SanDisk 2008 Annual Report Download - page 35

We have significant financial obligations related to Flash Ventures, which could impact our ability to
comply with our obligations under our 1% Senior Convertible Notes due 2013 and our 1% Convertible Notes due
2035. We have entered into agreements to guarantee or provide financial support with respect to lease and certain
other obligations of Flash Ventures in which we have a 49.9% ownership interest. In addition, we may enter into
future agreements to increase manufacturing capacity, including the expansion of Fab 4. As of December 28,
2008, we had guarantee obligations for Flash Venture master lease agreements of approximately $2.09 billion. In
addition, we have significant commitments for the future fixed costs of Flash Ventures. Due to these and our
other commitments, we may not have sufficient funds to make payments under or repay the notes.
The settlement of the 1% Senior Convertible Notes due 2013 or the 1% Convertible Notes due 2035 may
have adverse consequences. The 1% Senior Convertible 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 or the conversion value of the 1% Senior Convertible 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. The holders of the 1% Convertible Notes due 2035 have a put option in March 2010 and various dates
thereafter under which they can demand cash repayment of the principal amount of $75 million.
Our failure to convert the 1% Senior Convertible 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. Similarly, our failure to settle the 1% Convertible Notes due 2035
if we were forced to repurchase the Notes in March 2010 or thereafter 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% Senior Convertible Notes due 2013 or the 1% Convertible
Notes due 2035. While we currently only have debt related to the 1% Senior Convertible Notes due 2013 and the
1% Convertible Notes due 2035 and we do not have other agreements that would restrict our ability to pay the
principal amount of any convertible notes 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, maturity, or put of
any convertible notes.
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 1% Senior Convertible Notes due 2013. We used approximately
$67.3 million of the net proceeds of funds received from the 1% Senior Convertible 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, 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% Senior Convertible 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
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