SanDisk 2003 Annual Report Download - page 48

successfully produces quantities at planned levels, the Yokkaichi fabrication facilities may not produce
quantities of wafers with acceptable prices, reliability and yields to satisfy our needs. Any failure in this regard
may harm our business, Ñnancial condition and results of operations, as our right to purchase Öash memory
products from Samsung and others is limited and may not be suÇcient to replace any shortfall in production at
the Yokkaichi facilities. In addition, because a substantial majority of our wafers are produced at the
Yokkaichi facilities, any disruption in supply from the Yokkaichi facilities due to natural disaster, power
failure, labor unrest or other causes could signiÑcantly harm our business, Ñnancial condition and results of
operations. For example, in the second quarter of 2003, an earthquake in northern Japan disrupted operations
at another Toshiba fabrication line for several weeks. Although no damage or disruption was reported at
Yokkaichi, the occurrence and eÅects of these events is unpredictable and could materially harm our business,
Ñnancial condition and results of operations. Moreover, we have no experience in operating a wafer
manufacturing line and we rely on the existing manufacturing organizations at the Yokkaichi facilities. If
Toshiba and FlashVision are uncompetitive or are unable to satisfy our wafer supply requirements, our
business, Ñnancial condition and results of operations would be harmed.
Our obligations under our wafer supply agreements with Toshiba and FlashVision, or decreased demand
for our products, may result in excess inventories and lead to inventory write oÅs, and any technical diÇculties
or manufacturing problems may result in shortages in supply, either of which would adversely aÅect our
business.
Under the terms of our wafer supply agreements with Toshiba, we are obligated to purchase half of
FlashVision's wafer production output and we will also purchase wafers from Toshiba's current Yokkaichi
fabrication facilities on a foundry relationship basis. Under the terms of our foundry relationship with Toshiba
and wafer supply agreements with FlashVision, we are obligated to provide a six-month rolling forecast of
anticipated purchase orders, which are diÇcult to estimate. Generally, the estimates for the Ñrst three months
of each rolling forecast are binding commitments and cannot be cancelled and the estimates for the remaining
months of the forecast may only be changed by a certain percentage from the previous month's forecast. This
limits our ability to react to Öuctuations in demand for our products. If we are unable for any reason to achieve
customer acceptance of our card products built with these Öash chips or if demand decreases, we will
experience a signiÑcant increase in our inventory, which may result in inventory write-oÅs and otherwise harm
our business, results of operations and Ñnancial condition. If we place purchase orders with Toshiba and our
business condition deteriorates, we could experience reduced revenues, increased expenses, and increased
inventory of unsold Öash wafers, which could adversely aÅect our operating results.
In addition, in order for us to sell our products, we have been developing, and will continue to develop,
new controllers, printed circuit boards and test algorithms. Any technical diÇculties or delays in the
development of these elements could prevent us from taking advantage of the available Öash memory output
and could adversely aÅect our results of operations.
We have a contingent indemniÑcation obligation for certain liabilities Toshiba incurs as a result of
Toshiba's guarantee of the FlashVision equipment lease arrangement.
FlashVision secured an equipment lease arrangement of approximately 37.9 billion Japanese Yen (or
approximately $305.0 million based on the exchange rate in eÅect on the date the agreement was executed) in
May 2002 with Mizuho Corporate Bank, Ltd., and other Ñnancial institutions. Under the terms of the lease,
Toshiba has guaranteed those commitments on behalf of FlashVision. We have agreed to indemnify Toshiba
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 and associated expenses under the lease, unless the 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. As
of December 28, 2003, the maximum amount of our contingent indemniÑcation obligation, which reÖects
payments and any lease adjustments, was approximately $125.5 million.
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