SanDisk 1998 Annual Report Download

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1998 A N N UA L REPORT

Table of contents

  • Page 1
    1 9 9 8 A N N U A L R E P O R T

  • Page 2
    ...SanDisk Corporation designs, manufactures and markets ï¬,ash memory products that store data, digital images and digital audio in a rapidly growing number of consumer electronics, telecommunications and electronic commerce applications. â„¢ These ï¬,ash memory products include removable CompactFlash...

  • Page 3
    Mission M I SSI O N ST A T E M E N T T O G LO B A L I N FLA SH D A TA B E T H E LEA D ER ST O R A G E

  • Page 4
    ...Senior Vice President, O perations Leon M almed Senior Vice President, M ark eting and Sales Jocelyn Scarborough Vice President, H um an R esources SanDisk and the SanDisk logo are registered trademarks, and CompactFlash and ImageM ate are trademarks of SanDisk Corporation. All other trademarks are...

  • Page 5
    Highlights F I N A N C I A L H I G H L I G H T S REV EN U ES in t housands W O RKI N G C A PI TA L in t housands $135,761 $125,253 $134,298 $138,471 $97,599 $77,029 $62,839 $68,002 $35,378 $20,971 94 95 96 97 98 94 95 96 97 98 O P ERAT I N G I N C O M E (Loss) in t housands $19,680...

  • Page 6
    ...C O M PA N Y H I G H L I G H T S Flash memory megabytes shipped increased 124% compared to 1997. SanDisk expanded the number of retail outlets carrying its products. M ore than 7,000 stores now carry SanDisk brand products in the United States, Japan and Europe. SanDisk began volume production of...

  • Page 7
    ... requirement plays to SanDisk's strength in low cost, small form factor, high capacity ï¬,ash storage products. We are working closely with several of the market leaders and our goal is to become a leading player in this exciting new opportunity for ï¬,ash storage. The new wave of digital camcorders...

  • Page 8
    ... year while improving deliveries to customer requests on significantly higher volumes. O ur highest priority during 1999 will be making SanDisk the industry's highest volume, most customer responsive ï¬,ash card supplier. Competition is expected to remain fierce as growth in our target markets...

  • Page 9
    ...O N T E N T S PA G E PA RT O N E Business ...6 Properties ...21 Legal Proceedings ...21 Submission of M atters to a Vote of Security H olders ...22......32 4 Changes in and ...Relationships and Related Transactions ...47 PA RT F O U R Exhibits, Financial Statements, Schedules, and Reports...

  • Page 10
    ...26734 SAN DISK CORPORAT ION (Exact name of Registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 140 Caspian Court, Sunnyvale, California (Address of principal executive office) Registrant's telephone number, including area code: Securities...

  • Page 11
    ...ash memory process and design, controller design, system-level integration, compact packaging and low-cost system test. The Company's products include removable CompactFlash â„¢ products, FlashDisk cards and M ultiM ediaCard products, and embedded FlashDrives and Flash ChipSet products. SanDisk has...

  • Page 12
    ...'s ï¬,ash data storage, this can translate into longer battery life. Low power consumption. H igh reliability. SanDisk's products utilize sophisticated error detection and correction algorithms and dynamic defect management techniques to provide high data reliability and endurance. H igh performance...

  • Page 13
    ... and the industrial/communications markets for its ï¬,ash data storage products. The Company's products are used in consumer electronics applications such as digital cameras, PDAs, highly portable computers, audio recorders, portable M P3 music players, video and electronic games, and in industrial...

  • Page 14
    ... small form factor consumer applications such as digital cameras, PDAs, personal communicators, pagers and audio recorders. CompactFlash products provide interoperability with systems based upon the PC Card ATA standard by using a low-cost passive Type II adapter. CompactFlash cards are available in...

  • Page 15
    ... ediaCard is targeted at the emerging markets for mobile smart phones, advanced pagers, consumer multimedia devices, digital audio recorders, portable M P3 music players and other products that need removable data storage in a small form factor. M ultiM ediaCard is available in storage capacities of...

  • Page 16
    ...Emerging M arkets and N ew Products." The Company also has developed core competencies in lowcost micropackaging technology as well as low-cost batch testing, both of which are important elements in building high capacity ï¬,ash cards to high reliability standards at a competitive cost. St r at egic...

  • Page 17
    ...' representative partners. D irect Sales Force. The Company believes that its future success will depend on the continued development and introduction of new generations of ï¬,ash memory chips, controllers and products designed specifically for the ï¬,ash data storage market. To date, the Company...

  • Page 18
    ... channel in 1997 and is shipping SanDisk brand name product directly to retail superstores, office clubs and selected retail distributors. SanDisk products are available in more than 7,000 stores worldwide. Eleven independent manufacturers' representative firms are supporting the Company's sales...

  • Page 19
    ...of the Company's quarterly product revenues coming from turns business. The Company believes that the current situation will continue until the new markets addressed by the Company's products enter a more predictable growth phase and demand begins to create longer lead times. See " Factors That M ay...

  • Page 20
    ...prices due to competitive pricing pressures • Seasonality in sales of products for consumer electronics applications • Changes in product and customer mix • M arket acceptance of new or enhanced versions of our products • Changes in our distribution channels • Timing of license and royalty...

  • Page 21
    ...by competition, has caused average selling prices to decline substantially over the past year. This trend is expected to continue. Average selling prices decreased by 28% in 1998 compared to 1997. O ne of our strategies is to cross-license our patents to other manufacturers of ï¬,ash products. Under...

  • Page 22
    ... of operations. O ther competitive factors include: • Product performance and availability • Adequate foundry capacity • Efficiency of production • O ur timing of new product announcements or introductions • Successful protection of intellectual property rights • General market and...

  • Page 23
    ...laws may be inconsistent. Sales t o a Small N umber of Cust omers Represent a Significant Port ion of O ur Revenues In 1998, the average selling prices of our products declined 28% compared to 1997. Because ï¬,ash data storage markets are characterized by intense competition, we expect that pricing...

  • Page 24
    ... and began customer shipments in the third quarter of 1998. We expect production volumes to be limited, however, because of more advanced 256M bit ï¬,ash memory designs currently planned for production by the end of 1999. These new advanced designs are expected to have faster write speeds than the...

  • Page 25
    ... using processes that may infringe the rights of third parties. We cannot assure you that we would be successful in redesigning our products or that the necessary licenses will be available under reasonable terms. We have historically indemnified various suppliers and customers for alleged patent...

  • Page 26
    ... SanDisk patents were valid and that Samsung had infringed such patents, and prohibited the import, sale, marketing, distribution or advertising of Samsung's infringing ï¬,ash memory circuits in the United States. In August 1997, the Company and Samsung entered into a settlement agreement resolving...

  • Page 27
    ... be available under reasonable terms. Furthermore, any such development or license negotiations could require substantial expenditures of time and other resources by the Company. As is common in the industry, the Company agrees to indemnify certain of its suppliers and customers for alleged patent...

  • Page 28
    ... of Engineering at Anamartic, a company that utilizes wafer scale technology to build DRAM mass storage systems. From 1984 to 1988, M r. Auclair was Vice President and General M anager of the O M TI division of Scientific M icro Systems, a supplier of disk controllers and disk controller chips to...

  • Page 29
    ...Common Stock is traded on the N asdaq N ational M arket under the symbol SN DK. SanDisk's initial public offering of stock was N ovember 8, 1995 at $10.00 per share. The following table lists the high and low sales price for each quarter during the last three years. Fiscal year 1996 H igh Low First...

  • Page 30
    ... except per share data) REV EN U ES 1998 1997 Year Ended December 31, 1996 1995 1994 Product License and royalty Total revenues Cost of revenues Gross profits O perating income (loss) N et income... of its line of credit agreement and paid no cash dividends during the five-year period. (See N ote ...

  • Page 31
    Quarterly Data SU P P L E M E N T A R Y Q U A R T E R LY D A T A S U P P L E M E N T A RY Q U A RT E R LY D A T A 1998 (U naudited. In thousands except per share data) REV EN U ES 1st 2nd 3rd 4th Product License and royalty Total revenues Gross profits O perating income N et income N et income per...

  • Page 32
    ... with changes in license and royalty revenues than with changes in product revenues. SanDisk markets its products using a direct sales organization, distributors, manufacturers' representatives, private label partners, O EM s and retailers. The Company expects that sales through the retail channel...

  • Page 33
    ... third quarter of 1998. The Company's FlashDisk, FlashDrive, Flash ChipSet, CompactFlash, M ultiM ediaCard, and ImageM ate product lines do not perform date related processing, do not contain real time clock circuitry and therefore are Year 2000 ready. SanDisk storage and connectivity products are...

  • Page 34
    ... systems designed by others that contain derivative works of the H ost Developer's Toolkit. The Year 2000 remediation of the Company's transaction processing systems was completed with the installation and testing of the Company's new management information system in the fourth quarter of 1998. The...

  • Page 35
    ... to locate and correct all relevant computer codes, the nature and amount of programming required to upgrade or replace each of the affected programs, the rate and magnitude of related labor and consulting costs and the success of the Company's external customers and suppliers in addressing the Year...

  • Page 36
    ... to in-house assembly and test. The Company anticipates that lower capacity products will continue to represent a significant portion of its sales as consumer applications such as digital cameras become more popular. The Company is currently working on many cost reduction programs to strengthen...

  • Page 37
    ... sale of common stock through the SanDisk stock option and employee stock purchase plans. Depending on the demand for the Company's products, the Company may decide to make additional investments, which could be substantial, in assembly and test manufacturing equipment or foundry capacity to support...

  • Page 38
    ... each of the three years in the period ended December 31, 1998. O ur audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. O ur responsibility is to express an opinion on...

  • Page 39
    ... of allowance for doubtful accounts of $1,069 in 1998 and $756 in 1997 Inventories Deferred tax assets Prepaid expenses and other current assets Total current assets Property and equipment, net Sa n D i sk C o r p o r a t i o n $ 15,384 119,074 20,400 8,922 15,900 6,694 186,374 17,542 51,208 617...

  • Page 40
    ... 1998 Years Ended December 31, 1997 1996 Product License and royalty Total revenues Cost of revenues Gross profits O P ERAT I N G EX P EN SES $ 103,190 32,571 135,761 80,311 55,450 $ 105,675 19,578 125,253 72,280 52,973 $ 89,599 8,000 97,599 58,707 38,892 Research and development Sales and...

  • Page 41
    ...930 1,475 - 1,761 33 N et income Unrealized gain on available for sale securities Comprehensive income Exercise of stock options for cash Issuance of stock pursuant to employee stock purchase plan Exercise of common stock warrants Sale of common stock, net of issuance costs Income tax benefit from...

  • Page 42
    ...T I ES 1998 Years Ended December 31, 1997 1996 N et income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Deferred tax Compensation related to modification of stock option terms Changes in assets and liabilities: Accounts receivable Inventory Prepaid...

  • Page 43
    ... geographic markets for the Company's products include the United States, Japan, Europe and the Far East. Supplier and C ust om er C oncent r at ions 38 A limited number of customers historically have accounted for a substantial portion of the Company's revenues. In 1998, one customer accounted...

  • Page 44
    ... to their carrying value at December 31, 1998 and 1997. Under FAS 115, management classifies investments as available-for-sale at the time of purchase and periodically reevaluates such designation. Debt securities classified as available-for-sale are reported at fair value. Unrecognized gains or...

  • Page 45
    ... and price protection, is deferred until the merchandise is sold by the distributors or retailers, or the rights expire. The Company earns patent license and royalty revenue under patent cross-license agreements with H itachi Ltd. (" H itachi" ), Intel Corporation (" Intel" ), Samsung Electronics...

  • Page 46
    ..., under the Agreement, the Company also has a $15.0 million foreign The Company relies on a combination of patents, mask work protection, trademarks, copyright and trade secret laws, confidentiality procedures and licensing arrangements to protect its intellectual property rights. There can...

  • Page 47
    ... a patent cross-license agreement for ï¬,ash memory related patents. Under the agreement, the Company and Samsung have licensed each others patents covering the design and manufacture of ï¬,ash memory products. From time to time the Company agrees to indemnify certain of its suppliers and customers...

  • Page 48
    ...had been granted at exercise prices ranging from $9.50 to $20.875 per share. O n July 17, 1998, the Board of Directors approved an option cancellation/regrant program. Under the cancellation/ regrant program, employees could elect to exchange their stock options with exercise prices in excess of $12...

  • Page 49
    ... Black-Scholes model with the following assumptions for those rights granted in 1998, 1997, and 1996: dividend yield of 0.0% ; and expected life of 6 months; expected volatility factor of .65 and 1.02 in 1998, 0.63 and 0.89 in 1997, and 0.588 in 1996; and a risk free interest rate ranging from 5.36...

  • Page 50
    ... 1993, the Company entered into a joint cooperation agreement with a stockholder. Under the terms of the agreement, the stockholder had a nonexclusive right to distribute ï¬,ash memory products produced by the Company. There were no revenues attributable to this agreement in 1998, 1997 and 1996...

  • Page 51
    ..., in deciding how to allocate resources and in assessing performance. The Company operates in one segment, ï¬,ash memory products. The Company markets its products in the United States and in foreign countries through its sales personnel, dealers, distributors, retailers and its subsidiaries. The...

  • Page 52
    ... dated M arch 30, 1999 for its Annual M eeting of Stockholders (the Proxy Statement), which information is incorporated in this Form 10-K by reference. Information regarding executive officers is set forth under " Executive O fficers of the Registrant" in Part I of this 10-K. I T EM 1 1 . EX EC...

  • Page 53
    ... 10.10 License Agreement between the Registrant and Dr. Eli H arari, dated September 6, 1988.2 Page (a) Documents filed as part of this report 1) All financial statements Index to Financial Statements 10.13 1989 Stock Benefit Plan.2 10.14 1995 Stock O ption Plan.2 10.15 Employee Stock Purchase...

  • Page 54
    ... O ption Plan and Employee Stock Purchase Plan of SanDisk Corporation of our report dated January 22, 1999, with respect to the consolidated financial statements and schedule of SanDisk Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 1998. ?O2@6K ?O2@@@@@@@6X...

  • Page 55
    ...of the Securities and Exchange Act of 1934, as amended, this Report has been signed below by the following persons in the capacities and on the dates indicated. Sa n D i sk C o r p o r a t i o n Signat ur e/ T it le D at e /s/ Dr. Eli H arari (Dr. Eli H arari) President, Chief Ex ecutive O fficer...

  • Page 56
    Schedule II V A L U A T I O N A N D Q U A L I F Y I N G A C C O U N T S Balance at (In thousands) Description Beginning of Period Additions Charged to Costs and Expenses Deductions* Balance at End of Period Allowance for doubtful accounts: Year ended December 31, 1996 Year ended December 31, 1997 ...

  • Page 57
    Locations SA N D I SK W O R L D W I D E L O C A T I O N S SA N D I SK C O RP O RAT E H E A D Q U A RT E R S EU RO P E U S RET A I L SA L ES 140 Caspian Court Sunnyvale, CA 94089 USA Tel: 408-542-0500 Fax: 408-542-0503 http://www.sandisk...Corporate Park, Suite 300 Irvine, CA...Center Tower II, Suite 2207...