SUNNYVALE, CA, NOVEMBER 15, 2003 - SanDisk Corporation (NASDAQ:SNDK) today announced that it has concluded a settlement agreement with Lee and Li, SanDisk's Taiwan law firm, concerning the embezzled UMC shares owned by SanDisk that were held under the control of Lee and Li. Approximately 127.8 million UMC shares with a cost basis of $83.3 million were sold in unauthorized transactions by a former Lee and Li employee. Pursuant to the settlement agreement, SanDisk received from Lee and Li a cash payment of $20.0 million, an additional $45.0 million secured by irrevocable standby letters of credit payable over four years, and a credit in the amount of $18.3 million to be applied against future legal services. SanDisk will record a non-operating charge of $18.3 million to its third quarter results, as the credit amount is unsecured.
SanDisk first discussed this issue in a conference call held on October 15, 2003, and in a press release issued the same day after being advised of the missing shares by Lee and Li on October 14, 2003. Lee and Li originally informed SanDisk that approximately 121 million UMC shares were embezzled by its former employee. Based on subsequent information provided by Lee and Li, SanDisk has now learned that approximately 127.8 million UMC shares owned by SanDisk and under the control of Lee and Li were sold in unauthorized transactions starting on August 6, 2003, and ending on September 15, 2003. The net proceeds from the unauthorized sales, amounting to approximately $92 million, were embezzled by a former employee of Lee and Li, who is now a fugitive. Lee and Li has informed SanDisk that it has launched investigations in several countries to apprehend their former employee and to recover the stolen assets. To date, no amounts have been recovered. Lee and Li and SanDisk believe that insurance will likely not cover this loss.
Pursuant to the settlement agreement, SanDisk received a cash payment of $20.0 million at the time of signing the settlement agreement on November 14, 2003. Lee and Li will pay SanDisk an additional $45.0 million over four years in sixteen quarterly installments secured by irrevocable standby letters of credit. Further, Lee and Li has extended a credit in the amount of $18.3 million to SanDisk to be applied against future legal services provided by Lee and Li over a number of years. In the event that SanDisk does not fully utilize the credit for future legal services in a given year, Lee and Li will annually remit one-third of the unused credit amount for that year to SanDisk and SanDisk will donate such amount to its corporate charitable fund. The remaining two-thirds of the unused credit will be donated by Lee and Li in equal amounts to the Taiwan Red Cross and to a joint SanDisk/Lee and Li Lecture Program to promote integrated education in business, technology and law in Taiwan and China. If any of the stolen assets are recovered, the net amount after recovery expenses will be split between SanDisk and Lee and Li, the majority of which will act to accelerate the recovery of SanDisk's book cost of the stolen shares, $83.3 million. If SanDisk receives the full $83.3 million, Lee and Li will be relieved of any remaining credit commitment. If there are any excess recovered funds, the net amount after recovery expenses will be distributed equally between SanDisk and Lee and Li, with SanDisk receiving up to a total maximum amount of $106.6 million, the fair market value of the shares at September 28, 2003.
In its third quarter 2003 Form 10-Q to be filed on November 17, 2003, SanDisk will record the stolen shares net of settlement proceeds as a one time non-operating charge of $18.3 million to its third quarter results as this amount is unsecured and SanDisk may not be able to fully utilize the credit for future Lee and Li legal services. Additionally, the balance sheet will reflect a non-cash decrease in investments in foundries, which will be reduced by $106.6 million from SanDisk's third quarter 2003 financial results issued on October 15, 2003, and a corresponding increase relating to the settlement of $28.4 million in short-term other receivables and $36.6 million in long-term other receivables. The third quarter tax provision will include an additional non-cash tax charge that is a reversal of a prior year tax-related benefit of approximately $24.4 million triggered by the sale of these shares, partially offset by a tax benefit of approximately $7 million on the recognized third quarter charge of $18.3 million.
Eli Harari, President and CEO of SanDisk said, "This embezzlement by a former employee of Lee and Li has been an unfortunate and painful event for both SanDisk and Lee and Li. I am very pleased that our two companies have arrived at a settlement. Both SanDisk and Lee and Li can now refocus our energies on the excellent business opportunities that are opening up for both our companies in Taiwan and China. I am particularly thankful to Dr. C.V. Chen, Senior Partner at Lee and Li, for his tireless efforts and leadership in reaching this agreement with SanDisk. I wish Lee and Li, its partners and employees success and good luck in future years."
Charles Van Orden, Vice President and General Counsel of SanDisk said, "We do not believe that the acts of a single rogue employee should alter the 40+-year solid reputation of one of the region's premiere law firms. In the past several weeks, we have come to know several of the firm's fine partners. As we pursue extensive new opportunities in Taiwan and mainland China, we look forward to continuing our relationship with the firm."
Separate from these 127.8 million UMC shares, SanDisk sold 35 million UMC shares in September, 2003, the proceeds of which, amounting to approximately $30 million, are in the United States in SanDisk's custody. This sale was reported in SanDisk's third quarter results. Additionally SanDisk still holds approximately 20 million UMC shares. The 127.8 million UMC shares had a cost basis for SanDisk of $83.3 million and were valued at approximately $106.6 million based on their trading price on the Taiwan Stock Exchange at the end of the third quarter.
SanDisk, the world's largest supplier of flash memory data storage card products, designs, manufactures and markets industry-standard, solid-state data, digital imaging and audio storage products using its patented, high density flash memory and controller technology. SanDisk is based in Sunnyvale, CA.
The matters discussed in this news release contain forward looking statements that are subject to certain risks and uncertainties, including the Company's ability or the ability of Lee and Li to locate and recover the embezzled funds and assets, the ability of Lee and Li to provide services on credit that they have agreed to provide, the ability of the Company to collect on the irrevocable letters of credit in the event of default on such payments, and the ultimate receipt by the Company of all amounts due it under the agreement . The Company assumes no obligation to update the information in this release.
SanDisk's web site/home page address: http://www.sandisk.com
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