SanDisk 2002 Annual Report Download - page 31

2 9 2 0 0 2 Annua l Re port
pre ve nt o r delay a c hang e in c ontrol and , as a res ult,
neg ative ly im p a c t our sto c kho lde rs.
We have taken a number of actions that could have the
effect of discouraging a takeover attem pt. For example, w e
have adopted a stockholder rights plan that w ould cause
substantial dilution to a stockholder, and substantially
increase the cost paid by a stockholder, w ho attem pts to
acquire us on term s not approved by our board of directors.
This could prevent us from being acquired. In addition, our
certificate of incorporation grants the board of directors the
authority to fix the rights, preferences and privileges of and
issue up to 4,000,000 shares of preferred stock w ithout
stockholder action. Although w e have no present intention to
issue shares of preferred stock, such an issuance could have
the effect of m aking it m ore difficult and less attractive for a
third party to acquire a m ajority of our outstanding voting
stock. Preferred stock m ay also have other rights, including
econom ic rights senior to our com mon stock that could have
a m aterial adverse effect on the m arket value of our com -
m on stock. In addition, w e are subject to the anti-takeover
provisions of Section 203 of the Delaw are General
Corporation Law. This section provides that except in certain
lim ited circum stances a corporation shall not engage in any
business com bination w ith any interested stockholder during
the three-year period following the tim e that such stock-
holder becom es an interested stockholder. This provision
could have the effect of delaying or preventing a change of
control of SanDisk.
Our stoc k p ric e has b e e n, a nd m ay c o ntinue to b e ,
volatile, w hic h c o uld re sult in investo rs los ing all o r part
of their inves tm e nts.
The m arket price of our stock has fluctuated significantly
in the past and is likely to continue to fluctuate in the future.
For exam ple, in the 12 m onths ending Decem ber 31, 2002,
our stock price fluctuated significantly from a low of $9.60 to
a high of $29.20. We believe that such fluctuations w ill con-
tinue as a result of future announcem ents concerning us, our
competitors or principal custom ers regarding technological
innovations, new product introductions, governmental regula-
tions, litigation or changes in earnings estim ates by analysts.
In addition, in recent years the stock m arket has experienced
significant price and volum e fluctuations and the m arket
prices of the securities of high technology and semiconduc-
tor com panies have been especially volatile, often for rea-
sons outside the control of the particular com panies. These
fluctuations as w ell as general econom ic, political and m arket
conditions m ay have an adverse affect on the m arket price
of our com m on stock. Furtherm ore, the m arket price for the
notes m ay be adversely affected by declines in the m arket
price of our com m on stock or deterioration of our financial
perform ance, declines in the overall m arket for sim ilar securi-
ties and the actual or perceived perform ance or prospects
for com panies in our industry.
The ratings ass ig ned to us a nd o ur no te s m a y fluc tu-
ate , w hic h c ould harm the m arket p rice o f the no te s and
our c o m m o n sto c k.
We and our notes have been rated by Standard & Poor’s
Ratings Services, and m ay be rated by other rating agencies
in the future. Standard & Poor’s Ratings Services assigned its
“B” corporate credit rating to us and its “CCC+” subordinated
debt rating to our notes. If our current ratings are low ered or
if other rating agencies assign us or the notes ratings low er
than expected by investors, the m arket price of the notes
and our com m on stock w ould be significantly harm ed.
Risk s Re la te d to O ur Inde bte d ne ss
W e have inc re as ed o ur ind e bted ne ss thro ug h o ur c o n-
vertible s ubo rd inated no te s o ffe ring , w hic h m ay re stric t
our c a sh flo w , m ake it d iffic ult fo r us to o b tain future
financ ing , d ivert o ur res o urc e s fro m o ther use s, lim it our
ab ility to re ac t to c hang es in the industry, and p lac e us
at a c om pe titive d isad vantag e.
As a result of the sale and issuance of our 4 1/2% con-
vertible subordinated notes in Decem ber 2001 and January
2002, w e incurred $150.0 m illion aggregate principal am ount
of additional indebtedness, substantially increasing our ratio
of debt to total capitalization. While the notes are outstand-
ing, w e w ill have debt service obligations on the notes of
approxim ately $6.8 m illion per year in interest paym ents. If
w e are unable to generate sufficient cash to m eet these obli-
gations and must instead use our existing cash or invest-
m ents, w e m ay have to reduce, curtail or term inate other
activities of our business.
We intend to fulfill our debt service obligations from cash
generated by our operations, if any, and from our existing
cash and investm ents. If necessary, am ong other alterna-
tives, w e m ay add lease lines of credit to finance capital
expenditures and obtain other long-term debt and lines of
credit. We m ay incur substantial additional indebtedness in
the future. The level of our indebtedness, am ong other
things, could:
• require the dedication of a substantial portion of any
cash flow from our operations to service our indebted-
ness, thereby reducing the am ount of cash flow available
for other purposes, including w orking capital, capital
expenditures and general corporate purposes;
• m ake it difficult for us to obtain any necessary future
financing for w orking capital, capital expenditures, debt
service requirem ents or other purposes;
• cause us to use a significant portion of our cash and
cash equivalents or possibly liquidate other assets to
repay the total principal am ount due under the notes and
our other indebtedness if w e w ere to default under the
notes or our other indebtedness;
• lim it our flexibility in planning for, or reacting to changes
in, our business and the industries in w hich w e com-
plete;
• place us at a possible com petitive disadvantage w ith
respect to less leveraged com petitors and competitors
that have better access to capital resources; and
• m ake us m ore vulnerable in the event of a further down-
turn in our business.
There can be no assurance that we w ill be able to m eet
our debt service obligations, including our obligations under
the notes.
In 2000, w e entered into a joint venture agreem ent w ith
Toshiba, under w hich w e form ed FlashVision. In M ay 2002,
FlashVision secured a new equipm ent lease arrangem ent of
approxim ately 37.9 billion Japanese Yen (or approxim ately
$305 m illion based on the exchange rate in effect on the
date the agreem ent w as executed) w ith M izuho Corporate
Bank, Ltd., or M izuho, and certain other financial institutions.
Under the term s of the new lease, Toshiba is required to pro-
vide a guarantee to these financial institutions on behalf of