SanDisk 2006 Annual Report Download - page 93

workforce reduction will impact functions related to operations, engineering, sales and marketing and adminis-
tration and will primarily be based in the United States and Israel, and to a lesser degree, other international
locations. The Plan is expected to be completed by the third quarter of fiscal 2007. Total annualized operating cash
cost savings related to the reduction-in-force and other cost saving measures, excluding severance costs, are
expected to be approximately $30 million to $35 million, including cash savings from the reduction-in-force of
approximately $20 million to $25 million. In addition, the reduction-in-force is expected to result in a decrease in
share-based compensation expense of approximately $10 million on an annualized basis.
Long-Term Requirements. Depending on the demand for our products, we may decide to make additional
investments, which could be substantial, in wafer fabrication foundry capacity and assembly and test manufacturing
equipment to support our business in the future. We may also make equity investments in other companies or engage
in merger or acquisition transactions. These additional investments or acquisitions may require us to raise additional
financing, which could be difficult to obtain, and which if not obtained in satisfactory amounts may prevent us from
funding the ventures with Toshiba, increasing our wafer supply, developing or enhancing our products, taking
advantage of future opportunities, growing our business or responding to competitive pressures or unanticipated
industry changes, any of which could harm our business.
Financing Arrangements. In May 2006, we issued and sold $1.15 billion in aggregate principal amount of
1% Notes due 2013. The 1% Notes were issued at par and pay interest at a rate of 1% per annum. The 1% Notes may
be converted into our common stock, under certain circumstances, based on an initial conversion rate of
12.1426 shares per $1,000 principal amount of notes (which represents an initial conversion price of approximately
$82.36 per share). The conversion price will be subject to adjustment in some events but will not be adjusted for
accrued interest. The net proceeds to us from the offering of the 1% Notes were $1.13 billion.
Concurrently with the issuance of the 1% Notes, we purchased a convertible bond hedge and sold warrants.
The separate convertible bond hedge and warrant transactions are structured to reduce the potential future economic
dilution associated with the conversion of the 1% Notes and to increase the initial conversion price to $95.03 per
share. Each of these components are discussed separately below:
•Convertible Bond Hedge. Counterparties agreed to sell to us up to approximately 14.0 million shares of our
common stock, which is the number of shares initially issuable upon conversion of the 1% Notes in full, at a
price of $82.36 per share. The convertible bond hedge transaction will be settled in net shares and will
terminate upon the earlier of the maturity date of the 1% Notes or the first day none of the 1% Notes remain
outstanding due to conversion or otherwise. Settlement of the convertible bond hedge in net shares on the
expiration date would result in us receiving net shares equivalent to the number of shares issuable by us upon
conversion of the 1% Notes. Should there be an early unwind of the convertible bond hedge transaction, the
number of net shares potentially received by us will depend upon 1) the then existing overall market
conditions, 2) our stock price, 3) the volatility of our stock, and 4) the amount of time remaining before
expiration of the convertible bond hedge. The convertible bond hedge transaction cost of $386.1 million has
been accounted for as an equity transaction in accordance with Emerging Issues Task Force No. 00-19, or
EITF 00-19, Accounting for Derivative Financial Statements Indexed to, and Potentially Settled in, a
Company’s Own Stock. We recorded a tax benefit of approximately $145.6 million in stockholders’ equity
from the deferred tax assets related to the convertible bond hedge.
•Sold Warrants. We received $308.7 million from the same counterparties from the sale of warrants to
purchase up to approximately 14.0 million shares of our common stock at an exercise price of $95.03 per
share. As of December 31, 2006, the warrants have an expected life of approximately 6.5 years and expire in
August 2013. At expiration, we may, at our option, elect to settle the warrants on a net share basis. As
December 31, 2006, the warrants had not been exercised and remained outstanding. The value of the
warrants has been classified as equity because they meet all the equity classification criteria of EITF 00-19.
On November 30, 2006, we assumed through our acquisition of msystems, their $75 million in aggregate
principal amount of 1% Convertible Senior Notes due 2035, or the 1% Notes due 2035. The 1% Notes due 2035, pay
interest at a rate of 1% per annum. The 1% Notes due 2035 may be converted into our common stock, under certain
circumstances, based on an initial conversion rate of 26.8302 shares of common stock per $1,000 principal amount
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