Commitments, Contingencies and Guarantees

Flash Ventures

Flash Ventures, the Company’s business ventures with Toshiba Corporation (“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 March 31, 2013, the Company had notes receivable from Flash Partners of $164.7 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 March 31, 2013 and December 30, 2012, the Company had an equity investment in Flash Partners of $213.0 million and $232.5 million, respectively, denominated in Japanese yen, offset by $39.3 million and $59.3 million, respectively, of cumulative translation adjustments recorded in AOCI. In the three months ended March 31, 2013 and April 1, 2012, the Company recorded a basis adjustment of $0.3 million and $1.3 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 March 31, 2013, the Company had notes receivable from Flash Alliance of $382.5 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 March 31, 2013 and December 30, 2012, the Company had an equity investment in Flash Alliance of $315.5 million and $342.0 million, respectively, denominated in Japanese yen, offset by $24.1 million and $53.7 million, respectively, of cumulative translation adjustments recorded in AOCI. In the three months ended March 31, 2013 and April 1, 2012, the Company recorded a basis adjustment of $2.9 million and $4.0 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 March 31, 2013, 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 March 31, 2013, the Company had notes receivable from Flash Forward of $148.8 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 March 31, 2013 and December 30, 2012, the Company had an equity investment in Flash Forward of $61.6 million and $65.7 million, respectively, denominated in Japanese yen, offset by ($9.4) million and ($3.7) million, respectively, of cumulative translation adjustments recorded in AOCI.

Toshiba Foundry. In the first quarter of fiscal year 2013, the Company concluded its foundry arrangement with Toshiba.

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.

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 262.6 billion Japanese yen, or approximately $2.79 billion based upon the exchange rate at March 31, 2013. As of March 31, 2013, the total amount outstanding from these master leases was 139.9 billion Japanese yen, or approximately $1.49 billion based upon the exchange rate at March 31, 2013, 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 69.9 billion Japanese yen, or approximately $743 million based upon the exchange rate at March 31, 2013.

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 March 31, 2013, Flash Ventures was in compliance with all of its master lease covenants. As of March 31, 2013, 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 March 31, 2013.



Master Lease Agreements by Execution Date	Lease Type	Lease Amounts				Expiration
		(Yen in billions)		(Dollars in thousands)
Flash Partners
April 2010	Refinanced	¥	1.3	$	14,320	2014
January 2011	Refinanced	6.1		64,984		2014
November 2011	Refinanced	2.2		23,111		2014
March 2012	Refinanced	3.9		41,077		2015
		13.5		143,492
Flash Alliance
June 2008	Original	9.1		96,867		2013
March 2012	Original	8.0		85,367		2017
July 2012	Refinanced	15.2		160,736		2017
		32.3		342,970
Flash Forward
November 2011	Original	13.1		139,886		2016
March 2012	Original	8.0		85,217		2017
July 2012	Original	3.0		31,612		2017
		24.1		256,715
Total guarantee obligations		¥	69.9	$	743,177

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 March 31, 2013 in U.S. dollars based upon the yen/dollar exchange rate at March 31, 2013 (in thousands).



Annual Installments	Payment of Principal Amortization		Purchase Option Exercise Price at Final Lease Terms		Guarantee Amount
Year 1	$	154,103	$	88,197	$	242,300
Year 2	155,389		49,040		204,429
Year 3	105,202		12,152		117,354
Year 4	72,340		61,233		133,573
Year 5	19,261		26,260		45,521
Total guarantee obligations	$	506,295	$	236,882	$	743,177

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 March 31, 2013, 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 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 March 31, 2013 or December 30, 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 March 31, 2013, 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 March 31, 2013, 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 March 31, 2013 are as follows (in thousands):



	Total			1 Year or Less (Remaining 9 months in 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	$	12,257	⁽⁵⁾	$	3,911	$	7,277	$	1,069	$	—
Flash Partners⁽¹⁾	527,765		⁽⁵⁾⁽⁶⁾	149,550		247,403		103,328		27,484
Flash Alliance⁽¹⁾	1,547,797		⁽⁵⁾⁽⁶⁾	286,035		843,078		302,913		115,771
Flash Forward⁽¹⁾	612,374		⁽⁵⁾⁽⁶⁾	179,225		265,307		140,319		27,523
Toshiba research and development	84,851		⁽⁵⁾	54,851		30,000		—		—
Capital equipment purchase commitments	55,189			55,029		127		33		—
1% Convertible senior notes principal and interest⁽²⁾	932,701			932,701		—		—		—
1.5% Convertible senior notes principal and interest⁽³⁾	1,067,500			7,500		30,000		1,030,000		—
Operating expense commitments	63,247			59,542		3,705		—		—
Noncancelable production purchase commitments⁽⁴⁾	261,325		⁽⁵⁾	261,325		—		—		—
Total contractual cash obligations	$	5,165,006		$	1,989,669	$	1,426,897	$	1,577,662	$	170,778

————


⁽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 March 31, 2013.


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

The Company has excluded $204.5 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 March 31, 2013. 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):



	March 31, 2013
Guarantee of Flash Ventures equipment leases ⁽¹⁾	$	743,177

————


⁽¹⁾	The Company’s guarantee obligation, net of cumulative lease payments, was 69.9 billion Japanese yen, or approximately $743 million based upon the exchange rate at March 31, 2013.

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):



	March 31, 2013
Fiscal year:
2013 (remaining nine months)	$	4,299
2014	4,593
2015	3,789
2016	1,211
2017	4
	13,896
Sublease income to be received in the future under noncancelable subleases	(1,639		)
Net operating leases	$	12,257

Net rent expense was as follows (in thousands):



	Three months ended
	March 31, 2013		April 1, 2012
Rent expense, net	$	1,843	$	1,113