SanDisk 2002 Annual Report Download - page 24

2 2 S a nD isk C o rp o ra tio n
ordinary shares and prepaid w afer credits of $4.4 m illion.
The paym ent of $11.0 m illion for the fourth m ilestone w as
paid on Septem ber 30, 2002. In exchange for this paym ent
w e received 1,344,829 ordinary shares of Tower and $4.4
m illion in prepaid w afer credits. These w afer credits w ere
credited to our pre-paid w afer account and are to be
applied against orders placed with Fab 2, w hen com pleted;
provided, how ever, that until July 1, 2005, the am ounts
added to the pre- paid w afer account may only be applied
tow ards a m aximum of 7.5% of our w afer purchases. We
periodically assess the value of our prepaid w afer credits
considering the tim ing and quantity of our planned annual
w afer purchases, the status of the foundry construction and
general econom ic conditions. If w e determ ine that the value
of these w afer credits is not recoverable, an additional
w rite-down w ill be recorded.
In addition to our com m itm ent under the share purchase
agreem ent, w e invested in Tow er’s stock rights offering in
October 2002. Tower issued one right for each 4.94 shares
ow ned by record holders as of the record date. In exercis-
ing our rights to participate, w e paid approxim ately $4.0 m il-
lion in exchange for 800,695 ordinary Tow er shares and a
w arrant to purchase 360,312 ordinary shares at $7.50 per
share. This w arrant expires on October 31, 2006. During the
fourth quarter of 2002, w e recorded a w rite-dow n in the fair
value of these Tow er w arrants of approxim ately $0.7 m illion.
The fair value of these w arrants w ill continue to fluctuate
and additional adjustments to the w arrant’s fair value w ill be
recorded in future periods.
In February 2003, w e agreed to further am end our
foundry investm ent agreem ents w ith Tower, by agreeing to
advance the paym ent for the fifth and final m ilestone. This
am endm ent is subject to approval by all required parties,
including Tow er’s shareholders. If approved, the term s of
the am endm ent require the paym ent of $11.0 m illion for the
advanced fifth m ilestone and this paym ent will be m ade in
tw o installments. The first installm ent of approxim ately $6.6
m illion w ill be due five business days after the am endm ent is
approved by all required parties, including Tower’s share-
holders; the second installm ent of approxim ately $4.4 m illion
w ill be due five business days after Tow er has raised addi-
tional funds equal to approxim ately $22.0 m illion, referred to
as the M inim um Financing. Tower m ust com plete the
M inim um Financing prior to Decem ber 31, 2003, or w e w ill
not be obligated to pay the second installment. Each of the
first and second installm ents w ill be paid provided Tow er
m eets these conditions, w hether or not Tower actually
achieves its original fifth m ilestone obligation. Im m ediately
following the advancem ent of the first installm ent, w e will be
issued fully-paid and non-assessable ordinary shares of
Tow er equivalent to the first installment divided by the aver-
age trading price for ordinary shares of Tow er during the
thirty (30) consecutive trading days preceding the date the
am endm ent w as approved by Tow er’s board of directors.
Im m ediately follow ing the advancem ent of the second
installment, if it occurs, w e w ill be issued fully-paid and non-
assessable ordinary shares of Tower equivalent to the sec-
ond installment divided by the price per ordinary share of
Tow er paid in connection w ith the M inim um Financing, or the
M inim um Financing Price; provided, how ever, that if the
M inim um Financing Price cannot reasonably be calculated
from the docum ents evidencing the M inimum Financing,
then the M inim um Financing Price shall be deem ed to be
the average trading price for the ordinary shares of Tow er
during the thirty (30) consecutive trading days preceding the
date the second installment is paid. In addition, w e have the
option to convert all or a portion of our unused pre-paid
w afer credits associated w ith the Septem ber 2002 fourth
m ilestone paym ent into fully-paid and non-assessable ordi-
nary shares of Tow er based on the average closing price of
ordinary shares of Tow er during the thirty (30) consecutive
trading days preceding Decem ber 31, 2005.
Co m p le tion of To w e r’s w afe r fo undry fa c ility, Fab 2 , is
de p e nd e nt o n se ve ral fa c to rs and m ay ne ver o c c ur,
w hic h m a y harm o ur b usiness and res ults o f o p e rations.
Tow er’s com pletion of Fab 2 is dependent on its ability to
obtain additional financing for the foundry construction from
equity and other sources and the release of grants and
approvals for changes in grant program s from the Israeli
governm ent’s Investm ent Center. The current political
uncertainty and security situation in the region m ay
adversely im pact Tow er’s business prospects and m ay dis-
courage investm ents in Tow er from outside sources. If
Tow er is unable to obtain additional financing, com plete
foundry construction in a tim ely m anner or is unable to suc-
cessfully com plete the developm ent and transfer of
advanced CM OS process technologies and ram p-up of
production, the value of our equity investm ent in Tow er and
w afer credits w ill decline significantly or possibly becom e
w orthless. In addition, w e m ay be unable to obtain sufficient
supply of w afers to m anufacture our products, w hich w ould
harm our business. The value of our equity investm ent in
Tow er m ay also be adversely affected by further deteriora-
tion of conditions in the m arket for foundry m anufacturing
services and the m arket for semiconductor products gener-
ally. If the fair value of our Tow er investment declines fur-
ther, w e m ay record additional losses, w hich potentially
could amount to the rem aining recorded value of our Tow er
investm ent. M oreover, if Tow er is unable to satisfy certain
financial covenants and com ply w ith certain conditions as
required by its credit facility agreem ent, and therefore is not
able to obtain additional bank financing, or its current bank
obligations are accelerated, or it fails to secure custom ers
for its foundry capacity to help offset its fixed costs, such
failure could jeopardize the com pletion of Fab 2 and
Tow er’s ability to continue operations.
We cannot assure you that the Tow er facility w ill be com -
pleted or w ill begin production as scheduled, or that the
processes needed to fabricate our w afers w ill be qualified at
the new facility. M oreover, w e cannot assure you that this
new facility w ill be able to achieve acceptable yields or
deliver sufficient quantities of w afers on a tim ely basis at a
competitive price. Furtherm ore, if the depressed business
conditions for sem iconductor w afers persists throughout
2003 and beyond, Tow er m ay be unable to operate Fab 2 at
an optim um capacity utilization, w hich would cause them to
operate at a loss or to discontinue operations.
The c urrent p o litic al unrest and violenc e in Israe l
m ay hinde r Tow er’s ab ility to o b tain inves tm e nt in a nd
c o m ple te its fabric atio n fa c ility, w hic h w ould harm o ur
bus iness .
Although w e do not believe the current political unrest and
continuing escalation of violence in Israel represent a m ajor
security problem for Tower since M igdal Haemek, Israel is in
a relatively secure geographic location, the unrest m ay
expand and even if it rem ains at current levels, could cause
scheduling delays, as w ell as econom ic uncertainty, w hich