July 7, 2000 Lexar Media Updates Registration Statement
from:
freeedgar.com
We are currently involved in significant and costly litigation with our
primary competitor in which the Federal District Court has found that our
products infringe our competitor's patent. If the court ultimately rules that
this patent is valid, we could be required to pay significant damages and
royalties and could be enjoined from making, selling or using the infringing
products.
Since March 1998, we have been engaged in significant litigation with
SanDisk Corporation, our primary competitor in the digital film market. This
litigation, which is described in more detail in "Business--Legal Proceedings,"
relates to claims by SanDisk that certain of our products infringe one of
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their patents. In its complaint, SanDisk alleges that it will seek preliminary
and permanent injunctions and damages for past infringement relating to our
CompactFlash and PC Card formats, as well as increased damages for willful
infringement up to treble damages, attorneys' fees and costs. SanDisk has
alleged that the operation of all of our controllers infringe their patent. A
substantial majority of our revenues in 1999 and in the first quarter of 2000
were from sales of our controllers and products incorporating our controllers,
and we expect this to be the case for the next several years.
On March 30, 2000, the U.S. District Court for the Northern District of
California found that certain of our products infringe one of the claims of
SanDisk's patent. The court has set a trial date for October 23, 2000 to
determine whether we infringe any of the other claims of the patent and whether
the patent is valid. We intend to vigorously contest SanDisk's claims and the
validity of SanDisk's patent at trial, but to succeed we will have to overcome
by clear and convincing evidence the legal presumption that a patent is valid.
This is a difficult burden of proof and, as a result, patents are found to be
valid in the significant majority of cases.
In its complaint, SanDisk requests both a preliminary and a permanent
injunction. SanDisk could request a hearing upon its request for a preliminary
injunction against us at any time prior to trial. In the event a preliminary or
permanent injunction were granted, we would be unable to sell products found to
infringe SanDisk's patent. Such an injunction would result in our not being
able to ship a substantial portion of our products, which would cause a
substantial reduction in our revenues, significant losses and loss of customer
goodwill for an extended period of time. As a result, we would face a
substantial depletion of our financial resources that could severely limit our
future business prospects or render us insolvent. Further, if at trial the
SanDisk patent is held to be valid, we could be required to pay significant
monetary damages to SanDisk, which, in the event of a finding of willful
infringement, would be subject to trebling and could also require us to pay
SanDisk's attorneys fees. We have also agreed to indemnify customers from
liability with respect to claimed infringement of the SanDisk patent, including
their costs and fees of defending themselves in such suits. The existence of
the SanDisk litigation has had and in the future could have an adverse effect
on our ability to attract and retain customers.
In the event of an injunction, we could seek a license from SanDisk to
enable us to continue selling our products, but SanDisk might not agree to
license its patents to us on reasonable terms, or at all. While SanDisk has
expressed a willingness to license its patents, such a license may cause us to
pay royalties on all our products, even those in the future that may not
infringe SanDisk's patent, and we might be required to grant a license to
SanDisk to utilize portions of our technology. Accordingly, the terms of any
license might adversely affect our margins and our ability to compete with
SanDisk and others. We are in the process of redesigning our products in an
effort to avoid infringement of SanDisk's patent. However, we cannot assure you
that these efforts will be successful. Even if successful, these efforts may
not result in a competitive product and could require a substantial period of
time to complete.
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 significantly increase our general and administrative costs. Further, if
the SanDisk patent litigation were to be resolved by a settlement, we might
need to make substantial upfront payments as well as ongoing royalties to
SanDisk and grant a license to SanDisk to utilize portions of our technology,
which could be harmful to our business.
We may be involved in additional litigation with SanDisk that could divert
management's time and attention, could be time-consuming and expensive and
could threaten our viability if we were to lose.
We believe that part of SanDisk's business strategy is to file intellectual
property lawsuits against its competitors and that SanDisk will initiate
additional litigation against us. SanDisk is the holder of a number
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of patents relating to flash memory and flash memory storage devices such as
CompactFlash. Potential additional SanDisk litigation would likely involve
different patents with new method or system claims. In addition, new patent
applications are continually being filed and pending United States patent
applications are confidential until patents are issued. Thus, it is impossible
to ascertain all potential patent infringement problems. As with the current
SanDisk litigation, we cannot assure you that we would prevail in any such
litigation and an adverse decision could render us insolvent or severely impair
our future business prospects. In the past we have initiated litigation against
SanDisk and may do so in the future. Any future litigation would be time-
consuming and costly, and would likely divert the efforts and attention of our
management and technical personnel.
We have recently redesigned our products to avoid SanDisk's intellectual
property, but the redesigned products may not be feasible to produce,
commercially competitive or have all the functionality of our current and
future products or may be held to infringe SanDisk's patents or the patents of
others.
In response to the District Court's finding that certain of our products
infringe one of SanDisk's patents, we have commenced the redesign of those
products. In the opinion of our patent counsel, Haverstock & Owens LLP, the
redesign does not infringe the SanDisk patent that is the subject of the
current litigation. We have not yet finished the development of, or
commercially produced, these products, and therefore we may find that our
redesigned products will not be feasible to manufacture, commercially
competitive, as reliable as our current products or accepted by our customers.
Our redesigned products may be more costly than our current products, and,
despite the opinion of Haverstock & Owens LLP, may infringe SanDisk's existing
or future patents or the existing or future patents of another party. We may
not be able to achieve our present functionality and future planned
functionality with our redesigned products. If we are not able to produce our
redesigned products by the time the SanDisk trial is completed and we were
enjoined from shipping our current products, or if the redesigned products had
been determined to infringe SanDisk's patents, then it could render us
insolvent or severely impair our future business prospects. Customers may delay
orders or return merchandise to wait until our redesigned products are
available. Because we have diverted substantial engineering resources from our
currently planned research and development projects to redesign our products,
we may experience a delay in the introduction of future products.
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