-----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, QOI76n+6bJJoFmXa3jOB+8G8xkxquZCu24EFKh2B6PWYTGyzFLsVGQLg8GLR6orj QM7Jo4stWrCdIgKDbjiI8A== 0001000180-97-000015.txt : 19970814 0001000180-97-000015.hdr.sgml : 19970814 ACCESSION NUMBER: 0001000180-97-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NASD 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: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26734 FILM NUMBER: 97657693 BUSINESS ADDRESS: STREET 1: 140 CASPIAN COURT CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4085620500 MAIL ADDRESS: STREET 1: 140 CASPIAN COURT CITY: SUNNYVALE STATE: CA ZIP: 94089 10-Q 1 FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997 Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark one) X Quarterly report pursuant to Section 13 or 15(d) of the Securities - ------------ Exchange Act of 1934 for the quarterly period ended June 30, 1997 OR Transition report pursuant to Section 13 or 15(d) of the Securities - ------------ Exchange Act of 1934 for the transition period from to ----- ------ Commission File Number 0-26734 SanDisk Corporation (Exact name of registrant as specified in its charter) Delaware 77-0191793 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 140 Caspian Court, Sunnyvale, California 94089 (Address of principal executive offices) (Zip code) (408) 542-0500 (Registrant's telephone number, including area code) N/A (Former name, former address, and former fiscal year, if changed since last report.) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock as of June 30, 1997 Common Stock, $0.001 par value 22,481,804 ------------------------------ ---------- Class Number of shares SanDisk Corporation Index PART I. FINANCIAL INFORMATION Page No. Item 1. Condensed Consolidated Financial Statements: Condensed Consolidated Balance Sheets June 30, 1997 and December 31, 1996............................ 3 Condensed Consolidated Statements of Income Three and six months ended June 30, 1997 and 1996.............. 4 Condensed Consolidated Statements of Cash Flows Three and six months ended June 30, 1997 and 1996.............. 5 Notes to Condensed Consolidated Financial Statements............... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................. 20 Item 2. Changes in Securities............................................. 20 Item 3. Defaults upon Senior Securities................................... 20 Item 4. Submission of Matters to a Vote of Security Holders............... 20 Item 5. Other Information................................................. 20 Item 6. Exhibits and Reports on Form 8-K.................................. 21 Signatures........................................................ 23 Page 2 PART I. FINANCIAL INFORMATION SanDisk Corporation Condensed Consolidated Balance Sheets (In thousands) ASSETS June 30, 1997 December 31, (unaudited) 1996* Current Assets: Cash and cash equivalents $ 21,118 $ 19,323 Short-term investments 50,268 54,965 Accounts receivable, net 16,251 11,885 Inventories, net 11,665 9,630 Prepaid expenses and other current assets 1,261 1,684 ------------ ------------ Total current assets 100,563 97,487 Property and equipment, net 11,410 10,285 Deposits and other assets 490 496 ------------ ------------ Total Assets $ 112,463 $ 108,268 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 7,529 $ 7,595 Accrued payroll and related expenses 3,098 2,857 Other accrued liabilities 4,103 4,354 Deferred revenue 3,472 5,652 ------------ ------------ Total current liabilities 18,202 20,458 Stockholders' Equity: Common stock 98,879 98,233 Accumulated deficit (4,618) (10,423) ------------ ------------ Total stockholders' equity 94,261 87,810 Total Liabilities and ------------ ------------ Stockholders' Equity $ 112,463 $ 108,268 ============ ============ The accompanying notes are an integral part of these condensed consolidated financial statements. * Information derived from the audited Consolidated Financial Statements. Page 3 SanDisk Corporation Condensed Consolidated Statements of Income (In thousands, except per share data; unaudited) Three months ended Six months ended June 30, June 30, 1997 1996 1997 1996 ------- ------- ------- ------- Revenues: Product $23,922 $23,312 $42,116 $42,801 Royalty 3,425 1,250 6,675 2,500 ------- ------- ------- ------- Total revenues 27,347 24,562 48,791 45,301 Cost of sales 16,375 15,057 29,340 27,779 ------- ------- ------- ------- Gross profits 10,972 9,505 19,451 17,522 Operating expenses: Research and development 3,083 2,400 6,084 4,545 Sales and marketing 2,971 2,296 5,532 4,306 General and administrative 1,527 1,937 2,904 3,301 ------- ------- ------- ------- Total operating expenses 7,581 6,633 14,520 12,152 Operating income 3,391 2,872 4,931 5,370 Interest and other income, net 954 770 1,909 1,521 ------- ------- ------- ------- Income before taxes 4,345 3,642 6,840 6,891 Provision for income taxes 655 237 1,025 432 ======= ======= ======= ======= Net income $ 3,690 $ 3,405 $ 5,815 $ 6,459 ======= ======= ======= ======= Net income per share $ 0.15 $ 0.14 $ 0.24 $ 0.27 ======= ======= ======= ======= Shares used in computing net income per share 24,414 24,141 24,260 24,172 ======= ======= ======= ======= The accompanying notes are an integral part of these condensed consolidated financial statements. Page 4 SanDisk Corporation Condensed Consolidated Statements of Cash Flows (In thousands; unaudited) Six months ended June 30, 1997 1996 -------- -------- Cash flows provided by (used in) operating activities: Net income $ 5,815 $ 6,459 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 1,811 1,025 Accounts receivable, net (4,366) (2,976) Inventory (2,035) (1,957) Prepaids and other assets 429 (452) Accounts payable (66) 963 Accrued payroll and related expenses 241 263 Other accrued liabilities (251) (149) Deferred revenue (2,180) (738) -------- -------- Total adjustments (6,417) (4,021) -------- -------- Net cash provided by (used in) operating activities (602) 2,438 Cash flows provided by (used in) investing activities: Purchases of short term investments (29,626) (27,893) Proceeds from sale of short term investments 34,313 17,657 Acquisition of capital equipment (2,936) (4,002) -------- -------- Net cash provided by (used in) investing activities 1,751 (14,238) Cash flows from financing activities: Sale of common stock, net of repurchases 646 330 Principal payments under capital leases -- (86) -------- -------- Net cash provided by financing activities 646 244 -------- -------- Net increase (decrease) in cash and cash equivalents 1,795 (11,556) Cash and cash equivalents at beginning of period 19,323 27,255 -------- -------- Cash and cash equivalents at end of period $ 21,118 $ 15,699 ======== ======== The accompanying notes are an integral part of these condensed consolidated financial statements. Page 5 SanDisk Corporation Notes to Condensed Consolidated Financial Statements 1. These interim condensed consolidated financial statements are unaudited but reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the financial position of SanDisk Corporation and Subsidiaries (the "Company") as of June 30, 1997, including the results of operations and cash flows for the three and six month periods ended June 30, 1997 and 1996. Because all the disclosures required by generally accepted accounting principles are not included, these interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto in the Company's annual report on Form 10-K as of, and for the year ended December 31, 1996. The year-end condensed consolidated balance sheet data as of December 31, 1996 was derived from the audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The results of operations for the three and six month periods ended June 30, 1997 and the statement of cash flows for the six months ended June 30, 1997 are not necessarily indicative of results of operations and cash flows for any future period. 2. The Company's fiscal year ends on the Sunday closest to December 31, and each fiscal quarter ends on the Sunday closest to March 31, June 30, and September 30. The second fiscal quarter of 1997 and 1996 ended on June 29, 1997 and June 30, 1996, respectively. Fiscal year 1996 ended on December 29, 1996. For ease of presentation, the accompanying financial statements have been shown as ending on the last day of the calendar month. 3. The components of inventory consist of the following: June 30, December 31, 1997 1996 ------- ----------- (In thousands) Raw materials $ 4,251 $ 3,858 Work-in-process 6,072 3,475 Finished goods 1,342 2,297 ------- ----------- $11,665 $ 9,630 ======= =========== 4. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to result in an increase of $0.01 in primary earnings per share for the three month periods ended June 30, 1997 and 1996 and an increase of $0.02 for the six month periods ended June 30, 1997 and 1996. The impact of Statement 128 on the calculation of fully diluted earnings per share (which has not been materially different from primary earnings per share for the periods presented) for these periods is not expected to be material. 5. The Company is party to various legal proceedings. In October 1995, Samsung Electronics Company Ltd. filed a complaint against the Company in the Northern District of California accusing the Company of infringing two Samsung patents, seeking declaratory relief with respect to five Company patents and alleging unspecified damages for certain other related claims. As written, the Page 6 complaint potentially implicates products that comprised substantially all of the Company's revenues for 1997, 1996 and 1995. The Company has received opinions from its patent counsel that, based on information currently known, the Company's products do not infringe one of these Samsung patents and that, based on certain assumptions as to how Samsung would claim infringement, the particular patent claim in the other Samsung patent that Samsung has accused the Company of infringing is invalid and that the Company's products do not infringe any of the other claims of such patent. Nonetheless, the Company anticipates that Samsung will continue to pursue litigation with respect to such claims. On January 11, 1996, the Company filed a complaint against Samsung with the United States International Trade Commission alleging that Samsung and its U.S. sales arm, are importing and selling products that infringe two of the Company's patents. The U.S. International Trade Commission initiated an investigation based upon the Company's complaint against Samsung. On February 26, 1997, the Administrative Law Judge assigned to the case issued an Initial Determination finding both SanDisk patents valid and infringed and further finding a violation of Section 337 of the Trade Act. On April 15, 1997, the Commission affirmed the Administrative Law Judge's findings of validity with respect to both patents and his finding of infringement with respect to one of the patents. On June 2, 1997, the Commission issued a limited exclusion order prohibiting the unlicensed entry of infringing flash memory circuits, and carriers and circuit boards containing such circuits, that are manufactured by or on behalf of Samsung. At that time, the Commission also issued a cease and desist order to Samsung's domestic sales arm, Samsung Semiconductor, Inc., prohibiting the importation, selling, marketing, distribution, or advertising of infringing flash memory circuits and carriers and circuit boards containing such circuits, in the United States. Samsung has the right to appeal the International Trade Commission's final ruling to the Federal Circuit Court and has publicly expressed its intention to do so. However, no appeal had been filed as of August 12, 1997. Litigation frequently involves substantial expenditures and can require significant management attention, even if the Company ultimately prevails. In addition, the results of any litigation matters are inherently uncertain. Accordingly, there can be no assurance that any of the foregoing matters, or any future litigation, will not have a material adverse effect on the Company's business, financial condition and results of operations. 6. On April 21, 1997, the Company adopted a shareholder rights plan (the Rights Agreement). Under the Rights Agreement, rights will be distributed as a dividend at the rate of one right for each share of common stock of the Company held by stockholders of record as of the close of business on April 28, 1997. The rights will expire on April 28, 2007 unless redeemed or exchanged. Under the Rights Agreement, each right will initially entitle the registered holder to buy one one-hundredth of a share of Series A Junior Participating Preferred Stock for $65.00. The rights will become exercisable only if a person or group (other than Seagate Corporation which is permitted to maintain its 25% stake in the Company) acquires beneficial ownership of 15 percent or more of the Company's common stock or commences a tender or exchange offer upon consummation of which such person or group would beneficially own 15 percent or more of the Company's common stock. 7. The Company recorded a provision for income taxes at a 15% effective tax rate for the first six months of 1997 compared to a 6% effective tax rate for the same period of 1996. The effective tax rate for the first half of 1997 is substantially below the federal statutory rate due to the utilization of federal and state tax credit carryforwards, Foreign Sales Corporation tax benefits and a reduction in the deferred tax asset valuation allowance. 8. In July 1997, the Company agreed to invest approximately $45.0 million in United Silicon, Inc., a semiconductor manufacturing joint venture headed by United Microelectronics Corporation (UMC) in Taiwan. The transaction will give the Company an equity stake of approximately 10% in the joint venture and guarantee access to approximately 12.5% of the wafer output from the facility. The Page 7 Company paid $22.5 million of this investment in July 1997. The Company delivered a promissory note to UMC for the remaining balance, which bears interest at 8.5% and is due on April 1, 1998. 9. The Company has a credit agreement (the Agreement) with a bank, which was renewed in July 1997. Under the provisions of the Agreement, which expires in July 1998, the Company may borrow up to $10,000,000 on a revolving line of credit at the bank's prime interest rate. Amounts under the revolving line of credit can be applied to the issuance of letters of credit of up to $10,000,000. At June 30, 1997, $5,200,000 in letters of credit were outstanding. In addition, under the Agreement, the Company also has a $15,000,000 foreign exchange contract line under which the Company may enter into foreign exchange contracts. No amounts were outstanding under the revolving line of credit portion of the Agreement and the foreign exchange contract portion of the line at June 30, 1997. The Agreement contains covenants that require the Company to maintain certain financial ratios and levels of net worth. The Agreement also does not permit the payment of cash dividends to stockholders. As of June 30, 1997 the Company was in compliance with the covenants. Page 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Certain statements in this discussion and analysis are forward looking statements based on current expectations, and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward looking statements. Such risks and uncertainties are discussed below and in the Company's Form 10-K for the year ended December 31, 1996 and the Company's Form 10-Q for the quarter ended March 31, 1997, under the heading "Risk Factors". Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances occurring after the date hereof. The following discussion should be read in conjunction with the Company's consolidated financial statements and the notes thereto. Results of Operations Product Revenues. SanDisk's product revenues were $23.9 million in the second quarter of 1997, up slightly from $23.3 million for the same period of 1996. Product revenues for the first six months of 1997 were $42.1 million compared to $42.8 million for the same period in 1996. During the second quarter of 1997, unit shipments increased 152% from the comparable period last year. The largest increase came from unit shipments of the Company's CompactFlash(TM) products. In the second quarter of 1997, CompactFlash products represented approximately 70% of all units shipped and 45% of product revenue, making it the first quarter where CompactFlash revenues exceeded revenues from type II PCMCIA flash cards. This shift in product mix to CompactFlash cards, which have lower capacities, contributed to a decline in average selling prices of 58% in the second quarter of 1997 compared to the second quarter of 1996. For the first six months of 1997, unit volumes increased 123% and average selling prices declined 56% compared to the same period in 1996. Over the last few quarters, the Company has experienced a shift in product mix to CompactFlash products with lower capacities. The Company anticipates that CompactFlash products will continue to represent a significant portion of its sales as consumer applications such as digital cameras become more popular. Sales of these lower capacity products generally have lower average selling prices and gross margins than higher capacity products. The mix of products sold varies from quarter to quarter and may vary in the future, affecting the Company's overall average selling prices and gross margins. Many of the markets for the Company's products are still in the emerging stages. While SanDisk has been successful winning design-ins for many new applications, it generally takes several quarters for these new customer products to reach the market. It is difficult to predict the timing of related new product introductions and future sales volumes from these design-ins as the success of the customers' products is uncertain. As these markets develop, competition is expected to increase, which will likely cause average selling prices and gross margins to decline. Order backlog strengthened in the second quarter of 1997; however, the turns component of the Company's business continues to be significant. If the Company is unable to maintain its "turns" business, its results of operations will be materially adversely affected. To adapt to these market conditions, the Company has shifted to more in-house manufacturing to reduce costs and lead times and to position itself to respond quickly to changes in customer demand. The current limited visibility of orders could continue indefinitely until the new markets addressed by the Company's products enter a more predictable growth phase and demand begins to create longer lead times. Export sales represented 52% of product revenue in the second quarter of 1997 and 47% for the first six months of 1997 compared with 50% and 51%, respectively, for the same periods of the previous year. The Company expects international sales to continue to represent a significant portion of revenues. The Company's top ten customers accounted for 67% of product revenue in the second quarter of 1997 compared to 72% for the second quarter of 1996. The company expects sales of its products to a limited Page 9 number of customers to continue to account for a substantial portion of its revenues for the foreseeable future. Royalty Revenues. Royalty revenues from patent cross license agreements were $3.4 million in the second quarter of 1997 up from $1.3 million in the same period of 1996. Revenues from patent licenses and royalties increased to 13% of total revenues in the second quarter of 1997, up from 5% in the same period of the previous year. Royalty revenues for the first six months of 1997 were $6.7 million or 14% of total revenues, up from $2.5 million or 6% of total revenues in the same period of 1996. In June 1997, the Company entered into a patent cross license agreement with Hitachi, Ltd and in July 1997, entered into a patent cross license agreement with Toshiba Corporation. The Company also has patent cross license agreements with Intel and Sharp Corporation. In the future, the Company will receive royalties under these agreements based on sales of flash products by the licensees. Gross Profits. In the second quarter of 1997, gross profits increased to $11.0 million or 40.1% of total revenues from $9.5 million or 38.7% of total revenues for the same period in the previous year. Gross profits for the six month period ended June 30, 1997 increased to $19.5 million or 39.9% of total revenues from $17.5 million or 38.7% of total revenues for the same period of 1996. Product gross margins were 31.5% of product revenues in the second quarter of 1997 and 30.3% of product revenues for the first six months of 1997, down from 35.4% and 35.1%, respectively, for the same periods of 1996. The decline was due to the shift in product mix to lower capacity products with lower average selling prices and gross margins. Revenues from patent cross-license royalties offset the lower product gross margins in the 1997 periods. The Company expects price competition to increase in the future, which will cause average selling prices and gross margins to continue to decline. As a result, the Company expects lower gross margins in the near term, and gross margins are expected to be subject to fluctuation for the foreseeable future. To remain competitive, the Company will be focusing on a number of programs to lower its manufacturing costs. These programs include transitioning from single to double density flash designs, from 0.5 to 0.35 micron manufacturing processes, and utilizing 8 inch instead of 6 inch wafers. These transitions are expected to occur over the next several quarters. The utilization of semiconductor devices with greater memory capacity and the design and implementation of new semiconductor manufacturing processes can entail a number of problems, including lower yields associated with semiconductor device production and production delays. There can be no assurance that such devices or processes will be successfully developed by the Company, or that development of such processes will lower manufacturing costs. Operating Expenses. Research and development, sales and marketing, and general and administrative expenses increased by $0.9 million or 14%, during the second quarter of 1997, and by $2.4 million or 19% for the six month period ended June 30, 1997 compared to the same periods of 1996. Operating expenses increased as a percentage of revenues to 28% for the second quarter of 1997 and 30% for the six months ended June 30, 1997, compared to 27% for the three and six month periods ended June 30, 1996. The increase in operating expenses for the three and six month periods ended June 30, 1997 was primarily due to increased salaries and payroll related expenses associated with additional personnel in all organizations compared to the same periods of the previous fiscal year. Higher facilities expenses related to SanDisk's new larger Sunnyvale facility also contributed to the overall growth in operating expenses. Increased depreciation on capital equipment additions and higher project related expenses contributed to the growth in research and development expenses. Higher travel and marketing communications related expenses contributed to the increase in sales and marketing expenses. General and administrative expenses declined in both the three and six month periods ended June 30, 1997. A reduction in legal fees offset increases in salary and payroll related expenses. Interest and Other Income, Net. Interest and other income, net, increased $184,000 for the three months ended June 30, 1997 and $388,000 for the six months ended June 30, 1997, compared to the same periods of 1996. This was primarily due to higher interest rates on short term investments. In July 1997, the Company agreed to invest approximately $45 million in a joint venture semiconductor manufacturing Page 10 facility headed by United Microelectronics Corporation ("UMC"). An initial payment of $22.5 million was made in July 1997. The remaining balance, including accrued interest at a rate of 8.5% will be paid in April 1998. These payments will reduce the Company's cash and investment holdings and correspondingly, interest income is expected to decline significantly in future quarters. Interest expense will increase significantly over the term of the note. Provision for Income Taxes. The Company recorded a provision for income taxes at a 15% effective tax rate for the first six months of 1997 compared to a 6% effective tax rate for the same period of 1996. The effective tax rate for the first half of 1997 is substantially below the federal statutory rate due to the utilization of federal and state tax credit carryforwards, Foreign Sales Corporation tax benefits and a reduction in the deferred tax asset valuation allowance. The 1996 rate was lower primarily due to the availability of federal net operating loss carryforwards. The Company utilized the remainder of its net operating loss carryforwards in 1996. Liquidity and Capital Resources As of June 30, 1997, the Company had working capital of $82.4 million, which included $21.1 million in cash and cash equivalents and $50.3 million in short term investments. The Company has a line of credit facility with a commercial bank under which it can borrow up to $10 million. This line of credit facility which was renewed in July 1997, expires in July 1998. As of June 30, 1997, the Company had $5.2 million committed under the line of credit facility for standby letters of credit. Operating activities used $602,000 of cash during the first six months of 1997. Net income of $5.8 million was offset by increases in accounts receivable and inventory of $4.4 and $2.0 million, respectively, and a decline in deferred revenue of $2.2 million. Cash provided by investing activities was $1.8 million for the six months ended June 30, 1997 which included net proceeds from investments of $4.7 million offset by capital equipment additions of $2.9 million. In July 1997, the Company agreed to invest approximately $45.0 million in a semiconductor manufacturing joint venture with UMC in Taiwan. The transaction will give the Company an equity stake of approximately 10% in the joint venture and guarantee access to approximately 12.5% of the wafer output from this facility. The company paid $22.5 million of this investment in July 1997. The Company delivered a promissory note to UMC for the remaining balance, which bears interest at 8.5% and is due on April 1, 1998. Depending on the demand for the Company's products, the Company may decide to make substantial investments in manufacturing equipment to support its business in the future. Management believes the existing cash and cash equivalents, short term investments and available line of credit will be sufficient to meet the Company's currently anticipated working capital and capital expenditure requirements for the next twelve months. Impact of Currency Exchange Rates The Company currently purchases wafers from Matsushita under purchase contracts denominated in yen. A portion of the Company's revenues are also denominated in yen. Foreign exchange exposures arising from the Company's yen denominated commitments and related accounts payable are offset to the extent the Company has yen denominated accounts receivable and cash balances. To the extent such foreign exchange exposures are not offset, the Company enters into foreign exchange forward contracts to hedge against changes in foreign currency exchange rates. At June 30, 1997, there were no forward contracts outstanding. Future exchange rate fluctuations could have a material adverse effect on the Company's business, financial condition and results of operations. Page 11 Risk Factors Fluctuations in Operating Results. SanDisk's operating results are subject to quarterly and annual fluctuations due to a variety of factors. The Company has limited visibility with respect to anticipated operating results for any given quarter, even during the quarter in question. Factors affecting the Company's operating results include volume of product orders and sales, availability of foundry capacity, dependence on sole source suppliers and subcontractors, the timing of significant orders, competitive pricing pressures, the ability of the Company to match supply with demand or to accurately forecast future inventory levels, fluctuations in product costs, fluctuation in manufacturing yields, manufacturing utilization, changes in product and customer mix, changes in the channels through which the Company's products are distributed, timing of new product announcements and introductions by the Company and its competitors, quality of the Company's products, increased research and development expenses associated with new product introductions, exchange rate fluctuations and customer qualification and acceptance of new or enhanced versions of the Company's products. In addition, the Company expects to continue to increase its operating expenses in connection with the hiring of additional personnel and the development of new applications. If the Company does not achieve increased levels of revenues commensurate with these increased levels of operating expenses, the Company's business, financial condition and results of operations will be materially adversely affected. All of these factors are difficult to forecast and these or other factors can materially affect the Company's quarterly or annual operating results. In 1996 and early 1997 order visibility weakened. Bookings visibility improved during the second quarter of 1997. However, the turns component of the Company's quarterly business remains high and visibility remains limited. Furthermore during the second quarter of 1997, the Company shipped more than 200,000 units of its CompactFlash product to a number of large digital camera manufacturers to support their product launches. There can be no assurance that any or all of these manufacturers will be successful with market acceptance for these products. Digital camera manufacturers who are not successful may end up with excess inventories of CompactFlash, which would preclude follow on orders in subsequent quarters, or worse could result in market dumping of CompactFlash inventories by these manufacturers. Over the last three quarters, the Company experienced a shift in product mix to lower capacity (2MB and 4MB) CompactFlash cards, which coupled with lower pricing due to competition, caused average selling prices to decline. The Company anticipates that lower capacity products will continue to represent a significant portion of its sales as consumer applications such as digital cameras become more popular. Sales of these lower capacity products generally have lower average selling prices and gross margins than higher capacity products. The mix of products sold varies from quarter to quarter and may vary in the future, affecting the Company's overall average selling prices and gross margins. Due to the emerging nature of the Company's markets and certain planned product transitions, it is difficult for the Company to forecast future inventory levels required to meet customer demand. As a result of both contractual obligations and manufacturing cycle time, the Company is required to order wafers from its foundries as much as six months in advance of the ultimate shipment of its products. Under the Company's wafer supply agreements, there are limits on the number of wafers the Company can order and the Company's ability to change that quantity is restricted. Accordingly, the Company's ability to react to significant fluctuations in demand for its products is limited. As a result, the Company is not able to match its purchases of wafers to specific customer orders and therefore, the Company may take write downs for potential excess inventory purchased prior to the receipt of customer orders. These write downs decrease gross margins in the quarter reported and can result in significant fluctuations in gross margins on a quarter to quarter basis. As the Company's manufacturing cycle time has decreased over the past 12 months, the Company's ability to respond to changes in customer demand has improved. Page 12 Dependence on Third Party Foundries. All of the Company's products require silicon wafers, which are currently supplied by Matsushita in Japan and LG Semicon in Korea. The Company is dependent on Matsushita and LG Semicon to produce wafers of acceptable quality and with acceptable manufacturing yields, to deliver those wafers to the Company on a timely basis and to allocate to the Company a portion of their foundry capacity sufficient to meet the Company's needs. On occasion, the Company has experienced difficulties in each of these areas. The loss or reduction of capacity from Matsushita and LG Semicon or the inability to qualify or receive the anticipated level of capacity from Matsushita and LG Semicon could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that Matsushita and LG Semicon will be able to maintain acceptable yields or that they will continue to deliver sufficient quantities of wafers on a timely basis. Under the Company's wafer supply agreements with Matsushita and LG Semicon, the Company is obligated to provide a monthly rolling forecast of anticipated purchase orders. Except in limited circumstances and subject to acceptance by the foundries, the estimates for the first three months of each forecast constitute a binding commitment and the estimates for the remaining months may not increase or decrease by more than a certain percentage from the previous month's forecast. This limits the Company's ability to react to any significant fluctuations in demand for its products. To the extent the Company inaccurately forecasts the number of wafers required, it may have either a shortage or an excess supply of wafers, either of which could have a material adverse effect on the Company's business, financial condition and results of operations. To the extent the Company is unable to obtain scheduled quantities of wafers from Matsushita or LG Semicon with planned yields, the Company's business, financial condition and results of operations could be negatively impacted. Both Matsushita and LG Semicon are shifting their production capacity from six inch wafers to eight inch wafers. Consequently, the Company is planning to ramp up eight inch wafer production and discontinue six inch wafer production at both facilities by the end of 1997. There can be no assurances that the transitions from six inch to eight inch wafer production will be completed smoothly and without adversely impacting wafer yields or the effective cost per die. The Company has entered into a joint development agreement with NEC for the development of future generations of semiconductor devices to be used in the manufacture of the Company's products. However, there can be no assurance that future generations of the semiconductor devices will be successfully developed or, if developed, that a wafer supply agreement will be entered into with NEC. The Company expects to receive first production shipments from NEC in 1998. In July 1997, the Company agreed to invest approximately $45.0 million in United Silicon Inc. (USI), a semiconductor manufacturing joint venture headed by United Microelectronics Corporation (UMC) in Taiwan. The transaction will give the Company an equity stake of approximately 10% in the joint venture and guarantee access to approximately 12.5% of the wafer output from this facility. The Company paid $22.5 million of this investment in July 1997. The Company delivered a promissory note to UMC for the remaining balance, which bears interest at 8.5% and is due on April 1, 1998. The USI fab is currently under construction at the Science Based Industrial Park in Hsin Chu City, Taiwan. The facility is scheduled to start producing limited wafer quantities in late 1998 and is scheduled to start full monthly production of approximately 20,000 eight-inch wafers in 1999. There can be no assurance that the USI fab will be completed as scheduled or that the processes needed to fabricate SanDisk wafers will be qualified. Because of the long lead time required to qualify each new foundry, the Company is working with several silicon wafer suppliers. The inability of the Company to qualify NEC, USI or other wafer manufacturers or to correctly forecast the number of wafers required from its current suppliers, as well as any inability to obtain timely and adequate deliveries from the Company's current or future suppliers or any other circumstance that would require the Company to seek alternative sources of supply, could delay shipments of the Company's products and could have a material adverse effect on the Company's business, financial condition and results of operations. Page 13 Risks Associated with Transitioning to New Products and Processes. Successive generations of the Company's products incorporate semiconductor devices with greater memory capacity per chip. In addition, the Company is continually involved in joint development with its foundries to produce semiconductor devices based upon smaller geometry manufacturing processes. Both the development of higher capacity semiconductor devices and the implementation of smaller geometry manufacturing processes are important determinants of the Company's ability to decrease the cost per megabyte of its flash data storage products. The utilization of semiconductor devices with greater memory capacity and the design and implementation of new semiconductor manufacturing processes can entail a number of problems, including lower yields associated with semiconductor device production, problems associated with design and manufacture of products to incorporate such devices, and production delays. Any problems experienced by the Company in its current or future transitions to higher capacity memory devices or to new semiconductor manufacturing processes could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that such devices or processes will be successfully developed by the Company. On November 6, 1996, the Company announced its first 64Mbit products based on double density flash ("D2 flash") technology, a new flash system designed to store two bits in each flash memory cell. The Company believes that D2 flash will be important to the Company's ability to increase the capacity and decrease the cost of certain of its products, maintain its competitive advantage, broaden its target markets and attract strategic partners. During the second quarter of 1997, the Company conducted qualification tests of its D2 flash products, which demonstrated to the Company's satisfaction that these products are ready to begin customer sales. The Company has commenced sampling of 64 Mbit D2 flash products, and expects its OEM customers to conduct their own qualifications over the next few quarters. The Company will not generate significant revenues from sales of 64Mbit D2 during the second half of 1997. The implementation of D2 flash in a production environment is proceeding as planned for the second half of 1997. High density flash memory, such as D2 flash, is a complex technology requiring tight manufacturing controls and effective test screens. The production ramp up period for a flash device is particularly prone to problems which can impact both reliability and yields exposing the Company to increased manufacturing costs. There can be no assurance that reliable and cost effective D2 flash products can be manufactured in commercial volumes and with yields sufficient to result in a lower cost per megabyte. Furthermore, flash data storage products designed with D2 flash will initially exhibit approximately one quarter of the write performance of the Company's existing products when writing data into memory. This may preclude their use in certain applications. The failure of the Company to successfully manufacture D2 flash devices could have a material adverse effect on the Company's business, financial condition and results of operations. Manufacturing Yields. The fabrication of the Company's products is a complex and precise process requiring wafers that are produced in a highly controlled and clean environment. Semiconductor companies supplying the Company with wafers periodically have experienced problems in achieving acceptable wafer manufacturing yields. Semiconductor manufacturing yields are a function both of design technology, which is developed by the Company, and process technology, which is typically proprietary to the foundry. Because low yields may result from either design or process technology failures, yield problems may not be effectively determined or improved until an actual product exists that can be analyzed and tested to recognize process sensitivities in relation to the design rules that were used. As a result, yield problems may not be identified until well into the production process. This risk is increased due to the fact that the Company receives its wafers from independent offshore foundries, increasing the effort and time required to identify, communicate and resolve manufacturing yield problems. There can be no assurance that the Company's foundries will achieve or maintain acceptable manufacturing yields in the future. The inability of the Company to achieve planned yields from its foundries could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Key and Sole Source Suppliers. The Company purchases several key components from single or sole source vendors for which alternative sources are not currently available. Even where Page 14 alternative vendors are available, a significant amount of time would be required to qualify an additional vendor in the case of certain of the Company's other components. The Company does not maintain long-term supply agreements with any of these vendors. The inability to develop alternative sources for these single or sole source components or to obtain sufficient quantities of these components could result in delays or reductions in product shipments which could adversely affect the Company's business, financial condition and results of operations. For example, the Company relies on Motorola as the sole source of microcontrollers, which are critical components in the Company's products. The sole source risk associated with microcontrollers from Motorola is heightened during transitions from one generation of microcontrollers to the next given the limited safety stock available during these transitions. In the event Motorola were to stop shipment of microcontrollers for any reason, the time to design and qualify an alternative source would be approximately nine to twelve months. The Company's reliance on Motorola as its sole source of microcontrollers exposes the Company to interruptions of supply that could have a material adverse effect on the Company's business, financial condition and results of operations. The Company uses, Alphatec in Manteca, California, to assemble a majority of the memory components for its products and from time to time uses other subcontractors to perform some assembly and test functions . The Company has no long term agreement with Alphatec. With the significant increases in unit shipments in the last few quarters, the Company has begun to experience capacity constraints in the memory assembly area. The Company has identified two additional memory assembly subcontractors, and is presently working to qualify these subcontractors to handle the increase in production volumes. The Company expects to complete these subcontractor qualifications by the end of the third quarter. As a result of this reliance on third party subcontractors for assembly of a portion its products, the Company cannot directly control product delivery schedules, which can lead to product shortages or quality assurance problems that could increase manufacturing costs of the Company's products. Any problems associated with the delivery, quality or cost of the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is continuing to identify and establish second sources for its key single and sole source component vendors and subcontractors as sales volumes increase, although there can be no assurance these efforts will be successful. During the next several quarters, if the demand for the Company's products exceeds its suppliers ability to deliver needed components or subassemblies, the Company may become delinquent meeting customer demand. Patents, Proprietary Rights and Related Litigation. The Company relies on a combination of patents, mask work protection, trademarks, copyright and trade secret laws, confidentiality procedures and licensing arrangements to protect its intellectual property rights. There can be no assurance that there will not be any disputes regarding the Company's intellectual property rights. Specifically, there can be no assurance that any patents held by the Company will not be invalidated, that patents will be issued for any of the Company's pending applications or that any claims allowed from existing or pending patents will be of sufficient scope or strength or be issued in the primary countries where the Company's products can be sold to provide meaningful protection or any commercial advantage to the Company. Additionally, competitors of the Company may be able to design around the Company's patents. From time to time the Company has been notified and its foundries may in the future be notified, of claims that they may be infringing patents or other intellectual property rights owned by third parties. If it is necessary or desirable, the Company may seek licenses under such patents or intellectual property rights. However, there can be no assurance that licenses will be offered or that the terms of any offered licenses will be acceptable to the Company. The failure to obtain a license from a third party for technology used by the Company could cause the Company to incur substantial liabilities and to suspend the manufacture of products or the use by the Company's foundries of processes requiring the technology, or to expend substantial resources redesigning its products to eliminate the infringement. There can be no assurance that the Company would be successful in redesigning its products or that such licenses would be available under reasonable terms, and any such development or license could require substantial expenditures of time and other resources by the Company. Page 15 In response to the Company's allegations of infringement of five of the Company's patents, Samsung filed a complaint in October 1995 accusing the Company of infringing two of its patents, seeking declaratory relief with respect to these five Company patents and alleging unspecified damages for certain other related claims. As written, the complaint potentially implicates products that comprise substantially all of the Company's product revenues for 1997, 1996 and 1995. The Company has received opinions from its Patent Counsel that, based on information currently known, the Company's products do not infringe one of these Samsung patents and that, based on certain assumptions as to how Samsung would claim infringement, the particular patent claim in the other Samsung patent that Samsung has accused the Company of infringing is invalid and that the Company's products do not infringe any of the other claims of such patent. Nonetheless, the Company anticipates that Samsung will continue to pursue litigation with respect to these claims. SanDisk filed its answer to Samsung's complaint in March 1996. At that time, SanDisk asserted a number of counterclaims based on Samsung's alleged infringement of three SanDisk patents. On January 11, 1996, the Company filed a complaint against Samsung with the United States International Trade Commission alleging that Samsung and its U.S. sales arm, are importing and selling products that infringe two of the Company's patents. The U.S. International Trade Commission completed its hearing on this matter in October 1996. On February 26, 1997, the Administrative Law Judge assigned to the case issued an Initial Determination finding both SanDisk patents valid and infringed and further finding a violation of Section 337 of the Trade Act. On April 15, 1997, the Commission affirmed the Administrative Law Judge's findings of validity with respect to both patents and his finding of infringement with respect to one of the patents. On June 2, 1997, the Commission issued a limited exclusion order prohibiting the unlicensed entry of infringing flash memory circuits and carriers and circuit boards containing such circuits, that are manufactured by or on behalf of Samsung. At that time, the Commission also issued a cease and desist order to Samsung's domestic sales arm, Samsung Semiconductor, Inc., prohibiting the importation, selling, marketing, distributing, or advertising of infringing flash memory circuits and carriers and circuit boards containing such circuits, in the United States. Samsung has the right to appeal the International Trade Commission's final ruling to the Federal Circuit Court and has publicly expressed its intention to do so. However, no appeal had been filed as of August 12, 1997. As is common in the industry, the Company agrees to indemnify certain of its suppliers and customers for alleged patent infringement. The scope of such indemnity varies, but may, in some instances, include indemnification for damages and expenses, including attorneys fees. The Company may from time to time be engaged in litigation as a result of such indemnification obligations. Third party claims for patent infringement are excluded from coverage under the Company's insurance policies. There can be no assurance that any future obligation to indemnify the Company's customers or suppliers, will not have a material adverse effect on the Company's business, financial condition and results of operations. The Company has notified and intends to notify several large flash suppliers that the Company believes certain of their existing or announced products infringe certain of the Company's patents. In addition, from time to time, the Company has entered into discussions with other companies regarding potential cross-license agreements for the Company's patents. To preserve its intellectual property rights, the Company believes it may be necessary to initiate litigation with one or more third parties, including but not limited to those the Company has notified of possible patent infringement. In addition, one or more of these parties may bring suit against the Company. Any litigation, whether as a plaintiff or as a defendant, would likely result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such litigation is ultimately determined in favor of the Company. In the event of an adverse result in any such litigation, the Company could be required to pay substantial damages, cease the Page 16 manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology, discontinue the use of certain processes or obtain licenses to the infringing technology. Litigation frequently involves substantial expenditures and can require significant management attention, even if the Company ultimately prevails. In addition, the results of any litigation matters are inherently uncertain. Accordingly, there can be no assurance that any of the foregoing matters, or any future litigation, will not have a material adverse effect on the Company's business, financial condition and results of operations. In addition to litigation, the Company may need to license some or all of its patent portfolio to be able to obtain cross-licenses to the patents of others. The Company currently has patent cross license agreements with Intel Corporation ("Intel"), Sharp Electronics Corporation ("Sharp"), Hitachi Ltd. ("Hitachi") and Toshiba Corporation ("Toshiba"). There can be no assurance that any other licenses will be available on commercially reasonable terms, or at all. Moreover, any such cross-licenses could result in more rapid and intense competition for the Company's products, by much larger and better financed competitors. Any such limitations on the Company's ability to market its products, or delays and costs associated with redesigning its products, or payments of license fees or licenses of Company rights to others could have a material adverse effect on the Company's business, financial condition and results of operations. Competition. The flash data storage markets in which the Company competes are characterized by rapid technological change, evolving industry standards, declining average selling prices and rapid product obsolescence. The Company's competitors include many large domestic and international companies that have greater access to foundry capacity, substantially greater financial, technical, marketing and other resources, broader product lines and longer standing relationships with customers than the Company. The Company expects competition to increase in the future from existing competitors and from other companies that may enter the Company's existing or future markets with similar or alternative data storage solutions that may be less costly or provide additional features. In addition, competition will increase to the extent that the Company determines to license its patents to certain of its competitors in order to gain licenses to their patents. For example, in October 1995, December 1996, June 1997 and July 1997, the Company entered into patent cross-license agreements with Intel, Sharp, Hitachi and Toshiba, respectively, pursuant to which each party is entitled to manufacture and sell products that incorporate technology covered by the other party's patents related to flash memory devices. Increased competition could have a material adverse effect on the Company's business, financial condition and results of operations. The Company faces competition from other manufacturers of products conforming to the PCMCIA Card and CompactFlash Card industry standards as well as from manufacturers whose products are based on competing standards. Intel's Miniature Card and Toshiba's Solid-State Floppy Disk Card (SSFDC) are products based on competing standards aimed at the mass storage market for consumer applications, such as digital filmless cameras. Hitachi has agreed to support the CompactFlash card standard and become an alternative source supplier. Hitachi is expected to become a formidable competitor as it introduces its own line of CompactFlash Products. The Company expects these products to compete against its CompactFlash product. A manufacturer of digital cameras wishing to design any one of these three alternative competing standards as removable "digital film" will eliminate the other two from use in their product, since all three are mechanically and electronically incompatible with each other. Competition to win the initial design-in is therefore fierce. Due to the high price sensitivity in the market for consumer products, aggressive price competition has been experienced for these applications. Such competition is expected to result in lower gross margins in future quarters, as the relative percentage of sales of CompactFlash products increase. Dependence on Emerging Markets and New Products. The Company's success depends to a significant extent upon the development of emerging markets and new applications for flash data storage systems, as well as on its ability to introduce commercially attractive and competitively priced products on Page 17 a timely basis. There can be no assurance that new applications or markets for flash data storage will develop as expected by the Company or that prospective customers developing products for any such markets will design the Company's products into their products and successfully introduce such products. Although the Company's CompactFlash has achieved considerable initial success in several digital cameras introduced during the first half of 1997, there can be no assurance that this early success will result in large scale market acceptance. The failure of new applications or markets to develop or the failure of new markets to be receptive to the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, the Company expects to supply its CompactFlash products to a number of OEM vendors of digital camera's and PDA's. Because of the large number of companies entering these markets there can be no assurance that all or any of these manufacturers will be successful with market acceptance for their products. Furthermore, any of SanDisk's customers who enter the digital camera market and are not successful may end up with excess inventories of CompactFlash, which would preclude follow on orders in subsequent quarters, or worse could result in market dumping of CompactFlash inventories by these OEM's. The Company believes that continued significant expenditures for research and development will be required in the future. In particular, the Company intends to develop new products with increased memory capacity at lower prices, which the Company believes will be essential to its ability to remain competitive. There can be no assurance that these products will be successfully developed or will achieve market acceptance, or that the Company will be successful in identifying new product opportunities and developing and bringing new products to market in a timely manner, or that products or technologies developed by others will not render the Company's products or technologies obsolete or noncompetitive. The failure of any of the Company's new product development efforts or lack of market acceptance of such products could have a material adverse effect on the Company's business, financial condition and results of operations. Customer Concentration. A limited number of customers have historically accounted for a substantial portion of the Company's revenues and the Company expects this trend to continue. Sales to the Company's customers are generally made pursuant to standard purchase orders rather than long-term contracts. The Company has also experienced significant changes in the composition of its major customer base from year to year and expects this variability to continue as certain customers increase or decrease their purchases of the Company's products as a result of fluctuations in market demand for such customers' products. Under a joint cooperation agreement signed in January 1993, Seagate Corporation ("Seagate") has the option to market the Company's products beginning in 1999. Under the amended agreement, beginning in 1999, if Seagate exercises its option to market the Company's products, the Company and Seagate will coordinate their efforts so that up to one-third of the Company's worldwide net revenues could be generated from sales of the Company's flash products through Seagate. International Operations. All of the Company's wafers are, and for the foreseeable future will be, produced by foreign foundries. Because the Company currently purchases the majority of its flash wafers in Japanese Yen at a set price, fluctuations in currencies could materially adversely affect the Company's business, financial condition and results of operations. Due to its reliance on export sales and its dependence on foundries outside the United States, the Company is subject to the risks of conducting business internationally, including foreign government regulation and general geopolitical risks such as political and economic instability, potential hostilities and changes in diplomatic and trade relationships. In addition, since most of the Company's international sales are denominated in U.S. dollars, the Company's products may be less competitive in countries with currencies declining in value against the dollar. In 1996 export sales accounted for approximately 55% of the Company's total revenues. Manufacturing and sales of the Company's products may also be materially adversely affected by factors such as unexpected changes in, or imposition of, regulatory requirements, tariffs, import and export restrictions and other barriers and restrictions, longer payment cycles, greater difficulty in accounts receivable collection, potentially adverse tax consequences, the burdens of complying with a variety of foreign laws and other factors beyond the Company's control. In addition, the laws of certain foreign countries in which the Company's products are or may be developed, manufactured or sold, including various countries in Asia, Page 18 may not protect the Company's intellectual property rights to the same extent as do the laws of the United States and thus make piracy of the Company's products a more likely possibility. There can be no assurance that these factors will not have a material adverse effect on the Company's business, financial condition or results of operations. Volatility of Stock Price. To date, the price of the Company's Common Stock on the NASDAQ National Market has been volatile. The Company believes that future announcements concerning the Company, its competitors or its principal customers, including technological innovations, new product introductions, governmental regulations, litigation or changes in earnings estimated by analysts, may cause the market price of the Common Stock to fluctuate substantially in the future. Sales of substantial amounts of the Company's outstanding Common Stock in the public market could materially adversely affect the market price of the Common Stock. Further, in recent years the stock market has experienced extreme price and volume fluctuations that have particularly affected the market prices of equity securities of many high technology companies and that often have been unrelated or disproportionate to the operating performance of such companies. These fluctuations as well as general economic, political and market conditions such as recessions or international currency fluctuations, may materially adversely affect the market price of the Common Stock. Page 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings The information required by this item is set forth in Note 5 of the Notes to the Condensed Consolidated Financial Statements on pages 6 and 7 and under "Risk Factors - Patents, Proprietary Rights and Related Litigation" on pages 15 to 17 of this Form 10-Q for the quarterly period ended June 30, 1997, and is hereby incorporated by reference. Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Meeting of Stockholders held on April 18, 1997, the following individuals were elected to the Board of Directors: Votes For Votes Withheld William V. Campbell 20,018,518 149,060 Irwin Federman 20,024,344 143,000 Catherine P. Lego 20,024,618 142,960 Eli Harari 20,023,618 143,960 James D. Meindl 20,024,618 142,960 Joseph Rizzi 20,024,578 143,000 Alan F. Shugart 20,020,618 146,960 The following proposals were approved at the Company's Annual Meeting:
Affirmative Negative Votes Broker Votes Votes Withheld Non-Votes -------------- -------------- --------------- ---------------- Amendments to the 1995 Stock 11,473,427 2,081,974 124,991 6,487,152 Option Plan Amendments to the 1995 12,983,875 840,886 96,313 6,246,470 Non-Employee Directors Stock Option Plan Amendment to increase common 14,003,793 270,980 84,578 5,808,193 shares under the 1995 Employee Stock Purchase Plan Ratify the appointment of 20,092,244 41,047 34,253 -- Ernst & Young LLP as independent auditors for the fiscal year ending December 31, 1997.
Item 5. Other Information None Page 20 Item 6. Exhibits and Reports on Form 8-K A. Exhibits Exhibit Number Exhibit Title 3.1 Certificate of Incorporation of the Registrant, as amended to date. /3/ 3.2 Form of Amended and Restated Certificate of Incorporation of the Registrant. /3/ 3.3 Bylaws of the Registrant, as amended. /3/ 3.4 Form of Amended and Restated Bylaws of the Registrant /3/ 3.5 Certificate of Designation for the Series A Junior Participating Preferred Stock, as filed with the Delaware Secretary of State on April 24, 1997. /7/ 4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4. /3/ 4.3 Amended and Restated Registration Rights Agreement, among the Registrant and the investors and founders named therein, dated March 3, 1995. /3/ 4.4 Amendment No. 1 to the Stock Purchase Agreements among the Registrant and the holders of Series A, B and D Preferred Stock, and certain holders of Series E Preferred Stock, dated January 15, 1993. /3/ 4.5 Series F Preferred Stock Purchase Agreement between Seagate Technology, Inc. and the Registrant, dated January 15, 1993. /3/ 4.6 Amendment Agreement between Seagate Technology, Inc. and the Registrant, dated August 23, 1995. /3/ 4.7 Form of Stock Purchase Agreement between the Registrant and Seagate Technology, Inc. /3/ 4.8 Rights Agreement, dated as of April 18, 1997, between the Company and Harris Trust and Savings Bank. /7/ 9.1 Amended and Restated Voting Agreement, among the Registrant and the investors named therein, dated March 3, 1995. /3/ 10.1 Form of Indemnification Agreement entered into between the Registrant and its directors and officers. /3/ 10.2 Foundry Agreement between Matsushita Electronics Corporation, Matsushita Electronic Industrial Co., Ltd. and the Registrant, dated May 20, 1992. /1, 3/ 10.3 Amendment No. 1 to MEC/SunDisk Foundry Agreement, between Matsushita Electronics Corporation, Matsushita Electronic Industrial Co., Ltd. and the Registrant, dated April 17, 1995. /1, 3/ 10.4 Foundry Agreement between Goldstar Electron Co., Ltd. and the Registrant, dated October 13, 1993. /1, 3/ 10.5 Amendment No. 1 to the Foundry Agreement between Goldstar Electron Co., Ltd. and the Registrant, dated May 10, 1994. /1, 3/ 10.6 SanDisk/Goldstar Technical Collaboration Agreement between Goldstar Electron Co., Ltd. and the Registrant, dated March 25, 1994. /1, 3/ 10.7 Joint Development Agreement between NEC Corporation and the Registrant, dated June 20, 1994. /1, 3/ 10.8 Joint Cooperation Agreement between the Registrant and Seagate Technology, Inc., dated January 15, 1993. /1, 3/ 10.9 Amendment and Termination Agreement between the Registrant and Seagate Technology, Inc., dated October 28, 1994. /1, 3/ 10.10 License Agreement between the Registrant and Dr. Eli Harari, dated September 6, 1988. /3/ 10.13 1989 Stock Benefit Plan. /3/ 10.14 1995 Stock Option Plan. /3/ 10.15 Employee Stock Purchase Plan. /3/ Page 21 10.16 1995 Non-Employee Directors Stock Option Plan. /3/ 10.17 Patent Cross License Agreement between the Registrant and Intel Corporation, dated October 12, 1995. /3/ 10.18 Lease Agreement between the Registrant and G.F. Properties, dated March 1, 1996. /4/ 10.19 Business loan agreement between the Registrant and Union Bank of California, dated July 3, 1996. /5/ 10.20 Patent Cross License Agreement between the Registrant and Sharp Corporation dated December 24, 1996. /2, 6/ 10.21 Amendment to Lease Agreement between the Registrant and G.F. Properties, dated April 3, 1997. 10.22 First and second amendments to business loan agreement between the Registrant and Union Bank of California, dated June 30, 1997. 11.1 Computation of Per Share of Earnings (three and six months ended June 30, 1997 and 1996). 21.1 Subsidiaries of the Registrant. /6/ 27.1 Financial Data Schedule for the three months ended June 30, 1997. (In EDGAR format only) - ---------- 1. Confidential treatment granted as to certain portions of these exhibits. 2. Confidential treatment requested as to certain portions of these exhibits. 3. Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-96298). 4. Previously filed as an Exhibit to the Registrant's 1995 Annual Report on Form 10-K. 5. Previously filed as an Exhibit to the Registrant's Form 10-Q for the quarter ended June 30, 1996. 6. Previously filed as an Exhibit to the Registrant's 1996 Annual Report on Form 10-K. 7. Previously filed as an Exhibit to the Registrant's Current Report on Form 8-K/A dated April 18, 1997. B. Reports on Form 8-K During the quarter ended June 30, 1997, the Company filed a current report on Form 8-K and an amended current report on Form 8-K/A dated April 18, 1997, reporting the adoption of a shareholder rights plan. Page 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. SanDisk Corporation (Registrant) By: /s/ Cindy L. Burgdorf ------------------------------------ Cindy L. Burgdorf Chief Financial Officer, Senior Vice President, Finance and Administration and Secretary DATED: August 12, 1997 Page 23 EX-10.21 2 AMENDMENT TO LEASE AGREEMENT FIRST AMENDMENT TO INDUSTRIAL LEASE This FIRST AMENDMENT TO INDUSTRIAL LEASE ("Amendment"), is hereby made and entered into on and as of the third day of April, 1997, by and between G.F. PROPERTIES, INC., a California corporation, as "Landlord" and SANDISK CORPORATION, a Delaware corporation, as "Tenant", in respect of the premises commonly known and referred to as 140 Caspian Court, Sunnyvale, California, (the "Premises") WHEREAS, by that certain INDUSTRIAL LEASE, dated March 1, 1996 (the "Lease"), Landlord leased the entirety of the Premises to Tenant, and WHEREAS, Tenant has, under date of December 30, 1996, exercised the First Expansion Option (as defined in Section 40(a) of the Lease) with respect to the building commonly known and referred to as 111 West Java Drive, Sunnyvale, California ("111 Java"), and WHEREAS, Landlord has, with Tenant's approval, executed and delivered to the current tenant of 111 Java an amendment to the existing lease between Landlord and the current tenant of 111 Java which extends the term of the existing lease on 111 Java until the earlier of December 31, 1998, or twelve (12) months following the giving of notice of election to terminate by either Landlord or the existing tenant of Ill Java to the other party, one copy of which is attached hereto, marked EXHIBIT A, and incorporated by this reference, and WHEREAS, in order to accommodate the foregoing without extending the originally agreed upon term of Tenant's existing lease, Landlord and Tenant are desirous of amending the INDUSTRIAL LEASE as set forth herein, NOW, THEREFORE, in consideration of the above recitals and for other fair and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant hereby covenant and agree as follows: 1. Exercise of First Expansion Option. Landlord and Tenant hereby acknowledge and agree that, by letter dated December 30, 1996, Tenant has exercised the First Expansion Option. 1 2. Notice of Termination of Tenancy on 111 Java. (a) Landlord agrees that, promptly upon its receipt from the current tenant of 111 Java of any notice of termination of the tenancy of such tenant, Landlord shall notify Tenant of such receipt and of the consequent date of termination of the tenancy. (b) Landlord agrees that, promptly upon its receipt of written notice from Tenant at any time prior to December 31, 1997, that Tenant is desirous of taking occupancy and possession of 111 Java twelve (12) months thereafter, Landlord will promptly give the current tenant of 111 Java twelve (12) months written notice of Landlord's election to terminate the lease on 111 Java in accordance with the applicable provisions of the lease between Landlord and the current tenant of 111 Java. 3. Lease Terms - 111 Java. Within thirty (30) days of the receipt by Landlord of any notice described in either Section 2(a) or Section 2(b) of this Amendment, Landlord shall prepare and Landlord and Tenant shall execute a lease on 111 Java ("111 Java Lease"), on the terms and conditions set forth in this Lease, as amended, with the following exceptions: (a) The initial term of the 111 Java Lease shall commence promptly upon the vacation of 111 Java by the current tenant of 111 Java. (b) The initial term of the 111 Java Lease shall terminate on July 31, 2001, unless earlier terminated in accordance with the terms and conditions of the Lease. (c) The rent payable by Tenant under the 111 Java Lease shall be calculated by applying the "Rent per RSF per month" which applies under Section 5 of the Lease to the then current period of the Term to the rentable square feet of 111 Java as determined by Landlord and submitted to Tenant upon the vacation of 111 Java by the current tenant. The rent payable by Tenant under the 111 Java Lease shall be subject to the same increases, during the same periods, as apply to the calculation of Monthly Rent under Section 5 of this Lease. (d) During the course of the existing lease on 111 Java, Landlord constructed for the benefit of the existing tenant of 111 Java three (3) additions to the original space within 111 Java. The additions include one subterranean storage area which is located directly under 111 Java, one fully enclosed storage area which extends beyond the original footprint of 111 Java, and one partially enclosed storage area which extends beyond the original footprint of 111 Java. 2 (i) Landlord and Tenant agree that the subterranean storage area under 111 Java and the partially enclosed storage area which extends beyond the original footprint of 111 Java shall each be included in the 111 Java Premises, but the square footage of neither the subterranean storage area under 111 Java nor the partially enclosed storage area which extends beyond the original footprint of 111 Java shall be included in the calculation of rent under Section 3(c) of this Amendment or under Section 5 of the Lease. (ii) Landlord and Tenant agree that the fully enclosed storage area which extends beyond the original footprint of 111 Java shall be included in the 111 Java Premises, it shall be identified as "Warehouse Space", and the rent (and increases in rent under Section 5 of the Lease) payable by Tenant for the square footage of the Warehouse Space shall be calculated at the rate of one-half of the "Rent per RSF per month" which applies under Section 5 of the Lease to the then current period of the Term to the rentable square feet of 111 Java. (e) Landlord agrees that Tenant shall be entitled to a rent credit which shall be credited against the rent due from Tenant to Landlord during the first months of the 111 Java Lease. The rent credit shall be calculated by multiplying the number of full calendar months during which the current tenant of 111 Java remains in possession of 111 Java after December 31, 1997, by the sum of $5,283.60. Tenant's entitlement to such rent credit shall continue, but shall not increase, during any period in which the current tenant of 111 Java continues its occupancy and control of 111 Java past the expiration or earlier termination of its lease, provided, however, that Tenant shall only be entitled to such rent credit during any such holdover period if and to the extent that the current tenant of 111 Java actually pays its rent to Landlord during such holdover period. Any such rent credit which is for less than one full month shall be prorated based on the actual number of days of the month involved. 4. Landlord shall expend its best efforts to cause the current tenant of 111 Java to vacate 111 Java upon the expiration or earlier termination of its lease on 111 Java 5. As required by the Lease, Landlord shall, prior to the commencement of Tenant's right to occupancy and possession of 111 Java and at Landlord's sole cost and expense, provide Tenant with a current update of the Phase I ESA, as the Phase I ESA relates to 111 Java, which shall be the Entrance Assessment for 111 Java. 6. This Amendment shall not become effective unless and until the current tenant of ill Java executes and delivers to Landlord one copy of EXRIBIT A to this Amendment within thirty (30) days of the date hereof. 3 7. Capitalized terms which are used but not defined in this Amendment shall have the meaning ascribed to them in the Lease. 8. As herein amended, the Lease is ratified and continues in full force and effect. IN WITNESS WHEREOF, the parties have executed this FIRST AMENDMENT TO INDUSTRIAL LEASE as of the date first above written. LANDLORD: By /s/ Stephen R. Barbieri - ------------------------------ Stephen R. Barbieri, Secretary G. F. PROPERTIES, INC., a California corporation, TENANT: By /s/ Cindy Burgdorf - --------------------------------------- Cindy Burgdorf, Chief Financial Officer SANDISK CORPORATION, a Delaware corporation, 4 EXHIBIT A THIRD AMENDMENT TO COMMERCIAL LEASE This THIRD AMENDMENT TO COMMERCIAL LEASE ("Amendment") is hereby made and entered into on and as of the ___ day of March, 1997, by and between G. F. PROPERTIES, INC., a California corporation, as "Landlord", and LOCKHEED MARTIN CORPORATION, a Maryland corporation, as "Tenant", in respect of the premises commonly known and referred to as 111 West Java Drive, Sunnyvale, California, (the "Premises"). WHEREAS, by that certain COMMERCIAL LEASE, dated November 1986, Landlord leased the entirety of the Premises to Tenant for an initial term of seven (7) years, and WHEREAS, by that certain FIRST AMENDMENT TO COMMERCIAL LEASE, dated November 30, 1993, Landlord and Tenant amended the COMMERCIAL LEASE, and WHEREAS, by that certain SECOND AMENDMENT TO COMMERCIAL LEASE, dated June 1, 1996, Landlord and Tenant amended the COMMERCIAL LEASE, and WHEREAS, Landlord and Tenant have agreed to extend the term of the Lease, as amended, for a further term as outlined in this Amendment, NOW, THEREFORE, Landlord and Tenant hereby covenant and agree as follows: 1. Subsection (A) of Section 3 of the Lease, as amended by Section 1 of the FIRST AMENDMENT TO COMMERCIAL LEASE and as further amended by Section 1 of the SECOND AMENDMENT TO COMMERCIAL LEASE, is hereby further amended to read as follows: "(A) The extended term of this Lease shall expire on December 31, 1998, unless earlier terminated in accordance with the provisions of this Lease, as amended by this THIRD AMENDMENT TO COMMERCIAL LEASE." 5 2. The following is added to Section 3 of the Lease: '"Notwithstanding any provision of this Lease to the contrary, either Landlord or Tenant shall have the right, at any time during the remaining Term of this Lease, to terminate this Lease upon giving the other party at least twelve (12) month's advance written notice of exercise of this right to terminate and, twelve (12) months after the receipt of such notice by the non-exercising party, the term of this Lease shall terminate, provided, however, that neither party shall have the right, by giving such notice) to extend the Term of this Lease beyond December31, 1998." 3) The following is added to Section 4 of the Lease: "The Base Monthly Rent during that portion of the Term of this Lease which commences on January 1, 1998 shall be $62,900.00 per month." 4) The provisions of Section 4 of the SECOND AMENDMENT TO COMMERCIAL LEASE shall continue to apply through the term of the Lease as extended by this THIRD AMENDMENT TO COMMERCIAL LEASE. 5) The provisions of Section 7 of the Lease are hereby modified to substitute "one hundred fifty percent (150%)" for "one hundred ten percent (110%)". 6) As herein amended, the Lease is ratified and continues in full force and effect. IN WITNESS WHEREOF, the parties have executed this THIRD AMENDMENT TO COMMERCIAL LEASE as of the date first above written. LANDLORD: TENANT: G. F. PROPERTIES, INC., LOCKHEED MARTIN CORPORATION, a California corporation, a Maryland corporation, By /s/ Stephen R. Barbieri By - -------------------------- --------------------------- Stephen R. Barbieri, Secretary Name: Title: 6 EX-10.22 3 AMENDMENT TO BUSINESS LOAN AGREEMENT AMENDMENT TO TRADE FINANCE AGREEMENT In reference to the Trade Finance Agreement ("Agreement") dated July 1, 1996 between Union Bank of California, N.A. ("Bank") and SanDisk Corporation ("Borrower"), the Bank and Borrower desire to amend the Agreement. This amendment shall be called the First Amendment to the Agreement. Initially capitalized terms used herein which are not otherwise defined shall have the meaning assigned thereto in the Agreement. Amendments to the Agreement: SECTION 1. THE LOAN Subsection 1.1 The Trade Finance Credit Facility, line 3, of the Agreement is hereby amended by substituting "July 15, 1998" for "July 1, 1997" Subsection 1.1.1 Clean Advance Line, line 5, of the Agreement is hereby amended by substituting "July 15, 1998" for "July 1, 1997" Subsection 1.1.2 The Standby Letter of Credit, line 7, of the Agreement is hereby amended by substituting "September 29, 1998" for "September 29, 1997". SECTION 3. REPRESENTATIONS AND WARRANTIES Subsection 3.4 Financial Statements, lines 2,3,4,5, and 6, of the Agreement are hereby amended by substituting "December 31, 1996" for each "December 31, 1995" and "March 31, 1997" for each "March 31, 1996". SECTION 4. AFFIRMATIVE COVENANTS Subsection 4.7 Tangible Net Worth, line 2, of the Agreement is hereby amended by substituting "Eighty Million Dollars ($80,000,000)" for "Seventy Million Dollars ($70,000,000)". Subsection 4.9 Profitability, of the Agreement is hereby deleted in its entirety and the following substituted therefor: "Profitability. Borrower will not have two consecutive quarterly after tax losses as reported at the end of such fiscal quarter." This First Amendment shall become effective when the Bank shall have received the acknowledgment copy of this First Amendment executed by the Borrower. Except as specifically amended hereby, the Agreement shall remain in full force and effect and is hereby ratified and confirmed. This first Amendment shall not be a waiver of any existing default or breach of a condition to covenant unless specified herein. Very truly yours, Union Bank of California, N.A. By: /s/ John Noble ---------------------------- John Noble Vice President By: /s/ James Goudy ---------------------------- James Goudy Vice President Agreed and Accepted this 30th day of June 1997. SanDisk Corporation By: /s/ Eli Harari -------------------------------- Name: Eli Harari Title: President & CEO By: /s/ Cindy Burgdorf ------------------------------- Name: Cindy Burgdorf Title: CFO, Sr. VP Finance AMENDMENT TO TRADE FINANCE AGREEMENT In reference to the Trade Finance Agreement ("Agreement") dated July 1, 1996, as amended from time to time, between Union Bank of California, N.A. ("Bank") and SanDisk Corporation ("Borrower"), the Bank and Borrower desire to amend the Agreement. This amendment shall be called the Second Amendment to the Agreement. Initially capitalized terms used herein which are not otherwise defined shall have the meaning assigned thereto in the Agreement. Amendments to the Agreement : SECTION 4. AFFIRMATIVE COVENANTS Subsection 4.7 Tangible Net Worth, is hereby deleted in its entirety and the following substituted therefor: "Tangible Net Worth. Borrower will maintain a Minimum Tangible Net Worth of not less than Eighty Million Dollars ($80,000,000.00), which amount shall be increased by Fifty percent (50%) of its net profit for each fiscal quarter. `Tangible Net Worth' shall mean net worth increased by indebtedness of Borrower subordinated to Bank and decreased by patents, licenses, trademarks, trade names, goodwill, and other similar intangible assets, organizational expenses, security deposits, prepaid costs and expenses and monies due from affiliates (including officers, shareholders and directors). `Tangible Net Worth' shall include the United Silicon Inc., a Taiwanese corporation, investment." Subsection 4.7 Debt to Tangible Net Worth, of the Agreement is hereby deleted in its entirety and the following substituted therefor: "Debt to Tangible Net Worth. Borrower will, on a quarterly basis, maintain a ratio of total liabilities to Tangible Net Worth of not greater than 0.5:1.0. `Tangible Net Worth' shall mean net worth increased by indebtedness of Borrower subordinated to Bank and decreased by patents, licenses, trademarks, trade names, goodwill, and other similar intangible assets, organizational expenses, security deposits, prepaid costs and expenses and monies due from affiliates (including officers, shareholders, and directors). `Tangible Net Worth' shall include the United Silicon Inc., a Taiwanese corporation, investment." SECTION 5. NEGATIVE COVENANTS Subsection 5.5 Investments, is hereby deleted in its entirety and the following substituted therefor: "Investments. Borrower will not purchase the debt or equity of another person or entity except for those eligible instruments outlined in Borrower's investment policy provided to Bank, the investment up to $50,000,000 in United Silicon Inc. ("USI") a Taiwanese corporation, savings accounts and certificates of Bank, direct U.S. Government obligations and commercial paper issued by corporations with the top ratings of Moody's or Standard & Poor's, provided all such permitted investments, excluding USI, shall mature within 24 months of purchase." This Second Amendment shall become effective when the Bank shall have received the acknowledgment copy of this Second Amendment executed by the Borrower. Except as specifically amended hereby, the Agreement shall remain in full force and effect and is hereby ratified and confirmed. This Second Amendment shall not be a waiver of any existing default or breach of a condition to covenant unless specified herein. Very truly yours, Union Bank of California, N.A. By: /s/ John Noble ------------------------------------------ John Noble Vice President By: /s/ James Goudy ------------------------------------------ James Goudy Vice President Agreed and Accepted this 30th day of June, 1997. SanDisk Corporation By: /s/ Eli Harari -------------------------------------------- Name: Eli Harari Title: President & CEO By: /s/ Cindy Burgdorf -------------------------------------------- Name: Cindy Burgdorf Title: CFO, Sr. VP Finance EX-11.1 4 COMPUTATION OF EARNINGS PER SHARE Exhibit 11.1 SanDisk Corporation Statement Regarding Computation of Per Share Earnings (In thousands, except per share data; unaudited)
Three months ended, Six months ended, June 30, June 30, 1997 1996 1997 1996 ------------ ----------- ----------- ----------- Net income $ 3,690 $ 3,405 $ 5,815 $ 6,459 Computations of weighted average common and common equivalent shares outstanding: Weighted average common shares outstanding 22,475 22,106 22,436 22,065 Common stock options 1,939 2,035 1,824 2,107 ------------ ----------- ----------- ----------- Shares used in computing net income per share 24,414 24,141 24,260 24,172 ============ =========== =========== =========== Net income per share applicable to common stockholders $ 0.15 $ 0.14 $ 0.24 $ 0.27 ============ =========== =========== ===========
EX-27 5 FINANCIAL DATA SCHEDULE
5 SanDisk Financial Data Schedule, June 30, 1997 0001000180 SanDisk Corporation 1,000 3-Mos Dec-31-1997 Jun-30-1997 21,118 50,268 16,251 0 11,665 100,563 11,410 0 112,463 18,202 0 0 0 98,879 (4,618) 112,463 23,922 27,347 16,375 0 7,581 0 0 4,345 655 3,690 0 0 0 3,690 0.15 0.15
-----END PRIVACY-ENHANCED MESSAGE-----