SanDisk 2003 Annual Report Download - page 61

our current stockholders only after all senior indebtedness, including our contingent indemniÑcation obliga-
tions to Toshiba and obligations under the notes, have been paid in full. As a result, there may not be suÇcient
assets remaining to make any distributions to our stockholders. The notes are also eÅectively subordinated to
the liabilities of any of our subsidiaries (including trade payables, which as of December 28, 2003 were
approximately $1.4 million). Neither we, nor our subsidiaries are limited from incurring debt, including senior
indebtedness, under the indenture. If we or our subsidiaries were to incur additional debt or liabilities, our
ability to pay our obligations on the notes could be adversely aÅected. We anticipate that from time to time we
will incur additional debt, including senior indebtedness. Our subsidiaries are also likely to incur liabilities in
the future.
Item 7A. Qualitative and Quantitative Disclosures about Market Risk
We are exposed to Ñnancial market risks, including changes in interest rates, foreign currency exchange
rates and marketable equity security prices. To mitigate some of these risks, we utilize currency forward
contracts. We do not use derivative Ñnancial instruments for speculative or trading purposes. At December 28,
2003, we had a warrant to purchase 360,313 ordinary shares of Tower at a fair value of approximately
$1.2 million.
Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our
investment portfolio. The primary objective of our investment activities is to preserve principal while
maximizing yields without signiÑcantly increasing risk. This is accomplished by investing in widely diversiÑed
short-term investments, consisting primarily of investment grade securities, substantially all of which either
mature within the next twelve months or have characteristics of short-term investments. A hypothetical
50 basis point increase in interest rates would result in an approximate $1.4 million decline (less than 0.5%) in
the fair value of our available-for-sale debt securities.
Foreign Currency Risk. A substantial majority of our revenue, expense and capital purchasing activity
are transacted in U.S. dollars. However, we do enter into transactions in other currencies, primarily the
Japanese Yen. To protect against reductions in value and the volatility of future cash Öows caused by changes
in foreign exchange rates, we have established a hedging program. Currency forward contracts are utilized in
this hedging program. Our hedging program reduces, but does not always entirely eliminate the impact of
foreign currency exchange rate movements. An adverse change of 10% in exchange rates would result in a
decline in income before taxes in 2003 of approximately $0.3 million.
Market Risk. We also hold available-for-sale equity securities in our short-term investment portfolio
and equity investments in semiconductor wafer manufacturing companies. A reduction in prices of 10% of
these marketable equity securities would result in a decrease in the fair value of our investments in marketable
equity securities of approximately $3.6 million. As of December 28, 2003, we had net unrealized gains on
short-term equity securities totaling $20.8 million, which were included in other comprehensive income. These
unrealized gains include an unrealized gain of $10.7 million on the change in value of our investment in UMC
and $10.1 million on our investment in Tower. The market value of our investments in UMC and Tower have
Öuctuated signiÑcantly in the past and may decline in the future due to downturns in the semiconductor
industry, declines in demand for UMC's products or unfavorable economic conditions. If we sell our
remaining UMC shares in future periods, we may recognize a gain or loss due to Öuctuations in the market
value of our UMC stock. In 2003, 2002 and 2001, we recognized losses of $3.9 million, $15.2 million and
$26.1 million, respectively, on the other-than-temporary decline in the value of our Tower investment and the
impairment in value on our prepaid wafer credits. If the fair value of our Tower investment declines further or
the wafer credits are deemed to have little or no value, it may be necessary to record additional losses.
All of the potential changes noted above are based on sensitivity analysis performed on our Ñnancial
position at December 28, 2003. Actual results may diÅer materially.
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