SanDisk 2002 Annual Report Download - page 14

12 Sa nD isk C o rp ora tio n
Re struc turing Charg es. In the third quarter of 2001, w e
adopted a plan to transfer all of our card assem bly and
test manufacturing operations from our Sunnyvale location
to offshore subcontractors. As a result w e recorded a
restructuring charge of $8.5 m illion in the third quarter of
2001. The charge included $1.4 million of severance and
em ployee related costs for a reduction in w orkforce of
approxim ately 193 personnel, equipm ent w rite-off charges
of $6.0 m illion and lease comm itm ents of $1.1 m illion on a
vacated w arehouse facility. As a part of our plan to transfer
all card assem bly and test m anufacturing operations to off-
shore subcontractors, w e abandoned excess equipm ent
and recorded a charge of $6.4 m illion in the third quarter
of fiscal 2001.
As of January 2003, w e have subleased a portion of our
w arehouse building in San Jose, California. Given the current
real estate m arket conditions in the San Jose area, w e do
not expect to be able to sublease the rem ainder of this
building before the end of 2003. Any sublease incom e w ill
be offset against the balance of the lease com m itm ent
restructuring charge recorded in the third quarter of 2001.
Of the $8.5 m illion restructuring charge, cash paym ents
of $0.8 m illion and $1.1 m illion w ere paid in 2001 and 2002
respectively. After w riting off certain non-cash charges
related to abandoned excess equipm ent, accruals of $0.6
m illion remain as of Decem ber 31, 2002, related to am ounts
to be paid out for excess facility lease charges, net of facility
sub-lease income, over the respective lease term s.
The follow ing table sum marizes our restructuring activities
from the inception of our plan through the end of 2002:
Wo rkforc e Co m m it-
(In thousands) Equipm ent Reduction m ents Total
Restructuring charge $ 6,383 $ 1,094 $ 1,033 $ 8,510
Non-cash charges (6,027) – – (6,027)
Cash paym ents – (805) – (805)
Accrual balance,
Decem ber 31, 2001 $ 356 $ 289 $ 1,033 $ 1,678
Non-cash charges (17) – – (17)
Ad justm ents (339) 321 18 –
Cash paym ents – (610) (471) (1,081)
Accrual balance,
Decem ber 31, 2002 $ – $ – $ 580 $ 580
Eq uity in Inc om e o f Joint Ve nture. In 2002 and 2001,
equity in incom e of joint ventures of $0.9 m illion and $2.1
m illion included our share of net incom e from our
FlashVision joint venture and losses from our Digital Portal
Inc., or DPI, joint venture. Under the equity m ethod of
accounting, our share of losses w ere deducted from our DPI
investm ent account and therefore, as of Decem ber 31, 2002
there is no value related to DPI on our consolidated balance
sheet. In Septem ber 2002, w e agreed to sell a significant
portion of our DPI shares to a nom inee of Photo-M e
International, PLC., or PM I, to reduce our ow nership per-
centage below 20%, and w e gave up our seat on DPI’s
board of directors. Under the agreem ent, w e discontinued
our kiosk related activities, are no longer required to m ake
additional equity investm ents in DPI, guarantee DPI’s equip-
m ent leases or otherw ise pay any of DPI’s expenses and
DPI w ill no longer use the SanDisk brand name. In future
periods, w e w ill account for our rem aining investment in DPI
on a cost basis.
Inte res t Inco m e /Exp e nse . Interest incom e w as $8.7
m illion in 2002 com pared to $12.4 m illion in 2001 and $22.8
m illion in 2000. The decrease in interest incom e in 2002
compared to 2001 w as prim arily due to reductions in m ar-
ket interest rates. The decrease in interest incom e in 2001
compared to 2000 w as also due to reductions in interest
rates and as w ell as the funding of our strategic invest-
m ents in Tow er and FlashVision. Interest expense w as $6.7
m illion in 2002 on our convertible subordinated notes, or
notes, issued in late 2001 and early 2002. In 2003, w e
expect interest expense to be consistent and interest
incom e to rem ain flat w ith an increase in cash balances
offset by the additional im pact of low er interest rates on
our portfolio as existing securities m ature and low er-yield-
ing securities are purchased.
Lo s s o n Inve s tm e nt in Fo undrie s. The m arket value of
our investm ent in Tow er and related wafer credits has
declined significantly over 2002 and 2001 due to the con-
tinuing semiconductor industry dow nturn. As of Decem ber
31, 2002, w e had invested $68.0 m illion in Tow er and
obtained 6,100,959 ordinary Tower shares, $6.0 m illion of
prepaid w afer credits, and a w arrant to purchase 360,313
ordinary Tow er shares at an exercise price of $7.50 per
share. This w arrant expires on October 31, 2006. At
Decem ber 31, 2002, the value of our Tow er investm ent and
w afer credits had declined to $27.3 m illion. Losses totaling
$15.2 m illion, or $9.4 m illion net of tax, w ere recorded in
2002, com prised of a $11.6 m illion related to the other-
than-tem porary decline of our equity investm ent, a $0.7
m illion adjustm ent to the fair value of w arrants purchased
during 2002 as determ ined using a Black-Scholes option
pricing m odel, and a $2.8 m illion w rite down in the value of
w afer credits. At Decem ber 31, 2001, the value of our
Tow er investment and w afer credits had declined to $16.6
m illion. Therefore, w e recorded a loss of $20.6 m illion,
w hich included the w rite-off of w afer credits received in
2001. In addition, w e recorded a loss of $5.5 m illion on our
exchange of 75% of our Tower w afer credits for 1,284,007
ordinary Tow er shares at $12.75 per share. These losses
totaled $26.1 m illion, or $15.8 m illion net of tax benefit in
2001. In both 2002 and 2001, Tow er losses w ere recorded
in loss on investm ent in foundry . If the fair value of our
Tow er investment declines further, it may be necessary to
record additional losses. We periodically assess the value
of the prepaid w afer credits for recoverability and w rite
down the value as necessary.
In 2001, w e determ ined that our investm ent in UM C had
sustained a substantial decline in its value as defined by
generally accepted accounting principles The value of our
investm ent in UM C had declined to $194.9 m illion at
Decem ber 31, 2001. We recorded a loss of $275.8 m illion
on our UM C investm ent in 2001, or $166.9 million net of
taxes. At Decem ber 31, 2002, the m arket value of the avail-
able- for-sale portion of our UM C investm ent had declined
$6.6 m illion, before tax, below its adjusted cost of $112.0
m illion, and this unrealized loss of approximately $6.6 m illion
is included in accum ulated other com prehensive incom e
(loss) on our consolidated balance sheet as this unrealized
loss w as deem ed to be tem porary. If the fair value of our
UM C investm ent declines further, it m ay be necessary to
record additional losses. In addition, in future periods, if our
UM C shares are sold, there m ay be a gain or loss, due to
fluctuations in the m arket value of UM C’s stock.