SanDisk 2006 Annual Report Download - page 128

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
December 31, 2006, the maximum amount of the Company’s contingent indemnification obligation, which reflects
payments and any lease adjustments, was approximately 5.8 billion Japanese yen, or approximately $49 million
based upon the exchange rate at December 31, 2006.
Flash Partners. Flash Partners sells and lease-back from a consortium of financial institutions a portion of its
tools and has entered into four equipment lease agreements of approximately 215.0 billion Japanese yen, or
approximately $1.8 billion based upon the exchange rate at December 31, 2006. As of December 31, 2006, Flash
Partners had drawn down approximately 144 billion Japanese yen, or approximately $1.2 billion based upon the
exchange rate at December 31, 2006, net of accumulated lease payments. The Company and Toshiba have each
guaranteed, on a several basis, 50% of Flash Partners’ obligations under the master lease agreements. Lease
payments are due quarterly or semi-annually and are scheduled to be completed in stages through 2011. At the end
of each of the lease terms, 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 comply with other customary terms to protect the leased assets. The master lease agreements contains
covenants that require the Company to maintain a minimum shareholder equity balance of $1.16 billion as well as a
long-term loan rating of BB- or Ba3, based on a named independent rating service. In addition, the master lease
agreements contain customary events of default for a Japanese lease facility. The master lease agreements are
exhibits to the Company’s annual report for Form 10-K for fiscal 2005. These agreements should be read carefully
in their entirety for a comprehensive understanding of their terms and the nature of the obligations the Company
guaranteed. The fair value of the Company’s guarantee of Flash Partners’ lease obligation was insignificant at
inception of the guarantee. In addition, Flash Partners expects to secure additional equipment lease facilities over
time, which the Company may be required to guarantee in whole or in part. As of December 31, 2006, the maximum
amount of the Company’s guarantee obligation of the Flash Partners master lease agreements, which reflects
payments and any lease adjustments, was approximately 72.0 billion Japanese yen, or approximately $605 million
based upon the exchange rate at December 31, 2006. On January 10, 2007, Flash Partners utilized approximately
52.0 billion Japanese yen, or approximately $437 million based upon the exchange rate at December 31, 2006, of
the outstanding lease lines, of which the Company’s guarantee was 26.0 billion Japanese yen, or approximately
$218 million based upon the exchange rate at December 31, 2006. See Note 17, “Subsequent Events.” 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.
Guarantees
Indemnification Agreements. The Company has 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 the 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 indem-
nification payments under any such agreements. As of December 31, 2006, no amount has been accrued in the
accompanying condensed consolidated financial statements with respect to these indemnification guarantees.
As permitted under Delaware law and the Company’s charter and bylaws, the Company has agreements
whereby it indemnifies certain of its officers and each of its directors for certain events or occurrences while the
Annual Report
F-29
Notes to Consolidated Financial Statements — (Continued)