-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FdPx1nLpLzm828Eb9rlJrjI74tiNxMjhnCVLoOInBrlfaX2UtEVquCr2hP3nQHV5 blXH75Gx34Cyw1VR8FZXVw== 0001000180-10-000094.txt : 20100812 0001000180-10-000094.hdr.sgml : 20100812 20100812172822 ACCESSION NUMBER: 0001000180-10-000094 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20100704 FILED AS OF DATE: 20100812 DATE AS OF CHANGE: 20100812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SANDISK CORP CENTRAL INDEX KEY: 0001000180 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 770191793 STATE OF INCORPORATION: DE FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26734 FILM NUMBER: 101012100 BUSINESS ADDRESS: STREET 1: 601 MCCARTHY BLVD. CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4088011000 MAIL ADDRESS: STREET 1: 601 MCCARTHY BLVD. CITY: MILPITAS STATE: CA ZIP: 95035 10-Q 1 form_10q.htm FORM 10-Q Q2'10 form_10q.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
 For the quarterly period ended July 4, 2010
     
   
                                                                                                                                              ;              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:  000-26734
 

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.)
     
601 McCarthy Blvd.
Milpitas, California
 
95035
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code
(408) 801-1000

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 þ
No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ
No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non accelerated filer ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨
No þ

Number of shares outstanding of the issuer’s common stock $0.001 par value, as of July 4, 2010: 233,071,767.

 



 
 

 

SanDisk Corporation

   
Page No.
PART I. FINANCIAL INFORMATION
Item 1.
Condensed Consolidated Financial Statements:
 
 
Condensed Consolidated Balance Sheets as of July 4, 2010 and January 3, 2010
 
Condensed Consolidated Statements of Operations for the three and six months ended July 4, 2010 and June 28, 2009
 
Condensed Consolidated Statements of Cash Flows for the six months ended July 4, 2010 and June 28, 2009
 
Notes to Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
(Removed and Reserved)
Item 5.
Other Information
Item 6.
Exhibits
 
Signatures
 
Exhibit Index





 
2

 

PART I. FINANCIAL INFORMATION

Item 1.  
Condensed Consolidated Financial Statements

SANDISK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

   
July 4,
 2010
   
January 3,
 2010
 
   
(In thousands)
 
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 1,237,011     $ 1,100,364  
Short-term marketable securities
    1,190,562       819,002  
Accounts receivable from product revenues, net
    345,264       234,407  
Inventory
    493,871       596,493  
Deferred taxes
    95,314       66,869  
Other current assets
    95,444       97,639  
Total current assets
    3,457,466       2,914,774  
Long-term marketable securities
    1,290,038       1,097,095  
Property and equipment, net
    258,837       300,997  
Notes receivable and investments in the flash ventures with Toshiba
    1,589,084       1,507,550  
Deferred taxes
    52,049       21,210  
Intangible assets, net
    47,331       58,076  
Other non-current assets
    45,575       102,017  
Total assets
  $ 6,740,380     $ 6,001,719  
                 
LIABILITIES
               
Current liabilities
               
Accounts payable trade
  $ 115,177     $ 134,427  
Accounts payable to related parties
    197,044       182,091  
Convertible short-term debt
          75,000  
Other current accrued liabilities
    304,554       234,079  
Deferred income on shipments to distributors and retailers and deferred revenue
    270,245       245,513  
Total current liabilities
    887,020       871,110  
Convertible long-term debt
    963,438       934,722  
Non-current liabilities
    321,071       287,478  
Total liabilities
    2,171,529       2,093,310  
                 
Commitments and contingencies (see Note 11)
               
                 
EQUITY
               
Stockholders’ equity
               
Preferred stock
           
Common stock
    233       229  
Capital in excess of par value
    4,394,832       4,268,845  
Retained earnings (accumulated deficit)
    5,096       (487,489 )
Accumulated other comprehensive income
    171,649       128,713  
Total stockholders’ equity
    4,571,810       3,910,298  
Non-controlling interests
    (2,959 )     (1,889 )
Total equity
    4,568,851       3,908,409  
Total liabilities and equity
  $ 6,740,380     $ 6,001,719  

The accompanying notes are an integral part of these condensed consolidated financial statements.


SANDISK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three months ended
   
Six months ended
 
   
July 4, 2010
   
June 28, 2009
   
July 4, 2010
   
June 28, 2009
 
   
(In thousands, except per share amounts)
 
Revenues
                       
Product
  $ 1,091,315     $ 610,432     $ 2,084,510     $ 1,198,531  
License and royalty
    87,753       120,141       181,221       191,513  
Total revenues
    1,179,068       730,573       2,265,731       1,390,044  
Cost of product revenues
    629,554       478,444       1,212,907       1,135,922  
Amortization of acquisition-related intangible assets
    3,132       3,132       6,264       6,264  
Total cost of product revenues
    632,686       481,576       1,219,171       1,142,186  
Gross profit
    546,382       248,997       1,046,560       247,858  
Operating expenses
                               
Research and development
    99,799       91,219       198,452       178,155  
Sales and marketing
    52,094       50,409       100,595       88,287  
General and administrative
    35,399       38,636       74,123       76,961  
Amortization of acquisition-related intangible assets
    291       291       583       583  
Restructuring and other
                      765  
Total operating expenses
    187,583       180,555       373,753       344,751  
Operating income (loss)
    358,799       68,442       672,807       (96,893 )
Interest income
    12,219       14,080       24,619       33,448  
Interest (expense) and other income (expense), net
    (12,243 )     (9,364 )     (15,657 )     (47,425 )
Total other income (expense)
    (24 )     4,716       8,962       (13,977 )
Income (loss) before provision for income taxes
    358,775       73,158       681,769       (110,870 )
Provision for income taxes
    100,881       20,651       189,184       44,618  
Net income (loss)
  $ 257,894     $ 52,507     $ 492,585     $ (155,488 )
                                 
Net income (loss) per share:
                               
Basic
  $ 1.11     $ 0.23     $ 2.14     $ (0.69 )
Diluted
  $ 1.08     $ 0.23     $ 2.07     $ (0.69 )
Shares used in computing net income (loss) per share:
                               
Basic
    231,673       226,976       230,487       226,753  
Diluted
    239,801       231,066       238,566       226,753  

The accompanying notes are an integral part of these condensed consolidated financial statements.


 
 
SANDISK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Six months ended
 
   
July 4, 2010
   
June 28, 2009
 
   
(In thousands)
 
Cash flows from operating activities:
           
Net income (loss)
  $ 492,585     $ (155,488 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Deferred taxes
    (78,909 )     2,303  
Depreciation
    69,105       76,652  
Amortization
    40,588       37,110  
Provision for doubtful accounts
    (2,599 )     (779 )
Share-based compensation expense
    31,847       38,684  
Excess tax benefit from share-based compensation
    (13,728 )      
Impairments, restructuring and other
    (16,238 )     7,133  
Other non-operating
    18,939       (967 )
Changes in operating assets and liabilities:
               
Accounts receivable from product revenues
    (109,935 )     (27,960 )
Inventory
    100,230       61,548  
Other assets
    23,577       270,808  
Accounts payable trade
    (19,072 )     (124,686 )
Accounts payable to related parties
    14,953       (123,263 )
Other liabilities
    162,002       (199,643 )
Total adjustments
    220,760       16,940  
Net cash provided by (used in) operating activities
    713,345       (138,548 )
                 
Cash flows from investing activities:
               
Purchases of short and long-term marketable securities
    (1,442,959 )     (536,109 )
Proceeds from sales of short and long-term marketable securities
    691,711       572,630  
Proceeds from maturities of short and long-term marketable securities
    169,015       87,640  
Acquisition of property and equipment
    (37,414 )     (32,667 )
Distribution from FlashVision Ltd.
    122       12,713  
Notes receivable issuance, Flash Partners Ltd. and Flash Alliance Ltd.
          (377,923 )
Notes receivable proceeds, Flash Partners Ltd. and Flash Alliance Ltd.
          330,149  
Proceeds from sale of assets
    17,767        
Purchased technology and other assets
    (1,982 )     (3,153 )
Net cash provided by (used in) investing activities
    (603,740 )     53,280  
                 
Cash flows from financing activities:
               
Repayment of debt financing
    (75,000 )      
Proceeds from employee stock programs
    84,356       6,275  
Excess tax benefit from share-based compensation
    13,728        
Net cash provided by financing activities
    23,084       6,275  
Effect of changes in foreign currency exchange rates on cash
    3,958       1,459  
Net increase (decrease) in cash and cash equivalents
    136,647       (77,534 )
Cash and cash equivalents at beginning of the period
    1,100,364       962,061  
Cash and cash equivalents at end of the period
  $ 1,237,011     $ 884,527  

 The accompanying notes are an integral part of these condensed consolidated financial statements.



SANDISK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.  
Organization and Summary of Significant Accounting Policies

Organization

These interim Condensed Consolidated Financial Statements are unaudited but reflect, in the opinion of management, all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly the financial position of SanDisk Corporation and its subsidiaries (the “Company”) as of July 4, 2010, the Condensed Consolidated Statements of Operations for the three and six months ended July 4, 2010 and June 28, 2009, and the Condensed Consolidated Statements of Cash Flows for the six months ended July 4, 2010 and June 28, 2009.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been omitted in accordance with the rules and regulations of the Securities and Exchang e Commission (“SEC”).  These Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s most recent Annual Report on Form 10-K filed on February 25, 2010.  Certain prior period amounts have been reclassified to conform to the current period presentation including certain cash flow line items within investing activities.  The results of operations for the three and six months ended July 4, 2010 are not necessarily indicative of the results to be expected for the entire fiscal year.

Basis of Presentation.  The Company’s fiscal year ends on the Sunday closest to December 31, and its fiscal quarters consist of 13 weeks and generally end on the Sunday closest to March 31, June 30 and September 30, respectively.  The second quarters of fiscal years 2010 and 2009 ended on July 4, 2010 and June 28, 2009, respectively.  Fiscal year 2010 consists of 52 weeks and fiscal year 2009 consisted of 53 weeks, with the fourth quarter of fiscal year 2009 having 14 weeks, ending on January 3, 2010.  For accounting and disclosure purposes, an exchange rate at July 4, 2010 of 87.68 was used to convert Japanese yen to U.S. dollars.

Organization and Nature of Operations.  The Company was incorporated in Delaware on June 1, 1988.  The Company designs, develops and markets flash storage products used in a wide variety of consumer electronics products.  The Company operates in one segment, flash memory storage products.

Principles of Consolidation.  The Condensed Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries.  All intercompany balances and transactions have been eliminated.  Non-controlling interest represents the minority shareholders’ proportionate share of the net assets and results of operations of the Company’s majority-owned subsidiaries.

Use of Estimates.  The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes.  The estimates and judgments affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent liabilities.  On an ongoing basis, the Company evaluates its estimates, including those related to customer programs and incentives, intellectual property claims, product returns, bad debts, inventories, investments, long-lived assets, income taxes, warranty obligations, restructuring, contingencies, share-based compensation and litigat ion.  The Company bases estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances.  These estimates form the basis for making judgments about the carrying value of assets and liabilities when those values are not readily apparent from other sources.  Actual results could materially differ from these estimates.

Revenue Recognition.  On January 4, 2010, the Company early adopted prospectively new accounting guidance as issued by the Financial Accounting Standards Board (“FASB”) related to revenue recognition of multiple element arrangements and revenue arrangements that include software elements.  Multiple element arrangements and arrangements that include software have been immaterial to the Company’s revenue and operating results through July 4, 2010.  The Company allocates revenue to each element based on their relative selling price in accordance with the Company’s normal pricing and discounting practices for the specific product or maintenance when sold separately for all multiple element products.  In addition, the C ompany analyzes whether tangible products containing software and non-software components that function together should be excluded from industry-specific software revenue recognition guidance.  In terms of the timing and pattern of revenue recognition, the new accounting guidance for revenue recognition is not expected to have a significant effect on total net revenues in periods after the initial adoption.


 
6


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



2.  
Investments and Fair Value Measurements
 
The Company measures assets and liabilities at fair value based upon exit price, representing the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants.  When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability.  The Company’s financial assets are measured at fair value on a recurring basis.
 
Fair Value Hierarchy.  The accounting guidance provides a framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  The three levels of the fair value hierarchy are described as follows:
 
Level 1
Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to directly access.
Level 2
Valuations based on quoted prices for similar assets or liabilities; valuations for interest-bearing securities based on non-daily quoted prices in active markets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3
Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Instruments that are classified within Level 1 of the fair value hierarchy generally include money market funds, U.S. Treasury securities and equity securities.  Level 1 securities represent quoted prices in active markets, and therefore do not require significant management judgment.
 
Instruments that are classified within Level 2 of the fair value hierarchy primarily include government agency securities, asset-backed securities, mortgage-backed securities, commercial paper, U.S. government-sponsored agency securities, corporate notes and bonds, and municipal obligations.  The Company’s Level 2 securities are primarily valued using quoted market prices for similar instruments and nonbinding market prices that are corroborated by observable market data.  The Company uses inputs such as actual trade data, benchmark yields, broker/dealer quotes, and other similar data, which are obtained from independent pricing vendors, quoted market prices, or other sources to determine the ultimate fair value of our assets and liabilities.  The inputs and fair value are reviewed for reasonableness a nd may be further validated by comparison to publicly available information or compared to multiple independent valuation sources.

 
7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Financial assets and liabilities measured at fair value on a recurring basis as of July 4, 2010 were as follows (in thousands):

   
Total
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Money market funds
  $ 999,003     $ 999,003     $     $  
Fixed income securities
    2,438,481       149,428       2,289,053        
Equity securities
    74,440       74,440              
Derivative assets
    20,850             20,850        
Other
    4,830             4,830        
Total financial assets
  $ 3,537,604     $ 1,222,871     $ 2,314,733     $  
                                 
Derivative liabilities
  $ 43,003     $     $ 43,003     $  
Total financial liabilities
  $ 43,003     $     $ 43,003     $  

Financial assets and liabilities measured at fair value on a recurring basis as of January 3, 2010 were as follows (in thousands):

   
Total
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Money market funds
  $ 869,643     $ 869,643     $     $  
Fixed income securities
    1,831,360       61,129       1,770,231        
Equity securities
    85,542       85,542              
Derivative assets
    4,433             4,433        
Other
    3,395             3,395        
Total financial assets
  $ 2,794,373     $ 1,016,314     $ 1,778,059     $  
                                 
Derivative liabilities
  $ 23,247     $     $ 23,247     $  
Total financial liabilities
  $ 23,247     $     $ 23,247     $  


 
8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Assets and liabilities measured at fair value on a recurring basis as of July 4, 2010, were presented on the Company’s Condensed Consolidated Balance Sheets as follows (in thousands):

   
Total
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Cash equivalents(1)
  $ 1,031,324     $ 1,030,299     $ 1,025     $  
Short-term marketable securities
    1,190,562       122,279       1,068,283        
Long-term marketable securities
    1,290,038       70,293       1,219,745        
Other current assets and other non-current assets
    25,680             25,680        
Total assets
  $ 3,537,604     $ 1,222,871     $ 2,314,733     $  
                                 
Other current accrued liabilities
  $ 20,220     $     $ 20,220     $  
Non-current liabilities
    22,783             22,783        
Total liabilities
  $ 43,003     $     $ 43,003     $  
_________________
(1)
Cash equivalents exclude cash of $205.7 million included in Cash and cash equivalents on the Condensed Consolidated Balance Sheets as of July 4, 2010.

Assets and liabilities measured at fair value on a recurring basis as of January 3, 2010, were presented on the Companys Consolidated Balance Sheets as follows (in thousands):

   
Total
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Cash equivalents(1)
  $ 871,173     $ 869,643     $ 1,530     $  
Short-term marketable securities
    819,002       74,906       744,096        
Long-term marketable securities
    1,097,095       71,765       1,025,330        
Other current assets and other non-current assets
    7,103             7,103        
Total assets
  $ 2,794,373     $ 1,016,314     $ 1,778,059     $  
                                 
Other current accrued liabilities
  $ 7,794     $     $ 7,794     $  
Non-current liabilities
    15,453             15,453        
Total liabilities
  $ 23,247     $     $ 23,247     $  
_________________
(1)
Cash equivalents exclude cash of $229.2 million included in Cash and cash equivalents on the Consolidated Balance Sheets as of January 3, 2010.

As of July 4, 2010, the Company did not elect the fair value option for any financial assets and liabilities that were not required to be measured at fair value.


 
9


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Available-for-Sale Investments.  Available-for-sale investments as of July 4, 2010 were as follows (in thousands):

   
Amortized Cost
   
Gross
Unrealized Gain
   
Gross
Unrealized Loss
   
Fair Value
 
Fixed income securities:
                       
U.S. Treasury and government agency securities
  $ 156,265     $ 112     $ (4 )   $ 156,373  
    U.S. government-sponsored agency securities
    43,985       120             44,105  
Corporate notes and bonds
    368,384       2,221       (318 )     370,287  
Asset-backed securities
    13,929       89             14,018  
Mortgage-backed securities
    7,482       26             7,508  
Municipal notes and bonds
    1,830,780       15,755       (345 )     1,846,190  
      2,420,825       18,323       (667 )     2,438,481  
Equity investments
    69,145       9,435       (4,140 )     74,440  
Total available-for-sale investments
  $ 2,489,970     $ 27,758     $ (4,807 )   $ 2,512,921  

Available-for-sale investments as of January 3, 2010 were as follows (in thousands):

   
Amortized Cost
   
Gross
Unrealized Gain
   
Gross
Unrealized Loss
   
Fair Value
 
Fixed income securities:
                       
U.S. Treasury and government agency securities
  $ 66,984     $ 90     $ (6 )   $ 67,068  
U.S. government-sponsored agency securities
    37,211       20       (298 )     36,933  
Corporate notes and bonds
    251,510       1,103       (664 )     251,949  
Asset-backed securities
    27,719       175             27,894  
Mortgage-backed securities
    4,986       20             5,006  
Municipal notes and bonds
    1,422,126       20,581       (197 )     1,442,510  
      1,810,536       21,989       (1,165 )     1,831,360  
Equity investments
    70,011       15,531             85,542  
Total available-for-sale investments
  $ 1,880,547     $ 37,520     $ (1,165 )   $ 1,916,902  

The fair value and gross unrealized losses on the available-for-sale securities that have been in an unrealized loss position, aggregated by type of investment instrument, and the length of time that individual securities have been in a continuous unrealized loss position as of July 4, 2010, are summarized in the following table (in thousands).  Available-for-sale securities that were in an unrealized gain position have been excluded from the table.

   
Less than 12 months
   
Greater than 12 months
 
   
Market Value
   
Gross
Unrealized Loss
   
Market Value
   
Gross
Unrealized Loss
 
U.S. Treasury and government agency securities
  $ 83,211     $ (4 )   $     $  
Corporate notes and bonds
    93,257       (318 )            
Municipal notes and bonds
    177,243       (345 )            
Equity investments
    64,024       (4,140 )            
Total
  $ 417,735     $ (4,807 )   $     $  


 
10


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The gross unrealized loss related to publicly-traded equity investments were due to changes in market prices.  The Company has cash flow hedges designated to substantially mitigate risk from these equity investments as of July 4, 2010, as discussed in Note 3, “Derivatives and Hedging Activities.”  The gross unrealized loss related to U.S. Treasury and government agency securities and corporate and municipal notes and bonds was primarily due to changes in interest rates.  Gross unrealized loss on all available-for-sale fixed income securities at July 4, 2010 was considered temporary in nature.  Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term pro spects of the investee, and the Company’s intent and ability to hold an investment for a period of time sufficient to allow for any anticipated recovery in market value.  For debt security investments, the Company considered additional factors including the Company’s intent to sell the investments or whether it is more likely than not the Company will be required to sell the investments before the recovery of its amortized cost.
 
The following table shows the gross realized gains and (losses) on sales of available-for-sale securities (in thousands).
 
   
Three months ended
   
Six months ended
 
   
July 4, 2010
   
June 28, 2009
   
July 4, 2010
   
June 28, 2009
 
Gross realized gains
  $ 8,718     $ 1,413     $ 11,707     $ 7,171  
Gross realized (losses)
    (296 )           (302 )     (560 )

Fixed income securities by contractual maturity as of July 4, 2010 are shown below (in thousands).  Actual maturities may differ from contractual maturities because issuers of the securities may have the right to prepay obligations.

   
Cost
   
Estimated
Fair Value
 
Due in one year or less
  $ 1,206,852     $ 1,212,468  
Due after one year through five years
    1,213,973       1,226,013  
Total
  $ 2,420,825     $ 2,438,481  

For certain of the Company’s financial instruments, including accounts receivable, short-term marketable securities and accounts payable, the carrying amounts approximate fair market value due to their short maturities.  For those financial instruments where the carrying amounts differ from fair market value, the following table represents the related costs and the estimated fair values, which are based on quoted market prices (in thousands).

   
As of July 4, 2010
   
As of January 3, 2010
 
   
Carrying
Value
   
Estimated
Fair Value
   
Carrying
Value
   
Estimated
Fair Value
 
1% Notes due 2013
  $ 963,438     $ 1,020,625     $ 934,722     $ 958,813  


 
11


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


3.  
Derivatives and Hedging Activities

The Company uses derivative instruments primarily to manage exposures to foreign currency and equity security price risks.  The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency and equity security prices.  The program is not designated for trading or speculative purposes.  The Company’s derivatives expose the Company to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement.  The Company seeks to mitigate such risk by limiting its counterparties to major financial institutions and by spreading the risk across several major financial institutions.  In addition, the potential risk of loss with any one counterparty resulting from this ty pe of credit risk is monitored on an ongoing basis.

The Company recognizes derivative instruments as either assets or liabilities on its balance sheets at fair value and provides qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements.  Changes in fair value (i.e., gains or losses) of the derivative instruments are recorded as cost of product revenues, other income (expense), or as accumulated other comprehensive income (“OCI”).  The Company does not offset or net the fair value amounts of derivative instruments and separately discloses the fair value amounts of the derivative instruments as either assets or liabilities.

Cash Flow Hedges.  The Company uses a combination of forward contracts and options designated as cash flow hedges to hedge a portion of future forecasted purchases in Japanese yen.  The gain or loss on the effective portion of a cash flow hedge is initially reported as a component of accumulated OCI and subsequently reclassified into cost of product revenues in the same period or periods in which the cost of product revenues is recognized, or reclassified into other income (expense) if the hedged transaction becomes probable of not occurring.  Any gain or loss after a hedge is no longer designated because it is no longer probable of occurring or it is related to an ineffective portion of a hedge, as well as any amount excluded from t he Company’s hedge effectiveness, is recognized as other income or expense immediately, and was a net gain (loss) of ($33) thousand, ($61) thousand, $0.1 million and $1.1 million for the three and six months ended July 4, 2010 and June 28, 2009, respectively.  As of July 4, 2010, the Company had forward and option contracts in place that hedged future purchases of approximately 18.7 billion Japanese yen, or approximately $213 million based upon the exchange rate as of July 4, 2010, and the net unrealized gain on the effective portion of these cash flow hedges was $6.4 million.  The forward and option contracts cover a portion of the Company’s future Japanese yen purchases that are expected to occur during the remainder of fiscal year 2010.

The Company has an outstanding cash flow hedge designated to mitigate equity risk associated with certain available-for-sale investments in equity securities.  The gain or loss on the cash flow hedge is reported as a component of accumulated OCI and will be reclassified into other income (expense) in the same period that the equity securities are sold.  The securities had a fair value of $64.0 million and $71.8 million as of July 4, 2010 and January 3, 2010, respectively.  The cash flow hedge designated to mitigate equity risk of these securities had a fair value of $8.0 million and $0.7 million as of July 4, 2010 and January 3, 2010, respectively.

Other Derivatives.  Other derivatives that are non-designated consist primarily of forward and cross currency swap contracts to minimize the risk associated with the foreign exchange effects of revaluing monetary assets and liabilities.  Monetary assets and liabilities denominated in foreign currencies and the associated outstanding forward and cross currency swap contracts were marked-to-market at July 4, 2010 with realized and unrealized gains and losses included in other income (expense).  As of July 4, 2010, the Company had foreign currency forward contracts hedging exposures in European euros, Japanese yen and British pounds.  Foreign currency forward contracts were outstanding to buy and (sell) U.S. dollar equivalent of approximately $332.1 million and ($70.1) million in foreign currencies, respectively, based upon each respective countries’ exchange rates at July 4, 2010.


 
12


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The Company has cross currency swap transactions with one counterparty to exchange Japanese yen for U.S. dollars for a combined notional amount of ($435.1) million which require the Company to maintain a minimum liquidity of $1.5 billion on, or prior to, June 30, 2010 and $1.0 billion after June 30, 2010.  Liquidity is defined as the sum of the Company’s cash and cash equivalents, and short and long-term marketable securities.  The Company was in compliance with the covenant as of July 4, 2010.  Should the Company fail to comply with this covenant, the Company may be required to settle the unrealized gain or loss on the foreign exchange contracts prior to the original maturity.

The amounts in the tables below include fair value adjustments related to the Company’s own credit risk and counterparty credit risk.

Fair Value of Derivative Contracts.  Fair value of derivative contracts were as follows (in thousands):

   
Derivative assets reported in
 
   
Other Current Assets
   
Long-term Marketable Securities and Other Non-current Assets
 
   
July 4,
2010
   
January 3,
2010
   
July 4,
2010
   
January 3,
2010
 
Designated Cash Flow Hedges
                       
Foreign exchange contracts
  $ 6,661     $     $     $  
Equity market risk contract
                8,043       725  
      6,661             8,043       725  
Foreign exchange contracts not designated
    5,548       3,708       598        
Total derivatives
  $ 12,209     $ 3,708     $ 8,641     $ 725  

   
Derivative liabilities reported in
 
   
Other Current Accrued Liabilities
   
Non-current Liabilities
 
   
July 4,
2010
   
January 3,
2010
   
July 4,
2010
   
January 3,
2010
 
Designated foreign exchange contracts
  $ 178     $     $     $  
Foreign exchange contracts not designated
    20,042       7,794       22,783       15,453  
Total derivatives
  $ 20,220     $ 7,794     $ 22,783     $ 15,453  



 
13


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Foreign Exchange and Equity Market Risk Contracts Designated as Cash Flow Hedges.  The impact of the effective portion of designated cash flow derivative contracts on the results of operations was as follows (in thousands):

   
Three months ended
   
Six months ended
 
   
Amount of gain (loss) recognized
in OCI
   
Amount of gain reclassified from OCI to the Statement of Operations
   
Amount of gain (loss) recognized
in OCI
   
Amount of gain reclassified from OCI to the Statement of Operations
 
   
July 4,
2010
   
June 28,
 2009
   
July 4,
2010
   
June 28,
 2009
   
July 4,
2010
   
June 28,
 2009
   
July 4,
2010
   
June 28,
 2009
 
Foreign exchange contracts
  $ 9,691     $ 3,056     $ 5,429     $ 19,957     $ 11,212     $ (11,581 )   $ 8,630     $ 23,568  
Equity market risk contract
    12,049       (3,853 )                 7,318       (13,679 )            

Foreign exchange contracts designated as cash flow hedges relate primarily to wafer purchases.  Gains and losses associated with foreign exchange contracts designated as cash flow hedges are expected to be recorded in cost of product revenues when reclassified out of accumulated OCI.  Gains and losses from the equity market risk contract are expected to be recorded in other income (expense) when reclassified out of accumulated OCI.  The Company expects to realize the accumulated OCI balance related to foreign exchange contracts within the next twelve months and realize the OCI balance related to the equity market risk contract by the end of fiscal year 2011.

The impact of the ineffective portion and amount excluded from effectiveness testing on designated cash flow derivative contracts on the Company’s results of operations recognized in other income (expense) were as follows (in thousands):

   
Three months ended
   
Six months ended
 
   
July 4, 2010
   
June 28, 2009
   
July 4, 2010
   
June 28, 2009
 
Foreign exchange contracts
  $ (33 )   $ (118 )   $ (61 )   $ (1,115 )

Effect of Non-Designated Derivative Contracts on the Condensed Consolidated Statements of Operations.  The effect of non-designated derivative contracts on the Company’s results of operations recognized in other income (expense) were as follows (in thousands):

   
Three months ended
   
Six months ended
 
   
July 4, 2010
   
June 28, 2009
   
July 4, 2010
   
June 28, 2009
 
Gain (loss) on foreign exchange contracts including forward point income
  $ (21,371 )   $ (6,162 )   $ (14,650 )   $ 94,964  
Gain (loss) from revaluation of foreign currency exposures hedged by foreign exchange contracts
    18,501       9,910       9,959       (90,271 )


 
14


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


4.  
Balance Sheet Information

Accounts Receivable from Product Revenues, net.  Accounts receivable from product revenues, net, were as follows (in thousands):

   
July 4,
 2010
   
January 3,
 2010
 
Trade accounts receivable
  $ 562,092     $ 534,549  
Allowance for doubtful accounts
    (9,101 )     (12,348 )
Price protection, promotions and other activities
    (207,727 )     (287,794 )
Total accounts receivable from product revenues, net
  $ 345,264     $ 234,407  

Inventory.  Inventories were as follows (in thousands):

   
July 4,
 2010
   
January 3,
 2010
 
Raw material
  $ 282,125     $ 329,966  
Work-in-process
    52,152       63,767  
Finished goods
    159,594       202,760  
Total inventory
  $ 493,871     $ 596,493  

Other Current Assets.  Other current assets were as follows (in thousands):

   
July 4,
 2010
   
January 3,
 2010
 
Royalty and other receivables
  $ 35,336     $ 53,864  
Prepaid expenses
    16,387       14,309  
Prepaid income taxes and tax-related receivables
    31,514       25,758  
Other current assets
    12,207       3,708  
Total other current assets
  $ 95,444     $ 97,639  

Notes Receivable and Investments in the Flash Ventures with Toshiba.  Notes receivable and investments in the flash ventures with Toshiba Corporation (“Toshiba”) were as follows (in thousands):

   
July 4,
 2010
   
January 3,
 2010
 
Notes receivable, Flash Partners Ltd.
  $ 593,636     $ 562,946  
Notes receivable, Flash Alliance Ltd.
    548,586       520,225  
Investment in Flash Partners Ltd.
    215,250       199,106  
Investment in Flash Alliance Ltd.
    231,612       225,273  
Total notes receivable and investments in flash ventures with Toshiba
  $ 1,589,084     $ 1,507,550  

See Note 11, “Commitments, Contingencies and Guarantees – Flash Partners and Flash Alliance,” regarding equity method investments and Note 12, “Related Parties and Strategic Investments,” for the Company’s maximum loss exposure related to these variable interest entities.


 
15


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Other Current Accrued Liabilities.  Other current accrued liabilities were as follows (in thousands):

   
July 4,
 2010
   
January 3,
 2010
 
Accrued payroll and related expenses
  $ 99,848     $ 118,648  
Accrued restructuring
    2,654       2,622  
Foreign currency forward contract payables
    20,220       7,794  
Income taxes payable
    79,450       7,136  
Other accrued liabilities
    102,382       97,879  
Total other current accrued liabilities
  $ 304,554     $ 234,079  

Non-current liabilities.  Non-current liabilities were as follows (in thousands):

   
July 4,
 2010
   
January 3,
 2010
 
Deferred tax liability
  $ 28,986     $ 35,470  
Income taxes payable
    226,544       206,464  
Accrued restructuring
    8,516       9,228  
Other non-current liabilities
    57,025       36,316  
Total non-current liabilities
  $ 321,071     $ 287,478  

As of July 4, 2010 and January 3, 2010, the total current accrued restructuring liability was primarily comprised of the current portion of excess facility lease obligations.  The non-current accrued restructuring balance and activity from the prior year end was primarily related to excess lease obligations and cash lease obligation payments.  The facility lease obligations extend through the end of the lease term in fiscal year 2016.


 
16


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5.  
Intangible Assets

Intangible Assets.  Intangible asset balances are presented below (in thousands):

   
July 4, 2010
 
   
Gross
Carrying Amount
   
Accumulated Amortization
   
Net
Carrying Amount
 
Core technology
  $ 179,300     $ (150,506 )   $ 28,794  
Developed product technology
    12,900       (8,761 )     4,139  
Acquisition-related intangible assets
    192,200       (159,267 )     32,933  
Technology licenses and patents
    34,026       (19,628 )     14,398  
Total
  $ 226,226     $ (178,895 )   $ 47,331  

   
January 3, 2010
 
   
Gross
Carrying Amount
   
Accumulated Amortization
   
Net
Carrying Amount
 
Core technology
  $ 179,300     $ (144,474 )   $ 34,826  
Developed product technology
    12,900       (7,946 )     4,954  
Acquisition-related intangible assets
    192,200       (152,420 )     39,780  
Technology licenses and patents
    34,026       (15,730 )     18,296  
Total
  $ 226,226     $ (168,150 )   $ 58,076  

The annual expected amortization expense of intangible assets as of July 4, 2010, is presented below (in thousands):

   
Estimated Amortization Expenses
 
   
Acquisition-Related Intangible Assets
   
Technology Licenses and Patents
 
Fiscal Year:
           
2010 (remaining six months)
  $ 6,848     $ 2,574  
2011
    13,034       4,619  
2012
    12,529       3,971  
2013
    522       2,670  
2014
          564  
Total
  $ 32,933     $ 14,398  


 
17


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


6.  
Warranties

Liability for warranty expense is included in Other current accrued liabilities and Non-current liabilities in the accompanying Condensed Consolidated Balance Sheets and the activity for the three and six months ended July 4, 2010 and June 28, 2009 was as follows (in thousands):

   
Three months ended
   
Six months ended
 
   
July 4, 2010
   
June 28, 2009
   
July 4, 2010
   
June 28, 2009
 
Balance, beginning of period
  $ 30,665     $ 31,294     $ 25,909     $ 36,469  
Additions
    1,733       10,874       23,005       15,788  
Usage
    (6,093 )     (9,049 )     (22,609 )     (19,138 )
Balance, end of period
  $ 26,305     $ 33,119     $ 26,305     $ 33,119  
 
The majority of the Company’s products have a warranty of less than three years with a small number of products having a warranty ranging up to ten years.  A provision for the estimated future cost related to warranty expense is recorded at the time of customer invoice.  The Company’s warranty liability is affected by customer and consumer returns, product failures, number of units sold, and repair or replacement costs incurred.  Should actual product failure rates, or repair or replacement costs differ from the Company’s estimates, increases or decreases to its warranty liability would be required.

 
18


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


7.  
Financing Arrangements
 
The following table reflects the carrying value of the Company’s convertible debt as of July 4, 2010 and January 3, 2010 (in millions):

   
July 4,
2010
   
January 3,
2010
 
1% Notes due 2013
  $ 1,150.0     $ 1,150.0  
Less: Unamortized interest discount
    (186.6 )     (215.3 )
Net carrying amount of 1% Notes due 2013
    963.4       934.7  
1% Notes due 2035
 
      75.0  
Total convertible debt
    963.4       1,009.7  
Less: convertible short-term debt
 
      (75.0 )
Convertible long-term debt
  $ 963.4     $ 934.7  

1% Convertible Senior Notes Due 2013.  In May 2006, the Company issued and sold $1.15 billion in aggregate principal amount of 1% Convertible Senior Notes due 2013 (the “1% Notes due 2013”) at par.  The 1% Notes due 2013 may be converted, under certain circumstances, based on an initial conversion rate of 12.1426 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $82.36 per share).  The net proceeds to the Company from the offering of the 1% Notes due 2013 were $1.13 billion.

The Company separately accounts for the liability and equity components of the 1% Notes due 2013.  The principal amount of the liability component of $753.5 million as of the date of issuance was recognized at the present value of its cash flows using a discount rate of 7.4%, the Company’s borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature.  The carrying value of the equity component was $241.9 million as of July 4, 2010 and January 3, 2010.

The following table presents the amount of interest cost recognized relating to both the contractual interest coupon and amortization of the discount on the liability component (in millions):

   
Three months ended
   
Six months ended
 
   
July 4, 2010
   
June 28, 2009
   
July 4, 2010
   
June 28, 2009
 
Contractual interest coupon
  $ 2.9     $ 2.9     $ 5.8     $ 5.8  
Amortization of interest discount
    14.5       13.5       28.7       26.7  
Total interest cost recognized
  $ 17.4     $ 16.4     $ 34.5     $ 32.5  

The effective interest rate on the liability component was 7.4% for each of the three and six months ended July 4, 2010 and June 28, 2009. The remaining unamortized interest discount of $186.6 million as of July 4, 2010 will be amortized over the remaining life of the 1% Notes due 2013, which is approximately 2.9 years.

Concurrent with the issuance of the 1% Notes due 2013, the Company sold warrants to acquire shares of its common stock at an exercise price of $95.03 per share.  As of July 4, 2010, the warrants had an expected life of approximately 3.1 years and expire in August 2013.  At expiration, the Company may, at its option, elect to settle the warrants on a net share basis.  As of July 4, 2010, the warrants had not been exercised and remain outstanding.  In addition, counterparties agreed to sell to the Company up to approximately 14.0 million shares of its common stock, which is the number of shares initially issuable upon conversion of the 1% Notes due 2013 in full, at a conversion price of $82.36 per share.  The convertible bond hedge transaction will be settled in net shares and wil l terminate upon the earlier of the maturity date of the 1% Notes due 2013 or the first day that none of the 1% Notes due 2013 remain outstanding due to conversion or otherwise.  Settlement of the convertible bond hedge in net shares on the expiration date would result in the Company receiving net shares equivalent to the number of shares issuable by it upon conversion of the 1% Notes due 2013.  As of July 4, 2010, the Company had not purchased any shares under this convertible bond hedge agreement.
 
1% Convertible Notes Due 2035.  On February 11, 2010, the Company notified the holders of its 1% Convertible Notes due 2035 that it would exercise its option to redeem the $75.0 million outstanding on March 15, 2010 for a redemption price of $1,000 per $1,000 principal amount of the notes, plus accrued interest.  On March 15, 2010, the Company completed the redemption of the 1% Convertible Notes due 2035 through an all-cash transaction of $75.0 million plus accrued interest of $0.4 million.  Since the date of the completion of the redemption, the Company had no further obligations related to the 1% Convertible Notes due 2035.


 
19


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8.  
Accumulated Other Comprehensive Income

Accumulated other comprehensive income, net of tax, presented in the accompanying Condensed Consolidated Balance Sheets consists of the accumulated unrealized gains and losses on available-for-sale investments, including the Company’s investments in equity securities, as well as currency translation adjustments relating to local currency-denominated subsidiaries and equity investees, and the accumulated unrealized gains and losses related to derivative instruments accounted for under hedge accounting (in thousands).

   
July 4,
 2010
   
January 3,
 2010
 
Accumulated net unrealized gain on:
           
Available-for-sale investments
  $ 11,327     $ 26,920  
Foreign currency translation
    147,052       98,424  
Hedging activities
    13,270       3,369  
Total accumulated other comprehensive income
  $ 171,649     $ 128,713  

Comprehensive income (loss) is presented below (in thousands):

   
Three months ended
   
Six months ended
 
   
July 4, 2010
   
June 28, 2009
   
July 4, 2010
   
June 28, 2009
 
Net income (loss)
  $ 257,894     $ 52,507     $ 492,585     $ (155,488 )
Non-controlling interest
    (557 )     (516 )     (1,070 )     (1,010 )
      257,337       51,991       491,515       (156,498 )
Change in accumulated unrealized gain (loss) on:
                               
Available-for-sale investments
    (18,785 )     3,526       (15,593 )     14,712  
Foreign currency translation
    66,826       29,366       48,628       (28,937 )
Hedging activities
    16,311       (20,754 )     9,901       (48,828 )
Comprehensive income (loss)
  $ 321,689     $ 64,129     $ 534,451     $ (219,551 )

Non-controlling interest is included in Other income (expense) in the Condensed Consolidated Statements of Operations.

The amount of income tax expense allocated to accumulated unrealized gain (loss) on available-for-sale investments and hedging activities was ($2.4) million and $6.8 million at July 4, 2010 and January 3, 2010, respectively.

 
20


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



9.  
Share-Based Compensation

Share-Based Plans.  The Company has a share-based compensation program that provides its Board of Directors with broad discretion in creating equity incentives for employees, officers, non-employee board members and non-employee service providers.  This program includes incentive and non-statutory stock option awards, stock appreciation right awards, restricted stock awards, performance-based cash bonus awards for Section 16 executive officers and an automatic grant program for non-employee board members pursuant to which such individuals will receive option grants or other stock awards at designated intervals over their period of board service.  These awards are granted under various plans, all of which are stockholder approved. 0; Stock option awards generally vest as follows: 25% of the shares vest on the first anniversary of the vesting commencement date and the remaining 75% vest proportionately each quarter over the next 3 years of continued service.  Restricted stock awards generally vest in equal annual installments over a 2 or 4-year period.  Initial grants under the automatic grant program for non-employee board members vest over a 4-year period and subsequent grants vest over a 1-year period in accordance with the specific vesting provisions set forth in that program.  Additionally, the Company has an Employee Stock Purchase Plan (“ESPP”) that allows employees to purchase shares of common stock at 85% of the fair market value at the subscription date or the date of purchase, whichever is lower.

Valuation Assumptions.  The fair value of the Company’s stock options granted to employees, officers and non-employee board members and ESPP shares granted to employees for the three and six months ended July 4, 2010 and June 28, 2009 was estimated using the following weighted average assumptions.

   
Three months ended
 
Six months ended
   
July 4, 2010
 
June 28, 2009
 
July 4, 2010
 
June 28, 2009
Option Plan Shares
               
Dividend yield
 
None
 
None
 
None
 
None
Expected volatility
  0.49   0.85   0.50   0.87
Risk free interest rate
  1.84%   1.50%   1.59%   1.40%
Expected lives
 
4.3 years
 
3.4 years
 
3.8 Years
 
3.6 Years
Estimated annual forfeiture rate
  7.32%   9.07%   7.32%   9.07%
Weighted average fair value at grant date
  $17.01   $8.56   $11.90   $5.07
                 
Employee Stock Purchase Plan Shares
               
Dividend yield
 
None
 
None
 
None
 
None
Expected volatility
  0.59   0.81   0.59   0.81
Risk free interest rate
  0.18%   0.39%   0.18%   0.39%
Expected lives
 
½ year
 
½ year
 
½ year
 
½ year
Weighted average fair value for grant period
  $8.58   $4.21   $8.58   $4.21

 
21


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Share-Based Compensation Plan Activities

Stock Options and SARs.  A summary of stock option and stock appreciation right (“SARs”) activity under all of the Company’s share-based compensation plans as of July 4, 2010 and changes during the six months ended July 4, 2010 is presented below (in thousands, except exercise price and contractual term).

   
Shares
   
Weighted Average Exercise Price
   
Weighted Average Remaining Contractual Term (Years)
   
Aggregate Intrinsic Value
 
Options and SARs outstanding at January 3, 2010
    24,896     $ 29.87       4.4     $ 180,834  
Granted
    2,614       30.24                  
Exercised
    (3,758 )     21.87               74,970  
Forfeited
    (220 )     24.12                  
Expired
    (506 )     49.03                  
Options and SARs outstanding at July 4, 2010
    23,026       30.86       4.3       319,715  
Options and SARs vested and expected to vest after July 4, 2010, net of forfeitures
    21,304       31.47       2.6       287,229  
Options and SARs exercisable at July 4, 2010
    15,367       34.78       3.6       173,794  

At July 4, 2010, the total compensation cost related to options and SARs granted to employees under the Company’s share-based compensation plans but not yet recognized was approximately $61.8 million, net of estimated forfeitures.  This cost will be amortized on a straight-line basis over a weighted average period of approximately 2.6 years.

Restricted Stock Units.  Restricted stock units (“RSUs”) are converted into shares of the Company’s common stock upon vesting on a one-for-one basis.  Typically, vesting of RSUs is subject to the employee’s continuing service to the Company.  The cost of these awards is determined using the fair value of the Company’s common stock on the date of the grant, and compensation is recognized on a straight-line basis over the requisite vesting period.

A summary of the changes in RSUs outstanding under the Company’s share-based compensation plan during the six months ended July 4, 2010 is presented below (in thousands, except for weighted average grant date fair value).

   
Shares
   
Weighted Average Grant Date Fair Value
   
Aggregate Intrinsic Value
 
Non-vested share units at January 3, 2010
    844     $ 24.69     $ 24,476  
Granted
    1,047       28.85          
Vested
    (236 )     25.18       7,519  
Forfeited
    (28 )     21.84          
Non-vested share units at July 4, 2010
    1,627       25.51       67,454  

As of July 4, 2010, the Company had approximately $26.9 million of unrecognized compensation expense, net of estimated forfeitures, related to RSUs, which will be recognized over a weighted average estimated remaining life of 2.6 years.

Employee Stock Purchase Plan.  At July 4, 2010, there was approximately $0.7 million of total unrecognized compensation cost related to ESPP that is expected to be recognized over a period of approximately 1.3 months.  The Company’s ESPP has an original authorization of 5,000,000 shares to be issued, of which 1,739,159 shares were available to be issued as of July 4, 2010.


 
22


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Share-Based Compensation Expense. The following tables set forth the detail allocation of the share-based compensation expense for the three and six months ended July 4, 2010 and June 28, 2009, respectively (in thousands).

   
Three months ended
   
Six months ended
 
   
July 4, 2010
   
June 28, 2009
   
July 4, 2010
   
June 28, 2009
 
Share-based compensation expense by caption:
                       
Cost of product revenues
  $ 1,309     $ 2,446     $ 3,767     $ 4,820  
Research and development
    6,544       9,051       13,346       15,203  
Sales and marketing
    3,152       4,886       5,340       7,235  
General and administrative
    3,972       5,971       9,394       11,426  
Total share-based compensation expense
  $ 14,977     $ 22,354     $ 31,847     $ 38,684  
                                 
Share-based compensation expense by type of award:
                               
Stock options and SARs
  $ 9,248     $ 16,077     $ 20,761     $ 29,958  
RSUs
    4,042       4,533       7,708       7,393  
ESPP
    1,687       1,744       3,378       1,333  
Total share-based compensation expense
  $ 14,977     $ 22,354     $ 31,847     $ 38,684  

Share-based compensation expense of $1.1 million and $2.3 million related to manufacturing personnel was capitalized into inventory as of July 4, 2010 and January 3, 2010, respectively.



 
23


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


10.  
Net Income (Loss) Per Share

The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts).


   
Three months ended
   
Six months ended
 
   
July 4, 2010
   
June 28, 2009
   
July 4, 2010
   
June 28, 2009
 
Numerator for basic net income (loss) per share:
                       
Net income (loss)
  $ 257,894     $ 52,507     $ 492,585     $ (155,488 )
Denominator for basic net income (loss) per share:
                               
Weighted average common shares outstanding
    231,673       226,976       230,487       226,753  
Basic net income (loss) per share
  $ 1.11     $ 0.23     $ 2.14     $ (0.69 )
Numerator for diluted net income (loss) per share:
                       
Net income (loss)
  $ 257,894     $ 52,507     $ 492,585     $ (155,488 )
Interest on the 1% Notes due 2035, net of tax
          116       157        
Net income (loss) for diluted net income (loss) per share
  $ 257,894     $ 52,623     $ 492,742     $ (155,488 )
Denominator for diluted net income (loss) per share:
                               
Weighted average common shares
    231,673       226,976       230,487       226,753  
Incremental common shares attributable to exercise of outstanding employee stock options, restricted stock, restricted stock units and warrants (assuming proceeds would be used to purchase common stock)
    8,128       2,078       7,294        
Effect of dilutive 1% Notes due 2035
          2,012       785        
Shares used in computing diluted net income (loss) per share
    239,801       231,066       238,566       226,753  
Diluted net income (loss) per share
  $ 1.08     $ 0.23     $ 2.07     $ (0.69 )

Anti-dilutive shares excluded from net income (loss) per share calculation
    34,405       48,559       38,434       54,865  

Basic earnings per share exclude any dilutive effects of stock options, SARs, RSUs, warrants and convertible securities.  Certain common stock issuable under stock options, SARs, RSUs, warrants and the convertible notes were omitted from the diluted earnings per share calculation because their inclusion is considered anti-dilutive.


 
24


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

11.  
Commitments, Contingencies and Guarantees

Flash Partners.  The Company has a 49.9% ownership interest in Flash Partners Ltd. (“Flash Partners”), a business venture with Toshiba which owns 50.1%, formed in fiscal year 2004.  In the venture, the Company and Toshiba have collaborated in the development and manufacture of NAND flash memory products.  These NAND flash memory products are manufactured by Toshiba at a 300-millimeter wafer fabrication facility located in Yokkaichi, Japan, using semiconductor manufacturing equipment owned or leased by Flash Partners.  Flash Partners purchases wafers from Toshiba at cost and then resells those wafers to the Company and Toshiba at cost plus a markup.  The Company accounts for its 49.9% ownership position in Flash Partners under the equity method of accounting.  The Company is committed to purchase its provided three-month forecast of Flash Partners’ NAND wafer supply, which generally equals 50% of the venture’s output.  The Company is not able to estimate its total wafer purchase commitment obligation beyond its rolling three-month purchase commitment because the price is determined by reference to the future cost of producing the semiconductor wafers.  In addition, the Company is committed to fund 49.9% of Flash Partners’ costs to the extent that Flash Partners’ revenues from wafer sales to the Company and Toshiba are insufficient to cover these costs.

As of July 4, 2010, the Company had notes receivable from Flash Partners of $593.6 million, denominated in Japanese yen.  These notes are secured by the equipment purchased by Flash Partners using the note proceeds.  The Company has additional guarantee obligations to Flash Partners, see “Off-Balance Sheet Liabilities.”  At July 4, 2010 and January 3, 2010, the Company had an equity investment in Flash Partners of $215.3 million and $199.1 million, respectively, denominated in Japanese yen, offset by $55.2 million and $43.9 million, respectively, of cumulative translation adjustments recorded in accumulated OCI.  In the six months ended July 4, 2010, the Company recorded a $4.8 million basis adjustment to its equity in earnings from Flash Partners related t o the difference between the basis in the Company’s equity investment compared to the historical basis of the assets recorded by Flash Partners.

Flash Alliance.  The Company has a 49.9% ownership interest in Flash Alliance Ltd. (“Flash Alliance”), a business venture with Toshiba which owns 50.1%, formed in fiscal year 2006.  In the venture, the Company and Toshiba have collaborated in the development and manufacture of NAND flash memory products.  These NAND flash memory products are manufactured by Toshiba at its 300-millimeter wafer fabrication facility located in Yokkaichi, Japan, using the semiconductor manufacturing equipment owned or leased by Flash Alliance.  Flash Alliance purchases wafers from Toshiba at cost and then resells those wafers to the Company and Toshiba at cost plus a markup.  The Company accounts for its 49.9% ownership po sition in Flash Alliance under the equity method of accounting.  The Company is committed to purchase its provided three-month forecast of Flash Alliance’s NAND wafer supply, which generally equals 50% of the venture’s output.  The Company is not able to estimate its total wafer purchase commitment obligation beyond its rolling three-month purchase commitment because the price is determined by reference to the future cost of producing the semiconductor wafers.  In addition, the Company is committed to fund 49.9% of Flash Alliance’s costs to the extent that Flash Alliance’s revenues from wafer sales to the Company and Toshiba are insufficient to cover these costs.

As of July 4, 2010, the Company had notes receivable from Flash Alliance of $548.6 million, denominated in Japanese yen.  These notes are secured by the equipment purchased by Flash Alliance using the note proceeds.  The Company has additional guarantee obligations to Flash Alliance, see “Off-Balance Sheet Liabilities.”  At July 4, 2010 and January 3, 2010, the Company had an equity investment in Flash Alliance of $231.6 million and $225.3 million, respectively, denominated in Japanese yen, offset by $58.0 million and $45.3 million, respectively, of cumulative translation adjustments recorded in accumulated OCI.  In the six months ended July 4, 2010, the Company recorded ($6.4) million of basis adjustment to its equity earnings from Flash Alliance related t o the difference between the basis in the Company’s equity investment compared to the historical basis of the assets recorded by Flash Alliance.


 
25


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FlashVision.  In the first quarter of fiscal year 2010, the wind-down was completed of FlashVision Ltd. (“FlashVision”), a business venture with Toshiba in which the Company owned 49.9%.  The Company recorded a gain of $4.1 million in the first quarter of fiscal year 2010 in Other income (expense) related to the completion of this wind-down.

Flash Ventures.  The Company participates in common research and development activities with Toshiba but is not committed to any minimum funding level.

The Company and Toshiba restructured Flash Partners and Flash Alliance (hereinafter collectively referred to as “Flash Ventures”) in the first quarter of fiscal year 2009 by selling more than 20% of Flash Ventures’ capacity to Toshiba.  The restructuring resulted in the Company receiving value of 79.3 billion Japanese yen of which 26.1 billion Japanese yen, or $277.1 million, was received in cash, reducing outstanding notes receivable from Flash Ventures, and 53.2 billion Japanese yen reflected the transfer of off-balance sheet equipment lease guarantee obligations from the Company to Toshiba.  The restructuring was completed in a series of closings through March 31, 2009.  The Company received the cash and transferred 53.2 billion Japanese yen of off-balance s heet equipment lease guarantee obligations in the first half of fiscal year 2009.  Transaction costs of $10.9 million related to the sale and transfer of equipment and lease obligations were expensed in the first quarter of fiscal year 2009.

The Company has guarantee obligations to Flash Ventures; see “Off-Balance Sheet Liabilities.”

New Venture with Toshiba.  In July 2010, the Company and Toshiba entered into an agreement to create a new flash venture, of which the Company will own 49.9% and Toshiba will own 50.1%, to operate in Toshiba’s Fab 5 facility (“Fab 5”).  Toshiba will own and fund the construction of the Fab 5 building, which will be located in Yokkaichi, Japan, adjacent to the site of the parties’ current Flash Partners and Flash Alliance ventures.  Fab 5 is expected to be constructed by Toshiba in two phases.  Phase 1 is expected to be completed in the second quarter of fiscal year 2011, with initial NAND production scheduled for the second half of fiscal year 2011.  On completion of the second phase, Fab 5  is expected to be of similar size and capacity to Toshiba’s existing Fab 4 facility.  The Company expects that Fab 5 will increase its 2011 wafer output by less than 10%.  The Company is committed to 50% of the initial ramp within Phase 1 of Fab 5, for which the Company currently expects its portion of equipment investments and startup costs to be approximately $500 million through fiscal year 2011.  No commitments or timelines have been finalized for any further Phase 1 capacity expansions or for the construction of Phase 2.  In addition to equipment investments and startup costs, the Company will also provide a cash prepayment of approximately $56 million in fiscal year 2011 to be credited against future charges.  If and when Phase 2 is built, the Company is committed to an initial ramp in Phase 2 similar to the ramp in Phase 1.  The Company and Toshiba will each retain some flexibility as to the extent and timing o f its respective fab capacity ramps, and the output allocation will be in accordance with each of the parties’ proportionate level of equipment funding.

Toshiba Foundry.  The Company has the ability to purchase additional capacity under a foundry arrangement with Toshiba.

Business Ventures and Foundry Arrangement with Toshiba.  Purchase orders placed under Flash Ventures and the foundry arrangement with Toshiba for up to three months are binding and cannot be canceled.  These outstanding purchase commitments are included as part of the total “Noncancelable production purchase commitments” in the “Contractual Obligations” table.

Other Silicon Sources.  The Company’s contracts with its other sources of silicon wafers generally require the Company to provide purchase order commitments based on nine month rolling forecasts.  The purchase orders placed under these arrangements relating to the first three months of the nine month forecast are generally binding and cannot be canceled.  These outstanding purchase commitments for other sources of silicon wafers are included as part of the total “Noncancelable production purchase commitments” in the “Contractual Obligations” table.

Subcontractors.  In the normal course of business, the Company’s subcontractors periodically procure production materials based on the forecast the Company provides to them.  The Company’s agreements with these subcontractors require that the Company reimburse them for materials that are purchased on the Company’s behalf in accordance with such forecast.  Accordingly, the Company may be committed to certain costs over and above its open noncancelable purchase orders with these subcontractors.  These commitments for production materials to subcontractors are included as part of the total “Noncancelable production purchase commitments” in the “Contractual Obligations” table.


 
26


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Off-Balance Sheet Liabilities

The following table details the Company’s portion of the remaining guarantee obligations under each of Flash Ventures’ master lease facilities in both Japanese yen and U.S. dollar equivalent based upon the exchange rate at July 4, 2010.

Master Lease Agreements by Execution Date
 
Lease Amounts
   
Expiration
 
   
(Yen in billions)
   
(Dollars in thousands)
       
Flash Partners
                 
December 2004
  ¥ 3.7     $ 42,489       2010  
December 2005
    3.0       34,571       2011  
June 2006
    4.7       53,979       2011  
September 2006
    17.2       195,572       2011  
March 2007
    8.8       100,235       2012  
March 2008
    3.4       38,985       2013  
April 2010
    1.2       13,653       2014  
      42.0       479,484          
Flash Alliance
                       
November 2007
    18.6       211,639       2013  
June 2008
    24.1       274,681       2013  
      42.7       486,320          
Total guarantee obligations
  ¥ 84.7     $ 965,804          

The following table details the breakdown of the Company’s remaining guarantee obligations between the principal amortization and the purchase option exercise price at the term of the master lease agreements, in annual installments as of July 4, 2010 in U.S. dollars based upon the exchange rate at July 4, 2010 (in thousands).

Annual Installments
 
Payment of Principal Amortization
   
Purchase Option Exercise Price at Final Lease Terms
   
Guarantee Amount
 
Year 1
  $ 274,487     $ 98,522     $ 373,009  
Year 2
    172,863       133,856       306,719  
Year 3
    78,796       157,805       236,601  
Year 4
    5,753       43,722       49,475  
Total guarantee obligations
  $ 531,899     $ 433,905     $ 965,804  


 
27


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Flash Partners.  Flash Partners sells and leases back from a consortium of financial institutions (“lessors”) a portion of its tools and has entered into six equipment master lease agreements totaling 300.0 billion Japanese yen, or approximately $3.42 billion based upon the exchange rate at July 4, 2010.  On April 26, 2010, Flash Partners refinanced one of the six maturing master leases that matures in stages in fiscal year 2010 totaling 8.65 billion yen, or approximately $99 million based upon the exchange rate at July 4, 2010.  Flash Partners is expected to draw upon this refinanced master lease as each tranche of the original master l ease becomes due in fiscal year 2010.  As of July 4, 2010, Flash Partners had drawn 2.4 billion Japanese yen, or approximately $27 million based upon the exchange rate at July 4, 2010, from the refinanced master lease, and retired an equal amount from the original master lease.

As of July 4, 2010, the total amount outstanding from these master leases was 84.1 billion Japanese yen, or approximately $959 million based upon the exchange rate at July 4, 2010, of which the amount of the Company’s guarantee obligation of the Flash Partners’ master lease agreements, which reflects future payments and any lease adjustments, was 42.0 billion Japanese yen, or approximately $480 million based upon the exchange rate at July 4, 2010.  The Company and Toshiba have each guaranteed 50%, on a several basis, of Flash Partners’ obligations under the master lease agreements.  In addition, these master lease agreements are secured by the underlying equipment.  For both the original six master leases and the refinanced master lease, certain lease payments are due quarterly an d certain lease payments are due semi-annually, and are scheduled to be completed in stages through fiscal year 2014.  At each lease payment date, Flash Partners has the option of purchasing the tools from the lessors.  Flash Partners is obligated to insure the equipment, maintain the equipment in accordance with the manufacturers’ recommendations and comply with other customary terms to protect the leased assets.  The fair value of the Company’s guarantee obligation of Flash Partners’ master lease agreements was not material at inception of each master lease.

The master lease agreements contain customary covenants for Japanese lease facilities.  In addition to containing customary events of default related to Flash Partners that could result in an acceleration of Flash Partners’ obligations, the master lease agreements contain an acceleration clause for certain events of default related to the Company as guarantor, including, among other things, the Company’s failure to maintain a minimum shareholders’ equity of at least $1.51 billion, and its failure to maintain a minimum corporate rating of BB- from Standard & Poors (“S&P”) or Moody’s Corporation (“Moody’s”), or a minimum corporate rating of BB+ from Rating & Investment Information, Inc. (“R&I”).  As of July 4, 2010, Flash Partners was in compliance with all of its master lease covenants.  As of July 4, 2010, the Company’s R&I credit rating was BBB-, two notches above the required minimum corporate rating threshold from R&I, and the Company’s S&P credit rating was BB-, which is the required minimum corporate rating threshold from S&P.  If both S&P and R&I were to downgrade the Company’s credit rating below the minimum corporate rating threshold, Flash Partners would become non-compliant under its master equipment lease agreements and would be required to negotiate a resolution to the non-compliance to avoid acceleration of the obligations under such agreements.  Such resolution could include, among other things, supplementary security to be supplied by the Company, as guarantor, or increased interest rates or waiver fees, should the lessors decide they need additional collateral or financial consideration under the circumstances.  If a non-compliance event w ere to occur and if the Company failed to reach a resolution, the Company could be required to pay a portion or the entire outstanding lease obligations covered by its guarantee under such Flash Partners master lease agreements.

 
28


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Flash Alliance.  Flash Alliance sells and leases back from a consortium of financial institutions (“lessors”) a portion of its tools and has entered into two equipment master lease agreements totaling 200.0 billion Japanese yen, or approximately $2.28 billion based upon the exchange rate at July 4, 2010, of which 85.3 billion Japanese yen, or approximately $973 million based upon the exchange rate at July 4, 2010, was outstanding as of July 4, 2010.  The Company and Toshiba have each guaranteed 50%, on a several basis, of Flash Alliance’s obligation under the master lease agreements.  In addition, these master lease agreements are secured by the underlying equipment.  As of July 4, 2010 , the amount of the Company’s guarantee obligation of the Flash Alliance’s master lease agreements was 42.7 billion Japanese yen, or approximately $486 million based upon the exchange rate at July 4, 2010.  Remaining master lease payments are due semi-annually and are scheduled to be completed in fiscal year 2013.  At each lease payment date, Flash Alliance has the option of purchasing the tools from the lessors.  Flash Alliance is obligated to insure the equipment, maintain the equipment in accordance with the manufacturers’ recommendations and comply with other customary terms to protect the leased assets.  The fair value of the Company’s guarantee obligation of Flash Alliance’s master lease agreements was not material at inception of each master lease.

The master lease agreements contain customary covenants for Japanese lease facilities.  In addition to containing customary events of default related to Flash Alliance that could result in an acceleration of Flash Alliance’s obligations, the master lease agreements contain an acceleration clause for certain events of default related to the Company as guarantor, including, among other things, the Company’s failure to maintain a minimum shareholders’ equity of at least $1.51 billion, and its failure to maintain a minimum corporate rating of BB- from S&P or Moody’s or a minimum corporate rating of BB+ from R&I.  As of July 4, 2010, Flash Alliance was in compliance with all of its master lease covenants.  As of July 4, 2010, the Company’s R&I credit rating was BBB-, two notches above the required minimum corporate rating threshold from R&I, and the Company’s S&P credit rating was BB-, which is the required minimum corporate rating threshold from S&P.  If both S&P and R&I were to downgrade the Company’s credit rating below the minimum corporate rating threshold, Flash Alliance would become non-compliant under its master equipment lease agreements and would be required to negotiate a resolution to the non-compliance to avoid acceleration of the obligations under such agreements.  Such resolution could include, among other things, supplementary security to be supplied by the Company, as guarantor, or increased interest rates or waiver fees, should the lessors decide they need additional collateral or financial consideration under the circumstances.  If a non-compliance event were to occur and if the Company failed to reach a resolution, the Company could be required to pay a portion or the entire outstanding le ase obligations covered by its guarantee under such Flash Alliance master lease agreements.


 
29


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Guarantees

Indemnification Agreements.  The Company has agreed to indemnify suppliers and customers for alleged patent infringement.  The scope of such indemnity varies, but may, in some instances, include indemnification for damages and expenses, including attorneys’ fees.  The Company may periodically engage in litigation as a result of these indemnification obligations.  The Company’s insurance policies exclude coverage for third-party claims for patent infringement.  Although the liability is not remote, the nature of the patent infringement indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its suppliers and custom ers.  Historically, the Company has not made any significant indemnification payments under any such agreements.  As of July 4, 2010, no amounts had been accrued in the accompanying Condensed Consolidated Financial Statements with respect to these indemnification guarantees.

As permitted under Delaware law and the Company’s certificate of incorporation and bylaws, the Company has agreements, or has assumed agreements in connection with its acquisitions, whereby it indemnifies certain of its officers, employees, and each of its directors for certain events or occurrences while the officer, employee or director is, or was, serving at the Company’s or the acquired company’s request in such capacity.  The term of the indemnification period is for the officer’s, employee’s or director’s lifetime.  The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is generally unlimited; however, the Company has a Director and Officer insurance policy that may reduce its exposure and enable it to recov er all or a portion of any future amounts paid.  As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal.  The Company has no liabilities recorded for these agreements as of July 4, 2010 or January 3, 2010, as these liabilities are not reasonably estimable even though liabilities under these agreements are not remote.

The Company and Toshiba have agreed to mutually contribute to, and indemnify each other and Flash Ventures for environmental remediation costs or liability resulting from Flash Ventures’ manufacturing operations in certain circumstances.  The Company and Toshiba have also entered into a Patent Indemnification Agreement under which in many cases the Company will share in the expenses associated with the defense and cost of settlement associated with such claims.  This agreement provides limited protection for the Company against third party claims that NAND flash memory products manufactured and sold by Flash Ventures infringes third party patents.  The Company has not made any indemnification payments under any such agreements and as of July 4, 2010, no amounts have been accrued in the accompanying Con densed Consolidated Financial Statements with respect to these indemnification guarantees.


 
30


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Contractual Obligations and Off-Balance Sheet Arrangements

The following tables summarize the Company’s contractual cash obligations, commitments and off-balance sheet arrangements at July 4, 2010, and the effect such obligations are expected to have on its liquidity and cash flows in future periods (in thousands).

Contractual Obligations.
   
Total
   
1 Year or Less
(6 months)
   
2 - 3 Years
(Fiscal 2011
and 2012)
   
4 –5 Years
(Fiscal 2013
and 2014)
   
More than 5 Years (Beyond
Fiscal 2014)
 
Facility and other operating leases
  $ 31,627     $ 4,782     $ 17,062     $ 6,537     $ 3,246  
Flash Partners reimbursement for certain fixed costs including depreciation
    1,125,568  (3)  (4)   239,830       628,869       186,151       70,718  
Flash Alliance reimbursement for certain fixed costs including depreciation
    2,109,230  (3)  (4)   334,293       1,175,367       444,809       154,761  
Toshiba research and development
    75,000  (3)     48,825       26,175              
Capital equipment purchase commitments
    16,233       15,283       950              
Convertible notes principal and interest (1)
    1,183,005       5,750       23,000       1,154,255        
Operating expense commitments
    45,413       37,368       8,045              
Noncancelable production purchase commitments (2)
    231,298  (3)     231,298                    
Total contractual cash obligations
  $ 4,817,374     $ 917,429     $ 1,879,468     $ 1,791,752     $ 228,725  

Off-Balance Sheet Arrangements.
   
As of
July 4, 2010
 
Guarantee of Flash Ventures equipment leases (5)
  $ 965,804  

(1)
In May 2006, the Company issued and sold $1.15 billion in aggregate principal amount of 1% Notes due 2013.  The Company will pay cash interest at an annual rate of 1%, payable semi-annually on May 15 and November 15 of each year until calendar year 2013.

(2)
Includes Flash Ventures, related party vendors and other silicon source vendor purchase commitments.

(3)
Includes amounts denominated in Japanese yen, which are subject to fluctuation in exchange rates prior to payment and have been translated using the exchange rate at July 4, 2010.

(4)
Excludes amounts related to the master lease agreements’ purchase option exercise price at final lease term.

(5)
The Company’s guarantee obligation, net of cumulative lease payments, is 84.7 billion Japanese yen, or approximately $966 million based upon the exchange rate at July 4, 2010.

On July 13, 2010, the Company and Toshiba entered into an agreement to create a new flash venture.  As this agreement was entered into after July 4, 2010, no commitment costs related to this new flash venture have been included in the “Contractual Obligations” table.  See “New Venture with Toshiba” for further discussion related to this new venture.

On July 21, 2010, the Company and Toshiba committed to further capacity expansion and technology transition within Flash Alliance, which is expected to result in an additional investment in fiscal year 2011 of approximately 32.6 billion Japanese yen or approximately $372 million, based on the exchange rate at July 4, 2010, of which the Company’s portion will be approximately 16.3 billion Japanese yen, or approximately $186 million, based on the exchange rate at July 4, 2010.  As this commitment was entered into after July 4, 2010, no investment amounts related to this commitment have been included in the “Contractual Obligations” table.


 
31


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company has excluded $226.5 million of unrecognized tax benefits (which includes penalties and interest) from the contractual obligation table above due to the uncertainty with respect to the timing of associated future cash flows at July 4, 2010.  The Company is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.

The Company leases many of its office facilities and operating equipment for various terms under long-term, noncancelable operating lease agreements.  The leases expire at various dates from fiscal year 2010 through fiscal year 2016.  Future minimum lease payments at July 4, 2010 are presented below (in thousands).

Fiscal Year:
     
2010 (remaining 6 months)
  $ 5,006  
2011
    8,767  
2012
    9,248  
2013
    5,072  
2014
    3,231  
2015 and thereafter
    3,246  
      34,570  
Sublease income to be received in the future under noncancelable subleases
    (2,943 )
Net operating leases
  $ 31,627  

Net rent expense for the three and six months ended July 4, 2010 and June 28, 2009 were $1.8 million, $3.8 million, $2.0 million and $4.0 million, respectively.



 
32


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

12.  
Related Parties and Strategic Investments

Flash Ventures with Toshiba.  The Company owns 49.9% of each of the flash ventures with Toshiba (Flash Partners and Flash Alliance) and accounts for its ownership position under the equity method of accounting.  The Company’s obligations with respect to Flash Ventures master lease agreements, take-or-pay supply arrangements and research and development cost sharing are described in Note 11, “Commitments, Contingencies and Guarantees.”  Flash Ventures are variable interest entities.  On January 4, 2010, the Company adopted new accounting guidance, as issued by the FASB, related to the consolidation of variable interest entities.  Under this new guidance, the Company evaluated whether it is the primary beneficiary of Flash Ventures for all periods presented and determined that it is not the primary beneficiary of either Flash Partners or Flash Alliance because it does not have a controlling financial interest in either entity, and therefore this evaluation does not change the Company’s original conclusions related to the consolidation of Flash Ventures.  The Company purchased NAND flash memory wafers from Flash Ventures and made loans to Flash Alliance totaling approximately $417.8 million, $931.2 million, $487.5 million and $1,064.3 million in the three and six months ended July 4, 2010 and June 28, 2009, respectively.  The Company received loan repayments from Flash Ventures of $53.1 million and $330.1 million in the three and six months ended June 28, 2009, respectively.  At July 4, 2010 and January 3, 2010, the Company had accounts payable balances due to Flash Ventures of $196.5 million and $182.1 million, respectively.

The Company’s maximum reasonably estimable loss exposure (excluding lost profits), based upon the exchange rate at each respective balance sheet date, as a result of its involvement with Flash Ventures is presented below (in millions).

   
July 4,
 2010
   
January 3,
 2010
 
Notes receivable
  $ 1,142     $ 1,083  
Equity investments
    447       424  
Operating lease guarantees
    966       1,070  
Maximum loss exposure
  $ 2,555     $ 2,577  

Solid State Storage Solutions LLC.  During the second quarter of fiscal year 2007, the Company formed Solid State Storage Solutions LLC (“S4”), a venture with third parties to license intellectual property.  S4 qualifies as a variable interest entity.  The Company is considered the primary beneficiary of S4 and the Company consolidates S4 in its Condensed Consolidated Financial Statements for all periods presented.  Due to the adoption of new accounting guidance by the FASB related to consolidation of variable interest entities in the first quarter of fiscal year 2010, the Company considered multiple factors in determining it was still the primary beneficiary, including its overall involvement with the venture, contributions and participation in operating activities.  S4’s assets and liabilities were not material to the Company’s Condensed Consolidated Balance Sheets as of July 4, 2010 and January 3, 2010.
 
Sale of SIM Business Net Assets. In February 2010, the Company sold its SIM business net assets for $17.8 million which resulted in a gain of $13.2 million recorded in other income (expense).  The sale proceeds are included in “Proceeds from sale of assets” in investing activities on the Condensed Consolidated Statements of Cash Flows.  The operating results of the SIM business assets were immaterial for all periods presented.  



 
33


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

13.  
Litigation

The flash memory industry is characterized by significant litigation seeking to enforce patent and other intellectual property rights.  The Company's patent and other intellectual property rights are primarily responsible for generating license and royalty revenue.  The Company seeks to protect its intellectual property through patents, copyrights, trademarks, trade secrets, confidentiality agreements and other methods, and has been and likely will continue to enforce such rights as appropriate through litigation and related proceedings.  The Company expects that its competitors and others who hold intellectual property rights related to its industry will pursue similar strategies.  From time-to-time, it has been and may continue to be necessary to initiate or defend litigation against third partie s.  These and other parties could bring suit against the Company.  In each case listed below where the Company is the defendant, the Company intends to vigorously defend the action.  At this time, the Company does not believe it is reasonably possible that losses related to the litigation described below have occurred beyond the amounts, if any, that have been accrued.

Patent Infringement Litigation Initiated by SanDisk. On October 24, 2007, the Company filed a complaint for patent infringement in the United States District Court for the Western District of Wisconsin against the following defendants:  Phison Electronics Corp. (“Phison”); Silicon Motion Technology Corp., Silicon Motion, Inc. (Taiwan), Silicon Motion, Inc. (California), and Silicon Motion International, Inc. (collectively, “Silicon Motion”); Synergistic Sales, Inc. (“Synergistic”); USBest Technology, Inc. dba Afa Technologies, Inc. (“USBest”); Skymedi Corp. (“Skymedi”); Chipsbank Microelectronics (HK) Co., Ltd., Chipsbank Technology (Shenzhen) Co., Ltd., and Chipsbank Microelectronics Co., Ltd., (collectively, “Chipsbank”); Infotech Logistic LLC (“Infotech”); Zotek Electronic Co., Ltd., dba Zodata Technology Ltd. (collectively, “Zotek”); Power Quotient International Co., Ltd., and PQI Corp., (collectively, “PQI”); PNY Technologies, Inc. (“PNY”); Kingston Technology Co., Inc., Kingston Technology Corp., Payton Technology Corp., and MemoSun, Inc. (collectively, “Kingston”); Buffalo, Inc., Melco Holdings, Inc., and Buffalo Technology (USA), Inc. (collectively, “Buffalo”); Verbatim Corp. (“Verbatim”); Transcend Information Inc. (Taiwan), Transcend Information Inc. (California), and Transcend Information Maryland, Inc., (collectively, “Transcend”); Imation Corp., Imation Enterprises Corp., and Memorex Products, Inc. (collectively, “Imation”); Add-On Computer Peripherals, Inc. and Add-On Computer Peripherals, LLC (collective ly, “Add-On Computer Peripherals”); Add-On Technology Co., A-Data Technology Co., Ltd., and A-Data Technology (USA) Co., Ltd., (collectively, “A-DATA”); Apacer Technology Inc. and Apacer Memory America, Inc. (collectively, “Apacer”); Acer, Inc.; Behavior Tech Computer Corp. and Behavior Tech Computer (USA) Corp. (collectively, “Behavior”); Corsair Memory, Inc. (“Corsair”); Dane-Elec Memory S.A., and Dane-Elec Corp. USA, (collectively, “Dane-Elec”) EDGE Tech Corp. (“EDGE”); Interactive Media Corp, (“Interactive”); LG Electronics, Inc., and LG Electronics U.S.A., Inc., (collectively, “LG”); TSR Silicon Resources Inc. (“TSR”); and Welldone Co. (“Welldone”).  In this action, Case No. 07-C-0607-C (“the ’607 Action”), the Company initially asserted that the defendants infringed U.S. Patent No. 5,719,808 (the “’808 patent”), U.S. Patent No. 6,763,424 (the “’424 patent”); U.S. Patent No. 6,426,893 (the “’893 patent”); U.S. Patent No. 6,947,332 (the “’332 patent”); and U.S. Patent No. 7,137,011 (the “’011 patent”).  The Company has since entered into a stipulation dismissing the ’332 patent.  The Company concurrently filed a second complaint for patent infringement in the same court against the following defendants:  Phison, Silicon Motion, Synergistic, USBest, Skymedi, Zotek, Infotech, PQI, PNY, Kingston, Buffalo, Verbatim, Transcend, Imation, A-DATA, Apacer, Behavior, and Dane-Elec.  In this action, Case No. 07-C-0605-C (“the ’605 Action”), the Company asserted that the defendants infringed U.S. Patent No. 6,149,316 (the “’316 patent”) and U.S. Patent No. 6,757,842 (the “’842 patent”).  The Company seeks damages and injunctive relief in both actions.  In light of settlement agreements, the Company dismissed its claims against Phison, Silicon Motion, Skymedi, Verbatim, Corsair, Add-On Computer Peripherals, EDGE, Infotech, Interactive, PNY, TSR and Welldone.  The Company’s claims against Chipsbank, Acer, Behavior, Dane-Elec, LG, PQI, USBest, Transcend, A-DATA, Apacer, Buffalo, and Synergistic have been dismissed without prejudice.  The Court consolidated the ’605 and ’607 Actions and stayed these actions during the pendency of related proceedings before the U.S. International Trade Commission, which are now closed.  After lifting the stay, the Court set the trial to begin on February 28, 2011 with dispositive motions due on September 13, 2010.  The two remaining defendants (Kingston and Imation) have answered the Company’s complaints by denying infringement and raising several affirmative defenses and related counterclaims.   These defenses and related counterclaims include, among o thers, lack of standing, unclean hands, non-infringement, invalidity, unenforceability for alleged patent misuse, express license, implied license, patent exhaustion, waiver, laches, and estoppel.

Federal Civil Antitrust Class Actions. Between August 31, 2007 and December 14, 2007, the Company (along with a number of other manufacturers of flash memory products) was sued in the Northern District of California, in eight purported class action complaints.  On February 7, 2008, all of the civil complaints were consolidated into two complaints, one on behalf of direct purchasers and one on behalf of indirect purchasers, in the Northern District of California in a purported class action captioned In re Flash Memory Antitrust Litigation, Civil Case No. C07-0086.  Plaintiffs alleged the Company and a number of other manufacturers of flash memory and flash memory products conspired t o fix, raise, maintain, and stabilize the price of NAND flash memory in violation of state and federal laws and sought an injunction, damages, restitution, fees, costs, and disgorgement of profits.  The direct purchaser lawsuit was recently dismissed with prejudice.  On April 15, 2010, the Court denied the indirect purchaser plaintiffs’ class certification motion, denied plaintiffs’ motion for leave to amend the Consolidated Amended Complaint to substitute certain class representatives, and dismissed the claims on behalf of South Dakota purchasers with prejudice.  Indirect purchaser plaintiffs have moved for leave to file a motion for reconsideration of that decision.

Spansion Bankruptcy. Spansion, LLC (“Spansion”) and SanDisk IL Ltd. f/k/a M-Systems Flash Disk Pioneers Ltd. (“SanDisk IL”) are parties to the SSP Driver Software License Agreement (the “SSP License”) and the ORNAND Driver Software License Agreement (the “ORNAND License” and, collectively with the New Collaboration Agreement, the “Agreements”).  As set forth in the Agreements, Spansion was required to make quarterly royalty and support fee payments for use of SanDisk IL’s patented technology.  On March 1, 2009, Spansion filed for protection under Chapter 11 of the United States Bankruptcy Code in the United States Ban kruptcy Court for the District of Delaware (the “Bankruptcy Court”).  On May 22, 2009, SanDisk IL filed a proof of claim asserting a prepetition unsecured claim against Spansion in the amount of $11.3 million.  Subsequently, the parties entered into Amendment to the New Collaboration Agreement (the “Amendment”) dated as of January 31, 2010, pursuant to which Spansion (a) assumed the SSP License and New Collaboration Agreement, (b) rejected the ORNAND License, (c) agreed to pay SanDisk IL $1.2 million in order to cure arrearages under the Agreements, and (d) agreed the allowance of a general unsecured, prepetition claim of $6.2 million in connection with the rejection of the ORNAND License, comprised of $1.2 million for prepetition arrearages and $5.0 million for rejection damages. SanDisk IL is in receipt of $1.2 million from Spansion.  On February 23, 2010, SanDisk IL entered into an agreement to assign its remaining ORNAND License claim to CFIP Master F und, Ltd., through the intermediary Hain Capital Holdings, LLC for $3.8 million, equal to 62.125% of the ORNAND claim amount of $6.2 million which has been paid in full to SanDisk IL.  On April 16, 2010, the Bankruptcy Court approved and confirmed Spansion’s reorganization plan.  On May 11, 2010, counsel for SanDisk IL received notice that Spansion would shortly distribute cure payments to SanDisk IL.  On May 13, 2010, SanDisk IL executed a transfer share form, made effective as of April 1, 2010, transferring its rights to the rejection payment in the form of Spansion shares to CFIP Master Fund, Ltd.  On July 8, 2010, the assignment was finalized.

 
Patent Infringement Litigation Initiated by SanDisk.  On May 4, 2010, the Company filed a complaint for patent infringement in the United States District Court for the Western District of Wisconsin against Kingston and Imation.  In this action, Case No. 3:10-cv-00243, the Company asserts U.S. Patent No. 7,397,713; U.S. Patent No. 7,492,660; U.S. Patent No. 7,657,702; U.S. Patent No. 7,532,511; U.S. Patent No. 7,646,666; U.S. Patent No. 7,646,667; and U.S. Patent No. 6,968,421.  The Company seeks damages and injunctive relief.   The defendants answered the complaint denying infringement and raising several affirmative defenses and related counterclaims.  Thes e defenses and related counterclaims include, among others, non-infringement, invalidity, implied license, express license, unenforceability for alleged patent misuse, lack of standing, and bad faith litigation.  Kingston also asserted antitrust counterclaims against the Company alleging monopolization, attempted monopolization, and agreement in restraint of trade, all under the Sherman Act.  Kingston also asserted state law unfair competition counterclaims.  On July 30, 2010, the Company answered Imation’s counterclaims and filed a motion to dismiss Kingston’s antitrust and unfair competition counterclaims.  On August 3, 2010, the Court issued a scheduling order setting the claim construction hearing for January 14, 2011, requiring that dispositive motions be filed by May 9, 2011 and that a trial commence on July 30, 2011.

Ritz Camera Federal Antitrust Class Action.  On June 25, 2010, Ritz Camera & Image, LLC filed a complaint in the United States District Court for the Northern District of California, alleging that the Company violated federal antitrust law by conspiring to monopolize and monopolizing the market for flash memory products.  The lawsuit, Ritz Camera & Image, LLC v. SanDisk Corporation, Inc. and Eliyahou Harari, Case No. 5:10-cv-02787-HRL, purports to be on behalf of purchasers of flash memory products sold by the Company and joint ventures controlled by the Company from June 25, 2006 through the present.  The Complaint alleges that the Company created and maintained a mono poly by fraudulently obtaining patents and using them to restrain competition and by allegedly converting other patents for its competitive use.  The Company believes that it has meritorious defenses to this action and intends to pursue its defenses vigorously.
 
Samsung Federal Antitrust Action Against Panasonic and SD-3C.  On July 15, 2010, Samsung Electronics Co., Ltd. (“Samsung”) filed this action in the United States District Court for the Northern District of California, Case No. CV 10 3098 (ND Cal.), alleging various claims against Panasonic Corporation and Panasonic Corporation of North America (collectively “Panasonic”) and SD-3C, LLC (“SD-3C”) under federal antitrust law pursuant to Sections 1 and 2 of the Sherman Act, and under California antitrust and unfair competition laws.  Such claims are based on, inter alia, alleged conduct related to the licensing practices and operations of SD-3C.  The complaint further seeks a declaration that Panasonic and SD-3C engaged in patent misuse and that the patents subject to such alleged misuse should be held unenforceable.  The Company is not named as a defendant in this case, but it established SD-3C along with Panasonic and Toshiba, and the complaint includes various factual allegations concerning the Company.
 
Washington Research Foundation Patent Infringement Litigation.  On June 25, 2010, Washington Research Foundation (“WRF”) filed an action in the United States District Court for the Western District of Washington against Silicon Laboratories Inc. (“SiLabs”) alleging infringement of various patents exclusively licensed to WRF relating to Low Intermediate Frequency radio frequency receiver technology by certain SiLabs chipsets.  An amended complaint was thereafter filed on July 23, 2010, adding as defendants the Company, Apple Inc. (“Apple”), Garmin Ltd. and Garmin International, Inc. (collectively “Garmin”), iriver Ltd. and iriver Inc. (collectively “iriver”), Avnet, Inc. (“Avnet& #8221;), and Pantech Co., Ltd., Pantech & Curitel Communications, Inc. and Pantech Wireless, Inc. ( collectively “Pantech”), Case No. 2:10-cv-1050 JLR.  In the amended complaint, WRF alleges that the Company has used infringing SiLabs chipsets in certain of the Company’s portable media players.  No response by the Company has yet been filed.




Item 2.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Statements in this report, which are not historical facts, are forward-looking statements within the meaning of the federal securities laws.  These statements may contain words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” or other wording indicating future results or expectations.  Forward-looking statements are subject to significant risks and uncertainties.  Our actual results may differ materially from the results discussed in these forward-looking statements.  Factors that could cause our actual results to differ materially include, but are not limited to, those discussed under “Risk Factors” in Part II, Item 1A and elsewhere in this repor t.  Our business, financial condition or results of operations could be materially adversely affected by any of these or other factors.  We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that arises after the date of this report.  References in this report to “SanDisk®,” “we,” “our,” and “us” refer collectively to SanDisk Corporation, a Delaware corporation, and its subsidiaries.

Overview

We are the global leader in flash memory cards.  Our mission is to provide simple, reliable and affordable storage for use in portable devices.  We sell our products globally through broad retail and original equipment manufacturer, or OEM, distribution channels.

We design, develop and manufacture data storage products and solutions in a variety of form factors using our flash memory, proprietary controller and firmware technologies.  We purchase the vast majority of our NAND flash memory supply requirements through our significant flash venture relationships with Toshiba which provide us with leading-edge, low-cost memory wafers.  Our removable card products are used in a wide range of consumer electronics devices such as mobile phones, digital cameras, gaming devices and laptop computers.  Our embedded flash products are used in mobile phones, navigation devices, gaming systems, imaging devices and computing platforms.  For computing platforms, we provide high-speed, high-capacity storage solutions known as solid-state drives, or SSDs, that can be used in lieu of hard disk drives in a variety of computing devices.

Our strategy is to be an industry-leading supplier of flash storage solutions and to develop large scale markets for flash-based storage products.  We maintain our technology leadership by investing in advanced technologies and flash memory fabrication capacity in order to produce leading-edge, low-cost flash memory for use in a variety of end-products.  We are a one-stop-shop for our retail and OEM customers, selling all major flash storage card formats for our target markets in high volumes.

Our results are primarily driven by worldwide demand for flash storage devices, which in turn primarily depends on end-user demand for consumer electronic products.  We believe the market for flash storage is generally price elastic.  Accordingly, we expect that as we reduce the price of our flash devices, consumers will demand an increasing number of gigabytes and/or units of memory and that over time, new markets will emerge.  In order to profitably capitalize on this price elasticity, we must reduce our cost per gigabyte at a rate similar to the change in selling price per gigabyte, while at the same time, increasing the average capacity and/or the number of units of our products enough to offset price declines.  We continually seek to achieve these cost reductions through technology improvement s, primarily by increasing the amount of memory stored in a given area of silicon.

Our industry is characterized by rapid technology transitions.  Since our inception, we have been able to scale NAND technology through fourteen generations over approximately twenty years.  However, the pace at which NAND technology is transitioning to new generations is expected to slow due to inherent physical technology limitations.  We currently expect to be able to continue to scale our NAND technology through a few additional generations, but beyond that there is no certainty that further technology scaling can be achieved cost effectively with the current NAND flash technology and architecture.  We also continue to invest in future alternative technologies, particularly our 3D Read/Write technology, which we believe may be a viable alternative to NAND when NAND can no longer scale at a suff icient rate, or at all.  However, even when NAND flash can no longer be further scaled, we expect NAND and potential alternative technologies to coexist for an extended period of time.

In March 2010, we completed the redemption of the 1% Convertible Notes due 2035 through an all-cash transaction of $75 million plus accrued interest of $0.4 million.

In July 2010, we and Toshiba entered into an agreement to create a new flash venture, of which we will own 49.9% and Toshiba will own 50.1%, to operate in Toshiba’s Fab 5 facility, or Fab 5.  Toshiba will own and fund the construction of the Fab 5 building, which will be located in Yokkaichi, Japan, adjacent to the site of our current Flash Partners Ltd. and Flash Alliance Ltd. ventures, hereinafter collectively referred to as Flash Ventures.  Fab 5 is expected to be constructed by Toshiba in two phases.  Phase 1 is expected to be completed in the second quarter of fiscal year 2011, with initial NAND production scheduled for the second half of fiscal year 2011.  On completion of the second phase, Fab 5 is expected to be of similar size and capacity to Toshiba’s existing Fab 4 facility.  We expect that Fab 5 will increase our 2011 wafer output by less than 10%.  We are committed to 50% of the initial ramp within Phase 1 of Fab 5, for which we currently expect our portion of equipment investments and startup costs to be approximately $500 million through fiscal year 2011.  No commitments or timelines have been finalized for any further Phase 1 capacity expansions or for the construction of Phase 2.  In addition to equipment investments and startup costs, we will also provide a cash prepayment of approximately $56 million in fiscal year 2011 to be credited against future charges.  If and when Phase 2 is built, we are committed to an initial ramp in Phase 2 similar to the ramp in Phase 1.  We and Toshiba will each retain some flexibility as to the extent and timing of each party’s respective fab capacity ramps, and the output allocation will be in accordance with each of the parties’ proportionate level of equipment funding.

In July 2010, we announced that Dr. Eli Harari, our Founder, Chairman and Chief Executive Officer, will retire from his current positions on December 31, 2010.  Dr. Harari will provide consulting services, particularly technology related, to us for a period of two years starting January 1, 2011.  Our Board of Directors appointed Sanjay Mehrotra, currently our President and Chief Operating Officer, to be our President and Chief Executive Officer effective January 1, 2011.  The Board also announced that Michael Marks, a member of the SanDisk Board since 2003, will assume the role of Chairman effective January 1, 2011.  





Results of Operations.
   
Three months ended
   
Six months ended
 
   
July 4,
2010
   
% of
Revenues
   
June 28,
2009
   
% of
Revenues
   
July 4,
2010
   
% of
Revenues
   
June 28,
2009
   
% of
Revenues
 
   
(In millions, except percentages)
 
Product revenues
  $ 1,091.3       92.6 %   $ 610.4       83.6 %   $ 2,084.5       92.0 %   $ 1,198.5       86.2 %
License and royalty revenues
    87.8       7.4 %     120.2       16.4 %     181.2       8.0 %     191.5       13.8 %
Total revenues
    1,179.1       100.0 %     730.6       100.0 %     2,265.7       100.0 %     1,390.0       100.0 %
Cost of product revenues
    629.6       53.4 %     478.5       65.5 %     1,212.9       53.5 %     1,135.9       81.7 %
Amortization of acquisition-related intangible assets
    3.1       0.3 %     3.1       0.4 %     6.2       0.3 %     6.2       0.5 %
Total cost of product revenues
    632.7       53.7 %     481.6       65.9 %     1,219.1       53.8 %     1,142.1       82.2 %
Gross profit
    546.4       46.3 %     249.0       34.1 %     1,046.6       46.2 %     247.9       17.8 %
Operating expenses
                                                               
Research and development
    99.8       8.5 %     91.2       12.5 %     198.5       8.8 %     178.1       12.8 %
Sales and marketing
    52.1       4.4 %     50.4       6.9 %     100.6       4.4 %     88.3       6.4 %
General and administrative
    35.4       3.0 %     38.7       5.3 %     74.1       3.3 %     77.0       5.5 %
Amortization of acquisition-related intangible assets
    0.3    
      0.3    
      0.6    
      0.6    
 
Restructuring and other
 
   
   
   
   
   
      0.8       0.1 %
Total operating expenses
    187.6       15.9 %     180.6       24.7 %     373.8       16.5 %     344.8       24.8 %
Operating income (loss)
    358.8       30.4 %     68.4       9.4 %     672.8       29.7 %     (96.9 )     (7.0 %)
Other income (expense)
 
      0.0 %     4.7       0.6 %     9.0       0.4 %     (14.0 )     (1.0 %)
Income (loss) before provision for income taxes
    358.8       30.4 %     73.1       10.0 %     681.8       30.1 %     (110.9 )     (8.0 %)
Provision for income taxes
    100.9       8.5 %     20.6       2.8 %     189.2       8.4 %     44.6       3.2 %
Net income (loss)
  $ 257.9       21.9 %   $ 52.5       7.2 %   $ 492.6       21.7 %   $ (155.5 )     (11.2 %)

Product Revenues.
   
Three months ended
   
Six months ended
 
   
July 4,
2010
   
June 28,
2009
   
Percent
Change
   
July 4,
2010
   
June 28,
2009
   
Percent
Change
 
   
(In millions, except percentages)
 
Retail
  $ 381.7     $ 357.8       6.7 %   $ 752.2     $ 704.4       6.8 %
OEM
    709.6       252.6       180.9 %     1,332.3       494.1       169.6 %
Product revenues
  $ 1,091.3     $ 610.4       78.8 %   $ 2,084.5     $ 1,198.5       73.9 %

The increase in our product revenues for the three months ended July 4, 2010 compared to the three months ended June 28, 2009 reflected growth in total gigabytes sold of 116%, largely driven by sales of mobile handset products, imaging products and wafers and components.  Average selling price per gigabyte for the three months ended July 4, 2010 declined 18% compared to the three months ended June 28, 2009, partially reflecting an increase in average capacity of 16%, as higher capacity products generally have lower average selling prices per gigabyte, as well as an increased mix of OEM sales, which also carry a lower price per gigabyte.  OEM revenues in the three months ended July 4, 2010 increased compared to the three months ended June 28, 2009 due to increased sales of cards, embedded solutions, non-branded pr oducts, wafers and components, primarily to the mobile market and to new channels that we added in the second half of fiscal 2009.  Retail product revenues in the three months ended July 4, 2010 increased modestly compared to the three months ended June 28, 2009.

The increase in our product revenues for the six months ended July 4, 2010 compared to the six months ended June 28, 2009 reflected increases in total gigabytes sold of 93% and average capacity of 11%.  Average selling price per gigabyte decreased 10% compared to the six months ended June 28, 2009.  OEM revenues increased in the six months ended July 4, 2010 compared to the six months ended June 28, 2009 due to increased sales of cards, embedded solutions, non-branded products, wafers and components, primarily to the mobile market and to new channels that we added in the second half of fiscal 2009.  The increase in retail product revenues for the six months ended July 4, 2010 compared to the six months ended June 28, 2009 was driven primarily by increased demand for imaging products and increased consumer sp ending in Asia-Pacific.
 
Our ten largest customers represented approximately 45% and 44% of our total revenues in the three and six months ended July 4, 2010, respectively, compared to 50% and 46% in the three and six months ended and June 28, 2009, respectively.  In the three and six months ended June 28, 2009, revenues from Samsung Electronics Co. Ltd., or Samsung, which included both license and royalty revenues and product revenues, accounted for 14% and 11% of our total revenues, respectively.  Other than Samsung in fiscal year 2009, no other customer exceeded 10% of our total revenues during the three and six months ended July 4, 2010 and June 28, 2009.
 

Geographical Product Revenues.
   
Three months ended
   
Six months ended
 
   
July 4,
2010
   
% of Product Revenues
   
June 28,
2009
   
% of Product Revenues
   
Percent
Change
   
July 4,
2010
   
% of Product Revenues
   
June 28,
2009
   
% of Product Revenues
   
Percent
Change
 
   
(In millions, except percentages)
 
United States
  $ 170.4       15.6 %   $ 228.2       37.4 %     (25.4 %)   $ 336.0       16.1 %   $ 442.2       36.9 %     (24.0 %)
Europe,  Middle East and Africa
    174.4       16.0 %     152.0       24.9 %     14.7 %     336.4       16.1 %     303.0       25.3 %     11.0 %
Asia-Pacific
    712.1       65.3 %     220.9       36.2 %     222.4 %     1,355.0       65.0 %     431.8       36.0 %     213.8 %
Other foreign countries
    34.4       3.1 %     9.3       1.5 %     270.1 %     57.1       2.8 %     21.5       1.8 %     165.6 %
Product revenues
  $ 1,091.3       100.0 %   $ 610.4       100.0 %     78.8 %   $ 2,084.5       100.0 %   $ 1,198.5       100.0 %     73.9 %

Product revenues in Asia-Pacific, which includes Japan, increased for the three and six months ended July 4, 2010 as compared to the three and six months ended June 28, 2009, due primarily to growth in our OEM channel sales for the mobile market, increased sales of non-branded products, wafers and components, and growth in retail sales due to increased consumer demand.  The decrease in product revenues for the United States in the three and six months ended July 4, 2010 compared to the three and six months ended June 28, 2009 primarily reflected a shift in the delivery location of OEM products from the U.S. to Asia-Pacific.  The increase in product revenues for Europe, Middle East and Africa in the three and six months ended July 4, 2010 compared to the three and six months ended June 28, 2009 was a result of increase d OEM sales primarily for the mobile market, partially offset by reduced retail revenues due to weak economic conditions.

License and Royalty Revenues.
   
Three months ended
   
Six months ended
 
   
July 4,
2010
   
June 28,
2009
   
Percent
Change
   
July 4,
2010
   
June 28,
2009
   
Percent
Change
 
   
(In millions, except percentages)
 
License and royalty revenues
  $ 87.8     $ 120.2       (27.0 %)   $ 181.2     $ 191.5       (5.4 %)

The decrease in our license and royalty revenues for the three and six months ended July 4, 2010 compared to the three and six months ended June 28, 2009 was primarily due to a lower royalty rate in our current license agreement with Samsung.

Gross Profit and Margin.
   
Three months ended
   
Six months ended
 
   
July 4,
2010
   
June 28,
2009
   
Percent
Change
   
July 4,
2010
   
June 28,
2009
   
Percent
Change
 
   
(In millions, except percentages)
 
Product gross profit
  $ 458.6     $ 128.9       255.8 %   $ 865.4     $ 56.3       1437.1 %
Product gross margin (as a percent of product revenues)
    42.0 %     21.1 %             41.5 %     4.7 %        
Total gross margin (as a percent of total revenues)
    46.3 %     34.1 %             46.2 %     17.8 %        

Product gross profit and product gross margin for the three and six months ended July 4, 2010 was substantially higher than the three and six months ended June 28, 2009 due to cost reductions exceeding average selling price reductions.  The decrease in product cost is due to wafer production transitioning from 43-nanometer to 32-nanometer technology, increased usage of 3-bits per cell memory, and production at Flash Ventures, running at full utilization in fiscal year 2010 compared to less than full utilization in the first half of fiscal year 2009.
 

 
 
Research and Development.
   
Three months ended
   
Six months ended
 
   
July 4,
2010
   
June 28,
2009
   
Percent
Change
   
July 4,
2010
   
June 28,
2009
   
Percent
Change
 
   
(In millions, except percentages)
 
Research and development
  $ 99.8     $ 91.2       9.4 %   $ 198.5     $ 178.1       11.5 %
Percent of revenue
    8.5 %     12.5 %             8.8 %     12.8 %        

The increase in our research and development expense for the three months ended July 4, 2010 compared to the three months ended June 28, 2009 was due primarily to higher third-party engineering costs of $4.4 million and employee-related costs of $3.9 million related to increased headcount and compensation expense.

The increase in our research and development expense for the six months ended July 4, 2010 compared to the six months ended June 28, 2009 was due primarily to higher employee-related costs of $15.2 million related to increased headcount and compensation expense, and higher third-party engineering costs of $4.8 million.

Sales and Marketing.
   
Three months ended
   
Six months ended
 
   
July 4,
2010
   
June  28,
2009
   
Percent
Change
   
July 4,
2010
   
June  28,
2009
   
Percent
Change
 
   
(In millions, except percentages)
 
Sales and marketing
  $ 52.1     $ 50.4       3.4 %   $ 100.6     $ 88.3       13.9 %
Percent of revenue
    4.4 %     6.9 %             4.4 %     6.4 %        

There were no significant changes in expense categories or in total for our sales and marketing expense for the three months ended July 4, 2010 compared to the three months ended June 28, 2009.  The increase in our sales and marketing expense for the six months ended July 4, 2010 compared to the six months ended June 28, 2009 was primarily due to increased branding and merchandising costs of $10.1 million and employee-related costs of $4.0 million, offset by lower outside service costs of $2.2 million.

General and Administrative.
   
Three months ended
   
Six months ended
 
   
July 4,
2010
   
June 28,
2009
   
Percent
Change
   
July 4,
2010
   
June 28,
2009
   
Percent
Change
 
   
(In millions, except percentages)
 
General and administrative
  $ 35.4     $ 38.7       (8.5 %)   $ 74.1     $ 77.0       (3.8 %)
Percent of revenue
    3.0 %     5.3 %             3.3 %     5.5 %        

The decline in our general and administrative expense for the three months ended July 4, 2010 compared to the three months ended June 28, 2009 reflects lower legal and outside service costs of ($6.5) million, offset by higher bad debt expense of $2.0 million and employee-related costs of $1.1 million.  The decline in our general and administrative expense for the six months ended July 4, 2010 compared to the six months ended June 28, 2009 reflects lower legal and outside service costs of ($8.4) million, offset by higher employee-related costs of $5.5 million, primarily due to increased incentive compensation expense.

        In connection with the planned retirement of our CEO, Dr. Harari, on December 31, 2010, we expect to expense in the second half of fiscal 2010, a cash payment to Dr. Harari of approximately $4 million and a non-cash charge related to the modification of stock options and restricted stock units held by Dr. Harari of approximately $19 million to $21 million, subject to future market conditions, including but not limited to our stock price.




Amortization of Acquisition-Related Intangible Assets.
   
Three months ended
   
Six months ended
 
   
July 4,
2010
   
June 28,
2009
   
Percent
Change
   
July 4,
2010
   
June 28,
2009
   
Percent
Change
 
   
(In millions, except percentages)
 
Amortization of acquisition-related intangible assets
  $ 0.3     $ 0.3       0.0 %   $ 0.6     $ 0.6       0.0 %
Percent of revenue
 
   
           
   
         

Amortization of acquisition-related intangible assets relate to the intangible assets acquired from Matrix Semiconductor, Inc., which will be amortized through fiscal year 2014, and MusicGremlin, Inc., which will be amortized through part of fiscal year 2011.

Restructuring and Other.
   
Three months ended
   
Six months ended
 
   
July 4,
2010
   
June 28,
2009
   
Percent
Change
   
July 4,
2010
   
June 28,
2009
   
Percent
Change
 
   
(In millions, except percentages)
 
Restructuring and others
  $
    $
      0.0 %   $
    $ 0.8       (100.0 %)
Percent of revenue
 
   
           
      0.1 %        
 
For the three and six months ended July 4, 2010, we recorded no charge related to employee severance costs under our restructuring plans compared to zero and $0.8 million recorded for the same periods in fiscal year 2009.

Other Income (Expense).
   
Three months ended
   
Six months ended
 
   
July 4,
2010
   
June 28,
2009
   
Percent
Change
   
July 4,
2010
   
June 28,
2009
   
Percent
Change
 
   
(In millions, except percentages)
 
Interest income
  $ 12.2     $ 14.1       (13.5 %)   $ 24.6     $ 33.4       (26.3 %)
Interest expense
    (18.1 )     (17.3 )     4.6 %     (36.1 )     (34.3 )     5.2 %
Income (loss) from equity investments
    0.3       3.0       (90.0 %)     (0.4 )     2.1       (119.0 %)
Other income (expense), net
    5.6       4.9       14.3 %     20.9       (15.2 )     (237.5 %)
Total other income (expense), net
  $
    $ 4.7       (100.0 %)   $ 9.0     $ (14.0 )     (164.3 %)
 
The decrease in “Total other income (expense), net” for the three months ended July 4, 2010 compared to three months ended June 28, 2009 was primarily due to lower interest income and lower income from equity investments.  The increase in “Total other income (expense), net” for the six months ended July 4, 2010 compared to the six months ended June 28, 2009 was primarily due to non-recurring gains on the sale of assets and investments in the first quarter of fiscal year 2010 reflected in “Other income (expense), net,” offset by a decrease in interest income due to lower interest rates.  In February 2010, we sold our SIM business net assets which resulted in a gain of $13.2 million recorded in “Other income (expense).”  “Other income (expense), net 221; was negative for the six months ended June 28, 2009 due to bank charges and fees of ($10.9) million related to the restructuring of the Flash Ventures master equipment leases and impairment of our equity investment in FlashVision Ltd. of ($7.9) million.

Provision for Income Taxes.
   
Three months ended
   
Six months ended
 
   
July 4,
2010
   
June 28,
2009
   
Percent
Change
   
July 4,
2010
   
June 28,
2009
   
Percent
Change
 
   
(In millions, except percentages)
 
Provision for income taxes
  $ 100.9     $ 20.6       389.8 %   $ 189.2     $ 44.6       324.2 %
Effective tax rate
    28.1 %     27.3 %             27.7 %     (41.2 %)        

The provision for income taxes for the three and six months ended July 4, 2010 increased from the three and six months ended June 28, 2009 primarily due to increased federal taxes based upon higher U.S. income.  The tax provision for the three and six months ended July 4, 2010 includes U.S. taxes net of changes in the valuation allowance of the U.S. deferred tax assets.  Due to our valuation allowance for U.S. deferred tax assets, the tax provision for the three and six months ended June 28, 2009 primarily reflects taxes on our income generating foreign jurisdictions, and withholding taxes on license and royalty income from certain foreign licensees.  As of July 4, 2010, due to recent net cumulative losses, a valuation allowance remains on certain U.S. deferred tax assets that are not more-likely-than-not to be realized.  We evaluate our deferred tax asset valuation allowance position on a regular basis.  As a result, management believes a reversal of a substantial portion of the Company's valuation allowance may be possible in the next twelve months.

Unrecognized tax benefits were $193.2 million and $184.8 million as of July 4, 2010 and April 4, 2010, respectively.  Unrecognized tax benefits that would impact the effective tax rate in the future are approximately $103.8 million at July 4, 2010.  Income tax expense in the three and six months ended July 4, 2010 included interest and penalties of $1.0 million and $2.5 million, respectively.

In October 2009, the Internal Revenue Service commenced an examination of our federal income tax returns for fiscal years 2005 through 2008.  We do not expect a resolution to be reached during the next twelve months.  In addition, we are currently under audit by various state and international tax authorities and cannot reasonably estimate that the outcome of these examinations will not have a material effect on our financial position, results of operations or liquidity.


Non-GAAP Financial Measures

Reconciliation of Net Income (Loss).

   
Three months ended
   
Six months ended
 
   
July 4,
2010
   
June 28,
2009
   
July 4,
2010
   
June 28,
2009
 
   
(In thousands except per share amounts)
 
Net income (loss)
  $ 257,894     $ 52,507     $ 492,585     $ (155,488 )
Share-based compensation
    14,977       22,354       31,847       38,684  
Amortization of acquisition-related intangible assets
    3,423       3,423       6,847       6,847  
Convertible debt interest
    14,208       13,159       28,129       26,085  
Income tax adjustments
    (32,702 )     (8,495 )     (76,566 )     58,357  
Non-GAAP net income (loss)
  $ 257,800     $ 82,948     $ 482,842     $ (25,515 )
                                 
Diluted net income (loss) per share:
  $ 1.08     $ 0.23     $ 2.07     $ (0.69 )
Share-based compensation
    0.06       0.10       0.13       0.17  
Amortization of acquisition-related intangible assets
    0.02       0.01       0.03       0.03  
Convertible debt interest
    0.06       0.06       0.12       0.12  
Income tax adjustments
    (0.14 )     (0.04 )     (0.32 )     0.26  
Non-GAAP diluted net income (loss) per share:
  $ 1.08     $ 0.36     $ 2.03     $ (0.11 )
                                 
Shares used in computing diluted net income (loss) per share:
                               
GAAP
    239,801       231,066       238,566       226,753  
Non-GAAP
    238,807       231,818       237,652       226,753  

We believe that providing this additional information is useful in enabling the investor to better assess and understand our operating performance, especially when comparing results with previous periods or forecasting performance for future periods, primarily because our management typically monitors our business excluding these items.  We also use these non-GAAP measures to establish operational goals and for measuring performance for compensation purposes.  However, analysis of results on a non-GAAP basis should be used as a complement to, and in conjunction with, and not as a replacement for, results presented in accordance with GAAP.

We believe that the presentation of non-GAAP measures, including net income (loss) and non-GAAP net income (loss) per diluted share, provides important supplemental information to management and investors regarding financial and business trends relating to our results of operations.  We believe that the use of these non-GAAP financial measures also provides consistency and comparability with our past financial reports.

We have historically used these non-GAAP measures when evaluating operating performance because we believe that the inclusion or exclusion of the items described below provides an additional measure of our core operating results and facilitates comparisons of our core operating performance against prior periods and our business model objectives.  We have chosen to provide this information to investors to enable them to perform additional analyses of past, present and future operating performance and as a supplemental means to evaluate our ongoing core operations.  Externally, we believe that these non-GAAP measures continue to be useful to investors in their assessment of our operating performance and their valuation of the company.

Internally, these non-GAAP measures are significant measures used by us for:
 
· evaluating the core operating performance of the company;
· establishing internal budgets;
· setting and determining variable compensation levels;
· calculating return on investment for development programs and growth initiatives;
· comparing performance with internal forecasts and targeted business models;
· strategic planning; and
· benchmarking performance externally against our competitors.



We exclude the following items from our non-GAAP measures:

Share-based Compensation Expense.  These expenses consist primarily of expenses for employee stock options, employee restricted stock units and the employee stock purchase plan.  Although share-based compensation is an important aspect of the compensation of our employees and executives, we exclude share-based compensation expenses from our non-GAAP measures primarily because they are non-cash expenses that we do not believe are reflective of ongoing operating results.  Further, we believe that it is useful to exclude share-based compensation expense for investors to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies.

Amortization of Acquisition-related Intangible Assets.  We incur amortization of intangible assets in connection with acquisitions.  Since we do not acquire businesses on a predictable cycle, we exclude these items in order to provide investors and others with a consistent basis for comparison across accounting periods.

Convertible Debt Interest.  This is the non-cash economic interest expense relating to the implied value of the equity conversion component of the convertible debt.  The value of the equity conversion component is treated as a debt discount and amortized to interest expense over the life of the note using the effective interest rate method.  We exclude this non-cash interest expense as it does not represent the semi-annual cash interest payments made to our note holders.

Income Tax Adjustments.  This amount is used to present each of the amounts described above on an after-tax basis, considering jurisdictional tax rates, consistent with the presentation of non-GAAP net income.  It also represents the amount of tax expense or benefit that we would record, considering jurisdictional tax rates, if we did not have any valuation allowance on our net deferred tax assets.

From time-to-time in the future, there may be other items that we may exclude if we believe that doing so is consistent with the goal of providing useful information to investors and management.

Limitations of Relying on Non-GAAP Financial Measures.  We have incurred and will incur in the future, many of the costs excluded from the non-GAAP measures, including share-based compensation expense, impairment of goodwill and acquisition-related intangible assets, amortization of acquisition-related intangible assets and other acquisition-related costs, convertible debt interest expense and income tax adjustments.  These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results.  These non-GAAP measures may be different than the non-GAAP measures used by other companies.


Liquidity and Capital Resources.

Our cash flows were as follows:
   
Six months ended
 
   
July 4,
2010
   
June 28,
2009
   
Percent
Change
 
   
(In millions, except percentages)
 
Net cash provided by (used in) operating activities
  $ 713.3     $ (138.5 )     614.9 %
Net cash provided by (used in) investing activities
    (603.8 )     53.3       (1233.1 %)
Net cash provided by financing activities
    23.1       6.3       267.9 %
Effect of changes in foreign currency exchange rates on cash
    4.0       1.4       185.7 %
Net increase (decrease) in cash and cash equivalents
  $ 136.6     $ (77.5 )     276.2 %

Operating Activities.  Cash provided by operations was $713.3 million for the six months ended July 4, 2010 as compared to cash used in operations of ($138.5) million for the six months ended June 28, 2009.  The increase in cash provided by operations in the six months ended July 4, 2010 compared to the six months ended June 28, 2009 resulted primarily from net income of $492.6 million, adjusted for non-cash items, compared with a net loss of ($155.5) million, adjusted for non-cash items.  Cash flow from accounts receivable decreased, as reflected by higher accounts receivable levels compared with the prior year, due to increased revenue in the first half of fiscal year 2010.  We have not seen a deterior ation in the credit worthiness of our customers in fiscal year 2010.  Cash flow from inventory increased primarily due to increased product revenue consuming additional inventory.  Cash flow from other assets decreased compared to the prior year primarily due to a tax refund received in the first quarter of fiscal year 2009.  Accounts payable trade and accounts payable from related parties increased primarily due to the timing of Flash Ventures payments as compared to the prior year, resulting in more cash on hand as of July 4, 2010.  Cashflow from other liabilities increased in the six months ended July 4, 2010 compared to the six months ended June 28, 2009 as a result of increased deferred revenue, primarily from licensee payments received in advance of revenue recognition.

Investing Activities.  Cash used for investing activities for the first half of fiscal year 2010 was ($603.8) million as compared to cash provided by investing activities of $53.3 million in the first half of fiscal year 2009.  The higher usage of cash in investing activities in the six months ended July 4, 2010 was primarily related to increased purchases of short and long-term marketable securities, offset by no new loans made to Flash Ventures and a reduced investment in property and equipment.  In addition, in the first six months of fiscal year 2010, we received proceeds of $17.8 million related to the sale of our SIM business net assets.

Financing Activities.  Net cash provided by financing activities for the first six months of fiscal year 2010 was $23.1 million compared to $6.3 million in the first six months of fiscal year 2009, primarily due to higher cash received from employee stock programs and the realized tax benefit related to the excess of the deductible amount over the compensation cost recognized, partially offset by the redemption of our $75.0 million 1% convertible notes in the first quarter of fiscal year 2010.



Liquid Assets.  At July 4, 2010, we had cash, cash equivalents and short-term marketable securities of $2.43 billion.  We had $1.29 billion of long-term marketable securities which we believe are also liquid assets, but are classified as long-term marketable securities due to the remaining contractual maturity of the investment being greater than one year.

Short-Term Liquidity.  As of July 4, 2010, our working capital balance was $2.57 billion.  We expect cash usage related to our loans to Flash Ventures as well as our investments in property and equipment in the remaining six months of fiscal year 2010 to be approximately $250 million to $300 million.

Our short-term liquidity is impacted in part by our ability to maintain compliance with covenants in the outstanding Flash Ventures master lease agreements.  The Flash Ventures master lease agreements contain customary covenants for Japanese lease facilities as well as an acceleration clause for certain events of default related to us as guarantor, including, among other things, our failure to maintain a minimum shareholder equity of at least $1.51 billion, and our failure to maintain a minimum corporate rating of BB- from Standard & Poors, or S&P, or Moody’s Corporation, or a minimum corporate rating of BB+ from Rating & Investment Information, Inc., or R&I.  As of July 4, 2010, Flash Ventures was in compliance with all of its master lease covenants.  As of July 4, 2010, our R& ;I credit rating was BBB-, two notches above the required minimum corporate rating threshold from R&I and our S&P credit rating was BB-, which is the required minimum corporate rating threshold from S&P.

If both S&P and R&I were to downgrade our credit rating below the minimum corporate rating threshold, Flash Ventures would become non-compliant with certain covenants under its master equipment lease agreements and would be required to negotiate a resolution to the non-compliance to avoid acceleration of the obligations under such agreements.  Such resolution could include, among other things, supplementary security to be supplied by us, as guarantor, or increased interest rates or waiver fees, should the lessors decide they need additional collateral or financial consideration under the circumstances.  If a resolution was unsuccessful, we could be required to pay a portion or up to the entire $965.8 million outstanding lease obligations covered by our guarantee under such Flash Ventures master lease agre ements, based upon the exchange rate at July 4, 2010, which would negatively impact our short-term liquidity.

Long-Term Requirements.  Depending on the demand for our products, we may decide to make additional investments, which could be substantial, in wafer fabrication foundry capacity and assembly and test manufacturing equipment to support our business in the future.  In July 2010, we and Toshiba entered into an agreement to create a new flash venture, of which the Company will own 49.9% and Toshiba will own 50.1%, to operate in Toshiba’s Fab 5 facility, or Fab 5.  See “Ventures with Toshiba” below for expected future obligations.

We may also make equity investments in other companies, or engage in merger or acquisition transactions.  These activities may require us to raise additional financing, which could be difficult to obtain, and which if not obtained in satisfactory amounts, could prevent us from funding Flash Ventures or new fabrication facilities; increasing our wafer supply; developing or enhancing our products; taking advantage of future opportunities; engaging in investments in or acquisitions of companies; growing our business; responding to competitive pressures or unanticipated industry changes; any of which could harm our business.

Financing Arrangements.  At July 4, 2010, we had $1.15 billion aggregate principal amount of 1% Senior Convertible Notes due 2013, or 1% Notes due 2013 outstanding.

Concurrent with the issuance of the 1% Notes due 2013, we sold warrants to acquire shares of our common stock at an exercise price of $95.03 per share.  As of July 4, 2010, the warrants had an expected life of approximately 3.1 years and expire in August 2013.  At expiration, we may, at our option, elect to settle the warrants on a net share basis.  As of July 4, 2010, the warrants had not been exercised and remain outstanding.  In addition, concurrent with the issuance of the 1% Notes due 2013, we entered into a convertible bond hedge transaction in which counterparties agreed to sell to us up to approximately 14.0 million shares of our common stock, which is the number of shares initially issuable upon conversion of the 1% Notes due 2013 in full, at a conversion price of $82.36 per shar e.  The convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 1% Notes due 2013 or the first day that none of the 1% Notes due 2013 remain outstanding due to conversion or otherwise.  Settlement of the convertible bond hedge in net shares on the expiration date would result in us receiving net shares equivalent to the number of shares issuable by us upon conversion of the 1% Notes due 2013.  As of July 4, 2010, we had not purchased any shares under this convertible bond hedge agreement.
 
 
 
Ventures with Toshiba.  We are a 49.9% owner in both Flash Partners and Flash Alliance, our business ventures with Toshiba to develop and manufacture NAND flash memory products.  In July 2010, we and Toshiba entered into an agreement to create a new flash venture, of which we will own 49.9% and Toshiba will own 50.1%, to operate in Toshiba’s Fab 5 facility, or Fab 5.  Toshiba will own and fund the construction of the Fab 5 building, which will be located in Yokkaichi, Japan, adjacent to the site of our current Flash Partners and Flash Alliance ventures.  Fab 5 is expected to be constructed by Toshiba in two phases.  Phase 1 is expected to be completed in the second quarter of fiscal year 2011, with initial N AND production scheduled for the second half of fiscal year 2011.  On completion of the second phase, Fab 5 is expected to be of similar size and capacity to Toshiba’s existing Fab 4 facility.  We expect that Fab 5 will increase our 2011 wafer output by less than 10%.  We are committed to 50% of the initial ramp within Phase 1 of Fab 5, for which we currently expect our portion of equipment investments and startup costs to be approximately $500 million through fiscal year 2011.  No commitments or timelines have been finalized for any further Phase 1 capacity expansions or for the construction of Phase 2.  In addition to equipment investments and startup costs, we will also provide a cash prepayment of approximately $56 million in fiscal year 2011 to be credited against future charges.  If and when Phase 2 is built, we are committed to an initial ramp in Phase 2 similar to the ramp in Phase 1.  We and Toshiba will each retai n some flexibility as to the extent and timing of each party’s respective fab capacity ramps, and the output allocation will be in accordance with each of the parties’ proportionate level of equipment funding.

With these ventures, we and Toshiba collaborate in the development and manufacture of NAND flash memory products.  These NAND flash memory products are manufactured by Toshiba at Toshiba’s Yokkaichi, Japan operations using the semiconductor manufacturing equipment owned or leased by these ventures.  This equipment is funded or will be funded by investments in or loans to the Flash Ventures from us and Toshiba as well as through operating leases received by Flash Ventures from third-party banks and guaranteed by us and Toshiba.  These ventures purchase wafers from Toshiba at cost and then resell those wafers to us and Toshiba at cost plus a markup.  We are contractually obligated to purchase half of these ventures’ NAND wafer supply or pay for 50% of the fixed costs of these ventures. 60; We are not able to estimate our total wafer purchase obligations beyond our rolling three month purchase commitment because the price is determined by reference to the future cost to produce the wafers.  See Note 12, “Related Parties and Strategic Investments,” of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.
 
The cost of the wafers we purchase from these ventures is recorded in inventory and ultimately cost of product revenues.  These ventures are variable interest entities; however, we are not the primary beneficiary of these ventures because we do not have a controlling financial interest in each venture.  Accordingly, we account for our investments under the equity method and do not consolidate.

We participate in other common research and development activities with Toshiba but are not committed to any minimum funding level.

For semiconductor fixed assets that are leased by these ventures, we and/or Toshiba jointly guarantee on an unsecured and several basis, 50% of the outstanding Flash Ventures’ lease obligations under master lease agreements entered into from December 2004 through April 2010.  These master lease obligations are denominated in Japanese yen and are noncancelable.  Our total master lease obligation guarantee as of July 4, 2010 was 84.7 billion Japanese yen, or approximately $966 million based upon the exchange rate at July 4, 2010.

In our fiscal year 2009, we and Toshiba restructured Flash Partners and Flash Alliance by selling more than 20% of their capacity to Toshiba.  The restructuring resulted in us receiving value of 79.3 billion Japanese yen of which 26.1 billion Japanese yen, or $277 million, was received in cash, reducing outstanding notes receivable from Flash Ventures and 53.2 billion Japanese yen of value reflected the transfer of off-balance sheet equipment lease guarantee obligations from us to Toshiba.  The restructuring was completed in a series of closings beginning in January 2009 and extending through March 31, 2009.  In the first quarter of fiscal year 2009, transaction costs of $10.9 million related to the sale and transfer of equipment and lease obligations were expensed.< /div>

From time-to-time, we and Toshiba mutually approve the purchase of equipment for the ventures in order to convert to new process technologies or add wafer capacity.  Flash Partners has previously reached full wafer capacity.  Flash Alliance is expected to reach full wafer capacity in 2011.  During the remainder of fiscal year 2010, we expect our portion of capital investments in Flash Partners and Flash Alliance for new process technologies and additional wafer capacity to be between $700 million to $800 million, of which we expect approximately $200 million will be funded through additional loans to these ventures, and the remaining amount is expected to be funded through working capital contributions from these ventures.
 

 
 
Contractual Obligations and Off-Balance Sheet Arrangements

Our contractual obligations and off-balance sheet arrangements at July 4, 2010, and the effect those contractual obligations are expected to have on our liquidity and cash flow over the next five years are presented in textual and tabular format in Note 11, “Commitments, Contingencies and Guarantees,” of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

Impact of Currency Exchange Rates

Exchange rate fluctuations could have a material adverse effect on our business, financial condition and results of operations.  Our most significant foreign currency exposure is to the Japanese yen in which we purchase the vast majority of our NAND flash wafers.  In addition, we also have significant costs denominated in the Chinese renminbi and the Israeli new shekel, and we have revenue denominated in the European euro and the British pound.  We do not enter into derivatives for speculative or trading purposes.  We use foreign currency forward and cross currency swap contracts to mitigate transaction gains and losses generated by certain monetary assets and liabilities denominated in currencies other than the U.S. dollar.  We use foreign currency forward contracts and options to partia lly hedge our future Japanese yen costs for NAND flash wafers.  Our derivative instruments are recorded at fair value in assets or liabilities with final gains or losses recorded in other income (expense), or as a component of accumulated other comprehensive income and subsequently reclassified into cost of product revenues in the same period or periods in which the cost of product revenues is recognized.  These foreign currency exchange exposures may change over time as our business and business practices evolve, and they could harm our financial results and cash flows.  See Note 3, “Derivatives and Hedging Activities,” of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

For a discussion of foreign operating risks and foreign currency risks, see Part II, Item 1A, “Risk Factors.”
 
Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities.  On an ongoing basis, we evaluate our estimates, including among others, those related to customer programs and incentives, product returns, bad debts, inventories, investments, income taxes, warranty obligations, share-based compensation, contingencies and litigation.  We base our estimates on historical experience and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities when those values are not readily apparent from other sources.  Estimates have historically approximated actual results.  However, future results will differ from these estimates under different assumptions and conditions.

There were no significant changes to our critical accounting policies during the fiscal quarter ended July 4, 2010.  For information about critical accounting policies, see the discussion of critical accounting policies in our most recent Annual Report on Form 10-K for the fiscal year ended January 3, 2010, filed on February 25, 2010.






We are exposed to financial market risks, including changes in interest rates, foreign currency exchange rates and marketable equity security prices.

Interest Rate Risk.  Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio.  The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk.  As of July 4, 2010, a hypothetical 50 basis point increase in interest rates would result in an approximate $15.0 million decline (less than 0.62%) of the fair value of our available-for-sale debt securities.

Foreign Currency Risk.  The majority of our revenues are transacted in the U.S. dollar, with some revenues transacted in the European euro, the British pound, and the Japanese yen.  Our flash memory costs, which represent the largest portion of our cost of product revenues, are denominated in the Japanese yen.  We also have some cost of product revenues denominated in Chinese renminbi.  The majority of our operating expenses are denominated in the U.S. dollar; however, we have expenses denominated in the Israeli new shekel and numerous other currencies.  On the balance sheet, we have numerous foreign currency denominated monetary assets and liabilities, with the largest monetary exposure being our notes receivable from Flash Ventures, which are denominated in Japanese yen.

We enter into foreign currency forward and cross currency swap contracts to hedge the gains or losses generated by the remeasurement of our significant foreign currency denominated monetary assets and liabilities.  The fair value of these contracts is reflected as other assets or other liabilities and the change in fair value of these balance sheet hedge contracts is recorded into earnings as a component of other income (expense) to largely offset the change in fair value of the foreign currency denominated monetary assets and liabilities which is also recorded in other income (expense).

We use foreign currency forward contracts and option contracts to partially hedge future Japanese yen flash memory costs.  These contracts are designated as cash flow hedges and are carried on our balance sheet at fair value with the effective portion of the contracts’ gains or losses included in accumulated other comprehensive income and subsequently recognized in cost of product revenues in the same period the hedged cost of product revenues is recognized.

At July 4, 2010, we had foreign currency forward contracts and cross currency swap contracts in place that amounted to a net sale in U.S. dollar equivalent of approximately $173.1 million in foreign currencies to hedge our foreign currency denominated monetary net asset position.  The maturities of these contracts were 24 months or less.

At July 4, 2010, we had foreign currency forward and option contracts in place that amounted to a net purchase in U.S. dollar equivalent of approximately $213.3 million to partially hedge our expected future wafer purchases in Japanese yen.  The maturities of these contracts were 5 months or less.
 
 
 
The notional amount and unrealized gain or loss of our outstanding cross currency swap and foreign currency forward contracts that are non-designated (balance sheet hedges) as of July 4, 2010 is shown in the table below.  In addition, this table shows the change in fair value of these balance sheet hedges assuming a hypothetical adverse foreign currency exchange rate movement of 10 percent.  These changes in fair values would be largely offset in other income (expense) by corresponding changes in the fair values of the foreign currency denominated monetary assets and liabilities.

   
Notional Amount
   
Unrealized Gain (Loss) as of
July 4, 2010
   
Change in Fair Value Due to 10% Adverse Rate Movement
 
   
(In thousands)
 
Cross currency swap contracts entered
  $ (435,105 )   $ (40,973 )   $ (46,232 )
Forward contracts sold
    (70,093 )     (1,254 )     (7,445 )
Forward contracts purchased
    332,083       5,548       36,900  
Total net outstanding contracts
  $ (173,115 )   $ (36,679 )   $ (16,777 )

The notional amount and fair value of our outstanding forward and option contracts that are designated as cash flow hedges as of July 4, 2010 is shown in the table below.  In addition, this table shows the change in fair value of these cash flow hedges assuming a hypothetical adverse foreign currency exchange rate movement of 10 percent.

   
Notional Amount
   
Fair Value
 as of
July 4, 2010
   
Change in Fair Value Due to 10% Adverse Rate Movement
 
   
(In thousands)
 
Option contracts purchased
  $ 213,333     $ 6,483     $ (9,807 )

Notwithstanding our efforts to mitigate some foreign exchange risks, we do not hedge all of our foreign currency exposures, and there can be no assurances that our mitigating activities related to the exposures that we do hedge will adequately protect us against risks associated with foreign currency fluctuations.

Market Risk.  We also hold available-for-sale equity securities in semiconductor wafer manufacturing companies, a portion of which is hedged.  As of July 4, 2010, a reduction in price of 10% of these marketable equity securities would result in a decrease in the fair value of our investments in marketable equity securities of approximately $1.0 million.

All of the potential changes noted above are based on sensitivity analysis performed on our financial position at July 4, 2010.  Actual results may differ materially.

Item 4.  
Controls and Procedures

Evaluation of Disclosure Controls and Procedures.  Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of July 4, 2010.  Based on their evaluation as of July 4, 2010, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was (i) recorded, processed, summarized and reported within th e time periods specified in the SEC’s rules and regulations and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the three months ended July 4, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





PART II. OTHER INFORMATION

Item 1.  
Legal Proceedings

For a discussion of legal proceedings, see Note 13, “Litigation,” in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.
 
Item 1A.        Risk Factors
 
The following description of the risk factors associated with our business includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended April 4, 2010.

Our operating results may fluctuate significantly, which may adversely affect our financial condition and 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.  Our results of operations are subject to fluctuations and other risks, including, among others:
  • competitive pricing pressures, resulting in lower average selling prices and lower or negative product gross margins;
  • unpredictable or changing demand for our products, particularly for certain form factors or capacities;
  • insufficient supply from captive flash memory sources and inability to obtain non-captive flash memory supply of the right product mix with adequate margins in the time frame necessary to meet demand;
  • expansion of supply from existing competitors and ourselves creating excess market supply, causing our average selling prices to decline faster than our costs;
  • excess captive memory output or capacity which could result in write-downs for excess inventory, the application of lower of cost or market charges, fixed costs associated with under-utilized capacity, or other consequences;
  • inability to maintain or grow sales through our new channels to which we are selling non-branded products, wafers and components or potential loss of branded product sales as a result;
  • insufficient non-memory materials or capacity from our suppliers and contract manufacturers to meet demand or increases in the cost of non-memory materials or capacity;
  • less than anticipated demand, including general economic weakness in our markets;
  • increased purchases of non-captive flash memory, which typically costs more than captive flash memory and may be of less consistent quality;
  • increased memory component and other costs as a result of currency exchange rate fluctuations to the U.S. dollar, particularly with respect to the Japanese yen;
  • inability to adequately invest in future technologies and products while controlling operating expenses;
  • our license and royalty revenues may fluctuate or decline significantly in the future due to license agreement renewals, non-renewals or if licensees fail to perform on a portion or all of their contractual obligations;
  • price increases, which could result in lower unit and gigabyte demand, potentially leading to reduced revenues and/or excess inventory;
  • inability to develop or unexpected difficulties or delays in developing, manufacturing with acceptable yields, or ramping, new technologies such as 2X-nanometer or next generation process technology, 3-bits per cell NAND memory architecture, 3-Dimensional, or 3D, Read/Write, or other advanced, alternative technologies;
  • insufficient assembly and test capacity from our Shanghai facility or our contract manufacturers, labor unrest, strikes or other disruptions in operations at any of these facilities;
  • difficulty in forecasting and managing inventory levels due to noncancelable contractual obligations to purchase materials, such as custom non-memory materials, and the need to build finished product in advance of customer purchase orders;
  • timing, volume and cost of wafer production from Flash Ventures as impacted by fab start-up delays and costs, technology transitions, lower than expected yields or production interruptions;
  • disruption in the manufacturing operations of suppliers, including suppliers of sole-sourced components;
  • potential delays in the emergence of new markets and products for NAND-based flash memory and acceptance of our products in these markets;
  • timing of sell-through and the financial liquidity and strength of our distributors and retail customers;
  • errors or defects in our products caused by, among other things, errors or defects in the memory or controller components, including memory and non-memory components we procure from third-party suppliers; and
  • the other factors described under “Risk Factors” and elsewhere in this report.
 
 
We require an adequate level of product gross margins to continue to invest in our business.  While product gross margins improved in fiscal year 2009 and the first half of fiscal year 2010, our ability to sustain sufficient product gross margin and profitability on a quarterly or annual basis in the future depends in part on industry and our supply/demand balance, our ability to reduce cost per gigabyte at an equal or higher rate than the price decline per gigabyte, our ability to develop new products and technologies, the rate of growth of our target markets, the competitive position of our products, the continued acceptance of our products by our customers, and our ability to manage expenses.  For example, we experienced negative product gross margins for fis cal year 2008 and the first quarter of fiscal year 2009 due to sustained aggressive industry price declines as well as inventory charges primarily due to lower of cost or market write downs.  In July 2010, we and Toshiba entered into an agreement to create a new flash venture, of which we will own 49.9% and Toshiba will own 50.1%, to operate in Toshiba’s Fab 5 facility, or Fab 5.  We will need an adequate level of product gross margins to sufficiently fund this capital expansion.  If we fail to maintain adequate product gross margins and profitability, our business and financial condition would be harmed and we may have to reduce, curtail or terminate certain business activities, including funding technology development and capacity expansion.
 
Our inability to obtain sufficient flash memory supply could cause us to lose sales and market share, and harm our operating results.  We are currently experiencing significant growth in demand for our flash memory products, and demand from our customers may exceed the supply of captive and non-captive flash memory available to us.  We are in the process of completing the expansion of Flash Alliance, and have recently announced a new flash venture with Toshiba.  However, it is uncertain whether additional supply provided by these expansions will enable us to meet expected demand.  While we have various sources of non-captive supply, our purchases of non-captive supply may be limited due to the required advanced purchase order lead-times, the product mix available and the higher cost of this non-captive supply.  Our inability to obtain supply to meet demand may cause us to lose sales, market share and corresponding profits, which would harm our operating results.

Competitive pricing pressures and excess supply have resulted in lower average selling prices and negative product gross margins in the past, and if we do not experience adequate price elasticity, our revenues may decline.  For more than a year through 2008, the NAND flash memory industry was characterized by supply exceeding demand, which led to significant declines in average selling prices.  Price declines exceeded our cost declines in fiscal years 2008, 2007 and 2006.  Significant price declines resulted in negative product gross margins in fiscal year 2008 and the first quarter of fiscal year 2009.  Price declines may be influenced by, among other factors, supply exceeding demand, macroeconomic factors, technology transitions, conversion of industry DRAM capacity to NAND, and new technologies or other strategic actions taken by us or our competitors to gain market share.  During 2010, we, as well as other NAND manufacturers, have announced plans for new capacity expansion primarily beginning in the second half of 2011.  If capacity grows at a faster rate than market demand, the industry could again experience significant price declines, which would negatively affect average selling prices, or we may incur adverse purchase commitments associated with under-utilization of Flash Ventures’ capacity, both of which would negatively impact our margins and operating results.  Additionally, if our technology transitions take longer or are more costly than anticipated to complete, or our cost reductions fail to keep pace with the rate of price declines, our product gross margins and operating results will be harmed, which could lead to quarterly or annual net losses.

Over our history, price decreases have generally been more than offset by increased unit demand and demand for products with increased storage capacity.  However, in fiscal year 2008 and the first half of 2009, price declines outpaced unit and megabyte growth resulting in reduced revenue as compared to prior comparable periods.  There can be no assurance that current and future price reductions will result in sufficient demand for increased product capacity or unit sales, which could harm our revenue and margins.

Sales to a small number of customers represent a significant portion of our revenues, and if we were to lose one of our major licensees or customers, or experience any material reduction in orders from any of our customers, our revenues and operating results would suffer.  Our ten largest customers or licensees represented approximately 45% and 44% of our total revenues in the three and six months ended July 4, 2010, respectively, compared to 50% and 46% in the three and six months ended June 28, 2009, respectively.  In the three and six months ended June 28, 2009, revenue from Samsung Electronics Co. Ltd., or Samsung, which included both license and royalty revenues and product revenues, accounted for 14% and 11% of our total revenues, respectively.   Other than Samsung in fiscal year 2009, no other customer exceeded 10% of our total revenues in the three and six months ended July 4, 2010 and June 28, 2009.  The composition of our major customer base has changed over time, including shifts between OEM and retail-based customers, and we expect fluctuations to continue as our markets and strategies evolve, which could make our revenues less predictable from period-to-period.  If we were to lose one of our major customers or licensees, or experience any material reduction in orders from any of our customers or in sales of licensed products by our licensees, our revenues and operating results would suffer.  If we fail to comply with the contractual terms of our significant customer contracts, the business covered under these contracts and our financial results may be harmed.  Additionally, our license and royalty revenues may decline significantly in the future as our existing license agreements and patents expire or if licensees fail to perform on a portion or all of their contractual obligations.  Our sales are generally made from standard purchase orders rather than long-term contracts.  Accordingly, our customers may generally terminate or reduce their purchases from us at any time without notice or penalty.

 
Our revenues depend in part on the success of products sold by our OEM customers.  A portion of our sales is to OEMs.  Most of our OEM customers bundle or embed our flash memory products with their products, such as mobile phones, global positioning systems, or GPS, devices and computers.  We also sell wafers and components to some of our OEM customers, as well as non-branded products which are re-branded and distributed by certain OEM customers.  Our sales to these customers are dependent upon the OEMs choosing our products over those of our competitors and on the OEMs’ ability to create, market and sell their products successfully in their markets.  Should our OEM customers be unsuccessful in selling their current or future products that include our products, or should they decide to not use our products, our results of operations and financial condition could be harmed.  OEM manufacturers of consumer devices, including mobile phones and tablets continue to increase their usage of embedded flash storage.  Embedded flash storage solutions typically require lengthy customer product qualifications, which could slow the adoption of our latest technology transitions and thereby have a negative impact on our gross margins by limiting our ability to reduce costs.  Also since our embedded solutions are specifically qualified, we would be restricted from using our sources of non-captive supply, resulting in the potential need for further capital investment in our captive capacity.  In 2009, we added OEMs to which we are selling non-branded products, wafers and components.  The sales to these OEMs could be more variable than the sales to our historical customer base, and these OEMs may be more incl ined to switch to an alternative supplier based on short-term price fluctuations or the timing of product availability.  Sales to these OEMs could also cause a decline in our branded product sales.  In addition, we are selling certain customized products and if the intended customer does not purchase these products as scheduled, we may incur excess inventory or rework costs.

Our business depends significantly upon sales through retailers and distributors, and if our retailers and distributors are not successful, we could experience reduced sales, substantial product returns or increased price protection, any of which would negatively impact our business, financial condition and results of operations.  A significant portion of our sales is made through retailers, either directly or through distributors.  Sales through these channels typically include rights to return unsold inventory and protection against price declines, as well as participation in various cooperative marketing programs.  As a result, we do not recognize revenue until after the product has been sold through to the end user, in the case of sales to retailer s, or to our distributors’ customers, in the case of sales to distributors.  Price protection against declines in our selling prices has the effect of reducing our deferred revenues, and eventually our revenues.  If our retailers and distributors are not successful, due to weak consumer retail demand caused by an economic downturn, decline in consumer confidence, or other factors, we could continue to experience reduced sales as well as substantial product returns or price protection claims, which would harm our business, financial condition and results of operations.  Except in limited circumstances, we do not have exclusive relationships with our retailers or distributors and, therefore, must rely on them to effectively sell our products over those of our competitors.  Certain of our retail and distributor partners are experiencing financial difficulty and prolonged negative economic conditions could cause liquidity issues for our retail and distributor custome rs and channels.  For example, two of our North American retail customers, Circuit City Stores, Inc. and Ritz Camera Centers, Inc., filed for bankruptcy protection in 2008 and 2009, respectively.  Negative changes in customer credit-worthiness; the ability of our customers to access credit; or the bankruptcy or shutdown of any of our significant retail or distribution partners would harm our revenue and our ability to collect outstanding receivable balances.  In addition, we have certain retail customers to which we provide inventory on a consigned basis, and a bankruptcy or shutdown of these customers could preclude us from taking possession of our consigned inventory, which could result in inventory charges.




The future growth of our business depends on the development and performance of new markets and products for NAND-based flash memory.  Our future growth is dependent on development of new markets, new applications and new products for NAND-based flash memory.  Historically, the digital camera market provided the majority of our revenues, but it is now a more mature market, and the mobile handset market has emerged as the largest segment of our revenues.  Other markets for flash memory include digital audio and video players, embedded memory, universal serial bus, or USB, drives and solid-state drives, or SSDs.  We cannot assure you that the use of flash memory in mobile handsets or other existing markets and products will develop and grow fas t enough, or that new markets will adopt NAND flash technologies in general or our products in particular, to enable us to grow.  Our revenue and future growth is also significantly dependent on international markets, and we may face difficulties entering or maintaining sales in some international markets.  Some international markets are subject to a higher degree of commodity pricing or tariffs and import taxes than in the U.S., subjecting us to increased pricing and margin pressure.

Our strategy of investing in captive manufacturing sources could harm us if our competitors are able to produce products at lower costs or if industry supply exceeds demand.  We secure captive sources of NAND through our significant investments in manufacturing capacity.  We believe that by investing in captive sources of NAND, we are able to develop and obtain supply at the lowest cost and access supply during periods of high demand.  Our significant investments in manufacturing capacity require us to obtain and guarantee capital equipment leases and use available cash, which could be used for other corporate purposes.  To the extent we secure manufacturing capacity and supply that is in excess of demand, or our cost is not competitive with other NAND suppliers, we may not achieve an adequate return on our significant investments and our revenues, gross margins and related market share may be harmed.  For example, we recorded charges of $121 million and $63 million in fiscal year 2008 and the first quarter of fiscal year 2009, respectively, for adverse purchase commitments associated with under-utilization of Flash Ventures’ capacity for the 90-day period in which we had non-cancelable production plans utilizing less than our share of Flash Ventures’ full capacity.

Our business and the markets we address are subject to significant fluctuations in supply and demand, and our commitments to Flash Ventures and our new venture with Toshiba may result in periods of significant excess inventory.  The start of production by Flash Alliance at the end of fiscal year 2007 and the ramp of production in fiscal year 2008 increased our captive supply and resulted in excess inventory.  As a result, we restructured and reduced our total capacity at Flash Ventures in the first quarter of fiscal year 2009.  However, beginning in the second half of 2010, we are investing in expanded wafer capacity in Flash Alliance, and we and Toshiba have entered into a new venture to further increase our captive memory supply beginning in the seco nd half of fiscal year 2011.  Increases in captive memory supply from these ventures could harm our business and results of operations if our committed supply exceeds demand for our products.  The adverse effects could include, among other things, significant decreases in our product prices, significant excess, obsolete or lower of cost or market inventory write-downs, or under-utilization charges such as those we experienced in fiscal year 2008, which would harm our gross margins and could result in the impairment of our investments in Flash Ventures.

 
We continually seek to develop new applications, products, technologies and standards, which may not be widely adopted by consumers or, if adopted, may reduce demand for our older products; and our competitors seek to develop new standards which could reduce demand for our products.  We continually devote significant resources to the development of new applications, products and standards and the enhancement of existing products and standards with higher memory capacities and other enhanced features.  Any new applications, products, technologies, standards or enhancements we develop may not be commercially successful.  The success of our new products is dependent on a number of factors, including market acceptance, our ability to manage risks associate d with new products and production ramp issues.  New applications, such as flash-based SSDs that are designed to replace hard disk drives in devices such as tablet, notebook and desktop computers, and ebooks, can take several years to develop.  We cannot guarantee that manufacturers will adopt SSDs or that this market will grow as we anticipate.  For the SSD market to become sizeable, the cost of flash memory must decline significantly from current levels so that the price point for the end consumer is compelling.  This requires the use of multi-level cell, or MLC, technology in our SSDs.  There can be no assurance that our MLC-based SSDs will be able to meet the specifications required to gain customer qualification and acceptance.  Other new products, such as slotMusic, slotRadio and our pre-loaded flash memory cards, may not gain market acceptance, and we may not be successful in penetrating the new markets that we target.  Sony Corporation’s, or Sony’s, decision to transition its future devices from the Memory Stick® format to the SD format could harm our market share or margins since there are a greater number of competitors selling SD products.

New applications may require significant up-front investment with no assurance of long-term commercial success or profitability.  As we introduce new standards or technologies, it can take time for these new standards or technologies to be adopted, for consumers to accept and transition to these new standards or technologies and for significant sales to be generated, if at all.

Competitors or other market participants could seek to develop new standards for flash memory products that, if accepted by device manufacturers or consumers, could reduce demand for our products.  For example, certain handset manufacturers and flash memory chip producers are currently advocating and developing a new standard, referred to as Universal Flash Storage, or UFS, for flash memory cards used in mobile phones.  Intel Corporation, or Intel, and Micron Technology, Inc., or Micron, have also developed a new specification for a NAND flash interface, called Open NAND Flash Interface, or ONFI, which would be used primarily in computing devices.  Broad acceptance of new standards and products may reduce demand for some of our products.  If this decreased demand is not offset by increased demand f or new form factors or products that we offer, our results of operations would be harmed.

Future alternative non-volatile storage technologies or other disruptive technologies could make NAND flash memory obsolete, and we may not have access to those new technologies on a cost-effective basis, or at all, which could harm our results of operations and financial condition.  The pace at which NAND technology is transitioning to new generations is expected to slow due to inherent physical technology limitations.  We currently expect to be able to continue to scale our NAND technology through a few additional generations, but beyond that there is no certainty that further technology scaling can be achieved cost effectively with the current NAND flash technology and architecture.  We also continue to invest in future alternative technologies, par ticularly our 3D Read/Write technology, which we believe may be a viable alternative to NAND when NAND can no longer scale at a sufficient rate, or at all.  However, even when NAND flash can no longer be further scaled, we expect NAND and potential alternative technologies to coexist for an extended period of time.  There can be no assurance that we will be successful in developing this or other technologies, or that we will be able to achieve the yields, quality or capacities to be cost competitive with existing or other alternative technologies.

Others are developing alternative non-volatile technologies such as ReRAM, Memristor, vertical or stacked NAND, charge-trap flash, and other technologies.  Successful broad-based commercialization of one or more of these technologies could reduce the future revenue and profitability of NAND flash technology and could supplant the alternative 3D Read/Write technology that we are developing.  In addition, we generate license and royalty revenues from NAND technology and we own intellectual property for 3D Read/Write technology, and if NAND is replaced by a technology other than 3D Read/Write, our ability to generate license and royalty revenues would be reduced.

Alternative storage solutions such as cloud storage, enabled by high bandwidth wireless or internet-based storage, could reduce the need for physical flash storage within electronic devices.  These alternative technologies could negatively impact the overall market for flash-based products, which could seriously harm our results of operations.

 
We face competition from numerous manufacturers and marketers of products using flash memory, as well as from manufacturers of new and alternative technologies, and if we cannot compete effectively, our results of operations and financial condition will suffer.  Our competitors include many large companies that may have greater advanced wafer manufacturing capacity, substantially greater financial, technical, marketing and other resources and more diversified businesses than we do, which may allow them to produce flash memory chips in high volumes at low costs and to sell these flash memory chips themselves or to our flash card competitors at a low cost.  Some of our competitors may sell their flash memory chips at or below their true manufacturing costs to gain market share and to cover their fixed costs.  Such practices occurred in the DRAM industry during periods of excess supply and resulted in substantial losses in the DRAM industry.  Our primary semiconductor competitors include Hynix Semiconductor, Inc., or Hynix, Intel, Micron, Samsung and Toshiba.  These current and future competitors produce or could produce alternative flash or other memory technologies that compete against our NAND-based flash memory technology or our alternative technologies, which may reduce demand or accelerate price declines for NAND.  Furthermore, the future rate of scaling of the NAND-based flash technology design that we employ may slow down significantly, which would slow down cost reductions that are fundamental to the adoption of flash memory technology in new applications.  If the scaling of NAND-based flash technology slows down or alternative technologies prove to be more economical, our business would be harmed, and our inv estments in captive fabrication facilities could be impaired.  Our cost reduction activities are dependent in part on the purchase of new specialized manufacturing equipment, and if this equipment is not generally available or is allocated to our competitors, our ability to reduce costs could be limited.

We also compete with flash memory card manufacturers and resellers.  These companies purchase or have a captive supply of flash memory components and assemble memory cards.  Our primary competitors currently include, among others, A-DATA Technology Co., Ltd., or A-DATA, Buffalo, Inc., Chips and More GmbH, Dane-Elec Memory, Dexxxon Digital Storage, Inc., dba Emtec Electronics, or EMTEC, Eastman Kodak Company, Elecom Co., Ltd., FUJIFILM Corporation, Gemalto N.V., Hagiwara Sys-Com Co., Ltd., Hama GmbH & Co. KG, Hynix, Imation Corporation, or Imation, and its division Memorex Products, Inc., or Memorex, I-O Data Device, Inc., Kingmax Digital, Inc., Kingston Technology Company, Inc., or Kingston, Lexar Media, Inc., or Lexar, a subsidiary of Micron, Netac Technology Co., Ltd., Panasonic Corporation, PNY Technologies, In c., or PNY, Power Quotient International Co., Ltd, RITEK Corporation, Samsung, Sony, STMicroelectronics N.V., Toshiba, Transcend Information, Inc., or Transcend, and Verbatim Americas LLC, or Verbatim.

Some of our competitors have substantially greater resources than we do, have well recognized brand names or have the ability to operate their business on lower margins than we do.  The success of our competitors may adversely affect our future revenues or margins and may result in the loss of our key customers.  For example, Toshiba and other manufacturers have increased their market share of flash memory cards for mobile phones, including the microSD™ card, which have been a significant driver of our growth.  In the digital audio market, we face competition from well established companies such as Apple Inc., ARCHOS Technology, Coby Electronics Corporation, Creative Technology Ltd., Koninklijke Philips Electronics N.V., Microsoft Corporation, or Microsoft, Samsung and Sony.  In the USB flash drive market, we face competition from a large number of competitors, including EMTEC, Hynix, Imation, Kingston, Lexar, Memorex, PNY, Sony and Verbatim.  In the market for SSDs, we face competition from large NAND flash producers such as Intel, Samsung and Toshiba, as well as from hard drive manufacturers, such as Seagate Technology LLC, Samsung, Western Digital Corporation, and others, who have established relationships with computer manufacturers.  We also face competition from third-party SSD solutions providers such as A-DATA, Kingston, Phison Electronics Corporation, STEC, Inc. and Transcend.

We sell flash memory in the form of white label cards, wafers or components to certain companies who sell flash products that may ultimately compete with SanDisk branded products in the retail or OEM channels.  This could harm the SanDisk branded market share and reduce our sales and profits.

Furthermore, many companies are pursuing new or alternative technologies or alternative forms of NAND, such as phase-change and charge-trap flash technologies which may compete with NAND-based flash memory.  New or alternative technologies, if successfully developed by our competitors, and we are unable to scale our technology on an equivalent basis, could provide an advantage to these competitors.

 
These new or alternative technologies may enable products that are smaller, have a higher capacity, lower cost, lower power consumption or have other advantages.  If we cannot compete effectively, our results of operations and financial condition will suffer.

We believe that our ability to compete successfully depends on a number of factors, including:
  • price, quality and on-time delivery of products;
  • product performance, availability and differentiation;
  • success in developing new applications and new market segments;
  • sufficient availability of cost-efficient supply;
  • efficiency of production;
  • ownership and monetization of intellectual property rights;
  • timing of new product announcements or introductions;
  • the development of industry standards and formats;
  • the number and nature of competitors in a given market; and
  • general market and economic conditions.
There can be no assurance that we will be able to compete successfully in the future.
 
Price increases could reduce our overall product revenues and harm our financial position.  In the first half of fiscal year 2009, we increased prices in order to improve profitability.  Price increases can result in reduced growth in gigabyte demand or even an absolute reduction in gigabyte demand.  For example, in the second quarter of fiscal year 2009, our average selling price per gigabyte increased 12% and our gigabytes sold decreased 7%, both on a sequential basis.  In the future, if we raise prices, our product revenues may be harmed and we may have excess inventory.

Our financial performance depends significantly on worldwide economic conditions and the related impact on levels of consumer spending, which have deteriorated in many countries and regions, including the U.S., and may not recover in the foreseeable future.  Demand for our products is adversely affected by negative macroeconomic factors affecting consumer spending.  The tightening of consumer credit, low level of consumer liquidity, and volatility in credit and equity markets have weakened consumer confidence and decreased consumer spending.  For example, we have experienced and continue to experience weak demand in our European retail markets.  These and other economic factors have reduced demand growth for our products and harmed our busine ss, financial condition and results of operations, and to the extent such economic conditions continue, they could cause further harm to our business, financial condition and results of operations.

Our license and royalty revenues may fluctuate or decline significantly in the future due to license agreement renewals or if licensees fail to perform on a portion or all of their contractual obligations.  If our existing licensees do not renew their licenses upon expiration and we are not successful in signing new licensees in the future, our license revenue, profitability, and cash provided by operating activities would be harmed.  For example, in the first quarter of fiscal year 2010, our license and royalty revenues decreased sequentially primarily due to a new license agreement with an existing licensee, effective in the third quarter of fiscal 2009, which reflects a lower effective royalty rate as compared to the previous license agreement.  To the extent that we are unable to renew license agreements under similar terms or at all, our financial results would be harmed by the reduced license and royalty revenue and we may incur significant patent litigation costs to enforce our patents against these licensees.  If our licensees fail to perform on a portion or all of their contractual obligations, we may incur costs to enforce the terms of our licenses and there can be no assurance that our enforcement and collection efforts will be effective.  In addition, we may be subject to disputes, claims or other disagreements on the timing, amount or collection of royalties or license payments under our existing license agreements.

 
Under certain conditions, a portion or the entire outstanding lease obligations related to Flash Ventures’ master equipment lease agreements could be accelerated, which would harm our business, results of operations, cash flows, and liquidity.  Flash Ventures’ master lease agreements contain customary covenants for Japanese lease facilities.  In addition to containing customary events of default related to Flash Ventures that could result in an acceleration of Flash Ventures’ obligations, the master lease agreements contain an acceleration clause for certain events of default related to us as guarantor, including, among other things, our failure to maintain a minimum stockholders’ equity of at least $1.51 billion, and our failure to maintain a minimum corporate rating of either BB- from Standard & Poors, or S&P, or Moody’s Corporation, or a minimum corporate rating of BB+ from Rating & Investment Information, Inc., or R&I.  As of July 4, 2010, Flash Ventures were in compliance with all of their master lease covenants.  As of July 4, 2010, our R&I credit rating was BBB-, two notches above the required minimum corporate rating threshold from R&I and our S&P credit rating was BB-, which is the required minimum corporate rating threshold from S&P.

If both S&P and R&I were to downgrade our credit rating below the minimum corporate rating threshold, Flash Ventures would become non-compliant with certain covenants under its master equipment lease agreements and would be required to negotiate a resolution to the non-compliance to avoid acceleration of the obligations under such agreements.  Such resolution could include, among other things, supplementary security to be supplied by us, as guarantor, or increased interest rates or waiver fees, should the lessors decide they need additional collateral or financial consideration.  If an event of default occurs and if we fail to reach a resolution, we may be required to pay a portion or the entire outstanding lease obligations up to $965.8 million, based upon the exchange rate at July 4, 2010, covered by ou r guarantee under the Flash Ventures master lease agreements, which would significantly reduce our cash position and may force us to seek additional financing, which may or may not be available.

The semiconductor industry is subject to significant downturns that have harmed our business, financial condition and results of operations in the past and may do so in the future.  The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence, price declines, evolving standards, short product life cycles and wide fluctuations in product supply and demand.  The industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles of both semiconductor companies and their customers’ products and declines in general economic conditions.  The flash memory industry has recently experienced significant excess supply, reduced d emand, high inventory levels, and accelerated declines in selling prices.  If we again experience oversupply of NAND-based flash products, we may be forced to hold excessive inventory, sell our inventory below cost, and record inventory write-downs, all of which would place additional pressure on our results of operation and our cash position.

We depend on Flash Ventures and third parties for silicon supply and any disruption or shortage in our supply from these sources will reduce our revenues, earnings and gross margins.  All of our flash memory products require silicon supply for the memory and controller components.  The substantial majority of our flash memory is currently supplied by Flash Ventures and to a much lesser extent by third-party silicon suppliers.  Any disruption or shortage in supply of flash memory from our captive or non-captive sources would harm our operating results.

The risks of supply disruption are magnified at Toshiba’s Yokkaichi, Japan operations, where Flash Ventures are operated and Toshiba’s foundry capacity is located.  Earthquakes and power outages have resulted in production line stoppages and loss of wafers in Yokkaichi, and similar stoppages and losses may occur in the future.  For example, in the first quarter of fiscal year 2006, a brief power outage occurred at Fab 3, which resulted in a loss of wafers and significant costs associated with bringing the fab back on line.  In addition, the Yokkaichi location is often subject to earthquakes, which could result in production stoppage, a loss of wafers and the incurrence of significant costs.  Moreover, Toshiba’s employees that produce Flash Ventures’ products are covered by c ollective bargaining agreements and any strike or other job action by those employees could interrupt our wafer supply from Flash Ventures.  If we have disruption in our captive wafer supply or if our non-captive sources fail to supply wafers in the amounts and at the times we expect, or we do not place orders with sufficient lead time to receive non-captive supply, we may not have sufficient supply to meet demand and our operating results could be harmed.

Currently, our controller wafers are manufactured by third-party foundries.  Any disruption in the manufacturing operations of our controller wafer vendors would result in delivery delays, harm our ability to make timely shipments of our products and harm our operating results until we could qualify an alternate source of supply for our controller wafers, which could take several quarters to complete.

In times of significant growth in global demand for flash memory, demand from our customers may outstrip the supply of flash memory and controllers available to us from our current sources.  If our silicon vendors are unable to satisfy our requirements on competitive terms or at all, we may lose potential sales and market share, and our business, financial condition and operating results may suffer.  Any disruption or delay in supply from our silicon sources could significantly harm our business, financial condition and results of operations.
 


Increase in captive memory supply from our new venture with Toshiba may not produce results as expected.  In July 2010, we and Toshiba entered into an agreement to create a new flash venture, of which we will own 49.9% and Toshiba will own 50.1%, to operate in Toshiba’s Fab 5 facility, or Fab 5.  Toshiba will own and fund the construction of the Fab 5 building, which will be located in Yokkaichi, Japan, adjacent to the site of our current Flash Partners and Flash Alliance ventures.  Fab 5 is expected to be constructed by Toshiba in two phases.  Phase 1 is expected to be completed in the second quarter of fiscal year 2011, with initial NAND production scheduled for the second half of fi scal year 2011.  On completion of the second phase, Fab 5 is expected to be of similar size and capacity to Toshiba’s existing Fab 4 facility.  We expect that Fab 5 will increase our 2011 wafer output by less than 10%.  We are committed to 50% of the initial ramp within Phase 1 of Fab 5, for which we currently expect our portion of equipment investments and startup costs to be approximately $500 million through fiscal year 2011.  No commitments or timelines have been finalized for any further Phase 1 capacity expansions or for the construction of Phase 2.  In addition to equipment investments and startup costs, we will also provide a cash prepayment of approximately $56 million in fiscal year 2011 to be credited against future charges.  If and when Phase 2 is built, we are committed to an initial ramp in Phase 2 similar to the ramp in Phase 1.  We and Toshiba will each retain some flexibility as to the extent and timing of each party ’s respective fab capacity ramps, and the output allocation will be in accordance with each of the parties’ proportionate level of equipment funding.  However, if this new venture does not commence production as planned or does not meet anticipated manufacturing output, we may not have sufficient supply to meet demand, which may lead to a loss in market share and potential revenue growth.  Conversely, this new venture with Toshiba could harm our business and results of operations if our committed supply exceeds demand for our products.  The adverse effects from excess supply could include significant decreases in our product prices, significant excess, obsolete or lower of cost or market inventory write-downs, and the impairment of our investment in this new venture with Toshiba.  Any future excess or shortage of supply could harm our business, financial condition and results of operations.  In addition, because all of the Flash Ventures, including the new Fab 5, are located in close proximity, any risk of supply disruption at Toshiba’s Yokkaichi, Japan operations may impact all of our ventures with Toshiba, including this new venture, which could impact all of our captive memory wafer supply.
 
If actual manufacturing yields are lower than our expectations, this may result in increased costs and product shortages. The fabrication of our products requires wafers to be produced in a highly controlled and ultra-clean environment.  Semiconductor manufacturing yields and product reliability are a function of both design and manufacturing process technology, and production delays may be caused by equipment malfunctions, fabrication facility accidents or human error.  Yield problems may not be identified during the production process or improved until an actual product is manufactured and can be tested.  We have, from time-to-time, experienced yields that have adversely affected our busin ess and results of operations.  On more than one occasion, we have experienced adverse yields when we have transitioned to new generations of products.  If actual yields are low, we will experience higher costs and reduced product supply, which could harm our business, financial condition and results of operations.  For example, if the production ramp and/or yield of 32-nanometer or 2X-nanometer 2-bits per cell and 3-bits per cell NAND technology wafers does not increase as expected, our cost competitiveness would be harmed, we may not have adequate supply or the right product mix to meet demand, and our business, financial condition and results of operations will be harmed.

We depend on our captive assembly and test manufacturing facility in China and our business could be harmed if this facility does not perform as planned.  Our reliance on our captive assembly and test manufacturing facility near Shanghai, China has increased significantly and we now utilize this factory to satisfy a significant portion of our assembly and test requirements, to produce products with leading-edge technologies such as multi-stack die packages and to provide order fulfillment to certain locations.  In addition, our Shanghai facility currently manages our Asia retail logistics and is transitioning to manage our Europe retail logistics.  Any delays or interruptions in production or the ability to ship product, or issues with manufacturing yi elds at our captive facility could harm our results of operations and financial condition.  Furthermore, if we were to experience labor unrest, or strikes, or if wages were to increase, our ability to produce and ship products could be impaired and we could experience higher labor costs, which could harm our results of operations, financial condition, and liquidity.

We depend on our third-party subcontractors and our business could be harmed if our subcontractors do not perform as planned.  We rely on third-party subcontractors for a portion of our wafer testing, IC assembly, product assembly, product testing and order fulfillment.  From time-to-time, our subcontractors have experienced difficulty meeting our requirements.  If we are unable to increase the capacity of our current subcontractors or qualify and engage additional subcontractors, we may not be able to meet demand for our products.  We do not have long-term contracts with our existing subcontractors nor do we expect to have long-term contracts with any new subcontractors.  We do not have exclusive relationships with any of our subco ntractors, and therefore, cannot guarantee that they will devote sufficient resources to manufacturing our products.  We are not able to directly control product delivery schedules.  Furthermore, we manufacture on a turnkey basis with some of our subcontractors.  In these arrangements, we do not have visibility and control of their inventories of purchased parts necessary to build our products or of the progress of our products through their assembly line.  Any significant problems that occur at our subcontractors, or their failure to perform at the level we expect, could lead to product shortages or quality assurance problems, either of which would have adverse effects on our operating results.

 
In transitioning to new processes, products and silicon sources, we face production and market acceptance risks that may cause significant product delays, cost overruns or performance issues that could harm our business.  Successive generations of our products have incorporated semiconductors with greater memory capacity per chip.  The transition to new generations of products, such as products containing 32-nanometer or 2X-nanometer process technologies and/or 3-bits per cell and 4-bits per cell NAND technologies, is highly complex and requires new controllers, new test procedures, potentially new equipment and modifications to numerous aspects of any manufacturing processes, as well as extensive qualification of the new products by our OEM customers and us. 60; There can be no assurance that these transitions or other future technology transitions will occur on schedule or at the yields or costs that we anticipate.  If Flash Ventures encounters difficulties in transitioning to new technologies, our cost per gigabyte may not remain competitive with the costs achieved by other flash memory producers, which would harm our gross margins and financial results.  In addition, we could face design, manufacturing and equipment challenges when transitioning to the next generation of technologies beyond NAND.  Any material delay in a development or qualification schedule could delay deliveries and harm our operating results.  We have periodically experienced 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.
 
Our products may contain errors or defects, which could result in the rejection of our products, product recalls, damage to our reputation, lost revenues, diverted development resources and increased service costs and warranty claims and litigation.  Our products are complex, must meet stringent user requirements, may contain errors or defects and the majority of our products provide a warranty period, which ranges up to ten years.  Generally, our OEM customers have more stringent requirements than other customers and increases in OEM product revenue could require additional cost to test products or increase service costs and warranty claims.  Errors or defects in our products may be caused by, among other things, errors or defects in the memory or con troller components, including components we procure from non-captive sources.  In addition, the substantial majority of our flash memory is supplied by Flash Ventures, and if the wafers contain errors or defects, our overall supply could be adversely affected.  These factors could result in the rejection of our products, damage to our reputation, lost revenues, diverted development resources, increased customer service and support costs, indemnification of our customer’s product recall costs, warranty claims and litigation.  We record an allowance for warranty and similar costs in connection with sales of our products, but actual warranty and similar costs may be significantly higher than our recorded estimate and result in an adverse effect on our results of operations and financial condition.

Our new products have, from time-to-time, been introduced with design and production errors at a rate higher than the error rate in our established products.  We must estimate warranty and similar costs for new products without historical information and actual costs may significantly exceed our recorded estimates.  Warranty and similar costs may be even more difficult to estimate as we increase our use of non-captive supply.  Underestimation of our warranty and similar costs would have an adverse effect on our results of operations and financial condition.

From time-to-time, we overestimate our requirements and build excess inventory, or underestimate our requirements and have a shortage of supply, either of which harm our financial results.  The majority of our products are sold directly or indirectly into consumer markets, which are difficult to accurately forecast.  Also, a substantial majority of our quarterly sales are from orders received and fulfilled in that quarter.  Additionally, we depend upon timely reporting from our retail and distributor customers as to their inventory levels and sales of our products in order to forecast demand for our products.  We have in the past significantly over-forecasted or under-forecasted actual demand for our products.  The failure to accura tely forecast demand for our products will result in lost sales or excess inventory, both of which will harm our business, financial condition and results of operations.  In addition, we may increase our inventory in anticipation of increased demand or as captive wafer capacity ramps.  If demand does not materialize, we may be forced to write-down excess inventory or write-down inventory to the lower of cost or market, as was the case in fiscal year 2008, which may harm our financial condition and results of operations.

During periods of excess supply in the market for our flash memory products, we may lose market share to competitors who aggressively lower their prices.  In order to remain competitive, we may be forced to sell inventory below cost.  If we lose market share due to price competition or we must write-down inventory, our results of operations and financial condition could be harmed.  Conversely, under conditions of tight flash memory supply, we may be unable to adequately increase our production volumes or secure sufficient supply in order to maintain our market share.  In addition, longer than anticipated lead times for advanced semiconductor manufacturing equipment or higher than expected equipment costs could negatively impact our ability to meet our supply requirements or to reduce future product ion costs.  If we are unable to maintain market share, our results of operations and financial condition could be harmed.

Our ability to respond to changes in market conditions from our forecast is limited by our purchasing arrangements with our silicon sources.  Some of these arrangements provide that the first three months of our rolling six-month projected supply requirements are fixed and we may make only limited percentage changes in the second three months of the period covered by our supply requirement projections.

We have some non-silicon components which have long-lead times requiring us to place orders several months in advance of our anticipated demand.  The extended period of time to secure these long-lead time parts increases our risk that forecasts will vary substantially from actual demand, which could lead to excess inventory or loss of sales.

 
We rely on our suppliers and contract manufacturers, some of which are the sole source of supply for our non-memory components, and capacity limitations or the absence of a back-up supplier exposes our supply chain to unanticipated disruptions or potential additional costs.  We do not have long-term supply agreements with some of these vendors.  From time-to-time, certain materials may become difficult or more expensive to obtain which could impact our ability to meet demand and could harm our profitability.  Our business, financial condition and operating results could be significantly harmed by delays or reductions in shipments if we are unable to obtain sufficient quantities of these components or develop alternative sources of supply in a timely ma nner, or at all.

Our global operations and operations at Flash Ventures and third-party subcontractors are subject to risks for which we may not be adequately insured.  Our global operations are subject to many risks including errors and omissions, infrastructure disruptions, such as large-scale outages or interruptions of service from utilities or telecommunications providers, supply chain interruptions, third-party liabilities and fires or natural disasters.  No assurance can be given that we will not incur losses beyond the limits of, or outside the scope of, coverage of our insurance policies.  From time-to-time, various types of insurance have not been available on commercially acceptable terms or, in some cases, at all.  We cannot assure you that in the future we will be able to maintain existing insurance coverage or that premiums will not increase substantially.  We maintain limited insurance coverage and in some cases no coverage for natural disasters and sudden and accidental environmental damages as these types of insurance are sometimes not available or available only at a prohibitive cost.  For example, our test and assembly facility in Shanghai, China, on which we have significant dependence, may not be adequately insured against all potential losses.  Accordingly, we may be subject to an uninsured or under-insured loss in such situations.  We depend upon Toshiba to obtain and maintain sufficient property, business interruption and other insurance for Flash Ventures.  If Toshiba fails to do so, we could suffer significant unreimbursable losses, and such failure could also cause Flash Ventures to breach various financing covenants.  In addition, we insure against property loss and business interruption resulting from the risks incurred at our third-party subcontractors; however, we have limited control as to how those sub-contractors run their operations and manage their risks, and as a result, we may not be adequately insured.
 
We are exposed to foreign currency exchange rate fluctuations that could negatively impact our business, results of operations and financial condition.  A significant portion of our business is conducted in currencies other than the U.S. dollar, which exposes us to adverse changes in foreign currency exchange rates.  These exposures may change over time as our business and business practices evolve, and they could harm our financial results and cash flows.  Our most significant exposure is related to our purchases of NAND flash memory from Flash Ventures, which are denominated in Japanese yen.  For example, since late 2008, the Japanese yen significantly appreciated relative to the U.S. dollar and this increased our cost of NAND flash wafers, negatively impacting our gross margins and results of operations.  In addition, our investments in Flash Ventures are denominated in Japanese yen and adverse changes in the exchange rate could increase the cost to us of future funding or increase our exposure to asset impairments.  We also have foreign currency exposures related to certain non-U.S. dollar-denominated revenue and operating expenses in Europe and Asia.  For example, the European euro has significantly depreciated relative to the U.S. dollar, which has contributed to a reduction in our European retail revenue.  Additionally, we have exposures to emerging market currencies, which can be extremely volatile.  An increase in the value of the U.S. dollar could increase the real cost to our customers of our products in those markets outside the U.S. where we sell in dollars, and a weakened U.S. dollar could increase local operating expenses and the cost of raw materials to the extent purchased in for eign currencies.  We also have significant monetary assets and liabilities that are denominated in non-functional currencies.

We enter into foreign exchange forward and cross currency swap contracts to reduce the impact of foreign currency fluctuations on certain foreign currency assets and liabilities.  In addition, we hedge certain anticipated foreign currency cash flows with foreign exchange forward and option contracts.  We generally have not hedged our future investments and distributions denominated in Japanese yen related to Flash Ventures.

Our attempts to hedge against currency risks may not be successful, resulting in an adverse impact on our results of operations.  In addition, if we do not successfully manage our hedging program in accordance with current accounting guidelines, we may be subject to adverse accounting treatment of our hedging program, which could harm our results of operations.  There can be no assurance that this hedging program will be economically beneficial to us.  Further, the ability to enter into foreign exchange contracts with financial institutions is based upon our available credit from such institutions and compliance with covenants or other restrictions.  Operating losses, third party downgrades of our credit rating or instability in the worldwide financial markets could impact our ability to effectivel y manage our foreign currency exchange rate risk, which could harm our business, results of operations and financial condition.

 
We may need to raise additional financing, which could be difficult to obtain, and which if not obtained in satisfactory amounts may prevent us from funding Flash Ventures, developing or enhancing our products, taking advantage of future opportunities, growing our business or responding to competitive pressures or unanticipated industry changes, any of which could harm our business.  We currently believe that we have sufficient cash resources to fund our operations as well as our anticipated investments in Flash Ventures and Fab 5 for at least the next twelve months; however, we may decide to raise additional funds to maintain the strength of our balance sheet, and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all.  ; The current worldwide financing environment is challenging, which could make it more difficult for us to raise funds on reasonable terms, or at all.  From time-to-time, we may decide to raise additional funds through equity, public or private debt, or lease financings.  If we issue additional equity securities, our stockholders will experience dilution and the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock.  If we raise funds through debt or lease financing, we will have to pay interest and may be subject to restrictive covenants, which could harm our business.  If we cannot raise funds on acceptable terms, if and when needed, our credit rating may be downgraded, and we may not be able to develop or enhance our technology or products, fulfill our obligations to Flash Ventures, take advantage of future opportunities including Fab 5, grow our business or respond to competitive pressures or unant icipated industry changes, any of which could harm our business.

We may be unable to protect our intellectual property rights, which would harm our business, financial condition and results of operations.  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 and expensive disputes regarding our intellectual property rights and those of others, including claims that we may be infringing third-parties’ patents, trademarks and other intellectual property rights.  We expect that we will be involved in similar disputes in the future.

We cannot assure you that:
  • any of our existing patents will continue to be held valid, if challenged;
  • patents will be issued for any of our pending applications;
  • any claims allowed from existing or pending patents will have sufficient scope or strength;
  • 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
  • any of our products or technologies do not infringe on the patents of other companies.
In addition, our competitors may be able to design their products around our patents and other proprietary rights.  We also have patent cross-license agreements with several of our leading competitors.  Under these agreements, we have enabled competitors to manufacture and sell products that incorporate technology covered by our patents.  While we obtain license and royalty revenue or other consideration for these licenses, if we continue to license our patents to our competitors, competition may increase and may harm our business, financial condition and results of operations.

There are both flash memory producers and flash memory card manufacturers who we believe may require a license from us.  Enforcement of our rights often requires litigation.  If we bring a patent infringement action and are not successful, our competitors would be able to use similar technology to compete with us.  Moreover, the defendant in such an action may successfully countersue us for infringement of their patents or assert a counterclaim that our patents are invalid or unenforceable.  If we do not prevail in the defense of patent infringement claims, 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 specific processes, or obtain licenses to the technology infringed.

For example, on October 24, 2007, we initiated two patent infringement actions in the United States District Court for the Western District of Wisconsin and one action in the United States International Trade Commission, or ITC, against certain companies that manufacture, sell and import USB flash drives, CompactFlash® cards, multimedia cards, MP3/media players and/or other removable flash storage products.  In this ITC action, an Initial Determination was issued in April 2009 and a Final Determination was issued in October 2009 finding non-infringement of certain accused flash memory products.  There can be no assurance that we will be successful in future patent infringement actions or that the validity of the asserted patents w ill be preserved or that we will not face counterclaims of the nature described above.

 
We and certain of our officers are currently and may in the future be involved in litigation, including litigation regarding our intellectual property rights or those of third parties, which may be costly, may divert the efforts of our key personnel and could result in adverse court rulings, which could materially harm our business.  We are involved in a number of lawsuits, including among others, several cases involving our patents and the patents of third parties.  We are the plaintiff in some of these actions and the defendant in other of these actions.  Some of the actions seek injunctions against the sale of our products and/or substantial monetary damages, which if granted or awarded, could have a material adverse effect on our business, financia l condition and results of operations.

We and numerous other companies have been sued in the United States District Court of the Northern District of California in purported consumer class actions alleging a conspiracy to fix, raise, maintain or stabilize the pricing of flash memory, and concealment thereof, in violation of state and federal laws.  The lawsuits purport to be on behalf of classes of purchasers of flash memory.  The lawsuits seek restitution, injunction and damages, including treble damages, in an unspecified amount.  We are unable to predict the outcome of these lawsuits and investigations.  The cost of discovery and defense in these actions as well as the final resolution of these alleged violations of antitrust laws could result in significant liability and expense and may harm our business, financial condition and res ults of operations.

Litigation is subject to inherent risks and uncertainties that may cause actual results to differ materially from our expectations.  Factors that could cause litigation results to differ include, but are not limited to, the discovery of previously unknown facts, changes in the law or in the interpretation of laws, and uncertainties associated with the judicial decision-making process.  If we receive an adverse judgment in any litigation, we could be required to pay substantial damages and/or cease the manufacture, use and sale of products.  Litigation, including intellectual property litigation, can be complex, can extend for a protracted period of time, can be very expensive, and the expense can be unpredictable.  Litigation initiated by us could also result in counter-claims against us, which cou ld increase the costs associated with the litigation and result in our payment of damages or other judgments against us.  In addition, litigation may divert the efforts and attention of some of our key personnel.

From time-to-time, we have sued, and may in the future sue, third parties in order to protect our intellectual property rights.  Parties that we have sued and that we may sue for patent infringement may countersue us for infringing their patents.  If we are held to infringe the intellectual property or related rights of others, we may need to spend significant resources to develop non-infringing technology or obtain licenses from third parties, but we may not be able to develop such technology or acquire such licenses on terms acceptable to us, or at all.  We may also be required to pay significant damages and/or discontinue the use of certain manufacturing or design processes.  In addition, we or our suppliers could be enjoined from selling some or all of our respective products in one or more geo graphic locations.  If we or our suppliers are enjoined from selling any of our respective products, or if we are required to develop new technologies or pay significant monetary damages or are required to make substantial royalty payments, our business would be harmed.

We may be obligated to indemnify our current or former directors or employees, or former directors or employees of companies that we have acquired, in connection with litigation or regulatory investigations.  These liabilities could be substantial and may include, among other things, the costs of defending lawsuits against these individuals; the cost of defending shareholder derivative suits; the cost of governmental, law enforcement or regulatory investigations; civil or criminal fines and penalties; legal and other expenses; and expenses associated with the remedial measures, if any, which may be imposed.

We continually evaluate and explore strategic opportunities as they arise, including business combinations, strategic partnerships, collaborations, capital investments and the purchase, licensing or sale of assets.  Potential continuing uncertainty surrounding these activities may result in legal proceedings and claims against us, including class and derivative lawsuits on behalf of our stockholders.  We may be required to expend significant resources, including management time, to defend these actions and could be subject to damages or settlement costs related to these actions.

Moreover, from time-to-time, we agree to indemnify certain of our suppliers and customers for alleged patent infringement.  The scope of such indemnity varies but generally includes indemnification for direct and consequential damages and expenses, including attorneys’ fees.  We may, from time-to-time, be engaged in litigation as a result of these indemnification obligations.  Third-party claims for patent infringement are excluded from coverage under our insurance policies.  A future obligation to indemnify our customers or suppliers may have a material adverse effect on our business, financial condition and results of operations.

For additional information concerning legal proceedings, including the examples set forth above, see Part II, Item 1, “Legal Proceedings.”

 
We may be unable to license intellectual property to or from third parties as needed, which could expose us to liability for damages, increase our costs or limit or prohibit us from selling products.  If we incorporate third-party technology into our products or if we are found to infringe 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 important cross-licenses to third-party patents.  We cannot be certain that licenses will be offered when we need them, that the terms offered will be acceptable, or that these licenses will help our business.  If we do obtain licenses from thir d 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 manufacture our products, we could be required to suspend the manufacture of products or stop our product suppliers from using processes that may infringe the rights of third parties.  We may not be successful in redesigning our products, or the necessary licenses may not be available under reasonable terms.

Seasonality in our business may result in our inability to accurately forecast our product purchase requirements.  Sales of our products in the consumer electronics market are subject to seasonality.  For example, sales have typically increased significantly in the fourth quarter of each fiscal year, sometimes followed by significant declines in the first quarter of the following fiscal year.  This seasonality makes it more difficult for us to forecast our business, especially in the current global economic environment and its corresponding decline in consumer confidence, which may impact typical seasonal trends.  If our forecasts are inaccurate, we may lose market share or procure excess inventory or inappropriately increase or decrease our operating expenses, any of which could harm our business, financial condition and results of operations.  This seasonality also may lead to higher volatility in our stock price, the need for significant working capital investments in receivables and inventory and our need to build inventory levels in advance of our most active selling seasons.
 
Because of our international business and operations, we must comply with numerous international laws and regulations, and we are vulnerable to political instability and other risks related to international operations.  Currently, a large portion of our revenues are derived from our international operations, and all of our products are produced overseas in China, Japan and Taiwan.  We are, therefore, affected by the political, economic, labor, environmental, public health and military conditions in these countries.

For example, China does not currently have a comprehensive and highly developed legal system, particularly with respect to the protection of intellectual property rights.  This results, among other things, in the prevalence of counterfeit goods in China.  The enforcement of existing and future laws and contracts remains 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.  Although we engage in efforts to prevent counterfeit products from entering the market, those efforts may not be successful.  Our results of operations and financial condition could be harmed by the sale of counterfeit products.  In addition, customs regulations in China are compl ex and subject to frequent changes, and in the event of a customs compliance issue, our ability to import and export from our factory in Shanghai, China, could be adversely affected, which could harm our results of operations and financial condition.

Our international business activities could also be limited or disrupted by any of the following factors:
  • the need to comply with foreign government regulation;
  • changes in diplomatic and trade relationships;
  • reduced sales to our customers or interruption to our manufacturing processes in the Pacific Rim that may arise from regional issues in Asia;
  • imposition of regulatory requirements, tariffs, import and export restrictions and other barriers and restrictions;
  • changes in, or the particular application of, government regulations;
  • duties and/or fees related to customs entries for our products, which are all manufactured offshore;
  • longer payment cycles and greater difficulty in accounts receivable collection;
  • adverse tax rules and regulations;
  • weak protection of our intellectual property rights;
  • delays in product shipments due to local customs restrictions; and
  • delays in research and development that may arise from political unrest at our development centers in Israel.
Our stock price and convertible notes price have been, and may continue to be, volatile, which could result in investors losing all or part of their investments. The market prices of our stock and convertible notes have fluctuated significantly in the past and may continue to fluctuate in the future.  We believe that such fluctuations will continue as a result of many factors, including financing plans, future announcements concerning us, our competitors or our principal customers regarding financial results or expectations, technological innovations, industry supply or demand dynamics, new product introductions, governmental regulations, the commencement or results of litigation or changes in earnings estimate s 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 and semiconductor 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 as well as the price of our outstanding convertible notes.

 
We may engage in business combinations that are dilutive to existing stockholders, result in unanticipated accounting charges or otherwise harm our results of operations, and result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies or businesses.  We continually evaluate and explore strategic opportunities as they arise, including business combinations, strategic partnerships, collaborations, capital investments and the purchase, licensing or sale of assets.  If we issue equity securities in connection with an acquisition, the issuance may be dilutive to our existing stockholders.  Alternatively, acquisitions made entirely or partially for cash would reduce ou r cash reserves.

Acquisitions may require significant capital infusions, typically entail many risks and could result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies.  We may experience delays in the timing and successful integration of acquired technologies and product development through volume production, unanticipated costs and expenditures, changing relationships with customers, suppliers and strategic partners, or contractual, intellectual property or employment issues.  In addition, key personnel of an acquired company may decide not to work for us.  The acquisition of another company or its products and technologies may also result in our entering into a geographic or business market in which we have little or no prior exp erience.  These challenges could disrupt our ongoing business, distract our management and employees, harm our reputation, subject us to an increased risk of intellectual property and other litigation and increase our expenses.  These challenges are magnified as the size of the acquisition increases, and we cannot assure you that we will realize the intended benefits of any acquisition.  Acquisitions may require large one-time charges and can result in increased debt or contingent liabilities, adverse tax consequences, substantial depreciation or deferred compensation charges, the amortization of identifiable purchased intangible assets or impairment of goodwill, any of which could have a material adverse effect on our business, financial condition or results of operations.

Mergers and acquisitions of high-technology companies are inherently risky and subject to many factors outside of our control, and no assurance can be given that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results, or financial condition.  Failure to manage and successfully integrate acquisitions could materially harm our business and operating results.  Even when an acquired company has already developed and marketed products, there can be no assurance that such products will be successful after the closing, will not cannibalize sales of our existing products, that product enhancements will be made in a timely fashion or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to such company.& #160; Failed business combinations, or the efforts to create a business combination, can also result in litigation.
 
Our success depends on our key personnel, including our executive officers, and the loss of key personnel or the transition of key personnel, including our Chief Executive Officer, 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.  We do not have employment agreements with any of our executive officers and they are free to terminate their employment with us at any time.  In July 2010, we announced that Dr. Eli Harari, our Founder, Chairman and Chief Executive Officer, will retire from his current positions on December 31, 2010.  Dr. Harari will provide consulting services, particularly technology related, to us for a p eriod of two years starting January 1, 2011.  Our Board of Directors appointed Sanjay Mehrotra, currently our President and Chief Operating Officer, to be our President and Chief Executive Officer effective January 1, 2011.  The Board also announced that Michael Marks, a member of the SanDisk Board since 2003, will assume the role of Chairman effective January 1, 2011.  While we will strive to make this transition as smooth as possible, this leadership change may result in disruptions to our business or operations.  In addition, our success will depend on our ability to recruit and retain additional highly-skilled personnel.  We have relied on equity awards in the form of stock options and restricted stock units as one means for recruiting and retaining highly skilled talent and a reduction in our stock price may reduce the effectiveness of share-based awards for retaining employees. 

Terrorist attacks, war, threats of war and government responses thereto may negatively impact our operations, revenues, costs and stock price.  Terrorist attacks, U.S. military responses to these attacks, war, threats of war and any corresponding decline in consumer confidence could have a negative impact on consumer demand.  Any of these events may disrupt our operations or those of our customers and suppliers and may affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers.  Any of these events could also increase volatility in the U.S. and world financial markets, which could harm our stock price and may limit the capital resources available to us and our customers or suppliers, or adversely affect consumer confidence.  We have substantial operations in Israel including a development center in Northern Israel, near the border with Lebanon, and a research center in Omer, Israel, which is near the Gaza Strip, areas that have experienced significant violence and political unrest.  Turmoil and unrest in Israel or the Middle East could cause delays in the development or production of our products.  This could harm our business and results of operations.

Natural disasters or epidemics in the countries in which we or our suppliers or subcontractors operate could negatively impact our operations.  Our operations, including those of our suppliers and subcontractors, are concentrated in Milpitas, California; Raleigh, North Carolina; Brno, Czech Republic; Astugi and Yokkaichi, Japan; Hsinchu and Taichung, Taiwan; and Dongguan, Futian, Shanghai and Shenzen, China.  In the past, these areas have been affected by natural disasters such as earthquakes, tsunamis, floods and typhoons, and some areas have been affected by epidemics, such as avian flu or H1N1 flu.  If a natural disaster or epidemic were to occur in one or more of these areas, we could incur a significant work or production stoppage.  The impact of these potential events is magnified by the fact that we do not have insurance for most natural disasters, including earthquakes.  The impact of a natural disaster could harm our business and results of operations.

 
Disruptions in global transportation could impair our ability to deliver or receive product on a timely basis or at all, causing harm to our financial results.  Our raw materials, work-in-process and finished product are primarily distributed via air.  If there are significant disruptions in air travel, we may not be able to deliver our products or receive raw materials.  For example, the volcanic eruption in Iceland in April 2010 halted air traffic for several days over Europe and disrupted other travel routes that pass through Europe, resulting in delayed delivery of our products to certain European countries.  In addition, a natural disaster that affects air travel in Asia could disrupt our ability to receive raw materials in, or ship finished produ ct from, our Shanghai facility or our Asia-based contract manufacturers.  As a result, our business and results of operations may be harmed.

We rely on information systems to run our business and any prolonged down time could materially impact our business operations and/or financial results.  We rely on an enterprise resource planning system, as well as multiple other systems, databases, and data centers to operate and manage our business.  Any information system problems, programming errors or unanticipated system or data center interruptions could impact our continued ability to successfully operate our business and could harm our financial results or our ability to accurately report our financial results on a timely basis.

Anti-takeover provisions in our charter documents, stockholder rights plan and in Delaware law could discourage 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 a stockholders’ rights plan that would cause substantial dilution to a stockholder, and substantially increase the cost paid by a stockholder, who attempts to acquire us on terms not approved by our board of directors.  This could discourage an acquisition of us.  In addition, our certificate of incorporation grants our board of directors the authority to fix the rights, preferences and privileges of and issue up to 4,000,000 s hares of preferred stock without stockholder action (2,000,000 of which have already been reserved under our stockholder rights plan).  Issuing preferred stock 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 our common stock that could have a material adverse effect on the market value of our 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 may not engage in any business combination with any interested stockholder, defined broadly as a beneficial owner of 15% or more of that corporation’s voting stock, during the three-year period following the time that a stockholder became an interested stockholder.  This provision could have the effect of delaying or disco uraging a change of control of SanDisk.

Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our profitability.  We are subject to income tax in the U.S. and numerous foreign jurisdictions.  Our tax liabilities are affected by the amounts we charge for inventory, services, licenses, funding and other items in intercompany transactions.  We are subject to ongoing tax audits in various jurisdictions.  Tax authorities may disagree with our intercompany charges or other matters and assess additional taxes.  For example, we are currently under a federal income tax audit by the Internal Revenue Service, or IRS, for fiscal years 2005 through 2008.  While we regularly assess the likely outcomes of these audits in orde r to determine the appropriateness of our tax provision, examinations are inherently uncertain and an unfavorable outcome could occur.  An unanticipated unfavorable outcome in any specific period could harm our results of operations for that period or future periods.  The financial cost and our attention and time devoted to defending income tax positions may divert resources from our business operations, which could harm our business and profitability.  The IRS audit may also impact the timing and/or amount of our refund claim.  In addition, our effective tax rate in the future could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, and the discovery of new information in the course of our tax return preparation process.  In particular, the carrying value of deferred tax assets, which are predominantly in the U.S., is de pendent on our ability to generate future taxable income in the U.S.  Any of these changes could affect our profitability.

We may be subject to risks associated with environmental regulations.  Production and marketing of products in certain states and countries may subject us to environmental and other regulations including, in some instances, the responsibility for environmentally safe disposal or recycling.  Such laws and regulations have recently been passed in several jurisdictions in which we operate, including Japan and certain states within the U.S.  Although we do not anticipate any material adverse effects in the future based on the nature of our operations and the focus of such laws, there is no assurance such existing laws or future laws will not harm our financial condition, liquidity or results of operations.




In the event we are unable to satisfy regulatory requirements relating to internal controls, or if our internal control over financial reporting is not effective, our business could suffer.  In connection with our certification process under Section 404 of the Sarbanes-Oxley Act, we have identified in the past and will, from time-to-time, identify deficiencies in our internal control over financial reporting.  We cannot assure you that individually or in the aggregate these deficiencies would not be deemed to be a material weakness or significant deficiency.  A material weakness or significant deficiency in internal control over financial reporting could materially impact our reported financial results and the market price of our stock could significan tly decline.  Additionally, adverse publicity related to the disclosure of a material weakness in internal controls could have a negative impact on our reputation, business and stock price.  Any internal control or procedure, no matter how well designed and operated, can only provide reasonable assurance of achieving desired control objectives and cannot prevent human error, intentional misconduct or fraud.

Our debt obligations may adversely affect us. Our indebtedness could have significant negative consequences.  For example, it could:
  • increase our vulnerability to general adverse economic and industry conditions;
  • limit our ability to obtain additional financing;
  • require the dedication of a substantial portion of any cash flow from operations to the payment of principal of our indebtedness, thereby reducing the availability of such cash flow to fund our growth strategy, working capital, capital expenditures and other general corporate purposes;
  • limit our flexibility in planning for, or reacting to, changes in our business and our industry;
  • place us at a competitive disadvantage relative to our competitors with less debt; and
  • increase our risk of credit rating downgrades.
We have significant financial obligations related to Flash Ventures, which could impact our ability to comply with our obligations under our 1% Senior Convertible Notes due 2013.  We have entered into agreements to guarantee or provide financial support with respect to lease and certain other obligations of Flash Ventures in which we have a 49.9% ownership interest.  As of July 4, 2010, we had guarantee obligations for Flash Ventures’ master lease agreements of approximately $965.8 million.  In addition, we have significant commitments for the future fixed costs of Flash Ventures, and we will incur significant obligations with respect to Fab 5 as well as continued investment in Flash Partners and Flash Alliance.  Due to these and o ur other commitments, we may not have sufficient funds to make payments under or repay the notes.

The settlement of the 1% Senior Convertible Notes due 2013 may have adverse consequences.  The 1% Senior Convertible Notes due 2013, or 1% Notes due 2013, are subject to net share settlement, which means that we will satisfy our conversion obligation to holders by paying a combination of cash and shares of our common stock in settlement thereof, in an amount of cash equal to the principal amount of the 1% Notes due 2013 plus an amount of shares of our common stock, if any, equal to the excess of the daily conversion values over the cash amount of the 1% Notes due 2013 being converted.

Our failure to convert the 1% Notes due 2013 into cash or a combination of cash and common stock upon exercise of a holder’s conversion right in accordance with the provisions of the indenture would constitute a default under the indenture.  We may not have the financial resources or be able to arrange for financing to pay such principal amount in connection with the surrender of the 1% Notes due 2013.  While we do not have other agreements that would restrict our ability to pay the principal amount of any convertible notes in cash, we may enter into such an agreement in the future, which may limit or prohibit our ability to make any such payment.  In addition, a default under the indenture could lead to a default under existing and future agreements governing our indebtedness.  If, due to a default, the repayment of related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay such indebtedness and amounts owing in respect of the conversion, maturity, or put of any convertible notes.

 
The convertible note hedge transactions and the warrant option transactions may affect the value of the notes and our common stock.  We have entered into convertible note hedge transactions with Morgan Stanley & Co. International Limited and Goldman, Sachs & Co., or hereinafter collectively referred to as “the dealers.”  These transactions are expected to reduce the potential dilution upon conversion of the 1% Notes due 2013.  We used approximately $67.3 million of the net proceeds of funds received from the 1% Notes due 2013 to pay the net cost of the convertible note hedge in excess of the warrant transactions.  These transactions were accounted for as an adjustment to our stockholders’ equity.  In c onnection with hedging these transactions, the dealers or their affiliates:
  • have entered into various over-the-counter cash-settled derivative transactions with respect to our common stock, concurrently with, and shortly after, the pricing of the notes; and
  • may enter into, or may unwind, various over-the-counter derivatives and/or purchase or sell our common stock in secondary market transactions following the pricing of the notes, including during any observation period related to a conversion of notes.
The dealers or their affiliates are likely to modify their hedge positions, from time-to-time, prior to conversion or maturity of the notes by purchasing and selling shares of our common stock, our securities or other instruments they may wish to use in connection with such hedging.  In particular, such hedging modification may occur during any observation period for a conversion of the 1% Notes due 2013, which may have a negative effect on the value of the consideration received in relation to the conversion of those notes.  In addition, we intend to exercise options we hold under the convertible note hedge transactions whenever notes are converted.  To unwind their hedge positions with respect to those exercised options, the dealers or their affiliates expect to sell shares of our common stock in secondary market transactions or unwind various over-the-counter derivative transactions with respect to our common stock during the observation period, if any, for the converted notes.

The effect of any of these transactions on the market price of our common stock or the 1% Notes due 2013 will depend in part on market conditions and cannot be ascertained at this time.  However, any of these activities could adversely affect the value of our common stock and the value of the 1% Notes due 2013, and consequently affect the amount of cash and the number of shares of common stock the holders will receive upon the conversion of the notes.


Item 2.  
Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.  
Defaults upon Senior Securities

None.

Item 4.  
(Removed and Reserved)

Item 5.  

None.

Item 6.  
Exhibits

The information required by this item is set forth on the exhibit index which follows the signature page of this report.





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)

Dated: August 12, 2010
By: /s/ Judy Bruner                                                                         
 
Judy Bruner
Executive Vice President, Administration and
Chief Financial Officer
(On behalf of the Registrant and as Principal
Financial and Accounting Officer)





INDEX TO EXHIBITS
 Exhibit
 Number
 Exhibit Title
3.1
Restated Certificate of Incorporation of the Registrant.(2)
3.2
Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated December 9, 1999.(3)
3.3
Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated May 11, 2000.(4)
3.4
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant dated May 26, 2006.(5)
3.5
Amended and Restated Bylaws of SanDisk Corporation dated August 4, 2009.(6)
3.6
Certificate of Designations for the Series A Junior Participating Preferred Stock, as filed with the Delaware Secretary of State on April 24, 1997.(7)
3.7
Amendment to Certificate of Designations for the Series A Junior Participating Preferred Stock, as filed with the Delaware Secretary of State on September 24, 2003.(8)
3.8
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant dated May 27, 2009.(9)
4.1
Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.8. (2), (3), (4), (5), (9)
4.2
Rights Agreement, dated as of September 15, 2003, between the Registrant and Computershare Trust Company, Inc.(8)
4.3
Amendment No. 1 to Rights Agreement by and between the Registrant and Computershare Trust Company, Inc., dated as of November 6, 2006.(10)
4.4
SanDisk Corporation Form of Indenture (including notes).(11)
4.5
Indenture (including form of Notes) with respect to the Registrant’s 1.00% Convertible Senior Notes due 2013 dated as of May 15, 2006 by and between the Registrant and The Bank of New York.(12)
12.1
Computation of Ratio of Earnings to Fixed Charges.(*)
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(*)
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(*)
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(**)
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(**)


*
Filed herewith.
**
Furnished herewith.
+
Confidential treatment has been requested with respect to certain portions hereof.

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 Form 10-Q for the quarter ended June 30, 2000.
4.  
Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-3 (No. 333-85686).
5.  
Previously filed as an Exhibit to the Registrant’s Form 8-K dated June 1, 2006.
6.  
Previously filed as an Exhibit to the Registrant’s Form 8-K dated August 4, 2009.
7.  
Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K/A dated April 18, 1997.
8.  
Previously filed as an Exhibit to the Registrant’s Registration Statement on Form 8-A dated September 25, 2003.
9.  
Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on May 28, 2009.
10.  
Previously filed as an Exhibit to the Registrant’s Form 8-A/A dated November 8, 2006.
11.  
Previously filed as an Exhibit to the Registrant’s Form 8-K dated May 9, 2006.
12.  
Previously filed as an Exhibit to the Registrant’s Form 8-K dated May 15, 2006.



 
69

 

EX-12.1 2 ex12_1.htm COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ex12_1.htm

EXHIBIT 12.1

Computation of Ratio of Earnings to Fixed Charges

   
Six
months ended
   
Fiscal years ended
 
   
July 4,
 2010
   
January 3,
 2010
   
December 28,
 2008
   
December 30,
 2007
   
December 31,
 2006
   
January 1,
 2006
 
   
(In thousands, except ratios)
 
Computation of earnings:
                                   
Income (loss) before provision for income taxes
  $ 681,769     $ 503,801     $ (1,952,374 )   $ 352,658     $ 403,355     $ 613,307  
Fixed charges excluding capitalized interest
    44,553       81,630       67,821       65,081       39,287       1,801  
Distributed earnings from 50%-or-less-owned affiliates
 
      (392 )     (3,604 )     (5,840 )     (2,498 )     (718 )
Adjusted earnings
  $ 726,322     $ 585,039     $ (1,888,157 )   $ 411,899     $ 440,144     $ 614,390  
Computation of fixed charges:
                                               
Interest expense
  $ 35,795     $ 70,205     $ 65,207     $ 62,097     $ 36,859     $ 17  
Interest relating to lease guarantee of 50%-or-less-owned affiliates
    7,609       8,898    
      615    
      538  
Interest portion of operating lease expense
    1,149       2,527       2,614       2,369       2,428       1,246  
Fixed charges
  $ 44,553     $ 81,630     $ 67,821     $ 65,081     $ 39,287     $ 1,801  
Ratio of earnings to fixed charges (1)
    16.3 x     7.2 x  
      6.3 x     11.2 x     341.1 x
__________________
(1)  
Computed by dividing (i) income (loss) before provision for income taxes adjusted for fixed charges by (ii) fixed charges which include interest expense plus amortization of debt issuance costs, the portion of rent expense under operating leases deemed to be representative of the interest factor and interest relating to lease guarantees of 50%-or-less-owned affiliates.  In fiscal year 2008, earnings were insufficient to cover fixed charges by $1.96 billion.
EX-31.1 3 ex31_1.htm EXHIBIT 31.1 CEO CERTIFICATION ex31_1.htm
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Eli Harari, certify that:

1.      I have reviewed this quarterly report on Form 10-Q of SanDisk Corporation for the quarter ended July 4, 2010;

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.      The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)      Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)      Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this report based on such evaluation; and

d)      Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.      The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 12, 2010
/s/ Eli Harari 
 
Eli Harari
Chief Executive Officer
(Principal Executive Officer)
EX-31.2 4 ex31_2.htm EXHIBIT 31.2 CFO CERTIFICATION ex31_2.htm
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Judy Bruner, certify that:

1.      I have reviewed this quarterly report on Form 10-Q of SanDisk Corporation for the quarter ended July 4, 2010;

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.      The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)      Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)      Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this report based on such evaluation; and

d)      Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.      The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 12, 2010
/s/ Judy Bruner 
 
Judy Bruner
Chief Financial Officer
(Principal Financial and Accounting Officer)
EX-32.1 5 ex32_1.htm EXHIBIT 32.1 CEO CERTIFICATION ex32_1.htm
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


I, Eli Harari, Chief Executive Officer of SanDisk Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the quarterly report on Form 10-Q of SanDisk Corporation for the quarter ended July 4, 2010 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of SanDisk Corporation.


By:  /s/ Eli Harari                                                     
 
Eli Harari
Chief Executive Officer
(Principal Executive Officer)
 
 
August 12, 2010
 


A signed original of this written statement required by Section 906 has been provided to SanDisk Corporation and will be retained by SanDisk Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
EX-32.2 6 ex32_2.htm EXHIBIT 32.1 CFO CERTIFICATION ex32_2.htm
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


I, Judy Bruner, Chief Financial Officer of SanDisk Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the quarterly report on Form 10-Q of SanDisk Corporation for the quarter ended July 4, 2010 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of SanDisk Corporation.


By:  /s/ Judy Bruner                                                           
 
Judy Bruner
Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 
 
August 12, 2010
 


A signed original of this written statement required by Section 906 has been provided to SanDisk Corporation and will be retained by SanDisk Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
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MARGIN-LEFT: 0pt; TEXT-INDENT: 18pt; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">Weighted average fair value for grant period</font></div></td><td valign="bottom" width="1%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">&#160;</font></td><td style="TEXT-ALIGN: center" valign="bottom" width="9%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">$8.58</font></td><td valign="bottom" width="1%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">&#160;</font></td><td style="TEXT-ALIGN: center" valign="bottom" width="9%"><font style ="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">$4.21</font></td><td valign="bottom" width="1%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">&#160;</font></td><td style="TEXT-ALIGN: center" valign="bottom" width="9%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">$8.58</font></td><td valign="bottom" width="1%"><font style="DISPLAY: inline; 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(&#8220;Phison&#8221;); Silicon Motion Technology Corp., Silicon Motion, Inc. (Taiwan), Silicon Motion, Inc. (California), and Silicon Motion International, Inc. (collectively, &#8220;Silicon Motion&#8221;); Synergistic Sales, Inc. (&#8220;Synergistic&#8221;); USBest Technology, Inc. dba Afa Technologies, Inc. (&#8 220;USBest&#8221;); Skymedi Corp. (&#8220;Skymedi&#8221;); Chipsbank Microelectronics (HK) Co., Ltd., Chipsbank Technology (Shenzhen) Co., Ltd., and Chipsbank Microelectronics Co., Ltd., (collectively, &#8220;Chipsbank&#8221;); Infotech Logistic LLC (&#8220;Infotech&#8221;); Zotek Electronic Co., Ltd., dba Zodata Technology Ltd. (collectively, &#8220;Zotek&#8221;); Power Quotient International Co., Ltd., and PQI Corp., (collectively, &#8220;PQI&#8221;); PNY Technologies, Inc. (&#8220;PNY&#8221;); Kingston Technology Co., Inc., Kingston Technology Corp., Payton Technology Corp., and MemoSun, Inc. (collectively, &#8220;Kingston&#8221;); Buffalo, Inc., Melco Holdings, Inc., and Buffalo Technology (USA), Inc. (collectively, &#8220;Buffalo&#8221;); Verbatim Corp. (&#8220;Verbatim&#8221;); Transcend Information Inc. (Taiwan), Transcend Information Inc. (California), and Transcend Information Maryland, Inc., (collectively, &#8220;Transc end&#8221;); Imation Corp., Imation Enterprises Corp., and Memorex Products, Inc. (collectively, &#8220;Imation&#8221;); Add-On Computer Peripherals, Inc. and Add-On Computer Peripherals, LLC (collectively, &#8220;Add-On Computer Peripherals&#8221;); Add-On Technology Co., A-Data Technology Co., Ltd., and A-Data Technology (USA) Co., Ltd., (collectively, &#8220;A-DATA&#8221;); Apacer Technology Inc. and Apacer Memory America, Inc. (collectively, &#8220;Apacer&#8221;); Acer, Inc.; Behavior Tech Computer Corp. and Behavior Tech Computer (USA) Corp. (collectively, &#8220;Behavior&#8221;); Corsair Memory, Inc. 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(&#8220;Welldone&#8221;).&#160;&#160;In this action, Case No. 07-C-0607-C (&#8220;the &#8217;607 Action&#8221;), the Company initially asserted that the defendants infringed U.S. Patent No. 5,719,808 (the &#8220;&#8217;808 patent&#8221;), U.S. Patent No. 6,763,424 (the &#8220;&#8217;424 patent&#8221;); U.S. Patent No. 6,426,893 (the &#8220;&#8217;893 patent&#8221;); U.S. Patent No. 6,947,332 (the &#8220;&#8217;332 patent&#8221;); and U.S. Patent No. 7,137,011 (the &#8220;&#8217;011 patent&#8221;).&#160;&#160;The Company has since entered into a stipulation dismissing the &#8217;332 patent.&#160;&#160;The Company concurrently filed a second complaint for patent infringement in the same court against the following defendants:&#160;&#160;Phison, Silicon Motion, Synergistic, USBest, Skymedi, Zotek, Infotech, PQI, PNY, Kingston, Buffalo, Verbatim, Transcend, Imation, A-DATA, Apacer, Behavior, and Dane-Elec.&#160;&#160;In this action, Case No. 07-C-0605-C (&#8220;the &#8217;605 Action&#8221;), the Company asserted that the defendants infringed U.S. Patent No. 6,149,316 (the &#8220;&#8217;316 patent&#8221;) and U.S. Patent No. 6,757,842 (the &#8220;&#8217;842 patent&#8221;).&#160;&#160;The Company seeks damages and injunctive relief in both actions.&#160;&#160;In light of settlement agreements, the Company dismissed its claims against Phison, Silicon Motion, Skymedi, Verbatim, Corsair, Add-On Computer Peripherals, EDGE, Infotech, Interactive, PNY, TSR and Welldone.&#160;&#160;The Company&#8217;s claims against Chipsbank, Acer, Behavior, Dane-Elec, LG, PQI, USBest, Transcend, A-DATA, Apacer, Buffalo, and Synergistic have been dismissed without prejudice.&#160;&#160;The Court consolidated the &#8217;605 and &#8217;607 Actions and stayed these actions during the pendency of relate d proceedings before the U.S. International Trade Commission, which are now closed.&#160;&#160;After lifting the stay, the Court set the trial to begin on February 28, 2011 with dispositive motions due on September 13, 2010.&#160;&#160;The two remaining defendants (Kingston and Imation) have answered the Company&#8217;s complaints by denying infringement and raising several affirmative defenses and related counterclaims.&#160;&#160;&#160;These defenses and related counterclaims include, among others, lack of standing, unclean hands, non-infringement, invalidity, unenforceability for alleged patent misuse, express license, implied license, patent exhaustion, waiver, laches, and estoppel.</font></div><div style="DISPLAY: block; TEXT-INDENT: 0pt"><br /></div><div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 18pt; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><font style="DISPLAY: inline; FONT-WEIGHT: bold; FONT-STYLE: italic">Federal Civil Antitrust Class Actions.</font><font style="DISPLAY: inline; FONT-STYLE: italic">&#160;</font>Between August 31, 2007 and December 14, 2007, the Company (along with a number of other manufacturers of flash memory products) was sued in the Northern District of California, in eight purported class action complaints.&#160;&#160;On February 7, 2008, all of the civil complaints were consolidated into two complaints, one on behalf of direct purchasers and one on behalf of indirect purchasers, in the Northern District of California in a purported class action captioned In re Flash Memory Antitrust Litigation, Civil Case No. C07-0086.&#160;&#160;Plaintiffs alleged the Company and a number of other manufacturers of flash memory and flash memory products conspired to fix, raise, maintain, and stabilize the price of NAND flash memory in violation of state and federal laws and sought an injunction, damag es, restitution, fees, costs, and disgorgement of profits.&#160;&#160;The direct purchaser lawsuit was recently dismissed with prejudice.&#160;&#160;On April 15, 2010, the Court denied the indirect purchaser plaintiffs&#8217; class certification motion, denied plaintiffs&#8217; motion for leave to amend the Consolidated Amended Complaint to substitute certain class representatives, and dismissed the claims on behalf of South Dakota purchasers with prejudice.&#160;&#160;Indirect purchaser plaintiffs have moved for leave to file a motion for reconsideration of that decision.</font></div><div style="DISPLAY: block; TEXT-INDENT: 0pt"><br /></div><div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 18pt; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><font style="DISPLAY: inline; FONT-WEIGHT: bold; FONT-STYLE: italic">Spansion Bankruptcy.</font><font style="D ISPLAY: inline; FONT-STYLE: italic">&#160;</font>Spansion, LLC (&#8220;Spansion&#8221;) and SanDisk IL Ltd. f/k/a M-Systems Flash Disk Pioneers Ltd. 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(&#8220;Flash Partners&#8221;), a business venture with Toshiba which owns 50.1%, formed in fiscal year 2004.&#160;&#160;In the venture, the Company and Toshiba have collaborated in the development and manufacture of NAND flash memory products.&#160;&#160;These NAND flash memory products are manufactured by Toshiba at a 300-millimeter wafer fabrication facility located in Yokkaichi, Japan, using semiconductor manufacturing equipment owned or leased by Flash Partners.&#160;&#160;Flash Partners purchases wafers from Toshiba at cost and then resells those wafers to the Company and Toshiba at cost plus a markup.&#160;&#160;The Company accounts for its 49.9% ownership position in Flash Partners under the equity method of accounting.&#160;&#160;The Company is committed to purchase its provided three-month forecast of Flash Partners&#8217; NAND wafer supply, which generally equals 50% of the venture&#8217;s output.&#160;&#160;The Company is not able to estimate its total wafer purchase commitment obligation beyond its rolling three-month pu rchase commitment because the price is determined by reference to the future cost of producing the semiconductor wafers.&#160;&#160;In addition, the Company is committed to fund 49.9% of Flash Partners&#8217; costs to the extent that Flash Partners&#8217; revenues from wafer sales to the Company and Toshiba are insufficient to cover these costs.</font></div><div style="DISPLAY: block; TEXT-INDENT: 0pt"><br /></div><div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 18pt; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">As of July 4, 2010, the Company had notes receivable from Flash Partners of $593.6&#160;million, denominated in Japanese yen.&#160;&#160;These notes are secured by the equipment purchased by Flash Partners using the note proceeds.&#160;&#160;The Company has additional guarantee obligations to Flash Partners, see &#8220;Off-Balance Sheet Liabilitie s.&#8221;&#160;&#160;At July 4, 2010 and January&#160;3, 2010, the Company had an equity investment in Flash Partners of $215.3&#160;million and $199.1&#160;million, respectively, denominated in Japanese yen, offset by $55.2&#160;million and $43.9&#160;million, respectively, of cumulative translation adjustments recorded in accumulated OCI.&#160;&#160;In the six months ended July 4, 2010, the Company recorded a $4.8 million basis adjustment to its equity in earnings from Flash Partners related to the difference between the basis in the Company&#8217;s equity investment compared to the historical basis of the assets recorded by Flash Partners.</font></div><div style="DISPLAY: block; TEXT-INDENT: 0pt"><br /></div><div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 18pt; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><font style="DISPLAY: inline; FONT-WEIG HT: bold; FONT-STYLE: italic">Flash Alliance.&#160;&#160;</font>The Company has a 49.9% ownership interest in Flash Alliance Ltd. 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Accounts payable trade Accounts Payable Trade Current Total current liabilities Total current liabilities Convertible long-term debt Non-current liabilities Total liabilities Total liabilities Preferred stock Common stock Capital in excess of par value Retained earnings (accumulated deficit) Accumulated other comprehensive income Total stockholders' equity Total stockholders' equity Non-controlling interests Total equity Total equity Beginning Balance Ending Balance Total liabilities and equity Total liabilities and equity Statement of Financial Position [Abstract] ASSETS Current assets LIABILITIES Current liabilities Commitments and contingencies (see Note 11) EQUITY Stockholders' equity Product License and royalty Revenue earned during the period relating to consideration received from another party for the right to use, but not own, certain of the entity's intangible assets. Licensing arrangements include, but are not limited to, rights to use a patent, copyright, technology, manufacturing process, software or trademark. Licensing fees are generally, but not always, fixed as to amount and not dependent upon the revenue generated by the licensing party. An entity may receive licensing fees for licenses that also generate royalty payments to the entity combined with the revenue earned during the period from the leasing or otherwise lending to a third party the entity's rights or title to certain property. Royalty revenue is derived from a percentage or stated amount of sales proceeds or revenue generated by the third party using the entity's property. Examples of property from which royalties may be derived include patents and oil and mineral rights. Total revenues Total revenues Cost of product revenues Amortization of acquisition-related intangible assets The amount of product related related expense recognized in the current period that reflects the allocation of the costs of acquisition related intangible assets over the expected benefit period of such assets. Total cost of product revenues Total cost of product revenues Gross profit Gross profit Research and development Sales and marketing General and administrative Amortization of acquisition-related intangible assets Operating The amount of non product related related expense recognized in the current period that reflects the allocation of the costs of acquisition related intangible assets over the expected benefit period of such assets. Amortization of acquisition-related intangible assets Restructuring and other Amount charged against earnings in the period for incurred and estimated costs, excluding asset retirement obligations, associated with exit from or disposal of business activities or restructurings pursuant to a program that is planned and controlled by management, and materially changes either the scope of a business undertaken by an entity, or the manner in which that business is conducted.. Additionally includes marketing contract termination costs, technology license impairments, and fixed asset impairments. Total operating expenses Total operating expenses Operating income (loss) Operating income (loss) Total other income (expense) Total other income (expense) Income Statement [Abstract] Revenues Operating expenses Net income (loss) per share: Basic Diluted Shares used in computing net income (loss) per share: Shares used in computing net income (loss) per share: Basic Basic Shares used in computing net income (loss) per share: Diluted Diluted Net income (loss) Net income (loss) Net income (loss) Net income (loss) Deferred taxes Depreciation Amortization Provision for doubtful accounts Share-based compensation expense Share Based Compensation Excess tax benefit from share-based compensation Excess tax benefit from share-based compensation Other non-cash charges Other expenses included in net income that result in no cash inflows or outflows in the period which are not otherwise defined in the taxonomy, combined with the gains and other income producing transactions that result in no cash inflows or outflows in the period in which they occur, but increase net income and thus are subtracted (removed) when calculating net cash flow from operating activities using the indirect method. This element is used when there is not a more specific and appropriate element. Other non-operating Accounts receivable from product revenues Accounts receivable from product revenues Inventory Increase (Decrease) In Inventories Inventory Other assets Other assets Accounts payable trade Accounts payable to related parties Other liabilities Total adjustments Total adjustments Net cash used in operating activities Net cash provided by (used in) operating activities Purchases of short and long-term investments Purchases of short and long term marketable securities Proceeds from sales of short and long term marketable securities The cash inflow associated with the sale of all investments such as debt, security and so forth during the period. Proceeds From Sales Of Short And Long Term Investments Proceeds from maturities of short and long-term investments The cash inflow associated with the maturity of all investments such as debt, security and so forth during the period. 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Purchased technology and other assets Purchased technology and other assets Net cash provided by (used in) investing activities Net cash provided by (used in) investing activities Repayment of debt financing Repayment of debt financing Proceeds from employee stock programs Excess tax benefit from share-based compensation Excess Tax Benefit From Share Based Compensation Financing Activities Net cash provided by financing activities Net cash provided by financing activities Effect of changes in foreign currency exchange rates on cash Net decrease in cash and cash equivalents Net increase (decrease) in cash and cash equivalents Statement of Cash Flows [Abstract] Cash flows from operating activities: Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Changes in operating assets and liabilities: Cash flows from investing activities: Cash flows from financing activities: Notes to Financial Statements [Abstract] Organization and Summary of Significant Accounting Policies Financing Arrangements Derivatives and Hedging Activities Investments and Fair Value Measurements Balance Sheet Information [Text Block] Balance Sheet Information This element represents the disclosure related to certain balance sheet items on a detailed level. Intangible Assets Warranties Accumulated Other Comprehensive Income Comprehensive Income Note [Text Block] Restructuring Plans Share-Based Compensation Net Income (Loss) Per Share Commitments, Contingencies and Guarantees [Text Block] Commitments, Contingencies and Guarantees Includes disclosure of commitments and contingencies. This element may be used as a single block of text to encapsulate the entire disclosure including data and tables. Additionally provides pertinent information about each guarantee obligation, or each group of similar guarantee obligations, including (a) the nature of the guarantee, including its term, how it arose, and the events or circumstances that would require the guarantor to perform under the guarantee; (b) the maximum potential amount of future payments (undiscounted) the guarantor could be required to make under the guarantee; (c) the current carrying amount of the liability, if any, for the guarantor's obligations under the guarantee; and (d) the nature of any recourse provisions under the guarantee, and any assets held either as collateral or by third parties, and any relevant related party disclosure. Excludes disclosures about product warranties. Related Parties and Strategic Investments Condensed Consolidating Financial Statements Investment in Flash Alliance Ltd. Investment in Flash Alliance Ltd. Document Type Amendment Flag Amendment Description Document Period End Date Entity Registrant Name Entity Central Index Key Current Fiscal Year End Date Entity Well-known Seasoned Issuer Entity Voluntary Filers Entity Current Reporting Status Entity Filer Category Entity Public Float Entity Common Stock, Shares Outstanding Income (loss) before income taxes Sum of operating profit and nonoperating income (expense) before income taxes, extraordinary items and cumulative effects of changes in accounting principles. Income (loss) before provision for income taxes Impairment Restructuring And Other Charges Adjustment to remove noncash portion of rectructuring charges, technology license impairments, and fixed asset impairments. Impairments, restructuring and other Provision for income taxes Document Fiscal Year Focus Document Fiscal Period Focus Document Information [Text Block] Entity [Text Block] Proceeds from sale of assets Payments For Long Term Loans For Related Parties The cash outflow associated with long-term loans for related parties where one party can exercise control or significant influence over another party, including affiliates, owners or officers and their immediate families, pension trusts, and so forth. Notes receivable issuance, Flash Partners Ltd. and Flash Alliance Ltd. Notes receivable issuance, Flash Partners Ltd. and Flash Alliance Ltd. Proceeds From Long Term Loans For Related Parties The cash inflow associated with long-term loans for related parties where one party can exercise control or significant influence over another party, including affiliates, owners or officers and their immediate families, pension trusts, and so forth. Notes receivable proceeds, Flash Partners Ltd. and Flash Alliance Ltd. Litigation [Text Block] Provides information about material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party or of which any of their property is subject. Includes the name of the court or agency in which the proceedings are pending, the date instituted, the principal parties thereto, a description of the factual basis alleged to underlie the proceeding and the relief sought. Includes simliar information as to any such proceedings known to be contemplated by governmental authorities. Litigation Interest Expense And Other Income Expense Net This item represents the cost of borrowed funds accounted for as interest that was charged against earnings during the period. 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This item also includes realized gains and losses on the sale or holding of investments in debt and equity securities required to be included in earnings for the period. Interest income InvestmentIncomeInterest This item represents investment income derived from investments in debt and equity securities consisting of interest income earned from investments in debt securities and on cash and cash equivalents, dividend income from investments in equity securities, and income or expense derived from the amortization of investment related discounts or premiums, respectively, net of related investment expenses. This item also includes realized gains and losses on the sale or holding of investments in debt and equity securities required to be included in earnings for the period. 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Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subjec t to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain or loss on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each g oodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss. 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FONT-FAMILY: times new roman">&#160;</font></td><td valign="bottom" width="1%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">&#160;</font></td><td style="TEXT-ALIGN: right" valign="bottom" width="9%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">&#160;</font></td><td valign="bottom" width="1%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">&#160;</font></td><td style="TEXT-ALIGN: right" valign="bottom" width="9%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">&#160;</font></td><td valign="bottom" width="1%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">&#160;</font></td><td style="TEXT-ALIGN: right" valign="bottom" width="9%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">&#160;</font></td></tr><tr bgcolor="white"><td valign="bottom" align="left" width="52%"><div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; 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FONT-FAMILY: times new roman">Expected volatility</font></div></td><td valign="bottom" width="1%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">&#160;</font></td><td style="TEXT-ALIGN: center" valign="bottom" width="9%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">0.59</font></td><td valign="bottom" width="1%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">&#160;</font></td><td style="TEXT-ALIGN: center" valign="bottom" width="9%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">0.81</font></td><td valign="bottom" width="1%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">& ;#160;</font></td><td style="TEXT-ALIGN: center" valign="bottom" width="9%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">0.59</font></td><td valign="bottom" width="1%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">&#160;</font></td><td style="TEXT-ALIGN: center" valign="bottom" width="9%"><font style="DISPLAY: inline; 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This element may be used as a single block of text to encapsulate the... false false false false false false false false false false false terselabel false 1 false false false false 0 0 <div><table cellspacing="0" cellpadding="0" width="100%"><tr valign="top"><td><div style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt" align="justify"><font style="DISPLAY: inline; FONT-WEIGHT: bold; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Commitments, Contingencies and Guarantees</font></div></td></tr></table></div><div style="DISPLAY: block; TEXT-INDENT: 0pt"><br /></div><div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 18pt; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><font style="DISPLAY: inline; FONT-WEIGHT: bold; FONT-STYLE: italic">Flash Partners.&#160;&#160;</font>The Company has a 49.9% ownership interest in Flash Partners Ltd. (&#8220;Flash Partners&#8221;), a business venture with Toshiba which owns 50.1%, formed in fiscal year 2004.&#160;&#160;I n the venture, the Company and Toshiba have collaborated in the development and manufacture of NAND flash memory products.&#160;&#160;These NAND flash memory products are manufactured by Toshiba at a 300-millimeter wafer fabrication facility located in Yokkaichi, Japan, using semiconductor manufacturing equipment owned or leased by Flash Partners.&#160;&#160;Flash Partners purchases wafers from Toshiba at cost and then resells those wafers to the Company and Toshiba at cost plus a markup.&#160;&#160;The Company accounts for its 49.9% ownership position in Flash Partners under the equity method of accounting.&#160;&#160;The Company is committed to purchase its provided three-month forecast of Flash Partners&#8217; NAND wafer supply, which generally equals 50% of the venture&#8217;s output.&#160;&#160;The Company is not able to estimate its total wafer purchase commitment obligation beyond its rolling three-month purchase commitment because the price is determine d by reference to the future cost of producing the semiconductor wafers.&#160;&#160;In addition, the Company is committed to fund 49.9% of Flash Partners&#8217; costs to the extent that Flash Partners&#8217; revenues from wafer sales to the Company and Toshiba are insufficient to cover these costs.</font></div><div style="DISPLAY: block; TEXT-INDENT: 0pt"><br /></div><div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 18pt; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">As of July 4, 2010, the Company had notes receivable from Flash Partners of $593.6&#160;million, denominated in Japanese yen.&#160;&#160;These notes are secured by the equipment purchased by Flash Partners using the note proceeds.&#160;&#160;The Company has additional guarantee obligations to Flash Partners, see &#8220;Off-Balance Sheet Liabilities.&#8221;&#160;&#160;At July 4, 2010 and January&#160;3, 2010, the Company had an equity investment in Flash Partners of $215.3&#160;million and $199.1&#160;million, respectively, denominated in Japanese yen, offset by $55.2&#160;million and $43.9&#160;million, respectively, of cumulative translation adjustments recorded in accumulated OCI.&#160;&#160;In the six months ended July 4, 2010, the Company recorded a $4.8 million basis adjustment to its equity in earnings from Flash Partners related to the difference between the basis in the Company&#8217;s equity investment compared to the historical basis of the assets recorded by Flash Partners.</font></div><div style="DISPLAY: block; TEXT-INDENT: 0pt"><br /></div><div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 18pt; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><font style="DISPLAY: inline; FONT-WEIGHT: bold; FONT-STYLE: italic">Flash Alliance. &#160;&#160;</font>The Company has a 49.9% ownership interest in Flash Alliance Ltd. (&#8220;Flash Alliance&#8221;), a business venture with Toshiba which owns 50.1%, formed in fiscal year 2006.&#160;&#160;In the venture, the Company and Toshiba have collaborated in the development and manufacture of NAND flash memory products.&#160;&#160;These NAND flash memory products are manufactured by Toshiba at its 300-millimeter wafer fabrication facility located in Yokkaichi, Japan, using the semiconductor manufacturing equipment owned or leased by Flash Alliance.&#160;&#160;Flash Alliance purchases wafers from Toshiba at cost and then resells those wafers to the Company and Toshiba at cost plus a markup.&#160;&#160;The Company accounts for its 49.9% ownership position in Flash Alliance under the equity method of accounting.&#160;&#160;The Company is committed to purchase its provided three-month forecast of Flash Alliance&#8217;s NAND wafer supply, w hich generally equals 50% of the venture&#8217;s output.&#160;&#160;The Company is not able to estimate its total wafer purchase commitment obligation beyond its rolling three-month purchase commitment because the price is determined by reference to the future cost of producing the semiconductor wafers.&#160;&#160;In addition, the Company is committed to fund 49.9% of Flash Alliance&#8217;s costs to the extent that Flash Alliance&#8217;s revenues from wafer sales to the Company and Toshiba are insufficient to cover these costs.</font></div><div style="DISPLAY: block; TEXT-INDENT: 0pt"><br /></div><div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 18pt; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">As of July 4, 2010, the Company had notes receivable from Flash Alliance of $548.6&#160;million, denominated in Japanese yen.&#160;&#160;These notes are secured by the equipment purchased by Flash Alliance using the note proceeds.&#160;&#160;The Company has additional guarantee obligations to Flash Alliance, see &#8220;Off-Balance Sheet Liabilities.&#8221;&#160;&#160;At July 4, 2010 and January&#160;3, 2010, the Company had an equity investment in Flash Alliance of $231.6&#160;million and $225.3&#160;million, respectively, denominated in Japanese yen, offset by $58.0&#160;million and $45.3&#160;million, respectively, of cumulative translation adjustments recorded in accumulated OCI.&#160;&#160;In the six months ended July 4, 2010, the Company recorded ($6.4) million of basis adjustment to its equity earnings from Flash Alliance related to the difference between the basis in the Company&#8217;s equity investment compared to the historical basis of the assets recorded by Flash Alliance.</font></div><div style="DISPLAY: block; TEXT-INDENT: 0pt"><br /></div><br /><br /><di v style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 18pt; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><font style="DISPLAY: inline; FONT-WEIGHT: bold; FONT-STYLE: italic">FlashVision.&#160;&#160;</font>In the first quarter of fiscal year 2010, the wind-down was completed of FlashVision Ltd. 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capacity to Toshiba.&#160;&#160;The restructuring resulted in the Company receiving value of 79.3&#160;billion Japanese yen of which 26.1&#160;billion Japanese yen, or $277.1&#160;million, was received in cash, reducing outstanding notes receivable from Flash Ventures, and 53.2&#160;billion Japanese yen reflected the transfer of off-balance sheet equipment lease guarantee obligations from the Company to Toshiba.&#160;&#160;The restructuring was completed in a series of closings through March&#160;31, 2009.&#160;&#160;The Company received the cash and transferred 53.2&#160;billion Japanese yen of off-balance sheet equipment lease guarantee obligations in the first half of fiscal year 2009.&#160;&#160;Transaction costs of $10.9&#160;million related to the sale and transfer of equipment and lease obligations were expensed in the first quarter of fiscal year 2009.</font></div><div style="DISPLAY: block; TEXT-INDENT: 0pt"><br /></div><div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 18pt; 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TEXT-INDENT: 0pt"><br /></div> Related Parties and Strategic InvestmentsFlash Ventures with Toshiba.&#160;&#160;The Company owns 49.9% of each of&#160;the flash ventures with Toshiba (Flash false false false us-types:textBlockItemType textblock This element may be used for the entire related party transactions disclosure as a single block of text. Disclosure may include: the nature of the relationship(s), a description of the transactions, the amount of the transactions, the effects of any change in the method of establishing the terms of the transaction from the previous period, stated interest rate, expiration date, terms and manner of settlement per the agreement with the related party, and amounts due to or from related parties. If the entity and one or more other entities are under common ownership or management control and this control affects the operating results or financial position, disclosure includes the nature of the control relationship even if there are no transactions between the entities. Disclosure may also include the aggregate amount of current and deferred tax expense for each statement of earnings presented where the entity is a member of a group that files a consolidated tax return, the amount of an y tax related balances due to or from affiliates as of the date of each statement of financial position presented, the principal provisions of the method by which the consolidated amount of current and deferred tax expense is allocated to the members of the group and the nature and effect of any changes in that method. Examples of related party transactions include transactions between (a) a parent company and its subsidiary; (b) subsidiaries of a common parent; (c) and entity and its principal owners; and (d) affiliates. 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(&#8220;Phison&#8221;); Silicon Motion Technology Corp., Silicon Motion, Inc. (Taiwan), Silicon Motion, Inc. (California), and Silicon Motion International, Inc. (collectively, &#8220;Silicon Motion&#8221;); Synergistic Sales, Inc. (&#8220;Synergistic&#8221;); USBest Technology, Inc. dba Afa Technologies, Inc. (&#8220;USBest&#8221; ); Skymedi Corp. (&#8220;Skymedi&#8221;); Chipsbank Microelectronics (HK) Co., Ltd., Chipsbank Technology (Shenzhen) Co., Ltd., and Chipsbank Microelectronics Co., Ltd., (collectively, &#8220;Chipsbank&#8221;); Infotech Logistic LLC (&#8220;Infotech&#8221;); Zotek Electronic Co., Ltd., dba Zodata Technology Ltd. (collectively, &#8220;Zotek&#8221;); Power Quotient International Co., Ltd., and PQI Corp., (collectively, &#8220;PQI&#8221;); PNY Technologies, Inc. (&#8220;PNY&#8221;); Kingston Technology Co., Inc., Kingston Technology Corp., Payton Technology Corp., and MemoSun, Inc. (collectively, &#8220;Kingston&#8221;); Buffalo, Inc., Melco Holdings, Inc., and Buffalo Technology (USA), Inc. (collectively, &#8220;Buffalo&#8221;); Verbatim Corp. (&#8220;Verbatim&#8221;); Transcend Information Inc. (Taiwan), Transcend Information Inc. (California), and Transcend Information Maryland, Inc., (collectively, &#8220;Transcend&#8221;); Imat ion Corp., Imation Enterprises Corp., and Memorex Products, Inc. (collectively, &#8220;Imation&#8221;); Add-On Computer Peripherals, Inc. and Add-On Computer Peripherals, LLC (collectively, &#8220;Add-On Computer Peripherals&#8221;); Add-On Technology Co., A-Data Technology Co., Ltd., and A-Data Technology (USA) Co., Ltd., (collectively, &#8220;A-DATA&#8221;); Apacer Technology Inc. and Apacer Memory America, Inc. (collectively, &#8220;Apacer&#8221;); Acer, Inc.; Behavior Tech Computer Corp. and Behavior Tech Computer (USA) Corp. (collectively, &#8220;Behavior&#8221;); Corsair Memory, Inc. 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TEXT-INDENT: 0pt"><br /></div><br /> Investments and Fair Value Measurements&#160;The Company measures assets and liabilities at fair value based upon exit price, representing the amount that false false false us-types:textBlockItemType textblock This element represents the disclosure related to the fair value measurement of assets and liabilities which includes [financial] instruments measured at fair value that are classified in stockholders' equity. Such assets and liabilities may be measured on a recurring or nonrecurring basis. The disclosures which may be required or desired include: (1) for assets and liabilities measured on a recurring basis, disclosure may include: (a) the fair value measurements at the reporting date; (b) the level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3); (c) for fair value measurements using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period a ttributable to the following: (i) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (ii) purchases, sales, issuances, and settlements (net); (iii) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs); (d) the amount of the total gains or losses for the period in subparagraph (c) (i) above included in earnings (or changes in net assets) that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date and a description of where those unrealized gains or losses are reported in the statement of income (or activities); (e) the valuation technique(s) used to measure fair value and a discussion of changes in valuation techni ques, if any, during the period and (2) for assets and liabilities that are measured at fair value on a nonrecurring basis (for example, impaired assets) disclosure may include, in addition to (a) above: (a) the reasons for the fair value measurements recorded; (b) the same as (b) above; (c) for fair value measurements using significant unobservable inputs (Level 3), a description of the inputs and the information used to develop the inputs; and (d) the valuation technique(s) used to measure fair value and a discussion of changes, if any, in the valuation technique(s) used to measure similar assets and/or liabilities in prior periods. Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 157 -Paragraph 32 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 157 -Paragraph 33 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 157 -Paragraph 6 -Footnote 4 false 1 2 false UnKnown UnKnown UnKnown false true XML 27 defnref.xml IDEA: XBRL DOCUMENT No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. Amount charged against earnings in the period for incurred and estimated costs, excluding asset retirement obligations, associated with exit from or disposal of business activities or restructurings pursuant to a program that is planned and controlled by management, and materially changes either the scope of a business undertaken by an entity, or the manner in which that business is conducted.. Additionally includes marketing contract termination costs, technology license impairments, and fixed asset impairments. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. Includes disclosure of commitments and contingencies. This element may be used as a single block of text to encapsulate the entire disclosure including data and tables. Additionally provides pertinent information about each guarantee obligation, or each group of similar guarantee obligations, including (a) the nature of the guarantee, including its term, how it arose, and the events or circumstances that would require the guarantor to perform under the guarantee; (b) the maximum potential amount of future payments (undiscounted) the guarantor could be required to make under the guarantee; (c) the current carrying amount of the liability, if any, for the guarantor's obligations under the guarantee; and (d) the nature of any recourse provisions under the guarantee, and any assets held either as collateral or by third parties, and any relevant related party disclosure. Excludes disclosures about product warranties. No authoritative reference available. The cash inflow associated with long-term loans for related parties where one party can exercise control or significant influence over another party, including affiliates, owners or officers and their immediate families, pension trusts, and so forth. No authoritative reference available. No authoritative reference available. No authoritative reference available. This item represents the cost of borrowed funds accounted for as interest that was charged against earnings during the period. Includes change in accumulated unrealized gain (loss) on availiable-for-sale investments required to be included in earnings for the period, foreign currency translation adjustments, hedging effects, and gain (loss) on investments in equity and income of business ventures. Additionally includes other than temporary losses related to investments in debt and equity securities which are included in realized losses in the period recognized, and investment income from real or personal property, such as rental income. No authoritative reference available. The total amount of investments in joint ventures that are intended to be held for an extended period of time (longer than one operating cycle) and loans due from and receivables due from the joint ventures. No authoritative reference available. Other expenses included in net income that result in no cash inflows or outflows in the period which are not otherwise defined in the taxonomy, combined with the gains and other income producing transactions that result in no cash inflows or outflows in the period in which they occur, but increase net income and thus are subtracted (removed) when calculating net cash flow from operating activities using the indirect method. This element is used when there is not a more specific and appropriate element. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. This element represents the disclosure related to certain balance sheet items on a detailed level. No authoritative reference available. No authoritative reference available. No authoritative reference available. Sum of operating profit and nonoperating income (expense) before income taxes, extraordinary items and cumulative effects of changes in accounting principles. No authoritative reference available. The cash inflow associated with the sale of all investments such as debt, security and so forth during the period. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. The amount of product related related expense recognized in the current period that reflects the allocation of the costs of acquisition related intangible assets over the expected benefit period of such assets. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. The carrying amount of deferred income on shipments to distribution channels, deferred revenue for software license and royalty arrangements, and consideration received or receivable as of the balance sheet date on potential earnings that were not recognized as revenue in conformity with GAAP, and which are expected to be recognized as such within one year or the normal operating cycle, if longer, including sales, license fees, and royalties, but excluding interest income. No authoritative reference available. No authoritative reference available. No authoritative reference available. Revenue earned during the period relating to consideration received from another party for the right to use, but not own, certain of the entity's intangible assets. Licensing arrangements include, but are not limited to, rights to use a patent, copyright, technology, manufacturing process, software or trademark. Licensing fees are generally, but not always, fixed as to amount and not dependent upon the revenue generated by the licensing party. An entity may receive licensing fees for licenses that also generate royalty payments to the entity combined with the revenue earned during the period from the leasing or otherwise lending to a third party the entity's rights or title to certain property. Royalty revenue is derived from a percentage or stated amount of sales proceeds or revenue generated by the third party using the entity's property. Examples of property from which royalties may be derived include patents and oil and mineral rights. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. The cash inflow associated with the maturity of all investments such as debt, security and so forth during the period. No authoritative reference available. The amount of non product related related expense recognized in the current period that reflects the allocation of the costs of acquisition related intangible assets over the expected benefit period of such assets. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. This item represents investment income derived from investments in debt and equity securities consisting of interest income earned from investments in debt securities and on cash and cash equivalents, dividend income from investments in equity securities, and income or expense derived from the amortization of investment related discounts or premiums, respectively, net of related investment expenses. This item also includes realized gains and losses on the sale or holding of investments in debt and equity securities required to be included in earnings for the period. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. Adjustment to remove noncash portion of rectructuring charges, technology license impairments, and fixed asset impairments. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. The cash outflow associated with long-term loans for related parties where one party can exercise control or significant influence over another party, including affiliates, owners or officers and their immediate families, pension trusts, and so forth. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. No authoritative reference available. Provides information about material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party or of which any of their property is subject. Includes the name of the court or agency in which the proceedings are pending, the date instituted, the principal parties thereto, a description of the factual basis alleged to underlie the proceeding and the relief sought. Includes simliar information as to any such proceedings known to be contemplated by governmental authorities. No authoritative reference available. 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This item includes treasury stock repurchased by the entity. Note: elements for number of nonredeemable preferred shares, par value and other disclosure concepts are in another section within stockholders' equity. 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This item includes treasury stock repurchased by the entity. Note: elements for number of common shares, par value and other disclosure concepts are in another section within stockholders' equity. Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 02 -Paragraph 30 -Article 5 false 35 3 us-gaap_AdditionalPaidInCapital us-gaap true credit instant No definition available. false false false false false false false false false false false false 1 false true false false 4394832000 4394832 false false false 2 false true false false 4268845000 4268845 false false false xbrli:monetaryItemType monetary Excess of issue price over par or stated value of the entity's capital stock and amounts received from other transactions involving the entity's stock or stockholders. Includes adjustments to additional paid in capital. Some examples of such adjustments include recording the issuance of debt with a beneficial conversion feature and certain tax consequences of equity instruments awarded to employees. Use this element for the aggregate amount of APIC associated with common AND preferred stock. For APIC associated with only common stock, use the element Additional Paid In Capital, Common Stock. For APIC associated with only preferred stock, use the element Additional Paid In Capital, Preferred Stock. Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 02 -Paragraph 31 -Article 5 false 36 3 us-gaap_RetainedEarningsAccumulatedDeficit us-gaap true credit instant No definition available. false false false false false false false false false false false false 1 false true false false 5096000 5096 false false false 2 false true false false -487489000 -487489 false false false xbrli:monetaryItemType monetary The cumulative amount of the reporting entity's undistributed earnings or deficit. Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher AICPA -Name Accounting Principles Board Opinion (APB) -Number 12 -Paragraph 10 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 02 -Paragraph 31 -Article 5 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 04 -Article 3 false 37 3 us-gaap_AccumulatedOtherComprehensiveIncomeLossNetOfTax us-gaap true credit instant No definition available. false false false false false false false false false false false false 1 false true false false 171649000 171649 false false false 2 false true false false 128713000 128713 false false false xbrli:monetaryItemType monetary Accumulated change in equity from transactions and other events and circumstances from non-owner sources, net of tax effect, at fiscal year-end. Excludes Net Income (Loss), and accumulated changes in equity from transactions resulting from investments by owners and distributions to owners. Includes foreign currency translation items, certain pension adjustments, and unrealized gains and losses on certain investments in debt and equity securities as well as changes in the fair value of derivatives related to the effective portion of a designated cash flow hedge. Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 04 -Article 3 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher AICPA -Name Accounting Principles Board Opinion (APB) -Number 12 -Paragraph 10 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 130 -Paragraph 14, 17, 26 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 02 -Paragraph 31 -Article 5 false 38 3 us-gaap_StockholdersEquity us-gaap true credit instant No definition available. false false false false false false false false false false false totallabel false 1 false true false false 4571810000 4571810 false false false 2 false true false false 3910298000 3910298 false false false xbrli:monetaryItemType monetary Total of all Stockholders' Equity (deficit) items, net of receivables from officers, directors owners, and affiliates of the entity which are attributable to the parent. The amount of the economic entity's stockholders' equity attributable to the parent excludes the amount of stockholders' equity which is allocable to that ownership interest in subsidiary equity which is not attributable to the parent (noncontrolling interest, minority interest). This excludes temporary equity and is sometimes called permanent equity. Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher AICPA -Name Accounting Research Bulletin (ARB) -Number 51 -Paragraph A3 -Appendix A Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Staff Accounting Bulletin (SAB) -Number Topic 4 -Section E Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 02 -Paragraph 29, 30, 31 -Article 5 true 39 2 us-gaap_MinorityInterest us-gaap true credit instant No definition available. false false false false false false false false false false false false 1 false true false false -2959000 -2959 false false false 2 false true false false -1889000 -1889 false false false xbrli:monetaryItemType monetary Total of all Stockholders' Equity (deficit) items, net of receivables from officers, directors owners, and affiliates of the entity which is directly or indirectly attributable to that ownership interest in subsidiary equity which is not attributable to the parent (noncontrolling interest, minority interest). Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 02 -Paragraph 27 -Article 5 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 03 -Paragraph 20 -Article 7 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher AICPA -Name Accounting Research Bulletin (ARB) -Number 51 -Paragraph 26 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher AICPA -Name Accounting Research Bulletin (ARB) -Number 51 -Paragraph 38 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher AICPA -Name Accounting Research Bulletin (ARB) -Number 51 -Paragraph A3 -Appendix A false 40 2 us-gaap_StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest us-gaap true credit instant No definition available. false false false false false false false false false false false totallabel false 1 false true false false 4568851000 4568851 false false false 2 false true false false 3908409000 3908409 false false false xbrli:monetaryItemType monetary Total of Stockholders' Equity (deficit) items, net of receivables from officers, directors owners, and affiliates of the entity including portions attributable to both the parent and noncontrolling interests (previously referred to as minority interest), if any. The entity including portions attributable to the parent and noncontrolling interests is sometimes referred to as the economic entity. This excludes temporary equity and is sometimes called permanent equity. 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Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 02 -Paragraph 32 -Article 5 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 03 -Paragraph 25 -Article 7 true 2 36 false Thousands UnKnown UnKnown false true XML 30 R2.xml IDEA: CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  2.2.0.7 false CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) 002000 - Statement - CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS true false In Thousands, except Per Share data false false 1 USD false false u000 Standard http://www.xbrl.org/2003/iso4217 USD iso4217 0 u002 Divide http://www.xbrl.org/2003/iso4217 USD iso4217 http://www.xbrl.org/2003/instance shares xbrli 0 u001 Standard http://www.xbrl.org/2003/instance shares xbrli 0 $ false 2 USD false false u000 Standard http://www.xbrl.org/2003/iso4217 USD iso4217 0 u002 Divide http://www.xbrl.org/2003/iso4217 USD iso4217 http://www.xbrl.org/2003/instance shares xbrli 0 u001 Standard http://www.xbrl.org/2003/instance shares xbrli 0 $ false 3 USD false false u000 Standard http://www.xbrl.org/2003/iso4217 USD iso4217 0 u002 Divide http://www.xbrl.org/2003/iso4217 USD iso4217 http://www.xbrl.org/2003/instance shares xbrli 0 u001 Standard http://www.xbrl.org/2003/instance shares xbrli 0 $ false 4 USD false false u000 Standard http://www.xbrl.org/2003/iso4217 USD iso4217 0 u002 Divide http://www.xbrl.org/2003/iso4217 USD iso4217 http://www.xbrl.org/2003/instance shares xbrli 0 u001 Standard http://www.xbrl.org/2003/instance shares xbrli 0 $ 3 1 us-gaap_RevenuesAbstract us-gaap true na duration No definition available. false false false false false true false false false false false false 1 false false false false 0 0 false false false 2 false false false false 0 0 false false false 3 false false false false 0 0 false false false 4 false false false false 0 0 false false false xbrli:stringItemType string No definition available. false 4 2 us-gaap_SalesRevenueNet us-gaap true credit duration No definition available. false false false false false false false false false false false false 1 true true false false 1091315000 1091315 false false false 2 true true false false 610432000 610432 false false false 3 true true false false 2084510000 2084510 false false false 4 true true false false 1198531000 1198531 false false false xbrli:monetaryItemType monetary Total revenue from sale of goods and services rendered during the reporting period, in the normal course of business, reduced by sales returns and allowances, and sales discounts. Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 03 -Paragraph 1 -Article 5 false 5 2 sndk_LicenseAndRoyalty sndk false credit duration Revenue earned during the period relating to consideration received from another party for the right to use, but not own,... false false false false false false false false false false false false 1 false true false false 87753000 87753 false false false 2 false true false false 120141000 120141 false false false 3 false true false false 181221000 181221 false false false 4 false true false false 191513000 191513 false false false xbrli:monetaryItemType monetary Revenue earned during the period relating to consideration received from another party for the right to use, but not own, certain of the entity's intangible assets. Licensing arrangements include, but are not limited to, rights to use a patent, copyright, technology, manufacturing process, software or trademark. Licensing fees are generally, but not always, fixed as to amount and not dependent upon the revenue generated by the licensing party. An entity may receive licensing fees for licenses that also generate royalty payments to the entity combined with the revenue earned during the period from the leasing or otherwise lending to a third party the entity's rights or title to certain property. Royalty revenue is derived from a percentage or stated amount of sales proceeds or revenue generated by the third party using the entity's property. Examples of property from which royalties may be derived include patents and oil and mineral rights. No authoritative reference available. false 6 2 us-gaap_Revenues us-gaap true credit duration No definition available. false false false false false false false false false false false totallabel false 1 false true false false 1179068000 1179068 false false false 2 false true false false 730573000 730573 false false false 3 false true false false 2265731000 2265731 false false false 4 false true false false 1390044000 1390044 false false false xbrli:monetaryItemType monetary Aggregate revenue recognized during the period (derived from goods sold, services rendered, insurance premiums, or other activities that constitute an entity's earning process). For financial services companies, also includes investment and interest income, and sales and trading gains. 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Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 03 -Paragraph 2 -Article 5 false 8 1 sndk_AmortizationOfAcquisitionRelatedIntangibleAssets sndk false debit duration The amount of product related related expense recognized in the current period that reflects the allocation of the costs of... false false false false false false false false false false false false 1 false true false false 3132000 3132 false false false 2 false true false false 3132000 3132 false false false 3 false true false false 6264000 6264 false false false 4 false true false false 6264000 6264 false false false xbrli:monetaryItemType monetary The amount of product related related expense recognized in the current period that reflects the allocation of the costs of acquisition related intangible assets over the expected benefit period of such assets. No authoritative reference available. false 9 1 us-gaap_CostOfRevenue us-gaap true debit duration No definition available. false false false false false false false false false false false totallabel false 1 false true false false 632686000 632686 false false false 2 false true false false 481576000 481576 false false false 3 false true false false 1219171000 1219171 false false false 4 false true false false 1142186000 1142186 false false false xbrli:monetaryItemType monetary The aggregate cost of goods produced and sold and services rendered during the reporting period. Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 03 -Paragraph 2 -Article 5 true 10 1 us-gaap_GrossProfit us-gaap true credit duration No definition available. false false false false false false false false false false false totallabel false 1 false true false false 546382000 546382 false false false 2 false true false false 248997000 248997 false false false 3 false true false false 1046560000 1046560 false false false 4 false true false false 247858000 247858 false false false xbrli:monetaryItemType monetary Aggregate revenue less cost of goods and services sold or operating expenses directly attributable to the revenue generation activity. No authoritative reference available. true 11 1 us-gaap_OperatingExpensesAbstract us-gaap true na duration No definition available. false false false false false true false false false false false false 1 false false false false 0 0 false false false 2 false false false false 0 0 false false false 3 false false false false 0 0 false false false 4 false false false false 0 0 false false false xbrli:stringItemType string No definition available. false 12 2 us-gaap_ResearchAndDevelopmentExpense us-gaap true debit duration No definition available. false false false false false false false false false false false false 1 false true false false 99799000 99799 false false false 2 false true false false 91219000 91219 false false false 3 false true false false 198452000 198452 false false false 4 false true false false 178155000 178155 false false false xbrli:monetaryItemType monetary The aggregate costs incurred (1) in a planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service, a new process or technique, or in bringing about a significant improvement to an existing product or process; or (2) to translate research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or the entity's use, during the reporting period charged to research and development projects, including the costs of developing computer software up to the point in time of achieving technological feasibility, and costs allocated in accounting for a business combination to in-process projects deemed to have no alternative future use. Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 141 -Paragraph 51 -Subparagraph g Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 2 -Paragraph 12, 13 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 86 -Paragraph 11, 12 false 13 2 us-gaap_SellingAndMarketingExpense us-gaap true debit duration No definition available. false false false false false false false false false false false false 1 false true false false 52094000 52094 false false false 2 false true false false 50409000 50409 false false false 3 false true false false 100595000 100595 false false false 4 false true false false 88287000 88287 false false false xbrli:monetaryItemType monetary The aggregate total amount of expenses directly related to the marketing or selling of products or services. No authoritative reference available. false 14 2 us-gaap_GeneralAndAdministrativeExpense us-gaap true debit duration No definition available. false false false false false false false false false false false false 1 false true false false 35399000 35399 false false false 2 false true false false 38636000 38636 false false false 3 false true false false 74123000 74123 false false false 4 false true false false 76961000 76961 false false false xbrli:monetaryItemType monetary The aggregate total of expenses of managing and administering the affairs of an entity, including affiliates of the reporting entity, which are not directly or indirectly associated with the manufacture, sale or creation of a product or product line. No authoritative reference available. false 15 2 sndk_AmortizationOfAcquisitionRelatedIntangibleAssetsOperating sndk false debit duration The amount of non product related related expense recognized in the current period that reflects the allocation of the costs... false false false false false false false false false false false terselabel false 1 false true false false 291000 291 false false false 2 false true false false 291000 291 false false false 3 false true false false 583000 583 false false false 4 false true false false 583000 583 false false false xbrli:monetaryItemType monetary The amount of non product related related expense recognized in the current period that reflects the allocation of the costs of acquisition related intangible assets over the expected benefit period of such assets. No authoritative reference available. false 16 2 sndk_RestructuringAndOther sndk false debit duration Amount charged against earnings in the period for incurred and estimated costs, excluding asset retirement obligations,... false false false false false false false false false false false false 1 false true false false 0 0 false false false 2 false true false false 0 0 false false false 3 false true false false 0 0 false false false 4 false true false false 765000 765 false false false xbrli:monetaryItemType monetary Amount charged against earnings in the period for incurred and estimated costs, excluding asset retirement obligations, associated with exit from or disposal of business activities or restructurings pursuant to a program that is planned and controlled by management, and materially changes either the scope of a business undertaken by an entity, or the manner in which that business is conducted.. Additionally includes marketing contract termination costs, technology license impairments, and fixed asset impairments. No authoritative reference available. false 17 2 us-gaap_OperatingExpenses us-gaap true debit duration No definition available. false false false false false false false false false false false totallabel false 1 false true false false 187583000 187583 false false false 2 false true false false 180555000 180555 false false false 3 false true false false 373753000 373753 false false false 4 false true false false 344751000 344751 false false false xbrli:monetaryItemType monetary Generally recurring costs associated with normal operations except for the portion of these expenses which can be clearly related to production and included in cost of sales or services. Includes selling, general and administrative expense. No authoritative reference available. true 18 1 us-gaap_OperatingIncomeLoss us-gaap true credit duration No definition available. false false false false false false false false false false false false 1 false true false false 358799000 358799 false false false 2 false true false false 68442000 68442 false false false 3 false true false false 672807000 672807 false false false 4 false true false false -96893000 -96893 false false false xbrli:monetaryItemType monetary The net result for the period of deducting operating expenses from operating revenues. No authoritative reference available. false 19 1 sndk_InterestIncome sndk false na duration This item represents investment income derived from investments in debt and equity securities consisting of interest income... false false false false false false false false false false false terselabel false 1 false true false false 12219000 12219 false false false 2 false true false false 14080000 14080 false false false 3 false true false false 24619000 24619 false false false 4 false true false false 33448000 33448 false false false xbrli:monetaryItemType monetary This item represents investment income derived from investments in debt and equity securities consisting of interest income earned from investments in debt securities and on cash and cash equivalents, dividend income from investments in equity securities, and income or expense derived from the amortization of investment related discounts or premiums, respectively, net of related investment expenses. This item also includes realized gains and losses on the sale or holding of investments in debt and equity securities required to be included in earnings for the period. No authoritative reference available. false 20 1 sndk_InterestExpenseAndOtherIncomeExpenseNet sndk false na duration This item represents the cost of borrowed funds accounted for as interest that was charged against earnings during the... false false false false false false false false false false false terselabel false 1 false true false false -12243000 -12243 false false false 2 false true false false -9364000 -9364 false false false 3 false true false false -15657000 -15657 false false false 4 false true false false -47425000 -47425 false false false xbrli:monetaryItemType monetary This item represents the cost of borrowed funds accounted for as interest that was charged against earnings during the period. Includes change in accumulated unrealized gain (loss) on availiable-for-sale investments required to be included in earnings for the period, foreign currency translation adjustments, hedging effects, and gain (loss) on investments in equity and income of business ventures. Additionally includes other than temporary losses related to investments in debt and equity securities which are included in realized losses in the period recognized, and investment income from real or personal property, such as rental income. No authoritative reference available. false 21 1 us-gaap_NonoperatingIncomeExpense us-gaap true credit duration No definition available. false false false false false false false false false false false totallabel false 1 false true false false -24000 -24 false false false 2 false true false false 4716000 4716 false false false 3 false true false false 8962000 8962 false false false 4 false true false false -13977000 -13977 false false false xbrli:monetaryItemType monetary The aggregate amount of income (expense) from ancillary business-related activities (that is to say, excluding major activities considered part of the normal operations of the business). Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 03 -Paragraph 7 -Article 5 true 22 1 sndk_IncomeLossBeforeIncomeTaxes sndk false credit duration Sum of operating profit and nonoperating income (expense) before income taxes, extraordinary items and cumulative effects of... false false false false false false false false false false false totallabel false 1 false true false false 358775000 358775 false false false 2 false true false false 73158000 73158 false false false 3 false true false false 681769000 681769 false false false 4 false true false false -110870000 -110870 false false false xbrli:monetaryItemType monetary Sum of operating profit and nonoperating income (expense) before income taxes, extraordinary items and cumulative effects of changes in accounting principles. No authoritative reference available. true 23 1 us-gaap_IncomeTaxExpenseBenefit us-gaap true debit duration No definition available. false false false false false false false false false false false false 1 false true false false 100881000 100881 false false false 2 false true false false 20651000 20651 false false false 3 false true false false 189184000 189184 false false false 4 false true false false 44618000 44618 false false false xbrli:monetaryItemType monetary The sum of the current income tax expense (benefit) and the deferred income tax expense (benefit) pertaining to continuing operations. Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 45 -Subparagraph a, b false 24 1 us-gaap_ProfitLoss us-gaap true credit duration No definition available. false false false false false false false false false false false totallabel false 1 true true false false 257894000 257894 false false false 2 true true false false 52507000 52507 false false false 3 true true false false 492585000 492585 false false false 4 true true false false -155488000 -155488 false false false xbrli:monetaryItemType monetary The consolidated profit or loss for the period, net of income taxes, including the portion attributable to the noncontrolling interest. 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