
	Commitments, Contingencies and Guarantees

Flash Ventures

Flash Ventures, the Company’s business ventures with Toshiba, consists of three separate legal entities: Flash Partners Ltd., Flash Alliance Ltd. and Flash Forward Ltd. The Company has a 49.9% ownership interest in each of these entities and Toshiba owns 50.1% of each of these entities. Through these ventures, the Company and Toshiba have collaborated in the development and manufacture of NAND flash memory products which are manufactured by Toshiba at its wafer fabrication facility located in Yokkaichi, Japan, using semiconductor manufacturing equipment owned or leased by Flash Ventures. Flash Ventures purchases wafers from Toshiba at cost and then resells those wafers to the Company and Toshiba at cost plus a markup. The Company accounts for its 49.9% ownership position in each Flash Ventures entity under the equity method of accounting. The Company is committed to purchase its provided three-month forecast of Flash Ventures’ NAND wafer supply, which generally equals 50% of Flash Ventures’ output. The Company is not able to estimate its total wafer purchase commitment obligation beyond its rolling three-month purchase commitment because the price is determined by reference to the future cost of producing the semiconductor wafers. In addition, the Company is committed to fund 49.9% of Flash Ventures’ costs to the extent that Flash Ventures’ revenues from wafer sales to the Company and Toshiba are insufficient to cover these costs.

Flash Partners. Flash Partners Ltd. (“Flash Partners”) was formed in fiscal year 2004. NAND flash memory products provided to the Company by this venture are manufactured by Toshiba at its 300-millimeter wafer fabrication facility (“Fab 3”) located in Yokkaichi, Japan. As of December 30, 2012, the Company had notes receivable from Flash Partners of $180.3 million, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Partners with the note proceeds. The Company also has guarantee obligations to Flash Partners; see “Off-Balance Sheet Liabilities.” At December 30, 2012 and January 1, 2012, the Company had an equity investment in Flash Partners of $232.5 million and $258.2 million, respectively, denominated in Japanese yen, offset by $59.3 million and $85.8 million, respectively, of cumulative translation adjustments recorded in accumulated OCI. In the fiscal years ended December 30, 2012, January 1, 2012 and January 2, 2011, the Company recorded a basis adjustment of $3.0 million, $5.3 million and $10.4 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. Flash Alliance Ltd. (“Flash Alliance”) was formed in fiscal year 2006. NAND flash memory products provided to the Company by this venture are manufactured by Toshiba at its 300-millimeter wafer fabrication facility (“Fab 4”) located in Yokkaichi, Japan. As of December 30, 2012, the Company had notes receivable from Flash Alliance of $476.8 million, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Alliance with the note proceeds. The Company also has guarantee obligations to Flash Alliance; see “Off-Balance Sheet Liabilities.” At December 30, 2012 and January 1, 2012, the Company had an equity investment in Flash Alliance of $342.0 million and $368.5 million, respectively, denominated in Japanese yen, offset by $53.7 million and $92.6 million, respectively, of cumulative translation adjustments recorded in accumulated OCI. In the fiscal years ended December 30, 2012, January 1, 2012 and January 2, 2011, the Company recorded a basis adjustment of $15.2 million, $24.5 million and $5.9 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. Flash Forward Ltd. (“Flash Forward”) was formed in fiscal year 2010. NAND flash memory products provided to the Company by this venture are manufactured by Toshiba at its 300-millimeter wafer fabrication facility (“Fab 5”) located in Yokkaichi, Japan. Fab 5 is to be built in two phases. As of December 30, 2012, the Phase 1 build-out had been completed and was equipped to a portion of the potential equipment capacity. The Company had invested in 50% of that equipment. No commitment has yet been made for further Phase 1 capacity expansion beyond productivity improvements; however, the Company periodically reviews the timeline of further Phase 1 capacity expansion. Furthermore, no timelines have been finalized for the construction of Phase 2. If and when Phase 2 is built, the Company is committed to 50% of the initial ramp in Phase 2, similar to that in Phase 1. On completion of Phase 2, Fab 5 is expected to be of similar size to Toshiba’s Fab 4. The Company and Toshiba will each retain some flexibility as to the extent and timing of each party’s respective fab capacity ramps, and the output allocation will be in accordance with each party’s proportionate level of equipment funding.

As of December 30, 2012, the Company had notes receivable from Flash Forward of $162.8 million, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Forward with the note proceeds. The Company also has guarantee obligations to Flash Forward; see “Off-Balance Sheet Liabilities.” At December 30, 2012 and January 1, 2012, the Company had an equity investment in Flash Forward of $65.7 million and $19.5 million, respectively, denominated in Japanese yen, offset by ($3.7) million and $1.1 million, respectively, of cumulative translation adjustments recorded in accumulated OCI.

FlashVision. In the first quarter of fiscal year 2010, the wind-down was completed of FlashVision, a business venture with Toshiba in which the Company owned 49.9%. The Company recorded a gain of $4.1 million in the first quarter of fiscal year 2010 in other income (expense) related to the completion of this wind-down.

Research and Development Activities. The Company participates in common research and development activities with Toshiba but is not contractually committed to any minimum funding level.

Toshiba Foundry. The Company has the ability to purchase additional capacity under a foundry arrangement with Toshiba.

Business Ventures and Foundry Arrangement with Toshiba. Purchase orders placed under Flash Ventures and the foundry arrangement with Toshiba 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.

Other Silicon Sources. The Company’s contracts with its other sources of silicon wafers generally require the Company to provide monthly purchase order commitments based on non-binding nine month rolling forecasts. The purchase orders placed under these arrangements are generally binding and cannot be canceled. These outstanding purchase commitments for other sources of silicon wafers are included as part of the total “Noncancelable production purchase commitments” in the “Contractual Obligations” table.

Subcontractors. In the normal course of business, the Company’s subcontractors periodically procure production materials based on the forecast the Company provides to them. The Company’s agreements with these subcontractors require that the Company reimburse them for materials that are purchased on the Company’s behalf in accordance with such forecast. Accordingly, the Company may be committed to certain costs over and above its open noncancelable purchase orders with these subcontractors. These commitments for production materials to subcontractors are included as part of the total “Noncancelable production purchase commitments” in the “Contractual Obligations” table.

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 387.6 billion Japanese yen, or approximately $4.51 billion based upon the exchange rate at December 30, 2012. As of December 30, 2012, the total amount outstanding from these master leases was 159.2 billion Japanese yen, or approximately $1.85 billion based upon the exchange rate at December 30, 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 79.6 billion Japanese yen, or approximately $926 million based upon the exchange rate at December 30, 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 for some of the leases, the Company’s 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 December 30, 2012, Flash Ventures was in compliance with all of its master lease covenants. As of December 30, 2012, the Company’s R&I credit rating was BBB, two 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 guarantees 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 December 30, 2012.



Master Lease Agreements by Execution Date	Lease Type	Lease Amounts				Expiration
		(Yen in billions)		(Dollars in thousands)
Flash Partners
February 2008	Original	¥	1.3	$	15,451	2013
April 2010	Refinanced	1.5		17,136		2014
January 2011	Refinanced	2.5		29,464		2014
November 2011	Refinanced	6.7		77,482		2014
March 2012	Refinanced	4.2		48,900		2015
		16.2		188,433
Flash Alliance
November 2007	Original	3.2		37,177		2013
June 2008	Original	10.0		116,545		2013
March 2012	Original	8.5		99,144		2017
July 2012	Refinanced	16.0		185,800		2017
		37.7		438,666
Flash Forward
November 2011	Original	14.0		163,093		2016
March 2012	Original	8.5		99,021		2017
July 2012	Original	3.2		36,632		2017
		25.7		298,746
Total guarantee obligations		¥	79.6	$	925,845

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 December 30, 2012 in U.S. dollars based upon the yen/dollar exchange rate at December 30, 2012 (in thousands).



Annual Installments	Payment of Principal Amortization		Purchase Option Exercise Price at Final Lease Terms		Guarantee Amount
Year 1	$	190,936	$	134,491	$	325,427
Year 2	180,734		52,001		232,735
Year 3	126,746		21,136		147,882
Year 4	87,072		31,361		118,433
Year 5	36,973		64,395		101,368
Total guarantee obligations	$	622,461	$	303,384	$	925,845

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 December 30, 2012, 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 and 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 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 December 30, 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 infringe third-party patents. The Company has not made any indemnification payments under any such agreements. As of December 30, 2012, no amounts have been accrued in the accompanying 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 December 30, 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 December 30, 2012 are as follows (in thousands):



	Total			1 Year (Fiscal 2013)		2 –3 Years (Fiscal 2014 and 2015)		4 –5 Years (Fiscal 2016 and 2017)		More than 5 Years (Beyond Fiscal 2017)
Facility and other operating leases	$	14,499	⁽⁵⁾	$	6,157	$	7,283	$	1,059	$	—
Flash Partners⁽¹⁾	626,011		⁽⁵⁾⁽⁶⁾	228,648		262,966		107,433		26,964
Flash Alliance⁽¹⁾	1,160,953		⁽⁵⁾⁽⁶⁾	412,995		536,461		144,860		66,637
Flash Forward⁽¹⁾	693,304		⁽⁵⁾⁽⁶⁾	155,890		355,448		150,532		31,434
Toshiba research and development	68,051		⁽⁵⁾	38,051		30,000		—		—
Capital equipment purchase commitments	37,561			37,561		—		—		—
1% Convertible senior notes principal and interest⁽²⁾	932,701			932,701		—		—		—
1.5% Convertible senior notes principal and interest⁽³⁾	1,075,000			15,000		30,000		1,030,000		—
Operating expense commitments	53,061			50,161		2,900		—		—
Noncancelable production purchase commitments⁽⁴⁾	294,526		⁽⁵⁾	294,526		—		—		—
Total contractual cash obligations	$	4,955,667		$	2,171,690	$	1,225,058	$	1,433,884	$	125,035

————


⁽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 December 30, 2012.


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

The Company has excluded $208.6 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 December 30, 2012. The Company is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.

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



	December 30, 2012
Guarantee of Flash Ventures equipment leases ⁽¹⁾	$	925,845

————


⁽¹⁾	The Company’s guarantee obligation, net of cumulative lease payments, was 79.6 billion Japanese yen, or approximately $926 million based upon the exchange rate at December 30, 2012.

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 2013 through fiscal year 2017. Future minimum lease payments are presented below (in thousands):



	December 30, 2012
Fiscal year:
2013	$	6,672
2014	4,600
2015	3,788
2016	1,200
2017	5
	16,265
Sublease income to be received in the future under noncancelable subleases	(1,766		)
Net operating leases	$	14,499

Net rent expense was as follows (in thousands):



	Fiscal years ended
	December 30, 2012		January 1, 2012		January 2, 2011
Rent expense, net	$	6,366	$	7,926	$	7,522

On January 31, 2012, the Company purchased for $87.5 million five adjacent buildings in Milpitas, California; three of which were previously leased by the Company. 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.