<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
---------- Exchange Act of 1934 For the quarterly period ended June 30, 2000
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 June 30, 2000
Common Stock, $0.001 par value 66,965,574
------------------------------ ----------------
Class Number of shares
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SanDisk Corporation
Index
<TABLE>
<CAPTION>
<S><C>
PART I. FINANCIAL INFORMATION
Page No.
--------
ITEM 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999........................................... 3
Condensed Consolidated Statements of Income
Three and six months ended June 30, 2000 and 1999............................. 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999....................................... 5
Notes to Condensed Consolidated Financial Statements.............................. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk........................31
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................ 32
ITEM 2. Changes in Securities............................................................ 32
ITEM 3. Defaults upon Senior Securities.................................................. 32
ITEM 4. Submission of Matters to a Vote of Security Holders.............................. 32
ITEM 5. Other Information................................................................ 32
ITEM 6. Exhibits and Reports on Form 8-K................................................. 33
Signatures....................................................................... 35
</TABLE>
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PART I. FINANCIAL INFORMATION
SanDisk Corporation
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
ASSETS JUNE 30, 2000 DECEMBER 31, 1999*
------------- ------------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 175,829 $ 146,170
Short-term investments 305,701 312,278
Investment in UMC 216,225 -
Accounts receivable, net 83,658 52,434
Inventories 46,760 35,679
Deferred tax assets - 17,000
Prepaid expenses and other current assets 5,993 4,829
------------ -----------
Total current assets 834,166 568,390
Property and equipment, net 34,793 31,788
Investment in UMC 197,688 -
Investment in foundry 14,970 51,208
Deposits and other assets 10,018 6,338
------------ -----------
Total Assets $1,091,635 $ 657,724
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 42,648 $ 30,734
Accrued payroll and related expenses 11,667 8,259
Income taxes payable 22,005 5,843
Other accrued liabilities 18,624 11,378
Deferred tax liability 60,671 -
Deferred revenue 32,971 29,383
------------ -----------
Total current liabilities 188,586 85,597
Deferred tax liability 68,317 -
------------ -----------
Total Liabilities 256,903 85,597
------------ -----------
Stockholders' Equity:
Common stock 532,343 524,131
Retained earnings 291,336 47,797
Accumulated other comprehensive income 11,053 199
------------ -----------
Total stockholders' equity 834,732 572,127
Total Liabilities and
------------ -----------
Stockholders' Equity $1,091,635 $ 657,724
============ ===========
</TABLE>
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)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Product $ 122,573 $ 42,300 $ 219,822 $ 78,226
License and royalty 21,376 10,249 33,496 18,459
-------------- --------------- -------------- --------------
Total revenues 143,949 52,549 253,318 96,685
Cost of sales 84,514 30,858 152,272 57,367
-------------- --------------- -------------- --------------
Gross profits 59,435 21,691 101,046 39,318
Operating expenses:
Research and development 11,051 6,007 19,820 11,219
Sales and marketing 11,519 5,755 22,063 10,928
General and administrative 6,013 2,896 10,760 5,290
-------------- --------------- -------------- --------------
Total operating expenses 28,583 14,658 52,643 27,437
Operating income 30,852 7,033 48,403 11,881
Interest income 5,818 1,436 11,436 2,834
Gain on investment in foundry - - 344,168 -
Other income, net 665 29 1,099 235
-------------- --------------- -------------- --------------
Income before taxes 37,335 8,498 405,106 14,950
Provision for income taxes 13,067 2,804 161,567 4,933
-------------- --------------- -------------- --------------
Net income $ 24,268 $ 5,694 $ 243,539 $ 10,017
============== =============== ============== ==============
Net income per share
Basic $ 0.36 $ 0.11 $ 3.66 $ 0.19
Diluted $ 0.33 $ 0.10 $ 3.34 $ 0.17
Shares used in computing
net income per share
Basic 66,817 53,886 66,456 53,710
Diluted 72,798 59,028 72,907 58,828
</TABLE>
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)
<TABLE>
<CAPTION>
Six months ended
June 30,
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 243,539 $ 10,017
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 7,059 3,750
Deferred taxes 138,437 -
Gain on investment in foundry (344,168) -
Loss on disposal of equipment 858
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable, net (31,224) (8,813)
Inventories (11,081) (8,410)
Prepaid expenses and other assets (4,844) 2,817
Accounts payable 11,914 11,626
Accrued payroll and related expenses 3,408 1,755
Income taxes payable 16,162 -
Other accrued liabilities 7,246 4,571
Deferred revenue 3,588 (220)
--------------- ---------------
Total adjustments (202,645) 7,076
--------------- ---------------
Net cash provided by operating activities 40,894 17,093
Cash flows from investing activities:
Purchases of short term investments (189,179) (73,456)
Proceeds from sale of short term investments 195,624 59,546
Investment in foundry (14,970) -
Acquisition of capital equipment (10,922) (8,619)
--------------- ---------------
Net cash used in investing activities (19,447) (22,529)
Cash flows from financing activities:
Sale of common stock 8,212 2,818
--------------- ---------------
Net cash provided by financing activities 8,212 2,818
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 29,659 (2,618)
Cash and cash equivalents at beginning of period 146,170 15,384
--------------- ---------------
Cash and cash equivalents at end of period $ 175,829 $ 12,766
=============== ===============
</TABLE>
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, 2000, and
the results of operations for the three and six month periods ended June
30, 2000 and 1999 and cash flows for the six month periods ended June 30,
2000 and 1999. Because all the disclosures required by generally accepted
accounting principles are not included, these interim condensed
consolidated financial statements should be read in conjunction with the
audited financial statements and notes thereto in the Company's annual
report on Form 10-K as of, and for, the year ended December 31, 1999. The
condensed consolidated balance sheet data as of December 31, 1999 was
derived from the audited financial statements.
The Company's results of operations for the three and six month periods
ended June 30, 2000 and 1999 and cash flows for the six month periods
ended June 30, 2000 and 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 2000 and 1999 ended on
July 2, 2000 and June 27, 1999, respectively. Fiscal year 2000 is 52
weeks long and ends on December 31, 2000. Fiscal year 1999 was 53 weeks
long and ended 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,
2000 1999
(In thousands)
Raw materials $ 20,173 $ 10,387
Work-in-process 16,852 20,708
Finished goods
9,735 4,584
----------- -----------
$ 46,760 $ 35,679
=========== ===========
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5. The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three months ended Six months endedd
June 30, June 30,
2000 1999 2000 1999
----- ----- ----- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted
net income per share - net income $ 24,268 $ 5,694 $ 243,539 $ 10,017
========= ======== ========== ========
Denominator for basic net income per share:
Weighted average common shares 66,817 53,886 66,456 53,710
--------- -------- ---------- --------
Shares used in computing basic net income
per share 66,817 53,886 66,456 53,710
========= ======== ========== ========
Basic net income per share $ 0.36 $ 0.11 $ 3.66 $ 0.19
========= ======== ========== ========
Denominator for diluted net income per share:
Weighted average common shares 66,817 53,886 66,456 53,710
Employee stock options and warrants
to purchase common stock 5,981 5,142 6,451 5,118
--------- -------- ---------- --------
Shares used in computing diluted net income
per share 72,798 59,028 72,907 58,828
========= ======== ========== ========
Diluted net income per share $ 0.33 $ 0.10 $ 3.34 $ 0.17
========= ======== ========== ========
</TABLE>
For the three and six month periods ended June 30, 2000, options to
purchase 340,086 and 214,232 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 periods ended 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.
6. The Company relies on a combination of patents, trademarks, copyright and
trade secret laws, confidentiality procedures and licensing arrangements
to protect its intellectual property rights. There can be no assurance
that there will not be any disputes regarding the Company's intellectual
property rights. Specifically, there can be no assurance that any patents
held by the Company will not be invalidated, that patents will be issued
for any of the Company's pending applications or that any claims allowed
from existing or pending patents will be of sufficient scope or strength
or be issued in the primary countries where the Company's products can be
sold to provide meaningful protection or any commercial advantage to the
Company. Additionally, competitors of the Company may be able to design
around the Company's patents.
To preserve its intellectual property rights, the Company believes it may
be necessary to initiate litigation with one or more third parties,
including but not limited to those the Company has notified of possible
patent infringement. In addition, one or more of these parties may bring
suit against the Company.
In March 1998, the Company filed a complaint in federal court against
Lexar for infringement of a fundamental flash memory card patent. Lexar
disputed this claim and asserted that our patent was invalid or
unenforceable, as well as asserted various counterclaims including unfair
competition, violation of the Lanham Act, patent misuse, interference
with prospective economic advantage,
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<PAGE>
trade defamation and fraud. The Company has denied all of these
counterclaims. In July 1998, the court denied Lexar's request to have the
case dismissed. Discovery in this suit began in August 1998. On February
22, 1999, the court considered arguments and papers submitted by the
parties regarding the scope and proper interpretation of the asserted
claims in the Company's patent at issue in the Lexar suit. On March 4,
1999, the court issued its ruling on the proper construction of the claim
terms in our patent. On July 30, 1999, the Company filed a motion for
partial summary judgment that Lexar CompactFlash and PC Cards
contributorily infringe the Company's patent. In December 1999, Lexar
filed a counter motion for partial summary judgment for invalidity of the
Company's patent. Both motions were heard by the court on March 17, 2000
and on March 28, 2000 the court found that the accused Lexar flash cards
contributarily infringed SanDisk's patent and granted SanDisk's motion
for partial summary judgement. Additionally, the court denied Lexar's
summary judgement motion for non-infringement and invalidity.
In May 1999, Lexar filed a complaint against us in federal court for
claims of unfair competition, false advertising, trade libel and
intentional and negligent interference with prospective business
advantage. In Lexar's complaint, Lexar alleged that statements by the
Company regarding the comparative performance of its products and Lexar's
in digital cameras were false, and further alleged that the Company had
interfered with the certification of certain Lexar products by the
CompactFlash Association. 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. On August 26, 1999, the parties executed
and filed with the court a joint stipulation withdrawing our motion to
dismiss and granting Lexar permission to amend its complaint. Lexar has
amended its complaint to remove any allegations and causes of action
based on our alleged interference in certification by the CompactFlash
Association. On September 17, 1999, the court conducted a hearing on
Lexar's motion for preliminary injunction. On September 24, 1999, the
court issued an order granting a limited preliminary injunction which
enjoins the Company from using or implying certain terminology in
advertising regarding the comparative performance of our memory products
in digital cameras. On October 1, 1999, the Company filed counterclaims
against Lexar asserting causes of action including unfair competition and
false advertising under both federal and California law. Although the
Company cannot predict the ultimate outcome of the case, it believes that
Lexar's claims are without merit and that we have meritorious
counterclaims against Lexar.
The trial date for the Company's patent case, filed in March 1998, has
been set for October 2000. No trial date has been set for the case filed
by Lexar in May 1999. Although we cannot predict the ultimate outcome of
these cases, we believe that Lexar's claims are without merit and that
SanDisk's counterclaims are meritorious.
On March 21, 2000, Mitsubishi Denki Co. Ltd. (Mitsubishi Electric) filed
a complaint in Tokyo District Court against SanDisk K.K., SanDisk's
wholly-owned subsidiary in Japan. The complaint alleges that SanDisk
K.K., based in Yokohama, Japan, infringes on three Mitsubishi Japanese
patents. The Mitsubishi patents in question are #JP2099342, #JP2129071
and # JP2138047. Based on preliminary information, SanDisk believes that
these patents are related primarily to the mechanical construction of
memory cards built with a separate connector. In the complaint,
Mitsubishi asked the court for a preliminary injunction halting the sale
of SanDisk CompactFlash and flash ATA memory cards in Japan. Although the
Company cannot predict the ultimate outcome of the case, it believes that
Mitsubishi's claims are without merit. The Company and SanDisk K.K. will
vigorously defend itself against Mitsubishi's claims.
From time to time, the Company has been contacted by various other
parties who have alleged that certain of the Company's products infringe
on patents that such parties claim to hold. To date no legal actions have
been filed in connection with any such infringement, other than as
discussed above.
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
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resources to develop non-infringing technology or obtain licenses to the
infringing technology, or discontinue the use of certain processes.
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.
Compaq Corporation has opposed in several countries, including the United
States, our attempting to register CompactFlash as a trademark. We do not
believe that our failure to obtain registration for the CompactFlash mark
will materially harm our business.
Litigation frequently involves substantial expenditures and can require
significant management attention, even if the Company ultimately
prevails. In addition, the results of any litigation matters are
inherently uncertain. Accordingly, there can be no assurance that any of
the foregoing matters, or any future litigation, will not have a material
adverse effect on the Company's business, financial condition and results
of operations.
7. 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, 2000, forward contracts to sell
Japanese Yen with a notional amount of $18.4 million were outstanding. In
the second quarter of 2000, the Company had a net foreign currency
transaction gain of $0.6 million, primarily due to transaction gains on
its Japanese yen based assets.
8. Accumulated other comprehensive income presented in the accompanying
balance sheet consists of the accumulated unrealized gains and losses on
available-for-sale marketable securities, net of the related tax effects,
for all periods presented.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
----- ----- ----- ----
(In thousands)
<S> <C> <C> <C> <C>
Net income $ 24,268 $ 5,694 $243,539 $ 10,017
Unrealized gain (loss) on
available-for-sale securities:
Loss due to change in market value (35,559) (550) (25,752) (802)
Gain from stock dividend received 36,606 - 36,606 -
--------- -------- --------- -------
Comprehensive income $ 25,315 $ 5,144 $254,393 $ 9,215
========= ======== ========= =======
</TABLE>
Accumulated other comprehensive income was $11.1 million and $0.2 million
at June 30, 2000 and December 31, 1999, respectively.
9. On June 30, 2000, the Company and Toshiba closed a transation providing
for the joint development and manufacture of 512 megabit and 1 gigabit
flash memory chips and Secure Digital
Page 9
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Memory Card controllers. As a part of this transaction, the Company and
Toshiba formed and contributed initial funding to FlashVision LLC, a
joint venture to equip and operate a silicon wafer manufacturing line in
Virginia. The cost of equipping the Virginia wafer manufacturing line is
estimated at between $700 million and $800 million. The Company, as part
of its 50% ownership of the joint venture, expects to invest up to $150
million in cash and, if necessary, guarantee equipment lease lines up to
an additional $250 million. SanDisk contributed the first $15.0 million
of this investment in FlashVision LLC in the second quarter of 2000. The
Company does not expect any material revenues from the 512 megabit
technology for at least one year and from the 1 gigabit technology for at
least two years.
10. On January 3, 2000, the USIC foundry was merged into UMC. The Company had
invested $51.2 million in USIC. In exchange for its USIC shares, the
Company received 111 million UMC shares. These shares were valued at
approximately $396 million at the time of the merger, resulting in a
pretax gain of $344.2 million ($203.9 million after-tax) in the first
quarter of 2000. All of the UMC shares received by the Company as a
result of the merger are subject to trading restrictions imposed by UMC
and the Taiwan Stock Exchange. The trading restrictions expired on
one-half of the shares on July 3, 2000. The remaining shares will become
available for sale over a two year period beginning in January 2002. When
the shares are ultimately sold, it is likely that the Company will
recognize additional gains or losses due to fluctuations in the price of
the UMC shares.
In May 2000, the Company received a stock dividend from UMC of 200 shares
for every 1000 shares of UMC owned, resulting in its ownership of 22
million additional shares of UMC. The shares received as a stock dividend
and the 50% of the shares received as a result of the merger that became
unrestricted in July 2000 were treated as available-for-sale securities
under Statement of Financial Accounting Standards 115, Accounting for
Certain Investments in Debt and Equity Securities, at June 30, 2000. At
June 30, 2000, these shares were adjusted to market value and the
resulting unrealized net gain of $0.9 million dollars in the second
quarter was included in accumulated other comprehensive income. The
remaining 50% of the shares received as a result of the merger, that will
be restricted from sale until 2002, are accounted for at their
historical cost until such time as the related restrictions lapse.
11. In July 2000, SanDisk entered into a definitive agreement to make a $75
million equity investment in Tower Semiconductor ("Tower") in Israel,
resulting in approximately 10% ownership of Tower. In exchange for its
investment, SanDisk will receive one seat on the board of directors and a
guaranteed portion of the wafer output from the advanced fab Tower plans
to build in Migdal Haemek, Israel. Under the terms of the agreement,
SanDisk will make its investment over a period of approximately 18 months
as key milestones related to the construction, equipping and wafer
production at the new wafer fab are met. First wafer production is
expected at the new fab in 2002. The closing of the transaction is
subject to several conditions including, the timely approval of a
financial incentive package for Tower from the Israeli government,
Tower's ability to secure additional financing from other foundry
partners and financial institutions, timely commencement of fab
construction and the approval of Tower's board.
12. On August 9, 2000, SanDisk entered into a joint venture with Photo-Me
International ("PMI") for the manufacture, installation and service of
self-service digital photo printing labs, or kiosks, bearing the SanDisk
brand name. Under the agreement, SanDisk and PMI will each make an
initial investment of $4 million and secure lease financing for the
purchase of the kiosks. The total value of the lease financing will
depend on the number of kiosks deployed by the joint venture. We estimate
that we will guarantee equipment lease arrangements of approximately $40
million over the first two years of the agreement. PMI will manufacture
the kiosks for the joint venture and will install and maintain the kiosks
under contract with the joint venture. The first kiosks are expected to
be deployed in retail stores in the United States in early 2001.
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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 under Section 21E of the Securities and Exchange Act of 1934 as
amended 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 our Form 10-K for the year ended December 31, 1999 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. We undertake 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 our consolidated
financial statements and the notes thereto.
Overview
SanDisk was founded in 1988 to develop and market flash data storage
systems. We sell our products to the consumer electronics and
industrial/communications markets. In the first half of fiscal 2000,
approximately 70% of our product sales were attributable to the consumer
electronics market, particularly sales of CompactFlash for use in digital camera
applications. Our CompactFlash products have lower average selling prices and
gross margins than our higher capacity FlashDisk and FlashDrive products. In
addition, a substantial portion of our CompactFlash products are sold into the
retail channel, which usually has shorter customer order lead-times than our
other channels. A majority of our sales to the retail channel are turns
business, with orders received and fulfilled in the same quarter, thereby
decreasing our ability to accurately forecast future production needs. We
believe sales to the consumer market will continue to represent a majority of
our sales as the popularity of consumer applications, including digital cameras,
increases.
Our operating results are affected by a number of factors including the
volume of product sales, availability of foundry capacity, variations in
manufacturing cycle times, fluctuations in manufacturing yields and
manufacturing utilization, the timing of significant orders, competitive pricing
pressures, our ability to match supply with demand, changes in product and
customer mix, market acceptance of new or enhanced versions of our products,
changes in the channels through which our products are distributed, timing of
new product announcements and introductions by us and our competitors, the
timing of license and royalty revenues, fluctuations in product costs, increased
research and development expenses, and exchange rate fluctuations. In addition,
as the proportion of our products sold for use in consumer electronics
applications increases, our 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 Which May Adversely Affect Our
Stock Price" and "-There is Seasonality in Our Business."
Beginning in late 1995, we adopted a strategy of licensing our flash
technology, including our patent portfolio, to selected third party
manufacturers of flash products. To date, we have entered into patent
cross-license agreements with several companies, and intend to pursue
opportunities to enter into additional licenses. Our current license agreements
provide for the payment of license fees, royalties, or a combination thereof.
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.
We market our products using a direct sales organization, distributors,
manufacturers' representatives, private label partners, OEMs and retailers. We
expect that sales through the retail channel will comprise an increasing share
of total revenues in the future, and that a substantial portion of our sales
into the retail channel will be made to participants that will have the right to
return unsold products. We do not recognize revenues from these sales until the
products are sold to the end customers.
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Historically, a majority of our sales have been to a limited number of
customers. We expect that sales of our products to a limited number of customers
will continue to account for a substantial portion of our product revenues for
the foreseeable future. We have also experienced significant changes in the
composition of our customer base from year to year and expect this pattern to
continue as market demand for our customers' products fluctuates. The loss of,
or significant reduction in purchases by major customers, could have a material
adverse effect on our 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" and "Business - Sales
and Distribution."
All of our products require silicon wafers, which are all currently
manufactured by UMC in Taiwan. Industry-wide demand for semiconductors increased
significantly in 1999 and the first half of 2000, due to increased demand in the
consumer electronics and cellular phone markets. This increased demand is
expected to continue throughout 2000 causing supply to become constrained and
prices to increase. Under our wafer supply agreements, there are limits on the
number of wafers we can order and our ability to change that quantity is
restricted. Accordingly, our ability to react to significant fluctuations in
demand for our products is limited. 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. If we are unable to obtain
adequate quantities of flash memory wafers with acceptable prices and yields
from our current and future wafer foundries, our business, financial condition
and results of operations could be harmed. 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. We have from time to time taken write downs
for excess inventories. 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 our business. Our sales may be
impacted by changes in economic conditions in our international markets. While a
majority of our 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, economic conditions in Asia may continue to adversely
effect our revenues to the extent that demand for our products in Asia declines.
Given the recent economic conditions in Asia and the weakness of many Asian
currencies relative to the United States dollar, our products may be relatively
more expensive in Asia, which could result in a decrease of our sales in that
region. We may also experience pressure on our gross margins as a result of
increased price competition from Asian competitors. While most of our sales are
denominated in U.S. Dollars, we invoice certain Japanese customers in Japanese
Yen and are subject to exchange rate fluctuations on these transactions which
could affect our business, financial condition and results of operations. See
"Factors That May Affect Future Results - Our international operations make us
vulnerable to changing conditions and currency fluctuations."
For the foreseeable future, we expect to realize a significant portion of
our revenues from recently introduced and new products. Typically, new products
initially have lower gross margins than more mature products because the
manufacturing yields are lower at the start of manufacturing each successive
product generation. In addition, manufacturing yields are generally lower at the
start of manufacturing any product at a new foundry. To remain competitive, we
are focusing on a number of programs to lower manufacturing costs, including
development of future generations of D2 flash and advanced technology wafers.
There can be no assurance that we will successfully develop such products or
processes or that development of such processes will lower manufacturing costs.
In addition, if the industry wide supply of flash memory products grows faster
than customer demand, we could experience increased price competition 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
Manufacturing Yields."
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RESULTS OF OPERATIONS
PRODUCT REVENUES. Our product revenues were $122.6 million in the second
quarter of 2000, up $80.3 million or 190% from the second quarter of 1999.
Product revenues for the six months ended June 30, 2000 were $219.8 million, up
$141.6 million or 181% from the same period of the prior year. During the three
and six month periods ended June 30, 2000, total unit sales increased
approximately 167% over the same periods in 1999. The largest increases in both
periods came from sales of MultiMediaCard, CompactFlash and Flash Chipset
products. CompactFlash products represented 43% of product revenues,
MultiMediaCards 22% of product revenues for the second quarter of 2000. For the
six month period ended June 30, 2000, CompactFlash products represented 46% of
product revenues and MultiMediaCards represented 19% of product revenues.
Average selling prices increased 8% in the second quarter of 2000 and 5% for the
first six months of 2000 compared to the same periods of the prior year due
primarily to a shift in product mix to higher capacity cards in our CompactFlash
and MultimediaCard product lines. Sales to the consumer market represented
approximately 70% of product revenues and sales to the
telecommunications/industrial market accounted for the remaining 30% during the
three and six month periods ended June 30, 2000. Sales to the retail channel
represented 28% of product revenues in the second quarter of 2000, up from 18%
for the same period of the previous year. The mix of products sold varies from
quarter to quarter and will continue to vary in the future, affecting our
overall average selling prices and gross margins.
Export sales represented 53% and 52%, respectively, of our product revenues
for the three and six month periods ended June 30, 2000 compared to 43% for the
same periods of the previous year. We expect international sales to continue to
represent a significant portion of our product revenues. For the three month
period ended June 30, 2000, our top ten customers represented approximately 49%
of our product revenues compared to 57% for the same period in 1999. One
customer accounted for more than 10% of product sales in the second quarter of
1999. We expect that sales to a limited number of customers will continue to
represent a substantial portion of our revenues for the foreseeable future.
LICENSE AND ROYALTY REVENUES. We currently earn patent license fees and
royalties under several cross-license agreements. License and royalty revenues
from patent cross-license agreements were $21.4 million in the second quarter of
2000, up from $10.2 million in the same period of the previous year, due
primarily to an increase in royalty revenues. Certain of our licensees report
royalty revenues to us only twice a year. The increase in royalty revenues for
the second quarter of 2000 included an adjustment to reconcile the estimated
royalty revenues recognized in the first half of 2000 with the actual royalties
reported by our licensees. In the first six months of 2000, revenue from patent
license and royalties was $33.5 million, up from $18.5 million for the same
period of the prior year. Revenues from licenses and royalties decreased to 15%
of total revenues in the second quarter of 2000 from 20% in the second quarter
of 1999.
GROSS PROFITS. In the second quarter of 2000, gross profits were $59.4
million, or 41% of total revenues compared to $21.7 million, or 41% of total
revenues in the same period of 1999. Gross profits for the first half of 2000
were $101.0 million compared to $39.3 million for the same period of the
previous year. Gross margin was 40% of total revenues for the six month period
ended June 30, 2000 compared to 41% for the same period of 1999.
Product gross margin increased to 31% of product revenues for the three and
six month periods ended June 30, 2000 compared to 27% for the same periods in
1999, primarily due to the lower cost per megabyte of our 256 Mbit flash memory
products which represented more than half of our shipments in the first six
months of 2000. We expect product gross margins to further improve in the second
half of 2000 as we complete the transition to our 256 Mbit technology for the
majority of our shipments and wafer production at the third UMC fab ramps into
volume production.
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 $11.1 million in the second quarter of 2000, up $5.0 million or
84% from $6.0 million in the same period of 1999. In the first six months of
2000, research and development expenses increased to $19.8 million, up $8.6
million or 77% from $11.2 million in the same period of 1999. These increases
were primarily due to increased salary and related expenses and increased
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depreciation and amortization expenses. Research and development expenses
represented 8% of total revenues in the second quarter of 2000 compared to 11%
in the second quarter of 1999. For the first six months of 2000, research and
development expenses represented 8% of total revenues compared to 12% for the
same period of the prior year. We expect our 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, including the
512Mbit and 1 Gigabit flash memory co-development and manufacturing joint
venture with Toshiba and the development of advanced controller chips. We
currently expect our incremental research and development expenses related to
the Toshiba joint development project to be in the range of $6.0 million to $8.0
million in fiscal 2000.
SALES AND MARKETING. Sales and marketing expenses include salaries, sales
commissions, benefits and travel expenses for our 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 $11.5 million in the second quarter of 2000, up $5.8
million or 100% from $5.8 million in the second quarter of 1999. In the first
six months of 2000, sales and marketing expenses increased to $22.1 million, up
$11.1 million or 102% from $10.9 million in the same period of 1999. These
increases were primarily due to higher commission expenses due to increased
product revenues, increased salary and related expenses and higher marketing
expenses. Sales and marketing expenses represented approximately 8% of total
revenues in the second quarter of 2000 compared to 11% in the second quarter of
1999. For the first six months of 2000, sales and marketing expenses represented
9% of total revenues compared to 11% for the same period of the prior year. We
expect sales and marketing expenses to continue to increase as sales of our
products grow and as we continue to develop the retail channel for our products
and as we increase our market development activities for our Secure Digital
Memory Card products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include the
cost of our finance, information systems, human resources, shareholder
relations, legal and administrative functions. General and administrative
expenses were $6.0 million in the second quarter of 2000, up $3.1 million or
108% from $2.9 million in the second quarter of 1999. In the first six months of
2000, general and administrative expenses increased to $10.8 million, up $5.5
million or 103% from $5.3 million in the same period of 1999. These increases
were primarily due to increased salary and related expenses, increased legal
fees and an increase in the allowance for doubtful accounts. General and
administrative expenses represented 4% of total revenues in the second quarter
of 2000 compared to 6% in the second quarter of 1999. For the first six months
of 2000, general and administrative expenses represented 4% of total revenues
compared to 5% for the same period of the prior year. We expect general and
administrative expenses to continue to increase as our general and
administrative functions grow to support our overall growth. General and
administrative expenses could also increase substantially in the future if we
continue to pursue litigation to defend our patent portfolio. See "Factors That
May Affect Future Results - Risks Associated with Patents, Proprietary Rights
and Related Litigation."
INTEREST INCOME. Interest income was $5.8 million in the second quarter of
2000 compared to $1.4 million in the second quarter of 1999. The increase in
2000 was due primarily to higher interest income due to the investment of the
proceeds from the sale of common stock in our November 1999 follow-on public
offering.
GAIN ON INVESTMENT IN FOUNDRY. In the first quarter of 2000, we recognized a
gain of $344.2 million as a result of the merger of United Silicon, Inc.
("USIC") and United Microelectronics Corporation ("UMC"). We had invested $51.2
million in USIC. We received 111 million shares of UMC in exchange for our USIC
shares. These shares were valued at $396 million at the time of the merger. All
of the UMC shares are subject to trading restrictions imposed by UMC and the
Taiwan Stock Exchange. The trading restrictions expired on one-half of the
shares on July 3, 2000. The remaining shares will become available for sale over
a two year period beginning in January 2002. When the shares are ultimately
sold, it is likely that we will recognize additional gains or losses. In May
2000, we received a stock dividend 200 UMC shares for every 1000 shares of UMC
owned, resulting in our ownership of 22 million additional UMC shares.
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OTHER INCOME, NET. Other income, net was $665,000 in the second quarter of
2000 compared to $29,000 for the same period of the prior year. The
increase was primarily due to increased foreign currency transaction gains in
the second quarter of 2000.
PROVISION FOR INCOME TAXES. In the first half of 2000 our effective tax
rate, exclusive of the gain on foundry investment, was 35% compared to 33% for
the same period of the prior year. In the first quarter of 2000, an additional
tax of $140.2 million was provided for the gain on foundry investment. The lower
effective tax rate in 1999 reflects greater benefits from federal and state tax
credits.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, we had working capital of $645.6 million, which
included $175.8 million in cash and cash equivalents and $305.7 million in
short-term investments. Operating activities provided $40.9 million of cash in
the six month period ended June 30, 2000 primarily from net income and an
increase in accounts payable of $11.9 million and income taxes payable of $16.2
million, which were partially offset by an increase in accounts receivable of
$31.2 million and inventories of $11.1 million.
Net cash used in investing activities in the first half of 2000 of $19.4
million consisted of our $15.0 million investment in FlashVision LLC, our
foundry joint venture with Toshiba, and capital equipment purchases of $10.9
million. These uses of cash were partially offset by net proceeds from short
term investments of $6.4 million. In the first half of 2000, cash provided by
financing activities of $8.2 million came primarily from the sale of common
stock through our stock option and employee stock purchase plans.
On June 30, 2000, we closed a transaction with Toshiba providing for the
joint development and manufacturing of 512 megabit and 1 gigabit flash memory
chips and Secure Digital Memory Card controllers. As part of this transaction,
we and Toshiba formed FlashVision LLC, a joint venture to equip and operate a
silicon wafer manufacturing line in Virginia. The cost of equipping the Virginia
wafer manufacturing line is estimated at between $700 million and $800 million.
We, as part of our 50% ownership of the joint venture, expect to invest up to
$150 million in cash, and, if necessary, guarantee equipment lease lines up to
an additional $250 million. We made our first contribution of $15.0 million to
the joint venture during the second quarter of 2000.
In July 2000, we entered into a definitive agreement to make a $75
million equity investment in Tower Semiconductor in Israel resulting in
approximately 10% ownership of Tower. In exchange for its investment, SanDisk
will receive one seat on the board of directors and a guaranteed portion of the
wafer output from the advanced fab Tower plans to build in Migdal Haemek,
Israel. Under the terms of the agreement, SanDisk will make its investment over
a period of approximately 18 months as key milestones related to the
construction, equipping and wafer production at the new wafer fab are met. First
wafer production is expected at the new fab in 2002. The closing of the
transaction is subject to several conditions including, the timely approval of a
financial incentive package for Tower from the Israeli government, Tower's
ability to secure additional financing from other foundry partners and financial
institutions, timely commencement of fab construction and the approval of
Tower's board.
On August 9, 2000, SanDisk entered into a joint venture with Photo-Me
International ("PMI") for the manufacture, installation and service of
self-service digital photo printing labs, or kiosks, bearing the SanDisk brand
name. Under the agreement, SanDisk and PMI will each make an initial investment
of $4 million in the joint venture, called Digital Portal, Inc., and secure
lease financing for the purchase of the kiosks. The total value of the lease
financing will depend on the number of kiosks deployed by the joint venture. We
estimate that we will guarantee equipment lease arrangements of approximately
$40 million over the first two years of the agreement. PMI will manufacture the
kiosks for the joint venture and will install and maintain the kiosks under
contract with the joint venture. The first kiosks are expected to be deployed in
retail stores in the United States in early 2001.
Depending on future demand for our products, we may make additional
investments, which could be substantial, in assembly and test manufacturing
equipment or foundry capacity to support our business in the future. We believe
our existing cash and cash equivalents and short-term investments along with the
planned capital equipment lease arrangements currently in negotiation related to
our FlashVision LLC and Digital Portal, Inc. joint
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ventures will be sufficient to meet our currently anticipated working capital
and capital equipment expenditure requirements for the next twelve months.
On January 3, 2000, the USIC foundry was merged into UMC. We previously
invested $51.2 million in USIC. In exchange for our USIC shares, we received 111
million UMC shares. These shares were valued at approximately $396 million at
the time of the merger, resulting in a pretax gain of $344 million ($204 million
after-tax). All the UMC shares we received as a result of the merger are subject
to trading restrictions imposed by UMC and the Taiwan Stock Exchange. The
trading restrictions expired on one-half of the shares on July 3, 2000. The
remaining shares will become available for sale over a two year period beginning
in January 2002. In addition, in May 2000 we received a stock dividend of 200
UMC shares for every 1000 shares owned, resulting in the ownership of an
additional 22 million shares. When the shares are ultimately sold, it is likely
that we will report additional gains or losses. To the extent we can liquidate
the UMC shares, we will plan to use such funds to support our operations and
capital expenditures.
IMPACT OF CURRENCY EXCHANGE RATES
A portion of our revenues are denominated in Japanese yen. We enter into
foreign exchange forward contracts to hedge against changes in foreign currency
exchange rates. At June 30, 2000, forward contracts with a notional amount of
$18.4 million were outstanding. Future exchange rate fluctuations could have a
material adverse effect on our 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:
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;
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 shortages of components such as capacitors and printed circuit
boards required for the manufacturing of our products;
o excess capacity of flash memory from our competitors and our own
new flash wafer capacity;
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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 natural disasters affecting the countries in which we conduct our
business, particularly Taiwan, Japan and the United States;
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
could 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 products,
CompactFlash and MultiMediaCard, are sold into emerging consumer markets, it has
been difficult to accurately forecast future sales. A substantial majority of
our quarterly sales have historically been 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
We increased our expense levels in the first half of fiscal 2000 to support
our growth. We expect operating expenses to continue to increase in fiscal 2000
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, including our collaboration with Toshiba providing for the joint
development of 512 megabit and 1 gigabit flash memory chips. For example in
fiscal 2000, the incremental research and development expenses related to the
Toshiba joint development project are expected to be in the range of $6 million
to $8 million. In addition, we have significant fixed costs and 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 and MultiMediaCard 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 and MultiMediaCard
products will continue to represent a significant percentage of our product
revenues as consumer applications, such as digital cameras and Internet music
players, become more popular. Dependence on CompactFlash sales, together with
lower pricing caused by increased competition, caused average unit selling
prices to decline 22% during fiscal 1999 compared to a decline of 28% during
fiscal 1998. In the first six months of 2000, average selling
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prices increased 5% compared to the same period in 1999 primarily due to a shift
in product mix to higher capacity cards in our CompactFlash and MultiMediaCard
product lines.
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.
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 encountered in the
shift to volume production for new flash products could impact both reliability
and yields, and result in increased manufacturing costs and reduced product
availability. We may not be able to manufacture future generations of our D2
products with yields sufficient to result in lower costs per megabyte. In fiscal
2000, we expect to rely on our 256 megabit flash memory technology, which has a
lower cost per megabyte than the 128 megabit technology for the majority of our
product shipments. If we are unable to bring future generations of 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, which would result in lost sales, reduced revenues and
reduced margins.
MULTIMEDIACARD PRODUCTS
The MultiMediaCard presents new challenges in assembly and testing. For
example, in the third quarter of 1999, during the MultiMediaCard production
startup phase, we experienced fluctuations in yields which reduced
MultiMediaCard product availability, increased manufacturing costs and reduced
product margins for this product family. We are currently unable to meet all
customer demand for MultiMediaCard products. Future yield problems with our
MultiMediaCard products 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 MultiMediaCard products.
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SECURE DIGITAL MEMORY CARD PRODUCTS
In the third quarter of 1999, we announced a memorandum of understanding
under which we, along with Matsushita and Toshiba, will jointly develop and
promote the Secure Digital Memory Card. The Secure Digital Memory Card is an
enhanced version of our MultiMediaCard that will incorporate advanced security
and copyright protection features required by the emerging markets for the
electronic distribution of music, video and other copyrighted works. We expect
to begin sampling our Secure Digital Memory Card products to key customers in
the second half of 2000. Negotiations for a definitive agreement with Matsushita
and Toshiba concerning this collaboration were concluded in the second quarter.
The Secure Digital Memory Card will incorporate a number of new features,
including SDMI compliant security and copy protection, a mechanical write
protect switch and a high data transfer rate. We have never built products
incorporating these features. Any problems or delays in establishing production
capabilities or ramping up production volumes of our Secure Digital Memory Card
products could result in lost sales or increased manufacturing costs in 2000 and
beyond. In addition, we cannot be sure that manufacturers of consumer electronic
products will develop new products that use the Secure Digital Memory Card or
that content providers such as music studios will agree to distribute their
copyrighted content for storage on Secure Digital Memory Cards. Furthermore,
there is no assurance that consumers will widely adopt Secure Digital Memory
Cards because of the requirement to purchase copyrighted content. Conversely,
broad acceptance of our Secure Digital Memory Card by consumers may reduce
demand for our MultiMediaCard and CompactFlash card products. See "--The success
of our business depends on emerging markets and new products."
WE DEPEND ON THIRD PARTY FOUNDRIES FOR SILICON WAFERS.
All of our products require silicon wafers. We rely on UMC in Taiwan to
supply all of our silicon wafers. We depend on UMC to allocate a portion of its
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 UMC is unable to satisfy these requirements, our business, financial
condition and operating results may suffer. For example, in September 1999, both
UMC foundries producing our flash memory wafers were damaged and temporarily
shut down by an earthquake in Taiwan. Future earthquakes, aftershocks or other
natural disasters in Taiwan could preclude us from obtaining an adequate supply
of wafers to fill customer orders, and could significantly harm our business,
financial condition and results of operations.
Industry-wide 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 2000 and possibly through 2001, which could adversely impact the rate
of growth of our business, either through reduced supply, higher wafer prices or
a combination of the two.
In January 2000, the USIC foundry was merged into UMC. Before the merger,
we owned 10% of USIC, had the right to appoint one of its directors and were
entitled to 12.5% of its total wafer production. As a result of the merger, we
received UMC shares in exchange for our USIC shares. However, we do not have a
right to 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 terms of our wafer supply agreements with UMC, we are obligated to
provide a rolling forecast of anticipated purchase orders for the next six
calendar months. 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
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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 dissatisfied customers, lost sales and lower revenues. In
addition, in February 2000, we entered into a capacity and reservation deposit
agreement with UMC. To reserve additional foundry capacity under this agreement,
we paid UMC a reservation deposit. This deposit will be refunded to us on a
quarterly basis, over the agreement term, if we purchase the full wafer capacity
reserved for us. We may forfeit part of our deposit if we are unable to utilize
our reserved capacity within four quarters of the end of the agreement term. 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.
In the second quarter of 2000 we completed qualifications and began volume
production of the 256 Mbit D2 .24 micron technology in one UMC fab. In the third
quarter of 2000 we plan to complete similar .24 micron qualification and
commence volume production in a second UMC fab. In the third quarter of 2000 we
also plan to complete .24 micron qualification in a third UMC fab in time to
commence volume production in the fourth quarter of 2000. This third fab is a
brand new UMC fab, and there can be no assurances that we will not experience
startup difficulties, delays in wafer availabilty, and potentially initial low
yields, all of which are quite frequently encountered with new advanced
semiconductor wafer fabs. Any such difficulties may adversely impact our product
availability and gross margins.
OUR INVESTMENT IN NEW FLASH MEMORY WAFER PRODUCTION MAY RESULT IN INCREASED
EXPENSES AND FLUCTUATIONS IN OPERATING RESULTS.
On June 30, 2000, we closed a transaction with Toshiba to jointly develop
future flash memory products and jointly manufacture such product, once
developed. Under this agreement, we expect to invest $150 million in cash and
guarantee up to $250 million in equipment leaselines to equip Toshiba's Dominion
Semiconductor manufacturing clean room with advanced wafer processing equipment.
Toshiba is obligated to invest an equal amount and each of us will equally share
the startup expenses and the wafer output. We will use the new production
capacity at Dominion to manufacture primarily flash memory wafers with minimum
lithographic feature size of 0.16 micron initially, moving to 0.13 micron in the
future. Such minimum feature sizes are considered today to be the most advanced
for mass production of silicon wafers and have never been used for the high
volume manufacture of flash memory chips. Therefore, it is difficult to predict
how long it will take to equip and commence production at the new facility and
achieve adequate yields and economically attractive product costs based on our
new designs. We have not operated our own wafer fabrication facility in the past
and therefore do not have any experience in addressing these challenges. With
our investments in the Dominion facility, we are now exposed to the adverse
financial impact of any delays or manufacturing problems associated with the
wafer production line. Any problems or delays in commencing production at the
new Dominion facility could adversely impact our operating results in fiscal
years 2000 and 2001.
We expect to share with Toshiba the expected startup costs
associated with flash memory production at the Dominion facility. We expect to
incur substantial start up expenses related to the hiring and training of
manufacturing personnel, facilitizing the clean room and installing equipment.
During the ramp-up period, equipment depreciation begins and line operating
expenses increase substantially. While the wafer output is still relatively low,
the cost of wafers from the Dominion facility is expected to be significantly
higher than the cost of wafers from our other suppliers. This may negatively
impact our overall product gross margins until flash wafer output from Dominion
reaches an optimum level, which may never occur. Under the agreement with
Toshiba, we are committed to purchase 50% of the output from the Dominion
facility. We will incur startup costs and pay our share of
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ongoing operating activities even if we do not utilize our full share of the
Dominion output. Should customer demand for Nand flash products be below our
available supply, we may suffer from reduced revenues and increased expenses
which could adversely affect our operating results. Furthermore, in order for us
to sell Nand based CompactFlash, MultiMediaCards and SD Cards, we will have to
develop new controllers, printed circuit boards and test algorithms because the
architecture of Nand flash is significantly different from our current Nor flash
designs. Any delays in the development of these elements could prevent us from
taking advantage of the available Nand output and could adversely affect our
results of operations.
In July 2000, SanDisk entered into a definitive agreement to make a $75
million equity investment in Tower Semiconductor in Israel. In exchange for its
investment, SanDisk will receive one seat on the board of directors and a
guaranteed portion of the wafer output from the advanced fab Tower plans to
build in Migdal Haemek, Israel with .18 mircon process technology which Tower
licensed from Toshiba. We plan to use the Tower wafers for the future
manufacture of a portion of our controller chips that are being designed at our
design center in Isreal. Under the terms of the agreement, SanDisk will make its
investment over a period of approximately 18 months as key milestones related to
the construction, equipping and wafer production at the new wafer fab are met.
First wafer production is expected at the new fab in 2002. The closing of the
transaction is subject to several conditions including, the timely approval of a
financial incentive package for Tower from the Israeli government, Tower's
ability to secure additional financing from other foundry partners and financial
institutions, timely commencement of fab construction and the approval of
Tower's board. We cannot assure you that the Tower facility will be completed or
will begin production as scheduled or that the processes needed to fabricate our
wafers will be qualified at the new facility. Moreover, we cannot assure you
that this new facility will be able to achieve acceptable yields or deliver
sufficient quantities of wafers on a timely basis at a competitive price.
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 portable digital 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 1999 and the first half of 2000,
demand for our MultiMediaCard for use in portable digital music players grew
faster than anticipated and we were unable to fill all customer orders .
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.
SECURE DIGITAL MEMORY CARD PRODUCTS
In the third quarter of 1999, we announced a collaboration under which we
will jointly develop the Secure Digital Memory Card, an enhanced version of our
MultiMediaCard, which will incorporate advanced security and copyright
protection features required by the emerging markets for the electronic
distribution of music, video and other copyrighted works. We expect to begin
shipping customer samples of our Secure Digital Memory Cards in 32 and 64
megabyte capacities in the second half of 2000. The Secure Digital Memory Card
is slightly thicker and uses a different interface than our MultiMediaCard.
Because of these differences, the Secure Digital Memory Card will not work in
current products that include a MultiMediaCard slot. In order for the market for
our Secure Digital Memory Card to develop, manufacturers of digital audio/video
and portable computing products must include a Secure Digital Memory Card
compatible slot in their products and acquire a license to the security
algorithms. If OEMs do not incorporate Secure Digital Memory Card slots in their
products or do not buy our Secure Digital Memory Cards, our business, financial
condition and results of operations may be harmed. In addition, consumers may
postpone or altogether forego buying products that utilize our MultiMediaCard
and CompactFlash cards in anticipation of new products that will incorporate the
Secure Digital Memory Card. If this occurs, sales of our MultiMediaCard and
CompactFlash products may be harmed. The main competition for the Secure Digital
Memory Card is expected to come from the Sony Memory Stick. Sony has
substantially greater financial and other resources than we do and extensive
marketing and sales channels and brand recognition. We cannot assure you that
our Secure Digital Memory Card will be successful in the face of such
competition.
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In addition, the market for 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 portable digital 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 portable digital music player market or other emerging markets, sales of
our products would be harmed.
The success of our 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.
512 MEGABIT AND 1 GIGABIT FLASH MEMORY CARD PRODUCTS
On June 30, 2000, we closed a transaction with Toshiba providing for the
joint development and manufacture of 512 megabit and 1 gigabit flash memory
chips and Secure Digital Memory Card controllers. As part of this collaboration,
we and Toshiba plan to employ Toshiba's future 0.16 micron and 0.13 micron NAND
flash integrated circuit manufacturing technology and SanDisk's multilevel cell
flash and controller system technology. The development of 512 megabit and 1
gigabit flash memory chips and Secure Digital Memory Card controllers is
expected to be complex and incorporates SanDisk and Toshiba technology that is
still under development. We cannot assure you that we and Toshiba will
successfully develop these new products or the underlying technology, or that
any development will be completed in a timely or cost-effective manner. If we
are not successful in any of the above, our business, financial condition and
results of operations could suffer.
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 and other components to
meet demand. If we are unable to do so in a timely manner, we may lose market
share to our competitors. Currently, our supply constraints are forcing some of
our largest customers to seek alternate sources of supply to meet their growing
flash memory product needs.
OUR SELLING PRICES MAY BE AFFECTED BY FUTURE EXCESS CAPACITY IN THE MARKET FOR
FLASH MEMORY PRODUCTS.
Currently industry wide demand for flash memory products far exceeds the
available supply. This is primarily driven by an explosion in the growth of
cellular phones and Internet appliances and the accelerating shift in consumer
electronics from analog to digital devices. This strong demand had manifested
itself in improved bookings visibility and a more stable pricing environment.
All major flash memory suppliers, including SanDisk, are responding to this
strong demand by significantly increasing investments in new advanced flash
memory production capacity due to the broadly held assumption that our industry
is entering a prolonged growth phase which will be able to absorb the new flash
production output. If this assumption should prove to be erroneous, or if one or
several of our target markets experience delays
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in anticipated growth, there may be excess supply in market for our products.
This excess capacity, even if temporary in nature, could cause average selling
prices to drop significantly, thereby adversely impacting our product gross
margins and operating results in future quarters.
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 UMC 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 in the past both countries
have conducted military exercises in or near the other's territorial waters and
airspace. The Taiwanese and Chinese governments may 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 "-- 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. Similarly, the weakness of the Euro may make our products less
competitive in Europe relative to Japanese flash memory suppliers.
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 1999, sales to Japan represented 22.4% of product revenue. We
believe these declines were primarily due to the Japanese recession.
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;
o general geopolitical risks such as political and economic instability,
potential hostilities and changes in diplomatic and trade relationships;
o natural disasters affecting the countries in which we conduct our
business, particularly Taiwan and Japan;
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o imposition of regulatory requirements, tariffs, import and export
restrictions and other barriers and restrictions, particularly in China;
o longer payment cycles and greater difficulty in accounts receivable
collection, particularly as we increase our sales through the retail
distribution channel;
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 significantly 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 UMC for all of our flash memory wafers and NEC to supply
certain designs of microcontrollers. In September 1999, both UMC foundries
producing our flash memory wafers were damaged and temporarily shut down by an
earthquake in Taiwan. In addition, due to industry-wide increasing demand for
semiconductors, we have been unable to achieve price reductions from some of our
important suppliers. See "--We depend on third party foundries for silicon
wafers." We have begun to experience longer order lead times and spot shortages
on standard components due to high industry demand. Shortages of any of these
standard components could result in higher manufacturing costs or lower revenues
due to production delays or reduced product shipments. Additionally, where
possible, we are building buffer inventories of critical components. If we
accumulate excess inventories or these buffer inventories become obsolete, we
will have to write down inventories which will adversely affect our gross
margins and results of operations.
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 half 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 second quarter of 2000, we will began using Amkor, in the Philippines, as
an additional subcontractor for card assembly and testing. In fiscal 2000, we
expect that these three subcontractors 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 test 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 2000.
CONTINUING DECLINES IN OUR AVERAGE SALES PRICES MAY RESULT IN DECLINES IN OUR
GROSS MARGINS.
In 1999, the average unit selling prices of our products declined 22%
compared to 1998. In 1999, the average price per megabyte shipped declined 52%
compared to 1998. Because flash data storage markets are characterized by
intense competition and price reductions for our products are necessary to meet
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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, 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 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. Currently,
the markets for our products are supply constrained and our selling prices have
stayed relatively stable. There can be no assurance that this trend will
continue throughout 2000.
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, Fujitsu 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., Sony Corporation,
Kingston Technology Company, Panasonic Consumer Electronic Company,
Silicon Storage Technology, Inc., TDK Corporation, Matsushita Battery,
Inc. Delkin Devices, Inc., Silicon Tek 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 announced an agreement with Matsushita and Toshiba to jointly
develop and promote a next generation flash memory card called the Secure
Digital Memory Card. Under this agreement, Secure Digital Memory Card
royalty-bearing licenses will be granted to other flash memory card
manufacturers, which will increase the competition for our Secure Digital Memory
Card, CompactFlash and MultiMediaCard products. In addition, Matsushita and
Toshiba will sell Secure Digital Memory Cards that will compete directly with
our products. While other flash card manufacturers will be required to pay the
SD Association license fees and royalties which will be shared between
Matsushita, Toshiba and SanDisk, there will be no royalties or license fees
payable among the three companies for their respective sales of the Secure
Digital Memory Card. Thus, we will forfeit potential royalty income from Secure
Digital Memory Card sales by Matsushita and Toshiba.
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On June 30, 2000, we closed a transaction with Toshiba providing for the
joint development and manufacture of 512 megabit and 1 gigabit flash memory
chips and Secure Digital Memory Card controllers. We and Toshiba will each
separately market and sell any products developed and manufactured under this
relationship. Accordingly, we will compete directly with Toshiba for sales of
these advanced chips and controllers.
We have entered into patent cross-license agreements with several of our
leading competitors including, Hitachi, Samsung, Toshiba, Intel, SST 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 of our
competitors, competition will increase and may harm our business, financial
condition and results of operations. Currently, we are engaged in licensing
discussions with several of our competitors. There can be no assurance that we
will be successful in concluding licensing agreements under terms which are
favorable to us.
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 and the Secure
MultiMediaCard from Hitachi and Infineon. 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.
IBM's microdrive, a rotating disk drive in a Type II CompactFlash format
competes directly with our Type II CompactFlash memory cards, for use in
high-end professional digital cameras. M-Systems' Diskonchip 2000 Millennium
product 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 and 1999. 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. Recently, Sony has shifted its focus to the use of its flash Memory
Stick in its latest digital camera models.
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. Sony has licensed its proprietary memory
stick to other companies. If it is adopted and achieves widespread use in future
products, sales of our MultiMediaCard and CompactFlash products may decline.
Recently, Hitachi, Infineon, Sanyo and Fujitsu have proposed their Secure
MultiMediaCard which provides the copy protection function that is included in
our Secure Digital Memory Card. Should this initiative gain industry wide
acceptance, it may reduce the widespread adoption of the Secure Digital Memory
Card.
In the first quarter of 2000, Sanyo announced that it is developing a
miniature magneto-optical storage device for use in future digital cameras,
music players and camcorders. There can be no assurance that this device will
not be adopted by some of our OEM customers.
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
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single bit stored by the industry standard flash technology. In the second
quarter of 1999, Intel announced their new 128 megabit multilevel cell chip and
Hitachi is currently shipping CompactFlash and MultiMediaCard products employing
their multilevel cell 256 megabit flash chip. In addition, Toshiba has begun
customer shipments of 32 and 64 megabyte SmartMedia cards employing their new
256 megabit flash chip. Although Toshiba has not incorporated multilevel cell
flash technology in their 256 megabit flash chip, their use of more advanced
lithographic design rules may allow them to achieve a more competitive cost
structure than that of our 256 megabit 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 1999 and the first half of 2000, 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 in the first half of 2000, sales to our top 10 customers accounted
for approximately 50% of our product revenues. In fiscal 1999 sales to our top
10 customers represented 57% of our product revenues, with sales to one customer
accounting for more than 10% of product sales. If we were to lose any of these
customers or experience any material reduction in orders from these customers,
our revenues and operating results would suffer. Our sales are generally made by
standard purchase orders rather than long-term contracts. In addition, the
composition of our major customer base changes from year to year as the market
demand for our customers' products change.
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 MAY BE SEASONALITY IN OUR BUSINESS.
Sales of our products, in particular the sale of CompactFlash products, in
the consumer electronics applications market may be subject to seasonality. As a
result, product sales may be 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
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in the first quarter of 1998 than in the fourth quarter of 1997, mostly due to
these seasonal factors. Although we did not experience this seasonality in the
first quarter of 2000, 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.
Under the terms of our definitive agreement with Toshiba, we and Toshiba
formed FlashVision LLC, a joint venture which will equip and operate a silicon
wafer manufacturing line in Virginia (the Dominion facility) to manufacture 512
megabit and 1 gigabit flash memory chips. However, we cannot assure you that
this manufacturing line will produce satisfactory quantities of wafers with
acceptable prices and yields. Any failure in this regard could materially harm
our business, financial condition and results of operations. In addition, the
construction improvements and operation of this line will cause us to incur
significant expense and may result in the diversion of resources from other
important areas of business. We cannot assure you that we or Toshiba will be
able to secure sufficient funding to support this manufacturing line. In
addition, we have no experience in operating a wafer manufacturing line and we
intend to rely on the existing manufacturing organization at the Dominion
facility. This organization will be trained in Nand flash manufacturing by
Toshiba, but we cannot assure you that they will be successful in manufacturing
these advanced Nand flash products on a cost-effective basis or at all. We are
committed to purchase 50% of the output from the Dominion facility, and
therefore, should the customer demand for Nand flash products be below our
available supply, our results of operations could be adversely affected.
Furthermore, in order for us to sell Nand based CompactFlash, MultiMediaCards
and SD Cards, we will have to develop new controllers, printed circuit boards
and test algorithms because the architecture of Nand flash is significantly
different from our current Nor flash designs. Any delays in the development of
these elements could prevent us from taking advantage of the available Nand
output and could adversely affect our 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;
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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; or
o any of our products may infringe on the patents of other companies.
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 of approximately $1.9
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,
SST, SmartDisk 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 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 court denied Lexar's request to have
the case dismissed. Discovery in this suit began in August 1998. On February 22,
1999, the 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 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. Lexar filed a motion for summary
judgement that our patent is invalid in view of prior art. A hearing on both of
these motions was held on March 17, 2000 and on March 28, 2000 the court found
that the accused Lexar flash cards contributarily infringed SanDisk's patent and
granted SanDisk's motion for partial summary judgement. Additionally, the court
denied Lexar's summary
Page 29
<PAGE>
judgement motion for non-infringement and invalidity. The trial date for our
patent case, filed in March 1998 has been set for October 2000. No trial date
has been set for the case filed by Lexar in May 1999.
On March 21, 2000, Mitsubishi Denki Co. Ltd. (Mitsubishi Electric) filed a
complaint in Tokyo District Court against SanDisk K.K., SanDisk's wholly-owned
subsidiary in Japan. The complaint alleges that SanDisk K.K., based in Yokohama,
Japan, infringes on three Mitsubishi Japanese patents. The Mitsubishi patents in
question are #JP2099342, #JP2129071 and # JP2138047. Based on preliminary
information, we believe that these patents are related primarily to the
mechanical construction of memory cards built with a separate connector. In the
complaint, Mitsubishi asked the court for a preliminary injunction halting the
sale of our CompactFlash and flash ATA memory cards in Japan. SanDisk and
SanDisk K.K. will vigorously defend itself against Mitsubishi's claims. From
time to time, we have been contacted by various parties who have alleged that
certain of our products infringe on patents that such parties claim to hold. To
date no legal actions have been filed in connection with any such infringement,
other than as discussed above.
In the event of an adverse result in any such litigation, we could be
required to pay substantial damages, cease the manufacture, use and sale of
infringing products, expend significant resources to develop non-infringing
technology or obtain licenses to the infringing technology, or discontinue the
use of certain processes. Litigation frequently involves substantial
expenditures and can require significant management attention, even if we
ultimately prevail. In addition, the results of any litigation matters are
inherently uncertain. Accordingly, there can be no assurance that any of the
foregoing matters, or any future litigation, will not have a material adverse
effect on our business, financial condition and results of operations.
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.
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 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-
Page 30
<PAGE>
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.
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 in the twelve
month period ending June 30, 2000 our stock price has fluctuated from a low of
$18.875 to a high of $169.625. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please refer to the Company's Form 10-K for the year ended December 31,
1999.
Page 31
<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 to 9 and
under "Factors That May Affect Future Results - Risks Associated with Patents,
Proprietary Rights and Related Litigation" on pages 28 to 30 of this Form 10-Q
for the quarterly period ended June 30, 2000, 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 our Annual Meeting of Stockholders held on May 11, 2000, the
following individuals were elected to the Board of Directors:
Votes For Votes Withheld
---------- --------------
William V. Campbell 59,456,150 228,415
Irwin Federman 44,818,795 14,865,770
Catherine P. Lego 59,456,946 227,519
Eli Harari 59,457,040 227,525
James D. Meindl 59,456,880 227,685
Alan F. Shugart 59,444,130 240,435
The following proposals were approved at our Annual Meeting:
<TABLE>
<CAPTION>
Shares in Shares Shares Shares
Favor Opposed Abstaining Non-voting
--------------- ------------- -------------- -----------------
<S> <C> <C> <C> <C>
Increase the authorized 50,514,905 9,139,357 30,303 0
common stock from 125,000,000
to 400,000,000 shares
Ratify the appointment of 59,646,195 8,834 29,536 0
Ernst & Young LLP as independent
auditors for the fiscal year
ending December 31, 2000.
</TABLE>
ITEM 5. OTHER INFORMATION
None
Page 32
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
<TABLE>
<CAPTION>
<S><C>
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)
10.33 Master Agreement, dated as of May 9, 2000, by and among the Company, Toshiba Corporation and
Semiconductor North America, Inc.*,+
10.34 Operating Agreement, dated as of May 9, 2000, by and between the Company and Semiconductor North
America, Inc.*
10.35 Common R&D and Participation Agreement, dated as of May 9, 2000, by and between the Company and
Toshiba Corporation. *,+
10.36 Product Development Agreement, dated as of May 9, 2000, by and between the Company and Toshiba
Corporation.*,+
</TABLE>
Page 33
<PAGE>
<TABLE>
<S><C>
21.1 Subsidiaries of the Registrant.(10)
27.1 Financial Data Schedule for the quarter ended March 31, 2000. (In EDGAR format only)*
</TABLE>
----------
* Filed herewith.
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.
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.
+ Confidential treatment has been requested for certain portions thereof.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 2000.
Page 34
<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/ Frank A. Calderoni
--------------------------
Frank A. Calderoni
Senior Vice President, Finance
and Administration and
Chief Financial Officer
(On behalf of the Registrant
and as Principal Financial
Officer.)
DATED: AUGUST 16, 2000
Page 35
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<S> <C> <C>
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)
10.33 Master Agreement, dated as of May 9, 2000, by and among the Company, Toshiba Corporation and
Semiconductor North America, Inc.*,+
10.34 Operating Agreement, dated as of May 9, 2000, by and between the Company and Semiconductor North
America, Inc.*
10.35 Common R&D and Participation Agreement, dated as of May 9, 2000, by and between the Company and
Toshiba Corporation. *,+
10.36 Product Development Agreement, dated as of May 9, 2000, by and between the Company and Toshiba
Corporation.*,+
21.1 Subsidiaries of the Registrant.(10)
27.1 Financial Data Schedule for the quarter ended March 31, 2000. (In EDGAR format only)*
</TABLE>
----------
* Filed herewith.
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.
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.
+ Confidential treatment has been requested for certain portions thereof.
