Shutterfly 2008 Annual Report Download - page 64

Stock-based Compensation Associated with Awards to Employees
All options granted were intended to be exercisable at a price per share not less than fair market value of the shares of the Company’
s stock underlying those options on their
respective dates of grant. The Board determined these fair market values in good faith based on the best information available to the Board and Company’
s management at the time of
the grant. Although the Company believes these determinations accurately reflect the historical value of the Company’
s common stock, management has retroactively revised the
valuation of its common stock for the purpose of calculating stock-
based compensation expense. Accordingly, in the periods ending December 31, 2004 and 2005 for such stock and
options issued to employees, the Company has recorded deferred stock-
based compensation of $2,299,000 and $1,225,000 respectively, net of cancellations, of which the Company
amortized $1,000, $565,000 and $1,547,000 of stock-based compensation in the years ended December 31, 2007, 2006 and 2005, respectively.
At December 31, 2007, the Company had deferred stock-
based compensation under APB 25, as shown in the consolidated statement of redeemable convertible preferred stock and
stockholders’ equity of $28,000, which is expected to be fully amortized in 2008.
On July 28, 2004, the Company entered into a transition agreement with one of its executive officers whereby vesting of previously granted options was accelerated resulting in a
new measurement date at the date of modification. This executive officer resigned effective January 31, 2005. A total of 316,000 shares would have been forfeited under the original
option terms resulting in total compensation expense of $1,145,000. The total compensation expense was measured in accordance with guidance provided by Financial Accounting
Standards Board Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25 (“FIN 44”),
as the intrinsic value
of the modified award at the date of modification in excess of
the amount measured at the original measurement date. A total of $164,000 and $981,000 was recognized in the years
ended December 31, 2005 and 2004, respectively.
On August 13, 2004 the Company entered into a transition agreement with one of its executive officers. Upon termination, the agreement provided for acceleration of 25% of the
officer’s unvested options. The agreement also provided for an extension of the time to exercise any vested options, from 90 days to 270 days from the date of the officer’
s termination.
In February 2005, this executive officer resigned and 17,000 shares that would have been forfeited under the original option terms were accelerated, resulting in total stock-
based
compensation expense of $65,000. In November 2005, this executive officer exercised options for 293,000 shares. As expense recognition for the additional 276,000 shares was
contingent on whether this executive officer took the benefit of the vesting extension, additional stock-
based compensation expense was not recognized until the November exercise
when $1,035,000 was recorded. Stock-
based compensation expense for the February and November 2005 charges was measured in accordance with guidance provided by FIN 44 as the
intrinsic value of the modified award at the date of modification in excess of the amount measured at the original measurement date.
Adoption of SFAS No. 123R
The Company adopted SFAS No. 123R on January 1, 2006. Under SFAS No. 123R, the Company estimated the fair value of each option award on the date of grant using the
Black-Scholes option-
pricing model using the assumptions noted in the following table. Expected volatility is based on the historical and implied volatility of a peer group of publicly
traded entities. The expected term of options gave consideration to historical exercises, post vest cancellations and the options contractual term. The risk-
free rate for the expected term
of the option is based on the U.S. Treasury Constant Maturity at the time of grant. The assumptions used to value options granted during the twelve months ended December 31, 2007
and December 31, 2006 were as follows
Employee stock-
based compensation expense recognized during the periods ended December 31, 2007 and December 31, 2006 was calculated based on awards ultimately
expected to vest and has been reduced for estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates.
As a result of adopting SFAS No. 123R on January 1, 2006, the Company’
s net income for the twelve months ended December 31, 2006, was lower by $1,950,000 net of tax
effect, than if the Company had continued to account for stock-
based compensation under APB 25. Basic and diluted net income per share for the twelve months ended December 31,
2006 would have been higher by $0.23 if the Company had not adopted SFAS No. 123R. At December 31, 2007, the Company had $21,618,000 of total unrecognized compensation
expense under SFAS No. 123R, net of estimated forfeitures, related to stock option plans that will be recognized over a weighted-
average period of approximately three years. In
accordance with SFAS No. 123R, unamortized compensation expense on stock option grants after January 1, 2006 is not included in deferred stock-
based compensation on the equity
statement. The balance in deferred stock-
based compensation as of December 31, 2007 is $28,000, which is comprised primarily of employee stock option grants prior to January 1,
2006.
In 2006, based on a reassessment of the value of its common stock during 2005, the Company offered to the employees who were granted options from January 2005 to October
2005 the ability to amend the terms of their options to increase the exercise prices in order to help them avoid potential adverse personal income tax consequences. On June 29, 2006
and December 22, 2006, options to purchase 1,789,217 and 3,480 shares, respectively, of the Company’
s common stock that had been granted at exercise prices ranging from $5.00 to
$5.50 per share were amended to exercise prices between $5.50 and $6.56 per share. No other terms of the option grants were modified. The transactions were deemed to be
modifications under SFAS No. 123R; deferred stock-
based compensation computed under APB 25 was reduced by $526,000 which will be amortized under SFAS No. 123R, and there
was no incremental stock-based compensation expenses from the amendments.
Note 8 — Income Taxes
The components of the provision for income taxes is as follows (in thousands):
SHUTTERFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended
December 31,
2007
Year Ended
December 31,
2006
Dividend yield
—
—
Annual risk free rate of return
4.1
%
5.0
%
Expected volatility
45.0
%
45.8
%
Expected term (years)
4.4
4.6
December 31,
2007
2006
2005
Federal:
Current
$
206
$
610
$
(187
)
Deferred
5,146
2,809
(20,230
)
$
5,352
$
3,419
$
(20,417
)
State:
Current
$
216
$
133
$
(40
)
Deferred
734
390
(3,603
)
$
950
$
523
$
(3,643
)
Total income tax expense (benefit):
Current
$
422
$
743
$
(227
)
Deferred
5,880
3,199
(23,833
)
$
6,302
$
3,942
$
(24,060
)