SanDisk 2005 Annual Report Download - page 85

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 wafer fabrication
facility, Fab 3, at its Yokkaichi Operations. Flash Partners purchases semiconductor manufacturing equip-
ment for Fab 3, which produces 300-millimeter NAND flash wafers. Toshiba began production for Flash
Partners in Fab 3 in the third quarter of fiscal 2005 and expects to achieve 30,000 wafers per month by March
2006. Flash Partners has committed to a plan to ramp production to 70,000 wafers per month by March 2007
and currently estimates the total equipment funding obligation to achieve this plan level to be approximately
365.0 billion Japanese yen, or approximately $3.1 billion based upon the exchange rate at January 1, 2006, of
which a portion has already been incurred. Of this amount, we are obligated to fund 50% or approximately
$1.5 billion based upon the exchange rate at January 1, 2006. Our remaining funding obligation at January 1,
2006 for the current expansion plan is approximately $1.0 billion. See “Sale and Leaseback” below.
•Capitalization and Related Matters. We own 49.9% of Flash Partners and Toshiba own 50.1% of Flash
Partners. Flash Partners’ funding from its parents is structured as a combination of permanent capital and
loans from us and Toshiba, funded one-half by each owner. 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 has entered into two equipment lease agreements as described below.
• In December 2004, Flash Partners entered into a master lease agreement with certain financial institutions
providing for up to 50.0 billion Japanese yen, or approximately $424 million based upon the exchange rate
at January 1, 2006, of original lease obligations. As of January 1, 2006, Flash Partners had drawn down
this entire master lease facility. We and Toshiba have each guaranteed, on a several basis, 50% of Flash
Partners’ obligations under the master lease agreement. Lease payments are due quarterly and will be
completed in stages through 2010. 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 and 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 have guaranteed.
• In December 2005, Flash Partners entered into a second master lease agreement with certain financial
institutions providing up to 35.0 billion Japanese yen, or approximately $297 million based upon the
exchange rate at January 1, 2006, of original lease obligations. There were no amounts outstanding under
this lease agreement at the end of fiscal 2005; however the entire amount was drawn down in January
2006. We and Toshiba have each guaranteed, on a several basis, 50% of Flash Partners’ obligations under
this master lease agreement. Lease payments are due quarterly and will be completed in 2011. 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 and 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
have guaranteed.
•Operations. Flash Partners’ current production ramp plan contemplates technology transitions from
90-nanometers to 70-nanometers to 55-nanometers. Flash Partners purchases wafers from Toshiba and
sells wafers to us and Toshiba at a price equal to manufacturing cost plus a mark-up. Toshiba operates Fab 3,
and we have our employees assigned to work in Fab 3. The cost of the wafers that Flash Partners purchases
from Toshiba includes Toshiba’s costs of running Fab 3 and 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
10