Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- - ------------ Exchange Act of 1934 for the quarterly period ended June 30, 1996
OR
Transition report pursuant to Section 13 or 15(d) of the Securities
- - ------------ Exchange Act of 1934 for the transition period from ________
to ________
Commission File Number 0-26734
SanDisk Corporation
(Exact name of registrant as specified in its charter)
Delaware 77-0191793
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
140 Caspian Court, Sunnyvale, California 94089
(Address of principal executive offices) (Zip code)
(408) 542-0500
(Registrant's telephone number, including area code)
3270 Jay Street, Santa Clara, California, 95054
(Former name, former address, and
former fiscal year, if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of June 30, 1996
Common Stock, $.01 par value 22,167,645
---------------------------- ----------
Class Number of shares
<PAGE>
SanDisk Corporation
Index
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 1996 and December 31, 1995........................ 3
Condensed Consolidated Statements of Operations
Three and six months ended June 30, 1996 and 1995.......... 4
Condensed Consolidated Statement of Cash Flows
Six months ended June 30, 1996 and 1995.................... 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 18
Item 2. Changes in Securities......................................... 18
Item 3. Defaults upon Senior Securities............................... 18
Item 4. Submission of Matters to a Vote of Security Holders........... 18
Item 5. Other Information............................................. 18
Item 6. Exhibits and Reports on Form 8-K.............................. 19
Signatures.................................................... 21
Page 2
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PART I. FINANCIAL INFORMATION
SanDisk Corporation
Condensed Consolidated Balance Sheets
(In thousands)
ASSETS June 30, 1996 December 31, 1995
(unaudited)
Current Assets:
Cash and cash equivalents $ 15,699 $ 27,255
Short-term investments 51,243 41,140
Accounts receivable, net 11,404 8,428
Inventories, net 12,368 10,411
Prepaid expenses and other current assets 720 534
-------- --------
Total current assets 91,434 87,768
Property and equipment, net 7,231 4,254
Deposits and other assets 391 125
-------- --------
Total Assets $ 99,056 $ 92,147
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 10,016 $ 9,053
Accrued payroll and related expenses 2,209 1,946
Accrued warranty 646 917
Other accrued liabilities 1,970 1,847
Deferred revenue 5,167 5,905
Current obligations under capital leases 11 98
-------- --------
Total current liabilities 20,019 19,766
Stockholders' Equity:
Common stock 97,624 97,294
Accumulated deficit (18,587) (24,913)
-------- --------
Total stockholders' equity 79,037 72,381
Total Liabilities and
-------- --------
Stockholders' Equity $ 99,056 $ 92,147
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3
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SanDisk Corporation
Condensed Consolidated Statements of Operations
(In thousands, except per share data; unaudited)
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
------- ------- ------- -------
Revenues $24,562 $14,404 $45,301 $26,707
Cost of sales 15,057 7,263 27,779 14,700
------- ------- ------- -------
Gross profits 9,505 7,141 17,522 12,007
Operating expenses:
Research and development 2,400 2,121 4,545 3,827
Sales and marketing 2,296 1,661 4,306 3,125
General and administrative 1,937 820 3,301 1,596
------- ------- ------- -------
Total operating expenses 6,633 4,602 12,152 8,548
Operating income 2,872 2,539 5,370 3,459
Interest and other income, net 770 466 1,521 747
------- ------- ------- -------
Income before taxes 3,642 3,005 6,891 4,206
Provision for income taxes 237 133 432 180
======= ======= ======= =======
Net income $ 3,405 $ 2,872 $ 6,459 $ 4,026
======= ======= ======= =======
Primary net income per share $ 0.14 $ 0.52 $ 0.27 $ 0.72
======= ======= ======= =======
Fully diluted net income per share $ 0.14 $ 0.14 $ 0.27 $ 0.20
======= ======= ======= =======
Shares used in computing primary
net income per share 24,141 5,555 24,172 5,558
======= ======= ======= =======
Shares used in computing fully diluted
net income per share 24,141 20,050 24,172 20,024
======= ======= ======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4
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SanDisk Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands; unaudited)
Six months ended
June 30,
1996 1995
-------- --------
Cash flows from operating activities:
Net income $ 6,459 $ 4,026
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,025 744
Accounts receivable, net (2,976) (870)
Inventory (1,957) (699)
Prepaids and other assets (452) 296
Accounts payable 963 2,036
Accrued payroll and related expenses 263 325
Accrued warranty (271) (24)
Other accrued liabilities 122 736
Deferred revenue (738) 515
-------- --------
Total adjustments (4,021) 3,059
-------- --------
Net cash provided by operating activities 2,438 7,085
Cash flows from investing activities:
Purchases of short term investments (27,893) (8,209)
Proceeds from short term investments 17,657 579
Acquisition of capital equipment (4,002) (893)
-------- --------
Net cash used in investing activities (14,238) (8,523)
Cash flows from financing activities:
Principal payments under capital leases (86) (298)
Sale of convertible preferred stock -- 6,216
Sale of common stock, net of repurchases 330 29
-------- --------
Net cash provided by financing activities 244 5,947
-------- --------
Net increase (decrease) in cash and cash equivalents (11,556) 4,509
Cash and cash equivalents at beginning of period 27,255 11,109
======== ========
Cash and cash equivalents at end of period $ 15,699 $ 15,618
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5
<PAGE>
SanDisk Corporation
Notes to Condensed Consolidated Financial Statements
1. These interim condensed consolidated financial statements are unaudited
but reflect, in the opinion of management, all normal recurring
adjustments necessary to present fairly the financial position of SanDisk
Corporation and Subsidiaries (the "Company") as of June 30, 1996,
including the results of operations for the three and six month periods
ended June 30, 1996 and cash flows for the six month periods ended June
30, 1996 and 1995. Because all the disclosures required by generally
accepted accounting principles are not included, these interim condensed
consolidated financial statements should be read in conjunction with the
audited financial statements and notes thereto in the Company's annual
report on Form 10-K as of, and for the year ended December 31, 1995. The
year-end condensed consolidated balance sheet data as of December 31,
1995 was derived from the audited financial statements, but does not
include all disclosures required by generally accepted accounting
principles.
The results of operations for the three and six month periods ended June
30, 1996 and the statement of cash flows for the six months ended June
30, 1996 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 1996 and 1995 ended on June
30, 1996 and July 2, 1995, respectively. Fiscal year 1995 ended on
December 31, 1995. For ease of presentation, the accompanying financial
statements have been shown as ending on the last day of the calendar
month.
3. The components of inventory consist of the following:
June 30, December 31,
1996 1995
------- -------
(In thousands)
Raw materials $ 3,098 $ 2,753
Work-in-process 7,035 6,921
Finished goods 2,235 737
------- -------
$12,368 $10,411
4. Primary net income per share applicable to common stockholders is
computed using the weighted average number of shares of common stock
outstanding. Common equivalent shares from Series C convertible preferred
stock (using the if-converted method) and from stock options and warrants
(using the treasury stock method or modified treasury stock method where
applicable) have been included in the computation when dilutive. Pursuant
to the Securities and Exchange Commission Staff Accounting Bulletins,
common and common equivalent (common stock options and Series G preferred
stock) shares issued by the Company at prices below the initial public
offering price during the twelve-month period prior to the offering have
been included in the calculation as if they were outstanding for all
periods presented regardless of whether they are dilutive (using the
treasury stock method and the initial public offering price). The Company
completed its initial public offering in November, 1995.
Fully diluted earnings per share is calculated using net income and the
shares used in the primary calculation, as well as other dilutive
preferred stock (Series A, B, D, E, and F) which is not deemed to be a
common stock equivalent for purposes of the primary earnings per share
calculation.
Page 6
<PAGE>
5. Samsung Electronics Company Ltd. filed a complaint against the
Company in the Northern District of California in October 1995 accusing
the Company of infringing two Samsung patents, seeking declaratory relief
with respect to five Company patents and alleging unspecified damages for
certain other related claims. The Company has received opinions from its
patent counsel that, based on information currently known, the Company's
products do not infringe one of these Samsung patents and that, based on
certain assumptions as to how Samsung would claim infringement, the
particular patent claim in the other Samsung patent is invalid and that
the Company's products do not infringe any of the other claims of such
patent. Nonetheless, the Company anticipates that Samsung will continue
to pursue litigation with respect to such claims. SanDisk filed its
answer to Samsung's complaint in March 1996. At that time, SanDisk
asserted a number of counterclaims based on the Company's belief that
Samsung infringes three SanDisk patents.
On January 11, 1996, the Company filed a complaint against Samsung with
the United States International Trade Commission alleging that Samsung
and its U.S. subsidiary, are importing and selling products that infringe
two of the Company's patents. By its complaint, the Company seeks a
judgment by the International Trade Commission that Samsung is infringing
the Company's patents and an order precluding Samsung from importing
those infringing products into the United States. The U.S. International
Trade Commission initiated an investigation based upon the Company's
complaint against Samsung and is expected to begin its hearings in
September 1996. A decision is expected by the end of this year. The
Company intends to vigorously enforce its patents against Samsung, but
there can be no assurance that these efforts will be successful.
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.
Page 7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis may contain forward looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including statements
regarding expected possible price competition, future sales mix (product and
channel), average selling prices, gross margins and the company's customer base.
Such statements are subject to certain risks and uncertainties, including those
discussed below and in the Company's Form 10-K for the year ended December 31,
1995 under the heading "Risk Factors", that could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to update these forward looking
statements to reflect events or circumstances occurring after the date hereof.
Results of Operations
Revenues. Revenues for the second quarter of fiscal 1996 increased 71%
to $24.6 million compared to $14.4 million for the same period of the previous
year. Revenues for the first six months of fiscal 1996 increased 70% to $45.3
million compared to $26.7 million for the same period in 1995. The increase in
revenue for the three and six month periods ended June 30, 1996 was primarily
due to increased sales of the Company's FlashDisk, CompactFlash(TM) and Chipset
products. Unit sales for the second quarter of 1996 increased 157% compared to
the second quarter of 1995. This growth in unit volume was offset by a decrease
in average selling prices of approximately 36%. For the first six months of 1996
unit volumes increased 160% and average selling prices declined 38% compared to
the same period in 1995. Revenue for the three and six month periods ended June
30, 1996 also included royalties from a patent cross-license agreement that was
entered into during the last quarter of 1995.
Approximately 14% of revenue in the second quarter and 18% of revenue
for the six month period ended June 30, 1996 was related to applications
destined for consumers (such as digital cameras). There is no assurance that
sales into the consumer products market will continue to represent a significant
portion of the Company's revenue, particularly on a quarter to quarter basis.
Many of the consumer products that incorporate SanDisk's flash memory are new
and the success of these products is still uncertain. As the consumer markets
develop, competition is expected to increase, which could cause lower average
selling prices and decreased gross margins on units shipped into these markets.
In addition to the consumer market, the Company sells products to the
industrial, highly portable computing and telecommunications markets. The mix of
sales to these key markets may vary in the future.
Export sales represented 47% of revenue in the second quarter of 1996
and 48% of revenue for the six months ended June 30, 1996 compared with 56% and
58%, respectively, for the same periods of the previous year. The Company's top
ten customers accounted for 69% of total revenue for the second quarter of 1996
compared with 77% in the second quarter of 1995. The Company expects sales of
its products to a limited number of customers to continue to account for a
substantial portion of its revenues for the foreseeable future.
Gross Profits. In the second quarter of 1996, gross profits increased
33% to $9.5 million, or 39% of revenue, compared to $7.1 million, or 50% of
revenue, for the same period of the previous year. Gross profits for the six
month period ended June 30, 1996 increased 46% to $17.5 million, or 39% of
revenue from $12.0 million, or 45% of revenue. During the second quarter of
1995, the Company was unable to meet its customers' demand for its products,
which allowed the Company to maintain stable prices. In addition, the Company's
products sold during this period were based on mature 16Mbit devices with high
manufacturing yields and proportionately low cost of revenues. As a result of
these factors, the Company's gross margin for the second quarter of 1995 was
unusually high. SanDisk continued its transition from 16 Mbit to 32 Mbit
technology during the second quarter of 1996. For the three and six month
periods ended June 30, 1996, 32 Mbit products accounted for approximately 75%
and 68%, respectively, of the Company's unit shipments. Revenue from patent
cross-license royalties partially offset the lower product gross margins in
1996. The Company expects price competition to increase in the future, which is
likely to result in decreased average selling prices and may result in lower
gross margins.
Operating Expenses. Research and development, sales and marketing, and
general and administrative expenses increased by $2.0 million, or 44%, during
the second quarter of 1996 and by $3.6 million, or 42% for the six month period
ended June 30, 1996 compared to the same periods of 1995. Operating expenses
declined as a percentage of revenue from 32% to 27% for the three and six month
periods ended June 30, 1996 compared to the same periods in 1995. Legal fees
related to the defense of SanDisk's patents increased significantly in the
second quarter. The Company spent approximately $1.0 million on patent related
litigation in the second quarter of 1996 and expects to incur significant legal
expenses for the remainder of the year as its ITC complaint against Samsung
Electronics Company goes to hearing. See Note 5 to the Company's financial
statements contained in Item 1 of this report. Salaries and payroll related
expenses increased for the three and six month periods ended June 30, 1996 due
to higher headcount in all organizations compared to the same periods of the
previous fiscal year. Increased professional fees associated with investor
relations activities and higher outside sales commissions also contributed to
the increases in general and administrative and sales and marketing expenses,
respectively.
Interest and Other Income, Net. Interest and other income, net,
increased $304,000 for the three months ended June 30, 1996 and $774,000 for the
six months ended June 30, 1996 compared to the same periods of 1995. This was
primarily due to increased investment balances associated with the proceeds of
SanDisk's initial public offering.
Provision for Income Taxes. The Company recorded a provision for income
taxes at a 6% effective tax rate for the first six months of 1996 compared to a
4% effective tax rate for the same period of 1995. The Company anticipates that
its effective tax rate for 1996 will be less than the statutory rate due to the
utilization of net operating loss and tax credit carryforwards.
Liquidity and Capital Resources
As of June 30, 1996, the Company had working capital of $71.4 million,
which included $15.7 million in cash and cash equivalents and $51.2 million in
short term investments. The Company also had a line of credit with a commercial
bank under which it could borrow up to $10 million that expired in July 1996.
During the second quarter of 1996, the Company entered into a new $10 million
line of credit that expires in July 1997. As of June 30, 1996, the Company had
$4.2 million committed under the line of credit facility for standby letters of
credit.
Operating activities provided $2.4 million of cash during the first six
months of 1996. Net income of $6.5 million was partially offset by increases in
accounts receivable and inventories. Cash used in investing activities was $14.2
million for the six months ended June 30, 1996 which included net purchases of
short term investments of $10.2 million. Capital equipment additions of $4.0
million included leasehold improvements on SanDisk's new Sunnyvale headquarters
facility, purchase of the surface mount production line and the construction of
test equipment for production of 32 Mbit products.
Depending on the demand for the Company's products, the Company may
decide to make substantial investments in manufacturing capacity to support its
business in the future. Management believes the existing cash and cash
equivalents, and short term investments will be sufficient to meet the Company's
currently anticipated working capital and capital expenditure requirements for
the next twelve months.
Impact of Currency Exchange Rates
The Company currently purchases wafers from Matsushita under purchase
contracts denominated in yen. A portion of the Company's revenues are also
denominated in yen. Foreign exchange exposures arising from the Company's yen
denominated commitments and related accounts payable are offset to the extent
the Company has yen denominated accounts receivable and cash balances. To the
extent such foreign exchange exposures are not offset, the Company enters into
foreign exchange forward contracts to hedge against changes in foreign currency
exchange rates. At June 30, 1996, the Company had one forward contract in the
amount of 260 million yen (approximately $2.4 million) outstanding. Future
exchange rate fluctuations could have a material adverse effect on the Company's
business, financial condition and results of operations.
Risk Factors
Fluctuations in Operating Results. SanDisk's operating results are
subject to quarterly and annual fluctuations due to a variety of factors. In
addition, the Company has very limited visibility with respect to anticipated
operating results for any given quarter, even during the quarter in question.
For example, the Company's gross margin and net income for the third quarter of
1995 decreased from the second quarter 1995 gross margin and net income. During
the second quarter of 1995, the Company was unable to meet its customers' demand
for its products, which allowed the Company to maintain stable prices. In
addition, the Company's products sold during this period were based on mature
16Mbit devices with high manufacturing yields and proportionately low cost of
revenues. As a result of these factors, the Company's net income and gross
margin for the second quarter of 1995 were unusually high. In contrast, gross
margin and net income in the fourth quarter of 1995 were impacted by development
and start-up costs associated with the next generation of products built with
the Company's 32Mbit devices and a new integrated microcontroller, and by lower
average selling prices due to the entry of new competitors into the Company's
markets. In addition, the Company is requesting customers to qualify its new
products based on the 32Mbit wafers produced by LG Semicon (formerly Goldstar
Electron). Any delays in customer qualifications or product acceptance could
negatively impact revenues during the second half of 1996.
Other factors affecting the Company's operating results include volume
of product sales, availability of foundry capacity, the timing of significant
orders, competitive pricing pressures, the ability of the Company to match
supply with demand or to accurately forecast future inventory levels,
fluctuations in product costs, fluctuation in manufacturing yields,
manufacturing utilization, changes in product and customer mix, changes in the
channels through which the Company's products are distributed, timing of new
product announcements and introductions by the Company and its competitors,
quality of the Company's products, increased research and development expenses
associated with new product introductions, exchange rate fluctuations and market
acceptance of new or enhanced versions of the Company's products. In addition,
the Company expects to continue to increase its operating expenses in connection
with the hiring of additional personnel and the development of new applications.
If the Company does not achieve increased levels of revenues commensurate with
these increased levels of operating expenses, the Company's business, financial
condition and results of operations will be materially adversely affected. All
of these factors are difficult to forecast and these or other factors can
materially affect the Company's quarterly or annual operating results.
Due to the emerging nature of the Company's markets and certain planned
product transitions, the Company has had difficulty forecasting future inventory
levels required to meet customer demand. As a result of both contractual
obligations and manufacturing cycle time, the Company has been required to order
wafers from its foundries approximately six months in advance of the ultimate
shipment of its products. Under the Company's wafer supply agreements, there are
limits on the number of wafers the Company can order and the Company's ability
to change that quantity is restricted. Accordingly, the Company's ability to
react to significant fluctuations in demand for its products is limited. As a
result, the Company has not been able to match its purchases of wafers to
specific customer orders and therefore the Company has taken provisions for
potential excess inventory purchased prior to the receipt of customer orders.
These provisions decrease gross margins in the quarter reported and have
resulted in fluctuations in gross margins on a quarter to quarter basis. As
demand for the Company's products has increased and its manufacturing cycle time
has decreased over the past 12 months, the Company's ability to forecast future
customer demand has improved. However, there can be no assurance that future
gross margin volatility will not reoccur as a result of the Company's inability
to match supply with demand or for other reasons.
During the first and second calendar quarters of 1996, the price of
Dynamic Memory (DRAM) decreased dramatically, in some cases by 75%. All DRAM
suppliers were adversely impacted, including the Company's two Flash foundry
suppliers, who now have excess capacity of foundry wafers which can be made
available to the Company at reduced prices. Such reduced wafer prices will help
the Company to accelerate its cost reduction efforts and thereby be more
competitive. However, because SanDisk values its inventory on a lower of cost or
market basis, these cost reductions may have an adverse effect on the Company's
gross margins and results of operations in the third and fourth quarters of 1996
as the Company's inventory is written down to reflect the lower wafer costs. Due
to the highly competitive nature of the DRAM business, there can be no assurance
that wafer costs will remain low or that increased capacities will remain
available.
Dependence on Third Party Foundries. All of the Company's products
require silicon wafers, which are currently supplied by Matsushita in Japan and
LG Semicon in Korea, which was qualified as a second foundry source in late
1995. The Company is dependent on Matsushita and LG Semicon to produce wafers of
acceptable quality and with acceptable manufacturing yields, to deliver those
wafers to the Company and its independent subcontractors on a timely basis and
to allocate to the Company a portion of their foundry capacity sufficient to
meet the Company's needs. On occasion, the Company has experienced difficulties
in each of these areas. The loss or reduction of capacity from Matsushita and LG
Semicon or the inability to qualify or receive the anticipated level of capacity
from Matsushita and LG Semicon could have a material adverse effect on the
Company's business, financial condition and results of operations. Each time a
new foundry is brought into operation, it typically requires several months
before acceptable quality and manufacturing yields are achieved. There can be no
assurance that Matsushita and LG Semicon will be able to maintain acceptable
yields or that it will continue to deliver sufficient quantities of wafers on a
timely basis.
Under the Company's wafer supply agreements with Matsushita and LG
Semicon, the Company is obligated monthly to provide a rolling forecast of
anticipated purchase orders. Except in limited circumstances and subject to
acceptance by the foundries, the estimates for the first three months of each
forecast constitute a binding commitment and the estimates for the remaining
months may not increase or decrease by more than a certain percentage from the
previous month's forecast. This limits the Company's ability to react to any
significant fluctuations in demand for its products. To the extent the Company
inaccurately forecasts the number of wafers required, it may have either a
shortage or an excess supply of wafers, either of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The wafer supply agreements with Matsushita and LG Semicon each
include a target number of wafers to be delivered per month that is
substantially higher than the level of supply from either foundry as of year-end
1995. To the extent the Company is unable to obtain scheduled quantities of
wafers from Matsushita or LG Semicon with planned yields, the Company's
business, financial condition and results of operations could be negatively
impacted.
The Company has entered into a joint development agreement with NEC for
the development of future generations of semiconductor devices to be used in the
manufacture of the Company's products. However, there can be no assurance that
future generations of the semiconductor devices will be successfully developed
or, if developed, that a wafer supply agreement will be entered into with NEC.
Because the lead time to qualify a new foundry is approximately 18 to 24 months,
in the event that the Company and NEC do enter into a wafer supply agreement,
the Company could not expect to receive volume shipments from NEC until 1998 at
the earliest.
Due to the unpredictable nature of the new markets for the Company's
products, the Company may periodically experience shortages in the future.
Because of the lengthy lead times required to qualify a new foundry, there is no
readily available alternative source of supply. The inability of the Company to
obtain expanded foundry capacity, to qualify other wafer manufacturers or to
correctly forecast the number of wafers required from its current suppliers, as
well as any inability to obtain timely and adequate deliveries from the
Company's current or future suppliers or any other circumstance that would
require the Company to seek alternative sources of supply, could delay shipments
of the Company's products and could have a material adverse effect on the
Company's business, financial condition and results of operations.
SanDisk has received recent indications from its foundries that
additional capacity is available. Finished goods inventory levels increased
during the first six months of 1996 and the Company is now quoting four to eight
week delivery times.
Risks Associated with Transitioning to New Products and Processes.
Successive generations of the Company's products incorporate semiconductor
devices with greater memory capacity per chip. In addition, the Company is
continually involved in joint development with its foundries to produce
semiconductor devices based upon smaller geometry manufacturing processes. Both
the development of higher capacity semiconductor devices and the implementation
of smaller geometry manufacturing processes are important determinants of the
Company's ability to decrease the cost per megabyte of its flash data storage
products. The utilization of semiconductor devices with greater memory capacity
and the design and implementation of new semiconductor manufacturing processes
can entail a number of problems, including lower yields associated with
semiconductor device production, problems associated with design and manufacture
of products to incorporate such devices, and production delays. However, there
can be no assurance that such devices or processes will be successfully
developed by the Company. For example, the Company discovered and successfully
corrected a design flaw in its new Flash ChipSet product in the fourth quarter
of 1995. As a result of delays in supplying this product to a major customer,
this customer canceled approximately $500,000 of product orders that were
scheduled for delivery in the fourth quarter of 1995. However, the Company
shipped the majority of its backlog scheduled for this customer during the
fourth quarter of 1995 and no additional order cancellations were received.
There can be no assurance that the Company will not experience similar problems
in the future that could have a material adverse effect on the Company's
business, financial condition and results of operations.
In the fourth quarter of 1995, the Company completed the transition
from 16Mbit to 32Mbit devices supplied by Matsushita for use in the Company's
products. During the first quarter of 1996, the Company began receiving 32Mbit
devices from LG Semicon and is in the qualification stage of this process. As of
the end of the second quarter of 1996, the Company had not completed full
qualification of the 32Mbit devices at LG Semicon. Any problems experienced by
the Company in its current or future transitions to higher capacity memory
devices or to new semiconductor manufacturing processes could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's 32Mbit devices are designed to work only in conjunction
with a new integrated microcontroller developed by the Company in cooperation
with Motorola Inc. ("Motorola"). Qualification of the Motorola microcontroller
was completed during the fourth quarter of 1995. The transition to 32Mbit
devices exposes the Company to risks related to the ability to obtain sufficient
quantities of 32Mbit wafers and integrated microcontrollers on a timely basis.
Such factors are difficult to forecast and may have a material adverse effect on
the Company's business, financial condition and results of operations.
Manufacturing Yields. The fabrication of the Company's products is a
complex and precise process requiring wafers that are produced in a highly
controlled and clean environment. Semiconductor companies supplying the Company
with wafers periodically have experienced problems in achieving acceptable wafer
manufacturing yields. Semiconductor manufacturing yields are a function both of
design technology, which is developed by the Company, and process technology,
which is typically proprietary to the foundry. Because low yields may result
from either design or process technology failures, yield problems may not be
effectively determined or improved until an actual product exists that can be
analyzed and tested to recognize process sensitivities in relation to the design
rules that are used. As a result, yield problems may not be identified until
well into the production process and would require cooperation by and
communication between the Company and the foundry for resolution. This risk is
increased due to the fact that the Company receives its wafers from independent
offshore foundries, increasing the effort and time required to identify,
communicate and resolve manufacturing yield problems. There can be no assurance
that the Company's foundries will achieve or maintain acceptable manufacturing
yields in the future. The inability of the Company to achieve planned yields
from its foundries could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Key and Sole Source Suppliers. The majority of the memory
components of the Company's products have been assembled by Anam in Korea and
Alphatec in Manteca, California. The majority of the controller components of
the Company's products have been assembled by GSS Array in Thailand and ATI in
Milpitas, California. However, in the third quarter of 1996, the Company plans
to stop using GSS Array and Anam and will install its own surface mount line in
its new Sunnyvale facility. The Company expects to do a substantial portion of
its assembly on this new line. The remainder will be done by other third party
subcontractors. Unexpected costs or delays in bringing the surface mount line to
full production capability could adversely effect the Company's results from
operations in the second half of 1996. The Company also has no long term
agreement with Alphatec. As a result of this reliance on a third party
subcontractor for assembly of a portion its products, the Company cannot
directly control product delivery schedules, which could lead to product
shortages or quality assurance problems that could increase the costs of
manufacture or assembly of the Company's products. Any problems associated with
the delivery, quality or cost of the Company's products could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company purchases several key components from sole or single source
vendors for which alternative sources are not currently available. Even where
alternative vendors are available, a significant amount of time would be
required to qualify an additional vendor in the case of certain of the Company's
other components. The Company does not maintain long-term supply agreements with
any of these vendors. The inability to develop alternative sources for these
single or sole source components or to obtain sufficient quantities of these
components could result in delays or reductions in product shipments which could
adversely affect the Company's business, financial condition and results of
operations. For example, the Company relies on Motorola as the sole source of
microcontrollers, which are critical components in the Company's products. The
sole source risk associated with microcontrollers from Motorola is heightened
during transitions from one generation of microcontrollers to the next given the
lack of safety stock available during these transitions. In the event Motorola
were to stop shipment of the microcontroller for any reason, the time to design
and qualify an alternative source would be approximately nine to twelve months.
The Company's reliance on Motorola as its sole source of microcontrollers
exposes the Company to interruptions of supply that could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company is continuing to identify and establish second sources
for its key single and sole source component vendors as sales volumes increase.
Patents, Proprietary Rights and Related Litigation. The Company relies
on a combination of patents, mask work protection, 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, 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.
From time to time the Company has been notified and its foundries may
in the future be notified, of claims that they may be infringing patents or
other intellectual property rights owned by third parties. If it is necessary or
desirable, the Company may seek licenses under such patents or intellectual
property rights. However, there can be no assurance that licenses will be
offered or that the terms of any offered licenses will be acceptable to the
Company. The failure to obtain a license from a third party for technology used
by the Company could cause the Company to incur substantial liabilities and to
suspend the manufacture of products or the use by the Company's foundries of
processes requiring the technology, or to expend substantial resources
redesigning its products to eliminate the infringement. There can be no
assurance that the Company would be successful in redesigning its products or
that such licenses would be available under reasonable terms, and any such
development or license could require expenditures by the Company of substantial
time and other resources.
The Company has notified IBM Microelectronics, Samsung Electronics
Company Ltd. ("Samsung") and Toshiba Corporation ("Toshiba") that the Company
believes certain of their existing or announced products infringe certain of the
Company's patents. In response to the Company's allegations of infringement of
five of the Company's patents, Samsung has filed a complaint in October 1995
accusing the Company of infringing two of its patents, seeking declaratory
relief with respect to these five Company patents and alleging unspecified
damages for certain other related claims. As written, the complaint potentially
implicates products that comprise substantially all of the Company's revenues
for 1995. The Company has received opinions from its Patent Counsel that, based
on information currently known, the Company's products do not infringe one of
these Samsung patents and that, based on certain assumptions as to how Samsung
would claim infringement, the particular patent claim in the other Samsung
patent that Samsung has accused the Company of infringing is invalid and that
the Company's products do not infringe any of the other claims of such patent.
Nonetheless, the Company anticipates that Samsung will continue to pursue
litigation with respect to these claims. SanDisk filed its answer to Samsung's
complaint in March 1996. At that time, SanDisk asserted a number of
counterclaims based on Samsung's alleged infringement of three SanDisk patents.
On January 11, 1996, the Company filed a complaint against Samsung
with the United States International Trade Commission alleging that Samsung and
its U.S. sales arm, are importing and selling products that infringe two of the
Company's patents. By its Complaint, the Company seeks a judgment by the
International Trade Commission that Samsung is infringing the Company's patents
and an Order precluding Samsung from importing those infringing products into
the United States. The U.S. International Trade Commission initiated an
investigation based upon the Company's complaint against Samsung and is expected
to begin its hearings in September 1996. A decision is expected by the end of
this year. The Company intends to vigorously enforce its patents against
Samsung, but there can be no assurance that these efforts will be successful.
As is common in the industry, the Company agrees to indemnify certain
of its suppliers and customers for alleged patent infringement. The scope of
such indemnity varies, but may, in some instances, include indemnification for
damages and expenses, including attorneys fees. The Company may from time to
time be engaged in litigation as a result of such indemnification obligations.
For example, in 1995 one of the Company's customers with which the Company has
an indemnification obligation was served with a complaint alleging patent
infringement with respect to a product manufactured by the Company. Although the
Company has received an opinion from its Patent Counsel that, based on certain
assumptions as to how the plaintiff would claim infringement, the Company's
products do not infringe any valid claim under this patent, the Company
anticipates that the plaintiff will continue to pursue this litigation. Third
party claims for patent infringement are excluded from coverage under the
Company's insurance policies. There can be no assurance that the Company's
obligation to indemnify this customer, or any future obligation to indemnify its
customers or suppliers, will not have a material adverse effect on the Company's
business, financial condition and results of operations.
If any third party patents are deemed to be valid and infringed by the
Company's products, the Company would be required to obtain a license to the
patents or to redesign its products to eliminate the infringement. Such a
redesign effort, if possible, could result in substantial delays in marketing
its products and in significant costs. There can be no assurance that the
Company could successfully design around the technology in question or that it
could obtain a license to the infringed patents on reasonable terms, or at all.
The Company's inability to design around a valid patent or to obtain a license
on reasonable terms could have a material adverse effect on the Company's
business, financial condition and results of operations.
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. In the event of an adverse
result in any such litigation, the Company could be required to pay substantial
damages, cease the manufacture, use and sale of infringing products, expend
significant resources to develop non-infringing technology, discontinue the use
of certain processes or obtain licenses to the infringing technology.
In addition to litigation, the Company may need to license some or all
of its patent portfolio to be able to obtain cross-licenses to the patents of
others. In October 1995, the Company entered into a cross-license agreement with
Intel Corporation ("Intel"). There can be no assurance that any other licenses
will be available on commercially reasonable terms, or at all. Moreover, any
such cross-licenses could result in more rapid and intense competition for the
Company's products, by much larger and better financed competitors. Any such
limitations on the Company's ability to market its products, or delays and costs
associated with redesigning its products, or payments of license fees or
licenses of Company rights to others could 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.
Competition. The flash data storage markets in which the Company
competes are characterized by rapid technological change, evolving industry
standards, declining average selling prices and rapid product obsolescence. The
Company's competitors include many large domestic and international companies
that have greater access to foundry capacity, substantially greater financial,
technical, marketing and other resources, broader product lines and longer
standing relationships with customers than the Company. The Company expects
competition to increase in the future from existing competitors and from other
companies that may enter the Company's existing or future markets with similar
or alternative data storage solutions that may be less costly or provide
additional features. In addition, competition will increase to the extent that
the Company determines to license its patents to certain of its competitors in
order to gain licenses to their patents. For example, in October 1995, the
Company entered into a patent cross-license agreement with Intel pursuant to
which each party is entitled to manufacture and sell products that incorporate
technology covered by their respective patents related to flash memory devices.
Increased competition could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company recently settled patent infringement issues relating to
features embodied in M-Systems' TFFS and FTL technology. Subsequent to the
M-System's settlement, the PCMCIA standards committee adopted FTL technology as
part of the PCMCIA standard, which enables flash file system software to operate
with linear flash cards. Intel recently announced the Miniature Card and Toshiba
announced the Solid-State Floppy Disk Card (SSFDC). Both products are aimed at
the mass storage market for consumer applications, such as digital filmless
cameras. The Company expects these products to compete against its CompactFlash
(TM) product. A manufacturer of digital cameras wishing to design any one of
these three alternatives as removable "digital film" will eliminate the other
two from use in their product, since all three are mechanically and
electronically incompatible with each other. Competition to win the initial
design-in is therefore expected to be fierce. Due to the high price sensitivity
in the market for consumer products, aggressive price competition is expected
for these applications. Such competition may result in lower gross margins in
future quarters, should the relative percentage of sales of CompactFlash(TM)
products increase.
Dependence on Emerging Markets and New Products. The Company's success
depends to a significant extent upon the development of emerging and new
applications and markets for flash data storage systems, as well as on its
ability to introduce commercially attractive and competitively priced new
products on a timely basis and to reduce production costs of existing products.
There can be no assurance that new applications or markets for flash data
storage will develop as expected by the Company or that prospective customers
developing products for any such markets will design the Company's products into
their products and successfully introduce such products. In addition, there can
be no assurance that the Company's new products, including its CompactFlash (TM)
or Flash ChipSet products, will achieve market acceptance. The failure of new
applications or markets to develop or the failure of new markets to be receptive
to the Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company believes that continued significant expenditures for
research and development will be required in the future. In particular, the
Company intends to develop new products with increased memory capacity at lower
prices, which the Company believes will be essential to its ability to remain
competitive. There can be no assurance that these products will be successfully
developed or will achieve market acceptance, or that the Company will be
successful in identifying new product opportunities and develop and bring new
products to market in a timely manner, or that products or technologies
developed by others will not render the Company's products or technologies
obsolete or noncompetitive. The failure of any of the Company's new product
development efforts or lack of market acceptance of such products would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Development of Double Density Flash. Since its inception, the Company
has been developing double density flash ("D2 flash"), a new flash system design
to store two bits in each flash memory cell. The Company believes that D2 flash
will be important to the Company's ability to increase the capacity and decrease
the cost of certain of its products, maintain its competitive advantage, broaden
its target markets and attract strategic partners. The implementation of D2
flash in a production environment is currently planned for the second half of
1997 and will be highly complex. There can be no assurance that reliable and
cost effective D2 flash products can be designed or, if designed, manufactured
reliably in commercial volumes and with yields sufficient to result in a lower
cost per megabyte. Furthermore, flash data storage products designed with D2
flash are expected, at least initially, to exhibit slower performance versus the
Company's existing products when writing data into memory. This may preclude
their use in certain applications. The failure of the Company to successfully
design and manufacture D2 flash devices could have a material adverse effect on
the Company's business, financial condition and results of operations.
Customer Concentration. A limited number of customers historically have
accounted for a substantial portion of the Company's revenues. The Company
expects that sales of its products to a limited number of customers will
continue to account for a substantial portion of its revenues for the
foreseeable future. Sales to the Company's customers are generally made pursuant
to standard purchase orders rather than long-term contracts. The Company has
also experienced significant changes in the composition of its major customer
base from year to year and expects this variability to continue as certain
customers increase or decrease their purchases of the Company's products as a
result of fluctuations in market demand for such customers' products. Beginning
in 1997, if Seagate exercises its option to market the Company's products, the
Company and Seagate will coordinate their efforts so that approximately
one-third of the Company's worldwide net revenues would be generated from sales
of the Company's flash products through Seagate.
International Operations. All of the Company's wafers are, and for the
foreseeable future will be, produced by foreign foundries. Because the Company
currently purchases the majority of its flash wafers in Japanese Yen at a set
price, fluctuations in currencies could materially adversely affect the
Company's business, financial condition and results of operations. Due to its
reliance on export sales and its dependence on foundries outside the United
States, the Company is subject to the risks of conducting business
internationally, including foreign government regulation and general
geopolitical risks such as political and economic instability, potential
hostilities and changes in diplomatic and trade relationships. In addition,
since most of the Company's international sales are denominated in U.S. dollars,
the Company's products may be less competitive in countries with currencies
declining in value against the dollar. Manufacturing and sales of the Company's
products may also be materially adversely affected by factors such as unexpected
changes in, or imposition of, regulatory requirements, tariffs, import and
export restrictions and other barriers and restrictions, longer payment cycles,
greater difficulty in accounts receivable collection, potentially adverse tax
consequences, the burdens of complying with a variety of foreign laws and other
factors beyond the Company's control. In addition, the laws of certain foreign
countries in which the Company's products are or may be developed, manufactured
or sold, including various countries in Asia, may not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States and thus make piracy of the Company's products a more likely possibility.
There can be no assurance that these factors will not have a material adverse
effect on the Company's business, financial condition or results of operations.
Possible Volatility of Stock Price. The Company believes that future
announcements concerning the Company, its competitors or its principal
customers, including technological innovations, new product introductions,
governmental regulations, litigation or changes in earnings estimated by
analysts, may cause the market price of the Common Stock to fluctuate
substantially. In addition, an aggregate of approximately 18,185,920 shares of
Common Stock became eligible for sale in May 1996 after the expiration of
lock-up agreements. Sales of substantial amounts of the Company's outstanding
Common Stock in the public market could materially adversely affect the market
price of the Common Stock. Further, in recent years the stock market has
experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many high technology
companies and that often have been unrelated or disproportionate to the
operating performance of such companies. These fluctuations as well as general
economic, political and market conditions such as recessions or international
currency fluctuations, may materially adversely affect the market price of the
Common Stock.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this item is set forth in Note 5 of the
Condensed Consolidated Financial Statements on page 7 of this Form 10-Q for the
quarterly period ended June 30, 1996, and is hereby incorporated by reference.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on April 24, 1996, the
following individuals were elected to the Board of Directors:
Votes For Votes Withheld
William V. Campbell 11,995,564 26,257
Irwin Federman 11,995,564 26,257
Catherine P. Goodrich 11,991,064 30,757
Eli Harari 11,995,564 26,257
James D. Meindl 11,991,064 30,757
Joseph Rizzi 11,995,564 26,257
Alan F. Shugart 11,994,864 26,957
The following proposal was approved at the Company's Annual Meeting:
Affirmative Negative Votes
Votes Votes Withheld
----------- --------- --------
Ratify the appointment of Ernst & Young LLP
LLP as independent auditors for the fiscal
year ending December 31, 1996 12,000,111 9,214 12,496
Item 5. Other Information
None
Page 18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
<S> <C>
3.1* Certificate of Incorporation of the Registrant, as amended to date.
3.2* Form of Amended and Restated Certificate of Incorporation of the Registrant
3.3* Bylaws of the Registrant, as amended.
3.4* Form of Amended and Restated Bylaws of the Registrant
4.1* Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.3* Amended and Restated Registration Rights Agreement, among the
Registrant and the investors and founders named therein,
dated March 3, 1995.
4.4* Amendment No. 1 to the Stock Purchase Agreements among the Registrant and the holders
of Series A, B and D Preferred Stock, and certain holders of Series E Preferred
Stock, dated January 15, 1993.
4.5* Series F Preferred Stock Purchase Agreement between Seagate Technology, Inc. and
the Registrant, dated January 15, 1993.
4.6* Amendment Agreement between Seagate Technology, Inc. and the Registrant, dated
August 23, 1995.
4.7* Form of Stock Purchase Agreement between the Registrant and Seagate Technology, Inc.
9.1* Amended and Restated Voting Agreement, among the Registrant and the investors
named therein, dated March 3, 1995.
10.1* Form of Indemnification Agreement entered into between the Registrant and its
directors and officers.
10.2*+ Foundry Agreement between Matsushita Electronics Corporation, Matsushita
Electronic Industrial Co., Ltd. and the Registrant, dated May 20, 1992.
10.3*+ Amendment No. 1 to MEC/SunDisk Foundry Agreement, between Matsushita Electronics
Corporation, Matsushita Electronic Industrial Co., Ltd. and the Registrant, dated
April 17, 1995.
10.4*+ Foundry Agreement between Goldstar Electron Co., Ltd. and the Registrant, dated
October 13, 1993.
10.5*+ Amendment No. 1 to the Foundry Agreement between Goldstar Electron Co., Ltd. and
the Registrant, dated May 10, 1994.
10.6*+ SanDisk/Goldstar Technical Collaboration Agreement between Goldstar Electron
Co., Ltd. and the Registrant, dated March 25, 1994.
10.7*+ Joint Development Agreement between NEC Corporation and the Registrant, dated
June 20, 1994.
10.8*+ Joint Cooperation Agreement between the Registrant and Seagate Technology, Inc.,
dated January 15, 1993.
10.9*+ Amendment and Termination Agreement between the Registrant
and Seagate Technology, Inc., dated October 28, 1994.
10.10* License Agreement between the Registrant and Dr. Eli Harari, dated September 6, 1988
10.11* Lease Agreement between the Registrant and A&P Family Investments, dated June 24,
1991, as amended on February 26, 1992, January 31, 1994,
January 30, 1995 and April 7, 1995.
10.12* Business Loan Agreement between the Registrant and Silicon
Valley Bank, dated July 31, 1992, as modified February 8,
1995 and July 27, 1995.
10.13* 1989 Stock Benefit Plan.
10.14* 1995 Stock Option Plan.
10.15* Employee Stock Purchase Plan.
10.16* 1995 Non-Employee Directors Stock Option Plan.
10.17* Patent Cross License Agreement between the Registrant and Intel Corporation,
dated October 12, 1995.
10.18** Lease Agreement between the Registrant and G.F. Properties, dated March 1, 1996.
10.19 Business loan agreement between the Registrant and Union Bank of California, dated July 3,
1996.
11.1 Computation of Earnings Per Share (three and six months ended June 30, 1996).
21.1* Subsidiaries of the Registrant.
27.1 Financial Data Schedule for six months ended June 30, 1996 (In EDGAR format only)
<FN>
- - ----------
* Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-96298).
** Previously filed as an Exhibit to the Registrant's 1995 Annual Report on Form 10-K
+ Confidential treatment granted as to certain portions of these exhibits.
</FN>
</TABLE>
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
1996.
Page 20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SanDisk Corporation
(Registrant)
By: /s/ Cindy L. Burgdorf
---------------------
Cindy L. Burgdorf
Chief Financial Officer,
Senior Vice President, Finance and
Administration and Secretary
DATED: August 14, 1996
Page 21
Exhibit 11.1
SanDisk Corporation
Statement Regarding Computation of Per Share Earnings
(In thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
Three Months ended, Six Months ended,
June 30, June 30,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Primary:
Net income ................................... $ 3,405 $ 2,872 $ 6,459 $ 4,026
Computations of weighted average common
and common equivalent shares outstanding:
Weighted average common
shares outstanding ................... 22,106 2,867 22,065 2,860
Common equivalent shares from stock
options and convertible preferred
stock granted or issued during the
twelve-month period prior to the
Company's initial public offering .... -- 1,408 -- 1,408
Common stock options .................... 2,035 1,053 2,107 1,063
Convertible preferred stock ............. -- 227 -- 227
------- ------- ------- -------
Shares used in computing net income
per share ............................... 24,141 5,555 24,172 5,558
======= ======= ======= =======
Net income per share applicable
to common stockholders .................. $ 0.14 $ 0.52 $ 0.27 $ 0.72
======= ======= ======= =======
Fully Diluted:
Net income ................................... $ 3,405 $ 2,872 $ 6,459 $ 4,026
Computation of weighted average common
and common equivalent shares outstanding:
Weighted average common
shares outstanding ................... 22,106 2,867 22,065 2,860
Common equivalent shares from stock
options and convertible preferred
stock granted or issued during the
twelve-month period prior to the
Company's initial public offering .... -- 1,408 -- 1,408
Common stock options .................... 2,035 1,110 2,107 1,091
Convertible preferred stock ............. -- 14,665 -- 14,665
------- ------- ------- -------
Shares used in computing net income
per share ............................... 24,141 20,050 24,172 20,024
======= ======= ======= =======
Net income per share ......................... $ 0.14 $ 0.14 $ 0.27 $ 0.20
======= ======= ======= =======
</TABLE>
[UNION BANK LOGO]
Union Bank
A Division of Union Bank of California, N.A.
PROMISSORY NOTE
(BASE RATE)
===============================================================================
Borrower Name SANDISK CORPORATION
- - -------------------------------------------------------------------------------
Borrower Address Office 70061 Loan Number 8159632704 0080-00-0-000
140 CASPIAN COURT --------------------------------------------------------
SUNNYVALE, CA 94089 Maturity Date JULY 1, 1997 Amount $10,000,000.00
===============================================================================
SAN FRANCISCO, California $10,000,000.00 Date July 3, 1996
FOR VALUE RECEIVED, on JULY 1, 1997, the undersigned ("Debtor") promises to pay
to the order of UNION BANK ("Bank"), as indicated below, the principal sum of
TEN MILLION AND NO/1O0 Dollars ($10,000,000.00), or so much thereof as is
disbursed, together with interest on the balance of such principal from time to
time outstanding, at the per annum rates and at the times set forth below;
provided, however, Debtor shall pay total interest over the term of this note of
not less than $5OO.
1. INTEREST PAYMENTS. Debtor shall pay interest on the 1ST day of each QUARTER
(commencing OCTOBER 1, 1996). Should interest not be paid when due, it
shall become part of the principal and bear interest as herein provided. All
computations of interest under this note shall be made on the basis of a year of
360 days, for actual days elapsed.
a. BASE INTEREST RATE. At Debtor's option, amounts
outstanding hereunder in increments of at least $10,OO0 shall
bear interest at a rate to be selected by Debtor which is
1.00% per annum in excess of Bank's Adjusted LIBOR-Rate for
the Interest Period so selected by Debtor.
Any Base Interest Rate selected by Debtor may not be changed,
altered or otherwise modified until the expiration of the
Interest Period for which it was selected. The exercise of
interest options by Debtor shall be as recorded in Bank's
records, which records shall be prima facie evidence of the
amount borrowed under either interest option and the interest
rate; provided, however, that failure of Bank to make any such
notation in its records shall not discharge Debtor from its
obligations to repay in full with interest all amounts borrowed.
In no event shall any Interest Period extend beyond the maturity
date of this note.
To select a Base Interest Rate, Debtor may, from time to time
with respect to principal outstanding on which a Base Interest
Rate has not been selected and on the expiration of any Interest
Period with respect to principal outstanding on which a Base
Interest Rate has been selected, select a Base Interest Rate by
telephoning an authorized lending officer of Bank located at the
banking office identified below prior to 10:OO a.m., California
time, on any Business Day and advising that officer of the Base
Interest Rate, the Interest Period and the Origination Date
selected (which Origination Date, for a Base Interest Rate Loan
based on the Adjusted LIBOR-Rate, shall follow the date of such
election by no more than two (2) Business Days).
Bank will confirm the terms of the election in writing by mail
to Debtor promptly after the election is made. Failure to send
such confirmation shall not affect Bank's rights to collect
interest at the rate selected. If, on the date of the election,
the Base Interest Rate selected is unavailable for any reason,
the selection shall be void. Bank reserves the right to fund the
principal from any source of funds notwithstanding any Base
Interest Rate selected by Debtor.
b. VARIABLE INTEREST RATE. All principal outstanding hereunder
which is not bearing interest at a Base Interest Rate shall bear
interest at a rate per annum equal to the Reference Rate,
which rate shall vary as and when the Reference Rate changes.
At any time prior to the maturity of this note, subject to the
provisions of paragraph 4, below, of this note, Debtor may
borrow, repay and reborrow hereon so long as the total
outstanding at any one time does not exceed the principal amount
of this note. Debtor shall pay all amounts due under this note
in lawful money of the United States at Bank's NORTHERN
CALIFORNIA COMMERCIAL BANKING Office, or such other office as
may be designated by Bank, from time to time.
- 1 -
PN-REV(LIBOR-RR)
7/1/96
<PAGE>
2. LATE PAYMENTS. If any payment required by the terms of this note shall remain
unpaid ten days after same is due, at the option of Bank, Debtor shall pay a fee
of $1OO to Bank.
3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option of
Bank, and, to the extent permitted by law, interest shall be payable on the
outstanding principal under this note at a per annum rate equal to five percent
(5%) in excess of the interest rate specified in paragraph 1.b, above, of this
note, calculated from the date of default until all amounts payable under this
note are paid in full.
4. PREPAYMENT.
a. Amounts outstanding under this note bearing interest at a
rate based on the Reference Rate may be prepaid in whole or in
part at any time, without penalty or premium. Amounts
outstanding at a Base Interest Rate under this note may only be
prepaid, in whole or in part provided Bank has received not less
than five (5) Business Days prior written notice of an intention
to make such prepayment and Debtor pays a prepayment fee to Bank
in an amount equal to: (i) the difference between (a) the Base
Interest Rate applicable to the principal amount which Debtor
intends to prepay, and (b) the return which Bank could obtain if
it used the amount of such prepayment of principal to purchase
at bid price regularly quoted securities issued by the United
States having a maturity date most closely coinciding with the
relevant Base Rate Maturity Date and such securities were held
by Bank until the relevant Base Rate Maturity Date ("Yield
Rate"); (ii) the above difference, if greater than zero, is
multiplied by a fraction, the numerator of which is the number
of days in the period between the date of prepayment and the
relevant Base Rate Maturity Date and the denominator of which is
360 days; (iii) the above product is multiplied by the amount of
the principal so prepaid (except in the event that principal
payments are required and have been made as scheduled under the
terms of the Base Interest Rate Loan being prepaid, then the
amount multiplied in this section shall be the lesser of the
amount prepaid or 50% of the total of the amount prepaid and the
amount of principal scheduled under the terms of the Base
Interest Rate Loan being prepaid to be outstanding at the
relevant Base Rate Maturity Date); and (iv) the above product is
then discounted to present value using the Yield Rate as the
annual discount factor. b. In no event shall Bank be obligated
to make any payment or refund to Debtor, nor shall Debtor be
entitled to any setoff or other claim against Bank, should the
return which Bank could obtain under the above prepayment
formula exceed the interest that Bank would have received if no
prepayment had occurred. All prepayments shall include payment
of accrued interest on the principal amount so prepaid and shall
be applied to payment of interest before application to
principal. A determination by Bank as to the prepayment fee
amount, if any, shall be conclusive. c. Such prepayment fee, if
any, shall also be payable if prepayment occurs as the result of
the acceleration of the principal of this note by Bank because
of any default hereunder. If, following such acceleration, all
or any portion of a Base Interest Rate Loan is satisfied,
whether through sale of property encumbered by a Security
agreement or other agreement securing this Note, if any, at a
foreclosure sale held thereunder or through the tender of
payment any time following such acceleration, but prior to such
a foreclosure sale, then such satisfaction shall be deemed an
evasion of the prepayment conditions set forth above, and Bank
shall, automatically and without notice or demand, be entitled
to receive, concurrently with such satisfaction the prepayment
fee set forth above, and the obligation to pay such prepayment
fee shall be added to the principal. DEBTOR HEREBY ACKNOWLEDGES
AND AGREES THAT BANK WOULD NOT LEND TO DEBTOR THE LOAN EVIDENCED
BY THIS NOTE WITHOUT DEBTOR'S AGREEMENT, AS SET FORTH ABOVE, TO
PAY BANK A PREPAYMENT FEE UPON THE SATISFACTION OF ALL OR ANY
PORTION OF THE PRINCIPAL BEARING INTEREST AT A BASE INTEREST
RATE FOLLOWING THE ACCELERATION OF THE MATURITY DATE HEREOF BY
REASON OF A DEFAULT. DEBTOR HAS CAUSED THOSE PERSONS SIGNING
THIS NOTE ON ITS BEHALF TO SEPARATELY INITIAL THE AGREEMENT
CONTAINED IN THIS PARAGRAPH BY PLACING THEIR INITIALS BELOW:
INITIALS: /i/ C. Burgdorf /i/ E. Harari
--------------- -------------
5. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but not
be limited to, any of the following: (a) the failure of Debtor to make any
payment required under this note when due; (b) any breach, misrepresentation or
other default by Debtor, any guarantor, co-maker, endorser, or any person or
entity other than Debtor providing security for this note (hereinafter
individually and collectively referred to as the "Obligor") under any security
agreement, guaranty or other agreement between Bank and any Obligor; (c) the
insolvency of any Obligor or the failure of any Obligor generally to pay such
Obligor's debts as such debts become due; (d) the commencement as to any Obligor
of any voluntary or involuntary proceeding under any laws relating to
bankruptcy, insolvency, reorganization, arrangement, debt adjustment or debtor
relief; (e) the assignment by any Obligor for the benefit of such Obligor's
creditors; (f) the appointment, or commencement of any proceeding for the
appointment of a receiver, trustee, custodian or similar official for all or
substantially all of any Obligor's property; (g) the commencement (if any
proceeding for the dissolution or liquidation of any Obligor; (h) the
termination of existence or death of any Obligor; (i) the revocation of any
guaranty or subordination agreement given in connection with this note; (j) the
failure of any Obligor to comply with any order, judgement, injunction, decree,
writ or demand of any court or other public authority; (k) the filing or
recording against any Obligor, or the property of any Obligor, of any notice of
levy, notice to withhold, or other legal process for taxes other than property
taxes; (l) the default by any Obligor personally liable for amounts owed
hereunder on any obligation concerning the borrowing of money; (m) the issuance
against any Obligor, or the property of any Obligor, of any writ of attachment,
execution, or other judicial lien; or (n) the deterioration of the financial
condition of any Obligor which results in Bank deeming itself, in good faith,
insecure. Upon the occurence of any such default, Bank, in its discretion, may
cease to advance funds hereunder and may declare all obligations under this note
immediately due and payable; however, upon the occurrence of an event of default
under d, e, f, or g, all principal and interest shall automatically become
immediately due and payable.
6. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note are not
paid when due, Debtor promises to pay all costs and expenses, including
reasonable attorneys' fees, incurred by Bank in the collection or enforcement of
this note. Debtor and any endorsers of this note, for the maximum period of time
and the full extent permitted by law, (a) waive diligence, presentment, demand,
notice of nonpayment, protest, notice
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of protest, and notice of every kind; (b) waive the right to assert the defense
of any statute of limitations to any debt or obligation hereunder; and (c)
consent to renewals and extensions of time for the payment of any amounts due
under this note. The receipt of any check or other item of payment by Bank, at
its option, shall not be considered a payment on account until such check or
other item of payment is honored when presented for payment at the drawee bank.
Bank may delay the credit of such payment based upon Bank's schedule of funds
availability, and interest under this note shall accrue until the funds are
deemed collected. In any action brought under or arising out of this note,
Debtor and any Obligor, including their successors or assigns, hereby consent to
the jurisdiction of any competent court within the State of California, as
provided in any alternative dispute resolution agreement executed between Debtor
and Bank, and consent to service of process by any means authorized by
California law. The term "Bank" includes, without limitation, any holder of this
note. This note shall be construed in accordance with and governed by the laws
of the State of California. This note hereby incorporates any alternative
dispute resolution agreement previously, concurrently or hereafter executed
between Debtor and Bank.
7. DEFINITIONS. As used herein, the following terms
shall have the meanings respectively set forth below: "Adjusted LIBOR-Rate"
shall mean the LIBOR Base Rate as adjusted for reserve requirements imposed on
Bank from time to time. "Base Interest Rate" shall mean a rate of interest based
on the Adjusted LIBOR-Rate. "Base Interest Rate Loan" shall mean amounts
outstanding under this note that bear interest at a Base Interest Rate. "Base
Rate Maturity Date" shall mean the last day of the Interest Period with respect
to principal outstanding on which a Base Interest Rate has been selected by
Debtor. "Business Day" shall mean a day which is not a Saturday or Sunday on
which Bank is open for business in California and on which dealings in U.S.
dollar deposits outside of the United States may be carried on by Bank.
"Interest Period" shall mean any calendar period of one, three, six, nine or
twelve months. In determining an Interest Period, a month means a period that
starts on one Business Day in a month and ends on and includes the day preceding
the numerically corresponding day in the next month. For any month in which
there is no such numerically corresponding day, then as to that month, such day
shall be deemed to be the last calendar day of such month. Any Interest Period
which would otherwise end on a non-Business Day shall end on the next succeeding
Business Day unless that is the first day of a month, in which event such
Interest Period shall end on the next preceding Business Day. "LIBOR Base Rate"
shall mean for each Interest Period the rate per annum (rounded upward, if
necessary, to the nearest 1/100 of 1%) at which dollar deposits, in immediately
available funds and in lawful money of the United States would be offered to
Bank, outside of the United States, for a term coinciding with such Interest
Period and for an amount equal to the amount of principal covered by Debtor's
interest rate election. "Origination Date" shall mean the Business Day on which
funds are made available to Debtor relating to Debtor's selection of a Base
Interest Rate. "Reference Rate" shall mean the rate announced by Bank from time
to time at its corporate headquarters at its "Reference Rate." The Reference
Rate is an index rate determined by Bank from time to time as a means of
pricing certain extensions of credit and is neither directly tied to any
external rate of interest or index nor necessarily the lowest rate of interest
charged by Bank at any given time.
SANDISK CORPORATION
By /s/ Cindy Burgdorf
- - -----------------------
Title Sr. V.P. Finance & Administration, CFO and Secretary
- - -----------------------------------------------------------
By /s/ E. Harari
- - ----------------
Title President, CEO
- - ---------------------
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<PAGE>
TRADE FINANCE AGREEMENT
THIS LOAN AGREEMENT ("Agreement") is made and entered into as of
July 1, 1996 by and between SANDISK CORPORATION, a Delaware corporation
("Borrower") and UNION BANK, a Division of Union Bank of California, N.A.
("Bank").
SECTION I. THE LOAN
1.1 The Trade Finance Credit Facility. Bank will extend to Borrower a Trade
Finance Credit Facility in an amount not to exceed Ten Million Dollars
($10,000,000.00) (the "Trade Finance Credit Facility") to expire on July 1,
1997. The Trade Finance Credit Facility shall be subject to the following
sublimits: a. The Clean Advance Line in an amount not to exceed Ten Million
Dollars ($10,000,000.00); b. The Standby L/C Line in an amount not to exceed Ten
Million Dollars ($10,000,000.00); and other terms and conditions described
below.
1.1.1 Clean Advance Line. Bank will also make available an amount that
will not exceed the amount listed above (the "Clean Advance Line") for
Borrower's working capital purposes. Advances under the Clean Advance Line may
not be used directly or indirectly, to reimburse draws under letters of credit,
bankers acceptances or trade advances. All advances under the Clean Advance Line
must be made on or before July 1, 1997, at which time all unpaid principal and
interest under the Clean Advance Line shall be due and payable. Borrower may
borrow, repay and reborrow all or part of the Clean Advance Line in accordance
with the terms of the Clean Advance Note. The Clean Advance Line shall be
evidenced by a Promissory Note (the "Clean Advance Note") on the standard form
used by Bank for commercial loans. Bank shall enter each amount borrowed and
repaid in Bank's records and such entry shall be deemed to be the amount of the
Clean Advance Line outstanding. Omission by Bank to make any such entries shall
not discharge Borrower of its obligation to repay amounts borrowed in full with
interest.
1.1.2 The Standby Letter of Credit Line. Bank shall issue, for the account of
Borrower, one or more irrevocable standby letters of credit (individually, a
"Standby L/C" and collectively, the "Standby L/Cs"). Each Standby L/C shall be
drawn on such terms and conditions as are acceptable to Bank and shall be
governed by the terms of (and Borrower agrees to execute) Bank's standard form
of Standby L/C application and reimbursement agreement. No Standby L/C shall
have an expiry date more than twelve (12) months from its date of issuance. No
Standby L/C shall have a stated expiry date after September 29, 1997.
1
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1.1.3. Trade Finance Revolving Lines and Limits. The aggregate amount available
to be drawn under each sublimit listed above shall be reduced, dollar for
dollar, by the aggregate amount of unpaid principal obligations under the
respective sublimit. The aggregate of all unpaid advances and reimbursement
obligations shall reduce, dollar for dollar, the maximum amount available under
the Trade Finance Credit Facility. Borrower may reborrow or obtain new
extensions of credit under each such sublimit until the expiration date of the
Trade Finance Credit Facility, to the extent that Borrower has paid or otherwise
satisfied prior borrowings or extensions of credit, subject to all terms and
conditions in the Loan Documents.
1.2 Terminology. As used herein the word "Loan" shall mean all the credit
facilities described above. As used herein the word "Note" shall mean all the
promissory notes described above. As used herein, the words "Loan Documents"
shall mean all documents executed in connection with this Agreement. As used
herein, the word "L/C" shall mean all Standby L/Cs described above.
1.3 Purpose of Loan. The purpose of the Trade Finance Credit Facility shall be
used for issuance of Standby L/Cs and to support Borrower's general working
capital requirements.
1.4 Interest. The unpaid principal balance of the Trade Finance Clean Advance
Line shall bear interest at the rate or rates provided in the Trade Finance
Clean Advance Note and selected by Borrower. The Trade Finance Clean Advance
Line may be prepaid in full or in part only in accordance with the terms of the
Trade Finance Clean Advance Note and any such prepayment shall be subject to the
prepayment fee provided for therein.
1.5 Trade Finance Fees. All fees in connection with the Trade Finance Credit
Facility will be in accordance with Bank's standard schedule of fees as
published from time to time, except as follows: Standby L/C Issuance Fee shall
be at Fourth-Tenth's of One Percent (0.40%) per annum.
1.6 Balances. Borrower shall maintain its major depository accounts, (excluding
Brokerage Accounts) with Bank until the Note and all sums payable pursuant to
this Agreement have been paid in full.
1.7 Disbursement. Upon execution hereof, Bank shall disburse the proceeds of the
Loan as provided in Bank's standard form Authorization executed by Borrower.
1.8 Controlling Document. In the event of any inconsistency between the terms of
this Agreement and any Note or any of the other Loan Documents, the terms of
such Note or other Loan Documents will prevail over the terms of this Agreement.
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Trade Finance Agreement
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SECTION 2. CONDITIONS PRECEDENT
Bank shall not be obligated to issue any L/C or disburse all or any
portion of the proceeds of the Loan unless at or prior to the time for extending
such credit, the following conditions have been fulfilled to Bank's
satisfaction:
2.1 Compliance. Borrower shall have performed and complied with all terms and
conditions required by this Agreement to be performed or complied with by it
prior to or at the date of the making of such disbursement and shall have
executed and delivered to Bank the Note and other documents deemed necessary by
Bank.
2.2 Borrowing Resolution. Borrower shall have provided Bank with certified
copies of resolutions duly adopted by the Board of Directors of Borrower,
authorizing this Agreement and the Loan Documents. Such resolutions shall also
designate the persons who are authorized to act on Borrower's behalf in
connection with this Agreement and to do the things required of Borrower
pursuant to this Agreement.
2.3 Continuing Compliance. At the time any standby L/C issued or disbursement is
to be made, there shall not exist any event, condition or act which constitutes
an event of default under Section 6 hereof or any event, condition or act which
with notice, lapse of time or both would constitute such event of default; nor
shall there be any such event, condition, or act immediately after such credit
extension were it to be made.
SECTION 3. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that:
3.1 Business Activity. The principal business of Borrower is Design, Develop,
and Market flash memory data storage products.
3.2 Affiliates and Subsidiaries. Borrower's affiliates and subsidiaries and
their addresses, and the names of Borrower's principal shareholders are provided
on a schedule delivered to Bank on or before the date of this Agreement.
3.3 Authority to Borrow. The execution, delivery and performance of this
Agreement, the Note and all other agreements, documents and instruments required
by Bank in connection with the Loan are not in contravention of any of the terms
of any indenture, agreement or undertaking to which Borrower is a party or by
which it or any of its property is bound or affected.
3.4 Financial Statements. The financial statements of Borrower, including both a
balance sheet at December 31, 1995 and March 31, 1996, together with supporting
schedules, and an income
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statement for the twelve (12) months ended December 31, 1995 and the three (3)
months ended March 31, 1996, have heretofore been furnished to Bank, and are
true and complete and fairly represent the financial condition of Borrower
during the period covered thereby. Since December 31, 1995 and March 31, 1996,
there has been no material adverse change in the financial condition or
operations of Borrower.
3.5 Title. Except for assets which may have been disposed of in the ordinary
course of business, Borrower has good and marketable title to all of the
property reflected in its financial statements delivered to Bank and to all
property acquired by Borrower since the date of said financial statements, free
and clear of all liens, encumbrances, security interests and adverse claims
except those specifically referred to in said financial statements.
3.6 Litigation. There is no litigation or proceeding pending or threatened
against Borrower or any of its property which is reasonably likely to affect the
financial condition, property or business of Borrower in a materially adverse
manner or result in liability in excess of Five Million Dollars ($5,000,000.00),
except as disclosed on Borrower's financial statements.
3.7 Default. Borrower is not now in default in the payment of any of its
material obligations, and there exists no event, condition or act which
constitutes an event of default under Section 6 hereof and no condition, event
or act which with notice or lapse of time, or both, would constitute an event of
default.
3.8 Organization. Borrower is duly organized and existing under the laws of the
state of its organization, and has the power and authority to carry on the
business in which it is engaged and/or proposes to engage.
3.9 Power. Borrower has the power and authority to enter into this Agreement and
to execute and deliver the Note and the other Loan Documents.
3.10 Authorization. This Agreement and all things required by this Agreement
have been duly authorized by a11 requisite action of Borrower.
3.11 Qualification. Borrower is duly qualified and in good standing in any
jurisdiction where such qualification is required.
3.12 Compliance With Laws. Borrower is not in violation with respect to any
applicable laws, rules, ordinances or regulations which materially affect the
operations or financial condition of Borrower.
3.13 ERISA. Any defined benefit pension plans as defined in the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), of Borrower meet,
as of the date hereof, the minimum
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SanDisk Corporation 5
Trade Finance Agreement
July 1996
funding standards of Section 302 of ERISA, and no Reportable Event or Prohibited
Transaction as defined in ERISA has occurred with respect to any such plan.
3.14 Regulation U. No action has been taken or is currently planned by Borrower,
or any agent acting on its behalf, which would cause this Agreement or the Note
to violate Regulation U or any other regulation of the Board of Governors of the
Federal Reserve System or to violate the Securities and Exchange Act of 1934, in
each case as in effect now or as the same may hereafter be in effect. Borrower
is not engaged in the business of extending credit for the purpose of purchasing
or carrying margin stock as one of its important activities and none of the
proceeds of the Loan will be used directly or indirectly for such purpose. 3.15
Continuing Representations. These representations shall be considered to have
been made again at and as of the date each L/C is issued and each disbursement
of the Loan is made and shall be true and correct as of such date or dates.
SECTION 4. AFFIRMATIVE COVENANTS Until the Note and all sums payable pursuant to
this Agreement or any other of the Loan Documents have been paid in full, unless
Bank waives compliance in writing, Borrower agrees that:
4.1 Use of Proceeds. Borrower will use the proceeds of the Loan only as provided
in subsection 1.3 above.
4.2 Payment of Obligations. Borrower will pay and discharge promptly all taxes,
assessments and other governmental charges and claims levied or imposed upon it
or its property, or any part thereof, provided, however, that Borrower shall
have the right in good faith to contest any such taxes, assessments, charges or
claims and, pending the outcome of such contest, to delay or refuse payment
thereof provided that adequately funded reserves are established by it to pay
and discharge any such taxes, assessments, charges and claims.
4.3 Maintenance of Existence. Borrower will maintain and preserve its existence
and assets and all rights, franchises, licenses and other authority necessary
for the conduct of its business and will maintain and preserve its property,
equipment and facilities in good order, condition and repair. Bank may, at
reasonable times, visit and inspect any of the properties of Borrower.
4.4 Records. Borrower will keep and maintain full and accurate accounts and
records of its operations according to generally accepted accounting principles
and will permit Bank to have access thereto, to make examination and photocopies
thereof, and to make audits during regular business hours. Costs for such audits
shall be paid by Borrower.
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4.5 Information Furnished. Borrower will furnish to Bank:
(a) Within Forty Five days (45) days after the close of each fiscal quarter, its
10-Q as of the close of such fiscal quarter, prepared in accordance with
generally accepted accounting principles and the requirements of the Securities
and Exchange Commission;
(b) Within One Hundred and Twenty (120) days after the close of each fiscal
year, Form 10-K, in accordance with generally accepted accounting principles
applied on a basis consistent with that of the previous year and the
requirements of the Securities and Exchange Commission;
(c) (Deleted)
(d) Such other financial statements and information as Bank may reasonably
request from time to time;
(e) In connection with each financial statement provided hereunder, a statement
executed by the the president or chief financial officer of Borrower, certifying
that no default has occurred and no event exists which with notice or the lapse
of time, or both, would result in a default hereunder;
(f) (Deleted)
(g) Prompt written notice to Bank of all events of default under any of the
terms or provisions of this Agreement or of any other agreement, contract,
document or instrument entered, or to be entered into with Bank; and of any
litigation which, if decided adversely to Borrower, would have a material
adverse effect on Borrower's financial condition; and of any other matter which
has resulted in, or is likely to result in, a material adverse change in its
financial condition or operations; and
(h) Prior written notice to Bank of any changes in Borrower's officers and other
senior management; borrower's name; and location of Borrower's assets, principal
place of business or chief executive office;
4.6 Quick Ratio. Borrower shall maintain, on a quarterly basis, a ratio of cash
accounts receivable and marketable securities to current liabilities of not less
than 2.5:1.0 as such terms are defined by generally accepted accounting
principles.
4.7 Tangible Net Worth. Borrower will maintain a Minimum Tangible Net Worth of
not less than Seventy Million Dollars ($70,000,000.00), which amount shall be
increased by Fifty percent (50%) of its net profit for the quarter. "Tangible
Net Worth" shall mean net worth increased by indebtedness of Borrower
subordinated to Bank and decreased by patents, licenses, trademarks, trade
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names, goodwill, and other similar intangible assets, organizational expenses,
security deposits, prepaid costs and expenses and monies due from affiliates
(including officers, shareholders and directors).
4.8 Debt to Tangible Net Worth. Borrower will, on a quarterly basis, maintain a
ratio of total liabilities to Tangible Net Worth of not greater than 0.5:1.0.
Tangible Net Worth shall mean net worth increased by indebtedness of Borrower
subordinated to Bank and decreased by patents, licenses, trademarks, trade
names, goodwill, and other similar intangible assets, organizational expenses,
security deposits, prepaid costs and expenses and monies due from affiliates
(including officers, shareholders, and directors).
4.9 Profitability. Borrower will maintain its net profit, after provision for
income taxes, of not less than Six Million Dollars ($6,000,000.00) for the term
of this Agreement, and that there be no two consecutive quarterly after tax
losses as reported at the end of such fiscal quarter.
4.10 Insurance Borrower will keep all of its insurable property, real, personal
or mixed, insured by companies and in amounts approved by Bank against fire and
such other risks as are customarily insured against by companies conducting
similar business. Borrower will maintain workers compensation insurance,
insurance against liability for damage to persons or property and insurance to
cover loss of or to goods in transit to Borrower. Borrower will furnish to Bank
statements of its insurance coverage, will promptly furnish other or additional
insurance deemed necessary by and upon request of Bank to the extent that such
insurance may be available and hereby assigns to Bank, as security for
Borrower's obligations to Bank, the proceeds of any such insurance. All such
insurance shall be maintained in such amounts as is customarily obtained by
companies conducting similar business with respect to like risks.
4.11 Additional Requirements. Borrower will promptly, upon demand by Bank, take
such further action and execute all such additional documents and instruments in
connection with this Agreement as Bank in its reasonable discretion deems
necessary, and promptly supply Bank with such other information concurring its
affairs as Bank may request from time to time.
4.12 Litigation and Attorneys' Fees. Borrower will pay promptly to Bank upon
demand, reasonable attorneys' fees (including but not limited to the reasonable
estimate of the allocated costs and expenses of in-house legal counsel and legal
staff) and all costs and other expenses paid or incurred by Bank in collecting,
modifying or compromising the Loan or in enforcing or exercising its rights or
remedies created by, connected with or provided for in this Agreement or any of
the Loan Documents, whether or not an arbitration, judicial action or other
proceeding is commenced. If such proceeding is commenced, only the prevailing
party shall be entitled to attorneys' fees and court costs.
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4.13 Bank Expenses. Borrower will pay or reimburse Bank for all costs, expenses
and fees incurred by Bank in preparing and documenting this Agreement and the
Loan, and all amendments and modifications thereof, including but not limited to
all filing and recording fees, costs of appraisals, insurance and attorneys'
fees, including the reasonable estimate of the allocated costs and expenses of
in-house legal counsel and legal staff.
4.14 Reports Under Pension Plans. Borrower will furnish to Bank, as soon as
possible and in any event within 15 days after Borrower knows or has reason to
know that any event or condition with respect to any defined benefit pension
plans of Borrower described in Section 3 above has occurred, a statement of an
authorized officer of Borrower describing such event or condition and the
action, if any, which Borrower proposes to take with respect thereto.
SECTION 5. NEGATIVE COVENANTS
Until the Note and all other sums payable pursuant to this Agreement or any
other of the Loan Documents have been paid in full, unless Bank waives
compliance in writing, Borrower agrees that:
5.1 Encumbrances and Liens. Borrower will not create, assume or suffer to exist
any mortgage, pledge, security interest, encumbrance, or lien (other than for
taxes not delinquent and for taxes and other items being contested in good
faith) on property of any kind, whether real, personal or mixed, now owned or
hereafter acquired, or upon the income or profits thereof, except for minor
encumbrances and easements on real property which do not affect its market
value, and except for existing liens on Borrower's personal property and future
purchase money security interests encumbering only the personal property
purchased.
5.2 Borrowings. Borrower will not sell, discount or otherwise transfer any
account receivable or any note, draft or other evidence of indebtedness, except
to Bank or except to a financial institution at face value for deposit or
collection purposes only and without any fee other than fees normally charged by
the financial institution for deposit or collection services. Borrower will not
borrow any money, become contingently liable to borrow money, nor enter any
agreement to directly or indirectly obtain borrowed money, except pursuant to
agreements made with Bank.
5.3 Sale of Assets, Liquidation or Merger. Borrower will neither liquidate nor
dissolve nor enter into any consolidation, merger, partnership or other
combination, nor convey, nor sell, nor lease all or the greater part of its
assets or business, nor purchase or lease all or the greater part of the assets
or business of another.
5.4 Loans, Advances and Guaranties. Borrower will not, except in the ordinary
course of business as currently conducted, make any loans or advances, become a
guarantor or surety, pledge its credit or properties in any manner or extend
credit.
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5.5 Investments. Except for those eligible instruments outlined in Borrowers
investment policy provided to Bank, borrower will not purchase the debt or
equity of another person or entity except for savings accounts and certificates
of deposit of Bank, direct U.S. Government obligations and commercial paper
issued by corporations with the top ratings of Moody's or Standard & Poor's,
provided all such permitted investments shall mature within 24 months of
purchase.
5.6 Payment of Dividends. Borrower will not declare or pay any dividends, other
than a dividend payable in its own common stock, or authorize or make any other
distribution with respect to any of its stock now or hereafter outstanding.
5.7 Capital Expenditures. Borrower will not make capital expenditures in excess
of Ten Million Dollars ($10,000,000.00) in any fiscal year. Each said
expenditure shall be needed by Borrower in the ordinary course of its business.
Expenditures as used in this subsection shall include the current expense
portion of all leases whether or not capitalized and shall also include the
current portion of any debt used to finance capital expenditures.
SECTION 6. EVENTS OF DEFAULT
The occurrence of any of the following events ("Events of Default") shall
terminate any obligation on the part of Bank to make or continue the Loan and
automatically, unless otherwise provided under the Loan Documents, shall make
all sums of interest and principal and any other amounts owing under the Loan
immediately due and payable, without notice of default, presentment or demand
for payment, protest or notice of nonpayment or dishonor, or any other notices
or demands:
6.1 Borrower shall default in the due and punctual payment of the principal of
or the interest on the Note or any of the other Loan Documents; or
6.2 Any default shall occur under the Note; or
6.3 Borrower shall default in the due performance or observance of any covenant
or condition of the Loan Documents;
6.4 There is a change in ownership or control of ten percent (10%) or more of
the issued and outstanding stock of Borrower.
SECTION 7. MISCELLANEOUS PROVISIONS
7.1 Additional Remedies. The rights, powers and remedies given to Bank hereunder
shall be cumulative and not alternative and shall be in addition to all rights,
powers and remedies given to Bank by law against Borrower or any other person,
including but not limited to Bank's rights of set off or banker's lien.
<PAGE>
SanDisk Corporation 10
Trade Finance Agreement
July 1996
==============================================================================
7.2 Nonwaiver. Any forbearance or failure or delay by Bank in exercising any
right, power or remedy hereunder shall not be deemed a waiver thereof and any
single or partial exercise of any right, power or remedy shall not preclude the
further exercise thereof. No waiver shall be effective unless it is in writing
and signed by an officer of Bank.
7.3 Inurement. The benefits of this Agreement shall inure to the successors and
assigns of Bank and the permitted successors and assignees of Borrower, and any
assignment of Borrower without Bank's consent shall be null and void.
7.4 Applicable Law. This Agreement and all other agreements and instruments
required by Bank in connection therewith shall be governed by and construed
according to the laws of the State of California.
7.5 Severability. Should any one or more provisions of this Agreement be
determined to be illegal or unenforceable, all other provisions nevertheless
shall be effective.
7.6 Integration Clause. Except for documents and instruments specifically
referenced herein, this Agreement constitutes the entire agreement between Bank
and Borrower regarding the Loan and all prior communications verbal or written
between Borrower and Bank shall be of no further effect or evidentiary value.
7.7 Construction. The section and subsection headings herein are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
7.8 Amendments. This Agreement may be amended only in writing signed by all
parties hereto.
7.9 Counterparts. Borrower and Bank may execute one or more counterparts to this
Agreement, each of which shall be deemed an original.
SECTION 8. SERVICE OF NOTICES
8.1 Any notices or other communications provided for or allowed hereunder shall
be effective only when given by one of the following methods and addressed to
the respective party at its address given with the signatures at the end of this
Agreement and shall be considered to have been validly given: (a) upon delivery,
if delivered personally; (b) upon receipt, if mailed, first class postage
prepaid, with the United States Postal Service; (c) on the next business day, if
sent by overnight courier service of recognized standing; and (d) upon
telephoned confirmation of receipt, if telecopied.
8.2 The addresses to which notices or demands are to be given may be changed
from time to time by notice delivered as provided above.
<PAGE>
SanDisk Corporation 11
Trade Finance Agreement
July 1996
===============================================================================
THIS AGREEMENT is executed on behalf of the parties by duly authorized
officers as of the date first above written. UNION BANK, a Division of Union
Bank of California, N.A.
By: /s/ John Noble
------------------------------------------------
Name: John Noble
------------------------------------------------
Title: Vice President
------------------------------------------------
By: ________________________________________________
Name: ________________________________________________
Title: ________________________________________________
Address:
- - ------------------------------------------------------
- - ------------------------------------------------------
- - ------------------------------------------------------
Attention:____________________________________________
FAX:__________________________________________________
Telephone:____________________________________________
SANDISK CORPORATION
By: /s/ Cindy Burgdorf
------------------------------------------------
Name: Cindy Burgdorf
------------------------------------------------
Title: Sr. V.P. Finance/Admin, CFO & Secretary
------------------------------------------------
By: /s/ Eli Harari
------------------------------------------------
Name: Eli Harari
------------------------------------------------
Title: President
------------------------------------------------
Address:
- - ------------------------------------------------------
- - ------------------------------------------------------
- - ------------------------------------------------------
Attention:____________________________________________
FAX:__________________________________________________
Telephone:____________________________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SanDisk Financial Data Schedule, June 30, 1996
</LEGEND>
<CIK> 0001000180
<NAME> SanDisk Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 15,699
<SECURITIES> 51,243
<RECEIVABLES> 11,404
<ALLOWANCES> 0
<INVENTORY> 12,368
<CURRENT-ASSETS> 91,434
<PP&E> 7,231
<DEPRECIATION> 0
<TOTAL-ASSETS> 99,056
<CURRENT-LIABILITIES> 20,019
<BONDS> 0
0
0
<COMMON> 97,624
<OTHER-SE> (18,587)
<TOTAL-LIABILITY-AND-EQUITY> 99,056
<SALES> 45,301
<TOTAL-REVENUES> 45,301
<CGS> 27,779
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,152
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,891
<INCOME-TAX> 432
<INCOME-CONTINUING> 6,459
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,459
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
