Mike and Thread,
re: Lexar Registration Statement
Just reading between the lines this is the message that I interpreted. Please draw your own conclusions...
"We are taking on the most strongly and successfully defended patent portfolio in the flash arena. It is going to cost us an arm and a leg."
We are currently involved in litigation with our primary competitor that has diverted management's time and attention, could be time-consuming and expensive to defend and could seriously harm our business.
"Stop reading here. It only gets worse."
We are currently involved in litigation with SanDisk Corporation, our primary competitor in the digital film market, regarding allegations by SanDisk that certain of our products infringe one of their patents. In its complaint, SanDisk seeks preliminary and permanent injunctions against infringement and damages relating to our CompactFlash and PC Card formats. A substantial portion of our revenues for the foreseeable future depends upon sales of these and other parts incorporating versions of our controllers. While we are vigorously contesting these claims, we cannot predict the ultimate outcome of the lawsuit. See "Business--Legal Proceedings" for a more complete discussion of this litigation.
"We are between a rock and a hard place."
In the event that a permanent injunction were granted, we would be unable to sell products incorporating those methods or parts found to infringe SanDisk's patent. We would need to either negotiate a license with SanDisk or engage in a redesign of those products. A redesign of those products would result in an interruption in sales that could extend for some time. We cannot assure you that any development or redesign efforts would be successful. Accordingly, a permanent injunction would result in a substantial reduction in our revenues and losses over an extended period of time, and our business would suffer. In addition, we also could be required to pay damages to SanDisk, which could be subject to trebling were we found to have willfully infringed the identified patent. Any of these outcomes could seriously harm our business.
"We should have just paid the licensing fees to begin with."
In connection with the SanDisk litigation, we have incurred and expect to continue to incur substantial legal and other expenses. In addition, the SanDisk litigation has diverted, and is expected to continue to divert, the efforts and attention of our management and technical personnel. Patent litigation is highly complex and can extend for a protracted period of time, which can substantially increase the cost of litigation. Accordingly, the expenses and diversion of resources associated with the SanDisk litigation could seriously harm our business and financial condition. Further, if the SanDisk patent litigation were to be resolved by a settlement, we might need to make substantial payments to SanDisk or grant a license to SanDisk to utilize portions of our technology, which could substantially harm our business and financial condition.
"We buy our flash memory from SanDisk's JV partner.
We purchase substantially all of our flash memory from Toshiba America Electronic Corporation and Samsung Semiconductor, Inc. We expect that the demand for flash memory over the next several years will be substantially greater than in past periods due to the increasing acceptance of digital cameras and other digital consumer products. If we are unable to obtain sufficient quantities of flash memory from Toshiba or Samsung in a timely manner, we would not be able to manufacture and deliver digital film to satisfy our customers' volume and schedule requirements. If we are not able to satisfy the delivery requirements of our customers, they may reduce any future orders or eliminate us as a supplier.
"We are a wart on UMC's ass."
Our controllers are currently manufactured by United Microelectronics Corporation, or UMC, in Taiwan. We do not have a long-term supply agreement with UMC and instead obtain manufacturing services on a purchase order basis. UMC has no obligation to supply products to us for any specific period, in any specific quantity or at any specific price, except as set forth in a particular purchase order. Our requirements represent a small portion of the total production capacity of UMC, and UMC may reallocate capacity to other customers on short notice, even during periods of high demand for our products. If UMC were to become unable or unwilling to continue manufacturing our controllers in the required volumes, at acceptable quality, yields and prices, and in a timely manner, our business would be seriously harmed.
"Our more expensive products are better than those made by the industry leader that wrote the textbook on high capacity, high reliability, economical flash memory solutions."
SanDisk currently holds the largest market share position in the flash media market, selling primarily CompactFlash and PC Cards. We believe that SanDisk's strategy is to sell flash memory products into a broad range of solid-state storage applications, one of which is digital cameras. We expect to compete with SanDisk both for retail accounts and in the original equipment manufacturer market. SanDisk's products generally have lower prices than our products. We believe the principal competitive factors in this market are performance and price. We believe we compete favorably with SanDisk by offering premium products with superior performance rather than low cost solutions. SanDisk is larger than we are and, because it manufactures its own controllers and flash memory, it does not depend as we do on third parties to supply it with flash memory or assemble its final products. We are currently in litigation with SanDisk regarding some of our products. You should refer to "Business--Legal Proceedings" for a discussion of our current litigation with SanDisk.
"We really pissed off SanDisk."
We are a party to SanDisk Corporation v. Lexar Media, Inc., an action filed in March 1998 in the United States District Court for the Northern District of California, Case No. C98-01115 CRB. The suit involves allegations by SanDisk that our CompactFlash cards and PC Cards are infringing its U.S. Patent No. 5,602,987. In its complaint, SanDisk alleges that it will seek preliminary and permanent injunctions against infringement, damages for infringement, increased damages for willful infringement up to treble damages, attorneys' fees and costs. A substantial portion of our revenues for the foreseeable future will depend upon sales of our CompactFlash cards and PC cards.
"We only infringed on a couple of key items."
To date, SanDisk has not sought a preliminary injunction. At our request, the district court conducted an expedited claim construction proceeding. SanDisk identified Claims 1, 10, 17, 23 and 35 of U.S. Patent No. 5,602,987 as being at issue. On March 4, 1999, the Court issued a memorandum and order regarding the construction of these claims of U.S. Patent No. 5,602,987. In that memorandum and order, the district court adopted some of the claim construction positions advanced by SanDisk and some of the claim construction positions advanced by Lexar, and did not rule on some of the issues raised by the parties. On September 20, 1999, SanDisk updated its disclosures to assert solely Claims 1 and 10 of U.S. Patent No. 5,602,987, with a reservation of rights with respect to the other claims originally asserted.
"We want the IPO completed before March 10, 2000!"
On July 29, 1999, SanDisk filed a motion for partial summary judgment that the identified products contribute to the infringement of Claim 10 of U.S. Patent No. 5,602,987. We believe that SanDisk's arguments are incorrect and, accordingly, we filed an opposition to this motion on December 30, 1999. We also filed our own motions that there is no infringement of this claim and that it is invalid. These motions are scheduled to be heard on March 10, 2000, after which the District Court will issue its decision.
"Our patent lawyers steered us in the wrong direction."
We believe that the SanDisk complaint is without merit and that we have meritorious defenses. We intend to vigorously defend the SanDisk litigation. We do not believe that our products infringe U.S. Patent No. 5,602,987. We further believe that U.S. Patent No. 5,602,987 is invalid and/or unenforceable. We have received a written opinion from our patent counsel, Oppenheimer Wolff & Donnelly, LLP, regarding non-infringement and invalidity of U.S. Patent No. 5,602,987. While we are vigorously contesting these claims, we cannot predict the ultimate outcome of the lawsuit.
"It wasn't willfull infringement, was it?"
In the event of an adverse ruling, we also could be required to pay damages to SanDisk, which could be subject to trebling were we found to have willfully infringed U.S. Patent No. 5,602,987.
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