SanDisk 2007 Annual Report Download - page 64

Our new products have from time-to-time been introduced with design and production errors at a rate higher
than the error rate in our established products. We must estimate warranty and similar costs for new products
without historical information and actual costs may significantly exceed our recorded estimates. Underestimation
of our warranty and similar costs would have an adverse effect on our results of operations and financial condition.
We and Toshiba plan to continue to expand the wafer fabrication capacity of the Flash Alliance business
venture as well as form a new venture, for which we will make substantial capital investments, which could
adversely impact our operating results. We and Toshiba commenced manufacturing at Fab 4 in September 2007,
and together we intend to continue to make substantial investments in new capital assets to expand the wafer
fabrication capacity of Fab 4 to 210,000 wafers per month. We expect to invest over $4 billion for our share in
equipping and expanding Fab 4. In addition, we and Toshiba signed a non-binding memorandum of understanding
for a new memory wafer fab in Japan and target production start-up in 2010. Our significant investments in
manufacturing capacity may require us to obtain and guarantee capital equipment leases and use available cash,
which could otherwise be used for other corporate purposes. Moreover, each time that we and Toshiba add
substantial new wafer fabrication capacity, we will experience significant initial design and development and
start-up costs as a result of the delay between the time of the investment and the time qualified products are
manufactured and sold in volume quantities. For several quarters, we will incur initial design and development costs
and start-up costs which will increase our expenses and reduce our gross margins. In addition, if we are ultimately
unable to utilize our full share of the expanded output, we would be faced with excess inventory and potential
impairment of our investments. Any excess inventory or investment impairment would negatively impact our gross
margins, results of operations and financial condition.
We have an investment of approximately $159 million in 200-millimeter wafer manufacturing assets that we
expect will no longer be cost effective in fiscal year 2008. Through the FlashVision venture with Toshiba, we have
an investment of approximately $159 million in 200-millimeter wafer manufacturing assets. We believe that in
fiscal year 2008, NAND produced on 200-millimeter wafers will no longer be cost effective for our products and, as
a result, we expect to dispose of our 200-millimeter wafer manufacturing assets during fiscal year 2008. In the
fourth quarter of fiscal year 2007, we recorded a $10 million impairment charge related to our equity investment in
FlashVision. We are currently in negotiations with Toshiba regarding the future of the FlashVision venture which
may include Toshiba purchasing our shares, sale and distribution of the venture’s equipment and underlying assets
or a combination thereof. The impairment charge is based upon the expected outcome of these negotiations and
related cash flows. There can be no assurance of a positive outcome to these negotiations and we may be required to
record additional impairment charges.
We have a contingent indemnification obligation and guarantee obligations related to the flash ventures with
Toshiba. Toshiba has guaranteed FlashVision’s lease arrangement with third-party lessors. The total minimum
remaining lease payments as of December 30, 2007 were 3.6 billion Japanese yen, or approximately $32 million
based upon the exchange rate at December 30, 2007. If Toshiba makes payments under its guarantee, we have
agreed to indemnify Toshiba for 49.9% of its costs, subject to certain limitations and exclusions.
From fiscal year 2004 through December 30, 2007, Flash Partners entered into and drew down five equipment
master lease facilities totaling approximately 275.0 billion Japanese yen, or approximately $2.44 billion based upon
the exchange rate at December 30, 2007, of which 220.0 billion Japanese yen, or approximately $1.95 billion based
upon the exchange rate at December 30, 2007, net of accumulated lease payments, were outstanding at Decem-
ber 30, 2007. As of December 30, 2007, our cumulative guarantee under these equipment leases, net of cumulative
lease payments, was approximately 110.0 billion Japanese yen, or approximately $974 million based on the
exchange rate at December 30, 2007.
In fiscal year 2007, Flash Alliance entered into an equipment master lease facility totaling approximately
100.0 billion Japanese yen, or approximately $886 million based upon the exchange rate at December 30, 2007, of
which 30.0 billion Japanese yen, or approximately $266 million based upon the exchange rate at December 30,
2007, was drawn and outstanding at December 30, 2007. As of December 30, 2007, our cumulative guarantee under
this equipment lease was approximately 15.0 billion Japanese yen, or approximately $133 million based on the
exchange rate at December 30, 2007. In addition, on February 19, 2008, Flash Alliance drew down on the 100 billion
Japanese yen master lease agreement an additional 30 billion Japanese yen, or approximately $133 million based on
18