<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 27, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SANDISK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
<TABLE>
<CAPTION>
DELAWARE 3572 77-0191793
<S> <C> <C>
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
140 CASPIAN COURT, SUNNYVALE, CALIFORNIA 94089
(408) 542-0500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
DR. ELI HARARI
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SANDISK CORPORATION
140 CASPIAN COURT, SUNNYVALE, CALIFORNIA 94089
(408) 542-0500
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<CAPTION>
<S> <C>
THOMAS W. KELLERMAN, ESQ. DONNA M. PETKANICS, ESQ.
TIMOTHY R. CURRY, ESQ. DANIEL R. MITZ, ESQ.
KIMBERLEY E. HENNINGSEN, ESQ. IVAN J. BROCKMAN, ESQ.
PATRICIA A. MONTALVO, ESQ. DAVID M. CAMPBELL, ESQ.
BROBECK, PHLEGER & HARRISON LLP WILSON SONSINI GOODRICH & ROSATI
TWO EMBARCADERO PLACE PROFESSIONAL CORPORATION
2200 GENG ROAD 650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94303 PALO ALTO, CALIFORNIA 94304
(650) 424-0160 (650) 493-9300
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, please check the
following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES AMOUNT TO BE AGGREGATE PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED (1) PER SHARE (2) OFFERING PRICE REGISTRATION FEE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value per share....... 3,450,000 28.0625 $96,815,625 $29,339
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Includes shares which the Underwriters have the option to purchase solely
to cover over-allotments, if any.
(2) The proposed maximum offering price per share and the registration fee
were calculated in accordance with Rule 457(c) based on the average of the
high and low prices for the Company's Common Stock on October 23, 1997, as
quoted in the Nasdaq National Market.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued October 27, 1997
3,000,000 Shares
[LOGO OF SANDISK CORP. APPEARS HERE]
COMMON STOCK
-----------
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE
COMPANY. THE COMPANY'S COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "SNDK." ON OCTOBER 24, 1997, THE LAST SALE PRICE OF THE
COMMON STOCK AS REPORTED ON THE NASDAQ NATIONAL MARKET WAS $27 1/2 PER
SHARE. SEE "PRICE RANGE OF COMMON STOCK."
-----------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 5 HEREOF.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- -----------
<S> <C> <C> <C>
Per Share.................... $ $ $
Total(3)..................... $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $400,000.
(3) The Company has granted the Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to an aggregate of 450,000
additional Shares at the price to public less underwriting discounts and
commissions for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total price to public,
underwriting discounts and commissions and proceeds to Company will be
$ , $ and $ , respectively. See
"Underwriters."
-----------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein, and subject to approval of certain legal matters
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the
Underwriters. It is expected that the delivery of the Shares will be made on or
about , 1997 at the office of Morgan Stanley & Co. Incorporated,
New York, N.Y., against payment therefor in immediately available funds.
-----------
MORGAN STANLEY DEAN WITTER
GOLDMAN, SACHS & CO.
BANCAMERICA ROBERTSON STEPHENS
, 1997
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED IN
CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATION OTHER THAN AS CONTAINED OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY ANY PERSON IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFERING OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
---- ----
<S> <C> <C> <C>
Incorporation of Certain Documents by Management's Discussion and Analysis of
Reference................................. 2 Financial
Prospectus Summary......................... 3 Condition and Results of Operations........ 18
The Company................................ 4 Business................................... 27
Risk Factors............................... 5 Management................................. 41
Use of Proceeds............................ 15 Underwriters............................... 43
Dividend Policy............................ 15 Legal Matters.............................. 45
Price Range of Common Stock................ 15 Experts.................................... 45
Capitalization............................. 16 Available Information...................... 45
Selected Consolidated Financial Data....... 17 Index to Consolidated Financial Statements. F-1
</TABLE>
--------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities Exchange Act
of 1934, as amended (the "Exchange Act") are incorporated herein by reference:
(i) the Company's Annual Report on Form 10-K for the year ended December 31,
1996; (ii) the Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997; (iii) the Company's
Current Report on Form 8-K filed with the Commission on October 16, 1997; (iv)
the Company's definitive Proxy Statement dated March 13, 1997 filed in
connection with the Company's 1997 Annual Meeting of Stockholders; (v) the
description of the Company's Common Stock contained in the Company's
Registration Statement on Form 8-A filed under Section 12 of the Exchange Act
with the Commission on September 8, 1995, including any amendment or report
updating such description; and (vi) the description of the Company's
stockholder rights contained in its Registration Statement on Form 8-A filed
with the Commission on April 28, 1997, as amended on May 15, 1997.
Each document filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering made hereby shall be deemed to be incorporated by
reference into this Prospectus and to be part hereof from the date of filing
of such document (all of such documents, and the documents enumerated above,
being hereinafter referred to as "Incorporated Documents"). Any statement
contained in an Incorporated Document shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed Incorporated Document
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company will provide without charge to each person to whom a copy of the
Prospectus is delivered, including any beneficial owner, upon the written or
oral request of such person, a copy of any or all of the Incorporated
Documents, other than exhibits to such documents unless such exhibits are
specifically incorporated by reference therein. Requests for such copies
should be submitted in writing or by telephone at (408) 542-0500 to
Shareholder Relations, SanDisk Corporation at the principal executive offices
of the Company, 140 Caspian Court, Sunnyvale, California 94089. The
information relating to the Company contained in this Prospectus does not
purport to be comprehensive and should be read together with the information
contained in the Incorporated Documents.
--------------
Except as set forth in the consolidated financial statements or as otherwise
indicated, all information in this Prospectus assumes no exercise of the
underwriters' over-allotment option. 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. For ease of presentation, the
accompanying financial statements have been shown as ending on the last day of
the relevant calendar month.
--------------
The SanDisk(R) name and logo, and the CompactFlash(TM) name and logo, are
trademarks of the Company. The CompactFlash Association makes the CompactFlash
name and logo available royalty-free to member companies. References in this
Prospectus to CompactFlash are references only to the Company's products
unless otherwise indicated. This Prospectus also includes trademarks of
companies other than the Company.
--------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
--------------
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITERS."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and consolidated financial
statements and notes thereto appearing elsewhere herein or incorporated by
reference in this Prospectus. Prospective investors should consider carefully
the factors described under "Risk Factors."
THE COMPANY
SanDisk designs, develops and markets flash memory data storage products used
in a wide variety of electronic systems. The Company has optimized its flash
memory storage solution, known as "system flash," to address the needs of many
emerging applications in the consumer electronics and industrial/communications
markets. Since its inception, the Company has been actively involved in all
aspects of flash memory process development, chip design, controller
development and system-level integration to ensure the creation of fully-
integrated, broadly interoperable products that are compatible with both
existing and new system platforms. The Company believes its core technical
competencies are in high-density flash memory process and design, controller
design, system-level integration, compact packaging and low-cost system test.
The Company's products include removable CompactFlash products and FlashDisk
cards, and embedded FlashDrives and Flash ChipSet products. SanDisk has
successfully applied its technology to the rapidly growing markets for digital
cameras and other consumer electronics devices such as personal digital
assistants. The Company was instrumental in the development of the PCMCIA
format and the CompactFlash format, which the Company believes is becoming the
de facto industry standard storage platform for digital cameras. SanDisk's
customers include Boeing Defense & Space Co., Canon Inc., Casio Manufacturing
Corporation, Eastman Kodak Company, Epson Hanbai Co., Ltd., Fujitsu-ICL
Systems, Hewlett-Packard Company, Kyocera America, Inc., Lucent Technologies,
Inc., Matsushita Electric Industrial Co., Ltd., NEC USA, Inc., Norand
Corporation, Pentax Corporation, Psion Computers PLC and Telxon Corporation.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered.............................. 3,000,000 shares
Common Stock to be outstanding after the offering. 25,720,573 shares(1)(2)
Use of proceeds................................... For general corporate
purposes, including working
capital, product
development and capital
expenditures.
Nasdaq National Market symbol..................... SNDK
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ ---------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenues:
Product................ $22,359 $20,551 $35,378 $61,589 $89,599 $67,599 $72,335
License and royalty.... -- -- -- 1,250 8,000 3,750 12,600
------- ------- ------- ------- ------- ------- -------
Total revenues....... 22,359 20,551 35,378 62,839 97,599 71,349 84,935
Gross profits........... 3,632 1,610 7,304 26,226 38,892 27,811 35,459
Operating income (loss). (6,042) (10,243) (4,781) 7,777 12,474 8,484 12,164
Net income (loss)....... $(5,969) $(9,990) (4,287) 9,065 14,485 10,102 12,617
Net income (loss) per
share (3).............. $ (.23) $ .43 $ .60 $ .42 $ .51
Shares used in computing
net income (loss) per
share (3).............. 18,872 20,856 24,206 24,204 24,504
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....... $ 60,323 $138,298
Working capital......................................... 48,022 125,997
Total assets............................................ 152,819 230,794
Long term obligations................................... -- --
Total stockholders' equity.............................. 102,026 180,001
</TABLE>
- ------
(1) Based on the number of shares outstanding as of September 30, 1997.
Excludes: (i) 2,933,617 shares of Common Stock issuable upon exercise of
stock options outstanding under the Company's 1995 Stock Option Plan; (ii)
96,000 shares of Common Stock issuable upon exercise of stock options
outstanding under the Company's 1995 Non-employee Directors Stock Option
Plan; (iii) warrants to purchase 106,363 shares of Common Stock; (iv)
2,680,801 shares available for future issuance under the Company's 1995
Stock Benefit Plan; (v) 665,186 shares available for future issuance under
the Company's Employee Stock Purchase Plan and (vi) 104,000 shares
available for future issuance under the Company's 1995 Non-Employee
Directors Stock Option Plan.
(2) Includes 6,141,374 shares owned by Seagate Technology, Inc., which prior to
the completion of this offering represents approximately 25% of the
Company's Common Stock on a fully-diluted basis.
(3) Amounts are pro forma in 1994. See Note 1 of Notes to Consolidated
Financial Statements.
(4) Adjusted to reflect the sale of 3,000,000 shares of Common Stock offered by
the Company at an assumed public offering price of $27 1/2 per share and
after deducting estimated underwriting discounts and commissions and
estimated offering expenses. See "Use of Proceeds" and "Capitalization."
3
<PAGE>
THE COMPANY
SanDisk designs, develops and markets flash memory data storage products
used in a wide variety of electronic systems. The Company has optimized its
flash memory storage solution, known as "system flash," to address the needs
of many emerging applications in the consumer electronics and
industrial/communications markets. Since its inception, the Company has been
actively involved in all aspects of flash memory process development, chip
design, controller development and system-level integration to ensure the
creation of fully-integrated, broadly interoperable products that are
compatible with both existing and new system platforms. The Company believes
its core technical competencies are in high-density flash memory process and
design, controller design, system-level integration, compact packaging and
low-cost system test. The Company's products include removable CompactFlash
products and FlashDisk cards, and embedded FlashDrives and Flash ChipSet
products. SanDisk has successfully applied its technology to the rapidly
growing markets for digital cameras and other consumer electronics devices
such as personal digital assistants ("PDAs"). The Company was instrumental in
the development of the PCMCIA format and the CompactFlash format, which the
Company believes is becoming the de facto industry standard storage platform
for digital cameras. SanDisk's customers include Boeing Defense & Space Co.,
("Boeing"), Canon Inc. ("Canon"), Casio Manufacturing Corporation ("Casio"),
Eastman Kodak Company ("Kodak"), Epson Hanbai Co., Ltd. ("Epson Hanbai"),
Fujitsu-ICL Systems ("Fujitsu"), Hewlett-Packard Company ("Hewlett-Packard"),
Kyocera America, Inc. ("Kyocera"), Lucent Technologies, Inc. ("Lucent"),
Matsushita Electric Industrial Co., Ltd. ("MEI"), NEC USA Inc. ("NEC USA"),
Norand Corporation ("Norand"), Pentax Corporation ("Pentax"), Psion Computers
PLC ("Psion") and Telxon Corporation ("Telxon").
In recent years, digital computing has expanded beyond the boundaries of
desktop computer systems to include a broad array of electronic systems such
as digital cameras, PDAs, cellular telephones, highly portable computers,
digital audio recorders, wireless base stations, network computers,
communications switches, mobile communication systems, handheld data
collection terminals, medical monitors, pay telephones and other electronic
systems. These applications have storage requirements that include small form
factor, high reliability, low power consumption and the capability to
withstand high levels of shock and vibration and extreme temperature
fluctuations. Such requirements are not well addressed by traditional storage
solutions such as rotating disk drives. Consequently, new market opportunities
have been created for data storage products that can satisfy these
requirements.
The Company's flash data storage products combine patented flash memory
chips with an integrated microcontroller in a system design that meets the
needs of many existing and emerging applications. The Company's products
comply with industry standards and are designed to be universally applicable
storage devices that are compatible across a wide range of electronic
applications, regardless of hardware platform, software operating system or
type of data stored. The use of non-volatile flash memory cells allows the
Company's products to retain information without power and to consume a
fraction of the power required by rotating disk drives. The Company's flash
data storage products are solid-state with no mechanical moving parts and
consequently are shock and vibration tolerant and operate in a wide variety of
temperature and humidity conditions. The Company's products utilize
sophisticated error detection and correction algorithms and dynamic defect
management techniques to provide high reliability and read/write endurance,
which can translate into decades of read/write usage without loss of data. All
of the Company's products offer forward and backward compatibility from one
product generation to the next. The Company's flash data storage products are
offered with memory capacities ranging from 2MB to 300MB.
The Company's strategy includes focusing on technological innovation and
reducing the cost of its flash data storage products in order to promote
broader acceptance of the Company's products in its target markets. The
Company seeks to promote the widespread acceptance of industry standards as a
means of developing the market for flash data storage products. The Company
has pursued long-term strategic relationships with manufacturing partners that
possess leading edge semiconductor technology and high volume manufacturing
capacity. This enables the Company to concentrate its resources on product
design, development, assembly and testing where the Company believes it has a
competitive advantage and eliminates the high cost of owning and operating a
semiconductor wafer fabrication facility. In this regard, the Company has
developed strategic relationships with Matsushita Electronics Corporation
("Matsushita"), LG Semicon ("LG Semicon"), NEC Corporation ("NEC") and United
Silicon, Inc. ("USIC"), a foundry joint venture headed by United
Microelectronics Corporation ("UMC"). The Company also has a strategic
relationship with Seagate Technology, Inc. ("Seagate"), which owns
approximately 25% of the Company's Common Stock on a fully-diluted basis prior
to this offering.
The Company was incorporated in Delaware in June 1988 under the name SunDisk
Corporation and changed its name to SanDisk Corporation in August 1995. The
Company's principal executive offices are located at 140 Caspian Court,
Sunnyvale, California 94089 and its telephone number is (408) 542-0500.
4
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus and in the documents
incorporated by reference herein, the following risk factors should be
considered carefully in evaluating an investment in the Company and its
business before purchasing the Common Stock offered by this Prospectus. The
sections entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" in this Prospectus contain forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), and Section 21E of the Exchange Act.
Actual results could differ materially from those projected in the forward-
looking statements as a result of the risk factors set forth below and
elsewhere in this Prospectus.
Fluctuations in Operating Results. SanDisk's operating results have been in
the past and are expected to be in the future, subject to quarterly and annual
fluctuations due to a variety of factors. For example, the Company's revenues
increased each quarter for the first three quarters of 1996 and then decreased
in both the last quarter of 1996 and the first quarter of 1997 before
increasing in the second and third quarters of 1997. The principal factors
that have caused the Company's operating results to fluctuate in the past
several quarters and may cause the Company's operating results to fluctuate in
the future are the unpredictable demand for the Company's products and
anticipated seasonality as sales of products for consumer electronics
applications become a greater proportion of the Company's product revenues.
The Company must order silicon wafers from its foundries several months prior
to the date such wafers are needed. If the Company overestimates the number of
silicon wafers it needs to fill product orders and as a result builds excess
inventories, gross margins and operating results will be materially adversely
affected. If the Company underestimates the number of silicon wafers required
in a particular quarter and is unable to fulfill customer orders promptly
after receipt of an order, the Company will risk losing potential sales and
customers. Since the Company is selling CompactFlash, its largest volume
product, into an emerging consumer market and is unable to accurately forecast
future sales, there will be a material adverse effect on the Company's
operating results if sales fall below the Company's expectations in a
particular quarter and the Company is unable to reduce its operating expenses.
The portion of the Company's quarterly sales attributable to orders received
and fulfilled in the same quarter remains high and product order backlog
fluctuates substantially from quarter to quarter. See "--Seasonality and "--
Dependence on Third Party Foundries."
Other factors affecting the Company's operating results and gross margins
include the volume of product sales, competitive pricing pressures, the
ability of the Company to match supply with demand, changes in product and
customer mix, market acceptance of new or enhanced versions of the Company's
products, changes in the channels through which the Company's products are
distributed, timing of new product announcements and introductions by the
Company and its competitors, the timing of license and royalty revenue,
fluctuations in product costs, availability of foundry capacity, variations in
manufacturing cycle time, fluctuations in manufacturing yields and
manufacturing utilization, the ability of the Company to achieve manufacturing
efficiencies with its new and existing products, increased research and
development expenses, exchange rate fluctuations and changes in the Company's
effective tax rate. All of these factors are difficult to forecast and these
or other factors can materially affect the Company's quarterly or annual
operating results or gross margins.
The Company has increased its expense levels to support its recent growth,
including expenses associated with the expansion of the Company's in-house
assembly and test operations. The Company expects to continue to increase its
operating expenses by hiring additional personnel to support expected growth,
increased marketing efforts and additional research and development
activities. If the Company does not achieve increased levels of revenues
commensurate with these increased levels of operating expenses, or if the
Company's revenues decrease or do not meet the Company's expectations for a
particular period, the Company's business, financial condition and results of
operations will be materially adversely affected.
The mix of the Company's products sold varies from quarter to quarter and
will vary in the future, affecting the Company's overall average selling
prices and gross margins. Over the last three quarters, the Company
experienced a shift in product mix to low capacity (2MB and 4MB) CompactFlash
cards that generally have
5
<PAGE>
lower average selling prices and lower gross margins than high capacity
products. This shift in product mix, coupled with lower pricing due to
competition, caused average selling prices to decline. The Company anticipates
that lower capacity products will continue to represent a significant portion
of its sales as consumer applications such as digital cameras become more
popular.
The Company has adopted a strategy of cross-licensing its patents to other
manufacturers of flash products. Under such arrangements, the Company earns
license fees and royalties on terms that are individually negotiated. The
timing of recognition of revenues from these payments depends on the terms of
each contract, and, in some cases, on the timing of product shipments by the
third parties. As a result, license and royalty revenue has fluctuated
significantly in the past and is likely to continue to fluctuate in the
future. Given the relatively high gross margins associated with license and
royalty revenue, gross margins and net income are likely to fluctuate more
with changes in license and royalty revenue than with changes in product
revenue.
Dependence on Emerging Markets and New Products. The Company's success
depends to a significant extent upon the development of emerging markets and
new applications for flash data storage systems, as well as on its ability to
introduce commercially attractive and competitively priced products on a
timely basis. The Company believes that continued significant expenditures for
research and development will be required in the future. In particular, the
Company intends to develop new products with increased memory capacity at a
lower cost per megabyte, which the Company believes will be essential to its
ability to remain competitive. There can be no assurance that the Company will
develop successfully these new products, that new applications or markets for
flash data storage will develop as expected by the Company, that prospective
customers developing products for any such markets will design the Company's
products into their products and successfully introduce such products, or that
products or technologies developed by others will not render the Company's
products or technologies obsolete or noncompetitive. The failure of new
applications or markets to develop or the failure of the Company's products to
be accepted by the market would have a material adverse effect on the
Company's business, financial condition and results of operations.
Increasing Dependence on Consumer Products. During the first nine months of
1997, the portion of the Company's product revenues derived from sales of
products for consumer electronics applications, principally digital cameras,
increased significantly and over this period represented the largest portion
of product revenues and units shipped. There can be no assurance, however,
that the Company will achieve large scale market acceptance for its products
in the consumer electronics market. The Company anticipates that products sold
for consumer applications will generally encounter intense competition and
will be more price sensitive than products sold into its other target markets.
In addition, consumer markets are more likely to experience seasonality of
sales, with potential declines in sales activity during the first quarter of
any year. Because of the large number of OEMs entering the digital camera
market, it is likely that not all of these manufacturers will be successful in
achieving market acceptance of their products. If SanDisk's OEM customers are
not successful in this market, such OEM customers may have excess inventories
of CompactFlash products, which may preclude follow-on orders or result in
sales of their CompactFlash inventories in the open market. In addition, if
market acceptance of digital cameras is slower than expected, or if the market
for CompactFlash becomes saturated, the Company may encounter reduced demand
for CompactFlash products, declining average selling prices or product
returns, any of which would have an adverse effect on the Company's results of
operations.
The Company anticipates that a greater proportion of its sales to the
consumer electronics market will be made through distributors and to retailers
than is the case with the industrial/communications market. This will be
particularly true if the level of after-market sales of flash memory products
increases. The Company is currently expending significant resources developing
a retail sales channel. The expenditures associated with this development are
likely to precede the realization of significant sales through this channel.
Moreover, the Company has no prior experience in the development or management
of the retail channel or sales through such channel. In addition, a
significant portion of retail sales for consumer applications will be made to
distributors and retail chains, which typically maintain rights to return
unsold inventory. As a result, the Company does not expect to recognize
revenues on sales to this channel until after the products have been sold to
end users. If the
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Company's retail customers are not successful in this market, there could be
substantial product returns to the Company. The inability to successfully
develop and effectively manage the retail sales channel could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Seasonality. The Company has experienced and expects to continue to
experience seasonality in its product sales. During the course of 1997, the
Company's product mix has increasingly shifted towards CompactFlash products,
which are sold principally for consumer electronics applications. The Company
anticipates that this trend will continue. As a result, the Company expects
that its product sales will be increasingly impacted by seasonal purchasing
patterns, with higher sales in the second half of each year as compared to the
first half of each such year. The Company believes product revenues during the
third quarter of 1997 included purchases by consumer electronics OEM customers
in anticipation of new product introductions and the fourth quarter holiday
season. In the past, the Company has experienced a reduction in order
quantities in the first quarter from Japanese OEM customers, reflecting the
fact that most customers in Japan operate on a fiscal year ending in March and
prefer to delay purchases until the beginning of their next fiscal year. As a
result of these factors, sales for the first quarter of 1998 are uncertain and
it is possible that product revenues in that quarter could be below the levels
experienced in the third quarter and anticipated in the fourth quarter of
1997. The Company expects that its operating expenses may continue to increase
over this time period. Accordingly, a decrease in revenues in any quarter
would adversely impact the Company's results of operations in that period.
Competition. The flash data storage markets in which the Company competes
are characterized by intense competition, rapid technological change, evolving
industry standards, declining average selling prices and rapid product
obsolescence. The Company's competitors include many large domestic and
international companies that have greater access to foundry capacity,
substantially greater financial, technical, marketing and other resources,
broader product lines and longer standing relationships with customers than
the Company. The Company's primary competitors include flash chip producers
such as Advanced Micro Devices, Inc. ("AMD"), Hitachi Ltd. ("Hitachi"), Intel
Corporation ("Intel"), Micron Technology, Inc. ("Micron"), Mitsubishi
Electronic Corporation ("Mitsubishi"), Samsung Electronics Company Ltd.
("Samsung"), Sharp Electronics Corporation ("Sharp") and Toshiba Corporation
("Toshiba"), other companies using data storage techniques such as socket
flash, linear flash and system flash components, as well as package assemblers
such as LEXAR Technology, Inc. ("LEXAR"), M-Systems, Inc. ("M-Systems"),
SIMPLE Technology Inc. ("SIMPLE"), SMART Modular Technologies, Inc. ("SMART
Modular") and Viking Components, Inc. ("Viking") that combine controllers and
flash memory chips developed by others into flash data storage cards. Hitachi,
LEXAR, Mitsubishi and Micron have been certified by the CompactFlash
Association ("CFA") to manufacture and sell their own brand of CompactFlash,
and the Company believes that other manufacturers will also seek to enter the
CompactFlash market in the future. Competing products promoting industry
standards that are different from SanDisk's CompactFlash product have been
announced, including Intel's Miniature Card, Toshiba's Solid-State Floppy Disk
Card and Sony Corporation's recently introduced Memory Stick. A manufacturer
of digital cameras that designs-in any one of these alternative competing
standards will eliminate CompactFlash from use in its product, as each
competing standard is mechanically and electronically incompatible with
CompactFlash. In addition, in the third quarter of 1997, Intel announced a
64Mbit flash chip based on its multilevel cell flash. The Company's double
density flash ("D2 flash") and Intel's multilevel cell flash are competing
technological innovations that allow each flash memory cell to store two bits
of information instead of the traditional single bit stored by the industry
standard flash technology. In the fourth quarter of 1996, Iomega Corporation
("Iomega") announced plans to introduce n.hand, a miniaturized, mechanical,
removable disk drive that may compete directly with SanDisk's flash card
products.
The Company expects competition to increase in the future from existing
competitors and from other companies that may enter the Company's existing or
future markets with similar or alternative data storage solutions that may be
less costly or provide additional features. Due to the high price sensitivity
in the market for consumer products, aggressive price competition has been
experienced for these applications. Such competition is expected to result in
lower gross margins in the future, if the Company's average selling prices
decrease faster than its costs.
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The Company has entered into patent cross-license agreements with Hitachi,
Intel, Samsung, Sharp and Toshiba, pursuant to which each party may
manufacture and sell products that incorporate technology covered by each
party's patents related to flash memory devices. As the Company continues to
license its patents to certain of its competitors, competition will increase.
As a result of the above factors, the Company expects to face substantially
more competition in the future than it has to date. Increased competition
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company believes that its ability to
compete successfully depends on a number of factors, which include price and
quality, product performance and availability, success in developing new
applications for system flash technology, adequate foundry capacity,
efficiency of production, timing of new product announcements or introductions
by the Company, its customers and its competitors, the ability of the
Company's competitors to incorporate their flash data storage systems into
their customers' products, the number and nature of the Company's competitors
in a given market, successful protection of intellectual property rights and
general market and economic conditions. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, financial condition or results of
operations.
Declining Average Sales Prices. The Company has experienced, and expects to
continue to experience, declining average sales prices for its products. The
flash data storage markets in which the Company competes are characterized by
increasing competition. Therefore, the Company expects to incur increasing
pricing pressures from its customers in future periods, which could result in
declining average sales prices for the Company's products. To offset declining
average sales prices, the Company believes that it must continue to achieve
manufacturing cost reductions as well as develop new products that incorporate
advanced features and can be sold at higher average gross margins. If,
however, the Company is unable to achieve such cost reductions, the Company's
gross margins could decline, and such decline could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Customer Concentration. A limited number of customers have historically
accounted for a substantial portion of the Company's revenues and the Company
expects this trend to continue. The Company's 10 largest customers accounted
for 71% and 55% of total revenues in 1996 and the first nine months of 1997,
respectively. Sales to the Company's customers are generally made pursuant to
standard purchase orders rather than long-term contracts. The Company has also
experienced significant changes in the composition of its major customer base
from year to year and expects this variability to continue as certain
customers increase or decrease their purchases of the Company's products as a
result of fluctuations in market demand for such customers' products. Under a
joint cooperation agreement signed in January 1993, Seagate has the option to
market the Company's products beginning in 1999 and, if exercised, the Company
will be required to coordinate sales with Seagate so that up to one-third of
the Company's worldwide net revenues could be generated from sales of the
Company's flash products through Seagate.
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. The Company has also entered into a wafer supply agreement
with NEC in Japan, pursuant to which the Company expects to receive initial
wafer shipments in 1998. In the third quarter of 1997, the Company made an
investment in USIC, a semiconductor manufacturing joint venture headed by UMC
in Taiwan, which has a fabrication facility currently under construction. The
Company is dependent on its foundries to allocate to the Company a portion of
their foundry capacity sufficient to meet the Company's needs, to produce
wafers of acceptable quality and with acceptable manufacturing yields and to
deliver those wafers to the Company on a timely basis. On occasion, the
Company has experienced difficulties in each of these areas. The loss or
reduction of capacity from Matsushita or LG Semicon or the inability to
qualify or receive the anticipated level of capacity from any of its
manufacturing partners could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the NEC fabrication facility will commence shipments on
schedule or that the USIC facility will be completed or will begin production
as scheduled, or that the processes needed to fabricate wafers for the Company
will be qualified at either facility. Moreover, there can be no assurance that
any of the Company's suppliers will be able to maintain acceptable yields or
deliver sufficient quantities of wafers on a timely basis.
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Under each of the Company's wafer supply agreements, the Company is
obligated to provide a monthly rolling forecast of anticipated purchase
orders. Except in limited circumstances and subject to acceptance by the
foundries, the estimates for the first three months of each forecast
constitute a binding commitment and the estimates for the remaining months may
not increase or decrease by more than a certain percentage from the previous
month's forecast. These restrictions limit the Company's ability to react to
significant fluctuations in demand for its products. As a result, the Company
has not been able to match its purchases of wafers to specific customer orders
and therefore the Company has taken write downs for potential excess inventory
purchased prior to the receipt of customer orders and may be required to do so
in the future. These adjustments decrease gross margins in the quarter
reported and have resulted, and could in the future result in fluctuations in
gross margins on a quarter to quarter basis. To the extent the Company
inaccurately forecasts the number of wafers required, it may have either a
shortage or an excess supply of wafers, either of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Additionally, if the Company is unable to obtain scheduled
quantities of wafers from any foundry with acceptable yields, the Company's
business, financial condition and results of operations could be negatively
impacted. See "--Fluctuations in Operating Results."
Dependence on Sole Source Suppliers and Third Party Subcontractors. The
Company purchases several critical components from single or sole source
vendors for which alternative sources are not currently available. Even where
alternative suppliers are available, a significant amount of time would be
required to qualify an additional vendor in the case of certain of the
Company's components. The Company does not maintain long-term supply
agreements with any of these vendors. The inability to develop alternative
sources for these single or sole source components or to obtain sufficient
quantities of these components could result in delays or reductions in product
shipments which could adversely affect the Company's business, financial
condition and results of operations. For example, the Company relies on
Motorola, Inc. ("Motorola") as the sole source of microcontrollers, which are
critical components in the Company's products. The sole source risk associated
with microcontrollers from Motorola is heightened during transitions from one
generation of microcontrollers to the next, given the limited safety stock
available during these transitions. In the event Motorola were to discontinue
shipment of microcontrollers for any reason, the time to design and qualify an
alternative source would be approximately nine to twelve months. The Company's
reliance on Motorola as its sole source of microcontrollers exposes the
Company to interruptions of supply that could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company uses third-party subcontractors to assemble the memory
components for its products and from time to time uses other subcontractors to
perform certain other assembly and test functions. The Company has no long
term agreements with these subcontractors. With the significant increases in
unit shipments in the last few quarters, the Company has from time to time
experienced capacity constraints in the memory assembly area. As a result of
this reliance on third party subcontractors for assembly of a portion of its
products, the Company cannot directly control product delivery schedules,
which can lead to product shortages or quality assurance problems that could
increase manufacturing costs of the Company's products. Any problems
associated with the delivery, quality or cost of the Company's products could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Risks Associated with Transitioning to New Processes and
Products. Successive generations of the Company's products incorporate
semiconductor devices with greater memory capacity per chip. In addition, the
Company is continually involved in joint development with its foundries to
produce semiconductor devices based upon smaller geometry manufacturing
processes. Most of the Company's wafers are currently manufactured using 0.5
micron process technology. The Company has started limited production of 0.4
micron flash wafers at Matsushita and expects to begin receiving 0.4 micron
wafers from LG Semicon in the first half of 1998. There can be no assurance
that the Company and its foundries will successfully complete the transition
from 0.5 to 0.4 micron process technology without adversely impacting wafer
yields or the effective cost per die, or that any of these suppliers will be
able to maintain acceptable yields or deliver sufficient quantities of wafers
on a timely basis. Both the development of higher capacity semiconductor
devices and the implementation of smaller
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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.
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.
In addition, Matsushita and LG Semicon are shifting their production
capacity from six inch wafers to eight inch wafers. Consequently, the Company
is planning to shift to volume production of eight inch wafers and discontinue
six inch wafer production at both facilities in 1998. There can be no
assurance that the transitions from six inch to eight inch wafer production
will be completed smoothly and without adversely impacting wafer yields or the
effective cost per die, or that any of these suppliers will be able to
maintain acceptable yields or deliver sufficient quantities of wafers on a
timely basis.
The Company has developed new products based on D2 flash technology, a new
flash system designed 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. High density flash memory, such as D2 flash, is a complex technology
requiring tight manufacturing controls and effective test screens. The shift
to volume production for new flash products is particularly prone to problems
which can impact both reliability and yields, thereby increasing manufacturing
costs. There can be no assurance that reliable and cost effective D2 flash
products can be manufactured in commercial volumes and with yields sufficient
to result in a lower cost per megabyte. Furthermore, flash data storage
products designed with D2 flash are expected to initially exhibit
approximately one-quarter of the write performance of the Company's existing
products when writing data into memory, potentially limiting their use in
certain applications.
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 errors in 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 were used. As a result, yield problems may
not be identified until the wafers are well into the production process. This
risk is increased due to the fact that the Company receives its wafers from
independent offshore foundries, increasing the effort and time required to
identify, communicate and resolve manufacturing yield problems. There can be
no assurance that the Company's foundries will achieve or maintain acceptable
manufacturing yields in the future. The inability of the Company to achieve
planned yields from its foundries could have a material adverse effect on the
Company's business, financial condition and results of operations.
Patents, Proprietary Rights and Related Litigation. The Company relies on a
combination of patents, trademarks, copyright and trade secret laws,
confidentiality procedures and licensing arrangements to protect its
intellectual property rights. The Company has been notified in the past and
the Company and its foundries may be notified in the future of claims that
they may be infringing patents or other intellectual property rights owned by
third parties. In the past the Company has been involved in significant
disputes regarding its intellectual property rights and believes it may be
involved in similar disputes in the future. There can be no assurance that in
the future any patents held by the Company will not be invalidated, that
patents will be issued for any of the Company's pending applications or that
any claims allowed from existing or pending patents will be of sufficient
scope or strength or be issued in the primary countries where the Company's
products can be sold to provide meaningful protection or any commercial
advantage to the Company. Additionally, competitors of the Company may be able
to design around the Company's patents.
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To preserve its intellectual property rights, the Company believes it may be
necessary to initiate litigation against one or more third parties, including
but not limited to those the Company has already notified of possible patent
infringement. In addition, one or more of these parties may bring suit against
the Company. In the event of an adverse result in any such litigation, the
Company could be required to pay substantial damages, cease the manufacture,
use and sale of infringing products, expend significant resources to develop
non-infringing technology, discontinue the use of certain processes or obtain
licenses to the infringing technology. Any litigation, whether as a plaintiff
or as a defendant, would likely result in significant expense to the Company
and divert the efforts of the Company's technical and management personnel,
whether or not such litigation is ultimately determined in favor of the
Company. In addition, the results of any litigation matter are inherently
uncertain. For example, in 1995, the Company informed Samsung that the Company
believed Samsung infringed certain of its patents. In response, Samsung filed
a complaint accusing the Company of infringing two of its patents. The Company
then filed a complaint against Samsung with the United States International
Trade Commission (the "ITC") alleging that Samsung and its U.S. sales arm were
importing and selling products that infringed two of the Company's patents.
After a hearing on this matter, the ITC issued an order that both SanDisk
patents were valid and that Samsung had infringed such patents, and prohibited
the import, sale, marketing, distribution or advertising of Samsung's
infringing flash memory circuits in the United States. In August 1997, the
Company and Samsung entered into a settlement agreement resolving all aspects
of this dispute, pursuant to which the parties agreed to cross-license certain
patents and Samsung agreed to make license and royalty payments to the
Company. While the Company believes it achieved a favorable result in this
matter, the expense and diversion of management attention in connection with
its resolution were substantial. In addition, the Company has notified several
large flash suppliers that the Company believes certain of their existing or
announced products infringe certain of the Company's patents.
In the event the Company desires to incorporate third party technology into
its products or is found to infringe on others' patents or intellectual
property rights, the Company may be required to license such patents or
intellectual property rights. The Company may also need to license some or all
of its patent portfolio to be able to obtain cross-licenses to the patents of
others. The Company currently has patent cross-license agreements with
Hitachi, Intel, Samsung, Sharp and Toshiba. From time to time, the Company has
also entered into discussions with other companies regarding potential cross-
license agreements for the Company's patents. However, there can be no
assurance that licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. If the Company obtains licenses
from third parties, it may be required to pay license fees or make royalty
payments, which could have a material adverse effect on the Company's gross
margins. The failure to obtain a license from a third party for technology
used by the Company could cause the Company to incur substantial liabilities
and to suspend the manufacture of products or the use by the Company's
foundries of processes requiring the technology, or to expend substantial
resources redesigning its products to eliminate the infringement. There can be
no assurance that the Company would be successful in redesigning its products
or that such licenses would be available under reasonable terms. Furthermore,
any such development or license negotiations could require substantial
expenditures of time and other resources by the Company.
As is common in the industry, the Company agrees to indemnify certain of its
suppliers and customers for alleged patent infringement. The scope of such
indemnity varies, but may, in some instances, include indemnification for
damages and expenses, including attorneys' fees. The Company may from time to
time be engaged in litigation as a result of such indemnification obligations.
Third party claims for patent infringement are excluded from coverage under
the Company's insurance policies. There can be no assurance that any future
obligation to indemnify the Company's customers or suppliers, will not have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Patents and Licenses."
Risks Associated with International Operations. In 1996 and the first nine
months of 1997, export sales accounted for approximately 55% of the Company's
total revenues. All of the Company's wafers are, and for the foreseeable
future will be, produced by foundries located outside the United States.
Because the Company currently purchases the majority of its flash wafers in
Japanese Yen at set prices, fluctuations in currencies could materially
adversely affect the Company's business, financial condition and results of
operations. Due to its
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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.
Management of Growth. The Company has recently experienced and may continue
to experience rapid growth, which has placed, and could continue to place, a
significant strain on the Company's limited personnel and other resources. To
manage such growth effectively, the Company will need to continue to implement
and improve its operational, financial and management information systems and
to hire, train, motivate and manage its employees. In particular, the Company
has recently experienced difficulty in hiring the engineering, sales and
marketing personnel necessary to support the growth of the Company's business.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting and retaining such personnel or
that the Company will be able to manage such growth effectively. The Company's
ability to manage its growth will require a significant investment in and
expansion of its existing internal information management systems to support
increased manufacturing, accounting and other management related functions.
The Company recently purchased a new management information system to replace
its existing in-house information system, and the implementation of this new
system will impact almost all phases of the Company's operations (i.e.,
planning, manufacturing, finance and accounting). This system is currently
scheduled to become operational in the second half of 1998. There can be no
assurance that the Company will not experience problems, delays or
unanticipated additional costs in implementing the new management information
system or in the use of its existing system that could have a material adverse
effect on the Company's business, financial condition and results of
operations, particularly in the period in which the new system is brought
online. In addition, the Company recently brought in-house certain assembly
operations that were previously performed by outside vendors. The Company has
limited experience in performing these functions and there can be no assurance
it will be able successfully integrate these operations into its manufacturing
process. In addition, if the Company experiences problems with these in-house
operations, it may be difficult to quickly substitute outside vendors. The
failure of the Company to successfully manage any of these issues would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Key Personnel. The Company's success depends to a significant
degree upon the continued contributions of members of its senior management
and other key research and development, sales, marketing and operations
personnel, including, in particular, Dr. Eli Harari, the Company's founder,
President and Chief Executive Officer. The loss of any of such persons could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company does not have an employment agreement
or non-competition agreement with any of its employees. See "Business--
Employees" and "Management."
Volatility of Stock Price. There has been a history of significant
volatility in the market prices of the Company's Common Stock on the Nasdaq
National Market, and it is likely that the market price of the Company's
Common Stock will continue to be subject to significant fluctuations. For
example, in 1997, the Company's stock price has fluctuated from a low of $8
7/8 to a high of $39 5/8. 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
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analysts, may cause the market price of the Common Stock to fluctuate
substantially in the future. Sales of substantial amounts of the Company's
outstanding Common Stock in the public market could materially adversely
affect the market price of the Common Stock. Further, in recent years the
stock market has experienced extreme price and volume fluctuations that have
particularly affected the market prices of equity securities of many high
technology companies and that often have been unrelated to the operating
performance of such companies. These fluctuations as well as general economic,
political and market conditions such as recessions or international currency
fluctuations, may materially adversely affect the market price of the Common
Stock. See "Price Range of Common Stock."
Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. As a
result, in less than three years, computer systems and/or software used by
many companies may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists concerning the potential effects
associated with such compliance. The Company is currently implementing a new
managment information system that is Year 2000 compliant. Any Year 2000
compliance problem of either the Company or its customers could result in a
material adverse effect on the Company's business, operating results and
financial condition.
Shares Eligible For Future Sale; Registration Rights. Sales of substantial
numbers of shares of Common Stock in the public market following this offering
could materially adversely affect the market price of the Common Stock. Upon
completion of this offering, the Company will have outstanding 25,720,573
shares of Common Stock, all of which will be freely tradeable in the public
market, subject to limitations on sales of shares held by "affiliates" of the
Company as defined in Rule 144 promulgated under the Securities Act. However,
the executive officers, directors and certain other stockholders of the
Company, who will together hold 8,629,814 of the outstanding shares upon
completion of this offering, have agreed that for a period of 90 days from the
date of this Prospectus and without the prior written consent of Morgan
Stanley & Co. Incorporated they will not (i) offer, pledge, sell, contract to
sell, sell any option contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer,
lend or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock,
or (ii) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (i) or (ii) above is
to be settled by delivery of Common Stock or such other securities, in cash or
otherwise, other than an aggregate of 100,000 shares by all such executive
officers and directors which shall include no more than 40,000 shares by any
one person. The Company has also agreed, subject to certain exceptions, that
without the prior written consent of Morgan Stanley & Co. Incorporated, it
will not issue, offer, sell or otherwise dispose of any of the Company's
equity securities or any other securities convertible into or exchangeable for
the Company's Common Stock for a period of 90 days after the date of this
Prospectus. However, the Company may, without such consent, grant options or
issue stock upon the exercise of outstanding stock options pursuant to the
Company's stock option plans. In addition, Seagate and certain other
stockholders who in the aggregate beneficially own 6,874,926 shares of Common
Stock hold certain rights with respect to the registration for the offer or
sale to the public of such shares. Upon completion of the offering, there will
be outstanding options to purchase a total of approximately 3,029,617 shares
of the Company's Common Stock under the Company's stock option plans.
Effect of Anti-Takeover Provisions. The Company has taken a number of
actions that could have the effect of discouraging a takeover attempt that
might be beneficial to stockholders who wish to receive a premium for their
shares from a potential bidder. The Company has adopted a Shareholder Rights
Plan that would cause substantial dilution to a person who attempts to acquire
the Company on terms not approved by the Company's Board of Directors. The
Shareholder Rights Plan may therefore have the effect of delaying or
preventing any change in control and deterring any prospective acquisition of
the Company. In addition, the Company's Certificate of Incorporation grants
the Board of Directors the authority to issue up to 4,000,000 shares of
Preferred Stock and to determine the price, rights, preferences and privileges
of those shares without any further
13
<PAGE>
vote or action by the Company's stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any shares of Preferred Stock that may be issued in the
future. While the Company has no present intention to issue shares of
Preferred Stock, such issuance, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult or less attractive for a third party to
acquire a majority of the outstanding voting stock of the Company. Such
Preferred Stock may also have other rights, including economic rights senior
to the Common Stock, and, as a result, the issuance thereof could have a
material adverse effect on the market value of the Common Stock. Furthermore,
the Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law ("Section 203"), which prohibits the company
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
first becomes an "interested stockholder," unless the business combination is
approved in a prescribed manner. The application of Section 203 also could
have the effect of delaying or preventing a change of control of the Company.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby are estimated to be approximately $78.0 million
(approximately $89.7 million if the Underwriters' over-allotment option is
exercised in full), at an assumed public offering price of $27 1/2 per share
and after deducting estimated underwriting discounts and commissions and
estimated offering expenses.
The purpose of this offering is to obtain additional capital to fund the
growth of the Company. The Company intends to use the net proceeds from this
offering for general corporate purposes, including working capital, product
development and capital expenditures. A portion of the net proceeds may also
be used to procure additional wafer supply arrangements with foundry partners,
to acquire or invest in complementary businesses or products or to obtain the
right to use complementary technologies. The Company has no current plans,
agreements or commitments with respect to any such procurements, acquisitions
or investments, and the Company is not currently engaged in any negotiations
with respect to any such transactions. Pending such uses, the Company plans to
invest the net proceeds in investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock
and does not anticipate paying cash dividends in the foreseeable future. In
addition, the Company's existing bank line of credit agreement currently
prohibits the payment of cash dividends on its capital stock without the
bank's consent. The Company currently intends to retain its earnings, if any,
for use in its business.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "SNDK" since November 8, 1995, the date of the Company's
initial public offering. The following table sets forth, for the periods
indicated, the high and low closing sale prices for the Common Stock as
reported on the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal Year Ended December 31, 1995:
Fourth Quarter (from November 8, 1995)..................... $28 $15
Fiscal Year Ended December 29, 1996:
First Quarter.............................................. 21 1/2 12 1/2
Second Quarter............................................. 16 3/4 11
Third Quarter.............................................. 16 10 1/8
Fourth Quarter............................................. 15 1/2 11 1/4
Fiscal Year Ending December 31, 1997:
First Quarter.............................................. 13 1/4 8 7/8
Second Quarter............................................. 14 1/2 9 3/4
Third Quarter.............................................. 34 1/8 14 3/4
Fourth Quarter (through October 24, 1997).................. 39 5/8 27 1/2
</TABLE>
On October 24, 1997, the last reported sale price for the Company's Common
Stock on the Nasdaq National Market was $27 1/2 per share. At September 30,
1997, there were approximately 256 holders of record and over 400 beneficial
holders of the Common Stock.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 (i) on an actual basis and (ii) as adjusted to reflect the
receipt by the Company of the estimated net proceeds from the sale of the
3,000,000 shares of Common Stock offered by the Company hereby at an assumed
public offering price of $27 1/2 and after deducting estimated underwriting
discounts and commissions and estimated offering expenses:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-----------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS,
EXCEPT SHARE
DATA)
<S> <C> <C>
Stockholders' equity:
Common stock, $.001 par value; 40,000,000 shares
authorized; 22,720,573 shares issued and outstanding
actual; 25,720,573 shares issued and outstanding as
adjusted(1)........................................... $ 23 $ 26
Preferred stock, $.001 par value; 4,000,000 shares
authorized; none issued and outstanding............... -- --
Capital in excess of par value......................... 99,814 177,786
Retained earnings...................................... 2,189 2,189
-------- --------
Total stockholders' equity............................. 102,026 180,001
-------- --------
Total capitalization................................. $102,026 $180,001
======== ========
</TABLE>
- --------
(1) Excludes as of September 30, 1997: (i) 2,933,617 shares of Common Stock
issuable upon exercise of stock options outstanding under the Company's
1995 Stock Option Plan; (ii) 96,000 shares of Common Stock issuable upon
exercise of stock options outstanding under the Company's 1995 Non-
employee Directors Stock Option Plan; (iii) warrants to purchase 106,363
shares of Common Stock; (iv) 2,680,801 shares available for future
issuance under the Company's 1995 Stock Benefit Plan; (v) 665,186 shares
available for future issuance under the Company's Employee Stock Purchase
Plan; and (vi) 104,000 shares available for future issuance under the
Company's 1995 Non-Employee Directors Stock Option Plan.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and related
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere in this Prospectus. The
consolidated statements of operations data for each of the three years in the
period ended December 31, 1996, and the consolidated balance sheets data at
December 31, 1995 and 1996, are derived from the consolidated financial
statements of the Company, which have been audited by Ernst & Young LLP,
independent auditors, and included elsewhere herein. The consolidated
statements of operations data for the years ended December 31, 1992 and 1993
and the consolidated balance sheets data at December 31, 1992, 1993 and 1994
are derived from audited financial statements not included herein. The
consolidated statements of operations data for the nine month periods ended
September 30, 1996 and 1997, and the consolidated balance sheets data at
September 30, 1997 are derived from unaudited consolidated financial
statements included elsewhere herein and include, in management's opinion, all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information. Operating results for the nine month
period ended September 30, 1997 are not necessarily indicative of results to
be expected for the year ending December 31, 1997 or any future period. The
data presented below should be read in conjunction with the financial
statements, related notes and other financial information included elsewhere
herein and incorporated herein by reference.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenues:
Product................ $22,359 $20,551 $35,378 $61,589 $89,599 $67,599 $72,335
License and royalty.... -- -- -- 1,250 8,000 3,750 12,600
------- ------- ------- ------- ------- ------- -------
Total revenues....... 22,359 20,551 35,378 62,839 97,599 71,349 84,935
Cost of revenues........ 18,727 18,941 28,074 36,613 58,707 43,538 49,476
------- ------- ------- ------- ------- ------- -------
Gross profits.......... 3,632 1,610 7,304 26,226 38,892 27,811 35,459
Operating expenses:
Research and
development........... 6,059 5,750 5,918 8,043 10,181 7,280 9,634
Sales and marketing.... 2,129 3,498 3,996 6,564 8,792 6,467 8,728
General and
administrative........ 1,486 2,605 2,171 3,842 7,445 5,580 4,933
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 9,674 11,853 12,085 18,449 26,418 19,327 23,295
------- ------- ------- ------- ------- ------- -------
Operating income (loss). (6,042) (10,243) (4,781) 7,777 12,474 8,484 12,164
Interest and other
income, net............ 277 445 593 1,749 3,154 2,320 2,680
Interest expense........ (204) (192) (99) (37) (3) -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) before
taxes.................. (5,969) (9,990) (4,287) 9,489 15,625 10,804 14,844
Provision for income
taxes.................. -- -- -- 424 1,140 702 2,227
------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $(5,969) $(9,990) $(4,287) $ 9,065 $14,485 $10,102 $12,617
======= ======= ======= ======= ======= ======= =======
Net income (loss) per
share(1)............... $ (.23) $ .43 $ .60 $ .42 $ .51
======= ======= ======= ======= =======
Shares used in computing
net income (loss) per
share(1)............... 18,872 20,856 24,206 24,204 24,504
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------- SEPT. 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS
DATA:
Cash, cash equivalents and
short-term investments.... $ 3,566 $21,886 $20,635 $ 68,395 $ 74,288 $ 60,323
Working capital............ 5,527 25,266 20,971 68,002 77,029 48,022
Total assets............... 13,522 32,594 31,861 92,147 108,268 152,819
Long-term obligations...... 957 621 93 -- -- --
Total stockholders' equity
.......................... 7,814 27,862 23,672 72,381 87,810 102,026
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of the shares used in computing net
income (loss) per share. Amounts are pro forma in 1994.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to the other information in this Prospectus and in the documents
incorporated by reference herein, the following discussion should be
considered carefully in evaluating the Company and its business before
purchasing the Common Stock offered by this Prospectus. This section,
including in particular the second paragraph under the discussion of product
revenues for the nine months ended September 30, 1996 and 1997, and the
sections entitled "Risk Factors" and "Business" in this Prospectus contain
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Actual results could differ
materially from those projected in the forward-looking statements as a result
of the risk factors set forth under "Risk Factors" and elsewhere in this
Prospectus.
OVERVIEW
The Company was founded in 1988 to develop and market flash data storage
systems. The Company sells its products to the consumer electronics and
industrial/communications markets. During the course of 1997, the percentage
of the Company's product sales attributable to the consumer electronics
market, particularly sales of CompactFlash for use in digital camera
applications, has increased substantially. This increase in sales to the
consumer market has resulted in a shift to lower capacity products, which
typically have lower average selling prices and gross margins than higher
capacity products. In addition, these products are frequently sold into the
retail channel, which usually has shorter customer order lead-times than the
other channels used by the Company, thereby decreasing the Company's ability
to accurately forecast future production needs. Subject to market acceptance
of its CompactFlash products, the Company believes these products will
continue to represent a majority of the Company's sales as the popularity of
consumer applications, including digital cameras, increases. The percentage of
sales attributable to orders received and fulfilled in the same quarter has
increased over time and, in response, the Company is continuing to work to
shorten its manufacturing cycle times.
The Company's operating results are affected by a number of factors
including the volume of product sales, the timing of significant orders,
competitive pricing pressures, the ability of the Company to match supply with
demand, changes in product and customer mix, market acceptance of new or
enhanced versions of the Company's products, changes in the channels through
which the Company's products are distributed, timing of new product
announcements and introductions by the Company and its competitors, the timing
of license and royalty revenue, fluctuations in product costs, availability of
foundry capacity, variations in manufacturing cycle times, fluctuations in
manufacturing yields and manufacturing utilization, increased research and
development expenses, exchange rate fluctuations and changes in the Company's
effective tax rate. In addition, as the proportion of the Company's products
sold for use in consumer electronics applications increases, the Company's
revenues may become subject to seasonal declines in the first quarter of each
year. See "Risk Factors--Fluctuations in Operating Results" and "--
Seasonality."
Beginning in late 1995, the Company adopted a strategy of licensing its
flash technology, including its patent portfolio, to selected third party
manufacturers of flash products. To date, the Company has entered into patent
cross-license agreements with five major companies, and it intends to pursue
opportunities to enter into additional licenses. The Company's current license
agreements provide for the payment of license fees, royalties, or a
combination thereof, to the Company. The timing and amount of these payments
can vary substantially from quarter to quarter, depending on the terms of each
agreement and, in some cases, the timing of sales of products by the other
parties. As a result, license and royalty revenues have fluctuated
significantly in the past and are likely to continue to fluctuate in the
future. Given the relatively high gross margins associated with license and
royalty revenues, gross margins and net income are likely to fluctuate more
with changes in license and royalty revenues than with changes in product
revenues.
SanDisk markets its products using a direct sales organization,
distributors, manufacturers' representatives, private label partners, OEMs and
retailers. The Company expects that sales through the retail channel will
18
<PAGE>
comprise an increasing share of total revenues in the future, and that a
substantial portion of its sales into the retail channel will be made to
participants that will have the right to return unsold products. The Company
does not expect to recognize revenues from these sales until the products are
sold to the end customers. See "Business--Sales and Distribution."
Historically, a majority of the Company's sales have been to a limited
number of customers. Sales to the Company's top 10 customers accounted for
approximately 80%, 71% and 55%, respectively, of the Company's total revenues
for 1995, 1996 and the nine months ended September 30, 1997. The Company
expects that sales of its products to a limited number of customers will
continue to account for a substantial portion of its total revenues for the
foreseeable future. The Company has also experienced significant changes in
the composition of its customer base from year to year and expects this
pattern to continue as market demand for such customers' products fluctuates.
For example, during the fourth quarter of 1996, the volume of large OEM orders
decreased due to the timing of customers' product introductions. The loss of,
or significant reduction in purchases by, major customers, could have a
material adverse effect on the Company's business, financial condition and
results of operations. The majority of the Company's sales in 1996 were of
FlashDisk cards. However, during the first nine months of 1997, the largest
portion of the Company's sales were of CompactFlash products. See "Risk
Factors--Customer Concentration" and "Business--Sales and Distribution."
Due to the emerging nature of the Company's markets and certain planned
product transitions, the Company has had difficulty forecasting future
inventory levels required to meet customer demand. As a result of both
contractual obligations and manufacturing cycle time, the Company has been
required to order wafers from its foundries several months in advance of the
ultimate shipment of its products. Under the Company's wafer supply
agreements, there are limits on the number of wafers the Company can order and
the Company's ability to change that quantity is restricted. Accordingly, the
Company's ability to react to significant fluctuations in demand for its
products is limited. As a result, the Company has not been able to match its
purchases of wafers to specific customer orders and therefore the Company has
taken write downs for potential excess inventory purchased prior to the
receipt of customer orders. These adjustments decrease gross margins in the
quarter reported and have resulted, and could in the future result, in
fluctuations in gross margins on a quarter to quarter basis. See "Risk
Factors--Fluctuations in Operating Results."
Export sales are an important part of the Company's business, constituting
55% of the Company's total revenues in 1996 and in the nine months ended
September 30, 1997. While most of the Company's sales are denominated in U.S.
Dollars, the Company invoices certain Japanese customers in Japanese Yen and
is subject to exchange rate fluctuations on these transactions. To date, a
significant portion of the Company's purchases of wafers, which constitute a
significant part of its cost of goods sold, have been denominated in Japanese
Yen. While this percentage has been decreasing, exchange rate fluctuations can
affect the Company's business, financial condition and results of operations.
For the foreseeable future, the Company expects to realize a significant
portion of its revenues from recently introduced and new products. Typically
new products initially have lower gross margins than more mature products
because the manufacturing yields are lower at the start of manufacturing each
successive product generation. In addition, manufacturing yields are generally
lower at the start of manufacturing any product at a new foundry, such as NEC
and USIC. To remain competitive, the Company is focusing on a number of
programs to lower its manufacturing costs. These include transitioning from
single to double density flash designs, from 0.5 to 0.4 micron manufacturing
processes, and from six inch to eight inch wafers. These transitions are
expected to occur over the next several quarters. As a result of these
factors, the Company expects that product gross margins may decline in the
near term from the level experienced in the quarter ended September 30, 1997,
and product gross margins are expected to be subject to fluctuation for the
foreseeable future. Moreover, there can be no assurance that such devices or
processes will be successfully developed by the Company or that development of
such processes will lower manufacturing costs. In addition, the Company
anticipates that price competition will increase in the future, which will
likely result in decreased average selling prices and lower gross margins. See
"Risk Factors--Manufacturing Yields" and "--Declining Average Sales Prices."
19
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of revenues, consolidated
statement of operations data for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED SEPTEMBER
DECEMBER 31, 30,
-------------------- ------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Product................................... 100.0% 98.0% 91.8% 94.7% 85.2%
License and royalty....................... -- 2.0 8.2 5.3 14.8
----- ----- ----- ----- -----
Total revenues.............................. 100.0 100.0 100.0 100.0 100.0
Cost of revenues............................ 79.4 58.3 60.2 61.0 58.3
----- ----- ----- ----- -----
Gross profits............................... 20.6 41.7 39.8 39.0 41.7
Operating expenses:
Research and development.................. 16.7 12.8 10.4 10.2 11.4
Sales and marketing....................... 11.3 10.4 9.0 9.1 10.2
General and administrative................ 6.1 6.1 7.6 7.8 5.8
----- ----- ----- ----- -----
Total operating expenses................ 34.1 29.3 27.0 27.1 27.4
----- ----- ----- ----- -----
Operating income (loss)..................... (13.5) 12.4 12.8 11.9 14.3
Interest and other income, net.............. 1.7 2.7 3.2 3.3 3.2
Interest expense............................ (.3) -- -- -- --
----- ----- ----- ----- -----
Income (loss) before taxes.................. (12.1) 15.1 16.0 15.2 17.5
Provision for income taxes.................. -- .7 1.2 1.0 2.6
----- ----- ----- ----- -----
Net income (loss)........................... (12.1)% 14.4% 14.8% 14.2% 14.9%
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
Product Revenues. SanDisk's product revenues were $72.3 million for the
first nine months of 1997, up $4.7 million or 7% from the same period in 1996.
During the first nine months of 1997, units shipped increased 149% as compared
to the same period in 1996. The largest increase came from sales of
CompactFlash products, primarily for use in digital cameras and other consumer
electronics applications. In the second and third quarters of 1997, sales of
CompactFlash products exceeded sales of PCMCIA flash cards. In the first nine
months of 1997, CompactFlash products represented approximately 74% of all
units shipped and 47% of product revenues. This shift in product mix from
PCMCIA flash cards to CompactFlash cards, which have lower capacities,
contributed to a decline in average selling prices of 57% in the first nine
months of 1997 compared to the same period last year. The Company anticipates
that lower capacity products will continue to represent a significant portion
of its sales as consumer applications such as digital cameras become more
popular. Sales of these lower capacity products generally have lower average
selling prices and gross margins than higher capacity products. The mix of
products sold varies from quarter to quarter and may vary in the future,
affecting the Company's overall average selling prices and gross margins.
Orders for the Company's products increased during the third quarter of 1997
as consumer electronics OEM customers increased their inventory of
CompactFlash products in preparation for the upcoming holiday season and their
new product introductions. Although the Company has limited visibility as to
customer orders, the Company expects product revenues in the fourth quarter of
1997 to be flat, or possibly up slightly relative to the third quarter of
1997. Due to a number of factors described herein and in "Risk Factors," the
Company's ability to adjust its operating expenses is limited in the short
term. As a result, if product revenues are lower than anticipated, the
Company's results of operations will be adversely affected. The outlook for
product revenues for the first quarter of 1998 is also uncertain due to the
unpredictable demand in the new and emerging markets for the Company's
products and the anticipated seasonality of the consumer electronics markets.
See "Risk Factors--Fluctuations in Operating Results" and "--Seasonality."
20
<PAGE>
License and Royalty Revenues. The Company currently earns patent license
fees and royalties under five cross-license agreements, of which agreements
with Hitachi, Toshiba and Samsung were entered into in the third quarter of
1997. SanDisk also has cross-license agreements with Intel and Sharp. License
and royalty revenue from patent cross-license agreements was $12.6 million for
the first nine months of 1997, up $8.8 million from $3.8 million in the
comparable period of 1996. Revenues from licenses and royalties increased to
15% of total revenues in the first nine months of 1997 from 5% in the
comparable period of 1996.
Gross Profits. In the first nine months of 1997, gross profits increased to
$35.5 million or 42% of total revenues from $27.8 million or 39% of total
revenues for the same period in 1996. The growth in overall gross profits
resulted from an increase in license and royalty revenues, which was partially
offset by a decline in gross profit from product sales. Product gross profits
declined as a percentage of product revenues to 32% for the first nine months
of 1997 compared to 36% for the same period in 1996. This decline was
primarily due to the shift in product mix to lower capacity CompactFlash
products that have lower average selling prices and gross margins. This
decline in gross margins was partially offset by the Company's shift to more
in-house assembly and test. The Company anticipates that lower capacity
products will continue to represent a significant portion of its sales as
consumer applications such as digital cameras become more popular. The Company
expects product gross margins may decrease slightly in the fourth quarter of
1997 due to anticipated increased competition.
Research and Development. Research and development expenses consist
principally of salaries and payroll related expenses for design and
development engineers, prototype supplies and contract services. Research and
development expenses increased $2.4 million or 32% to $9.6 million for the
first nine months of 1997 from $7.3 million for the same period in 1996.
Research and development expenses represented 11% of total revenues for the
first nine months of 1997 compared to 10% for the same period in 1996. The
increase in research and development expenses was primarily due to an increase
in salaries and payroll-related expenses associated with additional personnel.
Increased depreciation due to capital equipment additions and higher project
related expenses also contributed to the growth in research and development
expenses. The Company expects research and development expenses to continue to
increase in absolute dollars to support the development of new generations of
flash data storage products and the addition of new foundries to manufacture
the Company's products.
Sales and Marketing. Sales and marketing expenses include salaries, sales
commissions, benefits and travel expenses for the Company's sales, marketing,
customer service and applications engineering personnel. These expenses also
include other selling and marketing expenses, such as independent
manufacturer's representative commissions, advertising and tradeshow expenses.
Sales and marketing expenses increased $2.3 million or 35% to $8.7 million for
the first nine months of 1997 from $6.5 million for the same period in 1996.
Sales and marketing expenses represented 10% of total revenues for the first
nine months of 1997 compared to 9% for the same period in 1996. The increase
in sales and marketing expenses was primarily due to an increase in salaries
and payroll related expenses associated with additional personnel. Higher
marketing, travel and selling expenses also contributed to this increase. The
Company expects sales and marketing expenses to increase in absolute dollars
as sales of its products grow and as it develops the retail channel for its
products.
General and Administrative. General and administrative expenses include the
cost of the Company's finance, information systems, human resources,
shareholder relations, legal and administrative functions. General and
administrative expenses decreased $0.6 million or 12% to $4.9 million in the
first nine months of 1997 from $5.6 million for the same period of 1996.
General and administrative expenses represented 6% of revenues in the first
nine months of 1997 compared to 8% for the same period of 1996. This decrease
was primarily due to a reduction in legal fees. The first nine months of 1996
included significant legal fees related to the Samsung litigation. The
decrease in legal fees was partially offset by increased salaries and payroll-
related expenses associated with increased personnel, increased allowance for
doubtful accounts and higher consulting expenses related to the implementation
of the Company's new management information system. The Company expects
general and administrative expenses to increase in absolute dollars as the
general and administrative functions grow to support the overall growth of the
Company. General and administrative expenses could also increase substantially
in the future if the Company pursues litigation to defend its patent
portfolio. See "Risk Factors--Patents, Proprietary Rights and Related
Litigation."
21
<PAGE>
Interest and Other Income, Net. Interest and other income, net, increased
$360,000 for the nine months ended September 30, 1997 compared to the same
period in 1996. This was primarily due to higher interest rates on short term
investments.
Provision for Income Taxes. The Company recorded a provision for income
taxes at a 15% effective tax rate for the first nine months of 1997 compared
to a 6.5% effective tax rate for the same period of 1996. The effective tax
rate for the first nine months of 1997 is substantially below the federal
statutory rate due to the utilization of federal and state tax credit
carryforwards, foreign sales corporation tax benefits and a reduction in the
deferred tax asset valuation allowance. The Company's 1997 effective tax rate
is substantially higher than its 1996 rate due to the utilization of all
federal net operating loss carryforwards in 1996.
Due to increased license and royalty revenues and growth in the Company's
net income in 1997, the Company anticipates that it will utilize the remainder
of its tax credit carryforwards in the current fiscal year. The Company's
effective tax rate is expected to increase significantly in 1998 and is
expected to approach the statutory tax rate.
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Product Revenues. SanDisk's product revenues grew 45% in 1996 to $89.6
million from $61.6 million in 1995. The increase of $28.0 million consisted of
a 126% increase in units shipped offset by a 36% decline in average selling
prices. The increase in product revenues in 1996 was due to increased sales of
the Company's Chipset, CompactFlash and FlashDisk products. Fiscal year 1995
product revenues of $61.6 million were 74% higher than 1994 due to increased
sales of FlashDisk products.
License and Royalty Revenues. License and royalty revenues from patent
cross-license agreements were $8.0 million in 1996 up from $1.3 million in
1995. Revenues from patent licenses and royalties increased to 8% of total
revenues in 1996, up from 2% in 1995. In December 1996, the Company entered
into a patent cross license agreement with Sharp. The Company also entered
into a patent cross license agreement with Intel in October 1995.
Gross Profits. In fiscal 1996, gross profits increased to $38.9 million or
39.8% of total revenues from $26.2 million or 41.7% of total revenues in 1995,
and $7.3 million or 20.6% of total revenues in 1994. SanDisk completed its
transition from 16Mbit to 32Mbit technology in the third quarter of 1996. For
the year ended December 31, 1996, 32Mbit products represented 70% of the
Company's units shipped up from 6% in the prior year. Product gross margins
declined in 1996 to 34.5% of product revenues from 40.6% in 1995 due to the
shift in product mix to lower capacity products where average selling prices
declined faster than product costs. Revenues from patent cross-license
royalties partially offset the lower product gross margins in 1996.
Research and Development. Research and development expenses increased to
$10.2 million in 1996 from $8.0 million in 1995 and $5.9 million in 1994. As a
percentage of total revenues, research and development costs represented 10.4%
in 1996, 12.8% in 1995, and 16.7% in 1994. Research and development expenses
increased in 1996 and 1995 primarily due to salary and benefit costs
associated with additional personnel. In 1996, increased depreciation due to
capital equipment additions during the year and higher contract service
expenses also contributed to the increase in research and development
expenses. In 1995, increased patent application related expenses and higher
prototype supply expenses contributed to the increase.
Sales and Marketing. Sales and marketing expenses increased to $8.8 million
in 1996 from $6.6 million in 1995 and $4.0 million in 1994. The growth in
sales and marketing expenses in both 1996 and 1995 was primarily due to higher
payroll and benefit related expenses associated with increased headcount
levels, higher outside sales commissions and increased travel expenses.
Increased public relations expenses also contributed to the increase in 1995.
As a percentage of total revenues, sales and marketing expenses represented
9.0% in 1996, 10.4% in 1995, and 11.3% in 1994.
22
<PAGE>
General and Administrative. General and administrative expenses increased to
$7.4 million in 1996 from $3.8 million in 1995 and $2.2 million in 1994. As a
percentage of total revenues, general and administrative expenses increased to
7.6% of total revenues from 6.1% in 1995 and 1994. The increase in general and
administrative expenses in 1996 and 1995 was primarily due to an increase in
professional and legal fees associated with the defense of the Company's
patents and salary and benefit costs associated with additional personnel. The
Company spent approximately $3.0 million on patent related litigation in 1996.
A substantial portion of these expenses were related to the Samsung
litigation. See Note 4 of Notes to Consolidated Financial Statements.
Interest and Other Income, Net. Interest and other income was $3.2 million
in 1996, $1.7 million in 1995, and $593,000 in 1994. The increase in interest
and other income since 1994 was due to increased cash and investment balances
and higher interest rates.
Interest Expense. Interest expense of $3,000 in 1996, $37,000 in 1995, and
$99,000 in 1994 was related to capital equipment leases which expired at
various times during 1995 and 1996. The Company had no outstanding capital
leases at December 31, 1996.
Provision for Income Taxes. The Company's 1996 and 1995 effective income tax
rates were approximately 7.3% and 4.5%, respectively. The 1996 effective tax
rate is higher than the 1995 rate primarily due to increased foreign
withholding taxes. The effective tax rate is substantially below the federal
statutory rate due to the utilization of federal and state net operating loss
and tax credit carryforwards. The Company had no tax provision in 1994 due to
operating losses incurred.
23
<PAGE>
QUARTERLY RESULTS
The following tables set forth certain unaudited quarterly consolidated
statements of operations data, both in absolute dollars and as a percentage of
total revenues, for each of the seven quarters in the period ended September
30, 1997. In the opinion of management, this information has been presented on
the same basis as the audited consolidated financial statements appearing
elsewhere in this Prospectus, and all necessary adjustments, consisting only
of normal recurring adjustments, have been included in the amounts stated
below to present fairly the unaudited quarterly results. This data should be
read in conjunction with the audited consolidated financial statements of the
Company and related notes thereto. The operating results for any quarter are
not necessarily indicative of results for any future period. See "Risk
Factors--Fluctuations in Operating Results."
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
-------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenues:
Product................ $19,489 $23,312 $24,798 $22,000 $18,194 $23,922 $30,219
License and royalty.... 1,250 1,250 1,250 4,250 3,250 3,425 5,925
------- ------- ------- ------- ------- ------- -------
Total revenues....... 20,739 24,562 26,048 26,250 21,444 27,347 36,144
Cost of revenues........ 12,722 15,057 15,759 15,169 12,965 16,375 20,135
------- ------- ------- ------- ------- ------- -------
Gross profits........... 8,017 9,505 10,289 11,081 8,479 10,972 16,009
Operating expenses:
Research and
development........... 2,145 2,400 2,735 2,901 3,001 3,083 3,550
Sales and marketing.... 2,010 2,296 2,161 2,325 2,561 2,971 3,197
General and
administrative........ 1,364 1,937 2,279 1,865 1,377 1,527 2,029
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 5,519 6,633 7,175 7,091 6,939 7,581 8,776
------- ------- ------- ------- ------- ------- -------
Operating income........ 2,498 2,872 3,114 3,990 1,540 3,391 7,233
Interest and other
income (expense), net.. 753 771 799 831 955 954 771
Interest expense........ (2) (1) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income before taxes..... 3,249 3,642 3,913 4,821 2,495 4,345 8,004
Provision for income
taxes.................. 195 237 270 438 370 655 1,202
------- ------- ------- ------- ------- ------- -------
Net income.............. $ 3,054 $ 3,405 $ 3,643 $ 4,383 $ 2,125 $ 3,690 $ 6,802
======= ======= ======= ======= ======= ======= =======
Net income per share.... $ .13 $ .14 $ .15 $ .18 $ .09 $ .15 $ .27
======= ======= ======= ======= ======= ======= =======
Shares used in computing
net income per share... 24,203 24,141 24,268 24,211 24,107 24,414 24,990
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
Product................ 94.0% 94.9% 95.2% 83.8% 84.8% 87.5% 83.6%
License and royalty.... 6.0 5.1 4.8 16.2 15.2 12.5 16.4
------- ------- ------- ------- ------- ------- -------
Total revenues....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:....... 61.3 61.3 60.5 57.8 60.5 59.9 55.7
------- ------- ------- ------- ------- ------- -------
Gross profits........... 38.7 38.7 39.5 42.2 39.5 40.1 44.3
Operating expenses:
Research and
development........... 10.3 9.8 10.5 11.0 14.0 11.2 9.8
Sales and marketing.... 9.7 9.3 8.3 8.9 12.0 10.9 8.8
General and
administrative........ 6.6 7.9 8.7 7.1 6.4 5.6 5.6
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 26.6 27.0 27.5 27.0 32.4 27.7 24.3
------- ------- ------- ------- ------- ------- -------
Operating income........ 12.1 11.7 12.0 15.2 7.1 12.4 20.0
Interest and other
income (expense), net.. 3.5 3.2 3.0 3.2 4.5 3.5 2.1
Interest expense........ -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income before taxes..... 15.6 14.9 15.0 18.4 11.6 15.9 22.1
Provision for income
taxes.................. 0.9 1.0 1.0 1.7 1.7 2.4 3.3
------- ------- ------- ------- ------- ------- -------
Net income.............. 14.7% 13.9% 14.0% 16.7% 9.9% 13.5% 18.8%
======= ======= ======= ======= ======= ======= =======
</TABLE>
24
<PAGE>
The Company's revenues and operating results are subject to quarterly and
annual fluctuations due to a variety of factors. The mix of products sold
varies from quarter to quarter and may vary in the future affecting the
Company's overall average selling prices and gross margins. Beginning in the
quarter ended December 31, 1996, the Company experienced a shift in product
mix to lower capacity CompactFlash products. Because of their low capacities,
CompactFlash products have lower average selling prices and gross margins than
the Company's higher capacity Type II PCMCIA cards. This shift caused average
selling prices to decline 23% during the fourth quarter of 1996 from the third
quarter of 1996. In addition, the volume of large OEM orders during the fourth
quarter of 1996 decreased due to the timing of customers' product
introductions. In the first quarter of 1997, sales to Japan decreased due to
seasonal factors relating to the Japanese fiscal year, a strong dollar and
increased competition. As a result of the foregoing factors, product revenues
declined quarter on quarter, 11% in the fourth quarter of 1996 and 17% in the
first quarter of 1997, despite increases in unit shipments for each quarter.
Revenues from CompactFlash products grew significantly in the quarters ended
June 30, and September 30, 1997, exceeding revenues from Type II PCMCIA cards
for the first time.
License and royalty revenues increased substantially in the fourth quarter
of 1996 and the third quarter of 1997, due to the recognition of initial
license and royalty revenues from Sharp, and Hitachi, Toshiba and Samsung,
respectively.
General and administrative expenses were particularly high as a percentage
of total revenues during the second, third and fourth quarters of 1996 due in
part to legal and other expenses associated with the Samsung litigation.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had working capital of $48.0 million,
which included $18.3 million in cash and cash equivalents and $42.0 million in
short-term investments. The Company has a line of credit facility with a
commercial bank under which it can borrow up to $10.0 million at the bank's
prime rate. This line of credit facility expires in July 1998. As of September
30, 1997, the Company had $7.2 million committed under the line of credit
facility for standby letters of credit. The facility contains covenants that
require the Company to maintain certain financial ratios and levels of net
worth, and prohibits the payment of cash dividends to stockholders. At
September 30, 1997, the Company was not in compliance with the quick ratio
covenant due to the increase in deferred revenue. Following the end of the
quarter, the financial covenant was retroactively amended by the bank and the
Company is currently in compliance with all financial covenants as amended.
Operating activities provided $30.5 million of cash during the first nine
months of 1997. In addition to net income, sources of cash included increased
deferred revenue of $26.3 million, primarily from the receipt of funds under
license and royalty agreements, and an increase in current liabilities of
approximately $4.0 million. These were partially offset by increases in
accounts receivable, inventory, and prepaid expenses and other assets totaling
$15.3 million. Investing activities used $33.1 million of cash in the first
nine months of 1997. Investing activities for the period included a $40.2
investment in the USIC foundry joint venture and $5.8 million of capital
equipment purchases, which were partially offset by net proceeds from
investment activity of $13.0 million.
Depending on the demand for the Company's products, the Company may decide
to make investments, which could be substantial, in assembly and test
manufacturing equipment to support its business in the future. Management
believes the existing cash and cash equivalents, short-term investments and
available line of credit will be sufficient to meet the Company's currently
anticipated working capital and capital expenditure requirements for the next
12 months.
25
<PAGE>
IMPACT OF CURRENCY EXCHANGE RATES
The Company currently purchases wafers from Matsushita under purchase
contracts denominated in Japanese Yen. A portion of the Company's revenues are
also denominated in Japanese Yen. Foreign exchange exposures arising from the
Company's Japanese Yen denominated commitments and related accounts payable
are offset to the extent the Company has Japanese 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 September 30,
1997, there were no forward contracts outstanding. Future exchange rate
fluctuations could have a material adverse effect on the Company's business,
financial condition and results of operations.
26
<PAGE>
BUSINESS
SanDisk designs, develops and markets flash memory data storage products
used in a wide variety of electronic systems. The Company has optimized its
flash memory storage solution, known as "system flash," to address the needs
of many emerging applications in the consumer electronics and
industrial/communications markets. Since its inception, the Company has been
actively involved in all aspects of flash memory process development, chip
design, controller development and system-level integration to ensure the
creation of fully-integrated, broadly interoperable products that are
compatible with both existing and new system platforms. The Company believes
its core technical competencies are in high-density flash memory process and
design, controller design, system-level integration, compact packaging and
low-cost system test. The Company's products include removable CompactFlash
products and FlashDisk cards, and embedded FlashDrives and Flash ChipSet
products. SanDisk has successfully applied its technology to the rapidly
growing markets for digital cameras and other consumer electronics devices
such as PDAs. The Company was instrumental in developing the PCMCIA format and
the CompactFlash format, which the Company believes is becoming the de facto
industry standard storage platform for digital cameras. The Company's
customers include Boeing, Canon, Casio, Kodak, Epson Hanbai, Fujitsu, Hewlett-
Packard, Kyocera, Lucent, MEI, NEC USA, Norand, Pentax, Psion and Telxon.
INDUSTRY BACKGROUND
The traditional data storage market encompasses several types of memory and
storage devices designed primarily for specific components of computer
systems. Dynamic random access memory ("DRAM") provides main system memory;
static random access memory ("SRAM") provides specialized and high speed
memory; hard disk drives provide high capacity data storage; and floppy disk
drives permit low capacity removable data storage. In recent years, digital
computing and processing have expanded beyond the boundaries of desktop
computer systems to include a broader array of electronic systems. These new
devices include digital cameras, personal digital assistants, highly portable
computers, digital audio recorders, wireless base stations, network computers,
communication switches, cellular telephones, mobile communication systems,
handheld data collection terminals, medical monitors, pay telephones and other
electronic systems. These emerging applications have storage requirements that
are not well addressed by traditional storage solutions. These requirements
include small form factor size, high reliability, low power consumption and
the capability to withstand high levels of shock and vibration and extreme
temperature fluctuations. Because storage products based on flash
semiconductor technology meet those requirements, these devices and systems
represent new market opportunities for flash storage systems.
In the late 1980s, a new memory technology, known as flash memory, was
developed as an extension of ultraviolet erasable programmable read-only
memory ("EPROM"). Flash memory is non-volatile, unlike DRAM and SRAM,
requiring no power to retain data and is electrically reprogrammable, unlike
EPROM. Flash memory has the potential to satisfy the requirements for a
variety of data storage applications although the most common types of flash
memory, "socket flash" and "linear flash," are not well suited for many
purposes.
Socket flash is being used as a replacement for EPROMs in applications such
as embedded firmware or microcode storage in computer systems. Typical chip
densities for socket flash range from 1Mbit to 16Mbit. Socket flash is well
suited for read often/write infrequently applications, as the erase times are
relatively slow (typically one second per block or sector). In addition,
socket flash has not been optimized for defect management. With frequent
erase/write operations, bits in flash storage media deteriorate over time. As
a result, the longevity and durability of socket flash chips in frequent
erase/write applications is limited. Also, socket flash chips, because they
are optimized for fast read access rather than low cost, are relatively large
and expensive memory chips.
More recently, technology known as linear flash has been developed that
permits socket flash chips to be used in data storage applications with the
use of separate flash file system software. While linear flash cards provide a
low cost mass storage solution, they provide limited built-in intelligence,
and rely instead on the host microprocessor and the specialized software to
manage the socket flash chips as a mass data storage device. This limits the
portability of linear flash cards between different systems, as well as their
ability to be upgraded for
27
<PAGE>
use in future generation products. A linear flash card used for data storage
in one system may not be usable in other systems because of potential
incompatibilities in the host processors as well as the operating system
software used in the two systems. Furthermore, because of differences in the
socket flash of various suppliers, linear flash cards from one manufacturer
may not function properly with flash file system software designed for linear
flash cards from other manufacturers.
Customers in the consumer electronics and industrial/communications markets
are seeking data storage solutions that satisfy requirements such as small
form factor, high reliability, low power consumption and the capability to
withstand high levels of shock and vibration and extreme temperature
fluctuations, which are not well addressed by traditional storage solutions
such as hard disk drives and DRAM or by linear flash cards based on socket
flash memory chips.
THE SANDISK SOLUTION
The Company has optimized its flash memory storage solution known as "system
flash," to address the needs of many emerging applications in the consumer
electronics and industrial/communications markets. Since its inception, the
Company has been actively involved in all aspects of flash memory process
development, chip design, controller development and system-level integration
to ensure the creation of fully-integrated, broadly interoperable products
that are compatible with both existing and new system platforms. The Company
believes its core technical competencies are in high-density flash memory
process and design, controller design, system-level integration, compact
packaging and low-cost system test. To achieve compatibility among various
electronic platforms regardless of the host processor or operating system
used, the Company has developed new capabilities in flash memory chip design,
created a new intelligent controller and developed an architecture that can
leverage advances in flash memory process technology to ensure a scaleable,
high-yielding, cost-effective and highly reliable manufacturing process. The
Company believes that these technical competencies and the Company's system
design approach have enabled it to introduce flash data storage products that
are better suited for its target markets than linear flash cards based on
socket flash chips.
The Company believes its products offer the following benefits:
Small form factor. SanDisk believes that its products are among the
smallest removable mass storage systems. The Company's FlashDisk cards are
small and lightweight with a length of 85.6 mm, width of 54.0 mm, thickness
of 5.0 mm (PCMCIA Type II) or 10.5 mm (PCMCIA Type III) and weight of less
than 2.0 ounces. The Company's CompactFlash products weigh about one-half
ounce and are approximately the size of a matchbook (36.4 mm x 42.8 mm x
3.3 mm).
Non-volatility. SanDisk products store information in non-volatile memory
cells that do not require power to retain information.
High degree of ruggedness. SanDisk's devices are among the most rugged in
the storage industry with an operating shock rating of 2,000 Gs for
CompactFlash and 1,000 Gs for all other products (equivalent to being able
to withstand ten foot and eight foot drops onto concrete, respectively).
The Company's products are also designed to tolerate extreme temperatures
and humidity.
Low power consumption. During read/write operations, SanDisk's products
use substantially less than the power demanded by the 1.8 inch and 2.5 inch
rotating disk drives found in many portable computers. At all other times
during system operation, the Company's products require virtually no power.
Depending upon the end product making use of the Company's flash data
storage, this can translate into significantly more time between battery
replacements.
High reliability. SanDisk's products utilize sophisticated error
detection and correction algorithms and dynamic defect management
techniques to provide high data reliability and endurance. SanDisk's
devices are highly reliable even after more than 300,000 erase/writes and,
based on internal test results, the Company believes the devices have a
theoretical product life of several decades in most applications.
28
<PAGE>
High performance. The Company believes that the access times of the
Company's products meet or exceed the read and write data rates of the
majority of consumer and industrial/communication applications.
The flash process and flash memory chip designs developed by the Company in
cooperation with its development partners make the Company's products
scaleable over several generations of semiconductor fabrication processes.
This feature has allowed the Company to significantly reduce its cost per
megabyte of capacity as each new process generation is qualified. By
maintaining the same basic design parameters, each generation of the Company's
products maintains full compatibility with prior generations. This chip
architecture has allowed the Company to significantly reduce cell size and
thereby chip size. This has permitted increased storage capacity in PC Card
and smaller platforms. The Company's proprietary flash process requires some
modifications to the typical CMOS semiconductor fabrication process, but can
be implemented on existing advanced fabrication lines without the need for
special materials or equipment. The Company has successfully implemented its
processes at Matsushita and at LG Semicon, and is currently implementing its
processes at NEC and USIC.
The Company also has developed core competencies in low cost micropackaging
technology as well as low cost batch testing, both of which are important
elements in building high capacity, high reliability flash cards at a
competitive cost.
SANDISK'S BUSINESS STRATEGY
The Company is pursuing the following strategies:
Enable New Products in Large and Emerging Markets; Develop and Promote
Industry Standards. The Company develops products that it believes will have
applications in large, emerging markets such as the markets for digital
cameras and PDAs. The Company believes that the widespread acceptance of
universal industry standards is important to the development of the market for
flash data storage. The Company designs its products to be compatible with
existing industry standards and, where appropriate, develops and promotes new
standards. The Company was one of the founding members of PCMCIA, where it has
worked to establish the ATA standard interface which is globally supported by
all PCMCIA card slots. The Company also developed the CompactFlash format and
was one of the founding members of the CFA, an organization established in
October 1995 to promote CompactFlash as a small form factor flash data storage
standard. The Company believes that this format is becoming the de facto
industry standard storage platform for digital cameras, where it is used
instead of traditional film. All of the Company's products are compatible with
IDE and ATA standard interfaces used in all IBM compatible PCs and are
compatible with Windows 95, Windows NT, Windows CE, Macintosh System 8.0 and
other operating systems. The interoperability afforded by adherence to these
industry standards enables users of flash data storage cards to transfer data
quickly and easily from one device to another, such as from a digital camera
to a desktop computer system equipped with a PCMCIA or CompactFlash slot. The
Company believes that working with industry groups to develop widely-adhered
to standards will lead to the acceptance of the Company's products in large
markets.
Maintain Technology Leadership. The Company believes that it was the first
to develop and introduce removable flash data storage cards and that it has
led the industry with several technological innovations. The Company believes
that its technological expertise in flash memory design and process
engineering, intelligent controllers and system-level integration, in
conjunction with its relationships with its semiconductor manufacturing
partners, provides it with a competitive advantage. The Company is actively
developing advanced flash data storage technologies designed to enable it to
continue to meet evolving customer requirements for flash data storage system
products. The Company has developed D2 flash, which is a technological
innovation that allows each flash memory cell to store two bits of information
instead of the traditional single bit per cell, effectively doubling the
amount of storage capacity on approximately the same size chip. The Company
plans to use this technology to achieve a significant reduction in the cost
per megabyte of flash data storage. The Company began low volume shipments of
flash card products employing D2 flash in the third quarter of 1997.
29
<PAGE>
Reduce Cost Per Megabyte of Flash Data Storage. The Company is focused on
reducing the cost per megabyte of its products in order to increase the number
of applications for these products and to enhance the Company's ability to
address new markets. The Company has designed its patented flash memory
technology and integrated intelligent controller to increase the amount of
usable flash storage per wafer. The Company works closely with its
manufacturing partners to increase the amount of storage capacity per wafer by
utilizing very small flash memory cells, to realize high yields through the
built-in ability to utilize partial die and to facilitate the migration to
smaller geometry manufacturing processes through several generations of flash
technology. The Company is working with its foundries to migrate the process
technology from the current 0.5 micron minimum design rules to 0.4 micron
minimum design rules over the next several quarters. Virtually all of the
Company's products utilize its 32Mbit flash devices.
Leverage Intellectual Property. The Company has cross-licensed its flash
technology, including its patent portfolio, to selected third parties. The
Company believes that permitting other flash memory providers to use its
technology will facilitate the development of its target markets, will provide
a second source of supply of CompactFlash, which is required by many OEM
customers, and can serve as a significant source of license fees and royalty
revenues for the Company. To date, the Company has entered into patent cross-
license agreements with Hitachi, Intel, Samsung, Sharp and Toshiba, and
intends to pursue opportunities to enter into additional licenses.
APPLICATIONS AND MARKETS FOR FLASH DATA STORAGE
The Company is targeting the consumer electronics and the industrial
communications markets for its flash data storage products.
Consumer Electronics. The increasing trend towards the use of digital
technology in consumer electronics devices has created requirements for new
data storage products. For example, a number of major camera and imaging
companies have introduced digital cameras that the Company believes will
enable professionals and consumers to eliminate the need for standard 35mm
photographic film by replacing it with re-usable compact digital data storage
devices. Removable and embedded flash data storage products can also be
potentially used in PDAs, highly portable computers, digital audio recorders,
network computers, cellular telephones, two-way pagers, next-generation smart
telephones, digital audio samplers and other devices. These data storage
devices need to have a very small form factor, must be lightweight, shock and
vibration tolerant, non-volatile and interoperable with computer systems and
software that can process, manipulate and print images digitally.
The Company co-founded the CompactFlash Association, which actively promotes
the development of products using CompactFlash. Other founding members of the
CFA are Apple Computer, Inc., Canon, Kodak, Hewlett-Packard, LG Semicon,
Matsushita, Motorola, NEC, Polaroid Corp., Seagate and Seiko Epson Corp.
During the third quarter of 1997, the number of member companies in the
CompactFlash Association reached 85. The Company is currently working with
several leading camera and imaging companies to facilitate the use of
CompactFlash products in next generation digital cameras. However, there can
be no assurance that the digital cameras employing these units will gain
significant consumer market acceptance.
Industrial/Communications Market. Emerging applications in the industrial
market encompass a wide variety of electronic systems used by personnel such
as inventory controllers, service technicians, route salesmen, delivery crews,
meter readers, car-rental service employees, physicians, real estate agents,
insurance agents and public safety officers. The systems used by these workers
are often subjected to rough handling, used in a variety of temperature and
humidity conditions and required to operate for extended periods of time
without external power sources or frequent battery changes. The information
collected by these individuals is critical to the successful operation of
their business or agency and hence must be stored reliably regardless of the
operating environment. In addition, the information is frequently processed at
some point (typically the end of the work day or night) by a computer system
and must therefore be easily transferable.
The communications market has applications that are beginning to require new
types of data storage. For example, communications switches and cellular base
stations require data storage in environments such as
30
<PAGE>
subway stations or outdoor telephone booths that are subject to shock and
vibration and a wide range of temperature and humidity conditions.
The Company's products are used in consumer electronics applications such as
digital cameras, PDAs, highly portable computers, audio recorders, video and
electronic games, and digital audio samplers, and in industrial/communications
applications such as POS terminals, transportation, medical/instrumentation,
automation, telecommunications switches, PHS base stations, cellular base
stations and routers. The Company's customers include Boeing, Canon, Casio,
Kodak, Epson Hanbai, Fujitsu, Hewlett-Packard, Kyocera, Lucent, MEI, NEC USA,
Norand, Pentax, Psion and Telxon.
In the nine months ended September 30, 1997, and the fiscal years ended
December 31, 1996 and 1995, sales to the Company's top 10 customers accounted
for approximately 64%, 71% and 80%, respectively, of the Company's product
revenues. For the nine months ended September 30, 1997, no single customer
accounted for greater than 10% of total revenues. During 1996, Epson Hanbai
accounted for approximately 26% of the Company's total revenues. Three of the
Company's customers, Epson Hanbai, Kyocera and Hewlett-Packard, accounted for
approximately 26%, 14% and 12% of the Company's total revenues, respectively,
in 1995. 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. The Company has also experienced significant
changes in the composition of its major customer base from year to year and
expects this pattern 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. Sales to the Company's customers
are generally made pursuant to standard purchase orders rather than long-term
contracts. The loss of, or significant reduction in purchases by, the
Company's major customers, could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors--Customer Concentration."
PRODUCTS
SanDisk's storage products are high capacity, solid-state, non-volatile
flash memory devices which comply with PC Card ATA and/or IDE industry
standards. The Company offers a broad line of flash data storage system
products in terms of capacities, form factors, operating voltage and
temperature ranges. The Company's current product families include removable
CompactFlash and FlashDisk cards, embedded FlashDrive products, and Flash
ChipSets. All products use the Company's proprietary 512 byte sector erase
flash memory chips and intelligent controller. The Company's products are
compatible with the majority of today's computing and communications systems
that are based on industry standards. The Company's products, as of September
30, 1997, are listed in the following table:
<TABLE>
<CAPTION>
PRODUCT FAMILY FORM FACTOR UNCOMPRESSED CAPACITY (IN MEGABYTES)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CompactFlash 36.4 mm x 42.8 mm x 3.3 mm 2, 4, 6, 8, 10, 15, 20, 24
(Removable)
- -----------------------------------------------------------------------------------------------
FlashDisk PC Card Type II 2, 4, 6, 8, 10, 20, 40, 60, 85, 150
(Removable)
-------------------------------------------------------------------------------
PC Card Type III 110, 175, 220, 300
- -----------------------------------------------------------------------------------------------
Flash ChipSet 2 chips 2, 4, 8
(Embedded)
- -----------------------------------------------------------------------------------------------
FlashDrive 1.3 inches 4, 10, 20, 40, 60
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1.8 inches 4, 10, 20, 40, 80, 140, 240
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Unlike rotating disk drives, the Company's flash products are solid-state
devices. The Company's products are very reliable. They have no moving parts
that are subject to mechanical failure. The Company's products are non-
volatile, meaning that no on-going source of power is required in order for
the products to retain data, images or audio indefinitely. Flash is noiseless,
considerably lighter, more rugged and consumes substantially
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less than the power required by a rotating disk drive. The Company's products
are small enough to be employed in mobile systems while the two smallest,
CompactFlash and Flash ChipSet, are small enough to be used in many of the
newer, miniaturized electronic systems being developed today. The ruggedness
levels of the Company's products range from 1,000 Gs to 2,000 Gs.
CompactFlash. The Company's CompactFlash products provide full PC Card ATA
functionality but are only one-fourth the size of a standard Type II PC card.
CompactFlash's compact size, ruggedness and low-power requirements and its
ability to operate at either 3.3V or 5V make it well-suited for a range of
current and next-generation, small form factor consumer applications such as
digital cameras, PDAs, personal communicators, pagers and audio recorders.
CompactFlash products provide interoperability with systems based upon the PC
Card ATA standard by using a low-cost passive Type II adapter. CompactFlash is
available in capacities ranging from 2MB to 24MB.
FlashDisk. The Company's FlashDisk products are used in storage, data backup
and data transport applications and are among the highest-capacity removable
PC Card ATA flash memory cards currently available. FlashDisk products are
available in Type II form factor with capacities ranging from 2MB to 150MB and
Type III form factor with capacities ranging from 110MB to 300MB.
Flash ChipSet. The Flash ChipSet product provides a very small footprint
solid-state ATA mass storage system. The Flash ChipSet product consists of a
single chip ATA controller and a flash memory chip and is available in 2MB,
4MB and 8MB capacities. It provides full PC Card, ATA and IDE disk drive
compatibility in a chip set format.
FlashDrive. The Company's FlashDrives in 1.3 inch and 1.8 inch form factors
are targeted at applications that require embedded data storage devices.
FlashDrives offer rugged, portable, low-power data storage and are "plug and
play" replacements for rotating IDE drives making them ideal for mobile
computers, communication devices and other systems that require embedded
storage. Capacities of the Company's FlashDrive products range between 4MB and
60MB for the 1.3 inch product and between 4MB and 240MB for the 1.8 inch
product.
TECHNOLOGY
Since its inception, the Company has focused its research and development
efforts on developing highly reliable and cost-effective flash memory storage
products to address a number of emerging markets. The Company has been
actively involved in all aspects of this development, including flash memory
process development, chip design, controller development and system-level
integration, to ensure the creation of fully-integrated, broadly interoperable
products that are compatible with both older and newly developed system
platforms. The Company believes its core technical competencies are in high
density flash memory process and design, controller design, system-level
integration, compact packaging and low cost system test.
To achieve compatibility among various electronic platforms regardless of
the host processors or operating systems used, the Company developed new
capabilities in flash memory chip design, created a new intelligent controller
and developed an architecture that could leverage advances in process
technology to ensure a scaleable, high-yielding, cost-effective and highly
reliable manufacturing process. The Company believes that these technical
competencies and the Company's system design approach have enabled it to
introduce flash data storage products that are better suited for its targeted
market than linear flash cards based on socket flash chips.
The Company designs its products to be compatible with industry-standard IDE
and ATA interfaces used in all IBM compatible PCs. To achieve this design, the
Company uses a 512 byte memory sector size that required a departure from the
typical socket flash chip design. By decreasing the sector size to be the same
as the sector size of all 3.5 inch, 2.5 inch and 1.8 inch hard disk drives,
the Company was able to achieve compatibility with DOS and Windows.
The Company's patented intelligent controller coupled with the intelligent
controller's advanced defect management system permits the Company's products
to achieve a high level of reliability and longevity. This
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defect management system, which currently resides on a single proprietary
controller chip, is able to detect bit "wearout," a common problem with flash
memory, both immediately following manufacture and late in the product's life.
Late bit failure can occur several years into the life of a product and can be
difficult to detect with traditional flash technology. The Company's defect
management system automatically detects bits that have failed or are likely to
fail due to the number of erase/write cycles such bits have undergone and
switches memory to spare good bits incorporated into the design. The system
also allows the automatic substitution of entire sectors or major blocks of
the memory chip. Additionally, the controller generates an error correcting
code which is stored simultaneously with the data and is used to detect and
correct any errors when the data is read. This design permits the Company's
products to maintain error-free operation for hundreds of thousands of
erase/write cycles and reduces manufacturing costs by allowing the Company to
incorporate partial die with less than 100% of the physical bits on each chip
into the products without loss of functionality. All of the Company's
controller chips are manufactured by Motorola using a Motorola 16 bit core
processor.
The flash process and flash memory chip designs developed by the Company in
cooperation with its development partners make the Company's products scalable
over several generations of semiconductor fabrication processes. This feature
has allowed the Company to significantly reduce its cost per megabyte of
capacity as each new process generation is qualified. By maintaining the same
basic design parameters, each generation of the Company's products maintains
full compatibility with prior generations. This chip architecture, which
incorporates three polysilicon layers and one metal layer, as well as a
virtual ground array and a split gate transistor cell, has allowed the Company
to significantly reduce cell size and thereby chip size. This has permitted
increased storage capacity in PCMCIA card and smaller platforms. The Company's
patented flash process requires some modifications to the typical CMOS
semiconductor fabrication process, but can be implemented on existing advanced
fabrication lines without the need for special materials or equipment. The
Company has successfully implemented its 0.5 micron process at Matsushita and
LG Semicon and is currently qualifying its 0.4 micron process at Matsushita,
LG Semicon and USIC. The Company is also in the advanced stages of development
of its 0.35 micron process at NEC.
In the third quarter of 1997, the Company commenced shipment of production
units of its D2 flash. D2 is a technological innovation which allows each
flash memory cell to store two bits of information instead of the traditional
single bit per cell employed by the industry standard flash technology. The D2
flash technology is highly complex, and the write speed of the first
generation 64Mbit D2 flash is significantly slower than the Company's current
flash products. In addition, D2 flash involves several techniques never proven
in a high volume production environment. There can be no assurance that the
much slower write speed of D2 flash will be accepted by SanDisk's customers.
Any failure by SanDisk's customers to accept the Company's D2 flash products,
or any failure to successfully establish volume production of the D2 flash
product, could cause a material adverse affect on the Company's business,
financial condition and results of operations. See "Risk Factors--Dependence
on Emerging Markets and New Products."
The Company also has developed core competencies in low cost micropackaging
technology as well as low cost batch testing, both of which are important
elements in building high capacity flash cards to high reliability standards
at competitive cost.
STRATEGIC MANUFACTURING RELATIONSHIPS
An important element of the Company's strategy has been to establish
strategic relationships with leading technology companies that can provide the
Company with access to leading edge semiconductor manufacturing capacity and
participate in the development of certain products. This enables the Company
to concentrate its resources on the product design and development areas where
the Company believes it has competitive advantages and eliminates the high
cost of owning and operating a semiconductor wafer fabrication facility. The
Company has developed strategic relationships with Matsushita, LG Semicon and
NEC. In the third quarter of 1997, the Company invested in USIC, a joint
venture semiconductor manufacturing facility founded by UMC in Taiwan.
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All of the Company's products require silicon wafers which are currently
supplied by Matsushita and LG Semicon. Most of the Company's wafers are
currently manufactured using 0.5 micron process technology. The Company has
started limited production of 0.4 micron flash wafers at Matsushita and
expects to begin receiving 0.4 micron wafers from LG Semicon in the first half
of 1998. Both Matsushita and LG Semicon are also shifting their production
capacity from six inch to eight inch wafers. The Company plans to shift to
volume production of eight inch wafers at Matsushita by the end of 1997 and at
LG Semicon in the first half of 1998. The Company currently has a joint
development agreement and a foundry agreement with NEC. The Company expects to
receive its first production wafer shipments from NEC in 1998.
The Company invested approximately $40.2 million in USIC, which represents
an ownership interest of approximately 10% in the joint venture and guarantees
the Company access to approximately 12.5% of the facility's wafer output. The
USIC facility is currently under construction at the Science Based Industrial
Park in Hsin Chu City, Taiwan. The facility is scheduled to start producing
limited wafer quantities in late 1998 and is scheduled to reach full monthly
production of approximately 20,000 eight inch wafers in 1999. The Company has
arranged to receive foundry wafers from a separate UMC fabrication facility
during the construction of the USIC plant. The Company expects to begin
receiving these wafers in the first half of 1998.
Under the general terms of the Company's wafer supply agreements with its
foundry partners, the Company is obligated to provide a monthly rolling
forecast of anticipated purchase orders. Except in limited circumstances and
subject to acceptance by the foundries, the estimates for a portion of the
forecast, generally three months, 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 months forecast. These requirements limit
the Company's ability to react to any significant fluctuations in demand for
its products. The Company is dependent upon its foundry partners to deliver
wafers and to maintain acceptable yields and quality.
The Company believes that shipments of wafers from its foundry partners will
be sufficient to meet the Company's anticipated requirements for wafers for
the foreseeable future. The Company's ability to increase its revenue and net
income in future periods is dependent on receiving an uninterrupted supply of
wafers from its manufacturing partnerships.
The Company's reliance on third-party wafer manufacturers involves several
material risks, including shortages of manufacturing capacity, reduced control
over delivery schedules, quality assurance, production yields and costs. In
addition, as a result of the Company's dependence on foreign wafer
manufacturers, the Company is subject to the risks of conducting business
internationally, including exchange rate fluctuations. See "Risk Factors--
Dependence on Third Party Foundries."
The Company has also developed a strategic manufacturing relationship with
Motorola, the supplier of the microcontroller for all of the Company's
products. In 1993, Motorola and the Company agreed to customize the Motorola
68000 core microprocessor to integrate the Company's previous three chip
controller into a single chip. The small form factor of this single chip
integrated controller is necessary to produce the Company's CompactFlash
products as well as its Flash ChipSet products. 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. See "Risk
Factors--Dependence on Sole Source Suppliers and Third Party Subcontractors."
The Company is continuing to identify and establish second sources for its
key single and sole source component vendors and subcontractors as sales
volumes increase, although there can be no assurance these efforts will be
successful. During the next several quarters, if the demand for the Company's
products exceeds its suppliers ability to deliver needed components or
subassemblies, the Company may be unable to meet customer demand.
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ASSEMBLY AND TEST
The Company tests the majority of its wafers at its headquarters in
Sunnyvale, California. Substantially all of the tested wafers are then shipped
to the Company's third party memory assembly subcontractors: ISE in Manteca,
California, Integrated Packaging Assembly Corporation in San Jose, California
and Mitsui in Japan. Monitoring of the assembly process is done by statistical
process control and audits by the Company's personnel.
The Company performs final assembly, testing and configuration of all
products at its headquarters in Sunnyvale, California. The Company has made
substantial capital investments and has established in-house surface mount
lines for the assembly of the printed circuit boards used in the Company's
CompactFlash and FlashDisk products. In July 1996, the Company moved its
corporate headquarters from two leased facilities totaling 54,000 square feet
in Santa Clara to a leased, 104,000 square foot building in Sunnyvale. The
move allowed the Company to substantially expand its manufacturing facility
and to move some production work in-house from off-site sub-contractors. The
Company currently anticipates that it will continue to make substantial
capital investments to further enhance its assembly capabilities. See "Risk
Factors--Dependence on Sole Source Suppliers and Third Party Subcontractors."
The Company's customers have demanding requirements for quality and
reliability. To maximize quality and reliability, the Company monitors
electrical and inspection data from its wafer foundries and assembly
subcontractors. The Company monitors wafer foundry production for consistent
overall quality, reliability and yield levels. Most of the Company's major
component suppliers and subcontractors have ISO 9001 or 9002 certification.
SEAGATE RELATIONSHIP
The Company has a strategic relationship with Seagate, which, prior to this
offering, owns approximately 25% of the Company's Common Stock on a fully
diluted basis. In January 1993, Seagate acquired a 25% ownership interest in
the Company and entered into a joint cooperation agreement that provides for a
strategic alliance between the parties. Seagate has the option to market the
Company's products commencing in January 1999 and at that time may be
established as a distributor for the Company's products. If the option is
exercised, the Company and Seagate will coordinate their efforts so that up to
one-third of the Company's worldwide net revenues from all flash products
could be generated from sales of the Company's flash products through Seagate.
The joint cooperation agreement also provides that each party will have the
exclusive right to market to certain customers. The joint cooperation
agreement will terminate if, among other things, Seagate's ownership interest
in the Company falls below 10% or, on or after January 15, 2000, upon at least
one year's advance written notice by the Company to Seagate. Seagate has the
right to nominate one director to the Company's Board of Directors. Alan F.
Shugart, Seagate's Chairman, President and Chief Executive Officer, serves as
Seagate's nominee to the Company's Board of Directors. The Shareholder Rights
Plan, adopted by the Board of Directors on April 21, 1997, permits Seagate to
continue to hold its ownership interest in the Company without triggering the
provisions of the plan.
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend on the continued
development and introduction of new generations of flash memory chips,
controllers and products designed specifically for the flash data storage
market. To date, the Company has developed and put into production flash data
storage products utilizing semiconductor devices with the following memory
capacity and geometries: 4Mbit (0.9 micron), 8Mbit (0.8 micron), 16Mbit (0.5
micron), 32Mbit (0.5 and 0.4 micron) and 64Mbit D2 flash (0.5 micron). In
addition, the Company has developed several generations of controllers for
these flash memory chips. Currently, a majority of the Company's products
utilize the 32Mbit device. Because of the complexity of its products, the
Company has periodically experienced significant delays in the development and
volume production ramp up of its products. There can be no assurance that
similar delays will not occur in the future.
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The Company, along with its current foundry partners (in separate design
efforts), is developing a new process to manufacture future generation, higher
capacity chips employing 0.35 to 0.4 micron geometries. To date, the Company
has not successfully completed the qualification of such a process and there
can be no assurance that the Company will be able to successfully commence
volume production with such a process in the future. The Company has
periodically experienced delays in the development of new processes at its
foundry partners and such delays may occur again in the future. The Company's
foundry partners may also experience delays in establishing development
capabilities for new processes and these delays may have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Risk Factors--Risks Associated with Transitioning to New
Products and Processes."
In the fourth quarter of 1996, the Company established a design center in
Tefen, Israel to conduct research on product design improvements and new
product development. As of September 30, 1997, the center had nine full time
employees engaged in research and development activities.
During the nine months ended September 30, 1997 and 1996, the Company spent
$9.6 million and $7.3 million, respectively, on research and development
activities. During the fiscal years ended December 31, 1996, 1995 and 1994,
the Company spent $10.2 million, $8.0 million and $5.9 million, respectively,
on research and development activities. As of September 30, 1997, the Company
had 71 full time employees engaged in research and development activities,
including those in its Israel design center.
SALES AND DISTRIBUTION
The Company markets its products using a direct sales organization,
distributors and manufacturers' representatives to serve the multi-faceted
customer base and sales channels into which the Company sells its products.
The Company also sells products to various customers on a private label basis.
The Company's sales efforts are organized as follows:
Direct Sales Force. The Company's direct sales force is located in
Maitland, Florida; Herndon, Virginia; Dublin, Ohio; Irvine, California;
Sunnyvale, California; Branford, Connecticut; Hannover, Germany; Hong Kong;
and Yokohama, Japan. This organization supports major OEM customers and the
Company's distribution and manufacturers' representative partners.
Distributors. In the United States, the Company's products are sold
through Anthem Electronics Inc., Arrow/Schweber Electronics Inc., Hamilton-
Hallmark Inc. and Bell MicroProducts Inc. to OEM customers for a wide
variety of industrial applications. In addition, the Company has
distributors in various regions of the world including Europe, Japan,
Australia, New Zealand, Taiwan, Korea and Hong Kong.
Independent Manufacturers' Representatives. In the United States, Canada
and Europe, the Company's direct sales force is supported in its sales
efforts by thirty three independent firms. Twenty nine of these independent
firms are domestic; eighteen of which support the industrial distribution
and OEM channels, and eleven of which support the retail channel. Four of
these firms are international. These companies receive a sales commission
and provide sales support to the direct sales force and the Company's
distributors. The manufacturers' representative companies sell the
Company's products as well as products from other manufacturers.
Private Label Partners and OEMs. The Company has contractual distribution
agreements with Epson Hanbai and Verbatim Corporation to sell the Company's
products on a private label basis. These companies sell directly to OEMs,
as well as superstores, mass merchants, office clubs, retailers and mail
order companies to serve the demand for the Company's products in the
various after-market sales channels. In addition, the Company provides
private label products to OEMs in the United States and the Pacific Rim.
Retail. The Company entered the retail channel in 1997 and is shipping
SanDisk brand name product directly to retail superstores, office clubs and
selected retail distributors. The Company is also shipping private label
product to some retail distributors. Eleven independent manufacturers'
representative firms are supporting the Company's sales efforts in the
retail channel.
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CUSTOMER SERVICE AND TECHNICAL SUPPORT
The Company provides customers with comprehensive product service and
support. The Company provides technical support through its application
engineering group located in the United States and Japan. The Company works
closely with its customers to monitor the performance of its product designs,
to provide application design support and assistance and to gain insight into
customer's needs to help in the definition of subsequent generations of
products.
The Company's support package is generally offered with product sales and
includes technical documentation and application design assistance. During an
OEM's production phase, the Company provides failure analysis and replacement
of defective components. In some cases, the Company offers additional support
which includes training, system-level design, implementation and integration
support. The Company believes that tailoring the technical support level to
its customers' needs is essential for the success of product introductions and
to achieve a high level of satisfaction among its customers.
The Company generally provides a one-year warranty on its products.
PATENTS AND LICENSES
The Company relies on a combination of patents, trademarks, copyright and
trade secret laws, confidentiality procedures and licensing arrangements to
protect its intellectual property rights. The Company vigorously protects and
defends its intellectual property rights and in the past has been involved in
significant disputes regarding its intellectual property rights and believes
it may be involved in similar disputes in the future.
In 1988, the Company developed the concept of emulation of a hard disk drive
with flash solid state memory. The first related patents were filed in 1988 by
Dr. Eli Harari and exclusively licensed to the Company. The Company currently
owns or has exclusive rights to fifty-seven United States and thirteen foreign
issued patents, seven patent applications allowed and over fifteen patent
applications pending in the United States, as well as eighteen pending in
foreign patent offices. The Company intends to seek additional international
and United States patents on its technology. The Company believes some of its
patents are fundamental to the implementation of flash data storage systems,
as well as the implementation of D2 flash, independent of the flash technology
used. However, 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.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which have resulted in
significant and often protracted and expensive litigation. To preserve its
intellectual property rights, the Company believes it may be necessary to
initiate litigation against one or more third parties, including but not
limited to those the Company has already notified of possible patent
infringement. In addition, one or more of these parties may bring suit against
the Company. In the event of an adverse result in any such litigation, the
Company could be required to pay substantial damages, cease the manufacture,
use and sale of infringing products, expend significant resources to develop
non-infringing technology, discontinue the use of certain processes or obtain
licenses to the infringing technology. Any litigation, whether as a plaintiff
or as a defendant, would likely result in significant expense to the Company
and divert the efforts of the Company's technical and management personnel,
whether or not such litigation is ultimately determined in favor of the
Company. In addition, the results of any litigation matter are inherently
uncertain. For example, in 1995, the Company informed Samsung that the Company
believed Samsung infringed certain of its patents. In response, Samsung filed
a complaint accusing the Company of infringing two of its patents. The Company
then filed a complaint against Samsung with the ITC alleging that Samsung and
its U.S. sales arm were importing and selling products that infringed two of
the Company's patents. After a hearing on this matter, the ITC issued an order
that both SanDisk patents were valid and that Samsung had infringed such
patents, and prohibited the import,
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sale, marketing, distribution or advertising of Samsung's infringing flash
memory circuits, in the United States. In August 1997, the Company and Samsung
entered into a settlement agreement resolving all aspects of this dispute,
pursuant to which the parties agreed to cross-license certain patents and
Samsung agreed to make license and royalty payments to the Company. While the
Company believes it achieved a favorable result in this matter, the expense
and diversion of management attention in connection with its resolution were
substantial. In addition, the Company has notified several large flash
suppliers that the Company believes certain of their existing or announced
products infringe certain of the Company's patents.
In the event the Company desires to incorporate third party technology into
its products or is found to infringe on others' patents or intellectual
property rights, the Company may be required to license such patents or
intellectual property rights. The Company may also need to license some or all
of its patent portfolio to be able to obtain cross-licenses to the patents of
others. The Company currently has patent cross-license agreements with
Hitachi, Intel, Samsung, Sharp and Toshiba. From time to time, the Company has
also entered into discussions with other companies regarding potential cross-
license agreements for the Company's patents. However, there can be no
assurance that licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. If the Company obtains licenses
from third parties, it may be required to pay license fees or make royalty
payments, which could have a material adverse effect on the Company's gross
margins. The failure to obtain a license from a third party for technology
used by the Company could cause the Company to incur substantial liabilities
and to suspend the manufacture of products or the use by the Company's
foundries of processes requiring the technology, or to expend substantial
resources redesigning its products to eliminate the infringement. There can be
no assurance that the Company would be successful in redesigning its products
or that such licenses would be available under reasonable terms. Furthermore,
any such development or license negotiations could require substantial
expenditures of time and other resources by the Company.
As is common in the industry, the Company agrees to indemnify certain of its
suppliers and customers for alleged patent infringement. The scope of such
indemnity varies, but may in some instances include indemnification for
damages and expenses, including attorneys' fees. The Company may from time to
time be engaged in litigation as a result of such indemnification obligations.
In its efforts to maintain the confidentiality and ownership of trade
secrets and other confidential information, the Company requires all employees
(regular and temporary), consultants, foundry partners, certain customers,
suppliers and partners to execute confidentiality and invention assignment
agreements upon commencement of a relationship with the Company and extending
for a period of time beyond termination of the relationship. There can be no
assurance that these agreements will provide meaningful protection for the
Company's trade secrets or other confidential information in the event of
unauthorized use or disclosure of such information. See "Risk Factors--
Fluctuations in Operating Results."
COMPETITION
The flash data storage markets in which the Company competes are
characterized by intense competition, rapid technological change, evolving
industry standards, rapidly declining average selling prices and rapid product
obsolescence. The Company's competitors include many large domestic and
international companies that have greater access to wafer fab capacity,
substantially greater financial, technical, marketing and other resources,
broader product lines and longer standing relationships with customers than
the Company. The Company's primary competitors include flash chip producers
such as AMD, Hitachi, Intel, Micron, Mitsubishi, Samsung, Sharp and Toshiba,
other companies using data storage techniques such as socket flash, linear
flash and system flash components, as well as package or card assemblers such
as LEXAR, M-Systems, SIMPLE, SMART Modular and Viking that combine controllers
and flash memory chips developed by others. Hitachi, LEXAR, Mitsubishi and
Micron have been certified by the CFA to manufacture and sell their own brand
of CompactFlash, and the Company believes that other manufacturers will also
seek to enter the CompactFlash market in the future. Competing products
promoting industry standards that are different from SanDisk's CompactFlash
product have been announced, including Intel's Miniature Card, Toshiba's
Solid-State Floppy Disk Card and Sony Corporation's recently announced Memory
Stick. A manufacturer of digital cameras that designs-in any one of
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these alternative competing standards will eliminate CompactFlash from use in
its product, as each competing standard is mechanically and electronically
incompatible with CompactFlash. In addition, in the third quarter of 1997,
Intel announced a 64Mbit flash chip based on its multilevel cell flash. The
Company's D2 flash and Intel's multilevel cell flash are competing
technological innovations that allow each flash memory cell to store two bits
of information instead of the traditional single bit stored by the industry
standard flash technology. In the fourth quarter of 1996, Iomega announced
plans to introduce n.hand, a miniaturized, mechanical, removable disk drive
that may compete directly with SanDisk's flash card products.
The Company expects competition to increase in the future from existing
competitors and from other companies that may enter the Company's existing or
future markets with similar or alternative data storage solutions that may be
less costly or provide additional features. Due to the high price sensitivity
in the market for consumer products, aggressive price competition has been
experienced for these applications. Such competition is expected to result in
lower gross margins in the future, as the Company's average selling prices
decrease faster than its costs.
The Company has entered into patent cross-license agreements with Hitachi,
Intel, Samsung, Sharp and Toshiba, pursuant to which each party may
manufacture and sell products that incorporate technology covered by each
party's patents related to flash memory devices. As the Company continues to
license its patents to certain of its competitors, competition will increase.
As a result of the above factors, the Company expects to face substantially
more competition in the future than it has to date. Increased competition
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company believes that its ability to
compete successfully depends on a number of factors, which include price and
quality, product performance and availability, success in developing new
applications for system flash technology, adequate foundry capacity,
efficiency of production, timing of new product announcements or introductions
by the Company, its customers and its competitors, the ability of the
Company's competitors to incorporate their flash data storage systems into
their customers' products, the number and nature of the Company's competitors
in a given market, successful protection of intellectual property rights and
general market and economic conditions. The Company believes that it competes
favorably with other companies with respect to these factors. There can be no
assurance that the Company will be able to compete successfully against
current and future competitors or that competitive pressures faced by the
Company will not materially adversely affect its business, financial condition
or results of operations. See "Risk Factors--Competition."
EMPLOYEES
As of September 30, 1997, the Company had 393 regular, full-time employees
and 128 temporary employees, including 71 in research and development, 52 in
sales and marketing, 41 in finance and administration and 357 in operations.
The Company's success is dependent on its retention of key technical, sales
and marketing employees and members of senior management. Additionally, the
Company's success is contingent on its ability to attract and recruit skilled
employees in a very competitive market. None of the Company's employees are
represented by a collective bargaining agreement and the Company has never
experienced any work stoppage. The Company believes that its employee
relations are good.
FACILITIES
The Company's principal facilities are presently located in a 104,000 square
foot building in Sunnyvale, California. Approximately one half of the space is
dedicated to production activities. The remaining space is used for
administrative, marketing and development activities. The Company occupies
this space under a lease agreement that expires in July 2001. In December
1996, the Company exercised its option to lease an adjacent 50,000 square foot
building beginning in 1998. The Company believes that its facilities will be
adequate to meet its near term needs and that additional space will be
available as required. The Company also leases domestic sales offices in
Herndon, Virginia; Irvine, California; Branford, Connecticut; Dublin, Ohio and
Maitland, Florida, as well as foreign sales offices in Hannover, Germany;
Yokohama, Japan; Hong Kong and a design center in Tefen, Israel.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
October 15, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Dr. Eli Harari........... 52 President, Chief Executive Officer and Director
Cindy Burgdorf........... 50 Chief Financial Officer, Senior Vice President,
Finance and Administration and Secretary
Leon Malmed.............. 60 Senior Vice President, Marketing/Sales
Daniel Auclair........... 51 Senior Vice President, Operations/Technology
Marianne F. Jackson...... 42 Vice President, Human Resources
Irwin Federman(1)........ 62 Chairman of the Board of Directors
William V. Campbell(2)... 57 Director
Catherine P. Lego(1)..... 41 Director
Dr. James D. Meindl...... 64 Director
Joseph Rizzi............. 55 Director
Alan F. Shugart(2)....... 67 Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Dr. Eli Harari, the founder of the Company, has served as the President and
Chief Executive Officer and as a director of the Company since June 1988. Dr.
Harari founded Wafer Scale Integration, a privately held semiconductor
company, in 1983 and was its President and Chief Executive Officer from 1983
to 1986, and Chairman and Chief Technical Officer from 1986 to 1988. From 1973
to 1983, Dr. Harari held various management positions with Honeywell Inc.,
Intel and Hughes Aircraft Microelectronics. Dr. Harari also serves as a
director of Orbit Semiconductor, Inc. Dr. Harari holds a Ph.D. degree in Solid
State Sciences from Princeton University.
Ms. Cindy Burgdorf joined the Company as Chief Financial Officer, Vice
President, Finance and Secretary in June 1994 and has served as Senior Vice
President, Finance and Administration since July 1995. From 1992 to 1994, Ms.
Burgdorf was Vice President of Operations Administration and Vice President of
Materials and Planning at Maxtor Corp. ("Maxtor"). From 1978 to 1992, Ms.
Burgdorf held various financial management positions including Corporate
Controller, Group Controller of the Components Group and director of the
worldwide customer satisfaction program at Intel. Ms. Burgdorf is a Certified
Public Accountant and holds a B.S. degree in Business Administration from San
Jose State University.
Mr. Leon Malmed joined the Company as Vice President, Worldwide Marketing
and Sales in December 1992 and has served as Senior Vice President, Marketing
and Sales since July 1995. From 1991 to 1992, Mr. Malmed was Executive Vice
President of Marketing/Sales at SyQuest Technology, Inc., a manufacturer of
removable-cartridge disk drives. From 1990 to 1991, Mr. Malmed was Senior Vice
President, Sales and Marketing at Prairetek, Inc., a manufacturer of disk
drives. From 1983 to 1990, Mr. Malmed held various management positions at
Maxtor. Mr. Malmed holds a B.S. degree in Mechanical Engineering from the
University of Paris.
Mr. Daniel Auclair has served as Vice President, Systems Engineering from
1990 to June 1993, Vice President, Engineering and Technology from June 1993
to July 1995 and as Senior Vice President, Operations/Technology since July
1995. From 1988 to 1990, Mr. Auclair was Vice President of Engineering at
Anamartic, a company that utilizes wafer scale technology to build DRAM mass
storage systems. From 1984 to 1988, Mr. Auclair was Vice President and General
Manager of the OMTI division of Scientific Micro Systems, a supplier of disk
controllers and disk controller chips to the disk drive industry. Mr. Auclair
holds a B.S. degree in Engineering Physics from the University of Maine and an
M.S. degree in Computer Science from the University of Santa Clara.
40
<PAGE>
Ms. Marianne F. Jackson has served as Vice President of Human Resources
since April 1995. From September 1994 to March 1995, Ms. Jackson was President
of M.F. Jackson & Associates, a consulting firm that provided human resource
and organizational development consulting services. From 1993 to 1994, Ms.
Jackson served as Vice President of Worldwide Human Resources at Logitech,
Inc., a leading manufacturer of computer accessories and software products.
Prior to 1993, Ms. Jackson was Director of Human Resources at Silicon
Graphics, Inc. and Sun Microsystems, Inc. Ms. Jackson holds B.A. degrees in
Psychology and Sociology from the University of California at Santa Barbara.
Mr. Irwin Federman has served as Chairman of the Board of Directors since
September 1988. Since April 1990, Mr. Federman has been a general partner in
U.S. Venture Partners, a venture capital firm. From 1988 to 1990, he was a
Managing Director of Dillon Read & Co., an investment banking firm, and a
general partner in its venture capital affiliate, Concord Partners. From
August 1987 to December 1987, Mr. Federman was Vice Chairman of AMD, which
acquired Monolithic Memories, a corporation engaged in the production of
integrated circuits, with which he was affiliated for 16 years. From 1979 to
1987, Mr. Federman was President of Monolithic Memories. Mr. Federman served
as Chairman of the Semiconductor Industry Association from 1986 to 1988. He is
also a director of Checkpoint Software Technologies Ltd., Komag Incorporated,
NeoMagic Corporation, TelCom Semiconductor, Inc., Western Digital Corporation
and various private corporations. Mr. Federman holds a B.S. degree from
Brooklyn College.
Mr. William V. Campbell has served as a director of the Company since
October 1993. Mr. Campbell has been President and Chief Executive Officer and
a director of Intuit Inc. since April 1994. From 1991 to 1993, Mr. Campbell
was President and Chief Executive Officer of GO Corporation, a pen-based
computing software company. From 1987 to 1991, Mr. Campbell was President and
Chief Executive Officer of Claris Corporation, a software subsidiary of Apple
Computer Inc. Mr. Campbell holds both B.A. and M.A. degrees in Economics from
Columbia University.
Ms. Catherine Lego has served as a director of the Company since March 1989.
Ms. Lego has been self-employed with her consulting firm, Lego Ventures, since
1992. From 1981 to 1992, Ms. Lego held various positions with Oak Investment
Partners, a venture capital firm and was general partner of several of the
venture capital partnerships affiliated with Oak Investment Partners. Ms. Lego
is a Certified Public Accountant and holds a B.A. degree in Economics from
Williams College and an M.S. degree in Accounting from the New York University
Graduate School of Business.
Dr. James D. Meindl has served as a director of the Company since March
1989. Dr. Meindl has been the Joseph M. Pettit Chair Professor of
Microelectronics at the Georgia Institute of Technology in Atlanta, Georgia
since 1993. From 1986 to 1993, Dr. Meindl served as Senior Vice President for
Academic Affairs and Provost of Rensselaer Polytechnic Institute. From 1967 to
1986, he was the John M. Fluke Professor of Electrical Engineering at Stanford
University. Dr. Meindl serves as a director of Zoran, Inc. Dr. Meindl holds
B.S., M.S. and Ph.D. degrees in Electrical Engineering from Carnegie-Mellon
University.
Mr. Joseph Rizzi has served as a director of the Company since February
1992. Mr. Rizzi has been a general partner of Matrix II L.P. and Matrix III
L.P. since 1986. From 1979 to 1986, Mr. Rizzi was Chief Executive Officer of
ELXSI Inc., of which is he is a founder. From 1969 to 1978, Mr. Rizzi was Vice
President of Intersil Inc., of which he is a founder. Mr. Rizzi also serves as
a director of Veritas Software, Inc. Mr. Rizzi holds B.S. and M.S. degrees in
Electrical Engineering from the University of New Hampshire.
Mr. Alan F. Shugart has served as a director of the Company since January
1993. Mr. Shugart has served as Chief Executive Officer of Seagate since its
inception in 1979, President of Seagate since September 1991 and Chairman of
the Board of Directors of Seagate since October 1992. He also served as
Chairman of the Board of Directors of Seagate from its inception until
September 1991 and Chief Operating Officer of Seagate from September 1991 to
March 1995. Mr. Shugart is also a director of Valence Technology, Inc. Mr.
Shugart holds a B.S. degree in Engineering/Physics from the University of
Redlands.
41
<PAGE>
UNDERWRITERS
Under the terms and subject to conditions contained in an Underwriting
Agreement dated the date hereof the ("Underwriting Agreement"), the
Underwriters named below the ("Underwriters"), for whom Morgan Stanley & Co.
Incorporated, Goldman, Sachs & Co. and BancAmerica Robertson Stephens are
serving as Representatives (the "Representatives"), have severally agreed to
purchase, and the Company has agreed to sell to the Underwriters, severally,
the respective number of shares set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..................................
Goldman, Sachs & Co................................................
BancAmerica Robertson Stephens.....................................
---------
Total.......................................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by
counsel, and to certain other conditions. The Underwriters are obligated to
take and pay for all of the shares of Common Stock offered hereby (other than
those covered by the over-allotment option described below) if any are taken.
The Underwriters initially propose to offer part of the shares of Common
Stock offered hereby directly to the public at the public offering price set
forth on the cover page hereof and part to certain dealers at a price that
represents a concession not in excess of $ a share under the public
offering price. Any Underwriter may allow, and such dealers may reallow, a
concession not in excess of $ a share to other Underwriters or to
certain other dealers. After the initial offering of the shares of Common
Stock, the offering price and other selling terms may from time to time be
varied by the Representatives.
Pursuant to the Underwriting Agreement, the Company has granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an aggregate of 450,000 additional shares of
Common Stock at the public offering price set forth on the cover page hereof,
less underwriting discounts and commissions. The Underwriters may exercise
such option to purchase solely for the purpose of covering over-allotments, if
any, incurred in the sale of the shares of Common Stock offered hereby. To the
extent such option is exercised, each Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage
of such additional shares as the number set forth next to such Underwriter's
name in the preceding table bears to the total number of shares of Common
Stock set forth next to the names of all the Underwriters in the preceding
table.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended.
Each of the Company and the directors, executive officers and certain other
shareholders of the Company has agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will
not, during the period ending 90 days after the date of this Prospectus, (i)
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer, lend or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or (ii) enter
42
<PAGE>
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the Common Stock,
whether any such transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise. However, the executive officers and directors of the Company may,
without such consent, sell an aggregate of up to 100,000 shares, which shall
include no more than 40,000 shares by any one person. Additionally, the
Company may, without such consent, grant options or issue stock upon the
exercise of outstanding stock options pursuant to the Company's stock option
plans.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the Common Stock, the Underwriters may bid for, and purchase,
shares of Common Stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an Underwriter or a dealer for
distributing the Common Stock in the offering, if the syndicate repurchases
previously distributed Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.
The Underwriters and dealers may engage in passive market marking,
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Securities and Exchange Commission (the "Commission"). In
general, a passive market maker may not bid for, or purchase, the Common Stock
at a price that exceeds the highest independent bid. In addition, the net
daily purchases made by any passive market maker generally may not exceed 30%
of its average daily trading volume in the Common Stock during a specified two
month prior period, or 200 shares, which ever is greater. A passive market
maker must indemnify passive market making bids as such on the Nasdaq
electronic inter-dealer reporting system. Passive market making may stabilize
or maintain the market price of the Common Stock above independent market
levels. Underwriters and dealers are not required to engage in passive market
making and may end passive market making activities at any time.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Brobeck, Phleger & Harrison LLP, Palo
Alto, California. Members of the firm Brobeck, Phleger & Harrison LLP
beneficially own an aggregate of 6,540 shares of the Company's Common Stock.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California.
EXPERTS
The consolidated financial statements of SanDisk Corporation at December 31,
1995 and 1996 and for each of the three years in the period ended December 31,
1996 appearing in this Prospectus and Registration Statement and in SanDisk
Corporation's Annual Report (Form 10-K) for the year ended December 31, 1996
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein and as set forth in their
report included in the Form 10-K and incorporated herein by reference. Such
consolidated financial statements are included herein and incorporated herein
by reference in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.
43
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy and information
statements, and other information with the Commission. Such reports, proxy and
information statements, and other information filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C., as well as the
regional offices of the Commission located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois, and Seven World Trade Center,
Suite 1300, New York, New York. Copies of such materials can be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Company's Common Stock is
listed on the Nasdaq National Market. The Commission maintains a World Wide
Web site that contains reports, proxy and information statements, and other
information filed through the Commission's Electronic Data Gathering Analysis
and Retrieval System. This Web site can be accessed at http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and such
Common Stock, reference is made to the Registration Statement and the exhibits
and schedules thereto. Statements contained in this Prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such
contract or document filed as an exhibit to the Registration Statement, each
such statement being qualified in all respects by such reference. Copies of
the Registration Statement, including all exhibits thereto, may be inspected
without charge at the Commission's principal office in Washington, D.C., and
copies of all or any part thereof may be obtained from the Public Reference
Section, Securities and Exchange Commission, Washington, D.C. 20549, upon
payment of the prescribed fees.
44
<PAGE>
SANDISK CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FOR YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (AUDITED)
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statements of Stockholders' Equity........................... F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
Condensed Consolidated Balance Sheets..................................... F-19
Condensed Consolidated Statements of Income............................... F-20
Condensed Consolidated Statements of Cash Flows........................... F-21
Notes to Condensed Consolidated Financial Statements...................... F-22
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SanDisk Corporation
We have audited the accompanying consolidated balance sheets of SanDisk
Corporation as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of SanDisk Corporation at December 31, 1995 and 1996 and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
San Jose, California
January 17, 1997, except for Note 4
for which the date is February 26, 1997
F-2
<PAGE>
SANDISK CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1995 1996
------- --------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $27,255 $ 19,323
Short-term investments.................................... 41,140 54,965
Accounts receivable, net of allowance for doubtful
accounts of $593 in 1995 and 1996........................ 8,428 11,885
Inventories............................................... 10,411 9,630
Prepaid expenses and other current assets................. 534 1,684
------- --------
Total current assets...................................... 87,768 97,487
Property and equipment, at cost:
Machinery and equipment................................... 10,900 17,937
Leasehold improvements.................................... 354 1,695
------- --------
11,254 19,632
Accumulated depreciation and amortization................. 7,000 9,347
------- --------
4,254 10,285
Deposits and other assets................................... 125 496
------- --------
Total assets................................................ $92,147 $108,268
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.......................................... $ 9,053 $ 7,595
Accrued payroll and related expenses...................... 1,946 2,857
Other accrued liabilities................................. 2,862 4,354
Deferred income........................................... 5,905 5,652
------- --------
Total current liabilities................................. 19,766 20,458
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value
Authorized shares: 4,000,000
Issued and outstanding: none............................. -- --
Common stock, $0.001 par value
Authorized shares: 40,000,000
Issued and outstanding: 22,004,820 in 1995 and 22,326,584
in 1996.................................................. 22 22
Capital in excess of par value............................ 97,272 98,211
Accumulated deficit....................................... (24,913) (10,423)
------- --------
Total stockholders' equity.................................. 72,381 87,810
------- --------
Total liabilities and stockholders' equity.................. $92,147 $108,268
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE>
SANDISK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenues
Product.......................................... $35,378 $61,589 $89,599
Royalties........................................ -- 1,250 8,000
------- ------- -------
Total revenues..................................... 35,378 62,839 97,599
Cost of revenues................................... 28,074 36,613 58,707
------- ------- -------
Gross profits...................................... 7,304 26,226 38,892
Operating expenses
Research and development......................... 5,918 8,043 10,181
Sales and marketing.............................. 3,996 6,564 8,792
General and administrative....................... 2,171 3,842 7,445
------- ------- -------
Total operating expenses........................... 12,085 18,449 26,418
------- ------- -------
Operating income (loss)............................ (4,781) 7,777 12,474
Interest and other income, net..................... 593 1,749 3,154
Interest expense................................... (99) (37) (3)
------- ------- -------
Income (loss) before taxes......................... (4,287) 9,489 15,625
Provision for income taxes......................... -- 424 1,140
------- ------- -------
Net income (loss).................................. $(4,287) $ 9,065 $14,485
------- ------- -------
Net income (loss) per share (pro forma for 1994)
Primary.......................................... $ (0.23) $ 0.91 $ 0.60
Fully diluted.................................... $ (0.23) $ 0.43 $ 0.60
------- ------- -------
Shares used in computing net income (loss) per
share (pro forma for 1994)
Primary.......................................... 18,872 9,983 24,206
Fully diluted.................................... 18,872 20,856 24,206
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
SANDISK CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED
STOCK COMMON STOCK CAPITAL IN TOTAL
--------------- ------------- EXCESS OF ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT PAR VALUE DEFICIT EQUITY
------- ------ ------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1994................... 14,649 $ 15 2,722 $ 3 $57,535 $(29,691) $27,862
Exercise of preferred
stock warrants......... 15 -- -- -- 62 -- 62
Exercise of common stock
grants and options for
cash, net of
repurchases............ -- -- 111 -- 35 -- 35
Net loss................ -- -- -- -- -- (4,287) (4,287)
------- ---- ------ --- ------- -------- -------
Balance at December 31,
1994................... 14,664 15 2,833 3 57,632 (33,978) 23,672
Sale of preferred stock,
net of issuance costs.. 665 -- -- -- 6,215 -- 6,215
Conversion of preferred
stock into common stock
at IPO................. (15,329) (15) 15,329 15 -- -- --
Initial Public Offering,
net of issuance costs.. -- -- 3,701 4 33,336 -- 33,340
Exercise of common stock
grants and options for
cash, net of
repurchases............ -- -- 142 -- 89 -- 89
Net income.............. -- -- -- -- -- 9,065 9,065
------- ---- ------ --- ------- -------- -------
Balance at December 31,
1995................... -- -- 22,005 22 97,272 (24,913) 72,381
Exercise of common stock
grants and options by
employees for cash..... -- -- 168 -- 95 -- 95
Issuance of stock
pursuant to employee
stock purchase plan.... -- -- 92 -- 783 -- 783
Exercise of common stock
warrants............... -- -- 62 -- -- -- --
Income tax benefit from
stock options
exercised.............. -- -- -- -- 61 -- 61
Unrealized gain on
available for sale
securities............. -- -- -- -- -- 5 5
Net income.............. -- -- -- -- -- 14,485 14,485
------- ---- ------ --- ------- -------- -------
Balance at December 31,
1996................... -- $-- 22,327 $22 $98,211 $(10,423) $87,810
======= ==== ====== === ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
SANDISK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ (4,287) $ 9,065 $ 14,485
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation.................................. 1,952 1,625 2,347
Deferred tax.................................. -- -- (1,000)
Changes in assets and liabilities:
Accounts receivable......................... (1,396) (4,311) (3,457)
Inventory................................... 325 (6,337) 781
Prepaid expenses and other current assets... 130 (293) (250)
Deposits and other assets................... (161) 581 (271)
Accounts payable............................ 2,167 4,721 (1,458)
Accrued payroll and related expenses........ 422 1,000 911
Other accrued liabilities................... 940 1,031 1,590
Deferred income............................. 558 5,348 (253)
Pledged cash................................ 1,000 -- --
-------- -------- --------
Total adjustments............................. 5,937 3,365 (1,060)
-------- -------- --------
Net cash provided by operating activities....... 1,650 12,430 13,425
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (23,867) (40,326) (47,977)
Proceeds from short-term investments............ 29,155 8,711 34,157
Acquisition of property and equipment........... (1,369) (3,791) (8,378)
-------- -------- --------
Net cash provided by (used in) investing
activities..................................... 3,919 (35,406) (22,198)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock and warrants, net of
repurchases.................................... 35 33,429 939
Sale of convertible preferred stock, net of
issuance costs................................. 62 6,215 --
Principal payments under capital leases......... (629) (523) (98)
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... (532) 39,121 841
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 5,037 16,145 (7,932)
-------- -------- --------
Cash and cash equivalents at beginning of year.. 6,073 11,110 27,255
-------- -------- --------
Cash and cash equivalents at end of year........ $ 11,110 $ 27,255 $ 19,323
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest........ $ 99 $ 37 $ 3
Cash paid for income taxes...................... -- $ 219 $ 451
Conversion of preferred stock to common stock... -- $ 63,683 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
SanDisk Corporation (the Company) was incorporated in Delaware on June 1,
1988, to design, manufacture, and market industry-standard, solid-state mass
storage products using proprietary, high-density flash memory technology. The
Company serves customers in the industrial, communications, highly portable
computing and consumer electronics markets. Principal geographic markets for
the Company's products include the United States, Japan, the Far East and
Europe. In August 1995, the Company changed its name from SunDisk Corporation
to SanDisk Corporation.
Supplier and Customer Concentrations
A limited number of customers historically have accounted for a substantial
portion of the Company's revenues. Epson Hanbai, Hewlett Packard and NEC USA,
Inc. accounted for approximately 20%, 19% and 11%, respectively, of total
revenues in 1994. Three of the Company's customers, Epson Hanbai, Kyocera and
Hewlett Packard accounted for approximately 26%, 14% and 12%, respectively, of
total revenues in 1995. Epson Hanbai accounted for approximately 26% of total
revenues in 1996. No other distributor or OEM customer constituted 10% or more
of revenues in the periods presented. Sales of the Company's products will
vary as a result of fluctuations in market demand for such customers'
products. Further, 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 technological
obsolescence.
Certain of the raw materials used by the Company in the manufacture of its
products are available from a limited number of suppliers. For example, all of
the Company's products require silicon wafers which are currently supplied by
two foundries, Matsushita in Japan and LG Semicon in Korea. As well, certain
key components such as controllers, are purchased from single source vendors
for which alternative sources are currently not available. Shortages could
occur in these essential materials due to the interruption of supply or
increased demand in the industry. If the Company were unable to procure
certain of such materials, it would be required to reduce its manufacturing
operations which could have a material adverse effect upon its results of
operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Basis of Presentation
The Company's fiscal year ends on the Sunday closest to December 31. Fiscal
year 1996 ended on December 29, 1996. Fiscal years 1995 and 1994 ended on
December 31, 1995 and January 1, 1995, respectively. For ease of presentation,
the accompanying financial statements have been shown as ending on the last
day of the calendar month.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
F-7
<PAGE>
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Foreign Currency Transactions
Foreign operations are measured using the U.S. dollar as the functional
currency. Accordingly, monetary accounts (principally cash, receivables, and
liabilities) are remeasured using the foreign exchange rate at the balance
sheet date. Operations accounts and nonmonetary balance sheet accounts are
remeasured at the rate in effect at the date of transaction. The effects of
foreign currency remeasurement are reported in current operations and have not
been material in the periods presented.
Cash Equivalents and Short-Term Investments
Cash equivalents consist of short-term, highly liquid financial instruments
with insignificant interest rate risk that are readily convertible to cash and
have maturities of three months or less from the date of purchase. Cash
equivalents and short-term investments consist of money market funds, taxable
commercial paper, U.S. Treasury bills, U.S. government agency obligations,
corporate notes and bonds with high-credit quality institutions and auction
rate preferred stock. The fair market value, based on quoted market prices, of
cash equivalents and short-term investments is substantially equal to their
carrying value at December 31, 1996 and 1995.
Under FAS 115, management classifies investments as available-for-sale at
the time of purchase and periodically reevaluates such designation. Debt
securities classified as available-for-sale and are reported at fair value.
Unrecognized gains or losses on available-for-sale securities are included,
net of tax, in equity until their disposition. Realized gains and losses and
declines in value judged to be other than temporary on available-for-sale
securities are included in interest income. The cost of securities sold is
based on the specific identification method.
All cash equivalents and short-term investments as of December 31, 1995 and
1996 are classified as available-for-sale securities and consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash equivalents:
Money market fund......................................... $ 1,198 $ 4,639
Commercial paper.......................................... -- 6,370
Corporate notes/bonds..................................... 2,000 5,894
------- -------
Total................................................... $ 3,198 $16,903
======= =======
Short term investments:
U.S. Treasury bills and U.S. government agency
obligations.............................................. $ 7,515 $ 4,183
Corporate notes/bonds..................................... 30,625 49,782
Auction rate preferred stock.............................. 3,000 1,000
------- -------
Total................................................... $41,140 $54,965
======= =======
</TABLE>
Unrealized holding gains and losses on available-for-sale securities at
December 31, 1996 and 1995 and gross realized gains and losses on sales of
available-for-sale securities during the years ended December 31, 1996 and
1995 were immaterial.
F-8
<PAGE>
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Debt securities at December 31, 1995 and 1996, by contractual maturity, are
shown below. Expected maturities may differ from contractual maturities
because issuers of the securities may have the right to prepay obligations.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Short-term investments:
Due in one year or less................................... $24,854 $49,675
Due after one year through two years...................... 16,286 5,290
------- -------
Total................................................... $41,140 $54,965
======= =======
</TABLE>
Inventories
Inventories are stated at the lower of cost or market. Cost is computed on a
currently adjusted standard basis (which approximates actual costs on a first-
in, first-out basis). Market value is based upon an estimated average selling
price reduced by normal gross margins. Inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Raw materials................................................. $ 2,753 $3,858
Work-in-process............................................... 6,921 3,475
Finished goods................................................ 737 2,297
------- ------
$10,411 $9,630
======= ======
</TABLE>
Given the volatility of the market, the Company makes inventory provisions
for potentially excess and obsolete inventory based on backlog and forecasted
demand. However, backlog is subject to revisions, cancellations and
rescheduling. Actual demand may differ from forecasted demand and such
differences may have a material effect on the financial statements.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally two to seven years. Equipment under
capital leases is amortized over the shorter of the estimated useful life of
the asset or the term of the lease.
Revenue Recognition
Product revenue is generally recognized at the time of shipment, less a
provision for estimated sales returns. However, revenue on shipments to
distributors, subject to certain rights of return and price protection, is
deferred until the merchandise is sold by the distributors or the rights
expire. The Company earns royalties under certain patent cross license
agreements. Royalty revenue is recognized when earned.
Net Income (Loss) Per Share
Primary net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding. In addition, 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
F-9
<PAGE>
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 assumed
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 prior to their issuance regardless of whether they are
dilutive (using the treasury stock method and the anticipated initial public
offering price). Pro forma net loss per share is presented for 1994.
Per share information calculated on the above basis is as follows (shares in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
---------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Primary net income (loss) per share applicable to
common stockholders.................................. $(1.02) $ 0.91 $ 0.60
Shares used in computing primary net income (loss) per
share................................................ 4,208 9,983 24,206
Fully diluted net income (loss) per share applicable
to common stockholders............................... $(1.02) $ 0.43 $ 0.60
Shares used in computing fully diluted net income
(loss) per share..................................... 4,208 20,856 24,206
</TABLE>
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.
Supplemental net income per share for 1995 computed to give effect to the
conversion of redeemable convertible preferred shares as of January 1, 1995
(using the if-converted method) was $0.43.
Pro Forma Net Loss Per Share
Pro forma net loss per share has been computed as described above and also
gives effect, even if antidilutive, to common equivalent shares from
convertible preferred stock that automatically converted upon the closing of
the Company's initial public offering (using the if-converted method). All of
the convertible preferred stock outstanding as of the closing date of the
offering automatically converted on a one-for-one basis into shares of common
stock, based on the number of shares of convertible preferred stock
outstanding at the date of the offering.
Stock Based Compensation
The Company accounts for employee stock based compensation under APB Opinion
No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Pro forma net income and earnings per share are disclosures
required by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation," and are included in Note 5.
NOTE 2: FINANCIAL INSTRUMENTS
Concentration of Credit Risk
The Company's concentration of credit risk consists principally of cash,
cash equivalents, short-term investments, and trade receivables. The Company's
investment policy restricts investments to high-credit quality investments and
limits the amounts invested with any one issuer. The Company sells primarily
to original equipment manufacturers in the United States and Japan, performs
ongoing credit evaluations of its customers' financial condition, and
generally requires no collateral. Reserves are maintained for potential credit
losses.
F-10
<PAGE>
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Off Balance Sheet Risk
In connection with the credit agreement discussed in Note 3, the Company has
a foreign exchange contract line in the amount of $15,000,000 at December 31,
1996. Under this line, the Company may enter into forward exchange contracts
which require the Company to sell or purchase foreign currencies. There were
no forward exchange contracts outstanding at December 31, 1996 and 1995.
Certain of the Company's purchase commitments and balance sheet accounts are
denominated in yen. Foreign exchange exposures arising from the Company's yen
denominated purchase commitments and related accounts payable are mitigated to
the extent the Company has yen denominated current assets. To the extent such
foreign exchange exposures are not mitigated, the Company enters into foreign
exchange contracts to hedge against changes in foreign currency exchange
rates. The effects of movements in currency exchange rates on these
instruments are recognized when the related operating revenues and expenses
are recognized. The impact of movements in currency exchange rates on foreign
exchange contracts substantially mitigates the related impact on the
underlying items hedged. The Company had net transaction gains (losses) of
approximately $109,000, ($20,000) and ($193,000) for the years ended December
31, 1994, 1995, and 1996, respectively. These amounts are included in interest
and other income, net in the statement of operations.
NOTE 3: LINE OF CREDIT
The Company has a credit agreement (the Agreement) with a bank, which
expires in July 1997. Under the provisions of the Agreement, the Company may
borrow up to $10,000,000 on a revolving line of credit at the bank's prime
interest rate (8.25% at December 31, 1996). Amounts under the revolving line
of credit can be applied to the issuance of letters of credit of up to
$10,000,000. At December 31, 1996, $6,200,000 in letters of credit were
outstanding. In addition, under the Agreement, the Company also has a
$15,000,000 foreign exchange contract line (see Note 2) under which the
Company may enter into forward exchange contracts. No amounts were outstanding
under the revolving line of credit portion of the Agreement and the foreign
exchange contract portion of the line at December 31, 1996. The Agreement
contains covenants that require the Company to maintain certain financial
ratios and levels of net worth. The Agreement also does not permit the payment
of cash dividends to stockholders. As of December 31, 1996, the Company was in
compliance with the covenants. Based on available collateral and outstanding
letters of credit, the amount available under the Agreement at December 31,
1996 was approximately $3,800,000.
NOTE 4: COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases its headquarters and sales offices under operating leases
that expire at various dates through 2002. Future minimum lease payments under
operating leases at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1997........................................................ $1,049,784
1998........................................................ 1,595,320
1999........................................................ 1,623,644
2000........................................................ 1,666,440
2001........................................................ 1,211,110
Thereafter.................................................. 573,648
----------
Total..................................................... $7,719,946
==========
</TABLE>
Rental expense under all operating leases was $730,000, $789,000 and
$1,050,000 for the years ended December 31, 1994, 1995 and 1996 respectively.
F-11
<PAGE>
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Contingencies
The Company is party to various legal proceedings. In October 1995, Samsung
Electronics Company Ltd. filed a complaint against the Company in the Northern
District of California 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. As written, the
complaint potentially implicates products that comprised substantially all of
the Company's revenues for 1996 and 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
such claims.
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.
On February 26, 1997, the Administrative Law Judge assigned to the case issued
an Initial Determination finding both SanDisk patents valid and infringed and
further finding a violation of Section 337 of the Trade Act. This decision
will go to the International Trade Commission which will decide whether to
approve the ruling and enter an exclusion or cease and desist order barring
importation of Samsung flash memory devices. While the ruling is important, no
assurance can be given that the Commission will enter an exclusion or cease
and desist order. A final decision is expected in May, 1997.
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.
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.
From time to time the Company agrees to indemnify certain of its suppliers
and customers for alleged patent infringement. The scope of such indemnity
varies but may in some instances include indemnification for damages and
expenses, including attorneys fees. The Company may from time to time be
engaged in litigation as a result of such indemnification obligations. Third
party claims for patent infringement are excluded from coverage under the
Company's insurance policies. There can be no assurance that any future
obligation to indemnify the
F-12
<PAGE>
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company's customers or suppliers, will not have a material adverse effect on
the Company's business, financial condition and results of operations.
Litigation frequently involves substantial expenditures and can require
significant management attention, even if the Company ultimately prevails. In
addition, the results of any litigation matters are inherently uncertain.
Accordingly, there can be no assurance that any of the foregoing matters, or
any future litigation, will not have a material adverse effect on the
Company's business, financial condition and results of operations.
NOTE 5: STOCKHOLDERS' EQUITY
Stock Purchase Agreements
Prior to the adoption of the 1989 Stock Benefit Plan, the Company entered
into stock purchase agreements with certain eligible individuals. Under the
stock purchase agreements, the Company authorized the sale of common stock to
certain employees, directors, and consultants at the fair value on the date of
grant, as determined by the Board of Directors. The shares sold under these
agreements generally vest over four years as determined by the Board of
Directors. Upon the termination of employment, director services, or
consultant services, unvested shares are subject to repurchase by the Company
at the original purchase price.
Stock Benefit Plan
The 1989 Stock Benefit Plan, in effect through August 1995, comprised two
separate programs, the Stock Issuance Program and the Option Grant Program.
The Stock Issuance Program allowed eligible individuals to immediately
purchase the Company's common stock at a fair value as determined by the Board
of Directors. Such shares may be fully vested when issued or may vest over
time as determined by the Board of Directors. Under the Option Grant Program,
eligible individuals were granted options to purchase shares of the Company's
common stock at a fair value, as determined by the Board of Directors, of such
shares on the date of grant. The options generally vest over a four-year
period, expiring no later than ten years from the date of grant. Unexercised
options are canceled upon the termination of employment or services. Options
that are canceled under this plan will be available for future grants under
the 1995 Stock Option Plan. There were no shares available for option grants
under this plan at December 31, 1996.
The 1995 Stock Option Plan provides for the issuance of incentive stock
options and nonqualified stock options. Under this plan, the vesting and
exercise provisions of option grants are determined by the Board of Directors.
The options generally vest over a four-year period, expiring no later than ten
years from the date of grant.
1995 Non-employee Directors Stock Option Plan
In August 1995, the Company adopted the 1995 Non-employee Directors Stock
Option Plan (the Directors' Plan) and reserved 150,000 shares of common stock
for issuance thereunder. Under this plan, automatic option grants are made at
periodic intervals to eligible non-employee members of the Board of Directors.
The options vest over a four-year period and expire ten years after the date
of grant. At December 31, 1996, a total of 72,000 options had been granted at
an exercise prices of $10.00 and $13.375 per share.
F-13
<PAGE>
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of activity under all stock option plans follows:
<TABLE>
<CAPTION>
TOTAL
AVAILABLE FOR WEIGHTED
FUTURE TOTAL AVERAGE
GRANT/ISSUANCE OUTSTANDING EXERCISE PRICE
-------------- ----------- --------------
(SHARES IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1993....... 174 1,481 $ 0.46
Increase in authorized shares.... 667 --
Granted.......................... (715) 715 $ 1.58
Exercised........................ -- (113) $ 0.31
Canceled......................... 215 (215) $ 0.46
----- -----
Balance at December 31, 1994....... 341 1,868 $ 0.89
Increase in authorized shares.... 1,566 --
Granted.......................... (790) 790 $ 6.41
Exercised........................ -- (141) $ 0.64
Canceled......................... 59 (59) $ 1.35
----- -----
Balance at December 31, 1995....... 1,176 2,458 $ 2.67
Granted.......................... (922) 922 $12.35
Exercised........................ -- (168) $ 0.57
Canceled......................... 68 (68) $ 8.46
----- -----
Balance at December 31, 1996....... 322 3,144 $ 5.49
===== =====
</TABLE>
At December 31, 1996, options outstanding were as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- --------------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AS OF AVERAGE REMAINING AVERAGE EXERCISABLE AS OF AVERAGE
EXERCISE PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE
--------------- ----------------- ----------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.15-$ 0.75 1,125,350 6.33 $ 0.5315 1,106,684 $ 0.54
$ 2.25-$ 4.50 466,453 8.04 $ 2.3467 462,153 $ 2.35
$ 6.75-$10.00 663,555 8.61 $ 6.9850 661,555 $ 6.99
$11.50-$14.62 886,050 9.87 $12.1884 24,000 $13.38
$17.25-$20.50 22,000 9.11 $17.3829 224 $20.50
--------- ---- -------- --------- ------
$ 0.15-$20.50 3,143,408 8.06 $ 5.4927 2,254,616 $ 2.94
</TABLE>
There were 22,259 shares subject to repurchase under the Stock Benefit Plan
or under stock purchase agreements at December 31, 1996. Approximately 46,359
shares were subject to repurchase at December 31, 1995.
Employee Stock Purchase Plan
In August 1995, the Company adopted the Employee Stock Purchase Plan (the
Purchase Plan) and reserved 433,333 shares of common stock for issuance
thereunder. Under the Purchase Plan, qualified employees are entitled to
purchase shares through payroll deductions at 85% of the fair market value at
the beginning or end of the offering period, whichever is lower. As of
December 31, 1996, shares issued under the Purchase Plan totaled 92,350.
F-14
<PAGE>
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accounting for Stock Based Compensation
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 "Accounting for
Stock-Based Compensation," requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of this Statement.
For all grants subsequent to December 31, 1994 that were granted prior to the
Company's initial public offering in November 1995, the fair value of these
options was determined using the minimum value method with a weighted average
risk free interest rate of 6.32% and an expected life of 5 years. The fair
value for the options granted subsequent to the Company's initial public
offering in November 1995 was estimated at the date of grant using a
Black-Scholes single option pricing model with the following weighted average
assumptions: risk-free interest rates of 6.23% and 6.37% for 1996 and 1995,
respectively; a dividend yield of 0.0%, a volatility factor of the expected
market price of the Company's common stock of 0.588 and 0.513 for 1996 and
1995, respectively; and a weighted-average expected life of the option of 5
years. The weighted average fair value of those options granted were $6.80 and
$3.34 for 1996 and 1995, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Under the 1995 Employee Stock Purchase Plan, the Company is authorized to
issue up to 433,333 shares of common stock to participating employees. Under
the terms of the Plan, employees can choose to have up to 10% of their annual
base earnings withheld to purchase the Company's common stock. The purchase
price of the stock is 85% of the lower of the subscription date fair market
value and the purchase date fair market value. Approximately 86% of eligible
employees have participated in the plan in 1996 and 1995. Under the Plan, the
Company sold 92,350 shares to employees in 1996. Pursuant to APB 25 and
related interpretations, the Company does not recognize compensation cost
related to employee purchase rights under the Plan. To comply with the pro
forma reporting requirements of SFAS 123, compensation cost is estimated for
the fair value of the employees' purchase rights using the Black-Scholes model
with the following assumptions for those rights granted in 1996 and 1995:
dividend yield of 0.0%; and expected life of 6 months; expected volatility
factor of 0.588 in 1996 and 0.513 in 1995; and a risk free interest rate
ranging from 5.36% to 5.48%. The weighted average fair value of those purchase
rights granted in November 1995, February 1996 and August 1996 were $2.01,
$2.47, and $2.52, respectively.
F-15
<PAGE>
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1995 1996
---------- -----------
<S> <C> <C>
Pro forma net income................................. $8,915,000 $13,553,000
Pro forma earnings per share......................... $ 0.43 $ 0.56
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
1999.
Warrants
The Company has periodically granted warrants in connection with the sale of
its stock and certain lease and bank agreements. The Company has the following
warrants outstanding to purchase capital stock at December 31, 1996:
<TABLE>
<CAPTION>
ISSUANCE CAPITAL NUMBER OF PRICE PER EXPIRATION
DATE STOCK SHARES SHARE DATE
-------- ------- --------- --------- -------------
<S> <C> <C> <C> <C>
May 1990........................... Common 12,094 $6.615 May 2000
June 1990.......................... Common 66,665 $6.000 None
June 1991.......................... Common 6,666 $6.615 June 1999
November 1991...................... Common 13,363 $6.615 November 1999
November 1992...................... Common 7,575 $3.300 June 1998
</TABLE>
During 1996, the Company issued 61,744 shares of common stock for no
proceeds in the net issuance of shares upon the exercise of 91,211 warrants
with a weighted average exercise price of $4.17 per share.
NOTE 6: RETIREMENT PLAN
Effective January 1, 1992, the Company adopted a tax-deferred savings plan,
the SanDisk 401(k) Plan, for the benefit of qualified employees. The plan is
designed to provide employees with an accumulation of funds at retirement.
Qualified employees may elect to make contributions to the plan on a monthly
basis. The Company may make annual contributions to the plan at the discretion
of the Board of Directors. No contributions were made by the Company for the
years ended December 31, 1996, 1995 and 1994.
NOTE 7: INCOME TAXES
The provision for income taxes computed under Statement of Financial
Accounting Standard No. 109 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
-------- -----------
<S> <C> <C>
Current:
Federal.............................................. $312,000 $ 1,701,000
State................................................ 66,000 42,000
Foreign.............................................. 46,000 397,000
-------- -----------
$424,000 $ 2,140,000
Deferred:
Federal.............................................. -- (1,000,000)
-------- -----------
Provision for income taxes............................. $424,000 $ 1,140,000
======== ===========
</TABLE>
F-16
<PAGE>
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's provision for income taxes differs from the amount computed by
applying the federal statutory rates of 35% for 1996 and 1995 and 34% for 1994
to income before taxes as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Tax at U.S. statutory rate............................. (34.0)% 35.0% 35.0%
Operating losses (utilized)/not utilized............... 34.0 (31.4) (17.4)
Research credit........................................ -- -- (5.6)
Valuation allowance.................................... -- -- (8.0)
Foreign taxes in excess of U.S. rate................... -- -- 2.1
Other individually immaterial items.................... -- .9 1.2
----- ----- -----
0.0% 4.5% 7.3%
===== ===== =====
</TABLE>
As of December 31, 1996, the Company had federal and state tax credit
carryforwards of approximately $750,000 and $75,000, respectively. The tax
credit carryforwards will expire at various dates beginning in years 2008
though 2011, if not utilized.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components
of the Company's deferred tax assets as of December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Inventory reserves...................................... $ 2,500 $ 2,500
Deferred revenue........................................ 2,300 2,000
Other................................................... 1,100 1,500
Tax credit carryforwards................................ 1,400 800
Fixed assets............................................ 800 350
Capitalized research and development.................... 500 300
Net operating loss carryforwards........................ 2,600 --
-------- -------
Total deferred tax assets............................. 11,200 7,450
Valuation allowance................................... (11,200) (6,450)
-------- -------
Net deferred tax assets............................... $ -- $ 1,000
======== =======
</TABLE>
The valuation allowance increased $2,600,000 in 1994 and decreased by
approximately $3,000,000 and $4,750,000 for 1995 and 1996, respectively.
Management has determined, based on the Company's history of prior operating
earnings and its expectations for the future, that a partial valuation
allowance for deferred tax assets should be provided. Approximately $500,000
of the valuation allowance is attributable to stock option deductions, the
benefit of which will be credited to paid in capital when realized.
NOTE 8: RELATED PARTY TRANSACTIONS
In January 1993, the Company entered into a joint cooperation agreement with
a stockholder. Under the terms of the agreement, the stockholder had a
nonexclusive right to distribute flash memory products produced by the
Company. Revenues under the agreement were approximately $3,234,000 in 1994.
There were no revenues attributable to this agreement in 1995 and 1996. The
agreement was amended in October 1994. Under
F-17
<PAGE>
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the terms of the amended agreement, the stockholder relinquished its right to
distribute flash memory products but has the option to reinstate this right in
January 1999. In addition, under the terms of the amended agreement, the
Stockholder returned approximately $0.8 million of inventory in November 1994.
The Company sold the majority of this returned inventory in December 1994.
Accordingly, the returned inventory did not have a material impact on the
Company's statement of operations for the year ended December 31, 1994.
NOTE 9: INDUSTRY AND GEOGRAPHIC INFORMATION
The Company markets its products in the United States and in foreign
countries through its sales personnel, dealers, distributors, and its
subsidiaries. Export sales account for a significant portion of the Company's
revenues. Geographic revenue information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
United States..................................... $ 21,799 $ 27,230 $ 43,999
Export:
Japan........................................... 11,300 24,255 43,947
Far East........................................ 1,689 8,125 4,314
Europe.......................................... 590 3,229 5,339
-------- -------- --------
Total............................................. $ 35,378 $ 62,839 $ 97,599
======== ======== ========
</TABLE>
NOTE 10: MAJOR CUSTOMERS
Customers who accounted for at least 10% of total revenues were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Epson Hanbai Co., Ltd......................................... 20% 26% 26%
Hewlett-Packard Company....................................... 19% 12% *
NEC USA, Inc.................................................. 11% * *
Kyocera America, Inc.......................................... * 14% *
</TABLE>
- --------
* Revenues were less than 10%
F-18
<PAGE>
SANDISK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996* 1997
------------ -------------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................... $ 19,323 $ 18,337
Short-term investments............................. 54,965 41,986
Accounts receivable, net........................... 11,885 22,681
Inventories, net................................... 9,630 11,320
Prepaid expenses and other current assets.......... 1,684 4,491
-------- --------
Total current assets................................. 97,487 98,815
Property and equipment, net.......................... 10,285 13,284
Investment in joint venture.......................... -- 40,231
Deposits and other assets............................ 496 489
-------- --------
Total Assets..................................... $108,268 $152,819
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable................................... $ 7,595 $ 11,165
Accrued payroll and related expenses............... 2,857 4,240
Other accrued liabilities.......................... 4,354 3,394
Deferred revenue................................... 5,652 31,994
-------- --------
Total current liabilities............................ 20,458 50,793
Stockholders' Equity:
Common stock....................................... 98,233 99,837
Retained earnings (accumulated deficit)............ (10,423) 2,189
-------- --------
Total stockholders' equity........................... 87,810 102,026
-------- --------
Total Liabilities and Stockholders' Equity....... $108,268 $152,819
======== ========
</TABLE>
- --------
* Information derived from the audited Consolidated Financial Statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-19
<PAGE>
SANDISK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1997
-------- --------
<S> <C> <C>
Revenues:
Product.................................................... $ 67,599 $ 72,335
License and royalty........................................ 3,750 12,600
-------- --------
Total revenues............................................... 71,349 84,935
Cost of sales................................................ 43,538 49,476
-------- --------
Gross profits................................................ 27,811 35,459
Operating expenses:
Research and development................................... 7,280 9,634
Sales and marketing........................................ 6,467 8,728
General and administrative................................. 5,580 4,933
-------- --------
Total operating expenses..................................... 19,327 23,295
Operating income............................................. 8,484 12,164
Interest and other income, net............................... 2,320 2,680
-------- --------
Income before taxes.......................................... 10,804 14,844
Provision for income taxes................................... 702 2,227
-------- --------
Net income................................................... $10,102 $12,617
======== ========
Net income per share......................................... $ 0.42 $ 0.51
======== ========
Shares used in computing net income per share................ 24,204 24,504
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-20
<PAGE>
SANDISK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1997
-------- --------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income................................................ $ 10,102 $ 12,617
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation............................................ 1,641 2,839
Accounts receivable, net................................ (1,407) (10,796)
Inventory............................................... 1,294 (1,690)
Prepaids and other assets............................... (412) (2,800)
Accounts payable........................................ (398) 3,570
Accrued payroll and related expenses.................... 858 1,383
Other accrued liabilities............................... 320 (960)
Deferred revenue........................................ 141 26,342
-------- --------
Total adjustments.................................... 2,037 17,888
-------- --------
Net cash provided by operating activities................. 12,139 30,505
Cash flows provided by (used in) investing activities:
Purchase of short term investments...................... (34,520) (17,859)
Proceeds from sale of short term investments............ 26,695 30,833
Acquisition of capital equipment........................ (6,025) (5,838)
Investment in joint venture............................. -- (40,231)
-------- --------
Net cash used in investing activities..................... (13,850) (33,095)
Cash flows provided by (used in) financing activities:
Sale of common stock, net of repurchases................ 855 1,604
Principal payments under capital leases................. (98) --
-------- --------
Net cash provided by financing activities................. 757 1,604
-------- --------
Net decrease in cash and cash equivalents................. (954) (986)
Cash and cash equivalents at beginning of period.......... 27,255 19,323
-------- --------
Cash and cash equivalents at end of period................ $ 26,301 $ 18,337
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-21
<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 September 30, 1997, and the results
of operations and cash flows for the nine month periods ended September 30,
1997 and 1996. 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 included elsewhere herein.
The condensed consolidated balance sheet data as of December 31, 1996 was
derived from the audited financial statements.
The results of operations and the statement of cash flows for the nine
months ended September 30, 1997 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 third fiscal quarter of 1997 and 1996 ended on September
28, 1997 and September 29, 1996, respectively. Fiscal year 1996 ended on
December 29, 1996. 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:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials................................. $3,858 $ 2,246
Work-in-process............................... 3,475 7,757
Finished goods................................ 2,297 1,317
------ -------
$9,630 $11,320
====== =======
</TABLE>
4. In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share ("SFAS 128"), which is required to be adopted
on December 31, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all
prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The
impact is expected to result in an increase of $0.05 in net income per
share for the nine month periods ended September 30, 1997 and 1996. The
calculation of diluted earnings per share under SFAS 128 is not materially
different from net income per share for the periods presented.
5. In October 1995, Samsung Electronics Company Ltd. filed a complaint against
the Company in the Northern District of California 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. 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, were importing and selling products that
infringe two of the Company's patents. On February 26, 1997, the
Administrative Law Judge assigned to the case issued an Initial
Determination finding both SanDisk patents valid and infringed and further
finding a violation of Section 337 of the Trade Act. On June 2, 1997, the
Commission issued a limited exclusion order prohibiting the unlicensed
entry of infringing flash memory circuits, and carriers and circuit boards
containing such circuits, that are manufactured by or on behalf of Samsung.
On August 14, 1997, in connection with the settlement of all disputes
between them, the Company and Samsung announced the signing of a patent
cross license agreement for flash memory related patents. Under the
agreement, the Company and Samsung have licensed each others patents
covering the design and manufacture of flash memory products.
F-22
<PAGE>
The Company also entered into other cross-license agreements during the
nine months ended September 30, 1997. Under these agreements, the Company
received payments, portions of which were recognized as license and royalty
revenues and portions of which are deferred revenue. Recognition of
deferred revenue is expected to occur in future periods as the Company
meets certain obligations as provided in the various agreements.
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 future
litigation, will not have a material adverse effect on the Company's
business, financial condition and results of operations.
6. On April 21, 1997, the Company adopted a shareholder rights plan (the
Rights Agreement). Under the Rights Agreement, rights were distributed as a
dividend at the rate of one right for each share of common stock of the
Company held by stockholders of record as of the close of business on April
28, 1997. The rights will expire on April 28, 2007 unless redeemed or
exchanged. Under the Rights Agreement, each right will initially entitle
the registered holder to buy one one-hundredth of a share of Series A
Junior Participating Preferred Stock for $65.00. The rights will become
exercisable only if a person or group (other than Seagate Corporation which
is permitted to maintain its 25% stake in the Company) acquires beneficial
ownership of 15 percent or more of the Company's common stock or commences
a tender or exchange offer upon consummation of which such person or group
would beneficially own 15 percent or more of the Company's common stock.
7. The Company recorded a provision for income taxes at a 15% effective tax
rate for the first nine months of 1997 compared to a 6.5% effective tax
rate for the same period of 1996. The effective tax rate for the first nine
months of 1997 is substantially below the federal statutory rate due to the
utilization of federal and state tax credit carryforwards, Foreign Sales
Corporation tax benefits and a reduction in the deferred tax asset
valuation allowance.
8. In the third quarter of 1997, the Company invested $40.2 million in United
Silicon, Inc. ("USIC"), a semiconductor manufacturing joint venture headed
by United Microelectronics Corporation in Taiwan. The transaction gives the
Company an equity stake of approximately 10% in the joint venture (which
will be accounted for on the cost basis) and guarantees access to
approximately 12.5% of the wafer output from the facility.
9. The Company has a credit agreement (the Agreement) with a bank, which was
renewed in July 1997. Under the provisions of the Agreement, which expires
in July 1998, the Company may borrow up to $10,000,000 on a revolving line
of credit at the bank's prime interest rate. Amounts under the revolving
line of credit can be applied to the issuance of letters of credit of up to
the full amount of the credit line. At September 30, 1997, $7,200,000 in
letters of credit were outstanding. In addition, under the Agreement, the
Company also has a $15,000,000 foreign exchange contract line under which
the Company may enter into foreign exchange contracts. No amounts were
outstanding under the revolving line of credit portion of the Agreement and
the foreign exchange contract portion of the line at September 30, 1997.
The Agreement contains covenants that require the Company to maintain
certain financial ratios and levels of net worth. The Agreement prohibits
the payment of cash dividends to stockholders. At September 30, 1997 the
Company was not in compliance with the quick ratio covenant due to the
increase in deferred revenue. Following the end of the quarter, the
financial covenants were retroactively amended by the bank and the Company
was in compliance with all financial covenants as amended.
F-23
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates
except the SEC registration fee, the NASD filing fees and the Nasdaq Listing
fee.
<TABLE>
<S> <C>
SEC Registration fee.............................................. $ 29,339
NASD fee.......................................................... 10,182
Nasdaq Listing fee................................................ 17,500
Printing and engraving............................................ 90,000
Legal fees and expenses of the Company............................ 100,000
Accounting fees and expenses...................................... 75,000
Blue sky fees and expenses........................................ 5,000
Transfer agent fees............................................... 5,000
Miscellaneous..................................................... 67,979
--------
Total........................................................... $400,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII of the Company's Bylaws
provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum
extent permitted by the Delaware General Corporation Law. The Company's
Certificate of Incorporation provides that, subject to Delaware law, its
directors shall not be personally liable for monetary damages for breach of
the directors' fiduciary duty as directors to the Company and its
stockholders. This provision in the Certificate of Incorporation does not
eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief
will remain available under Delaware law. In addition, each director will
continue to be subject to liability for breach of the director's duty of
loyalty to the Company or its stockholders for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director, and for payment
of dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Company has entered into
indemnification agreements with its officers and directors, a form of which
was previously filed with the Securities and Exchange Commission as an Exhibit
to the Registrant's Registration Statement on Form S-1 (No. 33-96298)(the
"Indemnification Agreements"). The Indemnification Agreements provide the
Company's officers and directors with further indemnification to the maximum
extent permitted by the Delaware General Corporation Law. Reference is also
made to Section VIII of the Underwriting Agreement contained in Exhibit 1.1
hereto, indemnifying officers and directors of the Company against certain
liabilities, and Section 10 of the Amended and Restated Registration Rights
Agreement contained in Exhibit 4.3 hereto, indemnifying certain of the
Company's stockholders, including controlling stockholders, against certain
liabilities.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits listed in the Exhibit Index as filed as part of this
Registration Statement.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.1* Form of Underwriting Agreement among the Registrant, Morgan Stanley
& Co. Incorporated, Goldman, Sachs & Co. and BancAmerica Robertson
Stephens.
4.1 Reserved.
4.2 Registrant's Specimen Stock Certificate.(1)
4.3 Amended and Restated Registration Rights Agreement, among the
Registrant and the investors and founders named therein, dated
March 3, 1995.(1)
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.(1)
4.5 Series F Preferred Stock Purchase Agreement between Seagate
Technology, Inc. and the Registrant, dated January 15, 1993.(1)
4.6 Amendment Agreement between Seagate Technology, Inc. and the
Registrant, dated August 23, 1995.(1)
Form of Stock Purchase Agreement between the Registrant and Seagate
4.7 Technology, Inc.(3)
4.8 Rights Agreement, dated as of April 18, 1997, between the Company
and Harris Trust and Savings Bank.(3)
5.1* Legal Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
Registrant.
21.1 Subsidiaries of the Registrant.(2)
23.1* Consent of Ernst & Young LLP, Independent Auditors (see page II-6).
23.2* Consent of Counsel (see Exhibit 5.1).
24.1* Power of Attorney (see page II-4).
</TABLE>
- --------
* Filed herewith.
(1) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-1 (No. 33-96298).
(2) Previously filed as an Exhibit to the Registrant's 1996 Annual Report on
Form 10-K.
(3) Previously filed as an Exhibit to the Registrant's Current Report on Form
8-K/A dated April 18, 1997.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
The Company hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations
and registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Company, Indemnification Agreements entered
into between the Company and its officers and directors, the Underwriting
Agreement, or otherwise, the Company has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Company of expenses incurred or paid by a director,
officer, or controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act of 1934, (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Exchange Act)
that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Sunnyvale, State of California, on
this 24th day of October, 1997.
SANDISK CORPORATION
By: /s/ Eliyahou Harari
___________________________________
Eliyahou Harari
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints, jointly and severally, Eliyahou Harari and
Cindy Burgdorf, and each one of them, his or her true and lawful attorneys-in-
fact and agents, each with full power of substitution, for him or her and in
his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering
covered by this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as
amended, and all post-effective amendments thereto, and to file the same, with
all exhibits thereto and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming that each of said attorneys-in-fact
and agents or any of them, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the persons whose signatures appear
below, which persons have signed such Registration Statement in the capacities
and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Eliyahou Harari President, Chief Executive Officer October 24, 1997
____________________________________ (Principal Executive Officer)
(Eliyahou Harari)
/s/ Cindy Burgdorf Senior Vice President, Finance and October 24, 1997
____________________________________ Administration, Chief Financial
(Cindy Burgdorf) Officer (Principal Financial and
Accounting Officer), and Secretary
/s/ Irwin Federman Director October 24, 1997
____________________________________
(Irwin Federman)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ William V. Campbell Director October 24, 1997
____________________________________
(William V. Campbell)
/s/ Dr. James D. Meindl Director October 24, 1997
____________________________________
(Dr. James D. Meindl)
/s/ Catherine P. Lego Director October 24, 1997
____________________________________
Catherine P. Lego
/s/ Joseph Rizzi Director October 24, 1997
____________________________________
Joseph Rizzi
/s/ Alan F. Shugart Director October 24, 1997
____________________________________
Alan F. Shugart
</TABLE>
II-5
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
January 17, 1997, except for Note 4 for which the date is February 26, 1997 in
the Registration Statement (Form S-3) and related Prospectus of SanDisk
Corporation for the registration of 3,450,000 shares of its Common Stock and
to the incorporation by reference therein of our report dated January 17,
1997, except for Note 4 for which the date is February 26, 1997, with respect
to the consolidated financial statements and schedule of SanDisk Corporation
included in its Annual Report (Form 10-K) for the year ended December 31,
1996, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
San Jose, California
October 24, 1997
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S> <C>
EXHIBIT DESCRIPTION SEQUENTIALLY
NO. ----------- NUMBERED PAGE
------- -------------
1.1* Form of Underwriting Agreement among the Registrant, Morgan Stanley & Co.
Incorporated, Goldman, Sachs & Co. and BankAmerica Robertson Stephens.
4.1 Reserved.
4.2 Registrant's Specimen Stock Certificate.(1)
4.3 Amended and Restated Registration Rights Agreement, among the Registrant
and the investors and founders named therein, dated March 3, 1995.(1)
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.(1)
4.5 Series F Preferred Stock Purchase Agreement between Seagate Technology,
Inc. and the Registrant, dated January 15, 1993.(1)
4.6 Amendment Agreement between Seagate Technology, Inc. and the Registrant,
dated August 23, 1995.(1)
Form of Stock Purchase Agreement between the Registrant and Seagate
4.7 Technology, Inc.(3)
4.8 Rights Agreement, dated as of April 18, 1997, between the Company and
Harris Trust and Savings Bank.(3)
5.1* Legal Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
Registrant.
21.1 Subsidiaries of the Registrant.(2)
23.1* Consent of Ernst & Young LLP, Independent Auditors (see page II-6).
23.2* Consent of Counsel (see Exhibit 5.1).
24.1* Power of Attorney (see page II-4).
</TABLE>
- --------
* Filed herewith.
(1) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-1 (No. 33-96298).
(2) Previously filed as an Exhibit to the Registrant's 1996 Annual Report on
Form 10-K.
(3) Previously filed as an Exhibit to the Registrant's Current Report on Form
8-K/A dated April 18, 1997.
<PAGE>
3,000,000 Shares
SANDISK CORPORATION
Common Stock, $.001 par value
UNDERWRITING AGREEMENT
November __, 1997
<PAGE>
November __, 1997
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
BancAmerica Robertson Stephens
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Ladies and Gentlemen:
SanDisk Corporation, a Delaware corporation (the "Company"), proposes
to issue and sell to the several Underwriters named in Schedule I hereto (the
"Underwriters"), an aggregate of 3,000,000 shares of the common stock, $.001 par
value, of the Company (the "Firm Shares").
The Company also proposes to issue and sell to the several
Underwriters not more than an additional 450,000 shares of its common stock,
$.001 par value (the "Additional Shares"), if and to the extent that you, as
Managers of the offering, shall have determined to exercise, on behalf of the
Underwriters, the right to purchase such shares of common stock granted to the
Underwriters in Section 2 hereof. The Firm Shares and the Additional Shares are
hereinafter collectively referred to as the "Shares." The shares of common
stock, $.001 par value, of the Company to be outstanding after giving effect to
the sales contemplated hereby are hereinafter referred to as the "Common Stock."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (Commission File No. 333-_____ ),
including a prospectus, relating to the Shares. The registration statement as
amended at the time it becomes effective, including the information (if any)
deemed to be part of the registration statement at the time of effectiveness
pursuant to Rule 430A under the Securities Act of 1933, as amended (the
"Securities Act"), is hereinafter referred to as the "Registration Statement;"
the prospectus in the form first used to confirm sales of Shares is hereinafter
referred to as the "Prospectus." As used herein, the terms "Registration
Statement," "Prospectus" and "preliminary prospectus" shall include in each case
the documents, if any, incorporated by reference therein (the "Incorporated
Documents") that the Company has filed pursuant to the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). The terms "supplement," "amendment"
and "amend" as used herein shall include all documents deemed to be incorporated
by reference in the Prospectus that are filed subsequent to the date of the
Prospectus by the Company with the Commission pursuant to the Exchange Act. If
the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "Rule 462 Registration Statement"), then any reference herein to the
term "Registration Statement" shall be deemed to include such Rule 462
Registration Statement.
<PAGE>
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each of the Underwriters that:
a. The Company meets the requirements for filing a Registration
Statement on Form S-3 and such Registration Statement has become effective,
no stop order suspending the effectiveness of the Registration Statement is
in effect, and no proceedings for such purpose are pending before or
threatened by the Commission.
b. (i) Each document filed or to be filed pursuant to the
Exchange Act and incorporated by reference in the Prospectus complied or
will comply when so filed in all material respects with the Exchange Act
and the applicable rules and regulations of the Commission thereunder;
(ii) each part of the Registration Statement, when such part became
effective, did not contain and each such part, as amended or supplemented,
if applicable, will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, (iii) the Registration
Statement and the Prospectus comply and, as amended or supplemented, if
applicable, will comply in all material respects with the Securities Act
and the applicable rules and regulations of the Commission thereunder and
(iv) the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in
this paragraph (b) do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating to
any Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use therein.
c. The Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of the State of Delaware,
has the corporate power and authority to own its property and to conduct
its business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires
such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect
on the Company and its subsidiaries, taken as a whole.
d. Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to
own its property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole; all of the issued shares of capital stock of each subsidiary of the
Company have been duly and validly authorized and issued, are fully paid
and non-assessable and are owned directly by the Company, free and clear of
all liens, encumbrances, equities or claims.
e. The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to
all personal property owned by them which is material to the business of
the Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such
3
<PAGE>
property by the Company and its subsidiaries; and any real property and
buildings held under lease by the Company and its subsidiaries are held by
them under valid, subsisting and enforceable leases with such exceptions as
are not material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company and its subsidiaries, in
each case except as described in or contemplated by the Prospectus.
f. The authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus.
g. The shares of Common Stock outstanding prior to the issuance
of the Shares to be sold by the Company have been duly authorized and are
validly issued, fully paid and non-assessable. Except as set forth in the
Prospectus, neither the Company nor any subsidiary has outstanding any
options to purchase, or any preemptive rights or other rights to subscribe
for or to purchase, any securities or obligations convertible into, or any
contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. All
outstanding shares of capital stock and options and other rights to acquire
capital stock have been issued in compliance with the registration and
qualification provisions of all applicable securities laws and were not
issued in violation of any preemptive rights, rights of first refusal or
other similar rights.
h. The Shares to be sold by the Company have been duly
authorized and when issued and delivered in accordance with the terms of
this Agreement will be, validly issued, fully paid and non-assessable, and
the issuance of such Shares will not be subject to any preemptive rights,
rights of first refusal or similar rights.
i. This Agreement has been duly authorized, executed and
delivered by the Company.
j. The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of applicable law or the certificate of
incorporation or bylaws of the Company or any subsidiary, or any agreement
or other instrument binding upon the Company or any of its subsidiaries
that is material to the Company and its subsidiaries, taken as a whole, or
any judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of or qualification with any governmental
body or agency is required for the performance by the Company of its
obligations under this Agreement, except such as may be required by the
securities or Blue Sky laws of the various states in connection with the
offer and sale of the Shares.
k. There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from that
set forth in the Prospectus.
l. Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) the Company and
its subsidiaries have not incurred any material liability or obligation,
direct or contingent, nor entered into any material transaction not in the
ordinary course of business; (ii) the Company has not purchased any of its
outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock other than
4
<PAGE>
ordinary and customary dividends; and (iii) there has not been any material
change in the capital stock, short-term debt or long-term debt of the
Company and its consolidated subsidiaries, except in each case as described
in or contemplated by the Prospectus.
m. There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is a party or to
which any of the properties of the Company or any of its subsidiaries is
subject that are required to be described in the Registration Statement or
the Prospectus and are not so described or any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
n. Each of the Company and its subsidiaries has all necessary
consents, authorizations, approvals, orders, certificates and permits of
and from, and has made all declarations and filings with, all federal,
state, local and other governmental authorities, all self-regulatory
organizations and all courts and other tribunals, to own, lease, license
and use its properties and assets and to conduct its business in the manner
described in the Prospectus, except to the extent that the failure to
obtain or file would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole.
o. Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 or Rule 462 under the Securities Act, complied when so
filed in all material respects with the Securities Act and the rules and
regulations of the Commission thereunder. The Incorporated Documents
heretofore filed, when they were filed (or, if any amendment with respect
to any such document was filed, when such amendment was filed), conformed
in all material respects with the requirements of the Exchange Act and the
rules and regulations of the Commission thereunder; any further
Incorporated Documents so filed will, when they are filed, conform in all
material respects with the requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
p. The Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds therefrom as
described in the Prospectus, will not be an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
q. There is no owner of any securities of the Company who has
any rights, not effectively satisfied or waived, to require registration of
any shares of capital stock of the Company in connection with the filing of
the Registration Statement.
r. The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which they are engaged; neither the Company nor any such subsidiary has
been refused any insurance coverage sought or applied for; and neither the
Company nor any such subsidiary has any reason to believe that it will not
be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition, financial or otherwise, or the earnings,
business or operations of the Company and its subsidiaries, taken as a
whole, except as described in or contemplated by the Prospectus.
5
<PAGE>
s. The Company and its subsidiaries (i) are in compliance with
any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants (collectively, "Environmental Laws"), (ii) have received all
permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance with Environmental Laws, failure
to receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or approvals
would not, singly or in the aggregate, have a material adverse effect on
the Company and its subsidiaries, taken as a whole.
t. The costs and liabilities, if any, associated with
Environmental Laws on the business, operations and properties of the
Company (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance
with Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties) would not, singly or in the aggregate, have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
u. Except as described in the Prospectus, the Company and each
of its subsidiaries owns or possesses or can acquire on reasonable terms
all material licenses or other rights to use all patents, copyrights,
trademarks, service marks, trade names, mask work rights, technology and
know-how necessary to conduct its business in the manner described in the
Prospectus and, neither the Company nor any of its subsidiaries has
received any notice of infringement or conflict with (and neither the
Company nor any of its subsidiaries knows of any infringement or conflict
with) asserted rights of others with respect to any patents, copyrights,
trademarks, service marks, trade names, mask work rights, technology or
know-how which could result in any material adverse effect upon the Company
and its subsidiaries, taken as a whole; and, except as disclosed in the
Prospectus, the discoveries, inventions, products or processes of the
Company and its subsidiaries referred to in the Prospectus do not, to the
best knowledge of the Company or any of its subsidiaries, infringe or
conflict with any right or patent of any third party, or any discovery,
invention, product or process which is the subject of a patent application
filed by any third party, known to the Company or any of its subsidiaries
which could have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
v. The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any such subsidiary has received
any notice of proceedings related to the revocation or modification of any
such certificate, authorization or permit which, singly or in the
aggregate, if the subject of any unfavorable decision, ruling or finding,
would result in a material adverse change in the condition, financial or
otherwise, or in the earnings, business or operations of the Company and
its subsidiaries, taken as a whole, except as described in or contemplated
by the Prospectus.
w. The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with
6
<PAGE>
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
x. As of the date the Registration Statement becomes effective,
the Common Stock will be authorized for listing on the Nasdaq National
Market upon official notice of issuance.
y. The Company has complied with all provisions of Section
517.075, Florida Statutes (Chapter 92-198, Laws of Florida), relating to
issuers doing business with the Government of Cuba or with any person or
affiliate located in Cuba.
z. No material labor dispute with the employees of the Company
or any of its subsidiaries exists, except as described in or contemplated
by the Prospectus, or, to the knowledge of the Company, is imminent; and
the Company is not aware of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers,
manufacturers or contractors that could result in any material adverse
change in the condition, financial or otherwise, or in the earnings,
business or operations of the Company and its subsidiaries, taken as a
whole.
2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees to
sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company at $_______ a share (the "Purchase Price") the number of Firm Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) that bear the same proportion to the number of Firm Shares to be sold
by the Company as the number of Firm Shares set forth in Schedule II hereto
opposite the name of such Underwriter bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company hereby agrees to
sell to the several Underwriters the Additional Shares, and the Underwriters
shall have a one-time right to purchase, severally and not jointly, up to
450,000 Additional Shares at the Purchase Price. If you, on behalf of the
Underwriters, elect to exercise such option, you shall so notify the Company in
writing not later than 30 days after the date of this Agreement, which notice
shall specify the number of Additional Shares to be purchased by the
Underwriters and the date on which such shares are to be purchased. Such date
may be the same as the Closing Date (as defined below) but not earlier than the
Closing Date nor later than ten business days after the date of such notice.
Additional Shares may be purchased as provided in Section 4 hereof solely for
the purpose of covering over-allotments made in connection with the offering of
the Firm Shares. If any Additional Shares are to be purchased, each Underwriter
agrees, severally and not jointly, to purchase the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) that bears the same proportion to the total number of Additional
Shares to be purchased as the number of Firm Shares set forth in Schedule II
hereto opposite the name of such Underwriter bears to the total number of Firm
Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
for a period of 90 days subsequent to the date of the final Prospectus (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for
7
<PAGE>
Common Stock, or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise, other than (A) the Shares to be sold hereunder, (B) any
shares of Common Stock sold by the Company upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof of which
the Underwriters have been advised in writing.
3. TERMS OF PUBLIC OFFERING. The Company is advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
$__________ a share (the "Public Offering Price") and to certain dealers
selected by you at a price that represents a concession not in excess of $______
a share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of $_______ a share, to
any Underwriter or to certain other dealers.
4. PAYMENT AND DELIVERY. Payment for the Firm Shares shall be made
to the Company in Federal or other funds immediately available in New York City
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on November ___, 1997, or at
such other time on the same or such other date, not later than November ___ ,
1997, as shall be designated in writing by you. The time and date of such
payment are hereinafter referred to as the "Closing Date."
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 2 or at such other time on the same or on such other
date, in any event not later than December ___, 1997 as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to
as the "Option Closing Date."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of
the Company to sell the Shares to the Underwriters and the several obligations
of the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than 5:30 p.m. (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
a. Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
8
<PAGE>
(i) there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading or
of any review for a possible change that does not indicate the
direction of the possible change, in the rating accorded any of the
Company's securities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule 436(g)(2)
under the Securities Act, and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or operations, of
the Company and its subsidiaries, taken as a whole, from that set
forth in the Prospectus (exclusive of any amendments or supplements
thereto subsequent to the date of this Agreement) that, in your
judgment, is material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
b. The Underwriters shall have received on the Closing Date and
on the Option Closing Date, as the case may be, a certificate, dated the
Closing Date or on the Option Closing Date, as the case may be, and signed
by the chief executive officer and the chief financial officer of the
Company, to the effect set forth in clause (a) above, and to the effect
that the representations and warranties of the Company contained in this
Agreement are true and correct as of the Closing Date or as of the Option
Closing Date, as the case may be, and that the Company has complied with
all of the agreements and satisfied all of the conditions on its part to be
performed or satisfied hereunder on or before the Closing Date or the
Option Closing Date, as the case may be.
The executive officers signing and delivering such certificate
may rely upon the best of their knowledge as to proceedings threatened.
c. The Underwriters shall have received on the Closing Date an
opinion of Brobeck, Phleger & Harrison, LLP ("Brobeck, Phleger &
Harrison"), counsel for the Company, dated the Closing Date, to the effect
that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the State
of Delaware, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in California
and, to the knowledge of such counsel, in each other jurisdiction in
which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as
a whole;
(ii) the Company owns all of the shares of capital stock of
each subsidiary of the Company and each subsidiary of the Company has
been duly incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, has
the corporate power and authority to own its property and to conduct
its business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in
which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the
failure to be so qualified or be in good
9
<PAGE>
standing would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole;
(ii) the authorized capital stock of the Company conforms as
to legal matters to the description thereof contained in the
Prospectus;
(iv) the shares of Common Stock outstanding prior to the
issuance of the Shares to be sold by the Company have been duly
authorized and are validly issued, fully paid and non-assessable;
(v) all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and are owned directly by
the Company, free and clear of all liens, encumbrances, equities or
claims;
(vi) the Shares to be sold by the Company have been duly
authorized, and when issued and delivered in accordance with the terms
of this Agreement will be, validly issued, fully paid and non-
assessable, and the issuance of such Shares will not be subject to any
preemptive or similar rights;
(vii) the Company has corporate power and authority to enter
into this Agreement and to issue, sell and deliver to the Underwriters
the Shares to be issued and sold by the Company;
(viii) this Agreement has been duly authorized, executed and
delivered by the Company;
(ix) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law or the certificate
of incorporation or bylaws of the Company or, to such counsel's
knowledge, any agreement or other instrument binding upon the Company
or any of its subsidiaries that is material to the Company and its
subsidiaries, taken as a whole (with such agreements and instruments
being set forth on a schedule to such counsel's opinion), or, to such
counsel's knowledge, any judgment, order or decree of any governmental
body, agency or court having jurisdiction over the Company or any
subsidiary, and no consent, approval, authorization or order of or
qualification with any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement,
except such as may be required by the securities or Blue Sky laws of
the various states and jurisdictions in connection with the offer and
sale of the Shares;
(x) the statements (A) in the Prospectus under the captions
"Risk Factors -- Effect of Anti-Takeover Provisions," "Risk Factors --
Shares Eligible for Future Sale;" "Business -- Manufacturing,"
"Business --Strategic Manufacturing Relationships," "Business --
Seagate Relationship," (B) in the Registration Statement in Item 15
and (C) in the Company's Registration Statement on Form 8-A, as
amended, filed under the Exchange Act, in each case insofar as such
statements constitute summaries of the legal matters, documents or
proceedings referred to therein, fairly present the information called
for with respect to such legal matters, documents and proceedings and
fairly summarize the matters referred to therein;
10
<PAGE>
(xi) such counsel does not know of any legal, regulatory or
governmental proceeding pending or threatened to which the Company or
any of its subsidiaries is a party or to which any of the properties
of the Company or any of its subsidiaries is subject that are required
to be described in the Registration Statement or the Prospectus and
are not so described or of any statutes, regulations, contracts or
other documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required;
(xii) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the net
proceeds therefrom as described in the Prospectus will not be, an
"investment company" as such term is defined in the Investment Company
Act of 1940, as amended;
(xiii) to the knowledge of such counsel, there is no legal
or beneficial owner of any securities of the Company who has any
rights, not effectively satisfied or waived, to require registration
of any shares of capital stock of the Company in connection with the
filing of the Registration Statement;
(xiv) nothing has come to the attention of such counsel that
would lead it to believe that the Company and its subsidiaries (A) are
not in compliance with any and all applicable Environmental Laws, (B)
have not received all permits, licenses or other approvals required of
them under applicable Environmental Laws to conduct their respective
businesses and (C) are not in compliance with all terms and conditions
of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required
permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect of the
Company and its subsidiaries, taken as a whole; and
(xv) to such counsel's knowledge (A) the Registration
Statement has become effective under the Securities Act, (B) no stop
order proceedings with respect thereto have been instituted or are
pending or threatened under the Securities Act and nothing has come to
such counsel's attention to lead it to believe that such proceedings
are contemplated; and (C) any required filing of the Prospectus and
any supplement thereto pursuant to Rule 424(b) under the Securities
Act has been made in the manner and within the time period required by
such Rule 424(b);
(xvi) the Shares to be sold under this Agreement to the
Underwriters are duly authorized for quotation on the Nasdaq National
Market; and
(xvii) such counsel shall also state that (A) it believes
that the Registration Statement and Prospectus (except for financial
statements and schedules included therein as to which such counsel
need not express any opinion) comply as to form in all material
respects with the Securities Act and the rules and regulations of the
Commission thereunder and (B) nothing has come to its attention that
would cause it to believe that (except for financial statements and
schedules as to which such counsel need not express any belief) the
Registration Statement and the Prospectus included therein at the time
the Registration Statement became effective contained any untrue
statement of a material fact or omitted to state a material fact
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required to be stated therein or necessary to make the statements
therein not misleading or that (except for financial statements and
schedules as to which such counsel need not express any belief) the
Prospectus as of its date or as of the Closing Date contained any
untrue statement of a material fact or omitted to state a material
fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
d. The Underwriters shall have received on the Closing Date an
opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
("Wilson Sonsini Goodrich & Rosati"), counsel for the Underwriters, dated
the Closing Date, covering the matters referred to in subparagraphs (vi),
(viii), (x) (but only as to the statements in the Prospectus under
"Underwriters") and (xvii) of paragraph (c) above.
With respect to subparagraph (xvii) of paragraph (c) above, Brobeck,
Phleger & Harrison and Wilson Sonsini Goodrich & Rosati may state that their
opinion and belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements thereto
and review and discussion of the contents thereof, but are without independent
check or verification except as specified.
The opinion of Brobeck, Phleger & Harrison described in paragraph (c)
above and the opinion of Yuasa and Hara described in paragraph (e) below, the
opinions of Majestic, Parsons, Siebert & Hsue described in paragraph (f) below
shall be rendered to you at the request of the Company, and shall so state
therein.
e. The Underwriters shall have received, on the Closing Date, a
letter dated the Closing Date, an opinion of Yuasa and Hara, special
Japanese counsel to the Company, dated the Closing Date, to the effect that
SanDisk KK has been duly incorporated, is validly existing as a corporation
in good standing under the laws of Japan, has the corporate power and
authority to own its property and to conduct its business as described in
the Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its subsidiaries taken as
a whole.
f. The Underwriters shall have received on the Closing Date an
opinion of Majestic, Parsons, Siebert & Hsue, patent counsel to the
Company, dated the Closing Date, to the effect that:
(i) the Company is listed in the records of the United
States Patent and Trademark Office ("PTO") as the holder of record of
the patent applications listed in Exhibit A hereto (the "Patent
Applications"). [Five] of such Patent Applications, listed on Exhibit
B hereto, have been allowed or indicated as containing allowable
subject matter. To the best of such counsel's knowledge, written
assignments to the Company of all ownership interests in the Patent
Applications have been duly authorized, executed and delivered by all
of the inventors in accordance with their terms. To the best of such
counsel's knowledge, there is no claim of any party other than the
Company to any ownership interest or lien with respect to any of the
Patent Applications except as noted on Exhibit A;
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(ii) to such counsel's knowledge, other than in connection
with assertions or inquiries made by patent office examiners in the
ordinary course of the prosecution of the Company's Patent
Applications and except as set forth on Exhibit C hereto, there is not
pending or threatened in writing any action, suit, proceeding or claim
by others (A) challenging the validity or scope of the Patent
Applications held by or licensed to the Company, or (B) asserting that
any third party patent is infringed by the activities of the Company
described in the Prospectus or by the manufacture, use or sale of any
of the Company's products or other items made and used according to
the Patent Applications held by or licensed to the Company;
(iii) to such counsel's knowledge and except as set forth on
Exhibit C hereto, there is not pending or threatened in writing any
action, suit, proceeding or claim by the Company asserting
infringement on the part of any third party of the Patent
Applications; and
(iv) the statements in the Prospectus under the captions
"Risk Factors -- Patents, Proprietary Rights and Related Litigation"
and "Business -- Patents and Licenses" (the "Intellectual Property
Portions") to the best of such counsel's knowledge, insofar as such
statements relate to the Patent Applications or any legal matters,
documents and proceedings relating thereto, fairly present the
information called for with respect to such legal matters, documents
and proceedings and fairly summarize the matters referred to therein.
g. The Underwriters shall have received on the Closing Date an
opinion of Wilson Sonsini Goodrich & Rosati, special intellectual property
counsel to the Company, dated the Closing Date, to the effect that:
(i) the statements in the Prospectus under the captions
"Risk Factors -- Patents, Proprietary Rights and Related Litigation,"
and "Business -- Patents and Licenses," to such counsel's knowledge,
insofar as such statements relate to the patents listed in Exhibit A
(the "Patents") or any legal matters, documents and proceedings
relating thereto, fairly present the information called for with
respect to such legal matters, documents and proceedings and fairly
summarize the matters referred to therein;
(ii) to such counsel's knowledge, other than in connection
with assertions or inquiries made by patent office examiners in the
ordinary course of the prosecution of the Company's Patent
Applications and except as set forth on Exhibit B hereto, there is not
pending or threatened in writing any action, suit, proceeding or claim
by others (A) challenging the validity or scope of the Patents held by
or licensed to the Company, or (B) asserting that any third party
patent is infringed by the activities of the Company described in the
Prospectus or by the manufacture, use or sale of any of the Company's
products or other items made and used according to the Patents held by
or licensed to the Company.
(iii) to such counsel's knowledge and except as set forth on
Exhibit C hereto, there is not pending or threatened in writing any
action, suit, proceeding or claim by the Company asserting
infringement on the part of any third party of the Patents.
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<PAGE>
h. The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance satisfactory to you, from Ernst
and Young LLP, independent public accountants, containing statements and
information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and
the Prospectus; provided that the letter delivered on the Closing Date
shall use a "cut off date" not earlier than the date hereof.
i. The Lock-up agreements each substantially in the form of Exhibit D
hereto, between you and certain stockholders, officers and directors of the
Company relating to sales of shares and certain other dispositions of
shares of Common Stock or certain other securities, delivered to you on or
before the date hereof, shall be in full force and effect on the Closing
Date.
j. The shares of Common Stock of the Company shall have received
authorization for listing, upon official notice of issuance, on the Nasdaq
National Market.
k. The Company shall have complied with the provisions of Section
6(a) hereof with respect to the furnishing of prospectuses on the business
day next succeeding the date of this Agreement in such quantities as you
may reasonably request.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed in compliance with the provisions
hereof only if Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters,
shall be reasonably satisfied that they comply in form and scope.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the Additional
Shares, other matters related to the issuance of the Additional Shares and an
opinion or opinions of Brobeck, Phleger & Harrison, Majestic, Parsons, Siebert &
Hsue and Yuasa and Hara in form and substance satisfactory to Wilson Sonsini
Goodrich & Rosati, counsel for the Underwriters.
6. COVENANTS OF THE COMPANY. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
a. To furnish to you, without charge, four signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City, without
charge, prior to 10:00 a.m. New York City time on the business day next
succeeding the date of this Agreement and during the period mentioned in
Section 6(c) below, as many copies of the Prospectus and any supplements
and amendments thereto or to the Registration Statement as you may
reasonably request.
b. Before amending or supplementing the Registration Statement or the
Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and to file no such proposed amendment or supplement to which
you reasonably object and to file with the Commission within the
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<PAGE>
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
c. If, during such period after the first date of the public offering
of the Shares as in the opinion of counsel for the Underwriters the
Prospectus is required by law to be delivered in connection with sales by
an Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
when the Prospectus is delivered to a purchaser, not misleading, or if, in
the opinion of counsel for the Underwriters, it is necessary to amend or
supplement the Prospectus to comply with applicable law, forthwith to
prepare, file with the Commission and furnish, at its own expense, to the
Underwriters and to the dealers (whose names and addresses you will furnish
to the Company) to which Shares may have been sold by you on behalf of the
Underwriters and to any other dealers upon request, either amendments or
supplements to the Prospectus so that the statements in the Prospectus as
so amended or supplemented will not, in the light of the circumstances when
the Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
d. To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request and to pay all expenses (including fees and disbursements of
counsel) in connection with such qualification and in connection with any
review of the offering of the Shares by the National Association of
Securities Dealers, Inc.; provided, however, that the Company shall not be
required to register or qualify as a foreign corporation in any
jurisdiction where it is not now so registered or qualified.
e. To make generally available to the Company's security holders and
to you as soon as practicable an earnings statement covering the twelve-
month period ending December 31, 1998 that satisfies the provisions of
Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
f. During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its stockholders and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission or
any national securities exchange.
g. The Company will use its best efforts to obtain and maintain in
effect the quotation of the Shares on the Nasdaq National Market and will
take all necessary steps to cause the Shares to be included on the Nasdaq
National Market as promptly as practicable and to maintain such inclusion
for a period of three years after the date hereof or until such earlier
date as the Shares shall be listed for regular trading privileges on
another national securities exchange approved by you.
h. The Company will comply with all provisions of all undertakings
contained in the Registration Statement.
i. The Company agrees: (i) to enforce the terms of each Lock-up
Agreement and (ii) issue stop-transfer instructions to the transfer agent
for the Common Stock with respect to any transaction or contemplated
transaction that would constitute a breach of or default under the
applicable Lock-up Agreement. In addition, except with the prior written
consent of Morgan Stanley,
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<PAGE>
the Company agrees (i) not to amend or terminate, or waive any right under,
any Lock-up Agreement, or take any other action that would directly or
indirectly have the same effect as an amendment or termination, or waiver
of any right under, any Lock-up Agreement, that would permit any holder of
shares of Common Stock, or securities convertible into or exercisable or
exchangeable for Common Stock, to sell, make any short sale of, grant any
option for the purchase of, or otherwise transfer or dispose of, any of
such shares of Common Stock or other securities prior to the expiration of
90 days after the date of the Prospectus, and (ii) not to consent to any
sale, short sale, grant of an option for the purchase of, or other
disposition or transfer of shares of Common Stock, or securities
convertible into or exercisable or exchangeable for Common Stock, subject
to a Lock-up Agreement.
7. EXPENSES. The Company agrees, whether or not the transactions
contemplated in this Agreement are consummated or this Agreement is terminated,
to pay or cause to be paid all expenses incident to the performance of its
obligations under this Agreement, including: (i) the fees, disbursements and
expenses of the Company's counsel and the Company's accountants in connection
with the registration and delivery of the Shares under the Securities Act and
all other fees or expenses in connection with the preparation and filing of the
Registration Statement, any preliminary prospectus, the Prospectus and
amendments and supplements to any of the foregoing, including all printing costs
associated therewith, and the mailing and delivering of copies thereof to the
Underwriters and dealers, in the quantities hereinabove specified, (ii) all
costs and expenses related to the transfer and delivery of the Shares to the
Underwriters, including any transfer or other taxes payable thereon, (iii) the
cost of printing or producing any Blue Sky or Legal Investment memorandum in
connection with the offer and sale of the Shares under state securities laws,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriters in connection with the Blue Sky or Legal Investment memorandum,
(iv) all filing fees and the reasonable fees and disbursements (including filing
fees) of counsel to the Underwriters incurred in connection with the review and
qualification of the offering of the Shares by the National Association of
Securities Dealers, Inc., (v) all costs and expenses incident to listing the
Shares on the Nasdaq National Market, (vi) the cost of printing certificates
representing the Shares, (vii) the costs and charges of any transfer agent,
registrar or depositary, (viii) the costs and expenses of the Company relating
to investor presentations on any "road show" undertaken in connection with the
marketing of the offering of the Shares, including, without limitation, expenses
associated with the production of road show slides and graphics, fees and
expenses of any consultants engaged in connection with the road show
presentations with the prior approval of the Company, travel and lodging
expenses of the representatives and officers of the Company and any such
consultants, and the cost of any aircraft chartered in connection with the road
show, and (ix) all other costs and expenses incident to the performance of the
obligations of the Company hereunder for which provision is not otherwise made
in this Section 7. It is understood, however, that except as provided in this
Section 7, Section 8 and the last paragraph of Section 10 below, the
Underwriters will pay all of their costs and expenses, including fees and
disbursements of their counsel, stock transfer taxes payable on resale of any of
the Shares by them and any advertising expenses connected with any offers they
may make.
8. INDEMNITY AND CONTRIBUTION.
a. The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
either Section 15 of the Securities Act or Section 20 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or is under common
control with, or is controlled by, any Underwriter, from and against any
and all losses,
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claims, damages and liabilities (including, without limitation, any legal
or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, including any Incorporated Document,
any preliminary prospectus or the Prospectus (as amended or supplemented if
the Company shall have furnished any amendments or supplements thereto),
including any Incorporated Document, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages or liabilities are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein; provided,
however, that the foregoing indemnity agreement with respect to any
preliminary prospectus shall not inure to the benefit of any Underwriter,
or any person controlling such Underwriter, from whom the person asserting
any such losses, claims, damages, or liabilities purchased Shares, if a
copy of the Prospectus (as then amended or supplemented if the Company
shall have furnished any amendments or supplements thereto) was not sent or
given by or on behalf of such Underwriter to such person, if required by
law so to have been delivered, at or prior to the written confirmation of
the sale of the shares to such person, and if the Prospectus (as so amended
or supplement) would have cured the defect given rise to such loss, claim,
damage or liability except that such provision shall inure to the benefit
of the Underwriters if the Company failed to deliver by 5:00 p.m. one day
following the date hereof as many copies of any such preliminary
prospectus, the Prospectus or the Registration Statement as the
Underwriters may so request.
b. Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, the directors of the Company, the officers
of the Company who sign the Registration Statement and each person, if any,
who controls the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and against any and
all losses, claims, damages and liabilities (including, without limitation,
any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary prospectus
or the Prospectus (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto), or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, but
only with reference to information relating to such Underwriter furnished
to the Company in writing by such Underwriter through you expressly for use
in the Registration Statement, any preliminary prospectus, the Prospectus
or any amendments or supplements thereto.
c. In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to paragraphs (a) or (b) of this Section 8, such person
(the "Indemnified Party") shall promptly notify the person against whom
such indemnity may be sought (the "Indemnifying Party") in writing and the
Indemnifying Party, upon request of the Indemnified Party, shall retain
counsel reasonably satisfactory to the Indemnified Party to represent the
Indemnified Party and any others the Indemnifying Party may designate in
such proceeding and shall pay the fees and disbursements of such counsel
related to such proceeding. In any such proceeding, any Indemnified Party
shall have the right to retain its own counsel, but the fees and expenses
of such counsel shall be at the expense of such Indemnified Party
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unless (i) the Indemnifying Party and the Indemnified Party shall have
mutually agreed to the retention of such counsel or (ii) the named parties
to any such proceeding (including any impleaded parties) include both the
Indemnifying Party and the Indemnified Party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that the
Indemnifying Party shall not, in respect of the legal expenses of any
Indemnified Party in connection with any proceeding or related proceedings
in the same jurisdiction, be liable for (a) the fees and expenses of more
than one separate firm (in addition to any local counsel) for all
Underwriters and all persons, if any, who control any Underwriter within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act and (b) the fees and expenses of more than one separate firm
(in addition to any local counsel) for the Company, its directors, its
officers who sign the Registration Statement and each person, if any, who
controls the Company within the meaning of either such Section. In the case
of any such separate firm for the Underwriters and such control persons of
Underwriters, such firm shall be designated in writing by Morgan Stanley &
Co. Incorporated. In the case of any such separate firm for the Company,
and such directors, officers and control persons of the Company, such firm
shall be designated in writing by the Company. The Indemnifying Party shall
not be liable for any settlement of any proceeding effected without its
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the Indemnifying Party agrees to indemnify the
Indemnified Party from and against any loss or liability by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any
time an Indemnified Party shall have requested an Indemnifying Party to
reimburse the Indemnified Party for fees and expenses of counsel as
contemplated by the second and third sentences of this paragraph, the
Indemnifying Party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such Indemnifying Party of
the aforesaid request and (ii) such Indemnifying Party shall not have
reimbursed the Indemnified Party in accordance with such request prior to
the date of such settlement. No Indemnifying Party shall, without the prior
written consent of the Indemnified Party, effect any settlement of any
pending or threatened proceeding in respect of which any Indemnified Party
is or could have been a party and indemnity could have been sought
hereunder by such Indemnified Party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability on
claims that are the subject matter of such proceeding.
d. To the extent the indemnification provided for in paragraph (a),
(b) or (c) of this Section 8 is unavailable to an Indemnified Party or
insufficient in respect of any losses, claims, damages or liabilities
referred to therein, then each Indemnifying Party under such paragraph, in
lieu of indemnifying such Indemnified Party thereunder, shall contribute to
the amount paid or payable by such Indemnified Party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Indemnifying
Party or parties on the one hand and the Indemnified Party or parties on
the other hand from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the
Indemnifying Party or parties on the one hand and of the Indemnified Party
or parties on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities, as well as
any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other
hand in connection with the offering of the Shares shall be deemed to be in
the same respective proportions as the net proceeds from the offering of
the Shares (before deducting expenses) received by the Company and the
total underwriting discounts and commissions received by the Underwriters,
in each
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case as set forth in the table on the cover of the Prospectus, bear to the
aggregate Public Offering Price of the Shares. The relative fault of the
Company on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission. The Underwriters' respective obligations to contribute
pursuant to this Section 8 are several in proportion to the respective
number of Shares they have purchased hereunder, and not joint.
e. The Company and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 8 were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an Indemnified Party as
a result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably
incurred by such Indemnified Party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of
this Section 8, no Underwriter shall be required to contribute any amount
in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The remedies provided for in this
Section 8 are not exclusive and shall not limit any rights or remedies
which may otherwise be available to any Indemnified Party at law or in
equity.
f. The indemnity and contribution provisions contained in this
Section 8 and the representations and warranties and other statements of
the Company contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any termination of this Agreement, (ii)
any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, or by or on behalf of the Company, its
officers or directors or any person controlling the Company and (iii)
acceptance of and payment for any of the Shares.
9. TERMINATION. This Agreement shall be subject to termination, by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities, or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your sole judgment, is material and adverse and (b) in the case of any
of the events specified in clauses (a)(i) through (iv), such event singly or
together with any other such event makes it, in your sole judgment,
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus.
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10. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall
become effective upon the later of (i) execution and delivery hereof by the
parties hereto and (ii) release of notification of the effectiveness of the
Registration Statement by the Commission.
If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I bears to the
aggregate number of Firm Shares set forth opposite the names of all such non-
defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided, that in no event shall the
number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 10 by an amount in excess of
one-ninth of such number of Shares without the written consent of such
Underwriter. If, on the Closing Date any Underwriter or Underwriters shall fail
or refuse to purchase Firm Shares and the aggregate number of Firm Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Firm Shares to be purchased on such date, and arrangements
satisfactory to you and the Company for the purchase of such Firm Shares are not
made within 36 hours after such default, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriter or the Company. In any
such case either you or the Company shall have the right to postpone the Closing
Date or the Option Closing Date, as the case may be, but in no event for longer
than seven days, in order that the required changes, if any, in the Registration
Statement and in the Prospectus or in any other documents or arrangements may be
effected. If, on the Option Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than one-
tenth of the aggregate number of Additional Shares to be purchased, the non-
defaulting Underwriters shall have the option to (i) terminate their obligation
to purchase Additional Shares or (ii) purchase not less than the number of
Additional Shares that such non-defaulting Underwriters would have been
obligated to purchase in the absence of such default. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
11. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
20
<PAGE>
12. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
13. HEADINGS. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
Very truly yours,
SANDISK CORPORATION
By: ________________________________
Name:
Title:
Accepted as of the date hereof.
MORGAN STANLEY & CO. INCORPORATED
GOLDMAN, SACHS & CO.
BANCAMERICA ROBERTSON STEPHENS
Acting severally on behalf
of themselves and the
several Underwriters named
herein.
By: MORGAN STANLEY & CO. INCORPORATED
By: __________________________________
Name:
Title:
21
<PAGE>
SCHEDULE I
----------
SCHEDULE OF UNDERWRITERS
Name Number of
----------------------------------- Shares
---------
Morgan Stanley & Co. Incorporated..............................
Goldman, Sachs & Co............................................
BancAmerica Robertson Stephens.................................
TOTAL: ---------
<PAGE>
EXHIBIT A
---------
PATENT APPLICATIONS
<PAGE>
EXHIBIT B
---------
ALLOWED PATENT APPLICATIONS
<PAGE>
EXHIBIT C
---------
LITIGATION
<PAGE>
EXHIBIT D
---------
FORM OF LOCK-UP AGREEMENT
October 17, 1997
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
BancAmerica Robertson Stephens
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Ladies and Gentlemen:
The undersigned understands that Morgan Stanley & Co. Incorporated ("Morgan
Stanley") proposes to enter into an Underwriting Agreement (the "Underwriting
Agreement") with SanDisk Corporation, a Delaware corporation (the "Company"),
providing for the public offering (the "Public Offering") by the several
Underwriters, including Morgan Stanley (the "Underwriters"), of 3,000,000 shares
(the "Shares") of the Common Stock, $.001 par value, of the Company ("Common
Stock").
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned
hereby agrees that, without the prior written consent of Morgan Stanley on
behalf of the Underwriters, he, she or it will not, during the period commencing
on the date hereof and ending 90 days after the date of the final prospectus
(the "Prospectus") relating to the Public Offering, (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
Common Stock, whether any such transaction described in clause (1) or (2) above
is to be settled by delivery of Common Stock or such other securities, in cash
or otherwise. However, the executive officers and directors of the Company may,
without such consent, sell an aggregate of up to 100,000 shares, which shall
include no more than 40,000 shares by any one person. The foregoing sentence
shall not apply to (1) the sale of any Shares to the Underwriters pursuant to
the Underwriting Agreement, (2) transactions relating to shares of Common
Stock or other securities acquired in open market transactions after the
completion of the Public Offering. In addition, the undersigned agrees that,
without the prior written consent of Morgan Stanley, on behalf of the
Underwriters, he, she or it will not, during the period commencing on the date
hereof and ending 90 days after the date of the Prospectus, make any demand
for or exercise any right with respect to, the registration of any shares of
Common Stock or any security convertible into or exercisable or exchangeable
for Common Stock.
Notwithstanding the foregoing, the undersigned may transfer any securities
of the Company either during his or her lifetime or on death by gift, will or
intestacy to his or her immediate family or to a trust, the beneficiaries of
which are exclusively the undersigned and/or a member of his or her immediate
family; provided, however, that in each such case described in this paragraph
the transferee agrees in writing to be bound
<PAGE>
by the provisions of this Agreement. For purposes of this Agreement, "immediate
family" shall mean spouse, lineal descendant, father, mother, brother or sister
of the transferee.
The undersigned hereby acknowledges that this Agreement is valid and binding
notwithstanding any prior agreements relating to this matter and further agrees
and consents to the entry of stop transfer instructions with the Company's
transfer agent against the transfer of shares of Common Stock held by the
undersigned except in compliance with this Agreement. The undersigned also
understands that the Company and the Underwriters will proceed with the Public
Offering in reliance on this Lock-Up Agreement.
Whether or not the Public Offering actually occurs depends on a number of
factors, including market conditions. Any Public Offering will only be made
pursuant to the Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
_________________________________
(Name)
_________________________________
(Address)
<PAGE>
EXHIBIT 5.1
October 24, 1997
SanDisk Corporation
140 Caspian Court
Sunnyvale, CA 94089
Re: Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-3 filed by
SanDisk Corporation (the "Company") with the Securities and Exchange
Commission (the "Commission") on October 27, 1997, (the "Registration
Statement") in connection with the registration under the Securities Act of
1933, as amended, of 3,450,000 shares of the Company's common stock (the
"Shares"). The Shares include an over-allotment option to purchase 450,000
shares granted to the Underwriters as described in said Registration Statement
for resale to the public. As your counsel in connection with this transaction,
we have examined the proceedings taken and are familiar with the proceedings
proposed to be taken by you in connection with the sale and issuance of the
Shares.
Based on the foregoing, it is our opinion that, upon conclusion of the
proceedings being taken or contemplated by us, as your counsel, to be taken
prior to the issuance of the Shares, and upon completion of the proceedings
being taken in order to permit such transactions to be carried out in
accordance with the securities laws of the various states where required, the
Shares, when issued and sold in the manner described in the Registration
Statement, will be legally and validly issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to said
Registration Statement, and further consent to the use of our name wherever
appearing in said Registration Statement, including the prospectus
constituting a part thereof, and in any amendment thereto.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
