SanDisk 2010 Annual Report Download - page 180

Concurrent with the issuance of the 1.5% Notes due 2017, we sold warrants to acquire shares of our common
stock at an exercise price of $73.33 per share. As of January 2, 2011, the warrants had an expected life of
approximately 6.9 years and expire over 40 different dates from November 13, 2017 through January 10, 2018. At
each expiration date, the Company may, at its option, elect to settle the warrants on a net share basis. As of
January 2, 2011, the warrants had not been exercised and remained outstanding. In addition, concurrent with the
issuance of the 1.5% Notes due 2017, we entered into a convertible bond hedge transaction in which counterparties
agreed to sell to us up to approximately 19.1 million shares of our common stock, which is the number of shares
initially issuable upon conversion of the 1.5% Notes due 2017 in full, at a conversion price of $52.37 per share. The
convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity
date of the 1.5% Notes due 2017 or the first day none of the 1.5% Notes due 2017 remains outstanding due to
conversion or otherwise. Settlement of the convertible bond hedge in net shares, based on the number of shares
issuable upon conversion of the 1.5% Notes due 2017, on the expiration date would result in the Company receiving
net shares equivalent to the number of shares issuable by the Company upon conversion of the 1.5% Notes due
2017. As of January 2, 2011, we had not purchased any shares under this convertible bond hedge agreement.
Ventures with Toshiba. We are a 49.9% owner in both Flash Partners and Flash Alliance, our business
ventures with Toshiba to develop and manufacture NAND flash memory products. 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. See Note 12,
“Commitments, Contingencies and Guarantees,” in the Notes to Consolidated Financial Statements of this Form
10-K included in Part II, Item 8 of this report for our contractual obligations related to Flash Forward.
With these ventures, we and Toshiba collaborate in the development and manufacture of NAND flash
memory products. These NAND flash memory products are manufactured by Toshiba at Toshiba’s Yokkaichi,
Japan operations using the semiconductor manufacturing equipment owned or leased by these ventures. This
equipment is funded or will be funded by investments in or loans to the Flash Ventures from us and Toshiba as
well as through operating leases received by Flash Ventures from third-party banks and guaranteed by us and
Toshiba. These ventures purchase wafers from Toshiba at cost and then resell those wafers to us and Toshiba at
cost plus a markup. We are contractually obligated to purchase half of these ventures’ NAND wafer supply or
pay for 50% of the fixed costs of these ventures. We are not able to estimate our total wafer purchase obligations
beyond our rolling three month purchase commitment because the price is determined by reference to the future
cost to produce the wafers. See Note 13, “Related Parties and Strategic Investments,” in the Notes to
Consolidated Financial Statements of this Form 10-K included in Part II, Item 8 of this report.
The cost of the wafers we purchase from these ventures is recorded in inventory and ultimately cost of
product revenues. These ventures are variable interest entities; however, we are not the primary beneficiary of
these ventures because we do not have a controlling financial interest in 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 our common semiconductor research and development activities. We and Toshiba each pay the
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