SanDisk 2006 Annual Report Download - page 57

We have various patent licenses with several companies including, among others, Intel Corporation, or Intel,
Lexar Media, Inc., or Lexar, a subsidiary of Micron Technology, Inc., or Micron, Matsushita, Renesas Technology
Corporation, or Renesas, Samsung, Sharp Electronics KK, or Sharp, Sony and Toshiba. From time-to-time, we have
also entered into discussions with other companies regarding potential license agreements for our patents.
Trade secrets and other confidential information are also important to our business. We protect our trade
secrets through confidentiality and invention assignment agreements.
Supply Chain. Our supply chain is an important competitive advantage.
•Silicon Sourcing. All of our flash memory card products require silicon chips for the memory and
controller components. The majority of our memory is supplied from our ventures with Toshiba and our
Toshiba foundry relationship. This represents captive memory supply and we are obligated to take the output
from the ventures with Toshiba. See “— Ventures With Toshiba.” In fiscal year 2006, we purchased non-
captive memory supply primarily from Samsung. We are guaranteed a certain amount of the total output
from Samsung and Hynix Semiconductor Inc., or Hynix, but we are not obligated to use the guaranteed
supply until we give them an order for future purchases. Our controller wafers are currently supplied by
Tower Semiconductor Ltd., or Tower, and United Microelectronics Corporation, or UMC. We have a
foundry agreement with Tower on a purchase order basis. See Item 1A, “Risk Factors.”
•Testing and Assembly. We sort and test our wafers at Toshiba in Yokkaichi, Japan, and Ardentec Corp. in
Taiwan. Our tested wafers are then shipped to our third-party memory assembly subcontractors, including
StatsChipPAC Ltd., or StatsChipPAC, in China, Silicon Precision Industries Co., Ltd., or SPIL, in Taiwan,
and Sharp and Mitsui & Co., Ltd., both in Japan. Our packaged memory final test, card assembly and card
test is performed at subcontractors such as ASE Group, DataFab Systems, Inc., or DataFab, SPIL and United
Test and Assembly Center, in Taiwan, and Beautiful Enterprise Co., Ltd., DataFab, Flextronics International,
Ltd., or Flextronics, Global Brands Manufacturing Ltd. and StatsChipPAC, in China. We believe our use of
subcontractors reduces the cost of our operations and gives us access to increased production capacity. On
November 29, 2006, we entered into a 50-year land lease in the Zizhu Science-Based Park near Shanghai,
China, and we are constructing a captive assembly and test manufacturing facility to provide in-house
manufacturing capacity for a portion of our card assembly and test needs. See Item 1A, “Risk Factors” and
Item 7, “Liquidity.”
Ventures with Toshiba
We and Toshiba have entered into several business ventures. In May 2000, we invested in the FlashVision Ltd.,
or 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, Japan operations. FlashVision produces 200-millimeter NAND flash wafers using both owned and
leased equipment. In September 2004, we and Toshiba formed the Flash Partners Ltd., or Flash Partners, venture
pursuant to which a wafer fabrication facility, Fab 3, was constructed at Toshiba’s Yokkaichi, Japan operations.
Flash Partners purchases and leases semiconductor manufacturing equipment 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 135,000 wafers per month by the end of fiscal year 2007. In July 2006, we and Toshiba
formed Flash Alliance Ltd., or Flash Alliance, to build Fab 4, a new 300-millimeter wafer fabrication facility, at
Toshiba’s Yokkaichi, Japan operations. Fab 4 is under construction and initial NAND production at Fab 4 is
currently scheduled for the end of fiscal year 2007. We currently expect to expand Fab 4 to approximately 67,500
wafers per month by the end of fiscal year 2008, and the capacity of Fab 4 at full expansion is currently expected to
be approximately 150,000 wafers per month, with the timeframe to reach full capacity to be mutually agreed by the
parties. We hold a 49.9% ownership position in each venture entity.
With these ventures, we and Toshiba collaborate in the development and manufacture of NAND flash memory
products. These NAND flash memory products are manufactured by Toshiba at Toshiba’s Yokkaichi, Japan
operations using the semiconductor manufacturing equipment owned or leased by FlashVision, Flash Partners or,
once Fab 4 comes online, Flash Alliance. Each venture entity purchases wafers from Toshiba at cost and then resells
those wafers to us and Toshiba at cost plus a mark-up. We are committed to purchase, and entitled to, half of each
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