SanDisk 2002 Annual Report Download - page 32

3 0 S a nD isk C o rp o ra tio n
FlashVision. We have agreed to indem nify Toshiba in certain
circum stances for certain liabilities Toshiba incurs as a result
of Toshiba’s guarantee of the FlashVision equipm ent lease
arrangem ent. If FlashVision fails to m eet its lease comm it-
m ents, and Toshiba fulfills these com m itm ents under the
term of Toshiba’s guarantee, w e w ill be obligated to reim-
burse Toshiba for 49.9% of any claim s under the lease,
unless such claim s result from Toshiba’s failure to m eet its
obligations to FlashVision or its covenants to the lenders.
Because FlashVision’s new equipm ent lease arrangement is
denom inated in Japanese Yen, the m aximum am ount of our
contingent indem nification obligation on a given date w hen
converted to U.S. Dollars w ill fluctuate based on the
exchange rate in effect on that date. As of Decem ber 31,
2002, the m axim um am ount of our contingent indem nifica-
tion obligation, w hich reflects paym ents and any lease
adjustm ents, w as approxim ately $142.4 m illion.
This contingent indem nification obligation might consti-
tute senior indebtedness under the notes and w e m ay use
a portion of the proceeds from the notes to repay the
obligation. This w ould result in the diversion of resources
from other im portant areas of our business and could sig-
nificantly harm our business, financial condition and results
of operations.
W e m a y not b e a b le to s atisfy a fund am ental c hang e
offe r unde r the inde nture g o ve rning the no te s.
The indenture governing the notes contains provisions
that apply to a fundam ental change. A fundamental change
as defined in the indenture would occur if w e w ere to be
acquired for consideration other than cash or securities
traded on a m ajor U.S. securities m arket. If som eone trig-
gers a fundam ental change, w e m ay be required to offer to
purchase the notes w ith cash. This w ould result in the diver-
sion of resources from other im portant areas of our busi-
ness and could significantly harm our business, financial
condition and results of operations.
If w e have to m ake a fundam ental change offer, w e can-
not be sure that w e w ill have enough funds to pay for all the
notes that the holders could tender. Our failure to redeem
tendered notes upon a fundam ental change w ould consti-
tute a default under the indenture and m ight constitute a
default under the term s of our other indebtedness, w hich
w ould significantly harm our business and financial condition.
W e m a y not b e a b le to p ay o ur d e b t and o the r o b li-
g atio ns, w hic h w ould c ause us to be in d e fa ult under
the term s of o ur inde b te d nes s, w hic h w o uld res ult in
harm to o ur b usine s s and financ ial c o nd ition.
If our cash flow is inadequate to m eet our obligations,
w e could face substantial liquidity problem s. If w e are
unable to generate sufficient cash flow or otherw ise obtain
funds necessary to m ake required paym ents on the notes
or our other indebtedness, w e w ould be in default under
the term s thereof, w hich w ould perm it the holders of the
notes to accelerate the m aturity of the notes and also could
cause defaults under our other indebtedness. Any such
default w ould harm our business, prospects, financial con-
dition and operating results. In addition, w e cannot assure
you that w e w ould be able to repay am ounts due in respect
of the notes if paym ent of the notes w ere to be accelerated
following the occurrence of any other event of default as
defined in the indenture governing the notes. M oreover, w e
cannot assure that we w ill have sufficient funds or w ill be
able to arrange for financing to pay the principal am ount
due on the notes at m aturity.
W e m a y nee d ad d itional financ ing , w hich c o uld b e d if-
fic ult to o b tain, and w hic h if no t o b taine d in s atisfac tory
am ounts m ay p re vent us from d e velo p ing o r e nhanc ing
our p rod uc ts , taking ad vantag e of future o p p ortunitie s,
g ro w ing o ur b us iness o r res p o nding to c om pe titive
pre ssures or unanticip ate d industry c ha ng e s, any o f
w hic h c o uld harm o ur b usine ss.
We currently expect that our existing cash and invest-
m ent balances, including the proceeds of the notes, and
cash generated from operations w ill be sufficient to m eet
our cash requirem ents to fund operations and expected
capital expenditures for at least the next tw elve m onths.
However, in the event we need to raise additional funds dur-
ing that tim e period or in future periods, w e cannot be cer-
tain that w e w ill be able to obtain additional financing on
favorable term s, if at all. From tim e to time, w e m ay decide
to raise additional funds through public or private debt or
equity financings to fund our activities. If w e issue additional
equity securities, our stockholders w ill experience additional
dilution and the new equity securities m ay have rights, pref-
erences or privileges senior to those of existing holders of
comm on stock or debt securities. In addition, if w e raise
funds through debt financing, w e w ill have to pay interest
and m ay be subject to restrictive covenants, w hich could
harm our business. If w e cannot raise funds on acceptable
term s, if and w hen needed, w e m ay not be able to develop
or enhance our products, take advantage of future opportu-
nities, grow our business or respond to com petitive pres-
sures or unanticipated industry changes, any of w hich could
have a negative im pact on our business.
The note s and o ther inde b te d nes s have rig hts se nior
to thos e o f o ur c urre nt sto c kho ld ers s uc h that in the
eve nt o f o ur b ankruptc y, liq uida tion o r re org anization o r
upo n ac ce le ration o f the note s d ue to an e vent o f
de fault unde r the inde nture and in c e rtain o ther e vents,
our ass e ts w ill b e availab le fo r distribution to o ur c urre nt
sto c kho lde rs o nly afte r a ll senio r inde b te d ne ss is rep a id.
In the event of our bankruptcy, liquidation or reorganiza-
tion or upon acceleration of the notes due to an event of
default under the indenture and in certain other events, our
assets w ill be available for distribution to our current stock-
holders only after all senior indebtedness, including our con-
tingent indem nification obligations to Toshiba and obligations
under the notes, have been paid in full. As a result, there
m ay not be sufficient assets remaining to m ake any distribu-
tions to our stockholders. The notes are also effectively sub-
ordinated to the liabilities of any of our subsidiaries (including
trade payables, w hich as of Decem ber 31, 2002 w ere
$722,000). Neither w e, nor our subsidiaries are limited from
incurring debt, including senior indebtedness, under the
indenture. If w e, or our subsidiaries w ere to incur additional
debt or liabilities, our ability to pay our obligations on the
notes could be adversely affected. We anticipate that from
tim e to tim e w e w ill incur additional debt, including senior
indebtedness. Our subsidiaries are also likely to incur liabili-
ties in the future.
Q u a lit a t iv e a n d Q u a n t it a t iv e D is c lo s u r e s
a b o u t M a r k e t R is k
We are exposed to financial m arket risks, including changes
in interest rates, foreign currency exchange rates and