Shutterfly 2014 Annual Report Download - page 45

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.
In addition, if any such convertible note hedge and warrant transactions fail to become effective, the
option counterparties may unwind their hedge positions with respect to our common stock, which could
adversely affect the value of our common stock and the value of the notes. The potential effect, if any, of
these transactions and activities on the market price of our common stock or the notes will depend in part
on market conditions and cannot be ascertained at this time. Any of these activities could adversely affect
the value of our common stock and the value of the notes (and as a result, the value of the consideration,
the amount of cash and/or the number of shares, if any, that holders would receive upon the conversion of
the notes) and, under certain circumstances, holders’ ability to convert the notes. The convertible note
hedge transactions and the warrant transactions are separate transactions (in each case entered into
between us and the option counterparties), are not part of the terms of the notes and will not affect the
holders’ rights under the notes. Holders of the notes will not have any rights with respect to the convertible
note hedge transactions or the warrant transactions.
We do not make any representation or prediction as to the direction or magnitude of any potential
effect that the transactions described above may have on the price of the notes or our common stock. In
addition, we do not make any representation that the option counterparties will engage in these
transactions or that these transactions, once commenced, will not be discontinued without notice.
We are subject to counterparty risk with respect to the convertible note hedge transactions.
The option counterparties are financial institutions, and we will be subject to the risk that any or all of
them might default under the convertible note hedge transactions. Our exposure to the credit risk of the
option counterparties will not be secured by any collateral. Recent global economic conditions have
resulted in the actual or perceived failure or financial difficulties of many financial institutions. If an option
counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those
proceedings, with a claim equal to our exposure at that time under our transactions with that option
counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be
correlated to an increase in the market price and in the volatility of our common stock. In addition, upon a
default by an option counterparty, we may suffer adverse tax consequences and more dilution than we
currently anticipate with respect to our common stock. We can provide no assurances as to the financial
stability or viability of the option counterparties.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
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