SanDisk 2013 Annual Report Download - page 197

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concurrently with the issuance of the 0.5% Notes due 2020, the Company purchased a convertible
bond hedge and sold warrants. The convertible bond hedge transaction is structured to reduce the
potential future economic dilution associated with the conversion of the 0.5% Notes due 2020 and,
combined with the warrants, to increase the initial conversion price to $122.9220 per share. Each of these
components is discussed separately below:
•Convertible Bond Hedge. Counterparties agreed to sell to the Company up to approximately
16.3 million shares of the Company’s common stock, which is the number of shares initially issuable
upon conversion of the 0.5% Notes due 2020 in full, at a price of $92.19 per share. The 0.5% Notes
due 2020 contains provisions where the number of shares to be sold under the convertible bond
hedge transaction and the conversion price will be adjusted if the Company pays a cash dividend
greater than a regular quarterly cash dividend of $0.225 per share or makes a distribution to all or
substantially all holders of its common stock. As of December 29, 2013, no adjustment has been
made to the number of shares to be sold under the convertible bond hedge transaction or the
conversion price. This convertible bond hedge transaction will be settled in net shares and will
terminate upon the earlier of the maturity date of the 0.5% Notes due 2020 or the first day none of
the 0.5% Notes due 2020 remain outstanding due to conversion or otherwise. Settlement of the
convertible bond hedge in net shares, based on the number of shares issuable upon conversion of
the 0.5% Notes due 2020, 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 0.5% Notes
due 2020. 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 $331.7 million has been accounted for as an equity transaction. The
Company initially recorded approximately $119.5 million in stockholders’ equity from the deferred
tax asset related to the convertible bond hedge at inception of the transaction. As of December 29,
2013, the Company had not purchased any shares under this convertible bond hedge agreement.
•Warrants. The Company received $217.8 million from the same counterparties from the sale of
warrants to purchase up to approximately 16.3 million shares of the Company’s common stock at an
exercise price of $122.9220 per share. The 0.5% Notes due 2020 contains provisions whereby the
number of shares to be acquired under the warrants and the strike price are adjusted if the
Company pays a cash dividend greater than a regular quarterly cash dividend of $0.225 per share or
makes a distribution to all or substantially all holders of its common stock. As of December 29,
2013, no adjustment has been made to the number of shares to be acquired under the warrants or
the strike price. The warrants mature on 40 different dates from January 13, 2021 through
March 11, 2021 and are exercisable at the maturity date. At each expiration date, the Company
may, at its option, elect to settle the warrants on a net share basis. As of December 29, 2013, 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.
Note 7: Share Repurchase Program
In September 2013, the Company’s Board of Directors increased the share repurchase program
authorization by $2.50 billion, to an aggregate amount of $3.75 billion for share repurchases. Under this
program, shares repurchased are recorded as a reduction to capital in excess of par value and retained
earnings in the Company’s Consolidated Balance Sheets. The repurchases will be made from time to time
in the open market, in privately negotiated transactions, or in structured stock repurchase programs, and
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