Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --------- Exchange Act of 1934 For the quarterly period ended September 30, 1998
OR
Transition report pursuant to Section 13 or 15(d) of the Securities
- --------- Exchange Act of 1934 For the transition period from to
----- -----
Commission File Number 0-26734
SanDisk Corporation
(Exact name of registrant as specified in its charter)
Delaware 77-0191793
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
140 Caspian Court, Sunnyvale, California 94089
(Address of principal executive offices) (Zip code)
(408) 542-0500
(Registrant's telephone number, including area code)
N/A
(Former name, former address, and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of September 30, 1998
Common Stock, $0.001 par value 26,588,350
------------------------------ ----------
Class Number of shares
<PAGE>
SanDisk Corporation
Index
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997.................... 3
Condensed Consolidated Statements of Income
Three and nine months ended September 30, 1998 and 1997..... 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997............... 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 26
Item 2. Changes in Securities.......................................... 26
Item 3. Defaults upon Senior Securities................................ 26
Item 4. Submission of Matters to a Vote of Security Holders............ 26
Item 5. Other Information.............................................. 26
Item 6. Exhibits and Reports on Form 8-K............................... 27
Signatures..................................................... 29
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
SanDisk Corporation
Condensed Consolidated Balance Sheets
(In thousands)
ASSETS September 30, December 31,
1998 1997*
------------ -----------
(unaudited)
Current Assets:
Cash and cash equivalents $ 13,880 $ 20,888
Short-term investments 112,972 114,037
Accounts receivable, net 17,738 19,352
Inventories 18,205 15,648
Deferred tax assets 17,110 17,060
Prepaid expenses and other current assets 1,105 1,406
------------- ------------
Total current assets 181,010 188,391
Property and equipment, net 16,018 15,892
Investment in foundry 51,209 40,284
Deposits and other assets 1,141 900
------------- ------------
Total Assets $249,378 $245,467
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,994 $ 14,111
Accrued payroll and related expenses 3,481 4,674
Other accrued liabilities 5,909 7,341
Deferred revenue 31,722 27,967
------------- ------------
Total current liabilities 47,106 54,093
Stockholders' Equity:
Common stock 184,210 181,921
Retained earnings 18,062 9,453
------------- ------------
Total stockholders' equity 202,272 191,374
Total Liabilities and
============= ============
Stockholders' Equity $249,378 $245,467
============= ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
* Information derived from the audited Consolidated Financial Statements.
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<PAGE>
SanDisk Corporation
Condensed Consolidated Statements of Income
(In thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product $ 24,143 $ 30,219 $ 73,049 $ 72,335
License and royalty 7,935 5,925 24,492 12,600
---------- ---------- ---------- -----------
Total revenues 32,078 36,144 97,541 84,935
Cost of sales 18,840 20,135 57,172 49,476
---------- ---------- ---------- -----------
Gross profits 13,238 16,009 40,369 35,459
Operating expenses:
Research and development 4,805 3,550 13,610 9,634
Sales and marketing 3,964 3,197 12,163 8,728
General and administrative 1,836 2,029 5,589 4,933
---------- ---------- ---------- -----------
Total operating expenses 10,605 8,776 31,362 23,295
Operating income 2,633 7,233 9,007 12,164
Interest and other income, net 1,283 771 3,900 2,680
---------- ---------- ---------- -----------
Income before taxes 3,916 8,004 12,907 14,844
Provision for income taxes 1,410 1,202 4,645 2,227
========== ========== ========== ===========
Net income $ 2,506 $ 6,802 $ 8,262 $ 12,617
========== ========== ========== ===========
Net income per share
Basic $ 0.09 $ 0.30 $ 0.32 $ 0.56
Diluted $ 0.09 $ 0.27 $ 0.30 $ 0.52
Shares used in computing
net income per share
Basic 26,411 22,568 26,200 22,480
Diluted 27,392 24,957 27,749 24,492
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</FN>
</TABLE>
Page 4
<PAGE>
SanDisk Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands; unaudited)
Nine months ended
September 30,
1998 1997
--------- ---------
Cash flows from operating activities:
Net income $ 8,262 $12,617
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 4,674 2,839
Accounts receivable, net 1,614 (10,796)
Inventory (2,557) (1,690)
Deferred tax assets (50) -
Prepaid expenses and other assets 60 (2,800)
Accounts payable (8,117) 3,570
Accrued payroll and related expenses (1,193) 1,383
Other accrued liabilities (1,432) (960)
Deferred revenue 3,755 26,342
--------- ---------
Total adjustments (3,246) 17,888
--------- ---------
Net cash provided by operating activities 5,016 30,505
Cash flows from investing activities:
Purchases of short term investments (114,556) (41,393)
Proceeds from sale of short term investments 115,968 54,367
Investment in foundry (10,925) (40,231)
Acquisition of capital equipment (4,800) (5,838)
--------- ---------
Net cash used in investing activities (14,313) (33,095)
Cash flows from financing activities:
Sale of common stock 2,289 1,604
--------- ---------
Net cash provided by financing activities 2,289 1,604
--------- ---------
Net decrease in cash and cash equivalents (7,008) (986)
Cash and cash equivalents at beginning of period 20,888 19,323
========= =========
Cash and cash equivalents at end of period $13,880 $18,337
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<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, 1998,
and the results of operations and cash flows for the three and nine month
periods ended September 30, 1998 and 1997. Because all the disclosures
required by generally accepted accounting principles are not included,
these interim condensed consolidated financial statements should be read
in conjunction with the audited financial statements and notes thereto in
the Company's annual report on Form 10-K as of, and for the year ended
December 31, 1997. The condensed consolidated balance sheet data as of
December 31, 1997 was derived from the audited financial statements.
The results of operations and cash flows for the three and nine month
periods ended September 30, 1998 are not necessarily indicative of
results of operations and cash flows for any future period.
2. The Company's fiscal year ends on the Sunday closest to December 31, and
each fiscal quarter ends on the Sunday closest to March 31, June 30, and
September 30. The third fiscal quarter of 1998 and 1997 ended on
September 27, 1998 and September 28, 1997, respectively. Fiscal year 1997
ended on December 28, 1997. For ease of presentation, the accompanying
financial statements have been shown as ending on the last day of the
calendar month.
3. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
4. The components of inventory consist of the following:
September 30, December 31,
1998 1997
-------- --------
(In thousands)
Raw materials $ 2,919 $ 3,289
Work-in-process 10,493 10,340
Finished goods 4,793 2,019
-------- --------
$ 18,205 $ 15,648
======== ========
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<PAGE>
5. The following table sets forth the computation of basic and diluted
earnings per share:
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
(In thousands, except
per share amounts)
Numerator:
Numerator for basic and diluted
net income per share - net income $ 2,506 $ 6,802 $ 8,262 $12,617
======= ======= ======= =======
Denominator for basic net income per share:
Weighted average common shares 26,411 22,568 26,200 22,480
------ ------ ------ ------
Shares used in computing basic net
income per share 26,411 22,568 26,200 22,480
====== ====== ====== ======
Basic net income per share $ 0.09 $ 0.30 $ 0.32 $ 0.56
====== ====== ====== ======
Denominator for diluted net income per share:
Weighted average common shares 26,411 22,568 26,200 22,480
Employee stock options and warrants
to purchase common stock 981 2,389 1,549 2,012
------ ------ ------ ------
Shares used in computing diluted net income
per share 27,392 24,957 27,749 24,492
====== ====== ====== ======
Diluted net income per share $ 0.09 $ 0.27 $ 0.30 $ 0.52
====== ====== ====== ======
6. To preserve its intellectual property rights, the Company believes it may
be necessary to initiate litigation with one or more third parties,
including but not limited to those the Company has notified of possible
patent infringement. In addition, one or more of these parties, or
others, may bring suit against the Company.
In March 1998, the Company filed a complaint in federal court against
Lexar Media, Inc. ("Lexar") for infringement of a fundamental flashdisk
patent. Lexar has disputed the Company's claim of patent infringement,
claimed SanDisk's patent is invalid or unenforceable and asserted various
counterclaims including unfair competition, violation of the Lanham Act,
patent misuse, interference with prospective economic advantage, trade
defamation and fraud. SanDisk has denied each of Lexar's counterclaims.
In July 1998, the federal district court denied Lexar's request to have
the case dismissed on the grounds the Company failed to perform an
adequate prefiling investigation. Discovery in the Lexar suit commenced
in August 1998. The Company intends to vigorously enforce its patents,
but there can be no assurance that these efforts will be successful.
From time to time the Company agrees to indemnify certain of its
suppliers and customers for alleged patent infringement. The scope of
such indemnity varies but may in some instances include 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
Page 7
<PAGE>
for patent infringement are excluded from coverage under the Company's
insurance policies. There can be no assurance that any future obligation
to indemnify the Company's customers or suppliers, will not have a
material adverse effect on the Company's business, financial condition
and results of operations.
Any litigation, whether as a plaintiff or as a defendant, will likely
result in significant expense to the Company and divert the efforts of
the Company's technical and management personnel, whether or not such
litigation is ultimately determined in favor of the Company. In the event
of an adverse result in any such litigation, the Company could be
required to pay substantial damages, cease the manufacture, use and sale
of infringing products, expend significant resources to develop
non-infringing technology or obtain licenses to the infringing
technology, or discontinue the use of certain processes. Accordingly,
there can be no assurance that any of the foregoing matters, or any
future litigation, will not have a material adverse effect on the
Company's business, financial condition and results of operations.
7. The Company recorded a provision for income taxes at a 36% effective tax
rate for the first nine months of 1998 compared to a 15% effective tax
rate for the same period of 1997. The effective tax rate for the first
nine months of 1997 was substantially below the federal statutory rate
due to the utilization of federal and state tax credit carryforwards,
Foreign Sales Corporation tax benefits and a reduction in the deferred
tax asset valuation allowance.
8. The Company has a credit agreement (the Agreement) with a bank, which was
renewed in July 1998. Under the provisions of the Agreement, which
expires in July 1999, the Company may borrow up to $10.0 million on a
revolving line of credit at the bank's prime interest rate. Amounts under
the revolving line of credit can be applied to the issuance of letters of
credit up to the full amount of the credit line. At September 30, 1998,
$1.0 million of letters of credit were outstanding. In addition, under
the Agreement, the Company also has a $15.0 million foreign exchange
contract line under which the Company may enter into foreign exchange
contracts. As of September 30, 1998, $2.8 million was outstanding under
the foreign exchange contract portion of the line. The Agreement contains
covenants that require the Company to maintain certain financial ratios
and levels of net worth. The Agreement prohibits the payment of cash
dividends to stockholders.
9. On August 21, 1998, the Company implemented an option
cancellation/regrant program. Under the cancellation/regrant program,
employees could elect to exchange their stock options with exercise
prices in excess of $12.00 per share for new options priced at $10.00 per
share, the market price of the Company's common stock on August 21, 1998.
Under the new options, shares become exercisable six to twelve months
later than under the old higher-priced options. The new options have a
maximum term of ten years from the August 21, 1998, grant date. Officers
and directors of the Company were not eligible for participation in the
option cancellation/regrant program. Options covering a total of
approximately 903,425 shares were canceled and regranted in connection
with the program.
10. As of January 1, 1998, the Company adopted statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income." SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
Statement had no impact on the Company's net income or stockholders'
equity. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income.
Page 8
<PAGE>
Statements of Comprehensive Income
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
Net income $ 2,506 $ 6,802 $ 8,262 $ 12,617
Unrealized gain (loss)
on available-for-sale
securities 203 5 347 (5)
-------- -------- -------- --------
Comprehensive income $ 2,709 $ 6,807 $ 8,609 $ 12,612
======== ======== ======== ========
Accumulated other comprehensive income, which consists of gains (losses)
on available-for-sale securities, was $390,000 and $1,000 at September
30, 1998 and 1997, respectively.
11. In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which is required to be adopted in years beginning after June 15, 1999.
Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of the new statement will have a significant
effect on earnings or the financial position of the Company.
Page 9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements in this discussion and analysis, including in
particular, the paragraph discussing patent license and royalty revenues, are
forward looking statements based on current expectations and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in such forward looking statements. Such risks and
uncertainties are discussed below and in the Company's Form 10-K for the year
ended December 31, 1997 under the heading "Risk Factors". Readers are cautioned
not to place undue reliance on these forward looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to update these
forward looking statements to reflect events or circumstances occurring after
the date hereof. The following discussion should be read in conjunction with the
Company's consolidated financial statements and the notes thereto.
Overview
The Company was founded in 1988 to develop and market flash data
storage systems. The Company sells its products to the consumer electronics and
industrial/communications markets. The percentage of the Company's product sales
attributable to the consumer electronics market has increased substantially and
in 1998 represents approximately 60% of product revenues. This increase in sales
to the consumer market resulted in a shift to CompactFlash products, which
typically have lower average selling prices and gross margins than higher
capacity products. In addition, these products are frequently sold into the
retail channel, which usually has shorter customer order lead-times than the
other channels used by the Company, thereby decreasing the Company's ability to
accurately forecast future production needs. Subject to continued market
acceptance of its CompactFlash products, the Company believes these products
will continue to represent a majority of the Company's sales as the popularity
of consumer applications, including digital cameras, increases. The percentage
of sales attributable to orders received and fulfilled in the same quarter has
increased over time and, in response, the Company is continuing to work to
shorten its manufacturing cycle times.
Beginning in late 1995, the Company adopted a strategy of licensing its
flash technology, including portions of its patent portfolio, to selected third
party manufacturers of flash products. To date, the Company has entered into
patent cross-license agreements with six companies, and it intends to pursue
opportunities to enter into additional licenses. The Company's current license
agreements provide for the payment of license fees, royalties, or a combination
thereof, to the Company. The timing and amount of these payments can vary
substantially from quarter to quarter, depending on the terms of each agreement
and, in some cases, the timing of sales of products by the other parties. As a
result, license and royalty revenues have fluctuated significantly in the past
and are likely to continue to fluctuate in the future. Given the relatively high
gross margins associated with license and royalty revenues, gross margins and
net income are likely to fluctuate more with changes in license and royalty
revenues than with changes in product revenues.
SanDisk markets its products using a direct sales organization,
distributors, manufacturers' representatives, private label partners, OEMs and
retailers. The Company expects that sales through the retail channel will
comprise an increasing share of total revenues in the future, and that a
substantial portion of its sales into the retail channel will be made to
participants that will have the right to return unsold products. The Company
recognizes revenues from sales to the retail channel and distributors when the
products are sold to the end customers.
Historically, a majority of the Company's sales have been to a limited
number of customers. The Company expects that sales of its products to a limited
number of customers will continue to account for a substantial portion of its
product revenues for the foreseeable future. The Company has also experienced
significant changes in the composition of its customer base from year to year
and expects this pattern to continue as market demand for such customers'
products fluctuates. The loss of, or significant reduction in purchases by major
customers, could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors - Customer
Concentration."
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<PAGE>
Export sales are an important part of the Company's business. While a
majority of the Company's revenues from sales to Asian countries are derived
from OEM customers who plan to export a portion of their products to countries
outside of Asia, the Asian economic crisis has and may continue to adversely
effect the Company's revenues to the extent that demand for the Company's
products in Asia declines. Given the recent economic conditions in Asia and the
weakness of many Asian currencies relative to the United States dollar, the
Company's products are and may continue to be relatively more expensive in Asia,
which could result in a decrease in the Company's sales in that region. The
Company has and may continue to experience pressure on its gross margins as a
result of increased price competition from Asian competitors. While most of the
Company's sales are denominated in U.S. Dollars, the Company invoices certain
Japanese customers in Japanese Yen and is subject to exchange rate fluctuations
on these transactions. To date, a portion of the Company's purchases of wafers
have been denominated in Japanese Yen. While this percentage has been
decreasing, exchange rate fluctuations can affect the Company's business,
financial condition and results of operations. See "Risk Factors Risks
Associated with International Operations."
The Company's operating results are affected by a number of factors
including the volume of product sales, the timing of significant orders,
competitive pricing pressures, the ability of the Company to match supply with
demand, changes in product and customer mix, market acceptance of new or
enhanced versions of the Company's products, changes in the channels through
which the Company's products are distributed, timing of new product
announcements and introductions by the Company and its competitors, the timing
of license and royalty revenues, fluctuations in product costs, the ability of
the Company to achieve manufacturing efficiencies with its new and existing
products, availability of foundry capacity, variations in manufacturing cycle
times, fluctuations in manufacturing yields and manufacturing utilization,
increased research and development expenses and exchange rate fluctuations. In
addition, as the proportion of the Company's products sold for use in consumer
electronics applications increases, the Company's revenues may become subject to
seasonal declines in the first quarter of each year. See "Risk Factors -
Fluctuations in Operating Results", "- Increasing Dependence on Consumer
Products" and "- Seasonality."
Year 2000 Readiness Disclosure
The Company is aware of problems associated with computer systems as
the year 2000 approaches. Year 2000 problems are the result of common computer
programming techniques that result in systems that do not function properly when
manipulating dates later than December 31, 1999. The issue is complex and wide
ranging. The problem may affect transaction processing computer applications
used by the Company for accounting, distribution, manufacturing, planning and
communications. The problem may also affect embedded systems such as building
security systems, machine controllers and production test equipment. Year 2000
problems with these systems may affect the ability or efficiency with which the
Company can perform many significant functions, including but not limited to:
order processing and fulfillment, material planning, product assembly, product
test, invoicing and financial reporting. In addition, the problem may affect the
computer systems of the Company's suppliers and customers, potentially
disrupting their operations. Year 2000 problems with the Company's business
partners may impact the Company's sources of supply and demand.
Year 2000 Readiness. The Company has established a Year 2000 Risk
Management program to assess the impact of the Year 2000 issue on SanDisk, and
to coordinate remediation activities. The Company completed the evaluation of
its products for Year 2000 compliance in the third quarter of 1998. The
Company's FlashDisk, FlashDrive, Flash Chipset, CompactFlash, MultiMediaCard,
and ImageMate product lines do not perform date related processing, do not
contain real time clock circuitry and therefore are Year 2000 ready. Sandisk
storage and connectivity products are used as components in a variety of host
systems. The firmware, operating system, and application software of these host
systems are designed and manufactured by others. SanDisk makes no claim with
regard to the Year 2000 readiness of host
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<PAGE>
systems designed by others in which SanDisk's products are used. Independent
system designers make derivative works from the SanDisk Host Developer's Toolkit
("Toolkit") source code product. Sample date related subroutines and data
structures are included in the Toolkit for use by system designers. Designers
modify the sample routines in order to fit the specific requirements of their
host operating system. The designer is responsible for the formatting and
processing logic associated with the date values that pass through the Toolkit
subsystem and for the Year 2000 readiness of the systems in which the Toolkit is
used. SanDisk makes no claims with regard to the Year 2000 readiness of host
firmware and operating systems designed by others that contain derivative works
of the Host Developer's Toolkit.
The Year 2000 compliance assessment of the Company's management
information system is complete, and remediation is well underway. The Company
expects to complete the implementation of a new, Year 2000 compliant management
information system in the fourth quarter of 1998. The new system is a
commercially available fully integrated MRP II (Materials Requirement Planning
and Accounting system) software application. This system will be used for
Accounting, Order Processing, Planning, Inventory Control, Shop Floor Control
and Distribution. Problems or delays in the implementation of the Company's Year
2000 compliant management information system could result in a disruption of the
Company's operations.
The assessment and remediation of Year 2000 problems in tertiary
business information systems is on-going. Well over 90% of the company's
investment in desktop PC hardware is known to be Year 2000 compliant. The
majority of the software used on these systems and network servers are recent
versions of vendor supported, commercially available products. Upgrading these
applications as Year 2000 compliant patches are released by the respective
vendors has not been a significant burden on the Company and is expected to be
completed before the end of 1999.
The assessment and remediation of Year 2000 problems in computer
systems used for facilities control, machine control, and manufacturing testing
is on-going. The most significant Year 2000 issue in this area has been found to
be related to older wafer test equipment. This equipment is not expected to be
in use in the year 2000. The Company is phasing in new Year 2000 compliant wafer
test equipment in conjunction with the introduction of new generations of flash
memory.
The Company has begun its assessment of Year 2000 risks related to
suppliers, customers and other third parties. Inquiries will be made of all
critical suppliers and an assessment made of their Year 2000 readiness. SanDisk
will also contact its significant customers regarding their Year 2000 readiness
in order to understand the potential for any disruptions in their ordering
patterns. Completion of this review will depend on the responsiveness of the
Company's vendors and customers, over which the Company has no control.
Year 2000 Risk Management Program Costs. The cost of the Year 2000
project related to upgrading the Company's core management information system is
approximately $1.0 million. The Company has capitalized approximately $400,000
for the cost of purchased software and hardware. The Company would have incurred
the majority of these costs, in spite of Year 2000 issues, due to the need to
upgrade its management information system to support the Company's growth. The
additional expenses related to the management of the Year 2000 compliance
program and completing the assessment of the Company's internal and external
risks are not expected to be material to the Company's quarterly operating
results.
The costs and time schedule for the Year 2000 problem abatement are
based on management's best estimates for the implementation of its new
management information system and Year 2000 problems uncovered to date. These
estimates were derived utilizing numerous assumptions, including that the most
significant Year 2000 risks have already been identified, that certain resources
will continue to be available, that third party plans will be fulfilled, and
other factors. However, there can be no guarantee that these estimates will be
achieved or that the anticipated time schedule will be met and actual results
could differ materially from those anticipated.
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<PAGE>
Contingency Plans. Specific contingency plans for systems that pose
significant risk to on-going operations are being developed under the auspices
of the Company's Year 2000 Risk Management program. If the Company is unable to
complete the replacement of its core management information system in a timely
manner, an alternative plan has been developed. This plan consists of applying
available vendor supplied software patches to the existing system. The costs and
time involved to complete this alternative are expected to be minimal. Should
previously undetected Year 2000 problems be found in other systems, these
systems will either be upgraded, replaced, turned off, or operated in place with
manual procedures to compensate for their deficiencies. While the Company
believes that these alternative plans would be adequate to meet the Company's
needs without materially impacting its operations, there can be no assurance
that such alternatives would be successful or that the Company's results of
operations would not be materially adversely affected by the delays and
inefficiencies inherent in conducting operations in this manner.
Risks Related to Year 2000 Readiness. Success of the Company's Year
2000 compliance efforts depend, in part, on the success of its key suppliers and
customers in dealing with their Year 2000 issues. The Company does not have any
control over the remediation efforts of its key suppliers and customers and is
not aware of the extent to which they have resolved their Year 2000 compliance
issues. The Company currently purchases several critical components from single
or sole source vendors. Disruptions in the supply of components from any of
these sole source suppliers due to Year 2000 issues, could cause delays in the
Company's fulfillment of customer orders which could result in reduced or lost
revenues. Furthermore, the Company's sales have historically been to a limited
number of customers. Any disruption in the purchasing patterns of these
customers or potential customers due to Year 2000 issues could cause a decline
in the Company's revenues. There can be no assurance that the Company and its
key suppliers and customers will identify and remediate all significant Year
2000 problems on a timely basis. Furthermore, there can be no assurance that the
Company's insurance will cover losses from business interruptions arising from
Year 2000 problems of the Company or its suppliers. Year 2000 compliance
problems of the Company's key suppliers and customers could adversely affect the
Company's, business, financial condition and results of operations.
The foregoing statements regarding the Company's Year 2000 readiness
are based upon management's best estimates at the present time, which were
derived utilizing assumptions regarding future events, including the continued
availability of certain resources, third party modification plans and other
factors. There can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, the nature and amount of programming
required to upgrade or replace each of the affected programs, the rate and
magnitude of related labor and consulting costs and the success of the Company's
external customers and suppliers in addressing the Year 2000 issue. The
Company's evaluation is on-going and it expects that new and different
information will become available to it as the evaluation continues.
Consequently, there is no guarantee that all material elements will be Year 2000
ready in time.
Results of Operations
Product Revenues. SanDisk's product revenues were $24.1 million in the
third quarter of 1998, down $6.1 million or 20% from the third quarter of 1997.
Product revenues for the nine months ended September 30, 1998 were $73.0
million, up $0.7 million or 1% from the same period in 1997. During the three
and nine month periods ended September 30, 1998, units shipped increased 29% and
36%, respectively, from the same periods of 1997. These increases were offset by
decreases in average selling prices of 39% for the third quarter of 1998 and 26%
for the first nine months of 1998 compared to the same periods of 1997.
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Due to the economic recession in Japan, sales to this region declined
$5.8 million in the third quarter of 1998 compared to the same period in 1997,
representing essentially all of the year to year decline in product revenues.
The Company continues to experience limited bookings visibility, particularly in
Japan. More than one half of the Company's anticipated quarterly revenues
continue to be turns business, orders received and fulfilled in the same
quarter, with customers demanding short lead times and quick delivery schedules,
thus capitalizing on the current market conditions and aggressive pricing
environment. Due to a number of factors described herein and in "Risk Factors,"
the Company's ability to adjust its operating expenses is limited in the short
term. As a result, if product revenues are lower than anticipated, the Company's
results of operations will be adversely affected. See "Risk Factors-Fluctuations
in Operating Results", "- Risks Associated with International Operations" and
"Seasonality."
Export sales represented 47% and 46%, respectively,of product revenues
for the three and nine month periods ended September 30, 1998 compared with 60%
and 53%, respectively, for the same periods of the previous year. The Company
expects international sales to continue to represent a significant portion of
its product revenues. The Company's top ten customers represented 65% of product
revenue in the third quarter of 1998 compared to 67% for the same period in
1997. The Company expects that sales to a limited number of customers will
continue to represent a substantial portion of its revenues for the foreseeable
future.
License and Royalty Revenues. The Company currently earns patent
licenses and royalty revenues under six cross license agreements, with Hitachi,
Intel, Samsung, Sharp, Silicon Storage Technology, Inc. ("SST") and Toshiba.
License and royalty revenue from patent cross license agreements was $7.9
million in the third quarter of 1998, up $2.0 million from $5.9 million in the
same period of 1997 primarily due to the timing of revenue recognition under the
various agreements. In the first nine months of 1998, revenue from patent
license and royalties was $24.5 million, up $11.9 million from the same period
of 1997. Revenues from patent licenses and royalties increased to 25% of total
revenues in the three and nine month periods ended September 30, 1998 from 16%
and 15% respectively, for the same periods of the previous year. The Company
currently expects that revenues from patent licenses and royalties will be in
the range of $7.5 to $8.0 million per quarter for the next several quarters.
Gross Profits. In the third quarter of 1998, gross profits were $13.2
million or 41% of total revenues, down from $16.0 million or 44% of total
revenues for the same period of 1997. Gross profits for the first nine months of
1998 were $40.4 million or 41% of total revenues compared to $35.5 million or
42% of total revenues for the same period in the previous year. The growth in
overall gross profits for the first nine months of 1998 was due to an increase
in license and royalty revenue. Product gross margins decreased to 22% in the
third quarter of 1998 compared to 33% for the same period of 1997. The decrease
was primarily due to the decline in average selling prices. During the third
quarter, the Company completed the transition from 32Mbit, 0.4 micron technology
to the more cost effective 64Mbit, 0.35 micron technology. While the Company has
ongoing efforts to reduce manufacturing costs, there can be no assurance that
these cost reductions will be adequate to offset future average selling price
declines due to increased competition.
Research and Development. Research and development expenses consist
principally of salaries and payroll related expenses for design and development
engineers, prototype supplies and contract services. Research and development
expenses increased $1.3 million or 35% in the third quarter of 1998 compared to
the third quarter of 1997. In the first nine months of 1998 research and
development expenses increased $4.0 million compared to the same period in 1997.
These increases were primarily due to an increase in salaries and payroll
related expenses associated with additional personnel, increased project related
expenses and increased depreciation due to capital equipment additions. Research
and development expenses represented 15% of total revenues for the third quarter
of 1998 compared to 10% for the same period in 1997. The Company expects
research and development expenses to continue to increase in absolute dollars to
support the development of new generations of flash data storage products.
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Sales and Marketing. Sales and marketing expenses include salaries
and payroll related expenses, sales commissions and travel expenses for the
Company's sales, marketing, customer service and applications engineering
personnel. These expenses also include other selling and marketing expenses such
as independent manufacturer's representative commissions, advertising and
tradeshow expenses. Sales and marketing expenses increased $0.8 million or 24%
in the third quarter of 1998 compared to the third quarter of 1997. In the first
nine months of 1998, sales and marketing expenses increased $3.4 million
compared same period in 1997. These increases were primarily due to increased
marketing and sales expenses related to the development of the retail channel
for the Company's products and an increase in salaries and payroll related
expenses associated with additional personnel. Sales and marketing expenses
represented 12% of total revenues in the third quarter of 1998 compared to 9%
for the same period of 1997. The Company expects sales and marketing expenses to
increase in absolute dollars as sales of its products grow and it continues to
develop the retail channel for its products both domestically and
internationally.
General and Administrative. General and administrative expenses include
the cost of the Company's finance, information systems, human resources,
shareholder relations, legal and administrative functions. General and
administrative expenses decreased $0.2 million or 10% in the third quarter of
1998 compared to the third quarter of 1997. In the first nine months of 1998,
general and administrative expenses increased $0.7 million or 13% compared to
the same period of 1997. The decrease in the third quarter of 1998 was primarily
due to a decrease in bad debt expense. The increase in the first nine months of
1998 was primarily due to increased salaries and payroll related expenses
associated with additional personnel and higher consulting expenses related to
the implementation of the Company's new management information system. General
and administrative expenses represented 6% of total revenues in the third
quarters of 1998 and 1997. The Company expects general and administrative
expenses to increase in absolute dollars as these functions grow to support the
overall growth of the Company. General and administrative expenses could also
increase substantially in the future in connection with the Company's efforts to
defend its patent portfolio. See "Risk Factors-Patents Proprietary Rights and
Related Litigation."
Interest and Other Income, Net. Interest and other income, net,
increased $0.5 million in the third quarter of 1998 compared to the same period
of 1997. This increase was primarily due to higher investment balances as a
result of the investment of proceeds from the sale of common stock in the
Company's November 1997 follow on public offering.
Provision for Income Taxes. The Company recorded a provision for income
taxes at a 36% effective tax rate for the first nine months of 1998 compared to
a 15% effective tax rate for the same period of 1997. The effective tax rate for
the first nine months of 1997 was substantially below the federal statutory rate
due to the utilization of federal and state tax credit carryforwards, foreign
sales corporation tax benefits and a reduction in the deferred tax asset
valuation allowance. The Company's 1998 effective tax rate is substantially
higher than its 1997 rate due to the utilization of all remaining federal and
state tax credit carryforwards in 1997.
Liquidity and Capital Resources
As of September 30, 1998, the Company had working capital of $133.9
million, which included $13.9 million in cash and cash equivalents and $113.0
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 million at the bank's
prime rate. This line of credit facility expires in July 1999. As of September
30, 1998, the Company had $2.8 million committed under the foreign exchange
facility of the line of credit for Yen forward exchange contracts that mature in
November 1998. The Agreement contains covenants that require the Company to
maintain certain financial ratios and levels of net worth, and prohibits the
payment of cash dividends to stockholders.
Operating activities provided $5.0 million of cash during the first
nine months of 1998 primarily from net income, an increase in deferred revenue
and a decrease in accounts receivable which were
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partially offset by a decline in accounts payable and an increase in inventory.
Investing activities used $14.3 million of cash in the first nine months of 1998
and included an additional investment of $10.9 million in the USIC foundry and
capital equipment purchases of $4.8 million, which were partially offset by net
proceeds from investments of $1.4 million. During the first nine months of 1998,
financing activities provided $2.3 million of cash primarily from the sale of
common stock under the SanDisk employee stock purchase and stock option plans.
Depending on the demand for the Company's products, the Company may
decide to make investments, which could be substantial, in assembly and test
manufacturing equipment or foundry capacity to support its business in the
future. Management believes the existing cash and cash equivalents, short term
investments and available line of credit, together with cash flow from
operations, will be sufficient to meet the Company's currently anticipated
working capital and capital expenditure requirements for at least the next
twelve months.
Impact of Currency Exchange Rates
The Company currently purchases wafers from Matsushita under purchase
contracts denominated in yen. A portion of the Company's revenues are also
denominated in yen. Foreign exchange exposures arising from the Company's yen
denominated commitments and related accounts payable are offset to the extent
the Company has yen denominated accounts receivable and cash balances. To the
extent such foreign exchange exposures are not offset, the Company enters into
foreign exchange forward contracts to hedge against changes in foreign currency
exchange rates. At September 30, 1998, there were $2.8 million in Yen forward
contracts outstanding. Future exchange rate fluctuations could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Risk Factors
Fluctuations in Operating Results. SanDisk's operating results have
been and are expected to continue to be, subject to quarterly and annual
fluctuations due to a variety of factors. The principal factors that have caused
the Company's operating results to fluctuate in the past several quarters and
may cause the Company's operating results to fluctuate in the future are
unpredictable demand for the Company's products, declining average selling
prices, the economic recession in Japan and the seasonality in sales of products
for consumer electronics applications. For example, the Company's product
revenues declined in the first and second quarters of 1998 and were relatively
flat in the third quarter, due to lower average selling prices, a decline in
sales to Japan and seasonal factors.
The Company must order silicon wafers from its foundries several months
prior to the date such wafers are needed. If the Company overestimates the
number of silicon wafers it needs to fill product orders and as a result builds
excess inventories, gross margins and operating results will be materially
adversely affected. For example, in the second quarter of 1998 product gross
margins declined to 12% from 30% in the previous quarter partially due to a
lower of cost or market write down of inventory. Because the Company is selling
CompactFlash, its largest volume product, into an emerging consumer market and
is unable to accurately forecast future sales, there will be a material adverse
effect on the Company's operating results if sales fall below the Company's
expectations in a particular quarter and the Company is unable to reduce its
operating expenses. The portion of the Company's quarterly sales attributable to
orders received and fulfilled in the same quarter ("turns business") remains
higher than 50% and product order backlog may fluctuate 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
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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 general economic conditions, including economic conditions in Asia.
All of these factors are difficult to forecast and these or other factors can
materially affect the Company's quarterly or annual operating results or gross
margins.
The Company has increased its expense levels to support its anticipated
growth, including expenses associated with the expansion of the Company's
in-house assembly and test operations. The Company expects to continue to
increase its operating expenses by hiring additional personnel to support
expected growth in sales unit volumes, increased marketing and sales efforts and
accelerated research and development activities. If the Company does not achieve
increased levels of revenues commensurate with these increased levels of
operating expenses, or if the Company's revenues decrease or do not meet the
Company's expectations for a particular period, the Company's business,
financial condition and results of operations will be materially adversely
affected.
The mix of the Company's products sold varies from quarter to quarter
and will vary in the future, affecting the Company's overall average selling
prices and gross margins. The Company's CompactFlash products, which currently
represent a significant portion of the Company's product revenues, have lower
average selling prices and gross margins than the Company's higher capacity
FlashDisk and FlashDrive products. The Company expects that sales of
CompactFlash products will represent a significant percentage of product
revenues as consumer applications such as digital cameras become more popular.
This dependence on CompactFlash sales, coupled with lower pricing due to
competition, has caused and is expected to continue to cause average selling
prices to decline, sometimes at a faster rate than cost reductions implemented
by the Company.
The Company has adopted a strategy of cross-licensing its patents to
other manufacturers of flash products. Under such arrangements, the Company
earns license fees and royalties on terms that are individually negotiated. The
timing of recognition of revenues from these payments depends on the terms of
each contract, and, in some cases, on the timing of product shipments by the
third parties. As a result, license and royalty revenue has fluctuated
significantly in the past and may fluctuate in the future. Given the relatively
high gross margins associated with license and royalty revenue, gross margins
and net income are likely to fluctuate more with changes in license and royalty
revenue than with changes in product revenue.
Dependence on Emerging Markets and New Products. The Company's success
depends to a significant extent upon the development of emerging markets and new
applications for flash data storage systems, as well as on its ability to
introduce commercially attractive and competitively priced products on a timely
basis. The Company believes that continued significant expenditures for research
and development will be required in the future. In particular, the Company
intends to develop new products with increased memory capacity at a lower cost
per megabyte, which the Company believes will be essential to its ability to
remain competitive. In November 1997, the Company introduced a new removable
storage card product family, the MultiMediaCard. MultiMediaCard is targeted for
the emerging markets for mobile smart phones, advanced pagers and consumer
multimedia devices. MultiMediaCard will initially be offered in storage
capacities of 4MB and 8MB. The Company does not expect to generate material
revenues from MultiMediaCard sales in 1998. There can be no assurance that the
Company will successfully develop any of these new products, that new
applications or markets for flash data storage will develop as expected by the
Company, that prospective customers developing products for any such markets
will design the Company's products into their products and successfully
introduce such products, or that products or technologies developed by others
will not render the Company's products or technologies obsolete or
noncompetitive. The failure of new applications or markets to develop or the
failure of the Company's products to be accepted by the market would have a
material adverse effect on the Company's business, financial condition and
results of operations.
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Increasing Dependence on Consumer Products. Product revenues derived
from sales of products for consumer electronics applications, principally
digital cameras, have increased significantly and in 1998 represent 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 require larger expenditures for
marketing and promotion to establish brand name recognition and preference.
Consumer markets are more likely to experience seasonality of sales,
with potential declines in sales activity during the first quarter of any year.
Because of the large number of OEMs entering the digital camera market, it is
likely that not all of these manufacturers will be successful in achieving
market acceptance of their products. If SanDisk's OEM customers are not
successful in this market, such OEM customers may have excess inventories of
CompactFlash products, which may preclude follow-on orders or result in sales of
their CompactFlash inventories in the open market. The market acceptance of
digital cameras that use CompactFlash has been slower than expected and the
number of companies supplying CompactFlash has increased, causing average
selling prices and product gross margins to decline at a rapid rate. If market
acceptance of digital cameras that use CompactFlash continues to be slower than
expected, or if the market for CompactFlash becomes saturated, the Company may
encounter reduced demand for CompactFlash products, declining average selling
prices or product returns, any of which would have an adverse effect on the
Company's results of operations.
The Company anticipates that a greater proportion of its sales to the
consumer electronics market will be made through distributors and to retailers
than is the case with the industrial/communications market. This will be
particularly true if the level of after-market sales of flash memory products
increases. The Company is currently expending significant resources developing a
retail sales channel. The expenditures associated with this development are
likely to precede the realization of significant sales through this channel.
Moreover, the Company has no prior experience in the development or management
of the retail channel or sales through such channel. In addition, a significant
portion of retail sales for consumer applications will be made to distributors
and retail chains, which typically maintain rights to return unsold inventory.
As a result, the Company does not recognize revenues on sales to this channel
until after the products have been sold to end users. If the Company's retail
customers are not successful in this market, there could be substantial product
returns to the Company. The inability to successfully develop and effectively
manage the retail sales channel could have a material adverse effect on the
Company's business, financial condition and results of operations.
Seasonality. The Company has experienced and expects to continue to
experience seasonality in its product sales. A significant portion of the
Company's product revenues are derived from the sale of CompactFlash products,
which are sold principally for consumer electronics applications. As a result,
the Company's product sales have been and are expected to be impacted by
seasonal purchasing patterns, with higher sales in the second half of each year
as compared to the first half of each such year. In the past, the Company has
experienced a reduction in order quantities in the first quarter from Japanese
OEM customers, reflecting the fact that most customers in Japan operate on a
fiscal year ending in March and prefer to delay purchases until the beginning of
their next fiscal year. In the first quarter of 1998, product revenues declined
24% from the level in the fourth quarter of 1997 due in part to these seasonal
factors and the Asian economic crisis.
Competition. The flash data storage markets in which the Company
competes are characterized by intense competition, rapid technological change,
evolving industry standards, declining average selling prices and rapid product
obsolescence. The Company's competitors include many large domestic and
international companies that have greater access to foundry capacity,
substantially greater financial, technical, marketing and other resources,
broader product lines and longer standing relationships with customers than the
Company. The Company's primary competitors include flash chip producers such as
Advanced Micro Devices, Inc. ("AMD"), Atmel Corporation ("Atmel"), Hitachi Ltd.
("Hitachi"), Intel
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Corporation ("Intel"), Micron Technology, Inc. ("Micron"), Mitsubishi Electronic
Corporation ("Mitsubishi"), Samsung Electronics Company Ltd. ("Samsung"), Sharp
Electronics Corporation ("Sharp") and Toshiba Corporation ("Toshiba"), other
companies using data storage techniques such as socket flash, linear flash and
system flash components, as well as package or card assemblers such as Lexar
Media, Inc. ("Lexar"), M-Systems, Inc. ("M-Systems"), Simple Technology Inc.
("Simple"), SMART Modular Technologies, Inc. ("Smart Modular"), Sony Corporation
("Sony"), Kingston Technology Company ("Kingston"), TDK Corporation ("TDK"),
Matsushita Battery, Inc. ("Matsushita Battery") and Viking Components, Inc.
("Viking") that combine controllers and flash memory chips developed by others
into flash storage cards. Several companies, including Hitachi, Lexar,
Mitsubishi and Micron have been certified by the CompactFlash Association to
manufacture and sell their own brand of CompactFlash, and the Company believes
that other manufacturers will enter the CompactFlash market in the future.
Competing products promoting industry standards that are different from
SanDisk's CompactFlash product have been announced, including Intel's Miniature
Card, Toshiba's Smart Media (Solid-State Floppy Disk Card), Sony Corporation's
Memory Stick, Matsushita Battery's recently introduced Mega Storage cards and
M-Systems' Diskonchip(TM) for embedded storage applications. A manufacturer of
digital cameras that designs-in any one of these alternative competing standards
will eliminate CompactFlash from use in its product, as each competing standard
is mechanically and electronically incompatible with CompactFlash. In addition,
in the third quarter of 1997, Intel announced a 64Mbit flash chip based on its
multilevel cell flash. The Company's double density flash ("D2 flash") and
Intel's multilevel cell flash are competing technological innovations that allow
each flash memory cell to store two bits of information instead of the
traditional single bit stored by the industry standard flash technology. In
November 1997, Iomega Corporation ("Iomega") announced its Clik drive, a
miniaturized, mechanical, removable disk drive that Iomega claims will compete
directly with SanDisk's flash card products. In September 1998, IBM introduced
the microdrive, a rotating disk drive in a type II CompactFlash format. This
product will initially compete directly with the Company's type II CompactFlash
memory cards for use in high end professional digital cameras. In October 1998,
M-Systems introduced their Diskonchip 2000 product which is expected to compete
against the Company's Chipset products in embedded storage applications.
In the first and second quarters of 1998, Sony's Mavica digital camera
captured approximately 40% of the US market for digital cameras according to
independent industry analysts. The Mavica uses a standard floppy disk to store
digital images and therefore uses no CompactFlash (or any other flash) cards. If
other manufacturers adopt the Mavica format and it becomes the new "defacto
standard", this will significantly reduce the Company's sales prospects for
CompactFlash cards. The Company's MultiMediaCard products are expected to face
stiff competition from Toshiba's SmartMedia flash cards and Sony's flash Memory
Stick. Although the Memory Stick is proprietary to Sony, its possible adoption
and widespread use in future products may adversely impact future sales of the
Company's MultiMediaCard and CompactFlash products.
The Company expects competition to increase in the future from existing
competitors and from other companies that may enter the Company's existing or
future markets with similar or alternative data storage solutions that may be
less costly or provide additional features. Due to the high price sensitivity in
the market for consumer products, aggressive price competition has been
experienced for these applications. Such competition is expected to result in
lower gross margins in the future, if the Company's average selling prices
decrease faster than its costs and could result in lost sales.
The Company has entered into patent cross-license agreements with
Hitachi, Intel, Samsung, Sharp, SST and Toshiba pursuant to which each party may
manufacture and sell products that incorporate technology covered by the other
party's patents related to flash memory devices. As the Company continues to
license its patents to certain of its competitors, competition will increase. As
a result of the above factors, the Company expects to face substantially more
competition in the future than it has to date. Increased competition could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company believes that its ability to compete
successfully depends on a number of factors, which include price and quality,
product performance and availability, success in developing new applications for
system flash technology, adequate foundry capacity, efficiency of
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production, timing of new product announcements or introductions by the Company,
the number and nature of the Company's competitors in a given market, successful
protection of intellectual property rights and general market and economic
conditions. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, financial condition or results of operations.
Declining Average Sales Prices. The Company has experienced, and
expects to continue to experience, declining average sales prices for its
products. For example in the third quarter of 1998 average selling prices
declined 29% compared to the third quarter of 1997. The flash data storage
markets in which the Company competes are characterized by intense competition.
Therefore, the Company expects to incur increasing pricing pressures from its
customers in future periods, which will likely result in a further decline in
average sales prices for the Company's products. To offset declining average
sales prices, the Company believes that it must continue to achieve
manufacturing cost reductions as well as develop new products that incorporate
advanced features and can be sold at higher average gross margins. If, however,
the Company is unable to achieve such cost reductions, it may not be able to
remain price competitive, resulting in lost sales, and the Company's gross
margins could decline, each of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
During the third quarter of 1998, the semiconductor industry as a whole
continued to experience significant production over capacity. This "buyers
market" continued to put margin pressures on all flash memory suppliers. The
Company believes that the current semiconductor down cycle may continue for the
next few quarters, putting continued pressure on average selling prices and
product gross margins.
Risks Associated with International Operations. Sales of the Company's
products have been denominated to date primarily in United States dollars.
Increases in the value of the United States dollar could increase the price of
the Company's products so that they become relatively more expensive to
customers in the local currency of a particular country, leading to a reduction
in sales and profitability in that country. Given the recent economic conditions
in Asia and the weakness of many Asian currencies relative to the United States
dollar, the Company's products are relatively more expensive in Asia, which has
resulted and may continue to result in a decrease in the Company's sales in that
region. In the third quarter of 1998, product sales to the Japan declined to 30%
of total product sales, primarily as a result of the Japanese economic crisis
and market recession. If the current market conditions in Japan do not improve,
or further decline, results of operations may be adversely affected.
All of the Company's wafers are, and for the foreseeable future will
be, produced by foundries located outside the United States. Because the Company
currently bills certain customers in Japanese Yen, fluctuations in currencies
could materially adversely affect the Company's business, financial condition
and results of operations. In addition, gains and losses on the conversion to
United States dollars of accounts receivable, accounts payable and other
monetary assets and liabilities arising from international operations may
contribute to fluctuations in the Company's results of operations. Due to its
reliance on export sales and its dependence on foundries outside the United
States, the Company is subject to the risks of conducting business
internationally, including foreign government regulation and general
geopolitical risks such as political and economic instability, potential
hostilities and changes in diplomatic and trade relationships. Manufacturing and
sales of the Company's products may also be materially adversely affected by
factors such as unexpected changes in, or imposition of, regulatory
requirements, tariffs, import and export restrictions and other barriers and
restrictions, longer payment cycles, greater difficulty in accounts receivable
collection, potentially adverse tax consequences, the burdens of complying with
a variety of foreign laws and other factors beyond the Company's control. In
addition, the laws of certain foreign countries in which the Company's products
are or may be developed, manufactured or sold, including various countries in
Asia, may not protect the Company's intellectual property rights to the same
extent as do the laws of the United States and thus make piracy of the Company's
products a more likely possibility. 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.
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Customer Concentration. A limited number of customers have historically
accounted for a substantial portion of the Company's revenues and the Company
expects this trend to continue. Sales to the Company's customers are generally
made pursuant to standard purchase orders rather than long-term contracts. The
Company has also experienced significant changes in the composition of its major
customer base from year to year and expects this variability to continue as
certain customers increase or decrease their purchases of the Company's products
as a result of fluctuations in market demand for such customers' products.
Dependence on Third Party Foundries. All of the Company's products
require silicon wafers, the majority of which are currently supplied by United
Silicon Corporation ("USC") and USIC in Taiwan and Matsushita Electronic
Corporation in Japan. The Company is dependent on its foundries to allocate to
the Company a portion of their foundry capacity sufficient to meet the Company's
needs, to produce wafers of acceptable quality and with acceptable manufacturing
yields and to deliver those wafers to the Company on a timely basis. On
occasion, the Company has experienced difficulties in each of these areas. The
loss or reduction of capacity from any of its foundry suppliers or the inability
to qualify or receive the anticipated level of capacity from any of its
manufacturing partners could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that any of the Company's suppliers will be able to maintain
acceptable yields or deliver sufficient quantities of wafers on a timely basis.
Under each of the Company's wafer supply agreements, the Company is
obligated to provide a monthly rolling forecast of anticipated purchase orders.
Except in limited circumstances and subject to acceptance by the foundries, the
estimates for the first three months of each forecast constitute a binding
commitment and the estimates for the remaining months may not increase or
decrease by more than a certain percentage from the previous month's forecast.
These restrictions limit the Company's ability to react to significant
fluctuations in demand for its products. As a result, the Company has not been
able to match its purchases of wafers to specific customer orders and therefore
the Company has from time to time taken write downs for potential excess
inventory purchased prior to the receipt of customer orders and may be required
to do so in the future. These adjustments decrease gross margins in the quarter
reported and have resulted, and could in the future result in fluctuations in
gross margins on a quarter to quarter basis. To the extent the Company
inaccurately forecasts the number of wafers required, it may have either a
shortage or an excess supply of wafers, either of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Additionally, if the Company is unable to obtain scheduled
quantities of wafers from any foundry with acceptable yields, the Company's
business, financial condition and results of operations could be negatively
impacted. See "Fluctuations in Operating Results."
Dependence on Sole Source Suppliers and Third Party Subcontractors. The
Company purchases several critical components from single or sole source vendors
for which alternative sources are not currently available. Even where
alternative suppliers are available, a significant amount of time would be
required to qualify an additional vendor in the case of certain of the Company's
components. The Company does not maintain long-term supply agreements with any
of these vendors. The inability to develop alternative sources for these single
or sole source components or to obtain sufficient quantities of these components
could result in delays or reductions in product shipments which could adversely
affect the Company's business, financial condition and results of operations.
For example, the Company relies on Motorola, Inc. ("Motorola") as the sole
source of certain designs of microcontrollers, which are critical components in
the Company's products. The sole source risk associated with microcontrollers
from Motorola is heightened during transitions from one generation of
microcontrollers to the next, given the limited safety stock available during
these transitions. In the event Motorola were to discontinue shipment of
microcontrollers for any reason, the time to design and qualify an alternative
source would be approximately nine to twelve months. The Company's reliance on
Motorola as its sole source of certain microcontrollers exposes the Company to
interruptions of supply that could have a material adverse effect on the
Company's business, financial condition and results of operations.
Page 21
<PAGE>
The Company uses third-party subcontractors to assemble the memory
components for its products and from time to time uses other subcontractors to
perform certain other assembly and test functions. The Company has no long term
agreements with these subcontractors. As a result of this reliance on third
party subcontractors for assembly of a portion of its products, the Company
cannot directly control product delivery schedules, which can lead to product
shortages or quality assurance problems that could increase manufacturing costs
of the Company's products. Any problems associated with the delivery, quality or
cost of the Company's products could have a material adverse effect on the
Company's business, financial condition and results of operations.
Risks Associated with Transitioning to New Processes and Products.
Successive generations of the Company's products incorporate semiconductor
devices with greater memory capacity per chip. In addition, the Company is
continually involved in joint development with its foundries to produce
semiconductor devices based upon smaller geometry manufacturing processes. Both
the development of higher capacity semiconductor devices and the implementation
of smaller geometry manufacturing processes are important determinants of the
Company's ability to decrease the cost per megabyte of its flash data storage
products. The utilization of semiconductor devices with greater memory capacity
and the design and implementation of new semiconductor manufacturing processes
can entail a number of problems, including lower yields associated with
semiconductor device production, problems associated with design and manufacture
of products to incorporate such devices, and production delays. Because of the
complexity of its products, the Company has periodically experienced significant
delays in the development and volume production ramp up of its products. There
can be no assurance that similar delays will not occur in the future. Any
problems experienced by the Company in its current or future transitions to
higher capacity memory devices or to new semiconductor manufacturing processes
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has developed new products based on D2 (Double Density)
flash technology, a new flash architecture designed to store two bits in each
flash memory cell. The Company introduced its new 80Mbit D2 flash chip in
November 1997 and began customer shipments in the third quarter of 1998, but
expects production volumes to be limited, primarily because of more advanced
flash memory designs currently planned for production in 1999, which are
expected to have faster write speed than the 80Mbit D2 flash. 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, D2 flash technology needs to be designed
to significantly improve its write speed so that it can be usefully applied to
market applications such as digital cameras, where write speed is an important
parameter. There can be no assurance that the Company will be able to achieve
the requisite write speed in its future D2 products.
Manufacturing Yields. The fabrication of the Company's products is a
complex and precise process requiring wafers that are produced in a highly
controlled and clean environment. Semiconductor companies supplying the Company
with wafers periodically have experienced problems achieving acceptable wafer
manufacturing yields. Semiconductor manufacturing yields are a function both of
design technology, which is developed by the Company, and manufacturing process
technology, which is typically proprietary to the foundry. Because low yields
may result from errors in either design or manufacturing failures, yield
problems may not be effectively determined or improved until an actual product
exists that can be analyzed and tested to recognize process sensitivities in
relation to the design rules that were used. As a result, yield problems may not
be identified until the wafers are well into the production process. This risk
is increased due to the fact that the Company receives its wafers from
independent offshore foundries, increasing the effort and time required to
identify, communicate and resolve manufacturing yield problems. There can be no
assurance that the Company's foundries will
Page 22
<PAGE>
achieve or maintain acceptable manufacturing yields in the future. The inability
of the Company to achieve planned yields from its foundries could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Patents, Proprietary Rights and Related Litigation. The Company relies
on a combination of patents, trademarks, copyright and trade secret laws,
confidentiality procedures and licensing arrangements to protect its
intellectual property rights. The Company has been notified in the past and the
Company and its foundries may be notified in the future of claims that they may
be infringing patents or other intellectual property rights owned by third
parties. In the past the Company has been involved in significant disputes
regarding its intellectual property rights and believes it may be involved in
similar disputes in the future. There can be no assurance that in the future any
patents held by the Company will not be invalidated, that patents will be issued
for any of the Company's pending applications or that any claims allowed from
existing or pending patents will be of sufficient scope or strength or be issued
in the primary countries where the Company's products can be sold to provide
meaningful protection or any commercial advantage to the Company. Additionally,
competitors of the Company may be able to design around the Company's patents.
To preserve its intellectual property rights, the Company believes it
may be necessary to initiate litigation against one or more third parties,
including but not limited to those the Company has already notified of possible
patent infringement. In addition, one or more of these parties may bring suit
against the Company. In March 1998, the Company filed a complaint in federal
court against Lexar for infringement of a fundamental flash disk patent. Lexar
has disputed the Company's claim of patent infringement, claimed SanDisk's
patent is invalid or unenforceable and asserted various counterclaims including
unfair competition, violation of the Lanham Act, patent misuse, interference
with prospective economic advantage, trade defamation and fraud. SanDisk has
denied each of Lexar's counterclaims. In July 1998, the federal district court
denied Lexar's request to have the case dismissed on the grounds the Company
failed to perform an adequate prefiling investigation. Discovery in the Lexar
suit commenced in August 1998. The Company intends to vigorously enforce its
patents, but there can be no assurance that these efforts will be successful.
In the event of an adverse result in any such litigation, the Company
could be required to pay substantial damages, cease the manufacture, use and
sale of infringing products, expend significant resources to develop
non-infringing technology, discontinue the use of certain processes or obtain
licenses to the infringing technology. Any litigation, whether as a plaintiff or
as a defendant, would likely result in significant expense to the Company and
divert the efforts of the Company's technical and management personnel, whether
or not such litigation is ultimately determined in favor of the Company. In
addition, the results of any litigation are inherently uncertain.
In the event the Company desires to incorporate third party technology
into its products or is found to infringe on others' patents or intellectual
property rights, the Company may be required to license such patents or
intellectual property rights. The Company may also need to license some or all
of its patent portfolio to be able to obtain cross-licenses to the patents of
others. The Company currently has patent cross-license agreements with Hitachi,
Intel, Samsung, Sharp, SST and Toshiba. From time to time, the Company has also
entered into discussions with other companies regarding potential cross-license
agreements for the Company's patents. However, there can be no assurance that
licenses will be offered or that the terms of any offered licenses will be
acceptable to the Company. If the Company obtains licenses from third parties,
it may be required to pay license fees or make royalty payments, which could
have a material adverse effect on the Company's gross margins. The failure to
obtain a license from a third party for technology used by the Company could
cause the Company to incur substantial liabilities and to suspend the
manufacture of products or the use by the Company's foundries of processes
requiring the technology, or to expend substantial resources redesigning its
products to eliminate the infringement. There can be no assurance that the
Company would be successful in redesigning its products or that such licenses
would be available under reasonable terms. Furthermore, any such development or
license negotiations could require substantial expenditures of time and other
resources by the Company.
Page 23
<PAGE>
As is common in the industry, the Company agrees to indemnify certain
of its suppliers and customers for alleged patent infringement. The scope of
such indemnity varies, but may, in some instances, include indemnification for
damages and expenses, including attorneys' fees. The Company may from time to
time be engaged in litigation as a result of such indemnification obligations.
Third party claims for patent infringement are excluded from coverage under the
Company's insurance policies. There can be no assurance that any future
obligation to indemnify the Company's customers or suppliers, will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
Management of Growth. The Company has experienced and may in the future
experience rapid growth, which has placed, and could continue to place, a
significant strain on the Company's limited personnel and other resources. To
manage such growth effectively, the Company will need to continue to implement
and improve its operational, financial and management information systems and to
hire, train, motivate and manage its employees. In particular, the Company has
on occasion experienced difficulty in hiring the engineering, sales and
marketing personnel necessary to support the growth of the Company's business.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting and retaining such personnel or
that the Company will be able to manage such growth effectively. The Company's
ability to manage its growth has required, and is expected to continue to
require, a significant investment in and expansion of its existing internal
information management systems to support increased manufacturing, accounting
and other management related functions. The Company is in the process of
replacing its existing in-house information system. The implementation of the
new system will impact almost all phases of the Company's operations (i.e.,
planning, manufacturing, finance and accounting). The new system is currently
scheduled to become operational in the fourth quarter of 1998. There can be no
assurance that the Company will not experience problems, delays or unanticipated
additional costs in implementing the new management information system or in the
use of its existing system that could have a material adverse effect on the
Company's business, financial condition and results of operations, particularly
in the period in which the new system is brought online. The failure of the
Company to successfully manage any of these issues would have a material adverse
effect on the Company's business, financial condition and results of operations.
Dependence on Key Personnel. The Company's success depends to a
significant degree upon the continued contributions of members of its senior
management and other key research and development, sales, marketing and
operations personnel, including, in particular, Dr. Eli Harari, the Company's
founder, President and Chief Executive Officer. The loss of any of such persons
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company does not have an employment
agreement or non-competition agreement with any of its employees.
Volatility of Stock Price. There has been a history of significant
volatility in the market prices of the Company's Common Stock on the Nasdaq
National Market, and it is likely that the market price of the Company's Common
Stock will continue to be subject to significant fluctuations. For example, in
the twelve month period ending September 30, 1998, the Company's stock price
fluctuated from a low of $7.50 to a high of $40.00. The Company believes that
future announcements concerning the Company, its competitors or its principal
customers, including technological innovations, new product introductions,
governmental regulations, litigation or changes in earnings estimated by
analysts, may cause the market price of the Common Stock to fluctuate
substantially in the future. Sales of substantial amounts of the Company's
outstanding Common Stock in the public market could materially adversely affect
the market price of the Common Stock. Further, in recent years the stock market
has experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many high technology
companies and that often have been unrelated to the operating performance of
such companies. These fluctuations as well as general economic, political and
market conditions such as recessions or international currency fluctuations, may
materially adversely affect the market price of the Common Stock.
Year 2000 Compliance. The Company is aware of problems associated with
computer systems as the year 2000 approaches. Year 2000 problems are the result
of common computer programming
Page 24
<PAGE>
techniques that result in systems that do not function properly when
manipulating dates later than December 31, 1999. The Company has established a
Year 2000 Risk Management program to assess the impact of the Year 2000 issue on
SanDisk, and to coordinate remediation activities. Based on the Company's
assessment to date, all of the Company's flash memory and connectivity products
are Year 2000 compliant. Other Year 2000 issues facing the Company include, but
are not limited to the following: remediation of the Company's management
information system, the assessment and the remediation of the tertiary business
information systems, the assessment and remediation of the computer systems used
for facilities control, machine control, and manufacturing testing and Year 2000
compliance problems of the Company's key suppliers and customers. The total cost
of Year 2000 compliance issues, based on management's estimates, has not been
and is not anticipated to be, material to the Company's business, financial
condition and results of operations. However, the Company does not have any
control over the remediation efforts of its key suppliers an customers and is
not aware of the extent to which they have resolved their Year 2000 compliance
issues. There can be no assurance that the Company and its key suppliers and
customers will identify and remediate all significant Year 2000 risks on a
timely basis, that remediation efforts will not involve significant time and
expense, or that unremediated problems will not have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Managements Discussion and Analysis of Financial Condition and Results of
Operations - Year 2000 Readiness Disclosure."
Effect of Anti-Takeover Provisions. The Company has taken a number of
actions that could have the effect of discouraging a takeover attempt that might
be beneficial to stockholders who wish to receive a premium for their shares
from a potential bidder. The Company has adopted a Shareholder Rights Plan that
would cause substantial dilution to a person who attempts to acquire the Company
on terms not approved by the Company's Board of Directors. The Shareholder
Rights Plan may therefore have the effect of delaying or preventing any change
in control and deterring any prospective acquisition of the Company. In
addition, the Company's Certificate of Incorporation grants the Board of
Directors the authority to issue up to 4,000,000 shares of Preferred Stock and
to determine the price, rights, preferences and privileges of those shares
without any further vote or action by the Company's stockholders. The rights of
the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any shares of Preferred Stock that may be
issued in the future. While the Company has no present intention to issue shares
of Preferred Stock, such issuance, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult or less attractive for a third party to
acquire a majority of the outstanding voting stock of the Company. Such
Preferred Stock may also have other rights, including economic rights senior to
the Common Stock, and, as a result, the issuance thereof could have a material
adverse effect on the market value of the Common Stock. Furthermore, the Company
is subject to the anti-takeover provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"), which prohibits the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
first becomes an "interested stockholder," unless the business combination is
approved in a prescribed manner. The application of Section 203 also could have
the effect of delaying or preventing a change of control of the Company.
Page 25
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this item is set forth in Note 6 of the
Notes to the Condensed Consolidated Financial Statements on pages 7 and 8 and
under "Risk Factors - Patents, Proprietary Rights and Related Litigation" on
pages 23 to 24 of this Form 10-Q for the quarterly period ended September 30,
1998, and is incorporated herein by reference.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Page 26
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
<S> <C>
3.1 Certificate of Incorporation of the Registrant, as amended to date./3/
3.2 Form of Amended and Restated Certificate of Incorporation of the Registrant./3/
3.3 Bylaws of the Registrant, as amended./3/
3.4 Form of Amended and Restated Bylaws of the Registrant /3/
3.5 Certificate of Designation for the Series A Junior Participating Preferred Stock, as filed
with the Delaware Secretary of State on April 24, 1997./7/
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4./3/
4.3 Amended and Restated Registration Rights Agreement, among the Registrant and the
investors and founders named therein, dated March 3, 1995./3/
4.4 Amendment No. 1 to the Stock Purchase Agreements among the Registrant and the holders
of Series A, B and D Preferred Stock, and certain holders of Series E Preferred
Stock, dated January 15, 1993./3/
4.5 Series F Preferred Stock Purchase Agreement between Seagate Technology, Inc. and
the Registrant, dated January 15, 1993./3/
4.6 Amendment Agreement between Seagate Technology, Inc. and the Registrant, dated
August 23, 1995./3/
4.7 Form of Stock Purchase Agreement between the Registrant and Seagate Technology, Inc./3/
4.8 Rights Agreement, dated as of April 18, 1997, between the Company and Harris Trust and Savings
Bank./7/
9.1 Amended and Restated Voting Agreement, among the Registrant and the investors
named therein, dated March 3, 1995./3/
10.10 License Agreement between the Registrant and Dr. Eli Harari, dated September 6, 1988.3
10.13 1989 Stock Benefit Plan./3/
10.14 1995 Stock Option Plan./3/
10.15 Employee Stock Purchase Plan./3/
10.16 1995 Non-Employee Directors Stock Option Plan./3/
10.18 Lease Agreement between the Registrant and G.F. Properties, dated March 1, 1996./4/
10.19 Business loan agreement between the Registrant and Union Bank of California, dated July 3,
1996./5/
10.21 Amendment to Lease Agreement between the Registrant and G.F. Properties, dated April 3, 1997./5/
10.22 First and second amendments to business loan agreement between the Registrant and Union Bank
of California, dated June 30, 1997./5/
10.23 Foundry Venture Agreement between the Registrant and United Microelectronics Corporation,
dated June 27, 1997./1,8/
10.24 Written Assurances Re: Foundry Venture Agreement between the Registrant and United
Microelectronics Corporation, dated September 13, 1995.1, 8
10.25 Side Letter between Registrant and United Microelectronics Corporation, dated May 28,
1997./1,8/
10.26 Third Amendment to the Trade Finance Agreement between the Registrant and Union Bank of
California./9/
10.27 Clarification letter with regards to Foundry Venture Agreement between the Registrant and
United Microelectronics Corporation dated October 24, 1997./9/
10.28 Lease Agreement between the Registrant and G.F. Properties, dated June 10, 1998./11/
10.29 Trade Finance Agreement between the Registrant and Union Bank of California, dated July 15,
1998.
21.1 Subsidiaries of the Registrant./10/
Page 27
27.1 Financial Data Schedule for the three months ended September 30, 1998. (In EDGAR format only)
<FN>
- ----------
1. Confidential treatment granted as to certain portions of these exhibits.
2. Confidential treatment requested as to certain portions of these exhibits.
3. Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-96298).
4. Previously filed as an Exhibit to the Registrant's 1995 Annual Report on Form 10-K.
5. Previously filed as an Exhibit to the Registrant's Form 10-Q for the quarter ended June 30, 1996.
6. Previously filed as an Exhibit to the Registrant's 1996 Annual Report on Form 10-K.
7. Previously filed as an Exhibit to the Registrant's Current Report on Form 8-K/A dated April 18, 1997.
8. Previously filed as an Exhibit to the Registrant's Current Report on form 8-K dated October 16, 1997.
9 Previously filed as an Exhibit to the Registrant's Form 10-Q for the quarter ended September 30, 1997.
10. Previously filed as an Exhibit to the Registrant's 1997 Annual Report on Form 10-K.
11. Previously filed as an Exhibit to the Registrant's Form 10-Q for the quarter ended June 30, 1998.
</FN>
</TABLE>
B. Reports on Form 8-K
No reports on form 8-K were filed during the quarter ended September
30, 1998.
Page 28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SanDisk Corporation
(Registrant)
By: /s/ Cindy L. Burgdorf
----------------------------------
Cindy L. Burgdorf
Chief Financial Officer,
Senior Vice President, Finance and
Administration and Secretary
DATED: November 10, 1998
Page 29
<PAGE>
TRADE FINANCE AGREEMENT
THIS AMENDED AND RESTATED TRADE FINANCE AGREEMENT ('Agreement') is made
and entered into as of July 15, 1998 by and between SanDisk Corporation, a
Delaware Corporation ('Borrower') and UNION BANK OF CALIFORNIA, N.A. ('Bank').
This Agreement amends and restates in its entirety that certain Trade Finance
Agreement dated July 1, 1996, as amended from time to time, between Bank and
Borrower.
SECTION 1. THE LOAN
1.1 The Trade Finance Credit Facility. Bank will extend to Borrower a
Trade Finance Credit Facility in an amount not to exceed Ten Million Dollars
($10,000,000); (the 'Trade Finance Credit Facility') to expire on July 15, 1999.
The Trade Finance Credit Facility shall be subject to the following sublimits:
a. The Clean Advance Line in an amount not to exceed Ten Million Dollars
($10,000,000);
b. The Standby L/C Line in an amount not to exceed Ten Million Dollars
($10,000,000);
1.1.1 Clean Advance Line. Bank will also make available an amount that
will not exceed the amount listed above (the 'Clean Advance Line') for
Borrower's working capital purposes. All advances under the Clean Advance Line
must be made on or before July 15, 1999, at which time all unpaid principal and
interest under the Clean Advance Line shall be due and payable. Borrower may
borrow, repay and reborrow all or part of the Clean Advance Line in accordance
with the terms of the Clean Advance Note. The Clean Advance Line shall be
evidenced by a Promissory Note (the 'Clean Advance Note') on the standard form
used by Bank for commercial loans. Bank shall enter each amount borrowed and
repaid in Bank's records and such entry shall be deemed to be the amount of the
Clean Advance Line outstanding. Omission by Bank to make any such entries shall
not discharge Borrower of its obligation to repay amounts borrowed in full with
interest.
1.1.2 The Standby L/C Sublimit. Bank shall issue, for the account of
Borrower, one or more irrevocable, standby letters of credit (individually, a
"Standby L/C' and collectively, the 'Standby L/Cs'). All such Standby L/Cs shall
be drawn on such terms and conditions as are acceptable to Bank and shall be
governed by the terms of (and Borrower agrees to execute) Bank's standard form
of Standby UC application and reimbursement agreement. The aggregate amount
available to be drawn under all outstanding Standby L/Cs and the aggregate
amount of unpaid reimbursement obligations under drawn Standby L/Cs shall not
exceed Ten Million Dollars ($10,000,000). No Standby L/C shall expire after July
15, 1999.
1.1.3 Trade Finance Revolving Lines and Limits. The aggregate amount
available to be drawn under each sublimit listed above shall be reduced, dollar
for dollar, by the aggregate amount of unpaid principal obligations under the
respective sublimit. The aggregate of all unpaid advances and reimbursement
obligations shall reduce, dollar for dollar, the maximum amount available under
the Trade Finance Credit Facility. Borrower may reborrow or obtain new
extensions of credit under each such sublimit until the expiration date of the
Trade Finance Credit Facility, to the extent that Borrower has paid or otherwise
satisfied prior borrowings or extensions of credit, subject to all terms and
conditions in the Loan Documents.
1.2 Terminology.
<PAGE>
As used herein the word 'Loan' shall mean, collectively, all the credit
facilities described above.
As used herein the word 'Note' shall mean, collectively, all the promissory
notes described above.
As used herein, the words 'Loan Documents' shall mean all documents executed in
connection with this Agreement.
As used herein, the word 'L/C' shall mean all Commercial L/Cs and Standby L/Cs
described above.
1.3 Purpose of Loan. The proceeds of the Trade Finance Credit Facility
shall be used to finance Borrower's customary trade cycle. Proceeds of the Clean
Advance Line shall be used for general working capital purposes.
1.4 Interest. The unpaid principal balance of the Clean Advance Line
shall bear interest at the rate of zero percent (0%) per annum in excess of the
Reference Rate as more specifically provided in the Clean Advance Note.
1.5 Trade Finance Fees. All fees in connection with the Trade Finance
Credit Facility will be in accordance with Bank's standard schedule of fees as
published from time to time, except as follows: Standby L/C Issuance Fee shall
be at Four-Tenth's of One Percent (0.40%) per annum.
1.6 Balances. Borrower shall maintain its major depository accounts,
excluding its broker accounts, with Bank until the Note and all sums payable
pursuant to this Agreement have been paid in full.
1.7 Disbursement. Upon execution hereof, Bank shall disburse the
proceeds of the Loan as provided in Bank's standard form Authorization executed
by Borrower.
1.8 Controlling Document. In the event of any inconsistency between the
terms of this Agreement and any Note or any of the other Loan Documents, the
terms of such Note or other Loan Documents will prevail over the terms of this
Agreement.
SECTION 2. CONDITIONS PRECEDENT
Bank shall not be obligated to disburse all or any portion of the
proceeds of the Loan unless at or prior to the time for the making of such
disbursement, the following conditions have been fulfilled to Bank's
satisfaction:
2.1 Compliance. Borrower shall have performed and complied with all
terms and conditions required by this Agreement to be performed or complied with
by it prior to or at the date of the making of such disbursement and shall have
executed and delivered to Bank the Note and other documents deemed necessary by
Bank.
2.2 Borrowing Resolution. Borrower shall have provided Bank with
certified copies of resolutions duly adopted by the Board of Directors of
Borrower, authorizing this Agreement and the Loan Documents. Such resolutions
shall also designate the persons who are authorized to act on Borrower's behalf
in connection with this Agreement and to do the things required of Borrower
pursuant to this Agreement.
2.3 Continuing Compliance. At the time any UC is to be issued, there
shall not exist any event, condition or act which constitutes an event of
default under Section 6 hereof or any event, condition or act which with notice,
lapse of time
<PAGE>
or both would constitute such event of default; nor shall there be
any such event, condition, or act immediately after the disbursement were it to
be made.
SECTION 3. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that:
3.1 Business Activity. The principal business of Borrower is the
manufacturing of flash storage products.
3.2 Affiliates and Subsidiaries. Borrower's affiliates and subsidiaries
(those entities in which Borrower has either a controlling interest or at least
a 25% ownership interest) and their addresses, and the names of Borrower's
principal shareholders, are as provided on a schedule delivered to Bank on or
before the date of this Agreement.
3.3 Authority to Borrow. The execution, delivery and performance of this
Agreement, the Note and all other agreements and instruments required by Bank in
connection with the Loan are not in contravention of any of the terms of any
indenture, agreement or undertaking to which Borrower is a party or by which it
or any of its property is bound or affected.
3.4 Financial Statements. The financial statements of Borrower,
including both a balance sheet at March 31, 1998 together with supporting
schedules, and an income statement for the three (3) months ended March 31,
1998, have heretofore been furnished to Bank, and are true and complete and
fairly represent the financial condition of Borrower during the period covered
thereby. Since March 31, 1998, there has been no material adverse change in the
financial condition or operations of Borrower.
3.5 Title. Except for assets which may have been disposed of in the
ordinary course of business, Borrower has good and marketable title to all of
the property reflected in its financial statements delivered to Bank and to all
property acquired by Borrower since the date of said financial statements, free
and clear of all liens, encumbrances, security interests and adverse claims
except those specifically referred to in said financial statements.
3.6 Litigation. There is no litigation or proceeding pending or
threatened against Borrower or any of its property which is reasonably likely to
affect the financial condition, property or business of Borrower in a materially
adverse manner or result in liability in excess of Borrower's insurance
coverage.
3.7 Default. Borrower is not now in default in the payment of any of its
material obligations, and there exists no event, condition or act which
constitutes an event of default under Section 6 hereof and no condition, event
or act which with notice or lapse of time, or both, would constitute an event of
default.
3.8 Organization. Borrower is duly organized and existing under the laws
of the state of its organization, and has the power and authority to carry on
the business in which it is engaged and/or proposes to engage.
3.9 Power. Borrower has the power and authority to enter into this
Agreement and to execute and deliver the Note and all of the other Loan
Documents.
3.10 Authorization. This Agreement and all things required by this
Agreement have been duly authorized by all requisite action of Borrower.
3.11 Qualification. Borrower is duly qualified and in good standing in
any jurisdiction where such qualification is required.
3.12 Compliance With Laws. Borrower is not in violation with respect to
any applicable laws, rules, ordinances or regulations which materially affect
the operations or financial condition of Borrower.
<PAGE>
3.13 ERISA. Any defined benefit pension plans as defined in the Employee
Retirement Income Security Act of 1974, as amended ('ERISA'), of Borrower meet,
as of the date hereof, the minimum funding standards of Section 302 of ERISA,
and no Reportable Event or Prohibited Transaction as defined in ERISA has
occurred with respect to any such plan.
3.14 Regulation U. No action has been taken or is currently planned by
Borrower, or any agent acting on its behalf, which would cause this Agreement or
the Note to violate Regulation U or any other regulation of the Board of
Governors of the Federal Reserve System or to violate the Securities and
Exchange Act of 1934, in each case as in effect now or as the same may hereafter
be in effect. Borrower is not engaged in the business of extending credit for
the purpose of purchasing or carrying margin stock as one of its important
activities and none of the proceeds of the Loan will be used directly or
indirectly for such purpose.
3.15 Continuing Representations. These representations shall be
considered to have been made again at and as of the date each L/C is issued and
of each disbursement of the Loan and shall be true and correct as of such date
or dates.
SECTION 4. AFFIRMATIVE COVENANTS
Until the Note and all sums payable pursuant to this Agreement or any
other of the Loan Documents have been paid in full, unless Bank waives
compliance in writing, Borrower agrees that:
4.1 Use of Proceeds. Borrower will use the proceeds of the Loan only as
provided in subsection 1.3 above.
4.2 Payment of Obligations. Borrower will pay and discharge promptly all
taxes, assessments and other governmental charges and claims levied or imposed
upon it or its property, or any part thereof, provided, however, that Borrower
shall have the right in good faith to contest any such taxes, assessments,
charges or claims and, pending the outcome of such contest, to delay or refuse
payment thereof provided that adequately funded reserves are established by it
to pay and discharge any such taxes, assessments, charges and claims.
4.3 Maintenance of Existence. Borrower will maintain and preserve its
existence and assets and all rights, franchises, licenses and other authority
necessary for the conduct of its business and will maintain and preserve its
property, equipment and facilities in good order, condition and repair. Bank
may, at reasonable times, visit and inspect any of the properties of Borrower.
4.4 Records. Borrower will keep and maintain full and accurate accounts
and records of its operations according to generally accepted accounting
principles and will permit Bank to have access thereto, to make examination and
photocopies thereof, and to make audits during regular business hours. Costs for
such audits shall be paid by Borrower.
4.5 Information Furnished. Borrower will furnish to Bank:
(a) Within forty five (45) days after the close of each fiscal quarter,
except for the final quarter of each fiscal year, its unaudited balance sheet as
of the close of such fiscal quarter, its unaudited income and expense statement
with supportive schedules and statement of retained earnings for that fiscal
quarter, prepared in accordance with generally accepted accounting principles;
(b)Within one hundred twenty (1 20) days after the close of each fiscal
year, a copy of its statement of financial condition including at least its
balance sheet as of the close of such fiscal year, its income and expense
statement and retained earnings statement for such fiscal year, examined and
prepared on an audited basis by independent certified public accountants
selected by Borrower and reasonably satisfactory to Bank, in accordance with
generally accepted accounting principles applied on a basis consistent with that
of the previous year;
(c) Such other financial statements and information as Bank may
reasonably request from time to time;
<PAGE>
(d) In connection with each financial statement provided hereunder, a
statement executed by chief financial officer of Borrower, certifying that no
default has occurred and no event exists which with notice or the lapse of time
or both, would result in a default hereunder,
(e)Prompt written notice to Son-k of all events of default under any of
the terms or p of this Agreement or of any other agreement, contract, document
or instrument entered, or to be entered into with Bank, and of any litigation
which, if decided adversely to Borrower, would have a material adverse effect on
Borrower's financial condition, and of any other matter which has resulted in,
or is likely to result in, a material adverse change in its financial condition
or operations, and
(f) Prior written notice to Bank of any changes in Borrower's officers
and other senior management; Borrower's name; and location of Borrower's assets,
principal place of business or chief executive office.
4.6 Quick Ratio. Borrower shall maintain at all times a ratio of cash,
accounts receivable and marketable securities to current liabilities of not less
than 2.25:1.0, as such terms are defined by generally accepted accounting
principals. Bank Line and Deferred Revenues shall be included in current
liabilities.
4.7 Tangible Net Worth. Borrower will at all times maintain Tangible Net
Worth of not less than One Hundred Seventy Million Dollars ($170,000,000) plus
50% of Net Profit after Taxes. "Tangible Net Worth" shall mean net worth
increased by indebtedness of Borrower subordinated to Bank and decreased by
patents, licenses, trademarks, trade names, goodwill and other similar
intangible assets, organizational expenses, and monies due from affiliates
(including officers, shareholders and directors).
4.8 Debt To Tangible Net Worth. Borrower will at all times maintain a
ratio of total liabilities to tangible net worth of not grater than 0.5:1.0.
"Tangible Net Worth" shall mean net worth increased by indebtedness of Borrower
subordinated to Bank and decreased by patents, licenses, trademarks, trade
names, goodwill and other similar intangible assets, organizational expenses,
and monies due from affiliates (including officers, shareholders and directors).
4.9 Profitability. Borrower will maintain a net profit, after provision
for income taxes, of any positive amount, for any two consecutive fiscal
quarters, as reported at the end of each such fiscal quarter. Net profit after
tax for any fiscal quarter will not reflect a loss greater than five percent
(5%) of Tangible Net Worth as of the last day of the immediately preceding
fiscal quarter.
4.10 Insurance. Borrower will keep all of its insurable property, real,
personal or mixed, insured by good and responsible companies against fire and
such other risks as are customarily insured against by companies conducting
similar business with respect to like properties. Borrower will maintain
adequate worker's compensation insurance and adequate insurance against
liability for damages to persons and property.
4.11 Additional Requirements. Borrower will promptly, upon demand by
Bank, take such further action and execute all such additional documents and
instruments in connection with this Agreement as Bank in its reasonable
discretion deems necessary, and promptly supply Bank with such other information
concerning its affairs as Bank may request from time to time.
4.12 Litigation and Attorneys' Fees. Borrower will pay promptly to Bank
upon demand, reasonable attorneys' fees (including but not limited to the
reasonable estimate of the allocated costs and expenses of in-house legal
counsel and legal staff) and all costs and other expenses paid or incurred by
Bank in collecting, modifying or compromising the Loan or in enforcing or
exercising its rights or remedies created by, connected with or provided for in
this Agreement or any of the Loan Documents, whether or not an arbitration,
judicial action or other proceeding is commenced. If such proceeding is
commenced, only the prevailing party shall be entitled to attorneys' fees and
court costs.
4.13 Bank Expenses. Borrower will pay or reimburse Bank for all costs,
expenses and fees incurred by Bank in preparing and documenting this Agreement
and the loan, and all amendments and modifications thereof, including but not
limited to all filing and recording fees, costs of appraisals, insurance and
attorneys' fees, including the reasonable estimate of the allocated costs and
expenses of in-house legal counsel and legal staff.
<PAGE>
4.14 Reports Under Pension Plans. Borrower will furnish to Bank, as soon
as possible and in any event within 15 days after Borrower knows or has reason
to know that any event or condition with respect to any defined benefit pension
plans of Borrower described in Section 3 above has occurred, a statement of an
authorized officer of Borrower describing such event or condition and the
action, if any, which Borrower proposes to take with respect thereto.
SECTION 5. NEGATIVE COVENANTS
Until the Note and all other sums payable pursuant to this Agreement or any
other of the Loan Documents have been paid in full, unless Bank waives
compliance in writing, Borrower agrees that:
5.1 Encumbrances and Liens. Borrower will not create, assume or suffer
to exist any mortgage, pledge, security interest, encumbrance, or lien (other
than for taxes not delinquent and for taxes and other items being contested in
good faith) on property of any kind, whether real, personal or mixed, now owned
or hereafter acquired, or upon the income or profits thereof, except to Bank and
except for minor encumbrances and easements on real property which do not affect
its market value, and except for existing liens on Borrower's personal property
and future purchase money security interests encumbering only the personal
property purchased.
5.2 Borrowings. Borrower will not sell, discount or otherwise transfer
any account receivable or any note, draft or other evidence of indebtedness,
except to Bank or except to a financial institution at face value for deposit or
collection purposes only and without any fee other than fees normally charged by
the financial institution for deposit or collection services. Borrower will not
borrow any money, become contingently liable to borrow money, nor enter any
agreement to directly or indirectly obtain borrowed money, except pursuant to
agreements made with Bank.
5.3 Sale of Assets, Liquidation or Merger. Borrower will neither
liquidate nor dissolve nor enter into any consolidation, merger, partnership or
other combination, nor convey, nor sell, nor lease all or the greater part of
its assets or business, nor purchase or lease all or the greater part of the
assets or business of another.
5.4 Loans, Advances and Guaranties. Borrower will not, except in the
ordinary course of business as currently conducted, make any loans or advances,
become a guarantor or surety, pledge its credit or properties in any manner or
extend credit.
5.5 Investments. Borrower will not purchase the debt or equity of
another person or entity except for savings accounts and certificates of deposit
of Bank, direct U.S. Government obligations and commercial paper issued by
corporations with the top ratings of Moody's or Standard & Poor's, and those
eligible instruments outlined in Borrower's investment policy provided to Bank,
provided all such permitted investments shall mature with in 30 months of
purchase. An additional cash investment in USI, a semiconductor manufacturing
venture headed by UMC is permitted, provided the investment does not exceed
Twenty Million Dollars ($20,000,000) in fiscal year 1998.
5.6 Payment of Dividends. Borrower will not declare or pay any
dividends, other than a dividend payable in its own common stock, or authorize
or make any other distribution with respect to any of its stock now or hereafter
outstanding.
5.7 Retirement of Stock. Borrower will not acquire or retire any share
of its capital stock for value.
5.8 Parent and Subsidiary Property. Borrower will not transfer any
property to its parent or any affiliate of its parent, except for value received
in the normal course of business as business would be conducted with an
unrelated or unaffiliated entity. In no event shall management fees or fees for
services be paid by Borrower to any such direct or indirect affiliate without
Bank's prior written approval.
5.9 Capital Expenditures. Borrower will not make capital expenditures in
excess of Fifteen Million Dollars ($15,000,000) in any fiscal year; and shall
only make such expenditures as are necessary for Borrower in the conduct of its
ordinary course of business. Each said expenditure shall be needed by Borrower
in the ordinary course of its business.
<PAGE>
Expenditures as used in this subsection shall include the current expense
portion of all leases whether or not capitalized and shall also include the
current portion of any debt used to finance capital expenditures.
SECTION 6. EVENTS OF DEFAULT
The occurrence of any of the following events ('Events of Default')
shall terminate any obligation on the part of Bank to make or continue the Loan
and automatically, unless otherwise provided under the Note, shall make all sums
of interest and principal and any other amounts owing under the Loan immediately
due and payable, without notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor, or any other notices or demands:
6.1 Borrower shall default in the due and punctual payment of the
principal of or the interest on the Note or any of the other Loan Documents; or
6.2 Any default shall occur under the Note; or
6.3 Borrower shall default in the due performance or observance of any
covenant or condition of the Loan Documents;
6.4 Any guaranty or subordination agreement required hereunder is
breached or becomes ineffective, or any Guarantor or subordinating creditor
dies, disavows or attempts to revoke or terminate such guaranty or subordination
agreement; or
6.5 There is a change in ownership or control of ten percent (1 0%) or
more of the issued and outstanding stock of Borrower.
SECTION 7. MISCELLANEOUS PROVISIONS
7.1 Additional Remedies. The rights, powers and remedies given to Bank
hereunder shall be cumulative and not alternative and shall be in addition to
all rights, powers and remedies given to Bank by law against Borrower or any
other person, including but not limited to Bank's rights of setoff or banker's
lion.
7.2 Non waiver. Any forbearance or failure or delay by Bank in
exercising any right, power or remedy hereunder shall not be deemed a waiver
thereof and any single or partial exercise of any right, power or remedy shall
not precede the further exercise thereof. No waiver shall be effective unless it
is in writing and signed by an officer of Bank.
7.3 Inurement. The benefits of this Agreement shall inure to the
successors and assigns of Bank and the permitted successors and assignees of
Borrower, and any assignment of Borrower without Bank's consent shall be null
and void.
7.4 Applicable Law. This Agreement and all other agreements and
instruments required by Bank in connection therewith shall be governed by and
construed according to the laws of the State of California.
7.5 Severability. Should any one or more provisions of this Agreement be
determined to be illegal or unenforceable, all other provisions nevertheless
shall be effective.
7.6 Integration Clause. Except for documents and instruments
specifically referenced herein, this Agreement constitutes the entire agreement
between Bank and Borrower regarding the Loan and all prior communications verbal
or written between Borrower and Bank shall be of no further effect or
evidentiary value.
7.7 Construction. The section and subsection headings herein are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
7.8 Amendments. This Agreement may be amended only in writing signed by
all parties hereto.
<PAGE>
7.9 Counterparts. Borrower and Bank may execute one or more counterparts
to this Agreement, each of which shall be deemed an original.
SECTION 8. SERVICE OF NOTICES
8.1 Any notices or other communications provided for or allowed
hereunder shall be effective only when given by one of the following methods and
addressed to the respective party at its address given with the signatures at
the end of this Agreement and shall be considered to have been validly given:
(a) upon delivery, if delivered personally; (b) upon receipt, if mailed, first
class postage prepaid, with the United States Postal Service; (c) on the next
business day, if sent by overnight courier service of recognized standing; and
(d) upon telephoned confirmation of receipt, if telecopied.
8.2 The addresses to which notices or demands are to be given may be
changed from time to time by notice delivered as provided above.
THIS AGREEMENT is executed on behalf of the parties by duly authorized officers
as of the date first above written.
UNION BANK OF CALIFORNIA, N.A. SANDISK CORPORATION, A
DELAWARE DELAWARE CORPORATION
- ------------------------------------ -----------------------------------
John Noble Eli Harari
Vice President President & CEO
- ------------------------------------ -----------------------------------
JamesGoudy Cindy Burgdorf
Vice President SVP & CFO
<PAGE>
UNION
BANK OF
CALIFORNIA
PROMISSORY NOTE
(BASE RATE)
Borrower Name: SANDISK CORPORATION
Borrower Address: 140 CASPIAN COURT, SUNNYVALE, CA. 94089
Office: 64561
Loan Number: 8159632704 0080000000
Maturity Date: JULY 15, 1999
Amount: $10,000,000.00
$10,000,000.00 Date JULY 15, 1998
FOR VALUE RECEIVED, on JULY 15, 1999, the undersigned ("Debtor") promises to pay
to the order of UNION BANK OF CALIFORNIA, N.A. ("Bank'), as indicated below, the
principal sum of TEN MILLION AND NO/1 00 Dollars ($1 0,000,000,00), or so much
thereof as is disbursed, together with interest on the balance of such principal
from time to time outstanding, at the per annum rate or rates and at the times
set forth below.
1. INTEREST PAYMENTS. Debtor shall pay interest on the 1 5TH day of each QUARTER
(commencing OCTOBER 15, 1998). Should interest not be paid when due, it shall
become part of the principal and bear interest as herein provided. All
computations of interest under this note shall be made on the basis of a year of
360 days, for actual days elapsed.
a. BASE INTEREST RATE. At Debtor's option, amounts outstanding hereunder
in minimum amounts of at least $1 00,000.00 shall bear interest at a
rate, based on an index selected by Debtor, which is 1.00% per annum in
excess of Bank's LIBOR-Rate for the Interest Period selected by Debtor,
acceptable to Bank.
No Base Interest Rate may be changed, altered or otherwise modified
until the expiration of the Interest Period selected by Debtor. The
exercise of interest rate options by Debtor shall be as recorded in
Bank's records, which records shall be prima facie evidence of the
amount borrowed under either interest option and the interest rate;
provided, however, that failure of Bank to make any such notation in its
records shall not discharge Debtor from its obligations to repay in full
with interest all amounts borrowed. In no event shall any Interest
Period extend beyond the maturity date of this note.
To exercise this option, Debtor may, from time to time with respect to
principal outstanding on which a Base Interest Rate is not accruing, and
on the expiration of any Interest Period with respect to principal
outstanding on which a Base Interest Rate has been accruing, select an
index offered by Bank for a Base Interest Rate Loan and an Interest
Period by telephoning an authorized lending officer of Bank located at
the banking office identified below prior to 1 0:00 a.m., Pacific time,
on any Business Day and advising that officer of the selected index, the
Interest Period and the Origination Date selected (which Origination
Date, for a Base Interest Rate Loan based on the LIBOR-Rate, shall
follow the date of such selection by no more than two (2) Business
Days).
Bank will mail a written confirmation of the terms of the selection to
Debtor promptly after the selection is made. Failure to send such
confirmation shall not affect Bank's rights to collect interest at the
rate selected. If, on the date of the selection, the index selected is
unavailable for any reason, the selection shall be void. Bank reserves
the right to fund the principal from any source of funds notwithstanding
any Base Interest Rate selected by Debtor.
b. VARIABLE INTEREST RATE. All principal outstanding hereunder which is
not bearing interest at a Base Interest Rate shall bear interest at a
rate per annum equal to the Reference Rate, which rate shall vary as and
when the Reference Rate changes.
At any time prior to the maturity of this note, subject to the
provisions of paragraph 4, below, of this note, Debtor may borrow, repay
and reborrow hereon so long as the total outstanding at any one time
does not exceed the principal amount of this note. Debtor shall pay all
amounts due under this note in lawful money of the United States at
Bank's SANTA CLARA VALLEY CBO Office, or such other office as may be
designated by Bank, from time to time.
-1-
<PAGE>
2. LATE PAYMENTS. If any payment required by the terms of this note shall remain
unpaid ten days after same is due, at the option of Bank, Debtor shall pay a fee
of $100 to Bank.
3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option of
Bank, and, to the extent permitted by law, interest shall be payable on the
outstanding principal under this note at a per annum rate equal to five percent
(5%) in excess of the interest rate specified in paragraph l..b, above,
calculated from the date of default until all amounts payable under this note
are paid in full.
4. PREPAYMENT.
a. Amounts outstanding under this note bearing interest at a rate based
on the Reference Rate may be prepaid in whole or in part at any time,
without penalty or premium. Debtor may prepay amounts outstanding under
this note bearing interest at a Base Interest Rate in whom or in part
provided Debtor has given Bank not less than five (5) Business Days
prior written notice of Debtor's intention to make such prepayment and
pays to Bank the liquidated damages due as a result. Liquidated Damages
shall also be paid, if Bank, for any other reason, including
acceleration or foreclosure, receives all or any portion of principal
bearing interest at a Base Interest Rate prior to its scheduled payment
date. Liquidated Damages shall be an amount equal to the present value
of the product of: (i) the difference (but not less than zero) between
(a) the Base Interest Rate applicable to the principal amount which is
being prepaid, and lb) the return which Bank could obtain if it used
the amount of such prepayment of principal to purchase at bid price
regularly quoted securities issued by the United States having a
maturity date most closely coinciding with the relevant Base Rate
Maturity Date and such securities were hold by Bank until the relevant
Base Rate Maturity Date ("Yield Rate"); (ii) a fraction, the numerator
of which is the number of days in the period between the date of
prepayment and the relevant Base Rate Maturity Date and the denominator
of which is 360; and (iii) the amount of the principal so prepaid
(except in the event that principal payments are required and have been
made as scheduled under the terms of the Base Interest Rate Loan being
prepaid, then an amount equal to the lesser of (A) the amount prepaid
or (B) 50% of the sum of (1) the amount prepaid and (2) the amount of
principal scheduled under the terms of the Base Interest Rate Loan
being prepaid to be outstanding at the relevant Base Rate Maturity
Date). Present value under this note is determined by discounting the
above product to present value using the Yield Rate as the annual
discount factor.
b. In no event shall Bank be obligated to make any payment or refund to
Debtor, nor shall Debtor be entitled to any setoff or other claim
against Bank, should the return which Bank could obtain under this
prepayment formula exceed the interest that Bank would have received if
no prepayment had occurred. All prepayments shall include payment of
accrued interest on the principal amount so prepaid and shall be applied
to payment of interest before application to principal. A determination
by Bank as to the prepayment fee amount, if any, shag be conclusive.
c. Bank shall provide Debtor a statement of the amount payable on
account of prepayment. Debtor acknowledges that (1) Bank establishes a
Base Interest Rate upon the understanding that it apply to the Base
Interest Rate Loan for the entire Interest Period, and (ii) any
prepayment may result in Bank incurring additional costs, expenses or
liabilities; and Debtor agrees to pay these liquidated damages as a
reasonable estimate of the costs, expenses and liabilities of Bank
associated with such prepayment.
5. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but not
be limited to, any of the following: (a) the failure of Debtor to make any
payment required under this note when due; (b) any breach, misrepresentation or
other default by Debtor, any guarantor, co-maker. endorser, or any person or
entity other than Debtor providing security for this note (hereinafter
individually and collectively referred to as the "Obligor") under any security
agreement, guaranty or other agreement between Bank and any Obligor; (c) the
insolvency of any Obligor or the failure of any Obligor generally to pay such
Obligor's debts as such debts become due; (d) the commencement as to any Obligor
of any voluntary or involuntary proceeding under any laws relating to
bankruptcy, insolvency, reorganization, arrangement, debt adjustment or debtor
relief; (e) the assignment by any Obligor for the benefit of such Obligor's
creditors; (f) the appointment, or commencement of any proceeding for the
appointment of a receiver, trustee, custodian or similar official for all or
substantially all of any Obligor's property; (g) the commencement of any
proceeding for the dissolution or liquidation of any Obligor; (h) the
termination of existence or death of any Obligor; (i) the revocation of any
guaranty or subordination agreement given in connection with this note; (j) the
failure of any Obligor to comply with any order, judgment, injunction, decree.
writ or demand of any court or other public authority; (k) the filing or
recording against any Obligor, or the property of any Obligor, of any notice of
levy, notice to withhold, or other legal process for taxes other than property
taxes; (1) the default by any Obligor personally liable for amounts owed
hereunder on any obligation concerning the borrowing of money; (m) the issuance
against any Obligor, or the property of any Obligor, of any writ of attachment,
execution, or other judicial lien; or (n) the deterioration of the financial
condition of any Obligor which results in Bank deeming itself, in good faith,
insecure. Upon the occurrence of any such default, Bank, in its discretion, may
cease to advance funds hereunder and may declare all obligations under this note
immediately due and payable; however, upon the occurrence of an event of default
under d, e, f, or g, all principal and interest shall automatically become
immediately due and payable.
6. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note are not
paid when due, Debtor promises to pay all costs and expenses, including
reasonable attorneys' fees, incurred by Bank in the collection or enforcement of
this note. Debtor and any endorsers of this note. for the maximum period of time
and the full extent permitted by law, (a) waive diligence, presentment, demand,
notice of nonpayment, protest, notice of protest, and notice of every kind; (b)
waive the right to assert the defense of any statute of limitations to any debt
or obligation hereunder; and (c) consent to renewals and extensions of time for
the payment of any amounts due under this note. The receipt of any check or
other item of payment by Bank, at its option, shall not be considered a payment
on account until such check or other item of payment is honored when presented
for payment at the drawee bank. Bank may delay the credit of such payment based
upon Bank's schedule of funds availability, and interest under this note shall
accrue until the funds are deemed collected. In any action brought under or
arising out of this note, Debtor and any Obligor, including their successors and
assigns, hereby consent to the jurisdiction of any competent court within the
State of
-2-
<PAGE>
California, as provided in any alternative dispute resolution agreement
executed between Debtor and Bank, and consent to service of process by any means
authorized by said state's law. The term "Bank' includes, without limitation,
any holder of this note. This note shall be construed in accordance with and
governed by the laws of the State of California.
7. DEFINITIONS. As used herein, the following terms shall have the meanings
respectively set forth below: 'Base Interest Rate' means a rate of interest
based on the LIBOR-Rate. "Base Interest Rate Loan" means amounts outstanding
under this note that bear interest at a Base Interest Rate. 'Base Rate Maturity
Date" means the last day of the Interest Period with respect to principal
outstanding under a Base Interest Rate Loan. 'Business Day' means a day on which
Bank is open for business for the funding of corporate loans, and, with respect
to the rate of interest based on the LIBOR Rate, on which dealings in U.S.
dollar deposits outside of the United States may be carried on by Bank.
"Interest Period' means with respect to funds bearing interest at a rate based
on the LIBOR Rate, any calendar period of [one, two or three weeks or one, two,
three, four, five, six, nine or twelve months]. In determining an Interest
Period, a month means a period that starts on one Business Day in a month and
ends on and includes the day preceding the numerically corresponding day in the
next month. For any month in which there is no such numerically corresponding
day, then as to that month, such day shall be deemed to be the last calendar day
of such month. Any Interest Period which would otherwise and on a non-Business
Day shall end on the next succeeding Business Day unless that is the first day
of a month, in which event such Interest Period shall end on the next preceding
Business Day. "LIBOR Rate" means a per annum rate of interest (rounded upward,
if necessary, to the nearest I /1 00 of 1%) at which dollar deposits, in
immediately available funds and in lawful money of the United States would be
offered to Bank, outside of the United States, for a term coinciding with the
Interest Period selected by Debtor and for an amount equal to the amount of
principal covered by Debtor's interest rate selection, plus Bank's costs,
including the costs, if any, of reserve requirements. 'Origination Date' means
the first day of the interest Period. "Reference Rate" means the rate announced
by Bank from time to time at its corporate headquarters as its Reference Rate.
The Reference Rate is an index rate determined by Bank from time to time as a
means of pricing certain extensions of credit and is neither directly tied to
any external rate of interest or index nor necessarily the lowest rate of
interest charged by Bank at any given time.
SANDISK CORPORATION
By
-----------------------------------------------
Eli Harari, President & CEO
By
-----------------------------------------------
Cindy L. Burgdorf, SVP & CFO
-3-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SanDisk Financial Data Schedule, September 30, 1998
</LEGEND>
<CIK> 0001000180
<NAME> SanDisk Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Sep-30-1998
<CASH> 13,880
<SECURITIES> 112,972
<RECEIVABLES> 17,738
<ALLOWANCES> 0
<INVENTORY> 18,205
<CURRENT-ASSETS> 181,010
<PP&E> 16,018
<DEPRECIATION> 0
<TOTAL-ASSETS> 249,378
<CURRENT-LIABILITIES> 47,106
<BONDS> 0
0
0
<COMMON> 184,210
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 249,378
<SALES> 24,143
<TOTAL-REVENUES> 32,078
<CGS> 18,840
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,605
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,916
<INCOME-TAX> 1,410
<INCOME-CONTINUING> 2,506
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,506
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
