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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
the Toshiba's guarantee, the Company 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 new equipment lease arrangement is denominated in Japanese
Yen, the maximum amount of the Company's 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 the Company's contingent indemniÑcation obligation, which reÖects payments
and any lease adjustments, was approximately $125.5 million.
Note 3: Commitments, Litigation, Contingencies and Guarantees
Commitments
The terms of the FlashVision joint venture, as described in Note 8, contractually obligated the Company
to purchase half of FlashVision's NAND wafer production output. The Company also has the ability to
purchase additional capacity under a foundry arrangement (also discussed more fully at Note 8) with Toshiba.
Under the terms of the Company's foundry agreement with Toshiba, the Company is required to provide
Toshiba with a purchase order commitment based on a six-month rolling forecast. The purchase orders placed
under this arrangement relating to the Ñrst three months of the six-month forecast are binding, are at market
prices and cannot be cancelled. At December 28, 2003, approximately $36.0 million of non-cancelable
purchase orders for Öash memory wafers from Toshiba and FlashVision were outstanding. In addition, as a
part of the joint venture agreement, the Company is required to fund certain research and development
expenses related to the development of advanced NAND Öash memory technologies. As of December 28,
2003, the Company had accrued liabilities related to those expenses of $11.8 million. The common research
and development amount is a variable computation with certain payment caps. Future obligations are to be
paid in installments using a percentage of the Company's revenue from NAND Öash products built with Öash
memory supplied by Toshiba or FlashVision. The direct research and development is a pre-determined
amount that extends through the third quarter of 2004. Subsequent to the third quarter of 2004, direct
research and development liabilities will be computed using a variable percentage of actual research and
development expenses incurred.
Given the current apparent acceleration in global demand for Öash memory wafers and assuming that the
markets for the Company's products continue their current growth, new anticipated demand from customers
may outstrip the supply of Öash memory wafers available to the Company from all its current sources. In that
case, the Company may need to secure for itself substantial additional Öash memory wafer fabrication capacity
at .09 micron and Ñner line lithography. Accordingly, the Company and Toshiba are currently discussing
various fabrication and test capacity expansion plans for the FlashVision operation in Yokkaichi, Japan.
Toshiba and the Company plan to substantially expand and increase Yokkaichi's 200 mm Flash memory wafer
output in 2004 and 2005. The capacity expansion will be partially funded through FlashVision internally
generated funds, as well as through substantial additional investments by Toshiba and SanDisk. In February
2004, the Company 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 Ñscal 2006. Because the Company's funding obligation is denominated in
Japanese Yen, the amount of the Company's 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, Toshiba and the Company
announced their 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, the Company 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. The Company may agree that in the event that the Company and Toshiba do not execute deÑnitive
74