SanDisk 2006 Annual Report Download - page 124

conversion price of approximately $82.36 per share). The net proceeds to the Company from the offering of the
1% Notes due 2013 were $1.13 billion.
The 1% Notes due 2013 may be converted prior to the close of business on the scheduled trading day
immediately preceding February 15, 2013, in multiples of $1,000 principal amount at th option of the holder under
any of the following circumstances: 1) during the five business-day period after any five consecutive trading-day
period (the “measurement period”) in which the trading price per note for each day of such measurement period was
less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate
on each such day; 2) during any calendar quarter after the calendar quarter ending June 30, 2006, if the last reported
sale price of the Company’s common stock for 20 or more trading days in a period of 30 consecutive trading days
ending on the last trading day of the immediately preceding calendar quarter exceeds 120% of the applicable
conversion price in effect on the last trading day of the immediately preceding calendar quarter; or 3) upon the
occurrence of specified corporate transactions. On and after February 15, 2013 until the close of business on the
scheduled trading day immediately preceding the maturity date of May 15, 2013, holders may convert their notes at
any time, regardless of the foregoing circumstances.
Upon conversion, a holder will receive the conversion value of the 1% Notes due 2013 to be converted equal to
the conversion rate multiplied by the volume weighted average price of the Company’s common stock during a
specified period following the conversion date. The conversion value of each 1% Notes due 2013 will be paid in:
1) cash equal to the lesser of the principal amount of the note or the conversion value, as defined, and 2) to the extent
the conversion value exceeds the principal amount of the note, a combination of common stock and cash. The
conversion price will be subject to adjustment in some events but will not be adjusted for accrued interest. In
addition, upon a fundamental change at any time, as defined, the holders may require the Company to repurchase for
cash all or a portion of their notes upon a “designated event” at a price equal to 100% of the principal amount of the
notes being repurchased plus accrued and unpaid interest, if any.
The Company will pay cash interest at an annual rate of 1%, payable semi-annually on May 15 and November
15 of each year, beginning November 15, 2006. Debt issuance costs of approximately $24.5 million are being
amortized to interest expense over the term of the 1% Notes due 2013.
Concurrently with the issuance of the 1% Notes due 2013, the Company purchased a convertible bond hedge
and sold warrants. The separate convertible bond hedge and warrant transactions are structured to reduce the
potential future economic dilution associated with the conversion of the 1% Notes due 2013 and to increase the
initial conversion price to $95.03 per share. Each of these components are discussed separately below:
•Convertible Bond Hedge. Counterparties agreed to sell to the Company up to approximately 14 million
shares of the Company’s common stock, which is the number of shares initially issuable upon conversion of
the 1% Notes due 2013 in full, at a 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 none of the 1% Notes due 2013 remain 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 in accordance with Emerging Issues Task Force No. 00-19, or EITF 00-19,
Accounting for Derivative Financial Statements Indexed to, and Potentially Settled in, a Company’s Own
Stock. The Company recorded a tax benefit of approximately $145.6 million in stockholders’ equity from the
deferred tax assets related to the convertible bond hedge.
•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
Annual Report
F-25
Notes to Consolidated Financial Statements — (Continued)