More on Lexar Media
On 7/28/00 Lexar Media filed an amended SEC Registration statement with Q2 results included.
They have sold $40 million worth of flash products during the first 6 months of 2000.
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Profitability
We incurred net losses of approximately $5.2 million, $9.1 million, $15.3 million and $19.1 million for 1997, 1998, 1999 and the six months ended June 30, 2000, respectively. As of June 30, 2000, we had an accumulated deficit of approximately $53.2 million. We will incur losses for this year and are likely to incur losses in 2001.
Licensing of Lexar Media Technology to Sony
In order to extend our digital film technology into these markets, we intend to selectively license our products and technology to third parties. We recently entered into an agreement with Sony to combine our proprietary controller technology with their Memory Stick media format. The Memory Stick is used in a wide variety of consumer electronic products, including camcorders, personal computers, portable music players, cameras and voice recorders. Our objective is to establish our products and services as the industry standard solution for capturing, storing, viewing, editing and distributing digital images. We intend to capitalize on the anticipated growth and development of the digital photography market by offering a broad range of digital film and connectivity products and services and to leverage our proprietary technology into other consumer product applications. We aim to:
*leverage our technology to enhance the digital photography experience;
*build our brand;
*extend our patented controller technology to address new market opportunities;
*capitalize on supply flexibility for our key components;
*expand our international presence
SanDisk
We are currently involved in significant and costly litigation with SanDisk Corporation, our primary competitor, in which the Federal District Court has found that some of our products infringe one of SanDisk's patents. In response to this ruling, we have commenced the redesign of these products in a manner that we believe does not infringe SanDisk's patent. These redesigned products are being tested in our labs and have met our requirements for functionality, reliability and compatibility. We believe that we will be able to ship redesigned products prior to the conclusion of the trial that is currently scheduled to commence on October 23, 2000. These redesigned products, however, 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.
Scope of Lexar's Infringement
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. Approximately 80% of our revenues in 1999 and in the first six months 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.
Remedies
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 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.
Redesigns: CompactFlash and PC Cards, but not Memory Stick
We are currently redesigning the controller used in our digital film for the CompactFlash
and PC Card formats.
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.
Supply Relationships
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, Samsung or another flash memory supplier in a timely manner, we would not be able to manufacture and deliver digital film to satisfy our customers' volume and schedule requirements.
There are three major types of flash memory: NAND, AND and NOR. We use industry standard NAND flash memory. Although we currently purchase almost all of our NAND flash memory from Toshiba and Samsung, we have the ability to use NAND flash memory produced by Advanced Micro Devices, Inc. and Fujitsu. Our controllers can also be configured to work with AND flash memory produced by Hitachi. Our controller technology can also be applied to other types of flash memory including NOR and other proprietary types of flash memory.
Product Features
Our high-performance digital film can record images faster than most other digital film. This performance advantage is particularly noticeable when used in advanced digital cameras that take advantage of our write speed, or the rate at which our film can capture a digital image. Many professional photographers choose to use our digital film over other brands. We offer digital film for substantially all digital cameras, including those manufactured by Agfa, Canon, Casio, Epson, Fuji, Hewlett-Packard, Kodak, Konica, Minolta, Nikon, Olympus, Polaroid, Ricoh, Sony and Yashica. We currently offer digital film in the four primary media formats currently used by digital cameras: CompactFlash, SmartMedia, PC Card and Memory Stick. Our technology can be applied to a variety of consumer electronic applications, including digital cameras, Internet music players, laptop computers, personal digital assistants, telecommunication and network devices and digital video recorders. As an example of how we intend to leverage our digital film technology into some of these markets, we have an agreement with Sony under which we combine our proprietary controller technology with their Memory Stick media format and include the Memory Stick as one of our digital film products. The Memory Stick is used in a wide variety of consumer electronic products, including camcorders, personal computers, portable music players, cameras and voice recorders. Under our agreement, we and Sony have cross-licensed technology to each other. We have the right to manufacture and sell the current version of the Memory Stick, and are obligated to pay a royalty to Sony for each Memory Stick that we sell. We have agreed to collaborate on technology development with Sony, including the development of a high-speed Memory Stick through the use of our proprietary controller technology. Sony is obligated to pay us royalties on Memory Sticks that it sells that incorporate our technology.
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Note: Lexar Media is not redesigning the Memory Stick product, suggesting that it does not infringe on SanDisk's patents. However, SanDisk has asserted that all of the controllers infringe. It will be interesting to see how this plays out.
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