SanDisk 2010 Annual Report Download - page 147

This is a TAB type table. Insert
conts here. Annual Report
• sufficient availability of cost-efficient supply;
• efficiency of production;
• ownership and monetization of intellectual property rights;
• timing of new product announcements or introductions;
• the development of industry standards and formats;
• the number and nature of competitors in a given market; and
• general market and economic conditions.
There can be no assurance that we will be able to compete successfully in the future.
Our license and royalty revenues may fluctuate or decline significantly in the future due to license
agreement renewals or if licensees fail to perform on a portion or all of their contractual obligations. If our
existing licensees do not renew their licenses upon expiration and we are not successful in signing new licensees
in the future, our license revenue, profitability, and cash provided by operating activities would be harmed. For
example, in the first quarter of fiscal year 2010, our license and royalty revenues decreased sequentially primarily
due to a new license agreement with Samsung that was effective in the third quarter of fiscal 2009, and contains a
lower effective royalty rate compared to the previous license agreement. To the extent that we are unable to
renew license agreements under similar terms or at all, our financial results would be harmed by the reduced
license and royalty revenue and we may incur significant patent litigation costs to enforce our patents against
these licensees. If our licensees or we fail to perform on contractual obligations, we may incur costs to enforce
the terms of our licenses and there can be no assurance that our enforcement and collection efforts will be
effective. If we license new intellectual property, or IP, from third-parties or existing licensees, we may be
required to pay license fees, royalty payments, or offset existing license revenues. In addition, we may be subject
to disputes, claims or other disagreements on the timing, amount or collection of royalties or license payments
under our existing license agreements.
Under certain conditions, the Flash Ventures’ master equipment lease obligations could be accelerated,
which would harm our business, results of operations, cash flows, and liquidity. Flash Ventures’ 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 us as guarantor, including,
among other things, our failure to maintain a minimum stockholders’ equity of at least $1.51 billion, and our
failure to maintain a minimum corporate rating of either BB- from S&P or Moody’s Corporation, or Moody’s, or
a minimum corporate rating of BB+ from Rating & Investment Information, Inc., or R&I. As of January 2, 2011,
Flash Ventures were in compliance with all of their master lease covenants. As of January 2, 2011, our R&I
credit rating was BBB, three notches above the required minimum corporate rating threshold for R&I and our
S&P credit rating was BB-, which is the required minimum corporate rating threshold for S&P.
If both S&P and R&I were to downgrade our credit rating below the minimum corporate rating threshold,
Flash Ventures would become non-compliant with certain covenants 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 us, as guarantor, or increased interest rates or waiver fees, should the lessors decide they need
additional collateral or financial consideration. If an event of default occurs and if we fail to reach a resolution,
we may be required to pay a portion or the entire outstanding lease obligations up to $879 million, based upon
the exchange rate at January 2, 2011, covered by our guarantee under the Flash Ventures master lease
agreements, which would significantly reduce our cash position and may force us to seek additional financing,
which may or may not be available.
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