Crucial 2012 Annual Report Download - page 13

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The European financial crisis and overall downturn in the worldwide economy may harm our business.
The European financial crisis and the overall downturn in the worldwide economy have had an adverse effect on our
business. A continuation or further deterioration of depressed economic conditions could have an even greater adverse effect on
our business. Adverse economic conditions affect demand for devices that incorporate our products, such as personal
computers, networking products and mobile devices. Reduced demand for these products could result in significant decreases
in our average selling prices. A continuation of current negative conditions in worldwide credit markets would limit our ability
to obtain external financing to fund our operations and capital expenditures. In addition, we may experience losses on our
holdings of cash and investments due to failures of financial institutions and other parties. Difficult economic conditions may
also result in a higher rate of loss on our accounts receivables due to credit defaults. As a result, our business, results of
operations or financial condition could be materially adversely affected.
Inotera's financial situation may adversely impact the value of our interest and our supply agreement.
Due to significant market declines in the selling prices of DRAM, Inotera incurred net losses of $259 million for its six-
month period ended June 30, 2012 and $737 million for its fiscal year ended December 31, 2011. Under generally accepted
accounting principles in the Republic of China, Inotera reported a loss for its quarter ended September 30, 2012 of an additional
New Taiwan dollars 4,390 million (approximately $150 million U.S. dollars). In addition, Inotera's current liabilities exceeded
its current assets by $1.85 billion as of June 30, 2012, which exposes Inotera to liquidity risk. As of June 30, 2012 and
December 31, 2011, Inotera was also not in compliance with certain loan covenants and had not been in compliance for the past
several years, which may result in its lenders requiring repayment of such loans during the next year. Inotera obtained a waiver
from complying with its financial covenants through June 30, 2012 and has requested an additional waiver from these
requirements. Inotera's management has developed plans to improve its liquidity. There can be no assurance that Inotera will
be successful in obtaining an additional waiver or improving its liquidity. If Inotera is unable to adequately improve its
liquidity, we may have to impair our investment in Inotera, which had a net carrying value of $321 million as of August 30,
2012.
In the second quarter of 2012, we contributed $170 million to Inotera, which increased our ownership percentage from
29.7% to 39.7%. We may not continue to make equity contributions to Inotera, which may further increase their liquidity risk.
We have a supply agreement with Inotera, under which Nanya is also a party, for the rights and obligations to purchase 50% of
Inotera's wafer production capacity (the "Inotera Supply Agreement"). As a result of our March 7, 2012 equity contribution to
Inotera, we expect to receive a higher share of Inotera's 30-nanometer output when it becomes available as a result of Inotera
capital investments enabled by our $170 million equity investment. In the fourth quarter of 2012, we purchased $170 million of
DRAM products from Inotera and our supply from Inotera accounted for 47% of our aggregate DRAM gigabit production. As
a result, if our supply of DRAM from Inotera is impacted, our business, results of operations or financial condition could be
materially adversely affected.
Our Inotera Supply Agreement involves numerous risks.
Our Inotera Supply Agreement involves numerous risks including the following:
• we have experienced difficulties and delays in ramping production at Inotera on our technology and may continue to
experience difficulties and delays in the future;
• we may experience continued difficulties in transferring technology to Inotera;
• costs associated with manufacturing inefficiencies resulting from underutilized capacity;
• difficulties in obtaining high yield and throughput due to differences in Inotera's manufacturing processes from our
other fabrication facilities;
• uncertainties around the timing and amount of wafer supply we will receive under the supply agreement; and
• the cost of our product obtained from Inotera is impacted by Nanya's revenue and back-end manufacturing costs for
product obtained from Inotera.