TSEM

Business Context and Reporting Period

Company: Tower Semiconductor Ltd.
Filing Type: Form 6-K (Notice of Annual and Special General Meeting)
Date: August 20, 2008
Meeting Date: September 24, 2008
Context: The filing announces an Annual and Special General Meeting to address critical corporate governance matters and a major debt restructuring plan. The company is an Israeli semiconductor manufacturer facing significant liquidity challenges, necessitating shareholder approval for debt-to-equity conversions and new capital injections.

Key Financial Metrics and Capital Structure

Outstanding Shares: 125,364,021 ordinary shares (as of August 20, 2008).
Authorized Shares: Currently 800,000,000; proposal to increase to 1,100,000,000.
Debt Obligations:

• Bank Debt: Approximately $399 million outstanding under Credit Facility and Bank Equipment Facilities with Bank Hapoalim and Bank Leumi.
• Israel Corp. Debt: $30 million in loans and $20 million in convertible debentures.

Proposed Restructuring (Debt-to-Equity):

• Bank Conversion: $200 million of bank debt to be converted into securities convertible into 140,845,070 shares at $1.42/share.
• Israel Corp. Conversion: $50 million of debt to be converted into securities convertible into 35,211,271 shares at $1.42/share.

Proposed Investment:

• Committed: $20 million cash investment by Israel Corp. for 28,169,014 shares.
• Potential: Up to $20 million additional investment by Israel Corp. contingent on financing needs through December 31, 2009.

Financial Performance: The filing text does not provide specific revenue, profit, or cash flow figures for the current period. Shareholders are directed to the 2007 audited financial statements available on the company website.

Material Changes and Restructuring Terms

The filing details a Memorandum of Understanding (MOU) signed on August 19, 2008, representing a material change to the company's capital structure and debt service obligations:

• Interest Deferral: Interest payments due from September 30, 2008, to June 30, 2009, will be postponed and capitalized (converted to principal).
• Repayment Schedule: Commencement of principal repayment for remaining bank debt is postponed from September 2009 to September 2010, payable in 8 quarterly installments ending June 2012.
• Covenant Waivers: Banks will waive compliance with financial covenants until the end of 2008. Future covenants will be revised to align with the restructuring and the pending Jazz merger.
• Interest Rate Adjustment: The rate on remaining bank loans will be set at LIBOR + 2.5% per annum.
• Conditions Precedent: The restructuring is conditioned on the closing of the Jazz merger and the execution of definitive agreements.

Guidance, Outlook, and Risks

Management Outlook: Management is pursuing a debt restructuring to ensure liquidity and operational continuity. The plan relies heavily on the support of major shareholder Israel Corporation Ltd. and the successful closing of the Jazz merger.

Risks and Contingencies:

• Default Risk: Without the restructuring, the company faces potential acceleration of obligations, requiring immediate repayment of all loans plus penalties, and enforcement of liens on assets.
• Merger Dependency: The amended credit facility is explicitly conditioned on the closing of the Jazz merger.
• Dilution: The conversion of $250 million in debt and the issuance of shares for new investment will result in significant dilution to existing shareholders.
• Financing Needs: The company has undertaken to raise an additional $20 million in new funds (excluding Israel Corp.'s investment) by December 31, 2009.

Key Facts for Investor Verification

• Shareholder Approval: Verify the outcome of Proposal 5, which requires a majority vote including specific thresholds for "disinterested" shareholders due to the related-party nature of the transaction with Israel Corp.
• Jazz Merger Status: Confirm the status of the Jazz merger, as the debt restructuring is contingent upon its closing.
• Dilution Impact: Calculate the total dilution resulting from the issuance of approximately 204 million new shares (140.8M for banks + 35.2M for Israel Corp. debt + 28.2M for Israel Corp. cash) against the current 125.4 million outstanding shares.
• Liquidity Runway: Assess whether the $20 million committed investment and the deferral of interest payments provide sufficient liquidity to fund operations until the next financing milestone in 2009.
• Covenant Compliance: Monitor the company's ability to meet the revised financial covenants starting in 2009.