SanDisk 2004 Annual Report Download - page 36

Table of Contents
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 the end of 2004 were 23.1 billion Japanese yen. If Toshiba makes payments under its
guarantee, we have agreed to indemnify Toshiba for 49.9% of its costs.
We have guaranteed up to 25 billion Japanese yen of Flash Partners’ obligations to third−party lessors. Flash Partners had not
drawn any amounts under the lease facility as of the end of 2004, but intends to draw the entire facility in 2005.
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 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. A substantial majority of our quarterly sales are from orders received and fulfilled in that quarter.
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. We have in the past significantly over−forecasted and under−forecasted
actual demand for our products. 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.
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. Conversely, 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.
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 six−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.
31