SanDisk 2006 Annual Report Download

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Table of contents

  • Page 1
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  • Page 2
    ..., SanDisk's products have helped drive the exponential growth in sales of digital cameras, multi-function mobile phones, USB flash drives, MP3 music players, and other digital consumer devices. In addition to retail and OEM flash memory cards, the company also manufactures and sells Sansa® audio...

  • Page 3
    Shareholder Letter Proxy Statement Annual Report

  • Page 4
    ... to SanDisk with their shared vision of NAND expansion, complementary products, IP strength, OEM customers and an excellent team specializing in Flash storage systems engineering and marketing. Since the acquisition just a few months ago, this team has launched a new solid state Flash drive for...

  • Page 5
    ... the mobile retail market. Cell phones with new applications are fueling growth for Flash storage and we believe digital music will drive user preference for higher NAND capacities in portable digital audio players. We are also pleased with the growth in our Sansa» MP3 line of products and we have...

  • Page 6
    ... been mailed concurrently herewith to all stockholders entitled to notice of and to vote at the Annual Meeting. We look forward to seeing you at the Annual Meeting. Proxy Statement Sincerely yours, Eli Harari Chairman of the Board, Director and Chief Executive Officer Milpitas, California April...

  • Page 7
    (This page intentionally left blank)

  • Page 8
    ... 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 Chairman of the Board, Director and Chief Executive Officer Milpitas, California...

  • Page 9
    ... a.m., local time, at the Company's headquarters, 601 McCarthy Boulevard, Milpitas, California 95035. This Proxy Statement and the enclosed proxy card will be first mailed to stockholders entitled to vote at the Annual Meeting on or about April 10, 2007. VOTING RIGHTS The close of business on March...

  • Page 10
    ... seven (7) nominees is currently a Director of the Company and was elected to the Board of Directors by the stockholders at the last annual meeting. Each of the non-employee nominees is independent as defined under Securities and Exchange Commission ("SEC") and applicable stock exchange rules. Alan...

  • Page 11
    ... Device Technology Award "For leadership in the development and commercialization of Flash EEPROMbased data storage products." Dr. Harari is a board member of Tower Semiconductor Ltd. Mr. Federman has served as a Director of the Company since September 1988. Mr. Federman has been a general partner...

  • Page 12
    ... years at Hewlett-Packard Company serving in various positions including finance, financial management, manufacturing and general management. Mr. Gomo holds a bachelor's degree from Oregon State University and a masters of business administration from Santa Clara University. Mr. Gomo was a director...

  • Page 13
    ... mail or email. Postal Mail Postal mail submissions should be directed to the following address: Board of Directors c/o Investor Relations SanDisk Corporation 601 McCarthy Boulevard Milpitas, CA 95035 Email Individuals may also communicate with the Board by submitting an email to the Company's Board...

  • Page 14
    ... in developing succession plans for executive officers; • review and recommend to the Board appropriate director compensation programs for non-employee directors; • develop and periodically assess the Compensation Committee's compensation policies; • approve stock option grants and other share...

  • Page 15
    ...be comprised of one or more officers of the Company, and is currently comprised of two officers, Sanjay Mehrotra, the Company's President and Chief Operating Officer, and Judy Bruner, the Company's Executive Vice President, Administration and Chief Financial Officer. Share-based awards to Section 16...

  • Page 16
    ...high levels of accomplishment; • Demonstrated business acumen and experience, and ability to exercise sound business judgment in matters that relate to the current and long-term objectives of the Company; • Ability to read and understand basic financial statements and other financial information...

  • Page 17
    ... 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 stock exchange rules. After reviewing appropriate biographical information and...

  • Page 18
    ... included as part of the Company's 2006 Annual Report filed on Form 10-K, which note is incorporated herein by reference. (3) As described below, we granted each of our Non-Employee Directors (other than Mr. Shugart, who resigned from the Board of Directors prior to the grant date, and Mr. Gomo, who...

  • Page 19
    ...an "early exercise" stock option because the holder is permitted to exercise the option prior to the time that the underlying shares vest. Subject to the Non-Employee Director's continued service, the shares subject to the Initial Option Grant vest, and the Company's repurchase right lapses, in four...

  • Page 20
    ... of the 2005 Plan, stock options and restricted stock units granted to our Non-Employee Directors may vest on an accelerated basis in connection with a change in control of the Company. Required Vote The affirmative vote of the holders of a plurality of the shares present in person or represented by...

  • Page 21
    ...will be available to respond to appropriate questions. Principal Accountant Fees and Services The following is a summary of the Ernst & Young LLP fees incurred by the Company for professional services rendered during the 2006 and 2005 fiscal years: 2006 2005 (a) Audit Fees ...(b) Audit-Related Fees...

  • Page 22
    ...the use of performance-vesting shares can be legally implemented by the Company and will otherwise apply to the design of all future plans and agreements. Supporting Statement We believe that our Company's compensation policies should encourage the ownership of stock by senior executives in order to...

  • Page 23
    ...-based bonus program, we have disclosed the performance-based criteria in effect for that year for our senior executives. We also use stock option and restricted stock unit grants to align our executives' long-term interests with those of our stockholders, to help hold executives accountable for...

  • Page 24
    ... the number of shares of Common Stock reserved for issuance thereunder, provides us additional flexibility in making awards to senior executives by allowing the use of not only time and performance-vesting stock options, restricted stock and restricted stock units, but also stock appreciation rights...

  • Page 25
    ... c/o SanDisk Corporation, 601 McCarthy Boulevard, Milpitas, California 95035. Unless otherwise indicated and pursuant to applicable community property laws, the persons named in the following table have sole voting and investment power with respect to all shares of Common Stock. The number of shares...

  • Page 26
    ... voting power over 218 shares of Common Stock and sole dispositive power over 12,506,143 shares of Common Stock. Proxy Statement (4) Comprised of 13,346 shares held as community property in the name of Ms. Bruner and her spouse. Also includes 299,686 shares subject to outstanding option granted to...

  • Page 27
    ... from one or more of such persons that no annual Form 5 reports were required to be filed by them for the 2006 fiscal year, the Company believes that all executive officers, stockholders holding more than 10% of the outstanding capital stock of the Company and Board members complied with all their...

  • Page 28
    ...assumed by the Company in connection with its acquisition of msystems Ltd., which had originally granted those options and Stock Appreciation Rights. (7) Weighted average estimated remaining life of the outstanding options is 6.10 years. (8) Consists of shares available for future issuance under the...

  • Page 29
    ..., by writing to Investor Relations at the Company's principal executive offices located at 601 McCarthy Boulevard, Milpitas, California 95035. The Annual Report on Form 10-K is also available on the Company's website at www.sandisk.com. AUDIT COMMITTEE REPORT The information contained in this report...

  • Page 30
    ... to individual performance. As described in more detail below, the material elements of our current executive compensation program for Named Executive Officers include a base salary, an annual cash incentive opportunity, a long-term share-based incentive opportunity, 401(k) retirement benefits and...

  • Page 31
    ...each Named Executive Officer that we believe achieves our compensation objectives and provides competitive compensation opportunities. From time to time, management has retained Buck Consultants, an independent compensation consulting firm, to review and identify our appropriate peer group companies...

  • Page 32
    ...1, 2007. Annual Cash Incentive Award None of our Named Executive Officers has an employment agreement or other contractual right to a fixed actual or target bonus for any given year. Historically, the Company utilized a formula to set aside pre-tax net income to fund a discretionary bonus pool. Each...

  • Page 33
    ... 2006, the annual awards were granted in the form of stock options and restricted stock units. The number of shares of the Company's Common Stock subject to each annual award is intended to create a meaningful opportunity for stock ownership in light of the Named Executive Officer's current position...

  • Page 34
    ... these Named Executive Officers with a change in control agreement with cash severance benefits based on one (1) times (two (2) times for the Chief Executive Officer) salary and bonus levels is consistent with our peer group companies and provides them with financial security during a period of time...

  • Page 35
    ...control. Stock Ownership Guidelines Each Board member and executive officer (as defined in Section 16 of the Securities Exchange Act of 1934, as amended) is required to own the Company's Common Stock, with a minimum stock ownership requirement, if any, to be determined by the Board from time to time...

  • Page 36
    ... in the Company's 2006 Annual Report on Form 10-K filed with the SEC. Compensation Committee of the Board of Directors Irwin Federman (Chair) Michael E. Marks Dr. James D. Meindl COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Of the Compensation Committee members whose names appear on...

  • Page 37
    ... Judy Bruner, ...Executive Vice President, Administration & Chief Financial Officer Sanjay Mehrotra, ...President and Chief Operating Officer Yoram Cedar, ...Executive Vice President, Mobile Business Unit & Corporate Engineering Dr. Randhir Thakur, ...Executive Vice President, Technology & Worldwide...

  • Page 38
    ... our Named Executive Officers for the year. In making its determination, the Compensation Committee considers the factors discussed above under "Current Executive Compensation Program Elements - Base Salaries." In fiscal 2006, instead of granting discretionary cash bonuses, the Company granted Named...

  • Page 39
    ...: Number of Shares of Stock or Units (#) (f) All Option Awards: Number of Securities Underlying Options (#) (g) Exercise or Base Price of Option Awards ($/Sh) (h) Grant Date Fair Value of Stock and Option Awards ($) (i) Name(a) Grant Date (b) Dr. Eli Harari ...3/30/06 5/25/06 5/25/06 Judy Bruner...

  • Page 40
    ... (based on the number of days during the performance period prior to the transaction) the bonus and performance targets based on year-to-date performance. Stock Options Each stock option reported in column (g) of the table above was granted with a per-share exercise price equal to the fair market...

  • Page 41
    ... plan award granted to our Named Executive Officers in fiscal 2006 consisted of an annual cash incentive opportunity under the 2005 Plan. The award provided for the payment of a cash bonus based on the Company's performance for fiscal 2006 in the areas of after-tax net income and revenue growth...

  • Page 42
    ...Awards(2) Market Value of Shares or Units of Stock That Have Not Vested ($)(3) (j) Allocable Financial Charge Recognized for Fiscal 2006 ($) (k) Name (a) Option Exercise Price ($) (d) Option Grant Date (e) Option Expiration Date (f) Stock Award Grant Date (i) Dr. Eli Harari ... 368,000 368,776...

  • Page 43
    ... if a Named Executive Officer's employment terminates. (3) The market or payout value of stock awards reported in column (j) is computed by multiplying the number of shares or units of stock reported in column (h) by $43.03, the closing market price of our common stock on December 29, 2006, the last...

  • Page 44
    ... 2006 of stock awards previously granted to the Named Executive Officers. Option Awards Number of Shares Acquired on Value Realized on Exercise Exercise (#) ($)(1) (b) (c) Stock Awards Number of Shares Acquired on Value Realized on Vesting Vesting (#) ($)(1) (d) (e) Name (a) Dr. Eli Harari ...Judy...

  • Page 45
    ...to one (1) times (two (2) times for Dr. Harari) the sum of (A) the Named Executive Officer's annual base salary as of the Change of Control or termination of employment, whichever is greater, plus (B) the Named Executive Officer's target annual bonus for the year of termination; (ii) for a period of...

  • Page 46
    ... Mr. Chan is entitled to severance pay that includes: (i) a lump sum payment equal to $700,000 (which represents one (1) year of Mr. Chan's base salary as of the separation date plus his target bonus for 2006); (ii) accelerated vesting of then-unvested stock options that were scheduled to vest on or...

  • Page 47
    .... Related persons include (i) the Company's directors, executive officers and nominees to become a director, (ii) any beneficial owner of more than 5% of any class of the Company's voting securities, (iii) any immediate family members of the foregoing persons, or (iv) any firm, corporation or...

  • Page 48
    ...amended, or the Securities Exchange Act of 1934, as amended, that might incorporate this Proxy Statement or future filings made by the Company under those statutes, the Stock Performance Graph and reference to the Audit Committee Charter and independence of the Audit Committee members are not deemed...

  • Page 49
    ... 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. BY ORDER OF THE BOARD OF DIRECTORS, Eli Harari Chairman of the Board, Director and Chief Executive Officer...

  • Page 50
    ...Blvd. Milpitas, California (Address of principal executive offices) 95035 (Zip Code) (408) 801-1000 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act...

  • Page 51
    .... Item 9A. Controls and Procedures...Item 9B. Other Information ...Item 10. Item 11. Item 12. Item 13. Item 14. Item 15. PART III Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder...

  • Page 52
    ..., Universal Serial Bus drives, or USB drives, gaming consoles, MP3 players and other digital devices. Our products are also embedded in a variety of systems for the enterprise, industrial, military and other markets. Flash storage technology allows data to be stored in a low-power consumption format...

  • Page 53
    ...memory and digital consumer devices. Our team manages a network of contract manufacturers that assemble and test our flash memory and cards according to our specifications and we are developing an in-house assembly and test facility in Shanghai, China. We sell our products globally to retail and OEM...

  • Page 54
    ...PCs, consumer electronics, communications and industrial products. Our products use flash memory to store digital information in devices such as mobile phones, digital still cameras, digital video camcorders, gaming consoles, portable digital audio players and PCs. These applications require storage...

  • Page 55
    ...portable. Using our USB flash drives, gamers can save game data, download portable games and demos and save game replays. • Embedded. Our embedded products are a set of reliable, high-capacity, high performance and costeffective embedded flash memory drive, or EFD, solutions for both data and code...

  • Page 56
    ... 1A, "Risk Factors." Annual Report 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 chief executive officer, Dr. Eli Harari and exclusively licensed to us. As of the end of fiscal year 2006, we owned or...

  • Page 57
    ...to our business. We protect our trade secrets through confidentiality and invention assignment agreements. Supply Chain. Our supply chain is an important competitive advantage. • Silicon Sourcing. All of our flash memory card products require silicon chips for the memory and controller components...

  • Page 58
    ... manufacturers and manufacturers and resellers of flash memory cards, USB drives, digital audio players and other consumer electronic devices. We also face competition from manufacturers of hard disk drives and from new technologies. See Item 1A, "Risk Factors." Key Competitive Advantages. Our key...

  • Page 59
    ... Vice President, Administration and Chief Financial Officer Executive Vice President, Technology and Worldwide Operations Executive Vice President, Handset Business and Corporate Engineering Dr. Eli Harari, the founder of SanDisk, has served as Chief Executive Officer and as a director of SanDisk...

  • Page 60
    ... Partners and Flash Alliance ventures as impacted by fab start-up delays and costs, technology transitions, yields or production interruptions due to natural disasters, power outages, equipment failure or other factors; • disruption in the manufacturing operations of suppliers, including suppliers...

  • Page 61
    ... composition of our major customer base changes from year-to-year as we enter new markets making our revenues from several customers somewhat less predictable from year-to-year. Our business depends significantly upon sales of products in the highly competitive consumer market, a significant portion...

  • Page 62
    ...could decline in future years. Newer markets for flash memory include digital audio and video players, mobile phones and solid state drives. There can be no assurance that new markets and products will develop and grow fast enough, or that new markets will adopt NAND flash technologies in general or...

  • Page 63
    ... names or have the ability to operate their business on lower margins than we do. The success of our competitors may adversely affect our future sales revenues and may result in the loss of our key customers. For example, Toshiba and other manufacturers have recently increased their market share...

  • Page 64
    ... to complete. In times of significant growth in global demand for flash memory, demand from our customers may outstrip the supply of flash memory and controllers available to us from our current sources. If our silicon vendors are unable to satisfy our requirements on competitive terms or at all...

  • Page 65
    ... 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. In addition, Flash Partners is currently ramping the 56-nanometer 8 gigabit MLC chip in the Yokkaichi, Japan...

  • Page 66
    ... gross margins, results of operations and financial condition. There is no assurance that Flash Partners' 300-millimeter NAND flash memory facility will perform as expected, in particular as we transition to new lithography feature sizes. The Flash Partners' 300-millimeter fab, Fab 3, is currently...

  • Page 67
    ... of the following year. This may become more pronounced as sales of our Sansa digital audio player have become a larger portion of our product mix. This seasonality increases the complexity of forecasting our business. If our forecasts are inaccurate, we can lose market share or procure excess...

  • Page 68
    ... to pay substantial damages, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology, discontinue the use of specific processes or obtain licenses to the infringing technology. We may be unable to license intellectual property to...

  • Page 69
    ...Japan, South Korea and Taiwan. We are, therefore, affected by the political, economic and military conditions in these countries. Specifically, China does not currently have a comprehensive and highly developed legal system, particularly with respect to the protection of intellectual property rights...

  • Page 70
    ...; • weak protection of our intellectual property rights; and • delays in product shipments due to local customs restrictions. Tower Semiconductor's Financial Situation is Challenging. Tower supplies a significant portion of our controller wafers from its Fab 2 facility and is currently a sole...

  • Page 71
    ..., technological innovations, industry supply dynamics, new product introductions, governmental regulations, the commencement or results of litigation or changes in earnings estimates by analysts. In addition, in recent years the stock market has experienced significant price and volume fluctuations...

  • Page 72
    ... funding the ventures with Toshiba, increasing our wafer supply, developing or enhancing our products, taking advantage of future opportunities, growing our business or responding to competitive pressures or unanticipated industry changes, any of which could harm our business. We currently believe...

  • Page 73
    ... regulatory requirements relating to internal control, or if our internal control over financial reporting is not effective, our business could suffer. The Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, that became law in July 2002 required changes in our corporate governance, public disclosure and...

  • Page 74
    ... any observation period related to a conversion of notes. Annual Report The dealers or their affiliates are likely to modify their hedge positions from time-to-time prior to conversion or maturity of the notes by purchasing and selling shares of our common stock, other of our securities or other...

  • Page 75
    ...' technology and products into our business and future product lines; • integrating msystems' sales force into our worldwide product sales network; • demonstrating to msystems' customers that the merger will not result in adverse changes in pricing, customer service standards or product support...

  • Page 76
    ...We and msystems operate in a highly competitive industry, and our future performance will be affected by our ability to retain each company's existing customers. Some of msystems' customers are our competitors or work with our competitors and may reduce or terminate their business relationships with...

  • Page 77
    ... are located in Milpitas, California. We lease four adjacent buildings comprising approximately 444,000 square feet. These facilities house our corporate offices, the majority of our engineering team, as well as a portion of our sales, marketing, operations and corporate services organizations...

  • Page 78
    ..., the Company filed a complaint under Section 337 of the Tariff Act of 1930 (as amended) (Case No. 337-TA 526) titled, "In the matter of certain NAND flash memory circuits and products containing same" in the United States International Trade Commission ("ITC"), naming STMicroelectronics N.V. and...

  • Page 79
    ... issued. The '45 Action is scheduled currently for jury selection and trial on April 16, 2007. On October 14, 2005, STMicroelectronics, Inc. ("STMicro") filed a complaint against the Company and the Company's CEO Eli Harari, in the Superior Court of the State of California for the County of Alameda...

  • Page 80
    ...The complaint seeks an order excluding ST's NOR and NAND flash memory products from importation into the United States. The ITC instituted an investigation, based on the Company's complaint, on February 8, 2006. On March 31, 2006, ST filed a motion for partial summary determination or termination of...

  • Page 81
    ... duties, abuse of control, constructive fraud, corporate waste, unjust enrichment and gross mismanagement with respect to past stock option grants. The alleged class and derivative claims also assert claims for breach of fiduciary duty by msystems' board, which the Company is alleged to have...

  • Page 82
    ...RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market For Our Common Stock. Our common stock is traded on the NASDAQ Global Select Market under the symbol "SNDK." The following table summarizes the high and low sale prices for our common stock as reported by the NASDAQ Global...

  • Page 83
    ... million net of tax, write-downs related to the recoverability of our Tower wafer credits of ($2.8) million, or ($1.8) million net of tax. (6) Net income per share and the share numbers each gives retroactive effect to a 2-for-1 stock split, in the form of a 100% stock dividend, effected on February...

  • Page 84
    ..., develop, market and manufacture products and solutions in a variety of form factors using our flash memory, controller, and firmware technologies. Our products are used in a wide range of consumer electronics devices such as digital cameras, mobile phones, USB drives, gaming consoles, MP3 players...

  • Page 85
    ...» 3-D Memory is used for one-time programmable storage applications that complement our existing flash storage memory products. Matrix 3-D Memory is used for storage applications that do not require rewriteable memory and where low cost is the paramount consideration, such as video games, music and...

  • Page 86
    ... estimating average selling prices based upon recent sales volumes, industry trends, existing customer orders, current contract prices, industry analysis of supply and demand and seasonal factors. Should actual market conditions differ from our estimates, our future results of operations could be...

  • Page 87
    ...benefit for certain net operating loss carryforwards, certain capitalized expenses and certain unrealized capital losses on our investments in foundries. Share-Based Compensation - Employee Incentive Plans and Employee Stock Purchase Plans. Beginning on January 2, 2006, we began accounting for stock...

  • Page 88
    ... sales of mobile cards to mobile phone manufacturers, 3-D gaming cards and from our acquisition of msystems, which accounted for an additional $115 million of revenue. Retail revenue growth benefited primarily from higher sales of mobile cards, flash-based digital audio players and USB flash drives...

  • Page 89
    ...90-nanometer technology partially offset by decreases in our average selling price per megabyte. Fiscal 2005 gross margins were also benefited due to more production supply coming from captive sources which have lower costs. Research and Development. FY 2006 Percent Percent Change FY 2005 Change (In...

  • Page 90
    ... associated with establishing new legal entities and modifying our corporate organization to reflect our global business. Write-off of Acquired In-process Technology. FY 2006 Percent Percent Change FY 2005 Change (In millions, except percentages) FY 2004 Annual Report Write-off of acquired...

  • Page 91
    ... primarily due to state tax expense, net of federal benefit, nondeductible stock option compensation adjustments recorded under FAS 123(R), in-process R&D write-offs, tax exempt interest income and foreign income at other than U.S. tax rates. The 2006 tax rate increased over prior year primarily due...

  • Page 92
    .... In December 2006, we announced that our Board of Directors authorized a stock repurchase program under which we intend to acquire up to $300 million of our outstanding common stock in the open market over the next two years. Under this program, share purchases may be made from time-to-time in the...

  • Page 93
    ..., increasing our wafer supply, developing or enhancing our products, taking advantage of future opportunities, growing our business or responding to competitive pressures or unanticipated industry changes, any of which could harm our business. Financing Arrangements. In May 2006, we issued and...

  • Page 94
    ...in, FlashVision, Flash Partners and Flash Alliance, our business ventures with Toshiba to develop and manufacture NAND flash memory products. These NAND flash memory products are manufactured by Toshiba at Toshiba's Yokkaichi, Japan operations using the semiconductor manufacturing equipment owned or...

  • Page 95
    ...other financing sources. We assumed msystems' ownership interest in the venture with Toshiba, TwinSys, which was designed to enable the parties to benefit from a portion of each party's respective sales of USB flash drives. As of December 31, 2006, we had a 50.1% beneficial ownership in Twinsys Data...

  • Page 96
    ... 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 December 31, 2006, a reduction in prices of 10% of these marketable equity securities would result in a decrease in the fair...

  • Page 97
    ..., our internal control over financial reporting. ITEM 9B. OTHER INFORMATION On November 1, 2006, we entered into the Building 5 Sublease Agreement with Maxtor Corporation (the "Sublessor") for approximately 94,484 square feet of office space at 1100 Sumac Drive, Milpitas, California 95035 (the...

  • Page 98
    ... OFFICERS AND CORPORATE GOVERNANCE The information 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 2007 Annual Meeting...

  • Page 99
    ... 15. (a) EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K Documents filed as part of this report 1) All financial statements Page Index to Financial Statements Reports of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Statements of...

  • Page 100
    SANDISK CORPORATION INDEX TO FINANCIAL STATEMENTS AND RELATED REPORTS Page Reports of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Statements of Income ...Consolidated Statements of Stockholders' Equity ...Consolidated Statements of Cash Flows...Notes...

  • Page 101
    ..., in 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 December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the...

  • Page 102
    ... reporting of the Company also did not include an evaluation of the internal control over financial reporting of msystems. In our opinion, management's assessment that SanDisk Corporation maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated...

  • Page 103
    ... Public Company Accounting Oversight Board (United States), the consolidated balance sheets of SanDisk Corporation as of December 31, 2006 and January 1, 2006, and the related consolidated statements of operation, stockholders' equity, and cash flows for each of the three years in the period ended...

  • Page 104
    ... investments...Property and equipment, net ...Notes receivable and investments in flash ventures ...Deferred taxes ...Goodwill ...Intangibles, net ...Other non-current assets ...Total assets ...LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ...Accounts payable to related...

  • Page 105
    ......Write-off of acquired in-process technology ...Amortization of acquisition-related intangible assets ...Total operating expenses ...Operating income ...Equity in income of business ventures ...Interest income ...Gain (loss) on investment in foundries ...Recovery on unauthorized sale of UMC shares...

  • Page 106
    ... 1, 2006 ... Annual Report Exercise of stock options for cash ...Issuance of stock pursuant to employee stock purchase plan ...Issuance of restricted stock ...Income tax benefit from stock options exercised ...FAS 123R compensation expense and reversal of deferred compensation ...Purchased calls...

  • Page 107
    ...from share-based compensation ...Write-off of acquired in-process technology ...Other non-cash charges ...Changes in operating assets and liabilities: Accounts receivable from product revenues ...Inventory ...Other assets ...Accounts payable ...Accounts payable and other current liabilities, related...

  • Page 108
    ... 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, markets and manufactures flash storage card products used in...

  • Page 109
    ... price protection, promotions, co-op advertising and other volume-based incentives and expected returns. Additionally, the Company has incentive programs that require it to estimate, based on historical experience, the number of customers who will actually redeem the incentive. All sales incentive...

  • Page 110
    ... that the carrying value of these long-lived assets may not be recoverable. Factors the Company considers important which could result in an impairment review include (1) significant under-performance relative to the expected historical or projected future operating results, F-11 Annual Report

  • Page 111
    ...$995 98 $ 15 N/A N/A $ 8 N/A N/A $ 10 Advertising Expenses. Marketing co-op development programs, where the Company receives, or will receive, an identifiable benefit (goods or services) in exchange for the amount paid to its customer and the Company can reasonably estimate the fair value of the...

  • Page 112
    ... errors based on the effects of each of the company's balance sheet and statement of operations and the related financial statement disclosures. Early application of the guidance in SAB 108 is encouraged in any report for an interim period of the first fiscal year ending after November 15, 2006...

  • Page 113
    ... The Company has the ability and intent to hold the fixed income investments until a recovery of fair value is realized. The decline is temporary for equity investments. Gross realized gains and losses on sales of available-for-sale securities during the fiscal years ended December 31, 2006, January...

  • Page 114
    ...047 18,338 14,251 $121,922 Total other non-current assets ...Property and Equipment. Property and equipment consisted of the following (in thousands): December 31, 2006 January 1, 2006 Annual Report Machinery and equipment ...Software ...Capital land lease ...Furniture and fixtures ...Leasehold...

  • Page 115
    ... years. A provision for the estimated future cost related to warranty expense is recorded at the time of customer invoice. The Company's warranty obligation is affected by customer and consumer returns, product failures and repair or replacement costs incurred. Should actual product failure rates...

  • Page 116
    ... Carrying Amount January 1, 2006 Accumulated Amortization Net Carrying Amount Annual Report Core technology ...Developed product technology ...Trademarks ...Backlog ...Supply agreement ...Customer relationships ...Acquisition-related intangible assets . . Technology licenses ...Total ... $311,801...

  • Page 117
    ... Company, and (iii) an automatic grant program for the non-employee board members pursuant to which such individuals will receive option grants or other stock awards at designated intervals over their period of board service. The 2005 Plan also includes a performance-based cash bonus awards program...

  • Page 118
    ...stock at any time prior to the expiration of the ten-year option term or any earlier termination of those options in connection with the optionee's cessation of service with the Company. Awards granted under these plans generally vest as follows: 50% of the shares will vest on the second anniversary...

  • Page 119
    ... Appreciation Rights (SARs). The fair value of the Company's stock options granted to employees for the years ended December 31, 2006, January 1, 2006 and January 2, 2005 was estimated using the following weighted average assumptions: December 31, 2006 January 1, 2006 January 2, 2005 Dividend yield...

  • Page 120
    ... Company's common stock on the date of the grant, and compensation is recognized on a straight-line basis over the requisite vesting period. A summary of the changes in restricted stock units outstanding under the Company's share-based compensation plan during the fiscal year ended December 31, 2006...

  • Page 121
    ..., "Business Acquisitions." Employee Stock Purchase Plans (ESPP). The fair value of grants under the employee stock purchase plans was estimated on the first date of the purchase period, with the following weighted average assumptions: December 31, 2006 January 1, 2006 January 2, 2005 Dividend yield...

  • Page 122
    ... Information and Major Customers. The Company markets and sells flash-based memory products in the United States and in foreign countries through its sales personnel, dealers, distributors, retailers and its subsidiaries. The Company's Chief Operating Decision Maker, the Chief Executive Officer...

  • Page 123
    ... revenues in 2006 and 2004. In 2005, Best Buy Co., Inc., accounted for 11% of the Company's revenues; all other customers were less than 10% of the Company's revenues. All of the Company's flash memory card products require silicon wafers for the memory components and the controller components. The...

  • Page 124
    ... at any time, regardless of the foregoing circumstances. Upon conversion, a holder will receive the conversion value of the 1% Notes due 2013 to be converted equal to the conversion rate multiplied by the volume weighted average price of the Company's common stock during a specified period following...

  • Page 125
    .... The Company will pay cash interest at an annual rate of 1%, payable semi-annually on March 15 and September 15 of each year, beginning November 15, 2006. In accordance with Accounting Principle Board Opinion No. 14, or APBO 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase...

  • Page 126
    ... NAND wafer supply. As a part of the FlashVision, Flash Partners and Flash Alliance 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. As of December 31, 2006, the Company had...

  • Page 127
    ... Toshiba relating to the first three months of the nine-month forecast are binding and cannot be canceled. At December 31, 2006, the Company had approximately $191.8 million of noncancelable purchase orders for flash memory wafers outstanding to FlashVision, Flash Partners and Toshiba. Other Silicon...

  • Page 128
    ... based upon the exchange rate at December 31, 2006. On January 10, 2007, Flash Partners utilized approximately 52.0 billion Japanese yen, or approximately $437 million based upon the exchange rate at December 31, 2006, of the outstanding lease lines, of which the Company's guarantee was 26.0 billion...

  • Page 129
    ...or Flash Alliance's manufacturing operations in certain circumstances. In fiscal years 2004 and 2006, respectively, the Company and Toshiba each engaged consultants to perform a review of the existing environmental conditions at the site of the facility at which Flash Partners operations are located...

  • Page 130
    ... 15, 2035. The Company will pay cash interest at an annual rate of 1%, payable semi-annually on March 15 and September 15 of each year until calendar year 2035. (3) Includes Toshiba foundries, FlashVision, Flash Partners, related parties vendors and other silicon sources vendors purchase commitments...

  • Page 131
    ... or trading purposes. Note 9: Related Parties and Strategic Investments Toshiba. The Company and Toshiba have collaborated in the development and manufacture of NAND flash memory products. These NAND flash memory products are manufactured by Toshiba at Toshiba's Yokkaichi, Japan operations using the...

  • Page 132
    ... suppliers of wafers for its controller components, has prepaid wafer credits issued by Tower, and has convertible debt and a warrant to purchase Tower ordinary shares. The Company's Chief Executive Officer is also a member of the Tower board of directors. As of December 31, 2006, the Company owned...

  • Page 133
    .... This combination joins together two flash memory companies with complementary products, customers and channels. In the transaction, each msystems common share has been converted into 0.76368 shares of the Company's common stock. The transaction was accounted for using the purchase method of...

  • Page 134
    ... unvested stock-based awards to be expensed ...312,500 186,000 (31,339) 55,339 Annual Report Total preliminary estimated purchase price ...$1,495,738 The core technology and customer relationships are being amortized over an estimated useful life of five years. Backlog, trademarks and the supply...

  • Page 135
    ... and developer of three-dimensional (3-D) integrated circuits. Matrix» 3-D Memory is used for one-time programmable storage applications that complement the Company's existing flash storage memory products. The Company acquired 100% of the outstanding shares of Matrix for a total purchase price of...

  • Page 136
    ... to be expensed ...281,816 14,563 Purchase price ...$296,379 Annual Report The core and developed product technology as a result of the acquisition of Matrix are being amortized over an estimated useful life of seven years, and the customer relationships are being amortized over an estimated...

  • Page 137
    ... gross margins were based on management's projections of the projects and were in line with industry averages. Estimated total net revenues from the projects were expected to grow through fiscal 2009 and decline thereafter as other new products are expected to become available. Estimated operating...

  • Page 138
    ... to income before taxes as follows: Annual Report December 31, 2006 January 1, 2006 January 2, 2005 U.S. Federal statutory rate ...State taxes, net of federal benefit ...Non-deductible stock option expense ...Write-off of acquired in-process technology ...Tax exempt interest income ...Foreign...

  • Page 139
    ... tax assets. Should the Company have the ability to benefit from the valuation allowance in future periods, approximately $45 million would be credited to goodwill, while the remainder would benefit the income statement. The Company also has federal and state net operating loss carryforwards of...

  • Page 140
    ...%-25% for the remaining six or eight-year benefit periods respectively. Following SanDisk's acquisition of SanDisk IL Ltd. the reduced corporate tax rate is expected to be 10%. Benefits relating to these investment plans will expire in fiscal years 2006 through 2015. In addition, under an agreement...

  • Page 141
    ..., 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 142
    ..., the Company filed a complaint under Section 337 of the Tariff Act of 1930 (as amended) (Case No. 337-TA 526) titled, "In the matter of certain NAND flash memory circuits and products containing same" in the United States International Trade Commission ("ITC"), naming STMicroelectronics N.V. and...

  • Page 143
    ... issued. The '45 Action is scheduled currently for jury selection and trial on April 16, 2007. On October 14, 2005, STMicroelectronics, Inc. ("STMicro") filed a complaint against the Company and the Company's CEO Eli Harari, in the Superior Court of the State of California for the County of Alameda...

  • Page 144
    ...The complaint seeks an order excluding ST's NOR and NAND flash memory products from importation into the United States. The ITC instituted an investigation, based on the Company's complaint, on February 8, 2006. On March 31, 2006, ST filed a motion for partial summary determination or termination of...

  • Page 145
    ... duties, abuse of control, constructive fraud, corporate waste, unjust enrichment and gross mismanagement with respect to past stock option grants. The alleged class and derivative claims also assert claims for breach of fiduciary duty by msystems' board, which the Company is alleged to have...

  • Page 146
    ... 20, 2007, Texas MP3 Technologies Ltd. filed suit against the Company, Samsung Electronics Co., Ltd., Samsung Electronics America, Inc. and Apple Computer, Inc., Case No. 2:07-CV-52, in the Eastern District of Texas, Marshall Division, alleging patent infringement related to MP3 players. Note 15...

  • Page 147
    ...Statements of Operations For the year ended December 31, 2006 Parent Company Subsidiary Issuer Other Combined Guarantor Non-Guarantor Subsidiary Subsidiaries (In thousands) Consolidating Adjustments Total Company Total revenues ...$2,101,601 Total cost of revenues...1,280,102 Gross profits ...Total...

  • Page 148
    ... STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable ...$ 43,910 Other current accrued liabilities ...515,042 Total current liabilities ...Convertible long-term debt ...Non-current liabilities and deferred revenue...Total liabilities ...Stockholders' Equity: Common stock...Retained earnings...

  • Page 149
    ... 16: Supplementary Financial Data (Unaudited) April 2, 2006 Quarters Ended July 2, October 1, December 31, 2006 2006 2006 (In thousands, except per share data) 2006 Revenues Product ...License and royalty ...Total revenues ...Gross profit(1) ...Operating income(1) ...Net income (loss)...Net income...

  • Page 150
    ... earnings per share figures may not total to yearly earnings per share, due to rounding and fluctuations in the number of options included or omitted from diluted calculations based on the stock price or option strike prices. Note 17: Subsequent Events In September 2006, Flash Partners entered into...

  • Page 151
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  • Page 152
    .... SANDISK CORPORATION By: /s/ Judy Bruner Judy Bruner Executive Vice President, Administration and Chief Financial Officer (On behalf of the Registrant and as Principal Financial and Accounting Officer) Dated: February 27, 2007 POWER OF ATTORNEY KNOW ALL PEOPLE BY THESE PRESENTS, that each person...

  • Page 153
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  • Page 154
    ... 1997.(5) Lease Agreement between the Registrant and G.F. Properties, dated June 10, 1998.(6) SanDisk Corporation 1995 Stock Option Plan, as Amended and Restated January 2, 2002.(15), (*) SanDisk Corporation 1995 Non-Employee Directors Stock Option Plan, as Amended and Restated as of January 2, 2004...

  • Page 155
    ...; the Executive Vice President and Chief Operating Officer; the Sr. Vice President and General Manager, Retail Business Unit; the Sr. Vice President, Engineering; the Vice President and General Counsel; and the Vice President, Business Development.(20), (*) Change of Control Agreement entered into...

  • Page 156
    ... Company, Limited and Toshiba Finance Corporation.(31) Amended and Restated SanDisk Corporation 2005 Incentive Plan.(34), (*) SanDisk Corporation Form of Notice of Grant of Stock Option.(23), (*) SanDisk Corporation Form of Notice of Grant of Non-Employee Director Automatic Stock Option (Initial...

  • Page 157
    ... as of December 8, 2006.(32) Computation of ratio of earnings to fixed charges. (**) Subsidiaries of the Registrant(**) Consent of Independent Registered Public Accounting Firm(**) Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(**) Certification of...

  • Page 158
    ...Form 10-Q for the quarter ended July 3, 2005. 25. Previously filed as an Exhibit to the Registrant's 2005 Annual Report on Form 10-K. 26. Previously filed as an Exhibit to the Registrant's Form 8-K dated January 20, 2006. 27. Previously filed as an Exhibit to the Registrant's Form 8-K dated April 10...

  • Page 159
    ... Judy Bruner Executive Vice President, Administration & Chief Financial Officer Yoram Cedar Executive Vice President, Mobile Business Unit & Corporate Engineering Dr. Randhir Thakur Executive Vice President, Technology & Worldwide Operations 1 CORPORATE HEADQUARTERS 601 McCarthy Boulevard Milpitas...

  • Page 160
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