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Notes To Consolidated Financial Statements
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 was 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, is being recognized as compensation expense, 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 related to excess lease obligations. The
lease obligations extend through the end of the lease term in fiscal year 2016. These acquisition-related
restructuring liabilities were included in the purchase price allocation of the cost to acquire Matrix. As of
December 28, 2008, the outstanding accrual balance was $12.7 million related to these long-term lease
obligations.
In-process Technology. As part of the Matrix 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 computer industry and written-off in the first 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 $39.6 million in the first quarter of fiscal year
2006. As of December 28, 2008, all in-process projects were completed.
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
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