SanDisk 2006 Annual Report Download - page 135

five years. No residual value has been estimated for the intangible assets. In accordance with SFAS 142, the
Company will not amortize the goodwill, but will evaluate it at least annually for impairment.
Acquisition-Related Restructuring. During the fourth quarter of fiscal 2006, the Company established its
plans to integrate the msystems operations, which included the involuntary termination of approximately 100
employees and exiting duplicative facilities and recorded $1.6 million for acquisition-related restructuring
activities, of which $0.3 million relates to excess lease obligations and $1.3 million is related to personnel.
The lease obligations extend through the end of the lease term in fiscal 2016. These acquisition-related restructuring
liabilities were included in the purchase price allocation of the cost to acquire msystems. No restructuring accruals
were paid or utilized as of December 31, 2006.
U3 LLC. As a result of the msystems acquisition, the U3 venture between msystems and SanDisk became a
wholly-owned subsidiary. At December 31, 2006, the minority interest relating to msystems’ ownership in U3 was
eliminated.
In-process Technology. As part of the msystems purchase agreement, a certain amount of the purchase price
was allocated to acquired in-process technology, which was determined through established valuation techniques in
the high-technology industry and written-off in the fourth quarter of fiscal 2006 because technological feasibility
had not been established and no alternative future uses existed. The value was determined by estimating the net cash
flows and discounting forecasted net cash flows to their present values. The Company wrote-off the acquired in-
process technology of $186.0 million in the fourth quarter of fiscal 2006. As of December 31, 2006, it was estimated
that these in-process projects would be completed at an estimated total cost of $13.1 million. The net cash flows
from the identified projects were based on estimates of revenues, costs of revenues, research and development
expenses, including costs to complete the projects, selling, marketing and administrative expenses, and income
taxes from the projects. The Company believes the assumptions used in the valuations were reasonable at the time of
the acquisition. The estimated net revenues and gross margins were based on management’s projections of the
projects and were in line with industry averages. Estimated total net revenues from the projects were expected to
grow through fiscal 2009 and decline thereafter as other new products are expected to become available. Estimated
operating expenses included research and development expenses and selling, marketing and administrative
expenses based upon historical and expected direct expense level and general industry metrics. Estimated research
and development expenses included costs to bring the projects to technological feasibility and costs associated with
ongoing maintenance after a product is released. These activities range from 0% to 5% of msystems’ portion of the
Company’s net revenues for the in-process technologies.
The effective tax rate used in the analysis of the in-process technologies reflects a historical industry-specific
average for the United States federal income tax rates. A discount rate (the rate utilized to discount the net cash
flows to their present values) of 19% was used in computing the present value of net cash flows for the projects. The
percentage of completion was determined using costs incurred by msystems prior to the acquisition date compared
to the estimated remaining research and development to be completed to bring the projects to technological
feasibility.
Matrix Semiconductor, Inc. On January 13, 2006, the Company completed the acquisition of Matrix
Semiconductor, Inc., or 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 the Company’s existing
flash storage memory products. The Company acquired 100% of the outstanding shares of Matrix for a total
purchase price of $296.4 million, consisting of $20.0 million in cash, 3,722,591 shares of common stock valued at
$242.3 million, assumed equity instruments to issue 567,704 shares of common stock valued at $33.2 million and
transaction expenses of $0.9 million primarily for accounting and legal fees. The assumed stock options were
valued using the Black-Scholes-Merton valuation model with the following assumptions: stock price of $65.09; a
weighted average volatility rate of 52.8%; a risk-free interest rate of 4.3%; a dividend yield of zero and a weighted
average expected remaining term of 1.4 years. The fair value of unvested assumed stock options, which was valued
at the consummation date, will be recognized as compensation expenses, net of forfeitures, over the remaining
vesting period.
F-36
Notes to Consolidated Financial Statements — (Continued)