SanDisk 2010 Annual Report Download - page 179

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which could be difficult to obtain, and which if not obtained in satisfactory amounts, could prevent us from
funding Flash Ventures, increasing our wafer supply, developing or enhancing our products, taking advantage of
future opportunities, engaging in investments in or acquisitions of companies, growing our business, responding
to competitive pressures or unanticipated industry changes, any of which could harm our business.
Our short-term liquidity is impacted in part by our ability to maintain compliance with covenants in the
outstanding Flash Ventures master lease agreements. The Flash Ventures master lease agreements contain
customary covenants for Japanese lease facilities as well as an acceleration clause for certain events of default
related to us as guarantor, including, among other things, our failure to maintain a minimum shareholder equity
of at least $1.51 billion, and our failure to maintain a minimum corporate rating of BB- from S&P or Moody’s, or
a minimum corporate rating of BB+ from R&I. As of January 2, 2011, Flash Ventures was in compliance with all
of its master lease covenants. As of January 2, 2011, our R&I credit rating was BBB, three notches above the
required minimum corporate rating threshold from R&I and our S&P credit rating was BB-, which is the required
minimum corporate rating threshold from S&P.
If both S&P and R&I were to downgrade our credit rating below the minimum corporate rating threshold,
Flash Ventures would become non-compliant with certain covenants under its master equipment lease
agreements and would be required to negotiate a resolution to the non-compliance to avoid acceleration of the
obligations under such agreements. Such resolution could include, among other things, supplementary security to
be supplied by us, as guarantor, or increased interest rates or waiver fees, should the lessors decide they need
additional collateral or financial consideration under the circumstances. If a resolution was unsuccessful, we
could be required to pay a portion or up to the entire outstanding lease obligations which are denominated in
Japanese yen and valued at approximately $879 million covered by our guarantee under such Flash Ventures
master lease agreements, based upon the exchange rate at January 2, 2011, which would negatively impact our
short-term liquidity.
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. We may also make equity investments in other companies, engage in merger or
acquisition transactions, or purchase or license technologies. These activities may require us to raise additional
financing, which could be difficult to obtain, and which if not obtained in satisfactory amounts, could prevent us
from funding Flash Ventures, increasing our wafer supply, developing or enhancing our products, taking advantage
of future opportunities, engaging in investments in or acquisitions of companies, growing our business, responding
to competitive pressures or unanticipated industry changes, any of which could harm our business.
Financing Arrangements. At January 2, 2011, we had $1.15 billion aggregate principal amount of 1%
Notes due 2013 outstanding and $1.00 billion aggregate principal amount of 1.5% Notes due 2017 outstanding.
See Note 6, “Financing Arrangements,” in the Notes to Consolidated Financial Statements of this Form 10-K
included in Part II, Item 8 of this report.
Concurrent with the issuance of the 1% Notes due 2013, we sold warrants to acquire shares of our common
stock at an exercise price of $95.03 per share. As of January 2, 2011, the warrants had an expected life of
approximately 2.6 years and expire in August 2013. At expiration, we may, at our option, elect to settle the
warrants on a net share basis. As of January 2, 2011, the warrants had not been exercised and remain outstanding.
In addition, concurrent with the issuance of the 1% Notes due 2013, we entered into a convertible bond hedge
transaction in which 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 due 2013 in full, at a
conversion 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 that none of the 1%
Notes due 2013 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 due 2013. As of January 2, 2011, we had not purchased any
shares under this convertible bond hedge agreement.
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