SanDisk 2008 Annual Report Download - page 58

Long-Term Requirements. Depending on the demand for our products, we may decide to make additional
investments, which could be substantial, in wafer fabrication foundry capacity and assembly and test
manufacturing equipment to support our business in the future. We may also make equity investments in other
companies or engage in merger or acquisition transactions. These activities may require us to raise additional
financing, which could be difficult to obtain, and which if not obtained in satisfactory amounts could prevent us
from funding Flash Ventures; increasing our wafer supply; developing or enhancing our products; taking
advantage of future opportunities; engaging in investments in or acquisitions of companies; growing our business
or responding to competitive pressures or unanticipated industry changes; any of which could harm our business.
Financing Arrangements. At December 28, 2008, we had $1.23 billion of aggregate principal amount in
convertible notes outstanding, consisting of $1.15 billion in aggregate principal amount of our 1% Senior
Convertible Notes due 2013 and $75.0 million in aggregate principal amount of our 1% Convertible Notes due
2035. Our 1% Convertible Notes due 2035 may be redeemed in whole or in part by the holders thereof at a
redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid
interest on March 15, 2010 and various dates thereafter.
Concurrent with the issuance of the 1% Senior Convertible Notes due 2013, we sold warrants to acquire
shares of our common stock at an exercise price of $95.03 per share. As of December 28, 2008, the warrants had
an expected life of approximately 4.6 years and expire in August 2013. At expiration, we may, at our option,
elect to settle the warrants on a net share basis. As of December 28, 2008, the warrants had not been exercised
and remain outstanding. In addition, counterparties agreed to sell to us up to approximately 14.0 million shares of
our common stock, which is the number of shares initially issuable upon conversion of the 1% Senior
Convertible Notes due 2013 in full, at a conversion 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% Senior
Convertible Notes due 2013 or the first day that none of the 1% Senior Convertible Notes due 2013 remain
outstanding due to conversion or otherwise. Settlement of the convertible bond hedge in net shares on the
expiration date would result in us receiving net shares equivalent to the number of shares issuable by us upon
conversion of the 1% Senior Convertible Notes due 2013. As of December 28, 2008, we had not purchased any
shares under this convertible bond hedge agreement. See Note 7, “Financing Arrangements,” of the Notes to
Consolidated Financial Statements of this Form 10-K included in Item 8 of this report.
Flash Partners and Flash Alliance Ventures with Toshiba. We are a 49.9% percent owner in both Flash
Partners and Flash Alliance, or hereinafter referred to as Flash Ventures, our business ventures with Toshiba to
develop and manufacture NAND flash memory products. These NAND flash memory products are manufactured
by Toshiba at Toshiba’s Yokkaichi, Japan operations using the semiconductor manufacturing equipment owned
or leased by Flash Ventures. This equipment is funded or will be funded by investments in or loans to the Flash
Ventures from us and Toshiba as well as through operating leases received by Flash Ventures from third-party
banks and guaranteed by us and Toshiba. Flash Ventures purchase wafers from Toshiba at cost and then resells
those wafers to us and Toshiba at cost plus a markup. We are contractually obligated to purchase half of Flash
Ventures’ NAND wafer supply or to pay for 50% of the fixed costs of Flash Ventures. We are not able to
estimate our total wafer purchase obligations beyond our rolling three month purchase commitment because the
price is determined by reference to the future cost to produce the wafers. See Note 14, “Related Parties and
Strategic Investments,” of the Notes to Consolidated Financial Statements of this Form 10-K included in Item 8
of this report.
The cost of the wafers we purchase from Flash Ventures is recorded in inventory and ultimately cost of
product revenues. Flash Ventures are variable interest entities; however, we are not the primary beneficiary of
these ventures because we are entitled to less than a majority of expected gains and losses with respect to each
venture. Accordingly, we account for our investments under the equity method and do not consolidate.
Under Flash Ventures’ agreements, we agreed to share in Toshiba’s costs associated with NAND product
development and our common semiconductor research and development activities. As of December 28, 2008, we
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