| SANDISK CORP ITEM 1A RISK FACTORS Our operating results may fluctuate significantly, which may adversely affect our operations and our stock price |
| Our quarterly and annual operating results have fluctuated significantly in the past and we expect that they will continue to fluctuate in the future |
| This fluctuation could result from a variety of factors, including, among others, the following: • decline in the average selling prices, net of promotions, for our products due to strategic price reductions initiated by us or our competitors, excess supply and competitive pricing pressures; • addition of new competitors, expansion of supply from existing competitors or cancellation of orders creating excess market supply, which could cause our average selling prices to decline faster than our costs decline; • timing, volume and cost of wafer production from the FlashVision and Flash Partners ventures as impacted by fab start-up delays and costs, technology transitions, yields or production interruptions due to natural disasters, power outages, equipment failure or other factors; • unpredictable or changing demand for our products, particularly demand for certain types or capacities of our products or demand for our products in certain markets or geographies; • insufficient supply from captive and non-captive sources or insufficient capacity from our test and assembly sub-contractors to meet demand; 13 _________________________________________________________________ [68]Table of Contents • continued development of new markets and products for NAND flash memory and acceptance of our products in these markets; • our license and royalty revenues may decline significantly in the future as our existing license agreements and key patents expire; • timing of sell through by our distributors and retail customers; • increased purchases of flash memory products from our non-captive sources, which typically have higher costs than our captive sources; • difficulty in forecasting and managing inventory levels; particularly, building a large inventory of unsold product due to noncancelable contractual obligations to purchase materials such as flash memory, controllers, printed circuit boards and discrete components; • write-downs of our investments in fabrication capacity, equity investments and other assets; • expensing of share-based compensation; • adverse changes in product and customer mix; • terrorist attacks, governmental responses to those attacks and natural disasters; • changes in general economic conditions; and • the factors listed elsewhere under “Risk Factors |
| ” Sales to a small number of customers represent a significant portion of our revenues and, if we were to lose one of our major licensees or customers or experience any material reduction in orders from any of our customers, our revenues and operating results would suffer |
| Sales to our top 10 customers and licensees accounted for more than 50prca, 55prca and 48prca of our total revenues during the fiscal years of 2005, 2004 and 2003, respectively |
| If we were to lose one of our major licensees or customers or experience any material reduction in orders from any of our customers or in sales of licensed products by our licensees, our revenues and operating results would suffer |
| Additionally, our license and royalty revenues may decline significantly in the future as our existing license agreements expire |
| Our sales are generally made by standard purchase orders rather than long-term contracts |
| Accordingly, our customers may generally terminate or reduce their purchases from us at any time without notice or penalty |
| In addition, the composition of our major customer base changes from year-to-year as we enter new markets |
| Our business depends significantly upon sales of products in the highly competitive consumer market, a significant portion of which are made to retailers and through distributors, and if our distributors and retailers are not successful in this market, we could experience substantial product returns, which would negatively impact our business, financial condition and results of operations |
| A significant portion of our sales are made through retailers, either directly or through distributors |
| Sales through these channels typically include rights to return unsold inventory and protection against price declines |
| As a result, we do not recognize revenue until after the product has been sold through to the end user, in the case of sales to retailers, or to our distributors’ customers, in the case of sales to distributors |
| If our distributors and retailers are not successful in this market, we could experience substantial product returns or price protection claims, which would harm our business, financial condition and results of operations |
| Availability of sell-through data varies throughout the retail channel, which makes it difficult for us to determine actual retail product revenues until after the end of each of our fiscal quarters |
| Our arrangements with our customers also provide them price protection against declines in our recommended selling prices, which has the effect of reducing our deferred revenue and eventually revenue |
| Except in limited circumstances, we do not have exclusive relationships with our retailers or distributors and therefore must rely on them to effectively sell our products over those of our competitors |
| Our average selling prices, net of promotions, may decline due to excess supply, competitive pricing pressures and strategic price reductions initiated by us or our competitors |
| The market for NAND flash products is competitive and characterized by rapid price declines |
| Price declines may be influenced by, among other factors, strategic price decreases by us or our competitors such as that implemented by us in the first quarter of 2006, supply 14 _________________________________________________________________ [69]Table of Contents in excess of demand from existing or new competitors, technology transitions, including adoption of multi-level cell, or MLC, by other competitors, new technologies or other strategic actions by competitors to gain market share |
| If our technology transitions and cost reductions fail to keep pace with the rate of price decline or our price decreases fail to generate sufficient additional demand, our gross margin and operating results will be negatively impacted |
| Our revenue depends in part on the success of products sold by our OEM customers |
| Our sales to these customers are dependent upon the OEM choosing our products over those of our competitors and on the OEM’s ability to create, introduce, market and sell these products successfully in its respective markets |
| Should our OEM customers be unsuccessful in selling their current or future products that include our product, or should they decide to discontinue bundling our products, our results of operation and financial condition could be harmed |
| The continued growth of our business depends on the development of new markets and products for NAND flash memory |
| This market continues to experience slower growth rates for our products and continues to represent a declining percentage of our total revenue and therefore, our growth will be increasingly dependent on the development of new markets and new products for NAND flash memory |
| Furthermore, in 2005, our revenue from the digital camera market grew by only 4prca over the prior year, and it is possible that our revenue from this market could decline in future years |
| Newer markets for flash memory include USB drives, handsets, gaming and digital audio players |
| There can be no assurance that new markets and products will develop and grow fast enough, or that new markets will adopt NAND flash technologies or our products, to enable us to continue our growth |
| We continually seek to develop new applications, products, technologies and standards, which may not be widely adopted by consumers or, if adopted, may reduce demand by consumers for our older products |
| We continually seek to develop new applications, products and standards and enhance existing products and standards with higher memory capacities and other enhanced features |
| New applications, such as the adoption of flash memory cards in mobile handsets, can take several years to develop |
| Early successes in working with handset manufacturers to add card slots to their mobile phones does not guarantee that consumers will adopt memory cards used for storing songs, images and other content |
| Our new products may not gain market acceptance and we may not be successful in penetrating the new markets that we target, such as handsets, digital audio players or pre-recorded flash memory cards |
| As we introduce new standards or technologies, such as TrustedFlash, it can take time for these new standards or technologies to be adopted, for consumers to accept and transition to these new standards or technologies and for significant sales to be generated from them, if this happens at all |
| Moreover, broad acceptance of new standards, technologies or products by consumers may reduce demand for our older products |
| For example, the digital still camera market is shifting away from use of CompactFlash memory cards to other form factors, such as SD cards |
| If this decreased demand is not offset by increased demand for our other form factors or our new products, our results of operations could be harmed |
| Any new applications, products, technologies or standards we develop may not be commercially successful |
| We face competition from numerous manufacturers and marketers of products using flash memory, as well as from manufacturers of new and alternative technologies, and if we cannot compete effectively, our results of operations and financial condition will suffer |
| Our competitors include many large domestic and international companies that have greater access to advanced wafer manufacturing capacity and substantially greater financial, technical, marketing and other resources than we do, which allows them to produce flash memory chips in high volumes at low costs and to sell these flash memory chips themselves or to our flash card competitors at a low cost |
| Some of our competitors may sell their flash memory chips at or below their true manufacturing costs to gain market share and to cover their fixed costs |
| Such practices have been common in the DRAM industry during periods of excess supply, and have resulted in substantial losses in the DRAM industry |
| In addition, many semiconductor companies have begun to bring up substantial new capacity of flash memory, including MLC flash memory |
| For example, Samsung began shipping its first MLC chips in the third quarter of 2005 and further ramped its MLC output in the fourth quarter of 2005 |
| In addition, Hynix is aggressively ramping NAND output and IM Flash is expected to produce significant NAND output in the future |
| If the combined total new flash memory capacity exceeds the corresponding growth in demand, prices may decline dramatically, adversely impacting our results of 15 _________________________________________________________________ [70]Table of Contents operations and financial condition |
| In addition, current and future competitors produce or could produce alternative flash memory technologies that compete against our NAND flash memory technology |
| Our primary semiconductor competitors continue to include our historical competitors Renesas, Samsung and Toshiba |
| New competitors include Hynix, Infineon, Micron and STMicro, which began shipping NAND or NAND-competitive memory in 2004 |
| If any of these competitors increase their memory output, as Hynix recently has, it will likely result in a decline in the prevailing prices for packaged NAND semiconductor components |
| We compete with flash memory card manufacturers and resellers |
| These companies purchase, or have a captive supply of, flash memory components and assemble memory cards |
| These companies include, among others, Dane-Elec, Delkin, Fuji, Hagiwara, Hama, I/O Data, Infineon, Jessops PLC, KingMax, Kingston, Lexar, M-Systems, Matsushita Battery Industrial Co, Ltd, Matsushita, Micron, Memorex, Panasonic, PNY, PQI Corp, Pretec Electronics, Renesas, Samsung, Sharp, Sony, Toshiba and Viking Components |
| Some of our competitors have substantially greater resources than we do, have well recognized brand names or have the ability to operate their business on lower margins than we do |
| The success of our competitors may adversely affect our future sales revenues and may result in the loss of our key customers |
| For example, Samsung, with significant manufacturing capacity, brand recognition and access to broad distribution channels, provides competing flash cards, such as the MMC micro^tm that competes directly with our microSD mobile card |
| Lexar markets a line of flash cards bearing the Kodak brand name, which competes with our flash memory cards |
| Our handset card products also face competition from embedded solutions from competitors including Intel, M-Systems and Samsung |
| Our digital audio players face competition from similar products offered by other companies, including Apple, Creative, iriver and Samsung |
| Our USB flash drives face competition from Lexar, Memorex, M-Systems and PNY, among others |
| If our products cannot compete effectively, our market share and profitability will be adversely impacted |
| Furthermore, many companies are pursuing new or alternative technologies, such as nanotechnologies or microdrives, which may compete with flash memory |
| These new or alternative technologies may provide smaller size, higher capacity, reduced costs, lower power consumption or other advantages |
| If we cannot compete effectively, our results of operations and financial condition will suffer |
| We have patent cross-license agreements with several of our leading competitors |
| Under these agreements, we have enabled competitors to manufacture and sell products that incorporate technology covered by our patents |
| If we continue to license our patents to our competitors, competition may increase and may harm our business, financial condition and results of operations |
| We believe that our ability to compete successfully depends on a number of factors, including: • price, quality and on-time delivery to our customers; • product performance, availability and differentiation; • success in developing new applications and new market segments; • sufficient availability of supply; • efficiency of production; • timing of new product announcements or introductions by us, our customers and our competitors; • the ability of our competitors to incorporate standards or develop formats which we do not offer; • the number and nature of our competitors in a given market; • successful protection of intellectual property rights; and • general market and economic conditions |
| We may not be able to successfully compete in the marketplace |
| The semiconductor industry is subject to significant downturns that have harmed our business, financial condition and results of operations in the past and may do so in the future |
| The semiconductor industry is highly 16 _________________________________________________________________ [71]Table of Contents cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price declines, evolving standards, short product life cycles and wide fluctuations in product supply and demand |
| The industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles of both semiconductor companies’ and their customers’ products and declines in general economic conditions |
| These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated declines in selling prices |
| We have experienced these conditions in our business in the past and may experience such downturns in the future |
| Our business and the markets we address are subject to significant fluctuations in supply and demand and our commitments to our ventures with Toshiba may result in losses |
| Through our ramp in Flash Partners, we expect our 2006 captive memory supply to increase by a higher percentage than our flash memory supply increased in either of the last two years |
| Our obligation to purchase 50prca of the output from FlashVision and Flash Partners could harm our business and results of operations if our committed supply exceeds demand for our products |
| The adverse effects could include, among other things, significant decreases in our product prices, significant excess, obsolete or lower of cost or market inventory write-downs and the impairment of our investments in the ventures with Toshiba |
| Any future excess supply could have a material adverse effect on our business, financial condition and results of operations |
| We depend on third-party foundries for silicon supply and any shortage or disruption in our supply from these sources will reduce our revenues, earnings and gross margins |
| All of our flash memory card products require silicon supply for the memory and controller components |
| The substantial majority of our flash memory is currently supplied by our ventures with Toshiba and by Toshiba pursuant to our foundry agreement, and to a lesser extent by Renesas and Samsung |
| Any disruption in supply of flash memory from our captive or non-captive sources would harm our operating results |
| For example, we intend to increase production at Fab 3 and we also procure wafers from non-captive sources |
| If Fab 3 production ramp does not increase as anticipated or our non-captive sources fail to supply wafers in the amounts and at the times we expect, we may not have sufficient supply to meet demand and our operating results will be harmed |
| Currently, our controller wafers are only manufactured by Tower and UMC, and some of these controllers are sole-sourced at either UMC or Tower |
| Any disruption in the manufacturing operations of Tower or UMC would result in delivery delays, would adversely affect our ability to make timely shipments of our products and would harm our operating results until we could qualify an alternate source of supply for our controller wafers, which could take three or more quarters to complete |
| In times of significant growth in global demand for flash memory, demand from our customers may outstrip the supply of flash memory and controllers available to us from our current sources |
| If our silicon vendors are unable to satisfy our requirements on competitive terms or at all due to lack of capacity, technological difficulties, natural disaster, financial difficulty, power failure, labor unrest, their refusal to do business with us, their relationships with our competitors or other causes, we may lose potential sales and our business, financial condition and operating results may suffer |
| In addition, these risks are magnified at Toshiba’s Yokkaichi operations, where the ventures are operated and Toshiba’s foundry capacity is located |
| For example, earthquakes, as well as unrelated power outages, have resulted in production line stoppage and loss of wafers in Yokkaichi and similar stoppages and losses may occur in the future |
| Also, the Tower fabrication facility, from which we source controller wafers, is facing financial challenges and is located in Israel, an area of political turmoil |
| Any disruption or delay in supply from our silicon sources could significantly harm our business, financial condition and results of operations |
| Our actual manufacturing yields may be lower than our expectations resulting in increased costs and product shortages |
| The fabrication of our products requires wafers to be produced in a highly controlled and ultra clean environment |
| Semiconductor manufacturing yields and product reliability are a function of both design technology and manufacturing process technology and production delays may be caused by equipment malfunctions, fabrication facility accidents or human errors |
| Yield problems may not be identified or improved until an actual product is made and can be tested |
| We have from time to time experienced yields which have adversely affected our business and results of operations |
| We have experienced adverse yields on more than one occasion when we have transitioned to new generations of products |
| If actual yields are low, we will experience higher costs and reduced product supply, which could harm our business, financial condition and results of operations |
| For example, if the production ramp and/or yield of the 70-nanometer, 300-millimeter Flash Partners wafers does not increase as expected, we may not 17 _________________________________________________________________ [72]Table of Contents have enough supply to meet demand and our cost competitiveness, business, financial condition and results of operations will be harmed |
| We depend on our third-party subcontractors and our business could be harmed if our subcontractors do not perform as planned |
| We rely on third-party subcontractors for our wafer testing, IC assembly, packaged testing, product assembly, product testing and order fulfillment |
| From time to time, our subcontractors have experienced difficulty in meeting our requirements |
| If we are unable to increase the capacity of our current sub-contractors or qualify and engage additional sub-contractors, we may not be able to meet demand for our products |
| We do not have long-term contracts with our existing subcontractors nor do we expect to have long-term contracts with any new subcontract suppliers |
| We do not have exclusive relationships with any of our subcontractors and therefore cannot guarantee that they will devote sufficient resources to manufacturing our products |
| We cannot, and will not, be able to directly control product delivery schedules |
| Furthermore, we manufacture on a turnkey basis with some of our subcontract suppliers |
| In these arrangements we do not have visibility and control of their inventories of purchased parts necessary to build our products or of the progress of our products through their assembly line |
| Any significant problems that occur at our subcontractors, or their failure to perform at the level we expect, could lead to product shortages or quality assurance problems, either of which would have adverse effects on our operating results |
| In transitioning to new processes, products and silicon sources, we face production and market acceptance risks that have caused, and may in the future cause significant product delays that could harm our business |
| Successive generations of our products have incorporated semiconductors with greater memory capacity per chip |
| The transition to new generations of products, such as the 70-nanometer 8 gigabit MLC chip which we began shipping in the third quarter of 2005, is highly complex and requires new controllers, new test procedures and modifications of numerous aspects of manufacturing, as well as extensive qualification of the new products by both us and our OEM customers |
| In addition, procurement of MLC wafers from non-captive sources requires us to develop new controller technology and may result in inadequate quality or performance in our products that integrate these MLC components |
| Any material delay in a development or qualification schedule could delay deliveries and adversely impact our operating results |
| We periodically have experienced significant delays in the development and volume production ramp-up of our products |
| Similar delays could occur in the future and could harm our business, financial condition and results of operations |
| Our products may contain errors or defects, which could result in the rejection of our products, product recalls, damage to our reputation, lost revenues, diverted development resources and increased service costs and warranty claims and litigation |
| Our products are complex, must meet stringent user requirements, may contain errors or defects and the majority of our products are warrantied for one to five years |
| Errors or defects in our products may be caused by, among other things, errors or defects in the memory or controller components, including components we procure from non-captive sources such as the MLC products we procure from a third-party supplier |
| These factors could result in the rejection of our products, damage to our reputation, lost revenues, diverted development resources, increased customer service and support costs and warranty claims and litigation |
| We record an allowance for warranty and similar costs in connection with sales of our product, but actual warranty and similar costs may be significantly higher than our recorded estimate and result in an adverse effect on our results of operations and financial condition |
| Our new products have from time to time been introduced with design and production errors at a rate higher than the error rate in our established products |
| We must estimate warranty and similar costs for new products without historical information and actual costs may significantly exceed our recorded estimates |
| Underestimation of our warranty and similar costs would have an adverse effect on our results of operations and financial condition |
| We and Toshiba plan to continue to expand the wafer fabrication capacity of the Flash Partners business venture and as we do so, we will make substantial capital investments and incur substantial start-up and tool relocation costs, which could adversely impact our operating results |
| We and Toshiba are making, and plan to continue to make, substantial investments in new capital assets to expand the wafer fabrication capacity of our Flash Partners business venture in Japan |
| We and Toshiba recently announced our intention to accelerate expansion at Fab 3 to bring wafer capacity to 70cmam000 wafers per month by March 2007 and in addition, we and Toshiba are considering a potential new advanced NAND Fab beyond Fab 3 |
| Each time that we and Toshiba add substantial new wafer fabrication capacity, we will experience significant initial design and development and start-up costs as a 18 _________________________________________________________________ [73]Table of Contents result of the delay between the time of the investment and the time qualified products are manufactured and sold in volume quantities |
| For several quarters, we will incur initial design and development costs and start-up costs and pay our share of ongoing operating activities even if we do not achieve the planned output volume or utilize our full share of the expanded output, and these costs will impact our gross margins, results of operations and financial condition |
| There is no assurance that Flash Partners’ 300-millimeter NAND flash memory facility will perform as expected |
| We believe that our future success will continue to depend on the development and introduction of new generations of flash memory wafers, such as the 300-millimeter wafers produced by Flash Partners |
| These wafers are substantially larger in surface area and therefore more susceptible to new technological and manufacturing issues, such as mechanical and thermal stresses, than 200-millimeter wafers that we use in production at Yokkaichi Fabs 1 and 2 |
| We have limited experience in operating a wafer manufacturing line and we rely on Toshiba’s capability to operate and manage the Yokkaichi facilities |
| Toshiba does not have prior experience in manufacturing 300-millimeter advanced NAND designs, nor in operating a new equipment set that has to be optimized to process 300-millimeter NAND wafers with competitive yields |
| Flash Partners’ facility may not perform as expected or ramp to volume production on time, and the cost to equip the facility may be significantly more than planned |
| Samsung, the world’s largest NAND flash memory manufacturer, already has experience manufacturing 300-millimeter wafers with 90- and 70-nanometer feature sizes |
| Also, Samsung is licensed under our patents to use MLC technology, which further enhances its manufacturing capabilities, and began shipping NAND/MLC products in the third quarter of 2005 |
| Samsung may be able to produce product at a lower cost than we can and increase their market share, thus adversely affecting our operating results and financial condition |
| We have a contingent indemnification obligation for certain liabilities Toshiba incurs as a result of Toshiba’s guarantee of the FlashVision equipment lease arrangement and have environmental and intellectual property indemnification as well as guarantee obligations with respect to Flash Partners |
| Toshiba has guaranteed FlashVision’s lease arrangement with third-party lessors |
| The total minimum remaining lease payments as of January 1, 2006 were 17dtta7 billion Japanese yen, or approximately dlra150 million based upon the exchange rate at January 1, 2006 |
| If Toshiba makes payments under its guarantee, we have agreed to indemnify Toshiba for 49dtta9prca of its costs |
| In December 2004, Flash Partners entered into an equipment lease facility of 50dtta0 billion Japanese yen, or approximately dlra424 million based upon the exchange rate at January 1, 2006, which, as of January 1, 2006, had been drawn down in its entirety |
| As of January 1, 2006, our cumulative guarantee under this equipment lease, net of cumulative lease payments was approximately 24dtta0 billion Japanese yen, or approximately dlra203 million based on the exchange rate at January 1, 2006 |
| In December 2005, Flash Partners secured an additional equipment lease facility of 35dtta0 billion Japanese yen, or approximately dlra296 million based upon the exchange rate at January 1, 2006 |
| Flash Partners had not drawn under this equipment lease facility at the end of fiscal 2005; however, the entire amount was drawn down in January 2006 |
| We and Toshiba each guaranteed, on a several basis, 50prca of Flash Partners’ obligation under this master lease |
| We and Toshiba have also agreed to mutually contribute to, and indemnify each other and Flash Partners for, environmental remediation costs or liability resulting from Flash Partners’ manufacturing operations in certain circumstances |
| In addition, we and Toshiba entered into a Patent Indemnification Agreement under which in many cases we will share in the expenses associated with the defense and cost of settlement associated with such claims |
| This agreement provides limited protection for us against third-party claims that NAND flash memory products manufactured and sold by Flash Partners infringe third-party patents |
| None of the foregoing obligations are reflected as liabilities on our consolidated balance sheets |
| If we have to perform our obligations under these agreements, our business will be harmed and our financial condition and results of operations will be adversely affected |
| Seasonality in our business may result in our inability to accurately forecast our product purchase requirements |
| Sales of our products in the consumer electronics market are subject to seasonality |
| For example, sales have typically increased significantly in the fourth quarter of each year, sometimes followed by declines in the first quarter of the following year |
| This seasonality increases the complexity of forecasting our business |
| If our forecasts are inaccurate, we can lose market share or procure excess inventory or inappropriately increase or decrease our 19 _________________________________________________________________ [74]Table of Contents operating expenses, any of which could harm our business, financial condition and results of operations |
| This seasonality also may lead to higher volatility in our stock price, the need for significant working capital investments in receivables and inventory and our need to build up inventory levels in advance of our most active selling seasons |
| From time to time, we overestimate our requirements and build excess inventories, and underestimate our requirements and have a shortage of supply, both of which harm our financial results |
| The majority of our products are sold into consumer markets, which are difficult to accurately forecast |
| Additionally, we depend upon timely reporting from our retail and distributor customers as to their inventory levels and sales of our products in order to forecast demand for our products |
| Our international customers submit these reports on a monthly, not weekly, basis making it more difficult to accurately forecast demand |
| The failure to accurately forecast demand for our products will result in lost sales or excess inventory both of which will have an adverse effect on our business, financial condition and results of operations |
| In addition, at times inventories may increase in anticipation of increased demand or as captive wafer capacity ramps |
| If demand does not materialize, we may be forced to write-down excess inventory which may harm our financial condition and results of operations |
| Under conditions of tight flash memory supply, we may be unable to adequately increase our production volumes or secure sufficient supply in order to maintain our market share |
| If we are unable to maintain market share, our results of operations and financial condition could be harmed |
| Conversely, during periods of excess supply in the market for our flash memory products, we may lose market share to competitors who aggressively lower their prices |
| Our ability to respond to changes in market conditions from our forecast is limited by our purchasing arrangements with our silicon sources |
| These arrangements generally provide that the first three months of our rolling nine-month projected supply requirements are fixed and we may make only limited percentage changes in the second three months of the period covered by our supply requirement projections |
| We are sole sourced for a number of our critical components and the absence of a back-up supplier exposes our supply chain to unanticipated disruptions |
| We rely on our vendors, some of which are a sole source of supply, for many of our critical components |
| We do not have long-term supply agreements with most of these vendors |
| Our business, financial condition and operating results could be significantly harmed by delays or reductions in shipments if we are unable to develop alternative sources or obtain sufficient quantities of these components |
| We are exposed to foreign currency risks |
| Our purchases of NAND flash memory from the Toshiba venture and our investments in those ventures are denominated in Japanese yen |
| Additionally, we expect over time to increase the percentage of our sales denominated in currencies other than the US dollar |
| Management of these foreign exchange exposures and the foreign currency forward contracts used to mitigate these exposures is complicated and if we do not successfully manage our foreign exchange exposures, our business, results of operations and financial condition could be harmed |
| Terrorist attacks, war, threats of war and government responses thereto may negatively impact our operations, revenues, costs and stock price |
| Terrorist attacks, US military responses to these attacks, war, threats of war and any corresponding decline in consumer confidence could have a negative impact on consumer retail demand, which is the largest channel for our products |
| Any of these events may disrupt our operations or those of our customers and suppliers and may affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers |
| Any of these events could increase volatility in the US and world financial markets, which could harm our stock price and may limit the capital resources available to us and our customers or suppliers or adversely affect consumer confidence |
| This could harm our business and results of operations |
| Natural disasters or epidemics in the countries in which we or our suppliers or subcontractors operate could negatively impact our operations |
| Our operations, including those of our suppliers and subcontractors, are concentrated in Sunnyvale, California, Yokkaichi, Japan, Hsinchu and Taichung, Taiwan and Dongguan, Shanghai and Shenzen, China |
| In the past, these areas have been affected by natural disasters such as earthquakes, tsunamis and typhoons, and some areas have been affected by epidemics, such as SARS If a natural disaster or epidemic were 20 _________________________________________________________________ [75]Table of Contents to occur in one or more or these areas, our disaster recovery processes may not provide adequate business continuity |
| In addition, we do not have insurance for most natural disasters, including earthquakes |
| This could harm our business and results of operations |
| We may be unable to protect our intellectual property rights, which would harm our business, financial condition and results of operations |
| We rely on a combination of patents, trademarks, copyright and trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights |
| In the past, we have been involved in significant and expensive disputes regarding our intellectual property rights and those of others, including claims that we may be infringing third parties’ patents, trademarks and other intellectual property rights |
| We cannot assure you that: • any of our existing patents will not be invalidated; • patents will be issued for any of our pending applications; • any claims allowed from existing or pending patents will have sufficient scope or strength; • our patents will be issued in the primary countries where our products are sold in order to protect our rights and potential commercial advantage; or • any of our products or technologies do not infringe on the patents of other companies |
| In addition, our competitors may be able to design their products around our patents and other proprietary rights |
| Several companies have recently entered or announced their intentions to enter the flash memory market, and we believe these companies may require a license from us |
| Enforcement of our rights may require litigation |
| If we bring a patent infringement action and are not successful, our competitors would be able to use similar technology to compete with us |
| Moreover, the defendant in such an action may successfully countersue us for infringement of their patent or assert a counterclaim that our patents are invalid or unenforceable |
| If we did not prevail as a defendant in patent infringement case, we could be required to pay substantial damages, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology, discontinue the use of specific processes or obtain licenses to the infringing technology |
| We may be unable to license intellectual property to or from third parties as needed, or renew existing licenses, and we have agreed to indemnify various suppliers and customers for alleged patent infringement, which could expose us to liability for damages, increase our costs or limit or prohibit us from selling products |
| If we incorporate third-party technology into our products or if we are found to infringe others’ intellectual property, we could be required to license intellectual property from a third party |
| We may also need to license some of our intellectual property to others in order to enable us to obtain important cross-licenses to third-party patents |
| We cannot be certain that licenses will be offered when we need them, or that the terms offered will be acceptable, or that these licenses will help our business |
| If we do obtain licenses from third parties, we may be required to pay license fees or royalty payments |
| In addition, if we are unable to obtain a license that is necessary to the manufacture of our products, we could be required to suspend the manufacture of products or stop our product suppliers from using processes that may infringe the rights of third parties |
| We may not be successful in redesigning our products, the necessary licenses may not be available under reasonable terms, our existing licensees may not renew their licenses upon expiration and we may not be successful in signing new licensees in the future |
| We are currently and may in the future be involved in litigation, including litigation regarding our intellectual property rights or those of third parties, which may be costly, may divert the efforts of our key personnel and could result in adverse court rulings which could materially harm our business |
| We are involved in a number of lawsuits, including among others, several cases involving our patents and the patents of third parties |
| We are the plaintiff in some of these actions and the defendant in other of these actions |
| Some of the actions could seek injunctions against the sale of our products and/or substantial monetary damages, which if granted or awarded, could have a material adverse effect on our business, financial condition and results of operations |
| 21 _________________________________________________________________ [76]Table of Contents Litigation is subject to inherent risks and uncertainties that may cause actual results to differ materially from our expectations |
| Factors that could cause litigation results to differ include, but are not limited to, the discovery of previously unknown facts, changes in the law or in the interpretation of laws, and uncertainties associated with the judicial decision-making process |
| If we receive an adverse judgment in any litigation, we could be required to pay substantial damages and/or cease the manufacture, use and sale of products |
| Litigation, including intellectual property litigation, can be complex, can extend for a protracted period of time, and can be very expensive |
| Litigation initiated by us could also result in counter-claims against us, which could increase the costs associated with the litigation and result in our payment of damages or other judgments against us |
| In addition, litigation may divert the efforts and attention of some of our key personnel |
| We have been, and expect to continue to be, subject to claims and legal proceedings regarding alleged infringement by us of the patents, trademarks and other intellectual property rights of third parties |
| From time to time we have sued, and may in the future sue, third parties in order to protect our intellectual property rights |
| Parties that we have sued and that we may sue for patent infringement may countersue us for infringing their patents |
| If we are held to infringe the intellectual property of others, we may need to spend significant resources to develop non-infringing technology or obtain licenses from third parties, but we may not be able to develop such technology or acquire such licenses on terms acceptable to us or at all |
| We may also be required to pay significant damages and/or discontinue the use of certain manufacturing or design processes |
| In addition, we or our suppliers could be enjoined from selling some or all of our respective products in one or more geographic locations |
| If we or our suppliers are enjoined from selling any of our respective products or if we are required to develop new technologies or pay significant monetary damages or are required to make substantial royalty payments, our business would be harmed |
| Moreover, from time to time we agree to indemnify certain of our 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 |
| We may from time to time be engaged in litigation as a result of these indemnification obligations |
| Third-party claims for patent infringement are excluded from coverage under our insurance policies |
| A future obligation to indemnify our customers or suppliers may have a material adverse effect on our business, financial condition and results of operations |
| For additional information concerning |