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. The Flash Ventures purchase wafers from Toshiba at cost and then resell 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’ revenue 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 29, 2013, the Company had notes receivable from Flash Partners of $100.1 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 29, 2013 and December 30, 2012, the Company had an equity investment in Flash Partners of $190.7 million and $232.5 million, respectively, denominated in Japanese yen, offset by $17.3 million and $59.3 million, respectively, of cumulative translation adjustments recorded in AOCI. In the fiscal years ended December 29, 2013, December 30, 2012 and January 1, 2012, the Company recorded a basis adjustment of $1.2 million, $3.0 million and $5.3 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 Partners’ share of the Fab 3 fabrication facility is fully equipped.

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 29, 2013, the Company had notes receivable from Flash Alliance of $324.0 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 29, 2013 and December 30, 2012, the Company had an equity investment in Flash Alliance of $284.0 million and $342.0 million, respectively, denominated in Japanese yen, offset by ($8.7) million and $53.7 million, respectively, of cumulative translation adjustments recorded in AOCI. In the fiscal years ended December 29, 2013, December 30, 2012 and January 1, 2012, the Company recorded a basis adjustment of $6.5 million, $15.2 million and $24.5 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 Alliance’s share of the Fab 4 fabrication facility is fully equipped.

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 29, 2013, over half of the Phase 1 building has been equipped with wafer capacity or equipment required to enable technology transition of the Flash Ventures’ wafer capacity. The Company regularly seeks to enhance wafer output through productivity improvements. In addition to what it may obtain through these improvements, the Company is currently evaluating the timing of a limited increase in wafer capacity in Flash Forward in fiscal year 2014. The Company and Toshiba each retain some flexibility as to the extent and timing of each party’s respective fab capacity ramps. Construction of the Phase 2 shell of the Fab 5 wafer fabrication facility is underway with expected completion in mid-2014. The Phase 2 shell is currently intended to be used primarily for technology transition of the existing Flash Ventures wafer capacity to 1Y‑nanometer and 1Z‑nanometer technology nodes and for a 3‑dimensional NAND (“3D NAND”) pilot line.

As of December 29, 2013, the Company had notes receivable from Flash Forward of $169.1 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 29, 2013 and December 30, 2012, the Company had an equity investment in Flash Forward of $66.7 million and $65.7 million, respectively, denominated in Japanese yen, offset by ($16.2) million and ($3.7) million, respectively, of cumulative translation adjustments recorded in AOCI.

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.

Other Arrangements and Activities

Research and Development Activities. The Company participates in common R&D activities with Toshiba and is contractually committed to a minimum funding level.

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

Other Silicon Sources. The Company’s contracts with its other sources of silicon wafers generally require the Company to provide monthly purchase order commitments. 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. The Flash Ventures sell and lease back from a consortium of financial institutions (“lessors”) a portion of their tools and have entered into equipment master lease agreements totaling 162.6 billion Japanese yen, or approximately $1.55 billion based upon the exchange rate at December 29, 2013. As of December 29, 2013, the total amount outstanding from these master leases was 103.2 billion Japanese yen, or approximately $983 million based upon the exchange rate at December 29, 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 51.6 billion Japanese yen, or approximately $492 million based upon the exchange rate at December 29, 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. As of December 29, 2013, Flash Ventures was in compliance with all of its master lease covenants, including the shareholder equity covenant with our stockholders’ equity at $6.97 billion as of December 29, 2013. If 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 (in billions) and U.S. dollar (in thousands) equivalent based upon the exchange rate at December 29, 2013.



Master Lease Agreements by Execution Date	Lease Type	Lease Amounts				Expiration
		(Japanese yen)		(U.S. dollar)
Flash Partners
April 2010	Refinanced	¥	1.0	$	9,675	2014
January 2011	Refinanced	1.7		15,768		2014
November 2011	Refinanced	4.5		42,640		2014
March 2012	Refinanced	3.2		30,917		2015
		10.4		99,000
Flash Alliance
March 2012	Original	7.1		67,633		2017
July 2012	Refinanced	13.4		127,945		2017
		20.5		195,578
Flash Forward
November 2011	Original	11.1		105,320		2016
March 2012	Original	7.0		66,470		2017
July 2012	Original	2.6		25,189		2017
		20.7		196,979
Total guarantee obligations		¥	51.6	$	491,557

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 29, 2013 in U.S. dollars based upon the yen/dollar exchange rate at December 29, 2013 (in thousands).



Annual Installments	Payment of Principal Amortization		Purchase Option Exercise Price at Final Lease Terms		Guarantee Amount
Year 1	$	148,038	$	42,233	$	190,271
Year 2	103,858		17,319		121,177
Year 3	71,348		11,748		83,096
Year 4	28,696		66,716		95,412
Year 5	1,601		—		1,601
Total guarantee obligations	$	353,541	$	138,016	$	491,557

Guarantees

Indemnification Agreements. The Company has agreed to indemnify suppliers and customers for alleged intellectual property 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 29, 2013, 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 29, 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 December 29, 2013, 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 29, 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 December 29, 2013 are as follows (in thousands):



	Total			1 Year (Fiscal 2014)		2 – 3 Years (Fiscal 2015 and 2016)		4 – 5 Years (Fiscal 2017 and 2018)		More than 5 Years (Beyond Fiscal 2018)
Facility and other operating leases	$	17,230	⁽⁵⁾	$	7,177	$	8,067	$	1,909	$	77
Flash Partners⁽¹⁾	378,021		⁽⁵⁾⁽⁶⁾	147,448		160,581		66,670		3,322
Flash Alliance⁽¹⁾	1,616,360		⁽⁵⁾⁽⁶⁾	683,292		583,158		313,211		36,699
Flash Forward⁽¹⁾	894,567		⁽⁵⁾⁽⁶⁾	391,188		321,920		157,504		23,955
Toshiba research and development	54,042		⁽⁵⁾	39,042		15,000		—		—
Capital equipment purchase commitments	29,980			21,790		8,187		3		—
1.5% Convertible senior notes principal and interest⁽²⁾	1,060,000			15,000		30,000		1,015,000		—
0.5% Convertible senior notes principal and interest ⁽³⁾	1,552,250			7,250		15,000		15,000		1,515,000
Operating expense commitments	32,659			30,340		2,319		—		—
Noncancelable production purchase commitments ⁽⁴⁾	233,976		⁽⁵⁾	233,976		—		—		—
Total contractual cash obligations	$	5,869,085		$	1,576,503	$	1,144,232	$	1,569,297	$	1,579,053


⁽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 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.


⁽³⁾	In October 2013, the Company issued and sold $1.5 billion in aggregate principal amount of 0.5% Notes due 2020. The Company will pay cash interest on the outstanding notes at an annual rate of 0.5%, payable semi-annually on April 15 and October 15 of each year until October 15, 2020.


⁽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 29, 2013.


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

The Company has excluded $205.3 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 29, 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):



	December 29, 2013
Guarantee of Flash Ventures equipment leases ⁽¹⁾	$	491,557


⁽¹⁾	The Company’s guarantee obligation, net of cumulative lease payments, was 51.6 billion Japanese yen, or approximately $492 million based upon the exchange rate at December 29, 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 2014 through fiscal year 2019. Future minimum lease payments are presented below (in thousands):



	Future minimum lease payments
Fiscal year:
2014	$	7,717
2015	6,083
2016	2,695
2017	1,370
2018	539
2019	77
	18,481
Sublease income to be received in the future under noncancelable subleases	(1,251		)
Net operating leases	$	17,230

Net rent expense was as follows (in thousands):



	Fiscal years ended
	December 29, 2013		December 30, 2012		January 1, 2012
Rent expense, net	$	6,473	$	6,366	$	7,926