SanDisk 2011 Annual Report Download - page 86

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, renew them on less favorable terms, or we are not
successful in signing new licensees in the future, our license revenue, profitability, and cash provided by
operating activities would be harmed. As our older patents expire, and the coverage of our newer patents may be
different, it may be more difficult to negotiate or renew favorable license agreement terms or a license agreement
at all. For example, in the first quarter of fiscal year 2010, our license and royalty revenues decreased
sequentially primarily due to a new license agreement with Samsung that was effective in the third quarter of
fiscal year 2009, and contains a lower effective royalty rate 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
harmed 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 or we fail to perform on 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. If we license new IP from third-parties or existing licensees, we may be required to pay
license fees, royalty payments or offset existing license revenues. 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, the Flash Ventures’ master equipment lease obligations could be accelerated,
which would harm our business, operating results, 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, or our
failure to maintain a minimum corporate rating of either BB- from S&P or Moody’s, or a minimum corporate
rating of BB+ from R&I. As of January 1, 2012, Flash Ventures was in compliance with all of its master lease
covenants. As of January 1, 2012, our R&I credit rating was BBB, three notches above the required minimum
corporate rating threshold for R&I; and our S&P credit rating was BB, one notch above the required minimum
corporate rating threshold for S&P.
If our stockholders’ equity is below $1.51 billion or both S&P and 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 fail to reach a resolution, we may be required to pay a portion or the entire outstanding
lease obligations up to $732 million, based upon the exchange rate at January 1, 2012, covered by our guarantee
under 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.
The semiconductor industry is subject to significant downturns that have harmed our business, financial
condition and operating results in the past and may do so again in the future. The semiconductor industry is
highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence,
price declines, evolving standards, short product life cycles and wide fluctuations in product supply and demand.
The industry has experienced significant downturns, often in connection with, or in anticipation of, maturing
product cycles of both semiconductor companies and their customers’ products and declines in general economic
conditions. The flash memory industry has several times in the past experienced significant excess supply,
reduced demand, high inventory levels and accelerated declines in selling prices. If we again experience
oversupply of NAND flash products, we may be forced to hold excessive inventory, sell our inventory below cost
and record inventory write-downs, all of which would place additional pressure on our results of operation and
our cash position.
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