SanDisk 2010 Annual Report Download - page 167

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NAND memory for use in a variety of end-products, including consumer, mobile phone and computing devices.
We are a one-stop-shop for our retail and OEM customers, selling in high volumes all major NAND flash storage
card formats for our target markets.
Our results are primarily driven by worldwide demand for flash storage devices, which in turn primarily
depends on end-user demand for consumer electronic products. We believe the markets for flash storage are
generally price elastic, meaning that a decrease in the price per gigabyte results in increased demand for higher
capacities and the emergence of new applications for flash storage. Accordingly, we expect that as we reduce the
price of our flash devices, consumers will demand an increasing number of gigabytes and/or units of memory and
that over time, new markets will emerge. In order to profitably capitalize on this price elasticity, we must reduce
our cost per gigabyte at a rate similar to the change in selling price per gigabyte, while at the same time,
increasing the average capacity and/or the number of units of our products enough to offset price declines. We
continually seek to achieve these cost reductions through technology improvements, primarily by increasing the
amount of memory stored in a given area of silicon.
Our industry is characterized by rapid technology transitions. Since our inception, we have been able to
scale NAND technology through fourteen generations over approximately twenty years. However, the pace at
which NAND technology is transitioning to new generations is expected to slow due to inherent physical
technology limitations. We currently expect to be able to continue to scale our NAND technology through a few
additional generations, but beyond that there is no certainty that further technology scaling can be achieved cost
effectively with the current NAND flash technology and architecture. We also continue to invest in future
alternative technologies, including our 3D Read/Write technology, which we believe may be a viable alternative
to NAND when NAND can no longer scale at a sufficient rate, or at all. However, even when NAND flash can
no longer be further scaled, we expect NAND and potential alternative technologies to coexist for an extended
period of time.
Fiscal Year 2010 Developments and Transactions
In March 2010, we completed the redemption of our 1% Convertible Notes due 2035 through an all-cash
transaction of $75 million plus accrued interest of $0.4 million.
In July 2010, we and Toshiba entered into an agreement to create Flash Forward to operate in Fab 5, of
which we will own 49.9% and Toshiba will own 50.1%. Toshiba will own and fund the construction of the Fab 5
building, which will be located in Yokkaichi, Japan, adjacent to the site of our current Flash Partners and Flash
Alliance ventures. Fab 5 is designed to be built in two phases. The Phase 1 building shell is expected to be
completed in the second quarter of calendar year 2011, after which equipment outfitting is expected to begin,
with initial NAND production scheduled for the third quarter of our fiscal year 2011. We are committed to invest
in 50% of the initial ramp within Phase 1 of Fab 5, which is expected to occur in the second half of fiscal year
2011. No timelines have been finalized for Phase 1 capacity expansions beyond 2011 or for the construction of
Phase 2. For Phase 1 expansion beyond the initial ramp, we have the option to make investments and share
output on a 50/50 basis between us and Toshiba. If and when Phase 2 is built, we are committed to 50% of an
initial ramp in Phase 2, similar to that in Phase 1. On completion of the second phase, Fab 5 is expected to be of
similar size and capacity to Fab 4. We and Toshiba will each retain some flexibility as to the extent and timing of
each party’s respective fab capacity ramps, and the output allocation will be in accordance with each of the
parties’ proportionate level of equipment funding.
In August 2010, we issued and sold $1.0 billion in aggregate principal amount of 1.5% Convertible Senior
Notes due August 15, 2017, or the “1.5% Notes due 2017.” The 1.5% Notes due 2017 were issued at par and pay
interest at a rate of 1.5% per annum. The 1.5% Notes due 2017 may be converted into our common stock, under
certain circumstances, based on an initial conversion rate of 19.0931 shares of common stock per $1,000
principal amount of notes (which represents an initial conversion price of approximately $52.37 per share). The
conversion price will be subject to adjustment in some events but will not be adjusted for accrued interest. The
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