SanDisk 2000 Annual Report Download - page 22

2 0 . Sa n D is k C o rp o ra t io n . 2 0 0 0 A n n u a l Re p o rt
b egin in the m id d le o f 20 01, equip m e nt d eprec iatio n
b egins and line operating expenses inc rease sub stan-
tially. W hile the w afer o utp ut is still relatively lo w , the
c o st o f w afers fro m the Do m inion fac ility is exp ected to
b e sig nific antly hig he r than the c o st o f w afe rs fro m our
o the r sup p lie rs. This m ay neg atively im p act o ur o ve rall
p ro d uc t g ro ss m arg ins until flash w afer o utput fro m
Do m inio n reac he s an o p tim um le vel, w hic h m ay ne ver
o c c ur. Under o ur ag reem e nt w ith Toshib a, w e are
c o m m itted to p urc hase 5 0% o f the o utp ut fro m the
Do m inio n fac ility. W e w ill incur startu p c o sts and p ay
o ur share of ong o ing o p erating ac tivities e ven if w e d o
no t utilize o ur full share o f the Do m inio n o utp ut. Sho uld
c usto m er d e m and for N AN D flash p ro d uc ts b e less
than our availab le sup p ly, w e m ay suffer fro m reduc ed
reve nues and increased e xp e nse s, and inc rease d
invento ry o f unso ld N AN D flash w afers, w hic h c o uld
ad ve rsely affe c t o ur o p erating results. W e c anno t
assure yo u that w e o r Toshib a w ill b e ab le to secure
suffic ient fund ing to sup p o rt this m an ufac turing line.
Furth erm ore , in o rd er for us to se ll N AN D b ased
Co m p actFlash, M ultiM ediaCard s and SD Card s, w e w ill
have to d e velop new c o ntrollers, printe d c irc uit b oards
and te st alg o rithm s b ecause the arc hitec ture o f N AN D
flash is sig nific antly d iffe rent fro m o ur current NOR flas h
d esig ns. Any delays in the d evelo p m ent o f these e le-
m ents c o uld p reve nt us fro m taking advantage o f the
available N AN D o utp ut and c o uld ad versely affe c t o ur
results o f o p e rations.
On July 4, 2 0 00, SanDisk ente red into a share p ur-
c hase ag re em ent to m ake a $ 75 m illio n inve stm ent in
To w er Sem ic o nd ucto r, o r Tow er, in Israel, re p resenting
ap p ro xim ate ly 10% ow ne rship o f Tow e r. In exc hang e
fo r o ur investm e nt, w e receive d o ne se at o n the b o ard
o f d irecto rs of Tow er and a g uarante e d p o rtion of the
w afer o utput fro m the ad vanced fabricatio n fac ility
To w er is starting to b uild in M ig d al H aem ek, Israe l.
Und e r the te rm s o f the ag reem ent, w e w ill m ake o ur
investm ent o ve r a p e riod o f approxim ately 18 m onths if
ke y m ile stones re lated to the construc tio n, eq uipp ing
and w afer p ro d uc tion at the new w afer fab ric ation fac il-
ity are m e t. On January 26 , 2 001, Tow er satisfied the
c lo sing c o nditio ns o f the share p urc hase agree m e nt,
and w e transferre d the first $20 m illion of our invest-
m ent fro m an esc ro w ac c o un t to Tow er in exc han g e
fo r 866 ,5 5 1 ordinary share s and o b tain $8 .8 m illio n in
p re- p aid w afer c redits. On M arc h 1, 200 1, w e p aid
To w er $11 m illio n up o n its c o m p letio n o f m ile stone o ne,
to purc hase 3 66,690 o rd inary share s and o b tain add i-
tio nal p re p aid w afer c redits. Additio nal c o ntributio ns w ill
take the fo rm o f m andato ry w arrant e xe rc ise s fo r o rd i-
nary shares at an e xe rc ise pric e of $3 0 .0 0 p e r share if
o the r m ilesto ne s are m e t. The w arrants w ill expire five
years fro m the d ate o f g rant, an d in the event the ke y
m ilesto nes are n o t ac hie ved, the exerc ise o f the se
w arrants w ill n o t be m andato ry. W e expec t first w afer
p ro d uc tion to c o m m ence at the ne w fab ric atio n facility
in late 2 0 02.
Althoug h w e d o no t b e lieve the c u rrent p o litical
unre st in Israel rep re se nts a m ajor se c urity p ro b le m fo r
To w er, in w hic h w e re c ently investe d , since M ig d al
H ae m ek, Israel is in a sec ure g eograp hic loc atio n, the
unre st m ay ne vertheless cause sc hed uling d e lays. W e
c anno t assure yo u that the Tow er facility w ill b e c o m -
p leted o r w ill b e g in p ro d uc tion as sc he d ule d , o r that
the processes need e d to fab ric ate o ur w afers w ill b e
q ualified at the ne w facility. M o reover, w e c annot
assure yo u that this ne w facility w ill b e able to ac hie ve
ac c e p table yield s o r d elive r suffic ie nt q uantities o f
w afers o n a tim e ly b asis at a c o m p e titive p ric e .
Th e s u c c e s s o f o u r b us in e s s d e p e n d s o n e m e r g -
in g m a rk e t s a n d n e w p r o d u c ts .
In order fo r d em and fo r o ur produc ts to g ro w , the
m arkets fo r new p ro d uc ts that use Co m p ac tFlash, the
M ultiM ed iaCard , and Sec ure Digital Card such as
p o rtab le dig ital m usic p laye rs and sm art pho ne s, m ust
d eve lo p and g ro w . If sales o f these p ro d uc ts do not
g ro w , o ur reve nues and p ro fit m arg ins c o uld level o ff
o r d e c line .
Bec ause w e sell o ur p ro d uc ts fo r u se in m any new
ap p lic atio ns, it is d iffic ult to fo rec ast d em and . During
the third q uarter o f 200 0, the U.S. Co urts ruled against
N ap ster.Co m and M P3.Co m in tw o c ases invo lving
unlic ensed d istrib utio n o f c o p yrig hted d ig ital m usic
o ver the Inte rne t. This ac tio n is b eing carefully studied
b y the o rig inal e q uip m e nt m anufac turers, or OEM s,
w ho have bee n d evelo p ing M P3 p laye rs using Flash
m em o ry c ard s suc h as o ur M ultiM ed iaCard s for stor-
ag e o f m usic . If these OEM s re d uc e the ir p ro d uc tio n o f
d ig ital m usic p layers in res p o nse to the se re c ent c o urt
d ecisio ns o r othe r fac tors, d em and fo r o ur produc ts
w ill d ec re ase . In ad d ition, w e b e lie ve that the se OEM s
m ay red e sig n their p latfo rm s to w o rk w ith o ur Secure
Dig ital Card , w hic h w e b e g an ship p ing in the first q uar-
te r o f 2 001. Ac c o rd ingly, w e m ay exp erience a drop in
d em and fro m o ur M ultiM ed iaCard c usto m ers b e fore
the new antic ip ated d e m and for o ur Secure Dig ital
Card m aterializes.
Secure Dig ital Ca rd p ro d uc ts
As p art o f o ur June 20 0 0 jo int venture w ith Toshib a,
w e w ill jo intly d evelo p the Sec ure Dig ital Card , an
enhanc ed versio n o f o ur M ultiM ed iaCard , w hich w ill
inc o rp o rate ad vanc ed se c urity and c o p yrig ht p ro tec -
tio n features re q uire d by the em erg ing m arkets fo r the
elec tro nic d istrib ution o f m usic , vid e o and o the r copy-
rig hte d w o rks. W e beg an ship p ing o ur Secure Dig ital
Card p ro d uc ts in 3 2 and 6 4 m e g ab yte c ap acities in the
first q uarte r o f 2 001. The Sec ure Dig ital Card is slig htly
thic ker and uses a d ifferent interfac e than o ur
M ultiM ed iaCard . B ec ause o f these d iffere nc es, the
Secure Dig ital Card w ill no t w o rk in c urrent p ro d uc ts
that inc lud e a M ultiM e d iaCard slot. In o rd er fo r the
m arket for o ur Secure Dig ital Card to d evelo p , m anu-
facture rs of dig ital audio/video and p o rtable c o m p uting
p ro d uc ts m ust inc lude a Sec ure Dig ital Card c o m p ati-
b le slo t in their p rod uc ts and ac q uire a lic e nse to the
se c urity alg o rith m s. If OEM s d o no t inc o rp o rate Se c ure
Dig ital Card slo ts in their p ro d uc ts or d o no t b uy our
Secure Dig ital Cards, o ur b usin ess, financial c ond itio n
and results o f o p e rations m ay be harm ed . In ad d ition,
c o nsum ers m ay p o stp o ne or altogether fore g o b uying