SanDisk 2002 Annual Report Download - page 16

14 Sa nD isk C o rp ora tio n
lines of credit. We m ay incur substantial additional indebted-
ness in the future. There can be no assurance that we w ill
be able to m eet our debt service obligations, including our
obligations under the Notes.
Inve stm e nt in UM C
In January 2000, the USIC foundry w as m erged into the
UM C parent com pany. In exchange for our USIC shares, w e
received 111 m illion UM C shares. These shares w ere valued
at approxim ately $396 m illion at the tim e of the m erger,
resulting in a pretax gain of $344.2 m illion ($203.9 m illion
after-tax) in the first quarter of 2000. All of the UM C shares
w e received as a result of the m erger in 2000 were subject
to trading restrictions im posed by UM C and the Taiw an
Stock Exchange. As of Decem ber 31, 2002, the trading
restrictions had expired on 77.8 million shares. The rem ain-
ing 33.3 m illion shares w ill becom e available for sale through
January 2004. We also received 23.0 m illion, 20.0 m illion
and 22.2 m illion shares as stock dividends from UM C in
2002, 2001 and 2000, respectively. Due to the decline in
UM C stock price from the w eakness in the semiconductor
industry, the value of our investm ent in UM C had declined to
$194.9 million at Decem ber 31, 2001. Therefore in 2001, it
w as determ ined that the decline in the m arket value of the
investm ent was other than tem porary, as defined by gener-
ally accepted accounting principles and a loss of $275.8 m il-
lion, or $166.9 m illion net of taxes w as recorded in accor-
dance w ith Statem ent of Financial Accounting Standards
Num ber 115. The loss w as included in loss on investm ent in
foundry. The UM C shares received as stock dividends for
the three years ending Decem ber 31, 2002 are included in
the 165 m illion shares classified as available-for- sale in
accordance w ith SFAS No. 115, are reported at a m arket
value of $105.4 m illion and included in current assets on our
consolidated balance sheet. We also have 11 m illion shares
that contain trading restrictions that extend beyond one
year, w hich are valued at their adjusted cost of $7.5 m illion
and included in non-current assets. UM C’s share price
declined to NT$22.20 at Decem ber 31, 2002 from a stock
dividend adjusted price of NT$42.87 at Decem ber 31, 2001
resulting in a $81.8 m illion reduction in our previously
recorded unrealized gain on the portion of our investment
that is classified as available-for-sale. At Decem ber 31,
2002, the m arket value of the available-for-sale portion of
our UM C investment had declined $6.6 m illion, before tax,
below its adjusted cost of $112.0 m illion, and this unrealized
loss of approxim ately $6.6 m illion is included in accum ulated
other com prehensive incom e (loss) on our consolidated bal-
ance sheet as this decline w as deemed to tem porary. If the
fair value of the UM C investm ent declines further, it m ay be
necessary to record additional losses. In addition, in future
periods, there m ay be a gain or loss due to fluctuations in
the m arket value of UM C stock or if UM C shares are sold.
Inve stm e nt in Fla s hVisio n Jo int Ve nture
On June 30, 2000, w e closed a transaction w ith Toshiba
providing for the joint developm ent and m anufacture of 512
m egabit and 1 gigabit flash m em ory chips and Secure Digital
Card controllers. As part of this transaction, w e and Toshiba
form ed FlashVision, a joint venture, to equip and operate a
silicon w afer m anufacturing line at Toshiba’s Dom inion
Sem iconductor facility in M anassas, Virginia. In January
2001, w e invested the final $15.0 million of our $150.0 million
cash com m itm ent in FlashVision L.L.C. In April 2002, w e and
Toshiba entered into a series of agreem ents under w hich
w e restructured our FlashVision joint venture by consolidat-
ing FlashVision’s advanced NAND w afer fabrication m anu-
facturing operations at Toshiba’s m em ory fabrication facility
in Yokkaichi, Japan. Under the term s of the agreem ents,
Toshiba transferred the FlashVision owned and leased
NAND production tool-set from Dom inion to Yokkaichi and
undertook full responsibility for the equipm ent transfer and
production set up. The FlashVision operation at Yokkaichi
continues the joint venture on essentially the sam e term s as
the parties had at Toshiba’s facility in Virginia. In M arch
2002, FlashVision exercised its right of early term ination
under its lease facility w ith ABN AM RO Bank, N.V. and in
April 2002 repaid all am ounts outstanding. FlashVision
secured a new equipm ent lease arrangem ent of approxi-
m ately 37.9 billion Japanese Yen (or approxim ately $305
m illion based on the exchange rate in effect on the date the
agreem ent was executed) in M ay 2002 w ith Mizuho
Corporate Bank, Ltd., or M izuho, and certain other financial
institutions. Under the term s of the new lease, Toshiba is
required to provide a guarantee to these financial institutions
on behalf of FlashVision. We have agreed to indem nify
Toshiba in certain circum stances for certain liabilities Toshiba
incurs as a result of Toshiba’s guarantee of the FlashVision
equipm ent lease arrangem ent. If FlashVision fails to m eet its
lease com m itm ents and Toshiba fulfills these comm itm ents
under the term s of Toshiba’s guarantee, then w e w ill be
obligated to reim burse Toshiba for 49.9% of any claim s
under the lease, unless such claim s result from Toshiba’s
failure to m eet its obligations to FlashVision or its covenants
to the lenders. Because FlashVision’s new equipm ent lease
arrangem ent is denom inated in Japanese Yen, the m axi-
m um am ount of our contingent indem nification obligation on
a given date w hen converted to U.S. Dollars w ill fluctuate
based on the exchange rate in effect on that date. As of
Decem ber 31, 2002, the m aximum am ount of our contingent
indem nification obligation, w hich reflects paym ents and any
lease adjustm ents, w as approxim ately $142.4 m illion.
In the next tw o to three years, w e expect to m ake sub-
stantial new investm ents in additional fabrication capacity at
FlashVision. We expect to fund up to approxim ately $33.0
m illion for the initial fabrication capacity expansion in 2003.
Inve stm e nt in Tow e r
In July 2000, w e entered into a share purchase agreem ent
to m ake a $75.0 m illion investm ent in Tow er, for its new
w afer foundry facility, Fab 2. During 2001, Tow er satisfied the
closing conditions of the share purchase agreem ent and
completed the first two m ilestones. Under the term s of the
agreem ent, w e invested $42.5 m illion to purchase 1,599,931
ordinary Tow er shares and obtained w afer credits of $21.4
m illion. In Septem ber 2001, w e agreed to convert 75% of our
w afer credits to equity at a price of $12.75 per share and
received an additional 1,284,007 ordinary Tow er shares. Due
to the continued w eakness in the semiconductor industry,
the value of our Tow er investm ent and rem aining wafer
credits had declined to $16.6 m illion at Decem ber 31, 2001. It
w as determ ined that this decline was other than tem porary,
as defined by generally accepted accounting principles and
a loss of $20.6 m illion w as recorded in the second half of