SanDisk 2007 Annual Report Download - page 72

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stockholders’ rights plan that would cause substantial dilution to a stockholder, and substantially increase the cost
paid by a stockholder, who attempts to acquire us on terms not approved by our board of directors. This could
discourage an acquisition of us. In addition, our certificate of incorporation grants our board of directors the
authority to fix the rights, preferences and privileges of and issue up to 4,000,000 shares of preferred stock without
stockholder action (2,000,000 of which have already been reserved under our stockholder rights plan). Issuing
preferred stock could have the effect of making it more difficult and less attractive for a third party to acquire a
majority of our outstanding voting stock. Preferred stock may also have other rights, including economic rights
senior to our common stock that could have a material adverse effect on the market value of our common stock. In
addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law.
This section provides that a corporation may not engage in any business combination with any interested
stockholder during the three-year period following the time that a stockholder became an interested stockholder.
This provision could have the effect of delaying or discouraging a change of control of SanDisk.
Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our
profitability. We are subject to income tax in the United States and numerous foreign jurisdictions. Our tax
liabilities are affected by the amounts we charge for inventory, services, licenses, funding and other items in
intercompany transactions. We are subject to ongoing tax audits in various jurisdictions. Tax authorities may
disagree with our intercompany charges or other matters and assess additional taxes. We regularly assess the likely
outcomes of these audits in order to determine the appropriateness of our tax provision. However, there can be no
assurance that we will accurately predict the outcomes of these audits, and the actual outcomes of these audits could
have a material impact on our net income or financial condition. In addition, our effective tax rate in the future could
be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the
valuation of deferred tax assets and liabilities, changes in tax laws, and the discovery of new information in the
course of our tax return preparation process. In particular, the carrying value of deferred tax assets, which are
predominantly in the United States, is dependent on our ability to generate future taxable income in the
United States. Any of these changes could affect our profitability. Declining product margins can cause reduced
profits in our manufacturing entities which are primarily located in relatively low tax rate jurisdictions. Continued
product margin declines could have a material adverse impact on our effective tax rate. Furthermore, our tax
provisions could be adversely affected as a result of any further interpretative accounting guidance related to
accounting for uncertain tax positions.
We may be subject to risks associated with environmental regulations. Production and marketing of products
in certain states and countries may subject us to environmental and other regulations including, in some instances,
the responsibility for environmentally safe disposal or recycling. Such laws and regulations have recently been
passed in several jurisdictions in which we operate, including Japan and certain states within the United States.
Although we do not anticipate any material adverse effects in the future based on the nature of our operations and
the focus of such laws, there is no assurance such existing laws or future laws will not have a material adverse effect
on our financial condition, liquidity or results of operations.
In the event we are unable to satisfy regulatory requirements relating to internal controls, or if our internal
controls over financial reporting are not effective, our business could suffer. In connection with our certification
process under Section 404 of Sarbanes-Oxley, we have identified in the past and will from time-to-time identify
deficiencies in our internal control over financial reporting. We cannot assure you that individually or in the
aggregate these deficiencies would not be deemed to be a material weakness. Furthermore, we may not be able to
implement enhancements on a timely basis, including any enhancements necessary to integrate msystems
operations, in order to prevent a failure of our internal controls or enable us to furnish future unqualified
certifications. A material weakness or deficiency in internal control over financial reporting could materially
impact our reported financial results and the market price of our stock could significantly decline. Additionally,
adverse publicity related to the disclosure of a material weakness or deficiency in internal controls could have a
negative impact on our reputation, business and stock price. Any internal control or procedure, no matter how well
designed and operated, can only provide reasonable assurance of achieving desired control objectives and cannot
prevent intentional misconduct or fraud.
Our debt service obligations may adversely affect our cash flow. While the 1% Senior Convertible Notes due
2013 and the 1% Convertible Notes due 2035 are outstanding, we are obligated to pay to the holders thereof
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