SanDisk 2010 Annual Report Download - page 228

Notes To Consolidated Financial Statements
At each lease payment date, Flash Alliance has the option of purchasing the tools from the lessors. Flash Alliance
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 Alliance’s master lease agreements was not material at inception of
each master lease.
The master lease agreements contain customary covenants for Japanese lease facilities. In addition to
containing customary events of default related to Flash Alliance that could result in an acceleration of Flash
Alliance’s 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 S&P or Moody’s or a minimum corporate rating of BB+ from R&I. As of January 2, 2011, Flash
Alliance 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 Alliance 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 Alliance master lease agreements.
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 indemnification payments under any such agreements. As of January 2, 2011, no amounts had been
accrued in the accompanying Consolidated Financial Statements with respect to these indemnification
guarantees.
As permitted under Delaware law and the Company’s certificate of incorporation and bylaws, the Company
has agreements, or has assumed agreements in connection with its acquisitions, whereby it indemnifies certain of
its officers, employees, and each of its directors for certain events or occurrences while the officer, employee or
director is, or was, serving at the Company’s or the acquired company’s request in such capacity. The term of the
indemnification period is for the officer’s, employee’s or director’s lifetime. The maximum potential amount of
future payments the Company could be required to make under these indemnification agreements is generally
unlimited; however, the Company has a Director and Officer insurance policy that may reduce its exposure and
enable it to recover all or a portion of any future amounts paid. As a result of its insurance policy coverage, the
Company believes the estimated fair value of these indemnification agreements is minimal. The Company has no
liabilities recorded for these agreements as of January 2, 2011 or January 3, 2010, as these liabilities are not
reasonably estimable even though liabilities under these agreements are not remote.
The Company and Toshiba have agreed to mutually contribute to, and indemnify each other and Flash
Ventures for environmental remediation costs or liability resulting from Flash Ventures’ manufacturing
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