SanDisk 2007 Annual Report Download - page 138

restructuring accrual based on actual costs being less than the original estimates. As of December 30, 2007, there
was no remaining acquisition-related restructuring accrual that had not been paid or utilized.
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 year 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 year 2006. As of December 30, 2007,
it was estimated that these in-process projects would be completed at an estimated total cost of $14.4 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 year 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, estimated at 2% of the expected 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, a
designer and developer of three-dimensional (“3D”) integrated circuits. Matrix»3D 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. The
purchase price is comprised of the following (in thousands):
Fair value of SanDisk common stock issued .................................. $242,303
Estimated fair value of options assumed ..................................... 33,169
Cash consideration ..................................................... 20,000
Direct transaction costs.................................................. 907
Total purchase price .................................................... $296,379
As a result of the acquisition, the Company issued approximately 3.7 million shares of SanDisk common stock
and assumed equity instruments to issue 567,704 shares of common stock. 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.
Acquisition-Related Restructuring. During the first quarter of fiscal year 2006, the Company established its
plans to integrate the Matrix operations, which included exiting duplicative facilities and recording $17.5 million
for acquisition-related restructuring activities, of which $17.4 million relates to excess lease obligations. The lease
obligations extend through the end of the lease term in fiscal year 2016. These acquisition-related restructuring
F-42
Notes to Consolidated Financial Statements — (Continued)