Shutterfly 2009 Annual Report Download

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SHUTTERFLY INC
FORM 10-K
(Annual Report)
Filed 02/24/09 for the Period Ending 12/31/08
Address 2800 BRIDGE PARKWAY
REDWOOD CITY, CA 94065
Telephone 650-610-5200
CIK 0001125920
Symbol SFLY
SIC Code 7384 - Photofinishing Laboratories
Industry Photography
Sector Consumer Cyclical
Fiscal Year 12/31
http://www.edgar-online.com
© Copyright 2009, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

Table of contents

  • Page 1
    SHUTTERFLY INC FORM 10-K (Annual Report) Filed 02/24/09 for the Period Ending 12/31/08 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year 2800 BRIDGE PARKWAY REDWOOD CITY, CA 94065 650-610-5200 0001125920 SFLY 7384 - Photofinishing Laboratories Photography Consumer Cyclical 12/31 ...

  • Page 2
    ... Parkway, Suite 101 Redwood City, California (Address of Principal Executive Offices) Registrant's telephone number, including area code (650) 610-5200 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, $0.0001 Par Value Per Share Name of Each Exchange on...

  • Page 3
    Portions of the documents listed below have been incorporated by reference into the indicated parts of this report, as specified in the responses to the item numbers involved: Designated portions of the Proxy Statement relating to the 2009 Annual Meeting of the Stockholders to be held on May 21, 200...

  • Page 4
    ... about Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership...

  • Page 5
    ...for consumers to upload, edit, enhance, organize, find, share, create, print and preserve their memories in a creative and thoughtful manner. Consumers use our products and services to stay connected to their friends and family, to organize their memories in a single location, to tell stories and to...

  • Page 6
    ... editing and sharing images. Photos had to be stored in physical form and were vulnerable to deterioration, destruction or loss. Most people chose the limited option of storing their 4x6 prints in shoeboxes or simple photo albums because photography-related markets - including film processing, photo...

  • Page 7
    ... online communities to keep in touch with distant friends and family, share event photos taken by multiple cameras, in a single location, and even promote a business or hobby. • • • Addressable Markets Digital cameras, digital image processing and the Internet have dramatically changed...

  • Page 8
    ... that can be customized with the imprint of a digital image. Photo-based merchandise includes, but is not limited to, photo calendars, photo greeting cards and photo books. InfoTrends estimates that revenue from U.S. online net-to-mail sales of non-print products (photo gifts and merchandise) will...

  • Page 9
    ... upload, edit, store and share an unlimited number of photos. Membership is not required to view shared pictures, which can be viewed with a simple click. We conveniently mail orders to our customers' homes or offices, directly to a gift recipient or allow customers to pick up at local Target stores...

  • Page 10
    ... our customers also use our website to create community-oriented products such as a photo book celebrating a school play or a yearbook for their children's soccer team, and they often proactively introduce and sell these items to larger groups of potential new customers. As our products and services...

  • Page 11
    ... products and services, including prints, photo-based merchandise and ancillary products. During 2008, we launched Shutterfly Gallery and Share Sites which we believe will enhance awareness of our products and services along with providing ease of use. We also added new premium designer stationery...

  • Page 12
    ... at Target stores, including in-store placements and ad circulars which complement our retail sales and "print-to-Target" offerings. The launch of our Share platform continues to expand our customer base as users create personalized sites and share them with their friends and family. Increase sales...

  • Page 13
    ... Shutterfly, customers can choose to view their photos in a variety of ways, including photo slideshows. To improve picture quality, customers also have access to our free online editing and image enhancement tools. In addition to cropping and red-eye removal, we offer a variety of creative options...

  • Page 14
    ... is created, the customer adds it to his or her shopping cart and completes the billing and shipping information. Shipping addresses can be typed in or easily added directly from a customer's Shutterfly address book. When a picture or product is being ordered, we flag photos of poor quality, usually...

  • Page 15
    ... service. This form of A-B testing enables us to continuously optimize products, pricing, promotions and user interaction with our website. Website system. We have designed our website system to be highly available, secure and cost-effective. We can scale to increasing numbers of customers by adding...

  • Page 16
    ... and ink businesses by gaining market share in the emerging digital photography marketplace; photo-related software companies such as Apple, Microsoft and Corel; social media companies that host images such as MySpace, Facebook and Hi5; and specialized companies in the photo book and stationery...

  • Page 17
    ... loyalty, quality and breadth of products and services, and customer service. Many of our competitors promote their products on the basis of low prices or the convenience of same-day availability for digital photos printed in drugstores or other retail outlets. As a general matter, we currently plan...

  • Page 18
    ... of certain processes under U.S. patents relating to uploading, storing, sharing, accessing, downloading and/or requesting or obtaining digital images or prints of digital images or merchandise to which such images are applied. Under the terms of the agreement, Shutterfly paid $2.0 million...

  • Page 19
    ... of California require online services to report certain breaches of the security of personal data, and to report to California consumers when their personal data might be disclosed to direct marketers. • • • • To resolve some of the remaining legal uncertainty, we expect new laws and...

  • Page 20
    ... website is located at http://www.shutterfly.com. The information on our website is not a part of this annual report. We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed...

  • Page 21
    ... our business in a number of ways, including lower prices for our products and services and reduced sales. In addition, the current economic conditions may lead to price increases by our suppliers or increase our operating expenses due to, among others, higher costs of labor, energy, equipment and...

  • Page 22
    ... range between 11% to 12% of our expected calendar year 2009 net revenues. A portion of those capital expenditures will be used to add manufacturing capacity during 2009. During 2007, we opened a new manufacturing and production plant in Charlotte, North Carolina, and in July 2008, we announced that...

  • Page 23
    ...taking; • the timing of holidays; • volatility in our stock price, which may lead to higher stock-based compensation expense; • consumer preferences for digital photography services; • improvements to the quality, cost and convenience of desktop printing of digital pictures and products; and...

  • Page 24
    ... website and customer operations; • enhance and expand our products and services; • successfully execute our business and marketing strategy; • continue to develop and upgrade our technology and information processing systems; • continue to enhance our service to meet the needs of a changing...

  • Page 25
    ... our data storage and management requirements, customer satisfaction and our reputation could be harmed. As a part of our current business model, we offer our customers free unlimited online storage and sharing of photographs and, as a result, must store and manage multiple petabytes of data. This...

  • Page 26
    ...% of our net revenues in 2008, 2007 and 2006 respectively. We offer discounted or free shipping, with a minimum purchase requirement, during promotional periods to attract and retain customers. If free shipping offers extend beyond a limited number of occasions, are not based upon a minimum purchase...

  • Page 27
    ... and ink businesses by gaining market share in the emerging digital photography marketplace; and • Photo-related software companies such as Apple, Microsoft and Corel; • Social media companies that host images such as MySpace, Facebook and Hi5; and • Specialized companies in the photo book and...

  • Page 28
    ... a fair value of $43.3 million. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, timing and amount of cash flows, credit and liquidity premiums, and expected holding periods of the ARS. These assumptions are volatile and subject to change as the...

  • Page 29
    ... additional personnel could affect our ability to successfully grow our business. We are highly dependent upon the continued service and performance of our senior management team and key technical, marketing and production personnel. The loss of these key employees, each of whom is "at will" and...

  • Page 30
    ...search engines, e-mail and direct mail. We pay providers of online services, search engines, directories and other website and e-commerce businesses to provide content, advertising banners and other links that direct customers to our website. We also use e-mail and direct mail to offer free products...

  • Page 31
    ... facility where our computer and communications hardware is located fails or if our production facilities fail, our business and results of operations would be harmed. Our ability to successfully receive and fulfill orders and to provide high-quality customer service depends in part on the efficient...

  • Page 32
    ... market acceptance of our products and services. If we experience a delay in a website release that results in customer dissatisfaction during the period required to correct errors and design faults, we would lose revenue. In the future, we may encounter scalability limitations, in current or future...

  • Page 33
    ... and photo-based products, such as photo books and calendars, we intend to address, and demand may shift to, new products and services. In addition, we believe we may need to address additional markets and expand our customer demographic in order to further grow our business. We may not successfully...

  • Page 34
    ... and New Zealand. An additional application for the Shutterfly mark is pending in Brazil. Our competitors may adopt names similar to ours, thereby impeding our ability to build brand identity and possibly leading to customer confusion. In addition, there could be potential trade name or trademark...

  • Page 35
    ... could limit or supersede the U.S. Supreme Court's position regarding sales and use taxes. Our effective tax rate may be subject to fluctuation from federal and state audits, and disqualifying dispositions of stock options. Future tax audits by taxing agencies for the open tax years could lead to...

  • Page 36
    .... Although we believe that we conspicuously and clearly communicate all details and conditions of these offers - for example, that customers are required to pay shipping, handling and/or processing charges to take advantage of the free product offer - we may be subject to claims from individuals...

  • Page 37
    ... public networks. Our failure to prevent security breaches could damage our reputation and brand and substantially harm our business and results of operations. For example, a majority of our sales are billed to our customers' credit card accounts directly, orders are shipped to a customer's address...

  • Page 38
    ... Stock Market. Additional or new regulatory requirements may be adopted in the future. The requirements of existing and potential future rules and regulations will likely continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming...

  • Page 39
    ...introduction of technologies or product enhancements that reduce the need for our products; • impairment or loss in value of our investments in auction rate securities; • the loss of key personnel; • lawsuits threatened or filed against us; • future sales of our common stock by our executive...

  • Page 40
    ... undesignated preferred stock, the terms of which may be established and shares of which ...change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate...

  • Page 41
    ... maintain our corporate headquarters in Redwood City, California in two leased facilities totaling approximately 98,000 square feet. The two buildings are under separate leases that both expire in 2010. We maintain our east-coast production and fulfillment operations in Charlotte, North Carolina in...

  • Page 42
    ... to finance the growth and development of our business and, therefore, we do not anticipate paying any cash dividends in the foreseeable future. The following table sets forth the high and low sales price per share for Shutterfly's common stock for the periods indicated: Year Ended December 31...

  • Page 43
    ...in accounting principle (Provision) / benefit for income taxes Net income before cumulative effect of change in accounting principle Cumulative effect of change in accounting principle Net income Net income per share: Basic Diluted Weighted Average Shares Basic Diluted _____ (1) Includes stock-based...

  • Page 44
    ...326 $ 2008 Consolidated Balance Sheet Data: Cash, cash equivalents, and short term investments Property and equipment, net Working capital Total assets Capital lease obligations, less current portion Preferred stock warrant liability Redeemable convertible preferred stock Total stockholders' equity...

  • Page 45
    ..., such as calendars, mugs, mouse pads, coasters, tote bags, desk organizers, puzzles, playing cards, multi-media DVDs, magnets and keepsake boxes, notebooks, notepads, address labels and stickers. Our high-quality products and services and the compelling online experience we create for our customers...

  • Page 46
    ..., mouse pads and magnets. Revenues are recorded net of estimated returns, promotions redeemed by customers and other discounts. Customers place orders through our website and pay primarily using credit cards. Our personalized products and services revenues are derived from the sale of photo-based...

  • Page 47
    ... met. Orders are typically processed and shipped within two business days after a customer places an order. Total number of orders has increased on an annual basis for each year since 2000, and we anticipate that this trend will continue in the future. Personalized Products and Services Revenues as...

  • Page 48
    ... related expenses for our customer acquisition, product marketing, business development and public relations activities. Our marketing efforts consist of various online and offline media programs, such as e-mail and direct mail promotions, the purchase of keyword search terms and various strategic...

  • Page 49
    ... shipping of prints and other photo-based products, advertising services and commercial print services. We generally recognize revenues from product sales upon shipment when persuasive evidence of an arrangement exists (typically through the use of a credit card or receipt of a check), the selling...

  • Page 50
    .... 142. To determine the fair value of our reporting unit we used a discounted cash flow model, using ten years of projected unleveraged free cash flows and terminal EBITDA earnings multiples. The discount rates used for the analysis reflected a weighted average cost of capital based on industry and...

  • Page 51
    ... 123R, we estimate the fair value of stock options granted using the Black-Scholes valuation model. This model requires us to make estimates and assumptions including, among other things, estimates regarding the length of time an employee will retain vested stock options before exercising them, the...

  • Page 52
    ... from prints to higher value personalized products, particularly photo books. Year Ended December 31, 2008 2007 Change % Change (In thousands, except AOV amounts) 2,789 2,357 432 18% 7,569 7,062 507 7% $28.20 $26.44 $1.76 7% Customers Orders Average order value Cost of net revenues increased $12...

  • Page 53
    ... our online media and direct response marketing campaigns and incurred increased agency fees for creative and branding promotions which represented a $5.0 million increase compared to 2007. We also expanded our internal marketing team resulting in an increase in personnel and related costs of...

  • Page 54
    ... increased by $94,000 for 2008 primarily due to amortization associated with the line of credit origination costs. Interest and other income, net decreased by $2.6 million for 2008, primarily as a result of an overall lower yield on our investment portfolio, including our auction rate securities...

  • Page 55
    ... increased volume of shipped products, and incremental costs associated with launching our second manufacturing facility in Charlotte, North Carolina. These costs were offset by savings in labor and shipping costs, reflecting efficiencies in both the reduced cost of labor between the North Carolina...

  • Page 56
    ..., total sales and marketing expense remained flat at 18% from 2006 to 2007. For 2007, personnel and related costs for employees and consultants increased by $2.5 million, and our expenditures incurred on customer acquisition and promotion costs increased by $8.2 million. In addition, stock-based...

  • Page 57
    .... Upon the completion of our initial public offering on October 4, 2006, all of our warrants to purchase shares of preferred stock converted into warrants to purchase shares of common stock and accordingly, no additional amounts for the change in fair value for the warrants will be recorded. Year...

  • Page 58
    ... to meet possible increased demand for our products. If we require additional capital resources to grow our business internally or to acquire complementary technologies and businesses at any time in the future, we may seek to sell additional debt or equity. The sale of additional equity could...

  • Page 59
    ... a fair value of $43.3 million. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, timing and amount of cash flows, credit and liquidity premiums, and expected holding periods of the ARS. These assumptions are volatile and subject to change as the...

  • Page 60
    ... policy, which requires that all of our investments meet high credit quality standards as defined by credit ratings of the major investment ratings agencies. These ratings are subject to change and a downgrade in rating would adversely affect the value of our investments. On an annual basis, for...

  • Page 61
    ... equipment for our manufacturing and production operations at our California and North Carolina facilities, and $4.5 million of capitalized software and website development. An additional $52.3 million was used to purchase auction rate securities, offset by $3.0 million in proceeds from the sale...

  • Page 62
    ... a non-cancelable operating lease for our new Phoenix, Arizona facility that commenced in February 2009 and will expire in 2016. We lease website infrastructure computer and network hardware, production equipment, information technology equipment and software under various capital leases that expire...

  • Page 63
    ... 1, 2008, and did not elect the fair value option for any financial assets and liabilities transacted during the twelve months ended December 31, 2008, except for the Rights related to our auction rate securities that was recorded in conjunction with signing an agreement with one of our investment...

  • Page 64
    ... assumptions used in determining the useful life or recognized intangible assets under FASB Statement No. 142, "Goodwill and Other Intangible Assets". This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations...

  • Page 65
    ...equivalents are carried at market value. We do not currently use or plan to use derivative financial instruments in our investment portfolio. The risk associated with fluctuating interest rates is limited to our investment portfolio and we do not believe that a 10% change in interest rates will have...

  • Page 66
    ... STATEMENTS AND SUPPLEMENTARY DATA. SHUTTERFLY, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders...

  • Page 67
    ..., the Company adopted new fair value measurement and disclosure accounting principles during the year ended December 31, 2008 and changed the manner in which it accounts for uncertainty in income taxes in 2007. A company's internal control over financial reporting is a process designed to provide...

  • Page 68
    ... per share amounts) December 31, 2008 2007 ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Deferred tax asset, current portion Prepaid expenses and other current assets Total current assets Long-term investments Property and equipment, net...

  • Page 69
    SHUTTERFLY, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) Year ...share: Basic Diluted Weighted average shares: Basic Diluted _____ (1) Stock-based compensation is allocated as follows (Notes 2 and 8): Cost of net revenues Technology and development Sales and marketing...

  • Page 70
    ...foundation Tax benefit of stock options Balance, end of year Deferred stock-based compensation Balance, beginning of year Reversal of unearned stock based compensation upon modification of options Vesting of restricted shares Cancellation of common stock options and restricted shares Amortization of...

  • Page 71
    SHUTTERFLY, INC. CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (Continued) (In thousands) Year Ended December 31, 2007 2006 2008 Number of shares Redeemable convertible preferred stock Balance, beginning of year Issuance of Series A preferred ...

  • Page 72
    SHUTTERFLY, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Year Ended December 31, 2008... on investments, net of tax Unrealized gain (loss) arising during period Less: reclassification adjustment for gain (loss) realized in net income Total comprehensive income $ $ $ The ...

  • Page 73
    ... of software and website development costs Acquisition of business and intangible assets, net of cash acquired Purchases of short term investments Proceeds from sale of short term investments Proceeds from sale of property and equipment Purchase of auction rate securities Net cash used in...

  • Page 74
    ...and manufacturing processes. The Company provides customers a full range of products and services to organize and archive digital images; share pictures; order prints and create an assortment of personalized items such as cards, calendars and photo books. The Company is headquartered in Redwood City...

  • Page 75
    ... market value. During the fourth quarter of fiscal 2008, the Company reclassified its auction rate securities from available-for-sale to trading securities. Investments that the Company designates as trading assets are reported at fair value, with gains or losses resulting from changes in fair value...

  • Page 76
    .... The Company's accounts receivable are derived primarily from sales to customers located in the United States who make payments through credit cards, sales of the Company's products in retail stores, and revenue generated from online advertisements posted on the Company's website. Credit card...

  • Page 77
    .... To determine the fair value of its reporting unit the Company used a discounted cash flow model, using ten years of projected unleveraged free cash flows and terminal EBITDA earnings multiples. The discount rates used for the analysis reflected a weighted average cost of capital based on industry...

  • Page 78
    ... data. The provision for estimated returns is included in accrued expenses. The Company periodically provides incentive offers to its customers in exchange for setting up an account and to encourage purchases. Such offers include free products and percentage discounts on current purchases. Discounts...

  • Page 79
    ... and are often ambiguous. The Company is required to make subjective assumptions and judgments regarding its income tax exposures. Interpretations and guidance surrounding income tax laws and regulations change over time. As such, changes in the Company's subjective assumptions and judgments can...

  • Page 80
    ... for the period by the weighted average number of common shares outstanding during the period as reduced by the weighted average unvested common shares subject to repurchase by the Company. Diluted net income per share attributed to common shares is computed by dividing the net income attributable...

  • Page 81
    ... 2006 are net of tax benefit of $3,148,000, $13,000 and $919,000 respectively. In November 2008, the Company accepted an offer (the "Rights") from UBS AG ("UBS"), one of its investment providers, entitling the Company to sell at par value its auction-rate securities ("ARS") originally purchased from...

  • Page 82
    ... financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Company did not elect to adopt the fair value option under this Statement. The Company did not elect the fair value option for its financial assets and liabilities existing...

  • Page 83
    ...(Losses) In thousands - (20 ) (20 ) 2 - - (18 ) $ Cost Cash Equivalents Money Market Funds Commercial Paper Total Cash Equivalents US Government Agency Securities Auction Rate Securities Rights from UBS Total Cash Equivalents and Investments $ Fair Value Cost Fair Value 80,410 - 80,410 - 52,250...

  • Page 84
    ... a fair value of $43.3 million. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, timing and amount of cash flows, credit and liquidity premiums, and expected holding periods of the ARS. These assumptions are volatile and subject to change as the...

  • Page 85
    ... of the offer and released UBS from any claims relating to the marketing and sale of ARS. Although the Company expects to sell its ARS under the Rights, if the Rights is not exercised before July 2, 2012, it will expire and UBS will have no further rights or obligation to buy the Company's ARS. The...

  • Page 86
    ... The Company has capitalized software and website development costs incurred in the application development phase and unamortized cost is included in property and equipment and ...through the closure date in early 2009. At December 31, 2008, the Company recorded $504,000 of accelerated depreciation...

  • Page 87
    SHUTTERFLY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Intangible Assets Intangible assets are composed of the following at December 31: Weighted Average Useful Life ...Company entered into an agreement with a competitor to acquire the customer list of that competitor without restriction of use...

  • Page 88
    .... To determine the fair value of its reporting unit the Company used a discounted cash flows model, using ten years of projected unleveraged free cash flows and terminal EBITDA earnings multiples. The discount rates used for the analysis reflected a weighted average cost of capital based on industry...

  • Page 89
    ... in early 2009, it would close its Hayward, California production facility and begin operations at a new manufacturing facility to be located in Phoenix, Arizona. As a result of this decision, the Company incurred approximately $80,000 in contractual lease termination costs which was recorded...

  • Page 90
    ...and liabilities of CustomAbility, LLC, a publishing company that produces customized children's books under the brand name Make It About Me ("MIAM"). This acquisition augmented the Company's personal publishing platform. The transaction was accounted for as a purchase business combination. The total...

  • Page 91
    ... interest Present value of future minimum lease payments Less: current portion Non-current portion of capital lease obligations Purchase obligations consist of non-cancelable marketing agreements, co-location services and printing equipment rental. As of December 31, 2008, the Company's purchase...

  • Page 92
    ... use amounts borrowed under the Facility, if any, to finance the company's working capital needs and for general corporate purposes, including future acquisitions. As of December 31, 2008, the Company has not drawn on the line of credit. The Company incurred $236,000 of Facility origination costs...

  • Page 93
    ... granted under the Plan were incentive stock options or non-qualified stock options. Incentive stock options ("ISO") were granted only to Company employees, which includes officers and directors of the Company. Non-qualified stock options ("NSO") and stock purchase rights were able to be granted...

  • Page 94
    ... advisors render bona-fide services not in connection with the offer and sale of securities in a capital-raising transaction. Other types of awards under the 2006 Plan include NSOs, restricted stock awards, stock bonus awards, restricted stock units, and performance shares. Options issued under the...

  • Page 95
    SHUTTERFLY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock Option Activity A summary of the status of the Company's stock option plans at December 31, 2008 and changes during the periods then ended is presented in the table below (share numbers and aggregate intrinsic value in thousands): ...

  • Page 96
    SHUTTERFLY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Options granted in 2006 are grouped as follows (share numbers in thousands): Weighted Average Fair Value $ 4.43 $ 5.06 $ 4.99 Weighted Average Exercise Price $ 10.00 $ 11.25 $ 11.11 Options with exercise price less than reassessed market ...

  • Page 97
    ...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...

  • Page 98
    .... The cost of restricted stock units is determined using the fair value of the Company's common stock on the date of grant. RSUs typically vest and become exercisable annually based on either a two year, three year or four year total vesting term. In accordance with Statement of Accounting Standards...

  • Page 99
    SHUTTERFLY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Inducement Awards Included in the stock option and restricted stock unit activity above, the Company granted inducement stock option awards and restricted stock units to two executives. These inducement grants were approved by the Company's...

  • Page 100
    ... Reform Act of 1986 limits the use of net operating loss and tax credit carryforwards in the case of an "ownership change" of a corporation or separate return loss year limitations. Any ownership changes, as defined, may restrict utilization of carryforwards. The Company also had federal and state...

  • Page 101
    ... Reductions for tax positions of prior years Settlement of franchise tax audit Balance of unrecognized tax benefits at December 31 $ $ The company does not expect the balance of unrecognized tax benefits to significantly increase or decrease in the next twelve months. As of December 31, 2008, the...

  • Page 102
    ... to use the Company's current and pending patented technology and processes. In addition, the Company has rights to use certain of the digital imaging company's pending patented technology and processes. As consideration for the rights under the agreement, the digital imaging company will pay fees...

  • Page 103
    SHUTTERFLY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 12 - Quarterly Financial Data (Unaudited, in thousands) Year Ended... Net income (loss) per common share: Basic Diluted Net Revenues Gross Profit Net income (loss) Net income (loss) per common share: Basic Diluted Year Ended December 31...

  • Page 104
    Schedule II Valuation and Qualifying Accounts Additions Charged to Charged to Costs and Other Expenses Accounts In thousands - - - - - - Balance at Beginning of Period Allowance for Doubtful Accounts Receivable Year ended December 31, 2006 Year ended December 31, 2007 Year ended December 31, 2008 ...

  • Page 105
    ... public accounting firm that also audited our financial statements included in this Annual Report on Form 10-K, audited the effectiveness of internal control over financial reporting as of December 31, 2008, and issued their related attestation report which is included herein. Changes in Internal...

  • Page 106
    Limitation on Effectiveness of Controls Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions ...

  • Page 107
    ... finance department designated by the Company's Chief Financial Officer. This code of ethics, titled the "Code of Conduct and Ethics for Chief Executive Officer and Senior Financial Department Personnel," can be found on our website at www.shutterfly.com . We intend to make all required disclosures...

  • Page 108
    ... this annual report. 2. Financial Statement Schedules. The Valuation and Qualifying Accounts schedule is incorporated by reference to Part II, Item 8 of this annual report. 3. Exhibits . The exhibit list in the Index to Exhibits is incorporated herein by reference as the list of exhibits required as...

  • Page 109
    ... to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SHUTTERFLY, INC. (Registrant) By: /s/ Mark J. Rubash Mark J. Rubash Senior Vice President & Chief...

  • Page 110
    ... and MetricStream, Inc. Subsidiaries of the Registrant X Consent of Independent Registered Public Accounting Firm. X Power of Attorney. (See page 107 of this Form 10-K) X Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a). X Certification of Chief Financial...

  • Page 111
    ...application for confidential treatment sent to the Securities and Exchange Commission. Such portions are omitted from this filing and were filed separately with the Securities... filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that Shutterfly ...

  • Page 112

  • Page 113
    ... in the Corporate Transaction, accelerated vesting of the number of your then-unvested Company stock option shares and restricted stock units that would have vested during the twelve (12) months following the date of such termination (collectively, the "Change in Control Benefits"). The Change in...

  • Page 114
    ...) days following receipt of such notice. For purposes of this paragraph, "Good Reason" means (i) a material reduction or change in your duties and responsibilities as in effect immediately prior to the Corporate Transaction; (ii) the relocation of the Company's corporate office at which you work by...

  • Page 115
    ... in the Corporate Transaction, accelerated vesting of the number of your then-unvested Company stock option shares and restricted stock units that would have vested during the twelve (12) months following the date of such termination (collectively, the "Change in Control Benefits"). The Change in...

  • Page 116
    ...) days following receipt of such notice. For purposes of this paragraph, "Good Reason" means (i) a material reduction or change in your duties and responsibilities as in effect immediately prior to the Corporate Transaction; (ii) the relocation of the Company's corporate office at which you work by...

  • Page 117
    ... in the Corporate Transaction, accelerated vesting of the number of your then-unvested Company stock option shares and restricted stock units that would have vested during the twelve (12) months following the date of such termination (collectively, the "Change in Control Benefits"). The Change in...

  • Page 118
    ...) days following receipt of such notice. For purposes of this paragraph, "Good Reason" means (i) a material reduction or change in your duties and responsibilities as in effect immediately prior to the Corporate Transaction; (ii) the relocation of the Company's corporate office at which you work by...

  • Page 119
    ... in the Corporate Transaction, accelerated vesting of the number of your then-unvested Company stock option shares and restricted stock units that would have vested during the twelve (12) months following the date of such termination (collectively, the "Change in Control Benefits"). The Change in...

  • Page 120
    ...) days following receipt of such notice. For purposes of this paragraph, "Good Reason" means (i) a material reduction or change in your duties and responsibilities as in effect immediately prior to the Corporate Transaction; (ii) the relocation of the Company's corporate office at which you work by...

  • Page 121
    ... first day of each calendar month of the term of this Temporary Sublease, without deduction, offset, prior notice or demand, in lawful money of the United States. Monthly Rent shall be paid to Sublessor at 3000 Bridge Parkway, Redwood Shores, CA 94065, Attn: Corporate Controller, or at such place as...

  • Page 122
    ... obligations of the "Tenant" under the Lease. 8. Security Deposit . The parties agree that (i) Assignor shall look directly to the Landlord for the return to Assignor of the security deposit currently held by Landlord under the Lease (the "Existing Security Deposit"), and (ii) Assignee shall have no...

  • Page 123
    ...Shutterfly, 2800 Bridge Parkway, Redwood City, CA 94065; and (b) to Landlord at the address for notices to Landlord given in the Lease. 11. Conditions Precedent . (a) A condition precedent to the effectiveness of this Assignment is that the Landlord under the Lease shall have consented hereto as set...

  • Page 124
    IN WITNESS WHEREOF, the parties hereto have executed this Assignment as of the Date of this Assignment set forth above. ASSIGNOR : METRICSTREAM, INC. By: /s/Shellye Archambeau Name: Shellye Archambeau Title: CEO ASSIGNEE : SHUTTERFLY, INC. By: /s/Doug Appleton Name: Doug Appleton Title: VP, Legal

  • Page 125
    Exhibit A (List of Subleases) 1. Aster Data Systems. 2. Moka5. 3. Regalix. 4. cFares, Inc.

  • Page 126
    Exhibit 21.01 SUBSIDIARIES OF SHUTTERFLY, INC. 1. 2. Nexo Systems, Inc. Shutterfly Lightbox, Inc.

  • Page 127
    ..., 333137676) of Shutterfly, Inc. of our report dated February 23, 2009 relating to the financial statements, financial statement schedules and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP San Jose, CA February 23...

  • Page 128
    ... or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ Jeffrey T. Housenbold Jeffrey T. Housenbold President and Chief Executive Officer (Principal Executive Officer) Date: February 24, 2009

  • Page 129
    ... management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ Mark J. Rubash Mark J. Rubash Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Date: February 24, 2009

  • Page 130
    ..., Jeffrey T. Housenbold, the President and Chief Executive Officer of Shutterfly, Inc. (the "Company"), pursuant to 18 U.S.C. §1350, hereby certifies that: (i) the Annual Report on Form 10-K for the period ended December 31, 2008 of the Company (the "Report") fully complies with the requirements of...

  • Page 131
    ... Financial Officer of Shutterfly, Inc. (the "Company"), pursuant to 18 U.S.C. §1350, hereby certifies: (i) the Annual Report on Form 10-K for the period ended December 31, 2008 of the Company (the "Report") fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange...