SanDisk 2013 Annual Report Download - page 159

made to the number of shares to be sold under the convertible bond hedge transaction or the conversion
price. The convertible bond hedge transaction will be settled in net shares and will terminate upon the
earlier of the maturity date of the 0.5% Notes due 2020 or the first day none of the 0.5% Notes due 2020
remain 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 0.5% Notes due 2020, on the
expiration date would result in us receiving net shares equivalent to the number of shares issuable by us
upon conversion of the 0.5% Notes due 2020. As of December 29, 2013, we had not purchased any shares
under this convertible bond hedge agreement.
Ventures with Toshiba. We are a 49.9% owner in each of the 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 the Flash 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. The Flash
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 the Flash Ventures’ NAND wafer supply or pay
for 50% of the fixed costs of the 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 semiconductor wafers. See Note 13, ‘‘Related Parties and
Strategic Investments,’’ in the Notes to Consolidated Financial Statements of this Form 10-K.
From time-to-time, we and Toshiba mutually approve the purchase of equipment for Flash Ventures in
order to convert to new process technologies or add wafer capacity. Flash Partners Ltd., or Flash Partners,
and Flash Alliance Ltd., or Flash Alliance, have been previously equipped to full wafer capacity. Flash
Forward Ltd, or Flash Forward, occupies Fab 5 which is being built in two phases. As of December 29,
2013, over half of the Phase 1 building has been equipped with wafer capacity or equipment required to
enable technology transition of the Flash Ventures’ wafer capacity.
Construction of the Phase 2 shell of the Fab 5 wafer fabrication facility is underway with expected
completion in mid-2014. Our current plans are to use the Phase 2 shell primarily for technology transition
of the existing Flash Ventures wafer capacity to 1Y-nanometer and 1Z-nanometer technology nodes and
the addition of a 3D NAND pilot line. The last new Flash Ventures wafer capacity was added in January
2012 in Phase 1 of Fab 5. We regularly seek to enhance wafer output through productivity improvements.
These improvements increased our wafer capacity by less than 10% in fiscal year 2013. In fiscal year 2014,
we currently expect productivity improvements and possible new wafer capacity investments to result in up
to a 5% increase in our current wafer capacity. We and Toshiba each retain some flexibility as to the extent
and timing of each party’s respective fab capacity ramps. To date, we have invested in 50% of the Flash
Forward equipment and the output has been in accordance with each party’s proportionate level of
equipment funding.
The cost of the wafers we purchase from Flash Ventures is recorded in inventory and ultimately cost
of revenue. Flash 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.
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 guarantees as of
December 29, 2013 were 51.6 billion Japanese yen, or approximately $492 million based upon the exchange
rate at December 29, 2013.
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Annual Report