemption.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
Our research and development activities have related primarily to our
process development and microFLASH module design efforts, and have been
sponsored and funded by us with some participation by the Israeli government.
Research and development expenses for the years ended December 31, 2005, 2004
and 2003 were $16.0 million, $17.1 million and $20.7 million net of government
participation of $1.0 million, $1.5 million and $1.1 million, respectively. We
have also incurred costs in connection with the transfer of Toshiba and
Freescale technology for use in Fab 2, some of which have been amortized over
the estimated economic life of the technology following the commencement of
production in Fab 2 during the third quarter of 2003 (see also in this Item
"Critical Accounting Policies - Depreciation and Amortization of Fab 2 Assets").
For a description of our research & development policies and our patents and
licenses, see "Item 4. Information on the Company--4.B. Business Overview".
D. TREND INFORMATION
The semiconductor industry has historically been highly cyclical on a
seasonal and long-term basis. On a long-term basis, the market has fluctuated,
cycling through periods of weak demand, production overcapacity, excess
inventory and lower sales prices and periods of strong demand, full capacity
utilization, product shortages and higher sales prices.
59
There is a trend within the semiconductor industry toward ever-smaller
features and ever-growing wafer sizes. State-of-the-art fabs are currently using
process geometries of 90-nanometer and below and wafer sizes of 300-mm. As
demand for smaller geometries increases, there is downward pressure on the
pricing of larger geometry products and increasing underutilization of fabs that
are limited to manufacturing larger geometry products, which results in less
profitability for manufacturers of larger geometry products. Fab 1 is limited to
geometries of 0.35-micron and above on 150-mm wafers and Fab 2 currently offers
process geometries of 0.18 and 0.13-micron and produces 200-mm wafers.
E. OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any material off-balance sheet arrangements. In
addition, we have no unconsolidated special purpose financing or partnership
entities that are likely to create material contingent obligations.
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations and commercial
commitments as of December 31, 2005:
PAYMENT DUE
-------------------------------------------------------------------------------------
LESS
THAN 1 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR 2 YEARS 3 YEARS 4 YEARS 5 YEARS YEARS
- ----------------------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Short-term debt and
other current
liabilities (1) $ 65,533 $ 65,533 - - - - -
Long-term debt (2) 615,307 57,711 183,272 185,744 174,115 14,465 0
Convertible
Debentures (3) 63,287 7,740 7,434 7,128 6,822 0 34,163
Operating leases (4) 4,822 2,293 1,817 712 0 0 0
Construction and
equipment purchase
agreements 15,018 10,218 4,800 0 0 0 0
Siliconix advance 19,615 1,593 2,585 2,168 2,123 2,123 9,023
Other long-term
liabilities 14,418 1,414 7,516 561 140 0 4,787
purchase obligations (5) 31,695 3,239 2,688 2,688 2,688 2,688 17,704
-------- -------- -------- -------- -------- -------- --------
TOTAL CONTRACTUAL
OBLIGATIONS 829,695 149,741 210,112 199,001 185,888 19,276 65,677
-------- -------- -------- -------- -------- -------- --------
(1) Short-term debt and other current liabilities include our trade accounts
payable for equipment and services that have already been supplied.
(2) Long-term debt includes principal and interest payments in accordance with
the terms of the credit facility, amended in November 2003, as well as the
impact of our hedging transactions.
(3) Total amounts include expected principal and interest payments for the
presented periods.
(4) These amounts primarily consist of ordered equipment that has not yet been
received. In addition to these contractual obligations, we have committed
approximately $1.1 million in standby letters of credit and guarantees to
secure our Fab 2 construction and equipment obligations.
60
The above table does not include other contractual obligations or
commitments we have, such as undertakings pursuant to royalty agreements,
commissions and service agreements. We are unable to reasonably estimate the
total amounts or the time table for such payments to be paid under the terms of
these agreements, as the royalties, commissions and required services are a
function of future sales revenues, the volume of business and hourly-based fees.
In addition, the above table does not include our long-term liability with
respect to our wafer partner advances, which as of December 31, 2005, amounted
to approximately 41.0 million that may be utilized by them against future
purchases of Fab 2 products. We are unable to reasonably estimate the total
amounts that may be utilized by our wafer partners since we can not reasonably
estimate their future orders in the periods set forth in the above chart; and
even if we could reasonably estimate our wafer partners' future orders, we are
unable to determine which portion of the advances they are entitled to utilize
against purchases will be chosen by them to be converted into our fully paid
ordinary shares, as provided under the amendments to our agreements with our
wafer partners (see "Fab 2 Agreements").
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Set forth below is information regarding the members of our administrative,
supervisory or management bodies and our directors.
61
- ------------------------ ------ ------------------------------------------------
AGE TITLE
- ------------------------ ------ ------------------------------------------------
Russell C. Ellwanger 51 Chief Executive Officer
- ------------------------ ------ ------------------------------------------------
Oren Shirazi 36 Acting Chief Financial Officer
- ------------------------ ------ ------------------------------------------------
Dudu Vidan 45 Vice President and Fab 1 Manager
- ------------------------ ------ ------------------------------------------------
Dr. Itzhak Edrei 46 Senior Vice President of Product Lines and Sales
- ------------------------ ------ ------------------------------------------------
Rafi Nave 56 Chief Technology Officer
- ------------------------ ------ ------------------------------------------------
Ephie Koltin 44 Vice President of Business Development
- ------------------------ ------ ------------------------------------------------
Dalit Dahan 38 Vice President of Human Resources
- ------------------------ ------ ------------------------------------------------
Shimon Dahan 43 Vice President of Manufacturing Services
- ------------------------ ------ ------------------------------------------------
Nati Somekh Gilboa 31 Corporate Secretary and General Counsel
- ------------------------ ------ ------------------------------------------------
Rafi Mor 42 Vice President and Fab 2 Manager
- ------------------------ ------ ------------------------------------------------
DIRECTORS
- ------------------------ ------ ------------------------------------------------
Udi Hillman 53 Chairman of the Board
- ------------------------ ------ ------------------------------------------------
Russell C. Ellwanger 51 Director
- ------------------------ ------ ------------------------------------------------
Yossi Rosen 66 Director
- ------------------------ ------ ------------------------------------------------
Dr. Eli Harari 61 Director
- ------------------------ ------ ------------------------------------------------
Miin Wu 57 Director
- ------------------------ ------ ------------------------------------------------
N. Damodar Reddy 67 Director
- ------------------------ ------ ------------------------------------------------
Kalman Kaufman 61 Independent Director
- ------------------------ ------ ------------------------------------------------
Hans Rohrer 56 Independent and External Director
- ------------------------ ------ ------------------------------------------------
Tal Yaron-Eldar 42 Independent and External Director
- ------------------------ ------ ------------------------------------------------
RUSSELL C. ELLWANGER has served as our Chief Executive Officer since May
2005. From 1998 to 2005, Mr. Ellwanger served in various executive positions for
Applied Materials Corporation, including Group Vice President, General Manager
of the Applied Global Services (AGS), from 2004 to 2005, Group Vice President,
General Manager of the CMP and Electroplating Business Group, from 2002 to 2004.
Mr. Ellwanger also served as Corporate Vice President, General Manager of the
Metrology and Inspection Business Group, from 2000 to 2002, during which he was
based in Israel. From 1998 to 2000, Mr. Ellwanger served as Vice President of
Applied Materials' 300-mm Program Office, USA. Mr. Ellwanger served as General
Manager of Applied Materials' Metal CVD Division from 1997 to 1998 and from 1996
to 1997, Mr. Ellwanger served as Managing Director of CVD Business Development,
during which he was based in Singapore. In addition, Mr. Ellwanger held various
managerial positions in Novellus System from 1992 to 1996 and in Philips
Semiconductors from 1980 to 1992.
OREN SHIRAZI was appointed as our acting Chief Financial Officer in
November 2004. Mr. Shirazi joined us in October 1998 and served as our
controller since July 2000, after serving as vice controller since October 1998.
Prior to joining us, Mr. Shirazi was employed as an Audit Manager in the
accounting firm of Ratzkovski-Fried & Co., which merged into Ernst & Young
(Israel). Mr. Shirazi is a Certified Public Accountant in Israel (CPA). He has
an MBA from the Graduate School of Business of Haifa University with honors and
a BA in economics and accounting from the Haifa University.
62
DUDU VIDAN was appointed Vice President and Fab 1 Manager in August 2005,
having served previously as FAB2 production manager since March 2003 and as FAB2
tool installation manager from March 2001. Previously, Mr. Vidan was employed by
MDF, serving as plant manager, and Carcom Aviation Products serving as
production manager. Mr Vidan served as a Naval Reserve Lt. Colonel in the Israel
Defense Forces. Mr. Vidan holds a B.Sc. in Industrial and Management Engineering
from the Technion - Israel Institute of Technology.
DR. Itzhak Edrei was appointed Senior Vice President of Product Lines and
Sales in August 2005 after serving as Vice President of Research and Development
since August 2001, having served as Director of Research and Development since
1996. From 1994 to 1996, Dr. Edrei served as our Device and Yield Department
Manager. Prior to joining Tower, Dr. Edrei was employed by National
Semiconductor as Device Section Head. Dr. Edrei earned his Ph.D. in physics from
Bar Ilan University and his post-doctorate from Rutgers University.
RAFI NAVE was appointed Chief Technology Officer in August 2005 after
serving as Vice President of Customer Services since August 2003. From 1996 to
2003, Mr. Nave served as Vice President of Research and Development for NDS
Group. From 1974 to 1995, Mr. Nave was employed by Intel Corporation in a
variety of positions of increasing responsibility, among them chip design
engineer and General Manager of Intel's design center in Israel. Mr. Nave earned
master and bachelor degrees in electrical engineering from the Technion - Israel
Institute of Technology.
EPHIE KOLTIN was appointed Vice President of Business Development in August
2005, having served as Vice President, General Foundry and Mixed Signal
Technology from 2003 and as Senior Director, FAB2 Process Engineering since
2000. From 1996-1999, Mr. Koltin served in several senior positions as Director,
NVM Technology, CIS technology and ERS manager, FAB1. Prior to joining Tower,
Mr. Koltin was employed at National Semiconductor and the Technion - Israel
Institute of Technology. Mr. Koltin holds a B.Sc. in Mechanical Engineering and
M.Sc. in Materials Engineering from the Technion - Israel Institute of
Technology.
DALIT DAHAN was appointed Vice President of Human Resources in April 2004.
Ms. Dahan joined us in November 1993 and served as Personnel Manager since April
2000, after having served as Compensation & Benefits Manager and in various
other positions in the Human Resources Department. Prior to joining us, Ms.
Dahan served as Manager of the North Branch of O.R.S - Manpower Company for 3
years. Ms. Dahan holds a bachelor's degree in social science from Haifa
University and an MBA from the University of Derby.
SHIMON DAHAN was appointed Vice President of Manufacturing Services in
January 2006, having served previously as Test & MTG manager since August 2005
and prior to that as Research and Development Operation Manager from November
2000. Prior to that, Mr. Dahan was employed by National Semiconductor in various
capacities. Mr. Dahan holds a bachelors degree in Political Science from Haifa
University, and an MBA from the University of Derby.
NATI SOMEKH GILBOA was appointed as Corporate Secretary and General Counsel
in March 2005, has served as our Associate General Counsel since May 2004. From
2001 to 2004, Ms. Somekh Gilboa was employed by Goldsobel & Kirshen, Adv. Ms.
Somekh Gilboa holds an LL.M. and J.D. from Boston University and a B.A. from
Johns Hopkins University. She is a member of the Israeli Bar Association and the
New York bar.
RAFI MOR was appointed Vice President and Fab 2 Manager in August 2005,
having served as Fab 1 Manager since August 2003 and Senior Director and Fab 1
Manager since March 2003. From November 2000 to March 2003, Mr. Mor served as
Senior Director of Process Device & Yield of Fab 1. From 1998 to 2000, Mr. Mor
served as Director of Equipment Reliability & Support of Fab 1. Previously, Mr.
Mor was employed by National Semiconductor in various engineering and management
capacities. Mr. Mor earned master and bachelor degrees in chemical engineering
from Ben Gurion University.
63
UDI HILLMAN has served as Chairman of the Board since May 2005. Mr. Hillman
served as Acting Chief Executive Officer from February 2005 to April 2005. Mr.
Hillman has served as a director from October 1996 through August 1999 and was
reappointed to the Board in January 2000. In January 2001, Mr. Hillman was
appointed Vice Chairman of the Board and resigned as Vice Chairman in March
2005. Mr. Hillman serves on the Tender Committee. Since March 2001, Mr. Hillman
has served as President and Chief Executive Officer of ICTech, a subsidiary of
Israel Corp., which is one of our current principal shareholders. Since February
2004, Mr. Hillman has served as a member of the Board of Directors of ZIM
Integrated Shipping Services. Mr. Hillman served as Chief Financial Officer of
Israel Corp. from September 1996 to 1997 and as Executive Vice President and
Chief Financial Officer of Israel Corp. from May 1997 to 2001. Mr. Hillman
served as a director of several subsidiaries of Israel Corp., including Israel
Chemicals Ltd., ZIM Integrated Shipping Services and others. Prior thereto, Mr.
Hillman was Vice President and Controller of Clal Industries Ltd. and a director
of several companies in the Clal Group.
YOSSI ROSEN has served as a director and Chairman of the Stock Option and
Compensation Committee since February 2005. Since November 30, 1998, Mr. Rosen
has served as the President and CEO of The Israel Corporation. Mr. Rosen is also
Chairman of the Board of Directors of Israel Chemicals Ltd. and a director of
its subsidiaries, a member of the Board of Directors and Executive Committee of
ZIM Integrated Shipping Services, Chairman of the Board of Dead Sea Magnesium
Ltd. and a director of Oil Refineries Ltd. Mr. Rosen was previously President of
Mashav Initiating & Development Ltd. and Chairman of the Board of various
industrial companies, such as Nesher cement. Mr. Rosen holds a BA in Economics
from the Hebrew University of Jerusalem and an MA in Business Management from
the Hebrew University of Jerusalem.
DR. ELI HARARI has served as a director since January 2001. Dr. Harari
serves on the Stock Option and Compensation Committee. Dr. Harari served as
President and Chief Executive Officer and as a Director of SanDisk Corporation
from its inception in 1988 until May 2006, and currently serves as Chief
Executive Officer and Chairman of the Board of SanDisk. Dr. Harari is a pioneer
in non-volatile semiconductor storage with more than 100 U.S. and foreign
patents and numerous technical articles and has more than 30 years of experience
in the electronics industry. His extensive operational and technological
development experiences include co-founding Waferscale Integration, overseeing
the development and transfer into production of Intel Corporation's
first-generation stepper and dry etch technology, and technical management
positions at Hughes Aircraft and Honeywell, Inc. He holds an M.A. and Ph.D. in
Solid State Sciences from Princeton University and a B.S. (Honors) degree in
Physics from Manchester University.
MIIN WU has served as a director since January 2001. Mr. Wu serves as
President, Chief Executive Officer and an Executive Director of Macronix
International and has been an executive officer of Macronix since its formation
in 1989. Mr. Wu received both a B.S. and an M.S. in Electrical Engineering from
National Cheng-Kung University in Taiwan as well as an M.S. in Material Science
& Engineering from Stanford University.
64
N. DAMODAR REDDY has served as a director since January 2001. Mr. Reddy
serves on the Audit Committee. Mr. Reddy is the co-founder of Alliance
Semiconductor Corporation and has served as its Chairman of the Board since its
inception in February 1985. Mr. Reddy also served as President and Chief
Executive Officer since its inception and until December 2005. In addition, Mr.
Reddy served as Chief Financial Officer of Alliance Semiconductor from June 1998
to January 1999 and from May 2001 until April 2002. From September 1983 to
February 1985, Mr. Reddy served as President and Chief Executive Officer of
Modular Semiconductor, Inc., and from 1980 to 1983, he served as manager of
Advanced CMOS Technology Development at Synertek, Inc., a subsidiary of
Honeywell, Inc. Prior to that time, Mr. Reddy held various research and
development and management positions at Four Phase Systems, a subsidiary of
Motorola, Inc., Fairchild Semiconductor and RCA Technology Center. He holds an
MS degree in Electrical Engineering from North Dakota State University and an
MBA from Santa Clara University.
KALMAN KAUFMAN has served as a director and as a member of our Audit
Committee since August 2005. Mr. Kaufman also served as Corporate Vice President
at Applied Materials from 1994 to 2005. Between 1985 and 1994, Mr. Kaufman
served as President of KLA Instruments Israel, a company he founded, and General
Manager of Kulicke and Soffa Israel. Mr. Kaufman is currently the Chairman of
Solgel Nanotechnology and is a member of several boards of directors. He holds
engineering degrees from the Technion - Israel Institute of Technology.
HANS ROHRER has been a director and member of the Audit Committee since
April 2002. Since May 2002, Mr. Rohrer serves as President and Chief Executive
Officer of Acuid Corporation. From 1999 to 2002, Mr. Rohrer served as President
of Taiwan Semiconductor Manufacturing Company -- Europe (TSMC - Europe). Mr.
Rohrer has held various engineering, marketing, sales and general management
positions, including Vice President and General Manager, Europe, with National
Semiconductor between 1980 and 1998. Mr. Rohrer started his career in the
semiconductor industry with Texas Instruments.
TAL YARON-ELDAR has been a director and member of the Audit Committee and
the Stock Option and Compensation Committee since January 2005. Since September
2004, Ms. Yaron-Eldar serves as Chief Executive Officer of Arazim Investment
Ltd. and she is a partner in Cohen, Cohen, Yaron-Eldar & Co. law offices. Ms.
Yaron-Eldar served as Israel's Income Tax and Real Property Tax Commissioner
from 2002 to 2004. Between 1998 and 2001, Ms. Yaron-Eldar served as the Chief
Legal Advisor to the Customs and V.A.T. Authority. During the preceding ten
years, Ms. Yaron-Eldar served in various positions with Israel's Income Tax and
Real Property Tax Commission, including Senior Head of its legislation
department and Deputy Chief Legal Advisor. Ms. Yaron-Eldar holds a master's
degree in business and a bachelor's degree in law from Tel-Aviv University and
is a member of the Israeli Bar Association.
Pursuant to a shareholders agreement dated January 18, 2001, SanDisk,
Alliance Semiconductor and Macronix have agreed to vote all their respective
shares for nominees designated by each shareholder and for the election of a
nominee of Israel Corp. as Chairman of the Board.
65
B. COMPENSATION
For the years ended December 31, 2005 and 2004, we paid to all our
directors and senior management, as a group, an aggregate of $1.2 and $1.2
million, respectively, in salaries, fees and bonuses, excluding management fees
paid to Israel Corp. The total amount set aside or accrued in the year ended
December 31, 2005 to provide for severance, retirement and similar benefits for
such persons was $0.2 million. No directors received cash compensation other
than the annual and meeting fees described below.
During 2005, three of our directors were granted options to purchase an
aggregate of 120,000 ordinary shares at a weighted average exercise price of
$1.67 per share. These options will become exercisable according to various
vesting schedules over four years and generally remain exercisable for five
years following the vesting date. During the year ended December 31, 2005, we
granted a total of 1,420,000 options to purchase ordinary shares to our senior
managers as a group. These options have a weighted average exercise price of
$1.545 per share with vesting periods over four years and expire in 2015.
In April 2005, our Board of Directors approved the grant of options to
purchase up to 1,325,724 of our ordinary shares to our Chief Executive Officer
("CEO"), who was also appointed as a director, which was further approved by our
shareholders in October 2005. These options are exercisable at an exercise price
of $1.56, which was the closing market price of our shares on the last trading
day prior to the board approval of the grant. These options will vest over a
four-year period, with 25% vesting over each year of employment. The options
granted are exercisable for a period of ten years from the date of grant.
In addition, in May 2006, our Audit Committee and Board of Directors
approved the grant of options to the CEO in addition to the options granted to
him in April 2005, such that in total, the CEO will hold options to purchase
shares that represent 4% of our shares on a fully diluted basis during the
two-year period from the approval of the Audit Committee. The exercise price of
the initial grant of additional options will be $1.45, the 90 day average
closing price of our shares prior to the Board of Directors' approval. In the
event of a future equity financing, additional options will be granted to the
CEO as described above with an exercise price equal to the price per share of
such investment. The vesting period of the new options will be identical to the
vesting period of the existing options. No additional options will be granted
under the CEO's employment agreement, which was approved by our shareholders in
October 2005. The new grant of options and its terms are subject to the approval
of our shareholders.
Since October 2001, our directors have foregone their directors' fees,
except for fees required by law to be paid to our external directors, consisting
of a NIS 26,000 (approximately $5,650) annual fee plus NIS 915 (approximately
$200) per meeting. The aggregate amount payable to our external directors with
respect to the year ended December 31, 2005 was approximately $21,000. The
annual and meeting fees paid to our external directors are adjusted semiannually
to reflect changes to the published guidelines in Israel for external directors.
C. BOARD PRACTICES
Our Articles of Association provide that the Board of Directors shall
consist of at least five and no more than 11 members. All directors, except for
external directors, hold office until their successors are elected at the next
annual general meeting of shareholders. Our officers are appointed by the Board
of Directors and (subject, in certain cases, to employment agreement provisions
that require 270 days notice of termination) continue to serve at the discretion
of the Board of Directors. The Board of Directors may grant the CEO the power to
appoint officers.
66
Our Articles of Association provide that any director may, by written
notice to us, appoint another person to serve as an alternate director, and may
cancel such appointment. Any person who is not already a director may act as an
alternate, and the same person may not act as the alternate for more than one
director at a time. The term of appointment of an alternate director may be for
one meeting of the Board of Directors or for a specified period or until notice
is given of the cancellation of the appointment.
None of the members of the Board are entitled to receive any severance or
similar benefits upon termination of service with the Board of Directors.
The Companies Law requires Israeli companies with shares that have been
offered to the public in or outside of Israel to appoint no less than two
external directors. No person may be appointed as an external director if the
person or the person's relative, partner, employer or any entity under the
person's control, has or had, on or within the two years preceding the date of
the person's appointment to serve as external director, any affiliation with the
company or any entity controlling, controlled by or under common control with
the company. The term "affiliation" includes:
o an employment relationship;
o a business or professional relationship maintained on a regular basis;
o control; and
o service as an office holder.
A person shall be qualified to serve as an external director only if he or
she possesses accounting and financial expertise or professional qualifications.
At least one external director must posses accounting and financial expertise.
The conditions and criteria for possessing accounting and financial expertise or
professional qualifications were recently determined in regulations promulgated
by the Israeli Minister of Justice in consultation with the Israeli Securities
Authority. These regulations do not appear to relate to external directors
currently serving. The regulations mandate that a person is deemed to have
"expertise in finance and accounting" if his or her education, experience and
qualifications provide him or her with expertise and understanding in business
matters - accounting and financial statements, in a way that allows him or her
to understand, in depth, the company's financial statements and to encourage
discussion about the manner in which the financial data is presented.
The company's board of directors must evaluate the proposed external
director's expertise in finance and accounting, by considering, among other
things, his or her education, experience and knowledge in the following: (i)
accounting and auditing issues typical to the field in which the company
operates and to companies of a size and complexity similar to such company; (ii)
a company's external public accountant's duties and obligations; (iii) preparing
company financial statements and their approval in accordance with the Companies
Law and the Israeli Securities Law.
67
A director is deemed to be "professionally qualified" if he or she meets
any of the following criteria: (i) has an academic degree in any of the
following professions: economics, business administration, accounting, law or
public administration; (ii) has a different academic degree or has completed
higher education in a field that is the company's main field of operations, or a
field relevant to his or her position; or (iii) has at least five years
experience in any of the following, or has a total of five years experience in
at least two of the following: (A) a senior position in the business management
of a corporation with significant operations, (B) a senior public position or a
senior position in public service, or (C) a senior position in the company's
main field of operations. The board of directors here too must evaluate the
proposed external director's "professional qualification" in accordance with the
criteria set forth above.
The affidavit required by law to be signed by a candidate to serve as an
external director must include a statement by such candidate concerning his or
her education and experience, if relevant, in order that the board of directors
may properly evaluate whether such candidate meets the requirements set forth in
the regulations. Additionally, the candidate should submit documents and
certificates that support the statements set forth in the affidavit.
No person may serve as an external director if the person's position or
other business activities create, or may create, a conflict of interest with the
person's responsibilities as an external director or may otherwise interfere
with the person's ability to serve as an external director. If, at the time
external directors are to be appointed, all current members of the board of
directors are of the same gender, then at least one external director must be of
the other gender.
External directors are to be elected by a majority vote at a shareholders'
meeting, provided that either:
o the majority of shares voted at the meeting, including at least one-third
of the shares held by non-controlling shareholders voted at the meeting,
vote in favor of election of the director; or
o the total number of shares held by non-controlling shareholders voted
against the election of the director does not exceed one percent of the
aggregate voting rights in the company.
The initial term of an external director is three years and may be extended
for an additional three years. External directors may be removed only by the
same percentage of shareholders as is required for their election, or by a
court, and then only if the external directors cease to meet the statutory
qualifications for their appointment or if they violate their duty of loyalty to
the company. Each committee of a company's board of directors must include at
least one external director.
Mr. Rohrer and Ms. Yaron-Eldar currently serve as our external directors.
Mr. Rohrer was appointed for an initial three-year term that expired in April
2005 and was reappointed for a subsequent three-year term expiring in April
2008. Ms. Yaron-Eldar was appointed for an initial three-year term expiring in
December 2007
68
An external director is entitled to compensation, as provided in
regulations adopted under the Israeli Companies Law, and is otherwise prohibited
from receiving any other compensation, directly or indirectly, in connection
with service provided as an external director.
The Companies Law requires public companies to appoint an audit committee.
The responsibilities of the audit committee include reviewing the company's
financial statements, monitoring the company's independent auditors, identifying
irregularities in the management of the company's business and approving related
party transactions as required by law. An audit committee must consist of at
least three directors, including the external directors of the company. The
chairman of the board of directors, any director employed by or otherwise
providing services to the company, and a controlling shareholder or any relative
of a controlling shareholder, may not be a member of the audit committee. An
employee, executive officer or director of a controlling shareholder of an
Israeli company may serve as a member of an audit committee under Israeli law,
unless such individual controls more than 50% of the controlling shareholder.
Each of our external directors are members of our audit committee.
Under the Companies Law, the board of directors must appoint an internal
auditor, who is recommended by the audit committee. The role of the internal
auditor is to examine, among other matters, whether the company's actions comply
with the law and orderly business procedure. Under the Companies Law, the
internal auditor may be an employee of the company but not an office holder, an
affiliate, or a relative of an office holder or affiliate, and he may not be the
company's independent auditor or its representative.
Mr. Rosen, Dr. Harari and Ms. Yaron-Eldar serve on the stock option and
compensation committee. The committee meets at least once a year. The primary
function of this committee is to approve our employee compensation policy and
determine remuneration and other terms of employment for our officers. In
setting our remuneration policy, the committee considers a number of factors
including:
o the overall employment market environment;
o the basic salaries and benefits available to comparable officers at
comparable companies;
o the need to attract and retain officers of an appropriate caliber;
o the need to ensure such executives' commitment to the future success
of our company by means of incentive schemes;
o the performance of the officer; and
o financial and operating results of our company.
69
D. EMPLOYEES
The following table sets forth for the last three fiscal years, the number
of our employees engaged in the specified activities.
As of
December 31,
-------------------------
2005 2004 2003
----- ----- -----
Process and Product Engineering, R&D, Design 293 360 405
Manufacturing, Operations (*) 734 780 670
Manufacturing Support 123 124 134
Administration, Marketing, Finance 88 100 117
Fab 2 Construction and Technology Transfer (*) -- 5 45
----- ----- -----
Total 1,238 1,369 1,371
===== ===== =====
(*) Following the commencement of operations of Fab 2 during the third
quarter of 2003, most of the employees that prior to that date were classified
under Fab 2 construction and technology transfer activities are classified under
manufacturing operations activities.
Except for an arrangement regarding pension contributions, we have no
collective bargaining agreements with any of our employees. However, by
administrative order, certain provisions of the collective bargaining agreements
between the Histadrut (General Federation of Labor in Israel) and the
Coordination Bureau of Economic Organizations, relating primarily to the length
of the work day, minimum wages, pension contributions, insurance for
work-related accidents, procedures for dismissing employees, determination of
severance pay and other conditions of employment are applicable to our
employees. In accordance with these provisions, the salaries of our employees
are partially indexed to the Consumer Price Index in Israel.
We generally provide our employees with benefits and working conditions
beyond the minimum requirements. For example, a general practice in Israel,
which we follow, despite not being legally obligated to do so, is the
contribution of funds to an employee's "Manager's Insurance" fund and/or pension
fund. Such funds generally provide a combination of savings plans, insurance and
severance pay benefits to the employee, giving the employee a lump sum payment
upon retirement and securing his or her right to receive severance pay, if
legally entitled, upon termination of employment. To the Manager's Insurance
fund, the employee usually contributes an amount equal to 5% of his or her wages
and the employer usually contributes an additional 13.3% to 15.8%. To the
pension fund the employee usually contributes an amount equal to between 5% and
6% of his or her wages and the employer usually contributes an additional 13.7%
to 17.3%. Israeli law generally requires severance pay upon the retirement or
death of an employee or termination of employment without due cause.
Furthermore, Israeli employees and employers are required to make payments to
the National Insurance Institute. We consider our relationship with our
employees to be good, and we have never experienced a labor dispute, strike or
work stoppage.
70
E. SHARE OWNERSHIP
All of the persons listed above under the caption "Directors and Senior
Management" own ordinary shares and/or options to purchase ordinary shares.
Except as described below, none of such persons own shares and/or options
amounting to 1% or more of the outstanding ordinary shares. Information
regarding our share option plans and warrants presented in Note 13B to our
consolidated financial statements is incorporated herein by reference.
In April 2005, our Board of Directors approved the grants of options to
purchase up to 1,325,724 ordinary shares (which represent 1.6% of our
outstanding share capital as of June 30, 2006) to our Chief Executive Officer,
who was also appointed as a director. These options are exercisable at an
exercise price of $1.56, the opening market price of our shares on the date of
the board approval of the grants. The options vest over a four-year period, 25%
over each year of employment. The options granted are exercisable for a period
of ten years from the date of grant. If as a result of future equity financings
(excluding the exercise or conversion of existing warrants, options or other
rights to acquire our securities), the number of total options granted to our
CEO through April 30, 2007 would represent less than 1.2% of our total number of
issued and outstanding shares as of such date, additional options will be
granted to the CEO to represent a 1.2% holding of the total number of our issued
and outstanding shares as of April 30, 2007. These grants were approved by our
shareholders in October 2005.
In May 2006, our audit committee and board of directors approved the grant
of options to our CEO, who also serves as a director, in addition to the options
granted to him in April 2005, such that in total, the CEO will hold options to
purchase shares that represent 4% of our shares on a fully diluted basis during
the two-year period from the approval of the audit committee. The exercise price
of the initial grant of additional options will be $1.45, the average closing
price of our shares on the Nasdaq during the 90 consecutive trading days prior
to the board of directors' approval. In the event of a future equity financing,
additional options will be granted to the CEO as described above with an
exercise price equal to the price per share of such investment. The vesting
period of the new options will be identical to the vesting period of the
existing options. The new grant of options and its terms are subject to the
approval of our shareholders. If the new grant of options is approved by our
shareholders, no additional options will be granted under the CEO's current
option agreement, which was approved by our shareholders in October 2005.
Our board of directors approved a plan to offer each of our current
employees the opportunity to exchange their existing options to purchase our
ordinary shares for new options with an exercise price $1.45, which is the
average closing price of our shares on the Nasdaq during the 90 consecutive
trading days prior to the board of directors' approval. The new options will be
granted based on terms similar to our existing employee option plan with new
vesting periods. As of May 19, 2006, options to purchase approximately 9 million
ordinary shares held by our current employees, with exercise prices ranging from
$1.46 to $25, were outstanding. Our board of directors further approved that if
the total number of employee options, including the options to our CEO, during
the coming 24 months will represent less than 8% of the our shares on a fully
diluted basis, additional options will be allocated for grants to be made to our
employees. As of May 31, 2006, no options have been granted under such plan.
71
During 2001, the Audit Committee, Board of Directors and shareholders
approved a stock option plan pursuant to which our Board members will be granted
options to purchase up to 400,000 ordinary shares. In accordance with this
option plan, 120,000 options were granted in 2005 to three directors (40,000
options each) at exercise prices of $1.87, $1.87 and $1.26 280,000 options to
purchase ordinary shares were outstanding under this plan, with a weighted
average exercise price of $5.39. These options vest over a four-year period,
according to various vesting schedules and are generally not exercisable
following the fifth anniversary of their vesting date.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
The following table and notes thereto set forth information, as of May 19,
2006, concerning the beneficial ownership (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended), and on a diluted basis, of
ordinary shares by any person who is known to own at least 5% of our issued and
outstanding ordinary shares. On such date, 77,561,979 ordinary shares were
issued and outstanding. The voting rights of our major shareholders do not
differ from the voting rights of other holders of our ordinary shares. However,
certain of our shareholders have entered into a shareholders agreement pursuant
to which they may be able to exercise control over matters requiring shareholder
approval, including the election of directors and approval of significant
corporate transactions.
AMOUNT PERCENT PERCENT OF CLASS
IDENTITY OF PERSON OR GROUP OWNED (1) OF CLASS(1) (DILUTED)(2)
- --------------------------- ------------ ----------- ------------
Israel Corporation Ltd. (3) 33,324,887(4) 34.49% 23.50%
SanDisk Corporation(3) 14,650,132(5) 18.06% 10.33%
Alliance Semiconductor Corporation (3) 13,492,975(6) 16.67% 9.52%
Macronix International Co. Ltd.(3) 9,979,485(7) 12.67% 7.04%
(1) Assumes the holder's beneficial ownership of all Ordinary Shares and
all securities that the holder has a right to purchase within 60 days.
(2) Assumes that all currently outstanding securities to purchase Ordinary
Shares, other than those which cannot be calculated as of the date of
this annual report, have been exercised by all holders.
(3) Pursuant to a shareholders agreement among Israel Corp., Alliance
Semiconductor Corporation, SanDisk Corporation and Macronix Co. Ltd.,
each of Israel Corp., Alliance Semiconductor Corporation, SanDisk
Corporation and Macronix Co. Ltd. may be said to have shared voting
and dispositive control over approximately 57% of the outstanding
shares of Tower.
(4) Based on information provided by Israel Corp., represents 14,260,504
shares currently owned by Israel Corp., 882,560 shares issuable upon
the exercise of currently exercisable warrants and 18,181,823 shares
issuable upon conversion of debentures.
72
(5) Based on information provided by SanDisk, represents 11,108,002 shares
currently owned by SanDisk, 360,312 shares issuable upon the exercise
of currently exercisable warrants and 3,181,818 shares issuable upon
conversion of debentures.
(6) Based upon information provided by Alliance, represents 10,125,410
shares currently owned by Alliance, 357,747 shares issuable upon the
exercise of currently exercisable warrants and 3,009,818 shares
issuable upon conversion of debentures.
(7) Based on information provided by Macronix, represents 8,773,395 shares
currently owned by Macronix, 297,000 shares issuable upon the exercise
of currently exercisable warrants and 909,090 shares issuable upon
conversion of debentures.
This information does not take into account the following potential
dilutive issuances of securities pursuant to our credit facility agreement and
agreements with our major wafer partners and with Israel Corp. which cannot be
calculated as of the date of this annual report since the number of shares
issuable will depend upon future transactions in which we may engage: (i)
ordinary shares issuable upon conversion of up to $30 million in wafer
prepayment credits (as of May 19, 2006) which we have issued to our major wafer
partners; and (ii) ordinary shares issuable upon conversion of securities we may
be required to issue in connection with a rights offering and outside investor
provisions agreed to in the November 2003 amendment to our facility agreement.
Pursuant to a shareholders agreement dated January 18, 2001, among Israel
Corp., Alliance Semiconductor, SanDisk and Macronix, such parties have agreed,
among other things, to vote or cause to be voted all their respective shares for
the election to the Board of Directors of nominees designated by each party,
nominees recommended by the Board, the election of a designee of the Israel
Corp. to serve as Chairman of the Board, and against the election of any other
persons to the Board of Directors. In addition, subject to certain exceptions,
each shareholder agreed to restrictions on the transfer of its shares, including
certain rights of first refusal, and through January 2008, to maintain minimum
shareholdings.
As of July 10, 2006, there were a total of 34 holders of record of our
ordinary shares, of which 21 were registered with addresses in the United
States. Such United States holders were, as of such date, the holders of record
of approximately 62% of our outstanding ordinary shares.
B. RELATED PARTY TRANSACTIONS
EXEMPTION AND INDEMNIFICATION AGREEMENTS WITH DIRECTORS. In December 2001,
we entered into exemption and indemnification agreements with the members of our
Board of Directors, pursuant to which, subject to the limitations set forth in
the Israeli Companies Law and our Articles of Association, they will be exempt
from liability for breaches of the duty of care owed by them to the Company or
indemnified for certain costs, expenses and liabilities with respect to events
specified in the exemption and indemnification agreements. In September 2005, we
entered into amended exemption and indemnification agreements with the members
of our Board of Directors to reflect certain amendments to the Companies Law
that came into effect in March 2005. Our shareholders approved these amended
exemption and indemnification agreements in October 2005.
73
AGREEMENTS WITH CERTAIN OF OUR WAFER PARTNERS AND ISRAEL CORP. We are party
to several agreements with our wafer partners, including SanDisk and Alliance,
and Israel Corp related to the financing of Fab 2 and manufacture of products as
described under the caption "Fab 2 Agreements" in "Item 5. Operating and
Financial Review and Prospects" of this annual report and Note 11A to the
consolidated financial statements included in this annual report, which
discussions are incorporated by reference herein
AGREEMENTS WITH ISRAEL CORP. Discussed under "Item 4 - Information on the
Company - A. History and Development of the Company - Recent Developments",
which discussion is incorporated by reference herein.
GRANT OF OPTIONS TO OUR CEO AND DIRECTOR. Discussed under "Item 6 -
Directors, Senior Management and Employees - E. Share Ownership", which
discussion is incorporated by reference herein.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Our consolidated financial statements are incorporated herein by reference to
pages following the signature page of this Annual Report.
LEGAL PROCEEDINGS
In June 2006, the United States Court of Appeals for the Second Circuit
affirmed the August 2004 decision of the United States District Court for the
Southern District of New York to dismiss the class action suit filed in July
2003 by certain of our shareholders in the United States against us and certain
of our directors, wafer partners and equity investors (the "Defendants"). The
plaintiffs had asserted claims arising under the Securities Exchange Act of
1934, alleging misstatements and omissions made by the Defendants in materials
sent to our shareholders in April 2002 with respect to the approval of an
amendment to the investment agreements with our Fab 2 investors. The decision of
the Court of Appeals may be subject to motions for appeal/or rehearing by the
plaintiff within 90 days of said decision and there is therefore no assurance
that the decision of the Court of Appeals is a final disposition of the action.
From time to time we are a party to various litigation matters incidental
to the conduct of our business. There is no pending or threatened legal
proceeding to which we are a party, that, in the opinion of management, is
likely to have a material adverse effect on our future financial results or
financial condition.
74
B. SIGNIFICANT CHANGES
Not applicable.
ITEM 9. THE OFFER AND LISTING
Our ordinary shares are listed and traded on the NASDAQ National Market
under the symbol "TSEM." In addition, in January 2001, our ordinary shares
commenced trading on the Tel Aviv Stock Exchange (TASE) under the symbol "TSEM."
The following table sets forth, for the periods indicated, the high and low
reported sales prices of the ordinary shares on the Nasdaq National Market and
Tel Aviv Stock Exchange:
- ------------------------- -------------------------------------- -------------------------------
PERIOD NASDAQ NATIONAL MARKET TEL AVIV STOCK EXCHANGE
- ------------------------- -------------------------------------- -------------------------------
HIGH ($) LOW ($) HIGH (NIS) LOW (NIS)
- ------------------------- ---------------- --------------------- --------------- ---------------
June 2006 1.70 1.35 7.65 6.00
- ------------------------- ---------------- --------------------- --------------- ---------------
May 2006 1.75 1.22 7.91 6.37
- ------------------------- ---------------- --------------------- --------------- ---------------
April 2006 1.41 1.25 6.90 6.00
- ------------------------- ---------------- --------------------- --------------- ---------------
March 2006 1.45 1.28 6.73 6.11
- ------------------------- ---------------- --------------------- --------------- ---------------
February 2006 1.73 1.22 8.10 6.03
- ------------------------- ---------------- --------------------- --------------- ---------------
January 2006 1.93 1.52 8.54 6.57
- ------------------------- ---------------- --------------------- --------------- ---------------
Second quarter 2006 1.75 1.22 7.91 6.00
- ------------------------- ---------------- --------------------- --------------- ---------------
First quarter 2006 1.93 1.22 8.54 6.03
- ------------------------- ---------------- --------------------- --------------- ---------------
Fourth quarter 2005 1.80 1.02 8.30 5.20
- ------------------------- ---------------- --------------------- --------------- ---------------
Third quarter 2005 1.40 0.92 6.04 5.10
- ------------------------- ---------------- --------------------- --------------- ---------------
Second quarter 2005 1.90 1.08 8.00 5.15
- ------------------------- ---------------- --------------------- --------------- ---------------
First quarter 2005 2.38 1.36 10.30 6.36
- ------------------------- ---------------- --------------------- --------------- ---------------
Fourth quarter 2004 3.66 1.62 15.55 7.70
- ------------------------- ---------------- --------------------- --------------- ---------------
Third quarter 2004 5.96 2.95 26.95 13.03
- ------------------------- ---------------- --------------------- --------------- ---------------
Second quarter 2004 7.20 4.87 32.70 21.80
- ------------------------- ---------------- --------------------- --------------- ---------------
First quarter 2004 10.80 6.22 46.39 29.30
- ------------------------- ---------------- --------------------- --------------- ---------------
2005 2.38 0.92 10.30 5.10
- ------------------------- ---------------- --------------------- --------------- ---------------
2004 10.80 1.62 46.39 7.70
- ------------------------- ---------------- --------------------- --------------- ---------------
2003 7.90 2.16 35.00 10.12
- ------------------------- ---------------- --------------------- --------------- ---------------
2002 8.50 3.11 37.99 15.30
- ------------------------- ---------------- --------------------- --------------- ---------------
2001 17.12 3.80 71.90 16.80
- ------------------------- ---------------- --------------------- --------------- ---------------
75
ITEM 10. ADDITIONAL INFORMATION
ARTICLES OF ASSOCIATION; ISRAELI COMPANIES LAW
ARTICLES OF ASSOCIATION
Our Articles of Association ("Articles") were adopted in November 2000, and
amended on October 27, 2005 in order to increase our authorized capital toNIS
500 million. The objective stated in the Articles is to engage in any lawful
activity.
We have currently outstanding only one class of equity securities, our
ordinary shares, par value NIS 1.00 per share. Holders of ordinary shares have
one vote per share, and are entitled to participate equally in the payment of
dividends and share distributions and, in the event of liquidation of the
Company, in the distribution of assets after satisfaction of liabilities to
creditors. No preferred shares are currently authorized.
Our Articles require that we hold our annual general meeting of
shareholders each year no later than 15 months from the last annual meeting, at
a time and place determined by the Board of Directors, upon at least 21 days'
prior notice to our shareholders. No business may be commenced until a quorum of
two or more shareholders holding at least 33% of the voting rights are present
in person or by proxy. Shareholders may vote in person or by proxy, and are
required to prove title to their shares as required by the Israeli Companies Law
- - 1999 (or the "Companies Law") pursuant to procedures established by the Board
of Directors. Resolutions regarding the following matters must be passed by an
ordinary majority of those voting at the general meeting:
o amendments to our Articles;
o appointment and termination of our independent auditors;
o appointment and dismissal of directors;
o approval of acts and transactions requiring general meeting approval
under the Companies Law;
o increase or reduction of authorized share capital or the rights of
shareholders or a class of shareholders;
o any merger as provided in section 320 of the Companies Law; and
o the exercise of the Board of Directors' powers by the general meeting,
if the Board of Directors is unable to exercise its powers and the
exercise of any of its powers is essential for Tower's proper
management, as provided in section 52(a) of the Companies Law.
A special meeting may be convened by the request of two directors or by
written request of one or more shareholders holding at least 5% of our issued
share capital and 1% of the voting rights or one or more shareholders holding at
least 5% of the voting rights. Shareholders requesting a special meeting must
submit their proposed resolution with their request. Within 21 days of receipt
of the request, the Board must convene a special meeting and send out notices
setting forth the date, time and place of the meeting. Such notice must be given
at least 21 days but not more than 35 days prior to the special meeting.
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EXEMPTION AND INDEMNIFICATION AGREEMENTS WITH DIRECTORS
In December 2001, we entered into exemption and indemnification agreements
with the members of our Board of Directors, pursuant to which, subject to the
limitations set forth in the Israeli Companies Law and our Articles of
Association, they will be exempt from liability for breaches of the duty of care
owed by them to the Company or indemnified for certain costs, expenses and
liabilities with respect to events specified in the exemption and
indemnification agreements. In September 2005, we entered into amended exemption
and indemnification agreements with the members of our Board of Directors to
reflect certain amendments to the Companies Law that came into effect in March
2005. Our shareholders approved these amended exemption and indemnification
agreements in October 2005.
THE COMPANIES LAW
We are subject to the provisions of the Israeli Companies Law - 1999. The
Companies Law codifies the fiduciary duties that "office holders," including
directors and executive officers, owe to a company. An office holder, as defined
in the Companies Law, is a director, general manager, chief business manager,
deputy general manager, vice general manager, executive vice president, vice
president, another manager directly subordinate to the managing director or any
other person assuming the responsibilities of any of the foregoing positions
without regard to such person's title. Each person listed in the table in "Item
6. Directors, Senior Management and Employees" above is an office holder. Under
the Companies Law, all arrangements as to compensation of office holders who are
not directors require approval of the board of directors. With the exception of
compensation of external directors in an amount specified in the regulations
adopted under the Companies Law, arrangements regarding the compensation of
directors also require audit committee and shareholder approval.
The Companies Law requires an office holder to promptly disclose any
personal interest that he or she may have and all related material information
known to him or her, in connection with any existing or proposed transaction by
the company. In addition, if the transaction is an extraordinary transaction,
the office holder must also disclose any personal interest held by the office
holder's spouse, siblings, parents, grandparents, descendants, spouse's
descendants and the spouse of any of the foregoing, or any corporation in which
the office holder is a 5% or greater shareholder, holder of 5% or more of the
voting power, director or general manager or in which he or she has the right to
appoint at least one director or the general manager. An extraordinary
transaction is defined as a transaction not in the ordinary course of business,
not on market terms, or that is likely to have a material impact on the
company's profitability, assets or liabilities.
The Companies Law requires that specific types of transactions, actions and
arrangements be approved as provided for in a company's articles of association
and in some circumstances by the company's audit committee, board of directors
and shareholders. In the case of a transaction that is not an extraordinary
transaction, after the office holder complies with the above disclosure
requirements, only board approval is required, unless the Articles provide
otherwise. If the transaction is an extraordinary transaction, then, in addition
to any approval required by the Articles it must be approved first by the audit
committee and then by the board of directors, and, in specific circumstances, by
a meeting of the shareholders. Subject to exceptions set forth in the Companies
Law, an office holder who has a personal interest in a matter that is considered
at a meeting of the board of directors or the audit committee may not be present
at such meeting or vote on such matter.
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The Companies Law applies the same disclosure requirements to a controlling
shareholder of a public company, which is defined as a shareholder who has the
ability to direct the activities of a company, other than if this power derives
solely from the shareholder's position on the board of directors or any other
position with the company and includes a shareholder that holds 25% or more of
the voting rights if no other shareholder owns more than 50% of the voting
rights in the company. Extraordinary transactions with a controlling shareholder
or in which a controlling shareholder has a personal interest, and agreements
relating to employment and compensation terms of controlling shareholders
require the approval of the audit committee, the board of directors and the
shareholders of the company. The shareholder approval must either include at
least one-third of the shares held by disinterested shareholders who are
present, in person or by proxy, at the meeting, or, alternatively, the total
shareholdings of the disinterested shareholders who vote against the transaction
must not represent more than one percent of the voting rights in the company.
In addition to approval by a company's board of directors, a private
placement in a public company requires approval by a company's shareholders in
the following cases:
o A private placement that meets all of the following conditions:
o 20 percent or more of the voting rights in the company prior to
such issuance are being offered.
o The private placement will increase the relative holdings of a
shareholder that holds five percent or more of the company's
outstanding share capital (assuming the exercise of all of the
securities convertible into shares held by that person), or that
will cause any person to become, as a result of the issuance, a
holder of five percent or more of the company's outstanding share
capital.
o All or part of the consideration for the offering is not cash or
registered securities, or the private placement is not being
offered at market terms.
o A private placement which results in anyone becoming a controlling
shareholder.
The above transactions must not be adverse to the company's interest.
Under the Companies Law, a shareholder has a duty to act in good faith
towards the company and other shareholders and refrain from abusing his power in
the company, including, among other things, vote in the general meeting of
shareholders on the following matters:
o any amendment to the Articles;
o an increase of the company's authorized share capital;
78
o a merger; or
o approval of interested party transactions that require shareholder
approval.
In addition, any controlling shareholder, any shareholder who knows that it
possesses power to determine the outcome of a shareholder vote and any
shareholder who has the power to appoint or prevent the appointment of an office
holder in the company is under a duty to act with fairness towards the company.
The Companies Law does not describe the substance of this duty.
Tender Offer. A person wishing to acquire shares or any class of shares of
a publicly traded Israeli company and who would as a result hold over 90% of the
company's issued and outstanding share capital or of a class of shares which are
listed, is required by the Companies Law to make a tender offer to all of the
company's shareholders for the purchase of all of the issued and outstanding
shares of the company. If the shareholders who do not respond to the offer hold
less than 5% of the issued share capital of the company, all of the shares that
the acquirer offered to purchase will be transferred to the acquirer by
operation of law. The Companies Law provides for an exception regarding the
threshold requirement for a shareholder that prior to and following February
2000 holds over 90% of a company's issued and outstanding share capital.
However, the shareholders may petition the court to alter the consideration for
the acquisition. If the dissenting shareholders hold more than 5% of the issued
and outstanding share capital of the company, the acquirer may not acquire
additional shares of the company from shareholders who accepted the tender offer
if following such acquisition the acquirer would then own over 90% of the
company's issued and outstanding share capital.
The Companies Law provides that an acquisition of shares of a public
company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% or greater shareholder of the
company. This rule does not apply if there is already another 25% shareholder of
the company. Similarly, the Companies Law provides that an acquisition of shares
in a public company must be made by means of a tender offer if as a result of
the acquisition the purchaser would become a 45% or greater shareholder of the
company, if there is no 45% or greater shareholder of the company.
Merger. The Companies Law permits merger transactions if approved by each
party's board of directors and the majority of each party's shares voted on the
proposed merger at a shareholders' meeting called on at least 21 days' prior
notice. Under the Companies Law, merger transactions may be approved by holders
of a simple majority of our shares present, in person or by proxy, at a general
meeting and voting on the transaction. In determining whether the required
majority has approved the merger, if shares of a company are held by the other
party to the merger, or by any person holding at least 25% of the outstanding
voting shares or 25% of the means of appointing directors of the other party to
the merger, then a vote against the merger by holders of the majority of the
shares present and voting, excluding shares held by the other party or by such
person, or anyone acting on behalf of either of them, is sufficient to reject
the merger transaction. If the transaction would have been approved but for the
exclusion of the votes of certain shareholders as provided above, a court may
still approve the merger upon the request of holders of at least 25% of the
voting rights of a company, if the court holds that the merger is fair and
reasonable, taking into account the value of the parties to the merger and the
consideration offered to the shareholders. Upon the request of a creditor of
either party to the proposed merger, the court may delay or prevent the merger
if it concludes that there exists a reasonable concern that, as a result of the
merger, the surviving company will be unable to satisfy the obligations of any
of the parties to the merger. In addition, a merger may not be executed unless
at least 30 days have passed from the receipt of the shareholders' approval and
50 days have passed from the time that a proposal for approval of the merger has
been filed with the Israeli Registrar of Companies.
79
NASDAQ MARKETPLACE RULES AND HOME COUNTRY PRACTICES
Nasdaq's Marketplace Rule 4350 ("Rule 4350") was amended to permit foreign
private issuers to follow certain home country corporate governance practices
without the need to seek an individual exemption from Nasdaq. Instead, a foreign
private issuer must provide Nasdaq with a letter from outside counsel in its
home country certifying that the issuer's corporate governance practices are not
prohibited by home country law.
In July 2005, pursuant to this new exception, we provided a notice to
Nasdaq required by Rule 4350, with a letter from our outside Israeli counsel
informing it that in keeping with Rule 4350(a)(1) we had elected to follow the
practices of our home country in lieu of those set forth in Rule 4350, to the
extent permitted thereby, and provided a letter from our outside Israeli counsel
certifying that our the practices being followed of amending employee share
option plans that do not permit the grant of options to directors upon the
approval of our board of directors, and without seeking shareholder approval
(which approval is required for Nasdaq-listed companies under Marketplace Rule
4350(i)), is in place thereof were not prohibited by Israeli law.
As provided by Rule 4350(a)(1), in lieu of the requirements of Rule 4350 we
have chosen to follow the practices of our home country with respect to the
following:
(a) We do not supply an annual report as required by Rule 4350(b)(1)(A),
but makes our audited financial statements available to our shareholders prior
to our annual general meeting.
(b) The majority of our Board of Directors is not comprised of directors
who meet the definition of independence contained in Nasdaq Marketplace Rule
4200(a)(15), as required by Rule 4350(c)(1). Under the Companies Law a majority
of the Board of Directors is not required to be comprised of independent
directors. In keeping with the requirements of the Companies Law two of the
members of our Board of Directors are external directors, and are independent as
defined under Rule 10A-3 of the Securities Act.
(c) Our Board has not adopted a policy of conducting regularly scheduled
meetings at which only our independent directors are present, as required by
Rule 4350(c)(2). The Companies Law does not require our external directors to
conduct regularly scheduled meetings at which only they are present.
(d) The compensation of our chief executive officer and all other executive
officers is not determined, or recommended to the Board for determination, in
the manner required by Rule 4350(c)(3). In accord with the Companies Law the
compensation of the chief executive officer and all other officers requires the
approval of our Board of Directors, however the compensation of our chief
executive officer, who also serves as a director, requires also the approval of
our shareholders.
(e) Director nominees are not selected, or recommended for the Board's
selection, as required by Rules 4350(c)(4)(A) and 4350(c)(4)(C).
80
(f) Our Board of Directors has not adopted a formal written charter or
board resolution addressing the nomination process and such related matters as
may be required under United States federal securities laws, as required by Rule
4350(c)(4)(B).
(g) Although we have adopted a formal written audit committee charter,
there is no requirement under the Companies Law to do so and the charter as
adopted may not specify all the items enumerated in Rule 4350(d)(1).
(h) Our audit committee does not meet with all of the requirements of Rules
4350(d)(2)(A)(i), 4350(d)(2)(A)(iii) and 4350(d)(2)(A)(iv). Though all members
are independent as such term is defined under Rule 10A-3 of the Exchange Act,
the audit committee does not comply with the foregoing Rule 4350 requirements,
as permitted by the Companies Law.
(i) Our articles of association do not provide for a quorum of not less
than 33 1/3% of the outstanding shares of our voting ordinary shares for
meetings of our ordinary shareholders, as required by Rule 4350(f). Our articles
of association presently require a quorum consisting of two shareholders holding
a combined 33% of our ordinary shares. Under the Companies Law a quorum
consisting of two shareholders holding a combined 25% of the company's voting
shares is required.
(j) We review and approve all related party transactions in accordance with
the requirements and procedures for approval of interested party acts and
transactions, set forth in the Companies Law, which do not fully reflect the
requirements of Rule 4350(h).
(k) We seek shareholder approval for all corporate action requiring such
approval, in accordance with the requirements of the Companies Law, which does
not fully reflect the requirements of Rule 4350(i).
We may in the future provide Nasdaq with an additional such letter or
letters notifying Nasdaq that we are following our own practices, consistent
with the Companies Law and practices in Israel in lieu of other requirements of
Marketplace Rule 4350.
MATERIAL CONTRACTS. Discussions of these agreements are incorporated herein
by reference to the discussion under the caption "Intellectual Property and
Licensing Agreements" in "Item 4."Information on the Company" and under the
caption "Fab 2 Agreements" in "Item 5. Operating and Financial Review and
Prospects" of this annual report.
FAB 2 AGREEMENTS. Since 2000, we have entered into several important Fab 2
agreements and arrangements with a key technology partner, wafer and equity
financing partners, the Israeli Investment Center and two leading Israeli banks.
Discussions of these agreements are incorporated herein by reference to the
discussion under the caption "Fab 2 Agreements" in "Item 5. Operating and
Financial Review and Prospects" of this annual report and to Note 11A to the
consolidated financial statements included in this annual report.
INTELLECTUAL PROPERTY AND LICENSING AGREEMENTS. Discussions of these
agreements are incorporated herein by reference to the discussion under the
caption "Intellectual Property and Licensing Agreements" in "Item 4."Information
on the Company" of this annual report.
81
EXCHANGE CONTROLS
Under Israeli law, non-residents of Israel who purchase ordinary shares
with certain non-Israeli currencies (including U.S. dollars) may freely
repatriate in such non-Israeli currencies all amounts received in Israeli
currency in respect of the ordinary shares, whether as a dividend, as a
liquidating distribution, or as proceeds from any sale in Israel of the ordinary
shares, provided in each case that any applicable Israeli income tax is paid or
withheld on such amounts. The conversion into the non-Israeli currency must be
made at the rate of exchange prevailing at the time of conversion.
Under Israeli law and our company's Articles, both residents and
non-residents of Israel may freely hold, vote and trade our ordinary shares.
TAXATION
The below discussion does not purport to be an official interpretation of
the tax law provisions mentioned therein or to be a comprehensive description of
all tax law provisions which might apply to our securities or to reflect the
views of the relevant tax authorities, and it is not meant to replace
professional advice in these matters. The below discussion is based on current,
applicable tax law, which may be changed by future legislation or reforms.
Non-residents should obtain professional tax advice with respect to the tax
consequences under the laws of their countries of residence of holding or
selling our securities.
A. Israeli Capital Gains Tax
Until the end of the year 2002 and provided we maintained our status as an
"Industrial Corporation", capital gains from the sale of our securities were
generally exempt from Israeli Capital Gains Tax. This exemption did not apply to
a shareholder whose taxable income was determined pursuant to the Israeli Income
Tax Law (Inflationary Adjustments) 1985, or to a person whose gains from selling
or otherwise disposing of our securities were deemed to be business income.
On January 1, 2006 an amendment to the Israeli tax regime became effective
(the "2006 Tax Reform"). The 2006 Tax Reform significantly changed the tax rates
applicable to income derived from shares.
According to the 2006 Tax Reform, an individual is subject to a 20% tax
rate on real capital gains derived from the sale of shares, as long as the
individual is not a "substantial shareholder" (generally a shareholder with 10%
or more of the right to profits, right to nominate a director and voting rights)
in the company issuing the shares. The rate on the gains from publicly traded
shares applicable to gains that were realized between January 1, 2003 and
January 1, 2006 was 15%.
A substantial shareholder will be subject to tax at a rate of 25% in
respect of real capital gains derived from the sale of shares issued by the
company in which he or she is a substantial shareholder. The determination of
whether the individual is a substantial shareholder will be made on the date
that the securities are sold. In addition, the individual will be deemed to be a
substantial shareholder if at any time during the 12 months preceding this date
he had been a substantial shareholder.
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Corporations will be subject to corporate tax rates in respect of total
income, including capital gains, with the corporate tax rate reduced gradually
from 34% in 2005 to 25% in 2010. However, between 2006 and 2009, corporations
whose taxable income was not determined, immediately before the 2006 Tax Reform
was published, pursuant to part B of the Israeli Income Tax Law (Inflationary
Adjustments), 1985 or pursuant to the Income Tax Regulations (Rules on
Bookkeeping by Foreign Invested Companies and Certain Partnership and
Determination of their Chargeable Income), 1984 will generally be taxed at a
rate of 25% on their capital gains from the sale of their securities.
Non-Israeli residents are exempt from Israeli capital gains tax on any
gains derived from the sale of shares in an Israeli corporation publicly traded
on the TASE and/or on a foreign stock exchange, provided such gains do not
derive from a permanent establishment of such shareholders in Israel and that
such shareholders did not acquire their shares prior to the issuer's initial
public offering. However, non-Israeli corporations will not be entitled to such
exemption if an Israeli resident (i) has a controlling interest of 25% or more
in such non-Israeli corporation, or (ii) is the beneficiary of or is entitled to
25% or more of the revenues or profits of such non-Israeli corporation, whether
directly or indirectly.
In some instances where our shareholders may be liable to Israeli tax on
the sale of their ordinary shares, the payment of the consideration may be
subject to the withholding of Israeli tax at the source.
Pursuant to the treaty between the Governments of the United States and
Israel with respect to taxes on income, or the U.S.-Israel tax treaty, the sale,
exchange or disposition of our ordinary shares by a person who qualifies as a
resident of the United States under the treaty and who is entitled to claim the
benefits afforded to him by the treaty, will generally not be subject to Israeli
capital gains tax. This exemption shall not apply to a person who held, directly
or indirectly, shares representing 10% or more of the voting power in our
company during any part of the 12-month period preceding the sale, exchange or
disposition, subject to certain conditions. A sale, exchange or disposition of
our shares by a U.S. resident qualified under the treaty, who held, directly or
indirectly, shares representing 10% or more of the voting power in our company
at any time during the preceding 12-month period would be subject to Israeli
tax, to the extent applicable; however, under the treaty, this U.S. resident
would be permitted to claim a credit for these taxes against the U.S. income tax
with respect to the sale, exchange or disposition, subject to the limitations in
U.S. laws applicable to foreign tax credits.
B. Israeli Tax on Interest Income and on Original Issuance Discount
Interest and Original Issuance Discount (OID) on our convertible debentures
will, in general, be subject to Israeli tax of up to 20% if received by an
individual. This reduced rate of tax will not apply if the interest and OID are
business income in the hands of the recipient, if the interest is recorded or
should be recorded in the individual's accounting books, if the recipient is a
substantial shareholder of our company, if financing expenses related to the
purchase of the debentures were deducted by the individual in the calculation of
the individual's Israeli taxable income, or if the individual is an employee,
supplier, or service provider of the company and the tax authorities have not
been persuaded that the payment of interest was not affected by the relationship
between the parties. In such cases the regular rate of tax on Interest and OID
of up to 49% will apply to the individual. Interest and OID paid to corporations
will be subject to corporate tax at the regular rates of 34% in 2005, 31% in
2006, 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter. As a
result of the provisions related to tax withholding, as explained below, foreign
resident individuals and corporations will be subject to tax of 25% or less,
according to the relevant treaty relating to their domicile country.
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Under regulations promulgated as part of the 2006 Tax Reform, withholding
tax at source from debenture interest and OID paid to resident individuals will,
in general, be at a rate of 20%. However, if the individual receiving the
interest and OID is a substantial shareholder, an employee, supplier or service
provider of the company, tax will be withheld at the marginal rates applicable
to individuals. Corporations will be subject to withholding tax at the
applicable rate of corporate tax as set out above. Withholding tax at source
from debenture interest and OID paid to non-resident individuals or corporations
will be at a rate of 25% or less, according to the relevant treaty relating to
their domicile country. In any event, under the US-Israel Tax Treaty, the
maximum Israeli tax withheld on interest and OID paid on our convertible
debentures due 2006 to a US treaty resident (other than a US bank, savings
institution or company) is 17.5%.
C. Israeli Tax on Dividend Income
On distributions of dividends other than bonus shares, or stock dividends,
to Israeli individuals and foreign resident individuals and corporations we
would be required to withhold income tax at the rate of 20%. If the income out
of which the dividend is being paid is attributable to an Approved Enterprise
under the Law for the Encouragement of Capital Investments, 1959, the rate is
15%. A different rate may be provided for in a treaty between Israel and the
shareholder's country of residence.
Under the US-Israel Tax Treaty, Israeli withholding tax on dividends paid
to a US treaty resident may not, in general, exceed 25%, or 15% in the case of
dividends paid out of the profits of an Approved Enterprise. Where the recipient
is a US corporation owning 10% or more of the voting stock of the paying
corporation and the dividend is not paid from the profits of an Approved
Enterprise, the Israeli tax withheld may not exceed 12.5%, subject to certain
conditions.
D. PFIC Rules
A non-U.S. corporation will be classified as a passive foreign investment
company, or 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.
We do not believe that we satisfied either of the tests for PFIC status in
2005 or in any prior year. However, there can be no assurance that we will not
be a PFIC in 2006 or a later year. If, for example, the "passive income" earned
by us exceeds 75% or more of our "gross income", we will be a PFIC under the
"income test". Passive income for PFIC purposes includes, among other things,
gross interest, dividends, royalties, rent and annuities. For manufacturing
businesses, gross income for PFIC purposes should be determined by reducing
total sales by the cost of goods sold. Although not free from doubt, if our cost
of goods sold exceeds our total sales by an amount greater than our passive
income, such that we are treated as if we had no gross income for PFIC purposes,
we believe that we would not be a PFIC as a result of the income test. However,
the tests for determining PFIC status are applied annually and it is difficult
to make accurate predictions of future income and assets, which are relevant to
the determination of PFIC status.
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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 tax rates on "excess
distributions," which is defined to include gain on a sale or other disposition
of ordinary shares, or (ii) so long as the ordinary shares are "regularly
traded" on a qualifying exchange, elect to recognize as ordinary income each
year the excess in the fair market value, if any, of its ordinary shares at the
end of the taxable year over such holder's adjusted basis in such ordinary
shares and, to the extent of prior inclusions of ordinary income, recognize
ordinary loss for the decrease in value of such ordinary shares (the "mark to
market" election). For this purpose, the Nasdaq National Market is a qualifying
exchange. U.S. holders are strongly urged to consult their own tax advisers
regarding the possible application and consequences of the PFIC rules.
DOCUMENTS ON DISPLAY
We are required to file reports and other information with the SEC under
the Securities Exchange Act of 1934 and the regulations thereunder applicable to
foreign private issuers. Reports and other information filed by us with the SEC
may be inspected and copied at the SEC's public reference facilities described
below. Although as a foreign private issuer we are not required to file periodic
information as frequently or as promptly as United States companies, we
generally do publicly announce our quarterly and year-end results promptly and
file periodic information with the SEC under cover of Form 6-K. As a foreign
private issuer, we are also exempt from the rules under the Exchange Act
prescribing the furnishing and content of proxy statements and our officers,
directors and principal shareholders are exempt from the reporting and other
provisions in Section 16 of the Exchange Act.
You may review and copy our filings with the SEC, including any exhibits
and schedules, at the SEC's public reference room at 100 F Street N.E.,
Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for further
information on this public reference room. As a foreign private issuer, all
documents which were filed after November 4, 2002 on the SEC's EDGAR system will
be available for retrieval on the SEC's website at www.sec.gov. These SEC
filings are also available to the public on the Israel Securities Authority's
Magna website at www.magna.isa.gov.il and from commercial document retrieval
services. We also generally make available on our own web site
(www.towersemi.com) our quarterly and year-end financial statements as well as
other information.
Any statement in this annual report about any of our contracts or other
documents is not necessarily complete. If the contract or document is filed as
an exhibit to a registration statement, the contract or document is deemed to
modify the description contained in this annual report. We urge you to review
the exhibits themselves for a complete description of the contract or document.
85
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss related to changes in market prices,
including interest rates and foreign exchange rates, of financial instruments
and derivatives that may adversely impact our consolidated financial position,
results of operations or cash flows.
Our primary market risk exposures relate to interest rate movements on
borrowings, fluctuations of the exchange rate of the US dollar, which is the
primary currency in which we conduct our operations, against the NIS, the
Japanese Yen and the Euro. To manage those risks and mitigate our exposure to
them, we from time to time use financial instruments, primarily, interest rate
collar agreements with a knock-out and knock-in features, and foreign currency
forward contracts and options (including zero-cost cylinders).
All financial instruments are managed and controlled under a program of
risk management in accordance with established policies. These policies are
reviewed and approved by our board of directors. Our treasury operations are
subject to an internal audit on a regular basis. We do not hold derivative
financial instruments for speculative purposes, and we do not issue any
derivative financial instruments for trading or speculative purposes.
RISK OF INTEREST RATE FLUCTUATION
We have market risk exposure to changes in interest rates on our long-term
debt obligations with floating interest rates. We have entered into debt
obligations to support our capital expenditures and needs. From time to time we
enter into interest rate collar agreements with knock-out and knock-in features
to modify our exposure to interest rate movements and to reduce our borrowing
costs. These agreements limit our exposure to the risks of fluctuating interest
rates by allowing us to convert a portion of the interest on our borrowings from
a variable rate to a limited variable rate. A knock-out LIBOR-based interest
rate collar is a combination of a purchased knock-out cap with a cap level,
floor level and a knock out level (and a knock in level for some of the
agreements).
We are subject to interest rate exposure in connection with $518 million
long-term debt outstanding as of December 31, 2005 under the Fab 2 facility
agreement, as such debt bears interest at a rate of LIBOR plus 2.5% per annum.
The interest rate as of December 31, 2005 on $226 million of the Fab 2 loans,
not subject to the results of our collar agreements, was 7.06%. Our remaining
loans of $292 million are covered by the collar agreements and bore annual
interest rate as of December 31, 2005, including the results of our hedging
activities described below, as follows: $212 million - 7.06%, $80 million -
6.5%, As of December 31,2005 loans in the amount of $21 million drawn down
during 2005 following the July 2005 Amendment of the Facility Agreement were
repayable through December 31,2006, loans in the amount of $431 million were
repayable in 12 equal consecutive quarterly installments commencing March 31,
2007, and loans in the amount of $66 million drawn down during 2004 were
repayable in 12 equal consecutive quarterly installments, commencing three years
from the end of the quarter of each draw down. Following the May 2006 Amendment
to the Facility Agreement, the repayments of long-term loans in the amount of
approximately $100 million (including $8 million drawn down in 2006 following
the July 2005 Amendment to the Facility Agreement) formerly scheduled to be paid
between October 2006 and June 2007, were deferred to July 2007.
86
All our collar agreements, which gradually expire in 2006-2009, were
effective as of December 31, 2005. These agreements provide for combinations as
described below. Under the knock-out provision in these agreements, in the event
that the LIBOR rate exceeds the knock-out LIBOR rate level during a particular
quarter, the protection provided under the interest collar agreements will not
apply with respect to that entire quarter. If the LIBOR rate decreases
thereafter and remains below the knock-out LIBOR rate level in any successive
quarter for the duration of the entire quarter, the protection provided under
the interest rate collar will again be effective.
With respect to the $172 million of our Fab 2 credit facility debt, under
the terms of the collar agreements, if the LIBOR is below the floor rate of
4.28% we will pay total interest at the fixed rate of 6.78% (the 4.28% floor
rate plus 2.5%); if the LIBOR is between 4.28% and 5.56%, we will pay total
interest at the actual LIBOR plus 2.5%; if the LIBOR is between 5.56% and 7.50%
we will pay total interest at a fixed rate of 8.06% (the 5.56% cap rate plus
2.5%); and if the LIBOR is higher than 7.50%, we will pay the actual LIBOR rate
plus 2.5%. On December 31, 2005, the LIBOR rate was 4.56%. Accordingly, as of
such date the interest rate on these long-term loans was 7.06% (the Libor rate
of 4.56% plus 2.5%).
With respect to the $40 million of our Fab 2 credit facility debt, under
the terms of the collar agreements, if the LIBOR is below the floor rate of
2.80% we will pay total interest at the fixed rate of 5.30% (the 2.80% floor
rate plus 2.5%); if the LIBOR is between 2.80% and 5.50%, we will pay total
interest at actual LIBOR plus 2.5%; if the LIBOR is between 5.50% and 7.50% we
will pay total interest at a fixed rate of 8.00% (the 5.50% cap rate plus 2.5%);
and if the LIBOR is higher than 7.50%, we will pay the actual LIBOR rate plus
2.5%. At December 31, 2005, the LIBOR rate was 4.56%. Accordingly, as of such
date, the interest rate on these long-term loans was 7.06% (the Libor rate of
4.56% plus 2.5%).
With respect to the $80 million of our Fab 2 credit facility debt, under
the terms of the collar agreements, if the LIBOR is below the knock-in of 0.70%
we will pay total interest at the fixed rate of 5.25% (the 2.75% floor rate plus
2.5%); if the LIBOR is between 0.70% and 4.00%, we will pay total interest at
the actual LIBOR plus 2.5%; if the LIBOR is between 4.00% and 7.00% we will pay
total interest at a fixed rate of 6.50% (the 4.00% cap level plus 2.5%); and if
the LIBOR is higher than 7.00%, we will pay the actual LIBOR rate plus 2.5%. At
December 31, 2005, the LIBOR rate was 4.56%. Accordingly, as of such date, the
interest rate on these long-term loans was 6.5% (the cap level of 4.0% plus
2.5%).
All our collar agreements resulted in a loss of $1.8 million in the year
ended December 31, 2005. The fair value of these agreements, as of December 31,
2005 was a $1.8 million gain.
Our cash equivalents and interest-bearing deposits are exposed to market
risk due to fluctuation in interest rates, which may affect our interest income
and the fair market value of our investments. We manage this exposure by
performing ongoing evaluations of our investments in those deposits. Due to the
short maturities of our investments, their carrying value approximates their
fair value.
87
CONVERTIBLE DEBENTURES AND OPTIONS - FOREIGN EXCHANGE RISK
We are exposed to the risk of fluctuation in the NIS/dollar exchange rate
with respect to our 2002 convertible debentures. As of December 31, 2005, we
were exposed to the risk of fluctuation in the NIS/dollar exchange rate with
respect to our exercise price of our Options (Series 1) issued in 2002, which
are both denominated in NIS linked to the Consumer Price Index in Israel (CPI).
As of December 31, 2005 the adjusted outstanding principal amount of the 2002
convertible debentures was $26.1 million and the adjusted exercise price of the
options (Series 1) was $9.2(all of which expired on January 2006). The dollar
amount of our finance costs (interest and currency adjustments) related to the
2002 convertible debentures will be increased if the rate of inflation in Israel
is not offset (or is offset on a lagging basis) by the devaluation of the NIS in
relation to the dollar. In addition, the dollar amount of any repayment on
account of the principal of the 2002 convertible debentures will be increased as
well. If the devaluation of the NIS against the dollar is greater than the rate
of inflation in Israel, the dollar amounts we may raise on the date of
exercising our NIS denominated options linked to the CPI will be decreased (all
our options (Series 1) expired in January 2006). From the date of the issuance
of the 2002 convertible debentures and Options (Series 1) in January 2002 until
December 31, 2005, the Israel consumer price index increased by 8.5% while the
US dollar/NIS exchange rate increased by 0.4%.
Following the completion of the TASE offering in June 2006, we will also be
exposed to foreign exchange risk with respect to our 2006 convertible debentures
and our Options (Series C3, 3 and 4), which are denominated in NIS and linked to
the CPI.
We are not exposed to foreign exchange risk with respect to our 2005
convertible debentures since these debentures are denominated in USD.
CONVERTIBLE DEBENTURES - RISK OF INTEREST RATE FLUCTUATION
The 2002 convertible debentures bear annual interest at a fixed rate of
4.7%. The debentures are payable in four annual installments commencing in
January 2006. The 2005 convertible debentures are denominated in USD and bear
annual interest at the rate of 5%. The principle of the debentures, together
with accrued interest, will be payable in one installment on January 12, 2012.
Therefore, we are not subject to exposure to interest rate fluctuations with
respect to the debentures. However, in case the actual market interest rates are
lower than the interest rate provided on the convertible debentures, our actual
finance costs would be higher than in case our convertible debentures bear
floating interest rate.
Assuming a 10% upward shift in the LIBOR rate at December 31, 2005 (from
4.56% to 5.02%), the effective fair value of $438 million debt would have
increased and the effective fair value of the convertible debentures would have
decreased resulting in a total increase in the fair value of our debts in the
amount of approximately $2.9 million. The amount of $438 is comprised of $226
million debt not hedged by the collar agreements and $212 million debt hedged by
the collar agreements with a cap level of 5.5% and a knock out level of 7.5%.
With regard to the remaining $80 million debt hedged by the collar agreements,
as of December 31, 2005 such assumed increase in the LIBOR rate presents no
change in the interest rate exposure since as of such date the collar agreements
would still result in a fixed rate interest of the cap level plus 2.5%.
88
We are not exposed to the risk of interest rate fluctuation with respect to
our 2006 convertible debentures since these debentures do not bear interest.
FOREIGN EXCHANGE RISK
Our main foreign currency exposures give rise to market risk associated
with exchange rate movements of the US dollar, our functional and reporting
currency, against the Japanese Yen, the Euro and the NIS. To protect against
reductions in value and the volatility of future cash flows caused by changes in
foreign exchange rates, we utilize foreign currency forward contracts and
options (including zero-cost cylinder options) in order to minimize part of the
impact of foreign currency fluctuations on our financial position and results of
operations. A cylinder option is a combination of a purchased call option and a
written put option. The exercise prices of the options may not be identical and
this effectively creates a synthetic range forward. The maturity dates of the
options coincide with the scheduled payments to suppliers.
Accordingly, we enter, from time to time, into foreign currency agreements
to hedge exposure to equipment purchase commitments and other firm commitments.
Most of our agreements to hedge equipment purchase commitments are designated to
eliminate exposure changes in the Japanese Yen and the Euro vis-a-vis the US
dollar. During the year ended December 31, 2005, we did not have any such
transactions.
We enter from time to time into foreign exchange agreements to hedge
exposure relating to Value Added Tax (VAT), grants receivables and payroll
payments denominated in NIS. During the year ended December 31, 2005, we did not
have any such transaction.
We are exposed to currency risk in the event of default by the other
parties of the exchange transaction. We estimate the likelihood of such default
to occur is remote, as the other parties are widely recognized and reputable
Israeli banks.
Assuming a 10% revaluation of the NIS against the US dollar on December 31,
2005 (from 4.603 to 4.143), the effective fair value of our liabilities net of
assets denominated in NIS (mainly vendors, convertible debentures and
liabilities in regard to employees ) would have increased in approximately $4.6
million.
IMPACT OF INFLATION
We believe that the rate of inflation in Israel has had a minor effect on
our business to date. However, our dollar costs in Israel will increase if
inflation in Israel exceeds the devaluation of the NIS against the dollar or if
the timing of such devaluation lags behind inflation in Israel.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
89
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
In December of 2005 we filed a registration statement on Form F-1
(Registration No. 333-126909) covering the registration of rights to purchase
$50 million worth of $1 denominated convertible debentures, $50 million in
aggregate principal amount of convertible debentures issuable upon the exercise
of the rights, and 45,454,454 Ordinary Shares issuable upon conversion of the
convertible debentures at a conversion price of $1.10 per share. The effective
date of the registration statement was December 15, 2005. The rights were
distributed to all holders of record of our Ordinary Shares as of December 20,
2005. The rights were exercisable for a 23-day period beginning on December 20,
2005 and ending on January 12, 2006. The offering, which terminated on January
20, 2005, resulted in gross proceeds to us from rights exercises of
approximately $48.2 million. After issuing expenses of approximately $1.6, the
net proceeds received by us were approximately $46.4 million. None of the net
proceeds were paid directly or indirectly to any of our directors or officers,
or their associates, any persons owning 10% or more of any class of our equity
securities, or any of our affiliates. From January 20, 2005 to the date of this
annual report, the net offering proceeds were used to finance our on going
operations, including the cash needed to support our production ramp-up in both
fabs to support our increased customers demand in the first half of 2006.
ITEM 15. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the
participation of our management, including the Chief Executive Officer and the
acting Chief Financial Officer, of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our Chief Executive Officer
and acting Chief Financial Officer concluded that as of December 31, 2005, our
disclosure controls and procedures were effective to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms and to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is accumulated and communicated
to our management, including our principal executive and principal financial
officers, or persons performing similar functions, as required to allow timely
decisions regarding required disclosure.
There have been no significant changes in our internal controls or in other
factors that could significantly affect disclosure controls and procedures
subsequent to the date of our most recent evaluation.
90
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that a member of our audit committee,
Ms. Tal Yaron-Eldar, is an audit committee financial expert and is independent
as defined by Nasdaq Marketplace Rule 4350.
ITEM 16B. CODE OF ETHICS
We adopted a code of ethics that applies to all of our directors, officers
and employees, including our chief executive officer, acting chief financial
officer, controller, and persons performing similar functions. We have posted
our code of ethics on our website, www.towersemi.com under "About Tower".
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees for professional services rendered by our
independent registered public accounting firm for audit services, audit-related
services and for tax services:
2005 2004
(US DOLLARS) (US DOLLARS)
------------ ------------
Audit Fees(1) 325,000 362,000
Audit-Related Fees(2) 3,000 12,000
Tax Fees(3) 9,000 14,000
Other(4) - -
Total 337,000 388,000
(1) Audit fees consist of fees for professional services rendered for the audit
of our consolidated financial statements, services in connection with
statutory and regulatory filings and engagements (including review of Forms
20-F, F-1, F-3 and S-8), and reviews of our unaudited interim consolidated
financial statements included in our quarterly reports.
(2) Audit related fees consist of accounting consultation and consultation on
financial accounting standards, not arising as part of the audit.
(3) Tax fees consist of fees for tax compliance services, tax planning and tax
advice.
Our audit committee's charter states that the audit committee is
responsible for receiving specific information on the independent auditor's
proposed services and for pre-approving all audit services annually and
separately approving any other permitted non-audit related services.
91
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FROM AUDIT COMMITTEES.
Not Applicable.
ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PARTIES.
Not Applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
See Index to Financial Statements following the signature page.
ITEM 19. EXHIBITS
1.1 Articles of Association of the Registrant, approved by shareholders on
November 14, 2000, as amended (incorporated by reference to Exhibit 3.1 of
the Registrant's Registration Statement on Form F-1, File No.
333-126909,"Form F-1 No. 333-126909").
2.1 Bank Warrants, dated January 18, 2001, between the Registrant and Bank
Hapoalim B.M. and Bank Leumi Le-Israel B.M. (incorporated by reference to
the correspondingly-numbered exhibit to the Registrant's Annual Report on
Form 20-F for the year ended December 31, 2000 (the "2000 Form 20-F")).
2.2 Registration Rights Agreement, dated January 18, 2001, by and between
SanDisk Corporation, Israel Corporation, Alliance Semiconductor Ltd. and
Macronix International Co., Ltd. (incorporated by reference to the
correspondingly-numbered exhibit to the 2000 Form 20-F).
2.3 Terms of the Registrant's Convertible Debentures issued under an Indenture,
dated January 22, 2002, (incorporated by reference to the summary of terms
included under the caption "Description of the Debentures" in Exhibit C to
the Registrant's Report on Form 6-K for January 2002 (No. 2), filed January
16, 2002 ("January 2002 Form 6-K")).
2.4 Terms of the Registrant's Options (Series 1) (incorporated by reference to
the summary of terms included under the caption "Description of the
Options" in Exhibit C to the January 2002 Form 6-K).
2.5 Form of Indenture (incorporated by reference to Exhibit 4.2 to Form F-1 No.
333-126909).
2.6 Form of Note for the Debentures (included as Exhibit A to the Indenture
filed as Exhibit No. 4.2 to Form F-1 No. 333-126909 and incorporated herein
by reference).
92
3.1 Consolidated Shareholders Agreement, dated January 18, 2001, by and between
SanDisk Corporation, Israel Corporation, Alliance Semiconductor Ltd. and
Macronix International Co., Ltd. (incorporated by reference to the
correspondingly-numbered exhibit to the 2000 Form 20-F).
4.1 Share Purchase Agreement, dated July 4, 2000, by and between SanDisk
Corporation and the Registrant (incorporated by reference to the
correspondingly-numbered exhibit to the 2000 Form 20-F).
4.2 Additional Purchase Obligation Agreement, dated July 4, 2000, by and
between SanDisk Corporation ("SanDisk") and the Registrant (incorporated by
reference to the correspondingly-numbered exhibit to the 2000 Form 20-F).
4.3 Share Purchase Agreement, dated August 29, 2000, by and between Alliance
Semiconductor Corporation ("Alliance") and the Registrant (incorporated by
reference to the correspondingly-numbered exhibit to the 2000 Form 20-F).
4.4 Share Purchase Agreement, dated December 11, 2000, by and between
QuickLogic Corporation ("QuickLogic") and the Registrant (incorporated by
reference to the correspondingly-numbered exhibit to the 2000 Form 20-F).
4.5 Share Purchase Agreement, dated December 12, 2000, by and between Macronix
International Co., Ltd. ("Macronix") and the Registrant (incorporated by
reference to the correspondingly-numbered exhibit to the 2000 Form 20-F).
4.6 Share Purchase Agreement, dated December 12, 2000, between Israel
Corporation and the Registrant (incorporated by reference to the
correspondingly-numbered exhibit to the 2000 Form 20-F).
4.7 Additional Purchase Obligation Agreement, dated December 12, 2000, between
Israel Corporation and the Registrant (incorporated by reference to the
correspondingly-numbered exhibit to the 2000 Form 20-F).
4.8 Share Purchase Agreement, dated February 11, 2001, between The Challenge
Fund - Etgar II and the Registrant (incorporated by reference to the
correspondingly-numbered exhibit to the 2000 Form 20-F).
4.9 Facility Agreement, dated January 18, 2001, among the Registrant, Bank
Hapoalim B.M. and Bank Leumi Le-Israel B.M. (the "Facility Agreement")
(incorporated by reference to the correspondingly-numbered exhibit to the
2000 Form 20-F).
4.10 Design and Construction/Turn-Key Contract, dated August 20, 2000, among the
Registrant, M+W Zander Holding GmbH, Meissner-Baran Ltd. and Baran Group
Ltd. (incorporated by reference to the correspondingly-numbered exhibit to
the 2000 Form 20-F).
4.11 Approval, dated December 31, 2000, of the Israeli Investment Center (Hebrew
language document; a summary of the terms is included in the 2000 Form 20-F
under the caption "Fab 2 Agreements" in "Item 5. Operating and Financial
Review and Prospects") (incorporated by reference to the
correspondingly-numbered exhibit to the 2000 Form 20-F).
93
4.12 Agreement between the Registrant and Saifun, dated October 9, 1997
(incorporated by reference to exhibit 1.1 to the Registrant's Annual Report
on Form 20-F for the year ended December 31, 1997).
4.13 Registrant's Non-Employee Director Share Option Plan 2000/3 (incorporated
by reference to exhibit 4.5 to the Registrant's Registration Statement on
Form S-8 No. 333-83204 ("Form S-8 No. 333-83204")).
4.14 Form of Grant Letter for Non-Employee Directors Share Option Plan 2001/4
(incorporated by reference to exhibit 4.9 to the Form S-8 No. 333-83204).
4.15 Form of Grant Letter for Non-Employee Directors Share Option Plan 2001/5
(incorporated by reference to exhibit 4.10 to the Form S-8 No. 333-83204).
4.16 Wafer Partner Conversion Agreements, dated September 2001, between the
Registrant and each of SanDisk, Alliance and Macronix (incorporated by
reference to the correspondingly-numbered exhibit to the Registrant's
Annual Report on Form 20-F for the year ended December 31, 2001 (the "2001
Form 20-F)).
4.17 Letter Agreement, dated November 29, 2001, among SanDisk, Alliance,
Macronix, QuickLogic and the Registrant regarding the Utilization of
Prepayments (incorporated by reference to the correspondingly-numbered
exhibit to the 2001 Form 20-F).
4.18 Letter Agreements among Alliance, Macronix, QuickLogic, Israel Corp. and
the Registrant and between SanDisk and the Registrant regarding Additional
Wafer Partner Financing Date (incorporated by reference to the
correspondingly-numbered exhibit to the 2001 Form 20-F).
4.19 Letter Agreement, dated November 15, 2001, among SanDisk, Alliance,
Macronix, QuickLogic, ICTech and the Registrant regarding Amendment to
Financing Plan (incorporated by reference to the correspondingly-numbered
exhibit to the 2001 Form 20-F).
4.20 First Amendment, dated January 29, 2001, to the Facility Agreement
(incorporated by reference to the correspondingly-numbered exhibit to the
2001 Form 20-F).
4.21 Second Amendment, dated January 10, 2002, to Facility Agreement
(incorporated by reference to the correspondingly-numbered exhibit to the
2001 Form 20-F).
4.22 Third Amendment, dated March 7, 2002, to the Facility Agreement
(incorporated by reference to the correspondingly-numbered exhibit to the
2001 Form 20-F).
4.23 Joint Development and Transfer and Cross License Agreement, dated May 2002,
between the Registrant and a Japanese manufacturer (incorporated by
reference to exhibit 10.3 to the Registrant's Registration Statement on
Form F-2, No. 333-97043).
4.24 Technology License Agreement, dated April 7, 2000, between the Registrant
and Toshiba Corporation (incorporated by reference to exhibit 10.4 to the
Registrant's Registration Statement on Form F-2, No. 333-97043).
94
4.25 Technology Transfer License Agreement, dated September 2002, between
Registrant and Motorola, Inc. (incorporated by reference to exhibit 10.5 to
the Registrant's Registration Statement on Form F-2, No. 333-97043).
4.26 Fourth Amendment, dated April 29, 2002, to the Facility Agreement
(incorporated by reference to the correspondingly-numbered exhibit to the
Registrant's Annual Report on Form 20-F for the year ended December 31,
2002 (the "2002 Form 20-F)).
4.27 Fifth Amendment dated September 18, 2002 to the Facility Agreement
(incorporated by reference to the correspondingly-numbered exhibit to the
2002 Form 20-F).
4.28 Amendment to Fifth Amendment to the Facility Agreement, dated October 22,
2002, to the Facility Agreement (incorporated by reference to the
correspondingly-numbered exhibit to the2002 Form 20-F).
4.29 Letter Agreement, dated March 2002, among SanDisk, Alliance, Macronix,
ICTech and Challenge Fund to advance Third and Fourth Milestone Payments
(incorporated by reference to the correspondingly-numbered exhibit to the
2002 Form 20-F).
4.30 Letter Agreement, dated July 2002, among SanDisk, Alliance, Macronix, and
ICTech to exercise rights distributed in rights offering (incorporated by
reference to the correspondingly-numbered exhibit to the 2002 Form 20-F).
4.31 Letter Agreement, dated March 2003, among SanDisk, Alliance, Macronix,
ICTech, and the Registrant (incorporated by reference to the
correspondingly-numbered exhibit to the 2002 Form 20-F).
4.32 Form of Rights Agent Agreement between the Registrant and American Stock
Transfer & Trust Company (including form of Rights Certificate)
(incorporated by reference to exhibit 4.1 to the Registrant's Registration
Statement on Form F-2, No. 333-97043).
4.33 Form of Warrant Agreement between the Registrant and American Stock
Transfer & Trust Company (including form of Warrant Certificate)
(incorporated by reference to exhibit 4.2 to the Registrant's Registration
Statement on Form F-2, No. 333-97043).
4.34 Reserved.
4.35 Investment Center Agreement related to Fab 1, dated November 13, 2001
(English translation of Hebrew original) (incorporated by reference to
exhibit 10.2 to the Registrant's Registration Statement on Form F-2, No.
333-97043).
4.36 Development and License Agreement, dated March 31, 2002, between Virage
Logic Corporation and the Registrant (incorporated by reference to the
correspondingly-numbered exhibit to the 2002 Form 20-F).
4.37 Master Services and License Agreement, dated June 2002, between Artisan
Components, Inc. and the Registrant (incorporated by reference to the
correspondingly-numbered exhibit to the 2002 Form 20-F).
95
4.38 Seventh Amendment to the Facility Agreement, dated November 11, 2003,
(incorporated by reference to Exhibit 99.1 of the Registrant's Report on
Form 6-K filed on December 17, 2003).
4.39 Undertaking of the Registrant, dated November 11, 2003 (incorporated by
reference to Exhibit 99.3 of the Registrant's Report on Form 6-K filed on
December 17, 2003).
4.40 Letter Agreement, dated November 11, 2003, by and among the Registrant,
Israel Corporation Technologies, SanDisk Corporation, Alliance
Semiconductor Corporation and Macronix International Co., Ltd.
(incorporated by reference to Exhibit 99.4 of the Registrant's Report on
Form 6-K filed on December 17, 2003).
4.41 Foundry Agreement, dated May 12, 2004, between the Registrant and Siliconix
incorporated (incorporated by reference to correspondingly-numbered exhibit
to the Registrant's Annual Report on Form 20-F for the year ended December
31, 2004 (the " 2004 Form 20-F)).
4.42 Share Purchase Agreement, dated December 8, 2004, between the Registrant
and the Purchasers named therein (incorporated by reference to
correspondingly-numbered exhibit to the 2004 Form 20-F).
4.43 Agreement, dated December 31, 2004, by and among the Registrant and the
Purchasers named therein (incorporated by reference to
correspondingly-numbered exhibit to the 2004 Form 20-F).
4.44 Employee Share Option Plan 2004 (incorporated by reference to Exhibit 4.3
to the Registrant's Registration Statement on Form S-8 No. 333-117565
("Form S-8 No. 333-117565").
4.45 Form of Grant Letter to Israeli Employees (incorporated by reference to
Exhibit 4.4 to Form S-8 No. 333-117565).
4.46 Form of Grant Letter to U.S. Employees (incorporated by reference to
Exhibit 4.5 to Form S-8 No. 333-117565).
4.47 Bank Warrants, dated August 2005, between the Registrant and Bank Hapoalim
B.M. and Bank Leumi Le-Israel B.M.
4.48 Ninth Amendment to the Facility Agreement, dated July 2005, dated July 24,
2005 (incorporated by reference to Form F-1 No. 333-126909).
4.49 Tenth Amendment to the Facility Agreement, dated September 2005incorporated
by reference to Exhibit 4.4 to Form F-1 No. 333-126909).
4.50 Eleventh Amendment to the Facility Agreement, dated October 2005
(incorporated by reference to Exhibit 4.3 to Form F-1 No. 333-126909).
4.51 Twelfth Amendment to the Facility Agreement, dated November 2005
(incorporated by reference to Exhibit 4.6 to Form F-1 No. 333-126909).
96
4.52 Thirteenth Amendment to the Facility Agreement, dated May 2006.
4.53 Fourteenth Amendment to the Facility Agreement, dated May 2006.
4.54 Fifteenth Amendment to the Facility Agreement, dated June 2006.
4.55 Form of Indenture (incorporated by reference to Exhibit 4.2 to Form F-1 No.
333-126909).
4.56 Form of Rights Agent Agreement with Rights Certificate Attached
(incorporated by reference to Exhibit 4.1 to Form F-1 No. 333-126909).
4.57 Development and License Agreement, dated July 2005, between Impinj, Inc.
and the Registrant.
4.58 License and Design Agreement, dated January 10, 2003 between Chipidea
Microelectronics S.A. and the Registrant.
4.59 Amendment to Design Agreement of January 2003 between Chipidea
Microelectronics S.A. and the Registrant, dated June 2005.
4.60 License Agreement, dated April 29, 2004, between Synopsys, Inc. and the
Registrant.
4.61 Equipment Purchase Agreement, dated May 17, 2006, between the Israel
Corporation Ltd. and the Registrant.
12.1 Certification by Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
12.2 Certification by Acting Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
13.1 Certification by Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
13.2 Certification by Acting Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
14.1 Consent of Brightman Almagor & Co.
97
TOWER SEMICONDUCTOR LTD.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
BALANCE SHEETS F-2
STATEMENTS OF OPERATIONS F-3
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F-4
STATEMENTS OF CASH FLOWS F-5
NOTES TO FINANCIAL STATEMENTS F-6 - F-58
Brightman Almagor
1 Azrieli Center
Tel Aviv 67021
P.O.B. 16593, Tel Aviv 61164
Israel
Tel: +972 (3) 608 5555
Fax: +972 (3) 609 4022
info@deloitte.co.il
www.deloitte.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF
TOWER SEMICONDUCTOR LTD.
We have audited the accompanying consolidated balance sheets of Tower
Semiconductor Ltd. and subsidiary ("the Company") as of December 31, 2005 and
2004, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2005. These financial statements are the responsibility of
the Company's Board of Directors and management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and subsidiary as of December 31, 2005 and 2004, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2005, in accordance with accounting principles
generally accepted in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The effect of the application of the latter on the financial position,
results of operations and cash flows as of the dates and for the years presented
is summarized in Note 20.
BRIGHTMAN ALMAGOR & CO.
CERTIFIED PUBLIC ACCOUNTANTS
A MEMBER FIRM OF DELOITTE TOUCHE TOHMATSU
Tel Aviv, Israel
February 1, 2006
F - 1
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND PER SHARE DATA)
AS OF DECEMBER 31,
------------------------
NOTE 2005 2004
------- --------- ---------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 7,337 $ 27,664
DESIGNATED CASH AND SHORT-TERM INTEREST-BEARING DEPOSITS 31,661 53,793
TRADE ACCOUNTS RECEIVABLE: 14
RELATED PARTIES 5,309 9,054
OTHERS 11,467 10,232
OTHER RECEIVABLES 3 9,043 11,365
INVENTORIES 4 24,376 25,669
OTHER CURRENT ASSETS 1,048 1,818
--------- ---------
TOTAL CURRENT ASSETS 90,241 139,595
--------- ---------
LONG-TERM INVESTMENTS
LONG-TERM INTEREST-BEARING DEPOSITS
DESIGNATED FOR FAB 2 OPERATIONS -- 5,134
--------- ---------
PROPERTY AND EQUIPMENT, NET 5 510,645 609,296
--------- ---------
OTHER ASSETS, NET: 6
TECHNOLOGY 61,441 76,950
OTHER 16,359 16,533
--------- ---------
77,800 93,483
========= =========
TOTAL ASSETS $ 678,686 $ 847,508
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITIES OF LONG-TERM DEBT 8 $ 21,103 $ --
CURRENT MATURITIES OF CONVERTIBLE DEBENTURES 9 6,453 --
TRADE ACCOUNTS PAYABLE 59,741 65,326
OTHER CURRENT LIABILITIES 7 8,972 10,678
--------- ---------
TOTAL CURRENT LIABILITIES 96,269 76,004
LONG-TERM DEBT 8 497,000 497,000
CONVERTIBLE DEBENTURES 9 19,358 26,651
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMERS' ADVANCES 11A 59,621 64,428
OTHER LONG-TERM LIABILITIES 10 11,012 15,445
COMMITMENTS AND CONTINGENCIES 11
--------- ---------
TOTAL LIABILITIES 683,260 679,528
--------- ---------
CONVERTIBLE DEBENTURES 12 25,493 --
--------- ---------
SHAREHOLDERS' EQUITY (DEFICIT)
ORDINARY SHARES, NIS 1.00 PAR VALUE - AUTHORIZED
500,000,000 AND 250,000,000 SHARES, RESPECTIVELY;
ISSUED 68,232,056 AND 66,999,796 SHARES, RESPECTIVELY 11A, 13 16,548 16,274
ADDITIONAL PAID-IN CAPITAL 11A 522,237 517,476
SHAREHOLDER RECEIVABLES (26) (26)
ACCUMULATED DEFICIT (559,754) (356,672)
--------- ---------
(20,995) 177,052
TREASURY STOCK, AT COST - 1,300,000 SHARES 13C (9,072) (9,072)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (30,067) 167,980
========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 678,686 $ 847,508
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 2
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data and per share data)
Year ended December 31,
---------------------------------------
Note 2005 2004 2003
----- --------- --------- ---------
REVENUES 14
SALES $ 93,991 $ 124,111 $ 61,368
REVENUES RELATED TO A JOINT DEVELOPMENT AGREEMENT 11B(3) 8,000 1,944 --
--------- --------- ---------
101,991 126,055 61,368
COST OF SALES 11A(1) 238,358 228,410 122,395
--------- --------- ---------
GROSS LOSS (136,367) (102,355) (61,027)
--------- --------- ---------
OPERATING COSTS AND EXPENSES
RESEARCH AND DEVELOPMENT 16,029 17,053 20,709
MARKETING, GENERAL AND ADMINISTRATIVE 17,418 21,297 22,615
--------- --------- ---------
33,447 38,350 43,324
========= ========= =========
OPERATING LOSS (169,814) (140,705) (104,351)
FINANCING EXPENSE, NET 15 (35,651) (29,745) (9,826)
OTHER INCOME (EXPENSE), NET 16 2,383 32,682 (84)
--------- --------- ---------
LOSS FOR THE YEAR $(203,082) $(137,768) $(114,261)
========= ========= =========
BASIC LOSS PER ORDINARY SHARE
LOSS PER SHARE $ (2.55) $ (1.79) $ (2.01)
========= ========= =========
LOSS USED TO COMPUTE
BASIC LOSS PER SHARE $(203,082) $(137,768) $(114,114)
========= ========= =========
WEIGHTED AVERAGE NUMBER OF ORDINARY
SHARES OUTSTANDING - IN THOUSANDS 79,675 77,071 56,696
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 3
TOWER SEMICONDUCTOR LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(dollars in thousands, except share data and per share data)
SHAREHOLDER
PROCEEDS RECEIVABLES
ORDINARY SHARES ADDITIONAL ON ACCOUNT AND
----------------------- PAID-IN OF SHARE UNEARNED ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL CAPITAL COMPENSATION DEFICIT STOCK TOTAL
---------- -------- --------- -------- ----- ----------- -------- ---------
BALANCE - JANUARY 1, 2003 44,735,532 $ 11,294 $ 400,808 $ -- $ (53) $ (104,643) $ (9,072) $ 298,334
STOCK-BASED COMPENSATION RELATED TO
THE FAB 2 CONSTRUCTOR 145 145
STOCK-BASED COMPENSATION RELATED TO THE
FACILITY AGREEMENT WITH THE BANKS, NOTE 13B(5) 4,205 4,205
ISSUANCE OF SHARES, NET OF RELATED COSTS 8,260,565 1,856 22,723 24,579
PROCEEDS ON ACCOUNT OF SHARE CAPITAL 16,428 16,428
AMORTIZATION OF UNEARNED COMPENSATION 27 27
LOSS FOR THE YEAR (114,261) (114,261)
---------- -------- --------- -------- ----- ----------- -------- ---------
BALANCE - DECEMBER 31, 2003 52,996,097 $ 13,150 $ 427,881 $ 16,428 $ (26) $ (218,904) $ (9,072) $ 229,457
ISSUANCE OF SHARES 2,463,949 553 16,414 (16,428) 539
ISSUANCE OF SHARES, NET OF RELATED COSTS -
PUBLIC OFFERING 11,444,500 2,550 72,536 75,086
EXERCISE OF SHARE OPTIONS 95,250 21 645 666
LOSS FOR THE YEAR (137,768) (137,768)
---------- -------- --------- -------- ----- ----------- -------- ---------
BALANCE - DECEMBER 31, 2004 66,999,796 $ 16,274 $ 517,476 $ -- $ (26) $ (356,672) $ (9,072) $ 167,980
ISSUANCE OF SHARES 1,232,260 274 1,520 1,794
STOCK-BASED COMPENSATION RELATED TO THE
FACILITY AGREEMENT WITH THE BANKS, NOTE 13B(5) 2,793 2,793
STOCK-BASED COMPENSATION RELATED TO RIGHTS OFFERED
TO EMPLOYEES, NOTE 13H 448 448
LOSS FOR THE YEAR (203,082) (203,082)
---------- -------- --------- -------- ----- ----------- -------- ---------
BALANCE - DECEMBER 31, 2005 68,232,056 $ 16,548 $ 522,237 $ -- $ (26) $ (559,754) $ (9,072) $ (30,067)
========== ======== ========= ======== ===== =========== ======== =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 4
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, except share data and per share data)
YEAR ENDED DECEMBER 31,
---------------------------------------
2005 2004 2003
--------- --------- ---------
CASH FLOWS - OPERATING ACTIVITIES
LOSS FOR THE YEAR $(203,082) $(137,768) $(114,261)
ADJUSTMENTS TO RECONCILE LOSS FOR THE YEAR
TO NET CASH USED IN OPERATING ACTIVITIES:
INCOME AND EXPENSE ITEMS NOT INVOLVING CASH FLOWS:
DEPRECIATION AND AMORTIZATION 144,852 121,067 54,611
EFFECT OF INDEXATION AND TRANSLATION ON
CONVERTIBLE DEBENTURES (1,031) 676 (878)
OTHER EXPENSE (INCOME), NET (2,383) (32,682) 84
CHANGES IN ASSETS AND LIABILITIES:
DECREASE (INCREASE) IN TRADE ACCOUNTS RECEIVABLE 2,510 (7,655) (4,175)
DECREASE (INCREASE) IN OTHER RECEIVABLES AND OTHER CURRENT ASSETS 1,988 (413) 1,264
DECREASE (INCREASE) IN INVENTORIES 1,293 (6,287) (6,221)
INCREASE IN TRADE ACCOUNTS PAYABLE 3,082 404 801
INCREASE (DECREASE) IN OTHER CURRENT LIABILITIES (1,839) (970) 1,467
INCREASE (DECREASE) IN OTHER LONG-TERM LIABILITIES (5,368) 9,344 529
--------- --------- ---------
(59,978) (54,284) (66,779)
INCREASE (DECREASE) IN LONG-TERM LIABILITY
IN RESPECT OF CUSTOMERS' ADVANCES, NET (760) 19,384 (899)
--------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES (60,738) (34,900) (67,678)
--------- --------- ---------
CASH FLOWS - INVESTING ACTIVITIES
DECREASE (INCREASE) IN DESIGNATED CASH, SHORT-TERM AND LONG-TERM
INTEREST-BEARING DEPOSITS, NET 27,266 (10,037) 14,341
INVESTMENTS IN PROPERTY AND EQUIPMENT (38,878) (154,975) (179,310)
INVESTMENT GRANTS RECEIVED 7,496 32,636 33,811
PROCEEDS RELATED TO SALE AND DISPOSAL OF PROPERTY AND EQUIPMENT 2,179 2,626 222
INVESTMENTS IN OTHER ASSETS (3,841) (702) (22,098)
DECREASE IN DEPOSITS, NET -- -- 10,500
PROCEEDS FROM SALE OF LONG-TERM INVESTMENT -- 38,677 --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (5,778) (91,775) (142,534)
--------- --------- ---------
CASH FLOWS - FINANCING ACTIVITIES
PROCEEDS FROM ISSUANCE OF CONVERTIBLE DEBENTURES, NET 25,086 -- --
PROCEEDS FROM LONG-TERM DEBT 21,103 66,000 --
PROCEEDS FROM ISSUANCE OF SHARES, NET -- 75,225 24,375
PROCEEDS FROM EXERCISE OF SHARE OPTIONS -- 666 --
PROCEEDS ON ACCOUNT OF SHARE CAPITAL -- -- 16,428
REPAYMENT OF LONG-TERM DEBT -- -- (13,000)
PROCEEDS FROM LONG-TERM DEBT, NET IN CONNECTION WITH
RE-BORROWING, NOTE 11A(6) -- -- 187,000
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 46,189 141,891 214,803
========= ========= =========
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (20,327) 15,216 4,591
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 27,664 12,448 7,857
--------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 7,337 $ 27,664 $ 12,448
========= ========= =========
NON-CASH ACTIVITIES
INVESTMENTS IN PROPERTY AND EQUIPMENT $ 12,999 $ 47,675 $ 17,160
========= ========= =========
STOCK-BASED COMPENSATION RELATED TO
THE FACILITY AGREEMENT WITH THE BANKS $ 2,793 $ -- $ 4,205
========= ========= =========
STOCK-BASED COMPENSATION RELATED TO RIGHTS OFFERED
TO EMPLOYEES, NOTE 13H $ 448 $ -- $ --
========= ========= =========
INVESTMENTS IN OTHER ASSETS $ 442 $ -- $ 3,153
========= ========= =========
CONVERSION OF LONG-TERM LIABILITY IN RESPECT OF CUSTOMERS' ADVANCES
TO SHARE CAPITAL $ 1,794 $ 539 $ --
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR CAPITALIZED AND EXPENSED INTEREST $ 32,805 $ 25,205 $ 15,674
========= ========= =========
CASH PAID DURING THE YEAR FOR INCOME TAXES $ 86 $ 130 $ 239
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F - 5
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 1 - DESCRIPTION OF BUSINESS AND GENERAL
A. DESCRIPTION OF BUSINESS
Tower Semiconductor Ltd. ("the Company"), incorporated in Israel,
commenced operations in March 1993. The Company is an independent
wafer foundry dedicated to the manufacture of semiconductor integrated
circuits on silicon wafers. The Company manufactures integrated
circuits in geometries from 1.0 to 0.35 microns at its 150-millimeter
fabrication facility ("Fab 1"), and in 0.18 microns and below at its
200-millimeter fabrication facility ("Fab 2"). As a foundry, the
Company manufactures wafers using its advanced technological
capabilities and the proprietary integrated circuit designs of its
customers.
The industry in which the Company operates is characterized by wide
fluctuations in supply and demand. Such industry is also characterized
by the complexity and sensitivity of the manufacturing process, by
high levels of fixed costs, and by the need for constant improvements
in production technology.
The Company's Ordinary Shares are traded on the Nasdaq National Market
and on the Tel-Aviv Stock Exchange.
B. ESTABLISHMENT AND OPERATIONS OF NEW FABRICATION FACILITY (FAB 2)
In January 2001, the Company's Board of Directors approved the
establishment of a new wafer fabrication facility in Israel ("Fab 2"),
at an expected cost of approximately $1,500,000. Fab 2 is designed to
manufacture semiconductor integrated circuits on silicon wafers in
geometries of 0.18 micron and below on 200-millimeter wafers. The
Company has entered into several related agreements and other
arrangements and has completed public and private financing deals,
which, as of the approval date of the financial statements, have
provided an aggregate of approximately $1,260,000 of financing for Fab
2.
The Fab 2 project is a complex undertaking, which entails substantial
risks and uncertainties. For further details concerning the Fab 2
project and related agreements, some of which were amended several
times, see Note 11A.
During the third quarter of 2003, in which Fab 2's construction was
substantially completed, the Company began commercial production and
shipment of wafers to its customers utilizing the 0.18 micron process
technology. With the commencement of Fab 2 operations, the Company
began to depreciate and amortize Fab 2 assets, and to expense most of
the ongoing direct costs related to the construction and equipping of
Fab 2 and to the transfer of the Fab 2 technology that had been
previously capitalized. For further details concerning the
depreciation and amortization of Fab 2 assets, see Note 11A.
F - 6
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 1 - DESCRIPTION OF BUSINESS AND GENERAL (cont.)
C. FINANCING OF THE COMPANY'S ONGOING OPERATIONS
In the year ended December 31, 2005 and in recent years, the Company
has experienced significant recurring losses from operations,
recurring negative cash flows from operating activities, an increasing
accumulated deficit and a deficit in shareholders equity. According to
the Company's approved short-term working plan, based on the current
prevailing semiconductor market conditions, the Company needs to raise
funds in order to finance its short-term activities and liabilities in
2006, including repayment of long-term loans to the extent to be
required (see the following paragraph). In addition, according to the
Facility Agreement with the Banks, in the fourth quarter of 2006 and
in 2007, the Company is to repay on account of long-term loans $21,103
and $160,257, respectively. For details concerning an amendment to the
Company's financial ratios and covenants through the third quarter of
2006 under the amended Facility Agreement with the Banks, which was
obtained subsequent to a waiver letter agreement signed between the
Company and the Banks in January 2005 following non-compliance of the
Company with certain of the financial ratios and covenants that were
applicable as of December 31, 2004, see Note 11A(6).
In light of the described above, the Company has been taking
comprehensive measures to obtain the needed funds for its near-term
ongoing operations, as well as to reduce its short-term liabilities.
The Company has also implemented cost reduction measures, including
measures to reduce expenses, cost structure and cash burn, and in
March 2005, the Company completed a workforce cutback, as part of an
across-the-board savings plan focused on operational efficiencies. In
this regard, the Company has held discussions with its Equity
Investors, Wafer Partners and its Banks to provide additional funding
for the Company of an aggregate amount of approximately $60,000.
Following an amendment to the Facility Agreement signed between the
Company and its Banks in July 2005, and the completion of a rights
offering in which in December 2005 and January 2006 the Company raised
$48,169 (of which $27,811 was received from certain of the Company's
Equity Investors and Wafer Partners), the Company was provided with
additional $29,693 from the Banks.
Further, the Company is currently examining alternatives for
additional funding sources, including raising funds in the capital
markets, private placements and other sources. In addition, as
provided in the July 2005 amendment, subsequent to the balance sheet
date the Company and the Banks commenced and are holding discussions
for rescheduling of the repayment dates of the $29,693 provided by the
Banks under this amendment, currently to be repaid through March 31,
2007 ($21,103 of which in the fourth quarter of 2006 and the reminder
in March 31, 2007). Management also intends to discuss with the Banks
the rescheduling of the repayment dates of all the remaining loans
obtained from the Banks.
The Company's management estimates that it is probable that additional
funds the Company will need in 2006 from the additional funding
sources the Company is currently examining, as described above, will
be achieved. Management also estimates, based on the discussions held
with the Banks subsequent to the balance sheet date, that reaching
satisfactory agreement with the Banks regarding the rescheduling of
the repayment dates of the $29,693 obtained under the July 2005
amendment is probable. Management further estimates that obtaining
satisfactory agreement with the Banks regarding the rescheduling of
all the remaining loans obtained from them is achievable, subject that
the discussions management intends to hold with the Banks are
concluded.
F - 7
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 1 - DESCRIPTION OF BUSINESS AND GENERAL (cont.)
D. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's consolidated financial statements are presented in accordance
with generally accepted accounting principles ("GAAP") in Israel. See Note
20 for the reconciliation of material differences between GAAP in Israel
and in the United States of America.
A. PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include the financial
statements of the Company and its wholly-owned marketing subsidiary in
the United States, after elimination of material inter-company
transactions and balances. The effect of the subsidiary's operations
on the Company's revenues, net loss and total assets was immaterial
for the dates and periods presented.
B. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of deposits in banks and short-term
investments (primarily time deposits and certificates of deposit) with
original maturities of three months or less.
C. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is computed on the specific
identification basis for accounts whose collectibility, in
management's estimation, is uncertain.
D. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined for raw materials, spare parts and supplies on the basis of
the weighted moving average cost per unit. Cost is determined for work
in process and finished goods on the basis of actual production costs.
E. PROPERTY AND EQUIPMENT
(1) Property and equipment are presented at cost, including interest
and other capitalizable costs. Capitalizable costs include only
incremental direct costs that are identifiable with, and related
to, the property and equipment and are incurred prior to its
initial operation. Identifiable incremental direct costs include
costs associated with acquiring, constructing, establishing and
installing property and equipment (whether performed by others or
by the Company), and costs directly related to preproduction test
runs of property and equipment that are necessary to get it ready
for its intended use. Those costs include payroll and
payroll-related costs of employees who devote time and are
dedicated solely to the acquiring, constructing, establishing and
installing property and equipment. Allocation, when appropriate,
of capitalizable incremental direct costs is based on
management's estimates and methodologies including time sheet
inputs.
F - 8
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
E. PROPERTY AND EQUIPMENT (cont.)
(1) (cont.)
Cost is presented net of investment grants received or
receivable, and less accumulated depreciation and amortization.
The accrual for grants receivable is determined based on
qualified investments made during the reporting period, provided
that the primary criteria for entitlement have been met.
Depreciation is calculated based on the straight-line method over
the estimated economic lives of the assets or terms of the
related leases, as follows:
Prepaid long-term land lease and buildings (including
facility infrastructure) 14-25 years
Machinery and equipment 5 years
Transportation vehicles 7 years
(2) Impairment examinations and recognition are performed and
determined based on the accounting policy outlined in O below.
F. OTHER ASSETS
(1) TECHNOLOGY
The cost of Fab 2 technologies includes the technology process
cost, internal incremental direct costs, mainly payroll-related
costs of employees designated for integrating the technologies in
the Company's facilities, and incremental direct costs associated
with implementing the technologies until the technologies are
ready for their intended use. The costs in relation to Fab 2
technologies are amortized over the expected estimated economic
life of the technologies. Amortization phases in commencing on
the dates on which each of the Fab 2 manufacturing lines is ready
for its intended use, and is based on the straight-line method
over a four-year period.
Impairment examinations and recognition are performed and
determined based on the accounting policy outlined in O below.
(2) DEFERRED FINANCING CHARGES
Deferred financing charges included in other assets in relation
to funding the establishment of Fab 2 are being amortized over
the lives of the borrowings based on the repayment schedule of
such funding (in general, 6 years). During the establishment
period of Fab 2, amortized deferred financing charges were
capitalized to property and equipment. Commencing the third
quarter of 2003, in which the building and infrastructures of Fab
2 were substantially completed and became ready for their
intended use, and in which the initial ramp-up commenced, the
deferred financing charges are being amortized to financing
expenses, net.
F - 9
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
G. CONVERTIBLE DEBENTURES
Convertible debentures the future conversion of which is not probable
as of the balance-sheet date are presented as long-term liabilities
and current liabilities (with respect to the current maturities) based
on their terms as of such date, net of discount.
Convertible debentures denominated in dollar the future conversion of
which is probable as of the balance-sheet date, are presented as a
separate line-item between total liabilities and shareholders equity.
See P(1) below for the effect of the initial adoption of Standard No.
22 of the Israeli Accounting Standards Board "FINANCIAL INSTRUMENTS:
DISCLOSURE AND PRESENTATION". See Notes 20F and 20G for presentation
of convertible debentures in accordance with U.S. GAAP.
H. INCOME TAXES
The Company records deferred income taxes in accordance with Standard
No. 19 "INCOME TAXES" of the Israeli Accounting Standards Board, to
reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes and for tax purposes. Deferred taxes are computed based on
the tax rates anticipated (under applicable law as of the balance
sheet date) to be in effect when the deferred taxes are expected to be
paid or realized.
Deferred tax liabilities and assets are classified as current or
noncurrent based on the classification of the related asset or
liability for financial reporting, or according to the expected
reversal dates of the specific temporary differences, if not related
to an asset or liability for financial reporting. Deferred tax
liabilities are recognized for temporary differences that will result
in taxable amounts in future years. Deferred tax assets are recognized
for temporary differences, which will result in deductible amounts in
future years and for carryforwards. An allowance against such deferred
tax asset is recognized if it is probable that some portion or all of
the deferred tax assets will not be realized. Due to the material loss
carryforward of the Company as of December 31, 2005 and uncertainties
with regard to its utilization in the future, no deferred taxes were
recorded in the Company's results of operations.
I. REVENUE RECOGNITION
Revenues are recognized upon shipment or as services are rendered when
title has been transferred, collectibility is reasonably assured and
acceptance provisions criteria are satisfied, based on performing
electronic, functional and quality tests on the products prior to
shipment and customer on-site testing. Such testing reliably
demonstrates that the products meet all of the specified criteria
prior to formal customer acceptance, and that product performance upon
customer on-site testing can reasonably be expected to conform to the
specified acceptance provisions. An accrual for estimated returns,
computed primarily on the basis of historical experience, is recorded
at the time when revenues are recognized.
F - 10
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
J. RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
Amounts received or receivable from the government of Israel and
others, as participation in research and development programs, are
offset against research and development costs. The accrual for grants
receivable is determined based on the terms of the programs, provided
that the criteria for entitlement have been met.
K. LOSS PER ORDINARY SHARE
Basic loss per ordinary share is calculated based on the weighted
average number of ordinary shares outstanding during each year
presented, adjusted retroactively to include the beneficial feature
contemplated in a rights offering. The calculation includes
retroactive effect from the beginning of each year (or the issuance
date, which is the earlier) of shares issued upon exercise of options
and warrants and upon conversion of convertible debentures outstanding
at the beginning of each year (or that were issued during the year).
The calculation further includes shares issuable from probable
exercise and from probable conversion. Basic loss per ordinary share
is calculated based on loss for the period with the inclusion of
imputed interest income on the exercise price of options and warrants
exercised or whose exercise is probable, and of financing expenses in
relation to conversion of convertible debentures or probable
conversion, as required under Israeli GAAP. See Note 20K for
disclosure of loss per share data in accordance with U.S. GAAP.
L. DERIVATIVE FINANCIAL INSTRUMENTS
The Company, from time to time, enters into foreign exchange
agreements (primarily forward contracts and options) to hedge
non-dollar equipment purchase and other firm commitments. Gains and
losses on such agreements through the date that the equipment is
received or the commitment is realized are deferred and capitalized to
the cost of equipment or the commitment, while gains and losses
subsequent thereto, through the date of expiration of the foreign
exchange agreement, are included in financing expense, net.
In addition, the Company, from time to time, enters into agreements to
hedge interest rate exposure on long-term loans. Gains and losses on
such agreements are recognized on a current basis in accordance with
the terms of these agreements, and expensed or capitalized in the same
manner as the corresponding interest costs.
See Note 20D for disclosure of the derivative financial instruments in
accordance with U.S. GAAP.
M. FUNCTIONAL CURRENCY AND TRANSACTION GAINS AND LOSSES
The currency of the primary economic environment in which the Company
conducts its operations is the U.S. dollar ("dollar"). Accordingly,
the Company uses the dollar as its functional and reporting currency.
Financing expenses, net in 2005 include net foreign currency
transaction gains of $1,398. Financing expenses, net in 2004 and 2003
include net foreign currency transaction losses of $760 and $232,
respectively.
F - 11
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
N. STOCK-BASED COMPENSATION
The Company accounts for employee and director stock-based
compensation in accordance with Accounting Principles Board Opinion
No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB 25") and
authoritative interpretations thereof. Accordingly, the Company
accounts for share options granted to employees and directors based on
the intrinsic value of the options on the measurement date. The
compensation cost of options without a fixed measurement date is
remeasured at each balance sheet date. Deferred compensation in
respect of awards with graded vesting terms is amortized to
compensation expense over the relevant vesting periods. In a manner
consistent with FIN 28, the vesting period over which compensation is
expensed is determined, based on the straight-line method, separately
for each portion of the award as if the grant were a series of awards.
See P(2) below for the effect of the initial adoption of Standard No.
24 of the Israeli Accounting Standards Board "SHARE-BASED PAYMENTS".
See Note 13B(6) for pro forma disclosures required by SFAS 123 and
SFAS 148.
The Company accounts for stock-based compensation of non-employees
using the fair value method in accordance with Financial Accounting
Standards Board Statement No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION" ("SFAS 123") and EITF 96-18: Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services. The award cost of
warrants granted in connection with bank financing is amortized as
deferred financing charges over the terms of the loans, in a manner
described in paragraph F(2) above. The award cost of warrants granted
in connection with the construction of Fab 2, is recorded as
depreciation expense over the life of the prepaid perpetual land lease
and buildings. The award cost of warrants granted to consultants and a
related party in connection with equity transactions is offset against
paid-in-capital.
O. IMPAIRMENT OF LONG-LIVED ASSETS
Management reviews long-lived assets on a periodic basis, as well as
when such a review is required based upon relevant circumstances, to
determine whether events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. According to
the Israeli Accounting Standards Board No.15, "IMPAIRMENT OF ASSETS",
an asset's recoverable value is the higher of the asset's net selling
price and the asset's value in use, the latter being equal to the
asset's discounted expected cash flows. Prior to issuing Standard No.
15 in January 2003, the Company tested the recoverability of its
assets based on undiscounted expected cash flows, as applicable by
U.S. GAAP, a method that under Standard No. 15 is no longer
acceptable.
F - 12
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
P. RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING STANDARDS
BOARD
(1) ACCOUNTING STANDARD NO. 22 "FINANCIAL INSTRUMENTS: DISCLOSURE AND
PRESENTATION" - In July 2005, the Israeli Accounting Standards
Board approved for publication Accounting Standard No. 22
"FINANCIAL INSTRUMENTS: DISCLOSURE AND PRESENTATION" (the
"Standard"). A FINANCIAL INSTRUMENT under this Standard is
defined, in general, as any contract that establishes a financial
asset of an entity, or a financial liability or equity instrument
of another entity. This Standard establishes the requirements for
presentation of financial instruments in the financial statements
and indicates the information that should be disclosed in
relation thereto, and, in certain cases, the method to measure
their impact on the entity's financial statements. The
presentation requirements relate to the classification of
financial instruments as financial assets, financial liabilities
or equity instruments. It also deals with the classification of
related interest, dividends, losses and gains and to the
circumstances under which financial assets and financial
liabilities derived from financial instruments are to be offset.
The Standard establishes requirements for disclosure of
information relating to factors affecting the amount, timing and
certainty of the entity's future cash flows relating to financial
instruments and accounting policy implemented in respect of these
instruments. The Standard also establishes requirements for
disclosure of information about the nature and the extent of an
entity's use of financial instruments, the business purposes they
serve, the risks associated with them and management's policies
for the oversight of those risks.
The Standard is effective for financial statements for periods
commencing January 1, 2006 or thereafter. The initial adoption of
the Standard will be accounted for by the "prospective method",
i.e. financial instruments issued before the effective date of
the Standard will be classified and presented in accordance with
its provisions commencing from the effective date. Comparative
financial statements for prior periods are not to be adjusted.
The new Standard supersedes Opinion No.53 "ACCOUNTING FOR
CONVERTIBLE LIABILITIES" and Opinion No.48 "ACCOUNTING FOR
OPTIONS".
The initial adoption of the Standard is expected to affect
primarily the presentation of the Company's convertible
debentures (the bifurcation of the convertible debentures into
debt component and equity component, as these terms are defined
by the Standard). Consequently, on January 1, 2006, the Company's
shareholders equity will be recorded with a one-time increase of
approximately $17,000, while its total convertible debentures
will be decreased by same amount. Commencing from that date, said
amount will be amortized as financing expenses through 2011.
(2) ACCOUNTING STANDARD NO. 24 "SHARE-BASED PAYMENTS" - In September
2005, the Israeli Accounting Standards Board published Accounting
Standard No. 24 "SHARE-BASED COMPENSATION" (the "Standard"),
which calls for the recognition in the financial statements of
share-based payments, including transactions with employees,
which are to be settled by the payment of cash, by other assets,
or by equity instruments. Under Standard No. 24, amongst other
matters, costs associated with grants of shares and options to
employees will be expensed over the vesting period of each grant.
Said costs will be determined based on the fair value of the
grants at each grant date. The Standard establishes guidelines
for measuring the fair value of each grant based on the
settlement terms (either by cash or equity instrument), and
disclosure provisions.
F - 13
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
P. RECENT ACCOUNTING PRONOUNCEMENTS BY THE ISRAELI ACCOUNTING STANDARDS
BOARD (CONT.)
(2) ACCOUNTING STANDARD NO. 24 "SHARE-BASED PAYMENTS" (cont.)
The Standard is effective for financial statements for periods
commencing January 1, 2006 or thereafter. The Standard provides
that with respect to Share-based payments to be settled by equity
instruments, its provisions should be applied to all grants made
after March 15, 2005, that are unvested as of December 31, 2005.
The Standard further provides that its provisions should be
applied to modifications that were made after March 15, 2005,
even if the underlying grants are not in the scope of the
Standard.
As of December 31, 2005, the award cost with respect to
outstanding employee and director options on which the Standard
will be applied amounts to approximately $2,000, to be amortized
over 2006-2009.
Q. RECLASSIFICATION
Certain amounts in prior years financial statements have been
reclassified in order to conform to the 2005 presentation.
NOTE 3 - OTHER RECEIVABLES
Other receivables consist of the following:
As of December 31,
-------------------
2005 2004
------- -------
Government of Israel - investment grants receivable $ 7,276 $ 8,400
Other government agencies 1,706 2,382
Others 61 583
------- -------
$ 9,043 $11,365
======= =======
NOTE 4 - INVENTORIES
Inventories consist of the following (*):
As of December 31,
-------------------
2005 2004
------- -------
Raw materials $ 6,777 $ 9,260
Spare parts and supplies 3,738 3,950
Work in process 11,502 10,085
Finished goods 2,359 2,374
------- -------
$24,376 $25,669
======= =======
(*) Net of aggregate write-downs to net realizable value of $3,259 and
$2,665 as of December 31, 2005 and 2004, respectively.
F - 14
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 5 - PROPERTY AND EQUIPMENT, NET
A. COMPOSITION
As of December 31,
---------------------
2005 2004
-------- --------
COST:
Prepaid perpetual land lease and buildings
(including facility infrastructure) $237,401 $235,632
Machinery and equipment 709,862 688,691
Transportation vehicles 425 2,989
-------- --------
947,688 927,312
-------- --------
ACCUMULATED DEPRECIATION AND AMORTIZATION:
Prepaid perpetual land lease and buildings
(including facility infrastructure) 47,841 33,960
Machinery and equipment 388,867 282,092
Transportation vehicles 335 1,964
-------- --------
437,043 318,016
======== ========
$510,645 $609,296
======== ========
SUPPLEMENTAL DISCLOSURE RELATING TO COST OF PROPERTY AND EQUIPMENT:
(1) As of December 31, 2005 and 2004, the cost of property and
equipment included costs relating to Fab 2 in the amount of
$713,837 and $701,982, respectively. Said amounts are net of
investment grants of $165,222 and $158,830, respectively.
(2) As of December 31, 2005, the cost of buildings, machinery and
equipment was reflected net of investment grants in the aggregate
of $268,688 (as of December 31, 2004 - $262,320).
(3) Cost of property and equipment as of December 31, 2005 and 2004
includes capitalized interest costs in the aggregate of $18,480.
(4) Following the commencement of Fab 2 operations in the third
quarter of 2003, in which the building and infrastructures of Fab
2 were substantially completed and became ready for their
intended use, the Company began to depreciate Fab 2 property and
equipment, resulting in depreciation expenses of $109,283,
$93,457 and $35,582 in 2005, 2004 and 2003, respectively.
F - 15
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 5 - PROPERTY AND EQUIPMENT, NET (cont.)
B. INVESTMENT GRANTS
In connection with the formation of the Company, the Investment Center
of the Ministry of Industry and Trade of the State of Israel
("Investment Center"), under its "approved enterprise" program,
approved an investment program for expenditures on buildings and
equipment in Fab 1 in the aggregate amount (as amended) of
approximately $96,850. The Company completed its investments under
this program, and received final approval from the Investment Center
in November 1997.
In January 1996, an investment program ("1996 program") for expansion
of Fab 1 in the aggregate amount (as amended in December 1999 and
2001) of $228,680, entitling the Company to investment grants, was
approved by the Investment Center. The Company completed its
investments under the 1996 program in December 2001 and invested
through such date approximately $207,000. In May 2002, the Company
submitted the final report in relation to the 1996 program. As of
December 31, 2005, the report has not yet received final approval from
the Investment Center.
See Note 11A(8) with respect to the Fab 2 program approved by the
Investment Center in December 2000.
Entitlement to the above grants and other tax benefits is subject to
various conditions stipulated by the Israeli Law for the Encouragement
of Capital Investments - 1959 ("Investments Law") and the regulations
promulgated thereunder, as well as the criteria set forth in the
certificates of approval. In the event the Company fails to comply
with such conditions, the Company may be required to repay all or a
portion of the grants received plus interest and certain inflation
adjustments. In order to secure fulfillment of the conditions related
to the receipt of investment grants, floating liens were registered in
favor of the State of Israel on substantially all of the Company's
assets. See also Note 17A.
C. For liens see Note 11A(6).
NOTE 6 - OTHER ASSETS, NET
Other assets, net consist of the following:
As of December 31,
-------------------
2005 2004
------- -------
TECHNOLOGIES (in relation to Fab 2) - Note 11A(2)
Cost $94,247 $90,747
Accumulated amortization (*) 32,806 13,797
------- -------
$61,441 $76,950
======= =======
OTHER ASSETS (in relation to Fab 2)
COST - Deferred financing charges $24,049 $20,915
Other 4,448 3,217
------- -------
28,497 24,132
------- -------
ACCUMULATED AMORTIZATION (**):
Deferred financing charges 10,812 6,606
Other 1,326 993
------- -------
12,138 7,599
======= =======
$16,359 $16,533
======= =======
(*) For amortization policy, see Note 2F(1).
(**) For amortization policy, see Note 2F(2).
F - 16
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 7 - OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
As of December 31,
-------------------
2005 2004
------- -------
Accrued salaries $ 3,162 $ 3,902
Vacation accrual 2,322 3,509
Interest payable (primarily in relation to convertible debentures) 1,263 1,208
Other 2,225 2,059
------- -------
$ 8,972 $10,678
======= =======
NOTE 8 - LONG-TERM DEBT
A. COMPOSITION:
As of December 31,
Effective interest rate as of ---------------------
December 31, 2005 2005 2004
----- -------- --------
In U.S. Dollar 7.06% $438,103 $417,000
In U.S. Dollar 6.5% 80,000 80,000
-------- --------
Total long-term debt 518,103 497,000
Less - current maturities 7.06% 21,103 --
-------- --------
$497,000 $497,000
======== ========
B. All loans received under the Facility Agreement bear interest based on
the three-month USD Libor rate plus 2.5%, as revised under the
amendment to the Facility Agreement described in detail in Note
11A(6). Prior to the closing of this amendment in December 2003, the
loans bore interest based on the three-month USD Libor rate plus
1.55%. The effective interest rate as of December 31, 2005 of loans,
the amount of which as of such date was $292,000, includes the terms
of collar agreements with knock-out and knock-in features described in
Note 18A. Interest is payable at the end of each quarter.
C. For additional information regarding the Facility Agreement, as
amended, between the Company and the Banks for financing the
construction and equipping of Fab 2, including re-borrowing terms and
including loans withdrawn under the July 2005 amendment to the
Facility Agreement, see Note 11A(6).
D. REPAYMENT SCHEDULE
The balance of the long-term debt as of December 31, 2005 is repayable
as follows:
2006 - current maturities $ 21,103
2007 151,667
2008 165,667
2009 165,666
2010 14,000
--------
$518,103
========
F - 17
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 8 - LONG-TERM DEBT (cont.)
E. The agreement with the Company's Banks restricts the Company's ability
to place liens on its assets (other than to the State of Israel in
respect of investment grants - see Note 11A(8), and to Siliconix - see
Note 11E(3)) without the prior consent of the Banks. Furthermore, the
agreements contain certain restrictive financial covenants (see also
Note 11A(6)). For further details concerning amendments to the
Facility Agreement for revised financial ratios and covenants for 2005
and 2006, see Note 11A(6).
NOTE 9 - CONVERTIBLE DEBENTURES
A. COMPOSITION:
As of December 31,
Interest rate as of -------------------
December 31, 2005 2005 2004
---- ------- -------
Convertible debentures 4.7% $25,811 $26,651
Less - current maturities 6,453 --
------- -------
$19,358 $26,651
======= =======
B. In January 2002, the Company issued on the Tel-Aviv Stock Exchange,
NIS 110,579,800 principal amount of convertible debentures, linked to
the Israeli Consumer Price Index ("CPI") (adjusted to the CPI as of
December 31, 2005 - NIS 119,960,426, $26,061). The debentures were
issued at 96% of their par value, and bear annual interest at the rate
of 4.7%, payable in January of each year commencing in January 2003.
The principal amount is payable in four equal installments in January
of each year between 2006 and 2009. The debentures may be converted
until December 31, 2008 into Ordinary Shares, at a conversion rate of
one Ordinary Share per each NIS 41.00 principal amount of the
debentures, linked to the CPI (subject to customary adjustments)
(adjusted to the CPI as of December 31, 2005 - NIS 44.48, $9.66). The
effective rate of interest on the convertible debentures, taking into
account the initial proceeds, net of the discount and the related
costs of issuance, is 7.26%. For U.S. GAAP purposes, which require
taking into account, in addition to the discount and the related
issuance costs, amounts attributed to the options described in Note
13E, the effective rate of interest on the convertible debentures is
9.88%.
Subject to certain conditions and the Company's Facility Agreement,
the Company may announce the early redemption of the debentures or
part thereof, provided that the sum of the last payment on account of
the principal shall be no less than approximately $700.
If on a payment date of the principal or interest on the debentures
there exists an infringement of certain covenants and conditions under
the Facility Agreement, the dates for payment of interest and
principal on the debentures may be postponed, depending on various
scenarios under the Facility Agreement until such covenant or
condition is settled.
The debentures and interest thereon are unsecured and rank behind the
Company's existing and future secured indebtedness, including
indebtedness to the Banks under the Facility Agreement, as well as to
the government of Israel in connection with grants the Company
received under its approved enterprise programs and to Siliconix.
See Note 20F for disclosure of the accounting treatment of the
convertible debentures in accordance with U.S. GAAP.
F - 18
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 9 - CONVERTIBLE DEBENTURES (cont.)
C. Following the initial adoption of Accounting Standard No. 22
"FINANCIAL INSTRUMENTS: DISCLOSURE AND PRESENTATION" of the Israeli
Accounting Standards Board (see Note 2P(1)) in the first quarter of
2006, the Company's convertible debentures would be bifurcated in a
manner by which the Company's shareholders' equity would increase by
approximately $500 and the convertible debentures will be reduced by
the same amount. Said amount will be expensed as financing expenses
through 2009.
NOTE 10 - OTHER LONG-TERM LIABILITIES
A. COMPOSITION
As of December 31,
----------------------
2005 2004
-------- --------
Net liability for employee
termination benefits (see B below):
Gross obligation $ 18,445 $ 20,938
Amounts funded through deposits to severance
pay funds and purchase of insurance policies (13,658) (16,350)
-------- --------
4,787 4,588
Long-term advances (see Note 11B(3)) - 5,500
Long-term liabilities in respect of license agreements 5,123 5,191
Other 1,102 166
-------- --------
$ 11,012 $ 15,445
======== ========
B. EMPLOYEE TERMINATION BENEFITS
Israeli law and labor agreements determine the obligations of the
Company to make severance payments to dismissed employees and to
employees leaving employment under certain other circumstances. The
liability for severance pay benefits, as determined by Israeli Law, is
generally based upon length of service and the employee's monthly
salary. This liability is primarily covered by regular deposits made
each month by the Company into recognized severance and pension funds
and by insurance policies purchased by the Company, based on the
employee's salary for the relevant month. The amounts so funded are
not reflected separately on the balance sheets, since they are
controlled by the fund trustees and insurance companies and are not
under the control and management of the Company. For presentation of
employee termination benefits in accordance with U.S GAAP, see Note
20C.
Costs relating to employee termination benefits were approximately
$2,631, $3,836 and $2,828 for 2005, 2004 and 2003, respectively.
F - 19
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2
(1) OVERVIEW
In January 2001, the Company's Board of Directors approved the
establishment of a new wafer fabrication facility in Israel ("Fab
2"), at an expected cost of approximately $1,500,000. Fab 2 is
designed to manufacture semiconductor integrated circuits on
silicon wafers in geometries of 0.18 micron and below on
200-millimeter wafers. The Company has entered into several
related agreements and other arrangements, and has completed
public and private financing transactions, to provide an
aggregate, as of the approval date of the financial statements,
of approximately $1,260,000 of financing for Fab 2. The
agreements and arrangements include those with technology
partners, Wafer Partners, Equity Investors, the Company's Banks,
the Government of Israel through the Investment Center and
others. The agreements with the Banks and the Investment Center
are subject to certain conditions, including the achievement of
performance and financing milestones, and the securing of
additional required financing. The Company has also entered into
agreements for the design and construction of Fab 2, for
equipping Fab 2 and for the transfer to the Company of process
technologies to produce wafers in Fab 2.
As of December 31, 2005, the Company had incurred costs
associated with the establishment of Fab 2 project of an
aggregate of approximately $1,000,000. As of the approval date of
the financial statements, the major shareholders of the Company
have invested an aggregate of $323,730; the Banks have made
long-term loans in the aggregate of $526,693; the Investment
Center grants at an aggregate of $165,419; the Company has raised
$243,370 from other financial sources.
During the third quarter of 2003, in which Fab 2's construction
was substantially completed, the Company began commercial
production and shipment of wafers to its customers utilizing the
0.18 micron process technology. With the commencement of Fab 2
operations, the majority of the ongoing direct costs related to
the construction and equipping of Fab 2 and to the transfer of
the Fab 2 technologies that previously had been capitalized, are
no longer capitalizable. Depreciation and amortization of Fab 2
assets in 2005, 2004 and 2003 amounted to $133,021, $108,542 and
$39,625, respectively (see also Note 5A), the majority of which
is included in cost of goods sold.
The construction and equipping of Fab 2 is a substantial project,
which requires extensive management involvement as well as timely
coordination of the activities of many participants. In addition,
this project is a complex undertaking which entails substantial
risks and uncertainties, including but not limited to those
associated with the following: obtaining additional commitments
to finance the construction and equipping of Fab 2 and its
ongoing operations (see also Note 1C); achieving certain
operational milestones and complying with various significant
conditions and financial ratios and covenants provided by the
Facility Agreement with the Banks; compliance with the conditions
under the Approval Certificate for Fab 2 provided by the
Investment Center; and completing the complex processes of
transferring from Freescale the manufacturing technologies to be
used at Fab 2 and development of new technologies.
F - 20
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(1) OVERVIEW (cont.)
According to the Facility Agreement with the Banks, raising
certain required additional funding by the dates specified,
achieving the milestones as scheduled, as well as complying with
all the conditions and financial ratios and covenants stipulated
in that agreement and in the Approval Certificate from the
Investment Center, are material provisions for financing provided
and to be further obtained. For details concerning revising
certain of the financial ratios and covenants under the Facility
Agreement for 2005 and 2006, as were amended in the July 2005
amendment to the Facility Agreement, see paragraph A(6) below.
(2) TECHNOLOGY TRANSFER AGREEMENTS
TOSHIBA - In April 2000, the Company entered into a technology
transfer agreement with Toshiba Corporation ("Toshiba"), a
Japanese corporation. This agreement provided for the transfer by
Toshiba to the Company of advanced semiconductor manufacturing
process technologies installed in Fab 2 including related
technology transfer assistance in exchange for certain fees for
patent licenses, technology transfer and technical assistance.
The transfer of the technology was substantially completed during
the first half of 2003. The Company's commitment under the
Toshiba agreement to reserve for Toshiba a certain portion of Fab
2 wafer manufacturing capacity expired in December 2005.
FREESCALE - In September 2002, the Company entered into a
non-exclusive technology transfer, development and licensing
agreement with Freescale. This agreement provides for the
transfer by Freescale to the Company of existing and newly
developed versions of advanced semiconductor manufacturing
process technologies to be installed in Fab 2, and for the
provision by Freescale of related technology transfer assistance,
in exchange for certain fees for patent and other intellectual
property licenses, technology transfer and development, technical
assistance and ongoing royalties based on sales of products to be
manufactured in Fab 2 with the transferred technology. Subject to
prior termination for cause by Freescale, the licenses under the
agreement are perpetual.
(3) WAFER PARTNER AGREEMENTS
During 2000, the Company entered into various share purchase
agreements ("Wafer Partner Agreements") with SanDisk Corporation,
Alliance Semiconductor Corporation, Macronix International Co.,
Ltd. and QuickLogic Corporation (collectively, the "Wafer
Partners"; excluding QuickLogic, the "primary Wafer Partners") to
partially finance the construction and equipping of Fab 2.
Pursuant to the Wafer Partner Agreements, the Wafer Partners
agreed to invest an aggregate of $250,000 to purchase Ordinary
Shares of the Company. According to the Wafer Partner Agreements,
the Company agreed, subject to certain conditions, to reserve for
each Wafer Partner a certain portion, and collectively
approximately 50%, of Fab 2 wafer manufacturing capacity for a
period of 10 years ending January 2011.
F - 21
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(3) WAFER PARTNER AGREEMENTS (cont.)
Through December 31, 2005, the Wafer Partners invested in the
Company, based on the Wafer Partner Agreements, an aggregate of
$246,823, of which as of such date $201,909, was credited as paid
in capital and $44,914, was established as long-term customers'
advances which may be, subject to the terms and conditions
stipulated in the Wafer Partner Agreements utilized as credit
against purchases to be made by the Wafer Partners, or converted
into paid-in-capital. Through December 31, 2005, the Wafer
Partners were issued an aggregate of 27,475,135 Ordinary Shares
at an average price per share of $7.35, which was determined
based on the average closing sale price of the Company's Ordinary
Shares for the 15-30 trading days prior to making any investment.
For additional investments made by the primary Wafer Partners in
the aggregate amount of $19,089 in connection with the 2002 and
2005 rights offerings, see Notes 13F and 13H, respectively, and
paragraph (6) below.
(4) EQUITY INVESTOR AGREEMENTS
Through December 31, 2005, The Israel Corporation ("TIC"), the
principal shareholder of the Company, and Challenge Fund-Edgar II
LP, a Delaware limited partnership ("Challenge") (together,
"Equity Investors") invested in the Company, an aggregate of
$55,000 for the purchase of an aggregate of 7,419,835 Ordinary
Shares of the Company at an average price per share of $7.41,
which was determined based on the average closing sale price of
the Company's Ordinary Shares for the 15-30 trading days prior to
making any investment. The investments of TIC and Challenge were
made in accordance with share purchase agreements the Company
entered into with them in December 2000 and February 2001,
respectively.
For additional investments made by TIC in the aggregate amount of
$29,152 in connection with the 2002 and 2005 rights offerings,
see Notes 13F and 13H, respectively, and paragraph (6) below.
In 2002, a Canadian pension fund invested in the Company's equity
$15,000 in consideration for 3,000,000 Ordinary Shares of the
Company for $5.00 per share, and a warrant to purchase an
additional 1,350,000 Ordinary Shares of the Company. The warrant
is exercisable for a four-year period ending in October 2006, at
an exercise price of $7.50 per share (subject to customary
adjustments).
(5) AMENDMENTS TO THE PRIMARY WAFER PARTNER AND EQUITY INVESTOR
AGREEMENTS
Pursuant to the primary Wafer Partner Agreements, as amended, the
primary Wafer Partners were entitled to convert an aggregate of
up to $7,507 of the unutilized long-term customers' advances,
which they had as of December 31, 2005, into fully-paid Ordinary
Shares of the Company. In January 2006, one of the primary Wafer
Partners notified the Company of its election to convert $3,880
of its advances into paid-in equity entitling it for 2,455,905
Ordinary Shares of the Company, constituting approximately 3.67%
of the Company's outstanding Ordinary Shares as of December 31,
2005. The number of shares was determined based on $1.58 per
share, which was the average closing sale price of the Company's
Ordinary Shares for the 15 trading days prior to December 31,
2005.
F - 22
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(5) AMENDMENTS TO THE PRIMARY WAFER PARTNER AND EQUITY INVESTOR
AGREEMENTS (cont.)
Pursuant to the primary Wafer Partner Agreements, as amended,
each of the primary Wafer Partners has an option to convert, at
the end of each calendar quarter in 2004-2006, that portion of
the long-term customers' advances which it is entitled to
utilize, based upon payments made by such primary Wafer Partner
during that quarter, into fully-paid Ordinary Shares of the
Company. The number of shares is to be determined based on the
average closing sale price of the Company's Ordinary Shares for
the 15 trading days preceding the end of each quarter.
Accordingly, through December 31, 2005, two of the primary Wafer
Partners had converted an aggregate of $2,332 of long-term
customer advances into 1,349,423 fully paid Ordinary Shares of
the Company, at an average share price of $1.73 per share.
Any quarterly amount, which the primary Wafer Partners have
elected not to so convert, will not be utilizable against
purchases made subsequent to that quarter, and shall bear
interest, payable at the end of each quarter, at an annual rate
equal to three-month LIBOR plus 2.5% through December 31, 2007.
The aggregate principal of the unconverted long-term customers'
advances, which could have been utilized against purchases and
which the primary Wafer Partners elected not to convert into
fully-paid Ordinary Shares of the Company (as of December 31,
2005 - $1,102), shall be fully repaid on December 31, 2007. Other
than as described above in this paragraph and the preceding
paragraph, each of the primary Wafer Partners agreed that
long-term customer's advances could not be utilized before
December 31, 2006. Following December 31, 2006, the remaining
long-term customer advances may be utilized as credits against
purchases to be made.
(6) FACILITY AGREEMENT
OVERVIEW - In January 2001, the Company entered into a credit
facility agreement with two leading Israeli banks ("Banks")
entitling the Company to borrow an aggregate, as amended in
January 2002, of $500,000 to finance the construction and
equipping of Fab 2 ("Facility Agreement"). Of that amount, as of
December 31, 2005, the Company withdrew an aggregate of $497,000.
These loans bear interest at a rate of Libor plus 2.5% per annum
payable at the end of each quarter (prior to the November 2003
amendment, described below, the loans bore interest at a rate of
Libor plus 1.55% per annum). The loans are subject to certain
prepayment provisions. Unused amounts under the Facility
Agreement were subject to a quarterly commitment fee of 0.25% per
annum.
In July 2005, the Company and its Banks entered into a definitive
amendment to the Facility Agreement. The amendment provides,
among other things, for Bank financing of up to approximately
$30,000, subject to the Company raising a similar amount by March
31, 2006. Through the approval date of the financial statements,
the Banks provided the Company with the entire amount it was
entitled to borrow under the July 2005 amendment following the
consummation of a rights offering in January 2006 by the Company
(for additional details, see below).
F - 23
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT (cont.)
REPAYMENT SCHEDULE - Loans in the amount of $431,000 received by
the Company through December 31, 2003, were repaid on December
31, 2003 and, concurrently, an equivalent amount was drawn down
on such date to be repaid in 12 equal consecutive quarterly
installments commencing March 31, 2007 (the net amount of
long-term loans the Company received in 2003 in connection with
the abovementioned re-borrowing was $187,000). Loans in the
amount of $66,000 drawn down during 2004 are repayable in 12
equal consecutive quarterly installments, commencing three years
from the draw down date of each loan, which in no case shall be
after the maturity date of the Facility Agreement. Loans drawn
down under the July 2005 amendment are repayable in a period
between twelve to fifteen months from each date any amount is
received by the Company.
The July 2005 amendment further provides that a rescheduling of
the repayment dates of the loans drawn down under it shall be
discussed following the closing date of the amendment. Subsequent
to the balance sheet date, the Company and the Banks commenced
and are holding discussions for rescheduling of the repayment
dates of the $29,693 provided by the Banks under this amendment.
For further details regarding loans drawn down under the Facility
Agreement see Note 8.
NOVEMBER 2003 AMENDMENT - In November 2003, the Company and its
Banks entered into an amendment to the Facility Agreement. The
amendment was based, among other things, on an updated plan for
the construction and equipping Fab 2 submitted to the Banks, and
was approved by the Company's shareholders' meeting held in
December 2003. Pursuant to the amendment, the Banks waived all
noncompliance or breach of covenants by the Company prior to the
date of amendment. The amendment further revised and updated the
covenants under the Facility Agreement according to which the
Company is obligated to comply with certain operational and
financial ratios, primarily total shareholders' equity to total
assets, quarterly and annual EBITDA, sales and production
capacity milestones.
During 2005, the Company and the Banks entered into the following
amendments to the Facility Agreement:
o JANUARY 2005 AMENDMENT - In January 2005, the Company and
its Banks signed a waiver letter agreement according to
which the Banks waived the Company's non-compliance with
certain financial ratios and covenants for the fourth
quarter of 2004. The agreement also amended certain of the
financial ratios and covenants with which the Company was to
comply with during 2005, and which were further revised in
the framework of the July 2005 amendment to the Facility
Agreement described below.
F - 24
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT (cont.)
o JULY 2005 AMENDMENT - In July 2005, the Company and its
Banks entered into a definitive amendment to the Facility
Agreement, which closed in August 2005. The amendment
provides, among other things, for the Banks to provide
additional financing of up to approximately $30,000, subject
to the Company raising through the issuance of shares or
convertible debentures $23,500 by October 31, 2005 (which
was subsequently extended to December 31, 2005) and an
additional $6,500 by March 31, 2006. In connection with the
amendment, certain of the Company's Equity Investors, Wafer
Partners and other investors committed to invest an
aggregate of $23,500 towards such funding in the context of
a rights offering. Following the closing of the amendment to
the Facility Agreement described above and complying with
the above commitments, the Banks provided the Company with
the full amount of loans to which it was entitled to borrow
under the July 2005 amendment.
Under the July 2005 amendment, the $29,693 provided by the
Banks through January 2006 bear annual interest based on the
three-month LIBOR plus 2.5% and are repayable in a period
between twelve to fifteen months from each date any amount
was received by the Company. The amendment further provides
that a rescheduling of said repayment dates shall be
discussed following the closing date of the amendment. Such
discussions have been commenced subsequent to the balance
sheet date.
The July 2005 amendment further provides that: (i) The
Israel Corp. ("TIC") undertaking, as detailed below, shall
be extended from June 30, 2006 to December 31, 2006; (ii)
such undertaking will be deemed to have been fulfilled if
TIC invests at least $14,000 in the context of a rights
offering; (iii) any amounts raised in equity or in
convertible debentures through March 31, 2006, up to
$30,000, shall not constitute financing from other sources
towards the $152,000 fundraising milestone, as detailed
below; and (iv) the last date in which the Company is to
comply with the $152,000 fundraising milestone is postponed
from December 31, 2005 to June 30, 2006.
The amendment also revised certain of the financial ratios
and covenants through the third quarter of 2006 (primarily
quarterly EBITDA and sales).
As described in Note 13H, the Company raised $48,169 in the
form of a rights offering, thereby satisfying its
obligations to raise $23,500 and $6,500 by December 31, 2005
and March 31, 2006, respectively. In the context of such
rights offering, TIC invested $20,000, thereby terminating
its undertaking detailed below. In addition, the commitment
by one of the Company's Wafer Partners to invest an
aggregate of $3,500 in the rights offering was fulfilled.
Following the satisfaction of all the Company's commitments
under the July 2005 amendment, as of December 31, 2005,
$21,103 was drawn down in two installments and in January
2006, an additional $8,590 was drawn down.
F - 25
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT (cont.)
FUNDRAISING MILESTONE - According to the amended Facility
Agreement with the Banks, the Company is to raise from specified
financial sources an aggregate of $152,000 by June 30, 2006. As
of the approval date of the financial statements, the Company had
raised $144,124 towards said amount. Accordingly, the Company's
remaining obligation to raise financings from specified financial
sources is $7,876 to be raised by June 30, 2006.
The Facility Agreement provided that should the Company fail to
meet its fundraising obligation towards the aggregate of $152,000
by June 30, 2006, the Banks will have the option to demand that
the Company consummate within three months from the failing
raising date a rights offering of convertible debentures and
warrants to purchase the Company's Ordinary Shares to raise the
missing amount towards the required funding, all in accordance
with the terms prescribed in the Facility Agreement.
TIC'S UNDERTAKING - In connection with the November 2003
amendment to the Facility Agreement, TIC undertook to the Banks
to exercise all of the rights it received in the above mentioned
rights offering. In addition, as part of TIC's undertaking, it
agreed to purchase from the Company additional securities in a
private placement on the same terms as the rights offering, in an
amount equal to 50/93 of the difference between the amount the
Company was to raise in the rights offering and the amount raised
from shareholders other than TIC, less any amounts actually
invested in the rights offering by TIC in connection with the
exercise of its own rights. Following TIC's investment in the
Company of $20,000 in the context of the 2005 rights offering
(see Note 13H), according to the July 2005 amendment, TIC's
undertaking has been fulfilled.
For further details regarding 58,906 warrants issued to TIC in
connection with its undertaking described above, see Note
13B(5)(b).
The Company has agreed to indemnify TIC for any liabilities it
incurs with respect to these arrangements, up to a maximum of
$100,000 as follows: up to $25,000 in cash and any amount
exceeding such $25,000 limit will earn interest at LIBOR plus
2.5% and will be paid on the same terms that the Company repays
its loans to the Banks.
WARRANTS ISSUED TO THE BANKS - For further details regarding
9,561,060 warrants issued to the Banks in connection with the
Facility Agreement, see Note 13B(5)(a).
COMPLIANCE WITH FINANCIAL RATIOS AND COVENANTS - As of the
balance sheet date, the Company was in full compliance with all
of the financial ratios and covenants under the amended Facility
Agreement. As of the approval date of the financial statements,
the Company anticipates that it will not be in compliance with
all of the financial ratios and covenants under the amended
Facility Agreement applicable for the fourth quarter of 2006.
According to the Facility Agreement, satisfying the financial
ratios and covenants is a material provision.
F - 26
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(6) FACILITY AGREEMENT (cont.)
LIENS - Under the Facility Agreement, the Company agreed to
register liens in favor of the Banks on substantially all its
present and future assets. If, as a result of any default under
the Facility Agreement, the Banks were to accelerate the
Company's obligations, the Company would be obligated to
immediately repay all loans made by the Banks (which as of the
approval date of the financial statements amounted to $526,693),
plus penalties, and the Banks would be entitled to exercise the
remedies available to them under the Facility Agreement,
including enforcement of the liens against the Company's assets.
OFFEROR BY THE BANKS - If one or more certain bankruptcy related
events occur, the Banks are entitled to bring a firm offer made
by a potential investor to purchase the Company's ordinary shares
("the Offer") at a price provided in the Offer. In such case, the
Company shall be required thereafter to procure a rights offering
to invest up to 60% of the amount of the Offer on the same terms.
If the offeror offers a majority of the Company's outstanding
share capital, the rights offering will be limited to allow for
this, unless TIC and the primary Wafer Partners agree to exercise
in a rights offering rights applicable to their shareholdings and
agree to purchase in a private placement enough shares to ensure
that the full amount of the Offer is invested.
(7) FAB 2 CONSTRUCTION AGREEMENT
In August 2000, the Company entered into a fixed price turn-key
agreement with a contractor for the design and construction of
Fab 2 in consideration of approximately $200,000 to be paid
according to certain performance milestones stipulated in the
agreement. As of December 31, 2005, approximately $192,000 of
that amount had already been paid by the Company.
(8) APPROVED ENTERPRISE STATUS
In December 2000, the Investment Center approved an investment
program in connection with Fab 2 for expansion of the Company's
plant. The approval certificate for the program provided for a
benefit track entitling the Company to investment grants at a
rate of 20% of qualified investments of up to $1,250,000, or an
aggregate of up to $250,000, of which as of the balance sheet
date, an aggregate of $158,143 has been received from the
Investment Center. Since the Company's eligibility to receive
grants is with respect to investments in Fab 2 plant and
equipment made by December 31, 2005, five years from the date the
approval certificate was obtained, the Company is not to receive
grants under this program for investments made after that date.
Due to the later than planned commencement of construction of Fab
2, prevailing market conditions and slower than planned ramp-up,
as of December 31, 2005, the Company did not complete the program
and made investments constituting approximately 72% of the
eligible investments under the approved enterprise program.
F - 27
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(8) APPROVED ENTERPRISE STATUS (cont.)
As a result of the Company's actual investments lagging behind
the original terms of the program, the Company notified the
Investment Center of its revised investment schedule contemplated
in an updated plan for the construction and equipping Fab 2. Such
plan includes, among other matters, a reduced rate of annual
investments and lower than projected expectations for Fab 2
sales. In July 2004, the Company received from the Investment
Center an approval to the revised investment schedule.
Since the approved investment period of five years ended on
December 31, 2005, the Company has been holding discussions with
the Investment Center to achieve satisfactory arrangements to
approve a new expansion program to commence on January 1, 2006.
During the first half of 2005, the Company received letters from
the Israeli Minister of Industry, Trade and Employment and from
the General Manager of the Investment Center stating that they
will act under Israeli law to support such expansion. In April
2005, at the Investment Center's request, the Company submitted a
revised business plan to the Investment Center for the period
commencing on January 1, 2006. As of the approval date of the
financial statements, although the Investment Center has
concluded its review of the revised business plan, the Company
has not received, and the Company's management cannot estimate
when the Company will receive, a formal response to its request
for a new expansion program to commence on January 1, 2006, or if
the Investment Center will approve the Company's request.
Any failure by the Company to meet the conditions of the 2000
approval certificate may result in the cancellation of all or a
portion of the grants to be received and tax benefits and in the
Investment Center requiring the Company to repay all or a portion
of grants already received. Under Israeli law, the Company's
non-completion of investments in an amount of $1,250,000 by
December 31, 2005 may permit the Investment Center to require the
Company to repay all or a portion of grants already received.
Management believes that it is improbable that the Investment
Center would demand the Company to repay all or a portion of
grants already received, or deny investment grants receivable as
of December 31, 2005, due to its non-completion of investments in
the amount of $1,250,000 by December 31, 2005 - see also Note
17A.
(9) AGREEMENT WITH THE ILA
In November 2000, the Company entered into a development
agreement with the Israel Land Administration ("ILA") with
respect to a parcel of land on which Fab 2 was constructed.
Following the completion of the construction of Fab 2 on the
land, in June 2003, the Company entered into a long-term lease
agreement with the ILA for a period ending in 2049. The lease
payments through 2049 relating to this lease have been paid in
advance.
(10) HEDGING ACTIVITIES
For hedging transactions and agreements the Company has entered
into, see Note 18C.
F - 28
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
A. COMMITMENTS AND CONTINGENCIES RELATING TO FAB 2 (cont.)
(11) OTHER AGREEMENTS
Through December 31, 2005, the Company had entered into several
additional agreements related mainly to the construction,
equipping and transfer of technology for Fab 2. The Company's
aggregate commitment in connection with these agreements which
were not supplied or rendered as of such date, including the Fab
2 construction agreement described in paragraph (7) above,
amounted to $14,715.
B. LICENSE AGREEMENTS
(1) In June 2000, the Company entered into a cross license agreement
with a major technology company. According to the agreement, each
party acquired a non-exclusive license to certain of the other's
patents. The Company agreed to pay an annual royalty through July
2005. Though the licenses terminated on December 31, 2005, the
parties are currently negotiating the renewal of said agreement.
(2) In December 2001, the Company and DSP Group Ltd. ("DSPG") entered
into a license agreement, pursuant to which DSPG granted the
Company a personal, non-exclusive, nontransferable license to use
certain technology in the Company's products, in exchange for
license fee and ongoing royalties to be paid by either the
Company or its customers based on sales of products manufactured
in Fab 2 based on the technology. In addition, the agreement
provides for technical support by DSPG in connection with using
the technology. The license terminates on December 31, 2007.
(3) In May 2002, the Company entered into a joint development and
royalty-free, non-exclusive cross-license agreement with a
Japanese semiconductor manufacturer corporation, for the joint
development of certain technology to be used by the Company in
its Fab 2 and by the Japanese manufacturer in its facilities. In
April 2005, the Japanese semiconductor manufacturer corporation
elected, and the Company agreed, to cease the joint development
of certain technology and to terminate the agreement. However,
the license rights granted to the parties continue pursuant to
the terms of the May 2002 original agreement. According to the
terms of the termination agreement, the Japanese manufacturer
paid the Company an amount of $2,500 in April 2005. In addition,
each party expressly released the other party from any
obligations or liabilities of any nature in connection with the
original agreement. Revenues for 2005 and 2004 include $8,000 and
$1,944, respectively, in relation to this agreement, with the
$8,000 of 2005 received subsequent to the termination of the
agreement, and as a result of its termination. See also Note 10A.
(4) The Company from time to time enters into intellectual property
and licensing agreements with third parties, the effect of each
of them on the Company's total assets and results of operations
is immaterial. Certain of these agreements call for royalties to
be paid by the Company to these third parties. See also Note 10A
and paragraph E(2) below.
F - 29
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
C. LEASES
(1) The Company's offices and engineering and manufacturing
operations are located in a building complex situated in an
industrial park in Migdal Ha'emek, in the northern part of
Israel. These premises are currently occupied under a long-term
lease from the Israel Lands Authority, which expires in 2032. The
Company has no obligation for lease payments related to this
lease through the year 2032.
(2) With respect to a long-term lease agreement of land on which Fab
2 was constructed, see paragraph A(9) above.
(3) The Company occupies certain other premises under various
operating leases. The obligations under such leases were not
material as of December 31, 2005.
D. PROFIT SHARING PLAN
The Company maintains an employee profit sharing plan. No amounts were
provided for under this plan for periods presented in these financial
statements, since the Company did not record profits for these
periods.
E. OTHER PRINCIPAL AGREEMENTS
(1) MACRONIX - In December 2000, the Company and Macronix entered
into an agreement according to which the Company waived in favor
of Macronix certain exclusive semiconductor manufacturing rights
it received from Saifun.
(2) SAIFUN - Pursuant to an agreement between the Company and Saifun
signed in October 1997, the Company has certain exclusive
semiconductor manufacturing rights for certain licensed
technology. The agreement also sets certain limitations on Saifun
regarding future licensing of such technology (see (1) above).
Pursuant to certain provisions of the agreement, the Company and
Saifun are obligated, under certain circumstances, to pay each
other royalties. For royalty amounts received and payable by the
Company under the agreement, see Note 19B. The agreement
terminates in October 2007, unless terminated earlier for cause.
(3) SILICONIX - In May 2004, the Company and chip maker Siliconix
incorporated ("Siliconix"), a wholly-owned subsidiary of Vishay
Intertechnology Inc., entered into a definitive long-term foundry
agreement for semiconductor manufacturing. Pursuant to the
agreement, Siliconix will place with the Company orders valued at
approximately $200,000 for the purchase of wafers to be
manufactured in the Company's Fab 1 over a seven to ten year
period. Approximately $53,000 of that amount will be delivered
over an initial three-year period commencing the second quarter
of 2005 (the date in which the transfer of Siliconix's technology
to Fab 1 was completed). According to the agreement, in August
2004 Siliconix advanced the Company $20,000 to be used primarily
for the purchase of additional equipment required to satisfy
Siliconix's orders. The advanced amount is credited towards the
purchase price of wafers. The unused remaining balance of the
$20,000 ($9,631 as of December 31, 2005) is included in
designated cash and short-term interest-bearing deposits in the
balance sheet. The Company registered liens in favor of Siliconix
on the bank account in which the $20,000 was deposited and over
the equipment purchased in connection with the transaction.
F - 30
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (cont.)
E. OTHER PRINCIPAL AGREEMENTS (cont.)
(4) OTHER - The Company, from time to time in the ordinary course of
business, enters into long-term agreements with various entities
for the joint development of products and processes utilizing
technologies owned by both the other entities and the Company.
F. ENVIRONMENTAL AFFAIRS
The Company's operations are subject to a variety of laws and
governmental regulations in Israel relating to the use, discharge and
disposal of toxic or otherwise hazardous materials used in the
production processes. Operating permits and licenses are required for
the operations of the Company's facilities and these permits and
licenses are subject to revocation, modification and renewal.
Government authorities have the power to enforce compliance with these
regulations, permits and licenses. As of the approval date of the
financial statements, the Company was in compliance with the terms of
the permits and licenses.
G. CLASS ACTION
In August 2004, the United States District Court dismissed the class
action filed in July 2003 by certain of the Company's shareholders in
the United States against the Company and certain of its directors,
Wafer Partners and Equity Investors ("the Defendants"). The plaintiffs
had asserted claims arising under the Securities Exchange Act of 1934,
alleging misstatements and omissions made by the Defendants in
materials sent to the Company's shareholders in April 2002 with
respect to the approval of an amendment to the Company's investment
agreements with its Fab 2 investors. In December 2004, one of the lead
plaintiffs filed an appeal of the decision dismissing the complaint.
The Company believes that the complaint is without merit and is
vigorously contesting it.
H. AMENDMENT TO ISRAELI BANKING REGULATIONS
Pursuant to an amendment to a directive published by the Israel
Supervisor of Banks, effective March 31, 2004, the Company may be
deemed part of a group of borrowers comprised of the Ofer Brothers
Group, Israel Corp., and other companies which are also included in
such group of borrowers pursuant to the directive, including companies
under the control or deemed control of these entities. The directive
provides for limits on amounts that banks may lend to borrowers or
groups of borrowers. Should the Company's Banks exceed these
limitations, they may limit the Company's ability to borrow other
money in the future and may require the Company to return some or all
of the outstanding borrowings (which were $526,693 as of the approval
date of the financial statements). As of the approval date of the
financial statements, the Company had received no such request.
I. OTHER COMMITMENTS
Receipt of certain research and development grants from the government
of Israel is subject to various conditions. In the event the Company
fails to comply with such conditions, the Company may be required to
repay all or a portion of the grants received. In management's
opinion, the Company has been in full compliance with the conditions
through December 31, 2005.
F - 31
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 12 - CONVERTIBLE DEBENTURE
A. In connection with the rights offering described in Note 13H, the
Company issued $48,169 principal amount of convertible debentures of
which $25,493 was fully paid as of December 31, 2005. The rights were
distributed to the Company's shareholders and eligible employees
holding options to purchase Ordinary Shares of the Company under share
option plans that entitle option holders to participate in a rights
offering. The debentures are listed for trade on the Tel-Aviv Stock
Exchange and on the NASDAQ Capital Market. The debentures bear annual
interest at the rate of 5% and are convertible into up to 43,790,272
of the Company's Ordinary Shares. The principal of the debentures,
together with accrued interest, will be payable in one installment on
January 12, 2012. The effective interest rate on the convertible
debentures, taking into account the proceeds and related costs of
issuance of approximately $1,300, is 5.48%.
The debentures are convertible into the Company's Ordinary Shares at a
conversion price of $1.10 per share. The conversion price is subject
to downward adjustment under certain circumstances in which the
Company sells securities in future financings at a price per share
which is lower than the conversion price, provided that such
financings close through December 2006 (or under certain conditions,
through June 2007).
Subject to the Facility Agreement, the Company may at its option
announce the early redemption of the debentures, provided that the
outstanding aggregate balance of principal on account of the
debentures is equal to or less than $500.
Certain of the Company's Equity Investors and Wafer Partners invested
$27,811 in the framework of the rights offering.
The debentures and interest thereon are unsecured and rank behind the
Company's existing and future secured indebtedness, including
indebtedness to the Banks under the Facility Agreement, as well as to
the government of Israel in connection with grants the Company
received under its approved enterprise programs and to Siliconix.
B. Subsequent to the balance sheet date and through the approval date of
the financial statements the nominee company acting on behalf of the
Tel Aviv Stock Exchange Clearing House has requested to convert,
3,351,854 of the convertible debentures, issued in connection with the
Company's recent rights offering, into 3,047,140 Ordinary Shares of
the Company.
C. The beneficial feature according to the provisions of Opinion No. 55
"EARNINGS PER SHARE" of the Institute of Certified Public Accountants
in Israel, determined based on the theoretical ex-price derived from
the Company's share price immediately prior to the issuance date of
the rights, was 19 %. According to Opinion No. 55, the number of
shares used in the computation of loss per share for the periods
presented has been adjusted retroactively according to that beneficial
feature.
D. Following the initial adoption of Accounting Standard No. 22
"FINANCIAL INSTRUMENTS: DISCLOSURE AND PRESENTATION" of the Israeli
Accounting Standards Board (see Note 2P(1)) in the first quarter of
2006, the Company's convertible debentures would be bifurcated in a
manner by which the Company's shareholders' equity would increase by
approximately $16,500 and the convertible debentures will be reduced
by the same amount. Said amount will be expensed as financing expenses
through 2011.
F - 32
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY
A. DESCRIPTION OF ORDINARY SHARES
As of December 31, 2005 and 2004, the Company had 500,000,000 and
250,000,000 authorized Ordinary Shares, respectively, par value NIS
1.00 each, of which 66,932,056 and 65,699,796, respectively, were
issued and outstanding (net of 1,300,000 Ordinary Shares held by the
Company as of such dates). As of the approval date of the financial
statements, there were 67,189,547 Ordinary Shares issued and
outstanding and 58,627,109 Ordinary Shares of the Company contingently
issuable. This amount includes Ordinary Shares to be issued under
various agreements according to their provisions related to Fab 2
Wafer Partners and Equity Investors warrants, the exercise of all
options granted and issued to non-employees and the conversion of all
convertible debentures. Subsequent to the balance sheet date and
through the approval date of the financial statements, the nominee
company acting on behalf of the Tel Aviv Stock Exchange Clearing House
has requested to convert 3,351,854 of convertible debentures, issued
in connection with the Company's recent rights offering, into
3,047,140 Ordinary Shares of the Company, which as of the approval
date of the financial statements have not yet been issued. Holders of
Ordinary Shares are entitled to participate equally in the payment of
cash dividends and bonus share (stock dividend) distributions and, in
the event of the liquidation of the Company, in the distribution of
assets after satisfaction of liabilities to creditors. Each ordinary
share is entitled to one vote on all matters to be voted on by
shareholders.
B. SHARE OPTION PLANS
(1) EMPLOYEE, CHIEF EXECUTIVE OFFICER AND DIRECTOR SHARE OPTIONS
(A) GENERAL - The Company has granted to its employees options
to purchase its Ordinary Shares under several option plans
adopted by the Company since 1995. The particular provisions
of each plan and grant vary as to vesting period, exercise
price, exercise period and other terms. Generally, the
options are granted at an exercise price which equals to not
less than 85% of the market value of the Ordinary Shares at
the date of grant (in mostly all cases, at an exercise price
equal to the market value of the underlying shares at the
date of grant); vest over a three to four-year period
according to various vesting schedules; and are not
exercisable beyond ten years from the grant date under each
plan.
(B) OPTIONS TO THE COMPANY'S NEW CHIEF EXECUTIVE OFFICER AND
DIRECTOR - In April 2005, the Company's Board of Directors
approved the grant of options to purchase up to 1,325,724
Ordinary Shares to the Company's new appointed Chief
Executive Officer ("CEO"), who was also appointed as a
director, which was further approved by the Company's
shareholders in October 2005. These options are exercisable
at an exercise price of $1.56, which was the closing market
price of the Company's shares on the last trading day prior
to the board approval of the grant. These options will vest
over a four-year period, with 25% vesting over each year of
employment. The options granted are exercisable for a period
of ten years from the date of grant.
F - 33
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(1) EMPLOYEE, CHIEF EXECUTIVE OFFICER AND DIRECTOR SHARE OPTIONS
(cont.)
(B) OPTIONS TO THE COMPANY'S NEW CHIEF EXECUTIVE OFFICER AND
DIRECTOR (CONT.)
If as a result of equity financings consummated after April
30, 2005 (excluding the exercise or conversion of warrants,
options, convertible debentures or other rights to acquire
the Company's securities outstanding on such date), the
CEO's total number of options granted to him through April
30, 2007 would represent less than 1.2% of the total number
of issued and outstanding shares of the Company as of April
30, 2007, additional options will be granted to the CEO to
result in a 1.2% holding of the total number of issued and
outstanding shares of the Company as of April 30, 2007.
(C) OPTIONS GRANTED TO DIRECTORS - During 2001, the Audit
Committee, the Board of Directors of the Company and the
general meeting of the Company's shareholders approved a
stock option plan pursuant to which the Company's directors
will be granted options to purchase up to 400,000 Ordinary
Shares of the Company (40,000 to each eligible director
appointed to the Board of Directors) at an exercise price
equal to the market price of the Company's shares on the
grant dates. In accordance with this option plan, 120,000
options were granted in 2005 to three directors who were
appointed in 2005 (40,000 options each) at exercise prices
of $1.87, $1.87 and $1.26, which equal the market price of
the Company's shares on the grant dates. As of December 31,
2005 and 2004, 280,000 and 240,000 options were outstanding
under the plan, respectively, with a weighted average
exercise price of $5.39 and $8.41, respectively.
Options granted under the plan vest over a four-year period
according to various vesting schedules, and generally may
not be exercised beyond five years from the date they first
become exercisable.
In addition, during 2000 and 2001, the Audit Committee, the
Board of Directors of the Company and the general meeting of
the Company's shareholders approved the grant to a director
of the Company options to purchase up to 50,000 and 21,500
Ordinary Shares, respectively, of the Company at an exercise
price of $20.00 and $10.75, respectively, per share, the
market price of the Company's shares on the dates of grant.
The options may be exercised for a period of three years
from the date on which they have become vested. As of
December 31, 2005, 16,666 and 14,334 options, respectively,
were expired.
F - 34
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(1) EMPLOYEE, CHIEF EXECUTIVE OFFICER AND DIRECTOR SHARE OPTIONS
(cont.)
(D) EXPIRATION OF OPTIONS GRANTED TO THE COMPANY'S FORMER
CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE
OFFICER - In March 2003, the Board of Directors of the
Company approved a share option plan, which was approved by
the Company's shareholders in May 2003, pursuant to which
the Company's former Chairman of the Board of Directors and
CEO was granted options to purchase up to 1,043,000 Ordinary
Shares of the Company at an exercise price of $2.983, an
exercise price which is higher than the Company's share
price at the date of the approval by the Board of Directors,
and is equivalent to the average closing trading price for
the Company's Ordinary Shares during the 30 consecutive
trading days preceding the date of board approval of an
amendment to the Fab 2 investment agreements. Options
granted under the plan vest over a five-year period
according to various vesting schedules. Due to the
resignation of the Company's former Chairman of the Board of
Directors and Chief Executive Officer in May 2005, 625,800
options granted to him were fully forfeited and 417,200
options were exercisable until May 2006.
(E) OPTIONS GRANTED TO FORMER CO-CEOS IN OCTOBER 1998 AND MAY
2001 - In October 1998 and May 2001, the Board of Directors
of the Company approved share option plans pursuant to which
each of the Company's two former Co-Chief Executive Officers
was granted options to purchase up to 300,000 and 100,000
Ordinary Shares of the Company, respectively, at an exercise
price of $7.00 and $11.81, respectively, the market price of
the Company's shares on the dates of grant. In the framework
of the retirement of the former Co-Chief Executive Officers
in May 2003, based on their retirement provisions as
stipulated in the agreements, the 300,000 options are
available for exercise through April 2007. As of December
31, 2005, there were 705,000 options exercisable by the
former Co-Chief Executive Officers.
(F) OPTIONS AVAILABLE FOR GRANT - Under a provision approved in
September 2000, as amended in December 2003, by the
Company's Board of Directors, on January 1 of each year
commencing 2001 and ending 2003 and on each year commencing
November 1, 2003 and November 1, 2004, the total number of
options available for grant under all the Company's employee
share option plans is to be increased by an amount equal to
a certain percentage of the outstanding Ordinary Shares of
the Company on each such dates, provided that the maximum
number of options available for grant at any time shall not
exceed 12% of the outstanding Ordinary Shares of the
Company, and that additional options may not be granted if
the total number of unvested options outstanding under all
the Company's share option plans exceeds 12% of the
outstanding Ordinary Shares of the Company. The percentage
of the outstanding Ordinary Shares of the Company added for
the years 2001, 2002 and 2003 was 4%, and for the years 2004
and 2005 - 3.6%. As of December 31, 2005, an aggregate of
1,973,025 options had not yet been granted, and are
accordingly available for grant under the general terms
described in paragraph (a) above.
F - 35
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(2) SUMMARY OF THE STATUS OF ALL THE COMPANY'S EMPLOYEE AND DIRECTOR
SHARE OPTIONS
A summary of the status of all the Company's employee and
director share option plans as of December 31, 2005, 2004 and
2003, as well as changes during each of the years then ended, is
presented below (for options granted to the Banks, a related
party and a consultant, see paragraph B(5) below):
2005 2004 2003
-------------------------- --------------------- ---------------------
Weighted Weighted eighted
Number of average Number average Number average
share exercise of share exercise of share exercise
options price options price options price
---------- ---------- --------- ------ --------- ------
Outstanding as of
beginning of year 10,212,920 $ 5.71 6,842,442 $ 7.93 4,247,898 $10.79
Granted 5,000,224 1.54 4,364,954 2.69 3,118,742 4.10
Exercised -- (95,250) 7.00 --
Terminated (77,214) 12.45 -- --
Forfeited (2,124,355) 4.99 (899,226) 7.89 (524,199) 8.25
----------- ----------- -----------
Outstanding as of
end of year 13,011,575 4.19 10,212,920 5.71 6,842,441 7.93
=========== =========== ===========
Options exercisable
as of end of year 4,602,447 7.77 3,010,870 10.78 2,008,674 11.60
=========== =========== ===========
F - 36
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(3) SUMMARY OF INFORMATION ABOUT EMPLOYEE SHARE OPTIONS OUTSTANDING
The following table summarizes information about employee share
options outstanding as of December 31, 2005:
Exercisable as of
Outstanding as of December 31, 2005 December 31, 2005
----------------------------------------------------------------- -------------------------
Weighted
Range of average Weighted Weighted
exercise Number remaining average Number average
prices outstanding contractual life exercise price exercisable exercise price
----------- ------- ---- ----- ------- -----
(in years)
1.00-1.99 4,860,017 9.29 1.54 -- 0.00
2.00-2.99 2,723,059 7.64 2.33 991,621 2.54
3.00-3.99 1,317,600 8.59 3.26 344,220 3.26
4.42-4.92 1,051,350 7.55 4.43 530,396 4.43
5.00-5.96 118,000 7.11 5.23 72,412 5.35
6.00-6.99 714,889 6.50 6.13 437,138 6.09
7.00-7.99 579,750 1.17 7.01 579,750 7.01
8.00-8.99 344,887 2.36 8.51 344,887 8.51
9.063-9.812 8,250 1.09 9.37 8,250 9.37
10.00-10.89 612,109 5.23 10.41 612,109 10.41
11.81-11.81 200,000 5.41 11.81 200,000 11.81
12.00-13.00 38,350 4.67 12.40 38,350 12.40
14.25-17.1875 18,500 4.85 16.16 18,500 16.16
18.75-18.75 44,500 4.26 18.75 44,500 18.75
20.00-25.00 380,314 4.30 24.48 380,314 24.48
---------- ---------
13,011,575 4,602,447
========== =========
(4) WEIGHTED AVERAGE GRANT-DATE FAIR VALUE OF OPTIONS GRANTED TO
EMPLOYEES
The weighted average grant-date fair value of the options granted
during 2005, 2004 and 2003 to employees and directors amounted to
$0.83, $1.53 and $2.18 per option, respectively. The Company
utilized the Black-Scholes option-pricing model to estimate fair
value, utilizing the following assumptions for the years 2005,
2004 and 2003 (all in weighted averages):
2005 2004 2003
---------- ---------- ----------
Risk-free interest rate 3.69%-4.34% 2.84%-3.88% 2.88%-3.22%
Expected life of options 4.49 years 4.5 years 4.75 years
Expected annual volatility 54%-69% 65%-82% 55%-74%
Expected dividend yield None None None
F - 37
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(5) NON-EMPLOYEE WARRANTS
(A) BANKS - As of December 31, 2005, the Company had granted the
Banks an aggregate of 9,561,060 warrants to purchase
Ordinary Shares of the Company, at an average exercise price
of $1.88 per share, at terms described below, of which
9,161,060 were outstanding and 5,028,828 were exercisable as
of the approval date of the financial statements.
WARRANTS ISSUED IN JANUARY 2001 - In January 2001, as part
of the Facility Agreement described in Note 11A(6), the
Banks received an aggregate of 400,000 warrants to purchase
Ordinary Shares of the Company (200,000 each) at an exercise
price, as amended in December 2001, of $6.20 per share. As
of December 31, 2005, all of these warrants were fully
vested. The warrants expired in January 2006.
The cost of the warrants issued to the Banks, determined
based on the fair value at the grant and amendment dates in
accordance with SFAS 123, amounted to a total of $5,466.
Such amount is amortized as deferred financing charges over
the terms of the loans under the Facility Agreement.
WARRANTS GRANTED IN DECEMBER 2003 - In December 2003, as
part of an amendment to the Facility Agreement, the Banks
received an aggregate of 896,596 warrants to purchase
Ordinary Shares of the Company (448,298 each) at an exercise
price of $6.17 per share, the 15 day average closing price
of the Company's Ordinary Shares prior to the date the
amendment with the Banks was signed. As of December 31,
2005, all of the warrants are fully vested. The warrants are
exercisable for a five-year period ending December 2008.
The cost of the warrants issued to the Banks, determined
based on the fair value at the grant and amendment dates in
accordance with SFAS 123, amounted to a total of $3,946.
Such amount is amortized as deferred financing charges over
the terms of the loans under the Facility Agreement.
WARRANTS ISSUED IN JULY 2005 - In connection with the July
2005 amendment to the Facility Agreement detailed in Note
11A(6) above, the Company agreed to issue warrants to the
Banks exercisable into an aggregate of 8,264,464 ordinary
shares of the Company, with an exercise price of $1.21.
One-half, or 4,132,232, of the warrants are exercisable for
five years ending in August 2010, and one-half, or
4,132,232, of the warrants shall be exercisable for a
five-year period commencing on the date on which the Company
and its Banks will agree, if at all, upon the rescheduled
repayment dates of the new loans of $29,693, as described in
Note 11A(6) above.
The cost of the currently exercisable 4,132,232 warrants,
determined based on the fair value at the grant date in
accordance with SFAS 123, amounted to a total of $2,793.
Such amount is amortized as deferred financing charges over
the term of the new loans of $29,693.
F - 38
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
B. SHARE OPTION PLANS (cont.)
(5) NON-EMPLOYEE WARRANTS (cont.)
(A) BANKS (cont.)
In lieu of paying the exercise price in cash, the Banks are
entitled to exercise all their warrants on a "cashless"
basis, i.e. by forfeiting part of the warrants in exchange
for ordinary shares equal to the aggregate fair market value
of the shares underlying the warrants forfeited less the
aggregate exercise price.
(B) WARRANTS GRANTED TO A RELATED PARTY - In consideration for
TIC's undertaking described in Note 11A(6), the Company
issued TIC warrants for the purchase of 58,906 of the
Company's Ordinary Shares. The exercise price for the
warrants is $6.17 per share, the 15-day average closing
price of the Company's Ordinary Shares prior to the date the
November 2003 amendment with the Banks described in Note
11A(6) was signed. As of December 31, 2005, all of the
warrants are fully vested and none of them was exercised.
The warrants are exercisable for a five-year period ending
December 2008.
The cost of the warrants award granted to TIC, determined
based on the fair value at the grant date in accordance with
SFAS 123, amounted to a total of $259. Such amount was
allocated to other assets as deferred financing charges and
is amortized as financing expense over the terms of the
loans under the Facility Agreement with the Banks.
(C) WARRANTS ISSUED TO A CANADIAN PENSION FUND - See Note
11A(4).
The Company utilized the Black-Scholes option pricing model to
estimate fair values of options and warrants granted to
non-employees, utilizing the assumptions similar to those
presented in paragraph B(4) above.
(6) PRO FORMA LOSS PER SHARE ACCORDING TO SFAS 123 AND SFAS 148
Had compensation cost for the Company's share option plans been
determined based on the fair value at the grant dates for all
awards made through December 31, 2005 in accordance with SFAS
123, as amended by SFAS 148, the Company's pro forma loss per
share would have been as follows:
For the year ended December 31,
---------------------------------------
2005 2004 2003
--------- --------- ---------
PRO FORMA LOSS
Loss for the year, as reported $(203,082) $(137,768) $(114,261)
Less - stock-based compensation
determined under APB 25 -- -- 27
Add - stock-based compensation
determined under SFAS 123 (4,229) (3,980) (8,437)
--------- --------- ---------
Pro forma loss $(207,311) $(141,748) $(122,671)
========= ========= =========
BASIC LOSS PER SHARE
As reported $ (2.55) $ (1.79) $ (2.01)
========= ========= =========
Pro forma $ (2.60) $ (1.84) $ (2.16)
========= ========= =========
F - 39
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
C. TREASURY STOCK
During 1998, the Board of Directors of the Company authorized, subject
to certain conditions, the purchase of up to 1,400,000 Ordinary Shares
of the Company to facilitate the exercise of employee stock options
under the Company's share option plans. During 1999 and 1998, the
Company funded the purchase by a trustee of 142,500 and 1,157,500,
respectively, of the Company's Ordinary Shares.
D. DIVIDEND DISTRIBUTIONS
According to the Facility Agreement, as amended (Note 11A(6)), the
Company undertook not to distribute any dividends prior to January 1,
2008. Any dividend distributions after that date shall be subject to
provisions stipulated in such agreement, mainly the prior approval of
the Banks.
E. SALE OF SECURITIES - JANUARY 2002
In January 2002, the Company issued on the Tel Aviv Stock Exchange,
Israel NIS 110,579,800 principal amount of convertible debentures,
under terms described in Note 9. Together with the convertible
debentures the Company issued for no consideration an aggregate of
552,899 options and 2,211,596 Options (Series 1). As of the approval
date of the financial statements, all said options were expired and
none were exercised.
The total initial proceeds raised were $23,200, and costs related to
the issuance of the securities and the prospectus were approximately
$1,750. See Note 20F for the presentation and the accounting treatment
of the sale of these securities under U.S. GAAP.
F. RIGHTS OFFERING - OCTOBER 2002
In October 2002, the Company issued in connection with a rights
offering done on the Nasdaq and on the Tel-Aviv Stock Exchange in
Israel 4,097,964 Ordinary Shares of the Company and 1,844,070
warrants, all of which were outstanding as of December 31, 2005, to
purchase Ordinary Shares of the Company, in consideration for
aggregate gross proceeds of $20,490. Of these amounts, 4,086,037
Ordinary Shares and 1,838,715 warrants were issued to Wafer Partners
and Equity Investors in consideration for an aggregate of $20,430.
Each warrant may be exercised for the purchase of one Ordinary Share
at an exercise price of $7.50 for a period ending on October 31, 2006.
Costs in relation to the prospectus and the issuance of the securities
were approximately $800.
G. PUBLIC OFFERING - JANUARY 2004
In January 2004, the Company completed a public offering of its
Ordinary Shares at a price of $7.00 per share. Following the offering,
and including the partial exercise in February 2004 of an
over-allotment option the Company granted the underwriters, the
Company issued 11,444,500 of its Ordinary Shares, in consideration for
gross proceeds of $80,112 (net of related costs - $75,086).
F - 40
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 13 - SHAREHOLDERS' EQUITY (cont.)
H. RIGHTS OFFERING - DECEMBER 2005
In December 2005, the Company filed in Israel and the U.S. a
prospectus for the distribution of transferable rights to purchase up
to $50,000 U.S. dollar denominated debentures that are convertible
into up to 45,454,545 of the Company's Ordinary Shares. The rights
were distributed to the shareholders of record of the Company on
December 20, 2005 (the record date), and to certain employees who on
the record date held options to purchase the Company's Ordinary Shares
under share option plans that entitle the option holders to
participate in a rights offering. Each 138.98 Ordinary Shares and/or
eligible employee options held on the record date entitled their
holder to one right. The rights were exercisable until January 12,
2006. Each right entitled its holder to purchase, at a subscription
price of $100.00, 100 U.S. dollar denominated convertible debentures.
In connection with the exercise of the rights, the Company issued
48,169,300 convertible debentures, with each debenture of $1.00 in
principal amount, or total of $48,169 principal amount of debentures,
which bear annual interest at the rate of 5%. The principal of the
debentures, together with accrued interest, is payable in one
installment on January 12, 2012.
The debentures are convertible into the Company's Ordinary Shares at a
rate of one ordinary share per $1.10 aggregate principal amount of
debentures. The conversion price is subject to downward adjustment
under certain circumstances in which the Company sells securities in
future financings at a price per share which is lower than the
conversion price, provided that such financings close through December
2006 (or under certain conditions, through June 2007).
Subject to the Facility Agreement, the Company may at its option
announce the early redemption of the debentures, provided that the
outstanding aggregate balance of principal on account of the
debentures is equal to or less than $500.
The debentures are listed and quoted on the NASDAQ Capital Market and
the Tel Aviv Stock Exchange.
Certain of the Company's Equity Investors and Wafer Partners invested
$27,811 in the framework of the rights offering.
The debentures and interest thereon are unsecured and rank behind the
Company's existing and future secured indebtedness, including
indebtedness to the Banks under the Facility Agreement, as well as to
the government of Israel in connection with grants the Company
received under its approved enterprise programs and to Siliconix.
If on the payment date of the principal and interest on the
debentures, there exists an infringement of certain covenants and
conditions under the Facility Agreement, the date for payment of the
interest and principal on the debentures may be postponed, depending
on various scenarios under the Facility Agreement until such covenant
or condition is settled. See Note 20G for the presentation of the
rights offering in accordance with U.S. GAAP.
F - 41
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 14 - INFORMATION ON GEOGRAPHIC AREAS AND MAJOR CUSTOMERS
A. REVENUES BY GEOGRAPHIC AREA (as percentage of total sales)
Year ended December 31,
----------------------
2005 2004 2003
---- ---- ----
United States 64% 60% 73%
Israel 7 20 2
Asia Pacific - in 2005 and 2004 -
primarily Taiwan; in 2003 - only
Taiwan 20 11 10
Europe 9 9 15
--- --- ---
Total 100% 100% 100%
=== === ===
B. LONG-LIVED ASSETS BY GEOGRAPHIC AREA - Substantially all of the
Company's long-lived assets are located in Israel.
C. MAJOR CUSTOMERS (as percentage of total sales)
Year ended December 31,
--------------------
2005 2004 2003
---- ---- ----
Customer A 22% 24% 20%
Customer B 14 5 1
Customer C 2 17 1
Customer D 4 8 24
Customer E 3 6 11
Other customers (*) 27 17 20
(*) Represent sales to six different customers each of whom accounted
for between 1% and 8% of sales during 2005; to four customers (1%
-8%) of sales during 2004; and to six customers (0%-9%) during
2003.
As of December 31, 2005 and 2004, the above major customers
constituted the majority of the trade accounts receivable reflected on
the balance sheets.
F - 42
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 15 - FINANCING EXPENSES, NET
Financing expenses, net consist of the following:
Year ended December 31,
------------------------------------
2005 2004 2003
-------- -------- --------
Financial expenses (primarily bank loan interest) $(35,595) $(29,709) $(16,073)
Interest expenses in relation
to convertible debentures (1,249) (1,233) (1,198)
Less capitalized interest - Note 5A(3) -- -- 6,892
-------- -------- --------
(36,844) (30,942) (10,379)
Financing income (primarily bank deposit interest) 1,193 1,197 553
-------- -------- --------
Financing expense, net $(35,651) $(29,745) $ (9,826)
======== ======== ========
NOTE 16 - OTHER INCOME
In December 2004, the Company entered into a definitive agreement to sell
all of its holdings in Saifun Semiconductors Ltd. ("Saifun"), an Israeli
company which designs and develops memory designs, to a U.S. based private
equity investor in consideration for $38,677. In December 2004,
shareholders of Saifun exercised their right of first refusal, and
accordingly purchased the shares from the Company for said amount. The net
gain from the sale of Saifun's shares amounted to $32,377.
NOTE 17 - INCOME TAXES
A. APPROVED ENTERPRISE STATUS
Substantially all of the Company's existing facilities as of December
31, 2005 have been granted approved enterprise status, as provided by
the Israeli Law for the Encouragement of Capital Investments - 1959
("Investments Law") (see Note 5B).
The tax benefits derived from approved enterprise status relate only
to taxable income attributable to each approved enterprise investments
programs. Pursuant to the Investments Law and the approval
certificates, the Company's income attributable to its various
approved enterprise investments is taxed at a rate of up to 25%
through 2012. Taxable income attributable to Fab 2 approved program
shall be tax-exempt for the first two years it arises. The portion of
the Company's taxable income that is not attributable to approved
enterprise investments is taxed at a rate of 34% in 2005 (regular
"Company Tax"). The regular Company Tax rate is to be gradually
reduced to 25% until 2010.
The tax benefits are also conditioned upon fulfillment of the
requirements stipulated by the Investments Law and the regulations
promulgated thereunder, as well as the criteria set forth in the
certificates of approval. In the event of a failure by the Company to
comply with these conditions, the tax benefits could be canceled, in
whole or in part, and the Company would be required to refund the
amount of the canceled benefits, plus interest and certain inflation
adjustments. In management's opinion, the Company has been in
compliance with the conditions through the approval date of the
financial statements. See also Notes 5B and 11A(8).
F - 43
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 17 - INCOME TAXES (cont.)
B. COMPONENTS OF DEFERRED TAX ASSET/LIABILITY
The following is a summary of the components of the deferred tax
benefit and liability reflected on the balance sheets as of the
respective dates:
As of December 31,
------------------------
2005 2004
--------- ---------
DEFERRED TAX BENEFIT - CURRENT
Accrued vacation pay $ 464 $ 702
Other 109 68
--------- ---------
573 770
Valuation allowance (573) (770)
--------- ---------
Total current deferred tax benefit $ -- $ --
========= =========
NET DEFERRED TAX BENEFIT - LONG-TERM
Deferred tax assets -
Net operating loss carryforwards $ 165,000 $ 112,147
Research and development 2,427 3,213
Liability for employee rights upon severance 957 918
--------- ---------
168,384 116,278
Valuation allowance (118,321) (75,613)
--------- ---------
50,063 40,665
Deferred tax liability - depreciation and amortization (50,063) (40,665)
--------- ---------
Total net long-term deferred tax benefit $ -- $ --
========= =========
C. EFFECTIVE INCOME TAX RATES
The reconciliation of the statutory tax rate to the Company's
effective tax rate is as follows:
Year ended December 31,
------------------------
2005 2004 2003
---- ---- ----
Israeli statutory rate (34)% (35)% (36)%
Reduced tax rate for approved enterprise 14 15 16
Tax benefits for which deferred taxes
were not recorded 21 23 23
Permanent differences and other, net (1) (3) (3)
--- --- ---
--% --% --%
=== === ===
D. NET OPERATING LOSS CARRYFORWARD
As of December 31, 2005, the Company had net operating loss
carryforwards for tax purposes of approximately $825,000, which may be
carried forward for an unlimited period of time.
E. FINAL TAX ASSESSMENTS
The Company possesses final tax assessments under agreement through
the year 1998. In addition, the tax assessments for the years
1999-2001 are deemed final.
F - 44
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 18 - FINANCIAL INSTRUMENTS
A financial instrument is defined as cash, evidence of an ownership
interest in an entity, or a contract that imposes on one entity a
contractual obligation either to deliver or receive cash or another
financial instrument to or from a second entity. Examples of financial
instruments include cash and cash equivalents, trade accounts receivable,
loans, investments, trade accounts payable, accrued expenses, options and
forward contracts.
The Company makes certain disclosures with regard to financial instruments,
including derivatives. These disclosures include, among other matters, the
nature and terms of derivative transactions, information about significant
concentrations of credit risk, and the fair value of financial assets and
liabilities.
See Note 20D for disclosure related to the Company's derivatives financial
instruments in accordance with U.S. GAAP.
A. HEDGING ACTIVITIES
The Company, from time to time, enters into foreign currency
derivatives to hedge its foreign currency exposure to equipment
purchase commitments and other firm commitments denominated in foreign
currency (primarily Japanese Yen and Euro). In that regard, the
Company generally uses foreign currency forward contracts and options
(zero-cost cylinder) as hedging instruments for foreign currency
exposure. Accordingly, if the hedge is determined to be effective all
changes in value attributed to spot rate fluctuations as well as the
premium of forward contracts and the time value of options at
inception are deferred until the hedged item is recognized (i.e.,
receipt of the equipment). The time value of options at inception is
amortized on a straight-line basis.
In addition, the Company, from time to time, enters into agreements to
hedge variable interest rate exposure on long-term loans (see Note 8).
In order to hedge the cash flow related to this exposure, the Company
uses various types of derivative contracts, consisting primarily of
interest rate caps, floors and collars. If the hedge is determined to
be effective, the changes in the intrinsic value of the derivative
contracts are deferred and recognized in results of operations as
interest payments become due. The time value of options at inception
is recognized in the results of operations on a straight-line basis.
When the related debt is issued in connection with the acquisition of
assets not yet placed into operations, interest costs and gains and
losses on the derivative contracts are capitalized to the related
asset.
The Company does not hold or issue derivative financial instruments
for non-hedging purposes.
F - 45
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 18 - FINANCIAL INSTRUMENTS (cont.)
B. CREDIT RISK OF FINANCIAL INSTRUMENTS, INCLUDING DERIVATIVES
The face or contract amounts of derivatives do not represent amounts
exchanged by the parties and, accordingly, are not a measure of the
exposure of the Company through its use of derivatives.
The Company is exposed to credit-related losses in respect of
derivative financial instruments in a manner similar to the credit
risk involved in the realization or collection of other types of
assets. In management's estimation, due to the fact that derivative
financial instrument transactions are entered into solely with
financial institution counterparties, it is not expected that such
counterparties will fail to meet their obligations. Substantially all
remaining financial instruments held by the Company are due from
governmental entities and, accordingly, the Company's credit risk in
respect thereof is negligible.
C. PRESENTATION OF HEDGING ACTIVITIES IN THE FINANCIAL STATEMENTS
(1) As of December 31, 2005 and 2004, there were no outstanding
foreign exchange agreements (options) to hedge exposure related
to the purchase of machinery and equipment. During 2005, the
Company did not enter into foreign exchange agreements (options)
and accordingly there were no results of such agreements during
that year. The loss resulted from these agreements in 2004 was
immaterial. The agreements resulted in 2003 in a gain of $2,357
of which $1,663 was capitalized to fixed assets.
(2) As of December 31, 2005 and 2004, the Company had outstanding
agreements to hedge interest rate exposure on loans drawn down
under the Facility Agreement, the aggregate amount of which was
$292,000, all of which is attributable to Fab 2. These agreements
resulted in 2005 and 2004 in a loss of $1,756 and $5,629,
respectively, and in 2003 in a loss of $5,335, out of which
$2,547 was capitalized to property and equipment.
D. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments,
excluding the Company's agreements to hedge interest rate exposure on
long-term loans, did not materially differ from their respective
carrying amounts as of December 31, 2005 and 2004. The fair value of
the interest rate hedging transactions as of December 31, 2005 would
have resulted in an unrealized capitalizable gain of $1,767 (as of
December 31, 2004 - an unrealized capitalizable loss of $2,406).
F - 46
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 19 - RELATED PARTIES BALANCES AND TRANSACTIONS
A. BALANCES
As of December 31,
-------------------
2005 2004
------- -------
Trade accounts receivable $ 5,309 $ 9,054
======= =======
Current liabilities $ 188 $ 12
======= =======
Convertible debenture $25,493 $ --
======= =======
Long-term liability in respect of customers' advances $37,785 $40,514
======= =======
Other long-term liabilities $ 1,102 $ 166
======= =======
B. TRANSACTIONS
Year ended December 31,
---------------------------------
2005 2004 2003
-------- -------- -------
Sales $ 33,456 $ 37,521 $13,282
======== ======== =======
Management fees $ 120 $ 120 $ 240
======== ======== =======
Expenses paid $ 47 $ 60 $ 99
======== ======== =======
Royalties received - Note 11E(2) $ -- $ 875 $ 225
======== ======== =======
Application of customer advances
towards purchases $ -- $ 445 $ 870
======== ======== =======
Equity conversion of customer advances -
Note 11A(5) $ 1,794 $ 539 $ --
======== ======== =======
Expense reimbursements received $ -- $ -- $ 282
======== ======== =======
Conversion of customer advances into
Long-term loans - Note 11A(5) $ 936 $ 166 $ --
======== ======== =======
C. For commitments, contingencies and other transactions relating to Fab
2 Wafer Partner and Equity Investor agreements - see Note 11A.
F - 47
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP
With regard to the Company's financial statements, the material differences
between GAAP in Israel and in the U.S. relate to the following. See H below
for the presentation of the Company's balance sheets as of December 31,
2005 and 2004 in accordance with U.S. GAAP.
A. RECENT ACCOUNTING PRONOUNCEMENTS BY THE FASB
(1) SFAS NO. 151 - INVENTORY COSTS, AN AMENDMENT OF ARB NO. 43,
CHAPTER 4 - In November 2004, the FASB issued SFAS No. 151,
"INVENTORY COSTS, AN AMENDMENT OF ARB NO. 43, CHAPTER 4". SFAS
No. 151 amends the guidance in ARB 43, Chapter 4, "Inventory
Pricing", which provides guidance on the allocation of certain
costs to inventory. SFAS 151 clarifies that abnormal amounts of
idle facility expense, freight, handling costs, and wasted
material (spoilage) should be recognized as current-period
charges. In addition, SFAS 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the
normal capacity of the production facilities. The provisions of
this statement are effective for inventory costs incurred during
fiscal years beginning after June 2005. The provisions of this
statement shall be applied prospectively. This Standard is not
expected to have a material effect on the Company's financial
position or results of operations.
(2) SFAS NO. 123 (REVISED 2004) "SHARE BASED PAYMENTS" - In December
2004, the FASB issued SFAS No. 123 (revised 2004) "SHARE BASED
PAYMENTS" ("SFAS 123(R)"). This Statement is a revision of FASB
Statement No. 123, "Accounting for Stock-Based Compensation",
which supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees" and its authoritative interpretations.
SFAS 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments
for goods or services; focuses primarily on accounting for
transactions in which an entity obtains employee and directors
services in share-based payment transactions; and does not change
the accounting guidance for share-based payment transactions with
parties other than employees.
SFAS 123(R) eliminates the alternative to use APB 25's intrinsic
value method of accounting that was provided in SFAS 123 as
originally issued and requires to measure the cost of employee
services received in exchange for an award of equity instruments
based on the grant-date fair value of the award. The
fair-value-based method in this Statement is similar to the
fair-value-based method in SFAS 123 in most respects. The costs
associated with the awards will be recognized over the period
during which an employee is required to provide service in
exchange for the award - the requisite service period (usually
the vesting period).
The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models
adjusted for the unique characteristics of those instruments
(unless observable market prices for the same or similar
instruments are available). If an equity award is modified after
the grant date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the
modified award over the fair value of the original award
immediately before the modification.
F - 48
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
A. RECENT ACCOUNTING PRONOUNCEMENTS BY THE FASB (cont.)
(2) SFAS NO. 123 (REVISED 2004) "SHARE BASED PAYMENTS" (cont.)
In The provisions of SFAS 123(R) apply to all awards to be
granted by the Company on or after January 1, 2006 and to awards
modified, repurchased, or cancelled after that date. When
initially applying the provisions of SFAS 123(R), in the first
quarter of 2006, the Company will be required to elect between
using either the "modified prospective method" or the "modified
retrospective method". Under the modified prospective method, the
Company is required to recognize compensation cost for all awards
granted after the adoption of SFAS 123(R) and for the unvested
portion of previously granted awards that are outstanding on that
date. Under the modified retrospective method, the Company is
required to restate its previously issued financial statements to
recognize the amounts previously calculated and reported on a pro
forma basis, as if the original provisions of SFAS 123(R) had
been adopted. Under both methods, it is permitted to use either a
straight line or an accelerated method to amortize the cost as an
expense for awards with graded vesting.
Management has commenced identifying the potential future impact
of applying the provisions of SFAS 123(R), including each of its
proposed transition methods. Based on the outstanding options as
of December 31, 2005, the total compensation to be amortized in
the years 2006-2009 is expected to be approximately $4,200.
(3) SFAS 153, EXCHANGE OF NON-MONETARY ASSETS - In December 2004, the
FASB issued SFAS No. 153, "EXCHANGES OF NONMONETARY ASSETS AN
AMENDMENT OF APB NO. 29". This Statement amends Opinion 29 to
eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial
substance. The Statement specifies that a nonmonetary exchange
has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange.
This Statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005.
Retroactive application is not permitted. The adoption of this
Standard does not affect the Company's financial position or
results of operations.
(4) SFAS NO. 154, ACCOUNTING CHANGES AND ERROR CORRECTIONS - This
Statement, published in May 2005, replaces APB Opinion No. 20,
Accounting Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements, and changes
the requirements for the accounting for and reporting of a change
in accounting principles. This Statement applies to all voluntary
changes in accounting principles, and to changes required by an
accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions.
F - 49
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
A. RECENT ACCOUNTING PRONOUNCEMENTS BY THE FASB (cont.)
(4) SFAS NO. 154, ACCOUNTING CHANGES AND ERROR CORRECTIONS (cont.)
Opinion 20 previously required that most voluntary changes in
accounting principles be recognized by including the cumulative
effect of changing to the new accounting principles in the net
income of the period of the change. This Statement requires
retrospective application to prior periods' financial statements
of changes in accounting principles, unless it is impracticable
to determine the specific effects or the cumulative effect of the
change. The Statement also provides guidance for cases in which
it is impracticable to determine the period-specific effects of
an accounting change on one or more individual prior periods
presented, and/or for cases in which it is impracticable to
determine the cumulative effect of applying a change in
accounting principles to all prior periods.
This Statement defines RETROSPECTIVE APPLICATION as (i) the
application of a different accounting principle to prior
accounting periods as if that principle had always been used, or
(ii) as the adjustment of previously issued financial statements
to reflect a change in the reporting entity. This Statement also
redefines RESTATEMENT as the revisiting of previously issued
financial statements to reflect the correction of an error.
This Statement also requires that a change in depreciation,
amortization, or depletion method for long-lived, non-financial
assets, be accounted for as a change in accounting estimate
effected by a change in accounting principles. This Statement
carries forward without change the guidance in Opinion 20 for
reporting the correction of an error in previously issued
financial statements and a change in accounting estimate. This
Statement also carries forward the guidance in Opinion 20
requiring justification of a change in accounting principles on
the basis of preferability.
The provisions of this Statement are effective for accounting
changes and corrections of errors made during fiscal years
beginning after December 15, 2005. The adoption of this Standard
is not expected to have a material effect on the Company's
financial position or results of operations.
B. PRESENTATION OF DESIGNATED CASH AND SHORT-TERM AND LONG-TERM
INTEREST-BEARING DEPOSITS
In accordance with U.S. GAAP, the Company's designated cash,
short-term and long-term interest-bearing deposits should be excluded
from current assets and long-term investments and presented separately
as a non-current asset. Accordingly, as of December 31, 2005, $31,661
was reclassified from current assets to a long-term asset (as of
December 31, 2004, $53,793 and $5,134 were reclassified, respectively,
from current assets and long-term investments to a long-term asset).
C. PRESENTATION OF NET LONG-TERM LIABILITIES IN RESPECT OF EMPLOYEES
Under U.S. GAAP, assets and liabilities relating to severance
arrangements are to be presented separately and are not to be offset,
while according to Israeli GAAP such an offset is required.
Accordingly, as of December 31, 2005 an amount of $13,658 was
reclassified from other long-term liabilities to long-term investments
(as of December 31, 2004 - $16,350).
F - 50
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
D. HEDGING ACTIVITIES IN ACCORDANCE WITH U.S. GAAP (SFAS 133)
(1) In 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and the related
statements and interpretations thereon (collectively, "SFAS
133"). A derivative is typically defined as an instrument whose
value is derived from an underlying instrument, index or rate,
has a notional amount, requires no or little initial investment
and can be net settled.
SFAS 133 requires that all derivatives be recorded in the
financial statements at their fair value at the date of the
financial statements. The changes in the fair value of the
derivatives are charged to the statement of operations or to
other comprehensive income, as appropriate in the circumstances.
The Company's derivatives consist mainly of foreign currency
forward transactions and options and interest rate instruments
(collars).
(2) The Company uses foreign exchange agreements (forward contracts
and options) to hedge its foreign currency exposure in
anticipated equipment purchases denominated in foreign currency.
All foreign exchange agreements are with underlying terms that
match or approximate the hedged transactions and thus are highly
effective. The Company measures the effectiveness of the forward
contracts hedges based on forward rates. The Company assesses and
measures the effectiveness of the options hedge, at inception and
throughout the hedge, based on total changes in cash flows. All
changes in fair value are reported in other comprehensive income.
The amounts accumulated in other comprehensive income are
expensed to results of operations concurrent with the recognition
of depreciation expenses on the equipment. As of December 31,
2005 and 2004, the Company had no outstanding foreign exchange
agreements.
The Company uses interest rate collars with a knock-out and
knock-in features to hedge its Libor-based variable long-term
debt cash flow exposure. The knock-out feature was set above the
cap level and the knock-in feature was set below the floor level.
The Company determined that the probability that the cap will be
knocked-out is remote and thus expected that the hedge will be
highly effective. The Company assessed and measured the
effectiveness of the hedge, at inception and throughout the
hedge, based on total changes in cash flows of the collar, and
reported all changes in fair value in other comprehensive income.
Amounts presented in other comprehensive income are reclassified
to operations or capitalized to property and equipment, as
applicable (see Note 2L), as interest payment become due. For
outstanding contracts as of December 31, 2005 and 2004, see Note
18C(2).
(3) Following the commencement of operations of Fab 2 during the
third quarter of 2003, $6,641 of the aggregate comprehensive loss
as of June 30, 2003, which is attributable to property and
equipment, is amortized on a straight-line method over five
years, in correspondence to the economic useful lives of the
machinery and equipment.
F - 51
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
D. HEDGING ACTIVITIES IN ACCORDANCE WITH U.S. GAAP (SFAS 133) (cont.)
(4) Complying with SFAS 133 with respect to the Company's hedging
transactions as of December 31, 2005 would have resulted in: an
increase in other long-term investments in the amount of $1,767;
a decrease (for U.S. GAAP purposes only) in other comprehensive
loss for the year ended December 31, 2005 in the net amount of
$5,501; an accumulated other comprehensive loss component of
equity balance as of such date in the amount of $1,554; and in a
decrease of $3,291 in property and equipment, net as of December
31, 2005.
E. IMPLEMENTATION OF SFAS 123 AND SFAS 148
Had compensation cost for the Company's share option plans been
determined based on fair value at the grant dates for awards made
through December 31, 2005 in accordance with SFAS 123, as amended
by SFAS 148, the Company's pro forma loss and loss per share
would have been as follows (for further information with regard
to the Company's share option plans and the assumptions for
utilizing the Black-Scholes pricing model, see Note 13B(4)):
Year ended December 31,
---------------------------------------
2005 2004 2003
--------- --------- ---------
PRO FORMA LOSS
Loss for the year, as reported according to
U.S. GAAP (see I below) $(203,082) $(137,768) $(114,261)
Less - stock-based compensation determined
under APB 25 -- -- 27
Add - stock-based compensation
determined under SFAS 123 (4,229) (3,980) (8,437)
--------- --------- ---------
Pro forma loss $(207,311) $(141,748) $(122,671)
========= ========= =========
BASIC LOSS PER SHARE
As reported according to U.S.
GAAP (see K below) $ (3.06) $ (2.13) $ (2.45)
========= ========= =========
Pro forma $ (3.12) $ (2.19) $ (2.63)
========= ========= =========
F - 52
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
F. SALE OF SECURITIES
Under Accounting Principles Board Opinion No. 14 ("APB 14"), the
proceeds from the sale of the securities described in Note 9 are to be
allocated to each of the securities issued based on their relative
fair value, while according to Israeli GAAP such treatment is not
required. Complying with APB 14, based on the average market value of
each of the securities issued in the first three days following their
issuance, would have resulted in an increase in shareholders' equity
as of December 31, 2005 and 2004 in the amount of $2,363 (net of $196
related issuance expenses), and a decrease in convertible debentures
as of such dates in the amount of $2,559. The effect of amortization
of the discount on the convertible debentures under U.S. GAAP for each
of the years ended December 31, 2005, 2004 and 2003 would have been
immaterial.
G. CONVERTIBLE DEBENTURES
Under U.S. GAAP (SFAS No. 133), an embedded conversion option should
be bifurcated and accounted for separately as a derivative instrument,
unless the specific requirements for equity classification of the
embedded conversion option, as stated in EITF 00-19, are met. EITF
00-19 provides that an equity classification is appropriate if the
settlement criteria set forth therein for such classification are met
and that the additional conditions necessary for equity
classification, set forth therein, are also met. EITF 00-19 also
allows for the equity classification of the embedded conversion option
in case the necessary additional conditions are not met, only if the
contract is a conventional convertible debt instrument. In accordance
with EITFs 00-19 and 05-2, a conventional convertible debt instrument
is an instrument that provides the holder with an option to convert
into a fixed number of shares or the equivalent amount of cash (at the
discretion of the issuer), and the ability to exercise that option is
based on the passage of time or a contingent event. Convertible debt
is not considered conventional when the number of shares the holder
converts into is not fixed and can vary based on a contingent future
event (other than "standard" antidilution provisions).
As detailed in Note 13H, the conversion price of the convertible
debenture issued by the Company in December 2005 is subject to
downward adjustment under certain circumstances; i.e. the number of
shares to be issued is not fixed. In addition, the criteria set forth
in EITF 00-19 for classification as equity are not met. Accordingly,
for purposes of U.S. GAAP, these convertible debentures are to be
accounted for under SFAS No. 133 and to be bifurcated with the
embedded conversion option treated as a liability.
Under Israeli GAAP, convertible debentures the future conversion of
which is probable as of the balance-sheet date, are presented as a
separate line-item between total liabilities and shareholders equity,
while according to U.S. GAAP such presentation is not allowed as
detailed above.
Accordingly, as of December 31, 2005 an amount of $25,493 was
reclassified from that separate line-item to convertible debentures
(under total long-term liabilities).
F - 53
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
H. Balance Sheets in Accordance with U.S. GAAP
AS OF DECEMBER 31, 2005 AS OF DECEMBER 31, 2004
------------------------------------- ---------------------------------------
U.S. AS PER AS PER AS PER AS PER
GAAP ISRAELI ADJUST- U.S. ISRAELI ADJUST- U.S.
REMARK GAAP MENTS GAAP GAAP MENTS GAAP
---- --------- -------- --------- --------- --------- ---------
A S S E T S
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 7,337 $ $ 7,337 $ 27,664 $ $ 27,664
DESIGNATED CASH AND SHORT-TERM INTEREST-BEARING DEPOSITS B 31,661 (31,661) -- 53,793 (53,793) --
TRADE ACCOUNTS RECEIVABLE:
RELATED PARTIES 5,309 5,309 9,054 9,054
OTHERS 11,467 11,467 10,232 10,232
OTHER RECEIVABLES 9,043 9,043 11,365 11,365
INVENTORIES 24,376 24,376 25,669 25,669
OTHER CURRENT ASSETS 1,048 1,048 1,818 1,818
--------- -------- --------- --------- --------- ---------
TOTAL CURRENT ASSETS 90,241 (31,661) 58,580 139,595 (53,793) 85,802
--------- -------- --------- --------- --------- ---------
LONG-TERM INVESTMENTS
LONG-TERM INTEREST-BEARING DEPOSITS
DESIGNATED FOR FAB 2 OPERATIONS B -- -- 5,134 (5,134) --
OTHER LONG-TERM INVESTMENT C, D -- 15,425 15,425 -- 16,350 16,350
--------- -------- --------- --------- --------- ---------
-- 15,425 15,425 5,134 11,216 16,350
--------- -------- --------- --------- --------- ---------
PROPERTY AND EQUIPMENT, NET D 510,645 (3,291) 507,354 609,296 (4,619) 604,677
--------- -------- --------- --------- --------- ---------
DESIGNATED CASH AND SHORT-TERM AND
LONG-TERM INTEREST-BEARING DEPOSITS B -- 31,661 31,661 -- 58,927 58,927
--------- -------- --------- --------- --------- ---------
OTHER ASSETS, NET:
TECHNOLOGY 61,441 61,441 76,950 76,950
OTHER F 16,359 (196) 16,163 16,533 (196) 16,337
--------- -------- --------- --------- --------- ---------
77,800 (196) 77,604 93,483 (196) 93,287
========= ======== ========= ========= ========= =========
TOTAL ASSETS $ 678,686 $ 11,938 $ 690,624 $ 847,508 $ 11,535 $ 859,043
========= ======== ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY 0 0
CURRENT LIABILITIES
CURRENT MATURITIES OF LONG-TERM DEBT $ 21,103 $ $ 21,103 $ -- $ $ --
CURRENT MATURITIES OF CONVERTIBLE DEBENTURES F 6,453 (640) 5,813 -- --
TRADE ACCOUNTS PAYABLE 59,741 59,741 65,326 65,326
OTHER CURRENT LIABILITIES 8,972 8,972 10,678 10,678
--------- -------- --------- --------- --------- ---------
TOTAL CURRENT LIABILITIES 96,269 (640) 95,629 76,004 -- 76,004
LONG-TERM DEBT 497,000 497,000 497,000 497,000
CONVERTIBLE DEBENTURES F, G 19,358 23,574 42,932 26,651 (2,559) 24,092
LONG-TERM LIABILITY IN RESPECT
OF CUSTOMERS' ADVANCES 59,621 59,621 64,428 64,428
OTHER LONG-TERM LIABILITIES C, D 11,012 13,658 24,670 15,445 18,756 34,201
--------- -------- --------- --------- --------- ---------
TOTAL LIABILITIES 683,260 36,592 719,852 679,528 16,197 695,725
--------- -------- --------- --------- --------- ---------
CONVERTIBLE DEBENTURES G 25,493 (25,493) -- -- -- --
--------- -------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY (DEFICIT)
ORDINARY SHARES, NIS 1.00 PAR VALUE - AUTHORIZED
500,000,000 AND 250,000,000 SHARES, RESPECTIVELY;
ISSUED 68,232,056 AND 66,999,796 SHARES, RESPECTIVELY 16,548 16,548 16,274 16,274
ADDITIONAL PAID-IN CAPITAL F 522,237 2,363 524,600 517,476 2,363 519,839
SHAREHOLDER RECEIVABLES (26) (26) (26) (26)
ACCUMULATED OTHER COMPREHENSIVE LOSS D -- (1,554) (1,554) -- (7,055) (7,055)
ACCUMULATED DEFICIT (559,754) 30 (559,724) (356,672) 30 (356,642)
--------- -------- --------- --------- --------- ---------
(20,995) 839 (20,156) 177,052 (4,662) 172,390
TREASURY STOCK, AT COST - 1,300,000 SHARES (9,072) (9,072) (9,072) (9,072)
--------- -------- --------- --------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (30,067) 839 (29,228) 167,980 (4,662) 163,318
========= ======== ========= ========= ========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 678,686 $ 11,938 $ 690,624 $ 847,508 $ 11,535 $ 859,043
========= ======== ========= ========= ========= =========
F - 54
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
I. STATEMENTS OF OPERATIONS IN ACCORDANCE WITH U.S. GAAP
Complying with SFAS 133 and SFAS 138 (D above) and APB 14 (F above)
would not have materially affected the results of operations for the
years ended December 31, 2005, 2004 and 2003.
J. COMPREHENSIVE INCOME (LOSS) IN ACCORDANCE WITH U.S. GAAP (SFAS 130)
Comprehensive income (loss) represents the change in shareholder's
equity during a reporting period from transactions and other events
and circumstances from non-owner sources. It includes all changes in
equity during a reporting period except those resulting from
investments by owners and distributions to owners. Other comprehensive
income (loss) represents gains and losses that under U.S. GAAP are
included in comprehensive income but excluded from net income.
Following are statements of comprehensive loss in accordance with U.S.
GAAP:
Year ended December 31,
--------------------------------------
2005 2004 2003
--------- --------- ---------
Loss for the year according to U.S. GAAP $(203,082) $(137,768) $(114,261)
Other comprehensive loss:
Amortization of unrealized
losses on derivatives 1,328 1,328 664
Unrealized gains on derivatives 4,173 7,514 1,276
--------- --------- ---------
Net comprehensive loss for the year $(197,581) $(128,926) $(112,321)
========= ========= =========
F - 55
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
K. LOSS PER SHARE DATA IN ACCORDANCE WITH U.S. GAAP (SFAS 128)
In accordance with U.S. GAAP (SFAS 128, including the implementation
of SFAS 133 and SFAS 138, and APB 14 as described above), the basic
and diluted loss per share would be:
Year ended December 31,
----------------------------
2005 2004 2003
------ ------ ------
Basic loss per share $(3.06) $(2.13) $(2.45)
====== ====== ======
Diluted loss per share $(3.06) $(2.13) $(2.45)
====== ====== ======
For the purpose of U.S. GAAP, the beneficial feature attributed to the
rights offering that retroactively adjusted loss per share under
Israeli GAAP, as described in Note 12C, was eliminated since such
accounting treatment is not allowed by U.S. GAAP.
The following tables provide a reconciliation of the numerators and
denominators of the basic and diluted per share computations for 2005,
2004 and 2003 in accordance with U.S. GAAP. The loss per share for
each year presented according to U.S. GAAP may differ from the
corresponding amount under Israeli GAAP due to different methods for
determining the weighted average number of ordinary shares outstanding
and the loss used to compute loss per share. According to Israeli
GAAP, the weighted average number of ordinary shares outstanding for
each year presented include retroactive effect from the beginning of
each year of shares issued upon exercise of share options and warrants
("Exercise") and upon conversion of convertible debentures
("Conversion"), outstanding at the beginning of each year and giving
effect to shares issuable from probable Exercise and from probable
Conversion. Israeli GAAP further provide that loss per ordinary share
is to be calculated based on loss for the year with the inclusion of
imputed interest income on the exercise price of options and warrants
exercised or of probable Exercise, and of financial expenses in
relation to converted debentures or on probable Conversion. According
to U.S. GAAP, the amount of shares underlying the options and warrants
is accounted for according to the treasury method, regardless of the
probability of the exercise of the options and warrants, and the
amount of shares underlying convertible debentures is accounted for by
application of the if-converted method. According to Israeli GAAP, the
loss to compute basic loss per share should include imputed interest
income on the exercise price of options and warrants exercised during
the year and of probable Exercise and probable Conversion, an
inclusion which is not allowed under U.S. GAAP.
F - 56
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
K. LOSS PER SHARE DATA IN ACCORDANCE WITH U.S. GAAP (SFAS 128) (cont.)
RECONCILIATION FOR 2005:
Year ended December 31, 2005
-----------------------------------
Shares
Loss (in thousands) Per-share
(numerator) (denominator) amount
--------- --------- ------
BASIC LOSS PER SHARE
Loss available to ordinary shareholders $(203,082) 66,371 $(3.06)
======
EFFECT OF DILUTIVE SECURITIES
Convertible debentures - -
Options and warrants - -
--------- ---------
DILUTED LOSS PER SHARE
Loss available to ordinary
shareholders after assumed conversions $(203,082) 66,371 $(3.06)
========= ========= ======
Options and warrants to purchase 28,437,207 Ordinary Shares at an
average exercise price of $4.23 per share were outstanding as of
December 31, 2005 but were not included in the computation of diluted
loss per share because their effect was anti-dilutive. The options and
warrants, which as of December 31, 2005 expire between January 2006
and November 2015 (weighted average remaining contractual life of 5.02
years), were still outstanding as of such date. Convertible
debentures, convertible into 25,872,523 Ordinary Shares, were
outstanding as of December 31, 2005 but were not included in the
computation of diluted loss per share since their effect is
anti-dilutive. Of that amount, 2,697,068 convertible debentures may be
converted into Ordinary Shares until December 31, 2008, and the
remaining 23,175,455 convertible debentures may be converted into
Ordinary Shares until December 2011.
RECONCILIATION FOR 2004:
Year ended December 31, 2004
-----------------------------------
Shares
Loss (in thousands) Per-share
(numerator) (denominator) amount
--------- --------- ------
BASIC LOSS PER SHARE
Loss available to ordinary shareholders $(137,768) 64,633 $(2.13)
======
EFFECT OF DILUTIVE SECURITIES
Convertible debentures -- --
Options and warrants -- --
--------- ---------
DILUTED LOSS PER SHARE
Loss available to ordinary
shareholders after assumed conversions $(137,768) 64,633 $(2.13)
========= ========= ======
Options and warrants to purchase 17,374,088 Ordinary Shares at an
average exercise price of $6.61 per share were outstanding as of
December 31, 2004 but were not included in the computation of diluted
loss per share because their effect was anti-dilutive. The options and
warrants, which as of December 31, 2004 expire between January 2005
and December 2014 (weighted average remaining contractual life of 5.26
years), were still outstanding as of such date. Convertible
debentures, convertible into 2,697,068 Ordinary Shares, were
outstanding as of December 31, 2004 but were not included in the
computation of diluted loss per share since their effect is
anti-dilutive. The convertible debentures may be converted until
December 31, 2008 into Ordinary Shares.
F - 57
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and per share data)
NOTE 20 - MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP (cont.)
K. LOSS PER SHARE DATA IN ACCORDANCE WITH U.S. GAAP (SFAS 128) (cont.)
RECONCILIATION FOR 2003:
Year ended December 31, 2003
-----------------------------------
Shares
Loss (in thousands) Per-share
(numerator) (denominator) amount
--------- --------- ------
BASIC LOSS PER SHARE
Loss available to ordinary shareholders $(114,261) 46,710 $(2.45)
======
EFFECT OF DILUTIVE SECURITIES
Convertible debentures -- --
Options and warrants -- --
--------- ---------
DILUTED LOSS PER SHARE
Loss available to ordinary
shareholders after assumed conversions $(114,261) 46,710 $(2.45)
========= ========= ======
Options and warrants to purchase 14,003,621 Ordinary Shares at an
average exercise price of $7.87 per share were outstanding as of
December 31, 2003 but were not included in the computation of diluted
loss per share because their effect was anti-dilutive. The options and
warrants, which as of December 31, 2003 expire between April 2005 and
December 2013 (weighted average remaining contractual life of 5.02
years), were still outstanding as of such date. Convertible
debentures, convertible into 2,697,068 Ordinary Shares, were
outstanding as of December 31, 2003 but were not included in the
computation of diluted loss per share since their effect is
anti-dilutive. The convertible debentures may be converted until
December 31, 2008 into Ordinary Shares.
L. STATEMENTS OF CASH FLOWS IN ACCORDANCE WITH U.S. GAAP (SFAS 95)
Complying with SFAS 95 would not have materially affected the cash
flows of the Company for each of the years ended December 31, 2005,
2004 and 2003.
F - 58
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all the requirements for filing
on Form 20-F and has duly caused this Annual Report to be signed on its behalf
by the undersigned, thereunto duly authorized on this 13 day of July, 2006.
TOWER SEMICONDUCTOR LTD.
BY: /s/ Russell C. Ellwanger
----------------------------
Russell C. Ellwanger
Chief Executive Officer
98
EXHIBIT 4.47
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("THE SECURITIES
ACT") AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT COVERING THIS
WARRANT AND/OR SUCH SECURITIES, OR THIS WARRANT OR SUCH SECURITIES ARE SOLD ON
THE TEL-AVIV STOCK EXCHANGE IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES
ACT, OR THE HOLDER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THE WARRANT
AND/OR SUCH SECURITIES SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE,
TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT AND THE QUALIFICATION
REQUIREMENTS UNDER APPLICABLE STATE OR FOREIGN LAW.
WARRANT TO PURCHASE ORDINARY SHARES
Tower Semiconductor Ltd., an Israeli company ("THE COMPANY"), whose shares are
currently traded on Nasdaq and the Tel-Aviv Stock Exchange ("TASE") hereby
grants to BANK HAPOALIM B.M. ("THE HOLDER"), the right to purchase from the
Company the number of Ordinary Shares of the Company, nominal value NIS. 1.00
("THE ORDINARY SHARES") specified below, subject to the terms and conditions set
forth below, effective July 24, 2005 ("THE EFFECTIVE DATE"), the date upon which
Bank Hapoalim B.M. and Bank Leumi Le-Israel B.M. ("THE BANKS") entered into the
Ninth Amendment ("THE NINTH AMENDMENT") to the Facility Agreement dated January
18, 2001, as amended ("THE AGREEMENT"), by and among the Company and the Banks.
1. NUMBER OF ORDINARY SHARES AVAILABLE FOR PURCHASE
This Warrant may be exercised to purchase 4,132,232 (four million one
hundred and thirty-two thousand, two hundred and thirty-two) of the
Company's Ordinary Shares, with each Ordinary Share having a value
calculated as set forth in Section 2 below, subject to adjustment under
Section 7 of this Warrant ("THE WARRANT SHARES"), and all references to
Warrant Shares or Ordinary Shares "purchaseable hereunder" shall refer to
all 4,132,232 (four million one hundred and thirty-two thousand, two
hundred and thirty-two) Warrant Shares, as such number may be adjusted
under Section 7 of this Warrant, less Warrant Shares already purchased
through exercise of this Warrant.
2. EXERCISE PRICE
The exercise price for each Warrant Share purchasable hereunder shall be,
subject to adjustment under Section 7 of this Warrant, US $1.21 (one United
States Dollar and twenty-one US cents) per share ("THE WARRANT PRICE").
2A. EXERCISABILITY; TERM
This Warrant may be exercised: (a) with respect to 2,066,116 (two million
and sixty-six thousand, one hundred and sixteen) Warrant Shares, during the
period beginning from the Ninth Amendment Closing Date (as defined in the
Ninth Amendment) and ending on the date which is 5 (five) years following
the Ninth Amendment Closing Date ("THE FIRST TRANCHE EXPIRATION DATE"); and
(b) with respect to 2,066,116 (two million and sixty-six thousand, one
hundred and sixteen) Warrant Shares, during the period beginning from the
date of signature by the Company and the Banks of an agreement by the Banks
to reschedule the repayment dates of the Interest Payment Loans (as defined
in the Ninth Amendment) ("THE SECOND TRANCHE EXERCISABILITY DATE") and
ending on the date which is 5 (five) years following the Second Tranche
Exercisability Date ("THE SECOND TRANCHE EXPIRATION DATE"). The "First
Tranche Expiration Date" and the "Second Tranche Expiration Date" are
sometimes hereinafter collectively referred to as "THE EXPIRATION DATE".
3. EXERCISE OF WARRANT
This Warrant may be exercised in whole or in part, on one or more occasions
during its term, provided that only up to 2,066,116 (two million and
sixty-six thousand, one hundred and sixteen) Warrant Shares may be
exercised prior to the Second Tranche Exercisability Date and, provided
further, that if the Second Tranche Exercisability Date does not occur, no
more than 2,066,116 (two million and sixty-six thousand, one hundred and
sixteen) Warrant Shares will be exercisable during the term of this
Warrant. The Warrant may be exercised by the surrender of the Warrant to
the Company at its principal office together with the Notice of Exercise
annexed hereto duly completed and executed on behalf of the Holder.
a. EXERCISE FOR CASH
To exercise for cash, the Notice of Exercise must be accompanied by
payment in full of the amount of the aggregate purchase price of the
Warrant Shares being purchased upon such exercise in immediately
available funds.
b. NET EXERCISE
In lieu of the payment method set forth in Section 3(a) above, the
Holder may elect to exchange the Warrant for a number of Warrant
Shares equal to the increase in value of the Warrant Shares otherwise
purchasable hereunder on the date of exchange. If the Holder elects to
exchange this Warrant as provided in this Section 3(b), the Holder
shall tender to the Company the Warrant along with the Notice of
Exercise and the Company shall issue to the Holder the number of
Warrant Shares computed using the following formula:
Y (A - B)
X = ---------
A
WHERE:
X = the number of Warrant Shares to be issued to the Holder;
Y = the number of Warrant Shares purchasable under this Warrant
or, if only a portion of the Warrant is being exercised, the
number of Warrant Shares being exercised under the Warrant
(as adjusted to the date of such calculation);
A = the Fair Market Value (as defined below) of one (1) Ordinary
Share; and
B = Warrant Price (for the removal of doubt, as adjusted to the
date of such calculation).
"FAIR MARKET VALUE" of an Ordinary Share shall mean:
(i) if the Ordinary Shares are listed on a national securities
exchange or are quoted on the Nasdaq National Market
(NASDAQ/NMS), then the closing or last sale price, respectively,
reported on the last trading day immediately preceding the
exercise date, as reported by Nasdaq or the principal national
securities exchange upon which the Ordinary Shares are listed or
traded; provided that, if the Ordinary Shares are listed on
Nasdaq and another national securities exchange, the applicable
price shall be the price reported by Nasdaq;
(ii) if the Ordinary Shares are not listed on a national securities
exchange or quoted on NASDAQ/NMS, but are traded in the
over-the-counter market, then the mean of the closing bid and
asked prices as reported on the last trading day immediately
preceding the exercise date; and
(iii) if the Ordinary Shares are not publicly traded, then as
determined by the Company's Board of Directors in good faith.
The exchange of this Warrant as provided in this Section 3(b) may not
be utilized on more than 9 (nine) occasions.
c. ISSUANCE OF SHARES ON EXERCISE
The Company agrees that the Warrant Shares so purchased shall be
issued as soon as practicable thereafter, and that the Holder shall be
deemed the record owner of such Warrant Shares as of and from the
close of business on the date on which this Warrant shall be
surrendered, together with payment in full as required pursuant to
subsection a. above or when surrendered for exchange pursuant to
subsection b. above. In the event of a partial exercise, the Company
shall concurrently issue to the Holder a replacement Warrant on the
same terms and conditions as this Warrant, but representing the number
of Warrant Shares remaining after such partial exercise.
4. FRACTIONAL INTEREST
No fractional shares will be issued in connection with any exercise
hereunder, but in lieu of such fractional shares, the Company shall make a
cash payment therefor upon the basis of the current market price of such
shares then in effect as determined in good faith by the Company's Board of
Directors.
5. WARRANT CONFERS NO RIGHTS OF SHAREHOLDER
Except as otherwise set forth in this Warrant, the Holder shall not have
any rights as a shareholder of the Company with regard to the Warrant
Shares prior to actual exercise resulting in the purchase of any Warrant
Shares.
6. INVESTMENT REPRESENTATION
Neither this Warrant nor the Warrant Shares issuable upon the exercise of
this Warrant have been registered under the Securities Act, or any other
securities laws. The Holder acknowledges by acceptance of the Warrant that
(a) it has acquired this Warrant for investment and not with a view to
distribution; (b) it has either a pre-existing personal or business
relationship with the Company, or its executive officers, or by reason of
its business or financial experience, it has the capacity to protect its
own interests in connection with the transaction; and (c) it is an
accredited investor as that term is defined in Regulation D promulgated
under the Securities Act. The Holder agrees that any Warrant Shares
issuable upon exercise of this Warrant will be acquired for investment and
not with a view to distribution and, unless the Warrant Shares are
theretofore registered, including following the exercise of the Holder of
its registration rights under Section 9 below, such Warrant Shares will not
be registered under the Securities Act and applicable state securities laws
and that such Warrant Shares may have to be held indefinitely unless they
are subsequently registered or qualified under the Securities Act and
applicable state securities laws, or based on an opinion of counsel
reasonably satisfactory to the Company, an exemption from such registration
and qualification is available. The Holder, by acceptance hereof, consents
to the placement of legend(s) on all securities hereunder as to the
applicable restrictions on transferability in order to ensure compliance
with the Securities Act, unless in the reasonable opinion of counsel for
the Company such legend is not required in order to ensure compliance with
the Securities Act. The Company may issue stop transfer instructions to its
transfer agent in connection with such restrictions.
7. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES
The number and kind of securities purchasable initially upon the exercise
of this Warrant and the Warrant Price shall be subject to adjustment from
time to time upon the occurrence of certain events, as follows:
a. ADJUSTMENT FOR SHARES SPLITS AND COMBINATIONS
If the Company at any time or from time to time effects a subdivision
of the outstanding Ordinary Shares, the number of Warrant Shares
purchaseable hereunder immediately before the subdivision shall be
proportionately increased, and conversely, if the Company at any time
or from time to time combines the outstanding Ordinary Shares, the
number of Warrant Shares purchaseable hereunder immediately before the
combination shall be proportionately decreased. Any adjustment under
this Section 7(a) shall become effective at the close of business on
the date the subdivision or combination becomes effective.
b. ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS
In the event the Company at any time, or from time to time, makes or
fixes a record date for the determination of holders of Ordinary
Shares entitled to receive a dividend or other distribution payable in
additional shares of Ordinary Shares, then and in each such event, the
number of Ordinary Shares purchaseable hereunder shall be increased as
of the time of such issuance or, in the event such a record date is
fixed, as of the close of business on such record date, by multiplying
the number of Ordinary Shares issuable upon exercise of this Warrant
by a fraction: (i) the numerator of which shall be the total number of
Ordinary Shares issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date plus the
number of Ordinary Shares issuable in payment of such dividend or
distribution; and (ii) the denominator of which is the total number of
Ordinary Shares issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date;
provided, however, that if such record date is fixed and such dividend
is not fully paid or if such distribution is not fully made on the
date fixed thereof, the number of Ordinary Shares purchaseable
hereunder shall be recomputed accordingly as of the close of business
on such record date and thereafter the number of Ordinary Shares
purchaseable hereunder shall be adjusted pursuant to this Section 7(b)
as of the time of the actual payment of such dividends or
distribution.
c. ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS
In the event the Company at any time or from time to time makes, or
fixes a record date for the determination of holders of Ordinary
Shares entitled to receive a dividend or other distribution payable in
securities of the Company other than Ordinary Shares, then in each
such event provision shall be made so that the Holder shall receive
upon exercise of this Warrant, in addition to the number of Ordinary
Shares receivable thereupon, the amount of securities of the Company
that the Holder would have received had this Warrant been exercised to
purchase all Ordinary Shares purchaseable hereunder immediately prior
to such event (or the record date for such event) and had the Holder
thereafter, during the period from the date of such event to and
including the date of exercise, retained such securities receivable by
it as aforesaid during such period, subject to all other adjustments
called for during such period under this Section and the Company's
Articles of Association with respect to the rights of the Holder.
d. ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION
If the Ordinary Shares purchaseable hereunder are changed into the
same or a different number of shares of any class or classes of
shares, whether by recapitalization, reclassification or otherwise
(other than a subdivision or combination of shares or shares dividend
or a reorganization, merger, consolidation or sale of assets, provided
for elsewhere in this Section), then and in any such event the Holder
shall have the right thereafter to exercise this Warrant into the kind
and amount of shares and other securities receivable upon such
recapitalization, reclassification or other change, by holders of the
number of shares of Ordinary Shares for which this Warrant might have
been exercised with respect to all Ordinary Shares purchaseable
hereunder immediately prior to such recapitalization, reclassification
or change, all subject to further adjustment as provided herein and
under the Company's Articles of Association.
e. REORGANIZATION, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS
If at any time or from time to time there is a capital reorganization
of the Ordinary Shares (other than a recapitalization, subdivision,
combination, reclassification or exchange of shares as provided for
elsewhere in this subsection), or a merger or consolidation of the
Company with or into another corporation, or the sale of all or
substantially all of the Company's properties and assets to any other
person, then, as a part of such reorganization, merger, consolidation
or sale, provision shall be made so that the Holder shall thereafter
be entitled to receive upon exercise of this Warrant, the number of
shares or other securities or property of the Company, or of the
successor corporation resulting from such merger or consolidation or
sale, to which a holder of Ordinary Shares deliverable upon conversion
would have been entitled on such capital reorganization, merger,
consolidation or sale. In any such case (except to the extent any cash
or property is received in such transaction), appropriate adjustment
shall be made in the application of the provisions of this subsection
and the Company's Articles of Association with respect to the rights
of the Holder after the reorganization, merger, consolidation or sale
to the end that the provisions of this subsection and the Company's
Articles of Association (including adjustment of the number of
Ordinary Shares purchaseable hereunder) shall be applicable after that
event and be as nearly equivalent to the provisions hereof as may be
practicable.
f. OTHER TRANSACTIONS
In the event that the Company shall issue shares to its shareholders
as a result of a split-off, spin-off or the like, then the Company
shall only complete such issuance or other action if, as part thereof,
allowance is made to protect the economic interest of the Holder
either by increasing the number of Warrant Shares or by procuring that
the Holder shall be entitled, on economically proportionate terms, to
acquire additional shares of the spun-off or split-off entities.
g. GENERAL PROTECTION
The Company will not, by amendment of its Articles of Association or
other charter document or through any reorganization,
recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder, or impair the
economic interest of the Holder, but will at all times in good faith
assist in the carrying out of all the provisions hereof and in taking
of all such actions and making all such adjustments as may be
necessary or appropriate in order to protect the rights and the
economic interests of the Holder against impairment.
h. NOTICE OF CAPITAL CHANGES
If at any time the Company shall offer for subscription pro rata to
the holders of Ordinary Shares any additional shares of any class,
other rights or any equity security of any kind, or there shall be any
capital reorganization or reclassification of the capital shares of
the Company, or consolidation or merger of the Company with, or sale
of all or substantially all of its assets to another company or there
shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Company, or other transaction described in this
Section 7, then, in any one or more of the said cases, the Company
shall give the Holder written notice, by registered or certified mail,
postage prepaid, of the date on which: (i) a record shall be taken for
such subscription rights; or (ii) such reorganization,
reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up shall take place, as the case may be. Such
notice shall also specify the date as of which the holders of record
of Ordinary Shares shall participate in such subscription rights, or
shall be entitled to exchange their Ordinary Shares for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up,
as the case may be. Such written notice shall be given at least 14
(fourteen) days prior to the action in question and not less than 14
(fourteen) days prior to the record date in respect thereto.
i. ADJUSTMENT OF WARRANT PRICE
Upon each adjustment in the number of Ordinary Shares purchasable
hereunder, the Warrant Price shall be proportionately increased or
decreased, as the case may be, in a manner that is the inverse of the
manner in which the number of Ordinary Shares purchasable hereunder
shall be adjusted.
j. NOTICE OF ADJUSTMENTS
Whenever the Warrant Price or the number of Ordinary Shares
purchasable hereunder shall be adjusted pursuant to Section 7 hereof,
the Company shall prepare a certificate signed by the chief financial
officer of the Company setting forth, in reasonable detail, the event
requiring the adjustment, the amount of the adjustment, the method by
which such adjustment was calculated, and the Warrant Price and the
number of Ordinary Shares purchasable hereunder after giving effect to
such adjustment, and shall cause copies of such certificate to be
mailed (by first class mail, postage prepaid) to the Holder.
k. ASSUMED EXERCISABILITY
For the avoidance of doubt, the fact that an adjustment event
described in this Section 7 occurs prior to the time this Warrant is
fully exercisable by the Holder shall not be taken into account and,
for purposes of determining any adjustment or other actions to be
taken by the Company pursuant to this Section 7, it shall be assumed
that this Warrant is fully exercisable as of the Effective Date.
8. TRANSFER OF THIS WARRANT OR SHARES
a. With respect to any offer, sale or other disposition of this Warrant
or securities purchaseable hereunder, the Holder will give written
notice to the Company prior thereto, describing briefly the manner
thereof, together with, if reasonably requested by the Company, a
written opinion of such Holder's counsel, to the effect that such
offer, sale or other distribution may be effected without registration
or qualification (under any federal or state law then in effect);
provided, however, that no legal opinion shall be required if the
transfer will be effected on TASE and the Holder represents to the
Company that the applicable conditions under Regulation S under the
Securities Act have been satisfied. If the proposed transfer is
intended to rely on a Regulation D exemption under the Securities Act,
such opinion letter and all such transferees must warrant and
represent that they are an "accredited" investor as that term is
defined under Regulation D of the Securities Act. Promptly, as
practicable, upon receiving such written notice and opinion and
warranties and representations, if so requested, the Company, as
promptly as practicable, shall deliver to the Holder one or more
replacement Warrant certificates on the same terms and conditions as
this Warrant for delivery to the transferees. Each Warrant thus
transferred and each certificate representing the securities thus
transferred shall bear legend(s) as to the applicable restrictions on
transferability in order to ensure compliance with the Securities Act,
unless in the opinion of counsel for the Company such legend is not
required in order to ensure compliance with the Securities Act. The
Company may issue stop transfer instructions to its transfer agent in
connection with such restrictions. Any provision of this Warrant to
the contrary notwithstanding, the Holder may not offer, sell or
otherwise dispose of this Warrant to any third party, other than: (i)
to a wholly owned subsidiary of Bank Hapoalim B.M.; or (ii) to any
other transferee approved by the Company in writing with such approval
not to be unreasonably withheld.
b. In the event that the Company or its shareholders receive an offer to
transfer all or substantially all of the shares in the Company, or to
effect a merger or acquisition or sale of all or substantially all of
the assets of the Company, then the Company shall promptly inform the
Holder in writing of such offer.
9. REGISTRATION RIGHTS
The Company covenants and agrees as follows:
a. DEFINITIONS
For purposes of this Section 9:
(i) "REGISTRABLE SHARES" means: (1) the Warrant Shares; and (2) any
Ordinary Shares of the Company issued as (or issuable upon the
conversion or exercise of any warrant, right or other security
that is issued as) a dividend or other distribution with respect
to, or in exchange for or in replacement of, such Warrant Shares;
provided, however, that any exercise of this Warrant in
connection with an exercise of rights to registration under this
Section 9 may be made conditional upon the closing of the
offering contemplated by such registration;
(ii) "REGISTER", "REGISTERED" and "REGISTRATION" refer to a
registration effected by filing a registration statement in
compliance with the Securities Act and the declaration or
ordering by the SEC of effectiveness of such registration
statement, or the equivalent actions under the laws of another
jurisdiction;
(iii) "INVESTOR HOLDERS" refers to SanDisk Corporation, Alliance
Semiconductor Corp., Macronix International Co., Ltd., QuickLogic
Corporation, and The Israel Corporation Ltd. and any additional
parties that entered into share purchase agreements with the
Company prior to the closing of and that closed simultaneously
with the Share Purchase Agreement dated as of July 4, 2000 by and
between the Company and SanDisk Corporation or any successors
thereto or permitted assignees thereof;
(iv) "1934 ACT" means the Securities Exchange Act of 1934, as amended;
(v) "SEC" means the United States Securities and Exchange Commission.
b. INCIDENTAL REGISTRATION
If the Company at any time proposes to register any of its securities
(other than a registration of securities to be offered to employees,
directors or consultants pursuant to a benefit plan on Form S-8 or a
registration in connection with a merger, an exchange offer or any
acquisition), it shall give notice to the Holder of such intention.
Upon the written request of the Holder given within 20 (twenty) days
after receipt of any such notice, the Company shall include in such
registration all of the Registrable Shares indicated in such request,
so as to permit the disposition of the shares so registered at the
expense of the Company.
Notwithstanding any other provision of this Section 9(b), in the event
that the Company is undertaking a registration of its securities and
the managing underwriter advises the Company in writing that marketing
factors require a limitation of the number of Ordinary Shares to be
underwritten, then there shall be excluded from such registration and
underwriting, to the extent necessary to satisfy such limitation,
Ordinary Shares held by any shareholders other than the Investor
Holders pro rata to their respective shareholdings in the Company.
c. ASSIGNMENT OF REGISTRATION RIGHTS
The rights to cause the Company to register Registrable Shares
pursuant to the Registration Rights may be assigned by a Holder to a
transferee or assignee of such shares to the same extent as permitted
by Section 8 of this Warrant.
d. NO CONFLICTING AGREEMENTS
The Company represents and warrants to the Holder that the Company is
not a party to any agreement that conflicts in any manner with the
Holder's rights to cause the Company to register Registrable Shares
pursuant to the Registration Rights. The Company covenants and agrees
that it shall not, without the prior written consent of the holders of
a majority of the outstanding Registrable Shares, amend, modify or
restate the Registration Rights if the Holder would be adversely
affected by the amendment in a different manner than other holders of
"Registrable Shares" similarly situated.
e. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE AND EXPIRATION OF WARRANT
The rights and obligations of the Company and the Holder set forth in
this Section 9 and in the Registration Rights shall survive the
exercise, conversion and expiration of this Warrant.
f. STAND-OFF PERIOD
The Holder, if requested by the Company and the underwriters of the
Company's securities, shall enter into an agreement ("THE MARKET
STAND-OFF AGREEMENT") not to sell, sell any option, or otherwise
transfer or dispose of any Registrable Shares held by the Holder
during the 90-day period (or such shorter period as is required by the
underwriters) following the effective date of a registration statement
of the Company filed under the Securities Act, provided that such
restrictions shall not apply to Ordinary Shares or other securities of
the Company that are included in such registration statement and the
Holder shall not be obligated to enter into a Market Stand-off
Agreement if any officer, director or holder of 5% (five percent) or
more of the outstanding Ordinary Shares of the Company is not subject
to a Market Stand-off Agreement with substantially similar terms. The
underwriters in connection with such registration statement are
intended third party beneficiaries of this provision.
g. INDEMNIFICATION
In the event any Registrable Shares are included in a registration
statement in accordance herewith:
To the extent permitted by law, the Company will indemnify and hold
harmless the Holder, its officers and directors, any underwriter (as
defined in the Securities Act) for any Holder and each person, if any,
who controls any Holder or underwriter within the meaning of the
Securities Act or the 1934 Act against any losses, claims, damages, or
liabilities to which they may become subject under the Securities Act,
the 1934 Act or other United States federal or state law or the
securities laws of the State of Israel, insofar as such losses,
claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "VIOLATION"): (i) any untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto; (ii) the omission to state therein
a material fact required to be stated therein, or necessary to make
the statements therein not misleading in light of the circumstances
under which they were made; or (iii) any violation by the Company of
the Securities Act, the 1934 Act, any state securities law or any rule
or regulation promulgated under the Securities Act, the 1934 Act or
any state securities law, or any of the securities laws of the State
of Israel or any rule or regulation thereunder; and the Company will
reimburse each such Holder, officer or director, underwriter or
controlling person for any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this Section 9(g), shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability,
or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), nor shall
the Company be liable to the Holder, underwriter or controlling person
in any such case for any such loss, claim, damage, liability, or
action to the extent that it arises out of or is based upon a
Violation which occurs in reliance upon and in conformity with written
information furnished to the Company expressly for use in connection
with such registration by the Holder, underwriter or controlling
person. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Holder,
the underwriter or any controlling person of the Holder or the
underwriter, and regardless of any sale in connection with such
offering by the Holder.
To the extent permitted by law, the Holder will indemnify and hold
harmless the Company, each of its directors, each of its officers who
have signed the registration statement, each person, if any, who
controls the Company within the meaning of the Securities Act, any
underwriter (within the meaning of the Securities Act) for the
Company, any person who controls such underwriter, and any other
parties selling securities in such registration statement or any
directors or officers or any persons controlling such parties, against
any losses, claims, damages, or liabilities to which the Company or
any such director, officer, controlling person, or underwriter or
controlling person may become subject under the Securities Act, the
1934 Act or other United States federal or state law, or any of the
securities laws of the State of Israel, insofar as such losses,
claims, damages, liabilities (or actions in respect hereto) arise out
of or are based upon any Violation, in each case to the extent (and
only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished to the Company by the
Holder expressly for use in connection with such registration
statement; and the Holder will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer,
controlling person, underwriter or controlling person, in connection
with investigating or defending any such loss, claim, damage,
liability or action attributable to such Violation or alleged
Violation; provided, however, that the indemnity agreement contained
in this Section 9(g) shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability or action if such settlement
is effected without the consent of the Holder, which consent shall not
be unreasonably withheld. In no event shall the liability of the
Holder hereunder exceed the net proceeds from the offering received by
the Holder.
Promptly after receipt by an indemnified party under this Section 9(g)
of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under
this Section 9(g), notify the indemnifying party in writing of the
commencement thereof and the indemnifying party shall have the right
to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed,
to assume the defense thereof with counsel mutually satisfactory to
the parties; provided, however, that an indemnified party shall have
the right to retain its own counsel, with the fees and expenses to be
paid by the indemnifying party, if representation of such indemnified
party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests between
such indemnified party and any other party represented by such counsel
in such proceeding. The failure to notify an indemnifying party within
a reasonable time of the commencement of any such action, if
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnifying party under
this Section 9(g), but the omission to so notify the indemnifying
party will not relieve such indemnifying party of any liability that
it may have to any indemnified party otherwise than under this Section
9(g).
9A. OBLIGATIONS OF THE COMPANY
Whenever the Company files a registration statement with respect to any
Registrable Shares, the Company, at its expense, shall:
9A.1 prepare and file with the SEC (or other relevant body) a registration
statement with respect to such Registrable Shares and use its best
efforts to cause such registration statement to become effective.
9A.2 promptly prepare and file with the SEC (or other relevant body) such
amendments and supplements to such registration statement and the
prospectus used in connection with such registration statement as may
be necessary to comply with the provisions of the Securities Act (or
other relevant legislation) with respect to the disposition of all
securities covered by such registration statement.
9A.3 furnish to the Holder such number of copies of a prospectus, including
a preliminary prospectus, in conformity with the requirements of the
Securities Act (or other relevant legislation), and such other
documents as it may reasonably request in order to facilitate the
disposition of Registrable Shares owned by it.
9A.4 register and qualify the securities covered by such registration
statement under such other securities or blue sky laws of such
jurisdictions as shall be reasonably requested by the Holder,
provided, however, that the Company shall not be required to qualify
to do business as a foreign corporation or to file any general consent
to service of process in any jurisdiction in which it has not already
so qualified or filed.
9A.5 in the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement with usual and
customary terms that are generally satisfactory to the managing
underwriter of such offer. The Holder shall also enter into and
perform their obligations under such an agreement (the terms of which
must be satisfactory to the Holder if the Holder is to participate in
such offering).
9A.6 notify the Holder at any time when a prospectus relating to a
registration statement filed pursuant hereto is required to be
delivered under the Securities Act or the happening of any event as a
result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing, in which event the
Holder shall forthwith discontinue disposition of its Registrable
Shares pursuant to such prospectus until it is advised in writing by
the Company that the use of such prospectus may be resumed or until
such holder receives copies of any supplement or amendment to such
prospectus.
9A.7 cause all Registrable Shares registered pursuant thereunder to be
listed on each securities exchange on which similar securities issued
by the Company are then listed.
9A.8 provide a transfer agent and registrar for all Registrable Shares
registered pursuant hereunder and a CUSIP number for all such
Registrable Share not later than the effective date of such
registration.
9A.9 afford the Holder and its representatives the opportunity to make such
examination of the business affairs of the Company and its
subsidiaries as the Holder may reasonably deem necessary to satisfy
itself as to the accuracy of the registration statement (subject to a
reasonable confidentiality undertaking on the part of the Holder and
its representatives).
9A.10 furnish, at the request of the Holder in connection with the
registration of Registrable Shares pursuant to this Agreement, on the
date that such Registrable Shares are delivered to the underwriters
for sale, if such securities are being sold through underwriters, or,
if such securities are not being sold through underwriters, on the
date that the registration statement with respect to such securities
becomes effective, (i) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in
form and substance as is customarily given to underwriters in an
underwritten public offering, addressed to the underwriters, if any,
and to the Holder, and (ii) a letter, dated such date, from the
independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and to the Holder.
9B. RULE 144 REPORTING
With a view to making available the benefits of certain rules and
regulations of the SEC that may permit the sale of the Registrable Shares
to the public without registration, the Company agrees to use its best
efforts to:
9B.1 make and keep public information regarding the Company available as
those terms are understood and defined in Rule 144 under the
Securities Act, at all times;
9B.2 file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the 1934 Act at
any time after it has become subject to such reporting requirements;
9B.3 so long as the Holder owns any Registrable Shares, furnish to the
Holder forthwith upon written request a written statement by the
Company as to its compliance with the reporting requirements of Rule
144, and of the Securities Act and the 1934 Act, a copy of the most
recent annual or quarterly report of the Company, and such other
reports and documents so filed as the Holder may reasonably request in
availing itself of any rule or regulation of the SEC allowing the
Holder to sell any such securities without registration.
9C. EXPENSES OF REGISTRATION
All expenses incurred by the Company in connection with any registration
pursuant to this Agreement (other than underwriter's commissions and fees)
including without limitation all registration, filing and qualification
fees, printers' and accounting fees and fees and disbursements of counsel
for the Company and fees and disbursements of one counsel for the Holder,
shall be borne by the Company.
10. REPRESENTATIONS, WARRANTIES AND COVENANTS
The Company represents, warrants and covenants to the Holder as follows:
a. this Warrant has been duly authorized and executed by the Company and
is a valid and binding obligation of the Company enforceable in
accordance with its terms;
b. the Warrant Shares are duly authorized and reserved for issuance by
the Company and, when issued in accordance with the terms hereof, will
be validly issued, fully paid and non-assessable and not subject to
any pre-emptive rights;
c. the execution and delivery of this Warrant are not, and the issuance
of the Warrant Shares upon exercise of this Warrant in accordance with
the terms hereof will not be, inconsistent with the Company's
Certificate of Incorporation, Memorandum of Association or Articles of
Association, do not and will not contravene any law, governmental rule
or regulation, judgment or order applicable to the Company and, except
for consents that have already been obtained by the Company, do not
and will not conflict with or contravene any provision of, or
constitute a default under, any indenture, mortgage, contract or other
instrument of which the Company is a party or by which it is bound or
require the consent or approval of, the giving of notice to, the
registration with or the taking of any action in respect of or by, any
federal, state or local governmental authority or agency or other
person; and
d. that it shall, upon the request of the Holder, procure the approvals
required in order to list the Warrant Shares for trading on TASE.
11. EXPENSES
The Company will pay the Israeli Stamp Duty on the issuance of the Warrant
Shares, and will notify the Israeli Companies Registrar of such issuance
within the time period required by law. The Stamp Duty on this Warrant, if
any, will be paid in full by the Company.
12. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Warrant or Shares
certificate, and in case of loss, theft or destruction, of indemnity, or
security reasonably satisfactory to it, and upon reimbursement to the
Company of all reasonable expenses incidental thereto, and upon surrender
and cancellation of such Warrant or Shares certificate, if mutilated, the
Company will make and deliver a new Warrant or Shares certificate of like
tenor and dated as of such cancellation, in lieu of such Warrant or Shares
certificate.
13. NOTICES
Any notice or other communication hereunder shall be in writing and shall
be deemed to have been given upon delivery, if personally delivered or 3
(three) business days after deposit if deposited in the mail for mailing by
certified mail, postage prepaid, and addressed as follows:
If to the Holder: Bank Hapoalim B.M.
Corporate Division
Zion Building
45 Rothschild Boulevard
Tel-Aviv
ATTENTION: HEAD OF CORPORATE DIVISION
FACSIMILE: (03) 567 3728
If to the Company: Tower Semiconductor Ltd.
P.O. Box 619
Ramat Gabriel Industrial Zone
Migdal Haemek 23105
Israel
ATTENTION: CHIEF FINANCIAL OFFICER
FACSIMILE: (04) 654 6510
WITH A COPY TO: Yigal Arnon & Co.
1 Azrieli Center
Tel Aviv
Israel
ATTENTION: DAVID H. SCHAPIRO, ADV.
FACSIMILE: (03) 608 7714
Each of the above addressees may change its address for purposes of this
paragraph by giving to the other addressees notice of such new address in
conformance with this paragraph.
14. APPLICABLE LAW; JURISDICTION
This Warrant shall be governed by and construed in accordance with the laws
of the State of Israel as applicable to contracts between two residents of
the State of Israel entered into and to be performed entirely within the
State of Israel. Any dispute arising under or in relation to this Warrant
shall be resolved in the competent court for Tel Aviv-Jaffa district, and
each of the parties hereby submits irrevocably to the jurisdiction of such
court.
Dated: August 4, 2005
for TOWER SEMICONDUCTOR LTD.
By: _____________________________
Title: _____________________________
NOTICE OF EXERCISE
TO:
[________________]
[1. The undersigned hereby elects to purchase ______ (________) Ordinary Shares
of Tower Semiconductor Ltd., pursuant to the terms of the attached Warrant,
and tenders herewith payment of the purchase price for such shares in full.
[OR
The undersigned hereby elects to exchange the attached Warrant for ______
(____________) [INSERT NUMBER OF WARRANT SHARES] Ordinary Shares of Tower
Semiconductor Ltd. on a Net Exercise basis, pursuant to clause 3.b of the
attached Warrant and the other terms and conditions contained therein]
2. In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the Ordinary Shares are being acquired solely for the
account of the undersigned and not as a nominee for any other party, or for
investment, and that the undersigned will not offer, sell or otherwise
dispose of any such Ordinary Shares except under circumstances that will
not result in a violation of the Securities Act of 1933, as amended, or any
state securities laws.
3. Please issue a certificate representing said Ordinary Shares in the name of
the undersigned.
4. Please issue a new Warrant for the unexercised portion of the attached
Warrant in the name of the undersigned.
______________________ _________________________
(Date) (Print Name)
_________________________
(Signature)
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("THE SECURITIES
ACT") AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT COVERING THIS
WARRANT AND/OR SUCH SECURITIES, OR THIS WARRANT OR SUCH SECURITIES ARE SOLD ON
THE TEL-AVIV STOCK EXCHANGE IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES
ACT, OR THE HOLDER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THE WARRANT
AND/OR SUCH SECURITIES SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE,
TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT AND THE QUALIFICATION
REQUIREMENTS UNDER APPLICABLE STATE OR FOREIGN LAW.
WARRANT TO PURCHASE ORDINARY SHARES
Tower Semiconductor Ltd., an Israeli company ("THE COMPANY"), whose shares are
currently traded on Nasdaq and the Tel-Aviv Stock Exchange ("TASE") hereby
grants to BANK LEUMI LE-ISRAEL B.M. ("THE HOLDER"), the right to purchase from
the Company the number of Ordinary Shares of the Company, nominal value NIS.
1.00 ("THE ORDINARY SHARES") specified below, subject to the terms and
conditions set forth below, effective July 24, 2005 ("THE EFFECTIVE DATE"), the
date upon which Bank Hapoalim B.M. and Bank Leumi Le-Israel B.M. ("THE BANKS")
entered into the Ninth Amendment ("THE NINTH AMENDMENT") to the Facility
Agreement dated January 18, 2001, as amended ("THE AGREEMENT"), by and among the
Company and the Banks.
1. NUMBER OF ORDINARY SHARES AVAILABLE FOR PURCHASE
This Warrant may be exercised to purchase 4,132,232 (four million one
hundred and thirty-two thousand, two hundred and thirty-two) of the
Company's Ordinary Shares, with each Ordinary Share having a value
calculated as set forth in Section 2 below, subject to adjustment under
Section 7 of this Warrant ("THE WARRANT SHARES"), and all references to
Warrant Shares or Ordinary Shares "purchaseable hereunder" shall refer to
all 4,132,232 (four million one hundred and thirty-two thousand, two
hundred and thirty-two) Warrant Shares, as such number may be adjusted
under Section 7 of this Warrant, less Warrant Shares already purchased
through exercise of this Warrant.
2. EXERCISE PRICE
The exercise price for each Warrant Share purchasable hereunder shall be,
subject to adjustment under Section 7 of this Warrant, US $1.21 (one United
States Dollar and twenty-one US cents) per share ("THE WARRANT PRICE").
2A. EXERCISABILITY; TERM
This Warrant may be exercised: (a) with respect to 2,066,116 (two million
and sixty-six thousand, one hundred and sixteen) Warrant Shares, during the
period beginning from the Ninth Amendment Closing Date (as defined in the
Ninth Amendment) and ending on the date which is 5 (five) years following
the Ninth Amendment Closing Date ("THE FIRST TRANCHE EXPIRATION DATE"); and
(b) with respect to 2,066,116 (two million and sixty-six thousand, one
hundred and sixteen) Warrant Shares, during the period beginning from the
date of signature by the Company and the Banks of an agreement by the Banks
to reschedule the repayment dates of the Interest Payment Loans (as defined
in the Ninth Amendment) ("THE SECOND TRANCHE EXERCISABILITY DATE") and
ending on the date which is 5 (five) years following the Second Tranche
Exercisability Date ("THE SECOND TRANCHE EXPIRATION DATE"). The "First
Tranche Expiration Date" and the "Second Tranche Expiration Date" are
sometimes hereinafter collectively referred to as "THE EXPIRATION DATE".
3. EXERCISE OF WARRANT
This Warrant may be exercised in whole or in part, on one or more occasions
during its term, provided that only up to 2,066,116 (two million and
sixty-six thousand, one hundred and sixteen) Warrant Shares may be
exercised prior to the Second Tranche Exercisability Date and, provided
further, that if the Second Tranche Exercisability Date does not occur, no
more than 2,066,116 (two million and sixty-six thousand, one hundred and
sixteen) Warrant Shares will be exercisable during the term of this
Warrant. The Warrant may be exercised by the surrender of the Warrant to
the Company at its principal office together with the Notice of Exercise
annexed hereto duly completed and executed on behalf of the Holder.
a. EXERCISE FOR CASH
To exercise for cash, the Notice of Exercise must be accompanied by
payment in full of the amount of the aggregate purchase price of the
Warrant Shares being purchased upon such exercise in immediately
available funds.
b. NET EXERCISE
In lieu of the payment method set forth in Section 3(a) above, the
Holder may elect to exchange the Warrant for a number of Warrant
Shares equal to the increase in value of the Warrant Shares otherwise
purchasable hereunder on the date of exchange. If the Holder elects to
exchange this Warrant as provided in this Section 3(b), the Holder
shall tender to the Company the Warrant along with the Notice of
Exercise and the Company shall issue to the Holder the number of
Warrant Shares computed using the following formula:
Y (A - B)
X = ---------
A
WHERE:
X = the number of Warrant Shares to be issued to the Holder;
Y = the number of Warrant Shares purchasable under this Warrant
or, if only a portion of the Warrant is being exercised, the
number of Warrant Shares being exercised under the Warrant
(as adjusted to the date of such calculation);
A = the Fair Market Value (as defined below) of one (1) Ordinary
Share; and
B = Warrant Price (for the removal of doubt, as adjusted to the
date of such calculation).
"FAIR MARKET VALUE" of an Ordinary Share shall mean:
(i) if the Ordinary Shares are listed on a national securities
exchange or are quoted on the Nasdaq National Market
(NASDAQ/NMS), then the closing or last sale price, respectively,
reported on the last trading day immediately preceding the
exercise date, as reported by Nasdaq or the principal national
securities exchange upon which the Ordinary Shares are listed or
traded; provided that, if the Ordinary Shares are listed on
Nasdaq and another national securities exchange, the applicable
price shall be the price reported by Nasdaq;
(ii) if the Ordinary Shares are not listed on a national securities
exchange or quoted on NASDAQ/NMS, but are traded in the
over-the-counter market, then the mean of the closing bid and
asked prices as reported on the last trading day immediately
preceding the exercise date; and
(iii) if the Ordinary Shares are not publicly traded, then as
determined by the Company's Board of Directors in good faith.
The exchange of this Warrant as provided in this Section 3(b) may not
be utilized on more than 9 (nine) occasions.
c. ISSUANCE OF SHARES ON EXERCISE
The Company agrees that the Warrant Shares so purchased shall be
issued as soon as practicable thereafter, and that the Holder shall be
deemed the record owner of such Warrant Shares as of and from the
close of business on the date on which this Warrant shall be
surrendered, together with payment in full as required pursuant to
subsection a. above or when surrendered for exchange pursuant to
subsection b. above. In the event of a partial exercise, the Company
shall concurrently issue to the Holder a replacement Warrant on the
same terms and conditions as this Warrant, but representing the number
of Warrant Shares remaining after such partial exercise.
4. FRACTIONAL INTEREST
No fractional shares will be issued in connection with any exercise
hereunder, but in lieu of such fractional shares, the Company shall make a
cash payment therefor upon the basis of the current market price of such
shares then in effect as determined in good faith by the Company's Board of
Directors.
5. WARRANT CONFERS NO RIGHTS OF SHAREHOLDER
Except as otherwise set forth in this Warrant, the Holder shall not have
any rights as a shareholder of the Company with regard to the Warrant
Shares prior to actual exercise resulting in the purchase of any Warrant
Shares.
6. INVESTMENT REPRESENTATION
Neither this Warrant nor the Warrant Shares issuable upon the exercise of
this Warrant have been registered under the Securities Act, or any other
securities laws. The Holder acknowledges by acceptance of the Warrant that
(a) it has acquired this Warrant for investment and not with a view to
distribution; (b) it has either a pre-existing personal or business
relationship with the Company, or its executive officers, or by reason of
its business or financial experience, it has the capacity to protect its
own interests in connection with the transaction; and (c) it is an
accredited investor as that term is defined in Regulation D promulgated
under the Securities Act. The Holder agrees that any Warrant Shares
issuable upon exercise of this Warrant will be acquired for investment and
not with a view to distribution and, unless the Warrant Shares are
theretofore registered, including following the exercise of the Holder of
its registration rights under Section 9 below, such Warrant Shares will not
be registered under the Securities Act and applicable state securities laws
and that such Warrant Shares may have to be held indefinitely unless they
are subsequently registered or qualified under the Securities Act and
applicable state securities laws, or based on an opinion of counsel
reasonably satisfactory to the Company, an exemption from such registration
and qualification is available. The Holder, by acceptance hereof, consents
to the placement of legend(s) on all securities hereunder as to the
applicable restrictions on transferability in order to ensure compliance
with the Securities Act, unless in the reasonable opinion of counsel for
the Company such legend is not required in order to ensure compliance with
the Securities Act. The Company may issue stop transfer instructions to its
transfer agent in connection with such restrictions.
7. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES
The number and kind of securities purchasable initially upon the exercise
of this Warrant and the Warrant Price shall be subject to adjustment from
time to time upon the occurrence of certain events, as follows:
a. ADJUSTMENT FOR SHARES SPLITS AND COMBINATIONS
If the Company at any time or from time to time effects a subdivision
of the outstanding Ordinary Shares, the number of Warrant Shares
purchaseable hereunder immediately before the subdivision shall be
proportionately increased, and conversely, if the Company at any time
or from time to time combines the outstanding Ordinary Shares, the
number of Warrant Shares purchaseable hereunder immediately before the
combination shall be proportionately decreased. Any adjustment under
this Section 7(a) shall become effective at the close of business on
the date the subdivision or combination becomes effective.
b. ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS
In the event the Company at any time, or from time to time, makes or
fixes a record date for the determination of holders of Ordinary
Shares entitled to receive a dividend or other distribution payable in
additional shares of Ordinary Shares, then and in each such event, the
number of Ordinary Shares purchaseable hereunder shall be increased as
of the time of such issuance or, in the event such a record date is
fixed, as of the close of business on such record date, by multiplying
the number of Ordinary Shares issuable upon exercise of this Warrant
by a fraction: (i) the numerator of which shall be the total number of
Ordinary Shares issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date plus the
number of Ordinary Shares issuable in payment of such dividend or
distribution; and (ii) the denominator of which is the total number of
Ordinary Shares issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date;
provided, however, that if such record date is fixed and such dividend
is not fully paid or if such distribution is not fully made on the
date fixed thereof, the number of Ordinary Shares purchaseable
hereunder shall be recomputed accordingly as of the close of business
on such record date and thereafter the number of Ordinary Shares
purchaseable hereunder shall be adjusted pursuant to this Section 7(b)
as of the time of the actual payment of such dividends or
distribution.
c. ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS
In the event the Company at any time or from time to time makes, or
fixes a record date for the determination of holders of Ordinary
Shares entitled to receive a dividend or other distribution payable in
securities of the Company other than Ordinary Shares, then in each
such event provision shall be made so that the Holder shall receive
upon exercise of this Warrant, in addition to the number of Ordinary
Shares receivable thereupon, the amount of securities of the Company
that the Holder would have received had this Warrant been exercised to
purchase all Ordinary Shares purchaseable hereunder immediately prior
to such event (or the record date for such event) and had the Holder
thereafter, during the period from the date of such event to and
including the date of exercise, retained such securities receivable by
it as aforesaid during such period, subject to all other adjustments
called for during such period under this Section and the Company's
Articles of Association with respect to the rights of the Holder.
d. ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION
If the Ordinary Shares purchaseable hereunder are changed into the
same or a different number of shares of any class or classes of
shares, whether by recapitalization, reclassification or otherwise
(other than a subdivision or combination of shares or shares dividend
or a reorganization, merger, consolidation or sale of assets, provided
for elsewhere in this Section), then and in any such event the Holder
shall have the right thereafter to exercise this Warrant into the kind
and amount of shares and other securities receivable upon such
recapitalization, reclassification or other change, by holders of the
number of shares of Ordinary Shares for which this Warrant might have
been exercised with respect to all Ordinary Shares purchaseable
hereunder immediately prior to such recapitalization, reclassification
or change, all subject to further adjustment as provided herein and
under the Company's Articles of Association.
e. REORGANIZATION, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS
If at any time or from time to time there is a capital reorganization
of the Ordinary Shares (other than a recapitalization, subdivision,
combination, reclassification or exchange of shares as provided for
elsewhere in this subsection), or a merger or consolidation of the
Company with or into another corporation, or the sale of all or
substantially all of the Company's properties and assets to any other
person, then, as a part of such reorganization, merger, consolidation
or sale, provision shall be made so that the Holder shall thereafter
be entitled to receive upon exercise of this Warrant, the number of
shares or other securities or property of the Company, or of the
successor corporation resulting from such merger or consolidation or
sale, to which a holder of Ordinary Shares deliverable upon conversion
would have been entitled on such capital reorganization, merger,
consolidation or sale. In any such case (except to the extent any cash
or property is received in such transaction), appropriate adjustment
shall be made in the application of the provisions of this subsection
and the Company's Articles of Association with respect to the rights
of the Holder after the reorganization, merger, consolidation or sale
to the end that the provisions of this subsection and the Company's
Articles of Association (including adjustment of the number of
Ordinary Shares purchaseable hereunder) shall be applicable after that
event and be as nearly equivalent to the provisions hereof as may be
practicable.
f. OTHER TRANSACTIONS
In the event that the Company shall issue shares to its shareholders
as a result of a split-off, spin-off or the like, then the Company
shall only complete such issuance or other action if, as part thereof,
allowance is made to protect the economic interest of the Holder
either by increasing the number of Warrant Shares or by procuring that
the Holder shall be entitled, on economically proportionate terms, to
acquire additional shares of the spun-off or split-off entities.
g. GENERAL PROTECTION
The Company will not, by amendment of its Articles of Association or
other charter document or through any reorganization,
recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder, or impair the
economic interest of the Holder, but will at all times in good faith
assist in the carrying out of all the provisions hereof and in taking
of all such actions and making all such adjustments as may be
necessary or appropriate in order to protect the rights and the
economic interests of the Holder against impairment.
h. NOTICE OF CAPITAL CHANGES
If at any time the Company shall offer for subscription pro rata to
the holders of Ordinary Shares any additional shares of any class,
other rights or any equity security of any kind, or there shall be any
capital reorganization or reclassification of the capital shares of
the Company, or consolidation or merger of the Company with, or sale
of all or substantially all of its assets to another company or there
shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Company, or other transaction described in this
Section 7, then, in any one or more of the said cases, the Company
shall give the Holder written notice, by registered or certified mail,
postage prepaid, of the date on which: (i) a record shall be taken for
such subscription rights; or (ii) such reorganization,
reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up shall take place, as the case may be. Such
notice shall also specify the date as of which the holders of record
of Ordinary Shares shall participate in such subscription rights, or
shall be entitled to exchange their Ordinary Shares for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up,
as the case may be. Such written notice shall be given at least 14
(fourteen) days prior to the action in question and not less than 14
(fourteen) days prior to the record date in respect thereto.
i. ADJUSTMENT OF WARRANT PRICE
Upon each adjustment in the number of Ordinary Shares purchasable
hereunder, the Warrant Price shall be proportionately increased or
decreased, as the case may be, in a manner that is the inverse of the
manner in which the number of Ordinary Shares purchasable hereunder
shall be adjusted.
j. NOTICE OF ADJUSTMENTS
Whenever the Warrant Price or the number of Ordinary Shares
purchasable hereunder shall be adjusted pursuant to Section 7 hereof,
the Company shall prepare a certificate signed by the chief financial
officer of the Company setting forth, in reasonable detail, the event
requiring the adjustment, the amount of the adjustment, the method by
which such adjustment was calculated, and the Warrant Price and the
number of Ordinary Shares purchasable hereunder after giving effect to
such adjustment, and shall cause copies of such certificate to be
mailed (by first class mail, postage prepaid) to the Holder.
k. ASSUMED EXERCISABILITY
For the avoidance of doubt, the fact that an adjustment event
described in this Section 7 occurs prior to the time this Warrant is
fully exercisable by the Holder shall not be taken into account and,
for purposes of determining any adjustment or other actions to be
taken by the Company pursuant to this Section 7, it shall be assumed
that this Warrant is fully exercisable as of the Effective Date.
8. TRANSFER OF THIS WARRANT OR SHARES
a. With respect to any offer, sale or other disposition of this Warrant
or securities purchaseable hereunder, the Holder will give written
notice to the Company prior thereto, describing briefly the manner
thereof, together with, if reasonably requested by the Company, a
written opinion of such Holder's counsel, to the effect that such
offer, sale or other distribution may be effected without registration
or qualification (under any federal or state law then in effect);
provided, however, that no legal opinion shall be required if the
transfer will be effected on TASE and the Holder represents to the
Company that the applicable conditions under Regulation S under the
Securities Act have been satisfied. If the proposed transfer is
intended to rely on a Regulation D exemption under the Securities Act,
such opinion letter and all such transferees must warrant and
represent that they are an "accredited" investor as that term is
defined under Regulation D of the Securities Act. Promptly, as
practicable, upon receiving such written notice and opinion and
warranties and representations, if so requested, the Company, as
promptly as practicable, shall deliver to the Holder one or more
replacement Warrant certificates on the same terms and conditions as
this Warrant for delivery to the transferees. Each Warrant thus
transferred and each certificate representing the securities thus
transferred shall bear legend(s) as to the applicable restrictions on
transferability in order to ensure compliance with the Securities Act,
unless in the opinion of counsel for the Company such legend is not
required in order to ensure compliance with the Securities Act. The
Company may issue stop transfer instructions to its transfer agent in
connection with such restrictions. Any provision of this Warrant to
the contrary notwithstanding, the Holder may not offer, sell or
otherwise dispose of this Warrant to any third party, other than: (i)
to a wholly owned subsidiary of Bank Hapoalim B.M.; or (ii) to any
other transferee approved by the Company in writing with such approval
not to be unreasonably withheld.
b. In the event that the Company or its shareholders receive an offer to
transfer all or substantially all of the shares in the Company, or to
effect a merger or acquisition or sale of all or substantially all of
the assets of the Company, then the Company shall promptly inform the
Holder in writing of such offer.
9. REGISTRATION RIGHTS
The Company covenants and agrees as follows:
a. DEFINITIONS
For purposes of this Section 9:
(i) "REGISTRABLE SHARES" means: (1) the Warrant Shares; and (2) any
Ordinary Shares of the Company issued as (or issuable upon the
conversion or exercise of any warrant, right or other security
that is issued as) a dividend or other distribution with respect
to, or in exchange for or in replacement of, such Warrant Shares;
provided, however, that any exercise of this Warrant in
connection with an exercise of rights to registration under this
Section 9 may be made conditional upon the closing of the
offering contemplated by such registration;
(ii) "REGISTER", "REGISTERED" and "REGISTRATION" refer to a
registration effected by filing a registration statement in
compliance with the Securities Act and the declaration or
ordering by the SEC of effectiveness of such registration
statement, or the equivalent actions under the laws of another
jurisdiction;
(iii) "INVESTOR HOLDERS" refers to SanDisk Corporation, Alliance
Semiconductor Corp., Macronix International Co., Ltd., QuickLogic
Corporation, and The Israel Corporation Ltd. and any additional
parties that entered into share purchase agreements with the
Company prior to the closing of and that closed simultaneously
with the Share Purchase Agreement dated as of July 4, 2000 by and
between the Company and SanDisk Corporation or any successors
thereto or permitted assignees thereof;
(iv) "1934 ACT" means the Securities Exchange Act of 1934, as amended;
(v) "SEC" means the United States Securities and Exchange Commission.
b. INCIDENTAL REGISTRATION
If the Company at any time proposes to register any of its securities
(other than a registration of securities to be offered to employees,
directors or consultants pursuant to a benefit plan on Form S-8 or a
registration in connection with a merger, an exchange offer or any
acquisition), it shall give notice to the Holder of such intention.
Upon the written request of the Holder given within 20 (twenty) days
after receipt of any such notice, the Company shall include in such
registration all of the Registrable Shares indicated in such request,
so as to permit the disposition of the shares so registered at the
expense of the Company.
Notwithstanding any other provision of this Section 9(b), in the event
that the Company is undertaking a registration of its securities and
the managing underwriter advises the Company in writing that marketing
factors require a limitation of the number of Ordinary Shares to be
underwritten, then there shall be excluded from such registration and
underwriting, to the extent necessary to satisfy such limitation,
Ordinary Shares held by any shareholders other than the Investor
Holders pro rata to their respective shareholdings in the Company.
c. ASSIGNMENT OF REGISTRATION RIGHTS
The rights to cause the Company to register Registrable Shares
pursuant to the Registration Rights may be assigned by a Holder to a
transferee or assignee of such shares to the same extent as permitted
by Section 8 of this Warrant.
d. NO CONFLICTING AGREEMENTS
The Company represents and warrants to the Holder that the Company is
not a party to any agreement that conflicts in any manner with the
Holder's rights to cause the Company to register Registrable Shares
pursuant to the Registration Rights. The Company covenants and agrees
that it shall not, without the prior written consent of the holders of
a majority of the outstanding Registrable Shares, amend, modify or
restate the Registration Rights if the Holder would be adversely
affected by the amendment in a different manner than other holders of
"Registrable Shares" similarly situated.
e. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE AND EXPIRATION OF WARRANT
The rights and obligations of the Company and the Holder set forth in
this Section 9 and in the Registration Rights shall survive the
exercise, conversion and expiration of this Warrant.
f. STAND-OFF PERIOD
The Holder, if requested by the Company and the underwriters of the
Company's securities, shall enter into an agreement ("THE MARKET
STAND-OFF AGREEMENT") not to sell, sell any option, or otherwise
transfer or dispose of any Registrable Shares held by the Holder
during the 90-day period (or such shorter period as is required by the
underwriters) following the effective date of a registration statement
of the Company filed under the Securities Act, provided that such
restrictions shall not apply to Ordinary Shares or other securities of
the Company that are included in such registration statement and the
Holder shall not be obligated to enter into a Market Stand-off
Agreement if any officer, director or holder of 5% (five percent) or
more of the outstanding Ordinary Shares of the Company is not subject
to a Market Stand-off Agreement with substantially similar terms. The
underwriters in connection with such registration statement are
intended third party beneficiaries of this provision.
g. INDEMNIFICATION
In the event any Registrable Shares are included in a registration
statement in accordance herewith:
To the extent permitted by law, the Company will indemnify and hold
harmless the Holder, its officers and directors, any underwriter (as
defined in the Securities Act) for any Holder and each person, if any,
who controls any Holder or underwriter within the meaning of the
Securities Act or the 1934 Act against any losses, claims, damages, or
liabilities to which they may become subject under the Securities Act,
the 1934 Act or other United States federal or state law or the
securities laws of the State of Israel, insofar as such losses,
claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "VIOLATION"): (i) any untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto; (ii) the omission to state therein
a material fact required to be stated therein, or necessary to make
the statements therein not misleading in light of the circumstances
under which they were made; or (iii) any violation by the Company of
the Securities Act, the 1934 Act, any state securities law or any rule
or regulation promulgated under the Securities Act, the 1934 Act or
any state securities law, or any of the securities laws of the State
of Israel or any rule or regulation thereunder; and the Company will
reimburse each such Holder, officer or director, underwriter or
controlling person for any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this Section 9(g), shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability,
or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), nor shall
the Company be liable to the Holder, underwriter or controlling person
in any such case for any such loss, claim, damage, liability, or
action to the extent that it arises out of or is based upon a
Violation which occurs in reliance upon and in conformity with written
information furnished to the Company expressly for use in connection
with such registration by the Holder, underwriter or controlling
person. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Holder,
the underwriter or any controlling person of the Holder or the
underwriter, and regardless of any sale in connection with such
offering by the Holder.
To the extent permitted by law, the Holder will indemnify and hold
harmless the Company, each of its directors, each of its officers who
have signed the registration statement, each person, if any, who
controls the Company within the meaning of the Securities Act, any
underwriter (within the meaning of the Securities Act) for the
Company, any person who controls such underwriter, and any other
parties selling securities in such registration statement or any
directors or officers or any persons controlling such parties, against
any losses, claims, damages, or liabilities to which the Company or
any such director, officer, controlling person, or underwriter or
controlling person may become subject under the Securities Act, the
1934 Act or other United States federal or state law, or any of the
securities laws of the State of Israel, insofar as such losses,
claims, damages, liabilities (or actions in respect hereto) arise out
of or are based upon any Violation, in each case to the extent (and
only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished to the Company by the
Holder expressly for use in connection with such registration
statement; and the Holder will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer,
controlling person, underwriter or controlling person, in connection
with investigating or defending any such loss, claim, damage,
liability or action attributable to such Violation or alleged
Violation; provided, however, that the indemnity agreement contained
in this Section 9(g) shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability or action if such settlement
is effected without the consent of the Holder, which consent shall not
be unreasonably withheld. In no event shall the liability of the
Holder hereunder exceed the net proceeds from the offering received by
the Holder.
Promptly after receipt by an indemnified party under this Section 9(g)
of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under
this Section 9(g), notify the indemnifying party in writing of the
commencement thereof and the indemnifying party shall have the right
to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed,
to assume the defense thereof with counsel mutually satisfactory to
the parties; provided, however, that an indemnified party shall have
the right to retain its own counsel, with the fees and expenses to be
paid by the indemnifying party, if representation of such indemnified
party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests between
such indemnified party and any other party represented by such counsel
in such proceeding. The failure to notify an indemnifying party within
a reasonable time of the commencement of any such action, if
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnifying party under
this Section 9(g), but the omission to so notify the indemnifying
party will not relieve such indemnifying party of any liability that
it may have to any indemnified party otherwise than under this Section
9(g).
9A. OBLIGATIONS OF THE COMPANY
Whenever the Company files a registration statement with respect to any
Registrable Shares, the Company, at its expense, shall:
9A.1 prepare and file with the SEC (or other relevant body) a registration
statement with respect to such Registrable Shares and use its best
efforts to cause such registration statement to become effective.
9A.2 promptly prepare and file with the SEC (or other relevant body) such
amendments and supplements to such registration statement and the
prospectus used in connection with such registration statement as may
be necessary to comply with the provisions of the Securities Act (or
other relevant legislation) with respect to the disposition of all
securities covered by such registration statement.
9A.3 furnish to the Holder such number of copies of a prospectus, including
a preliminary prospectus, in conformity with the requirements of the
Securities Act (or other relevant legislation), and such other
documents as it may reasonably request in order to facilitate the
disposition of Registrable Shares owned by it.
9A.4 register and qualify the securities covered by such registration
statement under such other securities or blue sky laws of such
jurisdictions as shall be reasonably requested by the Holder,
provided, however, that the Company shall not be required to qualify
to do business as a foreign corporation or to file any general consent
to service of process in any jurisdiction in which it has not already
so qualified or filed.
9A.5 in the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement with usual and
customary terms that are generally satisfactory to the managing
underwriter of such offer. The Holder shall also enter into and
perform their obligations under such an agreement (the terms of which
must be satisfactory to the Holder if the Holder is to participate in
such offering).
9A.6 notify the Holder at any time when a prospectus relating to a
registration statement filed pursuant hereto is required to be
delivered under the Securities Act or the happening of any event as a
result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing, in which event the
Holder shall forthwith discontinue disposition of its Registrable
Shares pursuant to such prospectus until it is advised in writing by
the Company that the use of such prospectus may be resumed or until
such holder receives copies of any supplement or amendment to such
prospectus.
9A.7 cause all Registrable Shares registered pursuant thereunder to be
listed on each securities exchange on which similar securities issued
by the Company are then listed.
9A.8 provide a transfer agent and registrar for all Registrable Shares
registered pursuant hereunder and a CUSIP number for all such
Registrable Share not later than the effective date of such
registration.
9A.9 afford the Holder and its representatives the opportunity to make such
examination of the business affairs of the Company and its
subsidiaries as the Holder may reasonably deem necessary to satisfy
itself as to the accuracy of the registration statement (subject to a
reasonable confidentiality undertaking on the part of the Holder and
its representatives).
9A.10 furnish, at the request of the Holder in connection with the
registration of Registrable Shares pursuant to this Agreement, on the
date that such Registrable Shares are delivered to the underwriters
for sale, if such securities are being sold through underwriters, or,
if such securities are not being sold through underwriters, on the
date that the registration statement with respect to such securities
becomes effective, (i) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in
form and substance as is customarily given to underwriters in an
underwritten public offering, addressed to the underwriters, if any,
and to the Holder, and (ii) a letter, dated such date, from the
independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and to the Holder.
9B. RULE 144 REPORTING
With a view to making available the benefits of certain rules and
regulations of the SEC that may permit the sale of the Registrable Shares
to the public without registration, the Company agrees to use its best
efforts to:
9B.1 make and keep public information regarding the Company available as
those terms are understood and defined in Rule 144 under the
Securities Act, at all times;
9B.2 file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the 1934 Act at
any time after it has become subject to such reporting requirements;
9B.3 so long as the Holder owns any Registrable Shares, furnish to the
Holder forthwith upon written request a written statement by the
Company as to its compliance with the reporting requirements of Rule
144, and of the Securities Act and the 1934 Act, a copy of the most
recent annual or quarterly report of the Company, and such other
reports and documents so filed as the Holder may reasonably request in
availing itself of any rule or regulation of the SEC allowing the
Holder to sell any such securities without registration.
9C. EXPENSES OF REGISTRATION
All expenses incurred by the Company in connection with any registration
pursuant to this Agreement (other than underwriter's commissions and fees)
including without limitation all registration, filing and qualification
fees, printers' and accounting fees and fees and disbursements of counsel
for the Company and fees and disbursements of one counsel for the Holder,
shall be borne by the Company.
10. REPRESENTATIONS, WARRANTIES AND COVENANTS
The Company represents, warrants and covenants to the Holder as follows:
a. this Warrant has been duly authorized and executed by the Company and
is a valid and binding obligation of the Company enforceable in
accordance with its terms;
b. the Warrant Shares are duly authorized and reserved for issuance by
the Company and, when issued in accordance with the terms hereof, will
be validly issued, fully paid and non-assessable and not subject to
any pre-emptive rights;
c. the execution and delivery of this Warrant are not, and the issuance
of the Warrant Shares upon exercise of this Warrant in accordance with
the terms hereof will not be, inconsistent with the Company's
Certificate of Incorporation, Memorandum of Association or Articles of
Association, do not and will not contravene any law, governmental rule
or regulation, judgment or order applicable to the Company and, except
for consents that have already been obtained by the Company, do not
and will not conflict with or contravene any provision of, or
constitute a default under, any indenture, mortgage, contract or other
instrument of which the Company is a party or by which it is bound or
require the consent or approval of, the giving of notice to, the
registration with or the taking of any action in respect of or by, any
federal, state or local governmental authority or agency or other
person; and
d. that it shall, upon the request of the Holder, procure the approvals
required in order to list the Warrant Shares for trading on TASE.
11. EXPENSES
The Company will pay the Israeli Stamp Duty on the issuance of the Warrant
Shares, and will notify the Israeli Companies Registrar of such issuance
within the time period required by law. The Stamp Duty on this Warrant, if
any, will be paid in full by the Company.
12. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Warrant or Shares
certificate, and in case of loss, theft or destruction, of indemnity, or
security reasonably satisfactory to it, and upon reimbursement to the
Company of all reasonable expenses incidental thereto, and upon surrender
and cancellation of such Warrant or Shares certificate, if mutilated, the
Company will make and deliver a new Warrant or Shares certificate of like
tenor and dated as of such cancellation, in lieu of such Warrant or Shares
certificate.
13. NOTICES
Any notice or other communication hereunder shall be in writing and shall
be deemed to have been given upon delivery, if personally delivered or 3
(three) business days after deposit if deposited in the mail for mailing by
certified mail, postage prepaid, and addressed as follows:
If to the Holder: Bank Leumi Le-Israel B.M.
Corporate Division
34 Yehuda Halevi Street
Tel-Aviv
ATTENTION: MANAGER OF HI-TECH
INDUSTRIES SECTION
FACSIMILE: (03) 514 9017
If to the Company: Tower Semiconductor Ltd.
P.O. Box 619
Ramat Gabriel Industrial Zone
Migdal Haemek 23105
Israel
ATTENTION: CHIEF FINANCIAL OFFICER
FACSIMILE: (04) 654 6510
WITH A COPY TO: Yigal Arnon & Co.
1 Azrieli Center
Tel Aviv
Israel
ATTENTION: DAVID H. SCHAPIRO, ADV.
FACSIMILE: (03) 608 7714
Each of the above addressees may change its address for purposes of this
paragraph by giving to the other addressees notice of such new address in
conformance with this paragraph.
14. APPLICABLE LAW; JURISDICTION
This Warrant shall be governed by and construed in accordance with the laws
of the State of Israel as applicable to contracts between two residents of
the State of Israel entered into and to be performed entirely within the
State of Israel. Any dispute arising under or in relation to this Warrant
shall be resolved in the competent court for Tel Aviv-Jaffa district, and
each of the parties hereby submits irrevocably to the jurisdiction of such
court.
Dated: August 4, 2005
for TOWER SEMICONDUCTOR LTD.
By: _____________________________
Title: _____________________________
NOTICE OF EXERCISE
TO:
[________________]
[1. The undersigned hereby elects to purchase ______ (________) Ordinary Shares
of Tower Semiconductor Ltd., pursuant to the terms of the attached Warrant,
and tenders herewith payment of the purchase price for such shares in full.
[OR
The undersigned hereby elects to exchange the attached Warrant for ______
(____________) [INSERT NUMBER OF WARRANT SHARES] Ordinary Shares of Tower
Semiconductor Ltd. on a Net Exercise basis, pursuant to clause 3.b of the
attached Warrant and the other terms and conditions contained therein]
2. In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the Ordinary Shares are being acquired solely for the
account of the undersigned and not as a nominee for any other party, or for
investment, and that the undersigned will not offer, sell or otherwise
dispose of any such Ordinary Shares except under circumstances that will
not result in a violation of the Securities Act of 1933, as amended, or any
state securities laws.
3. Please issue a certificate representing said Ordinary Shares in the name of
the undersigned.
4. Please issue a new Warrant for the unexercised portion of the attached
Warrant in the name of the undersigned.
______________________ _________________________
(Date) (Print Name)
_________________________
(Signature)
EXHIBIT 4.52
THIRTEENTH AMENDMENT
TO THE FACILITY AGREEMENT
Made and entered into on this 1st day of May 2006, by and between:
(1) TOWER SEMICONDUCTOR LTD. ("THE BORROWER")
and
(2) BANK LEUMI LE-ISRAEL B.M. and BANK HAPOALIM B.M. ("THE BANKS")
WHEREAS: the Borrower, on the one hand, and the Banks, on the other hand,
are parties to a Facility Agreement dated January 18, 2001, as
amended pursuant to a letter dated January 29, 2001, a Second
Amendment dated January 10, 2002, a letter dated March 7, 2002, a
letter dated April 29, 2002, a letter dated September 18, 2002,
as amended on October 22, 2002, a letter dated June 10, 2003, a
Seventh Amendment dated November 11, 2003, a letter dated January
30, 2005, a Ninth Amendment dated July 24, 2005, a Tenth
Amendment dated September 29, 2005, an Eleventh Amendment dated
October 27, 2005 and a Twelfth Amendment dated November 30, 2005
(the Facility Agreement, as amended as aforesaid, hereinafter
"THE FACILITY AGREEMENT"); and
WHEREAS: the Borrower has requested that the Banks postpone the Borrower's
obligation to make certain repayments of principal pursuant to
the Facility Agreement; and
WHEREAS: following the Borrower's request, the Borrower and the Banks have
agreed to amend the Facility Agreement in the manner set out
below ("THIS THIRTEENTH AMENDMENT"),
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. INTERPRETATION
Unless the context specifies otherwise, terms and expressions defined in
the Facility Agreement shall have the same meanings when used in this
Thirteenth Amendment. References herein to clauses and paragraphs, are to
clauses and paragraphs of the Facility Agreement.
2. AMENDMENT
The Facility Agreement is hereby amended as follows:
2.1. In clause 1 (INTERPRETATION), paragraph (e) of clause 1.1.97 ("LOAN
MATURITY DATE") shall be amended to read in its entirety as follows:
"(e) each Interest Payment Loan, the first Business Day in July
2007;".
2.2. Clause 6.1 (REPAYMENT OF LOANS) shall be amended to read as follows:
2.2.1. by adding the following to the end of the second paragraph of
clause 6.1.1:
"; provided that, the Borrower shall be permitted to pay the
first and second quarterly principal instalments on the first
Business Day in July 2007 rather than on March 31, 2007 and the
last Business Day in June 2007, respectively. For the avoidance
of doubt, all subsequent quarterly principal instalments shall
continue to be due and payable by the Borrower in accordance with
the repayment provisions set forth in this clause 6.1.1 above."
and
2.2.2. by adding the following to the end of clause 6.1.2:
"provided that with respect to Advances made to the Borrower
during the second Quarter of 2004 ("THE SECOND QUARTER 2004
ADVANCES"), the Borrower shall be permitted to pay the first
quarterly principal instalment on the first Business Day in July
2007, rather than on the last Business Day in June 2007 and for
the avoidance of doubt:
(a) all subsequent quarterly principal instalments shall
continue to be due and payable by the Borrower in accordance
with the repayment provisions set forth in this clause 6.1.2
above; and
- 2 -
(b) all Advances made to the Borrower as described in this
clause 6.1.2 above subsequent to the Second Quarter 2004
Advances shall continue to be due and payable by the
Borrower in accordance with the repayment provisions set
forth in this clause 6.1.2 above."
2.3. Clause 11 (Commissions, Fees and Expenses) shall be amended as
follows:
2.3.1. Clause 11.1 shall be amended to read as follows:
"11.1 THIRTEENTH AMENDMENT FEES
The Borrower shall pay to each of the Banks, in accordance
with, and on the dates set forth in, the fee letters between
the Borrower and the Banks ("THE THIRTEENTH AMENDMENT FEE
LETTERS"), the fees set out in the Thirteenth Amendment Fee
Letters."
3. INTEREST PAYMENTS
For the avoidance of doubt, all Interest on each Advance (including the
Second Quarter 2004 Advances) and each Loan (including Interest Payment
Loans) shall continue to be due and payable in accordance with clause 9.3.
4. NINTH AMENDMENT WARRANTS
This Thirteenth Amendment shall not derogate from Section 7 of the Ninth
Amendment and does not constitute an agreement by the Banks to reschedule
the repayment dates of the Interest Payment Loans as contemplated by the
Warrants issued to each of the Banks on August 4, 2005 in connection with
the Ninth Amendment and, as such, as of the date hereof, each of such
Warrants is only exercisable with respect to 2,066,116 (two million and
sixty-six thousand, one hundred and sixteen) Warrant Shares (as defined in
such Warrants).
- 3 -
5. FULL FORCE AND EFFECT OF FACILITY AGREEMENT
The Facility Agreement is hereby amended as expressly set out in this
Thirteenth Amendment above. This Thirteenth Amendment shall be read
together with the Facility Agreement as one agreement and, save as
expressly amended by this Thirteenth Amendment, the Facility Agreement
shall remain unaltered and in full force and effect.
IN WITNESS WHEREOF, THE PARTIES HAVE SIGNED THIS THIRTEENTH AMENDMENT ON THE
DATE FIRST MENTIONED ABOVE.
for: TOWER SEMICONDUCTOR LTD.
By: ______________________________
Title: ______________________________
for: BANK LEUMI LE-ISRAEL B.M. for: BANK HAPOALIM B.M.
By: ______________________________ By: ______________________
Title: ______________________________ Title: ______________________
- 4 -
EXHIBIT 4.53
FOURTEENTH AMENDMENT
TO THE FACILITY AGREEMENT
Made and entered into on this 30th day of May, 2006, by and between:
(1) TOWER SEMICONDUCTOR LTD. ("THE BORROWER")
and
(2) BANK LEUMI LE-ISRAEL B.M. and BANK HAPOALIM B.M. ("THE BANKS")
WHEREAS: the Borrower, on the one hand, and the Banks, on the other hand,
are parties to a Facility Agreement dated January 18, 2001, as
amended pursuant to a letter dated January 29, 2001, a Second
Amendment dated January 10, 2002, a letter dated March 7, 2002, a
letter dated April 29, 2002, a letter dated September 18, 2002,
as amended on October 22, 2002, a letter dated June 10, 2003, a
Seventh Amendment dated November 11, 2003, a letter dated January
30, 2005, a Ninth Amendment dated July 24, 2005, a Tenth
Amendment dated September 29, 2005, an Eleventh Amendment dated
October 27, 2005, a Twelfth Amendment dated November 30, 2005 and
a Thirteenth Amendment dated May 1, 2006 (the Facility Agreement,
as amended as aforesaid, hereinafter "THE FACILITY AGREEMENT");
and
WHEREAS: following the Borrower's request, the Borrower and the Banks have
agreed to amend the Facility Agreement in the manner set out
below ("THIS FOURTEENTH AMENDMENT"),
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. The Facility Agreement is hereby amended by deleting the reference to "June
30, 2006" in clause 16.27.2 and substituting therefor, "September 30,
2006".
2. The Facility Agreement is hereby amended as expressly set out in this
Fourteenth Amendment above. This Fourteenth Amendment shall be read
together with the Facility Agreement as one agreement and, save as
expressly amended by this Fourteenth Amendment, the Facility Agreement
shall remain unaltered and in full force and effect.
IN WITNESS WHEREOF, THE PARTIES HAVE SIGNED THIS FOURTEENTH AMENDMENT ON THE
DATE FIRST MENTIONED ABOVE.
for: TOWER SEMICONDUCTOR LTD.
By: ______________________________
Title: ______________________________
for: BANK LEUMI LE-ISRAEL B.M. for: BANK HAPOALIM B.M.
By: ______________________________ By: ______________________
Title: ______________________________ Title: ______________________
- 2 -
EXHIBIT 4.54
FROM: TOWER SEMICONDUCTOR LTD.
TO: BANK HAPOALIM B.M. AND BANK LEUMI LE-ISRAEL B.M.
DATE: JUNE 14, 2006
================================================================================
Dear Sirs,
We refer to the Facility Agreement dated January 18, 2001, as amended, made
between Bank Hapoalim B.M. and Bank Leumi Le-Israel B.M., on the one hand ("THE
BANKS") and Tower Semiconductor Ltd. ("THE BORROWER"), on the other hand ("THE
FACILITY AGREEMENT"). We confirm that this letter agreement is a Finance
Document and shall be deemed to be the Fifteenth Amendment to the Facility
Agreement.
We hereby confirm that, at the request of the Borrower, it has been agreed
between us as follows:
1. Notwithstanding anything to the contrary in the Facility Agreement:
1.1. All references to Equity Convertible Debentures in clause 1.1.118(j)
may apply to Permitted Subordinated Debt issued by the Borrower in a
proposed public offering in Israel only that may take place after the
date hereof but no later than three months after the date hereof, in
an aggregate principal amount not to exceed US $50,000,000 (fifty
million US dollars) ("THE FIFTEENTH AMENDMENT SUBORDINATED DEBT").
1.2. No principal, Interest or any other amount on account of the Fifteenth
Amendment Subordinated Debt may be repayable or repaid by the Borrower
prior to December 2011.
1.3. The Fifteenth Amendment Subordinated Debt (net of discounts, but not
net of commissions, fees and other issuance costs) may be taken into
account towards the Borrower's obligations to raise funds pursuant to
clause 16.27.2. The Borrower shall, within 10 (ten) days after each
investment in the Fifteenth Amendment Subordinated Debt, submit to the
Banks a certificate from the Auditors (such certificate to be in a
form satisfactory to the Banks), confirming the amount of such
Fifteenth Amendment Subordinated Debt actually received by the
Borrower.
1.4. Clause 1.1.118(e) shall not apply to the Fifteenth Amendment
Subordinated Debt.
2. For the removal of doubt, nothing herein shall derogate from clause
1.1.118(a).
3. Unless the context specifies otherwise, terms and expressions defined in
the Facility Agreement shall have the same meanings when used in this
letter agreement. References herein to clauses and paragraphs, are to
clauses and paragraphs of the Facility Agreement. Except for the amendment
specifically set forth herein, the Banks are not making any other
amendments to any other provisions of the Facility Agreement or of any of
the Schedules thereto. Save as expressly agreed to by the Banks in this
letter agreement, the Facility Agreement and the Schedules thereto shall
remain unaltered and in full force and effect.
Yours faithfully,
TOWER SEMICONDUCTOR LTD.
By: _______________________
We hereby confirm and agree to the above.
____________________ __________________________
BANK HAPOALIM B.M. BANK LEUMI LE-ISRAEL B.M.
EXHIBIT 4.57
CONFIDENTIAL PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.
DEVELOPMENT AGREEMENT
This Development Agreement (this "AGREEMENT") is made and entered into as
of July _____, 2005 (the "EFFECTIVE DATE") by and between, Tower Semiconductor
Ltd, an Israeli company, located at Ramat Gavriel Industrial Area, P.O. Box 619
Migdal Haemek 230105, Israel ("TOWER") and Impinj, Inc., a Delaware corporation,
located at 701 N 34th Street, Suite 300 Seattle, WA 98103 ("DEVELOPER").
A. Developer designs and develops AEON and/or AEFuse products.
B. TOWER is a dedicated foundry providing high quality manufacturing
services for semiconductor companies worldwide.
C. The parties desire to provide TOWER and Developer customers with the
capability to produce semiconductors incorporating Developer Technology at
TOWER's foundry.
The parties agree as follows:
1. DEFINITIONS
"ACCEPTANCE CRITERIA" means the acceptance criteria for Developer
Deliverables and/or Developed Technology listed in a SOW.
"AEFUSE" means a family of multi-time programmable memory modules and
related Technology that is created by Developer using Self Adaptive Silicon, and
that is structured by Developer to look similar to a semiconductor fuse
architecture with data available at the output after power up without providing
an address. AEFuse supports total bit sizes up to 256bits with a single
controller and higher bit counts with multiple instantiations.
"AEON" means a family of multi-time programmable memory modules and related
Technology that is created by Developer using Self Adaptive Silicon, and that is
structured by Developer to be similar to an EEPROM architecture with row/column
addressing. AEON supports various total bit sizes from 64bits to 16kbits with
configurable page size, word width, and memory sizes.
"AFFILIATE" means an entity as to which a party to this Agreement owns or
controls, directly or indirectly controls, is under common control with, or is
controlled by such party (with "control" meaning ownership of more than fifty
percent (50%) of the voting stock of the entity or, in the case of a
noncorporate entity, an equivalent interest), but only during such times as such
ownership or control exists, and which entity has agreed in writing to be bound
to the terms of this agreement. Prior to the exercise of any rights of any TOWER
Affiliate under this Agreement, TOWER shall provide written notice to Developer
of the name of such TOWER Affiliate.
"CONFIDENTIAL INFORMATION" means any information disclosed by one party to
the other in connection with the performance of this Agreement, including
Technology and other information that relates to the disclosing party's
products, designs, business plans, business opportunities, finances, research,
development, know-how, personnel, or third-party confidential information
disclosed to the receiving party by the disclosing party in any form whatsoever
(including, but limited to, disclosure made in writing, orally or in the form of
samples, models, computer programs or otherwise), and the terms and conditions
of this Agreement, provided that such information is at the time of disclosure
either designated as "confidential", "proprietary," or similar legend or
reasonably should be known to the receiving party to be confidential.
Confidential Information does and will not include material that:
(a) is now or subsequently becomes generally available to the public or is
disclosed to third parties without restriction on its use or
disclosure;
(b) the receiving party had rightfully in its possession prior to
disclosure by the disclosing party;
(c) is developed independently by or for the receiving party without the
use of any Confidential Information of the disclosing party;
(d) the receiving party rightfully obtains without restriction from a
third party who has the right to transfer or disclose it; or
(e) is disclosed with the disclosing party's prior written approval for
public disclosure.
"DELIVERABLES" means the deliverables to be provided by one party to the
other party pursuant to this Agreement, as set forth in a SOW.
"DESIGNATED TOWER PROCESS(ES)" means the TOWER Processes and process
variants thereof, each as listed in a SOW.
"DEVELOPED TECHNOLOGY" means the Technology set forth in a given SOW, which
Developer is to develop and license in accordance with this Agreement and the
applicable SOW.
"DEVELOPER DELIVERABLES" means the deliverables to be provided by Developer
to TOWER pursuant to this Agreement, as set forth in a SOW.
"DEVELOPER COMPETITOR" means any entity or specific division of a larger
entity that, as a material business, licenses to third parties any Technology
manufactured using a logic process that is contains, incorporates, utilizes or
is derived from nonvolatile memory Technology or that competes with AEON or
AEFuse (including without limitation, any one-time programmable solutions). Upon
TOWER's written (or email) request, Developer shall provide to TOWER a list of
the then-current Developer Competitors. Developer Competitors as of the
Effective Date are [***].
"INTELLECTUAL PROPERTY RIGHTS" means all copyright rights, patent rights
(including reissues, divisions, renewals, extensions, provisionals,
continuations and continuations-in-part thereof, and equivalent or similar
rights anywhere in the world in inventions and discoveries), trademark rights,
trade secret rights, moral rights, rights of publicity, authors' rights,
semiconductor mask work rights, contract and licensing rights, goodwill and all
other intellectual property rights as may exist now and/or hereafter come into
existence and all applications therefor and registrations, renewals and
extensions thereof, regardless of whether such rights arise under the law of the
United States or any other state, country, jurisdiction or international treaty.
"LICENSED PRODUCTS" means integrated circuits manufactured by TOWER or a
TOWER Affiliate, whether on a silicon wafer, separated, or packaged, that
contain, incorporate, utilize or are derived (directly or indirectly) from Self
Adaptive Silicon.
"MARKS" of a party shall mean the registered or unregistered trademarks,
service marks, trade names or logos of such party.
"MILESTONE PAYMENTS" shall be any payment in any SOW or exhibit thereto
identified as a 'Milestone Payment.'
"PROCESS" means recipes, modules and other semiconductor manufacturing
process Technology used to fabricate integrated circuits and other semiconductor
devices and products, including variants of such Technology and any
improvements, updates or revisions thereto.
"RESIDUAL INFORMATION" means information that is incidentally retained in
the unaided memories of the receiving party's employees who lawfully have had
access to the disclosing party`s Confidential Information pursuant to the terms
of this Agreement and that employee's specific responsibilities. An employee's
memory is unaided if the employee has not intentionally memorized the
information for the purpose of retaining and subsequently using or disclosing
it, and has not recorded the information.
"SCHEDULE" means the development schedule set forth in a SOW.
"SELF ADAPTIVE SILICON" means Developer's p-channel floating gate
non-volatile memory cell technology.
"SPECIFICATION" means the specification for the Developed Technology that
is set forth in a SOW.
- ----------
[***] THE CONFIDENTIAL PORTION OF THIS AGREEMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
"STATEMENT OF WORK (SOW)" means each separate statement of work to be
mutually agreed upon by Developer and TOWER as set forth in SECTION 2.1.
"TECHNOLOGY" means all circuit designs, hardware description language
coding, software (including firmware), simulation models, schematics, layout
topologies, cells, libraries, data, formulas, designs, software, other original
works of authorship, applications, processes, products, know-how, techniques,
programs, improvements, test protocols, test structures, characterization and
test results, methods and patterns, specifications and other technical
information, whether or not patentable or otherwise protectable.
"TOWER CUSTOMER" means any entity that TOWER identifies as a customer or a
potential customer for the integrated circuit fabrication services of TOWER or
TOWER Affiliates.
2. DEVELOPMENT
2.1 STATEMENTS OF WORK. From time to time during the term and under the
terms and conditions of this Agreement, the parties may enter into separate
SOW's for the development of Developed Technology by Developer using a
Designated TOWER Process. Each Statement of Work shall set forth: (a) the
Developed Technology to be developed or customized thereunder, the
Specification, the Schedule, the Developer Deliverables, the Designated TOWER
Process(es) to be utilized, the TOWER Deliverables, the Acceptance Criteria, the
consideration to be paid by TOWER, the payment schedule, development milestones
and the parties' respective tasks and responsibilities, including in the design,
evaluation, characterization, testing, qualification and debugging of
prototypes. An SOW may specify each party's contributions of employee,
engineering and design resources, equipment, supplies, capital, Technology and
Intellectual Property Rights.
2.2 PERFORMANCE PER SCHEDULE. Each party agrees to use commercially
reasonable efforts to perform its responsibilities as set forth under each
applicable SOW and to allocate reasonably sufficient resources to complete and
deliver its Deliverables and complete its other tasks in accordance with the
relevant Specifications and Schedule set forth in such SOW.
2.3 DELIVERY AND ACCEPTANCE. Developer shall deliver Developer Deliverables
that it in good faith believes meet the Specifications and the applicable
Acceptance Criteria. Upon receipt of any Developer Deliverable, TOWER shall have
[***] from the date of receipt ("REVIEW PERIOD") in which TOWER may review such
Developer Deliverable. Before the end of the Review Period, TOWER shall provide
Developer with a written report (which may be delivered by e-mail) that
specifies in detail TOWER's feedback on such Developer Deliverable. Within [***]
from the date of submission of the report, the parties will discuss the TOWER
feedback, and TOWER shall decide whether such Developer Deliverable is to be
accepted by TOWER, rejected by TOWER or accepted by TOWER subject to a
commitment by Developer to perform post-acceptance corrective measures with
respect to such Developer Deliverable. For the purposes of this SECTION 2.3, the
corrective action to be taken by Developer as part of a conditional acceptance
shall be deemed to be a separate Developer Deliverable with an associated
Schedule. TOWER shall only reject such Developer Deliverable if it does not
substantially meet the applicable Acceptance Criteria for such Developer
Deliverable set forth in the SOW. If TOWER does not send such a review report
during the Review Period, the Developer Deliverable shall be deemed accepted. If
TOWER sends a report during the Review Period, Developer shall use commercially
reasonable efforts to correct any nonconformance(s) specified in the report and
to deliver the corrected Developer Deliverable to TOWER. The process set forth
in this SECTION 2.3 shall continue until the Developer Deliverable is fully
accepted; provided that TOWER or Developer may terminate the applicable SOW
[***] if such process is [***] (unless otherwise set forth in a SOW) and the
Developer Deliverable has not been accepted by TOWER. Such a termination shall
not be deemed a termination for breach.
2.4 DELIVERY. All deliveries of software or electronic files made pursuant
to this Agreement shall be made electronically unless otherwise agreed to by the
parties. Each party shall use commercially reasonable efforts to make all
Deliverables available electronically, unless it is physically impossible to do
so.
2.5 WATERMARKS. Unless otherwise specified in the relevant SOW, Developer
may, in its sole discretion, incorporate watermarks in the Developed Technology
it provides to TOWER Customers to uniquely identify such Developed Technology,
provided that such watermarks shall not interfere with the performance of any
Developed Technology. TOWER shall provide Developer any information that is
required to write watermarks compatible with the Designated TOWER Process(es).
3. LICENSE GRANTS
3.1 LICENSE TO TOWER. Subject to the terms and conditions of this
Agreement, Developer grants to TOWER and TOWER's Affiliates, under Developer's
Intellectual Property Rights in and to the Developed Technology (including,
without limitation, in Self Adaptive Silicon, AEFuse and AEON as embodied
therein), a personal, worldwide, non-exclusive, non-assignable (except as
otherwise provided in SECTION 14.6), non-sublicensable, non-transferable (except
as otherwise provided in SECTION 14.6) license solely to make Licensed Products
using the Designated TOWER Process(es) for TOWER Customers that have licensed
from Developer the right to have made Licensed Products at TOWER. The parties
acknowledge and agree that the licenses set forth above shall not be read to
grant to TOWER any license to any portion of the Licensed Products other than
that portion implementing the Developer Technology.
- ----------
[***] THE CONFIDENTIAL PORTION OF THIS AGREEMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
3.2 LICENSE TO THIRD PARTIES. Upon TOWER's request, Developer agrees to
license the Developed Technology (or derivatives thereof developed under this
Agreement) to TOWER Customers (and any third party design services companies
providing design services to TOWER Customers) pursuant to the specific terms and
conditions set forth in an Exhibit to an SOW (if any), and, to the extent not
inconsistent with such specific terms and conditions (if any), under terms and
conditions mutually agreeable to Developer and the third-party licensee;
provided, however, that Developer shall not be required to (a) license the
Developed Technology or derivatives thereof that have been designed to be
manufactured on the Designated TOWER Process(es) to any TOWER Customer that is
also a Developer Competitor, or (b) offer for license any derivatives of the
Developed Technology that have been designed to be manufactured on the
Designated TOWER Process(es) which Developer is contractually prohibited from
offering generally or which Developer, [***]. To the extent that Developer and
any such third-party licensee agree that such third-party licensee's royalties
to Developer for the Developed Technology are based on [***] agrees to permit
such third-party licensee to disclose [***] under confidentiality obligations
similar to those set forth herein. Developer agrees to provide terms and
conditions to TOWER Customers (other than a Developer Competitor) that are,
[***] Developer shall, within a reasonable period after licensing Developed
Technology to a TOWER Customer, notify TOWER in writing of the names of TOWER
Customers who have licensed Developed Technology from Developer and the specific
Developed Technology so licensed and shall obtain such TOWER Customer's consent
for the reporting specified in SECTION 5.4. Developer acknowledges and agrees
that TOWER Customers that have licensed the Developed Technology (or derivatives
thereof developed under this Agreement) from Developer shall have the right to
engage TOWER as a design services company to provide design and development
services for Licensed Products on behalf of Tower Customers subject to the terms
and conditions of the license agreements between Developer and Tower Customers.
- ----------
[***] THE CONFIDENTIAL PORTION OF THIS AGREEMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
3.3 LICENSE TO DEVELOPED TECHNOLOGY AND CUSTOMER SUPPORT. Subject to the
terms and conditions of this Agreement, Developer hereby grants TOWER a
non-transferable, nonexclusive license to use, reproduce and prepare derivative
works of the Deposit Materials (as defined in SECTION 13.1) during the term of
this Agreement, and following its termination in the event of a Release Event
(as defined in SECTION 13.3), solely as necessary for TOWER to support existing
TOWER Customers that have already licensed the applicable Developed Technology
from Developer (provided, such existing TOWER Customers pay all applicable
license fees and royalties to Developer) and to deliver to new TOWER Customers
the applicable Developed Technology (provided, such new TOWER Customers have
agreed in writing to Developer's then-current terms and conditions and pay all
applicable license fees and royalties to Developer). TOWER acknowledges that it
shall have no right to access the Deposit Materials until the occurrence of a
Release Event.
3.4 TOWER DELIVERABLES. Subject to the terms and conditions of this
Agreement, TOWER grants to Developer, under TOWER's Intellectual Property Rights
in and to the TOWER Deliverables, a personal, worldwide, non-exclusive,
non-assignable (except as otherwise provided in SECTION 14.6),
non-sublicenseable, non-transferable (except as otherwise provided in SECTION
14.6) license to use the TOWER Deliverables solely for the purposes of
developing, customizing and/or porting the Developed Technology to the
Designated TOWER Process(es), developing derivatives of the Developed Technology
solely to deliver to TOWER and TOWER Affiliates and license to TOWER Customers,
and providing such Developed Technology (and the derivatives thereof) and
support for such Developed Technology to TOWER, TOWER Affiliates and TOWER
Customers (and, upon TOWER prior written consent and under NDA, any third party
design services companies providing design services to TOWER Customers). No
other license or right in the TOWER Deliverables is granted to Developer.
3.5 LICENSE GRANT RESTRICTIONS. Neither TOWER nor any TOWER Affiliates
shall use the Developed Technology or Developer Deliverables for any purpose
other than to promote, market, and distribute the Licensed Products manufactured
at TOWER and TOWER Affiliates using the Designated TOWER Processes. In addition,
except as otherwise expressly permitted and required under SECTION 3.3, TOWER
and TOWER Affiliates shall not: (a) reverse engineer or otherwise attempt to
gain access to logic, structure or design of any Developer Deliverable or
Developed Technology except in the ordinary course of failure analysis, quality
assurance, and other services incidental to and for the purpose of providing
foundry services; (b) except with the prior written approval of Developer,
modify or create derivative works of any Developer Deliverable or Developed
Technology except as reasonably required for incorporating the Developer
Deliverables without modification into Licensed Products as designed by TOWER
Customers (or as designed by TOWER as part of design services performed by TOWER
for such TOWER Customers) that have licensed the applicable Developed Technology
from Developer and as provided to TOWER; (c) use or otherwise exploit any
Developer Deliverable or Developed Technology, or any derivative work thereof,
in whole or in part, except as expressly provided in this SECTION 3; (d) remove,
alter, cover or obfuscate any mask work notices, watermarks or proprietary
rights notices placed or embedded by Developer on or in any Developer
Deliverable or Developed Technology, provided the same do not interfere with the
functionality of Developer Deliverables or Developed Technology; or (e) cause or
authorize any third party to do any of the foregoing.
3.6 RESERVATION OF RIGHTS. Either party reserves all rights not expressly
granted in this Agreement, and no licenses are granted by either party to the
other party under this Agreement, whether by implication, estoppel or otherwise,
except as expressly set forth herein.
4. SUPPORT
4.1 TOWER. Subject to payment by TOWER to Developer of the applicable
maintenance and support fees, as set forth in an Exhibit to a SOW, Developer
will provide the following maintenance and support services to TOWER and TOWER
Affiliates during [***]beginning upon the expiration of the Warranty Period set
forth in SECTION 8.2 for the first SOW entered into by the parties: (a) use
commercially reasonable efforts to promptly deliver corrections of any failures
by the Developed Technology to meet the applicable Specifications that are not
attributable to changes in the Designated Tower Process for such Developed
Technology; (b) with notice of improvements, modifications or enhancements to
any Developed Technology (or derivative thereof developed pursuant to this
Agreement) developed by Developer on a regular basis on and after the completion
of the qualification of such Developed Technology; (c) a reasonable amount of
telephone and email technical support for any Developed Technology to help
resolve yield, quality, and other issues, similar in scope and quality to the
technical support that Developer generally provides to its other foundries; and
(d) quarterly update meetings regarding any Developed Technology to discuss
yield, quality and other issues as mutually agreed.
4.2 TOWER CUSTOMERS. During the term of this Agreement, Developer will
offer support services to TOWER Customers pursuant to terms and conditions
mutually agreeable to Developer and such TOWER Customers. Developer shall offer
such support [***].
5. CONSIDERATION
5.1 PAYMENTS. The consideration to be paid by TOWER for the development of
a Developed Technology by Developer under a SOW shall be set forth in an exhibit
to such SOW.
5.2 PAYMENT TERMS. All payments shall be made sixty (60) days after receipt
by TOWER of an invoice generated after the applicable payment event unless
otherwise set forth in the applicable SOW or exhibits thereto. All monetary
amounts set forth in this Agreement refer to U.S. dollars. All payments due
under this Agreement shall be made by check or bank wire transfer in immediately
available funds to an account designated by Developer.
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
5.3 TAXES. All amounts payable to Developer under SECTION 5.1 of this
Agreement are exclusive of sales, or value added taxes imposed by the State of
Israel but inclusive of any withholding taxes and all other taxes, levies, or
duties of any kind which may be imposed in any jurisdiction with respect to
transactions executed pursuant to this Agreement. Without limiting the
generality of the sentence immediately above,
in the event that TOWER is required to withhold tax at source from any amount
payable to Developer, TOWER will remit the amount of such withholding tax to the
appropriate tax authorities and the payment that the Developer shall be entitled
to receive will be reduced by the amount so withheld. TOWER shall, upon request,
furnish to Developer evidence of amounts withheld and paid to any tax
authorities. If requested, TOWER shall make commercially reasonable efforts to
assist Developer in making a claim for a reduced rate of withholding tax.. The
parties agree to commercially reasonable efforts to cooperate to reduce the tax
burden on each party.
5.4 ROYALTY REPORTS. TOWER and TOWER Affiliates agree to make, and to
maintain until [***] after the last payment under this Agreement is due and
paid, complete books, records and accounts with respect to the number and types
of wafers containing Licensed Products manufactured by TOWER and TOWER
Affiliates on a customer-by-customer basis. Developer acknowledges that (a)
TOWER's only current source of information concerning whether a particular TOWER
customer product is a Licensed Product (i.e., contains Developed Technology) is
the TOWER customer's own reporting on such usage (whether directly to TOWER or
through Developer); and (b) any Confidential Information regarding third parties
(including TOWER customers) will only be disclosed to Developer as part of a
periodic report or during an audit to the extent the prior written consent of
such third party to such disclosure has been obtained. Developer shall have the
right to audit such books and records for purposes of verification of such
reports. Any such audit shall be conducted at Developer's expense by independent
internationally recognized auditors selected by TOWER and approved by Developer,
which approval shall not be unreasonably withheld or denied. The audit shall
take place only during normal business hours, and TOWER shall cooperate fully
with Developer or its representatives in any such audit. Upon Developer's
request, within sixty (60) days after the end of each calendar quarter, TOWER
shall provide Developer with a report of the number of wafers containing
Licensed Products manufactured at TOWER on a customer-by-customer basis and any
other information reasonably agreed by the parties as required by Developer for
calculation of royalties due to Developer by TOWER Customers.
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
6. PRESS RELEASES AND MARKETING
6.1 PRESS RELEASES. Upon mutual consent, TOWER and Developer may issue a
joint press release disclosing the nature of their relationship (but not the
terms and conditions of this Agreement); provided, however, the parties agree to
issue a joint press release within thirty (30) days of the date the Developed
Technology in each SOW is qualified by the parties, or if such date would fall
within a TOWER news blackout period mandated by law or regulation, the first
date thereafter not falling within such a news blackout period. The parties
shall issue no separate public announcements or press releases concerning this
relationship until after the date of the joint press release. TOWER and
Developer each have the right to separately and jointly market this relationship
to their mutual and respective customers, the scope and intensity of such
marketing to be determined by each party in its sole discretion. Nothing in this
Agreement shall be interpreted as creating an exclusive marketing or other
relationship between the parties. TOWER and Developer each shall bear their own
costs for any marketing activities, sole or joint.
6.2 USE OF MARKS. Subject to the terms and conditions of this Agreement,
each party (as a licensor party) grants to the other party (as a licensee party)
the right during the term of this Agreement to use its Marks on documentation
and materials associated with promoting the Developed Technology and TOWER's
foundry services ("MARKETING MATERIALS"). All use of such Marks shall be in
conformance with such written trademark usage guidelines as licensor party from
time to time may provide licensee party. Upon licensor party's request, licensee
party will provide licensor party with copies and samples of any materials
bearing the licensor party's Marks that are distributed to any third parties,
and will promptly remedy any failure of such materials to conform with such
reasonable written trademark usage guidelines that are provided to licensee
party by licensor party. Any other use of a licensor party's Marks shall be
subject to the licensor party's prior written consent. Nothing herein shall
grant to licensee party's any right, title or interest in licensor party's Marks
and all use of the Marks shall inure solely to the benefit of licensor party.
6.3 RESTRICTIONS. Each party (as a licensee party) will not, and will
ensure that its Affiliates will not, at any time, directly or indirectly,
register in any country the Marks of the other party (as a licensor party) or
any name or mark substantially similar, confusingly similar or identical
thereto, or challenge the validity of the Marks of the other party. Upon
termination of this Agreement, the licensee party shall cease and desist from
use of licensor party's Marks in any manner.
7. PROPRIETARY OWNERSHIP RIGHTS AND LICENSE
7.1 OWNERSHIP BY DEVELOPER. Except for the rights and licenses expressly
granted to TOWER in this Agreement, and as between Developer and TOWER,
Developer hereby reserves and retains all right, title and interest (including,
without limitation, all Intellectual Property Rights) in and to: (a) the
Developer Marks, (b) the Developed Technology and Developer Deliverables
(subject to TOWER's rights in any underlying TOWER Deliverables, TOWER
Confidential Information, and the Technology owned by Tower under Sub-Section
7.2(c) below), (c) any improvement, modification or enhancement to the Developed
Technology or Developer Deliverables [***] and (d) the Confidential Information
of Developer.
7.2 OWNERSHIP BY TOWER. Except for the rights and licenses expressly
granted to Developer in this Agreement, and as between Developer and TOWER,
TOWER hereby reserves and retains all right, title and interest (including,
without limitation, all Intellectual Property Rights) in and to: (a) the TOWER
Marks, (b) the TOWER Deliverables, (c) any improvement, modification or
enhancement to the TOWER Deliverables: [***] and (d) the Confidential
Information of TOWER.
7.3 LICENSE TO TOWER. To the extent Tower creates or suggests any
improvement, modification or enhancement to the Developed Technology or
Developer Deliverables that [***] (each a "NON SELF ADAPTIVE SILICON
IMPROVEMENT"), Developer hereby grants to TOWER, under Developer's Intellectual
Property Rights in and to each such Non Self Adaptive Silicon Improvement, a
perpetual, irrevocable, worldwide, [***], non-exclusive, non-transferable
(except in connection with an assignment by TOWER as described in SECTION 14.6)
license to use, reproduce, create derivative works of, distribute, make, have
made, sell and offer to sell and import products and services based on or
incorporating such Non Self Adaptive Silicon Improvements. For purposes of
clarification, the foregoing license does not include any license rights to
Developer's pre-existing Intellectual Property Rights.
7.4 FURTHER ACTIONS. Each party shall, without demanding any further
consideration therefor, at the request and expense of the other party take all
reasonably necessary actions and execute all reasonably necessary documents as
requested by the other party, in order to effect the intent of this SECTION 7.
8. REPRESENTATIONS AND WARRANTIES
8.1 NONINFRINGEMENT. Developer represents, warrants and covenants that, to
Developer's knowledge, the Developer Deliverables and Developed Technology as
provided by Developer to TOWER will not infringe any third party Intellectual
Property Rights. Developer represents and warrants it has all the rights and
licenses necessary to provide the Developer Deliverables and Developed
Technology to TOWER pursuant to this Agreement and to grant the licenses granted
in this Agreement. TOWER represents, warrants and covenants that, to TOWER's
knowledge, the TOWER Deliverables provided by TOWER to Developer will not
infringe any third party Intellectual Property Rights. TOWER represents and
warrants it has all the rights and licenses necessary to provide the TOWER
Deliverables to Developer pursuant to this Agreement and to grant the licenses
granted in this Agreement.
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[***] THE CONFIDENTIAL PORTION OF THIS AGREEMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
8.2 LIMITED WARRANTY. For each item of Developed Technology, Developer
warrants that beginning upon Tower's acceptance of each Developer Deliverable,
to be provided under the SOW covering that Developed Technology and for a period
[***] from the date of TOWER's acceptance of the final Developer Deliverable to
be provided under such SOW ("WARRANTY PERIOD") that such Developed Technology
(and, where applicable, each Developer Deliverable), as delivered, will
substantially conform to the Specifications; provided, that TOWER has paid all
applicable payments for such Developed Technology (and, where applicable, each
Developer Deliverable) on or prior to the applicable due date(s). In the event
of nonconformance of the Developed Technology with the above limited warranty,
TOWER shall provide Developer with all available information in written or
electronic form to aid Developer in the reproduction of the error. In the event
of a breach of the warranty above, Developer shall, at its sole expense and as
its sole obligation for such breach: (a) correct the Developed Technology within
a commercially reasonable period so that it conforms with the Specifications,
(b) promptly provide TOWER with a replacement for the defective Developed
Technology which replacement meets the Specifications, or (c) if neither (a) nor
(b) is available upon commercially reasonable terms, refund the amount paid by
TOWER to Developer for the defective Developed Technology, and terminate the
license for such Developed Technology, subject to SECTIONS 12.4(B). The warranty
set forth above shall not apply to Developed Technology that: (x) has been
damaged as a result of misuse, neglect, or accident; (y) has been installed
improperly, wired improperly or repaired, modified or altered by anyone other
than Developer; or (z) has been manufactured on any semiconductor manufacturing
Process other than the exact Process and in same fabrication facility for which
such Developed Technology was developed.
8.3 AUTHORITY. Each party represents and warrants that it possesses the
right and capacity to enter into this Agreement.
8.4 WARRANTY DISCLAIMERS. NEITHER PARTY MAKES ANY REPRESENTATIONS OR
WARRANTIES OF ANY KIND (EXPRESSED, IMPLIED, STATUTORY OR OTHERWISE) WITH RESPECT
TO ITS MARKS, INTELLECTUAL PROPERTY RIGHTS, DELIVERABLES OR TECHNOLOGY OR ANY
ELEMENT OF THE FOREGOING OTHER THAN AS EXPLICITLY SET FORTH IN SECTION 8 OF THIS
AGREEMENT. THE PARTIES EXPRESSLY DISCLAIM ANY OTHER WARRANTIES, EXPRESS OR
IMPLIED, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE AND NONINFRINGEMENT, WHETHER ARISING IN LAW, CUSTOM, CONDUCT
OR OTHERWISE, AND THEIR EQUIVALENTS UNDER THE LAWS OF ANY JURISDICTION.
8.5 NO REPRESENTATIONS OR WARRANTIES. TOWER shall not make any
representations or warranties regarding the Developer Deliverables or Developed
Technology unless otherwise authorized under this Agreement. Developer shall not
make any representations or warranties regarding the TOWER Deliverables unless
otherwise authorized under this Agreement.
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
9. INDEMNIFICATION
9.1 BY DEVELOPER. Developer will defend and/or settle any third party claim
or action against TOWER and its Affiliates ("INDEMNIFIED PARTIES"), and hold the
Indemnified Parties harmless from and against any and all damages, judgments,
claims and expenses to the extent arising out of a claim by a third party that
the Developer Deliverables or Developed Technology as used within the scope of
this Agreement infringe or violate any [***] of a third party. TOWER agrees that
Developer shall be released from the foregoing obligation unless the Indemnified
Party provides Developer: (a) prompt written notification of the claim or
action; (b) sole control and authority over the defense and settlement thereof;
and (c) all reasonably available information, assistance and authority to settle
and/or defend any such claim or action.
9.2 LIMITED REMEDIES. If any Developer Deliverable or Developed Technology
becomes, or in Developer's opinion may become, the subject of an infringement
action or claim, Developer may in its sole option: (a) procure, at no cost to
TOWER, the right to continue using, the Developer Deliverable or Developed
Technology; (b) replace or modify the Developer Deliverable to render it
non-infringing, provided that there is no material loss of functionality and
Developer performs without charge to the Indemnified Party, or fully reimburses
the Indemnified Party costs associated with, all re-qualification,
re-characterization or other work required as a result of such changes that
Developer performed on the allegedly infringing Developer Deliverable or
Developed Technology; or (c) if neither (a) or (b) are commercially feasible,
terminate the license for that Developer Deliverable or Developed Technology and
refund the unamortized portion of fees (including any support and maintenance
amounts) paid by TOWER with respect to such Developer Deliverable and associated
Developed Technology, provided that such termination shall not be effective
until TOWER and TOWER Affiliates have had a commercially reasonable period of
time to fulfill any outstanding binding orders to TOWER Customers to manufacture
and deliver Licensed Products containing such Developer Deliverable and/or
Developed Technology (which orders, such TOWER Customers have not requested to
cancel), or to find a replacement therefor which is satisfactory to such TOWER
Customers.
9.3 EXCEPTIONS. Developer will have no liability under this SECTION 9 for
any claim or action where such claim or action would have been avoided but for:
(a) modifications of the Developer Deliverable, Developed Technology or portions
thereof, made other than by or for Developer, (b) use of the TOWER manufacturing
Process to manufacture the Developer Deliverable or Developed Technology; (c)
use of the Developer Deliverable or Developed Technology outside the scope of
the licenses hereunder or in combination with other hardware, software or other
technology not provided by Developer; or (d) arising out of the TOWER
Deliverables.
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[***] THE CONFIDENTIAL PORTION OF THIS AGREEMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
9.4 BY TOWER. TOWER will defend and/or settle any third party claim or
action against Developer, and hold the Developer harmless from and against any
and all damages, judgments, claims and expenses to the extent arising out of a
third party claim that the TOWER Deliverables as used within the scope of this
Agreement infringe or violate any [***] of a third party. Developer agrees that
TOWER shall be released from the foregoing obligation unless the Developer
provides TOWER: (a) prompt written notification of the claim or action; (b) sole
control and authority over the defense and settlement thereof; and (c) all
reasonably available information, assistance and authority to settle and/or
defend any such claim or action.
9.5 LIMITED REMEDIES. If any TOWER Deliverable becomes, or in TOWER's
opinion may become, the subject of an infringement action or claim, TOWER may in
its sole option: (a) procure, at no cost to Developer, the right to continue
using, the TOWER Deliverable; (b) replace or modify the TOWER Deliverable to
render it non-infringing, provided that there is no material loss of
functionality and TOWER performs without charge for the Developer or fully
reimburse Developer costs associated with all re-qualification,
re-characterization or other work required as a result of such changes that
TOWER performed on the allegedly infringing TOWER Deliverable; or (c) if neither
(a) or (b) are commercially feasible, terminate the license for that TOWER
Deliverable.
9.6 EXCEPTIONS. TOWER will have no liability under this SECTION 9 for any
claim or action where such claim or action would have been avoided but for: (a)
modifications of the TOWER Deliverable, or portions thereof, made other than by
or for TOWER; (b) use of the TOWER Deliverables outside the scope of the
licenses hereunder or in combination with other hardware, software or other
technology not provided by TOWER; or (c) arising out of the Developer
Deliverables or Developed Technology (excluding the portion attributable to the
TOWER Deliverables).
9.7 DISCLAIMER. THE FOREGOING PROVISIONS OF THIS SECTION 9 STATE THE ENTIRE
LIABILITY AND OBLIGATION (EXPRESS, STATUTORY, IMPLIED OR OTHERWISE) OF EACH
PARTY, WITH RESPECT TO ANY ACTUAL OR ALLEGED INFRINGEMENT OF ANY INTELLECTUAL
PROPERTY RIGHTS OR CLAIMS THEREOF.
10. LIMITATION OF LIABILITY
10.1 EXCEPT FOR THE SPECIFIC LIABILITIES DESCRIBED IN SECTION 10.3 BELOW,
UNDER NO CIRCUMSTANCES, SHALL EITHER PARTY BE LIABLE FOR ANY SPECIAL, INCIDENTAL
OR CONSEQUENTIAL DAMAGES ARISING IN ANY WAY OUT OF THIS AGREEMENT OR THE USE OF
THE DEVELOPER DELIVERABLES, DEVELOPED TECHNOLOGY OR TOWER DELIVERABLES, HOWEVER
CAUSED, (WHETHER ARISING UNDER A THEORY OF CONTRACT, TORT (INCLUDING
NEGLIGENCE); OR OTHERWISE), INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOST
PROFITS, LOSS OF DATA, OR COSTS OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES,
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
10.2 EXCEPT FOR THE SPECIFIC LIABILITIES DESCRIBED IN SECTION 10.3 BELOW,
EACH PARTY'S TOTAL LIABILITY ARISING OUT OF ANY SOW SHALL NOT EXCEED THE GREATER
OF (A) THE TOTAL AMOUNTS PAID AND PAYABLE TO DEVELOPER PURSUANT TO SECTION 5 FOR
SUCH SOW AND (B) [***] IF TOWER HAS NOT PAID DEVELOPER ANY MILESTONE PAYMENT
UNDER SUCH SOW, [***] IF TOWER HAS PAID DEVELOPER ONE (1) MILESTONE PAYMENT
UNDER SUCH SOW, [***] IF TOWER HAS PAID DEVELOPER TWO (2) MILESTONE PAYMENTS
UNDER SUCH SOW, [***] IF TOWER HAS PAID DEVELOPER THREE (3) MILESTONE PAYMENTS
UNDER SUCH SOW, AND [***] IF TOWER HAS PAID DEVELOPER FOUR (4) OR MORE MILESTONE
PAYMENTS UNDER SUCH SOW.
10.3 IN THE CASE OF [***], EACH PARTY'S TOTAL LIABILITY SHALL NOT EXCEED
[***], WHICH FIGURE MAY INCLUDED CONSEQUENTIAL AND INDIRECT DAMAGES.
10.4 THE LIMITATIONS ON EITHER PARTY'S LIABILITY SET FORTH IN THIS SECTION
10 SHALL APPLY NOTWITHSTANDING THE SUCCESS OR EFFECTIVENESS OF OTHER REMEDIES.
FOR PURPOSES OF CLARIFICATION, THE LIMITATIONS IN THIS SECTION 10 SHALL NOT
APPLY TO ANY INFRINGEMENT OR MISAPPROPRIATION BY ONE PARTY OF THE OTHER PARTY'S
INTELLECTUAL PROPERTY RIGHTS.
11. CONFIDENTIALITY
11.1 DUTY TO MAINTAIN CONFIDENTIALITY. Each party agrees to accept
Confidential Information from the other party solely for use in connection with
performance of its obligations and exercise of its express rights granted under
this Agreement and that for a period of five (5) years from the date of
disclosure it will hold in strict confidence and not disclose, publish, or
disseminate such Confidential Information, to the extent it is not Residual
Information, to anyone other than those of its employees and subcontractors with
a need to know and have executed appropriate confidentiality agreements, nor use
Confidential Information for its own or any third party's benefit, without the
prior written approval of an authorized representative of originating party. The
receiving party will protect Confidential Information of the disclosing party
from disclosure, publication, dissemination and unauthorized use with the same
degree of care the receiving party uses to protect its own confidential and
proprietary information of similar nature, but in no event less than a
reasonable degree of care.
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[***] THE CONFIDENTIAL PORTION OF THIS AGREEMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
11.2 EXCEPTIONS. The receiving party may disclose Confidential Information
if required by operation of law or any tribunal of competent jurisdiction,
provided that it will take reasonable steps to first give the originating party
sufficient prior notice to contest the order to disclose, and must cooperate
with the originating party in any efforts by the originating party to obtain a
protective order or other confidential treatment. The parties shall have the
right to disclose the terms of this Agreement to attorneys, government agencies,
financial advisors and potential investors and acquirers (of the party or the
party's relevant foundry, division, or product line), subject to reasonable
confidentiality provisions.
11.3 RESIDUALS; NO LICENSES. The parties acknowledge that exposure to
Confidential Information necessarily will mean that personnel of a receiving
party will learn and may retain Residual Information. This Agreement shall not
restrict use of Residual Information by employees of a receiving party;
provided, however, that nothing in this SECTION 11 shall be deemed to grant any
rights under disclosing party Intellectual Property Rights to the receiving
party or their personnel in excess of those license rights expressly granted
under SECTION 3 above. All Confidential Information remains the property of the
disclosing party, unless otherwise conveyed under the terms of the Agreement and
any license under Intellectual Property Rights must be express and in writing
signed by both parties.
11.4 INJUNCTIVE RELIEF. The parties acknowledge that any breach or
threatened breach of the obligations of confidentiality contained in this
SECTION 11 may cause substantial harm to the non-breaching party that may not be
reasonably or adequately compensated with monetary damages. Accordingly, in
addition to any other available remedies, the parties recognize each party's
right to seek injunctive relief in connection with such breach or threatened
breach.
12. TERM AND TERMINATION
12.1 TERM. This Agreement will be in effect for [***] term commencing on
the Effective Date unless earlier terminated in accordance with the terms of
this Agreement. Unless terminated earlier, this Agreement will renew
automatically for additional one (1) year terms unless either party delivers to
the other party written notice of its intention not to renew at least thirty
(30) days prior to the end of the initial or any renewal term.
12.2 TERMINATION FOR CAUSE.
(a) Either party may terminate upon written notice this Agreement or
any SOW hereunder if: the other party breaches any material provision of
this Agreement or any SOW and fails to remedy such breach within [***]
after receipt of the non-breaching party's written notice of such breach.
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
(b) Either party may terminate upon written notice this Agreement if:
(i) the other party dissolves, becomes adjudged insolvent or
makes a general assignment for the benefit of its creditors;
(ii) a voluntary or involuntary petition or proceeding is
commenced by or against the other party under the Federal Bankruptcy
Act or any other statute of any state or country relating to
insolvency or the protection of the rights of creditors, or any other
insolvency or bankruptcy proceeding or other similar proceeding for
the settlement of the other party's debt is instituted, and such
petition or proceeding, if involuntary, is not dismissed within sixty
(60) days of commencement; or
(iii) a receiver of all or substantially all of the property of
the other party is appointed.
12.3 Either party may terminate this Agreement pursuant to SECTION 2 above
or SECTION 14.10 below.
12.4 EFFECT OF TERMINATION. Termination or expiration of this Agreement
shall terminate all Statements of Work then in effect (but not any payment
obligations accrued prior to termination), but the termination of a Statement of
Work shall not affect this Agreement or other Statements of Work then in effect.
(a) Upon TOWER's termination of this Agreement or any SOW for Developer's
default, the licenses granted TOWER and TOWER Affiliates under SECTION 3 of this
Agreement with respect to each item Developed Technology accepted by TOWER under
this Agreement or the terminated SOW (as the case may be) will survive such
termination until the expiration of the then-current term of this Agreement,
subject to TOWER's full payment of all applicable amounts due for the acceptance
of such Developed Technology and TOWER's compliance with the applicable terms
and conditions of this Agreement. Upon the expiration of the then-current term
of this Agreement the rights of TOWER and TOWER Affiliates in such Developed
Technology shall be governed by SECTIONS 12.4(B) and 12.5.
(b) Upon any expiration or termination of this Agreement or any specific
Statement of Work other than TOWER's termination of this Agreement for
Developer's default, all rights and licenses granted to TOWER and TOWER
Affiliates under this Agreement for the Developed Technology provided under the
terminated Agreement or SOW (as the case may be), and TOWER and TOWER Affiliates
shall cease to design, develop, modify, translate, manufacture or use any such
Developer Deliverables or Developed Technology, provided, however, that the
rights and licenses granted to TOWER and TOWER Affiliates to manufacture
Licensed Products that are then in production or design-in by TOWER Customers
and that incorporate such Developer Deliverables or Developed Technology which
have been licensed by such TOWER Customers from Impinj (collectively, the
"EXISTING PRODUCTS") shall continue subject to TOWER's and TOWER Affiliates'
compliance with all applicable terms and conditions of this Agreement, including
without limitation, SECTION 3.5;
(c) Upon any expiration or termination of this Agreement or any specific
Statement of Work:
(i) TOWER shall pay according to the terms of this Agreement any
amounts due to Developer and relating to any terminated SOW outstanding at
the time of such termination. Within thirty (30) days of termination,
Developer shall invoice TOWER for any SOW milestones or other invoiceable
SOW events that occurred prior to such termination, and TOWER shall pay
such invoices according to the terms of this Agreement;
(ii) all rights and licenses granted to Developer will terminate,
except that the rights and licenses granted to Developer to support and
provide maintenance for Existing Products; provided, that Developer
complies with all applicable terms and conditions of this Agreement; and
(iii) Upon request by the other party, each party shall return or
destroy within 30 days, at the other party's option, all Confidential
Information it received from the other party relating to any terminated
Statement of Work, and in the case of termination of the Agreement, all
Confidential Information of the other party; provided however that in
either case, each party shall be entitled to retain sufficient copies of
those elements of the other party's Confidential Information as are
reasonably necessary to exercise those of its rights which may survive
under this SECTION 12.4 and SECTION 12.5.
12.5 SURVIVAL. SECTIONS 1, 3.5, 3.6, 5.4, 6.3, 7, 8, 9, 10, 11, 12 and 14
and all unpaid but accrued obligations will survive any expiration or
termination of this Agreement. Notwithstanding the foregoing, the termination of
this Agreement will not relieve the parties of any liability or obligation that
accrued prior to such termination.
13. [***]
13.1 [***]. "[***]" shall mean one copy of the any [***] listed in a [***]
as [***] to be [***]..
13.2 [***]. Developer shall [***]with [***] pursuant to a mutually-agreed
[***] consistent with this SECTION [***].
13.3 UPDATES. Developer shall update the [***] within a reasonable period
(not to exceed forty-five (45) days) of any update to the [***] generally
provided to [***].
13.4 [***]. A "[***]" is defined as the occurrence of either of the
following during the term of this Agreement: (a) [***]by [***] to either [***]as
required under this Agreement or [***] under a valid [***] agreement [***] or
(b) [***]as required under this Agreement; provided, that: (w) if the [***]is a
failure [***] pursuant to [***] (x) at such time, [***] has [***] all [***]this
Agreement [***] (y) [***]of each such [***]with [***] and (z) [***]within
[***]of the date TOWER [***].
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
13.5 [***] PROCEDURE. If [***]. believes in good faith that [***].has
occurred, [***]. may [***]. (the "NOTICE") to [***]. and to [***]. requesting
[***]. and [***]. that [***]. If [***]. desires [***].,[***]. shall, [***].after
receipt thereof, deliver to [***].that in [***]. view no [***]. (the "[***].").
If [***]., at the end of such [***]. period, does not receive [***]., then
[***].shall deliver a [***].to [***]..
13.6 CONFIDENTIALITY. The [***] shall be deemed Confidential Information of
[***]. [***] shall use its best efforts to prevent, prosecute and enjoin and
actual or threatened unauthorized copying, use or disclosure of the [***].
13.7 TERMINATION. Upon the earlier of (i) termination of this Agreement,
other than termination for cause by [***] which is accompanied with a [***], and
(ii) the date the then-current term of this Agreement would have expired but for
[***] termination of this Agreement for cause, all rights and licenses granted
pursuant to this SECTION 13 and SECTION 3.3 shall terminate, and [***] shall
promptly return the [***] and all copies thereof, whether in whole or in part,
to [***].
14. GENERAL
14.1 COMPLETE AGREEMENT This Agreement (including the attached exhibits)
contains all material and essential terms of a binding agreement between the
parties with respect to the stated subject matter. This Agreement is the entire
agreement between the parties with respect to the stated subject matter; they
supersede all prior understandings and agreements with respect to these matters,
and there are no prior representations, warranties or other agreements relating
thereto. This Agreement may not be modified, except in writing signed by duly
authorized officer of each party. Without limiting the foregoing, the parties
anticipate negotiating additional detailed agreements concerning the matters
involved, and commit to cooperate in good faith with respect to such agreements.
14.2 EXPORT CONTROLS. Each party will comply with all applicable export
control laws, and shall not export (or, knowingly, directly or indirectly effect
any transfer of) any material (including Confidential Information of the other
party identified as subject to export control rules) in violation of such export
control laws.
14.3 GOVERNING LAW. This Agreement shall be governed by the laws of the
State of California, U.S.A. without regard to the conflicts of laws provisions
thereof and without regard to the United Nations Convention on Contracts for
International Sales of Goods.
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
14.4 ESCALATION. Any dispute or disagreement shall first be resolved on a
confidential, expedited basis by escalation in management to senior officers of
both parties in Santa Clara County, California (the "NEUTRAL LOCATION") and
failing such resolution within thirty (30) days of the date of dispute or
disagreement, then through conciliation and mediation before a qualified neutral
mediator appointed by the parties jointly or failing such joint appointment,
then as appointed by the American Arbitration Association.
14.5 VENUE. Any controversy, disputes or claims arising out of and/or
relating to this Agreement which cannot be resolved by negotiation or mediation
as set forth in SECTION Y14.4 above within thirty (30) days (unless a longer
period is otherwise agreed upon), shall be commenced solely in the federal or
state courts sitting in the Northern District of California. Each Party
irrevocably agrees to submit to the personal jurisdiction of such courts and
irrevocably waives objection to such venue. In any such dispute, the parties
expressly waive any right they may have to a jury trial and agree that any such
dispute shall be tried solely by a judge without a jury.
14.6 ASSIGNMENT. Neither party may assign any rights or obligations under
this Agreement without the other party's prior written consent; any prior
assignment made without the requisite consent shall be null and void.
Notwithstanding the foregoing, each party shall have the right to assign this
Agreement to any successor to substantially all its business or assets to which
this Agreement relates, whether by merger, sale of assets, sale of stock,
reorganization or otherwise, and this Agreement may be pledged by Tower for the
benefit of Bank Hapoalim B.M. and Bank Leumi Le-Israel B.M. (collectively, the
"Banks") to secure debt financing made available to Tower in connection with the
construction of Tower's new wafer fab; provided, however, that any assignment to
such banks pursuant to such pledge will be made only in connection with an
assignment of substantially all of the business or assets to which this
Agreement relates. Subject to the foregoing, this Agreement will be binding upon
and inure to the benefit of the successors and the permitted assigns of the
respective parties hereto.
14.7 INDEPENDENT CONTRACTORS. The parties are and shall remain independent
contractors and nothing in this Agreement shall be interpreted as a joint
venture, partnership, franchise, employment, or other form of agreement other
than the development, licensing, marketing and royalty obligations agreed to by
and between independent contractors as set forth in the foregoing and in any
supplement or amendment.
14.8 NOTICES. All notices, payments, reports and other communications
required or permitted hereunder shall be in writing and shall be emailed, mailed
by first class, registered or certified mail, postage prepaid, or otherwise
delivered by hand, by messenger (including express mail courier services) or by
facsimile, addressed to the addresses first set forth above or at such other
address furnished with a notice in manner set forth herein. Such notices shall
be deemed to have been served when delivered or, if delivery is not accomplished
by reason of some fault of the addressee, when tendered. Notices shall be
addressed as follows:
If to TOWER:
Tower Semiconductor Ltd.
Ramat Gavriel Industrial Area
P.O. Box 619
Migdal Haemek, Israel, 23105
Attn: President
If to Developer:
Impinj, Inc.
501 N. 34th Street, Suite 100,
Seattle, Washington 98103
Attn: President
14.9 PARTIAL INVALIDITY. If any paragraph, provision, or clause thereof in
this Agreement shall be found or be held to be invalid or unenforceable in any
jurisdiction in which this Agreement is being performed, the remainder of this
Agreement shall be valid and enforceable and the parties shall negotiate, in
good faith, a substitute, valid and enforceable provision that most nearly
reflects the parties' intent in entering into this Agreement.
14.10 FORCE MAJEURE. No party will incur any liability to the other party
on account of any loss or damage resulting from any delay or failure to perform
all or any part of this Agreement (other than payment of money) if such delay or
failure is caused, in whole or in part, by embargoes, floods, acts of civil or
military authority, acts of nature, riots, acts of war, fires, floods,
hurricanes and explosions, or any similar cause beyond the control of a party
(each, a "FORCE MAJEURE"). The time for performance will be extended for a
period equal to the duration of the delay caused by the Force Majeure, but in no
event longer [***]. If, as a result of a Force Majeure, a party is unable to
resume performance within such [***], the other party will have the right to
terminate this Agreement.
14.11 PRESUMPTIONS. In construing the terms of this Agreement, no
presumption shall operate in either party's favor as a result of its counsel's
role in drafting the terms or provisions hereof.
14.12 WAIVER. The failure of either party to enforce at any time the
provisions of this Agreement, or the failure to require at any time performance
by the other party of any of the provisions of this Agreement, shall in no way
be construed to be a present or future waiver of such provisions, nor in any way
affect the right of either party to enforce each and every such provision
thereafter. The express waiver by either party of any provision, condition or
requirement of this Agreement shall not constitute a waiver of any future
obligation to comply with such provision, condition or requirement.
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
14.13 CUMULATIVE REMEDIES. The remedies under this Agreement shall be
cumulative and not alternative and the election of one remedy for a breach shall
not preclude pursuit of other remedies unless as expressly provided in this
Agreement.
IN WITNESS WHEREOF, the parties have executed this Development Agreement by
their duly authorized representatives.
"DEVELOPER": IMPINJ, INC.
By: __________________
Name: ________________
Title: _______________
"TOWER": TOWER SEMICONDUCTOR LTD.
By: __________________
Name: ________________
Title: _______________
EXHIBIT 4.58
CONFIDENTIAL PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.
LICENSE AND DESIGN AGREEMENT 92-2C/2002
This Design Agreement (this "Agreement") is made and entered into as of 10
January 2003 (the "Effective Date") by and between Tower Semiconductor Limited,
an Israeli Company ("Tower"), and Chipidea Microelectronics S.A., a Portuguese
corporation ("Chipidea").
This License Agreement concerns the design and licensing of various IP Blocks of
Chipidea to Tower and Tower Customers.
RECITALS
WHEREAS, Tower is a silicon wafer foundry providing integrated circuits
manufacturing services for its customers;
WHEREAS, Chipidea is in the business of designing, developing and selling
various types of mixed-signal blocks for integrated circuits as those designed
by Tower Customers; and
WHEREAS, in order for Tower Customer products incorporating the Chipidea IP
Blocks to be manufactured by Tower, the Chipidea IP Blocks must be customized
for use with Tower's manufacturing processes, and Tower wishes to have Chipidea
undertake such customization, working at its facilities in Lisbon, Portugal; and
WHEREAS, in consideration of the customization work of the IP Blocks performed
by Chipidea hereunder to enable use of such IP Blocks by Tower Customers, Tower
agrees to pay the service fees set forth herein.
AGREEMENT
IN CONSIDERATION THEREOF AND THE MUTUAL PROMISES CONTAINED HEREIN, THE PARTIES
HERETO AGREE AS FOLLOWS:
1. DEFINITIONS
a. DELIVERABLES means with respect to each IP Block the items listed in
Exhibit A
b. INTELLECTUAL PROPERTY RIGHTS means any patents, patent rights, trade
marks, service marks, registered designs, topography or semiconductor
maskwork rights, applications for any of the foregoing, copyright,
know-how, unregistered design right, trade secrets and know-how, and
any other similar protected rights in any country.
c. IP BLOCK means any block designed/modified/ported by Chipidea per
Tower requirement
d. SPECIFICATION means the specification of each IP Block as described in
Exhibit B and as may be further agreed, added or amended in writing by
the parties.
e. TEST CHIP means a design structure database containing the IP Block
that can be manufactured at Tower fabrication facility and enable
characterization and validation of the IP Block.
f. TOWER CUSTOMER means a customer or potential customer of Tower that
desires to use an IP Block designed by Chipidea.
g. TOWER DESIGN KIT means the items listed in Exhibit G as delivered by
Tower and further revised by Tower.
h. TOWER PROCESS(ES) means the Tower [***] and [***], [***], [***] to
[***] metal layers [***] process technology [***]and [***]
o.13-micron, [***] layer, [***] to [***] metal layers [***] process
technology and any additional process the parties agree on in writing.
2. STATEMENT OF WORK, SCHEDULE, AND DELIVERABLES
For each IP Block developed by Chipidea:
a. Chipidea shall use its best efforts to perform the tasks required to
generate and deliver to Tower the items listed in Exhibit A with
respect to such IP Block incorporated by reference and attached hereto
("Deliverables") and including the responsibilities specified in
section 12(c) below.
b. Chipidea shall use its best efforts to ensure that the IP Block and
its Deliverables will meet its Specification and complete the tasks
and provide the Deliverables according to the schedule of milestones
listed on Exhibit C incorporated by reference and attached hereto.
c. Chipidea shall use its best efforts to design, package, test and
characterize the Test Chip to ensure the IP Block performance. Test
and characterization shall be performed across all the conditions
specified in the Specifications.
d. Exhibits B, C and D shall be separately prepared and agreed to by the
parties and shall be incorporated and be made part of this Agreement.
e. For each IP block Chipidea and Tower will hold the following reviews:
a. Kickoff Review to discuss and agree on the Initial Specifications
b. Concept Review to discuss and agree on the Specifications
signoff, including:
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o Design Concept Review
o Architecture Review
o Verification Strategy - [***]
o Test Strategy and Test-Chip Architecture
o Others
c. Design Review 1 including:
o Design Entry review - [***]
o [***] Simulation Results review
o Test Modes
d. Design Review 2 including:
o Final design entry and layout review
o Physical Verification review
o [***] Simulation Results review
o Test Chip final Specifications
o Others
e. Test Chip Design Review
f. Post [***] Review
g. IP Block Package Qualification Review
3. DESCRIPTION AND OWNERSHIP OF THE DELIVERABLES
Tower shall own all Intellectual Property Rights in the Tower Design Kit as
described in Exhibit F.
Chipidea shall own all Intellectual Property Rights in the IP Blocks and
respective Deliverables, [***] provided by Chipidea as part of the
Deliverables, as described in Exhibits A.
Chipidea's Deliverables for each IP Block shall consist of the following
analog cells and associated digital functions and their relevant technical
documentation:
a. The [***] blocks supplied by Chipidea for embedded use in the
mixed-signal semiconductor products of Tower's customers, as described
by the Specification.
b. The [***] blocks supplied by Chipidea that contain a digital part and
an analog part.
c. [***]
d. Chipidea considers [***] to constitute Chipidea's Intellectual
Property, whether provided separately or not.
e. The analog part is a data base for integration containing the
following 3 main levels of hierarchy:
i. Macro Block - corresponds to a multi-function architecture
defined to take into account the required performance, area,
power dissipation and target technology for integration.
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ii. Functional Block - corresponds to the architecture of a specific
function (e.g. [***]) that is required for the implementation of
said macro block.
iii. Component Cell - corresponds to the architecture of a specific
component (e.g. [***]) that is required for the implementation of
said functional blocks.
f. For each IP Block, the Deliverables will be implemented in the Tower
Process(es) as described in the respective Exhibits A, B and C.
4. LICENSE
a. Subject to the payment of the fees specified in section 9 below with
respect to each IP Block, Chipidea hereby grants to Tower a
non-exclusive, perpetual, irrevocable, world-wide, multiple use
license to use the Deliverables of each IP Block and their relevant
documentation and all related Intellectual Property Rights of
Chipidea, to manufacture sell and otherwise distribute integrated
circuits of Tower Customers containing IP Blocks to Tower Customers
and to design, develop, manufacture, have manufactured, use, modify,
sell and otherwise distribute products, provided that Chipidea retain
all Intellectual Property Rights in such IP Blocks and their relevant
documentation, including the modifications thereto, except for the
derived portion thereof developed by Tower or Tower Customer
hereunder, which shall be owned by Tower or Tower Customer, as the
case may be. As of the Effective Date of this Agreement, Tower does
not intend to use Chipidea's IP Blocks to design its proprietary
integrated circuits and the IP Blocks are only planned to be used by
Tower Customers for the design of integrated circuits.
b. Subject to the payment of fees by a Tower Customer, as specified in
section 14 below with respect to each IP Block, Chipidea shall grant
such Tower Customer a non-exclusive, perpetual, irrevocable,
world-wide, multiple use license (subject to fees being paid) to use
the Deliverables of such IP Block and their relevant documentation and
all related Intellectual Property Rights of Chipidea, to design,
develop, manufacture at Tower only, use, modify, sell and otherwise
distribute products, provided that Chipidea retain all Intellectual
Property Rights in such IP Blocks and their relevant documentation,
including the modifications thereto, except for the derived portion
thereof developed by the Tower Customer hereunder, which shall be
owned by the relevant Tower Customer.
5. CONDITIONS OF USE
a. All Functional and Component Block Cells, as defined in Section 3,
transferred by Chipidea to Tower or Tower Customer for the license
granted hereunder are the Property of Chipidea and can not be used by
Tower or Tower Customer except in the context of the Macro Block where
they are embedded.
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b. For technical reasons related to production requirements, Tower or
Tower Customer may carry out small changes to IP Blocks and their
relevant technical documentation, giving due notice of such changes to
Chipidea. Upon Tower or Tower Customer request for minor design
changes to the IP Blocks, Chipidea will support and perform such
changes under reasonable commercial terms. If Chipidea created a
modified version of an IP Block for Tower of a Tower Customer,
Chipidea will offer such modified IP Blocks to [***] customers of
Tower under the terms specified in section 14 for such IP Block.
c. Major changes to IP Blocks and their relevant technical documentation
that might be required by Tower or Tower Customer should be carried
out with prior consultation and collaboration with Chipidea.
d. In the event that either party believes that the characterization
results of the Test Chip shows that the IP Block manufactured on Tower
manufacturing process failed to meet the Specification for such IP
Block, Chipidea shall debug and/or perform a failure analysis of the
silicon and present it conclusions to Tower [***]. Unless the parties
agree that the reason for the failure is due to [***] or [***]
(including [***]), Chipidea shall re-design, re tape-out a Test Chip,
re-test and re-provide a silicon validation report for such IP Block
[***].
e. Subject to the provisions of section 13 below, additional design
services that might be provided by Chipidea to carry out the
modification to a previously agreed Specification of a given data base
will be quoted by Chipidea and Tower can decide if it wishes to
proceed on this basis.
f. Chipidea will not be held responsible for the possible changes of
performance and conditions of operation of databases whose contents
have been changed by Tower or a Tower Customer to meet specific
requirements in the event Tower or a Tower Customer makes such changes
without being compliant with the obligations set forth in Sections
5.b. and 5.c. above.
g. In the event Chipidea demonstrates a pattern of failure to honor the
Agreement, maintain the IP Blocks or support either Tower or a Tower
Customer with respect to IP Blocks, Tower shall have a right to use,
modify, maintain, support, distribute directly to Tower Customers all
IP Blocks developed by Chipidea for Tower and use subcontractors for
all the above activities, [***].
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
6. PROTECTION AND SECURITY OF DESIGN
a. "Confidential Information" shall mean that information of either party
which is disclosed to the other party ("Receiving Party") by reason of
the parties' relationship hereunder, either directly or indirectly in
any written or recorded form, orally, or by drawings or inspection of
parts or equipment, and, either in writing and marked as confidential
or proprietary, or if oral, reduced to writing similarly marked within
thirty (30) days of disclosure.
b. Receiving Party covenants and agrees that it will receive and use the
Confidential Information only as expressly permitted in this
Agreement, and will not otherwise employ such Confidential
Information, and shall not disclose such Confidential Information to
any person or persons who do not need to have knowledge of such
Confidential Information in the course of their employment.
c. It is expressly understood that Receiving Party shall not be liable
for disclosure of any Confidential Information if the same:
i. is or becomes part of the public domain without violation of this
Agreement;
ii. is known and on record at the Receiving Party prior to disclosure
by the Disclosing Party;
iii. is lawfully obtained by the Receiving Party from a third party;
iv. is furnished to others by the Disclosing Party without similar
restrictions to those herein contained as to use or disclosure
thereof;
v. is developed by the Receiving Party completely independently of
any such disclosure by the Disclosing Party;
vi. is ascertainable from a commercially available product;
vii. is disclosed pursuant to the order or requirement of a government
body, court or administration agency or by applicable law or
regulation; or
viii. is disclosed after five (5) years from the receipt of the
respective Confidential Information.
7. INTELLECTUAL PROPERTY INDEMNITY
a. Chipidea warrants that to the best of its belief and knowledge none of
its designs, IP Blocks, Deliverables or Intellectual Property
components supplied to Tower under this agreement infringes on any
third party Intellectual Property Right.
b. Chipidea warrants that there are no pending claims or actions
commenced against Chipidea by any third party. Chipidea will alert
immediately Tower if any legal actions, threats or claims are
commenced or decided against Chipidea by a third party.
c. In the event that a third party claims that Tower is in breach of its
Intellectual Property rights due to the use of IP Blocks, Deliverables
or Chipidea designs, Chipidea shall indemnify Tower for any damages
awarded against Tower and pay all expenses (including attorney fees)
incurred by Tower in connection with such a claim or lawsuit. The
total amount to be paid out by Chipidea for said indemnification and
expenses shall not exceed [***]. Notwithstanding the foregoing, the
indemnification provided in this Section 7.c shall not apply to the
claim to (i) any portion of the IP Blocks and their relevant technical
information that is proprietary to Tower or Tower Customer, where said
infringement would occur if such portion proprietary to Tower or Tower
Customer were stand-alone (ii) solely related to the products
manufactured by Tower which implements and/or incorporates said IP
Blocks and their relevant technical information and that the claim is
not related to the IP Blocks and their relevant technical information.
d. At the end of the design project, and before fabrication starts,
Chipidea and Tower will carry out a joint review meeting for risk
assessment of third party patent rights. In the event that such a
possibility is identified during the review meeting, both parties
agree to fully investigate the source of third-party ownership of
techniques employed in the design.
Chipidea will carry out all the modifications that will be deemed
necessary to make its designs non-infringing.
e. In addition to Section 7.d above, if the IP Blocks and their relevant
technical information and/or documentation become or in the opinion of
Chipidea is likely to become the subject of a claim of infringement of
a patent, trademark, copyright or other Intellectual Property Rights,
Chipidea may, at its option (1) procure for Tower the right to use
such materials [***]; or (2) replace or modify or re-perform the same
to make them non-infringing, provided that substantially the same
function is performed by the replacement or modified version of such
IP Blocks. In the event the right to continue use cannot be reasonably
procured for Tower or the IP Blocks cannot be replaced or modified to
make it non-infringing with the same degree of performance and
functionality, Chipidea [***].
8. CONSEQUENTIAL DAMAGE WAIVER
Except for liability under section 7 above, in no event shall either party
be liable for any special, incidental, consequential or indirect damages
resulting from its performance or failure to perform under this agreement,
whether based upon contract, negligence, strict liability in tort, warranty
or any other basis whatsoever (including, without limitation, damages for
loss of business profits), even if such party has been notified of the
possibility of such damages.
9. PAYMENT
a. With respect to each IP Block, Tower shall pay Chipidea the fees
specified in Exhibit D incorporated by reference and attached hereto.
Each payment is due within [***] days after receipt of an invoice upon
completion of the respective milestone.
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b. All the payments to be made to Company shall be direct transfer to the
following bank account:
Bank Name: [***]
Address: [***]
A/C Name: [***]
For USD Payments:
International Bank Account Number: (IBAN): [***]
For EURO Payments:
International Bank Account Number: (IBAN): [***]
c. Payments shall be made without bank charges.
d. If any applicable law requires Tower to deduct or withhold amounts
from any payments to Chipidea under this Agreement, Tower shall effect
such deduction or withholding, remit such amounts to the appropriate
taxing authorities and promptly furnish Chipidea with tax receipts
evidencing the payments of such amounts. Chipidea shall provide all
such assistance as Tower may reasonably require in obtaining such
withholding tax certificates. Notwithstanding the foregoing, in no
event shall Tower pay to Chipidea less than_[***] of any payment
specified hereunder (such payment measured prior to any withholding of
tax), regardless of any amount required by law to be withheld.
Accordingly, if Tower has the legal obligation to withhold taxes equal
to more than [***] of an amount to be paid hereunder, Tower shall
withhold such excess amount, but shall add to the payment such amount
that Chipidea receives _[***] of the payment.
e. Any amount not received when due and payable shall bear an interest at
an annual rate of [***] points above the discount rate of the European
Central Bank. Chipidea reserves the right to claim additional damages,
if any, caused by Customer's delay in payment.
f. Tower may not offset against its payment obligations any claims
against Chipidea except those claims that are undisputed or judicially
awarded.
g. Any conflicting purchasing terms and conditions of Tower will not
affect the obligations of Chipidea, unless otherwise agreed to by
Chipidea in writing. This agreement shall be implemented and come into
effect upon signing a purchase order by Tower.
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10. TERM AND TERMINATION
a. Term. This License shall be effective on the Effective Date and shall
continue until terminated in accordance with this Section 10.
b. Termination for Cause. Either party will have the right to immediately
terminate this License if the other party is in breach of any material
obligation hereof and such breach is not cured within [***] after
receipt or written notice of such breach from the non-breaching party,
or within such additional cure period as the non-breaching party may
authorize.
c. Termination for Insolvency. Either part shall have the right to
immediately terminate this License upon written notice in the event
that the other party (i) voluntarily or involuntarily becomes the
subject of a petition in bankruptcy or of any proceeding relating to
insolvency, receivership, liquidation or composition for the benefit
of creditors, or (ii) admits in writing its inability to pay its debts
as they become due.
d. Consequences of Termination. Upon termination of this License, the
licenses, rights and obligations granted hereunder shall terminate
except as expressly set forth in this License. Except as necessary to
exercise the rights set forth in Section 10(e), each party shall
return or destroy, at the disclosing party's discretion, the
Confidential Information received from the other party pursuant to
EXHIBITS A AND B.
e. Survival. Sections 3, 4, 5, 6, 7, 8 shall survive termination of this
License. In addition to the foregoing, the license rights specified in
Section 4 with respect to any Tower or Tower Customers products that
are in existence, substantially designed or for which Tower or a Tower
Customer has received binding contractual commitments as of the
effective date of termination of this License, shall survive such
termination provided all fees described in Appendix C or D have been
paid to Chipidea.
11. GENERAL
a. Neither party may assign its rights or obligations under this
Agreement without the prior written consent of the other, and any
purposed assignment without such consent shall have no force or
effect. Subject to the foregoing, this Agreement shall bind and inure
to the benefit of the respective parties hereto and their successors
and assigns.
b. Chipidea acknowledges and agrees that this Agreement may be pledged
for the benefit of Bank Hapoalim B.M and Bank Le umi Le-Israel B.M. to
secure debt financing made available to Tower from Bank Hapoalim B.M
and Bank Leumi Le-Israel B.M in connection with the construction of
Tower's new fabrication facility (Fab-2).
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[***] THE CONFIDENTIAL PORTION OF THIS AGREEMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
c. No failure or delay by either party to enforce or take advantage of
any provision or right under this Agreement shall constitute a
subsequent waiver of that provision or right, nor shall it be deemed
to be a waiver of any of the other terms and conditions of this
Agreement.
d. No technical information obtained hereunder, nor any direct product
thereof is intended to, or shall be exported or re-exported, directly
or indirectly to any destination restricted or prohibited by export
control laws or regulations of the United States, including the U.S.
Export Control Administration Act, without authorization from the
appropriate governmental authorities. In addition, the parties agree
that no technology furnished to the other will be used for any purpose
to develop and/or manufacture nuclear, chemical, biological weapons
and/or missiles (hereinafter "Weapons of Mass Destruction"). The
parties further agrees that it will not sell semiconductor products
using technology received from the other party hereunder, to any party
if it knows that the end-user of such products will use them for the
development and/or manufacture of Weapons of Mass Destruction.
e. The validity, performance and construction of this Agreement shall be
governed by the laws of England without regard to the conflict of laws
provisions thereof.
f. The parties shall attempt in good faith to resolve any dispute arising
out of or in connection with this Agreement informally.
g. The prevailing party in any legal action arising out of, or related to
this Agreement shall be entitled, in addition to any other rights and
remedies it may have, to reimbursement for its expenses incurred in
such action, including court costs and reasonable attorney's fees.
h. All notices or communications to be given under this Agreement shall
be in writing and shall be deemed delivered upon mail and/or hand
delivery, and upon acknowledged telex or facsimile communication. The
addresses are as follows (or to such other address as the party to
receive the notice or request so designated by written notice to the
other).
If to Chipidea:
[***]
Chipidea Microelectronics, S.A.
Tagus Park, Parque de Ciencia e Tecnologia
Edificio Inovacao IV, Sala 733
2780-920 Porto Salvo
Portugal
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
VAT Number: [***]
Tel: [***], Fax: [***]
If to Tower:
[***]
Tower Semiconductor Limited
Ramat Gavriel Industrial Park,
PO Box 619
Midgal Haemek 23105
Israel
Tel: [***], Fax: [***]
VAT Number:
h. The terms and conditions of this Agreement may not be superseded,
modified, or amended except in writing which states that it is such a
modification, and is signed by an authorized representative of each
party hereto.
i. This Agreement, including exhibits, constitutes the entire Agreement
between the parties as to the subject matter hereof, and supersedes
and replaces all prior or contemporaneous agreements, written or oral,
regarding such subject matter, and shall take precedence over any
additional or conflicting terms which may be contained in either
party's purchase orders or order acknowledgment forms.
j. Force Majeure. Neither party shall be considered in default in the
performance of any obligation hereunder to the extent that the
performance of such obligation is prevented or delayed by a "FORCE
MAJEURE EVENT", which is defined to include a fire, flood, explosion,
strike, war, insurrection, embargo, government requirement, act of
civil or military authority, act of God, or any similar event,
occurrence or condition which is not caused, in whole or in part, by
that party, and which is beyond the reasonable control of that party.
k. Independent Contractors. The parties to this License are independent
contractors. Neither party is an agent, representative or partner of
the other party. Neither party shall have any right, power or
authority to enter into any agreement for or on behalf of, or to incur
any obligation or liability for, or to otherwise bind, the other
party. Neither party shall make any representations and warranties to
third parties regarding the other party's Property, products and/or
services. This Agreement shall not be interpreted or construed to
create an association, joint venture or partnership between the
parties or to impose any partnership obligation or liability upon
either party.
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
l. Severability. If any provision of this License is found invalid or
unenforceable by a court of law or an arbitration panel, the remainder
of this License shall continue in full force and effect and the
applicable provision shall remain in effect to the maximum extent
permissible by law.
12. FABRICATION AND EVALUATION OF THE IP
With respect to each IP Block:
a. If Tower does not report on any deviations from Specification, within
[***] from receipt by Tower of Chipidea's silicon validation report
for such IP Block, then such IP Block will be deemed to be accepted by
Tower.
b. If Tower does not start fabrication of a Test Chip for such IP Block
within [***] from receipt of the Test Chip [***], then such IP Block
will be deemed to be accepted by Tower.
c. Chipidea is responsible for: (i) the design work needed to meet the
agreed Specification; (ii) Provision of a Test Chip in [***] format to
Tower; (iii) Defining the Package required for each Test Chip dice
fabricated by Tower (including bonding diagram) and packaging each
Test Chip; (iv) Characterizing the Test Chip at a the Process, Voltage
and Temperature ranges as agreed in the Specification; Writing a
silicon validation report comparing fabricated Test Chip results with
the Specification. Tower is responsible for all silicon wafer
fabrication activities and for each Test Chip shall deliver to
Chipidea [***] for packaging and testing by Chipidea.
d. Chipidea is responsible to provide comprehensive support for each
Tower Customer which license an IP Block from Chipidea. [***]
13. ENGINEERING CHANGE NOTES
With respect to each IP Block developed by Chipidea:
a. If Tower or Chipidea desires to make a modification to the
specifications, Chipidea will initiate an Engineering Change Order (ECO),
detailing the requested changes and their impact on timescales and costs. Before
any work begins on the requested modification, the Managements of Tower and
Chipidea have to agree to the contents of the ECO.
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
b. Notwithstanding section 13(a) above, in the event that following the
delivery of the Deliverables of an IP Block by Chipidea, Tower introduces [***]
that necessitate(s) a [***] change in the deliverables, Chipidea will redo the
IP Block [***] , to the extent that the scope of such work does not exceed
[***]. In the event the scope of the [***] work exceeds [***], Chipidea will
estimate the scope of work required to redo the IP Block and will notify Tower
through an ECO. Chipidea commits to perform [***] IP Block provided that Tower
commits to pay for the amount of work exceeding [***] at a rate of [***] per
[***].
c. Notwithstanding section 13(a) above, in the event that following the
delivery of the Deliverables of an IP Block by Chipidea, Tower introduces a
[***], Chipidea will re-characterize the IP Block to the updated [***] ([***])
and present the effects of the change to Tower in a report [***]. If following
the report Tower believes that the IP Block needs to be re-validated on silicon,
Tower will agree with Chip idea on a price for redoing a Test Chip for such IP
Block and reporting the new silicon results to Tower, provided that the price
for such activities shall not exceed [***] of the overall price paid by Tower
for such IP Block.
A sample ECO can be seen in Exhibit F
14. INSTANTIATION
a. [***]
b. For each IP Block used by a Tower Customer, the Tower Customer shall pay
Chipidea a manufacturing license fee in accordance with the terms and conditions
set forth in Exhibit E hereunder..
15. JOINT MARKETING
a. Chipidea shall include Tower's name in its customer list and list all IP
Blocks offered to Tower Customers on Chipidea's website in a similar fashion to
the way other IP components are offered by Chipidea to customers of [***]. Each
party may also use the other party's name, logo, trademarks and service
capabilities in its promotional literature, collaterals, marketing website,
presentations and correspondence to customers, provided that such party obtains
the other party's prior approval, such approval not to be unreasonably withheld
or delayed. Upon request, each party will provide its non-confidential sales
collaterals, such as datasheets, brochures and manuals, to the other party, for
purposes of introducing its services to potential customers.
b. Chipidea and Tower shall jointly announce the existence of their
relationship and of this Agreement through a joint press release within [***]
after the Effective Date of this Agreement. The text of the joint press release
shall be mutually agreed upon by Chipidea and Tower.
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
In witness whereof, the parties hereto have caused this Agreement to be signed
below by their authorized representatives.
CHIPIDEA MICROELECTRONICS S.A. TOWER SEMICONDUCTOR LTD.
By: ______________________________ By:______________________________
Name: Jose Epifanio da Franca Name: Yoav Nissan Cohen
Title President and CEO Title: Co-CEO
Date: ____________________________ Date: Jannuary 13, 2003
EXHIBIT 4.59
CONFIDENTIAL PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.
AGREEMENT 14-2A/2005
AMENDMENT TO THE
LICENSE AND DESIGN AGREEMENT 92-2C/2002
BETWEEN TOWER SEMICONDUCTOR LTD.
AND CHIPIDEA MICROELECTRONICA S.A.
This Addendum to the Development Agreement (this "Addendum"), serves to add and
amend that certain Design Agreement 92-2C/2002 dated 12 January 2003 between
Tower Semiconductor Limited, an Israeli Company ("Tower") and Chipidea
Microelectronica S.A., a accompany duly incorporated under the laws of Portugal
("Chipidea") ("Agreement") solely with respect to the development of New IP
Blocks and their subsequent licensing by Chipidea to Tower Customers. This
Addendum is effective as of the date last signed below (the "Effective Date").
RECITALS
The parties desire to amend the Agreement to provide for the following
obligations and responsibilities of the parties relating to the development and
customization of a New IP Block(s) to be performed in Portugal under the
Agreement and its subsequent licensing by Chipidea for the use of Tower's
Customers under a separate end user license agreement between Chipidea and the
Tower Customer.
The parties agree the below terms and conditions are added to and made a
part of the Agreement with respect to the New IP Block and shall apply only to
the New IP Block set forth in this Addendum. Except as otherwise specified in
this Addendum, all the terms and conditions of the Agreement shall apply to the
New IP Blocks. Capitalized terms not otherwise defined in this Addendum shall
have the meaning set forth in the Agreement:
ADDENDUM
0. "New IP Block" means: a [***] to be developed by Chipidea on Tower's
o.13um Process (the [***] process variant, and if applicable, the [***] (or
[***]) process variant).
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
1. Section 6.b of the Agreement shall read as follows: Receiving Party
covenants and agrees that it will receive and use the Confidential Information
only as expressly permitted in this Agreement, and will not otherwise employ or
disclose such Confidential Information, and shall only disclose such
Confidential Information to its employees or contractors who: (i) have signed a
non disclosure agreement with the Receiving Party and (ii) need to have
knowledge of such Confidential Information in the course of their employment or
assigned duties with the Receiving Party.
2. Section 7.d shall not apply
3. Section 9.b shall read as follows: All the payments to be made to
Chipidea shall be direct transfer to the Chipidea bank account. The bank
specifications for the execution of each payment will be detailed in each
electronic invoice. In addition the bank specifications are attached in Exhibit
D so as to enable Customer to prepare its payment process for On-Time payment.
4. Section 9.d shall read as follows: Payments shall be made [***] without
bank charges, deductions or withholding taxes.
5. Section 11.d shall read as follows: The parties agree that no technology
furnished to the other will be used for any purpose to develop and/or
manufacture nuclear, chemical, biological weapons and/or missiles (hereinafter
"Weapons of Mass Destruction"). The parties further agree that it will not sell
semiconductor products using technology received from the other party hereunder,
to any party if it knows that the end-user of such products will use them for
the development and/or manufacture of Weapons of Mass Destruction.
6. In Section 11.h, the Tower focal point for attention shall read to be
[***]; with telephone number [***]
7. Section 13.b shall not apply
8. Section 13.c shall not apply
9. Maintenance and support
a. DOCUMENTATION: Chipidea's New IP Block will be provided with
documentation that [***] for [***] integration of the New IP Block
into the Tower Customer's chip design [***]. This documentation is
intended to assure that the New IP Block gets [***]
well-[***]-connected [***]Tower Customer's chip. Chipidea [***]
supplies [***]guidelines.
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
b. SUPPORT TO TOWER: Notwithstanding anything else in the Agreement, for
a period of [***]after silicon validation of the New IP Block on the
applicable Tower Process, Chipidea will provide [***]E-mail and
telephone support to Tower with issues caused by the failure of a
Deliverable to meet its Specifications.
c. SUPPORT TO TOWER AND TOWER CUSTOMERS FOR NEW IP BLOCK ISSUES: Chipidea
will provide both Tower and each Tower Customer which licenses the New
IP Block from Chipidea with comprehensive support. The Support to
Tower and each Tower Customer will cover issues such as those set
forth in Section 12(d) of the Agreement [***]. Chipidea will provide
Tower and [***] Tower Customer with [***]of E-mail and telephone
support [***]. Additional support, in excess of [***], will be
provided by Chipidea to either Tower or [***] Tower Customer at the
Chipidea's Support Rates.
d. SUPPORT TO TOWER CUSTOMERS FOR TOWER CUSTOMER'S RELATED ISSUES: For
integration support and assistance with issues related to the
operation of Chipidea's New IP Block within the context of Tower
Customer's chip or system design, such as compatibility and
interface-ability, Chipidea will provide such E-mail and telephone
support at the Chipidea Support Rates.
e. ON SITE SUPPORT: Chipidea will provide on-site support or meetings at
a Tower Customer's request; provided that the Tower Customer pays
Chipidea its reasonable travel expenses.
f. CHIPIDEA SUPPORT RATES: Hour - [***]; Day - [***]; Week - [***]. Daily
and weekly rates apply only if ordered in advance. Chipidea may change
the rates set forth herein with a [***] notice.
g. MAINTENANCE: In this section, "Maintenance" means bug fixing and
updates to the New IP Block due to: (i) changes in the Tower
deliverables ([***], etc); (ii) Changes to the standards evolution of
the [***]. Upon request by either Tower or a Tower Customer who has
signed end user license agreement with Chipidea, Chipidea will provide
Maintenance. Maintenance updates to the New IP Block will only be
provided when a Tower's Customer requests a new instantiation. The
Maintenance period will start upon the silicon verification of the New
IP Block and will then be provided, [***], for the next [***]following
silicon verification of the applicable New IP Block. After such
[***]period expires, Tower may renew Maintenance for the New IP Block
for additional [***] periods upon a fee of [***] of the applicable
development fees of such New IP Block listed in Exhibit D.
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[***] THE CONFIDENTIAL PORTION OF THIS AGREEMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
10. Exhibit B:
Specifications for implementation of the New IP Block [***]
implemented in the [***] Tower Process and, if and when applicable, in the
[***] Tower Process.
For each Tower Customer, Chipidea will instantiate the New IP Block with
the number of metal layers as required for the Tower Customer chip (i.e.,
from [***] or [***] up to [***]).
11. Exhibit C shall be read as follows:
SCHEDULE OF MILESTONES applicable to the [***]IP Block in the [***]
1. The Effective Date of Addendum, issue of purchase order and
first payment t0
2. Transfer of design rules and CAD set-up from Tower t1
3. IP Datasheet or Specification sign-off t2
4. Functional Behavior Models [***]delivery [***]
5. IP Database delivered to Tower [***] (not before [***])
6. Tower delivery of Engineering Samples to Chipidea [***]
7. When Engineering Samples provided to Chipidea, delivery of Test and
Characterization Report [***] (SEE NOTE 3)
SCHEDULE OF MILESTONES applicable to the [***]IP Block in the [***]
8. Purchase order for the [***] Option and first payment for the
[***] option t7
9. Transfer of design rules and CAD set-up from Tower t8
10. IP Datasheet or Specification sign-off t9
11. Availability of Chipidea resources t10
12. Functional Behavior Models [***]delivery [***]
13. IP Database delivered to Tower [***]
14. Tower delivery of Engineering Samples to Chipidea [***]
15. When Engineering Samples provided to Chipidea, delivery of Test and
Characterization Report [***] (SEE NOTE 3)
Note 1: Milestones 2 & 3 can be listed as "- n weeks" in case it is
mutually agreed by Customer and Chipidea to complete these milestones
prior to the Effective Date of Design Agreement. When this is the
case, Milestone 4 changes to [***]
Note 2: this can be either t0, t1 or t2 whichever occurs later.
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
Note 3: Test reports will be delivered [***]after samples arrive provided
that the package, pin-out, and special test mode (if applicable)
information is provided to Chipidea at least [***]prior to samples
arriving. Also, this information must not change for the [***] period.
If these conditions are not met then the test report delivery time
will start [***]after test chip information is delivered and
unchanged.
Note 4: Any deliveries from Chipidea will be conditional on On-Time payment
of previous invoices by Customer.
Note 5: this can be either t7, t8, t9 or t10 whichever occurs later.
12. Exhibit D shall be read as follows:
PAYMENT SCHEDULE FOR THE [***]:
- ---------------- -------------- ------------- -------------
Milestone % of total [***] [***]
- ---------------- -------------- ------------- -------------
1 [***] [***] [***]
- ---------------- -------------- ------------- -------------
2 [***] [***] [***]
- ---------------- -------------- ------------- -------------
3 [***] [***] [***]
- ---------------- -------------- ------------- -------------
4 [***] [***] [***]
- ---------------- -------------- ------------- -------------
Total [***] [***] [***]
- ---------------- -------------- ------------- -------------
Comments:
1. The definition of Milestones 1, 2, 3 & 4 and the breakdown of the
payments per the Milestones are per Exhibit D of the Agreement.
2. In the following cases milestone 4 would be paid earlier than
specified in the Agreement: in event that milestone 3 has been
achieved before [***] but no Tower Customer licenses the New IP Block
by such day, then milestone 4 would be deemed to have occurred on that
day. If milestone 3 occurs after [***] but no Tower Customer licenses
the New IP Block within [***]of the occurrence of milestone 3, then
milestone 4 would be deemed to have occurred on the [***]from the
achievement of Milestone 3.
3. The [***] implementation exercisable at Tower's option upon a [***]
notice and availability of Chipidea resources.
[***]
Bank details:
Name: [***]
Bank Address: [***]
IBAN (International Bank Account Number): [***]
SWIFT: [***]
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
13. Exhibit E shall read as follows:
INSTANTIATION
Chipidea agrees to license the [***]on Tower's 0.13um Process ("New IP Block")
set forth in exhibit B, if ordered by Tower, to Tower Customers and will work
with third party developers, as appropriate, to satisfy Tower Customers
requests. Chipidea agrees to provide terms and conditions to Tower Customers
that are [***]. A Tower Customer wishing to use the New IP Block set forth in
exhibit B shall license the New IP Block from Chipidea under the terms to be
agreed between Chipidea and such Tower Customer, provided that the license fees
to be paid by the Tower Customer shall not exceed the values set forth
hereunder.
- ------------------------- ------------- --------------- ------------------------
1ST & 2ND USE SUBSEQUENT USES UNIVERSAL USE
- ------------------------- ------------- ---------------- -----------------------
PRICE [***] [***] [***]
- ------------------------- ------------- ---------------- -----------------------
APPLICABLE TO THE [***]IP BLOCK PER PROCESS AND TOWER CUSTOMER FOR SINGLE OR
MULTIPLE USE:
- ---------------------------------------- ---------------------- ----------------
Use (per each particular Tower Customer) Time of Payment (^) Price (USD)
- ---------------------------------------- ---------------------- ----------------
First Schedule to be defined [***]
- ---------------------------------------- ---------------------- ----------------
Second Design start [***]
- ---------------------------------------- ---------------------- ----------------
Third & Beyond Design start [***]
- ---------------------------------------- ---------------------- ----------------
(*) Use by each particular Tower Customer means the incorporation of one or more
implementations of the New IP Block into a single specific design database of
such Tower Customer chip which is designed for manufacturing on a particular
process of Tower.
(^) Time of payment mean the time Chipidea will invoice the Tower Customer for
the license fees relating to the Use of the New IP Block instantiation.
APPLICABLE TO THE [***]IP BLOCK PER PROCESS AND TOWER CUSTOMER FOR
UNIVERSAL USE:
Universal Use
1. Schedule to be defined [***]
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
Universal use means an unlimited number of one or more implementations of the
New IP Block.
14. Exhibit G shall read as follows:
TOWER DESIGN KIT
a. [***]
b. [***]
c. [***]
d. [***]
e. [***]
f. [***]
g. [***]
h. [***]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to be
duly executed by their duly authorized representatives. This document may be
signed in counterparts with the understanding that faxed signatures shall serve
as originals.
TOWER SEMICONDUCTOR LTD. CHIPIDEA MICROELECTRONICA S.A.
By: ___________________ By: ______________________
Name: Russell Ellwanger Name: Jose E. Franca
Title: CEO Title: President and CEO
Date: ___ June 2005 Date: ___ June 2005
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
EXHIBIT 4.60
CONFIDENTIAL PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.
TERMINATION AGREEMENT
BETWEEN
TOWER SEMICONDUCTOR LTD.
AND
SYNOPSYS, INC. AND SYNOPSYS INTERNATIONAL LIMITED
This Termination Agreement (this "AGREEMENT") is effective as of 29 April 2004
("Effective Date") and is made between:
SYNOPSYS, INC. a Delaware corporation, with its principal place of business at
700 East Middlefield Road, Mountain View, California 94043-4033 and SYNOPSYS
INTERNATIONAL LIMITED with its principal place of business at Block 1,
Blanchardstown Corporate Park, Blanchardstown, Dublin 15, Ireland (collectively
"SYNOPSYS"); and
TOWER SEMICONDUCTOR LIMITED with its principal place of business at Ramat
Gavriel Industry Zone, Migdal Haemek, 23105 Israel, together with certain of its
controlled subsidiaries defined as the "Tower Group" in the Agreement with an
Effective Date of 29 June 2001 made between Tower and, collectively, Avant!
Corporation and Avant! International Distribution Limited ("AVANT!") (the
"LIBRARY AGREEMENT") (Tower and all such entities referred to simply as "TOWER"
in this Agreement).
WHEREAS:
A. By the Library Agreement, Avant! granted to Tower certain licenses under
the Avant!-Tower 0.18 Libra-Visa Library (the "Library," as defined in the
Library Agreement). The Library Agreement was amended by an instrument
dated and effective 3 June 2002.
B. As of 6 June 2002 Synopsys, Inc. acquired Avant! and assumed
responsibility, as Licensor, either directly or through its European
subsidiary, Synopsys International Limited, for the Library Agreement.
C. The Library Agreement, as amended, provided for certain development and
support of the Licensed Library Products (as defined in the Library
Agreement) for the benefit of Tower and those current or future Tower
customers or suppliers who are authorized to integrate all or part of the
Licensed Library Products into their own integrated circuit designs ("END
USERS").
D. The Parties wish to terminate the Library Agreement save for certain
elements they wish to survive termination.
THEREFOR, the Parties hereby agree to the following terms and conditions.
1.0 SCOPE
(a) The intention of the Agreement is to terminate the Library Agreement save
for Tower's obligations to make certain payments, set out in Section 3
below, and those obligations in the Library Agreement, set out in Sections
5.0(a) and 8.0(a) below, which specifically are intended to survive.
(b) Capitalized terms not otherwise defined in this Termination Agreement shall
have the meaning set forth in the Initial Agreement as amended.
(c) In the event of a conflict between the Library Agreement and this
Agreement, the terms of this Agreement shall control.
2.0 TERMINATION OF DEVELOPMENT OBLIGATIONS
Synopsys will no longer be required to develop the Licensed Library
Products, and shall no longer be required to enter into new license
agreements granting rights in the Licensed Library Products to End Users.
3.0 PAYMENT
Within [***] of the Effective Date, Tower will pay Synopsys [***] US
Dollars (USD [***]) in consideration of the matters set out in this
Agreement and as an agreed sum in satisfaction of Tower's outstanding
obligations under the Library Agreement, as amended, including without
limitation all obligations under purchase order No. [***] dated December 5,
2003 and a SOW for the development of [***].
4.0 FEES AND PAYMENT SCHEDULE
For absence of doubt, Tower's payment obligations under Library Agreement,
as amended, including without limitation the payment schedules set forth in
Exhibits 2 and 3 of Amendment No. 1 and in any purchase order issued under
the Library Agreement, as amended, are superseded in their entirety by the
terms of Section 3.0 of this Agreement. All payment obligations of Tower
under the Library Agreement, as so amended, are cancelled, other than those
expressly set forth in Section 3 of this Agreement.
5.0 LICENSE RIGHTS AND RESTRICTIONS
(a) Notwithstanding anything to the contrary in this Agreement, all grants of
Intellectual Property rights granted to Tower and to End Users under the
Library Agreement, as amended, shall continue in full force and effect.
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
(b) Subject to Tower's payment obligations under Section 3.0 of this Agreement,
Synopsys grants to Tower, under Synopsys' Relevant Intellectual Property
Rights (as defined in Section 5.0(c) below), a non-exclusive, irrevocable,
world-wide, royalty-free license, with the right to sub-license, to Use (as
defined in Section 5.0(d) below) and otherwise commercialize and exploit
the Technical Information (as defined in Section 6 below).
(c) As used in this Agreement, "RELEVANT INTELLECTUAL PROPERTY RIGHTS" shall
mean any and all Intellectual Property Rights (as defined in Section 7.0
below) that would be infringed or misappropriated by Use, as defined in the
next sentence, of the subject of a license grant under this Agreement,
absent a license. (1)
(d) As used in this Agreement, "USE" shall mean:
(i) with respect to patents, patent rights and applications therefor, to
make, use, sell, have made, offer to sell, import, and, to the extent
applicable in any jurisdiction(s), export;
(ii) with respect to copyrights, maskworks and applications therefor, to
copy, distribute, create derivative works of, publicly display and, to
the extent applicable, publicly perform;
(iii) with respect to trade secrets, rights in confidential information and
know-how, any activity set forth in (i) and (ii) above;
(iv) with respect to moral rights, the irrevocable waiver of all moral
rights in a work; and
(v) with respect to trademarks, tradenames and service marks, any display
that takes place merely by virtue of engaging in any of (i) through
(iv) above, but not, for absence of doubt, use on or in connection
with any product or service that requires any act over and above such
activities.
(e) Notwithstanding the foregoing, Tower undertakes:
i. not to use the Technical Information at silicon manufacturers other
than Tower, in a manner that [***] in the business of [***] (including
[***] and [***]) (the "[***]") and either:
(A) does not benefit any current or future [***] who is or may be
under the terms of this Agreement authorized to integrate all or
part of the [***] into its own integrated circuit designs ("END
USERS"); or :
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[***] THE CONFIDENTIAL PORTION OF THIS AGREEMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
(B) does not relate to arrangement(s) between Tower and [***]
regarding [***]or [***];
ii. not to provide any Technical Information to any Synopsys library
competitor (a list of whom is set forth in EXHIBIT B to this Agreement
and is incorporated herein by reference, which list may be updated
from time to time) (each such entity set forth on Exhibit B being a
"SYNOPSYS COMPETITOR") without a contractual commitment by the
Synopsys Competitor to keep all Technical Information in confidence
and not to use the Technical Information to [***] (provided that Tower
will not be required to retrospectively change the terms of any
agreement already entered by virtue of a subsequent update to the list
of Synopsys competitors on Exhibit B); and
iii. prior to the disclosure of Technical Information to a third party, for
the purpose of modification or enhancement, to execute an agreement:
A. of sufficient breadth to protect Synopsys' interests and rights
in the Technical Information ; and,
B. restricting use of the Technical Information by the third party,
for the benefit of Tower.
6.0 CONVEYANCE OF LIBRARIES, TECHNICAL DATA AND DEVELOPMENT ENVIRONMENTS
Within [***]days of the Effective Date, Synopsys shall transfer to Tower
full and complete copies of the libraries and technical data as set out in
further detail on Exhibit A to this Agreement ("TECHNICAL INFORMATION"),
which shall be regarded as Confidential Information. The parties intend
that the Technical Information will include all useful and desirable
aspects of [***], including without limitation [***]and one copy each of
the most recent version of all existing [***]and related documentation, as
applicable, and including [***] for all [***]technology generation. Tower
will review the Technical Information, and, within [***]days of the
Effective Date, communicate its acceptance or rejection of the Technical
Information in its sole discretion. If Tower rejects the Technical
Information within [***]days of the Effective Date, this Agreement shall
not continue, provided, however, that if Tower fails to communicate
acceptance or rejection within such period, the Technical Information shall
be deemed accepted.
7.0 OWNERSHIP
(a) As between the Parties, this Agreement will not change the ownership of
each Party's pre-existing Intellectual Property Right(s) (as defined in the
next sentence), which will continue to be owned by the Party owning such
rights immediately before the Effective Date. As used in this Agreement,
"INTELLECTUAL PROPERTY RIGHTS" means patents, patent rights, copyrights,
trade secrets, rights in confidential information and know-how, service
marks, maskworks, moral rights, tradenames and trademarks, and any
applications for any of the foregoing, in all countries in the world.
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[***] THE CONFIDENTIAL PORTION OF THIS AGREEMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
(b) Subject to each party's ownership rights set forth in Section 7.0(a) of
this Agreement, Tower will own all Intellectual Property Rights relating to
any enhancement to, derivative, of or incremental development work based on
or relating to ("ENHANCEMENT") the Technical Information, to the extent any
such Enhancement is developed [***] or by any [***] (including in such
event and without limitation Synopsys).
(c) Subject to each party's ownership rights set forth in Section 7.0(a) of
this Agreement, Synopsys will own all Intellectual Property Rights relating
to any Enhancement to the extent such Enhancement is developed by or for
Synopsys or its contractors, independent of any services performed by
Synopsys or its subcontractors for Tower.
8.0 SURVIVAL
(a) Notwithstanding termination, the rights and obligations of the parties set
forth in Sections 2 (License Grant), 10.2 (Authority), 11 (Confidential
Information), 12 (Indemnification), 13(Limitation of Liability), 16 (Export
Control), 17.3 (Addresses for Service) and 18 (General) of the Library
Agreement shall survive and continue after the Effective Date, as shall the
parties' rights and obligations under this Agreement, and, for absence of
doubt and without limiting Section 5 of this Agreement, any license rights
granted to Tower under the Library Agreement more extensive than the rights
granted under Section 5 of this Agreement.
(b) All other rights and obligations under the Library Agreement (including,
for the avoidance of doubt, any rights under its Section 14 (Term &
Termination)) are hereby terminated.IN WITNESS WHEREOF, the parties hereto
have caused this Termination Agreement to be duly executed by their duly
authorized representatives.
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[***] THE CONFIDENTIAL PORTION OF THIS AGREEMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
SYNOPSYS, INC. TOWER SEMICONDUCTOR LTD.
By: ________________________________ By: ________________________________
Name: ______________________________ Name: ______________________________
Title: _____________________________ Title: _____________________________
Date: ______________________________ Date: ______________________________
SYNOPSYS INTERNATIONAL LIMITED
By: ________________________________
Name: ______________________________
Title: _____________________________
Date: ______________________________
EXHIBIT 4.61
CONFIDENTIAL PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.
EQUIPMENT PURCHASE AGREEMENT
This Equipment Purchase Agreement (this "AGREEMENT"), dated May 17, 2006,
is between Tower Semiconductor Ltd., a company organised under the laws of the
State of Israel ("TOWER") and Israel Corporation Ltd., a company organised under
the laws of the State of Israel ("TIC").
The above-mentioned parties are collectively known as the "PARTIES" and
individually known as a "PARTY".
W I T N E S S E T H:
WHEREAS, Tower's Board of Directors recently approved an accelerated
ramp-up plan for Tower's Fab 2 manufacturing facility ("FAB 2");
WHEREAS, TIC, a major shareholder of Tower, wishes to assist Tower in the
ramp-up of Fab 2 by purchasing certain equipment as set forth herein; and
WHEREAS, TIC and Tower wish to detail the conditions which would result in
the transferring of the title to such equipment from TIC to Tower.
NOW, THEREFORE, in consideration of the mutual promises herein contained, it is
hereby agreed as follows:
1. PURCHASE ORDERS AND/OR EQUIPMENT AGREEMENTS
1.1. Immediately following the signature of this Agreement, and by no later
than one (1) week from the date hereof, TIC shall order the equipment
listed in ANNEX A1 (the "EQUIPMENT"), in their entirety, from the
suppliers listed therein (the "SUPPLIERS") and at the total prices,
including all related costs and VAT which in the aggregate shall not
exceed $70 million, and delivery dates set forth therein (the
"PURCHASE ORDERS"; together with any and all equipment purchase and/or
installation agreements in connection therewith, the "EQUIPMENT
AGREEMENTS"). By no later than one (1) week after this Agreement is
effective pursuant to Section y5_hereof, TIC shall enter into
Equipment Agreements relating to the Equipment listed in ANNEX A2 in
their entirety, from the Suppliers at the total prices, including all
related costs and VAT which in the aggregate shall not exceed $11
million on the delivery dates set forth therein. For the avoidance of
doubt, the terms "Equipment", "Suppliers", "Purchase Orders" and
"Equipment Agreements" shall also relate to the Equipment listed on
Annex A1, Annex A2 and the Replacement Equipment.
The Parties acknowledge (i) that changes in price and/or delivery
dates may be required by the Suppliers and (ii) that the negotiation
and execution of all or any of the equipment purchase and/or
installation agreements to which the Purchase Orders relate may not be
completed within one (1) week, but the Parties hereto undertake to use
their commercially reasonable best efforts to finalize and execute
such agreements as soon as practicable following the date hereof.
However, Tower and TIC will agree in writing whether such new prices
and/or delivery dates are acceptable, provided that such new prices
including all related costs and VAT which, in the aggregate for the
Equipment in Annex A1 and Annex A2, shall not exceed $84 million.
1.2. The Equipment Agreements shall provide, INTER ALIA, that TIC shall be
the owner of the Equipment. While the Equipment Agreements shall not
provide details as to where the Equipment shall be delivered, the
Equipment shall be delivered to such location as instructed by TIC
prior to the delivery dates set forth in ANNEX A1 OR A2. In addition,
TIC and Tower shall use their best efforts when negotiating the
Equipment Agreements to ensure that the rights and obligations
associated therewith, including any and all Equipment warranties and
related service agreements, shall be assignable to Tower, without the
need for Supplier or other third party consents. In addition, Tower
shall use its best efforts when negotiating the Equipment Agreements
to ensure that the Equipment Agreements are cancelable for a period of
15 days after their signature with no cancellation fees.
1.3. The terms and conditions of the Equipment Agreements and any
amendments thereto shall be approved in writing b y Tower prior to
their execution. TIC shall furnish Tower with signed copies of the
Equipment Agreements and any amendments thereto as soon as practicable
following their execution.
1.4. The Parties acknowledge that on or about May 1, 2006, TIC transferred
[***] to [***] and [***] to [***] with respect to the certain
Equipment Agreements (each an "ADVANCE AGREEMENT") which were ordered
by Tower (each an "ADVANCE"), pursuant to the letter from Tower to
TIC, dated April 30, 2006 (the "ADVANCE LETTER").
As soon as practicable following the signature of this Agreement,
Tower shall use its best efforts to cause [***] and [***] to consent
to the assignment of the Advance Agreements to TIC.
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SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
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If, within two weeks from the date hereof, either or both of such
consents to the assignment of the Advance Agreements to TIC are
obtained,
(i) Immediately after effectiveness of this Agreement pursuant
to Section 5 hereof, Tower shall assign and TIC shall assume
Tower's rights and obligations in connection with such
assigned Advance Agreement, including, without limitation,
Tower's rights to the equipment underlying such purchase
order and Tower's obligations to make future payments in
connection therewith.
(ii) The provisions of this Agreement shall be applicable to each
of the assigned Advance Agreements and the total price of
the Equipment to be purchased by TIC under Section 1.1 of
this Agreement shall be increased by the amounts paid and
due to be paid under such assigned Advance Agreement such
that if both the consents of [***] and [***] are received,
the total price including all related costs and VAT of the
Equipment to be purchased under this Agreement shall be $100
million.
(iii) For the avoidance of all doubt, with respect to the
Equipment purchased pursuant to such assigned Advance
Agreement, Tower shall be released from its repayment
obligations as set forth in the Advance Letter but shall be
subject to all of the terms and conditions of this
Agreement.
If, within two weeks from the date hereof, one or more of such
consents are not obtained, and this Agreement is effective pursuant to
Section 5 hereof (i) Tower shall be entitled to request that TIC order
additional Equipment up to the aggregate amount of the unpaid portions
of the purchase prices under such unassigned Advance Agreement(s) (the
"REPLACEMENT EQUIPMENT"); (ii) this Agreement shall apply to such
Replacement Equipment MUTATIS MUTANDIS; and (iii) the Advance Letter
shall remain in full force and effect with respect to the unassigned
Advance Agreement and such Equipment shall not be subject to this
Agreement. If neither consent is received within such two week time
period, the total amount including all related costs and VAT to be
ordered under this Agreement in aggregate, shall not exceed $94.3
million.
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[***] THE CONFIDENTIAL PORTION OF THIS AGREEMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
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2. PURCHASE AND SALE OF EQUIPMENT
2.1. PUT OPTION. Tower hereby grants TIC the right (the "PUT OPTION"),
during the period commencing on the Effective Date (as defined below)
to sell all or part of the Equipment and the rights purchased pursuant
to the Equipment Agreements to which such Equipment relate (together
the "PURCHASED ASSETS") to Tower, in consideration for the aggregate
consideration paid by TIC, in connection with such Purchased Assets
(hereinafter, the "PURCHASE PRICE" as more fully defined in Section 3
hereof). TIC may exercise the Put Option on all or part of the
Purchased Assets by delivering a written notice to Tower (the "PUT
NOTICE"), and upon receipt, Tower shall be obligated to purchase such
Purchased Assets and pay the Purchase Price within fifteen (15) days
of receipt of the Put Notice, or such later date as directed by TIC,
provided, that such payment shall be made no later than the date of
the consummation of the Investment. Notwithstanding anything to the
contrary herein the Put Option may only be exercised in the event and
to the extent that the Purchased Assets have not been uncrated, used
or installed for the benefit or in the facilities of a party other
than Tower and if TIC elects under the Put Option to sell to Tower any
of the Purchased Assets labeled as belonging to a Set of Equipment in
Annex A1 or A2, at the discretion of Tower, TIC shall also sell all or
part of the other Purchased Assets belonging to such Set of Equipment
to Tower, provided that if the relevant Supplier does not supply any
portion of a Set of Equipment to Tower, TIC shall not be required to
sell to Tower such portion(s) of the Set of Equipment.
2.2. CALL OPTION. TIC hereby grants Tower the right (the "CALL OPTION"),
during the period commencing on the later of: (i) the consummation of
an Investment (as defined below); and (ii) the Effective Date and
ending on the date on which the Reserve Period ends, to purchase all
and not part of the Purchased Assets, in consideration for the
Purchase Price. Tower may exercise the Call Option by delivering a
written notice to TIC (the "CALL NOTICE"), and upon receipt, TIC shall
be obligated to sell to Tower the Purchased Assets and Tower shall pay
the Purchase Price within fifteen (15) days of receipt of the Call
Notice, or such later date as directed by TIC, provided, that such
payment shall be made no later than the date of the consummation of
the Investment. In the event suc h payment of the Purchase Price has
not been made within [***] after the Call Notice was delivered to TIC
for any reason, the exercise of the Call Option shall be voided and
for the avoidance of doubt, Tower shall not have any further right to
exercise any Call Option hereunder. For the avoidance of doubt, TIC is
not required to sell or transfer the Purchased Assets or transfer
title thereto to Tower, unless it has received the Purchase Price in
full. For purposes of this Agreement, an "INVESTMENT" shall mean an
investment or investments in Tower by one or more investors after the
date hereof in exchange for securities of Tower and/or proceeds which
were paid to Tower on account of the future issuance of securities,
including debt securities and/or including payments on account of
wafer prepayments, which result in gross proceeds to Tower in an
aggregate amount equal to or greater than one hundred million US
dollars ($100,000,000), subject to such Investment obtaining such
approvals as may be required by law. For the avoidance of doubt, the
Parties hereto may jointly agree, that any or all amounts paid by TIC
under this Agreement shall constitute an Investment, provided that
nothing herein shall require TIC to so agree.
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[***] THE CONFIDENTIAL PORTION OF THIS AGREEMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
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2.3. RESERVE PERIOD. During the period ending on the earliest of: (i) the
exercise by Tower of the Call Option; (ii) the exercise by TIC of the
Put Option; (iii) the termination of this Agreement pursuant to
Section y7 or the existence of an Event of Default; and (iv) [***]
from the date of signature of this Agreement (the "RESERVE PERIOD"),
in the absence of the prior written consent of Tower, TIC shall not:
(x) sell, assign or otherwise transfer title or interest in the
Purchased Assets to a party other than Tower; (y) uncrate the
Purchased Assets; or (z) install or cause the installation of the
Purchased Assets in the facilities of a party other than Tower (the
"EQUIPMENT INTEGRITY RESTRICTIONS"). After the Reserve Period, TIC may
sell or assign all or part of the Purchased Assets, in its sole
discretion, without any consent required from Tower to any third party
with no limitation on the identity or business of such third party.
Nothing herein creates any obligation for TIC to deliver the Purchased
Assets to Tower, or to allow Tower to uncrate, use or install the
Purchased Assets until both (i) the exercise of the Put Option or the
Call Option and (ii) the payment of the Purchase Price in full (or
such applicable percentage of the Purchase Price in the event of a
partial exercise of the Put Option).
2.4. CONSENTS. To the extent that the purchase by Tower of the Purchased
Assets, or a portion thereof, is subject to the receipt of Supplier or
any other third party consent, TIC and Tower shall apply fo r or
otherwise seek, and use their commercially reasonable efforts to
obtain, the necessary consents to consummate the purchase.
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[***] THE CONFIDENTIAL PORTION OF THIS AGREEMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
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2.5. For the avoidance of doubt, upon the exercise of the Put Option or the
Call Option and to the extent that: (i) an Equipment Agreement that is
the subject of such exercise is assignable to Tower; and (ii) there
are payments outstanding under such Equipment Agreement, such
Equipment Agreement shall be assigned to Tower and upon assignment,
(a) Tower shall assume all of the obligations associated with such
outstanding payments (provided that TIC shall reimburse Tower for
penalties incurred due to any non-payment to a Supplier by TIC unless
TIC has been advised by Tower not to pay such Supplier) (b) TIC shall
be released by such supplier in writing and (c) the Purchase Price
shall not include amounts due and payable at a later time in
connection therewith ("FUTURE PAYMENTS"). To the extent that any
Equipment Agreement is not assignable or is not completely assignable
in a manner that TIC is fully released from any obligation under such
Equipment Agreement ("NON-ASSIGNABLE OBLIGATIONS"), the Purchase Price
shall include the entire purchase price of such Purchased Asset
including Future Payments and Tower shall simultaneously pay TIC for
all Future Payments together with all other portions of the Purchase
Price. TIC shall hold all amounts paid by Tower on account of Future
Payments in trust and shall continue to make payments to Suppliers in
accordance with the Non-Assignable Obligations. If an Equipment
Agreement is not assignable to Tower but the Purchase Price related to
such Equipment (including all Future Payments included therein) has
been paid to TIC, TIC shall be obligated to transfer to Tower the
Equipment including title and possession thereto, immediately upon its
receipt of same.
2.6. TITLE. Title to a Purchased Asset shall be transferred or deemed
transferred if title cannot be transferred to Tower only upon full
payment by Tower of the entire amount of the Purchase Price relating
to such Purchased Assets and shall continue to vest in TIC until such
payment has been made. If, TIC, in its sole discretion and with no
obligation to do so, decides to deliver a Purchased Asset to Tower or
to allow Tower to uncrate, use and/or install such Purchased Asset
prior to the exercise of the Put Option or the Call Option, in respect
of such Purchased Asset, title shall not pass to Tower except in
accordance with the foregoing. To the extent that: (i) Purchased
Assets are uncrated, used and/or installed at Tower's facilities; and
(ii) title to such Purchased Assets has not been transferred to Tower
in accordance with the foregoing ("UTILIZED EQUIPMENT"), if necessary,
Tower will (a) assist TIC in registering any pledge or other
registration on such Purchased Assets promptly and (b) disassemble and
repackage such Purchased Assets for Resale by TIC (as defined below)
to a third party, if requested by TIC, in its sole discretion. TIC
acknowledges that the grant and registration of a pledge as
contemplated by this Section 2.6 may be subject to third party
consents, which Tower undertakes to use its best commercial efforts to
obtain.
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2.7. NO WARRANTIES. Subject to TIC's compliance with the Equipment
Integrity Restrictions prior to any Resale, any sale or assignment by
TIC to Tower of any of the Purchased Assets or of the Equipment
Agreements pursuant to the Put Option, Call Option or any other manner
shall be on an "AS IS" manner and Tower shall not have any claim
against TIC for defects in such Purchased Assets or any other product
liability. Tower may make any such claims against the supplier
directly without any involvement of TIC. Prior to their assignment or
transfer of title to Tower, TIC shall use its commercially reasonable
best efforts to enforce any and all warranties associated with all
Utilized Equipment to the extent it is aware of such claims, including
in accordance with Tower's instructions, provided, that Tower shall
pay for all costs related to such enforcement directly and that in any
event, TIC may enforce such warranties on its own and the costs of
such effort shall be added to the Purchase Price if not paid for by
Tower. TIC shall be entitled, in its sole discretion, to assign to
Tower any or all rights to enforce such warranties, if such
enforcement rights can be assigned.
3. REIMBURSEMENT AND INDEMNIFICATION BY TOWER OF ALL PAYMENTS AND EXPENSES OF
TIC UNDER THIS AGREEMENT
3.1. Tower shall repay TIC for all amounts that TIC has paid or incurred or
will be required to pay or incur under the terms of this Agreement
and/or the Equipment Agreements. The full amount of the obligations of
Tower contained in this Section 3.1 may be fulfilled through (i)
payment of the Purchase Price pursuant to the Call Option or the Put
Option; or (ii) payment of the Indemnification Amount (as defined
below).
3.2. The "PURCHASE PRICE" shall include but shall not be limited to the
following (each amount in this Section 3.2 shall include any domestic
or foreign VAT, sales tax or the equivalent thereof):
3.2.1. any amount paid by TIC or, to the extent not fully assignable
to Tower, obligated but not paid by to, any Supplier, including
shipping, storage, VAT (whether foreign or Israeli), sales tax,
or other taxes or duties, licensing fees, warranty/service
agreements or insurance.
3.2.2. legal fees.
3.2.3. any amounts necessary to secure consent to assignment of any
Equipment Agreements, sale of any Purchased Assets or transfer of
any license, service agreement or warranty relating to any of the
Purchased Assets.
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3.2.4. any expenses in connection with the Equipment Agreements prior
to their assignment to Tower hereunder.
3.2.5. wiring fees.
3.2.6. registration of title.
3.2.7. registration of any pledge, if requested by TIC pursuant to
Section 2.6.
3.2.8. customs fees and expenses, including warehousing fees. (If TIC
shall direct that the Equipment be delivered to Tower prior to
the sale thereof to Tower, Tower shall make available storage
space for such purposes and TIC shall pay Tower applicable market
storage fees therefor.)
3.2.9. Other Financing Expenses (as defined below).
For the removal of doubt, if only a portion of the Purchased Assets is
purchased by Tower, then only the applicable portion of the Purchase Price
shall be paid.
3.3. "OTHER FINANCING EXPENSES" shall mean other cash-related costs
incurred by TIC including its cost of capital at a rate of [***], to
be accrued between the date that TIC makes any payment under this
Agreement and the actual date that such amount gets repaid in full by
Tower.
3.4. In the event that following the Reserve Period TIC assigns all or part
of the Equipment Agreements or sells all or part of the Purchased
Assets or transfers any license, service agreement or warranty
relating to any of the Purchased Assets to any party other than Tower
to the extent permitted hereunder (each a "RESALE"), in TIC's sole
discretion, Tower shall indemnify TIC for each of the following (and
TIC shall have a right to demand that Tower pay any known costs below
directly), no later than [***] after any such Resale, as they relate
to each such Equipment Agreement, Purchased Asset, license, service
agreement or warranty (the "INDEMNIFICATION AMOUNT"):
3.4.1. the amount equal to (x) the Purchase Price minus (y) the amount
received (net after reasonable brokers fees, shipping fees,
insurance, taxes, VAT and storage fees) from such Resale.
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[***] THE CONFIDENTIAL PORTION OF THIS AGREEMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
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3.4.2. any necessary costs of reconfiguring or modifying the Purchased
Assets for resale.
3.4.3. Other Financing Expenses.
3.4.4. any amounts necessary to secure consent to assignment of any of
the Equipment Agreements, sale of any of the Purchased Assets or
transfer of any license, service agreement or warranty relating
to any of the Purchased Assets.
3.4.5. storage and insurance fees.
3.4.6. any costs to enforce any warranty on the Equipment not
previously paid for by Tower as per Section 2.7.
3.5. If a Resale is necessary, the parties to this Agreement agree that
such Resale should take place at reasonable prices under the
circumstances. Since Tower has the necessary industry expertise
relating to the Equipment, Tower shall assist TIC in obtaining the
best price possible for the Equipment as quickly as practicable.
Notwithstanding the provisions in this Section, TIC will have the sole
discretion to decide on the terms of such Resale.
4. REPRESENTATIONS OF TOWER
Tower represents and warrants to TIC as follows:
4.1. Tower has full legal right, power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby.
This Agreement, has been approved by Tower's audit committee and Board
of Directors and when executed and delivered by Tower and approved by
its shareholders (if there will be a written request by any
shareholder or shareholders of Tower who hold at least 1% of the
issued shares or voting rights of Tower, provided that such request is
made no later than fourteen (14) calendar days from the date on which
Tower announces its decision to enter into this Agreement),
constitutes and will constitute the legal, valid and binding
obligation of Tower, enforceable against it in accordance with its
terms, except to the extent that such enforceability may be limited by
bankruptcy, insolvency, reorganization and other laws affecting
creditors' rights generally. Tower has attached the legal opinion of
its counsel, Yigal Arnon & Co., Advocates to this effect hereto as
ANNEX B.
4.2. Neither the execution and delivery of this Agreement by Tower, nor the
compliance with the terms and provisions of this Agreement on the part
of Tower, will: (i) violate any statute or regulation of any
governmental authority, domestic or foreign, affecting Tower; (ii)
require the issuance of any authorization, license, consent or
approval of any governmental agency, or any other person; or (iii)
conflict with or result in a breach of any of the terms, conditions or
provisions of any judgment, order, injunction, decree, loan agreement
or other material agreement or instrument to which Tower is a party,
or by which Tower is bound, or constitute a default thereunder, the
effect of which will have a material adverse effect on Tower.
- 9 -
4.3. All necessary consents of (i) any parties to any material contracts
which are material to Tower's business, and (ii) any governmental
authorities or agencies, to the extent required, in connection with
the transactions contemplated by this Agreement, for which the failure
to obtain such consents would have a material adverse effect on Tower,
shall have been obtained and true and complete copies thereof
delivered to TIC.
4.4. There are no actions, suits, proceedings, or injunctive order, pending
or threatened against or affecting Tower which could prevent the
consummation of the transactions contemplated by this Agreement.
4.5. Tower has not engaged any broker or finder in connection with the
transactions contemplated by this Agreement, and no broker or other
person is entitled to any commission or finder's fee in connection
with such transactions.
5. EFFECTIVENESS. In accordance with Tower's representations in Section 4.1
hereof, the effectiveness of Sections 2 and 3 of this Agreement shall be on
(the "EFFECTIVE DATE") the earlier of (i) approval of Tower's shareholders
(if there will be a written request by any shareholder or shareholders of
Tower who hold at least 1% of the issued shares or voting rights of Tower
no later than fourteen (14) calendar days from the date on which Tower
announces its decision to enter into this Agreement) or (ii) fifteen (15)
calendar days from the date on which Tower announces its decision to enter
into this Agreement if such shareholder vote has not been so requested. By
signature hereof, Tower acknowledges and agrees that it will make such
announcement within one (1) business day after the date of the signing of
this Agreement. Notwithstanding the foregoing, upon the occurrence of any
Event of Default, TIC shall not be obligated to enter into any additional
Equipment Agreements and shall be permitted but not obligated to revoke any
Equipment Agreements already entered into to the extent possible.
6. COVENANTS
6.1. Within five (5) days of becoming aware of the existence of any
condition or event which constitutes an Event of Default (as defined
below), or any condition or event which would upon notice or lapse of
time, or both, constitute an Event of Default, Tower shall give TIC
written notice thereof specifying the nature and duration thereof and
the action being or proposed to be taken with respect thereto.
6.2. Until the exercise of the Put Option or Call Option, Tower will
operate in the ordinary course of business and neither TIC nor Tower
will take any action inconsistent with this Agreement. For the
avoidance of any doubt, nothing herein shall require TIC to take or
refrain from taking any action as a shareholder or investor of Tower.
- 10 -
6.3. To the extent that TIC assigns any of the Equipment Agreements, sells
the Equipment or transfers any license, maintenance agreement or
warranty relating to the Equipment, to any party other than Tower as
permitted hereunder, Tower hereby acknowledges that TIC may make such
transfer assignment or sale to any third party without limitation on
the identity or business of such third party and hereby waives any
claim it might have against TIC with respect thereto.
7. TERMINATION
7.1. TIC may terminate this Agreement upon [***] notice, except for (i) the
rights and obligations of the Parties in connection with the Put
Option; (ii) Tower's obligation to repay the Purchase Price and/or to
indemnify TIC; and (iii) Sections 2.7, 8, 9 and 10 hereof, which shall
survive indefinitely if any of the following events occur, each an
"EVENT OF DEFAULT":
a. If no Investment is consummated on or prior to such date which is
[***] from the date of signature of this Agreement.
b. If Tower shall default in connection with any agreement for
greater than [***] with any creditor, which entitles said
creditor to accelerate the maturity thereof.
c. If Tower shall file a voluntary petition in bankruptcy or a
voluntary petition or answer seeking liquidation, reorganization,
arrangement, readjustment of its debts, or for any other relief
under the Companies Law or Companies Ordinance, or under any
other act or law pertaining to insolvency or debtor relief,
whether Israeli or foreign, now or hereafter existing; Tower
shall enter into any agreement indicating its consent to,
approval of, or acquiescence in, any such petition or proceeding;
Tower shall apply for or permit the appointment by consent or
acquiescence of a receiver, custodian or trustee of Tower for all
or a substantial part of its property; Tower shall make an
assignment for the benefit of creditors; Tower shall be unable or
shall fail to pay its debts generally as such debts become due;
or Tower shall admit, in writing, its inability or failure to pay
its debts generally as such debts become due.
- ----------
[***] THE CONFIDENTIAL PORTION OF THIS AGREEMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIALITY.
- 11 -
d. If, (i) there shall have been filed against Tower an involuntary
petitio n in bankruptcy or seeking liquidation, reorganization,
arrangement, readjustment of its debts or for any other relief
under the Companies Law or Companies Ordinance, or under any
other act or law pertaining to insolvency or debtor relief; (ii)
Tower shall suffer or permit the involuntary appointment of a
receiver, custodian or trustee of Tower or for all or a
substantial part of its property; (iii) Tower shall suffer or
permit the issuance of a warrant of attachment, execution or
similar process against all or any substantial part of the
property of Tower; (iv) any motion, complaint or other pleading
is filed in any bankruptcy case of any person or entity other
than Tower and such motion, complaint or pleading seeks the
consolidation of Tower's assets and liabilities with the assets
and liabilities of such person or entity.
e. If the Board of Directors or Audit Committee of Tower shall
rescind their approval of this Agreement, whether legally allowed
to do so or not.
f. If the shareholders of Tower are requested to approve the terms
of this Agreement and the transactions contemplated hereby and
fail to approve the same at the meeting called to approve it.
7.2. In the event any of the proceedings in Section 7.1.d shall be
dismissed or removed within 60 days, this Agreement shall be
reinstated or enforceable to the extent no other Event of Default has
occurred and to the extent the Call Option would not have otherwise
expired, as if such Event of Default had not occurred, including the
reinstatement of the Call Option.
7.3. Nothing herein shall terminate TIC's Put Option or Tower's obligation
to indemnify TIC.
8. NOTICES
All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally or by commercial delivery service,
or mailed by registered or certified mail (return receipt requested) or sent via
facsimile (with confirmation of receipt) to the Parties at the following address
(or at such other address for a Party as shall be specified by like notice):
If to Tower: If to TIC:
Tower Semiconductor Ltd. Israel Corporation Ltd.
Ramat Gavriel Industrial Area Millennium Tower,
P.O. Box 619 23 Aranha St. Tel Aviv Israel 61070
Migdal Haemek Israel 23105 Fax: 972-3-684-4574
Fax. 972-4-6047242 Attn: Chief Financial Officer
Attn: Oren Shirazi, Acting CFO
- 12 -
with a copy to (which shall not with a copy to (which shall not constitute
constitute notice): notice):
Yigal Arnon & Co. Gornitzky & Co.
One Azrieli Center, 45 Rothschild Blvd.,
Tel Aviv 67021 Israel Tel-Aviv 65784 Israel
Fax: 972-3-608-7714 Fax: 972-3-560-6555
Attn: Adv. David H. Schapiro Attn: Adv. Zvi Ephrat
9. PUBLICITY
The Parties agree not to publish any press release or disclosure filing or
otherwise publicize the existence, or any of the terms, of this Agreement
without the prior consent of the other Party, except as may be required under
law.
10. MISCELLANEOUS
10.1. This Agreement, including the validity, interpretation, or
performance of this Agreement and any of its terms or provisions, and
the rights and obligations of the parties under this Agreement shall
be governed by, and construed and interpreted in and only in
accordance with, the domestic laws of the State of Israel without
giving effect to any choice or conflict of law provision or rule that
would cause the application of the laws of any jurisdiction other than
the State of Israel. The competent court in Tel Aviv-Jaffa will have
the sole and exclusive jurisdiction over any dispute arising under
this Agreement.
10.2. A Party's delay or failure to enforce at any time any of the
provisions of this Agreement or any right with respect thereto shall
in no way be construed to be a waiver of such provision, or rights or
in any way to affect its right later to enforce them. A Party's
exercise of any of its rights hereunder shall not preclude or
prejudice that Party from thereafter exercising the same or any right
which it may have under this Agreement, irrespective of any previous
action or proceeding taken by it hereunder.
10.3. This Agreement shall be binding upon and inure to the benefit of the
successors and assigns of Tower and TIC.
10.4. This Agreement and the Annexes hereto shall be modified only by an
instrument in writing that is signed by duly-authorized
representatives of the Parties.
10.5. In the event that any provision of this Agreement, or the application
thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement
will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the Parties. The Parties further
agree to replace such void or unenforceable provision of this
Agreement with a valid and enforceable provision that will achieve, to
the extent possible, the economic, business and other purposes of such
void or unenforceable provision.
- 13 -
10.6. At any time and from time to time, each Party agrees, without further
consideration, to take such actions and to execute and deliver such
documents as may be reasonably necessary to effectuate the purposes of
this Agreement and shall refrain from taking any action that may
frustrate the purpose of this Agreement.
10.7. No Party shall be entitled to assign this Agreement or its rights
under it without the prior written consent of the other Party.
10.8. This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement and shall become
effective when one or more counterparts have been signed by a Party
hereto and delivered to the other Party hereto.
10.9. This document constitutes the entire agreement between the Parties
with respect to the subject matter hereof, and supersedes all previous
communications, representations, understandings and agreements, either
oral or written, between the Parties or any official or representative
thereof.
10.10. The Parties have participated jointly in the negotiation and
drafting of this Agreement. In the event that an ambiguity or question
of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of
proof shall arise favoring or disfavoring any Party by virtue of the
authorship of any provisions of this Agreement.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly
executed as of the date first hereinabove set forth, such Parties acting by
their officers, being thereunto duly authorized.
______________________________ ______________________________
TOWER SEMICONDUCTOR LTD. ISRAEL CORPORATION LTD.
Name: Russell Ellwanger Name: ___________________
Title: Chief Executive Officer Title: __________________
EXHIBIT 12.1
CERTIFICATION
I, Russell C. Ellwanger, certify that:
1. I have reviewed this annual report on Form 20-F of Tower Semiconductor
Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) [Paragraph omitted in accordance with SEC transition instructions
contained in SEC Release 34-47986];
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
July 13, 2006
/s/ Russell C. Ellwanger
- ------------------------
RUSSELL C. ELLWANGER
CHIEF EXECUTIVE OFFICER
TOWER SEMICONDUCTOR LTD.
EXHIBIT 12.2
CERTIFICATION
I, Oren Shirazi, certify that:
1. I have reviewed this annual report on Form 20-F of Tower Semiconductor
Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within this entity ,
particularly during the period in which this report is being prepared;
b) [Paragraph omitted in accordance with SEC transition instructions
contained in SEC Release 34-47986];
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
July 13, 2006
/s/ Oren Shirazi
- ----------------
OREN SHIRAZI
ACTING CHIEF FINANCIAL OFFICER
TOWER SEMICONDUCTOR LTD.
EXHIBIT 13.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Tower Semiconductor Ltd. (the
"Registrant") on Form 20-F for the year ended December 31, 2005 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Russell C. Ellwanger, Chief Executive Officer of the Registrant, certify,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that to my knowledge:
1. the Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Registrant.
/s/ Russell C. Ellwanger
------------------------
Russell C. Ellwanger
Chief Executive Officer
July 13, 2006
A signed original of this written statement required by Section 906 has been
provided to the Registrant and will be retained by the Registrant and furnished
to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 13.2
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Tower Semiconductor Ltd. (the
"Registrant") on Form 20-F for the year ended December 31, 2005 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Oren Shirazi, Acting Chief Financial Officer of the Registrant, certify,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that to my knowledge:
1. the Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Registrant.
/s/ Oren Shirazi
----------------
Oren Shirazi
Acting Chief Financial Officer
July 13, 2006
A signed original of this written statement required by Section 906 has been
provided to the Registrant and will be retained by the Registrant and furnished
to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 14.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements Nos.
333-85090, 333-97043, 333-108896, 333-110486 and 333-131315, on Form F-3, and
Nos. 33-80947, 333-06482, 333-11720, 333-83204, 333-107943 and 333-117565, on
Form S-8, of our report dated February 1, 2006, relating to the consolidated
financial statements of Tower Semiconductor Ltd., appearing in this Annual
Report on Form 20-F of Tower Semiconductor Ltd. for the year ended December 31,
2005.
Brightman Almagor & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu
Tel Aviv, Israel
July 13, 2006