Form 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --------- Exchange Act of 1934 For the quarterly period ended June 30, 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 27,156,980
------------------------------ ----------
Class Number of shares
<PAGE>
SanDisk Corporation
Index
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998........................... 3
Condensed Consolidated Statements of Income
Three and six months ended June 30, 1999 and 1998............. 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 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.................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 29
Item 2. Changes in Securities............................................ 29
Item 3. Defaults upon Senior Securities.................................. 29
Item 4. Submission of Matters to a Vote of Security Holders.............. 29
Item 5. Other Information................................................ 29
Item 6. Exhibits and Reports on Form 8-K................................. 30
Signatures....................................................... 32
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PART I. FINANCIAL INFORMATION
SanDisk Corporation
Condensed Consolidated Balance Sheets
(In thousands)
ASSETS June 30, December 31,
1999 1998*
---------- ----------
(unaudited)
Current Assets:
Cash and cash equivalents $ 12,766 $ 15,384
Short-term investments 132,182 119,074
Accounts receivable, net 29,213 20,400
Inventories 17,332 8,922
Deferred tax assets 15,900 15,900
Prepaid expenses and other current assets 3,700 6,694
----------- -----------
Total current assets 211,093 186,374
Property and equipment, net 22,410 17,542
Investment in foundry 51,208
51,208
Deposits and other assets 794 617
----------- -----------
Total Assets $ 285,505 $ 255,741
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 18,563 $ 6,938
Accrued payroll and related expenses 5,523 3,768
Other accrued liabilities 14,316 9,745
Deferred revenue 27,232 27,452
----------- -----------
Total current liabilities 65,634 47,903
Stockholders' Equity:
Common stock 188,938 186,120
Retained earnings 30,933 21,718
----------- -----------
Total stockholders' equity 219,871 207,838
Total Liabilities and
----------- -----------
Stockholders' Equity $ 285,505 $ 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 Six months ended
June 30, June 30,
1999 1998 1999 1998
------- ------- ------- -------
Revenues:
Product $42,300 $23,480 $78,226 $48,906
License and royalty 10,249 7,881 18,459 16,557
------- ------- ------- -------
Total revenues 52,549 31,361 96,685 65,463
Cost of sales 30,858 20,560 57,367 38,332
------- ------- ------- -------
Gross profits 21,691 10,801 39,318 27,131
Operating expenses:
Research and development 6,007 4,474 11,219 8,805
Sales and marketing 5,755 4,248 10,928 8,199
General and administrative 2,896 1,709 5,290 3,753
------- ------- ------- -------
Total operating expenses 14,658 10,431 27,437 20,757
Operating income 7,033 370 11,881 6,374
Interest and other income, net 1,465 1,278 3,069 2,617
------- ------- ------- -------
Income before taxes 8,498 1,648 14,950 8,991
Provision for income taxes 2,804 595 4,933 3,235
------- ------- ------- -------
Net income $ 5,694 $ 1,053 $10,017 $ 5,756
======= ======= ======= =======
Net income per share
Basic $ 0.21 $ 0.04 $ 0.37 $ 0.22
Diluted $ 0.19 $ 0.04 $ 0.34 $ 0.21
Shares used in computing
net income per share
Basic 26,943 26,168 26,855 26,094
Diluted 29,514 27,834 29,414 27,928
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
Six months ended
June 30,
1999 1998
-------- --------
Cash flows from operating activities:
Net income $ 10,017 $ 5,756
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,750 3,166
Accounts receivable, net (8,813) 3,235
Inventory (8,410) (5,920)
Prepaid expenses and other assets 2,817 (90)
Accounts payable 11,626 (3,197)
Accrued payroll and related expenses 1,755 (938)
Other accrued liabilities 4,571 (1,993)
Deferred revenue (220) (1,746)
-------- --------
Total adjustments 7,076 (7,483)
-------- --------
Net cash provided by (used in) operating activities 17,093 (1,727)
Cash flows from investing activities:
Purchases of short term investments (73,456) (85,654)
Proceeds from sale of short term investments 59,546 81,632
Acquisition of capital equipment (8,619) (2,865)
-------- --------
Net cash used in investing activities (22,529) (6,887)
Cash flows from financing activities:
Sale of common stock 2,818 1,193
-------- --------
Net cash provided by financing activities 2,818 1,193
-------- --------
Net decrease in cash and cash equivalents (2,618) (7,421)
Cash and cash equivalents at beginning of period 15,384 20,888
-------- --------
Cash and cash equivalents at end of period $ 12,766 $ 13,467
======== ========
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 June 30, 1999, the
results of operations for the three and six month periods ended June 30,
1999 and 1998 and cash flows for the six month periods ended June 30,
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 for the three and six month periods ended June
30, 1999 and cash flows for the six month periods ended June 30, 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 second fiscal quarter of 1999 and 1998 ended on June
27, 1999 and June 28, 1998, respectively. Fiscal year 1998 was 52 weeks
long and ended on December 27, 1998. Fiscal year 1999 is 53 weeks long
and ends on January 2, 2000. For ease of presentation, the accompanying
financial statements have been shown as ending on the last day of the
calendar month.
3. The preparation of financial statements in conformity with 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:
June 30, December 31,
1999 1998
-------- -----------
(In thousands)
Raw materials $ 2,646 $ 2,710
Work-in-process 9,866 3,818
Finished goods 4,820 2,394
-------- -------
$ 17,332 $ 8,922
======== =======
5. The following table sets forth the computation of basic and diluted earnings
per share:
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<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
------- ------- ------- ------
(In thousands, except
per share amounts)
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted
net income per share - net income $ 5,694 $ 1,053 $10,017 $ 5,756
======= ======= ======= =======
Denominator for basic net income per share:
Weighted average common shares 26,943 26,168 26,855 26,094
------- ------- ------- -------
Shares used in computing basic net income
per share 26,943 26,168 26,855 26,094
======= ======= ======= =======
Basic net income per share $ 0.21 $ 0.04 $ 0.37 $ 0.22
======= ======= ======= =======
Denominator for diluted net income per share:
Weighted average common shares 26,943 26,168 26,855 26,094
Employee stock options and warrants
to purchase common stock 2,571 1,666 2,559 1,834
------- ------- ------- -------
Shares used in computing diluted net income
per share 29,514 27,834 29,414 27,928
======= ======= ======= =======
Diluted net income per share $ 0.19 $ 0.04 $ 0.34 $ 0.21
======= ======= ======= =======
</TABLE>
For the three and six month periods ending June 30, 1999, options to
purchase 100,465 and 55,609 shares of common stock, respectively have
been excluded from the earnings per share calculation, as their effect is
antidilutive. For the three and six month period ended June 30, 1998,
options to purchase 885,839 and 254,634 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. On July 30, 1999, the Company filed a motion for
partial summary judgment that Lexar CompactFlash and PC Cards
contributorily infringe SanDisk's patent. This motion is scheduled to
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be heard in September 1999. In August 1999, we had a mandatory settlement
meeting with Lexar. No settlement was reached through this meeting. 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.
In May 1999, Lexar filed a complaint against the Company for claims of
unfair competition, false advertising, trade libel and intentional and
negligent interference with prospective business advantage. On July 1,
1999, the Company filed a motion to dismiss the Lexar complaint. Also, in
July 1999, Lexar filed a motion for preliminary injunction seeking to
stop certain advertising practices that Lexar alleges were misleading.
The Company intends to vigorously oppose this motion. Both motions are
scheduled to be heard in September 1999. There can be no assurances that
these motions will be decided in favor of the Company.
From time to time the Company agrees to indemnify certain of its
suppliers and customers for alleged patent infringement. The scope of
such indemnity varies but may in some instances include indemnification
for damages and expenses, including attorneys' fees. The Company may from
time to time be engaged in litigation as a result of such indemnification
obligations. Third party claims for patent infringement are excluded from
coverage under the Company's insurance policies. There can be no
assurance that any future obligation to indemnify the Company's customers
or suppliers, will not have a material adverse effect on the Company's
business, financial condition and results of operations.
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 had a credit agreement (the Agreement) with a bank, which
expired in July 1999. At June 30, 1999, there were no amounts outstanding
under the line of credit. The Agreement contained covenants that required
the Company to maintain certain financial ratios and levels of net worth
and prohibited the payment of cash dividends to stockholders. The Company
was in compliance with these covenants at June 30, 1999.
8. Certain of the Company's balance sheet accounts and purchase commitments
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. At June 30, 1999, forward contracts with a
notional amount of $11.9 million were outstanding.
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.
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Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands)
Net income $ 5,694 $ 1,053 $ 10,017 $ 5,756
Unrealized gain (loss) on
available-for-sale securities (550) 19 (802) 144
-------- -------- -------- --------
Comprehensive income $ 5,144 $ 1,072 $ 9,215 $ 5,900
======== ======== ======== ========
Accumulated other comprehensive income (loss) was ($331,000) and $471,000
at June 30, 1999 and December 31, 1998, respectively.
Page 9
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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. The
Company believes its CompactFlash 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 continues to be more than 50% of
quarterly product revenues, 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 a number of 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 through the retail
channel will continue to comprise an increasing share of total revenues in the
future, and
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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 continue 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.
In the second quarter of 1999, the Company completed all of the primary
elements of its Year 2000 assessment and remediation program for mission
critical hardware and software. Tests of software applications, which have been
identified by their vendors as Year 2000 Compliant, and several minor software
upgrades will be completed in the third quarter of 1999. 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 implemented 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 and remediation of Year 2000 problems in computer
systems used for facilities control, machine control and manufacturing testing
is complete. The most significant Year 2000 issue in this area has been found to
be related to older wafer test equipment. This equipment is not expected to be
in use in the year 2000. The Company is phasing in new Year 2000 compliant wafer
test equipment in conjunction with the introduction of new generations of flash
memory.
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The Company's assessment of Year 2000 risks related to material suppliers,
customers and other third parties is substantially complete. Inquiries were made
of all critical suppliers and an assessment of their Year 2000 readiness was the
basis for strategic decisions regarding alternate material sourcing and/or
increasing inventory safety stocks. The survey of the Company's service
suppliers is on-going, as many of these suppliers have third or fourth quarter
1999 target compliance dates for their Year 2000 programs. SanDisk is also
contacting its significant customers regarding their Year 2000 readiness in
order to understand the potential for any disruptions in their ordering
patterns. Completion of these reviews 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 half of
1999, the Company spent approximately $175,000 for application software upgrades
and computer hardware. The Company estimates that costs to upgrade or replace
any remaining software applications and non-compliant computer hardware will not
be material to the Company's operating results. 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 were funded from operating cash flows. No material projects were
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 remaining 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 insurance will cover
losses from business interruptions arising from Year 2000 problems of the
Company or
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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 $42.3 million in the
second quarter of 1999, up $18.8 million or 80% from the second quarter of 1998.
Product revenues for the six months ended June 30, 1999 were $78.2 million, up
$29.3 million or 60% from the same period in 1998. During the three and six
month periods ended June 30, 1999, units shipped increased 168% and 156%,
respectively from the same periods in 1998. The largest increase in both periods
came from sales of CompactFlash which represented 56% and 58% of product
revenues, respectively, for the three and six month periods ended June 30, 1999.
Average selling prices declined 32% in the second quarter of 1999 and 38% for
the first six months of 1999 compared to the same periods of the prior year. 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
third quarter revenues are expected 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 43% and 42%, respectively, of product revenue for
the three and six month periods ended June 30, 1999 compared to 46% for the same
periods of the previous year. The Company expects international sales to
continue to represent a significant portion of its product revenues. In the
second quarter of 1999, the Company's top ten customers represented
approximately 57% of product revenue with the top two customers representing a
combined 27% of product revenues. Sales to the top 10 customers represented
approximately 64% of product revenues in the second 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 several cross-license agreements. License and royalty
revenues from patent cross-license agreements were $10.2 million in the second
quarter of 1999, up from $7.9 million in the same period of the previous year
due primarily to the timing of royalties earned under the various agreements. In
the first six months of 1999, revenue from patent license and royalties was
$18.5 million, up from $16.6 million in the same period of the prior year.
Revenues from licenses and royalties decreased to 20% of total revenues in the
second quarter of 1999 from 25% in the second quarter of 1998.
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GROSS PROFITS. In the second quarter of 1999, gross profits were $21.7
million, or 41% of total revenues compared to $10.8 million, or 34% of total
revenues in the same period of 1998. Product gross margins increased to 27% of
product revenues in the second quarter of 1999 from 12% in the second quarter of
1998. In the second quarter of 1998, product gross margins were unusually low
due to a steep decline in average selling prices and a lower of cost or market
inventory write down. Gross profits for the first half of 1999 were $39.3
million compared to $27.1 million for the same period of the previous year.
Gross margin was 41% of total revenues for the six month periods ended June 30,
1999 and 1998.
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 which began in the second quarter. However, there can
be no assurance that the Company will be successful in these efforts. Also,
increased competition may negatively affect gross margins in the second half of
1999.
During the second quarter of 1999, the Company began shipping CompactFlash
and FlashDisk products utilizing its new 128Mbit flash chip. 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 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 moved 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. These subcontractors now
assemble and test a majority of the Company's CompactFlash and MultiMediaCard
products. 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."
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 $6.0 million in the second quarter of 1999, up $1.5 million or 34%
from $4.5 million in the same period of 1998. In the first half of 1999,
research and development expenses increased to $11.2 million up $2.4 million or
27% from $8.8 million in the same period of 1998. The increases were primarily
due to increased salary and related expenses and higher nonrecurring engineering
and project related expenses. Research and development expenses represented 11%
of total revenues in the second quarter of 1999 compared to 14% in the second
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 expenses were $5.8 million in the second quarter of 1999 up $1.5
million or 35% from $4.2 million in the second quarter of 1998. In the first
half of 1999, sales and marketing expenses were $10.9 million, up $2.7 million
or 33% from the same period of 1998. The increases were primarily due to
increased salary and related expenses and higher commission expenses due to
increased product revenues. Sales and marketing expenses represented
approximately 11% of total revenues in the second quarter of 1999 compared to
14% in the second quarter of 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.
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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 $2.9 million in the second quarter of 1999, up $1.2 million or 69%
from $1.7 million in the second quarter of 1998. In the first half of 1999,
general and administrative expenses were $5.3 million, up $1.5 million or 41%
from the same period in 1998. The increases were primarily due to increased
salary and related expenses, an increase in the allowance for doubtful accounts
and higher consulting expenses. General and administrative expenses represented
6% of total revenues in the second quarter of 1999 compared to 5% for the second
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 $1.5
million in the second quarter of 1999 compared to $1.3 million in the second
quarter of 1998. In 1998, other income was lower due to the recognition of a
loss on fixed asset disposal and foreign exchange losses.
PROVISION FOR INCOME TAXES. The Company recorded a provision for income
taxes at a 33% effective tax rate for the first six 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 June 30, 1999, the Company had working capital of $145.5 million,
which included $12.8 million in cash and cash equivalents and $132.2 million in
short-term investments. Operating activities provided $17.1 million of cash in
the first six months of 1999 primarily from net income and an increase in
current liabilities of $17.7 million, which were partially offset by increases
in accounts receivable of $8.8 million and inventory of $8.4 million.
Net cash used in investing activities of $22.5 million in the first six
months of 1999 consisted of net purchases of investments of $13.9 million and
capital equipment purchases and leasehold improvements of $8.6 million. In the
first six months of 1999, cash provided by financing activities of $2.8 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.
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 June 30, 1999, forward contracts with a
notional amount of $11.9 million were 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 OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY WHICH MAY ADVERSELY AFFECT OUR
STOCK PRICE.
Our quarterly and annual operating results have fluctuated
significantly in the past and we expect that they will continue to fluctuate in
the future. This fluctuation is a result of a variety of factors, including the
following:
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o unpredictable demand for our products;
o decline in the average selling prices of our products due to
competitive pricing pressures;
o seasonality in sales of our products;
o adverse changes in product and customer mix;
o slower than anticipated market acceptance of new or enhanced versions
of our products;
o competing flash memory card standards which displace the standards
used in 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 sufficient silicon wafer foundry capacity to meet
customer demand;
o significant yield losses which could affect our ability to fulfill
customer orders and could increase our costs;
o lengthening in manufacturing cycle times due to our suppliers
operating at peak capacity;
o increased research and development expenses;
o exchange rate fluctuations, particularly the U.S. dollar to Japanese
yen exchange rate;
o changes in general economic conditions, in particular the economic
recession in Japan;
o difficulty of forecasting and management of inventory levels; and
o expenses related to obsolescence of unsold inventory.
DIFFICULTY OF ESTIMATING SILICON WAFER NEEDS
When we order silicon wafers from our foundries, we have to estimate
the number of silicon wafers needed to fill product orders several months into
the future. If we overestimate this number, we will build excess inventories
which would harm 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 inventory to reflect net
realizable value. If we underestimate the number of silicon wafers needed to
fill product orders, we may be unable to obtain an adequate supply of wafers
which could harm our product revenues. Because our largest volume product,
Compact Flash, is sold into an emerging consumer market, it is very difficult to
accurately forecast future sales. A substantial majority of our quarterly sales
are from orders received and fulfilled in the same quarter. In addition, our
product order backlog may fluctuate substantially from quarter to quarter.
ANTICIPATED GROWTH IN EXPENSE LEVELS
Due to anticipated growth, we increased our expense levels in the first
half of 1999. We expect operating expenses to continue to increase as a result
of the need to hire additional personnel to support expected growth in sales
unit volumes, sales and marketing efforts and research and development
activities.
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In addition, we have significant fixed costs. We cannot readily reduce these
expenses over the short term. If revenues do 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 harmed.
VARIABILITY OF AVERAGE SELLING PRICES AND GROSS MARGIN
Our 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 unit selling
prices to decline 28% during fiscal 1998, and 38% in the first half of 1999
compared to the same period in 1998. We expect this trend to continue.
VARIABILITY OF LICENSE FEES AND ROYALTIES
Our intellectual property strategy is to cross-license our patents to
other manufacturers of flash products. Under these arrangements, we earn license
fees and royalties on individually negotiated terms. The timing of revenue
recognition from these payments is dependent on the terms of each contract and
on the timing of product shipments by the third parties. This may cause license
and royalty revenues to fluctuate significantly from quarter to quarter. Because
these revenues have higher gross margins than product revenues, gross margins
and net income fluctuate significantly with changes in license and royalty
revenues.
IN TRANSITIONING TO NEW PROCESSES AND PRODUCTS WE FACE PRODUCTION AND MARKET
ACCEPTANCE RISKS.
GENERAL
Successive generations of our products have incorporated semiconductor
devices with greater memory capacity per chip. Two important factors 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:
o overcoming lower yields often experienced in the early production of
new semiconductor devices;
o problems with design and manufacturing of products that will
incorporate these devices; and
o 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.
128 MEGABIT TECHNOLOGY
We began shipments of 128 megabit products in the second quarter of
1999. In the third quarter of 1999, we plan to increase production of our 128
megabit flash memory technology, which has a lower cost per megabyte than our 64
megabit technology currently in production and will allow us to begin shipping
products with increased capacities including the 32 megabyte MultiMediaCard. If
we are unable to bring our 128 megabit flash memory into full production as
quickly as planned or if we experience unplanned
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yield problems, we may be unable to meet our customers' demand for high capacity
MultiMediaCard and CompactFlash products which could result in lost sales and
reduced revenues. In addition, our gross margins may be harmed by any problems
we encounter in the production of our 128 megabit flash memory.
D2 FLASH TECHNOLOGY
We have developed new products based on D2 flash technology, a new
flash architecture designed to store two bits in each flash memory cell. High
density flash memory, such as D2 flash, is a complex technology that requires
strict manufacturing controls and effective test screens. Problems from the
shift to volume production for new flash products could impact both reliability
and yields and result in increased manufacturing costs and reduced availability.
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. It is possible that we may not be able to achieve the targeted write
speed for our 256 megabit product.
In the fourth quarter of 1999, we expect to increase production of our
256 megabit flash memory technology, which has a lower cost per megabyte than
the 128 megabit technology. If we are unable to bring our 256 megabit flash
memory into full production as quickly as planned or if we experience unplanned
yield problems, we will not be able to meet our customers' forecasted demand in
the fourth quarter of 1999 and beyond, which would result in lost sales, reduced
revenues and reduced margins.
In the second half of 1999, we will be dependent for the majority of
megabytes shipped on the successful volume shipments of cards built with our 128
megabit and 256 megabit new designs. If we are unable to successfully achieve
the planned yields for these designs, we will be unable to meet our forecasted
customer needs, and consequently our revenues and profits may fall significantly
below our expectations.
MULTIMEDIACARD PRODUCTS
We expect to increase the MultiMediaCard product family production
volumes during the second half of 1999. This product presents new challenges in
assembly and testing. During the startup phase, we have experienced fluctuations
in yields which have reduced MultiMediaCard product availability, increased
manufacturing costs and reduced product margins for this product family. We are
currently unable to meet customer demand for MultiMediaCard products. This is
primarily due to demand exceeding previous forecasts from our customers.
Although we are steadily resolving the assembly manufacturing issues, we have
not yet achieved the production assembly yields necessary for high volume
production.
WE DEPEND ON THIRD PARTY FOUNDRIES FOR SILICON WAFERS.
All of our products require silicon wafers. We rely on United Silicon
Corporation, or USC, and United Semiconductor Incorporated, or USIC, in Taiwan
to supply all of our silicon wafers. We depend on these foundries to allocate a
portion of their capacity to our needs, produce acceptable quality wafers with
acceptable manufacturing yields and deliver our wafers on a timely basis at a
competitive price. If these foundries are unable to satisfy these requirements,
our business, financial condition and operating results may suffer.
Currently, demand for semiconductor wafers has increased significantly,
due to increased demand in the consumer electronics and cellular phone markets.
Increased demand for advanced technology silicon wafers is increasing the price
of these wafers as supply becomes constrained. We expect this trend to continue
throughout 1999 and 2000 which could adversely impact the rate of growth of our
business, either through reduced supply, higher wafer prices or a combination of
the two.
USC and USIC are subsidiaries of United Microelectronics Corporation,
or UMC. We currently own 10% of USIC, have the right to appoint one of its
directors and are entitled to 12.5% of its total wafer production. In the second
quarter of 1999, UMC announced plans to merge the USC and USIC foundries
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into the UMC parent company. When the merger is complete, which is currently
expected to occur in late 1999 or early 2000, we will receive UMC shares in
exchange for the USIC shares we currently own. However, we will not have a seat
on the board of directors of the combined company. We have received assurances
from the senior management of UMC that it intends to continue to supply us the
same wafer capacity at the prices we currently enjoy under our agreement with
USIC. However, there can be no assurance that we will be able to maintain our
current wafer capacity and competitive pricing arrangement in our future supply
negotiations with UMC.
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. For example, if customer
demand falls below our forecast and we are unable to reschedule or cancel our
wafer orders, we may end up with excess wafer inventories, which could result in
higher operating expenses and reduced gross margins. Conversely, if customer
demand exceeds our forecasts, we may be unable to obtain an adequate supply of
wafers to fill customer orders, which could result in lost sales and lower
revenues. 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 harmed.
THE SUCCESS OF OUR BUSINESS DEPENDS ON EMERGING MARKETS AND NEW PRODUCTS.
In order for demand for our products to grow, the markets for new
products that use CompactFlash and the MultiMediaCard, such as MP3 portable
music players and smart phones, must develop and grow. If sales of these
products do not grow, our revenues and profit margins could level off or
decline.
Because we sell our products for use in many new applications, it is
difficult to forecast demand. For example, in the second quarter of 1999, demand
for our 32 megabyte capacity MultiMediaCard for use in MP3 portable digital
music players grew faster than anticipated and we were unable to fill all
customer orders during the quarter. Although we are increasing production of the
MultiMediaCard, if we are unable to fulfill customer demand for these products
in the future, we may lose sales to our competitors. In addition, the market for
MP3 portable digital music players is very new and it is uncertain how quickly
consumer demand for these players will grow. If this market does not grow as
quickly as anticipated or our customers are not successful in selling their MP3
portable music players to consumers, our revenues could be adversely affected.
In addition, it is often the case with new consumer markets that after an
initial period of new market formation and initial acceptance by early adopters,
the market enters a period of slow growth as standards emerge and infrastructure
develops. In the event that this occurs in the MP3 music market or other
emerging markets, sales of our products would be harmed.
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 and enhanced features 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; and
o the extent to which our products or technologies become obsolete or
noncompetitive due to products or technologies developed by others.
If we fail to do any of the above, our business, financial condition
and results of operations could suffer.
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WE MAY BE UNABLE TO MAINTAIN MARKET SHARE
We may be unable to increase our production volumes at a sufficiently
rapid rate so as to maintain our market share. Ultimately our growth rate
depends on our ability to obtain sufficient flash memory wafers to meet demand.
If we are unable to do so, in a timely manner, we may lose market share to our
competitors.
OUR INTERNATIONAL OPERATIONS MAKE US VULNERABLE TO CHANGING CONDITIONS AND
CURRENCY FLUCTUATIONS.
POLITICAL RISKS
Currently, all of our flash memory wafers are produced by two foundries
in Taiwan. We also use a third-party subcontractor in Taiwan for the assembly
and testing of our MultiMediaCard products. We may therefore be affected by the
political, economic and military conditions in Taiwan. Taiwan is currently
engaged in various political disputes with China and both countries have
recently conducted military exercises in or near the other's territorial waters
and airspace. The Taiwanese and Chinese governments may continue to escalate
these disputes, resulting in an economic embargo, a disruption in shipping
routes or even military hostilities. This could harm our business by
interrupting or delaying the production or shipment of flash memory wafers or
MultiMediaCard products by our Taiwanese foundries and subcontractor. See also
"--We depend on our suppliers and third party subcontractors."
In addition, in the second quarter of 1999, we began using a
third-party subcontractor in China for the assembly and testing of our
CompactFlash products. As a result, our business could be harmed by the effect
of political, economic, legal and other uncertainties in China. Under its
current leadership, the Chinese government has been pursuing economic reform
policies, including the encouragement of foreign trade and investment and
greater economic decentralization. The Chinese government may not continue to
pursue these policies and, even if it does continue, these policies may not be
successful. The Chinese government may also significantly alter these policies
from time to time. In addition, China does not currently have a comprehensive
and highly developed legal system, particularly with respect to the protection
of intellectual property rights. As a result, enforcement of existing and future
laws and contracts is uncertain, and the implementation and interpretation of
such laws may be inconsistent. Such inconsistency could lead to piracy and
degradation of our intellectual property protection.
ECONOMIC RISKS
We price our products primarily in U.S. dollars. As a result, if the
value of the U.S. dollar increases relative to foreign currencies, our products
could become less competitive in international markets. For example, our
products are relatively more expensive in Asia because of the weakness of many
Asian currencies relative to the US dollar. In addition, we currently invoice
some of our customers in Japanese yen. Therefore, fluctuations in the Japanese
yen against the U.S. dollar could harm our business, financial condition and
results of operations.
Our sales are also highly dependent upon global economic conditions. In
fiscal 1998, sales to Japan declined to 31.6% of total product sales from 38.1%
in 1997. In the first half of 1999, sales to Japan represented 25.6% of product
revenue compared to 32.7% for the same period of 1998. We believe these declines
were primarily due to the Japanese economic crisis and market recession. If the
current market conditions in Japan do not improve, or if they decline further,
our results of operations may suffer.
GENERAL RISKS
Our international business activities could also be limited or
disrupted by any of the following factors:
o the need to comply with foreign government regulation;
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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; and
o delays in product shipments due to local customs restrictions.
WE DEPEND ON OUR SUPPLIERS AND THIRD PARTY SUBCONTRACTORS.
We rely on our vendors, some of which are sole source suppliers, for
several of our critical components. We do not have long-term supply agreements
with some of these vendors. Our business, financial condition and operating
results could be harmed by delays or reductions in shipments if we are unable to
develop alternative sources or obtain sufficient quantities of these components.
For example, we rely on USIC and USC for all of our flash memory wafers and
Motorola, Inc. and NEC to supply certain designs of microcontrollers. Due to
industry-wide increasing demand for semiconductors, we have recently experienced
resistance to price reductions from some of our important suppliers.
We also rely on third-party subcontractors to assemble and 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 quarter of 1999, we transferred a substantial portion
of wafer testing, packaged memory final testing, card assembly and card testing
to Silicon Precision Industries Co., Ltd. in Taiwan and Celestica, Inc. in
China. In the third quarter of 1999, we will transfer additional production to
these subcontractors, and by the end of the year we expect that they will be
assembling and testing a majority of our mature, high-volume products. This
increased reliance on subcontractors is expected to reduce manufacturing costs
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 testing equipment and training personnel of
our subcontractors. However, we do not have sufficient duplicative production
testing equipment at Sunnyvale and at our subcontractors. Therefore, 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 half of 1999 and beyond.
CONTINUING DECLINES IN OUR AVERAGE SALES PRICES MAY RESULT IN DECLINES IN OUR
GROSS MARGINS.
In 1998, the average unit selling prices of our products declined 28%
compared to 1997. In the first half of 1999, the average unit selling prices of
our products declined 38% compared to the same period of 1998. Because flash
data storage markets are characterized by intense competition and price
reductions for our products are necessary to meet consumer price points, we
expect that market-driven pricing pressures will continue. 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 more advanced
technology and include more advanced features and can be sold at stable average
gross margins despite continued declines in average selling price per megabyte.
However, if we are unable to achieve such cost reductions and technological
advances, this could result in lost sales and declining gross margins, and as a
result, our business, financial condition
Page 22
<PAGE>
and results of operations could suffer.
The semiconductor industry is cyclical and we believe it is currently
in a recovery from one of its most severe down cycles. During most of 1997 and
1998, the semiconductor industry experienced significant production over
capacity, which reduced margins for substantially all flash memory suppliers.
OUR MARKETS ARE HIGHLY COMPETITIVE.
FLASH MEMORY MANUFACTURERS AND MEMORY CARD ASSEMBLERS
We compete in an industry characterized by intense competition, rapid
technological changes, evolving industry standards, declining average selling
prices and rapid product obsolescence. Our competitors include many large
domestic and international companies that have greater access to advanced wafer
foundry capacity, substantially greater financial, technical, marketing and
other resources, broader product lines and longer standing relationships with
customers. Our primary competitors include:
o storage flash chip producers, such as Hitachi Ltd., Samsung
Electronics Company Ltd. and Toshiba Corporation;
o socket flash, linear flash and component manufacturers, such as
Advanced Micro Devices, Inc., Atmel Corporation, Intel Corporation,
Macronix International Co., Ltd., Micron Technology, Inc., Mitsubishi
Electronic Corporation, Sharp Electronics Corporation and
STMicroelectronics NV; and
o module or card assemblers, such as Lexar Media, Inc., M-Systems, Inc.,
Pretec Electronics Corp., Simple Technology Inc., SMART Modular
Technologies, Inc., Sony Corporation, Kingston Technology Company,
Panasonic Consumer Electronic Company, Silicon Storage Technology,
Inc., TDK Corporation, Matsushita Battery, Inc. and Viking Components,
Inc., who combine controllers and flash memory chips developed by
others into flash storage cards.
In addition, over 25 companies have been certified by the CompactFlash
Association to manufacture and sell their own brand of CompactFlash. We believe
additional manufacturers will enter the CompactFlash market in the future.
We have entered into patent cross-license agreements with several of
our leading competitors including, Hitachi, Samsung, Toshiba, Intel and Sharp.
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 harm our business, financial condition and
results of operations.
ALTERNATIVE STORAGE MEDIA
Competing products have been introduced that promote industry standards
that are different from our CompactFlash and MultiMediaCard products, including
Toshiba's SmartMedia, Sony Corporation's Memory Stick, Sony's standard floppy
disk used for digital storage in its Mavica digital cameras, Panasonic's Mega
Storage cards, Iomega's Clik drive, a miniaturized, mechanical, removable disk
drive and M-Systems' Diskonchip for embedded storage applications. Each
competing standard is mechanically and electronically incompatible with
CompactFlash and MultiMediaCard. If a manufacturer of digital cameras or other
consumer electronic devices designs in one of these alternative competing
standards, CompactFlash or MultiMediaCard will be eliminated from use in that
product.
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, which we introduced in the second
quarter of 1999, for use in high-end professional digital cameras.
Page 23
<PAGE>
In October 1998, M-Systems introduced their Diskonchip 2000 Millennium product
which competes against our Flash ChipSet products in embedded storage
applications such as set top boxes and networking appliances.
According to independent industry analysts, Sony's Mavica digital
camera captured a considerable portion of the 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 have been adversely impacted by the success of
the Mavica.
Our MultiMediaCard products also have faced significant competition
from Toshiba's SmartMedia flash cards and we expect to face similarly
significant competition from Sony's Memory Stick. 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.
ALTERNATIVE FLASH TECHNOLOGIES
We also face competition from products based on multilevel cell flash
technology such as Intel's 64 megabit and 128 megabit StrataFlash chips and
Hitachi's 256 megabit multilevel cell 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. In the second quarter of 1999, Intel announced their
new 128Mbit multilevel cell chip and Hitachi began shipping customer samples of
CompactFlash cards employing their new multilevel cell flash chip. In addition,
Toshiba has begun customer shipments of 32 megabyte SmartMedia cards employing
their new 256Mbit flash chip. Although Toshiba has not incorporated multilevel
cell flash technology in their 256Mbit flash chip, their use of more advanced
lithographic design rules has resulted in a comparably-sized die and may allow
them to achieve a more competitive cost structure than that of our 256Mbit D2
flash chip.
Furthermore, we expect to face competition from existing competitors
and from other companies that may enter our existing or future markets that have
similar or alternative data storage solutions which may be less costly or
provide additional features. Price is an important competitive factor in the
market for consumer products. Increased price competition could lower gross
margins if our average selling prices decrease faster than our costs and could
also result in lost sales.
OUR BUSINESS DEPENDS UPON CONSUMER PRODUCTS.
In 1998 and the first half 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 application. 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, we do not
recognize revenue until after the product has been sold to the end user. If our
distributors and retailers are not successful in this market, there could be
substantial product returns, which would harm our business, financial condition
and results of operations.
SALES TO A SMALL NUMBER OF CUSTOMERS REPRESENT A SIGNIFICANT PORTION OF OUR
REVENUES.
More than half of our revenues come from a small number of customers.
For example, sales to our top 10 customers accounted for approximately 59%, 67%,
and 71%, respectively, of our product revenues for 1998, 1997, and 1996. In the
first six months of 1999, our top 10 customers represented approximately 57% of
product revenues. In the first six months of fiscal 1999 and in fiscal year
1998, two customers each accounted for 10% or more of our product sales. If we
were to lose any of these customers or experience
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<PAGE>
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.
OUR MULTIPLE SALES CHANNELS MAY COMPETE FOR A LIMITED NUMBER OF CUSTOMER SALES.
Web based sales of our products today represent a small but growing
portion of our overall sales. Sales on the Internet tend to undercut the
traditional distribution channels and may dramatically change the way our
consumer products are purchased in future years. We cannot assure you that we
will successfully manage the inherent channel conflicts between our retail
channel customers and customers that wish to purchase directly on the Internet.
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. In addition, in the
past we have experienced a decrease in orders in the first quarter from our
Japanese OEM customers primarily because most customers in Japan operate on a
fiscal year ending in March and prefer to delay purchases until the beginning of
their next fiscal year. 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. Although we did not experience
this seasonality in the first quarter of 1999, we cannot assure you that we will
not experience seasonality in the future.
WE MUST ACHIEVE ACCEPTABLE WAFER MANUFACTURING YIELDS.
The fabrication of our products requires wafers to be produced in a
highly controlled and ultra clean environment. Semiconductor companies that
supply our wafers sometimes have experienced problems achieving acceptable wafer
manufacturing yields. Semiconductor manufacturing yields are a function of both
our design technology and the foundry's manufacturing process technology. Low
yields may result from design errors or manufacturing failures. Yield problems
may not be determined or improved until an actual product is made and can be
tested. As a result, yield problems may not be identified until the wafers are
well into the production process. The risks associated with yields are even
greater because we rely 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, this will result in higher costs and reduced product availability, and
could harm our business, financial condition and results of operations.
RISKS ASSOCIATED WITH PATENTS, PROPRIETARY RIGHTS AND RELATED LITIGATION.
GENERAL
We rely on a combination of patents, trademarks, copyright and trade
secret laws, confidentiality procedures and licensing arrangements to protect
our intellectual property rights. In the past, we have been involved in
significant disputes regarding our intellectual property rights and claims that
we may be infringing third parties' intellectual property rights. We expect that
we may be involved in similar disputes in the future. We cannot assure you that:
o any of our existing patents will not be invalidated;
o patents will be issued for any of our pending applications;
o any claims allowed from existing or pending patents will have
sufficient scope or strength; or
Page 25
<PAGE>
o 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 their products around our
patents.
We intend to vigorously enforce our patents but we cannot be sure that
our efforts will be successful. If we were to have an adverse result in any
litigation, we could be required to pay substantial damages, cease the
manufacture, use and sale of infringing products, expend significant resources
to develop non-infringing technology, discontinue the use of certain processes
or obtain licenses to the infringing technology. Any litigation is likely to
result in significant expense to us, as well as divert the efforts of our
technical and management personnel. For example the Lexar litigation described
below has resulted in cumulative litigation expenses approaching $1 million.
CROSS LICENSES AND INDEMNIFICATION OBLIGATIONS
If we decide to incorporate third party technology into our products or
if we are found to infringe on others' intellectual property, we could be
required to license intellectual property from a third party. We may also need
to license some of our intellectual property to others in order to enable us to
obtain cross-licenses to third party patents. Currently, we have patent
cross-license agreements with several companies, including Hitachi, Intel,
Samsung, Sharp and Toshiba and we are in discussions with other companies
regarding potential cross-license agreements. We cannot be certain that licenses
will be offered when we need them, or that the terms offered will be acceptable.
If we do obtain licenses from third parties, we may be required to pay license
fees or royalty payments. In addition, if we are unable to obtain a license that
is necessary to the manufacture of our products, we could be required to suspend
the manufacture of products or stop our wafer suppliers from using processes
that may infringe the rights of third parties. We cannot assure you that we
would be successful in redesigning our products or that the necessary licenses
will be available under reasonable terms.
We have historically agreed to indemnify various suppliers and
customers for alleged patent infringement. The scope of such indemnity varies,
but may, in some instances, include indemnification for damages and expenses,
including attorney's fees. We may periodically engage in litigation as a result
of these indemnification obligations. We are not currently engaged in any such
indemnification proceedings. Our insurance policies exclude coverage for third
party claims for patent infringement. Any future obligation to indemnify our
customers or suppliers could harm our business, financial condition or results
of operations.
LITIGATION RISKS ASSOCIATED WITH OUR INTELLECTUAL PROPERTY
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. For example, in March 1998 we filed a complaint
in Federal District Court against Lexar Media, Inc. for infringement of one of
our flash card patents. 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 our 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 our patent. On July 30, 1999, we filed a
motion for partial summary judgment that Lexar CompactFlash and PC Cards
contributorily infringe our patent. This motion is scheduled to be heard in
September 1999. In August 1999, we had a mandatory settlement meeting with
Lexar. No settlement was reached through this meeting. A trial date has not yet
been set.
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<PAGE>
OUR RAPID GROWTH MAY STRAIN OUR OPERATIONS.
We are currently experiencing 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 hire, train, motivate and manage
our employees. We are having difficulty hiring the necessary engineering, sales
and marketing personnel to support our growth. In addition, we must make a
significant investment in our existing internal information management systems
to support increased manufacturing, as well as accounting and other management
related functions. Our systems, procedures and controls may not be adequate to
support our rapid growth, which could in turn harm our business, financial
condition and results of operations.
OUR SUCCESS DEPENDS ON KEY PERSONNEL, INCLUDING OUR EXECUTIVE OFFICERS, THE LOSS
OF WHOM COULD DISRUPT OUR BUSINESS.
Our success greatly depends on the continued contributions of our
senior management and other key research and development, sales, marketing and
operations personnel, including Dr. Eli Harari, our founder, President and Chief
Executive Officer. Our success will also depend on our ability to recruit
additional highly skilled personnel. We cannot assure you that we will be
successful in hiring or retaining such key personnel, or that any of our key
personnel will remain employed with us.
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE.
The market price of our stock has fluctuated significantly in the past
and is likely to continue to fluctuate in the future. For example for the twelve
month period ending June 30, 1999, our stock price has fluctuated from a low of
$5.125 to a high of $44.6875. We believe that such fluctuations will continue as
a result of future announcements concerning us, our competitors or principal
customers regarding technological innovations, new product introductions,
governmental regulations, litigation or changes in earnings estimates by
analysts. In addition, in recent years the stock market has experienced
significant price and volume fluctuations and the market prices of the
securities of high technology companies have been especially volatile, often for
reasons outside the control of the particular companies. These fluctuations as
well as general economic, political and market conditions may have an adverse
affect on the market price of our common stock.
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 assessment and remediation of the computer systems used for
facilities control, machine control and manufacturing testing and 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.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS, STOCKHOLDER RIGHTS PLAN AND
IN DELAWARE LAW COULD PREVENT OR DELAY A CHANGE IN CONTROL AND, AS A RESULT,
NEGATIVELY IMPACT OUR STOCKHOLDERS.
We have taken a number of actions that could have the effect of
discouraging a takeover attempt. For example, we have adopted a stockholder
rights plan that would cause substantial dilution to a stockholder 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
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<PAGE>
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 25 and 26 of this Form 10-Q
for the quarterly period ended June 30, 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
At the Company's Annual Meeting of Stockholders held on May 12, 1999,
the following individuals were elected to the Board of Directors:
Votes For Votes Withheld
---------- --------------
William V. Campbell 25,591,230 127,559
Irwin Federman 25,591,030 127,759
Catherine P. Lego 25,591,230 127,559
Eli Harari 25,591,230 127,559
James D. Meindl 25,591,230 127,559
Thomas F. Mulvaney 25,591,230 127,559
Alan F. Shugart 25,591,230 127,559
The following proposals were approved at the Company's Annual Meeting:
<TABLE>
<CAPTION>
Affirmative Negative Votes Broker
Votes Votes Withheld Non-Votes
--------------- ------------- -------------- -----------------
<S> <C> <C> <C> <C>
Amendment to the 1995 Stock 11,078,236 10,604,999 33,140 4,002,414
Option Plan
Amendments to the 1995 13,562,790 8,114,752 38,833 4,002,414
Non-Employee Directors Stock
Option Plan
Amendment to the 1995 21,366,072 317,873 32,430 4,002,414
Employee Stock Purchase Plan
Ratify the appointment of 25,626,898 85,736 6,155 0
Ernst & Young LLP as independent
auditors for the fiscal
year ending December 31, 1999.
</TABLE>
Item 5. Other Information
None
Page 29
<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, 1998.12
10.31 1995 Non-Employee Directors Stock Option Plan Amended and Restated as of
December 17, 1998.12
10.32 1995 Employee Stock Purchase Plan Amended and Restated as of December 17,
1998.12
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 June 30, 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).
3. Previously filed as an Exhibit to the Registrant's 1995 Annual Report on
Form 10-K.
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<PAGE>
4. Previously filed as an Exhibit to the Registrant's Current Report on Form
8-K/A dated April 18, 1997.
5. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended June 30, 1997.
6. Previously filed as an Exhibit to the Registrant's Current Report on form
8-K dated October 16, 1997.
7. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended September 30, 1997.
8. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended June 30, 1998.
9. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended September 30, 1998.
10. Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K.
11. Previously filed as an Exhibit to the Registrant's Current Report on Form
8-K dated January 1, 1999.
12. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended March 31, 1999.
B. Reports on Form 8-K
No reports on form 8-K were filed during the quarter ended June 30,
1999.
Page 31
<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
(On behalf of the Registrant and as
Principal Financial Officer.)
DATED: August 24, 1999
Page 30
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SanDisk Financial Data Schedule, June 30, 1999
</LEGEND>
<CIK> 0001000180
<NAME> SanDisk Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Jun-30-1999
<CASH> 12,766
<SECURITIES> 132,182
<RECEIVABLES> 29,213
<ALLOWANCES> 0
<INVENTORY> 17,332
<CURRENT-ASSETS> 211,093
<PP&E> 22,410
<DEPRECIATION> 0
<TOTAL-ASSETS> 285,505
<CURRENT-LIABILITIES> 65,634
<BONDS> 0
0
0
<COMMON> 188,938
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 285,505
<SALES> 42,300
<TOTAL-REVENUES> 52,549
<CGS> 30,858
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,658
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,498
<INCOME-TAX> 2,804
<INCOME-CONTINUING> 5,694
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 5,694
<EPS-BASIC> 0.21
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</TABLE>
