SanDisk 2006 Annual Report Download - page 126

As of December 31, 2006, the Company had notes receivable from FlashVision of 4.6 billion Japanese yen, or
approximately $38 million based upon the exchange rate at December 31, 2006. These notes are secured by the
equipment purchased by FlashVision using the note proceeds. In fiscal 2006, the Company received its first cash
repayment against the note receivable and expects FlashVision to continue generating cash to pay down this note
receivable over time. The Company 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 fulfills these commitments under the terms of Toshiba’s guarantee, then the Company
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 the
Company’s contingent indemnification obligation on a given date when converted to U.S. dollars will fluctuate
based on the exchange rate in effect on that date. See “Off Balance Sheet Liabilities.”
Flash Partners. The Company has a 49.9% ownership interest in Flash Partners Ltd., or Flash Partners, a
business venture with Toshiba, formed in fiscal 2004. In the venture, the Company and Toshiba have collaborated in
the development and manufacture of NAND flash memory products. These NAND flash memory products are
manufactured by Toshiba at the 300-millimeter wafer fabrication facility, Fab 3, located in Yokkaichi, Japan, using
the semiconductor manufacturing equipment owned or leased by Flash Partners. Flash Partners purchases wafers
from Toshiba at cost and then resells those wafers to the Company and Toshiba at cost plus a markup. Toshiba owns
50.1% of this venture. The Company accounts for its 49.9% ownership position in Flash Partners under the equity
method of accounting. The Company is committed to purchase half of Flash Partners’ NAND wafer supply. The
Company cannot estimate the total amount of this commitment as of December 31, 2006, because it is based upon
future costs and volumes. In addition, the Company is committed to fund 49.9% of Flash Partners’ costs to the
extent that Flash Partners’ revenues from wafer sales to the Company and Toshiba are insufficient to cover these
costs.
As of December 31, 2006, the Company had notes receivable from Flash Partners of 11.0 billion Japanese yen,
or approximately $92 million based upon the exchange rate at December 31, 2006. These notes are secured by the
equipment purchased by Flash Partners using the note proceeds.
Flash Alliance. The Company has a 49.9% ownership interest in Flash Alliance Ltd., or Flash Alliance, a
business venture with Toshiba, formed on July 7, 2006. In the venture, the Company and Toshiba will collaborate in
the development and manufacture of NAND flash memory products. These NAND flash memory products will be
manufactured by Toshiba at its 300-millimeter wafer fabrication facility, Fab 4, being built in Yokkaichi, Japan,
using the semiconductor manufacturing equipment that will be owned or leased by Flash Alliance. Flash Alliance
will purchase wafers from Toshiba at cost and then resell those wafers to the Company and Toshiba at cost plus a
markup. Toshiba owns 50.1% of this venture. The Company accounts for its 49.9% ownership position in Flash
Alliance under the equity method of accounting. The Company is committed to purchase half of Flash Alliance’s
NAND wafer supply.
As a part of the FlashVision, Flash Partners and Flash Alliance venture agreements, the Company is required to
fund direct and common research and development expenses related to the development of advanced NAND flash
memory technologies. As of December 31, 2006, the Company had accrued liabilities related to these expenses of
$5.9 million.
Toshiba Foundry. The Company has the ability to purchase additional capacity under a foundry arrangement
with Toshiba. Under the terms of this agreement, the Company is required to provide Toshiba with a purchase order
commitment based on a nine-month rolling forecast.
TwinSys. The Company assumed msystems’ ownership interest in the venture with Toshiba, TwinSys Data
Storage Limited Partnership, or TwinSys, designed to enable the parties to benefit from a portion of each party’s
respective sales of USB flash drives. As of December 31, 2006, the Company had a 50.1% beneficial ownership in
Twinsys, consisting of (i) 49.9% ownership in TwinSys and (ii) 0.2% interest held by Twinsys Ltd., in which the
Company has a 51% ownership interest. On a routine basis, the parties collectively prepare a joint production
Annual Report
F-27
Notes to Consolidated Financial Statements — (Continued)