Tower Semiconductor Ltd. (TSEM)

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QUESTIONS AND ANSWERS ABOUT TOWER SEMICONDUCTOR LTD

What do we do?

We are a pure-play independent wafer foundry dedicated to the manufacture of semiconductors and strategically focused on embedded non-volatile memory, complementary metal oxide semiconductor (CMOS) image sensor, mixed signal and radio frequency CMOS (RFCMOS) technologies. 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 0.18-micron, while our 0.13-micron technology is expected to be ready for production by the end of 2005. 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.

In January 2001, we commenced construction of a new, state-of-the-art wafer fabrication facility, which we refer to as Fab 2, located in Migdal Haemek, and adjacent to our first facility, Fab 1. Depending on the process technology and product mix, as of June 30, 2005, Fab 1 is able to achieve capacity levels of approximately 16,000 wafers per month. In 2003, we completed the infrastructure of Fab 2 and commenced production wafer shipments from this Fab. Fab 2 is designed to operate in geometries of 0.18-micron and below, using advanced materials and advanced CMOS technology licensed from Freescale and Toshiba and other technologies that we developed and will develop independently or with development partners. Production capacity at the end of June 2005 was 14,600 wafers per month. We currently expect to have production capacity of 15,400 wafers per month by the end of 2005, of which approximately 800 wafers per month are expected to be in 0.13-micron. Depending on the process technology and product mix, when fully ramped-up we estimate that Fab 2 will be able to achieve capacity levels of up to 36,000 wafers per month.

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.

Are the debentures subordinated to our current indebtedness?
Yes. The payment of the principal of and interest on the 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. As of June 30, 2005, our indebtedness to our banks was $497 million, which as of August 31, 2005 increased to $510.4 million. Payment of the principal and interest on the debentures is also effectively subordinated to our current and potential obligations to two secured creditors: the Investment Center of the Israeli Ministry of Industry, Trade and Labor, to whom we may have obligations related to $156 million in grants received through August 31, 2005 under the “Approved Enterprise” program, and Siliconix Technology C.V., one of our customers, which has a first ranking charge on a bank account into which Siliconix deposited in 2004, $20 million for the purchase of equipment and other expenses in connection with the performance of our obligations under our agreement with Siliconix (of which as of August 31, 2005, there is a balance of approximately $10 million)and over the equipment which has been or which may be subsequently purchased with such funds. As a result, upon any distribution to our creditors in liquidation or reorganization or similar proceedings, these senior and secured creditors will be entitled to be paid in full before any payment may be made with respect to the debentures. There may not be sufficient assets remaining to pay amounts due on any or all of the debentures then outstanding. In addition, if on a payment date of principal or interest on the debentures there exists an “Event of Default” 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. If, in such event, we reach an agreement with the banks (with respect to rescheduling our debt to the banks), the debenture holders may be bound thereby. The terms of the Indenture permit the Co-Trustees to initiate legal proceedings against us only in a limited number of cases, and always provided that advance notice is given to us and to the banks.

How much money will we receive from the rights offering?

The amount of gross proceeds from the rights offering depends on the number of rights that are exercised and, consequently, on the number of debentures convertible into our ordinary shares that are purchased. We will receive gross proceeds of $25.5 million from the purchase of convertible debentures by our four major shareholders as described under “The Rights Offering – Committed Purchases.” If all the rights are exercised, we will receive gross proceeds of $50 million.

RECENT DEVELOPMENTS

In July 2005, we entered into an amendment to the credit facility agreement with our banks, which closed in August 2005. The amendment provides for financing from our banks in the amount of up to approximately $30 million, subject to a similar amount being raised by us from investors through the issuance of shares or convertible debentures. In connection with the amendment, our four major shareholders have agreed to invest an aggregate of $25.5 million towards this funding requirement in a rights offering.

The amendment to the credit facility agreement contains the following material terms:

— We may draw down up to $23.5 million through the end of March 2006, $21.1 million of which has been drawn down to date.

— We are obligated to raise at least $23.5 million through the issuance of shares or convertible debentures by October 31, 2005, which we are raising through this offering. Our banks have agreed to extend this date to November 30, 2005 and we and our banks are preparing a formal agreement to such effect. In order for us to draw down up to an aggregate of approximately $30 million through the end of March 2006, which includes the $23.5 million currently available to us as mentioned above, we must raise an additional $6.5 million through the issuance of shares or convertible debentures by March 31, 2006.

— Loans under the amendment are to be repaid within 12 to 15 months from the date the loan is received by us; our banks have agreed to discuss (but without any obligation on their part to agree) longer repayment schedules.

— The loans under the amendment bear interest at an annual rate of three-month Libor plus 2.5%.


— We issued warrants to our banks exercisable for 8,264,464 ordinary shares with an exercise price of $1.21 per share, one-half of which are exercisable only if and when our banks agree to reschedule the repayment dates of the loans under this amendment.

— Our obligation to raise $26 million from specified sources, in addition to the $30 million described above, was postponed from December 31, 2005 to June 30, 2006 (See “Description of Debentures – Subordination of Debentures – Events of Default under the Facility Agreement”).

— If Israel Corp. invests at least $14 million through the purchase of the convertible debentures or equity, its undertaking in favor of our banks to purchase securities from us in the event we fail to raise the $26 million from specified sources by June 30, 2006 will terminate (See “Description of Debentures – Subordination of Debentures –Events of Default under the Facility Agreement”).

— Israel Corp.‘s undertaking in favor of our banks to purchase securities from us in the event we fail to raise the $26 million from specified sources by June 30, 2006 was extended from June 30, 2006 to December 31, 2006.

— We must comply with updated financial ratios and covenants through September 30, 2006, which relate to periodic sales and periodic earnings before interest, taxes, depreciation and amortization (EBITDA).

Risk Factors

***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.

***If we do not have sufficient funds to fully equip Fab 2, our business will be materially adversely affected

***If we do not meet conditions to receive the Israeli government grants and tax benefits approved for Fab 2, we may be required to seek alternative financing sources.

***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.

***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.

***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

***Our operating results fluctuate from quarter to quarter which makes it difficult to predict our future performance

***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 sales cycles may be long and, as a result, orders received may not meet our expectations which may adversely affect our operating results.

***Demand for our foundry services is dependant on the demand in our customers’ end markets.

***If we do not attract additional customers, our business may be adversely affected.

For the six months ended June 30, 2005, approximately 61% of our business was generated by four significant customers that contributed 29%, 16%, 10% and 6% of our revenues, respectively. We expect to continue to receive a significant portion of our revenue from a limited number of customers in 2005. 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 and business.

***We depend on a small number of products for a significant portion of our revenues.

***If we do not receive orders from our wafer partners we may have excess capacity.

***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.

***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 20 integrated semiconductor and end-product manufacturers that allocate a portion of their manufacturing capacity to foundry operations.

***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

***We may be required to repay grants to the Israel Investment Center that we received in connection with Fab 1.

We received grants and tax benefits for Fab 1 under the government of Israel Approved Enterprise program. As of December 31, 2001, we completed our investments under our Fab 1 program and are no longer entitled to any further investment grants for future capital investments in Fab 1

***We depend on intellectual property rights of third parties and failure to maintain or acquire licenses could harm our business.

***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.

http://xml.10kwizard.com/filing_raw.php?repo=tenk&ipage=3725587

In short, an altogether huge risk.
Chances of survival seems minimal.

Too many risk factors from different aspects makes it real
hard to see the light at the end of the tunnel.

Comments?

Regards,

Dubi