SanDisk 2011 Annual Report Download - page 117

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sell to us up to approximately 19.1 million shares of our common stock, which is the number of shares initially
issuable upon conversion of the 1.5% Notes due 2017 in full, at a conversion price of $52.37 per share. The
convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity
date of the 1.5% Notes due 2017 or the first day none of the 1.5% Notes due 2017 remains outstanding due to
conversion or otherwise. Settlement of the convertible bond hedge in net shares, based on the number of shares
issuable upon conversion of the 1.5% Notes due 2017, on the expiration date would result in us receiving net
shares equivalent to the number of shares issuable by us upon conversion of the 1.5% Notes due 2017. As of
January 1, 2012, we had not purchased any shares under this convertible bond hedge agreement.
Ventures with Toshiba. We are a 49.9% owner in each entity within Flash Ventures, our business ventures
with Toshiba to develop and manufacture NAND flash memory products. These NAND flash memory products
are manufactured by Toshiba at its Yokkaichi, Japan operations using the semiconductor manufacturing
equipment owned or leased by these ventures. This equipment is funded or will be funded by investments in or
loans to the Flash Ventures from us and Toshiba as well as through operating leases received by Flash Ventures
from third-party banks and guaranteed by us and Toshiba. Flash Ventures purchase wafers from Toshiba at cost
and then resell those wafers to us and Toshiba at cost plus a markup. We are contractually obligated to purchase
half of Flash Ventures’ NAND wafer supply or pay for 50% of the fixed costs of Flash Ventures. We are not able
to estimate our total wafer purchase obligations beyond our rolling three month purchase commitment because
the price is determined by reference to the future cost to produce the wafers.
In the second quarter of fiscal year 2011, the Phase 1 building shell construction of Fab 5 was completed
and initial NAND production began at Flash Forward. As of January 2012, Phase 1 of Fab 5 was approximately
30% equipped and we have invested in 50% of that capacity. No commitment has yet been made for further
Phase 1 capacity expansion; however, we are periodically reviewing the timeline of further Phase 1 capacity
expansion. Furthermore, no timelines have been finalized for the construction of Phase 2. If and when Phase 2 is
built, we are committed to 50% of the initial ramp in Phase 2, similar to that in Phase 1. On completion of Phase
2, Fab 5 is expected to be of similar size and capacity to Toshiba’s Fab 4. We and Toshiba will each retain some
flexibility as to the extent and timing of each party’s respective fab capacity ramps, and the output allocation will
be in accordance with each party’s proportionate level of equipment funding. See Note 12, “Commitments,
Contingencies and Guarantees,” in the Notes to Consolidated Financial Statements of this Form 10-K included in
Part II, Item 8 of this report.
The cost of the wafers we purchase from these ventures is recorded in inventory and ultimately cost of
product revenues. These ventures are variable interest entities; however, we are not the primary beneficiary of
these ventures because we do not have a controlling financial interest in each venture. Accordingly, we account
for our investments under the equity method and do not consolidate.
Under Flash Ventures’ agreements, we agreed to share in Toshiba’s costs associated with NAND product
development and our common semiconductor research and development activities. We and Toshiba each pay the
cost of our own design teams and 50% of the wafer processing and similar costs associated with this direct
design and development of flash memory.
In our fiscal year 2009, we and Toshiba restructured Flash Partners and Flash Alliance by selling more than
20% of the capacity of each of the two ventures to Toshiba. The restructuring resulted in us receiving value of
79.3 billion Japanese yen of which 26.1 billion Japanese yen, or $277 million, was received in cash, reducing
outstanding notes receivable from Flash Ventures and 53.2 billion Japanese yen of value reflected the transfer of
off-balance sheet equipment lease guarantee obligations from us to Toshiba. The restructuring was completed in
a series of closings beginning in January 2009 and extending through March 31, 2009. In the first quarter of
fiscal year 2009, transaction costs of $10.9 million related to the sale and transfer of equipment and lease
obligations were expensed.
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