Shutterfly 2015 Annual Report Download - page 40

The accounting method for convertible debt securities that may be settled in cash, such as the notes, could
have a material effect on our reported financial results.
In May 2008, the Financial Accounting Standards Board, which we refer to as FASB, issued FASB Staff
Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon
Conversion (Including Partial Cash Settlement), which has subsequently been codified as Accounting Standards
Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20. Under ASC
470-20, an entity must separately account for the liability and equity components of the convertible debt
instruments (such as the notes) that may be settled entirely or partially in cash upon conversion in a manner that
reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the notes is that the
equity component is required to be included in the additional paid-in capital section of stockholders’ equity on
our consolidated balance sheet and the value of the equity component would be treated as original issue discount
for purposes of accounting for the debt component of the notes. As a result, we will be required to record a
greater amount of non-cash interest expense in current periods presented as a result of the amortization of the
discounted carrying value of the notes to their face amount over the term of the notes. We will report lower net
income in our financial results because ASC 470-20 will require interest to include both the current period’s
amortization of the debt discount and the instrument’s coupon interest, which could adversely affect our reported
or future financial results, the trading price of our common stock and the trading price of the notes. In addition,
under certain circumstances, convertible debt instruments (such as the notes) that may be settled entirely or partly
in cash are currently accounted for utilizing the treasury stock method, the effect of which is that any shares
issuable upon conversion of the notes are not included in the calculation of diluted earnings per share except to
the extent that the conversion value of the notes exceeds their principal amount. Under the treasury stock method,
for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common
stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We
cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock
method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion
of the notes, then our diluted earnings per share would be adversely affected.
Future sales of our common stock in the public market could lower the market price for our common stock
and adversely impact the trading price of the notes.
In the future, we may sell additional shares of our common stock to raise capital. In addition, a substantial
number of shares of our common stock is reserved for issuance upon the exercise of stock options, the vesting of
restricted stock units and other equity awards pursuant to our employee benefit plans, upon conversion of the
notes, and in relation to the convertible note hedge and warrant transactions entered into in connection with the
pricing of the notes. We cannot predict the size of future issuances or the effect, if any, that they may have on the
market price for our common stock. The issuance and sale of substantial amounts of common stock, or the
perception that such issuances and sales may occur, could adversely affect the trading price of the notes and the
market price of our common stock and impair our ability to raise capital through the sale of additional equity
securities.
Holders of notes will not be entitled to any rights with respect to our common stock, but they will be subject to
all changes made with respect to them to the extent our conversion obligation includes shares of our common
stock.
Holders of notes will not be entitled to any rights with respect to our common stock (including, without
limitation, voting rights and rights to receive any dividends or other distributions on our common stock) prior to
the conversion date relating to such notes (if we elect to settle the relevant conversion by delivering solely shares
of our common stock (other than paying cash in lieu of delivering any fractional share)) or the last trading day of
the relevant observation period (if we elect to pay and deliver, as the case may be, a combination of cash and
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