SanDisk 2003 Annual Report Download - page 27

Excess inventory not only ties up our cash, but also can result in substantial losses if such inventory, or
large portions thereof, has to be written down due to lower market pricing or product obsolescence. We have
from time to time taken write-downs for excess or obsolete inventories and lower of cost or market price
adjustments. In 2001 for example, such write-downs and lower of cost or market adjustments were
approximately $85.0 million. We may be forced to take additional write-downs for excess or obsolete inventory
in future quarters if market demand for our products deteriorates and our inventory levels exceed customer
orders. In addition, we may record additional lower of cost or market price adjustments to our inventories if
pricing pressure results in a net realizable value that is lower than our cost. These inventory adjustments
decrease gross margins and in 2001 resulted in, and could in the future result in, Öuctuations in gross margins
and net earnings in the quarter in which they occur. See ""Factors That May AÅect Future Results Ì Risks
Related to Our Business Ì Our operating results may Öuctuate signiÑcantly....''
Export sales are an important part of our business, representing 58%, 51% and 55% of our total revenues
in 2003, 2002 and 2001, respectively. Our sales may be impacted by changes in economic or political
conditions in our international markets. Economic conditions in our international markets, including Japan,
Asia and the European Union, may adversely aÅect our revenues to the extent that demand for our products in
these regions declines. While most of our sales are denominated in U.S. dollars, we invoice certain Japanese
customers in Japanese Yen and are subject to exchange rate Öuctuations on these transactions, which could
aÅect our business, Ñnancial condition and results of operations. See ""Factors That May AÅect Future
Results Ì Risks Related to Our International Operations and Changes in Securities Laws and Regulations Ì
Because of our international operations, we must comply with numerous international laws and regulations...''
For the foreseeable future, we expect to realize a signiÑcant portion of our revenues from recently
introduced and new products. Typically, new products initially have lower gross margins than more mature
products because the manufacturing yields are lower at the start of manufacturing each successive product
generation. In addition, manufacturing yields are generally lower at the start of manufacturing any product at a
new foundry or at a new line width geometry. In 2003, 2002 and 2001, we experienced start-up costs of
approximately $3.3 million, $6.5 million and $22.0 million, respectively, associated with transition from one
technology to another and with the ramping up NAND wafer production at FlashVision in 2002 and 2001.
During the start-up phase, the fabrication equipment and operating expenses are applied to a relatively small
output of production wafers, making this output very expensive. In the next two to three years, we expect to
make substantial new investments in additional fabrication capacity at FlashVision. In February 2004, we
committed to loan FlashVision up to approximately $150.4 million to fund additional 200-millimeter
fabrication capacity through the end of 2004. This loan is secured by the equipment purchased by FlashVision
using the loan proceeds. Additional loans are expected to be made in several tranches through the Ñrst quarter
of 2006. Because our funding obligation is denominated in Japanese Yen, the amount of our obligation on a
given date when converted to U.S. dollars will Öuctuate based on the exchange rate in eÅect on that date.
In December 2003, we and Toshiba announced our intention to, and are currently in discussions
regarding, cooperating in the construction of a new 300-millimeter wafer fabrication facility, Fab 3, at
Toshiba's Yokkaichi operations. As under the current FlashVision joint venture, we would be obligated to
purchase half of Fab 3's NAND wafer production output. Toshiba would construct the Fab 3 building,
depreciation of the Fab 3 building would be a component of the cost to each party of wafers produced by
Fab 3, and both parties would provide funds for the manufacturing equipment. Toshiba currently plans to
begin construction of the building in the Ñrst half of 2004. We may agree that in the event that we and Toshiba
do not execute deÑnitive agreements with respect to Fab 3, we will reimburse Toshiba for 50% of certain
start-up costs and Fab 3 Co. formation costs incurred by Toshiba and for cancellation fees due under
authorized contractor and vendor invoices for orders placed by Toshiba for certain equipment and construction
materials for Fab 3 that Toshiba cannot otherwise use, which amounts would be substantial. The total
investment in Fab 3, excluding the cost of building construction, is currently estimated at $2.5 billion through
the end of 2006, of which our share is estimated to be approximately $1.3 billion, with initial production
currently scheduled for the end of 2005. We and Toshiba have not yet agreed to the terms of this potential new
venture. We and Toshiba would share equally in the investment, and we may need to raise additional capital
for our portion of the investment. In addition to our initial investment in expansion at Yokkaichi and in Fab 3,
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