SanDisk 2009 Annual Report Download - page 74

• 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 financial performance can depend significantly on worldwide economic conditions and the related
impact on levels of consumer spending, which have deteriorated in many countries and regions, including the
U.S., and may not recover in the foreseeable future. Demand for our products is adversely affected by negative
macroeconomic factors affecting consumer spending. The tightening of consumer credit, low level of consumer
liquidity, and volatility in credit and equity markets have weakened consumer confidence and decreased
consumer spending. These and other economic factors have reduced demand growth for our products and harmed
our business, financial condition and results of operations, and to the extent such economic conditions continue,
they could cause further harm to our business, financial condition and results of operations.
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 fourth quarter of fiscal year 2009, our license and royalty revenues declined due to a new license
agreement with an existing licensee at a lower effective royalty rate as 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 adversely impacted 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 fail to perform on
a portion or all of their 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. 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, a portion or the entire outstanding lease obligations related to Flash Ventures’
master equipment lease agreements 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 Standard & Poors, or S&P, or Moody’s Corporation, or a minimum corporate rating of BB+
from Rating & Investment Information, Inc., or R&I. As of January 3, 2010, Flash Ventures were in compliance
with all of their master lease covenants. While our S&P credit rating was B, two levels below the required
minimum corporate rating threshold from S&P, our R&I credit rating was BBB-, one level above the required
minimum corporate rating threshold from R&I.
If 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 failed to reach a resolution, we may be required to
pay a portion or the entire outstanding lease obligations up to $1.07 billion, based upon the exchange rate at
January 3, 2010, 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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