Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
| (Mark one) | ||||
| [X] |
Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the quarterly period ended March 31, 2003 |
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OR
| [ ] |
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from to |
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| Commission File Number 0-26734 | ||||
SanDisk Corporation
| Delaware | 77-0191793 | |
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| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 140 Caspian Court, Sunnyvale, California | 94089 | |
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| (Address of principal executive offices) | (Zip code) |
(408) 542-0500
N/A
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 [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer’s classes of capital stock as of March 31, 2003
| Common Stock, $0.001 par value | 69,358,766 | |||
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| Class | Number of shares |
SanDisk Corporation
Index
| Page No. | ||||||||||
PART I. FINANCIAL INFORMATION |
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| Item 1. | Condensed Consolidated Financial Statements: |
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Condensed Consolidated Balance Sheets
March 31, 2003 and December 31, 2002 |
3 | |||||||||
Condensed Consolidated Statements of Operations
Three months ended March 31, 2003 and 2002 |
4 | |||||||||
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2003 and 2002 |
5 | |||||||||
Notes to Condensed Consolidated Financial Statements |
6 | |||||||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition
and Results of Operations |
18 | ||||||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
47 | ||||||||
| Item 4. | Controls and Procedures |
47 | ||||||||
PART II. OTHER INFORMATION |
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| Item 1. | Legal Proceedings |
48 | ||||||||
| Item 2. | Changes in Securities |
49 | ||||||||
| Item 3. | Defaults upon Senior Securities |
49 | ||||||||
| Item 4. | Submission of Matters to a Vote of Security Holders |
49 | ||||||||
| Item 5. | Other Information |
49 | ||||||||
| Item 6. | Exhibits and Reports on Form 8-K |
49 | ||||||||
Signatures |
50 | |||||||||
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
| SANDISK CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) |
|||||||||||
| March 31, | December 31, | ||||||||||
| 2003 | 2002* | ||||||||||
| (unaudited) | |||||||||||
Current Assets: |
|||||||||||
Cash and cash equivalents |
$ | 269,811 | $ | 266,635 | |||||||
Short-term investments |
214,709 | 189,856 | |||||||||
Investment in foundries |
119,723 | 110,069 | |||||||||
Accounts receivable, net |
80,971 | 81,086 | |||||||||
Inventories |
88,058 | 88,595 | |||||||||
Prepaid expenses, other current assets and tax
receivable |
8,558 | 18,489 | |||||||||
Total current assets |
781,830 | 754,730 | |||||||||
Property and equipment, net |
33,130 | 30,307 | |||||||||
Investment in foundries |
— | 24,197 | |||||||||
Investment in FlashVision |
142,785 | 142,825 | |||||||||
Deferred tax asset, deposits and other non-current assets |
14,729 | 21,520 | |||||||||
Total Assets |
$ | 972,474 | $ | 973,579 | |||||||
Current Liabilities: |
|||||||||||
Accounts payable |
$ | 33,940 | $ | 28,294 | |||||||
Accounts payable to related parties |
23,263 | 26,349 | |||||||||
Accrued payroll and related expenses |
7,214 | 11,690 | |||||||||
Income taxes payable |
17,837 | 15,978 | |||||||||
Deferred tax liability |
1,237 | 6,922 | |||||||||
Research & development liability, related party |
4,500 | 10,507 | |||||||||
Other accrued liabilities |
27,282 | 26,780 | |||||||||
Deferred income on shipments to distributors
and
retailers and deferred revenue |
42,892 | 43,760 | |||||||||
Total current liabilities |
158,165 | 170,280 | |||||||||
Convertible subordinated notes payable |
150,000 | 150,000 | |||||||||
Other liabilities |
2,039 | 2,404 | |||||||||
Deferred revenue |
22,027 | 23,175 | |||||||||
Total Liabilities |
332,231 | 345,859 | |||||||||
Commitments and contingencies |
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Stockholders’ Equity: |
|||||||||||
Preferred
stock |
— | — | |||||||||
Common stock |
588,140 | 585,968 | |||||||||
Retained earnings |
109,690 | 84,765 | |||||||||
Accumulated other comprehensive loss |
(57,587 | ) | (43,013 | ) | |||||||
Total stockholders’ equity |
640,243 | 627,720 | |||||||||
Total Liabilities and
Stockholders’ Equity |
$ | 972,474 | $ | 973,579 | |||||||
*Information derived from the audited Consolidated Financial Statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 3
SANDISK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(unaudited)
| Three months ended | ||||||||||
| March 31, | ||||||||||
| 2003 | 2002 | |||||||||
Revenues: |
||||||||||
Product |
$ | 155,448 | $ | 86,459 | ||||||
License and royalty |
19,032 | 6,160 | ||||||||
Total revenue |
174,480 | 92,619 | ||||||||
Cost of product revenue |
102,889 | 81,399 | ||||||||
Gross profits |
71,591 | 11,220 | ||||||||
Operating expenses: |
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Research and development |
17,578 | 14,550 | ||||||||
Sales and marketing |
12,642 | 9,048 | ||||||||
General and administrative |
6,685 | 4,666 | ||||||||
Total operating expenses |
36,905 | 28,264 | ||||||||
Operating income (loss) |
34,686 | (17,044 | ) | |||||||
Equity in income (loss) of joint ventures |
139 | (493 | ) | |||||||
Interest income |
2,188 | 2,314 | ||||||||
Interest expense |
(1,688 | ) | (1,656 | ) | ||||||
Loss in investment in foundries |
(2,166 | ) | — | |||||||
Loss in equity investment |
(4,500 | ) | — | |||||||
Other loss, net |
(1,016 | ) | (54 | ) | ||||||
Income (loss) before taxes |
27,643 | (16,933 | ) | |||||||
Provision for (benefit from) income taxes |
2,718 | (13,199 | ) | |||||||
Net income (loss) |
$ | 24,925 | $ | (3,734 | ) | |||||
Net income (loss) per share |
||||||||||
Basic |
$ | 0.36 | $ | (0.05 | ) | |||||
Diluted |
$ | 0.33 | $ | (0.05 | ) | |||||
Shares used in computing net income (loss) per share |
||||||||||
Basic |
69,289 | 68,598 | ||||||||
Diluted |
79,957 | 68,598 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 4
SANDISK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
| Three months ended | ||||||||||
| March 31, | ||||||||||
| 2003 | 2002 | |||||||||
Cash flows from operating activities: |
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Net income (loss) |
$ | 24,925 | $ | (3,734 | ) | |||||
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |
||||||||||
Depreciation and amortization |
4,850 | 4,795 | ||||||||
Deferred taxes |
(5,685 | ) | (11,151 | ) | ||||||
Allowance for doubtful accounts |
— | 150 | ||||||||
Amortization bond issuance costs |
220 | 215 | ||||||||
Loss on investment in foundry |
2,166 | — | ||||||||
Loss on equity investment |
4,500 | — | ||||||||
Equity in (income) loss of joint ventures |
(139 | ) | 494 | |||||||
(Gain) loss on disposal of fixed assets |
371 | (1,230 | ) | |||||||
Changes in operating assets and liabilities: |
||||||||||
Accounts receivable, net |
115 | (7,752 | ) | |||||||
Income tax receivable |
1,563 | (480 | ) | |||||||
Inventory |
537 | 3,452 | ||||||||
Prepaid expenses and other current assets |
8,368 | (1,568 | ) | |||||||
Deposits and other assets |
(24 | ) | 238 | |||||||
Investment in FlashVision |
179 | 3,736 | ||||||||
Accounts payable |
5,646 | (1,510 | ) | |||||||
Accrued payroll and related expenses |
(4,476 | ) | 280 | |||||||
Income taxes payable |
1,859 | (4,539 | ) | |||||||
Other current liabilities |
502 | 89 | ||||||||
Other current liabilities, related parties |
(3,086 | ) | 5,148 | |||||||
Research & development liabilities, related parties |
(6,007 | ) | 4,514 | |||||||
Deferred revenue |
(2,016 | ) | 5,224 | |||||||
Other non-current liabilities |
(365 | ) | — | |||||||
Net cash provided (used) by operating activities |
34,003 | (3,629 | ) | |||||||
Cash flows from investing activities: |
||||||||||
Purchases of short term investments |
(53,562 | ) | (52,302 | ) | ||||||
Proceeds from sale of short term investments |
28,512 | 21,636 | ||||||||
Restricted cash |
— | (10,723 | ) | |||||||
Acquisition of capital equipment |
(7,949 | ) | (6,429 | ) | ||||||
Net cash used in investing activities |
(32,999 | ) | (47,818 | ) | ||||||
Cash flows from financing activities: |
||||||||||
Proceeds from issuance of convertible subordinated
notes |
— | 24,375 | ||||||||
Issuance of common stock |
2,172 | 1,970 | ||||||||
Net cash provided by financing activities |
2,172 | 26,345 | ||||||||
Net increase (decrease) in cash and cash equivalents |
3,176 | (25,102 | ) | |||||||
Cash and cash equivalents at beginning of period |
266,635 | 189,499 | ||||||||
Cash and cash equivalents at end of period |
$ | 269,811 | $ | 164,397 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 5
SANDISK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of presentation
These interim condensed consolidated financial statements are unaudited but reflect, in the opinion of management, all adjustments, consisting of normal recurring adjustments and accruals necessary to present fairly the financial position of SanDisk Corporation and its subsidiaries (the “Company”) as of March 31, 2003, and the results of operations for the three month periods ended March 31, 2003 and 2002 and cash flows for the three month periods ended March 31, 2003 and 2002. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K as of, and for, the year ended December 31, 2002. Certain prior period amounts have been reclassified to conform to the current period presentation.
The Company’s results of operations for the three month periods ended March 31, 2003 and 2002 and its cash flows for the three month periods ended March 31, 2003 and 2002 are not necessarily indicative of results that may be expected for the year ended December 31, 2003, or for any future period.
The Company’s fiscal year ends on the Sunday closest to December 31, and each fiscal quarter ends on the Sunday closest to March 31, June 30, and September 30. The first fiscal quarters of 2003 and 2002 ended on March 30, 2003 and March 31, 2002. Fiscal year 2003 is 52 weeks long and ends on December 28, 2003. Fiscal year 2002 was 52 weeks long and ended on December 29, 2002. For ease of presentation, the accompanying financial statements have been shown as ending on the last day of the calendar month.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the accounts of SanDisk Corporation and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Foreign Currency Translation. The U.S. dollar is the functional currency for most of the Company’s foreign operations. Gains and losses on the remeasurement into U.S. Dollars of the amounts denominated in foreign currencies are included in the net income (loss) for those operations whose functional currency is the U.S. dollar. The Japanese Yen is the functional currency for the Company’s restructured FlashVision joint venture.
Deferred Tax Assets. At December 31, 2002, the Company provided a full valuation allowance against the net deferred tax assets of approximately $66 million. At the end of the first quarter of 2003, based on the weight of all available evidence, the Company released a portion of that valuation allowance based primarily on the first quarter’s taxable income and its assessment of the availability of future taxable income to benefit the net deferred tax assets. This release reduced the effective tax rate used for the first quarter of 2003. Any release of the remaining valuation allowance in the current year would be based primarily on the Company’s ability to realize tax credit carryforwards and any future capital gains on its investments.
Warranty Costs. The majority of the Company’s products are warrantied for
one to seven years. A provision for the estimated future cost related to
warranty expense is recorded and included in the cost of revenue when revenue
is recognized. The Company’s warranty obligation is affected by product
failure rates and repair or replacement costs incurred in correcting a product
failure. Should actual product failure rates or repair or replacement costs
differ from the Company’s estimates, increases or decreases to its warranty
liability would be required.
6
The warranty activity is as follows (in thousands):
Table of Contents
| Balance at | Additions Charged to | Balance at | ||||||||||
| December 31, 2002 | Costs of Revenue | (Usage) | March 31, 2003 | |||||||||
| $3,472 | $ | 1,632 | $ | (1,513 | ) | $ | 3,591 | |||||
Stock Based Compensation. The Company accounts for employee stock based compensation using the intrinsic value method and accordingly, no expense has been recognized for options granted to employees under the plans as the grant price is set at the fair market value of the stock on the day of grant. The following table summarizes relevant information as if the fair value recognition provisions of SFAS No. 123, “Accounting for Stock Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” had been applied to all stock-based awards (in thousands, except per share data):
| Three
months ended March 31, |
||||||||
| 2003 | 2002 | |||||||
Net income (loss) as reported |
$ | 24,925 | $ | (3,734 | ) | |||
Fair value method expense, net of related tax |
$ | (9,192 | ) | $ | (2,134 | ) | ||
Pro forma net income (loss) |
$ | 15,733 | $ | (5,868 | ) | |||
Pro forma basic income (loss) per share |
$ | 0.23 | $ | (0.09 | ) | |||
Pro forma diluted income (loss) per share |
$ | 0.22 | $ | (0.09 | ) | |||
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions for grants made as of March 31, 2003 and 2002:
| March 31, | ||||||||
| 2003 | 2002 | |||||||
Dividend yield |
None | None | ||||||
Expected volatility |
0.975 | 0.963 | ||||||
Risk free interest rate |
2.88 | % | 4.56 | % | ||||
Expected lives |
5 years | 5 years | ||||||
The weighted-average fair value of options granted during the first quarters of 2003 and 2002 were $13.16 and $9.67, respectively.
The pro forma net income (loss) and pro forma net income (loss) per share listed above include expense related to our Employee Stock Purchase Plans. The fair value of issuance under the employee stock purchase plans is estimated on the date of issuance using the Black-Scholes model, with the following weighted-average assumptions for issuances made in the first quarters of 2003 and 2002:
| March 31, | ||||||||
| 2003 | 2002 | |||||||
Dividend yield |
None | None | ||||||
Expected volatility |
0.841 | 0.895 | ||||||
Risk free interest rate |
3.07 | % | 4.33 | % | ||||
Expected lives |
1/2 year | 1/2 year | ||||||
7
Recent Accounting Pronouncements — On December 31, 2002 the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” SFAS 148 amends SFAS 123 “Accounting of Stock-Based Compensation” and APB Opinion No. 28 “Interim Financial Reporting.” SFAS 148 provides alternative transition methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation, and requires disclosure in both the interim and annual financial statements about the method of accounting for stock-based employee compensation and its effect on reported net income and earnings per share. The recognition provisions of SFAS 148 are applied as of the beginning of a company’s fiscal year for financial statement periods and interim periods within those fiscal years ending after December 15, 2002, and SFAS 148’s amendment of disclosure requirements of APB No. 28 is effective for financial statements ending after December 15, 2002. The Company has elected not to adopt the recognition provisions of SFAS 148. However, the Company elected to follow APB 25, and related interpretations, in accounting for its employee stock options. Under APB 25, if 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. The disclosure requirements of SFAS 148 for pro forma information regarding reported net income and earnings per share have been adopted for the fiscal year ending December 31, 2002 and have been applied to the first quarter of fiscal year 2003. The adoption of the disclosure provisions of SFAS 148 did not have a material impact on the Company’s results of operations and financial position.
In July 2002, the FASB issued FASB Interpretation No. 45, or FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”-an interpretation of SFAS No 5 “Accounting for Contingencies,” SFAS No. 57 “Related Party Disclosures,” SFAS No. 107 “Disclosures about Fair Value of Financial Instruments,” and rescission of FIN 34 “Disclosure of Indirect Guarantees of Indebtedness of Others.” FIN 45 provides disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. FIN 45 establishes recognition and measurement provisions of a liability to be recognized at the inception of a guarantee for fair value based on agreements which contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying contingent liability related to the guaranteed party. The disclosure provisions of FIN 45 are effective for financial statement periods and interim periods within those fiscal years ending after December 15, 2002, and the requirement for recognition and measurement provisions are effective for guarantees issued or modified on a prospective basis after December 31, 2002. The Company adopted the disclosure provisions for the fiscal year ended December 31, 2002. The Company has 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. Although, the Company is not currently engaged in any indemnification proceedings, the Company may periodically engage in l