SanDisk 2006 Annual Report Download - page 76

The merger may result in a loss of customers. We and msystems operate in a highly competitive industry, and
our future performance will be affected by our ability to retain each company’s existing customers. Some of
msystems’ customers are our competitors or work with our competitors and may reduce or terminate their business
relationships with the combined company as a result of the merger. msystems sells its products through OEM
distribution channels, while we primarily sell our products through retail channels. msystems has a broad base of
OEM customers and has substantial experience selling to those customers. In order to achieve the expected benefits
of the merger, we must continue to sell, and expand sales levels, to OEM customers. We may not be able to
successfully continue or expand sales through OEM channels, particularly because some of msystems’ OEM
customers are competitors of ours.
We and msystems currently sell to several of the same large customers. Our ability to maintain the current level
of sales of each company to these common customers may be limited by the desire of these customers to minimize
their dependence on a single supplier. If common customers seek alternative suppliers for at least a portion of the
products currently provided by both us and msystems, our business may be harmed.
Third-parties may terminate, alter or litigate under existing contracts or relationships with the combined
company. Third-parties, including suppliers, distributors, customers, licensors, licensees and other business
partners, have contracts with msystems. In addition, third-parties with whom msystems or we currently have
relationships, including suppliers, distributors, customers, licensors, licensees and other business partners, may
terminate, otherwise adversely modify their relationship with the combined company or enter into litigation with
the combined company or msystems as a result of the merger. Among other things, this may result in the combined
company suffering damages or a loss of potential future revenue and possibly losing rights that are material to our
business. In order to achieve the expected benefits of the merger, we may seek to renegotiate contracts with some of
msystems’ and our suppliers, distributors, customers, licensors, licensees, other business partners and other third-
parties, and there is no assurance that such negotiations will be successful or that costly litigation may be avoided.
General uncertainty related to the merger could harm us. Our or msystems’ existing customers may, in
response to the merger, reduce future orders, pursue other sources of supply, or delay or defer purchasing decisions.
If any of the foregoing occurs, the revenues of the combined company could be lower than expected and market
share could be lost. In addition, the merger may create uncertainty among important suppliers, which might lead
suppliers to reduce supply or adversely modify pricing to us or msystems. Any of the foregoing could have an
adverse effect on our revenues, margins and profitability which, in turn, could cause our results to be substantially
below the expectations of market analysts and have an adverse impact on our stock price.
Furthermore, our and msystems’ employees may experience or perceive uncertainty about their future roles
with the combined company. This may harm our and msystems’ ability to attract and retain key management,
marketing, sales, technical and research and development personnel.
There is pending litigation. Actions purporting to be class and derivative actions on behalf of msystems and
its shareholders were filed against us and msystems prior to the closing of the merger. See Part I, Item 3, “Legal
Proceedings.” We may be required to expend significant resources, including management time, to defend these
actions and could be subject to damages or settlement costs related to these actions. We are responsible for liabilities
associated with these and any other class and derivative actions, including indemnification of directors and certain
members of management of msystems.
There are risks related to msystems’ prior option grant practices. As a result of an investigation by a special
committee of its board of directors into its prior option grant practices, on July 17, 2006, msystems filed a Form 20-F
with the U.S. Securities and Exchange Commission, or SEC, in which it restated its financial statements for each of
the fiscal years ended December 31, 1999 through 2005 and, in a separate report on Form 6-K, restated its financial
statements for each of the four quarters of fiscal 2005 and the first quarter of fiscal 2006. In addition, msystems has
disclosed that the SEC is conducting an informal investigation into msystems’ prior option grant practices and the
restatement of its financials.
Under the merger agreement, the combined company is responsible for liabilities associated with msystems’
prior stock option grant practices, including indemnification of directors and certain members of management of
msystems. These liabilities could be substantial and may include, among other things, the costs of defending
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Annual Report