SanDisk 2000 Annual Report Download - page 16

14 . Sa n D is k C o r p o ra t io n . 2 0 0 0 A n n ua l Re p o r t
Sale s a nd M arke ting . Sales and m arketing
exp ense s inc lud e salarie s, sale s co m m issions, b e ne fits
and trave l expenses fo r o ur sales, m arke ting, c usto m er
se rvice and ap p licatio ns e ng inee ring p ersonne l. These
exp ense s also inc lude o ther selling and m arke ting
exp ense s, suc h as ind e p end ent m anufac ture r’s rep re -
se ntative c o m m is sio ns, ad vertising and tradesho w
exp ense s. Sales and m arketing expenses in c reased to
$49 .3 m illio n in 20 00 fro m $25 .3 m illio n in 1999 and
$16.9 m illio n in 19 98. The inc re ases in b o th 2 000 and
19 99 w ere prim arily d u e to inc re ased salaries and p ay-
ro ll- re late d expenses and inc re ase d com m ission
exp ense s d ue to hig her p ro d uc t revenues and
inc re ase d m arke ting e xp e nses. Sales and m arke ting
exp ense s rep re se nted 8% o f to tal re venues in 2 0 00
c o m p are d to 10% in 1999 and 12 % in 19 98. W e expec t
sale s and m arketing expenses to c o ntinue to inc rease
as sales o f o ur p ro d uc ts gro w, as w e c o ntinue to
d eve lo p the re tail c hannel and b rand aw areness fo r o u r
p ro d uc ts and as w e inc re ase o ur m arke ting ac tivities
fo r o ur Sec ure Dig ital Card p ro d uc ts.
General and Ad m inis trative. General and ad m in-
istrative exp ense s inc lude the c o st o f o ur financ e , info r-
m ation syste m s, hum an re so urc e s, s hare ho ld e r re la-
tio ns , legal and ad m inistrative functio ns. General and
ad m inistrative exp ense s w ere $2 4 .8 m illion in 2 000
c o m p are d to $ 12 .6 m illio n in 19 99 and $7.5 m illio n in
19 98. The inc re ases for b o th 2 000 and 1999 w ere pri-
m arily due to inc re ased salary and re late d expenses
asso c iate d w ith ad d itional p erso nne l, inc re ased legal
fe es and an inc re ase in the allow anc e fo r doub tful
ac c o unts relate d to higher trade ac c o unts receivable
b alan c es fro m inc reased re ven ues. Ge ne ral and
ad m inistrative exp ense s rep re se nted 4% o f to tal re v-
enue s in 20 00 c o m p are d to 5% in 199 9 and 6 % in
19 98. W e expec t g e ne ral and ad m inistrative exp ense s
to inc rease as w e exp and an d d e velop o ur infrastruc -
ture to sup p o rt o ur anticipate d future g ro w th. Ge ne ral
and ad m inistrative exp ense s c o uld also inc re ase sub -
stantially in the future if w e pursue ad d itio nal litig ation
to defend our p atent p o rtfolio. See “ Fac to rs That M ay
Affe c t Future Results – Risks Asso c iated w ith Pate nts,
Pro p rie tary Rig hts and Re lated Litig atio n.”
Given the c urrent m arket c ond itio ns and e xp ec te d
d ecline in p ro d uc t re venues in the first q uarter o f 200 1,
w e have instituted stric t e xp e nse c o ntro l m e asures.
The se m easures in the first q uarter o f 200 1 inc luded a
red uc tio n in o ur w o rk fo rc e and sig nificant c uts in d is-
c retio nary sp e nd ing. How eve r, w e are c o ntinuing to
invest in research and deve lo p m e nt o f ad vanc ed tec h-
no lo g ie s and future produc ts.
Inte re st Inc o m e . Inte rest inc o m e w as $22 .8 m il-
lio n in 20 00 c o m p are d to $8 .3 m illio n in 1999 and $5 .3
m illio n in 1998 . The inc re ase in 2 0 00 is prim arily d ue to
a full year o f higher intere st inc om e resulting from the
investm ent o f the p ro c e eds fro m the sale o f c o m m on
sto c k in o ur N o vem b er 19 99 fo llo w - o n p ub lic o ffering ,
as w e ll as inc reased c ash flo w s as a result o f the
inc re ase in re venue and operating m arg in. The
inc re ase in 1999 is p rim arily d ue to hig he r interest
inc o m e in the fourth q uarter d ue to the inve stm ent of
the procee d s fro m the sale of c o m m o n stock in o ur
N o vem ber 19 99 fo llo w - o n p ub lic o ffering . W e e xp e c t
inte rest inc o m e to d ec line in 20 01 re lative to 20 0 0 d ue
to low er c ash and investm e nt b alanc es resulting fro m
o ur investm e nts in FlashVisio n and Tow er, c o m b ined
w ith the d ro p in risk- free inte rest rate s due to recent
ac tions taken b y the U.S. Federal Re se rve Board .
Gain o n inve stm e nt in foundry. In the first q uar-
te r o f 2 000 , w e re c o g nized a g ain o f $ 344 .2 m illio n as
a result of the exchange o f o ur investm e nt o f $ 51.2
m illio n in Unite d Silic on, Inc ., o r USIC, fo r an investm e nt
in Unite d M icroele c tro nics C o rp o ratio n, or UM C. We
rec eived 111 m illio n shares o f UM C in exc hang e for o ur
USIC share s. These shares w ere valued at $ 396 m illion
at the tim e o f the e xc hang e and w ere sub je c t to trad -
ing restric tio ns im posed b y UM C and the Taiw an Sto c k
Exc hang e . The trad ing restric tions exp ired o n o ne - half
o f the shares o n July 3, 2 0 00. The rem aining shares
w ill b ec o m e availab le fo r sale o ve r a tw o- year p erio d
b eginning in January 2 0 02. W hen the shares are ulti-
m ately so ld , it is like ly that w e w ill recognize ad d itio nal
g ains o r lo sse s. In M ay 2 000 , w e re c eived a sto c k d ivi-
d end o f 20 0 UM C shares fo r e very 1,000 share s o f
UM C o w ne d , resulting in o ur o w ne rship o f 2 2 m illio n
ad d itional UM C share s.
At Decem b er 31, 20 0 0, the m arket value o f b o th
o ur sho rt- te rm and long - term inve stm ent in UM C had
d eclined $ 201.9 m illion b e lo w its c arrying b asis. It w as
d eterm ined that this d e c line w as related to the d o w n-
turn in the se m ic o nd uc to r ind ustry as a w hole and w as
te m p o rary in nature d ue to the histo ric ally cyclic al
nature o f the ind ustry. The available- fo r- sale p o rtion o f
o ur investm e nt w as m arked- to - m arke t thro ugh othe r
c o m p rehensive inc o m e as re q uire d b y SFAS 115 .
As o f M arc h 2 2, 20 0 1, the m arket value o f o ur
investm ent in UM C rem aine d sig nific antly b e lo w our
c o st. The d o w nturn in the sem icond uc tor ind ustry and
the ec o no m y in g e ne ral ap p ears to be m o re seve re
than previo usly antic ip ated. There is a g reat d eal o f
unc ertainty reg arding w hen the sem ic o n d uc tor ind us-
try w ill reco ver fro m this d o w n c yc le . B ecause of the
c o ntinue d d o w nturn in the econo m y, w e b e lie ve that
the dec lin e in the m arke t value of our investm e nt in
UM C at M arc h 2 2, 20 01 is o ther than te m p o rary, and
w e w ill rep o rt a lo ss in o ther inc o m e and expense in
the first q uarter o f 2 001. This lo ss w ill b e b ased up o n
the fair m arket value o f the investm e nt at the end of
the first q uarter o f fisc al 200 1, as com p ared to the
investm ent’s cost b asis.
Othe r Inc o m e , Net. Other incom e, net w as
$572 ,00 0 in 200 0 c o m pared to $1.3 m illion in 1999 and
$374 ,00 0 in 19 98. The fluc tuatio ns largely relate to fo r-
eign c urrency transactio n g ains. In 20 00, 1999 , and
19 98 w e had net fore ig n c urre nc y transac tion g ains o f
$42 8,0 00, $ 1.1 m illio n and $412,000 , resp e c tively.
Provisio n fo r Inc o m e Taxe s. Our 200 0 , 19 99 and
19 98 effe c tive tax rates w e re ap p ro xim ate ly 3 9 %, 33 %
and 36% , resp ectively. Our 20 0 0 effec tive tax rate w as
hig her than o ur 19 9 9 rate d ue p rim arily to effec ts o f
state incom e taxes o n signific antly inc rease d inc o m e
and a red uc ed p ro p o rtio nal rate b e nefit fro m fed e ral