SanDisk 2010 Annual Report Download - page 227

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conts here. Annual Report
Notes To Consolidated Financial Statements
Flash Partners. Flash Partners sells and leases back from a consortium of financial institutions (“lessors”) a
portion of its tools and has entered into six equipment master lease agreements totaling 258.6 billion Japanese
yen, or approximately $3.18 billion based upon the exchange rate at January 2, 2011. As of January 2, 2011, the
total amount outstanding from these master leases was 69.8 billion Japanese yen, or approximately $860 million
based upon the exchange rate at January 2, 2011, of which the amount of the Company’s guarantee obligation of
the Flash Partners’ master lease agreements, which reflects future payments and any lease adjustments, was
34.9 billion Japanese yen, or approximately $430 million based upon the exchange rate at January 2, 2011. The
Company and Toshiba have each guaranteed 50%, on a several basis, of Flash Partners’ obligations under the
master lease agreements. In addition, these master lease agreements are secured by the underlying equipment.
Remaining master lease payments are due quarterly and certain lease payments are due semi-annually, and are
scheduled to be completed in stages through fiscal year 2014. At each lease payment date, 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 fair value of the Company’s guarantee obligation of Flash Partners’ master lease
agreements was not material at inception of each master lease.
On January 27, 2011, Flash Partners refinanced two of its maturing equipment leases totaling 11.0 billion
Japanese yen, or approximately $136 million based upon the exchange rate at January 2, 2011. The Company and
Toshiba have each guaranteed 50%, on a several basis, of Flash Partners’ obligations under the refinanced lease
agreement. This refinanced equipment lease, due in fiscal year 2014, is to be paid by Flash Partners in quarterly
installments, with interest based on the 3-month Euro-Yen Tokyo InterBank Offer Rate (“TIBOR”).
The master lease agreements contain customary covenants for Japanese lease facilities. In addition to
containing customary events of default related to Flash Partners that could result in an acceleration of Flash
Partners’ obligations, the master lease agreements contain an acceleration clause for certain events of default
related to the Company as guarantor, including, among other things, the Company’s failure to maintain a
minimum shareholders’ equity of at least $1.51 billion, and its failure to maintain a minimum corporate rating of
BB- from Standard & Poors (“S&P”) or Moody’s Corporation (“Moody’s”), or a minimum corporate rating of
BB+ from Rating & Investment Information, Inc. (“R&I”). As of January 2, 2011, Flash Partners was in
compliance with all of its master lease covenants. As of January 2, 2011, the Company’s R&I credit rating was
BBB, three notches above the required minimum corporate rating threshold from R&I, and the Company’s S&P
credit rating was BB-, which is the required minimum corporate rating threshold from S&P. If both S&P and
R&I were to downgrade the Company’s credit rating below the minimum corporate rating threshold, Flash
Partners would become non-compliant under its master equipment lease agreements and would be required to
negotiate a resolution to the non-compliance to avoid acceleration of the obligations under such agreements.
Such resolution could include, among other things, supplementary security to be supplied by the Company, as
guarantor, or increased interest rates or waiver fees, should the lessors decide they need additional collateral or
financial consideration under the circumstances. If a non-compliance event were to occur and if the Company
failed to reach a resolution, the Company could be required to pay a portion or the entire outstanding lease
obligations covered by its guarantee under such Flash Partners master lease agreements.
Flash Alliance. Flash Alliance sells and leases back from lessors a portion of its tools and has entered into
two equipment master lease agreements totaling 200.0 billion Japanese yen, or approximately $2.46 billion based
upon the exchange rate at January 2, 2011, of which 73.0 billion Japanese yen, or approximately $898 million
based upon the exchange rate at January 2, 2011, was outstanding as of January 2, 2011. As of January 2, 2011,
the amount of the Company’s guarantee obligation of the Flash Alliance’s master lease agreements was
36.5 billion Japanese yen, or approximately $449 million based upon the exchange rate at January 2, 2011. The
Company and Toshiba have each guaranteed 50%, on a several basis, of Flash Alliance’s obligation under the
master lease agreements. In addition, these master lease agreements are secured by the underlying equipment.
Remaining master lease payments are due semi-annually and are scheduled to be completed in fiscal year 2013.
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