SanDisk 2010 Annual Report Download - page 155

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including class and derivative lawsuits on behalf of our stockholders. We may be required to expend significant
resources, including management time, to defend these actions and could be subject to damages or settlement
costs related to these actions.
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 generally includes indemnification for direct and
consequential 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 legal proceedings, including the examples set forth above, see Part I,
Item 3, “Legal Proceedings.”
We may be unable to license, or license at a reasonable cost, intellectual property to or from third parties as
needed, 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, 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, royalty payments, or offset license revenues. In addition, if we are unable to
obtain a license that is necessary to manufacture 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, or the necessary licenses may not be available under
reasonable terms.
Price increases could reduce our overall product revenues and harm our financial position. In the first half
of fiscal year 2009, we increased prices in order to improve profitability. Price increases can result in reduced
growth, or even an absolute reduction, in gigabyte demand. For example, in the second quarter of fiscal year
2009, our average selling price per gigabyte increased 12% and our gigabytes sold decreased 7%, both on a
sequential basis. In the future, if we raise prices, our product revenues may be harmed and we may have excess
inventory.
Changes in the seasonality of 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 fiscal year, sometimes followed
by significant declines in the first quarter of the following fiscal year. Changes in seasonality make it more
difficult for us to forecast our business, especially in the current global economic environment and its
corresponding decline in consumer confidence, which may impact typical seasonal trends. Changes in the
product or channel mix of our business can also impact seasonal patterns, adding to complexity in forecasting
demand. 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.
Because of our international business and operations, we must comply with numerous international laws
and regulations, and we are vulnerable to political instability and other risks related to international operations.
Currently, a large portion of our revenues are derived from our international operations, and all of our products
are produced overseas in China, Japan and Taiwan. We are, therefore, affected by the political, economic, labor,
environmental, public health and military conditions in these countries. For example, China does not currently
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