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
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Exchange Act of 1934
For the quarterly period ended June 30, 2001
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
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SanDisk Corporation
(Exact name of registrant as specified in its charter)
Delaware 77-0191793
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
140 Caspian Court, Sunnyvale, California 94089
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(Address of principal executive offices) (Zip code)
(408) 542-0500
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(Registrant's telephone number, including area code)
N/A
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(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 _______
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Indicate the number of shares outstanding of each of the issuer's classes of
capital stock as of June 30, 2001
Common Stock, $0.001 par value 68,172,991
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Class Number of shares
SanDisk Corporation
Index
PART I. FINANCIAL INFORMATION
Page No.
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Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 2001 and December 31, 2000................................. 3
Condensed Consolidated Statements of Operations
Three and six months ended June 30, 2001 and 2000................... 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2001 and 2000............................. 5
Notes to Condensed Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 31
Item 2. Changes in Securities................................................ 31
Item 3. Defaults upon Senior Securities...................................... 31
Item 4. Submission of Matters to a Vote of Security Holders.................. 32
Item 5. Other Information.................................................... 32
Item 6. Exhibits and Reports on Form 8-K..................................... 32
Signatures........................................................... 35
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
SANDISK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2001 2000*
--------------- -------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 84,909 $ 106,277
Short-term investments 221,923 260,462
Investment in UMC 117,848 112,854
Accounts receivable, net 60,935 104,617
Inventories 55,887 96,600
Deferred tax assets 31,840 7,066
Prepaid expenses and other current assets 10,400 9,431
--------------- -------------
Total current assets 583,742 697,307
Property and equipment, net 38,429 41,095
Investment in UMC 71,925 197,688
Investments in FlashVision 150,775 134,730
Investments in equity securities and joint venture 28,993 7,200
Deposits and other assets 28,992 29,887
--------------- -------------
Total Assets $902,856 $1,107,907
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 60,767 $ 67,112
Accrued payroll and related expenses 9,413 16,215
Income taxes payable 2,021 16,427
Other accrued liabilities 23,117 20,863
Deferred revenue 26,707 50,740
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Total current liabilities 122,025 171,357
Deferred tax liability 21,269 70,000
Other liabilities 8,822 3,492
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Total Liabilities 152,116 244,849
Stockholders' Equity:
Common stock 572,509 567,001
Retained earnings 193,372 346,469
Accumulated other comprehensive loss (15,141) (50,412)
--------------- -------------
Total stockholders' equity 750,740 863,058
Total Liabilities and
Stockholders' Equity $902,856 $1,107,907
=============== =============
______________
* Information derived from the audited Consolidated Financial Statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SANDISK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ----------------------------------
2001 2000 2001 2000
--------------- -------------- --------------- --------------
Revenues:
Product $ 88,115 $122,573 $ 176,198 $219,822
License and royalty 19,033 21,376 32,277 33,496
--------------- -------------- --------------- --------------
Total revenues 107,148 143,949 208,475 253,318
Cost of sales 106,752 84,514 225,532 152,272
--------------- -------------- --------------- --------------
Gross profits (losses) 396 59,435 (17,057) 101,046
Operating expenses:
Research and development 14,218 11,051 30,571 19,820
Sales and marketing 10,533 11,519 20,751 22,063
General and administrative 4,295 6,013 8,574 10,760
--------------- -------------- --------------- --------------
Total operating expenses 29,046 28,583 59,896 52,643
Operating income (loss) (28,650) 30,852 (76,953) 48,403
Equity in income of joint ventures, net of
equity in losses of joint ventures (127) -- 507 --
Interest income 3,079 5,818 7,154 11,436
Gain (loss) on investment in foundry -- -- (179,981) 344,168
Other income (expense), net (219) 665 (2,002) 1,099
--------------- -------------- --------------- --------------
Income (loss) before taxes (25,917) 37,335 (251,275) 405,106
Provision for (benefit from) income taxes (15,923) 13,067 (98,179) 161,567
--------------- -------------- --------------- --------------
Net income (loss) $ (9,994) $ 24,268 $(153,096) 243,539
=============== ============== =============== ==============
Net income (loss) per share
Basic $(0.15) $0.36 $(2.25) $3.66
Diluted $(0.15) $0.33 $(2.25) $3.34
Shares used in computing net income (loss) per share
Basic 68,088 66,817 67,951 66,456
Diluted 68,088 72,798 67,951 72,907
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
SANDISK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
--------------- ----------------
2001 2000
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Cash flows from operating activities:
Net income (loss) $(153,096) $ 243,539
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 9,297 7,059
Deferred taxes (97,447) 138,437
Loss (gain) on investment in foundry 179,981 (344,168)
Equity in income of joint ventures, net of equity (507) --
losses of joint ventures
Loss on write down/ disposal of fixed assets 8,907 858
Changes in operating assets and liabilities:
Accounts receivable, net 43,682 (31,224)
Inventories 40,713 (11,081)
Prepaid expenses and other assets (75) (4,844)
Accounts payable (6,345) 11,914
Accrued payroll and related expenses (6,802) 3,408
Income taxes payable (14,406) 16,162
Other accrued liabilities 2,253 7,246
Deferred revenue (24,033) 3,558
Other non-current liabilities 5,332 --
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Total adjustments 140,553 (202,645)
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Net cash provided by (used in) operating activities (12,544) 40,894
Cash flows from investing activities:
Purchases of short term investments 154,987 (189,179)
Proceeds from sale of short term investments 193,526 195,624
Investment in equity securities (20,361) (14,970)
Investment in joint ventures (16,971) --
Acquisition of capital equipment (15,539) (10,922)
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Net cash used in investing activities (14,332) (19,447)
Cash flows from financing activities:
Sale of common stock 5,508 8,212
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Net cash provided by financing activities 5,508 8,212
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Net increase (decrease) in cash and cash equivalents (21,368) 29,659
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Cash and cash equivalents at beginning of period 106,277 146,170
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Cash and cash equivalents at end of period $ 84,909 $ 175,829
========= ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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 its subsidiaries (the "Company") as of June 30, 2001, and the
results of operations for the three and six month periods ended June 30, 2001
and 2000 and cash flows for the six month periods ended June 30, 2001 and 2000.
Because all the disclosures required by accounting principles generally accepted
in the United States 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, 2000. The condensed consolidated balance
sheet data as of December 31, 2000 was derived from the audited financial
statements.
The Company's results of operations for the three and six month periods
ended June 30, 2001 and 2000 and its cash flows for the six month periods ended
June 30, 2001 and 2000 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 2001 and 2000 ended on July 1, 2001
and July 2, 2000, respectively. Fiscal year 2001 is 52 weeks long and ends on
December 30, 2001. Fiscal year 2000 was 52 weeks long and ended on December 31,
2000. 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 accounting
principles generally accepted in the United States 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.
In the first quarter of 2001, the Company recorded an inventory charge
and wrote down inventories by $45.3 million, reflecting lower market pricing and
the write off of excess and obsolete inventories. An additional inventory charge
and write down of $23.1 million, reflecting a larger than anticipated decline in
our average selling prices, was recorded in the second quarter of 2001. The
Company also recorded a $7.6 million charge in the second quarter of 2001related
to the retirement of unique NOR-based tooling and equipment and accelerated
depreciation relating to the NOR to NAND transition. These charges reflect the
Company's best estimation of the current value of inventory and assets, based on
market pricing, customer demand, and future usability.
4. The components of inventories consist of the following:
June 30, December 31,
2001 2000
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(in thousands)
Raw materials........................................ $11,545 $33,092
Work-in-process...................................... 11,976 53,921
Finished goods....................................... 32,366 9,587
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$55,887 $96,600
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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,
------------------------------- ----------------------------------
2001 2000 2001 2000
------------- ------------- -------------- ---------------
(in thousands), except for (in thousands), except for per
per share amounts share amounts
Numerator:
Numerator for basic and diluted net income (loss)
per share--net income (loss) $(9,994) $24,268 $(153,096) $243,539
=========== =========== ============ ============
Denominator for basic net income (loss) per share:
Weighted average common shares 68,088 66,817 67,950 66,456
----------- ----------- ------------ ------------
Basic net income (loss) per share $ (0.15) $ 0.36 $ (2.25) $ 3.66
=========== =========== ============ ============
Denominator for diluted net income (loss) per share:
Weighted average common shares 68,088 66,817 67,950 66,456
Employee common stock options --- 5,981 --- 6,451
----------- ----------- ------------ ------------
Shares used in computing diluted net
income (loss) per share 68,088 72,798 67,950 72,907
=========== =========== ============ ============
Diluted net income (loss) per share $ (0.15) $ 0.33 $ (2.25) $ 3.34
=========== =========== ============ ============
For the three months ended June 30, 2001 and 2000, options to purchase
8,229,000 and 340,000 shares of common stock, respectively, have been excluded
from the earnings per share calculation, as their effect is antidilutive. For
the six months ended June 30, 2001 and 2000, options to purchase 8,391,000 and
214,000 shares of common stock, respectively, have been excluded from the
earnings per share calculation, as their effect is antidilutive.
6. 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. There can be no assurance that there
will not be any disputes regarding the Company's intellectual property rights.
Specifically, there can be no assurance that any patents held by the Company
will not be invalidated or that others will not be granted rights under the
Company's patents, 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 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. Any litigation, whether as a plaintiff or as a defendant, would
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.
On March 21, 2000, Mitsubishi Denki Co. Ltd. (Mitsubishi Electric) filed a
complaint in Tokyo District Court against SanDisk K.K., SanDisk's wholly owned
subsidiary in Japan. The complaint alleges that SanDisk K.K., based in Yokohama,
Japan, infringes on three Mitsubishi Japanese patents, which are related
primarily to the mechanical construction of memory cards. In the complaint,
Mitsubishi asked the court for a preliminary injunction halting the sale of
SanDisk CompactFlash and flash ATA memory cards in Japan. Mitsubishi dropped two
of the patents from the suit. During the second quarter, we won a favorable
ruling, dismissing the complaint on the third patent and thereby concluding the
Mitsubishi lawsuit.
7
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.
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 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.
Litigation frequently involves substantial expenditures and can require
significant management attention, even if the Company ultimately prevails. In
addition, the results of any litigation matters are inherently uncertain.
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. On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The standard requires that all derivatives be recorded
on the balance sheet at fair value and establishes criteria for designation and
effectiveness of hedging relationships. The cumulative effect of adopting SFAS
133 as of January 1, 2001 was not material to the Company's consolidated
financial statements.
The Company is exposed to foreign currency exchange rate risk inherent in
forecasted sales, cost of sales, and assets and liabilities denominated in
currencies other than the U.S. dollar. The Company is also exposed to interest
rate risk inherent in its debt and investment portfolios. The Company's risk
management strategy provides for the use of derivative financial instruments,
including foreign exchange forward contracts, to hedge certain foreign currency
exposures. The Company's intent is to offset gains and losses that occur on the
underlying exposures, with gains and losses on the derivative contracts hedging
these exposures. The Company does not enter into any speculative positions with
regard to derivative instruments. The Company enters into foreign exchange
contracts to hedge against exposure to changes in foreign currency exchange
rates, only when natural offsets cannot be achieved. Such contracts are
designated at inception to the related foreign currency exposures being hedged,
which include sales by subsidiaries, and assets and liabilities that are
denominated in currencies other than the U.S. dollar. The Company's foreign
currency hedges generally mature within six months.
All derivatives are recorded at fair market value on the balance sheet,
classified in other assets. For derivative instruments that are designated and
qualify as cash flow hedges, the effective portion of the gain or loss on the
derivative instrument is recorded in accumulated other comprehensive income as a
separate component of stockholders' equity and reclassified into earnings in the
period during which the hedged transaction affects earnings. For derivative
instruments that are designated and qualify as fair value hedges, the gain or
loss on the derivative instrument, as well as the offsetting gain or loss on the
hedged item attributable to the hedged risk, are recognized in earnings in the
current period. For derivative instruments not designated as hedging
instruments, changes in their fair values are recognized in earnings in the
current period.
For foreign currency forward contracts, hedge effectiveness is measured by
comparing the cumulative change in the hedged contract with the cumulative
change in the hedged item, both of which are based on forward rates. To the
extent that the critical terms of the hedged item and the derivative are not
identical, hedge ineffectiveness is reported in earnings immediately. The
Company estimates the fair values on derivatives based on quoted market prices
or pricing models using current market rates.
The Company reports hedge ineffectiveness from foreign currency derivatives
for both options and forward contracts in other income or expense. Hedge
ineffectiveness was not material in the first quarter of fiscal 2001. The
effective portion of all derivatives is reported in the same financial statement
line item as the changes in the hedged item.
8
At June 30, 2001, the Company had $24.5 million in Japanese Yen-denominated
accounts payable and open purchase orders designated as cash flow hedges or fair
value hedges against Japanese Yen-denominated cash holdings and accounts
receivable. The Company estimates the fair values on derivatives based on quoted
market prices or pricing models using current market rates. At June 30, 2001,
the Company had one forward contract to sell Yen in the amount of $8.4 million.
There was no unrealized loss on derivative instruments as of June 30, 2001.
In the second quarter of 2001, the Company had a net foreign currency
transaction loss of $0.1 million, compared to a gain of $0.6 million in the
second quarter of 2000. In the six months ended June 30, 2001, the Company had
a net foreign currency transaction loss of $2.0 million, compared to a gain of
$1.1 million in the six months ended June 30, 2000. These amounts are primarily
due to translation adjustments on Japanese Yen-based assets.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statement is not expected to have a
significant impact on our financial position at transition. During 2002, the
Company will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company.
8. Accumulated other comprehensive income (loss) presented in the
accompanying balance sheet consists of the accumulated unrealized gains and
losses on available-for-sale marketable securities, including the short-term
portion of the Company's investment in UMC, net of the related tax effects, for
all periods presented.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- ------------
(in thousands) (in thousands)
Net income (loss) $ (9,994) $24,268 $(153,096) $243,539
Unrealized gain (loss) on available-for-sale securities: (15,709) 1,047 (15,339) 10,854
------------- ------------- ------------- ------------
Comprehensive income (loss) $(25,703) $25,315 $(168,435) $254,393
============= ============= ============= ============
Accumulated other comprehensive loss was $15.1 million and $50.4 million at
June 30, 2001 and December 31, 2000, respectively. The balance at June 30, 2001
and December 31, 2000 included unrealized losses on UMC of $15.7 million and
$50.3 million, respectively.
9. In January 2001, the Company invested the final $15 million of its
$150 million cash commitment in FlashVision, L.L.C., its joint venture with
Toshiba for the development and manufacture of 512 megabit and 1 gigabit flash
memory chips and Secure Digital Card controllers. The first draw down of $20
million in equipment lease lines to equip FlashVision's manufacturing clean room
with advanced wafer processing equipment occurred during the first quarter of
2001. The second draw down of $30 million occurred during the second quarter of
2001, and the third draw down of $46 million occurred early in the third quarter
of 2001. A total of up to $215 million will be guaranteed by the Company. The
Company accounts for this investment using the equity method, and recorded
$181,000 as its share of the equity in income of joint ventures in the second
quarter of 2001, and total income of $1.1 million in the first six months of
2001.
9
10. As discussed in the Company's Form 10-K for the year ended December
31, 2000 and Form 10-Q for the first quarter ending March 31, 2001, the market
value of SanDisk's investment in UMC had declined significantly from January 3,
2000, the date of the exchange of USIC shares for UMC shares. At that time, the
fair value of the investment was $395.4 million, and a pretax gain of $344.2
million was recorded on our original investment of $51.2 million. On March 31,
2001 the value of the UMC shares declined to $215.8 million, and it was
determined that the decline in the market value of the investment in UMC was
other than temporary, as defined by generally accepted accounting principles, so
a loss of $179.6 million was recorded, or $114.0 million net of taxes. This loss
was included in other income and expense in the first quarter of 2001. At the
end of the second quarter of 2001, the value of the investment in UMC has
declined further. However, at this time it is believed that this further decline
is temporary. Accordingly, the decline in value of $26.0 million, or $15.7
million net of taxes, on the marketable portion of our investment is recorded in
other comprehensive income (loss), in accordance with Statement of Financial
Accounting Standards Number 115. If the decline in the fair value of these UMC
shares is deemed to be other- than-temporary or declines further, it may be
necessary to record additional losses. In addition, in future periods, there may
be a gain or loss, due to fluctuations in the market value of UMC's stock, if
the UMC shares are sold.
11. On July 4, 2000, SanDisk entered into a share purchase agreement to
make a $75 million investment in Tower Semiconductor, or Tower, in Israel,
representing approximately 10% ownership of Tower. The investment is subject to
the completion of certain milestones. On January 26, 2001, Tower satisfied the
closing conditions of the share purchase agreement, and the Company transferred
the first $20 million of its investment from an escrow account to purchase
866,551 shares ordinary shares and obtain $8.8 million in pre-paid wafer
credits. Upon the completion of the first milestone, on March 1, 2001, the
Company exercised its first warrant and paid Tower an additional $11.0 million
to purchase 366,690 ordinary shares and obtain $6.1 million prepaid wafer
credits. Upon the completion of the second milestone, on May 1, 2001, the
Company exercised its second warrant and paid Tower an additional $11.0
million to purchase 366,690 ordinary shares and obtain $6.8 million prepaid
wafer credits. Wafer credits are recorded in other assets at fair value.
Additional contributions will take the form of mandatory warrant exercises for
ordinary shares at an exercise price of $30.00 per share if other milestones
are met. The warrants will expire five years from the date of grant, and in
the event the key milestones are not achieved, the exercise of these warrants
will not be mandatory. We expect first wafer production to commence at the new
fabrication facility in late 2002.
12. On August 9, 2000, SanDisk entered into a joint venture, DigitalPortal
Inc., or DPI, with Photo-Me International, or PMI, for the manufacture,
installation, marketing, and maintenance of self-service, digital photo printing
labs, or kiosks, bearing the SanDisk brand name in locations in the U.S. and
Canada. Under the agreement, SanDisk and PMI will each make an initial
investment of $4.0 million and secure lease financing for the purchase of the
kiosks. During the second quarter of 2001, $2.0 million in cash investments were
made in DPI. The total value of the lease financing will depend on the number
of kiosks deployed by the joint venture. The Company estimates that it will
guarantee equipment lease arrangements of approximately $40.0 million over the
first two years of the agreement. PMI will manufacture the kiosks for the joint
venture and will install and maintain the kiosks under contract with the joint
venture. The Company expects the first kiosks to be deployed in pilot programs
in select retail stores in the United States starting in the third quarter of
2001. The Company accounts for this investment under the equity method, and
recorded a loss of $308,000 as its share of the equity in loss of joint venture
in the second quarter of 2001 and a total loss $568,000 in the first six months
of 2001.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements in this report are forward-looking statements under
Section 21E of the Securities and Exchange Act of 1934, as amended, based on our
current expectations, and entail various significant risks and uncertainties
that could cause our actual results to differ materially from those expressed in
such forward looking statements. Forward-looking statements in this report are
identified by words such as "believes," "anticipates," "expects," "intends,"
"may," "will" and other similar expressions. However, these words are not the
only way we identify forward-looking statements. In addition, any statements,
which refer to expectations, projections or other characterizations of future
events or circumstances are forward-looking statements. Such risks and
uncertainties are discussed below and in our Form 10-K for the year ended
December 31, 2000 under the heading "Factors That May Affect Future Results."
Readers are cautioned not to place undue reliance on these forward-looking
statements,
10
which speak only as of the date hereof. We undertake 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 our consolidated financial statements and the notes thereto.
Overview
SanDisk was founded in 1988 to develop and market flash data storage
systems. We sell our products to the consumer electronics and
industrial/communications markets. In the first six months of fiscal 2001,
approximately 77% of our product sales were derived from the consumer
electronics market, particularly sales of CompactFlash and MultiMediaCard
products for use in digital cameras and portable music devices. Our CompactFlash
products have lower average selling prices and gross margins than our higher
capacity FlashDisk and FlashDrive products. In addition, a substantial portion
of our CompactFlash , MultiMediaCard, Secure Digital card and SmartMedia card
products are sold into the retail channel, which usually has shorter customer
order lead-times than our other channels. A majority of our sales to the retail
channel are turns business, with orders received and fulfilled in the same
quarter, thereby decreasing our ability to accurately forecast future production
needs. We believe sales to the consumer market will continue to represent a
majority of our sales, and increase as a percentage of sales in future years, as
the popularity of consumer applications, including digital cameras, increases.
Our operating results are affected by a number of factors including the
volume of product sales, competitive pricing pressures, availability of foundry
capacity, our ability to match supply with demand, excess supply from
competition which may lead to lower pricing and excess inventory, low order
visibility, variations in manufacturing cycle times, fluctuations in
manufacturing yields and manufacturing utilization, the timing of significant
orders, changes in product and customer mix, market acceptance of new or
enhanced versions of our products, changes in the channels through which our
products are distributed, timing of new product announcements and introductions
by us and our competitors, the timing of license and royalty revenues,
fluctuations in product costs, increased research and development expenses, weak
worldwide economic conditions and uncertainty, and exchange rate fluctuations.
We have experienced seasonality in the past, and as the proportion of our
products sold for use in consumer electronics applications increases, our
revenues may become subject to more pronounced seasonal declines in the first
quarter of each year. See "Factors That May Affect Future Results--Our Operating
Results May Fluctuate Significantly Which May Adversely Affect Our Stock Price"
and "--There is Seasonality in Our Business."
Beginning in late 1995, we adopted a strategy of licensing our flash
technology, including our patent portfolio, to third-party manufacturers of
flash products. To date, we have entered into patent cross-license agreements
with several companies, and intend to pursue opportunities to enter into
additional licenses. Under our current license agreements, licensees pay us
license fees, royalties, or a combination thereof. In some cases, the
compensation to us may be partially in the form of guaranteed access to flash
memory-manufacturing capacity from the licensee. The timing and amount of
royalty payments and the recognition of license fees 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.
We market our products using a direct sales organization, distributors,
manufacturers' representatives, private label partners, OEMs and retailers. We
expect that sales through the retail channel will comprise an increasing share
of our product revenues in the future, and that a substantial portion of our
sales into the retail channel will be made to participants that will have the
right to return unsold products. Our policy is to defer recognition of revenues
from these sales to the retail and distribution channels until the products are
sold to the end customers.
Historically, a majority of our sales have been to a limited number of
customers. We expect that sales of our products to a limited number of customers
will continue to account for a substantial portion of our product revenues for
the foreseeable future. We have also experienced significant changes in the
composition of our customer base from year to year and expect this pattern to
continue as market demand for our customers' products fluctuates. The loss of,
or significant reduction in purchases by any of our major customers, could have
a material adverse effect on
11
our business, financial condition and results of operations. See "Factors That
May Affect Future Results--Sales to a Small Number of Customers Represent a
Significant Portion of Our Revenues".
All of our Flash memory card products require silicon wafers, the
majority of which are currently supplied by Toshibafrom its Yokkaichi wafer
fab in Japan and through our FlashVision joint venture in Virginia, as well as
UMC in Taiwan. Semiconductor manufacturers, including UMC and Toshiba, as well
as competitors such as Samsung, added new advanced wafer fab capacity during
2000. This additional capacity, along with slowing economic conditions
experienced late in the fourth quarter of 2000 and into 2001, has resulted in
excess supply and intense pricing pressure. If industry-wide demand for our
products continues to be below the industry-wide available supply, our product
prices could decrease further causing our revenues and gross margins to
continue to decline significantly. Under our wafer supply agreements, there
are limits on the number of wafers we can order and our ability to change that
quantity, either up or down, is restricted. Accordingly, our ability to react
to significant fluctuations in demand for our products is limited. If customer
demand falls below our forecast and we are unable to reschedule or cancel our
orders for wafers or other long lead-time items such as controller chips or
printed circuit boards, we will end up with excess inventories, which could
result in higher operating expenses and reduced gross margins. If customer
demand exceeds our forecasts, we may be unable to obtain an adequate supply of
wafers to fill customer orders, which could result in lost sales and lower
revenues. If we are unable to obtain adequate quantities of flash memory
wafers with acceptable prices and yields from our current and future wafer
foundries, our business, financial condition and results of operations could
be harmed. During the startup and production ramp at the Virginia fabrication
facility, while the unit output is still relatively low compared to the fixed
expenses, we expect our gross margins to be adversely impacted .See "Factors
That May Affect Future Results--Our Operating Results May Fluctuate
Significantly."
In the first quarter of 2001, we recorded an inventory charge and wrote
down inventories by $45.3 million, reflecting lower market pricing and the write
off of excess and obsolete inventories. In the second quarter of 2001, we
recorded an additional inventory charge and inventory write down of $23.1
million, reflecting a larger than anticipated decline in our average selling
prices. We also recorded a $7.6 million charge in the second quarter of
2001 related to the retirement of unique NOR-based tooling and equipment and
accelerated depreciation relating to our transition from NOR to NAND. We may be
forced to write down inventories again, if the current deterioration in market
demand for our products continues and our inventory levels continue to exceed
customer orders. In addition, we may have to write down our inventories if
continued pricing pressure results in a net realizable value that is lower than
our cost, or if part of the inventory becomes obsolete. We believe the current
level of inventory is in line with the anticipated level of near-term business.
However, we are obligated to honor existing purchase orders that we have placed
with our suppliers, which may increase our inventory levels if demand does not
increase. Furthermore, to assure favorable future business relations with our
major suppliers, we may choose not to shut down their production of our
products. In the case of FlashVision manufacturing at Dominion in Virginia, both
Toshiba and SanDisk are obligated to purchase their share of the production
output, which may make it more difficult for us to reduce our inventory.
Excess inventory not only uses our cash, but can also result in
substantial losses if such inventory, or large portions thereof, has to be
revalued due to lower market pricing or product obsolescence. These inventory
adjustments decrease gross margins and have resulted in, and could in the future
result in, fluctuations in our gross margins and net earnings in the quarter in
which they occur. The total write downs to inventories and write offs of NOR-
based tooling and equipment of $76.0 million in the first six months of 2001
represented 43% of product revenues, resulting in a decrease of product gross
margins from positive 15% to negative 28%.
Export sales are an important part of our business. Our international sales
are impacted by changes in economic conditions in our international markets.
Economic conditions in our international markets, including Asia and the
European Union, may adversely affect our revenues to the extent that demand for
our products in these regions declines. Given the recent adverse economic
conditions in Asia and the European Union and the weakness of the Euro, Yen and
other currencies relative to the United States Dollar, our products may be
relatively more expensive in these regions, which could result in a decrease of
our sales in these regions. While most of our sales are denominated in U.S.
Dollars, we invoice certain Japanese customers in Japanese Yen and are subject
to exchange
12
rate fluctuations on these transactions, which could affect our business,
financial condition and results of operations. See "Factors That May Affect
Future Results--Our international operations make us vulnerable to changing
conditions and currency fluctuations."
For the foreseeable future, we expect to realize a significant portion of
our 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, for example FlashVision. To
remain competitive, we are focusing on a number of programs to lower
manufacturing costs, including development of future generations of flash
memory. There can be no assurance that we will successfully develop such
products or processes or that development of such processes will lower
manufacturing costs. If the current industry-wide and worldwide economic
slowdown continues for the rest of fiscal 2001, we may be unable to efficiently
utilize the NAND flash wafer production from FlashVision, which would force us
to amortize the fixed costs of the fabrication facility over a reduced wafer
output, making these wafers significantly more expensive, and correspondingly
impacting gross margins. The output of NAND flash wafers from FlashVision is
expected to increase substantially in the second half of 2001, which will result
in a corresponding increase of our NAND inventory if the market conditions for
the sale of our products do not improve materially in the second half. See
"Factors That May Affect Future Results--We Must Achieve Acceptable
Manufacturing Yields."
Results of Operations
Product Revenues. Our product revenues were $88.1 million in the second
quarter of 2001, down $34.5 million or 28% from the second quarter of 2000.
Product revenues were $176.2 million in the first six months of 2001, down $43.6
million or 20% from the first six months of 2000. During the second quarter of
2001, total flash memory product units shipped increased approximately 15% over
the second quarter of 2000, and the unit increase was 16%, when comparing the
first six months of 2001 to the first six months 2000. The largest unit increase
came from sales of CompactFlash products, followed by the addition of Secure
Digital Cards. CompactFlash products represented 55% of product revenues and
MultiMediaCards 10% of product revenues for the first six months of 2001,
compared to 46% and 19%, respectively, in the first six months of 2000.
The average selling price per megabyte of memory shipped declined 33% in
the first six months of 2001, due primarily to competitive pricing pressures
driven by excess supply in the market. Average unit selling prices decreased
by 43% during the first six months of 2001, due to a 33% price decline per
megabyte, and a decrease in the average megabytes per unit associated with an
increase in sales of lower capacity cards. The average unit selling price had
decreased 6% in the first six months of 2000. The mix of products sold varies
from quarter to quarter and will continue to vary in the future, affecting our
overall average selling prices and gross margins.
Product revenues in the second quarter of 2001 were flat, when compared to
the first quarter of 2001. The total units shipped increased 16% and the
average selling price per megabyte decreased by 22%. Compared to the first
quarter of 2001, average unit selling price for memory products decreased 33%
from quarter to quarter. Total revenues for the second quarter of 2001 were up
$5.8 million or 6% compared to $101.3 million in the first quarter of 2001
driven by an increase in license and royalty revenues.
Sales to the consumer market represented 79% of product revenues, while the
telecommunications/ industrial market made up the remaining 21% in the first six
months of 2001. This compares to approximately 70% and 30%, respectively, in
the first six months of 2000. Sales to the retail channel represented 53% and
46% of product revenues in the second quarter and first six months of 2001,
compared to 29% and 35% in the second quarter and first six months of 2000. The
mix of products sold varies from quarter to quarter and will continue to vary in
the future, affecting our overall average selling prices and gross margins.
Export sales represented 51% and 59% of our product revenues in the second
quarter and first six months of 2001, compared to 55% and 54% in the second
quarter and first six months of 2000. We expect international sales to continue
to represent a significant portion of our product revenues. Our top ten
customers represented approximately 54% and 57% of our product revenues in the
second quarter and first six months of 2001, compared to 49% and 50% in the same
periods of 2000. In the first six months of 2001, sales to one customer totaled
16% of product revenue, and there was no customer that represented more than 10%
of product sales in the first six months of 2000. We
13
expect that sales to a limited number of customers will continue to represent a
substantial portion of our product revenues for the foreseeable future.
License and Royalty Revenues. We earn patent license fees and royalties
under several cross-license agreements. License and royalty revenues from patent
cross-license agreements were $19.0 million and $32.3 million in the second
quarter and first six months of 2001, compared to $21.4 million and $33.5
million in the same periods of 2000. Revenues from licenses and royalties
increased to 15% of total revenues in the first six months of 2001 from 13% in
the first six months of 2000. Our revenues from patent license and royalties
fluctuate quarterly based on the timing of revenue recognition under our various
agreements. We expect license and royalty revenues to be approximately $9
million in the third quarter of 2001.
Gross Profits. In the second quarter and first six months of 2001, gross
profits were $396,000, or less than 1% of total revenues, and negative $17.1
million, or negative 8% of total revenues, compared to positive $59.4 million,
or 41% of total revenues, and positive $101.0 million, or 40% of total revenues,
in the same periods of 2000. In the second quarter and first six months of 2001,
product gross margins were negative 21% and negative 28% of product revenues,
compared to positive 31% in each of the same periods of 2000. Cost of sales in
the second quarter of 2001 included charges totaling $30.7 million, and the
first six months of 2001 included charges totaling $76.0 million. These charges
reflect substantially lower market pricing, reduced demand for our products, and
the write off of excess and obsolete inventory components and equipment.
Excluding these charges, our product gross margin for the second quarter and
first six months of 2001 would have been 14% and 15%, respectively. Our product
gross margins were also adversely affected by the decrease of 33% in average
selling prices per megabyte in the first six months of 2001.
Operating Expenses. Given the current market conditions, we have instituted
strict expense control measures. These measures in the first six months of 2001
included a reduction in our work force in the first quarter of 2001 and cuts in
discretionary spending. In the first six months of 2001, our headcount,
including full-time and temporary employees, has decreased by 16%. However, we
are continuing to invest in research and development of advanced technologies
and future products.
Research and Development Expenses. 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 were $14.2 million in the second quarter of 2001, up $3.1
million or 29% from $11.1 million in the second quarter of 2000. In the first
six months of 2001, research and development expenses were $30.6 million, up
$10.8 million or 54% from $19.8 million in the first six months of 2000. These
increases were primarily due to increased salary and related expenses associated
with additional personnel, increased project expenses to support the development
of new generations of flash data storage products including the 512 megabit and
1 gigabit flash memory co-development with Toshiba, and increased depreciation
and amortization expenses. Research and development expenses represented 13% and
15% of total revenues in the second quarter and first six months of 2001,
compared to 8% in the each of the same periods of 2000. We expect our research
and development expenses to continue to increase in future quarters to support
the development and introduction of new generations of flash data storage
products, including the joint venture with Toshiba and the development of
advanced controller chips.
Sales and Marketing Expenses. Sales and marketing expenses include
salaries, sales commissions, benefits and travel expenses for our sales,
marketing, customer service and applications engineering personnel. These
expenses also include other selling and marketing expenses, such as independent
manufacturers representative commissions, advertising and tradeshow expenses.
Sales and marketing expenses were $10.5 million in the second quarter of 2001,
down $1.0 million or 9% from $11.5 million in the second quarter of 2000. In the
first six months of 2001, sales and marketing expenses were $20.8 million, down
$1.3 million or 6% from $22.1 million in the first six months of 2000. These
decreases were primarily due to decreased variable compensation and selling
expenses related to reduced revenue levels, offset by increased salary and
related expenses associated with additional personnel and the additional
expenses due to the increase in revenue in our retail channel as a percentage of
total product revenues. Sales and marketing expenses represented approximately
10% of total revenues in the second quarter and first six months of 2001,
compared to 8% and 9% for each of the same periods of 2000. We expect sales and
marketing expenses to continue to increase, as we continue to develop our retail
channel and brand awareness for our products and as we increase our marketing
activities for our Secure Digital Card products.
14
General and Administrative Expenses. General and administrative expenses
include the cost of our finance, information systems, human resources,
stockholder relations, legal and administrative functions. General and
administrative expenses were $4.3 million in the second quarter of 2001, down
$1.7 million or 29% from $6.0 million in the first quarter of 2000. In the first
six months of 2001, general and administrative expenses were $8.6 million, down
$2.2 million or 20% from $10.8 million in the first six months of 2000. These
decreases were primarily due to lower legal fees, offset by increased salary and
related expenses associated with additional personnel. General and
administrative expenses represented 4% of total revenues in the second quarter
and first six months of 2001 and 2000. General and administrative expenses could
increase substantially in the future if we continue to pursue litigation to
defend our patent portfolio. In addition, we expect general and administrative
expenses to continue to increase as our general and administrative functions
grow to support our overall expected growth and our investments in
infrastructure.
Equity in Income of Joint Ventures. In the second quarter and first six
months of 2001, equity in income (loss) of joint ventures of ($127,000) and
$506,000 included our share of interest income, net of expenses, from our
FlashVision joint venture and expenses from our DigitalPortal joint venture. As
FlashVision utilizes cash to fund its operations in future quarters, its
interest income will decrease. DPI's expenses are expected to increase as
operations are ramped up.
Interest Income. Interest income was $3.1 million and $7.2 million in the
second quarter and first six months of 2001 compared to $5.8 million and $11.4
million in the same periods of 2000. The decreases are a result of our lower
cash and investment balances, associated with our investments in Tower and
FlashVision, as well as cash used in operations, and the lower interest rates
in 2001 when compared to 2000. We expect interest income to decrease in the
third quarter of 2001 as cash balances will decrease due to the utilization of
cash to fund operating activities and internal capital acquisitions and
investments due to the transition from NOR to NAND technology.
Loss on Investment in Foundry. As discussed in footnote 10 of the financial
statements included in this report, the market value of our investment in UMC
has declined significantly. On January 3, 2000, the date we exchanged our USIC
shares for UMC shares, the fair value of our investment was $395.4 million. At
that time, we recorded a pretax gain of $344.2 million on our original
investment of $51.2 million. On March 31, 2001 the value of our UMC shares
declined to $215.8 million, and it was determined that the decline in the market
value of the investment in UMC was other than temporary, as defined by generally
accepted accounting principles, so we recorded a loss of $179.6 million, or
$114.0 million after taxes. This loss was included in other income and expense
in the first quarter of 2001. At the end of the second quarter of 2001, the
fair value of our investment in UMC had declined further. However, at this time
we believe that this further decline is temporary. Accordingly, we have
recorded the decline in value of $26.0 million, or $15.7 million net of taxes,
on the marketable portion of our investment in other comprehensive income
(loss), in accordance with Statement of Financial Accounting Standards Number
115. If the decline in value of our UMC shares is deemed to be other- than-
temporary or declines further, we may be required to record additional losses.
In addition, in future periods, we may recognize a gain or loss, due to
fluctuations in the market value of UMC's stock, if we sell our UMC shares. Also
included in the loss on investment in foundry is a loss on our investment in
SmartDisk for $382,000 during the first quarter of 2001, as its decline in value
was also determined to be other than temporary.
Other Income (Expense), Net. Other expense, net was $219,000 and $2.0
million in the second quarter and first six months of 2001 compared to other
income, net of $665,000 and $1.1 million in the same periods of 2000. The
expense in 2001 was primarily due to foreign exchange losses on our Japanese Yen
denominated assets, compared to significant gains on Japanese Yen denominated
assets in 2000.
Provision for Income Taxes. For the first six months of 2001, we recorded
a tax rate benefit of 38%, due largely to a tax rate benefit on the UMC loss of
39.5%. This compares with an effective tax rate expense of approximately 40% in
the first six months of 2000.
Liquidity and Capital Resources
As of June 30, 2001, we had working capital of $461.7 million, which
included $84.9 million in cash and cash equivalents and $221.9 million in short-
term investments, excluding our investment in UMC. Operating activities used
$12.5 million of cash in the first six months of 2001 primarily due to the net
loss and a relief of future tax
15
obligations of $111.9 million and a decrease in deferred revenue of $24.0
million. These were partially offset by cash provided by a decline in accounts
receivable of $43.7 million, due to strong collections, and a reduction in
inventories of $40.7 million, reflecting the reduced value. In the first six
months of 2000, operating activities provided $40.9 million of cash, primarily
from net income, an increase in future tax obligations of $154.6 million and an
increase in accounts payable of $11.9 million, due to increased levels of
inventory purchases, partially offset by an increase in accounts receivable of
$31.2 million, due to increased revenues, and inventories of $11.1 million,
required to support anticipated increased levels of revenues in the upcoming
quarters.
Net cash used in investing activities in the first six months of 2001 of
$14.3 million included our investments in Tower of $20.4 million, net of prepaid
wafer credits of $21.6 million, our additional investment in the FlashVision
foundry joint venture of $15.0 million, investments in DPI of $2.0 million, and
capital equipment purchases of $15.5 million, which were partially offset by net
proceeds of short term investments of $38.5 million. In the first six months of
2000, investing activities used $19.4 million due to an investment in
FlashVision of $15.0 and capital equipment purchases of $10.9 million, offset by
net proceeds of short term investments of $6.4 million. In the first six months
of both 2001 and 2000, cash provided by financing activities was primarily due
to the sale of common stock through our stock option and employee stock purchase
plans.
On January 3, 2000, the USIC foundry was merged into UMC. We had invested
$51.2 million in USIC. In exchange for its USIC shares, we received 111 million
UMC shares. These shares were valued at approximately $396 million at the time
of the merger, resulting in a pretax gain of $344.2 million ($203.9 million
after-tax) in the first quarter of 2000. Trading restrictions expired on one-
half of the shares on July 3, 2000, and the remaining shares become available
for sale over a two-year period beginning in January 2002. On March 31, 2001
the value of our UMC shares declined to $215.8 million, and it was determined
that the decline in the market value of the investment in UMC was other than
temporary, as defined by generally accepted accounting principles, so we
recorded a loss of $179.6 million, or $114.0 million after taxes. This loss was
included in other income and expense in the first quarter of 2001. At the end
of the second quarter of 2001, the value of our investment in UMC has declined
further. However, at this time we believe that this further decline is
temporary. Accordingly, we have recorded the decline in value of $26.0 million,
or $15.7 million net of taxes, on the marketable portion of our investment in
other comprehensive income, in accordance with Statement of Financial Accounting
Standards Number 115. If the decline in value of our UMC shares is deemed to be
other- than-temporary or declines further, we may be required to record an
additional unrealized loss. In addition, in future periods, we may recognize a
gain or loss, due to fluctuations in the market value of UMC's stock, if we sell
our UMC shares. Also included in the loss on investment in foundry is a loss on
our investment in SmartDisk for $382,000 during the first quarter of 2001, as
its decline in value was also determined to be other than temporary.
In January 2001, we invested the final $15 million of $150 million in cash
in FlashVision LLC, our joint venture with Toshiba for the development and
manufacture of 512 megabit and 1 gigabit flash memory chips and Secure Digital
Card controllers. The first draw down of $20 million in equipment lease lines to
equip Toshiba's Dominion Semiconductor manufacturing clean room with advanced
wafer processing equipment occurred during the first quarter of 2001. The second
draw down of $30 million occurred during the second quarter of 2001, and the
third draw down of $46 million occurred early in the third quarter of 2001. We
will guarantee a total of up to $215 million. We account for this investment
using the equity method, and recorded equity in income of joint ventures of
$181,000 in the second quarter of 2001, and $1.1 million in the first six months
of 2001, which included interest income, net of operating expenses.
On July 4, 2000, we entered into a share purchase agreement to make a $75
million investment in Tower Semiconductor, or Tower, in Israel, representing
approximately 10% ownership of Tower. The investment is subject to the
completion of certain milestones. On January 26, 2001, Tower satisfied the
closing conditions of the share purchase agreement, and we transferred the first
$20.0 million of this investment from an escrow account to purchase 866,551
shares ordinary shares and obtain $8.8 million in pre-paid wafer credits. Upon
the completion of the first milestone, on March 1, 2001, we exercised the first
warrant and paid Tower $11.0 million to purchase 366,690 ordinary shares and
obtain $6.1 million prepaid wafer credits. Upon the completion of the second
milestone, on May 1, 2001, we exercised the second warrant and paid Tower an
additional $11.0 million to purchase 366,690 ordinary shares and obtain $6.8
million prepaid wafer credits. Additional contributions will take the form of
mandatory warrant exercises for ordinary shares at an exercise price of $30.00
per share if other milestones are met. The
16
warrants will expire five years from the date of grant, and in the event the key
milestones are not achieved, the exercise of these warrants will not be
mandatory. We expect first wafer production to commence at the new fabrication
facility in late 2002.
On August 9, 2000, we entered into a joint venture, DigitalPortal Inc.,
or DPI, with Photo-Me International, or PMI, for the manufacture,
installation, marketing and maintenance of self-service, digital photo
printing labs, or kiosks, bearing the SanDisk brand name in locations in the
U.S. and Canada. Under the agreement, we and PMI each own 50% of DPI and will
each make an initial investment of $4.0 million and secure lease financing for
the purchase of the kiosks. During the second quarter of 2001, we invested
$2.0 million in DPI. The total value of the lease financing will depend on the
number of kiosks deployed by the joint venture. We estimate that, as part of
this joint venture, we will guarantee equipment lease arrangements of
approximately $40.0 million over the first two years of the agreement. PMI
will manufacture the kiosks for the joint venture and will install and
maintain the kiosks under contract with the joint venture. We expect the first
kiosks to be deployed in pilot programs in select retail stores in the United
States starting in the third quarter of 2001. We account for this investment
under the equity method, and recorded a loss of $308,000 as equity in loss of
joint venture in the second quarter of 2001, and a total loss of $568,000 in
the first six months of 2001.
We may make additional investments, which could be substantial, in assembly
and test manufacturing equipment or foundry capacity to support our business in
the future. We believe our existing cash and cash equivalents and short-term
investments along with the capital equipment lease arrangements related to our
FlashVision, L.L.C. joint venture and the planned equipment lease arrangements
related to our Digital Portal, Inc. joint venture will be sufficient to meet our
currently anticipated working capital, capital equipment expenditures, and joint
venture and Tower foundry investment requirements for at least the next twelve
months.
Impact of Currency Exchange Rates
A portion of our revenues are denominated in Japanese yen. We enter into
foreign exchange forward contracts to hedge against changes in foreign currency
exchange rates. Future exchange rate fluctuations could have a material adverse
effect on our business, financial condition and results of operations.
Factors That May Affect Future Results
Our operating results may fluctuate significantly, which may adversely affect
our stock price.
Our quarterly and annual operating results have fluctuated significantly in
the past and we expect that they will continue to fluctuate in the future. This
fluctuation is a result of a variety of factors, including the following:
. unpredictable or declining demand for our products;
. decline in the average selling prices of our products due to
competitive pricing pressures;
. seasonality in sales of our products;
. excess capacity of flash memory from our competitors and our own new
flash wafer capacity;
. difficulty of forecasting and management of inventory levels; in
particular, building a large inventory of unsold product due to non-
cancelable contractual obligations to purchase materials such as flash
wafers, controllers, printed circuit boards and discrete components;
. expenses related to obsolescence or devaluation of unsold inventory,
or reserves necessary to protect us against future write-offs of such
unsold inventory;
. adverse changes in product and customer mix;
. slower than anticipated market acceptance of new or enhanced versions
of our products;
. competing flash memory card standards, which displace the standards
used in our products;
17
. changes in our distribution channels;
. timing of license and royalty revenue;
. fluctuations in product costs, particularly due to fluctuations in
manufacturing yields and utilization;
. availability of sufficient silicon wafer foundry capacity to meet
customer demand;
. shortages of components such as capacitors and printed circuit boards
required for the manufacturing of our products;
. significant yield losses, which could affect our ability to fulfill
customer orders and could increase our costs;
. manufacturing flaws affecting the reliability, functionality or
performance of our products which could increase our product costs,
reduce demand for our products or require product recalls;
. increased research and development expenses;
. exchange rate fluctuations, particularly the U.S. dollar to Japanese
yen exchange rate;
. changes in general economic conditions, particularly in Japan and the
European Union;
. natural disasters affecting the countries in which we conduct our
business, particularly Taiwan, Japan and the United States;
Difficulty of estimating silicon wafer needs
When we order silicon wafers from our foundries, we have to estimate the
number of silicon wafers needed to fill product orders several months into the
future. If we overestimate this number, we will build excess inventories, which
could harm our gross margins and operating results. On the other hand, if we
underestimate the number of silicon wafers needed to fill product orders, we may
be unable to obtain an adequate supply of wafers, which could harm our product
revenues. Because our largest volume products, CompactFlash and MultiMediaCard,
are sold into emerging consumer markets, it has been difficult to accurately
forecast future sales. In addition, bookings visibility declined significantly
late in the fourth quarter of 2000, and remains low in 2001 due to the current
economic uncertainty in our markets. A substantial majority of our quarterly
sales are currently, and have historically been, from orders received and
fulfilled in the same quarter, which makes accurate forecasting very difficult.
In addition, our product order backlog may fluctuate substantially from quarter
to quarter.
Anticipated growth in expense levels
We significantly increased our expense levels in 2000 to support our
growth. We may need to hire additional personnel in certain business areas or
increase our operating expenses in 2001 to support our sales and marketing
efforts and research and development activities, including our joint venture
with Toshiba providing for the development of 512 megabit and 1 gigabit flash
memory chips. We have significant fixed costs and we cannot readily reduce these
expenses over the short term. If our revenues do not increase proportionately to
our operating expenses, or if revenues decrease or do not meet expectations for
a particular period, our business, financial condition and results of operations
will be harmed.
Variability of average selling prices and gross margins
Our product mix varies quarterly, which affects our overall average selling
prices and gross margins. Our CompactFlash and MultiMediaCard products, which
currently represent the majority of our product revenues, have lower average
selling prices and gross margins than our higher capacity FlashDisk and
FlashDrive products. We believe that sales of CompactFlash and MultiMediaCard
products will continue to represent a significant percentage of our product
revenues as consumer applications, such as digital cameras and digital music
players, become more popular. In fiscal 2000, average selling prices per
megabyte decreased 22% compared to fiscal 1999, reflecting the Flash memory
supply shortages that prevailed during the first nine months of the year, which
helped to keep selling prices in 2000 more stable than in 1999. Due to recent
increases in flash memory foundry capacity and the economic slow-down in 2001,
we expect that the decline in our average selling prices in 2001 will be more
severe than in
18
2000. We have already experienced a 33% decline in our average selling price per
megabyte of memory shipped in the first half of 2001. If we cannot reduce our
product manufacturing costs in 2001 to offset these reduced prices, our gross
margins and net profitability will suffer.
Variability of license fees and royalties
Our intellectual property strategy consists of cross-licensing our patents
to other manufacturers of flash products. Under these arrangements, we earn
license fees and royalties on individually negotiated terms. The timing of
revenue recognition from these payments is dependent on the terms of each
contract and on the timing of product shipments by the third parties. Our income
from patent licenses and royalties can fluctuate significantly from quarter to
quarter. A substantial portion of this income comes from royalties based on the
actual sales by our licensees. Given the current market outlook for 2001, sales
of licensed flash products by our licensees may be substantially lower than the
corresponding sales in recent quarters, which may cause a substantial drop in
our royalty revenues. Because these revenues have higher gross margins than
our product revenues, gross margins and net income fluctuate significantly with
changes in license and royalty revenues. We receive royalty revenue reports from
certain of our licensees twice a year, and record all revenues one quarter in
arrears. We align estimates to actual reported royalty revenues when reports
are received.
Continuing declines in our average sales prices may result in declines in our
gross margins.
In 2000, the average price per megabyte shipped declined 22% compared to
1999, and we have experienced a 33% decline in the first half of 2001. Flash
data storage markets are intensely competitive, and price reductions for our
products are necessary to meet consumer price points. Due to recent increases
in flash memory foundry capacity and the worldwide economic slow-down in 2001,
we expect that further price declines for our products in the next several
quarters could be significant. If we cannot reduce our product manufacturing
costs in the second half of 2001 to offset these reduced prices, our gross
margins and net profitability will suffer.
Our selling prices may be affected by excess capacity in the market for flash
memory products.
In the first nine months of 2000, industry-wide demand for flash memory
products exceeded the available supply, driven by an explosion in the growth of
cellular phones and the accelerating shift in consumer electronics from analog
to digital devices. Flash memory suppliers, including SanDisk, responded to this
strong demand by significantly increasing investments in new advanced flash
memory production capacity. This has led to a significant increase in worldwide
flash memory supply which currently exceeds customer demand , causing excess
supply in the markets for our products and significant declines in average
selling prices. If this situation continues throughout 2001, we expect that
price declines for our products could be significant on an annualized basis. If
we cannot reduce our product manufacturing costs in 2001 to offset these reduced
prices, our gross margins and net profitability will suffer.
Our business depends upon consumer products.
In 2000, and the first six months of 2001, we continued to receive more
product revenue and ship more units of products for consumer electronics
applications, principally digital cameras, compared to other applications. The
consumer market is intensely competitive and is more price sensitive than our
other target markets. In addition, we must spend more on marketing and promotion
in consumer markets to establish brand name recognition and drive demand.
A significant portion of our sales to the consumer electronics market is
made through distributors and to retailers. Sales through these channels
typically include rights to return unsold inventory. As a result, we do not
recognize revenue until after the product has been sold through to the end user.
If our distributors and retailers are not successful in this market, there could
be substantial product returns, which would harm our business, financial
condition and results of operations.
There is seasonality in our business.
Sales of our products, in particular the sale of CompactFlash,
MultiMediaCard, Secure Digital card and Smartmedia card products, in the
consumer electronics market may be subject to seasonality. As a result, product
19
sales may be impacted by seasonal purchasing patterns with higher sales
generally occurring in the second half of each year. In addition, in the past we
have experienced a decrease in orders in the first quarter from our Japanese OEM
customers primarily because 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. Although we did not experience seasonality in 2000, we cannot
assure you that we will not experience seasonality in the future.
In transitioning to new processes and products, we face production and market
acceptance risks.
General
Successive generations of our products have incorporated semiconductor
devices with greater memory capacity per chip. Two important factors have
enabled us to decrease the cost per megabyte of our flash data storage products:
the development of higher capacity semiconductor devices and the implementation
of smaller geometry manufacturing processes. A number of challenges exist in
achieving a lower cost per megabyte, including:
. lower yields often experienced in the early production of new
semiconductor devices;
. manufacturing flaws with new processes including manufacturing
processes at our subcontractors which may be extremely complex;
. problems with design and manufacturing of products that will
incorporate these devices, which may result in delays or product
recalls; and
. production delays.
Because our products are complex, we periodically experience significant
delays in the development and volume production ramp up of our products. Similar
delays could occur in the future and could harm our business, financial
condition and results of operations.
D2 flash technology
We have developed new products based on D2 NOR flash technology, a flash
architecture designed to store two bits in each flash memory cell. High density
flash memory, such as D2 flash, is a complex technology that requires strict
manufacturing controls and effective test screens. Problems encountered in the
shift to volume production for new flash products could impact both reliability
and yields, and result in increased manufacturing costs and reduced product
availability. As we transition from NOR to NAND technology, we expect to develop
NAND MLC (Multi Level Cell) products which are the D2 NOR equivalents, and which
will allow each NAND memory cell to store two data bits in place of one bit.
NAND MLC technology is highly complex and has never been successfully
commercialized. We may not be able to manufacture future generations of NAND
MLC products with yields sufficient to result in lower costs per megabyte. If we
are unable to bring future generations of high density flash memory into full
production as quickly as planned or if we experience unplanned yield or
reliability problems, our revenues and gross margins will decline.
Secure Digital Card products
SanDisk, along with Matsushita and Toshiba, jointly developed and jointly
promote the Secure Digital Card. The Secure Digital Card is an enhanced version
of our MultiMediaCard that incorporates advanced security and copyright
protection features required by the emerging markets for the electronic
distribution of music, video and other copyrighted works. We began shipping our
Secure Digital Card products in the first quarter of 2001, and began higher-
volume production in the second quarter of 2001, with unit shipments more than
doubling.
The Secure Digital Card incorporates a number of new features, including
SDMI compliant security and copy protection, a mechanical write protect switch
and a high data transfer rate. Any problems or delays in establishing
production capabilities or ramping up production volumes of our Secure Digital
Card products could result in lost sales or increased manufacturing costs in
2001 and beyond. In addition, we cannot be sure that manufacturers of consumer
electronic products will develop new products that use the Secure Digital Card
or that content providers such as music studios will agree to distribute their
copyrighted content for storage on Secure Digital Cards. For example, in 2000,
and thus far in 2001, the major U.S. based content providers had significant
success in U.S. courts in their litigation with Napster.Com and
20
MP3.Com, and this may have slowed down the widespread distribution of digital
music on the internet. Although the Secure Digital Card is designed specifically
to address the copy protection rights of the content providers, there can be no
assurance that these content providers will find these measures sufficient or
will agree to support them. Furthermore, there is no assurance that consumers
will widely adopt Secure Digital Cards, as they only operate with copyrighted
content. Conversely, broad acceptance of our Secure Digital Card by consumers
may reduce demand for our MultiMediaCard and CompactFlash card products. See "--
The success of our business depends on emerging markets and new products."
We are transitioning our technology to NAND based products
The transition to NAND based products is very complex, and requires good
execution from our manufacturing, technology, quality, marketing, and sales and
customer support staffs. If the current soft market conditions continue through
the second half of this year, or if we are unable for any reason to achieve
customer acceptance of our card products built with these NAND flash chips, we
will experience a significant increase in our inventory, as we are contractually
obligated to purchase half of FlashVision's NAND wafer production output. This
may result in inventory write offs and have a material adverse effect on our
business, results of operations and financial condition.
In connection with our ramping up of NAND flash wafer production through
the FlashVision joint venture, we began to reduce our purchases of NOR flash
wafers from UMC. At the same time, we began to increase our purchase of
controller wafers from UMC and are continuing development of advanced flash
memory technology at the 0.15 micron technology design rules.
We depend on third party foundries for silicon wafers.
All of our flash memory card products require silicon wafers, the majority
of which are currently supplied by Toshiba's wafer fab at Yokkaichi, Japan and
through our FlashVision joint venture in Virginia, as well as UMC in Taiwan.. If
Toshiba, Flashvision and UMC are unable to satisfy these requirements, our
business, financial condition and operating results may suffer. Any disruption
in supply from these sources due to natural disaster, power failure or other
causes could significantly harm our business, financial condition and results of
operations.
Under the terms of our wafer supply agreements with Toshiba, Flashvision
and UMC, we are obligated to provide a rolling forecast of anticipated purchase
orders for the next six calendar months. Generally, the estimates for the first
three months of each forecast are binding commitments. The estimates for the
remaining months may only be changed by a certain percentage from the previous
month's forecast. This limits our ability to react to fluctuations in demand for
our products. For example, if customer demand falls below our forecast and we
are unable to reschedule or cancel our wafer orders, we may end up with excess
wafer inventories, which could result in higher operating expenses and reduced
gross margins. Conversely, if customer demand exceeds our forecasts, we may be
unable to obtain an adequate supply of wafers to fill customer orders, which
could result in dissatisfied customers, lost sales and lower revenues. In
addition, in February 2000, we entered into a capacity and reservation deposit
agreement with UMC. To reserve additional foundry capacity under this agreement,
we paid UMC a reservation deposit. This deposit will be refunded to us on a
quarterly basis, over the agreement term, if we purchase the full wafer capacity
reserved for us. We may forfeit part of our deposit if we are unable to utilize
our reserved capacity within four quarters of the end of the agreement term. If
we are unable to obtain scheduled quantities of wafers with acceptable price and
yields from any foundry, our business, financial condition and results of
operations could be harmed.
Our investment in new flash memory wafer production may result in increased
expenses and fluctuations in operating results.
On June 30, 2000, we closed a transaction with Toshiba providing for the
joint development and manufacture of 512 megabit and 1 gigabit flash memory
chips and Secure Digital Card controllers. As a part of this transaction, we and
Toshiba formed and contributed initial funding to FlashVision LLC, a joint
venture to equip and operate a
21
silicon wafer manufacturing line at Dominion Semiconductor in Virginia. To date,
we have invested a total of $150 million in cash, and have guaranteed $96
million in equipment lease lines to equip Toshiba's Dominion Semiconductor
manufacturing clean room with advanced wafer processing equipment. We will
guarantee a total of up to $215 million. We will use the new production capacity
at Dominion to manufacture primarily NAND flash memory wafers with minimum
lithographic feature size of 0.16 micron initially, moving to 0.13 micron in the
future. Such minimum feature sizes are considered today to be among the most
advanced for mass production of silicon wafers and have never been used for the
high volume manufacture of flash memory chips. Therefore, it is difficult to
predict how long it will take to equip and commence production at the new
facility and achieve adequate yields, reliable operation, and economically
attractive product costs based on our new designs, although we expect
significant forward progress in the third quarter of 2001. We have not operated
our own wafer fabrication facility in the past and therefore we rely on Toshiba
to address these challenges. With our investments in the Dominion facility, we
are now exposed to the adverse financial impact of any delays or manufacturing
problems associated with the wafer production line. Any problems or delays in
commencing production at the new Dominion facility could adversely impact our
operating results in 2001 and beyond.
We expect to incur substantial start up expenses related to the hiring
and training of manufacturing personnel, facilitizing the clean room and
installing equipment. During the ramp-up period, which began late in the
second quarter of 2001, equipment depreciation began and line-operating
expenses increased substantially. While the wafer output is still relatively
low, the cost of wafers from the Dominion Virginia fab facility will is
significantly higher than the cost of wafers from our other suppliers. This
will negatively impact our overall product gross margins until the flash wafer
output from Dominion reach a more optimum level. Under our agreement with
Toshiba, we are committed to purchase 50% of the output from the Dominion
facility. We will incur startup costs and pay our share of ongoing operating
activities even if we do not utilize our full share of the Dominion output.
Should customer demand for NAND flash products be less than our available
supply, we may suffer from reduced revenues and increased expenses, and
increased inventory of unsold NAND flash wafers, which could adversely affect
our operating results. In order for us to sell NAND based CompactFlash,
MultiMediaCards and Secure Digital Cards, we have been developing new
controllers, printed circuit boards and test algorithms because the
architecture of NAND flash is significantly different from our current NOR
flash designs. Any technical difficulties or delays in the development of
these elements could prevent us from taking advantage of the available NAND
output and could adversely affect our results of operations.
On July 4, 2000, we entered into a share purchase agreement to make a $75
million investment in Tower Semiconductor, or Tower, in Israel, representing
approximately 10% ownership of Tower. Including the initial payment and payments
relating to the completion of the first and second milestones, we have paid a
total of $42 million in cash for an investment position of $20.4 million and
wafer credits of $21.6 million. Additional contributions will take the form of
mandatory warrant exercises for ordinary shares at an exercise price of $30.00
per share if other milestones are met. The warrants will expire five years from
the date of grant, and in the event the key milestones are not achieved, the
exercise of these warrants will not be mandatory. We expect first wafer
production to commence at the new fabrication facility in late 2002 or early
2003.
The success of our business depends on emerging markets and new products.
In order for demand for our products to grow, the markets for new products
that use CompactFlash, the MultiMediaCard, and Secure Digital Card such as
portable digital music players and smart phones, must develop and grow. If sales
of these products do not grow, our revenues and profit margins could level off
or decline.
In the second quarter of 2001, we experienced a substantial drop in demand
from our MultiMediaCard customers, which we are attributing to the expected
switch by these customers to the Secure Digital Card.
Secure Digital Card products
As part of our June 2000 collaboration with Toshiba and Matsushita Electric
Industrial Co. Ltd., we have jointly developed the Secure Digital Card, an
enhanced version of our MultiMediaCard, which incorporates advanced security
and copyright protection features required by the emerging markets for the
electronic distribution of music, video and other copyrighted works. We began
shipping our Secure Digital Card products in 32 and 64 megabyte capacities in
the first quarter of 2001. The Secure Digital Card is slightly thicker and uses
a different
22
interface than our MultiMediaCard. Because of these differences, the Secure
Digital Card will not work in current products that include a MultiMediaCard
slot. In order for the market for our Secure Digital Card to develop,
manufacturers of digital audio/video and portable computing products must
include a Secure Digital Card compatible slot in their products and acquire a
license to the security algorithms. If OEMs do not incorporate Secure Digital
Card slots in their products or do not buy our Secure Digital Cards, our
business, financial condition and results of operations may be harmed. In
addition, consumers may postpone or altogether forego buying products that
utilize our MultiMediaCard in anticipation of new products such as MP3 players
and digital camcorders that will incorporate the Secure Digital Card. If this
occurs, sales of our MultiMediaCard products may be harmed. The main
competition for the Secure Digital Card is expected to come from the
MultiMediaCards supplied by competitors such as Hitachi and Infineon, as well
as the Sony Memory Stick. Sony has substantially greater financial and other
resources than we do and extensive marketing and sales channels and brand
recognition. We cannot assure you that our Secure Digital Card will be
successful in the face of such competition.
In addition, the market for portable digital music players is very new and
it is uncertain how quickly consumer demand for these players will grow. If this
market does not grow as quickly as anticipated or our customers are not
successful in selling their portable digital music players to consumers, our
revenues could be adversely affected. In addition, it is often the case with new
consumer markets that after an initial period of new market formation and
initial acceptance by early adopters, the market enters a period of slow growth
as standards emerge and infrastructure develops. In the event that this occurs
in the portable digital music player market or other emerging markets, sales of
our products would be harmed.
The success of our new product strategy will depend upon, among other
things, the following:
. our ability to successfully develop new products with higher memory
capacities and enhanced features at a lower cost per megabyte;
. the development of new applications or markets for our flash data
storage products;
. the adoption by the major content providers of the copy protection
features offered by our Secure Digital Card products;
. the extent to which prospective customers design our products into their
products and successfully introduce their products; and
. the extent to which our products or technologies become obsolete or
noncompetitive due to products or technologies developed by others.
512 megabit and 1 gigabit flash memory card products
On June 30, 2000, we closed a transaction with Toshiba providing for the
joint development and manufacture of 512 megabit and 1 gigabit flash memory
chips and Secure Digital Card controllers. As part of this venture, we and
Toshiba plan to employ Toshiba's 0.16 micron and future 0.13 micron NAND flash
integrated circuit manufacturing technology and SanDisk's multilevel cell flash
and controller system technology. During the third quarter of 2000, we announced
with Toshiba the completion of the joint development of the 512 Megabit NAND
flash chip employing Toshiba's .16 micron manufacturing process technology. We
expect cards employing the 512 megabit technology to be shipped in significant
quantities in the second half of 2001, and cards employing the 1 gigabit
technology to be shipped in 2002. The development of 512 megabit and 1 gigabit
flash memory chips and Secure Digital Card controllers is expected to be complex
and incorporates SanDisk and Toshiba technology that is still under development.
We cannot assure you that we and Toshiba will successfully develop and bring
into full production with acceptable yields and reliability these new products
or the underlying technology, or that any development or production ramp will be
completed in a timely or cost-effective manner. If we are not successful in any
of the above, our business, financial condition and results of operations could
suffer.
We may be unable to maintain market share.
During periods of excess supply in the market for our flash memory
products, such as we have experienced in the first half of 2001 and continue to
experience, we may lose market share to competitors who aggressively lower their
prices. Conversely, under conditions of tight flash memory supply, we may be
unable to increase our
23
production volumes at a sufficiently rapid rate so as to maintain our market
share. Ultimately, our growth rate depends on our ability to obtain sufficient
flash memory wafers and other components to meet demand. If we are unable to do
so in a timely manner, we may lose market share to our competitors.
Our international operations make us vulnerable to changing conditions and
currency fluctuations.
Political risks
Currently, a significant portion of our flash memory wafers are produced by
Toshiba in Japan and UMC in Taiwan. We also use a third-party subcontractor in
Taiwan for the assembly and testing of our MultiMediaCard products. We may
therefore be affected by the political, economic and military conditions in
Taiwan. Taiwan is currently engaged in various political disputes with China and
in the past both countries have conducted military exercises in or near the
other's territorial waters and airspace. The Taiwanese and Chinese governments
may escalate these disputes, resulting in an economic embargo, a disruption in
shipping routes or even military hostilities. This could harm our business by
interrupting or delaying the production or shipment of flash memory wafers or
MultiMediaCard products by our Taiwanese foundries and subcontractor. See "-- We
depend on our suppliers and third party subcontractors."
We use a third-party subcontractor in China for the assembly and testing of
our CompactFlash products. As a result, our business could be harmed by the
effect of political, economic, legal and other uncertainties in China. Under its
current leadership, the Chinese government has been pursuing economic reform
policies, including the encouragement of foreign trade and investment and
greater economic decentralization. The Chinese government may not continue to
pursue these policies and, even if it does continue, these policies may not be
successful. The Chinese government may also significantly alter these policies
from time to time. In addition, China does not currently have a comprehensive
and highly developed legal system, particularly with respect to the protection
of intellectual property rights. As a result, enforcement of existing and future
laws and contracts is uncertain, and the implementation and interpretation of
such laws may be inconsistent. Such inconsistency could lead to piracy and
degradation of our intellectual property protection.
Although we do not believe the current political unrest in Israel
represents a major security problem for Tower since Migdal Haemek, Israel is in
a secure geographic location, the unrest may expand and even if it remains at
current levels, could cause scheduling delays, as well as economic uncertainty,
which could cause potential foundry customers to go elsewhere for their foundry
business. We cannot assure you that the Tower facility will be completed or
will begin production as scheduled, or that the processes needed to fabricate
our wafers will be qualified at the new facility. Moreover, we cannot assure
you that this new facility will be able to achieve acceptable yields or
deliver sufficient quantities of wafers on a timely basis at a competitive
price. Furthermore, if the current depressed business conditions for
semiconductor wafers persists beyond 2002, Tower may be unable to operate
their new fab at an optimum capacity utilization, which would cause them to
operate at a loss. In addition, while the political unrest has not yet posed a
direct security risk to our engineering design center in Israel, it may cause
unforeseen delays in the development of our products.
Economic risks
We price our products primarily in U.S. dollars. Given the recent economic
conditions in Asia and the European Union and the weakness of the Euro, Yen and
other currencies relative to the United States dollar, our products may be
relatively more expensive in these regions, which could result in a decrease in
our sales. While most of our sales are denominated in U.S. Dollars, we invoice
certain Japanese customers in Japanese Yen and are subject to exchange rate
fluctuations on these transactions, which could harm our business, financial
condition and results of operations.
General risks
Our international business activities could also be limited or disrupted by
any of the following factors:
. the need to comply with foreign government regulation;
24
. general geopolitical risks such as political and economic instability,
potential hostilities and changes in diplomatic and trade relationships;
. natural disasters affecting the countries in which we conduct our
business, such as the earthquake experienced in Taiwan in 1999;
. imposition of regulatory requirements, tariffs, import and export
restrictions and other barriers and restrictions, particularly in China;
. longer payment cycles and greater difficulty in accounts receivable
collection, particularly as we increase our sales through the retail
distribution channel, and general business conditions deteriorate;
. Adverse tax rules and regulations;
. weak protection of our intellectual property rights; and
. delays in product shipments due to local customs restrictions.
We depend on our suppliers and third party subcontractors.
We rely on our vendors, some of which are sole source suppliers, for
several of our critical components. We do not have long-term supply agreements
with some of these vendors. Our business, financial condition and operating
results could be significantly harmed by delays or reductions in shipments if we
are unable to develop alternative sources or obtain sufficient quantities of
these components. For example, we rely on Toshiba's Yokkaichi fab, as well as
UMC for a significant portion of our flash memory wafers as we ramp up our wafer
production at our FlashVision joint venture in Virginia. NEC has traditionally
supplied 100% of certain designs of our microcontrollers. During the second
quarter, we commenced production of other controller designs at UMC.
We also rely on third-party subcontractors for a substantial portion of
wafer testing, packaged memory final testing, card assembly and card testing,
including Silicon Precision Industries Co., Ltd. in Taiwan, Celestica, Inc. in
China, and Amkor, in the Philippines. These three subcontractors will also be
assembling and testing a majority of our mature, high-volume products. We
began transferring portions of our testing and assembly operations to these
subcontractors in the second half of 1999 and are still continuing this
transition. We expect to substantially curtail our card manufacturing
operations at our Sunnyvale production facility and outsource these operations
to our overseas subcontractors. Any problems in this complex transition may
result in a disruption of production and a shortage of product to meet
customer demand. We have no long-term contracts with these subcontractors and
cannot directly control product delivery schedules. Any significant problems
that occur at our subcontractors, or their failure to perform at the level we
expect could lead to product shortages or quality assurance problems, which
could increase the manufacturing costs of our products and have adverse
effects on our operating results. Furthermore, we are moving to turnkey
manufacturing with some of our subcontract suppliers, which may reduce our
visibility and control of their inventories of purchased parts necessary to
build our products.
Our markets are highly competitive.
Flash memory manufacturers and memory card assemblers
We compete in an industry characterized by intense competition, rapid
technological changes, evolving industry standards, declining average selling
prices and rapid product obsolescence. Our competitors include many large
domestic and international companies that have greater access to advanced wafer
foundry capacity, substantially greater financial, technical, marketing and
other resources, broader product lines and longer standing relationships with
customers.
Our primary competitors include companies that develop and manufacture
storage flash chips, such as Hitachi, Samsung, Micron Technology and Toshiba. In
addition, we compete with companies that manufacture other forms of flash memory
and companies that purchase flash memory components and assemble memory cards.
Companies that manufacture socket flash, linear flash and components include
Advanced Micro Devices, Atmel, Intel, Macronix, Mitsubishi, Fujitsu, Sharp
Electronics and ST Microelectronics. Companies that combine controllers and
flash
25
memory chips developed by others into flash storage cards include Lexar Media,
M-Systems, Pretec, Simple Technology, Sony Corporation, Kingston Technology,
Panasonic, Silicon Storage Technology, TDK Corporation, Matsushita Battery,
Delkin Devices, Inc., Feiya Technology Corporation, Dane-Elec Manufacturing,
Silicon Tek, Infineon Technologies, PNY and Viking Components.
In addition, many companies have been certified by the CompactFlash
Association to manufacture and sell their own brand of CompactFlash. We believe
additional manufacturers will enter the CompactFlash market in the future.
We have entered into an agreement with Matsushita and Toshiba to jointly
develop and promote a next generation flash memory card called the Secure
Digital Card. Under this agreement, Secure Digital Card royalty-bearing licenses
will be granted to other flash memory card manufacturers, which will increase
the competition for our Secure Digital Card, CompactFlash and MultiMediaCard
products. In addition, Matsushita and Toshiba have commenced selling Secure
Digital Cards that will compete directly with our products. While other flash
card manufacturers will be required to pay the SD Association license fees and
royalties, which will be shared among Matsushita, Toshiba and SanDisk, there
will be no royalties or license fees payable among the three companies for their
respective sales of the Secure Digital Card. Thus, we will forfeit potential
royalty income from Secure Digital Card sales by Matsushita and Toshiba.
In addition, we and Toshiba will each separately market and sell any 512
megabit and 1 gigabit flash memory chips and Secure Digital Card controllers
developed and manufactured under our relationship. Accordingly, we will compete
directly with Toshiba for sales of these advanced chips and controllers.
We have entered into patent cross-license agreements with several of our
leading competitors including Hitachi, Lexar, Samsung, Toshiba, Intel, SST,
Sharp, SmartDisk and TDK. Under these agreements, each party may manufacture and
sell products that incorporate technology covered by the other party's patents
related to flash memory devices. As we continue to license our patents to
certain of our competitors, competition will increase and may harm our business,
financial condition and results of operations. Currently, we are engaged in
licensing discussions with several of our competitors. There can be no assurance
that we will be successful in concluding licensing agreements under terms which
are favorable to us.
Alternative storage media
Competing products have been introduced that promote industry standards
that are different from our CompactFlash and MultiMediaCard products including
Toshiba's SmartMedia, Sony Corporation's Memory Stick, Sony's standard floppy
disk used for digital storage in its Mavica digital cameras, Panasonic's Mega
Storage cards, Iomega's Clik drive, a miniaturized, mechanical, removable disk
drive, M-Systems' Diskonchip for embedded storage applications and the Secure
MultiMediaCard from Hitachi and Infineon. Each competing standard is
mechanically and electronically incompatible with CompactFlash and
MultiMediaCard. If a manufacturer of digital cameras or other consumer
electronic devices designs in one of these alternative competing standards,
CompactFlash or MultiMediaCard will be eliminated from use in that product.
IBM's microdrive, a rotating disk drive in a Type II CompactFlash format
competes directly with our Type II CompactFlash memory cards for use in high-end
professional digital cameras. M-Systems' Diskonchip 2000 Millennium product
competes against our Flash ChipSet products in embedded storage applications
such as set top boxes and networking appliances.
According to independent industry analysts, Sony's Mavica digital camera
captured a considerable portion of the U.S. market for digital cameras from 1998
to 2000. The Mavica uses a standard floppy disk to store digital images and
therefore uses no CompactFlash, or any other flash cards. Our sales prospects
for CompactFlash cards have been adversely impacted by the success of the
Mavica. Recently, Sony has shifted its focus to the use of its flash Memory
Stick in its latest digital camera models. Sony's consumer electronics products,
which use the Memory Stick, cannot use any of our current flash cards and
therefore erode our overall market share for such cards.
Our MultiMediaCard products also have faced significant competition from
Toshiba's SmartMedia flash cards and we expect to face similarly significant
competition from Sony's Memory Stick. Sony has licensed its proprietary Memory
Stick to other companies. If it is adopted and achieves widespread use in future
products, sales of our MultiMediaCard and CompactFlash products may decline.
Recently, Hitachi, Infineon, Sanyo and Fujitsu have
26
proposed their Secure MultiMediaCard which provides the copy protection function
that is included in our Secure Digital Card. Should this initiative gain
industry wide acceptance, it may reduce the widespread adoption of the Secure
Digital Card.
In the first quarter of 2000, Sanyo announced that it is developing a
miniature magneto-optical storage device for use in future digital cameras,
music players and camcorders. Although this storage device has not yet been
widely adopted outside of Sanyo, there can be no assurance that this device will
not be adopted by some of our OEM customers.
Alternative flash technologies
We also face competition from products based on multilevel cell flash
technology from Intel and Hitachi. These products compete with our D2 multilevel
cell flash technology. Multilevel cell flash is a technological innovation that
allows each flash memory cell to store two bits of information instead of the
traditional single bit stored by the industry standard flash technology.
Furthermore, we expect to face competition from existing competitors and
from other companies that may enter our existing or future markets that have
similar or alternative data storage solutions, which may be less costly or
provide additional features. For example, Infineon has formed a joint venture
with Saifun, an Israeli startup company, to develop a proprietary flash memory
technology which will be targeted at low cost data storage applications. Price
is an important competitive factor in the market for consumer products.
Increased price competition could lower gross margins if our average selling
prices decrease faster than our costs and could also result in lost sales.
Sales to a small number of customers represent a significant portion of our
revenues.
Approximately one-half of our revenues came from a small number of
customers in fiscal 2000 and 1999. For example, sales to our top 10 customers
accounted for approximately 54% and 57% of our product revenues in the second
quarter and first six months of 2001, compared to 49% and 50% in the same
periods of 2000. In the first six monthsof 2001, sales to one customer totaled
16% of product sales, and there was no customer that represented more than 10%
of product sales in the first six months of 2000. If we were to lose one of our
major customers or experience any material reduction in orders from any of these
customers, our revenues and operating results would suffer. Our sales are
generally made by standard purchase orders rather than long-term contracts. In
addition, the composition of our major customer base changes from year to year
as the market demand for our customers' products changes.
Our multiple sales channels may compete for a limited number of customer sales.
Web-based sales of our products today represent a small but growing portion
of our overall sales. Sales on the Internet tend to undercut traditional
distribution channels and may dramatically change the way our consumer products
are purchased in future years. We cannot assure you that we will successfully
develop the Internet sales channel or successfully manage the inherent conflict
between the Internet and our traditional sales channels.
We must achieve acceptable wafer manufacturing yields.
The fabrication of our products requires wafers to be produced in a highly
controlled and ultra clean environment. Semiconductor companies that supply our
wafers sometimes have experienced problems achieving acceptable wafer
manufacturing yields. Semiconductor manufacturing yields are a function of both
our design technology and the foundry's manufacturing process technology. Low
yields may result from design errors or manufacturing failures. Yield problems
may not be determined or improved until an actual product is made and can be
tested. As a result, yield problems may not be identified until the wafers are
well into the production process. The risks associated with yields are even
greater because we rely exclusively on independent offshore foundries for our
wafers which increases the effort and time required to identify, communicate and
resolve manufacturing yield problems. If the foundries cannot achieve planned
yields, we will experience higher costs and reduced product availability, which
could harm our business, financial condition and results of operations.
27
In addition, we cannot assure you that the FlashVision's fabrication
facility that we are co-developing with Toshiba in Virginia, will produce
satisfactory quantities of wafers with acceptable prices, reliability and
yields. Any failure in this regard could materially harm our business, financial
condition and results of operations. In addition, the construction and operation
of this line will cause us to incur significant expense and may result in the
diversion of resources from other important areas of our business. In addition,
we have no experience in operating a wafer manufacturing line and we intend to
rely on the existing manufacturing organization at the Dominion facility. This
organization will be trained in NAND flash manufacturing by Toshiba, and will be
tasked to "copy exactly" the same manufacturing flow employed by Toshiba in
Yokkaichi, Japan, but we cannot assure you that they will be successful in
manufacturing these advanced NAND flash products on a cost-effective basis or at
all.
Risks associated with patents, proprietary rights and related litigation.
General
We rely on a combination of patents, trademarks, copyright and trade secret
laws, confidentiality procedures and licensing arrangements to protect our
intellectual property rights. In the past, we have been involved in significant
disputes regarding our intellectual property rights and claims that we may be
infringing third parties' intellectual property rights. We expect that we may be
involved in similar disputes in the future. We cannot assure you that:
. any of our existing patents will not be invalidated;
. patents will be issued for any of our pending applications;
. any claims allowed from existing or pending patents will have sufficient
scope or strength;
. our patents will be issued in the primary countries where our products
are sold in order to protect our rights and potential commercial
advantage; or
. any of our products may infringe on the patents of other companies.
In addition, our competitors may be able to design their products around
our patents.
We intend to vigorously enforce our patents but we cannot be sure that our
efforts will be successful. If we were to have an adverse result in any
litigation, we 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 is likely to
result in significant expense to us, as well as divert the efforts of our
technical and management personnel. For example, our recent Litigation with
Lexar lasted for two and one-half years and resulted in cumulative litigation
expenses of approximately $6.0 million.
Cross-licenses and indemnification obligations
If we decide to incorporate third party technology into our products or if
we are found to infringe on others' intellectual property, we could be required
to license intellectual property from a third party. We may also need to license
some of our intellectual property to others in order to enable us to obtain
cross-licenses to third party patents. Currently, we have patent cross-license
agreements with several companies, including Hitachi, Intel, Lexar, Samsung,
Sharp, SST, SmartDisk, TDK and Toshiba and we are in discussions with other
companies regarding potential cross-license agreements. We cannot be certain
that licenses will be offered when we need them, or that the terms offered will
be acceptable. If we do obtain licenses from third parties, we may be required
to pay license fees or royalty payments. In addition, if we are unable to obtain
a license that is necessary to the manufacture of our products, we could be
required to suspend the manufacture of products or stop our wafer suppliers from
using processes that may infringe the rights of third parties. We cannot assure
you that we would be successful in redesigning our products or that the
necessary licenses will be available under reasonable terms.
We have historically agreed to indemnify various 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
attorney's fees. We may periodically engage in litigation as a result of these
indemnification obligations.
28
We are not currently engaged in any such indemnification proceedings. Our
insurance policies exclude coverage for third party claims for patent
infringement. Any future obligation to indemnify our customers or suppliers
could harm our business, financial condition or results of operations.
Litigation risks associated with our intellectual property
Litigation is subject to inherent risks and uncertainties that may cause
actual results to differ materially from our expectations. Factors that could
cause litigation results to differ include, but are not limited to, the
discovery of previously unknown facts, changes in the law or in the
interpretation of laws, and uncertainties associated with the judicial decision-
making process. See Part II, Item 1 for further discussion on litigation which
we are currently involved in.
Our rapid growth may strain our operations.
We have experienced rapid growth, which has placed a significant strain on
our personnel and other resources. To accommodate future growth, we must
continue to hire, train, motivate and manage our employees. We have experienced
difficulty hiring the necessary engineering, sales and marketing personnel to
support our growth. In addition, we must make a significant investment in our
existing internal information management systems to support increased
manufacturing, as well as accounting and other management related functions. Our
systems, procedures and controls may not be adequate to support rapid growth,
which could in turn harm our business, financial condition and results of
operations.
California energy crisis
In recent months, California has been experiencing a shortage of energy
supply. This shortage is expected to continue throughout 2001 and possibly into
future years. Although the majority of our product assembly and testing is done
outside of California, we may experience some hardship due to rolling blackouts
and the need for reduced power consumption, as well as increased power costs.
Our success depends on key personnel, including our executive officers, the loss
of whom could disrupt our business.
Our success greatly depends on the continued contributions of our senior
management and other key research and development, sales, marketing and
operations personnel, including Dr. Eli Harari, our founder, President and Chief
Executive Officer. Our success will also depend on our ability to recruit
additional highly skilled personnel. We cannot assure you that we will be
successful in hiring or retaining such key personnel, or that any of our key
personnel will remain employed with us.
Anti-takeover provisions in our charter documents, stockholder rights plan and
in Delaware law could prevent or delay a change in control and, as a result,
negatively impact our stockholders.
We have taken a number of actions that could have the effect of
discouraging a takeover attempt. For example, we have adopted a stockholder
rights plan that would cause substantial dilution to a stockholder, and
substantially increase the cost paid by a stockholder, who attempts to acquire
us on terms not approved by our board of directors. This could prevent us from
being acquired. In addition, our certificate of incorporation grants the board
of directors the authority to fix the rights, preferences and privileges of and
issue up to 4,000,000 shares of preferred stock without stockholder action.
Although we have no present intention to issue shares of preferred stock, such
an issuance could have the effect of making it more difficult and less
attractive for a third party to acquire a majority of our outstanding voting
stock. Preferred stock may also have other rights, including economic rights
senior to our common stock that could have a material adverse effect on the
market value of our common stock. In addition, we are subject to the anti-
takeover provisions of Section 203 of the Delaware General Corporation Law. This
section provides that a corporation shall not engage in any business combination
with any interested stockholder during the three-year period following the time
that such stockholder becomes an interested stockholder. This provision could
have the effect of delaying or preventing a change of control of SanDisk.
29
Our stock price has been, and may continue to be, volatile.
The market price of our stock has fluctuated significantly in the past and
is likely to continue to fluctuate in the future. For example, in the 12 months
ending June 30, 2001 our stock price fluctuated significantly from a low of
$17.25 to a high of $94.50. We believe that such fluctuations will continue as a
result of future announcements concerning us, our competitors or principal
customers regarding technological innovations, new product introductions,
governmental regulations, litigation or changes in earnings estimates by
analysts. In addition, in recent years the stock market has experienced
significant price and volume fluctuations and the market prices of the
securities of high technology companies have been especially volatile, often for
reasons outside the control of the particular companies. These fluctuations as
well as general economic, political and market conditions may have an adverse
affect on the market price of our common stock.
Our Digital Portal Inc. (DPI) Joint Venture has an unproven product and an
untested market.
The Digital Photo Kiosk currently under development for DPI has experienced
delays in its US market rollout, due primarily to modifications to improve its
operation as a standalone, reliable, user friendly photo printing kiosk. We
cannot assure you that these kiosks, once introduced will function reliably as
intended, or that they will receive favorable acceptance from consumers in a
reasonable period of time. If DPI is unsuccessful it may not be able to meet
its objectives.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Please refer to the Company's Form 10-K for the year ended December 31,
2000.
30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, it may be necessary to initiate litigation against third
parties to preserve our intellectual property rights. These parties could in
turn bring suit against us. On March 21, 2000, Mitsubishi Denki Co. Ltd.
(Mitsubishi Electric) filed a complaint in Tokyo District Court against SanDisk
K.K., our wholly owned subsidiary in Japan. The complaint alleged that SanDisk
K.K., based in Yokohama, Japan, infringes on three Mitsubishi Japanese patents,
which are related primarily to the mechanical construction of memory cards. In
the complaint, Mitsubishi asked the court for a preliminary injunction halting
the sale of SanDisk CompactFlash and flash ATA memory cards in Japan. During the
litigation, Mitsubishi dropped two of the patents from the suit. During the
second quarter, the court ruled in our favor, dismissing the complaint on the
third patent and thereby concluding the Mitsubishi lawsuit.
Compaq Corporation has opposed in several countries, including the United
States, our attempting to register CompactFlash as a trademark. We do not
believe that our failure to obtain registration for the CompactFlash mark will
materially harm our business.
On May 10, 2001, the Company filed a declaratory judgment action in the
United States District Court for the Northern District of California against an
individual named Frederik Buch seeking a declaration from the Court that Mr.
Buch made no contribution to and is not an inventor of twenty SanDisk patents
("the Patents"). The Company filed this action in response to a written demand
made by Mr. Buch in which he claimed to have conceived of certain architectures
for fault-tolerant computer memories, which he also claims to have disclosed to
Dr. Eli Harari, SanDisk's President and CEO, over 15 years ago. Mr. Buch further
claims that the architectures he disclosed were incorporated in and became part
of the inventions claimed in the Patents, and that, as a consequence, he should
be named as an inventor on the Patents. Mr. Buch has never been an employee of
SanDisk and has never met any of the inventors of the Patents, save Dr. Harari.
Mr. Buch filed an amended answer and counterclaims on June 19, 2001. In his
counterclaims, Mr. Buch is seeking to have the Court correct the inventorship of
the Patents to include his name, damages for misappropriation of trade secrets,
and recovery for the unjust enrichment of SanDisk by virtue of the revenue it
received from its patent license agreements relating to the Patents. Based on
information currently available to us, we believe that Mr.Buch's claims will be
determined to be fatally flawed both legally and factually, and that we will
prevail in this litigation.
On May 10, 2001, we filed a complaint for patent infringement against
Viking Components, Inc. in the United States District Court for the Northern
District of California. The complaint seeks damages and an injunction against
Viking Components from making, selling or importing all Viking CompactFlash(TM)
cards that use controllers incorporated in CompactFlash cards that were found to
infringe SanDisk's U.S. Patent No. 5,602,987 in a previous lawsuit filed by
SanDisk against Lexar Media, Inc.
Litigation is subject to inherent risks and uncertainties that may cause
actual results to differ materially from our expectations. Factors that could
cause litigation results to differ include, but are not limited to, the
discovery of previously unknown facts, changes in the law or in the
interpretation of laws, and uncertainties associated with the judicial decision-
making process.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
31
Item 4. Submission of Matters to a Vote of Security Holders
At our Annual Meeting of Stockholders held on June 5, 2001, the following
individuals were elected to the Board of Directors:
Votes For Votes Withheld
--------- --------------
William V. Campbell 55,958,616 171,325
Irwin Federman 55,773,250 356,691
Catherine P. Lego 55,952,338 177,603
Eli Harari 53,178,883 2,951,058
James D. Meindl 55,958,973 170,968
Alan F. Shugart 55,539,054 590,887
The following proposal was approved at our Annual Meeting:
Shares in Shares Shares Shares
Favor Opposed Abstaining Non-voting
----------- --------- ------------ ------------
Ratify the appointment of 55,439,535 643,679 46,727 0
Ernst & Young LLP as
independent auditors for
the fiscal year ending
December 31, 2001.
Item 5. Other Information
None
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.(2),(13)
3.2 Form of Amended and Restated Certificate of Incorporation of the
Registrant.(2)
3.3 Bylaws of the Registrant, as amended.(2)
3.4 Form of Amended and Restated Bylaws of the Registrant.(2)
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.(4)
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.(2)
4.3 Amended and Restated Registration Rights Agreement, among the
Registrant and the investors and founders named therein, dated
March 3, 1995.(2)
4.5 Series F Preferred Stock Purchase Agreement between Seagate
Technology, Inc. and the Registrant dated January 15, 1993.(2)
4.8 Rights Agreement, dated as of April 18, 1997, between the Company
and Harris Trust and Savings Bank.(4)
4.9 First Amendment to Rights Agreement dated October 22, 1999,
between Harris Trust and the Registrant.(11)
9.1 Amended and Restated Voting Agreement, among the Registrant and
the investors named therein, dated March 3, 1995.(2)
10.10 License Agreement between the Registrant and Dr. Eli Harari, dated
September 6, 1988.(2)
10.13 1989 Stock Benefit Plan.(2)
10.15 Employee Stock Purchase Plan.(2)
10.16 1995 Non-Employee Directors Stock Option Plan.(2)
10.18 Lease Agreement between the Registrant and G.F. Properties, dated
March 1, 1996.(3)
32
Exhibit
Number Exhibit Title
------- -------------
10.21 Amendment to Lease Agreement between the Registrant and G.F.
Properties, dated April 3, 1997.(5)
10.23 Foundry Venture Agreement between the Registrant and United
Microelectronics Corporation, dated June 27, 1997.(1),(6)
10.24 Written Assurances Re: Foundry Venture Agreement between the
Registrant and United Microelectronics Corporation, dated
September 13, 1995.(1), (6)
10.25 Side Letter between Registrant and United Microelectronics
Corporation, dated May 28, 1997.(1), (6)
10.27 Clarification letter with regards to Foundry Venture Agreement
between the Registrant and United Microelectronics Corporation
dated October 24, 1997.(7)
10.28 Lease Agreement between the Registrant and G.F. Properties, dated
June 10, 1998.(8)
10.29 Trade Finance Agreement between the Registrant and Union Bank of
California, dated July 15, 1998.(9)
10.30 1995 Stock Option Plan Amended and Restated as of December 17,
1998.(12)
10.31 1995 Non-Employee Directors Stock Option Plan Amended and Restated
as of December 17, 1998.(12)
10.32 1995 Employee Stock Purchase Plan Amended and Restated as of
December 17, 1998. (12)
10.33 Master Agreement, dated as of May 9, 2000, by and among the
Registrant, Toshiba Corporation and Semiconductor North America,
Inc.(13),(+)
10.34 Operating Agreement dated as of May 9, 2000, by and between the
Registrant and Semiconductor North America, Inc.(13)
10.35 Common R&D and Participation Agreement, dated as of May 9, 2000,
by and between the Registrant and Toshiba Corporation.(13),(+)
10.36 Product Development Agreement, dated as of May 9, 2000, by and
between the Registrant and Toshiba Corporation.(13),(+)
10.37 Share Purchase Agreement, dated as of July 4, 2000, by and between
the Registrant and Tower Semiconductor Ltd.(14)
10.38 Escrow Agreement, dated as of August 14, 2000, by and between the
Registrant, Tower Semiconductor Ltd. and Union bank of California,
N.A.(14)
10.39 Additional Purchase Obligation Agreement, dated as of July 4,
2000, by and between the Registrant and Tower Semiconductor
Ltd.(14)
10.40 Shareholders Agreement, dated as of July 4, 2000, by and between
the Registrant and the Israel Corporation.(14)
10.41 Definitive Agreement to Form Vending Business, dated August 7,
2000, by and between the Registrant and Photo-Me International,
Plc.(14),(+)
10.42 Non-Solicitation Agreement, dated August 7, 2000, by and between
the Registrant, DigitalPortal Inc. and Photo-Me International,
Plc.(14),(+)
10.43 Exclusive Product Purchase Agreement, dated as of August 7, 2000,
by and between Photo-Me, International Plc., and DigitalPortal
Inc. (14),(+)
10.44 Stockholders' Agreement, dated as of August 7, 2000, by and among
the Registrant, DigitalPortal Inc. and Photo-Me, International,
Plc.(14),(+)
10.45 Bylaws of DigitalPortal Inc.(14),(+)
10.46 Registration Rights Agreement, dated as of January 18, 2001, by
and between Registrant, The Israel Corporation, Alliance
Semiconductor Ltd., Macronix International Co., Ltd. and Quick
Logic Corporation (15)
10.47 Consolidated Shareholders Agreement, dated as of January 18, 2001,
by and among Registrant, The Israel Corporation, Alliance
Semiconductor Ltd. And Macronix International Co., Ltd. (15)
10.48 Appendix 1 to FlashVision L.L.C. 2000 lease financing agreement
between FlashVision L.L.C. Corporation to ABN AMRO Bank N.V. (16),
(+)
33
Exhibit
Number Exhibit Title
------- -------------
10.49 Master Lease agreement between FlashVision L.L.C. Corporation to
ABN AMRO Bank N.V. (16), (+)
10.50 Guarantee, dated as of December 27, 2000 from SanDisk Corporation
to ABN AMRO Bank N.V., related to FlashVision L.L.C. 2000 lease
financing. (16), (+)
21.1 Subsidiaries of the Registrant. (10)
______________
* Filed herewith.
+ Confidential treatment has been granted for certain portions thereof.
1. Confidential treatment granted as to certain portions of these exhibits.
2. Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-1 (No. 33-96298).
3. Previously filed as an Exhibit to the Registrant's 1995 Annual Report on
Form 10-K.
4. Previously filed as an Exhibit to the Registrant's Current Report on Form
8-K/A dated April 18, 1997.
5. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended June 30, 1997.
6. Previously filed as an Exhibit to the Registrant's Current Report on form
8-K dated October 16, 1997.
7. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended September 30, 1997.
8. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended June 30, 1998.
9. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended September 30, 1998.
10. Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K.
11. Previously filed as an Exhibit to the Registrant's Current Report on Form
8-K dated January 1, 1999.
12. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended March 31, 1999.
13. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended June 30, 2000.
14. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended September 30, 2000.
15. Previously filed as an Exhibit to the Registrant's Schedule 13(d) dated
January 26, 2001.
16. Previously filed as an Exhibit to the Registrant's 2000 Annual Report on
Form 10-K.
B. Reports on Form 8-K
None
34
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)
Dated: August 14, 2001 By: /s/ Frank Calderoni
----------------------------------
Frank A. Calderoni
Senior Vice President,
Finance and Administration and
Chief Financial Officer
(On behalf of the Registrant and as
Principal Financial Officer.)
35