SanDisk 2010 Annual Report Download - page 211

This is a TAB type table. Insert
conts here. Annual Report
Notes To Consolidated Financial Statements
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. The Company initially recorded approximately $0.8 million in stockholders’ equity from
the net deferred tax liability related to the convertible bond hedge at inception of the transaction.
•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. As of January 2, 2011, the warrants had an expected life of 2.6 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 January 2, 2011, the warrants had not been exercised and remained
outstanding. The value of the warrants was initially recorded in equity and continues to be classified as
equity.
1.5% Convertible Senior Notes Due 2017. In August 2010, the Company issued and sold $1.0 billion in
aggregate principal amount of 1.5% Convertible Senior Notes due August 15, 2017 (the “1.5% Notes due 2017”)
at par. The 1.5% Notes due 2017 may be converted, under certain circumstances described below, based on an
initial conversion rate of 19.0931 shares of common stock per $1,000 principal amount of notes (which
represents an initial conversion price of approximately $52.37 per share). The net proceeds to the Company from
the sale of the 1.5% Notes due 2017 were $981.0 million.
The Company separately accounts for the liability and equity components of the 1.5% Notes due 2017. The
principal amount of the liability component of $706.0 million as of the date of issuance was recognized at the
present value of its cash flows using a discount rate of 6.85%, the Company’s borrowing rate at the date of the
issuance for a similar debt instrument without the conversion feature. The carrying value of the equity
component was $294.0 million as of January 2, 2011. The effective interest rate on the liability component of the
1.5% Notes due 2017 for the year ended January 2, 2011 was 6.85%.
The following table presents the amount of interest cost recognized for the period relating to both the
contractual interest coupon and amortization of the discount on the liability component of the 1.5% Notes due
2017 (in millions):
Year ended
January 2,
2011
Contractual interest coupon ......................................................... $ 5.2
Amortization of interest discount ..................................................... 11.9
Total interest cost recognized .................................................... $ 17.1
The remaining bond discount of $282.2 million as of January 2, 2011 will be amortized over the remaining
life of the 1.5% Notes due 2017, which is approximately 6.6 years.
The 1.5% Notes due 2017 may be converted on any day prior to the close of business on the scheduled
trading day immediately preceding May 15, 2017, in multiples of $1,000 principal amount at the option of the
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