Shutterfly 2009 Annual Report Download - page 97

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SHUTTERFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Valuation of Stock Options
Under SFAS No. 123R, the Company estimated the fair value of each option award on the date of grant using the Black-Scholes option-
pricing model and the assumptions noted in the following table. Expected volatility is based on the historical and implied volatility of a peer
group of publicly traded entities. The expected term of options gave consideration to historical exercises, post vest cancellations and the options
contractual term. The risk-
free rate for the expected term of the option is based on the U.S. Treasury Constant Maturity at the time of grant. The
assumptions used to value options granted during the twelve months ended December 31, 2008, 2007, and 2006, were as follows:
Employee stock-
based compensation expense recognized during the periods ended December 31, 2008 and December 31, 2007 was
calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. SFAS No. 123R requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
At December 31, 2008, the Company had $25,136,000 of total unrecognized compensation expense under SFAS No. 123R, net of estimated
forfeitures, related to stock plans that will be recognized over a weighted-average period of approximately two years.
In 2006, based on a reassessment of the value of its common stock during 2005, the Company offered to the employees who were granted
options from January 2005 to October 2005 the ability to amend the terms of their options to increase the exercise prices in order to help them
avoid potential adverse personal income tax consequences. On June 29, 2006 and December 22, 2006, options to purchase 1,789,217 and
3,480 shares, respectively, of the Company’
s common stock that had been granted at exercise prices ranging from $5.00 to $5.50 per share were
amended to exercise prices between $5.50 and $6.56 per share. No other terms of the option grants were modified. The transactions were
deemed to be modifications under SFAS No. 123R, deferred stock-
based compensation computed under APB 25 was reduced by $526,000
which has been amortized under SFAS No. 123R, and there was no incremental stock-based compensation expenses from the amendments.
Year Ended December 31,
2008
2007
2006
Dividend yield
—
—
—
Annual risk free rate of return
2.5
%
4.1
%
5.0
%
Expected volatility
51.7
%
45
%
45.8
%
Expected term (years)
4.4
4.4
4.6
95