SanDisk 2004 Annual Report Download - page 72

Table of Contents
Notes to Consolidated Financial Statements — (Continued)
Note 7: Investments in Foundries
UMC. The Company maintains an investment position in UMC, one of its suppliers of controller wafers, on the cost basis of
accounting. In 1997, the Company invested $51.2 million in a company that was acquired by UMC in 2000. In 2000, the Company
recorded a gain on investment of approximately $344.2 million. In 2001, the Company concluded that the market decline in the value
of those shares was other than temporary and recorded a loss of $275.8 million. In 2003, the Company sold 35 million UMC shares for
net proceeds of approximately $30.0 million, which resulted in a gain of approximately $7.0 million. Also in 2003, the Company
recognized a loss of $18.3 million as a result of the fraudulent sale and misappropriation by an employee of the Company’s Taiwan
law firm of 127.8 million UMC shares owned by the Company (as described in Note 5). In the fourth quarter of 2004, the Company
received a settlement of $6.2 million from a third−party brokerage firm related to the fraudulent sale of the UMC stock. As of
January 2, 2005, the Company owned 22.2 million UMC shares with a cost basis of $13.4 million and a fair market value on that date
of $14.2 million.
Tower Semiconductor. Since July 2000, the Company has invested $79.0 million in Tower’s foundry facility, Fab 2, and received
9.0 million ordinary shares, $14.3 million convertible wafer credits and a warrant to purchase 0.4 million Tower ordinary shares at an
exercise price of $7.50 per share. The warrant expires on October 31, 2006. The investment has provided the Company with a
guaranteed source of controller wafers. Since the third quarter of 2003, the Company has sourced controller wafers from Tower.
The 9.0 million Tower ordinary shares represented an approximate 14% equity ownership position in Tower as of January 2, 2005.
In 2004, the Company recorded an other−than−temporary impairment loss of $11.8 million on its Tower investment. Tower’s market
value had declined to $2.26 per share at the end of fiscal 2004 from a its cost basis of $3.40 per share. Additionally, Tower’s Fab 2 is
operational but has not been completed and Tower’s financial situation is challenging which indicates that Tower’s share price may
not appreciate from the value at the end of fiscal 2004. From July 2000 through January 2, 2005, the Company has recognized
cumulative losses of approximately $44.0 million as a result of the other−than−temporary decline in the value of its investment in
Tower. As of January 2, 2005, the Company’s Tower ordinary shares had a carrying value and fair market value of $20.4 million. Of
the approximately 9.0 million Tower ordinary shares the Company owns, the Company has agreed not to sell approximately
6.3 million shares until on or after January 29, 2006, and the value of these restricted shares is included in the Company’s consolidated
balance sheet as long−term investment in foundries. In addition, the Company has extended the date on which it may exercise its
demand registration rights on all its shares until the earlier of (i) December 31, 2005 and (ii) such date that Tower has fulfilled all of
its obligations to raise any additional financing pursuant to its facility agreement. The Company may be required to recognize
additional losses with respect to its Tower investments in future periods.
In November 2003, the Company amended its foundry investment agreements with Tower and, among other things, agreed not to
use wafer credits until January 1, 2007, except with respect to purchase orders issued before the November 2003 amendment, which
had been completely utilized as of the end of the Company’s second fiscal quarter of 2004. In fiscal 2004 the Company utilized
approximately $0.7 million of these wafer credits to purchase controller wafers from Tower. The Company has the option to convert
the credits it would have otherwise been able to utilize per quarter into Tower ordinary shares at the 15−day average trading price
(ATP) preceding the last day of the relevant quarter. During the first nine months of 2004, the Company exercised its option to convert
credits it would have otherwise been able to utilize for the period into Tower ordinary shares and received approximately $0.5 million
in Tower ordinary shares, or approximately 117,000 Tower ordinary shares. In the last quarter of 2004, the Company chose not to
convert the credit it would have otherwise been able to utilize for the quarter into shares and the unconverted credits are accruing
interest at a rate per annum equal to three−month LIBOR plus 2.5% through December 31, 2007. Interest payments will be made
quarterly and the aggregate principal amount of the unconverted credits will be repaid in one lump sum on December 31, 2007.
Effective as of December 31, 2005, the Company may convert all of the then remaining credits it was issued in connection with its
fourth milestone payment into F−26