February 9, 2006
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549-0305
Attention: Barbara C. Jacobs
Jay Ingram
Morgan Youngwood
Re: M-Systems Flash Disk Pioneers Ltd. (i) Registration Statement on Form
F-3 (File No. 333-129291) filed on October 28, 2005, (ii) Form 20-F
for the year ended December 31, 2004, filed on May 27, 2005, and (iii)
Form 6-K filed on September 30, 2005 (File No. 001-11712)
Ladies and Gentlemen:
On behalf of our client, M-Systems Flash Disk Pioneers Ltd., an
Israeli company ("M-Systems" or the "Company"), please find enclosed the
Company's responses to the comments of the Staff of the Securities and Exchange
Commission that were contained in the letter from the Staff dated February 3,
2006 (the "Comment Letter"). For ease of reference, each comment contained in
the Comment Letter is printed therein and is followed by the Company's response.
Should you wish to discuss the enclosed materials at any time please
do not hesitate to contact Jeffrey Nadler, Esq. (212-310-8387) of Weil, Gotshal
& Manges LLP or Clifford M. J. Felig, Adv., of Meitar Liquornik Geva & Leshem
Brandwein (011-972-3-610-3100).
Sincerely,
/s/ Jeffrey Nadler
Jeffrey Nadler
Enclosures
cc: Ronit Maor, M-Systems Flash Disk Pioneers Ltd.
Clifford M.J. Felig, Meitar Liquornik Geva & Leshem Brandwein
M E M O R A N D U M
FORM 20-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
Consolidated Financial Statements
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Consolidated Statements of Operations - page 5
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1. WE ARE REVIEWING YOUR RESPONSE TO PRIOR COMMENT NO. 1, AND WE MAY HAVE
FURTHER COMMENTS UPON COMPLETION OF OUR REVIEW.
Please let us know if the Staff has any further comments with respect to this
issue.
Notes to the Consolidated Financial Statements.
- -----------------------------------------------
Note 5-Investment in a Venture-page 21
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2. WE NOTE YOUR RESPONSE TO PRIOR COMMENT NO. 2. EXPLAIN IN GREATER
DETAIL WHY YOU BELIEVE THAT TOSHIBA IS "MORE CLOSELY ASSOCIATED WITH
THE VENTURE" THAN YOU. YOUR RESPONSE TO PRIOR COMMENT NO. 10 FROM YOUR
DECEMBER 5, 2005 RESPONSE LETTER CITES EXAMPLES OF HOW TOSHIBA
BENEFITS FROM THE VENTURE, HOWEVER, THIS ANALYSIS DOES NOT INDICATE
HOW YOU BENEFIT. PLEASE ADDRESS THE FOLLOWING STATEMENTS FROM YOUR
RESPONSE LETTERS WHEN ADDRESSING THIS COMMENT. YOUR RESPONSE TO PRIOR
COMMENT NO. 1 STATES THAT YOU BELIEVE YOUR PRESENTATION OF EQUITY
INCOME REFLECTS THE SIGNIFICANCE AND RELATIONSHIP OF THE VENTURE'S
OPERATIONS TO YOUR OPERATIONS. YOU ALSO STATE IN RESPONSE TO PRIOR
COMMENT NO. 4 FROM YOUR DECEMBER 5, 2005 RESPONSE LETTER THAT THE
VENTURE IS ESSENTIALLY AN EXTENSION OF THE COMPANY'S FLASH SOURCING
ARRANGEMENTS FOR MANUFACTURE OF DOK PRODUCTS. THE RESPONSE CONTINUES
TO STATE THAT THE VENTURE'S OPERATIONS ARE INTEGRAL TO YOUR OPERATIONS
AND THAT THE VENTURE OPERATES IN MANNER THAT IS ESSENTIALLY THE SAME
AS THE COMPANY'S ORDINARY COURSE METHOD OF OPERATIONS. EXPLAIN WHY
THESE STATEMENTS WOULD NOT RESULT IN THE CONCLUSION THAT YOU ARE MORE
CLOSELY ASSOCIATED WITH THE VENTURE THAN TOSHIBA.
As detailed in the Company's prior responses, Toshiba and the Company constitute
the related party group that is the primary beneficiary of the Venture.
Accordingly, Paragraph 17 of FIN 46-R provides that the party, within the
related party group, that is most closely associated with the VIE is the primary
beneficiary. In this context, the Company believes that the analysis of (1)
whether the Venture is integral to the Company's operations and (2) whether the
Company or Toshiba are more closely associated with the Venture, while related,
are separate and distinct analyses. Consequently, the conclusion that the
Venture is integral to the Company's operations does not contradict the
conclusion that Toshiba is more closely associated with the Venture.
THE VENTURE IS INTEGRAL TO THE COMPANY'S OPERATIONS.
As detailed in the Company's prior response, before the formation of the
Venture, the Company sourced flash components from Toshiba (as well as from
other flash component suppliers) and used those flash components to manufacture
its DiskOnKey (DOK) products. The formation of the Venture was, from the
Company's perspective, an extension of the Company's existing sourcing
relationship with Toshiba for its DOK products. The Venture was designed
operationally to continue the manufacture of DOK products in the same manner as
the Company's ordinary course of operations prior to the formation of the
Venture. In this connection, the Venture purchases flash components from Toshiba
and uses them to manufacture DOK products. The Venture has no employees and the
operations and manufacturing method of the Venture are identical to the one
employed by the Company. With the exception of the commercial terms of the
arrangement with Toshiba, the formation of the Venture did not vary the existing
operational relationship between the two parties. Accordingly, the Company
believes that the Venture's operations are integral to the Company's operations
and the equity income derived from the Venture is most appropriately presented
as part of operating income to reflect the relationship of the Venture's
operations to the Company's other operations.
Nevertheless, the Company's conclusion that the Venture is integral to its own
operations does not diminish the importance of the Venture to Toshiba and does
not result in the conclusion that the Company is more closely associated with
the Venture since the Venture also constitutes a significant element of
Toshiba's ordinary course operations in the flash market. Following is a more
detailed analysis of why the Company believes that Toshiba is more closely
associated with the Venture than the Company, taking into account the respective
benefits received by the Company and Toshiba from the Venture.
TOSHIBA IS THE PARTY WITHIN THE RELATED PARTY GROUP MORE CLOSELY ASSOCIATED WITH
THE VENTURE.
The determination of the party within the related party group that is more
closely associated with the Venture requires an analysis of facts and
circumstances, including the relationship and significance of the activities of
the Venture to the various parties within the related party group and the
parties' exposure to the expected losses of the Venture.
In response to the Staff's comment as to how the Company benefits from the
Venture, the Company notes that it receives the following benefits from the
Venture:
o The parties to the Venture have committed to supply the Venture with a
specified capacity of components for the manufacture of DOK products.
The Company benefits from the committed capacity of Toshiba to the
Venture.
o The Venture purchases flash memory components from Toshiba and
controller components from the Company at prices that are less than
their respective market prices. The Company enjoys the preferential
pricing terms provided to the Venture.
o The parties to the Venture are each entitled to 50% of the Venture's
profits, which are a function of sales made by the Company and by
Toshiba to their respective customers. This benefit is shared equally
by both parties in their respective capacities as holders of a 50%
interest in the Venture.
Notwithstanding the benefits that it receives from the Venture, the Company
nevertheless believes that when analyzing the relationship and significance of
the activities of the Venture to the Company and Toshiba, the activities of the
Venture are more significant to Toshiba than the Company for the following
reasons:
o Prior to the formation of the Venture, Toshiba did not manufacture DOK
products. The formation of the Venture enabled Toshiba to enter the
DOK product market. More specifically, the formation of the Venture
gave Toshiba access to the Company's intellectual property and to its
know how in the manufacture of DOK, neither of which it had prior to
the Venture and without which it could not sell the DOK products
without infringing the intellectual property rights of the Company.
Without the Venture and its relationship with the Company, Toshiba
would not have the intellectual property rights necessary to sell DOK
products. The Company, on the other hand, while benefiting from the
committed capacity and preferential pricing terms provided to the
Venture, has access to flash components from additional sources, since
these components are a commodity, and produces DOK products both
independently and through the Venture. The Venture did not, therefore,
enable the Company to participate in any business activities in which
it did not already participate prior to formation of the Venture.
However, the Venture opened an entirely new market for Toshiba.
o The Venture is a significant customer of Toshiba, providing a
reliable, long-term customer for its flash components. A meaningful
percentage of Toshiba's flash manufacturing capacity is designated to
be utilized for producing components for the DOK products manufactured
through the Venture. If not utilized by the Venture, Toshiba would
need to find an alternate customer for its flash components to ensure
that Toshiba not be left with unused capacity from its fabrication
facilities. While the Venture sources controllers from the Company,
these controllers are only produced to the extent there is a need for
such controllers for the manufacture of DOK products by the Company or
the Venture. As opposed to Toshiba, which derives a meaningful portion
of its business from the manufacture and sale of flash components to
various parties, the manufacture and sale of controllers by the
Company is not a stand alone business, but rather a step in the
production of its DOK products, which is undertaken only in
furtherance of the Venture's or the Company's manufacturing
requirements. Accordingly, the Venture in its capacity as a customer
is substantially more significant to Toshiba than to the Company.
In addition to the relationship and significance of the activities of the
Venture to the various parties within the related party group, the Company
considered the parties' relative exposure to the expected losses of the Venture.
As stated in the Company's response to prior comment No. 10, the Company
believes that Toshiba has a higher exposure to the expected losses of the
Venture. Although the equity interests are held equally by the parties, Toshiba
extends more credit to the Venture in its capacity as the principal supplier of
raw materials to the Venture, thus exposing it to more than 50% of the Venture's
expected losses.
In attempting to determine the primary beneficiary of the Venture, the Company
has been mindful of the FASB interpretative advice set forth in Appendix D of
FIN 46-R with respect to this issue: "The guidance includes factors to be
considered but does not identify a single factor as determinative. The Board
understands that the application of this guidance to specific situations
requires an enterprise to make judgments based on all relevant facts and
circumstances including the nature of the relationships between, and activities
of, the parties involved. The Board expects that the revised guidance will put
more emphasis on the need to make reasonable judgments in those circumstances."
(Paragraph D49)
Accordingly, based on the guidance set forth in Paragraph 17 of FIN 46-R and the
Company's judgment after considering an analysis of all relevant facts and
circumstances, the Company believes that Toshiba is the party within the related
party group that is more closely associated with the Venture, and therefore it
concluded that Toshiba is the party in the related party group of primary
beneficiaries that should consolidate the Venture.