Shutterfly 2009 Annual Report Download - page 29

In November 2008, we accepted an offer (the “Rights”) from UBS AG (“UBS”),
one of our investment advisors, entitling us to sell at par
value auction-rate securities originally purchased from UBS (approximately $52.3 million, par value) at anytime during a two-
year period from
June 30, 2010 through July 2, 2012. In accepting the Rights, we also granted UBS the authority to sell or auction the ARS at par at any time up
until the expiration date of the offer and released UBS from any claims relating to the marketing and sale of ARS. Although we expect to
sell our ARS under the Rights, if the Rights are not exercised before July 2, 2012, it will expire and UBS will have no further rights or obligation
to buy our ARS. The Rights represent a contractual agreement between us and UBS that will rank senior to UBS' ordinary shares. Throughout
the period from acceptance of the offer until the Rights are redeemed or UBS sells the securities, ARS will continue to accrue interest as
determined by the auction process or the terms outlined in the prospectus of the ARS if the auction process fails. UBS’
s obligations under the
Right are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Rights. UBS
has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Rights.
The Rights represents a firm agreement in accordance with FASB Statement No. 133, “
Accounting for Derivative Instruments and Hedging
Activities”, (
SFAS 133), which defines a firm agreement with an unrelated party, binding on both parties and usually legally enforceable, with
the following characteristics: a) the agreement specifies all significant terms, including the quantity to be exchanged, the fixed price, and the
timing of the transaction, and b) the agreement includes a disincentive for nonperformance that is sufficiently large to make performance
probable. The enforceability of the Rights resulted in the recognition of a separate freestanding asset and was accounted for separately from the
ARS investment. As of December 31, 2008, we recorded $9.0 million as the fair value of the Rights, classified as long-
term investment on the
consolidated balance sheet as of December 31, 2008, with a corresponding credit to interest and other income, net, in the consolidated statement
of income for the year ended December 31, 2008. The Rights does not meet the definition of a derivative instrument under SFAS
133. Therefore, we elected to measure the Rights at fair value under SFAS 159, which permits an entity to elect the fair value option for
recognized financial assets, in order to match the changes in the fair value of the ARS. We valued the Rights as the difference between the fair
value and the original Par value of the ARS, adjusted for bearer risk, if any, associated with UBS’
s financial ability to repurchase the ARS
beginning June 30, 2010.
Prior to accepting the UBS offer, we recorded our ARS as available-for-
sale investments, and therefore recorded resulting unrealized gains
or losses, net of tax, in accumulated other comprehensive income in stockholders’
equity. In connection with the acceptance of the UBS offer in
November 2008, resulting in a right to require UBS to purchase the ARS at par value beginning on June 30, 2010, we have reclassified our ARS
subject to the Rights and held by UBS from available-for-sale to trading in accordance with FASB Statement No. 115, “ Accou
nting for Certain
Investments in Debt and Equity Securities
” (
SFAS 115). The transfer to trading securities reflects our intent to exercise the Rights during the
period June 30, 2010 to July 3, 2012. Prior to our agreement with UBS, our intent was to hold the ARS until the earlier of anticipated recovery
in market value or maturity. At December 31, 2008, we recorded an other than temporary impairment loss on our auction rate securities of $9.0
million in interest and other income, net, which had previously been recognized as a component of other comprehensive income, net of tax. Any
future gains or losses resulting from changes in the fair value of the ARS will be recognized in earnings.
The loss of key personnel and an inability to attract and retain 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 may terminate his or her employment relationship with us
at any time, may significantly delay or prevent the achievement of our business objectives.
We believe that our future success will also depend in part on our continued ability to identify, hire, train and motivate qualified personnel.
We face intense competition for qualified individuals from numerous technology, marketing, financial services, manufacturing and e-
commerce
companies. In addition, competition for qualified personnel is particularly intense in the San Francisco Bay Area, where our headquarters are
located. We may be unable to attract and retain suitably qualified individuals who are capable of meeting our growing operational and
managerial requirements, or we may be required to pay increased compensation in order to do so. Our failure to attract and retain qualified
personnel could impair our ability to implement our business plan.
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