SanDisk 1999 Annual Report Download

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CONTENTS
Reinforcing our Purpose. Embracing our Potential. 1
Letter from the President 2
Converging Markets. Compelling Opportunities. 4
Inventive Solutions. Breakthrough Applications. 7
Positioned for Success 8
Selected Financial Data 10
Supplementary Quarterly Data 11
Management’s Discussion and Analysis 12
Balance Sheets 29
Statements of Income 30
Statements of Stockholders’ Equity 31
Statements of Cash Flows 32
Notes to Financial Statements 33
Report of Independent Auditors 44
Worldwide Locations 45
Corporate Information 46
SanDisk 1999 Annual Report
Table of Contents

Table of contents

  • Page 1
    ... Report Table of Cont ent s CON T E N T S Reinforcing our Purpose. Embracing our Potential. Letter from the President Converging Markets. Compelling Opportunities. Inventive Solutions. Breakthrough Applications. Positioned for Success Selected Financial Data Supplementary Quarterly Data Management...

  • Page 2
    a n n u a l r e p o r t 19 9 9 In Step wi t h t he Fut ure

  • Page 3
    Flash Memory Digital breakthrough mainstreet Compatibility alliances

  • Page 4
    ... the world 's top supplier of flash data storage. SanDisk's alliances with leading manufacturers expanded in scope in 1999. We gained a solid foothold in many emerging consumer markets as SanDisk products became widely used in digital cameras, portable digital music players, cell phones, and a host...

  • Page 5
    ... 130 digital camera models sold in retail outlets throughout the world have slots for CompactFlash. Also during the year, the MultiMediaCard product family gained strong support from the emerging Internet music player market, as well as the digital camcorder and smart cell phone markets. Because...

  • Page 6
    ..., we shipped almost four times more megabytes of flash memory in 1999 than we shipped in all of 1998. and passionate. Their hard work has brought us to where we are today, a world class, highly respected, market leader. As we look ahead, we are confident that we will continue to reap the rewards of...

  • Page 7
    ... in emerging markets such as portable digital music players, digital video cameras, and smart phones. SanDisk IDE FlashDrives are solid-state mass storage systems for use in mobile computers, communications platforms, and embedded systems. They maintain full compatibility with a hard disk drive but...

  • Page 8
    SanDisk Flash Memory Cards are used in a variety of handheld PCs. SanDisk MultiMediaCards store music files for today's popular Internet music players. More than 1 3 0 digital cameras now take SanDisk's CompactFlash cards.

  • Page 9
    The Secure Digital Memory Card provides security for copyright protection of digital data. SanDisk's Personal Tag (P-Tag) makes critical health information accessible to authorized medical personnel. Over 7 5 Internet music players now take SanDisk's MultiMediaCard.

  • Page 10
    ... 1999, SanDisk joined forces with Matsushita Electric (best known for its Panasonic brand name products) and Toshiba to jointly develop, specify, and promote the Secure Digital Memory Card. As part of this collaboration, all three companies will foster the development of application products using...

  • Page 11
    ... enabling new consumer mega-markets by providing world-leading technology, enabling scalable, high-volume production, and developing and promoting industry standards. As a company, in our many alliances, and as a force for innovation, SanDisk is positioned for success. 8 An n u al Rep ort 1 9 9 9

  • Page 12
    ...Selected Financial Data Supplementary Quarterly Data Management 's Discussion and Analysis Balance Sheets Statements of Income Statements of Stockholders' Equity Statements of Cash Flows Notes to Financial Statements Report of Independent Auditors Worldwide Locations Corporate Information 10 11 12...

  • Page 13
    ...ou san d s, exc ep t p er sh ar e d at a) Ye a r E n d e d D e c e m b e r 3 1 , 1999 1998 1997 1996 1995 Revenues Product License and royalty Total revenues Cost of revenues Gross profits Operating income Net income Net income per share Basic Diluted Shares used...656 1995 Working capital ...

  • Page 14
    ... R T E R L Y D A T A ( U n au d i t ed . I n t h ou san d s, exc ep t p er sh ar e d at a) Qu a r t e r l y / 1 9 9 9 1 st 2nd 3 rd 4th Revenues Product License and royalty Total revenues Gross profits Operating income Net income Net income per share Basic Diluted $ $ 0.08 0.07 $ $ 0.11 0.10...

  • Page 15
    ...revenues. We market our products using a direct sales organization, distributors, manufacturers' representatives, private label partners, OEMs and retailers. We expect that sales through the retail channel will com- and industrial/communications markets. In 1999, the percentage of our product sales...

  • Page 16
    ... of flash memory shipped declined 52% compared to the prior year. The mix of products sold varies from quarter to quarter and may vary in the future, affecting our overall average selling prices and gross margins. may fluctuate significantly. " Export sales are an important part of our business...

  • Page 17
    ...increase in unit volume came from sales of CompactFlash products, primarily for use in digital cameras and other consumer electronics applications. CompactFlash products represented approximately 50% of product revenues in 1998. SanDisk's backlog at the end of 1999 was $157.2 million compared to $13...

  • Page 18
    ... In October 1999, we entered into a nonbinding memorandum of understanding with Toshiba providing for the joint development and manufacturing of 512 megabit and 1 gigabit flash memory chips and Secure Digital Memory Card controllers. Further, we and Toshiba intend to form and fund a joint venture to...

  • Page 19
    ...assessment and remediation program for our principal hardware and software. Tests of software applications, which have been identified by their vendors as Year 2000 compliant, and several minor software upgrades were successfully completed in the third quarter of 1999. 16 An n u al Rep ort 1 9 9 9

  • Page 20
    ...being carefully managed, disruptions in the supply of components from any of these sole source suppliers due to Year 2000 issues, could cause delays in our fulfillment of customer orders which could result in reduced or lost revenues. Furthermore, our sales have historically been to a limited number...

  • Page 21
    ... of the need to hire additional personnel to support expected growth in sales unit volumes, sales and marketing efforts and research and development activities, including our proposed collaboration with Toshiba providing for the joint development of 512 megabit and 1 gigabit flash memory chips. For...

  • Page 22
    ... flash memory into full production as quickly as planned or if we experience unplanned yield problems, we will not be able to meet our customers' forecasted demand, which would result in lost sales, reduced revenues and reduced margins. M U LT I M E D I A C A R D P R O D U C T S The Secure Digital...

  • Page 23
    ...new products that use CompactFlash and the MultiMediaCard, such as portable digital music players and smart phones, must develop and grow. If sales of these products do not grow, our revenues and profit margins could level off or decline. Because we sell our products for use in many new applications...

  • Page 24
    ... our product gross margins and operating results in future quarters. In October 1999, we entered into a nonbinding memorandum of understanding with Toshiba providing for the joint development and manufacture of 512 megabit and 1 gigabit flash memory chips and Secure Digital Memory Card controllers...

  • Page 25
    ... restrictions, particularly in China; • longer payment cycles and greater difficulty in accounts receivable collection, particularly as we increase our sales through the retail distribution channel; • potentially adverse tax consequences; • less protection of our intellectual property rights...

  • Page 26
    ... relationships with customers. Our primary competitors include: • storage flash chip producers, such as Hitachi Ltd., Samsung Electronics Company Ltd. and Toshiba Corporation; • socket flash, linear flash and component manufacturers, such Continuing declines in our average sales prices may...

  • Page 27
    ... our Compact Flash and MultiMediaCard products, including Toshiba's SmartMedia, Sony Corporation 's Memory Stick, 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...

  • Page 28
    ... manage the inherent channel conflicts between our retail channel customers and customers that wish to purchase directly on the Internet. There is seasonality in our business. Sales of our products, in particular the sale of CompactFlash products, in the consumer electronics applications market...

  • Page 29
    ... against third parties to preserve our intellectual property rights. These parties could in turn bring suit against us. For example, in March 1998 we filed a complaint in federal court against Lexar Media, Inc. for infringement of one of our flash card patents. Lexar disputed this claim and asserted...

  • Page 30
    ... 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 companies have been especially volatile, often for reasons outside the control of the particular companies. These...

  • Page 31
    ... the Japanese Yen. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, we have established a hedging program. Currency forward contracts are utilized in these hedging programs. Our hedging programs reduce, but do not always...

  • Page 32
    ... liabilities Deferred revenue Total current liabilities Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value Authorized shares: 4,000,000 Issued: none Common stock, $0.001 par value Authorized shares: 125,000,000 Issued and outstanding: 65,248,308 in 1999 and 53...

  • Page 33
    ...I n t h ou san d s, exc ep t p er sh ar e d at a) Ye a r s E n d e d D e c e m b e r 3 1 , 1999 1998 1997 Revenues Product License and royalty Total revenues Cost of revenues Gross profits Operating expenses Research and development Sales and marketing General and administrative Total operating...

  • Page 34
    ...of stock pursuant to employee stock purchase plan Net exercise of common stock warrants Income tax benefit from stock options exercised Compensation expense related to modification of stock options Balance at December 31, 1998 Net income Unrealized loss on available for sale securities Comprehensive...

  • Page 35
    ...1 , 1999 1998 1997 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Deferred tax asset Compensation related to modification of stock option terms Changes in assets and liabilities: Accounts receivable...

  • Page 36
    ... e mass st orage product s using propriet ary, high-density flash memory technology. The Company operates in one segment and serves customers in the consumer electronics, industrial, communications and highly portable computing markets. Principal geographic markets for the Company's products include...

  • Page 37
    ... high-credit quality, money market preferred stock and auction rate preferred stock. The fair market value, based on quoted market prices, of cash equivalents and short-term investments is substantially equal to their carrying value at December 31, 1999 and 1998. Under FAS 115, management classifies...

  • Page 38
    .... However, revenue on shipments to distributors and retailers, subject to certain rights of return and price protection, is deferred until the merchandise is sold by the distributors or retailers, or the rights expire. $ 3 5 ,6 7 9 Given the volatility of the market, the Company writes down...

  • Page 39
    ... the underlying items hedged. The Company had net transaction gains (losses) of approximately $1,467,000, $412,000 and ($7,000) for The Company accounts for employee stock based compensation under APB Opinion No. 25, " Accounting for Stock Issued to Employees" and related interpretations. Pro forma...

  • Page 40
    ... with prospective business advantage. In Lexar's complaint, Lexar alleged that statements by us The Company relies on a combination of patents, trademarks, copyright and trade secret laws, confidentiality procedures and licensing arrangements to protect its intellectual property rights. There can...

  • Page 41
    ...comparative performance of our memory products in digital cameras. On October 1, 1999, we filed counterclaims against Lexar asserting causes of action including unfair competition and false advertising under both federal and California law. Although we cannot predict the ultimate outcome of the case...

  • Page 42
    ... year, but in no event will any such annual increase exceed 200,000 shares. At December 31, 1999, the Company reserved 800,000 shares of common stock for issuance under the Directors' Plan and a total of 368,000 options had been granted at exercise prices ranging from $4.75 to $15.2188 per share...

  • Page 43
    ...and 1997, respectively; a dividend yield of 0.0%, a volatility factor of the expected market price of the Company's common stock model with the following assumptions for those rights granted in 1999, 1998 and 1997: dividend yield of 0.0%; and expected life of 6 months; expected volatility factor of...

  • Page 44
    ... distributed as a dividend at the rate of one right for each share of common stock of the Company held by stockholders of record as of the close of business on April 28, 1997. The rights will expire on April 28, 2007 unless redeemed or exchanged. Under the Rights Agreement, each right will initially...

  • Page 45
    ...31, 1999 and 1998, respectively. In January 2000, the USIC resources and in assessing performance. The Company operates in one segment, flash memory products. The Company markets its products in the United States and in foreign countries through its sales personnel, dealers, distributors, retailers...

  • Page 46
    ... after-tax). All of the UMC shares received by the Company are subject to trading restrictions imposed by UMC and the Taiwan Stock Exchange. The trading restrictions will expire on one-half of the In 1999 and 1998, revenues from one customer represented approximately $28.0 million and $14.0 million...

  • Page 47
    ... that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SanDisk Corporation at December 31, 1999 and 1998 and the consolidated results of its...

  • Page 48
    ....6480 F: 81.6.6343.6481 8 Corporate Park, Suite 300 Irvine, CA 92606 T: 949.442.8370 F: 949.442.8371 Central Region USA 89 Queensway, Lippo Center Tower II, Suite 4104 Admiralty Hong Kong T: 852.2712.0501 F: 852.2712.9385 545 MetroPlace MetroPlace South, Suite 100 Dublin, OH 43017 T: 614.760.3700...

  • Page 49
    ... and Intellectual Property Frank Calderoni CFO, Senior Vice President, Finance and Administration Nelson Chan Senior Vice President, Marketing Dr. Eli Harari President and CEO Ralph Hudson Senior Vice President, Operations Jocelyn Scarborough Vice President, Human Resources 46 An n u al Rep...

  • Page 50
    © 2 0 0 0 SanDisk Corporation. All rights reserved. SanDisk and the SanDisk logo are registered trademarks, and CompactFlash and I mageM ate are trademarks of SanDisk Corporation. FlashPath is a trademark of SmartDisk. Other brands and products are trademarks of their respective holder(s). 4 /0 0

  • Page 51
    S a n D i sk Annual Report 1 9 9 9 SanDisk Corporat ion 1 4 0 Caspi an Court Sunnyval e, CA 9 4 0 8 9 -1 0 0 0 P: 4 0 8 . 5 4 2 . 0 5 0 0 F: 4 0 8 . 5 4 2 . 0 4 0 3 www. sandi sk. com