-----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, IfZrZ3/LKi3AgiMoLHg0JTst683mnbGheVeGb3ksTncgOHFz5MVU1SCxioZeZ0Ij OK5/ELfiWIkZhlZ7hWdELA== 0001012870-02-003452.txt : 20020814 0001012870-02-003452.hdr.sgml : 20020814 20020814080150 ACCESSION NUMBER: 0001012870-02-003452 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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: 02731576 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 d10q.htm FORM 10-Q FOR PERIOD ENDED 06/30/2002 Prepared by R.R. Donnelley Financial -- Form 10-Q for Period Ended 06/30/2002
Table of Contents
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(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, 2002
 
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
(State or other jurisdiction
of incorporation or organization)
  
77-0191793
(I.R.S. Employer
Identification No.)
 
140 Caspian Court, Sunnyvale, California
(Address of principal executive offices)
  
94089
(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 capital stock as of June 30, 2002
 
Common Stock, $0.001 par value
  
68,737,378
Class
  
Number of shares
 

Table of Contents
 
SANDISK CORPORATION
 
Index
 
         
Page No.
    
PART I.    FINANCIAL INFORMATION
     
 
Item 1.
   
 
Condensed Consolidated Financial Statements:
     
       
3
       
4
       
5
       
6
Item 2.
      
14
Item 3.
      
42
    
 
PART II.    OTHER INFORMATION
     
 
Item 1.
   
 
   
43
Item 2.
      
44
Item 3.
      
44
Item 4.
      
44
Item 5.
      
45
Item 6.
      
45
       
48

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Table of Contents
PART I.    FINANCIAL INFORMATION
 
 
SANDISK CORPORATION
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
    
June 30,
2002
   
December 31, 2001 *
    
(unaudited)
     
ASSETS
              
Current Assets:
              
Cash and cash equivalents
   
$
255,814
   
$
189,499
Short-term investments
   
 
134,659
   
 
105,501
Investment in foundries
   
 
164,420
   
 
105,364
Accounts receivable, net
   
 
70,345
   
 
45,223
Inventories
   
 
61,283
   
 
55,968
Tax refund receivable
   
 
28,955
   
 
28,473
Prepaid expenses and other current assets
   
 
7,015
   
 
12,129
    
  
Total current assets
   
 
722,491
   
 
542,157
Restricted cash and cash equivalents
   
 
—  
   
 
64,734
Property and equipment, net
   
 
33,629
   
 
33,730
Investment in foundries
   
 
32,717
   
 
41,380
Restricted investment in UMC
   
 
—  
   
 
64,734
Investment in FlashVision
   
 
144,876
   
 
153,168
Deferred tax asset
   
 
18,842
   
 
18,842
Deposits and other non-current assets
   
 
15,612
   
 
13,603
    
  
Total Assets
   
$
968,167
   
$
932,348
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY:
       
Current Liabilities:
              
Accounts payable
   
$
26,125
   
$
19,938
Accounts payable to related parties
   
 
23,909
   
 
24,008
Accrued payroll and related expenses
   
 
5,768
   
 
5,279
Income taxes payable
   
 
7,149
   
 
7,361
Deferred tax liability
   
 
18,842
   
 
18,842
Research & development liability, related party
   
 
22,143
   
 
15,256
Other accrued liabilities
   
 
26,073
   
 
20,571
Deferred income on shipments to distributors and retailers and deferred revenue
   
 
28,886
   
 
15,806
    
  
Total current liabilities
   
 
158,895
   
 
127,061
Convertible subordinated notes payable
   
 
150,000
   
 
125,000
Deferred taxes and other liabilities
   
 
8,171
   
 
4,908
    
  
Total Liabilities
   
 
317,066
   
 
256,969
               
Commitments and contingencies
              
               
Stockholders’ Equity:
              
Common stock
   
 
582,708
   
 
580,431
Retained earnings
   
 
53,831
   
 
48,525
Accumulated other comprehensive income
   
 
14,562
   
 
46,423
    
  
Total stockholders’ equity
   
 
651,101
   
 
675,379
Total Liabilities and Stockholders’ Equity
   
$
968,167
   
$
932,348
    
  
*
 
Information derived from the audited Consolidated Financial Statements.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Table of Contents
 
SANDISK CORPORATION
 
(In thousands, except per share data)
(Unaudited)
 
    
Three Months Ended
June 30,
     
Six Months Ended
June 30,
  
    
2002
     
2001
     
2002
     
2001
  
Revenues:
                                    
Product
   
$
115,677
 
   
$
88,115
 
   
$
202,136
 
   
$
176,198
 
License and royalty
   
 
12,021
 
   
 
19,033
 
   
 
18,181
 
   
 
32,277
 
    
  
  
  
Total revenue
   
 
127,698
 
   
 
107,148
 
   
 
220,317
 
   
 
208,475
 
Cost of product revenues
   
 
84,384
 
   
 
106,752
 
   
 
165,783
 
   
 
225,532
 
    
  
  
  
Gross profit (loss)
   
 
43,314
 
   
 
396
 
   
 
54,534
 
   
 
(17,057
)
Operating expenses:
                                    
Research and development
   
 
17,273
 
   
 
14,218
 
   
 
31,823
 
   
 
30,571
 
Sales and marketing
   
 
8,817
 
   
 
10,533
 
   
 
17,865
 
   
 
20,751
 
General and administrative
   
 
6,591
 
   
 
4,295
 
   
 
11,257
 
   
 
8,574
 
    
  
  
  
Total operating expenses
   
 
32,681
 
   
 
29,046
 
   
 
60,945
 
   
 
59,896
 
Operating income (loss)
   
 
10,633
 
   
 
(28,650
)
   
 
(6,411
)
   
 
(76,953
)
Equity in income (loss) of joint ventures
   
 
1,740
 
   
 
(127
)
   
 
1,247
 
   
 
507
 
Interest income
   
 
2,183
 
   
 
3,079
 
   
 
4,497
 
   
 
7,154
 
Interest expense
   
 
(1,707
)
   
 
—  
 
   
 
(3,363
)
   
 
—  
 
Loss on investment in foundries
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(179,981
)
Other expense, net
   
 
(1,929
)
   
 
(219
)
   
 
(1,983
)
   
 
(2,002
)
    
  
  
  
Income (loss) before taxes
   
 
10,920
 
   
 
(25,917
)
   
 
(6,013
)
   
 
(251,275
)
Provision for (benefit from) income taxes
   
 
1,880
 
   
 
(15,923
)
   
 
(11,319
)
   
 
(98,179
)
    
  
  
  
Net income (loss)
   
$
9,040
 
   
$
(9,994
)
   
$
5,306
 
   
$
(153,096
)
    
  
  
  
Net income (loss) per share
                                    
Basic
   
$
0.13
 
   
$
(0.15
)
   
$
0.08
 
   
$
(2.25
)
Diluted
   
$
0.13
 
   
$
(0.15
)
   
$
0.07
 
   
$
(2.25
)
Shares used in computing net income (loss) per share
                           
Basic
   
 
68,711
 
   
 
68,088
 
   
 
68,654
 
   
 
67,950
 
Diluted
   
 
70,977
 
   
 
68,088
 
   
 
70,991
 
   
 
67,950
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents
SANDISK CORPORATION
 
(In thousands, Unaudited)
 
    
Six months ended
June 30,
  
    
2002
     
2001
  
Cash flows from operating activities:
                  
Net income (loss)
   
$
5,306
 
   
$
(153,096
)
Adjustments to reconcile net loss to net cash used in operating activities:
                  
Depreciation and amortization
   
 
9,701
 
   
 
9,297
 
Deferred taxes
   
 
(11,151
)
   
 
(105,107
)
Loss (gain) on investment in foundry
   
 
—  
 
   
 
179,981
 
Equity in income of joint ventures
   
 
(1,247
)
   
 
(761
)
(Gain) loss on disposal of fixed assets
   
 
(1,286
)
   
 
8,907
 
Changes in operating assets and liabilities:
                  
Accounts receivable, net
   
 
(25,122
)
   
 
43,936
 
Inventory
   
 
(5,315
)
   
 
40,713
 
Prepaids expenses and other assets
   
 
7,281
 
   
 
6,459
 
Investment in FlashVision
   
 
6,190
 
   
 
—  
 
Accounts payable
   
 
6,187
 
   
 
(13,261
)
Accrued payroll and related expenses
   
 
489
 
   
 
(6,802
)
Income taxes payable
   
 
(594
)
   
 
(14,406
)
Other current liabilities
   
 
(2,815
)
   
 
788
 
Other current liabilities, related parties
   
 
89
 
   
 
6,916
 
Research and development liabilities, related parties
   
 
6,887
 
   
 
—  
 
Deferred income on shipments to distributors and retailers and deferred revenue
   
 
13,080
 
   
 
(24,033
)
Other non-current liabilities
   
 
11,409
 
         
Other non-current liabilities, related parties
   
 
—  
 
   
 
5,330
 
    
  
Total adjustments
   
 
13,783
 
   
 
137,957
 
Net cash provided by (used in) operating activities
   
 
19,089
 
   
 
(15,139
)
Cash flows from investing activities:
                  
Purchases of short term investments
   
 
(78,618
)
   
 
(141,688
)
Proceeds from sale of short term investments
   
 
49,591
 
   
 
180,821
 
Investment in foundries and joint ventures
   
 
(6,802
)
   
 
(35,331
)
Restricted cash
   
 
64,734
 
   
 
—  
 
Acquisition of capital equipment
   
 
(8,331
)
   
 
(15,539
)
    
  
Net cash provided by (used in) investing activities
   
 
20,574
 
   
 
(11,737
)
Cash flows from financing activities:
                  
Proceeds from issuance convertible subordinated notes
   
 
24,375
 
   
 
—  
 
Sale of common stock
   
 
2,277
 
   
 
5,508
 
    
  
Net cash provided by financing activities
   
 
26,652
 
   
 
5,508
 
Net increase (decrease) in cash and cash equivalents
   
 
66,315
 
   
 
(21,368
)
Cash and cash equivalents at beginning of period
   
 
189,499
 
   
 
106,277
 
    
  
Cash and cash equivalents at end of period
   
$
255,814
 
   
$
84,909
 
    
  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Table of Contents
 
SANDISK CORPORATION
 
(Unaudited)
 
1.  These interim condensed consolidated financial statements are unaudited but reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the financial position of SanDisk Corporation and its subsidiaries (the “Company”) as of June 30, 2002, and the results of operations for the three and six month periods ended June 30, 2002 and 2001 and cash flows for the six month periods ended June 30, 2002 and 2001. Because all the disclosures required by accounting principles generally accepted in the United States 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, 2001. The condensed consolidated balance sheet data as of December 31, 2001 was derived from the audited financial statements.
 
The Company’s results of operations for the three and six month periods ended June 30, 2002 and 2001 and its cash flows for the six month periods ended June 30, 2002 and 2001 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 2002 and 2001 ended on June 30, 2002 and July 1, 2001, respectively. Fiscal year 2002 is 52 weeks long and ends on December 29, 2002. Fiscal year 2000 was 52 weeks long and ended on December 30, 2001. For ease of presentation, the accompanying financial statements have been shown as ending on the last day of the calendar month.
 
3.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
 
4.  The components of inventories consist of the following:
 
    
June 30,
2002
   
December 31,
2001
    
(In thousands)
Raw Materials
   
$
6,328
   
$
6,325
Work-in-process
   
 
28,052
   
 
18,850
Finished Goods
   
 
26,903
   
 
30,793
    
  
    
$
61,283
   
$
55,968
    
  
 
In the second quarter of 2002, the Company sold approximately $5.3 million worth of NOR inventory that had been fully written off as excess or obsolete in previous quarters.
 
5.  In the third quarter of 2001, the Company adopted a plan to transfer all of its card assembly and test manufacturing operations from its Sunnyvale location to offshore subcontractors. As a result, the Company recorded a restructuring charge of $8.5 million. The charge included $1.1 million of severance and employee related costs for a reduction in workforce, equipment write-off charges of $6.4 million and lease commitments of $1.0 million on a vacated warehouse facility.
 
Workforce Reduction:    In the third quarter of 2001, the Company adopted a plan to reduce its workforce by a total of 193 employees through involuntary employee separations from October 2001 through April 2002. As of June 30, 2002, the Company had made severance and benefit payments related to the planned reduction in force totaling $1.3 million.
 
Abandonment of Excess Equipment:    As a result of the transfer all card assembly and test manufacturing operations to offshore subcontractors, the Company abandoned excess equipment and recorded a charge of $6.4

6

Table of Contents
million in the third quarter of fiscal 2001.
 
Abandonment of Excess Leased Facilities:    The Company is attempting to sublease one warehouse building in San Jose, California. Given the current real estate market condition in the San Jose area, the Company does not expect to be able to sublease this building before the end of 2003 and as a result, the Company recorded a charge of $1.0 million in the third quarter of 2001. In the second quarter and first six months of 2002, the Company made cash payments for rent on this excess facility of $138,000 and $193,000, respectively.
 
Remaining Payout:    Amounts related to the abandonment of excess leased facilities will be paid as the lease payments are due in 2002 and 2003.
 
Savings:    The Company believes that the savings resulting from the restructuring activity will contribute to a reduction in manufacturing and operating expense levels of approximately $11.8 million in fiscal 2002.
 
The following table reflects the total restructuring charge:
 
    
Equipment
     
Workforce
Reduction
       
Lease
Commitments
     
Total
  
    
(In thousands)
  
Reserve balance, December 31, 2001
   
$
356
 
   
$
289
 
     
$
1,033
 
   
$
1,678
 
Write offs and write downs
   
 
(8
)
   
 
—  
 
     
 
—  
 
   
 
(8
)
Transfers
   
 
—  
 
   
 
176
 
     
 
(176
)
   
 
—  
 
Cash charges
   
 
—  
 
   
 
(465
)
     
 
(193
)
   
 
(658
)
    
  
    
  
Reserve balance, June 30, 2002
   
$
348
 
   
$
—  
 
     
$
664
 
   
$
1,012
 
    
  
    
  
 
6.  The following table sets forth the computation of basic and diluted earnings per share:
 
    
Three Months Ended
June 30,
     
Six Months Ended
June 30,
  
    
2002
   
2001
     
2002
   
2001
  
    
(In thousands, except per share amounts)
  
Numerator:
                                
Numerator for basic and diluted net income (loss) per share—net income (loss)
   
$
9,040
   
$
(9,994
)
   
$
5,306
   
$
(153,096
)
    
  
  
  
Denominator for basic net income (loss) per share:
                                
Weighted average common shares
   
 
68,711
   
 
68,088
 
   
 
68,654
   
 
67,950
 
    
  
  
  
Basic net income (loss) per share
   
$
0.13
   
$
(0.15
)
   
$
0.08
   
$
(2.25
)
    
  
  
  
Denominator for diluted net income (loss) per share:
                                
Weighted average common shares
   
 
68,711
   
 
68,088
 
   
 
68,654
   
 
67,950
 
Employee common stock options
   
 
2,266
   
 
—  
 
   
 
2,337
   
 
—  
 
    
  
  
  
Shares used in computing diluted net income (loss) per share
   
 
70,977
   
 
68,088
 
   
 
70,991
   
 
67,950
 
    
  
  
  
Diluted net income (loss) per share
   
$
0.13
   
$
(0.15
)
   
$
0.07
   
$
(2.25
)
    
  
  
  
 
For the three and six month periods ended June 30, 2002, options to purchase 4,474,640 and 4,653,736 shares of common stock, respectively, have been excluded from the earnings per share calculation as their effect is antidilutive. For the three and six months ended June 30, 2001, the effects of the assumed conversion of common stock equivalents was excluded from the diluted earnings per share calculation, as their effect would be antidilutive due to the Company’s loss. For the three and six months ended June 30, 2002 and 2001, the effects of the assumed conversion of convertible securities was excluded from the diluted earnings per share calculation as their effect would be antidilutive.

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7.  From time to time, it has been and may continue to be necessary to initiate or defend litigation against third parties to preserve and defend our intellectual property rights. These parties could in turn bring suit against us.
 
On or about August 3, 2001, the Lemelson Medical, Education & Research Foundation, or Lemelson Foundation, filed a complaint for patent infringement against the Company and four other defendants. The suit, captioned Lemelson Medical, Education, & Research Foundation, Limited Partnership vs. Broadcom Corporation, et al., Civil Case No. CIV01 1440PHX HRH, was filed in the United States District Court, District of Arizona. On November 13, 2001, the Lemelson Foundation filed an Amended Complaint, which made the same substantive allegations against us but named more than twenty-five additional defendants. The Amended Complaint alleges that the Company, and the other defendants, have infringed certain patents held by the Lemelson Foundation pertaining to bar code scanning technology. By its complaint, the Lemelson Foundation requests that the Company be enjoined from our allegedly infringing activities and seeks unspecified damages. On February 4, 2002, the Company filed an answer to the amended complaint, wherein it alleged that it does not infringe the asserted patents, and further contends that the patents are not valid or enforceable.
 
On October 15, 2001, the Company filed a complaint for patent infringement in the United States District Court for the Northern District of California against Micron Technology, Inc., or Micron. In the suit, captioned SanDisk Corp. v. Micron Technology, Inc., Civil No. CV 01-3855 CW, the complaint seeks damages and an injunction against Micron for making, selling, importing or using flash memory cards that infringe the Company’s U.S. Patent No. 6,149,316. On February 15, 2002, Micron answered the complaint, denied liability, and counterclaimed seeking a declaration that the patent in suit is not infringed, is invalid, and is unenforceable. On May 31, 2002, based on allegations of infringement leveled by Micron against SanDisk, the Company filed a complaint for declaratory judgment, seeking a declaration that it has not infringed and is not infringing five patents (or, in the alternative, that the patents are invalid). The patents in question are U.S. Patent No. 4,468,308; U.S. Patent No. 5,286,344; U.S. Patent No. 5,320,981; U.S. Patent No. 6,015,760; and U.S. Patent No. 6,287,978 B1. The suit is captioned SanDisk Corp. v. Micron Technology, Inc., Civil No. CV 02-2627 VRW. On June 4, 2002, Micron answered and counterclaimed alleging that the Company does infringe the five listed patents.
 
On October 31, 2001, the Company filed a complaint for patent infringement in the United States District Court for the Northern District of California against Memorex Products, Inc., Pretec Electronics Corporation, Ritek Corporation and Power Quotient International Co., Ltd. In the suit, captioned SanDisk Corp. v. Memorex Products, Inc., et. al., Civil No. CV 01-4063 VRW, the Company seeks damages and injunctions against these companies from making, selling, importing or using flash memory cards that infringe the Company’s U.S. patent No. 5,602,987 or the ‘987 Patent. Defendants Memorex, Pretec and Ritek have filed answers denying the allegations. The Company filed a motion for a preliminary injunction in the suit to enjoin Memorex, Pretec and Ritek from making, selling, importing or using flash memory cards that infringe its ‘987 Patent prior to the trial on the merits. On May 17, 2002, the Court denied the Company’s motion. Discovery has commenced. The Court has set a trial date for the later half of 2003.
 
On November 30, 2001, the Company filed a complaint for patent infringement in the United States District Court for the Northern District of California against Power Quotient International—USA Inc, or PQI-USA. In the suit, captioned SanDisk Corp. v. Power Quotient International—USA Inc., Civil No. C 01-21111, the Company seeks damages and an injunction against PQI-USA from making, selling, importing or using flash memory cards that infringe its U.S. patent No. 5,602,987. The PQI-USA complaint and litigation are related to the October 31, 2001 litigation referred to above. The products at issue in the PQI-USA case are identical to those charged with infringement in the October 31, 2001 litigation. On December 21, 2001, PQI-USA filed an answer to the complaint denying the allegations, which included a counter claim for a declaratory judgment of non-infringement and invalidity of the Company’s ‘987 Patent. The Company has motioned for a preliminary injunction in the suit to enjoin PQI-USA from making, selling, importing or using flash memory cards that infringe its ‘987 Patent prior to the trial on the merits. On April 8, 2002, the Court heard argument on the preliminary injunction motion and a decision on the motion is pending. Discovery has commenced. The Court has set a trial date for the later half of 2003.
 
On or about March 5, 2002, Samsung Electronics Co., Ltd., or Samsung, filed a patent infringement lawsuit against the Company in the United States District Court for the Eastern District of Texas, Civil Action No.

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9:02CV58. The lawsuit alleges that the Company infringes four Samsung United States patents, Nos. 5,473,563; 5,514,889; 5,546,341 and 5,642,309, and seeks a preliminary and permanent injunction against unnamed products of the Company, as well as damages, attorneys’ fees and cost of the lawsuit. On March 28, 2002, the Company filed an answer and counterclaims denying infringement and asserting the Samsung patents are invalid and/or unenforceable. The counterclaims asserted that Samsung breached a 1997 agreement between SanDisk and Samsung. On April 3, 2002, Samsung filed its first amended complaint. The amended complaint restricted Samsung’s original infringement allegations with respect to the four patents listed above to SanDisk products that include NAND flash memory. Substantially all of SanDisk products include NAND flash memory devices. On April 26, 2002, the Company filed an answer to Samsung’s first amended complaint and amended counterclaims. This answer and amended counterclaims again denied infringement and asserted that the Samsung patents are invalid and/or unenforceable. In SanDisk’s amended counterclaims, the Company seeks relief for both breach of the 1997 agreement and a declaration of its rights under the 1997 agreement. On July 19, 2002 the Court in the Eastern District of Texas granted our motion to move this lawsuit to the United States District Court for the Northern District of California. As a result of this order, the previous trial date set by the Texas court is no longer effective, and until the Northern District Court orders a new trial date, there is currently no trial date set for this lawsuit. On April 26, 2002, the Company filed a complaint against Samsung in the United States District Court for the Northern District of California, Civil No. C02-2069 MJJ, for declaratory judgment of non-infringement, invalidity, a declaration of rights under the 1997 agreement with Samsung and breach of contract. In July 2002, the court in this action granted Samsung’s motion to dismiss the action. We intend to appeal the court’s dismissal.
 
The Company’s current license agreement with Samsung expires in August 2002. In the event that the Company and Samsung do not enter into a new license agreement, the Company expects that it will incur substantially higher legal fees and may also experience a reduction in royalty income starting in the fourth quarter of 2002 and potential interruption of sales of certain of its products in certain geographic markets if Samsung prevails in its current litigation against the Company.
 
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.
 
8.  The U.S. dollar is the functional currency for most of the Company’s foreign operations. Gains and losses on the remeasurement into U.S. dollars of the amounts denominated in foreign currencies are included in the net income for those operations whose functional currency is the U.S. dollar. The Japanese Yen is the functional currency for the Company’s restructured FlashVision joint venture.
 
The Company is exposed to foreign currency exchange rate risk inherent in forecasted sales, cost of sales, and assets and liabilities denominated in currencies other than the U.S. dollar. The Company is also exposed to interest rate risk inherent in its debt and investment portfolios. The Company’s risk management strategy provides for the use of derivative financial instruments, including foreign exchange forward contracts, to hedge certain foreign currency exposures. The Company’s intent is to offset gains and losses that occur on the underlying exposures, with gains and losses on the derivative contracts hedging these exposures. The Company does not enter into any speculative positions with regard to derivative instruments. The Company enters into foreign exchange contracts to hedge against exposure to changes in foreign currency exchange rates, only when natural offsets cannot be achieved. Such contracts are designated at inception to the related foreign currency exposures being hedged, which include sales by subsidiaries, and assets and liabilities that are denominated in currencies other than the U.S. dollar. The Company’s foreign currency hedges generally mature within six months.
 
Under SFAS 133, all derivatives are recorded at fair market value on the balance sheet, classified in other assets. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is recorded in accumulated other comprehensive income as a separate component of stockholders’ equity and reclassified into earnings in the period during which the hedged transaction affects earnings. For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on

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the derivative instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in earnings in the current period. For derivative instruments not designated as hedging instruments, changes in their fair values are recognized in earnings in the current period.
 
For foreign currency forward contracts, hedge effectiveness is measured by comparing the cumulative change in the hedged contract with the cumulative change in the hedged item, both of which are based on forward rates. To the extent that the critical terms of the hedged item and the derivative are not identical, hedge ineffectiveness is reported in earnings immediately. The Company estimates the fair values on derivatives based on quoted market prices or pricing models using current market rates.
 
The Company reports hedge ineffectiveness from foreign currency derivatives for both options and forward contracts in other income or expense. Hedge ineffectiveness was not material in the first three months of fiscal 2002. The effective portion of all derivatives is reported in the same financial statement line item as the changes in the hedged item.
 
The Company had foreign exchange contract lines in the amount of $75.0 million at June 30, 2002. Under these lines, the Company may enter into forward exchange contracts that require the Company to sell or purchase foreign currencies. At June 30, 2002, the Company had two forward contracts outstanding to sell Yen in the amount of $16.1 million.
 
At June 30, 2002, the Company had $22.9 million in Japanese Yen-denominated accounts payable and open purchase orders designated as fair value hedges against Japanese Yen-denominated cash holdings and accounts receivable. The Company estimates the fair values of derivatives based on quoted market prices or pricing models using current market rates. There was no unrealized loss on derivative instruments as of June 30, 2002.
 
The impact of movements in currency exchange rates on foreign exchange contracts substantially mitigates the related impact on the underlying items hedged. In the second quarter of 2002, the Company had a net foreign currency translation loss of $1.7 million compared to a loss of $0.1 million in the second quarter of 2001. These amounts are included in other income (loss), net, in the statement of operations.
 
9.  In the first quarter of 2002, the Company adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142, supersedes APB Opinion No. 17, “Intangible Assets,” and states that goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed for impairment annually, or more frequently if impairment indicators arise. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives.
 
As a result of the adoption of SFAS 142, during the second quarter of 2002, the Company determined that the value of goodwill related to purchased technology was impaired and wrote-off the remaining $1.3 million balance.
 
In November 2001, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 01-09 (“EITF 01-09”), “Accounting for Consideration Given by a Vendor to a Customer/Reseller,” which addresses the accounting for consideration given by a vendor to a customer including both reseller of the vendor’s products and an entity that purchases the vendor’s products from a reseller. EITF 01-09 also codifies and reconciles related guidance issued by the EITF including EITF No. 00-25 “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products” (“EITF 00-25”). EITF 01-09 outlines the presumption that consideration given by a vendor to a customer, a reseller or a customer of a reseller is to be treated as a deduction from revenue. Treatment of such payments as an expense is only appropriate if two conditions are met: a) the vendor receives an identifiable benefit in return for the consideration paid that is sufficiently separable from the sale such that the vendor could have entered into an exchange transaction with a party other than the purchaser or its products in order to receive that benefit; and b) the vendor can reasonably estimate the fair value of that benefit. EITF 01-09 was adopted by the Company as of January 1, 2002 and did not have a material impact on the Company’s financial position or results of operations.

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In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than when the exit or disposal plan is approved. The provisions of this statement apply to exit or disposal activities that are initiated after December 31, 2002.
 
10.  Accumulated other comprehensive income (loss) presented in the accompanying balance sheet consists of the accumulated unrealized gains and losses on available-for-sale marketable securities, including the short-term portion of the Company’s investments in UMC and Tower, net of the related tax effects, for all periods presented.
 
    
Three months ended
June 30,
     
Six months ended
June 30,
  
    
2002
     
2001
     
2002
     
2001
  
    
(In thousands)
  
Net Income (loss)
   
$
9,040
 
   
$
(9,994
)
   
$
5,306
 
   
$
(153,096
)
Unrealized gain (loss) on foundries
   
 
(40,232
)
   
 
23
 
   
 
(31,982
)
   
 
(393
)
Unrealized gain (loss) on available-for-sale securities
   
 
721
 
   
 
(15,732
)
   
 
121
 
   
 
(15,732
)
    
  
  
  
Comprehensive income (loss)
   
$
(30,471
)
   
$
(25,703
)
   
$
(26,555
)
   
$
(168,435
)
    
  
  
  
 
Accumulated other comprehensive income was $14.6 million and $46.4 million at June 30, 2002 and December 31, 2001, respectively and included gains, net of tax, on the Company’s UMC investment of $14.1 million at June 30, 2002 and $45.7 million at December 31, 2001.
 
11.  In April 2002, the Company signed a series of agreements with Toshiba under which the Company and Toshiba restructured their FlashVision business by consolidating FlashVision’s advanced NAND wafer fabrication manufacturing operations at Toshiba’s memory fabrication facility at Yokkaichi, Japan. Through this consolidation, the Company expects Yokkaichi to provide more cost-competitive NAND flash wafers than is possible at Dominion. Under the terms of the agreements, Toshiba will transfer the FlashVision owned and leased NAND production tool-set from Dominion to Yokkaichi and will undertake full responsibility for the transition, which is expected to be completed in 2002. Once the consolidation is completed, Yokkaichi’s total NAND wafer output is expected to match the combined prior NAND capacity of Yokkaichi and Dominion. The FlashVision operation at Yokkaichi will continue essentially the same 50-50 joint venture and on essentially the same terms as it has had at Dominion in Virginia. In March 2002, FlashVision exercised its right of early termination under its lease facility with ABN AMRO and in April 2002 repaid all amounts outstanding thereunder. A new lease arrangement was completed in May 2002. Under the terms of the new lease, the Company does not have a guarantee obligation to the lender. However, the Company has agreed to indemnify Toshiba in certain circumstances for certain liabilities Toshiba incurs as a result of Toshiba’s guarantee of the FlashVision equipment lease arrangement. If FlashVision fails to meet its lease commitments, the Company will be obligated to reimburse Toshiba for 49.9% of any claims under the lease, unless such claims result from Toshiba’s failure to meet its obligations to FlashVision or its covenants to the lender. As of June 30, 2002, the maximum amount of the Company’s indemnification obligation was approximately $158.0 million.
 
12.  At June 30, 2002, the Company’s equity investment in UMC was valued at $174.5 million on the Company’s balance sheet. This includes 131 million shares classified as available-for-sale in accordance with SFAS No. 115 which are reported at market value of $157.2 and included in current assets on the Company’s balance sheet and 22 million shares that contain trading restrictions that extend beyond one year, are valued at their adjusted cost of $17.3 million and included in non-current assets. UMC’s share price declined to NT$40.10 at June 30, 2002 from NT$52.50 at March 31, 2002 resulting in an unrecognized loss of $39.7 million in the second quarter of 2002 on the

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portion of the Company’s investment that is classified as available-for-sale. Despite the decline in the second quarter, at June 30, 2002, the market value of the available-for-sale portion of the Company’s UMC investment exceeded its adjusted cost of $102.2 million. The total unrecognized gain of $55.0 million, before tax, is included in other comprehensive income on the Company’s balance sheet. (See Note 10.) If the fair value of the UMC shares declines in the future, it may be necessary to record losses. In addition, in future periods, there may be a gain or loss, due to fluctuations in the market value of UMC’s stock, if the UMC shares are sold.
 
13.  In July 2000, the Company entered into a share purchase agreement to make a $75 million investment in Tower Semiconductor, or Tower, in Israel, representing approximately 10% ownership of Tower. As of June 30, 2002, the Company had invested $53.5 million in Tower and obtained 3,955,435 ordinary shares and $9.9 million of prepaid wafer credits. In 2001, the Company recognized losses of $26.1 million on the other-than-temporary decline in the value of its Tower investment and prepaid wafer credits in accordance with SFAS No. 115. The Company’s investment in Tower was valued at $22.6 million as of June 30, 2002 and included an unrealized loss of $0.5 million for the first half of 2002. At June 30, 2002, the Company’s prepaid wafer credits were valued at $4.4 million. The Company assesses on a quarterly basis the value of its prepaid wafer credits considering the timing and quantity of its planned wafer purchases on an annual basis, the status of the foundry construction and general economic conditions. If the Company determines that the value of these wafer credits is not recoverable, a write-down will be recorded.
 
In March 2002, the Company amended its share purchase agreement with Tower by agreeing to advance the payments for the third and fourth milestones. The payment for the third milestone of $11.0 million was made on April 5, 2002. In exchange for this payment the Company received 1,071,497 shares and prepaid wafer credits of $4.4 million. The payment of $11.0 million for the fourth milestone will be paid on October 1, 2002. The Company will make this payment whether or not Tower actually achieves its previously agreed upon milestone obligations. In exchange for this and as part of the modification to the share purchase agreement, Tower has agreed that of the payment of $11.0 million represented by the fourth milestone payment, (i) 60% of this amount, or $6.6 million, will be applied to the issuance of additional ordinary Tower shares based on the average closing price of Tower shares on the NASDAQ in the thirty consecutive trading days preceding each payment date, referred to as the ATP, (provided, however, that pursuant to the purchase agreement as modified, the ATP shall not exceed $12.50 per share) and (ii) 40% of this amount, or $4.4 million, will be credited to the Company’s pre-paid wafer account, to be applied against orders placed with Tower’s new fabrication facility, when completed; provided, however, that until July 1, 2005, the amounts added to the pre-paid wafer account may only be applied towards a maximum of 7.5% of wafer purchases. The final contribution by the Company will take the form of a mandatory warrant exercise for 366,690 ordinary shares at an exercise price of $30.00 per share if the final milestone is met by Tower. The final milestone warrant will expire in July 2005, and in the event the milestone is not achieved, the exercise of the warrant will not be mandatory. If Tower’s stock price is trading below $30.00 per share on the day the final contribution is made, the Company will receive wafer credits in an amount equal to the number of shares purchased on the final contribution date multiplied by the difference between $30.00 and the ATP (provided, however, that the ATP shall not be less than $12.50). If the Company makes timely milestone payments, Tower is contractually obligated to fill the Company’s wafer orders with up to 15% of available wafers from the new fabrication facility. The Company currently expects Tower to supply it a portion of the ASIC controller chips used in its flash cards. The Company expects first wafer production to commence at the new fabrication facility in the first half of 2003.
 
Tower’s completion of the wafer foundry facility is dependent on its ability to obtain additional financing for the foundry construction from equity and other sources and the release of grants and approvals for changes in grant programs from the Israel government’s Investment Center. The current political uncertainty and security situation in the region may adversely impact Tower’s business prospects and may discourage investments in Tower from outside sources. If Tower is unable to obtain additional financing, complete foundry construction in a timely manner or successfully complete the development and transfer of advanced CMOS process technologies and ramp-up of production, the value of the Company’s investment in Tower will decline significantly or possibly become worthless and the Company may be unable to obtain the wafers needed to manufacture its products, which would harm its results of operations. In addition, the value of the Company’s investment in Tower and its corresponding wafer credits may be adversely affected by a further deterioration of conditions in the market for foundry manufacturing services and the market for semiconductor products generally. If the fair value of the Tower investment declines further or the wafer credits are deemed to have little or no value, it may be necessary to record additional losses.

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14.  On August 9, 2000, we entered into a joint venture, Digital Portal, Inc., or DPI, with Photo-Me International, PLC., or PMI, for the manufacture, installation, marketing, and maintenance of self-service, digital photo printing labs, or kiosks, bearing the SanDisk brand name in locations in the U.S. and Canada. Under the agreement, the Company invested $2.0 million in DPI. The Company currently accounts for this investment under the equity method, and recorded a loss of $0.2 million and $0.9 million as its share of the equity in loss of joint venture for the three and six month periods ended June 30, 2002, respectively. The Company’s share of losses from DPI’s inception through June 30, 2002, exceeded the amount of the Company’s investment. Under the equity method of accounting, the Company’s share of losses were deducted from its DPI investment account. Accordingly, on the Company’s June 30, 2002 balance sheet, the carrying value of the Company’s investment in DPI is $183,000. On July 18, 2002, the Company agreed in principle to sell a significant portion of its DPI shares to PMI to reduce its ownership percentage below 20%. In addition, the Company will give up its seat on DPI’s board of directors. Under the new agreement, the Company will discontinue its kiosk related activities, will no longer be required to make additional equity investments in DPI or guarantee DPI’s equipment leases and DPI will no longer use the SanDisk brand name. When this transaction is completed, the Company will account for its remaining investment in DPI on a cost basis.
 
15.  The Company’s effective income tax rate was 17% for the second quarter of 2002 primarily due to the impact of foreign withholding tax on the Company’s royalty revenues. Foreign withholding taxes will continue to impact the Company’s tax rate in 2002. The Company’s effective income tax benefit rate was 78% for the first quarter of 2002 and included $11.1 million related to the reduction in the Company’s valuation allowance due to the increase in the deferred tax liability associated with the unrealized gain on the Company’s investment in UMC. The Company’s assessment of its continuing valuation allowance will be influenced by the amount of unrealized tax gains on investments. The Company cannot predict from quarter to quarter the value of its investment in UMC. Although there was no appreciation in the value of the Company’s UMC shares in the second quarter of 2002, renewed appreciation in the value of the Company’s UMC shares or an increase in the number of shares available for sale could continue to impact our tax rate for the remainder of 2002. The extent of such an effect, if any, depends on the size of the appreciation.

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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”, “estimates,” or other wording indicating future results or expectations. Forward-looking statements are subject to risks and uncertainties. Our actual results may differ materially from the results discussed in forward-looking statements. Factors that could cause our actual results to differ materially include, but are not limited to, those discussed under “Factors That May Affect Future Results” below, and elsewhere in this report. The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that may arise after the date of this report.
 
Overview
 
SanDisk was founded in 1988 to develop and market flash data storage systems. We sell our products to the consumer electronics and industrial/communications markets. In the first six months of 2002, approximately 85% of our product sales were attributable to the consumer electronics market, particularly sales of CompactFlash and SmartMedia card products for use in digital camera applications. Our CompactFlash products have lower average selling prices and gross margins than our higher capacity FlashDisk and FlashDrive products. In addition, a substantial portion of our products is sold into the retail channel, which usually has shorter customer order lead-times than our other channels. A majority of our sales to the retail channel are turns business, with orders received and fulfilled in the same quarter, thereby decreasing our ability to accurately forecast future production needs. We believe sales to the consumer market will continue to represent a substantial majority of our sales, and may increase as a percentage of sales in future years, as the popularity of consumer applications, including digital cameras, increases.
 
Our operating results are affected by a number of factors including the volume of product sales, competitive pricing pressures, overall market supply, availability of foundry capacity, variations in manufacturing cycle times, fluctuations in manufacturing yields and manufacturing utilization, the timing of significant orders, our ability to match supply with demand, changes in product and customer mix, market acceptance of new or enhanced versions of our products, changes in the channels through which our products are distributed, timing of new product announcements and introductions by us and our competitors, the timing of license and royalty revenues, fluctuations in product costs, increased research and development expenses, and exchange rate fluctuations. We have experienced seasonality in the past. As the proportion of our products sold for use in consumer electronics applications increases, our revenues may become increasingly subject to seasonal increases in the fourth quarter of each year and declines in the first quarter of the following year. See “Factors That May Affect Future Results—Risks Related to Our Business” and “—Risks Related to Sales of Our Products.”
 
Beginning in late 1995, we adopted a strategy of licensing our flash technology, including our patent portfolio, to third party manufacturers of flash products. To date, we have entered into patent cross-license agreements with several companies, and intend to pursue opportunities to enter into additional licenses. Under our current license agreements, licensees pay license fees, royalties, or a combination thereof. The timing and amount of royalty payments and the recognition of license fees can vary substantially from quarter to quarter depending on the terms of each agreement and, in some cases, the timing of sales of products by the other parties. As a result, license and royalty revenues have fluctuated significantly in the past and are likely to continue to fluctuate in the future. Given the relatively high gross margins associated with license and royalty revenues, gross margins and net income are likely to fluctuate more with changes in license and royalty revenues than with changes in product revenues. Our license and royalty revenues may decline in the future as certain of our existing license agreements expire or our licensees reach their royalty payment caps.
 
We market our products using a direct sales organization, distributors, manufacturers’ representatives, private label partners, OEMs and retailers. In the first six months of 2002, retail sales accounted for 61% of total product revenues, compared to 42% in the first six months of 2001. We expect that sales through the retail channel will

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continue to comprise a significant share of our product revenues in the future, and that a substantial portion of our sales into the retail channel will be made to participants that will have the right to return unsold products. Our policy is to defer recognition of revenues from these sales until the products are sold to the end customers.
 
Historically, a majority of our sales have been to a limited number of customers. Sales to our top 10 customers accounted for approximately 51% of our product revenues in the second quarter and first six months of 2002. We expect that sales of our products to a limited number of customers will continue to account for a substantial portion of our product revenues for the foreseeable future. We have also experienced significant changes in the composition of our customer base from year to year and expect this pattern to continue as market demand for our customers’ products fluctuates. The loss of, or a significant reduction in purchases by any of our major customers, could harm our business, financial condition and results of operations. See “Factors That May Affect Future Results—Risks Related to Sales of Our Products”.
 
All of our products require silicon wafers, the majority of which are currently manufactured for us by Toshiba’s wafer facility at Yokkaichi, Japan, under our joint venture agreement, as well as UMC in Taiwan. Industry-wide demand for semiconductors decreased significantly in 2001, due to decreased demand and the broad, general economic downturn leading to a U.S. recession. Semiconductor manufacturers, including some of our suppliers and competitors, added new advanced wafer fab capacity prior to the downturn. This additional capacity, along with slowing economic conditions, resulted in excess supply and led to intense pricing pressure. From the fourth quarter of 2000 to the fourth quarter of 2001, the average sales price per megabyte we sold decreased by 68%, far in excess of our ability to reduce our cost per megabyte. Consequently we saw a dramatic reduction in our product gross margins, which resulted in substantial operating losses in 2001 and the first quarter of 2002. If industry-wide demand for our products is below the industry-wide available supply in the future, our product prices could decrease significantly causing operating losses.
 
Under our wafer supply agreements, there are limits on the number of wafers we can order and our ability to change that quantity, either up or down, is restricted. Accordingly, our ability to react to significant fluctuations in demand for our products is limited. If customer demand falls below our forecast and we are unable to reschedule or cancel our orders for wafers or other long lead-time items such as controller chips or printed circuit boards, we may end up with excess inventories, which could result in higher operating expenses and reduced gross margins. If customer demand exceeds our forecasts, we may be unable to obtain an adequate supply of wafers to fill customer orders, which could result in lost sales and lower revenues. If we are unable to obtain adequate quantities of flash memory wafers with acceptable prices and yields from our current and future wafer foundries, our business, financial condition and results of operations could be harmed.
 
We have from time to time taken write-downs for excess or obsolete inventories and lower of cost or market price adjustments. In 2001, such write-downs and lower of cost or market adjustments were approximately $85.0 million. We may be forced to take additional write-downs for excess or obsolete inventory in future quarters if market demand for our products deteriorates and our inventory levels exceed customer orders. In addition, we may record additional lower of cost or market price adjustments to our inventories if pricing pressure results in a net realizable value that is lower than our cost. Although we continuously try to reduce our inventory in line with the current level of business, we are obligated to honor existing purchase orders, which we have placed with our suppliers. In the case of FlashVision manufacturing, both we and Toshiba are obligated to purchase our share of the production output, which makes it more difficult for us to reduce our inventory.
 
Excess inventory not only ties up our cash, but also can result in substantial losses if such inventory, or large portions thereof, has to be revalued due to lower market pricing or product obsolescence. These inventory adjustments decrease gross margins and in 2001 resulted in, and could in the future result in, fluctuations in gross margins and net earnings in the quarter in which they occur. See “Factors That May Affect Future Results—Risks Related to Our Business.”
 
Export sales are an important part of our business, representing approximately 56% of our product revenues in the second quarter of 2002 and 51% of our product revenues in the first six months of 2002. Our sales may be impacted by changes in economic conditions in our international markets. Economic conditions in our international markets, including Japan, Asia and the European Union, may adversely affect our revenues to the extent that demand for our products in these regions declines. While most of our sales are denominated in U.S. Dollars, we invoice certain Japanese customers in Japanese Yen and are subject to exchange rate fluctuations on these transactions,

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which could affect our business, financial condition and results of operations. See “Factors That May Affect Future Results—Risks Related to Our Business.”
 
For the foreseeable future, we expect to realize a significant portion of our revenues from recently introduced and new products. Typically, new products initially have lower gross margins than more mature products because the manufacturing yields are lower at the start of manufacturing each successive product generation. In addition, manufacturing yields are generally lower at the start of manufacturing any product at a new foundry. In 2001, we experienced start-up costs of approximately $22.0 million associated with ramping up NAND wafer production at FlashVision. During the start-up phase, the fabrication equipment and operating expenses are applied to a relatively small output of production wafers, making this output very expensive.
 
To remain competitive, we are focusing on a number of programs to lower manufacturing costs, including development of future generations of NAND flash memory. There can be no assurance that we will successfully develop such products or processes or that development of such processes will lower manufacturing costs. If the current worldwide economic slowdown continues throughout fiscal 2002, we may be unable to efficiently utilize the NAND flash wafer production from FlashVision, which would force us to amortize the fixed costs of the fabrication facility over a reduced wafer output, making these wafers significantly more expensive. See “Factors That May Affect Future Results—Risks Related to the Development of New Products” and “—Risks Related to our FlashVision Joint Venture.”
 
Results of Operations
 
Product Revenues.    Our product revenues were $115.7 million in the second quarter of 2002, up $27.6 million or 31% from the second quarter of 2001. Product revenues were $202.1 million for the first six months of 2002, up $25.9 million or 15% from the first six months of 2001. The increase in product revenues in the second quarter of 2002 was primarily due to increased unit sales of our CompactFlash, Memory Stick, Secure Digital and FlashDisk products. During the second quarter of 2002, total flash memory product units shipped increased approximately 42% over the second quarter of 2001. CompactFlash products represented 52% of product revenues in the second quarter of 2002, compared to 60% in the same period of the prior year. SmartMedia card products represented 11% of product revenues in the second quarter of 2002 compared to 13% in the second quarter of 2001. Our FlashDisk products represented 12% of product revenues in the second quarter of 2002 compared to 11% for the same period of the prior year. For the first six months of 2002, the increase in product revenues came primarily from higher sales of our CompactFlash, Memory Stick, Secure Digital and SmartMedia card products. In the first six months of 2002, total flash memory product units shipped increased approximately 34% compared to the first six months of 2001. In the second quarter of 2002, average selling prices declined 62% compared to the second quarter of 2001.
 
Product revenues in the second quarter of 2002 increased $29.2 million or 34% compared to the first quarter of 2002. The increase in second quarter product revenues came primarily from increased sales of our CompactFlash and FlashDisk products. Average selling prices declined 8% in the second quarter of 2002 compared to the first quarter of 2001.
 
Sales to the consumer market represented approximately 85% of product revenues, while the telecommunications/industrial market made up the remaining 15% in the first six months of 2002. This compares to approximately 79% consumer and 21% telecommunications/industrial in the first six months of 2001. Sales to the retail channel represented 60% of product revenues in the second quarter of 2002 and 61% for the first six months of 2002, compared to 49% and 42%, respectively, for the same periods of the prior year. We expect that sales through the retail channel will continue to comprise a significant share of our product revenues in the future.
 
Export sales represented 56% and 51% of our product revenues in the second quarter and first six months of 2002, compared to 54% and 56% in the second quarter and first six months of 2001. We expect international sales to continue to represent a significant portion of our product revenues.
 
Our top ten customers represented approximately 51% of our product revenues in the second quarter and first six months of 2002, compared to 54% and 57% for the same periods of 2001. In the first six months of 2002, no customer exceeded 10% of product revenues. In the first six months of 2001, sales to one customer totaled 16% of product revenues. We expect that sales to a limited number of customers will continue to represent a substantial portion of our product revenues for the foreseeable future.

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License and Royalty Revenues.    License and royalty revenues from patent cross-license agreements were $12.0 million in the second quarter and $18.2 million in the first six months of 2002, compared to $19.0 million and $32.3 million in the same periods of 2001. The decreases in 2002 were primarily due to lower royalty bearing sales by our licensees. Revenues from licenses and royalties represented 9% of total revenues in the second quarter of 2002 compared to 18% in the second quarter of 2001. We receive royalty reports from certain of our licensees twice a year and record all revenue one quarter in arrears. We align actual reported royalty revenues when reports are received during the second and fourth quarters. Our current license agreement with Samsung expires in August 2002. In the event we do not enter into a new agreement with Samsung, or renew the agreement on different terms, we may experience a significant reduction in royalty income starting in the fourth quarter of 2002. Our revenues from patent license and royalties fluctuate quarterly based on the timing of revenue recognition under our various license agreements.
 
Gross Profits.    In the second quarter of 2002, gross profits were $43.3 million, or 34% of total revenues, compared to $0.4 million in the same period of 2001. In the first six months of 2002, gross profits were $54.5 million or 25% of total revenues compared to negative $17.1 million in the first six months of 2001. In the second quarter of 2002, product gross margins were 27% compared to negative 21% in the same period of 2001. In the first six months of 2002, product gross margins were 18% compared to negative 28% for the same period of 2001. The increase in product gross margins in the second quarter of 2002 was due to a combination of factors including, the lower cost of NAND flash wafers produced by Toshiba’s Yokkaichi foundry, lower cost per megabyte of our 1 Gigabit MLC (multi level cell) chip, significantly lower overhead expenses due to our restructuring activities in 2001 and improved economies of scale due to the growth in unit volumes across our major product lines. In addition, in the second quarter of 2002, we sold approximately $5.3 million worth of NOR inventory that had been fully written off as excess or obsolete in previous quarters.
 
Research and Development Expenses.    Research and development expenses consist principally of salaries and payroll-related expenses for design and development engineers, prototype supplies and contract services. Research and development expenses were $17.3 million in the second quarter of 2002, up $3.1 million or 21% from $14.2 million in the second quarter of 2001. In the first six months of 2002, research and development expenses were $31.8 million, up $1.3 million or 4% from the same period in 2001. The increase in the second quarter was primarily due to the write-off of goodwill related to purchased patents of $1.3 million, an increase of $0.8 million in salaries and related expenses and an increase of $0.4 million in project related expenses. The increase in research and development expenses in the first six months of 2002 was primarily due to an increase of $1.6 million in depreciation expense and the $1.3 million write-off of goodwill which were partially offset by a decline of $0.8 million in salaries and related expenses. Research and development expenses represented 14% of total revenues in the second quarter and first six months of 2002 compared to 13% in the second quarter of 2001 and 15% for the first six months of 2001. We expect our research and development expenses to increase in future quarters to support the development and introduction of new generations of flash data storage products, including with respect to our joint venture with Toshiba, our co-development agreement with Sony and our development of advanced controller chips.
 
Sales and Marketing Expenses.    Sales and marketing expenses include salaries, sales commissions, benefits and travel expenses for our sales, marketing, customer service and applications engineering personnel. These expenses also include other selling and marketing expenses, such as independent manufacturers representative commissions, advertising and tradeshow expenses. Sales and marketing expenses were $8.8 million in the second quarter of 2002, down $1.7 million or 16% from $10.5 million in the second quarter of 2001. The decrease in the second quarter of 2002 was primarily due to a decrease in advertising expense of $3.3 million which was partially offset by an increase in commissions of $0.9 million and an increase in salaries and related expenses of $0.5 million. In the first six months of 2002, sales and marketing expenses were $17.9 million, down $2.9 million or 14% from $20.8 million for the same period of 2001. The decrease in the first six months of 2002 was primarily due to a decrease in advertising expense of $4.0 million which was partially offset by an increase in commissions of $1.7 million. Sales and marketing expenses represented approximately 7% of total revenues in the second quarter of 2002 and 8% of total revenues for the first six months of 2002 compared to 10% for the second quarter and first six months of 2001. We expect sales and marketing expenses to increase as sales of our products grow and as we continue to develop the retail channel and brand awareness for our products.
 
General and Administrative Expenses.    General and administrative expenses include the cost of our finance, information systems, human resources, stockholder relations, legal and administrative functions. General and administrative expenses were $6.6 million in the second quarter of 2002, up $2.3 million or 53% from $4.3 million in the second quarter of 2001. The increase in the second quarter of 2002 was primarily due to an increase of $1.5

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million in legal fees primarily related to the defense of our patent portfolio and an increase in salaries and related expenses of $0.5 million. In the first six months of 2002, general and administrative expenses were $11.3 million, up $2.7 million or 31% from $8.6 million for the same period in 2001. The increase in the first six months of 2002 was primarily due to an increase of $2.3 million in legal fees and an increase of $0.9 million in salaries and related expenses. General and administrative expenses represented 5% of total revenues in the second quarter and first six months of 2002 compared to 4% for the same periods of 2001. General and administrative expenses will increase in the future if we continue to pursue litigation to defend our patent portfolio and grow our infrastructure to support our growth.
 
Equity in Income of Joint Ventures.    Equity in income of joint ventures of $1.7 million in the second quarter of 2002 and $1.2 million in the first six months of 2002 included our share of income and foreign exchange gains, net of expenses, from our FlashVision joint venture and losses from our Digital Portal joint venture.
 
Interest Income.    Interest income was $2.2 million in the second quarter of 2002 and $4.5 million in the first six months of 2002 compared to $3.1 million and $7.2 million in the same periods of 2001. This decrease was primarily due to lower interest rates in 2002 compared to 2001.
 
Interest Expense.    Interest expense on our outstanding convertible notes was $1.7 million in the second quarter of 2002 and $3.4 million in the first six months of 2002.
 
Loss on Investment in Foundry.    In the first quarter of 2001, we recognized an unrealized loss on the other than temporary decline in the value of our investment in UMC of $180.0 million. In future periods, if we sell our UMC shares, we may recognize a gain or loss due to fluctuations in the market value of UMC’s stock.
 
Other Income (Expense), Net.    Other expense, net was $1.9 million in the second quarter of 2002 and $2.0 million for the first six months of 2002 compared to $0.2 million and $2.0 million for the same periods of 2001. These expenses were primarily due to foreign exchange losses on our Japanese Yen denominated assets.
 
Provision for (Benefit from) Income Taxes.    Our effective income tax rate was 17% for the second quarter of 2002 primarily due to the impact of foreign withholding tax on our royalty revenues. Foreign withholding taxes will continue to impact our tax rate in the remainder of 2002. Our effective income tax benefit rate was 78% for the first quarter of 2002. Of our first quarter of 2002 tax benefit provision, $11.1 million was related to the reduction in the valuation allowance due to the increase in the deferred tax liability associated with the unrealized gain on our investment in UMC. Our assessment of the amount of valuation allowance required will be influenced by the amount of unrealized tax gains on our investments. We cannot predict from quarter to quarter the value of our investment in UMC. If the value of our UMC shares appreciates in the future or the number of shares available for sale increases, our tax rate for the remainder of 2002 could be impacted. The extent of such an effect, if any, depends on the size of the appreciation.
 
Liquidity and Capital Resources
 
Transactions Affecting Liquidity
 
On December 24, 2001, we completed a private placement of $125.0 million of 4½% Convertible Subordinated Notes due 2006, or Notes, and on January 10, 2002, the initial purchasers completed the exercise of their option to purchase an additional $25.0 million of Notes, for which we received net proceeds of approximately $145.9 million. Based on the aggregate principal amount at maturity of $150.0 million, the Notes require us to make semi-annual interest payments of $3.4 million each on May 15 and November 15 of each year while the Notes are outstanding. The Notes are convertible into shares of our common stock at any time prior to the close of business on the maturity date, unless previously redeemed or repurchased, at a conversion rate of 54.2535 shares per $1,000 principal amount of the Notes, subject to adjustment in certain events. At anytime on or after November 17, 2004, we may redeem the notes in whole or in part at a specified percentage of the principal amount plus accrued interest. The debt issuance costs are being amortized over the term of the Notes using the interest method. We intend to fulfill our debt service obligations from cash generated by our operations, if any, and from our existing cash and investments. If necessary, among other alternatives, we may

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add lease lines of credit to finance capital expenditures and obtain other long-term debt and lines of credit. We may incur substantial additional indebtedness in the future. There can be no assurance that we will be able to meet our debt service obligations, including our obligations under the Notes.
 
At June 30, 2002, our equity investment in UMC was valued at $174.5 million on our balance sheet. This includes 131 million shares classified as available-for-sale in accordance with SFAS No. 115 of $157.2 million, which are reported at market value and included in current assets on our balance sheet and 22 million shares which contain trading restrictions that extend beyond one year, are valued at their adjusted cost of $17.3 million and included in non-current assets. UMC’s share price declined to NT$40.10 at June 30, 2002 from NT$52.50 at March 31, 2002 resulting in an unrecognized loss of $39.7 million in the second quarter of 2002 on the portion of our investment that is classified as available-for-sale. Despite the decline in the second quarter, at June 30, 2002, the market value of the available-for-sale portion of our UMC investment exceeded its adjusted cost of $102.2 million. The total unrecognized gain of $55.0 million, before tax, is included in other comprehensive income on our balance sheet. If the fair value of our UMC shares declines, it may be necessary to record losses. In addition, in future periods, there may be a gain or loss, due to fluctuations in the market value of UMC’s stock, if the UMC shares are sold.
 
In April 2002, we signed a series of agreements with Toshiba under which we and Toshiba restructured our FlashVision business by consolidating FlashVision’s advanced NAND wafer fabrication manufacturing operations at Toshiba’s memory fabrication facility at Yokkaichi, Japan. Through this consolidation, we expect Yokkaichi to provide more cost-competitive NAND flash wafers than is possible at Dominion. Under the terms of the agreement, Toshiba will transfer the FlashVision owned and leased NAND production tool-set from Dominion to Yokkaichi and will undertake full responsibility for the transition, which is expected to be completed in 2002. Once the consolidation is completed, Yokkaichi’s total NAND wafer output is expected to match the combined prior NAND capacity of Yokkaichi and Dominion. The FlashVision operation at Yokkaichi will continue essentially the same 50-50 joint venture and on essentially the same terms as it has had at Dominion in Virginia. In March 2002, FlashVision exercised its right of early termination under its lease facility with ABN AMRO and in April 2002 repaid all amounts outstanding there under. A new lease arrangement was completed in May 2002. Under the terms of the new lease, we do not have a guarantee obligation to the lender. However, we have agreed to indemnify Toshiba in certain circumstances for certain liabilities Toshiba incurs as a result of Toshiba’s guarantee of the FlashVision equipment lease arrangement. If FlashVision fails to meet its lease commitments, we will be obligated to reimburse Toshiba for 49.9% of any claims under the lease, unless such claims result from Toshiba’s failure to meet its obligations to FlashVision or covenants to the lender. As of June 30, 2002, the maximum amount of our indemnification obligation was approximately $158.0 million.
 
In July 2000, we entered into a share purchase agreement to make a $75 million investment in Tower representing approximately 10% ownership of Tower. As of June 30, 2002, we had invested $53.5 million in Tower and obtained 3,955,435 ordinary shares and $9.9 million of prepaid wafer credits. In 2001, we recognized losses of $26.1 million on the other-than-temporary decline in the value of our Tower investment and prepaid wafer credits in accordance with SFAS No. 115. Our investment in Tower was valued at $22.6 million as of June 30, 2002 and included an unrecognized loss of $0.5 million for the first half of 2002. At June 30, 2002, our prepaid wafer credits were valued at $4.4 million. We assess on a quarterly basis the value of our prepaid wafer credits considering the timing and quantity of our planned wafer purchases on an annual basis, the status of the foundry construction and general economic conditions. If we determine that the value of these wafer credits is not recoverable, a write-down will be recorded.
 
In March 2002, we amended our share purchase agreement with Tower by agreeing to advance the payments for the third and fourth milestones. The payment for the third milestone of $11.0 million was made on April 5, 2002. In exchange for this payment we received 1,071,497 shares and prepaid wafer credits of $4.4 million. The payment of $11.0 million for the fourth milestone will be paid on October 1, 2002. We will make this payment whether or not Tower actually achieves its previously agreed upon milestone obligations. In exchange for this and as part of the modification to the share purchase agreement, Tower has agreed that of the payment of $11.0 million represented by the fourth milestone payment, (i) 60% of this amount, or $6.6 million, will be applied to the issuance of additional ordinary Tower shares based on the average closing price of Tower shares on the NASDAQ in the thirty consecutive trading days preceding each payment date, referred to as the ATP, (provided, however, that pursuant to the purchase

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agreement as modified, the ATP shall not exceed $12.50 per share) and (ii) 40% of this amount, or $4.4 million, will be credited to our pre-paid wafer account, to be applied against orders placed with Tower’s new fabrication facility, when completed provided, however, that until July 1, 2005, the amounts added to the pre-paid wafer account may only be applied towards a maximum of 7.5% of wafer purchases. The final contribution by us will take the form of a mandatory warrant exercise for 366,690 ordinary shares at an exercise price of $30.00 per share if the final milestone is met by Tower. The final milestone warrant will expire in July 2005, and in the event the milestone is not achieved, the exercise of the warrant will not be mandatory. If Tower’s stock price is trading below $30.00 per share on the day the final contribution is made, we will receive wafer credits in an amount equal to the number of shares purchased on the final contribution date multiplied by the difference between $30.00 and the ATP (provided, however, that the ATP shall not be less than $12.50). If we make timely milestone payments, Tower is contractually obligated to fill our wafer orders with up to 15% of available wafers from the new fabrication facility. We currently expect Tower to supply us a portion of the ASIC controller chips used in our flash cards. We expect first wafer production to commence at the new fabrication facility in the first half of 2003.
 
Tower’s completion of the wafer foundry facility is dependent on its ability to obtain additional financing for the foundry construction from equity and other sources and the release of grants and approvals for changes in grant programs from the Israel government’s Investment Center. The current political uncertainty and security situation in the region may adversely impact Tower’s business prospects and may discourage investments in Tower from outside sources. If Tower is unable to obtain additional financing, complete foundry construction in a timely manner or successfully complete the development and transfer of advanced CMOS process technologies and ramp-up of production, the value of our investment in Tower will decline significantly or possibly become worthless and we may be unable to obtain the wafers needed to manufacture our products, which would harm our results of operations. In addition, the value of our investment in Tower and corresponding wafer credits may be adversely affected by a further deterioration of conditions in the market for foundry manufacturing services and the market for semiconductor products generally. If the fair value of our Tower investment declines further or the wafer credits are deemed to have little or no value, it may be necessary to record additional losses.
 
On August 9, 2000, we entered into a joint venture, Digital Portal, Inc., or DPI, with Photo-Me International, PLC., or PMI, for the manufacture, installation, marketing, and maintenance of self-service, digital photo printing labs, or kiosks, bearing the SanDisk brand name in locations in the U.S. and Canada. Under the agreement, we invested $2.0 million in DPI. We currently account for this investment under the equity method, and recorded a loss of $0.2 million and $0.9 million as our share of the equity in loss of joint venture for the three and six month periods ended June 30, 2002, respectively. Our share of DPI’s losses from DPI’s inception through June 30, 2002, exceeded the amount of our investment. Under the equity method of accounting, our share of DPI’s losses were deducted from the investment account. Accordingly, on our June 30, 2002 balance sheet, the carrying value of our investment in DPI is $183,000. On July 18, 2002, we agreed in principle to sell a significant portion of our DPI shares to PMI to reduce our ownership percentage below 20%. In addition, we will give up our seat on DPI’s board of directors. Under the new agreement, we will discontinue our kiosk related activities, will no longer be required to make additional equity investments in DPI or guarantee DPI’s equipment leases and DPI will no longer use the SanDisk brand name. When this transaction is completed, we will account for our remaining investment in DPI on a cost basis.
 
On November 2, 2000, we made a strategic investment of $7.2 million in Divio, Inc., or Divio. Divio is a privately-held manufacturer of digital imaging compression technology and products for future digital camcorders that will be capable of using our flash memory cards to store home video movies, replacing the magnetic tape currently used in these systems. Under the agreement, we own approximately 10% of Divio and are entitled to one board seat. A number of companies are developing compression chip products that may be superior to, or may be offered at a lower cost than the Divio chips. These competing products may render Divio’s products uncompetitive and thereby significantly reduce the value of our investment in Divio. Divio is currently unprofitable, and will require additional funding from external sources to complete the development and commercialization of its products. Given the current depressed conditions for financing private, venture capital backed startup companies, we cannot assure you that Divio will be able to successfully finance its activities or become profitable. If they cannot do so, our investment in Divio may become worthless.

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Discussion of Cash Flows
 
At June 30, 2002, we had working capital of $563.6 million, which included $255.8 million in cash and cash equivalents and $134.7 million in short-term investments, excluding our investment in UMC.
 
Operating activities provided $19.1 million of cash in the first six months of 2002 primarily due to net income, an increase in liabilities of $34.8 million which were partially offset by an increase in accounts receivable of $25.1 million.
 
Net cash provided by investing activities was $20.6 million in the first six months of 2002, which included net purchases of short term investments of $29.0 million, our April 2002 investment in Tower of $11.0 million, the release of $64.7 of restricted cash related to the termination of FlashVison’s equipment lease with ABN AMRO in April 2002 and $8.3 million of capital equipment purchases.
 
Net cash provided by financing activities was $26.7 million in the first six months of 2002, which included the $24.4 million net proceeds from the issuance of convertible subordinated notes and $2.3 million from the sale of common stock through our stock option and employee stock purchase plans.
 
Liquidity Sources, Requirements and Contractual Cash Commitments
 
Our principal sources of liquidity as of June 30, 2002 consisted of: $390 million in cash, cash equivalents, and short-term investments, $164 million in unrestricted investments in foundries, and cash we expect to generate from operations during our fiscal year.
 
Since the closing of the convertible subordinated notes, our principal liquidity requirements have been to service our debt and meet our working capital, research and development and capital expenditures needs.
 
We believe that these sources of cash will be sufficient to fund our operations and meet our cash requirements at least through the second quarter of fiscal year 2003. Our ability to fund these requirements will depend on future operations, performance and cash flow and is subject to prevailing economic conditions and financial, business and other factors, some of which are beyond our control. In addition, as part of our strategy, we intend to pursue acquisitions, strategic alliances and investments that we believe are complementary to our business. Any material future acquisitions, alliances or investments will likely require additional capital. We cannot assure you that additional funds from available sources will be available on terms acceptable to us, or at all.
 
The following summarizes our contractual cash obligations, commitments and off balance sheet arrangements at June 30, 2002, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands).
 
    
Total
   
Fiscal 2002
   
Fiscal
2003-2004
   
Fiscal
2005-2006
   
After 2006
CONTRACTUAL OBLIGATIONS:
                                   
Convertible subordinated notes payable
   
$
150,000
   
$
—  
   
$
—  
   
$
150,000
   
$
—  
Operating leases
   
 
10,321
   
 
1,492
   
 
5,534
   
 
3,295
   
 
—  
Investment in Tower Semiconductor
   
 
22,000
   
 
11,000
   
 
11,000
   
 
—  
   
 
—  
Purchase commitments for flash memory wafers
   
 
23,650
   
 
23,650
   
 
—  
   
 
—  
   
 
—  
    
  
  
  
  
Total contractual cash obligations
   
$
205,971
   
$
36,142
   
$
16,534
   
$
153,295
   
$
—  
    
  
  
  
  

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As of
June 30, 2002
OFF BALANCE SHEET ARRANGEMENTS:
       
Indemnification of FlashVision foundry equipment lease
   
$
158,200
 
Depending on the demand for our products, we may decide to make additional investments, which could be substantial, in assembly and test manufacturing equipment or foundry capacity to support our business in the future. We may also invest in or acquire other companies’ product lines or assets. Our operating expenses may increase as a result of the need to hire additional personnel to support our sales and marketing efforts and research and development activities, including our collaboration with Toshiba for the joint development of 512 megabit and 1 gigabit flash memory chips and Sony for the joint development of the next generation Memory Stick. We believe our existing cash and cash equivalents and short-term investments will be sufficient to meet our currently anticipated working capital and capital expenditure requirements for the next twelve months.
 
Impact of Currency Exchange Rates
 
A portion of our revenues are denominated in Japanese yen. We enter into foreign exchange forward contracts to hedge against changes in foreign currency exchange rates. Future exchange rate fluctuations could have a material adverse effect on our business, financial condition and results of operations.
 
Factors That May Affect Future Results
 
Risks Related to Our Business
 
Our operating results may fluctuate significantly, which may adversely affect our operating results 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. This fluctuation is a result of a variety of factors, including the following:
 
 
•
 
unpredictable or declining demand for our products;
 
 
•
 
decline in the average selling prices of our products due to competitive pricing pressures;
 
 
•
 
seasonality in sales of our products;
 
 
•
 
natural disasters affecting the countries in which we conduct our business, particularly Japan, where our sole source of NAND flash memory wafer capacity will be located and, to a lesser extent, Taiwan, China and the United States;
 
 
•
 
excess capacity of flash memory from our competitors and our own flash wafer capacity, which may continue the acceleration in the decline in our average selling prices;
 
 
•
 
difficulty of forecasting and management of inventory levels; particularly, building a large inventory of unsold product due to non-cancelable contractual obligations to purchase materials such as flash wafers, controllers, printed circuit boards and discrete components;
 
 
•
 
expenses related to obsolescence or devaluation of unsold inventory;
 
 
•
 
adverse changes in product and customer mix;
 
 
•
 
slower than anticipated market acceptance of new or enhanced versions of our products;
 
 
•
 
competing flash memory card standards, which displace the standards used in our products;

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•
 
changes in our distribution channels;
 
 
•
 
fluctuations in our license and royalty revenue;
 
 
•
 
fluctuations in product costs, particularly due to fluctuations in manufacturing yields and utilization;
 
 
•
 
availability of sufficient silicon wafer foundry capacity to meet customer demand;
 
 
•
 
shortages of components such as capacitors and printed circuit boards required for the manufacturing of our products;
 
 
•
 
significant yield losses, which could affect our ability to fulfill customer orders and could increase our costs;
 
 
•
 
manufacturing flaws affecting the reliability, functionality or performance of our products, which could increase our product costs, reduce demand for our products or require product recalls;
 
 
•
 
increased research and development expenses;
 
 
•
 
exchange rate fluctuations, particularly the U.S. Dollar to Japanese Yen exchange rate;
 
 
•
 
changes in general economic conditions, particularly in Japan and the European Union; and
 
 
•
 
reduced sales to our retail customers if consumer confidence declines or economic conditions worsen.
 
Difficulty of estimating future silicon wafer needs may cause us to overestimate our needs and build excess inventories, or underestimate our needs and have a shortage of silicon wafers, either of which will harm our financial results.
 
When we order silicon wafers from our foundries, we have to estimate the number of silicon wafers needed to fill product orders several months into the future. If we overestimate this number, we will build excess inventories, which could harm our gross margins and operating results. On the other hand, if we underestimate the number of silicon wafers needed to fill product orders, we may be unable to obtain an adequate supply of wafers, which could harm our product revenues. Because the majority of our CompactFlash, SmartMedia card, MultiMediaCard and Secure Digital card products are sold into emerging consumer markets, it has been difficult to accurately forecast future sales. In addition, bookings visibility remains low due to the current economic uncertainty in our markets. A substantial majority of our quarterly sales are currently, and have historically been, from orders received and fulfilled in the same quarter, which makes accurate forecasting very difficult. Our product order backlog may fluctuate substantially from quarter to quarter.
 
Variability of expense levels and significant fixed costs will harm our business if our revenues do not exceed our operating expenses.
 
Despite the significant actions we took in 2001 to align expense levels with decreased revenues, we may need to hire additional personnel in certain business areas or otherwise increase our operating expenses in the future to support our sales and marketing efforts and research and development activities. We have significant fixed costs and we cannot readily reduce these expenses over the short term. If our revenues do not increase proportionately to our operating expenses, or if revenues decrease or do not meet expectations for a particular period, our business, financial condition and results of operations will be harmed.

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License fees and royalties from our patent cross license agreements are variable and fluctuate from period to period making it difficult to predict our royalty revenues.
 
Our intellectual property strategy consists of cross-licensing our patents to other manufacturers of flash products. Under these arrangements, we earn license fees and royalties on individually negotiated terms. Our income from patent licenses and royalties can fluctuate significantly from quarter to quarter. A substantial portion of this income comes from royalties based on the actual sales by our licensees. The timing of revenue recognition from these payments is dependent on the terms of each contract and on the timing of product shipments by the third parties. We align actual reported royalty revenues when reports are received during the second and fourth quarters of each fiscal year. Our revenues from patent license and royalties fluctuate quarterly based on the timing of revenue recognition under our various license agreements. Given the current market outlook for the third quarter of 2002 and beyond, sales of licensed flash products by our licensees may be substantially lower than the corresponding sales in recent quarters, which may cause a substantial drop in our royalty revenues. Because these revenues have higher gross margins than our product revenues, our overall gross margins and net income (loss) fluctuate significantly with changes in license and royalty revenues. We cannot assure you that our existing licensees will renew their licenses upon expiration, or that we will be successful in signing new licensees in the future.
 
Terrorist attacks and threats, and government responses thereto, may negatively impact all aspects of our operations, revenues, costs and stock price.
 
The terrorist attacks in the United States, the U.S. retaliation for these attacks and the related decline in consumer confidence and continued economic weakness have had a substantial adverse impact on our retail sales. If consumer confidence does not recover, our revenues and results of operations may be adversely impacted in the third quarter of 2002 and beyond.
 
In addition, any similar future 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. In addition, these events have had and may continue to have an adverse impact on the U.S. and world economy in general and consumer confidence and spending in particular, which could harm our sales. Any of these events could 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. This could have a significant impact on our operating results, revenues and costs and may result in increased volatility in the market price of our common stock.
 
Because of our international operations, we must comply with numerous international laws and regulations and we are vulnerable to political instability and currency fluctuations.
 
Political risks.    Currently, the majority of our flash memory and controller wafers are produced by Toshiba in Japan and UMC in Taiwan. After the restructuring of our FlashVision business, all of our flash memory and controller wafers are now produced overseas by Toshiba and UMC. We also use third-party subcontractors in Taiwan and China for the assembly and testing of some of our card and component products. We may therefore be affected by the political, economic and military conditions in Taiwan. Taiwan is currently engaged in various political disputes with China and in the past both countries have conducted military exercises in or near the other’s territorial waters and airspace. The Taiwanese and Chinese governments may escalate these disputes, resulting in an economic embargo, a disruption in shipping routes or even military hostilities. This could harm our business by interrupting or delaying the production or shipment of flash memory wafers or card products by our Taiwanese foundry and subcontractors. See “—We depend on our suppliers and third party subcontractors.”
 
We use a third-party subcontractor in China for the assembly and testing of our CompactFlash products. As a result, our business could be harmed by the effect of political, economic, legal and other uncertainties in China.
 
Under its current leadership, the Chinese government has been pursuing economic reform policies, including the encouragement of foreign trade and investment and greater economic decentralization. The Chinese government may not continue to pursue these policies and, even if it does continue, these policies may not be successful. The Chinese government may also significantly alter these policies from time to time. In addition, China does not currently have a comprehensive and highly developed legal system, particularly with respect to the protection of intellectual property rights. As a result, enforcement of existing and future laws and contracts is uncertain, and the

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implementation and interpretation of such laws may be inconsistent. Such inconsistency could lead to piracy and degradation of our intellectual property protection.
 
Although we do not believe the current political unrest and continuing escalation of violence in Israel represent a major security problem for Tower since Migdal Haemek, Israel is in a relatively secure geographic location, the unrest may expand and even if it remains at current levels, could cause scheduling delays, as well as economic uncertainty, which could cause potential foundry customers to go elsewhere for their foundry business. Moreover, if U.S. military actions in Afghanistan, or elsewhere, or current Israeli military actions, result in retaliation against Israel, Tower’s fabrication facility and our engineering design center in Israel may be adversely impacted. We cannot assure you that the Tower facility will be completed or will begin production as scheduled, or that the processes needed to fabricate our wafers will be qualified at the new facility. Moreover, we cannot assure you that this new facility will be able to achieve acceptable yields or deliver sufficient quantities of wafers on a timely basis at a competitive price. Furthermore, if the depressed business conditions for semiconductor wafers persist throughout 2002 and beyond, Tower may be unable to operate their new fabrication facility at an optimum capacity utilization, which would cause them to operate at a loss. In addition, while the political unrest has not yet posed a direct security risk to our engineering design center in Israel, it may cause unforeseen delays in the development of our products and may in the future pose such a direct security risk.
 
Economic risks.    We price our products primarily in U.S. Dollars. If the Euro, Yen and other currencies weaken relative to the U.S. Dollar, our products may be relatively more expensive in these regions, which could result in a decrease in our sales. While most of our sales are denominated in U.S. Dollars, we invoice certain Japanese customers in Japanese Yen and are subject to exchange rate fluctuations on these transactions, which could harm our business, financial condition and results of operations.
 
General risks.    Our international business activities could also be limited or disrupted by any of the following factors:
 
 
•
 
the need to comply with foreign government regulation;
 
 
•
 
general geopolitical risks such as political and economic instability, potential hostilities and changes in diplomatic and trade relationships;
 
 
•
 
natural disasters affecting the countries in which we conduct our business, particularly Japan, such as the earthquakes experienced in Taiwan in 1999 and in Japan and China in previous years;
 
 
•
 
imposition of regulatory requirements, tariffs, import and export restrictions and other barriers and restrictions;
 
 
•
 
longer payment cycles and greater difficulty in accounts receivable collection, particularly as we increase our sales through the retail distribution channel, and general business conditions deteriorate;
 
 
•
 
adverse tax rules and regulations;
 
 
•
 
weak protection of our intellectual property rights; and
 
 
•
 
delays in product shipments due to local customs restrictions.
 
Risks Related to the Development of New Products
 
In transitioning to new processes and products, we face production and market acceptance risks which have caused, and may in the future cause, significant product delays that could harm our business
 
Successive generations of our products have incorporated semiconductor devices with greater memory capacity per chip. Two important factors have enabled us to decrease the cost per megabyte of our flash data storage

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products: the development of higher capacity semiconductor devices and the implementation of smaller geometry manufacturing processes. A number of challenges exist in achieving a lower cost per megabyte, including:
 
 
•
 
lower yields often experienced in the early production of new semiconductor devices;
 
 
•
 
manufacturing flaws with new processes including manufacturing processes at our subcontractors which may be extremely complex;
 
 
•
 
problems with design and manufacturing of products that will incorporate these devices, which may result in delays or product recalls; and
 
 
•
 
production delays.
 
Because our products are complex, we periodically experience significant delays in the development and volume production ramp up of our products. Similar delays could occur in the future and could harm our business, financial condition and results of operations.
 
New products based on NAND MLC flash technology may encounter production delays and problems impacting production reliability and yields, which may cause our revenues and gross margins to decline.
 
We have developed new products based on NAND MLC (Multi Level Cell) flash technology, a flash architecture designed to store two bits in each flash memory cell. High density flash memory, such as NAND MLC flash, is a complex technology that requires strict manufacturing controls and effective test screens. Problems encountered in the shift to volume production for new flash products could impact both reliability and yields, and result in increased manufacturing costs and reduced product availability. NAND MLC technology is highly complex and has not previously been successfully commercialized. We may not be able to manufacture future generations of NAND MLC products with yields sufficient to result in lower costs per megabyte. If we are unable to bring future generations of high density flash memory into full production as quickly as planned or if we experience unplanned yield or reliability problems, our revenues and gross margins will decline.
 
The Secure Digital card standard has been slow to develop as a major new standard and may not be widely adopted by consumers.
 
We, along with Matsushita and Toshiba, jointly developed and jointly promote the Secure Digital card. The Secure Digital card incorporates advanced security and copyright protection features required by the emerging markets for the electronic distribution of music, video and other copyrighted works. Although the Secure Digital card is designed specifically to address the copy protection rights of the content providers, there can be no assurance that these content providers will find these measures sufficient or will agree to support them. Furthermore, despite numerous design wins, the Secure Digital card standard has been slow to develop as a major new standard and we cannot assure you that consumers will widely adopt the Secure Digital card. Conversely, broad acceptance of our Secure Digital card by consumers will likely reduce demand for our MultiMediaCard and CompactFlash card products. During 2001, we experienced a substantial decline in sales of MultiMediaCards which was not matched by a corresponding increase in sales of Secure Digital cards. See “—The success of our business depends on emerging markets and new products.”
 
Memory Stick products sold by us may not generate substantial revenues for us or contribute to our gross margins.
 
In September 2001, we signed an agreement with Sony involving their Memory Stick card format. Under the agreement, Sony will supply us a portion of their Memory Stick output for us to resell under our brand name. Sony has also agreed to purchase a portion of their NAND memory chip requirements from us provided that we meet market competitive pricing for these components. In addition, we and Sony agreed to co-develop and co-own the specifications for the next generation Memory Stick. Each of us will have all rights to manufacture and sell this new generation Memory Stick. In the fourth quarter of 2001, we commenced retail sales of Memory Stick cards supplied to us under an OEM supply and purchase agreement with Sony. We cannot assure you that the gross margins on the

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sale of Memory Stick products will be comparable to the gross margins from the sale of our other products or that this new business will generate substantial revenues or gross margin contributions for us. Consumers may prefer to purchase the Sony brand Memory Stick over our SanDisk brand Memory Stick. Furthermore, the second generation Memory Stick is still in the early stages of development and is not expected to generate significant sales before 2003. We cannot assure you that the second generation Memory Stick will achieve commercial success in the marketplace when it is introduced.
 
We have transitioned our technology to NAND-based products which has required us to significantly increase our inventory of NAND flash chips and if these products do not achieve customer acceptance, may result in inventory write offs that adversely affect our business.
 
The transition to NAND-based products is very complex, and requires good execution from our manufacturing, technology, quality, marketing, and sales and customer support staffs. If the current soft market conditions continue throughout 2002 and beyond, or if we are unable for any reason to achieve customer acceptance of our card products built with these NAND flash chips, we will experience a significant increase in our inventory, as we are contractually obligated to purchase half of FlashVision’s NAND wafer production output. This may result in inventory write offs and have a material adverse effect on our business, results of operations and financial condition. See “—Our investment in new flash memory wafer production may result in increased expenses and fluctuations in operating results.”
 
In the third quarter of 2001, we began to purchase controller wafers from UMC and are continuing development of advanced flash memory technology utilizing the 0.15 micron technology design rules at UMC.
 
The success of our business depends on emerging markets and new products.
 
In order for demand for our products to grow, the markets for new products that use CompactFlash, the MultiMediaCard, and Secure Digital card such as digital cameras, portable digital music players and cellular phones must develop and grow. If sales of these products do not grow, our revenues and profit margins could be adversely impacted.
 
In 2001, we experienced a substantial drop in demand from our MultiMediaCard customers, which we believe is attributable to the switch by these customers to the Secure Digital card, as well as the generally soft market conditions.
 
The success of our new product strategy will depend upon, among other things, the following:
 
 
•
 
our ability to successfully develop new products with higher memory capacities and enhanced features at a lower cost per megabyte;
 
 
•
 
the development of new applications or markets for our flash data storage products;
 
 
•
 
the adoption by the major content providers of the copy protection features offered by our Secure Digital card products;
 
 
•
 
the extent to which prospective customers design our products into their products and successfully introduce their products; and
 
 
•
 
the extent to which our products or technologies become obsolete or noncompetitive due to products or technologies developed by others.
 
512 megabit and 1 gigabit flash memory card products.    On June 30, 2000, we, along with Toshiba, formed FlashVision for the joint development and manufacture of 512 megabit and 1 gigabit flash memory chips and the manufacture of Secure Digital card controllers. As part of this venture, we and Toshiba employ Toshiba’s 0.16 micron and future 0.13 micron NAND flash integrated circuit manufacturing technology and SanDisk’s multilevel cell flash and controller system technology. During the third quarter of 2000, we announced with Toshiba the

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completion of the joint development of the 512 megabit NAND flash chip employing Toshiba’s 0.16 micron manufacturing process technology. We began employing the 512 megabit technology in the second half of 2001, and commenced shipment of cards employing the 1 gigabit technology in the second quarter of 2002. The development of the next generation 0.13 micron, 1 gigabit and 2 gigabit NAND flash memory chips is highly complex. We cannot assure you that we and Toshiba will successfully develop and bring into full production with acceptable yields and reliability these new products or the underlying technology, or that any development or production ramp will be completed in a timely or cost-effective manner. If we are not successful in any of the above, or if our cost structure is not competitive, our business, financial condition and results of operations could suffer.
 
We may be unable to maintain market share which would reduce our potential revenues and benefit our competitors.
 
During periods of excess supply in the market for our flash memory products, such as we experienced in 2001 and the first quarter of 2002, we may lose market share to competitors who aggressively lower their prices. Conversely, under conditions of tight flash memory supply, we may be unable to increase our production volumes at a sufficiently rapid rate so as to maintain our market share. Ultimately, our future growth depends on our ability to obtain sufficient flash memory wafers and other components to meet demand. If we are unable to do so in a timely manner, we may lose market share to our competitors. Currently, we are experiencing severe price competition for our products which is adversely impacting our product gross margins and overall profitability.
 
Rapid growth may strain our operations.
 
Despite actions we took in 2001 to align expense levels with decreased revenues, we must continue to hire, train, motivate and manage our employees to achieve future growth. In the past, we have experienced difficulty hiring the necessary engineering, sales and marketing personnel to support our growth. In addition, we must make a significant investment in our existing internal information management systems to support increased manufacturing, as well as accounting and other management related functions. Our systems, procedures and controls may not be adequate to support rapid growth, which could in turn harm our business, financial condition and results of operations.
 
Our success depends on key personnel, including our executive officers, the loss of whom could disrupt our business.
 
Our success greatly depends on the continued contributions of our senior management and other key research and development, sales, marketing and operations personnel, including Dr. Eli Harari, our founder, President and Chief Executive Officer. Our success will also depend on our ability to recruit additional highly skilled personnel. We cannot assure you that we will be successful in hiring or retaining such key personnel, or that any of our key personnel will remain employed with us.
 
Risks Related to Our FlashVision Joint Venture
 
Our FlashVision joint venture with Toshiba makes us vulnerable to certain risks, including potential inventory write-offs, disruptions or shortages of supply, limited ability to react to fluctuations in product demand, direct competition with Toshiba, and guarantee obligations, any of which could substantially harm our business and financial condition.
 
On June 30, 2000, we, along with Toshiba, formed FlashVision for the joint development and manufacture of 512 megabit and 1 gigabit flash memory chips and Secure Digital card controllers. As a part of this transaction, we and Toshiba formed and contributed initial funding to FlashVision, a joint venture to equip and operate a silicon wafer manufacturing line at Dominion Semiconductor in Virginia. We and Toshiba will each separately market and sell any 512 megabit and 1 gigabit flash memory chips developed and manufactured by our joint venture. Accordingly, we will compete directly with Toshiba for sales of these advanced chips.

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We and Toshiba have restructured our FlashVision business and transferred certain assets to Toshiba’s Yokkaichi fabrication facility in Japan, which may cause production delays and reduce NAND wafer supply available to us, which could adversely impact our operating results.
 
In April 2002, we and Toshiba entered into a series of agreements that restructured our FlashVision business and provided for the transfer of its operations to Toshiba’s Yokkaichi fabrication facility in Japan. Under the terms of the agreements, Toshiba will transfer the FlashVision owned and leased NAND production tool-set from Dominion to Yokkaichi and will bear substantially all of the costs associated with the equipment transfers, which are expected to be completed in 2002. The transfer and qualification of the advanced fabrication equipment from Dominion, Virginia to Yokkaichi, Japan is a highly complex operation. It is quite possible that we may encounter difficulties and delays. Although the additional costs associated with potential delays will be borne substantially by Toshiba, our results of operations may suffer if this equipment transfer is not completed on time and production does not commence at Yokkaichi as planned, thereby reducing the total NAND production capacity available to us.
 
In addition, we incurred substantial start-up expenses related to the hiring and training of manufacturing personnel, facilitizing the clean room and installing equipment at the Dominion fabrication facility. Although as part of our agreement with Toshiba to restructure our FlashVision business we will recapture substantially all of the Dominion start-up expenses incurred by us, we will incur similar start-up expenses in connection with the new Yokkaichi fabrication facility. In addition, we may not achieve the expected cost benefits of this transition until the second half of 2002, if at all. We will incur start-up costs and pay our share of ongoing operating activities even if we do not utilize our full share of the new Yokkaichi output.
 
We face challenges and possible delays relating to the expected shift in a portion of our production at Yokkaichi to 0.13 micron NAND, which could adversely affect our operating results.
 
We were using the new production capacity at Dominion to manufacture NAND flash memory wafers with minimum lithographic feature size of 0.16 micron. Late in 2002, we expect to start shifting a portion of our production output at Yokkaichi to 0.13 micron NAND. Such minimum feature sizes are considered today to be among the most advanced for mass production of silicon wafers. Therefore, it is difficult to predict how long it will take to achieve adequate yields, reliable operation, and economically attractive product costs based on our new designs. Introduction of new feature sizes and technologies are subject to the same risks and uncertainties after the restructuring of our FlashVision business. We currently rely and will continue to rely on Toshiba to address these challenges. With our investments in the FlashVision joint venture at Toshiba’s Yokkaichi facility, we are now and will continue to be exposed to the adverse financial impact of any delays or manufacturing problems associated with wafer production lines. Any problems or delays in volume production at the Yokkaichi fabrication facility could adversely impact our operating results in 2002 and beyond.
 
All of our NAND flash memory wafers are supplied by Toshiba’s Yokkaichi facilities and any disruption in this supply will reduce our revenues, earnings and gross margins.
 
Until the transition of the Dominion tool-set is completed, we will rely solely on Toshiba’s current Yokkaichi fabrication facility to supply all of our NAND wafers. If we experience increased demand during this transition period, we may not be able to procure a sufficient number of wafers from Toshiba’s current Yokkaichi fabrication facility to meet this demand, which would harm our business and operating results. Even if FlashVision establishes the new Yokkaichi fabrication facility, the Yokkaichi fabrication facilities may not produce satisfactory quantities of wafers with acceptable prices, reliability and yields. Any failure in this regard would be particularly harmful to our business, financial condition and results of operations, as we will not have an alternate source of supply of NAND wafers. In addition, any disruption in supply from the Yokkaichi fabrication facility due to natural disaster, power failure, labor unrest or other causes could significantly harm our business, financial condition and results of operations. Moreover, we have no experience in operating a wafer manufacturing line and we intend to rely on the existing manufacturing organizations at the Yokkaichi fabrication facilities. The new Yokkaichi fabrication facility will be tasked to “copy exactly” the same manufacturing flow employed by Toshiba in its existing Yokkaichi fabrication facility, but it may not be successful in manufacturing these advanced NAND flash products on a cost-effective basis or at all. If Toshiba and FlashVision are uncompetitive or are unable to satisfy our wafer supply requirements, our business, financial condition and results of operations would be harmed.

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Our obligations under our wafer supply agreements with Toshiba and FlashVision, or decreased demand for our products, may result in excess inventories and lead to inventory write offs, and any technical difficulties or manufacturing problems may result in shortages in supply, either of which would adversely affect our business.
 
Under the terms of our wafer supply agreements with Toshiba, we are obligated to purchase half of FlashVision’s NAND wafer production output and we will also purchase NAND wafers from Toshiba’s current Yokkaichi fabrication facility on a foundry relationship basis. If the current soft market conditions continue throughout 2002 and beyond, or if we are unable for any reason to achieve customer acceptance of our card products built with these NAND flash chips, we will experience a significant increase in our inventory, which may result in inventory write offs and harm our business, results of operations and financial condition. Apart from our commitment to purchase wafer output from FlashVision after the restructuring, under our foundry relationship with Toshiba, we order NAND wafers under purchase orders at market prices that cannot be cancelled. If we place purchase orders with Toshiba and our business condition deteriorates, we may end up with excess inventories of NAND wafers, which could harm our business and financial condition. Should customer demand for NAND flash products be less than our available supply, we may suffer from reduced revenues and increased expenses, and increased inventory of unsold NAND flash wafers, which could adversely affect our operating results.
 
Under the terms of our foundry relationship with Toshiba and wafer supply agreements with FlashVision, we are obligated to provide a rolling forecast of anticipated purchase orders for the next six calendar months, which are difficult to estimate. Generally, the estimates for the first three months of each forecast are binding commitments. The estimates for the remaining months may only be changed by a certain percentage from the previous month’s forecast. This limits our ability to react to fluctuations in demand for our products. At the beginning of the second quarter of 2002, the demand for foundry wafers began to grow and the leading foundries started to allocate their capacity as well as extend delivery lead-times and raise prices. If this trend continues, we may encounter shortages in our supply of wafers and we may also incur higher manufacturing costs for some of our products, which would make us unable to meet our customer demand and adversely impact our product gross margins.
 
In addition, in order for us to sell NAND based CompactFlash, MultiMediaCards and Secure Digital cards, we have been developing new controllers, printed circuit boards and test algorithms because the architecture of NAND flash is significantly different from our prior NOR flash designs. Any technical difficulties or delays in the development of these elements could prevent us from taking advantage of the available NAND output and could adversely affect our results of operations. See “—Our investment in new flash memory wafer production may result in increased expenses and fluctuations in operating results.”
 
We have contingent indemnification obligations for certain liabilities Toshiba incurs as a result of Toshiba’s guarantee of the FlashVision equipment lease arrangement.
 
FlashVision secured a new equipment lease arrangement in May 2002 with Mizuho and certain other financial institutions. Under the terms of the new lease, we do not have a guarantee obligation to the lender. However, we have agreed to indemnify Toshiba in certain circumstances for certain liabilities Toshiba incurs as a result of Toshiba’s guarantee of the FlashVision equipment lease arrangement. If FlashVision fails to meet its lease commitments, we will be obligated to reimburse Toshiba for 49.9% of any claims under the lease, unless such claims result from Toshiba’s failure to meet its obligations to FlashVision or its covenants to the lender. As of June 30, 2002, the maximum amount of our indemnification obligation was approximately $158.0 million.
 
Risks Related to Our Investment in Tower Semiconductor Ltd.
 
Our $75.0 million investment in Tower Semiconductor Ltd. is subject to certain inherent risks, including those associated with certain Israeli regulatory requirements, political unrest and financing difficulties, which could harm our business and financial condition.
 
In July 2000, we entered into a share purchase agreement to make a $75 million investment in Tower representing approximately 10% ownership of Tower. As of June 30, 2002, we had invested $53.5 million in Tower and obtained 3,955,435 ordinary shares and $9.9 million of prepaid wafer credits. In 2001, we recognized losses of $26.1 million on the other-than-temporary decline in the value of our Tower investment and prepaid wafer credits in accordance with Statement of Financial Accounting Standards 115. Our investment in Tower was valued at $22.6

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million as of June 30, 2002 and included an unrecognized loss of $0.5 million for the first half of 2002. At June 30, 2002, our prepaid wafer credits were valued at $4.4 million. We assess on a quarterly basis, the value of our prepaid wafer credits considering the timing and quantity of our planned wafer purchases on an annual basis, the status of the foundry construction and general economic conditions. If we determine that the value of these wafer credits is not recoverable, a write-down will be recorded.
 
In March 2002, we amended our share purchase agreement with Tower by agreeing to advance the payments for the third and fourth milestones. The payment for the third milestone of $11.0 million was made on April 5, 2002. In exchange for this payment we received 1,071,497 shares and prepaid wafer credits of $4.4 million. The payment of $11.0 million for the fourth milestone will be paid on October 1, 2002. We will make this payment whether or not Tower actually achieves its previously agreed upon milestone obligations. In exchange for this and as part of the modification to the share purchase agreement, Tower has agreed that of the payment of $11.0 million represented by the fourth milestone payment, (i) 60% of this amount, or $6.6 million, will be applied to the issuance of additional ordinary Tower shares based on the average closing price of Tower shares on the NASDAQ in the thirty consecutive trading days preceding each payment date, referred to as the ATP, (provided, however, that pursuant to the purchase agreement as modified, the ATP shall not exceed $12.50 per share) and (ii) 40% of this amount, or $4.4 million, will be credited to our pre-paid wafer account, to be applied against orders placed with Tower’s new fabrication facility, when completed provided, however, that until July 1, 2005, the amounts added to the pre-paid wafer account may only be applied towards a maximum of 7.5% of wafer purchases.
 
The final contribution by us will take the form of a mandatory warrant exercise for 366,690 ordinary shares at an exercise price of $30.00 per share if the final milestone is met by Tower. The final milestone warrant will expire in July 2005, and in the event the milestone is not achieved, the exercise of the warrant will not be mandatory. If Tower’s stock price is trading below $30.00 per share on the day the final contribution is made, we will receive wafer credits in an amount equal to the number of shares purchased on the final contribution date multiplied by the difference between $30.00 and the ATP (provided, however, that the ATP shall not be less than $12.50). If we make timely milestone payments, Tower is contractually obligated to fill our wafer orders with up to 15% of available wafers from the new fabrication facility. We currently expect Tower to supply us a portion of the ASIC controller chips used in our flash cards. We expect first wafer production to commence at the new fabrication facility in the first half of 2003.
 
Tower’s completion of the wafer foundry facility is dependent on its ability to obtain additional financing for the foundry construction from equity and other sources and the release of grants and approvals for changes in grant programs from the Israel government’s Investment Center. The current political uncertainty and security situation in the region may adversely impact Tower’s business prospects and may discourage investments in Tower from outside sources. If Tower is unable to obtain additional financing, complete foundry construction in a timely manner or successfully complete the development and transfer of advanced CMOS process technologies and ramp-up of production, the value of our investment in Tower will decline significantly or possibly become worthless and we may be unable to obtain the wafers needed to manufacture our products, which would harm our results of operations. In addition, the value of our investment in Tower and corresponding wafer credits may be adversely affected by a further deterioration of conditions in the market for foundry manufacturing services and the market for semiconductor products generally. If the fair value of our Tower investment declines further or the wafer credits are deemed to have little or no value, it may be necessary to record additional losses.
 
Completion of Tower’s wafer foundry facility is dependent on several factors and may never occur, which may harm our business and results of operations.
 
Tower’s completion of the wafer foundry facility is dependent on its ability to obtain additional financing for the foundry construction from equity and other sources and the release of grants and approvals for changes in grant programs from the Israel government’s Investment Center. If Tower is unable to obtain additional financing, complete foundry construction in a timely manner or is unable to successfully complete the development and transfer of advanced CMOS process technologies and ramp-up of production, the value of our investment in Tower will decline significantly or possibly become worthless and we may be unable to obtain the wafers needed to manufacture our products, which would harm our results of operations. In addition, the value of our investment in Tower may be adversely affected by a further deterioration of conditions in the market for foundry manufacturing services and the

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market for semiconductor products generally. If the fair value of the Tower investment declines further, we may record additional losses.
 
We cannot assure you that the Tower facility will be completed or will begin production as scheduled, or that the processes needed to fabricate our wafers will be qualified at the new facility. Moreover, we cannot assure you that this new facility will be able to achieve acceptable yields or deliver sufficient quantities of wafers on a timely basis at a competitive price. Furthermore, if the depressed business conditions for semiconductor wafers persists throughout 2002 and beyond, Tower may be unable to operate their new fabrication facility at an optimum capacity utilization, which would cause them to operate at a loss.
 
The current political unrest and violence in Israel may hinder Tower’s ability to obtain investment and complete its fabrication facility, which would harm our business.
 
Although we do not believe the current political unrest and continuing escalation of violence in Israel represent a major security problem for Tower since Migdal Haemek, Israel is in a relatively secure geographic location, the unrest may expand and even if it remains at current levels, could cause scheduling delays, as well as economic uncertainty, which could cause potential investors and foundry customers to avoid Tower. Moreover, if U.S. military actions in Afghanistan, or elsewhere, result in retaliation against Israel, Tower’s fabrication facility may be adversely impacted.
 
Risks Related to Our UMC and DPI Joint Ventures
 
Fluctuations in the market value of our UMC foundry investment affect our financial results and in fiscal 2001 we recorded a loss on investment in foundry of $275.8 million on our UMC investment.
 
In 1997, we invested $51.2 million in United Silicon, Inc., or USIC, a semiconductor manufacturing subsidiary of United Microelectronics Corporation, or UMC, which was merged into the UMC parent company on January 3, 2000. In exchange for our USIC shares, we received 111 million UMC shares. Our equity investment in UMC was valued at $174.5 million at June 30, 2002 and included an unrealized gain of $55.0 million, which was included in other comprehensive income. In fiscal year 2001, we recorded a loss on investment in foundry of $275.8 million, or $166.9 million net of taxes, on our UMC investment. If the fair value of our UMC investment declines in future periods, we may record additional losses for those periods. In addition, in future periods, we may recognize a gain or loss upon the sale of our UMC shares, which will impact our financial results.
 
Our Digital Portal Inc., or DPI, joint venture has an unproven product and an untested market and may not be successful.
 
On August 9, 2000, we entered into a joint venture, DPI, with Photo-Me International Plc., or PMI, for the manufacture, installation, marketing and maintenance of self-service, digital photo printing labs, or kiosks, bearing the SanDisk brand name in locations in the U.S. and Canada. On July 18, 2002, we agreed in principle to sell a significant portion of our DPI shares to PMI to reduce our ownership percentage below 20%. In addition, we will give up our seat on DPI’s board of directors. Under the new agreement, we will discontinue our kiosk related activities, will no longer be required to make additional equity investments in DPI or guarantee DPI’s equipment leases and DPI will no longer use the SanDisk brand name. If DPI is unsuccessful, our investment may become worthless.
 
Risks Related to Vendors and Subcontractors
 
We depend on our suppliers and third-party subcontractors for several of our critical components and our business could be harmed if we are unable to obtain a sufficient supply of these components on a timely basis.
 
We rely on our vendors, some of which are sole source suppliers, for several of the critical components of our products. We do not have long-term supply agreements with some of these vendors. Our business, financial condition and operating results could be significantly harmed by delays or reductions in shipments if we are unable to develop alternative sources or obtain sufficient quantities of these components. For example, until the transition of the Dominion tool-set is completed, we will rely solely on the current Yokkaichi fabrication facility for our NAND wafers. If we experience increased demand during this transition period, we may not be able to procure a sufficient

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number of wafers from Toshiba to meet this demand, which would harm our business and operating results. After the transition of our FlashVision business, we will continue to rely on Toshiba’s Yokkaichi fabrication facility for all of our flash memory wafers. Any disruption in the supply of wafers from the Yokkaichi fabrication facility would severely adversely impact our business.
 
We also rely on third-party subcontractors for a substantial portion of our wafer testing, packaged memory final testing, card assembly and card testing, including Silicon Precision Industries Co., Ltd. in Taiwan and Celestica, Inc. in China. In the fourth quarter of 2001, we completed the transfer of all of our card assembly and test manufacturing operations from our Sunnyvale location to these offshore subcontractors. We have no long-term contracts with these subcontractors and cannot directly control product delivery schedules. 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, which could increase the manufacturing costs of our products and have adverse effects on our operating results. Furthermore, we are moving to turnkey manufacturing with some of our subcontract suppliers, which may reduce our visibility and control of their inventories of purchased parts necessary to build our products.
 
We depend on third-party foundries for silicon wafers and any shortage or disruption in our supply from these sources will reduce our revenues, earnings and gross margins.
 
All of our flash memory card products require silicon wafers, the majority of which are currently supplied by Toshiba’s wafer facility at Yokkaichi, Japan, as well as UMC in Taiwan. All of our NAND flash memory wafers are now supplied by Toshiba’s Yokkaichi wafer fabrication facilities. If Toshiba, FlashVision and UMC are uncompetitive or are unable to satisfy these requirements, our business, financial condition and operating results may suffer. Any disruption in supply from these sources due to natural disaster, power failure, labor unrest or other causes could significantly harm our business, financial condition and results of operations.
 
Our obligation to provide a rolling forecast of anticipated purchase orders for the next six calendar months under the terms of our wafer supply agreements with Toshiba, FlashVision and UMC, limits our ability to react to fluctuations in demand for our products which may lead to excess wafer inventories and could result in higher operating expenses and reduced gross margins.
 
Under the terms of our wafer supply agreements with Toshiba, FlashVision and UMC, we are obligated to provide a rolling forecast of anticipated purchase orders for the next six calendar months. Generally, the estimates for the first three months of each forecast are binding commitments. The estimates for the remaining months may only be changed by a certain percentage from the previous month’s forecast. In addition, we are obligated to purchase 50% of all of FlashVision’s wafer production. This limits our ability to react to fluctuations in demand for our products. For example, if customer demand falls below our forecast and we are unable to reschedule or cancel our wafer orders, we may end up with excess wafer inventories, which could result in higher operating expenses and reduced gross margins. Conversely, if customer demand exceeds our forecasts, we may be unable to obtain an adequate supply of wafers to fill customer orders, which could result in dissatisfied customers, lost sales and lower revenues. If we are unable to obtain scheduled quantities of wafers with acceptable price and yields from any foundry, our business, financial condition and results of operations could be harmed. At the beginning of the second quarter of 2002, the demand for foundry wafers began to grow and the leading foundries started to allocate their capacity as well as extend delivery lead-times and raise prices. If this trend continues, we may encounter shortages in our supply of wafers and we may also incur higher manufacturing cost for some of our products, which would make us unable to meet our customer demand and adversely impact our product gross margins.
 
We and our manufacturing partners must achieve acceptable wafer manufacturing yields or our costs will increase and production will decrease, which could negatively impact our business.
 
The fabrication of our products requires wafers to be produced in a highly controlled and ultra clean environment. Semiconductor companies that supply our wafers sometimes have experienced problems achieving acceptable wafer manufacturing yields. Semiconductor manufacturing yields are a function of both our design technology and the foundry’s manufacturing process technology. Low yields may result from design errors or manufacturing failures. Yield problems may not be determined or improved until an actual product is made and can

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be tested. As a result, yield problems may not be identified until the wafers are well into the production process. The risks associated with yields are even greater because we rely exclusively on independent offshore foundries for our wafers which increases the effort and time required to identify, communicate and resolve manufacturing yield problems. If the foundries cannot achieve planned yields, we will experience higher costs and reduced product availability, which could harm our business, financial condition and results of operations.
 
Risks Related to Competition
 
We face competition from flash memory manufacturers and memory card assemblers and if we cannot compete effectively, our business will be harmed.
 
We compete in an industry characterized by intense competition, rapid technological changes, evolving industry standards, declining average selling prices and rapid product obsolescence. Our competitors include many large domestic and international companies that have greater access to advanced wafer foundry capacity, substantially greater financial, technical, marketing and other resources, broader product lines and longer standing relationships with customers.
 
Our primary competitors include companies that develop and manufacture storage flash chips, such as Hitachi, Micron Technology, Samsung and Toshiba. In addition, we compete with companies that manufacture other forms of flash memory and companies that purchase flash memory components and assemble memory cards. Companies that manufacture socket flash, linear flash and components include Advanced Micro Devices, Atmel, Fujitsu, Intel, Macronix, Mitsubishi, Sharp Electronics and ST Microelectronics. Companies that combine controllers and flash memory chips developed by others into flash storage cards include Dane-Elec Manufacturing, Delkin Devices, Inc., Feiya Technology Corporation, Fuji, Hagiwara, I/O Data, Ingentix, Kingston Technology, Lexar Media, M-Systems, Matsushita Battery, Matsushita Panasonic, Memorex, PNY, Pretec, Silicon Storage Technology, Silicon Tek, Simple Technology, Sony Corporation, TDK Corporation, Toshiba and Viking Components.
 
In addition, many companies have been certified by the CompactFlash Association to manufacture and sell their own brand of CompactFlash. We believe additional manufacturers will enter the CompactFlash market in the future.
 
We have entered into agreements with, and face direct competition from, Toshiba and other competitors.
 
We have entered into an agreement with Matsushita and Toshiba, forming the Secure Digital Association, or SD Association, to jointly develop and promote a next generation flash memory card called the Secure Digital card. Under this agreement, royalty-bearing Secure Digital card licenses will be available to other flash memory card manufacturers, which will increase the competition for our Secure Digital card and other products. In addition, Matsushita and Toshiba have commenced selling Secure Digital cards that will compete directly with our products. While other flash card manufacturers will be required to pay the SD Association license fees and royalties, which will be shared among Matsushita, Toshiba and us, there will be no royalties or license fees payable among the three companies for their respective sales of the Secure Digital card. Thus, we will forfeit potential royalty income from Secure Digital card sales by Matsushita and Toshiba.
 
In addition, we and Toshiba will each separately market and sell any 512 megabit and 1 gigabit flash memory chips developed and manufactured by our joint venture, FlashVision. Accordingly, we will compete directly with Toshiba for sales of these advanced chips. Moreover, we rely solely on Toshiba for the supply of our NAND wafers.
 
We have entered into patent cross-license agreements with several of our leading competitors including Hitachi, Intel, Matsushita, SST, Samsung, Sharp, Sony, Toshiba and TDK. Under these agreements, each party may manufacture and sell products that incorporate technology covered by the other party’s patent or patents related to flash memory devices. As we continue to license our patents to certain of our competitors, competition will increase and may harm our business, financial condition and results of operations. Currently, we are engaged in licensing discussions with several of our competitors. There can be no assurance that we will be successful in concluding licensing agreements under terms which are favorable to us, or at all.

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Our products compete against new products that promote different industry standards from ours, and if these new industry standards gain market acceptance, our business will be harmed.
 
Competing products have been introduced that promote industry standards that are different from our products including Sony’s standard floppy disk used for digital storage in its Mavica digital cameras, Panasonic’s Mega Storage cards, Iomega’s Clik drive, a miniaturized, mechanical, removable disk drive, M-Systems’ DiskOnKey, a USB-based memory device, and the Secure MultiMediaCard from Hitachi and Infineon. Each competing standard may not be mechanically and electronically compatible with our products. If a manufacturer of digital cameras or other consumer electronic devices designs in one of these alternative competing standards, our products will be eliminated from use in that product. In addition, other companies, such as Sanyo, DataPlay and Matrix Semiconductor have announced products or technologies that may potentially compete with our products.
 
IBM’s Microdrive, a rotating disk drive in a Type II CompactFlash format competes directly with our larger capacity memory cards. M-Systems’ DiskOnChip 2000 Millennium product competes against our NAND Flash Components in embedded storage applications such as set top boxes and networking appliances.
 
Sony has licensed its proprietary Memory Stick to us and other companies and Sony has agreed to supply us a portion of their Memory Stick output for resale under our brand name. If consumer electronics products using the Memory Stick achieve widespread use, sales of our MultiMediaCard, Secure Digital card, SmartMedia card and CompactFlash products may decline. Our MultiMediaCard products also have faced significant competition from Toshiba’s SmartMedia flash cards.
 
We face competition from products based on alternative flash technologies and if we cannot compete effectively, our business will be harmed.
 
We also face competition from products based on multilevel cell flash technology from Intel and Hitachi. These products currently compete with our NAND MLC products. Multilevel cell flash is a technological innovation that allows each flash memory cell to store two bits of information instead of the traditional single bit stored by conventional flash technology.
 
Furthermore, we expect to face competition both from existing competitors and from other companies that may enter our existing or future markets that have similar or alternative data storage solutions, which may be less costly or provide additional features. For example, Infineon has formed a joint venture with Saifun, an Israeli startup company, to develop a proprietary flash memory technology which will be targeted at low cost data storage applications. Price is an important competitive factor in the market for consumer products. Increased price competition could lower gross margins if our average selling prices decrease faster than our costs and could also result in lost sales.
 
Risks Related to Sales of Our Products
 
Sales to a small number of customers represent a significant portion of our revenues and if we were to lose one of our major customers or experience any material reduction in orders from any of these customers, our revenues and operating results would suffer.
 
Approximately one-half of our revenues come from a small number of customers. For example, sales to our top 10 customers accounted for approximately 51% of our product revenues in the first six months of 2002. In the first six months of 2002, no single customer accounted for greater than 10% of our total revenues. If we were to lose one of our major customers or experience any material reduction in orders from any of these customers, our revenues and operating results would suffer. Our sales are generally made by standard purchase orders rather than long- term contracts. In addition, the composition of our major customer base changes from year to year as the market demand for our customers’ products changes.

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We may not be successful selling our products on the Internet and these sales may undercut our traditional sales channels.
 
Web-based sales of our products today represent a small but growing portion of our overall sales. Sales on the Internet tend to undercut traditional distribution channels and may dramatically change the way our consumer products are purchased in future years. We cannot assure you that we will successfully develop the Internet sales channel or successfully manage the inherent conflict between the Internet and our traditional sales channels.
 
Variability of average selling prices and gross margins resulting from changes in our product mix and price reductions for certain of our products may cause our gross margins and net profitability to suffer.
 
Our product mix varies quarterly, which affects our overall average selling prices and gross margins. Our CompactFlash, SmartMedia card, MultiMediaCard and Secure Digital card products, which currently represent the majority of our product revenues, have lower average selling prices and gross margins than our higher capacity FlashDisk and FlashDrive products. We believe that sales of CompactFlash, SmartMedia card, MultiMediaCard and Secure Digital card products will continue to represent a significant percentage of our product revenues as consumer applications, such as digital cameras and digital music players, become more popular. Flash data storage markets are intensely competitive, and price reductions for our products are necessary to meet consumer price points. Due to continued oversupply in flash memory foundry capacity throughout 2001 and the economic slow-down in 2001, the decline in our average selling price per megabyte of 50% was much more severe than the 22% decrease we experienced in 2000. Price declines for our products could continue to be significant. If we cannot reduce our product manufacturing costs in future periods to offset further price reductions, our gross margins and net profitability will suffer.
 
Our selling prices may decline due to excess capacity in the market for flash memory products and if we cannot reduce our manufacturing costs to offset these price declines, our gross margins and net profitability will be harmed.
 
Throughout 2001, worldwide flash memory supply exceeded customer demand, causing excess supply in the markets for our products and significant declines in average selling prices. If this situation continues throughout 2002, price declines for our products could continue to be significant. If we cannot reduce our product manufacturing costs to offset these reduced prices, our gross margins and net profitability will be adversely impacted.
 
Our business depends significantly upon sales of products in the highly competitive consumer market, a significant portion of which are made to retailers and through distributors, and if our distributors and retailers are not successful in this market, we could experience substantial product returns, which would negatively impact our business, financial condition and results of operations.
 
In 2001 and the first six months of 2002, we continued to receive more product revenue and ship more units of products for consumer electronics applications, including digital cameras and PDAs, compared to other applications. The consumer market is intensely competitive and is more price sensitive than our other target markets. In addition, we must spend more on marketing and promotion in consumer markets to establish brand name recognition and drive demand.
 
A significant portion of our sales to the consumer electronics market are made to retailers and through distributors. Sales through these channels typically include rights to return unsold inventory. As a result, we do not recognize revenue until after the product has been sold through to the end user. If our distributors and retailers are not successful in this market, there could be substantial product returns, which would harm our business, financial condition and results of operations.
 
There is seasonality in our business which may impact our product sales, particularly in the fourth and first quarters of the fiscal year.
 
Sales of our products in the consumer electronics market may be subject to seasonality. As a result, product sales may be impacted by seasonal purchasing patterns with higher sales generally occurring in the fourth quarter of each year followed by declines in the first quarter of the following year. In addition, in the past we have experienced a decrease in orders in the first quarter from our Japanese OEM customers primarily because most customers in

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Japan operate on a fiscal year ending in March and prefer to delay purchases until the beginning of their next fiscal year.
 
Risks Related to Our Intellectual Property
 
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 disputes regarding our intellectual property rights and claims that we may be infringing third parties’ intellectual property rights. We expect that we may be involved in similar disputes in the future. We cannot assure you that:
 
 
•
 
any of our existing patents will not be invalidated;
 
 
•
 
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 do not infringe on the patents of other companies.
 
In addition, our competitors may be able to design their products around our patents.
 
We intend to vigorously enforce our patents but we cannot be sure that our efforts will be successful. If we were to have an adverse result in any litigation, we could be required to pay substantial damages, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology, discontinue the use of certain processes or obtain licenses to the infringing technology. Any litigation is likely to result in significant expense to us, as well as divert the efforts of our technical and management personnel.
 
We may be unable to license intellectual property to or from third parties as needed, or renew existing licenses, and have agreed to indemnify various suppliers and customers for alleged patent infringement, which could expose us to liability for damages, increase our costs or limit or prohibit us from selling certain products.
 
If we decide to incorporate third party technology into our products or if we are found to infringe on others’ intellectual property, we could be required to license intellectual property from a third party. We may also need to license some of our intellectual property to others in order to enable us to obtain cross-licenses to third party patents. Currently, we have patent cross-license agreements with several companies, including Hitachi, Intel, Matsushita, SST, Samsung, Sharp, Smartdisk, Sony, TDK and Toshiba and we are in discussions with other companies regarding potential cross-license agreements. We cannot be certain that licenses will be offered when we need them, or that the terms offered will be acceptable. If we do obtain licenses from third parties, we may be required to pay license fees or royalty payments. In addition, if we are unable to obtain a license that is necessary to the manufacture of our products, we could be required to suspend the manufacture of products or stop our wafer suppliers from using processes that may infringe the rights of third parties. We cannot assure you that we would be successful in redesigning our products or that the necessary licenses will be available under reasonable terms, or that our existing licensees will renew their licenses upon expiration, or that we will be successful in signing new licensees in the future.
 
We have historically agreed to indemnify various suppliers and customers for alleged patent infringement. The scope of such indemnity varies, but may, in some instances, include indemnification for damages and expenses, including attorney’s fees. We may periodically engage in litigation as a result of these indemnification obligations. We are not currently engaged in any such indemnification proceedings. Our insurance policies exclude coverage for

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third party claims for patent infringement. Any future obligation to indemnify our customers or suppliers could harm our business, financial condition or results of operations.
 
We may be involved in litigation regarding our intellectual property rights or those of third parties, which would be costly and would divert the efforts of our technical and management personnel.
 
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. Furthermore, parties that we have sued and that we may sue for patent infringement may counter sue us for infringing their patents.
 
On or about August 3, 2001, the Lemelson Medical, Education & Research Foundation, or Lemelson Foundation, filed a complaint for patent infringement against us and four other defendants. The suit, captioned Lemelson Medical, Education, & Research Foundation, Limited Partnership vs. Broadcom Corporation, et al., Civil Case No. CIV01 1440PHX HRH, was filed in the United States District Court, District of Arizona. On November 13, 2001, the Lemelson Foundation filed an Amended Complaint, which made the same substantive allegations against us but named more than twenty-five additional defendants. The Amended Complaint alleges that we, and the other defendants, have infringed certain patents held by the Lemelson Foundation pertaining to bar code scanning technology. By its complaint, the Lemelson Foundation requests that we be enjoined from our allegedly infringing activities and seeks unspecified damages. On February 4, 2002, we filed an answer to the amended complaint, wherein we alleged that we do not infringe the asserted patents, and further contend that the patents are not valid or enforceable.
 
On October 15, 2001, we filed a complaint for patent infringement in the United States District Court for the Northern District of California against Micron Technology, Inc., or Micron. In the suit, captioned SanDisk Corp. v. Micron Technology, Inc., Civil No. CV 01-3855 CW, the complaint seeks damages and an injunction against Micron for making, selling, importing or using flash memory cards that infringe our U.S. Patent No. 6,149,316. On February 15, 2002, Micron answered the complaint, denied liability, and counterclaimed seeking a declaration that the patent in suit is not infringed, is invalid, and is unenforceable. On May 31, 2002, based on allegations of infringement leveled by Micron against us, we filed a complaint for declaratory judgment, seeking a declaration that we have not infringed and are not infringing five patents (or, in the alternative, that the patents are invalid). The patents in question are U.S. Patent No. 4,468,308; U.S. Patent No. 5,286,344; U.S. Patent No. 5,320,981; U.S. Patent No. 6,015,760; and U.S. Patent No. 6,287,978 B1. The suit is captioned SanDisk Corp. v. Micron Technology, Inc., Civil No. CV 02-2627 VRW. On June 4, Micron answered and counterclaimed alleging that we do infringe the five listed patents.
 
On October 31, 2001, we filed a complaint for patent infringement in the United States District Court for the Northern District of California against Memorex Products, Inc., Pretec Electronics Corporation, Ritek Corporation and Power Quotient International Co., Ltd. In the suit, captioned SanDisk Corp. v. Memorex Products, Inc., et. al., Civil No. CV 01-4063 VRW, we seek damages and injunctions against these companies from making, selling, importing or using flash memory cards that infringe our U.S. patent No. 5,602,987 or the ‘987 Patent. Defendants Memorex, Pretec and Ritek have filed answers denying the allegations. We filed a motion for a preliminary injunction in the suit to enjoin Memorex, Pretec and Ritek from making, selling, importing or using flash memory cards that infringe our ‘987 Patent prior to the trial on the merits. On May 17, 2002, the Court denied our motion. Discovery has commenced. The Court has set a trial date for the later half of 2003.
 
On November 30, 2001, we filed a complaint for patent infringement in the United States District Court for the Northern District of California against Power Quotient International—USA Inc, or PQI-USA. In the suit, captioned SanDisk Corp. v. Power Quotient International—USA Inc., Civil No. C 01-21111, we seek damages and an injunction against PQI-USA from making, selling, importing or using flash memory cards that infringe our U.S. patent No. 5,602,987. The PQI-USA complaint and litigation are related to the October 31, 2001 litigation referred to above. The products at issue in the PQI-USA case are identical to those charged with infringement in the October 31, 2001 litigation. On December 21, 2001, PQI-USA filed an answer to the complaint denying the allegations, which included a counter claim for a declaratory judgment of non-infringement and invalidity of our ‘987 Patent. We

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have motioned for a preliminary injunction in the suit to enjoin PQI-USA from making, selling, importing or using flash memory cards that infringe our ‘987 Patent prior to the trial on the merits. On April 8, 2002, the Court heard argument on the preliminary injunction motion and a decision on the motion is pending. Discovery has commenced. The Court has set a trial date for the later half of 2003.
 
On or about March 5, 2002, Samsung Electronics Co., Ltd., or Samsung, filed a patent infringement lawsuit against us in the United States District Court for the Eastern District of Texas, Civil Action No. 9:02CV58. The lawsuit alleges that we infringe four Samsung United States patents, Nos. 5,473,563; 5,514,889; 5,546,341 and 5,642,309, and seeks a preliminary and permanent injunction against unnamed products of ours, as well as damages, attorneys’ fees and cost of the lawsuit. On March 28, 2002, we filed an answer and counterclaims denying infringement and asserting the Samsung patents are invalid and/or unenforceable. The counterclaims asserted that Samsung breached a 1997 agreement between SanDisk and Samsung. On April 3, 2002, Samsung filed its first amended complaint. The amended complaint restricted Samsung’s original infringement allegations with respect to the four patents listed above to SanDisk products that include NAND flash memory. Substantially all of SanDisk products include NAND flash memory devices. On April 26, 2002, we filed an answer to Samsung’s first amended complaint and amended counterclaims. This answer and amended counterclaims again denied infringement and asserted that the Samsung patents are invalid and/or unenforceable. In SanDisk’s amended counterclaims, we seek relief for both breach of the 1997 agreement and a declaration of our rights under the 1997 agreement. On July 19, 2002 the Court in the Eastern District of Texas granted our motion to move this lawsuit to the United States District Court for the Northern District of California. As a result of this order, the previous trial date set by the Texas court is no longer effective, and until the Northern District Court orders a new trial date, there is currently no trial date set for this lawsuit. On April 26, 2002, we filed a complaint against Samsung in the United States District Court for the Northern District of California, Civil No. C02-2069 MJJ, for declaratory judgment of non-infringement, invalidity, a declaration of rights under the 1997 agreement with Samsung and breach of contract. In July 2002, the court in this action granted Samsung’s motion to dismiss the action. We intend to appeal the court’s dismissal.
 
Our current license agreement with Samsung expires in August 2002. In the event that we and Samsung do not enter into a new license agreement, we expect that we will incur substantially higher legal fees, and we may also experience a reduction in royalty income starting in the fourth quarter of 2002 and potential interruption of sales of certain of our products in certain geographic markets if Samsung prevails in its current litigation against us.
 
Risks Related to Our Charter Documents, Stockholder Rights Plan and Our Stock Price
 
Anti-takeover provisions in our charter documents, stockholder rights plan and in Delaware law could prevent or delay a change in control and, as a result, negatively impact our stockholders.
 
We have taken a number of actions that could have the effect of discouraging a takeover attempt. For example, we have adopted a stockholder rights plan that would cause substantial dilution to a stockholder, 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 prevent us from being acquired. In addition, our certificate of incorporation grants the board of directors the authority to fix the rights, preferences and privileges of and issue up to 4,000,000 shares of preferred stock without stockholder action. Although we have no present intention to issue shares of preferred stock, such an issuance could have the effect of making it more difficult and less attractive for a third party to acquire a majority of our outstanding voting stock. Preferred stock may also have other rights, including economic rights senior to 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 except in certain limited circumstances a corporation shall not engage in any business combination with any interested stockholder during the three-year period following the time that such stockholder becomes an interested stockholder. This provision could have the effect of delaying or preventing a change of control of SanDisk.

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Our stock price has been, and may continue to be, volatile, which could result in investors losing all or part of their investments.
 
The market price of our stock has fluctuated significantly in the past and is likely to continue to fluctuate in the future. For example, in the 12 months ending June 30, 2002, our stock price fluctuated significantly from a low of $8.61 to a high of $27.94. We believe that such fluctuations will continue as a result of future announcements concerning us, our competitors or principal customers regarding technological innovations, new product introductions, governmental regulations, litigation or changes in earnings estimates by analysts. In addition, in recent years the stock market has experienced significant price and volume fluctuations and the market prices of the securities of high technology 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. Furthermore, the market price for the notes may be adversely affected by declines in the market price of our common stock or deterioration of our financial performance, declines in the overall market for similar securities and the actual or perceived performance or prospects for companies in our industry.
 
Risks Related to Our Indebtedness
 
We have substantially increased our indebtedness, which may restrict our cash flow, make it difficult for us to obtain future financing, divert our resources from other uses, limit our ability to react to changes in the industry, and place us at a competitive disadvantage.
 
As a result of the sale and issuance of our 4½% convertible subordinated notes in December 2001 and January 2002, we incurred $150.0 million aggregate principal amount of additional indebtedness, substantially increasing our ratio of debt to total capitalization. While the notes are outstanding, we will have debt service obligations on the notes of approximately $6.8 million per year in interest payments. If we are unable to generate sufficient cash to meet these obligations and must instead use our existing cash or investments, we may have to reduce, curtail or terminate other activities of our business.
 
We intend to fulfill our debt service obligations from cash generated by our operations, if any, and from our existing cash and investments. If necessary, among other alternatives, we may add lease lines of credit to finance capital expenditures and obtain other long-term debt and lines of credit. We may incur substantial additional indebtedness in the future. The level of our indebtedness, among other things, could:
 
 
•
 
require the dedication of a substantial portion of any cash flow from our operations to service our indebtedness, thereby reducing the amount of cash flow available for other purposes, including working capital, capital expenditures and general corporate purposes;
 
 
•
 
make it difficult for us to obtain any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes;
 
 
•
 
cause us to use a significant portion of our cash and cash equivalents or possibly liquidate other assets to repay the total principal amount due under the notes and our other indebtedness if we were to default under the notes or our other indebtedness;
 
 
•
 
limit our flexibility in planning for, or reacting to changes in, our business and the industries in which we complete;
 
 
•
 
place us at a possible competitive disadvantage with respect to less leveraged competitors and competitors that have better access to capital resources; and
 
 
•
 
make us more vulnerable in the event of a further downturn in our business.
 
There can be no assurance that we will be able to meet our debt service obligations, including our obligations under the notes.

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In 2000, we entered into a joint venture agreement with Toshiba, under which we formed FlashVision. We agreed to guarantee one-half of all FlashVision lease amounts up to a maximum guarantee of $175.0 million. In March 2002, FlashVision exercised its right of early termination under the lease facility and repaid all amounts outstanding thereunder in April 2002. FlashVision secured a new equipment lease arrangement in May 2002 with Mizuho and certain other financial institutions. Under the terms of the new lease, we do not have a guarantee obligation to the lender. However, we have agreed to indemnify Toshiba in certain circumstances for certain liabilities Toshiba incurs as a result of Toshiba’s guarantee of the FlashVision equipment lease arrangement. If FlashVision fails to meet its lease commitments, we will be obligated to reimburse Toshiba for 49.9% of any claims under the lease, unless such claims result from Toshiba’s failure to meet its obligations to FlashVision or its covenants to the lender. As of June 30, 2002, the maximum amount of our indemnification obligation was approximately $158.0 million.
 
This contingent indemnification obligation might constitute senior indebtedness under the notes and we may use a portion of the proceeds from the notes to repay the obligation. This would result in the diversion of resources from other important areas of our business and could significantly harm our business, financial condition and results of operations.
 
We may not be able to satisfy a fundamental change offer under the indenture governing the notes.
 
The indenture governing the notes contains provisions that apply to a fundamental change. A fundamental change as defined in the indenture would occur if we were to be acquired for consideration other than cash or securities traded on a major U.S. securities market. If someone triggers a fundamental change, we may be required to offer to purchase the notes with cash. This would result in the diversion of resources from other important areas of our business and could significantly harm our business, financial condition and results of operations.
 
If we have to make a fundamental change offer, we cannot be sure that we will have enough funds to pay for all the notes that the holders could tender. Our failure to redeem tendered notes upon a fundamental change would constitute a default under the indenture and might constitute a default under the terms of our other indebtedness, which would significantly harm our business and financial condition.
 
We may not be able to pay our debt and other obligations which would cause us to be in default under the terms of our indebtedness which would result in harm to our business and financial condition.
 
If our cash flow is inadequate to meet our obligations, we could face substantial liquidity problems. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on the notes or our other indebtedness, we would be in default under the terms thereof, which would permit the holders of the notes to accelerate the maturity of the notes and also could cause defaults under our other indebtedness. Any such default would harm our business, prospects, financial condition and operating results. In addition, we cannot assure you that we would be able to repay amounts due in respect of the notes if payment of the notes were to be accelerated following the occurrence of any other event of default as defined in the indenture governing the notes. Moreover, we cannot assure that we will have sufficient funds or will be able to arrange for financing to pay the principal amount due on the notes at maturity.
 
We may need additional financing, which could be difficult to obtain, which if not obtained in satisfactory amounts may prevent us from 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 expect that our existing cash and investment balances, including the proceeds of the notes, and cash generated from operations will be sufficient to meet our cash requirements to fund operations and expected capital expenditures for at least the next twelve months. However, in the event we need to raise additional funds during that time period or in future periods, we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. From time to time, we may decide to raise additional funds through public or private debt or equity financings to fund our activities. If we issue additional equity securities, our stockholders will experience additional dilution and the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock or debt securities. In addition, if we raise funds through debt financing, we will

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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, we may not be able to develop or enhance our products, take advantage of future opportunities, grow our business or respond to competitive pressures or unanticipated industry changes, any of which could have a negative impact on our business.
 
The notes and other indebtedness have rights senior to those of our current stockholders such that in the event of our bankruptcy, liquidation or reorganization or upon acceleration of the notes due to an event of default under the indenture and in certain other events, our assets will be available for distribution to our current stockholders only after all senior indebtedness is repaid.
 
In the event of our bankruptcy, liquidation or reorganization or upon acceleration of the notes due to an event of default under the indenture and in certain other events, our assets will be available for distribution to our current stockholders only after all senior indebtedness, including our indemnification obligations to Toshiba and obligations under the notes, have been paid in full. As a result, there may not be sufficient assets remaining to make any distributions to our stockholders. The notes are also effectively subordinated to the liabilities of any of our subsidiaries (including trade payables, which as of June 30, 2002 were $188,000). Neither we nor our subsidiaries are limited from incurring debt, including senior indebtedness, under the indenture. If we or our subsidiaries were to incur additional debt or liabilities, our ability to pay our obligations on the notes could be adversely affected. We anticipate that from time to time we will incur additional debt, including senior indebtedness. Our subsidiaries are also likely to incur liabilities in the future.
 
Item 3.     Quantitative and Qualitative Disclosures About Market Risk
 
Please refer to the our Form 10-K/A for the year ended December 31, 2001.

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PART II.    OTHER INFORMATION
 
Item 1.     Legal Proceedings
 
From time to time, it has been and may continue to be necessary to initiate or defend litigation against third parties to preserve and defend our intellectual property rights. These parties could in turn bring suit against us.
 
On or about August 3, 2001, the Lemelson Medical, Education & Research Foundation, or Lemelson Foundation, filed a complaint for patent infringement against us and four other defendants. The suit, captioned Lemelson Medical, Education, & Research Foundation, Limited Partnership vs. Broadcom Corporation, et al., Civil Case No. CIV01 1440PHX HRH, was filed in the United States District Court, District of Arizona. On November 13, 2001, the Lemelson Foundation filed an Amended Complaint, which made the same substantive allegations against us but named more than twenty-five additional defendants. The Amended Complaint alleges that we, and the other defendants, have infringed certain patents held by the Lemelson Foundation pertaining to bar code scanning technology. By its complaint, the Lemelson Foundation requests that we be enjoined from our allegedly infringing activities and seeks unspecified damages. On February 4, 2002, we filed an answer to the amended complaint, wherein we alleged that we do not infringe the asserted patents, and further contend that the patents are not valid or enforceable.
 
On October 15, 2001, we filed a complaint for patent infringement in the United States District Court for the Northern District of California against Micron Technology, Inc., or Micron. In the suit, captioned SanDisk Corp. v. Micron Technology, Inc., Civil No. CV 01-3855 CW, the complaint seeks damages and an injunction against Micron for making, selling, importing or using flash memory cards that infringe our U.S. Patent No. 6,149,316. On February 15, 2002, Micron answered the complaint, denied liability, and counterclaimed seeking a declaration that the patent in suit is not infringed, is invalid, and is unenforceable. On May 31, 2002, based on allegations of infringement leveled by Micron against us, we filed a complaint for declaratory judgment, seeking a declaration that we have not infringed and are not infringing five patents (or, in the alternative, that the patents are invalid). The patents in question are U.S. Patent No. 4,468,308; U.S. Patent No. 5,286,344; U.S. Patent No. 5,320,981; U.S. Patent No. 6,015,760; and U.S. Patent No. 6,287,978 B1. The suit is captioned SanDisk Corp. v. Micron Technology, Inc., Civil No. CV 02-2627 VRW. On June 4, 2002, Micron answered and counterclaimed alleging that we do infringe the five listed patents.
 
On October 31, 2001, we filed a complaint for patent infringement in the United States District Court for the Northern District of California against Memorex Products, Inc., Pretec Electronics Corporation, Ritek Corporation and Power Quotient International Co., Ltd. In the suit, captioned SanDisk Corp. v. Memorex Products, Inc., et. al., Civil No. CV 01-4063 VRW, we seek damages and injunctions against these companies from making, selling, importing or using flash memory cards that infringe our U.S. patent No. 5,602,987 or the ‘987 Patent. Defendants Memorex, Pretec and Ritek have filed answers denying the allegations. We filed a motion for a preliminary injunction in the suit to enjoin Memorex, Pretec and Ritek from making, selling, importing or using flash memory cards that infringe our ‘987 Patent prior to the trial on the merits. On May 17, 2002, the Court denied our motion. Discovery has commenced. The Court has set a trial date for the later half of 2003.
 
On November 30, 2001, we filed a complaint for patent infringement in the United States District Court for the Northern District of California against Power Quotient International—USA Inc, or PQI-USA. In the suit, captioned SanDisk Corp. v. Power Quotient International—USA Inc., Civil No. C 01-21111, we seek damages and an injunction against PQI-USA from making, selling, importing or using flash memory cards that infringe our U.S. patent No. 5,602,987. The PQI-USA complaint and litigation are related to the October 31, 2001 litigation referred to above. The products at issue in the PQI-USA case are identical to those charged with infringement in the October 31, 2001 litigation. On December 21, 2001, PQI-USA filed an answer to the complaint denying the allegations, which included a counter claim for a declaratory judgment of non-infringement and invalidity of our ‘987 Patent. We have motioned for a preliminary injunction in the suit to enjoin PQI-USA from making, selling, importing or using flash memory cards that infringe our ‘987 Patent prior to the trial on the merits. On April 8, 2002, the Court heard argument on the preliminary injunction motion and a decision on the motion is pending. Discovery has commenced. The Court has set a trial date for the later half of 2003.

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On or about March 5, 2002, Samsung Electronics Co., Ltd., or Samsung, filed a patent infringement lawsuit against us in the United States District Court for the Eastern District of Texas, Civil Action No. 9:02CV58. The lawsuit alleges that we infringe four Samsung United States patents, Nos. 5,473,563; 5,514,889; 5,546,341 and 5,642,309, and seeks a preliminary and permanent injunction against unnamed products of ours, as well as damages, attorneys’ fees and cost of the lawsuit. On March 28, 2002, we filed an answer and counterclaims denying infringement and asserting the Samsung patents are invalid and/or unenforceable. The counterclaims asserted that Samsung breached a 1997 agreement between SanDisk and Samsung. On April 3, 2002, Samsung filed its first amended complaint. The amended complaint restricted Samsung’s original infringement allegations with respect to the four patents listed above to SanDisk products that include NAND flash memory. A substantial percentage of SanDisk products include NAND flash memory devices. On April 26, 2002, we filed an answer to Samsung’s first amended complaint and amended counterclaims. This answer and amended counterclaims again denied infringement and asserted that the Samsung patents are invalid and/or unenforceable. In SanDisk’s amended counterclaims, we seek relief for both breach of the 1997 agreement and a declaration of our rights under the 1997 agreement. On July 19, 2002 the Court in the Eastern District of Texas granted our motion to move this lawsuit to the United States District Court for the Northern District of California. As a result of this order, the previous trial date set by the Texas court is no longer effective, and until the Northern District Court orders a new trial date, there is currently no trial date set for this lawsuit. On April 26, 2002, we filed a complaint against Samsung in the United States District Court for the Northern District of California, Civil No. C02-2069 MJJ, for declaratory judgment of non-infringement, invalidity, a declaration of rights under the 1997 agreement with Samsung and breach of contract. In July 2002, the court in this action granted Samsung’s motion to dismiss the action. We intend to appeal the court’s dismissal.
 
Our current license agreement with Samsung expires in August 2002. In the event that we and Samsung do not enter into a new license agreement, we expect that we will incur substantially higher legal fees and we may also experience a reduction in royalty income starting in the fourth quarter of 2002 and potential interruption of sales of certain of our products in certain geographic markets if Samsung prevails in its current litigation against us.
 
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.
 
Item 2.     Changes in Securities
 
None
 
Item 3.     Defaults upon Senior Securities
 
None
 
Item 4.     Submission of Matters to a Vote of Security Holders
 
At our Annual Meeting of Stockholders held on May 22, 2002, the following individuals were elected to the Board of Directors:
 
    
Votes For
   
Votes Withheld
William V. Campbell
   
57,074,016
   
284,479
Irwin Federman
   
50,720,370
   
6,638,125
Eli Harari
   
52,925,530
   
4,432,965
James D. Meindl
   
57,053,488
   
305,007
Alan F. Shugart
   
56,608,619
   
749,876

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The following proposal was approved at our Annual Meeting:
 
    
Shares Voted For
   
Shares Voted Against
   
Shares Abstaining
   
Broker Non-votes
Ratify the appointment of Ernst & Young LLP as independent auditors for the fiscal year ending December 31, 2002.
   
55,463,553
   
1,855,923
   
38,719
   
300
 
Item 5.     Other Information
 
None
 
Item 6.     Exhibits and Reports on Form 8-K
 
A.  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.(12)
3.3
   
Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated May 11, 2000.(16)
3.4
   
Restated Bylaws of the Registrant, as amended to date.(15)
3.5
   
Certificate of Designation for the Series A Junior Participating Preferred Stock, as filed with the Delaware Secretary of State on April 24, 1997.(4)
4.1
   
Reference is made to Exhibits 3.1, 3.2 and 3.3.(2), (12), (15)
4.2
   
Amended and Restated Registration Rights Agreement, among the Registrant and the investors and founders named therein, dated March 3, 1995.(2)
4.3
   
Series F Preferred Stock Purchase Agreement between Seagate Technology, Inc. and the Registrant dated January 15, 1993.(2)
4.4
   
Rights Agreement, dated as of April 18, 1997, between the Company and Harris Trust and Savings Bank.(4)
4.5
   
First Amendment to Rights Agreement dated October 22, 1999, between Harris Trust and the Registrant.(9)
4.6
   
Second Amendment to Rights Agreement dated December 17, 1999, between Harris Trust and the Registrant. (11)
4.7
   
Indenture, dated as of December 24, 2001, between the Registrant and The Bank of New York, as Trustee, including the form of note set forth in Section 2.2 thereof.(15)
4.8
   
Registration Rights Agreement, dated as of December 24, 2001, among the Registrant, as Issuer and Morgan Stanley & Co. Incorporated and ABN AMRO Rothschild LLC, as Initial Purchasers.(15)
9.1
   
Amended and Restated Voting Agreement, among the Registrant and the investors named therein, dated March 3, 1995.(2)
10.1
   
License Agreement between the Registrant and Dr. Eli Harari, dated September 6, 1988.(2)
10.2
   
1989 Stock Benefit Plan.(2), (*)
10.3
   
Employee Stock Purchase Plan.(2), (*)
10.4
   
1995 Non-Employee Directors Stock Option Plan.(2), (*)
10.5
   
Lease Agreement between the Registrant and G.F. Properties, dated March 1, 1996.(3)
10.6
   
Amendment to Lease Agreement between the Registrant and G.F. Properties, dated April 3, 1997.(5)
10.7
   
Foundry Venture Agreement between the Registrant and United Microelectronics Corporation, dated June 27, 1997.(1),(6)
10.8
   
Written Assurances Re: Foundry Venture Agreement between the Registrant and United Microelectronics Corporation, dated September 13, 1995.(1), (6)

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Table of Contents
Exhibit Number
   
Exhibit Title
10.9
   
Side Letter between Registrant and United Microelectronics Corporation, dated May 28, 1997.(1),(6)
10.10
   
Clarification letter with regards to Foundry Venture Agreement between the Registrant and United Microelectronics Corporation dated October 24, 1997.(7)
10.11
   
Lease Agreement between the Registrant and G.F. Properties, dated June 10, 1998.(8)
10.12
   
1995 Stock Option Plan Amended and Restated as of December 17, 1998.(10),(*)
10.13
   
1995 Non-Employee Directors Stock Option Plan Amended and Restated as of December 17, 1998.(10),(*)
10.14
   
1995 Employee Stock Purchase Plan Amended and Restated as of December 17, 1998. (10),(*)
10.15
   
Common R&D and Participation Agreement, dated as of May 9, 2000, by and between the Registrant and Toshiba Corporation.(12),(+)
10.16
   
Product Development Agreement, dated as of May 9, 2000, by and between the Registrant and Toshiba Corporation.(12),(+)
10.17
   
Share Purchase Agreement, dated as of July 4, 2000, by and between the Registrant and Tower Semiconductor Ltd.(13)
10.18
   
Escrow Agreement, dated as of August 14, 2000, by and between the Registrant, Tower Semiconductor Ltd. and Union bank of California, N.A.(13)
10.19
   
Additional Purchase Obligation Agreement, dated as of July 4, 2000, by and between the Registrant and Tower Semiconductor Ltd.(13)
10.20
   
Shareholders Agreement, dated as of July 4, 2000, by and between the Registrant and the Israel Corporation.(13)
10.21
   
Definitive Agreement to Form Vending Business, dated August 7, 2000, by and between the Registrant and Photo-Me International, Plc.(13),(+)
10.22
   
Non-Solicitation Agreement, dated August 7, 2000, by and between the Registrant, DigitalPortal Inc. and Photo-Me International, Plc.(13),(+)
10.23
   
Exclusive Product Purchase Agreement, dated as of August 7, 2000, by and between Photo-Me, International Plc., and DigitalPortal Inc.(13),(+)
10.24
   
Stockholders’ Agreement, dated as of August 7, 2000, by and among the Registrant, DigitalPortal Inc. and Photo-Me, International, Plc.(13),(+)
10.25
   
Bylaws of DigitalPortal Inc.(13),(+)
10.26
   
Registration Rights Agreement, dated as of January 18, 2001, by and between Registrant, The Israel Corporation, Alliance Semiconductor Ltd., Macronix International Co., Ltd. and Quick Logic Corporation(14)
10.27
   
Consolidated Shareholders Agreement, dated as of January 18, 2001, by and among Registrant, The Israel Corporation, Alliance Semiconductor Ltd. And Macronix International Co., Ltd. (14)
10.28
   
Memorandum of Understanding, dated as of December 17, 2001 by and between the Registrant and Toshiba Corporation. (15), (+)
10.29
   
Amendment to Share Purchase Agreement, dated as of March 20, 2002, by and between the Registrant and Tower Semiconductor Ltd.(17)
10.30
   
New Master Agreement, dated as of April 10, 2002, by and between the Registrant and Toshiba Corporation. (**), (++)
10.31
   
New Operating Agreement, dated as of April 10, 2002, by and between the Registrant and Toshiba Corporation. (**), (++)
10.32
   
Amendment to Common R&D Agreement, dated as of April 10, 2002, by and between the Registrant and Toshiba Corporation. (**), (++)
10.33
   
Amendment to Product Development Agreement, dated as of April 10, 2002, by and between the Registrant and Toshiba Corporation. (**), (++)
10.34
   
Indemnification and Reimbursement Agreement, dated as of April 10, 2002, by and between the Registrant and Toshiba Corporation. (**), (++)
10.35
   
Amendment to Indemnification and Reimbursement Agreement, dated as of May 29, 2002 by and between the Registrant and Toshiba Corporation. (**)
99.1
   
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (**)

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Table of Contents
*
 
Indicates management contract or compensatory plan or arrangement.
**
 
Filed herewith.
+
 
Confidential treatment has been granted for certain portions thereof.
++
 
Confidential treatment has been requested for certain portions thereof.
 
  1.
 
Confidential treatment granted as to certain portions of these exhibits.
  2.
 
Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-1 (No. 33-96298).
  3.
 
Previously filed as an Exhibit to the Registrant’s 1995 Annual Report on Form 10-K.
  4.
 
Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K/A dated April 18, 1997.
  5.
 
Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended June 30, 1997.
  6.
 
Previously filed as an Exhibit to the Registrant’s Current Report on form 8-K dated October 16, 1997.
  7.
 
Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended September 30, 1997.
  8.
 
Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended June 30, 1998.
  9.
 
Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated January 1, 1999.
10.
 
Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended March 31, 1999.
11.
 
Previously filed as an Exhibit to the Registrant’s 1999 Annual Report on Form 10-K.
12.
 
Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended June 30, 2000.
13.
 
Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended September 30, 2000.
14.
 
Previously filed as an Exhibit to the Registrant’s Schedule 13(d) dated January 26, 2001.
15.
 
Previously filed as an Exhibit to the Registrant’s 2001 Annual Report on Form 10-K.
16.
 
Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-3 (No. 333-85686).
17.
 
Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended March 31, 2002.
 
B.  Reports on Form 8-K
 
None

47

Table of Contents
 
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/    MICHAEL GRAY        
   
Michael Gray
Vice President Finance
(On behalf of the Registrant and as
Principal Financial Officer.)
 
Dated:    August 13, 2002

48
EX-10.30 3 dex1030.txt NEW MASTER AGREEMENT DATED 04/10/2002 Exhibit 10.30 ================================================================================ NEW MASTER AGREEMENT Dated as of April 10, 2002 by and between TOSHIBA CORPORATION and SANDISK CORPORATION ================================================================================ New Master Agreement CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS, RULES OF CONSTRUCTION AND DOCUMENTARY CONVENTIONS ........... 1 SECTION 1.01 Certain Definitions ............................................... 1 SECTION 1.02 Additional Definitions ............................................ 2 SECTION 1.03 Rules of Construction and Documentary Conventions ................. 3 SECTION 1.04 Additional Rules of Construction .................................. 3 ARTICLE II PURPOSE OF FVC-JAPAN ..................................................... 4 SECTION 2.01 Purpose ........................................................... 4 SECTION 2.02 New Operating Agreement ........................................... 4 ARTICLE III CLOSING; DISSOLUTION OF FVC .............................................. 4 SECTION 3.01 Closing ........................................................... 4 SECTION 3.02 Termination of Master Agreement ................................... 4 SECTION 3.03 Post Closing Matters ............................................. 5 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PARTIES ............................ 6 SECTION 4.01 Organization, Ownership Interest, etc ............................. 6 SECTION 4.02 Authorization; No Conflict ........................................ 7 SECTION 4.03 Enforceability .................................................... 8 SECTION 4.04 Proceedings ....................................................... 8 SECTION 4.05 Litigation; Decrees ............................................... 8 SECTION 4.06 Compliance with Other Instruments ................................. 9 SECTION 4.07 Patents and Proprietary Rights .................................... 9 SECTION 4.08 Compliance with Laws .............................................. 9 SECTION 4.09 Patent Cross Licenses ............................................. 9 SECTION 4.10 Representations with Respect to FVC-Japan ......................... 9 ARTICLE V COVENANTS ................................................................ 10 SECTION 5.01 Covenants of the Parties .......................................... 10 SECTION 5.02 Further Assurances ................................................ 11 SECTION 5.03 Public Announcements .............................................. 11 SECTION 5.04 Expenses .......................................................... 12 SECTION 5.05 Undertaking as to Affiliate Obligations ........................... 12
New Master Agreement TABLE OF CONTENTS (continued)
Page SECTION 5.06 Continuity and Maintenance of Operations ................. 12 SECTION 5.07 Certain Deliveries and Notices ........................... 12 ARTICLE VI COVENANTS CONCERNING NAND FLASH MEMORY PRODUCT BUSINESS ................................................... 13 SECTION 6.01 Technology Transfers ..................................... 13 SECTION 6.02 Start-up Services at the Yokkaichi Facility .............. 13 SECTION 6.03 Expanded Capacity ........................................ 14 SECTION 6.04 Capacity Sharing Arrangement ............................. 16 SECTION 6.05 Creation of Management Committee ......................... 18 SECTION 6.06 Personnel ................................................ 21 SECTION 6.07 Non-solicitation of Employees ............................ 22 SECTION 6.08 External Financing; Additional Equipment ................. 23 SECTION 6.09 Other Activities ......................................... 23 SECTION 6.10 Protection of Intellectual Property ...................... 24 SECTION 6.11 Purchase of Replacement Tools ............................ 24 SECTION 6.12 Installation of FVC-Japan Equipment ...................... 25 ARTICLE VII OTHER AGREEMENTS ................................................. 25 SECTION 7.01 FVC-Japan Foundry Agreement .............................. 25 SECTION 7.02 SanDisk Foundry Agreement ................................ 27 SECTION 7.03 Purchase and Supply Agreement ............................ 28 SECTION 7.04 Common R&D Agreement ..................................... 29 SECTION 7.05 Product Development Agreement ............................ 29 SECTION 7.06 Other Matters ............................................ 29 SECTION 7.07 Yokkaichi Service Agreement .............................. 30 SECTION 7.08 Patent Cross License ..................................... 30 ARTICLE VIII TERMINATION ...................................................... 30 SECTION 8.01 Termination .............................................. 30 ARTICLE IX MISCELLANEOUS .................................................... 35 SECTION 9.01 No Partnership ........................................... 35 SECTION 9.02 Governing Law ............................................ 35 SECTION 9.03 Dispute Resolution ....................................... 35
Master Agreement ii TABLE OF CONTENTS (continued)
Page SECTION 9.04 Damages Limited .................................................... 36 EXHIBITS - -------- Exhibit A - New Operating Agreement Exhibit B - Certificate of Cancellation Exhibit C - Articles of Incorporation of FVC-Japan Exhibit D - Balance Sheet of FVC-Japan Exhibit E - Indemnification Agreement Exhibit F - SanDisk Foundry Agreement Exhibit G - Amendment to Common R&D Agreement Exhibit H - Amendment to Product Development Agreement Exhibit I - License Amendment SCHEDULES - --------- Schedule 2.01 - Definition Regarding Embedded NAND Flash Schedule 4.05 - Litigation; Decrees Schedule 4.07 - Patents and Proprietary Rights Schedule 6.01 - New Facility Transfer Costs Schedule 6.02(b) - Costs and Expenses Related to Disposal of FVC Assets Schedule 6.03 - Priority for Expansion of Manufacturing Capacity of NAND Flash Memory Products Schedule 7.02(b) - Allocation of Yokkaichi (not including the FVC-Japan Equipment) NAND Flash Memory Products Schedule 8.01(d) - Royalty in case of SanDisk Unilateral Termination Schedule 8.01(e) - Royalty in case of Deadlock Termination Schedule 8.01(f) - Royalty in case of Event of Default Termination
Master Agreement iii This NEW MASTER AGREEMENT, dated as of April 10, 2002, is entered into by and between TOSHIBA CORPORATION, a Japanese corporation ("Toshiba") and SANDISK CORPORATION, a Delaware corporation ("SanDisk", and together with Toshiba, the "Parties"). WHEREAS, the Parties desire to jointly develop, manufacture and market NAND Flash Memory Products (as hereinafter defined) and NAND related products; WHEREAS, in connection with the manufacturing of NAND Flash Memory Products, the Parties have formed FlashVision, L.L.C., a Virginia limited liability company ("FVC"), and the Parties collectively own all of the outstanding equity interest of FVC; WHEREAS, Toshiba currently owns and operates a manufacturing facility located in Yokkaichi-shi, Japan (the "Yokkaichi Facility"). For purposes of this Agreement, "Yokkaichi" means Toshiba in its capacity as the owner and operator of the Yokkaichi Facility; WHEREAS, Toshiba currently owns all of the outstanding equity interest in FlashVision, Ltd., a limited liability company (yugenkaisha) organized under the laws of Japan ("FVC-Japan"); WHEREAS, the Parties now desire to discontinue FVC's business in Manassas, Virginia and move the operations formerly conducted by FVC to Japan, where such operations will be conducted by FVC-Japan; WHEREAS, in order to realize these goals, the Parties desire to consummate or cause to be consummated the transactions described in this Agreement, and any other transactions which the Parties may from time to time consider necessary or appropriate to carry out the intent of the Parties; NOW, THEREFORE, the Parties agree as follows: ARTICLE I DEFINITIONS, RULES OF CONSTRUCTION AND DOCUMENTARY CONVENTIONS SECTION 1.01 Certain Definitions. (a) Capitalized terms used but not defined in this Agreement shall have the respective meanings assigned to them in Appendix A, Definitions, Rules of Construction and Documentary Conventions, attached to this Agreement and made a part hereof. New Master Agreement (b) As used herein, the term "Agreement" means this New Master Agreement together with any Exhibits, Schedules, Appendices and Attachments hereto. SECTION 1.02 Additional Definitions. The following capitalized terms used in this Agreement shall have the respective meanings assigned in this Agreement: Term Defined In - ---- ---------- ..13u/MLC Tools Section 6.11 Acquiring Party Section 8.01(c) Additional Capacity Tools Section 6.11 Amendment to Common R&D Agreement Section 7.04 Amendment to Product Development Agreement Section 7.05 Appointing Party Section 6.05(b) Bridge Loan Section 3.03(c)(ii) Committee Representatives Section 6.05(b) Common R&D Agreement Section 7.04 Designated Individuals Section 9.03(a) FVC Recitals FVC Capital Section 3.03(b)(iv) FVC Owned Equipment Section 3.03(b)(v) FVC-Japan Recitals FVC-Japan Foundry Agreement Section 7.01 FVC-Japan Sales Price Section 7.03(b) ICs Section 2.01 Indemnification Agreement Section 6.08(a) Intellectual Property Section 4.07 Leased Equipment Section 3.03(b)(i) License Agreement Section 7.08 License Amendment Section 7.08 Logistics Service Agreement Section 6.02(b)(iii) Management Committee Section 6.05 NAND Flash Memory Integrated Circuits Section 6.09 NAND Flash Memory Products Section 2.01 NAND Process Technology Section 6.01(a) New Facility Section 6.01(a) New Operating Agreement Section 2.02 Master Agreement 2 Term Defined In - ---- ---------- Non-Originating Party Section 6.04(c) Originating Party Section 6.04(c) Product Development Agreement Section 7.05 Proprietary NAND Flash Memory Products Section 6.04(b) Purchase and Supply Agreement Section 7.03 Replacement Tools Section 6.11 Requesting Party Section 8.01(c)(I) SanDisk Foundry Agreement Section 7.02 SanDisk Termination Capacity Section 8.01(d)(i) Selling Party Section 8.01(c) Service Fee Section 6.02(b)(iii) Start-Up Costs Section 6.02(a) Start-Up Period Section 6.02(a) Start-Up Services Section 6.02(a) Tax Returns Section 4.10(f) Termination Capacity Section 8.01(c)(i) Termination Date Section 8.01(a) Transferred Equipment Section 6.02(a) Units Section 3.03(a) Yokkaichi Recitals Yokkaichi Facility Recitals Yokkaichi Manufacturing Costs Section 7.01(d) Yokkaichi Sales Price Section 7.01(d) Yokkaichi Service Agreement Section 7.07 Yokkaichi Target Capacity Section 7.01(b) SECTION 1.03 Rules of Construction and Documentary Conventions. The rules of construction and documentary conventions set forth in Appendix A shall apply to this Agreement. SECTION 1.04 Additional Rules of Construction. The terms and provisions of this Agreement are binding on the Parties; provided however, that to the extent that a description in this Agreement of another agreement (whether an Operative Document or otherwise) conflicts with or differs from the provisions of that agreement, then the provisions of that agreement shall control as to such conflict or difference. Master Agreement 3 ARTICLE II PURPOSE OF FVC-JAPAN SECTION 2.01 Purpose. FVC-Japan will, through a series of relationships and agreements, be engaged in the manufacture, by one or more subcontract arrangements, and sale of NAND (both binary and MLC Flash Memory) Flash Memory Integrated Circuits (as hereinafter defined), excluding any products with process design rules generally greater than 0.25 microns (collectively, "NAND Flash Memory Products"), for the Parties (whether directly or indirectly through their respective Affiliates). Except as specifically provided for in Articles VI and VII, all NAND Flash Memory Products of the Parties and their respective Affiliates will be acquired through FVC-Japan. Embedded Integrated Circuits ("ICs") incorporating NAND Flash Memory Products as well as logic circuitry (i) will be included in the definition of NAND Flash Memory Products if the main function and value of such IC is Flash Memory and (ii) will not be included in the definition of NAND Flash Memory Products if the main function and value of such IC is logic. Schedule 2.01 sets forth the formula that the Parties shall use to determine the main function and value of ICs. The Parties each are permitted to market and sell NAND Flash Memory Products manufactured by and for Toshiba and/or SanDisk, as provided for in this Agreement, to any third party in any form, including but not limited to chips, packaged devices and cards. SECTION 2.02 New Operating Agreement. In accordance with the Japan Act, as of the date hereof, the Parties will enter into that certain New Operating Agreement (the "New Operating Agreement"), in the form attached hereto as Exhibit A, which sets forth (i) the business of FVC-Japan, (ii) the conduct of FVC-Japan's affairs and (iii) the rights, powers, preferences, limitations and responsibilities of the Parties as owners of Units in FVC-Japan. ARTICLE III CLOSING; DISSOLUTION OF FVC SECTION 3.01 Closing. The Closing shall occur upon the execution of this Agreement and of each other Operative Document (except for any Operative Document to be executed following the Closing under the terms of this Agreement). SECTION 3.02 Termination of Master Agreement. Effective immediately upon Closing, that certain Master Agreement, dated as of May 9, 2000, by and among Toshiba, SENA and SanDisk, shall be terminated and be of no further force or effect. Pursuant to a letter agreement dated as of the date hereof, SENA has consented to such termination. Master Agreement 4 SECTION 3.03 Post Closing Matters. (a) Sale of FVC-Japan Equity Interest. As soon as practicable following the Closing, Toshiba agrees to sell to FVC all of the units of contribution (shussi mochibun) in FVC-Japan, the par value of one unit (shussi-hitokuchi-no-kingaku) being JPY 5,000 (the "Units"), for the amount of [***]. (b) Transfer of FVC Equipment; Capital Increase in FVC-Japan. The Parties agree to take the following actions, in the order listed, as soon as practicable following the sale of the Units to FVC: (i) cause FVC to sell to FVC-Japan the equipment which was formerly leased from ABN AMRO (the "Leased Equipment"), for an amount equal to the Net Book Value thereof; then (ii) cause FVC to sell to either DSC or Toshiba certain building, clean room and other assets to be agreed by the Parties in the amount equal to the Net Book Value thereof as of March 31, 2002; then (iii) cause FVC to sell to either DSC or Toshiba certain other tools to be agreed by the Parties in the amount equal to the Net Book Value thereof; then (iv) cause FVC-Japan to authorize the increase of the capital in FVC-Japan by 1,000 Units, and cause FVC to subscribe to purchase all of such increase by means of a cash payment, by wire transfer of immediately available Japanese Yen, in an amount equal to fifty percent (50%) of the result of (A) the amount of paid in capital of FVC ($300,000,000) minus (B) the amount paid by FVC to Toshiba to acquire all of the outstanding Units pursuant to Section 3.03(a) above ([***]) (the amount resulting from subtracting subsection (B) from subsection (A) hereinafter referred to as the "FVC Capital"); then (v) cause FVC to sell to FVC-Japan the remainder of its owned equipment formerly used by DSC in the manufacture of NAND Flash Memory Products in Manassas, Virginia (the "FVC Owned Equipment") in an amount equal to the Net Book Value thereof as of April 30, 2002; then (vi) cause FVC-Japan to authorize the increase of the capital in FVC-Japan by 1,000 Units, and cause FVC to subscribe to purchase all of such increase by means of a cash payment, by wire transfer of immediately available Japanese Yen, in an amount equal to fifty percent (50%) of the FVC Capital; then (vii) cause FVC to be dissolved and liquidated by filing or causing to be filed, in accordance with the Virginia Act, the Certificate of Cancellation attached hereto as Exhibit B; then New Master Agreement [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 5 (viii) cause the Units held by FVC to be distributed to the Parties on a pro rata basis based upon their respective Percentages as of the date of such distribution. (c) Arrangement of Financing for FVC-Japan. (i) The Parties agree that, following the Closing, they shall use their commercially reasonable efforts (and shall cooperate with the other Party and negotiate in good faith) to cause FVC-Japan to enter into financing arrangements with Mizuho Corporate Bank, Ltd., or any other financial institutions organized under the laws of Japan, as soon as practicable following the Closing with respect to the Leased Equipment. Nothing in this Section 3.03(c) shall be deemed to amend or otherwise affect the obligations of Toshiba under that certain letter agreement, dated March 20, 2002, between the Parties. (ii) In the event that the outstanding principal amount of the loan evidenced by that certain Loan Agreement, dated the date hereof, between Toshiba and FVC-Japan (the "Bridge Loan"), along with any interest accrued thereon, shall have not been repaid on or prior to the date on which any of such amounts have become due and payable, [***]. (d) Asset Sale Adjustment. As soon as practicable, but in no event later than the liquidation of FVC, Toshiba shall pay to FVC an amount equal to the Net Book Value of the assets remaining in the fixed asset account of FVC following the sale or other disposition of installation components, building, clean room assets, the FVC Owned Equipment, tools, and any other assets. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PARTIES Except as may be disclosed in disclosure schedules attached to this Agreement, and unless indicated differently in the provisions of this Article IV, each Party represents and warrants to the other Party, as of the date hereof, as follows: SECTION 4.01 Organization, Ownership Interest, etc. (a) It is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization or incorporation and has the power and authority to carry on its business as conducted on the date hereof, to own or hold under lease its properties and to enter into and perform its obligations under each Operative Document to which it is specified to be a party. New Master Agreement [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 6 (b) It is duly qualified to own or lease its properties and generally to conduct its business as currently, or proposed under the Operative Documents to be, conducted in each jurisdiction necessary for purposes of the transactions contemplated by the Operative Documents, except where failure to so qualify would not have a material adverse effect on either Party or FVC-Japan. SECTION 4.02 Authorization; No Conflict. (a) It has duly authorized, by all necessary action, the execution, delivery and performance of each Operative Document to which it or FVC-Japan is specified to be a party. All corporate and other legal proceedings taken by each Party, FVC and FVC-Japan in connection with the transactions contemplated by the Operative Documents and all documents relating to the transactions contemplated thereby are reasonably satisfactory in form and substance to each Party and its counsel, and certified or other copies of all relevant documents as either Party reasonably requested have been provided to such Party or its counsel. (b) Its execution and delivery of each such Operative Document, its consummation of the transactions contemplated thereby and its compliance therewith, does not and will not (i) require any approval of its stockholders or any approval or consent of any trustee or holder of any of its Indebtedness or obligations, (ii) contravene any Governmental Rule applicable to or binding on it or any of its properties if such contravention would have a material adverse effect on it or on its ability to perform any of its obligations under any Operative Document, (iii) contravene or result in any breach of, or constitute any default, with or without the passage of time, the giving of notice or both, under its charter or by-laws, or contravene or result in any breach of or constitute any default under, or result in the creation of any Lien (other than Permitted Liens) upon any of its property or the property of FVC or FVC-Japan under, any material indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, loan or credit agreement, non-compete agreement, license agreement, partnership or joint venture agreement or other material agreement or document to which it is a party or by which it or any of its properties is or is intended to be bound or by which FVC or FVC-Japan or any of their respective properties is or is intended to be bound, (iv) require any negotiation with, or notice to, any labor union or violate, or require any procedure to be followed under, any collective bargaining or other agreement with employees or (v) require any Governmental Action (other than immaterial Governmental Actions such as routine qualifications to do business intended to be obtained as needed or Governmental Actions needed in connection with the construction and operation of the FVC-Japan Equipment), except, in each case described in clauses (i) through (v) above, such as have been duly obtained, made, taken or otherwise accomplished and which are in full force and effect. All consents and approvals of any Governmental Authority (other than immaterial Governmental Actions such as routine qualifications to do business intended to be obtained as needed or Governmental Actions needed in connection with the operation of the FVC-Japan Equipment) or other third Person necessary or advisable for Master Agreement 7 such Party to consummate in all material respects the transactions contemplated by the Operative Documents have been obtained. No Burdensome Condition exists with respect to such Party, FVC or FVC-Japan in connection with the transactions contemplated by the Operative Documents. The pre-transaction waiting period required by the Japanese Foreign Exchange and Foreign Trade Law, the HSR Act or any other comparable statute, if applicable, and related regulations relating to the transactions contemplated by the Operative Documents, shall have expired or been terminated. SECTION 4.03 Enforceability. (a) It has duly executed and delivered this Agreement and, upon the execution and delivery of this Agreement by the other Party, this Agreement will constitute its legal, valid and binding obligation, enforceable against it in accordance with its terms except as enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance or similar laws affecting the enforcement of creditors' rights generally or the availability of equitable remedies (regardless of whether enforceability is considered in a proceeding at law or in equity). (b) It and its Affiliates have duly executed and delivered each other Operative Document to which it or its Affiliates is or is specified to be a party and, upon the execution and delivery of each such other Operative Document by each other party thereto, each such other Operative Document will constitute its legal, valid and binding obligation, enforceable against it or its Affiliates in accordance with its terms except as enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance or similar laws affecting the enforcement of creditors' rights generally or the availability of equitable remedies (regardless of whether enforceability is considered in a proceeding at law or in equity). SECTION 4.04 Proceedings. There are no actions, claims, investigations or proceedings pending, or to its knowledge threatened, by or before any Governmental Authority that, if adversely determined, would have a material adverse effect on it, on the conduct of the business of FVC-Japan following the Closing as contemplated in the Operative Documents or on such Party's ability to perform any of its material obligations under any Operative Document. SECTION 4.05 Litigation; Decrees. Except as set forth in Schedule 4.05, there are no lawsuits, arbitrations or other legal proceedings pending, or to its knowledge threatened, by or against or affecting it or any of its Affiliates or any of their respective properties that (i) are reasonably likely, based on information known to it as of the date hereof, to have a material adverse effect on the conduct of the business of FVC-Japan following the Closing as contemplated by the Operative Documents or (ii) relate to any of the transactions contemplated by the Operative Documents in a manner which is material to the ability of it to carry out the transactions contemplated hereby and in the other Operative Documents or which could have a material adverse effect on the conduct Master Agreement 8 of the business of FVC-Japan following the Closing as contemplated in the Operative Documents. SECTION 4.06 Compliance with Other Instruments. It is not in default in any material respect in the performance of any material obligation, agreement, instrument or undertaking to which it is a party or by which it or any of its properties is bound, and there is no such obligation, agreement, instrument or undertaking to which it is a party or by which it or any of its properties is bound, in each case which is reasonably likely to have a material adverse effect on the conduct of the business of FVC-Japan following the Closing as contemplated by the Operative Documents. SECTION 4.07 Patents and Proprietary Rights. Except as set forth in Schedule 4.07, to its knowledge, it owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and proprietary rights and processes (collectively, "Intellectual Property") necessary (i) to carry out its obligations under the Operative Documents and (ii) for the conduct of the business of FVC-Japan following the Closing as contemplated in the Operative Documents, without any conflict with or infringement of the rights of others, except as will not have a material adverse effect on either (i) or (ii) above. Except with respect to items referenced in Schedule 4.07, it has not received any communications alleging that its Intellectual Property violates, or by its entering into the transactions contemplated by the Operative Documents, would violate the Intellectual Property of any other Person or entity, which violation could reasonably be expected to have a material adverse effect on either (i) or (ii) above. SECTION 4.08 Compliance with Laws. It has complied and is complying in all material respects with all laws, statutes, permit requirements, licensing requirements, rules and regulations and judicial or administrative decisions, except where the failure to so comply would not have a material adverse effect on its ability to perform its obligations hereunder or under any other Operative Document or on the conduct of the business of FVC-Japan following the Closing as contemplated by the Operative Documents. SECTION 4.09 Patent Cross Licenses. With respect to (a) Toshiba, except as previously disclosed to SanDisk in writing, there are no patent cross licenses between it and any third party that would require FVC-Japan to make any payment pursuant to Section 10 of the License Amendment, and (b) SanDisk, there are no patent cross licenses between it and any third party that would require FVC-Japan to make any payment pursuant to Section 8 of the License Amendment. SECTION 4.10 Representations with Respect to FVC-Japan. Toshiba represents and warrants to SanDisk with respect to FVC-Japan as follows: (a) FVC-Japan is a limited liability company (yugenkaisha) duly organized and validly existing under the laws of Japan. Master Agreement 9 (b) All of the outstanding Units in FVC-Japan are owned by Toshiba. No Units have been issued in violation of the rights of any equity holder, applicable law or the Articles of Incorporation of FVC-Japan, a copy of which is attached hereto as Exhibit C. All of the Units are owned by Toshiba free and clear of all encumbrances, claims, options, warrants, rights or other agreements granting to any other entity any interest in or rights to acquire any equity interest in FVC-Japan at any time or upon the happening of any stated event. (c) Transfer of the Units contemplated under Section 3.03(a) hereof shall vest in FVC legal, valid and marketable title to the Units free and clear of any encumbrances, rights to acquire options and rights of preemption with respect thereto in Toshiba or any other party. (d) The balance sheet of FVC-Japan, dated as of the date hereof, a copy of which is attached as Exhibit D hereto, accurately presents the financial condition of FVC-Japan as of the date hereof. FVC-Japan has no material obligation or liability of any nature whatsoever (direct or indirect, matured or unmatured, absolute, accrued, contingent or otherwise), whether or not required by Japanese GAAP to be provided or reserved against on a balance sheet, except for obligations or liabilities provided for or reserved against in the attached balance sheet. (e) There is no litigation, proceeding or governmental investigation pending or, to the best knowledge of Toshiba, threatened against FVC-Japan. FVC-Japan is not in violation of any decree, order or arbitration award or law, statute or regulations of any Governmental Authority, other than such violations that would not have a material adverse effect on FVC-Japan. (f) All income, consumption, property and other tax returns and reports (the "Tax Returns") required to be filed by FVC-Japan with respect to taxable years or periods ending on or prior to the date hereof have been filed with the appropriate Governmental Authorities in Japan, except such Tax Returns with respect to which the failure to file would not have a material adverse effect on FVC-Japan, and no Tax Return is disputed by any tax authority. FVC-Japan has not received any notice of assessment or proposed assessment by any tax authority in connection with the Tax Returns, and there are no tax claims asserted in writing against FVC-Japan or its properties in connection therewith. ARTICLE V COVENANTS SECTION 5.01 Covenants of the Parties. Each Party agrees that, during the term of this Agreement: Master Agreement 10 (a) Performance of Obligations. It or its Affiliates shall fully and faithfully carry out all its obligations under each Operative Document to which it is a party. (b) Ownership Interest. Except as otherwise expressly permitted by Article IX, X or XI of the New Operating Agreement and the Indemnification Agreement and as contemplated by this Agreement, it shall not Transfer or permit any of its Affiliates to Transfer all or any portion of its Units in FVC-Japan (or all or any portion of its interest in any Subsidiary through which it beneficially owns its Units), to any Person without the consent of the other Party. SECTION 5.02 Further Assurances. Following the Closing, each Party shall, and shall cause its Affiliates, FVC and FVC-Japan to, take all reasonable actions necessary or appropriate to effectuate the transactions contemplated by each Operative Document, and to obtain (and cooperate with the other Party in obtaining) any Governmental Action or third party consent required to be obtained or made by it in connection with any of the transactions contemplated by the Operative Documents; provided, that no Burdensome Condition shall be made to exist with respect to such Party or any of its Affiliates in connection therewith. SECTION 5.03 Public Announcements. (a) At or following the Closing, neither Party shall, nor shall it permit any of its Affiliates to, without the prior written consent of the other Party: (i) issue any public release, announcement or other document, or otherwise publicly disclose any information or make any public statement, concerning the operations of FVC or FVC-Japan or that refers to the other Party or any of its Affiliates in connection therewith (other than a general reference to affiliation with FVC or FVC-Japan) that (A) concerns the financial condition or results of operations of FVC or FVC-Japan other than as required by any Governmental Rule, Japanese GAAP, Japanese GAAS, US GAAP or US GAAS, with respect to the financial disclosure obligations of either Party or (B) disparages either Party, FVC or FVC-Japan's performance or reflects negatively on either Party's commitment to FVC-Japan; or (ii) other than as may be required in connection with filings required to be made with Governmental Authorities with respect to the transactions contemplated by the Operative Documents pursuant to the HSR Act and the Japanese Foreign Exchange and Foreign Trade Law and related regulations, (A) publicly file all or any part of any Operative Document or any description thereof or (B) issue or otherwise make publicly available any press release, announcement or other document that contains confidential information belonging to the other Party (or its Affiliates), FVC or FVC-Japan, except as may be required by any applicable Governmental Rule, in which case such Party shall Master Agreement 11 (or shall cause the Person required to make such filing to) cooperate with the other Party, to the extent reasonable and practicable, in obtaining any confidential treatment for such filing requested by the other Party. (b) Except as required above, the Parties shall endeavor to cooperate to assure that any press releases and announcements be approved by the appropriate representatives of each Party. Each Party agrees to use commercially reasonable efforts to give any approval required under this Section 5.03, or to indicate that such approval will not be given, within five (5) days of receipt of written request by the other Party; provided, however, a Party's failure to respond within said time period shall not be deemed to constitute such Party's approval or consent. SECTION 5.04 Expenses. Each Party shall bear its own expenses in connection with the negotiation, execution and delivery of the Operative Documents. SECTION 5.05 Undertaking as to Affiliate Obligations. Each Party shall cause all covenants, conditions and agreements to be performed, observed or satisfied by any of its Affiliates expressly set forth in any of the Operative Documents to be fully and faithfully observed, performed and satisfied by such Affiliate, and shall not cause or permit to exist (i) an Event of Default with respect to such Affiliate or (ii) except as otherwise permitted pursuant to the New Operating Agreement, any event of dissolution of FVC-Japan caused by such Affiliate. Nothing in Section 5.01 (Covenants of the Parties) or in this Section 5.05 shall be construed to create any right in any Person other than the Parties. SECTION 5.06 Continuity and Maintenance of Operations. During the term of this Agreement, each Party agrees to use all reasonable efforts consistent with past practice and policies to (i) preserve intact in all material respects its present business operations, (ii) keep available the services of its key employees as a group, and (iii) preserve its relationships with suppliers, licensors, licensees, and others having business relationships with it, each to the extent necessary to allow it to perform its obligations under the Operative Documents and to allow FVC-Japan to conduct its business as contemplated in the most recently approved Business Plan. SECTION 5.07 Certain Deliveries and Notices. Each Party shall promptly inform in writing the other Party of (i) any event or occurrences which could be reasonably expected to have a material adverse effect on its ability to perform its obligations under any of the Operative Documents or the ability of FVC-Japan to conduct its business as contemplated in the most recently approved Business Plan, or (ii) any breach or failure to satisfy any condition or covenant contained herein or in any other Operative Document by such Party. Master Agreement 12 ARTICLE VI COVENANTS CONCERNING NAND FLASH MEMORY PRODUCT BUSINESS SECTION 6.01 Technology Transfers. (a) Toshiba shall use all reasonable efforts to develop, and, in exchange for the payments made by SanDisk under the Common R&D Agreement (as hereinafter defined), upon successful development of 0.21, 0.16, 0.13 [***] micron process technology applicable to the manufacturing and testing of NAND Flash Memory Products ("NAND Process Technology") that can be implemented in a commercially viable manner, Toshiba shall transfer such technology and all improvements thereto [***] developed by Toshiba during the term of the Common R&D Agreement, to such manufacturing facilities, other than the Yokkaichi Facility, as may hereafter be agreed upon by the Parties (each, a "New Facility"). Timing of the delivery of technology transfers shall be based on, among other things, available capacity and shall be in accordance with the decision to be made from time to time by the Management Committee. (b) Whenever a technology transfer is required hereunder, Toshiba shall deliver such level of NAND Process Technology to the applicable New Facility as would be normal practice by the Toshiba Semiconductor Company whenever it transfers a technology to a new manufacturing facility or transfers a new or advanced technology to an existing manufacturing facility in order to achieve successful implementation of the newly transferred technology. (c) A technology transfer hereunder shall be deemed complete when the transferred technology passes a reasonable qualification procedure to be mutually agreed upon by the Parties. (d) [***]. (e) [***]. SECTION 6.02 Start-up Services at the Yokkaichi Facility. (a) During the Start-Up Period (as hereinafter defined), various activities will be undertaken to physically transfer the FVC Owned Equipment and the Leased Equipment (collectively, the "Transferred Equipment"), from DSC's facility to the Yokkaichi Facility, with the intent to prepare the Yokkaichi Facility for use of the FVC-Japan Equipment to produce wafers, and during such period of transfer, equipment will be set up, modified and processes refined to achieve reasonable manufacturing yield and overall quality (such activities, the "Start-Up Services"). The costs of the Start-Up Services (the "Start-Up Costs") shall be Yokkaichi's actual expenses for operations together with an allocation (approved by the Parties) of common indirect costs incurred New Master Agreement [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 13 during the Start-Up Period, and shall include, but are not limited to, personnel costs, material costs, FVC-Japan Equipment occupancy costs and other operating expenses. Start-Up Costs shall not include the costs described in Section 6.02(c)(i) and (ii). The term "Start-Up Period" means the period commencing on the execution of this Agreement and ending on either the date of the first wafer in for [***] L/M production or December 31, 2002, whichever occurs earlier. As of the date hereof, the Parties have determined that, SanDisk shall be responsible for [***] of the Start-Up Costs. Such [***] shall be invoiced quarterly by Toshiba to SanDisk in proportion to the level of Start-Up Services expected to be completed during the relevant period as follows: (i) [***] on June 28, 2002, (ii) [***] on September 27, 2002; and (iii) [***] on December 27, 2002. Payment of each invoiced amount shall be due 45 days after the date of such invoice. (b) The Parties agree that the physical transfer of the Transferred Equipment will occur on the basis of the following understanding: (i) Toshiba shall bear, and shall reimburse SanDisk (in such manner as may be mutually agreed by the Parties) for, all costs and expenses related to the disposal of those assets of FVC listed on Schedule 6.02(b). For the avoidance of doubt, it is the intention of the Parties that such costs and expenses have no financial impact on SanDisk. (ii) Toshiba will bear all transportation and insurance expenses related to the transfer of the Transferred Equipment. [***]. (iii) [***]. SECTION 6.03 Expanded Capacity. (a) The Parties intend to meet demand for increased capacity by equally investing in, and jointly building (except for the expansion of the Yokkaichi Facility (not including the FVC-Japan Equipment), unless otherwise agreed upon by the Parties), and sharing, on equal or substantially equal terms, equal amounts of new capacity for NAND Flash Memory Products. Schedule 6.03 sets forth a list in order of priority of expanding the manufacturing capacity of NAND Flash Memory Products. Toshiba shall be allocated NAND Flash Memory Product capacity of [***] L/M and SanDisk shall be allocated NAND Flash Memory Product capacity of [***] L/M at the Yokkaichi Facility (not including the FVC-Japan Equipment). FVC-Japan Equipment shall be installed with a targeted maximum manufacturing capacity for NAND Flash Memory Products of [***] L/M, to be allocated to each Party on an equal basis. Toshiba shall have the right, in its sole discretion, to expand the manufacturing capacity for NAND Flash Memory Products of the Yokkaichi Facility, by up to a maximum of [***] L/M; provided, that, SanDisk shall have the right to have allocated up to [***] of any such expanded capacity so long as SanDisk commits to load such additional capacity for six (6) months, and provided, further, that Toshiba may, in its sole discretion, decrease the manufacturing capacity of the Yokkaichi Facility (not including FVC-Japan Equipment), subject to Section 7.02(b). Master Agreement 14 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (b) Once the FVC-Japan Equipment installed at the Yokkaichi Facility has achieved NAND Flash Memory Products manufacturing capacity of [***] L/M, and after such time as the Yokkaichi Facility (not including the FVC-Japan Equipment) has achieved NAND Flash Memory Products manufacturing capacity of [***] L/M, the Management Committee will determine whether to further expand capacity at the Yokkaichi Facility or to establish a New Facility with capacity to manufacture NAND Flash Memory Products at a targeted capacity to be determined by the Management Committee, not to exceed [***] L/M. SanDisk shall have the option to commit to an allocation of such converted capacity to manufacture NAND Flash Memory Products, up to a maximum of [***] L/M. (c) Until (i) the Yokkaichi Facility (not including the FVC-Japan Equipment) has achieved the expansion of its manufacturing capacity for NAND Flash Memory Products, if any, determined by Toshiba in accordance with Section 6.03(a), (ii) the FVC-Japan Equipment installed at the Yokkaichi Facility has achieved a NAND Flash Memory Product manufacturing capacity of [***] L/M, and (iii) the Parties have further expanded capacity at the Yokkaichi Facility or established a New Facility with a capacity to manufacture NAND Flash Memory Products in an amount determined by the Management Committee (not to exceed a targeted maximum capacity of [***] L/M), the Parties shall not make or cause to be made any other increases in the manufacturing capacity for NAND Flash Memory Products. After the capacity expansions described in clauses (i), (ii) and (iii) of the preceding sentence have been achieved, either Party shall have the one-time option to expand its capacity to manufacture NAND Flash Memory Products; provided, that, in no event shall such Party's capacity [***] of the total combined committed capacity to manufacture NAND Flash Memory Products, after giving effect to such additional expansion. (d) Notwithstanding anything in this Section 6.03 to the contrary, if SanDisk desires to purchase more than [***] L/M of NAND [***] in the calendar year of 2003 or anytime thereafter, and Toshiba cannot offer such additional capacity at a market competitive price, then (i) SanDisk may purchase such additional capacity [***], and (ii) if SanDisk purchases such additional capacity from another source, Toshiba may thereafter utilize more than [***] of the total NAND manufacturing capacity and Toshiba shall no longer be subject to the last sentence of Section 6.03(c); provided, however, SanDisk shall continue to be entitled to purchase (A) [***] L/M of NAND [***] from FVC-Japan under and pursuant to the SanDisk Purchase and Supply Agreement and (B) up to [***] L/M of NAND [***] from Yokkaichi under and pursuant to the SanDisk Foundry Agreement. (e) After the capacity expansions described in Section 6.03(a), (b) and (c), any additional capacity expansion shall be determined by the Management Committee and shall be made by mutual agreement of the Parties. Master Agreement 15 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (f) All NAND Flash Memory Products will be obtained by the Parties or for the Parties through their respective Affiliates from FVC-Japan, except that each Party may obtain, directly or indirectly, a combined total of up to [***] L/M of NAND Flash Memory Products produced at the Yokkaichi Facility (not including the FVC-Japan Equipment), which shall be obtained according to agreed upon allocations in accordance with this Section 6.03. Notwithstanding the foregoing, all orders for NAND Flash Memory Products not ordered through FVC-Japan shall be reported to FVC-Japan on a quarterly basis. (g) If the Parties mutually agree to secure external manufacturing sources other than the Yokkaichi Facility through joint investment or investment by either Party in accordance with this Section 6.03, FVC-Japan and Toshiba will jointly transfer the applicable manufacturing technology and know-how to such source. FVC-Japan will conduct all negotiations with the external manufacturing source; provided, however, the terms and conditions of any agreement shall be subject to prior consultation with and the approval of Toshiba. The Parties may purchase NAND Flash Memory Products manufactured at such external source only from FVC-Japan. In connection with any technology transfer to such external source, Toshiba will be reimbursed its mutually agreed transfer costs for assisting in the transfer of manufacturing technology and know-how. If the new capacity secured at such external manufacturing source is requested by only one of the Parties, such Party will pay the transfer costs and be entitled to purchase the full output of NAND Flash Memory Products purchased by FVC-Japan from such external manufacturing source. If both Parties request such new external capacity, then FVC-Japan will pay the transfer costs to Toshiba. Neither Party shall have the right to grant manufacturing licenses to such external manufacturing source or to disclose or transfer to any such external manufacturing source, manufacturing know-how related to the manufacture of NAND Flash Memory Products, except through FVC-Japan. SECTION 6.04 Capacity Sharing Arrangement. (a) Each of the Parties will have the right and obligation, through FVC-Japan, to utilize 50% of the FVC-Japan Equipment's manufacturing capacity based on a measure of equivalent wafer starts per day with the equivalency being weighed based on the process complexity factors (as calculated by a formula to be mutually determined by the Parties) of the NAND Flash Memory Products being produced for such Parties. Where the Parties purchase the same output volume (up to and including 50% of the Yokkaichi Target Capacity (as hereinafter defined)) for equivalent NAND Flash Memory Products supplied by FVC-Japan, the Parties will pay the same purchase price per die or packaged unit. If a Party is unable to utilize 50% of FVC-Japan's manufacturing capacity for NAND Flash Memory Products, such Party may contract with FVC-Japan to utilize its surplus capacity to manufacture such Party's proprietary products, including but not limited to controllers or Flash Memory products that are not NAND Flash Memory Products, provided, that such Party installs the necessary process technology and bears all incremental costs (measured as incremental costs above the Yokkaichi Master Agreement 16 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Manufacturing Costs (as hereinafter defined) at the then-current maximum capacity of the FVC-Japan Equipment) associated with the adverse impact on the manufacture of NAND Flash Memory Products. If either Party is unable to use its allocated capacity, the Parties may negotiate the terms of a transfer of such capacity shortfall to the Party not experiencing such shortfall. To the extent that a Party is not able to utilize excess capacity or transfer such capacity to the other Party, the Party experiencing such shortfall will pay the incremental cost increase to the Party not experiencing a shortfall (or pay to FVC-Japan an under-utilization fee in accordance with a formula to be mutually determined by the Parties). (b) Each Party may use a portion of its total allocated capacity to cause to be manufactured NAND Flash Memory Products which are proprietary to that Party ("Proprietary NAND Flash Memory Products") and which need not be shared with the other Party. Any adverse incremental costs (measured as incremental costs above the Yokkaichi Manufacturing Costs at the then-current maximum capacity of the FVC-Japan Equipment) associated with the manufacture and production of such Proprietary NAND Flash Memory will be borne by the initiating Party. Each Party shall give the other Party at least ninety (90) days advance written notice of its intention to use a portion of its allocated capacity to manufacture Proprietary NAND Flash Memory Products and the Parties shall refer the matter to the Board of Directors for consultation and planning, with the intention to minimize the impact of such allocation. Such notifying Party will limit the output volume of such Proprietary NAND Flash Memory Products to [***] of such Party's total allocated output unless it receives the consent of the other Party to an increase in such output volume above such limit. (c) Each Party (the "Originating Party") shall inform the other (the "Non-Originating Party") of the development plans by the Originating Party to develop NAND Flash Memory Products or NAND Flash Memory-related controllers, and the Originating Party and the Non-Originating Party shall each refer such matter to the Coordinating Committee (as defined in the Product Development Agreement). If the Coordinating Committee unanimously decides that such planned development shall be undertaken jointly, then the cost of such joint development shall be borne by each Party in accordance with the Product Development Agreement, and the NAND Flash Memory Products manufactured following such joint development shall be considered non-Proprietary NAND Flash Memory Products for purposes of Section 6.04(b) above; provided, however, the NAND Flash Memory Products set forth in Exhibit A to the Product Development Agreement shall be deemed to be non-Proprietary NAND Flash Memory Products without any action by the Coordinating Committee. Subject to the foregoing, if the Coordinating Committee does not unanimously decide that such planned development shall be undertaken jointly, then the Originating Party may, at its sole discretion, either (i) transfer to the Non-Originating Party the technology, including the items in Exhibit C to the Product Development Agreement relating to such technology, used to manufacture such NAND Flash Memory Products on a royalty-free basis, whereupon such NAND Flash Memory Products shall be considered non-Proprietary Master Agreement 17 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. NAND Flash Memory Products, or (ii) treat such NAND Flash Memory Products as Proprietary NAND Flash Memory Products for purposes of Section 6.04(b) above. In the event the Originating Party elects to treat any NAND Flash Memory Products as Proprietary NAND Flash Memory Products in accordance with the preceding sentence, but thereafter the Coordinating Committee unanimously determines that such Proprietary NAND Flash Memory Products should be developed jointly, the Originating Party shall transfer to the other Party the technology used to manufacture such NAND Flash Memory Products on reasonable terms and conditions to be mutually agreed upon by the Parties, whereupon such Proprietary NAND Flash Memory Products shall be treated as non-Proprietary NAND Flash Memory Products. (d) Each Party may use a portion of its total allocated capacity to cause controllers to be manufactured at a New Facility or at the Yokkaichi Facility using the FVC-Japan Equipment, including NAND Flash Memory-related controllers, and non-NAND Flash Memory-related products which are proprietary to that Party and which need not be shared with the other Party. Any adverse incremental costs (measured as incremental costs above the Yokkaichi Manufacturing Costs at the then-current maximum capacity of the FVC-Japan Equipment) associated with the manufacture and production of such proprietary designs will be borne by the initiating Party. Each Party shall give the other Party at least ninety (90) days advance written notice of its intention to use a portion of its allocated capacity to manufacture such proprietary products, and the Parties shall refer the matter to the Board of Directors for consultation and planning, with the intention to minimize the impact of such allocation. SECTION 6.05 Creation of Management Committee. Immediately after the Closing, the Parties shall establish a management committee (the "Management Committee") to manage the objectives of FVC-Japan set forth in the New Operating Agreement and certain affairs of FVC-Japan. (a) Authority. The Management Committee shall have the authority to (i) advise FVC-Japan with respect to policy and operating matters common to Toshiba and SanDisk as well as on such other matters as FVC-Japan may decide to refer to the Management Committee from time to time, (ii) preside over and pass upon any disputes regarding operational matters (but not with respect to alleged breaches of contractual obligations under the Operative Documents) that may arise and cannot be resolved by FVC-Japan, in accordance with Section 9.03 (Dispute Resolution), and (iii) take the actions specified to be taken by the Management Committee in this Section 6.05 and in Sections 6.01 (Technology Transfer), 6.03 (Expanded Capacity) and 9.03 (Dispute Resolution). (b) Members of the Management Committee; Voting; etc. (i) The Management Committee shall consist of six members (the "Committee Representatives"), three of whom shall be appointed by Toshiba, and three of whom shall be appointed by SanDisk (for such purpose, each of the Parties is referred to in this Master Agreement 18 Section 6.05 as an "Appointing Party"). Each Appointing Party shall be entitled to appoint an alternate Committee Representative to serve in the place of any Committee Representative appointed by such Appointing Party should any such Committee Representative be unable to attend a meeting. (ii) Each Committee Representative or alternate Committee Representative shall serve at the pleasure of the designating Appointing Party and may be removed as such, with or without cause, and his successor designated, by the designating Appointing Party. Each Appointing Party shall have the right to designate a replacement Committee Representative in the event of any vacancy among such Appointing Party's appointees. (iii) Each Appointing Party shall bear any cost and expense incurred by any Committee Representative or alternate Committee Representative designated by such Appointing Party to serve on the Management Committee, and no Committee Representative or alternate Committee Representative shall be entitled to compensation from FVC or FVC-Japan for serving in such capacity. (iv) Each Appointing Party shall notify the other Appointing Party and FVC-Japan in writing of the name, business address and business telephone and facsimile numbers of each Committee Representative and each alternate Committee Representative that such Appointing Party has been appointed to the Management Committee. Each Appointing Party shall promptly notify the other Appointing Party and FVC-Japan of any change in such Appointing Party's appointments or of any change in any such address or number. (v) For purposes of any approval or action taken by the Management Committee, each Committee Representative shall have one vote. All of the votes eligible to be cast at any meeting shall be required for purposes of approving any action to be taken by the Management Committee at such meeting. (vi) At any meeting of the Management Committee, a Committee Representative, in the absence of one or more other Committee Representatives appointed by the same Appointing Party or an alternate Committee Representative, may cast the vote such absent Committee Representatives would otherwise be entitled to cast. (vii) The quorum necessary for any meeting of the Management Committee shall be those Committee Representatives entitled to cast all of the votes held by the members of the Management Committee. A quorum shall be deemed not to be present at any meeting for which notice was not properly given under Section 6.05(c) (Meetings, Notice, etc.), unless the Committee Representative or Committee Representatives as to whom such notice was not properly given attend(s) such meeting without protesting the lack of notice or duly Master Agreement 19 execute(s) and deliver(s) a written waiver of notice or a written consent to the holding of such meeting. (viii) Each appointment by an Appointing Party to the Management Committee shall remain in effect until the Appointing Party making such appointment notifies the other Appointing Party and FVC-Japan in writing of a change in such appointment. The resignation or removal of a Committee Representative shall not invalidate any act of such Committee Representative taken before the giving of such written notice of the removal or resignation of such Committee Representative (or alternate Committee Representative). (c) Meetings, Notice, etc. (i) Meetings of the Management Committee shall be held at such location or locations as may be selected by the Management Committee from time to time. (ii) Regular meetings of the Management Committee shall be held on such dates and at such times as shall be determined by the Management Committee and shall be held on a bi-annual basis or such other period as agreed upon by the Parties. (iii) Notice of any regular meeting or special meeting pursuant to Section 6.05(c)(iv) shall be given to each Committee Representative at least ten (10) Business Days prior to such meeting in the case of a meeting in person or at least five (5) Business Days prior to such meeting in the case of a meeting by conference telephone or similar communications equipment pursuant to Section 6.05(c)(vi), which notice shall state the purpose or purposes for which such meeting is being called and include any supporting documentation relating to any action to be taken at such meeting. (iv) Special meetings of the Management Committee may be called by any Committee Representative by notice given in accordance with the notice requirements set forth in this Section 6.05, which notice shall state in reasonable detail the purpose or purposes for which such meeting is being called; provided, that, the Committee Representatives appointed by the Appointing Party that is not represented by the Committee Representative calling such special meeting shall be entitled to in good faith select a convenient location for the meeting and to suggest an alternative time or times if the designated time is not convenient for them. Except as set forth in Section 6.05(c)(vi), no action may be taken and no business may be transacted at such special meeting which is not identified in such notice unless (A) such action or business is incidental to the action or business for which the special meeting is called or (B) such action or business does not materially adversely affect the Parties, any of their respective Affiliates which are parties to any of the Operative Documents or FVC-Japan. Master Agreement 20 Minutes of each Management Committee meeting shall be sent by facsimile to all Committee Representatives within ten (10) Business Days after such meeting. Material to be presented at any Management Committee meeting shall be sent by facsimile, electronic mail or delivered in hard copy to all Committee Representatives together with the notice described in Section 6.05(c)(iii). (v) The actions taken by the Management Committee at any meeting, however called and noticed, shall be as valid as though taken at a meeting duly held after regular call and notice if (but not until), either before, at or after the meeting, any Committee Representative as to whom such meeting was improperly held duly executes and delivers a written waiver of notice or a written consent to the holding of such meeting; provided, however, any Committee Representative who is present at a meeting and does not protest the failure of notice shall be deemed to have received adequate notice thereof. A vote of the Management Committee may be taken only either in a meeting of the members thereof duly called and held or by the execution by the Committee Representatives eligible to cast all the votes on the Management Committee without a meeting of a consent setting forth the action so taken, and identified as a consent of the Committee Representatives pursuant to this Section 6.05. (vi) Upon the consent of all Committee Representatives, a meeting of the Management Committee may be held by conference telephone or similar communications equipment by means of which all Committee Representatives participating in the meeting can be heard by all other participants, provided, that, such communications equipment continues to be operational throughout the meeting. Any Committee Representative may elect to participate in a meeting by conference telephone or similar communications equipment upon sufficient advance notice to permit arrangements therefor to be made. At any meeting, the Management Committee shall consider (A) any items added to the Management Committee agenda for discussion by the Parties and (B) such other matters as the Management Committee decides to review. (d) The Management Committee shall, from time to time, elect one of its members to preside at its meetings, which presiding member shall alternate annually if requested by either Party. The Management Committee may establish reasonable rules and regulations to (A) require officers to call meetings and perform other administrative duties, (B) limit the number and participation of observers, if any, and require them to observe confidentiality obligations and (C) otherwise provide for the keeping and distribution of minutes and other internal Management Committee governance matters not inconsistent with the terms of this Agreement. SECTION 6.06 Personnel. (a) Subject to the terms and conditions of this Section 6.06, each Party may assign to FVC-Japan, as Seconded Employees, employees whom such Party believes Master Agreement 21 are capable of performing the assignment and likely to contribute to the success of FVC-Japan and to have a positive impact on FVC-Japan's business environment. Any liabilities in respect of the employment of Seconded Employees assigned to work at the Yokkaichi Facility shall be retained by the relevant Party (or its Subsidiary) that assigned such Seconded Employee to FVC-Japan. (b) The Parties agree that it is in the best interests of FVC-Japan to attract capable and qualified potential employees to work at FVC-Japan. FVC-Japan's management will decide what type of promotional activities and personal incentives are desirable to help achieve this goal and shall be responsible for hiring decisions. (c) The Parties agree that all Seconded Employees, during their period of assignment to FVC-Japan, are expected to devote their best efforts to promote the interests and success of FVC-Japan and to perform their work for FVC-Japan in good faith under the direction of management of FVC-Japan. Each Party agrees to encourage Seconded Employees assigned to FVC-Japan by such Party to be dedicated to the best interests and success of FVC-Japan. (d) The Parties will, by mutual consent, which consents shall not be unreasonably withheld, agree on the total number of Seconded Employees assigned to FVC-Japan at any time. The Party that assigns a Seconded Employee to the Yokkaichi Facility in accordance with the terms hereof shall be responsible for the salaries, employment-related Taxes and customary and reasonable additional expenses of such Seconded Employee associated with the temporary nature of such Seconded Employee's duties, including the costs and expenses associated with any stock-based compensation (including, but not limited to, stock options, stock appreciation rights, restricted stock, restricted stock units and dividend equivalent rights) provided to such Seconded Employees; provided, however, that FVC-Japan shall be responsible for expenses, mutually agreed to by the Parties, of a Seconded Employee assigned to a New Facility, other than as set forth in Schedule 6.01 in connection with the transfer of the technology. (e) FVC-Japan shall be responsible for paying any expenses associated with hiring its employees, including moving and living expenses and signing bonuses, subject to approval of the Board of Directors after the Closing. SECTION 6.07 Non-solicitation of Employees. So long as the business of FVC-Japan is being continued, each Party (and each of its respective Affiliates) shall not, without the prior written consent of the other Party, directly recruit or solicit any employee or officer of FVC or FVC-Japan (other than a Seconded Employee of such Party or one of its Affiliates) to leave his or her employment with FVC-Japan prior to the period ending twenty-four (24) months after the termination of this Agreement; provided, however, that placement of employment advertisements or other general solicitation for employees not specifically targeted to the employees or officers of FVC or FVC-Japan shall not be deemed to constitute direct recruitment. In the event of the dissolution and upon the liquidation of FVC-Japan, either Party (or any Affiliate of either Party) may Master Agreement 22 solicit any employee or former employee of FVC or FVC-Japan, but neither Party (nor any of its Affiliates) shall be required to employ any such Person. In the event that all of the Units of one Party are purchased by the other Party or by the designee of the other Party, the Parties shall reach agreement on a reasonable transition plan of up to six months in connection with the services provided to FVC-Japan by Seconded Employees assigned to FVC-Japan by the Party selling all of its Units. SECTION 6.08 External Financing; Additional Equipment. (a) Funding required by FVC-Japan in excess of the aggregate US $300 million in cash originally contributed by SENA and SanDisk to FVC will be obtained by FVC-Japan through loans, equipment leasing transactions and other methods of financing agreed to by the Parties; provided, however, such funding shall not exceed US $500 million, without the written consent of each Party. The types and amount of funding will continue to be evaluated until the time the financing is required and will be based on, among other things, asset lives, lease terms and cost of capital. The funding obligations of the Parties shall be several and not joint, unless otherwise specifically agreed to in writing by both Parties. It is the intent of the Parties that such obligations be incurred on a pro rata basis based upon their respective Percentages as of the date on which such obligations are incurred. The Parties shall provide several but not joint guarantees of any institutional Indebtedness on a pro rata basis based upon their respective Percentages as of the date on which such obligations are incurred if such guarantees are required by third parties from which FVC-Japan will obtain such funding or if such guarantees would substantially reduce the interest rate applicable to such Indebtedness. Except as otherwise agreed to in writing by the Parties, the actual cost of, and liabilities arising from, each such guarantee shall be borne by the Party that provides such guarantee. In no event shall the Parties be obligated to provide any joint and several guarantees to third parties or otherwise be liable to any third party on a joint and several basis. If either Party is unable to provide guarantees required hereunder, such Party (or its Affiliates) shall make loans to FVC-Japan in the amount of the guarantee required to be made by it hereunder; provided, that, the interest rate for such loans shall not exceed competitive interest rates denominated in U.S. dollars. Notwithstanding the foregoing, in connection with the refinancing of the lease facilities with ABN AMRO as lessor which were recently terminated by FVC by letter dated March 21, 2002, [***]. (b) A definitive list of the FVC-Japan Equipment has not been completed as of the date hereof. As soon as practicable after the Closing, the Board of Directors shall establish the process and mechanism for obtaining such equipment. Such process and mechanism shall include procedures for obtaining equipment pursuant to arms-length negotiations on the most favorable terms and conditions available. SECTION 6.09 Other Activities. During the term of this Agreement and except as set forth in Section 6.03(d), neither Party nor any of their respective Affiliates shall: (i) fabricate NAND Flash Memory Integrated Circuits at any location Master Agreement 23 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. other than the Yokkaichi Facility or any other fabrication facility agreed upon by the Parties; (ii) have any third party fabricate NAND Flash Memory Integrated Circuits; or (iii) have any right to fabricate NAND Flash Memory Integrated Circuits beyond the capacity as limited pursuant to this Article VI, as such capacity limitations may be amended from time to time in accordance with this Article VI. For the avoidance of doubt, nothing contained in the foregoing shall restrict the Parties from engaging in any other activities, including, without limitation, (i) designing any NAND Flash Memory Product; (ii) selling any NAND Flash Memory Product to any customer; (iii) entering into any equipment purchase or material supply agreements; or (iv) entering into any patent licensing arrangement, and nothing in the foregoing shall restrict Toshiba from installing any manufacturing line in the Yokkaichi Facility (subject to the capacity limitations set forth in this Article VI, as such capacity limitations may be amended from time to time in accordance with this Article VI). For purposes of this Section 6.09, "NAND Flash Memory Integrated Circuits" means ICs included in the definition of NAND Flash Memory Products pursuant to Section 2.01. SECTION 6.10 Protection of Intellectual Property. Both Parties share the common recognition that it is important for the success of the NAND Flash Memory Products business to promote the adoption of such NAND Flash Memory Products with a wide variety of customers and applications, whether for card use or non-card use, and with such recognition, each Party will use reasonable efforts to protect and enhance the value of NAND Flash Memory Products. Further, where feasible, each Party shall share with FVC-Japan internally prepared analyses of competitive products prepared by either Party so as to allow FVC-Japan to respond to such information and remain competitive in the marketplace; provided, that neither Party warrants as to the accuracy or completeness of any such analysis so provided. SECTION 6.11 Purchase of Replacement Tools. As soon as practicable after the Closing and with the intent to facilitate [***] L/M .16u NAND Flash Memory Product output capacity for FVC-Japan, the Parties will cause FVC-Japan to purchase (i) certain tools to replace the tools sold to third parties pursuant to Section 3.03(b)(iii) (the "Replacement Tools") and (ii) certain tools required in addition to the Replacement Tools to enable FVC-Japan to attain [***] L/M output capacity for the .16u NAND Flash Memory Product (the "Additional Capacity Tools"). The Replacement Tools and the Additional Capacity Tools will be purchased from third party manufacturers and from Yokkaichi as determined by the Parties. [***]. Unless otherwise agreed by the Parties, Replacement Tools and Additional Capacity Tools will be 0.13u process compatible. FVC-Japan shall bear broker fees, if any, transportation, insurance and installation expenses associated with the Additional Capacity Tools. [***]. Purchase of tools from the Yokkaichi Facility shall not occur prior to January 2003. As soon as practical after the Closing, the Parties will develop a plan to Master Agreement 24 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. cause FVC-Japan to purchase certain new tools with the intent to facilitate [***] L/M .13u NAND Flash Memory Product for FVC-Japan by the end of calendar 2002 (the ".13u/MLC Tools"). FVC-Japan shall bear broker fees, if any, transportation, insurance and installation expenses associated with the .13u/MLC Tools. In approximately the same time frame, Toshiba shall, at its expense, purchase and install certain new tools with the intent to upgrade the existing [***] L/M capacity at the Yokkaichi Facility (not including the FVC-Japan Equipment) to process .13u/MLC NAND Flash Memory Product. SECTION 6.12 Installation of FVC-Japan Equipment. FVC-Japan shall purchase new installation components (including, but not limited to, tool modification and installation services) related to the FVC-Japan Equipment (excluding Additional Capacity Tools and .13u/MLC Tools) in an amount not to exceed the Net Book Value (as of March 31, 2002) of FVC capitalized expenses related to the installation of (i) the FVC Owned Equipment, (ii) the Leased Equipment at the DSC Facility and (iii) equipment sold to third parties pursuant to Section 3.03(b)(iii). ARTICLE VII OTHER AGREEMENTS In addition to this Agreement, the Parties will enter into or cause to be entered into the following agreements (it being understood that the descriptions of the following agreements are for reference purposes only, and the fact that all provisions of said agreements are not included in the following summary descriptions is not significant to the Parties): SECTION 7.01 FVC-Japan Foundry Agreement. FVC-Japan and Yokkaichi shall enter into a foundry agreement (the "FVC-Japan Foundry Agreement") on, or as soon as practicable after, the Closing. At such time as the FVC-Japan Foundry Agreement is executed, it shall be deemed an Operative Document hereunder. The FVC-Japan Foundry Agreement shall provide for ordering procedures, prices, delivery, cost reporting and other specific terms and conditions for the manufacture by Yokkaichi and supply to FVC-Japan of NAND Flash Memory Products, which shall be consistent with the following basic terms: (a) Facilities, Equipment and Raw Materials. The manufacturing facilities will be located at the Yokkaichi Facility. FVC-Japan will lease or sublease certain NAND manufacturing equipment to Yokkaichi to be used in the manufacture of NAND Flash Memory Products by the FVC-Japan Equipment. Certain equipment owned by Yokkaichi will also be made available for the manufacture of NAND Flash Memory Products; provided, that [***], the depreciation and related costs thereof shall be shared by FVC-Japan. Yokkaichi will be responsible for obtaining the raw materials to be used in the manufacture of NAND Flash Memory Products. Master Agreement 25 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (b) Production. Yokkaichi will manufacture NAND Flash Memory Products for FVC-Japan ordered by Toshiba and SanDisk under the terms and conditions of the Purchase and Supply Agreement (as hereinafter defined). FVC-Japan and Yokkaichi will use their best efforts to achieve a manufacturing capacity of the FVC-Japan Equipment of [***] L/M for 0.16 microns (the "Yokkaichi Target Capacity"). Wafers will be sorted between the Parties such that aggregate yield losses will be shared on an equal basis. (c) Operating Relationship. Yokkaichi shall provide all employees necessary for the manufacturing of the NAND Flash Memory Products by the FVC-Japan Equipment. (d) Consideration to be Paid to Yokkaichi. The price charged to FVC-Japan by Yokkaichi (the "Yokkaichi Sales Price") for the NAND Flash Memory Products it manufactures under the FVC-Japan Foundry Agreement will be (i) after commencement of the transition of wafer production from DSC's facility to the Yokkaichi Facility [***], with respect to the wafers manufactured for SanDisk under the FVC-Japan Foundry Agreement (which shall not exceed [***] L/M), without duplication, the sum of [***]. The term "Yokkaichi Manufacturing Costs" means all of Yokkaichi's costs and expenses which are directly or indirectly incurred by Yokkaichi in conjunction with its operation and administration of the FVC-Japan Equipment determined in accordance with Japanese GAAP consistently applied in accordance with Yokkaichi's past practices and the cost methodology to be agreed upon by the Parties on or before December 31, 2002. These costs and expenses include but are not limited to, personnel costs, materials costs, depreciation, leases, rentals, FVC-Japan Equipment occupancy costs, taxes, insurance, interest and other operating expenses. The Yokkaichi Manufacturing Costs shall expressly exclude: [***]. Notwithstanding the foregoing, commencing on January 1, 2003 and for periods thereafter, the price per wafer, [***], shall not exceed the prices set forth in (i)(w) above unless Toshiba, after consultation with SanDisk, makes a capital investment for NAND Flash Memory which results in a higher wafer price in order to accommodate the extra cost to Toshiba. [***]. (e) Exclusivity. Except as provided in Section 6.03 (Expanded Capacity), Yokkaichi shall be FVC-Japan's exclusive manufacturing source for output of NAND Flash Memory Products up to the total of the Yokkaichi Target Capacity. FVC-Japan may seek external manufacturing sources for output in excess of the Yokkaichi Target Capacity in accordance with the capacity expansion priority set forth in Section 6.03 (Expanded Capacity). (f) Business Interruption Insurance. The Parties agree to discuss and negotiate in good faith with respect to the necessity for business interruption insurance for FVC-Japan. In the event that it is decided to obtain such insurance coverage, each of the Parties shall be named as an additional insured on the policy evidencing such coverage and the policy limits for such coverage shall be an amount sufficient to protect Master Agreement 26 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Toshiba's and SanDisk's projected margin on NAND Flash Memory Products. SECTION 7.02 SanDisk Foundry Agreement. As of the date hereof, Toshiba and SanDisk shall enter into a foundry and supply agreement in the form of Exhibit F (the "SanDisk Foundry Agreement") providing for specific terms and conditions for the manufacture and sale of NAND Flash Memory Products at the Yokkaichi Facility (not including the FVC-Japan Equipment), which shall be consistent with the following basic terms: (a) Facilities, Raw Materials and Equipment: Toshiba will procure and be responsible for all facilities, raw materials and equipment utilized in the manufacture of NAND Flash Memory Products at the Yokkaichi Facility (not including the FVC-Japan Equipment). (b) Production. Yokkaichi will manufacture and supply NAND Flash Memory Products in accordance with the demand requirements of Toshiba and SanDisk. Toshiba agrees to allocate a portion of the manufacturing capacity of the Yokkaichi Facility (not including the FVC-Japan Equipment) to SanDisk in accordance with the allocation set forth in Schedule 7.02(b). Such allocation will be subject to SanDisk's loading commitment to be made quarterly pursuant to the SanDisk Foundry Agreement. In order to meet the capacity demands of both Parties, Toshiba will expand the Yokkaichi Facility (not including the FVC-Japan Equipment), up to [***] L/M in the aggregate. Such expansion shall be made at Toshiba's own expense. The timing and amount of the investment necessary to effect such expansion shall be in the sole discretion of Toshiba. If Toshiba expands the capacity of the Yokkaichi Facility (not including the FVC-Japan Equipment) from [***] L/M to [***] L/M, SanDisk shall have the right to utilize up to [***] of such incremental capacity, up to a maximum of [***] L/M, provided, however, once SanDisk exercises such right to utilize such incremental capacity, SanDisk shall be obligated to commit to load such capacity for three (3) months thereafter. Notwithstanding the foregoing, SanDisk acknowledges that Toshiba may, in its sole discretion, decrease the manufacturing capacity of the Yokkaichi Facility (not including the FVC-Japan Equipment), subject to the prior loading commitment for three (3) month period made by SanDisk; provided, however, a maximum of [***] L/M of such incremental capacity of SanDisk may decrease to zero if Toshiba gives SanDisk written notice two (2) months prior to the next three (3) month period, in which case Toshiba's manufacturing capacity shall be proportionately reduced. (c) Pricing of NAND Flash Memory Products Produced at the Yokkaichi Facility. The purchase price to SanDisk for NAND Flash Memory Products produced at the Yokkaichi Facility (not including the FVC-Japan Equipment) pursuant to the SanDisk Foundry Agreement shall be as set forth in the SanDisk Foundry Agreement and shall be consistent with the following basic terms: (i) Prior to commencement of the transition of wafer production from DSC's facility to the Yokkaichi Facility [***], Toshiba shall sell Master Agreement 27 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. wafers manufactured at the Yokkaichi Facility (not including the FVC-Japan Equipment) to SanDisk directly at a price equal to [***]. (ii) After commencement of the transition of wafer production from DSC's facility to the Yokkaichi Facility (not including the FVC-Japan Equipment), with respect to up to [***] L/M of wafers requested by SanDisk in excess of the first [***] L/M of wafers purchased by SanDisk under the Purchase and Supply Agreement, Toshiba shall sell wafers manufactured at the Yokkaichi Facility (not including the FVC-Japan Equipment) to SanDisk directly at a price equal to: (A) With respect to [***]; (B) With respect to [***]; (C) With respect to [***]; and (D) With respect to [***], in connection with the SanDisk Foundry Agreement, the price for wafers manufactured at the Yokkaichi Facility (not including the FVC-Japan Equipment) will be negotiated in good faith among the Parties; [***]. (d) Priority of FVC-Japan NAND Flash Memory Products. Toshiba and SanDisk shall not order or purchase NAND Flash Memory Products produced at the Yokkaichi Facility (not including the FVC-Japan Equipment) except to the extent FVC-Japan is unable to procure NAND Flash Memory Products manufactured at the Yokkaichi Facility by the FVC-Japan Equipment in accordance with the demand requirements of Toshiba and SanDisk. In the event that the Parties intend to meet increased demand for NAND Flash Memory Products by expanding capacity at the Yokkaichi Facility (not including the FVC-Japan Equipment), such expansion of capacity shall be pursuant to the order set forth in Section 6.03 (Expanded Capacity). (e) Any dispute arising under the SanDisk Foundry Agreement (but not under any other agreement specified in this Agreement) shall be resolved by binding arbitration in Tokyo, Japan under the rules of the International Chamber of Commerce. Each party shall bear its own costs and expenses of arbitration, including attorneys' fees. SECTION 7.03 Purchase and Supply Agreement. FVC-Japan will enter into an agreement with the Parties or their respective Affiliates providing for specific terms and conditions for the purchase by the Parties of NAND Flash Memory Products from FVC-Japan (the "Purchase and Supply Agreement"), which shall be consistent with the following basic terms: (a) Manufacturing. Except as provided in Sections 6.03 (Expanded Capacity) and 7.02 (SanDisk Foundry Agreement), FVC-Japan shall manufacture or Master Agreement 28 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. cause to be manufactured 100% of the demand of the Parties for NAND Flash Memory Products. (b) Sales Price for NAND Flash Memory Products. The sales price (the "FVC-Japan Sales Price") charged by FVC-Japan to the Parties for wafers manufactured pursuant to the FVC-Japan Foundry Agreement with respect to the sale of the first [***] L/M of wafers pursuant to Section 7.01 will be a price equal to the sum of (A) the [***]; provided, however, if during the transition of the wafer production from DSC's facility to the Yokkaichi Facility [***]. The Parties further agree to discuss in good faith at the request of Toshiba or SanDisk the possibility of sales by FVC-Japan to non-Japanese Affiliates of Toshiba or SanDisk if such sales can be made in a manner mutually beneficial to the Parties. FVC-Japan shall use profits earned from the sale of NAND Flash Memory Products for future investment in manufacturing and production as well as for expenses associated with managing FVC-Japan and reimbursing expenses for Seconded Employees. SECTION 7.04 Common R&D Agreement. As of the date hereof, the Parties shall amend the Common R&D and Participation Agreement entered into as of May 9, 2000 (as amended in accordance herewith, the "Common R&D Agreement") in the form of Exhibit G attached hereto (the "Amendment to Common R&D Agreement"). SECTION 7.05 Product Development Agreement. As of the date hereof, the Parties shall amend that certain Product Development Agreement entered into as of May 9, 2000 (as amended in accordance herewith, the "Product Development Agreement") for the design and development of new NAND Flash Memory Products and NAND Flash Memory-related controllers in the form of Exhibit H attached hereto (the "Amendment to Product Development Agreement"). SECTION 7.06 Other Matters. (a) Sale of SmartMedia. Upon the request of SanDisk, Toshiba will sell SmartMedia to SanDisk on an OEM basis at mutually agreed terms and conditions, including price. (b) Assembly and Testing Services Agreement. The Parties will consider joint arrangements for the provision of assembly (TSOP, card, PTP, etc.) and test services. Subject to the availability of Toshiba's capacity, Toshiba will, at SanDisk's request, provide assembly and test services at cost plus a reasonable margin. Alternatively, the Parties will, at equal cost to each, subcontract with third parties for such assembly and test services. (c) Manufacture of Controllers. SanDisk may request that Toshiba manufacture controllers for SanDisk, in which case, subject to availability of manufacturing capacity, Toshiba agrees to sell the controllers to SanDisk at prices and Master Agreement 29 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. under terms and conditions at least as favorable as those previously or presently made available by Toshiba to any other party. (d) No Duplication of Costs or Expenses. It is the intent of the parties that any payments made by SanDisk under or pursuant to the Common R&D Agreement, the Product Development Agreement or the Yokkaichi Service Agreement shall not be duplicative and SanDisk shall in no event be required to pay more than once for any service provided under such agreements, if such service is provided under more than one agreement, including without limitation, the Start-Up Services. In addition, if SanDisk makes a direct payment for any service provided under any such agreement, the cost incurred by Yokkaichi or FVC-Japan, as the case may be, in connection with the provision of such service shall not be included in the applicable wafer price charged to SanDisk. SECTION 7.07 Yokkaichi Service Agreement. The Parties agree that Yokkaichi and FVC-Japan shall enter into an agreement pursuant to which Yokkaichi shall provide for FVC-Japan certain services such as administrative, clerical, accounting and human resource services (the "Yokkaichi Service Agreement"). SECTION 7.08 Patent Cross License. Toshiba and SanDisk are parties to a Patent Cross License Agreement, dated July 30, 1997 and amended as of May 9, 2000 (the "License Agreement") under which Toshiba pays royalties to SanDisk in consideration for the license granted by SanDisk to Toshiba. The License Agreement expires on or about July 29, 2002. As of the date hereof, the Parties shall enter into a Second Amendment to the Patent Cross License Agreement in the form attached as Exhibit I (the "License Amendment"). ARTICLE VIII TERMINATION SECTION 8.01 Termination. (a) This Agreement shall be terminated automatically upon the earlier of the transfer of all of a Party's Units to the other Party (or its Affiliate) or upon completion of the dissolution and liquidation of FVC-Japan pursuant to Article XI (Dissolution) of the New Operating Agreement (the date of such transfer or dissolution and liquidation, the "Termination Date"); provided, that, all obligations or liabilities of either Party which are accrued or owing prior to such termination and the Parties' covenants contained in Section 5.03 (Public Announcements) shall survive such termination. (b) Upon termination of this Agreement resulting from an event of dissolution of FVC-Japan pursuant to Section 11.01(a) of the New Operating Agreement: Master Agreement 30 (i) The Parties shall further amend the License Agreement, as in effect as of the Termination Date, to specify that each Party's patents issued or issuing on patent applications entitled to an effective filing date prior to the Termination Date are licensed on a royalty-free basis for the duration of such patents. The scope of the licenses as amended pursuant to this Section 8.01(b)(i) shall not be greater than the scope of those granted under the License Agreement, as in effect as of the Termination Date. (ii) Toshiba shall grant to SanDisk, effective upon such Termination Date, a non-exclusive, non-transferable (except to Affiliates of SanDisk), non-sub-licensable, fully paid up, royalty-free license to make, have made, use, sell and have sold NAND Flash Memory Products anywhere in the world utilizing the NAND technology transferred to and/or utilized by Yokkaichi, and SanDisk shall have full access to all such know-how at the Yokkaichi Facility which has been transferred to Yokkaichi prior to the Termination Date. (c) Upon termination of this Agreement resulting from an event of dissolution of FVC-Japan or one Party's acquisition of the other Party's Units (the acquirer thereof referred to hereinafter as the "Acquiring Party" and the seller thereof referred to hereinafter as the "Selling Party") pursuant to Section 11.05 (Dissolution Upon Notice) of the New Operating Agreement: (i) Toshiba or the Acquiring Party, as the case may be, will, upon the request, prior to the Termination Date, of (A) SanDisk (such request to be made at the time of its notice pursuant to Section 11.05 of the New Operating Agreement) in the case of the dissolution of FVC-Japan or (B) the Selling Party (each, a "Requesting Party"), as the case may be, continue to manufacture NAND Flash Memory Products for the Requesting Party (not to exceed the Requesting Party's capacity allocation available from FVC-Japan under this Agreement as of the Termination Date (the "Termination Capacity")) for a period of eighteen (18) months following the Termination Date in the following ramp-down manner: (A) During the first six months following the Termination Date: 100% of the Termination Capacity (B) During the 7th through the 12th month following the Termination Date: 75% of the Termination Capacity (C) During the 13th through the 18th month following the Termination Date: 50% of the Termination Capacity. (ii) Toshiba and SanDisk and their respective Affiliates shall have a perpetual, fully paid-up, royalty-free right to use technology previously transferred to one another during the term of this Agreement. Master Agreement 31 (iii) The Parties shall further amend the License Agreement to specify that each Party's patents issued or issuing on patent applications entitled to an effective filing date prior to the Termination Date are licensed on a royalty free basis for the duration of such patents. The scope of the licenses as amended pursuant to this Section 8.01(c)(iii) shall not be greater than the scope of those granted under the License Agreement, as in effect as of the Termination Date. (iv) Upon termination of this Agreement resulting from an event of dissolution of FVC-Japan caused by Toshiba's election to withdraw from FVC-Japan pursuant to the New Operating Agreement, then Toshiba hereby grants to SanDisk, effective upon the Termination Date, a non-exclusive, non-transferable (except to Affiliates of SanDisk), non-sub-licensable, fully paid-up, royalty-free license to make, have made, use, sell and have sold NAND Flash Memory Products anywhere in the world utilizing the NAND technology transferred to and/or utilized by Yokkaichi, and SanDisk shall have full access to all such know-how at the Yokkaichi Facility which has been transferred to Yokkaichi prior to the Termination Date. (d) Upon termination of this Agreement resulting from an event of dissolution of FVC-Japan or Toshiba's acquisition of SanDisk's Units pursuant to Section 11.04 (Dissolution by Unilateral Option) of the New Operating Agreement: (i) Yokkaichi will, upon request of SanDisk given within sixty (60) days of the notice given by SanDisk pursuant to Section 11.04 of the New Operating Agreement, continue to manufacture products for SanDisk for a period of eighteen (18) months following the Termination Date in accordance with the following ramp-down manner; provided, however, such capacity allocation for SanDisk shall not exceed its capacity allocation available from FVC-Japan under this Agreement as of the Termination Date (the "SanDisk Termination Capacity"): (A) During the first six months following the Termination Date: 100% of the SanDisk Termination Capacity (B) During the 7th through the 12th month following the Termination Date: 75% of the SanDisk Termination Capacity (C) During the 13th through the 18th month following the Termination Date: 50% of the SanDisk Termination Capacity. (ii) The Parties and their respective Affiliates shall have a perpetual, fully paid-up, royalty-free right to use technology previously transferred to one another during the term of this Agreement. Master Agreement 32 (iii) The Parties shall further amend the License Agreement to specify that each Party's patents issued or issuing on patent applications entitled to an effective filing date prior to the Termination Date are licensed at the royalty rates specified in Schedule 8.01(d) for five (5) years following the Termination Date; provided, that after such five (5) year period, such license shall be on a royalty free basis and provided, further, that at any time during such five year period, both Parties shall negotiate in good faith for up to one hundred and eighty (180) days as requested by either Party to mutually agree on royalty rates for patents filed by each Party after the Termination Date. The scope of the licenses as amended pursuant to this Section 8.01(d)(iii) shall not be greater than the scope of those granted under the License Agreement, as in effect as of the Termination Date. (e) Upon termination of this Agreement resulting from an event of dissolution of FVC-Japan or one Party's acquisition of the other Party's Units following a Deadlock (as defined in the New Operating Agreement) pursuant to Section 10.04 (Dispute Resolution; Deadlock Respecting Business Plan) of the New Operating Agreement: (i) In the case of one Party's acquisition of the other Party's Units in FVC-Japan pursuant to Section 10.04(e) of the New Operating Agreement, the Acquiring Party will continue to manufacture products for the other Party (not to exceed the other Party's Termination Capacity) for a period of eighteen (18) months following the Termination Date in accordance with the following ramp down manner: (A) During the first six months following the Termination Date: 100% of the SanDisk Termination Capacity (B) During the 7th through the 12th month following the Termination Date: 75% of the SanDisk Termination Capacity (C) During the 13th through the 18th month following the Termination Date: 50% of the SanDisk Termination Capacity. (ii) The Parties and their respective Affiliates shall have a perpetual, fully paid-up, royalty-free right to use technology previously transferred to one another during the term of this Agreement. (iii) The Parties shall further amend the License Agreement to specify that each Party's patents issued or issuing on patent applications entitled to an effective filing date prior to the Termination Date are licensed: (x) at the royalty rates specified in Schedule 8.01(e) until March 31, 2008; (y) at the royalty rates specified in Schedule 8.01(d) from April 1, 2008 through December 31, 2010; and (z) thereafter, on a royalty-free basis. Both Parties shall negotiate Master Agreement 33 in good faith for up to one hundred and eighty (180) days upon request of either Party at any time during the five-year period after the Termination Date to mutually agree on royalty rates for patents filed by each Party after the Termination Date. The scope of the licenses as amended pursuant to this Section 8.01(e)(iii) shall not be greater than the scope of those granted under the License Agreement, as in effect as of the Termination Date. (f) Upon termination of this Agreement resulting from an event of dissolution of FVC-Japan or a Party's acquisition of the other Party's Units described in Section 11.03 (Dissolution Upon Event of Default) of the New Operating Agreement: (i) The Parties shall further amend the License Agreement to specify that each Party's patents issued or issuing on patent applications entitled to an effective filing date prior to the Termination Date are licensed at the royalty rates specified in Schedule 8.01(f) for seven (7) years after the Termination Date or until the end of calendar 2015, whichever comes first, and thereafter such licenses shall be on a royalty-free basis. (ii) In the event that Toshiba or an Affiliate of Toshiba is the Defaulting Party, Toshiba shall grant to SanDisk, effective upon such date of termination, a non-exclusive, non-transferable (except to Affiliates of SanDisk), non-sub-licensable, fully paid- up, royalty-free license to make, have made, use, sell and have sold NAND Flash Memory Products anywhere in the world utilizing the NAND technology transferred to and/or utilized by Yokkaichi, and SanDisk shall have full access to all such know-how at the Yokkaichi Facility which has been transferred to Yokkaichi prior to the Termination Date. (g) Upon termination of this Agreement resulting from an event of dissolution described in Section 11.01(f) (Bankruptcy Event) of the New Operating Agreement: (i) If such termination is caused by a Bankruptcy Event in respect of Toshiba, (x) the license granted to SanDisk under Toshiba Licensed Patents pursuant to the License Amendment shall continue on a royalty-free basis, and (y) Toshiba shall grant to SanDisk, effective upon such date of termination, a non-exclusive, non-transferable (except to Affiliates of SanDisk), non-sub-licensable, fully paid-up, royalty-free license to make, have made, use, sell and have sold NAND Flash Memory Products anywhere in the world utilizing the NAND technology transferred to and/or utilized by Yokkaichi, and SanDisk shall have full access to all such know-how at the Yokkaichi Facility which has been transferred to Yokkaichi prior to the Termination Date. (ii) If such termination is caused by a Bankruptcy Event in respect of SanDisk, the license granted to Toshiba under SanDisk Licensed Master Agreement 34 Patents (as defined in the License Amendment) pursuant to the License Amendment shall continue on a royalty-free basis. (h) Upon termination of this Agreement pursuant to Section 9(b)(2) of the Indemnification Agreement, the license granted to Toshiba under SanDisk Licensed Patents pursuant to the License Amendment shall continue on a royalty-free basis. (i) Termination of this New Master Agreement shall not affect any surviving rights or obligations of either Party set forth in the Product Development Agreement and the Common R&D Agreement. ARTICLE IX MISCELLANEOUS SECTION 9.01 No Partnership. Nothing contained in this Agreement shall be deemed or construed to make the Parties, or any Affiliate of any of them, partners or joint venturers with each other. FVC-Japan shall not be a general partnership, a limited partnership or a joint venture, and no Party shall be considered a partner or joint venturer of or with any other Party, for any purposes other than for Federal, state and other tax purposes. SECTION 9.02 Governing Law. This Agreement shall in all respects be governed by and construed in accordance with the internal laws of the State of California applicable to agreements made and to be performed entirely within such state without regard to the conflict of laws principles of such state; provided, however, that any Operative Document described herein shall be governed by the governing law specified in that Operative Document in the manner specified in that Operative Document. SECTION 9.03 Dispute Resolution. (a) The Parties shall use the process set forth in Section 10.04(a) and (b) (Dispute Resolution) of the New Operating Agreement to address any disputes which may arise concerning any material breach of any provision of any of the Operative Documents, other than Events of Default, and in the absence of exigent circumstances, the Parties shall refrain from commencing any lawsuit or seeking judicial relief in connection with any such disputes until the Parties have pursued such process to its conclusion. For such alleged breaches, the Party alleging breach shall initiate the process by providing a written notice to the individuals referred to in Section 10.04(b) of the New Operating Agreement (the "Designated Individuals"), describing with specificity the facts and circumstances forming the basis of the alleged breach, with the factual explanation cross-referenced to any actions taken pursuant to Section 10.04(a) of the New Operating Agreement and the applicable provisions of the relevant Operative Document alleged to have been breached. Such notice shall also provide a list of specific actions that, if taken by the alleged breaching Party, would result in curing such alleged breach, if capable of Master Agreement 35 cure, within sixty (60) days of the end of the dispute resolution process referred to in said Section 10.04(b) of the New Operating Agreement. The Party alleging breach and the alleged breaching Party will prepare and present their views, including evidence collected, on such matter to the Designated Individuals, in writing; and later in person to both Designated Individuals in a single meeting, if requested by either Designated Individual. The written description shall be provided not less than seven Business Days prior to any meeting requested to be in person by either Designated Individual. If irreparable harm would result from such alleged breach continuing during the normal dispute resolution process, the Parties will accelerate the process at the request of any party to the Operative Document alleged to have been breached. (b) If senior management or the Management Committee cannot resolve the dispute in accordance with Section 9.03(a), then such dispute will be settled by binding arbitration in San Francisco, California. The dispute shall be heard by a panel of three arbitrators pursuant to the rules of the International Chamber of Commerce. The awards of such arbitration shall be final and binding upon the parties thereto. Each party will bear its own fees and expenses associated with the arbitration. SECTION 9.04 Damages Limited. IN THE ABSENCE OF ACTUAL FRAUD, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO OR BE REQUIRED TO INDEMNIFY THE OTHER PARTY OR ANY OF THEIR RESPECTIVE AFFILIATES FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL OR INDIRECT DAMAGE OF ANY KIND, (INCLUDING WITHOUT LIMITATION LOSS OF PROFIT OR DATA), WHETHER OR NOT ADVISED OF THE POSSIBILITY OF SUCH LOSS. Master Agreement 36 IN WITNESS WHEREOF, this Agreement has been executed and delivered by the Parties as of the date first above written. TOSHIBA CORPORATION By: /s/ Takeshi Nakagawa ---------------------------------------- Name: Takeshi Nakagawa Title: Corporate Senior Vice President President & CEO Semiconductor Company SANDISK CORPORATION By: /s/ Eli Harari ---------------------------------------- Name: Eli Harari Title: President & Chief Executive Officer [Signature Page to New Master Agreement] 37 SCHEDULE 2.01 Definition Regarding Embedded NAND Flash The main function and value of any product is Flash Memory if the total NAND flash memory array area is greater than [***] of the total die area or the product is a cut-down or derivative of a standard NAND Flash Memory Product. Master Agreement 38 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. SCHEDULE 4.05 Litigation; Decrees. On or about August 3, 2001, the Lemelson Medical, Education & Research Foundation filed a complaint for patent infringement against SanDisk Corporation and other defendants. The suit was filed in the United States District Court, District of Arizona. On November 13, 2001, the Lemelson Foundation filed an Amended Complaint, which made the same substantive allegations against SanDisk but named more than twenty-five additional defendants. The Amended Complaint alleges that SanDisk, and the other defendants, have infringed certain patents held by the Lemelson Foundation pertaining to bar code scanning technology. By its complaint, the Lemelson Foundation requests that SanDisk be enjoined from our allegedly infringing activities and seeks unspecified damages. On or about March 5, 2002, Samsung Electronics Co., Ltd. filed a patent infringement lawsuit against SanDisk Corporation in the United States District Court for the Eastern District of Texas. The lawsuit alleges that SanDisk infringes four Samsung United States patents, Nos. 5,473,563; 5,514,889; 5,546,341 and 5,642,309, and seeks a preliminary and permanent injunction against unnamed SanDisk products, as well as damages, attorneys' fees and costs of the lawsuit. Master Agreement 39 SCHEDULE 4.07 Patents and Proprietary Rights See Schedule 4.05. Master Agreement 40 SCHEDULE 6.01 New Facility Transfer Costs [***] Master Agreement 41 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. SCHEDULE 6.02(b) Costs and Expenses Related to Disposal of FVC Assets [***] Master Agreement 42 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. SCHEDULE 6.03 Priority for Expansion of Manufacturing Capacity of NAND Flash Memory Products
- ------------------------------------------------------------------------------------------------------------ Toshiba SanDisk - ------------------------------------------------------------------------------------------------------------ 1. Yokkaichi (not [***] L/M [***] L/M including the FVC-Japan Equipment) - ------------------------------------------------------------------------------------------------------------ 2. Yokkaichi Expansion Minimum [***] Maximum [***] (at about the same time as [***] L/M (or proportionate [***] L/M (or proportionate FVC-Japan amount in relation to total amount in relation to total expansion)(total expansion capacity if expansion capacity if expansion not to exceed expansion less than [***] expansion less than [***] [***] L/M) L/M in total) L/M in total) - ------------------------------------------------------------------------------------------------------------ 2. FVC-Japan (at about [***] L/M [***] L/M the same time as (or [***] of the actual (or [***] of the actual Yokkaichi expansion) capacity) capacity) - ------------------------------------------------------------------------------------------------------------ 3. Yokkaichi Facility or [***] L/M to [***] L/M [***] L/M to [***] L/M a New Facility (or proportionate amount in (or proportionate amount in relation to total expansion relation to total expansion capacity if expansion less capacity if expansion less than [***] L/M in total) than [***] L/M in total) - ------------------------------------------------------------------------------------------------------------ Until the capacity expansions described above are made, no other expansions of capacity shall be permitted - ------------------------------------------------------------------------------------------------------------ 4. Thereafter, one time (e.g., [***] L/M if previous capacity expansion TSB allocation is [***] L/M permitted, in an amount and SD allocation is [***] not to exceed the capacity L/M) ratio of [***] - ------------------------------------------------------------------------------------------------------------ 5. Thereafter, all capacity expansion must be mutually agreed upon - ------------------------------------------------------------------------------------------------------------
Master Agreement 43 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. SCHEDULE 7.02(b) Allocation of Yokkaichi (not including the FVC-Japan Equipment) NAND Flash Memory Products
- ----------------------------------------------------------------------------------------------------------- Period 1Q02 2Q02 2H02 1H03 and beyond - ----------------------------------------------------------------------------------------------------------- SanDisk [***] [***] [***] [***] Allocation(L/M) - -----------------------------------------------------------------------------------------------------------
Notes: Wafers sold to the Parties by Toshiba will have the same yields on an aggregate basis. Such capacity includes [***] of 512Mbit 0.21 micron NAND MLC [***] of newly installed 0.16 micron and 0.13 micron capacity for NAND Flash Memory. For incremental capacity above [***] L/M at the Yokkaichi Facility, [***] of the incremental capacity will be allocated to SanDisk, including up to [***] of any 0.13 micron capacity expansion for NAND Flash Memory. Master Agreement 44 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. SCHEDULE 8.01(d) Royalty in case of SanDisk Unilateral Termination [***] Master Agreement 45 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. SCHEDULE 8.01(e) Royalty in case of Deadlock Termination [***] 46 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. SCHEDULE 8.01(f) Royalty in case of Event of Default Termination [***] 47 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. APPENDIX A DEFINITIONS, RULES OF CONSTRUCTION AND DOCUMENTARY CONVENTIONS In any agreement or instrument that incorporates the definitions set forth in this Appendix and states that the rules of construction and documentary conventions set forth herein shall apply to such agreement or instrument, then, unless such agreement or instrument otherwise requires: Article I. Definitions ----------- The following terms shall have the specified meanings: "ABN AMRO" means ABN AMRO Bank, N.V. "Accountants" means such firm of internationally recognized independent certified public accountants for FVC-Japan as is appointed pursuant to the New Operating Agreement from time to time. Initially, the Accountants shall be Deloitte & Touche LLP. "Affiliate" of any Person means any other Person which directly or indirectly controls, is controlled by or is under common control with, such Person; provided, however, that the term Affiliate, (a) when used in relation to FVC, FVC-Japan or any of their respective subsidiaries, shall not include either Party or any of its Affiliates, (b) when used in relation to a Party or any of its Affiliates, shall not include FVC, FVC-Japan or any of their respective Subsidiaries. "Articles" means the Articles of Incorporation of FVC-Japan. "Bankruptcy Event" means, with respect to any Person, the occurrence or existence of any of the following events or conditions: such Person (1) is dissolved; (2) becomes insolvent or fails or is unable or admits in writing its inability generally to pay its debts as they become due; (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors; (4) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights, or a petition is presented for its winding up or liquidation and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition (A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding up or liquidation or (B) is not dismissed, discharged, stayed or restrained in each case within 60 days of the institution or presentation thereof; (5) has a resolution passed by its governing body for its winding-up or liquidation; (6) seeks or becomes subject to the appointment of an administrator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets (regardless of how brief such appointment may be, or whether any obligations are promptly assumed by another entity or whether any other event described in this clause (6) has occurred and is continuing); (7) experiences any event which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) through (6) above; or (8) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts. "Board of Directors" means the board of directors of FVC-Japan. "Burdensome Condition" means, with respect to any proposed transaction, any action taken, or credibly threatened, by any Governmental Authority or (except if such action or threat is frivolous) other Person to challenge the legality of such proposed transaction, including (i) the pendency of a governmental investigation (formal or informal) in contemplation of the possible actions described in clauses (ii)(A), (ii)(B) or (ii)(C) below, (ii) the institution of a suit or the written threat thereof (A) seeking to restrain, enjoin or prohibit the consummation of such transaction or material part thereof, to place any material condition or limitation upon such consummation or to invalidate, suspend or require modification of any material provision of any Operative Document, (B) challenging the acquisition by either Party of its Units or (C) seeking to impose limitations on the ability of either Party effectively to exercise full rights as a member or Unitholder, as applicable, of FVC or FVC-Japan, including the right to act on all matters properly presented to the Parties pursuant to the New Operating Agreement, or (iii) an order by a court of competent jurisdiction having any of the consequences described in (ii)(A), (ii)(B) or (ii)(C) above, or placing any conditions or limitations upon such consummation that are unreasonably burdensome in the reasonable judgment of the applicable Person. "Business Day" means any day (other than a day which is a Saturday, Sunday or legal holiday in the State of California or Japan) on which banks are open for business in the State of California or Tokyo, Japan. "Business Plan" means the Initial Business Plan and each subsequent business plan, including budgets and projections for FVC-Japan for each relevant period, approved in accordance with Section 3.04(c) of the New Operating Agreement and complying with Section 3.04(b) of the New Operating Agreement. "Capital Contribution" means the capital contribution made by or allocated to a Party by virtue of its ownership of Units of FVC-Japan, as indicated on Schedule 6.01 to the New Operating Agreement. "Change of Control" with respect to a Person means a transaction or series of related transactions as a result of which (i) more than 50% of the beneficial ownership of the outstanding common stock or other ownership interests of such Person (representing the right to vote for the Board of Directors or similar organization of such Person) is acquired by another Person or affiliated group of Persons, whether by reason of stock acquisition, merger, consolidation, reorganization or otherwise or (ii) the sale or disposition of all or substantially all of a Person's assets to another Person or affiliated group of Persons. "Closing" means the closing of the transactions described in Section 3.01 of the New Master Agreement. 2 "Closing Date" means the date mutually agreed for the Closing by the Parties; provided, however, that in no event will the Closing Date be later than April 30, 2002 without the written agreement of both Parties. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. Any reference to a particular provision of the Code or a treasury regulation promulgated pursuant to the Code means, where appropriate, the corresponding provision of any successor statute or regulation. "Control" (including its correlative meanings "controlled by" and "under common control with") means possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise). "DSC" means Dominion Semiconductor Company, L.L.C, a Virginia limited liability company. "Event of Default" means, with respect to a Party, the occurrence or existence of any of the following events or conditions which remains uncured for sixty (60) days following receipt by such Party of written notice thereof: (a) a Bankruptcy Event in respect of such Party or any Person of which such Party is a Subsidiary; or (b) the breach by such Party of its covenant in Section 9.01 of the New Operating Agreement or the breach by such Party of its covenant in Section 5.01(b) of the New Master Agreement, provided that a Change of Control of a Party shall not be deemed an Event of Default. "Fiscal Quarter" means, unless changed by the Board of Directors, a calendar quarter. "Fiscal Year" means the one year period commencing on April 1 of each year. "Foundry Agreements" means, collectively, the SanDisk Foundry Agreement and the FVC-Japan Foundry Agreement. "FVC" means FlashVision, L.L.C., a Virginia limited liability company. "FVC-Japan" means FlashVision, Ltd., a Japanese limited liability company (yugenkaisha). "FVC-Japan Equipment" means, collectively, the FVC Owned Equipment, Leased Equipment, Replacement Tools, Additional Capacity Tools, .13u/MLC Tools (each as defined in the New Master Agreement) and any other equipment which is or will, from time to time, be owned or leased by FVC-Japan. 3 "FVC-Japan Foundry Agreement" means the Foundry Agreement between FVC-Japan and Yokkaichi. "Governmental Action" means any authorization, consent, approval, order, waiver, exception, variance, franchise, permission, permit or license of, or any registration, filing or declaration with, by or in respect of, any Governmental Authority. "Governmental Authority" means any United States or Japanese federal, state, local or other political subdivision or foreign governmental Person, authority, agency, court, regulatory commission or other governmental body, including the Internal Revenue Service and the Secretary of State of any State. "Governmental Rule" means any statute, law, treaty, rule, code, ordinance, regulation, license, permit, certificate or order of any Governmental Authority or any judgment, decree, injunction, writ, order or like action of any court or other judicial or arbitration tribunal. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the rules and regulations promulgated thereunder. "Indebtedness" of any Person means, without duplication: (a) all obligations (whether present or future, contingent or otherwise, as principal or surety or otherwise) of such Person in respect of borrowed money or in respect of deposits or advances of any kind; (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments; (c) all obligations of such Person upon which interest charges are customarily paid, except for trade payables; (d) all obligations of such Person under conditional sale or other title retention agreements relating to property or assets purchased by such Person; (e) all obligations of such Person issued or assumed as the deferred purchase price of property or services (other than with respect to the purchase of personal property under standard commercial terms); (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed; (g) all guarantees by such Person of Indebtedness of others; (h) all obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property (or a combination thereof), which obligations would be required to be classified and accounted 4 for as capital leases on a balance sheet of such Person prepared in accordance with Japanese GAAP or US GAAP, as applicable; (i) all obligations of such Person (whether absolute or contingent) in respect of interest rate swap or protection agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements; and (j) all obligations of such Person as an account party in respect of letters of credit and bankers' acceptances. The Indebtedness of any Person shall include the Indebtedness of any partnership in which such Person is a general partner. "Japan Act" means the Japanese Limited Liability Company Act (yugenkaisha-ho), as in effect from time to time. "Japanese GAAP" means generally accepted accounting principles in Japan as in effect from time to time, consistently applied. "Japanese GAAS" means generally accepted auditing standards in Japan as in effect from time to time. "License Agreement" means the Patent Cross License Agreement dated July 30, 1997 by and between Toshiba and SanDisk. "Lien" means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, encumbrance, charge or security interest in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement relating to such asset and (c) in the case of securities, any purchase option, call or similar right with respect to such securities. "L/M" means lots per month. "Material" means, with respect to any Person, an event, change or effect which is or, insofar as reasonably can be foreseen, will be material to the condition (financial or otherwise), properties, assets, liabilities, capitalization, licenses, businesses, operations or prospects of such Person and, in the case of FVC-Japan, the capital accounts of the Parties or the ability of FVC-Japan to carry out its then-current Business Plan. "Net Book Value" means, with respect to any Person, the total assets of such Person less the total liabilities of such Person, in each case as determined in accordance with Japanese GAAP or US GAAP, as applicable. "New Initial Business Plan" means the initial business plan of FVC-Japan to be agreed to and adopted by the Parties. "New Master Agreement" means the New Master Agreement dated as of April 10, 2002 by and between Toshiba and SanDisk. 5 "New Operating Agreement" means the New Operating Agreement dated as of April 10, 2002 between Toshiba and SanDisk. "Operative Documents" means the New Operating Agreement, the New Master Agreement, the Articles, the SanDisk Foundry Agreement, the Common R&D Agreement, the Product Development Agreement and, when executed, the FVC-Japan Foundry Agreement. "Party" means Toshiba and SanDisk, and each of them. "Percentage" means, with respect to any Unitholder (as defined in the New Operating Agreement), the percentage of such Unitholders' ownership interest in FVC or FVC Japan, as the case may be. For the avoidance of doubt, as of the date hereof, Percentage means with respect to Toshiba or its Affiliate, 50.1%, and with respect to SanDisk or its Affiliate, 49.9%; provided, however, if either Unitholder transfers all of its Units to any Affiliate in accordance with the New Operating Agreement, its Percentage shall be 0% and such Affiliate transferee shall receive the entire Percentage of the transferring Unitholder. "Permitted Liens" means (a) the rights and interests of FVC-Japan, either Party or any Affiliate of any such Person as provided in the Operative Documents, and (b) Liens for Taxes which are not due and payable or which may after contest be paid without penalty or which are being contested in good faith and by appropriate proceedings and so long as such proceedings shall not involve any substantial risk of the sale, forfeiture or loss of any part of any relevant asset or title thereto or any interest therein. "Person" means any individual, firm, company, corporation, limited liability company, unincorporated association, partnership, trust, joint venture, Governmental Authority or other entity, and shall include any successor (by merger or otherwise) of such entity. "Purchase and Supply Agreement" means that certain Purchase and Supply Agreement to be entered into in connection with the New Master Agreement, by and among FVC-Japan, Toshiba and SanDisk. "SanDisk" means SanDisk Corporation, a Delaware corporation. "SanDisk Foundry Agreement" means the Foundry Agreement between Toshiba and SanDisk. "Seconded Employee" means an individual who was originally an employee of a Party or any of its Affiliates and who was assigned to FVC-Japan or any of its Subsidiaries by such Party or such Affiliate at the request of such Party as contemplated by Section 6.06 of the New Master Agreement. "SENA" means Semiconductor North America, Inc., a Delaware corporation. "Subsidiary" of any Person means any other Person: (i) more than 50% of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, or 6 (ii) which does not have outstanding shares or securities (as may be the case in a partnership, joint venture or unincorporated association), but more than 50% of whose ownership interest representing the right to make decisions (equivalent to those generally reserved for the board of directors of a corporation) for such other Person is, now or hereafter owned or controlled, directly or indirectly, by such Person, but such other Person shall be deemed to be a Subsidiary only so long as such ownership or control exists; provided, however, that the term Subsidiary as used in any Operative Document, when used in relation to a Party or any of its Affiliates, shall not include FVC, FVC-Japan or any of its Subsidiaries. "Tax" or "Taxes" means all United States or Japanese Federal, state, local or other political subdivision and foreign taxes, assessments and other governmental charges, including: (a) taxes based upon or measured by gross receipts, income, profits, sales, use or occupation and (b) value added, ad valorem, transfer, franchise, withholding, payroll, employment, excise or property taxes, together with (c) all interest, penalties and additions imposed with respect to such amounts and (d) any obligations under any agreements or arrangements with any other Person with respect to such amounts. "Toshiba" means Toshiba Corporation, a Japanese corporation. "Transfer" means any transfer, sale, assignment, conveyance, creation of any Lien (other than a Permitted Lien), or other disposal or delivery, including by dividend or distribution, whether made directly or indirectly, voluntarily or involuntarily, absolutely or conditionally, or by operation of law or otherwise. "Unique Activities" means production activities of FVC or FVC-Japan at the request of either Member to (i) implement changes in the manufacturing processes to be employed for Products to be manufactured for such Member (or its Affiliates) that are not agreed to by the other Member, (ii) commence manufacturing other Products for the requesting Member (or its Affiliates) that the other Member does not desire to have manufactured for it and which require a change in manufacturing processes or in the utilization of the Facility or production resources, or (iii) implement any other change in its operations in order to manufacture Products specifically for the requesting Member (or its Affiliates). "Units" means the units of contribution (shussi mochibun) in FVC-Japan, the par value of one Unit (shussi-hitokuchi-no-kingaku) being JPY 5,000. "US GAAP" means generally accepted accounting principles in the United States as in effect from time to time, consistently applied. "US GAAS" means generally accepted auditing standards in the United States as in effect from time to time. "Virginia Act" means the Virginia Limited Liability Company Act, as in effect from time to time. 7 "Yokkaichi Facility" means the manufacturing facility owned and operated by Toshiba in Yokkaichi-shi, Japan. Article II. Rules of Construction and Documentary Conventions ------------------------------------------------- Section 2.01 Amendment and Waiver. (a) No amendment to or waiver of any -------------------- agreement or instrument incorporating these Rules of Construction and Documentary Conventions shall be effective unless it shall be in writing, identify with specificity the provisions of the applicable agreement or instrument that are thereby amended or waived and be signed by each party thereto. Any failure of a party to comply with any obligation, covenant, agreement or condition contained in such agreement or instrument may be waived by the party entitled to the benefits thereof only by a written instrument duly executed and delivered by the party granting such waiver, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure of compliance. Section 2.02 Severability. If any provision of any agreement or instrument ------------ incorporating these Rules of Construction and Documentary Conventions or the application of any such provision is invalid, illegal or unenforceable in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of such agreement or instrument (except as may be expressly provided in such agreement or instrument) or invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the Parties waive any provision of law that renders any provision of such agreement or instrument invalid, illegal or unenforceable in any respect. The Parties shall, to the extent lawful and practicable, use their reasonable efforts to enter into arrangements to reinstate the intended benefits, net of the intended burdens, of any such provision held invalid, illegal or unenforceable. If the intent of the Parties for entering into the Operative Documents, considered as a single transaction, cannot be preserved, the Operative Documents shall either be renegotiated or terminated by mutual agreement of the Parties. Section 2.03 Survival. Except as may otherwise be specifically provided in -------- any agreement or instrument incorporating these Rules of Construction and Documentary conventions, all covenants, agreements, representations and warranties of the Parties made in or pursuant to such agreement or instrument shall survive the execution and delivery of such agreement or instrument and the closing of the transactions contemplated thereby, notwithstanding any investigation by or on behalf of any party. Further, the provisions set forth in Article II hereof shall survive and shall apply with respect to any terminated agreement which incorporated these Rules of Construction and Documentary Conventions. Section 2.04 Assignment. Except as may otherwise be specifically provided ---------- in any agreement or instrument incorporating these Rules of Construction and Documentary Conventions, a party thereto shall not transfer, or grant or permit to exist any Lien (except Permitted Liens) on, such agreement or instrument or any of its rights thereunder (except for any transfer to an Affiliate or in connection with a merger, consolidation or sale of all or substantially all the assets or the outstanding securities of such party, which transfer shall not require any 8 consent of the other parties) without the prior written consent of each other party thereto (which consent may be withheld in each such other party's sole discretion), and any such purported transfer or Lien without such consent shall be void. Section 2.05 Remedies; Force Majeure. In no event, except in the case of ----------------------- fraud, will any party to any agreement or instrument incorporating these Rules of Construction and Documentary Conventions (except as may be otherwise expressly provided therein) be liable to another party thereto for special, indirect, punitive or incidental damages, lost profits, lost savings or any other consequential damages, even if such party has been advised of the possibility of such damages, resulting from the breach by it of any of its obligations thereunder or breach by it or any of its Affiliates of any of their respective obligations under any other Operative Document or from the use of any confidential or other information. (a) Except as may otherwise be specifically provided in any agreement or instrument incorporating these Rules of Construction and Documentary Conventions, the rights and remedies of the parties under such agreement or instrument are cumulative and are not exclusive of any rights or remedies which the parties would otherwise have. Equitable relief, including the remedies of specific performance and injunction, shall be available with respect to any actual or attempted breach of such agreement or instrument; provided, however, in the absence of exigent circumstances, the parties shall refrain from commencing any lawsuit or seeking judicial relief in connection with such actual or attempted breach that is contemplated to be addressed by the dispute resolution process set forth in Section 10.03 of the New Master Agreement until the parties have attempted to resolve the subject dispute by following said dispute resolution process to its conclusion. (b) If the due date for any amount required to be paid under an Operative Document incorporating these Rules of Construction and Documentary Conventions is not a Business Day, such amount shall be payable on the next succeeding Business Day; provided that if payment cannot be made due to the existence of a banking crisis or international payment embargo, such amount may be paid within the following 30 days. If due to the occurrence of an act of God, any party is prevented from providing training, technical assistance or other similar support required to be provided to FVC or FVC-Japan pursuant to any Operative Document incorporating these Rules of Construction and Documentary Conventions, such party shall have an additional 30 day period to make alternative arrangements to provide such support. Section 2.06 Parties in Interest; Limitation on Rights of Others. Any --------------------------------------------------- agreement or instrument incorporating these Rules of Construction and Documentary Conventions shall be binding upon and inure to the benefit of the parties thereto and their permitted successors and assigns. Nothing in any such agreement or instrument, whether express or implied, shall give or be construed to give any Person (other than the parties thereto and their permitted successors and assigns) any legal or equitable right, remedy or claim under or in respect of such agreement or instrument, unless such Person is expressly stated in such agreement or instrument to be entitled to any such right, remedy or claim. Section 2.07 Table of Contents; Headings. The Table of Contents and Article --------------------------- and Section headings to any agreement or instrument incorporating these Rules of Construction 9 and Documentary Conventions are for convenience of reference only and shall not affect the construction of or be taken into consideration in interpreting any such agreement or instrument. Section 2.08 Counterparts; Effectiveness. Any agreement or instrument --------------------------- incorporating these Rules of Construction and Documentary Conventions may be executed by the parties thereto in separate counterparts, each of which when so executed and delivered shall be an original, but all of which counterparts shall together constitute but one and the same contract. Any agreement or instrument incorporating these Rules of Construction and Documentary Conventions shall not become effective until one or more counterparts have been executed by each party thereto and delivered to the other parties thereto. Section 2.09 Entire Agreement. Any agreement or instrument incorporating ---------------- these Rules of Construction and Documentary Conventions, together with the other Operative Documents and the Exhibits, Schedules, Appendices and Attachments thereto, any agreement entered into simultaneously therewith, and the Initial Business Plan, when completed, constitute the agreement of the parties to the Operative Documents with respect to the subject matter thereof and supersede all prior written and oral agreements and understandings with respect to such subject matter. Section 2.10 Construction. References in any agreement or instrument ------------ incorporating these Rules of Construction and Documentary Conventions to any gender include references to all genders, and references in any such agreement or instrument to the singular include references to the plural and vice versa. Unless the context otherwise requires, the term "party" when used in any such agreement or instrument means a party to such agreement or instrument. References in any such agreement or instrument to a party or other Person include their respective permitted successors and assigns. The words "include", "includes" and "including", when used in any such agreement or instrument, shall be deemed to be followed by the phrase "without limitation". Unless the context otherwise requires, references used in any such agreement or instrument to Articles, Sections, Exhibits, Schedules, Appendices and Attachments shall be deemed references to Articles and Sections of, and Exhibits, Schedules, Appendices and Attachments to, such agreement or instrument. Unless the context otherwise requires, the words "hereof", "hereby" and "herein" and words of similar meaning when used in any such agreement or instrument refer to such agreement or instrument in its entirety and not to any particular Article, Section or provision of such agreement or instrument. Any reference to an Operative Document shall include such Operative Document as amended or supplemented from time to time in accordance with the provisions thereof. Section 2.11 Official Language. The official language of any agreement ----------------- incorporating these Rules of Construction and Documentary Conventions is the English language only, which language shall be controlling in all respects, and all versions of any such agreement in any other language shall not be binding on the parties thereto or nor shall such other versions be admissible in any legal proceeding, including arbitration, brought under such agreement. All communications and notices to be made or given pursuant to any such agreement shall be in the English language. Section 2.12 Governing Law. Any agreement incorporating these Rules of ------------- Construction and Documentary Conventions shall be governed and construed as to all matters 10 including validity, construction and performance by and under the substantive laws of the State of California, unless such agreement expressly provides otherwise. Section 2.13 Waiver of Jury Trial and Certain Damages. Each party to any ---------------------------------------- Operative Document incorporating these Rules of Construction and Documentary Conventions waives, to the fullest extent permitted by applicable law, (i) any right it may have to a trial by jury in respect of any action, suit or proceeding arising out of or relating to any Operative Document and (ii) absent fraud, any right it may have to receive damages or indemnification from any other party to any Operative Document in respect of any act, omission or event relating to such Operative Document or the transactions contemplated by the Operative Documents based on any theory of liability for any special, indirect, consequential or punitive damages. Each party to any such agreement or instrument (x) certifies that no representative, agent or attorney of another party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver and (y) acknowledges that it has been induced to enter into such agreement or instrument by, among other things, the mutual waivers and certifications set forth above in this Section 2.13. Section 2.14 Arbitration. Each party to any agreement or instrument ----------- incorporating these Rules of Construction and Documentary Conventions hereby agrees to adhere to the dispute resolution procedures described in Section 10.03 of the New Master Agreement with respect to any disputes, grievances or actions arising thereunder. Section 2.15 Notices. All notices and other communications to be given to ------- any party under any agreement or instrument incorporating these Rules of Construction and Documentary Conventions shall be in writing and any notice shall be deemed received when delivered by hand, courier or overnight delivery service, or by facsimile (if confirmed within two Business Days by delivery of a copy by hand, courier or overnight delivery service), or five days after being mailed by certified or registered mail, return receipt requested, with appropriate postage prepaid and shall be directed to the address of such party specified below (or at such other address as such party shall designate by like notice): (a) If to SanDisk: SanDisk Corporation 140 Caspian Court Sunnyvale, CA 94089 Telephone: (408) 542-0555 Facsimile: (408) 542-0600 Attention: President and CEO 11 With a copy to: SanDisk Corporation 140 Caspian Court Sunnyvale, CA 94089 Telephone: (408) 548-0208 Facsimile: (408) 548-0385 Attention: Vice President and General Counsel (b) If to Toshiba: Toshiba Corporation Semiconductor Company 1-1 Shibaura 1-Chome Minato-Ku, Tokyo 105-8001 Japan Telephone: 011 81 3 3457 3362 Facsimile: 011 81 3 5444 9339 Attention: Vice President With a copy to: Toshiba Corporation Semiconductor Company Legal Affairs and Contracts Division 1-1 Shibaura 1-Chome Minato-Ku, Tokyo 105-8001 Japan Telephone: 011-81-3-3457-3452 Facsimile: 011-81-3-5444-9342 Attention: General Manager (c) If to FVC-Japan: FlashVision, Ltd. 800 Yamanoisshikicho, Yokkaichi, Mie, Japan Attention: President and CEO 12 With a copy to: SanDisk Corporation 140 Caspian Court Sunnyvale, CA 94089 Telephone: (408) 542-0510 Facsimile: (408) 542-0640 Attention: General Manager, NAND Division And Toshiba Corporation Semiconductor Company Legal Affairs and Contracts Division 1-1 Shibaura 1-Chome Minato-Ku, Tokyo 105-8001 Japan Telephone: 011-81-3-3457-3452 Facsimile: 011-81-3-5444-9342 Attention: General Manager Section 2.16 Definitions. The definitions set forth in Article I of this ----------- Appendix A shall apply to this Article II. 13 EX-10.31 4 dex1031.txt NEW OPERATING AGREEMENT DATED 04/10/2002 Exhibit 10.31 ================================================================================ NEW OPERATING AGREEMENT Dated as of April 10, 2002 between TOSHIBA CORPORATION and SANDISK CORPORATION ================================================================================ CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. TABLE OF CONTENTS
Page ARTICLE I Definitions, Rules of Construction and Documentary Conventions ................ 1 SECTION 1.01 Certain Definitions ................................................... 1 SECTION 1.02 Additional Definitions ................................................ 2 SECTION 1.03 Rules of Construction and Documentary Conventions ..................... 2 ARTICLE II General Provisions ............................................................ 3 SECTION 2.01 Sale of Units; Capital Increase; Distribution of Units ................ 3 SECTION 2.02 Name .................................................................. 4 SECTION 2.03 Principal Office ...................................................... 4 SECTION 2.04 Term; Extension ....................................................... 4 SECTION 2.05 (Intentionally Blank) ................................................. 4 SECTION 2.06 Scope of Activity ..................................................... 4 SECTION 2.07 Powers ................................................................ 4 SECTION 2.08 Articles of Incorporation ............................................. 4 SECTION 2.09 Company Actions ....................................................... 4 ARTICLE III Business Operations ........................................................... 4 SECTION 3.01 Business Dealings with the Company .................................... 4 SECTION 3.02 Other Activities ...................................................... 5 SECTION 3.03 Seconded Employees .................................................... 5 SECTION 3.04 Business Plans and Related Matters .................................... 5 SECTION 3.05 Standard of Care ...................................................... 7 SECTION 3.06 Use of Names .......................................................... 7 ARTICLE IV Actions by the Unitholders .................................................... 7 SECTION 4.01 Matters Requiring the Approval of the Unitholders ..................... 7 SECTION 4.02 General Meetings of Unitholders ....................................... 9 SECTION 4.03 Restrictions on Unitholders ........................................... 10 ARTICLE V Management and Operations of Company .......................................... 10 SECTION 5.01 Meetings of the Board of Directors .................................... 10 SECTION 5.02 Officers; Employees ................................................... 15 SECTION 5.03 Insurance ............................................................. 16 SECTION 5.04 Records ............................................................... 16 ARTICLE VI Capital Contributions; Distributions .......................................... 17
i TABLE OF CONTENTS (continued)
Page SECTION 6.01 Capital Contributions .......................................... 17 SECTION 6.02 Distributions .................................................. 17 SECTION 6.03 No Interest .................................................... 18 SECTION 6.04 Return of Capital Contributions ................................ 18 ARTICLE VII (Intentionally Blank) .................................................. 18 ARTICLE VIII Accounting and Taxation ................................................ 18 SECTION 8.01 Financial Accounting Conventions ............................... 18 SECTION 8.02 Maintenance of Books of Account ................................ 18 SECTION 8.03 Financial Statements ........................................... 18 SECTION 8.04 Other Reports and Inspection ................................... 20 SECTION 8.05 Characterization ............................................... 20 SECTION 8.06 Deposit of Funds ............................................... 20 ARTICLE IX Units of Contribution; Disposition of Units ............................ 21 SECTION 9.01 Restrictions on Transfer of Units .............................. 21 SECTION 9.02 Admission of New Unitholders ................................... 22 SECTION 9.03 Withdrawal Prohibited .......................................... 23 SECTION 9.04 Purchase of Additional Interest ................................ 23 ARTICLE X Certain Agreements of the Unitholders .................................. 23 SECTION 10.01 (Intentionally Blank) .......................................... 23 SECTION 10.02 Taxes and Charges; Governmental Rules .......................... 23 SECTION 10.03 Further Assurances ............................................. 23 SECTION 10.04 Dispute Resolution; Deadlock Respecting Business Plan .......... 23 SECTION 10.05 Remedies Upon Event of Default; Termination on Breach .......... 25 SECTION 10.06 (Intentionally Blank) .......................................... 25 SECTION 10.07 Mechanics of Sale .............................................. 25 ARTICLE XI Dissolution ............................................................ 26 SECTION 11.01 Events of Dissolution .......................................... 26 SECTION 11.02 Dissolution by Agreement ....................................... 26 SECTION 11.03 Dissolution Upon Event of Default .............................. 27 SECTION 11.04 Dissolution by Unilateral Option ............................... 27 SECTION 11.05 Dissolution upon Notice ........................................ 27
ii TABLE OF CONTENTS (continued)
Page SECTION 11.06 Winding Up .................................................. 27 SECTION 11.07 Liquidation Proceeds ........................................ 28 SECTION 11.08 Additional Contribution ..................................... 28 ARTICLE XII Indemnification and Insurance ....................................... 28 SECTION 12.01 Indemnification ............................................. 28 SECTION 12.02 Insurance ................................................... 29 SECTION 12.03 Indemnification by the Unitholders .......................... 30 SECTION 12.04 Assertion of Claims ......................................... 30 ARTICLE XIII Miscellaneous ....................................................... 30 SECTION 13.01 Governing Law ............................................... 30 SECTION 13.02 Effectiveness ............................................... 31 SECTION 13.03 Conflict with Articles ...................................... 31
Exhibit A Articles of Incorporation of the Company Schedule 6.01 Capital Contributions Schedule 8.03 Monthly Reports iii NEW OPERATING AGREEMENT of FLASHVISION, LTD., a Japanese limited liability company (yugenkaisha), dated as of April 10, 2002, between TOSHIBA CORPORATION, a Japanese corporation ("Toshiba"), and SANDISK CORPORATION, a Delaware corporation ("SanDisk"). WHEREAS, FLASHVISION, LTD. (the "Company") is a Japanese limited liability company (yugenkaisha) whose units of contribution (shussi mochibun), the par value of one unit (Shussi-hitokuchi-no-kingaku) being JPY5,000 (the "Units"), are wholly owned by Toshiba; WHEREAS, Toshiba, through its wholly-owned subsidiary, SEMICONDUCTOR NORTH AMERICA, INC., and SanDisk entered into the Operating Agreement dated May 9, 2000, and pursuant to such Operating Agreement, formed FLASHVISION, L.L.C., a Virginia limited liability company ("FVC"); and WHEREAS, SanDisk and Toshiba intend to cause FVC to purchase all the Units of the Company from Toshiba pursuant to the New Master Agreement, dated as of the date hereof, by and between SanDisk and Toshiba (the "New Master Agreement"); and WHEREAS, SanDisk and Toshiba desire to enter into this New Operating Agreement in accordance with the Japan Act and the Articles of Incorporation of the Company (as amended from time to time, the "Articles") in order to provide for (i) the business of the Company, (ii) the conduct of the Company's affairs and (iii) the rights, powers, preferences, limitations and responsibilities of the Company's Unitholders, employees and Directors. Accordingly, Toshiba and SanDisk agree as follows: ARTICLE I Definitions, Rules of Construction and Documentary Conventions SECTION 1.01 Certain Definitions. (a) Capitalized terms used but not defined in this Agreement shall have the respective meanings assigned to them in the Definitions, Rules of Construction and Documentary Conventions, attached as Appendix A (the "Rules Document") to the New Master Agreement. Capitalized terms used but not defined in this Agreement or the Rules Document shall have the respective meanings assigned to them in the New Master Agreement. (b) As used herein, the term "Agreement" means this New Operating Agreement together with any Exhibits, Schedules, Appendices and Attachments hereto and the Rules Document. 1 SECTION 1.02 Additional Definitions. The following capitalized terms used in this Agreement shall have the respective meanings assigned in the sections indicated below: Term Defined in ---- ---------- "Articles" Recitals "Bankruptcy Event" Section 11.01(f) "Claim" Section 12.04(a) "Company" Recitals "Deadlock" Section 10.04(c) "Deadlock Dissolution Notice" Section 10.04(d) "Defaulting Unitholder" Section 10.05 "Designated Individuals" Section 10.04(b) "Director(s)" Section 3.05 (a) "FVC Capital" Section 2.02(b)(i) "General Meeting of Unitholders" Section 4.01(b) "Indemnified Party" Section 12.04(a) "Indemnifying Party" Section 12.04(a) "Initiating Unitholder" Section 10.04(d) "Losses" Section 12.01(a) "New Master Agreement" Recitals "Nondefaulting Unitholder" Section 10.05 "Notified Party" Section 11.05 "Notifying Party" Section 11.05 "Permissible Assignee" Section 9.01(c) "Permissible Assignment Agreement" Section 9.01(c) "Price Per Unit" Section 2.01(b)(i) "Responding Unitholder" Section 10.04(d) "Rules Document" Section 1.01(a) "Termination Date" Section 11.04 "Transition Period" Section 2.01(c) "Units" Recitals "Units Distribution" Section 2.01(b)(v) "Units Sale" Section 2.01(a) "Unitholder" Section 2.01(c) SECTION 1.03 Rules of Construction and Documentary Conventions. The rules of construction and documentary conventions set forth in the Rules Document shall apply to, and are hereby incorporated in, this Agreement. 2 ARTICLE II General Provisions SECTION 2.01 Sale of Units; Capital Increase; Distribution of Units. (a) As soon as practicable following the Closing, Toshiba shall sell to FVC, and Toshiba and SanDisk shall cause FVC to purchase from Toshiba, all of the Units for a cash payment, by wire transfer of immediately available Japanese Yen, in the amount of JPY [***] (the "Units Sale"). (b) Toshiba and SanDisk agree to take the following actions, in the order listed, as soon as practicable following the Units Sale: (i) cause the Company to authorize the increase of the capital in the Company by 1,000 Units, and cause FVC to subscribe to purchase all of such increase by means of a cash payment, by wire transfer of immediately available Japanese Yen, in an amount equal to fifty percent (50%) of the result of (A) the amount of paid in capital of FVC ($300,000,000) minus (B) the amount paid by FVC to Toshiba to acquire all of the outstanding Units pursuant to Section 2.01(a) above ([***]) (the amount resulting from subtracting subsection (B) from subsection (A) hereinafter referred to as the "FVC Capital"); then (ii) cause FVC to sell to the Company the FVC Owned Equipment for a cash payment, by wire transfer of immediately available Japanese Yen, in an amount equal to the [***] thereof as of April 30, 2002; then (iii) cause the Company to authorize the increase of the capital in the Company by 1,000 Units, and cause FVC to subscribe to purchase all of such increase by means of a cash payment, by wire transfer of immediately available Japanese Yen, in an amount equal to fifty percent (50%) of the FVC Capital; then (iv) cause FVC to be dissolved and liquidated by filing or causing to be filed, in accordance with the Virginia Act, the Certificate of Cancellation attached as Exhibit B to the New Master Agreement; then (v) cause the Units held by FVC to be distributed to the Toshiba and SanDisk on a pro rata basis based upon the respective Percentages of the Unitholders as of the date of such distribution (the "Units Distribution"). (c) The holders of the Units shall be hereinafter called the "Unitholders." For purposes of this Agreement, during the period beginning upon consummation of the Units Sale and ending immediately prior to the Units Distribution (the "Transition Period"), Toshiba and SanDisk, as members of FVC (which shall hold all of the Units during the Transition Period), shall be deemed to be the Unitholders (Toshiba being deemed the Unitholder of 50.1% of the outstanding Units, and SanDisk being deemed the Unitholder of 49.9% of the outstanding Units). 3 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (d) The rights and obligations of the Unitholders shall be as set forth in the Japan Act, except as provided herein. SECTION 2.02 Name. The name of the Company is "FLASHVISION YUGEN KAISHA", which translates to "FLASHVISION, LTD." in English, and all Company business shall be conducted in that name or such other name as the Unitholders shall mutually agree. SECTION 2.03 Principal Office. The principal office of the Company shall be located in Yokkaichi, Mie, or such other place as the Unitholders may designate by mutual agreement from time to time in accordance with the Articles and the Japan Act. SECTION 2.04 Term; Extension. The Company shall be terminated on December 31, 2016, unless extended by mutual written agreement of all of the Unitholders or earlier terminated in accordance with Article XI (Dissolution). Any such extension shall be effective only upon the written agreement of all of the Unitholders and shall be on such terms and for such period as set forth in such agreement. The Unitholders agree to meet, no later than December 31, 2015, to discuss the possible extension of the term of the Company. SECTION 2.05 (Intentionally Blank) SECTION 2.06 Scope of Activity. The scope of activity of the Company shall be to manufacture or to cause to be manufactured Products and the sale of NAND Flash Memory Products to the Unitholders and their Affiliates, with the objective of meeting the demand of each Unitholder for NAND Flash Memory Products. SECTION 2.07 Powers. The Company shall have all the powers now or hereafter conferred by applicable law on limited liability companies formed under the Japan Act and may do any and all acts and things necessary, incidental or convenient to the purpose specified in Section 2.06 (Scope of Activity). SECTION 2.08 Articles of Incorporation. The Articles of the Company in effect as of the date hereof are as attached hereto as Exhibit A. In the event of any conflict between this Agreement and the Articles, the terms of this Agreement shall prevail. SECTION 2.09 Company Actions. The Unitholders hereby authorize the Company, and ratify (including for purposes of Section 4.01 (Matters Requiring the Approval of the Unitholders)) all action having been taken by or on behalf of the Company prior to the date hereof, to execute and deliver the Operative Documents to which it is or is specified to be a party, including all certificates, agreements and other documents required in connection therewith. ARTICLE III Business Operations SECTION 3.01 Business Dealings with the Company. Subject to the provisions set forth in Sections 4.01(a) (Matters Requiring the Approval of the Unitholders) and 4 5.01(d) (Matters Requiring the Approval of the Board of Directors), the Company may enter into contracts or agreements, or otherwise enter into transactions or dealings, with any Unitholder or any of their respective Affiliates, and derive and retain profits therefrom. The validity of any such contract, agreement, transaction or dealing or any payment or profit related thereto or derived therefrom shall not be affected by any relationship between the Company and any Unitholder or any of their respective Affiliates, subject to the Japan Act. The Unitholders agree that where practicable and contractually allowable (based on competitive price, availability and other material terms), the Board of Directors will consider whether to utilize any Unitholder or any of their respective Affiliates as the preferred providers of products and services that may be required in the manufacturing operations of the Company, subject to the ability of such Unitholder or Affiliate to meet the Company's manufacturing requirements on competitive terms. Unless otherwise approved by the Unitholders or otherwise expressly provided in the Operative Documents, all business dealings of the Company with any Unitholder or any of their respective Affiliates shall be on the most beneficial standard commercial terms and conditions, including volume, price and credit terms, currently offered or made available to unaffiliated customers by such Unitholder or Affiliate, as the case may be, with respect to the products and services to be offered and provided to the Company. SECTION 3.02 Other Activities. During the term of this Agreement and except as set forth in Section 6.03(d) of the New Master Agreement, no Unitholder nor any of their respective Affiliates shall: (i) fabricate NAND Flash Memory Integrated Circuits at any location other than the Yokkaichi Facility or any other fabrication facility agreed upon by the Unitholders; (ii) have any third party fabricate NAND Flash Memory Integrated Circuits; or (iii) have any right to fabricate NAND Flash Memory Integrated Circuits beyond the capacity as limited pursuant to Article VI of the New Master Agreement, as such capacity limitations may be amended from time to time in accordance with Article VI of the New Master Agreement. For the avoidance of doubt, nothing contained in the foregoing shall restrict the Unitholders from engaging in any other activities, including, without limitation, (i) designing any NAND Flash Memory Product; (ii) selling any NAND Flash Memory Product to any customer; (iii) entering into any equipment purchase or material supply agreements; or (iv) entering into any patent licensing arrangement, and nothing in the foregoing shall restrict Toshiba from installing any manufacturing line in the Yokkaichi Facility (subject to the capacity limitations set forth in Article VI of the New Master Agreement, as such capacity limitations may be amended from time to time in accordance with Article VI of the New Master Agreement). For purposes of this Section 3.02, NAND Flash Memory Integrated Circuits shall mean ICs included in the definition of NAND Flash Memory Products pursuant to Section 2.01 of the New Master Agreement. SECTION 3.03 Seconded Employees. The Unitholders agree that all Seconded Employees, during their period of assignment to the Company, are expected to devote their best efforts to promote the interests and success of the Company and to perform their work for the Company in good faith under the direction of the Company's management. Each Unitholder agrees to encourage Seconded Employees assigned to the Company by such Unitholder to be dedicated to the best interests and success of the Company. SECTION 3.04 Business Plans and Related Matters. 5 (a) Initial and Subsequent Business Plans. The Business Plan of the Company, setting forth the Company's products, pricing, operating budget, capital expenditures, expense budgets, financing plans and other business activities of the Company through the [***], will be agreed upon and certified by the Board of Directors as soon as practicable after the Closing. (i) The Unitholders acknowledge that the initial Business Plan and each successive Business Plan will, at the time such Business Plan is in effect, represent the Company's then-current forecast of the proposed operations of the Company. (ii) An updated Business Plan complying with Section 3.04(b) (Form and Scope) in respect of each successive Fiscal Year after the Fiscal Year ending [***] shall be prepared under the direction of the Chief Executive Officer of the Company and submitted to the Board of Directors for review and approval not later than [***] preceding the commencement of such Fiscal Year. (iii) When the proposed Business Plan in respect of a Fiscal Year is approved by the Board of Directors, it shall constitute the Business Plan of the Company for such Fiscal Year and the Company and its officers and employees shall implement such Business Plan, which shall be the basis of the Company's operations for such Fiscal Year. Upon approval, the approved Business Plan shall constitute the approved operational, financing and capital expenditure budget. The Board of Directors shall have the authority pursuant to Section 5.01(d) (Matters Requiring the Approval of the Board of Directors) to amend the most recently approved Business Plan, including the operating budget contained therein, and any Unitholder may request that the Board of Directors review the Company's operating results and prospects, as well as market conditions, and consider a proposal for amendment or review of the most recently approved Business Plan at any regularly scheduled or special meeting of the Board of Directors and upon such request, the Board of Directors shall in good faith make such review and/or consider such proposal. (b) Form and Scope. Each Business Plan shall contain a statement of long-range strategy and short-range tactics detailing quantitative and qualitative goals for the Company and relating the attainment of those goals to the Company's manufacturing objectives, and shall include such items as planned capital expenditures, planned product development, planned product output and projected product cost, sales forecasts, total headcount, total spending and revenue and profit projections, financing plans and tax planning. No Business Plan shall be deemed to be an amendment of this Agreement. (c) Approval. Other than the initial Business Plan (which shall be approved in accordance with Section 3.04(a) above), the Board of Directors shall vote upon the proposed Business Plan, with such modifications as it may deem necessary, before February 15 preceding the commencement of each Fiscal Year. Subject to Sections 10.04(c), (d) and (e) (Dispute Resolution; Deadlock Respecting Business Plan), pending approval by the Board of Directors of any proposed Business Plan, the most recently approved Business Plan shall continue in effect; provided, however, the Board of Directors may, by unanimous vote, adopt an 6 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. amended interim business plan for the Company's operations until it is able to reach agreement on the proposed Business Plan for the forthcoming year. SECTION 3.05 Standard of Care. (a) Each Unitholder, and each director of the Company, as defined in the Japan Act (each, a "Director"), shall be entitled to rely (unless such Person has knowledge or information concerning the matter in question that makes reliance unwarranted) on information, opinions, reports or statements, including financial statements and other financial data, if prepared or presented by: (i) one or more managers or employees of the Company who such Unitholder or Director believes in good faith to be reliable and competent in the matters presented; or (ii) legal counsel, public accountants or other Persons as to matters that such Unitholder or Director believes to be within such Person's professional or expert competence. (b) Each Unitholder shall also be entitled to rely upon information, opinions, reports or statements, including financial statements and other financial data, prepared or presented by the Board of Directors pursuant to the responsibilities delegated to the Board of Directors pursuant to this Agreement. SECTION 3.06 Use of Names. Except as may be expressly provided in the Operative Documents, nothing in this Agreement shall be construed as conferring on the Company or any Unitholder the right to use in advertising, publicity or other promotional activities any name, trade name, trademark or other designation of any other Unitholder or any of its Affiliates, including any contraction, abbreviation or simulation of any of the foregoing. ARTICLE IV Actions by the Unitholders SECTION 4.01 Matters Requiring the Approval of the Unitholders. (a) Notwithstanding any provision of the Articles to the contrary, no action may be taken by or on behalf of the Company in connection with any of the following matters without the prior unanimous written approval of the Unitholders: (i) any amendment, restatement or revocation of the Articles; (ii) any amendment to or renewal of any Operative Document between the Company and any Unitholder or any of their respective Affiliates; (iii) any change in the scope of activity or strategic direction of the Company's business; 7 (iv) any merger, consolidation or other business combination to which the Company or any of its Subsidiaries is a party, or any other transaction to which the Company is a party resulting in a Change of Control of the Company; (v) any sale, lease, pledge, assignment or other disposition of assets of the Company in an amount (in terms of consideration to be received by the Company) in excess of JPY 5,000,000 in one transaction or a series of related transactions, other than as set forth in the most recently approved Business Plan; (vi) the approval of any transaction or agreement between the Company and any Unitholder or any of their respective Affiliates (other than transactions or agreements expressly provided for or authorized by an Operative Document or the most recently approved Business Plan) or any amendment thereto (including the waiver of any material term thereof), other than any such transaction, agreement or amendment that contains generally available, arm's length commercial terms and is in an amount (in terms of payments to be made or the value of services or products to be provided or delivered) less than JPY 5,000,000 for any single transaction or agreement or for substantially identical transactions within a 24 month period (or a waiver that does not materially adversely affect the rights and benefits of the Company), other than as set forth in the most recently approved Business Plan; (vii) incurring Indebtedness in an amount in excess of JPY 1,000,000 or an increase in aggregate Indebtedness in excess of JPY 1,000,000 in any calendar quarter, other than as authorized by Section 5.01(d) (Matters Requiring the Approval of the Board of Directors); (viii) with respect to the Company or any of its Subsidiaries, (A) the voluntary commencement of any proceeding or the voluntary filing of any petition seeking relief under Japanese or foreign bankruptcy, insolvency, receivership or similar law, (B) the consent to the institution of, or the failure to contest in a timely and appropriate manner, any involuntary proceeding or any involuntary filing of any petition of the type described in clause (A) above, (C) the application for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company, or for a substantial part of its property or assets, (D) the filing of an answer admitting the material allegations of a petition filed against the Company in any such proceeding described above, (E) the consent to any order for relief issued with respect to any such proceeding described above, (F) the making of a general assignment for the benefit of creditors, (G) the admission in writing of the Company's inability, or the failure of the Company generally, to pay its debts as they become due or (H) the taking of any action for the purpose of effecting any of the foregoing; (ix) subject to Section 9.01(a) and the Rules Document, the granting of consent to the transfer of any Units; (x) the winding up, dissolution or liquidation of the Company or any of its Subsidiaries (other than the dissolution of the Company pursuant to and as contemplated by Article XI (Dissolution)); 8 (xi) the acquisition of any business, entry into any joint venture or partnership, or creation of any direct or indirect Subsidiary of the Company; (xii) the commitment of the Company to any development project; (xiii) the sale, license, assignment or other Transfer of any of the Company's intellectual property owned or in its possession (including any technology or know-how, whether or not patented, any trademark, trade name or service mark, any copyright or any software or other method or process); (xiv) any increase in the capital amount of the Company, whether by increasing the number of the Units or increasing the par value per Unit or otherwise; and (xv) any other matter material to the operation, staffing, business or financial condition of the Company. (b) Each Unitholder may exercise its vote by proxy; provided, that such proxy shall submit to the Company, prior to the relevant General Meeting of Unitholders, as defined in the Japan Act (the "General Meeting of Unitholders"), a power of attorney duly signed by the Unitholder and/or other document establishing its power of representation; and provided, further, that the conferment of the power of proxy for one General Meeting of Unitholders shall not be deemed to be a conferment of the power of proxy for any subsequent General Meeting of Unitholders. (c) Notwithstanding the requirements of Section 4.01(a) (Matters Requiring the Approval of the Unitholders) relating to agreements between the Company and any Unitholder or any of their respective Affiliates, any question regarding a material default or alleged material default (including any question regarding a breach of representation or alleged breach of representation) under any Operative Document between the Company and any Unitholder or any of their respective Affiliates shall be subject to the dispute resolution process set forth in Section 10.04(a) and (b) (Dispute Resolution; Deadlock Respecting Business Plan). SECTION 4.02 General Meetings of Unitholders. (a) An annual General Meeting of Unitholders shall be held within three (3) months from the date immediately following the last day of each Fiscal Year of the Company. A special General Meeting of Unitholders may be held at any time and may be called by a resolution of the Board of Directors or in any other manner permitted by the Japan Act or the Articles. All General Meetings of Unitholders shall be called and held in accordance with the Articles and the Japan Act. The General Meetings of Unitholders may be held at the Company's principal office or at any other location, or, if all the Unitholders so agree, by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, provided that such communications equipment continues to be operational throughout the meeting. 9 (b) Except as otherwise provided in this Agreement, each Unitholder shall be entitled to one vote for each Unit owned by such Unitholder. (c) The minutes of every General Meeting of Unitholders shall be kept with the Company's records referred to in Section 5.04 (Records). (d) The quorum necessary for any General Meeting of Unitholders shall be those Persons entitled to cast all of the votes held by the Unitholders. A quorum shall be deemed not to be present at any meeting for which notice was not properly given under the Articles or the Japan Act, unless the Unitholder as to whom such notice was not properly given attends such meeting without protesting the lack of notice or duly executes and delivers a written waiver of notice or a written consent to the holding of such meeting. SECTION 4.03 Restrictions on Unitholders. As between the Unitholders, no Unitholder may, without the prior written consent of the other Unitholder: (a) confess any judgment against the Company; (b) enter into any agreement on behalf of or otherwise purport to bind the other Unitholder or the Company; (c) do any act in contravention of this Agreement; (d) except as contemplated by Article XI (Dissolution), dispose of the goodwill or the business of the Company; or (e) assign the property of the Company in trust for creditors or on the assignee's promise to pay any Indebtedness of the Company. ARTICLE V Management and Operations of Company SECTION 5.01 Meetings of the Board of Directors. (a) General. Except as otherwise provided herein (including but not limited to Section 4.01 (Matters Requiring the Approval of the Unitholders) and Section 5.02 (Officers; Employees)), the Board of Directors is vested with complete and exclusive power to direct and control the Company and to manage the Company as provided by the Articles and this Agreement, as it may be amended from time to time. (b) Members of the Board of Directors; Voting; etc. (i) The Board of Directors of the Company shall consist of six (6) Directors, three (3) of which shall be designated by Toshiba, and the other three (3) of which shall be designated by SanDisk; provided that the total number of Directors of the Company may be changed by mutual agreement of the Unitholders. 10 (ii) Directors shall be elected for a one (1) year term, and shall be shall be eligible for re-election. (iii) Subject to the fiduciary duty of Directors under the Japan Act, each Director shall serve at the pleasure of the designating Unitholder and may be removed as such, with or without cause, and his successor designated, by the designating Unitholder. Each Unitholder shall have the right to designate a replacement Director in the event of any vacancy among such Unitholder's appointees. (iv) Each Unitholder shall bear any cost incurred by any Director designated by it to serve on the Board of Directors, and no Director shall be entitled to compensation from the Company for serving in such capacity. (v) Each Unitholder shall notify the other Unitholder and the Company of the name, business address and business telephone and facsimile numbers of each Director that such Member has appointed to the Board of Directors. Each Unitholder shall promptly notify the other Unitholder and the Company of any change in such Unitholder's appointments or of any change in any such address or number. (vi) For purposes of any approval or action taken by the Board of Directors, each Director shall have one vote. (vii) At any meeting of the Board of Directors, each Director may exercise his vote by proxy; provided, that such proxy shall submit to the Company, prior to the relevant meeting, a power of attorney duly signed by the Director and/or other document establishing its power of representation; and provided, further, that the conferment of the power of proxy for one meeting of the Board of Directors shall not be deemed to be a conferment of the power of proxy for any subsequent meeting of the Board of Directors. (viii) The quorum necessary for any meeting of the Board of Directors shall be those Directors entitled to cast all of the votes held by the members of the Board of Directors. A quorum shall be deemed not to be present at any meeting for which notice was not properly given under Section 5.01(c) (Meetings, Notices, etc.), unless the Director or Directors as to whom such notice was not properly given attend such meeting without protesting the lack of notice or duly execute and deliver a written waiver of notice or a written consent to the holding of such meeting. (ix) Any resolution of the Board of Directors may be adopted by obtaining the written consent of each Director. (c) Meetings, Notice, etc. Meetings of the Board of Directors shall be held at such location or locations as may be selected by the Board of Directors from time to time. (i) Regular meetings of the Board of Directors shall be held on such dates and at such times as shall be determined by the Board of Directors and shall be held at least on a quarterly basis, unless otherwise agreed by the Directors. 11 (ii) Notice of any regular meeting or special meeting pursuant to Section 5.01(c)(iii) shall be given to each Director at least ten (10) Business Days prior to such meeting in the case of a meeting in person or at least five (5) Business Days prior to such meeting in the case of a meeting by conference telephone or similar communications equipment pursuant to Section 5.01(c)(vi), which notice shall state the purpose or purposes for which such meeting is being called and include any supporting documentation relating to any action to be taken at such meeting. (iii) Special meetings of the Board of Directors may be called by any Director by notice given in accordance with the notice requirements set forth in Section 5.01(c)(ii); provided that the Directors appointed by the Unitholder that is not represented by the Director calling such special meeting shall be entitled to select a convenient location for the meeting and to suggest an alternative time or times if the designated time is not convenient for them. No action may be taken and no business may be transacted at such special meeting which is not identified in such notice unless (A) such action or business is incidental to the action or business for which the special meeting is called or (B) such action or business does not materially adversely affect any Unitholder or the Company. (iv) The minutes of each meeting of the Board of Directors shall be sent by facsimile to all Directors within twenty (20) calendar days after such meeting. Material to be presented at a Board of Directors meeting shall be sent by facsimile or delivered in hard copy to all Directors ten (10) Business Days prior to such meeting if feasible in light of the circumstances giving rise to the need for such meeting, or in any event a minimum of five (5) Business Days prior to such meeting. (v) The actions taken by the Board of Directors at any meeting, however called and noticed, shall be as valid as though taken at a meeting duly held after regular call and notice if (but not until), either before, at or after the meeting, each Director as to whom such meeting was improperly held duly executes and delivers a written waiver of notice or a written consent to the holding of such meeting; provided, however, any Director who is present at a meeting and does not protest the failure of notice shall be deemed to have received adequate notice thereof. A vote of the Board of Directors may be taken only (A) at a meeting of the members thereof duly called and held or (B) without a meeting by the execution by the Directors eligible to cast all the votes on the Board of Directors of a consent setting forth the action so taken, and identified as a consent of the Directors pursuant to this Section 5.01(c)(v). (vi) Upon the consent of all Directors, a meeting of the Board of Directors may be held by conference telephone or similar communications equipment by means of which all Directors participating in the meeting can be heard by all other participants, provided that such communications equipment continues to be operational throughout the meeting. Any Director may elect to participate in a meeting by conference telephone or similar communications equipment upon sufficient advance notice to permit arrangements therefor to be made. 12 (vii) At each meeting, the Board of Directors shall consider (A) any of the items set forth in Section 5.01(d) (Matters Requiring the Approval of the Board of Directors) that may require the Board of Directors' attention, (B) any items added to the Board of Directors' agenda for discussion by any Unitholder and (C) such other matters as the Board of Directors decides to review; provided, however, that the Directors shall not be required to vote or take other action (other than carrying on discussions) on matters that were not placed on the meeting agenda at least five Business Days in advance of the time set for the meeting unless such action or business is incidental to the action or business which was otherwise properly on the agenda and considered at such meeting. (viii) The Board of Directors shall, from time to time, elect one of its members to preside at its meetings. The Board of Directors may establish reasonable rules and regulations to (A) require officers to call meetings and perform other administrative duties, (B) limit the number and participation of observers, if any, and require them to observe confidentiality obligations and (C) otherwise provide for the keeping and distribution of minutes and other internal Board of Directors governance matters not inconsistent with the terms of this Agreement. (ix) The Board of Directors shall have the authority to establish subcommittees and to delegate to any such subcommittee any of the Board of Directors' responsibilities; provided, however, the power of the Board of Directors to approve the matters set forth in Section 5.01(d) (Matters Requiring the Approval of the Board of Directors) may not be delegated to a subcommittee. (d) Matters Requiring the Approval of the Board of Directors. Notwithstanding any provision of the Articles to the contrary, no action may be taken by or on behalf of the Company in connection with any of the following matters without the unanimous written approval of the Board of Directors: (i) any sale, lease, pledge, assignment or other disposition of assets of the Company in an amount (in terms of consideration to be received by the Company) in excess of JPY 1,000,000 in one transaction or a series of related transactions, other than as set forth in the most recently approved Business Plan; (ii) the approval of any transaction or agreement between the Company and any Unitholder or any of their respective Affiliates (other than transactions or agreements expressly provided for or authorized by an Operative Document or the most recently approved Business Plan) or any amendment thereto (including the waiver of any material term thereof), other than any such transaction, agreement or amendment that contains generally available, arm's length commercial terms and is in an amount (in terms of payments to be made or the value of services or products to be provided or delivered) less than JPY 1,000,000 for any single transaction or agreement or for substantially identical transactions within a 24 month period (or a waiver that does not materially adversely affect the rights and benefits of the Company), other than as set forth in the most recently approved Business Plan; 13 (iii) the purchase, lease, license or other acquisition of (A) personal property or services or (B) any list of capital equipment approved by the Unitholders, in each case in an amount (in terms of payments to be made or the value of services of products to be provided or delivered) exceeding JPY1,000,000 in any one transaction or a series of related transactions, other than as provided for in the most recently approved Business Plan; (iv) the selection of attorneys, accountants, auditors and financial advisors; (v) the adoption of accounting and tax policies, procedures and principles; (vi) incurring any Indebtedness; (vii) the hiring or termination of any employees referenced in Section 5.02(a) (Officers; Employees) who are not Seconded Employees, if any; (viii) the adoption of or changes to the forms of confidentiality, assignment or disclosure of intellectual property or employment agreements to be entered into between the Company and its employees; (ix) the adoption of or changes to any employee benefit plan, including any incentive compensation plan; (x) the amount and timing of any distributions; (xi) the commencement or settlement of litigation by or against the Company; (xii) the purchase, sale or lease (as lessor or lessee) of any real property; (xiii) any acquisition of securities or any other ownership interest in any entity; (xiv) the making of any public announcements by or on behalf of the Company; provided, that in any case any such public announcements must otherwise comply with the requirements of Section 6.03 (Public Announcements) of the New Master Agreement, if applicable; (xv) the entry into or amendment of any collective bargaining arrangements or the waiver of any material provision or requirement thereof; (xvi) the approval of a proposed Business Plan, or the amendment to the most recently approved Business Plan, in each case including the operating budget contained therein; 14 (xvii) the incurrence of capital expenditures in excess of those provided for in the most recently approved Business Plan or the commitment of the Company to any development projects other than as provided for in the most recently approved Business Plan; (xviii) subject to Section 5.01(c)(ix), the establishment of any subcommittees or delegation of authority of the Board of Directors; (xix) the authorization and approval of any filing with, public comments to, or negotiation/discussion with, any Governmental Authority (excluding regular operating filings and other routine administrative matters); (xx) the approval of Unique Activities to be performed by the Company at the request of any Unitholder, in connection with which the Board of Directors shall be satisfied that such Unitholder has reached agreement with the Company as to the payment by such Unitholder of all costs incurred in connection with such Unique Activities and that adequate provision has been made by such Unitholder for the funding of any additional required capital expenditures required in conjunction with such Unique Activities; (xxi) the decision of the Company to negotiate external sources of additional wafer fabrication capacity for NAND Flash Memory Products; and (xxii) such other matters as the Board of Directors decides, in its sole discretion, to review. SECTION 5.02 Officers; Employees. (a) Unless otherwise mutually agreed by the Unitholders, the Directors of the Company with specific titles shall be designated as: the Representative Director/President/Chief Executive Officer and the Representative Director/Executive Vice President, each of whom shall be elected by the Board of Directors from among the Directors designated alternately by Toshiba and SanDisk to serve successive three-year terms, subject to the consent of the non-appointing Unitholder, which consent shall not unreasonably be withheld. Notwithstanding the foregoing, the first term of the Representative Director/President/Chief Executive Officer held by Toshiba shall expire on June 30, 2003. In addition, the Board of Directors may appoint such other officers from time to time as it deems necessary or advisable in the conduct of the business and affairs of the Company. Any individual may hold more than one office. Toshiba shall appoint the Company's first Representative Director/President/Chief Executive Officer and SanDisk shall appoint the Company's first Representative Director/Executive Vice President. (b) The President/Chief Executive Officer shall have the authority to retain other senior management of the Company, subject to the approval of the Board of Directors. (c) Subject to the terms and conditions of Section 6.06 of the New Master Agreement, each Unitholder may assign to the Company, as Seconded Employees, employees whom such Unitholder believes are capable of performing the assignment and likely to contribute to the success of the Company and to have a positive impact on the Company's 15 business environment. Any liabilities in respect of the employment of Seconded Employees assigned to work for the Company shall be retained by the relevant Unitholder (or its Subsidiary) that assigned such Seconded Employee to the Company; provided, however, financial responsibility for the salary, employment-related Taxes, benefits and temporary expenses relating to Seconded Employees shall be allocated as provided in Section 6.06 (Personnel) of the New Master Agreement. Seconded Employees other than the Company's executive officers referred to in Section 5.02(a) (Officers; Employees) may be removed for cause by the Company's management and may be removed with or without cause by the Board of Directors. The Board of Directors shall have the right to terminate the services of the Company's executive officers referred to in Section 5.02(a) (Officers; Employees) with or without cause, in any manner permissible under Section 5.01 (Meetings of the Board of Directors). (d) The Company will have agreements with and policies applicable to each of its officers, employees and consultants who are not Seconded Employees, in forms acceptable to each Unitholder, and shall also have appropriate arrangements with its Seconded Employees, in each case with respect to (i) protection of confidential information, (ii) patent and copyright assignment, (iii) invention disclosure (including improvements and advances) and assignments thereof and (iv) in respect of certain employees who are not Seconded Employees, by agreement of the Board of Directors, non-competition. SECTION 5.03 Insurance. The Company shall maintain insurance against such liabilities and other risks associated with the conduct by the Company of its business and in such amounts and against such risks as agreed by the Unitholders, and in any event as is generally maintained by companies engaged in a business similar to that of the Company. SECTION 5.04 Records. The Company shall maintain the following records at its principal office: (a) a current list of the full name set forth in alphabetical order and last known business address of each Unitholder and Director; (b) a copy of the Articles, and all articles of amendment thereto; (c) a copy of this Agreement and all amendments hereto; (d) a copy of all financial statements of the Company for the three most recent Fiscal Years; (e) a copy of the Company's income tax or information returns and reports, if any, for the three most recent years; (f) a copy of all indentures, loan agreements, lease agreements, guarantees, security agreements, promissory notes, licensing or other intellectual property agreements, agreements that relate to the payment or receipt by the Company of amounts in excess of JPY 5,000,000 or that are not terminable by the Company upon ninety (90) days notice, documents, if any, evidencing employee compensation arrangements, employee pension or other benefit arrangements, and similar documents and instruments executed and delivered by the Company; 16 (g) a list of all contributions made to the Company by the Unitholders; and (h) a record of all distributions by the Company to each Unitholder. The Unitholders and/or the Directors and/or their respective designees (which shall be limited to its employees or professional advisers subject to appropriate confidentiality obligations) shall have reasonable access to the records during normal business hours upon reasonable request. Copies of records shall be made available and delivered to the Unitholders and/or the Directors promptly after reasonable request for same, provided the requesting party pays for copy and delivery charges. ARTICLE VI Capital Contributions; Distributions SECTION 6.01 Capital Contributions. (a) The Unitholders shall be deemed to have made Capital Contributions to the Company in the amounts set forth opposite their respective names on Schedule 6.01. (b) No Unitholder shall be obligated to make any additional Capital Contributions to the Company, unless otherwise mutually agreed upon by the Unitholders in writing, in which case such additional Capital Contributions shall be made in proportion to the Unitholders' respective Percentages as of the date of such additional Capital Contribution. SECTION 6.02 Distributions. (a) General. Notwithstanding any provision of the Articles to the contrary, and subject to Section 11.07 (Liquidation Proceeds), unless otherwise agreed by the Unitholders, no distributions of cash (or in the case of Section 11.07 (Liquidation Proceeds), other property) shall be made by the Company to the Unitholders for a period of three (3) years from the date of this Agreement, and thereafter all distributions of cash (or, in the case of Section 11.07 (Liquidation Proceeds), other property) by the Company to the Unitholders shall be made in Japanese Yen at the times and in the amounts determined by the Unitholders. Except as provided in Section 11.07 (Liquidation Proceeds), each distribution to the Unitholders shall be made on a pro rata basis based upon the respective Percentages of the Unitholders as of the date of such distribution. (b) Distribution for Taxes. Notwithstanding the provisions of Section 6.02(a), the Company shall make, in respect of each Fiscal Year in which SanDisk must recognize taxable income of the Company in SanDisk's US federal, state and local income and franchise tax returns, a distribution to SanDisk to the extent necessary to meet SanDisk's aggregate US tax liability with respect to such taxable income, with such liability calculated at the highest US, state and local corporate tax rates as may be then applicable to SanDisk. SanDisk will make a request upon the Company for such distribution as soon as is practicable after the filing of SanDisk's applicable US tax returns. Following receipt of such request, the 17 Company shall make the requested distribution on the next date on which the Company is permitted to make distributions pursuant to the Japan Act. Simultaneously therewith, the Company shall also make a distribution to Toshiba in an amount equal to the amount of the distribution made to SanDisk pursuant to this Section 6.02(b). Any such prior distributions shall be taken into account upon any purchase and sale of Units under Article X herein or dissolution of the Company under Article XI herein. SECTION 6.03 No Interest. No interest shall be payable to the Unitholders on their Capital Contributions or otherwise in respect of the capital of the Company. SECTION 6.04 Return of Capital Contributions. Except as expressly provided herein, no Unitholder shall be entitled to the return of any part of such Unitholder's Capital Contributions. ARTICLE VII (Intentionally Blank) ARTICLE VIII Accounting and Taxation SECTION 8.01 Financial Accounting Conventions. (a) The Company shall adopt and follow Japanese GAAP. (b) Notwithstanding anything to the contrary in the Rules Document, the first Fiscal Year shall begin on April 10, 2002 and end on March 31, 2003. SECTION 8.02 Maintenance of Books of Account. The Company shall keep or cause to be kept at its principal office, or such other location as the Board of Directors shall designate, full and complete books of account. The books of account shall be maintained in a manner that provides sufficient assurance that transactions of the Company are recorded so as to comply with all applicable laws and to permit (a) the preparation of the Company's consolidated financial statements in accordance with Japanese GAAP and (b) the Unitholders to account for their interest in the Company in accordance with Japanese GAAP. SECTION 8.03 Financial Statements. (a) Annual Statements. As soon as practicable following the end of each Fiscal Year (and in any event not later than sixty (60) days after the end of such Fiscal Year), the Company shall prepare and deliver to each Unitholder and each Director, audited consolidated and consolidating balance sheets of the Company as of the end of such Fiscal Year and the related audited consolidated and consolidating statements of operations, the Unitholders' capital accounts and cash flows of the Company for such Fiscal Year (or similar statements if such statements change as the result of changes in Japanese GAAP), together with appropriate notes to such consolidated financial statements, and in each case setting forth in comparative form the corresponding figures for the preceding Fiscal Year and for the budget for the Fiscal 18 Year just completed. Such financial statements shall be accompanied by (i) the report of the Accountants to the effect that such financial statements (except for the comparison to the budget) have been prepared in conformity with Japanese GAAP (except as otherwise specified in such report) and that the audit of such financial statements has been performed in accordance with Japanese GAAP and (ii) a report as to all transactions (including the nature, type and amount) between the Company and each Unitholder and their respective Affiliates. The Company shall conduct its business such that the report of the Accountants shall not contain any qualifications as to the scope of the audit or with respect to the Company's compliance with Japanese GAAP, except for changes in methods of accounting in which such Accountants concur and except that the foregoing shall not be deemed to obligate any Unitholder to contribute any capital to the Company. The Company shall deliver to SanDisk, at SanDisk's request and expense, any other financial information related to the Company that is reasonably requested by SanDisk for US Federal, state, and local income or franchise tax purposes. (b) Quarterly Statements. As soon as practicable following the end of each Fiscal Quarter (and in any event not later than fifteen (15) days after the end of such Fiscal Quarter), the Company shall prepare and deliver to each Unitholder and each Director unaudited consolidated and consolidating balance sheets of the Company as of the end of such Fiscal Quarter and the related unaudited consolidated and consolidating statements of operations, the Unitholders' capital accounts and cash flows of the Company for such Fiscal Quarter and for the Fiscal Year to date (or similar statements if such statements change as the result of changes in Japanese GAAP), in each case setting forth in comparative form the corresponding figures for the preceding Fiscal Quarter, for the corresponding Fiscal Quarter of the preceding Fiscal Year and for the budget for the Fiscal Quarter just completed and for the Fiscal Year to date. Such financial statements shall be accompanied by a certificate of the principal accounting or financial officer of the Company to the effect that such financial statements have been prepared under such officer's supervision and that, although such financial statements do not contain the footnotes and other disclosures required to be presented in interim financial statements by Japanese GAAP, such financial statements, in such officer's judgment, fairly present the financial condition and results of operations of the Company as of the date and for the periods indicated, subject to normal recurring year-end audit adjustments. The Company shall deliver to SanDisk, at SanDisk's request and expense, any other financial information related to the Company that is reasonably requested by SanDisk for US Federal, state, and local income or franchise tax purposes. (c) Monthly Reports. Each month, the Company shall prepare and deliver to each Unitholder and each Director the reports and other information set forth on Schedule 8.03. Such reports and other information will become available at the respective times set forth on Schedule 8.03. (d) Business Plan. Subject to Sections 10.04(c), (d) and (e), and provided that the most recently approved Business Plan does not provide for the next Fiscal Year, the Company shall, not later than February 15 prior to the commencement of each Fiscal Year, deliver to each Unitholder a copy of the Business Plan, including the Company's monthly budgets, for the upcoming Fiscal Year, as approved by the Board of Directors. 19 (e) Legal Proceedings. The Company shall promptly inform each Unitholder and each Director with regard to litigation, governmental investigations, material government notices and threatened legal proceedings. SECTION 8.04 Other Reports and Inspection. The Company shall furnish promptly to each Unitholder such other reports, financial data and information relating to the Company as such Unitholder may reasonably request and shall require the Accountants to provide to each Unitholder copies of any document related to the Company in the possession of the Accountants as such Unitholder may reasonably request. The Company shall, upon reasonable prior notice and during normal business hours, make available to each Unitholder and their respective professional advisors, from time to time as requested by such Unitholder, all properties, assets, books of account, corporate records, contracts and documentation, if any, relating to employee benefits of the Company, and any other material requested by such Unitholder for inspection and, in the case of books of account, corporate records, contracts and documentation, if any, relating to employee benefits, copying, and shall use reasonable efforts to make available to such Unitholder the Accountants and the key employees of the Company for interviews to verify any information furnished or to enable such Unitholder otherwise to review the Company and its operations. The Company may condition such availability upon the entering into of reasonable and appropriate confidentiality agreements. Notwithstanding the foregoing, the Company will not make available to any Unitholder information provided to the Company on a confidential basis by any other Unitholder without the consent of such other Unitholder. SECTION 8.05 Characterization. For the purposes of US federal, state and local income and franchise taxation, the Unitholders intend that the Company shall be treated as a disregarded entity at all times during the Transition Period and as a partnership at all times following the expiration of the Transition Period, and shall take all actions, including the execution of other documents required to be filed by the Code, as may be reasonably required to qualify for and receive treatment as a disregarded entity and as a partnership, as the case may be, for such US tax purposes. SanDisk shall bear all costs and expenses incurred by the Company or any Unitholder in connection with any action required to be taken pursuant to this Section. Notwithstanding the foregoing, the Company shall have no obligation to take any action under this Section that would have an adverse effect on it or any Unitholder under any Japanese Governmental Rule. SECTION 8.06 Deposit of Funds. All funds of the Company and its Subsidiaries not otherwise employed shall be deposited from time to time to its credit in such banks, trust companies or other depositories, or invested in such other investments held as cash equivalents, as the Board of Directors shall authorize. The funds of the Company and its Subsidiaries shall not be commingled with the funds of any Unitholder or any of their respective Affiliates. ARTICLE IX Units of Contribution; Disposition of Units SECTION 9.01 Restrictions on Transfer of Units. 20 (a) No Unitholder (nor any permitted transferees of any Unitholder) may Transfer any interest in the Company, including any of such Unitholder's Units, to any Person, except by a Change of Control; provided, that any Unitholder may Transfer all of its interest in the Company, including all of its Units, to any of their respective Affiliates, with the prior written consent of every other Unitholder, which consent shall not be unreasonably withheld; and provided, further, that (i) the transferee agrees in writing to become a party hereto and assumes all the obligations of the transferring Unitholder hereunder and under each other Operative Document to which the transferring Unitholder is a party and (ii) immediately after giving effect to such Transfer, no Event of Default or an event or condition that with the giving of notice or lapse of time or both would constitute an Event of Default with respect to the transferee Unitholder shall exist. Following the effectiveness of any such Transfer, the transferring Unitholder shall no longer have the transferred right, title or interest in the Company or any rights under this Agreement and the transferee shall be substituted as a Unitholder for all purposes of this Agreement. The transferring Unitholder shall, however, remain responsible for all obligations under this Agreement and the other Operative Documents for any transferee which is an Affiliate of the transferring Unitholder and shall not be released or discharged from any existing liability or obligation to any Person. Any subsequent Transfer of an ownership interest in such Affiliate by the transferring Unitholder shall be deemed to constitute a Transfer of Units requiring compliance with this Section 9.01. (b) If a Unitholder Transfers its entire interest in the Company pursuant to Section 9.01(a), the transferee shall succeed to all the rights and obligations of such Unitholder under this Agreement. (c) Any Unitholder may agree to pay amounts equal to distributions received by such Unitholder from the Company to a third party in its sole discretion pursuant to a Permissible Assignment Agreement. "Permissible Assignment Agreement" means an agreement between a Unitholder and another Person (the "Permissible Assignee") which: (i) provides for the grant by such Unitholder to the Permissible Assignee of the right to receive amounts equal to distributions received by such Unitholder from the Company pursuant to Article VI or XI of this Agreement, but does not give the Permissible Assignee any Units or any other rights whatsoever with respect to the Company; (ii) provides that under no circumstances (including any Bankruptcy Event in respect of such Unitholder) may any claim be made by the Permissible Assignee against the Company or any such Unitholder or any Affiliate of any such Unitholder or any of their respective assets, under or in connection with such agreement, even if such Unitholder defaults in performance thereunder; (iii) provides that the rights of the Permissible Assignee under such agreement may not be transferred without the prior written consent of each Unitholder and that any such Transfer without such consents shall be null and void; 21 (iv) may not be amended, nor any provision thereof waived, in a manner that would cause it not to be a Permissible Assignment Agreement, without the prior written consent of the non-assigning Unitholder; (v) provides that the assigning Unitholder is authorized to Transfer its entire interest in the Company pursuant to Section 9.01(a) of this Agreement free and clear of any interest of the Permissible Assignee and without any liability on the part of the transferee thereunder to the Permissible Assignee; and (vi) contains an express acknowledgment by the Permissible Assignee, for the benefit of the non-assigning Unitholder and the Company, to the effect of clauses (i)-(v) above. The assigning Unitholder shall ensure that any payment due to a Permissible Assignee pursuant to or in connection with a Permissible Assignment Agreement shall be made in full to such Permissible Assignee when due. SECTION 9.02 Admission of New Unitholders. No Person shall have the right to become a Unitholder unless and until all the following conditions are satisfied: (a) except in the case of a Transfer of a Unitholder's Units to an Affiliate of such Unitholder in accordance with Section 9.01 (Restrictions on Transfer of Units), such Person, the terms and conditions of such Person's admission as a Unitholder and the rights appurtenant to the Units to be issued or Transferred, as applicable, to such Person are approved by all existing Unitholders and, if applicable, the creation of any new class or group of Units in the Company having different rights, powers and duties is reflected in amendments to the Articles and to this Agreement; (b) such Person executes a counterpart of this Agreement and such other instrument or instruments as the Company may reasonably deem appropriate to affirm that the representations and warranties contained in the New Master Agreement are true and correct with respect to such Person and that such Person agrees to be bound as a Unitholder by this Agreement and all of the covenants and agreements herein; and (c) if requested by the Company, an opinion of counsel, a purchaser representation letter or other appropriate documentation is furnished to the Company establishing that the issuance or Transfer, as applicable, of Units to the new Unitholder will comply with the Japan Act. Except to the extent required by law, the Company shall have no obligation to recognize or to furnish information or make distributions to any new Unitholder or any transferee of a Unitholder who does not become a Unitholder in accordance with Section 9.01 (Restrictions on Transfer of Units) or this Section 9.02. SECTION 9.03 Withdrawal Prohibited. Except as otherwise expressly permitted by this Agreement, (i) no Unitholder may withdraw from the Company and (ii) no Unitholder may effect or cause a termination or dissolution of the Company without the prior 22 written consent of all other Unitholders (which consent may be withheld in such other Unitholder's sole discretion). SECTION 9.04 Purchase of Additional Interest. At any time during the term of this Agreement and so long as SanDisk is a Unitholder, SanDisk shall have the right to purchase from Toshiba that number of Units which is equal to 0.1% of the total number of Units then issued and outstanding in the event that (i) Toshiba's patent umbrella does not adequately protect the Company or (ii) dissolution of the Company is commenced pursuant to Article XI hereof. The purchase price of such Units shall equal 0.1% of the Company's Net Book Value as of the date of such transaction. ARTICLE X Certain Agreements of the Unitholders SECTION 10.01 (Intentionally Blank) SECTION 10.02 Taxes and Charges; Governmental Rules. Each Unitholder shall (a) promptly pay all applicable Taxes and other governmental charges except to the extent any such Taxes or other charges are being contested in good faith by appropriate proceedings and (b) comply with all applicable Governmental Rules, in each case except to the extent that nonpayment or noncompliance will not have a material adverse effect on the Company. SECTION 10.03 Further Assurances. Following the Closing, each Unitholder shall, and shall cause its Affiliates, FVC and the Company to take all reasonable actions necessary or appropriate to, effectuate the transactions contemplated by this Agreement, and to obtain (and cooperate with the other Unitholder in obtaining) any Governmental Action or third party consent required to be obtained or made by it in connection with the transactions contemplated by this Agreement; provided, that no Burdensome Condition shall be made to exist with respect to such Unitholder or any of its Affiliates in connection therewith. SECTION 10.04 Dispute Resolution; Deadlock Respecting Business Plan. (a) The Unitholders shall endeavor to settle, through their respective designees to the Board of Directors, any disputes which may arise between them, including without limitation, failure by the Board of Directors to reach agreement (or failure to take a vote) on any matter requiring Board of Directors approval pursuant to Section 5.01(d) (Matters Requiring the Approval of the Board of Directors). The Unitholders shall attempt to resolve the issue or proposed action in question, to the extent practicable, in a manner consistent with the Company's most recently approved Business Plan, unless the issue in dispute is the adoption of a new Business Plan, in which case the provisions of Sections 10.04(c), (d) and (e) shall apply. (b) If (i) the Unitholders are unable to agree on any matter requiring the approval of the Unitholders pursuant to Section 4.01(a) (Matters Requiring the Approval of the Unitholders ), (ii) the Board of Directors is unable to agree on any matter requiring the approval of the Board of Directors pursuant to Section 5.01(d) (Matters Requiring the Approval of the Board of Directors) (other than the approval of any Business Plan, with respect to which the failure to agree shall be governed by Sections 10.04(c), (d) and (e)) or (iii) the Unitholders or 23 the Board of Directors are otherwise unable to resolve a dispute on any other item (other than the approval of any Business Plan, with respect to which the failure to agree shall be governed by Sections 10.04(c), (d) and (e)), then any Unitholder may bring the matter to the attention of the Vice President, Semiconductor Company of Toshiba, and the SanDisk General Manager, NAND Division (the "Designated Individuals"), who will attempt to find a resolution. If the matter has not been resolved within 30 days of referral to the Designated Individuals, the matter will be referred to the Management Committee for a final decision, which decision will be final and binding on the Company and the Unitholders with respect to any matter specified in Sections 10.04(b)(i) and (ii) above. If an agreement is reached by the Management Committee, the mutually agreed resolution shall be implemented by the Company. Should no solution be agreed upon within thirty (30) days after submission of the matter to the Management Committee with respect to the matters specified in (iii) above, such matter shall be submitted to arbitration in accordance with Section 10.03(b) (Dispute Resolution) of the New Master Agreement. Should no solution be agreed upon within sixty (60) days after submission of the matter to the Management Committee with respect to the matters specified in Sections 10.04(b)(i) and (ii) above, then the action for which approval was requested will not occur, unless it is already included in the most recently approved Business Plan. (c) If by February 15 of any calendar year during the term of this Agreement, commencing February 15, 2004, the Board of Directors and the Unitholders have not approved and agreed upon a Business Plan for the upcoming Fiscal Year, then any Unitholder may refer the dispute to the Management Committee for a decision, which decision shall be final and binding on the Company and the Unitholders. If a decision is reached by mutual agreement of the Management Committee, such decision shall be implemented by the Company. Should no decision be reached within ninety (90) days after submission of the matter to the Management Committee, and unless the Unitholders have agreed to continue operations under the most recently approved Business Plan until a new Business Plan is approved, then within ten (10) Business Days thereafter any Unitholder may elect by written notice to all other Unitholders to declare a deadlock ("Deadlock"). (d) Within thirty (30) days after a Unitholder has notified the other Unitholder of a Deadlock, either Unitholder (the "Initiating Unitholder") may submit to the other Unitholder (the "Responding Unitholder") a written irrevocable notice (the "Deadlock Dissolution Notice") to the effect that the Initiating Unitholder offers to sell to the Responding Unitholder or its designee the Initiating Unitholder's Units for a cash payment, by wire transfer of immediately available Japanese Yen, in an amount [***] of the Company as of the date of such transaction multiplied by the Initiating Unitholder's Percentage as of such date. (e) The Responding Unitholder may accept such offer by written response to the Initiating Unitholder within forty-five (45) days of receipt of the Deadlock Dissolution Notice indicating that the Responding Unitholder elects to purchase the Units of the Initiating Unitholder. If the Responding Unitholder declines to exercise its right to purchase the Units of the Initiating Unitholder pursuant to this Section 10.04 or fails to respond to such Deadlock Dissolution Notice (or if both Unitholders submit Deadlock Dissolution Notices), the Company shall be dissolved pursuant to Section 11.01(d) (Events of Dissolution), at the end of a one-year period for the wind-down of operations commencing with the receipt of the Deadlock Dissolution Notice by the Responding Unitholder. During such one-year period, the Company's business shall be conducted in accordance 24 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. with the most recently approved Business Plan except that additional capital expenditures will not be made except as required for line maintenance. SECTION 10.05 Remedies Upon Event of Default; Termination on Breach. If there has occurred and is continuing an Event of Default with respect to a Unitholder (upon such occurrence, such Unitholder is referred to herein as the "Defaulting Unitholder"), in addition to all other remedies available to the Company or the other Unitholder (the "Nondefaulting Unitholder"), whether under any of the Operative Documents or other agreements or by law, the Nondefaulting Unitholder shall have the option to take one or more of the following actions: (a) give written notice to the Defaulting Unitholder of its intention to acquire all of the Units of the Defaulting Unitholder for a cash payment, by wire transfer of immediately available Japanese Yen, in an amount equal to the Net Book Value of the Company as of the date of such transaction multiplied by the Defaulting Unitholder's Percentage as of such date; and/or (b) elect to dissolve the Company pursuant to Section 11.03 (Dissolution Upon Event of Default), in which case the affairs of the Company shall be wound up and the Company shall be dissolved in accordance with Article XI (Dissolution). SECTION 10.06 (Intentionally Blank) SECTION 10.07 Mechanics of Sale. (a) The closing of any purchase and sale of Units pursuant to Section 10.04(e) (Dispute Resolution; Deadlock Respecting Business Plan), 10.05(a) (Remedies Upon Event of Default; Termination on Breach), 11.04 (Dissolution by Unilateral Option) or 11.05 (Dissolution Upon Notice) shall take place not later than the [***] Business Day after notice of the purchase is given, as the case may be, except that such period shall be extended as necessary in order to comply with any Governmental Rule. The purchasing Unitholder shall pay for the Units being acquired by wire transfer of immediately available funds in Japanese Yen to an account specified by the selling Unitholder. The selling Unitholder shall execute all documents necessary to effect the conveyance of its Units, free and clear of all Liens, to the purchasing Unitholder. In addition, the Unitholders shall enter into an indemnity and release agreement, in a form reasonably satisfactory to each Unitholder, indemnifying and holding harmless the selling Unitholder and its Affiliates for liabilities or claims made after the date of the purchase and sale under any guarantees or other agreements supporting the obligations of the Company which may have been extended by the selling Unitholder or any of its Affiliates. The Unitholders shall also reach agreement on a reasonable transition plan of up to six months in connection with services provided to the Company by Seconded Employees assigned to the Company by the Selling Unitholder. (b) If a Unitholder elects to acquire all of the Units of the other Unitholder pursuant to Section 10.04(e) (Dispute Resolution; Deadlock Respecting Business Plan), 10.05(a) (Remedies Upon Event of Default; Termination on Breach), 11.04 (Dissolution by Unilateral Option) or 11.05 (Dissolution Upon Notice), such Unitholder shall be obligated to take all actions required of it to consummate the applicable purchase and sale on the date 25 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. determined pursuant to Section 10.07(a) (Mechanics of Sale). If any Unitholder has the right to purchase the Units of any other Unitholder, such Unitholder shall have the right to assign such right to purchase to any other Person. ARTICLE XI Dissolution SECTION 11.01 Events of Dissolution. The Company shall be dissolved and shall commence winding up its affairs upon the first to occur of the following: (a) the expiration of the term of the Company pursuant to Section 2.04 (Term; Extension); (b) the agreement of the Unitholders to dissolve the Company pursuant to Section 11.02 (Dissolution by Agreement); (c) the election of the Nondefaulting Unitholder pursuant to Section 11.03 (Dissolution Upon Event of Default); (d) the first anniversary of the receipt by either Unitholder of a Deadlock Dissolution Notice submitted with respect to a failure of the Unitholders to approve and agree upon a Business Plan pursuant to Section10.04(d) (Dispute Resolution; Deadlock Respecting Business Plan) if either (i) the Responding Unitholder declines to exercise its right to purchase the Units of the Initiating Unitholder or fails to respond to such Deadlock Dissolution Notice, or (ii) both Unitholders submit Deadlock Dissolution Notices with respect to such failure to agree; (e) the election by Toshiba to dissolve the Company pursuant to Section 11.04 (Dissolution by Unilateral Option); (f) the bankruptcy, death, dissolution, expulsion or incapacity of a Unitholder or the occurrence of any other event which terminates the membership of a Unitholder in the Company ("Bankruptcy Event"); or (g) the election of the Notifying Party to dissolve the Company pursuant to Section 11.05 (Dissolution Upon Notice) unless the Notified Party elects to purchase the Units of the Notifying Party pursuant to Section 11.05 (Dissolution Upon Notice). SECTION 11.02 Dissolution by Agreement. The Company may be dissolved at any time by the unanimous written consent of the Unitholders. SECTION 11.03 Dissolution Upon Event of Default. During the occurrence and continuation of an Event of Default (other than a Bankruptcy Event) with respect to a Unitholder, the Nondefaulting Unitholder may elect, by written notice to the Defaulting Unitholder, to dissolve the Company, in which event the Company shall be dissolved and the Unitholders shall take all actions necessary to wind up the affairs of the Company in accordance with Section 11.06 (Winding Up). This Section 11.03 shall not be construed to limit the rights of the 26 Nondefaulting Unitholder under Section 10.05 (Remedies Upon Event of Default) or to seek damages from the Defaulting Unitholder or any other Person for the breach of its obligations under any of the Operative Documents. SECTION 11.04 Dissolution by Unilateral Option. At any time between April 1, 2003 and March 31, 2004, SanDisk may, by giving written notice to Toshiba, elect to withdraw from the Company, in which case Toshiba must, directly or through any of its Affiliates, either (i) purchase from SanDisk all of SanDisk's Units one (1) year following SanDisk's notice to withdraw (the "Termination Date") for a cash payment, by wire transfer of immediately available Japanese Yen, in an amount equal to the Net Book Value of the Company as of the Termination Date multiplied by SanDisk's Percentage as of the Termination Date, and increased or decreased, as the case may be, for any cash contributions by or distributions to the Unitholders after the date of the notice, or (ii) dissolve the Company and wind-up its affairs in accordance with Section 11.06 (Winding Up) within one (1) year of the notice of withdrawal and make such payment to SanDisk on the Termination Date. SECTION 11.05 Dissolution upon Notice. At any time during the one (1) year period following the eighth anniversary of May 16, 2000 (which was the date of formation of FVC), any Unitholder (the "Notifying Party") may elect, by giving notice to all other Unitholders (the "Notified Party"), to dissolve the Company, in which event the Company will be dissolved and, within the one (1) year period following the giving of such notice, the Unitholders shall mutually agree upon a plan for winding up the affairs of the Company in accordance with Section 11.06 (Winding Up), unless the Notified Party, directly or through any of its Affiliates, elects in writing within three (3) months of receiving such notice, to purchase from the Notifying Party all of its Units for a cash payment, by wire transfer of immediately available Japanese Yen, in an amount equal to the Net Book Value of the Company as of the date of such transaction multiplied by the Notifying Party's Percentage as of such date. SECTION 11.06 Winding Up. (a) Upon the dissolution of the Company, the Unitholders shall proceed as promptly as practicable to (i) wind-up the affairs of the Company and satisfy the Company's liabilities and (ii) dispose of the Company's assets as quickly as possible consistent with obtaining the full fair market value of the Company, preferably, to the extent it is commercially practicable to do so, by selling the Company as a going concern; provided, however, no Unitholder shall be under any obligation to extend the terms of any Operative Document or to offer to enter into any other agreement with a prospective purchaser of the Company for the purchase or sale of goods or services or the use of facilities or any other business arrangement. In connection with a sale of the Company's assets under clause (ii), each Unitholder or any of their respective Affiliates shall have a right of first offer to acquire the Company's tangible personal property in the liquidation process and may also acquire such property through participation at auction except in the event of a dissolution pursuant to Section 11.03 (Dissolution Upon Event of Default), in which event the Defaulting Unitholder and its Affiliates shall not have such right of first offer to acquire the Company's tangible personal property. Each of the Unitholders shall be furnished with a statement setting forth the assets and liabilities of the Company as of the date of the complete liquidation of the Company. The Accountants shall review the final accounting and shall render their opinion with respect thereto. 27 (b) During the period of winding-up, the Company shall continue to operate and all the provisions of this Agreement shall remain in effect, except as otherwise expressly provided herein. The Company shall notify all known creditors and claimants of the dissolution of the Company in accordance with applicable law. SECTION 11.07 Liquidation Proceeds. (a) In the case of the dissolution and liquidation of the Company, the Company may make a distribution in kind. Any cash and all distributions in kind that are to be distributed shall be distributed to the Unitholders, on a pro rata basis based upon the respective Percentages of the Unitholders as of the date of such distribution. (b) Unless otherwise agreed by the Unitholders, and to the extent permitted under any agreements with third parties, all assets to be distributed upon the dissolution and liquidation of the Company shall be distributed as follows: (i) first, to creditors, including Unitholders who are creditors, to the extent permitted by law, in satisfaction of liabilities of the Company, other than for distributions to Unitholders pursuant to Section 6.02 (Distributions); and (ii) second, to the Unitholders on a pro rata basis based upon the respective Percentages of the Unitholders as of the date of such distribution. For purposes of this Section 11.07, instruments of transfer and other documents reasonably requested by the distributee shall be executed by the Company or the other Unitholder, or both. (c) Any distribution made pursuant to this Section 11.07 shall be made as soon as practicable under and in accordance with applicable Japanese law. SECTION 11.08 Additional Contribution. No Unitholder shall be obligated to contribute any additional amounts to the Company or otherwise be liable for the debts and obligations of the Company. ARTICLE XII Indemnification and Insurance SECTION 12.01 Indemnification. (a) Subject to Section 12.01(c), the Company shall indemnify each Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including an action by or in the right of a Unitholder or the Company), by reason of the fact that such Person is or was a Unitholder or is or was or has agreed to become a Director or is or was serving or has agreed to serve at the request of the Company as a director, officer, employee or agent of the Company or of another partnership, corporation, joint venture, trust or other enterprise, arising from any action alleged to have been taken in any such capacity or by reason of any liability or obligation of the Company, against any and all losses, damages, liabilities, 28 costs, charges, expenses (including interest, penalties and reasonable attorneys' fees and expenses), judgments, fines and amounts paid in settlement (collectively, "Losses") actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom. Without limiting the generality of the foregoing, any of such Losses shall be deemed to arise out of a Company liability or obligation if it arises out of or is based upon the conduct of the business of the Company (or any of its Subsidiaries) or the ownership of the property of the Company (or any of its Subsidiaries). (b) The indemnification provided under this Section 12.01 shall inure to the benefit of the successors, heirs and personal representatives of any Person entitled to the benefit of such indemnification. Such indemnification shall be a contract right and shall include the right to be paid advances of reasonable expenses incurred by any such Person in connection with such action, suit or proceeding. (c) The indemnification provided under this Section 12.01 shall not inure to the benefit of any Person in respect of Losses to the extent that such Losses (i) arise out of or are based upon the gross negligence or willful misconduct of such Person or (ii) constitute a tax, levy or similar governmental charge not imposed upon the Company (or any of its Subsidiaries) or on their respective properties. The indemnification provided under this Section 12.01 shall also not be available to any Person in respect of any Losses if a judgment or other final adjudication adverse to such Person establishes (x) that such Person's acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated or (y) that such Person gained in fact a financial profit or other advantage to which such Person was not legally entitled. It is understood and agreed that, for the purposes of this Section 12.01, Losses shall be deemed not to arise out of or be based upon the gross negligence or willful misconduct of a Person solely because it arises out of or is based upon the gross negligence, willful misconduct, bad faith or active and deliberate dishonesty of a director, officer or employee of such Person if at the time of such gross negligence, willful misconduct, bad faith or active and deliberate dishonesty, such director, officer or employee was also a Seconded Employee or a Director acting in his capacity as such. (d) The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the indemnified Person did not meet the standard set forth in Section 12.01(c) (Indemnification). SECTION 12.02 Insurance. The Company may, to the fullest extent permitted by law, purchase and maintain insurance against any liability that may be asserted against any Person entitled to indemnity pursuant to Section 12.01. SECTION 12.03 Indemnification by the Unitholders. (a) Each Unitholder agrees to, and does hereby, indemnify and hold harmless the Company and the other Unitholder from and against any and all Losses arising out of, or based upon, the gross negligence or willful misconduct of such Unitholder under this Agreement or such Unitholder exceeding its authority under this Agreement. 29 (b) The provisions of this Section 12.03 shall survive each of the termination of this Agreement, the dissolution of the Company and the withdrawal of any Unitholder. SECTION 12.04 Assertion of Claims. (a) In the event that a Person (the "Indemnified Party") desires to assert its right to indemnification from a Person (an "Indemnifying Party") required to indemnify such Indemnified Party under this Article XII, the Indemnified Party will give the Indemnifying Party prompt notice of the claim giving rise thereto (a "Claim"), and the Indemnifying Party shall undertake the defense thereof (unless the Claim is asserted against or related to or results from any action or failure to take action by such Indemnifying Party). The failure to promptly notify the Indemnifying Party hereunder shall not relieve the Indemnifying Party of its obligations hereunder, except to the extent that the Indemnifying Party is actually prejudiced by the failure to so notify promptly. (b) The Indemnified Party shall not settle or compromise any Claim without the written consent of the Indemnifying Party unless the Indemnified Party agrees in writing to forego any and all claims for indemnification from the Indemnifying Party with respect to such Claim. However, if the Indemnifying Party, within a reasonable time after notice of any such Claim, fails to defend such Claim, the Indemnified Party shall have the right to undertake the defense, compromise or settlement of such Claim on behalf of and for the account and risk of the Indemnifying Party, subject to the right of the Indemnifying Party to assume the defense of such Claim at any time prior to settlement, compromise or final determination thereof. (c) If the Indemnifying Party has undertaken the defense of a Claim and (i) if there is a reasonable expectation that (x) a Claim may materially and adversely affect the Indemnified Party other than as a result of money damages or other money payments or (y) the Indemnified Party or Parties may have legal defenses available to it or them that are different from or additional to the defenses available to the Indemnifying Party, or (ii) if the Indemnifying Party shall not have employed counsel reasonably satisfactory to the Indemnified Party, the Indemnified Party shall nevertheless have the right, at the Indemnifying Party's cost and expense, to defend such Claim. ARTICLE XIII Miscellaneous SECTION 13.01 Governing Law. Notwithstanding anything to the contrary in the Rules Document, this Agreement shall in all respects be governed by and construed in accordance with the laws of Japan, without regard to the conflict of laws principles. SECTION 13.02 Effectiveness. Notwithstanding anything to the contrary in the Rules Document, this Agreement shall be effective as of April 10, 2002. SECTION 13.03 Conflict with Articles. In the event of any conflict between this Agreement and the Articles, the provisions of this Agreement shall control, and the 30 conflicting provisions of the Articles shall be deemed to have been waived by the Parties, to the extent permissible under applicable law. [REST OF PAGE INTENTIONALLY LEFT BLANK] 31 IN WITNESS WHEREOF, this Agreement has been executed and delivered by each party as of the date first above written. TOSHIBA CORPORATION By: /s/ Takeshi Nakagawa -------------------------------------- Name: Takeshi Nakagawa Title: Corporate Senior Vice President President & CEO Semiconductor Company SANDISK CORPORATION By: /s/ Eli Harari -------------------------------------- Name: Eli Harari Title: President and Chief Executive Officer [SIGNATURE PAGE TO NEW OPERATING AGREEMENT] EXHIBIT A ARTICLES OF INCORPORATION OF THE COMPANY SCHEDULE 6.01 CAPITAL CONTRIBUTIONS The Unitholders shall be deemed to have made Capital Contributions to the Company in the amounts set forth opposite their respective names below: Unitholder Capital Contribution - ---------- -------------------- Toshiba Corporation ............ JPY 7,515,000 SanDisk Corporation ............ JPY 7,485,000 --------------- Total ................. JPY 15,000,000 SCHEDULE 8.03 MONTHLY REPORTS This Schedule provides a list of Unitholder required reports, pursuant to Section 8.03(c) (Monthly Reports), that are required to be transmitted to the Unitholders by the dates listed. Any Unitholder may modify this list periodically as requirements for data change. When a Unitholder requests a report, a sample format for the report will be provided to the Company by the requesting Unitholder. REPORTS TO UNITHOLDERS REPORT TITLE DATE DUE A. Monthly Flash Report 3 days after month close B. Monthly Measurement Report 7 days after month close C. Monthly Cash Flow Report 7 days after month close D Monthly Balance sheets 7 days after month close E. Monthly Profit & Loss 7 days after month close F. Monthly Operational Spending Summary 7 days after month close EX-10.32 5 dex1032.txt AMENDMENT TO COMMON R AND D AGREEMENT DATED 04/10/2002 EXHIBIT 10.32 AMENDMENT TO COMMON R&D AND PARTICIPATION AGREEMENT THIS AMENDMENT (the "Amendment") to the Common R&D and Participation Agreement (the "Agreement"), dated as of May 9, 2000 by and between Toshiba Corporation, a Japanese corporation with a principal place of business at 1-1, Shibaura 1-chome, Minato-ku, Tokyo 105-8001, Japan, (hereinafter "Toshiba"), and SanDisk Corporation, a Delaware corporation with a principal place of business at 140 Caspian Court, Sunnyvale, CA 94089, U. S. A. (hereinafter "SanDisk"), is dated and effective as of April 10, 2002. WITNESSETH ---------- WHEREAS, Toshiba and SanDisk have entered into a New Master Agreement dated as of April 10, 2002; WHEREAS, Toshiba and SanDisk desire to amend the Agreement in order to make it consistent with the foregoing and the terms and conditions of the New Master Agreement. NOW THEREFORE, in consideration of the premises and of the mutual promises herein contained, the parties hereto agree as follows: AGREEMENT --------- 1. Amendment to Section 5.1(i). Section 5.1(i) of the Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: "From the second quarter of the calendar year 2000 through and including March 31, 2002: SanDisk will share in Toshiba's Common R&D expenditures as set forth in Table A below, and SanDisk shall pay Toshiba for such Common R&D expenditures in the amounts and on or prior to the dates provided in Table B as follows:
- ---------------------------------------------------------------------------------------------------------------------- Table A - ---------------------------------------------------------------------------------------------------------------------- SanDisk's Allocation of Common R&D Expenses - ---------------------------------------------------------------------------------------------------------------------- 2000 2001 2002 - ---------------------------------------------------------------------------------------------------------------------- 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q - ---------------------------------------------------------------------------------------------------------------------- (amounts incurred in millions of Yen) - ---------------------------------------------------------------------------------------------------------------------- [***] [***] [***] [***] [***] [***] [***] [***] - ----------------------------------------------------------------------------------------------------------------------
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
- ---------------------------------------------------------------------------------------------------------------------- Table B - ---------------------------------------------------------------------------------------------------------------------- Payment by SanDisk for Common R&D Expenses - ---------------------------------------------------------------------------------------------------------------------- 2002 Total - ---------------------------------------------------------------------------------------------------------------------- June 30 September 30 December 31 - ---------------------------------------------------------------------------------------------------------------------- (amounts payable in millions of Yen) - ---------------------------------------------------------------------------------------------------------------------- [***] [***] [***] [***] - ----------------------------------------------------------------------------------------------------------------------
Notwithstanding the foregoing, in the event of the termination of this Agreement after the Effective Date but prior to December 31, 2002, SanDisk shall be obligated immediately to pay any unpaid amount set forth in Table B. 2. Amendment to Sections 5.1(ii) and (iii). Sections 5.1(ii) and (iii) of the Agreement are hereby deleted in their entirety and the following is substituted in lieu thereof: "(ii) After March 31, 2002: The parties acknowledge that after March 31, 2002, it will be difficult to predetermine Toshiba's total Common R&D expenditures and a fixed allocation of Common R&D expenditures for SanDisk. Therefore, after March 31, 2002, the payment by SanDisk to Toshiba for Common R&D expenditures will be based on a percentage of SanDisk's Net Sales (as hereinafter defined), and calculated and paid as follows: Within thirty days of the end of each calendar quarter based on SanDisk's Net Sales of NAND Flash Memory Products for the quarter just ended as follows: From April 1, 2002 to December 31, 2002 (a) [***] of the first US $ 100 million for the quarter reported; (b) [***] of the next US $ 100 million for the quarter reported; and (c) [***] of net sales in excess of US $ 200 million per quarter. For the purpose of this Article, "Net Sales" shall mean the invoice price for NAND Flash Memory Products billed by SanDisk. (iii) Notwithstanding (ii) above, SanDisk's quarterly contribution for Common R&D pursuant to (i) and (ii) above shall not exceed the sum of (a) [***] of the total Common R&D annual expenditure of the Semiconductor Company of Toshiba, as notified to SanDisk by Toshiba at the beginning of each of Toshiba fiscal year ("Total R&D Budget") for the first [***] of the Total R&D Budget and (b) [***] of the portion of such Total R&D Budget in excess of [***]." 3. Pricing for 2003 and Beyond. For 2003 and beyond, SanDisk's quarterly common R&D payments shall be agreed upon by the parties and will be based on certain percentages of SanDisk's Net Sales (as defined in the Agreement) and calculated in a manner [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. consistent with Section 5.1(ii) of the Agreement, provided that the percentages used in such calculation shall not exceed (a) the percentages of the applicable SanDisk Net Sales amount set forth in Section 5.1(ii) of the Agreement, as amended herein and (b) the applicable percentages of the Total R&D Budget set forth in Section 5.1(iii) of the Agreement, as amended herein. 4. Effect of this Amendment. Except as specifically amended hereby, the Agreement shall remain in full force and effect as in existence on the date hereof and is hereby ratified and confirmed in all respects. 5. Governing Law. This Amendment shall be governed by and construed in accordance with the Governing Law provision incorporated by reference into the Agreement. 6. Counterparts. This Amendment may be executed in any number of counterparts which together shall constitute one and the same instrument. [Remainder of Page Intentionally Left Blank] IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and year first above written. TOSHIBA CORPORATION By: /s/ Takeshi Nakagawa ---------------------------------------- Name: Takeshi Nakagawa Title: Corporate Senior Vice President President & CEO Semiconductor Company SANDISK CORPORATION By: /s/ Eli Harari ---------------------------------------- Name: Eli Harari Title: President & Chief Executive Officer [Signature Page to Amendment to Common R&D Agreement] EX-10.33 6 dex1033.txt AMDT. TO PRODUCT DEVELOPMENT AGRMT. DATED 04/10/02 EXHIBIT 10.33 AMENDMENT TO PRODUCT DEVELOPMENT AGREEMENT THIS AMENDMENT (the "Amendment") to the Product Development Agreement (the "Agreement"), dated as of May 9, 2000 by and between Toshiba Corporation, a Japanese corporation with a principal place of business at 1-1, Shibaura 1-chome, Minato-ku, Tokyo 105-8001, Japan, (hereinafter "Toshiba"), and SanDisk Corporation, a Delaware corporation with a principal place of business at 140 Caspian Court, Sunnyvale, CA 94089, U. S. A. (hereinafter "SanDisk"), is dated and effective as of April 10, 2002. W I T N E S S E T H - - - - - - - - - - WHEREAS, Toshiba and SanDisk have entered into a New Master Agreement dated as of April 10, 2002; WHEREAS, Toshiba and SanDisk desire to amend the Agreement in order to make it consistent with the terms and conditions of the New Master Agreement. NOW THEREFORE, in consideration of the premises and of the mutual promises herein contained, the parties hereto agree as follows: A G R E E M E N T - - - - - - - - - 1. Amendment to Exhibit B to the Agreement. Exhibit B to the Agreement is --------------------------------------- hereby deleted in its entirety and the Exhibit B attached hereto is substituted in lieu thereof. 2. Information Exchange. Each of Toshiba and SanDisk agree to provide to -------------------- the other party certain information relating to product development, including without limitation, the information set forth on Exhibit D attached hereto. 3. Governing Law. This Amendment shall be governed by and construed in ------------- accordance with the Governing Law provision incorporated by reference into the Agreement. 4. Effect of this Amendment. Except as specifically amended hereby, the ------------------------ Agreement shall remain in full force and effect as in existence on the date hereof and is hereby ratified and confirmed in all respects. 5. Counterparts. This Amendment may be executed in any number of ------------ counterparts which together shall constitute one and the same instrument. [Remainder of Page Intentionally Left Blank] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and year first above written. TOSHIBA CORPORATION By: /s/ Takeshi Nakagawa ---------------------------------------- Name: Takeshi Nakagawa Title: Corporate Senior Vice President President & CEO Semiconductor Company SANDISK CORPORATION By: /s/ Eli Harari ---------------------------------------- Name: Eli Harari Title: President & Chief Executive Officer [Signature Page to Amendment to Product Development Agreement] Exhibit B --------- SHARING OF WAFER PROCESSING COSTS - (For Jointly Developed Products and Jointly Developed Controllers) ------------------------------------------------------------------ Jointly Developed Products -------------------------- SanDisk Toshiba ------- ------- (1) 1H/2000 [***] [***] (2) 2H/2000 [***] [***] (3) 1H/2001 [***] [***] (4) 2H/2001 [***] [***] (5) 1Q/2002 [***] [***] (6) 2Q/2002 [***] [***] (7) 3Q/2002 [***] [***] (8) 4Q/2002 [***] [***] (9) 1Q/2003 and beyond [***] Jointly Developed Controllers ----------------------------- (1) Wafer processing cost associated with Jointly Developed Controllers will be shared by the parties as determined by the Coordinating Committee in accordance with Article 3.2. Note 1: All costs charged pursuant to this Exhibit B are direct costs and have been referred to by the parties as Direct R&D charges. Original back-up information and financial detail of all such charges shall be made available to the party paying the shared expense, and all such charges are subject to financial audit by the external auditors of the party paying the charge. The party receiving payment shall cooperate with all reasonable requests to view and make copies of financial back-up and financial detail material associated with the charges. Note 2: Payments specified above shall be made within sixty (60) days after receipt of invoice issued at the end of each calendar half year. [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit D --------- Information Exchange
- ------------------------------------------------------------------------------------------------------------------- Name of Report / Data Description Frequency - ------------------------------------------------------------------------------------------------------------------- 17. Status of new technology Details of each new product Monthly - by the 15th day of next qualification and production schedule month - ------------------------------------------------------------------------------------------------------------------- 18. Design rule documentation Description of design rules Whenever change is made - ------------------------------------------------------------------------------------------------------------------- 19. DRC / LVS runset DRC/LVS runset file and version control Whenever change is made - ------------------------------------------------------------------------------------------------------------------- 20. Database of product OPUS data base for each product After tapeout - ------------------------------------------------------------------------------------------------------------------- 21. Feature set change or new New function and specification Making decision jointly Document features sent after finalized - ------------------------------------------------------------------------------------------------------------------- 22. Design review document Description of specification, circuit Before tapeout review and design rule - ------------------------------------------------------------------------------------------------------------------- 23. Characterization report (product AC/DC characteristics At release of new product or level) Reliability and qualification report release of product change - ------------------------------------------------------------------------------------------------------------------- 24. Simulation models SPICE model Beginning of circuit design cycles - ------------------------------------------------------------------------------------------------------------------- 25. Transistor characteristics and Specification for each device, Beginning of circuit design cycles detailed device information Transistor measurement data, Measurement data of each device - ------------------------------------------------------------------------------------------------------------------- 26. Design change / revision history Description of data base revision with Document due after each design design change information change - ------------------------------------------------------------------------------------------------------------------- 27. Preliminary information of new Device Target specification At the time new technology technology development begins - ------------------------------------------------------------------------------------------------------------------- 28. Process cross-section Cross-sectional view At the time of process change and technology - ------------------------------------------------------------------------------------------------------------------- 29. Process flow Current POR At the time of process change and technology - -------------------------------------------------------------------------------------------------------------------
EX-10.34 7 dex1034.txt INDEMNIFICATION AND REIMBURSEMENT AGREEMENT 04/10/02 Exhibit 10.34 INDEMNIFICATION AND REIMBURSEMENT AGREEMENT INDEMNIFICATION AND REIMBURSEMENT AGREEMENT (this "Agreement"), dated as of April 10, 2002, is made between SANDISK CORPORATION, a Delaware corporation (herein, "SanDisk"), and TOSHIBA CORPORATION, a Japanese corporation (herein, "Toshiba"). W I T N E S S E T H: WHEREAS, Toshiba and SanDisk hold (directly or indirectly) 50.1% and 49.9%, respectively, of the outstanding limited liability company interests of FlashVision L.L.C., a Virginia limited liability company ("FVC"); and WHEREAS, as of the date hereof, FVC is subject to (i) (A) that certain Master Lease Intended as Security (FlashVision / Toshiba Tranche) dated as of December 27, 2000, between FVC and ABN AMRO Bank, N.V. ("ABN AMRO"), (B) that certain Participation Agreement (FlashVision / Toshiba Tranche), dated as of December 27, 2000, between FVC, ABN AMRO as Lessor, ABN AMRO as agent for the Participants (as defined therein), the Syndication Agents (as defined therein) and such Participants, and (C) the Operative Documents (as defined in Appendix A thereto) (collectively, the "Toshiba Tranche Lease Documents"), and (ii) (A) that certain Master Lease Intended as Security (FlashVision/ SanDisk Tranche), dated as of December 27, 2000, between FVC and ABN AMRO, (B) that certain Participation Agreement (FlashVision / SanDisk Tranche), dated as of December 27, 2000, between FVC, ABN AMRO as Lessor, ABN AMRO as agent for the Participants (as defined therein), the Syndication Agents (as defined therein), and such Participants, and (C) the Operative Documents (as defined in Appendix A thereto) (collectively, the "SanDisk Tranche Lease Documents") (the Toshiba Tranche Lease Documents and the SanDisk Tranche Lease Documents referred to collectively herein as the "Lease Documents"); and WHEREAS, Toshiba and SanDisk have caused FVC to exercise the Early Termination Option (as such term is defined in the Lease Documents) for the purchase of all of the Equipment (as such term is defined in the Lease Documents); and WHEREAS, (i) Toshiba and Mizuho Corporate Bank, Ltd. (as successor in interest to The Industrial Bank of Japan, the "Bridge Bank") are parties to that certain Overdraft Agreement entered into on September 30, 1994 and amended on December 20, 2001 (together with any documents delivered pursuant thereto, in each case as from time to time amended, restated, supplemented or otherwise modified, collectively being the "Toshiba Bridge Loan Documents") and (ii) Toshiba and FlashVision, Ltd., a limited liability company (yugen kaisha) organized under the laws of Japan the Units (as such term is defined in the New Master Agreement) in which are owned or to be owned by SanDisk and Toshiba as provided in Section 3.03(b)(viii) of the New Master Agreement ("FVC-Japan"), have entered into that certain Loan Agreement dated as of April 10, 2002 (together with any documents delivered pursuant thereto, in each case as from time to time amended, restated, supplemented or otherwise modified, collectively being the "FVC-Japan Bridge Loan Documents"; the FVC-Japan Bridge Loan Documents, together with the Toshiba Bridge Loan Documents, collectively being the "Bridge CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Loan Documents"), for the purpose of providing, on a short-term basis, the financing necessary to make all payments due under the Lease Documents, including, without limitation, payment in full for all of the Equipment, following consummation of the exercise by FVC of the Early Termination Option; and WHEREAS, SanDisk and Toshiba have entered into that certain New Master Agreement dated as of April 10, 2002 (as from time to time amended, restated, supplemented or otherwise modified, the "New Master Agreement"), providing for the transfer by FVC to FVC-Japan, pursuant to Section 3.03(b) of the New Master Agreement, of certain equipment as provided therein, including the Leased Equipment (as such term is defined in the New Master Agreement); and WHEREAS, Toshiba and SanDisk shall take such actions as are provided for in Section 3.03(c)(i) of the New Master Agreement to cause FVC-Japan to enter into a financing facility with Mizuho Corporate Bank, Ltd. and such other financial institutions as may be parties to such facility (collectively the "Refinancing Banks") (the agreements providing for such financing, as from time to time amended, restated, supplemented or otherwise modified, collectively being the "Refinancing Documents") for the purpose of providing financing for the repayment of the obligations under the Bridge Loan Documents and for the refinancing of the Leased Equipment; and WHEREAS, as an inducement to the Bridge Bank and the Refinancing Banks to enter into, and perform their obligations under, the Toshiba Bridge Loan Documents and the Refinancing Documents, Toshiba will execute and deliver for the benefit of the Bridge Bank and the Refinancing Banks one or more guaranties or other documents for the purpose of guarantying the obligations of FVC-Japan under the Refinancing Documents (as from time to time amended, restated, supplemented or otherwise modified, together with the Toshiba Bridge Loan Documents, collectively being the "Toshiba Guaranty"); and WHEREAS, partially as an inducement to Toshiba to execute and deliver, and perform its obligations under, the Toshiba Guaranty, SanDisk is entering into this Agreement with Toshiba; and otherwise to provide for certain agreements between SanDisk and Toshiba as to their conduct in connection with the arrangements under the Bridge Loan Documents, the Refinancing Documents and the Toshiba Guaranty, SanDisk and Toshiba are entering into this Agreement and undertaking their respective obligations to each other hereunder. NOW THEREFORE, for value received, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows: Section 1. Definitions and Construction. Capitalized terms used but not defined in this Agreement shall have the respective meanings assigned to them in Appendix A, entitled "Definitions, Rules of Construction and Documentary Conventions", to the New Master Agreement. The following terms shall have the meanings specified below: (a) "Business Day" means a day on which banks are open for business in Tokyo, Japan. 2 (b) "Demand Amount" means, with respect to any Reimbursable Obligation, the sum of (i) the amount of such Reimbursable Obligation plus (ii) the amount of any Expenses related thereto. (c) "Demand Notice" means a written notice delivered by Toshiba to SanDisk demanding payment of a Demand Amount due under this Agreement, which (i) shall set forth in respect of such Demand Amount the following: (1) the amount of Reimbursable Obligations and any Expenses covered by such Demand Notice; (2) the type (as Fully Reimbursable Obligations, FV Cure Obligations or Pro-Rata Reimbursement Obligations) of the Reimbursable Obligations covered by such Demand Notice; (3) a copy of any notice given to Toshiba under the Toshiba Guaranty in respect of the FVC-Japan default under the Financing Documents giving rise to the Obligations payable by Toshiba to generate the Reimbursable Obligations covered by such Demand Notice; (4) a description of the facts and circumstances giving rise to the Obligations payable by Toshiba to generate any Reimbursable Obligation covered by such Demand Notice; (5) if such Demand Notice covers Demand Amounts that include Expenses, a description in reasonable detail of the nature of such Expenses; and (6) if such Demand Notice covers Demand Amounts that include FV Cure Obligations, the date on which Toshiba made the payment as provided in Section 3 hereof giving rise to such FV Cure Obligations and a description of to whom, and, if other than to FVC-Japan, on account of what FVC-Japan obligations, such payment was made; and (ii) shall represent and warrant that the information set forth in such Demand Notice is true and correct. (d) "Due Date" has the meaning set forth in Section 2. (e) "Expenses" means any and all reasonable expenses, including, without limitation, attorneys' fees and disbursements, which have been actually incurred by Toshiba or which Toshiba reasonably estimates will be incurred by it, in either case, in collecting any Demand Amount or enforcing its rights against SanDisk under this Agreement; provided, however, Expenses shall in no event include any costs for de-installing, re-installing or relocation of any equipment or otherwise incurred by Toshiba in owning, operating or disposing of any equipment following any exercise by Toshiba of the remedy provided for in Section 9(b)(3) hereof. (f) "Existing Operating Agreement" means that certain Operating Agreement dated as of May 9, 2000, between Toshiba and SanDisk. 3 (g) "Financing Documents" means the Bridge Loan Documents and the Refinancing Documents. (h) "Fully Reimbursable Obligation " means any amount that is (i) either (A) a payment Obligation that is payable by Toshiba under the Toshiba Guaranty upon demand duly made under the Toshiba Guaranty or (B) an FVC-Japan Bridge Default Obligation that is due to Toshiba, in either case on account of a default by FVC-Japan in the performance of any of its obligations under the Bridge Loan Documents or Refinancing Documents, to the extent such default arose as a result of a SanDisk FV Payment Default and (ii) equal in amount to the lesser of (A) the unpaid obligation of SanDisk giving rise to such SanDisk FV Payment Default and (B) the amount of such payment Obligation of Toshiba or FVC-Japan Bridge Default Obligation, as the case may be. (i) "Fully Reimbursable Obligation Default" means any failure by SanDisk to pay any Demand Amount comprised of Fully Reimbursable Obligations and/or Expenses related thereto payable under Section 2 hereof on or before the earlier of (A) 30 days after delivery to SanDisk of a Demand Notice covering such Demand Amount as provided herein and (B) the Business Day immediately prior to the date of expiration of a period of time, after the date of delivery to SanDisk of a Demand Notice covering such Demand Amount as provided herein, which period of time is equal to the period of grace and/or cure time FVC-Japan had or would have had pursuant to the Financing Documents to perform the obligations whose default gave rise to the Reimbursable Obligations included within such Demand Amount without triggering a right of the Bridge Bank, Toshiba or the Refinancing Banks to exercise default remedies under the Financing Documents for non-performance of such obligations. (j) "FVC-Japan Bridge Default Obligation" means any amount payable by FVC-Japan to Toshiba that has not been paid when due (after giving effect to all applicable grace and cure periods) under the FVC-Japan Bridge Loan Documents. (k) "FV Cure Obligation" has the meaning set forth in Section 3. (l) "FV Cure Obligation Default" means, with respect to any Demand Amount comprised of FV Cure Obligations and/or Expenses related thereto payable under Section 3 hereof, any failure by SanDisk to pay such Demand Amount on or before the later of (A) 30 days after delivery to SanDisk as provided herein of a FV Cure Payment Notice in respect of the FV Payment Default giving rise to such Demand Amount and (B) one Business Day after delivery to SanDisk of the Demand Notice covering such Demand Amount. (m) "FV Cure Payment" has the meaning set forth in Section 3. (n) "FV Cure Payment Notice" has the meaning set forth in Section 3. (o) "FV Payment Default" means a default by SanDisk in paying or causing payment of an obligation of SanDisk or any of its subsidiaries to make a payment to FVC-Japan due pursuant to Article 7 of the New SanDisk Supply Agreement on account of "lease fee charges" and/or "bridge loan interest payments" specified as provided in such Article 7 and any applicable provisions of the New Master Agreement. 4 (p) "Lease Payment Due Date" means in the case of any obligation of SanDisk to make a payment to FVC-Japan pursuant to Article 7 of the New SanDisk Supply Agreement on account of "lease fee charges" and/or "bridge loan interest payments" as provided in such Article 7 and any applicable provisions of the New Master Agreement, the date on which such payment is due. (q) "Lessee" means FVC or FVC-Japan, as the context may require. (r) "New Operating Agreement" has the meaning set forth in the New Master Agreement. (s) "New SanDisk Supply Agreement" means the Purchase and Supply Agreement, as such term is defined in the New Master Agreement, to which SanDisk is party. (t) "New Toshiba Supply Agreement" means the Purchase and Supply Agreement, as such term is defined in the New Master Agreement, to which Toshiba is party. (u) "Non-Reimbursable Obligation" means any amount that is (i) either (A) an Obligation that is paid or payable by Toshiba under the Toshiba Guaranty or (B) an FVC-Japan Bridge Default Obligation that is due to Toshiba, in either case on account of a default by FVC-Japan in the performance of any of its obligations under the Bridge Loan Documents or Refinancing Documents, to the extent such default arose as a result of a Toshiba FV Payment Default and (ii) equal in amount to the lesser of (A) the unpaid obligation of Toshiba giving rise to such Toshiba FV Payment Default and (B) the amount of such Obligation of Toshiba or FVC-Japan Bridge Default Obligation, as the case may be. (v) "Obligation" means any liability or obligation of FVC-Japan under the Financing Documents that is guarantied by Toshiba and becomes due and payable by Toshiba to the Bridge Bank or the Refinancing Banks at any time under or pursuant to the terms of the Toshiba Guaranty, whether for principal, interest, premiums, fees, expenses or otherwise. (w) "Outstanding Financing Amount" means on any date of determination the aggregate amount on such date of determination of rent payments scheduled to become due on or after such date from FVC-Japan and the principal amount of all borrowings by FVC-Japan outstanding, in each case under the Financing Documents, after giving effect to any borrowings and payments on account of such rent or principal amount occurring on such date. (x) "Ownership Percentage" means, with respect to any party on any date of determination, the percentage of such party's ownership interest in FVC-Japan, as the same may have been adjusted from time to time as of such date of determination in accordance with the terms and provisions of the New Operating Agreement. For the avoidance of doubt, as of the date hereof, SanDisk's Ownership Percentage is 49.9% and Toshiba's Ownership Percentage is 50.1%. (y) "Potential Toshiba Guaranty Default" means any event, occurrence or circumstance that (i) but for the giving of notice would constitute a Toshiba Guaranty Default or (ii) but for the passage of time would, and is reasonably expected by Toshiba upon such passage of time to, constitute a Toshiba Guaranty Default. 5 (z) "Pro-Rata Reimbursable Obligation" means any amount that is the product of : (i) SanDisk's Ownership Percentage (at the time any such payment under the Toshiba Guaranty referred to in clause (ii) below is due or any such FVC-Japan Bridge Default Obligation referred to in clause (ii) below arises, as the case may be) multiplied by (ii) any amount that: (A) comprises an amount that is either (1) a payment that has actually been made in cash by Toshiba under the Toshiba Guaranty in payment of an Obligation upon demand duly made under the Toshiba Guaranty or (2) an FVC-Japan Bridge Default Obligation that is due to Toshiba, in either case on account of a default by FVC-Japan in the performance of any of its obligations under the Bridge Loan Documents or Refinancing Documents, where (x) such default by FVC Japan did not arise as a result of any Toshiba Guaranty Default or Potential Toshiba Guaranty Default, or occur (other than on account of a default by FVC-Japan in the performance of any of its obligations under the Bridge Loan Documents or Refinancing Documents, where such default arose as a result of a SanDisk FV Payment Default) after the occurrence of any Toshiba Guaranty Default or Potential Toshiba Guaranty Default and (y) any such Obligations were not incurred (other than on account of a default by FVC-Japan in the performance of any of its obligations under the Bridge Loan Documents or Refinancing Documents, where such default arose as a result of a SanDisk FV Payment Default) at a time when any Toshiba Guaranty Default or Potential Toshiba Guaranty Default had occurred; but (B) does not include any amount to the extent comprised of any Fully Reimbursable Obligation, FV Cure Obligation or Non-Reimbursable Obligation. (aa) "Pro-Rata Reimbursable Obligation Default" means any failure by SanDisk to pay any Demand Amount comprised of Pro-Rata Reimbursable Obligations and Expenses related thereto payable under Section 2 hereof on or before the earlier of (A) 30 days after delivery to SanDisk of a Demand Notice covering such Demand Amount as provided herein and (B) the Business Day immediately prior to the date of expiration of a period of time, after the date of delivery to SanDisk of a Demand Notice covering such Demand Amount as provided herein, which period of time is equal to the period of grace and/or cure time FVC-Japan had or would have had pursuant to the Financing Documents to perform the obligations whose default gave rise to the Reimbursable Obligations included within such Demand Amount without triggering a right of the Bridge Bank, Toshiba or the Refinancing Banks to exercise default remedies under the Financing Documents for non-performance of such obligations. (bb) "Reimbursable Obligation" means any Fully Reimbursable Obligation, Pro-Rata Reimbursable Obligation or FV Cure Obligation payable hereunder. (cc) "Toshiba FV Payment Default" means a default by Toshiba in paying an obligation of Toshiba to make a payment to FVC-Japan due pursuant to Article 7 of the New 6 Toshiba Supply Agreement on account of "lease fee charges" and/or "bridge loan interest payments" specified as provided in such Article 7 and any applicable provisions of the New Master Agreement. (dd) "Toshiba Guaranty Default" means any default by Toshiba in the performance of any obligation under or compliance with any covenant under the Toshiba Guaranty, or any event, occurrence or circumstance that, under the Toshiba Guaranty, entitles any of the Bridge Bank or Refinancing Banks to demand payment. Section 2. Indemnification. SanDisk will reimburse Toshiba, and indemnify and hold harmless Toshiba from and against, any Demand Amount incurred by Toshiba and will, not later than the next Business Day immediately after Toshiba's delivery to SanDisk of a Demand Notice covering such Demand Amount in accordance with the terms and conditions of this Agreement (such Business Day being the "Due Date" in respect of such Demand Amount), pay to Toshiba the Demand Amount set forth therein. Without limiting SanDisk's obligations hereunder and notwithstanding any purported termination of this Agreement, if any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation, dissolution, assignment for the benefit of creditors, or similar event with respect to SanDisk shall occur, and such occurrence shall result in the return of any payment or performance of any Demand Amount, then (a) without further notice, demand or other action, the obligations of SanDisk hereunder shall be reinstated with respect to (i) such payment or performance returned and (ii) all further obligations arising as a result of such return or request, and (b) SanDisk shall thereupon be liable therefor, without any obligation on the part of Toshiba to contest or resist any such return. Section 3. Cure of FV Payment Defaults. In the event of any FV Payment Default, Toshiba shall have the right to make such payment to FVC-Japan in lieu of SanDisk under the New SanDisk Supply Agreement or otherwise to make such payment under the Financing Documents as in either case is necessary to preclude such FV Payment Default from resulting in what would otherwise be a default by FVC-Japan under the Bridge Loan Documents or Refinancing Documents (any such payment by Toshiba being a "FV Cure Payment"); provided, however, that Toshiba shall have such right only (i) after it shall have given to SanDisk, as provided herein, notice of Toshiba's intention to exercise such right (a "FV Cure Payment Notice") not less than 30 days prior to exercising such right or such lesser period (as specified in such FV Cure Payment Notice) prior to such exercise of such right as is necessary to enable such exercise to be effective to preclude such FV Payment Default from resulting in a default by FVC-Japan under the Bridge Loan Documents or Refinancing Documents and (ii) if during such notice period SanDisk shall have failed to cure such FV Payment Default in a manner effective to preclude such FV Payment Default from resulting in a default by FVC-Japan under the Bridge Loan Documents or Refinancing Documents. The amount of any FV Cure Payment, together with interest thereon accrued, at a per annum rate of [***], from the date of payment thereof by Toshiba until the date of reimbursement thereof and payment of such interest hereunder shall comprise "FV Cure Obligations" hereunder. Section 4. Dispute Resolution. Upon payment of any amount demanded by Toshiba as Demand Amount payable hereunder, SanDisk shall have the right to contest whether such amount was properly payable hereunder, and seek recovery thereof, in the manner set forth in 7 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Section 19 hereof. Any payment by SanDisk to Toshiba of an amount demanded by Toshiba as a Demand Amount payable hereunder shall not be deemed to constitute an admission by SanDisk, nor create a presumption, of SanDisk's liability for such amount. Section 5. Fees. (a) During the term of this Agreement, SanDisk shall pay a guarantee fee (the "Fee") to Toshiba. The Fee shall accrue, on the daily amount of SanDisk's Ownership Percentage of the daily Outstanding Financing Amount, at the rate of [***] per annum, and such Fee shall be payable on a quarterly basis in arrears, on the last Business Day of each March, June, September and December, commencing with the first such date to occur after the date hereof, and on the date of termination of this Agreement. (b) Toshiba shall be responsible for any other fees, costs and expenses, other than legal fees for SanDisk's counsel, incurred in connection with Financing Documents, the Toshiba Guaranty and the transactions contemplated thereby, including, without limitation, any rearrangement fees assessed by Bank and any breakage fees assessed in connection with the Lease Documents. Section 6. Nature of Agreement. Notwithstanding anything herein otherwise to the contrary: (a) The obligations and liability of SanDisk under this Agreement shall be independent, absolute, primary and direct, irrevocable and unconditional, regardless of (i) any untrue or incorrect information in a Demand Notice, whose untruth or incorrectness was not known by Toshiba at the time of delivery of such Demand Notice (ii) any nonperfection of any collateral security for the Obligations; (iii) any lack of validity or enforceability of the Toshiba Guaranty, the Financing Documents, or any of the Obligations; (iv) the voluntary or involuntary liquidation, dissolution, sale or other disposition of all, or substantially all of the assets, marshalling of assets and liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition with creditors or readjustment of, or other similar proceedings affecting either Lessee, Toshiba, SanDisk or any co-guarantor or endorser of, any or all of the Obligations or any of the assets of any of them, or any contest of the validity of this Agreement in any such proceeding; or (v) any law, regulation or decree now or hereafter in effect in any jurisdiction which might in any manner affect any of such terms or provisions or any of the rights of Toshiba with respect thereto or which might cause or permit either Lessee or any co-guarantor of the Obligations to invoke any defense to, or any alteration in the time, amount or manner of payment of any or all of the Obligations or performance of this Agreement. (b) For the avoidance of doubt, neither anything contained in, nor any performance or default (including, without limitation, any Toshiba Guaranty Default or Potential Toshiba Guaranty Default) under, the Toshiba Guaranty or any modification thereof or any other agreement, document or arrangement entered into by Toshiba or any of its affiliates with or for the benefit of the Bridge Bank or the Refinancing Banks in any case shall result in SanDisk having any liability or obligation under this Agreement, other than obligations and liabilities of 8 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. SanDisk provided for under the terms contained in this Agreement (construed under applicable principles of contract construction to give effect to the intent of the parties). Section 7. Rights and Remedies. No remedy herein conferred upon or reserved to Toshiba is intended to be exclusive of any other remedies or remedy available to Toshiba, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given to Toshiba under this Agreement or now or hereafter existing at law or in equity. No failure or delay on the part of Toshiba in exercising any power or right under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power preclude any other or further exercise thereof or the exercise of any other right or power under this Agreement. Without limiting the foregoing, nothing contained herein is intended to limit Toshiba to delivering a single Demand Notice relating to a particular circumstance or set of circumstances, it being understood that any Demand Notice delivered hereunder shall cover only Reimbursable Obligations and/or Expenses payable under Section 2 hereof and shall not cover Reimbursable Obligations and/or Expenses covered by any other Demand Notice. Section 8. Payments. All payments by SanDisk hereunder to Toshiba shall be made in immediately available funds and in Japanese Yen to Toshiba at its office or at such other location as Toshiba shall specify by notice to SanDisk. All payments by SanDisk under this Agreement shall be made by SanDisk solely from SanDisk's own funds and not from any funds of either Lessee. Section 9. Events of Default; Remedies. (a) The occurrenc e of any of the following events shall constitute an "Event of Default" under this Agreement (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any governmental authority): (1) Both of the following (A) and (B) shall occur: (A) either a FV Cure Obligation Default or a Fully Reimbursable Obligation Default shall occur at a time when there shall not have been any earlier occurrence of either any Fully Reimbursable Obligation Default or any FV Cure Obligation Default and (B) thereafter, and on or prior to the later of (x) the Lease Payment Due Date next succeeding such FV Cure Obligation Default or Fully Reimbursable Obligation Default, as the case may be, and (y) the date that is three months after the FV Payment Default giving rise to such FV Cure Obligation Default or Fully Reimbursable Obligation Default, as the case may be, either (i) SanDisk shall fail to pay the Demand Amount, specified in a Demand Notice duly delivered hereunder, that includes the FV Cure Obligations or Fully Reimbursable Obligations, as the case may be, giving rise to such FV Cure Obligation Default or Fully Reimbursable Obligation Default, as the case may be, (together, solely in the case of any such Demand Amount that includes Fully Reimbursable Obligations, with interest on such Fully Reimbursable Obligations accrued, at a per annum rate of [***], from the Due Date for payment by SanDisk under Section 2 hereof of such Fully Reimbursable Obligations) or (ii) there shall 9 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. occur any other FV Payment Default after the FV Payment Default that gave rise to such FV Cure Obligation Default or Fully Reimbursable Obligation Default, as the case may be; (2) At any time when there shall have been any earlier occurrence of either any Fully Reimbursable Obligation Default or any FV Cure Obligation Default, there shall be any additional occurrence of either any FV Cure Obligation Default or any Fully Reimbursable Obligation Default; (3) A Pro-Rata Reimbursable Obligation Default; (4) SanDisk shall fail (other than any failure described in paragraph (1), (2) or (3)) to observe or perform any covenant, condition or agreement of SanDisk contained in this Agreement, and such failure remains uncured for 30 days after notice thereof from Toshiba to SanDisk; or (5) a Bankruptcy Event of SanDisk. (b) Upon the occurrence of any Event of Default, Toshiba may, at its option, declare a default by written notice to SanDisk, and at any time thereafter, Toshiba may, at its option, take one or more of the following actions: (1) acquire SanDisk's interest in each Lessee in the manner applicable under the New Operating Agreement (in respect of FVC-Japan) and Existing Operating Agreement (in respect of FVC, if it has not by then been dissolved) to an exercise by Toshiba of the remedy provided for in Section 10.05(a) of the New Operating Agreement and Section 10.05(a) of the Existing Operating Agreement, respectively; provided that the amount payable to SanDisk in any such acquisition shall be reduced by the amount of any Demand Amounts unpaid and due hereunder at the time of such acquisition, unless such acquisition of SanDisk's interest in each Lessee is effected by Toshiba hereunder following or in conjunction with any exercise of the remedy provided for in Section 9(b)(3) below (in which case the amount payable in such acquisition shall not be so reduced); and/or (2) upon termination of the New Master Agreement under the terms thereof, exercise the rights to a royalty-free license from SanDisk provided for in Section 8.01(g)(ii) of the New Master Agreement; and/or (3) in the event that (i) the Outstanding Financing Amount has become accelerated and payable in full as a result of a default by FVC-Japan giving rise to the Reimbursable Obligation payable hereunder that gave rise to such Event of Default and (ii) Toshiba pursuant to the Toshiba Guaranty has paid in full the Outstanding Financing Amount as so accelerated following such Event of Default, be entitled to assume full ownership rights to such interest as either Lessee has in the Leased Equipment upon such payment in full of such Outstanding Financing Amount as so accelerated; and/or (4) exercise any other right or remedy that may be available under applicable law or proceed by appropriate court action to enforce the terms hereof or to recover damages for the breach hereof. 10 Section 10. Modifications and Waivers. No modification or waiver of any provision of this Agreement nor consent to any departure therefrom shall, in any event, be effective unless the same is in writing signed by Toshiba and SanDisk and any such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on any party, in any case, shall entitle such party to any other or further notice or demand in similar or other circumstances. Section 11. Waiver. Except as provided herein, SanDisk hereby waives promptness, diligence, presentment, notice of acceptance and any other notice with respect to any Demand Amount. Section 12. No Setoff by SanDisk. No setoff, counterclaim, deduction, reduction, or diminution of any obligation, or any defense of any kind or nature which SanDisk has or may have against either Lessee or Toshiba shall be available hereunder to SanDisk. Section 13. Representations and Warranties. (a) Each of SanDisk and Toshiba hereby represents and warrants, solely in respect of itself, as follows: (1) Such party is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has full right, power and authority to enter into, and perform this Agreement. (2) The execution, delivery and performance by such party of this Agreement (i) have been duly authorized by all necessary actions, and (ii) do not and will not contravene any law or any contract binding on, or affecting such party except to the extent that any such contravention would not have a materially adverse effect on such party's ability to perform its obligations under this Agreement. (3) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body (other than any that has been obtained, taken or made or whose failure to be obtained, taken or made would not have a materially adverse effect on such party's ability to perform its obligations under the Agreement ) is required for the due execution, delivery and performance by such party of this Agreement. (4) This Agreement is a legal, valid and binding obligation of such party, enforceable against such party in accordance with its terms. (b) SanDisk hereby represents and warrants as follows: (1) There are no actions, claims investigations or proceedings pending, or to SanDisk's knowledge threatened, by or before any governmental authority that, if adversely determined, would have a material adverse effect on SanDisk, on the conduct of the business of FVC-Japan following the Closing as contemplated by the Operative Documents or on SanDisk's ability to perform any of its material obligations under this Agreement. 11 (2) Except as set forth in Schedule I attached hereto, there are no lawsuits, arbitrations or other legal proceedings pending, or to SanDisk's knowledge threatened, by or against or affecting SanDisk or any of its Affiliates or any of their respective properties that (i) are reasonably likely, based on information known to SanDisk as of the date hereof, to have a material adverse effect on the conduct of the business of FVC-Japan following the Closing as contemplated by the Operative Documents or (ii) relate to any of the transactions contemplated by the Operative Documents in a manner which is material to the ability of it to carry out the transactions contemplated hereby or which could have a material adverse effect on the conduct of the business of FVC-Japan following the Closing as contemplated in the Operative Documents. (3) SanDisk is solvent and has assets having a present fair saleable value at least equal to the amount of its liabilities. Section 14. Covenants. (a) SanDisk covenants and agrees that, during the term of this Agreement, it shall: (1) maintain its corporate existence and shall not dissolve or otherwise dispose of all, or substantially all of its assets; provided, that this clause (1) shall not limit SanDisk's ability to consummate a Change of Control so long as the person surviving in such Change of Control (if not SanDisk), or that shall have acquired all or substantially all of the assets of SanDisk in connection with such Change of Control, shall expressly assume in writing all of the duties and obligations of SanDisk under this Agreement; (2) except as otherwise expressly permitted by the New Operating Agreement, not Transfer or permit any of its affiliates to Transfer all or any portion of its Units in FVC-Japan (or all or any portion of SanDisk's interest in any subsidiary through which SanDisk beneficially owns such Units), to any person without the consent of Toshiba. (b) Toshiba covenants and agrees that, during the term of this Agreement, it shall deliver a true and correct copy of the Toshiba Guaranty or a modification thereof, as soon as practicable after the execution and delivery thereof, to SanDisk in accordance with the procedures established for the giving of notice in Section 16 hereof; provided, however, that (i) prior to such delivery, Toshiba may redact from such copy any information which Toshiba deems to be confidential or proprietary to either Toshiba or the Bridge Bank or Refinancing Banks and (ii) no such document or delivery of a copy of it hereunder shall limit the effect of Section 6(b) hereof (c) [***]. Section 15. Additional Provisions relating to Expenses. In the event that Toshiba should incur Expenses relating to Reimbursable Obligations and such Expenses were not incurred in time to be included in any Demand Notice covering such Reimbursable Obligations delivered hereunder, Toshiba shall nevertheless be entitled to reimbursement of such Expenses upon request to SanDisk advising SanDisk of such Expenses and the facts and circumstances of their incurrence. In the event that any estimate of Expenses included in any Demand Notice 12 [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. should prove to be in excess of the amount of such Expenses actually incurred by Toshiba, upon determination that such excess exists Toshiba shall reimburse SanDisk for any payment made by SanDisk of such excess. Section 16. Addresses for Notices. All notices and other communications to be given to any party under this Agreement shall be in writing and any notice shall be deemed received when delivered by hand, courier or overnight delivery service, or by facsimile or email (if such facsimile or email is confirmed within two Business Days by delivery of a copy by hand, courier or overnight delivery service), with appropriate postage prepaid and shall be directed to the address of such party specified below (or at such other address as such party shall designate by like notice): (a) If to SanDisk: SanDisk Corporation 140 Caspian Court Sunnyvale, CA 94089 Telephone: (408) 542-0555 Facsimile: (408) 542-0600 Attention: President and CEO With a copy to: SanDisk Corporation 140 Caspian Court Sunnyvale, CA 94089 Telephone: (408) 548-0208 Facsimile: (408) 548-0385 Attention: Vice President and General Counsel (b) If to Toshiba: Toshiba Corporation Semiconductor Company 1-1 Shibaura 1-Chome Minato-Ku, Tokyo 105-8001 Japan Telephone: 011 81 3 3457 3362 Facsimile: 011 81 3 5444 9339 Attention: Vice President 13 With a copy to: Toshiba Corporation Semiconductor Company Legal Affairs and Contracts Division 1-1 Shibaura 1-Chome Minato-Ku, Tokyo 105-8001 Japan Telephone: 011-81-3-3457-3452 Facsimile: 011-81-3-5444-9342 Attention: General Manager Section 17. Term; Assignment. This Agreement shall (i) remain in full force and effect until the earlier of (x) payment in full of all obligations under the Bridge Loan Documents and the Refinancing Documents (after payment of any Reimbursable Obligation and/or Expenses then due hereunder) and (y) termination of the New Master Agreement pursuant to Section 8.01(a) thereof, whereupon this Agreement (except as provided below) shall terminate, (ii) be binding upon each of SanDisk and Toshiba and their respective personal representatives, heirs, successors and assigns and (iii) inure to the benefit of, and be enforceable by each of Toshiba and SanDisk and their respective successors, transferees and assigns. Without limiting the generality of the foregoing clause (iii), Toshiba may assign or otherwise transfer its obligations under the Toshiba Guaranty to any other person or entity without any requirement that SanDisk give its consent to such assignment or transfer (provided, that this provision shall not affect any consent rights of SanDisk under the New Master Agreement or New Operating Agreement or otherwise as a participant in either Lessee), and such other person or entity shall thereupon become vested with all the rights in respect thereof granted to Toshiba herein or otherwise; provided, further, that SanDisk may assign or otherwise transfer its obligations under this Agreement to any other person or entity in connection with a merger, consolidation or sale of all or substantially all of the assets or the outstanding securities of SanDisk (so long as such merger, consolidation or sale shall be in compliance with Section 14(a)(1)) without the consent of Toshiba or its successors or assigns; provided, further, that Sections 4, 5(b), 6, 7, 8, 10, 12, 13, 14(c), 15, 16, 17, 18, 19, 20, 21 and 22 shall survive any termination of this Agreement. Section 18. Entire Agreement. This Agreement constitutes the entire agreement with respect to, and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to, the subject matter hereof. Section 19. Severability. If any provision of this Agreement or the application of any such provision is invalid, illegal or unenforceable in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement (except as may be expressly provided in this Agreement) or invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the parties waive any provision of law that renders any provision of this Agreement invalid, illegal or unenforceable in any respect. The parties shall, to the extent lawful and practicable, use their reasonable efforts to enter into arrangements to reinstate the intended benefits, net of the intended burdens, of any such provision held invalid, illegal or unenforceable. If the intent of the parties in entering into 14 this Agreement cannot be preserved, this Agreement shall either be renegotiated or terminated, by mutual agreement of the parties. Section 20. Governing Law. This Agreement shall be deemed to be a contract under the laws of the State of California and for all purposes shall be governed by and construed in accordance with such laws. Section 21. No Presumption Against Either Party. This Agreement was negotiated and drafted jointly by both of the parties hereto, and there shall be no presumption in the construction of this Agreement that the Agreement or any provision thereof shall be construed against either party on account of such party being the drafter hereof. Section 22. Arbitration. Any dispute arising under this Agreement will be settled by binding arbitration in San Francisco, California. Such dispute shall be heard by a panel of three arbitrators pursuant to the rules of the International Chamber of Commerce. The awards of such arbitration shall be final and binding upon the parties thereto. The non-prevailing party will bear all fees and expenses of both parties associated with the arbitration. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 15 IN WITNESS WHEREOF, for good and valuable consideration and intending to be legally bound hereby, this Agreement has been executed and delivered by SanDisk and Toshiba as of the date hereof. SANDISK CORPORATION By: /s/ Eli Harari ---------------------------------------- Name: Eli Harari Title: President & Chief Executive Officer TOSHIBA CORPORATION By: /s/ Takeshi Nakagawa ---------------------------------------- Name: Takeshi Nakagawa Title: Corporate Senior Vice President President & CEO Semiconductor Company EX-10.35 8 dex1035.txt AMDT. TO REIMBURSEMENT AGMT. 05/29/2002 Exhibit 10.35 AMENDMENT TO INDEMNIFICATION AND REIMBURSEMENT AGREEMENT This AMENDMENT TO INDEMNIFICATION AND REIMBURSEMENT AGREEMENT (this "Amendment"), dated as of May 29, 2002, is made between SANDISK CORPORATION, a Delaware corporation ("SanDisk"), and TOSHIBA CORPORATION, a Japanese corporation ("Toshiba"). WITNESSETH: WHEREAS, SanDisk and Toshiba are parties to that certain Indemnification and Reimbursement Agreement dated as of April 10, 2002 (as from time to time amended, restated, supplemented or otherwise modified, the "Indemnification Agreement"); and WHEREAS SanDisk and Toshiba desire to amend the Indemnification Agreement to make certain amendments as set forth below. NOW, THEREFORE, in consideration of the mutual covenants herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, SanDisk and Toshiba have agreed as follows: Section 1. Amendments to the Indemnification Agreement. (a) The definition of "Toshiba Guaranty Default" in the Indemnification Agreement is amended in its entirety to read in full as follows: "Toshiba Guaranty Default" means: (i) any default by Toshiba in the performance of any obligation under or compliance with any covenant under the Toshiba Guaranty, or (ii) any event, occurrence or circumstance that, under the Toshiba Guaranty, entitles any of the Bridge Bank or Refinancing Banks to demand payment, excluding from this clause (ii) any default by FVC-Japan under the Refinancing Documents that is not a result of any Guarantor-Triggered Refinancing Document Default. (b) Section 1 of the Indemnification Agreement is hereby amended by adding thereto in the correct alphabetical order the following definitions: "Guarantor-Triggered Refinancing Document Default" means any event, occurrence or circumstance affecting or effected by Toshiba or any act or omission by Toshiba (including, without limitation, difficulty in performing any obligation under the Toshiba Guaranty) in any case the occurrence or existence of which constitutes an event described under Article 26, Paragraphs 1(5), 1(6), 1(7), 1(8), or 1(11) of the Refinancing Lease Agreement. "Refinancing Lease Agreement" means that certain Lease Agreement dated May 29, 2002 made and entered into by and between Incandescent Leasing Yugen Kaisha and FVC-Japan (as from time to time amended, restated, supplemented or otherwise modified). Section 2. Effectiveness; Counterparts. Section 1 of this Amendment shall be effective upon the execution hereof by each of SanDisk and Toshiba. This Amendment may be executed in any number of counterparts Section 3. Governing Law. This Amendment shall be deemed to be a contract under the laws of the State of California and for all purposes shall be governed by and construed in accordance with such laws. Section 4. No Other Amendments. Except for the amendments expressly set forth and referred to in Section 1 above, the Indemnification Agreement shall remain unchanged and in full force and effect. Section 5. Entire Agreement. The Indemnification Agreement as amended by this Amendment embodies the entire agreement between the parties hereto relating to the subject matter hereof and supercedes all prior agreements, representations and understandings, if any, relating to the subject matter hereof. [Remainder of page intentional left blank] 2 IN WITNESS WHEREOF, for good and valuable consideration and intending to be legally bound hereby, this Amendment has been executed and delivered by SanDisk and Toshiba as of the date hereof. SANDISK CORPORATION By: /s/ Eli Harari ------------------------------- Name: Eli Harari Title: President & Chief Executive Officer TOSHIBA CORPORATION By: /s/ Takeshi Nakagawa ------------------------------- Name: Takeshi Nakagawa Title: Corporate Senior Vice President President & CEO Semiconductor Company EX-99.1 9 dex991.htm CERTIFICATION OF CEO AND CFO Prepared by R.R. Donnelley Financial -- Certification of CEO and CFO
 
Exhibit 99.1
 
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 of SanDisk Corporation on Form 10-Q for the quarterly period ended June 30, 2002 (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
August 13, 2002
 
 
CERTIFICATION OF VICE PRESIDENT, FINANCE (PRINCIPAL FINANCIAL OFFICER)
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Michael Gray, Vice President, Finance (Principal 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 of SanDisk Corporation on Form 10-Q for the quarterly period ended June 30, 2002 (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/    MICHAEL GRAY
 
Michael Gray
Vice President, Finance (Principal Financial Officer)
August 13, 2002
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