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 March 31, 1999
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 March 31, 1999
Common Stock, $0.001 par value 26,865,588
------------------------------ ----------
Class Number of shares
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SanDisk Corporation
Index
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998........................... 3
Condensed Consolidated Statements of Income
Three months ended March 31, 1999 and 1998..................... 4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998..................... 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 25
Item 2. Changes in Securities............................................. 25
Item 3. Defaults upon Senior Securities................................... 25
Item 4. Submission of Matters to a Vote of Security Holders............... 25
Item 5. Other Information................................................. 25
Item 6. Exhibits and Reports on Form 8-K.................................. 26
Signatures........................................................ 28
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PART I. FINANCIAL INFORMATION
SanDisk Corporation
Condensed Consolidated Balance Sheets
(In thousands)
ASSETS March 31, 1999 December 31, 1998*
-------------- ---------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 15,430 $ 15,384
Short-term investments 129,562 119,074
Accounts receivable, net 23,509 20,400
Inventories 8,066 8,922
Deferred tax assets 15,900 15,900
Prepaid expenses and other current assets 3,371 6,694
---------------- ----------------
Total current assets 195,838 186,374
Property and equipment, net 18,921 17,542
Investment in foundry 51,208 51,208
Deposits and other assets 620 617
---------------- ----------------
Total Assets $ 266,587 $ 255,741
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 15,521 $ 6,938
Accrued payroll and related expenses 4,772 3,768
Other accrued liabilities 11,876 9,745
Deferred revenue 21,034 27,452
---------------- ----------------
Total current liabilities 53,203 47,903
Stockholders' Equity:
Common stock 187,595 186,120
Retained earnings 25,789 21,718
---------------- ----------------
Total stockholders' equity 213,384 207,838
Total Liabilities and
---------------- ----------------
Stockholders' Equity $ 266,587 $ 255,741
================ ================
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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SanDisk Corporation
Condensed Consolidated Statements of Income
(In thousands, except per share data; unaudited)
Three months ended
March 31,
1999 1998
---------- ----------
Revenues:
Product $ 35,926 $ 25,426
License and royalty 8,210 8,676
---------- ----------
Total revenues 44,136 34,102
Cost of sales 26,509 17,772
---------- ----------
Gross profits 17,627 16,330
Operating expenses:
Research and development 5,212 4,331
Sales and marketing 5,173 3,951
General and administrative 2,394 2,044
---------- ----------
Total operating expenses 12,779 10,326
Operating income 4,848 6,004
Interest and other income, net 1,604 1,339
---------- ----------
Income before taxes 6,452 7,343
Provision for income taxes 2,129 2,640
---------- ----------
Net income $ 4,323 $ 4,703
========== ==========
Net income per share
Basic $ 0.16 $ 0.18
Diluted $ 0.15 $ 0.17
Shares used in computing
net income per share
Basic 26,767 26,019
Diluted 29,314 28,022
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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SanDisk Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands; unaudited)
Three months ended
March 31,
1999 1998
-------- --------
Cash flows from operating activities:
Net income $ 4,323 $ 4,703
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,657 1,351
Accounts receivable, net (3,109) 785
Inventory 856 (4,788)
Prepaid expenses and other assets 3,320 401
Accounts payable 8,583 (8,793)
Accrued payroll and related expenses 1,004 (1,147)
Other accrued liabilities 2,131 2,074
Deferred revenue (6,418) (1,427)
-------- --------
Total adjustments 8,024 (11,544)
-------- --------
Net cash provided by (used in) operating activities 12,347 (6,841)
Cash flows from investing activities:
Purchases of short term investments (45,127) (48,984)
Proceeds from sale of short term investments 34,387 46,284
Acquisition of capital equipment (3,036) (1,825)
-------- --------
Net cash used in investing activities (13,776) (4,525)
Cash flows from financing activities:
Sale of common stock 1,475 1,120
-------- --------
Net cash provided by financing activities 1,475 1,120
-------- --------
Net increase (decrease) in cash and cash equivalents 46 (10,246)
Cash and cash equivalents at beginning of period 15,384 20,888
-------- --------
Cash and cash equivalents at end of period $ 15,430 $ 10,642
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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SanDisk Corporation
Notes to Condensed Consolidated Financial Statements
1. These interim condensed consolidated financial statements are unaudited
but reflect, in the opinion of management, all normal recurring
adjustments necessary to present fairly the financial position of SanDisk
Corporation and its subsidiaries (the "Company") as of March 31, 1999,
and the results of operations and cash flows for the three month periods
ended March 31, 1999 and 1998. 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/A as of, and for the year ended December 31,
1998. The condensed consolidated balance sheet data as of December 31,
1998 was derived from the audited financial statements.
The results of operations and cash flows for the three month period ended
March 31, 1999 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 first fiscal quarter of 1999 and 1998 ended on March
28, 1999 and March 29, 1998, respectively. Fiscal year 1998 ended on
December 27, 1998. 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:
March 31, December 31,
1999 1998
---------- ----------
(In thousands)
Raw materials $ 2,094 $ 2,710
Work-in-process 3,876 3,818
Finished goods 2,096 2,394
---------- ----------
$ 8,066 $ 8,922
========== ==========
5. The following table sets forth the computation of basic and diluted earnings
per share:
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Three months ended
March 31,
1999 1998
------- -------
(In thousands, except
per share amounts)
Numerator:
Numerator for basic and diluted
net income per share - net income $ 4,323 $ 4,703
======= =======
Denominator for basic net income per share:
Weighted average common shares 26,767 26,019
------- -------
Shares used in computing basic net income
per share 26,767 26,019
======= =======
Basic net income per share $ 0.16 $ 0.18
======= =======
Denominator for diluted net income per share:
Weighted average common shares 26,767 26,019
Employee stock options and warrants
to purchase common stock 2,547 2,003
------- -------
Shares used in computing diluted net income
per share 29,314 28,022
======= =======
Diluted net income per share $ 0.15 $ 0.17
======= =======
For the three month periods ending March 31, 1999 and 1998, options to
purchase 10,753 and 150,706 shares of common stock, respectively, have
been excluded from the earnings per share calculation, as their effect is
antidilutive.
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. On February 22, 1999, the Federal District Court
considered arguments and papers submitted by the parties regarding the
scope and proper interpretation of the asserted claims in SanDisk's
patent at issue in the Lexar suit. On March 4, 1999, the Federal District
Court issued its ruling on the proper construction of the claim terms in
SanDisk's patent. A trial date has not yet been set. 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
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to time be engaged in litigation as a result of such indemnification
obligations. Third party claims for patent infringement are excluded from
coverage under the Company's insurance policies. There can be no
assurance that any future obligation to indemnify the Company's customers
or suppliers, will not have a material adverse effect on the Company's
business, financial condition and results of operations.
Any litigation, whether as a plaintiff or as a defendant, will likely
result in significant expense to the Company and divert the efforts of
the Company's technical and management personnel, whether or not such
litigation is ultimately determined in favor of the Company. In the event
of an adverse result in any such litigation, the Company could be
required to pay substantial damages, cease the manufacture, use and sale
of infringing products, expend significant resources to develop
non-infringing technology or obtain licenses to the infringing
technology, or discontinue the use of certain processes. Accordingly,
there can be no assurance that any of the foregoing matters, or any
future litigation, will not have a material adverse effect on the
Company's business, financial condition and results of operations.
7. The Company 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 March 31, 1999, $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 March 31, 1999, $4.5 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.
8. Certain of the Company's purchase commitments and balance sheet accounts
are denominated in Japanese Yen. The Company enters into foreign exchange
contracts to hedge against changes in foreign currency exchange rates.
The effects of movements in currency exchange rates on these instruments
are recognized when the related operating revenues and expenses are
recognized. The impact of movements in currency exchange rates on foreign
exchange contracts substantially mitigates the related impact on the
underlying items hedged.
9. Accumulated other comprehensive income presented in the accompanying
balance sheet consists of the accumulated unrealized gains and loses on
available-for-sale marketable securities, net of the related tax effects,
for all periods presented.
Three months ended
March 31,
1999 1998
--------- --------
(In thousands)
Net income $ 4,323 $ 4,703
Unrealized gain (loss) on
available-for-sale securities (252) 125
--------- --------
Comprehensive income $ 4,071 $ 4,828
========= ========
Accumulated other comprehensive income was $219,000 and $168,000 at March
31, 1999 and 1998, respectively.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements in this discussion and analysis 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/A for the year ended December 31,
1998 under the heading "Factors That May Affect Future Results." Readers are
cautioned not to place undue reliance on these forward looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to update
these forward looking statements to reflect events or circumstances occurring
after the date hereof. The following discussion should be read in conjunction
with the Company's consolidated financial statements and the notes thereto.
Overview
The Company was founded in 1988 to develop and market flash data storage
systems. The Company sells its products to the consumer electronics and
industrial/communications markets. During 1998, the percentage of the Company's
product sales attributable to the consumer electronics market, particularly
sales of CompactFlash for use in digital camera applications, increased
substantially. This increase in sales to the consumer market resulted in a shift
to lower capacity products, which typically have lower average selling prices
and gross margins than higher capacity products. In addition, these products are
frequently sold into the retail channel, which usually has shorter customer
order lead-times than the other channels used by the Company, thereby decreasing
the Company's ability to accurately forecast future production needs. Subject to
market acceptance of its CompactFlash products, the Company believes these
products will continue to represent a majority of the Company's sales as the
popularity of consumer applications, including digital cameras, increases. The
percentage of sales attributable to orders received and fulfilled in the same
quarter has increased over time and, in response, the Company is continuing to
work to shorten its manufacturing cycle times.
The Company's operating results are affected by a number of factors
including the volume of product sales, the timing of significant orders,
competitive pricing pressures, the ability of the Company to match supply with
demand, changes in product and customer mix, market acceptance of new or
enhanced versions of the Company's products, changes in the channels through
which the Company's products are distributed, timing of new product
announcements and introductions by the Company and its competitors, the timing
of license and royalty revenues, fluctuations in product costs, 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 continues to increase, the Company's revenues may become subject to
seasonal declines in the first quarter of each year. See "Factors That May
Affect Future Results - Our Operating Results May Fluctuate Significantly" and
"There is Seasonality in Our Business."
Beginning in late 1995, the Company adopted a strategy of licensing its
flash technology, including its patent portfolio, to selected third party
manufacturers of flash products. To date, the Company has entered into patent
cross-license agreements with six companies, and it intends to pursue
opportunities to enter into additional licenses. The Company's current license
agreements provide for the payment of license fees, royalties, or a combination
thereof, to the Company. The timing and amount of these payments can vary
substantially from quarter to quarter, depending on the terms of each agreement
and, in some cases, the timing of sales of products by the other parties. As a
result, license and royalty revenues have fluctuated significantly in the past
and are likely to continue to fluctuate in the future. Given the relatively high
gross margins associated with license and royalty revenues, gross margins and
net income are likely to fluctuate more with changes in license and royalty
revenues than with changes in product revenues.
SanDisk markets its products using a combination of its direct sales
organization, distributors, manufacturers' representatives, private label
partners, OEMs and retailers. The Company expects that sales
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through the retail channel will continue to comprise an increasing share of
total revenues in the future, and that a substantial portion of its sales into
the retail channel will be made to participants that will have the right to
return unsold products. The Company does not recognize revenues from these sales
until 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 "Factors That May Affect
Future Results - Sales to a Small Number of Customers Represent a Significant
Portion of Our Revenues."
Due to the emerging nature of the Company's target markets and certain
planned product transitions, the Company has had difficulty forecasting future
inventory levels required to meet customer demand. As a result of both
contractual obligations and manufacturing cycle times, the Company has been
required to order wafers from its foundries several months in advance of the
ultimate shipment of its products. Under the Company's wafer supply agreements,
there are limits on the number of wafers the Company can order and the Company's
ability to change that quantity is restricted. Accordingly, the Company's
ability to react to significant fluctuations in demand for its products is
limited. As a result, the Company has not been able to match its purchases of
wafers to specific customer orders and therefore the Company has from time to
time taken write downs for potential excess inventory purchased prior to the
receipt of customer orders. For example, in the second quarter of 1998, the
Company's product gross margins declined to 12% from 30% in the previous quarter
due in part to a write down of this inventory to reflect inventory at net
realizable value. These adjustments decrease gross margins in the quarter
reported and have resulted, and could in the future result, in fluctuations in
gross margins on a quarter to quarter basis. See "Factors That May Affect Future
Results - Our Operating Results May Fluctuate Significantly."
Export sales are an important part of the Company's business. In 1998,
product sales to Japan declined 19% from the prior year, due in part to the
Asian economic crisis. While a majority of the Company's revenues from sales to
Japan and other 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 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 may be relatively more
expensive in Asia, which could result in a decrease in the Company's sales in
that region. The Company may also 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. Exchange rate fluctuations can therefore
affect the Company's business, financial condition and results of operations.
See "Factors That May Affect Future Results - We Face Risks Associated with
International Operations."
For the foreseeable future, the Company expects to realize a significant
portion of its revenues from recently introduced and new products. Typically new
products initially have lower gross margins than more mature products because
the manufacturing yields are lower at the start of manufacturing each successive
product generation. In addition, manufacturing yields are generally lower at the
start of manufacturing any new product. To remain competitive, the Company is
focusing on a number of programs to lower its manufacturing costs, including
development of future generations of double density ("D2") flash and advanced
technology wafers. There can be no assurance that such products or processes
will be successfully developed by the Company or that development of such
processes will lower manufacturing costs. In addition, the Company anticipates
that price competition will increase in the future, which could result in
decreased average selling prices and lower gross margins. See "Factors That May
Affect Future Results -We Must Achieve Acceptable Wafer Manufacturing Yields."
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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. While there can be no guarantee of
unaffected operation, the completed implementation of the Company's new
Management Information System, and the completed assessment of its embedded
systems indicates limited exposure in these areas. The Year 2000 problem may
also 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 a Year 2000 Risk Management
program to assess the impact of the Year 2000 issue on the Company, 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 and do not
contain real time clock circuitry and therefore, are Year 2000 ready. The
Company's 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. The Company makes no
claim with regard to the Year 2000 readiness of host systems designed by others
in which the Company'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. The Company 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 Toolkit.
The Year 2000 remediation of the Company's transaction processing
systems was completed with the installation and testing of the Company's new
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 is used for Accounting,
Order Processing, Planning, Inventory Control, Shop Floor Control and
Distribution.
The Company's 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,
and proven remediation solutions have been identified for the remaining 10%. 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 Company's assessment of Year 2000 problems in computer systems used
for facilities control, machine control and manufacturing testing is complete,
and remediation is on-going. The most significant Year 2000 issue in this area
has been found to be related to older wafer test equipment. This
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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's assessment of Year 2000 risks related to suppliers,
customers and other third parties is ongoing. Inquiries have been made of all
critical suppliers and an assessment of their Year 2000 readiness is in
progress. The Company expects to utilize the completed assessment as the basis
for strategic decisions regarding alternate material sourcing and/or increasing
inventory safety stocks by the end of the second quarter of 1999. 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
was approximately $1.0 million, $400,000 of which was related to the purchase of
software and hardware which was capitalized by the Company. In the first quarter
of 1999, the Company spent approximately $100,000 for application software
upgrades. The Company estimates it will cost an additional $150,000 to upgrade
remaining non-compliant application software and to replace non-compliant
personal computer systems. 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, application software and personal computers to support the
Company's growth. The Company's Year 2000 remediation projects will be funded
from operating cash flows. No material projects have been deferred in order to
complete the Company's Year 2000 assessment and remediation project. 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 remediation of 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.
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. 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 effort depends, 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
cannot fully determine 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. While this issue is being carefully managed,
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
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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 $35.9 million in the first
quarter of 1999, up $10.5 million or 41% from the first quarter of 1998. During
the three months ended March 31, 1999, units shipped increased 144%. The largest
increase in unit volumes came from sales of CompactFlash products, which
represented approximately 76% of units shipped and 60% of product revenues
compared to 68% of units shipped and 45% of product revenues for the first
quarter of 1998. Average selling prices declined 44% in the first quarter of
1999 compared to the same period of the prior year, partially due to a shift in
product mix to CompactFlash, Flash ChipSet and MultiMediaCard products which
have lower capacities and average selling prices than the Company's FlashDisk
products. The Company anticipates that lower capacity products will continue to
represent a significant portion of its sales as consumer applications such as
digital cameras become more popular. Sales of these lower capacity products
generally have lower average selling prices and gross margins than higher
capacity products. The mix of products sold varies from quarter to quarter and
may vary in the future, affecting the Company's overall average selling prices
and gross margins.
The Company continues to experience limited bookings visibility as customers
continue to expect short lead-times, particularly in the growing retail
component of the Company's business. A majority of the Company's anticipated
second quarter revenues, which are projected to slightly exceed the level
achieved in the first quarter, continue to be turns business with orders
received and fulfilled in the same quarter. Due to a number of factors described
herein and in "Factors That May Affect Future Results," 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.
Export sales represented 42% of product revenue for the first quarter of
1999 compared with 46% for the same period of the previous year. The Company
expects international sales to continue to represent a significant portion of
its product revenues. In the first quarter of 1999, the Company's top ten
customers represented approximately 61% of product revenue with the top two
customers representing a combined 31% of product revenues. Sales to the top 10
customers represented approximately 72% of product revenues in the first quarter
of 1998. 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 license
fees and royalties under six cross-license agreements with Hitachi Ltd.
("Hitachi"), Intel Corporation ("Intel"), Samsung Electronics Company Ltd.
("Samsung"), Sharp Electronics Corporation ("Sharp"), Silicon Storage
Technology, Inc.
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("SST") and Toshiba Corporation ("Toshiba"). License and royalty revenues from
patent cross-license agreements were $8.2 million in the first quarter of 1999,
down from $8.7 million in the same period of the previous year due primarily to
the timing of royalties earned under the various agreements. Revenues from
licenses and royalties decreased to 19% of total revenues in the first quarter
of 1999 from 25% in the first quarter of 1998.
Gross Profits. In the first quarter of 1999, gross profits were $17.6
million, or 40% of total revenues compared to $16.3 million, or 48% of total
revenues in the same period of 1998. Product gross margins decreased to 26% of
product revenues from 30% in the first quarter of 1998 due primarily to a
decline in average selling prices.
Competition remains strong and product gross margins are expected to remain
under pressure due to declining average selling prices. The Company is currently
working on a number of cost reduction programs to strengthen product gross
margins in 1999, including the transition of manufacturing operations for high
volume products offshore. However, there can be no assurance that the Company
will be successful in these efforts. Also, increased competition may negatively
affect gross margins in 1999.
During the first quarter of 1999, the Company began shipping customer
samples of its CompactFlash and FlashDisk products utilizing its new 128Mbit
flash chip. This design is currently undergoing final internal qualification,
with full volume production expected to begin in the second quarter of 1999. The
128Mbit flash chip has a lower manufacturing cost per megabyte and is expected
to contribute to improved product gross margins in the second half of 1999. The
initial production period of each new generation of flash technology is subject
to many risks and uncertainties as described in "Factors That May Affect Future
Results - We Face Risk in Transitioning to New Processes and Products." There
can be no assurance that the Company will successfully complete the internal and
customer qualifications of the 128Mbit flash chips in a timely manner, or that
it will realize the expected cost reductions in the second half of 1999.
In addition, in the second quarter of 1999, the Company will be moving the
high volume production of its CompactFlash cards to Celestica in South China and
the production of its MultiMediaCard products to Siliconware Precision
Industries Co. Ltd. and Siliconware Corporation in Taiwan. The Company expects
to incur some start up costs related to these ventures in the second quarter of
1999, but expects these investments to reduce future product costs and greatly
expand production capacity in the second half of the year. There are many risk
and uncertainties involved with the transfer of production to these
subcontractors as discussed in "Factors That May Affect Future Results - We Face
Risks Associated with Our International Operations and -- We Depend on Our
Suppliers and Third Party Subcontractors." Failure to successfully manage the
transition could result in excess and/or obsolete inventory or lower of cost or
market valuation adjustments due to potential duplication of certain inventory
build plans. There can be no assurance that the Company will realize the
expected product cost reductions or that these reductions will be large enough
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 were $5.2 million in the first quarter of 1999, up $0.9 million or 20%
from $4.3 million in the same period of 1998. The increase was primarily due to
increased salary and related expenses and higher nonrecurring engineering and
project related expenses. Research and development expenses represented 12% of
total revenues in the first quarter of 1999 compared to 13% in the first quarter
of 1998. The Company expects research and development expenses to continue to
increase in absolute dollars to support the development and introduction of new
generations of flash data storage products.
Sales and Marketing. Sales and marketing expenses include salaries, sales
commissions, benefits and travel expenses for the Company's sales, marketing,
customer service and applications engineering personnel. These expenses also
include other selling and marketing expenses, such as independent manufacturer's
representative commissions, advertising and tradeshow expenses. Sales and
marketing
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expenses were $5.2 million in the first quarter of 1999 up $1.2 million or 31%
from $4.0 million in the first quarter of 1998. The increase was primarily due
to increased salary and related expenses, higher commissions and increased
marketing expenses. Sales and marketing expenses represented approximately 12%
of total revenues in the first quarters of both 1999 and 1998. The Company
expects sales and marketing expenses to increase as sales of its products grow
and as it continues to develop the retail channel for its products.
General and Administrative. General and administrative expenses include the
cost of the Company's finance, information systems, human resources, shareholder
relations, legal and administrative functions. General and administrative
expenses were $2.4 million in the first quarter of 1999, up $0.4 million or 17%
from $2.0 million in the first quarter of 1998. The increase was primarily due
to increased salary and related expenses and higher legal fees as a result of
patent litigation related to the Lexar suit. General and administrative expenses
represented 5% of total revenues in the first quarter of 1999 compared to 6% for
the first quarter of 1998. The Company expects general and administrative
expenses to increase as the general and administrative functions grow to support
the overall growth of the Company. General and administrative expenses could
also increase substantially in the future if the Company continues to pursue
litigation to defend its patent portfolio. See "Factors That May Affect Future
Results - Risks Associated with Patents, Proprietary Rights and Related
Litigation."
Interest and Other Income, Net. Interest and other income, net, was $1.6
million in the first quarter of 1999 compared to $1.3 million in the first
quarter of 1999. The increase in 1998 was primarily due to foreign currency
transaction gains.
Provision for Income Taxes. The Company recorded a provision for income
taxes at a 33% effective tax rate for the first three months of 1999 compared to
a 36% effective tax rate for the same period of 1998. The lower effective tax
rate in 1999 reflects greater benefits from federal and state tax credits.
Liquidity and Capital Resources
As of March 31, 1999, the Company had working capital of $142.6 million,
which included $15.4 million in cash and cash equivalents and $129.6 million in
short-term investments. The Company has a line of credit facility with a
commercial bank under which it can borrow up to $10.0 million at the bank's
prime rate. This line of credit facility expires in July 1999. As of March 31,
1999, the Company had $1.0 million committed under the line of credit facility
for standby letters of credit. The facility contains covenants that require the
Company to maintain certain financial ratios and levels of net worth, and
prohibits the payment of cash dividends to stockholders. The Company is
currently in compliance with all covenants in the line of credit agreement. The
Company intends to either renew its line of credit or negotiate a new line of
credit upon the expiration of its current line.
Operating activities provided $12.3 million of cash in the first quarter of
1999 primarily from net income, an increase in accounts payable of $8.6 million
and a reduction in prepaids and other assets of $3.3 million. These were
partially offset by a decrease in deferred revenue of $6.4 million and an
increase in accounts receivable of $3.1 million.
Net cash used in investing activities of $13.8 million in the first quarter
of 1999 consisted of net purchases of investments of $10.7 million and capital
equipment purchases and leasehold improvements of $3.0 million. In the first
quarter of 1999, cash provided by financing activities of $1.5 million came
primarily from the sale of common stock through the Company's stock option and
employee stock purchase plans.
Depending on the future demand for the Company's products, the Company may
decide to make additional 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
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equivalents, short-term investments and available line of credit will be
sufficient to meet the Company's currently anticipated working capital and
capital expenditure requirements for the next twelve months.
Impact of Currency Exchange Rates
A portion of the Company's revenues are denominated in Japanese Yen. The
Company enters into foreign exchange forward contracts to hedge against changes
in foreign currency exchange rates. At March 31, 1999, one forward contract with
a notional amount of $4.5 million was outstanding. Future exchange rate
fluctuations could have a material adverse effect on the Company's business,
financial condition and results of operations.
Factors That May Affect Future Results
Our business, financial condition and results of operations could be
impacted by a number of factors including the risk factors listed below.
Our Operating Results May Fluctuate Significantly
Our quarterly and annual operating results have fluctuated
significantly in the past and we expect that they will continue to fluctuate in
the future. This fluctuation is a result of a variety of factors, including the
following:
o Unpredictable demand for our products
o Decline in our average selling prices due to competitive pricing pressures
o Seasonality in sales of our products for consumer electronics applications
o Changes in product and customer mix
o Market acceptance of new or enhanced versions of our products
o Changes in our distribution channels
o Timing of license and royalty revenue recognition
o Fluctuations in product costs, particularly due to fluctuations in
manufacturing yields and utilization
o Availability of foundry capacity
o Variations in manufacturing cycle times
o Increased research and development expenses
o Exchange rate fluctuations
o Changes in general economic conditions, in particular the economic
recession in Japan
o Obsolescence of unsold inventory
When we order silicon wafers from our foundries, we have to estimate
the number of silicon wafers needed to fill product orders several months into
the future. If we overestimate this number, we build excess inventories which
adversely affects our gross margins and operating results. For example, in the
second quarter of 1998, our product gross margins declined to 12% from 30% in
the previous quarter due in part to a write down of this inventory to reflect
inventory at net realizable value. Because our largest volume product,
CompactFlash, is sold into an emerging consumer market, it is very difficult to
accurately forecast future sales. If sales fall below our forecast, our
operating results could be adversely affected if we are unable to reduce our
operating expenses. More than 50% of our quarterly sales are from orders
received and fulfilled in the same quarter (turns business). In addition, our
product order backlog may fluctuate substantially from quarter to quarter.
Due to anticipated growth, we increased our expense levels in 1998 and
in the first quarter of 1999. Operating expenses are expected to continue to
increase as a result of the need to hire additional personnel to support
expected growth in sales unit volumes, marketing and sales efforts and research
and development activities. These expenses cannot be readily scaled back over
the short term. If revenue does
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not increase proportionately to operating expenses, or if revenues decrease or
do not meet expectations for a particular period, our business, financial
condition and results of operations will be adversely affected.
Product mix varies quarterly, which affects our overall average selling
prices and gross margins. Our CompactFlash products, which currently represent
the majority of our product revenues, have lower average selling prices and
gross margins than our higher capacity FlashDisk and FlashDrive products. We
believe that sales of CompactFlash products may become an even more significant
percentage of our product revenues as consumer applications, such as digital
cameras, become more popular. Dependence on CompactFlash sales, together with
lower pricing caused by increased competition, caused average selling prices to
decline 28% during 1998. Average selling prices declined 24% in the first
quarter of 1999 compared to the fourth quarter of 1998, partially due to a shift
in product mix to CompactFlash, Flash ChipSet and MultiMediaCard products which
have lower capacities and average selling prices than the Company's FlashDisk
products. This trend is expected to continue.
Our intellectual property strategy is to cross-license our patents to
other manufacturers of flash products. Under such arrangements, we earn license
fees and royalties on individually negotiated terms. The timing of revenue
recognition from these payments is dependent on the terms of each contract and
on the timing of product shipments by the third parties. This may cause license
and royalty revenue to fluctuate significantly from quarter to quarter. Because
this revenue has higher gross margins than product revenue, gross margins and
net income fluctuate more with changes in license and royalty revenue than with
changes in product revenue.
Our Business Depends Upon Consumer Products
In 1998 and the first quarter of 1999, we received more product revenue
and shipped more units of products destined for consumer electronics
applications, principally digital cameras, than for any other applications. We
believe that these products will encounter intense competition and be more price
sensitive than products sold into our other target markets. In addition, we must
spend more on marketing and promotion in consumer markets to establish brand
name recognition and preference.
A significant portion of sales to the consumer electronics market is
made through distributors and to retailers. Sales through these channels
typically include rights to return unsold inventory. As a result, revenue is not
recognized until after the product has been sold to the end user. If our retail
customers are not successful in this market, there could be substantial product
returns, which may cause harm to our business, financial condition and results
of operations.
Our Business Depends on Emerging Markets and New Products
In order for demand for our products to grow, the markets for new
products that use CompactFlash and the MultiMediaCard, such as smart phones and
MP3 portable music players, must develop and grow. If sales of these products do
not grow, our product revenues and profit margins could level off or decline. To
remain competitive, we intend to develop new products with increased memory
capacity at a lower cost per megabyte. The success of this new product strategy
will depend upon, among other things, the following:
o Our ability to successfully develop new products with higher memory
capacities at a lower cost per megabyte;
o The development of new applications or markets for our flash data storage
products; o The extent to which prospective customers design our products
into their products and successfully introduce their products;
o The extent to which our products or technologies become obsolete or
noncompetitive due to products or technologies developed by others.
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If our new applications or target markets fail to develop, or if our
products are not accepted by the market, our business, financial condition and
results of operations could suffer.
There Is Seasonality In Our Business
Sales of our products, in particular the sale of CompactFlash Products,
in the consumer electronics applications market are subject to seasonality. As a
result, product sales are impacted by seasonal purchasing patterns with higher
sales generally occurring in the second half of each year as compared to the
first half of each such year. In addition, in the past we have experienced a
decrease in orders in the first quarter from our Japanese OEM customers
primarily due to 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. For example, our product revenues were 24% lower in the first
quarter of 1998 than in the fourth quarter of 1997, mostly due to these seasonal
factors and the Asian economic crisis. However, we did not experience such
seasonality in the first quarter of 1999.
Our Markets Are Highly Competitive
We compete in an industry characterized by intense competition, rapid
technological changes, evolving industry standards, declining average selling
prices and rapid product obsolescence. Our competitors include many large
domestic and international companies that have greater access to foundry
capacity, substantially greater financial, technical, marketing and other
resources, broader product lines and longer standing relationships with
customers. Our primary competitors include flash chip producers such as Advanced
Micro Devices, Inc., Atmel Corporation, Hitachi Ltd., Intel Corporation, Micron
Technology, Inc., Mitsubishi Electronic Corporation, Samsung Electronics Company
Ltd., Sharp Electronics Corporation and Toshiba Corporation. Other competitors
include 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., M-Systems, Inc., Simple Technology Inc., SMART Modular
Technologies, Inc., Sony Corporation, Kingston Technology Company, TDK
Corporation, Matsushita Battery, Inc. and Viking Components, Inc., which combine
controllers and flash memory chips developed by others into flash storage cards.
Approximately 25 companies have been certified by the CompactFlash Association
to manufacture and sell their own brand of CompactFlash. We believe that other
manufacturers will enter the CompactFlash market in the future.
In addition, competing products have been introduced that promote
industry standards that are different from our CompactFlash product, including
Toshiba's Smart Media (Solid-State Floppy Disk Card), Sony Corporation's Memory
Stick, Panasonic's recently introduced Mega Storage cards and M-Systems'
Diskonchip(TM) for embedded storage applications. Each competing standard is
mechanically and electronically incompatible with CompactFlash. If a
manufacturer of digital cameras or other consumer electronic devices designs-in
one of these alternative competing standards, CompactFlash will be eliminated
from use in that product.
In November 1997, Iomega Corporation announced its Clik drive, a
miniaturized, mechanical, removable disk drive, and claims that it will compete
directly with our flash card products. In September 1998, IBM introduced the
microdrive, a rotating disk drive in a type II CompactFlash format. Initially,
this product will compete directly with our type II CompactFlash memory cards,
when we introduce these products in 1999, for use in high end professional
digital cameras. In October 1998, M-Systems introduced their Diskonchip 2000
product which is expected to compete against our Flash ChipSet products in
embedded storage applications.
According to independent industry analysts, Sony's Mavica digital
camera captured a considerable portion of the United States market for digital
cameras in 1998. The Mavica uses a standard floppy disk to store digital images
and therefore uses no CompactFlash (or any other flash) cards. Our sales
prospects for CompactFlash cards will be adversely impacted if the Mavica market
share continues at a high level into the future. Also, our MultiMediaCard
products are expected to face stiff competition from
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Toshiba's SmartMedia flash cards and Sony's flash Memory Stick. Although the
Memory Stick is proprietary to Sony, if it is adopted and achieves widespread
use in future products, sales of our MultiMediaCard and CompactFlash products
may decline.
We also face competition from products based on multilevel cell flash
technology such as Intel's 64Mbit flash chip and Hitachi's anticipated
introduction of their 256Mbit flash chip. These products compete with our D2
multilevel cell flash technology. Multilevel cell flash is a technological
innovation that allows each flash memory cell to store two bits of information
instead of the traditional single bit stored by the industry standard flash
technology.
Furthermore, we expect to face competition from existing companies and
from other companies that may enter our existing or future markets that have
similar or alternative data storage solutions which may be less costly or
provide additional features. Price is an important competitive factor in the
market for consumer products. Increased price competition could lower gross
margins if our average selling prices decrease faster than costs and could also
result in lost sales.
We have entered into patent cross-license agreements with Hitachi,
Intel, Samsung, Sharp, SST and Toshiba. Under these agreements, each party may
manufacture and sell products that incorporate technology covered by the other
party's patents related to flash memory devices. As we continue to license our
patents to certain competitors, competition will increase and may cause harm to
our business, financial condition and results of operations.
Other competitive factors include:
o Product cost, availability and performance
o Adequate foundry capacity
o Efficiency of production
o Timing of our new product announcements or introductions
o Successful protection of our intellectual property rights
o General market and economic conditions
Our Average Sales Prices Have Declined
In 1998, the average unit selling prices of our products declined 28%
compared to 1997. In the first quarter of 1999, the average unit selling prices
of our products declined 24% compared to the fourth quarter of 1998. Because
flash data storage markets are characterized by intense competition, we expect
that pricing pressures from our customers and competitors may increase. This
will likely result in a further decline in average sales prices for our
products. We believe that we can offset declining average sales prices by
achieving manufacturing cost reductions and developing new products that
incorporate advanced features and can be sold at higher average gross margins.
However, if we are unable to achieve such cost reductions or remain price
competitive, this could result in lost sales, declining gross margins, and as a
result, our business, financial condition and results of operations could
suffer.
From time to time, the semiconductor industry has experienced a
significant downturn and is currently beginning to recover from one of its most
severe down cycles. During most of 1998, the semiconductor industry experienced
significant production over capacity. This "buyers market" put margin pressures
on all flash memory suppliers. We believe product gross margins will remain
under pressure in the first half of 1999 until the more favorable cost structure
of our 128Mbit flash chip design begins to have a favorable impact on the cost
per megabyte of our products.
We Face Risks Associated with Our International Operations
Our sales are primarily denominated in United States dollars. As a
result, if the value of the US dollar increases relative to foreign currencies,
our products could become less competitive in international
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markets. For example, our products are relatively more expensive in Asia because
of the recent economic conditions in Asia and the weakness of many Asian
currencies relative to the US dollar. This resulted in a decrease in our sales
in that region in 1998. In fiscal 1998, sales to Japan declined to 31.6% of
total product sales from 38.1% in 1997. This was primarily due to the Japanese
economic crisis and market recession. In the first quarter of 1999, sales to
Japan represented 27.6% of product revenue compared to 35.0% for the same period
of 1998. If the current market conditions in Japan do not improve, or if they
decline further, our results of operations may suffer.
Currently, all of our wafers are produced by foundries located outside
the United States and the majority are purchased in United States dollars.
Because we currently invoice certain customers in Japanese Yen, fluctuations in
currencies could adversely affect our business, financial condition and results
of operations. Our international business activities could also be limited or
disrupted by any of the following:
o The need to comply with foreign government regulation;
o General geopolitical risks such as political and economic instability,
potential hostilities and changes in diplomatic and trade relationships;
o Imposition of regulatory requirements, tariffs, import and export
restrictions, and other barriers and restrictions;
o Longer payment cycles and greater difficulty in accounts receivable
collection;
o Potentially adverse tax consequences;
o Less protection of our intellectual property rights;
o Delays in product shipments due to local customs restrictions.
In the second quarter of 1999, we will begin using third-party
subcontractors in China and Taiwan for the assembly and testing of our
components. As a result, our business could be harmed by the effect of
political, economic, legal and other uncertainties in China. Under its current
leadership, the Chinese government has been pursuing economic reform policies,
including the encouragement of foreign trade and investment and greater economic
decentralization. The Chinese government may not continue to pursue such
policies and, even if it continued, such policies may not be successful. The
Chinese government may significantly alter these policies from time to time. In
addition, China does not currently have a comprehensive and highly developed
system of laws, particularly with respect to the protection of intellectual
property rights. As a result, enforcement of existing and future laws and
contracts is uncertain, and the implementation and interpretation of such laws
may be inconsistent, which could lead to piracy and degradation of the Company's
intellectual property protection among other things.
Sales to a Small Number of Customers Represent a Significant Portion of
Our Revenues
More than half of our revenue comes from a small number of customers.
For example, sales to the Company's top 10 customers accounted for approximately
59%, 67%, and 71%, respectively, of the Company's product revenues for 1998,
1997, and 1996. In the first quarter of 1999, the Company's top 10 customers
represented approximately 61% of product revenue. If we were to lose any of
these customers or experience any material reduction in orders from these
customers, our revenues and operating results would suffer. Our sales are
generally made by standard purchase orders rather than long-term contracts. In
addition, the composition of our major customer base changes from year to year
as the market demand for our customers' products change.
We Depend on Third Party Foundries for Silicon Wafers
All of our products require silicon wafers. We rely on United Silicon
Corporation ("USC") and United Semiconductor Incorporated ("USIC") in Taiwan for
supplying our silicon wafers. We depend on our foundries to (1) allocate a
portion of their foundry capacity to our needs, (2) produce acceptable quality
wafers with acceptable manufacturing yields and (3) deliver our wafers on a
timely basis at a competitive
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price. If our foundries are unable to satisfy these requirements, our business,
financial condition and operating results may suffer.
Under the wafer supply agreements with our foundries, we are obligated
to provide monthly rolling forecasts for our anticipated wafer purchases.
Generally, the estimates for the first three months of each forecast are binding
commitments. The estimates for the remaining months may only be changed by a
certain percentage from the previous month's forecast. This limits our ability
to react to fluctuations in demand for our products and could cause us to have
excess inventory. In addition, if we are unable to obtain scheduled quantities
of wafers with acceptable price and yields from any foundry, our business,
financial condition and results of operations could be adversely affected.
We Depend on Our Suppliers and Third Party Subcontractors
We rely on our vendors, some of which are sole source suppliers, for
several of our critical components. We do not have long-term supply agreements
with any of these vendors. Our business, financial condition and operating
results could be harmed by delays or reductions in shipments if we are unable to
develop alternative sources or to obtain sufficient quantities of these
components. For example, we rely on Motorola, Inc. and NEC to supply certain
designs of critical microcontrollers.
We also rely on third-party subcontractors to assemble, and sometimes
test the memory components for our products. We have no long-term contracts with
these subcontractors and cannot directly control product delivery schedules.
This could lead to product shortages or quality assurance problems which could
increase the manufacturing costs of our products and have adverse effects on our
operating results.
During the second and third quarters of 1999, we plan to transfer the
majority of wafer test, packaged memory final test, card assembly and card test
to subcontractors in Taiwan and China. This increased reliance on subcontractors
is expected to reduce the cost of such operations and give us access to
increased production capacity. During the transition period, we will continue
full operations at our Sunnyvale production facility while simultaneously
transferring test equipment and training personnel of our subcontractors. Any
significant problems in this complex transfer of operations may result in a
disruption of production and a shortage of product to meet customer demand in
the second and third quarters of 1999.
We Face Risk in Transitioning to New Processes and Products
Successive generations of our products incorporate semiconductor
devices with greater memory capacity per chip. We are continually involved in
joint development efforts with our foundries to produce semiconductor devices
based upon smaller geometry manufacturing processes. Two important factors that
enable us to decrease the costs per megabyte of our flash data storage products
are the development of higher capacity semiconductor devices and the
implementation of smaller geometry manufacturing processes. A number of
challenges exist in achieving a lower cost per megabyte, including (1) lower
yields often associated with the early production of new semiconductor devices,
(2) problems with design and manufacturing of products that will incorporate
these devices and (3) production delays. Because our products are complex, we
periodically experience significant delays in the development and volume
production ramp up of our products. Similar delays could occur in the future and
could harm our business, financial condition and results of operations.
We have developed new products based on D2 flash technology, a new
flash architecture designed to store two bits in each flash memory cell. We
believe that the 256Mbit D2 flash design currently in advanced development, will
help us increase the capacity and decrease the costs of certain products,
enabling us to maintain our competitive advantage and broaden our target
markets. High density flash memory, such as D2 flash, is a complex technology
that requires tight manufacturing controls and effective test screens. Problems
from the shift to volume production for new flash products could impact both
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reliability and yields and result in increased manufacturing costs. We may not
be able to manufacture reliable and cost effective D2 flash products in
commercial volumes and with yields sufficient to result in lower costs per
megabyte. Furthermore, D2 flash technology needs significantly improved write
speed so that it can be usefully applied to market applications such as digital
cameras. Although the 256Mbit design is intended to meet the improved write
speed requirements, it is possible that we may not be able to achieve the target
write speed in our future D2 products.
The MultiMediaCard product family is expected to undergo a rapid
production ramp during the second and third quarters of 1999. During the startup
phase, it is expected that production yields may be lower than expected, thereby
adversely impacting MultiMediaCard product availability as well as increasing
manufacturing costs and reducing product margins for this product family.
We Must Achieve Acceptable Wafer Manufacturing Yields
The fabrication of our products requires wafers to be produced in a
highly controlled and clean environment. Semiconductor companies that supply our
wafers sometimes have experienced problems achieving acceptable wafer
manufacturing yields. Semiconductor manufacturing yields are a function of both
our design technology and the foundry's manufacturing process technology. Low
yields may result from design errors or manufacturing failures. Yield problems
may not be determined or improved until an actual product is made and can be
tested. As a result, yield problems may not be identified until the wafers are
well into the production process. The risks associated with yields are even
greater because we rely on independent offshore foundries for our wafers which
increases the effort and time required to identify, communicate and resolve
manufacturing yield problems. If the foundries cannot achieve the planned
yields, it could negatively affect our business, financial condition and results
of operations.
Risks Associated with Patents, Proprietary Rights and Related Litigation
We rely on a combination of patents, trademarks, copyright and trade
secret laws, confidentiality procedures and licensing arrangements to protect
our intellectual property rights. In the past, we have been involved in
significant disputes regarding our intellectual property rights and claims that
we may be infringing third parties' intellectual property rights. We expect that
we may be involved in similar disputes in the future. We cannot assure you (1)
that any of our patents will not be invalidated, (2) that patents will be issued
for any of our pending applications, (3) that any claims allowed from existing
or pending patents will have sufficient scope or strength or (4) that our
patents will be issued in the primary countries where our products are sold in
order to protect our rights and potential commercial advantage. In addition, our
competitors may be able to design around our patents.
From time to time, it may be necessary to initiate litigation against
third parties to preserve our intellectual property rights. These parties could
in turn bring suit against us. Such a situation occurred in March of 1998. We
filed a complaint in federal court against Lexar for infringement of a
fundamental flash disk patent. Lexar disputed this claim and asserted that our
patent was invalid or unenforceable, as well as asserting various counterclaims
including unfair competition, violation of the Lanham Act, patent misuse,
interference with prospective economic advantage, trade defamation and fraud. We
have denied all of these counterclaims. In July 1998, the federal district court
denied Lexar's request to have the case dismissed. Discovery in this suit began
in August 1998. On February 22, 1999, the Federal District Court considered
arguments and papers submitted by the parties regarding the scope and proper
interpretation of the asserted claims in SanDisk's patent at issue in the Lexar
suit. On March 4, 1999, the Federal District Court issued its ruling on the
proper construction of the claim terms in SanDisk's patent. A trial date has not
yet been set.
We intend to vigorously enforce our patents but we cannot be sure that
our efforts will be successful. If we were to have an adverse result in any such
litigation, we could be required to pay substantial damages, cease the
manufacture, use and sale of infringing products, expend significant resources
to develop non-infringing technology, discontinue the use of certain processes
or obtain licenses
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<PAGE>
to the infringing technology. Any litigation is likely to result in significant
expense to us, as well as divert the efforts of our technical and management
personnel.
If we decide to incorporate third party technology into our products or
if we are found to infringe on others' intellectual property, we could be
required to license intellectual property from a third party. We may also need
to license some of our intellectual property to others in order to enable us to
obtain cross-licenses to third party patents. Currently, we have patent
cross-license agreements with Hitachi, Intel, Samsung, Sharp, SST and Toshiba
and we are in discussions with other companies regarding potential cross-license
agreements. We cannot be certain that licenses will be offered when we need
them, or that the terms offered will be acceptable. If we do obtain licenses
from third parties, we may be required to pay license fees or royalty payments.
In addition, if we are unable to obtain a license that is necessary to the
manufacture of our products, we could be required to suspend the manufacture of
products or stop our foundries from using processes that may infringe the rights
of third parties. We cannot assure you that we would be successful in
redesigning our products or that the necessary licenses will be available under
reasonable terms.
We have historically agreed to indemnify various suppliers and
customers for alleged patent infringement. The scope of such indemnity varies,
but may, in some instances, include indemnification for damages and expenses,
including attorney's fees. We may periodically engage in litigation as a result
of these indemnification obligations. We are not currently engaged in any such
indemnification proceedings. Our insurance policies exclude coverage for third
party claims for patent infringement. Any future obligation to indemnify our
customers or suppliers could have a negative affect on our business, financial
condition or results of operations.
Our Rapid Growth May Strain Our Operations
We have periodically experienced rapid growth, which has placed, and
continues to place, a significant strain on our personnel and other resources.
To accommodate this growth, we must continue to implement and improve our
operational, financial and management information systems, as well as hire,
train, motivate and manage our employees. We have had difficulty in the past
hiring the necessary engineering, sales and marketing personnel to support our
growth. In addition, we must make a significant investment in our existing
internal information management systems to support increased manufacturing, as
well as accounting and other management related functions. Our systems,
procedures and controls may not be adequate to support our rapid growth, which
could in turn negatively affect our business, financial condition and results of
operations.
We Depend Upon Certain Key Personnel
Our success greatly depends on the continued contributions of our
senior management and other key research and development, sales, marketing and
operations personnel, including Dr. Eli Harari, the founder, President and Chief
Executive Officer. Our success will also depend on our ability to recruit
additional highly skilled personnel. We cannot assure you that we will be
successful in hiring or retaining such key personnel, or that any of our key
personnel will remain employed with us.
Our Stock Price May Be Volatile
The market price of our stock has fluctuated in the past and is likely
to fluctuate in the future. For example, in the twelve month period ending March
31, 1999, our stock price fluctuated from a low of $5.125 to a high of $37.00.
We believe that such fluctuations could continue as a result of future
announcements concerning us, our competitors or principal customers regarding
technological innovations, new product introductions, governmental regulations,
litigation or changes in earnings estimates by analysts. In addition, in recent
years the stock market has experienced significant price and volume fluctuations
and the market prices of the securities of high technology companies have been
especially volatile, often for reasons outside the control of the particular
companies. These fluctuations as well as
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<PAGE>
general economic, political and market conditions may have an adverse affect on
the market price of our Common Stock.
Year 2000 Issues May Harm Our Business
Many existing computer systems and applications may not function
properly when using dates beyond December 31, 1999. We have established a Year
2000 Risk Management program to assess the impact that the Year 2000 issue may
have on our business. Based on our assessment to date, all of our flash memory
and connectivity products are Year 2000 compliant. Other Year 2000 issues that
we face include:
o Assessment and remediation of the tertiary business information systems
o Assessment and remediation of the computer systems used for facilities
control, machine control and manufacturing testing
o Year 2000 compliance of our key suppliers and customers
Our estimated total costs for Year 2000 compliance issues are not expected to
have a material adverse affect on our business. However, the failure of our key
suppliers and customers to take proper remedial efforts could harm our business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Year 2000 Readiness
Disclosure."
We Have Anti-Takeover Provisions
We have taken a number of actions that could have the effect of
discouraging a takeover attempt. For example, we have adopted a Shareholder
Rights Plan that would cause substantial dilution to a stockholder who attempts
to acquire us on terms not approved by our Board of Directors. In addition, our
Certificate of Incorporation grants the Board of Directors the authority to fix
the rights, preferences and privileges of and issue up to 4,000,000 shares of
Preferred Stock without stockholder action. Although we have no present
intention to issue shares of Preferred Stock, such an issuance could have the
effect of making it more difficult and less attractive for a third party to
acquire a majority of our outstanding voting stock. Preferred Stock may also
have other rights, including economic rights senior to the Common Stock that
could have a material adverse effect on the market value of the Common Stock. In
addition, we are subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law. This section provides that a corporation shall
not engage in any business combination with any interested stockholder during
the three-year period following the time that such stockholder becomes an
interested stockholder. This provision could have the effect of delaying or
preventing a change of control of SanDisk.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Please refer to the Company's form 10-K/A for the year ended December
31, 1998.
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<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 "Factors That May Affect Future Results - Risks Associated with Patents,
Proprietary Rights and Related Litigation" on pages 22 and 23 of this Form 10-Q
for the quarterly period ended March 31, 1999, 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 25
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit
Number Exhibit Title
3.1 Certificate of Incorporation of the Registrant, as amended to date.2
3.2 Form of Amended and Restated Certificate of Incorporation of the
Registrant.2
3.3 Bylaws of the Registrant, as amended.2
3.4 Form of Amended and Restated Bylaws of the Registrant 2
3.5 Certificate of Designation for the Series A Junior Participating
Preferred Stock, as filed with the Delaware Secretary of State on April
24, 1997.4
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.2
4.3 Amended and Restated Registration Rights Agreement, among the
Registrant and the investors and founders named therein, dated March 3,
1995.2
4.5 Series F Preferred Stock Purchase Agreement between Seagate Technology,
Inc. and the Registrant, dated January 15, 1993.2
4.8 Rights Agreement, dated as of April 18, 1997, between the Company and
Harris Trust and Savings Bank.4
4.9 First Amendment to Rights Agreement dated October 22, 1999, between
Harris Trust and the Registrant.11
9.1 Amended and Restated Voting Agreement, among the Registrant and the
investors named therein, dated March 3, 1995.2
10.10 License Agreement between the Registrant and Dr. Eli Harari, dated
September 6, 1988.2
10.13 1989 Stock Benefit Plan.2
10.14 1995 Stock Option Plan.2
10.15 Employee Stock Purchase Plan.2
10.16 1995 Non-Employee Directors Stock Option Plan.2
10.18 Lease Agreement between the Registrant and G.F. Properties, dated March
1, 1996.3
10.21 Amendment to Lease Agreement between the Registrant and G.F.
Properties, dated April 3, 1997.5
10.23 Foundry Venture Agreement between the Registrant and United
Microelectronics Corporation, dated June 27, 1997.1, 6
10.24 Written Assurances Re: Foundry Venture Agreement between the Registrant
and United Microelectronics Corporation, dated September 13, 1995.1, 6
10.25 Side Letter between Registrant and United Microelectronics Corporation,
dated May 28, 1997.1, 6
10.27 Clarification letter with regards to Foundry Venture Agreement between
the Registrant and United Microelectronics Corporation dated October
24, 1997.7
10.28 Lease Agreement between the Registrant and G.F. Properties, dated June
10, 1998.8
10.29 Trade Finance Agreement between the Registrant and Union Bank of
California, dated July 15, 1998.9
10.30 1995 Stock Option Plan Amended and Restated as of December 17, 1998.
10.31 1995 Non-Employee Directors Stock Option Plan Amended and Restated as
of December 17, 1998.
10.32 1995 Employee Stock Purchase Plan Amended and Restated as of December
17, 1998.
21.1 Subsidiaries of the Registrant.10
23.1 Consent of Ernst & Young, LLP, Independent Auditors. 10
27.1 Financial Data Schedule for the quarter ended March 31, 1999. (In EDGAR
format only)
- ----------
1. Confidential treatment granted as to certain portions of these
exhibits.
2. Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (No. 33-96298).
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<PAGE>
3. Previously filed as an Exhibit to the Registrant's 1995 Annual Report
on Form 10-K.
4. Previously filed as an Exhibit to the Registrant's Current Report on
Form 8-K/A dated April 18, 1997.
5. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended June 30, 1997.
6. Previously filed as an Exhibit to the Registrant's Current Report on
form 8-K dated October 16, 1997.
7. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended September 30, 1997.
8. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended June 30, 1998.
9. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended September 30, 1998.
10. Previously filed as an Exhibit to the Registrant's Annual Report on
Form 10-K.
11. Previously filed as an Exhibit to the Registrant's Current Report on
Form 8-K dated January 1, 1999.
B. Reports on Form 8-K
During the quarter ended March 31, 1999, the Company filed a current
report on Form 8-K dated January 8, 1999, reporting the amendment to its
shareholders' rights agreement.
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<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: May 11, 1999
Page 28
SANDISK CORPORATION
1995 STOCK OPTION PLAN
AMENDED AND RESTATED AS OF DECEMBER 17, 1998
ARTICLE One
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1995 Stock Option Plan is intended to promote the interests of
SanDisk Corporation, a Delaware corporation, by providing eligible persons with
the opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to remain in
the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in the
attached Appendix.
II. ADMINISTRATION OF THE PLAN
A. The Committee shall have sole and exclusive authority to administer
the Plan with respect to Section 16 Insiders. Administration of the Plan with
respect to all other persons eligible to participate may, at the Board's
discretion, be vested in the Committee, or the Board may retain the power to
administer the Plan with respect to all such persons.
B. Members of the Committee shall serve for such period of time as the
Board may determine and shall be subject to removal by the Board at any time.
C. The Plan Administrator shall, within the scope of its administrative
functions under the Plan, have full power and authority (subject to the
provisions of the Plan) to establish such rules and regulations as it may deem
appropriate for proper administration of the Plan and to make such
determinations under, and issue such interpretations of, the provisions of such
program and any outstanding options thereunder as it may deem necessary or
advisable. Decisions of the Plan Administrator within the scope of its
administrative functions under the Plan shall be final and binding on all
parties who have an interest in the Plan or any option thereunder.
D. Service on the Committee shall constitute service as a Board member,
and members of the Committee shall accordingly be entitled to full
indemnification and reimbursement as Board members for their service. No member
of the Committee shall be liable for any act or omission made in good faith with
respect to the Plan or any option grants made under the Plan.
III. ELIGIBILITY
A. The persons eligible to participate in the Plan are as follows:
<PAGE>
(i) Employees,
(ii) Non-employee Board members, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. The Plan Administrator shall, within the scope of its administrative
jurisdiction under the Plan, have full authority to determine which eligible
persons are to receive option grants, the time or times when such option grants
are to be made, the number of shares to be covered by each such grant, the
status of the granted option as either an Incentive Option or a Non-Statutory
Option, the time or times at which each option is to become exercisable and the
vesting schedule (if any) applicable to the option shares and the maximum term
for which the option is to remain outstanding.
IV. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed 9,498,711 shares.
Such share reserve includes (i) the initial reserve of 3,498,711 shares which
reflects the 2:3 stock split adopted by the Board on July 25, 1995, (ii) the
additional increase of 2,500,000 shares authorized by the Board on February 10,
1997, and approved by the stockholders at the 1997 Annual Meeting and (iii) an
additional increase of 3,500,000 shares authorized by the Board on December 17,
1998, subject to stockholder approval at the 1999 Annual Meeting. The initial
authorized share reserve was comprised of the number of shares which remained
available for issuance, as of the Effective Date, under the Predecessor Plan as
last approved by the Corporation's stockholders prior to such date, including
the shares subject to the outstanding options incorporated into the Plan and any
other shares which would have been available for future option grants under the
Predecessor Plan.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of January each
calendar year during the term of the Plan, beginning with calendar year 2002, by
an amount equal to four and thirty-six hundreds percent (4.36%) of the shares of
Common Stock outstanding on the last trading day in December of the immediately
preceding calendar year, but in no event shall any such annual increase exceed
2,000,000 shares.
C. No one person participating in the Plan may receive options and
separately exercisable stock appreciation rights for more than 1,000,000 shares
of Common Stock in the aggregate over the term of the Plan.
2
<PAGE>
D. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
(including any options incorporated from the Predecessor Plan) expire or
terminate for any reason prior to exercise in full or (ii) the options are
cancelled in accordance with the cancellation-regrant provisions of Article Two.
In addition, unvested shares issued under the Plan and subsequently repurchased
by the Corporation, at the original exercise price paid per share, pursuant to
the Corporation's repurchase rights under the Plan shall be added back to the
number of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants under the Plan. However, should the exercise price of an option under the
Plan (including any option incorporated from the Predecessor Plan) be paid with
shares of Common Stock or should shares of Common Stock otherwise issuable under
the Plan be withheld by the Corporation in satisfaction of the withholding taxes
incurred in connection with the exercise of an option under the Plan, then the
number of shares of Common Stock available for issuance under the Plan shall be
reduced by the gross number of shares for which the option is exercised, and not
by the net number of shares of Common Stock issued to the holder of such option.
E. Should any change be made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the maximum number and/or class of securities by which the share
reserve is to increase automatically each calendar year pursuant to the
provisions of Section IV.B of this Article One, (iii) the number and/or class of
securities for which any one person may be granted options and separately
exercisable stock appreciation rights over the term of the Plan and (iv) the
number and/or class of securities and the exercise price per share in effect
under each outstanding option (including any option incorporated from the
Predecessor Plan) in order to prevent the dilution or enlargement of benefits
thereunder. The adjustments determined by the Plan Administrator shall be final,
binding and conclusive.
3
<PAGE>
ARTICLE TWO
OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Three and the documents evidencing the option, be payable in one or more
of the forms specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued
at Fair Market Value on the Exercise Date, or
(iii) to the extent the option is exercised for vested
shares, through a special sale and remittance
procedure pursuant to which the Optionee shall
concurrently provide irrevocable written instructions
to (a) a Corporation-designated brokerage firm to
effect the immediate sale of the purchased shares and
remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to
cover the aggregate exercise price payable for the
purchased shares plus all applicable Federal, state
and local income and employment taxes required to be
withheld by the Corporation by reason of such
exercise and (b) the Corporation to deliver the
certificates for the purchased shares directly to
such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
4
<PAGE>
C. Effect of Termination of Service.
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain
exercisable for such period of time thereafter as
shall be determined by the Plan Administrator and set
forth in the documents evidencing the option, but no
such option shall be exercisable after the expiration
of the option term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently
exercised by the personal representative of the
Optionee's estate or by the person or persons to whom
the option is transferred pursuant to the Optionee's
will or in accordance with the laws of descent and
distribution.
(iii) During the applicable post-Service exercise period,
the option may not be exercised in the aggregate for
more than the number of vested shares for which the
option is exercisable on the date of the Optionee's
cessation of Service. Upon the expiration of the
applicable exercise period or (if earlier) upon the
expiration of the option term, the option shall
terminate and cease to be outstanding for any vested
shares for which the option has not been exercised.
However, the option shall, immediately upon the
Optionee's cessation of Service, terminate and cease
to be outstanding to the extent it is not exercisable
for vested shares on the date of such cessation of
Service.
(iv) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the
Optionee shall terminate immediately and cease to be
outstanding.
2. The Plan Administrator shall have the discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation
of Service from the period otherwise in effect for
that option to such greater period of time as the
Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term,
and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only
with respect to the number of vested shares of Common
Stock for which such option is exercisable at the
time of the Optionee's cessation of Service but also
with respect to one or more additional installments
in which the Optionee would have vested under the
option had the Optionee continued in Service.
D. Stockholder Rights. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
5
<PAGE>
E. Repurchase Rights. The Plan Administrator shall have the discretion
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
F. Limited Transferability of Options. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. However, a Non-Statutory Option
may, in connection with the Optionee's estate plan, be assigned in whole or in
part during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive Options.
Except as modified by the provisions of this Section II, all the provisions of
the Plan shall be applicable to Incentive Options. Options which are
specifically designated as Non-Statutory Options when issued under the Plan
shall not be subject to the terms of this Section II.
A. Eligibility. Incentive Options may only be granted to Employees.
B. Exercise Price. The exercise price per share shall not be less than
one hundred percent (100%) of the Fair Market Value per share of Common Stock on
the option grant date.
C. Dollar Limitation. The aggregate Fair Market Value of the shares of
Common Stock (determined as of the respective date or dates of grant) for which
one or more options granted to any Employee under the Plan (or any other option
plan of the Corporation or any Parent or Subsidiary) may for the first time
become exercisable as Incentive Options during any one (1) calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% Stockholder. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
6
<PAGE>
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Corporate Transaction, become fully exercisable for
all of the shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
However, an outstanding option shall not so accelerate if and to the extent: (i)
such option is, in connection with the Corporate Transaction, either to be
assumed by the successor corporation (or parent thereof) or to be replaced with
a comparable option to purchase shares of the capital stock of the successor
corporation (or parent thereof), (ii) such option is to be replaced with a cash
incentive program of the successor corporation which preserves the spread
existing on the unvested option shares at the time of the Corporate Transaction
and provides for subsequent payout in accordance with the same vesting schedule
applicable to such option or (iii) the acceleration of such option is subject to
other limitations imposed by the Plan Administrator at the time of the option
grant. The determination of option comparability under clause (i) above shall be
made by the Plan Administrator, and its determination shall be final, binding
and conclusive.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are to be assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.
C. The Plan Administrator shall have the discretion, exercisable either
at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding options (and the automatic termination of one or more outstanding
repurchase rights with the immediate vesting of the shares of Common Stock
subject to those rights) upon the occurrence of a Corporate Transaction, whether
or not those options are to be assumed or replaced (or those repurchase rights
are to be assigned) in the
Corporate Transaction.
D. Immediately following the consummation of the Corporate Transaction,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof).
E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan on both an aggregate and per
Optionee basis following the consummation of such Corporate Transaction and (ii)
the exercise price payable per share under each outstanding option, provided the
aggregate exercise price payable for such securities shall remain the same.
7
<PAGE>
F. Any options which are assumed or replaced in the Corporate
Transaction and do not otherwise accelerate at that time, shall automatically
accelerate (and any of the Corporation's outstanding repurchase rights which do
not otherwise terminate at the time of the Corporate Transaction shall
automatically terminate and the shares of Common Stock subject to those
terminated rights shall immediately vest in full) in the event the Optionee's
Service should subsequently terminate by reason of an Involuntary Termination
within twelve (12) months following the effective date of such Corporate
Transaction. Any options so accelerated shall remain exercisable for
fully-vested shares until the earlier of (i) the expiration of the option term
or (ii) the expiration of the one (1)-year period measured from the effective
date of the Involuntary Termination.
G. The Plan Administrator shall have the discretion, exercisable either
at the time the option is granted or at any time while the option remains
outstanding, to (i) provide for the automatic acceleration of one or more
outstanding options (and the automatic termination of one or more outstanding
repurchase rights with the immediate vesting of the shares of Common Stock
subject to those rights) upon the occurrence of a Change in Control or (ii)
condition any such option acceleration (and the termination of any outstanding
repurchase rights) upon the subsequent Involuntary Termination of the Optionee's
Service within a specified period following the effective date of such Change in
Control. Any options accelerated in connection with a Change in Control shall
remain fully exercisable until the expiration or sooner termination of the
option term.
H. The portion of any Incentive Option accelerated in connection with a
Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
limitation is not exceeded. To the extent such dollar limitation is exceeded,
the accelerated portion of such option shall be exercisable as a Non-Statutory
Option under the Federal tax laws.
I. The grant of options under the Option Grant Program shall in no way
affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Option Grant Program
(including outstanding options incorporated from the Predecessor Plan) and to
grant in substitution new options covering the same or different number of
shares of Common Stock but with an exercise price per share based on the Fair
Market Value per share of Common Stock on the new option grant date.
<PAGE>
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to grant
to selected Optionees tandem stock appreciation rights and/or limited stock
appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right, exercisable
upon such terms as the Plan Administrator may establish, to
elect between the exercise of the underlying option for shares
of Common Stock and the surrender of that option in exchange
for a distribution from the Corporation in an amount equal to
the excess of (A) the Fair Market Value (on the option
surrender date) of the number of shares in which the Optionee
is at the time vested under the surrendered option (or
surrendered portion thereof) over (B) the aggregate exercise
price payable for such shares.
(ii) No such option surrender shall be effective unless it is
approved by the Plan Administrator. If the surrender is so
approved, then the distribution to which the Optionee shall be
entitled may be made in shares of Common Stock valued at Fair
Market Value on the option surrender date, in cash, or partly
in shares and partly in cash, as the Plan Administrator shall
in its sole discretion deem appropriate.
(iii) If the surrender of an option is rejected by the Plan
Administrator, then the Optionee shall retain whatever rights
the Optionee had under the surrendered option (or surrendered
portion thereof) on the option surrender date and may exercise
such rights at any time prior to the later of (A) five (5)
business days after the receipt of the rejection notice or (B)
the last day on which the option is otherwise exercisable in
accordance with the terms of the documents evidencing such
option, but in no event may such rights be exercised more than
ten (10) years after the option grant date.
C. The following terms shall govern the grant and exercise of limited
stock appreciation rights:
(i) One or more Section 16 Insiders may be granted limited stock
appreciation rights with respect to their outstanding options.
(ii) Upon the occurrence of a Hostile Take-Over, each such
individual holding one or more options with such a limited
stock appreciation right shall have the unconditional right
(exercisable for a thirty (30)-day period following such
Hostile Take-Over) to surrender each such option to the
Corporation, to the extent the option is at the time
exercisable for vested shares of Common Stock. In return for
the surrendered option, the Optionee shall receive a cash
distribution from the Corporation in an amount equal to the
excess of (A) the Take-Over Price of the shares of Common
Stock which are at the time vested under each surrendered
option (or surrendered portion thereof) over (B) the aggregate
exercise price payable for such shares. Such cash distribution
shall be paid within five (5) days following the option
surrender date.
9
<PAGE>
(iii) The Plan Administrator shall pre-approve, at the time the
limited right is granted, the subsequent exercise of that
right in accordance with the terms of the grant and the
provisions of this Section V.C. No additional approval of the
Plan Administrator or the Board shall be required at the time
of the actual option surrender and cash distribution.
(iv) The balance of the option (if any) shall continue in full
force and effect in accordance with the documents evidencing
such option.
10
<PAGE>
ARTICLE Three
MISCELLANEOUS
I. FINANCING
A. The Plan Administrator may permit any Optionee to pay the option
exercise price by delivering a promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. Promissory notes may be authorized with or without security
or collateral. In all events, the maximum credit available to the Optionee may
not exceed the sum of (i) the aggregate option exercise price payable for the
purchased shares plus (ii) any Federal, state and local income and employment
tax liability incurred by the Optionee in connection with the option exercise.
B. The Plan Administrator may, in its discretion, determine that one or
more such promissory notes shall be subject to forgiveness by the Corporation in
whole or in part upon such terms as the Plan Administrator may deem appropriate.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock upon
the exercise of options or stock appreciation rights under the Plan shall be
subject to the satisfaction of all applicable Federal, state and local income
and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options with the right to use shares of Common Stock in
satisfaction of all or part of the Withholding Taxes to which such holders may
be subject in connection with the exercise of their options. Such right may be
provided to any such holder in either or both of the following formats:
(i) Stock Withholding: The election to have the Corporation
withhold, from the shares of Common Stock otherwise issuable
upon the exercise of such Non-Statutory Option, a portion of
those shares with an aggregate Fair Market Value equal to the
percentage of the Withholding Taxes (not to exceed one hundred
percent (100%)) designated by the holder.
(ii) Stock Delivery: The election to deliver to the Corporation, at
the time the Non-Statutory Option is exercised, one or more
shares of Common Stock previously acquired by such holder
(other than in connection with the option exercise triggering
the Withholding Taxes) with an aggregate Fair Market Value
equal to the percentage of the Withholding Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
11
<PAGE>
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan became effective on the November 7, 1995 Effective Date
after adoption by the Board on July 25, 1995, and approval by the Corporation's
stockholders in August 1995.
B. The Plan was amended on February 10, 1997 (the "February 1997
Amendment") to effect the following changes: (i) increase the number of shares
of Common Stock authorized for issuance over the term of the Plan by an
additional 2,500,000 shares, (ii) render the non-employee Board members eligible
to receive option grants under the Plan, (iii) allow unvested shares issued
under the Plan and subsequently repurchased by the Corporation at the option
exercise price paid per share to be reissued under the Plan and (iv) effect a
series of technical changes to the provisions of the Plan (including the
stockholder approval requirements) in order to take advantage of the recent
amendments to Rule 16b-3 of the Securities Exchange Act of 1934 which exempts
certain officer and director transactions under the Plan from the short-swing
liability provisions of the Federal securities laws. The February 1997 Amendment
was approved at the 1997 Annual Meeting. All option grants made prior to the
February 1997 Amendment shall remain outstanding in accordance with the terms
and conditions of the respective instruments evidencing those options or
issuances, and nothing in the February 1997 Amendment shall be deemed to modify
or in any way affect those outstanding options or issuances. The Plan was
amended on December 17, 1998 (the "December 1998 Amendment") to effect the
following changes: (i) increase the number of shares of Common Stock authorized
for issuance over the term of the Plan by an additional 3,500,000 shares and
(ii) implement the automatic share increase provisions of Section IV.B of
Article One. The December 1998 Amendment is subject to stockholder approval at
the 1999 Annual Meeting and no option grants made on the basis of the
3,500,000-share increase authorized by that amendment shall become exercisable
in whole or in part unless and until the December 1998 Amendment is approved by
the stockholders. Should such stockholder approval not be obtained at the 1999
Annual Meeting, then each option grant made pursuant to the 3,500,000-share
increase authorized by the December 1998 Amendment shall terminate and cease to
remain outstanding, and no further option grants shall be made on the basis of
that share increase, and the automatic share increase provisions of Section IV.B
of Article One shall not be implemented. Subject to the foregoing limitations,
options may be granted under the Plan at any time before the date fixed herein
for the termination of the Plan.
C. The Plan shall serve as the successor to the Predecessor Plan, and
no further option grants shall be made under the Predecessor Plan after the
Effective Date. All options outstanding under the Predecessor Plan as of such
date shall, immediately upon approval of the Plan by the Corporation's
stockholders, be incorporated into the Plan and treated as outstanding options
under the Plan. However, each outstanding option so incorporated shall continue
to be governed solely by the terms of the documents evidencing such option, and
no provision of the Plan shall be deemed to affect or otherwise modify the
rights or obligations of the holders of such incorporated options with respect
to their acquisition of shares of Common Stock.
12
<PAGE>
D. The provisions of the Plan (including, without limitation, the
option/vesting acceleration provisions of Article Two relating to Corporate
Transactions and Changes in Control) may, in the Plan Administrator's
discretion, be extended to one or more options incorporated from the Predecessor
Plan which do not otherwise provide for such acceleration.
E. The Plan shall terminate upon the earliest of (i) July 24, 2005,
(ii) the date on which all shares available for issuance under the Plan have
been issued pursuant to the exercise of the options under the Plan or (iii) the
termination of all outstanding options in connection with a Corporate
Transaction. Upon such Plan termination, all options outstanding on such date
shall thereafter continue to have force and effect in accordance with the
provisions of the documents evidencing such options.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
options or stock appreciation rights at the time outstanding under the Plan
unless the Optionee consents to such amendment or modification. In addition,
certain amendments may require stockholder approval in accordance with
applicable laws and regulations.
B. Options to purchase shares of Common Stock may be granted that are
in excess of the number of shares then available for issuance under the Plan,
provided any excess shares actually issued are held in escrow until stockholder
approval of an amendment sufficiently increasing the number of shares of Common
Stock available for issuance under the Plan is obtained. If such stockholder
approval is not obtained within twelve (12) months after the date the first such
excess issuances are made, then (i) any unexercised options granted on the basis
of such excess shares shall terminate and cease to be outstanding and (ii) the
Corporation shall promptly refund to the Optionees the exercise price paid for
any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any option or stock
appreciation right under the Plan and the issuance of any shares of Common Stock
upon the exercise of any option or stock appreciation right shall be subject to
the Corporation's procurement of all approvals and permits required by
regulatory authorities having jurisdiction over the Plan, the options and stock
appreciation rights granted under it and the shares of Common Stock issued
pursuant to it.
13
<PAGE>
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining such person) or of the Optionee, which rights
are hereby expressly reserved by each, to terminate such person's Service at any
time for any reason, with or without cause.
14
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
B. Change in Control shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly, by any person or
related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation), of
beneficial ownership (within the meaning of Rule 13d-3 of the
1934 Act) of securities possessing more than fifty percent
(50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer
made directly to the Corporation's stockholders, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more
contested elections for Board membership, to be comprised of
individuals who either (A) have been Board members
continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during
such period by at least a majority of the Board members
described in clause (A) who were still in office at the time
the Board approved such election or nomination.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
D. Committee shall mean the committee of two (2) or more non-employee
Board members appointed by the Board to administer the Plan.
E. Common Stock shall mean the Corporation's common stock.
F. Corporate Transaction shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of
the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those
immediately prior to such transaction; or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete
liquidation or dissolution of the Corporation.
G. Corporation shall mean SanDisk Corporation, a Delaware corporation.
A-1
<PAGE>
H. Effective Date shall mean November 7, 1995, the date on which the
Underwriting Agreement was executed and the initial public offering price of the
Common Stock was established.
I. Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
J. Exercise Date shall mean the date on which the Corporation shall
have received written notice of the option exercise.
K. Fair Market Value per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the
closing selling price per share of Common Stock on the date in
question, as such price is reported by the National
Association of Securities Dealers on the Nasdaq National
Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in
question on the Stock Exchange determined by the Plan
Administrator to be the primary market for the Common Stock,
as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling
price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.
L. Hostile Take-Over shall mean a change in ownership of the
Corporation effected through the acquisition, directly or indirectly, by any
person or related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common control
with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3
of the 1934 Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Corporation's outstanding securities pursuant
to a tender or exchange offer made directly to the Corporation's stockholders
which the Board does not recommend such stockholders to accept.
M. Incentive Option shall mean an option which satisfies the
requirements of Code Section 422.
A-2
<PAGE>
N. Involuntary Termination shall mean the termination of the Service of
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a change
in his or her position with the Corporation which materially
reduces his or her level of responsibility, (B) a reduction in
his or her level of compensation (including base salary,
fringe benefits and participation in corporate-performance
based bonus or incentive programs) by more than fifteen
percent (15%) or (C) a relocation of such individual's place
of employment by more than fifty (50) miles, provided and only
if such change, reduction or relocation is effected by the
Corporation without the individual's consent.
O. Misconduct shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or discharge
of any Optionee or other person in the Service of the Corporation (or any Parent
or Subsidiary).
P. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
Q. Non-Statutory Option shall mean an option not intended to satisfy
the requirements of Code Section 422.
R. Option Grant Program shall mean the option grant program in effect
under the Plan.
S. Optionee shall mean any person to whom an option is granted under
the Plan.
T. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
U. Permanent Disability or Permanently Disabled shall mean the
inability of the Optionee to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment expected to
result in death or to be of continuous duration of twelve (12) months or more.
A-3
<PAGE>
V. Plan shall mean the Corporation's 1995 Stock Option Plan, as set
forth in this document.
W. Plan Administrator shall mean the particular entity, whether the
Committee or the Board, which is authorized to administer the Option Grant
Program with respect to one or more classes of eligible persons, to the extent
such entity is carrying out its administrative functions under those programs
with respect to the persons under its jurisdiction.
X. Predecessor Plan shall mean the Corporation's existing 1989 Stock
Benefit Plan.
Y. Section 16 Insider shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
Z. Section 12(g) Registration Date shall mean the first date on which
the Common Stock is registered under Section 12(g) of the 1934 Act.
AA. Service shall mean the provision of services to the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant.
BB. Stock Exchange shall mean either the American Stock Exchange or the
New York Stock Exchange.
CC. Subsidiary shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
DD. Take-Over Price shall mean the greater of (i) the Fair Market Value
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
EE. 10% Stockholder shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
FF. Underwriting Agreement shall mean the agreement between the
Corporation and the underwriter or underwriters which managed the initial public
offering of the Common Stock.
A-4
<PAGE>
GG. Withholding Taxes shall mean the Federal, state and local income
and employment withholding taxes to which the holder of Non-Statutory Options or
unvested shares of Common Stock may become subject in connection with the
exercise of such holder's options or the vesting of his or her shares.
A-5
SANDISK CORPORATION
1995 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
AMENDED AND RESTATED AS OF DECEMBER 17, 1998
ARTICLE One
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1995 Non-Employee Directors Stock Option Plan is intended to
promote the interests of SanDisk Corporation, a Delaware corporation, by
providing the non-employee members of the Board with the opportunity to acquire
a proprietary interest, or otherwise increase their proprietary interest, in the
Corporation as an incentive for them to remain in the service of the
Corporation.
Capitalized terms shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The terms of each option grant (including the timing and pricing of the
option grant) shall be determined by the express terms of the Plan, and neither
the Board nor any committee of the Board shall exercise any discretionary
functions with respect to option grants made pursuant to the Plan.
III. ELIGIBILITY
The individuals eligible to receive option grants under the Plan shall
be (i) those individuals who are serving as non-employee Board members on the
Effective Date or who are first elected or appointed as non-employee Board
members on or after such date, whether through appointment by the Board or
election by the Corporation's stockholders, and (ii) those individuals who
continue to serve as non-employee Board members after one or more Annual
Stockholders Meetings beginning with the 1996 Annual Meeting. A non-employee
Board member who has previously been in the employ of the Corporation (or any
Parent or Subsidiary) shall not be eligible to receive an option grant under the
Plan on the Effective Date or at the time he or she first becomes a non-employee
Board member, but shall be eligible to receive periodic option grants under the
Plan upon his or her continued service as a non-employee Board member following
one or more Annual Stockholders Meetings.
<PAGE>
IV. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed 400,000 shares.1
Such share reserve includes (i) the initial share reserve of 150,000 shares
approved by the stockholders in August 1995, (ii) an additional 50,000 share
increase authorized by the Board on February 10, 1997 and approved by
stockholders at the 1997 Annual Stockholders Meeting and (iii) an additional
200,000 share increase authorized by the Board on December 17, 1998, subject to
stockholder approval at the 1999 Annual Meeting. No shares of Common Stock shall
become exercisable under the Plan on the basis of the 200,000- share increase
unless that increase is approved by the stockholders at the 1999 Annual Meeting.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of January each
calendar year during the term of the Plan, beginning with calendar year 2002, by
an amount equal to two tenths of one percent (0.2%) of the shares of Common
Stock outstanding on the last trading day in December of the immediately
preceding calendar year, but in no event shall any such annual increase exceed
75,000 shares.
C. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent the options
expire or terminate for any reason prior to exercise in full. In addition,
unvested shares issued under the Plan and subsequently repurchased by the
Corporation, at the original exercise price paid per share, pursuant to the
Corporation's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants under the Plan. However, shares subject to any option or portion thereof
surrendered in accordance with Article Two shall reduce on a share-for-share
basis the number of shares of Common Stock available for subsequent issuance
under the Plan. Should the exercise price of an option under the Plan be paid
with shares of Common Stock, then the number of shares of Common Stock available
for issuance under the Plan shall be reduced by the gross number of shares for
which the option is exercised, and not by the net number of shares of Common
Stock issued to the holder of such option.
D. Should any change be made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the maximum number and/or class of securities by which the share
reserve is to increase each calendar year pursuant to the provisions of Section
IV.B of this Article One, (iii) the number and/or class of securities for which
option grants are to be
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1 This number reflects the 2:3 stock split adopted by the Board on
July 25, 1995.
2
<PAGE>
subsequently made per Eligible Director and (iv) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option in order to prevent the dilution or enlargement of benefits thereunder.
The adjustments to the outstanding options shall be made by the Board and shall
be final, binding and conclusive.
3
<PAGE>
ARTICLE Two
OPTION GRANT PROGRAM
I. OPTION TERMS
The provisions of this Article Two reflect the changes to the number of
shares of Common Stock subject to the initial and annual option grants to be
made to the non-employee Board members pursuant to the amendment authorized by
the Board on December 17, 1998, subject to stockholder approval at the 1999
Annual Meeting. Stockholder approval of such amendment shall constitute
pre-approval of each option grant made on or after the date of the 1999 Annual
Meeting to the non-employee Board members pursuant to the amended provisions of
this Article Two and the subsequent exercise of that option in accordance with
such provisions.
A. Grant Dates. Option grants shall be made on the dates specified below:
1. Each Eligible Director who is first elected or appointed as a
non-employee Board member on or after the date of the 1999 Annual Stockholders
Meeting shall automatically be granted, on the date of such initial election or
appointment (as the case may be), a Non-Statutory Option to purchase 32,000
shares of Common Stock.
2. On the date of each Annual Stockholders Meeting, beginning with the
1999 Annual Meeting, each individual who is to continue to serve as an Eligible
Director shall automatically be granted, whether or not such individual is
standing for re-election as a Board member at that Annual Meeting, a
Non-Statutory Option to purchase an additional 8,000 shares of Common Stock,
provided such individual has served as a non-employee Board member for at least
six (6) months prior to the date of such Annual Meeting. There shall be no limit
on the number of such 8,000-share option grants any one Eligible Director may
receive over his or her period of Board service.
B. Exercise Price.
1. The exercise price per share shall be equal to one hundred percent
(100%) of the Fair Market Value per share of Common Stock on the option grant
date.
2. The exercise price shall become immediately due upon exercise of the
option and shall be payable in one or more of the forms specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite period necessary
to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the
Exercise Date, or
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<PAGE>
(iii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to
which the Optionee shall concurrently provide irrevocable
written instructions to (A) a Corporation-designated brokerage
firm to effect the immediate sale of the purchased shares and
remit to the Corporation, out of the sale proceeds available
on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the purchased shares plus
all applicable Federal, state and local income and employment
taxes required to be withheld by the Corporation by reason of
such exercise and (B) the Corporation to deliver the
certificates for the purchased shares directly to such
brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. Option Term. Each option shall have a term of ten (10) years
measured from the option grant date.
D. Exercise and Vesting of Options. Each option shall be immediately
exercisable for any or all of the option shares. However, any shares purchased
under the option shall be subject to repurchase by the Corporation, at the
exercise price paid per share, upon the Optionee's cessation of Board service
prior to vesting in those shares. Each initial grant shall vest, and the
Corporation's repurchase right shall lapse, in a series of four (4) equal and
successive annual installments over the Optionee's period of continued service
as a Board member, with the first such installment to vest upon the Optionee's
completion of one (1) year of Board service measured from the option grant date.
Each annual grant shall vest, and the Corporation's repurchase right shall
lapse, upon the Optionee's completion of one (1) year of Board service measured
from the option grant date.
E. Effect of Termination of Board Service. The following provisions
shall govern the exercise of any options held by the Optionee at the time the
Optionee ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death, the
personal representative of the Optionee's estate or the person
or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and
distribution) shall have a twelve (12)-month period following
the date of such cessation of Board service in which to
exercise each such option.
(ii) During the twelve (12)-month exercise period, the option may
not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable at the time
of the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board member by reason
of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such
option may, during the twelve (12)-month exercise period
following such cessation of Board service, be exercised for
all or any portion of such shares as fully-vested shares.
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(iv) In no event shall the option remain exercisable after the
expiration of the option term. Upon the expiration of the
twelve (12)-month exercise period or (if earlier) upon the
expiration of the option term, the option shall terminate and
cease to be outstanding for any vested shares for which the
option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Board service,
terminate and cease to be outstanding to the extent it is not
exercisable for vested shares on the date of such cessation of
Board service.
F. Stockholder Rights. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
G. Limited Transferability of Options. An automatic option granted
under the Plan may, in connection with the Optionee's estate plan, be assigned
in whole or in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established exclusively for one or
more such family members. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the specified effective date of the Corporate Transaction, become fully
exercisable for all of the shares of Common Stock at the time subject to such
option and may be exercised for all or any portion of such shares as
fully-vested shares of Common Stock. Immediately following the consummation of
the Corporate Transaction, each option grant shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
B. In connection with any Change in Control, the shares of Common Stock
at the time subject to each outstanding option but not otherwise vested shall
automatically vest in full so that each such option shall, immediately prior to
the effective date of the Change in Control, become fully exercisable for all of
the shares of Common Stock at the time subject to such option and may be
exercised for all or any portion of such shares as fully-vested shares of Common
Stock. Each such option shall remain exercisable for such fully-vested option
shares until the expiration of the option term or the surrender of the option in
connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have
a thirty (30)-day period in which to surrender to the Corporation each option
held by him or her. The Optionee shall in return be entitled to a cash
distribution from the Corporation in an amount equal to the excess of (i) the
Take-Over Price of the shares of Common Stock at the time subject
<PAGE>
to the surrendered option (whether or not the Optionee is otherwise at the time
vested in those shares) over (ii) the aggregate exercise price payable for such
shares. Such cash distribution shall be paid within five (5) days following the
surrender of the option to the Corporation. Stockholder approval of the December
17, 1998 amendment and restatement of the Plan shall constitute pre-approval of
each option surrender right subsequently granted under the Plan and the
subsequent exercise of that right in accordance with the terms and provisions of
this Section II.C. No additional approval of the Board or any committee of the
Board shall be required at the time of the actual option surrender and cash
distribution.
D. The grant of options under the Plan shall in no way affect the right
of the Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
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ARTICLE Three
MISCELLANEOUS
I. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan became effective on the November 7, 1995 Effective Date
after adoption by the Board on July 25, 1995 and approval by the Corporation's
stockholders in August 1995.
B. The Plan was amended on February 10, 1997 (the "February 1997
Amendment") to effect the following changes: (i) increase the number of shares
of Common Stock authorized for issuance over the term of the Plan by an
additional 50,000 shares, (ii) allow unvested shares issued under the Plan and
subsequently repurchased by the Corporation at the option exercise price paid
per share to be reissued under the Plan and (iii) effect a series of technical
changes to the provisions of the Plan (including stockholder approval
requirements) in order to take advantage of the recent amendments to Rule 16b-3
of the Securities Exchange Act of 1934 which exempts certain officer and
director transactions under the Plan from the short-swing liability provisions
of the Federal securities laws. The February 1997 Amendment was approved by the
stockholders at the 1997 Annual Meeting. The Plan was amended on December 17,
1998 (the "December 1998 Amendment") to effect the following changes: (i)
increase the number of shares of Common Stock authorized for issuance over the
term of the Plan by an additional 200,000 shares, (ii) implement the automatic
share increase provisions of Section IV.B of Article One, (iii) increase the
size of the initial grants to non-employee Board members from 16,000 to 32,000
shares of Common Stock and (iv) increase the size of the annual grants to
non-employee Board members from 4,000 to 8,000 shares of Common Stock. No option
grants made on the basis of the 200,000-share increase authorized by the
December 1998 Amendment shall become exercisable in whole or in part unless and
until that amendment is approved by the stockholders. Should such stockholder
approval not be obtained at the 1999 Annual Meeting, then each option grant made
pursuant to the 200,000-share increase authorized by the December 1998 Amendment
shall terminate and cease to remain outstanding, no further option grants shall
be made on the basis of that share increase, and the automatic share increase
provisions of Section IV.B of Article One shall not be implemented. However, the
provisions of the Plan as in effect immediately prior to the December 1998
Amendment shall automatically be reinstated, and option grants may thereafter
continue to be made pursuant to the reinstated provisions of the Plan. All
option grants made prior to the December 1998 Amendment shall remain outstanding
in accordance with the terms and conditions of the respective instruments
evidencing those options or issuances, and nothing in the December 1998
Amendment shall be deemed to modify or in any way affect those outstanding
options or issuances. Subject to the foregoing limitations, options may be
granted under the Plan at any time before the date fixed herein for the
termination of the Plan.
C. The Plan shall terminate upon the earliest of (i) July 24, 2005,
(ii) the date on which all shares available for issuance under the Plan shall
have been issued or cancelled pursuant to the exercise or cash-out of the
options under the Plan or (iii) the termination of all outstanding options in
connection with a Corporate Transaction. Upon such Plan termination, all
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option grants and unvested stock issuances outstanding on such date shall
thereafter continue to have force and effect in accordance with the provisions
of the documents evidencing such grants or issuances.
II. AMENDMENT OF THE PLAN
The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee consents to such amendment or modification. In addition,
certain amendments may require stockholder approval pursuant to applicable laws
or regulations.
III. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
IV. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any option under the
Plan and the issuance of any shares of Common Stock upon the exercise of any
option shall be subject to the Corporation's procurement of all approvals and
permits required by regulatory authorities having jurisdiction over the Plan,
the options granted under it and the shares of Common Stock issued pursuant to
it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
V. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining such person) and the Corporation's
stockholders or of the Optionee, which rights are hereby expressly reserved by
each, to terminate such person's Service at any time for any reason, with or
without cause.
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APPENDIX
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
B. Change in Control shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders; or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have
been Board members continuously since the beginning of such period or
(B) have been elected or nominated for election as Board members during
such period by at least a majority of the Board members described in
clause (A) who were still in office at the time such election or
nomination was approved by the Board.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
D. Common Stock shall mean the Corporation's common stock.
E. Corporate Transaction shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those immediately prior to
such transaction; or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.
F. Corporation shall mean SanDisk Corporation, a Delaware corporation.
G. Effective Date shall mean November 7, 1995, the date on which the
Underwriting Agreement was executed and the initial public offering price of the
Common Stock was established.
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H. Eligible Director shall mean a non-employee Board member eligible to
participate in the Plan.
I. Exercise Date shall mean the date on which the Corporation shall
have received written notice of the option exercise.
J. Fair Market Value per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as
such price is reported by the National Association of Securities
Dealers on the Nasdaq National Market or any successor system. If there
is no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling price
on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on the Stock Exchange
which serves as the primary market for the Common Stock, as such price
is officially quoted in the composite tape of transactions on such
exchange. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.
K. Hostile Take-Over shall mean a change in ownership of the
Corporation through the direct or indirect acquisition by any person or related
group of persons (other than the Corporation or a person that directly or
indirectly controls, is controlled by, or is under common control with, the
Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the
1934 Act) of securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities pursuant to a
tender or exchange offer made directly to the Corporation's stockholders which
the Board does not recommend such stockholders to accept.
L. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
M. Non-Statutory Option shall mean an option not intended to satisfy
the requirements of Code Section 422.
N. Optionee shall mean any person to whom an option is granted under
the Plan.
O. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
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<PAGE>
P. Permanent Disability shall mean the inability of the Optionee to
perform his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.
Q. Plan shall mean the Corporation's 1995 Non-Employee Directors Stock
Option Plan, as set forth in this document.
R. Section 16 Insiders shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
S. Stock Exchange shall mean either the American Stock Exchange or the
New York Stock Exchange.
T. Subsidiary shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
U. Take-Over Price shall mean the greater of (i) the Fair Market Value
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over.
V. Underwriting Agreement shall mean the agreement between the
Corporation and the underwriter or underwriters which managed the initial public
offering of the Common Stock.
A-3
SANDISK CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
AMENDED AND RESTATED AS OF DECEMBER 17, 1998
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the interests
of SanDisk Corporation by providing eligible employees with the opportunity to
acquire a proprietary interest in the Corporation through participation in a
payroll-deduction based employee stock purchase plan designed to qualify under
Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such terms
in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares of Common Stock
purchased on the open market. The maximum number of shares of Common Stock which
may be issued in the aggregate over the term of this Plan and the Corporation's
International Employee Stock Purchase Plan shall not exceed One Million One
Hundred Eighty-Three Thousand Three Hundred Thirty-Three (1,183,333) shares.
Such share reserve includes (i) the initial share reserve of 433,333 shares (as
adjusted to reflect the 2:3 split of the Common Stock authorized by the Board on
July 25, 1995) approved by the stockholders in August 1996, (ii) an additional
450,000 share increase authorized by the Board on February 10, 1997 and approved
by the stockholders at the 1997 Annual Meeting and (iii) an additional 300,000
share increase authorized by the Board on December 17, 1998, subject to
stockholder approval at the 1999 Annual Meeting. No shares of Common Stock shall
be issued under the Plan on the basis of such 300,000-share increase unless that
increase is approved by the stockholders at the 1999 Annual Meeting. In no event
shall more than 741,455 shares of Common Stock be issued in the aggregate under
this Plan and the International Employee Stock Purchase Plan after March 15,
1999.
B. The number of shares of Common Stock available for issuance under
the combined reserve of this Plan and the International Plan shall automatically
increase on the first trading day of January each calendar year during the term
of the Plan, beginning with calendar year 2002, by an amount equal to
forty-three one hundredths of one percent (0.43%) of the shares of Common Stock
outstanding on the last trading day in December of the immediately preceding
calendar year, but in no event shall any such annual increase exceed 150,000
shares.
<PAGE>
C. Should any change be made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and class of securities issuable in the aggregate
under this Plan and the International Plan, (ii) the maximum number and/or class
of securities by which the combined share reserve under this Plan and the
International Plan is to increase each calendar year pursuant to the provisions
of Section III.B, (iii) the maximum number and class of securities purchasable
per Participant on any one Purchase Date and (iv) the number and class of
securities and the price per share in effect under each outstanding purchase
right in order to prevent the dilution or enlargement of benefits thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under the Plan
through a series of successive Offering Periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.
B. Each Offering Period (other than the Initial Offering Period) shall
have a duration of six (6) months. Offering Periods shall run from the first
business day in February to the last business day in July each year and from the
first business day of August each year to the last business day in January in
the following year. However, the Initial Offering Period shall commence at the
Effective Time and terminate on the last business day in January, 1997. During
the Initial Offering Period, there shall be three (3) successive Purchase
Intervals: the first shall run from the Effective Time to the last business day
in January 1996; the second shall run from the first business day in February
1996 to the last business day in July 1996; and the last shall run from the
first business day in August to the last business day in January 1997. A
Purchase Date shall occur at the end of each Purchase Interval within the
Initial Offering Period. However, for each subsequent Offering Period, there
shall only be a single Purchase Date coincident with the last day of that
Offering Period.
V. ELIGIBILITY
A. Only individuals who are Eligible Employees on the start date of an
Offering Period shall be eligible to participate in the Plan for that Offering
Period. For the Initial Offering Period, the following special eligibility
provisions shall be in effect:
- - Each individual who is an Eligible Employee at the Effective Time may
enter the Initial Offering Period at that time or on the start date of
any subsequent Purchase Interval within that Offering Period, provided
he or she remains an Eligible Employee on that date.
- - Each individual who first becomes an Eligible Employee after the
Effective Time may enter the Initial Offering Period on the start date
of any subsequent Purchase Interval within that Offering Period,
provided he or she is an Eligible Employee on that date.
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B. The date an Eligible Employee enters the Offering Period shall be
designated his or her Entry Date.
C. To participate in the Plan for a particular Offering Period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization form) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes of
acquiring shares of Common Stock under the Plan may be any multiple of one
percent (1%) of the Cash Compensation paid to the Participant during each
Offering Period, up to a maximum of ten percent (10%). The deduction rate so
authorized shall continue in effect from Offering Period to Offering Period,
except to the extent such rate is changed in accordance with the following
guidelines:
(i) The Participant may, at any time during an Offering Period, reduce
his or her rate of payroll deduction to become effective as soon as
possible after filing the appropriate form with the Plan Administrator.
The Participant may not, however, effect more than one (1) such
reduction per Offering Period or Purchase Interval.
(ii) The Participant may, prior to the start of any new Offering Period
or the start of any new Purchase Interval within the Initial Offering
Period, increase the rate of his or her payroll deduction by filing the
appropriate form with the Plan Administrator. The new rate (which may
not exceed the ten percent (10%) maximum) shall become effective as of
the start date of the first Offering Period or Purchase Interval
following the filing of such form.
B. Payroll deductions shall begin on the first pay day following the
Participant's Entry Date into the Offering Period and shall (unless sooner
terminated by the Participant) continue through the pay day ending with or
immediately prior to the last day of that Offering Period. The amounts so
collected shall be credited to the Participant's book account under the Plan,
but no interest shall be paid on the balance from time to time outstanding in
such account. The amounts collected from the Participant shall not be held in
any segregated account or trust fund and may be commingled with the general
assets of the Corporation and used for general corporate purposes.
C. Payroll deductions shall automatically cease upon the termination of
the Participant's purchase right in accordance with the provisions of the Plan.
D. The Participant's acquisition of Common Stock under the Plan on any
Purchase Date shall neither limit nor require the Participant's acquisition of
Common Stock on any subsequent Purchase Date.
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VII. PURCHASE RIGHTS
A. Grant of Purchase Right. A Participant shall be granted a separate
purchase right for each Offering Period in which he or she participates. The
purchase right shall be granted on the Participant's Entry Date into the
Offering Period and shall provide the Participant with the right to purchase
shares of Common Stock upon the terms set forth below. The Participant shall
execute a stock purchase agreement embodying such terms and such other
provisions (not inconsistent with the Plan) as the Plan Administrator may deem
advisable.
Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Employee if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)) or hold outstanding options or
other rights to purchase, stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Corporation
or any Corporate Affiliate.
B. Exercise of the Purchase Right. The purchase right shall be
automatically exercised on each Purchase Date within the Offering Period, and
shares of Common Stock shall accordingly be purchased on behalf of the
Participant (other than any Participant whose payroll deductions have previously
been refunded in accordance with the Termination of Purchase Right provisions
below) on such Purchase Date. The purchase shall be effected by applying the
Participant's payroll deductions for the Offering Period or the Purchase
Interval to the purchase of whole shares of Common Stock at the purchase price
in effect for the Participant for the Purchase Date coincident with the last day
of that Offering Period or Purchase Interval. All shares purchased on
Participant's behalf shall be directly deposited into an account maintained for
such Participant at a Corporation-designated brokerage firm.
C. Purchase Price. The purchase price per share at which Common Stock
shall be purchased on the Participant's behalf on each Purchase Date within the
Offering Period shall be equal to eighty-five percent (85%) of the lower of (i)
the Fair Market Value per share of Common Stock on the Participant's Entry Date
into that Offering Period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date. However, for each Participant who joins the Initial
Offering Period after the start date, the clause (i) amount shall in no event be
less than the Fair Market Value per share of Common Stock on the start date of
the Initial Offering Period.
D. Number of Purchasable Shares. The number of shares of Common Stock
purchasable by a Participant on each Purchase Date shall be the number of whole
shares obtained by dividing the Participant's payroll deductions for the
Offering Period or Purchase Interval ending on such date by the purchase price
in effect for the Participant for that Purchase Date. However, the maximum
number of shares of Common Stock purchasable per Participant on any one Purchase
Date shall not exceed Seven Hundred Fifty (750) shares, subject to periodic
adjustments in the event of certain changes in the Corporation's capitalization.
However, the Plan Administrator shall have the discretionary authority,
exercisable prior to the start of any Offering Period, to increase or decrease
the limitation to be in effect for the number of shares purchasable per
Participant on the Purchase Date for that Offering Period.
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E. Excess Payroll Deductions. Any payroll deductions not applied to the
purchase of shares of Common Stock on any Purchase Date because they are not
sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable by the Participant on the
Purchase Date shall be promptly refunded.
F. Termination of Purchase Right. The following provisions shall govern
the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next scheduled
Purchase Date, terminate his or her outstanding purchase right
by filing the appropriate form with the Plan Administrator (or
its designate), and no further payroll deductions shall be
collected from the Participant with respect to the terminated
purchase right. Any payroll deductions collected during the
Offering Period or Purchase Interval in which such termination
occurs shall, at the Participant's election, be immediately
refunded or held for the purchase of shares on the next
scheduled Purchase Date. If no such election is made at the
time such purchase right is terminated, then the payroll
deductions collected with respect to the terminated right
shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be irrevocable,
and the Participant may not subsequently rejoin the Offering
Period for which the terminated purchase right was granted. In
order to resume participation in any subsequent Offering
Period, such individual must re-enroll in the Plan (by making
a timely filing of the prescribed enrollment forms) on or
before the start date of that Offering Period.
(iii) Should the Participant cease to remain an Eligible Employee
for any reason (including death, disability or change in
status) while his or her purchase right remains outstanding,
then that purchase right shall immediately terminate, and all
of the Participant's payroll deductions for the Offering
Period or Purchase Interval in which the purchase right so
terminates shall be immediately refunded. However, should the
Participant cease to remain in active service by reason of an
approved unpaid leave of absence, then the Participant shall
have the election, exercisable up until the last day of the
Offering Period or Purchase Interval in which such leave
commences, to (a) withdraw all the payroll deductions
collected to date on his or her behalf for such Offering
Period or Purchase Interval or (b) have such funds held for
the purchase of shares on the next scheduled Purchase Date. In
no event, however, shall any further payroll deductions be
collected on the Participant's behalf during such leave. Upon
the Participant's return to active service (x) within ninety
(90) days following the commencement of such leave or (y)
prior to the expiration of any longer period for which such
Participant's right to reemployment with the Corporation is
guaranteed by either statute or contract, his or her payroll
deductions under the Plan shall automatically resume at the
rate in effect at the time the leave began, unless the
Participant withdraws from the Plan prior to his or her
return. An individual who returns to active employment
following a leave of absence which exceeds in duration the
applicable (x) or (y) time period will be treated as a new
5
<PAGE>
Employee for purposes of subsequent participation in the Plan
and must accordingly re-enroll in the Plan (by making a timely
filing of the prescribed enrollment forms) on or before the
start date of any new Offering Period or Purchase Interval.
G. Corporate Transaction. Each outstanding purchase right shall
automatically be exercised, immediately prior to the effective date of any
Corporate Transaction, by applying the payroll deductions of each Participant to
the purchase of whole shares of Common Stock at a purchase price per share equal
to eighty-five percent (85%) of the lower of (i) the Fair Market Value per share
of Common Stock on the Participant's Entry Date into the Offering Period in
which such Corporate Transaction occurs or (ii) the Fair Market Value per share
of Common Stock immediately prior to the effective date of such Corporate
Transaction. However, the applicable limitation on the number of shares of
Common Stock purchasable per Participant shall continue to apply to each
purchase.
The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Corporate Transaction,
and Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Corporate Transaction.
H. Proration of Purchase Rights. Should the total number of shares of
Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. Assignability. During the Participant's lifetime, the purchase right
shall be exercisable only by the Participant and shall not be assignable or
transferable.
J. Stockholder Rights. A Participant shall have no stockholder rights
with respect to the shares subject to his or her outstanding purchase right
until the shares are purchased on the Participant's behalf in accordance with
the provisions of the Plan and the Participant has become a holder of record of
the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire Common
Stock pursuant to any purchase right outstanding under this Plan if and to the
extent such accrual, when aggregated with (i) rights to purchase Common Stock
accrued under any other purchase right granted under this Plan and (ii) similar
rights accrued under other employee stock purchase plans (within the meaning of
Code Section 423) of the Corporation or any Corporate Affiliate, would otherwise
permit such Participant to purchase more than Twenty-Five Thousand Dollars
($25,000) worth of stock of the Corporation or any Corporate Affiliate
(determined on the basis of the Fair Market Value of such stock on the date or
dates such rights are granted) for each calendar year such rights are at any
time outstanding.
6
<PAGE>
B. For purposes of applying such accrual limitations to the purchase
rights granted under this Plan, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each outstanding
purchase right shall accrue in one or more installments on
each Purchase Date within the Offering Period for which such
right is granted.
(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has
already accrued in the same calendar year the right to acquire
Common Stock under one (1) or more other purchase rights at a
rate equal to Twenty-Five Thousand Dollars ($25,000) worth of
Common Stock (determined on the basis of the Fair Market Value
of such stock on the date or dates of grant) for each calendar
year such rights were at any time outstanding.
C. If by reason of such accrual limitations, the purchase right of a
Participant does not accrue for a particular Offering Period (or a particular
Purchase Interval within the Initial Offering Period), then the payroll
deductions which the Participant made during that Offering Period (or Purchase
Interval) with respect to such unaccrued purchase right shall be promptly
refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on July 25, 1995 and shall become
effective at the Effective Time, provided no purchase rights granted under the
Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect and all sums collected from Participants during
the Initial Offering Period shall be refunded.
B. Unless sooner terminated by the Board, the Plan shall terminate upon
the earliest of (i) the last business day in July 2005, (ii) the date on which
all shares available for issuance under the Plan shall have been sold pursuant
to purchase rights exercised under the Plan or (iii) the date on which all
purchase rights are exercised in connection with a Corporate Transaction. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
7
<PAGE>
X. AMENDMENT OF THE PLAN
A. The Board may alter, amend, suspend or discontinue the Plan at any
time to become effective immediately following the close of any Offering Period
or Purchase Interval. However, the Board may not, without the approval of the
Corporation's stockholders, (i) materially increase the number of shares of
Common Stock issuable under the Plan, except for permissible adjustments in the
event of certain changes in the Corporation's capitalization, (ii) alter the
purchase price formula so as to reduce the purchase price payable for the shares
of Common Stock purchasable under the Plan or (iii) modify the requirements for
eligibility to participate in the Plan.
B. On February 10, 1997, the Board adopted an amendment to the Plan to
increase the number of shares of Common Stock authorized for issuance under this
Plan and the International Employee Stock Purchase Plan by an additional 450,000
shares in the aggregate. This amendment was approved by the stockholders at the
1997 Annual Meeting. On December 17, 1998, the Board adopted amendments to the
plan to (i) increase the number of shares of Common Stock authorized for
issuance in the aggregate under this Plan and the International Employee Stock
Purchase Plan by an additional 300,000 shares and (ii) to implement the
automatic share increase provisions of Section III.B. These amendments are
subject to stockholder approval at the 1999 Annual Meeting, and no shares may be
issued on the basis of the 300,000 share increase unless and until the share
increase is approved by the stockholders. Should such stockholder approval not
be obtained at the 1999 Annual Meeting, then the maximum number of shares
available for subsequent issuance in the aggregate under this Plan and the
International Employee Stock Purchase Plan shall not exceed the number of shares
which remained available for issuance immediately prior to the 300,000-share
increase authorized by the Board on December 17, 1998, and the automatic share
increase provisions of Section III.B shall not be implemented.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation.
B. Nothing in the Plan shall confer upon the Participant any right to
continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
C. The provisions of the Plan shall be governed by the laws of the
State of California without resort to that State's conflict-of-laws rules.
8
<PAGE>
Schedule A
Corporations Participating in
Employee Stock Purchase Plan
As of the Effective Time
SanDisk Corporation
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
B. Cash Compensation shall mean the (i) regular base salary paid to a
Participant by one or more Participating Companies during such individual's
period of participation in one or more Offering Periods under the Plan, plus
(ii) any pre-tax contributions made by the Participant to any Code Section
401(k) salary deferral plan or any Code Section 125 cafeteria benefit program
now or hereafter established by the Corporation or any Corporate Affiliate, plus
(iii) all of the following amounts to the extent paid in cash: overtime
payments, bonuses, commissions, profit-sharing distributions and other
incentive-type payments. However, Eligible Earnings shall not include any
contributions (other than Code Section 401(k) or Code Section 125 contributions)
made on the Participant's behalf by the Corporation or any Corporate Affiliate
to any deferred compensation plan or welfare benefit program now or hereafter
established.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
D. Common Stock shall mean the Corporation's common stock.
E. Corporate Affiliate shall mean any parent or subsidiary corporation
of the Corporation (as determined in accordance with Code Section 424), whether
now existing or subsequently established.
F. Corporate Transaction shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of
the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those
securities immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete
liquidation or dissolution of the Corporation.
G. Corporation shall mean SanDisk Corporation, a Delaware corporation,
and any corporate successor to all or substantially all of the assets or voting
stock of SanDisk Corporation which shall by appropriate action adopt the Plan.
H. Effective Time shall mean November 7, 1995, the time at which the
Underwriting Agreement was executed and finally priced. Any Corporate Affiliate
which becomes a Participating Corporation after such Effective Time shall
designate a subsequent Effective Time with respect to its employee-Participants.
A-1
<PAGE>
I. Eligible Employee shall mean any person who is employed by a
Participating Company on a basis under which he or she is regularly expected to
render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section
3401(a).
J. Entry Date shall mean the date an Eligible Employee first commences
participation in the Offering Period in effect under the Plan. The earliest
Entry Date under the Plan shall be the Effective Time.
K. Fair Market Value per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the
closing selling price per share of Common Stock on the date in
question, as such price is reported by the National
Association of Securities Dealers on the Nasdaq National
Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in
question on the Stock Exchange determined by the Plan
Administrator to be the primary market for the Common Stock,
as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling
price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.
L. Initial Offering Period shall mean the first Offering Period in
effect under the Plan which began at the Effective Time and ended on the last
business day in January 1997.
M. 1933 Act shall mean the Securities Act of 1933, as amended.
N. Offering Period shall mean each successive period during which
payroll deductions are to be collected on the behalf of Participants and applied
to the purchase of Common Stock on one or more Purchase Dates within that
period.
O. Participant shall mean any Eligible Employee of a Participating
Corporation who is actively participating in the Plan.
P. Participating Corporation shall mean the Corporation and such
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan as of the Effective Time are listed in
attached Schedule A.
A-2
<PAGE>
Q. Plan shall mean the Corporation's Employee Stock Purchase Plan, as
set forth in this document.
R. Plan Administrator shall mean the committee of two (2) or more Board
members appointed by the Board to administer the Plan.
S. Purchase Date shall mean the last business day of January and July
each year on which shares of Common Stock shall be purchased on behalf of each
Participant.
T. Purchase Interval shall mean each of three (3) successive periods
within the Initial Offering Period at the end of which there shall be purchased
shares of Common Stock on behalf of each Participant. The first Purchase
Interval shall begin at the Effective Time and end on the last business day in
January 1996; the second Purchase Interval shall begin on the first business day
in February 1996 and end on the last business day in July 1996; and the final
Purchase Interval shall begin on the first business day in August 1996 and end
on the last business day in January 1997.
U. Stock Exchange shall mean either the American Stock Exchange or the
New York Stock Exchange.
V. Underwriting Agreement shall mean the agreement between the
Corporation and the underwriter or underwriters which managed the initial public
offering of the Common Stock.
A-3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SanDisk Financial Data Schedule, March 31, 1999
</LEGEND>
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<NAME> SanDisk Corporation
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<PERIOD-END> Mar-31-1999
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