SanDisk 2010 Annual Report Download - page 160

We intend to fulfill our debt service obligations from cash generated by our operations, if any, and from our
existing cash and investments. We may enter into other senior financial instruments in the future.
Our indebtedness could have significant negative consequences. For example, it could:
• increase our vulnerability to general adverse economic and industry conditions;
• limit our ability to obtain additional financing;
• require the dedication of a substantial portion of any cash flow from operations to the payment of
principal of, and interest on, our indebtedness, thereby reducing the availability of such cash flow to
fund our growth strategy, working capital, capital expenditures and other general corporate purposes;
• limit our flexibility in planning for, or reacting to, changes in our business and our industry;
• place us at a competitive disadvantage relative to our competitors with less debt; and
• increase our risk of credit rating downgrades.
The net share settlement feature of the 1% Convertible Senior Notes due 2013 and 1.5% Convertible Senior
Notes due 2017 may have adverse consequences. The 1% Notes due 2013 and 1.5% Notes due 2017 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 1.5%
Notes due 2017 and by delivering shares of our common stock in settlement of any and all conversion obligations
in excess of the principal amount. Accordingly, upon conversion of a note, holders might not receive any shares
of our common stock, or they might receive fewer shares of common stock relative to the conversion value of the
note.
Our failure to convert the 1% Notes due 2013 and 1.5% Notes due 2017 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
applicable indenture would constitute a default under that 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 and 1.5% Notes due 2017 for conversion. While we do not currently have any debt or 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 either 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 convertible notes.
The convertible note hedge transactions and warrant transactions and/or early termination of the 2006
hedge and warrant transactions may affect the value of the notes and our common stock. In connection with the
pricing of the 1% Notes due 2013 and 1.5% Notes due 2017, we have entered into privately negotiated
convertible note hedge transactions with the underwriters in the offerings of the notes (collectively, the “dealers”)
or their respective affiliates. The convertible note hedge transactions cover, subject to customary anti-dilution
adjustments, the number of shares of our common stock that initially underlie the 1% Notes due 2013 and the
1.5% Notes due 2017. These transactions are expected to reduce the potential dilution with respect to our
common stock upon conversion of the 1% Notes due 2013 and 1.5% Notes due 2017. However, if there is a
counterparty default or other nonperformance under the hedge transactions, we may not be able to reduce the
potential dilution with respect to our common stock upon conversion of our 1% Notes due 2013 and 1.5% Notes
due 2017, or we may not be refunded our initial costs associated with such hedge transactions.
Separately, we have also entered into privately negotiated warrant transactions with the dealers or their
respective affiliates, relating to the same number of shares of our common stock, subject to customary anti-
dilution adjustments. We used approximately $67.3 million of the net proceeds of the offering of the 1% Notes
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