SanDisk 2014 Annual Report Download - page 169

SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes, which represents the difference between the fair market value allocated to the liability component
and the net carrying amount of the liability component and unamortized debt issuance costs on settlement
date. As of December 28, 2014, after conversion of $3.2 million aggregate principal amount of the
Converted Notes, the remaining aggregate principal amount of the 1.5% Notes due 2017 outstanding was
$996.8 million. As of January 30, 2015, the Company had received additional conversion notices for a total
of $46 thousand aggregate principal amount of the 1.5% Notes due 2017, for which conversion is expected
to be completed in the first quarter of fiscal year 2015.
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 $18.7 million, of which
$5.5 million was allocated to capital in excess of par value and $13.2 million was allocated to deferred
issuance costs and is amortized to interest expense over the term of the 1.5% Notes due 2017. As of
December 28, 2014, unamortized deferred issuance cost was $4.9 million.
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 $73.3250 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 1.5% Notes
due 2017 contains provisions where the number of shares to be sold under the convertible bond
hedge transaction and the conversion price will be adjusted if the Company pays a cash dividend or
makes a distribution to all or substantially all holders of its common stock. Adjusting for dividends
paid through December 28, 2014, the counterparties have agreed to sell to us up to approximately
19.4 million shares of the Company’s common stock, which is the number of shares issuable upon
conversion of the 1.5% Notes due 2017 in full, at a price of $51.36 per share as of December 28,
2014. This 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 remain 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 maturity 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 maturity 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. Through December 28,
2014, the Company had received 26,622 shares of the Company’s common stock from the exercise
of a portion of the convertible note hedges related to the conversion of the $3.2 million aggregate
principal amount of the 1.5% Notes due 2017.
•Warrants. The Company received $188.1 million from the same counterparties from the sale of
warrants to purchase up to approximately 19.1 million shares of the Company’s common stock at an
exercise price of $73.3250 per share. The 1.5% Notes due 2017 contains provisions whereby the
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Annual Report