SanDisk 1999 Annual Report Download - page 36

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-stan-
dard, 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 each of 1999 and
1998, one customer accounted for more than 10% of total rev-
enues. In 1997, no single customer accounted for greater than 10%
of total revenues. Sales of the Company’s products will vary as a
result of fluctuations in market demand. Further, the flash data stor-
age 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 which
are currently supplied by United Microelectronics Corporation
(“UMC”) in Taiwan. The Company is dependent on its foundries to
allocate to the Company a portion of their foundry capacity suffi-
cient 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 antic-
ipated 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 fluctu-
ations 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 avail-
able. 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 which 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 which could increase the manufacturing costs of our prod-
ucts and have adverse effects on our operating results.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make esti-
mates 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 1999 ended on January 2, 2000 and was 53 weeks in
length. Fiscal years 1998 and 1997 ended on December 27, 1998
and December 28, 1997, respectively, and were each 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.
33
SanDisk Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS