SanDisk 2006 Annual Report Download - page 74

of our ventures with Toshiba in which we have a 49.9% ownership interest. In addition, we may enter into future
agreements to increase manufacturing capacity, including further expansion of Fab 3 and start-up of Fab 4. As of
December 31, 2006 we had unfunded commitments of approximately $877 million to fund our various obligations
under the FlashVision and Flash Partners ventures with Toshiba. As of December 31, 2006, we had indemnification
and guarantee obligations for these ventures of approximately $653 million. Due to these and our other commit-
ments, we may not have sufficient funds to make payments under or repurchase the notes.
The net share settlement feature of the 1% Notes due 2013 may have adverse consequences. The 1% Notes
due 2013 are subject to net share settlement, which means that we will satisfy our conversion obligation to holders
by paying cash in settlement of the lesser of the principal amount and the conversion value of the 1% Notes due 2013
and by delivering shares of our common stock in settlement of any and all conversion obligations in excess of the
daily conversion values.
Our failure to convert the 1% Notes due 2013 into cash or a combination of cash and common stock upon
exercise of a holder’s conversion right in accordance with the provisions of the indenture would constitute a default
under the indenture. We may not have the financial resources or be able to arrange for financing to pay such
principal amount in connection with the surrender of the 1% Notes due 2013 for conversion. While we currently
only have debt related to the 1% Notes due 2013 and the 1% Notes due 2035 and we do not have other agreements
that would restrict our ability to pay the principal amount of the 1% Notes due 2013 in cash, we may enter into such
an agreement in the future, which may limit or prohibit our ability to make any such payment. In addition, a default
under the indenture could lead to a default under existing and future agreements governing our indebtedness. If, due
to a default, the repayment of related indebtedness were to be accelerated after any applicable notice or grace
periods, we may not have sufficient funds to repay such indebtedness and amounts owing in respect of the
conversion of any 1% Notes due 2013.
The convertible note hedge transactions and the warrant option transactions may affect the value of the notes
and our common stock. We have entered into convertible note hedge transactions with Morgan Stanley & Co.
International Limited and Goldman, Sachs & Co., or the dealers. These transactions are expected to reduce the
potential dilution upon conversion of the notes. We used approximately $67.3 million of the net proceeds of funds
received from the 1% Notes due 2013 to pay the net cost of the convertible note hedge in excess of the warrant
transactions. These transactions were accounted for as an adjustment to our stockholders’ equity. In connection with
hedging these transactions, the dealers or their affiliates:
• have entered into various over-the-counter cash-settled derivative transactions with respect to our common
stock, concurrently with, and shortly after, the pricing of the notes; and
• may enter into, or may unwind, various over-the-counter derivatives and/or purchase or sell our common
stock in secondary market transactions following the pricing of the notes, including during any observation
period related to a conversion of notes.
The dealers or their affiliates are likely to modify their hedge positions from time-to-time prior to conversion or
maturity of the notes by purchasing and selling shares of our common stock, other of our securities or other
instruments they may wish to use in connection with such hedging. In particular, such hedging modification may
occur during any observation period for a conversion of the 1% Notes due 2013, which may have a negative effect
on the value of the consideration received in relation to the conversion of those notes. In addition, we intend to
exercise options we hold under the convertible note hedge transactions whenever notes are converted. To unwind
their hedge positions with respect to those exercised options, the dealers or their affiliates expect to sell shares of our
common stock in secondary market transactions or unwind various over-the-counter derivative transactions with
respect to our common stock during the observation period, if any, for the converted notes.
The effect, if any, of any of these transactions and activities on the market price of our common stock or the
1% Notes due 2013 will depend in part on market conditions and cannot be ascertained at this time, but any of these
activities could adversely affect the value of our common stock and the value of the 1% Notes due 2013 and, as a
result, the amount of cash and the number of shares of common stock, if any, holders will receive upon the
conversion of the notes.
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Annual Report