Yahoo 2013 Annual Report Download - page 32

amount of converted Notes, as the case may be. We also entered into warrant transactions with the option
counterparties. However, the warrant transactions could separately have a dilutive effect to the extent that the
market price per share of our common stock exceeds the applicable strike price of the warrants.
In connection with establishing their initial hedge of the note hedge and warrant transactions, the option
counterparties or their respective affiliates have purchased shares of our common stock and/or entered into
various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of
the Notes. In addition, the option counterparties 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 or other securities of ours in secondary market transactions 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 repurchase date or otherwise). This activity could cause or avoid an increase or a
decrease in the market price of our common stock or the Notes.
Any adverse change in the rating of the Notes may cause their trading price to decline.
While we did not seek a rating on the Notes, one rating service has rated the Notes. If that rating service
announces its intention to put the Notes on credit watch or lowers its rating on the Notes below any rating
initially assigned to the Notes, the trading price of the Notes could decline.
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 debt 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 the current period’s amortization of the debt
discount, 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 the 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.
Item 1B. Unresolved Staff Comments
None.
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