Shutterfly 2010 Annual Report Download - page 53

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate and Credit Risk.
We have exposure to interest rate risk that relates primarily to our investment portfolio. All of our cash
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 a significant impact on our interest income, operating results or liquidity.
At December 31, 2009, we held approximately $47.9 million par value of variable rate bond investments with a fair value of approximately
$41.7 million, classified as short-term investments, with an auction reset feature (“auction rate securities”
or "ARS") whose underlying assets are
student loans which are substantially backed by the federal government. Since February 2008, these auctions have failed. Therefore the ARS
continue to be illiquid and we will not be able to access these funds until a future auction of these investments is successful or a buyer is found
outside of the auction process.
In November 2008, we accepted an offer from UBS AG (“UBS”),
one of our investment providers, entitling us to sell at par value ARS
purchased from UBS at anytime during a two-year period from June 30, 2010 through July 2, 2012 (the "Right"). 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. If UBS has insufficient
funding to buy back the ARS and the auction process continues to fail, then we may incur further losses on the carrying value of the ARS. We
intend to exercise the Rights on June 30, 2010.
Although these investments continue to be illiquid, during 2009 we liquidated $4.3 million (at par value) ARS investments that were called
by the state issuers.
Inflation.
We do not believe that inflation has had a material effect on our current business, financial condition or results of operations. If
our costs were to become subject to significant inflationary pressures, for example, if the cost of our materials or the cost of shipping our
products to customers were to incur substantial increases as a result of the rapid rise in the cost of oil, we may not be able to fully offset such
higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
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