SanDisk 2009 Annual Report Download

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tive Pioneering Leading Design Brea
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Leader Innovator Accolades Empow
n Breakthrough Engineering Global In
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ndustry Leader Innovator Accolades
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Design Breakthrough Engineering Gl
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Stockholders Letter
Notice of 2010 Annual Meeting and Proxy Statement
2009 Annual Report on Form 10-K

Table of contents

  • Page 1
    ... Breakthrough Engineering Gl owering Imaginative Pioneering Lead ndustry Leader Innovator Accolades Design Breakthrough Engineering Gl owering Imaginative Pioneering Lead tive Pioneering Leading Design Brea Stockholders Letter Notice of 2010 Annual Meeting and Proxy Statement 2009 Annual Report on...

  • Page 2
    SanDisk Corporation is the global leader in ï¬,ash memory cards, from research, manufacturing and product design to consumer branding and retail distribution. SanDisk's product portfolio includes ï¬,ash memory cards for mobile phones, digital cameras and camcorders; digital audio/video players; USB ...

  • Page 3
    Stockholders Letter Proxy Statement Annual Report

  • Page 4

  • Page 5
    ... demand drivers for flash-based storage products in the years ahead. Our traditional markets such as imaging, USB drives, gaming, and audio/ video consume a significant amount of NAND flash today, and we expect demand to continue growing. The mobile phone market has become the largest market segment...

  • Page 6
    ... we are looking forward to being a significant player in this large emerging end-market. As we look to the future, SanDisk is exceptionally well positioned to benefit from growing NAND flash usage trends, and we enter 2010 with strong fundamentals, including our leading-edge technology and IP, our...

  • Page 7
    ... We look forward to seeing you at the Annual Meeting. By Order of the Board of Directors, Proxy Statement Eli Harari Chairman of the Board, Director and Chief Executive Officer Milpitas, California April 22, 2010 ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. IN ANY...

  • Page 8
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  • Page 9
    ...COMMITTEE REPORT ON EXECUTIVE COMPENSATION ...SUMMARY COMPENSATION TABLE-FISCAL 2007-2009 ...GRANTS OF PLAN-BASED AWARDS IN FISCAL 2009 ...OUTSTANDING EQUITY AWARDS AT FISCAL 2009 YEAR-END ...OPTION EXERCISES AND STOCK VESTED IN FISCAL 2009 ...POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL...

  • Page 10
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  • Page 11
    ...Materials free of charge to any stockholder who requests copies by calling 1-800-579-1639 or by sending an e-mail with the 12-Digit Control Number in the subject line to [email protected]. VOTING RIGHTS At the Record Date, approximately 229,981,056 shares of the Company's common stock (the...

  • Page 12
    ... to stockholders who may have more than one account holding Common Stock but who share the same address, the Company has a procedure approved by the SEC called "householding." Under this procedure, certain stockholders of record who have the same address and last name, and who do not participate in...

  • Page 13
    .... A proxy may be revoked by filing with the Secretary of the Company an instrument of revocation or a duly executed proxy bearing a later date, or by attending the Annual Meeting and voting in person. If your shares of Common Stock are held in street name, contact your broker or nominee for specific...

  • Page 14
    ... not be voted for more than nine nominees. Set forth below is information regarding the nominees to the Board of Directors as of March 31, 2010. Position(s) with the Company First Elected/Appointed as a Director Name Age Dr. Eli Harari ...Irwin Federman (1)(2) ...Kevin DeNuccio ...Steven J. Gomo...

  • Page 15
    ... of SanDisk, has served as Chief Executive Officer and as a Director of SanDisk since June 1988. He was appointed Chairman of the Board in June 2006. Dr. Harari also served as President from June 1998 to June 2006. From 1973 to 1988, Dr. Harari held various technical and management positions with...

  • Page 16
    ..., Mr. Hartenstein served as Chairman, President and Chief Executive Officer of HD Partners Acquisition Corporation, a corporation formed to acquire assets or an operating business in the media, entertainment or telecommunication industries, from its formation in December 2005 through February 2008...

  • Page 17
    ... of the Corporate Governance Principles free of charge to any stockholder who sends a written request to SanDisk Corporation, Investor Relations, 601 McCarthy Boulevard, Milpitas, CA 95035. Company Policy Regarding Board Member Attendance at Annual Meetings The Company encourages each incumbent...

  • Page 18
    ...March 2010. Stockholders can access the Audit Committee charter on the website at www.sandisk.com. We will also provide copies of the Audit Committee charter free of charge to any stockholder who sends a written request to SanDisk Corporation, Investor Relations, 601 McCarthy Boulevard, Milpitas, CA...

  • Page 19
    ...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. The Secondary Executive Committee took action by written consent 20 times during fiscal 2009. Share-based awards...

  • Page 20
    ... function) of any other entity, the executive officers of which served as a director or member of the Compensation Committee during the fiscal year ended January 3, 2010. Nominating and Governance Committee The Nominating and Governance Committee of the Board of Directors (the "Nominating and...

  • Page 21
    ... Governance Principles of the Company. Under the Company's Corporate Governance Principles, 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...

  • Page 22
    ...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 pertaining to the Company; Commitment to understand the Company and its business, industry and strategic objectives; Commitment and...

  • Page 23
    ... and background in financial and accounting matters, which in the case of all four includes financial experience in the technology industry. The Board also considered Dr. Harari's experience with the Company as its founder because such knowledge of the Company's business and products is essential to...

  • Page 24
    ... as part of the Company's 2009 Annual Report on Form 10-K filed with the SEC on February 25, 2010, which note is incorporated herein by reference. In fiscal 2009, we granted each of our Non-Employee Directors (other than Mr. DeNuccio and Dr. Hu) an award of 6,250 stock options and 5,752 restricted...

  • Page 25
    ... the terms of the 2005 Plan and the Company's share-based award grant practices, the fair market value is equal to the closing price of a share of the Common Stock on the NASDAQ Global Market on the grant date. The stock options granted to Non-Employee Directors are immediately exercisable. However...

  • Page 26
    ... paid or terminated, then the Company will credit the Non-Employee Director's bookkeeping account with an amount equal to (i) the per-share cash dividend paid by the Company on its Common Stock with respect to the dividend record date, multiplied by (ii) the total number of outstanding and unpaid...

  • Page 27
    ... 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 In accordance with the procedures described above under "Voting Rights," a Director nominee must...

  • Page 28
    ... of a different independent registered public accounting firm at any time during the year if the Audit Committee determines that such a change would be in the best interests of the Company and its stockholders. Ernst & Young LLP has audited the Company's financial statements annually since 1991. The...

  • Page 29
    ... of a majority of the shares present in person or represented by proxy at the Annual Meeting and entitled to vote on Proposal No. 2 is required to ratify the appointment of Ernst & Young LLP as the Company's independent registered public accounting firm for the fiscal year ending January 2, 2011...

  • Page 30
    ... and all current executive officers and Directors of the Company as a group. Unless otherwise indicated and subject 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 31
    ..., be subject to a repurchase right of the Company that lapses over time. Excludes 5,752 shares restricted stock units that will not vest on February 25, 2010 or within 60 days after that date. Includes 1,964,568 shares held in the name of a trust for the benefit of Dr. Harari and his spouse, 561,495...

  • Page 32
    ... FMR LLC have the sole power to dispose or direct the disposition of 33,481,422 shares and the sole power to vote or direct the vote of 5,801,493 shares of Common Stock. Based on the Schedule 13G filed by Wellington Management Company, LLP on February 12, 2010 with the SEC. Wellington Management, in...

  • Page 33
    ... up to 1,500 shares of Common Stock at the end of each six-month offering period (the last U.S. business day in January and July each year) at a purchase price per share equal to 85% of the lower of (i) the closing selling price per share of Common Stock on the employee's entry date into that six...

  • Page 34
    ... acquisition by the Company, as set forth in this table: Acquired Company Award Category Number of Weighted Average Securities Subject Weighted Average Estimated to Applicable Plan Exercise Price Remaining Life (yrs) Matrix ...Matrix ...msystems ...msystems ...(5) Options Restricted Stock Units...

  • Page 35
    ...-K, 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 www.sandisk.com/IR under SEC Filings. AUDIT COMMITTEE REPORT The information contained...

  • Page 36
    ... fiscal year ending January 3, 2010 (referred to herein as "fiscal 2009"). These individuals are referred to as the "Named Executive Officers" in this Proxy Statement. The Company's current executive compensation programs are determined and approved by the Compensation Committee of the Board. None...

  • Page 37
    ...following companies as our peer group companies in fiscal 2009: Adobe Systems Incorporated; Advanced Micro Devices, Inc.; Analog Devices, Inc.; Broadcom Corporation; CA, Inc.; Electronic Arts Inc.; Juniper Networks, Inc.; LSI Corporation; Marvell Technology Group Ltd.; Maxim Integrated Products, Inc...

  • Page 38
    ... as Chief Executive Officer and President, an equal weighting might be given to all three factors. For other positions that are somewhat hybrid in nature and not directly comparable to positions at our peer group, such as Executive Vice President, OEM Business and Corporate Engineering, the internal...

  • Page 39
    ... salaries of Named Executive Officers for fiscal 2009 compared with fiscal 2008. Annual Cash Incentive Award None of our Named Executive Officers has an employment agreement or other contractual right to cash incentive awards or bonuses for any given year. In recent years, the Company has granted...

  • Page 40
    ... bulk of the awards have historically been stock options. The number of shares of 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 economic value of comparable...

  • Page 41
    ...Named Executive Officers. The $3,000 cap on matching contributions was removed for fiscal 2010. To make the plan more attractive for employees with relatively short periods of service, the vesting period under the plan was reduced effective April 1, 2009 from 4 years of service to 2 years of service...

  • Page 42
    ... bonus levels (a multiple of two (2) times for the Chief Executive Officer, one and one half (1 1⁄ 2) times for the President and Chief Operating Officer and one (1) times for the other Named Executive Officers) is consistent with our peer group companies and provides them with financial security...

  • Page 43
    ... per share and the achievement of certain non-financial key strategic objectives, with the Compensation Committee having discretion to reduce the bonus amounts based on such Company and individual performance factors it deems appropriate. Stock Ownership Guidelines Each Board member and executive...

  • Page 44
    ... the sole governing factor. Accordingly, the Compensation Committee may provide one or more executive officers with the opportunity to earn incentive compensation, whether through cash bonus programs tied to the Company's financial performance or share-based awards in the form of restricted stock or...

  • Page 45
    ...as part of the Company's 2009 Annual Report on Form 10-K, filed with the SEC. Under general accounting principles, compensation expense with respect to stock awards and option awards granted to our employees and directors is generally recognized over the vesting periods applicable to the awards. The...

  • Page 46
    ... fiscal 2009 presentation using the grant date fair value of the awards granted during the corresponding year (regardless of the period over which the awards are scheduled to vest). Since this requirement differs from the SEC's past disclosure rules, the amounts reported in the table above for stock...

  • Page 47
    ...Awards: Number of Shares of Stock or Units (#) (c) All Option Awards: Number of Securities Underlying Options (#) (d) Exercise or Base Price of Option Awards ($/Sh) (e) Grant Date Fair Value of Stock and Option Awards ($) (f) Name(a) Grant Date (b) Dr. Eli Harari ...Sanjay Mehrotra ...Judy Bruner...

  • Page 48
    ... the terms of the 2005 Plan and the Company's option grant practices, the fair market value is equal to the closing price of a share of Common Stock on the NASDAQ Global Market on the applicable grant date. Each stock option granted to our Named Executive Officers in fiscal 2009 is subject to a four...

  • Page 49
    ...of that date. Additional information regarding these awards is presented in the footnotes below and in the table below under "Option Exercises and Stock Vested in Fiscal 2009." Option Awards (1) Stock Awards (2) Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have...

  • Page 50
    ... a Named Executive Officer's employment terminates. The market or payout value of stock awards reported in columns (i) and (k) are computed by multiplying the number of shares or units of stock reported in columns (h) and (j), respectively, by $28.99, the closing market price of our common stock on...

  • Page 51
    ...the number of shares or units, as applicable, that vested by the per-share closing price of Common Stock on the vesting date. POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL Proxy Statement The following section describes the benefits that may become payable to Named Executive Officers in...

  • Page 52
    ... (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 24 months following the termination date, continuation of...

  • Page 53
    ... company's total annual revenue; compensation to executive officers determined by the Compensation Committee; compensation to directors determined by the Board; transactions in which all security holders receive proportional benefits; and banking-related services involving a bank depository of funds...

  • Page 54
    ..., to the fullest extent permitted by the Delaware General Corporation Law (the "DGCL"). In addition, each of the Company's current Directors and executive officers has entered into a separate indemnification agreement with the Company. Finally, the Certificate and Bylaws limit the liability of...

  • Page 55
    ... 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 April 22, 2010 Proxy Statement 45

  • Page 56
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  • Page 57
    ... the fiscal year ended January 3, 2010 OR ' TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 0000-26734 SANDISK CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or...

  • Page 58
    ...Disagreements with Accountants on Accounting and Financial Disclosure ...Controls and Procedures ...Other Information ...PART III Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder...

  • Page 59
    ... Who We Are. SanDisk Corporation, a global technology company, is the inventor and largest supplier of NAND flash storage card products. Flash storage technology allows digital information to be stored in a durable, compact format that retains the data even after the power has been switched off. Our...

  • Page 60
    ... standard. Through our internal development and technology obtained through acquisitions, we also hold key intellectual property for USB drives and SSDs. We plan to continue to work with a variety of leading companies in various end markets to develop new markets for flash storage products. Our team...

  • Page 61
    ...user and are specifically designed to support secure and authorized access to corporate information. Digital Media Players. Sansa® is our branded line of flash-based digital media players for the digital audio and video player market. Many of our Sansa models offer a removable card slot for storage...

  • Page 62
    ... by our OEM customers. Our sales are made through the following channels: • Retail. We sell SanDisk branded products directly or through distributors to consumer electronics stores, office superstores, photo retailers, mobile phone stores, mass merchants, catalog and mail order companies, internet...

  • Page 63
    .... We design our products to be compatible with industry-standard interfaces used in standard operating systems for PCs, mobile phones, gaming devices, digital media players and other consumer and industrial products. Our patented intelligent controller technology, with its advanced defect management...

  • Page 64
    ... our operations, provides flexibility and gives us access to increased production capacity. • Ventures with Toshiba We and Toshiba have successfully partnered in several flash memory manufacturing business ventures, which provide us leading edge, cost competitive NAND wafers for our end products...

  • Page 65
    ... sales to us and Toshiba are insufficient to cover these costs. The investments in each venture entity are shared equally between us and Toshiba. Our committed capacity from Flash Ventures was approximately 1.5 million wafers per year as of the end of fiscal year 2009. In addition, we have the right...

  • Page 66
    ... 3D memory, a version of which we are jointly developing with Toshiba, phase-change, ReRAM, vertical or stacked NAND and charge-trap flash technologies. Additional Information We file reports and other information with the Securities and Exchange Commission, or SEC, including annual reports on Form...

  • Page 67
    ..., 2010): Name Age Position Eli Harari ...Sanjay Mehrotra ...Judy Bruner ...Yoram Cedar ... 64 51 51 57 Chairman of the Board and Chief Executive Officer President and Chief Operating Officer Executive Vice President, Administration and Chief Financial Officer Executive Vice President, OEM Business...

  • Page 68
    ... build finished product in advance of customer purchase orders; timing, volume and cost of wafer production from Flash Ventures as impacted by fab start-up delays and costs, technology transitions, yields or production interruptions; disruption in the manufacturing operations of suppliers, including...

  • Page 69
    ... at an equal or higher rate than price decline per gigabyte, our ability to develop new products and technologies, the rate of growth of our target markets, the competitive position of our products, the continued acceptance of our products by our customers, and our ability to manage expenses. If...

  • Page 70
    ...than the sales to our historical customer base, and these OEMs may be more inclined to switch to an alternative supplier based on short-term price fluctuations. Sales to these OEMs could also cause a decline in our branded product sales. In addition, we are selling certain customized products and if...

  • Page 71
    ...fiscal year 2009, respectively, for adverse purchase commitments associated with under utilization of Flash Ventures' capacity for the 90-day period in which we had non-cancelable production plans utilizing less than our share of Flash Ventures' full capacity. Our business and the markets we address...

  • Page 72
    ... competitors include many large companies that may have greater advanced wafer manufacturing capacity, substantially greater financial, technical, marketing and other resources and more diversified businesses than we do, which may allow them to produce flash memory chips in high volumes at low costs...

  • Page 73
    ... key customers. For example, Toshiba and other manufacturers have increased their market share of flash memory cards for mobile phones, including the microSDâ„¢ card, which have been a significant driver of our growth. In the digital audio market, we face competition from well established companies...

  • Page 74
    ... Poors, or S&P, or Moody's Corporation, or a minimum corporate rating of BB+ from Rating & Investment Information, Inc., or R&I. As of January 3, 2010, Flash Ventures were in compliance with all of their master lease covenants. While our S&P credit rating was B, two levels below the required minimum...

  • Page 75
    ... 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, we may lose potential sales and market share, and our business, financial condition and...

  • Page 76
    ... resources, increased customer service and support costs, indemnification of our customer's product recall costs, warranty claims and litigation. We record an allowance for warranty and similar costs in connection with sales of our products, but actual warranty and similar costs may be significantly...

  • Page 77
    ...lower of cost or market, as was the case in fiscal year 2008, which may harm our financial condition and results of operations. During periods of excess supply in the market for our flash memory products, we may lose market share to competitors who aggressively lower their prices. In order to remain...

  • Page 78
    ... in Japanese yen related to Flash Ventures. Our attempts to hedge against currency risks may not be successful, resulting in an adverse impact on our results of operations. In addition, if we do not successfully manage our hedging program in accordance with current accounting guidelines, we may...

  • Page 79
    ... States International Trade Commission, or ITC, against certain companies that manufacture, sell and import USB flash drives, CompactFlash® cards, multimedia cards, MP3/media players and/or other removable flash storage products. In this ITC action, an Initial Determination was issued in April 2009...

  • Page 80
    ...certain manufacturing or design processes. In addition, we or our suppliers could be enjoined from selling some or all of our respective products in one or more geographic locations. If we or our suppliers are enjoined from selling any of our respective products, or if we are required to develop new...

  • Page 81
    ... in our stock price, the need for significant working capital investments in receivables and inventory and our need to build inventory levels in advance of our most active selling seasons. Because of our international business and operations, we must comply with numerous international laws and...

  • Page 82
    ... with customers, suppliers and strategic partners, or contractual, intellectual property or employment issues. In addition, key personnel of an acquired company may decide not to work for us. The acquisition of another company or its products and technologies may also result in our entering into...

  • Page 83
    ... of our senior management and other key research and development, sales, marketing and operations personnel, including Dr. Eli Harari, our founder, chairman and chief executive officer. We do not have employment agreements with any of our executive officers and they are free to terminate their...

  • Page 84
    ...the third quarter of fiscal year 2009, we implemented a new enterprise resource planning, or ERP, system. Any ERP system problems, quality issues or programming errors could impact our continued ability to successfully operate our business or to timely and accurately report our financial results. In...

  • Page 85
    ...impact our reported financial results and the market price of our stock could significantly decline. Additionally, adverse publicity related to the disclosure of a material weakness in internal controls could have a negative impact on our reputation, business and stock price. Any internal control or...

  • Page 86
    ... 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 87
    ...; operation support offices in Taichung, Taiwan; Hong Kong, Shanghai and Shenzhen, China; and New Delhi, India; and design centers in Omer and Tefen, Israel; Edinburgh, Scotland; and Bangalore, India. ITEM 3. LEGAL PROCEEDINGS See Note 16, "Litigation," of the Notes to Consolidated Financial...

  • Page 88
    ... PURCHASES OF EQUITY SECURITIES Market For Our Common Stock. Our common stock is traded on the NASDAQ Global Select Market, or NASDAQ, under the symbol "SNDK." The following table summarizes the high and low sale prices for our common stock as reported by the NASDAQ. High Low 2008 First quarter...

  • Page 89
    ... 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 Index, and assumes all dividends are reinvested. For each reported year, the reported dates are the last trading dates of our fiscal quarters (which end on the...

  • Page 90
    ITEM 6. SELECTED FINANCIAL DATA January 3, 2010 (1) Fiscal Years Ended December 28, December 30, December 31, 2008 (2) 2007 (3) 2006 (4) (In thousands, except per share data) January 1, 2006 (5) Revenues Product ...License and royalty ...Total revenues ...Cost of product revenues ... $ 3,154,314 ...

  • Page 91
    ... flash venture relationships with Toshiba which provide us with leading-edge, low-cost memory wafers. Our removable card products are used in a wide range of consumer electronics devices such as mobile phones, digital cameras, gaming devices and laptop computers. Our embedded flash products...

  • Page 92
    ... those related to customer programs and incentives, product returns, bad debts, inventories and related reserves, investments, long-lived assets, income taxes, warranty obligations, restructuring, contingencies, share-based compensation, and litigation. We base our estimates on historical experience...

  • Page 93
    ... under agreements allowing price protection and/or right of return and, therefore, the sales and related costs of these transactions are deferred until the retailers or distributors sell the merchandise to their end customer, or the rights of return expire. At January 3, 2010 and December 28...

  • Page 94
    ... decline in retail product revenues in fiscal year 2009 compared to fiscal year 2008 was primarily attributable to a weak worldwide consumer spending environment through all of 2009. The increase in OEM product revenues in fiscal year 2009 compared to fiscal year 2008 was due to increased sales of...

  • Page 95
    ... to growth in our OEM channel sales for the mobile phone market and growth in the sale of private label cards, wafers and components. Product revenues in fiscal year 2009 compared to fiscal year 2008 decreased in the United States and Europe, Middle East and Africa, or EMEA, primarily due to a weak...

  • Page 96
    ... offset by lower share-based compensation expense of ($10) million and lower Flash Venture related costs of ($7) million. The growth in fiscal year 2008 research and development expense reflects parallel investment in NAND X2, X3 and X4 storage technologies, and 3D Read/ Write memory architecture...

  • Page 97
    ... and lower outside service costs of ($19) million. Our fiscal year 2008 sales and marketing expense growth over the comparable period in fiscal year 2007 was primarily due to increased branding and merchandising costs of $34 million and increased employee-related costs of $13 million, partially...

  • Page 98
    ...which considered factors including a reduced business outlook primarily due to NAND-industry pricing conditions. There were no such impairments or impairment indicators in fiscal years 2009 and 2007. Amortization of Acquisition-Related Intangible Assets. FY 2009 Percent Percent Change FY 2008 Change...

  • Page 99
    ... costs incurred in fiscal year 2009 related to the sale of equipment and transfer of lease obligations resulting from the restructuring of Flash Ventures, reflected in "Other income (expense), net." In addition, interest income in fiscal year 2009 declined by ($31) million compared to fiscal year...

  • Page 100
    ... information to management and investors about financial and business trends relating to the company's results of operations. Management believes that the use of these non-GAAP financial measures also provides consistency and comparability with our past financial reports. Management has historically...

  • Page 101
    ... operating performance of the company; establishing internal budgets; setting and determining variable compensation levels; calculating return on investment for development programs and growth initiatives; comparing performance with internal forecasts and targeted business models; strategic planning...

  • Page 102
    ...receivable in fiscal year 2008 was positively impacted by increased collection efforts and by reduced product accounts receivable levels as compared with the prior year period. The increase in inventory was related primarily to the expansion of capacity and production at Flash Ventures while revenue...

  • Page 103
    ... in investing activities was primarily related to lower proceeds from sale and maturities of short and long-term marketable securities, offset by a reduction in the net loans made to Flash Ventures and a reduced investment in property and equipment. During fiscal year 2009, we loaned $378 million to...

  • Page 104
    ... in both Flash Partners and Flash Alliance, or hereinafter collectively referred to as Flash Ventures, 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...

  • Page 105
    ... quarter of fiscal year 2009, transaction costs of $10.9 million related to the sale and transfer of equipment and lease obligations were expensed. From time-to-time, we and Toshiba mutually approve the purchase of equipment in the Flash Ventures for conversion to new process technologies or the...

  • Page 106
    ... for NAND flash wafers. Our derivative instruments are recorded at fair value in assets or liabilities with final gains or losses recorded in other income (expense) or as a component of accumulated OCI and subsequently reclassified into cost of product revenues in the same period or periods in which...

  • Page 107
    ... activities related to the exposures that we do hedge will adequately protect us against risks associated with foreign currency fluctuations. Market Risk. We also hold available-for-sale equity securities in semiconductor wafer manufacturing companies. As of January 3, 2010, a reduction in price of...

  • Page 108
    ...-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report (the "Evaluation Date"). Based upon the evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were...

  • Page 109
    ...control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended January 3, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION Not applicable. Annual Report...

  • Page 110
    ..., EXECUTIVE 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 2010 Annual...

  • Page 111
    ... STATEMENT SCHEDULES (a) Documents filed as part of this report 1) All financial statements Index to Financial Statements Page Reports of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Statements of Operations ...Consolidated Statements of Equity...

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  • Page 113
    ... Reports of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Statements of Operations ...Consolidated Statements of Equity ...Consolidated Statements of Cash Flows ...Notes to Consolidated Financial Statements ... F-2 F-4 F-5 F-6 F-7 F-8 Annual Report...

  • Page 114
    ... three years in the period ended January 3, 2010, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), SanDisk Corporation's internal control over financial reporting...

  • Page 115
    ...Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of SanDisk Corporation as of January 3, 2010 and December 28, 2008, and the related Consolidated Statements of Operations, Equity, and Cash Flows for each of the three years in the period ended January 3, 2010...

  • Page 116
    ... accounts of $12,348 in fiscal year 2009 and $13,881 in fiscal year 2008 ...Inventory ...Deferred taxes ...Other current assets ...Total current assets ...Long-term marketable securities ...Property and equipment, net ...Notes receivable and investments in flash ventures with Toshiba ...Deferred...

  • Page 117
    .... SANDISK CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Years Ended January 3, December 28, December 30, 2010 2008 2007 (In thousands, except per share amounts) Revenues Product ...License and royalty ...Total revenues ...Cost of product revenues ...Amortization of acquisition-related...

  • Page 118
    ...Distribution to non-controlling interests ...Issuance of shares pursuant to equity plans ...Issuance of stock pursuant to employee stock purchase plan ...Income tax benefit from stock options exercised ...Share-based compensation expense ...Cumulative effect to prior year related to unrecognized tax...

  • Page 119
    ... from share-based compensation ...Impairment, restructuring and other charges ...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 120
    ... those related to customer programs and incentives, product returns, bad debts, inventories, investments, long-lived assets, income taxes, warranty obligations, restructuring, contingencies, share-based compensation and litigation. The Company bases its estimates on historical experience and...

  • Page 121
    ... revenues. Marketing development programs are recorded as a reduction to revenue. Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable include amounts owed by geographically dispersed distributors, retailers and original equipment manufacturer ("OEM") customers. No collateral...

  • Page 122
    ... Statements of Operations. See Note 5, "Balance Sheet Information-Notes Receivable and Investments in Flash Ventures with Toshiba," regarding impairment of equity method investments in fiscal year 2008. Inventories and Inventory Valuation. Inventories are stated at the lower of cost (first-in...

  • Page 123
    ...and $35.5 million in fiscal years 2009, 2008 and 2007, respectively. Research and Development Expenses. Research and development expenditures are expensed as incurred. Annual Report Note 2: Recent Accounting Pronouncements In June 2009, the Financial Accounting Standards Board ("FASB") amended the...

  • Page 124
    ... identical assets or liabilities that the Company has the ability to directly access. Valuations based on quoted prices for similar assets or liabilities; valuations for interest-bearing securities based on non-daily quoted prices in active markets; quoted prices in markets that are not active; or...

  • Page 125
    ... on the Company's Consolidated Balance Sheets as follows (in thousands): Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Annual Report Total Cash ...Short-term marketable securities ...Long-term...

  • Page 126
    .... Available-for-sale investments as of January 3, 2010 were as follows (in thousands): Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Fair Value Fixed income securities: U.S. Treasury and government agency securities ...U.S. government-sponsored agency securities ...Corporate notes...

  • Page 127
    ...be required to sell the investments before the recovery of its amortized cost. The following table shows the gross realized gains and (losses) on sales of available-for-sale securities (in thousands). January 3, 2010 Year ended December 28, 2008 December 30, 2007 Annual Report Gross realized gains...

  • Page 128
    ...securities and accounts payable, the carrying amounts approximate fair value due to their short maturities. For those financial instruments where the carrying amounts differ from fair value, the following table represents the related costs and the fair values, which are based on quoted market prices...

  • Page 129
    ... fair value adjustments related to the Company's own credit risk and counterparty credit risk. Fair Value of Derivative Contracts. Fair value of derivative contracts were as follows (in thousands): Derivative assets reported in Other Current Assets Long-term Marketable Securities January 3, December...

  • Page 130
    ... the accumulated OCI balance related to the equity market risk contract in fiscal year 2011. The impact of the ineffective portion and amount excluded from effectiveness testing on designated cash flow derivative contracts on the Company's results of operations recognized in other income (expense...

  • Page 131
    ...the first quarter of fiscal year 2008, the Company recorded an additional provision for doubtful accounts as well as a reversal of $12.0 million of product revenues associated with receivable balances related to a customer having severe financial difficulties. Inventory. Inventory was as follows (in...

  • Page 132
    ... use of significant estimates related to valuation such as discount rates, long-term growth rates, foreign currency rates, and the level and timing of future cash flows. The Flash Partners and Flash Alliance impairments were recorded in cost of product revenues due to the operational nature of the...

  • Page 133
    ... of the Company's products have a warranty ranging up to ten years. A provision for the estimated 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, number of units...

  • Page 134
    ... due to NAND-industry pricing conditions. The annual expected amortization expense of intangible assets as of January 3, 2010 is presented below (in thousands): Estimated Amortization Expenses Acquisition-related Technology Licenses Intangible Assets and Patents Fiscal periods 2010 2011 2012 2013...

  • Page 135
    ...of interest cost recognized for the periods relating to both the contractual interest coupon and amortization of the discount on the liability component of the 1% Notes due 2013 (in millions): January 3, 2010 Fiscal Years Ended December 28, December 30, 2008 2007 Annual Report Contractual interest...

  • Page 136
    ...the product of the last reported sale price of the Company's common stock and the conversion rate on each such day; 2) during any calendar quarter after the calendar quarter ending June 30, 2006, if the last reported sale price of the Company's common stock for 20 or more trading days in a period of...

  • Page 137
    ..., to but excluding 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...

  • Page 138
    ...upon the headquarters of the licensee. Long-lived assets by geographic area as of the end of fiscal years 2009 and 2008 are as follows (in thousands): January 3, 2010 As of December 28, 2008 Long-lived assets: United States ...Japan ...China ...Other foreign countries ...Total ... $ 147,125 428,675...

  • Page 139
    ... as a stock bonus for services 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...

  • Page 140
    ... an international component for employees who are non-U.S. residents. The ESPP allows eligible employees to purchase shares of the Company's common stock at the end of each six-month offering period at a purchase price equal to 85% of the lower of the fair market value per share on the start date of...

  • Page 141
    ... rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term. Valuation Assumptions. The fair value of the Company's stock options granted to employees, officers and non-employee board members and ESPP shares granted to employees for the years ended January 3, 2010...

  • Page 142
    Notes To Consolidated Financial Statements Stock Options and SARs. A summary of stock options and stock appreciation rights ("SARs") activity under all of the Company's share-based compensation plans as of January 3, 2010 and changes during the fiscal year ended January 3, 2010 is presented below: ...

  • Page 143
    ... life of 1.3 years. Employee Stock Purchase Plan. At January 3, 2010, there was $0.6 million of total unrecognized compensation cost related to ESPP that is expected to be recognized over a period of approximately 0.1 years. Share-Based Compensation Expense. The Company recorded $95.6 million...

  • Page 144
    ... align its cost structure with business operation levels ("Fourth Quarter of Fiscal 2008 Restructuring Plan and Other"). Under this plan, the Company recorded costs of $12.6 million related to the involuntary termination of 428 employees and 51 employees in fiscal years 2008 and 2009, respectively...

  • Page 145
    ...During fiscal year 2009, the Company recorded additional employee restructuring costs of $2.2 million to reflect employees terminated in fiscal year 2009. In addition, employee severance and benefits was reduced by ($0.5) million to reflect lower employee severance and benefits costs than originally...

  • Page 146
    ...(in thousands): January 3, 2010 Fiscal Years Ended December 28, December 30, 2008 2007 United States ...International ...Total ... $ $ 412,646 91,155 503,801 $(1,908,020) $ (44,354) $(1,952,374) $ 408,389 (55,731) 352,658 The Company's provision for income taxes differs from the amount computed...

  • Page 147
    ... Stabilization Act of 2008 enacted October 3, 2008 retroactively extended the research credit for the fiscal years through 2009. As a result, the current year credit of $1.7 million, if not utilized, will be carried forward and is subject to a valuation allowance. The Company has federal, state, and...

  • Page 148
    ... for positions existing at January 3, 2010. The Company is subject to U.S. federal income tax as well as income taxes in many state and foreign jurisdictions. In October 2009, the Internal Revenue Service commenced an examination of our federal income tax returns for fiscal years 2005 through...

  • Page 149
    ... located in Yokkaichi, Japan, using the semiconductor manufacturing equipment owned or leased by Flash Partners. Flash Partners purchases wafers from Toshiba at cost and then resells those wafers to the Company and Toshiba at cost plus a markup. The Company accounts for its 49.9% ownership position...

  • Page 150
    ... fiscal year 2009, the Company recorded an adjustment to its equity in earnings from Flash Partners related to the difference between the basis in the Company's equity investment compared to the historical basis of the assets recorded by Flash Partners of $0.7 million. Flash Alliance. The Company...

  • Page 151
    ... to any minimum funding level. In addition, in fiscal year 2008, the Company recorded charges of $121 million in cost of product revenues for adverse purchase commitments associated with under-utilization of Flash Ventures capacity for the 90-day period subsequent to December 28, 2008 related to the...

  • Page 152
    ...$538.7 million based upon the exchange rate at January 3, 2010. Certain lease payments are due quarterly and certain lease payments are due semi-annually, and are scheduled to be completed in stages through fiscal year 2013. At each lease payment date, Flash Partners has the option of purchasing the...

  • Page 153
    ... or a minimum corporate rating of BB+ from Rating & Investment Information, Inc. ("R&I"). As of January 3, 2010, Flash Partners was in compliance with all of its master lease covenants. While the Company's S&P credit rating was B, two levels below the required minimum corporate rating threshold from...

  • Page 154
    ... each other and Flash Ventures for environmental remediation costs or liability resulting from Flash Ventures' manufacturing operations in certain circumstances. The Company and Toshiba have also entered into a Patent Indemnification Agreement under which in many cases the Company will share in the...

  • Page 155
    ... amount of 1% Convertible Notes due March 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. Includes Toshiba foundries, Flash Ventures, related party vendors and other silicon source vendor...

  • Page 156
    ... years ended January 3, 2010, December 28, 2008 and December 30, 2007 was $7.9 million, $8.2 million and $7.7 million, respectively. Note 14: Related Parties and Strategic Investments Toshiba. The Company and Toshiba have collaborated in the development and manufacture of NAND flash memory products...

  • Page 157
    ... January 3, 2010, the Company had loaned $1.7 million to S4 under a revolving line of credit which expires in May 2012. In July 2007, S4 invested $10.0 million for the acquisition of intellectual property of which $3.2 million, $3.2 million and $1.8 million was amortized in fiscal years 2009, 2008...

  • Page 158
    ... plan to terminate the rights issued under that rights plan, and the Company adopted a new rights plan. Under the new rights plan, rights were distributed as a dividend at the rate of one right for each share of common stock of the Company held by stockholders of record as of the close of business...

  • Page 159
    ... flash memory controllers, drives, memory cards, and media players and products containing same" with the U.S. International Trade Commission ("ITC") (hereinafter, "the 619 Investigation"), naming the following companies as respondents: Phison Electronics Corp. ("Phison"); Silicon Motion Technology...

  • Page 160
    ... In re Flash Memory Antitrust Litigation, Civil Case No. C07-0086. Plaintiffs allege the Company and a number of other manufacturers of flash memory and flash memory products conspired to fix, raise, maintain, and stabilize the price of NAND flash memory in violation of state and federal laws. The...

  • Page 161
    ... customers of the Company. LSI has counterclaimed for infringement of the eight LSI patents in suit and has accused most of SanDisk's digital audio and video players of infringement. On September 18, 2009, the Court granted LSI's motion to dismiss SanDisk's state law claims. The Court has set a date...

  • Page 162
    ... in subsidiaries account. The elimination entries eliminate investments in subsidiaries, related stockholders' equity and other intercompany balances and transactions. Condensed Consolidating Statements of Operations For the fiscal year ended January 3, 2010 Parent Company (1) Subsidiary Issuer...

  • Page 163
    ...Financial Statements Condensed Consolidating Statements of Operations For the fiscal year ended December 28, 2008 Parent Company...) (136,764) (3,818) 4,301 $ 3,896,366 2,693,647 1,202,719 926,205 276,514 76,144 Annual Report 487,121 145,405 9,005 350,721 - 1 - - 1 - (112,798) 7,539 (2,816) (123,...

  • Page 164
    ...2010 Parent Company (1) Subsidiary Issuer (1) Other Combined Guarantor Non-Guarantor Subsidiary (1) Subsidiaries (2) (In thousands) Consolidating Adjustments Total Company ASSETS Current assets: Cash and cash equivalents ...Short-term marketable securities ...Accounts receivable, net . . Inventory...

  • Page 165
    ...2008 Parent Company (1) Subsidiary Issuer (1) Other Combined Guarantor Non-Guarantor Subsidiary (1) Subsidiaries (2) (In thousands) Consolidating Adjustments Total Company ASSETS Current assets: Cash and cash equivalents ...Short-term marketable securities ...Accounts receivable, net . . Inventory...

  • Page 166
    ... To Consolidated Financial Statements Condensed Consolidating Statements of Cash Flows For the fiscal year ended January 3, 2010 Parent Company (1) Subsidiary Issuer (1) Other Combined Guarantor Non-Guarantor Subsidiary (1) Subsidiaries (2) (In thousands) Consolidating Adjustments Total Company Net...

  • Page 167
    ...Financial Statements Condensed Consolidating Statements of Cash Flows For the fiscal year ended December 30, 2007 Parent Company... represents legal entity results which exclude any subsidiaries required to be consolidated under GAAP. This represents all other legal subsidiaries. Annual Report F-55

  • Page 168
    ... Company's third-party software application incorrectly accounted for estimated forfeitures in share-based compensation calculations. This cumulative adjustment relates to the nine months ended September 27, 2009 and the three years ended December 28, 2008, and is not material for any prior period...

  • Page 169
    ...type table. Insert conts here. Notes To Consolidated Financial Statements March 29, 2009 Fiscal Quarters Ended June 28, September 27, 2009 2009 (In thousands) January 3, 2010 Share-based compensation ...Amortization of acquisition-related intangible assets ...Amortization of bond discount ...Total...

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  • Page 171
    ...undersigned, thereunto duly authorized. 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 25, 2010 POWER OF ATTORNEY KNOW ALL PEOPLE...

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  • Page 173
    ... entered into between the Registrant 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.(13), (*) SanDisk Corporation 1995 Non-Employee...

  • Page 174
    ... the Registrant and Toshiba Corporation.(20) Form of Amended and Restated Change of Control Benefits Agreement entered into by and between the Registrant and its named executive officers.(21), (*) Form of Option Agreement Amendment.(21), (*) Flash Partners Master Agreement, dated as of September...

  • Page 175
    ... SanDisk (Cayman) Limited, Toshiba Corporation, Flash Partners Limited, and Flash Alliance Limited.(32)(1) Computation of ratio of earnings to fixed charges.(**) Subsidiaries of the Registrant.(**) Consent of Independent Registered Public Accounting Firm.(**) Certification of Chief Executive Officer...

  • Page 176
    ...2004 Annual Report on Form 10-K. Previously filed as Annex B to the Company's Proxy Statement filed with the Commission pursuant to Section 14(a) of the Exchange Act on April 15, 2009 (Commission File No. 000-26734). Previously filed as an Exhibit to the Registrant's Current Report on Form 8-K dated...

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  • Page 179
    NAMED EXECUTIVE OFFICERS Dr. Eli Harari Chairman and Chief Executive O cer Sanjay Mehrotra President and Chief Operating O cer Judy Bruner Executive Vice President, Administration and Chief Financial O cer Yoram Cedar Executive Vice President, OEM Business and Corporate Engineering BOARD OF ...

  • Page 180
    ... trademarks or registered trademarks of Sony Corporation. SanDisk is an authorized licensee of the xD-Picture Card trademark. Other brand names mentioned herein are for identification purposes only and may be trademarks of their respective holder(s). © 2010 SanDisk Corporation. All rights reserved...