SanDisk 2007 Annual Report Download - page 73

approximately $12.3 million per year in interest. If we issue other debt securities in the future, our debt service
obligations will increase. If we are unable to generate sufficient cash to meet these obligations and must instead use
our existing cash or investments, we may have to reduce, curtail or terminate other business activities. We intend to
fulfill our debt service obligations from cash generated by our operations, if any, and from our existing cash and
investments. 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; and
• place us at a competitive disadvantage relative to our competitors with less debt.
The accounting method for convertible debt securities with net share settlement, such as our 1% Senior
Convertible Notes due 2013 may be subject to change. The Financial Accounting Standards Board, or FASB,
issued a proposed FASB Staff Position (“FSP”) No. APB 14-a, Accounting for Convertible Debt Instruments That
May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement). The proposed accounting method for
net share settled convertible securities would be to bifurcate and account for the net settled convertible securities as
if they were a separate debt and equity security. In November 2007, the FASB announced it is expected to begin its
redeliberations of the proposed FSP in February 2008. Therefore, final guidance will not be issued until at least the
end of the first quarter of 2008, and earlier application would not be permitted. The guidance in the proposed FSP
would be applied retrospectively to all periods presented. While the proposed FSP has not yet been finalized by the
FASB, our initial estimate based upon the current interpretations by the FASB, is that we would be required to report
an additional before tax, non-cash interest expense of approximately $400 million over the life of the 1% Senior
Convertible Notes due 2013, including approximately $50 million to $55 million in fiscal 2008. However, these
amounts are subject to material changes based upon finalization of the proposed FSP. These impacts could
adversely affect our financial results, the trading price of our common stock and negatively impact the trading price
of the notes.
We have significant financial obligations related to our flash ventures with Toshiba, which could impact our
ability to comply with our obligations under our 1% Senior Convertible Notes due 2013 and our 1% Convertible
Notes due 2035. We have entered into agreements to guarantee, indemnify or provide financial support with
respect to lease and certain other obligations of the flash ventures with Toshiba in which we have a 49.9% ownership
interest. In addition, we may enter into future agreements to increase manufacturing capacity, including the
expansion of Fab 4. As of December 30, 2007, we had indemnification and guarantee obligations for these ventures
of approximately $1.14 billion. As of December 30, 2007, we had unfunded commitments of approximately
$1.8 billion to fund our various obligations under the Flash Partners and Flash Alliance ventures with Toshiba. Due
to these and our other commitments, we may not have sufficient funds to make payments under or repurchase the
notes.
The net share settlement feature of the 1% Senior Convertible Notes due 2013 may have adverse consequences.
The 1% Senior Convertible Notes due 2013 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% Senior Convertible Notes due 2013 and by delivering shares of our common stock in
settlement of any and all conversion obligations in excess of the daily conversion values.
Our failure to convert the 1% Senior Convertible Notes due 2013 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 indenture would
constitute a default under the 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% Senior Convertible Notes due 2013 for
conversion. While we currently only have debt related to the 1% Senior Convertible Notes due 2013 and the
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