Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ------------ Exchange Act of 1934 For the quarterly period ended June 30, 1998
OR
Transition report pursuant to Section 13 or 15(d) of the Securities
- ------------ Exchange Act of 1934 For the transition period from to
----- -----
Commission File Number 0-26734
SanDisk Corporation
(Exact name of registrant as specified in its charter)
Delaware 77-0191793
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
140 Caspian Court, Sunnyvale, California 94089
(Address of principal executive offices) (Zip code)
(408) 542-0500
(Registrant's telephone number, including area code)
N/A
(Former name, former address, and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of June 30, 1998
Common Stock, $0.001 par value 26,209,294
------------------------------ ----------
Class Number of shares
SanDisk Corporation
Index
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997............................ 3
Condensed Consolidated Statements of Income
Three and six months ended June 30, 1998 and 1997.............. 4
Condensed Consolidated Statements of Cash Flows
Three and six months ended June 30, 1998 and 1997.............. 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 27
Item 2. Changes in Securities............................................. 27
Item 3. Defaults upon Senior Securities................................... 27
Item 4. Submission of Matters to a Vote of Security Holders............... 27
Item 5. Other Information................................................. 27
Item 6. Exhibits and Reports on Form 8-K.................................. 28
Signatures........................................................ 30
Page 2
PART I. FINANCIAL INFORMATION
SanDisk Corporation
Condensed Consolidated Balance Sheets
(In thousands)
ASSETS June 30, December 31,
1998 1997*
-------- --------
(unaudited)
Current Assets:
Cash and cash equivalents $ 13,467 $ 20,888
Short-term investments 118,203 114,037
Accounts receivable, net 16,117 19,352
Inventories 21,568 15,648
Deferred tax assets 17,060 17,060
Prepaid expenses and other current assets 1,255 1,406
-------- --------
Total current assets 187,670 188,391
Property and equipment, net 15,591 15,892
Investment in foundry 40,284 40,284
Deposits and other assets 1,141 900
-------- --------
Total Assets $244,686 $245,467
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 10,914 $ 14,111
Accrued payroll and related expenses 3,736 4,674
Other accrued liabilities 5,348 7,341
Deferred revenue 26,221 27,967
-------- --------
Total current liabilities 46,219 54,093
Stockholders' Equity:
Common stock 183,114 181,921
Retained earnings 15,353 9,453
-------- --------
Total stockholders' equity 198,467 191,374
Total Liabilities and
-------- --------
Stockholders' Equity $244,686 $245,467
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
* Information derived from the audited Consolidated Financial Statements.
Page 3
SanDisk Corporation
Condensed Consolidated Statements of Income
(In thousands, except per share data; unaudited)
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
------- ------- ------- -------
Revenues:
Product $23,480 $23,922 $48,906 $42,116
License and royalty 7,881 3,425 16,557 6,675
------- ------- ------- -------
Total revenues 31,361 27,347 65,463 48,791
Cost of sales 20,560 16,375 38,332 29,340
------- ------- ------- -------
Gross profits 10,801 10,972 27,131 19,451
Operating expenses:
Research and development 4,474 3,083 8,805 6,084
Sales and marketing 4,248 2,971 8,199 5,532
General and administrative 1,709 1,527 3,753 2,904
------- ------- ------- -------
Total operating expenses 10,431 7,581 20,757 14,520
Operating income 370 3,391 6,374 4,931
Interest and other income, net 1,278 954 2,617 1,909
------- ------- ------- -------
Income before taxes 1,648 4,345 8,991 6,840
Provision for income taxes 595 655 3,235 1,025
======= ======= ======= =======
Net income $ 1,053 $ 3,690 $ 5,756 $ 5,815
======= ======= ======= =======
Net income per share
Basic $ 0.04 $ 0.16 $ 0.22 $ 0.26
Diluted $ 0.04 $ 0.15 $ 0.21 $ 0.24
Shares used in computing
net income per share
Basic 26,168 22,475 26,094 22,437
Diluted 27,834 24,414 27,928 24,260
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4
SanDisk Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands; unaudited)
Six months ended
June 30,
1998 1997
-------- --------
Cash flows used in operating activities:
Net income $ 5,756 $ 5,815
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 3,166 1,811
Accounts receivable, net 3,235 (4,366)
Inventory (5,920) (2,035)
Prepaids and other assets (90) 429
Accounts payable (3,197) (66)
Accrued payroll and related expenses (938) 241
Other accrued liabilities (1,993) (251)
Deferred revenue (1,746) (2,180)
-------- --------
Total adjustments (7,483) (6,417)
-------- --------
Net cash used in operating activities (1,727) (602)
Cash flows provided by (used in) investing activities:
Purchases of short term investments (85,654) (29,626)
Proceeds from sale of short term investments 81,632 34,313
Acquisition of capital equipment (2,865) (2,936)
-------- --------
Net cash provided by (used in) investing activities (6,887) 1,751
Cash flows from financing activities:
Sale of common stock 1,193 646
-------- --------
Net cash provided by financing activities 1,193 646
-------- --------
Net increase (decrease) in cash and cash equivalents (7,421) 1,795
Cash and cash equivalents at beginning of period 20,888 19,323
======== ========
Cash and cash equivalents at end of period $ 13,467 $ 21,118
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5
SanDisk Corporation
Notes to Condensed Consolidated Financial Statements
1. These interim condensed consolidated financial statements are unaudited
but reflect, in the opinion of management, all normal recurring
adjustments necessary to present fairly the financial position of SanDisk
Corporation and Subsidiaries (the "Company") as of June 30, 1998, and the
results of operations and cash flows for the three and six month periods
ended June 30, 1998 and 1997. Because all the disclosures required by
generally accepted accounting principles are not included, these interim
condensed consolidated financial statements should be read in conjunction
with the audited financial statements and notes thereto in the Company's
annual report on Form 10-K as of, and for the year ended December 31,
1997. The condensed consolidated balance sheet data as of December 31,
1997 was derived from the audited financial statements.
The results of operations and cash flows for the three and six month
period ended June 30, 1998 are not necessarily indicative of results of
operations and cash flows for any future period.
2. The Company's fiscal year ends on the Sunday closest to December 31, and
each fiscal quarter ends on the Sunday closest to March 31, June 30, and
September 30. The second fiscal quarter of 1998 and 1997 ended on June
28, 1998 and June 29, 1997, respectively. Fiscal year 1997 ended on
December 28, 1997. For ease of presentation, the accompanying financial
statements have been shown as ending on the last day of the calendar
month.
3. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
4. The components of inventory consist of the following:
June 30, December 31,
1998 1997
-------- --------
(In thousands)
Raw materials $ 4,416 $ 3,289
Work-in-process 11,643 10,340
Finished goods 5,509 2,019
-------- --------
$ 21,568 $ 15,648
======== ========
Page 6
5. The following table sets forth the computation of basic and diluted earnings
per share:
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
------- ------- ------- -------
(In thousands, except
per share amounts)
Numerator:
Numerator for basic and diluted
net income per share - net income $ 1,053 $ 3,690 $ 5,756 $ 5,815
======= ======= ======= =======
Denominator for basic net income per share:
Weighted average common shares 26,168 22,475 26,094 22,437
------- ------- ------- -------
Shares used in computing basic net income
per share 26,168 22,475 26,094 22,437
======= ======= ======= =======
Basic net income per share $ 0.04 $ 0.16 $ 0.22 $ 0.26
======= ======= ======= =======
Denominator for diluted net income per share:
Weighted average common shares 26,168 22,475 26,094 22,437
Employee stock options and warrants
to purchase common stock 1,666 1,939 1,834 1,823
------- ------- ------- -------
Shares used in computing diluted net income
per share 27,834 24,414 27,928 24,260
======= ======= ======= =======
Diluted net income per share $ 0.04 $ 0.15 $ 0.21 $ 0.24
======= ======= ======= =======
6. To preserve its intellectual property rights, the Company believes it may
be necessary to initiate litigation with one or more third parties,
including but not limited to those the Company has notified of possible
patent infringement. In addition, one or more of these parties may bring
suit against the Company.
In March 1998, the Company filed a complaint in federal court against
Lexar Media, Inc. ("Lexar") for infringement of a fundamental flashdisk
patent. Lexar has disputed the Company's claim of patent infringement,
claimed SanDisk's patent is invalid or unenforceable and asserted various
counterclaims including unfair competition, violation of the Lanham Act,
patent misuse, interference with prospective economic advantage, trade
defamation and fraud. SanDisk has denied each of Lexar's counterclaims.
In July 1998, the federal district court denied Lexar's request to have
the case dismissed on the grounds the Company failed to perform an
adequate prefiling investigation. As a result, discovery in the Lexar
suit will commence in August 1998. The Company intends to vigorously
enforce its patents, but there can be no assurance that these efforts
will be successful.
From time to time the Company agrees to indemnify certain of its
suppliers and customers for alleged patent infringement. The scope of
such indemnity varies but may in some instances include
Page 7
indemnification for damages and expenses, including attorneys fees. The
Company may from time to time be engaged in litigation as a result of
such indemnification obligations. Third party claims for patent
infringement are excluded from coverage under the Company's insurance
policies. There can be no assurance that any future obligation to
indemnify the Company's customers or suppliers, will not have a material
adverse effect on the Company's business, financial condition and results
of operations.
Any litigation, whether as a plaintiff or as a defendant, will likely
result in significant expense to the Company and divert the efforts of
the Company's technical and management personnel, whether or not such
litigation is ultimately determined in favor of the Company. In the event
of an adverse result in any such litigation, the Company could be
required to pay substantial damages, cease the manufacture, use and sale
of infringing products, expend significant resources to develop
non-infringing technology or obtain licenses to the infringing
technology, or discontinue the use of certain processes. Accordingly,
there can be no assurance that any of the foregoing matters, or any
future litigation, will not have a material adverse effect on the
Company's business, financial condition and results of operations.
7. The Company recorded a provision for income taxes at a 36% effective tax
rate for the first six months of 1998 compared to a 15% effective tax
rate for the same period of 1997. The effective tax rate for the first
six months of 1997 was substantially below the federal statutory rate due
to the utilization of federal and state tax credit carryforwards, Foreign
Sales Corporation tax benefits and a reduction in the deferred tax asset
valuation allowance.
8. The Company has a credit agreement (the Agreement) with a bank, which was
renewed in July 1998. Under the provisions of the Agreement, which
expires in July 1999, the Company may borrow up to $10.0 million on a
revolving line of credit at the bank's prime interest rate. Amounts under
the revolving line of credit can be applied to the issuance of letters of
credit up to the full amount of the credit line. At June 30, 1998, $7.2
million of letters of credit were outstanding. In addition, under the
Agreement, the Company also has a $15.0 million foreign exchange contract
line under which the Company may enter into foreign exchange contracts.
As of June 30, 1998, $4.4 million was outstanding under the foreign
exchange contract portion of the line. The Agreement contains covenants
that require the Company to maintain certain financial ratios and levels
of net worth. The Agreement prohibits the payment of cash dividends to
stockholders.
9. As of January 1, 1998, the Company adopted statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income." SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
Statement had no impact on the Company's net income or stockholders'
equity. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income.
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
------- ------- ------- -------
(In thousands)
Net income $ 1,053 $ 3,690 $ 5,756 $ 5,815
Unrealized gain (loss) on
available-for-sale securities 19 76 144 (10)
------- ------- ------- -------
Comprehensive income $ 1,072 $ 3,766 $ 5,900 $ 5,805
======= ======= ======= =======
Page 8
Accumulated other comprehensive income, which consists of gains (losses)
on available-for-sale securities, was $187,000 and ($4,000) at June 30,
1998 and 1997, respectively.
10. In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which is required to be adopted in years beginning after June 15, 1999.
Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of the new statement will have a significant
effect on earnings or the financial position of the Company.
Page 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements in this discussion and analysis, including in
particular, the second paragraph under the discussion of product revenues and
the paragraph discussing patent license and royalty revenues, are forward
looking statements based on current expectations and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward looking statements. Such risks and uncertainties are
discussed below and in the Company's Form 10-K for the year ended December 31,
1997 under the heading "Risk Factors". Readers are cautioned not to place undue
reliance on these forward looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to update these forward looking
statements to reflect events or circumstances occurring after the date hereof.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto.
Overview
The Company was founded in 1988 to develop and market flash data
storage systems. The Company sells its products to the consumer electronics and
industrial/communications markets. During the course of 1997, the percentage of
the Company's product sales attributable to the consumer electronics market,
particularly sales of its CompactFlash products for use in digital camera
applications, increased substantially. This increase in sales to the consumer
market resulted in a shift to lower capacity products, which typically have
lower average selling prices and gross margins than higher capacity products. In
addition, these products are frequently sold into the retail channel, which
usually has shorter customer order lead-times than the other channels used by
the Company, thereby decreasing the Company's ability to accurately forecast
future production needs. Subject to continued market acceptance of its
CompactFlash products, the Company believes these products will continue to
represent a majority of the Company's sales as the popularity of consumer
applications, including digital cameras, increases. The percentage of sales
attributable to orders received and fulfilled in the same quarter has increased
over time and, in response, the Company is continuing to work to shorten its
manufacturing cycle times.
The Company's operating results are affected by a number of factors
including the volume of product sales, the timing of significant orders,
competitive pricing pressures, the ability of the Company to match supply with
demand, changes in product and customer mix, market acceptance of new or
enhanced versions of the Company's products, changes in the channels through
which the Company's products are distributed, timing of new product
announcements and introductions by the Company and its competitors, the timing
of license and royalty revenues, fluctuations in product costs, the ability of
the Company to achieve manufacturing efficiencies with its new and existing
products, availability of foundry capacity, variations in manufacturing cycle
times, fluctuations in manufacturing yields and manufacturing utilization,
increased research and development expenses and exchange rate fluctuations. In
addition, as the proportion of the Company's products sold for use in consumer
electronics applications increases, the Company's revenues may become subject to
seasonal declines in the first quarter of each year. See "Risk Factors -
Fluctuations in Operating Results", "- Increasing Dependence on Consumer
Products" and "- Seasonality."
Beginning in late 1995, the Company adopted a strategy of licensing its
flash technology, including its patent portfolio, to selected third party
manufacturers of flash products. To date, the Company has entered into patent
cross-license agreements with six companies, and it intends to pursue
opportunities to enter into additional licenses. The Company's current license
agreements provide for the payment of license fees, royalties, or a combination
thereof, to the Company. The timing and amount of these payments can vary
substantially from quarter to quarter, depending on the terms of each agreement
and, in some cases, the timing of sales of products by the other parties. As a
result, license and royalty revenues have fluctuated significantly in the past
and are likely to continue to fluctuate in the future. Given the relatively high
gross margins associated with license and royalty revenues, gross margins and
net income are likely to fluctuate more with changes in license and royalty
revenues than with changes in product revenues.
Page 10
SanDisk markets its products using a direct sales organization,
distributors, manufacturers' representatives, private label partners, OEMs and
retailers. The Company expects that sales through the retail channel will
comprise an increasing share of total revenues in the future, and that a
substantial portion of its sales into the retail channel will be made to
participants that will have the right to return unsold products. The Company
recognizes revenues from these sales when the products are sold to the end
customers.
Historically, a majority of the Company's sales have been to a limited
number of customers. The Company expects that sales of its products to a limited
number of customers will continue to account for a substantial portion of its
product revenues for the foreseeable future. The Company has also experienced
significant changes in the composition of its customer base from year to year
and expects this pattern to continue as market demand for such customers'
products fluctuates. The loss of, or significant reduction in purchases by major
customers, could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors - Customer
Concentration."
Due to the emerging nature of the Company's markets and certain planned
product transitions, the Company has had difficulty forecasting future inventory
levels required to meet customer demand. As a result of both contractual
obligations and manufacturing cycle time, the Company has been required to order
wafers from its foundries several months in advance of the ultimate shipment of
its products. Under the Company's wafer supply agreements, there are limits on
the number of wafers the Company can order and the Company's ability to change
that quantity is restricted. Accordingly, the Company's ability to react to
significant fluctuations in demand for its products is limited. As a result, the
Company has not been able to match its purchases of wafers to specific customer
orders and therefore the Company has from time to time taken write downs for
potential excess inventory purchased prior to the receipt of customer orders.
Also, the Company has from time to time taken write downs of inventory to
reflect a lower of cost or market valuation. The Company most recently recorded
such a write down in the second quarter of 1998. These adjustments decrease
gross margins in the quarter reported and have resulted, and could in the future
result, in fluctuations in gross margins on a quarter to quarter basis. See
"Risk Factors - Fluctuations in Operating Results."
Export sales are an important part of the Company's business. While a
majority of the Company's revenues from sales to Asian countries are derived
from OEM customers who plan to export their products to countries outside of
Asia, the Asian economic crisis has and may continue to adversely effect the
Company's revenues to the extent that demand for the Company's products in Asia
declines. Given the recent economic conditions in Asia and the weakness of many
Asian currencies relative to the United States dollar, the Company's products
are and may continue to be relatively more expensive in Asia, which could result
in a decrease in the Company's sales in that region. The Company has and may
continue to experience pressure on its gross margins as a result of increased
price competition from Asian competitors. While most of the Company's sales are
denominated in U.S. Dollars, the Company invoices certain Japanese customers in
Japanese Yen and is subject to exchange rate fluctuations on these transactions.
To date, a portion of the Company's purchases of wafers, which constitute a
significant part of its cost of goods sold, have been denominated in Japanese
Yen. While this percentage has been decreasing, exchange rate fluctuations can
affect the Company's business, financial condition and results of operations.
See "Risk Factors - Risks Associated with International Operations."
For the foreseeable future, the Company expects to realize a
significant portion of its revenues from recently introduced and new products.
Typically new products initially have lower gross margins than more mature
products because the manufacturing yields are lower at the start of
manufacturing each successive product generation. In addition, manufacturing
yields are generally lower at the start of manufacturing any product at a new
foundry, such as USIC and NEC. As a result of these factors, the Company expects
that product gross margins may decline in the near term from the levels
experienced in 1997, and product gross margins are expected to be subject to
fluctuation for the foreseeable future. Moreover, there can be no assurance that
such products or processes will be successfully developed by the
Page 11
Company or that development of such processes will lower manufacturing costs. In
addition, the Company anticipates that price competition will increase in the
future, which will likely result in decreased average selling prices and lower
gross margins. See "Risk Factors -Manufacturing Yields" and "- Declining Average
Sales Prices."
The Company is aware of problems associated with computer systems as
the year 2000 approaches. Year 2000 problems are the result of common computer
programming techniques that result in systems that do not function properly when
manipulating dates later than December 31, 1999. The issue is complex and wide
ranging. The problem may affect transaction processing computer applications
used by the Company for accounting, distribution, manufacturing, and planning.
The problem may also affect embedded systems such as building security systems,
machine controllers and production test equipment. Year 2000 problems with these
systems may affect the ability or efficiency with which the company can perform
many significant functions, including but not limited to: order processing,
material planning, product assembly, product test, invoicing, and financial
reporting. In addition, the problem may affect the computer systems of the
Company's suppliers and customers, disrupting their operations. Year 2000
problems with the Company's business partners may impact the Company's sources
of supply and demand.
The Company has established a year 2000 Risk Management program to
assess the impact of the year 2000 issue on SanDisk, and coordinate remediation
activities. The Company is in the process of certifying that it's products are
year 2000 compliant. Preliminary product testing has uncovered no Year 2000
problems in the Company's products. Preliminary investigation into product
design, specifically firmware, microcode, and software developer tool kits has
uncovered no design assumptions or application programming interfaces that would
cause year 2000 problems. The Company expects to compete the year 2000
compliance testing of its products in the third quarter of 1998.
The year 2000 compliance assessment of the Company's management
information system is complete, and remediation is well underway. The Company
currently uses a commercially available fully integrated MRP II (Materials
Requirement Planning and Accounting system) software application that is not
year 2000 compliant. This system is used for Accounting, Order Processing,
Planning, Inventory Control, Shop Floor Control and Distribution. This system is
now being replaced with a commercial system that is year 2000 compliant. The
replacement project is expected to be completed in 1998.
The assessment and remediation of year 2000 problems in tertiary
business information systems is on-going. Well over 90% of the company's
investment in desktop PC hardware is known to be year 2000 compliant. The
majority of the software used on these systems and network servers are recent
versions of vendor supported, commercially available products. Upgrading these
applications as year 2000 compliant patches are released by the respective
vendors has not been a significant burden on the company.
The assessment and remediation of year 2000 problems in computer
systems used for facilities control, machine control, and manufacturing testing
is on-going. The most significant year 2000 issue in this area has been found to
be related to older wafer test equipment. This equipment is not expected to be
in use in the year 2000. The Company is phasing in new year 2000 compliant wafer
test equipment in conjunction with the introduction of new generations of flash
memory.
The cost of the Year 2000 project related to upgrading the Company's
core management information system is estimated to be approximately $1.0
million. The Company has capitalized approximately $400,000 for the cost of
purchased software and hardware. The Company estimates it will incur
approximately $350,000 of consulting expenses over the next few quarters related
to the implementation of its new information system. The additional expenses
related to the management of the year 2000 compliance program and completing the
assessment of the Company's internal and external risks is not expected to be
material to the Company's quarterly operating results.
The costs and time schedule for the Year 2000 problem abatement are
based on management's best estimates for the implementation of its new
management information system and year 2000 problems
Page 12
uncovered to date. These estimates were derived utilizing numerous assumptions,
including that the most significant Year 2000 risks have already been
identified, that certain resources will continue to be available, that third
party plans will be fulfilled, and other factors. However, there can be no
guarantee that these estimates will be achieved or that the anticipated time
schedule will be met and actual results could differ materially from those
anticipated.
Specific contingency plans for systems that pose significant risk to
on-going operations are being developed under the auspices of the Company's year
2000 Risk Management program. If the Company is unable to complete the
replacement of its core management information system in a timely manner, an
alternative plan has been developed. This plan consists of applying available
vendor supplied software patches to the existing system. The costs and time
involved to complete this alternative are expected to be minimal. Should
previously undetected Year 2000 problems be found in other systems, these
systems will either be upgraded, replaced, turned off, or operated in place with
manual procedures to compensate for their deficiencies. While the Company
believes that these alternative plans would be adequate to meet the Company's
needs without materially impacting its operations, there can be no assurance
that such alternatives would be successful or that the Company's results of
operations would not be materially adversely affected by the delays and
inefficiencies inherent in conducting operations in this manner.
There may be additional Year 2000 problems that are as yet unknown to
the Company and for which remediation plans have not yet been made. Any such
year 2000 compliance problem of either the Company, or its suppliers or
customers could materially adversely affect the Company's business, results of
operations, financial condition, and prospects. There can be no assurance that
the Company's insurance will cover losses from business interruptions arising
from year 2000 problems of the Company or its suppliers.
See "Risk Factors - Year 2000 Compliance."
Results of Operations
Product Revenues. SanDisk's product revenues were $23.5 million in the
second quarter of 1998, down $0.4 million or 2% from the second quarter of 1997.
Product revenues for the first half of 1998 were $48.9 million, up $6.8 million
or 16% from the same period in 1997. During the three and six month periods
ended June 30, 1998, units shipped increased 17% and 42%, respectively, from the
same periods of 1997. In the second quarter of 1998, the trend toward sales of
higher capacity cards continued with the average megabyte capacity per unit
increasing 56% from the same period of the prior year. Due to the decline in
average selling prices, the average selling price per megabyte of capacity
declined by 50% over this period. CompactFlash average selling prices have
eroded more quickly than anticipated due to increased price competition and weak
demand. The Company anticipates that CompactFlash and other small form factor
products will continue to represent the major portion of its sales as consumer
applications such as digital cameras become more popular. Due to price
sensitivity and intense competition in the consumer market, sales of these
products generally have lower average selling prices and gross margins than the
Company's higher capacity FlashDisk and FlashDrive products. The mix of products
sold varies from quarter to quarter and may vary in the future, affecting the
Company's overall average selling prices and gross margins.
Sales to Japan declined 20% in the second quarter of 1998 compared to
the same period in 1997 due to the to the economic recession in Japan and the
Company's transition to a direct sales model from the use of distributors in the
retail channel in Japan. The Company continues to experience limited bookings
visibility, particularly in Japan. More than one half of the Company's
anticipated quarterly revenues continue to be turns business, orders received
and fulfilled in the same quarter, with customers demanding short lead times and
quick delivery schedules, thus capitalizing on the current market conditions and
aggressive pricing environment. Due to a number of factors described herein and
in "Risk Factors," the Company's ability to adjust its operating expenses is
limited in the short term. As a result, if product revenues are lower than
anticipated, the Company's results of operations will be adversely affected. See
Page 13
"Risk Factors-Fluctuations in Operating Results", "- Risks Associated with
International Operations" and "Seasonality."
While SanDisk has been successful winning design-ins for many new
applications, it generally takes several quarters for these new customer
products to reach the market. It is difficult to predict the timing of related
new product introductions and future sales volumes from these design-ins as the
success of the customers' products is uncertain. There can be no assurance the
applications will be developed and marketed successfully or at all. As new
markets develop, competition is expected to increase, which will likely cause
average selling prices to decline further and may cause gross margins to
decline.
Export sales represented 46% of product revenues for the three and six
month periods ended June 30, 1998 compared with 52% and 47%, respectively, for
the same periods of the previous year. The Company expects international sales
to continue to represent a significant portion of revenues. The Company's top
ten customers represented 64% of product revenue in the second quarter of 1998
compared to 67% for the same period in 1997. The Company expects that sales to a
limited number of customers will continue to represent a substantial portion of
its revenues for the foreseeable future.
License and Royalty Revenues. The Company currently earns patent
licenses and royalty revenues under six cross license agreements, with Hitachi,
Intel, Samsung, Sharp, Silicon Storage Technology, Inc. ("SST") and Toshiba.
License and royalty revenue from patent cross license agreements was $7.9
million in the second quarter of 1998, up $4.5 million from $3.4 million in the
same period of 1997 primarily due to license and royalty revenues earned under
agreements with Hitachi, Toshiba and Sharp which were entered into in the second
half of 1997. In the first half of 1998, revenue from patent license and
royalties was $16.6 million, up $9.9 million from the same period of 1997.
Revenues from patent licenses and royalties increased to 25% of total revenues
in the three and six month periods ended June 30, 1998 from 13% and 14%
respectively, for the same periods of the previous year. The Company currently
expects that revenues from patent licenses and royalties will be in the range of
$7.5 to $8.0 million in the third quarter of 1998 due to the timing of revenue
recognition under the various agreements.
Gross Profits. In the second quarter of 1998, gross profits were $10.8
million or 34% of total revenues, down slightly from $11.0 million or 40% of
total revenues for the same period of 1997. Gross profits for the first half of
1998 were $27.1 million or 41% of total revenues compared to $19.5 million or
40% of total revenues for the same period in the previous year. The growth in
overall gross profits for the first half of 1998 was due to an increase in
license and royalty revenue. Product gross margins decreased to 12% in the
second quarter of 1998 compared to 32% for the same period of 1997. The decrease
was primarily due to the decline in average selling prices. A lower of cost or
market inventory write down also contributed to the decline in gross margins.
The Company expects to complete the transition from 32Mbit, 0.4 micron
technology to the more cost effective 64Mbit, 0.35 micron technology and begin
shipment of its 80Mbit D2 flash products in the second half of 1998. If this
transition is successful, the Company expects gross margins to recover to the
low 20% range over this period. While the Company has ongoing efforts to reduce
manufacturing costs, there can be no assurance that these cost reductions will
be adequate to offset average selling price declines due to anticipated
increased competition.
Research and Development. Research and development expenses consist
principally of salaries and payroll related expenses for design and development
engineers, prototype supplies and contract services. Research and development
expenses increased $1.4 million or 45% in the second quarter of 1998 compared to
the same period in 1997. In the first half of 1998 research and development
expenses increased $2.7 million compared to the first half of 1997. These
increases were primarily due to an increase in salaries and payroll related
expenses associated with additional personnel, increased project related
expenses and increased depreciation due to capital equipment additions. Research
and development expenses represented 14% of total revenues for the second
quarter of 1998 compared to 11% for the same period in 1997. The Company expects
research and development expenses to continue to increase in absolute dollars to
support the development of new generations of flash data storage products and
the addition of new foundries to manufacture the Company's products.
Page 14
Sales and Marketing. Sales and marketing expenses include salaries and
payroll related expenses, sales commissions and travel expenses for the
Company's sales, marketing, customer service and applications engineering
personnel. These expenses also include other selling and marketing expenses such
as independent manufacturer's representative commissions, advertising and
tradeshow expenses. Sales and marketing expenses increased $1.3 million or 43%
in the second quarter of 1998 compared to the same period in 1997. In the first
half of 1998, sales and marketing expenses increased $2.7 million compared to
the first half of 1997. These increases were primarily due to increased
marketing and sales expenses related to the development of the retail channel
for the Company's products. An increase in salaries and payroll related expenses
associated with additional personnel also contributed to the increase in the
first half of 1998. Sales and marketing expenses represented 14% of total
revenues in the second quarter of 1998 compared to 11% for the same period of
1997. The Company expects sales and marketing expenses to increase in absolute
dollars as sales of its products grow and it continues to develop the retail
channel for its products both domestically and internationally.
General and Administrative. General and administrative expenses include
the cost of the Company's finance, information systems, human resources,
shareholder relations, legal and administrative functions. General and
administrative expenses increased $0.2 million or 12% in the second quarter of
1998 compared to the same period of 1997. In the first half of 1998, general and
administrative expenses increased $0.8 million or 29% compared to the first half
of 1997. These increases were primarily due to increased salaries and payroll
related expenses associated with additional personnel and higher consulting
expenses related to the implementation of the Company's new management
information system. General and administrative expenses represented 5% of total
revenues in the second quarter of 1998 compared to 6% for the same period in
1997. The Company expects general and administrative expenses to increase in
absolute dollars as these functions grow to support the overall growth of the
Company. General and administrative expenses could also increase substantially
in the future in connection with the Company's efforts to defend its patent
portfolio. See "Risk Factors-Patents Proprietary Rights and Related Litigation."
Interest and Other Income, Net. Interest and other income, net,
increased $324,000 in the second quarter of 1998 compared to the same period of
1997. This increase was primarily due to higher investment balances as a result
of the investment of proceeds from the sale of common stock in the Company's
November 1997 follow on public offering.
Provision for Income Taxes. The Company recorded a provision for income
taxes at a 36% effective tax rate for the first six months of 1998 compared to a
15% effective tax rate for the same period of 1997. The effective tax rate for
the first six months of 1997 was substantially below the federal statutory rate
due to the utilization of federal and state tax credit carryforwards, foreign
sales corporation tax benefits and a reduction in the deferred tax asset
valuation allowance. The Company's 1998 effective tax rate is substantially
higher than its 1997 rate due to the utilization of all remaining federal and
state tax credit carryforwards in 1997.
Liquidity and Capital Resources
As of June 30, 1998, the Company had working capital of $141.5 million,
which included $13.5 million in cash and cash equivalents and $118.2 million in
short term investments. The Company has a line of credit facility with a
commercial bank under which it can borrow up to $10 million at the bank's prime
rate. This line of credit facility expires in July 1999. As of June 30, 1998,
the Company had $4.4 million committed under the foreign exchange facility of
the line of credit for Yen forward exchange contracts that mature in September
of 1998. The Agreement contains covenants that require the Company to maintain
certain financial ratios and levels of net worth, and prohibits the payment of
cash dividends to stockholders.
Operating activities used $1.7 million of cash during the first six
months of 1998 primarily due to a decline in current liabilities and an increase
in inventories. Investing activities used $6.9 million of cash
Page 15
in the first six months of 1998 and included net purchases of investments of
$4.0 million and $2.9 million of capital equipment purchases. During the first
six months of 1998, financing activities provided $1.2 million of cash primarily
from the sale of common stock under the SanDisk employee stock purchase and
stock option plans.
Depending on the demand for the Company's products, the Company may
decide to make investments, which could be substantial, in assembly and test
manufacturing equipment or foundry capacity to support its business in the
future. Management believes the existing cash and cash equivalents, short term
investments and available line of credit, together with cash flow from
operations, will be sufficient to meet the Company's currently anticipated
working capital and capital expenditure requirements for at least the next
twelve months.
Impact of Currency Exchange Rates
The Company currently purchases wafers from Matsushita under purchase
contracts denominated in yen. A portion of the Company's revenues are also
denominated in yen. Foreign exchange exposures arising from the Company's yen
denominated commitments and related accounts payable are offset to the extent
the Company has yen denominated accounts receivable and cash balances. To the
extent such foreign exchange exposures are not offset, the Company enters into
foreign exchange forward contracts to hedge against changes in foreign currency
exchange rates. At June 30, 1998, there were $4.4 million in Yen forward
contracts outstanding. Future exchange rate fluctuations could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Risk Factors
Fluctuations in Operating Results. SanDisk's operating results have
been and are expected to continue to be, subject to quarterly and annual
fluctuations due to a variety of factors. The principal factors that have caused
the Company's operating results to fluctuate in the past several quarters and
may cause the Company's operating results to fluctuate in the future are
unpredictable demand for the Company's products, declining average selling
prices, the economic recession in Japan and the seasonality in sales of products
for consumer electronics applications. For example, the Company's product
revenues declined in the first and second quarters of 1998 due to lower average
selling prices, a decline in sales to Japan and seasonal factors.
The Company must order silicon wafers from its foundries several months
prior to the date such wafers are needed. If the Company overestimates the
number of silicon wafers it needs to fill product orders and as a result builds
excess inventories, gross margins and operating results will be materially
adversely affected. For example, in the second quarter of 1998 product gross
margins declined to 12% from 30% in the previous quarter partially due to a
lower of cost or market write down of inventory. Because the Company is selling
CompactFlash, its largest volume product, into an emerging consumer market and
is unable to accurately forecast future sales, there will be a material adverse
effect on the Company's operating results if sales fall below the Company's
expectations in a particular quarter and the Company is unable to reduce its
operating expenses. The portion of the Company's quarterly sales attributable to
orders received and fulfilled in the same quarter ("turns business") remains
higher than 50% and product order backlog fluctuates substantially from quarter
to quarter. See "Seasonality" and "Dependence on Third Party Foundries."
Other factors affecting the Company's operating results and gross
margins include the volume of product sales, competitive pricing pressures, the
ability of the Company to match supply with demand, changes in product and
customer mix, market acceptance of new or enhanced versions of the Company's
products, changes in the channels through which the Company's products are
distributed, timing of new product announcements and introductions by the
Company and its competitors, the timing of license and royalty revenue,
fluctuations in product costs, availability of foundry capacity, variations in
Page 16
manufacturing cycle time, fluctuations in manufacturing yields and manufacturing
utilization, the ability of the Company to achieve manufacturing efficiencies
with its new and existing products, increased research and development expenses,
exchange rate fluctuations and changes in general economic conditions, including
economic conditions in Asia. All of these factors are difficult to forecast and
these or other factors can materially affect the Company's quarterly or annual
operating results or gross margins.
The Company has increased its expense levels to support its anticipated
growth, including expenses associated with the expansion of the Company's
in-house assembly and test operations. The Company expects to continue to
increase its operating expenses by hiring additional personnel to support
expected growth in sales unit volumes, increased marketing and sales efforts and
accelerated research and development activities. If the Company does not achieve
increased levels of revenues commensurate with these increased levels of
operating expenses, or if the Company's revenues decrease or do not meet the
Company's expectations for a particular period, the Company's business,
financial condition and results of operations will be materially adversely
affected.
The mix of the Company's products sold varies from quarter to quarter
and will vary in the future, affecting the Company's overall average selling
prices and gross margins. The Company's CompactFlash products, which currently
represent a significant portion of the Company's product revenues, have lower
average selling prices and gross margins than the Company's higher capacity
FlashDisk and FlashDrive products. The Company expects that sales of
CompactFlash products will represent a significant percentage of product
revenues as consumer applications such as digital cameras become more popular.
This dependence on CompactFlash sales, coupled with lower pricing due to
competition, has caused and is expected to continue to cause average selling
prices to decline, sometimes at a faster rate than cost reductions implemented
by the Company.
The Company has adopted a strategy of cross-licensing its patents to
other manufacturers of flash products. Under such arrangements, the Company
earns license fees and royalties on terms that are individually negotiated. The
timing of recognition of revenues from these payments depends on the terms of
each contract, and, in some cases, on the timing of product shipments by the
third parties. As a result, license and royalty revenue has fluctuated
significantly in the past and may fluctuate in the future. Given the relatively
high gross margins associated with license and royalty revenue, gross margins
and net income are likely to fluctuate more with changes in license and royalty
revenue than with changes in product revenue.
Dependence on Emerging Markets and New Products. The Company's success
depends to a significant extent upon the development of emerging markets and new
applications for flash data storage systems, as well as on its ability to
introduce commercially attractive and competitively priced products on a timely
basis. The Company believes that continued significant expenditures for research
and development will be required in the future. In particular, the Company
intends to develop new products with increased memory capacity at a lower cost
per megabyte, which the Company believes will be essential to its ability to
remain competitive. In November 1997, the Company introduced a new removable
storage card product family, the MultiMediaCard ("MMC"). MMC is targeted for the
emerging markets for mobile smart phones, advanced pagers and consumer
multimedia devices. MMC will initially be offered in storage capacities of 4MB
and 8MB. The Company does not expect to generate material revenues from MMC
sales in 1998. There can be no assurance that the Company will successfully
develop any of these new products, that new applications or markets for flash
data storage will develop as expected by the Company, that prospective customers
developing products for any such markets will design the Company's products into
their products and successfully introduce such products, or that products or
technologies developed by others will not render the Company's products or
technologies obsolete or noncompetitive. The failure of new applications or
markets to develop or the failure of the Company's products to be accepted by
the market would have a material adverse effect on the Company's business,
financial condition and results of operations.
Page 17
Increasing Dependence on Consumer Products. Product revenues derived
from sales of products for consumer electronics applications, principally
digital cameras, have increased significantly and in 1997 represented the
largest portion of product revenues and units shipped. The Company expects sales
of products for consumer applications to continue to represent the major portion
of product revenues in 1998. There can be no assurance, however, that the
Company will achieve large scale market acceptance for its products in the
consumer electronics market. The Company anticipates that products sold for
consumer applications will generally encounter intense competition and will be
more price sensitive than products sold into its other target markets. In
addition, consumer markets require larger expenditures for marketing and
promotion to establish brand name recognition and preference.
Consumer markets are more likely to experience seasonality of sales,
with potential declines in sales activity during the first quarter of any year.
Because of the large number of OEMs entering the digital camera market, it is
likely that not all of these manufacturers will be successful in achieving
market acceptance of their products. If SanDisk's OEM customers are not
successful in this market, such OEM customers may have excess inventories of
CompactFlash products, which may preclude follow-on orders or result in sales of
their CompactFlash inventories in the open market. The market acceptance of
digital cameras that use CompactFlash has been slower than expected and the
number of companies supplying CompactFlash has increased, causing average
selling prices and product gross margins to decline at a rapid rate. If market
acceptance of digital cameras that use CompactFlash continues to be slower than
expected, or if the market for CompactFlash becomes saturated, the Company may
encounter reduced demand for CompactFlash products, declining average selling
prices or product returns, any of which would have an adverse effect on the
Company's results of operations.
The Company anticipates that a greater proportion of its sales to the
consumer electronics market will be made through distributors and to retailers
than is the case with the industrial/communications market. This will be
particularly true if the level of after-market sales of flash memory products
increases. The Company is currently expending significant resources developing a
retail sales channel. The expenditures associated with this development are
likely to precede the realization of significant sales through this channel.
Moreover, the Company has no prior experience in the development or management
of the retail channel or sales through such channel. In addition, a significant
portion of retail sales for consumer applications will be made to distributors
and retail chains, which typically maintain rights to return unsold inventory.
As a result, the Company does not recognize revenues on sales to this channel
until after the products have been sold to end users. If the Company's retail
customers are not successful in this market, there could be substantial product
returns to the Company. The inability to successfully develop and effectively
manage the retail sales channel could have a material adverse effect on the
Company's business, financial condition and results of operations.
Seasonality. The Company has experienced and expects to continue to
experience seasonality in its product sales. A significant portion of the
Company's product revenues are derived from the sale of CompactFlash products,
which are sold principally for consumer electronics applications. As a result,
the Company's product sales have been and are expected to be impacted by
seasonal purchasing patterns, with higher sales in the second half of each year
as compared to the first half of each such year. In the past, the Company has
experienced a reduction in order quantities in the first quarter from Japanese
OEM customers, reflecting the fact that most customers in Japan operate on a
fiscal year ending in March and prefer to delay purchases until the beginning of
their next fiscal year. In the first quarter of 1998, product revenues declined
24% from the level in the fourth quarter of 1997 due to these seasonal factors
and the Asian economic crisis
Competition. The flash data storage markets in which the Company
competes are characterized by intense competition, rapid technological change,
evolving industry standards, declining average selling prices and rapid product
obsolescence. The Company's competitors include many large domestic and
international companies that have greater access to foundry capacity,
substantially greater financial, technical, marketing and other resources,
broader product lines and longer standing relationships with customers than the
Company. The Company's primary competitors include flash chip producers such as
Page 18
Advanced Micro Devices, Inc. ("AMD"), Hitachi Ltd. ("Hitachi"), Intel
Corporation ("Intel"), Micron Technology, Inc. ("Micron"), Mitsubishi Electronic
Corporation ("Mitsubishi"), Samsung Electronics Company Ltd. ("Samsung"), Sharp
Electronics Corporation ("Sharp") and Toshiba Corporation ("Toshiba"), other
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. ("Lexar"), M-Systems, Inc. ("M-Systems"), Simple Technology Inc.
("Simple"), SMART Modular Technologies, Inc. ("Smart Modular"), Sony Corporation
("Sony"), Kingston, TDK, Matsushita Battery, Inc. ("Matsushita Battery") and
Viking Components, Inc. that combine controllers and flash memory chips
developed by others into flash storage cards. Several companies, including
Hitachi, Lexar, Mitsubishi and Micron have been certified by the CompactFlash
Association to manufacture and sell their own brand of CompactFlash, and the
Company believes that other manufacturers will enter the CompactFlash market in
the future. Competing products promoting industry standards that are different
from SanDisk's CompactFlash product have been announced, including Intel's
Miniature Card, Toshiba's Smart Media (Solid-State Floppy Disk Card), Sony
Corporation's Memory Stick, and Matsushita Battery's recently introduced Mega
Storage cards. A manufacturer of digital cameras that designs-in any one of
these alternative competing standards will eliminate CompactFlash from use in
its product, as each competing standard is mechanically and electronically
incompatible with CompactFlash. In addition, in the third quarter of 1997, Intel
announced a 64Mbit flash chip based on its multilevel cell flash. The Company's
double density flash ("D2 flash") and Intel's multilevel cell flash are
competing technological innovations that allow each flash memory cell to store
two bits of information instead of the traditional single bit stored by the
industry standard flash technology. In November 1997, Iomega Corporation
("Iomega") announced its Clik drive, a miniaturized, mechanical, removable disk
drive that Iomega claims will compete directly with SanDisk's flash card
products.
In the first and second quarters of 1998, Sony's Mavica digital camera
captured approximately 40% of the US market for digital cameras according to
independent industry analysts. The Mavica uses a standard floppy disk to store
digital images and therefore uses no CompactFlash (or any other flash) cards. If
other manufacturers adopt the Mavica format and it becomes the new "defacto
standard", this will significantly reduce the Company's sales prospects for
CompactFlash cards. The Company's MMC products are expected to face stiff
competition from Toshiba's SmartMedia flash cards and Sony's flash Memory Stick.
Sony announced its intention to begin shipments of the Memory Stick in the
fourth quarter of 1998. Although the Memory Stick is proprietary to Sony, its
possible adoption and widespread use in future products may adversely impact
future sales of the Company's MMC and CompactFlash products.
The Company expects competition to increase in the future from existing
competitors and from other companies that may enter the Company's existing or
future markets with similar or alternative data storage solutions that may be
less costly or provide additional features. Due to the high price sensitivity in
the market for consumer products, aggressive price competition has been
experienced for these applications. Such competition is expected to result in
lower gross margins in the future, if the Company's average selling prices
decrease faster than its costs and could result in lost sales.
The Company's ability to compete in the Japanese market against
Japanese flash card suppliers has been impacted by the weak Yen. If the Yen's
decline against the dollar continues unchecked the Company's sales and gross
margins in Japan will be adversely affected.
The Company has entered into patent cross-license agreements with
Hitachi, Intel, Samsung, Sharp Toshiba, and SST pursuant to which each party may
manufacture and sell products that incorporate technology covered by the other
party's patents related to flash memory devices. As the Company continues to
license its patents to certain of its competitors, competition will increase. As
a result of the above factors, the Company expects to face substantially more
competition in the future than it has to date. Increased competition could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company believes that its ability to compete
successfully depends on a number of factors, which include price and quality,
product performance and availability, success in developing new applications for
system flash technology, adequate foundry capacity, efficiency of
Page 19
production, and timing of new product announcements or introductions by the
Company, the number and nature of the Company's competitors in a given market,
successful protection of intellectual property rights and general market and
economic conditions. There can be no assurance that the Company will be able to
compete successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, financial condition or results of operations.
Declining Average Sales Prices. The Company has experienced, and
expects to continue to experience, declining average sales prices for its
products. For example in the second quarter of 1998 average selling prices
declined 18% compared to the second quarter of 1997. During this same period the
average selling price per megabyte of capacity declined 50%. The flash data
storage markets in which the Company competes are characterized by intense
competition. Therefore, the Company expects to incur increasing pricing
pressures from its customers in future periods, which will likely result in a
further decline in average sales prices for the Company's products. To offset
declining average sales prices, the Company believes that it must continue to
achieve manufacturing cost reductions as well as develop new products that
incorporate advanced features and can be sold at higher average gross margins.
If, however, the Company is unable to achieve such cost reductions, it may not
be able to remain price competitive, resulting in lost sales, and the Company's
gross margins could decline, each of which could have a material adverse effect
on the Company's business, financial condition and results of operations.
During the second quarter of 1998, the semiconductor industry as a
whole experienced significant production over capacity, and a further decline in
DRAM pricing. This "buyers market" has created an environment of somewhat
irrational pricing even in flash memories. The Company believes that the current
semiconductor down cycle may continue for the next few quarters, putting
continuing pressure on average selling prices and product gross margins.
Risks Associated with International Operations. Sales of the Company's
products have been denominated to date primarily in United States dollars.
Increases in the value of the United States dollar could increase the price of
the Company's products so that they become relatively more expensive to
customers in the local currency of a particular country, leading to a reduction
in sales and profitability in that country. Given the recent economic conditions
in Asia and the weakness of many Asian currencies relative to the United States
dollar, the Company's products are relatively more expensive in Asia, which has
resulted and may continue to result in a decrease in the Company's sales in that
region. In the second quarter of 1998, sales to the Japan declined to 30% of
total sales, primarily as a result of the Japanese economic crisis and market
recession. If the current market conditions in Japan do not improve, or further
decline, results of operations may be adversely affected.
All of the Company's wafers are, and for the foreseeable future will
be, produced by foundries located outside the United States. Because the Company
currently purchases a significant portion of its flash wafers in Japanese Yen at
set prices, and bills certain customers in Japanese Yen, fluctuations in
currencies could materially adversely affect the Company's business, financial
condition and results of operations. In addition, gains and losses on the
conversion to United States dollars of accounts receivable, accounts payable and
other monetary assets and liabilities arising from international operations may
contribute to fluctuations in the Company's results of operations. Due to its
reliance on export sales and its dependence on foundries outside the United
States, the Company is subject to the risks of conducting business
internationally, including foreign government regulation and general
geopolitical risks such as political and economic instability, potential
hostilities and changes in diplomatic and trade relationships. Manufacturing and
sales of the Company's products may also be materially adversely affected by
factors such as unexpected changes in, or imposition of, regulatory
requirements, tariffs, import and export restrictions and other barriers and
restrictions, longer payment cycles, greater difficulty in accounts receivable
collection, potentially adverse tax consequences, the burdens of complying with
a variety of foreign laws and other factors beyond the Company's control. In
addition, the laws of certain foreign countries in which the Company's products
are or may be developed, manufactured or sold, including various countries in
Asia, may not protect the Company's intellectual property rights to the same
extent as do the laws of the United States and thus make piracy of the Company's
products a more likely possibility.
Page 20
There can be no assurance that these factors will not have a material adverse
effect on the Company's business, financial condition or results of operations.
Customer Concentration. A limited number of customers have historically
accounted for a substantial portion of the Company's revenues and the Company
expects this trend to continue. Sales to the Company's customers are generally
made pursuant to standard purchase orders rather than long-term contracts. The
Company has also experienced significant changes in the composition of its major
customer base from year to year and expects this variability to continue as
certain customers increase or decrease their purchases of the Company's products
as a result of fluctuations in market demand for such customers' products. Under
a joint cooperation agreement signed in January 1993, Seagate has the option to
market the Company's products beginning in 1999 and, if exercised, the Company
will be required to coordinate sales with Seagate so that up to one-third of the
Company's worldwide net revenues could be generated from sales of the Company's
flash products through Seagate. SanDisk may terminate this agreement by giving
one year written notice of termination beginning in January 1999.
Dependence on Third Party Foundries. All of the Company's products
require silicon wafers, which are currently supplied by United Microelectronics
Corporation ("UMC") in Taiwan and Matsushita in Japan. The Company has a
development agreement with NEC in Japan, pursuant to which the Company expects
to receive initial wafer shipments once the products under development complete
internal qualification. In the third quarter of 1997, the Company made an
investment in USIC, a semiconductor manufacturing venture headed by UMC in
Taiwan. The Company has arranged to receive foundry wafers from a separate UMC
fabrication facility during the qualification of the USIC plant. During the
second quarter of 1998, the Company received first wafers from the USIC
facility. Under the current development schedule, the Company should complete
the qualification and start production at USIC in the third quarter of 1998. The
Company is dependent on its foundries to allocate to the Company a portion of
their foundry capacity sufficient to meet the Company's needs, to produce wafers
of acceptable quality and with acceptable manufacturing yields and to deliver
those wafers to the Company on a timely basis. On occasion, the Company has
experienced difficulties in each of these areas. The loss or reduction of
capacity from any of its foundry suppliers or the inability to qualify or
receive the anticipated level of capacity from any of its manufacturing partners
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the NEC
fabrication facility will commence shipments on schedule or that the USIC
facility will begin production as scheduled, or that the processes needed to
fabricate wafers for the Company will be qualified at either facility. Moreover,
there can be no assurance that any of the Company's suppliers will be able to
maintain acceptable yields or deliver sufficient quantities of wafers on a
timely basis.
Under each of the Company's wafer supply agreements, the Company is
obligated to provide a monthly rolling forecast of anticipated purchase orders.
Except in limited circumstances and subject to acceptance by the foundries, the
estimates for the first three months of each forecast constitute a binding
commitment and the estimates for the remaining months may not increase or
decrease by more than a certain percentage from the previous month's forecast.
These restrictions limit the Company's ability to react to significant
fluctuations in demand for its products. As a result, the Company has not been
able to match its purchases of wafers to specific customer orders and therefore
the Company has from time to time taken write downs for potential excess
inventory purchased prior to the receipt of customer orders and may be required
to do so in the future. These adjustments decrease gross margins in the quarter
reported and have resulted, and could in the future result in fluctuations in
gross margins on a quarter to quarter basis. To the extent the Company
inaccurately forecasts the number of wafers required, it may have either a
shortage or an excess supply of wafers, either of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Additionally, if the Company is unable to obtain scheduled
quantities of wafers from any foundry with acceptable yields, the Company's
business, financial condition and results of operations could be negatively
impacted. See "Fluctuations in Operating Results."
Page 21
Dependence on Sole Source Suppliers and Third Party Subcontractors. The
Company purchases several critical components from single or sole source vendors
for which alternative sources are not currently available. Even where
alternative suppliers are available, a significant amount of time would be
required to qualify an additional vendor in the case of certain of the Company's
components. The Company does not maintain long-term supply agreements with any
of these vendors. The inability to develop alternative sources for these single
or sole source components or to obtain sufficient quantities of these components
could result in delays or reductions in product shipments which could adversely
affect the Company's business, financial condition and results of operations.
For example, the Company relies on Motorola, Inc. ("Motorola") as the sole
source of certain designs of microcontrollers, which are critical components in
the Company's products. The sole source risk associated with microcontrollers
from Motorola is heightened during transitions from one generation of
microcontrollers to the next, given the limited safety stock available during
these transitions. In the event Motorola were to discontinue shipment of
microcontrollers for any reason, the time to design and qualify an alternative
source would be approximately nine to twelve months. The Company's reliance on
Motorola as its sole source of certain microcontrollers exposes the Company to
interruptions of supply that could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company uses third-party subcontractors to assemble the memory
components for its products and from time to time uses other subcontractors to
perform certain other assembly and test functions. The Company has no long term
agreements with these subcontractors. As a result of this reliance on third
party subcontractors for assembly of a portion of its products, the Company
cannot directly control product delivery schedules, which can lead to product
shortages or quality assurance problems that could increase manufacturing costs
of the Company's products. Any problems associated with the delivery, quality or
cost of the Company's products could have a material adverse effect on the
Company's business, financial condition and results of operations.
Risks Associated with Transitioning to New Processes and Products.
Successive generations of the Company's products incorporate semiconductor
devices with greater memory capacity per chip. In addition, the Company is
continually involved in joint development with its foundries to produce
semiconductor devices based upon smaller geometry manufacturing processes. Both
the development of higher capacity semiconductor devices and the implementation
of smaller geometry manufacturing processes are important determinants of the
Company's ability to decrease the cost per megabyte of its flash data storage
products. The utilization of semiconductor devices with greater memory capacity
and the design and implementation of new semiconductor manufacturing processes
can entail a number of problems, including lower yields associated with
semiconductor device production, problems associated with design and manufacture
of products to incorporate such devices, and production delays. Because of the
complexity of its products, the Company has periodically experienced significant
delays in the development and volume production ramp up of its products. There
can be no assurance that similar delays will not occur in the future. Any
problems experienced by the Company in its current or future transitions to
higher capacity memory devices or to new semiconductor manufacturing processes
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has developed new products based on D2 (Double Density)
flash technology, a new flash architecture designed to store two bits in each
flash memory cell. The Company began low-volume shipments of its 64Mbit D2 flash
products in the third quarter of 1997. The Company introduced its new 80Mbit D2
flash chip in November 1997 and expects to begin customer shipments of products
utilizing this chip in the second half of 1998. The Company experienced delays
in the production ramp up of the 64Mbit D2 technology and has subsequently
shifted its resources to the qualification and production startup of the second
generation 80Mbit D2 design. Consequently, product revenues from the 64Mbit D2
were not material in 1997, and the product was made obsolete by the 80Mbit D2
design. The Company believes that D2 flash will be important to the Company's
ability to increase the capacity and decrease the cost of certain of its
products, maintain its competitive advantage, broaden its target markets and
attract strategic partners. High density flash memory, such as D2 flash, is a
complex technology requiring tight manufacturing controls and effective test
screens. The shift to volume production for new flash products is particularly
Page 22
prone to problems which can impact both reliability and yields, thereby
increasing manufacturing costs. There can be no assurance that reliable and cost
effective D2 flash products can be manufactured in commercial volumes and with
yields sufficient to result in a lower cost per megabyte. Furthermore, flash
data storage products designed with 80Mbit D2 flash are expected to initially
exhibit approximately one-quarter of the write performance of the Company's
existing products when writing data into memory, potentially excluding their use
in certain applications, such as digital cameras, thereby limiting their revenue
generating potential.
Manufacturing Yields. The fabrication of the Company's products is a
complex and precise process requiring wafers that are produced in a highly
controlled and clean environment. Semiconductor companies supplying the Company
with wafers periodically have experienced problems achieving acceptable wafer
manufacturing yields. Semiconductor manufacturing yields are a function both of
design technology, which is developed by the Company, and manufacturing process
technology, which is typically proprietary to the foundry. Because low yields
may result from errors in either design or manufacturing failures, yield
problems may not be effectively determined or improved until an actual product
exists that can be analyzed and tested to recognize process sensitivities in
relation to the design rules that were used. As a result, yield problems may not
be identified until the wafers are well into the production process. This risk
is increased due to the fact that the Company receives its wafers from
independent offshore foundries, increasing the effort and time required to
identify, communicate and resolve manufacturing yield problems. There can be no
assurance that the Company's foundries will achieve or maintain acceptable
manufacturing yields in the future. The inability of the Company to achieve
planned yields from its foundries could have a material adverse effect on the
Company's business, financial condition and results of operations.
Patents, Proprietary Rights and Related Litigation. The Company relies
on a combination of patents, trademarks, copyright and trade secret laws,
confidentiality procedures and licensing arrangements to protect its
intellectual property rights. The Company has been notified in the past and the
Company and its foundries may be notified in the future of claims that they may
be infringing patents or other intellectual property rights owned by third
parties. In the past the Company has been involved in significant disputes
regarding its intellectual property rights and believes it may be involved in
similar disputes in the future. There can be no assurance that in the future any
patents held by the Company will not be invalidated, that patents will be issued
for any of the Company's pending applications or that any claims allowed from
existing or pending patents will be of sufficient scope or strength or be issued
in the primary countries where the Company's products can be sold to provide
meaningful protection or any commercial advantage to the Company. Additionally,
competitors of the Company may be able to design around the Company's patents.
To preserve its intellectual property rights, the Company believes it
may be necessary to initiate litigation against one or more third parties,
including but not limited to those the Company has already notified of possible
patent infringement. In addition, one or more of these parties may bring suit
against the Company. In March 1998, the Company filed a complaint in federal
court against Lexar for infringement of a fundamental flash disk patent. Lexar
has disputed the Company's claim of patent infringement, claimed SanDisk's
patent is invalid or unenforceable and asserted various counterclaims including
unfair competition, violation of the Lanham Act, patent misuse, interference
with prospective economic advantage, trade defamation and fraud. SanDisk has
denied each of Lexar's counterclaims. In July 1998, the federal district court
denied Lexar's request to have the case dismissed on the grounds the Company
failed to perform an adequate prefiling investigation. As a result, discovery in
the Lexar suit will commence in August 1998. The Company intends to vigorously
enforce its patents, but there can be no assurance that these efforts will be
successful.
In the event of an adverse result in any such litigation, the Company
could be required to pay substantial damages, cease the manufacture, use and
sale of infringing products, expend significant resources to develop
non-infringing technology, discontinue the use of certain processes or obtain
licenses to the infringing technology. Any litigation, whether as a plaintiff or
as a defendant, would likely result in
Page 23
significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation is ultimately
determined in favor of the Company. In addition, the results of any litigation
are inherently uncertain.
In the event the Company desires to incorporate third party technology
into its products or is found to infringe on others' patents or intellectual
property rights, the Company may be required to license such patents or
intellectual property rights. The Company may also need to license some or all
of its patent portfolio to be able to obtain cross-licenses to the patents of
others. The Company currently has patent cross-license agreements with Hitachi,
Intel, Samsung, Sharp, SST and Toshiba. From time to time, the Company has also
entered into discussions with other companies regarding potential cross-license
agreements for the Company's patents. However, there can be no assurance that
licenses will be offered or that the terms of any offered licenses will be
acceptable to the Company. If the Company obtains licenses from third parties,
it may be required to pay license fees or make royalty payments, which could
have a material adverse effect on the Company's gross margins. The failure to
obtain a license from a third party for technology used by the Company could
cause the Company to incur substantial liabilities and to suspend the
manufacture of products or the use by the Company's foundries of processes
requiring the technology, or to expend substantial resources redesigning its
products to eliminate the infringement. There can be no assurance that the
Company would be successful in redesigning its products or that such licenses
would be available under reasonable terms. Furthermore, any such development or
license negotiations could require substantial expenditures of time and other
resources by the Company.
As is common in the industry, the Company agrees to indemnify certain
of its suppliers and customers for alleged patent infringement. The scope of
such indemnity varies, but may, in some instances, include indemnification for
damages and expenses, including attorneys' fees. The Company may from time to
time be engaged in litigation as a result of such indemnification obligations.
Third party claims for patent infringement are excluded from coverage under the
Company's insurance policies. There can be no assurance that any future
obligation to indemnify the Company's customers or suppliers, will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
Management of Growth. The Company has recently experienced and may
continue to experience rapid growth, which has placed, and could continue to
place, a significant strain on the Company's limited personnel and other
resources. To manage such growth effectively, the Company will need to continue
to implement and improve its operational, financial and management information
systems and to hire, train, motivate and manage its employees. In particular,
the Company has on occasion experienced difficulty in hiring the engineering,
sales and marketing personnel necessary to support the growth of the Company's
business. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel or that the Company will be able to manage such growth effectively.
The Company's ability to manage its growth will require a significant investment
in and expansion of its existing internal information management systems to
support increased manufacturing, accounting and other management related
functions. The Company is in the process of replacing its existing in-house
information system. The implementation of the new system will impact almost all
phases of the Company's operations (i.e., planning, manufacturing, finance and
accounting). The new system is currently scheduled to become operational in the
fourth quarter of 1998. There can be no assurance that the Company will not
experience problems, delays or unanticipated additional costs in implementing
the new management information system or in the use of its existing system that
could have a material adverse effect on the Company's business, financial
condition and results of operations, particularly in the period in which the new
system is brought online. The failure of the Company to successfully manage any
of these issues would have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Key Personnel. The Company's success depends to a
significant degree upon the continued contributions of members of its senior
management and other key research and development, sales, marketing and
operations personnel, including, in particular, Dr. Eli Harari, the Company's
founder, President and Chief Executive Officer. The loss of any of such persons
could have a material adverse effect
Page 24
on the Company's business, financial condition and results of operations. The
Company does not have an employment agreement or non-competition agreement with
any of its employees.
Volatility of Stock Price. There has been a history of significant
volatility in the market prices of the Company's Common Stock on the Nasdaq
National Market, and it is likely that the market price of the Company's Common
Stock will continue to be subject to significant fluctuations. For example, in
1997, the Company's stock price fluctuated from a low of $8 7/8 to a high of
$40. The Company believes that future announcements concerning the Company, its
competitors or its principal customers, including technological innovations, new
product introductions, governmental regulations, litigation or changes in
earnings estimated by analysts, may cause the market price of the Common Stock
to fluctuate substantially in the future. Sales of substantial amounts of the
Company's outstanding Common Stock in the public market could materially
adversely affect the market price of the Common Stock. Further, in recent years
the stock market has experienced extreme price and volume fluctuations that have
particularly affected the market prices of equity securities of many high
technology companies and that often have been unrelated to the operating
performance of such companies. These fluctuations as well as general economic,
political and market conditions such as recessions or international currency
fluctuations, may materially adversely affect the market price of the Common
Stock.
Year 2000 Compliance. The Company is aware of problems associated with
computer systems as the year 2000 approaches. Year 2000 problems are the result
of common computer programming techniques that result in systems that do not
function properly when manipulating dates later than December 31, 1999. The
issue is complex and wide ranging. The problem may affect transaction processing
computer applications used by the Company for accounting, distribution,
manufacturing, and planning. The problem may also affect embedded systems such
as building security systems, machine controllers and production test equipment.
Year 2000 problems with these systems may affect the ability or efficiency with
which the company can perform many significant functions, including but not
limited to: order processing, material planning, product assembly, product test,
invoicing, and financial reporting. In addition, the problem may affect the
computer systems of the Company's suppliers and customers, disrupting their
operations. Year 2000 problems with the Company's business partners may impact
the Company's sources of supply and demand.
The costs and time schedule for the Company's Year 2000 problem
abatement program are based on management's best estimates for the
implementation of its new management information system and year 2000 problems
uncovered to date. These estimates were derived utilizing numerous assumptions,
including that the most significant Year 2000 risks have already been
identified, that certain resources will continue to be available, that third
party plans will be fulfilled, and other factors. However, there can be no
guarantee that these estimates will be achieved or that the anticipated time
schedule will be met and actual results could differ materially from those
anticipated.
Specific contingency plans for systems that pose significant risk to
on-going operations are being developed under the auspices of the Company's year
2000 Risk Management program. If the Company is unable to complete the
replacement of its core management information system in a timely manner, an
alternative plan has been developed. This plan consists of applying available
vendor supplied software patches to the existing system. The costs and time
involved to complete this alternative are expected to be minimal. Should
previously undetected Year 2000 problems be found in other systems, these
systems will either be upgraded, replaced, turned off, or operated in place with
manual procedures to compensate for their deficiencies. While the Company
believes that these alternative plans would be adequate to meet the Company's
needs without materially impacting its operations, there can be no assurance
that such alternatives would be successful or that the Company's results of
operations would not be materially adversely affected by the delays and
inefficiencies inherent in conducting operations in this manner.
Failure of the Company's internal computer systems or of such
third-party equipment or software, or of systems maintained by the Company's
suppliers, to operate properly with regard to the Year 2000 and thereafter could
require the Company to incur unanticipated expenses to remedy any problems,
which
Page 25
could have a material adverse effect on the Company's business, operating
results and financial condition. There can be no assurance that the Company's
insurance will cover losses from business interruptions arising from year 2000
problems of the Company or its suppliers. Furthermore, the purchasing patterns
of customers or potential customers may be affected by Year 2000 issues. which
could have a material adverse effect on the Company's business, operating
results and financial condition.
Effect of Anti-Takeover Provisions. The Company has taken a number of
actions that could have the effect of discouraging a takeover attempt that might
be beneficial to stockholders who wish to receive a premium for their shares
from a potential bidder. The Company has adopted a Shareholder Rights Plan that
would cause substantial dilution to a person who attempts to acquire the Company
on terms not approved by the Company's Board of Directors. The Shareholder
Rights Plan may therefore have the effect of delaying or preventing any change
in control and deterring any prospective acquisition of the Company. In
addition, the Company's Certificate of Incorporation grants the Board of
Directors the authority to issue up to 4,000,000 shares of Preferred Stock and
to determine the price, rights, preferences and privileges of those shares
without any further vote or action by the Company's stockholders. The rights of
the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any shares of Preferred Stock that may be
issued in the future. While the Company has no present intention to issue shares
of Preferred Stock, such issuance, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult or less attractive for a third party to
acquire a majority of the outstanding voting stock of the Company. Such
Preferred Stock may also have other rights, including economic rights senior to
the Common Stock, and, as a result, the issuance thereof could have a material
adverse effect on the market value of the Common Stock. Furthermore, the Company
is subject to the anti-takeover provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"), which prohibits the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
first becomes an "interested stockholder," unless the business combination is
approved in a prescribed manner. The application of Section 203 also could have
the effect of delaying or preventing a change of control of the Company.
Page 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this item is set forth in Note 6 of the
Notes to the Condensed Consolidated Financial Statements on pages 7 and 8 and
under "Risk Factors - Patents, Proprietary Rights and Related Litigation" on
pages 23 to 24 of this Form 10-Q for the quarterly period ended June 30, 1998,
and is incorporated herein by reference.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on April 30, 1998,
the following individuals were elected to the Board of Directors:
Votes For Votes Withheld
William V. Campbell 21,401,825 2,018,919
Irwin Federman 21,402,565 2,017,979
Catherine P. Lego 21,372,059 2,048,485
Eli Harari 21,401,965 2,018,579
James D. Meindl 20,296,548 3,123,996
Joseph Rizzi 21,401,625 2,018,919
Alan F. Shugart 21,400,625 2,018,919
The following proposals were approved at the Company's Annual Meeting:
Affirmative Negative Votes Broker
Votes Votes Withheld Non-Votes
-------------- ---------- ---------- -----------
Ratify the appointment of 23,379,004 20,898 -- 20,642
Ernst & Young LLP as
independent auditors for
the fiscal year ending
December 31, 1998.
Item 5. Other Information
None
Page 27
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit
Number Exhibit Title
3.1 Certificate of Incorporation of the Registrant, as amended to date.3
3.2 Form of Amended and Restated Certificate of Incorporation of the Registrant.3
3.3 Bylaws of the Registrant, as amended.3
3.4 Form of Amended and Restated Bylaws of the Registrant 3
3.5 Certificate of Designation for the Series A Junior Participating Preferred Stock, as filed
with the Delaware Secretary of State on April 24, 1997.7
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.3
4.3 Amended and Restated Registration Rights Agreement, among the Registrant and the
investors and founders named therein, dated March 3, 1995.3
4.4 Amendment No. 1 to the Stock Purchase Agreements among the Registrant and the holders
of Series A, B and D Preferred Stock, and certain holders of Series E Preferred
Stock, dated January 15, 1993.3
4.5 Series F Preferred Stock Purchase Agreement between Seagate Technology, Inc. and
the Registrant, dated January 15, 1993.3
4.6 Amendment Agreement between Seagate Technology, Inc. and the Registrant, dated
August 23, 1995.3
4.7 Form of Stock Purchase Agreement between the Registrant and Seagate Technology, Inc.3
4.8 Rights Agreement, dated as of April 18, 1997, between the Company and Harris Trust and Savings
Bank.7
9.1 Amended and Restated Voting Agreement, among the Registrant and the investors
named therein, dated March 3, 1995.3
10.8 Joint Cooperation Agreement between the Registrant and Seagate Technology, Inc.,
dated January 15, 1993.1, 3
10.9 Amendment and Termination Agreement between the Registrant and Seagate
Technology, Inc., dated October 28, 1994.1, 3
10.10 License Agreement between the Registrant and Dr. Eli Harari, dated September 6, 1988.3
10.13 1989 Stock Benefit Plan.3
10.14 1995 Stock Option Plan.3
10.15 Employee Stock Purchase Plan.3
10.16 1995 Non-Employee Directors Stock Option Plan.3
10.18 Lease Agreement between the Registrant and G.F. Properties, dated March 1, 1996.4
10.19 Business loan agreement between the Registrant and Union Bank of California, dated July 3,
1996.5
10.21 Amendment to Lease Agreement between the Registrant and G.F. Properties, dated April 3, 1997.5
10.22 First and second amendments to business loan agreement between the Registrant and Union Bank
of California, dated June 30, 1997.5
10.23 Foundry Venture Agreement between the Registrant and United Microelectronics Corporation,
dated June 27, 1997.1, 8
10.24 Written Assurances Re: Foundry Venture Agreement between the Registrant and United
Microelectronics Corporation, dated September 13, 1995.1, 8
10.25 Side Letter between Registrant and United Microelectronics Corporation, dated May 28,
1997.1, 8
10.26 Third Amendment to the Trade Finance Agreement between the Registrant and Union Bank of
California. 9
10.27 Clarification letter with regards to Foundry Venture Agreement between the Registrant and
United Microelectronics Corporation dated October 24, 1997.9
10.28 Lease Agreement between the Registrant and G.F. Properties, dated June 10, 1998.
21.1 Subsidiaries of the Registrant.10
27.1 Financial Data Schedule for the three months ended June 30, 1998. (In EDGAR format only)
<FN>
- ----------
1. Confidential treatment granted as to certain portions of these exhibits.
2. Confidential treatment requested as to certain portions of these exhibits.
3. Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-96298).
4. Previously filed as an Exhibit to the Registrant's 1995 Annual Report on Form 10-K.
5. Previously filed as an Exhibit to the Registrant's Form 10-Q for the quarter ended June 30, 1996.
6. Previously filed as an Exhibit to the Registrant's 1996 Annual Report on Form 10-K.
7. Previously filed as an Exhibit to the Registrant's Current Report on Form 8-K/A dated April 18, 1997.
8. Previously filed as an Exhibit to the Registrant's Current Report on form 8-K dated October 16, 1997.
9 Previously filed as an Exhibit to the Registrant's Form 10-Q for the quarter ended September 30, 1997.
10. Previously filed as an Exhibit to the Registrant's 1997 Annual Report on Form 10-K.
</FN>
B. Reports on Form 8-K
No reports on form 8-K were filed during the quarter ended June 30,
1998.
Page 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SanDisk Corporation
(Registrant)
By: /s/ Cindy L. Burgdorf
--------------------------------------
Cindy L. Burgdorf
Chief Financial Officer,
Senior Vice President, Finance and
Administration and Secretary
DATED: August 12, 1998
Page 30