SanDisk 2007 Annual Report Download - page 74

1% Convertible Notes due 2035 and we do not have other agreements that would restrict our ability to pay the
principal amount of the 1% Senior Convertible Notes due 2013 in cash, we may enter into such an agreement in the
future, which may limit or prohibit our ability to make any such payment. In addition, a default under the indenture
could lead to a default under existing and future agreements governing our indebtedness. If, due to a default, the
repayment of related indebtedness were to be accelerated after any applicable notice or grace periods, we may not
have sufficient funds to repay such indebtedness and amounts owing in respect of the conversion of any 1% Senior
Convertible Notes due 2013.
The convertible note hedge transactions and the warrant option transactions may affect the value of the notes
and our common stock. We have entered into convertible note hedge transactions with Morgan Stanley & Co.
International Limited and Goldman, Sachs & Co., or the dealers. These transactions are expected to reduce the
potential dilution upon conversion of the 1% Senior Convertible Notes due 2013. We used approximately
$67.3 million of the net proceeds of funds received from the 1% Senior Convertible Notes due 2013 to pay the
net cost of the convertible note hedge in excess of the warrant transactions. These transactions were accounted for as
an adjustment to our stockholders’ equity. In connection with hedging these transactions, the dealers or their
affiliates:
• have entered into various over-the-counter cash-settled derivative transactions with respect to our common
stock, concurrently with, and shortly after, the pricing of the notes; and
• may enter into, or may unwind, various over-the-counter derivatives and/or purchase or sell our common
stock in secondary market transactions following the pricing of the notes, including during any observation
period related to a conversion of notes.
The dealers or their affiliates are likely to modify their hedge positions from time-to-time prior to conversion or
maturity of the notes by purchasing and selling shares of our common stock, our securities or other instruments they
may wish to use in connection with such hedging. In particular, such hedging modification may occur during any
observation period for a conversion of the 1% Senior Convertible Notes due 2013, which may have a negative effect
on the value of the consideration received in relation to the conversion of those notes. In addition, we intend to
exercise options we hold under the convertible note hedge transactions whenever notes are converted. To unwind
their hedge positions with respect to those exercised options, the dealers or their affiliates expect to sell shares of our
common stock in secondary market transactions or unwind various over-the-counter derivative transactions with
respect to our common stock during the observation period, if any, for the converted notes.
The effect, if any, of any of these transactions and activities on the market price of our common stock or the
1% Senior Convertible Notes due 2013 will depend in part on market conditions and cannot be ascertained at this
time, but any of these activities could adversely affect the value of our common stock and the value of the 1% Senior
Convertible Notes due 2013 and, as a result, the amount of cash and the number of shares of common stock, if any,
holders will receive upon the conversion of the notes.
There is pending litigation. Actions purporting to be class and derivative actions on behalf of msystems and
its shareholders were filed against us and msystems prior to the closing of the merger. See Item 3, “Legal
Proceedings.” We may be required to expend significant resources, including management time, to defend these
actions and could be subject to damages or settlement costs related to these actions. We are responsible for liabilities
associated with these and any other class and derivative actions, including indemnification of directors and certain
members of management of msystems.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our principal facilities are located in Milpitas, California. We lease four adjacent buildings comprising
approximately 444,000 square feet. These facilities house our corporate offices, the majority of our engineering
team, as well as a portion of our sales, marketing, operations and corporate services organizations. We occupy this
space under lease agreements that expire in 2011 and 2013. In addition, we own two buildings comprising
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