SanDisk 2003 Annual Report Download - page 36

result of the fraudulent sale and misappropriation of proceeds of 127.8 million UMC shares owned by us. 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 have reduced our UMC investment
in foundries as shown in the consolidated balance sheet to $17.5 million at December 28, 2003. In addition, 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 the year ended December 28, 2003. Pursuant to the Settlement Agreement entered into between
us, Lee and Li and certain Lee and Li personnel, we received a cash payment of $20.0 million on
November 14, 2003, as well as, promises to pay, exclusive of interest, of $45.0 million over four years. The
promises to pay have been classiÑed on our consolidated balance sheet as a short-term other current asset of
$11.3 million and a long-term other asset 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
$24.4 million resulting from the reversal of a tax beneÑt recognized in prior periods associated with the stolen
UMC shares. If we realize any additional recovery, a gain will be realized in the period of recovery. UMC's
share price increased to New Taiwan dollars, or NT$, of NT$29.00 at December 28, 2003, from a stock
dividend adjusted price of NT$21.34 at December 29, 2002. As a result, our remaining investment, which is
classiÑed as available-for-sale in accordance with SFAS No. 115 includes an unrealized gain of approximately
$4.7 million, inclusive of related tax expense of $0.6 million, recorded as a component of accumulated
comprehensive income on our consolidated balance sheet. If the fair value of the remaining 20.6 million UMC
shares declines in the future and such declines are deemed to be other-than-temporary, it may be necessary to
record losses on these declines. In addition, in future periods, there may be a gain or loss if the UMC shares
are sold, due to Öuctuations in the market value of UMC's stock.
Investment in FlashVision Joint Venture
In June 2000, we closed a transaction with Toshiba providing for the joint development and manufacture
of 512 megabit, 1 gigabit and 2 gigabit Öash memory chips and Secure Digital Card controllers. As part of this
transaction, we and Toshiba formed FlashVision, a joint venture, to equip and operate a silicon wafer
manufacturing line at Toshiba's Dominion Semiconductor facility in Manassas, Virginia. In April 2002, we
and Toshiba consolidated FlashVision's advanced NAND wafer fabrication manufacturing operations at
Toshiba's memory fabrication facility in Yokkaichi, Japan. In March 2002, FlashVision exercised its right of
early termination under its lease facility with ABN AMRO Bank, N.V. and in April 2002 repaid all amounts
outstanding. FlashVision secured an equipment lease arrangement of approximately 37.9 billion Japanese Yen
(or approximately $305 million based on the exchange rate in eÅect on the date the agreement was executed)
in May 2002 with Mizuho and other Ñnancial institutions. Under the terms of this lease, Toshiba guaranteed
these commitments on behalf of FlashVision. We have agreed to indemnify Toshiba in certain circumstances
for certain liabilities Toshiba incurs as a result of Toshiba's guarantee of the FlashVision equipment lease
arrangement. If FlashVision fails to meet its lease commitments and Toshiba fulÑlls these commitments under
the terms of Toshiba's guarantee, then we will be obligated to reimburse Toshiba for 49.9% of any claims
under the lease, unless such claims result from Toshiba's failure to meet its obligations to FlashVision or its
covenants to the lenders. Because FlashVision's equipment lease arrangement is denominated in Japanese
Yen, the maximum amount of our contingent indemniÑcation obligation on a given date when converted to
U.S. Dollars will Öuctuate based on the exchange rate in eÅect on that date. As of December 28, 2003, the
maximum amount of our contingent indemniÑcation obligation, which reÖects payments and any lease
adjustments, was approximately $125.5 million.
The terms of the FlashVision joint venture contractually obligate us to purchase half of FlashVision's
NAND wafer production output. We also have the ability to purchase additional capacity under a foundry
arrangement with Toshiba. Under the terms of our foundry agreement with Toshiba, we must provide Toshiba
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