SanDisk 2004 Annual Report Download - page 40

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Table of Contents
• reduced sales to our customers or interruption to our manufacturing processes in the Pacific Rim that may arise from regional
issues in Asia;
• imposition of regulatory requirements, tariffs, import and export restrictions and other barriers and restrictions;
• imposition of additional duties, charges and/or fees related to customs entries for our products, which are all manufactured
offshore;
• longer payment cycles and greater difficulty in accounts receivable collection;
• adverse tax rules and regulations;
• weak protection of our intellectual property rights; and
• delays in product shipments due to local customs restrictions.
Our products may contain errors or defects, which could result in the rejection of our products, product recalls, damage to our
reputation, lost revenues, diverted development resources and increased service costs and warranty claims and litigation. Our
products are complex, must meet stringent user requirements, may contain errors or defects and the majority of our products are
warrantied for one to five years. These factors could result in the rejection of our products, damage to our reputation, lost revenues,
diverted development resources, increased customer service and support costs and warranty claims and litigation. We provide an
allowance for warranty and similar costs in connection with sales of our product, but actual warranty and similar costs may be
significantly higher than our recorded estimates resulting in an adverse effect on our results of operations and financial condition.
Our new products have from time to time been introduced with design and production errors at a rate higher than the error rate in
our established products. We must estimate warranty and similar costs for new products without historical information and actual
costs may significantly exceed our recorded estimates. Under estimation of our warranty and similar costs would have an adverse
effect on our results of operations and financial condition.
Tower Semiconductor’s Financial Situation is Challenging. Tower supplies a significant portion of our controller wafers from its
Fab 2 facility and is currently a sole source of supply for some of our controllers. Tower’s Fab 2 is operational but has not been
completed and continued supply of controllers to us on a cost−effective basis may be dependent on this completion. Tower’s
completion of the equipment installation, technology transfer and ramp−up of production at Fab 2 is dependent upon Tower (a) having
sufficient funds to complete the Fab 2 project; (b) meeting the conditions to receive Israeli government grants and tax benefits
approved for Fab 2; and (c) obtaining the approval of the Israeli Investment Center to extend the five−year investment period under its
Fab 2 approved enterprise program. In addition, Tower is required to comply with financial ratios and covenants to avoid being in
default under its amended bank credit agreements. If Tower is unable to satisfy these requirements, we will be forced to source our
controllers from another supplier and our business, financial condition and results of operations may be adversely effected.
Specifically, our ability to supply a number of products would be disrupted until we were able to transition manufacturing and qualify
a new foundry with respect to controllers that are currently sole sourced at Tower.
We have recognized cumulative losses of approximately $44.0 million as a result of the other−than−temporary decline in the value
of our investment in Tower ordinary shares, $12.2 million as a result of the impairment in value on our prepaid wafer credits and
$1.2 million of losses on our warrant to purchase Tower ordinary shares. Of the approximately 9.0 million Tower ordinary shares we
own, we have agreed not to sell approximately 6.3 million shares until on or after January 29, 2006. It is possible that we will record
further write−downs of our investment, which was carried on our consolidated balance sheet at $20.4 million as of January 2, 2005,
which would adversely affect our results of operations and financial condition.
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