SanDisk 2009 Annual Report Download - page 81

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continuing uncertainty surrounding these activities may result in legal proceedings and claims against us,
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 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
or royalty payments. 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.
Seasonality in 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. This seasonality makes 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. 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 is 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 have a comprehensive and highly developed legal system,
particularly with respect to the protection of intellectual property rights. This results, among other things, in the
prevalence of counterfeit goods in China. The enforcement of existing and future laws and contracts remains
uncertain, and the implementation and interpretation of such laws may be inconsistent. Such inconsistency could
lead to piracy and degradation of our intellectual property protection. Although we engage in efforts to prevent
counterfeit products from entering the market, those efforts may not be successful. Our results of operations and
financial condition could be harmed by the sale of counterfeit products.
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