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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0001012870-01-001444.txt : 20010409
<SEC-HEADER>0001012870-01-001444.hdr.sgml : 20010409
ACCESSION NUMBER: 0001012870-01-001444
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010402
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: SANDISK CORP
CENTRAL INDEX KEY: 0001000180
STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572]
IRS NUMBER: 770191793
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 000-26734
FILM NUMBER: 1588946
BUSINESS ADDRESS:
STREET 1: 140 CASPIAN COURT
CITY: SUNNYVALE
STATE: CA
ZIP: 94089
BUSINESS PHONE: 4085620500
MAIL ADDRESS:
STREET 1: 140 CASPIAN COURT
CITY: SUNNYVALE
STATE: CA
ZIP: 94089
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>FORM 10-K405
<TEXT>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
- ----- Act of 1934 for the fiscal year ended December 31, 2000 or *
Transition report pursuant to Section 13 or 15(d) of the Securities Act of
- ----- 1934
Commission File No. 0-26734
SANDISK CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 77-0191793
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
140 Caspian Court, Sunnyvale, California 94089
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (408) 542-0500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value;
Rights to Purchase Series A, Junior Participating Preferred Stock
-----------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ].
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 8,
2001 as reported on the NASDAQ National Market System, was approximately
$1,396,929,000. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 8, 2001, Registrant had 67,957,788 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2001 Annual Meeting of
Stockholders to be held on June 5, 2001 are incorporated by reference into Part
III of this Form 10-K.
*For purposes of this Form 10-K the Registrant has indicated its fiscal year as
ending on December 31st. The Registrant operates on a fifty-two-fifty-three week
fiscal year cycle ending on the Sunday closest to December 31/st/.
<PAGE>
SANDISK CORPORATION
2000 FORM 10-K ANNUAL REPORT
Table of Contents
<TABLE>
<CAPTION>
PART I
Page No.
--------
<S> <C>
Item 1. Business 1
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Executive Officers of the Registrant 15
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 8. Financial Statements and Supplementary Data 43
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 67
PART III
Item 10. Directors and Executive Officers of the Registrant 67
Item 11. Executive Compensation 67
Item 12. Security Ownership of Certain Beneficial Owners and
Management 67
Item 13. Certain Relationships and Related Transactions 67
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports
on Form 8-K 68
Signatures 71
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
--------
BUSINESS
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, 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 fiscal 2000, we shipped over 13
million flash memory cards and flash chip sets. Our products include removable
CompactFlash cards, MultiMediaCards, FlashDisk cards and Secure Digital Cards
and embedded FlashDrives and Flash ChipSets with storage capacities ranging from
8 megabytes to 1.2 gigabytes. In fiscal 2000, our customers included Arrow
Electronics, Inc., Avnet Electronics, Bell Microproducts, Inc., Best Buy
Company, Inc., Canon, Inc., Cisco Systems, Inc., Eastman Kodak Company,
Ericsson, Hewlett-Packard Company, Lucent Technologies Inc., Matsushita Electric
Industrial Co., Ltd., Mitsubishi Plastic Co. Ltd., NEC America, Inc., Nikon
Corporation, Nokia Corporation, Siemens, Tech Data Corporation, Thomson, and
Wynit, Inc. In addition, we currently license our technologies to several
companies including Hitachi Ltd., Intel Corporation, Lexar Media, Incorporated,
Samsung Electronics Company Ltd., Sharp Electronics Corporation, SmartDisk
Corporation, Silicon Storage Technologies, Incorporated, TDK Corporation and
Toshiba Corporation. In 2000, we entered into a joint venture agreement with
Toshiba Corporation, under which we formed FlashVision, LLC to produce advanced
flash memory, utilizing fabrication space at Dominion Semiconductor in Manassas,
Virginia. Toshiba and SanDisk will each get 50 percent of Dominion's flash
memory output with production expected to commence in the second half of 2001.
Industry Background
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, personal digital assistants, or 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.
The SanDisk Solution
We have optimized our flash memory storage solution, known as system flash or
data storage flash, to address 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 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,
<PAGE>
regardless of the host processor or operating system used, we have developed new
capabilities in flash memory chip design and created intelligent controllers. We
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 mail, e-mail, music, video clips and digital images.
SanDisk's products offer the following features:
Small form factor. Our CompactFlash products weigh about one-half ounce and
are approximately the size of a matchbook. Our MultiMediaCard and Secure Digital
Card products are approximately the size of a quarter coin and weigh less than
two grams. Our FlashDisk cards are small and lightweight with a length of 85.6
mm, width of 54.0 mm, thickness of 5.0 mm or 10.5 mm and weight of less than 2.0
ounces.
Non-volatility. Our products store information in non-volatile memory cells
that do not require power to retain information.
High degree of ruggedness. Our devices have an operating shock rating of 2,000
Gs for CompactFlash and 1,000 Gs for all other products (equivalent to being
able to withstand ten foot and eight foot drops onto concrete, respectively).
Our products are also designed to tolerate extensive fluctuations in
temperatures and humidity.
Low power consumption. During read and write operations, our products use less
power than the rotating disk drives found in many portable computers. At all
other times during system operation, our products require virtually no power.
Depending upon the end product making use of our flash data storage, this
translates into longer battery life.
High reliability. Our products utilize sophisticated error detection and
correction algorithms and dynamic defect management techniques to provide high
data reliability and endurance.
High performance. We believe that the read and write data rates of our
products meet or exceed the read and write data rates required today by the
majority of consumer and industrial/communications applications.
The flash process and flash memory chip designs developed by us in cooperation
with our partners make our products scaleable over several generations of
semiconductor fabrication processes. This feature has allowed us to
significantly reduce our cost per megabyte of capacity with each new generation
of our products. By maintaining the same basic design parameters, each
generation of our products maintains full compatibility with prior generations.
This chip architecture has allowed us to significantly reduce cell size and
thereby chip size. This has allowed us to increase storage capacity and lower
the cost of our PC Card, CompactFlash and MultiMediaCard products.
We have developed core competencies in low-cost micropackaging technology as
well as low-cost batch testing, both of which are important elements in building
high-capacity, high-reliability flash cards at a competitive cost and in high
volumes.
Applications and Markets for Flash Data Storage
We are targeting the consumer electronics and the industrial/communications
markets for our flash data storage products.
Our products are used in a number of rapidly growing consumer electronics
applications, such as digital cameras, personal digital assistants, portable
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.
2
<PAGE>
Consumer Electronics. The increasing trend towards the use of digital
technology in consumer electronics devices has created requirements for new data
storage products. For example, a number of major camera and imaging companies
have introduced digital cameras that we believe will enable professionals and
consumers to eliminate the need for standard 35mm photographic film by replacing
it with re-usable compact digital data storage devices. Removable and embedded
flash data storage products, such as our CompactFlash, MultiMediaCard, Secure
Digital Card and Flash ChipSet products, are used in personal digital
assistants, highly portable computers, digital audio players, network computers,
cellular telephones, next-generation smart telephones and other devices.
Industrial/Communications Market. The communications market has applications
that are beginning to require new types of data storage. For example,
communications switches and cellular base stations require data storage in
environments that are subject to shock and vibration and a wide range of
temperature and humidity conditions. As the storage capacity of our cards
grows, we are increasingly able to displace disk drives in routers and switches
manufactured by telecommunications companies such as Cisco, Nortel and Lucent.
In the fiscal years ended December 31, 2000, 1999, and 1998, product sales
to our top 10 customers accounted for approximately 48%, 57%, and 59% of our
product revenues, respectively. In 2000, no single customer accounted for
greater than 10% of our total revenues. In 1999 and 1998, revenues from one
customer exceeded 10% of total revenues. We expect that sales of our products
to a limited number of customers will continue to account for a substantial
portion of our revenues for the foreseeable future. We have also experienced
significant changes in the composition of our major customer base from year to
year and expect this pattern to continue as certain customers increase or
decrease their purchases of our products as a result of fluctuations in market
demand for their products. Sales to our customers are generally made pursuant
to standard purchase orders rather than long-term contracts. The loss of, or
significant reduction in, purchases by any of our major customers, could harm
our business, financial condition and results of operations.
SanDisk's Products
Our storage products are high capacity, solid-state, non-volatile flash memory
devices that comply with PC Card ATA and/or IDE industry standards. We offer a
broad line of flash data storage products in terms of capacities, form factors,
operating voltage and temperature ranges. Our current product families include
removable CompactFlash, MultiMediaCard, FlashDisk and Secure Digital Card
products, embedded FlashDrive products and Flash ChipSets. Our products are
compatible with the majority of today's computing and communications systems
that are based on industry standards. Our products, as of December 31, 2000, are
listed in the following table:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Uncompressed
Product Family Form Factor Capacity
<S> <C> <C>
CompactFlash (Removable) Type I (36.4 mm x 42.8 mm x 3.3 mm) 8 to 512 megabytes
Type II (36.4 mm x 42.8 mm x 5.3 mm) 256 and 300 megabytes
MultiMediaCard (Removable) 32 mm x 24 mm x 1.4 mm 8 to 64 megabytes
FlashDisk (Removable) PC Card Type II (54.0 mm x 85.6 mm x 5.0 mm) 8 megabytes to 1.2 gigabytes
Flash ChipSet (Embedded) 2 chips 8 to 64 megabytes
FlashDrive (Embedded) 2.5 & 3.5 inches 32 megabytes to 1.2 gigabytes
SmartMedia (Removable) Flash Card (45 mm x 37 mm x 0.76 mm) 8 to 64 megabytes
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
CompactFlash. Our CompactFlash products provide full PC Card ATA functionality
but are only one-fourth the size of a standard PC Card. CompactFlash's compact
size, ruggedness, low-power requirements and its ability to
3
<PAGE>
operate at either 3.3V or 5V make it well-suited for a range of current and
next-generation, small form factor consumer applications such as digital
cameras, PDAs, personal communicators and audio recorders. CompactFlash products
provide interoperability with systems based upon the PC Card ATA standard by
using a low-cost passive Type II adapter. CompactFlash cards are available in
capacities ranging from 8 megabytes to 512 megabytes in Type I form factor and
in capacities of 256 and 300 megabytes in Type II form factor.
MultiMediaCard. Our MultiMediaCard measures 32.0 mm by 24.0 mm by 1.4 mm,
about the size of a quarter coin, and weighs less than two grams. MultiMediaCard
is targeted at the emerging markets for mobile smart phones, consumer multimedia
devices, digital audio recorders, digital video recorders, portable music
players and other products that need removable data storage in a small form
factor. Our MultiMediaCard is available in storage capacities of 8, 16, 32 and
64 megabytes.
FlashDisk. Our FlashDisk products are used in storage, data backup and data
transport applications. Our FlashDisk products are available in the PC Card Type
II form factor with capacities ranging from 8 megabytes to 1.2 gigabytes.
Flash ChipSet. Our Flash ChipSet products provide a very small footprint,
solid-state ATA mass storage system. Our Flash ChipSet products consist of a
single chip ATA controller and a flash memory chip, and are available in
capacities of 8, 16, 32 and 64 megabytes. We provide full PC Card, ATA and IDE
disk drive compatibility in a chip set format.
FlashDrive. Our FlashDrives come in 2.5 and 3.5 inch form factors and are
targeted at applications that require embedded data storage devices. FlashDrives
offer rugged, portable, low-power data storage and are plug and play
replacements for rotating IDE drives making them ideal for mobile computers,
communication devices and other systems that require embedded storage.
Capacities of our FlashDrive products range between 32 megabytes and 1.2
gigabytes.
Other SanDisk products. We also sell SmartMedia Cards, ImageMate external
drives and FlashPath adapters under the SanDisk brand name. Our SanDisk brand
SmartMedia Cards are available in capacities ranging from 8 to 64 megabytes. Our
ImageMate external drives offer a fast, convenient way to transfer data between
our memory card products and a personal computer through a USB or parallel port
connection. The ImageMate is available in CompactFlash, MultiMediaCard and
SmartMedia Card versions. FlashPath adapters are floppy disk-shaped adapters
that allow users to transfer data to and from their MultiMediaCard or SmartMedia
Cards and their computer using a floppy disk drive. We also sell TriFlash
embedded chips with capacities of 16 to 64 megabytes and NAND Flash embedded
chips with a capacity of 32 megabytes.
Our Personal Tag, or P-Tag, is a wearable, matchbook size, memory card that
can be used to store critical data such as medical records and other personal
information. The target markets for these cards include military agencies,
government departments, insurance and health care companies worldwide.
Secure Digital Card. The Secure Digital Card measures 32.0 mm by 24.0 mm by
2.1 mm. The Secure Digital Card is an enhanced version of our MultiMediaCard
that incorporates advanced security and copyright protection features required
by the emerging markets for the electronic distribution of music, video and
other copyrighted works. Our Secure Digital Card is available in storage
capacities of 8, 16, 32 and 64 megabytes. We began shipping the Secure Digital
Card in the first quarter of 2001.
The Secure Digital Card incorporates a number of new features, including SDMI
compliant security and copy protection, a mechanical write protect switch and a
high data transfer rate. The Secure Digital Card is slightly thicker (2.1mm)
than our MultiMediaCard and uses a nine-pin interface instead of the seven-pin
interface of the MultiMediaCard. Because of these differences, the Secure
Digital Card will not work in current products that include a MultiMediaCard
slot. However, our MultiMediaCard products are forward compatible and will work
in Secure Digital Card slots. Conversely, broad acceptance of our Secure Digital
Card by consumers may reduce demand for our MultiMediaCard and CompactFlash card
products. The Secure Digital Card
4
<PAGE>
relies on the copy protection features that have been developed for the DVD
standard and therefore may be more likely to be endorsed by the leading content
providers. The Secure Digital Card will face significant competition from the
Sony Memory Stick and the Secure MultiMediaCard from Hitachi and Infineon. The
Secure Digital Card Association currently numbers 225 members, however, some of
these members are also participating in associations for competing standards. We
cannot assure you that our Secure Digital Card will receive substantial market
acceptance. Any failure by our customers to accept our Secure Digital Card
products could harm our business, financial condition and results of operations.
Technology
Since our inception, we have focused our research and development efforts on
developing highly reliable and cost-effective flash memory storage products to
address a number of emerging markets. We have been actively involved in all
aspects of this development, including flash memory process development, chip
design, controller development and system-level integration to ensure the
creation of fully-integrated, broadly interoperable products that are compatible
with both existing and newly developed 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 with various electronic platforms regardless of the
host processors or operating systems used, we developed new capabilities in
flash memory chip design and created intelligent controllers. We also developed
an architecture that can leverage advances in process technology to ensure a
scaleable, high-yielding, cost-effective and highly reliable manufacturing
process. We believe that these technical competencies and our system design
approach have enabled us to introduce flash data storage products that are
better suited for our target markets than linear flash cards based on socket
flash chips or SmartMedia flash cards, which do not contain an intelligent
controller. We design our products to be compatible with industry-standard IDE
and ATA interfaces used in all Windows and Apple compatible personal computers.
Our patented intelligent controller with its advanced defect management system
permits our products to achieve a high level of reliability and longevity.
Latent bit failure can occur several years into the life of a flash card product
and can be difficult to detect with traditional flash technology. The system
allows the automatic substitution of entire sectors or major blocks of the
memory chip in case of any latent flash memory failures. Additionally, the
controller generates an error correcting code that is stored simultaneously with
the data and is used to detect and dynamically correct any errors when the data
is read. This design permits our products to maintain error-free operation for
hundreds of thousands of erase and write cycles and reduces manufacturing costs
by allowing us to incorporate partial die with less than 100% of the physical
bits on each chip into the products without loss of functionality.
Strategic Manufacturing Relationships
An important element of our strategy has been to establish strategic
relationships with leading technology companies that can provide us with access
to leading edge semiconductor manufacturing capacity and participate in the
development of some of our products. This enables us to concentrate our
resources on the product design and
5
<PAGE>
development areas where we believe we have competitive advantages. We have
developed strategic relationships with UMC in Taiwan, Toshiba with whom we have
a joint venture, FlashVision LLC, which will manufacture NAND flash memory and
Tower Semiconductor in Israel. We may establish relationships with other
foundries in the future.
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,
SanDisk and Toshiba formed and contributed initial funding to FlashVision LLC,
a joint venture to equip and operate a silicon wafer manufacturing line at
Dominion Semiconductor in Virginia. The cost of equipping the Virginia wafer
manufacturing line is estimated at between $700 million and $800 million. As
part of our 50% ownership of the joint venture we had invested $134.7 million
as of December 31, 2000, and in January 2001, we invested the remaining $15.3
million. We have also guaranteed up to $215 million in equipment lease lines
to equip Toshiba's Dominion Semiconductor manufacturing clean room with
advanced wafer processing equipment. As of January 26, 2001, $20 million was
guaranteed. In addition, we will share certain research and development costs.
We expect to begin shipping products based on the 512 megabit technology
during the second half of 2001, and from the 1 gigabit technology during 2002.
All of our products require silicon wafers that are currently supplied by UMC
and Toshiba, under our joint venture agreement. Most of our wafers are currently
manufactured using 0.24 micron process technology, and the wafers that will be
made in our FlashVision Joint Venture employ a 0.16 micron process technology.
In the past, we have experienced periods of supply constraints or excesses, each
of which can have a significant impact on our gross margins and supplier
relationships. Any delays in wafer availability or uncompetitive wafer pricing
could limit our revenue growth and harm our business, financial condition and
results of operations.
Under the terms of our wafer supply agreements with UMC, we are obligated to
provide a rolling forecast of anticipated purchase orders for the next six
calendar months. Except in limited circumstances and subject to acceptance by
UMC, the estimates for a portion of the forecast, generally three months,
constitute a binding commitment and the estimates for the remaining months may
not increase or decrease by more than a certain percentage from the previous
month's forecast. We have similar forecast requirements and binding commitments
under our supply agreement with Toshiba for wafers from their Yokkaichi foundry
and will be obligated to purchase 50% of the NAND flash wafer output from the
Dominion fab or bear the costs of unused capacity if we choose to not purchase
our share of the available wafers. These requirements limit our ability to
react to any significant fluctuations in demand for our products. When the
demand for our products experiences an unexpected, sudden and sharp decline,
as occurred late in the fourth quarter of fiscal 2000 and the first quarter of
2001, and we are unable to reschedule or cancel our wafer orders, we end up
with excess wafer inventories, which result in higher costs and reduced gross
margins. Furthermore, if a significant drop in demand is also accompanied by a
rapid decline in market prices for our products we may have to reduce the
value of our inventory to market, resulting in lower 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 lost sales and the loss of customers to competitors who are able to
meet the customer requirements. In addition, in February 2000, we entered into
a capacity and reservation deposit agreement with UMC. To reserve additional
foundry capacity under this agreement, we paid UMC a reservation deposit. This
deposit will be refunded to us on a quarterly basis over the agreement term if
we purchase the full wafer capacity reserved for us. We may forfeit part of
our deposit if we are unable to utilize our reserved capacity within four
quarters of the end of the agreement term. We are dependent upon our foundry
partners to deliver wafers and to maintain acceptable yields and quality. In
2000, 1999, and 1998, we purchased wafers from UMC, a foundry in which we have
ownership, totaling approximately $161.6 million, $22.8 million and $11.6
million, respectively.
On July 4, 2000, SanDisk entered into a share purchase agreement to make a $75
million investment in Tower Semiconductor, or Tower, in Israel, representing
approximately 10% ownership of Tower. In exchange for our investment, we
received one seat on the board of directors of Tower and a guaranteed portion of
the wafer output from the advanced fabrication facility Tower has started to
build in Migdal Haemek, Israel.
6
<PAGE>
Under the terms of the agreement, we will make our investment over a period of
approximately 18 months if key milestones related to the construction, equipping
and wafer production at the new wafer fabrication facility are met. On January
26, 2001, Tower satisfied the closing conditions of the share purchase
agreement, and we transferred the first $20 million of our investment from an
escrow account to purchase 866,551 ordinary shares and obtain $8.8 million in
pre-paid wafer credits. On March 1, 2001, we paid Tower $11 million upon its
completion of milestone one, to purchase 366,690 ordinary shares and obtain
additional prepaid wafer credits. Additional contributions will take the form of
mandatory warrant exercises for ordinary shares at an exercise price of $30.00
per share if other milestones are met. The warrants expire five years from the
date of grant and in the event the key milestones are not achieved, the exercise
of these warrants will not be mandatory. We expect first wafer production to
commence at the new fabrication facility in late 2002.
We also have a manufacturing relationship with NEC, under which NEC supplies
microcontrollers for our products. NEC is currently a sole-source supplier for
these controller chips. Any interruption in supply from NEC may harm our
business.
We believe additional foundry capacity will be necessary to meet future demand
for our products. Our ability to increase our revenues and net income in future
periods is dependent on establishing additional wafer supply relationships and
on receiving an uninterrupted supply of wafers from our manufacturing partners.
Our reliance on third-party wafer manufacturers involves several material
risks, including shortages of manufacturing capacity, reduced control over
delivery schedules, quality assurance, production yields and costs. This
reliance could significantly harm our business, financial condition and results
of operations. In addition, as a result of our dependence on foreign wafer
manufacturers, we are subject to the risks of conducting business
internationally, including political risks and exchange rate fluctuations.
Assembly and Testing
We test wafers at our headquarters in Sunnyvale, California, at the UMC
facility in Taiwan, at Silicon Precision Industries in Taiwan, and at Celestica,
Inc. in China. Substantially all of the tested wafers are then shipped to our
third party memory assembly subcontractors: Silicon Precision Industries Co.,
Ltd. in Taiwan and Mitsui & Co., Ltd. in Japan.
A substantial portion of packaged memory final test, card assembly and card
test is performed at Silicon Precision Industries in Taiwan and Celestica, Inc.
in China. In fiscal 2001, these subcontractors will assemble and test a majority
of our mature, high-volume products. We expect our reliance on subcontractors
will continue to reduce the cost of our operations and give us access to
increased production capacity. We began transferring portions of our testing and
assembly operations to these subcontractors in the second half of 1999 and are
still continuing this transition. We will continue operations at our Sunnyvale
production facility for new products and special customer requirements. Any
significant problems that occur at our subcontractors, or their failure to
perform at the level we expect, could result in a disruption of production and a
shortage of products to meet customer demand in the first half of 2001 and
beyond.
Our customers have demanding requirements for quality and reliability. To
maximize quality and reliability, we monitor electrical and inspection data from
our wafer foundries and assembly subcontractors. We monitor wafer foundry
production for consistent overall quality, reliability and yield levels. Most of
our major component suppliers and subcontractors are ISO 9001 or 9002 certified.
Research and Development
We believe that our future success will depend on the continued development
and introduction of new generations of flash memory chips, controllers and
products designed specifically for the flash data storage market. In fiscal
2000, the majority of our production output shifted to the 256 megabit, .24
micron D2 technology. In our
7
<PAGE>
joint venture with Toshiba, FlashVision LLC, we will begin production of 512
megabit NAND flash memory that employs 0.16 micron process feature size by mid-
year 2001. We do not expect to generate revenues from this 512 megabit
technology until the second half of 2001. The next generation of 1 gigabit
NAND flash that is under joint development is not expected to contribute to
revenues before 2002.
Our research and development expenses were $46.1 million, $26.9 million and
$18.2 million for the fiscal years ended December 31, 2000, 1999, and 1998,
respectively. As of December 31, 2000, we had 177 full-time equivalent employees
engaged in research and development activities, including 25 in our Israel
design center. In fiscal 2001 and beyond, we expect to significantly increase
our spending on process and design research and development to support the
development and introduction of new generations of flash data storage products,
including our 512 megabit and 1 gigabit NAND flash memory co-development and
manufacturing joint venture with Toshiba.
8
<PAGE>
Sales and Distribution
We market our products using a direct sales organization, distributors and
manufacturers' representatives. We also sell products to various customers on a
private label basis and under the SanDisk brand in the retail channel. Our sales
efforts are organized as follows:
Direct Sales Force. Our direct sales offices are located in Maitland, Florida;
Herndon, Virginia; Dublin and Avon, Ohio; Nashua, New Hampshire; Sunnyvale,
Irvine, and Trabuco Canyon, California; Bedford, Texas; Hannover and Rantingen,
Germany; Amsterdam, the Netherlands; Paris, France; Hertfordshire, England; Hong
Kong, China; and Yokohama and Osaka, Japan. These offices support our major OEM
customers and our distribution and manufacturers' representative partners.
Distributors. In the United States, our products are sold through Arrow
Electronics Inc., Avnet Inc. and Bell MicroProducts Inc. to OEM customers for a
wide variety of industrial applications. In addition, we have distributors in
various regions of the world including Europe, Japan, Australia, New Zealand,
Taiwan, Korea, Singapore and Hong Kong.
Independent Manufacturers' Representatives. In the United States, Canada and
Europe, our direct sales force is supported in its sales efforts by more than 39
independent firms. These domestic and international firms receive a commission
for providing support to our direct sales force and distributors in the
industrial distribution, OEM and retail channels. The manufacturers'
representative companies sell our products as well as products from other
manufacturers.
OEMs. We provide private label products to OEMs in the United States, Europe
and the Pacific Rim.
Retail. We ship SanDisk brand name products directly to consumer electronics
stores, office superstores, photo retailers, mass merchants, catalog and mail
order companies, Internet and e-commerce retailers and selected retail
distributors. Our distributors include Ingram Micro, Inc., Tech Data
Corporation, Laguna Corporation and Wynit, Inc. in the United States, in
addition to international distributors. Our products are available in more than
20,000 retail stores worldwide. Fourteen independent manufacturers'
representative firms are supporting our sales efforts in the retail channel. In
addition, we sell our products on the Internet through third parties such as
Amazon.com.
Strategic Investments
On August 9, 2000, we entered into a joint venture, Digital Portal Inc., or
DPI, with Photo-Me International, or PMI, for the manufacture, installation,
marketing and service of self-service, digital photo printing labs, or kiosks,
bearing the SanDisk brand name in locations in the U.S. and Canada. These
kiosks employ high-quality, low-cost, silver halide photo processing
technology developed by PMI. Under the agreement, we and PMI will each make an
initial investment of $4.0 million and secure lease financing for the purchase
of the kiosks. The total value of the lease financing will depend on the
number of kiosks deployed by the joint venture. We estimate that we will
guarantee equipment lease arrangements of approximately $40 million over the
first two years of the agreement. PMI will manufacture the kiosks for the
joint venture and will install and maintain the kiosks under contract with the
joint venture. We expect the first kiosks to be deployed in pilot programs in
selected retail stores in the United States starting in the first half of
2001.
On November 2, 2000, we made a strategic investment of $7.2 million in Divio,
Inc. Divio is a privately-held manufacturer of digital imaging compression
technology and products for future digital camcorders that will be capable of
using our flash memory cards to store home video movies, replacing the magnetic
tape currently used in these systems. Under the agreement, we own approximately
10% of Divio and are entitled to one board seat.
Customer Service and Technical Support
9
<PAGE>
We provide customers with comprehensive product service and support. We
provide technical support through our application engineering group located in
the United States, Japan and Hong Kong. We work closely with our customers to
monitor the performance of our product designs, to provide application design
support and assistance, and to gain insight into our customers' needs to help in
the design of future products.
Our support package is generally offered with product sales and includes
technical documentation and application design assistance. In some cases, we
offer additional support which includes training, system-level design,
implementation and integration support and failure analysis. We believe that
tailoring the technical support level to our customers' needs is essential for
the success of product introductions and to achieve a high level of satisfaction
among our customers. We generally provide a one-year warranty on our products.
Patents and Licenses
We rely on a combination of patents, trademarks, copyright and trade secret
laws, confidentiality procedures and licensing arrangements to protect our
intellectual property rights. We vigorously protect and defend our intellectual
property rights. In the past, we have been involved in significant disputes
regarding our intellectual property rights and we believe we may be involved in
similar disputes in the future.
In 1988, we developed the concept of emulation of a hard disk drive with flash
solid-state memory. The first related patents were filed in 1988 by Dr. Eli
Harari and exclusively licensed to us. We currently own or have exclusive rights
to 138 United States and 37 foreign issued patents, and over 75 patent
applications pending in the United States, as well as 40 pending in foreign
patent offices. We intend to seek additional international and United States
patents on our technology. We believe some of our patents are fundamental to the
implementation of flash data storage systems, as well as the implementation of
D2 flash, independent of the flash technology used. However, we cannot assure
you that any patents held by us will not be invalidated, that patents will be
issued for any of our pending applications, or that any claims allowed from
existing or pending patents will be of sufficient scope or strength or be issued
in the primary countries where our products can be sold to provide meaningful
protection or any commercial advantage to us. Additionally, our competitors may
be able to design their products around our patents.
The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights or positions, which has resulted in significant
and often protracted and expensive litigation. To preserve our intellectual
property rights, we believe it may be necessary to initiate litigation against
one or more third parties, including but not limited to those we have already
notified of possible patent infringement. In addition, one or more of these
parties may bring suit against us.
For example, in March 1998, we sued Lexar in the Northern District of
California alleging that Lexar's CompactFlash and PC Cards infringe our U.S.
Patent No. 5,602,987 ("'987 Patent"). Lexar disputed this claim and asserted
various counter claims, including unfair competition, violation of the Lanham
Act, patent misuse, interference with prospective economic advantage, trade
defamation, unenforceability and fraud. On November 14, 2000, in resolution of
these actions, Lexar stipulated that our '987 Patent is valid and infringed by
Lexar's current CompactFlash and PC Cards. Lexar made a lump sum payment of $8.0
million for royalties due on the '987 Patent, through March 31, 2001. Subject to
Lexar's representations and warranties relating to Lexar's newly designed
CompactFlash and PC Cards, we have stipulated that these designs do not infringe
our '987 Patent. Lexar entered into a 4% royalty-bearing license agreement for
certain Lexar products that may use the '987 Patent beyond March 31, 2001. We
and Lexar have agreed to dismiss with prejudice all pending claims of patent
infringement and counterclaims involving claims of false advertising, unfair
competition and patent misuse.
In September 2000, Lexar sued us in the District Court of Delaware alleging
that our SmartMedia products infringe Lexar's United States Patent No. 5,479,638
("'638 Patent"). In resolution of this action, we paid Lexar a lump sum payment
of $2.0 million for a fully-paid up license for use of the '638 Patent in
SmartMedia products. Under the settlement, Lexar has provided us with an option
for a royalty bearing license to its patents for use in certain future products.
10
<PAGE>
We and Lexar have agreed to resolve any future disputes relating to the use by
Lexar of the '987 Patent through binding arbitration. We have also agreed that
for a period of seven years, neither we nor Lexar shall seek injunctive relief
against the other in any patent lawsuit. However, at all times, we retain the
right to seek injunctive relief to enforce the payment of royalties pursuant to
an arbitrator's ruling.
On March 21, 2000, Mitsubishi Denki Co. Ltd. (Mitsubishi Electric) filed a
complaint in Tokyo District Court against SanDisk K.K., our wholly-owned
subsidiary. The complaint alleges that SanDisk K.K., based in Yokohama,
Japan, infringes on three Mitsubishi Japanese patents. The Mitsubishi patents in
question are #JP2099342, #JP2129071 and #JP2138047, which are related primarily
to the mechanical construction of memory cards. In the complaint, Mitsubishi
asked the court for a preliminary injunction halting the sale of our
CompactFlash and flash ATA memory cards in Japan. Mitsubishi has since dropped
patents #JP2129071 and #JP2138047 from the suit. We are vigorously defending
against Mitsubishi's remaining claims.
From time to time, we have been contacted by various other parties who have
alleged that certain of our products infringe on patents that these parties
claim to hold. To date no legal actions have been filed in connection with any
such infringement, other than as discussed above.
In the event of an adverse result in any such 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, whether as a plaintiff or as a defendant, would
likely result in significant expense to us and divert the efforts of our
technical and management personnel, whether or not such litigation is ultimately
determined in our favor. In addition, the results of any litigation are
inherently uncertain.
In the event we desire to incorporate third party technology into our products
or our products are found to infringe on others' patents or intellectual
property rights, we may be required to license such patents or intellectual
property rights. We may also need to license some or all of our patent portfolio
to be able to obtain cross-licenses to the patents of others. We currently have
patent cross-license agreements with several companies including Hitachi, Intel,
Lexar, Samsung, Sharp, SST, SmartDisk, TDK and Toshiba. From time to time, we
have also entered into discussions with other companies regarding potential
cross-license agreements for our patents. However, we cannot assure you that
licenses will be offered or that the terms of any offered licenses will be
acceptable to us. If we obtain licenses from third parties, we may be required
to pay license fees or make royalty payments, which could reduce our gross
margins. If we are unable to obtain a license from a third party for technology,
we could incur substantial liabilities or be required to expend substantial
resources redesigning our products to eliminate the infringement. In addition,
we might be required to suspend the manufacture of products or the use by our
foundries of processes requiring the technology. We cannot assure you that we
would be successful in redesigning our products or that we could obtain licenses
under reasonable terms. Furthermore, any development or license negotiations
could require substantial expenditures of time and other resources by us.
As is common in the industry, we agree to indemnify certain of our suppliers
and customers for alleged patent infringement. The scope of such indemnity
varies, but may in some instances include indemnification for damages and
expenses, including attorneys' fees. We may from time to time be engaged in
litigation as a result of these indemnification obligations.
In our efforts to maintain the confidentiality and ownership of our trade
secrets and other confidential information, we require all regular and temporary
employees, consultants, foundry partners, certain customers, suppliers and
partners to execute confidentiality and invention assignment agreements upon
commencement of a relationship with us and extending for a period of time beyond
termination of the relationship. We cannot assure you that these agreements will
provide meaningful protection for our trade secrets or other confidential
information in the event of unauthorized use or disclosure of such information.
11
<PAGE>
Backlog
We manufacture and market primarily standard products. Sales are generally
made pursuant to standard purchase orders. We include in our backlog only
those customer orders for which we have accepted purchase orders and assigned
shipment dates within the upcoming twelve months. Since orders constituting
our current backlog are subject to changes in delivery schedules or
cancellations, backlog is not necessarily an indication of future revenue. As
of December 31, 2000, our backlog was $63.3 million, compared to $157.2
million at December 31, 1999. Retail sales are typically booked and shipped in
the same quarter.
Competition
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, Intel, Macronix, Mitsubishi, Fujitsu, Sharp
Electronics and ST Microelectronics. Companies that combine controllers and
flash memory chips developed by others into flash storage cards include Lexar
Media, M-Systems, Pretec, Simple Technology, Sony Corporation, Kingston
Technology, Panasonic, Silicon Storage Technology, TDK Corporation, Matsushita
Battery, Delkin Devices, Inc., Feiya Technology Corporation, Dane-Elec
Manufacturing, Silicon Tek, Infineon Technologies and Viking Components.
We have entered into patent cross-license agreements with several of our
leading competitors including Hitachi, Intel, Lexar, Sharp, Samsung, SST, TDK
and Toshiba. Under these agreements, each party may manufacture and sell
products that incorporate technology covered by each party's 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.
In addition, over 40 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 announced a memorandum of understanding under which we, Matsushita and
Toshiba are jointly developing and promoting a next generation flash memory card
called the Secure Digital Card. Under this agreement, Secure Digital Card
licenses will be granted to other flash memory card manufacturers, which will
increase the competition for our Secure Digital Card, CompactFlash and
MultiMediaCard products. In addition, Matsushita and Toshiba are selling Secure
Digital Cards that will compete directly with our MultiMediaCard and Secure
Digital Card products. While other flash card manufacturers will be required to
pay the SD Association license fees and royalties, there will be no royalties or
license fees payable among the three companies for their respective sales of the
Secure Digital Card.
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.
12
<PAGE>
We expect to begin shipping products based on the 512 megabit
technology during the second half of 2001, and from the 1 gigabit technology
during 2002. As we and Toshiba will each separately market and sell any products
developed and manufactured under this relationship, we will compete directly
with Toshiba for sales of these advanced chips and controllers.
Competing products have been introduced that promote industry standards that
are different from our CompactFlash, MultiMediaCard and Secure Digital Card
products, including Toshiba's SmartMedia, Sony Corporation's Memory Stick,
Sony's standard floppy disk used for digital storage in their Mavica digital
cameras, Panasonic's Mega Storage cards, Iomega's Clik drive, a miniaturized
mechanical, removable disk drive, DataPlay's miniature optical storage drive and
the Secure MultiMediaCard from Hitachi and Infineon. Each competing standard is
mechanically and electronically incompatible with CompactFlash, MultiMediaCard
and Secure Digital Card. If a manufacturer of products such as digital cameras
designs in one of these alternative competing standards, CompactFlash,
MultiMediaCard and Secure Digital Card will be eliminated from use in that
product.
The IBM microdrive, a rotating disk drive in a Type II CompactFlash competes
directly with our Type II CompactFlash memory cards for use in high-end
professional digital cameras. M-Systems' Diskonchip 2000 Millennium product
competes against our Flash ChipSet and NAND flash memory component products in
embedded storage applications such as set top boxes and networking appliances.
According to independent industry analysts, Sony's Mavica digital camera
captured a considerable portion of the United States market for digital cameras
from 1998 to 2000. The Mavica uses a standard floppy disk to store digital
images and therefore uses no CompactFlash, or any other flash cards. Our sales
prospects for CompactFlash cards have been adversely impacted by the success of
the Mavica.
Recently, Sony has shifted its focus to the use of its flash Memory Stick in
its latest digital camera models, and we may face significant competition from
this product. Sony has licensed its proprietary Memory Stick to other companies.
If it is adopted and achieves widespread use in future products, sales of our
MultiMediaCard and CompactFlash products may decline. Our MultiMediaCard
products have also faced significant competition from Toshiba's SmartMedia flash
cards. We also sell SmartMedia cards to our retail customers who prefer to buy
all their flash memory cards from one supplier. Hitachi, Infineon, Sanyo and
Fujitsu have proposed their Secure MultiMediaCard, which provides the copy
protection function that is included on our Secure Digital Card. Should this
initiative gain industry acceptance, it may reduce the widespread adoption of
the Secure Digital Card.
We also face competition from products based on multilevel cell flash
technology from Intel and Hitachi. These products compete with our D2 multilevel
cell flash technology. Multilevel cell flash is a technological innovation
13
<PAGE>
that allows each flash memory cell to store two bits of information instead of
the traditional single bit stored by the industry standard flash technology.
Furthermore, we expect to face competition 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. 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.
We believe that our ability to compete successfully depends on a number of
factors, which include:
. price, quality, and on-time delivery to our customers;
. product performance and availability;
. success in developing new applications for system flash technology;
. adequate foundry capacity;
. efficiency of production;
. timing of new product announcements or introductions by us, our customers
and our competitors;
. the ability of our competitors to incorporate their flash data storage
systems into their customers' products;
. the number and nature of our competitors in a given market;
. successful protection of intellectual property rights; and
. general market and economic conditions.
We believe that we compete reasonably favorably with other companies with
respect to these factors. We cannot assure you that we will be able to compete
successfully against current and future competitors or that competitive
pressures faced by us will not materially adversely affect our business,
financial condition or results of operations.
Employees
As of December 31, 2000, we had 720 full-time employees and 283 temporary
employees, including 177 in research and development, 132 in sales and
marketing, 114 in finance and administration and 580 in operations. Our success
is dependent on our retention of key technical, sales and marketing employees
and members of senior management. Additionally, our success is contingent on our
ability to attract and recruit skilled employees in a very competitive market.
None of our employees are represented by a collective bargaining agreement and
we have never experienced any work stoppage. We believe that our employee
relations are good.
ITEM 2. PROPERTIES
----------
Our principal facilities are presently located in Sunnyvale, California. We
lease two adjacent buildings, a 104,000 square foot building that is dedicated
to production and research and development activities and a 50,000 square foot
building which houses our administrative and sales and marketing functions. We
occupy this space under lease agreements that expire in July 2006. Under these
agreements, we have the option to renew the leases on both buildings for one
additional five-year term ending on June 30, 2011. In addition, we lease
warehouse space in San Jose, California. This 40,000 square foot building is
leased through July 2005. We believe that our facilities will be adequate to
meet our near term needs and that additional space will be available as
required. We also lease domestic sales offices in Herndon, Virginia; Irvine and
Trabuco Canyon, California; Dublin and Avon, Ohio; Nashua, New Hampshire;
Bedford, Texas and Maitland, Florida, as well as foreign sales offices in Paris,
France; Hannover and Ratingen, Germany; Amsterdam, the Netherlands; Yokohama and
Osaka, Japan; Hong Kong, China and Hertfordshire, England, a technical support
office in Taichung, Taiwan and a design center in Tefen, Israel.
14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
-----------------
In March 1998, we sued Lexar in the Northern District of
California alleging that Lexar's CompactFlash and PC Cards infringe our U.S.
Patent No. 5,602,987 ("'987 Patent"). Lexar disputed this claim and asserted
various counter claims, including unfair competition, violation of the Lanham
Act, patent misuse, interference with prospective economic advantage, trade
defamation, unenforceability and fraud. On November 14, 2000, in resolution of
these actions, Lexar stipulated that SanDisk's '987 Patent is valid and
infringed by Lexar's current CompactFlash and PC Cards. Lexar made a lump sum
payment of $8.0 million in December 2000 for royalties due on the '987 Patent,
through March 31, 2001. Subject to Lexar's representations and warranties
relating to Lexar's newly designed CompactFlash and PC Cards, SanDisk has
stipulated that these designs do not infringe SanDisk's '987 Patent. Lexar
entered into a 4% royalty-bearing license agreement for certain Lexar products
that may use the '987 Patent beyond March 31, 2001. SanDisk and Lexar have
agreed to dismiss with prejudice all pending claims of patent infringement and
counterclaims involving claims of false advertising, unfair competition and
patent misuse.
In September 2000, Lexar sued SanDisk in the District of Delaware alleging
that our SmartMedia products infringe Lexar's United States Patent No. 5,479,638
("'638 Patent"). In resolution of this action, we paid Lexar a lump sum payment
of $2.0 million for a fully-paid up license for use of the '638 Patent in
SmartMedia products. Under the settlement, Lexar has provided us with
an option for a royalty bearing license to its patents for use in certain future
products.
SanDisk and Lexar have agreed to resolve any future disputes relating to the
use by Lexar of the '987 Patent through binding arbitration. We have also agreed
that for a period of seven years, neither SanDisk nor Lexar shall seek
injunctive relief against the other in any patent lawsuit. However, at all
times, we retain the right to seek injunctive relief to enforce the payment of
royalties pursuant to an arbitrator's ruling.
On March 21, 2000, Mitsubishi Denki Co. Ltd. (Mitsubishi Electric) filed a
complaint in Tokyo District Court against SanDisk K.K., SanDisk's wholly owned
subsidiary. The complaint alleges that SanDisk K.K., based in Yokohama,
Japan, infringes on three Mitsubishi Japanese patents. The Mitsubishi patents in
question are #JP2099342, #JP2129071 and #JP2138047, which are related primarily
to the mechanical construction of memory cards. In the complaint, Mitsubishi
asked the court for a preliminary injunction halting the sale of SanDisk
CompactFlash and flash ATA memory cards in Japan. Mitsubishi has since dropped
patents #JP2129071 and #JP2138047 from the suit. SanDisk and SanDisk K.K. are
vigorously defending against Mitsubishi's remaining claims.
Compaq Corporation has opposed in several countries, including the United
States, our attempting to register CompactFlash as a trademark. We do not
believe that our failure to obtain registration for the CompactFlash mark will
materially harm our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
EXECUTIVE OFFICERS OF THE REGISTRANT
- -------------------------------------
Our executive officers, who are elected by and serve at the discretion of the
Board of Directors, are as follows (all ages are as of March 8, 2001):
Name Age Position
---- --- --------
Dr. Eli Harari 55 President, Chief Executive Officer and Director
Frank Calderoni 43 Chief Financial Officer, Senior Vice President,
Finance and Administration
Ralph Hudson 56 Senior Vice President, Worldwide Operations
Sanjay Mehrotra 42 Senior Vice President, Engineering
Nelson Chan 39 Senior Vice President, Sales and Marketing
Jocelyn Scarborough 56 Vice President, Human Resources
Dr. Eli Harari, the founder of SanDisk, has served as President and Chief
Executive Officer and as a director of SanDisk since June 1988. Dr. Harari
founded Wafer Scale Integration, a privately held semiconductor company, in 1983
and was its President and Chief Executive Officer from 1983 to 1986, and
Chairman and Chief Technical Officer from 1986 to 1988. From 1973 to 1983, Dr.
Harari held various management positions with Honeywell Inc., Intel Corporation
and Hughes Aircraft Microelectronics. Dr. Harari holds a Ph.D. in Solid State
Sciences from Princeton University.
Mr. Frank Calderoni joined SanDisk in February 2000 as its Chief Financial
Officer and Senior Vice President, Finance and Administration. He was previously
Vice President, Finance and Operations, Global Small Business at International
Business Machines Corporation. From 1979 to 1999, Mr. Calderoni held various
management
15
<PAGE>
positions, including controller Storage Systems Division, Server Group
Controller and System 390 division director of finance and planning at IBM. Mr.
Calderoni holds a B.S. in Finance/Accounting from Fordham University and an
M.B.A. from Pace University.
Mr. Ralph Hudson joined SanDisk as Senior Vice President of World Wide
Operations in August 1998. He was previously President of RJ Hudson Consulting
from 1997 to 1998, Vice President of Operations for USRobotics/3Com's Network
Work Systems Division from 1996 to 1997, Senior Vice President and General
Manager for Bell and Howell from 1993 to 1996 and held various senior management
positions with Data General from 1977 to 1993 where he was Vice President of
World Wide Operations from 1989 to 1993. Prior to this, he held various
management and senior management positions with NCR Corporation from 1967 to
1977. Mr. Hudson holds a B.S. in Industrial Engineering from Allied Institute
of Technology.
Mr. Sanjay Mehrotra is a co-founder of SanDisk, has served as Director of
Memory Design and Product Engineering from November 1988 to June 1995; Vice
President of Product Development from July 1995 to July 1999; and as Senior Vice
President, Engineering since July 1999. From January 1980 until November 1988,
Mr. Mehrotra worked at Intel, Seeq Technology, Integrated Device Technology and
Atmel Corporation in the area of design engineering and engineering management,
mostly in EPROM and EEPROM product development. Mr. Mehrotra holds a B.S. and an
M.S. in Electrical Engineering and Computer Science from the University of
California at Berkeley.
Mr. Nelson Chan joined SanDisk as Vice President, Marketing in September 1992,
and he became Senior Vice President, Marketing in December 1999 and has served
as Senior Vice President, Sales and Marketing Since July 2000. From 1986 to
1992, Mr. Chan was Marketing Manager for the Integrated Systems Products
Division at Chips and Technologies. From 1983 to 1986, Mr. Chan held marketing
and engineering positions at Signetics and Delco Electronics. Mr. Chan holds a
B.S. in Electrical and Computer Engineering from the University of California at
Santa Barbara and an M.B.A. from Santa Clara University.
Ms. Jocelyn Scarborough joined SanDisk as Vice President of Human Resources in
March 1999. She was previously Principal of Scarborough and Associates from 1997
to 1999 and Vice President of Human Resources for the California State
Automobile Association from 1994 to 1997. From 1973 to 1993, Ms. Scarborough
held various management positions, including Director of Human Resources and
Organization Development, at Digital Equipment Corporation. Ms. Scarborough
holds a B.S. in Psychology from Gordon College.
16
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
----------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
Market Price of Common Stock
- ----------------------------
Our Common Stock is traded on the Nasdaq National Market under the symbol SNDK.
Our initial public offering of stock occurred on November 8, 1995 at a post-
split price to the public of $5.00 per share. On January 26, 2000, our board of
directors approved a 2-for-1 stock split, in the form of a 100% stock dividend,
payable to stockholders of record as of February 8, 2000. The dividend was paid
and the split was effected on February 22, 2000. Shares, per share amounts,
common stock at par value and capital in excess of par value have been restated
to reflect the stock split for all periods presented. The following table lists
the high and low sales prices for each quarter during the last two years.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal year 1999
First quarter $ 18.813 $ 6.250
Second quarter $ 22.344 $ 8.500
Third quarter $ 47.875 $19.750
Fourth quarter $ 50.313 $18.875
Fiscal year 2000
First quarter $169.625 $37.469
Second quarter $126.500 $41.250
Third quarter $ 94.500 $51.125
Fourth quarter $ 74.750 $27.500
</TABLE>
As of March 8, 2001, we had approximately 325 stockholders of record. We have
never declared or paid any cash dividends on our Common Stock and do not expect
to 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.
17
<PAGE>
ITEM 6: SANDISK CORPORATION SELECTED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues
Product $ 526,359 $205,770 $103,190 $105,675 $ 89,599
License and royalty 75,453 41,220 32,571 19,578 8,000
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues 601,812 246,990 135,761 125,253 97,599
Cost of revenues 357,017 152,143 80,311 72,280 58,707
- -----------------------------------------------------------------------------------------------------------------------------
Gross profits 244,795 94,847 55,450 52,973 38,892
Operating income 124,666 30,085 12,810 19,680 12,474
Net income $ 298,672 $ 26,550 $ 11,836 $ 19,839 $ 14,485
Net income per share
Basic $4.47 $0.48 $0.23 $0.43 $0.33
Diluted $4.11 $0.43 $0.21 $0.40 $0.30
Shares used in per share calculations
Basic 66,861 55,834 52,596 45,760 44,324
Diluted 72,651 61,433 55,344 49,940 48,412
<CAPTION>
At December 31, 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital $ 525,950 $482,793 $138,471 $134,298 $ 77,029
Total assets 1,107,907 657,724 255,741 245,467 108,268
Total stockholders' equity 863,058 572,127 207,838 191,374 87,810
</TABLE>
See Notes to the Consolidated Financial Statements and Management's Discussion
and Analysis of Financial Condition and Results of Operations.
18
<PAGE>
SanDisk Corporation
SUPPLEMENTARY QUARTERLY DATA
(Unaudited. In thousands except per share data)
<TABLE>
<CAPTION>
Quarterly/2000 1st 2nd 3rd 4th
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Product $ 97,249 $122,572 $151,817 $154,721
License and royalty 12,120 21,377 19,022 22,934
- -----------------------------------------------------------------------------------------------------------------
Total revenues 109,369 143,949 170,839 177,655
Gross profits 41,611 59,435 68,965 74,784
Operating income 17,551 30,852 35,535 40,728
Net income* 219,271 24,269 25,602 29,530
Net income per share
Basic $ 3.32 $ 0.36 $ 0.38 $ 0.44
Diluted** $ 3.00 $ 0.33 $ 0.35 $ 0.41
<CAPTION>
Quarterly/1999 1st 2nd 3rd 4th
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Product $ 35,926 $ 42,300 $ 57,624 $ 69,920
License and royalty 8,210 10,249 9,910 12,851
- -----------------------------------------------------------------------------------------------------------------
Total revenues 44,136 52,549 67,534 82,771
Gross profits 17,627 21,691 23,637 31,892
Operating income 4,848 7,033 6,956 11,248
Net income 4,323 5,694 6,505 10,028
Net income per share
Basic $ 0.08 $ 0.11 $ 0.12 $ 0.17
Diluted $ 0.07 $ 0.10 $ 0.11 $ 0.15
</TABLE>
* On January 3, 2000, the USIC foundry was merged into the UMC parent company.
We had invested $51.2 million in USIC. In exchange for our USIC shares, we
received 111 million UMC shares. These shares were valued at approximately $396
million at the time of the merger, resulting in a pretax gain of $394.2 million
($203.9 million after tax) in the first quarter of 2000.
** Quarterly earnings per share figures may not total to yearly earnings per
share, due to rounding and the fluctuations in the number of options included
or omitted from diluted calculations based on the stock price or option strike
prices.
See Notes to the Consolidated Financial Statement and Management's Discussion
and Analysis of Financial Condition and Results of Operations.
19
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Certain statements in this discussion and analysis are forward looking
statements based on current expectations, and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward looking statements. Such risks and uncertainties are
set forth in "Factors That May Affect Future Results" and elsewhere in this
report. The following discussion should be read in conjunction with our
consolidated financial statements and the notes thereto.
Overview
SanDisk was founded in 1988 to develop and market flash data storage
systems. We sell our products to the consumer electronics and
industrial/communications markets. In fiscal 2000, approximately 58% of our
product sales were attributable to the consumer electronics market,
particularly sales of CompactFlash and MultiMediaCard products for use in
digital camera applications. Our CompactFlash products have lower average
selling prices and gross margins than our higher capacity FlashDisk and
FlashDrive products. In addition, a substantial portion of our CompactFlash
and MultiMediaCard products are sold into the retail channel, which usually
has shorter customer order lead-times than our other channels. A majority of
our sales to the retail channel are turns business, with orders received and
fulfilled in the same quarter, thereby decreasing our ability to accurately
forecast future production needs. We believe sales to the consumer market will
continue to represent a majority of our sales, and increase as a percentage of
sales in future years, as the popularity of consumer applications, including
digital cameras, increases.
Our operating results are affected by a number of factors including the
volume of product sales, competitive pricing pressures, availability of foundry
capacity, variations in manufacturing cycle times, fluctuations in manufacturing
yields and manufacturing utilization, the timing of significant orders, our
ability to match supply with demand, changes in product and customer mix, market
acceptance of new or enhanced versions of our products, changes in the channels
through which our products are distributed, timing of new product announcements
and introductions by us and our competitors, the timing of license and royalty
revenues, fluctuations in product costs, increased research and development
expenses, and exchange rate fluctuations. We have experienced seasonality in the
past. As the proportion of our products sold for use in consumer electronics
applications increases, our revenues may become subject to seasonal declines in
the first quarter of each year. See "Factors That May Affect Future Results--Our
Operating Results May Fluctuate Significantly Which May Adversely Affect Our
Stock Price" and "--There is Seasonality in Our Business."
Beginning in late 1995, we adopted a strategy of licensing our flash
technology, including our patent portfolio, to third party manufacturers of
flash products. To date, we have entered into patent cross-license agreements
with several companies, and intend to pursue opportunities to enter into
additional licenses. Under our current license agreements, licensees pay license
fees, royalties, or a combination thereof. In some cases, the compensation to us
may be partially in the form of guaranteed access to flash memory manufacturing
capacity from the licensee company. The timing and amount of royalty payments
and the recognition of license fees can vary substantially from quarter to
quarter depending on the terms of each agreement and, in some cases, the timing
of sales of products by the other parties. As a result, license and royalty
revenues have fluctuated significantly in the past and are likely to continue to
fluctuate in the future. Given the relatively high gross margins associated with
license and royalty revenues, gross margins and net income are likely to
fluctuate more with changes in license and royalty revenues than with changes in
product revenues.
We market our products using a direct sales organization, distributors,
manufacturers' representatives, private label partners, OEMs and retailers. We
expect that sales through the retail channel will comprise an increasing share
of our product revenues in the future, and that a substantial portion of our
sales into the retail channel will be made to participants that will have the
right to return unsold products. Our policy is to defer recognition of revenues
from these sales until the products are sold to the end customers.
Historically, a majority of our sales have been to a limited number of
customers. Sales to our top 10 customers accounted for approximately 48%, 57%,
and 59%, respectively, of our product revenues for 2000, 1999, and 1998. In
2000, no single customer accounted for greater than 10% of our total revenues.
In 1999 and 1998,
20
<PAGE>
revenues from one customer exceeded 10% of total revenues. We expect that sales
of our products to a limited number of customers will continue to account for a
substantial portion of our product revenues for the foreseeable future. We have
also experienced significant changes in the composition of our customer base
from year to year and expect this pattern to continue as market demand for our
customers' products fluctuates. The loss of, or a significant reduction in
purchases by any of our major customers, could harm our business, financial
condition and results of operations. See "Factors That May Affect Future
Results--Sales to a Small Number of Customers Represent a Significant Portion of
Our Revenues".
All of our products require silicon wafers, the majority of which are
currently manufactured for us by UMC in Taiwan. Industry-wide demand for
semiconductors increased significantly in 1999 and the first nine months of
2000, due to increased demand in the consumer electronics and cellular phone
markets. This increased demand caused supply constraints for most of 2000.
However, semiconductor manufacturers, including UMC and Toshiba have been
adding new advanced wafer fab capacity. This additional capacity, along with
slowing economic conditions experienced late in the fourth quarter of 2000 and
into 2001, has resulted in excess supply and intense pricing pressure. If
industry-wide demand for our products continues to be below the industry-wide
available supply, our product prices could decrease further causing our
revenues and profits to decline significantly. Under our wafer supply
agreements, there are limits on the number of wafers we can order and our
ability to change that quantity, either up or down, is restricted.
Accordingly, our ability to react to significant fluctuations in demand for
our products is limited. If customer demand falls below our forecast and we
are unable to reschedule or cancel our orders for wafers or other long lead-
time items such as controller chips or printed circuit boards, we may end up
with excess wafer inventories, which could result in higher operating expenses
and reduced gross margins. 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 lost sales and lower revenues. If we are unable to obtain
adequate quantities of flash memory wafers with acceptable prices and yields
from our current and future wafer foundries, our business, financial condition
and results of operations could be harmed.
We have from time to time taken write-downs for excess inventories, and may
be forced to do so again if the current deterioration in market demand for our
products continues and our inventory levels exceed customer orders. In
addition, we may have to write-down our inventories if continued pricing
pressure results in a net realizable value that is lower than our cost, or if
part of the inventory becomes obsolete. Due to the current market demand for
our products changing so rapidly, we ended the fourth quarter with significant
amounts of excess inventory. Although we are working to reduce this inventory
in line with the current level of business, we are obligated to honor existing
purchase orders, which we have placed with our suppliers. Furthermore, to
assure favorable future business relations with our major suppliers, we may
choose not to shut down their production of our products. In the case of
FlashVision manufacturing at Dominion in Virginia, both Toshiba and SanDisk
are obligated to purchase their share of the production output, which may make
it more difficult for us to reduce our inventory.
Excess inventory not only ties up our cash, but also can result in
substantial losses if such inventory, or large portions thereof, has to be
revalued due to lower market pricing or product obsolescence. These inventory
adjustments decrease gross margins and have resulted, and could in the future
result in, fluctuations in gross margins and net earnings in the quarter in
which they occur. See "Factors That May Affect Future Results--Our Operating
Results May Fluctuate Significantly."
Export sales are an important part of our business, representing 57%, 53% and
56% of our total revenues in 2000, 1999, and 1998, respectively. Our sales may
be impacted by changes in economic conditions in our international markets.
Economic conditions in our international markets, including Asia and the
European Union, may adversely affect our revenues to the extent that demand for
our products in these regions declines. Given the recent economic conditions in
Asia and the European Union and the weakness of the Euro, Yen and other
currencies relative to the United States dollar, our products may be relatively
more expensive in these regions, which could result in a decrease of our sales
in these regions. 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 affect our business,
financial condition and results of operations. See "Factors That May Affect
Future Results--Our international operations make us vulnerable to changing
conditions and currency fluctuations."
21
<PAGE>
For the foreseeable future, we expect to realize a significant portion of
our revenues from recently introduced and new products. Typically, new
products initially have lower gross margins than more mature products because
the manufacturing yields are lower at the start of manufacturing each
successive product generation. In addition, manufacturing yields are generally
lower at the start of manufacturing any product at a new foundry. To remain
competitive, we are focusing on a number of programs to lower manufacturing
costs, including development of future generations of D2 flash and advanced
technology wafers. There can be no assurance that we will successfully develop
such products or processes or that development of such processes will lower
manufacturing costs. If the current industry-wide and worldwide economic
slowdown continues for the rest of fiscal 2001, we may be unable to
efficiently utilize the NAND flash wafer production from FlashVision, which
would force us to amortize the fixed costs of the fabrication facility over a
reduced wafer output, making these wafers significantly more expensive. See
"Factors That May Affect Future Results--We must achieve acceptable
manufacturing yields."
Results of Operations
Product Revenues. In 2000, our product revenues increased 156% to $526.4
million from $205.8 million in 1999. The increase consisted of an increase of
173% in unit sales, which was partially offset by a 7% decline in average
selling prices per unit. In 2000, the largest increase in unit volume came from
sales of CompactFlash Products that represented 47% of product revenues and
MultiMediaCard products that represented 21% of product revenues. The
continuing move towards higher capacity cards in 2000 partially offset a decline
in the average selling price per megabyte of capacity shipped. In 2000, the
average megabyte capacity per unit shipped increased 17% while the average
selling price per megabyte of flash memory shipped declined 22% compared to the
prior year. The mix of products sold varies from quarter to quarter and may
vary in the future, affecting our overall average selling prices and gross
margins.
In 1999, our product revenues were $205.8 million, an increase of 99% from
$103.2 million in 1998. In 1999 the largest increase in unit volume came from
sales of CompactFlash which represented 61% of product revenues, and
MultiMediaCard products which represented 7% of product revenues. A shift in
product mix to higher capacity cards in 1999 partially offset a decline in the
average selling price per megabyte of capacity shipped. In 1999, the average
megabyte capacity per unit shipped increased 65% while the average selling price
per megabyte of flash memory shipped declined 52% compared to the prior year.
Our backlog as of December 31, 2000 was $63.3 million compared to $157.2
million in 1999 and $13.4 million in 1998. See "Factors That May Affect Future
Results - Our Operating Results May Fluctuate Significantly" and "-There is
Seasonality in Our Business." Bookings visibility declined significantly late
in the fourth quarter of 2000, and we experienced material order cancellations
and rescheduling of existing purchase orders from some of our customers.
Visibility remains low in the first quarter of 2001 due to the current
economic uncertainty in our markets. Since orders constituting our current
backlog are subject to changes in delivery schedules or cancellations, backlog
is not necessarily an indication of future revenue. Retail sales are typically
booked and shipped in the same quarter.
In the first quarter of 2001, demand from our major OEM customers has been
substantially below forecast, as these customers continue to try to reduce their
inventories. In addition, retail channel orders have been lower than the levels
we experienced in the fourth quarter of 2000. Due to this continuing weakness of
economic conditions and ongoing customer inventory corrections, we expect first
quarter 2001 revenues to be significantly below our revenues in the fourth
quarter of 2000.
License and Royalty Revenues. We currently earn patent license fees and
royalties under nine cross-license agreements with Hitachi, Intel, Lexar, Sharp,
Samsung, SmartDisk, SST, TDK and Toshiba. License and royalty revenues from
patent cross-license agreements was $75.5 million in 2000, up from $41.2 million
in 1999 and $32.6 million in 1998. The increase in license and royalty revenues
in 2000 was primarily due to patent royalties from
22
<PAGE>
increased sales by certain of our licensees, and the revenue of $4.7 million
recognized in conjunction with the settlement of the Lexar litigation. The
increase in license and royalty revenues in 1999, as compared to 1998, was
primarily due to an increase in patent royalty revenues. Revenues from licenses
and royalties were 13% of total revenues in 2000, 17% in 1999 and 24% in 1998.
Our income from patent licenses and 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
2001, 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.
Gross Profits. In fiscal 2000, gross profits increased to $244.8 million, or
41% of total revenues from $94.8 million, or 38% of total revenues in 1999 and
$55.5 million, or 41% of total revenues in 1998. Product gross margins
increased to 32% in 2000 from 26% in 1999 and 22% in 1998. The increases in
2000 were primarily due to the lower cost per megabyte of our 256 megabit flash
memory products, which represented the majority of our product sales in 2000.
The increases in 1999 were due to the lower cost per megabyte of our 256 megabit
and 128 megabit flash memory products, which began shipping in volume in the
second half of 1999.
Due to weak economic conditions, excess supply in the markets for our
products, and lower demand from customers as they continue to reduce their
inventories, we are experiencing intense pricing pressures. Due to these
factors, we expect our average selling prices per megabyte to decline
significantly in the first quarter of 2001 and in future quarters throughout
2001 and possibly beyond, until market supply and demand for our products
returns to equilibrium. Although we are taking significant steps to lower our
product costs, given the current market conditions, we expect our selling prices
to decline more quickly than our product cost, resulting in a decline in our
product gross margins in 2001.
Research and Development. Research and development expenses consist
principally of salaries and payroll-related expenses for design and development
engineers, prototype supplies and contract services. Research and development
expenses increased to $46.1 million in 2000 from $26.9 million in 1999 and $18.2
million in 1998. As a percentage of revenues, research and development expenses
were 8% in 2000, 11% in 1999 and 13% in 1998. In 2000 and 1999, the increase in
research and development expenses was primarily due to an increase in salaries
and payroll-related expenses associated with additional personnel and higher
project related expenses. Increased depreciation due to capital equipment
additions also contributed to the growth in research and development expenses in
both years. The additional project expenses in 2000 were to support the
development of new generations of flash data storage products including the 512
megabit and 1 gigabit flash memory co-development with Toshiba. We expect our
research and development expenses to continue to increase in future quarters to
support the development and introduction of new generations of flash data
storage products, including the joint venture with Toshiba and the development
of advanced controller chips.
Sales and Marketing. Sales and marketing expenses include salaries, sales
commissions, benefits and travel expenses for our sales, marketing, customer
service and applications engineering personnel. These expenses also include
other selling and marketing expenses, such as independent manufacturer's
representative commissions, advertising and tradeshow expenses. Sales and
marketing expenses increased to $49.3 million in 2000 from $25.3 million in 1999
and $16.9 million in 1998. The increases in both 2000 and 1999 were primarily
due to increased salaries and payroll-related expenses and increased commission
expenses due to higher product revenues and increased marketing expenses. Sales
and marketing expenses represented 8% of total revenues in 2000 compared to
10% in 1999 and 12% in 1998. We expect sales and marketing expenses to continue
to increase as sales of our products grow, as we continue to develop the retail
channel and brand awareness for our products and as we increase our marketing
activities for our Secure Digital Card products.
23
<PAGE>
General and Administrative. General and administrative expenses include the
cost of our finance, information systems, human resources, shareholder
relations, legal and administrative functions. General and administrative
expenses were $24.8 million in 2000 compared to $12.6 million in 1999 and $7.5
million in 1998. The increases for both 2000 and 1999 were primarily due to
increased salary and related expenses associated with additional personnel,
increased legal fees and an increase in the allowance for doubtful accounts
related to higher trade accounts receivable balances from increased revenues.
General and administrative expenses represented 4% of total revenues in 2000
compared to 5% in 1999 and 6% in 1998. We expect general and administrative
expenses to increase as we expand and develop our infrastructure to support
our anticipated future growth. General and administrative expenses could also
increase substantially in the future if we pursue additional litigation to
defend our patent portfolio. See "Factors That May Affect Future Results -
Risks Associated with Patents, Proprietary Rights and Related Litigation."
Given the current market conditions and expected decline in product revenues
in the first quarter of 2001, we have instituted strict expense control
measures. These measures in the first quarter of 2001 included a reduction in
our work force and significant cuts in discretionary spending. However, we are
continuing to invest in research and development of advanced technologies and
future products.
Interest Income. Interest income was $22.8 million in 2000 compared to $8.3
million in 1999 and $5.3 million in 1998. The increase in 2000 is primarily due
to a full year of higher interest income resulting from the investment of the
proceeds from the sale of common stock in our November 1999 follow-on public
offering, as well as increased cash flows as a result of the increase in revenue
and operating margin. The increase in 1999 is primarily due to higher interest
income in the fourth quarter due to the investment of the proceeds from the sale
of common stock in our November 1999 follow-on public offering. We expect
interest income to decline in 2001 relative to 2000 due to lower cash and
investment balances resulting from our investments in FlashVision and Tower,
combined with the drop in risk-free interest rates due to recent actions taken
by the U.S. Federal Reserve Board.
Gain on investment in foundry. In the first quarter of 2000, we recognized a
gain of $344.2 million as a result of the exchange of our investment of $51.2
million in United Silicon, Inc., or USIC, for an investment in United
Microelectronics Corporation, or UMC. We received 111 million shares of UMC in
exchange for our USIC shares. These shares were valued at $396 million at the
time of the exchange and were subject to trading restrictions imposed by UMC and
the Taiwan Stock Exchange. The trading restrictions expired on one-half of the
shares on July 3, 2000. The remaining shares will become available for sale over
a two-year period beginning in January 2002. When the shares are ultimately
sold, it is likely that we will recognize additional gains or losses. In May
2000, we received a stock dividend of 200 UMC shares for every 1,000 shares of
UMC owned, resulting in our ownership of 22 million additional UMC shares.
At December 31, 2001, the market value of both our short-term and long-term
investment in UMC had declined $201.9 million below its carrying basis. It was
determined that this decline was related to the downturn in the semiconductor
industry as a whole and was temporary in nature due to the historically
cyclical nature of the industry. The available-for-sale portion of our
investment was marked-to-market through other comprehensive income as required
by SFAS 115.
As of March 22, 2001, the market value of our investment in UMC remained
significantly below our cost. The downturn in the semiconductor industry and
the economy in general appears to be more severe than previously anticipated.
There is a great deal of uncertainty regarding when the semiconductor industry
will recover from this down cycle. Because of the continued downturn in the
economy, we believe that the decline in the market value of our investment in
UMC at March 22, 2001 is other than temporary, and we will report a loss in
other income and expense in the first quarter of 2001. This loss will be based
upon the fair market value of the investment at the end of the first quarter of
fiscal 2001, as compared to the investment's cost basis.
24
<PAGE>
Other Income, Net. Other income, net was $572,000 in 2000 compared to $1.3
million in 1999 and $374,000 in 1998. The fluctuations largely relate to
foreign currency transaction gains. In 2000, 1999, and 1998 we had net foreign
currency transaction gains of $428,000, $1.1 million and $412,000, respectively.
Provision for Income Taxes. Our 2000, 1999 and 1998 effective tax rates were
approximately 39%, 33% and 36%, respectively. Our 2000 effective tax rate was
higher than our 1999 rate due primarily to effects of state income taxes on
significantly increased income and a reduced proportional rate benefit from
federal and state credits and tax exempt interest income due to the significant
increase in taxable income over 1999. Our 1999 effective tax rate was lower than
our 1998 rate due to the proportional rate benefits from federal and state tax
credits.
Liquidity and Capital Resources
As of December 31, 2000, we had working capital of $526.0 million, which
included $106.3 million in cash and cash equivalents and $373.3 million in
short-term investments. Operating activities provided $84.9 million of cash in
2000 primarily from net income, increases in deferred taxes of $114.5 million
largely due to the gain on UMC, income taxes payable of $39.8 million as a
result of higher taxable income than in 1999, accounts payable of $36.4 million
primarily from increased inventories, and deferred revenue of $21.4 million
related to license fees, which were partially offset by an increase in inventory
of $60.9 million and an increase in accounts receivable of $52.2 million
associated with higher revenues. Cash provided by operations was $17.0 million
in 1999 and $15.1 million in 1998.
Net cash used in investing activities of $137.9 million in 2000 included
$134.7 million invested in FlashVision LLC, our foundry joint venture with
Toshiba, $26.6 million of capital equipment purchases, a $20.0 million deposit
in an escrow account for our investment in Tower Semiconductor, and our $7.2
million investment in Divio, partially offset by proceeds from net sales of
investments of $51.5 million. In 1999, net cash used in investing activities of
$214.4 million consisted $21.4 million of capital equipment purchases and net
purchases of investments of $193.0 million. In 1998, net cash used in investing
activities of $23.0 million consisted of a second investment in the USIC foundry
of $10.9 million, $7.5 million of capital equipment purchases and net purchases
of investments of $4.6 million.
In 2000, financing activities provided $13.6 million, primarily from the sale
of common stock through the our stock option and employee stock purchase plans.
During 1999, cash provided by financing activities of $328.2 million was
primarily from $320.3 million from the net proceeds of the sale of common stock
in our November 1999 follow-on stock offering and $7.9 million from the sale of
common stock through the SanDisk stock option and employee stock purchase plans.
During 1998, cash provided by financing activities of $2.4 million was primarily
from the sale of common stock through the SanDisk stock option and employee
stock purchase plans.
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 part of this transaction, SanDisk and
Toshiba formed FlashVision LLC, a joint venture to equip and operate a silicon
wafer manufacturing line at Dominion Semiconductor in Virginia. The cost of
equipping the Virginia wafer manufacturing line is estimated at between $700
million and $800 million. As part of our 50% ownership of the joint venture we
had invested $134.7 million as of December 31, 2000, and in January 2001 we
invested the remaining $15.3 million. We have also guaranteed up to $215 million
in equipment lease lines to equip Toshiba's Dominion Semiconductor manufacturing
clean room with advanced wafer processing equipment. As of January 26, 2001, $20
million of this amount had been borrowed by FlashVision.
On July 4, 2000, we entered into a share purchase agreement to make a $75
million investment in Tower Semiconductor, or Tower, in Israel, representing
approximately 10% ownership of Tower. In exchange for our investment, we
received one seat on the board of directors of Tower and a guaranteed portion of
the wafer output from the advanced fabrication facility Tower has started to
build in Migdal Haemek, Israel. Under the terms of the agreement, we will make
our investment over a period of approximately 18 months if key milestones
related to the construction, equipping and wafer production at the new wafer
fabrication facility are met.
25
<PAGE>
On January 26, 2001, Tower satisfied the closing conditions of the share
purchase agreement, and we transferred the first $20 million of our investment
from an escrow account to purchase 866,551 ordinary shares and obtain $8.8
million in pre-paid wafer credits. On March 1, 2001, we paid Tower $11 million
upon its completion of milestone one, to purchase 366,690 ordinary shares and
obtain additional prepaid wafer credits. Additional contributions will take the
form of mandatory warrant exercises for ordinary shares at an exercise price of
$30.00 per share if other milestones are met. The warrants will expire five
years from the date of grant, and in the event the key milestones are not
achieved, the exercise of these warrants will not be mandatory. We expect
first wafer production to commence at the new fabrication facility in late 2002.
On August 9, 2000, we entered into a joint venture, DigitalPortal Inc , or
DPI, with Photo-Me International, or PMI, for the manufacture, installation,
marketing and service of self-service, digital photo printing labs, or kiosks,
bearing the SanDisk brand name in locations in the U.S. and Canada. These kiosks
employ high-quality, low-cost, silver halide photo processing technology
developed by PMI. Under the agreement, SanDisk and PMI will each make an initial
investment of $4 million in the DPI joint venture, and secure lease financing
for the purchase of the kiosks. The total value of the lease financing will
depend on the number of kiosks deployed by the joint venture. We estimate that
we will guarantee equipment lease arrangements of approximately $40 million over
the first two years of the agreement. PMI will manufacture the kiosks for the
joint venture and will install and maintain the kiosks under contract with the
joint venture. We expect to deploy the first kiosks in pilot programs in
selected retail stores in the United States starting in the first half of 2001.
On November 2, 2000, we made a strategic investment of $7.2 million in Divio,
Inc. Divio is a privately-held manufacturer of digital imaging compression
technology and products for future digital camcorders that will be capable of
using our flash memory cards to store home video movies, replacing the magnetic
tape currently used in these systems. Under the agreement, we own approximately
10% of Divio and are entitled to one board seat.
Depending on the demand for our products, we may decide to make additional
investments, which could be substantial, in assembly and test manufacturing
equipment or foundry capacity to support our business in the future. Our
operating expenses may increase as a result of the need to hire additional
personnel to support our sales and marketing efforts and research and
development activities, including our proposed collaboration with Toshiba for
the joint development of 512 megabit and 1 gigabit flash memory chips. We
believe the existing cash and cash equivalents and short-term investments will
be sufficient to meet our currently anticipated working capital and capital
expenditure requirements for the next twelve months.
In January 2000, the USIC foundry was merged into the UMC parent company. In
exchange for our USIC shares, we received 111 million UMC shares. These shares
were valued at approximately $396 million at the time of the merger, resulting
in a pretax gain of $344.2 million ($203.9 million after-tax) in the first
quarter of 2000. All of the UMC shares we received as a result of the merger
were subject to trading restrictions imposed by UMC and the Taiwan Stock
Exchange. The trading restrictions expired on one-half of the shares six months
after the date of the merger, on July 3, 2000. The remaining shares will become
available for sale over a two-year period beginning in January 2002. When the
shares are ultimately sold, it is likely that we will recognize additional gains
or losses due to fluctuations in the price of the UMC shares. While we do not
anticipate the need for such funds in the current year, we may liquidate a
portion of the UMC shares that are available for sale, and use the proceeds to
support our operations and capital expenditures.
Impact of Currency Exchange Rates
A portion of our revenues are denominated in Japanese Yen. We enter into
foreign exchange forward contracts to hedge against changes in foreign currency
exchange rates. No forward contracts were outstanding at December 31, 2000. At
December 31, 1999, two forward contracts with notional amounts of $8.2 million
were outstanding.
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Future exchange rate fluctuations could have a material adverse effect on our
business, financial condition and results of operations.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement 133,
Accounting for Derivative Instruments and Hedging Activities, which we are
required to adopt in fiscal 2001. Historically, we have had a minimal use of
derivatives and do not anticipate that the adoption of the new Statement will
have a significant effect on our earnings or financial position.
In December 1999, The Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements". SAB
101 provides guidance on the recognition, presentation and disclosure of revenue
in financial statements. All registrants are expected to apply the accounting
and disclosures described in SAB 101. Our implementation of SAB 101 did not have
a material impact on our consolidated results of operations, financial position
and cash flows.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation-an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion 25 and, among other issues clarifies the
following: the definition of an employee for the purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequences of various modifications to
the terms for the previously fixed stock options or awards; and the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
became effective July 1, 2000 and did not have a material impact on our
consolidated results of operations, financial position, and cash flows.
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Factors That May Affect Future Results
- --------------------------------------
Our operating results may fluctuate significantly, which may adversely affect
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:
. unpredictable demand for our products;
. decline in the average selling prices of our products due to competitive
pricing pressures;
. seasonality in sales of our products;
. excess capacity of flash memory from our competitors and our own new flash
wafer capacity;
. difficulty of forecasting and management of inventory levels; and in
particular, 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; and
. expenses related to obsolescence or devaluation of unsold inventory, or
reserves necessary to protect us against future write offs of such unsold
inventory.
. adverse changes in product and customer mix;
. slower than anticipated market acceptance of new or enhanced versions of
our products;
. competing flash memory card standards which displace the standards used in
our products;
. changes in our distribution channels;
. timing of license and royalty revenue;
. fluctuations in product costs, particularly due to fluctuations in
manufacturing yields and utilization;
. availability of sufficient silicon wafer foundry capacity to meet customer
demand;
. shortages of components such as capacitors and printed circuit boards
required for the manufacturing of our products;
. significant yield losses which could affect our ability to fulfill
customer orders and could increase our costs;
. 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;
. lengthening in manufacturing cycle times due to our suppliers operating at
peak capacity;
. increased research and development expenses;
. exchange rate fluctuations, particularly the U.S. dollar to Japanese yen
exchange rate;
. changes in general economic conditions, particularly in Japan and the
European Union;
. natural disasters affecting the countries in which we conduct our
business, particularly Taiwan, Japan and the United States;
Difficulty of estimating silicon wafer needs
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. Bookings visibility declined
significantly late in the fourth quarter of 2000, and remains low in 2001 due to
the current economic uncertainty in our markets. On the
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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 our largest volume products,
CompactFlash and MultiMediaCard, are sold into emerging consumer markets, it has
been difficult to accurately forecast future sales. A substantial majority of
our quarterly sales have historically been from orders received and fulfilled in
the same quarter, which makes accurate forecasting very difficult. In addition,
our product order backlog may fluctuate substantially from quarter to quarter.
Anticipated growth in expense levels
We significantly increased our expense levels in 2000 to support our growth.
We may need to hire additional personnel or increase our operating expenses in
2001 to support our sales and marketing efforts and research and development
activities, including our joint venture with Toshiba providing for the
development of 512 megabit and 1 gigabit flash memory chips. 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, such as
we are forecasting for the first quarter of 2001, our business, financial
condition and results of operations will be harmed.
Variability of average selling prices and gross margin
Our product mix varies quarterly, which affects our overall average selling
prices and gross margins. Our CompactFlash and MultiMediaCard 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 and MultiMediaCard
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. In fiscal 2000, average selling prices per
megabyte decreased 22% compared to fiscal 1999, reflecting the Flash memory
supply shortages that prevailed during the first nine months of the year, which
helped to keep selling prices in 2000 more stable than in 1999. Average selling
prices per megabyte declined 52% in 1999 compared to 1998. Due to recent
increases in flash memory foundry capacity and the economic slow-down in the
first quarter of 2001, we expect that the decline in our average selling prices
in 2001 will be more severe than in 2000. If we cannot reduce our product
manufacturing costs in 2001 to offset these reduced prices, our gross margins
and net profitability will suffer.
Variability of license fees and royalties
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 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 2001, 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
product revenues, gross margins and net income fluctuate significantly with
changes in license and royalty revenues.
Continuing declines in our average sales prices may result in declines in our
gross margins.
In 2000, the average price per megabyte shipped declined 22% compared to 1999.
Flash data storage markets are intensely competitive and accordingly, price
reductions for our products are necessary to meet consumer price points. Due to
recent increases in flash memory foundry capacity and the worldwide economic
slow-down in the first quarter of 2001, we expect that price declines for our
products could be significant on an annualized basis. If we cannot reduce our
product manufacturing costs in 2001 to offset these reduced prices, our gross
margins and net profitability will suffer.
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Our selling prices may be affected by excess capacity in the market for flash
memory products.
In the first nine months of 2000, industry-wide demand for flash memory
products exceeded the available supply, driven by an explosion in the growth of
cellular phones and the accelerating shift in consumer electronics from analog
to digital devices. Flash memory suppliers, including SanDisk, responded to this
strong demand by significantly increasing investments in new advanced flash
memory production capacity. This has led to a significant increase in worldwide
flash memory supply at a time when customer demand has decreased significantly,
causing excess supply in the markets for our products and significant declines
in average selling prices. If this situation continues throughout 2001, we
expect that price declines for our products could be significant on an
annualized basis. If we cannot reduce our product manufacturing costs in 2001 to
offset these reduced prices, our gross margins and net profitability will
suffer.
Our business depends upon consumer products.
In 2000, we continued to receive more product revenue and ship more units of
products for consumer electronics applications, principally digital cameras,
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 is made
through distributors and to retailers. 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.
Sales of our products, in particular the sale of CompactFlash and
MultiMediaCard 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 second half of each 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. Although we did not experience
seasonality in 2000, we cannot assure you that we will not experience
seasonality in 2001 or future years.
In transitioning to new processes and products, we face production and market
acceptance risks.
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:
. lower yields often experienced in the early production of new
semiconductor devices;
. manufacturing flaws with new processes including manufacturing processes
at our subcontractors which may be extremely complex;
. problems with design and manufacturing of products that will incorporate
these devices; and
. production delays.
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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.
D2 flash technology
We have developed new products based on D2 flash technology, a flash
architecture designed to store two bits in each flash memory cell. High density
flash memory, such as D2 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. We may not be able to manufacture future generations of our D2
products with yields sufficient to result in lower costs per megabyte. If we are
unable to bring future generations of our 256 and 512 megabit 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.
Secure Digital Card products
SanDisk, along with Matsushita and Toshiba, jointly developed and will promote
the Secure Digital Card. The Secure Digital Card is an enhanced version of our
MultiMediaCard that incorporates advanced security and copyright protection
features required by the emerging markets for the electronic distribution of
music, video and other copyrighted works. We began shipping our Secure Digital
Card products in the first quarter of 2001, and expect to begin high-volume
production in the first half of 2001.
The Secure Digital Card incorporates a number of new features, including SDMI
compliant security and copy protection, a mechanical write protect switch and a
high data transfer rate. We have never before built products incorporating these
features. Any problems or delays in establishing production capabilities or
ramping up production volumes of our Secure Digital Card products could result
in lost sales or increased manufacturing costs in 2001 and beyond. In addition,
we cannot be sure that manufacturers of consumer electronic products will
develop new products that use the Secure Digital Card or that content providers
such as music studios will agree to distribute their copyrighted content for
storage on Secure Digital Cards. For example, in 2000 the major U.S. based
content providers have had significant success in U.S. courts in their
litigation with Napster.Com and MP3.Com, and this may have slowed down the
widespread distribution of digital music on the internet. 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,
there is no assurance that consumers will widely adopt Secure Digital Cards, as
they only operate with copyrighted content. Conversely, broad acceptance of our
Secure Digital Card by consumers may reduce demand for our MultiMediaCard and
CompactFlash card products. See "--The success of our business depends on
emerging markets and new products."
We depend on third party foundries for silicon wafers.
All of our products require silicon wafers. We rely on UMC in Taiwan and
Toshiba in Yokkaichi, Japan to supply the majority of our silicon wafers. We
depend on UMC to allocate a portion of its capacity to meet our needs, produce
acceptable quality wafers with acceptable manufacturing yields and deliver our
wafers on a timely basis at a competitive price. If UMC is unable to satisfy
these requirements, our business, financial condition and operating results may
suffer. Any disruption in supply from UMC due to natural disaster, power failure
or other causes could significantly harm our business, financial condition and
results of operations.
Under the terms of our wafer supply agreements with 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
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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. In
addition, in February 2000, we entered into a capacity and reservation deposit
agreement with UMC. To reserve additional foundry capacity under this agreement,
we paid UMC a reservation deposit. This deposit will be refunded to us on a
quarterly basis, over the agreement term, if we purchase the full wafer capacity
reserved for us. We may forfeit part of our deposit if we are unable to utilize
our reserved capacity within four quarters of the end of the agreement term. 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. In 2000, 1999, and 1998, we purchased wafers from
UMC, a foundry in which we have ownership, totaling approximately $161.6
million, $22.8 million and $11.6 million, respectively.
In the third quarter of 2000, we completed qualifications and began volume
production of the 256 megabit D2 0.24 micron technology in two UMC fabs. We now
have three UMC fabs producing our 0.24 micron wafers. The yields on these wafers
vary from fab to fab due to the relative stage of start-up or production ramp.
The third UMC fab to begin production is a new UMC fab and we have been
experiencing lower yields than the two other fabs. There can be no assurances
that we will not experience delays in wafer availability, low yields, or
undetected manufacturing flaws which may adversely impact the reliable operation
of our products. Any such difficulties may adversely impact our product supply
and gross margins.
Our investment in new flash memory wafer production may result in increased
expenses and fluctuations in operating results.
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. Under this agreement, we had invested $134.7
million as of December 31, 2000 and in January 2001 invested the remaining $15.3
million. We have also guaranteed up to $215 million in equipment lease lines
entered into by FlashVision LLC, which is jointly owned by us and Toshiba, to
equip Toshiba's Dominion Semiconductor manufacturing clean room with advanced
wafer processing equipment. As of January 26, 2001, $20 million of this amount
had been borrowed by FlashVision. Toshiba is obligated to invest and guarantee
an equal amount and each of us will equally share the startup expenses and the
wafer output. We will use the new production capacity at Dominion to manufacture
primarily NAND flash memory wafers with minimum lithographic feature size of
0.16 micron initially, moving to 0.13 micron in the future. Such minimum feature
sizes are considered today to be among the most advanced for mass production of
silicon wafers and have never been used for the high volume manufacture of flash
memory chips. Therefore, it is difficult to predict how long it will take to
equip and commence production at the new facility and achieve adequate yields,
reliable operation, and economically attractive product costs based on our new
designs. We have not operated our own wafer fabrication facility in the past and
therefore we rely on Toshiba to address these challenges. With our investments
in the Dominion facility, we are now exposed to the adverse financial impact of
any delays or manufacturing problems associated with the wafer production line.
Any problems or delays in commencing production at the new Dominion facility
could adversely impact our operating results in 2001 and beyond.
We expect to incur substantial start up expenses related to the hiring and
training of manufacturing personnel, facilitizing the clean room and installing
equipment. During the ramp-up period, currently expected to begin in the middle
of 2001, equipment depreciation begins and line operating expenses increase
substantially. While the wafer output is still relatively low, the cost of
wafers from the Dominion facility is expected to be significantly higher than
the cost of wafers from our other suppliers. This may negatively impact our
overall product gross margins until flash wafer output from Dominion reaches an
optimum level, which may never occur. Under our agreement with Toshiba, we are
committed to purchase 50% of the output from the Dominion facility. We will
incur startup costs and pay our share of ongoing operating activities even if we
do not utilize our full share of the Dominion output. 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. We cannot
assure you that we or Toshiba will be able to secure sufficient
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funding to support this manufacturing line. Furthermore, in order for us to sell
NAND based CompactFlash, MultiMediaCards and Secure Digital Cards, we will have
to develop new controllers, printed circuit boards and test algorithms because
the architecture of NAND flash is significantly different from our current 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.
On July 4, 2000, SanDisk entered into a share purchase agreement to make a $75
million investment in Tower Semiconductor, or Tower, in Israel, representing
approximately 10% ownership of Tower. In exchange for our investment, we
received one seat on the board of directors of Tower and a guaranteed portion of
the wafer output from the advanced fabrication facility Tower is starting to
build in Migdal Haemek, Israel. Under the terms of the agreement, we will make
our investment over a period of approximately 18 months if key milestones
related to the construction, equipping and wafer production at the new wafer
fabrication facility are met. On January 26, 2001, Tower satisfied the closing
conditions of the share purchase agreement, and we transferred the first $20
million of our investment from an escrow account to Tower in exchange for
866,551 ordinary shares and obtain $8.8 million in pre-paid wafer credits. On
March 1, 2001, we paid Tower $11 million upon its completion of milestone one,
to purchase 366,690 ordinary shares and obtain additional prepaid wafer credits.
Additional contributions will take the form of mandatory warrant exercises for
ordinary shares at an exercise price of $30.00 per share if other milestones are
met. The warrants will expire five years from the date of grant, and in the
event the key milestones are not achieved, the exercise of these warrants will
not be mandatory. We expect first wafer production to commence at the new
fabrication facility in late 2002.
Although we do not believe the current political unrest in Israel represents a
major security problem for Tower, in which we recently invested, since Migdal
Haemek, Israel is in a secure geographic location, the unrest may nevertheless
cause scheduling delays. 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.
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
portable digital music players and smart phones, must develop and grow. If sales
of these products do not grow, our revenues and profit margins could level off
or decline.
Because we sell our products for use in many new applications, it is difficult
to forecast demand. During the third quarter of 2000, the U.S. Courts ruled
against Napster.Com and MP3.Com in two cases involving unlicensed distribution
of copyrighted digital music over the Internet. This action is being carefully
studied by the original equipment manufacturers, or OEMs, who have been
developing MP3 players using Flash memory cards such as our MultiMediaCards for
storage of music. If these OEMs reduce their production of digital music players
in response to these recent court decisions or other factors, demand for our
products will decrease. In addition, we believe that these OEMs may redesign
their platforms to work with our Secure Digital Card, which we began shipping in
the first quarter of 2001. Accordingly, we may experience a drop in demand from
our MultiMediaCard customers before the new anticipated demand for our Secure
Digital Card materializes.
Secure Digital Card products
As part of our June 2000 joint venture with Toshiba, we will jointly develop
the Secure Digital Card, an enhanced version of our MultiMediaCard, which will
incorporate advanced security and copyright protection features required by the
emerging markets for the electronic distribution of music, video and other
copyrighted works. We began shipping our Secure Digital Card products in 32 and
64 megabyte capacities in the first quarter of 2001. The Secure Digital Card is
slightly thicker and uses a different interface than our MultiMediaCard. Because
of
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these differences, the Secure Digital Card will not work in current products
that include a MultiMediaCard slot. In order for the market for our Secure
Digital Card to develop, manufacturers of digital audio/video and portable
computing products must include a Secure Digital Card compatible slot in their
products and acquire a license to the security algorithms. If OEMs do not
incorporate Secure Digital Card slots in their products or do not buy our Secure
Digital Cards, our business, financial condition and results of operations may
be harmed. In addition, consumers may postpone or altogether forego buying
products that utilize our MultiMediaCard in anticipation of new products such as
MP3 players and digital camcorders that will incorporate the Secure Digital
Card. If this occurs, sales of our MultiMediaCard products may be harmed. The
main competition for the Secure Digital Card is expected to come from the Sony
Memory Stick. Sony has substantially greater financial and other resources than
we do and extensive marketing and sales channels and brand recognition. We
cannot assure you that our Secure Digital Card will be successful in the face of
such competition.
In addition, the market for portable digital music players is very new and it
is uncertain how quickly consumer demand for these players will grow. If this
market does not grow as quickly as anticipated or our customers are not
successful in selling their portable digital music players to consumers, our
revenues could be adversely affected. In addition, it is often the case with new
consumer markets that after an initial period of new market formation and
initial acceptance by early adopters, the market enters a period of slow growth
as standards emerge and infrastructure develops. In the event that this occurs
in the portable digital music player market or other emerging markets, sales of
our products would be harmed.
The success of our new product strategy will depend upon, among other things,
the following:
. our ability to successfully develop new products with higher memory
capacities and enhanced features at a lower cost per megabyte;
. the development of new applications or markets for our flash data storage
products;
. the adoption by the major content providers of the copy protection
features offered by our Secure Digital Card products;
. the extent to which prospective customers design our products into their
products and successfully introduce their products; and
. 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 and manufacture of 512 megabit and 1 gigabit flash memory chips and
Secure Digital Card controllers. As part of this collaboration, 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 .16 micron manufacturing process technology. We
expect cards employing the 512 megabit technology to be shipped in significant
quantities in the second half of 2001, and cards employing the 1 gigabit
technology to be shipped in 2002. The development of 512 megabit and 1 gigabit
flash memory chips and Secure Digital Card controllers is expected to be complex
and incorporates SanDisk and Toshiba technology that is still under development.
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, our business, financial condition and results of operations could
suffer.
We may be unable to maintain market share.
During periods of excess supply in the market for our flash memory products,
such as we are experiencing in the first half of 2001, 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
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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.
Our international operations make us vulnerable to changing conditions and
currency fluctuations.
Political risks
Currently, the majority of our flash memory wafers are produced by three UMC
foundries in Taiwan. We also use a third-party subcontractor in Taiwan for the
assembly and testing of our MultiMediaCard 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 MultiMediaCard
products by our Taiwanese foundries and subcontractor. 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. 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.
In addition, while the political unrest in Israel has not yet posed a direct
security risk to our engineering design center or our foundry investment in
Tower Semiconductor due to their geographic location, it may nevertheless cause
unforeseen delays in the development of our products or the construction of the
Tower wafer foundry.
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 United States 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.
Our sales are also highly dependent upon global economic conditions. An
example of this is our sales to Japan, which declined to 21% of product revenue
in 2000, from 22% of product revenue in 1999. In 1998 our sales to Japan were
32% of total product revenue, down from 38% in 1997. We believe these declines
were primarily due to the ongoing Japanese recession.
General risks
Our international business activities could also be limited or disrupted by
any of the following factors:
. the need to comply with foreign government regulation;
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. general geopolitical risks such as political and economic instability,
potential hostilities and changes in diplomatic and trade relationships;
. natural disasters affecting the countries in which we conduct our
business, such as the earthquake experienced in Taiwan in 1999;
. imposition of regulatory requirements, tariffs, import and export
restrictions and other barriers and restrictions, particularly in China;
. longer payment cycles and greater difficulty in accounts receivable
collection, particularly as we increase our sales through the retail
distribution channel;
. Adverse tax rules and regulations;
. weak protection of our intellectual property rights; and
. delays in product shipments due to local customs restrictions.
We depend on our suppliers and third party subcontractors.
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, we rely on UMC for the majority of our flash memory wafers and NEC
to supply 100% of certain designs of microcontrollers.
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, Celestica, Inc. in
China, and Amkor, in the Philippines. These three subcontractors will also be
assembling and testing a majority of our mature, high-volume products. We began
transferring portions of our testing and assembly operations to these
subcontractors in the second half of 1999 and are still continuing this
transition. We will continue operations at our Sunnyvale production facility
for new products and special customer requirements. However, we do not have
sufficient duplicative production testing equipment at Sunnyvale and at our
subcontractors. Any problems in this complex transition may result in a
disruption of production and a shortage of product to meet customer demand. 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.
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.
36
<PAGE>
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, Intel, Macronix, Mitsubishi, Fujitsu, Sharp
Electronics and ST Microelectronics. Companies that combine controllers and
flash memory chips developed by others into flash storage cards include Lexar
Media, M-Systems, Pretec, Simple Technology, Sony Corporation, Kingston
Technology, Panasonic, Silicon Storage Technology, TDK Corporation, Matsushita
Battery, Delkin Devices, Inc., Feiya Technology Corporation, Dane-Elec
Manufacturing, Silicon Tek, Infineon Technologies 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 announced an agreement with Matsushita and Toshiba to jointly develop
and promote a next generation flash memory card called the Secure Digital Card.
Under this agreement, Secure Digital Card royalty-bearing licenses will be
granted to other flash memory card manufacturers, which will increase the
competition for our Secure Digital Card, CompactFlash and MultiMediaCard
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 between Matsushita, Toshiba and SanDisk, 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 and Secure Digital Card controllers
developed and manufactured under our relationship. Accordingly, we will compete
directly with Toshiba for sales of these advanced chips and controllers.
We have entered into patent cross-license agreements with several of our
leading competitors including Hitachi, Lexar, Samsung, Toshiba, Intel, SST,
Sharp, SmartDisk and TDK. Under these agreements, each party may manufacture and
sell products that incorporate technology covered by the other party's 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.
Alternative storage media
37
<PAGE>
Competing products have been introduced that promote industry standards that
are different from our CompactFlash and MultiMediaCard products including
Toshiba's SmartMedia, Sony Corporation's Memory Stick, 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, and M-Systems' Diskonchip for embedded storage applications and the
Secure MultiMediaCard from Hitachi and Infineon. Each competing standard is
mechanically and electronically incompatible with CompactFlash and
MultiMediaCard. If a manufacturer of digital cameras or other consumer
electronic devices designs in one of these alternative competing standards,
CompactFlash or MultiMediaCard will be eliminated from use in that product.
IBM's microdrive, a rotating disk drive in a Type II CompactFlash format
competes directly with our Type II CompactFlash memory cards for use in high-end
professional digital cameras. M-Systems' Diskonchip 2000 Millennium product
competes against our Flash ChipSet products in embedded storage applications
such as set top boxes and networking appliances.
According to independent industry analysts, Sony's Mavica digital camera
captured a considerable portion of the U.S. market for digital cameras from
1998 to 2000. The Mavica uses a standard floppy disk to store digital images and
therefore uses no CompactFlash, or any other flash cards. Our sales prospects
for CompactFlash cards have been adversely impacted by the success of the
Mavica. Recently, Sony has shifted its focus to the use of its flash Memory
Stick in its latest digital camera models.
Our MultiMediaCard products also have faced significant competition from
Toshiba's SmartMedia flash cards and we expect to face similarly significant
competition from Sony's Memory Stick. Sony has licensed its proprietary Memory
Stick to other companies. If it is adopted and achieves widespread use in future
products, sales of our MultiMediaCard and CompactFlash products may decline.
Recently, Hitachi, Infineon, Sanyo and Fujitsu have proposed their Secure
MultiMediaCard which provides the copy protection function that is included in
our Secure Digital Card. Should this initiative gain industry wide acceptance,
it may reduce the widespread adoption of the Secure Digital Card.
In the first quarter of 2000, Sanyo announced that it is developing a
miniature magneto-optical storage device for use in future digital cameras,
music players and camcorders. There can be no assurance that this device will
not be adopted by some of our OEM customers.
Alternative flash technologies
We also face competition from products based on multilevel cell flash
technology from Intel and Hitachi. These products compete with our D2 multilevel
cell flash technology. 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 the industry standard flash technology.
Furthermore, we expect to face competition 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. 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.
Approximated one-half of our revenues come from a small number of customers.
For example, sales to our top 10 customers accounted for approximately 48%, 57%,
and 59%, respectively, of our product revenues for 2000, 1999,
38
<PAGE>
and 1998. In 2000, no single customer accounted for greater than 10% of our
total revenues. In 1999 and 1998, revenues from one customer exceeded 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.
Our multiple sales channels may compete for a limited number of customer sales.
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 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.
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 Dominion fabrication facility we
are co-developing with Toshiba, 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. In
addition, the construction and operation of this line will cause us to incur
significant expense and may result in the diversion of resources from other
important areas of our business. In addition, we have no experience in operating
a wafer manufacturing line and we intend to rely on the existing manufacturing
organization at the Dominion facility. This organization will be trained in NAND
flash manufacturing by Toshiba, 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.
Risks associated with patents, proprietary rights and related litigation.
General
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:
. any of our existing patents will not be invalidated;
. patents will be issued for any of our pending applications;
. any claims allowed from existing or pending patents will have sufficient
scope or strength;
. 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
39
<PAGE>
. any of our products may 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. For example, our recent Litigation with
Lexar lasted for two and one-half years and resulted in cumulative litigation
expenses of approximately $6.0 million.
Cross-licenses and indemnification obligations
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, Samsung,
Sharp, SST, SmartDisk, TDK and 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.
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.
Litigation risks associated with our intellectual property
From time to time, it may be necessary to initiate litigation against third
parties to preserve our intellectual property rights. These parties could in
turn bring suit against us. On March 21, 2000, Mitsubishi Denki Co. Ltd.
(Mitsubishi Electric) filed a complaint in Tokyo District Court against SanDisk
K.K., our wholly owned subsidiary in Japan. The complaint alleges that SanDisk
K.K., based in Yokohama, Japan, infringes on three Mitsubishi Japanese patents.
The Mitsubishi patents in question are #JP2099342, #JP2129071 and #JP2138047,
which are related primarily to the mechanical construction of memory cards. In
the complaint, Mitsubishi asked the court for a preliminary injunction halting
the sale of SanDisk CompactFlash and flash ATA memory cards in Japan. Mitsubishi
has since dropped patents #JP2129071 and #JP2138047 from the suit. We and
SanDisk K.K. are vigorously defending against Mitsubishi's remaining claims.
Our rapid growth may strain our operations.
We have experienced rapid growth, which has placed a significant strain on our
personnel and other resources. To accommodate future growth, we must continue to
hire, train, motivate and manage our employees. We have
40
<PAGE>
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.
California energy crisis
In recent months, California has been experiencing a shortage of energy supply.
This shortage is expected to continue throughout 2001 and possibly into future
years. Although the majority of our product assembly and testing is done
outside of California, we may experience some hardship due to rolling blackouts
and the need for reduced power consumption, as well as increased power costs.
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 our outstanding voting stock. Preferred stock may
also have other rights, including economic rights senior to our common stock
that could have a material adverse effect on the market value of our common
stock. In addition, we are subject to the anti-takeover provisions of Section
203 of the Delaware General Corporation Law. This section provides that a
corporation 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.
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 2000 our stock
price fluctuated significantly from a low of $27.50 to a high of $169.63, and
has recently traded as low as $18.63. 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 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.
41
<PAGE>
Item 7a. Market Risk Disclosure Information
- ---------------------------------------------
Interest Rate Risk. Our exposure to market risk for changes in interest rates
relates primarily to our investment portfolio. The primary objective of our
investment activities is to preserve principal while maximizing yields without
significantly increasing risk. This is accomplished by investing in widely
diversified short-term investments, consisting primarily of investment grade
securities, substantially all of which either mature within the next twelve
months or have characteristics of short-term investments. A hypothetical 50
basis point increase in interest rates would result in an approximate $731,000
decline (less than 0.28%) in the fair value of our available-for-sale debt
securities.
Foreign Currency Risk. A substantial majority of our revenue, expense and
capital purchasing activity are transacted in U.S. dollars. However, we do
enter into transactions in other currencies, primarily the Japanese Yen. To
protect against reductions in value and the volatility of future cash flows
caused by changes in foreign exchange rates, we have established a hedging
program. Currency forward contracts are utilized in these hedging programs.
Our hedging programs reduce, but do not always entirely eliminate, the impact of
foreign currency exchange rate movements. An adverse change of 10% in exchange
rates would result in a decline in income before taxes of approximately
$294,000.
All of the potential changes noted above are based on sensitivity analyses
performed on our financial positions at December 31, 2000.
42
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SANDISK CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors................. 44
Consolidated Balance Sheets....................................... 45
Consolidated Statements of Income................................. 46
Consolidated Statements of Stockholders' Equity................... 47
Consolidated Statements of Cash Flows............................. 48
Notes to Consolidated Financial Statements........................ 49
</TABLE>
43
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SanDisk Corporation
We have audited the accompanying consolidated balance sheets of SanDisk
Corporation as of December 31, 2000 and 1999, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SanDisk Corporation at December 31, 2000 and 1999 and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
San Jose, California
January 23, 2001
44
<PAGE>
SanDisk Corporation
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, 2000 1999
- -------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 106,277 $ 146,170
Short-term investments 373,316 311,049
Accounts receivable, net of allowance for doubtful
accounts of $5,010 in 2000 and $1,871 in 1999 104,617 52,434
Inventories 96,600 35,679
Deferred tax assets 7,066 17,000
Prepaid expenses and other current assets 9,431 6,058
-------------------------------------------------------------------------------
Total current assets 697,307 568,390
Property and equipment, net 41,095 31,788
Investment in foundry 197,688 51,208
Investment in joint venture 134,730 --
Deposits and other non-current assets 37,087 6,338
- -------------------------------------------------------------------------------------
Total assets $ 1,107,907 $ 657,724
- -------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 67,112 $ 30,734
Accrued payroll and related expenses 16,215 8,259
Income taxes payable 16,427 5,843
Other accrued liabilities 20,863 11,378
Deferred revenue 50,740 29,383
-------------------------------------------------------------------------------
Total current liabilities 171,357 85,597
Deferred taxes and other liabilities 73,492 --
-------------------------------------------------------------------------------
Total liabilities 244,849 85,597
Stockholders' equity:
Preferred stock, $0.001 par value
Authorized shares: 4,000,000
Issued: none --
-
Common stock, $0.001 par value
Authorized shares: 125,000,000
Issued and outstanding: 67,464,000 in 2000 and
65,248,000 in 1999 67
65
Capital in excess of par value 566,934 524,066
Retained earnings 346,469 47,797
Accumulated other comprehensive income (loss) (50,412) 199
-------------------------------------------------------------------------------
Total stockholders' equity 863,058 572,127
- -------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,107,907 $ 657,724
- -------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
45
<PAGE>
SanDisk Corporation
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Product $ 526,359 $ 205,770 $ 103,190
License and royalty 75,453 41,220 32,571
- -------------------------------------------------------------------------------------------------
Total revenues 601,812 246,990 135,761
Cost of revenues 357,017 152,143 80,311
- -------------------------------------------------------------------------------------------------
Gross profits 244,795 94,847 55,450
Operating expenses
Research and development 46,057 26,883 18,174
Sales and marketing 49,286 25,294 16,933
General and administrative 24,786 12,585 7,533
- -------------------------------------------------------------------------------------------------
Total operating expenses 120,129 64,762 42,640
- -------------------------------------------------------------------------------------------------
Operating income 124,666 30,085 12,810
Interest income 22,786 8,280 5,307
Gain on investment in foundry 344,168 - -
Other income, net 572 1,261 374
- -------------------------------------------------------------------------------------------------
Income before taxes 492,192 39,626 18,491
Provision for income taxes 193,520 13,076 6,655
- -------------------------------------------------------------------------------------------------
Net income $ 298,672 $ 26,550 $ 11,836
- -------------------------------------------------------------------------------------------------
Net income per share
Basic $ 4.47 $ 0.48 $ 0.23
Diluted $ 4.11 $ 0.43 $ 0.21
- -------------------------------------------------------------------------------------------------
Shares used in computing net income
per share
Basic 66,861 55,834 52,596
Diluted 72,651 61,433 55,344
- -------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
46
<PAGE>
SanDisk Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Capital In Other Total
Common Excess of Retained Comprehensive Stockholders'
Stock
Shares Amount Par Value Earnings Income Equity
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 51,730 $ 52 $ 181,869 $ 9,411 $ 42 $ 191,374
Net income - - - 11,836 - 11,836
Unrealized gain on available for
sale securities - - - - 429 429
--------
Comprehensive income 12,265
--------
Exercise of stock options for cash 1,260 1 929 - - 930
Issuance of stock pursuant to
employee stock purchase plan 260 1 1,474 - - 1,475
Net exercise of common stock warrants 6 - - - - -
Income tax benefit from stock
options exercised - - 1,761 - - 1,761
Compensation expense related to
modification of stock options - - 33 - - 33
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 53,256 54 186,066 21,247 471 207,838
Net income - - - 26,550 - 26,550
Unrealized loss on available for
sale securities - - - - (272) (272)
--------
Comprehensive income 26,278
--------
Exercise of stock options for cash 1,766 2 6,107 - - 6,109
Issuance of stock pursuant to
employee stock purchase plan 268 - 1,807 - - 1,807
Net exercise of common stock warrants 58 - - - - -
Sale of common stock, net of
issuance costs 9,900 9 320,277 - - 320,286
Income tax benefit from stock
options exercised - - 9,809 - - 9,809
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 65,248 65 524,066 47,797 199 572,127
Net income - - - 298,672 - 298,672
Unrealized loss on available for
sale securities - - - - (343) (343)
Unrealized loss on investments - - - - (50,268) (50,268)
--------
Comprehensive income 248,061
--------
Exercise of stock options for cash 2,147 2 10,370 - - 10,372
Issuance of stock pursuant to
employee stock purchase plan 69 - 2,815 - - 2,815
Compensation expense related to
modification of stock options - - 425 - - 425
Sale of common stock, net of
issuance costs - - - - - -
Income tax benefit from stock
options exercised 29,258 29,258
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 67,464 $ 67 $ 566,934 $ 346,469 $ 50,412 $ 863,058
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
47
<PAGE>
SanDisk Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 298,672 $ 26,550 $ 11,836
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred taxes 114,501 (1,100) 1,160
Gain on investment in foundry (344,168)
Depreciation 15,928 7,145 5,839
Loss on disposal of equipment 1,013
Compensation related to modification of
stock option terms 425 - 33
Changes in assets and liabilities:
Accounts receivable (52,183) (33,616) (247)
Inventories (60,921) (26,757) 6,726
Prepaid expenses and other current assets (3,373) 2,959 (6,089)
Deposits and other assets (3,545) (5,721) 283
Accounts payable 36,378 23,796 (7,174)
Accrued payroll and related expenses 7,956 4,491 (906)
Income taxes payable 39,842 10,984 2,617
Other accrued liabilities 9,485 6,301 1,548
Deferred revenue 21,357 1,931 (515)
Other non-current liabilities 3,485 - -
- --------------------------------------------------------------------------------------------------------------
Total adjustments (213,820) (9,587) 3,275
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 84,852 16,963 15,111
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of short-term investments (593,146) (332,379) (137,822)
Proceeds from short-term investments 643,734 139,391 133,214
Acquisition of property and equipment (26,586) (21,391) (7,489)
Investment in joint venture (134,730) 0 0
Investment in equity securities (7,200) 0 0
Deposit in escrow account for investment in equity (20,004) 0 (10,923)
securities
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (137,932) (214,379) (23,020)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Sale of common stock and warrants 13,187 328,202 2,405
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 13,187 328,202 2,405
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (39,893) 130,786 (5,504)
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 146,170 15,384 20,888
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 106,277 $ 146,170 $ 15,384
- --------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 37,260 $ 4,306 $ 8,277
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
48
<PAGE>
Notes to Consolidated Financial Statements
- ------------------------------------------
Note 1: Organization and Summary of Significant Accounting Policies
Organization and Nature of Operations
SanDisk Corporation (the Company) was incorporated in Delaware on June 1,
1988, to design, manufacture, and market industry-standard, solid-state mass
storage products using proprietary, high-density flash memory technology. The
Company operates in one segment and serves customers in the consumer
electronics, industrial, communications and highly portable computing markets.
Principal geographic markets for the Company's products include the United
States, Japan, Europe and the Far East.
Supplier and Customer Concentrations
A limited number of customers historically have accounted for a substantial
portion of the Company's revenues. In 2000, no single customer accounted for
more than 10% of total revenues. In 1999 and 1998, revenues from one customer
exceeded 10% of total revenues. Sales of the Company's products will vary as a
result of fluctuations in market demand. Further, the flash data storage markets
in which the Company competes are characterized by rapid technological change,
evolving industry standards, declining average selling prices and rapid
technological obsolescence.
Certain of the raw materials used by the Company in the manufacture of its
products are available from a limited number of suppliers. For example, all of
the Company's products require silicon wafers, the majority of which are
currently supplied by United Microelectronics Corporation ("UMC') in Taiwan and
Toshiba, through its Yokaaichi facility in Japan. The Company is dependent on
its foundries to allocate to the Company a portion of their foundry capacity
sufficient to meet the Company's needs, to produce wafers of acceptable quality
and with acceptable manufacturing yields and to deliver those wafers to the
Company on a timely basis. On occasion, the Company has experienced difficulties
in each of these areas.
Under each of the Company's wafer supply agreements, the Company is obligated
to provide a monthly rolling forecast of anticipated purchase orders. Except in
limited circumstances and subject to acceptance by the foundries, the estimates
for the first three months of each forecast constitute a binding commitment and
the estimates for the remaining months may not increase or decrease by more than
a certain percentage from the previous month's forecast. These restrictions
limit the Company's ability to react to significant fluctuations in demand for
its products. As a result, the Company has not been able to match its purchases
of wafers to specific customer orders, and therefore the Company has taken write
downs for potential excess inventory purchased prior to the receipt of customer
orders and may be required to do so in the future. These adjustments decrease
gross margins in the quarter reported and have resulted, and could in the future
result in fluctuations in gross margins on a quarter to quarter basis. To the
extent the Company inaccurately forecasts the number of wafers required, it may
have either a shortage or an excess supply of wafers, either of which could have
a material adverse effect on the Company's business, financial condition and
results of operations. Additionally, if the Company is unable to obtain
scheduled quantities of wafers from any foundry with acceptable yields, the
Company's business, financial condition and results of operations could be
negatively impacted.
In addition, certain key components are purchased from single source vendors
for which alternative sources are currently not available. Shortages could occur
in these essential materials due to an interruption of supply or increased
demand in the industry. If the Company were unable to procure certain of such
materials, it would be required to reduce its manufacturing operations that
could have a material adverse effect upon its results of operations. We also
rely on third-party subcontractors to assemble and test the memory components
for our products. We have no long-term contracts with these subcontractors and
cannot directly control product delivery schedules. This could lead to product
shortages or quality assurance problems that could increase the manufacturing
costs of our products and have adverse effects on our operating results.
49
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Basis of Presentation
The Company's fiscal year ends on the Sunday closest to December 31. Fiscal
year 2000 ended on December 31, 2000 and was 52 weeks in length. Fiscal year
1999 ended on January 2, 2000 and was 53 weeks in length. Fiscal year 1998 ended
on December 27, 1998 and was 52 weeks in length. For ease of presentation, the
accompanying financial statements have been shown as ending on the last day of
the calendar month.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Foreign Currency Transactions
Foreign operations are measured using the U.S. dollar as the functional
currency. Accordingly, monetary accounts (principally cash, accounts receivable
and liabilities) are remeasured using the foreign exchange rate at the balance
sheet date. Operations accounts and nonmonetary balance sheet accounts are
remeasured at the rate in effect at the date of transaction. The effects of
foreign currency remeasurement are reported in current operations. See Note 2.
Cash Equivalents and Short-Term Investments
Cash equivalents consist of short-term, highly liquid financial instruments
with insignificant interest rate risk that are readily convertible to cash and
have maturities of three months or less from the date of purchase. Cash
equivalents and short-term investments consist of money market funds, taxable
commercial paper, U.S. government agency obligations, corporate / municipal
notes and bonds with high-credit quality, money market preferred stock and
auction rate preferred stock. Short-term investments also include 50% of the UMC
shares referred to below ("Investment in Foundry"). The fair market value, based
on quoted market prices, of cash equivalents and short-term investments is
substantially equal to their carrying value at December 31, 2000 and 1999.
Under FAS 115, management classifies investments as available-for-sale at the
time of purchase and periodically reevaluates such designation. Debt securities
classified as available-for-sale are reported at fair value. Unrecognized gains
or losses on available-for-sale securities are included, in equity until their
disposition. Realized gains and losses and declines in value judged to be other
than temporary on available-for-sale securities are included in other income
(expense). The cost of securities sold is based on the specific identification
method.
All cash equivalents and short-term investments as of December 31, 2000 and
1999 are classified as available-for-sale securities and consist of the
following (in thousands):
50
<PAGE>
<TABLE>
<CAPTION>
December 31
2000 1999
-------- --------
<S> <C> <C>
Cash equivalents:
Money market fund $ 2,921 $ 21,853
Commercial paper 60,505 117,769
Corporate notes / bonds 12,492 -
-------- --------
Total $ 75,918 $139,622
======== ========
Short term investments:
U.S. government agency obligations $ 10,004 $ 2,969
Municipal notes / bonds 136,580 133,462
Corporate notes / bonds 47,795 58,969
Commercial paper 6,115 4,009
Auction rate preferred stock 59,967 111,640
Marketable equity securities * 112,855 -
-------- --------
Total $373,316 $311,049
======== ========
</TABLE>
* Investment in UMC. No such amounts were recorded in fiscal 1999.
Unrealized gain and losses on available-for-sale securities at December 31,
2000 and 1999 were ($50.4 million) and $199,000, respectively. The unrealized
loss as of December 31, 2000 includes $50.3 million of unrealized loss on the
current portion of the Company's investment in UMC (see "Investment in Foundry"
below). Fair value of available-for-sale securities is based upon quoted market
prices. Gross realized gains and losses on sales of available-for-sale
securities during the years ended December 31, 2000 and 1999 were immaterial.
Debt securities at December 31, 2000 and 1999, by contractual maturity, are
shown below. Actual maturities may differ from contractual maturities because
issuers of the securities may have the right to prepay obligations.
<TABLE>
<CAPTION>
December 31,
2000 1999
-------- --------
<S> <C> <C>
Short-term investments: (In thousands)
Due in one year or less $ 94,554 $170,097
Due after one year through two years 165,907 140,952
-------- --------
Total $260,461 $311,049
======== ========
</TABLE>
Long-Term Investments
The Company holds minority equity investments in companies having operations
or technology in areas within SanDisk's strategic focus. Certain of the
investments carry restrictions on immediate disposition. Investments in public
companies with restrictions of less than one year are classified as available-
for-sale and are adjusted to their fair market value with unrealized gains and
losses recorded as a component of accumulated other comprehensive income. Upon
disposition of these investments, the specific identification method is used to
determine the cost basis in computing realized gains or losses. Declines in
value that are judged to be other than temporary are reported in other income
and expense.
51
<PAGE>
Accounts Receivable
The activity in the allowance for doubtful accounts is as follows (in
thousands):
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance at
For the year ended Beginning Costs and Deductions End
December 31, of Period Expenses (Write-offs) of Period
----------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C>
1998 $ 756 $ 345 $ 32 $1,069
1999 $1,069 $ 945 $143 $1,871
2000 $1,871 $3,991 $852 $5,010
</TABLE>
Inventories
Inventories are stated at the lower of cost or market. Cost is computed on a
currently adjusted standard basis (which approximates actual costs on a first-
in, first-out basis). Market value is based upon an estimated average selling
price reduced by normal gross margins. Inventories are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31
2000 1999
-------- --------
<S> <C> <C>
Raw materials $ 33,092 $ 10,387
Work-in-process 53,921 20,708
Finished goods 9,587 4,584
-------- --------
$ 96,600 $ 35,679
======== ===-====
</TABLE>
Given the volatility of the market, the Company writes down inventories to net
realizable value based on backlog and forecasted demand. However, backlog is
subject to revisions, cancellations and rescheduling. Actual demand may differ
from forecasted demand and such differences may have a material effect on the
Company's financial position and results of operations.
Property and Equipment
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
2000 1999
-------- --------
<S> <C> <C>
Machinery and equipment $ 62,310 $ 47,004
Software 7,435 5,994
Furniture and fixtures 2,103 1,335
Leasehold improvements 5,842 3,772
-------- --------
Property and equipment, at cost 77,690 58,105
Accumulated depreciation and amortization (36,595) (26,317)
-------- --------
Property and equipment, net $ 41,095 $ 31,788
======== ========
</TABLE>
Depreciation and Amortization
Depreciation and amortization is computed using the straight-line method over
the estimated useful lives of the assets or the remaining lease term, whichever
is shorter, generally two to seven years.
Investment in Foundry
In 1997, the Company invested $40.3 million in United Silicon, Inc., ("USIC")
a semiconductor manufacturing subsidiary of United Microelectronics Corporation
in Taiwan ("UMC"). The transaction gave the Company an equity stake of
approximately 10% in the facility (which was accounted for on the cost basis)
and guaranteed access to approximately 12.5% of the wafer output from the
facility. In 1998, the Company increased its investment by $10.9 million to
retain its 10% ownership interest. No changes were made to the production
agreement.
In January 2000, the USIC foundry was merged into the UMC parent company. The
Company received UMC shares in exchange for its USIC shares. The Company does
not have a right to a seat on the board of directors of the combined company.
52
<PAGE>
In exchange for USIC shares, we received 111 million UMC shares. These shares
were valued at approximately $396 million at the time of the merger, resulting
in a pretax gain of $344.2 million ($203.9 million after-tax) in the first
quarter of 2000. All of the UMC shares received by the Company as a result of
the merger were subject to trading restrictions imposed by UMC and the Taiwan
Stock Exchange. The trading restrictions expired on one-half of the shares on
July 3, 2000. The remaining shares will become available for sale over a two-
year period beginning in January 2002. When the shares are ultimately sold, it
is likely that the Company will recognize additional gains or losses due to
fluctuations in the price of the UMC shares.
In May 2000, the Company received a stock dividend from UMC of 200 shares for
every 1,000 shares of UMC owned, resulting in its ownership of 22 million
additional shares of UMC. The shares received as a stock dividend and the 50% of
the shares received as a result of the merger that became unrestricted in July
2000 are treated as available-for-sale securities under Statement of Financial
Accounting Standards 115, "Accounting for Certain Investments in Debt and Equity
Securities", at December 31, 2000 and are included in short-term investments.
These shares were adjusted to market value and the resulting unrealized loss of
$50.3 million in fiscal 2000 is included in accumulated other comprehensive
income. In addition, on September 18, 2000, UMC completed its American
Depositary Shares ("ADRs") offering. In connection with this offering, SanDisk
signed a lock-up agreement that prohibits the sale of all but 5 million of these
unrestricted UMC shares for a period of 90 days following the completion of the
offering. The remaining 50% of the shares received as a result of the merger,
that will be restricted from sale until 2002, are accounted for at their
historical cost beginning in the first quarter of 2001. These securities will be
marked to market through other comprehensive income when the when the related
restrictions lapse
Revenue Recognition
Product revenue, less a provision for estimated sales returns, is recognized
when title passes which is generally at the time of shipment. However, revenue
on shipments to distributors and retailers, subject to certain rights of return
and price protection, is deferred until the merchandise is sold by the
distributors or retailers, or the rights expire.
The Company earns patent license and royalty revenue under patent cross-
license agreements with Hitachi Ltd., Intel Corporation, Lexar, Samsung
Electronics Company Ltd., Sharp Electronics Corporation, Silicon Storage
Technology, Inc., SmartDisk Corporation, TDK and Toshiba Corporation. The
Company's current license agreements provide for the payment of license fees,
royalties, or a combination thereof, to the Company. The timing and amount of
these payments can vary substantially from quarter to quarter, depending on the
terms of each agreement and, in some cases, the timing of sales of products by
the other parties.
53
<PAGE>
Patent license and royalty revenue is recognized when earned. In 2000, 1999
and 1998, the Company received payments under these cross-license agreements,
portions of which were recognized as revenue and portions of which are deferred
revenue. Recognition of deferred revenue is expected to occur in future periods
over the life of the agreements, as the Company meets certain obligations as
provided in the various agreements.
Advertising Expense
The cost of advertising is expensed as incurred. Advertising costs were $8.2
million, $3.6 million, and $2.0 million in 2000, 1999, and 1998, respectively.
54
<PAGE>
Net Income Per Share
The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted
net income per share - net income $298,672 $ 26,550 $ 11,836
======== ======== ========
Denominator for basic net income per share:
Weighted average common shares 66,861 55,834 52,596
-------- -------- --------
Basic net income per share $ 4.47 $ 0.48 $ 0.23
======== ======== ========
Denominator for diluted net income per share:
Weighted average common shares 66,861 55,834 52,596
Incremental common shares attributable to exercise of
outstanding employee stock options and warrants
(assuming proceeds would be used to purchase common
stock) 5,790 5,599 2,748
-------- -------- --------
Shares used in computing diluted net income
per share 72,651 61,433 55,344
======== ======== ========
Diluted net income per share $ 4.11 $ 0.43 $ 0.21
======== ======== ========
</TABLE>
Options and warrants to purchase 907,380, 190,807, and 1,802,886 shares of
common stock were outstanding during 2000, 1999 and 1998, respectively, but have
been omitted from the diluted earnings per share calculation because the
options' exercise price was greater than the average market price of the common
shares and, therefore the effect would be antidilutive.
Stock Based Compensation
The Company accounts for employee stock based compensation under APB Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations.
Pro forma net income and net income per share disclosures are required by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation," and are included in Note 4.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted by the Company beginning January 1, 2001. Historically, the
Company has had a minimal use of derivatives and do not anticipate that the
adoption of the new Statement will have a significant effect on our earnings or
financial position; however, we have studied the actual impact, and have
determined that it will be immaterial to our financial position or earnings.
In December 1999, The Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements". SAB
101 provides guidance on the recognition, presentation and disclosure of revenue
in financial statements. All registrants are expected to apply the accounting
and disclosures described in SAB 101. The Company's implementation of SAB 101
did not have a material impact on consolidated results of operations, financial
position and cash flows.
55
<PAGE>
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation-an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion 25 and, among other issues clarifies the
following: the definition of an employee for the purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequences of various modifications to
the terms for the previously fixed stock options or awards; and the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
became effective July 1, 2000 and did not have a material impact on the
Company's consolidated results of operations, financial position, and cash
flows.
Note 2: Financial Instruments
Concentration of Credit Risk
The Company's concentration of credit risk consists principally of cash, cash
equivalents, short-term investments and trade receivables. The Company's
investment policy restricts investments to high-credit quality investments and
limits the amounts invested with any one issuer. The Company sells to original
equipment manufacturers, retailers and distributors in the United States, Japan,
Europe and the Far East, performs ongoing credit evaluations of its customers'
financial condition, and generally requires no collateral. Reserves are
maintained for potential credit losses.
Off Balance Sheet Risk
Certain of the Company's balance sheet accounts are denominated in Japanese
Yen. The Company enters into foreign exchange contracts to hedge against changes
in foreign currency exchange rates. The effects of movements in currency
exchange rates on these instruments are recognized when the related operating
revenues and expenses are recognized. The Company has a foreign exchange
contract line in the amount of $15.0 million at December 31, 1999. Under this
line, the Company may enter into forward exchange contracts that require the
Company to sell or purchase foreign currencies. Two forward exchange contracts
in the notional amount of $8.2 million were outstanding at December 31, 1999.
Foreign currency translation gains of $122,000 were deferred at December 31,
1999 in connection with these contracts as the contracts have been identified as
hedging contracts. One forward exchange contract in the amount of $4.3 million
was outstanding at December 31, 1998. Foreign currency translation losses of
$34,000 were deferred at December 31, 1998 in connection with this forward
contract.
The impact of movements in currency exchange rates on foreign exchange
contracts substantially mitigates the related impact on the underlying items
hedged. The Company had net transaction gains of approximately $428,000,
$1,467,000 and $412,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. These amounts are included in other income (loss), net, in the
statement of income.
56
<PAGE>
Note 3: Commitments and Contingencies
Commitments
The Company leases its headquarters and sales offices under operating leases
that expire at various dates through 2006. Future minimum lease payments under
operating leases at December 31, 2000 are as follows (in thousands):
Year Ending December 31,
- ------------------------
2001 $ 2,685
2002 2,411
2003 2,370
2004 2,416
2005 2,251
2006 1,024
-------
Total $13,157
=======
Rental expense under all operating leases was $2.5 million, $2.1 million and
$1.7 million for the years ended December 31, 2000, 1999 and 1998, respectively.
Contingencies
The Company relies on a combination of patents, trademarks, copyright and
trade secret laws, confidentiality procedures and licensing arrangements to
protect its intellectual property rights. There can be no assurance that there
will not be any disputes regarding the Company's intellectual property rights.
Specifically, there can be no assurance that any patents held by the Company
will not be invalidated, that patents will be issued for any of the Company's
pending applications or that any claims allowed from existing or pending patents
will be of sufficient scope or strength or be issued in the primary countries
where the Company's products can be sold to provide meaningful protection or any
commercial advantage to the Company. Additionally, competitors of the Company
may be able to design around the Company's patents.
To preserve its intellectual property rights, the Company believes it may be
necessary to initiate litigation with one or more third parties, including but
not limited to those the Company has notified of possible patent infringement.
In addition, one or more of these parties may bring suit against the Company.
Any litigation, whether as a plaintiff or as a defendant, would likely result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation is ultimately
determined in favor of the Company.
For example, in March 1998, the Company sued Lexar in the Northern District of
California alleging that Lexar's CompactFlash and PC Cards infringe our U.S.
Patent No. 5,602,987 ("'987 Patent"). Lexar disputed this claim and asserted
various counter claims, including unfair competition, violation of the Lanham
Act, patent misuse, interference with prospective economic advantage, trade
defamation, unenforceability and fraud. On November 14, 2000, in resolution of
these actions, Lexar stipulated that SanDisk's '987 Patent is valid and
infringed by Lexar's current CompactFlash and PC Cards. Lexar made a lump sum
payment of $8.0 million in December 2000 for royalties due on the '987 Patent,
through March 31, 2001. Subject to Lexar's representations and warranties
relating to Lexar's newly designed CompactFlash and PC Cards, SanDisk has
stipulated that these designs do not infringe SanDisk's '987 Patent. Lexar
entered into a 4% royalty-bearing license agreement for certain Lexar products
that may use the '987 Patent beyond March 31, 2001. SanDisk and Lexar have
agreed to dismiss with prejudice all pending claims of patent infringement and
counterclaims involving claims of false advertising, unfair competition and
patent misuse.
In September 2000, Lexar sued SanDisk in the District of Delaware alleging
that our SmartMedia products infringe Lexar's United States Patent No. 5,479,638
("'638 Patent"). In resolution of this action, the Company paid
57
<PAGE>
Lexar a lump sum payment of $2.0 million for a fully-paid up license for use of
the '638 Patent in SmartMedia products.
Under the settlement, Lexar has provided the Company with an option for a
royalty bearing license to its patents for use in certain future products.
SanDisk and Lexar have agreed to resolve any future disputes relating to the use
by Lexar of the '987 Patent through binding arbitration. We have also agreed
that for a period of seven years, neither SanDisk nor Lexar shall seek
injunctive relief against the other in any patent lawsuit. However, at all
times, we retain the right to seek injunctive relief to enforce the payment of
royalties pursuant to an arbitrator's ruling.
On March 21, 2000, Mitsubishi Denki Co. Ltd. (Mitsubishi Electric) filed a
complaint in Tokyo District Court against SanDisk K.K., SanDisk's wholly owned
subsidiary in Japan. The complaint alleges that SanDisk K.K., based in Yokohama,
Japan, infringes on three Mitsubishi Japanese patents. The Mitsubishi patents in
question are #JP2099342, #JP2129071 and #JP2138047, which are related primarily
to the mechanical construction of memory cards. In the complaint, Mitsubishi
asked the court for a preliminary injunction halting the sale of SanDisk
CompactFlash and flash ATA memory cards in Japan. Mitsubishi has since dropped
patents #JP2129071 and #JP2138047 from the suit. The Company and SanDisk K.K.
are vigorously defending against Mitsubishi's remaining claims.
Compaq Corporation has opposed in several countries, including the United
States, our attempting to register CompactFlash as a trademark. We do not
believe that our failure to obtain registration for the CompactFlash mark will
materially harm our business.
In the event of an adverse result in any such litigation, the Company could be
required to pay substantial damages, cease the manufacture, use and sale of
infringing products, expend significant resources to develop non-infringing
technology or obtain licenses to the infringing technology, or discontinue the
use of certain processes.
From time to time the Company agrees to indemnify certain of its suppliers and
customers for alleged patent infringement. The scope of such indemnity varies
but may in some instances include indemnification for damages and expenses,
including attorneys' fees. The Company may from time to time be engaged in
litigation as a result of such indemnification obligations. Third party claims
for patent infringement are excluded from coverage under the Company's insurance
policies. There can be no assurance that any future obligation to indemnify the
Company's customers or suppliers, will not have a material adverse effect on the
Company's business, financial condition and results of operations.
Litigation frequently involves substantial expenditures and can require
significant management attention, even if the Company ultimately prevails. In
addition, the results of any litigation matters are inherently uncertain.
Accordingly, there can be no assurance that any of the foregoing matters, or any
future litigation, will not have a material adverse effect on the Company's
business, financial condition and results of operations.
Note 4: Stockholders' Equity
Stock Benefit Plan
The 1989 Stock Benefit Plan, in effect through August 1995, comprised two
separate programs, the Stock Issuance Program and the Option Grant Program. The
Stock Issuance Program allowed eligible individuals to immediately purchase the
Company's common stock at a fair value as determined by the Board of Directors.
Under the Option Grant Program, eligible individuals were granted options to
purchase shares of the Company's common stock at a fair value, as determined by
the Board of Directors, of such shares on the date of grant. The options
generally vest over a four-year period, expiring no later than ten years from
the date of grant. Unexercised options are canceled upon the termination of
employment or services. Options that are canceled under this plan will be
available for future grants under the 1995 Stock Option Plan. There were no
shares available for option grants under the 1989 Stock Benefit Plan at December
31, 2000.
58
<PAGE>
1995 Stock Benefit Plan
The 1995 Stock Option Plan provides for the issuance of incentive stock
options and nonqualified stock options. Under this plan, the vesting and
exercise provisions of option grants are determined by the Board of Directors.
The options generally vest over a four-year period, expiring no later than ten
years from the date of grant.
On July 17, 1998, the Board of Directors approved an option
cancellation/regrant program. Under the cancellation/regrant program, employees
could elect to exchange their stock options with exercise prices in excess of
$6.00 per share for new options priced at $5.00 per share, the market price of
the Company's common stock on the date of implementation, August 21, 1998. Under
the new options, shares become exercisable six to twelve months later than under
the old higher-priced options. The new options have a maximum term of ten years
from the August 21, 1998 grant date. Officers and directors of the Company were
not eligible for participation in the option cancellation/regrant program.
Options covering a total of approximately 1,806,846 shares were canceled and
regranted in connection with the program. The number of options shown as granted
and canceled in the table below reflect this exchange of options. Such options
had a weighted average exercise price before repricing of $10.331, and the new
options were granted at an exercise price of $5.00.
In May 1999, the stockholders increased the shares available for future
issuance under the 1995 Stock Benefit Plan by 7,000,000 shares and approved an
automatic share increase feature pursuant to which the number of shares
available for issuance under the plan will automatically increase on the first
trading day in January each calendar year, beginning with calendar year 2002 and
continuing over the remaining term of the plan, by an amount equal to
approximately 4% of the total number of shares outstanding on the last trading
day in December in the immediately preceding calendar year, but in no event will
any such annual increase exceed 4,000,000 shares.
1995 Non-employee Directors Stock Option Plan
In August 1995, the Company adopted the 1995 Non-employee Directors Stock
Option Plan (the Directors' Plan. Under this plan, automatic option grants are
made at periodic intervals to eligible non-employee members of the Board of
Directors. Initial option grants vest over a four-year period. Subsequent annual
grants vest one year after date of grant. All options granted under the Non-
employee Directors Stock Option Plan expire ten years after the date of grant.
In May 1999, the stockholders increased the shares available for future issuance
under the 1995 Non-Employee Directors Stock Option Plan by 400,000 and approved
an automatic share increase feature pursuant to which the number of shares
available for issuance under the plan will automatically increase on the first
trading day in January each calendar year, beginning with calendar year 2002 and
continuing over the remaining term of the plan, by an amount equal to 0.2% of
the total number of shares outstanding on the last trading day in December in
the immediately preceding calendar year, but in no event will any such annual
increase exceed 200,000 shares. At December 31, 2000, the Company had reserved
800,000 shares for issuance under the Directors' Plan and a total of 448,000
options had been granted at exercise prices ranging from $5.00 to $70.063 per
share.
59
<PAGE>
A summary of activity under all stock option plans follows (shares in
thousands):
<TABLE>
<CAPTION>
Total Available Weighted
for Future Total Average
Grant/ Issuance Outstanding Exercise Price
----------------- ----------- --------------
<S> <C> <C> <C>
Balance at December 31, 1997 4,210 7,106 $ 4.79
---------------- ------------
Granted (4,444) 4,444 $ 5.97
Exercised - (1,260) $ 0.74
Canceled 2,038 (2,038) $10.04
---------------- ------------
Balance at December 31, 1998 1,804 8,252 $ 4.75
---------------- ------------
Increase in authorized
shares 7,400 -
Granted (3,000) 3,000 $31.00
Exercised - (1,766) $ 3.47
Canceled 308 (308) $ 9.69
---------------- ------------
Balance at December 31, 1999 6,512 9,178 $ 9.50
----------------- ------------
Granted (2,290) 2,290 $53.57
Exercised - (2,147) $ 4.85
Canceled 469 (469) $ 9.69
---------------- ------------
Balance at December 31, 2000 4,691 8,852 $25.29
================ ============
</TABLE>
At December 31, 2000, options outstanding were as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
Range of as of Remaining Average as of Average
Exercise Prices December 31, 1999 Contractual Life Exercise Price December 31, 1999 Exercise Price
- -------------------- --------------------- ------------------ ---------------- --------------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.188 - $ 5.000 1,752,233 6.77 $ 4.270 1,088,408 $ 3.963
$ 5.094 - $ 6.250 1,801,785 7.27 $ 6.122 1,119,848 $ 6.078
$ 6.438 - $ 15.219 526,006 7.52 $10.304 316,648 $10.563
$16.750 - $ 29.919 647,778 8.59 $23.517 172,426 $23.340
$30.000 - $ 41.031 3,119,537 9.32 $35.144 485,486 $34.778
$43.438 - $139.500 1,004,515 9.40 $74.707 90,000 $69.167
- ------------------- --------- ---- ------- --------- -------
$ 0.188 - $139.500 8,851,854 8.25 $25.288 3,330,457 $12.858
</TABLE>
Employee Stock Purchase Plan
In August 1995, the Company adopted the Employee Stock Purchase Plan (the
Purchase Plan). In May 1999, the stockholders increased the shares available for
future issuance under the Employee Stock Purchase Plan by 600,000 and approved
an automatic share increase feature pursuant to which the number of shares
available for issuance under the plan will automatically increase on the first
trading day in January each calendar year, beginning with calendar year 2002 and
continuing over the remaining term of the plan, by an amount equal to forty-
three hundredths of one percent (0.43%) of the total number of shares
outstanding on the last trading day in December in the immediately preceding
calendar year, but in no event will any such annual increase exceed 400,000
shares. Under the Purchase Plan, qualified employees are entitled to purchase
shares through payroll deductions at 85% of the fair market value at the
beginning or end of the offering period, whichever is lower. As of December 31,
2000, the Company had reserved 2,366,666 shares of common stock for issuance
under the Purchase Plan and a total of 1,034,293 shares had been issued.
60
<PAGE>
Accounting for Stock Based Compensation
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required
by SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of this Statement. For all grants
subsequent to December 31, 1994 that were granted prior to the Company's initial
public offering in November 1995, the fair value of these options was determined
using the minimum value method with a weighted average risk free interest rate
of 6.32% and an expected life of 5 years. The fair value for the options granted
subsequent to the Company's initial public offering in November 1995 was
estimated at the date of grant using a Black-Scholes single option pricing model
with the following weighted average assumptions: risk-free interest rates of
6.16%, 5.52% and 4.84% for 2000, 1999 and 1998, respectively; a dividend yield
of 0.0%, a volatility factor of the expected market price of the Company's
common stock of 0.951, 0.888 and 0.600 for 2000, 1999 and 1998 respectively; and
a weighted-average expected life of the option of approximately 5 years. The
weighted average fair value of those options granted were $39.82, $22.38 and
$3.325 for 2000, 1999 and 1998, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option models require the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
Under the 1995 Employee Stock Purchase Plan participating employees can choose
to have up to 10% of their annual base earnings withheld to purchase the
Company's common stock. The purchase price of the stock is 85% of the lower of
the subscription date fair market value and the purchase date fair market value.
Approximately 78% of eligible employees participated in the plan in 2000 and 79%
and 65% in 1999 and 1998, respectively. Under the Plan, the Company sold 69,423,
269,092 and 259,484 shares to employees in 2000, 1999 and 1998, respectively.
Pursuant to APB 25 and related interpretations, the Company does not recognize
compensation cost related to employee purchase rights under the Plan. To comply
with the pro forma reporting requirements of SFAS 123, compensation cost is
estimated for the fair value of the employees' purchase rights using the Black-
Scholes model with the following assumptions for those rights granted in 2000,
1999 and 1998: dividend yield of 0.0%; and expected life of 6 months; expected
volatility factor of 1.56 and 1.18 in 2000, .98 and 1.16 in 1999, and .65 and
1.02 in 1998; and a risk free interest rate ranging from 5.35% to 6.43%. The
weighted average fair value of those purchase rights granted in February 1998,
August 1998, February 1999, August 1999, February 2000 and August 2000 were
$3.50, $2.25, $6.01, $17.72, $38.69 and $29.24, respectively.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Years ended December 31,
2000 1999 1998
-------- ------- ------
<S> <C> <C> <C>
Pro forma net income $276,421 $19,625 $7,575
Pro forma net income per share
Basic $ 4.13 $ 0.35 $ 0.14
</TABLE>
61
<PAGE>
<TABLE>
<S> <C> <C> <C>
Diluted $ 3.80 $ 0.32 $ 0.14
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect was not fully reflected until 1999.
Shareholder Rights Plan
On April 21, 1997, the Company adopted a shareholder rights plan (the Rights
Agreement). Under the Rights Agreement, rights were distributed as a dividend at
the rate of one right for each share of common stock of the Company held by
stockholders of record as of the close of business on April 28, 1997. The rights
will expire on April 28, 2007 unless redeemed or exchanged. Under the Rights
Agreement, each right will initially entitle the registered holder to buy one
one-fiftieth of a share of Series A Junior Participating Preferred Stock for
$250.00. The rights will become exercisable only if a person or group acquires
beneficial ownership of 15 percent or more of the Company's common stock or
commences a tender offer or exchange offer upon consummation of which such
person or group would beneficially own 15 percent or more of the Company's
common stock.
Stock Split
On January 26, 2000, the Company's board of directors approved a 2-for-1 stock
split, in the form of a 100% stock dividend, payable to stockholders of record
as of February 8, 2000. The dividend was paid and the split was effected on
February 22, 2000. Shares, per share amounts, common stock at par value and
capital in excess of par value have been restated to reflect the stock split for
all periods presented.
Note 5: Retirement Plan
Effective January 1, 1992, the Company adopted a tax-deferred savings plan,
the SanDisk 401(k) Plan, for the benefit of qualified employees. The plan is
designed to provide employees with an accumulation of funds at retirement.
Qualified employees may elect to make contributions to the plan on a monthly
basis. The Company may make annual contributions to the plan at the discretion
of the Board of Directors. The Company contributed $105,000 for the plan year
ended December 31, 1999. No contributions were made by the Company for the
years ended December 31, 2000 and 1998.
Note 6: Income Taxes
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
2000 1999 1998
-------- ------- ------
<S> <C> <C> <C>
Current:
Federal $ 53,683 $10,354 $1,413
State 13,296 2,117 651
Foreign 10,211 4,105 2,936
-------- ------- ------
77,190 16,576 5,000
Deferred:
Federal 94,147 (2,600) 1,305
State 21,683 (400) 350
Foreign 500 (500) -
-------- ------- ------
116,330 (3,500) 1,655
Provision for income taxes $193,520 $ 13,076 $ 6,655
======== ======== =======
</TABLE>
62
<PAGE>
The tax benefits associated with stock options reduces taxes currently payable
as shown above by $29,258,000, $9,809,000, and $1,761,000 in 2000, 1999 and
1998, respectively. Such benefits are credited to capital in excess of par when
realized.
The Company's provision for income taxes differs from the amount computed by
applying the federal statutory rates to income before taxes as follows:
<TABLE>
<CAPTION>
December 31,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 4.6 2.8 3.5
Research credit (0.2) (1.7) (1.9)
Tax exempt interest income (0.8) (3.9) (6.1)
Other individually immaterial items 0.7 0.8 5.5
---- ---- ----
39.3% 33.0% 36.0%
==== ==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31, 2000 and 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
2000 1999
--------- -------
<S> <C> <C>
Deferred tax assets:
Inventory writedown reserves $ 13,000 $ 3,400
Deferred revenue 17,100 10,600
Accruals and other reserves 11,400 4,000
Other 1,200 800
--------- -------
Total deferred tax assets $ 42,700 $18,800
--------- -------
Deferred tax liabilities:
Unrealized gain on exchange of UMC shares (105,600) -
--------- -------
Total deferred tax assets/(liabilities) $ (62,900) $18,800
========= =======
</TABLE>
Note 7: Joint Venture, Strategic Manufacturing Relationships and Investments
On June 30, 2000, the Company and Toshiba closed a transaction 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, the Company and Toshiba formed and contributed initial funding to
FlashVision LLC, a joint venture to equip and operate a silicon wafer
manufacturing line at Dominion Semiconductor in Virginia. The cost of
equipping the Virginia wafer manufacturing line is estimated at between $700
million and $800 million. As part of the Company's 50% ownership of the joint
venture it had invested $134.7 million as of December 31, 2000, and in January
2001, we invested the remaining $15.3 million. The Company has also guaranteed
63
<PAGE>
up to $215 million in equipment lease lines to equip Toshiba's Dominion
Semiconductor manufacturing clean room with advanced wafer processing equipment.
As of January 26, 2001, $20 million was guaranteed. In addition, the Company
will share certain research and development costs. The Company expects to
generate revenues from the sale of products using 512 megabit technology during
the second half of 2001, and from the 1 gigabit technology during 2002. The
Company accounts for this investment under the equity method, and the Company's
of losses on this joint venture through December 31, 2000 are not material.
On July 4, 2000, SanDisk entered into a share purchase agreement to make a $75
million investment in Tower Semiconductor, or Tower, in Israel, representing
approximately 10% ownership of Tower. In exchange for its investment, the
Company will receive one seat on the board of directors of Tower and a
guaranteed portion of the wafer output from the advanced fabrication facility
Tower is starting to build in Migdal Haemek, Israel. Under the terms of the
agreement, the Company will make our investment over a period of approximately
18 months if key milestones related to the construction, equipping and wafer
production at the new wafer fabrication facility are met. On January 26, 2001,
Tower satisfied the closing conditions of the share purchase agreement, and the
Company transferred the first $20 million of its investment from an escrow
account to purchase 866,551 shares ordinary shares and obtain $8.8 million in
pre-paid wafer credits. On March 1, 2001, the Company paid Tower $11 million
upon its completion of milestone one, to purchase 366,690 ordinary shares and
obtain additional prepaid wafer credits. Additional contributions will take the
form of mandatory warrant exercises for ordinary shares at an exercise price of
$30.00 per share if other milestones are met. The warrants will expire five
years from the date of grant, and in the event the key milestones are not
achieved, the exercise of these warrants will not be mandatory. We expect first
wafer production to commence at the new fabrication facility in late 2002. The
Company accounts for this investment under the cost method.
On August 9, 2000, SanDisk entered into a joint venture, DigitalPortal Inc.,
or DPI, with Photo-Me International, or PMI, for the manufacture, installation,
marketing and service of self-service, digital photo printing labs, or kiosks,
bearing the SanDisk brand name in locations in the U.S. and Canada. These kiosks
employ high-quality, low-cost, silver halide photo processing technology
developed by PMI. Under the agreement, SanDisk and PMI will each make an initial
investment of $4 million and secure lease financing for the purchase of the
kiosks. The total value of the lease financing will depend on the number of
kiosks deployed by the joint venture. The Company estimates that it will
guarantee equipment lease arrangements of approximately $40 million over the
first two years of the agreement. PMI will manufacture the kiosks for the joint
venture and will install and maintain the kiosks under contract with the joint
venture. The Company expects the first kiosks to be deployed in pilot programs
in select retail stores in the United States starting in the first half of 2001.
The Company accounts for this investment under the equity method, and the
Company's of losses on this joint venture through December 31, 2000 are not
material.
On November 2, 2000, SanDisk made a strategic investment of $7.2 million in
Divio, Inc. Divio is a privately-held manufacturer of digital imaging
compression technology and products for future digital camcorders that will be
capable of using our flash memory cards to store home video movies, replacing
the magnetic tape currently used in these systems. Under the agreement, SanDisk
owns approximately 10% of Divio and is entitled to one board seat. The Company
accounts for this investment under the cost method.
In 2000, 1999, and 1998, the Company purchased wafers from USIC/UMC, a foundry
in which the Company has ownership, totaling approximately $161.6 million, $22.8
million and $11.6 million, respectively.
Note 8: Segment Information
The Company applied SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information". Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or group, in deciding
how to allocate resources and in assessing performance.
64
<PAGE>
The Company operates in one segment, flash memory products. The Company
markets its products in the United States and in foreign countries through its
sales personnel, dealers, distributors, retailers and its subsidiaries. The
Chief Executive Officer has been identified as the Chief Operating Decision
Maker ("CODM") because he has final authority over resource allocation decisions
and performance assessment. The CODM does not receive discrete financial
information about individual components of the market.
65
<PAGE>
Geographic Information:
Information regarding geographic areas for the years ended December 31, 2000,
1999, and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues:
United States $258,715 $116,922 $ 60,113
Japan 178,564 62,176 46,276
Europe 99,352 22,674 9,810
Other foreign countries 65,181 45,218 19,562
-------- -------- --------
Total $601,812 $246,990 $135,761
Long Lived Assets:
United States $174,685 $ 25,442 $ 16,779
Japan 520 261 445
Europe 55 20 9
Other foreign countries 198,253 57,273 51,517
-------- -------- --------
Total $373,517 $ 82,996 $ 68,750
======== ======== ========
</TABLE>
Revenues are attributed to countries based on the location of the customers.
Long lived assets in other foreign countries includes the long-term investment
in UMC of $197.7 in 2000 and $51.2 million in 1999 and 1998. Long lived assets
in the United States includes the investment in FlashVision of $134.7 in 2000.
Major Customers
In 2000, there were no customers who accounted for more than 10% of total
revenue. In 1999 and 1998, revenues from one customer represented approximately
$28.0 million and $14.0 million, respectively, of consolidated revenues.
Note 9: Accumulated Other Comprehensive Income
Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income", requires unrealized gains or losses on the Company's
available-for-sale securities to be included in other comprehensive income.
Comprehensive income consists of net income and other comprehensive income.
66
<PAGE>
Accumulated other comprehensive income presented in the accompanying balance
sheet consists of the accumulated unrealized gains and loses on available-for-
sale marketable securities for all periods presented. The tax effects for other
comprehensive income were immaterial for all periods presented (in thousands).
<TABLE>
2000 1999 1998
--------- ----- -----
<S> <C> <C> <C>
Accumulated other comprehensive income at beginning of year $ 199 $ 471 $ 42
Change of accumulated other comprehensive income during the year
Unrealized loss on investments $ (50,268) - -
--------- ----- -----
Unrealized gain (loss) on available-for-sale securities $ (343) $(272) $ 429
--------- ----- -----
Accumulated other comprehensive income at year end $ (50,412) $ 199 $ 471
========= ===== =====
</TABLE>
The unrealized loss on investments includes a tax benefit of approximately
$34.6 million.
Note 10: Subsequent Event (unaudited)
At December 31, 2000, the market value of both our short-term and long-term
investment in UMC had declined $201.9 million below its carrying basis. It was
determined that this decline was related to the downturn in the semiconductor
industry as a whole and was temporary in nature due to the historically cyclical
nature of the industry. The available-for-sale portion of our investment was
marked-to-market through other comprehensive income as required by SFAS 115.
As of March 22, 2001, the market value of our investment in UMC remained
significantly below our cost. The downturn in the semiconductor industry and the
economy in general appears to be more severe than previously anticipated. There
is a great deal of uncertainty regarding when the semiconductor industry will
recover from this down cycle. Because of the continued downturn in the economy,
we believe that the decline in the market value of our investment in UMC at
March 22, 2001 is other than temporary, and we will report a loss in other
income and expense in the first quarter of 2001. This loss will be based upon
the fair market value of the investment at the end of the first quarter in
fiscal 2001, as compared to the investment's cost basis.
Item 9. Changes in and Disagreements With Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the REGISTRANT
--------------------------------------------------
Directors. Reference is made to the information regarding directors appearing
under the caption "Election of Directors" in our Proxy Statement for our Annual
Meeting of Stockholders to be held on June 5, 2001, which information is
incorporated in this Form 10-K by reference. Information regarding executive
officers is set forth under the caption "Executive Officers" in Part I of this
Form 10-K.
Item 11. Executive Compensation
-----------------------
The information required by this item is set forth under "Executive
Compensation and Related Information" in our Proxy Statement for the 2001 Annual
Meeting of Stockholders, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The information required by this item is set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" in our Proxy Statement
for the 2001 Annual Meeting of Stockholders, and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The information required by this item is set forth under the caption
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions" in our Proxy Statement for the Annual Meeting of Stockholders, and
is incorporated herein by reference.
67
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
1) All financial statements
<TABLE>
<CAPTION>
<S> <C>
Index to Financial Statements Page
-----
Report of Ernst & Young LLP, Independent Auditors 44
Consolidated Balance Sheets 45
Consolidated Statements of Income 46
Consolidated Statements of Stockholders' Equity 47
Consolidated Statements of Cash Flows 48
Notes to Consolidated Financial Statements 49-66
2) Financial statement schedules
Index to Financial Statement Schedules
Financial Statement Schedules
II. Valuation and Qualifying Accounts 79
</TABLE>
All other schedules have been omitted because the required information is not
present or not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements or notes thereto.
3) Exhibits required by Item 601 of Regulation S-K
A. Exhibits
68
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- ------ -------------
<S> <C>
3.1 Certificate of Incorporation of the Registrant, as amended to
date.(2),(13)
3.2 Form of Amended and Restated Certificate of Incorporation of the
Registrant.(2)
3.3 Bylaws of the Registrant, as amended.(2)
3.4 Form of Amended and Restated Bylaws of the Registrant.(2)
3.5 Certificate of Designation for the Series A Junior Participating
Preferred Stock, as filed with the Delaware Secretary of State on
April 24, 1997.(4)
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.(2)
4.3 Amended and Restated Registration Rights Agreement, among the
Registrant and the investors and founders named therein, dated March
3, 1995.(2)
4.5 Series F Preferred Stock Purchase Agreement between Seagate
Technology, Inc. and the Registrant dated January 15, 1993.(2)
4.8 Rights Agreement, dated as of April 18, 1997, between the Company and
Harris Trust and Savings Bank.(4)
4.9 First Amendment to Rights Agreement dated October 22, 1999, between
Harris Trust and the Registrant.(11)
9.1 Amended and Restated Voting Agreement, among the Registrant and the
investors named therein, dated March 3, 1995.(2)
10.10 License Agreement between the Registrant and Dr. Eli Harari, dated
September 6, 1988.(2)
10.13 1989 Stock Benefit Plan.(2)
10.15 Employee Stock Purchase Plan.(2)
10.16 1995 Non-Employee Directors Stock Option Plan.(2)
10.18 Lease Agreement between the Registrant and G.F. Properties, dated
March 1, 1996.(3)
10.21 Amendment to Lease Agreement between the Registrant and G.F.
Properties, dated April 3, 1997.(5)
10.23 Foundry Venture Agreement between the Registrant and United
Microelectronics Corporation, dated June 27, 1997.(1),(6)
10.24 Written Assurances Re: Foundry Venture Agreement between the
Registrant and United Microelectronics Corporation, dated September
13, 1995.(1), (6)
10.25 Side Letter between Registrant and United Microelectronics
Corporation, dated May 28, 1997.(1), (6)
10.27 Clarification letter with regards to Foundry Venture Agreement between
the Registrant and United Microelectronics Corporation dated October
24, 1997.(7)
10.28 Lease Agreement between the Registrant and G.F. Properties, dated June
10, 1998.(8)
10.29 Trade Finance Agreement between the Registrant and Union Bank of
California, dated July 15, 1998.(9)
10.30 1995 Stock Option Plan Amended and Restated as of December 17,
1998.(12)
10.31 1995 Non-Employee Directors Stock Option Plan Amended and Restated as
of December 17, 1998.(12)
10.32 1995 Employee Stock Purchase Plan Amended and Restated as of December
17, 1998. (12)
10.33 Master Agreement, dated as of May 9, 2000, by and among the
Registrant, Toshiba Corporation and Semiconductor North America,
Inc.(13),(+)
10.34 Operating Agreement dated as of May 9, 2000, by and between the
Registrant and Semiconductor North America, Inc.(13)
10.35 Common R&D and Participation Agreement, dated as of May 9, 2000, by
and between the Registrant and Toshiba Corporation.(13),(+)
10.36 Product Development Agreement, dated as of May 9, 2000, by and between
the Registrant and Toshiba Corporation.(13),(+)
10.37 Share Purchase Agreement, dated as of July 4, 2000, by and between the
Registrant and Tower Semiconductor Ltd.(14)
10.38 Escrow Agreement, dated as of August 14, 2000, by and between the
Registrant, Tower Semiconductor Ltd. and Union bank of California,
N.A.(14)
</TABLE>
69
<PAGE>
<TABLE>
<S> <C>
10.39 Additional Purchase Obligation Agreement, dated as of July 4, 2000, by
and between the Registrant and Tower Semiconductor Ltd.(14)
10.40 Shareholders Agreement, dated as of July 4, 2000, by and between the
Registrant and the Israel Corporation.(14)
10.41 Definitive Agreement to Form Vending Business, dated August 7, 2000,
by and between the Registrant and Photo-Me International, Plc.(14),(+)
10.42 Non-Solicitation Agreement, dated August 7, 2000, by and between the
Registrant, DigitalPortal Inc. and Photo-Me International,
Plc.(14),(+)
10.43 Exclusive Product Purchase Agreement, dated as of August 7, 2000, by
and between Photo-Me, International Plc., and DigitalPortal Inc.
(14),(+)
10.44 Stockholders' Agreement, dated as of August 7, 2000, by and among the
Registrant, DigitalPortal Inc. and Photo-Me, International,
Plc.(14),(+)
10.45 Bylaws of DigitalPortal Inc.(14),(+)
10.46 Registration Rights Agreement, dated as of January 18, 2001, by and
between Registrant, The Israel Corporation, Alliance Semiconductor
Ltd., Macronix International Co., Ltd. and Quick Logic Corporation.
(15)
10.47 Consolidated Shareholders Agreement, dated as of January 18, 2001 by
and among Registrant, the Israel Corporation, Alliance
Semiconductor, Ltd. and Macronix International Co., Ltd. (15)
10.48 Appendix 1 to Participation Agreement, dated as of December 27, 2000,
by and among FlashVision L.L.C., ABN AMRO Bank N.V., Keybank National
Association, Union Bank of California, N.A. and other participants.
(*), (++)
10.49 Master Lease Intended as Security, dated as of December 27, 2000, by
and between Flashvision, L.L.C. and ABN Ammo Bank N.V. (*), (++).
10.50 Guarantee, dated as of December 27, 2000 by the Registrant to
ABN AMRO Bank N.V. (*), (++)
21.1 Subsidiaries of the Registrant. (10)
23.1 Consent of Ernst & Young LLP, Independent Auditors (*)
</TABLE>
______________
* Filed herewith.
+ Confidential treatment has been granted for certain portions thereof.
++ Confidential treatment has been requested for certain portions thereof.
1. Confidential treatment granted as to certain portions of these exhibits.
2. Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-1 (No. 33-96298).
3. Previously filed as an Exhibit to the Registrant's 1995 Annual Report on
Form 10-K.
4. Previously filed as an Exhibit to the Registrant's Current Report on Form
8-K/A dated April 18, 1997.
5. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended June 30, 1997.
6. Previously filed as an Exhibit to the Registrant's Current Report on form
8-K dated October 16, 1997.
7. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended September 30, 1997.
8. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended June 30, 1998.
9. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended September 30, 1998.
10. Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K.
11. Previously filed as an Exhibit to the Registrant's Current Report on Form
8-K dated January 1, 1999.
12. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended March 31, 1999.
13. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended June 30, 2000,
14. Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended September 30, 2000,
15. Previously filed as an Exhibit to the Registrant's Schedule 13(d) dated
January 26, 2001.
B. Reports on Form 8-K
None
70
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SANDISK CORPORATION
By: /s/ Frank Calderoni
-------------------------------------
Frank Calderoni
Chief Financial Officer, Senior Vice
President, Finance and Administration
(on behalf of the Registrant)
DATED: March 29, 2001
--------------
71
<PAGE>
POWER OF ATTORNEY
KNOW ALL PEOPLE BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Dr. Eli Harari and Frank Calderoni,
jointly and severally, his or her attorneys in fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys in
fact, or his or her substitute or substitutes, may do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
as amended, this Report has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
By: /s/ Dr. Eli Harari President, Chief Executive Officer March 29, 2001
----------------------------
(Dr. Eli Harari) and Director
By: /s/ Irwin Federman Chairman of the Board, Director March 29, 2001
----------------------------
(Irwin Federman)
By: /s/ Frank Calderoni Chief Financial Officer, March 29, 2001
----------------------------
(Frank Calderoni) Senior Vice President, Finance and
Administration (Principal Financial
and Accounting Officer)
By: /s/ William V. Campbell Director March 29, 2001
----------------------------
(William V. Campbell)
By: /s/ Catherine P. Lego Director March 29, 2001
----------------------------
(Catherine P. Lego)
By: /s/ Dr. James D. Meindl Director March 29, 2001
----------------------------
(Dr. James D. Meindl)
By: /s/ Alan F. Shugart Director March 29, 2001
------------------------------
(Alan F. Shugart)
</TABLE>
72
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.48
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>APPENDIX I TO PARTICIPATION AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.48
- --------------------------------------------------------------------------------
APPENDIX 1
To Participation Agreement
FlashVision/SanDisk Tranche Lease Financing
DEFINITIONS AND INTERPRETATION
- --------------------------------------------------------------------------------
A. Interpretation. In each Operative Document, unless a clear contrary
intention appears:
(i) the singular number includes the plural number and vice versa;
(ii) reference to any Person includes such Person's successors and
assigns but, if applicable, only if such successors and assigns are
permitted by the Operative Documents, and reference to a Person in a
particular capacity excludes such Person in any other capacity or
individually;
(iii) reference to any gender includes the other gender;
(iv) reference to any agreement (including any Operative Document),
document or instrument means such agreement, document or instrument as
amended, restated, supplemented or otherwise modified and in effect from
time to time in accordance with the terms thereof and, if applicable, the
terms of the other Operative Documents;
(v) reference to any Applicable Laws means such Applicable Laws as
amended, modified, codified, replaced or reenacted, in whole or in part,
and in effect from time to time, including rules and regulations
promulgated thereunder and reference to any section or other provision of
any Applicable Laws means that provision of such Applicable Laws from time
to time in effect and constituting the substantive amendment,
modifications, codification, replacement or reenactment of such section or
other provision;
(vi) reference in any Operative Document to any Article, Section,
Appendix, Schedule or Exhibit means such Article or Section thereof or
Appendix, Schedule or Exhibit thereto;
(vii) "hereunder", "hereof", "hereto" and words of similar import
shall be deemed references to an Operative Document as a whole and not to
any particular Article, Section or other provision thereof;
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
Appendix 1-1
<PAGE>
(viii) "including" (and with correlative meaning "include") means
including without limiting the generality of any description preceding
such term; and
(ix) relative to the determination of any period of time, "from"
means "from and including" and "to" means "to but excluding".
B. Accounting Terms. In each Operative Document, unless expressly
otherwise provided, accounting terms shall be construed and interpreted, and
accounting determinations and computations shall be made, in accordance with
GAAP.
C. Conflict in Operative Documents. If there is any conflict between any
Operative Documents, such Operative Document shall be interpreted and construed,
if possible, so as to avoid or minimize such conflict, but, to the extent (and
only to the extent) of such conflict, the Participation Agreement shall prevail
and control.
D. Legal Representation of the Parties. The Operative Documents were
negotiated by the parties with the benefit of legal representation and any rule
of construction or interpretation that any ambiguity in the Operative Documents
is to be construed or interpreted against the drafting party shall not apply to
any construction or interpretation hereof or thereof.
E. Defined Terms. Unless a clear contrary intention appears, terms defined
herein have the respective indicated meanings when used in each Operative
Document.
"ABN AMRO" means ABN AMRO Bank N.V.
"Accepted" means, with respect to any Item of Equipment, that Lessee has
inspected and tested such Item of Equipment after the date such Item of
Equipment was delivered and Installed at the Facility and that Lessee has
accepted such Item of Equipment from the manufacturer or vendor thereof.
"Acquisition Agreement" shall mean, with respect to any Equipment, the
purchase agreement or purchase order with the manufacturer or vendor of such
Equipment pursuant to which Lessee has agreed to purchase such Equipment.
"Additional Costs" means amounts payable to any Participant pursuant to
Article XIII or Article XV of the Participation Agreement.
"Advance" means an advance by Lessor to Lessee pursuant to Article III of
the Participation Agreement.
"Affiliate" means, with respect to any Person, any other Person (i)
directly or indirectly controlling or controlled by or under direct or indirect
common control with such Person or (ii) directly or indirectly owning or holding
five percent (5%) or more of the equity interest in such Person. For purposes of
this definition, "control", when used with respect to any Person, means the
power to direct the management and policies of such Person, directly or
indirectly, whether
Appendix 1-2
<PAGE>
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the foregoing.
"Affiliate Sublease" is defined in Section 5.2 of the Lease.
"After Tax Basis" means, with respect to any payment to be received, the
amount of such payment increased so that, after deduction of the amount of all
Taxes (including any Taxes otherwise excluded by the definition of
"Impositions", and assuming for this purpose that the recipient of such payment
is subject to taxation at the highest marginal Federal rate generally applicable
to Persons of the same type as the recipient and the highest marginal state and
local rates generally applicable to Persons of the same type as the recipient in
the jurisdiction in which such recipient has its principal place of business)
required to be paid by the recipient (less any tax savings realized as a result
of the payment of the indemnified amount) with respect to the receipt by the
recipient of such amounts, such increased payment (as so reduced) is equal to
the payment otherwise required to be made.
"Agent" means ABN AMRO or any successor pursuant to the terms of the
Operative Documents when acting in its capacity as agent for the Participants.
"Aggregate Commitment Amount" means Two Hundred and Fifteen Million
Dollars ($215,000,000).
"Aggregate Purchase Price" means, at any time, (a) with respect to any
Lease Supplement, the sum of the Purchase Prices for all related Lease
Supplement Equipment, and (b) with respect to all Equipment, the sum of the
Purchase Prices for all Equipment subject to the Lease at such time.
"Allocation Fraction" means, with respect to any Item of Equipment, a
fraction, the numerator of which is the Purchase Price of such Item of Equipment
and the denominator of which is the Aggregate Purchase Price of all Equipment
then subject to the applicable Lease Supplement, including such Item of
Equipment.
"Annual Appraisal" means an update (which update shall be a desktop
appraisal) of the Initial Appraisal from an Appraiser received pursuant to the
terms of the Lease on each annual anniversary of the Document Closing Date,
setting forth as of such annual anniversary the Fair Market Value of each Item
of Equipment then subject to the Lease, in form and substance reasonably
satisfactory to Agent and the Required Participants and using appraisal methods
consistent with the methods used in the Initial Appraisal. Each such appraisal
shall be prepared at the sole cost and expense of Lessee.
"Applicable Laws" at any time means all then existing applicable laws,
rules, regulations (including Environmental Laws), statutes, treaties, codes,
ordinances, Permits, certificates, orders and licenses of and interpretations by
any Governmental Authority, and applicable judgments, decrees, injunctions,
writs, orders or like action of any court, arbitrator or other administrative,
judicial or quasi-judicial tribunal or agency of competent jurisdiction
(including those pertaining to health, safety or the environment and those
pertaining to the construction, installation or use of the Equipment.
Appendix 1-3
<PAGE>
"Applicable Lending Office" means, for each Participant, the office of
such Participant set forth as the Applicable Lending Office for such Participant
on Schedule II to the Participation Agreement, or such other office of such
Participant (or of an Affiliate of such Participant) as such Participant may
from time to time specify to Agent and Lessee by written notice as the office
from which its Participation Interests are made available and maintained.
"Applicable Margin" means with respect to the Participation Interests
purchased by the Participants while interest or yield is accruing thereon by
reference to the LIBO Rate, the respective margin percentage that shall be
subject to adjustment (upwards or downwards, as appropriate) based on the
existence of the applicable Level I, II, III, IV or V as at the end of any
fiscal quarter as set forth below. The Leverage Ratio of the Guarantor shall be
determined from the then most recent quarterly or annual financial statements
and the Compliance Certificate in respect thereof delivered by the Guarantor
pursuant to the Guarantee. The adjustment, if any, to the Applicable Margin
shall be effective commencing on the third Business Day after the delivery of
such financial statements and Compliance Certificate. If the Guarantor shall at
any time fail to timely furnish to the Participants the financial statements and
Compliance Certificate required to be delivered pursuant to the Guarantee, then,
during the period commencing on the date such financial statements and
Compliance Certificate were required to be delivered pursuant to the Guarantee
until the date on which such financial statements and Compliance Certificate are
delivered by the Guarantor (but only during such period), Level V shall be
deemed to exist and no retroactive adjustments shall be made for such period.
Notwithstanding the foregoing, during the period from the Document Closing Date
through the date which is three Business Days after the date on which the
Guarantor delivers the first quarterly or annual financial statements and
Compliance Certificate pursuant to the Guarantee for the period ended June 30,
2001, Level IV shall be deemed to exist.
---------------------------------------------------------------------------
Applicable Margin Table
---------------------------------------------------------------------------
Applicable Margin for Applicable Margin for
Tranche A and Tranche B Tranche C
Level Advances Advances
---------------------------------------------------------------------------
Level V [*] [*]
---------------------------------------------------------------------------
Level IV [*] [*]
---------------------------------------------------------------------------
Level III [*] [*]
---------------------------------------------------------------------------
Level II [*] [*]
---------------------------------------------------------------------------
Level I [*] [*]
---------------------------------------------------------------------------
"Appraisal" means any of the Initial Appraisal, any Annual Appraisal, any
Supplemental Appraisal or any Lease Term Appraisal.
"Appraiser" means American Appraisal Associates or such other independent
qualified Person as may be selected by Agent and reasonably satisfactory to
Lessee.
"Arrangement Fee" means the arrangement fee described in the Fee Letter.
[*] INDICATES THAT CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL
TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
Appendix 1-4
<PAGE>
"Arranger" means ABN AMRO in its capacity as arranger of the lease
facility provided under the Operative Documents.
"Assignment Agreement" means an Assignment Agreement substantially in the
form of Exhibit F to the Participation Agreement.
"Available Commitment" means as to any Participant at any time an amount
equal to the excess, if any, of (A) the amount of such Participant's Commitment,
over (B) the aggregate amount of its Participation Interest in all Advances then
outstanding.
"Bank" means ABN AMRO in its individual capacity.
"Bankruptcy Code" means Title 11 of United States Code entitled
"Bankruptcy," as now or hereafter in effect.
"Base Term" means, with respect to any Lease Supplement, the period
beginning on the applicable Lease Supplement Closing Date and ending on the
first anniversary of such Lease Supplement Closing Date.
"Basic Rent" means, with respect to any Lease Supplement, all installments
of Fixed Rent and Variable Rent in respect of the relevant Lease Supplement
Balance due and payable by Lessee on each Payment Date during the Base Term or
Renewal Term, if any, applicable thereto.
"Bill of Sale" means a bill of sale substantially in the form of Exhibit C
to the Participation Agreement to be delivered to Lessor pursuant to the
Participation Agreement.
"Break Costs" means an amount equal to the amount, if any, required to
compensate any Participant for any losses (including, without limitation, any
loss, cost or expense incurred by reason of the liquidation or reemployment of
deposits or funds acquired by any Participant to fund its obligations under the
Operative Documents) it may reasonably incur as a result of (x) Lessee's payment
of any Basic Rent other than on a Payment Date therefor, (y) any Advance not
being made on the date specified therefor in the applicable Lease Supplement
Closing Date Notice (other than as a result of a breach by such Participant of
its obligation under Section 3.1 of the Participation Agreement to fund its
Participation Interest in such Advance) as set forth in Section 3.4 of the
Participation Agreement, or (z) any conversion of the LIBO Rate other than
pursuant to and in accordance with the Operative Documents. A statement as to
the amount of such loss, cost or expense, prepared in good faith and in
reasonable detail and submitted by any Participant to Agent and by Agent to
Lessee, shall be presumed correct absent demonstrable error.
"Business Day" means (i) each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banks in New York, New York, Chicago,
Illinois, Manassas, Virginia or Sunnyvale, California are generally authorized
or obligated, by law or executive order, to close and (ii) relative to any
determination of the LIBO Rate, any day which is a Business Day under clause (i)
and is also a day on which dealings in Dollars are carried on in the London
interbank eurodollar market.
Appendix 1-5
<PAGE>
"Capital Asset" shall mean with respect to any Person, any tangible fixed
or capital asset owned or leased (in the case of a Capitalized Lease) by such
Person, or any expense incurred by such Person that is required by GAAP to be
reported as a non-current asset on such Person's balance sheet.
"Capital Expenditures" means with respect to any Person and its
Subsidiaries on a consolidated basis, all expenses accrued for the acquisition
of Capital Assets which, in accordance with GAAP, would be classified as capital
expenditures (including all Capitalized Lease Obligations).
"Capitalized Lease" means with respect to any Person and its Subsidiaries
on a consolidated basis, any lease of property, real, personal or mixed, the
obligations under which are capitalized on the consolidated balance sheet of
such Person and its Subsidiaries in accordance with GAAP.
"Capitalized Lease Obligations" means with respect to any Person and its
Subsidiaries on a consolidated basis, the capitalized amount of monetary
obligations of such Person and its Subsidiaries to pay rent or other amounts
under or in respect of Capitalized Leases.
"Cash Equivalents" means, as at any date of determination:
(a) Direct obligations of, or obligations the principal and interest on
which are unconditionally guaranteed by, the United States of
America or obligations of any agency of the United States of America
to the extent such obligations are backed by the full faith and
credit of the United States of America, in each case maturing within
one year from the date of acquisition thereof;
(b) Certificates of deposit maturing within one year from the date of
acquisition thereof issued by a commercial bank or trust company
organized under the laws of the United States of America or a state
thereof or that is a Participant, provided that (A) such deposits
are denominated in Dollars, (B) such bank or trust company has
capital, surplus and undivided profits of not less than
$1,000,000,000 and (C) such bank or trust company has certificates
of deposit or other debt obligations that were rated, as of the date
such Cash Equivalents were acquired, at least A-1 (or its
equivalent) by S&P or P-1 (or its equivalent) by Moody's;
(c) Open market commercial paper maturing within 270 days from the date
of acquisition thereof issued by a corporation organized under the
laws of the United States of America or a state thereof, provided
such commercial paper was rated, as of the date such Cash
Equivalents were acquired, at least A-1 (or its equivalent) by S&P
or P-1 (or its equivalent) by Moody's; and
(d) Any repurchase agreement entered into with a commercial bank or
trust company organized under the laws of the United States of
America or a state thereof or that is a Participant, provided that
(A) such bank or trust company has capital, surplus and undivided
profits of not less than $1,000,000,000, (B) such bank or trust
company has certificates of deposit or other debt obligations that
were rated, as of the date such Cash Equivalents were acquired, at
least A-1 (or its equivalent) by
Appendix 1-6
<PAGE>
S&P or P-1 (or its equivalent) by Moody's, (C) the repurchase
obligations of such bank or trust company under such repurchase
agreement are fully secured by a perfected security interest in a
security or instrument of the type described in clause (a), (b) or
(c) above and (D) such security or instrument so securing the
repurchase obligations has fair market value at the time such
repurchase agreement is entered into of not less than 100% of such
repurchase obligations.
"Casualty" is defined in Section 6.1 of the Lease.
"Casualty Amount" means, with respect to any Item of Equipment as of any
date specified for payment thereof, an amount equal to the greater of (a) the
Purchase Price for such Item of Equipment and (b) the product obtained by
multiplying (i) the outstanding Lease Supplement Balance for the Lease
Supplement to which such Equipment is subject plus all Variable Rent accrued and
unpaid on such Lease Supplement Balance by (ii) the Allocation Fraction of such
Item of Equipment.
"Casualty Notice" is defined in Section 6.1 of the Lease.
"Casualty Recoveries" is defined in Section 6.1 of the Lease.
"Casualty Settlement Date" is defined in Section 6.1(a) of the Lease.
"CERCLA" means the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, 42 U.S.C. ss.ss.9601 et seq., as amended.
"Change in Control" shall mean a change in control of Guarantor of a
nature that would be required to be reported (assuming such event has not been
"previously reported") in response to Item 1(a) of the Current Report on Form
8-K, pursuant to Section 13 or 15(d) of the Exchange Act; provided that, without
limitation, a Change in Control shall be deemed to have occurred at such time as
(i) any "person" including a "group" (within the meaning of Sections 13(d) and
14(d) of the Exchange Act) (x) is or has become the "beneficial owner", as
defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of [*] or
more of the combined voting power of the outstanding securities of Guarantor
ordinarily having the right to vote at the election of directors, (y) acquires
all or substantially all of the assets of Guarantor, or (ii) individuals who
constituted the Board of Directors of Guarantor on the Document Closing Date
(the "Incumbent Board") have ceased for any reason to constitute at least a
majority thereof; provided further that any person becoming a director
subsequent to the Document Closing Date whose election, or nomination for
election by Guarantor's shareholders, was approved by a vote of at least
three-quarters (3/4) of the directors comprising the Incumbent Board (either by
a specific vote or by approval of the proxy statement of Guarantor in which such
person is named as a nominee for director without objection to such nomination)
shall be, for purposes of this definition, considered as though such person were
a member of the Incumbent Board.
"Claims" means any and all obligations, liabilities, losses, actions,
suits, judgments, penalties, fines, claims, demands, settlements, costs and
expenses (including, without limitation, reasonable legal fees and expenses) of
any nature whatsoever.
[*] INDICATES THAT CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2 CONFIDENTIAL
TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
Appendix 1-7
<PAGE>
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor statute thereto.
"Collateral" means each of the following:
(i) the Equipment (including all Parts thereof, accessions thereto
and replacements (including any Replacement Equipment) and substitutions
therefor);
(ii) the Sublease and any Affiliate Sublease;
(iii) all Related Property to the extent assignable;
(iv) all products, accessions, rents, issues, profits, returns,
income and proceeds of and from any and all of the foregoing Collateral
(including proceeds which constitute property of the types described in
clauses (i), (ii) and (iii) above and, to the extent not otherwise
included, all payments under insurance (whether or not Agent or Lessor is
the loss payee thereof, or any indemnity, warranty or guaranty, payable by
reason of loss or damage to or otherwise with respect to any of the
foregoing Collateral).
"Collateral Assignment" means (i) a Collateral Assignment of Sublease
(FlashVision/SanDisk Tranche) to be entered into on or prior to the initial
Lease Supplement Closing Date, executed by Lessee and acknowledged by DSC, and
(ii) if any Affiliate Sublease is entered into by Lessee, a Collateral
Assignment of Sublease (FlashVision/SanDisk Tranche) in the form of the
Collateral Assignment of Sublease (FlashVision/SanDisk Tranche) entered into on
or prior to the initial Lease Supplement Closing Date, executed by Lessee and
acknowledged by the applicable Affiliate Sublessee but with such changes as are
necessary to reflect the different parties and the different terms of the
sublease.
"Commitment" means (i) as to any Participant, the obligation of such
Participant to purchase a Participation Interest in Advances to be made by
Lessor under the Participation Agreement, in an aggregate amount at any one time
outstanding not to exceed the amount set forth opposite such Participant's name
on Schedule I to the Participation Agreement, and (ii) as to Lessor, the
obligation of Lessor to make Advances from amounts received from the
Participants pursuant to the purchase of Participation Interests under the
Participation Agreement.
"Commitment Fee Payment Date" means each quarterly Payment Date in respect
of Fixed Rent occurring during the Installation Period and the last day of the
Installation Period.
"Commitment Fee Rate" means with respect to the Available Commitment of
each Participant, the per annum percentage that shall be subject to adjustment
(upwards or downwards, as appropriate) based on the existence of the applicable
Level I, II, III, IV or V as at the end of any fiscal quarter as set forth
below. The Leverage Ratio of the Guarantor shall be determined from the then
most recent quarterly or annual financial statements and the Compliance
Certificate in respect thereof delivered by the Guarantor pursuant to the
Guarantee. The adjustment, if any, to the Commitment Fee Rate shall be effective
commencing on the third Business Day after the delivery of such financial
statements and Compliance Certificate. If the Guarantor shall at any time fail
to timely furnish to the Participants the financial statements and
Appendix 1-8
<PAGE>
Compliance Certificate required to be delivered pursuant to the Guarantee, then,
during the period commencing on the date such financial statements and
Compliance Certificate were required to be delivered pursuant to the Guarantee
until the date on which such financial statements and Compliance Certificate are
delivered by the Guarantor (but only during such period), Level V shall be
deemed to exist and no retroactive adjustments shall be made for such period.
Notwithstanding the foregoing, during the period from the Document Closing Date
through the date which is three Business Days after the date on which the
Guarantor delivers the first quarterly or annual financial statements and
Compliance Certificate pursuant to the Guarantee for the period ended June 30,
2001, Level IV shall be deemed to exist.
[*]
"Commitment Fees" is defined in Section 4.1 of the Participation
Agreement.
"Commitment Percentage" means, as to any Participant, such Participant's
Tranche A Participation Interest Commitment Percentage, Tranche B Participation
Interest Commitment Percentage or Tranche C Equity Interest Commitment
Percentage, as the case may be (or, at any time after the Commitments of the
Participants shall have expired or terminated, the percentage which the
aggregate amount of such Participant's purchases of Participation Interests then
outstanding constitutes of the aggregate amount of the purchases of
Participation Interests then outstanding).
"Compliance Certificate" means a certificate of a Responsible Officer of
Guarantor delivered pursuant to Section 10(a)(iv)(A) or 10(a)(iv)(B) of the
Guarantee.
"Consolidated Total Debt" means with respect to Guarantor and its
Subsidiaries on a consolidated basis as of any date of determination, the
outstanding principal balance of all Indebtedness of such Persons, including all
Guaranty Obligations (including those of Guarantor in respect of the Obligations
of Lessee under the Operative Documents).
"Debt Service Coverage Ratio" means, as of any date of determination, the
ratio of (a)Lessee EBITDAR for the Fiscal Quarter ending on such date to (b) the
sum of all Interest Expense of Lessee and its Subsidiaries plus all rental
expense of Lessee and its Subsidiaries on a consolidated basis for such period.
"Debt to Equity Ratio" means, as of any date of determination, the ratio
of (a) Indebtedness of Lessee and its Subsidiaries on a consolidated basis as of
such date, to (b) Members' original capital in Lessee plus retained earnings
less distributions made to Members in respect of capital as of such date.
"Default" means any Event of Default or any condition, occurrence or event
which, after notice or lapse of time or both, would constitute an Event of
Default.
"Defaulted Amount" is defined in Section 3.4(a) of the Participation
Agreement.
"Defaulting Participant" is defined in Section 3.4(a) of the Participation
Agreement.
[*] INDICATES THAT CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL
TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
Appendix 1-9
<PAGE>
"Document Closing Date" is defined in Section 2 of the Participation
Agreement.
"Dollars" and "$" mean dollars in lawful currency of the United States of
America.
"DSC" means Dominion Semiconductor Company, L.L.C., a Virginia limited
liability company and a wholly-owned Subsidiary of Toshiba.
"DSC Foundry Agreement" means the Foundry Agreement to be entered into
between DSC and Lessee and referred to in Section 8.1(w) of the Participation
Agreement.
"DSC Services Agreement" means the Services Agreement dated as of April 1,
2000 between Lessee and DSC.
"Early Termination Option" is defined in Section 10.1 of the Lease.
"Eligible Institution" means (i) a commercial bank organized under the
laws of the United States, or any State thereof; (ii) a commercial bank
organized under the laws of any other country that is a member of the OECD or
has concluded special lending arrangements with the International Monetary Fund
associated with its General Arrangements to Borrow, or a political subdivision
of any such country, provided that such bank is acting through a branch or
agency located in the United States; (iii) a finance company, insurance company
or other financial institution or fund (whether a corporation, partnership or
other entity) engaged generally in making, purchasing or otherwise investing in
commercial loans in the ordinary course of its business; (iv) the central bank
of any country that is a member of the OECD; (v) any Participant; or (vi) in the
case of an assignment or transfer by Bank Leumi USA of the Participation
Interests held by it, the ultimate parent of such Participant; provided,
however, that (A) any such Person described in clause (i), (ii), (iii), (iv) or
(vi) above or a parent entity of any such Person shall also have combined
capital and surplus (as established in its most recent report of condition to
its primary regulator) of not less than $250,000,000 (or its equivalent in
foreign currency), and (B) any Person described in clause (ii), (iii), (iv) or
(vi) above shall, on the date on which it is to become a Participant hereunder,
be entitled to receive payments hereunder without deduction or withholding of
any United States Federal income taxes.
"Employee Benefit Plan" means any "employee benefit plan" as defined in
Section 3(3) of ERISA which is or was maintained or contributed to by Lessee or
any of its ERISA Affiliates.
"Environmental Claim" means any investigation, notice, notice of
violation, claim, action, suit, proceeding, demand, abatement order or other
order or directive (conditional or otherwise), by any Governmental Authority or
any other Person, arising (i) pursuant to or in connection with any actual or
alleged violation of any Environmental Law; (ii) in connection with any
Hazardous Substance or any actual or alleged Hazardous Activity; or (iii) in
connection with any actual or alleged damage, injury, threat or harm to health,
safety, natural resources or the environment.
"Environmental Indemnity Agreement" means the Environmental Indemnity
Agreement dated as of May 9, 2000 between Guarantor, Toshiba and DSC.
Appendix 1-10
<PAGE>
"Environmental Law" at any time, means any applicable Federal, state,
county or local law, statute, ordinance, rule, regulation, license, permit,
authorization, approval, covenant, criteria having the effect of law, guideline
having the effect of law, administrative or court order, judgment, decree,
injunction, code or requirement or any agreement with a Governmental Authority
theretofore enacted or promulgated:
(x) relating to pollution (or the cleanup, removal, remediation or
encapsulation thereof, or any other response thereto), or the regulation
or protection of human health, safety or the environment, including air,
water, vapor, surface water, groundwater, drinking water, land (including
surface or subsurface), plant, aquatic and animal life, or
(y) concerning exposure to, or the use, manufacture, containment,
storage, recycling, treatment, generation, discharge, emission, Release or
threatened Release, transportation, processing, handling, labeling,
containment, production, distribution, disposal or remediation of, any
Hazardous Substance or Hazardous Activity,
in each case as amended and as then in effect, and any common law or equitable
doctrine (including, without limitation, injunctive relief and tort doctrines
such as negligence, nuisance, trespass and strict liability) that may impose
liability or obligations for injuries (whether personal or to property) or
damages due to or threatened as a result of the presence of, exposure to, or
ingestion of, any Hazardous Substance. At any time, Environmental Laws include,
but are not limited to, CERCLA; the Resource Conservation and Recovery Act of
1976, 42 U.S.C. ss.6901 et seq.; the Federal Water Pollution Control Act, 33
U.S.C. ss.1251 et seq.; the Clean Air Act, 42 U.S.C. ss.ss.7401 et seq.; the
National Environmental Policy Act, 42 U.S.C. ss.4321; the Refuse Act, 33 U.S.C.
ss.ss.401 et seq.; the Hazardous Materials Transportation Act of 197S, 49 U.S.C.
ss.ss.1801-1812; the Toxic Substances Control Act, 15 U.S.C. ss.ss.2601 et seq.;
the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. ss.ss.136 et
seq.; the Safe Drinking Water Act, 42 U.S.C. ss.ss. 300f et seq., each as
amended and as then in effect, and their state and local counterparts or
equivalents, including any regulations promulgated thereunder.
"Equipment" means collectively all Items of Equipment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and any successor statute thereto, as interpreted by the rules and
regulations thereunder, all as the same may be in effect from time to time.
"ERISA Affiliate" means, as applied to any Person, (i) any corporation
which is a member of a controlled group of corporations within the meaning of
Section 414(b) of the Code of which that Person is a member; (ii) any trade or
business (whether or not incorporated) which is a member of a group of trades or
businesses under common control within the meaning of Section 414(c) of the Code
of which that Person is a member; and (iii) any member of an affiliated service
group within the meaning of Section 414(m) or (o) of the Code of which that
Person, any corporation described in clause (i) above or any trade or business
described in clause (ii) above is a member. Any former ERISA Affiliate of Lessee
shall continue to be considered an ERISA Affiliate of Lessee within the meaning
of this definition with respect to the
Appendix 1-11
<PAGE>
period such entity was an ERISA Affiliate of Lessee and with respect to
liabilities arising after such period for which Lessee could be liable under the
Code or ERISA.
"ERISA Event" means (i) the assertion of a claim (other than routine
claims for benefits) against any Employee Benefit Plan or the assets thereof, or
against Lessee or any of its ERISA Affiliates in connection with any Employee
Benefit Plan which is reasonably likely to have a Material Adverse Effect; or
(ii) receipt from the Internal Revenue Service of notice of the failure of any
Pension Plan (or any other Employee Benefit Plan intended to be qualified under
Section 401(a) of the Code) to qualify under Section 401(a) of the Code, or the
failure of any trust forming part of any Pension Plan to qualify for exemption
from taxation under Section 501(a) of the Code.
"Escrow Account" is defined in Section 3.1(c) of the Participation
Agreement.
"Event of Default" is defined in Section 8.1 of the Lease.
"Excepted Payments" means
(a) all indemnity payments (including indemnity payments made
pursuant to Section 12 of the Participation Agreement) to
which Lessor, or any of its Affiliates, agents, officers,
directors or employees is entitled;
(b) any amounts (other than Basic Rent, any Renewal Payment or
amounts payable by Lessee pursuant to Section 6.1 or Articles
VIII or X of the Lease) payable under any Operative Document
to reimburse Lessor or any of its respective Affiliates
(including the reasonable expenses of Lessor incurred in
connection with any such payment) for performing or complying
with any of the obligations of Lessee under and as permitted
by any Operative Document, except to the extent that one or
more Participants have indemnified Lessor with respect thereto
pursuant to the Participation Agreement;
(c) any amount payable to Lessor by any Participant or transferee
permitted under the Operative Documents of the interest of
Lessor as the purchase price of such purchasing Participant's
Participation Interest;
(d) any insurance proceeds (or payments with respect to risks
self-insured or policy deductibles) to which Lessor is
entitled under liability policies other than such proceeds or
payments payable to Agent;
(e) any insurance proceeds under policies maintained by Lessor,
excluding insurance proceeds under policies required to be
maintained by Lessee under the Lease;
(f) Transaction Expenses or other amounts or expenses paid or
payable to or for the benefit of Lessor; and
(g) any payments in respect of interest to the extent attributable
to payments referred to in clauses (a) through (f) above.
Appendix 1-12
<PAGE>
"Expiration Date" means with respect to any Lease Supplement the last day
of the Base Term applicable thereto or, if a Renewal Term has been granted with
respect thereto, the last day of the then current Renewal Term applicable
thereto.
"Facility" means the "Module II" facility of DSC located at Manassas,
Virginia.
"Fair Market Value" means, with respect to any Item of Equipment as of any
date, the price at which a purchaser would purchase such Item of Equipment in an
arm's-length transaction between a willing buyer and a willing seller none of
which is affiliated with Lessee, Guarantor, Agent or any Participant, and
neither of them being under any compulsion to buy or sell. In making any
determination of Fair Market Value, the Appraiser may assume such Item of
Equipment has been maintained in accordance with the requirements of the Lease
and that such Item of Equipment is in the condition in which it is required to
be under the Lease as of the date for which such determination is made (unless
such Fair Market Value is being determined for purposes of Section 12.2 of the
Participation Agreement or a Lease Term Appraisal, in which case the foregoing
assumptions shall not be made and the Appraiser shall determine the Fair Market
Value based on the actual condition of such Item of Equipment).
"Federal Funds Effective Rate" means for any day the greater of (i)
average of the rates per annum as determined by ABN AMRO at which overnight
Federal funds are offered to ABN AMRO for such day by major banks in the
interbank market, and (ii) if ABN AMRO is borrowing overnight funds from a
Federal Reserve Bank on that day, the rate per annum at which such overnight
borrowings are made on that day. Each determination of the Federal Funds
Effective Rate by ABN AMRO shall be conclusive and binding on Lessee except in
the case of manifest errors.
"Fee Letter" means the commitment and fee letter, dated December 5, 2000,
between Lessee and ABN AMRO.
"Fees" is defined in Section 4.1 of the Participation Agreement.
"Final Expiration Date" means the last Expiration Date to occur with
respect to all of the Lease Supplements.
"Fiscal Quarter" means any reported quarter of a Fiscal Year.
"Fiscal Year" means any period of twelve consecutive calendar months
ending on March 31; references to a Fiscal Year with a number corresponding to
any calendar year (e.g., the "2000 Fiscal Year") refer to the Fiscal Year ending
on March 31st of such calendar year.
"Fixed Charges" means, for any period for which a determination is made
pursuant to the applicable terms of the Participation Agreement, the sum,
without duplication, determined in respect of Lessee and its Subsidiaries on a
consolidated basis, of (a) Interest Expense of Lessee and its Subsidiaries for
such period plus (b) current maturities of long term Funded Indebtedness of
Lessee and its Subsidiaries plus current maturities of long term Funded
Indebtedness of any other Person to the extent Lessee or any of its Subsidiaries
is liable in respect of any Guaranty Obligations of such Funded Indebtedness of
such other Person, plus (c) all rental expenses of Lessee and its Subsidiaries
for such period, plus (d) Capital Expenditures of Lessee and its
Appendix 1-13
<PAGE>
Subsidiaries during such period, plus (e) Restricted Payments, as described in
clause (i) of the definition of such term, made by Lessee and its Subsidiaries
(other than to Lessee) during such period.
"Fixed Charge Coverage Ratio" means for any period for which a
determination is made pursuant to the applicable terms of the Participation
Agreement, with respect to Lessee and its Subsidiaries on a consolidated basis,
the ratio of (a) Lessee EBITDAR for such period to (b) Fixed Charges for such
period.
"Fixed Rent" shall mean, for each Lease Supplement and each Payment Date
therefor, that portion of the installment of Basic Rent payable on such Payment
Date representing amortization of the relevant Lease Supplement Balance, all as
set forth on Schedule A to the Lease, as amended from time to time pursuant to
Section 4.1(a) of the Lease.
"FlashVision/Toshiba Tranche Operative Documents" means the Participation
Agreement (FlashVision/Toshiba Tranche) dated as of December 27, 2000 among
FlashVision, L.L.C., as lessee, ABN AMRO, as agent, lessor and a participant,
the Conduit Group Agents and the other "Participants" from time to time party
thereto, the Guarantee of even date therewith executed by Toshiba, as guarantor,
and the other "Operative Documents" as defined in Appendix 1 to such
Participation Agreement.
"F.R.S. Board" means the Board of Governors of the Federal Reserve System
or any successor thereto.
"Funded Indebtedness" of any Person means, without duplication:
(a) All obligations of such Person evidenced by notes, bonds,
debentures or other similar instruments and all other
obligations of such Person for borrowed money (including
obligations to repurchase receivables and other assets sold
with recourse);
(b) All non-contingent obligations of such Person for the deferred
purchase price of property or services (including obligations
under letters of credit and other credit facilities which
secure or finance such purchase price), other than trade
payables incurred by such Person in the ordinary course of its
business on ordinary terms and overdue;
(c) All obligations of such Person under conditional sale or other
title retention agreements with respect to property acquired
by such Person (to the extent of the value of such property if
the rights and remedies of the seller or lender under such
agreement in the event of default are limited solely to
repossession or sale of such property), including the interest
and yield components of rent under Synthetic Leases and,
without duplication, the principal balance of Synthetic
Leases;
(d) All obligations of such Person as lessee under or with respect
to Capitalized Lease Obligations; and
(e) any Guaranty Obligations of such Person in respect of
obligations described in clauses (a) through (d) above of
another Person.
Appendix 1-14
<PAGE>
"Fund," "Funded" or "Funding" means each funding by a Participant of its
Participation Interest in any Advance as described in Article III of the
Participation Agreement.
"GAAP" means United States generally accepted accounting principles
(including principles of consolidation), in effect from time to time.
"GAAS" means United States generally accepted auditing standards as in
effect from time to time.
"Governmental Action" means all permits, authorizations, registrations,
consents, approvals, waivers, exceptions, variances, orders, judgments, written
interpretations, decrees, licenses, exemptions, publications, filings, notices
to and declarations of or with, or required by, any Governmental Authority, or
required by any Applicable Laws, and shall include, without limitation, all
environmental and operating permits and licenses that are required by Applicable
Laws or any Governmental Authority for the use and operation of the Equipment as
contemplated by the Lease.
"Governmental Authority" means any nation or government, any state or
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Grossed-Up Basis" is defined in Section 12.4(d) of the Participation
Agreement.
"Guarantee" means that certain Guarantee dated as of December 27, 2000
executed and delivered by the Guarantor in favor of the Agent, Lessor and the
Participants.
"Guarantee Event of Default" is defined in Section 11.1 of the Guarantee.
"Guarantor" means SanDisk Corporation, a Delaware corporation.
"Guarantor EBITDAR" means, with respect to Guarantor and its Subsidiaries
on a consolidated basis for any period for which a determination is made
pursuant to the Operative Documents, the sum of the following:
(a) The net income of Guarantor and its Subsidiaries for such
period;
plus
(b) The sum (to the extent deducted in calculating net income in
clause (a) above) of (i) all Interest Expenses (net of all interest income
of Guarantor and its Subsidiaries during such period), (ii) all
depreciation and amortization expenses, (iii) all rental expenses, and
(iv) all tax expense based on or measured by income.
"Guaranty Obligation" means, with respect to any Person, any direct or
indirect liability of that Person with respect to any indebtedness, lease,
dividend, letter of credit or other obligation, including a Synthetic Lease (the
"primary obligations") of another Person (the "primary obligor"), including any
obligation of that Person, whether or not contingent, (a) to purchase,
repurchase or otherwise acquire such primary obligation or any property
constituting
Appendix 1-15
<PAGE>
direct or indirect security therefor, or (b) to advance or provide funds (i) for
the payment or discharge of any such primary obligation, or (ii) to maintain
working capital or equity capital of the primary obligor or otherwise to
maintain the net worth or solvency or any balance sheet item, level of income or
financial condition of the primary obligor, or (c) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation, or (d) otherwise to assure or hold harmless the holder
of any such primary obligation against loss in respect thereof. The amount of
any Guaranty Obligation shall be deemed equal to the stated or determinable
amount of the primary obligation in respect of which such Guaranty Obligation is
made or, if not stated or if indeterminable, the maximum reasonably anticipated
liability in respect thereof.
"Hazardous Activity" means any activity, process, procedure or undertaking
that directly or indirectly (i) produces, generates or creates any Hazardous
Substance; (ii) causes or results in (or threatens to cause or result in) the
Release of any Hazardous Substance into the environment (including air, water
vapor, surface water, groundwater, drinking water, land (including surface or
subsurface), plant, aquatic and animal life); (iii) involves the containment or
storage of any Hazardous Substance; or (iv) would be regulated as hazardous
waste treatment, storage or disposal within the meaning of any Environmental
Law.
"Hazardous Substance" or "Hazardous Material" means any substance, waste
or material which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous by listing
characteristic or definition under any Environmental Law, including petroleum,
crude oil or any fraction thereof, petroleum derivatives, by-products and other
hydrocarbons and is or becomes regulated by any Governmental Authority,
including any agency, department, commission, board or instrumentality of the
United States or any political subdivision of the foregoing and also including
asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls ("PCBs")
and radon gas.
"Highest Lawful Rate" is defined in Section 4.3(b) of the Participation
Agreement.
"Holdback Amount" is defined in Section 3.1(c) of the Participation
Agreement.
"Impositions" means, except to the extent described in the following
sentence, any and all liabilities, losses, expenses, costs, charges and Liens of
any kind whatsoever for fees, taxes, levies, imposts, duties, charges,
assessments or withholdings of any nature whatsoever ("Taxes") (including (i)
personal property or ad valorem taxes; (ii) sales taxes, use taxes and other
similar taxes (including rent taxes and intangibles taxes); (iii) any excise
taxes; (iv) transfer taxes, conveyance taxes, mortgage taxes, intangible taxes,
stamp taxes and documentary recording taxes and fees; (v) taxes that are or are
in the nature of franchise, income, value added, gross receipts, privilege and
doing business taxes, license and registration fees; and (vi) assessments on any
Equipment or any Part thereof); and in each case all interest, additions to tax
and penalties thereon, which at any time may be levied, assessed or imposed by
any Governmental Authority upon or with respect to (a) any Indemnitee, any
Equipment or any Part thereof or interest therein, or Lessee or any sublessee or
user of any Equipment; (b) the leasing, financing, refinancing, demolition,
construction, installation, substitution, subleasing, acquisition, acceptance,
inspection, assignment, control, condition, servicing, maintenance, repair,
ownership, possession,
Appendix 1-16
<PAGE>
sale, purchase, rental, lease, activity conducted on, delivery, insuring, use,
operation, improvement, transfer, return or other disposition of any Equipment
or any Part thereof or interest therein; (c) the Participation Interests or
other indebtedness with respect to any Equipment or any Part thereof or interest
therein or transfer thereof; (d) the rentals, receipts or earnings arising from
any Equipment or any Part thereof or interest therein; (e) the Operative
Documents, the performance thereof or any payment made or accrued pursuant
thereto; (f) the income or other proceeds received with respect to any Equipment
or any Part thereof or interest therein upon the sale or disposition thereof;
(g) any contract relating to the manufacture, acquisition or delivery of any
Equipment or any Part thereof or interest therein; or (h) otherwise in
connection with the Overall Transaction or the enforcement thereof.
Notwithstanding anything in the first paragraph of this definition (except
as provided in the final paragraph of this definition) the term "Imposition"
shall not mean or include:
(i) Taxes and impositions (other than Taxes that are, or are in the
nature of, sales, use, value added, rental, transfer, property or ad
valorem taxes) that are imposed by any Governmental Authority and that are
based upon or measured by net income (including any taxes based on capital
gains and minimum taxes); provided that this clause (i) shall not limit or
expand Lessee's obligations under Sections 12.4(e) or 13.3 of the
Participation Agreement;
(ii) any Tax or imposition to the extent, but only to such extent,
that it relates to any act, event or omission that first occurs, or
relates to a period, after the termination of the Lease, return of the
Equipment as required under the Lease and payment in full of all amounts
due under the Lease (but not any Tax or imposition that relates to any
period prior to such termination, return and payment in full with respect
to the Equipment to which such Tax or Imposition relates);
(iii) any Tax or imposition for so long as, but only for so long as,
it is being contested in accordance with the provisions of Section 12.4(b)
of the Participation Agreement, provided that the foregoing shall not
limit Lessee's obligation under Section 12.4(b) of the Participation
Agreement to advance to such Indemnitee amounts with respect to Taxes or
impositions that are being contested in accordance with Section 12.4(b) of
the Participation Agreement or any expenses incurred by such Indemnitee in
connection with such contest;
(iv) any Taxes imposed against or payable by an Indemnitee resulting
from, or that would not have been imposed but for, the actual (as opposed
to imputed) gross negligence or actual (as opposed to imputed) willful
misconduct of such Indemnitee;
(v) any Taxes imposed upon an Indemnitee with respect to any
voluntary transfer, sale, finance or other voluntary disposition of any
interest in the Equipment or any part thereof or interest therein, or any
interest or obligation under the Operative Documents or any Participation
Interest, or from any sale, assignment, transfer or other disposition of
any interest in an Indemnitee (other than any transfer in connection with
(1) the exercise by the Lessee of an termination option or Purchase Option
with respect to
Appendix 1-17
<PAGE>
the Equipment, (2) the exercise by Lessee of the Sale Option, (3) an Event
of Default or (4) a Casualty or Condemnation affecting the Equipment);
(vi) Taxes imposed on or payable by an Indemnitee to the extent such
Taxes would not have been imposed but for a breach by the Indemnitee or an
Affiliate thereof of any representations, warranties or covenants in the
Operative Documents (unless such breach is caused by Lessee's breach of
any of its representations, warranties or covenants in the Operative
Documents);
(vii) Taxes to the extent resulting from an Indemnitee's failure to
comply with the provisions of Section 12.4(b) of the Participation
Agreement, which failure materially adversely affects the ability of
Lessee to contest such Taxes (unless such failure is caused by Lessee's
breach of any of its representations, warranties, or covenants in the
Operative Documents; or
(viii) any Taxes imposed on an Indemnitee as a result of the failure
of such Indemnitee to file any return or report timely and in the form
prescribed by law or to pay any Tax (unless such failure is caused by
Lessee's breach of any of its representations, warranties or covenants in
the Operative Documents).
Notwithstanding the foregoing, the exclusions from the definition of Impositions
set forth in clauses (i), (ii) and (viii) above shall not apply (but the other
exclusions shall apply) to any Taxes or increase in Taxes (net of any
corresponding decrease in Taxes realized by an Indemnitee) imposed by a taxing
authority of a State in which the Equipment is located on an Indemnitee, to the
extent such increase or imposition would not have occurred if on each Lease
Supplement Closing Date the Participants had advanced funds to Lessee in the
form of a loan secured by the Equipment in an amount equal to the amounts funded
on such Lease Supplement Closing Date, with debt service for such loan equal to
the Basic Rent payable and a principal balance on the maturity of such loan in
an amount equal to the then outstanding amount of the Lease Supplement Balance
at the end of the Lease Term with respect to such Equipment.
"Indebtedness" of any Person shall mean, without duplication, (i) all
indebtedness of such Person for borrowed money or for the deferred purchase
price (or a portion thereof) of property or services, including obligations
under Synthetic Leases (other than trade payables incurred in the ordinary
course of business of such Person), (ii) all indebtedness of such Person
evidenced by a note, bond, debenture or similar instrument, (iii) the principal
component of all Capitalized Lease Obligations of such Person and all
obligations of such Person under any other lease to the extent that the then
present value of the minimum rental commitment thereunder should, in accordance
with GAAP, be capitalized on a balance sheet of such Person, (iv) the face
amount of all letters of credit issued for the account of such Person and,
without duplication, all unreimbursed amounts drawn thereunder, (v) all
indebtedness of any other Person secured by any Lien on any property owned by
such Person, whether or not such indebtedness has been assumed, (vi) payment
obligations under any interest rate protection agreements (including without
limitation, any interest rate swaps, caps, floors, collars and similar
agreements) and currency swaps and similar agreements, and (vii) any
indebtedness of any other Person of the character referred to in clauses (i)
through (vi) with respect to which such Person has become
Appendix 1-18
<PAGE>
liable by way of any guarantee, similar contingent obligation or other
arrangement which has the effect of assuring payment.
"Indemnitee" means each Participant, Agent (in its individual capacity and
as agent), Lessor (in its individual capacity and as lessor), any additional,
separate or co-agent appointed in accordance with the terms of the Participation
Agreement, and the respective Affiliates, successors, permitted assigns,
permitted transferees, contractors, employees, officers, directors,
shareholders, partners, Sub-Participants, representatives and agents of each of
the foregoing Persons; provided, however, that in no event shall Guarantor,
Lessee or any of their respective Affiliates be an Indemnitee.
"Initial Appraisal" means the appraisal of all of the Equipment delivered
pursuant to Appendix 2 to the Participation Agreement on the Document Closing
Date, setting forth the Fair Market Value of each Item of Equipment which as of
the initial Lease Supplement Closing Date or any subsequent Lease Supplement
Closing Date is to become subject to the Lease, in form and substance, and using
appraisal methods, reasonably satisfactory to Agent and the Required
Participants. Such appraisal shall be prepared at the sole cost and expense of
Lessee.
"Installation Expenses" means all fees, costs and expenses incurred or
payable by Lessee with respect to the Installation of any Equipment.
"Installation Period" means the period commencing on the Document Closing
Date and ending on the earliest of (i) the eighteenth (18th) monthly anniversary
of the Document Closing Date, (ii) the termination of the Lease as to all Lease
Supplements pursuant to Section 10.1(a) of the Lease, (iii) the date Lessee
gives notice or is deemed to have given notice of its election of the Purchase
Option or Sale Option pursuant to Section 11.1(b) or 11.1(c) of the Lease, to
the extent such notice relates to all of the Equipment then subject to the
Lease, or (iv) upon the occurrence of an Event of Default as described in
Section 8.1(e) of the Lease or upon notice by Agent, at the direction of the
Required Participants, following the occurrence of any other Event of Default,
that the Commitments are terminated.
"Installed" means, with respect to any Equipment, that such Equipment has
been installed at the Facility and is fully operational and fit for its intended
purposes, and "Installation" shall refer to the process of causing any such
Equipment to be so Installed.
"Insurance Requirements" means all terms and conditions of any insurance
policy required by the Lease to be maintained by Lessee and all requirements of
the issuer of such policy with respect to such policy.
"Interest Expense" means, with respect to any Person (and its
Subsidiaries) on a consolidated basis for any period, the sum determined on a
consolidated basis in accordance with GAAP, of (a) all interest accruing on the
Indebtedness of such Person during such period (including, without limitation,
interest attributable to Capitalized Lease Obligations) plus (b) all fees in
respect of outstanding letters of credit payable by such Person and accruing
during such period.
"Interest Period" means (a) with respect to any interest or yield in
respect of any portion of the Participation Interests determined by reference to
the Prime Rate, all or any portion of the
Appendix 1-19
<PAGE>
period from and including a Payment Date (or, in the case of the initial
Interest Period in respect thereof, from and including the date on which such
Participation Interests were Funded at such rate or were converted into a
Funding of such Type, in either case in accordance with the Operative Documents)
in respect of such portion of Variable Rent representing such interest or yield,
to but excluding the next succeeding Payment Date in respect of such portion of
Variable Rent during which such interest or yield is determined by reference to
such rate, or (b) with respect to any interest or yield on any portion of any
Participation Interests determined by reference to the LIBO Rate, the LIBO Rate
Period therefor then in effect as of the determination date.
"Item of Equipment" means any item of equipment used or to be used in the
manufacture of NAND flash memory integrated circuits at the Facility and which
is or will be purchased by Lessor pursuant to the Operative Documents and
described on Schedule I to the relevant Lease Supplement but only if included in
the Initial Appraisal, together with any accessories, additions, improvements,
modifications, Parts and replacements from time to time incorporated or
installed in any such item of equipment which are or become property of Lessor
pursuant to the terms of the Lease.
"Investment Company Act" means the Investment Company Act of 1940, as
amended, together with the rules and regulations promulgated thereunder.
"Lease" means the Master Lease Intended as Security FlashVision/SanDisk
Tranche, dated as of December 27, 2000, between Lessor and Lessee, together with
all Lease Supplements.
"Lease Balance" means, as of any determination date, the sum of the
outstanding amount of the Lease Supplement Balances.
"Lease Extension" is defined in Section 14.18 of the Participation
Agreement.
"Lease Supplement" means a Lease Supplement substantially in the form of
Exhibit A to the Lease, together with all attachments and schedules thereto, as
any such Lease Supplement may be amended from time to time pursuant to the
Operative Documents.
"Lease Supplement Balance" means, with respect to any Lease Supplement as
any date of determination, the sum of (i) the amount set forth in Section 7 of
such Lease Supplement, less (ii) the amount of all Fixed Rent, Renewal Payments
and Casualty Amounts paid by Lessee pursuant to such Lease Supplement and the
Lease.
"Lease Supplement Closing Date" means any Business Day on which an Advance
is made under the Participation Agreement in accordance with Section 3.3
thereof, Lessor purchases any Equipment, a Lease Supplement in respect of such
Equipment is executed and delivered in accordance with the Operative Documents
and the conditions precedent set forth in Article VI of the Participation
Agreement have been satisfied or waived in respect of such Lease Supplement.
"Lease Supplement Closing Date Notice" is defined in Section 3.3 of the
Participation Agreement.
Appendix 1-20
<PAGE>
"Lease Supplement Equipment" means, with respect to any Lease Supplement,
all Equipment listed on Attachment A to such Lease Supplement.
"Lease Term" with respect to any Lease Supplement is defined in Section
3.1 of the Lease.
"Lease Term Appraisal" means any appraisal required to be delivered
pursuant to Section 11.4 of the Lease.
"Lessee" means FlashVision, L.L.C., a Virginia limited liability company.
"Lessee Articles" means the Articles of Organization of Lessee as filed
with the State Corporation Commission of the Commonwealth of Virginia on May 16,
2000.
"Lessee EBITDAR" means, with respect to Lessee and its Subsidiaries on a
consolidated basis for any period for which a determination is made pursuant to
the Operative Documents, the sum of the following:
(a) The net income of Lessee and its Subsidiaries for such period;
plus
(b) The sum (to the extent deducted in calculating net income in
clause (a) above) of (i) all Interest Expenses (net of all interest income
of Lessee and its Subsidiaries during such period), (ii) all depreciation
and amortization expenses, (iii) all rental expenses, and (iv) all tax
expense based on or measured by income.
"Lessor" means ABN AMRO in its capacity as lessor under the Operative
Documents.
"Lessor Lien" means Liens on or against any Equipment (a) which result
from any act of, or any Claim against, Lessor or any Participant in any case
unrelated to the Overall Transaction or (b) which result from any Tax owed by
any such Person, except any Tax for which Lessee is obligated to indemnify.
"Level I" means at any time that the Guarantor's Leverage Ratio at the end
of the applicable Fiscal Quarter for the trailing four Fiscal Quarters then
ended is less than 1.50 to 1.0.
"Level II" means at any time that the Guarantor's Leverage Ratio at the
end of the applicable Fiscal Quarter for the trailing four Fiscal Quarters then
ended is greater than or equal to 1.50 to 1.0 but is less than 2.00 to 1.0.
"Level III" means at any time that the Guarantor's Leverage Ratio at the
end of the applicable Fiscal Quarter for the trailing four Fiscal Quarters then
ended is greater than or equal to 2.00 to 1.0 but is less than 2.50 to 1.0.
"Level IV" means at any time that the Guarantor's Leverage Ratio at the
end of the applicable Fiscal Quarter for the trailing four Fiscal Quarters then
ended is greater than or equal to 2.50 to 1.0 but is less than 2.75 to 1.0.
Appendix 1-21
<PAGE>
"Level V" means at any time that the Guarantor's Leverage Ratio at the end
of the applicable Fiscal Quarter for the trailing four Fiscal Quarters then
ended is equal to or greater than 2.75 to 1.0.
"Leverage Ratio" means as of any date of determination, for Guarantor and
its Subsidiaries on a consolidated basis, the ratio of (i) Consolidated Total
Debt as of such date to (ii) Guarantor EBITDAR for the four-Fiscal Quarter
period then ended, in each case as set forth in the most recent Compliance
Certificate delivered by the Guarantor pursuant to the Guarantee.
"LIBO Rate" means for any LIBO Rate Period at any time, the applicable
London interbank offered rate for deposits in U.S. dollars appearing on Telerate
Page 3750 as of 11:00 a.m. (London time) two (2) Business Days prior to the
first day of the LIBO Rate Period chosen by Lessee or otherwise in effect
pursuant to Section 10.1 of the Participation Agreement, and having a maturity
approximately equal to such LIBO Rate Period; or if no London interbank offered
rate of such maturity then appears on Telerate Page 3750, then the rate equal to
the London interbank offered rate for deposits in U.S. dollars maturing
immediately before or immediately after such maturity, whichever is higher, as
determined by Agent from Telerate Page 3750; or if Telerate Page 3750 is not
available, the applicable LIBO Rate for the relevant LIBO Rate Period shall be
the rate determined by Agent to be the arithmetic average of the rates at which
ABN AMRO offers to place deposits in U.S. dollars with first-class banks in the
London interbank market at approximately 11:00 a.m. (London time) two (2)
Business Days prior to the first day of such LIBO Rate Period, in the
approximate amount of the aggregate outstanding Lease Balance to which such LIBO
Rate is to apply having a maturity approximately equal to such LIBO Rate Period.
"LIBO Rate Funding" means, with respect to any Participation Interest, the
portion of such Participation Interest which is accruing interest or yield by
reference to the LIBO Rate (Reserve Adjusted).
"LIBO Rate Period" means, with respect to any LIBO Rate Funding:
(a) (i) initially the period commencing on the applicable Lease
Supplement Closing Date, so long as three (3) Business Days prior written
notice of such Lease Supplement Closing Date has been given in accordance
with Section 3.3 of the Participation Agreement and ending one, two, three
or six months thereafter, as selected by Lessee in the relevant Lease
Supplement Closing Date Notice; or
(ii) with respect to any conversion of any portion of any
Participation Interests into a LIBO Rate Funding from a Prime Rate
Funding, the period commencing on the day on which such Prime Rate Funding
is so converted pursuant to an irrevocable notice of conversion given to
Agent by Lessee pursuant to Section 3.2(g) of the Participation Agreement
and ending one, two, three or six months thereafter, as selected by Lessee
in such notice of conversion; and
(b) thereafter, each period commencing on the last day of the next
preceding LIBO Rate Period applicable to such Participation Interests and
ending one, two, three or six months thereafter, as selected by Lessee by
irrevocable notice to Lessor and the Agent
Appendix 1-22
<PAGE>
not less than three Business Days prior to the last day of the then
current LIBO Rate Period with respect thereto;
provided that, the foregoing provisions relating to LIBO Rate Periods are
subject to the following:
(i) if any LIBO Rate Period would otherwise end on a day that is not
a Business Day, such LIBO Rate Period shall be extended to the next
succeeding Business Day unless the result of such extension would be to
carry such LIBO Rate Period into another calendar month, in which event
such LIBO Rate Period shall end on the immediately preceding Business Day;
(ii) any LIBO Rate Period in respect of Participation Interests
relating to any Lease Supplement that would otherwise extend beyond the
Expiration Date in respect of such Lease Supplement shall end on such
Expiration Date;
(iii) any LIBO Rate Period that begins on a day for which there is
no numerically corresponding day in the calendar month at the end of such
LIBO Rate Period shall end on the last Business Day of such last calendar
month of such LIBO Rate Period;
(iv) Lessee shall select LIBO Rate Periods so as not to require a
payment or prepayment of any Participation Interests during a LIBO Rate
Period for such Participation Interests; and
(v) if Lessee shall fail to specify the length of any LIBO Rate
Period for any Participation Interests, such Participation Interests shall
have a LIBO Rate Period of one month.
Interest and yield computations in respect of LIBO Rate Fundings shall be
made including the first day, but excluding the last day, occurring in each LIBO
Rate Period.
"LIBO Rate (Reserve Adjusted)" means, relative to any Advance for any LIBO
Rate Period, a rate per annum (rounded upwards, if necessary, to the nearest
1/16 of 1%) determined pursuant to the following formula:
LIBO RATE LIBO RATE
(Reserve Adjusted) = --------------------------------
1.00 - LIBOR Reserve Percentage
The LIBO Rate (Reserve Adjusted) for any LIBO Rate Period will be
determined by Agent, on the basis of the LIBOR Reserve Percentage in effect on,
and the applicable LIBO Rate obtained by Agent, two Business Days before the
first day of such LIBO Rate Period.
"LIBOR Reserve Percentage" means, relative to any LIBO Rate Period, the
reserve percentage (expressed as a decimal) equal to the maximum aggregate
reserve requirements (including all basic, emergency, supplemental, marginal and
other reserves and taking into account any transitional adjustments or other
scheduled changes in reserve requirements) specified under regulations issued
from time to time by the F.R.S. Board and then applicable to
Appendix 1-23
<PAGE>
assets or liabilities consisting of and including "Eurocurrency Liabilities", as
currently defined in Regulation D of the F.R.S. Board, having a term
approximately equal or comparable to such LIBO Rate Period.
"Lien" means any mortgage, deed of trust, pledge, security interest,
encumbrance, lien, easement, declaration or servitude of any kind, including,
without limitation, any irrevocable license, conditional sale or other title
retention agreement or any financing lease having substantially the same
economic effect as the foregoing.
"Management Committee" is defined in the Master Agreement.
"Master Agreement" means that certain Master Agreement dated as of May 9,
2000 among Toshiba, SENA and Guarantor, together with all Schedules, Exhibits
and Appendices thereto, as the same may be amended, restated, supplemented or
otherwise modified from time to time to the extent permitted by the Operative
Documents.
"Master Agreement Documents" means the Master Agreement, the Operating
Agreement, the Lessee Articles, the Environmental Indemnity Agreement, the DSC
Services Agreement and when effective, the Sublease, the Purchase and Supply
Agreements, the DSC Foundry Agreement and any Affiliate Sublease, as any such
document may be amended, restated, supplemented or otherwise modified from time
to time to the extent permitted by the Operative Documents.
"Master Agreement Event of Default" means a breach or default by any
applicable Person under any of the Specified Master Agreement Document
Provisions.
"Material Adverse Effect" means any change or changes, effect or effects
or condition or conditions that individually or in the aggregate are or would
reasonably be expected to be materially adverse to (i) the business operations
or financial condition of Lessee or of Guarantor and its Subsidiaries on a
consolidated basis, (ii) the Overall Transaction, (iii) the ability of Lessee or
Guarantor to perform their respective obligations under the Operative Documents,
(iv) the validity or enforceability of any of the Operative Documents, or (v)
the useful life or Fair Market Value of the Equipment then subject to the Lease,
on any date of determination.
"Materials of Environmental Concern" shall mean and include chemicals,
pollutants, contaminants, wastes, toxic substances, petroleum and petroleum
products.
"Members" means the members of Lessee which, as of the Document Closing
Date, are the Guarantor and SENA.
"Membership Interest" means a Member's aggregate rights in Lessee,
including such Member's right to a share of the profits and losses of Lessee,
the right to receive distributions from Lessee and the right to vote and
participate in the management of Lessee.
"Modifications" is defined in Section 5.4 of the Lease.
"Moody's" means Moody's Investors Service, Inc. or any successor agency
thereto.
Appendix 1-24
<PAGE>
"Multiemployer Plan" means any Employee Benefit Plan which is a
"multiemployer plan" as defined in Section 3(37) of ERISA.
"Non-Consenting Participant" means any Participant that has not consented
to (a) any amendment or waiver requested pursuant to the Operative Documents, or
(b) any Lease Extension pursuant to Section 14.18 of the Participation
Agreement.
"Non-Defaulting Participant" is defined in Section 3.4(b) of the
Participation Agreement.
"Obligations" means all obligations (monetary or otherwise) of Lessee
arising under or in connection with any of the Operative Documents.
"Operating Agreement" means the Operating Agreement dated as of May 9,
2000 between the Guarantor and SENA with respect to the formation and governance
of Lessee, as the same may be amended, restated, supplemented or otherwise
modified from time to time to the extent permitted by the Operative Documents.
"Operating Committee" is defined in the Operating Agreement.
"Operative Documents" means the following:
(a) the Participation Agreement;
(b) the Lease;
(c) the Lease Supplements;
(d) the Security Documents;
(e) the Bills of Sale;
(f) the Guarantee; and
(g) the Fee Letter.
"Option Exercise Amount" means, as of any date of determination with
respect to any Lease Supplement, the sum of the relevant Lease Supplement
Balance plus all accrued but unpaid Rent thereon plus all other sums then due
and payable with respect thereto under the Operative Documents by Lessee or any
of its Affiliates.
"Original Part" is defined in Section 5.4 of the Lease.
"Overall Transaction" means all the transactions and activities referred
to in or contemplated by the Operative Documents.
"Overdue Rate" means the Prime Rate plus 2.0% per annum.
"Part" means all appliances, parts, instruments, appurtenances,
accessories, furnishings and other equipment of whatever nature that may from
time to time be incorporated or installed in or attached to any Item of
Equipment.
"Participant Balance" means (a) with respect to any Lease Supplement for
each Participant, the sum of its Tranche A Participant Balance related thereto,
its Tranche B Participant Balance related thereto and its Tranche C Participant
Balance related thereto, and (b)
Appendix 1-25
<PAGE>
with respect to the Lease Balance for each Participant, the sum of its Tranche A
Participant Balance, its Tranche B Participant Balance and its Tranche C
Participant Balance.
"Participants" means, collectively, the Tranche A Participants, the
Tranche B Participants, and the Tranche C Participants.
"Participation Agreement" means the Participation Agreement
(FlashVision/SanDisk Tranche), dated as of December 27, 2000, among Lessee,
Agent, Lessor and the Participants.
"Participation Interest" means, as to each Tranche A Participant and
Tranche B Participant, a participation interest or, as to each Tranche C
Participant, an equity interest, in the Advances Funded by it and the Lease and
the right to receive its applicable portion of the following payments actually
received by Lessor from or on behalf of Lessee with respect to any Lease
Supplement or any other Operative Document, pursuant to the provisions of
Section 5.3 of the Participation Agreement: (i) Basic Rent, (ii) Supplemental
Rent, (iii) Option Exercise Amount, (iv) Proceeds, (v) Residual Value Guarantee
Amount, (vi) the Lease Balance or any Lease Supplement Balance, and (vii) other
payments in respect of indemnities or pursuant to the Guarantee or the exercise
of remedies under the Operative Documents, but excluding, however, (x) any
Excepted Payments and (y) as to a particular Participant, any payments on
account of any Advances and interest or yield thereon for which Lessor has not
received payment from such Participant of such Participant's Commitment
Percentage thereof.
"Payment Date" means, with respect to the Base Term and each Renewal Term
in respect of any Lease Supplement, (a) as to any Variable Rent accruing based
on a LIBO Rate, the last day of each LIBO Rate Period therefor then in effect
(or, if any such LIBO Rate Period is longer than three months, the three month
calendar anniversary of the first day of such LIBO Rate Period and the last day
of such LIBO Rate Period), (b) as to any other Variable Rent, the fifteenth
(15th) day of each month or if such fifteenth (15th) day is not a Business Day,
the next succeeding Business Day, and (c) as to any Fixed Rent payable with
respect thereto, each Business Day specified on Schedule A to the Lease as a
"Payment Date" in respect of Fixed Rent thereon.
"Payment Default" means an Event of Default contemplated by Section 8.1(a)
of the Lease.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Pension Plan" means any Employee Benefit Plan, other than a Multiemployer
Plan, which is subject to Section 412 of the Code or Section 302 of ERISA.
"Permitted Contest" means actions taken by a Person to contest in good
faith, by appropriate proceedings initiated timely and diligently prosecuted,
the legality, validity or applicability to any Equipment or other Collateral or
any interest in any thereof of any Person of (a) any law, regulation, rule,
judgment, order or other legal provision or judicial or administrative
requirements; (b) any term or condition of, or any revocation or amendment of,
or other proceeding relating to, any authorization or other consent, approval or
other action by any Governmental Authority or any Governmental Action; (c) any
manufacturer's guidelines or
Appendix 1-26
<PAGE>
standards or any Insurance Requirements, or (d) any Lien or Tax; provided that
the initiation and prosecution of such contest would not: (i) result in, or
increase the risk of the imposition of, any criminal liability on any
Indemnitee; (ii) materially and adversely affect the security interests created
by the Operative Documents or the right, title or interest of Agent, Lessor or
any Participant in or to any of the Equipment or any Part thereof or other
Collateral or the right of Agent, Lessor or any Participant to receive all or
any portion of the Rent, Lease Balance, or any other amount payable under the
Operative Documents; (iii) permit, or pose a material risk of, the sale or
forfeiture of, or foreclosure on, any Equipment or any Part thereof or other
Collateral; or (iv) materially and adversely affect the fair market value,
utility or remaining useful life of any Equipment or other Collateral or any
interest therein or the continued economic operation thereof; and provided
further that in any event adequate reserves in accordance with GAAP are
maintained against any adverse determination of such contest.
"Permitted Liens" means (a) any rights in favor of Agent, Lessor and/or
the Participants pursuant to the Lease and the other Operative Documents; (b)
materialmen's, mechanics', workers', artisan's, repairmen's, employees' or other
like Liens securing payment of the price of goods or services (but excluding any
Installation Expenses) rendered in the ordinary course of business for amounts
the payment of which is not overdue or is being contested pursuant to a
Permitted Contest; (c) any Lessor Lien; (d) Liens for current Taxes which are
not delinquent or the validity of which is being contested pursuant to a
Permitted Contest; (e) Liens of any of the types referred to in clause (b) above
that have been bonded for not less than the full amount in dispute (or as to
which other security arrangements reasonably satisfactory to Lessor have been
made), which bonding (or arrangements) shall comply with applicable Requirements
of Law, and has effectively stayed any execution or enforcement of such Liens;
(f) Liens arising out of judgments or awards with respect to which appeals or
other proceedings for review are being prosecuted in good faith and for the
payment of which adequate reserves have been provided as required by GAAP or
other appropriate provisions have been made, so long as such proceedings have
the effect of staying the execution of such judgments or awards and satisfy the
conditions for the continuation of proceedings to contest set forth in Section
5.7 of the Lease; (g) Liens attaching to property or assets (other than the
Equipment or other Collateral) and created with the consent of the Required
Participants; (h) Liens (other than Liens created or imposed under ERISA or
Liens on or in any way affecting the Equipment) incurred or deposits made by
Lessee in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security, or to
secure the performance of tenders, statutory obligations, bids, leases,
government contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money); (i)
the respective rights and interests of the parties under the Sublease or any
Affiliate Sublease; provided (i) such rights and interests under such Sublease
or Affiliate Sublease remain at all times subject and subordinate to the rights
of Agent and the Participants and the Liens granted to Lessor and/or Agent under
the Operative Documents and (ii) such Sublease or Affiliate Sublease shall not
create, grant or provide for any Lien against any Equipment; and (j) Liens in
favor of manufacturers of equipment that is to become Equipment but only so long
as such Liens terminate on or prior to such equipment being purchased by Lessor
pursuant to the Participation Agreement, other than with respect to the
Equipment subject to the final Lease Supplement for which a Holdback Amount has
been established; provided that such Liens terminate upon release of the
Holdback Amount.
Appendix 1-27
<PAGE>
"Permitted Modification" is defined in Section 5.4 of the Lease.
"Person" means any individual, corporation, partnership, joint venture,
limited liability company, association, joint-stock company, trust,
unincorporated organization, Governmental Authority or any other entity.
"Prime Rate" means, on any date on which the Prime Rate is used with
respect to any Variable Rent, a fluctuating rate of interest per annum equal to
the greater of (i) the rate of interest most recently announced by ABN AMRO as
its prime rate and (ii) the Federal Funds Effective Rate most recently
determined by Agent, plus 50 basis points per annum. If the Federal Funds
Effective Rate or the rate of interest announced by ABN AMRO as its prime rate,
as applicable, changes from time to time after the Document Closing Date, the
Prime Rate shall be automatically increased or decreased, if appropriate and as
the case may be, without notice to Lessee or Lessor, as of the effective time of
each change.
"Prime Rate Funding" means, with respect to any Participation Interest,
the portion of such Participation Interest which is accruing interest or yield
by reference to the Prime Rate.
"Proceeds" means all amounts received by Agent or Lessor in connection
with any Casualty or any sale of the Equipment pursuant to Lessor's exercise of
remedies under Section 8.2 of the Lease or Lessee's exercise of the Sale Option
under Section 11.1(c) of the Lease, and all interest earned thereon, less,
solely in the case of a sale pursuant to Section 8.2 of the Lease, the
reasonable expense of claiming and collecting such amounts, including all
reasonable costs and expenses in connection therewith for which Agent, Lessor or
any Participant is entitled to be reimbursed pursuant to the Lease.
"Purchase and Supply Agreements" means each Purchase and Supply Agreement
to be entered into between Lessee and each of SENA and SanDisk, respectively,
and referred to in Section 8.1(w) of the Participation Agreement.
"Purchase Option" is defined in Section 11.1(b) of the Lease.
"Purchase Price" for any Equipment means an amount equal to the lesser of
(a) the purchase price paid by Lessee to the manufacturer or vendor of such
Equipment pursuant to the applicable Acquisition Agreement, including any other
amounts payable to the manufacturer or vendor of such Equipment and referred to
in the invoice for such Equipment, to the extent included in the applicable
Appraisal referred to in clause (b) below, and (b) the Fair Market Value of such
Equipment as of the Lease Supplement Closing Date therefor indicated in (i) the
Initial Appraisal, or (ii) in the case of any Equipment acquired by Lessor as of
any Lease Supplement Closing Date occurring after the first anniversary of the
Document Closing Date, the most recent Annual Appraisal delivered as of such
Lease Supplement Closing Date, provided that in the event a Supplemental
Appraisal of any Equipment is required to be delivered pursuant to Section
6.2(b) of the Participation Agreement, the Fair Market Value of such Equipment
shall be as indicated in such Supplemental Appraisal.
"Regulated Activity" shall mean the use, Release, generation, treatment,
storage, recycling, transportation or disposal of Hazardous Substance to the
extent such activities are regulated by any Governmental Authority.
Appendix 1-28
<PAGE>
"Regulation T, U, or X" means Regulation T, U or X, respectively, of the
F.R.S. Board as from time to time in effect and any successor to all or a
portion thereof.
"Related Agreements" shall mean all agreements or contracts now or
hereafter necessary for the use, operation or maintenance of any Equipment or
otherwise relating to any Equipment, including each Acquisition Agreement, but
excluding the Master Agreement Documents.
"Related Goods" shall mean (a) all operation manuals, service manuals,
maintenance manuals and other materials regarding the operation, service or
maintenance of the Equipment provided by the vendors or manufacturers of the
Equipment or others and (b) all books and records relating to the Equipment in
any and all tangible forms, except to the extent the same constitutes
confidential business information or processes of Lessee.
"Related Intangibles" shall mean all general intangibles now or hereafter
necessary for the use, operation or maintenance of any Equipment or otherwise
relating to any Equipment, including all records, files, insurance policies,
guarantees and warranties relating to such Equipment, and all computer software
and intellectual property, guaranties and warranties and documents relating to
such Equipment to the extent provided by the manufacturer or vendor of the
Equipment, except to the extent the same constitutes proprietary business
information or processes of Lessee, in each case to the extent assignable.
"Related Permits" shall mean all licenses, authorizations, certificates,
consents, approvals and other permits, now or hereafter necessary for the use,
operation or maintenance of the Equipment or otherwise relating to the
Equipment.
"Related Property" means, with respect to any Lease Supplement, all
Related Agreements, Related Goods, Related Intangibles and Related Permits
applicable thereto.
"Release" means the release, deposit, disposal or leak of any Hazardous
Substance into or upon or under any land or water or air, or otherwise into the
environment, including, without limitation, by means of burial, disposal,
discharge, emission, injection, spillage, leakage, seepage, leaching, dumping,
pumping, pouring, escaping, emptying, placement and the like.
"Removable Part" is defined in Section 5.4 of the Lease.
"Renewal Payment" means, with respect to any Lease Supplement, the payment
required to be made pursuant to Section 4.1(b) of the Lease on the last day of
the relevant Base Term or Renewal Term, as applicable, which payment shall be
applied to reduce the applicable outstanding Lease Supplement Balance as of such
date (after applying any Fixed Rent or Casualty Amount payable or to be paid on
such date with respect to such Lease Supplement) to an amount not in excess of
the aggregate Fair Market Value of the relevant Lease Supplement Equipment as of
such date, but in each case only to the extent, if any, that such Lease
Supplement Balance exceeds the Fair Market Value of such Equipment.
"Renewal Option" is defined in Section 11.1(a) of the Lease.
"Renewal Term" is defined in Section 11.1(a) of the Lease.
Appendix 1-29
<PAGE>
"Rent" means, collectively, the Basic Rent and the Supplemental Rent, in
each case payable under the Lease.
"Replaced Equipment" is defined in Section 6.4 of the Lease.
"Replacement Notice" is defined in Section 6.4 of the Lease.
"Replacement Participant" is defined in Section 10.1(b) of the
Participation Agreement.
"Replacement Equipment" means (x) a new Item of Equipment of identical
manufacture and model as the Item of Equipment comprising the Replaced Equipment
or (y) an Item of Equipment which shall have a utility, Fair Market Value, and
an economic useful life at least equal to that of the Replaced Equipment
immediately prior to such substitution assuming the Replaced Equipment was in
the condition and repair required to be maintained by the terms of the Lease,
and Lessee shall have provided to Agent and Lessor at Lessee's expense, an
appraisal satisfactory to Agent and Lessor with respect to the determination of
such utility, Fair Market Value and economic useful life or (z) such Replacement
Equipment as shall otherwise be acceptable to each of the Participants in its
respective sole and absolute discretion.
"Required Alteration" is defined in Section 5.4 of the Lease.
"Required Participants" means, as of any date of the determination,
Participants the Commitment Percentages of which aggregate at least 51% of the
aggregate Commitment Percentages of all Participants.
"Requirements of Law" means all Federal, state, county, municipal and
other governmental statutes, laws, rules, orders, regulations, ordinances,
judgments, decrees and injunctions, affecting the Equipment or other Collateral,
or the demolition, manufacture, installation, use or alteration thereof, whether
now or hereafter enacted and in force, including any that require repairs,
modifications or alterations in or to the Equipment or other Collateral or in
any way limit the use and enjoyment thereof and any that may relate to
environmental requirements (including all Environmental Laws), and all permits,
licenses, authorizations and regulations relating thereto.
"Residual Value Guarantee Amount" means, with respect to any Lease
Supplement as of any date of determination, an amount equal to the percentage,
as specified in Schedule B to the Lease in respect of the Base Term or Renewal
Term then in effect, with respect to such Lease Supplement of the applicable
Lease Supplement Balance as of the first day of the Base Term or Renewal Term
then in effect with respect to such Lease Supplement, less Fixed Rent and
Casualty Amounts applied to the Tranche A Participant Balance paid by Lessee in
respect thereof or any other amount paid in reduction of the applicable Lease
Supplement Balance and applied to the Tranche A Participant Balance during the
Base Term or Renewal Term then in effect, but in no event less than the
aggregate outstanding Participation Interests of the Tranche A Participants in
respect of such Lease Supplement on the applicable Expiration Date.
"Responsible Officer" means (i) in the case of Lessee, the President, the
Chief Executive Officer or Executive Vice President, and (ii) in the case of
Guarantor, the Chief Financial Officer.
Appendix 1-30
<PAGE>
"Responsible Officer's Certificate" means a certificate signed by any
Responsible Officer, which certificate shall certify as true and correct the
subject matter being certified to in such certificate.
"Restricted Payment" means (i) any dividend or other payment or
distribution, direct or indirect, on account of any Membership Interests of
Lessee now or hereafter outstanding (including without limitation any payment in
connection with any dissolution, merger, consolidation or disposition involving
Lessee), or to the Members, in their capacity as such, in respect of any
Membership Interests of Lessee, now or hereafter outstanding, (ii) any
redemption, retirement, sinking fund or similar payment, purchase or other
acquisition for value, direct or indirect, of any Membership Interests of
Lessee, now or hereafter outstanding and (iii) any payment made to retire, or to
obtain the surrender of, any outstanding warrants, options or other rights to
acquire Membership Interests of Lessee now or hereafter outstanding.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., or any successor agency thereto.
"Sale Option" is defined in Section 11.1(c) of the Lease.
"Scheduled Lease Supplement Closing Date" is defined in Section 3.4 of the
Participation Agreement.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, together
with the rules and regulations promulgated thereunder.
"Security Agreement " means that certain Security Agreement to be entered
into as of the initial Lease Supplement Closing Date between Lessor and Agent,
for the benefit of the Participants.
"Security Documents" means the Security Agreement, the Collateral
Assignment and all UCC financing statements executed, delivered and filed or
required to be executed, delivered and filed pursuant to the Operative
Documents.
"SENA" means Semiconductor North America, Inc. a Delaware corporation and
a wholly-owned Subsidiary of Toshiba.
"Specified Master Agreement Document Provisions" means the provisions of
the Master Agreement Documents specified on Schedule 8.1(s) to the Participation
Agreement, as amended from time to time in accordance with Section 8.1(w) of the
Participation Agreement.
"Sublease" means that certain Master Lease Agreement (FlashVision/SanDisk
Tranche) to be entered into on or prior to the initial Lease Supplement Closing
Date between Lessee, as lessor, and DSC, as lessee, relating to the Equipment.
"Subsidiary" shall mean, with respect to any Person, any corporation or
other entity of which securities or other ownership interests having ordinary
voting power to elect a majority of
Appendix 1-31
<PAGE>
the board of directors or other Persons performing similar functions are at the
time directly or indirectly owned by such Person.
"Sub-Participant" is defined in Section 11.2 of the Participation
Agreement.
"Supplemental Appraisal" means any update (which update shall be a desktop
appraisal) of the Initial Appraisal or then most recent Annual Appraisal, as
applicable, from an Appraiser received pursuant to Section 6.2(b) of the
Participation Agreement on a Lease Supplement Closing Date, setting forth as of
such date the Fair Market Value of each Item of Equipment then required to be
appraised pursuant to said Section 6.2(b) of the Participation Agreement, any of
which appraisal updates shall be in form and substance reasonably satisfactory
to Agent and the Required Participants and shall use appraisal methods
consistent with the methods used in the Initial Appraisal. Each such appraisal
shall be prepared at the sole cost and expense of Lessee.
"Supplemental Rent" means any and all amounts, liabilities and obligations
other than Basic Rent which Lessee assumes or agrees or is otherwise obligated
to pay under the Lease or any other Operative Document (whether or not
designated as Supplemental Rent) to Agent, Lessor, any Participant or any other
Person, including without limitation, Fees, Break Costs, any Residual Value
Guarantee Amount, any Lease Balance, any Lease Supplement Balance, any Renewal
Payment and any Additional Costs.
"Synthetic Lease" means a lease intended to qualify as an operating lease
under Financial Accounting Standards Board Statement No. 13 where the lessee
retains beneficial ownership of the leased property for federal income tax
purposes.
"Taxes" is defined in the definition of Impositions.
"Toshiba" means Toshiba Corporation, a Japanese corporation.
"Toshiba Lease" means the Master Lease Intended as Security between ABN
AMRO, in its capacity as lessor, and Lessee relating to the FlashVision/Toshiba
Tranche Operative Documents.
"Tranche" with respect to the Participation Interests means the Tranche A
Participation Interests, the Tranche B Participation Interests or the Tranche C
Equity Interests.
"Tranche A Participant" means a Person named as a Tranche A Participant on
Schedule I to the Participation Agreement.
"Tranche A Participant Balance" means (a) with respect to any Lease
Supplement Balance for each Tranche A Participant as of any date of
determination an amount equal to such Participant's Tranche A Participation
Interest as of such date in the outstanding amount of the Advance made in
respect of such Lease Supplement, and (b) with respect to the Lease Balance
means for each Tranche A Participant as of any date of determination an amount
equal to the sum of such Participant's Tranche A Participation Interest as of
such date in all outstanding Advances.
Appendix 1-32
<PAGE>
"Tranche A Participation Interest" means, as to each Tranche A Participant
as of any date of determination and with respect to any Lease Supplement, such
Tranche A Participant's Tranche A Participation Interest Commitment Percentage
multiplied by the outstanding amount of the Advance with respect to such Lease
Supplement as to which such Participant has Funded its Tranche A Participation
Interest Commitment Percentage under Article III of the Participation Agreement.
"Tranche A Participation Interest Commitment" is defined in Section 3.2(a)
of the Participation Agreement.
"Tranche A Participation Interest Commitment Percentage" means with
respect to each Tranche A Participant and each Lease Supplement, the percentage
of the Aggregate Commitment Amount set forth after such Participant's Tranche A
Participation Interest Commitment in Schedule I to the Participation Agreement.
"Tranche B Participant" means a Person named as a Tranche B Participant on
Schedule I to the Participation Agreement.
"Tranche B Participant Balance" means (a) with respect to any Lease
Supplement Balance for each Tranche B Participant as of any date of
determination an amount equal to the sum of such Participant's Tranche B
Participation Interest as of such date in the outstanding amount of the Advance
made in respect of such Lease Supplement, and (b) with respect to the Lease
Balance means for each Tranche B Participant as of any date of determination an
amount equal to the sum of such Participant's Tranche B Participation Interest
as of such date in all outstanding Advances.
"Tranche B Participation Interest" means, as to each Tranche B Participant
as of any date of determination and with respect to any Lease Supplement, such
Tranche B Participant's Tranche A Participation Interest Commitment Percentage
in respect of such Lease Supplement multiplied by the outstanding amount of the
Advance with respect to such Lease Supplement as to which such Participant has
funded its Tranche B Participation Interest Commitment Percentage under Article
III of the Participation Agreement.
"Tranche B Participation Interest Commitment" is defined in Section 3.2(a)
of the Participation Agreement.
"Tranche B Participation Interest Commitment Percentage" means with
respect to each Tranche B Participant and each Lease Supplement, the percentage
of the Aggregate Commitment Amount set forth after such Participant's Tranche B
Participation Interest Commitment in Schedule I to the Participation Agreement.
"Tranche C Equity Interest" means, as to each Tranche C Participant as of
any date of determination and with respect to any Lease Supplement, such Tranche
C Participant's Tranche C Equity Interest Commitment Percentage multiplied by
the outstanding amount of the Advance with respect to such Lease Supplement as
to which such Participant has funded its Tranche C Equity Interest Commitment
Percentage under Article III of the Participation Agreement.
Appendix 1-33
<PAGE>
"Tranche C Equity Interest Commitment" is defined in Section 3.2(a) of the
Participation Agreement.
"Tranche C Equity Interest Commitment Percentage" means with respect to
each Tranche C Participant and each Lease Supplement, the percentage of the
Aggregate Commitment Amount set forth after such Participant's Tranche C Equity
Interest Commitment in Schedule I to the Participation Agreement.
"Tranche C Participant" means the Person named as a Tranche C Participant
on Schedule I to the Participation Agreement.
"Tranche C Participant Balance" means (a) with respect to any Lease
Supplement Balance for each Tranche C Participant as of any date of
determination an amount equal to the sum of such Participant's Tranche C Equity
Interest as of such date in the outstanding amount of the Advance made in
respect of such Lease Supplement, and (b) with respect to the Lease Balance
means for each Tranche C Participant as of any date of determination an amount
equal to the sum of such Participant's Tranche C Equity Interest as of such date
in all outstanding Advances.
"Transaction Expenses" means all reasonable costs and expenses incurred in
connection with the preparation, execution and delivery of the Operative
Documents and the transactions contemplated by the Operative Documents including
without limitation:
(a) the reasonable fees and expenses of McGuireWoods LLP, special
counsel to Agent and Lessor and document counsel to the Participants (it
being understood that Lessee will not be obligated to pay legal fees and
expenses for any additional counsel for any Participant except as
otherwise provided in Section 14.15(c) of the Participation Agreement);
(b) the initial and ongoing fees and reasonable expenses of Agent
and Lessor;
(c) all applicable appraisal fees and reasonable expenses;
(d) search fees, recording fees and filing fees incurred in
connection with Lien searches and the filing of UCC financing statements;
(e) any other reasonable out-of-pocket expenses of any party to the
Operative Documents incurred in connection with the consummation of the
Overall Transaction on the Document Closing Date; and
(f) the reasonable fees and expenses of Mayer, Brown & Platt,
special counsel to Lessee and Guarantor.
"Transferee" is defined in Section 11.3(a) of the Participation Agreement.
"Type" means, with respect to any Funding as of any date of determination,
its nature as a LIBO Rate Funding or a Prime Rate Funding as of such date.
Appendix 1-34
<PAGE>
"Uniform Commercial Code" and "UCC" means the Uniform Commercial Code as
in effect in any applicable jurisdiction.
"Variable Rent" means with respect to each Interest Period occurring
during the Base Term and any Renewal Term with respect to any Lease Supplement,
an amount equal to the interest and yield accrued on the Participation Interests
made in respect of such Lease Supplement outstanding during such period at the
applicable per annum rate determined in accordance with Section 3.2(b) of the
Participation Agreement.
Appendix 1-35
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.49
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>MASTER LEASE INTENDED AS SECURITY
<TEXT>
<PAGE>
Exhibit 10.49
EXECUTION COPY
================================================================================
MASTER LEASE INTENDED AS SECURITY
(FLASHVISION/SANDISK TRANCHE)
Dated as of December 27, 2000
between
FLASHVISION, L.L.C.,
as Lessee,
and
ABN AMRO BANK N.V.,
not in its individual capacity, but solely as Lessor
================================================================================
THIS LEASE HAS BEEN EXECUTED IN 10 MANUALLY EXECUTED SERIALLY NUMBERED
COUNTERPARTS OF WHICH THIS IS COUNTERPART NUMBER ___. TO THE EXTENT, IF ANY,
THAT THIS LEASE CONSTITUTES CHATTEL PAPER (AS SUCH TERM IS DEFINED IN THE
UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION) NO SECURITY
INTEREST IN THIS LEASE MAY BE CREATED THROUGH THE TRANSFER OR POSSESSION OF ANY
COUNTERPART HEREOF OTHER THAN COUNTERPART "NUMBER 1", WHICH SHALL BE IDENTIFIED
AS THE COUNTERPART CONTAINING THE RECEIPT THEREFOR EXECUTED BY AGENT ON OR
FOLLOWING THE SIGNATURE PAGE THEREOF.
<PAGE>
EXECUTION COPY
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS; LESSEE LIABILITY........................................1
ARTICLE II DELIVERY AND ACCEPTANCE.............................................1
Section 2.1 Acceptance and Lease of Equipment............................1
Section 2.2 Acceptance Procedure.........................................1
ARTICLE III LEASE TERM.........................................................2
Section 3.1 Lease Term...................................................2
ARTICLE IV RENT; OTHER ECONOMIC PROVISIONS.....................................2
Section 4.1 Basic Rent and Renewal Payments; Residual Value Guarantee
Amount. .....................................................2
Section 4.2 Supplemental Rent............................................3
Section 4.3 Place and Manner of Payment..................................3
Section 4.4 Net Obligations..............................................3
Section 4.5 Overdue Amounts..............................................4
ARTICLE V POSSESSION, ASSIGNMENT, USE AND MAINTENANCE OF EQUIPMENT.............4
Section 5.1 Possession and Use of the Equipment; Compliance with Law.....4
Section 5.2 Subleases and Assignments....................................5
Section 5.3 Maintenance..................................................5
Section 5.4 Alterations, Modifications, etc..............................6
Section 5.5 Liens........................................................7
Section 5.6 Inspection...................................................7
Section 5.7 Permitted Contests...........................................8
Section 5.8 Annual Appraisals............................................8
ARTICLE VI RISK OF LOSS; INSURANCE; REPLACEMENTS OF EQUIPMENT..................8
Section 6.1 Casualty.....................................................8
Section 6.2 Insurance Coverages.........................................10
Section 6.3 Delivery of Insurance Certificates..........................11
Section 6.4 Replacement and Substitution................................11
ARTICLE VII WARRANTIES........................................................12
ARTICLE VIII EVENTS OF DEFAULT; REMEDIES......................................13
Section 8.1 Events of Default...........................................13
Section 8.2 Remedies....................................................15
Section 8.3 Sale of Collateral..........................................16
Section 8.4 Application of Proceeds.....................................16
Section 8.5 Right to Perform Obligations................................16
Section 8.6 Power of Attorney...........................................17
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EXECUTION COPY
Section 8.7 Lessee Purchase Following Event of Default..................17
ARTICLE IX RETURN OF EQUIPMENT................................................17
Section 9.1 Return of Equipment.........................................17
ARTICLE X EARLY TERMINATION...................................................19
Section 10.1 Early Termination .........................................19
Section 10.2 Required Termination ......................................19
ARTICLE XI LEASE TERMINATION..................................................20
Section 11.1 Lessee's Options ..........................................20
Section 11.2 Election of Options .......................................21
Section 11.3 Sale Option Procedures ....................................21
Section 11.4 Appraisals ................................................22
ARTICLE XII OWNERSHIP, GRANT OF SECURITY INTEREST AND FURTHER ASSURANCES......22
Section 12.1 Grant of Security Interest ................................22
Section 12.2 Retention of Proceeds .....................................23
ARTICLE XIII MISCELLANEOUS....................................................23
Section 13.1 Effect of Waiver ..........................................23
Section 13.2 Applicable Law ............................................23
Section 13.3 Effect and Modification of Lease ..........................23
Section 13.4 Notices ...................................................23
Section 13.5 Counterparts ..............................................23
Section 13.6 Severability ..............................................24
Section 13.7 Successors and Assigns; Merger ............................24
Section 13.8 Section Headings; Table of Contents .......................24
Section 13.9 Final Agreement ...........................................24
Section 13.10 Timeliness of Performance ................................24
Section 13.11 FINANCE LEASE ............................................24
Schedule A Fixed Rent
Schedule B Residual Value Guarantee Amount
ii
<PAGE>
EXECUTION COPY
MASTER LEASE INTENDED AS SECURITY
This MASTER LEASE INTENDED AS SECURITY (FLASHVISION/SANDISK TRANCHE) (as
amended and supplemented from time to time, including each Lease Supplement
entered into pursuant hereto, this "Lease") is entered into as of December 27,
2000 between FLASHVISION, L.L.C., a Virginia limited liability company
("Lessee"), with its principal office at 9600 Godwin Drive, Manassas, Virginia
20110, and ABN AMRO BANK N.V., a bank organized under the laws of the
Netherlands, not in its individual capacity, but solely in its capacity as
Lessor ("Lessor").
W I T N E S S E T H:
NOW THEREFORE, in consideration of the mutual terms and conditions herein
contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS; LESSEE LIABILITY
For all purposes hereof, the capitalized terms used herein and not
otherwise defined shall have the meanings assigned thereto in Appendix 1 to that
certain Participation Agreement (FlashVision/SanDisk Tranche) dated as of
December 27, 2000, among Lessee, Lessor, the Participants party thereto from
time to time and ABN AMRO BANK N.V., not in its individual capacity but solely
in its capacity as Agent for the Participants ("Agent") (the "Participation
Agreement"). All obligations imposed on Lessee in this Lease shall be the full
recourse liability of Lessee.
ARTICLE II
DELIVERY AND ACCEPTANCE
Section 2.1 Acceptance and Lease of Equipment. On each Lease Supplement
Closing Date, subject to the satisfaction or waiver of the conditions set forth
in Article VI of the Participation Agreement and its receipt of Funds from the
Participants, (a) Lessor hereby agrees to accept delivery on such Lease
Supplement Closing Date of the interest in the Equipment to be delivered
pursuant to the terms of the Participation Agreement and simultaneously to lease
such Equipment to Lessee under this Lease, and (b) Lessee hereby agrees,
expressly for the direct benefit of Lessor, Agent and the Participants, to lease
from Lessor hereunder, for the applicable Lease Term, the Equipment to be
delivered on such Lease Supplement Closing Date.
Section 2.2 Acceptance Procedure. Lessor hereby authorizes one or more
employees of Lessee, to be designated by Lessee, as the authorized
representative or representatives of Lessor to accept delivery under this Lease
of the Equipment identified on Schedule I to each
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
EXECUTION COPY
Lease Supplement executed by Lessee on the related Lease Supplement Closing
Date. Lessee hereby agrees that such acceptance of delivery by such authorized
representative or representatives and the execution and delivery by Lessee of a
Lease Supplement on such Lease Supplement Closing Date shall, without further
act, constitute the irrevocable acceptance by Lessee under this Lease of the
Equipment which is the subject thereof for all purposes of this Lease and the
other Operative Documents on the terms set forth therein and herein.
ARTICLE III
LEASE TERM
Section 3.1 Lease Term. Unless earlier terminated, the term of this Lease
with respect to any Lease Supplement (with respect to any Lease Supplement, the
"Lease Term") shall consist of the Base Term in respect of such Lease Supplement
and the Renewal Terms in respect of such Lease Supplement, if any, provided that
in no event shall the Expiration Date of any Renewal Term in respect of any
Lease Supplement extend beyond the fifth (5th) anniversary of the Document
Closing Date without the prior written consent of Lessor and each Participant
pursuant to Section 14.18 of the Participation Agreement.
ARTICLE IV
RENT; OTHER ECONOMIC PROVISIONS
Section 4.1 Basic Rent and Renewal Payments; Residual Value Guarantee
Amount.
(a) With respect to each Lease Supplement, Lessee shall pay to Lessor
Basic Rent for the relevant Lease Supplement Equipment (i) on each Payment Date,
(ii) on the date required under Section 11.1(c) in connection with Lessee's
exercise of the Sale Option with respect to such Lease Supplement Equipment, and
(iii) on any date on which this Lease terminates or upon demand following an
Event of Default, as provided in Section 8.2. Fixed Rent in respect of each
Lease Supplement shall be payable on the dates and in the amounts set forth on
Schedule A hereto, which schedule shall be amended (i) on each Lease Supplement
Closing Date to reflect the Fixed Rent payable with respect to such Lease
Supplement which may be necessary based on the Lease Supplement Equipment
delivered as of such date and (ii) following the delivery of each Annual
Appraisal pursuant to Section 5.8, if necessary to reflect the Fair Market Value
of the Equipment as of the next succeeding Expiration Date for each Lease
Supplement and the last day of each Renewal Term for each Lease Supplement (but
not beyond the fifth anniversary of the Document Closing Date) permitted
hereunder.
(b) If a Renewal Term has been elected by Lessee with respect to any Lease
Supplement pursuant to Section 11.1(a), then Lessee shall as a condition
precedent to the effectiveness of such election, on the last Business Day of the
Base Term or the Renewal Term in effect prior to giving effect to such election,
as applicable, in respect of such Lease Supplement, pay to Lessor as
Supplemental Rent an amount (a "Renewal Payment") sufficient,
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when applied to the outstanding Lease Supplement Balance in respect of such
Lease Supplement pursuant to Section 5.3 of the Participation Agreement, to
reduce such Lease Supplement Balance by the amount, if any, that such Lease
Supplement Balance exceeds the Fair Market Value of such Lease Supplement
Equipment as of such date, as determined pursuant to the most recent Annual
Appraisal therefor delivered pursuant to Section 5.8.
(c) Schedule B hereto sets forth the percentage referred to in the
definition of "Residual Value Guarantee Amount," for the Base Term and each
Renewal Term for all Lease Supplements.
Section 4.2 Supplemental Rent. Lessee shall pay to Lessor (or the other
applicable Person entitled thereto pursuant to the Operative Documents) any and
all Supplemental Rent promptly as the same shall become due and payable and in
the event of any failure on the part of Lessee to pay any Supplemental Rent when
due and payable (subject to the applicable notice or grace periods, to the
extent applicable, set forth in Section 8.1(a)), Lessor, and Agent and the
Participants, acting through Lessor, shall have all rights, powers and remedies
provided for herein or by law or in equity or otherwise in the case of
nonpayment of Basic Rent. Lessee hereby reaffirms that its obligation to pay
Supplemental Rent shall include the payment of any and all Additional Costs. The
expiration or other termination of Lessee's obligation to pay Basic Rent
hereunder shall not limit or modify the obligation of Lessee with respect to
Supplemental Rent.
Section 4.3 Place and Manner of Payment. Payments of Rent shall be paid in
immediately available funds at the office of Agent specified on Schedule II to
the Participation Agreement, or at such other office of Agent as Agent may from
time to time specify to Lessee in a notice pursuant to Section 14.3 of the
Participation Agreement. All payments of Basic Rent, Lease Balance, Lease
Supplement Balance, Option Exercise Amount and Casualty Amount shall be received
by Agent not later than 12:00 noon, Chicago, Illinois time, on the date due;
funds received after such time shall for all purposes under the Operative
Documents be deemed to have been received by Agent on the next succeeding
Business Day. All payments of Supplemental Rent paid to Agent shall be
distributed by Agent in accordance with Section 5.3 of the Participation
Agreement.
Section 4.4 Net Obligations. This Lease is a net lease and Lessee's
obligation to pay all indemnities and other amounts payable under the Operative
Documents in accordance with their terms shall be absolute and unconditional
under any and all circumstances and, without limiting the generality of the
foregoing, Lessee shall not be entitled to any abatement or reduction of
payments or any setoff against Rent, indemnity or other amounts, whether arising
by reason of any past, present or future claims of any nature by Lessee against
Agent, Lessor or any Participant, or otherwise. Except as otherwise expressly
provided herein, this Lease shall not terminate, nor shall the obligations of
Lessee be otherwise affected: (a) by reason of any defect in, damage to, or loss
of possession or use, obsolescence or destruction, of any or all of the
Equipment, however caused; or (b) by the taking or requisitioning of any or all
of the Equipment by condemnation or otherwise; or (c) by the invalidity or
unenforceability or lack of due authorization by Agent, Lessor, any Participant
or Lessee or other infirmity of this Lease or any other Operative Document; or
(d) by the attachment of any Lien of any third party to any Equipment; or (e) by
any prohibition or restriction of or interference with Lessee's use or quiet
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enjoyment of any or all of the Equipment by any Person; or (f) by the insolvency
of or the commencement by or against Agent, Lessor or any Participant of any
bankruptcy, reorganization or similar proceeding; or (g) by the failure of
Lessee to achieve the characterization of the transaction intended as set forth
in Section 5.1 of the Participation Agreement; or (h) by any other cause,
whether similar or dissimilar to the foregoing, any present or future law to the
contrary notwithstanding. It is the intention of the parties that all Rent,
indemnities and other amounts payable by Lessee under the Operative Documents
shall be payable in all events in the manner and at the times herein provided
unless Lessee's obligations in respect thereof have been terminated or modified
pursuant to the express provisions of this Lease or any other Operative
Document. To the extent permitted by Applicable Laws, Lessee hereby waives any
and all rights which it may now have or which may at any time be conferred upon
it, by statute or otherwise, to terminate, cancel, quit or surrender this Lease,
in whole or in part, except strictly in accordance with the express terms hereof
and any other Operative Document. Each rental, indemnity or other payment made
by Lessee hereunder shall be final, and Lessee shall not seek to recover (except
as expressly provided in this Lease) all or any part of such payment from Agent,
Lessor or any Participant for any reason whatsoever. In the event that Lessee
believes Lessor or Lessee has made a miscalculation or Lessee has made an
overpayment of any amount due and payable hereunder, Lessee may submit to Lessor
a statement showing the calculation of the correct amount that was due and
payable and request a repayment of any amount Lessee believes to be an excess
payment and Lessor shall reasonably consider such request; provided, that any
such statement shall not be deemed conclusive. Without affecting Lessee's
obligation to pay Rent or other amounts payable under the Operative Documents,
Lessee may seek damages for a breach by Agent, Lessor or any Participant of its
obligations or the inaccuracy of its representations and warranties under this
Lease or the Participation Agreement or any other Operative Documents.
Section 4.5 Overdue Amounts. If any Rent shall not be paid when due,
Lessee shall pay to Lessor, for its own account or , if payable to the Agent,
any Participant or any other Person for the account of such Person, as
applicable, in each case as Supplemental Rent, interest at the Overdue Rate on
such overdue amount from and including the due date thereof (without regard to
any applicable grace period) to but excluding the Business Day of payment
thereof.
ARTICLE V
POSSESSION, ASSIGNMENT, USE AND MAINTENANCE OF EQUIPMENT
Section 5.1 Possession and Use of the Equipment; Compliance with Law.
Lessee agrees that the use of the Equipment will be limited to the fabrication,
assembly and testing of semiconductor wafers and will be used, operated,
maintained and stored in compliance with any and all Applicable Laws, including
all Environmental Laws, where the failure to so comply would have a Material
Adverse Effect, and all Insurance Requirements, except where the failure to
comply would not reasonably be expected to cause the relevant insurance to
lapse, to be cancelled or to be reduced (as to amount or scope of coverage).
Lessee shall procure and maintain in effect all licenses, registrations,
certificates, permits, approvals and consents required by Applicable Laws or any
Governmental Authority, where the failure to so comply would have a Material
Adverse Effect, or any Insurance Requirements, except where the failure to
comply would not reasonably be expected to cause the relevant insurance to
lapse, to be cancelled or to
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be reduced (as to amount or scope of coverage) in connection with the ownership,
delivery, installation, use and operation of any or all of the Equipment. The
Equipment will at all times be and remain in the possession and control of
Lessee at the Facility, subject, however, to the terms of Section 5.2 and to the
removal of Items of Equipment from the Facility for customary periods for repair
and maintenance in accordance with customary maintenance and overhaul procedures
or for repair or restoration following a casualty. Subject to Lessor's rights
under Section 8.2, 8.3, 8.5, and 8.6 if an Event of Default has occurred and is
continuing, Lessor covenants that it will not interfere in Lessee's use or
possession of the Equipment during the Lease Term.
Section 5.2 Subleases and Assignments. LESSEE SHALL NOT, WITHOUT THE PRIOR
WRITTEN CONSENT OF AGENT AND LESSOR, SUBLEASE OR OTHERWISE RELINQUISH POSSESSION
OF ANY EQUIPMENT OR OTHER COLLATERAL, OR ASSIGN, TRANSFER OR ENCUMBER ITS
RIGHTS, INTERESTS OR OBLIGATIONS HEREUNDER AND ANY ATTEMPTED SUBLEASE,
RELINQUISHMENT, ASSIGNMENT, TRANSFER OR ENCUMBERING BY LESSEE SHALL BE NULL AND
VOID, except, subject to the terms and conditions set forth in this Section 5.2,
in connection with the Sublease or an Affiliate Sublease as specifically
contemplated by this Section 5.2. Lessee shall be entitled to enter into the
Sublease of the Equipment with DSC or a sublease with any other Affiliate of
Toshiba that is controlled by Toshiba in form substantially similar to the
Sublease (an "Affiliate Sublease"); provided, however, that such Sublease or
Affiliate Sublease and with respect to which such Affiliate has executed and
delivered an acknowledgement to Agent and Lessor substantially similar to the
acknowledgement executed by DSC in respect of the Collateral Assignment in
respect of any Lease Supplement Equipment shall not extend beyond the then
remaining Lease Term applicable thereto, and provided, further, that (i) Lessee
shall at all times remain primarily liable hereunder with respect to all Lease
Supplement Equipment so subleased to the same extent as if such Sublease or
Affiliate Sublease had not occurred; (ii) DSC or any sublessee under an
Affiliate Sublease shall not engage in activities with the Equipment in
contravention of Section 5.1 without prior written consent of Agent and Lessor;
and (iii) each sublease permitted hereby shall contain a provision requiring the
sublessee to give prompt notice of any Casualty to the Equipment to Lessee
within the time period specified herein. Lessee agrees that (i) the Sublease and
any Affiliate Sublease are subject and subordinate to this Lease and the rights
and interests of Agent, Lessor and the Participants and (ii) that the Sublease
and any Affiliate Sublease shall (a) expressly state that it is subject and
subordinate to all of the provisions of this Lease and the other Operative
Documents and the rights and interests of Agent, Lessor and the Participants
under this Lease and the other Operative Documents in respect of the Equipment
covered by the Sublease and any Affiliate Sublease upon the occurrence of an
Event of Default, but in all cases such sublessee shall have the right and
Lessor shall be subject to the same obligation under the applicable sublease as
set forth in the final sentence of Section 5.1, (b) expressly require possession
of the Equipment subject thereto to be returned as directed by Agent or Lessor
upon notice to DSC or any Affiliate sublessee that an Event of Default shall
have occurred and be continuing if Lessor is exercising a remedy to regain
possession of the Equipment pursuant to Article VIII, and (c) expressly prohibit
any further sublease or assignment of the Equipment subject thereto or the
granting of any Lien on the Equipment (other than the Lien of the Sublease and
any Affiliate Sublease) or other Collateral subject thereto.
Section 5.3 Maintenance. At all times during the term of this Lease,
Lessee shall, at its own cost and expense, keep, repair, maintain and preserve
all of the Equipment in at least as
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good order and operating and mechanical condition, repair and appearance as when
originally Accepted and Installed, ordinary wear and tear excepted, in
accordance with prudent industry practice and in a manner consistent with that
relating to similar Equipment owned or operated by Lessee and the terms of all
contracts (including, without limitation, service contracts and insurance
contracts) at the time applicable thereto, and subject to Lessee's rights under
Section 5.7 regarding Permitted Contests, in compliance with all Applicable Laws
in all material respects and Insurance Requirements, except where the failure to
comply would not reasonably be expected to cause the relevant insurance to
lapse, to be cancelled or to be reduced (as to amount or scope of coverage),
and, subject to Lessee's rights under Section 5.7 regarding Permitted Contests,
in the event that Applicable Laws or Insurance Requirements require any
alteration, replacement or addition of or to any Part of any Equipment, Lessee
will conform therewith at its own expense where the failure to comply would have
a Material Adverse Effect or cause the relevant insurance to lapse, to be
cancelled or to be reduced (as to amount or scope of coverage). In no event
shall Lessee discriminate as to the use or maintenance of any Equipment
(including the periodicity of maintenance or recordkeeping in respect of such
Equipment) as compared to equipment of a similar nature which Lessee owns or
leases. To the extent not prohibited by Applicable Laws, Lessee shall prepare
and deliver to Agent within a reasonable time prior to the required date of
filing (or, to the extent permissible, file on behalf of Agent, Lessor and the
Participants) any and all reports (other than income tax returns) to be filed by
Agent, Lessor or any Participant with any Governmental Authority or other Person
by reason of the ownership by Lessor of the Equipment or the leasing thereof to
Lessee. Lessor agrees to promptly inform Lessee of any request for such reports
received by it. Lessee shall maintain all records, logs and other materials
required by any Governmental Authority having jurisdiction over the Equipment or
Lessee to be maintained in respect of the Equipment where the failure to so
maintain would reasonably cause a Material Adverse Effect. Lessee hereby waives
any right now or hereafter conferred by Applicable Laws to make repairs on any
of the Equipment at the expense of Agent, Lessor or any Participant.
Section 5.4 Alterations, Modifications, etc. In case any Item of Equipment
or any Part is required to be altered, added to, replaced or modified in order
to comply with any Applicable Laws in all material respects or Insurance
Requirements where the failure to so comply would reasonably be expected to
cause the relevant insurance to lapse, to be cancelled or to be reduced (as to
amount of scope of coverage) (a "Required Alteration") pursuant to Sections 5.1
or 5.3 hereof, subject to the provisions of Section 5.7 regarding Permitted
Contests, Lessee agrees to make such Required Alteration at its own expense.
Lessee shall have the right to make any modification, alteration or improvement
to any Item of Equipment (herein referred to as a "Permitted Modification"), or
to remove any Parts which have become worn out, broken or obsolete, provided in
each case that Lessee continues to be in compliance with Sections 5.1 and 5.3
hereof and that such action (a) will not decrease the economic value of such
Item of Equipment or impair its originally intended use or function or decrease
its useful life in any material respect and (b) will not cause such Item of
Equipment to become suitable for use only by Lessee unless in the case of this
clause (b) such modification is readily removable without damage to such Item of
Equipment. In the event any Permitted Modification (i) is readily removable
without in any material respect impairing the value or useful life which the
Item of Equipment would have had at such time had such Part not been affixed or
placed to or on such Item of Equipment (or if not readily removable without in
any material respect so impairing the value or useful life of
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such Item of Equipment, Lessee actually restores the value or useful life of
such Item of Equipment in all material respects to the value or useful life
which the Item of Equipment would have had at such time had such Part not been
affixed or placed to or on such Item of Equipment) (a "Removable Part"), (ii) is
not a Required Alteration and (iii) is not a Part which replaces any Part
originally incorporated or installed in or attached to such Item of Equipment on
the date on which such Item of Equipment became subject to this Lease or any
Part in replacement of or substitution for any such original Part (each an
"Original Part"), any such Permitted Modification or Original Part so removed
and replaced shall be and remain the property of Lessee. To the extent such
Permitted Modification is not a Removable Part, or is a Required Alteration or
an Original Part, the same shall immediately and automatically be and become the
property of Lessor and subject to the terms of this Lease. Any Required
Alterations and any Parts installed or replacements made by Lessee upon any Item
of Equipment pursuant to its obligation to maintain and keep the Equipment in
good order, operating condition and repair under Section 5.3 shall be
considered, in each case, accessions to such Item of Equipment and title thereto
and a security interest therein shall be immediately and automatically vested in
Lessor.
Section 5.5 Liens. Subject to the final sentence of this Section 5.5,
Lessee will not directly or indirectly create, incur, assume or suffer to exist
any Lien (other than Permitted Liens) on or with respect to (i) any Item of
Equipment or any Part thereof or any other Collateral, Lessor's title thereto,
or any interest therein or (ii) this Lease or any of Agent's, Lessor's or any
Participant's interests hereunder. Lessee, at its own expense, will promptly
pay, satisfy and otherwise take such actions as may be necessary to keep this
Lease, each Item of Equipment and all other Collateral free and clear of, and to
duly discharge or eliminate or bond in a manner satisfactory to Agent and
Lessor, any such Lien not excepted above if the same shall arise at any time.
Lessee will notify Agent and Lessor in writing promptly upon becoming aware of
any Lien (other than any Lien excepted above) that attaches to the Equipment or
any Item of Equipment or any other Collateral, and a description of the full
particulars thereof. Without limiting the foregoing, Lessee shall not assign or
pledge any of its rights under the Sublease or any Affiliate Sublease to any
Person other than to Agent. Lessee, on its own or on Lessor's behalf but at
Lessee's sole cost and expense, may contest, by appropriate administrative or
judicial proceedings conducted in good faith and with due diligence, the amount,
validity or application, in whole or in part, of any Lien on any Item of the
Equipment or other Collateral, and Lessor agrees not to pay, settle or otherwise
compromise any such Lien, so long as such contest constitutes a Permitted
Contest.
Section 5.6 Inspection. Upon three (or, upon the occurrence and during the
continuance of an Event of Default, one) Business Day's prior written notice by
Agent or Lessor, Lessee shall make the Equipment and all other Collateral
available to Agent and Lessor and their representatives (the "Inspecting
Parties") for inspection at reasonable times at the Facility and, if requested
in such notice, shall also make Lessee's records pertaining to the Equipment and
all other Collateral available for inspection. All such inspections shall be
during Lessee's normal business hours, shall be subject to Lessee's customary
safety and security provisions and shall be at the expense and risk of the
Inspecting Parties, except that if an Event of Default has occurred and is
continuing, Lessee shall reimburse the Inspecting Parties for the reasonable
costs of such inspections. No inspection shall unreasonably interfere with
Lessee's or any sublessee's operations. None of the Inspecting Parties shall
incur any liability or obligation by reason of making any such inspection or
inquiry unless and to the extent such Inspecting Party causes
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damage to any Person or to the Equipment or any property of Lessee or any other
Person during the course of such inspection. Provided that an Event of Default
has not occurred and is continuing, neither Lessor nor Agent shall conduct such
inspection more frequently than once in any calendar year.
Section 5.7 Permitted Contests. If, to the extent and for so long as a
Permitted Contest in respect of any Applicable Laws, Governmental Action,
manufacturer's guidelines or standards or Insurance Requirements relating to the
Equipment, any part thereof or any other Collateral or the obligation to comply
therewith shall be prosecuted diligently and in good faith in appropriate
proceedings by the Lessee or its Affiliates, Lessee shall not be required to
comply with such Applicable Laws, Governmental Action, manufacturer's guidelines
or standards or Insurance Requirements, as the case may be. At Lessee's request,
Lessor will join in any proceedings pursuant to this Section 5.7 if and so long
as the Lessee agrees in writing to pay, and pays, all related reasonable out of
pocket expenses of Lessor and Lessee agrees that any such claim against Lessor,
Agent or any Participant relating thereto will be subject to the indemnification
provisions of Section 12.1 of the Participation Agreement.
Section 5.8 Annual Appraisals. On or prior to each annual anniversary of
the Document Closing Date, Lessee shall deliver to Agent, Lessor and the
Participants an Annual Appraisal covering all Equipment then subject to this
Lease as to which Lessee has not theretofore exercised the Purchase Option, the
Sale Option or the Early Termination Option.
ARTICLE VI
RISK OF LOSS; INSURANCE; REPLACEMENTS OF EQUIPMENT
Section 6.1 Casualty. If (A) any Item of Equipment shall be or become (i)
lost, stolen, destroyed, irreparably damaged from any cause whatsoever, damaged
beyond economic repair, or rendered permanently unfit for normal use for any
reason whatsoever (other than obsolescence), including by reason of any defect
in design or manufacture, in each such case in Lessee's reasonable
determination, which determination shall be made promptly after any such event
or Lessee's discovery thereof (including notification by any sublessee, as
applicable), or (ii) damaged so as to result in an insurance settlement on the
basis of a total loss or a constructive or compromised total loss, or (iii)
captured, confiscated or requisitioned by condemnation or otherwise and the loss
shall have resulted in loss of possession of such Item of Equipment by Lessee
for a period of more than 180 consecutive days, or (B) as a result of any rule,
regulation, order or other action of any Governmental Authority having
jurisdiction, the use in normal operation of such Item of Equipment shall have
been prohibited for a period extending beyond the Lease Term applicable to such
Item of Equipment (any such occurrence being hereinafter called a "Casualty"),
prior to or during the term of this Lease, Lessee shall give Agent and Lessor
notice thereof (a "Casualty Notice") not later than thirty (30) days (or, with
respect to a Casualty referred to in clause (ii) of the definition of such term,
such longer period as Lessee may request, not to exceed one hundred nineteen
(119) days), following a Responsible Officer of Lessee becoming aware of the
occurrence of such Casualty. The Casualty Notice shall specify whether Lessee
will:
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(a) pay the Casualty Amount of the Item of Equipment suffering such
Casualty, which payment shall be made no later than ninety (90) days (unless
Lessee has delivered a Casualty Notice with respect to a Casualty referred to in
clause (ii) of the definition of such term after the expiration of such thirty
(30) day period, no later than the date which is one hundred twenty (120) days
following a Responsible Officer of Lessee becoming aware of the occurrence of
such Casualty) following the date of such Casualty Notice (the "Casualty
Settlement Date"), provided that in any event the Casualty Settlement Date shall
be no later than the last day of the Lease Term applicable to such Equipment;
and the Casualty Amount shall be applied by Agent to reduce the relevant Lease
Supplement Balance as indicated below; or
(b) replace the Item of Equipment with respect to which the Casualty has
occurred pursuant to the following provisions of this Section 6.1 and Section
6.4, provided that upon the occurrence and during the continuance of an Event of
Default, Lessee shall be obligated, at the option of the Required Participants,
to make the payments referred to in clause (a) above and shall not be entitled
to exercise any right or election of replacement as set forth in this clause
(b).(c)
If Lessee has elected, or is required, to pay the Casualty Amount pursuant
to clause (a) above, Lessee shall continue to make all payments of Basic Rent
due under this Lease without reduction for the Item of Equipment suffering such
Casualty until such Casualty Amount is paid, upon which event Lessee's
obligation to pay Basic Rent for the Item of Equipment suffering such Casualty
shall cease. Upon payment of the Casualty Amount in respect of any Item of
Equipment suffering a Casualty, the amount of the Lease Supplement Balance shall
be reduced by an amount equal to the product of the remaining relevant Lease
Supplement Balance (determined prior to the receipt of such Casualty Amount),
multiplied by the Allocation Fraction of the Item of Equipment suffering such
Casualty.
If Lessee has given notice that it intends to replace the Item of
Equipment suffering such Casualty, and such replacement is permitted under the
foregoing clause (b), Lessee may, not more than ninety (90) days after the date
of such Casualty Notice, replace the Item of Equipment suffering the Casualty
with Replacement Equipment pursuant to the requirements of Section 6.4.
If Lessee has paid the amount payable with respect to the Casualty as set
forth in clause (a) above and all other amounts due hereunder and no Event of
Default has occurred and is continuing, Lessee shall be entitled to receive, and
Lessor shall direct the applicable insurance carrier to pay, or if received by
Lessor shall pay, to Lessee the proceeds of any recovery in respect of such Item
of Equipment from insurance or otherwise ("Casualty Recoveries"), and Lessor,
subject to the rights of any insurer insuring such Item of Equipment as provided
herein, shall execute and deliver to Lessee, or to its assignee or nominee, a
quitclaim bill of sale (without representations or warranties except that such
Item of Equipment is free and clear of all Lessor Liens) for such Item of
Equipment, and such other documents as may be required to release the Equipment
from the terms of this Lease, in such form as may reasonably be requested by
Lessee. All fees, costs and expenses relating to a substitution as described
herein shall be borne by Lessee.
Any payments (including, without limitation, insurance proceeds) received
at any time by Agent, Lessor or Lessee from any Governmental Authority or other
party with respect to any loss
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or damage to any Item of Equipment not constituting a Casualty will be paid to
Lessee to be applied directly in payment of repairs or for replacement of
property in accordance with the provisions of Sections 5.1 and 5.3, if not
already paid by Lessee, or if already paid by Lessee and no Event of Default
shall have occurred and be continuing, shall be applied to reimburse Lessee for
such payment, and any balance remaining after compliance with said Sections with
respect to such loss or damage shall be retained by Lessee. During the existence
of a Default, or any Event of Default, any payments received by Agent or Lessor
with respect to any loss or damage to any item of Equipment (whether or not
constituting a Casualty) shall be held by Agent as security for the obligations
of Lessee under this Lease, and at such time as there shall not be continuing
any such Event of Default or Default, such amount (unless theretofore otherwise
applied to the obligations of Lessee hereunder in accordance with Section 8.4)
shall be applied to pay the Casualty Amount of the applicable Item of Equipment
if Lessee has elected, or is required, to pay such Casualty Amount or paid over
to Lessee. Any such payments received by Lessor in excess of the costs of repair
or replacement of the applicable Item of Equipment not required to be held by
Agent pursuant to the preceding sentence or if so held when released shall be
and remain the property of Lessee.
LESSEE HEREBY ASSUMES ALL RISK OF LOSS, DAMAGE, THEFT, TAKING,
DESTRUCTION, CONFISCATION, REQUISITION, COMMANDEERING, TAKING BY EMINENT DOMAIN
OR CONDEMNATION, PARTIAL OR COMPLETE, OF OR TO ANY OF THE EQUIPMENT, HOWEVER
CAUSED OR OCCASIONED, SUCH RISK TO BE BORNE BY LESSEE WITH RESPECT TO EACH ITEM
OF EQUIPMENT FROM THE DATE OF THIS LEASE, AND CONTINUING UNTIL SUCH ITEM OF
EQUIPMENT HAS BEEN RETURNED TO LESSOR IN ACCORDANCE WITH THE PROVISIONS OF
ARTICLE IX. LESSEE AGREES THAT NO OCCURRENCE SPECIFIED IN THE PRECEDING SENTENCE
SHALL IMPAIR, IN WHOLE OR IN PART, ANY OBLIGATION OF LESSEE UNDER THIS LEASE,
INCLUDING, WITHOUT LIMITATION, THE OBLIGATION TO MAKE PAYMENTS.
Section 6.2 Insurance Coverages. Lessee shall at all times, at its
expense, cause to be carried and maintained (a) commercial general liability
insurance with respect to the Equipment against third party personal injury and
property damage in an amount as of each Lease Supplement Closing Date and at all
times thereafter of not less than $50,000,000 per occurrence, including fire,
flood and environmental insurance, (b) property insurance in respect of the
Equipment at the time leased hereunder, said property insurance to be in amounts
at least equal at all times to the replacement cost of the Equipment then
subject to this Lease, and (c) such other insurance, including worker's
compensation and business interruption insurance, in each case, as is consistent
with prudent industry practice and as generally carried by corporations of
established reputation engaged in the same or similar business as Lessee.
Such insurance shall be written by reputable insurance companies that are
financially sound and solvent and otherwise reasonably appropriate considering
the amount and type of insurance being provided by such companies. Any insurance
company selected by Lessee and writing such required insurance shall be rated in
A.M. Best's Insurance Guide or any successor thereto (or if there be none, an
organization having a similar national reputation) and shall have a general
financial rating of "A" (or comparable rating for a rating by an organization
other than A.M. Best) and a financial rating of at least "X" (or comparable
rating for a rating by an
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organization other than A.M. Best) or be otherwise acceptable to Agent and
Lessor. In the case of liability insurance maintained by Lessee, it shall name
Agent and Lessor (in each case, in its individual capacity and as Agent or
Lessor, as applicable) and each of the Participants as additional insureds and,
in the case of property insurance maintained by Lessee, it shall name Agent and
Lessor as loss payees to the extent of their and the Participants' interests in
the Equipment. Each policy referred to in this Section 6.2 shall provide that:
(i) it will not be cancelled, materially modified or its limits reduced, or
allowed to lapse without renewal, except after not less than (x) 10 days' prior
written notice to Agent and Lessor, in the case of a cancellation or non-renewal
due to non-payment, or (y) 30 days' prior written notice to Agent and Lessor, in
all other cases; (ii) the interests of Agent and Lessor and any Participant
shall not be invalidated by any act or negligence of or breach of warranty or
representation by Lessee or any Person having an interest in the Equipment;
(iii) such insurance is primary with respect to any other insurance carried by
or available to Agent and Lessor or any Participant; (iv) the insurer shall
waive any right of subrogation, setoff, counterclaim, or other deduction,
whether by attachment or otherwise, against Agent and Lessor and the
Participants; and (v) such policy shall contain a cross-liability clause
providing for coverage of Agent and Lessor and each Participant, as if separate
policies had been issued to each of them. Lessee will notify Agent and Lessor
promptly of any policy cancellation, expiration, reduction in policy limits,
modification or amendment. Lessee hereby waives, releases and discharges Agent,
Lessor and each Participant and their agents and employees from all claims
whatsoever arising out of loss, claim, expense or damage to or destruction
covered or coverable by insurance required under this Article VI notwithstanding
that such loss, claim, expense or damage may have been caused by Agent, Lessor
or any Participant or any of their agents or employees, and Lessee agrees to
look solely to the insurance coverage in the event of such loss.
Section 6.3 Delivery of Insurance Certificates. On or before the initial
Lease Supplement Closing Date and each subsequent Lease Supplement Closing Date,
Lessee shall deliver to Agent and Lessor certificates of insurance satisfactory
to Agent and Lessor evidencing the existence of all insurance required to be
maintained hereunder and setting forth the respective coverages, limits of
liability, carrier, policy number and period of coverage. Thereafter, throughout
the Lease Terms, at the time each of Lessee's insurance policies is renewed or
replaced (but in no event less frequently than once each year and in all cases
not less than fifteen (15) days prior to the expiration date of any policy) or
upon written request by Agent or Lessor following and during the continuance of
an Event of Default, Lessee shall deliver to Agent and Lessor certificates of
insurance evidencing that all insurance then required by Section 6.2 to be
maintained by Lessee is in effect. The insurance coverage herein required may be
subject to deductibles or self-insured retentions up to an amount not in excess
of (i) $1,000,000 in respect of property insurance, (ii) $100,000 in respect of
liability insurance, (iii) $200,000 per individual and $800,000 maximum for
workers' compensation insurance and (iv) damage arising from 48 hours of
cessation of operations in respect of business interruption insurance. Such
coverage may be provided in a combination of umbrella and excess liability
policies.
Section 6.4 Replacement and Substitution. During the applicable Lease Term
and provided that no Event of Default exists and Lessee has not elected or is
not deemed to have elected an option under Section 10.1, 10.2 or Section 11.1(b)
or (c) with respect to the Item of
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Equipment to be replaced or substituted, Lessee may replace or substitute such
Item of Equipment ("Replaced Equipment") with Replacement Equipment subject to
Lessee's satisfaction of each of the following conditions:
(a) Lessee shall have delivered to Agent and Lessor a written notice (the
"Replacement Notice") indicating the date such replacement or substitution is to
take place (which date shall be (i) in respect of a voluntary replacement or
substitution, not more than 90 days following the date of the Replacement Notice
or (ii) in the case of a replacement or substitution on account of a Casualty,
not later than the date provided for in the applicable Casualty Notice, which
Casualty Notice shall serve as the Replacement Notice with respect to such
Casualty, which shall identify the Replacement Equipment, the Purchase Price for
the Replacement Equipment, and the Replaced Equipment;
(b) Lessee shall have delivered to Agent and Lessor evidence satisfactory
to Agent and Lessor (i) of Lessee's compliance with the insurance provisions of
Section 6.2 with respect to the Replacement Equipment, (ii) of Lessee's payment
in full of the Purchase Price and all Installation Expenses of the Replacement
Equipment, and (iii) that the Item of Equipment to serve as the Replacement
Equipment satisfies the requirements set forth in the definition of "Replacement
Equipment";
(c) Lessee shall cause a Bill of Sale and an amendment to the relevant
Lease Supplement and UCC financing statements as detailed on Schedule 6.1(f) of
the Participation Agreement to be executed and delivered to Lessor in order to
subject such Replacement Equipment to this Lease; and
(d) Such Replacement Equipment shall be the same make, model and year of
manufacture as the Replaced Equipment or Lessee shall have delivered to Agent
and Lessor an Appraisal of the Replacement Equipment showing both (i) the
then-current Fair Market Value thereof, and (ii) the Fair Market Value thereof
as of the then-current Expiration Date with respect to the Replaced Equipment
and on each date on which a Renewal Term with respect thereto would expire, in
each case greater than or equal to such values at such dates for the Replaced
Equipment.
Upon the satisfaction by Lessee of the foregoing conditions, Lessor shall,
subject to the rights of any insurer insuring Replaced Equipment suffering a
casualty, if applicable, execute and deliver to Lessee, or to its assigns or a
nominee, a quitclaim bill of sale (without representations or warranties, except
that the Replaced Equipment is free and clear of all Lessor Liens) for the
Replaced Equipment and such other documents as may be required to release the
Replaced Equipment from the terms of this Lease and the Security Documents, in
such form as may reasonably be requested by Lessee.
ARTICLE VII
WARRANTIES
LESSEE ACKNOWLEDGES AND AGREES THAT: (a) ALL OF THE EQUIPMENT IS LEASED
AS-IS AND WHERE-IS; (b) ALL OF THE EQUIPMENT LEASED BY IT IS OF
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A SIZE, DESIGN, SPECIFICATION AND MANUFACTURE SELECTED BY LESSEE; (c) LESSEE IS
SATISFIED THAT THE SAME IS SUITABLE FOR ITS PURPOSES; (d) LESSOR IS NOT A
MANUFACTURER THEREOF OR A DEALER IN PROPERTY OF SUCH KIND; AND (e) LESSOR HAS
NOT MADE NOR SHALL IT BE DEEMED TO HAVE MADE: (i) ANY REPRESENTATION OR WARRANTY
OR COVENANT WITH RESPECT TO THE TITLE, MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, CONDITION, QUALITY, DESCRIPTION, DURABILITY OR SUITABILITY OF ANY OF
THE EQUIPMENT IN ANY RESPECT OR IN CONNECTION WITH OR FOR THE PURPOSES AND USES
OF LESSEE; OR (ii) ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR
IMPLIED, WITH RESPECT TO ANY OF THE EQUIPMENT.
ARTICLE VIII
EVENTS OF DEFAULT; REMEDIES
Section 8.1 Events of Default. The occurrence of any of the following
shall constitute an event of default (each an "Event of Default") hereunder
(whether any such event shall be voluntary or involuntary or come about or be
effected by operation of law or pursuant to or in compliance with any judgment,
decree or order of any court or any order, rule or regulation of any
Governmental Authority):
(a) (i) any payment of Rent, Lease Supplement Balance or Lease
Balance (other than a Renewal Payment or other payment due on an Expiration
Date) payable by Lessee shall not be paid when due, and, such payment shall be
overdue for a period of five (5) Business Days, (ii) any payment payable by
Lessee on an Expiration Date, including any Renewal Payment or any payment
described at Section 10.2 or Article XI hereof or Section 12.2 of the
Participation Agreement, shall not be paid when due or (iii) Lessee shall fail
to make payment of any Supplemental Rent (other than Supplemental Rent referred
to in clause (i) or (ii) of this Section 8.1(a)) due and payable within ten (10)
Business Days after receipt of written notice thereof; or
(b) Any representation or warranty of Lessee contained in any
Operative Document, or in any certificate, report, financial statement or in
other document required to be furnished or delivered pursuant to any Operative
Documents by Lessee or on Lessee's behalf to any Participant or Agent or Lessor
is false or misleading in any material respect when made or reaffirmed, as the
case may be and, if capable of being cured, remains uncured for thirty (30) days
after the earlier of (i) receipt by Lessee of notice thereof and (ii) a
Responsible Officer of Lessee obtaining knowledge thereof; or
(c) Lessee shall default in the performance or observance of any
term, covenant, condition or agreement on its part to be performed or observed
under Sections 8.1(d), (j) or (n) of the Participation Agreement; or
(d) Lessee shall default in any material respect in the performance
or observance of (i) any term, covenant, condition or agreement on its part to
be performed or
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observed under Sections 8.1(k), (l), (m), (o), (p), (q) or (t) of the
Participation Agreement or (ii) any other term, covenant, condition or agreement
on its part to be performed or observed hereunder or under any other Operative
Document (and not constituting an Event of Default under any other clause of
this Section 8.1), and such default, in the case of either clause (i) or clause
(ii) above, if capable of being remedied, shall continue unremedied for a period
of thirty (30) days after the earlier to occur of (x) written notice thereof by
Agent or Lessor to Lessee or (y) a Responsible Officer of Lessee obtaining
knowledge thereof (provided that, upon notice from Lessee to Lessor, if such
failure referred to in clause (ii) of this Section 8.1(d) is not reasonably
capable of being cured during such 30-day period, such period shall be extended
for a total period of 180 days so long as (i) such failure is subject to cure
during such 180-day period and (ii) Lessee is diligently and continuously
proceeding to cure or cause to be cured such failure); or
(e) (i) Lessee shall commence a voluntary case concerning itself
under the Bankruptcy Code; or (ii) an involuntary case is commenced against
Lessee and the petition remains unstayed and in effect for more than sixty (60)
days, or is not dismissed within sixty (60) days, after commencement of the
case; or (iii) a custodian (as defined in the Bankruptcy Code) is appointed for,
or takes charge of, all or substantially all of the property of Lessee or Lessee
commences any other proceedings under any reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or
similar law of any jurisdiction whether now or hereafter in effect relating to
Lessee or there is commenced against Lessee any such proceeding which remains
undismissed for a period of sixty (60) days; or (iv) any order of relief is
entered in any such case or proceeding; or (v) Lessee is adjudicated insolvent
or bankrupt or (vi) Lessee suffers any appointment of any custodian or the like
for it or any substantial part of its property to continue undischarged or
unstayed for a period of sixty (60) days; or (vii) Lessee makes a general
assignment for the benefit of creditors; or (viii) Lessee shall fail to pay, or
shall state that it is unable to pay its debts generally as they become due; or
(ix) Lessee shall consent to, or approve in writing any of the foregoing; or (x)
any limited liability company action is taken by Lessee for the purpose of
effecting any of the foregoing; or
(f) (i) Lessee shall default in the payment when due (whether by
scheduled maturity, required prepayment, acceleration, demand or otherwise) of
any amount owing in respect of any Indebtedness in the principal amount of [*]
or more; or Lessee shall default in the performance or observance of any
obligation or condition with respect to any Indebtedness or any other event
shall occur or condition exist, if the effect of such default, event or
condition is to accelerate the maturity of any such Indebtedness or to permit
the holder or holders thereof, or any trustee or agent for such holders, to
accelerate the maturity of any such Indebtedness, or any such Indebtedness shall
become or be declared to be due and payable prior to its stated maturity other
than as a result of a regularly scheduled payment, and the principal amount of
such Indebtedness is [*] or more, but excluding, except as described in clause
(ii) below, any breach or default under the FlashVision/Toshiba Tranche
Operative Documents; or (ii) any Event of Default shall occur under the Flash
Vision/Toshiba Tranche Operative Documents, other than a Guarantee Event of
Default (as defined therein); or
(g) any ERISA Event which constitutes grounds for the termination of
any Pension Plan by the PBGC or for the appointment of a trustee by the PBGC to
administer any
[*] INDICATES THAT CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL
TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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Pension Plan shall occur, or any Pension Plan shall be terminated within the
meaning of Title IV of ERISA or a trustee shall be appointed by the PBGC to
administer any Pension Plan;
(h) One or more judgments or decrees in an aggregate amount of
$20,000,000 or more, to the extent not paid by insurance or coverage thereof has
not been acknowledged in writing by the applicable insurer, shall be entered by
a court against Lessee and any such judgments or decrees shall not be stayed,
discharged, paid, bonded or vacated within 30 days; or
(i) Lessee fails to maintain the insurance coverages required under
Section 6.2; or
(j) any Guarantee Event of Default shall occur and be continuing; or
(k) Lessee shall have elected the Sale Option with respect to any
Lease Supplement and shall have failed to comply with the return conditions set
forth in Section 11.3; or
(l) any Master Agreement Event of Default shall have occurred and
such event of default, if capable of being remedied, shall continue unremedied
for a period of thirty (30) days after the earlier to occur of (i) written
notice thereof by Agent or Lessor to Lessee and Guarantor, or (ii) a Responsible
Officer of Guarantor obtaining knowledge thereof; or
(m) (i) Lessee shall have been dissolved (x) voluntarily by the
Members pursuant to Section 11.01(b) of the Operating Agreement or (y) as a
result of a default by a Member pursuant to Section 11.01(c) of the Operating
Agreement, or (z) as a result of a "Deadlock" pursuant to Section 11.01(d) of
the Operating Agreement; (ii) Guarantor shall sell, transfer or convey any of
its equity interest in Lessee to any Person, other than to an Affiliate of
Guarantor that is controlled by Guarantor; (iii) upon the occurrence of the
Termination Date (as defined in Section 11.04 of the Operating Agreement), in
the event Guarantor elects the Unilateral Option under Section 11.04
(Dissolution by Unilateral Option) of the Operating Agreement, unless prior to
such Termination Date (A) Toshiba restructures the Operative Documents to take
into consideration Toshiba's assumption of Guarantor's obligations under the
Guarantee, which may include a repricing of the transaction covered thereby, (B)
Toshiba provides a guarantee of Lessee's obligations under the Operative
Documents in form substantially similar to the Guarantee (in which case the
Guarantee shall be deemed released) and (C) Lessee or its designee under the
Operative Documents exercises its Early Termination Option under Section 10.1 of
the Lease with respect to all of the Equipment subject to the Lease and pays in
full the amounts due under such Section 10.1 of the Lease; or
(n) (i) Guarantor shall fail to own and control at least 49.9% of
the Membership Interests in Lessee unless such failure is due to a circumstance
not constituting an Event of Default under Section 8.1(m); or (ii) Toshiba shall
fail to own and control at least 50% of the Membership Interests in Lessee
unless such failure is due to a circumstance not constituting an Event of
Default under, or otherwise is permitted pursuant to the terms of, Section
8.1(m) or Section 8.1(m) of the Toshiba Lease.
Section 8.2 Remedies. If any Event of Default exists, Lessor shall have
the rights, options and remedies of a secured party under the UCC (regardless of
whether the UCC or a law
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similar thereto has been enacted in a jurisdiction wherein the rights or
remedies are asserted) and all other Applicable Laws, and, without limiting the
foregoing, Lessor also may exercise in any order one or more or all of the
following remedies (it being understood that no remedy herein conferred is
intended to be exclusive of any other remedy or remedies, but each and every
remedy shall be cumulative and shall be in addition to every other remedy given
herein or now or hereafter existing at law or in equity or by statute): (i)
terminate this Lease by notice in writing to Lessee, but Lessee shall remain
liable as hereinafter provided; (ii) declare the entire outstanding Lease
Balance to be due and payable, together with accrued unpaid Rent and any other
amounts payable under the Operative Documents; (iii) enforce the security
interest given hereunder pursuant to the UCC or any other law; (iv) enter upon
the premises where any of the Collateral may be and take possession of all or
any of such Collateral; (v) proceed by appropriate court action or actions
either at law or in equity, to enforce performance by Lessee of the applicable
covenants of this Lease or to recover damages for the breach thereof; and (vi)
require Lessee to assemble and return the Equipment and other Collateral as
provided in Section 9.1. Notwithstanding the foregoing, Lessor's rights under
this Section 8.2 and 8.3 shall be subject to Lessee's rights to purchase all of
the Equipment pursuant to Section 10.1, but in any such case within the time
periods provided for in Section 8.7, to the extent applicable.
Notwithstanding the foregoing, if any Event of Default described in
Section 8.1(e) shall have occurred and be continuing, then the entire
outstanding Lease Balance and all accrued Rent and other amounts payable under
the Operative Documents shall automatically and immediately become due and
payable, without presentment, demand, notice, declaration, protest or other
requirements of any kind, all of which are hereby expressly waived and, upon
payment of such amounts, Lessor and Agent shall transfer title to the Equipment
to Lessee free and clear of Lessor Liens or any Liens described in clause (a) of
the definition of Permitted Liens in the manner required under Section 10.1.
Section 8.3 Sale of Collateral. Subject to Section 8.7, in addition to the
remedies set forth in Section 8.2 and to the extent permitted by Applicable
Laws, if any Event of Default shall occur, Lessor may, but is not required to,
sell the Collateral in one or more sales. Any Participant, Agent or Lessor may
purchase all or any part of the Collateral at such sale. Lessee acknowledges
that sales for cash or on credit to a wholesaler, retailer or user of such
Collateral, or at public or private auction, are all commercially reasonable.
Any notice required by law of intended disposition by Lessor shall be deemed
reasonably and properly given if given at least ten (10) days before such
disposition.
Section 8.4 Application of Proceeds. The proceeds of such sale or exercise
of other remedies shall be applied in the manner set forth in Section 5.3 of the
Participation Agreement.
Section 8.5 Right to Perform Obligations. If an Event of Default exists,
Lessor may, but shall not be obligated to, on ten (10) Business Days' notice to
Lessee (or at least one (1) Business Day's, notice, if, in the reasonable
judgment of Lessor an emergency exists or at least three (3) Business Days'
notice, if in the reasonable judgment of Lessor there exists a condition which
Lessee has failed to address pursuant to the terms of the Lease which if not
remedied would have a Material Adverse Effect), remedy such condition, and the
fees and expenses incurred by Lessor in connection with such performance
together with interest thereon shall be payable by Lessee within ten (10) days
of written demand. Interest on fees and expenses so
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incurred by Lessor shall accrue at the Overdue Rate as provided in Section 4.5
from the date payment by Lessee for such fees and expenses is due hereunder
until paid in full.
Section 8.6 Power of Attorney. Lessee unconditionally and irrevocably
appoints Lessor as its true and lawful attorney-in-fact, with full power of
substitution, to the extent permitted by Applicable Laws, in its name and stead
and on its behalf, for the purpose of effectuating any sale, assignment,
transfer or delivery hereunder, if an Event of Default exists, whether pursuant
to foreclosure or power of sale or otherwise, and in connection therewith to
execute and deliver all such deeds, bills of sale, assignments, releases
(including releases of this Lease on the records of any Governmental Authority)
and other proper instruments as Lessor may reasonably consider necessary or
appropriate. Lessee ratifies and confirms all that such attorney or any
substitute shall lawfully do by virtue hereof in accordance with the terms
hereof. If requested by Lessor or any purchaser, Lessee shall ratify and confirm
any such lawful sale, assignment, transfer or delivery by executing and
delivering to Lessor or such purchaser, all deeds, bills of sale, assignments,
releases and other proper instruments to effect such ratification and
confirmation as may be designated in any such request.
Section 8.7 Lessee Purchase Following Event of Default.
(a) At any time after the occurrence and during the continuance of an
Event of Default Lessor may give Lessee notice that Lessee's Purchase Option or
Early Termination Option shall terminate unless exercised and consummated within
thirty (30) days of the date of such notice is given. Lessee may exercise (which
exercise shall be irrevocable) and consummate the purchase of all, but not less
than all, of the Equipment during such thirty (30) day period by paying the
amounts required under Sections 10.1 or 11.1(b), together with (without
duplication) all other amounts then due and payable by Lessee pursuant to this
Lease and the other Operative Documents.
(b) Guarantor and/or Toshiba may exercise directly the right to purchase
the Equipment under Section 10.1 upon such conditions and at such times as set
forth in a written notice to Lessor and Agent executed by each of Lessee,
Guarantor and Toshiba.
ARTICLE IX
RETURN OF EQUIPMENT
Section 9.1 Return of Equipment.
(a) If Lessor has terminated this Lease pursuant to Article VIII,
and Lessee has not purchased the Equipment pursuant to Section 10.2, or if
Lessee has exercised the Sale Option with respect to any Equipment, Lessee shall
(i) for a period of up to one year after the applicable Expiration Date or the
date of such termination, as the case may be, maintain (or cause to be
maintained) the applicable Equipment in the condition required by Section 5.3,
store such Equipment without cost to Lessor, Agent or any Participant, and keep
all of such Equipment insured in accordance with Article VI, and (ii) upon
Lessor's or Agent's request following the applicable Expiration Date or such
termination forthwith deliver exclusive
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possession of such Equipment to Lessor or a purchaser of the Equipment at a
location designated by Lessor within the continental United States, together
with a copy of an inventory list of such Equipment, all operating, maintenance
and repair manuals relating to such Equipment and subject to applicable
confidentiality requirements, if any, that have been received or prepared by
Lessee (in condition to be placed in immediate service), and, at Lessee's cost
and expense, remove any Permitted Modifications if permitted by clause (b) of
Section 5.4.
(b) In connection with the delivery of any Equipment required to be
made to Lessor or any purchaser under Section 9.1(a)(ii), Lessee shall, at its
sole cost and expense:
(i) properly remove all markings on such Equipment made by
Lessee which are not necessary for the operation, maintenance or
repair of such Equipment or required by the manufacturer, Applicable
Law or Insurance Requirements;
(ii) at least ninety (90) days prior to the Expiration Date of
the Lease Supplement to which such Equipment is subject, or, in the
case of a termination of this Lease pursuant to Article VIII,
promptly after such termination, cause a supplier's representative
or qualified maintenance provider reasonably acceptable to Agent to
perform a comprehensive inspection, examination and test of such
Equipment and provide a comprehensive report which certifies that
such Equipment is operating within the applicable supplier's
specifications or if during such inspection, examination and test,
the authorized inspector finds such Equipment not operating within
the supplier's specifications, then Lessee shall repair or replace
such defective Equipment in accordance with this Lease and, after
corrective measures are completed, Lessee will provide for a
follow-up inspection and report of such Equipment by the authorized
inspector;
(iii) if such Equipment is not to be operated in place
pursuant to the Sublease or an Affiliate Sublease, provide for such
Equipment to be completely de-installed and severed from the
Facility or any other real property to which attached by a
supplier's representative or maintenance provider reasonably
acceptable to Agent in accordance with the supplier's
recommendations and repair any and all damage caused to such
Equipment by such severance;
(iv) if such Equipment is not to be operated in place pursuant
to the Sublease or an Affiliate Sublease, pack such Equipment
properly for shipment and arrange for the shipment thereof to any
location within the continental United States specified by Lessor
(or any purchaser) in a manner consistent with the supplier's
recommendations; and
(v) if requested by Lessor or Agent (or any purchaser), such
delivery shall include the assignment by Lessee to Lessor (or any
purchaser) of any Related Agreements subject to applicable contract
provisions and applicable confidentiality requirements, if any and,
to the extent permitted by Applicable Law and otherwise
transferable, any Related Permits necessary for the use, operation
or maintenance of such Equipment.
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(c) This Article IX shall survive termination of this Lease.
ARTICLE X
EARLY TERMINATION
Section 10.1 Early Termination. If Lessee has not previously elected the
Sale Option with respect to any Lease Supplement, Lessee may, at its option,
upon at least thirty (30) days' advance written notice to Agent and Lessor,
purchase all, but not less than all, of the Equipment and Related Property
subject to this Lease ("Early Termination Option") for the sum of (i) all
accrued and unpaid Rent payable through the date of such purchase, (ii) the
outstanding Lease Balance after giving effect to any payment under clause (i),
and (iii) all other fees and expenses and other amounts then due and payable
pursuant to this Lease and the other Operative Documents (including any Break
Costs to the extent such payment is not made on a scheduled Payment Date). Upon
the indefeasible payment of such sums by Lessee in accordance with the
provisions of the preceding sentence, the obligation of Lessee to pay Rent
hereunder (other than Rent expressly surviving the termination of this Lease,
including payments pursuant to Article XII of the Participation Agreement) shall
cease, the term of this Lease with respect to all Lease Supplements shall end on
the date of such payment and Lessor and Agent, on behalf of the Participants,
shall as promptly as practicable execute and deliver to Lessee such documents as
may be reasonably required to release the Equipment and Related Property and
other Collateral from the terms and scope of this Lease and the other Operative
Documents (without representations or warranties, except that the Collateral is
free and clear of Lessor Liens), including quitclaim bills of sale, UCC
termination statements, lease termination agreements and an assignment of any
right of Lessor to any Related Property, if any, or the benefits thereof, in
such form as may be reasonably requested by Lessee, all at Lessee's sole cost
and expense.
Section 10.2 Required Termination. In the event that (a) any Operative
Document to which Lessee or Guarantor is a party or the security interest
granted under this Lease or any other Operative Document shall (except in
accordance with its or their terms), in whole or in part, terminate, cease to be
effective or cease to be the legally valid, binding and enforceable obligation
of Lessee or Guarantor, as applicable, (b) Lessee or any of its Affiliates
shall, directly or indirectly, contest in any manner in any court the
effectiveness, validity, binding nature or enforceability of any Operative
Document, (c) the security interest in the Collateral securing Lessee's or
Guarantor's obligations shall, in whole or in part, cease to be a perfected
first priority security interest (subject to Permitted Liens), (d) there exists
an Event of Default, (e) Lessee shall have abandoned or constructively abandoned
all or any material portion of the Equipment for a period of 30 consecutive days
which results in the Equipment not being properly maintained in accordance with
the terms of this Lease or (f) Equipment with a Fair Market Value in excess of
thirty percent (30%) of the Aggregate Purchase Price of all of the Equipment
then subject to this Lease shall have suffered and shall be subject at such time
to a Casualty, Lessee shall, upon notice from Agent, Lessor or the Required
Participants (except in the case of an Event of Default set forth in Section
8.1(e), in which case no notice shall be required and such purchase shall be
made promptly upon such Event of Default, and except in the case of an event
described in clause (c) that occurs as a result of Lessor's or Agent's acts or
omissions, in which case Lessee shall have a thirty (30) day period from the
receipt of notice from Lessor or Agent of
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such occurrence to cure such lapsed perfection), repurchase all of the Equipment
and Related Property by paying to Agent, for the benefit of Lessor and the
Participants, all amounts that would have been payable on the date of such
repurchase if Lessee had purchased all of the Equipment and Related Property on
such date pursuant to Section 10.1, such payment to be made not later than
thirty (30) days following such notice or Event of Default, or in the case of a
Casualty described in clause (f), within the period provided for in Section
6.1(a).
ARTICLE XI
LEASE TERMINATION
Section 11.1 Lessee's Options. Not later than 180 days prior to the
Expiration Date then in effect with respect to any Lease Supplement, Lessee
shall, by delivery of written notice to Agent and Lessor, exercise one of the
following options, subject to the requirements and limitations of Section 11.2:
(a) elect to renew this Lease with respect to all, but not less than
all, of the Lease Supplement Equipment then subject to such Lease Supplement
(the "Renewal Option") with respect to the applicable Base Term or applicable
Renewal Term then in effect, for a renewal term commencing on the last day of
the applicable Base Term or applicable Renewal Term then in effect and expiring
on the one year anniversary thereof (each, a "Renewal Term") provided, that (i)
such option shall be exercised only with respect to the applicable Base Term or
applicable Renewal Term then in effect with respect to such Lease Supplement,
(ii) in connection with the exercise of the Renewal Option with respect to a
Lease Supplement, Lessee shall have theretofore provided Agent, Lessor and the
Participants with an Annual Appraisal required pursuant to Section 5.8 of this
Lease as of the most recent anniversary of the Document Closing Date and (iii)
notwithstanding the foregoing, in no event shall any Renewal Term in respect of
any Lease Supplement extend beyond the date which is five (5) years following
the Document Closing Date unless such additional Renewal Term has been approved
pursuant to Section 14.18 of the Participation Agreement; or
(b) purchase all, but not less than all, of such Lease Supplement
Equipment for cash for the Option Exercise Amount on such Expiration Date (such
option being referred to as the "Purchase Option"); or
(c) sell on such Expiration Date all, but not less than all, of such
Lease Supplement Equipment on behalf of the Participants for cash to a purchaser
or purchasers not in any way affiliated with Lessee (the "Sale Option").
Simultaneously with a sale pursuant to a Sale Option, Lessee shall pay or cause
to be paid to Lessor on the last day of the applicable Lease Term (i) all
accrued Basic Rent and any Supplemental Rent then due and payable with respect
to such Lease Supplement and the Casualty Amount of any Item of such Lease
Supplement Equipment theretofore suffering a Casualty as to which the Casualty
Amount was not paid under Section 6.1, (ii) as Supplemental Rent for the benefit
of the Participants, an amount equal to the Residual Value Guarantee Amount then
in effect with respect to such Lease Supplement, determined after giving effect
to the payment of any amount required under clause (i) and (iii) all of the
Proceeds of such sale. Lessor shall refund to Lessee the portion of the
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Proceeds in excess of the relevant Lease Supplement Balance (as determined
following the application of such Residual Value Guarantee Amount paid by Lessee
and all amounts paid pursuant to clause (i) above), if any, as promptly as
practicable following the receipt by Lessor of the foregoing payments. Lessee
agrees, however, that the amount payable pursuant to this Section 11.1(c) shall
in no event be construed to limit any obligation of Lessee under Article XII of
the Participation Agreement and Sections 11.3 and 11.4 of this Lease. The
obligation of Lessee to pay the amounts determined pursuant to clauses (i) and
(ii) of this Section 11.1(c) and Sections 11.3 and 11.4 shall be recourse
obligations of Lessee and shall be payable on the applicable Expiration Date.
All amounts paid to Lessor pursuant to this Section 11.1(c) and any Proceeds to
be retained by Lessor shall be distributed to the Participants in accordance
with Section 5.3 of the Participation Agreement.
Section 11.2 Election of Options. Lessee's election of a Purchase
Option will be irrevocable at the time made, but if Lessee fails to make a
timely election under Section 11.1, Lessee will be deemed to have irrevocably
elected the Renewal Option, and if the Renewal Option is not available, Lessee
shall be deemed to have irrevocably elected the Purchase Option. Lessee shall be
deemed to have elected the Purchase Option with respect to a Lease Supplement if
it fails to sell all of the applicable Lease Supplement Equipment on the
applicable Expiration Date in accordance with the terms and conditions herein
relating to the Sale Option. Furthermore, a Sale Option shall automatically be
revoked if there exists a Default or Event of Default at any time after such
Sale Option is properly elected, and, if an Event of Default exists, Lessor
shall be entitled to exercise all rights and remedies provided in Article VIII.
Lessee may not elect a Sale Option if there exists on the date the election is
made an Event of Default or a Default.
Section 11.3 Sale Option Procedures. If Lessee elects a Sale Option
with respect to any Lease Supplement, Lessee shall use its best commercial
efforts to obtain the highest all cash purchase price for all of the Lease
Supplement Equipment then subject to such Lease Supplement, and Lessee shall
comply with Section 9.1 hereof. All costs related to such sale and delivery,
including the reasonable cost of sales agents, removal of the Equipment,
delivery of documents and the Equipment to any location designated by a buyer
within the continental United States, certification, installation and testing of
the Equipment in any location chosen by the buyer or prospective buyer,
reasonable legal costs, reasonable costs of notices, any advertisement or other
similar costs or other information and of any parts shall be borne entirely by
Lessee, without regard to whether such costs were incurred by Agent, Lessor,
Lessee or any potentially qualified buyer, and shall in no event be paid from
any of the Proceeds. Neither Agent, Lessor nor any Participant shall have any
responsibility for procuring any purchaser. If, nevertheless, Lessor, at the
direction of the Required Participants, undertakes any sales efforts, Lessee
shall promptly reimburse Agent, Lessor and/or any such Participant for any
reasonable charges, costs and expenses incurred in such effort, including any
allocated reasonable time charges, costs and expenses of internal counsel or
other reasonable attorneys' fees. Upon a sale of any Lease Supplement Equipment
pursuant to the Sale Option, such Lease Supplement Equipment shall be in the
condition required by Section 5.3 and Liens for Taxes not yet due and payable
(which shall be the responsibility of Lessee for the period prior to the sale)
and shall be free and clear of all Liens (including Permitted Liens, other than
Lessor Liens), and Lessee shall cause all such Lease Supplement Equipment to be
delivered to such location or locations designated by the buyer thereof. Lessor
(A) at the direction of the Required Participants, shall
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determine whether to accept the highest all cash offer for such Lease Supplement
Equipment which determination shall be made by the Required Participants, and
(B) if accepted by the Required Participants, Lessee shall sell such Lease
Supplement Equipment in accordance with the terms of such offer to the buyer
submitting such offer; provided that Lessor shall not be entitled to reject the
highest all cash offer for such Lease Supplement Equipment if the Proceeds from
the sale of such Lease Supplement Equipment pursuant to such offer would be
sufficient, together with the sum of the amounts referred to in clauses (i) and
(ii) of Section 11.1(c), to reduce such Lease Supplement Balance to $0. If,
within 45 days prior to the relevant Expiration Date relating to a Sale Option
with respect to any Lease Supplement, Lessee has not obtained an all cash
purchase price for the relevant Lease Supplement Equipment that would provide
Proceeds sufficient, together with such amounts referred to in clauses (i) and
(ii) of Section 11.1(c), to reduce such Lease Supplement Balance to $0, then any
Participant may request the Lease Term Appraisal with respect to such Lease
Supplement Equipment described in Section 11.4 and, if such Lease Term Appraisal
is requested, receipt of such Lease Term Appraisal at least ten (10) Business
Days prior to the relevant Expiration Date relating to such Sale Option shall be
a condition to the consummation of the sale of such Lease Supplement Equipment
on such Expiration Date. Any purchaser or purchasers of any Equipment shall not
in any way be affiliated with Lessee.
Section 11.4 Appraisals. If Lessee exercises a Sale Option with
respect to any Lease Supplement and the sum of the anticipated Proceeds from the
sale of the relevant Lease Supplement Equipment and Related Property plus the
Residual Value Guarantee Amount then in effect with respect to such Lease
Supplement is less than the applicable outstanding Lease Supplement Balance,
Lessor (upon direction from any Participant) shall, as provided in Section 11.3,
engage an appraiser of nationally recognized standing reasonably acceptable to
Lessee, at Lessee's expense, to prepare a Lease Term Appraisal with respect to
such Lease Supplement Equipment to determine (by appraisal methods satisfactory
to the Participants) the Fair Market Value of such Lease Supplement Equipment as
of the relevant Expiration Date. If the Fair Market Value of such Lease
Supplement Equipment as of such Expiration Date set forth in such Lease Term
Appraisal is in excess of the aggregate Proceeds, Lessee shall, to the extent
required by Section 12.2 of the Participation Agreement, promptly pay to Lessor,
as Supplemental Rent, for the benefit of Lessor and the Participants, an amount,
not to exceed the lesser of the amount required by Section 12.2 of the
Participation Agreement and the amount of such excess, as necessary to repay the
relevant outstanding Lease Supplement Balance determined immediately prior to
the application of the foregoing amounts.
ARTICLE XII
OWNERSHIP, GRANT OF SECURITY INTEREST
AND FURTHER ASSURANCES
Section 12.1 Grant of Security Interest. Title to the Equipment shall
remain in Lessor as security for the obligations of Lessee hereunder and under
the other Operative Documents to which it is a party until Lessee has fulfilled
all of its obligations hereunder and thereunder (which security shall be
assigned by Lessor to Agent, for the benefit of the Participants, pursuant to
the relevant Security Documents). Lessee hereby assigns, hypothecates, transfers
and pledges to
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Lessor, and grants to Lessor a continuing security interest in, the Equipment
and other Collateral, to secure the payment of all sums due hereunder and under
the related documents to which it is a party and the performance of all other
obligations hereunder and under the other Operative Documents to which it is a
party.
Section 12.2 Retention of Proceeds. If Lessee would be entitled to any
amount (including any Casualty Recoveries) or title to any Equipment hereunder
but for the existence of any Event of Default or Default, Lessor shall hold such
amount or Equipment as part of the Collateral and, while such Event of Default
exists, shall be entitled to apply such amounts against any amounts due
hereunder; provided, that Lessor shall (or shall cause Agent to) distribute such
amount or transfer such Equipment in accordance with the other terms of this
Lease if and when no Event of Default or Default exists or Lessee purchases the
Equipment pursuant to this Lease.
ARTICLE XIII
MISCELLANEOUS
Section 13.1 Effect of Waiver. No delay or omission to exercise any right,
power or remedy inuring to Lessor, or Agent or any Participant through Lessor,
upon any breach or default of Lessee hereunder shall impair any such right,
power or remedy nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein or thereof or in any similar breach or
default thereafter occurring, nor shall any single or partial exercise of any
right, power or remedy preclude any other or further exercise thereof, or the
exercise of any other right, power or remedy, nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default theretofore
or thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of Agent, Lessor or the Participants of any breach or
default under this Lease must be specifically set forth in writing and must
satisfy the applicable requirements set forth in Section 14.5 of the
Participation Agreement.
Section 13.2 Applicable Law. THIS LEASE SHALL BE GOVERNED BY AND CONSTRUED
UNDER THE INTERNAL LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO CONFLICT OF
LAW PRINCIPLES.
Section 13.3 Effect and Modification of Lease. No variation, modification,
amendment or waiver of this Lease shall be valid unless entered into in
accordance with Section 14.5 of the Participation Agreement.
Section 13.4 Notices. All demands, notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
given as provided from Section 14.3 of the Participation Agreement.
Section 13.5 Counterparts. This Lease may be executed in any number of
counterparts, each of which shall be an original, but all of which shall
together constitute one and the same instrument. This Lease has been executed in
several counterparts. One counterpart has been prominently marked "Counterpart
No. 1 ". Only the counterpart marked "Counterpart No.
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1 " shall evidence a monetary obligation of Lessee or shall be deemed to be an
original or to be chattel paper for purposes of the Uniform Commercial Code, and
such copy shall be held by Agent.
Section 13.6 Severability. Whenever possible, each provision of this Lease
shall be interpreted in such manner as to be effective and valid under
Applicable Laws; but if any provision of this Lease shall be prohibited by or
invalid under Applicable Laws, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Lease.
Section 13.7 Successors and Assigns; Merger. This Lease shall be binding
upon the parties hereto and their respective successors and assigns and shall
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
Section 13.8 Section Headings; Table of Contents. Section headings and the
table of contents used in this Lease (including the schedule) are for
convenience of reference only and shall not affect the construction of this
Lease.
Section 13.9 Final Agreement. THIS LEASE, TOGETHER WITH THE OTHER
OPERATIVE DOCUMENTS, REPRESENTS THE ENTIRE FINAL AGREEMENT BETWEEN THE PARTIES
WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED BY THE LEASE AND THE OTHER
OPERATIVE DOCUMENTS. THIS LEASE CANNOT BE MODIFIED, SUPPLEMENTED, AMENDED,
RESCINDED OR CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES, EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY THE
PARTIES HERETO IN ACCORDANCE WITH THE TERMS OF THE PARTICIPATION AGREEMENT.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Section 13.10 Timeliness of Performance. The provisions of Articles VIII
and XI pertaining to the delivery of notice and the performance of certain
events on dates required by Articles VIII and XI are to be strictly adhered to
by the parties hereto.
Section 13.11 FINANCE LEASE. THE PARTIES INTEND THAT THIS LEASE BE A
FINANCE LEASE UNDER ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN
THE STATE OF CALIFORNIA.
[remainder of page intentionally left blank]
24
<PAGE>
EXECUTION COPY
IN WITNESS WHEREOF, the parties hereto have caused this Lease to be
executed and delivered as of the date first above written.
FLASHVISION, L.L.C.
By:
------------------------------------
Name Printed:
--------------------------
Title:
---------------------------------
ABN AMRO BANK N.V., not individually but
solely as Lessor
By:
------------------------------------
Name Printed:
--------------------------
Title:
---------------------------------
By:
------------------------------------
Name Printed:
--------------------------
Title:
---------------------------------
25
<PAGE>
EXECUTION COPY
THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART.
Receipt of this original counterpart of the foregoing Lease is hereby
acknowledged as of the date hereof.
ABN AMRO BANK N.V.,
not individually but solely as
Agent for the Participants
By:
------------------------------------
Name Printed:
--------------------------
Title:
---------------------------------
By:
------------------------------------
Name Printed:
--------------------------
Title:
---------------------------------
26
<PAGE>
SCHEDULE A TO LEASE
Fixed Rent
Fixed Rent will be set on each Lease Supplement Closing Date in respect of
the Lease Supplement Equipment financed on such date, based on the Fair Market
Value of each Item of Equipment so financed on such date (as set forth in the
most recent Initial Appraisal, Annual Appraisal or Supplemental Appraisal then
delivered in respect thereof). This Schedule A will be replaced on the initial
Lease Supplement Closing Date with a mutually acceptable Schedule A reflecting
the Fixed Rent payable with respect to the Items of Equipment made subject to
the Lease on such date.
Schedule A - 1
27
<PAGE>
EXECUTION COPY
SCHEDULE B TO LEASE
Percentage Applicable to Calculation of Residual Value Guarantee Amount
Base Term of any Lease Supplement: 86%
Renewal Term #1 of any Lease Supplement: 88%
Renewal Term #2 of any Lease Supplement: 88%
Renewal Term #3 of any Lease Supplement: 88%
Renewal Term #4 of any Lease Supplement: 88%
Schedule B - 1
28
<PAGE>
EXECUTION COPY
EXHIBIT A TO LEASE
LEASE SUPPLEMENT NO. ____
COUNTERPART NO. ____ OF SERIALLY NUMBERED MANUALLY EXECUTED COUNTERPARTS.
TO THE EXTENT THAT THIS DOCUMENT CONSTITUTES CHATTEL PAPER UNDER THE
UNIFORM COMMERCIAL CODE, NO SECURITY INTEREST IN THIS DOCUMENT MAY BE
CREATED THROUGH THE TRANSFER AND POSSESSION OF ANY COUNTERPART OTHER THAN
COUNTERPART NO. 1.
Lease Supplement No. ___ dated _____________, _____ (this "Lease
Supplement") between FLASHVISION, L.L.C., a Virginia limited liability company
("Lessee"), and ABN AMRO BANK N.V. ("Lessor"), not in its individual capacity,
but solely in its capacity as Lessor.
W I T N E S S E T H:
WHEREAS, Lessee and Lessor have heretofore entered into that certain
Master Lease Intended as Security (FlashVision/SanDisk Tranche) dated as of
December 27, 2000 (as from time to time amended, restated, supplemented or
otherwise modified, the "Lease"; unless otherwise defined herein, capitalized
terms used herein shall have the meanings specified in the Lease); and
WHEREAS, the Lease provides for the execution and delivery of a separate
Lease Supplement on each Lease Supplement Closing Date for the Equipment to be
acquired on such Lease Supplement Closing Date for the purpose of confirming the
acceptance and lease of such Equipment, specifying the purchase prices and
descriptions applicable to such Equipment and setting forth certain other
matters, all as required pursuant to the Lease and the other Operative
Documents;
NOW, THEREFORE, in consideration of the premises and other good and
sufficient consideration, Lessor and Lessee hereby agree as follows:
(1) Inspection and Approval. Lessee hereby acknowledges and confirms that
it has inspected, received and approved the Equipment set forth on Schedule I
hereto for all purposes of the Lease and the other Operative Documents and, as
among Agent, Lessor, the Participants and Lessee, such Equipment complies in all
material respects with the specifications for such Equipment, is in good working
order, repair, condition and appearance and has been Installed and Accepted at
the Facility and is otherwise acceptable to Lessee. Lessee hereby certifies that
it has no knowledge of any defect in any of the Equipment set forth on Schedule
I with respect to design, manufacture, condition (reasonable wear and tear
excepted) or in any other respect. Lessee reaffirms, as to the Equipment set
forth in Schedule I, each of the waivers acknowledgments and agreements of
Lessee set forth in Article VII of the Lease.
Exhibit A - 1
29
<PAGE>
EXECUTION COPY
(2) Delivery and Acceptance. Lessor hereby confirms delivery and lease to
Lessee, and Lessee hereby confirms acceptance of delivery and lease under the
Lease hereby supplemented, of the Equipment listed on Schedule I hereto and all
Related Property.
(3) Warranty. Lessee hereby represents and warrants that (i) no event
which would constitute a Casualty under the Lease has occurred with respect to
any of the Equipment set forth on Schedule I hereto as of the date hereof and
(ii) no offset assertable by Lessee exists with respect to the Equipment covered
by this Lease Supplement or any Rent that will be payable with respect to such
Equipment. Lessee hereby reaffirms each of the representations and warranties
set forth in Section 7.2 of the Participation Agreement as if made on the date
hereof, including that the Equipment set forth on Schedule I hereto and all
Related Property is free and clear of all Liens other than Permitted Liens.
(4) Payment of Vendors. Lessee hereby represents and warrants that on or
prior to the Lease Supplement Closing Date, it has paid each vendor of the
Equipment set forth on Schedule I hereto in full or will pay such vendor in full
with the proceeds of the Advance being made on such date pursuant to the terms
of the relevant Acquisition Agreement.
(5) Confirmation. Lessee hereby confirms its agreement, in accordance with
the Lease, as supplemented by this Lease Supplement, to pay Basic Rent to
Lessor, for the Equipment subject hereto. Nothing herein shall reduce Lessee's
obligation to make all other payments required under the Lease and the other
Operative Documents, including those payments to be made on the last day of the
Lease Term with respect to the Equipment described on Schedule I hereto pursuant
to Article XI of the Lease.
(6) Base Term. The Base Term of this Lease Supplement shall commence on
the date hereof and end on the first anniversary of the date hereof (the
"Scheduled Expiration Date" of this Lease Supplement), subject to renewal or
early termination as provided in the Lease.
(7) Lease Supplement Balance. Until reduced by any payments of Fixed Rent
or any Renewal Payments applied with respect to this Lease Supplement, the Lease
Supplement Balance of this Lease Supplement as of the date hereof is $_________.
(8) Fixed Rent. Payments of the Fixed Rent are due with respect to this
Lease Supplement on the dates and in the amounts set forth in Schedule A to the
Lease. Other payments of Basic Rent and Supplemental Rent are due with respect
to this Lease Supplement as set forth in Section 3.2 of the Lease.
(9) Incorporation into Lease. This Lease Supplement shall be construed in
connection with and as part of the Lease, and all terms, conditions and
covenants contained in the Lease, as supplemented by this Lease Supplement,
shall be and remain in full force and effect and shall govern the Equipment
described on Schedule I hereto.
(10) References. Any and all notices, requests, certificates and other
instruments executed and delivered concurrently with or after the execution and
delivery of this Lease Supplement may refer to the "Master Lease Intended as
Security (FlashVision/SanDisk Tranche), dated as of December 27, 2000", or may
identify the Lease in any other respect
Exhibit A - 2
30
<PAGE>
EXECUTION COPY
without making specific reference to this Lease Supplement, but nevertheless all
such references shall be deemed to include this Lease Supplement, unless the
context shall otherwise require.
(11) Counterparts. This Lease Supplement may be executed in any number of
counterparts, each of which shall be an original, but all of which shall
together constitute one and the same instrument. Only the counterpart designated
as "Counterpart No. 1" shall evidence a monetary obligation of Lessee or shall
be deemed to be chattel paper for purposes of the Uniform Commercial Code, and
such copy shall be held by Agent.
(12) GOVERNING LAW. THIS LEASE SUPPLEMENT SHALL BE GOVERNED BY AND
CONSTRUED UNDER THE INTERNAL LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO
CONFLICT OF LAW PRINCIPLES.
[remainder of page intentionally left blank]
Exhibit A - 3
31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Lease Supplement
No. ___ to be executed and delivered as of the date first above written.
FLASHVISION, L.L.C.
By:
-------------------------------------
Name Printed:
---------------------------
Title:
----------------------------------
ABN AMRO BANK N.V., not individually but
solely as Lessor
By:
-------------------------------------
Name Printed:
---------------------------
Title:
----------------------------------
By:
-------------------------------------
Name Printed:
---------------------------
Title:
----------------------------------
32
<PAGE>
THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART.
Receipt of this original counterpart of the foregoing Lease Supplement is hereby
acknowledged as of the date hereof.
ABN AMRO BANK N.V.,
not individually but solely as
Agent for the Participants
By:
-------------------------------------
Name Printed:
---------------------------
Title:
----------------------------------
By:
-------------------------------------
Name Printed:
---------------------------
Title:
----------------------------------
33
<PAGE>
ATTACHMENT A
TO LEASE SUPPLEMENT NO. ___
_____________, ______ Funding
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Fair
Equipment Delivery Internal Purchase Market
Tool ID Description Manufacturer Model PO# Serial # Date Order # Price Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
Total Lease Supplement No. ____ $_______________
34
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.50
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>GUARANTEE, DATED 12/27/2000
<TEXT>
<PAGE>
Exhibit 10.50
===============================================================================
GUARANTEE
dated as of December 27, 2000
from
SANDISK CORPORATION,
as Guarantor
to
ABN AMRO BANK N.V.,
as Lessor and Agent,
and
EACH OF THE PARTICIPANTS
===============================================================================
FLASHVISION/SANDISK TRANCHE
2000 LEASE FINANCING
<PAGE>
TABLE OF CONTENTS
Page
Section 1. Defined Terms..................................................1
Section 2. Guarantee......................................................8
Section 3. Intentionally Omitted..........................................8
Section 4. No Subrogation; Subordination..................................8
Section 5. Amendments, etc. with Respect to the Guaranteed Obligations;
Waiver of Rights...............................................9
Section 6. Guarantee Absolute and Unconditional..........................10
Section 7. Reinstatement.................................................10
Section 8. Payments......................................................11
Section 9. Representations of Guarantor..................................11
Section 10. Covenants of Guarantor........................................15
Section 11. Guarantee Events of Default; Remedies.........................26
Section 12. Notices.......................................................29
Section 13. Severability..................................................29
Section 14. Integration...................................................29
Section 15. Amendments in Writing.........................................29
Section 16. Section Headings..............................................29
Section 17. Successors and Assigns........................................29
Section 18. Submission to Jurisdiction....................................29
Section 19. WAIVER OF JURY TRIAL..........................................29
Section 20. GOVERNING LAW.................................................30
Section 21. Nature of Transaction.........................................30
Section 22. Actions by Guaranteed Parties.................................30
Section 23. Termination...................................................30
i
<PAGE>
SCHEDULES
Schedule I Notice Information
Schedule 9(u) Subsidiaries
Schedule 10(a)(iv)(M) Form of Annual Plan
Schedule 10(b)(i) Indebtedness
Schedule 10(b)(ii) Liens
Schedule 10(b)(iv)(D) Investments
ii
<PAGE>
GUARANTEE
GUARANTEE (this "Guarantee"), dated as of December 27, 2000, made by
SANDISK CORPORATION, a Delaware corporation (the "Guarantor"), in favor of ABN
AMRO BANK N.V., a bank organized under the laws of the Netherlands, not in its
individual capacity, but solely as lessor (together with its permitted
successors and assign, the "Lessor"), ABN AMRO BANK N.V., as agent for each of
the Participants (in such capacity, together with its successors in such
capacity, the "Agent"), and each of the Participants.
W I T N E S S E T H:
WHEREAS, FlashVision, L.L.C., a Virginia limited liability company
(together with its permitted successors and assigns, the "Lessee"), Lessor,
Agent and the Participants have entered into that certain Participation
Agreement (FlashVision/SanDisk Tranche), dated as of the date hereof (as
amended, restated, modified or supplemented after the date hereof, the
"Participation Agreement (SanDisk Tranche)"), for the purpose of providing lease
financing in respect of certain equipment for Lessee; and
WHEREAS, pursuant to the Participation Agreement (SanDisk Tranche) and the
other SanDisk Tranche Operative Documents, on each Lease Supplement Closing Date
with respect to any Equipment, Lessor, using amounts funded by the Participants,
will pay to Lessee the Purchase Price of the Lease Supplement Equipment to be
purchased by Lessor on such Lease Supplement Closing Date, which Equipment shall
in turn be leased to Lessee by Lessor; and
WHEREAS, subject to the terms and conditions of the Participation
Agreement (SanDisk Tranche) and the other SanDisk Tranche Operative Documents,
from time to time during the Installation Period the Participants are willing to
purchase Participation Interests in Advances made by Lessor to fund a portion of
the Purchase Price of such Equipment; and
WHEREAS, it is a condition precedent to the obligations of Lessor, Agent
and the Participants under the Participation Agreement (SanDisk Tranche) that
Guarantor shall have executed and delivered this Guarantee to Lessor, Agent and
the Participants.
NOW, THEREFORE, in consideration of the premises and to induce Lessor to
enter into the Lease and the other SanDisk Tranche Operative Documents to which
it is a party and the Participants to enter into the Participation Agreement
(SanDisk Tranche) and to purchase their Participation Interests, Guarantor
hereby agrees as follows:
Section 1. Defined Terms.
(a) As used herein, the following terms shall have the following
respective meanings:
"Adverse Proceeding" means any action, suit, proceeding (whether
administrative, judicial or otherwise), governmental investigation or
arbitration (whether or not purportedly on behalf of Guarantor or any of
Guarantor's Subsidiaries) at law or in equity, or before or by any
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED
PORTIONS.
<PAGE>
Governmental Authority (including any Environmental Claims), whether pending or,
to the knowledge of Guarantor or its Subsidiaries, threatened in writing against
or affecting Guarantor or any of its Subsidiaries or any property of the
Guarantor or any of its Subsidiaries.
"Consolidated Assets" means, at any date of determination, the total
assets of the Guarantor and its Subsidiaries on a consolidated basis.
"Deposit Account" means a demand, time, savings, passbook or like account
with a bank, savings and loan association, credit union or like organization,
other than an account evidenced by a negotiable certificate of deposit.
"Domestic Subsidiary" means any Subsidiary organized under the laws of the
United States of America, any state thereof or the District of Columbia.
"Equity Securities" of any Person shall mean (a) all common stock,
preferred stock, participations, shares, partnership interests or other equity
interests in and of such Person (regardless of how designated and whether or not
voting or non-voting) and (b) all warrants, options and other rights to acquire
any of the foregoing.
"Fixed Charges" shall mean, for any period for which a determination is
made pursuant to the applicable terms of this Guarantee, the sum, without
duplication, determined in respect of Guarantor and its Subsidiaries on a
consolidated basis, of (a) Interest Expense of Guarantor and its Subsidiaries
for such period (including without limitation the interest and yield component
of any Funded Indebtedness of any Person (including Lessee) with respect to
which and to the extent Guarantor or any of its Subsidiaries has any Guaranty
Obligations) plus (b) current maturities of long term Funded Indebtedness of
Guarantor and its Subsidiaries, plus (c) all rental expenses of Guarantor and
its Subsidiaries for such period.
"Fixed Charge Coverage Ratio" shall mean for any period for which a
determination is made pursuant to the applicable terms of this Guarantee, with
respect to Guarantor and its Subsidiaries on a consolidated basis as of any day,
the ratio of (a) Guarantor EBITDAR for such period minus Capital Expenditures
for such period (but excluding, at all times during Guarantor's 2001 fiscal
year, up to $70,000,000 in the aggregate of Capital Expenditures made during
such fiscal year and, at all times during Guarantor's 2002 fiscal year, Capital
Expenditures made during such fiscal year in an aggregate amount equal to the
portion, if any, of aggregate Capital Expenditures so permitted to be excluded
in Guarantor's 2001 fiscal year which were not expended in such 2001 fiscal
year), to (b) Fixed Charges for such period.
"Foreign Subsidiary" means any Subsidiary that is not a Domestic
Subsidiary.
"Funded Indebtedness" of any Person shall mean, without duplication:
(a) All obligations of such Person evidenced by notes, bonds,
debentures or other similar instruments and all other obligations of such
Person for borrowed money (including obligations to repurchase receivables
and other assets sold with recourse);
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2
<PAGE>
(b) All non-contingent obligations of such Person for the deferred
purchase price of property or services (including obligations under
letters of credit and other credit facilities which secure or finance such
purchase price), other than trade payables incurred by such Person in the
ordinary course of its business on ordinary terms and overdue;
(c) All obligations of such Person under conditional sale or other
title retention agreements with respect to property acquired by such
Person (to the extent of the value of such property if the rights and
remedies of the seller or lender under such agreement in the event of
default are limited solely to repossession or sale of such property),
including the interest and yield components of rent under Synthetic Leases
and, without duplication, the principal balance of Synthetic Leases;
(d) All obligations of such Person as lessee under or with respect
to Capitalized Lease Obligations; and
(e) any Guaranty Obligations of such Person in respect of
obligations described in clauses (a) through (d) above of another Person.
"Guarantee Default" shall mean an event, act, condition or occurrence
which with the giving of notice or the lapse of time (or both) would become a
Guarantee Event of Default.
"Guarantee Event of Default" shall mean any of the events specified in
Section 11.1; provided, however, that any requirement for the giving of notice,
the lapse of time, or both, or any other condition, has been satisfied.
"Guaranteed Obligations" means the collective reference to (a) all Rent,
including the Lease Balance, any Lease Supplement Balance, any Residual Value
Guarantee Amount, any other payments required to be made by Lessee upon any
purchase or sale of Equipment, any indemnity payments, any damages and any
reimbursements including, without limitation, Transaction Expenses, payable by
Lessee under each of the Participation Agreement (SanDisk Tranche), the Lease or
any other SanDisk Tranche Operative Documents to which Lessee is a party; (b)
Guarantor's obligations under each of the Specified Master Agreement Document
Provisions in those Master Agreement Documents to which it is a party.
Notwithstanding anything contained in this definition of "Guaranteed
Obligations," Guaranteed Obligations shall not include any obligation Lessee may
have to Lessor, Agent or any of the Participants under the SanDisk Tranche
Operative Documents which have actually been paid to Lessor or Agent by Lessee.
"Guaranteed Parties" means Lessor, Agent and the Participants and their
respective permitted successors and assigns, collectively.
"Guaranty Obligation" shall mean, with respect to any Person, any direct
or indirect liability of that Person with respect to any indebtedness, lease,
dividend, letter of credit or other obligation, including a Synthetic Lease (the
"primary obligations") of another Person (the "primary obligor"), including any
obligation of that Person, whether or not contingent, (a) to purchase,
repurchase or otherwise acquire such primary obligation or any property
constituting direct or indirect security therefor, or (b) to advance or provide
funds (i) for the payment or
3
3
<PAGE>
discharge of any such primary obligation, or (ii) to maintain working capital or
equity capital of the primary obligor or otherwise to maintain the net worth or
solvency or any balance sheet item, level of income or financial condition of
the primary obligor, or (c) to purchase property, securities or services
primarily for the purpose of assuring the owner of any such primary obligation
of the ability of the primary obligor to make payment of such primary
obligation, or (d) otherwise to assure or hold harmless the holder of any such
primary obligation against loss in respect thereof. The amount of any Guaranty
Obligation shall be deemed equal to the stated or determinable amount of the
primary obligation in respect of which such Guaranty Obligation is made or, if
not stated or if indeterminable, the maximum reasonably anticipated liability in
respect thereof.
"Historical Financial Statements" means as of the Document Closing Date,
(i) the audited financial statements of Guarantor and its Subsidiaries as filed
with the SEC, for the immediately preceding three fiscal years (or, in the case
of balance sheets, for the preceding two fiscal years), consisting of balance
sheets and the related consolidated statements of income, stockholders' equity
and cash flows for such fiscal years, (ii) the unaudited financial statements of
Guarantor and its Subsidiaries as filed with the SEC as at the most recently
ended fiscal quarter, consisting of a balance sheet and the related consolidated
statements of income, stockholders' equity and cash flows for the three-, six-
or nine-month period, as applicable, ending on such date.
"Indebtedness" of any Person shall mean, without duplication, (i) all
indebtedness of such Person for borrowed money or for the deferred purchase
price (or a portion thereof) of property or services, including obligations
under Synthetic Leases (other than trade payables incurred in the ordinary
course of business of such Person), (ii) all indebtedness of such Person
evidenced by a note, bond, debenture or similar instrument, (iii) the principal
component of all Capitalized Lease Obligations of such Person and all
obligations of such Person under any other lease to the extent that the then
present value of the minimum rental commitment thereunder should, in accordance
with GAAP, be capitalized on a balance sheet of such Person, (iv) the face
amount of all letters of credit issued for the account of such Person and,
without duplication, all unreimbursed amounts drawn thereunder, (v) all
indebtedness of any other Person secured by any Lien on any property owned by
such Person, whether or not such indebtedness has been assumed, (vi) payment
obligations under any interest rate protection agreements (including without
limitation, any interest rate swaps, caps, floors, collars and similar
agreements) and currency swaps and similar agreements, and (vii) any Guaranty
Obligations of such Person.
"Investment" of any Person shall mean any loan or advance of funds by such
Person to any other Person (other than advances to employees of such Person for
moving and travel expenses, drawing accounts and similar expenditures in the
ordinary course of business), any purchase or other acquisition of any Equity
Securities or Indebtedness of any other Person, any capital contribution by such
Person to or any other investment by such Person in any other Person; provided,
however, that Investments shall not include (a) accounts receivable or other
indebtedness owned by customers of such Person which are current assets and
arose from sales of inventory in the ordinary course of such Person's business
or (b) prepaid expenses of such Person incurred and prepaid in the ordinary
course of business.
"Material Adverse Effect" means any change or changes, effect or effects,
or condition or conditions that individually or in the aggregate are or would
reasonably be expected to be
4
4
<PAGE>
materially adverse to (i) the business operations or financial condition of
Guarantor and its Subsidiaries on a consolidated basis, (ii) the Overall
Transaction, (iii) the ability of Guarantor to perform its obligations under the
SanDisk Tranche Operative Documents to which it is a party, or (iv) the validity
or enforceability of any of the SanDisk Tranche Operative Documents.
"Material Subsidiary" means any Subsidiary that would be a "significant
subsidiary" within the meaning of Rule 1-02 of the SEC's Regulation S-X.
"Permitted Liens" means the following Liens:
(a) Liens in favor of Lessor, Agent or any Participant under the
SanDisk Tranche Operative Documents;
(b) Liens for taxes, assessments or governmental charges or claims
not yet due or with respect to which the Guarantor or its Subsidiaries are
taking each of the actions required pursuant to Section 10(a)(iii) of this
Guarantee; and
(c) statutory Liens of landlords, banks (and rights of set-off), of
carriers, warehousemen, mechanics, repairmen, workmen and materialmen, and
other Liens imposed by law, in each case incurred in the ordinary course
of business (i) for amounts not yet overdue or (ii) for amounts that are
overdue and that are being contested in good faith by appropriate
proceedings, so long as such reserves or other appropriate provisions, if
any, as shall be required by GAAP shall have been made for any such
contested amounts;
(d) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, or to secure the performance of
tenders, statutory obligations, surety and appeal bonds, bids, leases,
government contracts, trade contracts, performance and return-of-money
bonds and other similar obligations (exclusive of obligations for the
payment of borrowed money), so long as no foreclosure, sale or similar
proceedings have been commenced with respect thereto or on account
thereof;
(e) easements, rights-of-way, zoning restrictions, encroachments,
imperfections and other minor defects or irregularities in title, which,
individually or in the aggregate, are not substantial in amount and do not
materially detract from the value of the property subject thereto or
interfere with the ordinary conduct of the business of the Guarantor or
any of its Subsidiaries;
(f) Liens on property or assets of any corporation which becomes a
Subsidiary of the Guarantor or on any property or assets acquired by the
Guarantor or any of its Subsidiaries after the Document Closing Date,
provided that (A) such Liens exist at the time the stock of said
corporation or assets or property is or are acquired by such Person and
(B) such Liens were not created in contemplation of such acquisition by
the Guarantor or such Subsidiary;
5
5
<PAGE>
(g) Liens incurred in connection with the purchase or shipping of
goods or assets on the related assets and proceeds thereof in favor of the
seller or shipper of such goods or assets;
(h) Liens on insurance proceeds in favor of i