SanDisk 2013 Annual Report Download - page 131

royalty payments, or offset license revenue. In addition, if we are unable to obtain a license that is
necessary to manufacture or sell our products, we could be required to redesign or stop shipping our
products to one or more geographic locations, 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, which
would harm our business and financial results.
Changes in the seasonality of 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.
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. However, the global economic
environment may impact typical seasonal trends, making it more difficult for us to forecast our business.
Changes in the product or channel mix of our business can also impact seasonal patterns, adding to
complexity in forecasting demand. 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 operating results. Changes in seasonality may also lead to greater
volatility in our stock price and the need for significant working capital investments in receivables and
inventory, including the need to build inventory levels in advance of our projected high volume selling
seasons.
The Flash Ventures’ master equipment lease obligations contain covenants, which if breached, 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, some of 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. As of December 29, 2013, Flash Ventures was in compliance with all of its master lease
covenants.
If our stockholders’ equity were to fall below $1.51 billion, 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 approximately
$492 million, based upon the exchange rate at December 29, 2013, 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 not be available.
We are vulnerable to numerous risks related to our international operations, including political instability,
and we must comply with numerous laws and regulations, many of which are complex. Currently, a large
portion of our revenue is derived from our international operations, and all of our products and many of
our components are produced overseas in China, Japan, Malaysia and Taiwan. Our revenue and future
growth is also significantly dependent on international markets, and we may face difficulties entering or
maintaining sales in some international markets. 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 IP rights, which results in the prevalence of counterfeit goods in China, among other things,
as well as piracy and degradation of our IP protection. Our efforts to prevent counterfeit products from
entering the market may not be successful, and the sale of counterfeit products could harm our operating
results and financial condition. In addition, customs regulations in China are complex and subject to
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Annual Report