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Flextronics and StatsChipPAC, in China. We believe our use of subcontractors reduces the cost of our
operations and gives us access to increased production capacity. See Item 1A, “Risk Factors.”
Ventures with Toshiba
FlashVision. In May 2000, we invested in the FlashVision venture, which operated in Manassas, Virginia
until May 2002. In April 2002, we and Toshiba agreed to consolidate the NAND wafer fabrication manufacturing
operations in Fabs 1 and 2 of Toshiba’s Yokkaichi operations in Japan, through a venture named FlashVision, Ltd.,
or FlashVision.
•Semiconductor Manufacturing Equipment. Toshiba owns the wafer fabrication facilities, Yokkaichi Fabs 1
and 2, in which FlashVision’s tools are installed. We have also installed in Yokkaichi Fabs 1 and 2 tools
which we own directly, providing us with approximately 10% additional capacity on approximately the
same terms as supply from FlashVision. Fabs 1 and 2 produce 200-millimeter wafers.
•Capitalization and Related Matters. We own 49.9% of FlashVision and Toshiba own 50.1% of
FlashVision. FlashVision’s funding takes the form of permanent capital (37.8 billion Japanese yen, or
approximately $321 million based upon the exchange rate at January 1, 2006, in total) and loans from
Toshiba and us, funded one-half by each owner.
At the end of fiscal 2005, our loans to FlashVision were 7.3 billion Japanese yen, or approximately
$62 million based upon the exchange rate at January 1, 2006, and we are not committed to fund additional
amounts in fiscal 2006. FlashVision’s stated life will terminate in December 2016, but may be terminated by
Toshiba or by us by notice given from May 16, 2008 to May 15, 2009. 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.
•Lease Facility. FlashVision sold and leased back from Mizuho Leasing tools which had an original book
value of 37.9 billion Japanese yen, or approximately $321 million based upon the exchange rate at January 1,
2006. FlashVision has been making lease payments and the remaining fixed lease payment obligation at the
end of 2005 was 17.7 billion Japanese yen, or approximately $150 million based upon the exchange rate at
January 1, 2006. Toshiba guaranteed FlashVision’s performance of its obligations under the lease facility
and we agreed to reimburse Toshiba for 49.9% of its claims and associated expenses related to its guarantee
agreement, unless those claims resulted from Toshiba’s failure to meet its obligations to FlashVision or
breach of Toshiba’s covenants with the lessors. We pay Toshiba a credit enhancement fee for providing the
direct guarantee of FlashVision’s lease obligations. In May 2006, FlashVision has the option of purchasing
the tools from the lessors. FlashVision 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 lease agreement contains customary events of default for a Japanese lease facility.
•Operations. By the end of 2005, FlashVision successfully transitioned the majority of its production from
90-nanometers to 70-nanometers. FlashVision purchases wafers from Toshiba and sells wafers to Toshiba
and to us at manufacturing cost plus a mark-up. FlashVision generates cash over time as a result of being paid
as part of manufacturing cost for its non-cash depreciation expense. This cash is currently expected to be
used to fund equipment purchases for FlashVision and to repay loans from Toshiba and us. We and Toshiba
are each committed to take 50% of FlashVision’s wafer output, with each company specifying the type of
wafer in its allocation.
•Research and Development. We and Toshiba each have design and development teams associated with
FlashVision. 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 in Item 8 of this report.
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Annual Report