SanDisk 2005 Annual Report Download - page 141

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 subcon-
tractors are included as part of the total “Noncancelable production purchase commitments” in the “Contractual
Obligations” table below.
Off Balance Sheet Liabilities
FlashVision. FlashVision secured an equipment lease arrangement of approximately 37.9 billion Japanese
yen, or approximately $321 million based upon the exchange rate at January 1, 2006, in May 2002 with Mizuho
Leasing, 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 1, 2006, the maximum amount of the Company’s
contingent indemnification obligation, which reflects payments and any lease adjustments, was approximately
8.8 billion Japanese yen, or approximately $75 million based upon the exchange rate at January 1, 2006.
Flash Partners. As described in “Commitments — Flash Partners” above, Flash Partners intends to sell and
lease-back from a consortium of financial institutions a portion of its tools and has entered into two equipment lease
agreements as described below.
• In December 2004, Flash Partners entered into a master lease agreement with certain financial institutions
providing for up to 50.0 billion Japanese yen, or approximately $424 million based upon the exchange rate at
January 1, 2006, of original lease obligations. As of January 1, 2006, Flash Partners had drawn down this
entire master lease facility. The Company and Toshiba have each guaranteed, on a several basis, 50% of
Flash Partners’ obligations under the master lease agreement. Lease payments are due quarterly and will be
completed in stages through 2010. At the end of the lease term, Flash Partners has the option of purchasing
the tools from the lessors. Flash Partners is obligated to insure the equipment, maintain the equipment in
accordance with the manufacturers’ recommendations and other customary terms to protect the leased
assets. The master lease agreement contains customary events of default for a Japanese lease facility and is
an exhibit to this report. That agreement should be read carefully in its entirety for a comprehensive
understanding of its terms and the nature of the obligations the Company guaranteed.
• In December 2005, Flash Partners entered into a second master lease agreement with certain financial
institutions providing up to 35.0 billion Japanese yen, or approximately $297 million based upon the
exchange rate at January 1, 2006, of original lease obligations. There were no amounts outstanding under
this lease agreement at the end of fiscal 2005; however the entire amount was drawn down in January 2006.
The Company and Toshiba have each guaranteed, on a several basis, 50% of Flash Partners’ obligations
under this master lease agreement. Lease payments are due quarterly and will be completed in 2011. At the
end of the lease term, Flash Partners has the option of purchasing the tools from the lessors. Flash Partners is
obligated to insure the equipment, maintain the equipment in accordance with the manufacturers’ recom-
mendations and other customary terms to protect the leased assets. The master lease agreement contains
F-22
Notes to Consolidated Financial Statements — (Continued)