SanDisk 2010 Annual Report Download - page 212

Notes To Consolidated Financial Statements
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 September 30, 2010, 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 130% 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 May 15, 2017 until the close of business on the second scheduled trading day immediately preceding the
maturity date of August 15, 2017, holders may convert their notes at any time, regardless of the foregoing
circumstances.
Upon conversion, a holder will receive the conversion value of the 1.5% Notes due 2017 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 1.5% Notes due 2017 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, common stock (plus cash in lieu
of any fractional shares of common stock). The conversion price will be subject to adjustment in some events but
will not be adjusted for accrued interest. Upon a “fundamental change” at any time, as defined, the Company will
in some cases increase the conversion rate for a holder who elects to convert its 1.5% Notes due 2017 in
connection with such fundamental change. In addition, 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 1.5%, payable semi-annually on February 15 and
August 15 of each year, beginning February 15, 2011. Debt issuance costs were approximately $19.0 million, of
which $5.6 million was allocated to capital in excess of par value and $13.4 million was allocated to deferred
issuance costs and is amortized to interest expense over the term of the 1.5% Notes due 2017.
Concurrently with the issuance of the 1.5% Notes due 2017, the Company purchased a convertible bond
hedge and sold warrants. The convertible bond hedge transaction is structured to reduce the potential future
economic dilution associated with the conversion of the 1.5% Notes due 2017 and, combined with the warrants,
to increase the initial conversion price to $73.33 per share. Each of these components is discussed separately
below:
•Convertible Bond Hedge. Counterparties agreed to sell to the Company up to approximately
19.1 million shares of the Company’s common stock, which is the number of shares initially issuable
upon conversion of the 1.5% Notes due 2017 in full, at a price of $52.37 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 1.5% Notes due 2017 or the first day none of the 1.5% Notes due 2017 remains outstanding
due to conversion or otherwise. Settlement of the convertible bond hedge in net shares, based on the
number of shares issuable upon conversion of the 1.5% Notes due 2017, 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 1.5% Notes due 2017. 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 $292.9 million has been accounted for as an
equity transaction. The Company initially recorded approximately $1.7 million in stockholders’ equity
from the deferred tax asset related to the convertible bond hedge at inception of the transaction.
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