SanDisk 2003 Annual Report Download - page 40

In June 2000, we closed a transaction with Toshiba providing for the joint development and manufacture
of 512 megabit, 1 gigabit and 2 gigabit Öash memory chips and Secure Digital Card controllers. As part of this
transaction, we and Toshiba formed FlashVision, a joint venture, to equip and operate a silicon wafer
manufacturing line at Toshiba's Dominion Semiconductor facility in Manassas, Virginia. In April 2002, we
and Toshiba restructured our FlashVision joint venture by consolidating FlashVision's advanced NAND wafer
fabrication manufacturing operations at Toshiba's memory fabrication facility in Yokkaichi, Japan. Under the
terms of the agreement, Toshiba transferred the FlashVision owned and leased NAND production tool-set
from Dominion to Yokkaichi and undertook full responsibility for the equipment transfer and production set
up. The FlashVision operation at Yokkaichi continues the joint venture on essentially the same terms as the
parties had at Toshiba's facility in Virginia. In March 2002, FlashVision exercised its right of early termination
under its lease facility with ABN AMRO Bank, N.V. and in April 2002 repaid all amounts outstanding.
FlashVision secured an equipment lease arrangement of approximately 37.9 billion Japanese Yen (or
approximately $305 million based on the exchange rate in eÅect on the date the agreement was executed) in
May 2002 with Mizuho and other Ñnancial institutions. Under the terms of this lease, Toshiba guaranteed
these commitments on behalf of FlashVision. We have agreed to indemnify Toshiba in certain circumstances
for certain liabilities Toshiba incurs as a result of Toshiba's guarantee of the FlashVision equipment lease
arrangement. If FlashVision fails to meet its lease commitments and Toshiba fulÑlls these commitments under
the terms of Toshiba's guarantee, then we will be obligated to reimburse Toshiba for 49.9% of any claims
under the lease, unless such claims result from Toshiba's failure to meet its obligations to FlashVision or its
covenants to the lenders. Because FlashVision's equipment lease arrangement is denominated in Japanese
Yen, the maximum amount of our contingent indemniÑcation obligation on a given date when converted to
U.S. Dollars will Öuctuate based on the exchange rate in eÅect on that date. In February 2004, we committed
to loan FlashVision up to approximately $150.4 million to fund additional 200-millimeter fabrication capacity
through the end of Ñscal 2004. This loan is secured by the equipment purchased by FlashVision using the loan
proceeds. Additional loans are expected to be made in several tranches through the Ñrst quarter of 2006.
Because our funding obligation is denominated in Japanese Yen, the amount of our obligation on a given date
when converted to U.S. dollars will Öuctuate based on the exchange rate in eÅect on that date.
Impact of Currency Exchange Rates
A portion of our revenues is denominated in Japanese Yen. We enter into foreign exchange forward
contracts to hedge against changes in foreign currency exchange rates. At December 28, 2003, there were no
forward contracts outstanding. Future exchange rate Öuctuations could have a material adverse eÅect on our
business, Ñnancial condition and results of operations.
Impact of Recently Issued Accounting Standards
In December 2003, the Financial Accounting Standards Board (FASB) issued a revision to Interpreta-
tion No. 46, ""Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51'' (""FIN 46R'').
FIN 46R clariÑes the application of ARB No. 51, ""Consolidated Financial Statements,'' to certain entities in
which equity investors do not have the characteristics of a controlling Ñnancial interest or do not have
suÇcient equity at risk for the entity to Ñnance its activities without additional subordinated Ñnancial support
provided by any parties, including the equity holders. FIN 46R requires the consolidation of these entities,
known as variable interest entities (""VIEs''), by the primary beneÑciary of the entity. The primary beneÑciary
is the entity, if any, that will absorb a majority of the entity's expected losses, receive a majority of the entity's
expected residual returns, or both.
Among other changes, the revisions of FIN 46R (a) clariÑed some requirements of the original FIN 46,
which had been issued in January 2003, (b) eased some implementation problems, and (c) added new scope
exceptions. FIN 46R deferred the eÅective date of the Interpretation for public companies to the end of the
Ñrst reporting period ending after March 15, 2004, except that all public companies must at a minimum apply
the unmodiÑed provisions of the Interpretation to entities that were previously considered ""special-purpose
entities'' in practice and under the FASB literature prior to the issuance of FIN 46R by the end of the Ñrst
reporting period ending after December 15, 2003.
36