SanDisk 2002 Annual Report Download - page 22

2 0 S a nD isk C o rp o ra tio n
partners such as Toshiba, M atsushita and Sony. For exam -
ple, in M arch 2003, our joint development efforts w ith
Toshiba and M atsushita, together w ith contribution by the
SD Association, resulted in the introduction of the m iniSD
card, a sm aller version of the SD card. In addition, w e and
Sony have co- developed and co-ow n the specifications for
the next generation M em ory Stick, the M em ory Stick Pro,
w hich each of us has the right to m anufacture and sell. As
w e introduce new standards and new products, such as the
m iniSD card and the M em ory Stick Pro, it w ill take tim e for
these new standards and products to be adopted, for con-
sum ers to accept and transition to these new products and
for significant sales to be generated therefrom , if this hap-
pens at all. M oreover, broad acceptance of new standards
or products by consum ers m ay reduce dem and for our
older products. If this decreased dem and is not offset by
increased dem and for our new products, our results of
operations could be harm ed. We cannot assure you that
any new products or standards w e develop w ill achieve
comm ercial success. See “– The success of our business
depends on emerging m arkets and new products.”
The suc c ess of o ur b usiness d e p e nd s o n e m e rg ing
m arkets and new pro d uc ts.
In order for dem and for our products to grow, the m ar-
kets for new devices that use our flash m em ory products,
such as digital cam eras, portable digital m usic players and
cellular phones m ust develop and grow. If sales of these
products do not grow, our revenues and profit m argins
could be adversely im pacted.
The success of our new product strategy w ill depend
upon, am ong other things, the follow ing:
• our ability to successfully develop new products w ith
higher m em ory capacities and enhanced features at a
low er cost per m egabyte;
• the developm ent of new applications or m arkets for our
flash data storage products;
• the extent to w hich prospective custom ers design our
products into their products and successfully introduce
their products;
• the extent to w hich our products or technologies
becom e obsolete or noncom petitive due to products or
technologies developed by others; and
• the adoption by the m ajor content providers of the copy
protection features offered by our SD card products.
Risk s Re la te d to O ur Fla shVision Jo int Ve nture
Our FlashVision joint venture w ith Toshiba m akes us vul-
nerable to certain risks, including potential inventory w rite-
offs, disruptions or shortages of supply, lim ited ability to
react to fluctuations in product dem and, direct competi-
tion w ith Toshiba, and significant guarantee obligations,
any of w hich could substantially harm our business and
financial condition.
W e and Tos hiba have res truc tured our Flas hVision
bus iness a nd transfe rre d c e rtain as se ts to To shib a’s
Yo kkaic hi fa b rica tion fac ility in Jap an, w hic h m ay c a use
pro d uc tio n d e lays and re d uc e NAND w afe r sup p ly
available to us, w hic h c o uld ad ve rse ly im p ac t o ur
op e rating res ults.
On June 30, 2000, w e, along w ith Toshiba, form ed
FlashVision for the joint developm ent and m anufacture of
several NAND flash mem ory products, including 512
m egabit, 1 gigabit and other advanced flash m em ory
products. We and Toshiba w ill each separately m arket and
sell these products. Accordingly, w e w ill com pete directly
w ith Toshiba for sales of products incorporating these jointly
developed and m anufactured products. In April 2002, w e
and Toshiba entered into a series of agreem ents that
restructured our FlashVision business and provided for the
transfer of its operations to Toshiba’s Yokkaichi fabrication
facility in Japan. Pursuant to the term s of the agreem ents,
Toshiba com pleted transfer of all required equipm ent from
Dom inion to Yokkaichi in 2002 and bore substantially all of
the costs associated w ith the equipm ent transfers. It is pos-
sible that production m ay not continue at Yokkaichi as
planned, thereby reducing the total NAND production capac-
ity available to us.
In addition, w e incurred substantial start-up expenses
related to the hiring and training of m anufacturing personnel,
and installing the clean room facilities and equipm ent at the
Dom inion fabrication facility. Although as part of our agree-
m ent w ith Toshiba to restructure our FlashVision business,
w e have recaptured substantially all of the Dom inion start-up
expenses incurred by us, w e have incurred sim ilar start- up
expenses in connection w ith the new Yokkaichi fabrication
facility. We w ill incur start- up costs and pay our share of
ongoing operating activities even if w e do not utilize our full
share of the new Yokkaichi output. Each time that we and
Toshiba add substantial new w afer fabrication capacity, w e
w ill experience startup costs as a result of the one to tw o
quarters of delay betw een the tim e of the investm ent and
the tim e qualified products m anufactured on the new w afer
fabrication capacity are sold. We expect to fund up to
approxim ately $33.0 m illion for the initial fabrication capacity
expansion in 2003.
W e fac e c halle ng e s a nd p o ss ible d e lays re lating to
the e xp e c te d shift in a p o rtion of o ur p ro d uc tion at
Yo kkaic hi to 0 .13 m ic ro n N AND, w hic h c o uld ad ve rse ly
affe c t o ur o p e rating re sults.
We w ere using the production capacity at Toshiba’s
Yokkaichi fabrication facility to m anufacture NAND flash
m em ory w afers with m inim um lithographic feature size of
0.16 m icron. Late in 2002, w e began shifting a portion of our
production output at Yokkaichi to 0.13 m icron NAND and
expect to shift the m ajority of our production output at
Yokkaichi to 0.13 m icron NAND in the second half of 2003.
Such m inim um feature sizes are considered today to be
am ong the m ost advanced for m ass production of silicon
w afers. Therefore, it is difficult to predict how long it w ill take
to achieve adequate yields, reliable operation, and economi-
cally attractive product costs based on our new designs. We
currently rely and w ill continue to rely on Toshiba to address
these challenges. With our investm ents in the FlashVision
joint venture at Toshiba’s Yokkaichi facility, w e are now and
w ill continue to be exposed to the adverse financial im pact
of any delays or m anufacturing problem s associated w ith
w afer production lines. Any problem s or delays in volum e
production at the Yokkaichi fabrication facility could
adversely im pact our operating results in 2003 and beyond.
Tos hiba’s Yokkaic hi fa c ilitie s are a sig nific ant sourc e
of sup p ly o f N AND flash m e m o ry w afers and a ny d isrup-
tio n in this sup p ly w ill reduc e o ur re venue s, e arnings and
g ro ss m arg ins.
Although w e buy flash mem ory from the FlashVision joint
venture, w e also rely on Toshiba’s Yokkaichi fabrication facil-
ity to supply on a foundry basis a portion of our NAND flash