SanDisk 2007 Annual Report Download - page 92

agreed upon by both parties. In fiscal year 2008, we expect to invest approximately $2 billion in Flash Ventures,
which we expect will be funded through additional investments, loans, lease guarantees and working capital
contributions to Flash Ventures. On February 19, 2008, we signed a non-binding memorandum of understanding
with Toshiba for a new memory wafer fab in Japan. No specific investment amount has been determined by the
parties. However, we expect in fiscal year 2009 and beyond to be required to make investments, loans and
guarantees related to our portion of the equipment and start-up costs, should a definitive agreement be signed. See
Note 12, “Commitments, Contingencies and Guarantees,” to our consolidated financial statements in Item 8 of this
report.
The cost of the wafers we purchase from Flash Ventures is recorded in inventory and ultimately cost of sales.
Flash Ventures are variable interest entities, and we are not the primary beneficiary of these ventures because we are
entitled to less than a majority of expected gains and losses with respect to each venture. Accordingly, we account
for our investments under the equity method and do not consolidate.
Under Flash Ventures’ agreements, we agreed to share in Toshiba’s costs associated with NAND product
development and its common semiconductor research and development activities. As of December 30, 2007, we
had accrued liabilities related to those expenses of $8.0 million. Our common research and development obligation
related to Flash Ventures is variable but capped at fixed quarterly amounts through fiscal year 2008. In addition to
general NAND product development and common semiconductor research performed by Toshiba, both parties
perform direct research and development activities specific to Flash Ventures, and our contribution is based on a
variable computation. 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 and development of flash memory.
For semiconductor fixed assets that are leased by Flash Ventures, we and/or Toshiba guaranteed, in whole or in
part, a portion of the outstanding lease payments under each of those leases through various methods. These
obligations are denominated in Japanese yen and are noncancelable. Under the terms of the FlashVision lease,
Toshiba guaranteed these commitments on behalf of FlashVision and we agreed to indemnify Toshiba for certain
liabilities Toshiba incurs as a result of its guarantee of the FlashVision equipment lease arrangement. As of
December 30, 2007, the maximum amount of our contingent indemnification obligation, which reflects payments
and any lease adjustments, was approximately 3.6 billion Japanese yen, or approximately $32 million based upon
the exchange rate at December 30, 2007. Under the terms of Flash Partners and Flash Alliance leases, we guaranteed
on an unsecured and several basis 50% of Flash Partners and Flash Alliance’s lease obligations under master lease
agreements entered into from December 2004 through November 2007. Our total lease obligation guarantee, net of
lease payments as of December 30, 2007, was 125.0 billion Japanese yen, or approximately $1.11 billion based
upon the exchange rate at December 30, 2007.
Contractual Obligations and Off-Balance Sheet Arrangements
Our contractual obligations and off-balance sheet arrangements at December 30, 2007, 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 12, “Commitments, Contingencies and Guarantees,” to our consolidated financial
statements included in Item 8 of this report.
Impact of Currency Exchange Rates
Exchange rate fluctuations could have a material adverse effect on our business, financial condition and results
of operations. We have not used financial instruments to hedge our economic exposures related to costs or revenue
denominated in currencies other than the U.S. dollar. Our most significant foreign currency exposure is to the
Japanese yen in which we purchase the vast majority of our NAND flash wafers. In addition, we also have
significant expenses denominated in the Chinese renminbi, or RMB, and the Israeli New Israel shekel, or ILS. We
do not enter into derivatives for speculative or trading purposes. In fiscal years 2007 and 2006, we used foreign
currency forward contracts to mitigate transaction gains and losses generated by certain monetary assets and
liabilities denominated in currencies other than the U.S. dollar. Our derivative instruments are recorded at fair value
with changes recorded in other income (expense) or accumulated other income. See Note 12, “Commitments,
Contingencies and Guarantees” to our consolidated financial statements included in Item 8 of this report.
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