SanDisk 2004 Annual Report Download - page 14

Download and view the complete annual report

Please find page 14 of the 2004 SanDisk annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 143

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143

Table of Contents
• Research and Development. We and Toshiba each have teams that are currently working on the 70−nanometer designs. We and
Toshiba each pay the cost of our own design teams and 50% of the wafer processing and similar costs associated with this direct
design of the flash memory. We also pay Toshiba for a portion of its semiconductor company’s common research and
development activities. See Note 5 to our consolidated financial statements included as Item 8 and the common R&D
participation agreement which is an exhibit to this report. That agreement should be read carefully in its entirety in order to more
fully understand the details of our obligations.
Flash Partners. In September 2004, the Flash Partners, Ltd., or Flash Partners, venture was formed. The key elements of the
venture are:
• Semiconductor Manufacturing Equipment. Toshiba has constructed at its expense a new wafer fabrication facility, Fab 3, at its
Yokkaichi Operations. Flash Partners will purchase and pay to install semiconductor manufacturing equipment in Fab 3. Flash
Partners has specified a plan for ramping production to 62,500 300−millimeter wafers per month over a period starting in 2005
and ending in 2008. Toshiba and we are currently committed to fund Flash Partners infrastructure up to a total of 15,000 wafers
per month in 2005 and 2006, which may be increased to meet market demand.
• Capitalization and Related Matters. We own 49.9% of Flash Partners and Toshiba owns 50.1% of Flash Partners. Flash Partners’
funding from its parents will be structured as a combination of permanent capital (currently estimated at 40.0 billion Japanese
yen in total) and loans (funded one−half by each owner) from us and Toshiba. As of January 2, 2005, we estimate our minimum
funding commitment to be approximately 55 billion Japanese yen, of which we believe 25 billion Japanese yen will be satisfied
with the portion of Flash Partners’ lease facility that we have guaranteed as described below. Flash Partners has a stated life of
15 years, but may be terminated by us or Toshiba by notice given from April 1, 2011 to March 31, 2012. In addition, we have a
termination right that may be exercised by notice between April 1, 2007 and March 31, 2008. There are other termination events
described in the master agreement and the operating agreement which are exhibits to this report. Those agreements should be
read carefully in their entirety for a comprehensive understanding of our rights and obligations.
• Sale and Leaseback. Flash Partners intends to sell and leaseback from a consortium of financial institutions approximately
one−half of its tools. In December 2004, Flash Partners entered into a master lease agreement with these financial institutions
providing for up to 50 billion Japanese yen of original lease obligations. There were no amounts outstanding under the master
lease agreement at the end of 2004. We and Toshiba have each guaranteed, on a several basis, 50% of Flash Partners’ obligations
under the master lease agreement. Flash Partners will draw individual tranches under the lease agreements during 2005 and each
individual draw will have a four−year or five−year term as agreed by Flash Partners and the lessors. Lease payments are due
quarterly. At the end of the lease term, Flash Partners has the option of purchasing the tools from the lessors. Flash Partners is
obligated to insure the equipment, maintain the equipment in accordance with the manufacturers’ recommendations and other
customary terms to protect the leased assets. The master lease agreement contains customary events of default for a Japanese
lease facility and is an exhibit to this report. That agreement should be read carefully in its entirety for a comprehensive
understanding of its terms and the nature of the obligations we guaranteed.
• Operations. Flash Partners’ current production ramp plan contemplates technology transitions from 90−nanometers, to
70−nanometers and to 55−nanometers. Flash Partners currently plans to deliver its first production wafers in the second half of
2005. Toshiba employees will operate Fab 3, and we have assigned a number of our employees in Japan to work in the wafer
production facility. Flash Partners will reimburse Toshiba for its costs of running Fab 3 and for the depreciation cost of the Fab 3
building and improvements. Flash Partners does not receive any commitment from Toshiba as to wafer yield or any protection
from operational incidents. We and Toshiba are each committed to take 50 percent of Flash Partners’ wafer output, with each
company specifying the type of wafer 9