SanDisk 2005 Annual Report Download

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Stockholders Letter
Notice of 2006 Annual Meeting
and Proxy Statement
2005 Annual Report on Form 10-K

Table of contents

  • Page 1
    Stockholders Letter Notice of 2006 Annual Meeting and Proxy Statement 2005 Annual Report on Form 10-K

  • Page 2
    ... original inventor of flash storage cards and is the world's largest supplier of flash data storage card products, using its patented, high-density flash memory and controller technology. SanDisk is headquartered in Sunnyvale, California and has operations worldwide, with more than half its revenues...

  • Page 3
    Shareholder Letter Proxy Statement Annual Report

  • Page 4
    ... product revenue growing 29% and licensing and royalties increasing 37% to $239 million. Our price per megabyte declined 52%, leading to the emergence and growth of new applications such as flash MP3 players and cards for both mobile phones and gaming. Our markets remain price elastic, and in 2005...

  • Page 5
    ... pleased with the growth in our MP3 line of products. Despite a hugely competitive landscape against well-known name brands, we have a clear #2 market share position in the U.S. and this market has become one of the largest applications for NAND flash memory. In the USB drive market we are focused...

  • Page 6
    ...of the business to be conducted at the Annual Meeting. After careful consideration, the Company's Board of Directors has unanimously approved the proposals and recommends that you vote FOR each proposal. After reading the Proxy Statement, please mark, sign, date and return the enclosed proxy card in...

  • Page 7
    (This page intentionally left blank)

  • Page 8
    ... OF DIRECTORS NOMINEES BUSINESS EXPERIENCE OF NOMINEES FOR ELECTION AS DIRECTORS BOARD MEETINGS AND COMMITTEES Communications with the Board Postal Mail Email Communications Intended for Non-Management Directors Company Policy Regarding Board Member Attendance at Annual Meetings Audit...

  • Page 9
    ..., TERMINATION OF EMPLOYMENT AND CHANGE-INCONTROL AGREEMENTS Change of Control Benefits Agreements with the Company's Executive Officers Change of Control Benefits Agreement with Dr. Eli Harari 2005 Plan STOCK PERFORMANCE GRAPH CERTAIN TRANSACTIONS OTHER BUSINESS 24 25 26 26 26 28 29...

  • Page 10
    ... return of your proxy card or your prompt use of the toll-free telephone number or the internet to grant your proxy will assist us in preparing for the Annual Meeting. We look forward to seeing you at the Annual Meeting. Proxy Statement By Order of the Board of Directors, Eli Harari President...

  • Page 11
    ... or postponement thereof. At the record date, the Company had approximately 194,590,630 shares of Common Stock outstanding and entitled to vote at the Annual Meeting, held by approximately 622 stockholders of record. Each holder of record at the close of business on March 28, 2006 is entitled...

  • Page 12
    ...proxy bearing a later date, or by attending the Annual Meeting and voting in person. SOLICITATION OF PROXIES The Company will bear the cost of soliciting proxies. Copies of solicitation materials will be furnished to brokerage houses, fiduciaries and custodians holding shares in their names that are...

  • Page 13
    ...Board of Directors and Lead Independent Director. BUSINESS EXPERIENCE OF NOMINEES FOR ELECTION AS DIRECTORS Dr. Harari has served as President and Chief Executive Officer and as a Director of the Company since SanDisk's inception in 1988. Dr. Harari is a pioneer in non-volatile semiconductor storage...

  • Page 14
    ... member of the board of directors of Flextronics since 1991, and also serves as a board member of KLA Tencor, a manufacturer of semiconductor fabrication equipment, Crocs, Inc., designer, manufacturer and marketer of footwear for men, women and children, Schlumberger Limited, an oil services company...

  • Page 15
    ... to the following address: Board of Directors c/o Investor Relations SanDisk Corporation 140 Caspian Court Sunnyvale, CA 94089 Email Individuals may also communicate with the Board by submitting an email to the Company's Board at [email protected]. Email submitted to this email address will be relayed...

  • Page 16
    ... 2005. A current copy of this charter is available on the Company's website at www.sandisk.com. The Nominating and Governance Committee identifies, considers and recommends director nominees to be selected by the Board of Directors for submission to vote at the Company's annual stockholder meetings...

  • Page 17
    ...the Securities Exchange Act of 1934 (including, with respect to Annual Meeting Nominees, such person's written consent to being named in the proxy statement as a nominee and, with respect to all nominees, such person's written consent to serving as a Director if elected); (2) the name(s) and address...

  • Page 18
    ... Principles of the Company. ‚ Management Directors. The number of officers or employees of the Company serving at any time on the Board should be limited such that, at all times, a majority of the Directors is ""independent'' under applicable SEC and Nasdaq National Market rules. After reviewing...

  • Page 19
    ...sale price per share of the Company's Common Stock on the Nasdaq Stock Market for the five (5) trading days ended on, and including, the date of the Annual Meeting of Stockholders on which the award is made. The options described above are granted at the closing price as reported on the Nasdaq Stock...

  • Page 20
    ... of key individuals. The proposed share increase will furnish the Company with the additional shares the Company needs to remain competitive in the marketplace for executive talent and other key employees. The proposed amendments to the 2005 Plan were approved by the Company's Board of Directors on...

  • Page 21
    ... 1,000,000-share limitation for purposes of Internal Revenue Code Section 162(m). This limitation will assure that any deductions to which the Company would otherwise be entitled upon the exercise of stock options or stock appreciation rights granted under the discretionary grant program will not...

  • Page 22
    ... Stock that the Company acquires, including shares purchased on the open market or in private transactions. Shares subject to any outstanding options or other awards under the 2005 Plan that remain unissued when those options or awards expire or terminate will be available for subsequent grants...

  • Page 23
    ... with a lower exercise price per share, (ii) the cancellation of outstanding options or stock appreciation rights with exercise prices per share in excess of the then current fair market value per share of Common Stock for consideration payable in the Company's equity securities or (iii) the direct...

  • Page 24
    ... may be granted cash bonus opportunities that are intended to be ""performance-based compensation'' within the meaning of Section 162(m) of the Internal Revenue Code, as described below. Performance-based awards granted under the 2005 Plan that may be paid only in cash and not related to shares and...

  • Page 25
    ... may vary as to each new non-employee Board member, and the size of the annual option grants may vary from year to year. Each automatic grant will have an exercise price per share equal to the fair market value per share of the Company's Common Stock on the grant date and will have a term of seven...

  • Page 26
    ... grants. Number of Shares Underlying Options Granted (#) Weighted Average Exercise Price per Share ($) Name and Position Named Executive Officers: Eli Harari President & CEO Sanjay Mehrotra Executive VP & COO Judy Bruner Executive VP, Administration & CFO Nelson Chan EVP, Consumer Products...

  • Page 27
    ... price, when that unit vests. Number of Shares Underlying Restricted Stock Units (#) Name and Position Named Executive Officers: Eli Harari President & CEO Sanjay Mehrotra Executive VP & COO Judy Bruner Executive VP, Administration & CFO Nelson Chan EVP, Consumer Products & Corp. Marketing...

  • Page 28
    .... (ii) All unvested shares outstanding under the discretionary grant and stock issuance programs will immediately vest upon a change in control, except to the extent the Company's repurchase rights with respect to those shares are to be assigned to the successor corporation or otherwise continued in...

  • Page 29
    ... non-employee board members. Such adjustments will be designed to preclude any dilution or enlargement of benefits under the 2005 Plan or the outstanding awards thereunder. Valuation. The fair market value per share of the Company's Common Stock on any relevant date under the 2005 Plan will...

  • Page 30
    ...by the Company's Board of Directors, the 2005 Plan will terminate on the earliest of (i) March 15, 2015, (ii) the date on which all shares available for issuance under the 2005 Plan have been issued as fully-vested shares or (iii) the termination of all outstanding options, stock appreciation rights...

  • Page 31
    ... holder will recognize ordinary income in the year in which the stock appreciation right is exercised, in an amount equal to the excess of the fair market value of the underlying shares of Common Stock on the exercise date over the base price in effect for the exercised right, and the Company will...

  • Page 32
    ... service periods or performance goals. The issuance of a fully-vested stock bonus will result in an immediate charge to the Company's earnings equal to the fair market value of the bonus shares on the issuance date. Option grants and other awards made under the 2005 Plan to non-employee consultants...

  • Page 33
    ... the Company's earnings and book value, an increase in the aggregate number of outstanding shares of the Company caused by the issuance of the additional shares would dilute the earnings per share and book value per share of all outstanding shares of the Company's capital stock. If such factors were...

  • Page 34
    ... with the annual audit of the Company's internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, the audit of the Company's employee benefit plan and other statutory audits of subsidiaries or affiliates of the Company. (b) Audit related fees consist...

  • Page 35
    ...officers and Directors of the Company as a group. Unless otherwise indicated, the principal address of each of the stockholders below is c/o SanDisk Corporation, 140 Caspian Court, Sunnyvale, California 94089. Unless otherwise indicated and pursuant to applicable community property laws, the persons...

  • Page 36
    ...under the Securities Exchange Act of 1934, as amended. Name or Group of Beneficial Owners Amount and Nature of Beneficial Ownership Number of Shares Percentage Owned (%) Entities Controlled by Capital Group International, Inc.(1) Entities Controlled by CAM North America, LLC(2) ÏÏÏÏ Judy Bruner...

  • Page 37
    ... Securities Exchange Act of 1934, as amended, requires the Company's Directors, executive officers, and persons who own more than ten percent (10%) of a registered class of the Company's equity securities, to file initial reports of ownership and reports of changes in ownership of Common Stock and...

  • Page 38
    ... under which any options to acquire such shares or other equity-based awards may be granted. (A) Number of Securities to be Issued Upon Exercise of Outstanding Options and Rights (B) Weighted Average Exercise Price of Outstanding Options(1) (C) Number of Securities Remaining Available for Future...

  • Page 39
    ...Term Compensation Awards Securities Options (#) All Other Compensation ($) Name & Principal Position Years Dr. Eli Harari President, Chief Executive Officer, Director(3) Sanjay Mehrotra Executive Vice President & Chief Operating Officer(3) Judy Bruner(5 Executive Vice President, Administration...

  • Page 40
    ... Company granted options to purchase 6,310,668 shares of Common Stock to all employees during fiscal 2005. (4) The exercise price may be paid in cash, in shares of the Company's Common Stock valued at fair market value on the exercise date, or the extent permissible under applicable law and Company...

  • Page 41
    ... (the closing selling price of the Company's Common Stock on that date on the Nasdaq National Market), less the exercise price payable for such shares. (3) Excludes option exercises and outstanding options held by Mr. Chan's spouse, an employee of the Company. During fiscal 2005, Mr. Chan's spouse...

  • Page 42
    ... Company's employee benefit and stock option plans. General Compensation Policy. The overall policy of the Compensation Committee is to provide the Company's executive officers and other key employees with competitive compensation opportunities based upon their contribution to the financial success...

  • Page 43
    ... officer remains employed by the Company during the applicable vesting period, and then only if the market price of the underlying shares appreciates over the option term. The number of shares subject to each option grant is set at a level intended to create a meaningful opportunity for stock...

  • Page 44
    ... unless the market price of the Company's Common Stock appreciates over the market price in effect at the time the grants were made. Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the Internal Revenue Code disallows a tax deduction to publicly-held companies for compensation...

  • Page 45
    ... executive officers serving as a member of the Company's Board of Directors or Compensation Committee. EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS Other than the Change of Control Benefit Agreements described below, none of the Company's executive officers have...

  • Page 46
    ...effective date. Change of Control Benefits Agreement with Dr. Eli Harari The Company entered into a Change of Control Benefits Agreement with Dr. Eli Harari, its Chief Executive Officer and President, effective as of May 20, 2004, as amended in August 2005. The Company's agreement with Dr. Harari is...

  • Page 47
    ... index composed of 19 companies primarily involved in the design, distribution, manufacture, and sale of semiconductors, to its stock performance graph, as it is the index that is most commonly used to reflect performance in SanDisk's peer group of companies. These indices, which reflect...

  • Page 48
    ...the Annual Meeting, however, it is the intention of the persons named in the accompanying proxy to vote the shares represented thereby on such matters in accordance with their best judgment. Proxy Statement BY ORDER OF THE BOARD OF DIRECTORS, Eli Harari President and Chief Executive Officer April...

  • Page 49
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  • Page 50
    ANNEX A PROPOSED AMENDED 2005 INCENTIVE PLAN Proxy Statement A-1

  • Page 51
    ... performance milestones, or be issued shares of Common Stock through direct purchase or as a bonus for services rendered the Corporation (or any Parent or Subsidiary), and ‚ the Automatic Grant Program under which eligible non-employee Board members will automatically receive grants at designated...

  • Page 52
    ... the specific number of shares to be subject to the initial and annual grants made to the non-employee Board members under such program. F. Awards to Employees who are ""covered employees'' under Section 162(m) of the Code of (i) options or stock appreciation rights, or (ii) shares or cash subject...

  • Page 53
    ... original issue price paid per share, pursuant to the Corporation's repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for subsequent reissuance. Should the exercise price of an option...

  • Page 54
    ... be made under the Automatic Grant Program to new and continuing non-employee Board members, (vi) the number and/or class of securities and the exercise or base price per share in effect under each outstanding option or stock appreciation right under the Plan and (vii) the number and/or class of...

  • Page 55
    ... policies) to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable income and employment taxes required to...

  • Page 56
    ... Options may only be granted to Employees. B. Dollar Limitation. The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation...

  • Page 57
    ... under applicable law or regulation. C. 10% Stockholder. If any Employee to whom an Incentive Option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date...

  • Page 58
    ...the Stand-alone Right is granted. In no event, however, may the base price per share be less than the Fair Market Value per underlying share of Common Stock on the grant date. In the event outstanding Standalone Rights are to be assumed in connection with a Change in Control transaction or otherwise...

  • Page 59
    ...maximum number and/or class of securities for which any one person may be granted stock options, stand-alone stock appreciation rights, direct stock issuances and other stock-based awards under the Plan per calendar year. To the extent the actual holders of the Corporation's outstanding Common Stock...

  • Page 60
    ... a lower exercise price per share, (ii) cancel outstanding options or stock appreciation rights under the Plan with exercise prices per share in excess of the then current Fair Market Value per share of Common Stock for consideration payable in equity securities of the Corporation or (iii) otherwise...

  • Page 61
    ... sales or revenue targets; (7) return on assets, capital or investment; (8) cash flow; (9) market share; (10) cost reduction goals; (11) budget comparisons; (12) measures of customer satisfaction; (13) any combination of, or a specified increase in, any of the foregoing; (14) new product development...

  • Page 62
    ...time of issuance to qualify as performance-based compensation under Code Section 162(m), except in the event of the Participant's Involuntary Termination or as otherwise provided in Section II of this Article Three. 7. Outstanding share right awards, restricted stock units or cash bonus awards under...

  • Page 63
    ...consummation of the Change in Control, the successor corporation may, in connection with the assumption or continuation of the outstanding restricted stock units or share right awards, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration...

  • Page 64
    ...actual number of shares for which such initial option grant shall be made shall (subject to the 150,000-share limit) be determined by the Plan Administrator at the time of each such grant. 2. Annual Grants: On the date of each annual stockholders meeting, beginning with the 2005 Annual Meeting, each...

  • Page 65
    ... Corporation's repurchase right shall lapse, in four (4) successive equal annual installments upon the Optionee's completion of each year of Service (whether as a non-employee Board member, Employee or consultant) over the four (4)-year period measured from the option grant date. The shares subject...

  • Page 66
    ... per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. To the extent the actual holders of the Corporation's outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Change in Control...

  • Page 67
    ...(100%)) designated by the holder. The shares of Common Stock so withheld shall reduce the number of shares of Common Stock authorized for issuance under the Plan. Stock Delivery: The election to deliver to the Corporation, at the time the Non-Statutory Option or stock appreciation right is exercised...

  • Page 68
    ... increase, then any options, stock appreciation rights or other stock-based awards granted on the basis of such excess shares shall terminate and cease to be outstanding. V. USE OF PROCEEDS Proxy Statement Any cash proceeds received by the Corporation from the sale of shares of Common Stock...

  • Page 69
    ... of applicable securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any Stock Exchange (or the Nasdaq National Market, if applicable) on which Common Stock is...

  • Page 70
    ... shall mean the Internal Revenue Code of 1986, as amended. F. Common Stock shall mean the Corporation's common stock. G. Compensation Committee shall mean the Compensation Committee of the Board comprised of two (2) or more non-employee Board members. H. Corporation shall mean SanDisk Corporation...

  • Page 71
    ... power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept. O. Incentive Option shall mean an option which satisfies the requirements of Code Section 422...

  • Page 72
    ... Corporation's 1995 Non-Employee Directors Stock Option Plan, as each such Plan is in effect immediately prior to the 2005 Annual Stockholders Meeting. BB. Secondary Board Committee shall mean a committee of one or more Board members appointed by the Board to administer the Discretionary Grant and...

  • Page 73
    ...the Corporation (or any Parent or Subsidiary). JJ. Withholding Taxes shall mean the applicable income and employment withholding taxes to which the holder of an option or stock appreciation right or shares of Common Stock or a cash bonus under the Plan may become subject in connection with the grant...

  • Page 74
    ... ARTICLE IV of the Amended and Restated Certificate of Incorporation is amended to read in its entirety as follows: ""A. Classes of Stock. This corporation is authorized to issue two classes of stock to be designated, respectively, ""Common Stock'' and ""Preferred Stock.'' The total number of shares...

  • Page 75
    IN WITNESS WHEREOF, the undersigned have executed this Certificate of Amendment on 2006. , Eli Harari President Charles Van Orden Secretary B-2

  • Page 76
    ... sale price as reported on the National Association of Securities Dealers Automated Quotation System National Market System. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at March 1, 2006 Annual Report...

  • Page 77
    SANDISK CORPORATION Table of Contents Page No. PART I Item 1. Business ...Item 1A. Risk Factors ...Item 1B. Unresolved Staff Comments ...Item 2. Properties ...Item 3. Legal Proceedings ...Item 4. Submission of Matters to a Vote of Security Holders... ... 3 13 25 25 26 29 PART II Item 5. Market for...

  • Page 78
    ... worldwide leader in flash storage card products. We design, develop and market flash storage devices used for a wide variety of consumer electronics products such as digital cameras, mobile phones, Universal Serial Bus, or USB, drives, gaming devices, MP3 players and other digital consumer devices...

  • Page 79
    ... Corporation, or Samsung, and Toshiba. Additionally, we design in-house and fabricate at third-party foundries the controllers which interface between the flash memory and digital consumer devices. Our team manages a network of contract manufacturers that assemble and test our flash memory and cards...

  • Page 80
    ... by fast write speeds, high capacity and lower manufacturing cost than NOR flash memory. We are focused on NAND-based products. Our Primary Markets. We currently focus primarily on five consumer electronics markets: imaging, mobile phones, USB flash drives, gaming devices and digital audio players...

  • Page 81
    ... factors of removable data storage cards as well as USB flash drives and flash digital audio players. The principal form factors of our products are: • CompactFlash. Our CF products are characterized by high performance. CF products are well-suited for a range of consumer applications, including...

  • Page 82
    ... microSD is an ultra-small removable flash memory storage format designed for new mobile phones that are compact yet fully-featured with storage-intensive multimedia applications such as digital cameras, video capture and playback, digital audio players, video games, email and voicemail capabilities...

  • Page 83
    ... property rights. See Item 1A, "Risk Factors." In 1988, we developed the concept of emulation of a hard disk drive with flash solid-state memory. The first related patents were filed by our president and chief executive officer Dr. Eli Harari and exclusively licensed to us. As of the end of 2005...

  • Page 84
    ... processing and similar costs associated with this direct design of the flash memory. We also pay Toshiba for a portion of its semiconductor company's common research and development activities. See Note 5 to our consolidated financial statements included in Item 8 of this report. 9 Annual Report

  • Page 85
    ... wafers to us and Toshiba at a price equal to manufacturing cost plus a mark-up. Toshiba operates Fab 3, and we have our employees assigned to work in Fab 3. The cost of the wafers that Flash Partners purchases from Toshiba includes Toshiba's costs of running Fab 3 and the depreciation cost of the...

  • Page 86
    ... semiconductor manufacturers of NAND flash memory. We also face competition from hard disk drives and from new technologies. See Item 1A, "Risk Factors." Our Key Competitive Advantages. include: We believe our key competitive advantages in NAND flash products • our intellectual property ownership...

  • Page 87
    ... and Chief Financial Officer Executive Vice President, Technology and Worldwide Operations Executive Vice President, Handset Business and Corporate Engineering Eli Harari, the founder of SanDisk, has served as President and Chief Executive Officer and as a director of SanDisk since June 1988. Dr...

  • Page 88
    ... working in product definition, marketing and development of systems and embedded flashbased semiconductors. Prior to SanDisk, he was the Vice President of New Business Development at Waferscale Integration and has more than 27 years of experience in design and engineering management of electronic...

  • Page 89
    ... of our products in these markets; • our license and royalty revenues may decline significantly in the future as our existing license agreements and key patents expire; • timing of sell through by our distributors and retail customers; • increased purchases of flash memory products from our...

  • Page 90
    ...other form factors or our new products, our results of operations could be harmed. Any new applications, products, technologies or standards we develop may not be commercially successful. Annual Report We face competition from numerous manufacturers and marketers of products using flash memory, as...

  • Page 91
    ...cards bearing the Kodak brand name, which competes with our flash memory cards. Our handset card products also face competition from embedded solutions from competitors including Intel, M-Systems and Samsung. Our digital audio players face competition from similar products offered by other companies...

  • Page 92
    ... our revenues, earnings and gross margins. All of our flash memory card products require silicon supply for the memory and controller components. The substantial majority of our flash memory is currently supplied by our ventures with Toshiba and by Toshiba pursuant to our foundry agreement, and...

  • Page 93
    ...of our products have incorporated semiconductors with greater memory capacity per chip. The transition to new generations of products, such as the 70-nanometer 8 gigabit MLC chip which we began shipping in the third quarter of 2005, is highly complex and requires new controllers, new test procedures...

  • Page 94
    ...-millimeter NAND wafers with competitive yields. Flash Partners' facility may not perform as expected or ramp to volume production on time, and the cost to equip the facility may be significantly more than planned. Samsung, the world's largest NAND flash memory manufacturer, already has experience...

  • Page 95
    ...we may be forced to write-down excess inventory which may harm our financial condition and results of operations. Under conditions of 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...

  • Page 96
    ... 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 us...

  • Page 97
    ...piracy and degradation of our intellectual property protection. Our results of operations and financial condition could be harmed by the sale of counterfeit products. Our international business activities could also be limited or disrupted by any of the following factors: • the need to comply with...

  • Page 98
    ..., in recent years the stock market has experienced significant price and volume fluctuations and the market prices of the securities of high technology and semiconductor companies have been especially volatile, often for reasons outside the control of the particular companies. These fluctuations as...

  • Page 99
    ...our business. Our success greatly depends on the continued contributions 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...

  • Page 100
    ... 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 control, or if our internal control over financial reporting is not effective, our business could suffer...

  • Page 101
    ... Electronics 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 01 4063 VRW, we seek damages and injunctions against these companies from making, selling, importing or using flash memory...

  • Page 102
    ... legal rights, has an ownership interest in several SanDisk patents that issued from applications filed by Dr. Harari, a former WSI employee. The complaint seeks the assignment of certain inventions and patents conceived of by Harari as well as damages in an unspecified amount. On November 15, 2005...

  • Page 103
    ..., we filed a complaint for patent infringement in the United States District Court for the Northern District of California against STMicro (Case No.C06-00194 JF). In the suit, we seek damages and injunctions against STMicro from making, selling, importing or using flash memory chips or products that...

  • Page 104
    ... Products, L.L.C., Digital Networks North America, Inc., Palm, Inc., Audiovox Corporation, SanDisk Corporation, and Thomson Inc., Case No. 2:06-cv-00017-LED. SoftVault accuses us, and others, of infringing its patents through the use of Microsoft's Windows Digital Rights Management technology...

  • Page 105
    ... FINANCIAL DATA SANDISK CORPORATION SELECTED FINANCIAL DATA January 1, 2006(1) Years Ended January 2, December 28, December 29, 2005(2) 2003(3) 2002(4) (In thousands, except per share data) December 30, 2001(5) Revenues Product ...$2,066,607 License and royalty ...239,462 Total revenues ...Cost of...

  • Page 106
    SANDISK CORPORATION SUPPLEMENTARY QUARTERLY DATA April 3, 2005 Quarters Ended July 3, October 2, January 1, 2005 2005 2006 (In thousands, except per share data) (Unaudited) 2005 Revenues Product ...$399,679 License and royalty ...51,296 Total revenues ...Gross profit ...Operating income ...Net ...

  • Page 107
    ... in product costs, increased research and development expenses and exchange rate fluctuations. See Item 1A, "Risk Factors." We operate in one business segment, flash memory products. Our chief decision-maker, our President and Chief Executive Officer, evaluates our performance based on company-wide...

  • Page 108
    ... costs of sale. Retail Sales. Our arrangements with retailers often involve complex terms. These terms include providing the retailer with a right to return unsold product, market development funds, cooperative advertising funds, price protection, volume incentive rebates and other promotions. In...

  • Page 109
    ... on historical experience, the number of customers who will actually redeem the incentive. All sales incentive programs are recorded as an offset to product revenues, deferred revenues or a charge to marketing expenses. In the past, actual returns and rebates have not been significantly different...

  • Page 110
    ..., USB flash drives and feature phones with card slots and the introduction, in the fourth quarter of fiscal 2004, of SanDisk flash-based digital audio players. In addition, our fiscal 2004 consisted of 53 weeks as compared to 52 weeks in the prior fiscal year. Geographical Product Revenues. FY 2005...

  • Page 111
    ... associated with the initial design and development of manufacturing process technology related to Flash Partners' 300-millimeter production line. We grew our research and development headcount to 340 at the end of 2004 from 272 at the end of 2003. Sales and Marketing. FY 2005 Percent Percent Change...

  • Page 112
    ... corporate organization to reflect our global business. Our 2004 general and administrative expenses increases were primarily relates to increased legal expenses related in part to higher litigation expenses to defend our intellectual property, increased staffing and consulting expenses to support...

  • Page 113
    ... $39.1 million of semiconductor wafer manufacturing equipment to be used at Toshiba's Yokkaichi Operations, purchased $95.4 million of test equipment and $3.5 million of investment in foundries and acquired a technology license for $4.5 million. For year ended January 2, 2005, we used $523.0 million...

  • Page 114
    ... wafer supply capacity of FlashVision and Flash Partners that may contractually obligate us to increased capital funding. We and Toshiba each pay the cost of our own design teams and 50% of the wafer processing and similar costs associated with this direct design and development of flash memory. See...

  • Page 115
    ... to expand Flash Partners' capacity to 70,000 wafer starts per month. We currently estimate the remaining total equipment funding obligation for the 70,000 wafer starts per month level to be approximately 365.0 billion Japanese yen, or approximately $3.1 billion based upon the exchange rate at...

  • Page 116
    ... financial statements included in Item 8 of this report. Market Risk. We also hold available-for-sale equity securities in semiconductor wafer manufacturing companies. As of January 1, 2006, a reduction in prices of 10% of these marketable equity securities would result in a decrease in the fair...

  • Page 117
    ... required by this item is set forth under "Business-Executive Officers" in this report and under "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in our Proxy Statement for our 2006 Annual Meeting of Stockholders, and is incorporated herein by...

  • Page 118
    ... forth under "Executive Compensation and Related Information" in our Proxy Statement for our 2006 Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required...

  • Page 119
    ... IV ITEM 15. (a) EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K Documents filed as part of this report 1) All financial statements Index to Financial Statements Page Reports of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Income...

  • Page 120
    SANDISK CORPORATION INDEX TO FINANCIAL STATEMENTS AND RELATED REPORTS Page Reports of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Income Statements ...Consolidated Statements of Stockholders' Equity ...Consolidated Statements of Cash Flows...Notes to...

  • Page 121
    ... accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of SanDisk Corporation's internal control over financial reporting as of January 1, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee...

  • Page 122
    ... 2005, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended January 1, 2006 of SanDisk Corporation and our report dated March 8, 2006 expressed an unqualified opinion thereon. Annual Report /s/ San Jose, California...

  • Page 123
    ... par value, Authorized shares: 4,000,000, Issued and outstanding: none ...- Common stock, $0.001 par value; Authorized shares: 400,000,000; Issued and outstanding: 188,221,958 in 2005 and 179,964,226 in 2004 ...188 Capital in excess of par value ...1,621,819 Retained earnings ...906,624 Accumulated...

  • Page 124
    ... 2, December 28, 2006 2005 2003 (In thousands, except per share amounts) Revenues: Product ...$2,066,607 License and royalty ...239,462 Total revenue ...Cost of product revenues ...Gross profit ...Operating expenses: Research and development ...Sales and marketing ...General and administrative...

  • Page 125
    ... 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 ...Net income ...Unrealized loss on available for sale securities ...Unrealized loss on...

  • Page 126
    ...of short-term investments ...Proceeds from sale of short-term investments ...Proceeds from sale of investments in foundries ...Notes receivable from Matrix Semiconductor ...Acquisition of property and equipment, net ...Acquisition of technology license ...Consideration paid in a business combination...

  • Page 127
    .... 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 consumer electronics products. The Company operates in one segment, flash memory storage...

  • Page 128
    ... accordingly no expense has been recognized in the consolidated income statements for options granted with an exercise price equal to the market value of the Company's stock on the date of grant to employees or directors under the Company's stock option plans. The Company has also accounted for its...

  • Page 129
    ...period and reported in net income as a non-operating item in each period. Monetary balance sheet items denominated in a currency other than the applicable functional currency are translated using the exchange rate in effect on the balance sheet date and are included in retained earnings. The Company...

  • Page 130
    ... in supporting a product failure. Should actual product failure rates, or repair or replacement costs differ from the Company's estimates, increases or decreases to its warranty liability would be required. Advertising Expenses. Marketing co-op development programs, where the Company receives...

  • Page 131
    ... the Company to recognize an expense based on the fair value of all share based payments to employees, including grants of options to buy shares of the Company's common stock. Share based awards to employees is calculated through the use of option pricing models. These models require subjective...

  • Page 132
    ... Total ...$1,716,035 Available-for-sale investments at January 2, 2005 was as follows: Book Value Gross Gross Unrealized Unrealized Gains Losses (In thousands) Market Value Money market funds ...Commercial paper ...U.S. government agency...Municipal notes/bonds ...Corporate notes/bonds ...Auction...

  • Page 133
    ... unrealized losses were primarily caused by interest rate increases. Gross realized gains and losses on sales of available-for-sale securities during the years ended January 1, 2006, January 2, 2005 and December 28, 2003 were immaterial. Debt securities at January 1, 2006 by contractual maturity are...

  • Page 134
    ... gains and losses on available-for-sale marketable securities, net of taxes, for all periods presented (in thousands): January 1, 2006 January 2, 2005 Annual Report Accumulated net unrealized gain (loss) on: Available-for-sale short-term investments ...Available-for-sale investments in foundries...

  • Page 135
    ... Company's stock plans and the rights to purchase shares under the Company's employee stock purchase plan. The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton optionpricing model, with the following weighted-average assumptions for grants made in 2005...

  • Page 136
    ... $69.75 per share, and outstanding options under the 1995 Non-Employee Directors Stock Option Plan had exercise prices ranging from $6.22 to $35.03 per share. Special Stock Option Plan. This plan expired on May 27, 2005. No options were ever granted under this plan. 2005 Stock Incentive Plan. 5,700...

  • Page 137
    ...) A summary of activity under all stock incentive plans follows (shares in thousands): Total Available for Future Grant/Issuance Total Outstanding Weighted Average Exercise Price Balance at December 29, 2002 ...Granted ...Automatic share increase...Exercised ...Canceled ...Balance at December 28...

  • Page 138
    ... 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, evaluates performance of the Company and makes...

  • Page 139
    ...interest in FlashVision, a business venture with Toshiba Corporation, or Toshiba, formed in fiscal 2000 to purchase from Toshiba NAND flash memory products. FlashVision operates in two of Toshiba's 200-millimeter wafer fabrication facilities, located in Yokkaichi, Japan. The Company accounts for its...

  • Page 140
    ... Partners venture agreements, the Company is required to fund direct and common research and development expenses related to the development of advanced NAND flash memory technologies. In fiscal 2004, the Company and Toshiba increased the maximum quarterly amounts the Company may be required to pay...

  • Page 141
    ... the Company guaranteed. • In December 2005, Flash Partners entered into a second master lease agreement with certain financial institutions providing up to 35.0 billion Japanese yen, or approximately $297 million based upon the exchange rate at January 1, 2006, of original lease obligations...

  • Page 142
    ... 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 third-party patents. In 2004, the Company and Toshiba each engaged consultants to perform a review of the existing...

  • Page 143
    ..., Ritek Corporation, and Power Quotient International Co., Ltd. In the suit, captioned SanDisk Corp. v. Memorex Products, Inc., et al., Civil Case No. CV 01 4063 VRW, the Company seeks damages and injunctions against these companies from making, selling, importing or using flash memory cards that...

  • Page 144
    ...., et al., Civil Case No. 03 CV 4999, was filed against Tower and a number of its shareholders and directors, including the Company and Dr. Harari, who is a Tower board member, and asserts claims arising under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 14a...

  • Page 145
    ...filed a complaint for patent infringement in the United States District Court for the Northern District of California against STMicro (Case No.C06-00194 JF). In the suit, the Company seeks damages and injunctions against STMicro from making, selling, importing or using flash memory chips or products...

  • Page 146
    ... Digital Networks North America, Inc., Palm, Inc., Audiovox Corporation, SanDisk Corporation, and Thomson Inc., Case No. 2:06-cv-00017-LED. SoftVault accuses the Company, and others, of infringing its patents through the use of Microsoft's Windows Digital Rights Management technology. The Company...

  • Page 147
    ... January 2, 2005, respectively. These amounts are secured by irrevocable standby letters of credit issued by the International Commercial Bank of China, or ICBC. Further, Lee and Li extended a credit to the Company in the amount of $18.3 million to be applied against future legal services provided...

  • Page 148
    ...FlashVision, Flash Partners, related parties vendors and other silicon sources vendors purchase commitments. (4) Amounts are denominated in Japanese yen, are subject to fluctuation in exchange rates prior to payment and have been translated using the exchange rate at January 1, 2006. (5) The Company...

  • Page 149
    .... The Company's provision for income taxes differs from the amount computed by applying the federal statutory rates to income before taxes as follows: January 1, 2006 January 2, 2005 December 28, 2003 U.S. Federal statutory rate ...State taxes, net of federal benefit ...Utilization of credits...

  • Page 150
    ... In the first quarter of fiscal 2005, the Company entered into an agreement with M-Systems, Inc., or M-Systems, under which they formed U3, LLC. U3, LLC was founded to develop a platform for which software developers can transform USB drives from a simple mass storage device to a platform for on-the...

  • Page 151
    ... 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 September 25, 2003. The rights will expire on April 28, 2007 unless redeemed or exchanged. Under the new rights agreement and after giving effect to...

  • Page 152
    ... - Tower Semiconductor." The former President and Chief Executive Officer of Flextronics International, Ltd., or Flextronics, has served on the Company's Board of Directors since September 2003. For the years ended January 1, 2006 and January 2, 2005, the Company recorded revenues related to...

  • Page 153
    ... with respect to Flash Partner's lease arrangement, capacity expansion, take-or-pay supply arrangements and research and development cost sharing are described in Note 5. Flash Partners is a variable interest entity and the Company is not the primary beneficiary of Flash Partners because it is...

  • Page 154
    ... a facility lease agreement for a new corporate office complex to be located in Milpitas, California. This new corporate facility will house the Company's research and development, sales and marketing and general and administrative functions. The facility lease agreement runs through 2013 with...

  • Page 155
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  • Page 156
    ... of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date By: /s/ (Eli Harari) (Eli Harari) By: /s/ (Judy Bruner) (Judy Bruner) President, Chief...

  • Page 157
    Signature Title Date By: /s/ (Michael E. Marks) (Michael E. Marks) By: /s/ (James D. Meindl) (James D. Meindl) By: /s/ (Alan F. Shugart (Alan F. Shugart) Director March 15, 2006 Director March 15, 2006 Director March 15, 2006 S-2

  • Page 158
    ... January 2, 2002.(15), (*) SanDisk Corporation 1995 Non-Employee Directors Stock Option Plan, as Amended and Restated as of January 2, 2004.(16), (*) Share Purchase Agreement, dated as of July 4, 2000, by and between the Registrant and Tower Semiconductor Ltd.(8) Escrow Agreement, dated as of August...

  • Page 159
    ...Flash Partners, Ltd.(22), (1) Guarantee Agreement, dated as of December 24, 2004, by and between the Registrant and Mitsui Leasing & Development, Ltd.(22) SanDisk Corporation 2005 Stock Incentive Plan.(23), (*) SanDisk Corporation Form of Notice of Grant of Stock Option.(23), (*) SanDisk Corporation...

  • Page 160
    ...to Change of Control Agreement for those officers of the Registrant who are party to such Agreement.(24), (*) Guarantee Agreement between the Registrant, IBJ Leasing Co., Ltd., Sumisho Lease Co., Ltd., and Toshiba Finance Corporation.(**) Basic Lease Contract between Flash Partners Yuken Kaisha, IBJ...

  • Page 161
    ... of the Board, General Partner, U.S. Venture Partners Steven J. Gomo1 Executive Vice President, Finance & Chief Financial Officer, Network Appliance, Inc. Dr. Eli Harari Founder, President & Chief Executive Officer, SanDisk Corporation Catherine P. Lego1 Partner, Photonics Fund Eddy W. Hartenstein...

  • Page 162
    ... Computer Entertainment, Inc. (SCEI). U3 and the U3 smart logo are trademarks of U3, LLC. Other brand names mentioned herein are for identification purposes only and may be trademarks of their respective holder(s). © 2006 SanDisk Corporation. All rights reserved. 03/06 store your world in ours ®