SanDisk 2003 Annual Report Download - page 34

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Lee and Li and certain Lee and Li personnel, the cash payment received by us of $20.0 million on
November 14, 2003, as well as, promises to pay, exclusive of interest, of $45.0 million over four years have
been classiÑed on our consolidated balance sheet as a short-term other receivable of $11.3 million and a long-
term other receivable of $33.7 million at December 28, 2003. The promises to pay are secured by irrevocable
standby letters of credit. We believe the credit for future professional services and payments of future
charitable contributions on our behalf in the amount of $18.3 million payable over 18 years, which are an
element of our Settlement Agreement, have no value, as there is no reasonable assurance of realization.
Accordingly, we have charged to earnings these amounts as a loss on unauthorized sale of UMC shares.
Related to the recorded loss, we recognized a tax beneÑt in the third quarter of approximately $7.0 million,
and we also recognized a charge to our tax provision of approximately $24.4 million resulting from the reversal
of a tax beneÑt recognized in prior periods associated with the stolen UMC shares. If we realize any additional
recovery, a gain will be realized in the period of recovery.
Gain (Loss) on Equity Investment. During 2003, our investment in Divio was sold to ESS Technology.
The net result of this sale was a net realized loss of approximately $0.2 million. In 2002, we recognized an
impairment charge on the decline in the value of our investment in Divio of $2.7 million, or $1.7 million net of
tax, in accordance with Statement of Financial Accounting Standards No. 115.
Other Income (Loss), Net. Other income (loss), net was ($2.7) million in 2003 compared to
($3.1) million in 2002 and ($1.0) million in 2001. The losses in 2003, 2002 and 2001 were primarily due to
foreign currency transaction losses on our Yen denominated assets.
Provision for (BeneÑt from) Income Taxes. Our 2003 eÅective tax provision rate was approximately
30%, while our 2002 and 2001 eÅective tax provision (beneÑt) rates were approximately 9% and (33%),
respectively. Our 2003 tax rate diÅers from the statutory rate primarily due to state taxes, a non-cash reversal
of the tax beneÑt we recognized in 2001 and 2002 related to the unrealized gain in our UMC shares that were
subsequently both voluntarily and fraudulently sold in 2003, and to the beneÑt provided by our reversal of
approximately $47 million of the valuation allowance we carried against certain net deferred tax assets at the
end of Ñscal 2002. Our 2002 tax rate was signiÑcantly lower than the statutory rate due to the utilization of
previously unbeneÑted net operating losses and a reduction of the valuation allowance due to the increase in
the unrealized gain on our investment in UMC. Our future tax rate may be impacted by state taxes, and our
ability to realize certain capital losses and tax credit carryforwards.
Liquidity and Capital Resources
Cash Flows
At December 28, 2003, we had working capital of $1.4 billion, which included $734.5 million in cash and
cash equivalents and $528.1 million in unrestricted short-term investments, excluding our investments in
UMC and Tower.
Operating activities for 2003 provided $270.4 million of cash, primarily due to net income of $168.9 mil-
lion; plus non-cash charges, primarily depreciation and amortization of $23.0 million, loss on unauthorized sale
of UMC shares of $18.3 million, a $51.3 million increase in accounts payable, a $57.7 million increase in
deferred income on shipments to distributors and retailers and deferred revenue, a $29.1 million increase in
liabilities due to related parties, a $26.2 million increase in income taxes payable and an increase in accrued
payroll and related expenses of $16.5 million. These were partially oÅset by increases of $104.6 million in
accounts receivable, $28.3 million in inventory, $4.1 million in deposits and other current assets and an
increase of $1.6 million in our investment in FlashVision. Cash provided by operations was $105.6 million in
2002, and cash used by operations was $72.1 million in 2001.
Net cash used in investing activities was $333.6 million in 2003. Purchases, net of proceeds from short
term investments of $293.0 million, $54.0 million of capital equipment and technology license purchases and
$11.0 million paid to Tower for the Ñfth milestone payment during Ñscal 2003 were partially oÅset by
$4.4 million in net proceeds from the sale of our 1.8 million Divio, Inc. shares, and proceeds of $21.6 million
30