SanDisk 2007 Annual Report Download

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STOCKHOLDERS LETTER
NOTICE OF 2008 ANNUAL MEETING & PROXY STATEMENT
2007 ANNUAL REPORT ON FORM 10-K

Table of contents

  • Page 1
    STOCKHOLDERS LETTER NOTICE OF 2008 ANNUAL MEETING & PROXY STATEMENT 2007 ANNUAL REPORT ON FORM 10-K

  • Page 2
    ... technology at the forefront of many young markets that have huge growth potential in the mobile convergence applications space. In the mobile handset business alone, we project that more than 500 million handsets will be sold in 2008 with a slot for Flash memory mobile cards. MP3 and video players...

  • Page 3
    ... stronger global competitor in the next industry upturn. I would like to express my deep appreciation to our employees for their continuing dedication and to our customers, strategic partners, suppliers and stockholders for your continuing confidence. Eli Harari Chairman and Chief Executive Officer

  • Page 4
    ... as the Company's independent registered public accounting firm for the fiscal year ending December 28, 2008. 3. To consider and vote on a stockholder proposal relating to majority voting for Directors, if properly presented at the Annual Meeting. 4. To transact such other business as may properly...

  • Page 5
    ... date, the Company had approximately 224,739,318 shares of Common Stock outstanding and entitled to vote at the Annual Meeting, held by approximately 495 stockholders of record. Each holder of record at the close of business on March 31, 2008 is entitled to one vote for each share of Common Stock...

  • Page 6
    ... in person. SOLICITATION OF PROXIES The Company's Board of Directors is soliciting proxies for the Annual Meeting. 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...

  • Page 7
    ... nominees. NOMINEES Set forth below is information regarding the nominees to the Board of Directors. Name Position(s) with the Company Age First Elected/Appointed As a Director Dr. Eli Harari(1) ...Chairman of the Board, Director and Chief Executive Officer Irwin Federman(2)(3) ...Vice Chairman of...

  • Page 8
    ... from the New York University Graduate School of Business. She has previously practiced as a Certified Public Accountant. Mr. Marks has served as a Director of the Company since August 2003. Since March 2007, Mr. Marks has managed a private equity fund called Riverwood Capital, LLC (formerly Bigwood...

  • Page 9
    ...-a-chip for applications in the consumer electronics and digital imaging markets. He received the 2006 IEEE Medal of Honor, the highest award presented by IEEE. Dr. Meindl holds a B.S., M.S. and Ph.D. in Electrical Engineering from Carnegie-Mellon University. BOARD MEETINGS AND COMMITTEES The Board...

  • Page 10
    ... this charter is available on the Company's website at www.sandisk.com. The charter requires that the Compensation Committee consist of no fewer than two Board members who satisfy the independence requirements of NASDAQ and applicable law. At all times during fiscal 2007, the Compensation Committee...

  • Page 11
    ... Operating Officer, and Judy Bruner, the Company's Executive Vice President, Administration and Chief Financial Officer. Share-based awards to Section 16 officers are made by the Compensation Committee. The Secondary Executive Committee took action by written consent 26 times during fiscal 2007. As...

  • Page 12
    ..., for any matters relating to its purposes. The Board of Directors adopted a charter for the Nominating and Governance Committee in February 2003, which was last amended in February 2007. A copy of this charter is available on the Company's website at www.sandisk.com. The Board of Directors has...

  • Page 13
    ...incumbent Director's performance during his or her term, including the number of meetings attended, level of participation, and overall contribution to the Company; the number of other company boards on which the individual serves; the composition of the Board at that time; any changed circumstances...

  • Page 14
    ... authority to grant stock options (but not stock units or other share-based awards) to employees other than Section 16 officers and Directors. The Secondary Executive Committee may be comprised of one or more officers of the Company and is currently comprised of Mr. Mehrotra and Ms. Bruner. Each of...

  • Page 15
    ... as part of the Company's 2007 Annual Report filed on Form 10-K, which note is incorporated herein by reference. (2) As described below, in fiscal 2007 we granted each of our Non-Employee Directors an award of 6,250 stock options and 1,842 restricted stock units. Each of the stock option awards had...

  • Page 16
    ...value is equal to the closing price of a share of the Company's Common Stock on the NASDAQ Global Select Market on the grant date. The stock options granted to Non-Employee Directors are immediately exercisable. However, upon a NonEmployee Director's cessation of service with the Company, any shares...

  • Page 17
    ... 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 proxy at the Annual Meeting and...

  • Page 18
    ... as the Company's independent registered public accounting firm for the fiscal year ending December 28, 2008, and is asking the Company's stockholders to ratify this appointment. The affirmative vote of the holders of a majority of the shares present or represented by proxy at the Annual Meeting and...

  • Page 19
    ...the audit-related services, tax services and other nonaudit services identified above is compatible with the principal accountants' independence. Required Vote The affirmative vote of the holders of a majority of the shares present in person or represented by proxy at the Annual Meeting and entitled...

  • Page 20
    ...address post-election issues related to the status of director nominees that fail to win election. Other companies have responded only partially to the call for change... public companies do not permit but is widely recognized as a corporate governance mechanism designed to protect stockholders' rights...

  • Page 21
    ... purpose of filling the vacancy. In any case, the Board may be left with vacancies for an indefinite period of time, making it difficult to staff key committees and otherwise meet its obligation to oversee the business and affairs of the Company. This could cause additional uncertainty, disruption...

  • Page 22
    ... 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 23
    ...granted to Mr. Federman, but some of the shares subject to those options are currently unvested and would, if purchased, be subject to a repurchase right of the Company that lapses over time. Excludes 1,842 restricted stock units that will not vest on February 15, 2008 or within 60 days of that date...

  • Page 24
    ... each of the independent Board members on June 11, 2007, reporting their annual automatic grants that occurred on May 24, 2007 and a late Form 4 report for each of Judy Bruner, Yoram Cedar, Eli Harari and Sanjay Mehrotra was filed on February 22, 2007 for the withholding shares issued for taxes in...

  • Page 25
    ...share of Common Stock on the employee's entry date into that six-month offering period or (ii) the closing selling price per share on the purchase date. (4) Excludes 3,164,134 shares that are subject to options and other equity compensation awards that were originally granted by Matrix Semiconductor...

  • Page 26
    ...the SEC on February 25, 2008. Stockholders may obtain a copy of this report, without charge, 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 at http://ww3.ics...

  • Page 27
    ...be contingent on the Company's performance. As an executive officer's level of responsibility increases, a greater portion of the officer's total compensation should be dependent on the Company's performance and stock price appreciation. • Pay for Performance. performance. A substantial portion of...

  • Page 28
    ... Dr. Harari based on the Company's targeted compensation levels. Dr. Harari does not participate in the Compensation Committee deliberations that relate to his personal compensation and he excuses himself from that portion of the Compensation Committee meeting. Dr. Harari and other employees of the...

  • Page 29
    ...and not directly comparable to positions at our peer group of Companies, such as Executive Vice President, Technology and Worldwide Operations and Executive Vice President, Mobile Business Unit and Corporate Engineering, the internal comparables and individual performance factors may be weighed more...

  • Page 30
    ... stock compensation and charges related to acquisition accounting, would provide the most relevant measure of the Company's performance in comparison to the previous year and in comparison to its annual operating plan. In addition to establishing target incentive amounts for Named Executive Officers...

  • Page 31
    ...the growth of the Company over the period covered by the expired awards. 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 with the Company, the...

  • Page 32
    ... Officers in the form of stock options with an exercise price that is equal to the fair market value of the Company's Common Stock on the grant date. Thus, the Named Executive Officers will only realize value on their stock options if our stockholders realize value on their shares. The stock options...

  • Page 33
    ... 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 34
    ... own additional shares. Section 162(m) Policy Section 162(m) of the Internal Revenue Code disallows a tax deduction to publicly-held companies for compensation paid to certain executive officers, to the extent that compensation exceeds $1,000,000 per officer in any year. The limitation applies only...

  • Page 35
    ... AND INSIDER PARTICIPATION Of the Compensation Committee members whose names appear on the Compensation Committee Report above, all were committee members during all of fiscal 2007. No current member of the Compensation Committee is a current or former executive officer or employee of the Company or...

  • Page 36
    ... Name and Principal Position (a) Year (b) Salary ($) (c) Bonus ($) (d) Stock Awards ($)(1) (e) Option Awards ($)(1) (f) Total ($) (j) Dr. Eli Harari, ...Chief Executive Officer and Chairman of the Board Judy Bruner, ...Executive Vice President, Administration & Chief Financial Officer Sanjay...

  • Page 37
    ... reported in the table are base salary, an annual bonus and long-term equity incentives consisting of stock options and restricted stock units. The Named Executive Officers also earned or were paid the other benefits listed in column (i) of the Summary Compensation Table - Fiscal 2006 and 2007...

  • Page 38
    ... Stock Awards: 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 ...Judy Bruner ...Sanjay...

  • Page 39
    ... 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 value of a share of the Company's Common...

  • Page 40
    ... the Company's performance for fiscal 2007 in the area of earnings per share. The amount of each Named Executive Officer's award (before any application of the Compensation Committee's discretion to reduce the payout under any award) is (i) the Named Executive Officer's target incentive amount times...

  • Page 41
    ... Vested (#) (h) Market Value of Shares or Units of Stock That Have Not Vested ($)(3) (j) Allocable Financial Charge Recognized for Fiscal 2007 ($) (k) Name (a) Option Exercise Price ($) (d) Option Grant Date (e) Option Expiration Date (f) Stock Award Grant Date (i) Dr. Eli Harari ... 143,000...

  • Page 42
    ... multiplying the number of shares or units of stock reported in column (h) by $33.17, the closing market price of our common stock on December 31, 2007, the last trading day of 2007. (4) The unvested portions of these option awards were scheduled to vest in full on January 16, 2008. (5) The unvested...

  • Page 43
    ... the number of shares or units, as applicable, that vested by the per-share closing price of the Company's Common Stock on the vesting date. POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL The following section describes the benefits that may become payable to Named Executive Officers in...

  • Page 44
    ... service. If a Change in Control of the Company had occurred on December 31, 2007, the Company estimates that the value of the one year acceleration of equity awards for each Named Executive Officer with a change in control agreement would have been as follows: Dr. Harari ($1,632,750), Ms. Bruner...

  • Page 45
    ... another company for which a related person's only relationship is as an employee (other than an executive officer), director, or beneficial owner of less than 5% of that company's shares, if the amount involved does not exceed the greater of $200,000, or 2% of that company's total annual revenue...

  • Page 46
    ... 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 47
    ... based on the closing sale price as reported on the NASDAQ Global Select Market. 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 January 31, 2008 Common Stock, $0.001 par value per share 224,260,481...

  • Page 48
    ... ...Item 2. Properties ...Item 3. Legal Proceedings ...Item 4. Submission of Matters to a Vote of Security Holders ...PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ...Item 6. Selected Financial Data ...Item 7. Management...

  • Page 49
    ... all major flash storage card formats for our target markets in high volumes. Our revenues are driven by the sale of our products and the licensing of our intellectual property. We believe the market for flash storage is price elastic. From fiscal years 2006 to 2007, we increased the number of...

  • Page 50
    ... Through our internal development and technology obtained through acquisitions, we also hold key intellectual property for USB drives. We plan to continue to work with leading mobile communications and digital consumer device companies to discover new markets for flash storage products. Our team has...

  • Page 51
    ...for embedded and removable data storage and is characterized by fast write speeds and high capacities. We internally develop flash memory technologies, produce the flash memory primarily through the flash ventures with Toshiba and utilize this production output in products that we design and sell to...

  • Page 52
    ... portable devices. We also offer high-capacity solid-state drives targeted for the personal computing and network server markets in capacities up to 72 gigabytes. • Digital Media Players. Sansa is our branded line of flash-based digital media players for the digital audio and video player market...

  • Page 53
    ... systems for personal computers, mobile phones, gaming devices, digital media players and other consumer and industrial products. Our patented intelligent controller technology, with its advanced defect management system, permits our flash storage card products to achieve a high level of reliability...

  • Page 54
    ...numerous semiconductor 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...

  • Page 55
    ... product offerings and many companies are attempting to develop memory cells that use different designs and materials in order to reduce memory costs. These potential competitive technologies include phase-change technology, charge-trap flash and millipedes/probes. Employees As of December 30, 2007...

  • Page 56
    ... of California, Berkeley. He also holds several patents and has published articles in the area of non-volatile memory design and flash memory systems. Judy Bruner has been our Chief Financial Officer and Executive Vice President Administration since June 2004. She served as a member of our board of...

  • Page 57
    ...as custom non-memory materials, and the need to build finished product in advance of customer purchase orders; • timing, volume and cost of wafer production from the flash ventures with Toshiba as impacted by fab start-up delays and costs, technology transitions, yields or production interruptions...

  • Page 58
    ...resulting in reduced revenue growth. There can be no assurance that current and future price reductions will result in sufficient demand for increased product capacity or unit sales, which could harm our margins and revenue growth. Sales to a small number of customers represent a significant portion...

  • Page 59
    ... segment of our revenues and driver of growth. Other markets for flash memory include digital audio and video players, USB drives and solid state drives. There can be no assurance that the use of flash memory in mobile handsets or other existing markets and products will continue to develop and grow...

  • Page 60
    ...per cell, or X4. We believe the successful introduction of X3 and X4 technology may be required in order to achieve the level of future cost reductions for the further adoption of flash memory in consumer applications. The performance, reliability, yields and time-to-market of X3 and X4 technologies...

  • Page 61
    ... revenues or margins and may result in the loss of our key customers. For example, Toshiba and other manufacturers have increased their market share of flash memory cards for mobile phones, including the microSD card, which have been a significant driver of our growth. In the digital audio market...

  • Page 62
    ...Our business and the markets we address are subject to significant fluctuations in supply and demand and our commitments to our flash ventures with Toshiba may result in periods of significant excess inventory. The start of production at Fab 4 at the end of fiscal year 2007 has further increased our...

  • Page 63
    ... flash ventures with Toshiba and if the wafers contain errors or defects, our overall supply could be adversely affected. These factors could result in the rejection of our products, damage to our reputation, lost revenues, diverted development resources, increased customer service and support costs...

  • Page 64
    ...the time qualified products are manufactured and sold in volume quantities. For several quarters, we will incur initial design and development costs and start-up costs which will increase our expenses and reduce our gross margins. In addition, if we are ultimately unable to utilize our full share of...

  • Page 65
    ... certain cases we may share in the expenses associated with the defense and cost of settlement associated with such claims. This agreement provides limited protection for us against third-party claims that NAND flash memory products manufactured and sold by Flash Partners or Flash Alliance infringe...

  • Page 66
    ... have limited control as to how those sub-contractors run their operations and manage their risks, and as a result we may not be adequately insured. We are exposed to significant risk from foreign currency fluctuations. Our purchases of NAND flash memory from the flash ventures with Toshiba and our...

  • Page 67
    ...the United States International Trade Commission against 25 companies that manufacture, sell and import USB flash drives, CompactFlash cards, multimedia cards, MP3/ media players and/or other removable flash storage products. There can be no assurance that we will be successful in this litigation or...

  • Page 68
    ... facts, changes in the law or in the interpretation of laws, and uncertainties associated with the judicial decision-making process. If we receive an adverse judgment in any litigation, we could be required to pay substantial damages and/or cease the manufacture, use and sale of products. Litigation...

  • Page 69
    ...and regulations; • weak protection of our intellectual property rights; • delays in product shipments due to local customs restrictions; and • delays in research and development that may arise from political unrest at our development centers in Israel. Tower Semiconductor's financial situation...

  • Page 70
    ... timing and successful integration of acquired technologies and product development through volume production, unanticipated costs and expenditures, changing relationships with customers, suppliers and strategic partners, or contractual, intellectual property or employment issues. In addition, key...

  • Page 71
    ... may prevent us from funding flash ventures with Toshiba or other third parties, 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...

  • Page 72
    ... operations, in order to prevent a failure of our internal controls or enable us to furnish future unqualified certifications. A material weakness or deficiency in internal control over financial reporting could materially impact our reported financial results and the market price of our stock could...

  • Page 73
    ... financial support with respect to lease and certain other obligations of the flash ventures with Toshiba in which we have a 49.9% ownership interest. In addition, we may enter into future agreements to increase manufacturing capacity, including the expansion of Fab 4. As of December 30, 2007, we...

  • Page 74
    ... 2. PROPERTIES Our principal facilities 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...

  • Page 75
    ..., the Company and a number of other manufacturers of flash memory products were sued in the Superior Court of the State of California for the City and County of San Francisco in a purported consumer class action captioned Willem Vroegh et al. v. Dane-Electric Corp. USA, et al., Civil Case No. GCG...

  • Page 76
    ... of the patents asserted by the Company in its litigations against STMicro, as well as damages in an unspecified amount. On November 15, 2005, Dr. Harari and the Company removed the case to the U.S. District Court for the Northern District of California, where it was assigned case number C05-04691...

  • Page 77
    ... Northern District of California, captioned SanDisk Corporation v. Lucent Technologies Inc., et al., Civil Case No. C 07 03618. The complaint seeks a declaratory judgment that the Company does not infringe the two patents asserted by Lucent against the Company's digital music players. The complaint...

  • Page 78
    ... flash memory controllers, drives, memory cards, and media players and products containing same" in the ITC (hereinafter, "the 619 Investigation"), naming the following companies as respondents: Phison Electronics Corp. ("Phison"); Silicon Motion Technology Corporation, Silicon Motion, Inc. (located...

  • Page 79
    memory controllers, drives, memory cards, and media players from entry into the United States as well as a permanent cease and desist order against the respondents. On December 6, 2007, the Commission instituted an investigation based on the Company's complaint. The target date for completing the ...

  • Page 80
    ... table summarizes the high and low sale prices for our common stock as reported by the NASDAQ Global Select Market. High Low 2006 First quarter ...Second quarter ...Third quarter...Fourth quarter ...2007 First quarter ...Second quarter ...Third quarter...Fourth quarter ...Holders. ... $79.80 $66...

  • Page 81
    ... common stock, the stocks included in the S&P 500 Stock Index, the stocks included in the S&P Semiconductor Company Stock Index and the stocks included in the PHLX Semiconductor Sector, and assumes all dividends are reinvested. For each reported year, our reported dates are the last trading dates of...

  • Page 82
    ... DATA SANDISK CORPORATION SELECTED FINANCIAL DATA December 30, 2007(1) Fiscal Years Ended December 31, January 1, January 2, 2006(2) 2006(3) 2005(4) (In thousands, except per share data) December 28, 2003(5) Revenues Product ...License and royalty ...Total revenues ...Cost of product revenues...

  • Page 83
    ... leading edge low-cost memory wafers. Our cards are used in a wide range of consumer electronics devices such as mobile phones, digital cameras, gaming devices and laptop computers. We also produce Universal Serial Bus, or USB, drives, MP3 players and other flash storage products that are embedded...

  • Page 84
    ... costs of disposal. The determination of market value involves numerous judgments including 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...

  • Page 85
    ... the management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets include but are not limited to future expected cash flows from product sales, customer relationships, acquired developed technologies and patents, expected costs to...

  • Page 86
    ... gaming cards and from our acquisition of msystems Ltd., or 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. Geographical Product Revenues. FY 2007...

  • Page 87
    ...-recurring engineering and material costs of $11 million and share-based compensation expense of $8 million related to increased headcount. In addition, in fiscal year 2007, we recognized Flash Alliance start-up costs of $18 million. Our fiscal year 2006 research and development expense growth was...

  • Page 88
    ... Percent Change FY 2006 Change (In millions, except percentages) FY 2005 Sales and marketing ...Percent of revenue... $294.6 7.6% 45% $203.4 6.3% 66% $122.2 5.3% Our fiscal year 2007 sales and marketing expense growth included increased advertising and promotional costs on a worldwide basis...

  • Page 89
    ... Acquisition-Related Intangible Assets. FY 2007 Percent Percent Change FY 2006 Change (In millions, except percentages) FY 2005 Amortization of acquisition-related intangible assets ...Percent of revenue... $25.3 0.6% 45% $17.4 0.5% - n/a n/a The increase of amortization of acquisition-related...

  • Page 90
    ... including depreciation, amortization, share-based compensation, loss on equity investments and deferred taxes, and (2) changes in balance sheet accounts including a decrease in accounts receivable and increases in accounts payable trade and accounts payable to related parties, which were partially...

  • Page 91
    ...funding the flash ventures with Toshiba; increasing our wafer supply; developing or enhancing our products; taking advantage of future opportunities; engaging in investments in or acquisitions of companies; growing our business or responding to competitive pressures or unanticipated industry changes...

  • Page 92
    ... computation. 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. For semiconductor fixed assets that are leased by Flash Ventures, we and/or Toshiba guaranteed, in whole...

  • Page 93
    ... 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 30, 2007, a reduction in prices of 10% of these marketable equity securities would result in a decrease in the fair...

  • Page 94
    ..., our management concluded that our internal control over financial reporting was effective as of December 30, 2007. However, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in our business or other...

  • Page 95
    ... Awards at Fiscal 2007 Year-End" and "Option Exercises and Stock Vested in Fiscal 2007" in our Proxy Statement for our 2008 Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS...

  • Page 96
    ... EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 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 Income ...Consolidated Statements...

  • Page 97
    SANDISK CORPORATION INDEX TO FINANCIAL STATEMENTS 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 to Consolidated ...

  • Page 98
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of SanDisk Corporation We have audited the accompanying consolidated balance sheets of SanDisk Corporation as of December 30, 2007 and December 31, 2006, and the related consolidated statements of income,...

  • Page 99
    ... OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of SanDisk Corporation We have audited SanDisk Corporation's internal control over financial reporting as of December 30, 2007, based on criteria established in Internal Control - Integrated Framework issued...

  • Page 100
    SANDISK CORPORATION CONSOLIDATED BALANCE SHEETS December 30, December 31, 2007 2006 (In thousands, except for share and per share amounts) ASSETS Current assets: Cash and cash equivalents ...Short-term investments ...Accounts receivable from product revenues, net of allowance for doubtful accounts ...

  • Page 101
    ... 2007 2006 2006 (In thousands, except per share amounts) Revenues: Product ...License and royalty ...Total revenues ...Cost of product revenues ...Amortization of acquisition-related intangible assets ...Total cost of product revenues ...Gross profit ...Operating expenses: Research and development...

  • Page 102
    ... of shares pursuant to equity plans. . Issuance of stock pursuant to employee stock purchase plan...Deferred compensation ...Amortization of deferred compensation ...Income tax benefit from stock options exercised ...Net income ...Unrealized income on available for sale securities ...Unrealized...

  • Page 103
    ... from share-based compensation ...Write-off of acquired in-process technology ...Other non-cash charges (income) ...Changes in operating assets and liabilities: Accounts receivable from product revenues ...Inventory ...Other assets ...Accounts payable trade ...Accounts payable to related parties...

  • Page 104
    ... of shipping products to customers is included in cost of product revenues. The Company recognizes expenses related to sales commissions in the period in which they are earned. Revenue from patent licensing arrangements is recognized when earned and estimable. The timing of revenue recognition is...

  • Page 105
    ...and OEM customers. No collateral is required. Provisions are provided for sales returns and credit losses. The Company estimates the collectibility of its accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer's inability to meet its...

  • Page 106
    ...assumptions about changes in average selling prices. If actual market conditions are less favorable than those projected by management, additional reductions in inventory valuation may be required. The Company's finished goods inventory includes consigned inventory held at customer locations as well...

  • Page 107
    ...be in the first quarter of the Company's fiscal year 2009. At such time, any changes to the recognition or measurement of uncertain tax positions related to pre-acquisition periods will be recorded through income tax expense, whereas currently the accounting treatment would require any adjustment to...

  • Page 108
    ...In the June 2007 meeting, the Emerging Issues Task Force ("EITF"), reached a final consensus on EITF Issue No. 07-3 ("EITF 07-3"), Accounting for Advance Payments for Goods or Services to be Received for Use in Future Research and Development Activities. The consensus requires companies to defer and...

  • Page 109
    ... loss related to publicly traded equity securities were due to changes in market prices. Gross unrealized losses on all available-for-sale securities at December 30, 2007 are considered temporary in nature. Factors considered in determining whether a loss is temporary include the length of time and...

  • Page 110
    ...,054 Accounts receivable from product revenues, net, were as December 30, 2007 December 31, 2006 Trade accounts receivable ...Related party accounts receivable ...Allowance for doubtful accounts ...Price protection, promotions and other activities ...Total accounts receivable from product revenues...

  • Page 111
    ... and investments in the flash ventures with Toshiba ... $1,108,905 $ 462,307 In the fourth quarter of fiscal year 2007, the Company recorded a $10.0 million impairment charge related to its equity investment in FlashVision. The Company is currently in negotiations with Toshiba regarding the future...

  • Page 112
    ... future cost related to warranty expense is recorded at the time of customer invoice. The Company's warranty liability is affected by customer and consumer returns, product failures and repair or replacement costs incurred. Should actual product failure rates, or repair or replacement costs differ...

  • Page 113
    ... Amortization Net Carrying Amount Core technology ...$311,801 Developed product technology ...12,900 Trademarks ...4,000 Backlog ...5,000 Supply agreement ...2,000 Customer relationships ...80,100 Acquisition-related intangible assets ...Technology licenses and patents ...415,801 39,243 $ (78...

  • Page 114
    ...Statements - (Continued) The annual expected amortization expense of other intangible assets as of December 30, 2007 is presented below: Estimated Amortization Expenses Technology Acquisition-related Licenses and Intangible Assets Patents (In thousands) Fiscal periods 2008 2009 2010 2011 2012 2013...

  • Page 115
    ... the redemption date, if the last reported sales price of the Company ordinary shares has exceeded 130% of the conversion price for at least 20 trading days in any consecutive 30-day trading period ending on the trading day prior to the date of mailing of the notice of redemption. At any time on or...

  • Page 116
    ... stock in the open market over two years following the date of authorization. During the year ended December 30, 2007, the Company repurchased 7.5 million shares, for an aggregate purchase price of approximately $300 million, all of which are held as treasury stock and accounted for using the cost...

  • Page 117
    ... revenues in fiscal years 2007 and 2006. In 2005, Best Buy Co., Inc., accounted for 11% of the Company's revenues and 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...

  • Page 118
    ... rendered to the 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...

  • Page 119
    ...-Scholes-Merton closed-form option valuation model to determine the estimated fair value and by attributing such fair value over the requisite service period on a straight-line basis for those awards that actually vested. The Company estimates the fair value of stock options granted using the Black...

  • Page 120
    ... 30, 2007 December 31, 2006 January 1, 2006 Option Plan Shares Dividend yield ...Expected volatility ...Risk-free interest rate ...Expected lives ...Estimated annual forfeiture rate ...Weighted average fair value at grant date ...Employee Stock Purchase Plan Shares Dividend yield ...Expected...

  • Page 121
    ... Financial Statements - (Continued) Stock Options and SARs. A summary of option and stock appreciation rights ("SARs") activity under all of the Company's share-based compensation plans as of December 30, 2007 and changes during the fiscal year ended December 30, 2007 is presented below: Weighted...

  • Page 122
    ...life of 2.3 years. Employee Stock Purchase Plans. At December 30, 2007, there was $0.4 million of total unrecognized compensation cost related to the ESPP that is expected to be recognized over a period of approximately 0.1 years. Share-Based Compensation Expense. The Company recorded $133.0 million...

  • Page 123
    ...of the organization worldwide and closures of redundant facilities in order to reduce the Company's cost structure. A restructuring charge of $6.7 million was recorded during the year ended December 30, 2007, of which $6.0 million related to severance and benefits to 149 terminated employees and the...

  • Page 124
    ...2007 Fiscal Years Ended December 31, 2006 January 1, 2006 U.S. federal statutory rate ...State taxes, net of federal benefit ...Non-deductible share-based compensation expense ...Write-off of acquired in-process technology... reporting purposes and the amounts used for income tax return reporting ...

  • Page 125
    ... carryforwards will begin to expire in fiscal year 2008, if not utilized. Some of these carryforwards are subject to annual limitations, including Section 382 of the Internal Revenue Code of 1986, as amended, for United States tax purposes and similar state provisions. No provision has been made for...

  • Page 126
    ...of limitation. The Company is currently under audit by several tax authorities. Because timing of the resolution and/or closure of these audits is highly uncertain it is not possible to estimate other changes to the amount of unrecognized tax benefits for positions existing at December 30, 2007. The...

  • Page 127
    ... the venture, 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 its 200-millimeter wafer fabrication facilities located in Yokkaichi, Japan, using the semiconductor manufacturing...

  • Page 128
    ... costs to the extent that Flash Partners' revenues from wafer sales to the Company and Toshiba are insufficient to cover these costs. As of December 30, 2007, the Company had notes receivable from Flash Partners of 72.3 billion Japanese yen, or approximately $640 million based upon the exchange rate...

  • Page 129
    ... terms of this agreement, the Company is required to provide Toshiba with a purchase order commitment based on a nine-month rolling forecast. TwinSys. The Company had a 50.1% beneficial ownership in TwinSys Data Storage Limited Partnership ("TwinSys"), a business venture with Toshiba, consisting of...

  • Page 130
    ... Japanese yen, or approximately $1.95 billion based upon the exchange rate at December 30, 2007, was outstanding at December 30, 2007. The Company and Toshiba have each guaranteed, on a several basis, 50% of Flash Partners' obligations under the master lease agreements. As of December 30, 2007...

  • Page 131
    ... the facilities at which Flash Partners and Flash Alliance operations are located to establish a baseline for evaluating future environmental conditions. The Company and Toshiba have also entered into a Patent Indemnification Agreement under which in many cases the Company will share in the expenses...

  • Page 132
    ... provides limited protection for the Company against third-party claims that NAND flash memory products manufactured and sold by Flash Partners or Flash Alliance infringe third-party patents. The Company has not made any indemnification payments under any such agreements and as of December 30, 2007...

  • Page 133
    ...The Company utilizes foreign currency forward contracts to minimize the risk associated with foreign exchange effects of trade accounts payable, intercompany accounts and loans receivable from related parties. As a result, increases or decreases in these accounts due to foreign exchange rate changes...

  • Page 134
    ...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 semiconductor manufacturing equipment owned or leased by Flash Ventures...

  • Page 135
    ...'s cost of product revenues. At December 30, 2007 and December 31, 2006, the Company had amounts payable to Tower of approximately $6.1 million and $7.7 million, respectively. Flextronics. The former Chairman of Flextronics International, Ltd., ("Flextronics"), who served on the Flextronics board of...

  • Page 136
    ...intellectual property should the venture be profitable. Note 14: Business Acquisitions msystems Ltd. On November 19, 2006, the Company completed the acquisition of msystems in an all stock transaction. This combination joined together two flash memory companies with complementary products, customers...

  • Page 137
    ... ...5,000 Supply agreement ...2,000 Total other identifiable intangible assets ...Acquired in-process technology ...Deferred tax liability ...Assumed unvested share-based awards to be expensed ...312,500 186,000 (19,641) 55,339 Total purchase price...$1,495,738 Acquisition-Related Restructuring...

  • Page 138
    ... the acquisition of Matrix, a designer and developer of three-dimensional ("3D") integrated circuits. Matrix» 3D 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...

  • Page 139
    ... costs to complete the projects, selling, marketing and administrative expenses, and income taxes from the projects. The Company believes the assumptions used in the valuations were reasonable at the time of the acquisition. The estimated net revenues and gross margins were based on management...

  • Page 140
    ..., the Company and a number of other manufacturers of flash memory products were sued in the Superior Court of the State of California for the City and County of San Francisco in a purported consumer class action captioned Willem Vroegh et al. v. Dane-Electric Corp. USA, et al., Civil Case No. GCG...

  • Page 141
    ... of the patents asserted by the Company in its litigations against STMicro, as well as damages in an unspecified amount. On November 15, 2005, Dr. Harari and the Company removed the case to the U.S. District Court for the Northern District of California, where it was assigned case number C05-04691...

  • Page 142
    ... Northern District of California, captioned SanDisk Corporation v. Lucent Technologies Inc., et al., Civil Case No. C 07 03618. The complaint seeks a declaratory judgment that the Company does not infringe the two patents asserted by Lucent against the Company's digital music players. The complaint...

  • Page 143
    ... flash memory controllers, drives, memory cards, and media players and products containing same" in the ITC (hereinafter, "the 619 Investigation"), naming the following companies as respondents: Phison Electronics Corp. ("Phison"); Silicon Motion Technology Corporation, Silicon Motion, Inc. (located...

  • Page 144
    ... respondents' flash memory controllers, drives, memory cards, and media players from entry into the United States as well as a permanent cease and desist order against the respondents. On December 6, 2007, the Commission instituted an investigation based on the Company's complaint. The target date...

  • Page 145
    ...District of California in a purported class action captioned In re Flash Memory Antitrust Litigation, Civil Case No. C07-0086. Plaintiffs allege the Company and a number of other manufacturers of flash memory products conspired to fix, raise, maintain, and stabilize the price of NAND flash memory in...

  • Page 146
    ...2007 Parent Company(1) Subsidiary Issuer(1) Combined Other NonGuarantor Guarantor (1) Subsidiary Subsidiaries(2) (In thousands) Consolidating Adjustments Total Company Total revenues ...Total cost of revenues ...Gross margin...represents legal entity results which exclude any subsidiaries required to be...

  • Page 147
    ...Parent Company(1) Subsidiary Issuer(1) Combined Other NonGuarantor Guarantor (1) Subsidiary Subsidiaries(2) (In thousands) Consolidating Adjustments Total Company Total revenues ...$2,101,601 $ Total cost of revenues...896 This represents legal entity results which exclude any subsidiaries required to ...

  • Page 148
    ... (In thousands) Parent Company(1) Subsidiary Issuer(1) Total Company ASSETS Current Assets: Cash and cash equivalents ...$ 389,337 $ Short-term investments ...1,001,641 Accounts receivable, net ...215,049 Inventory ...104,626 Other current assets ...759,872 Total current assets ...Property and...

  • Page 149
    ... (In thousands) Parent Company(1) Subsidiary Issuer(1) Total Company ASSETS Current Assets: Cash and cash equivalents ...$1,165,473 $ Short-term investments ...1,192,084 Accounts receivable, net ...256,801 Inventory...106,772 Other current assets ...497,513 Total current assets ...Property and...

  • Page 150
    ...) Parent Company(1) Subsidiary Issuer(1) Total Company Net cash provided by (used in) operating activities ...Net cash provided by (used in) investing activities ...Net cash provided by (used in) financing activities ...Effect of changes in foreign currency exchange rates on cash...Net increase...

  • Page 151
    ... related to acquisitions of Matrix in January 2006 and msystems in November 2006. The Company received business interruption proceeds of $21.8 million, which were recorded as a reduction to cost of product revenue as a result of a power outage in fiscal 2006 related to Flash Ventures. April 1, 2007...

  • Page 152
    ... wafer fab located in Japan. The new venture has a targeted production start-up date in 2010. Half of the new memory wafer fab's production capacity will be allocated to the new joint venture and the Company and Toshiba will equally share wafer output and funding for the related equipment. The...

  • Page 153
    ... Date By: /s/ Eli Harari (Dr. Eli Harari) By: /s/ Judy Bruner (Judy Bruner) Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Executive Vice President, Administration and Chief Financial Officer (Principal Financial and Accounting Officer) Vice Chairman of the Board...

  • Page 154
    ... and its directors and officers.(2) License Agreement between the Registrant and Dr. Eli Harari, dated September 6, 1988.(2) SanDisk Corporation 1995 Stock Option Plan, as Amended and Restated January 2, 2002.(9),(*) SanDisk Corporation 1995 Non-Employee Directors Stock Option Plan, as Amended and...

  • Page 155
    ...Development, Ltd.(15) Guarantee Agreement, dated as of September 22, 2006, by and among the Registrant, SMBC Leasing Company, Limited and Toshiba Finance Corporation.(23) Amended and Restated SanDisk Corporation 2005 Incentive Plan.(25),(*) SanDisk Corporation Form of Notice of Grant of Stock Option...

  • Page 156
    ...12.1 21.1 23.1 31.1 31.2 32.1 32.2 SanDisk Corporation Form of Restricted Stock Award Agreement.(16),(*) SanDisk Corporation Form of Restricted Stock Award Agreement (Director Grant).(16),(*) Form of Amendment to Change of Control Agreement for those officers of the Registrant who are party to such...

  • Page 157
    ... Annual Report on Form 10-K. 16. Previously filed as an Exhibit to the Registrant's Current Report on Form 8-K dated ...Annual Report on Form 10-K. 19. Previously filed as an Exhibit to the Registrant's Form 8-K dated July 27, 2007. 20. Previously filed as an Exhibit to the Registrant's Form 8-K dated...