As filed with the Securities and Exchange Commission on May 23, 2002
Registration No. 333-85686
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SANDISK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0191793
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
140 Caspian Court
Sunnyvale, California 94089
(408) 542-0500
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Dr. Eli Harari
President and Chief Executive Officer
SanDisk Corporation
140 Caspian Court
Sunnyvale, California 94089
(408) 542-0500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Timothy R. Curry, Esq.
Megan R. Comport, Esq.
Brobeck, Phleger & Harrison LLP
2000 University Avenue
East Palo Alto, CA 94303
Telephone: (650) 331-8000
Facsimile: (650) 331-8100
Approximate date of commencement of the proposed sale to the public: From
time to time after this registration statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
----------------
The registrant hereby undertakes to amend this registration statement on
such date or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. The prospectus is not an offer
to sell these securities, and is not soliciting an offer to buy these
securities, in any state where the offer or sale is not permitted.
================================================================================
Subject to completion, dated May 23, 2002
Preliminary Prospectus
[SanDisk Logo]
SanDisk Corporation
$150,000,000
(Aggregate Principal Amount)
4 1/2% Convertible Subordinated Notes due 2006
and the Common Stock Issuable Upon Conversion of the Notes
We issued the notes in private placements in December 2001 and January
2002. This prospectus will be used by selling securityholders to resell their
notes and the common stock issuable upon conversion of their notes. We will not
receive any proceeds from this offering.
The notes are convertible into shares of our common stock at a rate of
54.2535 shares per each $1,000 principal amount of notes, subject to adjustment
as described in this prospectus. In addition, at certain times and under certain
circumstances, we may redeem the notes at our election or at the election of the
holders of the notes. You can find a more extensive description of the notes
beginning on page 24. In the event of a fundamental change, the holders may
require us to repurchase any notes held by them.
We will pay interest on the notes on May 15 and November 15 of each year,
beginning on May 15, 2002. The notes are not secured and are subordinated to all
of our present and future senior indebtedness.
The notes are eligible for trading on the Private Offerings, Resales and
Trading through Automated Linkages, or PORTAL, Market.
Our common stock is quoted on the Nasdaq National Market under the symbol
"SNDK." On May 22, 2002, the last reported sale price for our common stock was
$14.71 per share. The securities offered by this prospectus may be offered by
the selling securityholders in negotiated transactions or otherwise, at
negotiated prices or at the market prices prevailing at the time of sale.
The securities offered hereby involve a high degree of risk. See "Risk
Factors" beginning on page 4 of this prospectus to read about certain
factors you should consider before purchasing these securities.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
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The date of this prospectus is May______, 2002.
TABLE OF CONTENTS
Page
----
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS ..................... i
WHERE YOU CAN FIND MORE INFORMATION .................................. i
SUMMARY .............................................................. 1
SANDISK CORPORATION .................................................. 1
THE NOTES ............................................................ 2
RATIO OF EARNINGS TO FIXED CHARGES ................................... 3
RISK FACTORS ......................................................... 4
USE OF PROCEEDS ...................................................... 24
DIVIDEND POLICY ...................................................... 24
DESCRIPTION OF THE NOTES ............................................. 24
DESCRIPTION OF CAPITAL STOCK ......................................... 36
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS ............. 39
SELLING SECURITYHOLDERS .............................................. 45
PLAN OF DISTRIBUTION ................................................. 47
LEGAL MATTERS ........................................................ 48
EXPERTS .............................................................. 48
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes and incorporates by reference forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, the Securities Act, and Section 21E of the Securities Exchange Act of
1934, as amended, the Exchange Act. These statements involve known and unknown
risks, uncertainties, and other factors that may cause our or our industry's
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, those listed under the caption "Risk Factors" and
elsewhere in this prospectus. In some cases, you can identify forward-looking
statements by terminology such as may, will, should, intend, expect, plan,
anticipate, believe, estimate, predict, potential, or continue, the negative of
such terms or other comparable terminology, or other wording indicating future
results or expectations.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance, or achievements. We do not assume responsibility for the
accuracy and completeness of the forward-looking statements. We do not intend to
update any of the forward-looking statements after the date of this prospectus
to conform them to actual results.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
materials that we have filed with the Securities and Exchange Commission at the
following Securities and Exchange Commission public reference rooms: 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549; 233 Broadway, Room 1024 New
York, New York 10279; 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the public reference rooms. Our Securities and Exchange
Commission filings are also available to the public on the Securities and
Exchange Commission's Internet website at http://www.sec.gov.
Our common stock is quoted on the Nasdaq National Market under the symbol
"SNDK," and our Securities and Exchange Commission filings can also be read at
the following Nasdaq address: Nasdaq Operations 1735 K Street, N.W. Washington,
D.C. 20006.
This prospectus provides you with a general description of the notes and
common stock being registered. This prospectus is part of a registration
statement that we have filed with the SEC. To see more detail, you should read
the exhibits and schedules filed with, or incorporated by reference into, out
registration statement.
i
We incorporate by reference into this prospectus the documents listed below
and any future filings we make with the Securities and Exchange Commission under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, including any filings
after the date of this prospectus, until this offering is completed. The
information incorporated by reference is an important part of this prospectus.
Any statement in a document incorporated by reference into this prospectus will
be deemed to be modified or superseded to the extent a statement contained in
(1) this prospectus or (2) any other subsequently filed document that is
incorporated by reference into this prospectus modifies or supersedes such
statement.
o Our Annual Report on Form 10-K for our fiscal year ended December 31,
2001 and related exhibits.
o Our Quarterly Report on Form 10-Q for our fiscal quarter ended March
31, 2002.
o The description of our common stock on Form 8-A filed on September 8,
1995, including any amendments or reports filed for the purpose of
updating that description.
o The description of our Shareholder Rights Plan on Form 8-A filed on
April 28, 1997, including any amendments or reports filed for the
purpose of updating that description.
You may request a copy of these filings, at no cost, by writing to us at
the following address or by telephoning us at (408) 542-0500 between the hours
of 9:00 a.m. and 5:00 p.m., Pacific time: Investor Relations, SanDisk
Corporation, 140 Caspian Court, Sunnyvale, California 94089.
ii
SUMMARY
This summary contains basic information about us and this offering. Because
it is a summary, it does not contain all of the information that you should
consider before investing. You should read this entire prospectus carefully,
including the section entitled "Risk Factors" and our financial statements and
the notes thereto incorporated by reference in this prospectus. All references
to "SanDisk," "we," "our" or "us" refer solely to SanDisk Corporation and its
subsidiaries and not to the selling securityholders.
SANDISK CORPORATION
We design, manufacture and market flash memory storage products that are
used in a wide variety of electronic systems. We have designed our flash memory
storage solutions to address the storage requirements of emerging applications
in the consumer electronics and industrial/communications markets. Our products
are used in a number of rapidly growing consumer electronics applications, such
as digital cameras, personal digital assistants, or PDAs, portable digital music
players, digital video recorders and smart phones, as well as in industrial and
communications applications, such as communications routers and switches and
wireless communications base stations.
In recent years, digital computing and processing have expanded beyond the
boundaries of desktop computer systems to include a broader array of consumer
electronic, industrial and communications products. These new devices include
digital cameras, PDAs, highly portable computers, portable music players,
digital video recorders, wireless base stations, network computers,
communication routers and switches, cellular telephones, mobile communication
systems, handheld data collection terminals, medical monitors and other
electronic systems. These emerging applications have storage requirements that
are not well addressed by traditional storage solutions. These requirements
include small form factor size, high reliability, low power consumption and the
capability to withstand high levels of shock and vibration and extreme
temperature fluctuations. Because storage products based on flash semiconductor
technology can meet these requirements, these devices and systems represent
market opportunities for flash storage systems.
Our flash memory storage solution, known as system flash or data storage
flash, addresses the needs of many emerging applications in the consumer
electronics and industrial/communications markets. Since our inception, we have
been actively involved in all aspects of flash memory process development, chip
design, controller development and system-level integration, as well as the
creation and promotion of new flash card industry standards, to ensure the
creation of fully-integrated, broadly interoperable products that are compatible
with both existing and new system platforms. We believe our core technical
competencies are in high-density flash memory process and design, controller
design, system-level integration, compact packaging and low-cost system testing.
To achieve compatibility among various electronic platforms, regardless of the
host processor or operating system used, we have developed new capabilities in
flash memory chip design and created intelligent controllers. We have also
developed an architecture that can leverage advances in flash memory process
technology to ensure a scaleable, high-yield, cost-effective and highly reliable
manufacturing process. Our CompactFlash, MultiMediaCard, Secure Digital card and
FlashDisk products are portable, have an on-board controller and use file
formats that are forward- and backward-compatible. All of our flash data storage
products can store almost any type of digital information, including voice,
e-mail, music, video clips and digital images.
Our products described above, including removable CompactFlash cards,
SmartMedia cards, FlashDisk cards, MultiMediaCards, Secure Digital cards, Memory
Stick, and Ultra CompactFlash cards and embedded Flash ChipSets, NAND Flash
Components and FlashDrives, have storage capacities ranging from 8 megabytes to
2 gigabytes. During 2001, we completed a technology transition from NOR flash
manufactured for us by UMC in Taiwan to NAND flash manufactured for us under our
FlashVision, L.L.C., or FlashVision, joint venture with Toshiba. In fiscal 2001,
our customers included Arrow Electronics, Inc., Avnet Electronics, Bell
Microproducts, Inc., Best Buy Company, Inc., Canon, Inc., Circuit City Stores,
Inc., Costco Wholesale Corporation, Eastman Kodak Company, Ericsson,
Hewlett-Packard Company, Ingram Micro, Inc., Matsushita Electric Industrial Co.,
Ltd., Mitsubishi Plastic Co. Ltd., Nikon Corporation, Office Depot, Inc.,
Siemens AG, Staples, Inc., Thomson Multimedia, Inc., and Wynit, Inc., among
others. In addition, we currently license our technologies to several companies
including Hitachi Ltd., Intel Corporation, Lexar Media, Incorporated, Matsushita
Electronics
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Corporation, Samsung Electronics Company Ltd., Sharp Electronics Corporation,
SmartDisk Corporation, Silicon Storage Technologies, Incorporated, Sony
Corporation, TDK Corporation and Toshiba Corporation.
Corporate Information
We were incorporated in Delaware in June 1988 under the name SunDisk
Corporation and changed our name to SanDisk Corporation in August 1995. Our
principal executive offices are located at 140 Caspian Court, Sunnyvale,
California 94089, and our telephone number is (408) 542-0500. Our website
address is www.sandisk.com. The information contained on our website is not a
part of this prospectus.
THE NOTES
Securities Offered ........................... $150,000,000 principal amount of 4 1/2% Convertible
Subordinated Notes due 2006.
Maturity Date ................................ November 15, 2006.
Interest ..................................... 4 1/2% per annum on the principal amount, payable
semiannually in arrears in cash on May 15 and November
15 of each year, beginning May 15, 2002.
Conversion ................................... You may convert the notes into shares of our common
stock at a conversion rate of 54.2535 shares per $1,000
principal amount of notes, subject to adjustment, prior
to the final maturity date.
Subordination ................................ The notes are subordinated to all of our existing and
future senior indebtedness and are effectively
subordinated to all liabilities (including trade
payables) of our subsidiaries. As of March 31, 2002 we had
guarantee obligations of $148.8 million, that constituted
senior indebtedness under the notes, as described in this
prospectus, that were repaid in April 2002 and no other
senior indebtedness or material subsidiary indebtedness
outstanding. Neither we nor any of our subsidiaries are
prohibited from incurring debt, including senior indebtedness,
under the indenture.
Sinking Fund ................................. None.
Fundamental Change ........................... If a fundamental change (as described under "Description
of Notes--Redemption at Option of the Holder") occurs
prior to maturity, you may require us to purchase all or
part of your notes at a redemption price equal to 100% of
their principal amount, plus accrued and unpaid interest.
Redemption ................................... We may redeem any of the notes on or after November 17,
2004, by giving you at least 30 days' notice at the prices
specified under "Description of Notes--Optional Redemption
by SanDisk."
Nasdaq National Market Symbol ................ SNDK.
2
RATIO OF EARNINGS TO FIXED CHARGES
The following summary represents our computation of the ratio of earnings
to fixed charges (unaudited) for the respective periods:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1998 1999 2000 2001
---------- --------- ---------- --------- -------
Ratio of earnings to
fixed charges(1) 61.8x 37.0x 64.7x 622.7x --
------------------
(1) Computed by dividing (a) earnings before taxes adjusted for fixed charges
by (b) fixed charges, which includes interest expense plus the portion of
rent expense under operating leases deemed by us to be representative of
the interest factor, plus amortization of debt issuance costs. We would
have to generate additional earnings of $444.0 million for the year ended
December 31, 2001 to achieve a ratio of 1:1.
3
RISK FACTORS
You should carefully consider the risks described below and in our Annual
Report on Form 10-K for the year ended December 31, 2001 and our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002 incorporated into this
prospectus by reference before making an investment decision. The risks
described below and in our Annual Report on Form 10-K for the year ended
December 31, 2001 and our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002 incorporated into this prospectus by reference are not the only
ones facing our company. 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", "estimates," or other wording
indicating future results or expectations. Forward-looking statements are
subject to risks and uncertainties. Our actual results may differ materially
from the results discussed in forward-looking statements. Factors that could
cause our actual results to differ materially include, but are not limited to,
those discussed below, and elsewhere in this prospectus. Our business, financial
condition or results of operations could be materially adversely affected by any
of these risks. The trading price of the notes and our common stock could
decline due to any of these risks, and you may lose all or part of your
investment. We undertake no obligation to revise or update any forward-looking
statements to reflect any event or circumstance that may arise after the date of
this prospectus.
Risks Related to Our Business
Our operating results may fluctuate significantly, which may adversely
affect our operating results 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 is a result of a variety of factors, including the following:
o unpredictable or declining demand for our products;
o decline in the average selling prices of our products due to
competitive pricing pressures;
o seasonality in sales of our products;
o natural disasters affecting the countries in which we conduct our
business, particularly Japan, where our sole source of NAND flash
memory wafer capacity will be located and, to a lesser extent, Taiwan,
China and the United States;
o excess capacity of flash memory from our competitors and our own flash
wafer capacity, which may continue the acceleration in the decline in
our average selling prices;
o difficulty of forecasting and management of inventory levels;
particularly, building a large inventory of unsold product due to
non-cancelable contractual obligations to purchase materials such as
flash wafers, controllers, printed circuit boards and discrete
components;
o expenses related to obsolescence or devaluation of unsold inventory;
o adverse changes in product and customer mix;
o slower than anticipated market acceptance of new or enhanced versions
of our products;
o competing flash memory card standards, which displace the standards
used in our products;
o changes in our distribution channels;
o fluctuations in our license and royalty revenue;
o fluctuations in product costs, particularly due to fluctuations in
manufacturing yields and utilization;
o availability of sufficient silicon wafer foundry capacity to meet
customer demand;
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o shortages of components such as capacitors and printed circuit boards
required for the manufacturing of our products;
o significant yield losses, which could affect our ability to fulfill
customer orders and could increase our costs;
o manufacturing flaws affecting the reliability, functionality or
performance of our products, which could increase our product
costs, reduce demand for our products or require product recalls;
o increased research and development expenses;
o exchange rate fluctuations, particularly the U.S. Dollar to Japanese
Yen exchange rate;
o changes in general economic conditions, particularly in Japan and the
European Union; and
o reduced sales to our retail customers if consumer confidence declines
or economic conditions worsen.
Difficulty of estimating future silicon wafer needs may cause us to
overestimate our needs and build excess inventories, or underestimate our needs
and have a shortage of silicon wafers, either of which will harm our financial
results. When we order silicon wafers from our foundries, we have to estimate
the number of silicon wafers needed to fill product orders several months into
the future. If we overestimate this number, we will build excess inventories,
which could harm our gross margins and operating results. On the other hand, if
we underestimate the number of silicon wafers needed to fill product orders, we
may be unable to obtain an adequate supply of wafers, which could harm our
product revenues. Because the majority of our CompactFlash, SmartMedia card,
MultiMediaCard and Secure Digital card, are sold into emerging consumer markets,
it has been difficult to accurately forecast future sales. In addition, bookings
visibility remains low due to the current economic uncertainty in our markets. A
substantial majority of our quarterly sales are currently, and have historically
been, from orders received and fulfilled in the same quarter, which makes
accurate forecasting very difficult. Our product order backlog may fluctuate
substantially from quarter to quarter.
We depend on third party foundries for silicon wafers and any shortage or
disruption in our supply from these sources will reduce our revenues, earnings
and gross margins. All of our flash memory card products require silicon wafers,
the majority of which are currently supplied by Toshiba's wafer facility at
Yokkaichi, Japan, as well as UMC in Taiwan. After the restructuring of our
FlashVision business, all of our NAND flash memory wafers are now supplied by
Toshiba's Yokkaichi wafer facilities. If Toshiba, FlashVision and UMC are
uncompetitive or are unable to satisfy these requirements, our business,
financial condition and operating results may suffer. Any disruption in supply
from these sources due to natural disaster, power failure, labor unrest or other
causes could significantly harm our business, financial condition and results of
operations.
Under the terms of our wafer supply agreements with Toshiba, FlashVision
and UMC, we are obligated to provide a rolling forecast of anticipated purchase
orders for the next six calendar months. Generally, the estimates for the first
three months of each forecast are binding commitments. The estimates for the
remaining months may only be changed by a certain percentage from the previous
month's forecast. This limits our ability to react to fluctuations in demand for
our products. For example, if customer demand falls below our forecast and we
are unable to reschedule or cancel our wafer orders, we may end up with excess
wafer inventories, which could result in higher operating expenses and reduced
gross margins. Conversely, if customer demand exceeds our forecasts, we may be
unable to obtain an adequate supply of wafers to fill customer orders, which
could result in dissatisfied customers, lost sales and lower revenues. If we are
unable to obtain scheduled quantities of wafers with acceptable price and yields
from any foundry, our business, financial condition and results of operations
could be harmed. At the beginning of the second quarter of 2002, the demand for
foundry wafers began to grow and the leading foundries started to allocate their
capacity as well as extend delivery lead-times and raise prices. If this trend
continues, we may encounter shortages in our supply of wafers and we may also
incur higher manufacturing cost for some of our products, which would make us
unable to meet our customer demand and adversely impact our product gross
margins.
Variability of expense levels and significant fixed costs will harm our
business if our revenues do not exceed our operating expenses. Despite the
significant actions we took in 2001 to align expense levels with decreased
revenues, we may need to hire additional personnel in certain business areas or
otherwise increase our operating expenses in the future to support our sales and
marketing efforts and research and development activities. We have significant
fixed costs and we cannot readily reduce these expenses over the short term. If
our revenues do not increase proportionately to our operating expenses, or if
revenues decrease or do not meet expectations for a particular period, our
business, financial condition and results of operations will be harmed.
Variability of average selling prices and gross margins resulting from
changes in our product mix and price reductions for certain of our products may
cause our gross margins and net profitability to suffer. Our product mix varies
quarterly, which affects our overall average selling prices and gross margins.
Our CompactFlash, SmartMedia card, MultiMediaCard and Secure Digital card
products, which currently represent the majority of our product revenues, have
lower average selling prices and gross margins than our higher capacity
FlashDisk and FlashDrive products. We believe that sales of CompactFlash,
SmartMedia card, MultiMediaCard and Secure Digital card products will continue
to represent a significant percentage of our product revenues as consumer
applications, such as digital cameras and digital music players, become more
popular. Flash data storage markets are intensely competitive, and price
reductions for our products are necessary to meet consumer price points. Due to
continued oversupply in flash memory foundry capacity throughout 2001 and the
economic slow-down in 2001, the decline in our average selling price per
megabyte of 50% was much more severe than the 22% decrease we experienced in
2000 and price declines for our products could continue to be significant in the
next several quarters. If we cannot reduce our product manufacturing costs in
future periods to offset further price reductions, our gross margins and net
profitability will suffer.
In the fourth quarter of 2001, we commenced retail sales of Memory Stick
cards supplied to us under an OEM supply and purchase agreement with Sony. We
cannot assure you that the gross margins on the sale of Memory Stick products
will be comparable to the gross margins from the sale of our other products.
License fees and royalties from our patent cross license agreements are
variable and fluctuate from period to period making it difficult to predict our
royalty revenues. Our intellectual property strategy consists of cross-licensing
our patents to other manufacturers of flash products. Under these arrangements,
we earn license fees and royalties on individually negotiated terms. The timing
of revenue recognition from these payments is dependent on the terms of each
contract and on the timing of product shipments by the third parties. Our income
from patent licenses and
5
royalties can fluctuate significantly from quarter to quarter. A substantial
portion of this income comes from royalties based on the actual sales by our
licensees. Given the current market outlook for the second quarter of 2002 and
beyond, sales of licensed flash products by our licensees may be substantially
lower than the corresponding sales in recent quarters, which may cause a
substantial drop in our royalty revenues. Because these revenues have higher
gross margins than our product revenues, our overall gross margins and net
income (loss) fluctuate significantly with changes in license and royalty
revenues. We cannot assure you that our existing licensees will renew their
licenses upon expiration, or that we will be successful in signing new licensees
in the future.
Our selling prices may decline due to excess capacity in the market for
flash memory products and if we cannot reduce our manufacturing costs to offset
these price declines, our gross margins and net profitability will be harmed
Throughout 2001, worldwide flash memory supply exceeded customer demand,
causing excess supply in the markets for our products and significant declines
in average selling prices. If this situation continues throughout 2002, price
declines for our products could continue to be significant. If we cannot reduce
our product manufacturing costs to offset these reduced prices, our gross
margins and net profitability will be adversely impacted.
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
In 2001 and the first quarter of 2002, we continued to receive more product
revenue and ship more units of products for consumer electronics applications,
including digital cameras and PDAs, compared to other applications. The consumer
market is intensely competitive and is more price sensitive than our other
target markets. In addition, we must spend more on marketing and promotion in
consumer markets to establish brand name recognition and drive demand.
A significant portion of our sales to the consumer electronics market are
made to retailers and through distributors. Sales through these channels
typically include rights to return unsold inventory. As a result, we do not
recognize revenue until after the product has been sold through to the end user.
If our distributors and retailers are not successful in this market, there could
be substantial product returns, which would harm our business, financial
condition and results of operations.
There is seasonality in our business which may impact our product sales,
particularly in the fourth and first quarters of the fiscal year
Sales of our products in the consumer electronics market may be subject to
seasonality. As a result, product sales may be impacted by seasonal purchasing
patterns with higher sales generally occurring in the fourth quarter of each
year followed by declines in the first quarter of the following year. In
addition, in the past we have experienced a decrease in orders in the first
quarter from our Japanese OEM customers primarily because most customers in
Japan operate on a fiscal year ending in March and prefer to delay purchases
until the beginning of their next fiscal year.
In transitioning to new processes and products, we face production and
market acceptance risks which have caused, and may in the future cause,
significant product delays that could harm our business
General. Successive generations of our products have incorporated
semiconductor devices with greater memory capacity per chip. Two important
factors have enabled us to decrease the cost per megabyte of our flash data
storage products: the development of higher capacity semiconductor devices and
the implementation of smaller geometry manufacturing processes. A number of
challenges exist in achieving a lower cost per megabyte, including:
o lower yields often experienced in the early production of new
semiconductor devices;
o manufacturing flaws with new processes including manufacturing
processes at our subcontractors which may be extremely complex;
o problems with design and manufacturing of products that will
incorporate these devices, which may result in delays or product
recalls; and
o production delays.
Because our products are complex, we periodically experience 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.
6
New products based on NAND MLC flash technology may encounter production
delays and problems impacting production reliability and yields, which may cause
our revenues and gross margins to decline. We have developed new products based
on NAND MLC (Multi Level Cell) flash technology, a flash architecture designed
to store two bits in each flash memory cell. High density flash memory, such as
NAND MLC flash, is a complex technology that requires strict manufacturing
controls and effective test screens. Problems encountered in the shift to volume
production for new flash products could impact both reliability and yields, and
result in increased manufacturing costs and reduced product availability. NAND
MLC technology is highly complex and has not previously been successfully
commercialized. We may not be able to manufacture future generations of NAND MLC
products with yields sufficient to result in lower costs per megabyte. If we are
unable to bring future generations of high density flash memory into full
production as quickly as planned or if we experience unplanned yield or
reliability problems, our revenues and gross margins will decline.
The Secure Digital card standard has been slow to develop as a major new
standard and may not be widely adopted by consumers. We, along with Matsushita
and Toshiba, jointly developed and jointly promote the Secure Digital card. The
Secure Digital card incorporates advanced security and copyright protection
features required by the emerging markets for the electronic distribution of
music, video and other copyrighted works. Although the Secure Digital card is
designed specifically to address the copy protection rights of the content
providers, there can be no assurance that these content providers will find
these measures sufficient or will agree to support them. Furthermore, despite
numerous design wins, the Secure Digital card standard has been slow to develop
as a major new standard and we cannot assure you that consumers will widely
adopt the Secure Digital card. Conversely, broad acceptance of our Secure
Digital card by consumers will likely reduce demand for our MultiMediaCard and
CompactFlash card products. During 2001, we experienced a substantial decline in
sales of MultiMediaCards which was not matched by a corresponding increase in
sales of Secure Digital cards. See "-The success of our business depends on
emerging markets and new products."
Memory Stick products sold by us may not generate substantial revenues for
us or contribute to our gross margins. In September 2001, we signed an agreement
with Sony involving their Memory Stick card format. Under the agreement, Sony
will supply us a portion of their Memory Stick output for us to resell under our
brand name. Sony has also agreed to purchase a portion of their NAND memory chip
requirements from us provided that we meet market competitive pricing for these
components. In addition, we and Sony agreed to co-develop and co-own the
specifications for the next generation Memory Stick. Each of us will have all
rights to manufacture and sell this new generation Memory Stick. We cannot
assure you that this new business will generate substantial revenues or gross
margin contributions for us. Consumers may prefer to purchase the Sony brand
Memory Stick over our SanDisk brand Memory Stick. Furthermore, the second
generation Memory Stick is still in the early stages of development and is not
expected to generate significant sales before 2003. We cannot assure you that
the second generation Memory Stick will achieve commercial success in the
marketplace when it is introduced.
We are transitioning our technology to NAND-based products which requires
us to significantly increase our inventory of NAND flash chips and if these
products do not achieve customer acceptance, may result in inventory write offs
that adversely affect our business. The transition to NAND-based products is
very complex, and requires good execution from our manufacturing, technology,
quality, marketing, and sales and customer support staffs. If the current soft
market conditions continue throughout 2002 and beyond, or if we are unable for
any reason to achieve customer acceptance of our card products built with these
NAND flash chips, we will experience a significant increase in our inventory, as
we are contractually obligated, and will continue to be obligated after the
restructuring of our FlashVision business, to purchase half of FlashVision's
NAND wafer production output. This may result in inventory write offs and have a
material adverse effect on our business, results of operations and financial
condition. See "-Our investment in new flash memory wafer production may result
in increased expenses and fluctuations in operating results."
In the third quarter of 2001, we began to purchase controller wafers from
UMC and are continuing development of advanced flash memory technology utilizing
the 0.15 micron technology design rules at UMC.
7
Our FlashVision joint venture with Toshiba makes us vulnerable to certain
risks, including potential inventory write-offs, disruptions or shortages of
supply, limited ability to react to fluctuations in product demand, direct
competition with Toshiba, and guarantee obligations, any of which could
substantially harm our business and financial condition
On June 30, 2000, we closed a transaction with Toshiba providing for the
joint development and manufacture of 512 megabit and 1 gigabit flash memory
chips and Secure Digital card controllers. As a part of this transaction, we and
Toshiba formed and contributed initial funding to FlashVision, a joint venture
to equip and operate a silicon wafer manufacturing line at Dominion
Semiconductor in Virginia. We and Toshiba will each separately market and sell
any 512 megabit and 1 gigabit flash memory chips developed and manufactured by
our joint venture. Accordingly, we will compete directly with Toshiba for sales
of these advanced chips.
We and Toshiba have restructured our FlashVision business and transferred
certain assets to Toshiba's Yokkaichi fabrication facility in Japan, which may
cause production delays and reduce NAND wafer supply available to us, which
could adversely impact our operating results. In April 2002, we and Toshiba
finalized certain of the agreements related to the restructuring of our
FlashVision business and the transfer of its operations to Toshiba's Yokkaichi
fabrication facility in Japan. Under the terms of the agreements, Toshiba will
transfer the FlashVision owned and leased NAND production tool-set from Dominion
to Yokkaichi and has agreed to bear substantially all of the costs associated
with the equipment transfers, which are expected to be completed in 2002. The
transfer and qualification of the advanced fabrication equipment from Dominion,
Virginia to Yokkaichi, Japan is a highly complex operation. It is quite possible
that we may encounter difficulties and delays. Although the additional costs
associated with potential delays will be borne substantially by Toshiba, our
results of operations may suffer if this equipment transfer is not completed on
time and production does not commence at Yokkaichi as planned, thereby reducing
the total NAND production capacity available to us.
In addition, we incurred substantial start up expenses related to the
hiring and training of manufacturing personnel, facilitizing the clean room and
installing equipment at the Dominion fabrication facility. Although as a part of
our agreement with Toshiba to restructure our FlashVision business we will
recapture substantially all of the Dominion start-up expenses incurred by us, we
will incur similar start-up expenses in connection with the new Yokkaichi
fabrication facility. In addition, we may not achieve the expected cost benefits
of this transition until the second half of 2002, if at all. We will incur
start-up costs and pay our share of ongoing operating activities even if we do
not utilize our full share of the new Yokkaichi output.
We face challenges and possible delays relating to the expected shift in a
portion of our production at Yokkaichi to 0.13 micron NAND, which could
adversely affect our operating results. We were using the new production
capacity at Dominion to manufacture NAND flash memory wafers with minimum
lithographic feature size of 0.16 micron. Late in 2002, we expect to start
shifting a portion of our production output at Yokkaichi to 0.13 micron NAND.
Such minimum feature sizes are considered today to be among the most advanced
for mass production of silicon wafers. Therefore, it is difficult to predict how
long it will take to achieve adequate yields, reliable operation, and
economically attractive product costs based on our new designs. Introduction of
new feature sizes and technologies are subject to the same risks and
uncertainties after the restructuring of our FlashVision business. We currently
rely and will continue to rely on Toshiba to address these challenges. With our
investments in the Dominion facility and in Toshiba's Yokkaichi facility after
the restructuring of our FlashVision business, we are now and will continue to
be exposed to the adverse financial impact of any delays or manufacturing
problems associated with wafer production lines. Any problems or delays in
volume production at the Yokkaichi fabrication facility could adversely impact
our operating results in 2002 and beyond.
8
All of our NAND flash memory wafers are supplied by Toshiba's Yokkaichi
facilities and any disruption in this supply will reduce our revenues, earnings
and gross margins. Until the transition of the Dominion tool-set is completed,
we will rely solely on Toshiba's current Yokkaichi fabrication facility to
supply all of our NAND wafers. If we experience increased demand during the
transition period, we may not be able to procure a sufficient number of wafers
from Toshiba's current Yokkaichi fabrication facility to meet this demand, which
would harm our business and operating results. Even if FlashVision establishes
the new Yokkaichi fabrication facility, the Yokkaichi fabrication facilities may
not produce satisfactory quantities of wafers with acceptable prices,
reliability and yields. Any failure in this regard would be particularly harmful
to our business, financial condition and results of operations, as we will not
have an alternate source of supply. In addition, any disruption in supply from
the Yokkaichi fabrication facility due to natural disaster, power failure, labor
unrest or other causes could significantly harm our business, financial
condition and results of operations. Moreover, we have no experience in
operating a wafer manufacturing line and we intend to rely on the existing
manufacturing organizations at the Yokkaichi fabrication facilities. The new
Yokkaichi fabrication facility will be tasked to "copy exactly" the same
manufacturing flow employed by Toshiba in its existing Yokkaichi fabrication
facility, but they may not be successful in manufacturing these advanced NAND
flash products on a cost-effective basis or at all. If Toshiba and FlashVision
are uncompetitive, are unable to satisfy our wafer supply requirements, our
business, financial condition and results of operations would be harmed.
Our obligations under our wafer supply agreements with Toshiba and
FlashVision, or failure to obtain customer acceptance, may result in excess
inventories and lead to inventory write offs, and any technical difficulties or
manufacturing problems may result in shortages in supply, either of which would
adversely affect our business. Under the terms of our wafer supply agreements
with Toshiba, we are obligated to purchase half of FlashVision's NAND wafer
production output and we will also purchase NAND wafers from Toshiba's current
Yokkaichi fabrication facility on a foundry relationship basis. If the current
soft market conditions continue throughout 2002 and beyond, or if we are unable
for any reason to achieve customer acceptance of our card products built with
these NAND flash chips, we will experience a significant increase in our
inventory, which may result in inventory write offs and harm our business,
results of operations and financial condition. Apart from our commitment to
purchase FlashVision wafer output from Yokkaichi after the restructuring, under
our foundry relationship with Toshiba, we order NAND wafers under purchase
orders at market prices that cannot be cancelled. If we place purchase orders
with Toshiba and our business condition deteriorates, we may end up with excess
inventories of NAND wafers, which could harm our business and financial
condition. Should customer demand for NAND flash products be less than our
available supply, we may suffer from reduced revenues and increased expenses,
and increased inventory of unsold NAND flash wafers, which could adversely
affect our operating results.
On the other hand, under the terms of our foundry relationship with Toshiba
and wafer supply agreements with FlashVision, we are obligated to provide a
rolling forecast of anticipated purchase orders for the next six calendar
months, which are difficult to estimate. Generally, the estimates for the first
three months of each forecast are binding commitments. The estimates for the
remaining months may only be changed by a certain percentage from the previous
month's forecast. This limits our ability to react to fluctuations in demand for
our products. At the beginning of the second quarter of 2002, the demand for
foundry wafers began to grow and the leading foundries started to allocate their
capacity as well as extend delivery lead-times and raise prices. If this trend
continues, we may encounter shortages in our supply of wafers and we may also
incur higher manufacturing cost for some of our products, which would make us
unable to meet our customer demand and adversely impact our product gross
margins.
In addition, in order for us to sell NAND based CompactFlash,
MultiMediaCards and Secure Digital cards, we have been developing new
controllers, printed circuit boards and test algorithms because the architecture
of NAND flash is significantly different from our prior NOR flash designs. Any
technical difficulties or delays in the development of these elements could
prevent us from taking advantage of the available NAND output and could
adversely affect our results of operations. See "-Our investment in new flash
memory wafer production may result in increased expenses and fluctuations in
operating results."
9
We may have guarantee or indemnification obligations on FlashVIsion lease
amounts under a permanent replacement facility. Under June 2000 our joint
venture agreement with Toshiba, we agreed to guarantee one-half of all
FlashVision lease amounts up to a maximum guarantee of $175.0 million. As of
March 31, 2002, we had guarantee obligations in the amount of $148.8 million in
favor of ABN AMRO Bank N.V., or ABN AMRO, as agent for a syndicate of financial
institutions, on the equipment lease lines to equip FlashVision. This guarantee
constituted senior indebtedness under the Notes. In March 2002, FlashVision
exercised its right of early termination under the lease facility and repaid all
amounts outstanding thereunder in April 2002. FlashVision completed interim
financing in the form of a bridge loan from Toshiba in April 2002 and we
currently anticipate that FlashVision will finalize a new equipment lease
arrangement by the end of May 2002. We may be required to guarantee or indemnify
Toshiba against our portion of any obligations incurred by FlashVision under any
new equipment lease arrangement.
Our $75.0 million investment in Tower Semiconductor is subject to certain
inherent risks, including those associated with certain Israeli regulatory
requirements, political unrest and financing difficulties, which could harm our
business and financial condition
On July 4, 2000, we entered into a share purchase agreement to make a $75.0
million investment in Tower Semiconductor, or Tower, in Israel, representing
approximately 10% ownership of Tower. The investment is subject to the
completion of certain milestones relative to the construction of a new wafer
fabrication facility by Tower. During 2001, Tower satisfied the closing
conditions of the share purchase agreement and completed the first two
milestones. Under the terms of the agreement, we invested $42.5 million to
purchase 1,599,931 ordinary shares and obtain wafer credits of $21.4 million. In
September 2001, we agreed to convert 75% of our wafer credits to equity at a
price of $12.75 per share and received an additional 1,284,007 ordinary shares.
Due to the continued weakness in the semiconductor industry, the value of our
Tower investment and remaining wafer credits had declined to $16.6 million on
December 31, 2001. It was determined that this decline was other than temporary,
as defined by generally accepted accounting principles and a loss of $20.6
million was recorded in the second half of 2001. In addition, we recognized a
loss of $5.5 million on our exchange of 75% of our Tower wafer credits for
ordinary shares. These losses totaling $26.1 million, or $15.8 million net of
tax benefit, were recorded in loss on investment in foundry in 2001.
In March 2002, we modified our share purchase agreement with Tower by
agreeing to advance the payments for the third and fourth milestones. The
payment for the third milestone of $11.0 million was paid on April 5, 2002 and
the payment for the fourth milestone of $11.0 million will be paid on October 1,
2002. We will make this payment whether or not Tower actually achieves its
previously agreed upon milestone obligations. In exchange for this, and as part
of the modification to the share purchase agreement, Tower has agreed that of
the aggregate payment of $22.0 million represented by the third and fourth
milestone payments, (i) 60% of this amount, or $13.2 million, will be applied to
the issuance of additional ordinary Tower shares based on the average closing
price of Tower shares on the NASDAQ in the thirty consecutive trading days
preceding each payment date, referred to as the ATP, (provided, however, that
pursuant to the purchase agreement as modified, the ATP shall not exceed $12.50
per share) and (ii) 40% of this amount, or $8.8 million, will be credited to our
pre-paid wafer account, to be applied against orders placed with Tower's new
fabrication facility, when completed; provided, however, that until July 1,
2005, these amounts added to the pre-paid wafer account may only be applied
towards a maximum of 7.5% of wafer purchases. As a result of our investment of
$11.0 million for the third milestone, we received 1,071,497 additional Tower
ordinary shares and $4.4 million in prepaid wafer credits. On a quarterly basis,
we will assess the value of the prepaid wafer credits considering the timing and
quantity of our planned wafer purchases from Tower, the contractual limitations
on the amount of wafer credits that can be applied to purchases on an annual
basis, the status of foundry construction and general economic conditions. If we
determine that the value of these wafer credits is not recoverable, we will
record a write-down.
The final contribution by us, if any, will take the form of a mandatory
warrant exercise for 366,690 ordinary shares at an exercise price of $30.00 per
share if the final milestone is met by Tower. The final milestone warrant will
expire in July 2005, and in the event the milestone is not achieved, the
exercise of the warrant will not be mandatory. If Tower's stock price is trading
below $30.00 per share on the day, if ever, that the final contribution is made,
we will receive wafer credits in an amount equal to the number of shares
purchased on the final contribution date multiplied by the difference between
$30.00 and the ATP (provided, however, that the ATP shall not be less than
$12.50). If we make timely milestone payments, Tower is contractually obligated
to fill our wafer orders with up to 15% of available wafers from the new
fabrication facility. We currently expect Tower to supply us a portion of the
ASIC controller chips used in our flash cards. Tower's new foundry facility is
currently on schedule to begin production in the first half of 2003.
10
Completion of Tower's wafer foundry facility is dependent on several
factors and may never occur, which may harm our business and results of
operations. Tower's completion of the wafer foundry facility is dependent on its
ability to obtain additional financing for the foundry construction from equity
and other sources and the release of grants and approvals for changes in grant
programs from the Israel government's Investment Center. If Tower is unable to
obtain additional financing, complete foundry construction in a timely manner or
is unable to successfully complete the development and transfer of advanced CMOS
process technologies and ramp-up of production, the value of our investment in
Tower will decline significantly or possibly become worthless and we may be
unable to obtain the wafers needed to manufacture our products, which would harm
our results of operations. In addition, the value of our investment in Tower may
be adversely affected by a further deterioration of conditions in the market for
foundry manufacturing services and the market for semiconductor products
generally. If the fair value of the Tower investment declines further, we may
record additional losses.
We cannot assure you that the Tower facility will be completed or will
begin production as scheduled, or that the processes needed to fabricate our
wafers will be qualified at the new facility. Moreover, we cannot assure you
that this new facility will be able to achieve acceptable yields or deliver
sufficient quantities of wafers on a timely basis at a competitive price.
Furthermore, if the depressed business conditions for semiconductor wafers
persists throughout 2002 and beyond, Tower may be unable to operate their new
fabrication facility at an optimum capacity utilization, which would cause them
to operate at a loss.
The current political unrest and violence in Israel may hinder the
completion of and delay competitive production from Tower's fabrication
facility, which would harm our business. Although we do not believe the current
political unrest and escalation of violence in Israel represent a major security
problem for Tower since Migdal Haemek, Israel is in a relatively secure
geographic location, the unrest may expand and even if it remains at current
levels, could cause scheduling delays, as well as economic uncertainty, which
could cause potential foundry customers to go elsewhere for their foundry
business. Moreover, if U.S. military actions in Afghanistan, or elsewhere,
result in retaliation against Israel, Tower's fabrication facility may be
adversely impacted.
Fluctuations in the market value of our UMC foundry investment affect our
financial results
In 1997, we invested $51.2 million in United Silicon, Inc., or USIC, a
semiconductor manufacturing subsidiary of United Microelectronics Corporation,
or UMC, which was merged into the UMC parent company on January 3, 2000. In
exchange for our USIC shares, we received 111 million UMC shares. Our equity
investment in UMC was valued at $214.2 million at March 31, 2002 and included an
unrealized gain of $19.3 million, or $8.3 million net of taxes, in the first
quarter of 2002, which was included in other comprehensive income. In fiscal
year 2001, we recorded a loss on investment in foundry of $275.8 million, or
$166.9 million net of taxes, on our UMC investment. If the fair value of our UMC
investment declines in future periods, we may record additional losses for those
periods. In addition, in future periods, we may recognize a gain or loss upon
the sale of our UMC shares, which will impact our financial results.
11
The success of our business depends on emerging markets and new products
In order for demand for our products to grow, the markets for new products
that use CompactFlash, the MultiMediaCard, and Secure Digital card such as
digital cameras, portable digital music players and cellular phones must develop
and grow. If sales of these products do not grow, our revenues and profit
margins could be adversely impacted.
12
In 2001, we experienced a substantial drop in demand from our
MultiMediaCard customers, which we believe is attributable to the switch by
these customers to the Secure Digital card, as well as the generally soft market
conditions.
The success of our new product strategy will depend upon, among other
things, the following:
o our ability to successfully develop new products with higher memory
capacities and enhanced features at a lower cost per megabyte;
o the development of new applications or markets for our flash data
storage products;
o the adoption by the major content providers of the copy protection
features offered by our Secure Digital card products;
o the extent to which prospective customers design our products into
their products and successfully introduce their products; and
o the extent to which our products or technologies become obsolete or
noncompetitive due to products or technologies developed by others.
512 megabit and 1 gigabit flash memory card products. On June 30, 2000, we
closed a transaction with Toshiba providing for the joint development of 512
megabit and 1 gigabit flash memory chips and the manufacture of Secure Digital
card controllers. As part of this venture, we and Toshiba plan to employ
Toshiba's 0.16 micron and future 0.13 micron NAND flash integrated circuit
manufacturing technology and SanDisk's multilevel cell flash and controller
system technology. During the third quarter of 2000, we announced with Toshiba
the completion of the joint development of the 512 megabit NAND flash chip
employing Toshiba's 0.16 micron manufacturing process technology. We began
employing the 512 megabit technology in the second half of 2001, and expect to
commence shipments of cards employing the 1 gigabit technology in the first half
of 2002. The development of the next generation .13 micron, 1 gigabit and 2
gigabit NAND flash memory chips is highly complex. We cannot assure you that we
and Toshiba will successfully develop and bring into full production with
acceptable yields and reliability these new products or the underlying
technology, or that any development or production ramp will be completed in a
timely or cost-effective manner. If we are not successful in any of the above,
or if our cost structure is not competitive, our business, financial condition
and results of operations could suffer.
We may be unable to maintain market share which would reduce our potential
revenues and benefit our competitors
During periods of excess supply in the market for our flash memory
products, such as we experienced in 2002, we may lose market share to
competitors who aggressively lower their prices. Conversely, under conditions of
tight flash memory supply, we may be unable to increase our production volumes
at a sufficiently rapid rate so as to maintain our market share. Ultimately, our
growth rate depends on our ability to obtain sufficient flash memory wafers and
other components to meet demand. If we are unable to do so in a timely manner,
we may lose market share to our competitors. Currently, we are experiencing
severe price competition for our products which is adversely impacting our
product gross margins and overall profitability.
Because of our international operations, we must comply with numerous
international laws and regulations and we are vulnerable to political
instability and currency fluctuations
Political risks. Currently, the majority of our flash memory and controller
wafers are produced by Toshiba in Japan and UMC in Taiwan. After the
restructuring of our FlashVision business, all of our flash memory and
controller are now produced overseas by Toshiba and UMC. We also use third-party
subcontractors in Taiwan and China for the assembly and testing of some of our
card and component products. We may therefore be affected by the political,
economic and military conditions in Taiwan. Taiwan is currently engaged in
various political disputes with China and in the past both countries have
conducted military exercises in or near the other's territorial waters and
airspace. The Taiwanese and Chinese governments may escalate these disputes,
resulting in an economic embargo, a disruption in shipping routes or even
military hostilities. This could harm our business by interrupting or delaying
the production or shipment of flash memory wafers or card products by our
Taiwanese foundry and subcontractors. See "--We depend on our suppliers and
third party subcontractors."
We use a third-party subcontractor in China for the assembly and testing of
our CompactFlash products. As a result, our business could be harmed by the
effect of political, economic, legal and other uncertainties in China.
13
Under its current leadership, the Chinese government has been pursuing economic
reform policies, including the encouragement of foreign trade and investment and
greater economic decentralization. The Chinese government may not continue to
pursue these policies and, even if it does continue, these policies may not be
successful. The Chinese government may also significantly alter these policies
from time to time. In addition, China does not currently have a comprehensive
and highly developed legal system, particularly with respect to the protection
of intellectual property rights. As a result, enforcement of existing and future
laws and contracts is 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 do not believe the current political unrest and escalation of
violence in Israel represent a major security problem for Tower since Migdal
Haemek, Israel is in a relatively secure geographic location, the unrest may
expand and even if it remains at current levels, could cause scheduling delays,
as well as economic uncertainty, which could cause potential foundry customers
to go elsewhere for their foundry business. Moreover, if U.S. military actions
in Afghanistan, or elsewhere, or current Israeli military actions, result in
retaliation against Israel, Tower's fabrication facility and our engineering
design center in Israel may be adversely impacted. We cannot assure you that the
Tower facility will be completed or will begin production as scheduled, or that
the processes needed to fabricate our wafers will be qualified at the new
facility. Moreover, we cannot assure you that this new facility will be able to
achieve acceptable yields or deliver sufficient quantities of wafers on a timely
basis at a competitive price. Furthermore, if the depressed business conditions
for semiconductor wafers persist throughout 2002 and beyond, Tower may be unable
to operate their new fabrication facility at an optimum capacity utilization,
which would cause them to operate at a loss. In addition, while the political
unrest has not yet posed a direct security risk to our engineering design center
in Israel, it may cause unforeseen delays in the development of our products and
may in the future pose such a direct security risk.
Economic risks. We price our products primarily in U.S. Dollars. Given the
recent economic conditions in Asia and the European Union and the weakness of
the Euro, Yen and other currencies relative to the U.S. Dollar, our products may
be relatively more expensive in these regions, which could result in a decrease
in our sales. While most of our sales are denominated in U.S. Dollars, we
invoice certain Japanese customers in Japanese Yen and are subject to exchange
rate fluctuations on these transactions, which could harm our business,
financial condition and results of operations.
General risks. Our international business activities could also be limited
or disrupted by any of the following factors:
o the need to comply with foreign government regulation;
o general geopolitical risks such as political and economic instability,
potential hostilities and changes in diplomatic and trade
relationships;
o natural disasters affecting the countries in which we conduct our
business, particularly Japan, such as the earthquakes experienced
in Taiwan in 1999 and in Japan and China in previous years;
o imposition of regulatory requirements, tariffs, import and export
restrictions and other barriers and restrictions;
o longer payment cycles and greater difficulty in accounts receivable
collection, particularly as we increase our sales through the retail
distribution channel, and general business conditions deteriorate;
o adverse tax rules and regulations;
o weak protection of our intellectual property rights; and
o delays in product shipments due to local customs restrictions.
14
We depend on our suppliers and third-party subcontractors for several of
our critical components and our business could be harmed if we are unable to
obtain a sufficient supply of these components on a timely basis
We rely on our vendors, some of which are sole source suppliers, for
several of our critical components. We do not have long-term supply agreements
with some 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 develop alternative sources or obtain sufficient quantities of
these components. For example, after the restructuring of our FlashVision
business, we now rely on Toshiba's Yokkaichi fabrication facility for all of
our flash memory wafers. Any disruption in the supply of wafers from the
Yokkaichi fabrication facility would severely adversely impact our business.
Until the transition of the Dominion tool-set is completed, we will rely solely
on the current Yokkaichi fabrication facility for our NAND wafers. If we
experience increased demand during this transition period, we may not be able to
procure a sufficient number of wafers from Toshiba to meet this demand, which
would harm our business and operating results.
We also rely on third-party subcontractors for a substantial portion of
wafer testing, packaged memory final testing, card assembly and card testing,
including Silicon Precision Industries Co., Ltd. in Taiwan and Celestica, Inc.
in China. These subcontractors will also be assembling and testing a majority of
our mature, high-volume products. In the fourth quarter of 2001, we completed
the transfer of all of our card assembly and test manufacturing operations from
our Sunnyvale location to these offshore subcontractors. We have no long-term
contracts with these subcontractors and cannot directly control product delivery
schedules. 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, which could increase the manufacturing costs of our
products and have adverse effects on our operating results. Furthermore, we are
moving to turnkey manufacturing with some of our subcontract suppliers, which
may reduce our visibility and control of their inventories of purchased parts
necessary to build our products.
Our markets are highly competitive and if we are unable to compete
effectively, our business will be harmed
Flash memory manufacturers and memory card assemblers. We compete in an
industry characterized by intense competition, rapid technological changes,
evolving industry standards, declining average selling prices and rapid product
obsolescence. Our competitors include many large domestic and international
companies that have greater access to advanced wafer foundry capacity,
substantially greater financial, technical, marketing and other resources,
broader product lines and longer standing relationships with customers.
Our primary competitors include companies that develop and manufacture
storage flash chips, such as Hitachi, Samsung, Micron Technology and Toshiba. In
addition, we compete with companies that manufacture other forms of flash memory
and companies that purchase flash memory components and assemble memory cards.
Companies that manufacture socket flash, linear flash and components include
Advanced Micro Devices, Atmel, Fujitsu, Intel, Macronix, Mitsubishi, Sharp
Electronics and ST Microelectronics. Companies that combine controllers and
flash memory chips developed by others into flash storage cards include
Dane-Elec Manufacturing, Delkin Devices, Inc., Feiya Technology Corporation,
Fuji, Hagiwara, I/O Data, Ingentix, Kingston Technology, Lexar Media, M-Systems,
Matsushita Battery, Matsushita Panasonic, Memorex, PNY, Pretec, Silicon Storage
Technology, Silicon Tek, Simple Technology, Sony Corporation, TDK Corporation,
Toshiba and Viking Components.
In addition, many companies have been certified by the CompactFlash
Association to manufacture and sell their own brand of CompactFlash. We believe
additional manufacturers will enter the CompactFlash market in the future.
We have entered into agreements with, and face direct competition from,
Toshiba and other competitors. We have entered into an agreement with Matsushita
and Toshiba, forming the Secure Digital Association, or SD Association, to
jointly develop and promote a next generation flash memory card called the
Secure Digital card. Under this agreement, royalty-bearing Secure Digital card
licenses will be available to other flash memory card manufacturers, which will
increase the competition for our Secure Digital card and other products. In
addition, Matsushita and Toshiba have commenced selling Secure Digital cards
that will compete directly with our products. While other flash card
manufacturers will be required to pay the SD Association license fees and
royalties, which will be shared among Matsushita, Toshiba and us, there will be
no royalties or license fees payable among the three companies for their
respective sales of the Secure Digital card. Thus, we will forfeit potential
royalty income from Secure Digital card sales by Matsushita and Toshiba.
In addition, we and Toshiba will each separately market and sell any 512
megabit and 1 gigabit flash memory chips developed and manufactured by our joint
venture, FlashVision. Accordingly, we will compete directly with Toshiba for
sales of these advanced chips. Moreover, we rely solely on Toshiba for the
supply of all of our NAND wafers.
15
We have entered into patent cross-license agreements with several of our
leading competitors including Hitachi, Intel, Lexar, Matsushita, SST, Samsung,
Sharp, Sony, Toshiba and TDK. Under these agreements, each party may manufacture
and sell products that incorporate technology covered by the other party's
patent or patents related to flash memory devices. As we continue to license our
patents to certain of our competitors, competition will increase and may harm
our business, financial condition and results of operations. Currently, we are
engaged in licensing discussions with several of our competitors. There can be
no assurance that we will be successful in concluding licensing agreements under
terms which are favorable to us, or at all.
Alternative storage media. Competing products have been introduced that
promote industry standards that are different from our products including Sony's
standard floppy disk used for digital storage in its Mavica digital cameras,
Panasonic's Mega Storage cards, Iomega's Clik drive, a miniaturized, mechanical,
removable disk drive, M-Systems' DiskOnKey, a USB-based memory device, and the
Secure MultiMediaCard from Hitachi and Infineon. Each competing standard may not
be mechanically and electronically compatible with our products. If a
manufacturer of digital cameras or other consumer electronic devices designs in
one of these alternative competing standards, our products will be eliminated
from use in that product. In addition, other companies, such as Sanyo, DataPlay
and Matrix Semiconductor have announced products or technologies that may
potentially compete with our products.
IBM's Microdrive, a rotating disk drive in a Type II CompactFlash format
competes directly with our larger capacity memory cards. M-Systems' DiskOnChip
2000 Millennium product competes against our NAND Flash Components in embedded
storage applications such as set top boxes and networking appliances.
Sony has licensed its proprietary Memory Stick to us and other companies
and Sony has agreed to supply us a portion of their Memory Stick output for
resale under our brand name. If consumer electronics products using the Memory
Stick achieve widespread use, sales of our MultiMediaCard, Secure Digital card,
SmartMedia card and CompactFlash products may decline. Our MultiMediaCard
products also have faced significant competition from Toshiba's SmartMedia flash
cards.
Alternative flash technologies. We also face competition from products
based on multilevel cell flash technology from Intel and Hitachi. These products
currently compete with our NAND MLC products. Multilevel cell flash is a
technological innovation that allows each flash memory cell to store two bits of
information instead of the traditional single bit stored by conventional flash
technology.
Furthermore, we expect to face competition both from existing competitors
and from other companies that may enter our existing or future markets that have
similar or alternative data storage solutions, which may be less costly or
provide additional features. For example, Infineon has formed a joint venture
with Saifun, an Israeli startup company, to develop a proprietary flash memory
technology which will be targeted at low cost data storage applications. Price
is an important competitive factor in the market for consumer products.
Increased price competition could lower gross margins if our average selling
prices decrease faster than our costs and could also result in lost sales.
Sales to a small number of customers represent a significant portion of our
revenues
Approximately one-half of our revenues come from a small number of
customers. For example, sales to our top 10 customers accounted for
approximately 55% our product revenues in the first quarter of 2002. In the
first quarter of 2002, no single customer accounted for greater than 10% of our
total revenues. If we were to lose one of our major customers or experience any
material reduction in orders from any of these customers, our revenues and
operating results would suffer. Our sales are generally made by standard
purchase orders rather than long-term contracts. In addition, the composition of
our major customer base changes from year to year as the market demand for our
customers' products changes.
We may not be successful selling our products on the Internet and these
sales may undercut our traditional sales channels
Web-based sales of our products today represent a small but growing portion
of our overall sales. Sales on the Internet tend to undercut traditional
distribution channels and may dramatically change the way our consumer
16
products are purchased in future years. We cannot assure you that we will
successfully develop the Internet sales channel or successfully manage the
inherent conflict between the Internet and our traditional sales channels.
We must achieve acceptable wafer manufacturing yields or our costs will
increase and production will decrease, which could negatively impact our
business.
The fabrication of our products requires wafers to be produced in a highly
controlled and ultra clean environment. Semiconductor companies that supply our
wafers sometimes have experienced problems achieving acceptable wafer
manufacturing yields. Semiconductor manufacturing yields are a function of both
our design technology and the foundry's manufacturing process technology. Low
yields may result from design errors or manufacturing failures. Yield problems
may not be determined 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. The risks associated with yields are even
greater because we rely exclusively on independent offshore foundries for our
wafers which increases the effort and time required to identify, communicate and
resolve manufacturing yield problems. If the foundries cannot achieve planned
yields, we will experience higher costs and reduced product availability, which
could harm our business, financial condition and results of operations.
In addition, we cannot assure you that the Yokkaichi fabrication facilities
will produce satisfactory quantities of wafers with acceptable prices,
reliability and yields. Any failure in this regard could materially harm our
business, financial condition and results of operations. During the transition
from the Dominion fabrication facility to the new Yokkaichi fabrication
facility, when we will be solely reliant on the current Yokkaichi fabrication
facility for our NAND wafers, any such failure will be particularly harmful to
us as we will not have an alternate source of supply. In addition, we have no
experience in operating a wafer manufacturing line and we intend to rely on the
existing manufacturing organizations at the Yokkaichi fabrication facilities.
The new Yokkaichi fabrication facility will be tasked to "copy exactly" the same
manufacturing flow employed by Toshiba in its existing Yokkaichi fabrication
facility but we cannot assure you that they will be successful in manufacturing
these advanced NAND flash products on a cost-effective basis or at all.
There are risks associated with patents, proprietary rights and related
litigation and if we cannot manage these risks effectively, our business may be
harmed
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
disputes regarding our intellectual property rights and claims that we may be
infringing third parties' intellectual property rights. We expect that we may be
involved in similar disputes in the future. We cannot assure you that:
o any of our existing patents will not be invalidated;
o patents will be issued for any of our pending applications;
o any claims allowed from existing or pending patents will have
sufficient scope or strength;
o 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
o any of our products do not infringe on the patents of other companies.
In addition, our competitors may be able to design their products around
our patents.
We intend to vigorously enforce our patents but we cannot be sure that our
efforts will be successful. If we were to have an adverse result in any
litigation, 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 certain processes
or obtain licenses to the infringing technology. Any litigation is likely to
result in significant expense to us, as well as divert the efforts of our
technical and management personnel.
We may be unable to license intellectual property to or from third parties
as needed, or renew existing licenses, and have agreed to indemnify various
suppliers and customers for alleged patent infringement, which could expose us
to liability for damages, increase our costs or limit or prohibit us from
selling certain products. If we decide to incorporate third party technology
into our products or if we are found to infringe on 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 cross-licenses to third party patents.
Currently, we have patent cross-license agreements with several companies,
including Hitachi, Intel, Lexar, Matsushita, SST, Samsung, Sharp, Smartdisk,
Sony, TDK and
17
Toshiba and we are in discussions with other companies regarding potential
cross-license agreements. We cannot be certain that licenses will be offered
when we need them, or that the terms offered will be acceptable. 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 wafer suppliers from using processes that may infringe
the rights of third parties. We cannot assure you that we would be successful in
redesigning our products or that the necessary licenses will be available under
reasonable terms, or that our existing licensees will renew their licenses upon
expiration, or that we will be successful in signing new licensees in the
future.
We have historically agreed to indemnify various 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
attorney's fees. We may periodically engage in litigation as a result of these
indemnification obligations. We are not currently engaged in any such
indemnification proceedings. Our insurance policies exclude coverage for third
party claims for patent infringement. Any future obligation to indemnify our
customers or suppliers could harm our business, financial condition or results
of operations.
We may be involved in litigation regarding our intellectual property rights
or those of third parties, which would be costly and would divert the efforts of
our technical and management personnel. 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. Furthermore, parties that we have sued and
that we may sue for patent infringement may counter sue us for infringing their
patents.
On or about August 3, 2001, the Lemelson Medical, Education & Research
Foundation, or Lemelson Foundation, filed a complaint for patent infringement
against us and four other defendants. The suit, captioned Lemelson Medical,
Education, & Research Foundation, Limited Partnership vs. Broadcom Corporation,
et al., Civil Case No. CIV01 1440PHX HRH, was filed in the United States
District Court, District of Arizona. On November 13, 2001, the Lemelson
Foundation filed an Amended Complaint, which made the same substantive
allegations against us but named more than twenty-five additional defendants.
The Amended Complaint alleges that we, and the other defendants, have infringed
certain patents held by the Lemelson Foundation pertaining to bar code scanning
technology. By its complaint, the Lemelson Foundation requests that we be
enjoined from our allegedly infringing activities and seeks unspecified damages.
On February 4, 2002, we filed an answer to the amended complaint, wherein we
alleged that we do not infringe the asserted patents, and further contend that
the patents are not valid or enforceable.
On October 15, 2001, we filed a complaint for patent infringement in the
United States District Court for the Northern District of California against
Micron Technology, Inc., or Micron. In the suit, captioned SanDisk Corp. v.
Micron Technology, Inc., Civil No. CV 01-3855 CW, the complaint seeks damages
and an injunction against Micron for making, selling, importing or using flash
memory cards that infringe our U.S. Patent No. 6,149,316. On February 15, 2002,
Micron answered the complaint, denied liability, and counterclaimed seeking a
declaration that the patent in suit is not infringed, is invalid, and is
unenforceable. On April 19, 2002, Micron filed a motion seeking to amend its
counterclaim to assert allegations that we have infringed or are infringing five
patents: U.S. Patent No. 4,468,308; U.S. Patent No. 5,286,344; U.S. Patent No.
5,320,981; U.S. Patent No. 6,015,760; and U.S. Patent No. 6,287,978 B1. We
intend to oppose Micron's motion.
On October 31, 2001, we 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 No. CV 01-4063 VRW, we seek damages and
injunctions against these companies from making, selling, importing or using
flash memory cards that infringe our U.S. patent No. 5,602,987 or the `987
Patent. Defendants Memorex, Pretec and Ritek have filed answers denying the
allegations. We filed a motion for a preliminary injunction in the suit to
enjoin Memorex, Pretec and Ritek from making, selling, importing or using flash
memory cards that infringe our `987 Patent prior to the trial on the merits.
On May 17, 2002, the Court denied our motion. Discovery has commenced. The Court
has set a trial date for the later half of 2003.
On November 30, 2001, we filed a complaint for patent infringement in the
United States District Court for the Northern District of California against
Power Quotient International - USA Inc, or PQI-USA. In the suit, captioned
SanDisk Corp. v. Power Quotient International - USA Inc., Civil No. C 01-21111,
we seek damages and an injunction against PQI-USA from making, selling,
importing or using flash memory cards that infringe our U.S. patent No.
5,602,987. The PQI-USA complaint and litigation are related to the October 31,
2001 litigation referred to above. The products at issue in the PQI-USA case are
identical to those charged with infringement in the October
18
31, 2001 litigation. On December 21, 2001, PQI-USA filed an answer to the
complaint denying the allegations, which included a counter claim for a
declaratory judgment of non-infringement and invalidity of our `987 Patent. We
have motioned for a preliminary injunction in the suit to enjoin PQI-USA from
making, selling, importing or using flash memory cards that infringe our `987
Patent prior to the trial on the merits. On April 8, 2002, the Court heard
argument on the preliminary injunction motion and a decision on the motion is
pending. Discovery has commenced. The Court has set a trial date for the later
half of 2003.
On or about March 5, 2002, Samsung Electronics Co., Ltd., or Samsung, filed
a patent infringement lawsuit against us in the United States District Court for
the Eastern District of Texas, Civil Action No. 9:02CV58. The lawsuit alleges
that we infringe four Samsung United States patents, Nos. 5,473,563; 5,514,889;
5,546,341 and 5,642,309, and seeks a preliminary and permanent injunction
against unnamed products of ours, as well as damages, attorneys' fees and cost
of the lawsuit. On March 28, 2002, we filed an answer and counterclaims denying
infringement and asserting the Samsung patents are invalid and/or unenforceable.
The counterclaims asserted that Samsung breached a 1997 agreement between
SanDisk and Samsung. On April 3, 2002, Samsung filed its first amended
complaint. The amended complaint restricted Samsung's original infringement
allegations with respect to the four patents listed above to SanDisk products
that include NAND flash memory. A substantial percentage of SanDisk products
include NAND flash memory devices. On April 26, 2002, we filed an answer to
Samsung's first amended complaint and amended counterclaims. This answer and
amended counterclaims again denied infringement and asserted that the Samsung
patents are invalid and/or unenforceable. In SanDisk's amended counterclaims, we
seek relief for both breach of the 1997 agreement and a declaration of our
rights under the 1997 agreement. A trial has been schedule for October 2002 on
this matter. On April 26, 2002, we filed a complaint against Samsung in the
United States District Court for the Northern District of California, Civil No.
C02-2069 MJJ, for declaratory judgment of non-infringement, invalidity, a
declaration of rights under the 1997 agreement with Samsung and breach of
contract.
Rapid growth may strain our operations
Despite actions we took in 2001 to align expense levels with decreased
revenues, we must continue to hire, train, motivate and manage our employees to
accommodate future growth. In the past, we have experienced difficulty hiring
the necessary engineering, sales and marketing personnel to support our growth.
In addition, we must make a significant investment in our existing internal
information management systems to support increased manufacturing, as well as
accounting and other management related functions. Our systems, procedures and
controls may not be adequate to support rapid growth, which could in turn harm
our business, financial condition and results of operations.
Terrorist attacks and threats, and government responses thereto, may
negatively impact all aspects of our operations, revenues, costs and stock price
The recent terrorist attacks in the United States, the U.S. retaliation for
these attacks and the related decline in consumer confidence and continued
economic weakness have had a substantial adverse impact on our retail sales. If
consumer confidence does not recover, our revenues and results of operations may
be adversely impacted in the second quarter of 2002 and beyond.
In addition, any similar future 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. In addition, these
events have had and may continue to have an adverse impact on the U.S. and world
economy in general and consumer confidence and spending in particular, which
could harm our sales. Any of these events could 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. This could
have a significant impact on our operating results, revenues and costs and may
result in increased volatility in the market price of our common stock.
Our success depends on 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, President and Chief
Executive Officer. Our success will also depend on our ability to recruit
additional highly skilled personnel. We cannot assure you that we will be
successful in hiring or retaining such key personnel, or that any of our key
personnel will remain employed with us.
Anti-takeover provisions in our charter documents, stockholder rights plan
and in Delaware law could prevent 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 adopted a stockholder
rights plan 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 prevent us from
being acquired. In addition, our certificate of incorporation grants the 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.
Although we have no present intention to issue shares of preferred stock, such
an issuance could have the effect of making it more difficult and less
attractive for a third party to acquire a majority of
19
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 except in certain limited
circumstances a corporation shall not engage in any business combination with
any interested stockholder during the three-year period following the time that
such stockholder becomes an interested stockholder. This provision could have
the effect of delaying or preventing a change of control of SanDisk.
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
is likely to continue to fluctuate in the future. For example, in the 12 months
ending December 31, 2001, our stock price fluctuated significantly from a low of
$8.61 to a high of $48.69. We believe that such fluctuations will continue as a
result of future announcements concerning us, our competitors or principal
customers regarding technological innovations, new product introductions,
governmental regulations, 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. Furthermore,
the market price for the notes may be adversely affected by declines in the
market price of our common stock or deterioration of our financial performance,
declines in the overall market for similar securities and the actual or
perceived performance or prospects for companies in our industry.
Our Digital Portal Inc., or DPI, joint venture has an unproven product and
an untested market and may not be successful
In April 2002, we and PMI agreed that we would scale down our kiosk
activities while PMI will assume responsibility to finance and direct the future
growth of DPI. Under the new agreement, we will convert approximately $400,000
in receivables from DPI to equity in DPI and will no longer be required to make
additional investments in DPI or guarantee DPI's equipment leases. If DPI is
unsuccessful, our investment may become worthless, requiring us to record a loss
equal to the total amount invested.
We have substantially increased our indebtedness, which may restrict our
cash flow, make it difficult for us to obtain future financing, divert our
resources from other uses, limit our ability to react to changes in the
industry, and place us at a competitive disadvantage
As a result of the sale and issuance of the notes, we incurred $150.0
million aggregate principal amount of additional indebtedness, substantially
increasing our ratio of debt to total capitalization. While the notes are
outstanding, we will have debt service obligations on the notes of approximately
$6.8 million per year in interest payments. 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 activities of
our business.
We intend to fulfill our debt service obligations from cash generated by
our operations, if any, and from our existing cash and investments. If
necessary, among other alternatives, we may add lease lines of credit to finance
capital expenditures and obtain other long-term debt and lines of credit. We may
incur substantial additional indebtedness in the future. The level of our
indebtedness, among other things, could:
o require the dedication of a substantial portion of any cash flow from
our operations to service our indebtedness, thereby reducing the
amount of cash flow available for other purposes, including working
capital, capital expenditures and general corporate purposes;
o make it difficult for us to obtain any necessary future financing for
working capital, capital expenditures, debt service requirements or
other purposes;
o cause us to use a significant portion of our cash and cash equivalents
or possibly liquidate other assets to repay the total principal amount
due under the notes and our other indebtedness if we were to default
under the notes or our other indebtedness;
o limit our flexibility in planning for, or reacting to changes in, our
business and the industries in which we complete;
20
o place us at a possible competitive disadvantage with respect to less
leveraged competitors and competitors that have better access to
capital resources; and
o make us more vulnerable in the event of a further downturn in our
business.
There can be no assurance that we will be able to meet our debt service
obligations, including our obligations under the notes.
In 2000, we entered into a joint venture agreement with Toshiba, under
which we formed FlashVision. We agreed to guarantee one-half of all FlashVision
lease amounts up to a maximum guarantee of $175.0 million. As of March 31, 2002,
we had guarantee obligations in the amount of $148.8 million in favor of ABN
AMRO Bank N.V., as agent for a syndicate of financial institutions, or ABN AMRO,
on the equipment lease lines to equip FlashVision. This guarantee constituted
senior indebtedness under the notes. In March 2002, FlashVision exercised its
right of early termination under the lease facility and repaid all amounts
outstanding thereunder in April 2002. FlashVision completed interim financing in
the form of a bridge loan from Toshiba in April 2002 and we currently anticipate
that FlashVision will finalize a new equipment lease arrangement by the end of
May 2002.
If, in connection with the restructuring of our FlashVision business and
the early termination of the ABN AMRO lease facility, we and Toshiba are unable
to refinance the bridge loan or if we undertake guarantee or indemnification
obligations under any permanent replacement facility, we may use a portion of
the proceeds from the notes to repay these obligations. This would result in the
diversion of resources from other important areas of our business and could
significantly harm our business, financial condition and results of operations.
We cannot assure you that we will be permanently replacing FlashVision's lease
facility.
We may not be able to satisfy a fundamental change offer under the
indenture governing the notes
The indenture governing the notes contains provisions that apply to a
fundamental change. A fundamental change as defined in the indenture would occur
if we were to be acquired for consideration other than cash or securities traded
on a major U.S. securities market. If someone triggers a fundamental change, we
may be required to offer to purchase the notes with cash. This would result in
the diversion of resources from other important areas of our business and could
significantly harm our business, financial condition and results of operations.
If we have to make a fundamental change offer, we cannot be sure that we
will have enough funds to pay for all the notes that the holders could tender.
Our failure to redeem tendered notes upon a fundamental change would constitute
a default under the indenture and might constitute a default under the terms of
our other indebtedness, which would significantly harm our business and
financial condition.
We may not be able to pay our debt and other obligations
If our cash flow is inadequate to meet our obligations, we could face
substantial liquidity problems. If we are unable to generate sufficient cash
flow or otherwise obtain funds necessary to make required payments on the notes
or our other indebtedness, we would be in default under the terms thereof, which
would permit the holders of the notes to accelerate the maturity of the notes
and also could cause defaults under our other indebtedness. Any such default
would harm our business, prospects, financial condition and operating results.
In addition, we cannot assure you that we would be able to repay amounts due in
respect of the notes if payment of the notes were to be accelerated following
the occurrence of any other event of default as defined in the indenture
governing the notes. Moreover, we cannot assure that we will have sufficient
funds or will be able to arrange for financing to pay the principal amount due
on the notes at maturity.
21
We may need additional financing, which could be difficult to obtain
We currently expect that our existing cash and investment balances, cash
generated from operations and the proceeds from the sale of the notes will be
sufficient to meet our cash requirements to fund operations and expected capital
expenditures for at least the next twelve months. However, in the event we need
to raise additional funds during that time period or in future periods, 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 or equity financings to fund our
activities. If we issue additional equity securities, our stockholders will
experience additional dilution and the new equity securities may have rights,
preferences or privileges senior to those of existing holders of common stock or
debt securities. In addition, if we raise funds through debt 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, 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.
The notes and other indebtedness have rights senior to those of our current
stockholders
In the event of our bankruptcy, liquidation or reorganization or upon
acceleration of the notes due to an event of default under the indenture and in
certain other events, our assets will be available for distribution to our
current stockholders only after all senior indebtedness, including any amount we
may guarantee on behalf of FlashVision and obligations under the notes, have
been paid in full. As a result, there may not be sufficient assets remaining to
make any distributions to our stockholders. The notes also will be effectively
subordinated to the liabilities, including trade payables, of any of our
subsidiaries. Neither we nor our subsidiaries are limited from incurring debt,
including senior indebtedness, under the indenture. If we or our subsidiaries
were to incur additional debt or liabilities, our ability to pay our obligations
on the notes could be adversely affected. We anticipate that from time to time
we will incur additional debt, including senior indebtedness. Our subsidiaries
are likely to incur liabilities in the future.
Risks Related to The Notes
The notes are subordinated
The notes are unsecured and subordinated in right of payment to all of our
existing and future senior indebtedness. In 2000, we entered into a joint
venture agreement with Toshiba, under which we formed FlashVision. We agreed to
guarantee one-half of all FlashVision lease amounts up to a maximum guarantee of
$175.0 million. As of March 31, 2002, we had guarantee obligations in the amount
of $148.8 million in favor of ABN AMRO on the equipment lease lines to equip
FlashVision. The guarantee constituted senior indebtedness under the notes, as
described in this prospectus, and as of March 31, 2002, we had no other senior
indebtedness or material subsidiary indebtedness outstanding. In March 2002,
FlashVision exercised its right of early termination under the lease facility
and repaid all amounts outstanding thereunder in April 2002. FlashVision
completed interim financing in the form of a bridge loan from Toshiba in April
2002 and we currently anticipate that FlashVision will finalize a new equipment
lease arrangement by the end of May 2002.
If, in connection with the restructuring of our FlashVision business and
the early termination of the ABN AMRO lease facility or future lease agreements
with alternative financing sources, we and Toshiba are unable to refinance the
bridge loan or if we undertake guarantee or indemnification obligations under
any permanent replacement facility, we may use a portion of the proceeds from
the notes to repay these obligations. This would result in the diversion of
22
resources from other important areas of our business and could significantly
harm our business, financial condition and results of operations.
In the event of our bankruptcy, liquidation or reorganization or upon
acceleration of the notes due to an event of default under the indenture and in
certain other events, our assets will be available to pay obligations on the
notes only after all senior indebtedness including any amount we have guaranteed
on behalf of FlashVision has been paid in full. As a result, there may not be
sufficient assets remaining to pay amounts due on any or all of the notes then
outstanding. See "-Events of Default; Notice and Waiver."
Securities we issue to fund our operations could dilute your ownership
We may decide to raise additional funds through public or private debt or
equity financing to fund our operations. If we raise funds by issuing equity
securities, the percentage ownership of our current stockholders will be reduced
and the new equity securities may have rights prior to those of the common stock
issuable upon conversion of the notes. We may not obtain sufficient financing on
terms that are favorable to you or us. We may delay, limit or eliminate some or
all of our proposed operations if adequate funds are not available.
We may not have sufficient funds to repurchase or redeem notes
We may be required to redeem all or a portion of the notes in the event of
a fundamental change. We may not have enough funds to pay the repurchase price
on a purchase date (in which case, we could be required to issue common stock to
pay the repurchase price) or pay the fundamental change purchase price in the
event of a fundamental change. Any future credit agreements or other debt
agreements (including other senior indebtedness and any guarantee or other
obligations we undertake on behalf of FlashVision) to which we become a party
may provide that our obligation to purchase or redeem the notes upon a
fundamental change would be an event of default under such agreement. As a
result, we may be restricted or prohibited from repurchasing or redeeming the
notes. If we are prohibited from repurchasing or redeeming the notes, we could
seek the consent of then-existing lenders to repurchase or redeem the notes or
we could attempt to refinance the borrowings that contain such prohibition. If
we are unable to obtain a consent or refinance the debt, we could not repurchase
or redeem the notes. Our failure to redeem tendered notes would constitute a
default under the indenture, which could constitute a default under any lease
facility entered into to permanently replace the ABN AMRO facility and might
constitute a default under the terms of our other indebtedness. In these
circumstances, if a fundamental change resulted in an event of default under any
lending agreement, the subordination provisions of the indenture would probably
restrict or prohibit payments to the holders of notes. The term "fundamental
change" is limited to certain specified transactions and may not include other
events that might adversely affect our financial condition. Our obligation to
offer to redeem the notes upon a fundamental change would not necessarily afford
holders of notes protection in the event of a highly leveraged transaction,
reorganization, merger or similar transaction involving us.
A public market may not develop for the notes
Prior to the offering, there was no trading market for the notes. Although
the initial purchasers have advised us that they currently intend to make a
market in the notes, they are not obligated to do so and may stop such market
making at any time without notice. In addition, such market making activity will
be subject to the limits imposed by the Securities Act and the Exchange Act.
Therefore, it is possible that no market for the notes will develop. Even if a
market does develop, the market may not be maintained. If an active market for
the notes does not develop or is not sustained, the trading price of the notes
could be materially adversely affected. The notes are expected to be eligible
for trading on the PORTAL Market; however, we do not intend to apply for listing
of the notes on any securities exchange or over-the-counter market. Furthermore,
the market price for the notes may be adversely affected by declines in the
market price of our common stock or deterioration of our financial performance,
declines in the overall market for similar securities and the actual or
perceived performance or prospects for companies in our industry.
Our notes may not be rated or may receive a lower rating than anticipated
One or more rating agencies may rate the notes. If one or more rating
agencies assign the notes a rating lower than expected by investors, or do not
rate the notes, the market price of the notes and our common stock would be
significantly harmed.
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USE OF PROCEEDS
All of the notes and the shares of common stock issuable upon conversion of
the notes are being sold by the selling securityholders or by their pledgees,
donees, transferees or other successors in interest. We will not receive any
proceeds from the sale of the notes or the shares of our common stock issuable
upon conversion of the notes.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock, and
do not expect to declare or pay cash dividends on our common stock in the
foreseeable future. We currently intend to retain our earnings, if any, for use
in our business.
DESCRIPTION OF THE NOTES
The 4 1/2% Convertible Subordinated Notes due November 15, 2006, or notes,
were issued under an indenture dated as of December 24, 2001, between us, as
issuer, and The Bank of New York, as trustee. The following description is a
summary of the material provisions of the notes and the indenture. It does not
purport to be complete. This summary is subject to and is qualified by reference
to all the provisions of the indenture, including the definitions of certain
terms used in the indenture. Wherever particular provisions or defined terms of
the indenture or form of note are referred to, these provisions or defined terms
are incorporated in this prospectus by reference.
As used in this "Description of Notes" section, references to "SanDisk,"
"we," "our" or "us" refer solely to SanDisk Corporation and not to our
subsidiaries.
General
We issued $150,000,000 aggregate principal amount of the notes in private
placements in December 2001 and January 2002. The notes are general unsecured
obligations of SanDisk. We are required to repay the principal amount of the
notes in full on November 15, 2006 unless earlier converted, redeemed at our
option or redeemed at your option upon a fundamental change. Our payment
obligations under the notes are subordinated to our senior and future
indebtedness as described under "Subordination of Notes." The notes are
convertible into common stock as described under "Conversion of Notes."
The notes bear interest at the rate of 4 1/2% per year. We will pay
interest semiannually on May 15 and November 15 of each year, beginning May 15,
2002. The notes will mature on November 15, 2006 unless earlier converted,
redeemed at our option or redeemed at your option upon a fundamental change.
Neither we nor any of our subsidiaries are subject to any financial
covenants under the indenture. In addition, neither we nor any of our
subsidiaries are restricted under the indenture from paying dividends, incurring
debt, or issuing or repurchasing our securities.
You are not afforded protection under the indenture in the event of a
highly leveraged transaction or a change in control of us except to the extent
described below under "Redemption at Option of the Holder."
We will pay interest on May 15 and November 15 of each year, beginning May
15, 2002, to record holders at the close of business on the preceding May 1 and
November 1, as the case may be, except:
o interest payable upon redemption will be paid to the person to whom
principal is payable, unless the redemption date is an interest
payment date; and
o as set forth in the next sentence.
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If you convert any of your notes into common stock during the period after
any record date but prior to the next interest payment date, one of the
following will occur:
o we will not be required to pay interest on the interest payment date
if the note has been called for redemption on a redemption date that
occurs during this period;
o we will not be required to pay interest on the interest payment date
if the note is to be redeemed in connection with a fundamental change
on a redemption date that occurs during this period; or
o if otherwise, any note not called for redemption that is submitted for
conversion during this period must also be accompanied by an amount
equal to the interest due on the interest payment date on the
converted principal amount, unless at the time of conversion there is
a default in the payment of interest on the notes. See "Conversion of
Notes."
We will maintain an office in the Borough of Manhattan, The City of New
York, for the payment of interest, which shall initially be an office or agency
of the trustee. We may pay interest either:
o by check mailed to your address as it appears in the note register,
provided that if you are a holder of the notes of an aggregate
principal amount in excess of $2.0 million, you shall be paid, at your
written election, by wire transfer in immediately available funds; or
o by transfer to an account maintained by you in the United States.
However, payments to The Depository Trust Company, New York, New York,
which we refer to as DTC, will be made by wire transfer of immediately available
funds to the account of DTC or its nominee. Interest will be computed on the
basis of a 360-day year composed of twelve 30-day months.
Conversion of Notes
You may convert your notes, in whole or in part, prior to the final
maturity date of the notes, subject to prior redemption of the notes. Your notes
will be convertible into shares of our common stock. The number of shares of
common stock you will receive upon conversion of your notes will be determined
by multiplying the number of $1,000 principal amount in notes you convert by the
conversion rate on the date of conversion. If we call notes for redemption, you
may convert the notes only until the close of business on the business day prior
to the redemption date unless we fail to pay the redemption price. If you have
submitted your notes for redemption upon a fundamental change, you may convert
your notes only if you withdraw your redemption election. You may convert your
notes in part so long as this part is $1,000 principal amount or an integral
multiple of $1,000. If any notes not called for redemption are converted after a
record date for any interest payment date and prior to the next interest payment
date, the notes must be accompanied by an amount equal to the interest payable
on the interest payment date on the converted principal amount unless a default
in the payment of interest exists at the time of conversion.
The initial conversion rate for the notes is 54.2535 shares of common stock
per $1,000 principal amount of notes, subject to adjustment as described below.
We will not issue fractional shares of common stock upon conversion of the
notes. Instead, we will pay cash equal to the market price of the common stock
on the business day prior to the conversion date. Except as described herein,
you will not receive any accrued interest or dividends upon conversion.
To convert your note into common stock you must do the following (or comply
with DTC procedures for doing so in respect of your beneficial interest in notes
evidenced by a global note held by DTC):
o complete and manually sign the conversion notice on the back of the
note or facsimile of the conversion notice and deliver this notice to
the conversion agent;
o surrender the note to the conversion agent;
o if required, furnish appropriate endorsements and transfer documents;
o if required, pay all transfer or similar taxes; and
o if required, pay funds equal to interest payable on the next interest
payment date.
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The date you comply with these requirements is the conversion date under
the indenture.
We will adjust the conversion rate if any of the following events occurs:
(1) we issue common stock as a dividend or distribution on our common
stock;
(2) we issue to all holders of common stock certain rights or warrants to
purchase our common stock;
(3) we subdivide or combine our common stock;
(4) we distribute to all holders of our common stock, shares of our
capital stock, evidences of indebtedness or assets, including
securities but excluding:
o rights or warrants listed in (2) above;
o dividends or distributions listed in (1) above; and
o cash distributions listed in (5) below;
(5) we distribute cash, excluding any dividend or distribution in
connection with our liquidation, dissolution or winding up or any
quarterly cash dividend on our common stock to the extent that the
aggregate cash dividend per share of common stock in any quarter does
not exceed the greater of:
o the amount per share of common stock of the next preceding
quarterly cash dividend on the common stock to the extent that
such preceding quarterly dividend did not require an adjustment
of the conversion rate pursuant to this clause (5), as adjusted
to reflect subdivisions or combinations of the common stock; and
o 3.75% of the average of the last reported sale price of the
common stock during the ten trading days immediately prior to the
declaration date of the dividend.
If an adjustment is required to be made under this clause (5) as a
result of a distribution that is a quarterly dividend, the adjustment
would be based upon the amount by which the distribution exceeds the
amount of the quarterly cash dividend permitted to be excluded
pursuant to this clause (5). If an adjustment is required to be made
under this clause (5) as a result of a distribution that is not a
quarterly dividend, the adjustment would be based upon the full amount
of the distribution;
(6) we or one of our subsidiaries makes a payment in respect of a tender
offer or exchange offer for our common stock to the extent that the
cash and value of any other consideration included in the payment per
share of common stock exceeds the current market price per share of
common stock on the trading day next succeeding the last date on which
tenders or exchanges may be made pursuant to such tender or exchange
offer; and
(7) someone other than us or one of our subsidiaries makes a payment in
respect of a tender offer or exchange offer which, as of the closing
date of the offer, our board of directors is not recommending
rejecting. The adjustment referred to in this clause (7) will only be
made if:
o the tender offer or exchange offer is for an amount that
increases the offeror's ownership of common stock to more than
25% of the total shares of common stock outstanding; and
o the cash and value of any other consideration included in the
payment per share of common stock exceeds the current market
price per share of common stock on the business day next
succeeding the last date on which tenders or exchanges may be
made pursuant to the tender or exchange offer.
However, the adjustment referred to in this clause (7) will generally
not be made if as of the closing of the offer, the offering documents
disclose a plan or an intention to cause us to engage in a
consolidation or merger or a sale of all or substantially all of our
assets.
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Under our existing rights plan, or any future rights plan, subject to
certain specified exceptions, upon conversion of your notes into common stock,
you will receive, in addition to the common stock, the rights under the rights
plan whether or not the rights have separated from the common stock at the time
of conversion.
In the event of:
o any reclassification of our common stock;
o a consolidation, merger or combination involving us; or
o a sale or conveyance to another person or entity of all or
substantially all of our property and assets;
in which holders of our common stock would be entitled to receive stock, other
securities, other property, assets or cash for their common stock, upon
conversion of your notes you will be entitled to receive the same type of
consideration which you would have been entitled to receive if you had converted
the notes into our common stock immediately prior to any of these events.
You may in certain situations be deemed to have received a distribution
subject to United States federal income tax as a dividend in the event of any
taxable distribution to holders of common stock or in certain other situations
requiring a conversion rate adjustment. See "Material United States Federal
Income Tax Considerations."
We may, from time to time, increase the conversion rate for a period of at
least 20 days if our board of directors has made a determination that this
increase would be in our best interests. Any such determination by our board
will be conclusive. We would give holders at least 15 days' notice of any
increase in the conversion rate. In addition, we may increase the conversion
rate if our board of directors deems it advisable to avoid or diminish any
income tax to holders of common stock resulting from any stock or rights
distribution. See "Material United States Federal Income Tax Considerations."
We will not be required to make an adjustment in the conversion rate unless
the adjustment would require a change of at least 1% in the conversion rate.
However, we will carry forward any adjustments that are less than 1% of the
conversion rate. Except as described above in this section, we will not adjust
the conversion rate for any issuance of our common stock or convertible or
exchangeable securities or rights to purchase our common stock or convertible or
exchangeable securities.
Optional Redemption by SanDisk
The notes are not entitled to any sinking fund. At any time on or after
November 17, 2004, we may redeem the notes in whole or in part at the following
prices expressed as a percentage of the principal amount:
Redemption Period Price
----------------- -----
Beginning on November 17, 2004 and ending on November 14, 2005 ............ 101.800%
Beginning on November 15, 2005 and ending on November 14, 2006 ............ 100.900%
and 100% if redeemed at November 15, 2006. In each case, we will pay interest
to, but excluding, the redemption date. If the redemption date is an interest
payment date, interest shall be paid to the record holder on the relevant record
date. We are required to give notice of redemption by mail to holders not more
than 60 but not less than 30 days prior to the redemption date.
If less than all of the outstanding notes are to be redeemed, the trustee
will select the notes to be redeemed in principal amounts of $1,000 or multiples
of $1,000 by lot, pro rata or by another method the trustee considers fair and
appropriate. If a portion of your notes is selected for partial redemption and
you convert a portion of your notes, the converted portion will be deemed to be
of the portion selected for redemption.
We may not redeem the notes if we have failed to pay any interest on the
notes and such failure to pay is continuing. We will issue a press release if we
redeem the notes.
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Redemption at Option of the Holder
If a fundamental change of SanDisk occurs at any time prior to the maturity
of the notes, you may require us to redeem your notes, in whole or in part, on a
redemption date that is 30 days after the date of our notice of the fundamental
change. The notes will be redeemable in multiples of $1,000 principal amount.
We will redeem the notes at a price equal to 100% of the principal amount
to be redeemed, plus accrued and unpaid interest to, but excluding, the
redemption date. If the repurchase date is an interest payment date, we will pay
interest to the record holder on the relevant record date.
We will mail to all record holders a notice of a fundamental change of
SanDisk within 10 days after it has occurred. We are also required to deliver to
the trustee a copy of the fundamental change notice. If you elect to redeem your
notes, you must deliver to us or our designated agent (or comply with DTC
procedures for doing so in respect of your beneficial interest in notes
evidenced by a global note held by DTC), on or before the 30th day after the
date of our fundamental change notice, your redemption notice and any notes to
be redeemed, duly endorsed for transfer. We will promptly pay the redemption
price for notes surrendered for redemption following the repurchase date.
A "fundamental change" of SanDisk is any transaction or event (whether by
means of an exchange offer, liquidation, tender offer, consolidation, merger,
combination, reclassification, recapitalization or otherwise) in connection with
which all or substantially all of our common stock is exchanged for, converted
into, acquired for or constitutes solely the right to receive, consideration
which is not all or substantially all common stock or depositary receipts that:
o are listed on, or immediately after the transaction or event will be
listed on, a United States national securities exchange, or
o are approved, or immediately after the transaction or event will be
approved, for quotation on the Nasdaq National Market or any similar
United States system of automated dissemination of quotations of
securities prices.
We will comply with any applicable provisions of Rule 13e-4 and any other
tender offer rules under the Exchange Act in the event of a fundamental change.
These fundamental change redemption rights could discourage a potential
acquiror of SanDisk. However, this fundamental change redemption feature is not
the result of management's knowledge of any specific effort to obtain control of
SanDisk by means of a merger, tender offer or solicitation, or part of a plan by
management to adopt a series of anti-takeover provisions. The term "fundamental
change" is limited to specified transactions and may not include other events
that might adversely affect our financial condition or business operations. Our
obligation to offer to redeem the notes upon a fundamental change would not
necessarily afford you protection in the event of a highly leveraged
transaction, reorganization, merger or similar transaction involving SanDisk.
We may be unable to redeem the notes in the event of a fundamental change.
If a fundamental change were to occur, we may not have enough funds to pay the
redemption price for all tendered notes. Any future credit agreements or other
agreements relating to our indebtedness may contain provisions prohibiting
redemption of the notes under certain circumstances, or expressly prohibit our
repurchase of the notes upon a fundamental change or may provide that a
fundamental change constitutes an event of default under that agreement. If a
fundamental change occurs at a time when we are prohibited from purchasing or
redeeming notes, we could seek the consent of our lenders to redeem the notes or
attempt to refinance this debt. If we do not obtain consent, we would not be
permitted to purchase or redeem the notes. Our failure to redeem tendered notes
would constitute an event of default under the indenture, which might constitute
a default under the terms of our other indebtedness. In these circumstances, or
if a fundamental change would constitute an event of default under our senior
indebtedness, the subordination provisions of the indenture would restrict
payments to the holders of notes.
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Subordination of Notes
Payment on the notes will, to the extent provided in the indenture, be
subordinated in right of payment to the prior payment in full of all of our
senior indebtedness. The notes also are effectively subordinated to all debt and
other liabilities, including trade payables and lease obligations, if any, of
our subsidiaries.
Upon any distribution of our assets upon any dissolution, winding up,
liquidation or reorganization, the payment of the principal of, or premium, if
any, interest, and liquidated damages, if any, on the notes will be subordinated
in right of payment to the prior payment in full in cash or other payment
satisfactory to the holders of senior indebtedness of all senior indebtedness.
In the event of any acceleration of the notes because of an event of default,
the holders of any outstanding senior indebtedness would be entitled to payment
in full in cash or other payment satisfactory to the holders of senior
indebtedness of all senior indebtedness obligations before the holders of the
notes are entitled to receive any payment or distribution. We are required under
the indenture to promptly notify holders of senior indebtedness, if payment of
the notes is accelerated because of an event of default.
We may not make any payment on the notes if:
o a default in the payment of designated senior indebtedness occurs and
is continuing beyond any applicable period of grace (called a "payment
default"); or
o a default other than a payment default on any designated senior
indebtedness occurs and is continuing that permits holders of
designated senior indebtedness to accelerate its maturity, or in the
case of a lease, a default occurs and is continuing that permits the
lessor to either terminate the lease or require us to make an
irrevocable offer to terminate the lease following an event of default
under the lease, and the trustee receives a notice of such default
(called a "payment blockage notice") from us or any other person
permitted to give such notice under the indenture (called a
"non-payment default").
We may resume payments and distributions on the notes:
o in case of a payment default, upon the date on which such default is
cured or waived or ceases to exist; and
o in case of a non-payment default, the earlier of the date on which
such nonpayment default is cured or waived or ceases to exist or 179
days after the date on which the payment blockage notice is received,
if the maturity of the designated senior indebtedness has not been
accelerated, or in the case of any lease, 179 days after notice is
received if we have not received notice that the lessor under such
lease has exercised its right to terminate the lease or require us to
make an irrevocable offer to terminate the lease following an event of
default under the lease.
No new period of payment blockage may be commenced pursuant to a payment
blockage notice unless 365 days have elapsed since the initial effectiveness of
the immediately prior payment blockage notice. No nonpayment default that
existed or was continuing on the date of delivery of any payment blockage notice
shall be the basis for any later payment blockage notice.
If the trustee or any holder of the notes receives any payment or
distribution of our assets in contravention of the subordination provisions on
the notes before all senior indebtedness is paid in full in cash or other
payment satisfactory to holders of senior indebtedness, then such payment or
distribution will be held in trust for the benefit of holders of senior
indebtedness or their representatives to the extent necessary to make payment in
full cash or payment satisfactory to the holders of senior indebtedness of all
unpaid senior indebtedness.
Because of the subordination provisions discussed above, in the event of
our bankruptcy, dissolution or reorganization, holders of senior indebtedness
may receive more, ratably, and holders of the notes may receive less, ratably,
than our other creditors. This subordination will not prevent the occurrence of
any event of default under the indenture.
The notes are exclusively obligations of SanDisk. A substantial portion of
our operations are conducted through our subsidiaries and joint ventures. As a
result, our cash flow and our ability to service our debt, including the notes,
is dependent upon the earnings of our subsidiaries and joint ventures. In
addition, we are dependent on the
29
distribution of earnings, loans or other payments from our subsidiaries and
joint ventures. In addition, any payment of dividends, distributions, loans or
advances by our subsidiaries and joint ventures to us could be subject to
statutory or contractual restrictions. Payments to us by our subsidiaries and
joint ventures will also be contingent upon our subsidiaries' and joint
ventures' earnings and business considerations.
Our right to receive any assets of any of our current or future
subsidiaries and joint ventures upon their liquidation or reorganization, and
therefore the right of the holders to participate in those assets, will be
effectively subordinated to the claims of that subsidiary's and joint ventures'
creditors, including trade creditors. In addition, even if we were a creditor to
any of our subsidiaries, our rights as a creditor would be subordinate to any
security interest in the assets of our subsidiaries and any indebtedness of our
subsidiaries senior to that held by us.
The term "senior indebtedness" is defined in the indenture and includes
principal, premium, interest, rent, fees, costs, expenses and other amounts
accrued or due on our existing or future indebtedness, as defined below, or any
existing or future indebtedness guaranteed or in effect guaranteed by us,
subject to certain exceptions. The term does not include:
o any indebtedness that by its express terms is not senior to the notes
or is pari passu or junior to the notes;
o any indebtedness we owe to any of our majority-owned subsidiaries; or
o the notes.
The term "indebtedness" is also defined in the indenture and includes, in
general terms, our liabilities in respect of borrowed money, notes, bonds,
debentures, letters of credit, bank guarantees, bankers' acceptances, capital
and certain other leases, interest rate and foreign currency derivative
contracts or similar arrangements, guarantees and certain other obligations
described in the indenture, subject to certain exceptions. The term does not
include, for example, any account payable or other accrued current liability or
obligation incurred in the ordinary course of business in connection with the
obtaining of materials or services.
The term "designated senior indebtedness" is defined in the indenture and
includes, in general terms, any senior indebtedness that by its terms expressly
provides that it is "designated senior indebtedness" for purposes of the
indenture. The term also includes our guarantee obligations on the FlashVision
equipment lease lines with ABN AMRO.
As of December 31, 2001, we had guarantee obligations in the amount of
$129.5 million, and as of March 31, 2002 we had guarantee obligations of $148.8
million, on the FlashVision equipment lease lines with ABN AMRO, as agent for a
syndicate of financial institutions, and no other senior indebtedness or
material subsidiary indebtedness outstanding. Neither we nor our subsidiaries
are prohibited from incurring debt, including senior indebtedness, under the
indenture. We may from time to time incur additional debt, including senior
indebtedness. Our subsidiaries may also from time to time incur additional debt
and liabilities.
We are obligated to pay agreed upon compensation to the trustee and to
indemnify the trustee against certain losses, liabilities or expenses incurred
by the trustee in connection with its duties relating to the notes. The
trustee's claims for these payments will generally be senior to those of holders
of notes in respect of all funds collected or held by the trustee.
Merger and Sale of Assets by Us
The indenture provides that we may not consolidate with or merge with or
into any other person or convey, transfer or lease our properties and assets
substantially as an entirety to another person, unless among other items:
o we are the surviving person, or the resulting, surviving or transferee
person, if other than SanDisk is organized and existing under the laws
of the United States, any state thereof or the District of Columbia,
or any other country if the merger, consolidation or other transaction
would not impair the rights of holders;
o any successor person assumes all our obligations under the notes and
the indenture; and
o we or such successor person will not be in default under the indenture
immediately after the transaction.
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When such a person assumes our obligations in such circumstances, subject
to certain exceptions, we shall be discharged from all obligations under the
notes and the indenture.
Events of Default; Notice and Waiver
The following will be events of default under the indenture:
o we fail to pay principal or premium, if any, when due upon redemption
or otherwise on the notes, whether or not the payment is prohibited by
subordination provisions; or
o we fail to pay any interest or liquidated damages, if any, on the
notes, when due and such failure continues for a period of 30 days,
whether or not the payment is prohibited by subordination provisions
of the indenture; or
o we fail to perform or observe any of the covenants in the indenture
for 60 days after notice thereof has been given to us; or
o certain events involving our bankruptcy, insolvency or reorganization.
The trustee may withhold notice to the holders of the notes of any default,
except defaults in payment of principal, premium, interest or liquidated
damages, if any, on the notes. However, the trustee must consider it to be in
the interest of the holders of the notes to withhold this notice.
If an event of default occurs and continues, the trustee or the holders of
at least 25% in principal amount of the outstanding notes may declare the
principal, premium, if any, and accrued interest and liquidated damages, if any,
on the outstanding notes to be immediately due and payable. In case of certain
events of bankruptcy or insolvency involving us, the principal, premium, if any,
and accrued interest and liquidated damages, if any, on the notes will
automatically become due and payable. However, if we cure all defaults, except
the nonpayment of principal, premium, if any, interest or liquidated damages, if
any, that became due as a result of the acceleration, and meet certain other
conditions, with certain exceptions, this declaration may be cancelled and the
holders of a majority of the principal amount of outstanding notes may waive
these past defaults.
Payment of principal, premium, if any, or interest on the notes that are
not made when due will accrue interest at the annual rate of 4 1/2% from the
required payment date.
The holders of a majority of outstanding notes will have the right to
direct the time, method and place of any proceedings for any remedy available to
the trustee, subject to limitations specified in the indenture.
No holder of the notes may pursue any remedy under the indenture, except in
the case of a default in the payment of principal, premium, if any, or interest
on the notes, unless:
o the holder has given the trustee written notice of an event of
default;
o the holders of at least 25% in principal amount of outstanding notes
make a written request, and offer indemnity satisfactory to the
trustee, to the trustee to pursue the remedy;
o the trustee does not receive an inconsistent direction from the
holders of a majority in principal amount of the notes; and
o the trustee fails to comply with the request within 60 days after
receipt.
Modification and Waiver
Except as provided below, the consent of the holders of a majority in
principal amount of the outstanding notes is required to modify or amend the
indenture. However, a modification or amendment requires the consent of the
holder of each outstanding note if it would:
o extend the fixed maturity of any note;
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o reduce the rate or extend the time for payment of interest of any
note;
o reduce the principal amount or premium of any note;
o reduce any amount payable upon redemption or repurchase of any note;
o adversely change our obligation to redeem any note upon a fundamental
change;
o impair the right of a holder to institute suit for payment on any
note;
o change the currency in which any note is payable;
o impair the right of a holder to convert any note;
o adversely modify, in any material respect, the subordination
provisions of the indenture;
o reduce the quorum or voting requirements under the indenture;
o change any obligation of SanDisk to maintain an office or agency in
the places and for the purposes specified in the indenture;
o subject to specified exceptions, modify certain of the provisions of
the indenture relating to modification or waiver of provisions of the
indenture; or
o reduce the percentage of notes required for consent to any
modification of the indenture.
We are permitted to modify certain provisions of the indenture without the
consent of the holders of the notes.
Form, Denomination and Registration
The notes are issued:
o in registered form;
o without interest coupons; and
o in denominations of $1,000 principal amount and multiples of $1,000.
Global Note, Book-Entry Form
The notes are currently evidenced by one or more global notes (collectively
referred to herein as the global note), deposited with the trustee as custodian
for DTC and registered in the name of Cede & Co. as DTC's nominee. Except as set
forth below, the global note may be transferred, in whole or in part, only to
another nominee of DTC or to a successor of DTC or its nominee.
A qualified institutional buyer, or QIB, may hold its beneficial interest
in a global note directly through DTC if the QIB is a participant in DTC, or
indirectly through organizations that are participants in DTC (called
participants). Transfers between participants will be effected in the ordinary
way in accordance with DTC rules and will be settled in clearing house funds.
The laws of some states require that certain persons take physical delivery of
securities in definitive form. As a result, the ability to transfer beneficial
interests in the global note to such persons may be limited.
QIBs who are not participants may beneficially own interests in a global
note held by DTC only through participants, or certain banks, brokers, dealers,
trust companies and other parties that clear through or maintain a custodial
relationship with a participant, either directly or indirectly (called indirect
participants). So long as Cede & Co., as the nominee of DTC, is the registered
owner of the global note, Cede & Co. for all purposes will be considered the
sole holder of the global note. Except as provided below, owners of beneficial
interests in the global note will:
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o not be entitled to have certificates registered in their names;
o not receive physical delivery of certificates in definitive registered
form; and
o not be considered holders of the global note.
We will pay interest on and the redemption price of a global note to Cede &
Co., as the registered owner of the global note, by wire transfer of immediately
available funds on each interest payment date or the redemption or repurchase
date, as the case may be. Neither we, the trustee nor any paying agent will be
responsible or liable:
o for the records relating to, or payments made on account of,
beneficial ownership interests in a global note; or
o for maintaining, supervising or reviewing any records relating to the
beneficial ownership interests.
We have been informed that DTC's practice is to credit participants'
accounts on that payment date with payments in amounts proportionate to their
respective beneficial interests in the principal amount represented by a global
note as shown in the records of DTC, unless DTC has reason to believe that it
will not receive payment on that payment date. Payments by participants to
owners of beneficial interests in the principal amount represented by a global
note held through participants will be the responsibility of the participants,
as is now the case with securities held for the accounts of customers registered
in street name.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants, the ability of a person having a beneficial
interest in the principal amount represented by the global note to pledge such
interest to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such interest, may be affected by the lack
of a physical certificate evidencing its interest.
Neither we, the trustee, registrar, paying agent nor conversion agent will
have any responsibility for the performance by DTC or its participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations. DTC has advised us that it will take any
action permitted to be taken by a holder of the notes, including the
presentation of notes for exchange, only at the direction of one or more
participants to whose account with DTC interests in the global note are
credited, and only in respect of the principal amount of the notes represented
by the global note as to which the participant or participants has or have given
such direction.
DTC has advised us that it is:
o a limited purpose trust company organized under the laws of the State
of New York, and a member of the Federal Reserve System;
o a clearing corporation within the meaning of the Uniform Commercial
Code; and
o a clearing agency registered pursuant to the provisions of Section 17A
of the Exchange Act.
DTC was created to hold securities for its participants and to facilitate
the clearance and settlement of securities transactions between participants
through electronic book-entry changes to the accounts of its participants.
Participants include securities brokers, dealers, banks, trust companies and
clearing corporations and other organizations. Some of the participants or their
representatives, together with other entities, own DTC. Indirect access to the
DTC system is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
DTC has agreed to the foregoing procedures to facilitate transfers of
interests in the global note among participants. However, DTC is under no
obligation to perform or continue to perform these procedures, and may
discontinue these procedures at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
us within 90 days, we will issue notes in certificated form in exchange for
global notes.
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Certificated Notes
QIBs may request that certificated notes be issued in exchange for notes
represented by the global note only in limited circumstances.
Restrictions on Transfer, Legends
The notes are subject to transfer restrictions as described below under
"Transfer Restrictions" and certificates for the notes bear a legend to this
effect.
Registration Rights of the Noteholders
We have entered into a registration rights agreement with the initial
purchasers. In the registration rights agreement, we agreed to file this shelf
registration statement with the SEC covering resale of the registrable
securities by April 8, 2002. We agreed to use our commercially reasonable
efforts to cause this shelf registration statement to become effective within
180 days after the date the notes were originally issued. We agreed to use
commercially reasonable efforts to keep this shelf registration statement
effective until the earlier of:
o the date all of the registrable securities have been sold pursuant to
the shelf registration statement; or
o the expiration of the holding period under Rule 144(k) under the
Securities Act, or any successor provision, without regard to a
holder's status as an affiliate of ours thereunder.
When we use the term registrable securities in this section, we are
referring to the notes and the common stock issuable upon conversion of the
notes until the earliest of:
o the effective registration under the Securities Act and the resale of
the securities in accordance with the registration statement;
o the expiration of the holding period under Rule 144(k) under the
Securities Act, or any successor provision, without regard to a
holder's status as an affiliate of ours thereunder; and
o the sale to the public pursuant to Rule 144 under the Securities Act,
or any similar provision then in force, but not Rule 144A.
We may suspend the use of the prospectus that is part of this shelf
registration statement under certain circumstances relating to pending corporate
developments, public filings with the SEC and similar events. Any suspension
period shall not:
o exceed 30 days in any three-month period; or
o an aggregate of 90 days for all periods in any 12-month period.
Notwithstanding the foregoing, we will be permitted to suspend the use of
the prospectus that is part of this shelf registration statement for up to 60
days in any three-month period under certain circumstances, relating to possible
acquisitions, financings or other similar transactions.
We will pay predetermined liquidated damages if this shelf registration
statement is not timely filed or made effective or if the prospectus that is
part of this shelf registration statement is unavailable for periods in excess
of those permitted above:
o on the notes at an annual rate equal to 0.5% of the aggregate
principal amount of the notes outstanding until the registration
statement is filed or made effective or during the additional period
the prospectus is unavailable; and
o on the common stock that has been converted, at an annual rate equal
to 0.5% of an amount equal to $1,000 divided by the conversion rate
during such periods.
A holder who elects to sell registrable securities pursuant to this shelf
registration statement will be required to:
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o be named as a selling stockholder in the related prospectus;
o deliver a prospectus to purchasers; and
o be subject to the provisions of the registration rights agreement,
including indemnification provisions.
Under the registration rights agreement we agreed to:
o pay all expenses of this shelf registration statement;
o provide each registered holder copies of the prospectus;
o notify holders when this shelf registration statement has become
effective; and
o take other reasonable actions as are required to permit unrestricted
resales of the registrable securities in accordance with the terms and
conditions of the registration rights agreement.
The plan of distribution of this shelf registration statement permits
resales of registrable securities by selling securityholders though brokers and
dealers.
We will give notice to all holders of the filing and effectiveness of this
shelf registration statement by issuing a press release to Reuters Economic
Services and Bloomberg Business News. We mailed a form of notice and
questionnaire to be completed and delivered by a holder interested in selling
its registrable securities pursuant to this shelf registration statement. In
order to sell your registrable securities, you must complete and deliver the
questionnaire to us prior to your intended disposition. In order to be named as
a selling stockholder in the prospectus at the time of effectiveness of this
shelf registration statement, you must complete and deliver the questionnaire to
us on or prior to the tenth business day before the effectiveness of this
registration statement. Upon receipt of a completed questionnaire after that
time, together with any other information we may reasonably request following
the effectiveness, we will, within 5 business days, file any amendments to the
shelf registration statement or supplements to the related prospectus as are
necessary to permit you to deliver your prospectus to purchasers of registrable
securities, subject to our right to suspend the use of the prospectus (in which
case we will file such amendments within 5 business days of when such suspension
is ended). We will pay the predetermined liquidated damages described above to
the holder if we fail to make the filing in the time required or, if such filing
is a post-effective amendment to the shelf registration statement required to be
declared effective under the Securities Act, if such amendment is not declared
effective within 45 days of the filing. If you do not complete and deliver a
questionnaire or provide the other information we may request, you will not be
named as a selling stockholder in the prospectus and will not be permitted to
sell your registrable securities pursuant to this shelf registration statement.
This summary of the registration rights agreement is not complete. This summary
is subject to, and is qualified in its entirety by reference to, all the
provisions of the registration rights agreement.
Rule 144A Information Request
We will furnish to the holders or beneficial holders of the notes or the
underlying common stock and prospective purchasers, upon their request, the
information required under Rule 144A(d)(4) under the Securities Act until such
time as such securities are no longer restricted securities within the meaning
of Rule 144 under the Securities Act, assuming these securities have not been
owned by an affiliate of ours.
Information Concerning the Trustee
We have appointed The Bank of New York, the trustee under the indenture, as
paying agent, conversion agent, note registrar and custodian for the notes. The
trustee or its affiliates may provide banking and other services to us in the
ordinary course of their business.
The indenture contains certain limitations on the rights of the trustee, if
it or any of its affiliates is then our creditor, to obtain payment of claims in
certain cases or to realize on certain property received on any claim as
security or otherwise. The trustee and its affiliates will be permitted to
engage in other transactions with us.
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However, if the trustee or any affiliate continues to have any conflicting
interest and a default occurs with respect to the notes, the trustee must
eliminate such conflict or resign.
DESCRIPTION OF CAPITAL STOCK
General
As of March 31, 2002, there were 68,674,948 shares of our common stock
issued and outstanding. We are authorized to issue 400,000,000 shares of common
stock, $0.001 par value per share. We are also authorized to issue 4,000,000
shares of preferred stock, $0.001 par value per share, of which as of March 31,
2002, 400,000 shares had been designated Series A Junior Participating Preferred
Stock and the remainder were undesignated. The following description summarizes
the material features of our capital stock and some provisions of Delaware
corporate law that apply to us. For greater detail about our capital stock,
please refer to our certificate of incorporation and our bylaws.
Common Stock
The holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders and are entitled to cumulate shares
for purposes of voting to elect directors. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of our common stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by our board of directors out of funds legally available for that
purpose. If we liquidate, dissolve or wind up, the holders of our common stock
are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of our preferred stock, if
any, then outstanding. Our common stock has no preemptive or conversion rights
or other subscription rights. There are no redemption or sinking fund provisions
applicable to our common stock.
Preferred Stock
Our board of directors has the authority to issue preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions of
each series, including dividend rights, conversion rights, voting rights, terms
of redemption, redemption prices, liquidation preferences and the number of
shares constituting any series or the designation of such series, without
further vote or action by our stockholders. The issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control of us
without further action by the stockholders and may adversely affect the voting
and other rights of the holders of our common stock. The issuance of preferred
stock with voting and conversion rights may adversely affect the voting power of
the holders of our common stock, including the loss of voting control to others.
In connection with the adoption of our shareholder rights plan described
below, our board of directors designated 400,000 shares of our preferred stock
as Series A Junior Participating Preferred Stock.
Shareholder Rights Plan
On April 18, 1997, we declared a dividend of one preferred share purchase
right for each outstanding share of our common stock, $0.001 par value. The
dividend was paid on April 28, 1997, the record date, to the stockholders of
record on that date. Each right entitles the registered holder to purchase from
us one one-hundredth of a share of our Series A Junior Participating Preferred
Stock, $0.001 par value (known as preferred shares), at a price of $500.00 per
one one-hundredth of a preferred share, subject to adjustment. Because the
rights may substantially dilute the stock ownership of a person or group
attempting to take us over without the approval of our board of directors, our
rights plan could make it more difficult for a third party to acquire us, or a
significant portion of our capital stock, without first negotiating with our
board of directors regarding the acquisition.
Rights Agreement. The description and terms of the rights are set forth in
a rights agreement between us and Computershare Investor Services, L.L.C, as the
rights agent, as amended to date.
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Exercisability of the Rights; Rights Distribution Date. The rights are not
exercisable until the rights distribution date. The rights distribution date
would occur, if ever, upon the earlier to occur of the following:
o ten business days after a public announcement that a person or group
of affiliated or associated persons, known as an acquiring person, has
acquired beneficial ownership of 15% or more of our outstanding common
stock, or
o ten business days (or such later date as may be determined by action
of the board of directors prior to such time as any person becomes an
acquiring person) following the commencement of, or announcement of an
intention to make, a tender offer or exchange offer the consummation
of which would result in the beneficial ownership by a person or group
of 15% or more of our outstanding common stock.
Transferability of Rights. Until the rights distribution date, our common
stock certificates will evidence the rights, and the transfer of our common
stock certificates will constitute a transfer of the rights. Until the rights
distribution date (or earlier redemption or expiration of the rights), new
certificates for our common stock issued after the record date, upon transfer or
new issuance of our common stock, will contain a notation incorporating the
rights agreement by reference. As soon as practicable following the rights
distribution date, separate certificates evidencing the rights, known as right
certificates, will be mailed to holders of record of our common stock as of the
close of business on the rights distribution date and such separate right
certificates alone will evidence the rights.
Expiration Date of Rights. If not previously exercised or redeemed, the
rights will expire at the close of business on April 28, 2007, the final
expiration date, unless the final expiration date is extended.
Anti-Dilution Adjustment. The purchase price payable, and the number of
preferred shares or other securities or property issuable, upon exercise of the
rights are subject to adjustment from time to time to prevent dilution under the
following circumstances:
o in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the preferred shares,
o upon the grant to holders of the preferred shares of certain rights or
warrants to subscribe for or purchase preferred shares at a price, or
securities convertible into preferred shares with a conversion price,
less than the then current market price of the preferred shares, or
o upon the distribution to holders of the preferred shares of evidences
of indebtedness or assets (excluding regular periodic cash dividends
paid out of earnings or retained earnings or dividends payable in
preferred shares) or of subscription rights or warrants (other than
those referred to above).
The number of outstanding rights and the number of one one-hundredths of a
preferred share issuable upon exercise of each right are also subject to
adjustment in the event of a stock split of our common stock or a stock dividend
on our common stock payable in our common stock or subdivisions, consolidations
or combinations of our common stock occurring, in any such case, prior to the
rights distribution date.
With certain exceptions, no adjustment in the purchase price will be
required until cumulative adjustments require an adjustment of at least 1% in
such purchase price. No fractional preferred shares will be issued (other than
fractions which are integral multiples of one one-hundredth of a preferred
share, which may, at our election, be evidenced by depositary receipts) and, in
lieu thereof, an adjustment in cash will be made based on the market price of
the preferred shares on the last trading day prior to the date of exercise.
No Stockholder Rights. A right holder, as such, has no rights as a
stockholder of SanDisk, including, without limitation, the right to vote or
receive dividends.
No Redemption of Preferred Shares. Preferred shares purchasable upon
exercise of the rights will not be redeemable. Each preferred share will be
entitled to an aggregate dividend of 100 times the dividend declared per share
of our common stock. In the event of liquidation, the holders of preferred
shares will be entitled to an aggregate payment of 100 times the payment made
per share of our common stock. Each preferred share will have 100 votes, voting
together with the common stock. Finally, in the event of any merger,
consolidation or other transaction in which our common stock is exchanged, each
preferred share will be entitled to receive 100 times the amount received per
share of our common stock. These rights are protected by customary antidilution
provisions.
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Because of the nature of the preferred shares' dividend, liquidation and
voting rights, the value of the one one-hundredth interest in a preferred share
purchasable upon exercise of each right should approximate the value of one
share of our common stock.
Redemption of Rights. By a majority vote of our board of directors, we may
redeem the rights in whole, but not in part, at a price of $0.01 per right at
any time before the earlier of the rights distribution date or the close of
business on the expiration date described below. The redemption of the rights
may be made effective at such time on such basis and with such conditions as our
board of directors in its sole discretion may establish. Immediately upon any
redemption of the rights, the right to exercise the rights will terminate and
the only right of the holders of rights will be to receive the redemption price.
The rights are also redeemable under other circumstances as specified in the
rights agreement.
Mergers, Asset Sales and Self-Dealing Transactions. In the event that,
following the rights distribution date, we are acquired in a merger or other
business combination transaction, or 50% or more of our consolidated assets or
earning power are sold, proper provision is to be made so that each holder of a
right will thereafter have the right to receive, upon the exercise thereof at
the then current exercise price of the right, that number of shares of common
stock of the acquiring company which at the time of such transaction will have a
market value of two times the exercise price of the right.
In the event that any person or group of affiliated or associated persons
becomes the beneficial owner of 15% or more of our outstanding common stock
(except pursuant to a tender offer for all of our common stock at a price and on
terms determined by a majority of our board of directors to be fair to and
otherwise in the our best interests and the best interests of our stockholders),
each holder of a right, other than rights beneficially owned by the acquiring
person (which will thereafter be void), will thereafter have the right to
receive upon exercise that number of shares of our common stock (or cash, other
securities or property) having a market value of two times the exercise price of
the right.
Exchange Option. At any time after the acquisition by a person or group of
affiliated or associated persons of beneficial ownership of 15% or more of our
outstanding common stock and prior to the acquisition by such person or group of
50% or more of our outstanding common stock, our board of directors may exchange
the rights (other than the rights owned by such person or group which have
become void), in whole or in part, at an exchange ratio of one share of our
common stock (or a fraction of a share of our preferred shares having equivalent
market value) per right (subject to adjustment).
Amendments. The terms of the rights may be amended by our board of
directors without the consent of the holders of the rights, including an
amendment to lower certain thresholds described above to not less than the
greater of (i) any percentage greater than the largest percentage of our
outstanding common stock then known to us to be beneficially owned by any person
or group of affiliated or associated persons and (ii) 15%, except that from and
after the rights distribution date no such amendment may adversely affect the
interests of the holders of the rights.
Anti-takeover Provisions of Our Restated Certificate of Incorporation, as
amended, our Restated Bylaws and Delaware Law
Provisions in our certificate of incorporation and bylaws may delay or
prevent a change of control or changes in our management. These provisions
include:
Certificate of Incorporation and Bylaws. Several provisions of our
certificate of incorporation and bylaws could deter or delay unsolicited changes
in control of us. These include provisions restricting or eliminating the
stockholders' power to fill vacancies on the board of directors, nominate
directors and raise other matters at stockholders' meetings. In addition, our
board of directors has the authority, without further action by the
stockholders, to fix the rights and preferences of and issue preferred stock.
These provisions and others that could be adopted in the future could deter
unsolicited takeovers or delay or prevent changes in control of us or our
management, including transactions in which stockholders might otherwise receive
a premium for their shares over then current market prices. In addition, these
provisions could limit the ability of stockholders to approve transactions that
they may deem to be in their best interests. See "Risk Factors--Anti-Takeover
Provisions."
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Section 203 Business Combinations. We are subject to the provisions of
Section 203 of the Delaware General Corporation Law. In general, this statute
prohibits a Delaware corporation from engaging in a business combination with
any interested stockholder for a period of three years following the time that
such stockholder became an interested stockholder, unless (1) prior to such
time, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; or (2) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (i) by persons
who are directors and also officers and (ii) employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (3) at or subsequent to such time, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder.
Generally, a "business combination" includes a merger, asset or stock sale,
or other transaction resulting in a financial benefit to the stockholders. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior did own) 15% or more of the
corporation's voting stock.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Computershare
Investor Services, L.L.C.
Listing
Our common stock is traded on the Nasdaq National Market under the trading
symbol SNDK.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following describes the material United States federal income and, in
the case of non-United States holders, estate tax considerations relating to the
purchase, ownership and disposition of the notes and of the common stock into
which the notes may be converted, by initial holders thereof, but does not
purport to be a complete analysis of all the potential tax considerations
relating thereto. This discussion is based upon the provisions of the Internal
Revenue Code of 1986, as amended, Treasury regulations promulgated under the
Internal Revenue Code, administrative rulings and judicial decisions, all as of
the date hereof. These authorities may be changed, perhaps retroactively, so as
to result in United States federal income and estate tax consequences different
from those set forth below. We have not sought any ruling from the Internal
Revenue Service or an opinion of counsel with respect to the statements made and
the conclusions reached in the following discussion, and there can be no
assurance that the Internal Revenue Service will agree with such statements and
conclusions.
This discussion assumes that the notes, and the common stock into which the
notes may be converted, are held as capital assets. This discussion also assumes
that holders purchased the notes upon their initial issuance pursuant to the
offering memorandum at the notes' initial offering price. This discussion does
not describe the tax considerations applicable to subsequent purchasers of the
notes. This discussion also does not address the tax considerations arising
under the laws of any foreign, state or local jurisdiction. In addition, this
discussion does not address all tax considerations that may be applicable to
holders in light of their own particular circumstances or to holders that may be
subject to special tax rules, including, without limitation:
o holders subject to the alternative minimum tax;
o banks, insurance companies, or other financial institutions;
o tax-exempt organizations;
o dealers in securities or commodities;
o traders in securities that elect to use a mark-to-market method of
accounting for their securities holdings;
o holders whose "functional currency" is not the United States dollar;
39
o persons that will hold the notes as a position in a hedging
transaction, "straddle," "conversion transaction" or other risk
reduction transaction; or
o persons deemed to sell the notes under the constructive sale
provisions of the Internal Revenue Code.
If a partnership holds notes, the tax treatment of a partner in the
partnership will generally depend upon the status of the partner and the
activities of the partnership. If you are a partner or a partnership holding our
notes, or our common stock, you should consult your tax advisor regarding the
tax consequences of the purchase, ownership and disposition of the notes and of
the common stock into which the notes may be converted.
THIS DISCUSSION OF MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. YOU ARE URGED TO CONSULT
YOUR TAX ADVISOR WITH RESPECT TO THE APPLICATION OF UNITED STATES FEDERAL INCOME
TAX LAWS TO YOUR PARTICULAR SITUATION AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE UNITED STATES FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF
ANY STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION OR UNDER ANY APPLICABLE
TAX TREATY.
Consequences to United States Holders
The following is a discussion of the material United States federal income
tax consequences that will apply to you if you are a United States holder of the
notes or of the common stock into which the notes may be converted. Certain
consequences to "non-United States holders" of the notes and of the common stock
into which the notes may be converted are described under "--Consequences to
Non-United States Holders" below. "United States holder" means a beneficial
owner of a note or of the common stock into which the notes may be converted
that is:
o a citizen or resident of the United States, as determined for federal
income tax purposes;
o a corporation created or organized in or under the laws of the United
States or any political subdivision of the United States;
o an estate the income of which is subject to United States federal
income taxation regardless of its source; or
o a trust that (1) is subject to the supervision of a court within the
United States and the control of one or more United States persons or
(2) has a valid election in effect under applicable Treasury
regulations to be treated as a United States person.
Payments of Interest
Stated interest on the notes will generally be taxable to you as ordinary
income at the time it is paid or accrued in accordance with your method of
accounting for tax purposes.
If the terms of a debt instrument entitle a holder to receive payments
other than fixed periodic interest that exceed the issue price of the
instrument, the holder may be required to recognize additional interest as
"original issue discount" over the term of the instrument. However, under
Treasury Regulations, the possibility of an additional payment under a note may
be disregarded for purposes of determining the amount of such interest or
original issue discount income to be recognized by the holder in respect of such
note (or the timing of such recognition) if the likelihood of the payment, as of
the date the notes are issued, is a "remote" or "incidental" contingency. We
intend to take the position for United States federal income tax purposes that
any payments of liquidated damages, as described under "Registration Rights of
the Noteholders" should be taxable to you as ordinary interest income when
received or accrued, in accordance with your method of tax accounting. This
position is based in part on the assumption that as of the date of issuance of
the notes, the possibility that liquidated damages will have to be paid is a
"remote" or "incidental" contingency within the meaning of applicable Treasury
Regulations. Our determination that such possibility is a remote or incidental
contingency is binding on you unless you explicitly disclose to the Internal
Revenue Service that you are taking a different position on your tax return for
the year during which you acquire the note. However, the Internal Revenue
Service may take a contrary position from that described above, which could
affect the timing and character of both your income from the notes and our
deduction with respect to the payments of liquidated damages.
If we do fail to timely register the notes for sale to the public, you
should consult your tax advisor concerning the appropriate tax treatment of the
payment of liquidated damages on the notes.
40
Disposition of the Notes
Upon the sale, exchange (other than a conversion), redemption or other
disposition of a note, you generally will recognize taxable gain or loss equal
to the difference between (i) the sum of cash plus the fair market value of all
other property received on such disposition (except to the extent such cash or
property is attributable to accrued but unpaid interest, which is treated as
interest as described above) and (ii) your adjusted tax basis in the note. Your
adjusted tax basis in a note generally will equal the amount you paid for such
note less any principal payments you have received in respect of such note.
Gain or loss recognized on the disposition of a note generally will be
capital gain or loss, and will be long-term capital gain or loss if, at any time
of the disposition, your holding period for the note is more than 12 months.
Long-term capital gains recognized by some noncorporate United States holders,
including individuals, will generally be subject to taxation at reduced rates.
The deductibility of capital losses by United States holders is subject to
limitations.
Conversion of the Notes
You generally will not recognize any income, gain or loss upon conversion
of a note into common stock, except to the extent the common stock is considered
attributable to accrued interest not previously included in income and, thus, is
taxable as ordinary income or with respect to cash received in lieu of a
fractional share of common stock. Your tax basis in the common stock received on
conversion of a note will be the same as your adjusted tax basis in the note at
the time of conversion reduced by any basis allocable to a fractional share
interest, and the holding period for the common stock received on conversion
will generally include the holding period of the note converted. However, your
tax basis in any shares of common stock considered attributable to accrued
interest generally will equal the amount of such accrued interest included in
income, and the holding period for such shares shall begin on the date of
conversion.
Cash received in lieu of a fractional share of common stock upon conversion
will be treated as a payment in exchange for the fractional share of common
stock. Accordingly, the receipt of cash in lieu of a fractional share of common
stock generally will result in capital gain or loss (measured by the difference
between the cash received for the fractional share and your adjusted tax basis
in the fractional share).
Dividends
Distributions, if any, on the common stock after a conversion generally
will constitute a dividend to be included in your income as ordinary income to
the extent of our current or accumulated earnings and profits as determined
under U.S. federal income tax principles. Distributions on the common stock in
excess of our current and accumulated earnings and profits will be treated as a
return of capital to the extent of your basis in the common stock and thereafter
as capital gain.
Holders of convertible debt instruments such as the notes may, in certain
circumstances, be deemed to have received constructive distributions where the
conversion ratio of such instruments is adjusted. Adjustments to the conversion
price made pursuant to a bona fide reasonable adjustment formula which has the
effect of preventing the dilution of the interest of the holders of the debt
instruments, however, will generally not be considered to result in a
constructive distribution of stock. Certain of the possible adjustments provided
in the notes, including, without limitation, adjustments in respect of taxable
dividends to our stockholders, will not qualify as being pursuant to a bona fide
reasonable adjustment formula. If such adjustments are made, the holders of
notes will be deemed to have received constructive distributions taxable as
dividends to the extent of our current and accumulated earnings and profits even
though they have not received any cash or property as a result of such
adjustments. In certain circumstances the failure of the notes to provide for
such an adjustment may result in taxable dividend income to the holders of
common stock.
Sale of Common Stock
Upon the sale or exchange of common stock, you generally will recognize
capital gain or loss equal to the sum of the amount of cash and the fair market
value of any property received upon the sale or exchange minus your adjusted tax
basis in the common stock. Such capital gain or loss will be long-term capital
gain or loss if your holding period in the common stock is more than one year at
the time of the sale or exchange. Long-term capital gains recognized by
noncorporate United States holders, including individuals, will generally be
subject to taxation at reduced rates. The deductibility of capital losses is
subject to limitations. A holder's basis and holding period in common stock
received upon conversion of a note are determined as discussed above under "--
Conversion of the Notes."
41
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to certain
payments of principal and interest on, and the proceeds of certain sales of,
notes, and to payments in respect of common stock, including the proceeds of
certain sales thereof, unless you are an exempt recipient. Backup withholding on
such payments will be required if you fail to provide your taxpayer
identification number or certification of exempt status or have been notified by
the Internal Revenue Service that payments to you are subject to backup
withholding.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will generally be allowed as a refund or a credit
against your United States federal income tax liability, provided the required
information is properly furnished to the Internal Revenue Service on a timely
basis.
Consequences to Non-United States Holders
The following is a discussion of the material United States federal income
and estate tax consequences that will apply to you if you are a non-United
States holder of the notes. The term "non-United States holder" means a
beneficial owner of a note that is not a United States holder.
Special rules may apply to certain non-United States holders such as
"controlled foreign corporations," "passive foreign investment companies" and
"foreign personal holding companies." Such entities should consult their own tax
advisors to determine the United States federal, state, local and other tax
consequences that may be relevant to them.
Payment of Interest
The 30% United States federal withholding tax otherwise applicable to
payments of United States source interest will not apply to any payment to you
of interest on a note, provided that:
o you do not actually or constructively own 10% or more of the total
combined voting power of all classes of our stock that are entitled to
vote within the meaning of section 871(h)(3) of the Internal Revenue
Code;
o you are not a controlled foreign corporation that is related to us
through stock ownership;
o you are not a bank whose receipt of interest on a note is described in
section 881(c)(3)(A) of the Internal Revenue Code; and
o (a) you provide your name and address, and certify, under penalties of
perjury, that you are not a United States person (which certification
may be made on an Internal Revenue Service Form W-8BEN) or (b) if the
note is held through an intermediary, including a securities clearing
organization, bank, or other financial institution that holds
customers' securities in the ordinary course of its business, such
intermediary complies with certification requirements, including the
provision of an Internal Revenue Service Form W-8INY, and provides a
copy of your Internal Revenue Service Form W-8BEN. If the notes are
held by or through certain foreign intermediaries or certain foreign
partnerships, such foreign intermediaries or partnerships must also
satisfy the certification requirements of applicable Treasury
regulations.
If you cannot satisfy the requirements described above, payments of
interest will be subject to the 30% United States federal withholding tax,
unless you provide us with a properly executed (1) Internal Revenue Service Form
W-8BEN claiming an exemption from or reduction in withholding under the benefit
of an applicable tax treaty or (2) Internal Revenue Service Form W-8ECI stating
that interest paid on the note is not subject to withholding tax because it is
effectively connected with your conduct of a trade or business in the United
States.
If you are engaged in a trade or business in the United States and interest
on a note is effectively connected with the conduct of that trade or business
you will be required to pay United States federal income tax on that interest on
a net income basis (although exempt from the 30% withholding tax, provided the
certification requirement described above is met) in the same manner as if you
were a United States person as defined under the Internal Revenue Code, except
as otherwise provided by an applicable tax treaty. In addition, if you are a
foreign corporation, you may be subject to a branch profits tax equal to 30% (or
lower applicable treaty rate) of your earnings and profits for the taxable year,
subject to adjustments, that are effectively connected with your conduct of a
trade or business in the United States. For this purpose, interest will be
included in the earnings and profits of such foreign corporation.
We believe that payments of liquidated damages, as described under
"Registration Rights of the Noteholders," will qualify as portfolio interest and
will not be subject to the 30% United States federal withholding tax, subject to
the qualifications discussed in this section.
42
Dividends
Dividends on common stock after conversion generally will be subject to
United States withholding tax at a 30% rate, except where an applicable tax
treaty provides for the reduction or elimination of such withholding tax.
If you are engaged in a trade or business in the United States and
dividends on the common stock are effectively connected with the conduct of such
trade or business, you will be required to pay United States federal income tax
on those dividends on a net income basis in the same manner as if you were a
United States person as defined under the Internal Revenue Code, except as
otherwise provided by an applicable tax treaty. In addition, if you are a
foreign corporation, you may be subject to a branch profits tax equal to 30% (or
lower applicable treaty rate) of your earnings and profits for the taxable year,
subject to certain adjustments, that are effectively connected with your conduct
of a trade or business in the United States. For this purpose, dividends on the
common stock generally will be included in the earnings and profits of such
foreign corporation.
Sale, Exchange or Other Taxable Disposition of Notes or Common Stock
Any gain realized upon the sale, exchange, or other taxable disposition of
a note (except with respect to accrued and unpaid interest, which would be
taxable as described above) or common stock generally will not be subject to
United States federal income tax unless:
o that gain is effectively connected with your conduct of a trade or
business in the United States;
o you are an individual who is present in the United States for 183 days
or more in the taxable year of that disposition, and certain other
conditions are met;
o you are subject to Internal Revenue Code provisions applicable to
certain United States expatriates; or
o in the case of common stock held by a person who holds more than 5% of
such stock, we are or have been, at any time within the shorter of the
five-year period preceding such sale or other disposition or the
period such holder held the common stock, a United States real
property holding corporation for United States federal income tax
purposes. We do not believe that we are currently or ever have been a
United States real property holding corporation or that we will become
one in the future. If, however, we become a real property holding
corporation, then under certain circumstances you may be subject to
United States income tax on gain realized upon any sale or other
disposition of notes or common stock.
A holder described in the first bullet point above will be required to pay
United States federal income tax on the net gain derived from the sale, except
as otherwise required by an applicable tax treaty, and if such holder is a
foreign corporation, it may also be required to pay a branch profits tax at a
30% rate or a lower rate if so specified by an applicable income tax treaty. A
holder described in the second bullet point above will be subject to a 30%
United States federal income tax on the gain derived from the sale, which may be
offset by United States source capital losses, even though the holder is not
considered a resident of the United States.
United States Federal Estate Tax
The United States federal estate tax will not apply to the notes owned by
you at the time of your death, provided that (1) you do not own actually or
constructively 10% or more of the total combined voting power of all classes of
our voting stock (within the meaning of the Internal Revenue Code and the
Treasury regulations) and (2) interest on the note would not have been, if
received at the time of your death, effectively connected with your conduct of a
trade or business in the United States. Common stock held by you at the time of
your death will be included in your estate for United States federal estate tax
purposes, unless an applicable estate tax treaty otherwise applies.
Information Reporting and Backup Withholding
The amount of interest paid to you on the note and the amount of tax
withheld, if any, will generally be reported to you and the Internal Revenue
Service. You will generally not be subject to backup withholding with respect to
payments that we make to you provided that you have made appropriate
certifications as to your foreign status, or you otherwise establish an
exemption.
Dividends on the common stock paid to you that are subject to United States
withholding tax, as described above, generally will be exempt from United States
back-up withholding tax, but will be subject to certain information reporting.
43
You will generally not be subject to backup withholding or information
reporting with respect to any payment of the proceeds of the sale of a note or
common stock effected outside the United States by a foreign office of a foreign
"broker" (as defined in applicable Treasury regulations), provided that such
broker:
o derives less than 50% of its gross income for certain periods from the
conduct of a trade or business in the United States,
o is not a controlled foreign corporation for United States federal
income tax purposes, and
o is not a foreign partnership that, at any time during its taxable
year, has 50% or more of its income or capital interests owned by
United States persons or is engaged in the conduct of a United States
trade or business.
You will be subject to information reporting, but not backup withholding,
with respect to any payment of the proceeds of a sale of a note or common stock
effected outside the United States by a foreign office of any other broker
unless such broker has documentary evidence in its records that you are not a
United States person and certain other conditions are met, or you otherwise
establish an exemption. You will be subject to backup withholding and
information reporting with respect to any payment of the proceeds of a sale of a
note or common stock effected by the United States office of a broker unless you
properly certify under penalties of perjury as to your foreign status and
certain other conditions are met or you otherwise establish an exemption.
Currently applicable Treasury regulations establish reliance standards with
regard to the certification requirements described above.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be allowed as a refund or a credit against your
United States federal income tax liability, provided the required information is
properly furnished to the Internal Revenue Service on a timely basis.
44
SELLING SECURITYHOLDERS
We originally issued the notes in private placements in December 2001 and
January 2002. The notes were resold by the initial purchasers to qualified
institutional buyers within the meaning of Rule 144A under the Securities Act in
transactions exempt from registration under the Securities Act. The notes and
the shares of common stock issuable upon conversion of the notes that may be
offered pursuant to this prospectus will be offered by the selling
securityholders, which includes their transferees, distributees, pledgees or
donees or their successors. The following table sets forth certain information
we have received as of May 22, 2002, concerning the principal amount of notes
beneficially owned by each selling securityholder and the number of conversion
shares that may be offered from time to time pursuant to this prospectus.
The number of conversion shares shown in the table below assumes conversion
of the full amount of notes held by such holder at the initial conversion rate
of 54.2535 shares per $1,000 principal amount at maturity of notes. This
conversion rate is subject to certain adjustments. Accordingly, the number of
shares of common stock issuable upon conversion of the notes may increase or
decrease from time to time. Under the terms of the indenture, fractional shares
will not be issued upon conversion of the notes. Cash will be paid instead of
fractional shares, if any. As of March 31, 2002, we had 68,674,948 shares of
common stock outstanding.
Principal Amount At Maturity Percentage Number of Conversion
of Notes Beneficially Owned of Notes Shares That May
Name That May Be Sold Outstanding Be Sold
---- ---------------------------- ----------- --------------------
Alexandra Global Investment Fund 1, LTD $9,000,000 6.00% 488,281
Zurich Institutional Benchmarks Master Fund 3,000,000 2.00% 162,760
c/o Alexandra Investment MGT LLC
Deutsche Banc Alex. Brown Inc. 6,000,000 4.00% 325,521
First Union National Bank 13,750,000 9.17% 745,985
First Union Securities Inc. 11,000,000 7.33% 596,788
Grace Brothers Management L.L.C. 1,000,000 * 54,253
GLG Market Neutral Fund 8,900,000 5.93% 482,856
GLG Global Convertible Fund 3,320,000 2.21% 180,121
GLG Global Convertible UCITS Fund 780,000 * 42,317
Highbridge International LLC 21,000,000 14.00% 1,139,323
Met Investors Bond Debenture Fund 250,000 * 13,563
B.C. McCabe Foundation 280,000 * 15,190
National Fuel Gas Co. Retirement Plan 120,000 * 6,510
Total Fina Elf Finance U.S.A., Inc. 200,000 * 10,850
Oxford, Lord Abbett & Co. 1,400,000 * 75,954
Lord, Abbett Bond Debenture Fund, Inc. 4,500,000 3.00% 244,140
Cheyne Capital Management Limited 3,000,000 2.00% 162,760
Marathon Global Convertible Master Fund 5,000,000 3.33% 271,267
TQA Master Plus Fund, Ltd. 1,000,000 * 54,253
WPG Convertible Arbitrage Overseas Master 2,000,000 1.33% 108,507
Fund, L.P.
DKR Fixed Income Holding Fund Ltd. 4,000,000 2.67% 217,014
Wachovia Securities International Ltd. 5,000,000 3.33% 271,267
Ram Trading, Ltd. 18,000,000 12.00% 976,563
Hotel Union & Hotel Industry of Hawaii Pension Plan 249,000 * 13,509
Jefferies & Company Inc. 6,000 * 325
American Samoa Government 23,000 * 1,247
BP Amoco PLC Master Trust 1,097,000 * 59,516
Viacom Inc. Pension Plan Master Trust 25,000 * 1,356
Zurich Institutional Benchmarks Master Fund Ltd. 456,000 * 24,739
The Estate of James Campbell 144,000 * 7,812
Granville Capital Corporation 1,000,000 * 54,253
Morgan Stanley & Co. Incorporated 20,000,000 13.33% 1,085,070
Any other holder of notes or future transferee 9,500,000 6.33% 515,408
from any such holder (1)
---------------------------- ----------- --------------------
Total: $150,000,000 100% 8,138,025
-------------------
* Less than 1%
(1) Information concerning other selling securityholders will be set forth in
prospectus supplements from time to time, if required.
45
The preceding table has been prepared based upon the information furnished
to us as of May 22, 2002 by the selling securityholders named above.
Except for Morgan Stanley & Co. Incorporated, which acted as managing
underwriter for our follow-on public offering of 4,950,000 shares of our common
stock in November 1999 and has provided, from time to time, and may continue to
provide, investment banking services to us, and First Union Bank, which was a
participant in the equipment lease facility with ABN AMRO to equip FlashVision,
none of the selling securityholders has had any position, office or other
material relationship with us or our affiliates within the past three years.
The selling securityholders identified above may have sold, transferred or
otherwise disposed of some or all of their notes since the date on which the
information in the preceding table is presented in transactions exempt from the
registration requirements of the Securities Act. Information concerning the
selling securityholders may change from time to time and, if necessary, we will
supplement this prospectus accordingly. We cannot give an estimate as to the
amount of the notes or conversion shares that will be held by the selling
securityholders upon the termination of this offering because the selling
securityholders may offer some or all of their notes or conversion shares
pursuant to the offering contemplated by this prospectus. See "Plan of
Distribution."
46
PLAN OF DISTRIBUTION
We will not receive any proceeds from the sale of the notes and the
underlying common stock offered by this prospectus. The selling securityholders
and their successors, which includes their transferees, distributees, pledgees
or donees or their successors, may sell the notes and the underlying common
stock directly to purchasers or through underwriters, broker-dealers or agents.
Underwriters, broker-dealers or agents may receive compensation in the form of
discounts, concessions or commissions from the selling securityholders or the
purchasers. These discounts, concessions or commissions may be in excess of
those customary in the types of transactions involved.
The notes and the underlying common stock may be sold in one or more
transactions at:
o fixed prices;
o prevailing market prices at the time of sale;
o prices related to such prevailing market prices;
o varying prices determined at the time of sale; or
o negotiated prices.
The sales may be effected in transactions in the following manner (which
may involve block transactions or transactions in which the same broker acts as
agent on both sides of the transaction, known as crosses):
o on any national securities exchange or quotation service on which the
notes or the common stock may be listed or quoted at the time of sale;
o in the over-the-counter market;
o in transactions otherwise than on such exchanges or services or in the
over-the-counter market;
o through the writing of options, whether such options are listed on an
options exchange or otherwise; or
o through the settlement of short sales.
Selling securityholders may enter into hedging transactions with
broker-dealers or other financial institutions which may in turn engage in short
sales of the notes or the underlying common stock and deliver these securities
to close out such short positions, or loan or pledge the notes or the common
stock into which the notes are convertible to broker-dealers that in turn may
sell these securities.
From time to time, one or more of the selling securityholders may
distribute, devise, gift, pledge, hypothecate or grant a security interest in
some or all of the securities owned by them. Any such distributees, devisees or
donees will be deemed to be selling securityholders. Any such pledgees, secured
parties or persons to whom the securities have been hypothecated will, upon
foreclosure in the event of default, be deemed to be selling securityholders.
The aggregate proceeds to the selling securityholders from the sale of the
notes or underlying common stock will be the purchase price of the notes or
common stock less any discounts and commissions. A selling securityholder
reserves the right to accept and, together with their agents, to reject, any
proposed purchase of notes or common stock to be made directly or through
agents. We will not receive any of the proceeds from this offering.
Our outstanding common stock is listed for trading on the Nasdaq National
Market. We do not intend to list the notes for trading on any national
securities exchange or on the Nasdaq National Market. The initial purchasers of
the notes have advised us that they are making and intend to continue making a
market in the notes; however, they are not obligated to do so and may stop such
market making at any time without notice. In addition, such market making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act. Therefore, we cannot
47
guarantee that any trading market will develop for the notes. Even if a market
does develop, the market may not be maintained.
The notes and underlying common stock may be sold in some states only
through registered or licensed brokers or dealers. The selling securityholders
and any underwriters, broker-dealers or agents that participate in the sale of
the notes and common stock into which the notes are convertible may be deemed to
be underwriters within the meaning of Section 2(11) of the Securities Act. Any
discounts, commissions, concessions or profit they earn on any resale of the
shares may be underwriting discounts and commissions under the Securities Act.
Selling securityholders who are underwriters within the meaning of Section 2(11)
of the Securities Act will be subject to the prospectus delivery requirements of
the Securities Act. The selling securityholders have acknowledged that they
understand their obligations to comply with the provisions of the Exchange Act
and the rules thereunder relating to stock manipulation including, but not
limited to, Regulation M, and have agreed that they will not engage in any
transaction in violation of such provisions.
In addition, any securities covered by this prospectus which qualify for
sale pursuant to Rule 144 or Rule 144A of the Securities Act may be sold under
Rule 144 or Rule 144A rather than pursuant to this prospectus. A selling
securityholder may not sell any notes or common stock described herein and may
not transfer, devise or gift such securities by other means not described in
this prospectus.
If required, the specific notes or common stock to be sold, the names of
the selling securityholders, the respective purchase prices and public offering
prices, the names of any agent, dealer or underwriter, and any applicable
commissions or discounts with respect to a particular offer will be set forth in
an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement of which this prospectus is a part.
Pursuant to the registration rights agreement filed as an exhibit to the
registration statement of which this prospectus is a part, we and the selling
securityholders will be indemnified by each other against certain liabilities,
including certain liabilities under the Securities Act or will be entitled to
contribution in connection with these liabilities.
We have agreed to pay substantially all of the expenses incidental to the
registration, offering and sale of the notes and underlying common stock to the
public other than applicable transfer taxes and commissions, fees and discounts
of underwriters, brokers, dealers and agents.
LEGAL MATTERS
The validity of the securities offered by this prospectus will be passed
upon for us by Brobeck, Phleger & Harrison LLP, East Palo Alto, California.
Certain attorneys of Brobeck, Phleger & Harrison LLP own in the aggregate
approximately 2,902 shares of our common stock.
EXPERTS
The consolidated financial statements of Sandisk Corporation appearing in
Sandisk Corporation's Annual Report on Form 10-K for the year ended December 31,
2001, have been audited by Ernst & Young LLP, independent auditors, as set forth
in their report thereon included therein and incorporated herein by reference.
Such consolidated financial statements are incorporated herein by reference in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
48
We have not authorized any person to make a statement that differs from what is
in this prospectus. If any person does make a statement that differs from what
is in this prospectus, you should not rely on it. This prospectus is not an
offer to sell, nor is it seeking an offer to buy, these securities in any state
in which the offer or sale is not permitted. The information in this prospectus
is complete and accurate as of its date, but the information may change after
that date.
SANDISK CORPORATION
$150,000,000
4 1/2% Convertible Subordinated Notes due 2006
and
8,138,025 Shares of Common Stock
-------------
PROSPECTUS
-------------
May __, 2002
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, payable by us in
connection with the issuance and distribution of the securities being
registered. All amounts are estimates except the SEC registration fee.
SEC registration fee .......................................... $ 13,800
Nasdaq National Market additional share listing fee ........... $ 22,500
Legal fees and expenses* ...................................... $ 75,000
Accounting fees and expenses* ................................. $ 20,000
Printing fees* ................................................ $ 40,000
Trustee's fees and expenses* .................................. $ 10,000
Miscellaneous* ................................................ $ 25,000
--------
Total .................................................. $206,300
========
--------------
* Estimated Amount
We will bear all expenses shown above. The selling securityholders will
bear all underwriting discounts and selling commissions and transfer taxes
applicable to the sale of the shares sold pursuant to this registration
statement.
Item 15. Indemnification of Directors and Officers--
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933.
The Registrant's Bylaws provide for permissible indemnification of officers,
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. The Registrant's Certificate of Incorporation provides
that, pursuant to Delaware law, its directors shall not be liable for monetary
damages for breach of their fiduciary duty as directors to the Registrant and
its stockholders. However, this provision in the Certificate of Incorporation
does not eliminate the fiduciary duty of the directors, and in appropriate
circumstances, equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of fiduciary duty
as a director for (i) any breach of the director's duty of loyalty to the
Registrant or its stockholders, (ii) acts or omissions not in good faith or
involving intentional misconduct or a knowing violation of law, (iii) payment of
dividends or approval of stock repurchases and redemptions that are unlawful
under Delaware law and (iv) any transaction from which the director derived any
improper personal benefit. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Registrant has entered into
Indemnification Agreements with its officers and directors which provide the
Registrant's officers and directors with further indemnification to the maximum
extent permitted by the Delaware General Corporation Law. The registrant
maintains officers' and directors' liability insurance.
Item 16. Exhibits
Exhibit
Number Exhibit Title
------ -------------
4.1 Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (No. 33-96298)).*
4.2 Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant (filed as
Exhibit 3.1 to the Registrant's Form 10-Q for the quarter ended June 30, 2000).*
II-1
4.3 Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant.*
4.4 Restated Bylaws of the Registrant, as amended to date (filed as Exhibit 3.3 to the Registrant's
2001 Annual Report on Form 10-K).*
4.5 Certificate of Designation for the Series A Junior Participating Preferred Stock, as filed with
the Delaware Secretary of State on April 24, 1997 (filed as Exhibit 3.5 to the Registrant's
Current Report on Form 8-K/A dated April 18, 1997).*
4.6 Rights Agreement, dated as of April 18, 1997, between the Company and Harris Trust and Savings Bank
(filed as Exhibit 4.8 to the Registrant's Current Report on Form 8-K/A dated April 18, 1997).*
4.7 First Amendment to Rights Agreement dated October 22, 1999, between Harris Trust and the
Registrant (filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated January 8,
1999).*
4.8 Second Amendment to Rights Agreement dated December 17, 1999, between Harris Trust and the
Registrant (filed as Exhibit 10.33 to the Registrant's 1999 Annual Report on Form 10-K).*
4.9 Indenture, dated as of December 24, 2001, between the Registrant and The Bank of New York, as
Trustee, including the form of note set forth in Section 2.2 thereof (filed as Exhibit 4.7 to the
Registrant's 2001 Annual Report on Form 10-K).*
4.10 Registration Rights Agreement, dated as of December 24, 2001, among the Registrant, as Issuer and
Morgan Stanley & Co. Incorporated and ABN AMRO Rothschild LLC, as Initial Purchasers (filed as
Exhibit 4.8 to the Registrant's 2001 Annual Report on Form 10-K).*
5.1 Opinion of Brobeck, Phleger & Harrison LLP.***
12.1 Statement re: Computation of Ratio of Earnings to Fixed Charges.***
23.1 Consent of Ernst & Young LLP, Independent Auditors.**
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in the opinion filed as Exhibit 5.1 hereto).
24.1 Power of Attorney (included on signature page).***
25.1 Statement of Eligibility of the Trustee on Form T-1.***
--------------
* Not filed herewith. In accordance with Rule 411 promulgated pursuant
to the Securities Act of 1933, as amended, reference is made to the documents
previously filed with the Commission, which are incorporated by reference
herein.
** Filed herewith.
*** Previously filed.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement or the most recent
post-effective amendment thereof which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424 (b) if, in the aggregate, the changes in volume and
price represent no
II-2
more than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this registration statement or any
material change to such information in this registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
the registration statement on Form S-3 to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Sunnyvale, State of
California, on this 23rd day of May, 2002.
SanDisk Corporation
By: /s/ Michael Gray
--------------------------------------
Michael Gray
Vice President, Finance
(on behalf of the Registrant)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement on Form S-3 has been signed below by the
following persons in the capacities and on the dates indicated:
Name Title Date
---- ----- ----
* President, Chief Executive Officer May 23, 2002
------------------------------------ and Director (Principal Executive
Dr. Eli Harari Officer)
/s/ Michael Gray Vice President, Finance (Principal May 23, 2002
------------------------------------ Financial and Accounting Officer)
Michael Gray
* Chairman of the Board, Director May 23, 2002
------------------------------------
Irwin Federman
* Director May 23, 2002
------------------------------------
William V. Campbell
* Director May 23, 2002
------------------------------------
Dr. James D. Meindl
* Director May 23, 2002
------------------------------------
Alan F. Shugart
* By: /s/ Michael Gray
------------------------------------
Michael Gray
Attorney-in-Fact
II-4
EXHIBIT INDEX
Exhibit
Number Exhibit Title
------ -------------
4.1 Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (No. 33-96298)).*
4.2 Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant (filed as
Exhibit 3.1 to the Registrant's Form 10-Q for the quarter ended June 30, 2000).*
4.3 Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant.*
4.4 Restated Bylaws of the Registrant, as amended to date (filed as Exhibit 3.3 to the Registrant's
2001 Annual Report on Form 10-K).*
4.5 Certificate of Designation for the Series A Junior Participating Preferred Stock, as filed with
the Delaware Secretary of State on April 24, 1997 (filed as Exhibit 3.5 to the Registrant's
Current Report on Form 8-K/A dated April 18, 1997).*
4.6 Rights Agreement, dated as of April 18, 1997, between the Company and Harris Trust and Savings Bank
(filed as Exhibit 4.8 to the Registrant's Current Report on Form 8-K/A dated April 18, 1997).*
4.7 First Amendment to Rights Agreement dated October 22, 1999, between Harris Trust and the
Registrant (filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated January 8,
1999).*
4.8 Second Amendment to Rights Agreement dated December 17, 1999, between Harris Trust and the
Registrant (filed as Exhibit 10.33 to the Registrant's 1999 Annual Report on Form 10-K).*
4.9 Indenture, dated as of December 24, 2001, between the Registrant and The Bank of New York, as
Trustee, including the form of note set forth in Section 2.2 thereof (filed as Exhibit 4.7 to the
Registrant's 2001 Annual Report on Form 10-K).*
4.10 Registration Rights Agreement, dated as of December 24, 2001, among the Registrant, as Issuer and
Morgan Stanley & Co. Incorporated and ABN AMRO Rothschild LLC, as Initial Purchasers (filed as
Exhibit 4.8 to the Registrant's 2001 Annual Report on Form 10-K).*
5.1 Opinion of Brobeck, Phleger & Harrison LLP.***
12.1 Statement re: Computation of Ratio of Earnings to Fixed Charges.***
23.1 Consent of Ernst & Young LLP, Independent Auditors.**
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in the opinion filed as Exhibit 5.1 hereto).
24.1 Power of Attorney (included on signature page).***
25.1 Statement of Eligibility of the Trustee on Form T-1.***
----------
* Not filed herewith. In accordance with Rule 411 promulgated pursuant
to the Securities Act of 1933, as amended, reference is made to the documents
previously filed with the Commission, which are incorporated by reference
herein.
** Filed herewith.
*** Previously filed.