Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --------- Exchange Act of 1934 For the quarterly period ended March 31, 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 March 31, 2000
Common Stock, $0.001 par value 66,558,905
------------------------------ ----------
Class Number of shares
<PAGE>
SanDisk Corporation
Index
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999.......................... 3
Condensed Consolidated Statements of Income
Three months ended March 31, 2000 and 1999.................... 4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 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........29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 30
Item 2. Changes in Securities............................................ 30
Item 3. Defaults upon Senior Securities.................................. 30
Item 4. Submission of Matters to a Vote of Security Holders.............. 30
Item 5. Other Information................................................ 30
Item 6. Exhibits and Reports on Form 8-K................................. 31
Signatures....................................................... 33
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PART I. FINANCIAL INFORMATION
SanDisk Corporation
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<S> <C> <C>
ASSETS March 31, 2000 December 31, 1999*
---------------- ------------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 107,558 $ 146,170
Short-term investments 353,145 312,278
Investment in UMC 214,760 -
Accounts receivable, net 78,884 52,434
Inventories 35,231 35,679
Deferred tax assets - 17,000
Prepaid expenses and other current assets 5,266 4,829
---------------- -----------------
Total current assets 794,844 568,390
Property and equipment, net 31,919 31,788
Investment in UMC 197,688 -
Investment in foundry - 51,208
Deposits and other assets 9,460 6,338
---------------- -----------------
Total Assets $ 1,033,911 $ 657,724
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 31,347 $ 30,734
Accrued payroll and related expenses 6,908 8,259
Income taxes payable 11,715 5,843
Other accrued liabilities 15,331 11,378
Deferred tax liability 60,074 -
Deferred revenue 32,941 29,383
---------------- -----------------
Total current liabilities 158,316 85,597
Deferred tax liability 68,317 -
---------------- -----------------
Total Liabilities 226,633 85,597
---------------- -----------------
Stockholders' Equity:
Common stock 530,204 524,131
Retained earnings 277,074 47,996
---------------- -----------------
Total stockholders' equity 807,278 572,127
Total Liabilities and
================ =================
Stockholders' Equity $ 1,033,911 $ 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)
Three months ended
March 31,
2000 1999
--------------- ----------------
Revenues:
Product $ 97,249 $ 35,926
License and royalty 12,120 8,210
--------------- ---------------
Total revenues 109,369 44,136
Cost of sales 67,758 26,509
--------------- ---------------
Gross profits 41,611 17,627
Operating expenses:
Research and development 8,769 5,212
Sales and marketing 10,544 5,173
General and administrative 4,747 2,394
--------------- ---------------
Total operating expenses 24,060 12,779
Operating income 17,551 4,848
Interest income 5,618 1,397
Gain on investment in foundry 344,168 -
Other income, net 434 207
--------------- ---------------
Income before taxes 367,771 6,452
Provision for income taxes 148,500 2,129
--------------- ---------------
Net income $ 219,271 $ 4,323
=============== ===============
Net income per share
Basic $ 3.32 $ 0.08
Diluted $ 3.00 $ 0.07
Shares used in computing
net income per share
Basic 66,095 53,534
Diluted 73,015 58,628
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>
Three months ended
March 31,
2000 1999
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 219,271 $ 4,323
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,546 1,657
Deferred taxes 138,437 -
Gain on investment in foundry (344,168) -
Changes in operating assets and liabilities:
Accounts receivable, net (26,451) (3,109)
Inventories 448 856
Prepaid expenses and other assets (3,559) 3,320
Accounts payable 613 8,583
Accrued payroll and related expenses (1,351) 1,004
Income taxes payable 5,873 2,089
Other accrued liabilities 3,952 42
Deferred revenue 3,558 (6,418)
--------------- ----------------
Total adjustments (219,102) 8,024
--------------- ----------------
Net cash provided by operating activities 169 12,347
Cash flows from investing activities:
Purchases of short term investments (114,631) (45,127)
Proceeds from sale of short term investments 73,453 34,387
Acquisition of capital equipment (3,676) (3,036)
--------------- ----------------
Net cash used in investing activities (44,854) (13,776)
Cash flows from financing activities:
Sale of common stock 6,073 1,475
--------------- ----------------
Net cash provided by financing activities 6,073 1,475
--------------- ----------------
Net increase (decrease) in cash and cash equivalents (38,612) 46
Cash and cash equivalents at beginning of period 146,170 15,384
=============== ================
Cash and cash equivalents at end of period $ 107,558 $ 15,430
=============== ================
</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 March 31, 2000,
and the results of operations and cash flows for the three month periods
ended March 31, 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 results of operations and cash flows for the three month periods
ended March 31, 2000 are not necessarily indicative of results of
operations and cash flows for any future period.
2. The Company's fiscal year ends on the Sunday closest to December 31, and
each fiscal quarter ends on the Sunday closest to March 31, June 30, and
September 30. The first fiscal quarter of 2000 and 1999 ended on April 2,
2000 and March 28, 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:
March 31, December 31,
2000 1999
---------- ----------
(In thousands)
Raw materials $ 10,040 $ 10,387
Work-in-process 15,489 20,708
Finished goods 9,702 4,584
---------- ----------
$ 35,231 $ 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
March 31,
2000 1999
--------- -------
(In thousands, except
per share amounts)
<S> <C> <C>
Numerator:
Numerator for basic and diluted
net income per share - net income $ 219,271 $ 4,323
========= =======
Denominator for basic net income per share:
Weighted average common shares 66,095 53,534
--------- -------
Shares used in computing basic net incomen per share 66,095 53,534
========= =======
Basic net income per share $ 3.32 $ 0.08
========= =======
Denominator for diluted net income per share:
Weighted average common shares 66,095 53,534
Employee stock options and warrants
to purchase common stock 6,920 5,094
--------- -------
Shares used in computing diluted net income
per share 73,015 58,628
========= =======
Diluted net income per share $ 3.00 $ 0.07
========= =======
</TABLE>
For the three month periods ended March 31, 2000 and 1999, options to
purchase 81,564 and 21,506 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, we 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, trade defamation and fraud. We have denied all of
these counterclaims. In July 1998, the court
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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. In December 1999, Lexar
filed a counter motion for partial summary judgment for invalidity of our
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 us
regarding the comparative performance of our products and Lexar's in
digital cameras were false, and further alleged that we had interfered
with the certification of certain Lexar products by the CompactFlash
Association. On July 1, 1999, we 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 us from using or implying certain terminology in advertising
regarding the comparative performance of our memory products in digital
cameras. On October 1, 1999, we filed counterclaims against Lexar
asserting causes of action including unfair competition and false
advertising under both federal and California law. Although we cannot
predict the ultimate outcome of the case, we believe that Lexar's claims
are without merit and that we have meritorious counterclaims against
Lexar.
A trial date has been set for both of these matters in October 2000.
Although we cannot predict the ultimate outcome of the 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 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 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
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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 March 31, 2000, forward contracts with a
notional amount of $16.2 million were outstanding. In the first quarter
of 2000, the Company had a net foreign currency transaction gain of $0.5
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 loses on
available-for-sale marketable securities, net of the related tax effects,
for all periods presented.
Three months ended
March 31,
2000 1999
-------- --------
(In thousands)
Net income $219,271 $ 4,323
Unrealized gain (loss) on
available-for-sale securities 9,807 (252)
-------- --------
Comprehensive income $229,078 $ 4,071
======== ========
Accumulated other comprehensive income was $10.0 million and $0.2 million
at March 31, 2000 and December 31, 1999, respectively.
9. On May 9, 2000, the Company signed a definitive agreement with Toshiba
providing for the joint development and manufacturing of 512 megabit and
1 gigabit flash memory chips and Secure Digital Memory Card controllers.
Further, the Company and Toshiba will form and fund a joint venture,
FlashVision LLC, 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
for an additional $250 million. 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. The agreement is
expected
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to close no later than June 30, 2000, pending satisfactory completion
of due diligence by SanDisk and Toshiba.
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). All of the UMC
shares received by the Company are subject to trading restrictions
imposed by UMC and the Taiwan Stock Exchange. The trading restrictions
will expire 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 report additional gains or losses.
The 50% of the shares that will become unrestricted in 2000 will be
treated as available-for-sale securities under FASB 115 at March 31,
2000. At March 31, 2000, these shares were adjusted to market value and
the resulting unrealized net gain of $10.1 million dollars was included
in other comprehensive income. The remaining 50% of the shares, that will
be restricted from sale until 2002, will be accounted for at their
historical cost. In April 2000, UMC announced a stock dividend of 200
shares for every 1000 shares of UMC owned, resulting in our ownership of
22 million shares additional shares of UMC.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements in this discussion and analysis are forward looking
statements based on current expectations, and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward looking statements. Such risks and uncertainties are
discussed below and in 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 quarter 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 currently manufactured
by UMC in Taiwan. Industry-wide demand for semiconductors increased
significantly in 1999 and the first quarter of 2000, due to increased demand in
the consumer electronics and cellular phone markets. This increased demand is
expected to continue in 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. For example, in the second quarter of 1998, our product
gross margins were negatively impacted by such an inventory write down. 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. For
example, in 1998, product sales to Japan declined 19% from the prior year, due
in part to the Asian economic crisis. 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 $97.2 million in the first
quarter of 2000, up $61.3 million or 171% from the first quarter of 1999. During
the three month period ended March 31, 2000, flash memory product unit shipments
increased 168% over the same period in 1999. The largest increase came from
sales of CompactFlash which represented 50% of product revenues, and
MultiMediaCards which represented 15% of product revenues for the three month
period ended March 31, 2000. Average selling prices were relatively unchanged in
the first quarter of 2000 compared to the same period in 1999. A shift in
product mix to higher capacity cards offset a decline in the average selling
price per megabyte of capacity shipped. 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 month periods ended March 31, 2000 and 1999. Sales to the retail channel
represented 26% of product revenues in the first quarter of 2000, up from 20%
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 50% of our product revenues for the three month
period ended March 31, 2000 compared to 42% for the same period 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 March 31,
2000, our top ten customers represented approximately 52% of our product
revenues compared to 61% for the same period in 1999. In the first three months
of fiscal 2000, one customer accounted for more than 10% of product sales. Two
customers each accounted for more than 10% of product sales in the first three
months 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 $12.1 million in the first quarter of
2000, up from $8.2 million in the same period of the previous year, due
primarily to an increase in royalty revenues. Revenues from licenses and
royalties decreased to 11% of total revenues in the first quarter of 2000 from
19% in the first quarter of 1999.
Gross Profits. In the first quarter of 2000, gross profits were $41.6
million, or 38% of total revenues compared to $17.6 million, or 40% of total
revenues in the same period of 1999. Product gross margin increased to 30% of
product revenues in the first quarter of 2000 from 26% in the first quarter of
1999, primarily due to a lower cost per megabyte of our 128Mbit and 256Mbit
flash memory products. We plan to decrease production of our 128Mbit products in
the second quarter of 2000 as we ramp up production of our 256Mbit products. The
256Mbit flash chip has a lower manufacturing cost per megabyte and we currently
expect it to contribute to improved product gross margins in the second quarter.
The initial production period of each new generation of flash technology is
subject to many risks and uncertainties as described in "Factors That May Affect
Future Results - In transitioning to new processes and products we face
production and market acceptance risks."
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 $8.8 million in the first quarter of 2000, up $3.6 million or 68%
from $5.2 million in the same period of 1999. This increase was primarily due to
increased salary and related expenses and increased depreciation expense.
Research and development expenses represented 8% of total revenues in the first
quarter of 2000 compared to 12% in the first quarter of 1999. 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. We expect the
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.
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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 $10.5 million in the first quarter of 2000, up $5.4
million or 104% from $5.2 million in the first quarter of 1999. The increase was
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 10% of total revenues in the first
quarter of 2000 compared to 12% in the first quarter of 1999. We expect sales
and marketing expenses to increase as sales of our products grow and as we
continue to develop the retail channel for our 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 $4.7 million in the first quarter of 2000, up $2.4 million or 98%
from $2.4 million in the first quarter of 1999. The increase was primarily due
to increased salary and related expenses, an increase in the allowance for
doubtful accounts and increased legal expenses. For the three month period ended
March 31, 2000, general and administrative expenses represented 4% of total
revenues compared to 5% for the same period in 1999. We expect general and
administrative expenses 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 $5.6 million in the first quarter of
2000 compared to $1.4 million in the first 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 will expire 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 report additional gains or losses. In April
2000, UMC announced a stock dividend of 200 shares for every 1000 shares of UMC
owned, resulting in our ownership of 22 million additional UMC shares.
Other Income, net. Other income, net was $0.4 million in the first quarter
of 2000 compared to $0.2 million for the same period of the prior year. The
increase was primarily due to increased foreign currency transaction gains in
the first quarter of 2000.
Provision for Income Taxes. We recorded a provision for income taxes of $8.3
million, or a 35% effective tax rate for the three month period ending March 31,
2000. We recorded an additional tax provision of $140.2 million, or an
approximate tax rate of 41% on the gain in foundry investment. The effective tax
rate in 1999 was 33%. The lower effective tax rate in 1999 reflects greater
benefits from federal and state tax credits.
Liquidity and Capital Resources
As of March 31, 2000, we had working capital of $636.5 million, which
included $107.6 million in cash and cash equivalents and $353.1 million in
short-term investments. Operating activities provided $0.2 million of cash in
the first quarter of 2000 primarily from net income and an increase in current
liabilities of $12.6 million, which were partially offset by an increase in
accounts receivable of $26.5 million.
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Net cash used in investing activities of $44.9 million in the first quarter
of 2000 consisted of net purchases of investments of $41.2 million and capital
equipment purchases of $3.7 million. In the first quarter of 2000, cash provided
by financing activities of $6.1 million came primarily from the sale of common
stock through our stock option and employee stock purchase plans.
In May 2000, we signed a definitive agreement with Toshiba providing for the
joint development and manufacturing of 512 megabit and 1 gigabit flash memory
chips and Secure Digital Memory Card controllers. Further, we and Toshiba will
form and fund a joint venture, FlashVision LLC, 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 for an
additional $250 million. The agreement is expected to close no later than June
30, 2000, pending satisfactory completion of due diligence by SanDisk and
Toshiba.
Depending on the future demand for our products, we may decide to make
additional investments, which could be substantial, in assembly and test
manufacturing equipment or foundry capacity to support our business in the
future.
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 will expire 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
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 March 31, 2000, forward contracts with a notional amount of
$16.2 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;
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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 excess capacity of flash memory from our competitors and our own new
flash wafer capacity;
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.
o 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 product,
CompactFlash, is sold into an emerging consumer market, 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 1999 and the first quarter 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.
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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 addition, average unit selling prices declined in the first
quarter of 2000 compared to the fourth quarter of 1999 and we expect this trend
to continue.
Variability of license fees and royalties
Our intellectual property strategy is to cross-license our patents to other
manufacturers of flash products. Under these arrangements, we earn license fees
and royalties on individually negotiated terms. The timing of revenue
recognition from these payments is dependent on the terms of each contract and
on the timing of product shipments by the third parties. This may cause license
and royalty revenues to fluctuate significantly from quarter to quarter. Because
these revenues have higher gross margins than product revenues, gross margins
and net income fluctuate significantly with changes in license and royalty
revenues.
In transitioning to new processes and products, we face production and market
acceptance risks.
General
Successive generations of our products have incorporated semiconductor
devices with greater memory capacity per chip. Two important factors that enable
us to decrease the costs per megabyte of our flash data storage products are the
development of higher capacity semiconductor devices and the implementation of
smaller geometry manufacturing processes. A number of challenges exist in
achieving a lower cost per megabyte, including:
o overcoming lower yields often experienced in the early production of new
semiconductor devices;
o problems with design and manufacturing of products that will incorporate
these devices; and
o production delays.
Because our products are complex, we periodically experience significant
delays in the development and volume production ramp up of our products. Similar
delays could occur in the future and could harm our business, financial
condition and results of operations.
128 megabit technology
We began shipments of 128 megabit products in the second quarter of 1999. In
the third quarter of 1999, we accelerated the production ramp up of our 128
megabit flash memory technology to meet increased demand. In the third quarter
of 1999, during the production ramp up of our 128 megabit technology, lower than
anticipated yields contributed to a decline in gross margins. If we experience
unplanned yield problems on our 128 megabit technology in the future, we may be
unable to meet our customers' demand for high capacity MultiMediaCard and
CompactFlash products which could result in lost sales and reduced revenues. In
addition, our gross margins may be harmed by any problems we encounter in the
production of our 128 megabit flash memory. We plan to decrease production of
our 128 megabit products in the second quarter of 2000 as we ramp up production
of our 256 megabit products.
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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 increase production of our 256 megabit flash memory
technology, which has a lower cost per megabyte than the 128 megabit technology.
If we are unable to bring 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. 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.
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 shipping our Secure Digital Memory Card products in the second quarter
of 2000. Negotiations for a definitive agreement concerning this collaboration
are underway, and are expected to be 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. 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
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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 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.
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, demand for our 32 megabyte
capacity MultiMediaCard for use in portable digital music players grew faster
than anticipated and we were unable to fill all customer orders during the year.
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 quarter of 2000. The Secure Digital Memory
Card is slightly thicker and uses a different interface than our MultiMediaCard.
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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.
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 scale flash memory card products
In May 2000, we signed a definitive agreement 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
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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 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.
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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;
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 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 recently experienced resistance to 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 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 begin using an additional subcontractor
in
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<PAGE>
the Philippines for card assembly and testing. In fiscal 2000, we expect that
they will be assembling and testing a majority of our mature, high-volume
products. This increased reliance on subcontractors is expected to reduce
manufacturing costs and give us access to increased production capacity. During
the transition period, we will continue full operations at our Sunnyvale
production facility while simultaneously transferring 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 first half of 2000 and beyond.
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
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, 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.
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<PAGE>
We have announced a memorandum of understanding under which we, Matsushita
and Toshiba will jointly develop and promote a next generation flash memory card
called the Secure Digital Memory Card. Under this agreement, Secure Digital
Memory Card 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.
In May 2000, we signed a definitive agreement 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.
In September 1998, IBM introduced the microdrive, a rotating disk drive in a
Type II CompactFlash format. This product competes directly with our Type II
CompactFlash memory cards, for use in high-end professional digital cameras. In
October 1998, M-Systems introduced their Diskonchip 2000 Millennium product
which competes against our Flash ChipSet products in embedded storage
applications such as set top boxes and networking appliances.
According to independent industry analysts, Sony's Mavica digital camera
captured a considerable portion of the United States market for digital cameras
in 1998 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
Page 24
<PAGE>
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 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 quarter 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 quarter of 2000, sales to our top 10 customers accounted
for approximately 52% of our product revenues and in 1999 sales to our top 10
customers represented 61% of our product revenues . In the first quarter of 2000
and in fiscal year 1999, one customer accounted 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.
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<PAGE>
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 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 and are not able to fulfill all demand from our customers,
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
will jointly form and fund 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 Nand flash 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.
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<PAGE>
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;
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 $1.7
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.
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<PAGE>
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 judgement motion for non-infringement and invalidity. A
trial date has been set this matter in October 2000.
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,
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<PAGE>
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-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 March 31, 2000 our stock price has fluctuated from a low of
$8.50 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.
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<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this item is set forth in Note 6 of the
Notes to the Condensed Consolidated Financial Statements on pages 7 and 8 and
under "Factors That May Affect Future Results - Risks Associated with Patents,
Proprietary Rights and Related Litigation" on pages 26 to 28 of this Form 10-Q
for the quarterly period ended March 31, 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
None
Item 5. Other Information
None
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit
Number Exhibit Title
3.1 Certificate of Incorporation of the Registrant, as amended to date.2
3.2 Form of Amended and Restated Certificate of Incorporation of the
Registrant.2
3.3 Bylaws of the Registrant, as amended.2
3.4 Form of Amended and Restated Bylaws of the Registrant 2
3.5 Certificate of Designation for the Series A Junior Participating
Preferred Stock, as filed with the Delaware Secretary of State on April
24, 1997.4
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.2
4.3 Amended and Restated Registration Rights Agreement, among the Registrant
and the investors and founders named therein, dated March 3, 1995.2
4.5 Series F Preferred Stock Purchase Agreement between Seagate Technology,
Inc. and the Registrant, dated January 15, 1993.2
4.8 Rights Agreement, dated as of April 18, 1997, between the Company and
Harris Trust and Savings Bank.4
4.9 First Amendment to Rights Agreement dated October 22, 1999, between
Harris Trust and the Registrant.11
9.1 Amended and Restated Voting Agreement, among the Registrant and the
investors named therein, dated March 3, 1995.2
10.10 License Agreement between the Registrant and Dr. Eli Harari, dated
September 6, 1988.2
10.13 1989 Stock Benefit Plan.2
10.14 1995 Stock Option Plan.2
10.15 Employee Stock Purchase Plan.2
10.16 1995 Non-Employee Directors Stock Option Plan.2
10.18 Lease Agreement between the Registrant and G.F. Properties, dated March
1, 1996.3
10.21 Amendment to Lease Agreement between the Registrant and G.F. Properties,
dated April 3, 1997.5
10.23 Foundry Venture Agreement between the Registrant and United
Microelectronics Corporation, dated June 27, 1997.1, 6
10.24 Written Assurances Re: Foundry Venture Agreement between the Registrant
and United Microelectronics Corporation, dated September 13, 1995.1, 6
10.25 Side Letter between Registrant and United Microelectronics Corporation,
dated May 28, 1997.1, 6
10.27 Clarification letter with regards to Foundry Venture Agreement between
the Registrant and United Microelectronics Corporation dated October 24,
1997.7
10.28 Lease Agreement between the Registrant and G.F. Properties, dated June
10, 1998.8
10.29 Trade Finance Agreement between the Registrant and Union Bank of
California, dated July 15, 1998.9
10.30 1995 Stock Option Plan Amended and Restated as of December 17, 1998.12
10.31 1995 Non-Employee Directors Stock Option Plan Amended and Restated as of
December 17, 1998.12
10.32 1995 Employee Stock Purchase Plan Amended and Restated as of December 17,
1998.12
21.1 Subsidiaries of the Registrant.10
27.1 Financial Data Schedule for the quarter ended March 31, 2000. (In EDGAR
format only)
- ----------
1. Confidential treatment granted as to certain portions of these exhibits.
2. Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-1 (No. 33-96298).
3. Previously filed as an Exhibit to the Registrant's 1995 Annual Report on
Form 10-K.
Page 31
<PAGE>
4. Previously filed as an Exhibit to the Registrant's Current Report on Form
8-K/A dated April 18, 1997.
5. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended June 30, 1997.
6. Previously filed as an Exhibit to the Registrant's Current Report on form
8-K dated October 16, 1997.
7. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended September 30, 1997.
8. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended June 30, 1998.
9. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended September 30, 1998.
10. Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K.
11. Previously filed as an Exhibit to the Registrant's Current Report on Form
8-K dated January 1, 1999.
12. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended March 31, 1999.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
2000.
Page 32
<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 Calderoni
-----------------------
Frank Calderoni
Chief Financial Officer,
Senior Vice President, Finance and
Administration
(On behalf of the Registrant and as
Principal Financial Officer.)
DATED: May 15, 2000
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 219,271
<EPS-BASIC> 3.32
<EPS-DILUTED> 3.00
</TABLE>
