SanDisk 2004 Annual Report Download - page 68

Table of Contents
Notes to Consolidated Financial Statements — (Continued)
Off Balance Sheet Liabilities
FlashVision. FlashVision secured an equipment lease arrangement of approximately 37.9 billion Japanese yen in May 2002 with
Mizuho Corporate Bank, Ltd., or Mizuho, and other financial institutions. Under the terms of the lease, Toshiba guaranteed these
commitments on behalf of FlashVision. 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. As of January 2, 2005, the maximum amount of the Company’s contingent
indemnification obligation, which reflects payments and any lease adjustments, was approximately 11.5 billion Japanese yen.
Flash Partners. Flash Partners intends to sell and lease−back from a consortium of financial institutions approximately one−half of
its tools. In December 2004, Flash Partners entered into a master lease agreement providing for up to 50 billion Japanese yen of
original lease obligations. There were no amounts outstanding under the master lease agreement at the end of 2004. The Company and
Toshiba have each guaranteed, on a several basis, 50 percent of Flash Partners’ obligations under the master lease agreement. Flash
Partners will draw individual tranches under the lease agreements during 2005 and each individual draw will have a four−year or
five−year term as agreed by Flash Partners and the lessors. Lease payments are due quarterly. At the end of the lease term, Flash
Partners has the option of purchasing the tools at a percentage of their original sales price to the lessors. The fair value of the
Company’s guarantee of Flash Partners’ lease obligation was insignificant at inception of the guarantee.
Contingencies
Lee and Li Settlement. Effective as of November 14, 2003, the Company and Lee and Li entered into a Settlement and General
Release Agreement, or Settlement Agreement, concerning UMC shares embezzled by a former employee of that firm. Pursuant to the
Settlement Agreement, the Company received a cash payment of $20.0 million at the time of signing. In addition, Lee and Li agreed to
pay the Company $45.0 million (inclusive of interest $47.9 million) over four years in sixteen quarterly installments. Of this amount
$11.3 million was classified as current other assets at January 2, 2005 and December 28, 2003, respectively and $22.5 million and
$33.7 million was classified as non−current other assets in the accompanying consolidated balance sheets as of January 2, 2005 and
December 28, 2003, respectively. These amounts are secured by irrevocable standby letters of credit issued by the International
Commercial Bank of China, or ICBC. Further, Lee and Li extended a credit to the Company in the amount of $18.3 million to be
applied against future legal services provided by Lee and Li and to be spread equally over 18 years. This amount was reduced by
$6.2 million as a result of a recovery from a third party brokerage firm in 2004. As a result of the recovery, the credit has been reduced
to approximately $12 million to be spread equally over approximately 12 years. If any of the stolen assets are recovered, the net
amount after recovery of expenses, will be split between the Company and Lee and Li, in specified proportions until the Company
receives a maximum amount of $106.6 million, including all amounts described above.
Indemnification Agreements. The Company has historically agreed to indemnify suppliers and customers for alleged patent
infringement. The scope of such indemnity varies, but may, in some instances, include indemnification for damages and expenses,
including attorneys’ fees. The Company may periodically engage in litigation as a result of these indemnification obligations. The
Company’s insurance policies exclude coverage for third−party claims for patent infringement. Although liability is not remote, the
nature of the patent infringement indemnification obligations prevents the Company from making a reasonable estimate of the
maximum potential amount it could be required to pay to its suppliers and customers. Historically, the Company has not made any
significant indemnification payments under any such agreements and as of January 2, 2005, no amount has been accrued in the
accompanying consolidated financial statements with respect to these indemnification guarantees.
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