SanDisk 2003 Annual Report Download - page 51

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investors and foundry customers avoiding doing business with Tower. Moreover, if U.S. military actions in
Iraq, or elsewhere, result in retaliation against Israel, Tower's fabrication facility may be adversely impacted,
causing a decline in the value of our investment.
A purported shareholder class action lawsuit was Ñled against Tower and certain of its shareholders and
directors, including us and our President and CEO, a Tower board member, which may be costly and could
divert the attention of our management personnel.
On July 3, 2003, a purported shareholder class action lawsuit was Ñled on behalf of United States holders
of ordinary shares of Tower as of the close of business on April 1, 2002 in the United States District Court for
the Southern District of New York. The lawsuit was Ñled against Tower and certain of its shareholders and
directors, including us and Dr. Eli Harari, our President and CEO and a Tower board member, and asserts
claims arising under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and the
Securities and Exchange Commission's Rule 14a-9. The lawsuit alleges that Tower and certain of its directors
made false and misleading statements in a proxy solicitation to Tower shareholders regarding a proposed
amendment to a contract between Tower and certain of its shareholders, including us. The plaintiÅs are
seeking unspeciÑed damages and attorneys' and experts' fees and expenses. Pursuant to our indemniÑcation
agreement with Dr. Harari, we have agreed to indemnify him for any expenses he may incur or liability he
may face in connection with this litigation. Litigation is inherently uncertain, can be costly and may divert the
attention of our management personnel, and if we are required to pay signiÑcant monetary or other damages,
our business, Ñnancial conditions and results of operations may be seriously harmed. For additional
information regarding this lawsuit, see item 3 ""Legal Proceedings'' in Part I of this annual report.
Risk Related to Our Investment in UMC
Fluctuations in the market value of our UMC foundry investment aÅect our Ñnancial results and in the
past we recorded a loss on investment in foundry on our UMC investment and we may record additional losses
in the future.
In 1997, we invested $51.2 million in United Silicon, Inc., or USIC, a semiconductor manufacturing
subsidiary of United Microelectronics Corporation, or UMC, which was merged into the UMC parent
company on January 3, 2000. In exchange for our USIC shares, we received 111 million UMC shares. In
2000, 2001, 2002,and 2003 we received additional shares as stock dividends totaling approximately 22 million,
20 million, 23 million and 7.1 million shares, respectively. We currently own 20.6 million shares of UMC
stock. Our current equity investment in UMC was valued at $17.5 million at December 28, 2003 and included
an unrealized gain of $4.7 million, inclusive of related tax expense of $0.6 million, which is included in
accumulated other comprehensive income. If the fair value of our UMC investment declines in future periods
and the related loss is deemed to be other than temporary, we may record additional losses for those periods.
In addition, in future periods, we may recognize a gain or a loss upon the sale of our UMC shares, which
would impact our Ñnancial results.
Risks Related to Vendors and Subcontractors
We depend on our suppliers and third-party subcontractors for several critical components and our
products and our business could be harmed if we are unable to obtain a suÇcient supply of these components on
a timely basis.
We rely on our vendors, some of which are a principal source of supply, for several of our critical
components. We do not have long-term supply agreements with most of these vendors. Our business, Ñnancial
condition and operating results could be signiÑcantly harmed by delays or reductions in shipments if we are
unable to develop alternative sources or obtain suÇcient quantities of these components.
We also rely on third-party subcontractors for our wafer testing, packaged memory Ñnal testing, card
assembly and card testing, including Silicon Precision Industries Co., Ltd. and United Test Center, Inc. in
Taiwan and Celestica, Inc. and Flextronics in China. In addition to our existing subcontract suppliers, we are
qualifying other subcontract suppliers for wafer testing, packaged memory Ñnal testing, card assembly, card
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