SanDisk 2012 Annual Report Download - page 158

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 December 30, 2012, the warrants had an expected
life of approximately 5.0 years and expire on 40 different dates from November 13, 2017 through January 10,
2018. At each expiration date, we may, at our option, elect to settle the warrants on a net share basis. As of
December 30, 2012, 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 us
receiving net shares equivalent to the number of shares issuable by us upon conversion of the 1.5% Notes due
2017. As of December 30, 2012, we had not purchased any shares under this convertible bond hedge agreement.
Ventures with Toshiba. We are a 49.9% owner in each entity within Flash Ventures, our business ventures
with Toshiba to develop and manufacture 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 Flash Ventures. This equipment is funded or will be funded by investments in or
loans to 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. Flash Ventures purchases wafers from Toshiba at cost and
then resells those wafers to us and Toshiba at cost plus a markup. We are contractually obligated to purchase half
of Flash Ventures’ NAND wafer supply or pay for 50% of the fixed costs of Flash 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, “Commitments,
Contingencies and Guarantees,” and Note 14, “Related Parties and Strategic Investments,” in the Notes to
Consolidated Financial Statements of this Form 10-K included in Item 8 of this report.
As of December 30, 2012, Phase 1 of Fab 5 was equipped to a portion of the potential equipment capacity
and we had invested in 50% of that equipment. We expect to achieve incremental wafer capacity through
investments in productivity improvements and we have not yet made a decision about adding new wafer
capacity. We are still evaluating the timing and extent of any new capacity addition in fiscal year 2013. See Note
13, “Commitments, Contingencies and Guarantees,” in the Notes to Consolidated Financial Statements of this
Form 10-K included in Item 8 of this report.
The cost of the wafers we purchase from Flash Ventures is recorded in inventory and ultimately cost of
product revenues. Flash Ventures are variable interest entities; however, we are not the primary beneficiary of
Flash 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.
For semiconductor manufacturing equipment that is leased by Flash Ventures, we and Toshiba jointly
guarantee on an unsecured and several basis, 50% of the outstanding Flash Ventures’ lease obligations under
original master lease agreements entered into by Flash Ventures. These master lease obligations are denominated
in Japanese yen and are noncancelable. Our total master lease obligation guarantee as of December 30, 2012 was
79.6 billion Japanese yen, or approximately $926 million based upon the exchange rate at December 30, 2012.
In the first quarter of fiscal year 2011, we made a $62 million prepayment for Flash Forward building-
related costs. As of December 30, 2012, $26 million was remaining, of which $21 million was classified as Other
current assets and $5 million was classified as Other non-current assets.
From time-to-time, we and Toshiba mutually approve the purchase of equipment for the Flash Ventures in
order to convert to new process technologies or add wafer capacity. Flash Partners and Flash Alliance have
already reached full wafer capacity.
52