SanDisk 2002 Annual Report Download - page 47

4 5 2 0 0 2 Annua l Re port
On M arch 21, 2000, M itsubishi Denki Co. Ltd. (M itsubishi
Electric) filed a com plaint in Tokyo District Court against
SanDisk K.K., SanDisk’s w holly ow ned subsidiary in Japan.
The com plaint alleges that SanDisk K.K., based in Yokoham a,
Japan, infringes on three M itsubishi Japanese patents, w hich
are related prim arily to the m echanical construction of m em -
ory cards. In the complaint, M itsubishi asked the court for a
prelim inary injunction halting the sale of SanDisk
Com pactFlash and flash ATA m em ory cards in Japan.
M itsubishi dropped tw o of the patents from the suit. During
the second quarter, w e w on a favorable ruling, dism issing
the complaint on the third patent and thereby concluding the
M itsubishi law suit.
In Chile, Com paq Corporation is opposing our attem pt to
register Com pactFlash as a tradem ark. We do not believe
that our failure to obtain registration for the Com pactFlash
m ark in any country w ill m aterially harm our business.
SanDisk successfully obtained the United States trademark
registration for the m ark “ Com pactFlash.”
In the event of an adverse result in any such litigation, the
Com pany could be required to pay substantial dam ages,
cease the m anufacture, use and sale of infringing products,
expend significant resources to develop non-infringing tech-
nology or obtain licenses to the infringing technology, or dis-
continue the use of certain processes.
From tim e to time the Com pany agrees to indem nify cer-
tain of its suppliers and custom ers for alleged patent
infringem ent. The scope of such indem nity varies but m ay in
som e instances include indemnification for dam ages and
expenses, including attorneys’ fees. The Com pany m ay from
tim e to tim e be engaged in litigation as a result of such
indem nification obligations. Third party claim s for patent
infringem ent are excluded from coverage under the
Com pany’s insurance policies. There can be no assurance
that any future obligation to indem nify the Com pany’s cus-
tom ers or suppliers, w ill not have a m aterial adverse effect
on the Com pany’s business, financial condition and results
of operations.
Litigation frequently involves substantial expenditures and
can require significant m anagem ent attention, even if the
Com pany ultimately prevails. In addition, the results of any
litigation m atters are inherently uncertain. Accordingly, there
can be no assurance that any of the foregoing m atters, or
any future litigation, w ill not have a m aterial adverse effect
on the Com pany’s business, financial condition and results
of operations.
C o nting e nc ie s
In M arch 2002, FlashVision exercised its right of early term i-
nation under its lease facility w ith ABN AM RO and in April
2002 repaid all am ounts outstanding there under. FlashVision
secured a new equipm ent lease arrangem ent of approxi-
m ately 37.9 billion Japanese Yen (or approxim ately $305 mil-
lion based on the exchange rate in effect on the date the
agreem ent was executed) in M ay 2002 w ith Mizuho
Corporate Bank, Ltd., or M izuho, and certain other financial
institutions. Under the term s of the new lease, Toshiba is
required to provide a guarantee to the financial institutions on
behalf of FlashVision. Under the term s of an agreem ent w ith
Toshiba, the Com pany has agreed to indem nify Toshiba in
certain circum stances for certain liabilities Toshiba incurs as
a result of Toshiba’s guarantee of the FlashVision equipm ent
lease arrangem ent. If FlashVision fails to m eet its lease
comm itm ents, and Toshiba fulfills these comm itm ents under
the term s of Toshiba’s guarantee, then the Com pany w ill be
obligated to reim burse Toshiba for 49.9% of any claim s
under the lease, unless such claim s result from Toshiba’s
failure to m eet its obligations to FlashVision or its covenants
to the lenders. Because FlashVision’s new equipm ent lease
arrangem ent is denom inated in Japanese Yen, the m axi-
m um am ount of SanDisk’s contingent indem nification obliga-
tion on a given date w hen converted to U.S. Dollars w ill fluc-
tuate based on the exchange rate in effect on that date. As
of Decem ber 31, 2002, the m aximum am ount of SanDisk’s
contingent indem nification obligation, w hich reflects pay-
m ents and any lease adjustments, w as approxim ately
$142.4 million.
Note 4:
C o n v e r t ib le S u b o r d in a t e d N o t e s P a y a b le
On Decem ber 24, 2001, the Com pany com pleted a private
placem ent of $125.0 m illion of 4 1/2% Convertible
Subordinated Notes due 2006, or Notes, and on January 10,
2002 the initial purchasers com pleted the exercise of their
option to purchase an additional $25.0 m illion of Notes, for
w hich the Com pany received net proceeds of approxim ately
$145.9 million. Based on the aggregate principal am ount at
m aturity of $150.0 million, the Notes provide for sem i-annual
interest paym ents of $3.4 m illion each on M ay 15 and
November 15. The Notes are convertible into shares of our
comm on stock at any tim e prior to the close of business on
the m aturity date, unless previously redeemed or repur-
chased, at a conversion rate of 54.2535 shares per $1,000
principal am ount of the Notes, subject to adjustment in cer-
tain events. At anytim e on or after Novem ber 17, 2004, the
Com pany m ay redeem the notes in whole or in part at a
specified percentage of the principal am ount plus accrued
interest. The debt issuance costs are being am ortized over
the term of the Notes using the interest m ethod. In 2002,
the Com pany recorded $0.9 m illion amortization of debt
issuance costs as a com ponent on other incom e (loss) in
the Consolidated Statem ents of Operations.
In the event of bankruptcy, liquidation or reorganization or
upon acceleration of the notes due to an event of default
under the indenture and in certain other events, our assets
w ill be available for distribution to our current stockholders
only after all senior indebtedness, including our contingent
indem nification obligations to Toshiba and obligations under
the notes, have been paid in full. The notes are also effec-
tively subordinated to the liabilities of any of our subsidiaries
(including trade payables, w hich as of Decem ber 31, 2002
w ere $722,000).
Note 5:
S t o c k h o ld e r s ’ E q u it y
Stoc k B e ne fit Pla n
The 1989 Stock Benefit Plan, in effect through August 1995,
comprised tw o separate program s, the Stock Issuance
Program and the Option Grant Program . The Stock