SanDisk 2003 Annual Report Download - page 38

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Tower ordinary shares at an exercise price of $7.50 per share. The warrant expires on October 31, 2006. The
8,313,638 Tower ordinary shares represented an approximate 16% equity ownership position in Tower as of
December 28, 2003. In Ñscal 2003 we recorded write-downs to the value of the wafer credits of $3.9 million
and utilized approximately $0.7 million of these wafer credits to purchase controller wafers from Tower. Also
in 2003, we recorded a $0.6 million gain to adjust the book value of the warrant and as of December 28, 2003,
we had recognized cumulative losses of approximately $32.2 million as a result of the other-than-temporary
decline in the value of our investment in Tower ordinary shares, $12.2 million as a result of the impairment in
value on our prepaid wafer credits and $0.1 million of losses on our warrant to purchase Tower ordinary shares.
As of December 28, 2003, our Tower ordinary shares were valued at $58.8 million and included an unrealized
gain of $34.0 million, inclusive of related tax expense impact of $2.7 million, recorded as a component of
accumulated other comprehensive income, our Tower prepaid wafer credits were valued at $1.4 million and
the warrant to purchase Tower ordinary shares was valued at $1.2 million.
In February 2003, we agreed to amend our foundry investment agreements with Tower and advance the
payment of $11.0 million for the Ñfth and Ñnal milestone in two installments, a Ñrst installment of
approximately $6.6 million and a second installment of approximately $4.4 million, regardless of whether the
milestone was met. Tower's shareholders approved the amendment in May 2003. In November 2003, we
agreed to further amend the foundry investment agreements, referred to as the November Amendment, to,
among other things, (a) advance the entirety of the remaining Ñfth milestone payment of $6,718,950, or
Payment, (b) defer our use of wafer credits, and (c) extend the lock-up period on our Tower ordinary shares.
The November Amendment was approved by Tower's shareholders in December 2003, following which
approval we made the Payment. We received 777,294 Tower ordinary shares at the time we made the
Payment and 628,611 Tower ordinary shares in January 2004 upon the closing of Tower's follow-on public
oÅering, which generated net cash to Tower of approximately $75.2 million and correspondingly reduced our
equity ownership position.
Also under the November Amendment, we agreed not to use wafer credits until January 1, 2007, except
with respect to purchase orders issued before the date of the November Amendment utilizing wafer credits;
however, we will have the option to convert credits we would have otherwise been able to utilize per quarter
into Tower ordinary shares at the 15 day average trading price of Tower shares, or ATP, preceding the last day
of the relevant quarter. Unconverted credits shall accrue interest at a rate per annum equal to three-month
LIBOR plus 2.5% through December 31, 2007. Interest payments will be made quarterly and the aggregate
principal amount of the unconverted credits will be repaid in one lump sum on December 31, 2007. EÅective
as of December 31, 2005, we may convert all of the then remaining Series A-4 Credits into Tower ordinary
shares at the 15 day ATP preceding December 31, 2005. If the number of Tower ordinary shares received by
us and the other wafer partners as a result of this conversion is greater than or equal to an aggregate of 5% of
Tower's issued and outstanding share capital on January 31, 2006, Tower will transact a rights oÅering for the
distribution of rights to all of Tower's shareholders, other than us and the other wafer partners but including
Israel Corporation Technologies, at the same 15 day ATP.
The November Amendment also provides that we will not sell our Tower ordinary shares until
January 29, 2006, except we may sell 30% of the Tower shares held as of January 29, 2004. In addition, we
have extended the date on which we may exercise our demand registration rights until the earlier of
(i) December 31, 2005 and (ii) such date that Tower has fulÑlled all of its obligations to raise any additional
Ñnancing pursuant to its facility agreement.
Other Equity Investments
In November 2000, we made a strategic investment of $7.2 million in Divio, Inc., or Divio. In 2002, we
accounted for this investment under the cost method, and we recorded a decline in the fair value of the
investment of $2.7 million. At December 29, 2002, the value of our Divio investment had declined to
$4.5 million. During Ñscal 2003, Divio was sold to ESS Technology resulting in a net loss from this sale for
Ñscal 2003 of $0.2 million.
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