SanDisk 2006 Annual Report Download - page 95

of this venture. We are committed to purchase half of Flash Alliance’s NAND wafer supply. The capacity of Fab 4 at
full expansion is expected to be greater than 150,000 wafers per month and the timeframe to reach full capacity is to
be mutually agreed by the parties. To date, the parties have agreed to an expansion plan to 67,500 wafers per month
for which the total investment in Fab 4 is currently estimated at approximately $2.0 billion through the end of fiscal
year 2008, of which our share is currently estimated to be approximately $1.0 billion. Initial NAND production at
Fab 4 is currently scheduled for the end of fiscal year 2007. For expansion beyond 67,500 wafers per month, it is
expected that investments and output would continue to be shared 50/50 between us and Toshiba. We are committed
to fund 49.9% of Flash Alliance’s costs to the extent that Flash Alliance’s revenues from wafer sales to us and
Toshiba are insufficient to cover these costs. We expect to fund our portion of the investment through cash as well as
other financing sources.
We assumed msystems’ ownership interest in the venture with Toshiba, TwinSys, which was designed to
enable the parties to benefit from a portion of each party’s respective sales of USB flash drives. As of December 31,
2006, we had a 50.1% beneficial ownership in Twinsys Data Storage L.P., consisting of (i) 49.9% ownership in
TwinSys and (ii) 0.2% interest held by Twinsys Ltd., in which we have a 51% ownership interest. We concluded that
the venture is a variable interest entity as defined in FIN 46R, and determined that we are the primary beneficiary of
the venture, and accordingly, we consolidate the venture. On a routine basis, the parties collectively prepare a joint
production forecast for each company’s respective needs. We and Toshiba are currently negotiating the mutual
closure of this venture by the first half of fiscal year 2007; however, no written agreement has been reached.
Contractual Obligations and Off Balance Sheet Arrangements
Our contractual obligations and off balance sheet arrangements at December 31, 2006, and the effect those
contractual obligations are expected to have on our liquidity and cash flow over the next five years is presented in
textual and tabular format in Note 8 to our consolidated financial statements included in Item 8 of this report.
Impact of Currency Exchange Rates
Future exchange rate fluctuations could have a material adverse effect on our business, financial condition and
results of operations. In 2006 and 2005, we used foreign currency forward contracts to mitigate transaction gains
and losses generated by these monetary assets and liabilities denominated in other currencies than the U.S. dollar,
currently only the Japanese yen. We do not enter into derivatives for speculative or trading purposes. Our derivative
instruments are recorded at fair value with changes recorded in other income (expense) or accumulated other
income. See Note 8 to our consolidated financial statements included in Item 8 of this report.
For a discussion of foreign operating risks and foreign currency risks, see Item 1A, “Risk Factors.”
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest rates, foreign currency exchange rates
and marketable equity security prices.
Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our
investment portfolio. The primary objective of our investment activities is to preserve principal while maximizing
yields without significantly increasing risk. This is accomplished by investing in widely diversified short-term
investments, consisting primarily of investment grade securities, substantially all of which either mature within the
next twelve months or have characteristics of short-term investments. As of December 31, 2006, a hypothetical
50 basis point increase in interest rates would result in an approximate $4.5 million decline (less than 0.25%) in the
fair value of our available-for-sale debt securities.
Foreign Currency Risk. A substantial majority of our revenue, expense and capital purchasing activity is
transacted in U.S. dollars. However, we do enter into transactions in other currencies, primarily the Japanese yen.
Movements in currency exchange rates, especially the Japanese yen, could cause variability in our revenues,
expenses or other income (expense), net. We had forward exchange contracts in place with a notional amount of
8.6 billion Japanese yen, or approximately $72 million based upon the exchange rate at December 31, 2006 and
approximately $34 million as of January 1, 2006. The effect of an immediate 10% adverse change in exchange rates
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