SanDisk 2006 Annual Report Download - page 70

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counterfeit goods in China. The enforcement of existing and future laws and contracts remains uncertain, and the
implementation and interpretation of such laws may be inconsistent. Such inconsistency could lead to piracy and
degradation of our intellectual property protection. Although we have increased our efforts to prevent counterfeit
products from entering the market, those efforts may not be successful. Our results of operations and financial
condition could be harmed by the sale of counterfeit products.
Our international business activities could also be limited or disrupted by any of the following factors:
• the need to comply with foreign government regulation;
• general geopolitical risks such as political and economic instability, potential hostilities and changes in
diplomatic and trade relationships;
• natural disasters affecting the countries in which we conduct our business, particularly Japan, such as the
earthquakes experienced in Taiwan in 1999, in Japan in 2004, 2003 and previous years, and in China in
previous years;
• 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;
• inability to successfully manage our foreign exchange exposures;
• 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.
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 and in the process of expanding capacity and our ability to continue to obtain sufficient supply
on a cost-effective basis may be dependent upon completion of this capacity expansion. Tower’s continued
expansion of Fab 2 requires sufficient funds to operate in the short-term and raising the funds required to implement
the current ramp-up plan. If Tower fails to comply with the financial ratios and covenants contained in the amended
credit facility agreement with its banks, fails to attract additional customers, fails to operate its Fab 2 facility in a
cost-effective manner, fails to secure additional financing, fails to meet the conditions to receive government grants
and tax benefits approved for Fab 2, or fails to obtain the approval of the Israeli Investment Center for a new
expansion program, Tower’s continued operations could be at risk. If this occurs, we will be forced to source our
controllers from another supplier and our business, financial condition and results of operations may be harmed.
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, which
could take three or more quarters to complete.
We have recognized cumulative losses of approximately $54.1 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 $1.3 million of losses on our warrant to purchase Tower ordinary shares as of
December 31, 2006. We are subject to certain restrictions on the transfer of our approximately 12.8 million Tower
ordinary shares including certain rights of first refusal, and through January 2008, have agreed to maintain
minimum shareholdings. It is possible that we will record further write-downs of our investment, which was carried
on our consolidated balance sheet at $17.5 million at December 31, 2006, which would harm our results of
operations and financial condition.
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Annual Report