SanDisk 2003 Annual Report Download - page 71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The warranty activity is as follows (in thousands):
Additions
Balance at Charged to Balance at
Beginning Costs of End of
For the Year Ended of Period Revenue (Usage) Period
December 29, 2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,139 $3,304 $(2,971) $3,472
December 28, 2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,472 $5,694 $(5,472) $3,694
Valuation of Financial Instruments. The Company's short-term investments include investments in
marketable equity and debt securities. As of December 28, 2003, the Company also had equity investments in,
UMC of $17.5 million and Tower of $58.7 million. In determining if and when a decline in market value below
cost of these investments is other-than-temporary, the Company evaluates the market conditions, oÅering
prices, trends of earnings, price multiples, and other key measures for its investments in marketable equity
securities and debt instruments. When such a decline in value is deemed to be other-than-temporary, the
Company recognizes an impairment loss in the current period operating results to the extent of the decline. In
2003, no declines of an other-than-temporary nature were recorded for these marketable equity investments
and a gain was recorded as an adjustment to the fair value of the Tower warrant of approximately $0.6 million
as determined using a Black-Scholes option pricing model with the following assumptions at December 28,
2003: dividend yield of 0.0%; expected life of 2.75 years; volatility factor of 0.70; and risk free interest rate of
2.32%. In 2002, the market value of the Company's investment in Tower had declined signiÑcantly therefore,
the Company recognized losses totaling $11.6 million related to the other-than-temporary decline of its equity
investment, and a loss recorded as an adjustment to the fair value of $0.7 million with the following
assumptions: dividend yield of 0.0%; expected life of 3.75 years; volatility factor of 0.845; and risk free interest
rate of 2.38%. (See Note 8.)
Deferred Tax Assets. Based on the weight of all available evidence, we provided no valuation allowance
against the net deferred tax assets as of December 28, 2003. This determination was based primarily on the
Company's substantial 2003 operating income and its assessment of the Company's current and future ability
to utilize certain tax credit carryforwards. The valuation allowance declined $66.4 million in 2003, after
increasing by $30.3 million and $36.1 million in 2002 and 2001, respectively. (See Note 7.)
Foreign Currency Transactions
Foreign operations are measured using the U.S. dollar as the functional currency. Accordingly, monetary
accounts (principally cash, accounts receivable and liabilities) are re-measured using the foreign exchange
rate at the balance sheet date. Operating accounts and non-monetary balance sheet accounts are re-measured
at the rate in eÅect at the date of transaction. The eÅects of foreign currency re-measurement are reported in
current operations.
ReclassiÑcation
Certain reclassiÑcations have been made to prior year's amounts to conform to the current year's
presentation.
Cash Equivalents and Short-Term Investments
Cash equivalents consist of short-term, highly liquid Ñnancial instruments with insigniÑcant interest rate
risk that are readily convertible to cash and have maturities of three months or less from the date of purchase.
Cash equivalents and short-term investments consist of money market funds, taxable commercial paper,
U.S. government agency obligations, corporate/municipal notes and bonds with high-credit quality, money
market preferred stock and auction rate preferred stock. Short-term investments also include the unrestricted
portion of the Company's investment in foundries for which trading restrictions expire within one year. The
fair market value, based on quoted market prices, of cash equivalents and short-term investments are
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