Commitments, Contingencies and Guarantees

Flash Partners. The Company has a 49.9% ownership interest in Flash Partners Ltd. (“Flash Partners”), a business venture with Toshiba Corporation (“Toshiba”) which owns 50.1%, formed in fiscal year 2004. As of July 1, 2012, the Company had notes receivable from Flash Partners of $220.0 million, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Partners using the note proceeds. The Company also has guarantee obligations to Flash Partners; see “Off-Balance Sheet Liabilities.” At July 1, 2012 and January 1, 2012, the Company had an equity investment in Flash Partners of $250.4 million and $258.2 million, respectively, denominated in Japanese yen, offset by $78.0 million and $85.8 million, respectively, of cumulative translation adjustments recorded in accumulated OCI. In the three and six months ended July 1, 2012 and July 3, 2011, the Company recorded a basis adjustment of $0.8 million, $2.1 million, $1.3 million and $2.7 million, respectively, to its equity in earnings from Flash Partners related to the difference between the basis in the Company’s equity investment compared to the historical basis of the assets recorded by Flash Partners.

Flash Alliance. The Company has a 49.9% ownership interest in Flash Alliance Ltd. (“Flash Alliance”), a business venture with Toshiba which owns 50.1%, formed in fiscal year 2006. As of July 1, 2012, the Company had notes receivable from Flash Alliance of $792.2 million, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Alliance using the note proceeds. The Company also has guarantee obligations to Flash Alliance; see “Off-Balance Sheet Liabilities.” At July 1, 2012 and January 1, 2012, the Company had an equity investment in Flash Alliance of $362.0 million and $368.5 million, respectively, denominated in Japanese yen, offset by $81.5 million and $92.6 million, respectively, of cumulative translation adjustments recorded in accumulated OCI. In the three and six months ended July 1, 2012 and July 3, 2011, the Company recorded a basis adjustment of $3.8 million, $7.8 million, $4.5 million and $15.9 million, respectively, to its equity earnings from Flash Alliance related to the difference between the basis in the Company’s equity investment compared to the historical basis of the assets recorded by Flash Alliance.

Flash Forward. The Company has a 49.9% ownership interest in Flash Forward Ltd. (“Flash Forward”), a business venture with Toshiba which owns 50.1%, formed in fiscal year 2010. As of July 1, 2012, the Company had notes receivable from Flash Forward of $176.0 million, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Forward using the note proceeds. The Company also has guarantee obligations to Flash Forward; see “Off-Balance Sheet Liabilities.” At July 1, 2012 and January 1, 2012, the Company had an equity investment in Flash Forward of $70.5 million and $19.5 million, respectively, denominated in Japanese yen, offset by $1.6 million and $1.1 million, respectively, of cumulative translation adjustments recorded in accumulated OCI. As of July 1, 2012, Phase 1 of Fab 5 was equipped to approximately 30% of eventual equipment capacity and the Company had invested in 50% of that equipment. The equipped portion of Fab 5 is running at full utilization. The Company does not plan to invest in further Fab 5 capacity expansion for the remainder of fiscal year 2012.

Inventory Purchase Commitments with Flash Ventures. Purchase orders placed under Flash Ventures for up to three months are binding and cannot be canceled. These outstanding purchase commitments are included as part of the total “Noncancelable production purchase commitments” in the “Contractual Obligations” table below.

Off-Balance Sheet Liabilities

Flash Ventures. Flash Ventures 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 404.2 billion Japanese yen, or approximately $5.08 billion based upon the exchange rate at July 1, 2012. As of July 1, 2012, the total amount outstanding from these master leases was 151.2 billion Japanese yen, or approximately $1.90 billion based upon the exchange rate at July 1, 2012, of which the amount of the Company’s guarantee obligation of the Flash Ventures’ master lease agreements, which reflects future payments and any lease adjustments, was 75.6 billion Japanese yen, or approximately $950 million based upon the exchange rate at July 1, 2012.

The master lease agreements contain customary covenants for Japanese lease facilities. In addition to containing customary events of default related to Flash Ventures that could result in an acceleration of Flash Ventures’ 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 stockholders’ 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 July 1, 2012, Flash Ventures was in compliance with all of its master lease covenants. As of July 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 Ventures 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 Ventures master lease agreements.

The following table details the Company’s portion of the remaining guarantee obligations under each of Flash Ventures’ master lease facilities (both original and refinanced leases) in both Japanese yen and U.S. dollar equivalent based upon the exchange rate at July 1, 2012.



Master Lease Agreements by Execution Date	Lease Type	Lease Amounts				Expiration
		(Yen in billions)		(Dollars in thousands)
Flash Partners
March 2007	Original	¥	2.1	$	25,896	2012
February 2008	Original	1.6		20,046		2013
April 2010	Refinanced	1.9		24,280		2014
January 2011	Refinanced	3.4		42,358		2014
November 2011	Refinanced	7.8		98,501		2014
March 2012	Refinanced	3.1		38,628		2015
		19.9		249,709
Flash Alliance
November 2007	Original	8.9		111,550		2013
June 2008	Original	12.0		151,812		2013
March 2012	Original	9.5		119,557		2017
		30.4		382,919
Flash Forward
November 2011	Original	15.8		198,191		2016
March 2012	Original	9.5		119,512		2017
		25.3		317,703
Total guarantee obligations		¥	75.6	$	950,331

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 July 1, 2012 in U.S. dollars based upon the yen/dollar exchange rate at July 1, 2012 (in thousands).



Annual Installments	Payment of Principal Amortization		Purchase Option Exercise Price at Final Lease Terms		Guarantee Amount
Year 1	$	243,882	$	173,530	$	417,412
Year 2	146,637		65,700		212,337
Year 3	103,508		45,080		148,588
Year 4	64,208		—		64,208
Year 5	35,327		72,459		107,786
Total guarantee obligations	$	593,562	$	356,769	$	950,331

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 July 1, 2012, no amounts had been accrued in the accompanying Condensed 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 July 1, 2012 or January 1, 2012, 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 operations in certain circumstances. The Company and Toshiba have also entered into a Patent Indemnification Agreement under which, in many cases, the Company will share in the expenses associated with the defense and cost of settlement associated with such claims. This agreement provides limited protection for the Company against third-party claims that NAND flash memory products manufactured and sold by Flash Ventures infringes third-party patents. The Company has not made any indemnification payments under any such agreements and as of July 1, 2012, no amounts have been accrued in the accompanying Condensed Consolidated Financial Statements with respect to these indemnification guarantees.

Contractual Obligations and Off-Balance Sheet Arrangements

The following tables summarize the Company’s contractual cash obligations, commitments and off-balance sheet arrangements at July 1, 2012, and the effect such obligations are expected to have on its liquidity and cash flows in future periods.

Contractual Obligations. Contractual cash obligations and commitments as of July 1, 2012 are as follows (in thousands):



	Total			1 Year or Less (Remaining 6 months in Fiscal 2012)		2 –3 Years (Fiscal 2013 and 2014)		4 –5 Years (Fiscal 2015 and 2016)		More than 5 Years (Beyond Fiscal 2016)
Facility and other operating leases	$	20,058	⁽⁵⁾	$	4,585	$	10,021	$	4,561	$	891
Flash Partners⁽¹⁾	796,962		⁽⁵⁾⁽⁶⁾	114,737		464,114		153,320		64,791
Flash Alliance⁽¹⁾	1,552,973		⁽⁵⁾⁽⁶⁾	286,066		799,390		366,016		101,501
Flash Forward⁽¹⁾	583,633		⁽⁵⁾⁽⁶⁾	68,103		270,144		209,728		35,658
Toshiba research and development	146,163		⁽⁵⁾	78,643		52,520		15,000		—
Capital equipment purchase commitments	115,416			115,405		11		—		—
1% Convertible senior notes principal and interest⁽²⁾	937,341			4,640		932,701		—		—
1.5% Convertible senior notes principal and interest⁽³⁾	1,082,500			7,500		30,000		30,000		1,015,000
Operating expense commitments	55,283			49,047		6,236		—		—
Noncancelable production purchase commitments⁽⁴⁾	310,115		⁽⁵⁾	310,024		91		—		—
Total contractual cash obligations	$	5,600,444		$	1,038,750	$	2,565,228	$	778,625	$	1,217,841

————


⁽¹⁾	Includes reimbursement for depreciation and lease payments on owned and committed equipment, funding commitments for loans and equity investments and reimbursement for other committed expenses. Funding commitments assume no additional operating lease guarantees; new operating lease guarantees can reduce funding commitments.


⁽²⁾	In May 2006, the Company issued and sold $1.15 billion in aggregate principal amount of 1% Notes due 2013. The Company will pay cash interest on the outstanding notes at an annual rate of 1.0%, payable semi-annually on May 15 and November 15 of each year until May 15, 2013. In fiscal year 2011, the Company redeemed $221.9 million of the outstanding notes.


⁽³⁾	In August 2010, the Company issued and sold $1.0 billion in aggregate principal amount of 1.5% Notes due 2017. The Company will pay cash interest on the outstanding notes at an annual rate of 1.5%, payable semi-annually on August 15 and February 15 of each year until August 15, 2017.


⁽⁴⁾	Includes Flash Ventures, related party vendors and other silicon source vendor purchase commitments.


⁽⁵⁾	Includes amounts denominated in a currency other than the U.S. dollar, which are subject to fluctuation in exchange rates prior to payment and have been translated using the exchange rate at July 1, 2012.


⁽⁶⁾	Excludes amounts related to the master lease agreements’ purchase option exercise price at final lease term.

Off-Balance Sheet Arrangements. Off-balance sheet arrangements are as follows (in thousands):



	July 1, 2012
Guarantee of Flash Ventures equipment leases ⁽¹⁾	$	950,331

————


⁽¹⁾	The Company’s guarantee obligation, net of cumulative lease payments, was 75.6 billion Japanese yen, or approximately $950 million based upon the exchange rate at July 1, 2012.

The Company has excluded $211.0 million of unrecognized tax benefits (which includes penalties and interest) from the contractual obligation table above due to the uncertainty with respect to the timing of associated future cash flows at July 1, 2012. The Company is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.

The Company leases many of its office facilities and operating equipment for various terms under long-term, noncancelable operating lease agreements. The leases expire at various dates from fiscal year 2012 through fiscal year 2020. Future minimum lease payments are presented below (in thousands):



	July 1, 2012
Fiscal year:
2012 (remaining 6 months)	$	4,834
2013	6,393
2014	4,683
2015	3,862
2016	1,410
2017 and thereafter	891
	22,073
Sublease income to be received in the future under noncancelable subleases	(2,015		)
Net operating leases	$	20,058

On January 31, 2012, the Company purchased for $87.5 million, five adjacent buildings in Milpitas, California, three of which were previously leased. Pursuant to this purchase, the Company terminated the three building lease agreements with remaining aggregate lease obligations of $3.9 million that were set to expire in 2013.

Net rent expense was as follows (in thousands):



	Three months ended				Six months ended
	July 1, 2012		July 3, 2011		July 1, 2012		July 3, 2011
Rent expense, net	$	1,685	$	1,951	$	2,798	$	3,847