SanDisk (SNDK)

 

Notes to Consolidated Financial Statements — (Continued)

The Company accounts for its 49.9% ownership position in FlashVision under the equity method of accounting. The terms of the FlashVision venture contractually obligate the Company to purchase half of FlashVision’s NAND wafer supply. The Company cannot estimate the total amount of this commitment as of January 1, 2006, because it is based upon future costs and volumes. In addition, the Company is committed to fund 49.9% of FlashVision’s costs to the extent that FlashVision’s revenues from wafer sales to the Company and Toshiba are insufficient to cover these costs.

 

As of January 1, 2006, the Company had notes receivable from FlashVision of 7.3 billion Japanese yen, or approximately $62 million based upon the exchange rate at January 1, 2006. These notes are secured by the equipment purchased by FlashVision using the note proceeds.

 

Flash Partners.  The Company has a 49.9% ownership interest in Flash Partners, a business venture with Toshiba, formed in fiscal 2004 to purchase from Toshiba NAND flash memory products at a new 300-millimeter wafer fabrication facility, Fab 3, at Toshiba’s Yokkaichi operations. 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 January 1, 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.

 

In February 2006, the Company and Toshiba committed to expand Flash Partners’ capacity to 70,000 wafer starts per month. The Company currently estimates the total equipment funding obligation at 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, the Company is obligated to fund 182.5 billion Japanese yen, or approximately $1.5 billion based upon the exchange rate at January 1, 2006, of which as of January 1, 2006, approximately $1.0 billion was left to fund.

 

As of January 1, 2006, Flash Partners had utilized an operating lease facility of 50.0 billion Japanese yen, or approximately $424 million based on the exchange rate at January 1, 2006, to partially fund Fab 3 equipment. As of January 1, 2006, the Company’s guarantee of the Flash Partners’ operating lease obligation, net of accumulated lease payments, was approximately 24.0 billion Japanese yen, or approximately $203 million based upon the exchange rate at January 1, 2006. In December 2005, Flash Partners secured an additional lease facility of 35.0 billion Japanese yen, or approximately $297 million based upon the exchange rate at January 1, 2006. The Company guaranteed on an unsecured and several basis 50% of the draw downs under this facility. As of January 1, 2006, no draw downs had been made, however the entire amount was drawn down in January 2006. The Company’s maximum exposure under the guarantee is 17.5 billion Japanese yen, or approximately $148 million based upon the exchange rate at January 1, 2006. In addition, Flash Partners expects to secure additional equipment lease facilities over time, which the Company may be obligated to guarantee in whole or in part. See “Off Balance Sheet Liabilities” below.

 

As a part of the FlashVision and Flash Partners 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. In fiscal 2004, the Company and Toshiba increased the maximum quarterly amounts the Company may be required to pay under these agreements and clarified the allocation methodologies for direct research and development costs. As of January 1, 2006, the Company had accrued liabilities related to these expenses of $4.2 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 six-month rolling forecast.

 

Business Ventures and Foundry Arrangement with Toshiba.  Purchase orders placed under the Toshiba ventures and foundry arrangement with Toshiba relating to the first three months of the six-month forecast are

 

Notes to Consolidated Financial Statements — (Continued)

binding and cannot be canceled. At January 1, 2006, the Company had approximately $116.2 million of noncancelable purchase orders for flash memory wafers outstanding to FlashVision, Flash Partners and Toshiba.

 

Other Silicon Sources.  The Company’s contracts with its other sources of silicon generally require the Company to provide a purchase order commitment based on a six-month rolling forecast. The purchase orders placed under these arrangements relating to the first three months of the six-month forecast are generally binding and cannot be canceled. Outstanding purchase commitments for other sources of silicon are included as part of the total “Noncancelable production purchase commitments” in the “Contractual Obligations” table below.

 

Subcontractors.  In the normal course of business, the Company’s subcontractors periodically procure production materials based on the forecast the Company provides to them. The Company’s agreements with these subcontractors require that it reimburse them for materials that are purchased on the Company’s behalf in accordance with such forecast. Accordingly, the Company may be committed to certain costs over and above its open noncancelable purchase orders with these subcontractors. Outstanding purchase commitments for subcontractors are included as part of the total “Noncancelable production purchase commitments” in the “Contractual Obligations” table below.