SanDisk 2007 Annual Report Download - page 65

the exchange rate at December 30, 2007. These leases contain numerous default clauses which, if triggered, could
cause us to repay the amounts due under our guarantees.
We and Toshiba have also agreed to mutually contribute to, and indemnify each other, Flash Partners and Flash
Alliance for environmental remediation costs or liability resulting from Flash Partners’ and Flash Alliance’s
manufacturing operations in certain circumstances. In addition, we and Toshiba entered into a Patent Indemni-
fication Agreement under which in certain cases we may 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 or Flash Alliance 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 require-
ments. 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 fiscal year, sometimes followed by significant declines
in the first quarter of the following fiscal year. This seasonality was particularly pronounced in the fourth quarter of
fiscal year 2006 and the first quarter of fiscal year 2007 during which we experienced a larger than average
sequential increase in retail unit sales in the fourth quarter of fiscal year 2006, followed by a larger than average
sequential decrease in retail unit sales in the first quarter of fiscal year 2007. We may experience the same
seasonality between the fourth quarter of fiscal year 2007 and the first quarter of fiscal year 2008. This seasonality
may become even more pronounced if we increase the mix of our sales coming from consumer products such as our
Sansa digital audio players. This seasonality makes it more difficult for us to forecast our business. If our forecasts
are inaccurate, we may 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 inventory levels in advance of our most active selling seasons.
From time-to-time, we overestimate our requirements and build excess inventory, or underestimate our
requirements and have a shortage of supply, either of which harm our financial results. The majority of our
products are sold into consumer markets, which are difficult to accurately forecast. Also, 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. We have in the past significantly over-forecasted or 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. In addition, at times inventory 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
and we may be forced to write-down inventory, which is in excess of forecasted demand or must be sold below cost.
If we lose market share due to price competition or we must write-down inventory, 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. Some of these arrangements 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.
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