SanDisk 2009 Annual Report Download - page 153

This is a TAB type table. Insert
conts here. Annual Report
Notes To Consolidated Financial Statements
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.
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 3, 2010, Flash Partners was in
compliance with all of its master lease covenants. While the Company’s S&P credit rating was B, two levels
below the required minimum corporate rating threshold from S&P, the Company’s R&I credit rating was BBB-,
one level above the required minimum corporate rating threshold from R&I. If 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 resolution were unsuccessful, 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 a consortium of financial institutions (“lessors”) a
portion of its tools and has entered into two equipment master lease agreements totaling 200.0 billion Japanese
yen, or approximately $2.16 billion based upon the exchange rate at January 3, 2010, of which 98.2 billion
Japanese yen, or approximately $1.06 billion based upon the exchange rate at January 3, 2010, was outstanding
as of January 3, 2010. 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. As of January 3, 2010, the amount of the Company’s guarantee obligation of the
Flash Alliance master lease agreements was 49.1 billion Japanese yen, or approximately $531.1 million based
upon the exchange rate at January 3, 2010. Remaining master lease payments are due semi-annually and are
scheduled to be completed in fiscal year 2013. 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 3, 2010, Flash
Alliance was in compliance with all of its master lease covenants. While the Company’s S&P credit rating was
B, two levels below the required minimum corporate rating threshold from S&P, the Company’s R&I credit
rating was BBB-, one level above the required minimum corporate rating threshold from R&I. If 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
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