SanDisk 2007 Annual Report Download - page 139

liabilities were included in the purchase price allocation of the cost to acquire Matrix. As of December 30, 2007, the
outstanding accrual balance was $13.4 million. The reduction in the accrual balance was primarily related to lease
obligation payments.
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 30, 2007, it
was estimated that these 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 projects to technological
feasibility and costs associated with ongoing maintenance after a product is released. These activities range from
0% to 5% of Matrix’s 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. Discount rates (the rates utilized to discount the net cash
flows to their present values) ranging from 12.5% to 15.5% were used in computing the present value of net cash
flows for the projects. The percentage of completion was determined using costs incurred by Matrix prior to the
acquisition date compared to the estimated remaining research and development to be completed to bring the
projects to technological feasibility.
Pro Forma Results. The following unaudited pro forma financial information for the twelve months ended
December 31, 2006 presents the combined results of the Company, Matrix and msystems, as if the acquisitions had
occurred at the beginning of the period presented (in thousands, except per share amounts). Certain adjustments
have been made to the combined results of operations, including amortization of acquired other intangible assets;
however, charges for acquired in-process technology were excluded as these items were non-recurring.
December 31,
2006
January 1,
2006
Twelve Months Ended
Net revenues............................................. $4,030,645 $2,925,431
Net income .............................................. $ 340,097 $ 295,305
Net income per share:
Basic ................................................ $ 1.49 $ 1.39
Diluted ............................................... $ 1.41 $ 1.29
The pro forma financial information does not necessarily reflect the results of operations that would have
occurred had the Company, Matrix and msystems constituted a consolidated entity during such period.
Note 15: Stockholders’ Rights Plan
On September 15, 2003, the Company amended its existing stockholder rights plan to terminate the rights
issued under that rights plan, and the Company adopted a new rights plan. Under the new rights plan, rights were
distributed as a dividend at the rate of one right for each share of common stock of the Company held by
F-43
Notes to Consolidated Financial Statements — (Continued)