SanDisk 2007 Annual Report Download - page 136

respectively, which are ultimately reflected as a component of the Company’s cost of product revenues. At
December 30, 2007 and December 31, 2006, the Company had amounts payable to Flextronics and its affiliates of
approximately $10.3 million and $6.7 million, respectively, for these services.
Solid State Storage Solutions LLC. During the second quarter of fiscal 2007, the Company formed a venture
with third parties that will license intellectual property. This venture qualifies as a variable interest entity under
FIN 46R. The Company is considered the primary beneficiary of this venture, and in accordance with FIN 46R, the
Company consolidates this venture in its financial statements. The venture was financed with $10.2 million of initial
aggregate capital contributions from the partners. In July 2007, Solid State Storage Solutions LLC invested
$10.0 million for the acquisition of intellectual property. The venture has an obligation of up to an additional
$32.5 million related to the acquisition of intellectual property should the venture be profitable.
Note 14: Business Acquisitions
msystems Ltd. On November 19, 2006, the Company completed the acquisition of msystems in an all stock
transaction. This combination joined together two flash memory companies with complementary products,
customers and channels. The transaction was accounted for using the purchase method of accounting in accordance
with Statement of Financial Accounting Standards No. 141 (“SFAS 141”), Business Combinations. The purchase
price was 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 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 (“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
Valuation method .......... 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
Fair value ................ $46.48 $46.48 $46.48
Exercise cap .............. N/A N/A $104.76
Direct transaction costs of approximately $15 million include investment banking, legal and accounting fees,
and other external costs directly related to the acquisition. As of December 30, 2007, substantially all costs for
accounting, legal and other professional services had been paid.
F-40
Notes to Consolidated Financial Statements — (Continued)