SanDisk 2003 Annual Report Download - page 50

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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 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 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.
Full completion of Tower's wafer foundry facility, Fab 2 and timely production ramp at Fab 2,are
dependent on several factors and may never occur, which may harm our business and results of operations.
Tower's full completion of Fab 2 is dependent on its ability to obtain additional Ñnancing for the foundry
construction from equity and other sources and the release of grants and approvals for changes in grant
programs from the Israeli government's Investment Center. The current political uncertainty and security
situation in the region may adversely impact Tower's business prospects and may discourage investments in
Tower from outside sources. If Tower is unable to obtain additional Ñnancing, complete foundry equipment
purchases in a timely manner or is unable to successfully complete the development and transfer of advanced
CMOS process technologies and ramp-up of production, the value of our equity investment in Tower and
wafer credits will decline signiÑcantly or possibly become worthless. In addition, we may be unable to obtain
suÇcient supply of controller wafers from Tower to manufacture our products, which would harm our
business. Further deterioration of market conditions for foundry manufacturing services and the market for
semiconductor products may also adversely aÅect the value of our equity investment in Tower. If the fair value
of our Tower investment declines, we may record additional losses, which potentially could amount to the
remaining recorded value of our Tower investment. Moreover, if Tower is unable to satisfy its Ñnancial
covenants and comply with the conditions in its credit facility agreement, and therefore is not able to obtain
additional bank Ñnancing, or if its current bank obligations are accelerated, or it fails to secure customers for
its foundry capacity to help oÅset its Ñxed costs, that failure could jeopardize the completion of Fab 2, the
production ramp at Fab 2 and Tower's ability to continue operations.
Tower is currently a sole source of supply for one of our new high volume controllers. Any interruption in
Tower's manufacturing operations resulting in delivery delays will adversely aÅect our ability to make timely
shipments of some of our higher capacity products. If this occurs, our operating results will be adversely
aÅected until we can qualify an alternate source of supply, which could take a quarter or more to complete.
We cannot assure you that the Fab 2 facility will be fully completed or will continue its production ramp
as scheduled. Moreover, we cannot assure you that this new facility will be able to sustain acceptable yields or
deliver suÇcient quantities of wafers on a timely basis at a competitive price. If Tower is unable to operate
Fab 2 at an optimum capacity utilization, it may operate at a loss or have to discontinue operations.
Political unrest and violence in Israel may hinder Tower's ability to obtain investment in and complete its
fabrication facility, which would harm our business.
Political unrest and violence in Israel could cause and could result in delays in the completion of Fab 2
and interruption or delay of manufacturing schedules once Fab 2 is completed, and could result in potential
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