Shutterfly 2013 Annual Report Download - page 41

Any adverse rating of the notes may cause their trading price to fall.
We do not intend to seek a rating on the notes. However, if a rating service were to rate the notes and
if such rating service were to lower its rating on the notes below the rating initially assigned to the notes or
otherwise announces its intention to put the notes on credit watch, the trading price of the notes could
decline.
Holders of the notes may be subject to tax if we make or fail to make certain adjustments to the conversion rate of the
notes even though such holders do not receive a corresponding cash distribution.
The conversion rate of the notes will be adjusted in certain circumstances. Under Section 305(c) of the
Internal Revenue Code of 1986, or the Code, adjustments (or failures to make adjustments) that have the
effect of increasing the holders’ proportionate interest in our assets or earnings may in some circumstances
result in a deemed distribution to the holders. Certain of the conversion rate adjustments with respect to
the notes (including, without limitation, adjustments in respect of taxable dividends to holders of our
common stock) will result in deemed distributions to the holders of notes even though they have not
received any cash or property as a result of such adjustments. In addition, an adjustment to the conversion
rate in connection with a make-whole fundamental change may be treated as a deemed distribution. Any
deemed distributions will be taxable as a dividend, return of capital, or capital gain. If holders are a
‘‘non-U.S. holder’’ under the Code any deemed dividend may be subject to U.S. withholding tax at a 30%
rate or such lower rate as may be specified by an applicable tax treaty, which may be set off against
subsequent payments on the notes (or in certain circumstances, on the common stock). Under proposed
regulations relating to certain ‘‘dividend equivalent’’ payments, an adjustment to the conversion rate of the
notes as a result of a dividend on our common stock may be subject to withholding tax at a different time
or in a different amount than the withholding tax otherwise imposed on dividends and constructive
dividends.
The convertible note hedge and warrant transactions may affect the value of the notes and our common stock.
In connection with the pricing of the notes, we entered into convertible note hedge transactions with
Morgan Stanley & Co. International plc, Credit Suisse International, Citibank, N.A., and Bank of America,
N.A., or the option counterparties. We also entered into warrant transactions with the option
counterparties pursuant to which we will sell warrants for the purchase of our common stock. The
convertible note hedge transactions are expected generally to reduce the potential dilution upon any
conversion of notes and/or offset any cash payments we are required to make in excess of the principal
amount upon conversion of the notes. The warrant transactions could separately have a dilutive effect to
the extent that the market price per share of our common stock exceeds the strike price of the warrants.
However, subject to certain conditions, we may elect to settle the warrant transactions in cash.
The option counterparties and/or their respective affiliates may modify their hedge positions by
entering into or unwinding various derivatives with respect to our common stock and/or purchasing or
selling our common stock in secondary market transactions following the pricing of the notes and prior to
the maturity of the notes (and are likely to do so during any observation period related to a conversion of
notes or following any repurchase of notes by us on any fundamental change repurchase date or
otherwise). This activity could also cause or avoid an increase or a decrease in the market price of our
common stock or the notes, which could affect holders’ ability to convert the notes and, to the extent the
activity occurs during any observation period related to a conversion of notes, it could affect the amount
and value of the consideration that holders will receive upon conversion of the notes.
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