SanDisk 2007 Annual Report Download - page 115

cash all or a portion of their notes upon a “designated event” at a price equal to 100% of the principal amount of the
notes being repurchased plus accrued and unpaid interest, if any.
The Company will pay cash interest at an annual rate of 1%, payable semi-annually on May 15 and November
15 of each year, beginning November 15, 2006. Debt issuance costs of approximately $24.5 million are being
amortized to interest expense over the term of the 1% Notes due 2013.
Concurrently with the issuance of the 1% Notes due 2013, the Company 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 due 2013 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 the Company up to approximately 14 million
shares of the Company’s common stock, which is the number of shares initially issuable upon conversion of
the 1% Notes due 2013 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 due 2013 or the
first day none of the 1% Notes due 2013 remains outstanding due to conversion or otherwise. Settlement of
the convertible bond hedge in net shares, based on the number of shares issued upon conversion of the
1% Notes due 2013, on the expiration date would result in the Company receiving net shares equivalent to
the number of shares issuable by the Company upon conversion of the 1% Notes due 2013. Should there be
an early unwind of the convertible bond hedge transaction, the number of net shares potentially received by
the Company will depend upon 1) the then existing overall market conditions, 2) the Company’s stock price,
3) the volatility of the Company’s 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, (“EITF 00-19”),
Accounting for Derivative Financial Statements Indexed to, and Potentially Settled in, a Company’s Own
Stock. The Company recorded a tax benefit of approximately $145.6 million in stockholders’ equity from the
deferred tax asset related to the convertible bond hedge.
•Sold Warrants. The Company received $308.7 million from the same counterparties from the sale of
warrants to purchase up to approximately 14 million shares of the Company’s common stock at an exercise
price of $95.03 per share. The warrants have an expected life of 5.5 years and expire in August 2013. At
expiration, the Company may, at its option, elect to settle the warrants on a net share basis. As of
December 30, 2007, 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.
1% Convertible Notes Due 2035. In November 2006, the Company assumed the aggregate principal amount
of $75.0 million 1% Convertible Senior Notes due March 2035 (the “1% Notes due 2035”) from msystems. The
Company is obligated to pay interest on the 1% Notes due 2035 semi-annually on March 15 and September 15
commencing March 15, 2007.
The 1% Notes due 2035 are convertible, at the option of the holders at any time before the maturity date, into
shares of the Company at a conversion rate of 26.8302 shares per one thousand dollars principal amount of the
1% Notes due 2035, representing a conversion price of approximately $37.27 per share.
Beginning on March 15, 2008 and until March 14, 2010, the Company may redeem for cash the notes, in whole
or in part at any time at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus
accrued but unpaid interest, if any, to but excluding the redemption date, if the last reported sales price of the
Company ordinary shares has exceeded 130% of the conversion price for at least 20 trading days in any consecutive
30-day trading period ending on the trading day prior to the date of mailing of the notice of redemption.
At any time on or after March 15, 2010, the Company may redeem the notes in whole or in part at a redemption
price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to
but excluding the optional redemption date.
F-19
Notes to Consolidated Financial Statements — (Continued)