Shutterfly 2009 Annual Report Download - page 65

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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 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.
As of December 31, 2008, our cash and cash equivalents were maintained by financial institutions in the United States and our deposits may
be in excess of insured limits. We believe that the financial institutions that hold our investments are financially sound and, accordingly, minimal
credit risk exists with respect to these investments.
At December 31, 2008, $52.3 million par value of our marketable securities portfolio was invested in AAA rated investments in auction-
rate
debt securities ("ARS"). The assets underlying each security are student loans and 90% of the principal amounts are guaranteed by the FFELP.
In November 2008, we accepted an offer 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 (the "Rights"). 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 is 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
Rights 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.
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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