SanDisk 2008 Annual Report Download - page 59

had accrued liabilities related to those common research and development expenses of $4.0 million. Our common
research and development obligation related to Flash Ventures is variable based on an annual forecasted joint
research and development costs as mutually agreed upon by us and Toshiba. 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 jointly guarantee on an
unsecured and several basis, 50% of the outstanding Flash Ventures’ lease obligations under master lease
agreements entered into from December 2004 through December 2008. These master lease obligations are
denominated in Japanese yen and are noncancelable. Our total master lease obligation guarantee, net of lease
payments, as of December 28, 2008, was 189.4 billion Japanese yen, or approximately $2.09 billion based upon
the exchange rate at December 28, 2008.
From time-to-time, we and Toshiba mutually approve increases in the wafer supply capacity of Flash
Ventures that may contractually obligate us to increase capital funding. As of December 28, 2008, Flash
Partners’ Fab 3 had reached full capacity of approximately 150,000 wafers per month; however, we expect to
continue to invest in Flash Partners in order to convert to future technology nodes. The capacity of Flash
Alliance’s Fab 4 at full expansion is expected to be approximately 210,000 wafers per month, and the timeframe
to reach full capacity is to be mutually agreed upon by both parties. In fiscal year 2008, Fab 4 was ramped to
more than 50% of this estimated full capacity. We are currently not investing in further capacity expansion of
Fab 4 as weak macroeconomic conditions coupled with the growth of our NAND supply base have resulted in us
carrying excess inventory. During the remainder of fiscal year 2009, we expect to invest approximately
$425 million in Flash Ventures primarily for future technology nodes, which we expect will be funded through
additional investments and loans to Flash Ventures, and working capital contributions from Flash Ventures.
On January 29, 2009, we entered into definitive agreements with Toshiba, under which we and Toshiba
agreed to restructure Flash Partners and Flash Alliance to provide for the acquisition by Toshiba of certain
production capacity in connection with the production of NAND flash memory products at the facilities. The
agreements specify the terms and conditions under which each flash venture has agreed to sell to Toshiba more
than 20% of its current production capacity through the acquisition by Toshiba of certain owned and leased
equipment. The total value of the restructuring transaction to us is approximately $890 million based upon the
exchange rate as of January 29, 2009. Approximately one-third of this value will be in cash paid to us and
approximately two-thirds of this value represents a transfer of lease obligations to Toshiba which should reduce
our outstanding lease obligations and associated lease guarantees by approximately 28%. These transactions are
expected to occur at several closings between January 30, 2009 and March 31, 2009, subject to certain closing
conditions and contingencies.
FlashVision Venture with Toshiba. In the second quarter of fiscal year 2008, we and Toshiba determined
that production of NAND flash memory products utilizing 200-millimeter wafers was no longer cost effective
relative to market prices for NAND flash memory and decided to wind-down the FlashVision venture. As part of
the ongoing wind-down of FlashVision, Toshiba purchased certain assets of FlashVision. The existing master
equipment lease agreement between FlashVision and a consortium of financial institutions has been retired,
thereby releasing us from our contingent indemnification obligation with Toshiba. Due to the wind-down
qualifying as a reconsideration event under FIN 46R, we re-evaluated and concluded that FlashVision is no
longer a variable interest entity within the scope of FIN 46R. In fiscal year 2008, we received distributions of
$103 million, relating to our investment in FlashVision. We took impairment charges of $10 million in the fourth
quarter of fiscal year 2007 and $10 million in the third quarter of fiscal year 2008 due to FlashVision’s difficulty
in selling the remaining excess capital equipment due to deteriorating market conditions for equipment related to
the production of 200-millimeter NAND-based flash memory products. At December 28, 2008, we had a net
investment in FlashVision of $64 million denominated in Japanese yen, offset by $43 million of cumulative
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