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$148 million based upon the exchange rate at January 1, 2006. See Item 1, “Business-Ventures With Toshiba-Flash
Partners.”
The terms of the Flash Partners venture contractually obligate us and Toshiba to expand Flash Partners’
capacity. As of February 2006, we and Toshiba have committed to expand Flash Partners’ capacity to 70,000 wafer
starts per month. We currently estimate the remaining total equipment funding obligation for the 70,000 wafer starts
per month level to be approximately 365.0 billion Japanese yen, or approximately $3.1 billion based upon the
exchange rate at January 1, 2006. Of this amount, we are obligated to fund 182.5 billion Japanese yen, or
approximately $1.5 billion based upon the exchange rate at January 1, 2006, of which 42.5 billion Japanese yen, or
approximately $361 million based upon the exchange rate at January 1, 2006, is being financed through Flash
Partners’ operating lease facilities. Our remaining funding obligation at January 1, 2006 is approximately
$1.0 billion. See Note 5 to our consolidated financial statements included in Item 8 of this report.
Contractual Obligations and Off Balance Sheet Arrangements
Our contractual obligations and off balance sheet arrangements at January 1, 2006, and the effect those
contractual obligations are expected to have on our liquidity and cash flow over the next five years is presented in
textual and tabular format in Note 5 to our consolidated financial statements included in Item 8 of this report.
Impact of Currency Exchange Rates
Future exchange rate fluctuations could have a material adverse effect on our business, financial condition and
result of operations. In 2005, we used foreign currency forward contracts to mitigate transaction gains and losses
generated by these monetary assets and liabilities denominated in other currencies than the U.S. dollar, currently
only the Japanese yen. We did not use foreign currency forward contracts in 2004 and 2003. We do not enter into
derivatives for speculative or trading purposes. Our derivative instruments are recorded at fair value with changes
recorded in other income (expense). See Note 5 to our consolidated financial statements included in Item 8 of this
report.
For a discussion of foreign operating risks and foreign currency risks, see Item 1A, “Risk Factors.”
Impact of Recently Issued Accounting Standards
The Financial Accounting Standards Board, or FASB, adopted a revised Statement of Financial Accounting
Standards No. 123, or FAS 123R, Share Based Payments, with an effective date of June 15, 2005. In April 2005, the
SEC amended the effective date of FAS 123R, and we will now be required to adopt this standard for our first fiscal
year beginning after June 15, 2005. We adopted FAS 123R in January 2006 and currently do not expect to restate
prior periods to conform to the new accounting standard as we will use the modified prospective method. FAS 123R
requires us to recognize an expense based on the fair value of all share-based payments to employees, including
grants of options to buy shares of our common stock. See Note 1 to our consolidated financial statements included in
Item 8 of this report for information related to the pro forma effect on reported net income and net earnings per share
of applying the fair value provisions of the FAS 123. Adoption of FAS 123R is expected to increase our operating
expenses. In anticipation of expensing equity instruments, we have reduced overall stock option grants and reduced
the percentage of incentive stock options to total stock options granted.
In May 2005, the FASB issued Financial Accounting Standards No. 154, or FAS 154, Accounting Changes and
Error Corrections. FAS 154 replaced Accounting Pronouncement Board Opinion No. 20, or APB 20, Accounting
Changes, and Financial Accounting Standards No. 3, or FAS 3, Reporting Accounting Changes in Interim Financial
Statements. FAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all
prior period financial statements presented based on the application of the new accounting principle. The statement
will require the retrospective application of the impact of the direct effect of changes in accounting principles unless
it is impracticable to determine either the period-specific effects or the cumulative effect of the change. FAS 154
carries forward without change the guidance contained in APB 20 for reporting the correction of an error in
previously issued financial statements and changes in accounting estimates. FAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December 15, 2005 and require prospective
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