e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 1, 2007
OR
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o |
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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: 000-26734
SANDISK CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE
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77-0191793 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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601 McCarthy Blvd. |
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Milpitas, California
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95035 |
(Address of principal executive offices)
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(Zip Code) |
Registrant’s telephone number, including area code
(408) 801-1000
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Number of shares outstanding of the issuer’s common stock $0.001 par value, as of July 1,
2007: 227,844,087.
SanDisk Corporation
Index
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (in thousands)
SANDISK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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July 1, 2007 |
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December 31, 2006* |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
1,124,213 |
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$ |
1,580,700 |
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Short-term investments |
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1,787,022 |
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1,251,493 |
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Accounts receivable from product revenues, net |
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311,705 |
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611,740 |
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Inventory |
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601,372 |
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495,984 |
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Deferred taxes |
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176,480 |
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176,007 |
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Other current assets |
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246,745 |
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125,937 |
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Total current assets |
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4,247,537 |
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4,241,861 |
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Long-term investments |
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330,020 |
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457,184 |
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Property and equipment, net |
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341,829 |
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317,965 |
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Notes receivable and investments in flash ventures |
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531,684 |
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462,307 |
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Deferred taxes |
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113,788 |
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102,100 |
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Goodwill |
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849,907 |
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910,254 |
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Intangibles, net |
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354,079 |
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389,078 |
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Other non-current assets |
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59,855 |
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87,034 |
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Total assets |
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$ |
6,828,699 |
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$ |
6,967,783 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable trade |
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$ |
190,240 |
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$ |
261,870 |
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Accounts payable to related parties |
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141,041 |
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139,627 |
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Other accrued liabilities |
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189,130 |
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311,000 |
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Deferred income on shipments to distributors and retailers and deferred revenue |
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143,587 |
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183,950 |
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Total current liabilities |
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663,998 |
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896,447 |
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Convertible long-term debt |
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1,225,000 |
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1,225,000 |
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Deferred taxes and other non-current liabilities |
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130,552 |
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72,226 |
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Total liabilities |
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2,019,550 |
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2,193,673 |
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Minority interest |
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1,207 |
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5,976 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock |
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— |
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— |
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Common stock |
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228 |
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226 |
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Capital in excess of par value |
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3,722,172 |
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3,656,895 |
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Retained earnings |
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1,091,752 |
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1,105,520 |
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Accumulated other comprehensive income (loss) |
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(6,210 |
) |
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5,493 |
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Total stockholders’ equity |
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4,807,942 |
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4,768,134 |
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Total liabilities and stockholders’ equity |
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$ |
6,828,699 |
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$ |
6,967,783 |
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* |
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Information derived from the audited Consolidated Financial Statements. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
SANDISK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three months ended |
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Six months ended |
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July 1, 2007 |
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July 2, 2006 |
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July 1, 2007 |
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July 2, 2006 |
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(In thousands, except per share amounts) |
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Revenues: |
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Product |
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$ |
719,991 |
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$ |
636,675 |
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$ |
1,409,348 |
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$ |
1,174,403 |
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License and royalty |
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107,041 |
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82,510 |
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203,770 |
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168,042 |
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Total revenues |
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827,032 |
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719,185 |
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1,613,118 |
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1,342,445 |
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Cost of product revenues |
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588,736 |
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430,177 |
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1,158,824 |
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815,044 |
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Amortization of acquisition-related
intangible assets |
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14,583 |
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— |
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35,645 |
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— |
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Total cost of product revenues |
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603,319 |
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430,177 |
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1,194,469 |
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815,044 |
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Gross profit |
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223,713 |
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289,008 |
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418,649 |
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527,401 |
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Operating expenses: |
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Research and development |
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101,185 |
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73,785 |
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196,825 |
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137,547 |
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Sales and marketing |
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60,517 |
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45,067 |
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116,723 |
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88,442 |
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General and administrative |
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41,165 |
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37,182 |
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88,156 |
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67,198 |
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Write-off of acquired in-process technology |
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— |
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— |
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— |
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39,600 |
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Amortization of acquisition-related
intangible assets |
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7,050 |
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4,432 |
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16,150 |
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8,147 |
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Restructuring |
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212 |
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— |
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6,728 |
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— |
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Total operating expenses |
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210,129 |
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160,466 |
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424,582 |
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340,934 |
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Operating income (loss) |
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13,584 |
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128,542 |
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(5,933 |
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186,467 |
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Interest income |
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34,727 |
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22,670 |
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72,215 |
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38,527 |
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Interest (expense) and other income
(expense), net |
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3,829 |
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(657 |
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2,600 |
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1,950 |
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Total other income |
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38,556 |
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22,013 |
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74,815 |
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40,477 |
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Income before taxes |
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52,140 |
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150,555 |
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68,882 |
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226,944 |
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Provision for income taxes |
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23,605 |
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54,914 |
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35,762 |
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96,188 |
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Income after taxes |
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28,535 |
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95,641 |
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33,120 |
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130,756 |
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Minority interest |
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51 |
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— |
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5,211 |
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— |
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Net income |
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$ |
28,484 |
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$ |
95,641 |
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$ |
27,909 |
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$ |
130,756 |
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Net income per share: |
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Basic |
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$ |
0.12 |
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$ |
0.49 |
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$ |
0.12 |
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$ |
0.67 |
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Diluted |
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$ |
0.12 |
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$ |
0.47 |
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$ |
0.12 |
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$ |
0.65 |
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Shares used in computing net income per share: |
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Basic |
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227,959 |
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195,527 |
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227,707 |
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194,302 |
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Diluted |
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236,036 |
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202,980 |
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235,951 |
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202,522 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
SANDISK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six months ended |
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July 1, 2007 |
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July 2, 2006 |
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( In thousands) |
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Cash flows from operating activities: |
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Net income |
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$ |
27,909 |
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$ |
130,756 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Deferred taxes |
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35,760 |
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(17,395 |
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Gain on investment in foundries |
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(567 |
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(1,195 |
) |
Depreciation and amortization |
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129,233 |
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57,666 |
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Provision for doubtful accounts |
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1,538 |
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|
1,001 |
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Share-based compensation expense |
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68,190 |
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44,656 |
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Excess tax benefit from share-based compensation |
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(11,508 |
) |
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(61,023 |
) |
Write-off of acquired in-process technology |
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— |
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39,600 |
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Other non-cash charges (income) |
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8,576 |
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(4,744 |
) |
Changes in operating assets and liabilities: |
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Accounts receivable from product revenues |
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|
298,927 |
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|
23,048 |
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Inventories |
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(104,563 |
) |
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(39,976 |
) |
Other assets |
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(30,176 |
) |
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(8,743 |
) |
Accounts payable trade |
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(71,698 |
) |
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|
(123,758 |
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Accounts payable to related parties |
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10,879 |
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|
13,065 |
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Other liabilities |
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(197,702 |
) |
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|
58,830 |
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Total adjustments |
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136,889 |
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(18,968 |
) |
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Net cash provided by operating activities |
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164,798 |
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|
111,788 |
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Cash flows from investing activities: |
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Purchases of short and long-term investments |
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(1,591,857 |
) |
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(805,300 |
) |
Proceeds from sale and maturities of short and long-term investments |
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1,204,682 |
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375,446 |
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Investment in Flash Partners and Flash Alliance |
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— |
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(127,919 |
) |
Acquisition of property and equipment, net |
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(97,801 |
) |
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|
(89,722 |
) |
Proceeds from notes receivable from FlashVision |
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37,512 |
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— |
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Issuance of notes receivable to Flash Partners |
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(123,305 |
) |
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|
(95,445 |
) |
Purchased technology and other assets |
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(13,240 |
) |
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— |
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Cash acquired in business combination, net of acquisition costs |
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|
— |
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|
9,432 |
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Net cash used in investing activities |
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(584,009 |
) |
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(733,508 |
) |
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Cash flows from financing activities: |
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Proceeds from issuance of convertible senior notes, net of issuance costs |
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|
— |
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|
1,125,500 |
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Purchase of convertible bond hedge |
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|
— |
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(386,090 |
) |
Proceeds from issuance of warrants |
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|
— |
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|
308,672 |
|
Proceeds from debt financing |
|
|
3,791 |
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|
|
— |
|
Proceeds from employee stock programs |
|
|
54,102 |
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|
|
68,850 |
|
Distribution to minority interest |
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|
(9,880 |
) |
|
|
— |
|
Excess tax benefit from share-based compensation |
|
|
11,508 |
|
|
|
61,023 |
|
Share repurchase programs |
|
|
(97,417 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(37,896 |
) |
|
|
1,177,955 |
|
|
|
|
|
|
|
|
Effect of changes in foreign currency exchange rates on cash |
|
|
620 |
|
|
|
186 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(456,487 |
) |
|
|
556,421 |
|
Cash and cash equivalents at beginning of the period |
|
|
1,580,700 |
|
|
|
762,058 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period |
|
$ |
1,124,213 |
|
|
$ |
1,318,479 |
|
|
|
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|
|
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|
|
|
|
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Supplemental disclosures of cash flow information: |
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|
|
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|
|
|
Issuance of stock for acquisition |
|
$ |
— |
|
|
$ |
260,908 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
SANDISK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Summary of Significant Accounting Policies
Organization
These interim condensed consolidated financial statements are unaudited but reflect, in the
opinion of management, all adjustments, consisting of normal recurring adjustments and accruals,
necessary to present fairly the financial position of SanDisk Corporation and its subsidiaries (the
“Company”) as of July 1, 2007, the condensed consolidated statements of operations for the three
and six months ended July 1, 2007 and July 2, 2006 and the condensed consolidated statements of
cash flows for the six months ended July 1, 2007 and July 2, 2006. Certain information and
footnote disclosures normally included in financial statements prepared in accordance with U.S.
generally accepted accounting principles (“GAAP”) have been omitted in accordance with the rules
and regulations of the Securities and Exchange Commission (“SEC”). These condensed consolidated
financial statements should be read in conjunction with the audited consolidated financial
statements and accompanying notes included in the Company’s most recent Annual Report on Form 10-K.
Certain prior period amounts have been reclassified to conform to the current period presentation,
including the reclassification of publicly traded unrestricted equity securities from other current
assets to short-term investments. The results of operations for the three and six months ended
July 1, 2007 are not necessarily indicative of the results to be expected for the entire fiscal
year.
The Company’s fiscal year ends on the Sunday closest to December 31, and its fiscal quarters
end on the Sunday closest to March 31, June 30, and September 30, respectively. The second
quarters of fiscal 2007 and fiscal 2006 ended on July 1, 2007 and July 2, 2006, respectively.
Fiscal 2007 ends on December 30, 2007 and fiscal 2006 ended on December 31, 2006.
Organization and Nature of Operations. The Company was incorporated in Delaware on June 1,
1988. The Company designs, develops and markets flash storage card products used in a wide variety
of consumer electronics products. The Company operates in one segment, flash memory storage
products.
Principles of Consolidation. The condensed consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries. All intercompany balances and
transactions have been eliminated. Minority interest represents the minority shareholders’
proportionate share of the net assets and results of operations of our majority-owned subsidiary.
The condensed consolidated financial statements also include the results of companies acquired by
the Company from the date of each acquisition.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The estimates and judgments affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On
an ongoing basis, the Company evaluates its estimates, including those related to customer programs
and incentives, product returns, bad debts, inventories and related reserves, investments, income
taxes, warranty obligations, restructuring and contingencies, stock compensation and litigation.
The Company bases estimates on historical experience and on other assumptions that its management
believes are reasonable under the circumstances. These estimates form the basis for making
judgments about the carrying values of assets and liabilities when those values are not readily
apparent from other sources. Actual results could materially differ from these estimates.
Recent Accounting Pronouncements
SFAS No. 157. In September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157, (“SFAS 157”), Fair Value Measurements. SFAS
157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value,
and expands disclosures about fair value measurements. SFAS 157 is applicable whenever another
accounting pronouncement requires or permits assets and liabilities to be measured at fair value.
SFAS 157 does not expand or require any new fair value measures. The provisions of SFAS 157 are to
be applied prospectively and are effective for financial statements issued for fiscal years
beginning after November 15, 2007. The Company is currently
evaluating what effect, if any, the adoption of SFAS 157 will have on the Company’s consolidated
results of operations and financial position.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
SFAS No. 159. In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159 (“SFAS 159”), Establishing the Fair Value Option for Financial Assets and Liabilities. The
FASB has issued SFAS 159 to permit all entities to elect, at specified election dates, to measure
eligible financial instruments at fair value. An entity shall report unrealized gains and losses
on items for which the fair value option has been elected in earnings at each subsequent reporting
date, and recognize upfront costs and fees related to those items in earnings as incurred and not
deferred. SFAS 159 applies to fiscal years beginning after November 15, 2007, with early adoption
permitted for an entity that has also elected to apply the provisions of SFAS 157. An entity is prohibited from retrospectively applying SFAS 159, unless it chooses
early adoption. SFAS 159 also applies to eligible items existing at November 15, 2007 (or early
adoption date). The Company has not completed its analysis but does not expect the adoption of
SFAS 159 to have a material effect on the Company’s results of operations and financial condition.
EITF
Issue No. 07-3. 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 capitalize prepaid, nonrefundable research and
development payments to third parties over the period that the research and development activities
are performed or the services are provided, subject to an assessment of recoverability. EITF 07-3
is effective for new contracts entered into in fiscal years beginning after December 15, 2007,
including interim periods within those fiscal years. The Company will adopt this pronouncement
beginning in the first quarter of fiscal 2008 and does not expect the adoption of EITF 07-3 to have
a material impact on its consolidated results of operations and financial condition.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
2. Balance Sheet Detail
Accounts Receivable from Product Revenues, net. Accounts receivable from product revenues,
net, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 1, 2007 |
|
|
December 31, 2006 |
|
Trade accounts receivable |
|
$ |
705,132 |
|
|
$ |
1,056,616 |
|
Related party accounts receivable |
|
|
15,584 |
|
|
|
41,708 |
|
Allowance for doubtful accounts |
|
|
(12,835 |
) |
|
|
(11,452 |
) |
Price protection, promotions and other activities |
|
|
(396,176 |
) |
|
|
(475,132 |
) |
|
|
|
|
|
|
|
Total accounts receivable from product revenues, net |
|
$ |
311,705 |
|
|
$ |
611,740 |
|
|
|
|
|
|
|
|
Inventory. Inventories were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 1, 2007 |
|
|
December 31, 2006 |
|
Raw material |
|
$ |
253,322 |
|
|
$ |
157,163 |
|
Work-in-process |
|
|
97,302 |
|
|
|
64,009 |
|
Finished goods |
|
|
250,747 |
|
|
|
274,812 |
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
601,371 |
|
|
$ |
495,984 |
|
|
|
|
|
|
|
|
Other Current Assets. Other current assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 1, 2007 |
|
|
December 31, 2006 |
|
Royalty and other receivables |
|
$ |
170,686 |
|
|
$ |
82,569 |
|
Prepaid expenses |
|
|
40,072 |
|
|
|
22,276 |
|
Other current assets |
|
|
35,987 |
|
|
|
21,092 |
|
|
|
|
|
|
|
|
Total other current assets |
|
$ |
246,745 |
|
|
$ |
125,937 |
|
|
|
|
|
|
|
|
Notes Receivable and Investments in Flash Ventures. Notes receivable and investments in
flash ventures were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 1, 2007 |
|
|
December 31, 2006 |
|
Notes receivable, FlashVision |
|
$ |
— |
|
|
$ |
38,229 |
|
Notes receivable, Flash Partners |
|
|
210,782 |
|
|
|
92,421 |
|
Investment in FlashVision |
|
|
154,456 |
|
|
|
159,144 |
|
Investment in Flash Partners |
|
|
162,483 |
|
|
|
168,210 |
|
Investment in Flash Alliance |
|
|
3,963 |
|
|
|
4,303 |
|
|
|
|
|
|
|
|
Total notes receivable and investments in flash ventures |
|
$ |
531,684 |
|
|
$ |
462,307 |
|
|
|
|
|
|
|
|
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Other Accrued Liabilities. Other accrued liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 1, 2007 |
|
|
December 31, 2006 |
|
Accrued payroll and related expenses |
|
$ |
58,158 |
|
|
$ |
61,050 |
|
Taxes payable and deferred tax liability |
|
|
6,247 |
|
|
|
119,502 |
|
Research and development liability, related party |
|
|
15,315 |
|
|
|
5,850 |
|
Other accrued liabilities |
|
|
109,410 |
|
|
|
124,598 |
|
|
|
|
|
|
|
|
Total other accrued liabilities |
|
$ |
189,130 |
|
|
$ |
311,000 |
|
|
|
|
|
|
|
|
Convertible Long-term Debt. The carrying value of our convertible long-term debt as of July 1, 2007
and December 31, 2006 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 1, 2007 |
|
|
December 31, 2006 |
|
1% Senior Convertible Notes due 2013 |
|
$ |
1,150,000 |
|
|
$ |
1,150,000 |
|
1% Convertible Notes due 2035 |
|
|
75,000 |
|
|
|
75,000 |
|
|
|
|
|
|
|
|
Total convertible long-term debt |
|
$ |
1,225,000 |
|
|
$ |
1,225,000 |
|
|
|
|
|
|
|
|
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
3. Share-Based Compensation
Share-Based Plans. The Company has a share-based compensation program that provides its Board
of Directors with broad discretion in creating equity incentives for employees, officers,
non-employee board members and non-employees. This program includes incentive and non-statutory
stock option awards, stock appreciation right awards, restricted stock awards, performance-based
cash bonus awards for Section 16 executive officers and an automatic grant program for 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. These awards are granted under various
plans, all of which are stockholder approved. Grants and awards under the discretionary grant
program generally vest as follows: 25% of the shares vest on the first anniversary of the vesting
commencement date and the remaining 75% vest proportionately each quarter over the next 12 quarters
of continued service. Awards under the stock issuance program generally vest in equal annual
installments over a 4 year period. Initial grants under the automatic grant program vest over a 4
year period and subsequent grants vest over a 1 year period in accordance with the specific vesting
provisions set forth in that program. Additionally, we have an Employee Stock Purchase Plan
(“ESPP”) that allows employees to purchase shares of common stock at 85% of the fair market value
at the subscription date or the date of purchase, whichever is lowest.
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 three and six
months ended July 1, 2007 and July 2, 2006 was estimated using the following weighted average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
July 1, 2007 |
|
July 2, 2006 |
|
July 1, 2007 |
|
July 2, 2006 |
Option Plan Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield |
|
None |
|
None |
|
None |
|
None |
Expected volatility |
|
|
0.38 |
|
|
|
0.53 |
|
|
|
0.44 |
|
|
|
0.53 |
|
Risk free interest rate |
|
|
4.81 |
% |
|
|
4.99 |
% |
|
|
4.58 |
% |
|
|
4.61 |
% |
Expected lives |
|
3.3 years |
|
3.6 years |
|
3.4 years |
|
3.7 years |
Estimated annual forfeitures rate |
|
|
7.59 |
% |
|
|
7.74 |
% |
|
|
7.59 |
% |
|
|
7.74 |
% |
Weighted average fair value at grant date |
|
$ |
14.66 |
|
|
$ |
28.14 |
|
|
$ |
15.55 |
|
|
$ |
27.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield |
|
None |
|
None |
|
None |
|
None |
Expected volatility |
|
|
0.44 |
|
|
|
0.54 |
|
|
|
0.44 |
|
|
|
0.54 |
|
Risk free interest rate |
|
|
5.16 |
% |
|
|
4.69 |
% |
|
|
5.16 |
% |
|
|
4.69 |
% |
Expected lives |
|
1/2 year |
|
1/2 year |
|
1/2 year |
|
1/2 year |
Weighted average fair value for grant period |
|
$ |
11.44 |
|
|
$ |
20.45 |
|
|
$ |
11.44 |
|
|
$ |
20.45 |
|
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Share-Based Compensation Plan Activities
Stock Option and SAR. Stock option and Stock Appreciation Right (“SAR”) activity for the six
months ended July 1, 2007, is as follows (in thousands, except exercise price and contractual
term):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (Years) |
|
|
Intrinsic Value |
|
Options and SARs outstanding at December 31, 2006 |
|
|
26,392 |
|
|
$ |
31.97 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
4,360 |
|
|
|
42.26 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(2,640 |
) |
|
|
20.31 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(1,079 |
) |
|
|
46.62 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(116 |
) |
|
|
55.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and SARs outstanding at July 1, 2007 |
|
|
26,917 |
|
|
|
34.10 |
|
|
|
6.2 |
|
|
$ |
451,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and SARs vested and expected to vest after
July 1, 2007 |
|
|
25,407 |
|
|
|
33.44 |
|
|
|
6.2 |
|
|
|
442,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and SARs exercisable at July 1, 2007 |
|
|
12,476 |
|
|
$ |
23.56 |
|
|
|
5.5 |
|
|
$ |
333,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and six months ended July 1, 2007 and July 2, 2006, the aggregate intrinsic
value of stock options and SARs exercised under the Company’s share-based compensation plans was $24.3
million, $56.3 million, $58.6 million and $176.3 million, respectively. At July 1, 2007, the total
compensation cost related to options granted to employees under the Company’s share-based
compensation plans but not yet recognized was approximately $237.8 million, net of estimated
forfeitures. The unamortized compensation expense will be amortized on a straight-line basis, and
the weighted average period of this expense is approximately 2.7 years.
Restricted Stock and
Restricted Stock Unit. Restricted stock and restricted stock unit (“RSU”) are converted into shares of the Company’s common stock upon vesting on a one-for-one
basis. Typically, vesting of restricted stock and RSU are subject to the employee’s continuing
service to the Company. The cost of these awards is determined using the fair value of the
Company’s common stock on the date of the grant, and compensation is recognized on a straight-line
basis over the requisite vesting period.
A summary of the changes in RSUs outstanding under the Company’s share-based compensation plan
during the six months ended July 1, 2007 is presented below (in thousands, except for grant date
fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average Grant |
|
|
Aggregate |
|
|
|
Shares |
|
|
Date Fair Value |
|
|
Intrinsic Value |
|
Non-vested RSUs at December 31, 2006 |
|
|
598 |
|
|
$ |
58.71 |
|
|
|
|
|
Granted |
|
|
97 |
|
|
|
41.34 |
|
|
|
|
|
Vested |
|
|
(130 |
) |
|
|
60.56 |
|
|
|
|
|
Forfeited |
|
|
(29 |
) |
|
|
68.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested RSUs at July 1, 2007 |
|
|
536 |
|
|
$ |
54.57 |
|
|
$ |
26,217 |
|
|
|
|
|
|
|
|
|
|
|
As of July 1, 2007, the Company had $25.4 million of total unrecognized compensation expense,
net of estimated forfeitures, related to restricted stock and RSUs. The unamortized compensation
expense will be recognized on a straight-line basis, and the weighted average estimated remaining
life is 2.6 years.
Employee
Stock Purchase Plan. At July 1, 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 1 month.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Share-Based Compensation Expense. Share-based compensation expense for the three and six months ended
July 1, 2007 and July 2, 2006 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
July 1, 2007 |
|
|
July 2, 2006 |
|
|
July 1, 2007 |
|
|
July 2, 2006 |
|
Share-based compensation expense by caption: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales |
|
$ |
3,306 |
|
|
$ |
2,478 |
|
|
$ |
6,521 |
|
|
$ |
2,478 |
|
Research and development |
|
|
13,013 |
|
|
|
10,421 |
|
|
|
25,700 |
|
|
|
19,206 |
|
Sales and marketing |
|
|
10,361 |
|
|
|
5,125 |
|
|
|
17,284 |
|
|
|
9,165 |
|
General and administrative |
|
|
10,290 |
|
|
|
7,846 |
|
|
|
18,685 |
|
|
|
13,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
36,970 |
|
|
$ |
25,870 |
|
|
$ |
68,190 |
|
|
$ |
44,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense by type of
award: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and SARs |
|
$ |
30,018 |
|
|
$ |
21,694 |
|
|
$ |
56,663 |
|
|
$ |
37,748 |
|
Restricted stock and RSUs |
|
|
5,714 |
|
|
|
3,202 |
|
|
|
9,181 |
|
|
|
5,239 |
|
ESPP |
|
|
1,238 |
|
|
|
974 |
|
|
|
2,346 |
|
|
|
1,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
36,970 |
|
|
$ |
25,870 |
|
|
$ |
68,190 |
|
|
$ |
44,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense of $4.1 million and $2.6 million related to manufacturing
personnel was capitalized into inventory as of July 1, 2007 and July 2, 2006, respectively.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
4. Restructuring
During the first quarter of fiscal 2007, the Company implemented a restructuring plan which
included reductions in workforce in all functions 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 six months ended July 1, 2007, of which $6.0 million related
to severance and benefits to 149 terminated employees and the remaining was primarily for excess
lease obligations. All expenses, including adjustments, associated with the Company’s
restructuring plans are included in “Restructuring” in the Condensed Consolidated Statements of
Operations.
The following table sets forth an analysis of the components of the restructuring charge and
payments made against the reserve for the six months ended July 1, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
|
|
|
|
|
|
|
|
Obligations |
|
|
|
|
|
|
|
Severance and |
|
|
and Other |
|
|
|
|
|
|
Benefits |
|
|
Charges |
|
|
Total |
|
Restructuring provision |
|
$ |
5,970 |
|
|
$ |
758 |
|
|
$ |
6,728 |
|
Cash paid |
|
|
(5,842 |
) |
|
|
(227 |
) |
|
|
(6,069 |
) |
|
|
|
|
|
|
|
|
|
|
Reserve balance at July 1, 2007 |
|
$ |
128 |
|
|
$ |
531 |
|
|
$ |
659 |
|
|
|
|
|
|
|
|
|
|
|
The Company anticipates that the remaining restructuring reserve balance will be paid out in
cash through the first quarter of fiscal 2010.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
5. Warranty
Changes to the Company’s warranty reserve activity were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
July 1, 2007 |
|
|
July 2, 2006 |
|
|
July 1, 2007 |
|
|
July 2, 2006 |
|
Balance, beginning of period |
|
$ |
10,732 |
|
|
$ |
8,423 |
|
|
$ |
15,338 |
|
|
$ |
11,258 |
|
Additions and adjustments to
costs of product revenue |
|
|
6,283 |
|
|
|
4,599 |
|
|
|
4,787 |
|
|
|
1,992 |
|
Usage |
|
|
(3,851 |
) |
|
|
(3,361 |
) |
|
|
(6,961 |
) |
|
|
(3,589 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
13,164 |
|
|
$ |
9,661 |
|
|
$ |
13,164 |
|
|
$ |
9,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of the Company’s products have a warranty ranging from one to five years. A
provision for the estimated future cost related to warranty expense is recorded at the time of
customer invoice. The Company’s warranty obligation is affected by customer and consumer returns,
product failures and repair or replacement costs incurred.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
6. Goodwill and Other Intangible Assets
Goodwill. Goodwill balance was as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2006 |
|
$ |
910,254 |
|
Goodwill adjustment |
|
|
(60,347 |
) |
|
|
|
|
Balance at July 1, 2007 |
|
$ |
849,907 |
|
|
|
|
|
The goodwill adjustment in the six months ended July 1, 2007 was primarily the result of
purchase price adjustments related to the msystems Ltd. (“msystems”) acquisition and to a lesser
extent from the Matrix Semiconductor, Inc. (“Matrix”) acquisition. See Note 12, “Business
Acquisition.”
Intangible Assets. Intangible asset balances were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2007 |
|
|
December 31, 2006 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Core technology |
|
$ |
311,801 |
|
|
$ |
(50,512 |
) |
|
$ |
261,289 |
|
|
$ |
311,801 |
|
|
$ |
(18,135 |
) |
|
$ |
293,666 |
|
Developed product technology |
|
|
12,900 |
|
|
|
(3,667 |
) |
|
|
9,233 |
|
|
|
12,900 |
|
|
|
(2,103 |
) |
|
|
10,797 |
|
Trademarks |
|
|
4,000 |
|
|
|
(4,000 |
) |
|
|
— |
|
|
|
4,000 |
|
|
|
(911 |
) |
|
|
3,089 |
|
Backlog |
|
|
5,000 |
|
|
|
(5,000 |
) |
|
|
— |
|
|
|
5,000 |
|
|
|
(1,139 |
) |
|
|
3,861 |
|
Supply agreement |
|
|
2,000 |
|
|
|
(2,000 |
) |
|
|
— |
|
|
|
2,000 |
|
|
|
(46 |
) |
|
|
1,954 |
|
Customer relationships |
|
|
80,100 |
|
|
|
(14,957 |
) |
|
|
65,143 |
|
|
|
80,100 |
|
|
|
(6,008 |
) |
|
|
74,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related intangible assets |
|
|
415,801 |
|
|
|
(80,136 |
) |
|
|
335,665 |
|
|
|
415,801 |
|
|
|
(28,342 |
) |
|
|
387,459 |
|
Technology licenses |
|
|
29,243 |
|
|
|
(10,829 |
) |
|
|
18,414 |
|
|
|
7,388 |
|
|
|
(5,769 |
) |
|
|
1,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
445,044 |
|
|
$ |
(90,965 |
) |
|
$ |
354,079 |
|
|
$ |
423,189 |
|
|
$ |
(34,111 |
) |
|
$ |
389,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross intangible assets increased by $21.9 million in the six months ended July 1, 2007,
primarily due to technology licenses obtained from third parties.
The annual amortization expense of intangible assets that existed as of July 1, 2007, is
expected to be as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Estimated Amortization Expenses |
|
|
|
Acquisition-Related |
|
|
Technology |
|
Fiscal periods: |
|
Intangible Assets |
|
|
Licenses |
|
2007 (remaining six months) |
|
$ |
38,323 |
|
|
$ |
1,937 |
|
2008 |
|
|
76,229 |
|
|
|
3,648 |
|
2009 |
|
|
71,724 |
|
|
|
3,023 |
|
2010 |
|
|
71,529 |
|
|
|
3,023 |
|
2011 |
|
|
64,809 |
|
|
|
3,023 |
|
2012 and thereafter |
|
|
13,051 |
|
|
|
3,760 |
|
|
|
|
|
|
|
|
Total |
|
$ |
335,665 |
|
|
$ |
18,414 |
|
|
|
|
|
|
|
|
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
7. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss), net of tax, presented in the accompanying
balance sheet consists of the accumulated unrealized gains and losses on available-for-sale
marketable securities, including the Company’s investments in equity securities, as well as
currency translation adjustments relating to local currency denominated subsidiaries and equity
investees (in thousands).
|
|
|
|
|
|
|
|
|
|
|
July 1, 2007 |
|
|
December 31, 2006 |
|
Accumulated net unrealized gain (loss) on: |
|
|
|
|
|
|
|
|
Available-for-sale investments |
|
$ |
955 |
|
|
$ |
(1,918 |
) |
Available-for-sale investments in foundries |
|
|
(1,504 |
) |
|
|
(610 |
) |
Foreign currency translation |
|
|
(5,661 |
) |
|
|
8,021 |
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income (loss) |
|
$ |
(6,210 |
) |
|
$ |
5,493 |
|
|
|
|
|
|
|
|
Comprehensive net income is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
July 1, 2007 |
|
|
July 2, 2006 |
|
|
July 1, 2007 |
|
|
July 2, 2006 |
|
Net income |
|
$ |
28,484 |
|
|
$ |
95,641 |
|
|
$ |
27,909 |
|
|
$ |
130,756 |
|
Unrealized income (loss) on
available-for-sale investment in
foundries |
|
|
(1,220 |
) |
|
|
238 |
|
|
|
(894 |
) |
|
|
2,215 |
|
Unrealized income (loss) on
available-for-sale investments |
|
|
3,128 |
|
|
|
(412 |
) |
|
|
2,873 |
|
|
|
1,325 |
|
Currency translation income (loss) |
|
|
(17,916 |
) |
|
|
6,164 |
|
|
|
(13,682 |
) |
|
|
4,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive net income |
|
$ |
12,476 |
|
|
$ |
101,631 |
|
|
$ |
16,206 |
|
|
$ |
139,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
8. Net Income Per Share
The following table sets forth the computation of basic and diluted net income per share (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
July 1, 2007 |
|
|
July 2, 2006 |
|
|
July 1, 2007 |
|
|
July 2, 2006 |
|
Numerator for basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as reported |
|
$ |
28,484 |
|
|
$ |
95,641 |
|
|
$ |
27,909 |
|
|
$ |
130,756 |
|
Denominator for basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
227,959 |
|
|
|
195,527 |
|
|
|
227,707 |
|
|
|
194,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.12 |
|
|
$ |
0.49 |
|
|
$ |
0.12 |
|
|
$ |
0.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as reported |
|
$ |
28,484 |
|
|
$ |
95,641 |
|
|
$ |
27,909 |
|
|
$ |
130,756 |
|
Interest on the 1% Convertible Notes due 2035,
net of tax |
|
|
116 |
|
|
|
— |
|
|
|
232 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income used in computing diluted net income
per share |
|
$ |
28,600 |
|
|
$ |
95,641 |
|
|
$ |
28,141 |
|
|
$ |
130,756 |
|
Denominator for diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
227,959 |
|
|
|
195,527 |
|
|
|
227,707 |
|
|
|
194,302 |
|
Effect of dilutive 1% Convertible Notes due 2035 |
|
|
2,012 |
|
|
|
— |
|
|
|
2,012 |
|
|
|
— |
|
Effect of dilutive options and restricted stock |
|
|
6,065 |
|
|
|
7,453 |
|
|
|
6,232 |
|
|
|
8,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income per
share |
|
|
236,036 |
|
|
|
202,980 |
|
|
|
235,951 |
|
|
|
202,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.12 |
|
|
$ |
0.47 |
|
|
$ |
0.12 |
|
|
$ |
0.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares excluded from net income
per share calculation |
|
|
41,158 |
|
|
|
33,189 |
|
|
|
39,798 |
|
|
|
31,922 |
|
Basic earnings per share exclude any dilutive effects of stock options, SARs, RSUs, warrants,
and convertible securities. Diluted earnings per share include the dilutive effects of stock
options, SARs, RSUs, warrants, and the 1% Convertible Notes due 2035. Certain common stock
issuable under stock options, SARs, warrants and the 1% Senior Convertible Notes due 2013 have been
omitted from the diluted net income per share calculation because their inclusion is considered
anti-dilutive.
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
9. Share Repurchase Program
During the fourth quarter of fiscal 2006, the Company’s Board of Directors authorized the
repurchase of up to $300 million of the Company’s common stock in the open market over two years
following the date of authorization. Share repurchases have been and will be made from
time-to-time in the open market at the Company’s discretion within the authorized program. The
stock repurchase program does not obligate the Company to repurchase any particular amount of
shares and may be suspended at the Company’s discretion. During the six months ended July 1, 2007,
the Company repurchased 1.5 million shares, for an aggregate purchase price of approximately $62.4
million, all of which are held as treasury stock and accounted for using the cost method. In
addition, during the three months ended July 1, 2007, the Company entered into a $35.0 million
prepaid forward variable share repurchase agreement with a third-party investment bank to deliver
shares by August 13, 2007, and has recorded this amount as a prepaid stock repurchase under
stockholders’ equity. The Company entered into this agreement in order to enable it to repurchase
shares at a discount of the Volume Weighted Average Price (“VWAP”) of its common shares over the
period.
18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
10. Commitments, Contingencies and Guarantees
FlashVision. The Company has a 49.9% ownership interest in FlashVision Ltd. (“FlashVision”),
a business venture with Toshiba Corporation (“Toshiba”), formed in fiscal 2000. In 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
equipment owned or leased by FlashVision. FlashVision purchases wafers from Toshiba at cost and
then resells those wafers to the Company and Toshiba at cost plus a markup. Toshiba owns 50.1% of
this venture. The Company accounts for its 49.9% ownership position in FlashVision under the
equity method of accounting. The terms of the FlashVision venture contractually obligate the
Company to purchase its provided three-month forecast of FlashVision’s NAND wafer supply, which
generally equals 50 percent of the venture’s output. The Company cannot estimate the total amount
of this commitment as of July 1, 2007, because it is based upon future costs and volumes. In
addition, the Company is committed to fund 49.9% of FlashVision’s costs to the extent that
FlashVision’s revenues from wafer sales to the Company and Toshiba are insufficient to cover these
costs.
The Company agreed to indemnify Toshiba for certain liabilities Toshiba incurs as a result of
Toshiba’s guarantee of the FlashVision equipment lease arrangement. If FlashVision fails to meet
its lease commitments, and Toshiba fulfills these commitments under the terms of Toshiba’s
guarantee, then the Company will be obligated to reimburse Toshiba for 49.9% of any claims and
associated expenses under the lease, unless the claims result from Toshiba’s failure to meet its
obligations to FlashVision or its covenants to the lenders. Because FlashVision’s equipment lease
arrangement is denominated in Japanese yen, the maximum amount of the Company’s contingent
indemnification obligation on a given date when converted to U.S. dollars will fluctuate based on
the exchange rate in effect on that date. See “Off Balance Sheet Liabilities.”
Flash Partners. The Company has a 49.9% ownership interest in Flash Partners Ltd. (“Flash
Partners”), a business venture with Toshiba, formed in fiscal 2004. In 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 the 300-millimeter wafer
fabrication facility, Fab 3, 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. Toshiba owns 50.1%
of this venture. The Company accounts for its 49.9% ownership position in Flash Partners under the
equity method of accounting. The Company is committed to purchase its provided three-month
forecast of Flash Partner’s NAND wafer supply, which generally equals 50 percent of the venture’s
output. The Company cannot estimate the total amount of this commitment as of July 1, 2007 because
it is based upon future costs and volumes. In addition, the Company is committed to fund 49.9% of
Flash Partners’ costs to the extent that Flash Partners’ revenues from wafer sales to the Company
and Toshiba are insufficient to cover these costs.
As of July 1, 2007, the Company had notes receivable from Flash Partners of 26.0 billion
Japanese yen, or approximately $211 million based upon the exchange rate at July 1, 2007. These
notes are secured by the equipment purchased by Flash Partners using the note proceeds. The
Company has additional guarantee obligations to Flash Partners, see “Off Balance Sheet
Liabilities.”
Flash Alliance. The Company has a 49.9% ownership interest in Flash Alliance Ltd. (“Flash
Alliance”), a business venture with Toshiba, formed in fiscal 2006. In the venture, the Company
and Toshiba will collaborate in the development and manufacture of NAND flash memory products.
These NAND flash memory products will be manufactured by Toshiba at its 300-millimeter wafer
fabrication facility, Fab 4, being built in Yokkaichi, Japan, using the semiconductor manufacturing
equipment that will be owned or leased by Flash Alliance. Flash Alliance will purchase wafers from
Toshiba at cost and then resell those wafers to the Company and Toshiba at cost plus a markup.
Toshiba owns 50.1% of this venture. The Company accounts for its 49.9% ownership position in Flash
Alliance under the equity method of accounting. The Company is committed to purchase its provided
three-month forecast of Flash Alliance’s NAND wafer supply, which is expected to equal 50 percent
of the venture’s output. In addition, the Company is committed to fund 49.9% of Flash Alliance’s
costs to the extent that Flash Alliance’s revenues from wafer sales to the Company and Toshiba are
insufficient to cover these costs.
As a part of the FlashVision, Flash Partners and Flash Alliance venture agreements, the
Company is required to fund direct and common research and development expenses related to the
development of advanced NAND flash memory technologies. As of July 1, 2007, the Company had
accrued liabilities related to these expenses of $15.3 million.
19
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Toshiba Foundry. The Company has the ability to purchase additional capacity under a foundry
arrangement with Toshiba. Under the terms of this agreement, the Company is required to provide
Toshiba with a purchase order commitment based on a nine-month rolling forecast.
TwinSys. As of July 1, 2007, the Company had a 50.1% beneficial ownership in TwinSys Data
Storage Limited Partnership (“TwinSys”), a business venture with Toshiba, consisting of (i) 49.9%
ownership in TwinSys and (ii) 0.2% interest held by TwinSys Ltd., in which the Company has a 51%
ownership interest. The Company and Toshiba have ceased operations of TwinSys as of March 31, 2007
and are in the process of liquidating the venture.
Business Ventures and Foundry Arrangement with Toshiba. Purchase orders placed under the
Toshiba ventures and the foundry arrangement with Toshiba for up to three months are binding and
cannot be canceled.
Other Silicon Sources. The Company’s contracts with the other sources of silicon wafers
generally require the Company to provide purchase order commitments based on nine-month rolling
forecasts. The purchase orders placed under these arrangements relating to the first three months
of the nine-month forecast are generally binding and cannot be canceled. Outstanding purchase
commitments for other sources of silicon wafers are included as part of the total “Noncancelable
production purchase commitments” in the “Contractual Obligations” table below.
Subcontractors. In the normal course of business, the Company’s subcontractors periodically
procure production materials based on the forecast the Company provides to them. The Company’s
agreements with these subcontractors require that it reimburse them for materials that are
purchased on the Company’s behalf in accordance with such forecast. Accordingly, the Company may
be committed to certain costs over and above its open noncancelable purchase orders with these
subcontractors. Outstanding purchase commitments to subcontractors are included as part of the
total “Noncancelable production purchase commitments” in the “Contractual Obligations” table
below.
Off Balance Sheet Liabilities
The following table details the Company’s portion of the remaining indemnification or
guarantee obligation under each of the FlashVision and Flash Partners master lease facilities in
both Japanese yen and United States dollar equivalent based upon the exchange rate at July 1, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
Master Lease Agreements by Execution Date |
|
Lease Amounts(1) |
|
|
Expiration |
|
|
|
(Yen in billions) |
|
|
(Dollars in millions) |
|
|
|
|
|
FlashVision |
|
|
|
|
|
|
|
|
|
|
|
|
June 2006 |
|
¥ |
4.2 |
|
|
$ |
34 |
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Flash Partners |
|
|
|
|
|
|
|
|
|
|
|
|
December 2004 |
|
|
17.9 |
|
|
|
145 |
|
|
|
2010 |
|
December 2005 |
|
|
13.6 |
|
|
|
110 |
|
|
|
2011 |
|
June 2006 |
|
|
12.9 |
|
|
|
104 |
|
|
|
2011 |
|
September 2006 |
|
|
45.9 |
|
|
|
373 |
|
|
|
2011 |
|
March 2007 |
|
|
15.0 |
|
|
|
122 |
|
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Flash Partners |
|
|
105.3 |
|
|
|
854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indemnification and guarantee obligations |
|
¥ |
109.5 |
|
|
$ |
888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The maximum amount of the Company’s contingent indemnification or
guarantee obligation, net of payments, and any lease adjustments based upon the exchange rate
at July 1, 2007. |
20
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
FlashVision. In May 2002, FlashVision secured an equipment lease arrangement of approximately
37.9 billion Japanese yen, or approximately $307 million based upon the exchange rate at July 1,
2007, with Mizuho Leasing, and other financial institutions. On May 31, 2006, FlashVision
refinanced the remaining balance of this equipment lease arrangement. The refinanced arrangement
was approximately 15.0 billion Japanese yen, or approximately $122 million based upon the exchange
rate at July 1, 2007. Lease payments are due quarterly and are scheduled to be completed in
February 2009 and a residual payment of 3.1 billion Japanese yen, or $25 million based upon the
exchange rate at July 1, 2007, will be due in May 2009. Under the terms of the refinanced lease,
Toshiba guaranteed these commitments on behalf of FlashVision. The Company agreed to indemnify
Toshiba for certain liabilities Toshiba incurs as a result of Toshiba’s guarantee of the
FlashVision equipment lease arrangement. If FlashVision fails to meet its lease commitments, and
Toshiba fulfills these commitments under the terms of Toshiba’s guarantee, then the Company will be
obligated to reimburse Toshiba for 49.9% of any claims and associated expenses under the lease,
unless the claims result from Toshiba’s failure to meet its obligations to FlashVision or its
covenants to the lenders. Because FlashVision’s equipment lease arrangement is denominated in
Japanese yen, the maximum amount of the Company’s contingent indemnification obligation on a given
date when converted to U.S. dollars will fluctuate based on the exchange rate in effect on that
date. As of July 1, 2007, the maximum amount of the Company’s contingent indemnification
obligation, which reflects payments and any lease adjustments, was approximately 4.2 billion
Japanese yen, or approximately $34 million based upon the exchange rate at July 1, 2007.
Flash Partners. Flash Partners sells and leases-back from a consortium of financial
institutions a portion of its tools and has entered into five equipment master lease agreements
totaling approximately 275.0 billion Japanese yen, or approximately $2.2 billion based upon the
exchange rate at July 1, 2007. As of July 1, 2007, Flash Partners had drawn down approximately
245.0 billion Japanese yen, or approximately $2.0 billion based upon the exchange rate at July 1,
2007, of which 210.6 billion Japanese yen, or approximately $1.7 billion based upon the exchange
rate at July 1, 2007, was outstanding at July 1, 2007. The Company and Toshiba have each
guaranteed, on a several basis, 50% of Flash Partners’ obligations under the master lease
agreements. As of July 1, 2007, the maximum amount of the Company’s guarantee obligation of the
Flash Partners master lease agreements, which reflects payments and any lease adjustments, was
approximately 105.3 billion Japanese yen, or approximately $854 million based upon the exchange
rate at July 1, 2007. Lease payments are due quarterly or semi-annually and are scheduled to be
completed in stages through fiscal 2011. At the end of each of the lease terms, Flash Partners has
the option of purchasing the tools from the lessors. Flash Partners is obligated to insure the
equipment, maintain the equipment in accordance with the manufacturers’ recommendations and comply
with other customary terms to protect the leased assets. The master lease agreements contain
covenants, the most restrictive of which require the Company to maintain a minimum shareholder
equity balance of $1.16 billion as well as a long-term loan rating of BB- or Ba3, based on a named
independent rating service. In addition, the master lease agreements contain customary events of
default for a Japanese lease facility. The master lease agreements are exhibits to the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2006. These agreements should be
read carefully in their entirety for a comprehensive understanding of their terms and the nature of
the obligations the Company guaranteed. The fair value of the Company’s guarantee of Flash
Partners’ lease obligations was insignificant at inception of each of the guarantees. In addition,
Flash Partners expects to secure additional equipment lease facilities over time, which the Company
may be required to guarantee in whole or in part.
Guarantees
Indemnification Agreements. The Company has agreed to indemnify suppliers and customers for
alleged patent infringement. The scope of such indemnity varies, but may, in some instances,
include indemnification for damages and expenses, including attorneys’ fees. The Company may
periodically engage in litigation as a result of these indemnification obligations. The Company’s
insurance policies exclude coverage for third-party claims for patent infringement. Although the
liability is not remote, the nature of the patent infringement indemnification obligations prevents
the Company from making a reasonable estimate of the maximum potential amount it could be required
to pay to its suppliers and customers. Historically, the Company has not made any significant
indemnification payments under any such agreements. As of July 1, 2007, no amount had been accrued
in the accompanying condensed consolidated financial statements with respect to these
indemnification guarantees.
As permitted under Delaware law and the Company’s charter and bylaws, the Company has
agreements, or has assumed agreements in connection with its acquisitions, whereby it indemnifies
certain of its officers, employees and each of its directors for certain events or occurrences
while the officer, employee or director is, or was, serving at the Company’s or the acquired
company’s request in such capacity. The term of the indemnification period is for the officer’s,
employee’s or director’s lifetime. The maximum potential amount of future payments the Company
could be required to make under these indemnification
21
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
agreements is generally unlimited; however, the Company has a Director and Officer insurance
policy that may reduce its exposure and enable it to recover all or a portion of any future amounts
paid. As a result of its insurance policy coverage, the Company believes the estimated fair value
of these indemnification agreements is minimal. The Company has no liabilities recorded for these
agreements as of July 1, 2007 or December 31, 2006, as this liability is not reasonably estimable
even though liability under these agreements is not remote.
The Company and Toshiba have agreed to mutually contribute to, and indemnify each other, Flash
Partners and Flash Alliance, for environmental remediation costs or liability resulting from Flash
Partners or Flash Alliance’s manufacturing operations in certain circumstances. In fiscal 2004 and
2006, respectively, the Company and Toshiba each engaged consultants to perform a review of the
existing environmental conditions at the site of the facility at which Flash Partners operations
are located and Flash Alliance operations will be 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
associated with the defense and cost of settlement associated with such claims. This agreement
provides limited protection for the Company against third-party claims that NAND flash memory
products manufactured and sold by Flash Partners or Flash Alliance infringe third-party patents.
The Company has not made any indemnification payments under any such agreements and as of July 1,
2007 and no amounts have been accrued in the accompanying condensed consolidated financial statements
with respect to these indemnification guarantees.
22
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Contractual Obligations and Off Balance Sheet Arrangements
Contractual Obligations. The following summarizes the Company’s contractual cash obligations,
commitments and off balance sheet arrangements at July 1, 2007, and the effect such obligations are
expected to have on its liquidity and cash flows in future periods (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than 5 |
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
2 - 3 Years |
|
|
4 –5 Years |
|
|
Years |
|
|
|
|
|
|
|
|
|
|
1 Year |
|
|
(Fiscal 2008 |
|
|
(Fiscal 2010 |
|
|
(Beyond |
|
|
|
|
|
|
Total |
|
|
(6 months) |
|
|
and 2009) |
|
|
and 2011) |
|
|
Fiscal 2011) |
|
|
Other |
|
Operating leases |
|
$ |
48,527 |
|
|
$ |
4,347 |
|
|
$ |
16,698 |
|
|
$ |
14,264 |
|
|
$ |
13,218 |
|
|
$ |
— |
|
FlashVision fabrication capacity
expansion costs, and reimbursement
for certain other costs including
depreciation |
|
|
156,261 |
(6) |
|
|
32,019 |
|
|
|
108,251 |
|
|
|
15,749 |
|
|
|
242 |
|
|
|
— |
|
Flash Partners fabrication
capacity expansion and
reimbursement for certain other
costs including depreciation
(1) |
|
|
2,610,140 |
(6) |
|
|
812,098 |
|
|
|
974,021 |
|
|
|
684,790 |
|
|
|
139,231 |
|
|
|
— |
|
Flash Alliance fabrication
capacity expansion and
reimbursement for certain other
costs including depreciation and
start-up |
|
|
1,750,357 |
(6) |
|
|
134,609 |
|
|
|
1,076,125 |
|
|
|
359,285 |
|
|
|
180,338 |
|
|
|
— |
|
Toshiba research and development |
|
|
50,000 |
(6) |
|
|
15,000 |
|
|
|
35,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Capital equipment purchases
commitments |
|
|
97,804 |
|
|
|
97,804 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Convertible notes principal and
interest (2) |
|
|
1,316,381 |
|
|
|
9,188 |
|
|
|
24,500 |
|
|
|
24,500 |
|
|
|
1,258,193 |
|
|
|
— |
|
Income taxes payable (3) |
|
|
48,779 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
48,779 |
|
Technology license acquisition and
capital investment commitments (4) |
|
|
47,638 |
(7) |
|
|
15,138 |
|
|
|
— |
|
|
|
32,500 |
|
|
|
— |
|
|
|
|
|
Operating expense commitments |
|
|
11,088 |
|
|
|
11,088 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Noncancelable production purchase
commitments (5) |
|
|
318,338 |
(6) |
|
|
318,338 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
6,455,313 |
|
|
$ |
1,449,629 |
|
|
$ |
2,234,595 |
|
|
$ |
1,131,088 |
|
|
$ |
1,591,222 |
|
|
$ |
48,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Off Balance Sheet Arrangements.
|
|
|
|
|
|
|
As of |
|
|
July 1, 2007 |
Indemnification of FlashVision foundry equipment lease (8) |
|
$ |
34,258 |
|
Guarantee of Flash Partners equipment leases (9) |
|
$ |
853,628 |
|
|
|
|
(1) |
|
As of July 1, 2007, the Company and Toshiba have agreed to expand Fab 3 to
150,000 wafers per month. |
|
(2) |
|
In May 2006, the Company issued and sold $1.15 billion in aggregate principal
amount of 1% Senior Convertible Notes due May 15, 2013. The Company will pay cash interest
at an annual rate of 1%, payable semi-annually on May 15 and November 15 of each year until
calendar year 2013. In November 2006, through its acquisition of msystems, the Company
assumed msystems’ $75 million in aggregate principal 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. |
|
(3) |
|
Includes liability of $9.0 million related to uncertain tax positions subject to
an ongoing examination and unrecognized tax benefits of $39.8 million on issues not
currently under examination. |
|
(4) |
|
In July 2007, the Company’s subsidiary incurred a liability of $42.5 million
related to purchase of technology licenses, of which, $10.0 million was paid on July 31,
2007. See Note 11, “Related Parties” and Note 16, “Subsequent Events.” In addition, the
Company has a definitive agreement to establish a venture with Qimonda AG, and has
committed to contribute supplemental capital of 3.8 million European euros, or
approximately $5 million based upon the exchange rate as of July 1, 2007. |
|
(5) |
|
Includes Toshiba foundries, FlashVision, Flash Partners, related parties vendors
and other silicon source vendor purchase commitments. |
|
(6) |
|
Includes amounts denominated in Japanese yen which are subject to fluctuation in
exchange rates prior to payment and have been translated using the exchange rate at July 1,
2007. |
|
(7) |
|
Includes amounts denominated in European euro which are
subject to fluctuation in exchange rates prior to payment and have been translated using the exchange rate at July 1, 2007. |
|
(8) |
|
The Company’s contingent indemnification obligation is 4.2 billion Japanese yen,
or approximately $34 million based upon the exchange rate at July 1, 2007. |
|
(9) |
|
The Company’s guarantee obligation, net of cumulative lease payments, is 105.3
billion Japanese yen, or approximately $854 million based upon the exchange rate at July 1,
2007. |
24
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
The Company leases many of its office facilities and operating equipment for various terms
under long-term, noncancelable operating lease agreements. The leases expire at various dates
from fiscal 2007 through 2016. Future minimum lease payments at July 1, 2007 were as follows (in
thousands):
|
|
|
|
|
Fiscal Year Ending: |
|
|
|
|
2007 (six months) |
|
$ |
4,435 |
|
2008 |
|
|
8,799 |
|
2009 |
|
|
8,877 |
|
2010 |
|
|
8,003 |
|
2011 |
|
|
6,391 |
|
2012 and beyond |
|
|
13,218 |
|
|
|
|
|
Total operating leases |
|
|
49,723 |
|
Sublease income |
|
|
1,196 |
|
|
|
|
|
|
|
$ |
48,527 |
|
|
|
|
|
Foreign Currency Exchange and Other Contracts. The Company transacts business in various
foreign currencies. Exposure to foreign currency exchange rate fluctuations arises mainly from
non-functional currency denominated trade accounts payable, intercompany accounts and loans
receivable from related parties. 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 are offset by gains and losses on the forward
contracts so as to minimize foreign currency transaction gains and losses. All foreign currency
balances and all outstanding forward contracts are marked-to-market at July 1, 2007 with
unrealized gains and losses included in “Other income” of the Condensed Consolidated
Statements of Operations. As of July 1, 2007, the Company had foreign currency exchange contract
lines available in the amount of $1.57 billion to enter into foreign currency forward contracts.
The Company had foreign currency forward contracts in place with a net notional amount of 15.7
billion Japanese yen, or approximately $127 million based upon the exchange rate at July 1, 2007.
For the three and six months ended July 1, 2007, foreign currency contracts resulted in a realized
gain of $3.6 million and $4.3 million, respectively, including forward point income. The foreign
currency exposures hedged by these forward contracts had realized losses of $3.1 million and $3.0
million for the three and six months ended July 1, 2007, respectively. The Company has outstanding
cash flow hedges designated to mitigate equity risk associated with certain available-for-sale
equity securities totaling approximately $63 million. The changes in the fair value of the cash
flow hedges are included in accumulated other comprehensive income (loss) and were immaterial for
the six months ended July 1, 2007. The Company does not enter into derivatives for speculative or
trading purposes.
25
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
11. Related Parties and Strategic Investments
Toshiba. The Company and Toshiba have collaborated in the development and manufacture of NAND
flash memory products. These NAND flash memory products are manufactured by Toshiba at Toshiba’s
Yokkaichi, Japan operations using the semiconductor manufacturing equipment owned or leased by
FlashVision or Flash Partners. See also Note 10, “Commitments, Contingencies and Guarantees.” The
Company purchased NAND flash memory wafers from FlashVision, Flash Partners and Toshiba, made
payments for shared research and development expenses, made loans to FlashVision and Flash Partners
and made investments in Flash Partners totaling approximately $367.6 million, $556.3 million,
$367.5 million and $562.6 million in the three months and six months ended July 1, 2007 and July 2,
2006, respectively. During the three months and six months ended July 1, 2007, the Company had
sales to Toshiba of $13.4 million and $39.8 million, respectively. The purchases of NAND flash
memory wafers are ultimately reflected as a component of the Company’s cost of product revenues.
At July 1, 2007 and December 31, 2006, the Company had accounts payable balances due to Toshiba of
$4.6 million and $19.2 million, respectively, and accounts receivable balances from Toshiba of $4.7
million and $1.4 million, respectively. At July 1, 2007 and December 31, 2006, the Company had
accrued current liabilities due to Toshiba for shared research and development expenses of $15.3
million and $5.9 million, respectively.
Flash Ventures with Toshiba. The Company owns 49.9% of FlashVision, Flash Partners and Flash
Alliance, jointly called “Flash Ventures.” The Company accounts for its 49.9% ownership position
in Flash Ventures under the equity method of accounting. The Company’s obligations with respect to
Flash Ventures’ lease arrangements, capacity expansion, take-or-pay supply arrangements and
research and development cost sharing are described in Note 10, “Commitments, Contingencies and
Guarantees.” Flash Ventures are all variable interest entities as defined under FASB
Interpretation No. 46 (“FIN 46R”), Consolidation of Variable Interest Entities, and the Company is
not the primary beneficiary of any of the Flash Ventures because it absorbs less than a majority of
the expected gains and losses of each venture. At July 1, 2007 and December 31, 2006, the Company
had accounts payable balances due to Flash Ventures of $110.8 million and $61.6 million,
respectively.
TwinSys. The Company assumed msystems’ ownership interest in the venture with Toshiba,
TwinSys, designed to enable the parties to benefit from a portion of each party’s respective sales
of USB flash drives. The Company had a 50.1% beneficial ownership in TwinSys, consisting of (i)
49.9% ownership in TwinSys and (ii) 0.2% interest held by TwinSys Ltd., in which the Company has a
51% ownership interest. The Company consolidated the venture under FIN 46R. During the three
months ended July 1, 2007, TwinSys had no sales to or purchases from Toshiba. During the six months
ended July 1, 2007, TwinSys had sales to and purchases from Toshiba of $53.0 million and $28.5
million, respectively. The Company and Toshiba ceased operations of TwinSys as of March 31, 2007
and are in the process of liquidating the venture.
Tower Semiconductor. As of July 1, 2007, the Company owned approximately 12.2% of the
outstanding shares of Tower Semiconductor Ltd. (“Tower”), one of its suppliers of wafers for its
controller components, has prepaid wafer credits issued by Tower, and has convertible debt and a
warrant to purchase Tower ordinary shares. The Company’s Chief Executive Officer is also a member
of the Tower Board of Directors. As of July 1, 2007, the Company owned approximately 14.9 million
Tower shares with a market value of $21.3 million, and Tower prepaid wafer credits with a carrying
value of zero. In addition, the Company holds a Tower convertible debenture with a market value of
$4.9 million. Also, as of July 1, 2007, the Company had loaned a total of $9.8 million to Tower to
fund a portion of the overall expansion of Tower’s 0.13 micron logic wafer capacity. The loan to
Tower is secured by the equipment purchased. The Company purchased controller wafers and related
non-recurring engineering, (“ NRE”), of $22.5 million and $38.5 million in the three and six months
ended July 1, 2007, respectively. These purchases of controller wafers are ultimately reflected as
a component of the Company’s cost of product revenues. At July 1, 2007 and December 31, 2006, the
Company had amounts payable to Tower of $15.7 million and $7.7 million, respectively.
Flextronics. The Chairman of Flextronics International Ltd. (“Flextronics”) has served on the
Company’s Board of Directors since September 2003. For the three and six months ended July 1, 2007
and July 2, 2006, the Company recorded revenues related to Flextronics and its affiliates of $20.9
million, $70.7 million, $29.8 million and $49.0 million, respectively, and at July 1, 2007 and
December 31, 2006, the Company had receivables from Flextronics and its affiliates of $11.4 million
and $18.9 million, respectively. In addition, the Company purchased from Flextronics and its
affiliates $18.1 million, $32.2 million, $6.2 million and $20.6 million of services for card
assembly and testing during the three and six months ended July 1, 2007 and July 2, 2006,
respectively, which are ultimately reflected as a component of the Company’s cost of product
revenues. At July 1, 2007 and
December 31, 2006, the Company had amounts payable to Flextronics and its affiliates of $9.9
million and $6.7 million, respectively, for these services.
26
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Solid State Storage Solutions LLC. During the second quarter of fiscal 2007, the Company
formed a venture with third parties that will license intellectual property. This venture qualifies
as a variable interest entity under FIN 46R. The Company is considered the primary beneficiary of
this venture, and in accordance with FIN 46R, the Company consolidates this venture in its
financial statements. The venture was financed with $10.2 million of initial aggregate capital
contributions from the partners. In July 2007, Solid State Storage Solutions LLC invested $42.5
million for the acquisition of intellectual property, with an initial payment of $10.0 million and
a liability of $32.5 million which is secured by the intellectual property.
27
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
12. Business Acquisition
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 and channels. In the transaction, each msystems common share was
converted into 0.76368 shares of the Company’s common stock. The transaction was accounted for
using the purchase method of accounting in accordance with Statement of Financial Accounting
Standards No. 141, (“SFAS 141”), Business Combinations.
The purchase price is comprised of the following (in thousands):
|
|
|
|
|
Fair value of SanDisk common stock issued |
|
$ |
1,365,150 |
|
Estimated fair value of options and stock appreciation rights assumed |
|
|
115,670 |
|
Direct transaction costs |
|
|
14,918 |
|
|
|
|
|
Total estimated purchase price |
|
$ |
1,495,738 |
|
|
|
|
|
Direct transaction costs of approximately $15 million include investment banking, legal
and accounting fees, and other external costs directly related to the acquisition. As of July 1,
2007, substantially all costs for accounting, legal and other professional services had been paid.
Net Tangible Assets. The preliminary allocation of the msystems’ purchase price to the
tangible assets acquired and liabilities assumed is summarized below (in thousands). The
preliminary allocation was based on management’s estimates of fair value, which included a
third-party appraisal. The allocation of the purchase price may be subject to change based on
final estimates of fair value, primarily related to acquisition-related restructuring, deferred
taxes and actual transaction costs. In the six months ended July 1, 2007, the Company booked an
adjustment to the net tangible assets acquired of approximately $60.4 million, largely related to a
revised estimate of the assumed deferred purchase credits.
|
|
|
|
|
Cash |
|
$ |
41,657 |
|
Short-term investments |
|
|
100,341 |
|
Accounts receivable |
|
|
163,705 |
|
Inventory |
|
|
133,512 |
|
Property and equipment, net |
|
|
36,778 |
|
Other assets |
|
|
108,819 |
|
|
|
|
|
Total assets acquired |
|
|
584,812 |
|
|
|
|
|
Accounts payable |
|
|
(133,263 |
) |
Other liabilities |
|
|
(177,192 |
) |
|
|
|
|
Total liabilities assumed |
|
|
(310,455 |
) |
|
|
|
|
Net tangible assets acquired |
|
$ |
274,357 |
|
|
|
|
|
Purchase Price Allocation. In accordance with SFAS 141, the total preliminary purchase price
was allocated to msystems net tangible and intangible assets based upon their estimated fair values
as of November 19, 2006. The excess purchase price over the value of the net tangible and
identifiable intangible assets was recorded as goodwill. The fair values assigned to tangible and
intangible assets acquired and liabilities assumed are based on estimates and assumptions of
management which included a third party appraisal. Some of these estimates are subject to change,
particularly those estimates relating to potential restructuring activities, deferred taxes and
actual transaction costs.
28
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
The following represents the allocation of the preliminary purchase price to the acquired net
assets of msystems (in thousands):
|
|
|
|
|
Net tangible assets acquired |
|
$ |
274,357 |
|
Goodwill |
|
|
698,881 |
|
Other identifiable intangible assets: |
|
|
|
|
Core technology |
|
|
235,500 |
|
Trademarks |
|
|
4,000 |
|
Customer relationships |
|
|
66,000 |
|
Backlog |
|
|
5,000 |
|
Supply agreement |
|
|
2,000 |
|
|
|
|
|
Total other identifiable intangible assets |
|
|
312,500 |
|
Acquired in-process technology |
|
|
186,000 |
|
Deferred tax liability |
|
|
(31,339 |
) |
Assumed unvested share-based awards to be expensed |
|
|
55,339 |
|
|
|
|
|
Total preliminary estimated purchase price |
|
$ |
1,495,738 |
|
|
|
|
|
Acquisition-Related Restructuring. During the fourth quarter of fiscal 2006, the Company
established its plans to integrate the msystems operations, which included the involuntary
termination of approximately 100 employees and exiting duplicative facilities, and recorded $1.6
million for acquisition-related restructuring activities, of which $0.3 million relates to excess
lease obligations and $1.3 million is related to personnel. The lease obligations extend through
the end of the lease term in fiscal 2009. These acquisition-related restructuring liabilities were
included in the purchase price allocation of the cost to acquire msystems. In the six months ended
July 1, 2007, the Company reversed through goodwill approximately $0.6 million of the restructuring
accrual based on actual costs being less than the original estimates. As of July 1, 2007, there
was approximately $0.1 million remaining of the acquisition-related restructuring accrual that had
not been paid or utilized.
In-process Technology. As part of the msystems purchase agreement, a certain amount of the
purchase price was allocated to acquired in-process technology, which was determined through
established valuation techniques in the high-technology industry and written-off in the fourth
quarter of fiscal 2006 because technological feasibility had not been established and no
alternative future uses existed. The value was determined by estimating the net cash flows and
discounting forecasted net cash flows to their present values. The Company wrote-off the acquired
in-process technology of $186.0 million in the fourth quarter of fiscal 2006. As of July 1, 2007,
it was estimated that these in-process projects would be completed at an estimated total cost of
$19.2 million. The net cash flows from the identified projects were based on estimates of
revenues, costs of revenues, research and development expenses, including 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’s projections
of the projects and were in line with industry averages. Estimated total net revenues from the
projects were expected to grow through fiscal 2009 and decline thereafter as other new products are
expected to become available. Estimated operating expenses included research and development
expenses and selling, marketing and administrative expenses based upon historical and expected
direct expense level and general industry metrics. Estimated research and development expenses
included costs to bring the projects to technological feasibility and costs associated with ongoing
maintenance after a product is released, estimated at 2% of the expected net revenues for the
in-process technologies.
The effective tax rate used in the analysis of the in-process technologies reflects a
historical industry-specific average for the United States federal income tax rates. A discount
rate (the rate utilized to discount the net cash flows to their present values) of 19% was used in
computing the present value of net cash flows for the projects. The percentage of completion was
determined using costs incurred by msystems prior to the acquisition date compared to the estimated
remaining research and development to be completed to bring the projects to technological
feasibility.
29
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Matrix Semiconductor, Inc. On January 13, 2006, the Company completed the acquisition of
Matrix, a designer and developer of three-dimensional (3-D) integrated circuits.
Matrix® 3-D Memory is used for one-time programmable storage applications that
complement the Company’s existing flash storage memory products. The Company acquired 100% of the
outstanding shares of Matrix for a total purchase price of $296.4 million.
The purchase price is comprised of the following (in thousands):
|
|
|
|
|
Fair value of SanDisk common stock issued |
|
$ |
242,303 |
|
Estimated fair value of options assumed |
|
|
33,169 |
|
Cash consideration |
|
|
20,000 |
|
Direct transaction costs |
|
|
907 |
|
|
|
|
|
Total purchase price |
|
$ |
296,379 |
|
|
|
|
|
Acquisition-Related Restructuring. During the first quarter of fiscal 2006, the Company
established its plans to integrate the Matrix operations, which included exiting duplicative
facilities and recorded $17.5 million for acquisition-related restructuring activities, of which
$17.4 million relates to excess lease obligations. The lease obligations extend through the end of
the lease term in fiscal 2016. These acquisition-related restructuring liabilities were included
in the purchase price allocation of the cost to acquire Matrix. As of July 1, 2007, the
outstanding accrual balance was $15.0 million. The reduction in the accrual balance was primarily
related to excess lease obligation payments.
In-process Technology. As part of the Matrix purchase agreement, a certain amount of the
purchase price was allocated to acquired in-process technology, which was determined through
established valuation techniques in the high-technology computer industry and written-off in the
first quarter of fiscal 2006 because technological feasibility had not been established and no
alternative future uses existed. The value was determined by estimating the net cash flows and
discounting forecasted net cash flows to their present values. The Company wrote-off the acquired
in-process technology of $39.6 million in the first quarter of fiscal 2006. As of July 1, 2007, it
was estimated that these in-process projects would be completed over the next one to two years at
an estimated total cost of $5.0 million.
The net cash flows from the identified projects were based on estimates of revenues, costs of
revenues, research and development expenses, including 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’s projections of the projects and
were in line with industry averages. Estimated total net revenues from the projects were expected
to grow through fiscal 2009 and decline thereafter as other new products are expected to become
available. Estimated operating expenses included research and development expenses and selling,
marketing and administrative expenses based upon historical and expected direct expense level and
general industry metrics. Estimated research and development expenses included costs to bring the
projects to technological feasibility and costs associated with ongoing maintenance after a product
is released. These activities range from 0% to 5% of Matrix’s portion of the Company’s net
revenues for the in-process technologies.
The effective tax rate used in the analysis of the in-process technologies reflects a
historical industry-specific average for the United States federal income tax rates. Discount
rates (the rates utilized to discount the net cash flows to their present values) ranging from
12.5% to 15.5% were used in computing the present value of net cash flows for the projects. The
percentage of completion was determined using costs incurred by Matrix prior to the acquisition
date compared to the estimated remaining research and development to be completed to bring the
projects to technological feasibility.
30
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Pro Forma Results. The following unaudited pro forma financial information for the three and
six months ended July 2, 2006 presents the combined results of the Company, Matrix and msystems, as
if the acquisitions had occurred at the beginning of the period presented (in thousands, except per
share amounts). Certain adjustments have been made to the combined results of operations,
including amortization of acquired other intangible assets; however, charges for acquired
in-process technology were excluded as these items were non-recurring.
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
|
Six months |
|
|
|
ended |
|
|
ended |
|
|
|
July 2, 2006 |
|
|
July 2, 2006 |
|
Net revenues |
|
$ |
928,678 |
|
|
$ |
1,771,890 |
|
Net income |
|
$ |
78,274 |
|
|
$ |
126,107 |
|
Net income per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.35 |
|
|
$ |
0.56 |
|
Diluted |
|
$ |
0.33 |
|
|
$ |
0.53 |
|
The pro forma financial information does not necessarily reflect the results of operations
that would have occurred had the Company, Matrix and msystems constituted a consolidated entity
during such periods.
31
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
13. Income Taxes
The Company’s effective tax rate of 45.3% and 51.9% for the three and six months ended July 1, 2007, respectively, differed from the statutory federal rate of 35.0% primarily due to the impact of state taxes, share-based compensation adjustments recorded under SFAS 123(R), acquisition-related intangible amortization taxed at rates lower
than federal rates, tax-exempt interest income, research and development tax credits and certain other tax items recognized in the quarter. The Company’s effective tax rate of 36.5% and 42.4% for the three and six months ended July 2, 2006, respectively, differed from the statutory federal rate of 35.0% primarily due to the impact of state taxes, share-based compensation adjustments recorded under SFAS 123(R), tax-exempt interest income, research and development tax credits and certain
other tax items recognized in the quarter.
The Company adopted FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109, on January 1, 2007. As a result of the
implementation, the Company recognized approximately $1.0 million increase in the liability for
unrecognized tax benefits, which was accounted for as a reduction to retained earnings at January
1, 2007. The total taxes payable on uncertain tax positions of $44.0 million at January 1, 2007 is
before tax benefit on state taxes and on interest of $6.1 million. Of the net taxes payable of
$37.9 million, $33.2 million could favorably impact the effective tax rate in future periods and
$4.7 million would increase capital in excess of par value. The total increase in taxes payable of
$4.8 million for the six months ended July 1, 2007 offset by the tax benefit on state taxes and on interest of $1.3 million would result in $3.5 million that could favorably impact the effective tax rate in
future periods.
The Company expects to recognize a $0.8 million tax benefit within the next 12 months as a
result of the expiration of statutes of limitation. The Company had recognized interest and/or
penalties of $5.0 million at date of adoption and recognized an additional $0.6 million and $1.1
million in the three and six months ended July 1, 2007 in income tax expense, respectively.
The Company is subject to U.S. federal income tax as well as income taxes in many state and
foreign jurisdictions. The federal statute of limitations on assessment remains open for the tax
years 2003 through 2006, and the statute of limitations in state jurisdictions remain open in
general from tax years 2002 through 2006. The major foreign jurisdictions remain open for
examination in general for tax years 2001 through 2006. The Company also had federal and state net
operating loss carryforwards of approximately $89 million and $52 million before federal benefit,
respectively, at December 31, 2006.
The tax benefit associated with the exercise of stock options for the three and six months
ended July 1, 2007 and July 2, 2006 was credited to capital in excess of par value in the amount of
$2.4 million, $4.9 million, $19.1 million and $61.0 million, respectively.
32
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
14. Litigation
From time-to-time, it has been and may continue to be necessary to initiate or defend
litigation against third parties. These and other parties could bring suit against us. In each case
listed below where we are the defendant, we intend to vigorously defend the action. The Company
does not believe it is reasonably possible that losses related to the litigation as described below
have occurred beyond the amounts that have been accrued.
On October 31, 2001, the Company filed a complaint for patent infringement in the United
States District Court for the Northern District of California against Memorex Products, Inc.,
Pretec Electronics Corporation, Ritek Corporation, and Power Quotient International Co., Ltd. In
the suit, captioned SanDisk Corp. v. Memorex Products, Inc., et al., Civil Case No. CV 01 4063 VRW,
the Company seeks damages and injunctions against these companies from making, selling, importing
or using flash memory cards that infringe its U.S. Patent No. 5,602,987. The District Court granted
summary judgment of non-infringement in favor of defendants Ritek, Pretec and Memorex and entered
judgment on May 17, 2004. On June 2, 2004, the Company filed a notice of appeal of the summary
judgment rulings to the United States Court of Appeals for the Federal Circuit. On July 8, 2005,
the Federal Circuit held in favor of the Company, vacating the judgment of non-infringement and
remanding the case back to the District Court. The District Court issued an order on claim
construction on February 22, 2007. On June 29, 2007, defendant Ritek entered into a settlement
agreement and cross-license with the Company. This case is scheduled for trial in November 2007.
On or about June 9, 2003, the Company received written notice from Infineon Technologies AG,
or Infineon, that it believes the Company has infringed its U.S. Patent No. 5,726,601 (the ‘601
patent). On June 24, 2003, the Company filed a complaint against Infineon for a declaratory
judgment of patent non-infringement and invalidity regarding the ’601 patent in the United States
District Court for the Northern District of California, captioned SanDisk Corporation v. Infineon
Technologies AG, a German corporation, et al., Civil Case No. C 03 02931 BZ. On October 6, 2003,
Infineon filed an answer and counterclaim: (a) denying that the Company is entitled to the
declaration sought by the Company’s complaint; (b) requesting that the Company be adjudged to have
infringed, actively induced and/or contributed to the infringement of
the ’601 patent and an
additional patent, U.S. Patent No. 4,841,222 (the “’222 patent”). On August 12, 2004, Infineon
filed an amended counterclaim for patent infringement alleging that the Company infringes U.S.
Patent Nos. 6,026,002 (the “’002 patent”); 5,041,894 (the “’894 patent”); and 6,226,219 (the “’219
patent”), and omitting the ’601 and ’222 patents. On August 18, 2004, the Company filed an amended
complaint against Infineon for a declaratory judgment of patent non-infringement and invalidity
regarding the ’002, ’894, and ’219 patents. On February 9, 2006, the Company filed a second amended
complaint to include claims for declaratory judgment that the ’002, ’894 and ’219 patents are
unenforceable. On March 17, 2006, the Court granted a stipulation by the parties withdrawing all
claims and counterclaims regarding the ’002 patent. On February 20, 2007, the Court entered an
order staying the case to facilitate settlement negotiations.
On February 20, 2004, 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 04 428953, alleging false advertising, unfair business practices, breach of
contract, fraud, deceit, misrepresentation and violation of the California Consumers Legal Remedy
Act. The lawsuit purports to be on behalf of a class of purchasers of flash memory products and
claims that the defendants overstated the size of the memory storage capabilities of such products.
The lawsuit seeks restitution, injunction and damages in an unspecified amount. The parties have
reached a settlement of the case, which is pending final court approval. In April 2006, the Court
issued an order preliminarily approving the settlement. In August 2006, the Court held a hearing
to consider final approval of the settlement, and on November 20, 2006, the Court issued its formal
written order of approval. Two objectors to the settlement have filed separate appeals from the
Court’s order granting final approval.
On October 15, 2004, the Company filed a complaint for patent infringement and declaratory
judgment of non-infringement and patent invalidity against STMicroelectronics N.V. and
STMicroelectronics, Inc. (collectively, “ST”) in the United States District Court for the Northern
District of California, captioned SanDisk Corporation v. STMicroelectronics, Inc., et al., Civil
Case No. C 04 04379 JF. The complaint alleges that ST’s products infringe one of the Company’s U.S.
patents, U.S. Patent No. 5,172,338 (the “’338 patent”), and also alleges that several of ST’s
patents are invalid and not infringed. On June 18, 2007, the Company filed an amended complaint,
removing several of the Company’s declaratory judgment claims. A case management conference was
conducted on June 29, 2007. At that conference, the parties agreed that the remaining declaratory
judgment claims will be dismissed, pursuant to a settlement agreement in two matters being
litigated in the Eastern District of Texas (Civil Case No. 4:05CV44 and Civil Case No. 4:05CV45,
discussed below). The parties also agreed that the ’338 patent and a second
33
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
SanDisk patent, presently at issue in Civil Case No. C0505021 JF (discussed below), will be
litigated together in this case. The case is scheduled to go to trial in July of 2008.
On February 4, 2005, STMicroelectronics, Inc. (“STMicro”) filed two complaints for patent
infringement against the Company in the United States District Court for the Eastern District of
Texas, captioned STMicroelectronics, Inc. v. SanDisk Corporation, Civil Case No. 4:05CV44 (the “’44
Action”), and STMicroelectronics, Inc. v. SanDisk Corporation, Civil Case No. 4:05CV45 (the “’45
Action”), respectively. The complaints sought damages and injunctions against certain SanDisk
products. On April 22, 2005, the Company filed counterclaims on two patents against
STMicroelectronics N.V. and STMicroelectronics, Inc. in the ’45 Action. The
counterclaims sought damages and injunctive relief against ST’s flash memory products. The Company
and ST have agreed to dismiss all claims and counterclaims with prejudice.
On
October 14, 2005, STMicro filed a complaint against the Company
and the Company’s CEO, Dr. Eli
Harari, in the Superior Court of the State of California for the County of Alameda, captioned
STMicroelectronics, Inc. v. Harari, Case No. HG 05237216 (the “Harari Matter”). The complaint
alleges that STMicro, as the successor to Wafer Scale Integration, Inc.’s (“WSI”) legal rights, has
an ownership interest in several SanDisk patents that issued from applications filed by Dr. Harari,
a former WSI employee. The complaint seeks the assignment or co-ownership of certain inventions and
patents conceived of by Dr. Harari, including some 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. On December 13, 2005, STMicro filed a
motion to remand the case back to the Superior Court of Alameda County. The case was remanded to
the Superior Court of Alameda County on July 18, 2006, after briefing and oral argument on a motion
by STMicro for reconsideration of an earlier order denying STMicro’s request for remand. Due to the
remand, the District Court did not rule upon a summary judgment motion previously filed by the
Company. In the Superior Court of Alameda County, the Company filed a Motion to Transfer Venue to
Santa Clara County on August 10, 2006, which was denied on September 12, 2006. On October 6, 2006,
the Company filed a Petition for Writ of Mandate with the First District Court of Appeal which asks
that the Superior Court’s September 12 Order be vacated, and the case transferred to Santa Clara
County. On October 20, 2006, the Court of Appeal requested briefing on the Company’s petition for a
writ of mandate and stayed the action during the pendency of the writ proceedings. On January 17,
2007, the Court of Appeal issued an alternative writ directing the Superior Court to issue a new
order granting the Company’s venue transfer motion or to show cause why a writ of mandate should
not issue compelling such an order. On January 23, 2007, the Superior Court of Alameda transferred
the case to Santa Clara County as a result of the writ proceeding at the Court of Appeal. The
Company also filed a special motion to strike STMicro’s unfair competition claim, which the
Superior Court denied on September 11, 2006. The Company has appealed the denial of that motion,
and the proceedings at the Superior Court are stayed during the pendency of the appeal.
On December 6, 2005, the Company filed a complaint for patent infringement in the United
States District Court for the Northern District of California against STMicroelectronics, Inc. and
STMicroelectronics, NV (Case No. C0505021 JF). In the suit, the Company seeks
damages and injunctions against ST from making, selling, importing or using flash memory chips or
products that infringe the Company’s U.S. Patent
No. 5,991,517 (the “’517 patent”). The ’517 patent will be litigated together with the ’338 patent in Civil Case No. C 04
04379JF, which is scheduled to go to trial in July of 2008.
On January 10, 2006, the Company filed a complaint under Section 337 of the Tariff Act of 1930
(as amended) (Case No. 337-TA-560) titled, “In the matter of certain NOR and NAND flash memory
devices and products containing same” in the United States
International Trade Commission (“ITC”), naming ST as respondents. In the complaint, the
Company alleges that: (i) ST’s NOR flash memory infringes the ’338 patent; (ii) ST’s NAND flash
memory infringes U.S. Patent No. 6,542,956 (the “’956 patent”); and (iii) ST’s NOR flash memory and
NAND flash memory infringe the ’517 patent. The complaint seeks an order excluding ST’s NOR and
NAND flash memory products from importation into the United States. The ITC instituted an
investigation, based on the Company’s complaint, on February 8, 2006. On March 31, 2006, ST filed a
motion for partial summary determination or termination of the investigation with respect to the
’338 patent. On May 1, 2006, the Administrative Law Judge (“ALJ”) denied ST’s motion in an initial
determination that is subject to review by the ITC. On May 17, 2006, SanDisk filed a motion to
voluntarily terminate the investigation with respect to the ’956 patent. On June 1, 2006, the ALJ
issued an Initial Determination granting the Company’s motion. On August 15, 2006, the ALJ set
December 4, 2006 as the date for the hearing, April 4, 2007 for the Initial Determination, and
August 13, 2007 as the target date for completion of the investigation. On September 12, 2006, the
Company filed a motion to voluntarily terminate the investigation with respect to claims 1, 2, and
4 of the ’517 patent. On October 10, 2006, the ALJ issued an Initial Determination granting the
Company’s motion with respect to claims 2 and 4 of the ’517 patent. On September 25, 2006, ST
filed motions for
34
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
summary determination of non-infringement of the ’338 patent with respect to its current
products and non-infringement of the ’338 and ’517 patents with respect to prospective products and
of lack of domestic industry with regard to the ’338 patent. On the same date, SanDisk filed a
motion for summary determination of the economic prong of the domestic industry requirement with
regard to the ’517 patent. On November 17, 2006, the ALJ granted SanDisk’s motion for summary
determination of the economic prong of domestic industry, and denied ST’s motion for summary
determination of lack of domestic industry with regard to the ’338 patent. The ALJ denied one of
ST’s motions for summary determination of noninfringement of the ’338 patent. The ALJ granted ST’s
motion for summary determination with respect to ST’s binary NOR products, which SanDisk was no
longer accusing, and terminated the investigation with respect to certain prospective products. On
November 28, 2006, the ALJ denied ST’s second motion for summary determination of non-infringement
of the ’338 patent. The ALJ then held an evidentiary hearing from December 1, 2006 through
December 15, 2006. In June 2007, the ALJ issued an initial determination that ST had not committed
a violation of U.S. trade laws. Neither the Company nor ST appealed. The initial determination
became final in July 2007.
On August 7, 2006, two purported shareholder class and derivative actions, captioned Capovilla
v. SanDisk Corp., No. 106 CV 068760, and Dashiell v. SanDisk Corp., No. 106 CV 068759, were filed
in the Superior Court of California in Santa Clara County, California. On August 9, 2006, and
August 17, 2006, respectively, two additional purported shareholder class and derivative actions,
captioned Lopiccolo v. SanDisk Corp., No. 106 CV 068946, and Sachs v. SanDisk Corp., No.
1-06-CV-069534, were filed in that court. These four lawsuits were subsequently consolidated under
the caption In re msystems Ltd. Shareholder Litigation, No. 106 CV 068759 and on October 27, 2006,
a consolidated amended complaint was filed that supersedes the four original complaints. The
lawsuit is brought by purported shareholders of msystems and names as defendants the Company and
each of msystems’ former directors, including its President and Chief Executive Officer, and its
former Chief Financial Officer, and names msystems as a nominal
defendant. The lawsuit asserts purported class action and derivative claims. The alleged
derivative claims assert, among other things, breach of fiduciary duties, abuse of control,
constructive fraud, corporate waste, unjust enrichment and gross mismanagement with respect to past
stock option grants. The alleged class and derivative claims also assert claims for breach of
fiduciary duty by msystems’ board, which the Company is alleged to have aided an abetted, with
respect to allegedly inadequate consideration for the merger, and allegedly false or misleading
disclosures in proxy materials relating to the merger. The complaints seek, among other things,
equitable relief, including enjoining the proposed merger, and
compensatory and punitive damages.
On September 11, 2006, Mr. Rabbi, a shareholder of msystems Ltd. (“msystems”), filed a
derivative action and a motion to permit him to file the derivative action against four directors
of msystems and msystems, arguing that options were allegedly allocated to officers and employees
of msystems in violation of applicable law. Mr. Rabbi claimed that the aforementioned actions
allegedly caused damage to msystems. On January 25, 2007, msystems filed a motion to dismiss the
motion to seek leave to file the derivative action and the derivative action on the grounds, inter
alia, that Mr. Rabbi ceased to be a shareholder of msystems after the merger between msystems and
the Company. msystems received an extension to file its comprehensive
response to the motion, to be submitted 30 days after the decision of
the court in its motion to dismiss.
On February 16, 2007, Texas MP3 Technologies, Ltd. (“Texas MP3”) filed suit against the
Company, Samsung Electronics Co., Ltd., Samsung Electronics America, Inc. and Apple Inc.,
Case No. 2:07-CV-52, in the Eastern District of Texas, Marshall Division, alleging infringement of
U.S. Patent 7,065,417 (the “’417 patent”). On June 19, 2007, the Company filed an answer and
counterclaim: (a) denying infringement; (b) seeking a declaratory judgment that the ’417 patent is
invalid, unenforceable and not infringed by the Company. On July 31, 2007, Texas MP3 filed an
amended complaint against the Company and the other parties named in the original complaint,
alleging infringement of the ’417 patent. The Company has not filed its response to the amended
complaint. A trial date has not been set.
On or about May 11, 2007, the Company received written notice from Alcatel-Lucent, S.A., or
Lucent, alleging that SanDisk digital music players require a license to U.S. Patent No. 5,341,457
(the “’457 patent”) and U.S. Patent No. RE39,080 (the “’080 patent”). On July 13, 2007, the
Company filed a complaint for a declaratory judgment of non-infringement and patent invalidity
against Lucent Technologies Inc. and Alcatel-Lucent, S.A. in the United States District Court for
the 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 further seeks a judicial determination and declaration that Lucent’s patents are invalid.
No answer has been filed.
On July 11, 2007, the Company filed a complaint for patent infringement against Memorex
Products, Inc. and its parent company, Imation Corporation, in the United States District Court for
the Northern District of California, captioned SanDisk
Corporation v. Imation Corporation, et al., Civil Case No. C 07 3588. The complaint alleges
that that the defendants’ products infringe one of the Company’s U.S. patents relating to USB flash
memory drive technology and seeks damages and an injunction. Neither defendant has filed its
answer.
35
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
15. Condensed Consolidating Financial Statements
As part of the acquisition of msystems in November 2006, the Company entered into a
supplemental indenture whereby the Company became an additional obligor and guarantor of the
assumed $75 million 1% Convertible Notes due 2035 issued by msystems Finance Company, (the
“Subsidiary Issuer” or “mfinco”) and guaranteed
by SanDisk IL Ltd. (the “Other Guarantor
Subsidiary” or formerly “msystems”). SanDisk Corporation’s (the “Parent Company” or the “Company”)
guarantee is full and unconditional, jointly and severally with msystems. Both msystems and mfinco
are wholly-owned subsidiaries of the Company. The following condensed consolidating financial
statements present separate information for mfinco as the subsidiary issuer, the Company and
msystems as guarantors and the Company’s other combined non-guarantor subsidiaries, and should be
read in conjunction with the condensed consolidated financial statements of the Company.
These condensed consolidating financial statements have been prepared using the equity method
of accounting. Earnings of subsidiaries are reflected in the Company’s investment in subsidiaries
account. The elimination entries eliminate investments in subsidiaries, related stockholders’
equity and other intercompany balances and transactions. Only the three and six months ended July
1, 2007 are presented for the Condensed Consolidating Statements of Operations, and the six months
ended July 1, 2007 for the cash flows, as the inception of the guarantee by the Company coincides
only with the consummation of the acquisition of msystems on November 19, 2006.
36
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Condensed Consolidating Statements of Operations
For the three months ended July 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Combined Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiary |
|
|
Guarantor |
|
|
Guarantor |
|
|
Consolidating |
|
|
Total |
|
|
|
Company (1) |
|
|
Issuer (1) |
|
|
Subsidiary (1) |
|
|
Subsidiaries (2) |
|
|
Adjustments |
|
|
Company |
|
|
|
(In thousands) |
|
Total revenues |
|
$ |
530,353 |
|
|
$ |
— |
|
|
$ |
61,547 |
|
|
$ |
1,032,172 |
|
|
$ |
(797,040 |
) |
|
$ |
827,032 |
|
Total cost of revenues |
|
|
307,074 |
|
|
|
— |
|
|
|
59,128 |
|
|
|
1,004,976 |
|
|
|
(767,859 |
) |
|
|
603,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
223,279 |
|
|
|
— |
|
|
|
2,419 |
|
|
|
27,196 |
|
|
|
(29,181 |
) |
|
|
223,713 |
|
Total operating expenses |
|
|
131,054 |
|
|
|
— |
|
|
|
27,819 |
|
|
|
82,130 |
|
|
|
(30,874 |
) |
|
|
210,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
92,225 |
|
|
|
— |
|
|
|
(25,400 |
) |
|
|
(54,934 |
) |
|
|
1,693 |
|
|
|
13,584 |
|
Total other income (expense) |
|
|
21,261 |
|
|
|
180 |
|
|
|
22,861 |
|
|
|
(11,376 |
) |
|
|
5,630 |
|
|
|
38,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
113,486 |
|
|
|
180 |
|
|
|
(2,539 |
) |
|
|
(66,310 |
) |
|
|
7,323 |
|
|
|
52,140 |
|
Provision (benefit) for income taxes |
|
|
19,198 |
|
|
|
— |
|
|
|
5,035 |
|
|
|
548 |
|
|
|
(1,176 |
) |
|
|
23,605 |
|
Minority interest |
|
|
— |
|
|
|
— |
|
|
|
51 |
|
|
|
— |
|
|
|
— |
|
|
|
51 |
|
Equity in net income (loss) of
consolidated subsidiaries |
|
|
(46,334 |
) |
|
|
— |
|
|
|
3,929 |
|
|
|
(6,331 |
) |
|
|
48,736 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
47,954 |
|
|
$ |
180 |
|
|
$ |
(3,696 |
) |
|
$ |
(73,189 |
) |
|
$ |
57,235 |
|
|
$ |
28,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Operations
For the six months ended July 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Combined Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiary |
|
|
Guarantor |
|
|
Guarantor |
|
|
Consolidating |
|
|
Total |
|
|
|
Company (1) |
|
|
Issuer (1) |
|
|
Subsidiary (1) |
|
|
Subsidiaries (2) |
|
|
Adjustments |
|
|
Company |
|
|
|
(In thousands) |
|
Total revenues |
|
$ |
951,846 |
|
|
$ |
— |
|
|
$ |
153,942 |
|
|
$ |
1,974,013 |
|
|
$ |
(1,466,683 |
) |
|
$ |
1,613,118 |
|
Total cost of revenues |
|
|
533,860 |
|
|
|
— |
|
|
|
158,725 |
|
|
|
1,912,810 |
|
|
|
(1,410,926 |
) |
|
|
1,194,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
417,986 |
|
|
|
— |
|
|
|
(4,783 |
) |
|
|
61,203 |
|
|
|
(55,757 |
) |
|
|
418,649 |
|
Total operating expenses |
|
|
260,642 |
|
|
|
— |
|
|
|
66,305 |
|
|
|
151,246 |
|
|
|
(53,611 |
) |
|
|
424,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
157,344 |
|
|
|
— |
|
|
|
(71,088 |
) |
|
|
(90,043 |
) |
|
|
(2,146 |
) |
|
|
(5,933 |
) |
Total other income (expense) |
|
|
59,616 |
|
|
|
(7 |
) |
|
|
26,114 |
|
|
|
(13,708 |
) |
|
|
2,800 |
|
|
|
74,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
216,960 |
|
|
|
(7 |
) |
|
|
(44,974 |
) |
|
|
(103,751 |
) |
|
|
654 |
|
|
|
68,882 |
|
Provision for income taxes |
|
|
31,479 |
|
|
|
— |
|
|
|
4,063 |
|
|
|
219 |
|
|
|
1 |
|
|
|
35,762 |
|
Minority interest |
|
|
— |
|
|
|
— |
|
|
|
5,211 |
|
|
|
— |
|
|
|
— |
|
|
|
5,211 |
|
Equity in net income (loss)
of consolidated
subsidiaries |
|
|
(81,890 |
) |
|
|
— |
|
|
|
9,140 |
|
|
|
(7,370 |
) |
|
|
80,120 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
103,591 |
|
|
$ |
(7 |
) |
|
$ |
(45,108 |
) |
|
$ |
(111,340 |
) |
|
$ |
80,773 |
|
|
$ |
27,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This represents legal entity results which exclude any subsidiaries required to
be consolidated under GAAP. |
|
(2) |
|
This represents all other legal subsidiaries. |
37
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Condensed
Consolidating Balance Sheets
As of July 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiary |
|
|
Guarantor |
|
|
Guarantor |
|
|
Consolidating |
|
|
Total |
|
|
|
Company (1) |
|
|
Issuer (1) |
|
|
Subsidiary (1) |
|
|
Subsidiaries (2) |
|
|
Adjustments |
|
|
Company |
|
|
|
(In thousands) |
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
744,177 |
|
|
$ |
216 |
|
|
$ |
184,492 |
|
|
$ |
194,188 |
|
|
$ |
1,140 |
|
|
$ |
1,124,213 |
|
Short-term investments |
|
|
1,750,754 |
|
|
|
— |
|
|
|
170 |
|
|
|
1,260 |
|
|
|
34,838 |
|
|
|
1,787,022 |
|
Accounts receivable, net |
|
|
114,729 |
|
|
|
— |
|
|
|
19,666 |
|
|
|
175,814 |
|
|
|
1,496 |
|
|
|
311,705 |
|
Inventory |
|
|
105,637 |
|
|
|
— |
|
|
|
33,807 |
|
|
|
462,389 |
|
|
|
(461 |
) |
|
|
601,372 |
|
Deferred taxes |
|
|
153,458 |
|
|
|
— |
|
|
|
— |
|
|
|
23,022 |
|
|
|
— |
|
|
|
176,480 |
|
Other current assets |
|
|
487,993 |
|
|
|
|
|
|
|
11,006 |
|
|
|
429,003 |
|
|
|
(681,257 |
) |
|
|
246,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
3,356,748 |
|
|
|
216 |
|
|
|
249,141 |
|
|
|
1,285,676 |
|
|
|
(644,244 |
) |
|
|
4,247,537 |
|
Property and equipment, net |
|
|
171,673 |
|
|
|
— |
|
|
|
33,964 |
|
|
|
136,238 |
|
|
|
(46 |
) |
|
|
341,829 |
|
Goodwill |
|
|
— |
|
|
|
— |
|
|
|
699,360 |
|
|
|
150,491 |
|
|
|
56 |
|
|
|
849,907 |
|
Intangibles, net |
|
|
— |
|
|
|
— |
|
|
|
258,963 |
|
|
|
95,117 |
|
|
|
(1 |
) |
|
|
354,079 |
|
Other non-current assets |
|
|
1,414,042 |
|
|
|
71,615 |
|
|
|
101,955 |
|
|
|
424,563 |
|
|
|
(976,828 |
) |
|
|
1,035,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,942,463 |
|
|
$ |
71,831 |
|
|
$ |
1,343,383 |
|
|
$ |
2,092,085 |
|
|
$ |
(1,621,063 |
) |
|
$ |
6,828,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
33,534 |
|
|
$ |
— |
|
|
$ |
14,126 |
|
|
$ |
283,483 |
|
|
$ |
138 |
|
|
$ |
331,281 |
|
Other current accrued liabilities |
|
|
355,775 |
|
|
|
226 |
|
|
|
30,542 |
|
|
|
734,742 |
|
|
|
(788,568 |
) |
|
|
332,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
389,309 |
|
|
|
226 |
|
|
|
44,668 |
|
|
|
1,018,225 |
|
|
|
(788,430 |
) |
|
|
663,998 |
|
Convertible long-term debt |
|
|
1,150,000 |
|
|
|
75,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,225,000 |
|
Deferred taxes and other non-current
liabilities |
|
|
41,710 |
|
|
|
— |
|
|
|
35,834 |
|
|
|
53,209 |
|
|
|
(201 |
) |
|
|
130,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,581,019 |
|
|
|
75,226 |
|
|
|
80,502 |
|
|
|
1,071,434 |
|
|
|
(788,631 |
) |
|
|
2,019,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
— |
|
|
|
— |
|
|
|
1,207 |
|
|
|
— |
|
|
|
— |
|
|
|
1,207 |
|
Stockholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
2,557,737 |
|
|
|
— |
|
|
|
1,022,911 |
|
|
|
1,004,421 |
|
|
|
(862,669 |
) |
|
|
3,722,400 |
|
Retained earnings |
|
|
803,587 |
|
|
|
(3,395 |
) |
|
|
240,213 |
|
|
|
16,544 |
|
|
|
34,803 |
|
|
|
1,091,752 |
|
Accumulated other comprehensive income
(loss) |
|
|
120 |
|
|
|
— |
|
|
|
(1,450 |
) |
|
|
(314 |
) |
|
|
(4,566 |
) |
|
|
(6,210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
3,361,444 |
|
|
|
(3,395 |
) |
|
|
1,261,674 |
|
|
|
1,020,651 |
|
|
|
(832,432 |
) |
|
|
4,807,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
4,942,463 |
|
|
$ |
71,831 |
|
|
$ |
1,343,383 |
|
|
$ |
2,092,085 |
|
|
$ |
(1,621,063 |
) |
|
$ |
6,828,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This represents legal entity results which exclude any subsidiaries required to
be consolidated under GAAP. |
|
(2) |
|
This represents all other legal subsidiaries. |
38
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Condensed Consolidating Balance Sheets
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiary |
|
|
Guarantor |
|
|
Guarantor |
|
|
Consolidating |
|
|
Total |
|
|
|
Company (1) |
|
|
Issuer (1) |
|
|
Subsidiary (1) |
|
|
Subsidiaries (2) |
|
|
Adjustments |
|
|
Company |
|
|
|
(In thousands) |
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,165,473 |
|
|
$ |
48 |
|
|
$ |
71,839 |
|
|
$ |
340,291 |
|
|
$ |
3,049 |
|
|
$ |
1,580,700 |
|
Short-term investments |
|
|
1,192,084 |
|
|
|
— |
|
|
|
26,294 |
|
|
|
2,681 |
|
|
|
30,434 |
|
|
|
1,251,493 |
|
Accounts receivable, net |
|
|
256,801 |
|
|
|
— |
|
|
|
55,864 |
|
|
|
313,407 |
|
|
|
(14,332 |
) |
|
|
611,740 |
|
Inventory |
|
|
106,772 |
|
|
|
— |
|
|
|
71,839 |
|
|
|
318,154 |
|
|
|
(781 |
) |
|
|
495,984 |
|
Deferred taxes |
|
|
152,791 |
|
|
|
— |
|
|
|
— |
|
|
|
23,217 |
|
|
|
(1 |
) |
|
|
176,007 |
|
Other current assets |
|
|
344,722 |
|
|
|
— |
|
|
|
74,434 |
|
|
|
229,912 |
|
|
|
(523,131 |
) |
|
|
125,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
3,218,643 |
|
|
|
48 |
|
|
|
300,270 |
|
|
|
1,227,662 |
|
|
|
(504,762 |
) |
|
|
4,241,861 |
|
Property and equipment, net |
|
|
182,750 |
|
|
|
— |
|
|
|
34,870 |
|
|
|
100,345 |
|
|
|
— |
|
|
|
317,965 |
|
Goodwill |
|
|
— |
|
|
|
— |
|
|
|
759,729 |
|
|
|
150,470 |
|
|
|
55 |
|
|
|
910,254 |
|
Intangibles, net |
|
|
— |
|
|
|
— |
|
|
|
312,682 |
|
|
|
76,396 |
|
|
|
— |
|
|
|
389,078 |
|
Other non-current assets |
|
|
1,735,998 |
|
|
|
71,789 |
|
|
|
111,754 |
|
|
|
368,467 |
|
|
|
(1,179,383 |
) |
|
|
1,108,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,137,391 |
|
|
$ |
71,837 |
|
|
$ |
1,519,305 |
|
|
$ |
1,923,340 |
|
|
$ |
(1,684,090 |
) |
|
$ |
6,967,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
43,910 |
|
|
$ |
— |
|
|
$ |
46,349 |
|
|
$ |
312,219 |
|
|
$ |
(981 |
) |
|
$ |
401,497 |
|
Other current accrued liabilities |
|
|
515,042 |
|
|
|
226 |
|
|
|
59,287 |
|
|
|
512,525 |
|
|
|
(592,130 |
) |
|
|
494,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
558,952 |
|
|
|
226 |
|
|
|
105,636 |
|
|
|
824,744 |
|
|
|
(593,111 |
) |
|
|
896,447 |
|
Convertible long-term debt |
|
|
1,150,000 |
|
|
|
75,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,225,000 |
|
Deferred taxes and other non-current
liabilities |
|
|
18,029 |
|
|
|
— |
|
|
|
32,229 |
|
|
|
29,770 |
|
|
|
(7,802 |
) |
|
|
72,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,726,981 |
|
|
|
75,226 |
|
|
|
137,865 |
|
|
|
854,514 |
|
|
|
(600,913 |
) |
|
|
2,193,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
— |
|
|
|
— |
|
|
|
5,976 |
|
|
|
— |
|
|
|
— |
|
|
|
5,976 |
|
Stockholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
2,387,819 |
|
|
|
— |
|
|
|
1,085,277 |
|
|
|
675,218 |
|
|
|
(491,193 |
) |
|
|
3,657,121 |
|
Retained earnings |
|
|
1,018,566 |
|
|
|
(3,389 |
) |
|
|
284,414 |
|
|
|
384,471 |
|
|
|
(578,542 |
) |
|
|
1,105,520 |
|
Accumulated other comprehensive income
(loss) |
|
|
4,025 |
|
|
|
— |
|
|
|
5,773 |
|
|
|
9,137 |
|
|
|
(13,442 |
) |
|
|
5,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
3,410,410 |
|
|
|
(3,389 |
) |
|
|
1,375,464 |
|
|
|
1,068,826 |
|
|
|
(1,083,177 |
) |
|
|
4,768,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
5,137,391 |
|
|
$ |
71,837 |
|
|
$ |
1,519,305 |
|
|
$ |
1,923,340 |
|
|
$ |
(1,684,090 |
) |
|
$ |
6,967,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This represents legal entity results which exclude any subsidiaries required to
be consolidated under GAAP. |
|
(2) |
|
This represents all other legal subsidiaries. |
39
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Condensed Consolidating Statements of Cash Flows
For the six months ended July 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Non- |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiary |
|
|
Guarantor |
|
|
Guarantor |
|
|
Consolidating |
|
|
Total |
|
|
|
Company (1) |
|
|
Issuer (1) |
|
|
Subsidiary (1) |
|
|
Subsidiaries (2) |
|
|
Adjustments |
|
|
Company |
|
|
|
(In thousands) |
|
Net cash provided by (used in)
operating activities |
|
$ |
153,499 |
|
|
$ |
168 |
|
|
$ |
78,621 |
|
|
$ |
(65,582 |
) |
|
$ |
(1,908 |
) |
|
$ |
164,798 |
|
Net cash provided by (used in) investing
activities |
|
|
(543,608 |
) |
|
|
— |
|
|
|
39,951 |
|
|
|
(80,352 |
) |
|
|
— |
|
|
|
(584,009 |
) |
Net cash used in financing activities |
|
|
(31,807 |
) |
|
|
— |
|
|
|
(6,089 |
) |
|
|
— |
|
|
|
— |
|
|
|
(37,896 |
) |
Effect of changes in foreign currency
exchange rates on cash |
|
|
620 |
|
|
|
— |
|
|
|
170 |
|
|
|
(170 |
) |
|
|
— |
|
|
|
620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents |
|
|
(421,296 |
) |
|
|
168 |
|
|
|
112,653 |
|
|
|
(146,104 |
) |
|
|
(1,908 |
) |
|
|
(456,487 |
) |
Cash and cash equivalents at beginning of
period |
|
|
1,165,473 |
|
|
|
48 |
|
|
|
71,839 |
|
|
|
340,292 |
|
|
|
3,048 |
|
|
|
1,580,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
744,177 |
|
|
$ |
216 |
|
|
$ |
184,492 |
|
|
$ |
194,188 |
|
|
$ |
1,140 |
|
|
$ |
1,124,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This represents legal entity results which exclude any subsidiaries required to
be consolidated under GAAP. |
|
(2) |
|
This represents all other legal subsidiaries. |
40
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
16. Subsequent Event
In July 2007, the Company and Toshiba made capital contributions of 5.0 billion Japanese yen
to Flash Alliance, of which the Company’s portion was 2.495 billion Japanese yen, or approximately
$20 million based on the exchange rate at July 1, 2007.
In July 2007, Solid State Storage Solutions LLC acquired intellectual property of $42.5
million. See Note 11, “Related Parties.”
41
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Statements in this report, which are not historical facts, are forward-looking statements
within the meaning of the federal securities laws. These statements may contain words such as
“expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” or other wording
indicating future results or expectations. Forward-looking statements are subject to significant
risks and uncertainties. Our actual results may differ materially from the results discussed in
these forward-looking statements. Factors that could cause our actual results to differ materially
include, but are not limited to, those discussed under “Risk Factors” and elsewhere in this report.
Our business, financial condition or results of operations could be materially adversely affected
by any of these factors. We undertake no obligation to revise or update any forward-looking
statements to reflect any event or circumstance that arises after the date of this report, except
as required by law. References in this report to “SanDisk®,” “we,” “our,” and “us”
refer collectively to SanDisk Corporation, a Delaware corporation, and its subsidiaries.
Overview
We are one of the world’s largest suppliers of NAND flash-based data storage products for the
consumer, mobile communications and industrial markets. Our mission is to be the preferred choice
of personal storage solutions for the worldwide digital economy. We seek to achieve our mission by
developing leading technologies and innovative products and delivering our products through both
retail and OEM channels.
We design, develop, market and manufacture products and solutions in a variety of form factors
using our flash memory, controller and firmware technologies. Our products are used in a wide
range of consumer electronics devices such as digital cameras, mobile phones, USB drives, gaming
consoles, MP3 players, laptop computers and other digital devices. Our products are also embedded
in a variety of systems for the enterprise, industrial, military and other markets. Flash storage
technology allows data to be stored in a low-power consumption, durable and compact format that
retains the data after the power has been turned off.
Our results are primarily driven by worldwide demand for flash storage devices, which in turn
depends on end-user demand for electronic products. We believe the market for flash storage is
price elastic. Accordingly, we expect that as we reduce the price of our flash devices, consumers
will demand an increasing number of megabytes of memory. In order to profitably capitalize on
price elasticity of demand in the market for flash storage products, we must reduce our cost per
megabyte at a rate similar to the change in selling price per megabyte to the consumer. We seek to
achieve these cost reductions through technology improvements primarily by increasing the amount of
memory stored in a given area of silicon.
We adopted Financial Accounting Standards Board, or FASB, Interpretation No. 48, or FIN 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, at the
beginning of fiscal 2007. FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. Adoption of FIN 48 did not
have a significant impact on our financial position and result of operations. For further
discussion on adoption of FIN 48, please refer to Note 13, “Income Taxes.”
42
Results
of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
July 1, |
|
|
% of |
|
|
July 2, |
|
|
% of |
|
|
July 1, |
|
|
% of |
|
|
July 2, |
|
|
% of |
|
|
|
2007 |
|
|
Revenues |
|
|
2006 |
|
|
Revenues |
|
|
2007 |
|
|
Revenues |
|
|
2006 |
|
|
Revenues |
|
|
|
(In millions, except percentages) |
|
Product revenues |
|
$ |
720.0 |
|
|
|
87.1% |
|
|
$ |
636.7 |
|
|
|
88.5% |
|
|
$ |
1,409.3 |
|
|
|
87.4% |
|
|
$ |
1,174.4 |
|
|
|
87.5% |
|
License and royalty revenues |
|
|
107.0 |
|
|
|
12.9% |
|
|
|
82.5 |
|
|
|
11.5% |
|
|
|
203.8 |
|
|
|
12.6% |
|
|
|
168.0 |
|
|
|
12.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
827.0 |
|
|
|
100.0% |
|
|
|
719.2 |
|
|
|
100.0% |
|
|
|
1,613.1 |
|
|
|
100.0% |
|
|
|
1,342.4 |
|
|
|
100.0% |
|
Cost of product revenues |
|
|
588.7 |
|
|
|
71.2% |
|
|
|
430.2 |
|
|
|
59.8% |
|
|
|
1,158.8 |
|
|
|
71.8% |
|
|
|
815.0 |
|
|
|
60.7% |
|
Amortization of
acquisition-related
intangible assets |
|
|
14.6 |
|
|
|
1.8% |
|
|
|
— |
|
|
|
— |
|
|
|
35.7 |
|
|
|
2.2% |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of product
revenues |
|
|
603.3 |
|
|
|
73.0% |
|
|
|
430.2 |
|
|
|
59.8% |
|
|
|
1,194.5 |
|
|
|
74.0% |
|
|
|
815.0 |
|
|
|
60.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margins |
|
|
223.7 |
|
|
|
27.0% |
|
|
|
289.0 |
|
|
|
40.2% |
|
|
|
418.6 |
|
|
|
26.0% |
|
|
|
527.4 |
|
|
|
39.3% |
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
101.2 |
|
|
|
12.2% |
|
|
|
73.8 |
|
|
|
10.3% |
|
|
|
196.8 |
|
|
|
12.2% |
|
|
|
137.5 |
|
|
|
10.2% |
|
Sales and marketing |
|
|
60.5 |
|
|
|
7.3% |
|
|
|
45.1 |
|
|
|
6.3% |
|
|
|
116.7 |
|
|
|
7.3% |
|
|
|
88.4 |
|
|
|
6.6% |
|
General and administrative |
|
|
41.2 |
|
|
|
5.0% |
|
|
|
37.2 |
|
|
|
5.2% |
|
|
|
88.2 |
|
|
|
5.5% |
|
|
|
67.2 |
|
|
|
5.0% |
|
Write-off of acquired
in-process technology |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
39.6 |
|
|
|
3.0% |
|
Amortization of
acquisition-related
intangible assets |
|
|
7.0 |
|
|
|
0.9% |
|
|
|
4.4 |
|
|
|
0.5% |
|
|
|
16.1 |
|
|
|
1.0% |
|
|
|
8.2 |
|
|
|
0.6% |
|
Restructuring |
|
|
0.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6.7 |
|
|
|
0.4% |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
210.1 |
|
|
|
25.4% |
|
|
|
160.5 |
|
|
|
22.3% |
|
|
|
424.5 |
|
|
|
26.4% |
|
|
|
340.9 |
|
|
|
25.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
13.6 |
|
|
|
1.6% |
|
|
|
128.5 |
|
|
|
17.9% |
|
|
|
(5.9 |
) |
|
|
(0.4%) |
|
|
|
186.5 |
|
|
|
13.9% |
|
Other income |
|
|
38.5 |
|
|
|
4.7% |
|
|
|
22.0 |
|
|
|
3.0% |
|
|
|
74.8 |
|
|
|
4.7% |
|
|
|
40.5 |
|
|
|
3.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
52.1 |
|
|
|
6.3% |
|
|
|
150.5 |
|
|
|
20.9% |
|
|
|
68.9 |
|
|
|
4.3% |
|
|
|
227.0 |
|
|
|
16.9% |
|
Provision for income taxes |
|
|
23.6 |
|
|
|
2.9% |
|
|
|
54.9 |
|
|
|
7.6% |
|
|
|
35.8 |
|
|
|
2.3% |
|
|
|
96.2 |
|
|
|
7.2% |
|
Minority interest |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5.2 |
|
|
|
0.3% |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
28.5 |
|
|
|
3.4% |
|
|
$ |
95.6 |
|
|
|
13.3% |
|
|
$ |
27.9 |
|
|
|
1.7% |
|
|
$ |
130.8 |
|
|
|
9.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
July 1, |
|
|
July 2, |
|
|
Percent |
|
|
July 1, |
|
|
July 2, |
|
|
Percent |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
|
(In millions, except percentages) |
|
Retail |
|
$ |
486.0 |
|
|
$ |
446.2 |
|
|
|
8.9% |
|
|
$ |
829.9 |
|
|
$ |
818.2 |
|
|
|
1.4% |
|
OEM |
|
|
234.0 |
|
|
|
190.5 |
|
|
|
22.8% |
|
|
|
579.4 |
|
|
|
356.2 |
|
|
|
62.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
|
$ |
720.0 |
|
|
$ |
636.7 |
|
|
|
13.1% |
|
|
$ |
1,409.3 |
|
|
$ |
1,174.4 |
|
|
|
20.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in our retail product revenues for the three and six months ended July 1,
2007 compared to the three and six months ended July 2, 2006, was due to growth in the number of
units sold and the average memory capacity of those products, partially offset by a decline in the
average selling price per megabyte. Our average retail selling price per megabyte declined 68% in
both the three and six months ended July 1, 2007 compared to a 49% decline in the three and six
months ended July 2, 2006. The price per megabyte decline in the first half of fiscal 2007 was
higher than in the prior year primarily due to excess industry supply. Retail revenue growth
compared to the prior year was strongest in our cards for mobile phones and our MP3 products.
OEM product revenues increased in the three and six months ended July 1, 2007 over the
comparable periods in fiscal 2006 primarily as a result of the addition of product lines from our
acquisition of msystems Ltd., or msystems. Sales of our consolidated TwinSys Ltd., or TwinSys,
venture with Toshiba Corporation, or Toshiba, were $53.0 million for the three months ended April
1, 2007, however, these sales were eliminated in the three months ended July 1, 2007, as the
venture terminated operations on March 31, 2007.
Our ten largest customers represented approximately 46% and 50% of our total revenues in the
three and six months ended July 1, 2007, compared to 52% and 51% in the three and six months ended
July 2, 2006. No customers exceeded 10% of our total revenues in the three months ended July 1,
2007. Customers who exceeded 10% of our total revenues in the six months ended July 1, 2007 were
Sony Ericsson Mobile Communications AB, or Sony Ericsson, and Samsung Electronics Co. Ltd., or
Samsung, which were 11% and 10% of our total revenues, respectively. No customer exceeded 10% of
our total revenues in either of the
three and six months ended July 2, 2006 except Samsung, which was 11% and 12% of our
total revenues in the three and six months ended July 2, 2006, respectively.
43
Geographical Product Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
|
July 1, |
|
|
% of Product |
|
|
July 2, |
|
|
% of Product |
|
|
Percent |
|
|
July 1, |
|
|
% of Product |
|
|
July 2, |
|
|
% of Product |
|
|
Percent |
|
|
|
2007 |
|
|
Revenues |
|
|
2006 |
|
|
Revenues |
|
|
Change |
|
|
2007 |
|
|
Revenues |
|
|
2006 |
|
|
Revenues |
|
|
Change |
|
|
|
(In millions, except percentages) |
North America |
|
$ |
293.1 |
|
|
|
40.7% |
|
|
$ |
276.2 |
|
|
|
43.4% |
|
|
|
6.1% |
|
|
$ |
534.9 |
|
|
|
38.0% |
|
|
$ |
493.4 |
|
|
|
42.0% |
|
|
|
8.4% |
|
Japan |
|
|
42.7 |
|
|
|
5.9% |
|
|
|
30.4 |
|
|
|
4.8% |
|
|
|
40.5% |
|
|
|
144.1 |
|
|
|
10.2% |
|
|
|
56.2 |
|
|
|
4.8% |
|
|
|
156.4% |
|
Europe and Middle
East |
|
|
195.8 |
|
|
|
27.2% |
|
|
|
153.3 |
|
|
|
24.0% |
|
|
|
27.7% |
|
|
|
330.3 |
|
|
|
23.4% |
|
|
|
293.6 |
|
|
|
25.0% |
|
|
|
12.5% |
|
Asia-Pacific |
|
|
177.7 |
|
|
|
24.7% |
|
|
|
175.8 |
|
|
|
27.6% |
|
|
|
1.1% |
|
|
|
379.4 |
|
|
|
26.9% |
|
|
|
329.6 |
|
|
|
28.1% |
|
|
|
15.1% |
|
Other foreign
countries |
|
|
10.7 |
|
|
|
1.5% |
|
|
|
1.0 |
|
|
|
0.2% |
|
|
|
970.0% |
|
|
|
20.6 |
|
|
|
1.5% |
|
|
|
1.6 |
|
|
|
0.1% |
|
|
|
1187.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
|
$ |
720.0 |
|
|
|
100.0% |
|
|
$ |
636.7 |
|
|
|
100.0% |
|
|
|
13.1% |
|
|
$ |
1,409.3 |
|
|
|
100.0% |
|
|
$ |
1,174.4 |
|
|
|
100.0% |
|
|
|
20.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue growth for the three months ended July 1, 2007 over the comparable
periods in fiscal 2006 was strongest in the Europe and Middle East regions driven primarily by
increased retail unit sales.
Product revenues for the six months ended July 1, 2007 over the comparable periods in fiscal
2006 grew significantly in Japan due to the acquired msystems’ TwinSys venture which added to
revenue in the quarter ended April 1, 2007 as well as growth in OEM sales of our gaming cards. The
growth in the Asia-Pacific region primarily reflects higher sales to handset OEM customers and
their subcontract manufacturers that are bundling our flash memory cards with mobile phones. The
increase in the Europe and Middle East regions primarily reflects increased retail unit sales.
License and Royalty Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
July 1, |
|
July 2, |
|
Percent |
|
July 1, |
|
July 2, |
|
Percent |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
Change |
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
License and royalty revenues |
|
$ |
107.0 |
|
|
$ |
82.5 |
|
|
|
29.7 |
% |
|
$ |
203.8 |
|
|
$ |
168.0 |
|
|
|
21.3 |
% |
The increase in our license and royalty revenues for the three and six months ended July
1, 2007 was primarily driven by increased overall sales by our licensees as well as increased
royalties related to licensee sales of multi-level-cell, or MLC, based products and new license
agreements.
Gross Margin.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
July 1, |
|
July 2, |
|
Percent |
|
July 1, |
|
July 2, |
|
Percent |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
Change |
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
Product gross margin |
|
$ |
116.7 |
|
|
$ |
206.5 |
|
|
|
(43.5 |
%) |
|
$ |
214.9 |
|
|
$ |
359.4 |
|
|
|
(40.2 |
%) |
Product gross margin
(as a percent of
product revenues) |
|
|
16.2 |
% |
|
|
32.4 |
% |
|
|
|
|
|
|
15.2 |
% |
|
|
30.6 |
% |
|
|
|
|
Total gross margin (as
a percent of total
revenues) |
|
|
27.0 |
% |
|
|
40.2 |
% |
|
|
|
|
|
|
26.0 |
% |
|
|
39.3 |
% |
|
|
|
|
Product gross margins for the three and six months ended July 1, 2007 were lower than in
comparable periods in fiscal 2006 primarily due to price declines on a per megabyte basis in excess
of cost declines due to excess industry supply. In addition, product gross margins were adversely
impacted in the three and six months ended July 1, 2007 when compared to the comparable periods in
fiscal 2006 by increased inventory charges related to certain products for which the cost was
higher than our expected average selling price and other products for which expected sales volumes
were not sufficient to consume on-hand and on-order inventory. In the three and six months ended
July 1, 2007, cost of product revenue also increased due to the amortization of
acquisition-related intangibles of $14.6 million and $35.7 million, respectively, primarily
from the msystems acquisition in November 2006.
44
In the three and six months ended July 1, 2007 and July 2, 2006, we sold approximately $6.5
million, $7.3 million, $5.2 million and $9.2 million, respectively, of inventory that had been
fully written-off or reserved.
Research and Development.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
July 1, |
|
July 2, |
|
Percent |
|
July 1, |
|
July 2, |
|
Percent |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
Change |
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
Research and development |
|
$ |
101.2 |
|
|
$ |
73.8 |
|
|
|
37.1 |
% |
|
$ |
196.8 |
|
|
$ |
137.5 |
|
|
|
43.1 |
% |
Percent of revenue |
|
|
12.2 |
% |
|
|
10.3 |
% |
|
|
|
|
|
|
12.2 |
% |
|
|
10.2 |
% |
|
|
|
|
Our research and development expense growth for the three and six months ended July 1,
2007 over the comparable periods in fiscal 2006 included increased payroll, payroll-related costs
and share-based compensation expense of $11.4 million and $27.9 million, respectively, primarily
related to overall headcount increases and our acquisition of msystems. In addition, we increased
our fab-related development costs by $6.8 million and $9.6 million, respectively, incurred
increased engineering consulting costs of $3.5 million and $5.7 million, respectively, and
increased engineering material costs of $3.4 million and $3.7 million, respectively.
Sales and Marketing.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
July 1, |
|
July 2, |
|
Percent |
|
July 1, |
|
July 2, |
|
Percent |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
Change |
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
Sales and marketing |
|
$ |
60.5 |
|
|
$ |
45.1 |
|
|
|
34.3 |
% |
|
$ |
116.7 |
|
|
$ |
88.4 |
|
|
|
32.0 |
% |
Percent of revenue |
|
|
7.3 |
% |
|
|
6.3 |
% |
|
|
|
|
|
|
7.3 |
% |
|
|
6.6 |
% |
|
|
|
|
Our sales and marketing expense growth for the three and six months ended July 1, 2007
over the comparable periods in fiscal 2006, was primarily due to increased payroll, payroll-related
and share-based compensation costs of $11.9 million and $24.9 million, respectively, primarily
related to overall headcount increases and our acquisition of msystems.
General and Administrative.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
July 1, |
|
July 2, |
|
Percent |
|
July 1, |
|
July 2, |
|
Percent |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
Change |
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
General and administrative |
|
$ |
41.2 |
|
|
$ |
37.2 |
|
|
|
10.7 |
% |
|
$ |
88.2 |
|
|
$ |
67.2 |
|
|
|
31.2 |
% |
Percent of revenue |
|
|
5.0 |
% |
|
|
5.2 |
% |
|
|
|
|
|
|
5.5 |
% |
|
|
5.0 |
% |
|
|
|
|
Our general and administrative expense growth for the three and six months ended July 1,
2007 over the comparable periods in fiscal 2006, included increased payroll, payroll-related and
share-based compensation costs of $5.3 million and $10.1 million, respectively, primarily related to overall
headcount increases and our acquisition of msystems. While patent and other litigation costs
decreased $1.9 million in the three months ended July 1, 2007 over the comparable periods in fiscal
2006, they increased by $6.6 million in the six months ended July 1, 2007 over the comparable
periods in fiscal 2006.
45
Write-off of Acquired In-process Technology.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
July 1, |
|
July 2, |
|
Percent |
|
July 1, |
|
July 2, |
|
Percent |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
Change |
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
Write-off of
acquired in-process
technology |
|
$ |
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
39.6 |
|
|
|
(100.0 |
%) |
Percent of revenue |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
3.0 |
% |
|
|
|
|
As part of the Matrix Semiconductor, Inc., or Matrix, acquisition in the first quarter of
fiscal 2006, a portion of the purchase price was allocated to acquired in-process technology, which
was determined through established valuation techniques in the high-technology industry and
written-off at the date of acquisition because technological feasibility had not been established
and no alternative future uses existed. The value was determined by estimating the net cash flows
and discounting forecasted net cash flows to their present values. As of July 1, 2007, it was
estimated that Matrix in-process projects would be completed over the next one to two years at an
estimated total cost of approximately $5.0 million. For further discussion on write-off of
acquired in-process technology, please refer to Note 12, “Business Acquisition.”
Amortization of Acquisition-Related Intangible Assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
July 1, |
|
July 2, |
|
Percent |
|
July 1, |
|
July 2, |
|
Percent |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
Change |
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
Amortization of
acquisition-related
intangible assets |
|
$ |
7.0 |
|
|
$ |
4.4 |
|
|
|
59.1 |
% |
|
$ |
16.1 |
|
|
$ |
8.2 |
|
|
|
98.2 |
% |
Percent of revenue |
|
|
0.9 |
% |
|
|
0.5 |
% |
|
|
|
|
|
|
1.0 |
% |
|
|
0.6 |
% |
|
|
|
|
Our expense from the amortization of acquisition-related intangible assets for the three
and six months ended July 1, 2007 was directly related to our acquisition of Matrix in January 2006
and msystems in November 2006. For further discussion on acquisition-related intangible assets,
please refer to Note 12, “Business Acquisition.”
Restructuring.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
July 1, |
|
July 2, |
|
Percent |
|
July 1, |
|
July 2, |
|
Percent |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
Change |
|
|
|
|
|
|
(In millions, except percentages) |
|
|
|
|
Restructuring |
|
$ |
0.2 |
|
|
$ |
— |
|
|
|
100.0 |
% |
|
$ |
6.7 |
|
|
$ |
— |
|
|
|
100.0 |
% |
Percent of revenue |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
0.4 |
% |
|
|
— |
|
|
|
|
|
During the first quarter of fiscal 2007, we implemented a restructuring plan which
included reductions of our workforce in all functions of the organization worldwide and closure of
redundant facilities in order to reduce our cost structure. A restructuring charge of $6.7 million
was recorded, of which $6.0 million related to severance and benefits to 149 terminated employees
and the remaining was primarily for excess lease obligations. We do not expect additional changes
relating to this restructuring plan. For further discussion on our restructuring plans, please
refer to Note 4, “Restructuring.”
As a result of our first quarter of fiscal 2007 restructuring plan, we expect to reduce our
annual infrastructure spending by approximately $21.7 million, of which approximately 8%, 24%, 44%
and 24% will be reflected as a reduction in cost of product revenues, research and development
expense, sales and marketing expense, and general and administrative expense, respectively.
46
Other Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
July 1, |
|
|
July 2, |
|
|
Percent |
|
|
July 1, |
|
|
July 2, |
|
|
Percent |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
|
(In millions, except percentages) |
Interest income |
|
$ |
35.9 |
|
|
$ |
22.7 |
|
|
|
58.1% |
|
|
$ |
73.4 |
|
|
$ |
38.5 |
|
|
|
90.6% |
|
Interest (expense)
and other income
(expense), net |
|
|
2.6 |
|
|
|
(0.9 |
) |
|
|
388.9% |
|
|
|
1.4 |
|
|
|
1.6 |
|
|
|
(12.5%) |
|
Equity in income of
business ventures |
|
|
— |
|
|
|
0.2 |
|
|
|
(100.0%) |
|
|
|
— |
|
|
|
0.4 |
|
|
|
(100.0%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
$ |
38.5 |
|
|
$ |
22.0 |
|
|
|
75.0% |
|
|
$ |
74.8 |
|
|
$ |
40.5 |
|
|
|
84.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in non-operating income for the three and six months ended July 1, 2007 over
the comparable periods in fiscal 2006 was primarily due to increased interest income of $13.2
million and $34.9 million, respectively, as a result of higher cash and investment balances
partially related to the 1% Senior Convertible Notes due in fiscal 2013 and higher interest rates
realized on our investments, partially offset by interest expense of $3.3 million and $6.5 million,
respectively, related to coupon payments and amortization of expenses associated with our 1% Senior
Convertible Notes due 2013 and 1% Convertible Notes due 2035.
Provision for Income Taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
July 1, |
|
July 2, |
|
July 1, |
|
July 2, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
(In millions, except for percentages) |
Provision for income taxes |
|
$ |
23.6 |
|
|
$ |
54.9 |
|
|
$ |
35.8 |
|
|
$ |
96.2 |
|
Effective tax rates |
|
|
45.3 |
% |
|
|
36.5 |
% |
|
|
51.9 |
% |
|
|
42.4 |
% |
Our effective tax rate of 45.3% and 51.9% for the three and six months ended July 1, 2007, respectively, differed from the statutory federal rate of 35.0% primarily due to the impact of state taxes, share-based compensation adjustments recorded under SFAS 123(R), acquisition-related intangible amortization taxed at rates lower than federal rates,
tax-exempt interest income, research and development tax credits and certain other tax items recognized in the quarter. Our effective tax rate of 36.5% and 42.4% for the three and six months ended July 2, 2006, respectively, differed from the statutory federal rate of 35.0% primarily due to the impact of state taxes, share-based compensation adjustments recorded under SFAS 123(R), tax-exempt interest income, research and development
tax credits and certain other tax items recognized in the quarter.
As a result of the implementation of FIN 48, we recognized approximately $1.0 million increase
in the liability for unrecognized tax benefits, which was accounted for as a reduction to retained
earnings at January 1, 2007. The total taxes payable on uncertain tax positions of $44.0 million
at January 1, 2007 is before tax benefit on state taxes and on
interest of $6.1 million. Of the net taxes
payable of $37.9 million, $33.2 million could favorably impact the effective tax rate in future
periods and $4.7 million would increase capital in excess of par value. The total increase in
taxes payable of $4.8 million for the six months ended July 1, 2007 offset by the tax
benefit on state taxes and on interest of $1.3 million would result in $3.5 million that could favorably impact the
effective tax rate in future periods.
We expect to recognize a $0.8 million tax benefit within the next 12 months as a result of the
expiration of statutes of limitation. We have recognized interest and/or penalties of $5.0 million
at date of adoption and recognized an additional $0.6 million and $1.1 million in the three and six
months ended July 1, 2007, in income tax expense, respectively.
We are subject to U.S. federal income tax as well as income taxes in many state and foreign
jurisdictions. The federal statute of limitations on assessment remains open for the tax years
2003 through 2006, and the statute of limitations in state jurisdictions remain open in general
from tax years 2002 through 2006. The major foreign jurisdictions remain open for examination in
general for tax years 2001 through 2006. We also had federal and state net operating loss
carryforwards of approximately $89 million and $52 million before federal benefit, respectively, at
December 31, 2006.
The tax benefit associated with the exercise of stock options for the three and six months
ended July 1, 2007 and July 2, 2006 was credited to capital in excess of par value in the amount of
$2.4 million, $4.9 million, $19.1 million and $61.0 million, respectively.
47
Liquidity
and Capital Resources.
Our cash flows were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
July 1, |
|
July 2, |
|
Percent |
|
|
2007 |
|
2006 |
|
Change |
|
|
(In millions, except percentages) |
Net cash provided by operating activities |
|
$ |
164.8 |
|
|
$ |
111.8 |
|
|
|
47.4 |
% |
Net cash used in investing activities |
|
|
(584.0 |
) |
|
|
(733.5 |
) |
|
|
20.4 |
% |
Net cash provided by (used in) financing activities |
|
|
(37.9 |
) |
|
|
1,178.0 |
|
|
|
(103.2 |
%) |
Effect of changes in foreign currency exchange rates on cash |
|
|
0.6 |
|
|
|
0.1 |
|
|
|
233.3 |
% |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
(456.5 |
) |
|
$ |
556.4 |
|
|
|
(182.0 |
%) |
|
|
|
|
|
|
|
Operating Activities. Cash provided by operating activities increased over the prior year
primarily due to collection on higher fourth quarter of fiscal 2006 receivable balances and higher
net income, adjusted to exclude the effect of non-cash charges including depreciation,
amortization, share-based compensation, excess tax benefit from share-based compensation and
write-off of amortization of acquired intangibles, and deferred taxes. These increases were
primarily offset by a reduction in income taxes payable, an increase in inventory and lower
deferred income on shipments to distributors and retailers.
Investing Activities. Cash used in investing activities was lower in the six months ended
July 1, 2007 over the comparable periods in fiscal 2006 primarily due to lower capital investments
in the flash ventures and collection of the FlashVision’s notes receivable offset by additional
notes receivable issued to Flash Partners and increased use of cash related to purchased
technology.
Financing Activities. Net cash from financing activities was substantially lower in the six
months ended July 1, 2007 over the comparable periods in fiscal 2006 primarily due to the funding
from the financing of our $1.15 billion 1% Senior Convertible Notes due 2013 in the second quarter
of fiscal 2006 offset by use of cash from our share repurchase program in the first and second
quarters of fiscal 2007, lower tax benefits from share-based compensation and cash distributions to
the minority interest holders of the TwinSys venture.
Liquid Assets. At July 1, 2007, we had cash, cash equivalents and short-term investments of
$2.9 billion.
Short-Term Liquidity. As of July 1, 2007, our working capital balance was $3.58 billion. We
do not expect any liquidity constraints in the next twelve months. We currently expect our total
investments, loans, expenditures and guarantees over the next 12 months to be approximately $2.1
billion. Of this amount, we expect to loan, make investments or guarantee future operating leases
for fab expansion of approximately $1.7 billion and expect to spend approximately $0.4 billion on
property and equipment, the majority of which is for assembly and test equipment. The additions
for property and equipment includes assembly, test and engineering equipment, and equipment and
building construction for our captive assembly and test manufacturing facility in Shanghai, China.
Long-Term Requirements. Depending on the demand for our products, we may decide to make
additional investments, which could be substantial, in wafer fabrication foundry capacity and
assembly and test manufacturing equipment to support our business in the future. We may also make
equity investments in other companies or engage in merger or acquisition transactions. These
additional investments may require us to raise additional financing, which could be difficult to
obtain, and which if not obtained in satisfactory amounts may prevent us from funding the ventures
with Toshiba, increasing our wafer supply, developing or enhancing our products, taking advantage
of future opportunities, growing our business or responding to competitive pressures or
unanticipated industry changes, any of which could harm our business.
48
Financing Arrangements. At July 1, 2007, we had $1.23 billion of aggregate principal amount
in convertible notes outstanding, consisting of $1.15 billion in aggregate principal amount of our
1% Senior Convertible Notes due 2013 and $75.0 million in aggregate principal amount of our 1%
Convertible Notes due 2035.
Also concurrent with the issuance of the 1% Senior Convertible Notes due 2013, we sold
warrants to acquire shares of our common stock at an exercise price of $95.03 per share. As of
July 1, 2007, the warrants had an expected life of approximately 6 years and expire in August 2013.
At expiration, we may, at our option, elect to settle the warrants on a net share basis. As of
July 1, 2007, the warrants had not been exercised and remain outstanding. In addition,
counterparties agreed to sell to us up to approximately 14.0 million shares of our common stock,
which is the number of shares initially issuable upon conversion of the 1% Senior Convertible Notes
due 2013 in full, at a conversion price of $82.36 per share. The convertible bond hedge
transaction will be settled in net shares and will terminate upon the earlier of the maturity date
of the 1% Senior Convertible Notes due 2013 or the first day none of the 1% Senior Convertible
Notes due 2013 remain outstanding due to conversion or otherwise. Settlement of the convertible
bond hedge in net shares on the expiration date would result in us receiving net shares equivalent
to the number of shares issuable by us upon conversion of the 1% Senior Convertible Notes due 2013.
As of July 1, 2007, we had not purchased any shares under this convertible bond hedge agreement.
Toshiba Ventures. We are a 49.9% percent owner in FlashVision, Flash Partners and Flash
Alliance, our business ventures with Toshiba to develop and manufacture NAND flash memory products.
Toshiba owns 50.1% of each of these ventures. These NAND flash memory products are manufactured
by Toshiba at Toshiba’s Yokkaichi, Japan operations using semiconductor manufacturing equipment
owned or leased by FlashVision or Flash Partners or to be owned or leased by Flash Alliance. This
equipment is funded or will be funded by investments in or loans to the ventures from us and
Toshiba. FlashVision and Flash Partners purchase and Flash Alliance will purchase wafers from
Toshiba at cost and then resell those wafers to us and Toshiba at cost plus a markup. We are
contractually obligated to purchase our provided three month forecast of FlashVision’s, Flash
Partners’ and, when operational, Flash Alliance’s NAND wafer supply, which generally equals 50
percent of such wafer supply. We cannot estimate the total amount of our wafer purchase commitment
as of July 1, 2007 because our price is determined by reference to the future cost to produce the
semiconductor wafers. In addition to the semiconductor assets owned or leased by FlashVision and
Flash Partners, we directly own certain semiconductor manufacturing equipment in Toshiba’s
200-millimeter operations in Yokkaichi, Japan from which we receive 100% of the output. From
time-to-time, we and Toshiba mutually approve increases in the wafer supply capacity of Flash
Partners that may contractually obligate us to increase capital funding. We and Toshiba each pay
the cost of our own design teams and 50% of the wafer processing and similar costs associated with
this direct design and development of flash memory.
The cost of the wafers we purchase from FlashVision and Flash Partners and wafers we will
purchase from Flash Alliance is recorded in inventory and ultimately cost of sales. FlashVision,
Flash Partners and Flash Alliance are variable interest entities and we are not the primary
beneficiary of these ventures because we are entitled to less than a majority of expected gains and
losses with respect to each venture. Accordingly, we account for our investments under the equity
method and do not consolidate. Our share of the net income or loss of FlashVision, Flash Partners
and Flash Alliance is included in our Condensed Consolidated Statements of Operations as “Interest
(expense) and other income (expense), net.”
Under the FlashVision, Flash Partners and Flash Alliance agreements, we agreed to share in
Toshiba’s costs associated with NAND product development and its common semiconductor research and
development activities. We also fund direct research and development contribution based on a
variable computation. As of July 1, 2007, we had accrued liabilities related to those expenses of
$15.3 million. Our common research and development obligation related to FlashVision, Flash
Partners and Flash Alliance is variable but capped at increasing fixed quarterly amounts through
fiscal 2008. The common research and development participation agreement and the product
development agreement are exhibits in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2006, and should be read carefully in their entirety for a more complete understanding
of these arrangements.
For semiconductor fixed assets that are leased by FlashVision or Flash Partners, we and/or
Toshiba have guaranteed, in whole or in part, the outstanding lease payments under each of those
leases through various methods. These obligations are denominated in Japanese yen and are
noncancelable. Under the terms of the FlashVision lease, Toshiba guaranteed these commitments on
behalf of FlashVision and we agreed to indemnify Toshiba for certain liabilities Toshiba incurs as
a result of its guarantee of the FlashVision equipment lease arrangement. As of July 1, 2007, the
maximum amount of our contingent indemnification obligation to Toshiba for their FlashVision lease
guarantee, which reflects payments and any lease adjustments, was approximately 4.2 billion
Japanese yen, or approximately $34 million based upon the exchange rate at July 1, 2007. Under
49
the terms
of the Flash Partners lease agreements, we have guaranteed on an unsecured and several basis
50% of Flash Partners’ lease obligations under multiple master lease agreements entered into in
fiscal 2004 through 2007. Our total Flash Partners lease obligation guarantees, net of lease
payments as of July 1, 2007, were 105.3 billion Japanese yen, or approximately $854 million based
upon the exchange rate at July 1, 2007. Toshiba has guaranteed the remaining 50% of Flash
Partners’ lease obligations.
The capacity of Fab 4 at full expansion is expected to be greater than 150,000 wafers per
month and the timeframe to reach full capacity is to be mutually agreed by the parties. To date,
the parties have agreed to an expansion plan to 67,500 wafers per month for which the total
investment in Fab 4 is currently estimated at approximately $2.0 billion through the end of fiscal
2008, of which our share is currently estimated to be approximately $1.0 billion. Initial NAND
production at Fab 4 is currently scheduled for the end of fiscal 2007. For expansion beyond 67,500
wafers per month, it is expected that investments and output would continue to be shared 50/50
between us and Toshiba. We are committed to fund 49.9% of Flash Alliance’s costs to the extent
that Flash Alliance’s revenues from wafer sales to us and Toshiba are insufficient to cover these
costs. We expect to fund our portion of the investment through cash as well as other financing
sources.
Contractual Obligations and Off Balance Sheet Arrangements
Our contractual obligations and off balance sheet arrangements at July 1, 2007, and the effect
those obligations and arrangements are expected to have on our liquidity and cash flow over the
next five years is presented in textual and tabular format in Note 10, “Commitments, Contingencies
and Guarantees.”
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an
ongoing basis, we evaluate our estimates, including, among others, those related to customer
programs and incentives, product returns, bad debts, inventories, investments, income taxes,
warranty obligations, share-based compensation, contingencies and litigation. We base our estimates on
historical experience and on other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for our judgments about the carrying values of
assets and liabilities when those values are not readily apparent from other sources. Estimates
have historically approximated actual results. However, future results will differ from these
estimates under different assumptions and conditions.
There were no significant changes to our critical accounting policies during the quarter ended
July 1, 2007. For information about critical accounting policies, see the discussion of critical
accounting policies in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
Recent Accounting Pronouncements
SFAS No. 157. In September 2006, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 157, or SFAS 157, Fair Value Measurements. SFAS
157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value,
and expands disclosures about fair value measurements. SFAS 157 is applicable whenever another
accounting pronouncement requires or permits assets and liabilities to be measured at fair value.
SFAS 157 does not expand or require any new fair value measures. The provisions of SFAS 157 are to
be applied prospectively and are effective for financial statements issued for fiscal years
beginning after November 15, 2007. We are currently evaluating what effect, if any, the adoption
of SFAS 157 will have on our consolidated results of operations and financial position.
SFAS No. 159. In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, or SFAS 159, Establishing the Fair Value Option for Financial Assets and Liabilities. The
FASB has issued SFAS 159 to permit all entities to elect, at specified election dates, to measure
eligible financial instruments at fair value. An entity shall report unrealized gains and losses
on items for which the fair value option has been elected in earnings at each subsequent reporting
date, and recognize upfront costs and fees related to those items in earnings as incurred and not
deferred. SFAS 159 applies to fiscal years beginning after November 15, 2007, with early adoption
permitted for an entity that has also elected to apply the provisions
of SFAS 157. An entity is prohibited from
retrospectively applying SFAS
159, unless it chooses early adoption. SFAS 159 also applies to eligible items existing at
November 15, 2007 (or early adoption date). We have not completed our analysis but do not expect
the adoption of SFAS 159 to have a material effect on our financial condition.
50
EITF Issue No. 07-3. In the June 2007 meeting, the Emerging Issues Task Force, or EITF,
reached a final consensus on EITF Issue
No. 07-3, or 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 capitalize prepaid, non-refundable research and
development payments to third parties over the period that the research and development activities
are performed or the services are provided, subject to an assessment of recoverability. EITF 07-3
is effective for new contracts entered into fiscal years beginning after December 15, 2007,
including interim periods within those fiscal years. We will adopt this pronouncement beginning in
the first quarter of fiscal 2008 and do not expect the adoption of EITF 07-3 to have a material
impact on our consolidated results of operations and financial condition.
FSP on Convertible Debt Instruments. At the July 25, 2007 FASB meeting, the FASB agreed to
issue for comment the proposed FASB Staff Position, or FSP, on convertible debt instruments that may
be settled in cash upon conversion (including partial cash settlement). This proposed FSP is
expected to replace EITF Issue No. 07-2, Accounting for Convertible Debt Instruments That Require
or Permit Partial Cash Settlement upon Conversion. While not yet publicly available, as expected
to be drafted, the proposed FSP would require the issuer to separately account for the liability
and equity components of the convertible debt instrument in a manner that reflects the issuer’s
economic interest cost. Further, the proposed FSP would require bifurcation of a component of the
debt, classification of that component to equity, and then accretion of the resulting discount on
the debt to result in the “economic interest cost” being reflected in the statement of operations.
In their public meeting comments, the FASB emphasized that the proposed FSP would be applied to the
terms of the instruments as they existed for the time periods they existed, therefore, the
application of the proposed FSP would be applied retrospectively to all periods presented. The
proposed FSP is expected to be effective for the fiscal year beginning after December 15, 2007.
While the proposed FSP has not yet been published by the FASB, our initial estimate based upon
public comments at the recent FASB meeting, which could materially change upon publication of the
proposed FSP or upon further interpretations by the FASB, is that we would be required to report an
additional before tax, non-cash interest expense of approximately $375 million to $425 million over
the life of the debt, or approximately $40 million to $55 million in fiscal 2007. The additional
interest expense has been calculated by comparing the current interest coupon rate of our
outstanding debt including common stock conversion rights to an estimated higher interest coupon
rate (based upon companies with similar third-party debt ratings) on similar debt without a common
stock conversion right. However, these amounts are subject to material changes based upon further
clarification or interpretation of the proposed FSP.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the disclosures in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2006.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Under the supervision and with the
participation of our management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 effective to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission rules and forms.
There were no changes in our internal control over financial reporting (as defined in Exchange
Act Rule 13a-15(f)) during the three and six months ended July 1, 2007 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
51
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time-to-time, it has been and may continue to be necessary to initiate or defend
litigation against third parties. These and other parties could bring suit against us. In each case
listed below where we are the defendant, we intend to vigorously defend the action. The Company
does not believe it is reasonably possible that losses related to the litigation as described below
have occurred beyond the amounts that have been accrued.
On October 31, 2001, the Company filed a complaint for patent infringement in the United
States District Court for the Northern District of California against Memorex Products, Inc.,
Pretec Electronics Corporation, Ritek Corporation, and Power Quotient International Co., Ltd. In
the suit, captioned SanDisk Corp. v. Memorex Products, Inc., et al., Civil Case No. CV 01 4063 VRW,
the Company seeks damages and injunctions against these companies from making, selling, importing
or using flash memory cards that infringe its U.S. Patent No. 5,602,987. The District Court granted
summary judgment of non-infringement in favor of defendants Ritek, Pretec and Memorex and entered
judgment on May 17, 2004. On June 2, 2004, the Company filed a notice of appeal of the summary
judgment rulings to the United States Court of Appeals for the Federal Circuit. On July 8, 2005,
the Federal Circuit held in favor of the Company, vacating the judgment of non-infringement and
remanding the case back to the District Court. The District Court issued an order on claim
construction on February 22, 2007. On June 29, 2007, defendant Ritek entered into a settlement
agreement and cross-license with the Company. This case is scheduled for trial in November 2007.
On or about June 9, 2003, the Company received written notice from Infineon Technologies AG,
or Infineon, that it believes the Company has infringed its U.S. Patent No. 5,726,601 (the ‘601
patent). On June 24, 2003, the Company filed a complaint against Infineon for a declaratory
judgment of patent non-infringement and invalidity regarding the ‘601 patent in the United States
District Court for the Northern District of California, captioned SanDisk Corporation v. Infineon
Technologies AG, a German corporation, et al., Civil Case No. C 03 02931 BZ. On October 6, 2003,
Infineon filed an answer and counterclaim: (a) denying that the Company is entitled to the
declaration sought by the Company’s complaint; (b) requesting that the Company be adjudged to have
infringed, actively induced and/or contributed to the infringement of the ‘601 patent and an
additional patent, U.S. Patent No. 4,841,222 (the “’222 patent”). On August 12, 2004, Infineon
filed an amended counterclaim for patent infringement alleging that the Company infringes U.S.
Patent Nos. 6,026,002 (the “’002 patent”); 5,041,894 (the “’894 patent”); and 6,226,219 (the “’219
patent”), and omitting the ’601 and ’222 patents. On August 18, 2004, the Company filed an amended
complaint against Infineon for a declaratory judgment of patent non-infringement and invalidity
regarding the ’002, ’894, and ’219 patents. On February 9, 2006, the Company filed a second amended
complaint to include claims for declaratory judgment that the ’002, ’894 and ’219 patents are
unenforceable. On March 17, 2006, the Court granted a stipulation by the parties withdrawing all
claims and counterclaims regarding the ’002 patent. On February 20, 2007, the Court entered an
order staying the case to facilitate settlement negotiations.
On February 20, 2004, 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 04 428953, alleging false advertising, unfair business practices, breach of
contract, fraud, deceit, misrepresentation and violation of the California Consumers Legal Remedy
Act. The lawsuit purports to be on behalf of a class of purchasers of flash memory products and
claims that the defendants overstated the size of the memory storage capabilities of such products.
The lawsuit seeks restitution, injunction and damages in an unspecified amount. The parties have
reached a settlement of the case, which is pending final court approval. In April 2006, the Court
issued an order preliminarily approving the settlement. In August 2006, the Court held a hearing
to consider final approval of the settlement, and on November 20, 2006, the Court issued its formal
written order of approval. Two objectors to the settlement have filed separate appeals from the
Court’s order granting final approval.
On October 15, 2004, the Company filed a complaint for patent infringement and declaratory
judgment of non-infringement and patent invalidity against STMicroelectronics N.V. and
STMicroelectronics, Inc. (collectively, “ST”) in the United States District Court for the Northern
District of California, captioned SanDisk Corporation v. STMicroelectronics, Inc., et al., Civil
Case No. C 04 04379 JF. The complaint alleges that ST’s products infringe one of the Company’s U.S.
patents, U.S. Patent No. 5,172,338 (the “’338 patent”), and also alleges that several of ST’s
patents are invalid and not infringed. On June 18, 2007, the Company filed an amended complaint,
removing several of the Company’s declaratory judgment claims. A case management conference was
conducted on June 29, 2007. At that conference, the parties agreed that the remaining declaratory
judgment
52
claims will be dismissed, pursuant to a settlement agreement in two matters being
litigated in the Eastern District of Texas (Civil Case No. 4:05CV44 and Civil Case No.
4:05CV45, discussed below). The parties also agreed that the ’338 patent and a second SanDisk
patent, presently at issue in Civil Case No. C0505021 JF (discussed below), will be litigated
together in this case. The case is scheduled to go to trial in July of 2008.
On February 4, 2005, STMicroelectronics, Inc. (“STMicro”) filed two complaints for patent
infringement against the Company in the United States District Court for the Eastern District of
Texas, captioned STMicroelectronics, Inc. v. SanDisk Corporation, Civil Case No. 4:05CV44 (the “’44
Action”), and STMicroelectronics, Inc. v. SanDisk Corporation, Civil Case No. 4:05CV45 (the “’45
Action”), respectively. The complaints sought damages and injunctions against certain SanDisk
products. On April 22, 2005, the Company filed counterclaims on two patents against
STMicroelectronics N.V. and STMicroelectronics, Inc. in the ’45 Action. The
counterclaims sought damages and injunctive relief against ST’s flash memory products. The Company
and ST have agreed to dismiss all claims and counterclaims with prejudice.
On
October 14, 2005, STMicro filed a complaint against the Company
and the Company’s CEO, Dr. Eli
Harari, in the Superior Court of the State of California for the County of Alameda, captioned
STMicroelectronics, Inc. v. Harari, Case No. HG 05237216 (the “Harari Matter”). The complaint
alleges that STMicro, as the successor to Wafer Scale Integration, Inc.’s (“WSI”) legal rights, has
an ownership interest in several SanDisk patents that issued from applications filed by Dr. Harari,
a former WSI employee. The complaint seeks the assignment or co-ownership of certain inventions and
patents conceived of by Dr. Harari, including some 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. On December 13, 2005, STMicro filed a
motion to remand the case back to the Superior Court of Alameda County. The case was remanded to
the Superior Court of Alameda County on July 18, 2006, after briefing and oral argument on a motion
by STMicro for reconsideration of an earlier order denying STMicro’s request for remand. Due to the
remand, the District Court did not rule upon a summary judgment motion previously filed by the
Company. In the Superior Court of Alameda County, the Company filed a Motion to Transfer Venue to
Santa Clara County on August 10, 2006, which was denied on September 12, 2006. On October 6, 2006,
the Company filed a Petition for Writ of Mandate with the First District Court of Appeal which asks
that the Superior Court’s September 12 Order be vacated, and the case transferred to Santa Clara
County. On October 20, 2006, the Court of Appeal requested briefing on the Company’s petition for a
writ of mandate and stayed the action during the pendency of the writ proceedings. On January 17,
2007, the Court of Appeal issued an alternative writ directing the Superior Court to issue a new
order granting the Company’s venue transfer motion or to show cause why a writ of mandate should
not issue compelling such an order. On January 23, 2007, the Superior Court of Alameda transferred
the case to Santa Clara County as a result of the writ proceeding at the Court of Appeal. The
Company also filed a special motion to strike STMicro’s unfair competition claim, which the
Superior Court denied on September 11, 2006. The Company has appealed the denial of that motion,
and the proceedings at the Superior Court are stayed during the pendency of the appeal.
On December 6, 2005, the Company filed a complaint for patent infringement in the United
States District Court for the Northern District of California against STMicroelectronics, Inc. and
STMicroelectronics, NV (Case No. C0505021 JF). In the suit, the Company seeks
damages and injunctions against ST from making, selling, importing or using flash memory chips or
products that infringe the Company’s U.S. Patent
No. 5,991,517 (the “’517 patent”). The ’517 patent will be litigated together with the ’338 patent in Civil Case No. C 04
04379JF, which is scheduled to go to trial in July of 2008.
On January 10, 2006, the Company filed a complaint under Section 337 of the Tariff Act of 1930
(as amended) (Case No. 337-TA-560) titled, “In the matter of certain NOR and NAND flash memory
devices and products containing same” in the United States
International Trade Commission (“ITC”), naming ST as respondents. In the complaint, the
Company alleges that: (i) ST’s NOR flash memory infringes the ’338 patent; (ii) ST’s NAND flash
memory infringes U.S. Patent No. 6,542,956 (the “’956 patent”); and (iii) ST’s NOR flash memory and
NAND flash memory infringe the ’517 patent. The complaint seeks an order excluding ST’s NOR and
NAND flash memory products from importation into the United States. The ITC instituted an
investigation, based on the Company’s complaint, on February 8, 2006. On March 31, 2006, ST filed a
motion for partial summary determination or termination of the investigation with respect to the
’338 patent. On May 1, 2006, the Administrative Law Judge (“ALJ”) denied ST’s motion in an initial
determination that is subject to review by the ITC. On May 17, 2006, SanDisk filed a motion to
voluntarily terminate the investigation with respect to the ’956 patent. On June 1, 2006, the ALJ
issued an Initial Determination granting the Company’s motion. On August 15, 2006, the ALJ set
December 4, 2006 as the date for the hearing, April 4, 2007 for the Initial Determination, and
August 13, 2007 as the target date for completion of the investigation. On September 12, 2006, the
Company filed a motion to voluntarily terminate the
53
investigation with respect to claims 1, 2, and 4 of the ’517 patent. On October 10, 2006, the
ALJ issued an Initial Determination granting the Company’s motion with respect to claims 2 and 4 of
the ’517 patent. On September 25, 2006, ST filed motions for summary determination of
non-infringement of the ’338 patent with respect to its current products and non-infringement of
the ’338 and ’517 patents with respect to prospective products and of lack of domestic industry
with regard to the ’338 patent. On the same date, SanDisk filed a motion for summary determination
of the economic prong of the domestic industry requirement with regard to the ’517 patent. On
November 17, 2006, the ALJ granted SanDisk’s motion for summary determination of the economic prong
of domestic industry, and denied ST’s motion for summary determination of lack of domestic industry
with regard to the ’338 patent. The ALJ denied one of ST’s motions for summary determination of
noninfringement of the ’338 patent. The ALJ granted ST’s motion for summary determination with
respect to ST’s binary NOR products, which SanDisk was no longer accusing, and terminated the
investigation with respect to certain prospective products. On November 28, 2006, the ALJ denied
ST’s second motion for summary determination of non-infringement of the ’338 patent. The ALJ then
held an evidentiary hearing from December 1, 2006 through December 15, 2006. In June 2007, the ALJ
issued an initial determination that ST had not committed a violation of U.S. trade laws. Neither
the Company nor ST appealed. The initial determination became final in July 2007.
On August 7, 2006, two purported shareholder class and derivative actions, captioned Capovilla
v. SanDisk Corp., No. 106 CV 068760, and Dashiell v. SanDisk Corp., No. 106 CV 068759, were filed
in the Superior Court of California in Santa Clara County, California. On August 9, 2006, and
August 17, 2006, respectively, two additional purported shareholder class and derivative actions,
captioned Lopiccolo v. SanDisk Corp., No. 106 CV 068946, and Sachs v. SanDisk Corp., No.
1-06-CV-069534, were filed in that court. These four lawsuits were subsequently consolidated under
the caption In re msystems Ltd. Shareholder Litigation, No. 106 CV 068759 and on October 27, 2006,
a consolidated amended complaint was filed that supersedes the four original complaints. The
lawsuit is brought by purported shareholders of msystems and names as defendants the Company and
each of msystems’ former directors, including its President and Chief Executive Officer, and its
former Chief Financial Officer, and names msystems as a nominal
defendant. The lawsuit asserts purported class action and derivative claims. The alleged
derivative claims assert, among other things, breach of fiduciary duties, abuse of control,
constructive fraud, corporate waste, unjust enrichment and gross mismanagement with respect to past
stock option grants. The alleged class and derivative claims also assert claims for breach of
fiduciary duty by msystems’ board, which the Company is alleged to have aided an abetted, with
respect to allegedly inadequate consideration for the merger, and allegedly false or misleading
disclosures in proxy materials relating to the merger. The complaints seek, among other things,
equitable relief, including enjoining the proposed merger, and
compensatory and punitive damages.
On September 11, 2006, Mr. Rabbi, a shareholder of msystems Ltd. (“msystems”), filed a
derivative action and a motion to permit him to file the derivative action against four directors
of msystems and msystems, arguing that options were allegedly allocated to officers and employees
of msystems in violation of applicable law. Mr. Rabbi claimed that the aforementioned actions
allegedly caused damage to msystems. On January 25, 2007, msystems filed a motion to dismiss the
motion to seek leave to file the derivative action and the derivative action on the grounds, inter
alia, that Mr. Rabbi ceased to be a shareholder of msystems after the merger between msystems and
the Company. msystems received an extension to file its comprehensive
response to the motion, to be submitted 30 days after the decision of
the court in its motion to dismiss.
On February 16, 2007, Texas MP3 Technologies, Ltd. (“Texas MP3”) filed suit against the
Company, Samsung Electronics Co., Ltd., Samsung Electronics America,
Inc. and Apple Inc.,
Case No. 2:07-CV-52, in the Eastern District of Texas, Marshall Division, alleging infringement of
U.S. Patent 7,065,417 (the “’417 patent”). On June 19, 2007, the Company filed an answer and
counterclaim: (a) denying infringement; (b) seeking a declaratory judgment that the ’417 patent is
invalid, unenforceable and not infringed by the Company. On July 31, 2007, Texas MP3 filed an
amended complaint against the Company and the other parties named in the original complaint,
alleging infringement of the ’417 patent. The Company has not filed its response to the amended
complaint. A trial date has not been set.
On or about May 11, 2007, the Company received written notice from Alcatel-Lucent, S.A., or
Lucent, alleging that SanDisk digital music players require a license to U.S. Patent No. 5,341,457
(the “’457 patent”) and U.S. Patent No. RE39,080 (the “’080 patent”). On July 13, 2007, the
Company filed a complaint for a declaratory judgment of non-infringement and patent invalidity
against Lucent Technologies Inc. and Alcatel-Lucent, S.A. in the United States District Court for
the 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 further seeks a judicial determination and declaration that Lucent’s patents are invalid.
No answer has been filed.
On July 11, 2007, the Company filed a complaint for patent infringement against Memorex
Products, Inc. and its parent company, Imation Corporation, in the United States District Court for
the Northern District of California, captioned SanDisk Corporation v. Imation Corporation, et al.,
Civil Case No. C 07 3588. The complaint alleges that that the defendants’ products infringe one of
the Company’s U.S. patents relating to USB flash memory drive technology and seeks damages and an
injunction. Neither defendant has filed its answer.
54
Item 1A.Risk Factors
The following description of the risk factors associated with our business includes any
material changes to and supersedes the description of the risk factors associated with our business
previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2006 and our most recent Quarterly Report on Form 10-Q.
Our operating results may fluctuate significantly, which may adversely affect our financial
condition and our stock price. Our quarterly and annual operating results have fluctuated
significantly in the past and we expect that they will continue to fluctuate in the future. This
fluctuation could result from a variety of factors, including, among others:
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average selling prices, net of promotions, declining at a faster rate than cost
reductions for our products due to industry or SanDisk excess supply and competitive
pricing pressures; |
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reduction in price elasticity of demand related to pricing changes for some of our
markets and products; |
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excess supply from captive sources due to output increasing faster than the growth in
demand resulting in excess inventory; |
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our license and royalty revenues may decline significantly in the future as our existing
license agreements and key patents expire, which may also lead to increased patent
litigation costs; |
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insufficient supply from captive and non-captive silicon
sources; |
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insufficient capacity or yields from our assembly and test subcontractors or captive
assembly and test facility to meet demand; |
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unpredictable or changing demand for our products, particularly demand for certain types
or capacities of our products or demand for our products in certain markets or geographies; |
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addition of new competitors, expansion of supply from existing competitors and ourselves
creating excess market supply, which could cause our average selling prices to decline
faster than our costs decline; |
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difficulty in forecasting and managing inventory levels, particularly due to
non-cancelable contractual obligations to purchase materials such as custom non-memory
materials, and the need to build finished product in advance of customer purchase orders; |
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timing, volume and cost of wafer production from the FlashVision, Flash Partners and
Flash Alliance ventures as impacted by fab start-up delays and costs, technology
transitions, yields or production interruptions; |
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disruption in the manufacturing operations of suppliers, including suppliers of
sole-sourced components; |
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increased memory component and other costs as a result of foreign currency fluctuations
to the United States dollar, particularly the Japanese yen; |
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increased purchases of flash memory products from our non-captive sources, which
typically cost more than products from our captive sources; |
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potential delays in the emergence of new markets and products for NAND flash memory and
acceptance of our products in these markets; |
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timing of sell-through by our distributors and retail customers; |
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errors or defects in our products caused by, among other things, errors or defects in
the memory or controller components, including memory and non-memory components we procure
from third-party suppliers; |
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write-downs of our investments in fabrication capacity, equity investments and other
assets; |
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impairment of goodwill, business integration and other challenges related to our
acquisitions of msystems and Matrix; |
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estimates used in calculating share-based compensation expense; and |
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the other factors described under “Risk Factors” and elsewhere in this report. |
Our average selling prices, net of promotions, may decline faster than cost reductions due to
industry or SanDisk excess supply, competitive pricing pressures or strategic price reductions
initiated by us or our competitors. The market for NAND flash products is competitive and
characterized by rapid price declines. As an example, our average selling price per megabyte
declined 65% in the second quarter of fiscal 2007 compared to the second quarter of fiscal 2006.
Price declines may be influenced by, among other factors, supply in excess of demand, technology
transitions, including adoption of MLC technology
55
by other competitors, new technologies or other strategic actions by competitors to gain
market share. If our technology transitions take longer or are more costly than anticipated to
complete or our cost reductions fail to keep pace with the rate of price declines, our gross
margins and operating results will be negatively impacted, which could generate quarterly or annual
net losses. Over our history, price decreases have generally been more than offset by increased
unit demand and demand for products with increased storage capacity. However, in the recent past,
price declines have outpaced growth in demand for higher capacities for some products resulting in
reduced revenue growth. There can be no assurance that our 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 of our revenues and, if
we were to lose one of our major licensees or customers or experience any material reduction in
orders from any of our customers, our revenues and operating results would suffer. Our ten largest
customers represented approximately 46% and 50% of our total revenues in the three and six months
ended July 1, 2007, compared to 52% and 51% in the three and six months ended July 2, 2006. No
customer exceeded 10% of our total revenues in the three months ended July 1, 2007. Customers who
exceeded 10% of our total revenues in the six months ended July 1, 2007 were Sony Ericsson and
Samsung, which were 11% and 10% of our total revenues, respectively. No customer exceeded 10% of
our total revenues in either of the three and six months ended July 2, 2006 except Samsung, which
was 11% and 12% of our total revenues in the three and six months ended July 2, 2006, respectively.
If we were to lose one of our major licensees or customers or experience any material reduction in
orders from any of our customers or in sales of licensed products by our licensees, our revenues
and operating results would suffer. Additionally, our license and royalty revenues may decline
significantly in the future as our existing license agreements and key patents expire. Our sales
are generally made from standard purchase orders rather than long-term contracts. Accordingly, our
customers may generally terminate or reduce their purchases from us at any time without notice or
penalty. In addition, the composition of our major customer base changes from year-to-year as we
enter new markets, making our revenues from several customers somewhat less predictable from
year-to-year.
Our business depends significantly upon sales of products in the highly competitive consumer
market, a significant portion of which are made to retailers and through distributors, and if our
distributors and retailers are not successful in this market, we could experience substantial
product returns, which would negatively impact our business, financial condition and results of
operations. A significant portion of our sales are made through retailers, either directly or
through distributors. Sales through these channels typically include rights to return unsold
inventory and protection against price declines. As a result, we do not recognize revenue until
after the product has been sold through to the end user, in the case of sales to retailers, or to
our distributors’ customers, in the case of sales to distributors. If our distributors and
retailers are not successful, we could experience reduced sales as well as substantial product
returns or price protection claims, which would harm our business, financial condition and results
of operations. Availability of sell-through data varies throughout the retail channel, which makes
it difficult for us to forecast retail product revenues. Our arrangements with our customers also
provide them price protection against declines in our recommended selling prices, which has the
effect of reducing our deferred revenue and eventually our revenue. Except in limited
circumstances, we do not have exclusive relationships with our retailers or distributors, and
therefore, must rely on them to effectively sell our products over those of our competitors.
Our revenue depends in part on the success of products sold by our OEM customers. A
significant portion of our sales are to OEMs, which either bundle or embed our flash memory
products with their products, such as cameras or mobile phones. Our sales to these customers are
dependent upon the OEMs choosing our products over those of our competitors and on the OEMs’
ability to create, introduce, market and sell their products successfully in their markets. Should
our OEM customers be unsuccessful in selling their current or future products that include our
products, or should they decide to discontinue utilizing our products, our results of operation and
financial condition could be harmed. In addition, our OEM revenues have been negatively impacted
due to our decision in the fourth quarter of fiscal 2006 to de-emphasize the former msystems
private label USB business and focus on our branded business and our decision with Toshiba to cease
operations of the TwinSys venture effective at the end of the first quarter of fiscal 2007.
The continued growth of our business depends on the development of new markets and products
for NAND flash memory and continued price elasticity in our existing markets. Our growth will be
increasingly dependent on the development of new markets, new applications and new products for
NAND flash memory. Historically, the digital camera market provided a majority of our revenues,
but it is now a more mature market representing a declining percentage of our total revenue. Newer
markets for flash memory include mobile phones, digital audio and video players and solid state
drives, with the mobile market currently an area of strong growth. There can be no assurance that
new markets and products will develop and grow fast enough, or that new markets will adopt NAND
flash technologies in general or our products in particular, to enable us to continue our
growth. There can be no assurance that the increase in average product capacity and unit
demand in response to price reductions will generate revenue growth for us as it has in the past.
56
Our strategy of investing in captive manufacturing sources could harm us if our competitors
are able to produce products more cheaply or if industry supply continues to exceed demand. We
continue to secure captive sources of NAND and related devices through our significant investments
in manufacturing capacity. We believe that by investing in captive sources of NAND we are able to
develop and obtain supply at the lowest cost and access supply during periods of high demand. Our
significant investments in manufacturing capacity require us to raise capital, including through
the issuance of debt, obtain capital equipment leases and use available cash and investments, which
could otherwise be used for potentially more valuable corporate purposes. To the extent we secure
manufacturing capacity and supply that is in excess of demand, or our cost is not competitive with
other NAND suppliers, we may not achieve an adequate return on our significant investment and our
revenues, gross margins and related market share may be negatively impacted. We may also incur
increased inventory or impairment charges related to our captive manufacturing investments and may
not be able to exit those investments without significant cost to us. In addition, if we finance
these manufacturing investments with debt, our return may not be sufficient to finance the related
debt payments or we may need to raise additional funding which could be difficult to obtain or may
only be available at rates and other terms that are unfavorable.
We continually seek to develop new applications, products, technologies and standards, which
may not be widely adopted by consumers or, if adopted, may reduce demand by consumers for our older
products. We continually seek to develop new applications, products and standards and enhance
existing products and standards with higher memory capacities and other enhanced features. Any new
applications, products, technologies, standards or enhancements we develop may not be commercially
successful. The success of new product introductions is dependent on a number of factors,
including market acceptance, our ability to manage risks associated with new products and
production ramp issues. New applications, such as the adoption of flash-based solid state drives
that are designed to replace hard disk drives in devices such as computers and servers, can take
several years to develop. Early success in working with computer system manufacturers to
incorporate solid state drives into their laptops and servers does not guarantee that manufacturers
will adopt solid state drives or that this market will grow as we anticipate. For this market to
become sizeable, the cost of flash memory must significantly decline so that the cost to consumers
is affordable, and we believe that we will need to implement MLC technology, which requires us to
develop new controllers. There can be no assurance that our MLC-based solid state drives will be
able to meet the required specifications to gain customer qualification and acceptance. Other new
products, such as Sansa® Connect™, USBTV™ and pre-recorded flash memory
cards, may not gain market acceptance and we may not be successful in penetrating the new markets
that we target. As we introduce new standards or technologies, such as TrustedFlash™,
it can take time for these new standards or technologies to be adopted, for consumers to accept and
transition to these new standards or technologies and for significant sales to be generated from
them, if this happens at all. Moreover, broad acceptance of new standards, technologies or
products by consumers may reduce demand for our older products. If this decreased demand is not
offset by increased demand for our other form factors or our new products, our results of
operations could be harmed.
We are developing the next generations of MLC technology, including 3-bits per cell, or X3,
and 4-bits per cell, or X4. We believe the successful introduction of these X3 and X4 technologies
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 are uncertain, and there can be no assurance of the commercial success of
these technologies.
In addition, we are investing in future alternative technologies, such as our
three-dimensional semiconductor memory, which currently is limited to one-time programming
applications. We are investing significant resources to develop this technology for multiple
read-write applications; however, there can be no assurance that we will be successful in this
development or that we will be able to achieve the yields, quality, or capacity required for this
technology to be cost competitive with new or other alternative memory technologies.
We face competition from numerous manufacturers and marketers of products using flash memory,
as well as from manufacturers of new and alternative technologies, and if we cannot compete
effectively, our results of operations and financial condition will suffer. Our competitors
include many large companies that have greater access to advanced wafer manufacturing capacity and
substantially greater financial, technical, marketing and other resources than we do, which allows
them to produce flash memory chips in high volumes at low costs and to sell these flash memory
chips themselves or to our flash card competitors at a low cost. Some of our competitors may sell
their flash memory chips at or below their true manufacturing costs to gain market share and to
cover their fixed costs. Such practices have been common in the DRAM industry during periods of
excess
57
supply, and have resulted in substantial losses in the DRAM industry. Our primary
semiconductor competitors include Samsung, Toshiba, Hynix Semiconductor Inc., or Hynix, IM Flash
Technologies, or IM Flash and STMicroelectronics, or STMicro. Samsung, in addition to increasing
its overall NAND output, continues to increase its MLC output. Hynix and IM Flash are aggressively
increasing NAND output and are expected to continue to produce significant NAND output in the
future. In addition, current and future competitors produce or could produce alternative flash
memory technologies that compete against our NAND flash memory technology which may reduce demand
or accelerate price declines for NAND. Furthermore, the future rate of scaling of the floating
gate NAND flash technology that we employ may slow down significantly, which would slow down cost
reductions that are fundamental to the adoption of flash memory technology in new applications. If
the scaling of NAND slows down or alternative technologies prove more economical, the investments
in our captive fabrication facilities could be impaired and our results of operations and financial
condition will suffer.
We also compete with flash memory card manufacturers and resellers. These companies purchase,
or have a captive supply of flash memory components and assemble memory cards. Our primary
competitors currently include, among others, A-Data Technology Inc., Buffalo Technology Inc.,
FUJIFILM Corporation, Hagiwara Sys-Con Co., Ltd., Hama Corporation, Inc., I/O Data Device, Inc.,
Kingmax Digital, Inc., Kingston Technology Company, or Kingston, Eastman Kodak Company, Matsushita
Electric Industries, Ltd. which owns the Panasonic brands, Memorex Products, Inc., or Memorex,
Micron Technology, Inc., and its subsidiary Lexar Media, Inc., or Lexar, Netac Technology Co.,
Ltd., PNY Technologies, Inc., or PNY, RITEK Corporation, Samsung, Sony Corporation, or Sony,
Toshiba, Tradebrands International and Transcend Information, Inc.
Some of our competitors have substantially greater resources than we do, have well recognized
brand names or have the ability to operate their business on lower margins than we do. The success
of our competitors may adversely affect our future sales revenues and may result in the loss of our
key customers. For example, Sony has recently increased its market share in the USB flash drive
market. In addition, Toshiba and other manufacturers had increased their market share of flash
memory cards for mobile phones, including the microSD™ card, which has been a
significant driver of our growth. In the digital audio market, we face competition from well
established companies such as Apple Inc. and Microsoft Corporation. In the USB flash drive market,
we also face competition from a large number of players including Kingston, Lexar, Memorex, PNY and
Sony among others. In the market for solid state drives, we may face competition from large NAND
flash producers such as Samsung and Intel Corporation, as well as from hard drive manufacturers,
such as Seagate Technology, Hitachi, Ltd., and others, who have established relationships with
computer manufacturers.
Furthermore, many companies are pursuing new or alternative technologies, such as phase-change
technology, charge-trap flash and millipedes/probes, which may compete with flash memory. For
example, two of our competitors are developing charge-trap flash technology, which if successful
and if we are unable to scale our technology on an equivalent basis, could provide an advantage to
these competitors.
These new or alternative technologies may provide smaller size, higher capacity, reduced cost,
lower power consumption or other advantages. If we cannot compete effectively, our results of
operations and financial condition will suffer.
We believe that our ability to compete successfully depends on a number of factors, including:
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price, quality and on-time delivery to our customers; |
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product performance, availability and differentiation; |
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success in developing new applications and new market segments; |
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sufficient availability of supply; |
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efficiency of production; |
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timing of new product announcements or introductions by us, our customers and our competitors; |
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the ability of our competitors to incorporate standards or develop formats which we do not offer; |
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the number and nature of our competitors in a given market; |
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successful protection of intellectual property rights; and |
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general market and economic conditions. |
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While we believe we are well-positioned to compete in the marketplace based on the foregoing
factors, there can be no assurance that we will be able to compete successfully in the future.
The semiconductor industry is subject to significant downturns that have harmed our business,
financial condition and results of operations in the past and may do so in the future. The
semiconductor industry is highly cyclical and is characterized by constant and rapid technological
change, rapid product obsolescence and price declines, evolving standards, short product life
cycles and wide fluctuations in product supply and demand. The industry has experienced
significant downturns, often in connection with, or in anticipation of, maturing product cycles of
both semiconductor companies’ and their customers’ products and declines in general economic
conditions. These downturns have been characterized by reduced product demand, production
overcapacity, high inventory levels and accelerated declines in selling prices. For example, the
flash memory industry experienced excess supply and a rapid decline in prices in the first half of
fiscal 2007. We have experienced these conditions in our business in the past and may experience
such downturns in the future.
Our business and the markets we address are subject to significant fluctuations in supply and
demand and our commitments to our ventures with Toshiba may result in periods of significant excess
inventory. With the ramp to volume production at the Flash Partners’ 300-millimeter fab, Fab 3, in
fiscal 2006, our captive memory supply increased substantially more than in either of the prior two
years. Our obligation to purchase 50% of the supply from FlashVision, Flash Partners and Flash
Alliance, our ventures with Toshiba, could harm our business and results of operations if our
committed supply exceeds demand for our products. The adverse effects could include, among other
things, significant decreases in our product prices, significant excess, obsolete or lower of cost
or market inventory write-downs and the impairment of our investments in the ventures with Toshiba.
For example, gross margins decreased to 27.0% and 26.0% for the three and six months ended July 1,
2007, respectively, in part due to inventory charges due to excess supply. In addition, over 95%
of our NAND memory wafer purchases were from our ventures with Toshiba. These effects will be
magnified once the Flash Alliance venture commences production, which we anticipate will occur in
the fourth quarter of fiscal 2007. Any future excess supply could have a material adverse effect
on our business, financial condition and results of operations.
We depend on third-party foundries for silicon supply and any disruption or shortage in our
supply from these sources will reduce our revenues, earnings and gross margins. All of our flash
memory products require silicon supply for the memory and controller components. The substantial
majority of our flash memory is currently supplied by our ventures with Toshiba and by Toshiba
pursuant to our foundry agreement and to a lesser extent by Samsung and Hynix. Any disruption in
supply of flash memory from our captive or non-captive sources would harm our operating results.
We intend to increase production at Fab 3, commence production at an additional 300-millimeter NAND
wafer fabrication facility that is currently under construction, Fab 4, and continue to procure
wafers from non-captive sources. In addition, these risks are magnified at Toshiba’s Yokkaichi,
Japan operations, where the current ventures are operated, Fab 4 is being constructed, and
Toshiba’s foundry capacity is located. Earthquakes and power outages have resulted in production
line stoppage and loss of wafers in Yokkaichi and similar stoppages and losses may occur in the
future. For example, in the first quarter of fiscal 2006, a brief power outage occurred at Fab 3,
which resulted in a loss of wafers and significant costs associated with bringing the Fab back on
line. In addition, the Yokkaichi location is often subject to earthquakes, which could result in
production stoppage, a loss of wafers and the incurrence of significant costs. If the Fab 3
production ramp is not completed, we fail to commence production at Fab 4 as planned, Fab 4 does
not meet anticipated manufacturing output, or our non-captive sources fail to supply wafers in the
amounts and at the times we expect, we may not have sufficient supply to meet demand and our
operating results could be harmed. In addition, in March 2007, we signed a memorandum of
understanding with Hynix for a proposed joint venture between the two companies which would
manufacture memory components and sell NAND memory system solutions. Our future memory
requirements may also depend on this venture being completed and ramped to volume production on a
timely basis.
Currently, our controller wafers are manufactured by Tower Semiconductor Ltd., or Tower, and
United Microelectronics Corporation, or UMC, Taiwan Semiconductor Manufacturing Company Ltd., or
TSMC, and Semiconductor Manufacturing International Corporation, or SMIC. The Tower fabrication
facility, from which we source controller wafers, is facing financial challenges and is located in
Israel, an area of political and military turmoil. Any disruption in the manufacturing operations
of Tower or one of our other controller wafer vendors would result in delivery delays, adversely
affect our ability to make timely shipments of our products and harm our operating results until we
could qualify an alternate source of supply for our controller wafers, which could take three or
more quarters to complete. In times of significant growth in global demand for flash memory,
demand from our customers may outstrip the supply of flash memory and controllers available to us
from our current sources. If our silicon vendors are unable to satisfy our requirements on
competitive terms or at all, we may lose potential sales and our
business, financial condition and operating results may suffer. Any disruption or delay in
supply from our silicon sources could significantly harm our business, financial condition and
results of operations.
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If actual manufacturing yields are lower than our expectations, this may result in increased
costs and product shortages. The fabrication of our products requires wafers to be produced in a
highly controlled and ultra clean environment. Semiconductor manufacturing yields and product
reliability are a function of both design technology and manufacturing process technology and
production delays may be caused by equipment malfunctions, fabrication facility accidents or human
errors. Yield problems may not be identified or improved until an actual product is made and can
be tested. As a result, yield problems may not be identified until the wafers are well into the
production process. We have from time-to-time experienced yields that have adversely affected our
business and results of operations. We have experienced adverse yields on more than one occasion
when we have transitioned to new generations of products. If actual yields are low, we will
experience higher costs and reduced product supply, which could harm our business, financial
condition and results of operations. For example, if the production ramp and/or yield of the
56-nanometer, 300-millimeter Flash Partners’ wafers do not increase as expected, we may not have
enough supply to meet demand and our cost competitiveness, business, financial condition and
results of operations will be harmed.
We depend on our third-party subcontractors and our business could be harmed if our
subcontractors do not perform as planned. We rely on third-party subcontractors for our wafer
testing, IC assembly, packaged testing, product assembly, product testing and order fulfillment.
From time-to-time, our subcontractors have experienced difficulty in meeting our requirements. If
we are unable to increase the capacity of our current subcontractors or qualify and engage
additional subcontractors, we may not be able to meet demand for our products. We do not have
long-term contracts with our existing subcontractors nor do we expect to have long-term contracts
with any new subcontract suppliers. We do not have exclusive relationships with any of our
subcontractors, and therefore, cannot guarantee that they will devote sufficient resources to
manufacturing our products. We are not able to directly control product delivery schedules.
Furthermore, we manufacture on a turnkey basis with some of our subcontract suppliers. In these
arrangements, we do not have visibility and control of their inventories of purchased parts
necessary to build our products or of the progress of our products through their assembly line.
Any significant problems that occur at our subcontractors, or their failure to perform at the level
we expect, could lead to product shortages or quality assurance problems, either of which would
have adverse effects on our operating results.
We are constructing a captive assembly and test manufacturing facility in China. We are
nearing completion of a captive assembly and test manufacturing facility in the Zizhu Science-Based
Park near Shanghai, China and expect to begin shipping from the new facility before the end of
fiscal 2007. We expect to continue to depend on our third-party subcontractors for the majority of
our test and assembly needs. Any delays in the construction and equipping of the facility or any
difficulties in achieving the production ramp or targeted yield, would harm our results of
operations and financial condition.
In transitioning to new processes, products and silicon sources, we face production and market
acceptance risks that may cause significant product delays, cost overruns or performance issues
that could harm our business. Successive generations of our products have incorporated
semiconductors with greater memory capacity per chip. The transition to new generations of
products, such as the 56-nanometer 8 and
16-gigabit MLC chip, which we began shipping in the first
half of fiscal 2007, is highly complex and requires new controllers, new test procedures and
modifications of numerous aspects of manufacturing, as well as extensive qualification of the new
products by both us and our OEM customers. There can be no assurance that this transition or
future technology transitions will occur on schedule or at the yields or costs that we anticipate.
If Flash Partners, or in the future, Flash Alliance, encounters difficulties in transitioning to
new technologies, our cost per megabyte may not remain competitive with the costs achieved by other
NAND flash memory producers. Any material delay in a development or qualification schedule could
delay deliveries and adversely impact our operating results. We periodically have experienced
significant delays in the development and volume production ramp-up of our products. Similar
delays could occur in the future and could harm our business, financial condition and results of
operations.
Our products may contain errors or defects, which could result in the rejection of our
products, product recalls, damage to our reputation, lost revenues, diverted development resources
and increased service costs and warranty claims and litigation. Our products are complex, must
meet stringent user requirements, may contain errors or defects and the majority of our products
are warrantied for one to five years. Errors or defects in our products may be caused by, among
other things, errors or defects in the memory or controller components, including components we
procure from non-captive sources such as the MLC products we procure from a third-party supplier.
In addition, in the second quarter of fiscal 2007, approximately 95% of our NAND memory purchases
were from our captive 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
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development resources, increased customer service and support costs and 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 higher than our recorded
estimate and result in an adverse effect on our results of operations and financial condition.
Our new products have from time-to-time been introduced with design and production errors at a
rate higher than the error rate in our established products. We must estimate warranty and similar
costs for new products without historical information and actual costs may significantly exceed our
recorded estimates. Underestimation of our warranty and similar costs would have an adverse effect
on our results of operations and financial condition.
We and Toshiba plan to continue to expand the wafer fabrication capacity of the Flash Partners
business venture and have formed a venture, Flash Alliance, for which we will make substantial
capital investments and incur substantial start-up and tool relocation costs, which could adversely
impact our operating results. We and Toshiba are making, and plan to continue to make, substantial
investments in new capital assets to expand the wafer fabrication capacity of our Flash Partners
business venture in Japan. We and Toshiba together intend to invest approximately $700 million to
continue expansion at Fab 3 to bring wafer capacity to 150,000 wafers per month by the end of
fiscal 2007 and are cooperating in the construction of Fab 4 to produce NAND flash memory products
for the parties under the Flash Alliance venture. We and Toshiba together intend to invest 343
billion Japanese yen, or approximately $2.8 billion, based on the exchange rate at July 1, 2007, in
the construction and equipping of Fab 4. Moreover, each time that we and Toshiba add substantial
new wafer fabrication capacity, we will experience significant initial design and development and
start-up costs as a result of the delay between the time of the investment and 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 and pay our share of ongoing operating
activities even if we do not achieve the planned output volume or utilize our full share of the
expanded output, and these costs will impact our gross margins, results of operations and financial
condition.
We have an investment of approximately $154 million in 200-millimeter wafer manufacturing
assets that we expect will no longer be competitive in fiscal 2008. Through our venture with
Toshiba, FlashVision, we have an investment of approximately $154 million in
200-millimeter wafer
manufacturing assets. We believe that in fiscal 2008, NAND produced on 200-millimeter wafers will
no longer be cost effective for our products, and as a result, we expect to dispose of our
200-millimeter wafer manufacturing assets during fiscal 2008. While we believe that we will reach
an agreement to dispose of our 200-millimeter manufacturing assets in fiscal 2008 at the then book
value of these assets, there can be no assurance that we will reach such agreement or that the
terms of such agreement, if reached, will be economically favorable to us. If we fail to reach an
agreement, or reach an agreement on unfavorable terms, we would likely suffer an impairment of our
investment in 200-millimeter wafer manufacturing assets.
We have a contingent indemnification obligation and guarantee obligations related to the
ventures with Toshiba. Toshiba has guaranteed FlashVision’s lease arrangement with third-party
lessors. The total minimum remaining lease payments as of July 1, 2007 were 4.2 billion Japanese
yen, or approximately $34 million based upon the exchange rate at July 1, 2007. If Toshiba makes
payments under its guarantee, we have agreed to indemnify Toshiba for 49.9% of its costs, subject
to certain limitations and exclusions.
In fiscal 2004 through fiscal 2007, Flash Partners entered into five equipment master lease
facilities totaling approximately 275.0 billion Japanese yen, or approximately $2.2 billion based
upon the exchange rate at July 1, 2007, of which, as of July 1, 2007, 245.0 billion Japanese yen,
or approximately $2.0 billion based upon the exchange rate at July 1, 2007, net of accumulated
lease payments, had been drawn down. As of July 1, 2007, our cumulative guarantee under the
equipment leases, net of cumulative lease payments, was approximately 105.3 billion Japanese yen,
or approximately $854 million based on the exchange rate at July 1, 2007. These leases contain
numerous default clauses which, if triggered, could cause us to repay the amounts due under our
guarantees. If our corporate rating is significantly downgraded by any rating agency, it may
impair the ability of our ventures with Toshiba to obtain future equipment lease financings on
terms consistent with current leases and would cause a default under certain current leases, either
of which could harm our business and financial condition.
We and Toshiba have also agreed to mutually contribute to, and indemnify each other, Flash
Partners and Flash Alliance for environmental remediation costs or liability resulting from Flash
Partners’ and Flash Alliance’s manufacturing operations in certain circumstances. In addition, we
and Toshiba entered into a Patent Indemnification Agreement under which in many cases we will 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 third-party patents.
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None
of the foregoing obligations are reflected as liabilities on our
Condensed Consolidated
Balance Sheets. If we have to perform our obligations under these agreements, our business will be
harmed and our financial condition and results of operations will be adversely affected.
Seasonality in our business may result in our inability to accurately forecast our product
purchase requirements. Sales of our products in the consumer electronics market are subject to
seasonality. For example, sales have typically increased significantly in the fourth quarter of
each year, sometimes followed by declines in the first quarter of the following year. This
seasonality was particularly pronounced in the fourth quarter of fiscal 2006 and the first quarter
of fiscal 2007 during which we experienced a larger than average sequential increase in retail unit sales
in the fourth quarter of fiscal 2006, followed by a larger than average sequential decrease in
retail unit sales in the first quarter of fiscal 2007. This seasonality may become even more
pronounced if we increase the mix of our sales coming from consumer products such as our Sansa
digital audio players. This seasonality makes it more difficult for us to forecast our business.
If our forecasts are inaccurate, we may lose market share or procure excess inventory or
inappropriately increase or decrease our operating expenses, any of which could harm our business,
financial condition and results of operations. This seasonality also may lead to higher volatility
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.
From time-to-time, we overestimate our requirements and build excess inventory, and
underestimate our requirements and have a shortage of supply, both of which harm our financial
results. The majority of our products are sold into consumer markets, which are difficult to
accurately forecast. Also, a substantial majority of our quarterly sales are from orders received
and fulfilled in that quarter. Additionally, we depend upon timely reporting from our retail and
distributor customers as to their inventory levels and sales of our products in order to forecast
demand for our products. We have in the past significantly over-forecasted and under-forecasted
actual demand for our products. The failure to accurately forecast demand for our products will
result in lost sales or excess inventory both of which will have an adverse effect on our business,
financial condition and results of operations. In addition, at times inventory may increase in
anticipation of increased demand or as captive wafer capacity ramps. If demand does not
materialize, we may be forced to write-down excess inventory which may harm our financial condition
and results of operations.
Under conditions of tight flash memory supply, we may be unable to adequately increase our
production volumes or secure sufficient supply in order to maintain our market share. If we are
unable to maintain market share, our results of operations and financial condition could be harmed.
Conversely, 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 and we may be forced to
write-down inventory which is in excess of forecasted demand or must be sold below cost. If we
lose market share due to price competition or we must write-down inventory, our results of
operations and financial condition could be harmed.
Our ability to respond to changes in market conditions from our forecast is limited by our
purchasing arrangements with our silicon sources. These arrangements generally provide that the
first three months of our rolling six-month projected supply requirements are fixed and we may make
only limited percentage changes in the second three months of the period covered by our supply
requirement projections.
We are sole-sourced for a number of our critical components and the absence of a back-up
supplier exposes our supply chain to unanticipated disruptions. We rely on our vendors, some of
which are a sole source of supply, for many of our critical components, such as certain controllers
for our CompactFlash® and USB products. We do not have long-term supply agreements with
most of these vendors. Our business, financial condition and operating results could be
significantly harmed by delays or reductions in shipments if we are unable to obtain sufficient
quantities of these components or develop alternative sources of supply.
We are exposed to foreign currency risks. Our purchases of NAND flash memory from the Toshiba
ventures and our investments in, and other transactions related to, those ventures are denominated
in Japanese yen. Our sales, however, are primarily denominated in U.S. dollars or other foreign
currencies. Additionally, we expect over time to increase the percentage of our sales denominated
in currencies other than the U.S. dollar. This exposes us to significant risk from foreign
currency
fluctuations. Management of these foreign exchange exposures and the foreign currency forward
contracts used to mitigate these exposures is complex and if we do not successfully manage our
foreign exchange exposures, our business, results of operations and financial condition could be
harmed.
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We may be unable to protect our intellectual property rights, which would harm our business,
financial condition and results of operations. We rely on a combination of patents, trademarks,
copyright and trade secret laws, confidentiality procedures and licensing arrangements to protect
our intellectual property rights. In the past, we have been involved in significant and expensive
disputes regarding our intellectual property rights and those of others, including claims that we
may be infringing third-parties’ patents, trademarks and other intellectual property rights. We
expect that we may be involved in similar disputes in the future. We cannot assure you that:
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any of our existing patents will not be invalidated; |
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patents will be issued for any of our pending applications; |
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any claims allowed from existing or pending patents will have sufficient scope or strength; |
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our patents will be issued in the primary countries where our products are sold in order
to protect our rights and potential commercial advantage; or |
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any of our products or technologies do not infringe on the patents of other companies. |
In addition, our competitors may be able to design their products around our patents and other
proprietary rights. We also have patent cross-license agreements with several of our leading
competitors. Under these agreements, we have enabled competitors to manufacture and sell products
that incorporate technology covered by our patents. While we obtain license and royalty revenue or
other consideration for these licenses, if we continue to license our patents to our competitors,
competition may increase and may harm our business, financial condition and results of operations.
Several companies have recently entered or announced their intentions to enter the flash
memory market, and we believe these companies may require a license from us. Enforcement of our
rights may require litigation. If we bring a patent infringement action and are not successful,
our competitors would be able to use similar technology to compete with us. Moreover, the
defendant in such an action may successfully countersue us for infringement of their patent or
assert a counterclaim that our patents are invalid or unenforceable. If we did not prevail as a
defendant in patent infringement case, we could be required to pay substantial damages, cease the
manufacture, use and sale of infringing products, expend significant resources to develop
non-infringing technology, discontinue the use of specific processes or obtain licenses to the
infringing technology.
We
may be unable to license intellectual property to or from third parties as needed, or renew
existing licenses, which could expose us to liability for damages, reduce our royalty revenues,
increase our costs or limit or prohibit us from selling products. If we incorporate third-party
technology into our products or if we are found to infringe others’ intellectual property, we could
be required to license intellectual property from a third party. We may also need to license some
of our intellectual property to others in order to enable us to obtain important cross-licenses to
third-party patents. We cannot be certain that licenses will be offered when we need them, or that
the terms offered will be acceptable, or that these licenses will help our business. If we do
obtain licenses from third-parties, we may be required to pay license fees or royalty payments. In
addition, if we are unable to obtain a license that is necessary to the manufacture of our
products, we could be required to suspend the manufacture of products or stop our product suppliers
from using processes that may infringe the rights of third-parties. We may not be successful in
redesigning our products, the necessary licenses may not be available under reasonable terms, our
existing licensees may not renew their licenses upon expiration and we may not be successful in
signing new licensees in the future. Our current license agreement with Samsung expires in August
2009, and to the extent that we are unable to renew this agreement under similar terms or if we are
unable to renew at all, our financial results may be adversely impacted, and we may incur
additional patent litigation costs to renew Samsung as a licensee.
We are currently and may in the future be involved in litigation, including litigation
regarding our intellectual property rights or those of third parties, which may be costly, may
divert the efforts of our key personnel and could result in adverse court rulings, which could
materially harm our business. We are involved in a number of lawsuits, including among others,
several cases involving our patents and the patents of third parties. We are the plaintiff in some
of these actions and the defendant in other of these actions. Some of the actions seek injunctions
against the sale of our products and/or substantial monetary damages, which if granted or awarded,
could have a material adverse effect on our business, financial condition and results of
operations.
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Litigation is subject to inherent risks and uncertainties that may cause actual results to
differ materially from our expectations. Factors that could cause litigation results to differ
include, but are not limited to, the discovery of previously unknown 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, including
intellectual property litigation, can be complex, can extend for a protracted period of time, and
can be very expensive. Litigation initiated by us could also result in counter-claims against us,
which could increase the costs associated with the litigation and result in our payment of damages
or other judgments against us. In addition, litigation may divert the efforts and attention of
some of our key personnel.
We have been, and expect to continue to be, subject to claims and legal proceedings regarding
alleged infringement by us of the patents, trademarks and other intellectual property rights of
third parties. From time-to-time we have sued, and may in the future sue, third parties in order
to protect our intellectual property rights. Parties that we have sued and that we may sue for
patent infringement may countersue us for infringing their patents. If we are held to infringe the
intellectual property of others, we may need to spend significant resources to develop
non-infringing technology or obtain licenses from third parties, but we may not be able to develop
such technology or acquire such licenses on terms acceptable to us or at all. We may also be
required to pay significant damages and/or discontinue the use of 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 technologies or pay
significant monetary damages or are required to make substantial royalty payments, our business
would be harmed.
Moreover, from time-to-time we agree to indemnify certain of our suppliers and customers for
alleged patent infringement. The scope of such indemnity varies but generally includes
indemnification for direct and consequential damages and expenses, including attorneys’ fees. We
may from time-to-time be engaged in litigation as a result of these indemnification obligations.
Third-party claims for patent infringement are excluded from coverage under our insurance policies.
A future obligation to indemnify our customers or suppliers may have a material adverse effect on
our business, financial condition and results of operations. For additional information concerning
legal proceedings, see Part 2, Item 1, “Legal Proceedings.”
Because of our international business and operations, we must comply with numerous
international laws and regulations, and we are vulnerable to political instability, currency
fluctuations and other risks related to international operations. Currently, all of our products
are produced overseas in China, Israel, Japan, South Korea and Taiwan. We are, therefore, affected
by the political, economic, labor, environmental, public health and military conditions in these
countries.
Specifically, China does not currently have a comprehensive and highly developed legal system,
particularly with respect to the protection of intellectual property rights. This results, among
other things, in the prevalence of counterfeit goods in China. The enforcement of existing and
future laws and contracts remains uncertain, and the implementation and interpretation of such laws
may be inconsistent. Such inconsistency could lead to piracy and degradation of our intellectual
property protection. Although we have increased our efforts to prevent counterfeit products from
entering the market, those efforts may not be successful. Our results of operations and financial
condition could be harmed by the sale of counterfeit products.
Our international business activities could also be limited or disrupted by any of the following factors:
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reduced sales to our customers or interruption to our manufacturing processes in the
Pacific Rim that may arise from regional issues in Asia; |
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imposition of regulatory requirements, tariffs, import and export restrictions and other barriers and restrictions; |
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duties and/or fees related to customs entries for our products, which are all manufactured offshore; |
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longer payment cycles and greater difficulty in accounts receivable collection; |
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adverse tax rules and regulations; |
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weak protection of our intellectual property rights; and |
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delays in product shipments due to local customs restrictions. |
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Tower Semiconductor’s Financial Situation is Challenging. Tower supplies a significant
portion of our controller wafers from its Fab 2 facility and is currently a sole source of supply
for some of our controllers. Tower’s Fab 2 is operational and in the process of expanding capacity
and our ability to continue to obtain sufficient supply on a cost-effective basis may be dependent
upon completion of this capacity expansion. Tower’s continued expansion of Fab 2 requires
sufficient funds to operate in the short-term and raising the funds required to implement the
current ramp-up plan. If Tower fails to comply with the financial ratios and covenants contained
in the amended credit facility agreement with its banks, fails to attract additional customers,
fails to operate its Fab 2 facility in a cost-effective manner, fails to secure additional
financing, fails to meet the conditions to receive government grants and tax benefits approved for
Fab 2, or fails to obtain the approval of the Israeli Investment Center for a new expansion
program, Tower’s continued operations could be at risk. If this occurs, we will be forced to
source our controllers from another supplier and our business, financial condition and results of
operations may be harmed. Specifically, our ability to supply a number of products would be
disrupted until we were able to transition manufacturing and qualify a new foundry with respect to
controllers that are currently sole sourced at Tower, which could take three or more quarters to
complete.
As of July 1, 2007, we have recognized cumulative losses of approximately $55.4 million as a
result of the other-than-temporary decline in the value of our investment in Tower ordinary shares,
$12.2 million as a result of the impairment in value on our prepaid wafer credits and $1.3 million
of losses on our warrant to purchase Tower ordinary shares. We are subject to certain restrictions
on the transfer of our approximately 14.9 million Tower ordinary shares including certain rights of
first refusal, and through January 2008, have agreed to maintain minimum shareholdings. It is
possible that we will record further write-downs of our investment, which was carried on our
condensed consolidated balance sheet at $21.3 million at July 1, 2007, which would harm our results
of operations and financial condition.
Our stock price has been, and may continue to be, volatile, which could result in investors
losing all or part of their investments. The market price of our stock has fluctuated
significantly in the past and may continue to fluctuate in the future. We believe that such
fluctuations will continue as a result of many factors, including future announcements concerning
us, our competitors or our principal customers regarding financial results or expectations,
technological innovations, industry supply dynamics, new product introductions, governmental
regulations, the commencement or results of litigation or changes in earnings estimates by
analysts. In addition, in recent years the stock market has experienced significant price and
volume fluctuations and the market prices of the securities of high technology and semiconductor
companies have been especially volatile, often for reasons outside the control of the particular
companies. These fluctuations as well as general economic, political and market conditions may
have an adverse affect on the market price of our common stock as well as the price of our
outstanding convertible notes and could impact the likelihood of those notes being converted into
our common stock, which would cause further dilution to our stockholders.
We may make acquisitions that are dilutive to existing stockholders, result in unanticipated
accounting charges or otherwise adversely affect our results of operations, and result in
difficulties in assimilating and integrating the operations, personnel, technologies, products and
information systems of acquired companies or businesses. We continually evaluate and explore
strategic opportunities as they arise, including business combinations, strategic partnerships,
collaborations, capital investments and the purchase, licensing or sale of assets. If we issue
equity securities in connection with an acquisition, the issuance may be dilutive to our existing
stockholders. Alternatively, acquisitions made entirely or partially for cash would reduce our
cash reserves.
Acquisitions may require significant capital infusions, typically entail many risks and could
result in difficulties in assimilating and integrating the operations, personnel, technologies,
products and information systems of acquired companies. We may experience delays in the 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
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 a geographic or business
market in which we have little or no prior experience. These challenges could disrupt our ongoing
business, distract our management and employees, harm our reputation, subject us to an increased
risk of intellectual property and other litigation and increase our expenses. These challenges are
magnified as the size of the acquisition increases, and we cannot assure you that we will realize
the intended benefits of any acquisition. Acquisitions may require large one-time charges and can
result in increased debt or contingent liabilities, adverse tax consequences, substantial
depreciation or deferred compensation charges, the amortization of identifiable purchased
intangible assets or impairment of goodwill, any of which could have a material adverse effect on
our business, financial condition or results of operations.
65
Mergers and acquisitions of high-technology companies are inherently risky and subject to many
factors outside of our control, and no assurance can be given that our previous or future
acquisitions will be successful and will not materially adversely affect our business, operating
results, or financial condition. Failure to manage and successfully integrate acquisitions could
materially harm our business and operating results. Even when an acquired company has already
developed and marketed products, there can be no assurance that such products will be successful
after the closing, will not cannibalize sales of our existing products, that product enhancements
will be made in a timely fashion or that pre-acquisition due diligence will have identified all
possible issues that might arise with respect to such company.
Our success depends on our key personnel, including our executive officers, the loss of whom
could disrupt our business. Our success greatly depends on the continued contributions of our
senior management and other key research and development, sales, marketing and operations
personnel, including Dr. Eli Harari, our founder, chairman and chief executive officer. We do not
have employment agreements with any of our executive officers and they are free to terminate their
employment with us at any time. Our success will also depend on our ability to recruit additional
highly skilled personnel. We may not be successful in hiring or retaining key personnel.
Terrorist attacks, war, threats of war and government responses thereto may negatively impact
our operations, revenues, costs and stock price. Terrorist attacks, U.S. military responses to
these attacks, war, threats of war and any corresponding decline in consumer confidence could have
a negative impact on consumer retail demand, which is the largest channel for our products. Any of
these events may disrupt our operations or those of our customers and suppliers and may affect the
availability of materials needed to manufacture our products or the means to transport those
materials to manufacturing facilities and finished products to customers. Any of these events
could also increase volatility in the U.S. and world financial markets, which could harm our stock
price and may limit the capital resources available to us and our customers or suppliers or
adversely affect consumer confidence. We have substantial operations in Israel including a
development center in Northern Israel, near the border with Lebanon, areas that have recently
experienced significant violence and political unrest. Tower, which supplies a significant portion
of our controller wafers, is also located in Israel. Continued turmoil and unrest in Israel or the
Middle East could cause delays in the development or production of our products. This could harm
our business and results of operations.
Natural disasters or epidemics in the countries in which we or our suppliers or subcontractors
operate could negatively impact our operations. Our operations, including those of our suppliers
and subcontractors, are concentrated in Milpitas, California; Yokkaichi, Japan; Hsinchu and
Taichung, Taiwan; and Dongguan, Shanghai and Shenzen, China. In the past, these areas have been
affected by natural disasters such as earthquakes, tsunamis and typhoons, and some areas have been
affected by epidemics, such as avian flu. If a natural disaster or epidemic were to occur in one
or more of these areas, our operations could be significantly impaired and our business may be
harmed. This is magnified by the fact that we do not have insurance for most natural disasters,
including earthquakes. This could harm our business and results of operations.
To manage our growth, we may need to improve our systems, controls, processes and procedures.
We have experienced and may continue to experience rapid growth, which has placed, and could
continue to place a significant strain on our managerial, financial and operations resources and
personnel. Our number of employees, including management-level employees, has increased
significantly due to our acquisition of msystems. As a result of the acquisition, we have recently
reorganized our corporation into several business units to increase focus on market penetration,
new product innovation and profitability. The reorganization requires re-engineering of many
processes and systems within our company. We must continue to improve our operational, accounting
and financial systems and managerial controls and procedures, including fraud procedures, and we
will need to continue to expand, as well as, train and manage our workforce. If we do not manage
our growth effectively or adapt our systems, processes and procedures to the evolving business and
organization, our business and results of operations could be harmed.
We may need to raise additional financing, which could be difficult to obtain, and which if
not obtained in satisfactory amounts may prevent us from funding the ventures with Toshiba,
increasing our wafer supply, developing or enhancing our products, taking advantage of future
opportunities, growing our business or responding to competitive pressures or unanticipated
industry changes, any of which could harm our business. We currently believe that we have
sufficient cash resources to fund our operations as well as our investments in the ventures with
Toshiba for at least the next twelve months; however, we may in the future raise additional funds,
including funds to meet our obligations with respect to Flash Partners and Flash Alliance, and we
cannot be certain that we will be able to obtain additional financing on favorable terms, if at
all. From time-to-time, we may decide to raise additional funds through public or private debt,
equity or lease financings. If we issue additional equity securities, our stockholders will
experience dilution and the new equity securities may have rights, preferences or privileges senior
to those
66
of existing holders of common stock. If we raise funds through debt or lease financing, we
will have to pay interest and may be subject to restrictive covenants, which could harm our
business. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to
develop or enhance our products, fulfill our obligations to Flash Partners and Flash Alliance, take
advantage of future opportunities, grow our business or respond to competitive pressures or
unanticipated industry changes, any of which could have a negative impact on our business.
Anti-takeover provisions in our charter documents, stockholder rights plan and in Delaware law
could discourage or delay a change in control and, as a result, negatively impact our stockholders.
We have taken a number of actions that could have the effect of discouraging a takeover attempt.
For example, we have a stockholders’ rights plan that expires in April 2017 that would cause
substantial dilution to a stockholder, and substantially increase the cost paid by a stockholder,
who attempts to acquire us on terms not approved by our board of directors. This could discourage
an acquisition of us. In addition, our certificate of incorporation grants our board of directors
the authority to fix the rights, preferences and privileges of and issue up to 4,000,000 shares of
preferred stock without stockholder action (2,000,000 of which have already been reserved under our
stockholder rights plan). Issuing preferred stock could have the effect of making it more
difficult and less attractive for a third party to acquire a majority of our outstanding voting
stock. Preferred stock may also have other rights, including economic rights senior to our common
stock that could have a material adverse effect on the market value of our common stock. In
addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law. This section provides that a corporation may not engage in any business
combination with any interested stockholder during the three-year period following the time that a
stockholder became an interested stockholder. This provision could have the effect of delaying or
discouraging a change of control of SanDisk.
Unanticipated changes in our tax provisions or exposure to additional income tax liabilities
could affect our profitability. We are subject to income tax in the United States and numerous
foreign jurisdictions. Our tax liabilities are affected by the amounts we charge for inventory,
services, licenses, funding and other items in intercompany transactions. We are subject to
ongoing tax audits in various jurisdictions. Tax authorities may disagree with our intercompany
charges or other matters and assess additional taxes. We regularly assess the likely outcomes of
these audits in order to determine the appropriateness of our tax provision. However, there can be
no assurance that we will accurately predict the outcomes of these audits, and the actual outcomes
of these audits could have a material impact on our net income or financial condition. In
addition, our effective tax rate in the future could be adversely affected by changes in the mix of
earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax
assets and liabilities, changes in tax laws and the discovery of new information in the course of
our tax return preparation process. In particular, the carrying value of deferred tax assets,
which are predominantly in the United States, is dependent on our ability to generate future
taxable income in the United States. Any of these changes could affect our profitability.
Declining product margins can cause reduced profits in our manufacturing entities which are
primarily located in relatively low tax rate jurisdictions. Continued product margin declines
could have a material adverse impact on our effective tax rate. Furthermore, our tax provisions
could be adversely affected as a result of any further interpretative accounting guidance related
to accounting for uncertain tax provisions.
We may be subject to risks associated with environmental regulations. Production and
marketing of products in certain states and countries may subject us to environmental and other
regulations including, in some instances, the responsibility for environmentally safe disposal or
recycling. Such laws and regulations have recently been passed in several jurisdictions in which
we operate, including Japan and certain states within the U.S. Although we do not anticipate any
material adverse effects in the future based on the nature of our operations and the focus of such
laws, there is no assurance such existing laws or future laws will not have a material adverse
effect on our financial condition, liquidity or results of operations.
Changes in securities laws and regulations have increased our costs; further, in the event we
are unable to satisfy regulatory requirements relating to internal control, or if our internal
controls over financial reporting is not effective, our business could suffer. The Sarbanes-Oxley
Act of 2002, or Sarbanes-Oxley, that became law in July 2002 required changes in our corporate
governance, public disclosure and compliance practices. The number of rules and regulations
applicable to us has increased and will continue to increase our legal and financial compliance
costs, and has made some activities more difficult, such as approving new or amendments to our
option plans. In addition, we have incurred and expect to continue to incur significant costs in
connection with compliance with Section 404 of Sarbanes-Oxley regarding internal control over
financial reporting. In fiscal 2007, we will continue to incur additional costs integrating msystems into
our internal control systems and procedures. These laws and regulations and perceived increased
risk of liability could make it more difficult for us to attract and retain qualified members of
our board of directors, particularly to serve on our audit committee, and qualified executive
officers. We cannot estimate the timing or magnitude of additional costs we may incur as a result.
67
In connection with our certification process under Section 404 of Sarbanes-Oxley, we have
identified in the past and will from time-to-time identify deficiencies in our internal control
over financial reporting. We cannot assure you that individually or in the aggregate these
deficiencies would not be deemed to be a material weakness. Furthermore, we may not be able to
implement enhancements on a timely basis, including any enhancements necessary to integrate
msystems 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 significantly decline. Additionally, adverse publicity related to the disclosure
of a material weakness or deficiency in internal controls could have a negative impact on our
reputation, business and stock price. Any internal control or procedure, no matter how well
designed and operated, can only provide reasonable assurance of achieving desired control
objectives and cannot prevent intentional misconduct or fraud.
Our debt service obligations may adversely affect our cash flow. While the 1% Senior
Convertible Notes due 2013 and the 1% Convertible Notes due 2035 are outstanding, we are obligated
to pay to the holders thereof approximately $12.3 million per year in interest. If we issue other
debt securities in the future, our debt service obligations will increase. If we are unable to
generate sufficient cash to meet these obligations and must instead use our existing cash or
investments, we may have to reduce, curtail or terminate other business activities. We intend to
fulfill our debt service obligations from cash generated by our operations, if any, and from our
existing cash and investments. Our indebtedness could have significant negative consequences. For
example, it could:
|
• |
|
increase our vulnerability to general adverse economic and industry conditions; |
|
|
• |
|
limit our ability to obtain additional financing; |
|
|
• |
|
require the dedication of a substantial portion of any cash flow from operations to the
payment of principal of, and interest on, our indebtedness, thereby reducing the
availability of such cash flow to fund our growth strategy, working capital, capital
expenditures and other general corporate purposes; |
|
|
• |
|
limit our flexibility in planning for, or reacting to, changes in our business and our industry; and |
|
|
• |
|
place us at a competitive disadvantage relative to our competitors with less debt. |
The accounting method for convertible debt securities with net share settlement, such as our
1% Senior Convertible Notes due 2013 may be subject to change. For the purpose of calculating
diluted earnings per share, a convertible debt security providing for net share settlement of the
conversion value and meeting specified requirements under Emerging Issues Task Force, or EITF,
Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock, is accounted for interest expense purposes similarly to
non-convertible debt, with the stated coupon constituting interest expense and any shares issuable
upon conversion of the security being accounted for under the treasury stock method. The effect of
the treasury stock method is that the shares potentially issuable upon conversion of the notes are
not included in the calculation of our earnings per share except to the extent that the conversion
value of the 1% Senior Convertible Notes due 2013 exceeds their principal amount, in which event
the number of shares of our common stock necessary to settle the conversion are treated as having
been issued for earnings per share purposes.
At
the July 25, 2007 FASB meeting, the FASB agreed to issue for comment the proposed FSP on convertible debt instruments that may
be settled in cash upon conversion. The proposed accounting method for net share settled
convertible securities would be to bifurcate and account for the net settled convertible securities
as if they were a separate debt and equity security. The proposed FSP is expected to be effective
for the fiscal year beginning after December 15, 2007 and would require us to apply the accounting
method retrospectively to all periods presented. While the proposed FSP has not yet been published
by the FASB, our initial estimate based upon public comments at the recent FASB meeting, which
could materially change upon publication of the proposed FSP or upon further interpretations by the
FASB, is that we would be required to report an additional before tax, non-cash interest expense of
approximately $375 million to $425 million over the life of the debt, or approximately $40 million
to $55 million in fiscal 2007. However, these amounts are subject to material changes based upon
further clarification or interpretation of the proposed FSP. These impacts could adversely affect
the trading price of our common stock and in turn negatively impact the trading price of the notes.
68
We have significant financial obligations related to our ventures with Toshiba, which could
impact our ability to comply with our obligations under our 1% Senior Convertible Notes due 2013
and our 1% Convertible Notes due 2035. We have entered into agreements to guarantee, indemnify or
provide financial support with respect to lease and certain other obligations of our 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 further expansion of Fab 3 and
the start-up and expansion of Fab 4. As of July 1, 2007, we had indemnification and guarantee
obligations for these ventures of approximately $888 million. As of July 1, 2007, we had unfunded
commitments of approximately $1.8 billion to fund our various obligations under the Flash Partners
and Flash Alliance ventures with Toshiba. Due to these and our other commitments, we may not have
sufficient funds to make payments under or repurchase the notes.
The net share settlement feature of the 1% Senior Convertible Notes due 2013 may have adverse
consequences. The 1% Senior Convertible Notes due 2013 are subject to net share settlement, which
means that we will satisfy our conversion obligation to holders by paying cash in settlement of the
lesser of the principal amount and the conversion value of the 1% Senior Convertible Notes due 2013
and by delivering shares of our common stock in settlement of any and all conversion obligations in
excess of the daily conversion values.
Our failure to convert the 1% Senior Convertible Notes due 2013 into cash or a combination of
cash and common stock upon exercise of a holder’s conversion right in accordance with the
provisions of the indenture would constitute a default under the indenture. We may not have the
financial resources or be able to arrange for financing to pay such principal amount in connection
with the surrender of the 1% Senior Convertible Notes due 2013 for conversion. While we currently
only have debt related to the 1% Senior Convertible Notes due 2013 and the 1% Convertible Notes due
2035 and we do not have other agreements that would restrict our ability to pay the principal
amount of the 1% Senior Convertible Notes due 2013 in cash, we may enter into such an agreement in
the future, which may limit or prohibit our ability to make any such payment. In addition, a
default under the indenture could lead to a default under existing and future agreements governing
our indebtedness. If, due to a default, the repayment of related indebtedness were to be
accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay
such indebtedness and amounts owing in respect of the conversion of any 1% Senior Convertible Notes
due 2013.
The convertible note hedge transactions and the warrant option transactions may affect the
value of the notes and our common stock. We have entered into convertible note hedge transactions
with Morgan Stanley & Co. International Limited and Goldman, Sachs & Co., or the dealers. These
transactions are expected to reduce the potential dilution upon conversion of the 1% Senior
Convertible Notes due 2013. We used approximately $67.3 million of the net proceeds of funds
received from the 1% Senior Convertible Notes due 2013 to pay the net cost of the convertible note
hedge in excess of the warrant transactions. These transactions were accounted for as an
adjustment to our stockholders’ equity. In connection with hedging these transactions, the dealers
or their affiliates:
|
• |
|
have entered into various over-the-counter cash-settled derivative transactions with
respect to our common stock, concurrently with, and shortly after, the pricing of the
notes; and |
|
|
• |
|
may enter into, or may unwind, various over-the-counter derivatives and/or purchase or
sell our common stock in secondary market transactions following the pricing of the notes,
including during any observation period related to a conversion of notes. |
The dealers or their affiliates are likely to modify their hedge positions from time-to-time
prior to conversion or maturity of the notes by purchasing and selling shares of our common stock,
our securities or other instruments they may wish to use in connection with such hedging.
In particular, such hedging modification may occur during any observation period for a conversion
of the 1% Senior Convertible Notes due 2013, which may have a negative effect on the value of the
consideration received in relation to the conversion of those notes. In addition, we intend to
exercise options we hold under the convertible note hedge transactions whenever notes are
converted. To unwind their hedge positions with respect to those exercised options, the dealers or
their affiliates expect to sell shares of our common stock in secondary market transactions or
unwind various over-the-counter derivative transactions with respect to our common stock during the
observation period, if any, for the converted notes.
The effect, if any, of any of these transactions and activities on the market price of our
common stock or the 1% Senior Convertible Notes due 2013 will depend in part on market conditions
and cannot be ascertained at this time, but any of these activities could adversely affect the
value of our common stock and the value of the 1% Senior Convertible Notes due 2013 and, as a
result, the amount of cash and the number of shares of common stock, if any, holders will receive
upon the conversion of the notes.
69
There are numerous risks associated with our acquisition of msystems Ltd. Achieving the
expected benefits of the acquisition will depend on the timely and efficient integration of our and
msystems’ technology, product lines, operations, business culture and personnel. This will be
particularly challenging due to the fact that the majority of the msystems’ operations are in Israel
and we are headquartered in California. The integration may not be completed as quickly as
expected, and if we fail to effectively integrate the companies or the integration takes longer
than expected, we may not achieve the expected benefits of the merger. The challenges involved in
this integration include, among others:
|
• |
|
maintaining employee morale and retaining key employees; |
|
|
• |
|
retaining key sources of supply; |
|
|
• |
|
incorporating msystems’ technology and products into our business and future product lines; |
|
|
• |
|
integrating msystems’ sales force into our worldwide product sales network; |
|
|
• |
|
demonstrating to msystems’ customers that the merger will not result in adverse changes
in pricing, customer service standards or product support; |
|
|
• |
|
coordinating research and development activities to enhance introduction of new products and technologies; |
|
|
• |
|
integrating msystems’ internal control over financial reporting with our internal control over financial reporting; |
|
|
• |
|
migrating both companies to a common enterprise resource planning information system to
integrate all operations, sales and administrative activities for the combined companies in
a timely and cost effective way; |
|
|
• |
|
integrating msystems’ international operations with ours; |
|
|
• |
|
integrating the business cultures of both companies; and |
|
|
• |
|
ensuring there are no delays in releasing new products to market. |
This integration effort is international in scope, complex, time consuming and expensive, and
may disrupt our respective businesses or result in the loss of customers or key employees or the
diversion of the attention of management. Neither msystems nor we have experience in integrating
businesses and operations of this magnitude and scope. Integration is particularly difficult
because certain key members of msystems’ senior management are no longer with the combined company.
In addition, the integration process may strain our financial and managerial controls and
reporting systems and procedures. This may result in the diversion of management and financial
resources from our core business objectives. There can be no assurance that we and msystems will
successfully integrate our respective businesses or that we will realize the anticipated benefits
of the merger. If we do not realize the expected benefits of the merger, including the achievement
of operating synergies, the merger could result in a reduction of our per share earnings as
compared to the per share earnings that would have been achieved by us had the merger not occurred.
There is pending litigation. Actions purporting to be class and derivative actions on behalf
of msystems and its shareholders were filed against us and msystems prior to the closing of the
merger. See Part 2, Item 1, ‘‘Legal Proceedings.’’ We may be required to expend significant
resources, including management time, to defend these actions and could be subject to damages or
settlement costs related to these actions. We are responsible for liabilities associated with
these and any other class and derivative actions, including indemnification of directors and
certain members of management of msystems.
There are risks related to msystems prior option grant practices. As a result of an
investigation by a special committee of its board of directors into its prior option grant
practices, on July 17, 2006, msystems filed a Form 20-F with the U.S. Securities and Exchange
Commission, or SEC, in which it restated its financial statements for each of the fiscal years
ended December 31, 1999 through 2005 and, in a separate report on Form 6-K, restated its financial
statements for each of the four quarters of fiscal 2005 and the first quarter of fiscal 2006. In
addition, msystems has disclosed that the SEC is conducting an informal investigation into msystems
prior option grant practices.
Under the merger agreement, the combined company is responsible for liabilities associated
with msystems’ prior stock option grant practices, including indemnification of directors and
certain members of management of msystems. These liabilities could be substantial and may include,
among other things, the costs of defending lawsuits against msystems and its directors, officers,
employees and former employees by stockholders and other third parties; the cost of defending any
shareholder derivative suits; the cost of governmental, law enforcement or regulatory
investigations; civil or criminal fines and penalties;
expenses associated with further financial restatements; auditor, legal and other expenses;
and expenses associated with the remedial measures, if any, which may be imposed.
70
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) |
|
Issuer Repurchases of Equity Securities. The table below summarizes information about the
Company’s repurchases of its equity securities registered pursuant to Section 12 of the
Exchange Act during the six months ended July 1, 2007. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
Value of Shares that |
|
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
|
May Yet Be |
|
|
|
Total Number of |
|
|
Average Price Paid |
|
|
Announced Plans of |
|
|
Purchased Under the |
|
Period |
|
Shares Purchased (1) |
|
|
per Share (2) |
|
|
Programs (1) |
|
|
Plans or Programs |
|
January 1, 2007 to January 28, 2007 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
January 29, 2007 to February 25, 2007 |
|
|
18,000 |
|
|
|
39.98 |
|
|
|
18,000 |
|
|
|
299,280,293 |
|
February 26, 2007 to April 1, 2007 |
|
|
172,184 |
|
|
|
37.01 |
|
|
|
172,184 |
|
|
|
292,908,146 |
|
April 2, 2007 to April 29, 2007 |
|
|
5,000 |
|
|
|
42.26 |
|
|
|
5,000 |
|
|
|
292,696,862 |
|
April 30, 2007 to May 27, 2007 |
|
|
1,322,769 |
|
|
|
41.66 |
|
|
|
1,322,769 |
|
|
|
237,596,251 |
|
May 28, 2007 to July 1, 2007 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
237,596,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,517,953 |
|
|
$ |
41.11 |
|
|
|
1,517,953 |
|
|
$ |
237,596,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In December 2006, the Company announced its intention to repurchase up to
$300 million in the open market of its common stock over the two years following the date of
authorization. |
|
(2) |
|
Represents the weighted average price paid per share without commissions. |
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
At
the Company’s Annual Meeting of Stockholders held on May 24, 2007, the following individuals were
elected to the Company’s Board of Directors:
|
|
|
|
|
|
|
|
|
|
|
Votes For |
|
Votes Withheld |
Irwin Federman |
|
|
134,434,007 |
|
|
|
66,938,431 |
|
Steven J. Gomo |
|
|
135,181,952 |
|
|
|
66,190,486 |
|
Dr. Eli Harari |
|
|
135,918,752 |
|
|
|
65,453,686 |
|
Eddy W. Hartenstein |
|
|
135,122,886 |
|
|
|
66,249,552 |
|
Catherine P. Lego |
|
|
134,988,440 |
|
|
|
66,383,998 |
|
Michael E. Marks |
|
|
133,513,048 |
|
|
|
67,859,390 |
|
Dr. James D. Meindl |
|
|
134,953,899 |
|
|
|
66,418,539 |
|
The
following proposal was also approved at the Company’s Annual Meeting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes |
|
|
|
|
Votes For |
|
Votes Against |
|
Abstained |
|
Non-votes |
Ratify the
appointment of
Ernst & Young LLP
as the Company’s
independent
registered public
accounting firm for
the fiscal year
ending December 30,
2007 |
|
|
195,804,769 |
|
|
|
4,210,667 |
|
|
|
1,357,002 |
|
|
|
— |
|
The
following proposal was not approved at the Company’s Annual Meeting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes |
|
|
|
|
Votes For |
|
Votes Against |
|
Abstained |
|
Non-votes |
To consider a
stockholder
proposal regarding
performance-vesting
shares |
|
|
67,277,584 |
|
|
|
83,246,748 |
|
|
|
1,634,700 |
|
|
|
49,213,406 |
|
71
Item 5. Other Information
On August 2, 2007, the Compensation Committee of the Company’s Board of Directors (the
“Compensation Committee”) approved discontinuing the base salary reductions for the Company’s
executive officers which had been implemented on March 1, 2007 as a cost savings measure and
approved new base salary levels for the Company’s executive officers identified in the Company’s
Proxy Statement for its 2007 Annual Meeting of Stockholders (the “Named Executive Officers”). The
new annual base salary levels of the Named Executive Officers, which took effect August 6, 2007,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
New Annualized |
Name |
|
Title |
|
Base Salary Level |
Dr. Eli Harari |
|
Chief Executive Officer & Chairman of the Board |
|
$ |
848,000 |
|
Sanjay Mehrotra |
|
President & Chief Operating Officer |
|
$ |
510,000 |
|
Judy Bruner |
|
Executive Vice President, Administration & Chief Financial Officer |
|
$ |
450,000 |
|
Yoram Cedar |
|
Executive Vice President, Mobile Business Unit & Corporate
Engineering |
|
$ |
385,422 |
|
Dr. Randhir Thakur |
|
Executive Vice President, Technology & Worldwide Operations |
|
$ |
385,422 |
|
On August 2, 2007, the Compensation Committee also approved an amendment to the Company’s
Change of Control Benefits Agreements previously entered into with certain executives of the
Company, including each of the Named Executive Officers (other than Dr. Thakur). The Change of
Control Benefits Agreements currently provide, in part, that in the event that the covered
executive’s employment is terminated in certain circumstances in connection with a change of
control of the Company and the executive is entitled to severance benefits in accordance with the
agreement, the executive’s stock options granted by the Company will become fully vested. The
amendment to the agreements extends this same accelerated vesting benefit, should the executive be
entitled to severance under his or her agreement, to any restricted stock, restricted stock units
and other equity awards granted by the Company to the executive. This summary of the amendment to
the Change of Control Benefits Agreements is qualified in its entirety by the form of letter
agreement amending the Company’s Change of Control Benefits Agreements attached hereto as Exhibit
10.1 and incorporated herein by this reference. On August 2, 2007, the Compensation Committee also
approved such a Change in Control Benefits Agreement for Dr. Thakur.
72
Item 6. Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Title |
|
|
|
2.1
|
|
Agreement and Plan of Merger, dated as of October 20, 2005, by and among SanDisk Corporation, Mike
Acquisition Company LLC, Matrix Semiconductor, Inc. and Bruce Dunlevie as the stockholder
representative for the stockholders of Matrix Semiconductor, Inc.(1) |
|
|
|
2.2
|
|
Agreement and Plan of Merger, dated as of July 30, 2006, by and among SanDisk Corporation, Project
Desert, Ltd. and msystems Ltd.(2) |
|
|
|
3.1
|
|
Restated Certificate of Incorporation of the Registrant.(3) |
|
|
|
3.2
|
|
Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated
December 9, 1999.(4) |
|
|
|
3.3
|
|
Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated May 11,
2000.(5) |
|
|
|
3.4
|
|
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant
dated May 26, 2006.(6) |
|
|
|
3.5
|
|
Amended and Restated Bylaws of the Registrant, as amended to date.(7) |
|
|
|
3.6
|
|
Certificate of Designations for the Series A Junior Participating Preferred Stock, as filed with the
Delaware Secretary of State on October 14, 1997.(8) |
|
|
|
3.7
|
|
Amendment to Certificate of Designations for the Series A Junior Participating Preferred Stock, as
filed with the Delaware Secretary of State on September 24, 2003.(9) |
|
|
|
4.1
|
|
Reference is made to Exhibits 3.1, 3.2, 3.3, and 3.4.(3), (4), (5), (6) |
|
|
|
4.2
|
|
Rights Agreement, dated as of September 15, 2003, between the Registrant and Computershare Trust
Company, Inc.(9) |
|
|
|
4.3
|
|
Amendment No. 1 to Rights Agreement, dated as of November 6, 2006, by and between the Registrant and
Computershare Trust Company, Inc.(10) |
|
|
|
10.1
|
|
Form of Second Amendment to Change of Control Agreement for those officers of the Registrant who are
party to such Agreement.(*) |
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(*) |
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(*) |
|
|
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.(*) |
|
|
|
32.2
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.(*) |
|
|
|
* |
|
Furnished herewith. |
|
(1) |
|
Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the
SEC on January 20, 2006. |
|
(2) |
|
Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K/A filed with the
SEC on August 1, 2006. |
|
(3) |
|
Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-1 (No.
33-96298). |
|
(4) |
|
Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended June 30,
2000. |
|
(5) |
|
Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-3 (No.
333-85686). |
|
(6) |
|
Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the
SEC on June 1, 2006. |
|
(7) |
|
Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the
SEC on July 27, 2007. |
|
(8) |
|
Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K/A dated April 18,
1997. |
|
(9) |
|
Previously filed as an Exhibit to the Registrant’s Registration Statement on Form 8-A dated
September 25, 2003. |
|
(10) |
|
Previously filed as an Exhibit to the Registrant’s Registration Statement on Form 8-A/A dated
November 8, 2006. |
73
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
SANDISK CORPORATION
(Registrant)
|
|
Dated: August 7, 2007 |
|
|
|
|
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) |
|
|
74
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Title |
|
|
|
2.1
|
|
Agreement and Plan of Merger, dated as of October 20, 2005, by and among SanDisk Corporation, Mike
Acquisition Company LLC, Matrix Semiconductor, Inc. and Bruce Dunlevie as the stockholder
representative for the stockholders of Matrix Semiconductor, Inc.(1) |
|
|
|
2.2
|
|
Agreement and Plan of Merger, dated as of July 30, 2006, by and among SanDisk Corporation, Project
Desert, Ltd. and msystems Ltd.(2) |
|
|
|
3.1
|
|
Restated Certificate of Incorporation of the Registrant.(3) |
|
|
|
3.2
|
|
Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated
December 9, 1999.(4) |
|
|
|
3.3
|
|
Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated May 11,
2000.(5) |
|
|
|
3.4
|
|
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant
dated May 26, 2006.(6) |
|
|
|
3.5
|
|
Amended and Restated Bylaws of the Registrant, as amended to date.(7) |
|
|
|
3.6
|
|
Certificate of Designations for the Series A Junior Participating Preferred Stock, as filed with the
Delaware Secretary of State on October 14, 1997.(8) |
|
|
|
3.7
|
|
Amendment to Certificate of Designations for the Series A Junior Participating Preferred Stock, as
filed with the Delaware Secretary of State on September 24, 2003.(9) |
|
|
|
4.1
|
|
Reference is made to Exhibits 3.1, 3.2, 3.3, and 3.4.(3), (4), (5), (6) |
|
|
|
4.2
|
|
Rights Agreement, dated as of September 15, 2003, between the Registrant and Computershare Trust
Company, Inc.(9) |
|
|
|
4.3
|
|
Amendment No. 1 to Rights Agreement, dated as of November 6, 2006, by and between the Registrant and
Computershare Trust Company, Inc.(10) |
|
|
|
10.1
|
|
Form of Second Amendment to Change of Control Agreement for those officers of the Registrant who are
party to such Agreement.(*) |
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(*) |
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(*) |
|
|
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.(*) |
|
|
|
32.2
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.(*) |
|
|
|
* |
|
Furnished herewith. |
|
(1) |
|
Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the
SEC on January 20, 2006. |
|
(2) |
|
Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K/A filed with the
SEC on August 1, 2006. |
|
(3) |
|
Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-1 (No.
33-96298). |
|
(4) |
|
Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended June 30,
2000. |
|
(5) |
|
Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-3 (No.
333-85686). |
|
(6) |
|
Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the
SEC on June 1, 2006. |
|
(7) |
|
Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the
SEC on July 27, 2007. |
|
(8) |
|
Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K/A dated April 18,
1997. |
|
(9) |
|
Previously filed as an Exhibit to the Registrant’s Registration Statement on Form 8-A dated
September 25, 2003. |
|
(10) |
|
Previously filed as an Exhibit to the Registrant’s Registration Statement on Form 8-A/A dated
November 8, 2006. |
75