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and 2003, respectively, but have been omitted from the diluted earnings per share calculation because the options’
exercise price was greater than the average market price of the common shares and, therefore the effect would be
antidilutive.
Note 10: Related Parties
The Company owns approximately 15% of the outstanding shares of Tower, prepaid wafer credits issued by
Tower convertible debt and a warrant to purchase Tower ordinary shares. The Company’s Chief Executive Officer is
a member of the Tower board of directors. The Company paid Tower approximately $31.3 million and $28.4 million
fiscal years ended January 1, 2006 and January 2, 2005, respectively, for the purchase of controller wafers and
related non-recurring engineering, or NRE. These purchases of controller wafers are ultimately reflected as a
component of the Company’s cost of product revenues. At January 1, 2006 and January 2, 2005, the Company had
amounts payable to Tower of approximately $2.4 million and $7.6 million, respectively, related to the purchase of
controller wafers and related NRE. See Note 7, “Strategic Investments — Tower Semiconductor.”
The former President and Chief Executive Officer of Flextronics International, Ltd., or Flextronics, has served
on the Company’s Board of Directors since September 2003. For the years ended January 1, 2006 and January 2,
2005, the Company recorded revenues related to Flextronics and its affiliates of $25.3 million and $4.3 million,
respectively, and at January 1, 2006 and January 2, 2005, the Company had amounts receivable from Flextronics
and its affiliates of $12.5 million and $2.7 million, respectively. In addition, the Company paid Flextronics and its
affiliates $40.2 million and $37.4 million for the years ended January 1, 2006 and January 2, 2005, respectively, for
card assembly and testing which are ultimately reflected as a component of the Company’s cost of product revenues.
At January 1, 2006 and January 2, 2005, the Company had amounts payable to Flextronics and its affiliates of
approximately $5.4 million and $2.0 million, respectively, for these services.
The Company and M-Systems entered into an agreement to form U3, LLC, an entity to develop and market a
next generation platform for universal serial bus flash drives. See Note 7, “Strategic Investments — U3, LLC.”
See also Note 11 for disclosures related to investments in Toshiba ventures.
Note 11: Investment in Toshiba Ventures
Toshiba
The Company entered into agreements with Toshiba; under which FlashVision and Flash Partners were formed
to purchase from Toshiba advanced NAND flash memory wafers (see also Note 5, “Commitments, Contingencies
and Guarantees”). During fiscal 2005, the Company purchased approximately $39.1 million of capital equipment
which is located in Toshiba’s Yokkaichi operations. In return, the Company will receive 100% of the output from
this equipment. The Company purchased NAND flash memory wafers from FlashVision, Flash Partners and
Toshiba, purchased capital equipment from FlashVision, made payments for shared research and development
expenses, made loans to FlashVision and made investments in Flash Partners totaling approximately $571.7 million,
$516.6 million and $223.5 million for the comparable periods of fiscal 2005, 2004 and 2003, respectively. The
purchases of NAND flash memory wafers are ultimately reflected as a component of the Company’s cost of product
revenues. At January 1, 2006 and January 2, 2005, the Company had accounts payable balances due to FlashVision
of $23.0 million and $30.7 million, respectively, balances due to Flash Partners of $27.0 million and zero,
respectively, and balances due to Toshiba of $11.7 million and $6.1 million, respectively. At January 1, 2006 and
January 2, 2005, the Company had accrued current liabilities due to Toshiba for shared research and development
expenses of $4.2 million and $5.5 million, respectively.
FlashVision
The Company owns 49.9% of FlashVision. The Company’s obligations with respect to FlashVision’s lease
arrangement, capacity expansion, take-or-pay supply arrangements and research and development cost sharing are
described in Note 5. The fair value of the Company’s loan to FlashVision approximates book value. FlashVision is a
F-33
Notes to Consolidated Financial Statements — (Continued)
Annual Report