Shutterfly 2010 Annual Report Download - page 18

In November 2008, we accepted an offer (the “Right”) from UBS AG (“UBS”),
one of our investment providers, entitling us to sell at par
value Auction Rate Securities purchased from UBS at anytime during a two-
year period from June 30, 2010 through July 2, 2012. We intend to
exersise the UBS Rights on June 30, 2010. If UBS has insufficient funding to buy back those Auction Rate Securities and the auction process
continues to fail, then we may incur further losses on the securities’ carrying value. 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 Right. UBS has disclaimed any
assurance that it will have sufficient financial resources to satisfy its obligations under the Right.
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.
In order to attract and retain key personnel, we plan to increase our equity pool and may need to grant inducement equity awards outside of
our equity pool, which would dilute the ownership of our existing stockholders.
In 2006, the Board authorized three automatic annual increases to our equity pool. Each annual increase is limited to a) 4.62% of common
stock issued and outstanding on the December 31 immediately prior to the date of increase or b) a lesser number as determined by the Board.
This provision expired after the last annual increase in January 2010, and we intend to propose to our stockholders at the 2010 annual meeting to
approve an increase in the number of shares in our equity pool. In addition, in order to attract key personnel, the Board authorized 380,000,
135,100 and 200,000 additional inducement stock option grants and restricted stock awards to supplement our equity pool, which were granted
in 2007, 2008 and 2009, respectively. Inducement stock options and awards are granted to certain employees upon hire and do not require
shareholder approval. In the future, attracting key personnel may require a level of option grants in excess of the amount available in our equity
pool. Moreover, if our stockholders reject an increase to our equity pool, we may need to make more inducement equity grants outside of our
equity pool. An increase in our equity pool and grants of awards from it as well as further inducement equity awards outside of our equity pool
will cause dilution to our stockholders.
If we are unable to attract customers in a cost
-effective manner, or if we were to become subject to e-
mail blacklisting, traffic to our website
would be reduced and our business and results of operations would be harmed.
Our success depends on our ability to attract customers in a cost-
effective manner. We rely on a variety of methods to bring visitors to our
website and promote our products, including paying fees to third parties who drive new customers to our website, purchasing search results from
online 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 and services to attract customers, and we offer substantial pricing discounts to encourage repeat purchases. Our methods of
attracting customers, including acquiring customer lists from third parties, can involve substantial costs, regardless of whether we acquire new
customers. Even if we are successful in acquiring and retaining customers, the cost involved in these efforts impacts our results of operations.
Customer lists are typically recorded as intangible assets and may be subject to impairment charges if the fair value of that list exceeds its
carrying value. These potential impairment charges could harm our results from operations. If we are unable to enhance or maintain the
methods we use to reach consumers, if the costs of attracting customers using these methods significantly increase, or if we are unable to develop
new cost-
effective means to obtain customers, our ability to attract new customers would be harmed, traffic to our website would be reduced and
our business and results of operations would be harmed.
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