SanDisk 2005 Annual Report Download - page 150

Significant components of the Company’s deferred tax assets as of January 1, 2006 and January 2, 2005 were as
follows (in thousands):
January 1,
2006
January 2,
2005
Deferred tax assets:
Inventory valuation ......................................... $ 2,000 $ 15,800
Deferred revenue recognized for tax purposes ...................... 51,000 38,400
Accruals and reserves not currently deductible ..................... 56,600 51,300
Fixed assets ............................................... 15,500 4,700
Unrealized loss on permanent impairment of investment in foundries .... 20,400 16,600
Other.................................................... 5,200 1,200
Subtotal: Deferred tax assets ................................ $150,700 $128,000
Valuation allowance for deferred tax assets ...................... (14,900) (12,300)
Total deferred tax assets .................................... $135,800 $115,700
Deferred tax liabilities:
Unrealized gain on sale of foundry shares ........................ (19,500) (29,100)
US taxes provided on unremitted earnings of foreign subsidiaries ....... (26,500) (1,600)
Total: Deferred tax liabilities ................................ (46,000) (30,700)
Total net deferred tax assets..................................... $ 89,800 $ 85,000
At January 1, 2006, a $14.9 million valuation allowance was provided based, more likely than not, on the
Company’s inability to recognize a tax benefit from certain write downs on its investment in Tower. At January 2,
2005, a $12.3 million valuation allowance was provided based on the net deferred tax assets on the same investment.
During the current and prior years, the Company has not made a determination to permanently reinvest
earnings of its foreign subsidiaries.
Note 7: Strategic Investments
UMC. The Company maintains an investment position in United Microelectronics Corporation, or UMC,
one of its suppliers of wafers for its controller components, on the cost basis of accounting. As of January 1, 2006,
the Company owned 24.5 million UMC shares with a cost basis of $13.4 million and a fair market value of
$13.9 million.
Tower Semiconductor. The Company owns approximately 15% of the outstanding shares of Tower Semi-
conductor Ltd., or Tower, one of its suppliers of wafers for its controller components. The Company has sourced
controller wafers from Tower since the third quarter of fiscal 2003. As of January 1, 2006, the Company owned
approximately 10.2 million Tower shares with a carrying value and market value of $12.9 million and $14.8 million,
respectively, a warrant to purchase 0.4 million Tower ordinary shares at an exercise price of $7.50 per share, with a
carrying value of zero and Tower prepaid wafer credits with a carrying value of zero. In fiscal 2005, the Company
recorded an unrealized loss of $1.1 million through OCI on its Tower investment to bring the carrying value of the
Tower shares to market value. In December 2005, the Company invested $3.5 million in a Tower convertible
debenture offering. Conversion is not restricted. See Note 10, “Related Parties — Tower.”
U3, LLC. In the first quarter of fiscal 2005, the Company entered into an agreement with M-Systems, Inc., or
M-Systems, under which they formed U3, LLC. U3, LLC was founded to develop a platform for which software
developers can transform USB drives from a simple mass storage device to a platform for on-the-go computing. The
Company and M-Systems each own 50% of U3, LLC. The Company is entitled to half of any residual gains.
However, as the Company will provide greater than 50% of the U3, LLC financial support, it would receive more
F-31
Notes to Consolidated Financial Statements — (Continued)
Annual Report