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FORM 10−K
SANDISK CORP − SNDK
Filed: March 18, 2005 (period: January 02, 2005)
Annual report which provides a comprehensive overview of the company for the past year

Table of contents

  • Page 1
    FORM 10âˆ'K SANDISK CORP âˆ' SNDK Filed: March 18, 2005 (period: January 02, 2005) Annual report which provides a comprehensive overview of the company for the past year

  • Page 2
    ... ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ITEM 9A. CONTROLS AND PROCEDURES ITEM 9B. OTHER INFORMATION PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED...

  • Page 3
    EXâˆ'21.1 (Subsidiaries of the registrant) EXâˆ'23.1 (Consents of experts and counsel) EXâˆ'31.1 EXâˆ'31.2 EXâˆ'32.1 EXâˆ'32.2

  • Page 4
    ...o The aggregate market value of common equity held by nonâˆ'affiliates, as of June 25, 2004, was approximately $2,865,000,000. Shares of common stock held by each executive officer, director and each person known to us to be the holder of 5% or more of the outstanding common stock were excluded from...

  • Page 5
    ... Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain...

  • Page 6
    ... phones and other digital consumer devices. Our products include flash cards, Universal Serial Bus, or USB, flash drives and digital audio players. Our Strategy. Our strategy is to identify current and emerging mass consumer markets for flash storage card products and to manufacture in high volumes...

  • Page 7
    ...key participants in the markets for feature phones, such as camera phones and MP3 phones, as well as other digital consumer devices. We are founders or coâˆ'founders of most major form factors of flash storage cards in the market today. We coâˆ'own the Memory Stick PROtm format with Sony Corporation...

  • Page 8
    ...and removable data storage and is characterized by fast write speeds, high capacity and lower manufacturing cost than NOR flash memory. Our Primary Markets. We currently focus primarily on four digital consumer markets: digital cameras and other consumer devices, feature phones, USB flash drives and...

  • Page 9
    ... sell products to OEM customers on a private label basis. Our sales efforts are organized as follows: • Retail. We ship SanDisk brand name products directly to consumer electronics stores, office superstores, photo retailers, mobile phone stores, mass merchants, catalog and mail order companies...

  • Page 10
    ... and Memory Stick PRO cards specifically designed for use in highâˆ'performance digital cameras and feature phones. This product line is targeted at advanced photographers who require highâˆ'speed cards to quickly shoot many high resolution images. Our Ultra II cards feature minimum sustained write...

  • Page 11
    ... is an ultraâˆ'small removable flash memory storage format. TransFlash is designed for new mobile phones that are compact yet fullyâˆ'featured with storageâˆ'intensive multimedia applications such as digital cameras, video capture and playback, digital audio players, video games, personal organizers...

  • Page 12
    ... interfaces used in standard operating systems for personal computers, feature phones and smart phones, PDAs and other consumer and industrial products. Our patented intelligent controller with its advanced defect management system permits our flash storage card products to achieve a high level of...

  • Page 13
    ... and card test is performed at SPIL, United Test Center, ASE Group and DataFab Systems, Inc. in Taiwan, and StatsChipPAC and Flextronics International, Ltd., or Flextronics, in China. We believe our use of subcontractors reduces the cost of our operations and gives us access to increased production...

  • Page 14
    ... customary events of default for a Japanese lease facility and is an exhibit to this report. That agreement should be read carefully in its entirety for a comprehensive understanding of its terms and the nature of the obligations we guaranteed. • Operations. Flash Partners' current production ramp...

  • Page 15
    ... to use their flash memory for traditional NAND applications, both embedded and in data storage cards. Card and USB Flash Drive Competitors. We compete with manufacturers and resellers of flash memory cards and USB flash drives. These companies purchase (or have captive supply of) flash memory...

  • Page 16
    ... field of nonâˆ'volatile memories and storage systems. Dr. Harari is a board member of Tower. Sanjay Mehrotra coâˆ'founded SanDisk in 1988 and has served as our Vice President of Engineering, Vice President of Product Development, Director of Memory Design, and Product Engineering. Mr. Mehrotra is...

  • Page 17
    ... Corporation, Ritek Corporation, and Power Quotient International Co., Ltd. In the suit, captioned SanDisk Corp. v. Memorex Products, Inc., et al., Civil Case No. CV 01âˆ'4063 VRW, we seek damages and injunctions against these companies from making, selling, importing or using flash memory cards...

  • Page 18
    ... Circuit. On February 20, 2004, we and a number of other manufacturers of flash memory products were sued in the Superior Court of the State of California for the City and County of San Francisco in a purported consumer class action captioned Willem Vroegh et al. v. Dane Electric Corp. USA, et al...

  • Page 19
    ... cash dividends on our common stock and do not expect to pay cash dividends on our common stock in the foreseeable future. Unregistered Sales of Equity Securities On December 2, 2004, we issued approximately 212,000 shares of our common stock in connection with the acquisition of a private company...

  • Page 20
    ... SANDISK CORPORATION SELECTED FINANCIAL DATA Years Ended January 2, 2005(1) December 28, 2003(2) December 29, 2002(3) December 30, 2001(4) December 31, 2000(5) (In thousands, except per share data) Revenues Product License and royalty Total revenues Cost of revenues Gross profit (loss) Operating...

  • Page 21
    Table of Contents SANDISK CORPORATION SUPPLEMENTARY QUARTERLY DATA Quarters Ended March 28, 2004 June 27, 2004 September 26, 2004 January 2, 2005 (Unaudited. In thousands, except per share data) 2004 Revenues Product License and royalty Total revenues Gross profit Operating income Net income(1) ...

  • Page 22
    ... the market for flash data storage cards, we must reduce our cost per megabyte at a rate similar to the change in selling price per megabyte to the consumer. Our operating results are affected by a number of factors including, among others, the unit volume of product sales, the flash memory density...

  • Page 23
    ... our customers in which we agree to protect their inventory balances against changes in our suggested retail price. Our retail business is seasonal, with the fourth quarter being the strongest due to holiday sales in North America. Memory Market Dynamics. Semiconductor memory markets have generally...

  • Page 24
    ... price protection, promotions, coâˆ'op advertising, and other volumeâˆ'based incentives and expected returns. Additionally, we have incentive programs that require us to estimate, based on historical experience, the number of customers who will actually redeem the incentive. Marketing development...

  • Page 25
    .... Transaction gains and losses arising from selling products and other activities other than the applicable functional currency are calculated using average exchange rates for the applicable period and reported as a nonâˆ'operating item in each period. Balance sheet items denominated in a currency...

  • Page 26
    ... to growth in the markets for digital still cameras, USB flash drives, feature phones and, most recently, flashâˆ'based digital audio players. In addition, our fiscal 2004 consisted of 53 weeks as compared to 52 weeks in the prior year. We expect our average selling price per megabyte to continue...

  • Page 27
    ... unit volumes and higher average card capacities within the digital still camera market. In addition, we entered the market for USB flash drives which contributed to our 2003 revenue growth. Our megabytes sold increased 237% in 2003 compared to 2002, while our averageâˆ'selling price per megabyte...

  • Page 28
    ... spending was attributable primarily to development and support of an increasing number of card formats and product lines. Our headcount grew to 272 at the end of 2003 from 198 at the end of 2002. Sales and Marketing. Our 2003 sales and marketing expenses were $66.3 million or 6.1% of revenues...

  • Page 29
    ... The common R&D participation agreement and the product development agreement are exhibits to this report and should be read carefully in their entirety for a more complete understanding of these arrangements. We guaranteed on an unsecured and several basis 50% of Flash Partners' lease obligation to...

  • Page 30
    ... will be determined by reference to inputs to our option pricing model at the time of future share based compensation awards. Adoption of SFAS 123R is expected to increase our operating expenses. The FASB adopted Statement of Financial Accounting Standards No. 151, Inventory Costs, an Amendment to...

  • Page 31
    ... our distributors and retail customers; • continued development of new markets and products for NAND flash memory; • timing and volume of wafer production from our Flash Partners venture and costs associated with the Flash Partners' facility; • increased purchases of flash memory products from...

  • Page 32
    ... to the end user, in the case of sales to retailers, or to distributor customers, in the case of sales to distributors. If our distributors and retailers are not successful in this market, there could be substantial product returns or price protection claims, which would harm our business, financial...

  • Page 33
    ...key customers. Lexar introduced a line of flash cards bearing the Kodak brand name, which creates significant competition for our flash memory cards. In addition, other companies, such as Matrix Semiconductor, have announced products or technologies that may compete with our Shoot and Store products...

  • Page 34
    ...on a number of factors, including: • price, quality, and onâˆ'time delivery to our customers; • product performance, availability and differentiation; • success in developing new applications and new market segments; • adequate manufacturing capacity; • efficiency of production; • timing...

  • Page 35
    ... greater memory capacity per chip. The transition to new generations of products is highly complex and requires new controllers, new test procedures and modifications of numerous aspects of manufacturing, as well as extensive qualification of the new products by both us and our OEM customers. Any...

  • Page 36
    ...tight flash memory supply, we may be unable to adequately increase our production volumes or secure sufficient supply in order to maintain our market share. If we are unable to maintain market share, our results of operations and financial condition could be harmed. Our ability to respond to changes...

  • Page 37
    ... of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers. Any of these events could increase volatility in the U.S. and world financial markets, which could harm our stock price and may limit the...

  • Page 38
    ... their intentions to enter the flash memory market, and we believe these companies may require a license from us. Enforcement of our rights may require litigation. If we bring a patent infringement action and are not successful, our competitors would be able to use similar technology to compete with...

  • Page 39
    ... suppliers may have a material adverse effect on our business, financial condition and results of operations. For additional information concerning legal proceedings, see Item 3 "Legal Proceedings." Because of our international business and operations, we must comply with numerous international laws...

  • Page 40
    ...to source our controllers from another supplier and our business, financial condition and results of operations may be adversely effected. Specifically, our ability to supply a number of products would be disrupted until we were able to transition manufacturing and qualify a new foundry with respect...

  • Page 41
    ... of our senior management and other key research and development, sales, marketing and operations personnel, including Dr. Eli Harari, our founder, president and chief executive officer. We do not have employment agreements with any of our executive officers and they are free to terminate their...

  • Page 42
    ...delaying or discouraging a change of control of SanDisk. Changes in securities laws and regulations have increased our costs; further, in the event we are unable to satisfy regulatory requirements relating to internal controls, or if these internal controls over financial reporting are not effective...

  • Page 43
    ... and other risks related to international operations." Market Risk. We also hold availableâˆ'forâˆ'sale equity securities in equity investments in semiconductor wafer manufacturing companies. As of January 2, 2005, a reduction in prices of 10% of these marketable equity securities would result in...

  • Page 44
    ... internal control over financial reporting which in included at page Fâˆ'3. Independent Registered Public Accounting Firm's Attestation Report The report required by this item is set forth at page Fâˆ'3. ITEM 9B. OTHER INFORMATION Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS...

  • Page 45
    ... SERVICES The information required by this item is set forth under the caption "Principal Accountant Fees and Services" in our Proxy Statement for our 2005 Annual Meeting of Stockholders, and is incorporated herein by reference. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS...

  • Page 46
    ...Contents SANDISK CORPORATION INDEX TO FINANCIAL STATEMENTS AND RELATED REPORTS Page Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Income Statements Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash...

  • Page 47
    ... the Public Company Accounting Oversight Board (United States), the effectiveness of SanDisk Corporation's internal control over financial reporting as of January 2, 2005, based on criteria established in Internal Controlâˆ'Integrated Framework issued by the Committee of Sponsoring Organizations of...

  • Page 48
    ... PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders SanDisk Corporation We have audited management's assessment, included in the Report of Management on Internal Control Over Financial Reporting, that SanDisk Corporation maintained effective internal control over financial reporting...

  • Page 49
    ...SANDISK CORPORATION CONSOLIDATED BALANCE SHEETS January 2, 2005 December 28, 2003 (In thousands, except per share amounts) ASSETS Current assets: Cash and cash equivalents Shortâˆ'term investments Investment in foundries Accounts receivable, net of allowance for doubtful accounts of $8,462 in 2004...

  • Page 50
    ... SANDISK CORPORATION CONSOLIDATED INCOME STATEMENTS January 2, 2005 December 28, 2003 (In thousands, except per share amounts) December 29, 2002 Revenues: Product License and royalty Total revenue Cost of product revenues Gross profit Operating expenses Research and development Sales and marketing...

  • Page 51
    ...income Exercise of stock options for cash Issuance of stock pursuant to employee stock purchase plan Sale of common stock, net of issuance costs Income tax benefit from stock options exercised Balance at December 28, 2003 Net income Unrealized loss on available for sale securities Unrealized loss on...

  • Page 52
    ... of common stock under employee programs Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year Supplemental disclosure of cash flow information: Cash paid for...

  • Page 53
    The accompanying notes are an integral part of these consolidated financial statements. Fâˆ'7

  • Page 54
    ... and Summary of Significant Accounting Policies Organization and Nature of Operations. SanDisk Corporation (together with its subsidiaries, the Company) was incorporated in Delaware on June 1, 1988. The Company designs, develops and markets flash storage card products used in a wide variety of...

  • Page 55
    ...with license and royalty revenues was insignificant for each of the three years in the period ended January 2, 2005. The Company records reductions to revenue and tradeâˆ'accounts receivable for customer programs and incentive offerings, including promotions and other volumeâˆ'based incentives based...

  • Page 56
    ... money market preferred stock and auction rate preferred stock. Shortâˆ'term investments also include the unrestricted portion of the Company's investment in foundries and investments for which trading restrictions expire within one year. The fair market value, based on quoted market prices, of cash...

  • Page 57
    .... Identifiable intangible assets are amortized on a straightâˆ'line basis over their estimated useful life, generally 3âˆ'5 years. Goodwill is evaluated for impairment annually by reference to the lowest level reporting unit to which the goodwill relates. The Company has one reporting unit based on...

  • Page 58
    ... be determined by reference to inputs to its option pricing model at the time of future share based compensation awards. Adoption of SFAS 123R is expected to increase the Company's operating expenses. The FASB adopted Statement of Financial Accounting Standards No. 151, Inventory Costs, an Amendment...

  • Page 59
    ... Notes to Consolidated Financial Statements - (Continued) The total net unrealized loss on availableâˆ'forâˆ'sale securities at January 2, 2005 was $1.8 million and includes an unrealized gain of $0.8 million on the Company's investment in United Microelectronics Corporation (UMC) and deferred...

  • Page 60
    ...âˆ'forâˆ'sale marketable securities, including the shortâˆ'term portion of the Company's investments in UMC and Tower, and also includes currency translation adjustments related to operations denominated in local functional currencies, net of the related tax effects, for all periods presented...

  • Page 61
    ... or the end of the purchase period, whichever is lower. During the fourth quarter of 2004, the Company reviewed both the actual volatility in the trading market for its common stock and the implied volatility of tradable forward call options to purchase shares of its common stock as part of its...

  • Page 62
    ... using the Blackâˆ'Scholesâˆ'Merton optionâˆ'pricing model, with the following weightedâˆ'average assumptions for grants made in 2004, 2003 and 2002, respectively: Years Ended January 2, 2005 December 28, 2003 December 29, 2002 Dividend yield Expected volatility Risk free interest rate Expected...

  • Page 63
    ... 2004 and 2003, respectively. At January 2, 2005, the Company had reserved 2,472,284 shares for issuance under the Nonâˆ'Employee Directors Stock Option Plan and a total of 1,856,000 options had been granted. Outstanding shares were at exercise prices ranging from $6.22 to $35.03 per share. Special...

  • Page 64
    ... Information Geographic Information and Major Customers. The Company markets and sells its products in the United States and in foreign countries through its sales personnel, dealers, distributors, retailers and its subsidiaries. The Company's chief decision maker, the Chief Executive Officer...

  • Page 65
    ...were also part of the Company's top ten customers or licensees in 2002. In 2004, 2003 and 2002, no single customer or licensee accounted for more than 10% of total revenues. All of the Company's flash memory card products require silicon wafers for the memory components and the controller components...

  • Page 66
    ... highâˆ'credit quality investments and limits the amounts invested with any one issuer. The Company sells to original equipment manufacturers, retailers and distributors in the United States, Japan, EMEA and nonâˆ'Japan Asiaâˆ'Pacific, performs ongoing credit evaluations of its customers' financial...

  • Page 67
    ....5 million of nonâˆ'cancelable purchase orders for memory and controllers were outstanding. Subcontractors. In the normal course of business, the Company's subcontractors periodically procure production materials based on the forecast the Company provides to them. The Company's agreements with these...

  • Page 68
    ...half of its tools. In December 2004, Flash Partners entered into a master lease agreement providing for up to 50 billion Japanese yen of original lease obligations. There were no amounts outstanding under the master lease agreement at the end of 2004. The Company and Toshiba have each guaranteed, on...

  • Page 69
    ... in many cases the Company will share in the expenses associated with the defense and cost of settlement associated with such claims. This agreement provides limited protection for the Company against third party claims that NAND flash memory products manufactured and sold by Flash Partners infringe...

  • Page 70
    ... to Consolidated Financial Statements - (Continued) The Company leases its headquarters and sales offices under operating leases that expire at various dates through 2007. Future minimum lease payments under operating leases at January 2, 2005 were as follows (in thousands): Fiscal Year Ending: 2005...

  • Page 71
    ... 28, 2003 December 29, 2002 U.S. Federal statutory rate State taxes, net of federal benefit Utilization of credits and impact of new tax law Reversal of tax benefit previously taken on UMC shares Tax exempt interest income Utilization of loss carryforward and change in valuation allowance Other 35...

  • Page 72
    ... 2004 the Company utilized approximately $0.7 million of these wafer credits to purchase controller wafers from Tower. The Company has the option to convert the credits it would have otherwise been able to utilize per quarter into Tower ordinary shares at the 15âˆ'day average trading price (ATP...

  • Page 73
    ...as of January 2, 2005 was estimated at approximately $65,000 using a Blackâˆ'Scholesâˆ'Merton option pricing model with the following assumptions: dividend yield of 0.0%; expected life of 1.75 years; volatility factor of 0.70; and risk free interest rate of 3.08%. The fair value of the Tower warrant...

  • Page 74
    ..., and convertible securities. Options and warrants to purchase 6,140,781, 1,253,457 and 8,031,890 shares of common stock were outstanding during 2004, 2003 and 2002, respectively, but have been omitted from the diluted earnings per share calculation because the options' exercise price was greater...

  • Page 75
    ... December 28, 2003, the Company had amounts payable to Tower of approximately $7.6 million and zero, respectively, related to the purchase of controller wafers. In September 2003, the president and chief executive officer of Flextronics joined the Company's board of directors. For 2004 and 2003, the...

  • Page 76
    ... September 2004, the Company and Toshiba entered into a series of definitive agreements and created a new semiconductor company, Flash Partners, to produce NAND flash memory products at a new 300âˆ'millimeter wafer fabrication facility, Fab 3, at Toshiba's Yokkaichi operations. The Company accounts...

  • Page 77
    ...duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. SANDISK CORPORATION By: /s/ Judy Bruner Judy Bruner Executive Vice President, Administration Chief Financial Officer (On behalf of the Registrant and as Principal Financial and Accounting Officer) Dated...

  • Page 78
    ... Special Stock Option Plan, as Amended and Restated through February 23, 2000.(20), (*) SanDisk Corporation 1995 Stock Option Plan, as Amended and Restated January 2, 2002.(21), (*) SanDisk Corporation 1995 Nonâˆ'Employee Directors Stock Option Plan, as Amended and Restated as of January 2, 2004...

  • Page 79
    ...of February 21, 2003, by and between the Registrant, Tower Semiconductor Ltd. and the other parties thereto.(23) Side Letter to Amendment to Share Purchase Agreement, dated as of February 24, 2003, by and between the Registrant, Tower Semiconductor Ltd. and the other parties thereto.(23) Side Letter...

  • Page 80
    ...Change of Control Agreement entered into by and between the Registrant and each of the following officers of the Registrant: the Chief Financial Officer; the Executive Vice President and Chief Operating Officer; the Sr. Vice President and General Manager, Retail Business Unit; the Sr. Vice President...

  • Page 81
    31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanesâˆ'Oxley Act of 2002(**)

  • Page 82
    ...Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanesâˆ'Oxley Act of 2002(**) * Indicates management... 2003 Annual Report on Form 10âˆ'K. Previously filed as an Exhibit to the Registrant's Form 10âˆ'Q for the quarter ended June 27, 2004. Previously...

  • Page 83
    ... Maintenance Management Change of the Original Condition Title to Parts Inspection Encumbrances Insurance Representations and Warranties Commitments Compensation and Cost Sharing Number of Times of Individual Transaction and Change of Delivery Period Purchase Option Returns Termination Default...

  • Page 84
    Article 34 Jurisdiction 20

  • Page 85
    Attachment 1 Attachment 2 Attachment 3 Attachment 4 Attachment 5 Attachment 6 Terms and Conditions of the Lease Lease Certificate Certificate of Restitution Certificate of Assignment Condition Requirements at the time of Return Addresses for Notices

  • Page 86
    ... in the context that such term shall mean otherwise: SD Group Companies: Termination Event: Certificate of Lease: SanDisk Corporation and the companies that SanDisk Corporation holds 50% or more of the voting shares. Any or all of the events stipulated in Article 26, Paragraph 1. The certificate of...

  • Page 87
    ... Lessors in case of the return, sale or other type of disposal of the Property under the power of attorney stipulated in Article 4, Paragraph 2, of the Relevant Parties Agreement. Toshiba Corporation and the companies that Toshiba Corporation holds 50% or more of the voting shares. Collective term...

  • Page 88
    ..., or other monies charged by the Lender to the Borrower under the Loan Agreement with respect to nonperformance or prepayment thereupon. âˆ'3âˆ' Delivery Date: Scheduled Delivery Date: Guaranteed: Encumbrances: Property Purchase Price: Property Manufacturer: Event of Default: Break Funding Cost:

  • Page 89
    ... to the return date stipulated in Article 25, Paragraph 1. The person indicated in Section 11 of Attachment 1. The Credit Line Agreement executed on the even date with this Agreement between the Borrower and the Lender and the Acceptance of Liabilities and Repayment Agreement relating thereto. The...

  • Page 90
    ... is excluded from this Agreement due to the Total Loss Event or exercise of a purchase option, the remaining part of the Unit Component shall constitute the Property. The collective term for the Basic Agreement for Assignment of Property for Security of the Lessor's Claim (kihon lessor bukken joto...

  • Page 91
    ... the ownership of the Property during the Lease Term under this Agreement. Article 3. Lease 1. On each Delivery Date, upon receipt of the delivery of each Unit Component forming the Property from the Lessee based on the Purchase Agreement, the Lessors shall lease such Unit Component to the Lessee...

  • Page 92
    ... the event it is necessary to change the Scheduled Delivery Date, the Lessee shall notify such fact to the Lessors as soon as possible (no later than five (5) Bank Business Days prior to such date). With respect to each Individual Transaction, the Lessee and the Lessors shall execute a new agreement...

  • Page 93
    ... of such conditions prior to the completion of the delivery: (1) No event has occurred by the Scheduled Delivery Date because of which the Lessors or Lessee expect the change of laws, administrative orders, or ordinances, or other changes under laws, administrative guidance or tax policy causing the...

  • Page 94
    ... the partial credit in accordance with the sharing ratio for the Property) and any money relating such credits shall be paid only to Toshiba Lessors. 2. For each Individual Transaction, the Lessee shall pay the Lease Fee for the Lease Fees Calculation Period ending on the Lease Fees Payment Date by...

  • Page 95
    ... the cancellation (in such event, the amount of the Lease Fees, the Liquidated Damages, the Purchase Option Exercise Price, and the Return Adjustment relating to Toshiba Tranche 1 shall be received at the bank account of the Lender stipulated in Section 10(2) of Attachment 1, the amount relating to...

  • Page 96
    ...such parties. However, as long as no Termination Event has occurred, the Lessee may exercise such security claim or warranty claim in its own name and receive benefits of the security or warranty directly from the Property Manufacturer or the supplier of the Parts during the Lease Period. âˆ' 11 âˆ'

  • Page 97
    ... immediately returned to the Lessee after deduction of any outstanding amount payable by the Lessee to the Lessors under the Relating Agreement (including the relevant delinquency charges). In the event such application is not sufficient, the Lessee shall be responsible to pay the remaining part of...

  • Page 98
    ... of the Lessee after the Delivery Date in view of the advice of the Property Manufacturer or the property maintenance operator, the provisions of this Article shall be applied as if the Total Loss Event has occurred immediately after its delivery on the Delivery Date without any cause attributable...

  • Page 99
    ...and its installation, use, functioning and operation, and the requirements, conditions, and instructions of, and the agreements with, the Property Manufacturer, supplier of the Parts or the insurance companies with respect to any major issues, and shall use the Property only for the legally accepted...

  • Page 100
    ... of the Property in any manner, Lessee may, at its own risk and expense, remove such components and Parts without attaching replacements for them to the Property, after the Property is delivered to Lessee. Article 15. Change of the Original Condition Lessee may, at its own risk and expense, make...

  • Page 101
    Article 17. Inspection Lessor and parties designated by Lessor may enter offices, plants, facilities, and premises of Lessee or location of the Property or Parts in order to inspect the condition, installation, use, operation, storage, keeping, maintenance and the like of the Property, providing to ...

  • Page 102
    ... such changed conditions. Article 20. Representations and Warranties 1. Lessee represents and warrants as follows as of the execution date of this Agreement: (1) Lessee has any and all abilities and powers required under applicable laws and its internal rules to execute the Relating Agreements to...

  • Page 103
    ... any and all procedures required under applicable laws or its internal rules to prepare the Relating Agreements, and exercise rights and perform obligations under such Relating Agreements are taken. (2) Preparation, delivery and performance of the Relating Agreements to which any of the Lessors is...

  • Page 104
    ..., operation, lease, sublease, installation, storage, keeping, maintenance, repair, improvement, modification, insurance, Encumbrances, delivery, purchase, assignment, return, Performances, structure, design, specification, effect, lifetime, operationality, manufactured items, any Relating Agreements...

  • Page 105
    ... to pay any additional costs, upon request of Borrower, Lesser may increase the Lease Fee relating to Toshiba Tranche 1 based on a reasonable calculation method providing written notice, or charge such additional costs to Lessee. In such case, the Purchase Option Exercise Price, Return Adjustment...

  • Page 106
    ... and Borrower. In the event modifications are necessary regarding the Lease Fee, Liquidated Damages, Purchase Option Exercise Price, Return Adjustment, or changes in other payment terms, Lessee and Lessor shall consult with each other on the changes. Article 24. Purchase Option 1. In each Individual...

  • Page 107
    ... report of the Property, all records or copies thereof concerning installation, storage, use, operation, keeping, maintenance, repair and the like of the Property, and if Lessor requests, certificates of the matters described in the above paragraph (1) issued by the Property Manufacturer, suppliers...

  • Page 108
    ... such the Property to Lessor under this Article 25, and the net amount of the sales proceeds less Taxes and Public Dues, sales commission and any other necessary costs exceeds the Standard Redemption Price of the Property as of the Return Date, Lessor shall pay to Lessee [***] % of the balance of...

  • Page 109
    ... in the event the following recovery periods have been stipulated. (1) (2) (3) (4) (5) If Lessee fails to pay the Lease Fee under the Relating Agreements or any monetary obligations, and the applicable payments are not made within 2 banking days after receiving notification in writing from the...

  • Page 110
    ... may seek an injunction to prevent actions constituting breach and request for specific payment concerning any provision of the Relating Agreements, request damage compensation for obligations or responsibilities incurred by Lessor, and seek other remedies available under applicable laws. âˆ' 25 âˆ'

  • Page 111
    ..., or make warranties or provide security equivalent to those by such Guarantors subject to such Termination Events under the Guaranty Agreement (in any case, only those approved by Lessor and Lender). In such case, such Termination Events shall not be deemed to have occurred. Article 27. Default...

  • Page 112
    ... or protection order concerning any property of the Lessee other than SD Available Assets. SD Lessor shall not file any petition for commencement of any bankruptcyâˆ'related procedures against Lessee. (1) Amounts equivalent to the Lease Fee, Liquidated Damages, Purchase Option Exercise Price, Return...

  • Page 113
    ... of any information or document that is already in the public domain, the disclosure relating to the marketing of the Property, the disclosure required for protecting, exercising any right, or performance of any obligation under the Relating Agreements, the disclosure based on the requirements...

  • Page 114
    3. In the event any party hereto breaches the provision of Paragraph 1 above, such party shall compensate for any economic damage incurred to other parties. Article 33. Governing Law This Agreement shall be governed by and construed in all respects in accordance with the laws of Japan. Article 34. ...

  • Page 115
    IN WITNESS WHEREOF, Lessor and Lessee cause this Agreement to be executed in four copies by affixing their respective names and seals to it, and each party shall retain one (1) copy respectively. (Master Lease Agreement) Lessor: Mitsui Leasing & Development, Ltd. âˆ' 30 âˆ'

  • Page 116
    (Master Lease Agreement) Lessor: IBJ Leasing Co., Ltd. âˆ' 31 âˆ'

  • Page 117
    (Master Lease Agreement) Lessor: Sumisho Lease Co., Ltd. âˆ' 32 âˆ'

  • Page 118
    (Master Lease Agreement) Lessee: Flash Partners, Ltd. âˆ' 33 âˆ'

  • Page 119
    ..., on which the Lessee objectively identifies the applicable Unit Constitutive Premises with serial numbers, etc. and notify to the Lessor as the due date of delivery at least [20] day prior to such due date of delivery. The Final Deliverable Date of this Agreement shall be the last date of...

  • Page 120
    ... months in the event the delivery date is a final banking day in the calendar month that it belongs to). However, if such corresponding date falls on banking holiday, it shall be pursuant to the provision in Article 7, Paragraph 3 of the agreement. [***] INDICATES THAT CERTAIN INFORMATION ON THIS...

  • Page 121
    ... immediately preceding day of the next Calculation Period of Lease Fee, provided, in case of early termination of this Agreement, to the date of such termination. 6. Option Purchase Price Described in the Certificate of Lease related to the applicable Separate Transaction 7. Adjustment Amount upon...

  • Page 122
    ... payment provided in Article 7, Paragraph 4, the Lease Fee, the Stipulated Compensation, Option Purchase Price and Adjustment Amount upon Return shall be transferred to the following account of the Borrower in cash. (The Lessee shall bear the transfer fee INDICATES THAT CERTAIN INFORMATION ON THIS...

  • Page 123
    ...any amount payable in case the delegation receipt of payment to the Borrower provided in Article 7, Paragraph 4 have been cancelled shall be transferred to the following accounts of the Lessor or the Lender in cash. (The Lessee shall bear the transfer fee.) [***] 11. The Lender Mizuho Corporate Bank...

  • Page 124
    ... with the Loan Agreement, the Borrower shall obtain a loan from the Lender on each Delivery Date to raise the Premises Purchase Price in its own decision... Price from its own fund. (5) The Lessor shall lease the applicable Unit Constitutive Premises to the Lessee on each Delivery Date. The share of...

  • Page 125
    ... confirm that, with respect to the Individual Transaction relating to this Certificate of Lease, the Delivery Date, Lease Period, composition ratio of each Tranche, and the Lease Fees, Purchase Option Exercise Price, Return Adjustment, Standard Redemption Price and Liquidated Damages under Sections...

  • Page 126
    (Appendix 1 of Loan Certificate) [Particulars of the Property] âˆ' 41 âˆ'

  • Page 127
    ...) Portion of each Tranche under Article 7, Paragraph 1, of the Lease Agreement: SD Tranche 1: SD Tranche 2: Toshiba Tranche 1: Toshiba Tranche 2: Calculation of the Lease Fees under Appendix 1, Section 3, of the Lease Agreement INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED...

  • Page 128
    Purchase Option Exercise Price under Appendix 1, Paragraph 6, of the Lease Agreement: The amounts are obtained by multiplying the Property Purchase Price by the applicable coefficient below. The Lease Fees as of the Lease Fees Payment Date shall be paid separately. [***] Return Adjustment under ...

  • Page 129
    ... Component, the amount shall be calculated by multiplying the Property Purchase Price with the applicable coefficient below. [***] Liquidated Damages under Appendix 1, Section 9, of the Lease Agreement INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE...

  • Page 130
    ... and serial number of each major component thereof), including, without limitation, all internal circuit boards, module boards and software features. 2. a complete and current set of all manuals, blue prints, process flow diagrams, equipment configuration diagrams, operation, maintenance and repair...

  • Page 131
    ... codes, software, keyboards, control consoles, all fittings and lines for gas, water, exhaust; Equipment labeling i.e. (operational, warning, safety labels) all current operational and service manuals. At the expense of Lessee, accommodation of power requirements different from where originally...

  • Page 132
    ... Lessee shall, at its expense, provide safe, secure storage for Equipment if requested by Lessors for a [***] period. If an equipment auction is necessary, Lessors should be permitted to auction the Equipment onâˆ'site. [***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED...

  • Page 133
    ...Ltd. Guarantee Agreement SanDisk Corporation (the "Guarantor") and Mitsui Leasing & Development, Ltd. (the "Lessor") hereby enter into this guarantee agreement (the "Agreement") with respect to the Master Lease Agreement dated December 24, 2004 and individual agreements thereunder (collectively the...

  • Page 134
    ... all or substantial part of assets, business and shares in the Guarantor by means of sale, merger, acquisition or other alteration in management rights. Article 6. (Limited Recourse) Limitation of liability by the limited recourse pursuant to Article 29, Paragraph 1 of the Lease Agreement shall not...

  • Page 135
    âˆ'4âˆ' Article 8. (Governing Law) This Agreement shall be governed by, and construed in accordance with, the laws of Japan in every respect. Article 9. (Jurisdiction) Any and all disputes arising out of or in connection with this Agreement shall be subject to the exclusive jurisdiction of the ...

  • Page 136
    âˆ'5âˆ' This Guarantee Agreement shall be prepared in duplicate and the Guarantor and the Lessor shall each retain one copy hereof. December 24, 2004 SanDisk Corporation /s/ Eli Harari By: Title: Eli Harari President and CEO

  • Page 137
    âˆ'6âˆ' Mitsui Leasing & Development, Ltd. /s/ Kanji Miyazaki

  • Page 138
    ...Delaware corporation SanDisk International Limited, a Cayman Islands company SanDisk Sweden AB, a Swedish company SanDisk U.K. Limited, a United Kingdom company SanDisk Scotland Limited, a United Kingdom company 10) SanDisk Secure Content Solutions, Inc., a Delaware corporation 11) MDRM Digital Ltd...

  • Page 139
    ... Directors Stock Option Plan (as Amended and Restated January 2, 2004), and (Form Sâˆ'8 No. 333âˆ'63076) pertaining to the Special Stock Option Plan (as amended and restated February 23, 2000)) of SanDisk Corporation of our report dated March 15, 2005, with respect to the consolidated financial...

  • Page 140
    Exhibit 31.1 I, Eli Harari, certify that: 1. I have reviewed this annual report on Form 10âˆ'K of SanDisk Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of ...

  • Page 141
    Exhibit 31.2 I, Judy Bruner, certify that: 1. I have reviewed this annual report on Form 10âˆ'K of SanDisk Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of ...

  • Page 142
    ... Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of SanDisk Corporation. By: /s/ Eli Harari Eli Harari Chief Executive Officer March 18, 2005 A signed original of this written statement required...

  • Page 143
    ... of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of SanDisk Corporation. By: /s/ Judy Bruner Judy Bruner Chief Financial Officer March 18, 2005 A signed original of this written statement required...