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SHUTTERFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 – Fair Value Measurement
The components of the Company’
s cash equivalents and investments, including the unrealized gains (losses) associated with each are as
follows (in thousands):
The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and short term investments) as of
December 31, 2009 (in thousands):
Level 3 assets consist of auction rate securities (“ARS”)
with an auction reset feature whose underlying assets are student loans that are
substantially backed by the federal government. Because the auctions for these securities have continued to fail since February 2008, these
investments are not currently trading and therefore do not have a readily determinable market value. Accordingly, the estimated fair value of the
ARS no longer approximates par value. The Company’s ARS investments are held by UBS AG ("UBS"), one of the Company’
s investment
providers. In November 2008, the Company accepted an offer (the “Right”)
from UBS entitling the Company to sell at par value ARS purchased
from UBS (approximately $47.9 million, par value at December 31, 2009) at anytime during a two-
year period from June 30, 2010 through
July 2, 2012. Although the Company expects to sell its ARS under the Right, if the Right 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. 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 Company has valued the ARS and Right using a discounted
cash flow model based on Level 3 assumptions. The assumptions used in valuing the ARS and the Right include estimates of, based on data
available as of December 31, 2009, interest rates, timing and amount of cash flows, credit and liquidity premiums, expected holding periods of
the ARS and bearer risk associated with UBS’s financial ability to repurchase the ARS beginning June 30, 2010.
December 31, 2009
December 31, 2008
Cost
Unrealized
Gains /
(Losses)
included in
earnings
Fair Value
Cost
Unrealized
Gains /
(Losses)
included in
earnings
Fair Value
Cash Equivalents
Money Market Funds
$
113,966
$
—
$
113,966
$
80,410
$
—
$
80,410
Total Cash Equivalents
113,966
—
113,966
80,410
—
80,410
Auction Rate Securities
47,925
(6,266
)
41,659
52,250
(9,013
)
43,237
Rights from UBS
—
6,266
6,266
—
9,013
9,013
Total Cash Equivalents and Investments
$
161,891
$
—
$
161,891
$
132,660
$
—
$
132,660
December 31, 2009
Fair Value
Level 1
Level 2
Level 3
Cash equivalents:
Money market funds
$
113,966
$
113,966
$
—
$
—
Short
-
term investments:
Auction rate securities
41,659
—
—
41,659
Rights from UBS
6,266
—
—
6,266
Total financial assets
$
161,891
$
113,966
$
—
$
47,925
66