SanDisk 2006 Annual Report Download - page 85

In January 2006, we acquired Matrix, a designer and developer of three-dimensional (3-D) integrated circuits.
Matrix»3-D Memory is used for one-time programmable storage applications that complement our existing flash
storage memory products.
Matrix 3-D Memory is used for storage applications that do not require rewriteable memory and where low
cost is the paramount consideration, such as video games, music and other content, or for archiving. The acquisition
of Matrix resulted in a $39.6 million write-off of in-process acquired technology during the first quarter of fiscal
2006.
In May 2006, we issued and sold $1.15 billion in aggregate principal amount of 1% Convertible Senior Notes
due 2013 (the “1% Notes due 2013”). The 1% Notes due 2013 were issued at par and pay interest at a rate of 1% per
annum. The 1% Notes due 2013 may be converted into our common stock, under certain circumstances, based on an
initial conversion rate of 12.1426 shares of common stock per $1,000 principal amount of notes (which represents
an initial conversion price of approximately $82.36 per share). The conversion price will be subject to adjustment in
some events but will not be adjusted for accrued interest. The net proceeds to us from the offering of the 1% Notes
due 2013 were $1.13 billion. Concurrently with the issuance of the 1% Notes due 2013, we purchased a convertible
bond hedge and sold warrants. The separate convertible bond hedge and warrant transactions are structured to
reduce the potential future economic dilution associated with the conversion of the 1% Notes due 2013 and to
increase the initial conversion price to $95.03 per share. Net proceeds from this offering will be used for general
corporate purposes, including capital expenditures for new and existing manufacturing facilities, development of
new technologies, general working capital and other non-manufacturing capital expenditures. The net proceeds
may also be used to fund strategic investments or acquisitions of products, technologies or complementary
businesses or obtain the right or license to use additional technologies.
On July 7, 2006, we and Toshiba Corporation, or Toshiba, entered into a business venture, Flash Alliance, to
build Fab 4, a new advanced 300-millimeter wafer fabrication facility at Toshiba’s Yokkaichi, Japan operations, to
meet the anticipated growing demand for NAND flash memory in 2008 and beyond. We own 49.9% and Toshiba
owns 50.1% of Flash Alliance. Both we and Toshiba will collaborate in the development and manufacture of NAND
flash memory products. These NAND flash memory products will be manufactured by Toshiba at Fab 4 using
semiconductor manufacturing equipment owned or leased by Flash Alliance. Flash Alliance will purchase wafers
from Toshiba at cost and then resell those wafers to us and Toshiba at cost plus a markup. We account for our 49.9%
ownership position in Flash Alliance under the equity method of accounting. We are committed to purchase half of
Flash Alliance’s NAND wafer supply. See “— Toshiba Ventures.”
Beginning in the first quarter of fiscal 2006, we adopted the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123(R), or SFAS 123(R), Share Based Payments, using the modified-
prospective transition method. Under that transition method, compensation cost recognized on a straight-line basis,
in the year ended December 31, 2006 included the following: (a) compensation cost based on the grant date fair
value related to any share-based awards granted through, but not yet vested as of January 1, 2006, and (b) com-
pensation cost for any share-based awards granted on or subsequent to January 2, 2006, based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123(R). As a result of adopting SFAS 123(R), we
recognized share-based compensation expense of $100.6 million during the year ended December 31, 2006, which
affected our reported cost of sales, research and development, selling and marketing and general and administrative
expenses. In addition, at December 31, 2006, we capitalized to inventory $3.2 million of compensation cost for
share-based awards that were issued to manufacturing personnel. We calculate this share-based compensation
expense based on the fair values of the share-based compensation awards as estimated using the Black-Scholes-
Merton closed-form option valuation model. As of December 31, 2006, total unrecognized compensation expense
related to unvested share-based compensation arrangements already granted under our various plans was
$260.1 million, which we expect to recognize over a weighted-average period of 2.7 years.
On November 19, 2006, we acquired msystems Ltd., or msystems. msystems designs, develops and markets
innovative flash data storage solutions for digital consumer electronics markets. msystems primarily targets two
digital consumer electronics markets: the mobile phone market and the USB flash drive market. msystems also sells
flash data storage products targeted at the embedded systems market. The acquisition of msystems resulted in a
$186.0 million write-off of in-process acquired technology during the fourth quarter of fiscal 2006.
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