SanDisk 2003 Annual Report Download - page 47

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.
In December 2003, we and Toshiba announced our intention to, and are currently in discussions
regarding, cooperating in the construction of a new 300-millimeter wafer fabrication facility, Fab 3, at
Toshiba's Yokkaichi operations. As under the current FlashVision joint venture, we would be obligated to
purchase half of Fab 3's NAND wafer production output. Toshiba would construct the Fab 3 building,
depreciation of the Fab 3 building would be a component of the cost to each party of wafers produced by
Fab 3, and both parties would provide funds for the manufacturing equipment. Toshiba currently plans to
begin construction of the building in the Ñrst half of 2004. We may agree that in the event that we and Toshiba
do not execute deÑnitive agreements with respect to Fab 3, we will reimburse Toshiba for 50% of certain
start-up costs and Fab 3 Co. formation costs incurred by Toshiba and for cancellation fees due under
authorized contractor and vendor invoices for orders placed by Toshiba for certain equipment and construction
materials for Fab 3 that Toshiba cannot otherwise use, which amounts would be substantial. The total
investment in Fab 3, excluding the cost of building construction, is currently estimated at $2.5 billion through
the end of 2006, of which our share is estimated to be approximately $1.3 billion, with initial production
currently scheduled for the end of 2005. We and Toshiba would share equally in the investment, and we may
need to raise additional capital for our portion of the investment. In addition to our initial investment in
expansion at Yokkaichi and in Fab 3, if a Ñnal agreement for Fab 3 is reached between us and Toshiba, for
several quarters we will incur substantial start-up expenses related to the hiring and training of manufacturing
personnel, facilitizing the clean room and installing equipment at the expanded fabrication facility and at
Fab 3. In addition, we may not achieve the expected cost beneÑts of the expansion or a new facility for several
quarters, if at all. We will incur start-up costs and pay ongoing operating activities even if we do not utilize the
new output. Should customer demand for NAND Öash products be less than our available supply, we may
experience reduced revenues and increased expenses as well as increased inventory of unsold NAND Öash
wafers, which could harm our operating results. In addition we have not yet, and may never, enter into
deÑnitive agreements with Toshiba with respect to the construction and operation of Fab 3 and even if we do
not do so, we may remain obligated to reimburse Toshiba for 50% of the costs and cancellation fees described
above, which would be substantial.
We face challenges and possible delays relating to the conversion of our production to 0.13 micron and
smaller feature sizes, which could adversely aÅect our operating results.
We were using the production capacity at Toshiba's Yokkaichi fabrication facilities to manufacture
NAND Öash memory wafers with minimum lithographic feature size of 0.16 micron and recently converted to
0.13 micron technology. We have not yet completed qualiÑcation of some new 0.13 micron product
components. Any material delay in our qualiÑcation schedule will delay deliveries and adversely impact our
operating results. In addition, we plan to manufacture Öash memory wafers with even smaller lithographic
feature sizes. Our minimum feature sizes are considered today to be among the most advanced for mass
production of Öash memory wafers. Therefore, it is diÇcult to predict how long it will take to achieve adequate
yields, reliable operation, and economically attractive product costs based on our new designs and feature
sizes. We currently rely and will continue to rely on Toshiba to address these challenges. With our investments
in the FlashVision joint venture at Toshiba's Yokkaichi facilities, we are now and will continue to be exposed
to the adverse Ñnancial impact of any delays or manufacturing problems associated with wafer production
lines. Any problems or delays in volume production at the Yokkaichi fabrication facilities could adversely
impact our operating results in 2004 and beyond.
Toshiba's Yokkaichi fabrication facilities are a signiÑcant source of supply of Öash memory wafers and
any disruption in this supply will reduce our revenues, gross margins and earnings.
Although we buy Öash memory from the FlashVision joint venture, we also rely on Toshiba's Yokkaichi
fabrication facilities to supply on a foundry basis a portion of our Öash memory wafers. Even if FlashVision
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