SanDisk 2011 Annual Report Download - page 166

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table details the breakdown of the Company’s remaining guarantee obligations between the
principal amortization and the purchase option exercise price at the end of the term of the master lease
agreements, in annual installments as of January 1, 2012 in U.S. dollars based upon the yen/dollar exchange rate
at January 1, 2012 (in thousands).
Annual Installments
Payment of
Principal
Amortization
Purchase Option
Exercise Price at
Final Lease
Terms
Guarantee
Amount
Year 1 ................................................. $ 216,470 $ 102,539 $ 319,009
Year 2 ................................................. 106,160 150,486 256,646
Year 3 ................................................. 54,316 59,031 113,347
Year 4 ................................................. 13,301 — 13,301
Year 5 ................................................. 13,384 15,975 29,359
Total guarantee obligations ............................ $ 403,631 $ 328,031 $ 731,662
Flash Partners. Flash Partners sells and leases back from a consortium of financial institutions (“lessors”) a
portion of its tools and has entered into equipment master lease agreements totaling 122.6 billion Japanese yen,
or approximately $1.59 billion based upon the exchange rate at January 1, 2012. As of January 1, 2012, the total
amount outstanding from these master leases was 45.8 billion Japanese yen, or approximately $594 million based
upon the exchange rate at January 1, 2012, 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
22.9 billion Japanese yen, or approximately $297 million based upon the exchange rate at January 1, 2012. 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 the Company’s 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.
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 1, 2012, Flash Partners was in
compliance with all of its master lease covenants. As of January 1, 2012, 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, one notch above 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, the
Company’s stockholders’ equity falls below $1.51 billion, or other events of default occur, 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.
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