SanDisk 1998 Annual Report Download - page 47

SanDisk Corporation
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the Company. Any litigation, whether as a plaintiff or as a
defendant, would likely result in significant expense to the
Company and divert the efforts of the Company’s technical
and management personnel, whether or not such litigation is
ultimately determined in favor of the Company.
In March 1998, the Company filed a complaint in federal
court against Lexar Media, Inc. (“Lexar”) for infringement
of a fundamental flashdisk patent. Lexar has disputed the
Company’s claim of patent infringement, claimed SanDisk’s
patent is invalid or unenforceable and asserted various counter-
claims including unfair competition, violation of the Lanham
Act, patent misuse, interference with prospective economic
advantage, trade defamation and fraud. SanDisk has denied
each of Lexar’s counterclaims.
In July 1998, the federal district court denied Lexar’s request
to have the case dismissed on the grounds the Company failed
to perform an adequate prefiling investigation. Discovery in
the Lexar suit commenced in August 1998. The claims con-
struction phase commenced in February 1999. The Company
intends to vigorously enforce its patents, but there can be no
assurance that these efforts will be successful.
In the event of an adverse result in any such litigation, the
Company could be required to pay substantial damages,
cease the manufacture, use and sale of infringing products,
expend significant resources to develop non-infringing tech-
nology or obtain licenses to the infringing technology, or
discontinue the use of certain processes.
In October 1995, Samsung Electronics Company Ltd. filed a
complaint against the Company in the Northern District of
California accusing the Company of infringing two Samsung
patents, seeking declaratory relief with respect to five Company
patents and alleging unspecified damages for certain other
related claims. On January 11, 1996, the Company filed a
complaint against Samsung with the United States
International Trade Commission alleging that Samsung and
its U.S. sales arm, were importing and selling products that
infringe two of the Company’s patents. On February 26, 1997,
the Administrative Law Judge assigned to the case issued an
Initial Determination finding both SanDisk patents valid and
infringed and further finding a violation of Section 337 of
the Trade Act. On June 2, 1997, the Commission issued a
limited exclusion order prohibiting the unlicensed entry of
infringing flash memory circuits, and carriers and circuit
boards containing such circuits, that are manufactured by or
on behalf of Samsung. On August 14, 1997, in connection
with the settlement of all disputes between them, the
Company and Samsung announced the signing of a patent
cross-license agreement for flash memory related patents.
Under the agreement, the Company and Samsung have
licensed each others patents covering the design and manu-
facture of flash memory products.
From time to time the Company agrees to indemnify certain
of its suppliers and customers for alleged patent infringement.
The scope of such indemnity varies but may in some
instances include indemnification for damages and expenses,
including attorneys fees. The Company may from time to
time be engaged in litigation as a result of such indemnifica-
tion obligations. Third party claims for patent infringement
are excluded from coverage under the Company’s insurance
policies. There can be no assurance that any future obligation
to indemnify the Company’s customers or suppliers, will not
have a material adverse effect on the Company’s business,
financial condition and results of operations.
Litigation frequently involves substantial expenditures and
can require significant management attention, even if the
Company ultimately prevails. In addition, the results of any
litigation matters are inherently uncertain. Accordingly,
there can be no assurance that any of the foregoing matters,
or any future litigation, will not have a material adverse
effect on the Company’s business, financial condition and
results of operations. See “Item 1: Business—Factors That
May Affect Future Results—Risks Associated with Patents,
Proprietary Rights and Related Litigation.”
NOTE 5: STOCKHOLDERS’ EQUITY
Stock Benefit Plan
The 1989 Stock Benefit Plan, in effect through August 1995,
comprised two separate programs, the Stock Issuance Program
and the Option Grant Program. The Stock Issuance Program
allowed eligible individuals to immediately purchase the
Company’s common stock at a fair value as determined by
the Board of Directors. Such shares may be fully vested
when issued or may vest over time as determined by the
Board of Directors. Under the Option Grant Program,
eligible individuals were granted options to purchase shares
of the Company’s common stock at a fair value, as deter-
mined by the Board of Directors, of such shares on the date
of grant. The options generally vest over a four-year period,
expiring no later than ten years from the date of grant.
Unexercised options are canceled upon the termination of
employment or services. Options that are canceled under this
plan will be available for future grants under the 1995 Stock
Option Plan. There were no shares available for option
grants under this plan at December 31, 1998.
The 1995 Stock Option Plan provides for the issuance of
incentive stock options and nonqualified stock options. Under
this plan, the vesting and exercise provisions of option grants
are determined by the Board of Directors. The options
generally vest over a four-year period, expiring no later
than ten years from the date of grant.
1995 Non-employee Directors Stock Option Plan
In August 1995, the Company adopted the 1995 Non-
employee Directors Stock Option Plan (the Directors’ Plan).
The Company reserved 200,000 shares of common stock for
issuance thereunder. Under this plan, automatic option grants
are made at periodic intervals to eligible non-employee mem-
bers of the Board of Directors. Initial option grants vest over