• Removable Cards.  Our removable data storage solutions are available in a variety of consumer form factors.  For example, our ultra-small microSD removable cards, available in capacities up to 16 gigabytes, are designed for use in mobile phones.  Our CompactFlash removable cards, available in capacities up to 64 gigabytes, are well-suited for a range of consumer applications, including digital cameras.  Our professional products include the SanDisk Ultra® and SanDisk Extreme® product lines which are designed for additional performance and reliability.

• Embedded Products.  Our embedded products include our iNAND™ embedded flash product line, with capacities up to 64 gigabytes,  which is designed to respond to the increasing demand for embedded storage for mobile phones and other portable devices.  We also offer high-capacity SSDs targeted for the personal computing and server markets in capacities up to 64 gigabytes.

• USB Drives.  Our Cruzer® line of USB Flash Drives, or UFDs, are used in the computing and consumer markets, are available in capacities up to 64 gigabytes, are highly-reliable and are designed for high-performance.  Our Cruzer products provide the user with the ability to carry files and application software on a portable USB drive.  Our Professional and Enterprise line of UFDs are geared towards the corporate user and are specifically designed to support secure and authorized access to corporate information.

• Digital Media Players.  Sansa® is our branded line of flash-based digital media players for the digital audio and video player market.  Many of our Sansa models offer a removable card slot for storage capacity expansion and easy transportability of content between devices.  Features within our Sansa line of products include FM radio, voice recording and support for a variety of audio and video download and subscription services.  Sansa media players are available in capacities up to 16 gigabytes.  We also sell slotMusic™ and slotRadio™ products that greatly simplify music content availability for consumers.

• Wafers and Components. In addition to finished products listed above, from time-to-time, we also sell raw memory wafers and memory components in packaged format.

• Mobile Phones.  We provide embedded and removable storage for mobile phones.  We are a leading supplier of the microSD and Memory Stick® Micro product lines of removable storage cards used in mobile phones.  Multimedia features in mobile phones, such as camera functionality, audio/MP3, games, video and internet access, have been gaining in popularity.  In addition, there has been increasing usage of native and downloaded applications in mobile phones.  The usage of multimedia features and applications are driving demand for additional NAND flash memory storage in mobile phones.

• Consumer.  We provide flash storage products to multiple consumer markets, including imaging, gaming, audio/video and global positioning system, or GPS.  Flash storage cards are used as the film for all major brands of digital cameras.  Our cards are also used to store video in solid-state digital camcorders and to store digital data in many other devices, such as maps in GPS devices.  In addition, portable game devices now include advanced features that require high capacity memory storage cards and we provide SD cards and Memory Stick PRO Duo™ cards that are all specifically packaged for the gaming market.  We also sell a line of digital media players with both embedded and removable memory under our Sansa brand with varying combinations of audio and video capabilities.  We also sell slotMusic cards and slotRadio which are preloaded with music content and can be used in a wide variety of mobile phones and digital media players.  Primary card formats for consumer devices include CF, SD, Memory Stick and xD-Picture Card™.

• Computing.  We provide multiple flash storage devices and solutions for the computing market.  USB flash drives allow consumers to store computer files, pictures and music on keychain-sized devices and then quickly and easily transfer these files between laptops, notebooks, desktops and other devices that incorporate a USB connection.  USB flash drives are easy to use, have replaced floppy disks and other types of external storage media, and are evolving into intelligent storage devices.  In addition, we sell modular SSDs, which we call pSSD™, that are flash-based embedded storage devices with capacities of up to 64 gigabytes for the netbook computer market.  We are currently developing SSDs for the mainstream notebook and desktop computer markets and we believe that SSDs will become a major application for NAND flash memory over the next several years as they are increasingly likely to replace hard disk drives in a variety of computing solutions.

• Retail.  We sell SanDisk branded products directly or through distributors to consumer electronics stores, office superstores, photo retailers, mobile phone stores, mass merchants, catalog and mail order companies, internet and e-commerce retailers, drug stores, supermarkets and convenience stores.

• OEM.  We sell our products through OEM customers who bundle or embed our products in a large variety of digital consumer devices, including mobile phones, digital cameras, personal computers, or PCs, navigation devices and gaming products.  We also sell products to OEM customers that offer the products under their own brand name in retail channels.  We sell directly to OEMs and through distributors.  We support our OEM customers through our direct sales representatives as well as through independent manufacturers’ representatives.

• high-density flash memory process, module integration, device design and reliability;
• securing data on a flash memory device;
• controller design;
• system-level integration;
• compact packaging; and
• low-cost system testing.

• Silicon Sourcing.  All of our flash memory card products require silicon chips for the memory and controller components.  The majority of our memory is supplied from the flash ventures with Toshiba.  This represents captive memory supply and we are obligated to take our share of the output from the flash ventures with Toshiba or pay the fixed costs associated with that capacity.  See “Ventures with Toshiba.”  From time-to-time, we also purchase non-captive NAND memory supply primarily from Toshiba, Samsung and Hynix.  We source our 3D one-time programmable, memory on a foundry basis at Taiwan Semiconductor Manufacturing Company, Ltd., or TSMC.  We are guaranteed a certain amount of the output from Toshiba, Samsung and Hynix if we provide orders within a required lead time; however we are not obligated to purchase the guaranteed supply unless we provide an order for future purchases.  Our controller wafers are currently supplied by Semiconductor Manufacturing International Corporation, or SMIC, TSMC, Tower Semiconductor Ltd., or Tower, and United Microelectronics Corporation, or UMC.

• Assembly and Testing.  We sort and test our wafers at Toshiba in Yokkaichi, Japan, and Ardentec Corporation in Taiwan.  Our flash memory products are assembled in both our in-house assembly and test facility in Shanghai, China, and through our network of contract manufacturers, including STATS ChipPAC Ltd., or STATS ChipPAC, in China, and Siliconware Precision Industries Co., Ltd., or SPIL, in Taiwan.  Our packaged memory final test, card assembly and card test is performed at our in-house facility and at subcontractors such as SPIL and United Test and Assembly Center Ltd., in Taiwan, and Beautiful Enterprise Co., Ltd., Flextronics International Ltd., or Flextronics, Global Brands Manufacture Ltd. and STATS ChipPAC, in China.  We believe the use of both our in-house assembly and test facility as well as subcontractors reduces the cost of our operations, provides flexibility and gives us access to increased production capacity.

• price, quality and on-time delivery of products;
• product performance, availability and differentiation;
• success in developing new applications and new market segments;
• sufficient availability of cost-efficient supply;
• efficiency of production;
• ownership and monetization of intellectual property rights;
• timing of new product announcements or introductions;
• the development of industry standards and formats;
• the number and nature of competitors in a given market; and
• general market and economic conditions.

• our tradition of technological innovation and standards creation which enables us to grow the overall market for flash memory;
• our intellectual property ownership, in particular our patents and MLC manufacturing know-how, provides us with license and royalty revenue as well as certain cost advantages;
• Flash Ventures provide us with leading edge, low-cost flash memory;
• we market and sell a broader range of card formats than any of our competitors, which gives us an advantage in obtaining strong retail and OEM distribution;
• we have global retail distribution of our products through worldwide retail storefronts; and
• we have worldwide leading market share in removable flash cards and UFDs.

• competitive pricing pressures, resulting in lower average selling prices and lower or negative product gross margins;
• expansion of supply from existing competitors and ourselves creating excess market supply, causing our average selling prices to decline faster than our costs;
• unpredictable or changing demand for our products, particularly for certain form factors or capacities;
• excess captive memory output or capacity which could result in write-downs for excess inventory, the application of lower of cost or market charges, fixed costs associated with under-utilized capacity, or other consequences;
• inability to maintain or grow sales through our new channels to which we are selling private label products, wafers and components or potential loss of branded product sales as a result;
• insufficient non-memory materials or capacity from our suppliers and contract manufacturers to meet demand; or increases in cost of non-memory materials or capacity;
• price increases which could result in lower unit and gigabyte demand, potentially leading to reduced revenue and/or excess inventory;
• less than anticipated demand, including a general economic weakness in our markets;
• insufficient supply from captive flash memory sources and inability to obtain non-captive flash memory supply in the time frame necessary to meet demand;
• increased purchases of non-captive flash memory, which typically cost more than captive flash memory and may be of less consistent quality;
• increased memory component and other costs as a result of currency exchange rate fluctuations to the U.S. dollar, particularly with respect to the Japanese yen;
• inability to adequately invest in future technologies and products while controlling operating expenses;
• our license and royalty revenues may fluctuate or decline significantly in the future due to license agreement renewals, non-renewals or if licensees fail to perform on a portion or all of their contractual obligations;
• inability to develop or unexpected difficulties or delays in developing, manufacturing with acceptable yields, or ramping, new technologies such as 32-nanometer or next generation process technology, 3-bits and 4-bits per cell NAND memory architecture, 3-Dimensional Read/Write, or 3D Read/Write, or other advanced, alternative technologies;
• insufficient assembly and test capacity from our Shanghai facility or our contract manufacturers or disruptions in operations at any of these facilities;
• difficulty in forecasting and managing inventory levels due to noncancelable contractual obligations to purchase materials, such as custom non-memory materials, and the need to build finished product in advance of customer purchase orders;
• timing, volume and cost of wafer production from Flash Ventures as impacted by fab start-up delays and costs, technology transitions, yields or production interruptions;
• disruption in the manufacturing operations of suppliers, including suppliers of sole-sourced components;
• potential delays in the emergence of new markets and products for NAND-based flash memory and acceptance of our products in these markets;
• timing of sell-through and the financial liquidity and strength of our distributors and retail customers;
• errors or defects in our products caused by, among other things, errors or defects in the memory or controller components, including memory and non-memory components we procure from third-party suppliers; and
• the other factors described under “Risk Factors” and elsewhere in this report.

• price, quality and on-time delivery of products;
• product performance, availability and differentiation;
• success in developing new applications and new market segments;
• sufficient availability of cost-efficient supply;
• efficiency of production;
• ownership and monetization of intellectual property rights;
• timing of new product announcements or introductions;
• the development of industry standards and formats;
• the number and nature of competitors in a given market; and
• general market and economic conditions.

• any of our existing patents will continue to be held valid, if challenged;
• 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
• any of our products or technologies do not infringe on the patents of other companies.

• the need to comply with foreign government regulation;
• changes in diplomatic and trade relationships;
• reduced sales to our customers or interruption to our manufacturing processes in the Pacific Rim that may arise from regional issues in Asia;
• imposition of regulatory requirements, tariffs, import and export restrictions and other barriers and restrictions;
• changes in, or the particular application of, government regulations;
• duties and/or fees related to customs entries for our products, which are all manufactured offshore;
• longer payment cycles and greater difficulty in accounts receivable collection;
• adverse tax rules and regulations;
• weak protection of our intellectual property rights;
• delays in product shipments due to local customs restrictions; and
• delays in research and development that may arise from political unrest at our development centers in Israel.

• increase our vulnerability to general adverse economic and industry conditions;
• limit our ability to obtain additional financing;
• require the dedication of a substantial portion of any cash flow from operations to the payment of principal of our indebtedness, thereby reducing the availability of such cash flow to fund our growth strategy, working capital, capital expenditures and other general corporate purposes;
• limit our flexibility in planning for, or reacting to, changes in our business and our industry;
• place us at a competitive disadvantage relative to our competitors with less debt; and
• increase our risk of credit rating downgrades.

• have entered into various over-the-counter cash-settled derivative transactions with respect to our common stock, concurrently with, and shortly after, the pricing of the notes; and
• may enter into, or may unwind, various over-the-counter derivatives and/or purchase or sell our common stock in secondary market transactions following the pricing of the notes, including during any observation period related to a conversion of notes.

 

Our principal facilities are located in Milpitas, California.  We lease four adjacent buildings comprising approximately 444,000 square feet.  These facilities house our corporate offices, the majority of our engineering team, as well as a portion of our sales, marketing, operations and corporate services organizations.  We occupy this space under lease agreements that expire in 2011 and 2013.  In addition, we own two buildings comprising approximately 157,000 square feet located in Kfar Saba, Israel, that house administrative offices and research and development facilities.  The buildings are located on a 99-year land lease, which we have 83 years remaining, of approximately 268,000 square feet of which approximately 70,000 square feet is vacant land for future expansion.  We have 48 years remaining on a 50-year land lease in Tefen, Israel of approximately 87,000 square feet of vacant land for future expansion.

We have 47 years remaining on a 50-year land lease in Shanghai, China of approximately 653,000 square feet on which we own an advanced testing and assembly facility of approximately 363,000 square feet.

We also lease sales and marketing offices in the U.S., China, France, Germany, India, Ireland, Israel, Japan, Korea, Russia, Scotland, Spain, Sweden, Taiwan and the United Arab Emirates; operation support offices in Taichung, Taiwan; Hong Kong, Shanghai and Shenzhen, China; and New Delhi, India; and design centers in Omer and Tefen, Israel; Edinburgh, Scotland; and Bangalore, India.

 

ITEM 3.

LEGAL PROCEEDINGS

 

See Note 16, “Litigation,” of the Notes to Consolidated Financial Statements of this Form 10-K included in Item 8 of this report.

 

 

No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2009.

• Inventory reserves primarily to reduce the carrying value to the lower-of-cost-or-market for both inventory on-hand and in the channel of $394 million.
• Charges of $121 million for adverse purchase commitments associated with under-utilization of Flash Ventures capacity for the 90-day period in which we have non-cancellable orders.
• Impairment in our investments in Flash Partners and Flash Alliance of $83 million.

• evaluating the core operating performance of the company;
• establishing internal budgets;
• setting and determining variable compensation levels;
• calculating return on investment for development programs and growth initiatives;
• comparing performance with internal forecasts and targeted business models;
• strategic planning; and
• benchmarking performance externally against our competitors.

 

The Company records estimated reductions of revenue for customer and distributor incentive programs and offerings, including price protection, promotions, co-op advertising and other volume-based incentives and expected returns.  Additionally, the Company has incentive programs that require it to estimate, the number of customers who will actually redeem the incentive.  All sales incentive programs are recorded as an offset to product revenues or deferred revenues.  Marketing development programs are recorded as a reduction to revenue.

Accounts Receivable and Allowance for Doubtful Accounts.  Accounts receivable include amounts owed by geographically dispersed distributors, retailers and original equipment manufacturer (“OEM”) customers.  No collateral is required.  Provisions are provided for sales returns and credit losses.

The Company estimates the collectibility of its accounts receivable based on a combination of factors.  In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations to the Company (e.g., bankruptcy filings or substantial downgrading of credit ratings), the Company provides allowance for bad debts against amounts due to reduce the net recognized receivable to the amount it reasonably believes will be collected.

Income Taxes.  The Company accounts for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s Consolidated Financial Statements, but have not been reflected in the Company's taxable income.  A valuation allowance has been established to reduce deferred tax assets to their estimated realizable value.  Therefore, the Company provides a valuation allowance to the extent that the Company does not believe it is more likely than not that it will generate sufficient taxable income in future periods to realize the benefit of its deferred tax assets.  The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.

Foreign Currency.  The Company determines the functional currency for its parent company and each of its subsidiaries by reviewing the currencies in which their respective operating activities occur.  Transaction gains and losses arising from activities in other than the applicable functional currency are calculated using average exchange rates for the applicable period and reported in net income (loss) as a non-operating item in each period.  Non-monetary balance sheet items denominated in a currency other than the applicable functional currency are translated using the exchange rate in effect on the balance sheet date and any gains and losses are included in cumulative translation adjustment.  The Company continuously evaluates its foreign currency exposures and may continue to enter into hedges or other risk mitigating arrangements in the future.  Aggregate gross foreign currency transaction gain (loss) prior to consideration of the offsetting hedges recorded to net income (loss) was ($90.0) million, $181.3 million and $15.6 million in fiscal years 2009, 2008 and 2007, respectively.

Cash Equivalents, Short and Long-Term Marketable Securities.  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.  Marketable securities with original maturities greater than three months and remaining maturities less than one year are classified as short-term marketable securities.  Marketable securities with remaining maturities greater than one year as of the balance sheet date are classified as long-term marketable securities.  Short and long-term fixed income investments consist of commercial paper, United States (“U.S.”) treasuries, government agency and government-sponsored agency obligations, corporate/municipal notes and bonds, and variable rate demand notes.  Both short and long-term marketable securities also include investments in certain equity securities.  The fair market value, based on quoted market prices, of cash equivalents, and short and long-term marketable securities at January 3, 2010 approximated their carrying value.  Cost of securities sold is based on specific identification.

In determining if and when a decline in market value below cost of these investments is other-than-temporary, the Company evaluates both quantitative and qualitative information including the market conditions, offering prices, trends of earnings, price multiples and other key measures.  For equity securities, when such a decline in value is deemed to be other-than-temporary, the Company recognizes an impairment loss in the current period operating results to the extent of the decline.  For debt securities, only the decline in the credit rating element of an other-than-temporary impairment is taken to the Consolidated Statement of Operations, unless the Company intends, or more likely than not will be forced, to sell the security.

 

 

Other Long-Lived Assets.  Intangible assets with definite useful lives and other long-lived assets are tested for impairment if certain impairment indicators are identified.  The Company assesses the carrying value of long-lived assets, whenever events or changes in circumstances indicate that the carrying value of these long-lived assets may not be recoverable.  Factors the Company considers important which could result in an impairment review include: (1) significant under-performance relative to the historical or projected future operating results; (2) significant changes in the manner of use of assets; (3) significant negative industry or economic trends; and (4) significant changes in the Company’s market capitalization relative to net book value.  Any changes in key assumptions used by the Company including those set forth above, could result in an impairment charge and such a charge could have a material adverse effect on the Company’s consolidated results of operations.  See Note 6, “Intangible Assets and Goodwill,” regarding impairment of long-lived assets in fiscal year 2008.

Fair Value of Financial Instruments.  For certain of the Company’s financial instruments, including accounts receivable, short-term marketable securities and accounts payable, the carrying amounts approximate fair value due to their short maturities.  See Note 3, “Investments and Fair Value Measurements,” for financial assets and liabilities measured at fair value.

Advertising Expenses.  Marketing co-op development programs, where the Company receives, or will receive, an identifiable benefit (e.g., goods or services) in exchange for the amount paid to its customer and the Company can reasonably estimate the fair value of the benefit it receives for the customer incentive payment, are classified, when granted, as a marketing expense.  Advertising expenses not meeting this criteria are classified as a reduction to product revenue.  Any other advertising expenses not meeting these conditions are expensed as incurred.  Advertising expenses were $7.0 million, $39.9 million and $35.5 million in fiscal years 2009, 2008 and 2007, respectively.

Research and Development Expenses.  Research and development expenditures are expensed as incurred.