SanDisk 2006 Annual Report Download - page 133

respectively. These purchases of controller wafers are ultimately reflected as a component of the Company’s cost of
product revenues. At December 31, 2006 and January 1, 2006, the Company had amounts payable to Tower of
approximately $7.7 million and $2.4 million, respectively.
Flextronics. The Chairman of Flextronics International, Ltd., or Flextronics, has served on the Company’s
Board of Directors since September 2003. For the fiscal years ended December 31, 2006, January 1, 2006 and
January 2, 2005 the Company recorded revenues related to Flextronics and its affiliates of $106.6 million,
$25.3 million and $4.3 million, respectively, and at December 31, 2006 and January 1, 2006, the Company had
receivables from Flextronics and its affiliates of $18.9 million and $12.5 million, respectively. In addition, the
Company purchased from Flextronics and its affiliates $53.5 million, $40.2 million and $37.4 million of services for
card assembly and testing in the fiscal years ended December 31, 2006, January 1, 2006 and January 2, 2005,
respectively, which are ultimately reflected as a component of the Company’s cost of product revenues. At
December 31, 2006 and January 1, 2006, the Company had amounts payable to Flextronics and its affiliates of
approximately $6.7 million and $5.4 million, respectively, for these services.
Note 10: Business Acquisitions
msystems Ltd. On November 19, 2006, the Company completed the acquisition of msystems in an all stock
transaction. This combination joins together two flash memory companies with complementary products, cus-
tomers and channels. In the transaction, each msystems common share has been converted into 0.76368 shares of
the Company’s common stock. The transaction was accounted for using the purchase method of accounting in
accordance with Statement of Financial Accounting Standards No. 141, or SFAS 141, Business Combinations.
The purchase price is comprised of the following (in thousands):
Fair value of SanDisk common stock issued ................................. $1,365,150
Estimated fair value of options and stock appreciation rights assumed .............. 115,670
Direct transaction costs ................................................ 14,918
Total estimated purchase price ......................................... $1,495,738
As a result of the acquisition, the Company issued approximately 29.4 million shares of SanDisk common
stock based on an exchange ratio of 0.76368 shares of the Company’s common stock for each outstanding share of
msystems common stock as of November 19, 2006. The average market price per share of SanDisk common stock
of $46.48 was based on the average of the closing prices for a range of trading days around the announcement date
(July 30, 2006) of the proposed transaction.
Pursuant to the terms of the merger agreement, each msystems stock option and stock appreciation right
outstanding and unexercised as of November 19, 2006 was converted into a stock option and stock appreciation
right, or SARs, to purchase the Company’s common stock. Based on msystems’ stock options outstanding at
November 19, 2006, the Company assumed msystems’ options and SARs to purchase approximately 5.4 million
shares of the Company’s common stock. The fair value of options and SARs assumed was estimated a valuation
model with the following assumptions:
Vested Options Unvested Options SARs
Valuationmethod.......... Black-Scholes-Merton Black-Scholes-Merton Binomial Model
Dividend yield ............ None None None
Expected volatility ......... 0.50 0.50 0.50
Risk-free interest rate ....... 5.04% 4.68% 4.67%
Weighted average expected
life................... 0.9Years 3.4 Years 3.7 Years
Fairvalue................ $46.48 $46.48 $46.48
Exercise cap .............. N/A N/A $104.76
F-34
Notes to Consolidated Financial Statements — (Continued)