SanDisk 2000 Annual Report Download - page 21

19 . Sa n D is k C o r p o ra t io n . 2 0 0 0 A n n ua l Re p o r t
p ro vid ers have had sig nific ant suc c ess in U.S. courts in
the ir litig ation w ith Nap ster.Co m and M P3.Co m , and
this m ay have slo w e d dow n the w idespread d istribu-
tio n o f d ig ital m usic on the internet. Althoug h the
Secure Dig ital Card is d esig ne d sp ec ific ally to ad d re ss
the cop y p ro tec tion rig hts o f the c o nte nt p ro vid e rs,
the re c an b e no assu ranc e that these c o ntent
p ro vid ers w ill find th ese m e asures suffic ient or w ill
ag re e to support them . Furtherm o re , there is no
assurance that consum ers w ill w id ely ad op t Se c ure
Dig ital Card s, as they only operate w ith c o p yrig hted
c o ntent. Co nve rse ly, b ro ad ac c e p tanc e o f o ur Sec ure
Dig ital Card b y c onsum ers m ay reduc e d e m and for o ur
M ultiM ed iaCard and Co m pac tFlash c ard produc ts. See
“ – The success of our b usine ss d e p end s o n em erg ing
m arkets and new p ro d uc ts.”
W e d e p e nd o n th ir d p a r ty fo und r ie s fo r s ilic o n
w a fe r s .
All of our pro du c ts require silic o n w afe rs. W e re ly o n
UM C in Taiw an and Toshib a in Yo kkaic hi, Jap an to sup -
p ly the m ajority o f o ur silic o n w afers. W e d e p end on
UM C to allo c ate a portio n o f its c ap ac ity to m ee t our
ne eds, p ro d uc e ac c eptab le quality w afers w ith ac c ept-
ab le m anufac turing yield s and d e liver o ur w afers o n a
tim e ly b asis at a c o m p e titive pric e. If UM C is unab le to
satisfy these req u irem ents, o ur b usiness, financ ial con-
d itio n and o p e rating re sults m ay suffe r. Any d isruptio n
in sup p ly fro m UM C d ue to natural d isaste r, p o w e r fail-
ure o r o the r c ause s c o uld sig nific antly harm our busi-
ne ss, financ ial c o nd ition and results o f o p e ratio ns.
Und e r the te rm s o f o ur w afer sup ply ag re em ents
w ith UM C, w e are o b lig ated to p ro vid e a ro lling fo re -
c ast o f antic ip ated p urc hase ord ers fo r the next six
c ale nd ar m o nths. Generally, the e stim ate s fo r the first
thre e m o nths o f e ac h fore c as t are b ind ing c o m m it-
m ents. The estim ates fo r the rem aining m o nths m ay
o nly be c hang ed b y a certain perc e ntag e from the
p revio us m onth’s fo recast. This lim its our ab ility to
reac t to fluc tuations in dem and fo r our p ro d uc ts. Fo r
exam p le , if c usto m e r d e m and falls b elow o ur forec ast
and w e are unable to reschedule o r canc e l our w afe r
o rd ers, w e m ay end up w ith excess w afe r invento ries,
w hic h c o uld result in hig her o p erating exp ense s and
red uc ed g ro ss m arg ins. Co nversely, if c usto m e r
d em and exc eed s o ur fo re c asts, w e m ay be unab le to
o b tain an adeq uate s up p ly of w afers to fill c usto m e r
o rd ers, w hic h c o uld result in d issatisfied c usto m e rs,
lo st sales and lo w e r re venue s. In additio n, in Fe b ruary
200 0, w e ente red into a c ap ac ity and reservatio n
d eposit ag reem ent w ith UM C. To reserve add itio nal
fo und ry c apac ity under this ag re em ent, w e paid UM C
a reservation dep o sit. This d e p o sit w ill b e refund ed to
us o n a q uarterly basis, over the ag reem e nt te rm , if
w e p urc hase the full w afer c ap acity re se rved fo r us.
W e m ay fo rfeit p art o f o ur d e p o sit if w e are unab le to
utilize o ur reserve d c ap ac ity w ithin fo ur q uarters o f the
end o f the agre e m ent term . If w e are unable to obtain
sc hed uled q uantitie s o f w afers w ith ac c ep tab le price
and yields fro m any fo undry, our b usine ss, financ ial
c o nd ition and results o f o p e ratio ns could be harm ed .
In 20 0 0, 1999 , and 19 9 8, w e p urc hase d w afe rs fro m
UM C, a found ry in w hic h w e have o w ne rship, to taling
ap p ro xim ate ly $ 16 1.6 m illio n, $2 2.8 m illion and $ 11.6 m il-
lio n, re sp e c tive ly.
In the third quarte r of 20 0 0, w e c o m p le ted q ualifi-
c ations and b egan vo lum e p ro d uc tio n o f the 256
m egab it D2 0.2 4 m ic ro n te c hnolo g y in tw o UM C fabs.
W e no w have thre e UM C fab s p ro d uc ing o ur 0.2 4
m ic ro n w afers. Th e yields o n these w afers vary fro m
fab to fab d ue to the relative stag e o f start- up or p ro -
d uc tion ram p . The third UM C fab to beg in p ro d uctio n is
a new UM C fab and w e have b een exp e rienc ing low er
yield s than the tw o o the r fab s. The re c an b e no assur-
anc es that w e w ill no t exp erie nc e delays in w afe r avail-
ab ility, low yie ld s, o r und e te c te d m anufacturing flaw s
w hic h m ay ad ve rse ly im p ac t the re liab le operatio n o f
o ur produc ts. Any suc h d iffic ulties m ay adverse ly
im p ac t o ur p ro d uc t sup p ly and g ro ss m arg ins.
O u r in ve s tm e n t in n e w fla s h m e m o r y w a fe r p ro d u c -
tio n m a y r e s u lt in in c r e a s e d e x p e n s e s a nd flu c tu a -
tio ns in o p e ra tin g r e s u lts .
On June 30 , 2 000 , w e c lo s ed a transac tion w ith
To shib a p ro vid ing for the jo int d evelo p m ent and m anu-
facture o f 5 12 m egab it and 1 g ig ab it flash m e m o ry
c hip s and Se c ure Dig ital Card contro lle rs. Und e r this
ag re em ent, w e had invested $ 13 4.7 m illio n as o f
Dec em b e r 3 1, 2 0 00 and in January 2 001 invested the
rem aining $15.3 m illio n. W e have also g uarante e d up to
$215 m illio n in equip m ent lease lines e nte red into b y
FlashVision LLC, w hic h is jo intly o w ne d by us and
To shib a, m illio n in eq uipm ent lease line s to equip
To shib a’s Do m inio n Sem icond uc tor m anufac turing
c lean room w ith ad vanced w afer p ro c essing e q uip -
m ent. As o f January 26, 2 001, $20 m illion of this
am o unt had b een b o rro w e d by FlashVisio n. Toshib a is
o b lig ated to invest and g uarante e an e q ual am ount and
eac h of us w ill eq ually share the startup e xp e nses and
the w afer o utp ut. W e w ill use the new p ro d uctio n
c ap acity at Do m in io n to m anufac ture p rim arily N AN D
flash m em ory w afers w ith m inim um litho g rap hic fe ature
size of 0.16 m icron initially, m oving to 0 .13 m ic ro n in the
future . Suc h m inim um fe ature size s are c o nsid ered
to d ay to b e am o n g the m o st advanc e d fo r m ass p ro -
d uc tion o f silic o n w afers and have ne ver b een used for
the hig h vo lum e m anufac ture o f flash m e m o ry c hips.
The refo re, it is d iffic u lt to p re d ic t ho w lo ng it w ill take to
equip and com m enc e p ro d uctio n at the ne w fac ility and
ac hieve adeq uate yie ld s, re liab le operatio n, and e c o -
no m ic ally attrac tive produc t c o sts b ased o n o ur ne w
d esig ns. We have no t o p erated o ur o w n w afer fab ric a-
tio n fac ility in the p ast and there fo re w e rely o n To shib a
to ad d ress the se challe ng e s. W ith o ur investm e nts in
the Dom inio n fac ility, w e are no w exp o se d to the
ad ve rse financial im pac t o f any d elays o r m anufac turing
p ro b lem s asso ciated w ith the w afe r p ro d uc tio n line .
Any p ro b lem s or d e lays in c o m m e nc ing p ro d uc tio n at
the new Do m inion fac ility c o uld ad ve rse ly im pac t our
o p erating results in 2 001 and b e yo nd .
W e e xp e c t to inc ur sub stantial start up e xp e nses
related to the hiring and training o f m anufacturing p e r-
so nnel, fac ilitizing the c lean room and installing e q uip-
m ent. During the ram p - up perio d , currently e xp ec te d to