RE: Lexar, from the recently filed 10-Q:
<<From time to time, it may be necessary to initiate litigation against third parties to preserve our intellectual property
rights. These parties could in turn bring suit against us. Such a situation occurred in March of 1998. We filed a complaint
in federal court against Lexar for infringement of a fundamental flash disk patent. Lexar disputed this claim and asserted
that our patent was invalid or unenforceable, as well as asserting various counterclaims including unfair competition,
violation of the Lanham Act, patent misuse, interference with prospective economic advantage, trade defamation and
fraud. We have denied all of these counterclaims. In July 1998, the federal district court denied Lexar's request to have
the case dismissed. Discovery in this suit began in August 1998. On February 22, 1999, the Federal District Court
considered arguments and papers submitted by the parties regarding the scope and proper interpretation of the asserted
claims in SanDisk's patent at issue in the Lexar suit. On March 4, 1999, the Federal District Court issued its ruling on the
proper construction of the claim terms in SanDisk's patent. On July 30, 1999, the we filed a motion for partial summary
judgment that Lexar CompactFlash and PC Cards contributorily infringe SanDisk's patent. This motion is scheduled to
be heard in September 1999. A trial date has not yet been set.>>
Why stop there, as long as I was in the 10-Q; here are Sandisk's management's [and lawyers] comments about their competition and various risks they face:
<<Our Markets Are Highly Competitive
We compete in an industry characterized by intense competition, rapid technological changes, evolving industry
standards, declining average selling prices and rapid product obsolescence. Our competitors include many large domestic
and international companies that have greater access to advanced wafer foundry capacity, substantially greater financial,
technological, technical, marketing and other resources, broader product lines and longer standing relationships with
customers. Our primary competitors include flash chip producers such as Advanced Micro Devices, Inc., Atmel
Corporation, Hitachi Ltd., Intel Corporation, Micron Technology, Inc., Mitsubishi Electronic Corporation, Samsung
Electronics Company Ltd., Sharp Electronics Corporation and Toshiba Corporation. Other competitors include
companies using data storage techniques such as socket flash, linear flash and system flash components, as well as
package or card assemblers such as Lexar Media, Inc., M-Systems, Inc., Simple Technology Inc., SMART Modular
Technologies, Inc., Sony Corporation, Kingston Technology Company, TDK Corporation, Matsushita Battery, Inc. and
Viking Components, Inc., which combine controllers and flash memory chips developed by others into flash storage
cards. Over 25 companies have been certified by the CompactFlash Association to manufacture and sell their own brand
of CompactFlash. We believe additional manufacturers will enter the CompactFlash market in the future.
In addition, competing products have been introduced that promote industry standards that are different from our
CompactFlash product, including Toshiba's Smart Media (Solid-State Floppy Disk Card), Sony Corporation's Memory
Stick, Panasonic's recently introduced Mega Storage cards, Iomega's Clik drive, a miniaturized, mechanical, removable
disk drive and M-Systems' Diskonchip(TM) for embedded storage applications. Each competing standard is
mechanically and electronically incompatible with CompactFlash and MultiMediaCard. If a manufacturer of digital
cameras or other consumer electronic devices designs in one of these alternative competing standards, CompactFlash or
MultiMediaCard will be eliminated from use in that product.
In September 1998, IBM introduced the microdrive, a rotating disk drive in a type II CompactFlash format. Initially, this
product will compete directly with our type II CompactFlash memory cards, which we introduced in the second quarter
of 1999, for use in high end professional digital cameras. In October 1998, M-Systems introduced their Diskonchip
2000 Millennium product which is expected to compete against our Flash ChipSet products in embedded storage
applications such as set top boxes and networking appliances.
According to independent industry analysts, Sony's Mavica digital camera captured a considerable portion of the United
States market for digital cameras in 1998. The Mavica uses a standard floppy disk to store digital images and therefore
uses no CompactFlash (or any other flash) cards. Our sales prospects for CompactFlash cards have been adversely
impacted by the success of the Mavica. However, we do not believe that the Mavica's market share is increasing. Also,
our MultiMediaCard products have faced significant competition from Toshiba's SmartMedia flash cards and are
expected to face similarly significant competition from Sony's flash Memory Stick. Although the Memory Stick is
proprietary to Sony, if it is adopted and achieves widespread use in future products, sales of our MultiMediaCard and
CompactFlash products may decline.
We also face competition from products based on multilevel cell flash technology such as Intel's 64Mbit flash chip and
Hitachi's recently introduced 256Mbit flash chip. These products compete with our D2 multilevel cell flash technology.
Multilevel cell flash is a technological innovation that allows each flash memory cell to store two bits of information
instead of the traditional single bit stored by the industry standard flash technology. In the second quarter of 1999 Intel
announced their new 128Mbit multilevel cell chip and Hitachi began shipping customer samples of CompactFlash cards
employing their new multilevel cell flash chip. In addition, Toshiba has begun customer shipments of 32 megabyte
SmartMedia cards employing their new 256Mbit flash chip. Although Toshiba has not incorporated multilevel cell flash
technology in their 256Mbit flash chip, their use of more advanced lithographic design rules may allow them achieve a
more competitive cost structure than that of our 256Mbit D2 flash chip.
Furthermore, we expect to face competition from existing companies and from other companies that may enter our
existing or future markets that have similar or alternative data storage solutions which may be less costly or provide
additional features. Price is an important competitive factor in the market for consumer products. Increased price
competition could lower gross margins if our average selling prices decrease faster than costs and could also result in lost
sales.
We have entered into patent cross-license agreements with a number of our leading competitors, including, Hitachi, Intel,
Samsung, Sharp, SST and Toshiba. Under these agreements, each party may manufacture and sell products that
incorporate technology covered by the other party's patents related to flash memory devices. As we continue to license
our patents to certain competitors, competition will increase and may cause harm to our business, financial condition and
results of operations.>> |
