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2002 Annual Report
he a r it. se e it. shoot it. sto re it.

Table of contents

  • Page 1
    2 0 0 2 Annual Re p o rt h e a r it. s e e it. s h o o t it. s to r e it.

  • Page 2
    ...la r g e s t s u p p lie r o f f la s h d a ...il o u t le t s . O u r p r o d u c t s a r e in c o r p o r a t e d in t o t h e la t e s t g e n e r a t io n o f d ig it a l c o n s u m e r e le c t r o n ic s , w ir e le s s a n d m o b ile c o m p u t in g d e v ic... e a w o r ld w id e le a d e r in ...

  • Page 3
    ...Annual Re p o rt 1 A L e t t e r f r o m t h e P r e s id e n t In 2 0 0 2 , w e s a w c o n s id...in Ta ...ic a n , Eu...il p r o d u c t lin e e n a b le s d ig it a l c a m e r a u s e r s t o c a p t u r e a n d s t o r e t h e ir s p e c ia l m e m o r ie s a n d s h a r e t h e ir fa v o r it e p ic...

  • Page 4
    2 SanDisk Co rp o ratio n W e c o n ...ir d ig it a l d a t a , m u s ic , p h o t o s a n d v id...ir e le s s c o m m u n ic a t io n s t e c h n o lo g y e n a b lin g u s e r s t o q u ic k ly t r a n s m it , r e c e iv e a n d s t o r e e m a il, d a t a , im a g e s a n d m u s ic fr o m t h e ir...

  • Page 5
    2 0 0 2 Annual Re p o rt 3 p r o d u c t io n o u t p u t . W e a ls o e x t e n d e ... r o w t h o f r e t a il s a le s fr o m n e w g e o g r a p h ic m a r k e t s a n d n ...ir e le s s c a r d s , w h ic h w e e x p e c t t o s h ip s t a r t in g in t h e fir s t h a lf o f 2 0 0 3 . W e b e lie...

  • Page 6
    4 SanDisk Co rp o ratio n Th e m a r k e t s in w h ic h w e h a v e a s t r o n g p r e s e n c e a r e s t ill r e la t iv e ly y o u n g a n d ... ic , m o v e m o r e p ic t u r e s a n d v id e o s , a n d s h a r e m o r e file s . P e o p le w h o w a n t in s t a n t a c c e s s t o t h e ir ...

  • Page 7
    ... s, e xc e p t p e r share d ata) Ye ar End e d De c e m b e r 3 1, Re ve nue s Pro d uc t Lic e nse and ro yalty To tal re ve nue s Co st o f re ve nue s Gro ss p ro fits (lo sse s) Op e rating inc o m e (lo ss) N e t inc o m e (lo ss) N e t inc o m e (lo ss) p e r share B asic Dilute d Share s use...

  • Page 8
    ... e r ly D a t a (Unaud ite d . In tho usand s, e xc e p t p e r share d ata) Quarte rs e nd e d 2002 M arc h 3 1 June 3 0 Se p te m b e r 3 0 De c e m b e r 3 1 Re ve nue s Pro d uc t Lic e nse and ro yalty To tal re ve nue s Gro ss p ro fits Op e rating inc o m e (lo ss) N e t inc o m e (lo ss...

  • Page 9
    ... p rivate lab e l p artne rs, OEM s and re taile rs. In 2 0 0 2 , 2 0 0 1 and 2 0 0 0 , re tail sale s ac c o unte d fo r 6 4 % , 5 4 % and 2 8 % o f to tal p ro d uc t re ve nue s, re sp e c tive ly. W e e xp e c t that sale s thro ug h the re tail c hanne l w ill c o m p rise an inc re asing share...

  • Page 10
    ... ram p ing up N AN D w afe r p ro d uc tio n at FlashVisio n. During the start- up p hase , the fab ric atio n e q uip m e nt and o p e rating e xp e nse s are ap p lie d to a re lative ly sm all o utp ut o f p ro d uc tio n w afe rs, m aking this o utp ut ve ry e xp e nsive . In the ne xt tw o to...

  • Page 11
    ... n in 2 0 0 3 . Suc h inc re ase s in fab ric atio n c ap ac ity are e xp e c te d to c ause us to p e rio d ic ally e xp e rie nc e startup c o sts o f a m ate rial nature . To re m ain c o m p e titive , w e are fo c using o n a num b e r o f p ro g ram s to lo w e r m anufac turing c o sts, inc...

  • Page 12
    ...the w o rld w id e e c o no m y, ind ustry- w id e e xc e ss sup p ly o f flash m e m o ry, and re d uc e d d e m and fro m OEM c usto m e rs w ho w e re liq uid ating e xisting inve nto rie s thro ug ho ut m o st o f 2 0 0 1. All o f the se fac to rs re d uc e d the d e m and fo r o ur p ro d uc ts...

  • Page 13
    ...p o rt the d e ve lo p m e nt o f ne w g e ne ratio ns o f N AN D flash d ata sto rag e p ro d uc ts. W e e xp e c t o ur re se arc h and d e ve lo p m e nt e xp e nse s to c o ntinue to inc re ase in ab so lute d o llars in future p e rio d s to sup p o rt the d e ve lo p m e nt and intro d uc tio...

  • Page 14
    ...r 3 1, 2 0 0 2 , the m arke t value o f the availab le - fo r- sale p o rtio n o f o ur UM C inve stm e nt had d e c line d $ 6 .6 m illio n, b e fo re tax, b e lo w its ad juste d c o st o f $ 112 .0 m illio n, and this unre alize d lo ss o f ap p ro xim ate ly $ 6 .6 m illio n is inc lud e d in ac...

  • Page 15
    ... inve st in o r ac q uire o the r c o m p anie s' p ro d uc t line s o r asse ts. Our o p e rating e xp e nse s m ay inc re ase as a re sult o f the ne e d to hire ad d itio nal p e rso nne l to sup p o rt o ur sale s and m arke ting e ffo rts and re se arc h and d e ve lo p m e nt ac tivitie s, inc...

  • Page 16
    ...r 3 1, 2 0 0 2 , the m arke t value o f the availab le - fo r- sale p o rtio n o f o ur UM C inve stm e nt had d e c line d $ 6 .6 m illio n, b e fo re tax, b e lo w its ad juste d c o st o f $ 112 .0 m illio n, and this unre alize d lo ss o f ap p ro xim ate ly $ 6 .6 m illio n is inc lud e d in ac...

  • Page 17
    ...o r suc c e ssfully c o m p le te the d e ve lo p m e nt and transfe r o f ad vanc e d CM OS p ro c e ss te c hno lo g ie s, ram p - up o f p ro d uc tio n, and se c ure fo und ry c usto m e rs suffic ie nt to d e fray its fixe d o p e rating c o sts, the value o f o ur inve stm e nt in To w e r and...

  • Page 18
    ... the ir o p tio n to p urc hase an ad d itio nal $ 2 5 .0 m illio n o f the N o te s. (2 ) FlashVisio n b ind ing thre e - m o nth p urc hase c o m m itm e nts fo r flash m e m o ry w afe rs are d e no m inate d in Jap ane se Ye n, and are sub je c t to fluc tuatio n in e xc hang e rate s p rio r to...

  • Page 19
    ... lo sure in b o th the inte rim and annual financ ial state m e nts ab o ut the m e tho d o f ac c o unting fo r sto c k- b ase d e m p lo ye e c o m p e nsatio n and it's e ffe c t o n re p o rte d ne t inc o m e and e arning s p e r share . The re c o g nitio n p ro visio ns o f SFAS 14 8 are ap...

  • Page 20
    ... to Jap ane se Ye n e xc hang e rate ; • c hang e s in g e ne ral e c o no m ic c o nd itio ns, p artic ularly in Jap an and the Euro p e an Unio n; and • re d uc e d sale s to o ur re tail c usto m e rs if c o nsum e r c o nfid e nc e w o rse ns d ue to d e c lining e c o no m ic c o nd itio ns...

  • Page 21
    ... t share to c o m p e tito rs w ho ag g re ssive ly lo w e r the ir p ric e s. Co nve rse ly, und e r c o nd itio ns o f tig ht flash m e m o ry sup p ly, w e m ay b e unab le to inc re ase o ur p ro d uc tio n vo lum e s at a suffic ie ntly rap id rate so as to m aintain o ur m arke t share . Ultim...

  • Page 22
    ...o p e rating ac tivitie s e ve n if w e d o no t utilize o ur full share o f the ne w Yo kkaic hi o utp ut. Eac h tim e that w e and To shib a ad d sub stantial ne w w afe r fab ric atio n c ap ac ity, w e w ill e xp e rie nc e startup c o sts as a re sult o f the o ne to tw o q uarte rs o f d e lay...

  • Page 23
    ...ility d ue to natural d isaste r, p o w e r failure , lab o r unre st o r o the r c ause s c o uld sig nific antly harm o ur b usine ss, financ ial c o nd itio n and re sults o f o p e ratio ns. M o re o ve r, w e have no e xp e rie nc e in o p e rating a w afe r m anufac turing line and w e inte nd...

  • Page 24
    ...am o unts ad d e d to the p re - p aid w afe r ac c o unt m ay o nly b e ap p lie d to w ard s a m axim um o f 7.5 % o f o ur w afe r p urc hase s. W e p e rio d ic ally asse ss the value o f o ur p re p aid w afe r c re d its c o nsid e ring the tim ing and q uantity o f o ur p lanne d annual w afe...

  • Page 25
    ...to r sup p lie rs, o r the ir failure to p e rfo rm at the le ve l w e e xp e c t c o uld le ad to p ro d uc t sho rtag e s o r q uality assuranc e p ro b le m s, w hic h c o uld inc re ase the m anufac turing c o sts o f o ur p ro d uc ts and have ad ve rse e ffe c ts o n o ur o p e rating re sults...

  • Page 26
    ... ry Stic k Pro ac hie ve w id e sp re ad use , sale s o f o ur M ultiM e d iaCard , SD c ard , Sm artM e d ia c ard and CF c ard p ro d uc ts m ay d e c line . Our M ultiM e d iaCard p ro d uc ts also have fac e d sig nific ant c o m p e titio n fro m To shib a's Sm artM e d ia flash c ard s. W e fa...

  • Page 27
    ... ic ro e le c tro nic s, have state d the ir inte ntio n to c o m p e te w ith N AN D flash m e m o ry w ith the ir o w n flash p ro d uc ts. If any o f the se c o m p e tito rs is suc c e ssful, this ne w c o m p e titio n c o uld ad ve rse ly im p ac t o ur future sale s. Furthe rm o re , w e e xp...

  • Page 28
    ...the fo llo w ing ye ar. In ad d itio n, in the p ast w e have e xp e rie nc e d a d e c re ase in o rd e rs in the first q uarte r fro m o ur Jap ane se OEM c usto m e rs p rim arily b e c ause m o st c usto m e rs in Jap an o p e rate o n a fisc al ye ar e nd ing in M arc h and p re fe r to d e lay...

  • Page 29
    ...re e d to d ism iss all c laim s b e tw e e n SanDisk and the PQI c o m p anie s in b o th law suits d e sc rib e d ab o ve w itho ut p re jud ic e . The Co nse nt Jud g m e nt o f Infring e m e nt and Valid ity and Injunc tio n is sub je c t to c o urt ap p ro val, w hic h is c urre ntly p e nd ing...

  • Page 30
    ... re ase o ur sale s thro ug h the re tail d istrib utio n c hanne l, and g e ne ral b usine ss c o nd itio ns d e te rio rate ; • ad ve rse tax rule s and re g ulatio ns; • w e ak p ro te c tio n o f o ur inte lle c tual p ro p e rty rig hts; and • d e lays in p ro d uc t ship m e nts d ue to...

  • Page 31
    ... ing ac q uire d . In ad d itio n, o ur c e rtific ate o f inc o rp o ratio n g rants the b o ard o f d ire c to rs the autho rity to fix the rig hts, p re fe re nc e s and p rivile g e s o f and issue up to 4 ,0 0 0 ,0 0 0 share s o f p re fe rre d sto c k w itho ut sto c kho ld e r ac tio n. Altho...

  • Page 32
    .... Fro m tim e to tim e , w e m ay d e c id e to raise ad d itio nal fund s thro ug h p ub lic o r p rivate d e b t o r e q uity financ ing s to fund o ur ac tivitie s. If w e issue ad d itio nal e q uity se c uritie s, o ur sto c kho ld e rs w ill e xp e rie nc e ad d itio nal d ilutio n and the ne...

  • Page 33
    ...d g ing p ro g ram . Our he d g ing p ro g ram re d uc e s, b ut d o e s no t alw ays e ntire ly e lim inate the im p ac t o f fo re ig n c urre nc y e xc hang e rate m o ve m e nts. An ad ve rse c hang e o f 10 % in e xc hang e rate s w o uld re sult in a d e c line in inc o m e b e fo re taxe s in...

  • Page 34
    ... Ac c rue d p ayro ll and re late d e xp e nse s Inc o m e taxe s p ayab le De fe rre d tax liab ility Re se arc h & d e ve lo p m e nt liab ility, re late d p arty Othe r ac c rue d liab ilitie s De fe rre d inc o m e o n ship m e nts to d istrib uto rs and re taile rs and d e fe rre d re ve nue To...

  • Page 35
    ... s, e xc e p t p e r share am o unts) De c e m b e r 3 1, Re ve nue s Pro d uc t Lic e nse and ro yalty To tal re ve nue Co st o f p ro d uc t re ve nue s Gro ss p ro fits (lo sse s) Op e rating e xp e nse s Re se arc h and d e ve lo p m e nt Sale s and m arke ting Ge ne ral and ad m inistrative...

  • Page 36
    ...y Ac c um ulate d Cap ital In Co m m o n Sto c k Exc e ss o f Par Value Re taine d Earning s Othe r Co m p re he nsive Inc o m e (Lo ss) To tal Sto c kho ld e rs' Eq uity (In tho usand s) B alanc e at De c e m b e r 3 1, 19 9 9 N e t inc o m e Unre alize d lo ss o n availab le fo r sale se c uritie...

  • Page 37
    ... De fe rre d inc o m e o n ship m e nts to d istrib uto rs and re taile rs and d e fe rre d re ve nue Othe r no n- c urre nt liab ilitie s, re late d p arty Othe r no n- c urre nt liab ilitie s To tal ad justm e nts N e t c ash p ro vid e d b y (use d in) o p e rating ac tivitie s C a s h flo w s fr...

  • Page 38
    ...o f O p e r a t io n s SanDisk Co rp o ratio n (the Co m p any) w as inc o rp o rate d in De law are o n June 1, 19 8 8 , to d e sig n, m anufac ture , and m arke t ind ustry- stand ard , so lid - state m ass sto rag e p ro d uc ts using p ro p rie tary, hig h- d e nsity flash m e m o ry te c hno lo...

  • Page 39
    ... e , ne t o f re late d c o sts, fro m sale s to d istrib uto rs and re taile rs w as $ 3 4 .8 m illio n and $ 6 .2 m illio n, re sp e c tive ly. Estim ate d p ro d uc t re turns w e re no t m ate rial fo r any p e rio d p re se nte d in the c o nso lid ate d financ ial state m e nts. The Co m p any...

  • Page 40
    ... m illio n w e re re c o g nize d . If the fair value o f the To w e r and UM C inve stm e nts d e c line furthe r, it m ay b e ne c e ssary to re c o rd ad d itio nal lo sse s. (Se e N o te 8 .) D e fe r r e d Ta x A s s e t s . B ase d o n the w e ig ht o f availab le e vid e nc e , the Co m p any...

  • Page 41
    ... taile rs, and OEM c usto m e rs. N o c o llate ral is re q uire d . Pro visio ns are p ro vid e d fo r sale s re turns, p ro d uc t e xc hang e s and b ad d e b ts. The ac tivity in the allo w anc e fo r d o ub tful ac c o unts is as fo llo w s (in tho usand s): B alanc e at B e g inning o f Pe rio...

  • Page 42
    ...e r S h a r e The fo llo w ing tab le se ts fo rth the c o m p utatio n o f b asic and d ilute d ne t inc o m e p e r share (in tho usand s, e xc e p t p e r share am o unts): 2002 N um e rato r: N um e rato r fo r b asic and d ilute d ne t inc o m e (lo ss) p e r share -ne t inc o m e (lo ss) De no...

  • Page 43
    ... hic h the e q uity inve sto rs d o no t have a c o ntro lling inte re st o r the e q uity inve stm e nt at risk is insuffic ie nt to financ e the e ntity's ac tivitie s w itho ut re c e iving ad d itio nal sub o rd inate d financ ial sup p o rt fro m the o the r p artie s. SanDisk is c urre ntly re...

  • Page 44
    ...b lig atio ns are to b e p aid in installm e nts using a p e rc e ntag e o f the Co m p any's re ve nue fro m N AN D flash p ro d uc ts b uilt w ith flash m e m o ry sup p lie d b y To shib a o r FlashVisio n. The Dire c t re se arc h and d e ve lo p m e nt is a fixe d am o unt. The variab le p e rc...

  • Page 45
    ... ity to he lp o ffse t its fixe d c o sts, suc h failure c o uld je o p ard ize the c o m p le tio n o f Fab 2 and To w e r's ab ility to c o ntinue o p e ratio ns. The Co m p any le ase s its he ad q uarte rs and sale s o ffic e s und e r o p e rating le ase s that e xp ire at vario us d ate s thro...

  • Page 46
    ...re e d to d ism iss all c laim s b e tw e e n SanDisk and the PQI c o m p anie s in b o th law suits d e sc rib e d ab o ve w itho ut p re jud ic e . The Co nse nt Jud g m e nt o f Infring e m e nt and Valid ity and Injunc tio n is sub je c t to c o urt ap p ro val, w hic h is c urre ntly p e nd ing...

  • Page 47
    ... M itsub ishi aske d the c o urt fo r a p re lim inary injunc tio n halting the sale o f SanDisk Co m p ac tFlash and flash ATA m e m o ry c ard s in Jap an. M itsub ishi d ro p p e d tw o o f the p ate nts fro m the suit. During the se c o nd q uarte r, w e w o n a favo rab le ruling , d ism issing...

  • Page 48
    ... h annual inc re ase e xc e e d 4 ,0 0 0 ,0 0 0 share s. The auto m atic share inc re ase fo r 2 0 0 2 w as 2 ,9 8 5 ,0 4 0 share s. 19 9 5 N o n - E m p lo ye e D ir e c t o r s S t o c k O p t io n P la n In Aug ust 19 9 5 , the Co m p any ad o p te d the 19 9 5 N o nEm p lo ye e Dire c to rs Sto...

  • Page 49
    ...o m e . SanDisk w as ab le to re d uc e its alte rnative m inim um tax fo r 2 0 0 1 b y ap p ro xim ate ly $ 2 .7 m illio n, w hic h re d uc e d the Co m p any's tax rate in the c urre nt ye ar. De fe rre d inc o m e taxe s re fle c t the ne t tax e ffe c ts o f te m p o rary d iffe re nc e s b e tw...

  • Page 50
    ... has fe d e ral alte rnative m inim um tax c re d it and state re se arc h and d e ve lo p m e nt tax c re d it, w hic h d o no t e xp ire . Utilizatio n o f the ne t o p e rating lo ss c arry- fo rw ard s and c re d its m ay b e sub je c t to a sub stantial annual lim itatio n d ue to the o w ne...

  • Page 51
    ... o unts ad d e d to the p re - p aid w afe r ac c o unt m ay o nly b e ap p lie d to w ard s a m axim um o f 7.5 % o f w afe r p urc hase s. The Co m p any p e rio d ic ally asse sse s the value o f its p re p aid w afe r c re d its c o nsid e ring the tim ing and q uantity o f its p lanne d annual...

  • Page 52
    ... c um ulative e ffe c t o f ad o p ting SFAS 13 3 as o f January 1, 2 0 0 1 w as no t m ate rial to the Co m p any's c o nso lid ate d financ ial state m e nts. The Co m p any is e xp o se d to fo re ig n c urre nc y e xc hang e rate risk inhe re nt in fo re c aste d sale s, c o st o f sale s, and...

  • Page 53
    ... r s The Co m p any o p e rate s in o ne se g m e nt, flash m e m o ry p ro d uc ts. The Co m p any m arke ts and se lls its p ro d uc ts in the Unite d State s and in fo re ig n c o untrie s thro ug h its sale s p e rso nne l, d e ale rs, d istrib uto rs, re taile rs and its sub sid iarie s. The Co...

  • Page 54
    ... fro m To shib a. In 2 0 0 1, the Co m p any p urc hase d N AN D flash m e m o ry w afe rs and c ard p ro d uc ts fro m FlashVisio n and To shib a and m ad e p aym e nts fo r share d re se arc h and d e ve lo p m e nt e xp e nse s to taling ap p ro xim ate ly $ 12 4 .7 m illio n in 2 0 0 2 and $ 13...

  • Page 55
    ... f Op e rating Offic e r M ic h a e l G r a y Se nio r Vic e Pre sid e nt, Financ e and Ad m inistratio n and Chie f Financ ial Offic e r N e ls o n C h a n Se nio r Vic e Pre sid e nt and Ge ne ral M anag e r, Re tail B usine ss Unit Yo r a m C e d a r Se nio r Vic e Pre sid e nt, Eng ine e ring...

  • Page 56
    S a n D is k C o r p o r a t io n 14 0 Casp ian Co urt Sunnyvale , Califo rnia 9 4 0 8 9 - 10 0 0 USA T: 4 0 8 .5 4 2 .0 5 0 0 F: 4 0 8 .5 4 2 .0 5 0 3 w w w .sand isk.c o m s h o w it. m o ve it. s h a r e it. p la y it.