SanDisk 2003 Annual Report Download - page 33

Download and view the complete annual report

Please find page 33 of the 2003 SanDisk annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 108

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108

our share of losses were deducted from our DPI investment account and therefore, as of December 29, 2002
there was no value related to DPI on our consolidated balance sheet. Our DPI investment was sold in
December 2003 with minimal gain realized.
Interest Income/Expense. Interest income was $8.9 million in 2003, compared to $8.7 million in 2002
and $12.4 million in 2001. The slight increase in interest income was due to higher average cash balances
during 2003 over 2002. In September, we completed a follow-on public oÅering raising over $500 million in
cash. In addition, during 2003 we generated over $270 million in cash from operating activities. Lower average
interest rates over the course of the year oÅset our higher average cash balances. The decrease in interest
income in 2002 compared to 2001 was primarily due to reductions in market interest rates. In 2004, we expect
interest expense to be consistent with 2003 and interest income to increase slightly as compared to 2003 as a
result of a full year of increased cash balances related to our secondary oÅering and cash from operating
activities.
Gain (Loss) on Investment in Foundries. In 2003, we sold 35 million shares of UMC stock, recognized
a gain of approximately $7.0 million and recorded a $0.6 million increase in fair value our Tower warrant as
determined using a Black-Scholes option pricing model. During 2003, we recognized a write-down of
$3.9 million related to the recoverability of our Tower prepaid wafer credits, which at December 28, 2003 were
valued at $1.3 million. We periodically assess the value of the warrant, our Tower ordinary shares and our
prepaid wafer credits and adjust the value as necessary. In future periods, if we sell shares that we own in
either UMC or Tower, we may recognize a gain or loss due to Öuctuations in the market value of these stocks.
During 2002, the value of our Tower investment and wafer credits had declined to $27.3 million. Losses
totaling $15.2 million, or $9.4 million net of tax, were recorded in 2002, comprised of a $11.6 million related to
the other-than-temporary decline of our equity investment, a $0.7 million adjustment to the fair value of the
warrant purchased during 2002 as determined using a Black-Scholes option pricing model, and a $2.8 million
write down in the value of wafer credits. At December 30, 2001, the value of our Tower investment and wafer
credits had declined to $16.6 million. We recorded an other-than-temporary loss of $20.6 million, which
included the write-oÅ of wafer credits received in 2001. In addition, we recorded a loss of $5.5 million on our
exchange of 75% of our Tower wafer credits for 1,284,007 Tower ordinary shares at $12.75 per share. These
losses totaled $26.1 million, or $15.8 million net of tax beneÑt in 2001. In both 2002 and 2001, Tower losses
were recorded in loss on investment in foundry. If the fair value of our Tower investment declines further, it
may be necessary to record additional losses.
In 2001, we determined that our investment in UMC had sustained a substantial decline in its value as
deÑned by generally accepted accounting principles. The value of our investment in UMC had declined to
$194.9 million at December 30, 2001. We recorded a loss of $275.8 million on our UMC investment in 2001,
or $166.9 million net of taxes. At December 29, 2002, the market value of the available-for-sale portion of our
UMC investment had declined $6.6 million, before tax, below its adjusted cost of $112.0 million, and this
unrealized loss of approximately $6.6 million was included in accumulated other comprehensive income (loss)
on our consolidated balance sheet as this unrealized loss was deemed to be temporary. If the fair value of our
UMC investment declines further, it may be necessary to record additional losses. In addition, in future
periods, if our UMC shares are sold, there may be a gain or loss, due to Öuctuations in the market value of
UMC's stock.
Loss on Unauthorized Sale of UMC Shares. On October 14, 2003, we were advised by our Taiwan law
Ñrm that UMC shares owned by us and held in custody by our Taiwan law Ñrm, Lee and Li, had been
embezzled by an employee of Lee and Li. Based on information provided by Lee and Li, a total of
approximately 127.8 million of our UMC shares were sold in unauthorized transactions starting on August 6,
2003 and ending on September 15, 2003.
As a result of the unauthorized sales of UMC shares and our sale of 35 million UMC shares, our current
holdings in UMC decreased to approximately 20.6 million shares. Accordingly, we recognized a loss of
approximately $18.3 million in accordance with SFAS No. 5 related to the stolen shares and recognized a gain
of $7.0 million related to the sale of the 35 million shares in our consolidated statements of income for 2003.
Pursuant to a Settlement and General Release Agreement, or Settlement Agreement, entered into between us,
29