SanDisk 2006 Annual Report Download - page 67

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 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 year, sometimes followed by declines in the first
quarter of the following year. This may become more pronounced as sales of our Sansa digital audio player have
become a larger portion of our product mix. 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 inventory levels in advance of our most active
selling seasons.
From time-to-time, we overestimate our requirements and build excess inventory, 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. 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. 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. 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.
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.
We are sole-sourced for a number of our critical components and the absence of a back-up supplier exposes our
supply chain to unanticipated disruptions. We rely on our vendors, some of which are a sole source of supply, for
many of our critical components. We do not have long-term supply agreements with most of these vendors. Our
business, financial condition and operating results could be significantly harmed by delays or reductions in
shipments if we are unable to develop alternative sources or obtain sufficient quantities of these components.
We are exposed to foreign currency risks. Our purchases of NAND flash memory from the Toshiba ventures
and our investments in those ventures are denominated in Japanese yen. Our sales, however, are primarily
denominated in U.S. dollars or other foreign currencies. Additionally, we expect over time to increase the
percentage of our sales denominated in currencies other than the U.S. dollar. This exposes us to significant risk
from foreign currency fluctuations. Management of these foreign exchange exposures and the foreign currency
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