SanDisk 2008 Annual Report Download - page 89

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Notes to Consolidated Financial Statements
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 pays 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 remains 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, (“EITF 00-19”), Accounting for
Derivative Financial Statements Indexed to, and Potentially Settled in, a Company’s Own Stock. The
Company initially recorded a tax benefit of approximately $145.6 million in stockholders’ equity from
the deferred tax asset related to the convertible bond hedge at inception of the transaction.
•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 price of $95.03 per share. The warrants have an expected life of 4.5 years and expire in
August 2013. At expiration, the Company may, at its option, elect to settle the warrants on a net share
basis. As of December 28, 2008, the warrants had not been exercised and remained outstanding. The
value of the warrants has been classified as equity because they meet all the equity classification
criteria of EITF 00-19.
1% Convertible Notes Due 2035. In November 2006, the Company assumed the aggregate principal amount
of $75.0 million 1% Convertible Senior Notes due March 2035 (the “1% Notes due 2035”) from msystems. The
Company is obligated to pay interest on the 1% Notes due 2035 semi-annually on March 15 and September 15
commencing March 15, 2007.
F-24