TSEM

Business Context and Reporting Period

Company: Tower Semiconductor Ltd. (Tower)
Reporting Period: Fiscal year ended December 31, 2009
Accounting Basis: US GAAP
Key Event: The financial statements include the results of Jazz Technologies, Inc. ("Jazz") following a stock-for-stock merger completed on September 19, 2008. Tower operates as a pure-play independent specialty foundry with manufacturing facilities in Israel (Fab 1 and Fab 2) and the United States (Jazz facility in Newport Beach, California).

Key Financial Metrics (Year Ended Dec 31, 2009)

Note: Total Debt includes $194.6 million in bank loans and $241.2 million in debentures as of Dec 31, 2009.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 18.7% to $298.8 million, driven primarily by the inclusion of Jazz's full-year results ($159.2 million) compared to partial-year inclusion in 2008. Tower's standalone revenues decreased by $55.8 million due to reduced product shipments.
• Operating Loss Improvement: Operating loss decreased significantly from $215.9 million in 2008 to $81.8 million in 2009. This improvement is largely attributable to the absence of a $120.5 million fixed assets impairment charge recorded in 2008.
• Net Loss Increase: Despite the lower operating loss, the Net Loss increased to $120.5 million from $105.1 million. This was primarily due to a $130.7 million "Gain on debt restructuring" recorded in 2008 which did not recur in 2009, and a $28.1 million increase in net financing expenses.
• Liquidity: Cash and cash equivalents more than doubled to $81.8 million, supported by $52.9 million raised from shareholders' equity and $37.2 million in net cash provided by operating activities.

Guidance, Outlook, and Risks

Outlook and Capacity: Management expects average fab utilization to exceed 85% by the fourth quarter of 2010. Plans are in place to increase capacity by approximately 30,000 wafers per year in Fab 2 (Israel) and 36,000 wafers per year in the Newport Beach facility to meet expanding customer demand.

Material Risks and Contingencies:

• Debt Obligations: The company carries significant debt (~$210 million in bank loans for Tower; ~$27 million for Jazz). Failure to meet repayment schedules or financial covenants could trigger immediate repayment demands and enforcement of liens on assets.
• Investment Center Grants: Approximately $45 million in cash grants from the Israeli Investment Center for Fab 2 are pending. Approval of an expansion plan is required to release these funds; failure to receive them may necessitate alternative financing.
• Fab 2 Ramp-up: Full utilization of Fab 2 (estimated at 40,000 wafers/month) is not yet achieved. Delays in equipment installation or funding could result in underutilization of substantial investments.
• Market Conditions: The semiconductor industry remains cyclical. The company faces risks from global economic downturns, downward price pressure, and excess inventory.
• Legal Proceedings: An ITC action regarding patent infringement (LSI Corporation) was terminated in March 2010 with the patent found invalid, but further petitions remain a possibility.

Investor Verification Checklist

• Debt Covenant Compliance: Verify current compliance with financial ratios under the amended facility agreement with Bank Hapoalim and Bank Leumi, specifically regarding the waiver of covenants through December 31, 2009.
• Investment Center Status: Confirm the status of the appeal regarding the $45 million pending grants and the expansion plan approval from the Israeli Investment Center.
• Debt Maturity Profile: Review the repayment schedule for the $210 million bank debt (due 2011-2013) and $123 million in Jazz convertible notes (due 2011).
• Customer Concentration: Assess reliance on top customers, noting that three customers contributed 17%, 11%, and 7% of revenues in 2009.
• Non-Cash Financing Expenses: Monitor the impact of fair value adjustments on convertible debentures and warrants, which can significantly affect reported net loss without impacting cash flow.