Shutterfly 2015 Annual Report Download - page 44

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.
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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