Initial Public Offering (IPO): Delayed-Release Pre-Effective Amendment to Registration Statement (General Form) — Form S-1 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: S-1/A Amendment to Form S-1 HTML 1.47M
13: CORRESP Comment-Response or Other Letter to the SEC HTML 178K
2: EX-3.03 Articles of Incorporation/Organization or By-Laws HTML 21K
3: EX-3.05 Articles of Incorporation/Organization or By-Laws HTML 100K
4: EX-4.01 Instrument Defining the Rights of Security Holders HTML 27K
5: EX-10.03 Material Contract HTML 244K
6: EX-10.04 Material Contract HTML 329K
7: EX-10.05 Material Contract HTML 184K
8: EX-10.06 Material Contract HTML 231K
9: EX-10.07 Material Contract HTML 229K
10: EX-10.08 Material Contract HTML 76K
11: EX-23.02 Consent of Experts or Counsel HTML 8K
12: EX-23.03 Consent of Experts or Counsel HTML 9K
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Gordon K. Davidson, Esq.
Daniel A. Dorosin, Esq.
Robert A. Freedman, Esq.
Fenwick & West LLP
801 California Street Mountain View, CA94041
(650) 988-8500
Kevin P. Kennedy, Esq.
Simpson Thacher & Bartlett LLP
2550 Hanover Street Palo Alto, CA94304
(650) 251-5000
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the effective date of
this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act
of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act of 1933, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act of 1933, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering. o
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment that
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information in this preliminary
prospectus is not complete and may be changed. These securities
may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell nor does it seek
an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted.
This is an initial public offering of shares of common stock of
Shutterfly, Inc. All of
the shares
of common stock are being offered by Shutterfly, Inc.
Prior to this offering, there has been no public market for the
common stock. It is currently estimated that the initial public
offering price per share will be between
$ and
$ .
Application has been made for listing on The NASDAQ Global
Market under the symbol “SFLY.”
See “Risk Factors” on page 8 to read about
factors you should consider before buying shares of the common
stock.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
Per Share
Total
Initial public offering price
$
$
Underwriting discount
$
$
Proceeds, before expenses, to
Shutterfly
$
$
To the extent that the underwriters sell more
than shares
of common stock, the underwriters have the option to purchase up
to an
additional shares
from the selling stockholders named in this prospectus at the
initial public offering price less the underwriting discount. We
will not receive any of the proceeds from the sale of shares by
the selling stockholders.
The underwriters expect to deliver the shares against payment in
New York, New York
on ,
2006.
This summary highlights information contained elsewhere in
this prospectus. This summary does not contain all the
information you should consider before buying our common stock.
You should read the entire prospectus carefully, including the
section entitled “Risk Factors” and our consolidated
financial statements and related notes included elsewhere in
this prospectus, before making an investment in our common
stock. Unless otherwise indicated, the terms
“Shutterfly,”“we,”“us” and
“our” refer to Shutterfly, Inc., a Delaware
corporation, together with its subsidiary.
Shutterfly, Inc.
We are an Internet-based social expression and personal
publishing service that enables consumers to share, print and
preserve their memories by leveraging our technology,
manufacturing, web-design and merchandising capabilities. Our
vision is to make the world a better place by helping people
share life’s joy. Our mission is to build an unrivaled
service that enables deeper, more personal relationships between
our customers and those who matter most in their lives. Today,
with the evolution of digital cameras and technology, millions
of people around the world are capturing their memories and
communicating in more meaningful ways. We provide a full range
of products and services that make it easy, convenient and fun
for consumers to upload, edit, enhance, organize, find, share,
create, print and preserve their digital photos in a creative
and thoughtful manner.
Consumers use our products and services to stay connected to
their friends and family. Our customers purchase prints and
other physical products both for their own personal use and for
giving thoughtful and personalized gifts such as photo-based
products, including photo books, calendars and greeting cards,
as well as photo-based merchandise, including mugs, mouse pads,
bags, puzzles, playing cards and apparel.
We have experienced rapid growth since launching our service in
December 1999. Since inception, we have fulfilled more than
12 million orders, sold approximately 370 million
prints and stored approximately one billion of our
consumers’ photos in our image archives. In addition, our
net revenues increased from approximately $31.4 million in
the year ended December 31, 2003 to $54.5 million in
the year ended December 31, 2004 to approximately
$83.9 million in the year ended December 31, 2005, and
our net income increased during those periods from approximately
$2.0 million to approximately $3.7 million to
approximately $28.9 million. However, our net income for
the year ended December 31, 2005 included an income tax
benefit of approximately $24.1 million, which should be
considered when comparing our historical net income data. As of
June 30, 2006, we had an accumulated deficit of
$39.8 million.
Industry Overview and Addressable Market
Internet and digital photo-based technology today enables
consumers to create an archive of memories that extends beyond
photos to include highly personalized, more engaging products
and services that can be protected and preserved for future
generations. We believe that the key forces driving the
expansion of the market for these products and services are:
•
the proliferation of digital cameras;
•
the increasing penetration of high-speed data connectivity;
•
the increasing convenience and quality of online photo services;
•
the growing consumer desire to find an easy, hassle-free way to
generate personalized content; and
•
the increasing participation by consumers in online communities.
The addressable market for our products and services includes
every person who enjoys the memories created by digital
photographic devices such as cameras, camera cell phones or
camcorders. We currently address several adjacent markets
related to consumers’ desire to be thoughtful and creative
with their memories, including:
•
Photo prints. Photo prints currently represent our
largest market opportunity, with industry sources estimating the
U.S. market for digital photo prints to be approximately
$10 billion in 2005 and growing to approximately
$30 billion in 2009. In addition, industry sources predict
that in the United States, photos ordered over the Internet for
mail delivery will grow from approximately $424 million in
2005 to approximately $1.9 billion in 2009.
•
Greeting cards. According to the Greeting Card
Association’s website, U.S. consumers purchase
approximately 7 billion greeting cards each year,
generating nearly $7.5 billion in retail sales.
•
Scrapbooks. According to a 2004 survey by Creating
Keepsakes and Craftrends magazines, the U.S. scrapbook
industry was approximately $2.55 billion in 2004, up 27.8%
from 2001.
•
Calendars. In a 2002 guide published by the Calendar
Marketing Association, it estimated that 500 million
calendars are produced annually in the United States.
•
Photo-based merchandise. Photo-based merchandise is a
substantial market opportunity that includes any product that
can be customized with the imprint of a digital image.
Value for Our Customers
We seek to create value for our customers by providing the
following:
Broad offering. We offer a wide variety of premium
products to customers, including prints, photo-based products
and merchandise and a broad assortment of high-quality ancillary
products such as frames, photo albums and scrapbooking
accessories. In addition, we provide a number of valuable tools
and services, such as the ability to upload and edit photos
online, share photos with friends and family and store an
unlimited number of photos on our system at no cost.
Premium brand. Our focus on ease of use, image quality,
secure photo storage, high-quality products and first-rate
packaging has established Shutterfly as a premium brand. We
maintain our status as a premium brand through fast, consistent
fulfillment times, responsive customer service and continuous
innovation.
Customer-focused approach. The entire Shutterfly customer
experience — including free membership, the ability to
upload, edit, store and share an unlimited number of photos and
the fact that membership is not required to view friends’
and family’s shared pictures — reflects our
customer-focused approach.
The Shutterfly Solution
We have developed a portfolio of products and services along
with specialized manufacturing capabilities that allow us to
offer consumers a better way to enjoy, share and preserve their
memories. We believe that our business model is supported by the
following characteristics:
Viral network effect. Our customers create a viral
network of new users and customers in a number of ways. They
generate most of the content on our service by uploading their
photos. They share their photos electronically with their
friends and families, extending and endorsing our brand and
creating a sense of community. By giving Shutterfly branded
products to colleagues, friends and loved ones throughout the
year, our customers reinforce our corporate brand with our
target market.
Attractive target demographics reflected in our loyal
customer base. Our high-quality products and services,
together with our focus on continuous innovation, have allowed
us to establish customer trust and loyalty. In addition, we
believe that our business benefits from a customer base with
attractive demographics. Based on our periodic customer surveys,
we believe that our current customer base fits the following
profile: approximately 84% female, approximately 63% in the
25-44 age range and approximately 53% with children. Our surveys
also indicate that the average household income of our customers
is greater than $75,000.
Premium pricing power. We believe that we are able to
maintain premium pricing for many of our products as a result of
our market position, the high quality of our products and
services and the loyal customer base we have created.
Deep customer understanding. Customer insights are an
important source of new product and service innovation for us,
and we continually strive to understand our customers’
needs in order to improve customer satisfaction. We invest
significant time and resources to understand and address the
needs of our customers through market research, focus groups,
customer surveys, usability testing, customer response to
promotions and customer service interactions.
Vertical integration and superior technology. We
manufacture all of our prints and photo-based products in our
Hayward, California manufacturing facility. We believe that our
vertically integrated and highly technical manufacturing
approach provides us with cost and innovation advantages and is
essential to our quality control, agility in rolling out new
products and ability to secure capacity at critical peak demand
periods. We derived approximately 91% of our net revenues in
2005 from products we manufactured in our manufacturing facility.
Our Growth Strategy
Our goal is to grow our business, build a premium lifestyle
brand and become the leading online provider of products and
services dedicated to improving the sharing and preservation of
personal memories. In addition to the strong consumer trends
supporting our business, we believe our growth will be supported
by the following initiatives:
Expand customer base. We intend to expand our customer
base and continue to promote the Shutterfly brand. We will
leverage existing channels, which include
word-of-mouth referrals
from existing customers, print advertising, catalogs, online
advertising, search engine marketing and complementary strategic
alliances with other
e-commerce companies.
Expand products and services offerings. We will continue
to innovate in order to increase the breadth and depth of our
products and services.
Increase sales to existing customers. We intend to
increase both average order size and repeat orders per customer
by expanding our products and services, tailoring our offerings
to encourage additional purchases for different occasions and
increasing our cross-selling and up-selling activities.
Leverage vertical integration. We will continue to invest
in making our business even more vertically integrated by adding
additional in-house production capabilities.
Develop new lines of business. We intend to continue to
leverage our existing systems and capabilities to develop
additional adjacent lines of business.
International expansion. We intend to develop additional
business opportunities through international expansion,
targeting consumers in key geographies where digital camera
penetration is high and where Internet usage and
e-commerce are
widespread.
We expect to have ongoing capital expenditure requirements to
support our growing website infrastructure and to meet
production and manufacturing requirements. We expect capital
expenditures to be between $30 million and $35 million
in the second half of 2006 and through 2007.
Corporate Information
We were incorporated in the State of Delaware in April 1999
under the name of Shortco, Inc. In June 1999, we changed our
corporate name to Digital Finish, Inc., in September 1999, we
changed our corporate name to Shutterfly.com, Inc., and in
September 2000, we changed our corporate name to Shutterfly,
Inc. Our principal executive offices are located at 2800 Bridge
Parkway, Suite 101, Redwood City, California94065 and our
telephone number is (650) 610-5200. Our website address is
www.shutterfly.com. The information on our website is not
incorporated by reference into this prospectus and should not be
considered to be a part of the prospectus.
Shutterfly, the Shutterfly logo and VividPics are our registered
trademarks and Shutterfly Collections and Shutterfly Studio are
some of our trademarks. Other trademarks appearing in this
prospectus are the property of their respective holders.
The selling stockholders have granted the underwriters a
30-day option to
purchase up
to shares
of our common stock.
Common stock to be outstanding after this offering
shares
Use of proceeds
We expect to use the net proceeds of this offering for general
corporate purposes, including working capital, potential capital
expenditures for manufacturing and website infrastructure
equipment and new and existing manufacturing facilities, and
potential acquisitions. See “Use of Proceeds.” We will
not receive any of the proceeds from the sale of shares by the
selling stockholders in the event the underwriters exercise
their over-allotment option.
Proposed NASDAQ Global Market symbol
SFLY
The number of shares to be outstanding after this offering is
based on 17,811,128 shares outstanding as of June 30,2006, and excludes:
•
4,733,392 shares issuable upon the exercise of stock
options outstanding as of June 30, 2006 at a
weighted-average exercise price of approximately $6.68 per share;
•
230,745 additional shares reserved for issuance under our 1999
Stock Plan as of June 30, 2006; shares reserved for
issuance under our 1999 Stock Plan that are not issued as of the
date of this prospectus will become available for grant and
issuance under our 2006 Equity Incentive Plan;
•
in addition to the shares that will roll over from the 1999
Stock Plan, an aggregate of 1,358,352 additional shares to
be reserved for issuance under our 2006 Equity Incentive Plan,
which will become effective on the first day that our common
stock is publicly traded and which contains a provision that
automatically increase its share reserve each year, as more
fully described in “Management — Employee Benefit
Plans;”
•
40,816 shares issuable upon the exercise of a warrant
outstanding as of June 30, 2006 with an exercise price of
$24.50 per share that expires upon the completion of this
offering; and
•
an aggregate of 116,364 shares issuable upon the exercise
of warrants outstanding as of June 30, 2006 at a
weighted-average exercise price of approximately $4.56 per
share, which warrants do not expire upon the completion of this
offering.
Except as otherwise indicated, all information in this
prospectus assumes:
•
the automatic conversion of all outstanding shares of our
preferred stock into an aggregate of 13,801,716 shares of
common stock upon the completion of this offering pursuant to
the terms of our certificate of incorporation;
•
the filing of our restated certificate of incorporation in
Delaware immediately following the completion of this offering;
and
•
no exercise by the underwriters of their 30-day option to
acquire additional shares of our common stock.
The following tables summarize the consolidated financial data
for our business. You should read this summary financial data in
conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” and our
consolidated financial statements and related notes, all
included elsewhere in this prospectus.
We derived the consolidated statements of operations data for
the years ended December 31, 2003, 2004 and 2005 from our
audited consolidated financial statements included elsewhere in
this prospectus. The consolidated statements of operations data
for the six months ended June 30, 2005 and 2006 and the
consolidated balance sheet data as of June 30, 2006 are
derived from our unaudited consolidated financial statements
included elsewhere in this prospectus. We have prepared the
unaudited information on the same basis as the audited
consolidated financial statements and have included, in our
opinion, all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation
of the financial information set forth in those statements. Our
historical results are not necessarily indicative of the results
to be expected in the future.
Pro forma basic net income (loss) per share attributable to
common stockholders has been calculated assuming the conversion
of all outstanding shares of our preferred stock into
13,801,716 shares of common stock upon the completion of
this offering. Pro forma diluted net income (loss) per share
attributable to common stockholders further includes the
incremental shares of common stock issuable upon the exercise of
stock options and warrants.
During the fourth quarter of 2005, we concluded that it was more
likely than not that we would be able to realize the benefit of
our deferred tax assets in the future. Consequently, we
recognized a non-cash tax benefit of $24.1 million in the
fourth quarter of 2005 resulting primarily from the release of
the entire net deferred tax valuation allowance. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Critical
Accounting Policies and Estimates — Income Taxes”
for a discussion of the uncertainty related to our deferred tax
asset.
(3)
For the year ended December 31, 2005, pro forma basic and
diluted net income per share is higher than basic and diluted
net income per share because the pro forma basic and diluted
calculation assumes the conversion of all preferred stock to
common stock. This has the effect of increasing the net income
allocable to common stockholders for the income that was
allocable to the preferred stockholders who are assumed to have
been converted to common stockholders. This increase in the
numerator of the earnings per share calculation is partially
offset by an increase in the denominator for the assumed
conversion of the preferred stock.
For the six months ended June 30, 2006, because there is a
net loss for the period, there is no impact on the pro forma
earnings per share calculation for income allocable to the
preferred stockholders and the reason that the pro forma basic
and diluted net loss per share is lower than the basic and
diluted net loss per share is entirely due to the assumed
conversion of the preferred stockholders.
The balance sheet data as of June 30, 2006 is presented:
•
on an actual basis;
•
on a pro forma basis to reflect the automatic conversion of all
outstanding shares of our preferred stock into
13,801,716 shares of common stock in connection with the
completion of this offering; and
•
on a pro forma as adjusted basis to reflect the pro forma
adjustments and the sale by us
of shares
of common stock offered by this prospectus at the assumed
initial public
Each $1.00 increase or decrease in the assumed initial public
offering price of
$ per
share would increase or decrease, as applicable, our cash and
cash equivalents, working capital, total assets and total
stockholders’ equity (deficit) by approximately
$ million,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions
payable by us.
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risk factors and all
other information contained in this prospectus before purchasing
our common stock. If any of the following risks occur, our
business, financial condition or results of operations could be
seriously harmed. In that case, the trading price of our common
stock could decline, and you may lose some or all of your
investment.
Risks Related to Our Business
Our net revenues, operating results and cash requirements
are affected by the seasonal nature of our business.
Our business is seasonal, with a high proportion of our net
revenues, net income and operating cash flows generated during
the fourth quarter. For example, we generated approximately 49%
of our net revenues for 2005 in the fourth quarter of 2005, and
the net income that we generated during the fourth quarter of
2005 was necessary for us to achieve profitability on an annual
basis for 2005. In addition, we incur significant additional
expenses in the period leading up to the fourth quarter holiday
season in anticipation of higher sales volume in that period,
including expenses related to the hiring and training of
temporary workers to meet our seasonal needs, additional
inventory and equipment purchases and increased advertising. If
we are unable to accurately forecast and respond to consumer
demand for our products during the fourth quarter, our
reputation and brand will suffer and the market price of our
common stock would likely decline.
In addition, we base our operating expense budgets on expected
revenue trends. A portion of our expenses, such as office leases
and various personnel costs, are fixed and are based on our
expectations of our peak levels of operations. We may be unable
to adjust spending quickly enough to offset any unexpected
revenue shortfall. Accordingly, any shortfall in revenues may
cause significant variation in operating results in any quarter.
Our limited operating history makes it difficult to assess the
exact impact of the seasonal factors on our business or whether
or not our business is susceptible to cyclical fluctuations in
the U.S. economy. In addition, our rapid growth may have
overshadowed whatever seasonal or cyclical factors might have
influenced our business to date. Seasonal or cyclical variations
in our business may become more pronounced over time and may
harm our results of operations in the future.
If we are unable to meet our seasonal production
requirements, our net revenues and results of operations would
be harmed.
We face significant production risks, particularly at peak
holiday seasons, including the risks of identifying and hiring
sufficient qualified seasonal production personnel. A majority
of our workforce during the fourth quarter of 2005 was seasonal
personnel hired on a temporary basis. We have had difficulties
in the past with finding a sufficient number of qualified
seasonal employees. We believe that we must significantly grow
our current production capability to meet our projected revenue
targets and, to date, have not yet identified or built out
locations for the additional production capacity we expect to
need beginning in 2007. We expect to invest between
$30 million and $35 million in capital expenditures
beginning in the second half of 2006 and through 2007. Our
inability to meet our seasonal production requirements could
lead to customer dissatisfaction and reduced net revenues.
Moreover, if the costs of meeting production requirements were
to increase, our results of operations would be harmed.
Our quarterly financial results may fluctuate, which may
lead to volatility in our stock price.
Our future revenues and operating results may vary significantly
from quarter-to-quarter
due to a number of factors, many of which are outside of our
control. Factors that could cause our quarterly operating
results to fluctuate include:
•
demand for our products and services, including seasonal demand;
•
our pricing and marketing strategies and those of our
competitors;
•
our ability to attract visitors to our website and convert those
visitors into customers;
•
our ability to retain customers and encourage repeat purchases,
particularly our high-volume customers from whom we derive a
high proportion of our net revenues;
•
our ability to sustain our profit margins, particularly our
ability to sell to consumers additional photo-based products
such as photo books, calendars and cards;
•
the costs of customer acquisition;
•
our ability to manage our production and fulfillment operations;
•
the costs to produce our prints and photo-based products and
merchandise and to provide our services;
•
the costs of expanding or enhancing our technology or website;
•
a significant increase in credits, beyond our estimated
allowances, for customers who are not satisfied with our
products;
•
declines or disruptions to the travel industry;
•
variations in weather, particularly heavy rain and snow which
tend to depress travel and picture taking;
•
the timing of holidays, particularly Easter;
•
volatility in our stock price, which may lead to higher
stock-based compensation expense under newly adopted accounting
standards;
•
consumer preferences for digital photography services; and
•
improvements to the quality, cost and convenience of desktop
printing of digital pictures and products.
Based on the factors cited above, we believe that
quarter-to-quarter
comparisons of our operating results are not a good indication
of our future performance. It is possible that in one or more
future quarters, our operating results may be below the
expectations of public market analysts and investors. In that
event, the trading price of our common stock may decline.
We have incurred operating losses in the past and may not
be able to sustain profitability in the future. Recent
accounting changes may make it more difficult for us to sustain
profitability.
We have periodically experienced operating losses since our
inception in 1999, and we make investments in our business that
generally result in operating losses in each of the first three
quarters of our fiscal year to enable us to generate net income
during the fourth quarter. This net income is necessary for us
to achieve profitability on an annual basis. As of June 30,2006, we had an accumulated deficit of approximately
$39.8 million. If we are unable to produce our products and
provide our services at commercially reasonable costs, if
revenues decline or if our expenses exceed our expectations, we
may not be able to sustain or increase profitability on a
quarterly or annual basis. In addition, as a publicly-traded
company, we will be subject to the Sarbanes-Oxley Act of
2002, including the requirement that our internal controls and
procedures be compliant with Section 404 of the
Sarbanes-Oxley Act, which we expect to be costly and could
impact our results of operations in future periods. In addition,
the Financial Accounting Standards Board now requires us to
follow Statement No. 123 (revised 2004), “Share Based
Payment,” or SFAS No. 123R. Under
SFAS No. 123R, companies must calculate and record in
their statement of operations the cost of equity instruments,
such as stock options or restricted stock, awarded to employees
for services received beginning in the first quarter of their
2006 fiscal year. SFAS No. 123R adversely impacted our
operating results for the first six months of 2006 in the amount
of approximately $0.4 million, and we expect an adverse impact
from the stock options we had outstanding as of June 30,2006 in future periods in an aggregate amount of approximately
$7.5 million. This, together with the impact on net income
of any additional options we grant in the future, could make it
difficult for investors to compare our results of operations for
these periods against prior corresponding periods that were not
impacted by SFAS No. 123R.
We have a limited operating history, which makes it
difficult to evaluate our business and prospects.
Our company was formed in April 1999, and we have only a limited
operating history on which investors can base an evaluation of
our business and prospects. As an e-commerce company in the
early stage of development, we face increased risks,
uncertainties, expenses and difficulties. To address these risks
and uncertainties, we must do the following:
•
maintain and increase our number of customers;
•
maintain and enhance our brand;
•
maintain and grow our website and customer operations;
•
enhance and expand our products and services;
•
successfully execute our business and marketing strategy;
•
continue to develop and upgrade our technology and information
processing systems;
•
continue to enhance our service to meet the needs of a changing
market;
•
provide superior customer service;
•
respond to competitive developments; and
•
attract, integrate, retain and motivate qualified personnel.
We may be unable to accomplish one or more of these things,
which could cause our business to suffer. In addition,
accomplishing one or more of these things might be very
expensive, which could harm our financial results.
We may have difficulty managing our growth and expanding
our operations successfully.
We have grown from 157 employees as of March 31, 2005
to 208 employees as of June 30, 2006, with website
operations, offices and customer support centers in Redwood
City, California and a production facility in Hayward,
California. Our growth has placed, and will continue to place, a
strain on our administrative and operational infrastructure, and
will likely require that we add an additional production
facility in a different geographic location. Our ability to
manage our operations and growth will require us to continue to
refine our operational, financial and management controls, human
resource policies and reporting systems.
If we are unable to manage future expansion, we may not be able
to implement improvements to our controls, policies and systems
in an efficient or timely manner and may discover deficiencies
in existing systems and controls. Our ability to provide a
high-quality customer experience could be
compromised, which would damage our reputation and brand and
substantially harm our business and results of operations.
If we fail to remedy the material weaknesses and
significant deficiencies in our internal control over financial
reporting, we may be unable to timely and accurately record,
process and report financial data, fail to meet our periodic
reporting obligations or have material misstatements in our
financial statements.
In connection with the audit of our 2005 consolidated financial
statements for the year ended and as of December 31, 2005
and the review of our 2006 quarterly financial statements for
the quarter ended June 30, 2006, our independent registered
public accounting firm identified three control deficiencies
that represent material weaknesses in our internal control over
financial reporting. Our internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements in accordance with generally
accepted accounting principles. A material weakness is a control
deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of
the annual or interim financial statements will not be prevented
or detected.
The material weaknesses in our internal control over financial
reporting are as follows:
•
We did not maintain effective controls to ensure adequate
analysis, documentation, reconciliation and review of accounting
records and supporting data. Specifically, we did not maintain
effective controls to ensure that accruals and accounts payable
were completely and accurately recorded in the proper period. We
believe this occurred primarily because of insufficient
management oversight and because several positions in our
accounting and finance organization were unfilled or were
staffed by temporary personnel unfamiliar with our policies and
procedures. In addition, some personnel performing these
functions did not have an appropriate level of accounting
knowledge, experience and training. This control deficiency
resulted in audit adjustments to our 2005 consolidated financial
statements.
•
We did not maintain effective controls over the completeness and
accuracy of revenue and deferred revenue to prevent our
personnel from reinstating expired prepaid print plans. Under
our prepaid print plans, we offer customers the opportunity to
purchase in advance larger quantities of prints at a discounted
price from our current list price for prints. Our lack of
controls resulted in the overstatement of revenue and
understatement of deferred revenue. This control deficiency
resulted in audit adjustments to our 2005 consolidated financial
statements.
•
We did not maintain effective controls over the accounting for
income taxes, including the completeness and accuracy of our
deferred income tax assets and liabilities and the related
provision for income taxes. Specifically, we did not maintain
effective controls to properly estimate and reconcile the change
in our deferred tax assets and liabilities in the calculation of
our income tax provision or properly calculate the applicable
tax rate to be applied to income on an interim basis. This
control deficiency required us to restate our financial
statements for the first quarter of 2006 and make adjustments to
our financial statements for the second quarter of 2006, which
adjustments were identified by our registered independent public
accounting firm.
These control deficiencies could result in a misstatement of our
accounts that would result in a material misstatement of our
annual or interim financial statements that might not be
prevented or detected. Accordingly, management has determined
that these control deficiencies constitute material weaknesses
as of June 30, 2006.
In addition, our independent registered public accounting firm
identified five control deficiencies that did not rise to the
level of material weaknesses but did represent significant
deficiencies in our internal control over financial reporting.
These significant deficiencies related to our failure to
properly account for fully depreciated assets; our lack of
sufficient, adequately trained finance personnel; our failure to
maintain sufficient access controls as well as documentation and
management oversight of our information technology systems; and
our failure to properly calculate the weighted average shares
outstanding for our diluted earnings per share calculation.
We have taken or plan to take the following steps, among others,
to strengthen our internal control processes to address these
material weaknesses and significant deficiencies:
(1) hiring a corporate controller, a manager of accounting
and additional experienced financial personnel;
(2) modifying our website system controls to remove the
capability of our customer service personnel to take certain
actions related to our prepaid print plans and clarifying our
policies related to our prepaid print plans for our personnel;
(3) modifying our controls to include an additional review
of fixed assets accounting; (4) implementing formal
procedures to control employee access to systems and
information; (5) creating procedures for the additional
testing of our information technology systems; and
(6) continuing to improve the skills, knowledge and
experience available to us for the preparation and review of our
net income (loss) per share and tax provision, additional
training of our finance and accounting personnel, and, with
respect to our tax provision, through hiring additional tax
accounting personnel and by continuing to utilize additional
outside tax consultants to assist us in interpreting and
applying income tax accounting literature.
We cannot assure you that the measures we have taken, or will
take, to remediate these material weaknesses and significant
deficiencies will be effective or that we will be successful in
implementing them. Moreover, we cannot assure you that we have
identified all, or that we will not in the future have
additional, material weaknesses or significant deficiencies. Our
independent registered public accounting firm has not evaluated
any of the measures we have taken, or that we propose to take,
to address the material weaknesses and significant deficiencies
discussed above. These control weaknesses could result in
material misstatements of our annual or interim financial
statements that would not be prevented or detected. Any such
failure would also adversely affect management’s assessment
of our disclosure controls and procedures, required with the
filing of our quarterly and annual reports after we complete
this offering, and the results of periodic management
evaluations and the annual attestation reports regarding the
effectiveness of our internal control over financial reporting
that our independent registered public accounting firm will be
required to provide when the SEC’s rules under
Section 404 of the Sarbanes-Oxley Act for 2002 become
applicable to us, which is currently scheduled to occur
beginning with our Annual Report on Form 10-K for the year
ending December 31, 2007, to be filed in the first quarter
of 2008. The existence of a material weakness could result in
errors in our financial statements that could result in a
restatement of our financial statements. The need to restate our
financial statements could cause us to fail to meet our
reporting obligations. Such events could cause investors to lose
confidence in our reported financial information, leading to a
decline in our stock price.
Competitive pricing pressures, particularly with respect
to 4×6 print pricing and shipping, may harm our business
and results of operations.
Demand for our products and services is sensitive to price. Many
external factors, including our production and personnel costs
and our competitors’ pricing and marketing strategies, can
significantly impact our pricing strategies. If we fail to meet
our customers’ price expectations, we could lose customers,
which would harm our business and results of operations.
Changes in our pricing strategies have had, and may continue to
have, a significant impact on our net revenues and net income.
For example, in the second quarter of 2005, certain of our
competitors reduced the list prices of their 4×6 prints
from $0.29 to $0.12. In response, we lowered the list price of
our 4×6 prints to $0.19 in order to remain competitive. A
drop in our 4×6 prices without a corresponding increase in
volume would negatively impact our net revenues. Our larger
competitors could elect to further reduce the list prices of
their 4×6 prints or use lower pricing of prints as a loss
leader. If this were to occur, we might not be able to remain
competitive on pricing for 4×6 prints, which could result
in a loss of customers.
In addition, we generate a significant portion of our net
revenues from the fees we collect from shipping our products.
For example, these fees represented approximately 19% of our net
revenues in 2005 and approximately 22% of our net revenues in
the first six months of 2006. We believe that these results are
consistent with our seasonal historical trends. Many online
businesses, including Shutterfly, offer discounted or free
shipping during promotional periods and usually based upon a
minimum purchase requirement as a means of attracting or
retaining customers. In the event that free shipping offers
extend beyond a limited number of occasions, are not based upon
a minimum purchase requirement and become commonplace, our net
revenues and results of operations would be negatively impacted.
In addition, many online businesses, including Shutterfly, make
offers for free or discounted products and services to attract
and retain customers. In the future, if we increase these offers
to respond to actions taken by our competitors, our results of
operations may be harmed.
We face intense competition from a range of competitors
and may be unsuccessful in competing against current and future
competitors.
The digital photography products and services industries are
intensely competitive, and we expect competition to increase in
the future as current competitors improve their offerings and as
new participants enter the market or as industry consolidation
further develops. Competition may result in pricing pressures,
reduced profit margins or loss of market share, any of which
could substantially harm our business and results of operations.
We face intense competition from a wide range of companies, many
of which have significantly longer operating histories, larger
and broader customer bases, greater brand recognition and
greater financial, research and development and distribution
resources than we do. These competitors include:
•
Online digital photography services companies such as Kodak
EasyShare Gallery (formerly known as Ofoto), Snapfish, which is
a service of Hewlett-Packard, Sony’s ImageStation and
others;
•
“Big Box” retailers such as Wal-Mart, Costco and
others that are seeking to offer low cost digital photography
products and services, such as in-store fulfillment and
self-service kiosks for printing, and that may, among other
strategies, offer their customers heavily discounted in-store
products and services that compete directly with our offerings;
•
Drug stores such as Walgreens, CVS and others that offer
in-store pick-up from
Internet orders;
•
Regional photography companies such as Wolf Camera and Ritz
Camera that have established brands and customer bases in
existing photography markets;
•
Internet portals and search engines such as Yahoo!, AOL, Google
and CNET that offer broad-reaching digital photography and
related products and services to their large user bases;
•
Home printing service providers such as Hewlett-Packard, Epson
and Canon, that are seeking to expand their printer and ink
businesses by gaining market share in the emerging digital
photography marketplace; and
•
Photo-related software companies such as Adobe, Apple,
Microsoft, Corel and others.
The numerous choices for digital photography services can cause
confusion for consumers, and may cause them to choose to use one
of our competitors, many of whom may have greater name
recognition than we do. In addition, some of our competitors
that are seeking to establish an online presence may be able to
devote substantially more resources to website and systems
development. Also, larger, more established and better
capitalized entities may acquire, invest in or partner with
traditional and online competitors. We may also face competition
from new entrants that are well funded and that may choose to
prioritize growing their market share and brand awareness
instead of profitability. Competitors and new entrants in the
digital photography products and services industries may also
seek to develop new products, technologies or capabilities that
could render obsolete or less competitive many of the products,
services and content that we offer, which could harm our
business and results of operations.
If we are unable to adequately control the costs
associated with operating our business, our results of
operations will suffer.
The primary costs in operating our business are related to
producing prints, shipping products, acquiring customers and
compensating our personnel, and if we are unable to keep these
costs aligned with the level of revenues that we generate, our
results of operations would be harmed. The challenge in
controlling our business costs is made more difficult by the
fact that many of the factors that impact these costs are beyond
our control. For example, the costs to produce prints, such as
the costs of photographic print paper, could increase due to a
shortage of silver or an increase in worldwide energy prices. In
addition, we may become subject to increased costs by the
third-party shippers that deliver our products to our customers,
and we may be unable to pass along any increases in shipping
costs to our customers. The costs of online advertising and
keyword search could also increase significantly due to
increased competition, which would increase our customer
acquisition costs.
The loss of key personnel, an inability to attract and
retain additional personnel or difficulties in the integration
of new members of our management team into our company 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 may be
required to pay increased compensation in order to do so, and
our failure to attract and retain qualified personnel could
impair our ability to implement our business plan.
In addition, some members of our management team have only
recently joined our company. For example, Stanford S. Au, our
Senior Vice President, Technology, joined us in April 2006. We
expect that it will take time for the new members of our
management team to integrate into our company and our business
could be harmed if the integration is not successful.
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 the
payment of fees to third parties who drive new customers to our
website, purchased 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 as a means of
attracting customers, and offer substantial pricing discounts as
a means of encouraging repeat purchases. Our methods of
attracting customers 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 may negatively impact our results of operations. If we
are unable to enhance or maintain the methods we use to reach
consumers, the costs of attracting customers using these methods
significantly increase, or 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.
In addition, various private entities attempt to regulate the
use of e-mail for
commercial solicitation. These entities often advocate standards
of conduct or practice that significantly exceed current legal
requirements and classify certain
e-mail solicitations
that comply with current legal requirements as unsolicited bulk
e-mails, or
“spam.” Some of these entities maintain blacklists of
companies and individuals, and the websites, Internet service
providers and Internet protocol addresses associated with those
entities or individuals that do not adhere to what the
blacklisting entity believes are appropriate standards of
conduct or practices for commercial
e-mail solicitations.
If a company’s Internet protocol addresses are listed by a
blacklisting entity,
e-mails sent from those
addresses may be blocked if they are sent to any Internet domain
or Internet address that subscribes to the blacklisting
entity’s service or purchases its blacklist. If we become
subject to blacklisting, it could impair our ability to market
our products and services, communicate with our customers and
otherwise operate our business.
We may not succeed in promoting, strengthening and
continuing to establish the Shutterfly brand, which would
prevent us from acquiring new customers and increasing
revenues.
A component of our business strategy is the continued promotion
and strengthening of the Shutterfly brand. Due to the
competitive nature of the digital photography products and
services markets, if we are unable to successfully promote the
Shutterfly brand, we may fail to substantially increase our net
revenues. Customer awareness of, and the perceived value of, our
brand will depend largely on the success of our marketing
efforts and our ability to provide a consistent, high-quality
customer experience. To promote our brand, we have incurred, and
will continue to incur, substantial expense related to
advertising and other marketing efforts.
Our ability to provide a high-quality customer experience also
depends, in large part, on external factors over which we may
have little or no control, including the reliability and
performance of our suppliers and third-party Internet and
communication infrastructure providers. For example, some of our
products, such as select photo-based merchandise, are produced
and shipped to customers by our third-party vendors, and we rely
on these vendors to properly inspect and ship these products. In
addition, we rely on third-party shippers, including the
U.S. Postal Service and United Parcel Service, to deliver
our products to customers. Strikes or other service
interruptions affecting these shippers could impair our ability
to deliver merchandise on a timely basis. Our products are also
subject to damage during delivery and handling by our
third-party shippers. Our failure to provide customers with
high-quality products in a timely manner for any reason could
substantially harm our reputation and our efforts to develop
Shutterfly as a trusted brand. The failure of our brand
promotion activities could adversely affect our ability to
attract new customers and maintain customer relationships, and,
as a result, substantially harm our business and results of
operations.
The success of our business depends on continued consumer
adoption of digital photography.
Our growth is highly dependent upon the continued adoption by
consumers of digital photography. The digital photography market
is rapidly evolving, characterized by changing
technologies, intense price competition, additional competitors,
evolving industry standards, frequent new service announcements
and changing consumer demands and behaviors. To the extent that
consumer adoption of digital photography does not continue to
grow as expected, our revenue growth would likely suffer.
Moreover, we face significant risks that, if the market for
digital photography evolves in ways that we are not able to
address due to changing technologies or consumer behaviors,
pricing pressures, or otherwise, our current products and
services may become unattractive, which would likely result in
the loss of customers and a decline in net revenues and/or
increased expenses.
Purchasers of digital photography products and services
may not choose to shop online, which would harm our net revenues
and results of operations.
The online market for digital photography products and services
is less developed than the online market for other consumer
products. If this market does not gain widespread acceptance,
our business may suffer. Our success will depend in part on our
ability to attract customers who have historically used
traditional retail photography services or who have produced
photographs and other products using self-service alternatives,
such as printing at home. Furthermore, we may have to incur
significantly higher and more sustained advertising and
promotional expenditures or reduce the prices of our products
and services in order to attract additional online consumers to
our website and convert them into purchasing customers. Specific
factors that could prevent prospective customers from purchasing
from us include:
•
the inability to physically handle and examine product samples;
•
delivery time associated with Internet orders;
•
concerns about the security of online transactions and the
privacy of personal information;
•
delayed shipments or shipments of incorrect or damaged
products; and
•
inconvenience associated with returning or exchanging purchased
items.
If purchasers of digital photography products and services do
not choose to shop online, our net revenues and results of
operations would be harmed.
If affordable broadband access does not become widely
available to consumers, our revenue growth will likely
suffer.
Because our business currently involves consumers uploading and
downloading large data files, we are highly dependent upon the
availability of affordable broadband access to consumers. Many
areas of the country still do not have broadband access, and the
cost of broadband access may be too expensive for many potential
customers. To the extent that broadband access is not available
or not adopted by consumers due to cost, our revenue growth
would likely suffer.
Interruptions to our website, information technology
systems, print production processes or customer service
operations could damage our reputation and brand and
substantially harm our business and results of
operations.
The satisfactory performance, reliability and availability of
our website, information technology systems, printing production
processes and customer service operations are critical to our
reputation, and our ability to attract and retain customers and
to maintain adequate customer satisfaction. Any interruptions
that result in the unavailability of our website or reduced
order fulfillment performance or customer service could result
in negative publicity, damage our reputation and brand and cause
our business and results of operations to suffer.
Because we depend in part on third parties for the
implementation and maintenance of certain aspects of our
communications and printing systems, and because many of the
causes of system interruptions or interruptions in the
production process may be outside of our control, we may not be
able to remedy such interruptions in a timely manner, or at all.
Our business interruption insurance policies do not address all
potential causes of business interruptions that we may
experience, and any proceeds we may receive from these policies
in the event of a business interruption may not fully compensate
us for the revenues we may lose.
If the single facility where substantially all of our
computer and communications hardware is located fails or if our
single production facility fails, our business and results of
operations would be harmed.
Our ability to successfully receive and fulfill orders and to
provide high-quality customer service depends in part on the
efficient and uninterrupted operation of our computer and
communications systems. Substantially all of the computer
hardware necessary to operate our website is located at a single
third-party hosting facility in Sunnyvale, California, and our
single production facility is in Hayward, California. Our
systems and operations could suffer damage or interruption from
human error, fire, flood, power loss, telecommunications
failure, break-ins, terrorist attacks, acts of war and similar
events. In addition, Hayward is located on, and Sunnyvale is
located near, a major fault line, increasing our susceptibility
to the risk that an earthquake could significantly harm the
operations of these facilities. We do not presently have
redundant systems in multiple locations, and our business
interruption insurance may be insufficient to compensate us for
losses that may occur. In addition, the impact of any of these
disasters on our business may be exacerbated by the fact that we
are still in the process of developing our formal disaster
recovery plan and we do not have a final plan currently in place.
Capacity constraints and system failures could prevent
access to our website, which could harm our reputation and
negatively affect our net revenues.
Our business requires that we have adequate capacity in our
computer systems to cope with the high volume of visits to our
website. As our operations grow in size and scope, we will need
to improve and upgrade our computer systems and network
infrastructure in the ordinary course of business to offer
customers enhanced and new products, services, capacity,
features and functionality. The expansion of our systems and
infrastructure may require us to commit substantial financial,
operational and technical resources before the volume of our
business increases, with no assurance that our net revenues will
increase.
Our ability to provide high-quality products and service depends
on the efficient and uninterrupted operation of our computer and
communications systems. If our systems cannot be expanded in a
timely manner to cope with increased website traffic, we could
experience disruptions in service, slower response times, lower
customer satisfaction, and delays in the introduction of new
products and services. Any of these problems could harm our
reputation and cause our net revenues to decline.
If we are not able to reliably meet our data storage and
management requirements, customer satisfaction and our
reputation could be harmed.
As a part of our current business model, we offer our customers
free unlimited online storage and sharing of photographs and, as
a result, must store and manage hundreds of terabytes of data.
This results in immense system requirements and substantial
ongoing technological challenges, both of which are expected to
continue to increase over time. If we are not able to reliably
meet these data storage and management requirements, we could
have disruptions in services which could impair customer
satisfaction and our reputation and lead to reduced net revenues
and increased expenses. Moreover, if the cost of meeting these
data storage and management requirements increases, our results
of operations would be harmed.
Our technology, infrastructure and processes may contain
undetected errors or design faults that could result in
decreased production, limited capacity or reduced demand.
Our technology, infrastructure and processes may contain
undetected errors or design faults. These errors or design
faults may cause our website to fail and result in loss of, or
delay in, market acceptance of our products and services. If we
experience a delay in a website release that results in customer
dissatisfaction during the period required to correct errors and
design faults, we would lose revenue. In the future, we may
encounter scalability limitations, in current or future
technology releases, or delays in the commercial release of any
future version of our technology, infrastructure and processes
that could seriously harm our business.
We currently depend on single suppliers for some of our
photographic print paper and for the machines used to
manufacture our 4×6 prints and photo-based products, which
exposes us to risks if these suppliers fail to perform under our
agreements with them.
We have historically relied on an exclusive supply relationship
with Fuji Photo Film U.S.A. to supply all of our photographic
paper for silver halide print production, such as 4×6
prints, and with GPA Acquisition Company for all of our paper
for our photo-based products, such as photo books and calendars.
In addition, we have purchased or rented all of the machines
currently used to manufacture our 4×6 prints from Imaging
Solutions and our photo-based products from Hewlett-Packard. Our
reliance on these third parties subjects us to a degree of risk.
We have an agreement with Fuji that expires in September 2007,
but if Fuji fails to perform in accordance with the terms of our
agreement and if we are unable to secure a paper supply from a
different source in a timely manner, we would likely fail to
meet customer expectations, which could result in negative
publicity, damage our reputation and brand and harm our business
and results of operations. We do not have long-term agreements
with any of GPA Acquisition Company, Hewlett-Packard or Imaging
Solutions, but purchase products from them on a purchase order
basis, and, as a result, these parties could increase their
prices, reallocate supply to others, including our competitors,
or choose to terminate their relationship with us. In addition,
Hewlett-Packard is one of our primary competitors in the area of
online digital photography services, and this competition may
influence their willingness to provide us with additional
products or services. If we were required to switch vendors of
machines for photo-based products, we may incur incremental
costs, which could harm our operating results.
If we are unable to develop, market and sell new products
and services that address additional market opportunities, our
results of operations may suffer. In addition, we may need to
expand beyond our current customer demographic to grow our
business.
Although historically we have focused our business on consumer
markets for silver halide prints, such as 4×6 prints, and
photo-based products, such as photo books and calendars, we
intend to address, and demand may shift to, expanding into new
products and services. In addition, we believe we may need to
address additional markets and expand our customer demographic
in order to further grow our business. We may not successfully
expand our existing services or create new products and
services, address new market segments or develop a significantly
broader customer base. Any failure to address additional market
opportunities could result in loss of market share, which would
harm our business, financial condition, and results of
operations.
We may need to raise additional capital that may be
required to grow our business, and we may not be able to raise
capital on terms acceptable to us or at all.
The operation of our business and growth efforts will require
significant cash outlays and advance capital equipment
expenditures and commitments. If cash on hand and cash generated
from operations and from this offering are not sufficient to
meet our cash requirements, we will need to seek additional
capital, potentially through debt or equity financings, to fund
our growth. We cannot assure you that we will be able to raise
needed cash on terms acceptable to us or at all. Financings may
be on terms that are dilutive or potentially dilutive to our
stockholders, and the prices at which new investors would be
willing to purchase our securities may be lower than the price
per share of our common stock in this offering. The holders of
new securities may also have rights, preferences or privileges
which are senior to those of existing holders of common stock.
If new sources of financing are required, but are insufficient
or unavailable, we will be required to modify our growth and
operating plans to the extent of available funding, which would
harm our ability to grow our business.
We may undertake acquisitions to expand our business,
which may pose risks to our business and dilute the ownership of
our existing stockholders.
A key component of our business strategy includes strengthening
our competitive position and refining the customer experience on
our website through internal development. However, from time to
time, we may selectively pursue acquisitions of businesses,
technologies or services. Integrating any newly acquired
businesses, technologies or services is likely to be expensive
and time consuming. To finance any acquisitions, it may be
necessary for us to raise additional funds through public or
private financings. Additional funds may not be available on
terms that are favorable to us, and, in the case of equity
financings, would result in dilution to our stockholders. If we
do complete any acquisitions, we may be unable to operate the
acquired businesses profitably or otherwise implement our
strategy successfully. If we are unable to integrate any newly
acquired entities, technologies or services effectively, our
business and results of operations will suffer. The time and
expense associated with finding suitable and compatible
businesses, technologies or services could also disrupt our
ongoing business and divert our management’s attention.
Future acquisitions by us could also result in large and
immediate write-offs or assumptions of debt and contingent
liabilities, any of which could substantially harm our business
and results of operations. We have no current plans, agreements
or commitments with respect to any future acquisitions.
Our net revenues and results of operations are affected by
the level of vacation and other travel by our customers, and any
declines or disruptions in the travel industry could harm our
business.
Because vacation and other travel is one of the primary
occasions in which our customers utilize their digital cameras,
our net revenues and results of operations are affected by the
level of vacation and other travel by our customers.
Accordingly, downturns or weaknesses in the travel industry
could harm our business. Travel expenditures are sensitive to
business and personal discretionary spending levels and tend to
decline during general economic downturns. Events or weakness in
the travel industry that could negatively affect the travel
industry include price escalation in the airline industry or
other travel-related industries, airline or other travel related
strikes, safety concerns, including terrorist activities,
inclement weather and airline bankruptcies or liquidations. In
addition, high gasoline prices may lead to reduced travel in the
United States. Any decrease in vacation or travel could harm our
net revenues and results of operations.
Failure to adequately protect our intellectual property
could substantially harm our business and results of
operations.
We rely on a combination of patent, trademark, trade secret and
copyright law and contractual restrictions to protect our
intellectual property. These protective measures afford only
limited protection. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy
aspects of our website features and functionalities or to obtain
and use information that we consider proprietary, such as the
technology used to operate our website, our production
operations and our trademarks.
As of July 31, 2006, we had 13 patents issued and more
than 29 patent applications pending in the United States.
We intend to pursue corresponding patent coverage in other
countries to the extent we believe such coverage is appropriate
and cost efficient. We cannot assure you that any of our pending
applications will be granted. In addition, third parties could
bring infringement, invalidity, co-inventorship or similar
claims with respect to any of our currently issued patents or
any patents that may be issued to us in the future. Any such
claims, whether or not successful, could be
extremely costly, could damage our reputation and brand and
substantially harm our business and results of operations.
Our primary brand is “Shutterfly.” We hold
registrations for the Shutterfly service mark in our major
markets of the United States and Canada, as well as in the
European Community, Mexico, Japan, Australia and New Zealand. An
additional application for the Shutterfly mark is pending in
Brazil. Our competitors may adopt names similar to ours, thereby
impeding our ability to build brand identity and possibly
leading to customer confusion. In addition, there could be
potential trade name or trademark infringement claims brought by
owners of marks that are similar to Shutterfly or one of our
other marks. Any claims or customer confusion related to our
marks could damage our reputation and brand and substantially
harm our business and results of operations.
If we become involved in patent litigation or other
proceedings related to a determination of rights, we could incur
substantial costs, expenses or liability, lose our exclusive
rights or be required to stop certain of our business
activities.
A third party may sue us for infringing its patent rights. In
addition, we have in the past received claims, and in the future
a third party may claim, that we have improperly obtained or
used its confidential or proprietary information. Likewise, we
may need to resort to litigation to enforce a patent issued to
us or to determine the scope and validity of third-party
proprietary rights.
The cost to us of any litigation or other proceeding relating to
intellectual property rights, even if resolved in our favor,
could be substantial, and the litigation would divert our
management’s efforts from growing our business. Some of our
competitors may be able to sustain the costs of complex
intellectual property litigation more effectively than we can
because they have substantially greater resources. Uncertainties
resulting from the initiation and continuation of any litigation
could limit our ability to continue our operations.
Alternatively, we may be required to, or decide to, enter into a
license with a third party. For example, in May 2005, we
entered into a settlement and license agreement to resolve
litigation brought by a third party with respect to our alleged
infringement of its patents. Under the terms of the agreement,
we agreed to pay the third party a total of $2.0 million,
and we received a license to its patents. Any future license
required under any other party’s patents may not be made
available on commercially acceptable terms, if at all. In
addition, such licenses are likely to be non-exclusive and,
therefore, our competitors may have access to the same
technology licensed to us. If we fail to obtain a required
license and are unable to design around a patent, we may be
unable to effectively conduct certain of our business
activities, which could limit our ability to generate revenues
and harm our results of operations and possibly prevent us from
generating revenues sufficient to sustain our operations.
The inability to acquire or maintain domain names for our
website could substantially harm our business and results of
operations.
We currently are the registrant of the “Shutterfly”
mark in numerous jurisdictions and of the Internet domain name
for our website, Shutterfly.com, as well as various related
domain names. Domain names generally are regulated by Internet
regulatory bodies and are controlled also by trademark and other
related laws. If we lose the ability to use our Shutterfly mark
in a particular country or our domain name, we could be forced
to either incur significant additional expenses to market our
products within that country, including the development of a new
brand and the creation of new promotional materials and
packaging, or elect not to sell products in that country. Either
result could substantially harm our business and results of
operations.
Furthermore, the regulations governing domain names and laws
protecting trademarks and similar proprietary rights could
change in ways that block or interfere with our ability to use
relevant domains or our current brand. Also, we might not be
able to prevent third parties from registering or retaining
domain names that interfere with our consumer communications or
infringe or otherwise
decrease the value of our trademarks and other proprietary
rights. Regulatory bodies also may establish additional generic
or country-code top-level domains or modify the requirements for
holding domain names. As a result, we might not be able to
acquire or maintain the domain names that utilize the name
Shutterfly in all of the countries in which we currently or
intend to conduct business.
Our net revenues may be negatively affected if we are
required to charge sales taxes in additional jurisdictions or
other taxes on purchases.
We do not collect or have imposed upon us sales or other taxes
related to the products and services we sell, except for certain
corporate level taxes and sales tax in California, Nevada and
Pennsylvania where we have a tax nexus. However, additional
states or one or more countries may seek to impose sales or
other tax collection obligations on us in the future. A
successful assertion by any country or state in which we do
business that we should be collecting sales or other taxes on
the sale of our products could result in substantial tax
liabilities for past sales, discourage customers from purchasing
products from us, decrease our ability to compete with
traditional retailers or otherwise substantially harm our
business and results of operations.
Currently, decisions of the U.S. Supreme Court restrict the
imposition of obligations to collect state and local sales and
use taxes with respect to sales made over the Internet. However,
implementation of the restrictions imposed by these Supreme
Court decisions is subject to interpretation by state and local
taxing authorities. While we believe that these Supreme Court
decisions currently restrict state and local taxing authorities
in the United States from requiring us to collect sales and use
taxes from purchasers located within their jurisdictions, taxing
authorities could disagree with our interpretation of these
decisions. Moreover, a number of states in the United States, as
well as the U.S. Congress, have been considering various
initiatives that could limit or supersede the Supreme
Court’s position regarding sales and use taxes on Internet
sales. If any state or local taxing jurisdiction were to
disagree with our interpretation of the Supreme Court’s
current position regarding state and local taxation of Internet
sales, or if any of these initiatives were to address the
Supreme Court’s constitutional concerns and result in a
reversal of its current position, we could be required to
collect additional sales and use taxes from purchasers. The
imposition by state and local governments of various taxes upon
Internet commerce could create administrative burdens for us and
could decrease our future net sales.
Government regulation of the Internet and
e-commerce is evolving,
and unfavorable changes or failure by us to comply with these
regulations could substantially harm our business and results of
operations.
We are subject to general business regulations and laws as well
as regulations and laws specifically governing the Internet and
e-commerce. Existing
and future laws and regulations may impede the growth of the
Internet or other online services. These regulations and laws
may cover taxation, restrictions on imports and exports,
customs, tariffs, user privacy, data protection, pricing,
content, copyrights, distribution, electronic contracts and
other communications, consumer protection, the provision of
online payment services, broadband residential Internet access
and the characteristics and quality of products and services. It
is not clear how existing laws governing issues such as property
ownership, sales and other taxes, libel and personal privacy
apply to the Internet and
e-commerce as the vast
majority of these laws were adopted prior to the advent of the
Internet and do not contemplate or address the unique issues
raised by the Internet or
e-commerce. Those laws
that do reference the Internet are only beginning to be
interpreted by the courts and their applicability and reach are
therefore uncertain. For example, the Digital Millennium
Copyright Act, or DMCA, is intended, in part, to limit the
liability of eligible online service providers for listing or
linking to third-party websites that include materials that
infringe copyrights or other rights of others. Portions of the
Communications Decency Act, or CDA, are intended to provide
statutory protections to online service providers who distribute
third-party content. We rely on the protections provided by both
the DMCA and CDA in conducting our business. Any changes in
these laws or judicial
interpretations narrowing their protections will subject us to
greater risk of liability and may increase our costs of
compliance with these regulations or limit our ability to
operate certain lines of business. The Children’s Online
Protection Act and the Children’s Online Privacy Protection
Act are intended to restrict the distribution of certain
materials deemed harmful to children and impose additional
restrictions on the ability of online services to collect user
information from minors. In addition, the Protection of Children
From Sexual Predators Act of 1998 requires online service
providers to report evidence of violations of federal child
pornography laws under certain circumstances. The costs of
compliance with these regulations may increase in the future as
a result of changes in the regulations or the interpretation of
them. Further, any failures on our part to comply with these
regulations may subject us to significant liabilities. Those
current and future laws and regulations or unfavorable
resolution of these issues may substantially harm our business
and results of operations.
Legislation regarding copyright protection or content
interdiction could impose complex and costly constraints on our
business model.
Because of our focus on automation and high volumes, our
operations do not involve, for the vast majority of our sales,
any human-based review of content. Although our website’s
terms of use specifically require customers to represent that
they have the right and authority to reproduce the content they
provide and that the content is in full compliance with all
relevant laws and regulations, we do not have the ability to
determine the accuracy of these representations on a
case-by-case basis. There is a risk that a customer may supply
an image or other content that is the property of another party
used without permission, that infringes the copyright or
trademark of another party, or that would be considered to be
defamatory, pornographic, hateful, racist, scandalous, obscene
or otherwise offensive, objectionable or illegal under the laws
or court decisions of the jurisdiction where that customer
lives. There is, therefore, a risk that customers may
intentionally or inadvertently order and receive products from
us that are in violation of the rights of another party or a law
or regulation of a particular jurisdiction. If we should become
legally obligated in the future to perform manual screening and
review for all orders destined for a jurisdiction, we will
encounter increased production costs or may cease accepting
orders for shipment to that jurisdiction which could
substantially harm our business and results of operations.
Our practice of offering free products and services could
be subject to judicial or regulatory challenge.
We regularly offer free products as an inducement for customers
to try our products. Although we believe that we conspicuously
and clearly communicate all details and conditions of these
offers — for example, that customers are required to
pay shipping, handling and/or processing charges to take
advantage of the free product offer — we may be
subject to claims from individuals or governmental regulators
that our free offers are misleading or do not comply with
applicable legislation, which claims may be expensive to defend
and could divert management’s time and attention. If we
become subject to such claims in the future, or are required or
elect to curtail or eliminate our use of free offers, our
results of operations may be harmed.
Our failure to protect the confidential information of our
customers and networks against security breaches and the risks
associated with credit card fraud could damage our reputation
and brand and substantially harm our business and results of
operations.
A significant prerequisite to online commerce and communications
is the secure transmission of confidential information over
public networks. Our failure to prevent security breaches could
damage our reputation and brand and substantially harm our
business and results of operations. For example, a majority of
our sales are billed to our customers’ credit card accounts
directly, orders are shipped to a customer’s address, and
customers log on using their
e-mail address. We rely
on encryption and authentication technology licensed from third
parties to effect the secure transmission of confidential
information, including credit card numbers. Advances in computer
capabilities, new
discoveries in the field of cryptography or other developments
may result in a compromise or breach of the technology used by
us to protect customer transaction data. In addition, any party
who is able to illicitly obtain a user’s password could
access the user’s transaction data or personal information.
Any compromise of our security could damage our reputation and
brand and expose us to a risk of loss or litigation and possible
liability which would substantially harm our business and
results of operations. In addition, anyone who is able to
circumvent our security measures could misappropriate
proprietary information or cause interruptions in our
operations. We may need to devote significant resources to
protect against security breaches or to address problems caused
by breaches.
In addition, under current credit card practices, we are liable
for fraudulent credit card transactions because we do not obtain
a cardholder’s signature. We do not currently carry
insurance against this risk. To date, we have experienced
minimal losses from credit card fraud, but we continue to face
the risk of significant losses from this type of fraud. Our
failure to adequately control fraudulent credit card
transactions could damage our reputation and brand and
substantially harm our business and results of operations.
Changes in regulations or user concerns regarding privacy
and protection of user data could harm our business.
Federal, state and international laws and regulations may govern
the collection, use, sharing and security of data that we
receive from our customers. In addition, we have and post on our
website our own privacy policies and practices concerning the
collection, use and disclosure of customer data. Any failure, or
perceived failure, by us to comply with our posted privacy
policies or with any data-related consent orders, Federal Trade
Commission requirements or other federal, state or international
privacy-related laws and regulations could result in proceedings
or actions against us by governmental entities or others, which
could potentially harm our business. Further, failure or
perceived failure to comply with our policies or applicable
requirements related to the collection, use or security of
personal information or other privacy-related matters could
damage our reputation and result in a loss of customers.
Expansion of our international operations will require
management attention and resources and may be unsuccessful,
which could harm our future business development and existing
domestic operations.
To date, we have conducted limited international operations, but
we intend to expand into international markets in order to grow
our business. These expansion plans will require management
attention and resources and may be unsuccessful. We have limited
experience in selling our products to conform to local cultures,
standards and policies. We may have to compete with local
companies which understand the local market better than we do.
In addition, to achieve satisfactory performance for consumers
in international locations it may be necessary to locate
physical facilities, such as production facilities in the
foreign market. We do not have experience establishing such
facilities overseas. We may not be successful in expanding into
any international markets or in generating revenues from foreign
operations. In addition, different privacy, censorship and
liability standards and regulations and different intellectual
property laws in foreign countries may cause our business to be
harmed.
Risks Related to This Offering
There has been no prior market for our common stock, our
stock price may be volatile or may decline regardless of our
operating performance, and you may not be able to resell your
shares at or above the initial public offering price.
There has been no public market for our common stock prior to
this offering. The initial public offering price for our common
stock will be determined through negotiations between the
underwriters and us. This initial public offering price may vary
from the market price of our common stock following this
offering. If you purchase shares of our common stock, you may
not be able to resell those shares at or above the initial
public offering price. An active or liquid market in our common
stock may not develop upon completion of this offering or, if it
does develop, it may not be sustainable. The market price of our
common stock may fluctuate significantly in response to numerous
factors, many of which are beyond our control, including:
•
price and volume fluctuations in the overall stock market;
•
changes in operating performance and stock market valuations of
other technology companies generally, or those in our industry
in particular;
•
actual or anticipated fluctuations in our operating results;
•
the financial projections we may provide to the public, any
changes in these projections or our failure to meet these
projections;
•
changes in financial estimates by any securities analysts who
follow our company, our failure to meet these estimates or
failure of those analysts to initiate or maintain coverage of
our stock;
•
ratings downgrades by any securities analysts who follow our
company;
•
the public’s response to our press releases or other public
announcements, including our filings with the SEC;
•
announcements by us or our competitors of significant technical
innovations, acquisitions, strategic partnerships, joint
ventures or capital commitments;
•
introduction of technologies or product enhancements that reduce
the need for our products;
•
market conditions or trends in our industry or the economy as a
whole;
•
the loss of key personnel;
•
lawsuits threatened or filed against us;
•
future sales of our common stock by our executive officers,
directors and significant stockholders; and
•
other events or factors, including those resulting from war,
incidents of terrorism or responses to these events.
In addition, the stock markets, and in particular The NASDAQ
Global Market on which we have applied to list our common stock,
have experienced extreme price and volume fluctuations that have
affected and continue to affect the market prices of equity
securities of many technology companies. Stock prices of many
technology companies have fluctuated in a manner unrelated or
disproportionate to the operating performance of those
companies. In the past, stockholders have instituted securities
class action litigation following periods of market volatility.
If we were involved in securities litigation, it could have
substantial costs and divert resources and the attention of
management from our business.
Maintaining and improving our financial controls and the
requirements of being a public company may strain our resources,
divert management’s attention and affect our ability to
attract and retain qualified board members.
As a public company, we will be subject to the reporting
requirements of the Securities Exchange Act of 1934, the
Sarbanes-Oxley Act of 2002 and the rules and regulations of The
NASDAQ Stock Market. The requirements of these rules and
regulations will increase our legal, accounting and financial
compliance costs, make some activities more difficult,
time-consuming or costly and may also place undue strain on our
personnel, systems and resources.
The Sarbanes-Oxley Act will require, among other things, that we
maintain effective disclosure controls and procedures and
internal control over financial reporting. This can be difficult
to do. In order to maintain and improve the effectiveness of our
disclosure controls and procedures and internal control over
financial reporting, significant resources and management
oversight will be required. We have a substantial effort ahead
of us to implement appropriate processes, document the system of
internal control over relevant processes, assess their design,
remediate any deficiencies identified, including the three
material weaknesses and five significant deficiencies identified
by our independent registered public accounting firm in
connection with the audit of our 2005 consolidated financial
statements, and test their operation. As a result,
management’s attention may be diverted from other business
concerns, which could harm our business, financial condition and
results of operations. These efforts will also involve
substantial accounting related costs. In addition, if we are
unable to continue to meet these requirements, we may not be
able to remain listed on The NASDAQ Global Market.
Under the Sarbanes-Oxley Act and the rules and regulations of
The NASDAQ Stock Market, we are required to maintain a board of
directors with a majority of independent directors. We also
expect that these rules and regulations will make it more
difficult and more expensive for us to maintain directors’
and officers’ liability insurance, and we may be required
to accept reduced coverage or incur substantially higher costs
to maintain coverage. If we are unable to maintain adequate
directors’ and officers’ insurance, our ability to
recruit and retain qualified directors, especially those
directors who may be considered independent for purposes of
Nasdaq rules, and officers will be significantly curtailed.
Purchasers in this offering will suffer immediate
dilution.
If you purchase shares of our common stock in this offering, the
value of your shares based on our actual book value will
immediately be less than the offering price you paid. This
effect is known as dilution. Based upon the pro forma net
tangible book value of our common stock at June 30, 2006,
your shares will have less book value per share than the price
you paid in the offering. If previously granted options are
exercised, additional dilution will occur. As of June 30,2006, options to purchase 4,733,392 shares of our common
stock at a weighted average exercise price of approximately
$6.68 per share and warrants to purchase 116,364 shares of our
common stock at a weighted average exercise price of
approximately $4.56 per share, which options and warrants do not
expire upon the completion of this offering, were outstanding.
Subsequent to June 30, 2006, we granted additional options
to purchase an aggregate of 101,633 shares of our common
stock at a weighted average exercise price of $14.20 per
share.
A significant portion of our total outstanding shares are
restricted from immediate resale but may be sold into the market
in the near future. If there are substantial sales of shares of
our common stock, the price of our common stock could
decline.
The price of our common stock could decline if there are
substantial sales of our common stock and if there is a large
number of shares of our common stock available for sale. After
this offering, we will have
outstanding shares
of our common stock based on the number of shares outstanding as
of June 30, 2006. This includes the shares that we are
selling in this offering, which may be resold in the public
market immediately. The remaining 17,811,128 shares,
or % of
our outstanding shares after this offering, are currently
restricted as a result of market standoff and/or
lock-up agreements but
will be able to be sold in the near future as set forth below.
Number of Shares and
Date Available for Sale
% of Total Outstanding
into Public Market
shares,
or %
Immediately after this offering.
shares,
or %
45 days after the date of this
prospectus.
shares,
or %
90 days after the date of this
prospectus.
shares,
or %
180 days after the date of
this prospectus.
After this offering, the holders of an aggregate of
13,732,545 shares of our common stock outstanding as of
June 30, 2006 or subject to warrants outstanding as of
June 30, 2006, will have rights, subject to some
conditions, to require us to file registration statements
covering their shares or to include their shares in registration
statements that we may file for ourselves or other stockholders,
which number will be reduced to shares if the underwriters
exercise their over-allotment option in full. We also intend to
register the issuance of all shares of common stock that we have
issued and may issue under our employee equity incentive plans.
Once we register the issuance of these shares, they can be
freely sold in the public market upon issuance, subject to
certain lock-up
agreements.
The market price of the shares of our common stock could decline
due to sales of a substantial number of our shares in the public
market or the perception in the market that the holders of a
large number of shares intend to sell their shares.
Our directors, executive officers and principal
stockholders will continue to have substantial control over
Shutterfly after this offering and could delay or prevent a
change in corporate control.
After this offering, our directors, executive officers and
holders of more than 5% of our common stock, together with their
affiliates, will beneficially own, in the aggregate,
approximately % of our outstanding
common stock. As a result, these stockholders, if acting
together, may have the ability to determine the outcome of
matters submitted to our stockholders for approval, including
the election of directors and any merger, consolidation or sale
of all or substantially all of our assets. In addition, these
persons, acting together, may have the ability to control the
management and affairs of our company. Accordingly, this
concentration of ownership may harm the market price of our
common stock by:
•
delaying, deferring or preventing a change in control of our
company;
•
impeding a merger, consolidation, takeover or other business
combination involving our company; or
•
discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of our company.
We have broad discretion in the use of the net proceeds
from this offering and may not use them effectively.
We cannot specify with certainty the particular uses of the net
proceeds that we will receive from this offering. Our management
will have broad discretion in the application of the net
proceeds, including working capital, capital expenditures,
possible acquisitions and other general corporate purposes. Our
stockholders may not agree with the manner in which our
management chooses to allocate and spend the net proceeds. The
failure by our management to apply these funds effectively could
harm our business. Pending their use, we may invest the net
proceeds from this offering in a manner that does not produce
income or that loses value.
Some provisions in our restated certificate of
incorporation and restated bylaws and Delaware law may deter
third parties from acquiring us.
Our restated certificate of incorporation and restated bylaws
that will each become effective immediately following the
completion of this offering contain provisions that may make the
acquisition of our company more difficult without the approval
of our board of directors, including the following:
•
our board is classified into three classes of directors, each
with staggered three-year terms;
•
only our chairman, our chief executive officer, our president or
a majority of our board of directors is authorized to call a
special meeting of stockholders;
•
our stockholders may take action only at a meeting of
stockholders and not by written consent;
•
vacancies on our board of directors may be filled only by our
board of directors and not by stockholders;
•
our certificate of incorporation authorizes undesignated
preferred stock, the terms of which may be established and
shares of which may be issued without stockholder
approval; and
•
advance notice procedures apply for stockholders to nominate
candidates for election as directors or to bring matters before
an annual meeting of stockholders.
These anti-takeover defenses could discourage, delay or prevent
a transaction involving a change in control of our company.
These provisions could also discourage proxy contests and make
it more difficult for you and other stockholders to elect
directors of your choosing and cause us to take other corporate
actions you desire.
In addition, we are subject to Section 203 of the Delaware
General Corporation Law, which, subject to some exceptions,
prohibits “business combinations” between a Delaware
corporation and an “interested stockholder,” which is
generally defined as a stockholder who becomes a beneficial
owner of 15% or more of a Delaware corporation’s voting
stock, for a three-year period following the date that the
stockholder became an interested stockholder. Section 203
could have the effect of delaying, deferring or preventing a
change in control that our stockholders might consider to be in
their best interests.
This prospectus contains, in addition to historical information,
forward-looking statements. We may, in some cases, use words
such as “project,”“believe,”“anticipate,”“plan,”“expect,”“estimate,”“intend,”“continue,”“should,”“would,”“could,”“potentially,”“will,” or “may,”
or other similar words and expressions that convey uncertainty
of future events or outcomes to identify these forward-looking
statements. Forward-looking statements in this prospectus
include statements about:
•
our financial performance, including our net revenues, cost of
revenues, operating expenses and ability to sustain
profitability;
•
our planned capital expenditures;
•
our liquidity and working capital requirements;
•
our ability to expand our customer base;
•
our ability to expand our product and service offerings;
•
our efforts to make our business more vertically integrated;
•
our ability to develop additional adjacent lines of business;
•
our international expansion plans;
•
our ability to secure adequate facility space;
•
our ability to retain and hire necessary employees, including
seasonal personnel, and appropriately staff our operations;
•
the impact of seasonality on our business;
•
our ability to remediate the material weaknesses and significant
deficiencies in our internal control over financial reporting;
•
our ability to stay abreast of modified or new laws applying to
our business; and
•
our spending of the net proceeds from this offering.
The outcome of the events described in these forward-looking
statements is subject to known and unknown risks, uncertainties
and other factors that could cause actual results to differ
materially from the results anticipated by these forward-looking
statements. These important risks, uncertainties and factors
include those factors we discuss in this prospectus under the
caption “Risk Factors.” You should read these factors
and the other cautionary statements made in this prospectus as
being applicable to all related forward-looking statements
wherever they appear in this prospectus.
The forward-looking statements made in this prospectus relate
only to events as of the date on which the statements are made.
We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by
law.
This prospectus also contains statistical data that we obtained
from industry publications and reports. Although we have not
independently verified the data contained in these industry
publications and reports, based on our industry experience, we
believe that the publications are reliable and the conclusions
contained in the publications and reports are reasonable.
We estimate that we will receive net proceeds from the sale of
the shares
of common stock that we are selling in this offering of
approximately
$ million,
based on an assumed initial public offering price of
$ per
share, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses. Each $1.00 increase
or decrease in the assumed initial public offering price of
$ per
share would increase or decrease, as applicable, the net
proceeds to us by approximately
$ million,
assuming the number of shares offered by us, as set forth on the
cover of this prospectus, remains the same and after deducting
estimated underwriting discounts and commissions payable by us.
To the extent that the underwriters exercise their
over-allotment option to purchase up
to shares
from the selling stockholders, we will not receive any of the
proceeds from the sale of shares by the selling stockholders,
although we will bear the costs, other than underwriting
discounts and commissions, associated with those sales.
We intend to use the net proceeds of this offering for general
corporate purposes, including working capital and potential
capital expenditures for manufacturing and website
infrastructure equipment and new and existing manufacturing
facilities. We expect our capital expenditures to be between
$30 million and $35 million in the second half of 2006
and through 2007, which will be funded by a combination of our
cash and cash equivalents, expected cash flows from operations
and the net proceeds from this offering. We expect to spend
approximately half of this amount to purchase manufacturing
equipment, obtain new manufacturing facilities and on
improvements to our new and existing manufacturing facilities,
with the remainder to be allocated for the purchase of website
infrastructure equipment. Although we may also use a portion of
the net proceeds for the acquisition of, or investment in,
companies, technologies, products or assets that complement our
business, we have no present understandings, commitments or
agreements to enter into any acquisitions or make any
investments.
Our management will retain broad discretion in the allocation
and use of the net proceeds of this offering, and investors will
be relying on the judgment of our management regarding the
application of these net proceeds. Pending specific utilization
of the net proceeds as described above, we intend to invest the
net proceeds of this offering in short-term, interest-bearing
obligations, investment grade instruments, certificates of
deposit or direct or guaranteed obligations of the United
States. The goal with respect to the investment of these net
proceeds will be capital preservation and liquidity so that such
funds are readily available to fund our operations.
C:
DIVIDEND POLICY
We have not paid any cash dividends on our capital stock since
we incorporated in April 1999. We currently intend to retain any
future earnings to finance future growth and development of our
business and do not anticipate paying any cash dividends in the
future.
The following table sets forth our capitalization as of
June 30, 2006:
•
on an actual basis;
•
on a pro forma basis to reflect (1) the automatic conversion of
all outstanding shares of our preferred stock into
13,801,716 shares of common stock in connection with the
completion of this offering and (2) the filing of our restated
certificate of incorporation in Delaware immediately following
the completion of this offering; and
•
on a pro forma as adjusted basis to reflect the pro forma
adjustments and the sale by us
of shares
of common stock offered by this prospectus at the assumed
initial public offering price of
$ per
share, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses.
You should read this table together with our consolidated
financial statements and related notes and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in
this prospectus.
Capital lease obligations,
including current portion
4,403
4,403
Redeemable convertible preferred
stock, $0.0001 par value per share; 15,454 shares
authorized, 13,802 shares issued and outstanding, actual;
15,454 shares authorized, no shares issued and outstanding,
pro forma; no shares authorized, no shares issued and
outstanding, pro forma as adjusted
89,652
—
Stockholders’ equity (deficit):
Undesignated preferred stock,
$0.0001 par value per share; no shares authorized, no
shares issued and outstanding, actual and pro forma;
5,000 shares authorized, no shares issued and outstanding
pro forma as adjusted
—
—
Common stock, $0.0001 par
value per share; 38,251 shares authorized,
3,914 shares issued and outstanding, actual;
38,251 shares authorized, 17,716 shares issued and
outstanding, pro forma; 100,000 shares
authorized, shares
issued and outstanding, pro forma as adjusted
—
2
Additional paid-in capital
10,859
102,171
Deferred stock-based compensation
(1,039
)
(1,039
)
Accumulated deficit
(39,796
)
(39,796
)
Total stockholders’ equity
(deficit)
(29,976
)
61,338
Total capitalization
$
65,741
$
65,741
$
(1)
Each $1.00 increase or decrease in the assumed initial public
offering price of
$ per
share would increase or decrease, as applicable, the amount of
additional paid-in capital, total stockholders’ equity
(deficit) and total capitalization by approximately
$ million,
assuming the number of shares offered by us, as set forth on the
cover of this prospectus, remains the same and after deducting
the estimated underwriting discounts and commissions payable by
us.
In the table above, the number of shares outstanding as of
June 30, 2006, unless otherwise stated, does not include:
•
4,733,392 shares issuable upon the exercise of stock
options outstanding as of June 30, 2006 at a
weighted-average exercise price of approximately $6.68 per share;
•
230,745 additional shares reserved for issuance under our 1999
Stock Plan as of June 30, 2006; shares reserved for
issuance under our 1999 Stock Plan that are not issued as of the
date of this prospectus will become available for grant and
issuance under our 2006 Equity Incentive Plan;
•
in addition to the shares that will roll over from the 1999
Stock Plan, an aggregate of 1,358,352 shares to be reserved
for issuance under our 2006 Equity Incentive Plan, which will
become effective on the first day that our common stock is
publicly traded and which contains a provision that
automatically increase its share reserve each year, as more
fully described in “Management — Employee Benefit
Plans;”
•
40,816 shares issuable upon the exercise of a warrant
outstanding as of June 30, 2006 with an exercise price of
$24.50 per share that expires upon the completion of this
offering; and
•
an aggregate of 116,364 shares issuable upon the exercise
of warrants outstanding as of June 30, 2006 at a weighted
average-exercise price of approximately $4.56 per share,
which warrants do not expire upon the completion of this
offering.
As of June 30, 2006, we had a negative net tangible book
value of approximately $31.4 million, or $7.84 per
share of common stock, based upon 4,009,412 shares of
common stock outstanding on such date, not taking into account
the automatic conversion of all outstanding shares of our
preferred stock into 13,801,716 shares of common stock in
connection with the completion of this offering. Net tangible
book value per share represents the amount of our total tangible
assets less our total liabilities, divided by the number of our
outstanding shares of common stock. As of June 30, 2006,
our pro forma net tangible book value was approximately
$59.9 million, or $3.36 per share, based upon
17,811,128 shares outstanding as of such date. Pro forma
net tangible book value per share represents the amount of our
total tangible assets less our total liabilities, divided by the
number of our outstanding shares of common stock, after giving
effect to the automatic conversion of all outstanding shares of
our preferred stock into 13,801,716 shares of common stock
in connection with the completion of this offering. The increase
in the net tangible book value per share attributable to the
conversion of our preferred stock into shares of our common
stock will accordingly be $11.20 per share.
Dilution in pro forma net tangible book value per share
represents the difference between the amount per share paid by
purchasers of our common stock in this offering and the pro
forma as adjusted net tangible book value per share of our
common stock immediately following this offering.
After giving effect to the receipt of the net proceeds from the
sale of the shares of our common stock in this offering at an
assumed initial public offering price of
$ per
share and after deducting the estimated underwriting discounts
and commissions and the estimated offering expenses, our pro
forma as adjusted net tangible book value as of June 30,2006 would have been approximately
$ million,
or
$ per
share. This represents an immediate increase in pro forma net
tangible book value of
$ per
share to existing stockholders and an immediate dilution of
$ per
share to new investors purchasing shares at the initial public
offering price. The following table illustrates the per share
dilution:
Assumed initial public offering
price per share
$
Pro forma net tangible book value
per share as of June 30, 2006
$
3.36
Increase in pro forma net tangible
book value per share attributable to new investors
Pro forma as adjusted net tangible
book value per share after this offering
Dilution in pro forma net tangible
book value per share to new investors
$
A $1.00 increase or decrease in the assumed initial public
offering price of
$ would
increase or decrease our pro forma as adjusted net tangible book
value per share after this offering by
$ per
share and the dilution in pro forma as adjusted net tangible
book value to new investors by
$ per
share, assuming the number of shares offered by us, as set forth
on the cover of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
The following table summarizes on the same pro forma as adjusted
basis described above, the difference between the existing
stockholders and the purchasers of shares of common stock in
this offering with respect to the number of shares of common
stock purchased from us, the total consideration and the average
price paid per share, based on an assumed initial public
offering price of
$ per
share, before deducting the estimated underwriting discounts and
commissions:
A $1.00 increase or decrease in the assumed initial public
offering price of
$ per
share would increase or decrease, respectively, total
consideration paid by new investors and total consideration paid
by all stockholders by approximately
$ million,
assuming that the number of shares offered by us, as set forth
on the cover page of this prospectus, remains the same.
The above discussion and tables assume no exercise of our
in-the-money stock options or warrants outstanding as of
June 30, 2006, consisting of 4,733,392 shares of
common stock issuable upon the exercise of stock options with a
weighted-average exercise price of approximately $6.68 per
share and 116,364 shares of common stock issuable upon
exercise of warrants with a weighted-average exercise price of
approximately $4.56 per share. If all of these options and
warrants were exercised, then:
•
there will be an additional
$ per
share of dilution to new investors;
•
our existing stockholders, including the holders of these
options and warrants, would own %
and our new investors would own %
of the total number of shares of our common stock outstanding
upon the completion of this offering; and
•
our existing stockholders, including the holders of these
options and warrants, would have
paid % of total consideration, at
an average price per share of
$ ,
and our new investors would have
paid % of total consideration.
You should read the following selected historical consolidated
financial data below in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and the consolidated financial statements,
related notes and other financial information included in this
prospectus. The selected consolidated financial data in this
section are not intended to replace the consolidated financial
statements and are qualified in their entirety by the
consolidated financial statements and related notes included in
this prospectus.
The consolidated statements of operations data for the years
ended December 31, 2003, 2004 and 2005 and the consolidated
balance sheets data as of December 31, 2004 and 2005, are
derived from our consolidated financial statements that have
been audited by PricewaterhouseCoopers LLP, our independent
registered public accounting firm, which are included elsewhere
in this prospectus. The consolidated statements of operations
data for the years ended December 31, 2001 and 2002 and the
consolidated balance sheets data as of December 31, 2001,
2002 and 2003 are derived from our audited consolidated
financial statements not included in this prospectus. The
consolidated statements of operations data for the six months
ended June 30, 2005 and 2006 and the consolidated balance
sheet data as of June 30, 2006 are derived from our
unaudited consolidated financial statements which are included
elsewhere in this prospectus. We have prepared the unaudited
information on the same basis as the audited consolidated
financial statements and have included, in our opinion, all
adjustments, consisting only of normal recurring adjustments,
that we consider necessary for a fair presentation of the
financial information set forth in those statements. Historical
results are not necessarily indicative of the results to be
expected in the future.
Pro forma basic net income (loss) per share attributable to
common stockholders has been calculated assuming the conversion
of all outstanding shares of our preferred stock into
13,801,716 shares of common stock upon the completion of
this offering. Pro forma diluted net income (loss) per share
attributable to common stockholders further includes the
incremental shares of common stock issuable upon the exercise of
stock options and warrants.
During the fourth quarter of 2005, we concluded that it was more
likely than not that we would be able to realize the benefit of
our deferred tax assets in the future. Consequently, we
recognized a non-cash tax benefit of $24.1 million in the
fourth quarter of 2005 resulting primarily from the release of
the entire net deferred tax valuation allowance. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Critical
Accounting Policies and Estimates — Income Taxes”
for a discussion of the uncertainty related to our deferred tax
asset.
(3)
For the year ended December 31, 2005, pro forma basic and
diluted net income per share is higher than basic and diluted
net income per share because the pro forma basic and diluted
calculation assumes the conversion of all preferred stock to
common stock. This has the effect of increasing the net income
allocable to common stockholders for the income that was
allocable to the preferred stockholders who are assumed to have
been converted to common stockholders. This increase in the
numerator of the earnings per share calculation is partially
offset by an increase in the denominator for the assumed
conversion of the preferred stock.
For the six months ended June 30, 2006, because there is a
net loss for the period, there is no impact on the pro forma
earnings per share calculation for income allocable to the
preferred stockholders and the reason that the pro forma basic
and diluted net loss per share is lower than the basic and
diluted net loss per share is entirely due to the assumed
conversion of the preferred stockholders.
You should read the following discussion and analysis in
conjunction with our financial statements and related notes
contained elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of a
variety of factors, including those set forth under “Risk
Factors” and elsewhere in this prospectus.
Overview
We are an Internet-based social expression and personal
publishing service that enables consumers to share, print and
preserve their memories by leveraging our technology-based
platform and manufacturing processes. Today, our primary focus
is on helping consumers manage their memories through the
powerful medium of photos. We provide a full range of products
and services that make it easy, convenient and fun for consumers
to upload, edit, enhance, organize, find, share, create, print
and preserve their digital photos in a creative and thoughtful
manner.
Basis of Presentation
Net Revenues. We generate revenues primarily from
the printing and shipping of photo prints, photo-based products,
such as photo books, cards and calendars, photo-based
merchandise, such as mugs, mouse pads and magnets, and ancillary
products such as frames, photo albums and scrapbooking
accessories. Revenues are recorded net of estimated returns,
promotions redeemed by customers and other discounts. Customers
place orders via our website and pay primarily using credit
cards.
Our print revenues are derived from sales of our photo
processing of digital images, including sales of 4x6 prints, and
the related shipping revenues from these sales. Historically,
average selling prices for prints have declined, and they may
continue to decline in the future.
Our non-print revenues are derived from the sale of photo-based
products, photo-based merchandise and ancillary products, and
the related shipping revenues from these sales. We believe our
products and services are differentiated from other traditional
photo processors by our personalized non-print photo-based
products and merchandise, which are key to attracting and
retaining customers.
Historically, a substantial majority of our revenues have been
derived in the United States. For the six months ended
June 30, 2006 and each of the years ended December 31,2003, 2004 and 2005, approximately 98% of our orders came from
customers with billing addresses in the United States,
representing approximately 98% of our net revenues. We have in
the past generated revenues from photo processing fulfillment
services we provide to other online merchants as well as
professional photographers. For the six months ended
June 30, 2006 and for the years ended December 31,2003, 2004 and 2005, we generated less than 3%, 1%, 4% and 3%,
respectively, of our net revenues from these fulfillment
services.
Our business is subject to seasonal fluctuations. In particular,
we generate a disproportionate amount of our revenues during the
holiday season in the fourth quarter of the calendar year. We
also typically experience increases in revenues during other
shopping-related seasonal events, such as Mother’s Day,
Father’s Day, Halloween and Easter. We anticipate our
revenues will continue to be subject to seasonality and
therefore our financial results will vary significantly from
period to period. Due to the relatively short lead time required
to fulfill orders for our products, usually one to two business
days, order backlog is not material to our business.
To further understand revenue trends, we monitor several key
metrics including:
Average Order Size. Average order size is net revenues
for a given period of time divided by the total number of
customer orders recorded during that same period. We seek to
increase average order size as a means of increasing net
revenues. Average order size has increased on an annual basis
for each year since 2000, and we anticipate that this trend may
continue in the future.
Total Number of Orders. We closely monitor total number
of orders as an indicator of revenue trends. We recognize the
revenues associated with an order when the products have been
shipped, consistent with our revenue recognition policy
discussed in Critical Accounting Policies and Estimates below.
Orders are typically processed and shipped within two business
days after a customer places an order. Total number of orders
has increased on an annual basis for each year since 2000, and
we anticipate that this trend may continue in the future.
Non-Print Revenues as Percentage of Net Revenues. We
strive to increase our non-print revenues as a percentage of net
revenues through the continued introduction and improvement of
innovative quality products and services.
We believe the analysis of these metrics provides us with
important information on our overall revenue trends and
operating results. Fluctuations in these metrics are not unusual
and no single factor is determinative of our net revenues and
operating results.
Cost of Revenues. Cost of revenues consist
primarily of direct materials (the majority of which consists of
paper), payroll and related expenses for direct labor, shipping
charges, packaging supplies, distribution and fulfillment
activities, rent for production facilities, depreciation of
production equipment and third-party costs for photo-based
merchandise. Cost of revenues also includes payroll and related
expenses for personnel engaged in customer service. In addition,
cost of revenues includes any third-party software or patents
licensed, as well as the amortization of capitalized website
development costs. We capitalize eligible costs associated with
software developed or obtained for internal use in accordance
with the American Institute of Certified Public Accountants, or
AICPA, Statement of Position No. 98-1, “Accounting for
the Costs of Computer Software Developed or Obtained for
Internal Use” and Emerging Issues Task Force, or EITF,
Issue No. 00-02,
“Accounting for Website Development Costs.” Costs
incurred in the development phase are capitalized and amortized
in cost of revenues over the product’s estimated useful
life. We anticipate that our cost of revenues will increase in
absolute dollars as we sell additional products but will remain
generally consistent with historical periods on an annual basis
as a percentage of net revenues.
Technology and Development Expense. Technology and
development expense consists primarily of personnel and related
costs for employees and contractors engaged in the development
and ongoing maintenance of our website, infrastructure and
software. These expenses include depreciation of the computer
and network hardware used to run our website and store the
customer data that we maintain, as well as amortization of
purchased software. Technology and development expense also
includes colocation and bandwidth costs. We expect our
technology and development expense will increase in absolute
dollars and will increase slightly from 2004 and 2005 levels as
a percentage of net revenues, and will thereafter remain
generally constant on an annual basis as a percentage of net
revenues.
Sales and Marketing Expense. Sales and marketing
expense consists of costs incurred for marketing programs and
personnel and related expenses for our customer acquisition,
product marketing, business development and public relations
activities. Our marketing efforts consist of various online and
offline media programs, such as
e-mail and direct mail
promotions, the purchase of keyword search terms and various
strategic alliances. We depend on these efforts to attract
customers to our service. We anticipate our sales and marketing
expense will increase in absolute dollars but will remain
generally consistent with historical periods on an annual basis
as a percentage of net revenues.
General and Administrative Expense. General and
administrative expense includes general corporate costs,
including rent for our corporate offices, insurance,
depreciation on information technology equipment and legal and
accounting fees. In addition, general and administrative expense
includes personnel expenses of employees involved in executive,
finance, accounting, human resources, information technology and
legal roles. Third-party payment processor and credit card fees
are also included in general and administrative expense and have
historically fluctuated based on revenues for the period. We
expect our general and administrative expense will increase in
the near to intermediate term in absolute dollars and as a
percentage of net revenues as we incur accounting and legal
expenses associated with public reporting requirements and
compliance with the requirements of the Sarbanes-Oxley Act of
2002, as well as increased costs for maintaining directors’
and officers’ insurance. On a longer-term basis, we
anticipate that our general and administrative expense will
decrease as a percentage of net revenues as we better leverage
our administrative infrastructure.
Interest Expense. Interest expense consists of
interest costs recognized under our capital lease obligations
and for borrowed money.
Other Income (Expense), Net. Other income
(expense), net consists primarily of the interest income on our
cash accounts and the net income (expense) related to changes in
the fair value of our convertible preferred stock warrants under
FASB Staff Position, or
FSP 150-5,
“Issuer’s Accounting under FASB Statement No. 150
for Freestanding Warrants and Other Similar Instruments on
Shares That Are Redeemable” adopted in July 2005. Under
FSP 150-5, the
warrants are subject to re-measurement at each balance sheet
date, and any changes in fair value are recognized as a
component of other income (expense), net.
Income Taxes. Provision for income taxes depends
on the statutory rate in the countries where we sell our
products. Historically, we have only been subject to taxation in
the United States because we have sold almost all of our
products to customers in the United States. If we continue to
sell our products primarily to customers located within the
United States, we anticipate that our long-term future effective
tax rate will be between 38% and 45%, without taking into
account the use of any of our net operating loss carryforwards.
However, we anticipate that in the future we may further expand
our sale of products to customers located outside of the United
States, in which case we would become subject to taxation based
on the foreign statutory rates in the countries where these
sales took place and our effective tax rate could fluctuate
accordingly.
Our fiscal year end for federal and state tax purposes is
September 30. As of December 31, 2005, for federal and
state tax purposes, we had approximately $57.0 million of
federal and $53.0 million of state net operating loss
carryforwards available to reduce future taxable income. These
net operating loss carryforwards begin to expire in 2020 and
2008 for federal and state tax purposes, respectively.
Historically, we have recorded a valuation allowance on our
deferred tax assets, the majority of which relates to net
operating loss tax carryforwards generated before we achieved
profitability. During the fourth quarter of 2005, we concluded
that it was more likely than not that we would be able to
realize the benefit of these deferred tax assets in the future.
Consequently, we recognized a net tax benefit of
$24.1 million in the fourth quarter of 2005 resulting
primarily from the release of the entire net deferred tax
valuation allowance.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States, or GAAP. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues,
costs and expenses and related disclosures. We base our
estimates on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances. In many instances, we could have reasonably used
different accounting estimates,
and in other instances, changes in the accounting estimates are
reasonably likely to occur from period to period. Accordingly,
actual results could differ significantly from the estimates
made by our management. To the extent that there are material
differences between these estimates and actual results, our
future financial statement presentation of our financial
condition or results of operations will be affected.
In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not
require management’s judgment in its application, while in
other cases, management’s judgment is required in selecting
among available alternative accounting standards that allow
different accounting treatment for similar transactions. We
believe that the accounting policies discussed below are
critical to understanding our historical and future performance,
as these policies relate to the more significant areas involving
management’s judgments and estimates.
Revenue Recognition. We generate revenues
primarily from the printing and shipping of prints, photo-based
products, such as photo books, cards and calendars, photo-based
merchandise, such as mugs, mouse pads and magnets, and ancillary
products such as frames, photo albums and scrapbooking
accessories. We generally recognize revenues from product sales
upon shipment when persuasive evidence of an arrangement exists
(typically through the use of a credit card or receipt of a
check), the selling price is fixed or determinable and
collection of resulting receivables is reasonably assured.
Revenues from amounts billed to customers, including prepaid
orders, are deferred until shipment of fulfilled orders. We
provide our customers with a 100% satisfaction guarantee whereby
products can be returned within a
30-day period for a
reprint or refund. We maintain an allowance for estimated future
returns based on historical data. The provision for estimated
returns is included in accrued liabilities. During the years
ended December 31, 2003, 2004 and 2005, returns totaled
less than 1% of net revenues and have been within
management’s expectations. We periodically provide
incentive offers to our customers in exchange for setting up an
account and to encourage purchases. Such offers include free
products and percentage discounts on current purchases.
Discounts, when accepted by customers, are treated as a
reduction to the purchase price of the related transaction and
are presented in net revenues. Production costs related to free
products are included in costs of revenues upon redemption.
Shipping charged to customers is recognized as revenues.
Inventories. Our inventories consist primarily of
paper and packaging supplies and are stated at the lower of cost
on a first-in,
first-out basis or market value. The value of inventories is
reduced by an estimate for excess and obsolete inventories. The
estimate for excess and obsolete inventories is based upon
management’s review of utilization of inventories in light
of projected sales, current market conditions and market trends.
Software and Website Development Costs. We
capitalize eligible costs associated with software developed or
obtained for internal use in accordance with the AICPA Statement
of Position No. 98-1 and EITF Issue
No. 00-2.
Accordingly, payroll and payroll-related costs incurred in the
development phase are capitalized and amortized over the
product’s estimated useful life, which is generally three
years. Costs associated with minor enhancements and maintenance
for our website are expensed as incurred.
Income Taxes. We use the asset and liability
method of accounting for income taxes. Under this method,
deferred tax assets and liabilities are recognized by applying
the statutory tax rates in effect in the years in which the
differences between the financial reporting and tax filing bases
of existing assets and liabilities are expected to reverse. We
have considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for a
valuation allowance against our deferred tax assets. We believe
that all net deferred tax assets shown on our balance sheet are
more likely than not to be realized in the future and no
valuation allowance is necessary. In the event that actual
results differ from those estimates or we adjust those estimates
in future periods, we may need to record a valuation allowance,
which will impact deferred tax assets and the results of
operations in the period the change in made.
Stock-based Compensation Expense. Prior to
January 1, 2006, we accounted for employee stock options
using the intrinsic-value method in accordance with Accounting
Principles Board, or APB, Opinion No. 25, “Accounting
for Stock Issues to Employees,” and related
interpretations, including Financial Accounting Standards Board,
or FASB, Interpretation No. 44, “Accounting for
Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25.” Under this
method, compensation expense was recorded for a stock option
grant only if the deemed fair value of the underlying common
stock exceeded the exercise price on the date of grant.
The fair value of the shares of common stock that underlie the
stock options we have granted has historically been determined
by our board of directors. Because there has been no public
market for our common stock, our board has determined the fair
value of our common stock at the time of grant of the option by
considering a number of objective and subjective factors,
including our sales of preferred stock to unrelated third
parties, our operating and financial performance, the lack of
liquidity of our capital stock, trends in the broader
e-commerce market and
other similar technology stocks, arm’s length, third-party
sales of our common stock and valuations preformed by an
unrelated valuation specialist.
For financial reporting purposes, in connection with the
preparation of the audit of our 2004 financial statements, we
received a valuation report in May 2005 from an unrelated
valuation specialist, Financial Strategies Consulting Group
(“FSCG”), which determined that the value of the
common stock was approximately $5.50 per share at
December 31, 2004. In estimating the valuation of our
common stock, FSCG utilized the Probability-Weighted Expected
Return Method. This method is detailed in the AICPA’s
Practice Guide: Valuation of Privately-Held-Company Equity
Securities Issued as Compensation. This method estimates the
value based on potential values for the enterprise assuming
various outcomes (initial public offering, sale, remaining a
private company and liquidation), with the ultimate value
estimate based on the probability-weighted value of these
potential outcomes.
During May 2005 through November 2005, the board continued to
assess the value of the common stock based upon a number of
factors, including our operating and financial performance,
values of comparable public companies and the likelihood of a
public offering. During this period of time, the board of
directors determined the value of the common stock and the
exercise price of stock options should remain at $5.50 per
share. In November 2005, in conjunction with completing the
Series F financing, the board obtained another valuation
report prepared by FSCG, who determined the common stock value
to be approximately $10.00 per share.
In conjunction with the 2005 audit, in May 2006 we received two
retrospective valuation reports from FSCG as of May 31,2005 and August 31, 2005. These dates coincided with our
June 1, 2005 acquisition of Memory Matrix, Inc. and a large
number of option grants made to our employees on August 18,2005. The valuations as of May 31, 2005 and August 31,2005 were approximately $6.00 and $6.56, respectively.
Based on these retrospective valuations, we reassessed the fair
value of the common stock underlying the stock options granted
to our employees during the ten months ended October 31,2005. As a result, we recorded stock-based compensation expense
in our consolidated statement of operations for the year ended
December 31, 2005 to the extent that these reassessed
values of the underlying common stock exceeded the exercise
price of the stock options as of the initial grant date. This
deferred stock-based compensation expense is amortized over the
vesting period of the stock options and is included as a
component of stock-based compensation.
The following table shows the computation of stock-based
compensation amounts arising from the reassessed fair value of
stock options granted to employees during the year ended
December 31, 2005:
Mar 31,
Jun 30,
Sep 30,
Dec 31,
2005
2005
2005
2005
Stock options granted to employees
1,345,896
621,050
352,761
52,500
Weighted average exercise price per
common share
$
5.00
$
5.50
$
5.50
$
7.39
Weighted average reassessed value
of underlying common shares
$
5.60
$
6.00
$
6.76
$
9.35
Weighted average intrinsic value
per common share
$
0.60
$
0.50
$
1.26
$
1.96
Deferred stock-based compensation
recorded
$
0.8 million
$
0.3 million
$
0.4 million
$
0.1 million
After taking into consideration these reassessed fair values of
our common stock, in June 2006 our board of directors authorized
us to seek from those employees who were granted options in
January 2005 through October 2005 their consent to amend their
options to increase the applicable exercise price from the
initial grant price to the corresponding reassessed value as of
the date of grant. We sought this consent from our employees in
June 2006 to help them avoid potential adverse personal income
tax consequences. On June 29, 2006, as a result of the consents
received from employees, options to purchase
1,789,217 shares of our 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.
The transaction was deemed a modification under SFAS
No. 123R, but did not result in any incremental stock-based
compensation expense in 2005 or 2006. No other terms of the
option grants were modified.
In May 2006, we obtained a valuation report as of March 31,2006, prepared by FSCG, which determined that the value of the
common stock was approximately $10.39 per share. In July
2006, we obtained a valuation report as of June 30, 2006,
prepared by FSCG, which determined that the value of the common
stock was approximately $14.20.
The total unamortized deferred stock-based compensation recorded
for all outstanding option grants made through December 31,2005 was approximately $1.5 million, and is expected to be
amortized as follows: $1.0 million in 2006,
$0.4 million in 2007, $0.1 million in 2008 and the
balance in 2009.
Effective January 1, 2006, we adopted the fair value
recognition provisions of SFAS No. 123R,
“Share-Based Payment,” using the prospective
transition method, which requires us to apply the provisions of
SFAS No. 123R only to new awards granted, and to awards
modified, repurchased or cancelled, after the effective date.
Under this transition method, stock-based compensation expense
recognized beginning January 1, 2006 is based on the
following: (a) the grant-date fair value of stock option
awards granted or modified after January 1, 2006; and
(b) the balance of deferred stock-based compensation
related to stock option awards granted prior to January 1,2006, which was calculated using the intrinsic value method as
previously permitted under APB Opinion No. 25.
For the six months ended June 30, 2006, the total
compensation cost related to stock-based awards granted under
SFAS No. 123R to employees and directors but not yet
recognized was approximately $7.5 million, net of estimated
forfeitures of $0.9 million. This cost will be amortized on
a straight-line basis over a weighted average period of
approximately four years. Amortization in the six months ended
June 30, 2006 was $0.4 million. Net loss per share for
the six months ended June 30, 2006 would have been reduced
by $0.07 per share, net of tax, if we had not adopted
SFAS No. 123R.
Net revenues increased $9.2 million, or 34%, from the six
months ended June 30, 2005 to the six months ended
June 30, 2006. Revenue growth was attributable to the
increase in both print and non-print revenues. Print revenues
increased from $19.1 million for the six months ended
June 30, 2005 to $21.8 million for the six months
ended June 30, 2006, an increase of $2.7 million, or
14%. Print revenues were positively affected by increased sales
volume of 4x8 prints and enlargements and negatively affected by
a decrease in 4x6 print average selling prices due to
competitive pricing pressures, as we reduced the list price of
our 4x6 prints from $0.29 to $0.19 in the fourth quarter of
2005. Non-print revenues increased from $8.2 million for
the six months ended June 30, 2005 to $14.8 million
for the six months ended June 30, 2006, an increase of
$6.6 million or 80%. Non-print revenues were positively
affected by increased sales of photo books, calendars, greeting
cards and photo-based merchandise. Total orders increased from
1,511,000 for the six months ended June 30, 2005 to
2,022,000 for the six months ended June 30, 2006, or 34%.
Average order size remained unchanged at $18 per order for the
six months ended June 30, 2005 and for the six months ended
June 30, 2006.
Cost of revenues increased by $5.3 million, or 40%, from
the six months ended June 30, 2005 to the six months ended
June 30, 2006, driven by the increased volume of shipped
products during this period. Cost of revenues as a percentage of
net revenues increased by 2% to 51% from the six months ended
June 30, 2005 to the six months ended June 30, 2006.
This increase was the result of the decline in 4x6 print average
selling prices, partially offset by the favorable impact of lower
paper prices we negotiated in September 2005, as well as the
reorganization of our workflows to achieve greater efficiencies,
each of which occurred during the third and fourth quarters of
2005.
Our technology and development expense increased by
$3.2 million, or 63%, from the six months ended
June 30, 2005 to the six months ended June 30, 2006.
The increase was attributable to increased personnel and related
costs for employees and consultants involved with website
development and website infrastructure support teams, which
increased by $1.5 million in the six months ended
June 30, 2006, as well as increased third-party hosting
expenses which increased by $0.4 million in the six months
ended June 30, 2006. We also continued to invest in our
website infrastructure hardware to support our continued revenue
growth, which resulted in increased depreciation expense of
$1.1 million for the six months ended June 30, 2006.
In addition, charges from the amortization of deferred
stock-based compensation from employee grants were
$0.2 million in the six months ended June 30, 2005,
compared to $0.3 million in the six months ended
June 30, 2006.
Our sales and marketing expense increased by $3.0 million,
or 59%, from the six months ended June 30, 2005 to the six
months ended June 30, 2006. Personnel and related costs for
employees and consultants increased by $1.1 million and our
customer acquisition and promotion costs increased by
$1.9 million in the six months ended June 30, 2006. In
addition, charges from the amortization of deferred stock-based
compensation from employee grants were $0.1 million in the
six months ended June 30, 2005, compared to
$0.2 million in the six months ended June 30, 2006.
Our general and administrative expense increased by
$2.5 million, or 48%, from the six months ended
June 30, 2005 to the six months ended June 30, 2006.
Personnel and related costs increased by $0.8 million.
While legal fees decreased by $0.7 million from the six
months ended June 30, 2005 to the six months ended
June 30, 2006, accounting fees and consultant expense
increased by $0.7 million and $0.5 million,
respectively, for the same period. Rent and related facilities
charges increased by $0.5 million and recruiting costs
increased by $0.2 million from the six months ended
June 30, 2005 to the six months ended June 30, 2006.
In addition, charges from the amortization of deferred
stock-based compensation from employee grants were
$0.8 million in the six months ended June 30, 2005,
compared to $0.4 million in the six months ended
June 30, 2006. Payment processing fees paid to third
parties increased by $0.3 million during the six months
ended June 30, 2006 due to increased order volumes.
Interest expense increased by $47,000, or 47%, from the six
months ended June 30, 2005 to the six months ended
June 30, 2006, due primarily to interest expense on
additional capitalized lease obligations.
Other income (expense), net increased by $0.4 million or
300%, from the six months ended June 30, 2005 to the six
months ended June 30, 2006, due to larger invested cash
balances and higher interest rates. For the six months ended
June 30, 2006, other income (expense), net also included
$0.1 million of expense related to changes in the fair
value of our convertible preferred stock warrants under FSP
150-5.
The provision for income taxes was $68,000 for the six months
ended June 30, 2005 compared to a benefit of
$2.1 million for the six months ended June 30, 2006
due to changes in our effective tax rate as a result of
releasing our valuation allowance in the fourth quarter of 2005.
Net loss increased by $2.4 million, or 183%, from a loss of
$1.3 million in the six months ended June 30, 2005 to
a loss of $3.7 million in the six months ended
June 30, 2006. This increase was primarily attributable to
our increased cost of revenues of $5.3 million, or 40%,
increased technology and development expense of
$3.2 million, or 63%, increased sales and marketing expense
of $3.0 million, or 59%, and increased general and
administrative expense of $2.5 million, or 48%, from the
six months ended June 30, 2005 to the six months ended
June 30, 2006, partially offset by increased net revenues
of $9.2 million, or 34%, and a higher benefit for income
taxes of $2.0 million, or 2988%, from the six months ended
June 30, 2005 to the six months ended June 30, 2006.
Net revenues increased $29.4 million, or 54%, from 2004 to
2005, attributable to the increase in both print and non-print
revenues. Print revenues increased from $35.6 million in
2004 to $48.7 million in 2005, an increase of
$13.1 million or 37%. Print revenues were positively
affected by increased 4×6 print sales and negatively
affected by a decrease in 4×6 print average selling prices
due to competitive pricing pressures. Non-print revenues
increased from $18.9 million in 2004 to $35.2 million
in 2005, an increase of $16.3 million, or 86%. As a result
of our plan to expand the sale of non-print products and reduce
the dependence on the price competitive print marketplace,
non-print revenue growth of 86% was more than twice the 37%
growth in print revenues. This caused non-print revenue to
increase to 42% of revenues in 2005 from 35% in 2004. 2005
represented the first full year of photo book sales, and we also
added photo-based merchandise to our product offering. Total
orders increased from 2,618,000 in 2004 to 3,650,000 in 2005, or
39%. The overall growth during the period was driven by
increases in average order sizes. Average order size increased
from approximately $21 per order in 2004 to $23 per
order in 2005.
Net revenues increased $23.1 million, or 74%, from 2003 to
2004, attributable to an increase in print revenues and the
addition of new non-print photo-based products. Print revenues
increased from $22.7 million in 2003 to $35.6 million
in 2004, an increase of $12.9 million, or 57%. Print
revenues were positively affected by increased 4×6 print
sales and negatively affected by a decrease in 4×6 print
average selling prices due to competitive pricing pressures.
Non-print revenues increased from $8.7 million in 2003 to
$18.9 million in 2004, an increase of $10.2 million,
or 117%. As a result of our plan to expand the sale of non-print
products and reduce the dependence on the price competitive
print marketplace, non-print revenue growth of 117% was more
than twice the 57% growth in print revenues. This caused
non-print revenue to increase to 35% of revenues in 2005 from
28% in 2004. During 2004, we introduced hardcover and softcover
photo books and began selling a variety of photo-based
merchandise, including mugs and mouse pads. Total orders
increased from 1,691,000 in 2003 to 2,618,000 in 2004, or 55%.
The overall growth during the period was also driven by
increases in average order sizes and revenues from repeat
customers. Average order size increased from approximately
$19 per order in 2003 to $21 per order in 2004.
Cost of revenues increased by $12.1 million, or 48%, from
2004 to 2005, driven by the increased volume of shipped products
during this period. Cost of revenues as a percent of net
revenues decreased by 2% to 44% from 2004 to 2005. This
improvement was driven by labor and production efficiencies
which offset a decline in 4×6 average selling prices.
During the fourth quarter holiday season, we employ a
significant amount of temporary workers through several
temporary staffing agencies, and in 2005, we were able to
negotiate savings in these staffing costs. During 2005, we also
negotiated lower paper prices and reorganized our workflows to
achieve greater efficiencies.
Cost of revenues increased by $10.6 million, or 74%, from
2003 to 2004, driven by the increased volume of shipped products
during this period. The 74% increase in cost of revenues during
2004 matched the 74% increase in net revenues during the same
period. Cost of revenues as a percent of net revenues also
remained the same from 2003 to 2004 at 46% of net revenues. We
were able to offset a decline in 4×6 average selling prices
with improved labor and overhead cost efficiencies.
Our technology and development expense increased
$5.7 million, or 77%, from 2004 to 2005. The increase was
attributable to increased personnel and related costs for
employees and consultants involved with website development and
website infrastructure support teams, which increased by
$2.4 million in 2005, as well as increased third-party
hosting expenses which increased by $0.7 million in 2005.
We also continued to invest in our website infrastructure to
support our continued revenue growth, which resulted in
increased depreciation expense of $1.5 million for 2005. In
addition, charges from the amortization of deferred stock-based
compensation from employee grants were $0.3 million in
2004, compared to $0.8 million in 2005.
Our technology and development expense increased
$2.5 million, or 50%, from 2003 to 2004. The increase was
attributable to increased personnel and related costs for
employees and consultants involved with website development and
website infrastructure support teams, which increased by
$1.0 million in 2004, as well as increased third-party
hosting expenses which increased $0.1 million in 2004. We
also continued to invest in our website infrastructure to
support our continued revenue growth, which resulted in
increased depreciation expense of $0.6 million for 2004. In
addition, charges from the amortization of deferred stock-based
compensation related to employee grants were $32,000 in 2003,
compared to $0.3 million in 2004.
Our sales and marketing expense increased $7.5 million, or
98%, from 2004 to 2005. Personnel and related costs for
employees and consultants increased by $1.6 million in 2005
and our customer acquisition and promotion costs increased by
$5.7 million in 2005 as we increased our online and offline
advertising, survey and research activities. In addition,
charges from the amortization of deferred stock-based
compensation related to employee grants were $0.1 million
in 2004, compared to $0.2 million in 2005.
Our sales and marketing expense increased $3.7 million, or
93%, from 2003 to 2004. Personnel and related costs for
employees and consultants increased by $0.6 million in 2004
and our customer acquisition and promotion costs increased by
$3.0 million in 2004. In addition, charges from the
amortization of deferred stock-based compensation related to
employee grants were $11,000 in 2003, compared to
$0.1 million in 2004.
Our general and administrative expense increased by
$3.5 million, or 35%, from 2004 to 2005. Personnel and
related costs increased by $0.8 million and legal and
accounting costs increased $0.5 million over 2004
expenditures. Recruiting costs increased by $0.5 million
due to increased hiring and depreciation increased
$0.2 million related to our information technology
equipment from 2004 to 2005. In addition, charges from the
amortization of deferred stock-based compensation related to
employee grants were $1.8 million in 2004, compared to
$2.2 million in 2005. Payment processing fees paid to third
parties also increased by $0.9 million in 2005 due to
increased order volumes.
Our general and administrative expense increased by
$4.5 million, or 80%, from 2003 to 2004. We increased our
headcount in our finance organization, which contributed to the
$0.7 million increase in personnel and related costs. Legal
and accounting costs also increased $0.8 million over 2003
expenditures. In addition, charges from the amortization of
deferred stock-based compensation related to employee grants
were $0.1 million in 2003, compared to $1.8 million in
2004. Payment processing fees paid to third parties also
increased by $0.5 million in 2004 due to increased order
volumes.
Interest expense decreased by $0.1 million, or 22%, from
2004 to 2005, due to the repayment of a loan from Monaco
Partners, L.P., which is controlled by James Clark, the Chairman
of our board of directors, in 2004. Interest expense in 2005
also included amounts representing interest expense on
capitalized lease obligations and interest expense and related
loan fees for a term loan entered into and repaid during 2005.
Interest expense increased by $79,000, or 20%, from 2003 to
2004, due to amounts representing interest expense on
capitalized lease obligations, as well as the amortization of
warrants issued to Monaco Partners, L.P. that was recorded as a
discount to the loan from Monaco Partners, L.P.
Other income (expense), net decreased by $0.2 million, or
227%, from 2004 to 2005, due to larger invested cash balances
and higher interest rates, offset by $0.5 million of
expense related to changes in the fair value of our convertible
preferred stock warrants under FSP 150-5.
Other income, net increased by $72,000 from 2003 to 2004, due to
larger invested cash balances and higher interest rates.
In 2003 and 2004, we recorded a provision for income taxes that
was principally attributable to California state taxes and other
minimum corporate taxes. In those periods, we offset our
remaining taxable income through the utilization of net
operating loss carryforwards. In the fourth quarter of 2005, we
determined that it would be more likely than not that the
cumulative net operating losses and other deferred tax benefits
would be recoverable by us, creating a $24.1 million income
tax benefit due to the deferred tax asset recorded on our
balance sheet at the end of 2005.
Net income (loss) increased by $25.2 million, or 680%, from
$3.7 million in 2004 to $28.9 million in 2005.
Included in 2005 net income was a $24.1 million non-cash
tax benefit due to releasing our net deferred tax valuation
allowance in the fourth quarter of 2005. We expect that our
long-term future effective tax rate will be between 38% and 45%.
Net income for 2005 also increased by $0.4 million for a
cumulative effect of a change in accounting principle related to
the adoption of FSP 150-5 in July 2005. As a result of the
tax benefit, the 2005 net income results are not indicative of
future results of operations. We believe that income before
income taxes and cumulative effect of change in accounting
principle is relevant and useful information to assist investors
in comparing our performance between 2005 and 2004. Income
before income taxes and cumulative effect of change in
accounting principle increased by $0.5 million, or 12%,
from $4.0 million in 2005 to $4.4 million in 2006.
This increase was primarily attributable to our increased net
revenues of $29.4 million, or 54%, from 2004 to 2005,
partially offset by increased cost of revenue of
$12.1 million, or 48%, increased technology and development
expense of $5.7 million, or 77%, increased sales and
marketing expense of $7.5 million, or 98%, and increased
general and administrative expense of $3.5 million, or 35%,
from 2004 to 2005.
Net income (loss) increased by $1.7 million, or 81%, from
$2.0 million in 2003 to $3.7 million in 2004. Income
before income taxes and cumulative effect of change in
accounting principle increased by $1.9 million, or 88%,
from $2.1 million in 2003 to $4.0 million in 2004.
This increase was primarily attributable to our increased net
revenues of $23.1 million, or 74%, from 2003 to 2004,
partially offset by increased cost of revenue of
$10.6 million, or 74%, increased technology and development
expense of $2.5 million, or 50%, increased sales and
marketing expense of $3.7 million, or 93%, and increased
general and administrative expense of $4.5 million, or 80%,
from 2003 to 2004.
The following tables set forth our unaudited quarterly
consolidated statements of operations data and our unaudited
statements of operations data as a percentage of net revenues
for each of the ten quarters in the period ended June 30, 2006.
In management’s opinion, the data has been prepared on the
same basis as the audited consolidated financial statements
included in this prospectus, and reflects all necessary
adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of this data. The results of
historical periods are not necessarily indicative of the results
of operations for a full year or any future period.
We restated our income tax benefit for the quarter ended
March 31, 2006 from $874,000 to $977,000 to correct for
errors in the calculation of our deferred tax assets and
liabilities and our interim tax rate. As a result of this
restatement, basic and diluted net loss per share for the
quarter ended March 31, 2006 were also restated from
$(0.44) to $(0.41).
For the Three Months Ended,
Mar 31,
Jun 30,
Sep 30,
Dec 31,
Mar 31,
Jun 30,
Sep 30,
Dec 31,
Mar 31,
Jun 30,
2004
2004
2004
2004
2005
2005
2005
2005
2006
2006
(As restated)
(In thousands, except per share amounts)
Consolidated Statements of
Operations Data:
Revenues, net
$
7,761
$
9,180
$
11,587
$
25,971
$
13,156
$
14,115
$
15,610
$
41,021
$
16,883
$
19,637
Cost of revenues
3,604
4,230
5,321
11,723
6,446
6,804
6,809
16,882
8,749
9,756
Gross profit
4,157
4,950
6,266
14,248
6,710
7,311
8,801
24,139
8,134
9,881
Operating expenses:
Technology and development(1)
1,509
1,438
1,981
2,505
2,311
2,755
3,708
4,378
3,983
4,271
Sales and marketing(1)
1,103
905
1,761
3,936
2,275
2,880
3,755
6,343
3,693
4,504
General and administrative(1)
1,492
1,835
2,594
4,205
2,818
2,372
2,802
5,665
3,397
4,301
Income (loss) from operations
53
772
(70
)
3,602
(694
)
(696
)
(1,464
)
7,753
(2,939
)
(3,195
)
Interest expense
(125
)
(104
)
(98
)
(144
)
(54
)
(47
)
(83
)
(183
)
(78
)
(70
)
Other income (expense), net
8
14
23
36
65
66
(103
)
(131
)
475
49
Income (loss) before income taxes
and cumulative effect of change in accounting principle
(64
)
682
(145
)
3,494
(683
)
(677
)
(1,650
)
7,439
(2,542
)
(3,216
)
Benefit (provision) for income taxes
—
(16
)
—
(242
)
—
68
(68
)
24,060
977
1,123
Net income (loss) before cumulative
effect of change in accounting principle
$
(64
)
$
666
$
(145
)
$
3,252
$
(683
)
$
(609
)
$
(1,718
)
$
31,499
$
(1,565
)
$
(2,093
)
Cumulative effect of change in
accounting principle
—
—
—
—
—
—
442
—
—
—
Net income (loss)
$
(64
)
$
666
$
(145
)
$
3,252
$
(683
)
$
(609
)
$
(1,276
)
$
31,499
$
(1,565
)
$
(2,093
)
Net income (loss) allocable to
common stockholders
$
(64
)
$
—
$
(145
)
$
333
$
(683
)
$
(609
)
$
(1,276
)
$
6,372
$
(1,565
)
$
(2,093
)
Net income (loss) per common share:
Basic
$
(0.04
)
$
—
$
(0.06
)
$
0.12
$
(0.23
)
$
(0.19
)
$
(0.38
)
$
1.78
$
(0.41
)
$
(0.54
)
Diluted
(0.04
)
—
(0.06
)
0.09
(0.23
)
(0.19
)
(0.38
)
1.23
(0.41
)
(0.54
)
Shares used in computing net income
(loss) per share attributable to common stockholders:
Income (loss) before income taxes
and cumulative effect of change in accounting principle
0
%
7
%
(1
)%
13
%
(5
)%
(5
)%
(12
)%
19
%
(15
)%
(17
)%
Benefit (provision) for income taxes
0
%
0
%
(0
)%
(1
)%
0
%
0
%
0
%
59
%
6
%
6
%
Net income (loss) before cumulative
effect of change in accounting principle
0
%
7
%
(1
)%
12
%
(5
)%
(5
)%
(12
)%
78
%
(9
)%
(11
)%
Cumulative effect of change in
accounting principle
0
%
0
%
0
%
0
%
0
%
0
%
3
%
0
%
0
%
0
%
Net income (loss)
0
%
7
%
(1
)%
12
%
(5
)%
(5
)%
(9
)%
78
%
(9
)%
(11
)%
Our quarterly results of operations have varied significantly in
the past and we expect our quarterly operating results to vary
significantly in the future. Our business is seasonal, with a
high proportion of our revenues and operating cash flows
generated during the holiday season in the fourth quarter of the
calendar year when people take more pictures and order more
photo-based products and merchandise. We incur significant
additional expenses in the period leading up to the fourth
quarter holiday season in anticipation of higher sales volume in
that period, including expenses related to the hiring of
temporary workers to meet our seasonal needs, additional
inventory and equipment purchases and increased advertising.
During the fourth quarter, we also incur significant additional
sales and marketing costs to promote our offerings for the
holidays and attract customers. Our quarterly revenues and
results of operations are also affected by factors such as the
timing of expenditures and the mix of products and services sold.
The increases in our net revenues for the quarters ended
December 31, 2004 and 2005 are attributable to our overall
growth as well as the seasonality of our business related to the
fourth quarter holiday season. In the quarters ended
March 31, 2005 and March 31, 2006, our cost of
revenues was higher as a percentage of net revenues than in the
prior quarters due to the decline in 4x6 print average selling
prices as well as increased depreciation from production
equipment acquired during the preceding quarter. In the fourth
quarter of 2004, we recorded $0.8 million of stock-based
compensation expense in general and administrative expense
related to a transition agreement with an executive and a
settlement agreement with a former employee. In the fourth
quarter of 2005, we recorded $1.0 million of stock-based
compensation expense in general and administrative expense
related to a transition agreement with another executive. In the
fourth quarter of 2005, we determined that it would be more
likely than not that our cumulative net operating losses and
other deferred tax benefits would be recoverable by us, creating
a $24.1 million income tax benefit. In the second quarter
of 2006, our general and administrative costs increased, in
part, due to $0.6 million of fees incurred for the
completion of our 2005 financial statement audit.
In the third quarter of 2005, we adopted
FSP 150-5. FSP
150-5 affirms that the outstanding warrants to purchase our
common stock are subject to the requirements in
SFAS No. 150, regardless of the timing of the
redemption feature or the redemption price, and requires us to
classify these warrants on our preferred stock as liabilities
and adjust our warrant instruments to fair value at each
reporting period. We recorded a $442,000 cumulative charge for
adoption as of July 1, 2005, reflecting the fair value of
the warrants as of that date, and recorded $159,000, $304,000,
$(122,000) and $249,000 of additional expense in other income
(expense), net in the quarters ended September 30, 2005,
December 31, 2005, March 31, 2006 and June 30,2006, respectively, to reflect the increase in fair value of the
warrants.
Our results of operations for any historical period are not
necessarily indicative of results of operations for any future
period.
Historically we have financed our operations and capital
expenditures through operations, private sales of preferred
stock, lease financing and the use of bank and related-party
loans. We had cash and cash equivalents of $24 million as
of June 30, 2006, a decrease from $39.2 million as of
December 31, 2005. The decrease in our cash and cash
equivalents as of June 30, 2006 was due primarily to the
payment of our seasonally high accounts payable and accrued
liabilities balances at December 31, 2005. In January 2006,
we also made a $1.0 million payment pursuant to an
intellectual property settlement and license agreement. The
December 31, 2005 cash balance represented an increase of
$25.4 million from the December 31, 2004 cash balance
of $13.8 million. The increase in cash as of
December 31, 2005 was primarily attributable to the
issuance of shares of our Series F preferred stock for net
proceeds of $19.8 million in November 2005.
Our industry is competitive and has recently endured periods of
intense price competition. Because we plan to finance our
operations and capital expenses largely through our operations,
and because our results of operations are sensitive to the level
of competition we face, increased competition could adversely
affect our liquidity and capital resources. Increased
competition could do so both by reducing our revenues and net
income, as a result of reduced sales, reduced prices and
increased promotional activities, among other factors, as well
as by requiring us to spend cash on advertising and marketing in
an effort to maintain or increase market share in the face of
such competition. In addition, we must increase many of our
expenses, including some capital expenses and some sales and
marketing expense, in advance of anticipated higher future
revenues. However, such increased expenses, while intended to
support anticipated increases in future revenues, must be funded
from current capital resources or from borrowings or equity
financings. As a result, our ability to grow our business
relying largely on funds from our operations is sensitive to
competitive pressures and other risks relating to our liquidity
or capital resources. We have incorporated the strategies and
expenses associated with targeting online customers overseas in
our plans and believe they will be similar to those we have had
in North America.
We anticipate capital expenditures of $30 million to
$35 million in the second half of 2006 and 2007,
approximately 50% of which we expect will be used to add
additional manufacturing capacity. We expect that such capital
expenditures will increase our production capacity and help
enable us to respond more quickly and efficiently to customer
demand. We believe that such capital expenditures will have a
positive effect on our results of operations if demand increases
in line with increases in our production capacity. However,
these capital expenditures, taken alone, will have a negative
effect on our results of operations if demand does not increase
as we expect, and will have a negative effect on our results of
operations in the short term if demand does not increase
simultaneously, as we expect, with the capital expenditures
spent to support increased demand.
Operating Activities. For the six months ended
June 30, 2006, net cash used in operations of
$8.1 million resulted from a net loss of $3.7 million,
which was offset by $4.6 million of depreciation and
amortization expense and $0.9 million of non-cash
amortization of stock-based compensation. In addition, for the
six months ended June 30, 2006, cash was used in operating
activities to fund accounts payable and accrued liabilities of
$8.6 million resulting from seasonally high balances at
December 31, 2005 related to our increased purchasing for
the holiday season.
In 2005, net cash provided from operating activities of
$18.6 million resulted from net income of
$28.9 million that was adjusted for $6.2 million of
depreciation and amortization and $3.3 million of non-cash
amortization of stock-based compensation. In addition, net cash
from operating activities increased due to a $4.1 million
increase in accounts payable and accrued liabilities due to
seasonally high balances at December 31, 2005 related to
increased purchasing for the fourth quarter holiday season.
Accounts payable and accrued liability balances were higher as
of December 31, 2005 compared to as of December 31,2004 due to higher sales in the 2005 fourth quarter holiday
season.
In 2004, net cash provided from operating activities of
$13.1 million resulted from net income of $3.7 million
that was adjusted for $3.8 million of depreciation and
amortization and $2.2 million of non-cash amortization of
stock-based compensation. In addition, net cash from operating
activities increased due to a $2.6 million increase in
accounts payable and accrued liabilities, a result of seasonally
high balances at December 31, 2004 related to increased
purchasing for the fourth quarter holiday season. Accounts
payable and accrued liability balances were higher as of
December 31, 2004 compared to as of December 31, 2003
due to higher sales in the 2004 fourth quarter holiday season.
Investing Activities. For the six months ended
June 30, 2006, cash used in investing activities was
$6.3 million for capital expenditures for computer and
network hardware to support our website infrastructure and
information technology computer hardware, as well as capitalized
website development costs related to projects that were placed
into service.
In 2004 and 2005, cash used in investing activities was
$7.4 million and $10.6 million, respectively,
primarily from the acquisition of computer and network hardware
to support our website
infrastructure and production equipment for our manufacturing
and production operations at our Hayward, California facilities.
We expect to have ongoing capital expenditure requirements to
support our growing website infrastructure and to meet
production and manufacturing requirements. We expect capital
expenditures to be between $30 million and $35 million
in the second half of 2006 and through 2007.
Financing Activities. For the six months ended
June 30, 2006, we used $0.7 million primarily for the
payment of capitalized lease obligations.
In 2005, we generated cash of $17.4 million, primarily the
result of receiving net proceeds of $19.8 million from the
sale of our Series F preferred stock in November 2005. This
increase in cash was offset by $2.4 million in principal
payments on capital lease obligations.
In 2004, we used $2.6 million of cash, which was due to the
repayment of a $2.5 million loan from Monaco Partners and
$0.5 million in principal payments on capital lease
obligations.
Contractual Obligations
We lease website infrastructure computer and network hardware,
production equipment, information technology equipment and
software under various capital leases that expire through the
year 2009. We also lease office space in Redwood City,
California and production facilities in Hayward, California
under various non-cancelable operating leases that expire
between 2007 and 2010. We also have a colocation agreement with
a third-party hosting facility that expires in 2006. As a result
of our growth strategies, we believe that our liquidity and
capital resources requirements will grow in absolute dollars but
will be generally consistent with historical periods on an
annual basis as a percentage of net revenues. During 2005, all
of our capital expenditures were made in cash. During the year,
we utilized a term loan to supplement liquidity which we repaid
in full prior to year end. We anticipate leasing additional
office space, production facilities and hosting facilities,
consistent with our historical business model.
The following are contractual commitments at December 31,2005 associated with lease obligations and contractual
commitments:
Less than
More than
Total
1 Year
1-3 Years
3-5 Years
5 Years
(In thousands)
Contractual
Obligations
Capital lease obligations
$
5,626
$
1,669
$
3,474
$
483
$
—
Operating lease obligations
5,997
1,132
2,652
2,213
—
Purchase obligations(1)
2,820
2,820
—
—
—
Preferred stock warrant liability(2)
1,535
—
—
—
1,535
Total contractual obligations
$
15,978
$
5,621
$
6,126
$
2,696
$
1,535
(1)
Purchase obligations includes commitments under non-cancellable
marketing agreements, software patent license agreements and
third-party hosting services. In January 2006, we entered into a
three-year non-cancelable agreement with a new third party for
colocation and hosting services that expires in 2009. The
purchase obligations do not reflect the new colocation agreement
as it was entered into subsequent to December 31, 2005. As
a result of this new colocation agreement, our purchase
obligations increased by $4.3 million, representing an
increase of $1.0 million due less than one year,
$3.1 million due in one to three years, and
$0.2 million due in three to five years.
(2)
Upon the completion of this offering, all of our warrants to
purchase shares of preferred stock will convert into warrants to
purchase common stock and, accordingly, the liability will be
reclassified as common stock and additional paid-in capital.
Other than the obligations, liabilities and commitments
described above, we have no significant unconditional purchase
obligations or similar instruments. We are not a guarantor of
any other entities’ debt or other financial obligations.
We anticipate that our current cash and cash equivalents
balances and cash generated from operations, along with the net
proceeds we receive from this offering will be sufficient to
meet our working capital requirements, capital lease
obligations, expansion plans and technology development projects
for at least the next 18 months. The adequacy of these
resources to meeting our liquidity needs beyond that period will
depend on our growth, operating results and the capital
expenditures required to meet possible increased demand for our
products. If we require additional capital resources to grow our
business internally or to acquire complementary technologies and
businesses at any time in the future, we may seek to sell
additional equity. The sale of additional equity could result in
additional dilution to our stockholders. Financing arrangements
may not be available to us, or may not be in amounts or on terms
acceptable to us.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited
purposes. In addition, we do not have any undisclosed borrowings
or debt, and we have not entered into any synthetic leases. We
are, therefore, not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had
engaged in such relationships.
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs, an amendment of ARB No. 43,
Chapter 4” (“SFAS No. 151”).
SFAS No. 151 amends the guidance in ARB No. 43,
Chapter 4, to clarify the accounting for abnormal amounts
of idle facility expense, handling costs and wasted material
(spoilage). Among other provisions, the new rule requires that
such items be recognized as current-period charges, regardless
of whether they meet the criterion of “so abnormal” as
stated in ARB No. 43. The statement was adopted as of
January 1, 2006, and did not have a material effect on our
financial position, results of operations or liquidity.
In May 2005, the FASB issued SFAS No. 154,
“Accounting Changes and Error Corrections,” which
replaces Accounting Principles Board Opinion, or APB,
No. 20, “Accounting Changes,” and
SFAS No. 3, “Reporting Accounting Changes in
Interim Financial Statements”
(“SFAS No. 154”). This statement requires
retrospective application, unless impracticable, for changes in
accounting principles in the absence of transition requirements
specific to newly adopted accounting principles. The provisions
of SFAS No. 154 will be effective for us beginning on
September 1, 2006. We are currently evaluating the impact,
if any, of this statement on our financial position and results
of operations.
In November 2005, the FASB issued FSP SFAS 115-1 and
SFAS 124-1, “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments”
(“FSP 115-1 and
124-1”), which
clarifies when an investment is considered impaired, whether the
impairment is other than temporary, and the measurement of an
impairment loss. It also includes accounting considerations
subsequent to the recognition of an other-than-temporary
impairment and requires certain related disclosures. FSP
115-1 and
124-1 was effective for
all reporting periods beginning after December 15, 2005 and
did not have a material impact on our financial statements.
In June 2006, the FASB issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes,”
(“FIN 48”), which prescribes detailed guidance
for the financial statement recognition, measurement and
disclosure of uncertain tax positions recognized in an
enterprise’s financial statements in accordance with FASB
Statement No. 109, “Accounting for Income
Taxes.”Tax
positions must meet a more-likely-than-not recognition threshold
at the effective date to be recognized upon the adoption of
FIN 48 and in subsequent periods. FIN 48 will be
effective for fiscal years beginning after December 15,2006, and the provisions of FIN 48 will be applied to all
tax positions accounted for under Statement No. 109 upon
initial adoption. The cumulative effect of applying the
provisions of this interpretation will be reported as an
adjustment to the opening balance of retained earnings for that
fiscal year. We are currently evaluating the impact, if any, of
FIN 48 on our financial statements.
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 current investments are classified as cash
equivalents and carried at cost, which approximates 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, 2004 and 2005, 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.
Inflation. We do not believe that inflation has
had a material effect on our business, financial condition or
results of operations. If our costs were to become subject to
significant inflationary pressures, 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.
We are an Internet-based social expression and personal
publishing service that enables consumers to share, print and
preserve their memories by leveraging our technology,
manufacturing, web-design and merchandising capabilities. Today,
our primary focus is on helping consumers manage their memories
through the powerful medium of photos. We provide a full range
of products and services that make it easy, convenient and fun
for consumers to upload, edit, enhance, organize, find, share,
create, print and preserve their digital photos in a creative
and thoughtful manner.
Consumers use our products and services to stay connected to
their friends and family, to organize their memories in a single
location, to tell stories and to preserve their memories for
themselves and their children. Our customers purchase physical
products both for their own personal use and for giving
thoughtful and personalized gifts such as photo books,
calendars, greeting cards and other photo-based products and
merchandise.
We currently generate revenues by selling high-quality prints,
ranging in size from wallet to jumbo sized 20x30 enlargements
and photo-based products such as professionally-bound photo
books, personalized calendars and greeting cards. We manufacture
all of these items in our Hayward, California manufacturing
facility. By controlling the production process in this
facility, we are able to ensure high-quality products, maintain
a favorable cost structure and ensure timely shipment to
customers, even during peak demand. Additionally, we sell a
variety of photo-based merchandise that is currently
manufactured for us by third parties, such as mugs, mouse pads,
coasters, tote bags, desk organizers, puzzles, playing cards,
multi-media DVDs, magnets and keepsake boxes, and ancillary
products, such as frames, photo albums and scrapbooking
accessories.
Our high-quality products and services and our online user
experience, together with our focus on continuous innovation,
have earned us numerous third-party accolades and, more
importantly, allowed us to establish a premium brand. We believe
that we realize the benefits of a premium brand through high
customer loyalty, low customer acquisition costs and premium
pricing.
Our customers are a central part of our business model. They
generate most of the content on our service by uploading their
photos and storing their memories. In addition, they share their
photos electronically with their friends and families, extending
and endorsing our brand and creating a sense of community.
Finally, by giving Shutterfly branded products to colleagues,
friends and loved ones throughout the year, customers reinforce
the Shutterfly brand. Through these various activities, our
customers create a viral network of new users and customers.
In addition to driving lower customer acquisition costs through
viral marketing, our customers provide input on new features and
functionalities. Close, frequent customer interactions, coupled
with significant investments in sophisticated customer
relationship management, or CRM, capabilities, enable us to
fine-tune and tailor our promotions and website presentation to
specific customer segments. Consequently, customers are
presented with a highly personalized Shutterfly shopping
experience, which helps foster a unique and deep relationship
with our brand.
We have experienced rapid growth since launching our service in
December 1999. Since inception, we have fulfilled more than
12 million orders, sold approximately 370 million
prints and stored approximately one billion of our
consumers’ photos in our image archives. According to
industry sources, in June 2006, Shutterfly.com had approximately
4.1 million unique visitors.
Our vision is to make the world a better place by helping people
share life’s joy. Our mission is to build an unrivaled
service that enables deeper, more personal relationships between
our customers and those who matter most in their lives.
We believe that people have an intrinsic desire for social
expression, as they wish to capture and share their experiences
and pass them on to future generations. Since the beginning of
humankind, people have shared detailed stories of their lives
through visual expression. Today, with the evolution of digital
cameras and technology, millions of people around the world are
capturing their memories and communicating in deeper, more
meaningful ways.
We believe people will continue to take more pictures of
important moments in their lives across various touch points
throughout the year, including vacations, weddings, birthdays,
graduations, family reunions and holidays. Our products and
services make sharing, printing and preserving those memories
easy, convenient and fun, and allow for our customers to be more
thoughtful and creative with their memories. As our customers
share these joyous memories, either digitally through our
sharing service or physically through giving personalized gifts,
they are enhancing their personal relationships, creating more
joy in the world and making the world a better place.
Industry Overview
Historically, preserving photos and creating original,
thoughtful compilations of memories was a difficult, expensive,
manual, time-consuming and often inconvenient process for
consumers. As a result of these constraints, the need for easy,
convenient, versatile, affordable and trusted online photo
services has emerged.
Until the widespread adoption of the Internet and digital
cameras, there were significant inefficiencies and quality
limitations associated with capturing, developing, processing,
storing, editing and sharing images. Photos had to be stored in
physical form and were vulnerable to deterioration, destruction
or loss. Most people chose the limited option of storing their
4x6 prints in shoeboxes or simple photo albums because
photography-related markets — including film
processing, photo printing and scrapbooking — either
did not exist or were relatively distinct. In particular,
convenient options for photo production, storage and sharing
were very limited; consumers had to settle for ordering
duplicate 4x6 prints from either mail-order or local processing
labs with varied capabilities and often poor quality control.
Furthermore, the “shoebox” approach created
significant difficulties for consumers in organizing their
photos and limited their ability to be thoughtful and creative
with their memories. The photo-related industries had not found
a way to capitalize on the public’s need to preserve
memories across generations in a secure, convenient, creative
and engaging manner. Despite these limitations, the
photo-finishing market was more than a $6 billion industry
in 2000.
Internet and digital photo-based technology enables consumers to
create an archive of memories that extends beyond photos to
include highly personalized, more engaging products and services
that can be protected and preserved for future generations. We
believe that the key forces driving the expansion of the market
for these products and services are:
•
Proliferation of digital cameras. The growing use of
digital cameras, largely driven by price decreases, has
increased the demand for online photo-printing services.
Industry sources estimate that in 2005, worldwide shipments of
digital cameras reached approximately 94 million units, a
27% increase from the approximately 74 million units
shipped in 2004. The United States accounted for more than
20 million of those units shipped in 2005, with the
penetration of digital cameras reaching nearly half of U.S.
households.
•
Penetration of high-speed data connectivity.
High-bandwidth, high-speed Internet access has spurred the
integration of the Internet into daily life and provides
consumers with improved performance and speed for sharing
information, especially large files such as digital
images. Industry sources estimate that by the end of 2006, there
will be more than 1 billion Internet users worldwide.
Another industry source estimates that in 2004, nearly
204 million Americans, representing approximately 75% of
the U.S. population, had access to the Internet in their homes.
In addition, more Internet users now have high-speed Internet
access. Industry sources estimate that by the end of 2006,
approximately 63% of all online U.S. households will have
broadband Internet connectivity.
•
Increasing convenience and quality of online photo
services. Online photo services provide multiple advantages
over at-home or retail printing. Although it enables
instantaneous printing, at-home photo printing requires an
investment in a printer, photo paper and ink, resulting in a
much higher cost per print. In addition, the quality rendered is
usually inferior compared to commercially produced prints.
Retail printing, while offering higher quality than at-home
printing, requires the consumer to make a trip to the retail
establishment to pick up his or her prints. Both at-home and
retail printing can produce prints of inconsistent quality, have
a limited variety of photo-based products and few or no
personalization options, and require the consumer to handle
shipping or delivery of the product to the final recipient,
often with additional costs in time and money. In contrast,
online photo services can conveniently provide a wide variety of
customized, high-quality photo-based products delivered anywhere
directly to consumers’ doorsteps.
•
Growing consumer desire to find an easy, hassle-free way to
generate personalized content. Consumers are interested in
creating highly customized and personalized photo-based products
and merchandise to preserve their precious memories, express
their creativity and make gift giving more personal and
thoughtful. Improvements in software and editing tools have
enabled consumers to modify their photos quickly and easily
using a personal computer. Consumers are now able to create
digital compilations of memories that were previously only
possible through a physical and more time-consuming process.
•
Participation in online communities. Consumers have
increasingly become comfortable with using the Internet as a
forum for sharing and publishing information in open or
permission-based networks. Many of the most popular online
communities include user generated rich-media content like
photos and videos because of the inherent power that visual
content has to communicate beyond the written word.
Addressable Markets
Digital cameras, digital image processing and the Internet have
dramatically changed the photo-related services market, and have
created entirely new ways for consumers to capture, edit,
enhance, organize, find, share, create, print and preserve
images. In particular, the range and quality of printed photos,
photo-based products, photo-based merchandise and ancillary
products has expanded and improved significantly, while
associated production costs and the time required to create this
output have decreased dramatically. Consequently, companies like
Shutterfly are now addressing a wide variety of consumer needs
and multiple, large markets in ways not possible with earlier
technology.
We currently address several adjacent markets related to
consumers’ desire to be thoughtful and creative with their
memories. These include, but are not limited to:
•
Photo prints. Industry sources estimate that the
worldwide market for digital photo prints was approximately
$38 billion in 2005, growing to approximately
$107 billion in 2009, and the U.S. market for digital
photo prints was approximately $10 billion in 2005, growing
to approximately $30 billion in 2009. In addition, industry
sources predict that in the United States, photos ordered over
the Internet for mail delivery will grow from approximately
$424 million in 2005 to approximately $1.9 billion in
2009.
Greeting cards. According to the Greeting Card
Association’s website, U.S. consumers purchase
approximately 7 billion greeting cards each year,
generating nearly $7.5 billion in retail sales. More than
90 percent of all U.S. households buy greeting cards,
with the average household purchasing 30 individual cards per
year. This website also reports that nine out of ten Americans
say they look forward to receiving personal letters and greeting
cards because cards allow them to keep in touch with friends and
family and make them feel they are important to someone else.
•
Scrapbooks. According to a 2004 survey by Creating
Keepsakes and Craftrends magazine, the U.S. scrapbook
industry was approximately $2.55 billion in 2004, up 27.8%
from 2001. Additionally, approximately 61% of scrapbookers have
at least a college degree and spend almost three hours a week
assembling their memories into scrapbooks.
•
Calendars. In a 2002 guide published by the Calendar
Marketing Association, it estimated that 500 million
calendars are produced annually in the United States and that
approximately 98% of American households have at least one
calendar.
•
Photo-based merchandise. Photo-based merchandise is a
substantial market opportunity that includes any product that
can be customized with the imprint of a digital image.
Photo-based merchandise includes, but is not limited to, mugs,
mouse pads, bags, puzzles, playing cards and apparel.
The addressable market for our products and services includes
every person who enjoys the memories created by digital
photographic devices such as cameras, camera cell phones or
camcorders. Although photofinishing products and services are
purchased by a broad consumer base, we believe that women, in
particular, play a key role in many photo-based purchasing
decisions. The U.S. Census Bureau reports that there, were
approximately 42 million women age 25-44 in 2005, and,
according to industry sources during 2002, more than 85% of
women 18 years and older identified themselves as the
principal shopper in their household. Securing the loyalty of
this core consumer base represents a sizable market opportunity.
Value for Our Customers
Creating value for our customers is the basis for our success.
We offer customers easy, convenient and fun ways to:
•
share and preserve memories for family, friends and themselves;
•
organize all of their photos in a single, safe and easily
accessible location;
•
maintain emotional connections to friends and family, despite
being time-constrained, through thoughtful and personal
photo-based communications and gifts; and
•
achieve satisfaction and self-expression through creativity and
telling stories with photos.
We accomplish this through providing the following benefits to
our customers:
Broad offering. We offer a wide variety of premium
products to customers, including prints, photo-based products
ranging from custom greeting cards to photo books, photo-based
merchandise ranging from mugs to mouse pads, and a broad
assortment of high-quality ancillary products such as frames,
photo albums and scrapbooking accessories. In addition, we
provide a number of valuable tools and services, such as the
ability to upload and edit photos online, share photos with
friends and family and store an unlimited number of photos on
our system at no cost. With many creative options from which to
choose, we enable customers to become engaged in the Shutterfly
experience and feel a sense of pride in their creations.
Premium brand. We have built strong relationships with
our customers who trust us to preserve and protect their photos
in a central photo repository. We enable customers to enhance,
share and make projects with their photos at their convenience.
Our focus on ease of use, image
quality, secure photo storage, high-quality products and
first-rate packaging has established Shutterfly as a premium
brand. Our customers have grown to expect the best quality and
service from us. This trust is maintained by fast, consistent
fulfillment times, responsive customer service and continuous
innovation.
Customer-focused approach. The entire Shutterfly customer
experience reflects our customer-centered approach. Membership
is free and offers customers the ability to upload, edit, store
and share an unlimited number of photos. Membership is not
required to view friends’ and family’s shared
pictures, which can be viewed with a simple click. We
conveniently mail orders to our customers’ homes or
offices, or directly to a gift recipient. We also offer a
year-round direct-mail greeting card service where customers
upload their electronic address books to Shutterfly and we mail
their cards and party invitations on their behalf. We take
special care to focus on our customers’ requests for new
features and functionality, products and services.
The Shutterfly Solution
We have developed a portfolio of products and services along
with specialized manufacturing capabilities that allow us to
offer consumers an easy, convenient and fun way to enjoy, share
and preserve their memories. We satisfy traditional consumer
needs — such as photo printing, storing and
sharing — and also introduce consumers to new forms of
communication and creative expression through our website
features and functionality, photo prints, photo-based products,
photo-based merchandise and ancillary products. We believe that
many people are intimidated by the process of creating
photo-based products or merchandise or fear that it will take
too much work. We believe that we have removed much of the
difficulty and intimidation of the process and have made it easy
and enjoyable. In addition to these consumer benefits, we
believe that our business model is supported by the following
characteristics:
Viral network effect. We benefit from a viral network in
several ways. When our existing customers upload and share their
personal memories through photos, they are providing compelling
user-generated content that attracts their friends and family to
our website, thus enlarging our network of users and potential
customers. This implicit endorsement, coupled with user-friendly
policies, such as not requiring share recipients to register to
view pictures, reinforces our trusted brand and leads to lower
customer acquisition costs. In addition, as our customers create
and give thoughtful and unique physical gifts such as greeting
cards, calendars and photo books, these products create numerous
opportunities for potential customers to interact with our
brand. Many of our customers also use our website to create
community-oriented products such as a photo book celebrating a
school play or a yearbook for their children’s soccer team,
and they often proactively introduce and sell these items to
larger groups of potential new customers. Lastly, as our
products and services delight our customers, they often become
enthusiastic evangelists for Shutterfly and introduce our
products and services to their friends and family through
word-of-mouth.
Attractive target demographics reflected in our loyal
customer base. We send a survey every month to approximately
5,000 of our customers selected by us to represent customers who
have made varying numbers of purchases from us historically and
who have purchased products from us within the prior
90 days, to which we typically receive a response rate of
approximately 14%. Based upon these surveys, we believe that our
current customer base fits the following profile: approximately
84% female, approximately 63% in the 25-44 age range and
approximately 53% with children. Our surveys also indicate that
the average household income of our customers is greater than
$75,000. Our customers have described themselves as being
interested in maintaining personal connections with friends and
family, wanting to tell stories, wishing to preserve their
memories for themselves and their children and wanting an
offering that is intuitive and easy to use. As a result, we
believe that they are looking for an easy and convenient way to
be both thoughtful and creative with their memories. Our
customers use our website to share, enhance and preserve
memories from vacations, holidays and family events and to
create gifts for events such as birthdays, weddings,
anniversaries, Halloween, Hanukkah, Christmas, Valentine’s
Day, Easter, Mother’s Day and Father’s
Day. We believe that our customer loyalty is also aided by the
time our customers have invested in uploading and organizing
their photos on our website. If a customer were to leave
Shutterfly, he or she would have to spend significant time
uploading and organizing photos on a new service.
Premium pricing power. We believe that we are able to
maintain premium pricing power for many of our products because
of our market position and the loyal customer base we have
created. We believe that our market position and loyal customer
base exists because we have differentiated ourselves in the
marketplace by delivering high-quality products, outstanding
customer service, an intuitive and easy user experience and
continuous innovation across our products and services.
Deep customer understanding. Customer insights are an
important source of new product and service innovation for us,
and we continually strive to understand our customers’
needs in order to improve customer satisfaction. We invest
significant time and resources to understand and address the
needs of our customers through market research, focus groups,
customer surveys, usability testing, customer response to
promotions and customer service interactions. We believe a
coordinated focus on understanding the customer allows us take
measures to increase customer loyalty, consumer awareness of
Shutterfly, customer satisfaction and repeat purchases.
Vertical integration and superior technology. We derived
approximately 91% of our net revenues in 2005 from products we
manufactured in our Hayward, California facility. Our vertically
integrated and highly technical manufacturing approach is
essential to our quality control, agility in rolling out new
products and ability to secure capacity at critical peak demand
periods. We believe that vertical integration also provides us
with cost and innovation advantages, including:
•
greater consistency and quality of output;
•
increased ability to control and optimize costs for raw
materials and production;
•
fully automated image processing and print scheduling;
•
more flexibility to provide rapid, responsive order fulfillment
and processing;
•
assured high-quality capacity, even during peak demand such as
the fourth quarter holiday season;
•
additional insights into new and existing photo products and
production processes;
•
rapid prototyping, testing and refinement of new products and
services; and
•
the ability to address customer inquiries quickly.
We have devoted more than six years to developing our
proprietary software, technology and production systems that we
believe give us an advantage over our competitors. It is our
intention to continue investing in and protecting our
proprietary technology, platforms and processes that help us
differentiate ourselves from the competition and control costs.
Our Growth Strategy
Our goal is to grow our business, build a premium lifestyle
brand and become the leading online provider of products and
services dedicated to improving the sharing and preservation of
personal memories. We believe the combination of our focus, our
dedication to customers and the benefits we derive from our
vertically integrated production facilities will allow us to
profitably capture a significant share of our addressable
market. In addition to strong consumer trends supporting our
business — such as the proliferation of digital
cameras, higher broadband penetration and greater adoption of
Internet related
e-commerce and
communication services — we believe our growth will be
supported by the following initiatives:
Expand customer base. We intend to expand our customer
base and continue to promote the Shutterfly brand. We will
leverage existing channels, which include
word-of-mouth referrals
from existing customers, print advertising, catalogs, online
advertising, search engine marketing and
complementary strategic alliances with other
e-commerce companies
such as Amazon.com, Buy.com, Evite and HSN.
Expand product and service offerings. We will continue to
innovate in order to increase the breadth and depth of our
products and services, including prints, photo-based products,
photo-based merchandise and ancillary products. For example, in
the past six quarters, we have launched numerous new products,
including canvas prints, keepsake boxes, desk organizers,
multi-media DVD slideshows, magnets, coasters, year-at-a-glance
calendars, tiled mugs, playing cards, puzzles, scrapbooking
supplies and frames, as well as numerous enhancements to our
photo books, including new covers, layouts and page designs. In
addition to new products, we have created new services,
including: the ability to search, tag and organize photos; the
launch of Shutterfly Studio, our consumer software application
that allows for uploading, organizing, printing, sharing and
editing from the desktop; a redesigned and easier to use
website; a new store that makes shopping easier and more
accessible; and dozens of new borders that customers can use to
enhance their pictures, cards and photo books.
Increase sales to existing customers. We intend to
increase both average order size and repeat orders per customer
by expanding our products and services, tailoring our offerings
to encourage additional purchases for different occasions and
increasing our cross-selling and up-selling activities.
Leverage vertical integration. We will continue to invest
in making our business even more vertically integrated by adding
additional in-house production capabilities. We believe this
will allow us to extend our objectives to provide the highest
quality products and services at the lowest possible costs, to
provide exceptional fulfillment and customer service, even at
peak demand periods, and to continue to innovate rapidly with
new products and services.
Develop new lines of business. We intend to continue to
leverage our existing systems and capabilities to develop
additional adjacent lines of business. For example, we are in
the early stages of developing Pro Gallery, which provides an
end-to-end fulfillment
service for professional photographers seeking to sell their
photos online. Photographers manage their own galleries (for
example, by uploading images and setting print and product
pricing), while we host the galleries and provide the printing,
payment and order fulfillment functions. For our Pro Gallery
line of business, we earn revenues from annual gallery
maintenance fees, individual print orders and a transaction fee.
International expansion. We intend to develop additional
business opportunities through international expansion,
targeting consumers in key geographies where digital camera
penetration is high and where Internet usage and
e-commerce are
widespread.
Products and Services
Using the Shutterfly service is easy, convenient and fun. Our
website is designed to be simple, uncluttered and inviting.
There are only five navigational “tabs,” which
correspond to the primary activities offered by the
website — Add Pictures, View & Enhance, Share
Online, Order Prints and Shutterfly Store. If consumers decide
to either upload pictures or purchase products, they register on
the website and begin the following process:
Upload. Customers can upload digital photos from their
computer to our website one at a time, many at once through
simple drag-and-drop or by using Shutterfly Studio, our new
photo organization software. There are no limits to photo file
sizes and the upload processes are accelerated by
multi-threading, which enables photos to be uploaded
simultaneously, thereby
reducing image upload times. Unlike some competitive services,
we do not compress image files as part of the upload process,
which we believe preserves quality and photo resolution.
Organize and find. Customers initially upload their
photos into user-defined albums. We offer multiple ways to
further organize and find pictures. For example, customers can
automatically sort photos within albums by upload date, photo
titles or original filenames. Additionally, customers can
quickly search for photos in a number of ways, including by
text, date taken, upload date and images ordered on prints or
specified products. Customers can also use our
“favorites” function to tag their favorite photos with
a star rating system on both the website and within Shutterfly
Studio.
View and enhance. Once photos have been uploaded to
Shutterfly, customers can choose to view their photos in a
variety of ways, including photo slideshows. To improve picture
quality, customers also have access to our free online editing
and image enhancement tools. In addition to cropping and red-eye
removal, we offer a variety of creative options, such as
saturating photos with additional color or changing color shots
to black-and-white or sepia. Customers are also able to choose
from a wide variety of photo borders, and we offer free
customized back printing on photos and the option to add
captions to many of our products. Customers can view and enhance
their photos online or on their desktop via Shutterfly Studio,
which easily integrates with our website. Shutterfly Studio
provides advanced viewing and enhancing capabilities such as
full screen slideshows, cropping, red-, blue- and green-eye
removal, sharpening, auto adjustments and captioning.
Create. We enable customers to create a variety of
personalized products from their photos, including prints in
wallet, 4x6, 5x7, 8x10, 11x14, 16x20 and 20x30 sizes,
greeting cards, calendars, photo books and other photo-based
products and merchandise. Our highly-interactive,
design-it-yourself “creation paths” help even
first-time customers make professional-looking, high-quality
prints and products. Customers can easily design each product by
following simple step-by-step instructions and using intuitive
features, such as dragging and dropping an image into a
template. Our technology then generates an image of the
customer’s product on screen so that customers can make any
desired design choices or changes and then view the final
product to ensure satisfaction before purchase. Customers can
also save in-process projects and return to them at a more
convenient time to finish and purchase.
Share. We enable our customers to share images in several
different ways. Customers can
e-mail friends, family
and colleagues with a link to an individual album that can be
viewed as a slideshow of images. In order to view those images,
e-mail recipients
simply click on the URL link in the
e-mail and view images
immediately without the need to register with Shutterfly.
Recipients can then order prints or save them into their own
album. To save our customers time, we offer an easy way to copy
names, e-mail addresses
and mailing addresses from various software such as Outlook,
Outlook Express, Entourage, Palm and Eudora into their
Shutterfly address book. Another way to share photos is by
creating a Shutterfly Collection, which is linked to a personal
web address that is powered by Shutterfly, where customers can
store and share an unlimited number of photo albums. Customers
can invite friends and family to view the photos, add additional
photos and post comments to both albums and individual photos
via the Guestbook feature. To ensure the privacy of Collections,
we offer users optional password protection. Shutterfly
customers can create up to two free Collections. We also sponsor
seasonal and topical photo contests that promote sharing of
photos by our customers.
Order and ship. We provide convenient ordering and
flexible shipping options. To order a product after it is
created, the customer adds it to his or her shopping cart and
completes the billing and shipping information. Shipping
addresses can be typed in or easily added directly from a
customer’s Shutterfly address book. When a picture or
product is being ordered, we flag photos of poor quality,
usually due to low resolution, to alert customers of potential
quality issues. This helps ensure that a customer does not order
an out-of-focus or poor
quality picture. Customers can ship single orders to multiple
recipients. We also offer several different shipping options,
such as next-
day, two-day or regular service. Standard turn-around times from
the time an order is placed to the time it is shipped are one
business day for most print orders and two business days for
other photo-based products manufactured by Shutterfly. For our
photo-based merchandise manufactured on our behalf by third
parties, turn-around times vary, but generally range from two to
five days from the time we receive the order and transmit it to
our manufacturer. We also offer premium services for addressing,
stamping and mailing greeting cards directly to recipients.
Archive. We provide customers with unlimited storage of
their photos, Collections and projects at no cost to the
customer. Customers can also order a copy of their photos on a
CD or DVD for an extra fee.
Marketing, Advertising and Promotion
We use a variety of advertising, direct marketing technologies,
channels, methods and strategic alliances to attract and retain
our customers. These methods include direct marketing over the
Internet, e-mail
marketing to prospects and existing customers, search engine
marketing, and traditional direct marketing mailings such as
postcards and seasonal catalogs. In addition, because many of
our products are either shared via the Internet or given as
gifts, the appearance of our brand on the products and packaging
provides ongoing distribution as well as viral advertising.
We place advertisements that cater to women and families on
websites and in publications, contract for targeted
e-mail marketing
services and contract for advertising placement on leading
search engines. We also maintain an affiliate program under
which we pay program participants for referral sales generated
from hyperlinks to our website from the affiliate’s website
and in promotional materials.
We maintain strategic alliances with complementary
e-commerce companies,
such as Amazon.com, where we are the sole photo services
provider to Amazon.com’s and Evite’s customers, as
well as other marketing and promotion arrangements with
companies such as Buy.com and HSN, which distribute our
marketing literature and promotions with purchases of digital
cameras from their programs.
We also sponsor and manage photo contests as a turn-key offering
for major corporations, such as
1-800-Flowers.com, HSN,
Lions Gate Entertainment, Petco and Procter & Gamble.
These corporations promote the photo contests to their own
customers, which in turn introduces new users to Shutterfly.
In addition, from time to time we create co-branded versions of
our website. In general, these arrangements involve payment of a
commission to or revenue sharing with to these companies for
sales of our products and services generated through these
websites.
Technology and Production Systems
We use a combination of proprietary and third-party technology,
including the following:
Customer relationship management, or CRM, system. Our
integrated CRM system is comprised of various sophisticated
tools designed to convert first-time customers into repeat
buyers with increasing average order sizes by expanding customer
awareness, providing targeted, segmented offers to customers and
encouraging cross- and up-selling. The system uses a variety of
data, including website usage patterns, order size, order
frequency, products purchased, seasonality factors, image upload
and share usage, as well as customer satisfaction information.
This data is continually updated and refreshed in a data
warehouse, from which different customer segments are identified
and modified on a continuing basis for targeted marketing
communications.
By using this deep customer intelligence and ongoing analysis,
we are able to offer customers a more personalized website
experience and to target them with specific website promotions,
discounts, specialized
e-mail and direct mail
offers. Our promotion engine generates special offers
that are account specific and applied automatically at checkout.
This enables us to run multiple offers at any given time that
are targeted to specific customer profiles.
We are also able to dynamically assign visitors to test and
control groups who are shown different versions of our service.
This testing enables us to continuously optimize products,
pricing, promotions and user interaction with our website. We
are able to run multiple tests at once, which enables us to
rapidly launch new products and services and enhances our
financial results.
Website system. Our website powers our service and
e-commerce
functionality. We have designed our user interface to be simple,
uncluttered and inviting. There are only five navigational
“tabs” that correspond to the primary activities
offered by the website — Add Pictures, View &
Enhance, Share Online, Order Prints and Shutterfly Store, which
includes personalized product creation.
We have designed our website system to be highly available,
secure and cost-effective. We can scale to increasing numbers of
customers by adding relatively inexpensive industry-standard
computers and servers. We have a strong commitment to our
privacy policy, and we utilize technologies such as firewalls,
encryption technology for secure transmission of personal
information between customers’ computers and our website
system and intrusion detection systems to ensure compliance with
that policy.
Image archive. We store our customers’ images in our
image archive. Once a customer uploads a photo to our website,
it is copied to multiple redundant systems, including an
off-site copy. At present, our image storage capacity is
hundreds of terabytes. We continue to expand our storage
capacity to meet increasing customer demand. Our innovative
storage architecture provides extremely low storage costs,
ensures the safe, secure archiving of customers’ images and
delivers the speed and performance required to enable customers
to access, enhance and edit their images in real-time.
When we store and archive a customer’s image, we never
alter the original image (for example, we do not reduce the data
file size), which preserves the quality and integrity of the
image. This also lets customers enhance the image using a
duplicate, while giving them the ability to recall the original
at any time.
Render farm. Once a customer orders a photo or any
photo-based product or photo-based merchandise, the render farm
performs fully automated image processing on the image prior to
production. The customer’s original uploaded image is
retrieved from the image archive, and automatic algorithms
enhance the color, contrast and sharpness of the image. The
render farm also performs customer-requested edits such as crop,
borders, customized back-printing and red-eye removal.
To ensure that output is of consistent quality, we apply our
proprietary ColorSure technology during this render stage.
ColorSure creates an automated mapping of the image’s
specific attributes to the printer’s specific print
calibrations and attributes, at which time the rendered image is
scheduled for production. For example, this allows a photo that
is printed on a 4x6 print to look the same as a photo printed on
an enlargement or in a photo book, even if they are ordered at
separate times.
Production system. We operate our own production facility
in Hayward, California, which we believe is one of the largest
all-digital labs in the world. Our automated production system
controls our bar code-driven production processes, including
order management and pick, pack and ship operations. Using
complex algorithms, the production system analyzes tens of
thousands of orders daily and automates the workflow into our
high-volume silver halide photofinishing machines and our
state-of-the-art
digital offset presses.
The market for digital photography products and services is
large, evolving and intensely competitive, and we expect
competition to increase in the future. We face intense
competition from a wide range of companies, including the
following:
•
Online digital photography services companies such as Kodak
EasyShare Gallery (formerly known as Ofoto), Snapfish, which is
a service of Hewlett-Packard, Sony’s ImageStation and
others;
•
“Big Box” retailers such as Wal-Mart, Costco and
others that are seeking to offer low cost digital photography
products and services, such as in-store fulfillment and
self-service kiosks for printing, and that may, among other
strategies, offer their customers heavily discounted in-store
products and services that compete directly with our offerings;
•
Drug stores such as Walgreens, CVS and others that offer
in-store pick-up from
Internet orders;
•
Regional photography companies such as Wolf Camera and Ritz
Camera that have established brands and customer bases in
existing photography markets;
•
Internet portals and search engines such as Yahoo!, AOL, Google
and CNET that offer broad-reaching digital photography and
related products and services to their large user bases;
•
Home printing service providers such as Hewlett-Packard, Epson
and Canon, that are seeking to expand their printer and ink
businesses by gaining market share in the emerging digital
photography marketplace; and
•
Photo-related software companies such as Adobe, Apple,
Microsoft, Corel and others.
We believe the primary competitive factors in attracting and
retaining customers are:
•
brand recognition and trust;
•
quality of products and services;
•
breadth of products and services;
•
user affinity and loyalty;
•
customer service;
•
ease of use;
•
convenience; and
•
price.
We believe that we compete favorably with respect to these
factors, and that none of our competitors offers a comparable
value proposition, trusted brand or singular focus. Many of our
competitors promote their products on the basis of low prices or
the convenience of same-day availability for digital photos
printed in drugstores or other retail outlets. As a general
matter, we currently plan to distinguish ourselves from such
competitors principally on the basis of product quality and
innovation, rather than price or same-day delivery.
The level of competition in our industry is likely to increase
as current competitors improve their offerings and as new
participants enter the market or as industry consolidation
further develops. Many of our existing competitors, as well as
potential new competitors, have significantly longer operating
histories, larger and broader customer bases, greater brand
recognition and greater financial, research and development and
distribution resources. Our larger, more established and better
capitalized competitors may acquire, invest in or partner with
traditional and online
competitors. In addition, the numerous choices for digital
photography services can cause confusion for consumers, and may
cause them to choose to use one of our competitors, many of
which may have greater name recognition than we do. Furthermore,
some of our competitors that are seeking to establish an online
presence may be able to devote substantially more resources to
website and systems development. We may also face competition
from new entrants that are well funded and that may choose to
prioritize growing their market share and brand awareness
instead of profitability. Competitors and new entrants in the
digital photography products and services industries may also
seek to develop new products, technologies or capabilities that
could render obsolete or less competitive many of the products,
services and content that we offer. We may be unable to compete
successfully against current and future competitors, and
competitive pressures could harm our business and prospects.
Intellectual Property
Protecting our intellectual property rights is part of our
strategy for continued growth and competitive differentiation.
We seek to protect our proprietary rights through a combination
of patent, copyright, trade secret and trademark law. We enter
into confidentiality and proprietary rights agreements with our
employees, consultants and business partners, and control access
to and distribution of our proprietary information.
As of July 31, 2006, we had 13 issued patents, which expire
at various dates between November 2019 and May 2021,
and more than 29 patent applications pending in the United
States. We intend to pursue corresponding patent coverage in
additional countries to the extent we believe such coverage is
appropriate and cost efficient. However, we cannot be certain
that any of our pending or any future applications will be
granted. In addition, third parties could bring invalidity,
co-inventorship or similar claims with respect to any of our
currently issued patents or any patents that may be issued to us
in the future. Our issued patents and patent applications relate
generally to the user interface for our website, our computer
network infrastructure and software, personalized photo-related
products and automated workflow and digital printing.
We have in the past received claims, and in the future a third
party may claim, that we have infringed its patent rights, which
could result in litigation or the entry into a license agreement
with a third party. For example, effective May 1, 2005,
Shutterfly entered into a settlement and license agreement to
resolve litigation with respect to alleged infringement of
certain processes under U.S. patents relating to uploading,
storing, sharing, accessing, downloading and/or requesting or
obtaining digital images or prints of digital images or
merchandise to which such images are applied. Under the terms of
the agreement, Shutterfly paid $2.0 million. The agreement
provides Shutterfly with a license to certain patents, including
a non-exclusive, fully-paid up, royalty-free, worldwide license
to the patents underlying the litigation, and a mutual release
of claims.
Our primary brand is “Shutterfly,” and we hold
registrations for the Shutterfly service mark in our major
markets of the United States and Canada, as well as in the
European Community, Mexico, Japan, Australia and New Zealand, as
well as “Shutterfly.com” registrations in the United
States, Mexico, Australia and New Zealand, and “Shutterfly
Express” and “Postcards by Shutterfly” service
mark registrations in the United States. An additional
application for the Shutterfly mark is pending in Brazil. In
addition, we hold a registration for the “VividPics”
service mark in the United States and Mexico, and have pending
applications for additional marks, including “Shutterfly
Studio” and “Shutterfly Collections.”
We are the registrant of the Internet domain name for our
website, Shutterfly.com. Domain names generally are regulated by
Internet regulatory bodies and are controlled also by trademark
and other related laws. If we lose the ability to use our
Shutterfly mark in a particular country or our domain name, we
could be forced to either incur significant additional expenses
to market our products within that country, including the
development of a new brand and the creation of new promotional
materials and packaging, or elect not to sell products in that
country. In addition, the
relationship between regulations governing domain names and laws
protecting trademarks and similar proprietary rights could
change in ways that block or interfere with our ability to use
relevant domains or our current brand. Also, we might not be
able to prevent third parties from registering or retaining
domain names that interfere with our consumer communications or
infringe or otherwise decrease the value of our trademarks and
other proprietary rights. Regulatory bodies also could establish
additional top-level or country-code domains, appoint additional
domain name registrars or modify the requirements for holding
domain names. As a result, we might not be able to acquire or
maintain the domain names that utilize the name Shutterfly in
all of the countries in which we currently or intend to conduct
business.
Government Regulation
The legal environment of the Internet is evolving rapidly in the
United States and elsewhere. The manner in which existing laws
and regulations will be applied to the Internet in general, and
how they will relate to our business in particular, is unclear
in many cases. For example, we often cannot be certain how
existing laws will apply in the online context, including with
respect to such topics as privacy, defamation, pricing, credit
card fraud, advertising, taxation, sweepstakes, promotions,
content regulation, quality of products and services and
intellectual property ownership and infringement.
Numerous laws have been adopted at the national and state level
in the United States that could have an impact on our business.
These laws include the following:
•
The CAN-SPAM Act of 2003 and similar laws adopted by a number of
states, which are intended to regulate unsolicited commercial
e-mails, create
criminal penalties for unmarked sexually-oriented material and
e-mails containing
fraudulent headers and control other abusive online marketing
practices.
•
The Communications Decency Act, which gives statutory protection
to online service providers who distribute third-party content.
•
The Digital Millennium Copyright Act, which is intended to
reduce the liability of online service providers for listing or
linking to third-party websites that include materials that
infringe copyrights or other rights of others.
•
The Children’s Online Privacy Protection Act and the
Prosecutorial Remedies and Other Tools to End Exploitation of
Children Today Act of 2003, which are intended to restrict the
distribution of certain materials deemed harmful to children and
impose additional restrictions on the ability of online services
to collect user information from minors. In addition, the
Protection of Children From Sexual Predators Act of 1998
requires online service providers to report evidence of
violations of federal child pornography laws under certain
circumstances.
•
The State of California has adopted statutes that require online
services to report certain breaches of the security of personal
data, and to report to California consumers when their personal
data might be disclosed to direct marketers.
To resolve some of the remaining legal uncertainty, we expect
new laws and regulations to be adopted over time that will be
directly applicable to the Internet and to our activities. Any
existing or new legislation applicable to Shutterfly could
expose us to substantial liability, including significant
expenses necessary to comply with such laws and regulations, and
could dampen the growth in the use of the Internet in general.
We post on our website our privacy policies and practices
concerning the use and disclosure of user data. Any failure by
us to comply with our posted privacy policies, Federal Trade
Commission requirements or other privacy-related laws and
regulations could result in proceedings by governmental or
regulatory bodies that could potentially harm our business,
results of operations and financial condition. In this regard,
there are a large number of legislative proposals before the
United
States Congress and various state legislative bodies regarding
privacy issues related to our business. It is not possible to
predict whether or when such legislation may be adopted, and
certain proposals, if adopted, could harm our business through a
decrease in user registrations and revenues. These decreases
could be caused by, among other possible provisions, the
required use of disclaimers or other requirements before users
can utilize our services.
Due to the global nature of the Internet, it is possible that
the governments of other states and foreign countries might
attempt to regulate its transmissions or prosecute us for
violations of their laws. We might unintentionally violate such
laws, such laws may be modified and new laws may be enacted in
the future. Any such developments could harm our business,
operating results and financial condition. We may be subject to
legal liability for our online services. The law relating to the
liability of providers of these online services for activities
of their users is currently unsettled both within the United
States and abroad. Claims may be threatened against us for
aiding and abetting, defamation, negligence, copyright or
trademark infringement, or other theories based on the nature
and content of information to which we provide links or that may
be posted online.
Employees
As of June 30, 2006, we had 208 full time employees.
Approximately 66 employees were engaged in engineering, 66
in photo lab operations, 32 in sales and marketing, 13 in
customer service and 31 in general and administrative functions.
In addition, we had one contract engineer working in the United
States and three contract engineers working in Costa Rica.
During the peak holiday season, we obtain contract workers on a
temporary basis from third-party outsourcing firms. For example,
during the fourth quarter of 2005, we used more than 475 of
these temporary workers to assist in our production and
fulfillment operations during high-demand periods. None of our
employees is represented by a labor union or is covered by a
collective bargaining agreement. We have never experienced any
employment-related work stoppages and consider our employee
relations to be good.
Facilities
We maintain our corporate headquarters in Redwood City,
California in a leased facility of approximately
48,384 square feet. The lease for this facility expires on
May 31, 2010.
We maintain our production and fulfillment operations in
Hayward, California in leased facilities totalling approximately
71,708 square feet. The lease for the facility for
approximately 25,206 square feet expires on September 30,2007. We have an option to extend the lease for five years and a
first right of refusal to lease any immediately adjacent
contiguous space. The leases for the other 46,502 square feet
expire on July 31, 2010.
We believe that our existing facilities are adequate to meet our
needs through the first half of 2007, although we expect to
require additional production and fulfillment facilities to
handle future growth. We believe that suitable additional space
will be available in the future on commercially reasonably terms
as needed.
Legal Proceedings
In the ordinary course of our business, we are subject to
periodic lawsuits, investigations and claims. Although we cannot
predict with certainty the ultimate resolution of lawsuits,
investigations and claims asserted against us, we do not believe
that any currently pending legal proceeding to which we are a
party is likely to harm our business, results of operations,
cash flows or financial condition.
Senior Vice President, Business and
Corporate Development
Jeannine M. Smith Thomas
45
Senior Vice President, Operations
Andrew F. Young
48
Chief Marketing Officer
John A. Kaelle
37
Vice President, Finance
James H. Clark(2)
62
Chairman of the Board
Patricia A. House(1)(2)
52
Director
Eric J. Keller(1)
54
Director
Nancy J. Schoendorf(2)(3)
51
Director
James N. White(1)(3)
44
Director
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Governance Committee.
Jeffrey T. Housenbold has served as our President, Chief
Executive Officer and a director since January 2005. Prior to
joining Shutterfly, Mr. Housenbold served as Vice President
of Business Development and Internet Marketing at eBay Inc., an
online marketplace for the sale of goods and services, from
January 2002 to January 2005. Previously, he was the Vice
President & General Manager,
Business-to-Consumer
Group at eBay from June 2001 to January 2002, and served as Vice
President, Mergers & Acquisitions of eBay from March
2001 to June 2001. Mr. Housenbold holds two Bachelor of
Science degrees in Economics and Business Administration from
Carnegie Mellon University and a Master of Business
Administration degree from the Harvard Graduate School of
Business Administration.
Stephen E. Rechthas served as our Chief Financial
Officer since June 2004. Prior to joining Shutterfly,
Mr. Recht served as Chief Operating Officer and Chief
Financial Officer at SkyStream Networks, Inc., a provider of IP
video delivery platforms, from August 2003 to June 2004.
Previously, he was the Chief Financial Officer at Brience, Inc.,
a provider of mobile infrastructure software, from July 2001 to
May 2002, and from May 2002 to July 2003, he served as its Chief
Executive Officer. Mr. Recht was previously the Chief
Financial Officer at Allegis, Inc., an application services
provider for partner relationship management software, from
April 2000 to May 2001. Mr. Recht was the Chief Financial
Officer of NetGravity Inc., an Internet advertising provider
that was acquired by DoubleClick Inc., from November 1996 to
October 1999. Mr. Recht also served as a Director and Chair
of the Audit Committee of the Board of Directors of Marimba,
Inc., a provider of products and services for software change
and configuration management, from August 2003 to July 2004.
Mr. Recht holds a Bachelor of Arts degree in Economics from
Stanford University and a Master of Business Administration
degree from the Wharton School at the University of Pennsylvania.
Stanford S. Au has served as our Senior Vice President,
Technology since April 2006. Prior to joining Shutterfly,
Mr. Au served as Vice President of Engineering at WebEx
Communications, Inc., a provider of online meeting services,
from October 2003 to November 2005. Previously, he was the
Senior Vice President of Engineering at Virage, Inc., a provider
of security and surveillance systems,
from January 2002 to August 2003, and served as Vice President
of Engineering and General Manager of the Internet Bill
Presentment and Payment (IBPP) business at AOL Time Warner
Inc., a media and communications company, from July 1997 to
September 2001. Mr. Au holds a Bachelor of Science degree
in Electrical Engineering and Computer Science from the
University of California, Berkeley.
Douglas J. Galen has served as our Senior Vice President,
Business and Corporate Development since March 2005. Prior to
joining Shutterfly, Mr. Galen served as President of Fourth
Fleet Financial Inc., an auto finance company, from March 2004
to March 2005, as Vice President of New Ventures for eBay from
April 2001 to March 2004, and Vice President of Sales and
Business Development for
E-LOAN, Inc., a
provider of loans, lines of credit and credit card referrals,
from June 1997 to December 2000. Mr. Galen serves on the
board of directors of Positive Coaching Alliance. He holds a
Bachelor of Arts degree in Economics and a Master of Business
Administration degree in Real Estate and Finance.
Jeannine M. Smith Thomas has served as our Senior Vice
President, Operations since October 2005. Ms. Smith Thomas
has held the following positions within Shutterfly: Senior
Software Engineer from September 1999 to August 2000, Director
of Lab Automation Software from August 2000 to August 2001 and
Chief Engineering Officer from August 2001 to March 2006.
Ms. Smith Thomas became acting Senior Vice President,
Operations in October 2005, which she assumed as a permanent
role in January 2006. She relinquished her title of Chief
Engineering Officer in April 2006 when Mr. Au was hired as
Senior Vice President, Technology. Prior to joining Shutterfly,
Ms. Smith Thomas held multiple positions at Silicon
Graphics, Inc., a provider of workstations and servers for
technical and entertainment communities, including principal
engineer and engineering manager, from September 1991 to
September 1998. She holds a Bachelor of Science degree in
Electrical Engineering from Stanford University.
Andrew F. Young has served as our Chief Marketing Officer
since July 2001. Prior to joining Shutterfly, Mr. Young
served as Vice President of Marketing at Vivaldi Networks, a
retail-based technology company, from July 2000 to May 2001.
Previously, he was the Senior Vice President of Marketing in the
Interactive Division at Mattel, Inc., a leading toy and game
manufacturer, from January 1998 to January 2000, and served as
Director of Marketing at Del Monte Foods Company, a manufacturer
and distributor of canned fruit and vegetables, from May 1991 to
December 1997. Mr. Young holds a Bachelor of Arts degree in
Economics from the University of Virginia and a Master in
Business Administration degree from the Wharton School at the
University of Pennsylvania.
John A. Kaelle has served as our Vice President, Finance
since October 2004. Prior to joining Shutterfly, Mr. Kaelle
was a Vice President in the Mergers and Acquisitions group at
Thomas Weisel Partners LLC, an investment banking firm, from
August 2000 to July 2004. Previously, he was the Assistant
Controller at TriNet Corporate Realty Trust, Inc., a real estate
investment trust, from April 1997 until July 1998.
Mr. Kaelle holds a Bachelor of Arts degree in Economics
from the University of Michigan, a Masters degree in Taxation
from Golden Gate University and a Master of Business
Administration degree in Finance from The Wharton School at the
University of Pennsylvania. Mr. Kaelle is a certified
public accountant in the State of California.
James H. Clark has served on our board of directors since
June 1999 and as our Chairman since June 1999. Mr. Clark is
currently an independent investor. Mr. Clark is the founder
of Netscape Communications Corporation, a provider of web
browsers and other Internet client and server software products;
Healtheon/ Web MD Corp., an online provider of health
information services; Silicon Graphics, Inc., a provider of
graphical computing workstations; and myCFO, Inc., a wealth
advisory firm. He holds a Bachelor of Science degree and a
Masters of Science in Physics from the University of New
Orleans, and a Ph.D. in Computer Science from the University of
Utah.
Patricia A. House has served on our board of directors
since January 2006. Ms. House is a co-founder of Siebel
Systems, Inc., a provider of enterprise applications and a
wholly owned subsidiary
of Oracle Corporation. From January 2001 to February 2006,
Ms. House served as Siebel Systems, Inc.’s Vice
Chairman, Co-Founder and Vice President of Strategic Planning.
From February 1996 to January 2001, she served as its Co-Founder
and Executive Vice President and from July 1993 to February 1996
as its Co-Founder and Senior Vice President of Marketing. She
currently serves on the board of directors of BDNA Corporation,
a provider of business software, and Levi Strauss &
Co., a jeans and casual wear manufacturer. Ms. House holds
a Bachelor of Arts degree in Education from Western Michigan
University.
Eric J. Keller has served on our board of directors since
March 2006. Mr. Keller has been the Chief Executive Officer
of Movaris, Inc., a financial software company, since March
2004. From September 2003 to February 2004 and from September
2001 to December 2001, Mr. Keller served as a
consultant to various technology companies. From January 2002 to
September 2002, Mr. Keller served as interim Chief Financial
Officer to Cardica, Inc., a medical device company. From October
2002 to August 2003, he served as President and Chief Executive
Officer of Endovasix, Inc., a medical device company. From
February 2000 to July 2001, Mr. Keller served as Chief
Financial Officer of Corio, Inc., an enterprise application
service provider. Mr. Keller holds a Bachelor of Science
degree in Industrial Relations from Cornell University and a
Master of Business Administration degree from the University of
California, Berkeley.
Nancy J. Schoendorf has served on our board of directors
since February 2004. Ms. Schoendorf has been a managing
partner with Mohr, Davidow Ventures, a venture capital firm,
since June 1993. Previously, she served as director of systems
software development at Sun Microsystems, Inc., a provider of
network computing products and services, from 1988 to 1989, as
an officer and Vice President of Research and Development and
Product Development at Software Publishing Corporation, an
international supplier of business productivity software, from
1985 to 1988, and as an engineering section manager at
Hewlett-Packard Company, a global technology company, from 1976
to 1985. She currently serves on the board of directors of Agile
Software Corporation, a provider of product lifecycle management
solutions, as well as several privately held companies.
Ms. Schoendorf holds a Bachelor of Science degree in
Computer Science and Mathematics from Iowa State University and
a Master of Business Administration degree from the University
of Santa Clara.
James N. White has served on our board of directors since
November 2005. Mr. White has been a managing director at
Sutter Hill Ventures, a venture capital firm, since October
2000. Mr. White previously held senior executive positions
at Macromedia, Inc., a software developer; Silicon Graphics,
Inc., a provider of graphical computing workstations; and
Hewlett-Packard Company. Mr. White serves on the board of
directors of numerous privately held companies. Mr. White
holds a Bachelor of Science degree in Industrial Engineering
from Northwestern University and a Master of Business
Administration degree from the Harvard Graduate School of
Business Administration.
Board of Directors Composition
The authorized number of directors under our restated bylaws
that will become effective immediately following the completion
of this offering is seven; however, our board of directors
currently consists of six members. Each director serves until
our next annual meeting or until his or her successor is duly
elected and qualified. Upon the completion of this offering, our
common stock will be listed on The NASDAQ Global Market. The
rules of The NASDAQ Stock Market require that a majority of the
members of our board of directors be independent within
specified periods following the completion of this offering. We
believe that five of our directors are independent as required
by the rules of The NASDAQ Stock Market: James H. Clark,
Patricia A. House, Eric J. Keller, Nancy J. Schoendorf and James
N. White.
Mr. Clark, Ms. Schoendorf and Mr. White are
affiliated with three of our principal stockholders, Monaco
Partners, Mohr, Davidow Ventures and Sutter Hill Ventures,
respectively, and were
appointed to our board of directors under the provisions of a
voting agreement between us and certain of our stockholders.
Upon the completion of this offering, these board representation
rights will terminate and no stockholders will have any
contractual rights with respect to board representation.
Immediately following the completion of this offering, we will
file our restated certificate of incorporation. The restated
certificate of incorporation will divide our board of directors
into three classes, with staggered three-year terms:
•
Class I directors, whose initial term will expire at the
annual meeting of stockholders expected to be held in 2007;
•
Class II directors, whose initial term will expire at the
annual meeting of stockholders expected to be held in
2008; and
•
Class III directors, whose initial term will expire at the
annual meeting of stockholders expected to be held in 2009.
At each annual meeting of stockholders after the initial
classification, the successors to directors whose terms have
expired will be elected to serve from the time of election and
qualification until the third annual meeting following election.
Upon the completion of this offering, the Class I directors
will consist of Eric J. Keller and Nancy J. Schoendorf; the
Class II directors will consist of James H. Clark and
Patricia A. House; and the Class III directors will consist
of Jeffrey T. Housenbold and James N. White. As a result, only
one class of directors will be elected at each annual meeting of
our stockholders, with the other classes continuing for the
remainder of their respective three-year terms.
In addition, we intend to amend our bylaws upon the completion
of this offering to provide that only the board of directors may
fill vacancies on the board of directors until the next annual
meeting of stockholders. Any additional directorships resulting
from an increase in the number of directors will be distributed
among the three classes so that, as nearly as possible, each
class will consist of one-third of the total number of directors.
This classification of the board of directors and the provisions
described above may have the effect of delaying or preventing
changes in our control or management. See “Description of
Capital Stock — Anti-Takeover Provisions —
Restated Certificate of Incorporation and Restated Bylaw
Provisions.”
Board Committees
Our board of directors has established an audit committee, a
compensation committee and a governance committee. The
composition and responsibilities of each committee are described
below. Members serve on these committees until their
resignations or until otherwise determined by the board of
directors.
Audit Committee. Our audit committee oversees our
corporate accounting and financial reporting process. Among
other matters, the audit committee is directly responsible for:
the selection, compensation, retention and oversight of our
independent registered public accounting firm; evaluating our
independent registered public accounting firm’s continuing
independence; approving the fees and other significant
compensation to be paid to our independent registered public
accounting firm; reviewing and discussing with management and
our independent registered public accounting firm the results of
the quarterly and annual financial statements; approving the
retention of our independent registered public accounting firm
to perform any proposed permissible non-audit services;
reviewing and discussing with management and our independent
registered public accounting firm our selection, application and
disclosure of our critical accounting policies; discussing with
our independent registered public accounting firm both privately
and with management the adequacy of our accounting and financial
reporting processes and systems of internal control;
reviewing any significant deficiencies and material weaknesses
in the design or operation over internal control over financial
reporting; and annually reviewing and evaluating the composition
and performance of the audit committee, including compliance of
the audit committee with its charter.
The current members of our audit committee are Eric J. Keller,
who is the chair of the audit committee, James N. White and
Patricia A. House. We believe that each member of our audit
committee meets the requirements for independence and financial
literacy under the applicable rules and regulations of the SEC
and The NASDAQ Stock Market. Mr. Keller is our audit
committee financial expert, as defined under applicable SEC
rules. The audit committee operates under a written charter that
satisfies the applicable standards of the SEC and The NASDAQ
Stock Market.
Compensation Committee. Our compensation committee
evaluates and approves policy relating to compensation and
benefits of our officers and employees. Among other matters, the
compensation committee is responsible for reviewing and
approving corporate goals and objectives relevant to the
compensation of our chief executive officer and other executive
officers; evaluating the performance of these officers in light
of those goals and objectives and setting the compensation of
these officers based on such evaluations; administering the
issuance of stock options and other awards under our stock
plans; annually reviewing and making recommendations to the
board of directors with respect to all cash and equity-based
incentive compensation plans and arrangements; and annually
reviewing and evaluating the composition and performance of the
compensation committee, including compliance of the compensation
committee with its charter.
The current members of our compensation committee are Patricia
A. House, who is the chair of the compensation committee, James
H. Clark and Nancy J. Schoendorf. We believe that each member of
our compensation committee is an “independent
director” under the applicable rules and regulations of The
NASDAQ Stock Market, a “non-employee director” within
the meaning of
Rule 16b-3 of the
Securities Exchange Act of 1934, and an “outside
director,” as that term is defined under
Section 162(m) of the Internal Revenue Code of 1986.
Governance Committee. The governance committee is
responsible for making recommendations to the board of directors
regarding candidates for directorship and the size, structure
and composition of our board of directors and committees of the
board of directors. Among other things, the governance committee
is responsible for identifying, evaluating and nominating
candidates for appointment or election as members of our board
of directors; developing, recommending and evaluating a code of
conduct and ethics; recommending that our board of directors
establish special committees as may be desirable from time to
time; recommending policies and procedures for stockholder
nomination of directors and annually reviewing and evaluating
the composition and performance of the governance committee,
including compliance of the governance committee with its
charter.
The current members of the governance committee are James N.
White, who is the chair of the governance committee, and Nancy
J. Schoendorf. We believe that the members of our governance
committee are “independent directors” under the
applicable rules and regulations of The NASDAQ Stock Market.
Compensation Committee Interlocks and Insider
Participation
None of the members of our compensation committee has at any
time been one of our officers or employees. None of our
executive officers serves or in the past has served as a member
of the board of directors or compensation committee of any
entity that has one or more of its executive officers serving on
our board of directors or our compensation committee.
Director Compensation
After the completion of this offering, each of our independent
directors who is not affiliated with one of our major
stockholders who serves as a chairperson of a board committee
will receive the
following annual cash retainer for each year of such service:
for service as the chairperson of the audit committee, $15,000;
for chairperson of the compensation committee, $10,000; for
chairperson of the governance committee, $10,000.
On January 20, 2006, we granted Patricia A. House an
option to purchase 50,000 shares of our common stock with
an exercise price of $10.00 per share and on May 9, 2006 we
granted Eric J. Keller an option to purchase
50,000 shares of our common stock with an exercise price of
$10.39 per share, in each case pursuant to the terms and
conditions of our 1999 Stock Plan. On July 20, 2006, we
granted Mr. Keller an option under the 1999 Stock Plan to
purchase 8,333 shares of our common stock with an exercise
price of $14.20 per share as compensation for his service as
audit committee chairman, in accordance with the policy
described below.
Each independent director who is not affiliated with one of our
major stockholders receives an initial stock option grant of
50,000 shares of our common stock upon joining our board of
directors. The shares subject to the option vest monthly over a
three-year period from the date of grant.
Upon each anniversary of an independent, non-major stockholder
affiliated director’s start date, the director will receive
an additional stock option grant of 10,000 shares of our common
stock that will vest monthly over a three-year period from the
date of grant.
In addition, if the chairman of the audit committee is an
independent, non-major stockholder affiliated director, each
year such director will receive a stock option grant of 8,333
shares of our common stock that will vest monthly over a
12-month period from the date of grant.
Executive Compensation
The following table presents compensation information for the
year ended December 31, 2005 paid to or accrued for each
individual who served as our Chief Executive Officer at any time
in 2005 and each of our four other most highly compensated
executive officers whose aggregate salary and bonus was more
than $100,000. We refer to these officers collectively as our
named executive officers.
Summary Compensation Table
Long-Term
Compensation
Annual
Compensation
Securities
Underlying
Name and Principal Position
Year
Salary
Bonus
Options
Jeffrey T. Housenbold, President
and Chief Executive Officer(1)
These options vest over four years, with 25% vesting after one
year and an additional 1/48th of the total number of shares
vesting each month thereafter. Options expire ten years from the
date of grant. Options were granted at an exercise price equal
to the fair market value of our common stock as determined by
our board as of the date of grant. In 2005, we granted to our
employees options to purchase a total of 2,372,207 shares
of our common stock.
Potential realizable values are computed by:
•
multiplying the number of shares of common stock subject to a
given option by the assumed initial public offering price of
$ per
share;
•
assuming that the aggregate stock value derived from that
calculation compounds at the annual 5% or 10% rates shown in the
table for the entire ten-year term of the option; and
•
subtracting from that result the aggregate option exercise price.
The 5% and 10% assumed annual rates of stock price appreciation
are hypothetical rates required to be presented by the rules of
the SEC and do not represent our estimate or projection of
future common stock prices.
In May 2006, we granted Jeffrey T. Housenbold,
Stephen E. Recht, Jeannine M. Smith Thomas,
Andrew F. Young and Douglas J. Galen options to
purchase 250,000, 47,800, 40,000, 40,000 and 50,000 shares
of our common stock, respectively, each at an exercise price of
$10.39 per share and each pursuant to the terms and conditions
of our 1999 Stock Plan. Each of these options vests as to 25% of
the shares subject to the option on the first anniversary of the
date of grant and as to an additional 1/48th of the total number
of shares subject to the option at the end of each full month
thereafter. Each of these options may be exercised in full prior
to vesting.
Aggregated Option Exercises in 2005 and Option Values as of
December 31, 2005
The following table presents the number of shares of our common
stock subject to exercisable and unexercisable stock options
held as of December 31, 2005 by the named executive
officers. There was no public trading for our stock as of
December 31, 2005. Accordingly, these values have been
calculated on the basis of the assumed initial public offering
price of
$ per
share, less the applicable exercise price per share, multiplied
by the number of shares issued or issuable, as the case may be,
on the exercise of the option. All options were granted under
our 1999 Stock Plan. These options generally vest as to 25% of
the shares subject to the option on the first anniversary of the
date of grant and as to an additional 1/48th of the total
number of shares subject to the option at the end of each full
month thereafter. They may be exercised in full prior to
vesting. None of the named executive officers exercised an
option in 2005.
Employment Contracts, Termination of Employment and
Change-in-Control
Arrangements
We have entered into employment, termination of employment and
change-in-control
arrangements with the following executive officers, which are
summarized below:
Jeffrey T. Housenbold. Mr. Housenbold’s
employment offer letter provides for an annual salary of
$275,000, with an annual bonus of up to 50% of his annual base
salary. The level of Mr. Housenbold’s bonus is
determined by our compensation committee based upon
Mr. Housenbold’s achievement of performance milestones
that are generally related to our financial performance,
including achievement of revenue and EBITDA targets, and the
achievement of specific operational and/or strategic goals. His
employment with us is at will, such that we have the right to
terminate his employment at any time with or without cause.
Mr. Housenbold’s offer letter provides that if within
12 months following a change of control of Shutterfly we
terminate his employment without cause or if Mr. Housenbold
terminates his employment for good reason (including an adverse
change in title, responsibility or authority, a relocation of
employment location more than 60 miles from our current
headquarters or a material reduction in base salary),
Mr. Housenbold will receive as severance
15 months’ salary plus 125% of the maximum target
bonus for the year in which the termination occurred, and all
unvested shares of our common stock subject to options granted
to Mr. Housenbold will fully vest.
We have also agreed that in the event we terminate
Mr. Housenbold’s employment without cause, or if
Mr. Housenbold terminates his employment for good reason,
Mr. Housenbold will receive 12 months salary plus the
maximum target bonus for the year in which the termination
occurred as severance, and 12 months of unvested shares of
our common stock subject to options granted to
Mr. Housenbold will fully vest. Our obligation to make any
severance payments is expressly conditioned upon
Mr. Housenbold’s execution and delivery of a general
release and waiver of all claims.
In the event that a portion of the severance and other benefits
provided to Mr. Housenbold under the offer letter or any
other agreement, benefit, plan or policy of Shutterfly are
subject to a specified federal excise tax in connection with a
change of control, such severance and other benefits will be
reduced on a pre-tax basis if necessary to provide
Mr. Housenbold with a greater amount of severance and other
benefits on an after-tax basis.
For purposes of Mr. Housenbold’s employment offer
letter, a change of control includes: (1) an acquisition of
50% or more of our outstanding voting stock by any person or
entity; (2) a merger or consolidation of Shutterfly after
which our then-current stockholders own less than a majority of
the voting power of the surviving entity; (3) a sale of all
or substantially all of our assets; or (4) a liquidation or
dissolution of Shutterfly.
Stephen E. Recht. Mr. Recht’s employment
offer letter provides for an annual salary of $235,000, with a
quarterly bonus of up to 25% of his annual base salary earned
during that quarter. The level of Mr. Recht’s bonus is
determined by our compensation committee based upon
Mr. Recht’s achievement of performance milestones that
are generally related to our financial performance, including
achievement of revenue and EBITDA targets. His employment with
us is at will, such that we have the right to terminate his
employment any time with or without cause.
Mr. Recht’s offer letter provides that in the event of
a change of control, merger or acquisition of Shutterfly, and in
connection with the change of control, merger or acquisition,
Mr. Recht is no longer our Chief Financial Officer,
Mr. Recht will receive six months’ salary as
severance, and 12 months of unvested shares of our common
stock subject to options granted to Mr. Recht will fully
vest. However, in the event of a change of control, merger or
acquisition of Shutterfly where Mr. Recht continues to
report to Shutterfly, Mr. Recht will not receive such
severance and acceleration.
We have also agreed that in the event we terminate
Mr. Recht’s employment without cause, he will receive
12 months’ salary as severance and 12 months of
unvested shares of our common stock subject to options granted
to Mr. Recht will fully vest. Our obligation to make any
severance payments is expressly conditioned upon
Mr. Recht’s execution and delivery of a general
release and waiver of all claims.
For purposes of Mr. Recht’s employment offer letter, a
change of control includes: (1) a merger or consolidation
of Shutterfly after which our then-current stockholders own less
than a majority of the voting power of the surviving entity or
(2) a sale or transfer of all or substantially all of our
assets.
Jeannine M. Smith Thomas. Ms. Smith
Thomas’ employment offer letter provides for a monthly
salary of $14,099, with a quarterly bonus of up to $5,000. The
level of Ms. Smith Thomas’ bonus is determined by our
compensation committee based upon Ms. Smith Thomas’
achievement of performance milestones that are generally related
to our financial performance, including achievement of revenue
and EBITDA targets, and the achievement of specific operational
and/or strategic goals. Ms. Smith Thomas’ current
salary is $210,000. Her employment with us is at will, such that
we have the right to terminate her employment any time with or
without cause.
Ms. Smith Thomas’ offer letter provides that in the
event of a change of control, merger or acquisition of
Shutterfly and within 12 months following the change of
control, merger or acquisition, we terminate her employment
without cause or if Ms. Smith Thomas terminates her
employment for good reason (including an adverse change in
title, responsibility or authority, a relocation of employment
location more than 35 miles from our current headquarters
or a material reduction in base salary), all unvested shares of
our common stock subject to options granted to Ms. Smith
Thomas will fully vest.
For purposes of Ms. Smith Thomas’ employment offer
letter, a change of control includes: (1) a merger or
consolidation of Shutterfly after which our then-current
stockholders own less than a majority of the voting power of the
surviving entity or (2) a sale or transfer of all or
substantially all of our assets.
Andrew F. Young. Mr. Young’s employment
offer letter provides for a monthly salary of $16,667.67, with a
quarterly bonus of up to $5,000. The level of
Mr. Young’s bonus is determined by our compensation
committee based upon Mr. Young’s achievement of
performance milestones that are generally related to our
financial performance, including achievement of revenue and
EBITDA targets, and the achievement of specific operational
and/or strategic goals. Mr. Young’s current salary is
$220,000. His employment with us is at will, such that we have
the right to terminate his employment any time with or without
cause.
Mr. Young’s offer letter provides that if we terminate
his employment without cause, Mr. Young will receive six
months’ salary as severance. Our obligation to make any
severance payment is expressly conditioned upon
Mr. Young’s execution and delivery of a general
release and waiver of all claims.
Douglas J. Galen. Mr. Galen’s employment
offer letter provides for an annual salary of $225,000, with a
bonus to be determined by our compensation committee. The level
of Mr. Galen’s bonus is determined by our compensation
committee based upon Mr. Galen’s achievement of
performance milestones that are generally related to our
financial performance, including achievement of revenue and
EBITDA targets, and the achievement of specific operational
and/or strategic
goals. His employment with us is at will, such that we have the
right to terminate his employment any time with or without cause.
Mr. Galen’s offer letter provides that in the event of
a change of control, merger or acquisition of Shutterfly and in
connection with the change of control, merger or acquisition,
(1) Mr. Galen is no longer our Senior Vice President
of Business Development, (2) Mr. Galen’s role is
materially diminished or (3) our corporate office are
relocated from our current headquarters and Mr. Galen
chooses not to relocate, Mr. Galen will receive six
months’ salary as severance and 12 months of unvested
shares of our common stock subject to options granted to
Mr. Galen will fully vest. However, in the event of a
change of control, merger or acquisition of Shutterfly where
Mr. Galen continues to report to the board of directors of
Shutterfly, Mr. Galen will not receive such severance and
acceleration.
We have also agreed that in the event we terminate
Mr. Galen’s employment without cause, Mr. Galen
will receive six months’ salary as severance and six months
of unvested shares of our common stock subject to options
granted to Mr. Galen will fully vest. Our obligation to
make any severance payments is expressly conditioned upon
Mr. Galen’s execution and delivery of a general
release and waiver of all claims.
For purposes of Mr. Galen’s employment offer letter, a
change of control includes: (1) a merger or consolidation
of Shutterfly after which our then-current stockholders own less
than a majority of the voting power of the surviving entity or
(2) a sale or transfer of all or substantially all of our
assets.
Stanford S. Au. Mr. Au’s employment
offer letter provides for an annual salary of $235,000, with a
hiring bonus of $15,000. If Mr. Au is terminated prior to
one complete year of service, Mr. Au will be responsible
for reimbursing to us the prorated portion of his hire bonus.
His employment with us is at will, such that we have the right
to terminate his employment any time with or without cause.
Mr. Au’s offer letter provides that in the event of a
change of control, merger or acquisition of Shutterfly and in
connection with the change of control, merger or acquisition,
(1) Mr. Au is no longer our Senior Vice President of
Technology, (2) he experiences a diminishment in
responsibility or authority or (3) there is a relocation of
employment location more than 50 miles from our current
headquarters and Mr. Au chooses not to relocate,
Mr. Au will receive six months’ salary as severance
and 12 months of unvested shares of our common stock
subject to options granted to Mr. Au will fully vest.
However, in the event of a change of control, merger or
acquisition of Shutterfly where Mr. Au continues to report
to the President of Shutterfly, Mr. Au will not receive
such severance and acceleration.
For purposes of Mr. Au’s employment offer letter, a
change of control includes: (1) a merger or consolidation
of Shutterfly after which our then-current stockholders own less
than a majority of the voting power of the surviving entity or
(2) a sale or transfer of all or substantially all of our
assets.
Employee Benefit Plans
1999 Stock Plan
Our board of directors adopted, and our stockholders approved,
our 1999 Stock Plan in September 1999. We reserved a pool of
shares of our common stock for issuance to employees and other
service providers pursuant to awards granted under our 1999
Stock Plan, as amended, and under other awards granted outside
of the 1999 Stock Plan. Awards can be either stock options or
purchase rights. With respect to stock options, our 1999 Stock
Plan provides for the grant of both incentive stock options that
qualify for favorable tax treatment under Section 422 of
the Internal Revenue Code for their recipients and nonqualified
stock options. Incentive stock options may be granted only to
our employees or employees of any of our subsidiaries.
Nonqualified stock options may be granted to our employees,
officers, directors, consultants, independent contractors and
advisors and those of any of our subsidiaries. The exercise
price of incentive stock options must be at least equal to the
fair market value of our common stock on the date of grant. The
exercise price
of incentive stock options granted to 10% stockholders must be
at least equal to 110% of the fair market value of our common
stock on the date of grant. The maximum permitted term of
options granted under our 1999 Stock Plan is ten years. In the
event of a change in control, the 1999 Stock Plan provides that
options held by current employees, directors and consultants
that are not assumed will immediately vest in full prior to such
change in control and all options will expire on the
consummation of the change in control.
As of June 30, 2006, options to purchase
4,733,392 shares of our common stock granted from the 1999
Stock Plan remained outstanding and 230,745 shares of our
common stock remained available for issuance upon the exercise
of awards that may be granted from the 1999 Stock Plan. The
options outstanding as of June 30, 2006 had a
weighted-average exercise price of approximately $6.68 per
share. Our 2006 Equity Incentive Plan will be effective upon the
completion of this offering. As a result, no awards will be
granted from the 1999 Stock Plan after the date of this
prospectus and the 1999 Stock Plan will terminate. However, any
outstanding options granted from the 1999 Stock Plan will remain
outstanding, subject to the terms of our 1999 Stock Plan and
stock option agreements, until the options are exercised or
until they terminate or expire by their terms. Options granted
from the 1999 Stock Plan are subject to terms similar to those
described below with respect to options granted under our 2006
Equity Incentive Plan.
If we are party to a merger or consolidation, then, as part of
the agreed terms of such transaction, outstanding stock options
may be continued (if we are a surviving corporation), assumed or
substituted by the surviving corporation, or cancelled without
payment to their holders.
2006 Equity Incentive Plan
Our 2006 Equity Incentive Plan will become effective on the date
of this prospectus and will serve as the successor to our 1999
Stock Plan. We have reserved 1,358,352 shares of our common
stock to be issued under our 2006 Equity Incentive Plan. In
addition, shares under our 1999 Stock Plan not issued or subject
to outstanding grants on the date of this prospectus, and any
shares issued under the 1999 Stock Plan that are forfeited or
repurchased by us or that are issuable upon exercise of options
that expire or become unexercisable for any reason without
having been exercised in full, will be available for grant and
issuance under our 2006 Equity Incentive Plan. The number of
shares available for grant and issuance under the 2006 Equity
Incentive Plan will be increased on January 1 of each of
2008 through 2010 by an amount equal to the lesser of
(1) 4.62% of our shares outstanding on the immediately
preceding December 31 and (2) a lesser number of
shares as may be determined by our board of directors in its
discretion. In addition, shares will again be available for
grant and issuance under our 2006 Equity Incentive Plan that are
subject to:
•
issuance upon exercise of an option granted under our 2006
Equity Incentive Plan and that cease to be subject to the option
for any reason other than exercise of the option;
•
an award granted under our 2006 Equity Incentive Plan and that
are subsequently forfeited or repurchased by us at the original
issue price; or
•
an award granted under our 2006 Equity Incentive Plan that
otherwise terminates without shares being issued.
Our 2006 Equity Incentive Plan will terminate after ten years
from the date our board of directors approves the plan, unless
it is terminated earlier by our board of directors. The plan
authorizes the award of stock options, restricted stock awards,
stock appreciation rights, restricted stock units and stock
bonuses. No person is eligible to receive more than
1,000,000 shares in any calendar year under the plan other
than a new employee of ours or a new employee of any parent or
subsidiary of ours, who will be eligible to receive no more than
2,000,000 shares under the plan in the calendar year in
which the employee commences employment.
Our 2006 Equity Incentive Plan will be administered by our
compensation committee, all of the members of which are
non-employee directors under applicable federal securities laws
and outside directors as defined under applicable federal tax
laws. The compensation committee will have the
authority to construe and interpret the plan, grant awards and
make all other determinations necessary or advisable for the
administration of the plan.
Our 2006 Equity Incentive Plan provides for the grant of
incentive stock options that qualify under Section 422 of
the Internal Revenue Code and may be granted only to our
employees or employees of any parent or subsidiary of ours. No
more than 7,000,000 shares will be issued pursuant to the
grant of incentive stock options. All awards other than
incentive stock options may be granted to our employees,
officers, directors, consultants, independent contractors and
advisors or any parent or subsidiary of ours, provided the
consultants, independent contractors and advisors render
services not in connection with the offer and sale of securities
in a capital-raising transaction. The exercise price of stock
options must be at least equal to the fair market value of our
common stock on the date of grant. The exercise price of
incentive stock options granted to 10% stockholders must be at
least equal to 110% of that value. The exercise price of
nonqualified stock options will be determined by our
compensation committee at the time of grant.
Our compensation committee may provide for options to be
exercised only as they vest or to be immediately exercisable
with the shares issued subject to our right of repurchase that
lapses as the shares vest. In general, options will vest over a
four-year period. The maximum term of options granted under our
2006 Equity Incentive Plan is ten years.
A restricted stock award is an offer by us to sell shares of our
common stock subject to restrictions. The price of a restricted
stock award will be determined by the compensation committee.
Unless otherwise determined by the compensation committee at the
time of award, vesting ceases on the date the participant no
longer provides services to us and unvested shares are forfeited
to us.
Stock bonuses are granted as additional compensation for service
and/ or performance, and therefore, are not issued in exchange
for cash.
Stock appreciation rights provide for a payment, or payments, in
cash or shares of common stock, to the holder based upon the
difference between the fair market value of our common stock on
the date of exercise over the stated exercise price up to a
maximum amount of cash or number of shares. Stock appreciation
rights may vest based on time or achievement of performance
conditions.
Restricted stock units represent the right to receive shares of
our common stock at a specified date in the future, subject to
forfeiture of such right due to termination of employment or
failure to achieve certain performance conditions. If the
restricted stock unit has not been forfeited, then on the date
specified in the restricted stock unit agreement, we will
deliver to the holder of the restricted stock unit whole shares
of our common stock (which may be subject to additional
restrictions), cash or a combination of our common stock and
cash.
Awards granted under our 2006 Equity Incentive Plan may not be
transferred in any manner other than by will or by the laws of
descent and distribution or as determined by our compensation
committee. Unless otherwise restricted by our compensation
committee, awards that are nonqualified stock options may be
exercised during the lifetime of the optionee only by the
optionee, the optionee’s guardian or legal representative
or a family member of the optionee who has acquired the option
by a permitted transfer. Awards that are incentive stock options
may be exercised during the lifetime of the optionee only by the
optionee or the optionee’s guardian or legal
representative. Options granted under our 2006 Equity Incentive
Plan generally may be exercised for a period of three months
after the termination of the optionee’s service to us or
any parent or subsidiary of ours. Options will generally
terminate immediately upon termination of employment for cause.
The purchase price for restricted stock will be determined by
our compensation committee. Stock bonuses may be issued for past
services or may be awarded upon the completion of services or
performance goals.
If we are dissolved or liquidated or have a change in control
transaction, the vesting of all outstanding awards may be
assumed or substituted by the successor company. Outstanding
awards that are not assumed or substituted will expire upon the
dissolution, liquidation or closing of a change in control
transaction. In the discretion of our compensation committee,
the vesting of these awards may be accelerated upon the
occurrence of one of these transactions.
401(k) Plan
We sponsor a retirement plan intended to qualify for favorable
tax treatment under Sections 401(a) and 401(k) of the
Internal Revenue Code of 1986, as amended, or the Code.
Employees who have attained at least 21 years of age are
generally eligible to participate in the plan on their first pay
period. Participants may make pre-tax contributions to the plan
from their eligible earnings up to the statutorily prescribed
annual limit on pre-tax contributions under the Code.
Participants 50 years of age or older may contribute
additional amounts based on the statutory limits for catch-up
contributions. We currently make no company contributions on
behalf of participants to the plan, but can do so in the
discretion of our board of directors. Pre-tax contributions by
participants to the plan and the income earned on such
contributions are generally not taxable to participants until
withdrawn. Participant contributions are held in trust as
required by law. Each participant’s retirement benefit
under the plan is determined solely on the basis of
contributions made on such participant’s behalf and
earnings thereon. No minimum benefit is provided under the plan.
Indemnification of Directors and Executive Officers and
Limitation of Liability
Our restated certificate of incorporation that will become
effective immediately following the completion of this offering
includes a provision that eliminates the personal liability of
our directors for monetary damages resulting from breach of
fiduciary duty as directors, except for liability:
•
for any breach of the director’s duty of loyalty to us or
our stockholders;
•
for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
•
under section 174 of the Delaware General Corporation Law
regarding unlawful dividends and stock purchases; or
•
for any transaction from which the director derived an improper
personal benefit.
Our restated bylaws that will become effective immediately
following the completion of this offering provide that:
•
we must indemnify our directors and officers to the fullest
extent permitted by Delaware law, subject to very limited
exceptions;
•
we may indemnify our other employees and agents as permitted by
Delaware law;
•
we must advance expenses, as incurred, to our directors and
officers in connection with a legal proceeding to the fullest
extent permitted by Delaware law, subject to very limited
exceptions; and
•
the rights conferred in the bylaws are not exclusive.
Prior to the completion of this offering, we intend to enter
into indemnity agreements with each of our current directors and
executive officers to provide additional contractual assurances
regarding the scope of the indemnification provided for in our
restated certificate of incorporation and restated bylaws and to
provide additional procedural protections. We believe that these
provisions and agreements are necessary to attract and retain
qualified directors and executive officers. Presently, there is
no pending litigation or proceeding involving any of our
directors, executive officers or employees for which
indemnification is sought.
We have liability insurance for our directors and officers,
including coverage for public securities matters.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In addition to the compensation arrangements, including the
employment, termination of employment and
change-in-control
arrangements and indemnification arrangements, discussed above
under “Management,” and the registration rights
described below under “Description of Capital
Stock — Registration Rights,” the following
is a description of transactions since January 1, 2003 to
which we have been a party, in which the amount involved in the
transaction exceeded or will exceed $60,000, and in which any of
our directors, executive officers or beneficial holders of more
than 5% of our capital stock had or will have a direct or
indirect material interest.
Loan Guarantee; Warrant to Purchase Our Series D
Preferred Stock and Sale of Our Series E Preferred Stock
In May 2002, Monaco Partners, L.P. agreed to guarantee our
payment obligations under a loan and security agreement between
us and Silicon Valley Bank, or SVB. Monaco, which is controlled
by James H. Clark, our Chairman, beneficially owned 28.2% of our
common stock as of July 31, 2006. Other entities controlled
by Mr. Clark beneficially owned 12.1% of our common stock
as of that date.
The guarantee agreement gave Monaco a right to purchase our
payment obligations (consisting of unpaid principal, accrued
interest, and certain fees and expenses) under the loan and
security agreement from SVB and assume all of SVB’s rights
under that agreement. In exchange for this guarantee, we issued
Monaco a warrant to purchase 60,252 shares of our
Series D preferred stock at a price of $0.10 per share
and gave Monaco a right to convert any amounts paid by Monaco to
SVB pursuant to the guarantee agreement into shares of our
capital stock. Monaco exercised the Series D preferred
stock warrant in May 2002.
In February 2003, Monaco exercised its purchase right pursuant
to the guarantee agreement and paid SVB approximately $546,000
in full satisfaction of our payment obligations to SVB, and
assumed all of SVB’s rights under the loan and security
agreement, including rights to receive payment from us. We made
monthly payments to Monaco against this amount beginning in
March 2003. In July 2003, Monaco converted the approximately
$439,000 then due from us to it into 717,545 shares of our
Series E preferred stock.
Secured Loan Agreement; Sale of Warrants to Purchase Our
Series D and Series E Preferred Stock
In February 2003, we entered into a secured loan agreement with
Monaco under which we borrowed a total of $2.5 million at
an annual interest rate of 5% above the prime rate, with a
maximum annual interest rate of 12%. We made interest payments
to Monaco totaling $31,000 and $83,000 in 2003 and 2004,
respectively. In December 2004, we paid Monaco the full amount
due to it under the secured loan agreement. In connection with
the loan agreement, we issued to Monaco warrants to
purchase 137,500 shares of our Series D preferred
stock and 112,500 shares of our Series E preferred
stock, each at an exercise price of $0.615 per share.
Monaco exercised these warrants in full in December 2004.
Acquisition of Memory Matrix, Inc.
In June 2005, we acquired Memory Matrix, Inc., a Nevada
corporation, in exchange for 229,994 shares of our common
stock. Monaco Partners, L.P. controlled 14.1% of Memory Matrix
at that time. In addition, Mr. Clark was a member of the
board of directors of Memory Matrix immediately prior to the
acquisition.
In November 2005, we sold 1,353,730 shares of our
Series F preferred stock to Sutter Hill Ventures and
affiliated persons and entities at a purchase price of
$14.774 per share. Sutter Hill beneficially owned 9.1% of
our common stock as of May 31, 2006. In connection with
Sutter Hill’s investment in our Series F preferred
stock, we also entered into a voting agreement giving Sutter
Hill the right to elect one member of our board of directors,
which right expires upon the completion of this offering.
Purchases of Our Common Stock by Sutter Hill from Third
Parties
From December 2005 through May 2006, Sutter Hill and affiliated
persons and entities purchased an aggregate of 260,000 shares of
our common stock from three of our former officers at a
weighted-average price of $10.19 per share. In connection with
Sutter Hill’s purchase of our Series F preferred stock
in our Series F financing in November 2005, we agreed to assign
to Sutter Hill our right of first refusal with respect to
transfers of our capital stock for a period of six months
following the closing of such financing.
The following tables presents information as to the beneficial
ownership of our common stock as of July 31, 2006, and as
adjusted to reflect the sale of the common stock in this
offering by:
•
each stockholder known by us to be the beneficial owner of more
than 5% of our common stock;
•
each of our directors;
•
each of our named executive officers;
•
all of our directors and executive officers as a group; and
•
in the second table, each of the selling stockholders.
Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Unless
otherwise indicated below, to our knowledge, the persons and
entities named in the table have sole voting and sole investment
power with respect to all shares beneficially owned, subject to
community property laws where applicable. Shares of our common
stock subject to options that are currently exercisable or
exercisable within 60 days of July 31, 2006 are deemed
to be outstanding and to be beneficially owned by the person
holding the options for the purpose of computing the percentage
ownership of that person, but are not treated as outstanding for
the purpose of computing the percentage ownership of any other
person.
Percentage ownership of our common stock in the table before the
offering is based on 17,798,278 shares of our common stock
outstanding on July 31, 2006, which includes the automatic
conversion of all outstanding shares of our preferred stock into
13,801,716 shares of common stock in connection with the
completion of this offering. Percentage ownership of our common
stock in the first table below after the offering also assumes
the sale
of shares
of common stock in this offering by us but no exercise of the
underwriters’ over-allotment option. Unless otherwise
indicated, the address of each of the individuals and entities
named below is c/o Shutterfly, Inc., 2800 Bridge Parkway,
Suite 101, Redwood City, California94065.
Percentage of Outstanding Shares
Beneficially Owned
Number of Shares
Name of Beneficial Owner
Beneficially Owned
Before Offering
After Offering
5% Stockholders:
Entities affiliated with
James H. Clark(1)
7,167,692
40.3
%
Mohr, Davidow Ventures(2) and
affiliated entities
4,088,510
23.0
Sutter Hill Ventures and affiliated
persons and entities(3)
Represents beneficial ownership of less than one percent of the
outstanding shares of common stock.
(1)
Consists of 5,018,610 shares held by Monaco Partners, L.P.,
1,947,082 shares held by JHC Investments, LLC,
17,000 shares held by JHC Investments 2000, LLC,
125,000 shares held by Woodside Ventures Limited
Partnership, 50,000 shares held by Atherton Properties
Partnership, L.P. and 10,000 shares held by Mountain Wood
Properties, LLC, and excludes 40,816 shares subject to a
warrant held by Monaco Partners, L.P. that expires upon the
completion of this offering. Mr. Clark has sole voting and
investment power over the shares held by Monaco Partners, L.P.,
JHC Investments LLC, JHC Investments 2000, LLC and Woodside
Ventures Limited Partnership. Two of Mr. Clark’s adult
children and one of their spouses have voting and investment
power over the shares held by Atherton Properties Partnership,
L.P. and Mountain Wood Properties, LLC. The address of Mr. Clark
is 1700 Seaport Blvd., 4th Floor, Redwood City, CA94063 and the address of the entities listed above is
777 East William Street #201, Carson City, NV89701.
(2)
Consists of 2,419,867 shares held by Mohr, Davidow Ventures
V, L.P., 1,516,168 shares held by Mohr, Davidow Ventures
V-L, L.P, and 152,475 shares held by Mohr, Davidow Ventures
V, L.P. as nominee for MDV Entrepreneurs’ Network Fund II
(A), L.P. and MDV Entrepreneurs’ Network Fund II (B), L.P.
Ms. Schoendorf is a managing member of the general partners of
the foregoing entities and shares voting and investment power
with respect to the shares held by these entities with Jon
Feiber, the other managing member of the general partners. Ms.
Schoendorf disclaims beneficial ownership of these shares except
to the extent of her individual pecuniary interest in these
entities. The address of Mohr, Davidow Ventures and Ms.
Schoendorf is 3000 Sand Hill Road, Building 3,
Suite 290, Menlo Park, CA94025.
(3)
Consists of (a) 1,204,205 shares held by Sutter Hill
Ventures, A California Limited Partnership (“SHV”),
(b) 1,684 shares held by SHV Profit Sharing Plan for
the benefit of James N. White, one of our directors and a
managing director of the general partner of SHV,
(c) 323 shares held by James N. White and Patricia A.
O’Brien as Trustees of The White Family Trust U/A/D 4/3/97,
(d) 397,165 shares held by eight other managing
directors of the general partner of SHV and by family trusts,
family partnerships or other entities associated with these
individuals and (e) 10,353 shares held by other
individuals affiliated with Sutter Hill and by entities
associated with them. Mr. White shares voting and investment
power with respect to the shares held by SHV with David L.
Anderson, G. Leonard Baker, Jr., Tench Coxe, Gregory P. Sands,
James C. Gaither, William H. Younger, Jr., Jeffrey W. Bird and
David E. Sweet, each of whom is a managing director of the
general partner of SHV. Messrs. White, Anderson, Baker, Coxe,
Sands, Gaither, Younger, Bird and Sweet disclaim beneficial
ownership of these shares except to the extent of their
individual pecuniary interest, in SHV. Mr. White has sole voting
and investment power with respect to the shares held by SHV
Profit Sharing Plan for the benefit of James N. White and has
shared voting and investment power with respect to the shares
held by The White Family Trust, and disclaims beneficial
ownership of the shares held by The White Family Trust except to
the extent of his individual pecuniary interest in such trust.
Mr. White and SHV do not have voting or investment power with
respect to the shares referenced under part (d) and (e) of this
footnote. The address of SHV and Mr. White is 755 Page Mill
Road, Suite A-200, Palo Alto, CA94304-1005.
(4)
Includes 1,204,205 shares held by SHV, 1,684 shares
held by SHV Profit Sharing Plan for the benefit of James N.
White and 323 shares held by James N. White and Patricia A.
O’Brien as Trustees of The White Family Trust U/A/D 4/3/97.
Mr. White has shared voting and investment power as described in
footnote (3) with respect to the shares held by SHV, sole
voting and investment power with respect to the shares held by
SHV Profit Sharing Plan for the benefit of James N. White and
shared voting and investment power with respect to the shares
held by The White Family Trust. Mr. White disclaims beneficial
ownership of shares held by SHV and The White Family Trust
except to the extent of his individual pecuniary interest in SHV
and The White Family Trust. The address of SHV and Mr. White is
755 Page Mill Road, Suite A-200, Palo Alto, CA94304-1005.
(5)
Consists of 50,000 shares subject to options that are
exercisable within 60 days of July 31, 2006.
(6)
Consists of 58,333 shares subject to options that are
exercisable within 60 days of July 31, 2006.
(7)
Consists of 1,288,146 shares subject to options that are
exercisable within 60 days of July 31, 2006.
(8)
Includes 201,000 shares subject to options that are
exercisable within 60 days of July 31, 2006.
(9)
Consists of 250,000 shares subject to options that are
exercisable within 60 days of July 31, 2006.
(10)
Includes 189,600 shares subject to options that are
exercisable within 60 days of July 31, 2006 and
72,000 shares held in a trust for the benefit of
Ms. Smith Thomas’ minor children.
(11)
Includes 221,600 shares subject to options that are
exercisable within 60 days of July 31, 2006.
Includes 2,516,179 shares subject to options that are
exercisable within 60 days of July 31, 2006 and
excludes 40,816 shares subject to a warrant held by Monaco
Partners, L.P. that expires upon the completion of this offering.
Over-Allotment Option
The following table presents information regarding beneficial
ownership of our common stock by the selling stockholders
assuming the underwriters’ over-allotment option to
purchase additional shares from the selling stockholders is
exercised in full.
Shares of Common
Shares of Common
Stock Beneficially
Stock
Owned Before the
Beneficially Owned
Offering
Shares
After the Offering
Being
Selling Stockholder
Number
Percentage
Offered
Number
Percentage
Entities affiliated with Jim
Clark(1)
7,167,692
40.3%
(3
)
%
Mohr, Davidow Ventures and
affiliated entities(2)
4,088,510
23.0%
(4
)
Claire Bienen
37,735
*
Ram Shriram
26,000
*
Michiel Lyppens
15,000
*
Harvey Armstrong
10,000
*
Big Basin Partners L.P.
536
*
*
Represents beneficial ownership of less than one percent of the
outstanding shares of common stock.
(1)
See footnote (1) to previous table.
(2)
See footnote (2) to previous table.
(3)
Consists
of shares
to be sold by Monaco Partners,
L.P., shares
to be sold by JHC Investments,
LLC, shares
to be sold by JHC Investments 2000,
LLC, shares
to be sold by Woodside Ventures Limited
Partnership, shares
to be sold by Atherton Properties Partnership, L.P.
and shares
to be sold by Mountain Wood Properties, LLC.
(4)
Consists
of shares
to be sold by Mohr Davidow Ventures V-L, L.P.
Upon the completion of this offering, our authorized capital
stock, after giving effect to the conversion of all outstanding
preferred stock into common stock and the filing of our restated
certificate of incorporation that will become effective
immediately following the completion of this offering, will
consist of 100,000,000 shares of common stock,
$0.0001 par value per share, and 5,000,000 shares of
undesignated preferred stock, $0.0001 par value per share.
The following description summarizes the most important terms of
our capital stock. Because it is only a summary, it does not
contain all the information that may be important to you. For a
complete description you should refer to our restated
certificate of incorporation and restated bylaws, which are
exhibits to the registration statement of which this prospectus
forms a part, and to the provisions of applicable Delaware law.
Common Stock
As of June 30, 2006, there were 17,811,128 shares of
our common stock outstanding held by 282 stockholders of
record. This amount assumes the conversion of all outstanding
shares of our preferred stock into 13,801,716 shares of our
common stock, which will automatically occur immediately upon
the completion of this offering. After this offering, there will
be shares
of our common stock outstanding.
Dividend Rights. Subject to preferences that may
apply to shares of preferred stock outstanding at the time, the
holders of outstanding shares of our common stock are entitled
to receive dividends out of funds legally available at the times
and in the amounts that our board of directors may determine.
Voting Rights. Each holder of common stock is
entitled to one vote for each share of common stock held on all
matters submitted to a vote of stockholders. Cumulative voting
for the election of directors is not provided for in our
restated certificate of incorporation, which means that the
holders of a majority of the shares voted can elect all of the
directors then standing for election.
No Preemptive or Similar Rights. Our common stock
is not entitled to preemptive rights and is not subject to
conversion or redemption.
Right to Receive Liquidation Distributions. Upon
the liquidation, dissolution or
winding-up of
Shutterfly, the assets legally available for distribution to our
stockholders will be distributable ratably among the holders of
our common stock and any participating preferred stock
outstanding at that time after payment of liquidation
preferences, if any, on any outstanding shares of preferred
stock and payment of other claims of creditors.
Fully Paid and Nonassessable. All of our
outstanding shares of common stock are, and the shares of common
stock to be issued pursuant to this offering will be, fully paid
and nonassessable.
Preferred Stock
As of June 30, 2006, there were 13,801,716 shares of our
preferred stock outstanding, consisting of 3,329,345 shares of
Series A preferred stock, 1,031,174 shares of Series B
preferred stock, 876,318 shares of Series C preferred
stock, 3,079,788 shares of Series D preferred stock,
4,131,361 shares of Series E preferred stock and 1,353,730
shares of Series F preferred stock. Each series of
preferred stock is convertible at any time, at the option of the
holder, into common stock at the then-effective conversion rate
for such series. The conversion rate for all series of our
preferred stock is currently one-to-one, and accordingly each
share of our preferred stock is currently convertible into one
share of our common stock.
All shares of preferred stock automatically convert into common
stock at the then-effective conversion rate at the election of
the holders of a majority of the outstanding preferred stock,
voting together as a single class, or immediately upon the
closing of a firm commitment underwritten public
offering in which the offering price equals or exceeds $12 per
share and the aggregate proceeds raised in the offering equal or
exceed $25 million. Since this offering will meet these
share price and offering size thresholds, upon the completion of
this offering, all outstanding shares of preferred stock will,
automatically and without further action on the part of any of
our preferred stockholders, be converted into 13,801,716 shares
of common stock. Immediately following the completion of this
offering, we will file our restated certificate of
incorporation, which will delete all references to the prior
series of preferred stock, and will authorize 5,000,000 shares
of undesignated preferred stock.
Following this offering, our board of directors will be
authorized, subject to limitations prescribed by Delaware law,
to issue preferred stock in one or more series, to establish
from time to time the number of shares to be included in each
series, to fix the designation, powers, preferences and rights
of the shares of each series and any of its qualifications,
limitations or restrictions in each case without further action
by our stockholders. Our board of directors can also increase or
decrease the number of shares of any series of preferred stock,
but not below the number of shares of that series then
outstanding, unless approved by the affirmative vote of the
holders of a majority of our capital stock entitled to vote, or
such other vote as may be required by the certificate of
designation establishing the series. Our board of directors may
authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power
or other rights of the holders of the common stock. The issuance
of preferred stock, while providing flexibility in connection
with possible acquisitions and other corporate purposes, could
discourage, delay or prevent a change in control of Shutterfly.
We have no current plan to issue any shares of preferred stock.
Warrants
As of June 30, 2006, we had issued and outstanding warrants
to purchase 75,229 shares of our Series A preferred stock
at an exercise price of $2.675 per share, 74,897 shares of our
Series B preferred stock at a weighted-average exercise
price of $16.11 per share, 4,245 shares of our Series C
preferred stock at an exercise price of $26.50 per share and
2,809 shares of our Series D preferred stock at an exercise
price of $3.60 per share. Following the completion of this
offering, any warrants that remain outstanding will be
exercisable for shares of our common stock.
Of the warrants listed above, a warrant to purchase
40,816 shares of our Series B preferred stock expires
immediately prior to the completion of this offering. The
expiration dates of the other warrants are: (a) with
respect to the Series A warrants, on the date we undergo a
merger or consolidation meeting certain conditions or the later
of three years following this offering or September 8,2006, (b) with respect to a second Series B warrant,
the date we undergo a merger or consolidation meeting certain
conditions or the later of three years following this offering
or March 8, 2007, (c) with respect to a third
Series B warrant, the earlier of January 1, 2011 or
the date we undergo a change of control or sell or transfer all
or substantially all of our assets, (d) with respect to the
Series C warrant, on the date we undergo a merger or
consolidation meeting certain conditions or the earlier of three
years following this offering or August 24, 2007 and
(e) with respect to the Series D warrant,
September 11, 2008.
Registration Rights
Pursuant to the terms of our fifth amended and restated
investors’ rights agreement, immediately following this
offering, the holders of approximately 13,732,545 shares of
our common stock outstanding as of June 30, 2006 or subject
to warrants outstanding as of June 30, 2006, including
shares of common stock beneficially owned by holders of 5% or
more of our common stock, will be entitled to rights with
respect to the registration of these shares under the Securities
Act, as described below, which number will be reduced
to shares
if the underwriters exercise their over-allotment option in full.
Demand Registration Rights. At any time beginning
six months after the completion of this offering, the holders of
at least 40% of the shares having registration rights can
request that we file
a registration statement covering registrable securities with an
anticipated aggregate offering price of at least
$7.5 million. We will only be required to file three
registration statements upon exercise of these demand
registration rights. We may postpone the filing of a
registration statement for up to 120 days once in a
12-month period if we
determine that the filing would be seriously detrimental to us
and our stockholders.
Piggyback Registration Rights. If we register any
of our securities for public sale, holders of shares having
registration rights will have the right to include their shares
in the registration statement. However, this right does not
apply to a registration relating to any of our employee benefit
plans or a corporate reorganization or acquisition. The managing
underwriter of any underwritten offering will have the right, in
its sole discretion, to limit, due to marketing reasons, the
number of shares registered by these holders, in which case the
number of shares to be registered will be apportioned pro rata
among these holders, according to the total amount of securities
entitled to be included by each holder, or in a manner mutually
agreed upon by the holders. However, the number of shares to be
registered by these holders cannot be reduced below 35% of the
total shares covered by the registration statement unless no
other stockholder’s shares are included in the registration
statement.
Form S-3
Registration Rights. The holders of at least 10% of the
shares with registration rights can request that we register
their shares on
Form S-3 if we are
eligible to file a registration statement on
Form S-3 and if
the aggregate price to the public of the shares offered is at
least $1.0 million. The stockholders may only require us to
file two registration statements on
Form S-3 in a
12-month period. We may
postpone the filing of a registration statement on
Form S-3 for up to
90 days once in a
12-month period if we
determine that the filing would be seriously detrimental to us
and our stockholders.
Expenses of Registration Rights. We will pay all
expenses, other than underwriting discounts and commissions,
incurred in connection with the registrations described above.
However, we will not pay for any expenses of any demand or
Form S-3
registration if the request is subsequently withdrawn by a
majority of the holders requesting that we file such
registration statement, subject to limited exceptions.
Expiration of Registration Rights. The
registration rights described above will expire, with respect to
any particular holder of such rights when, after this offering
is completed, the holder owns registrable securities
constituting 2% or less of our outstanding voting stock and can
sell all of its registrable securities in any three-month period
under Rule 144 of the Securities Act. The registration
rights described above will expire with respect to all holders
five years after this offering is completed.
Anti-Takeover Provisions
The provisions of Delaware law, our restated certificate of
incorporation and our restated bylaws may have the effect of
delaying, deferring or discouraging another person from
acquiring control of Shutterfly.
Delaware Law. We are governed by the provisions of
Section 203 of the Delaware General Corporation Law. In
general, Section 203 prohibits a public Delaware
corporation from engaging in a “business combination”
with an “interested stockholder” for a period of three
years after the date of the transaction in which the person
became an interested stockholder, unless the business
combination is approved by the board or directors or the
stockholders in a prescribed manner or meets other conditions. A
“business combination” includes mergers, asset sales
or other transactions resulting in a financial benefit to the
stockholder. An “interested stockholder” is a person
who, together with affiliates and associates, owns, or within
three years did own, 15% or more of the corporation’s
outstanding voting stock. These provisions may have the effect
of delaying, deferring or preventing a change in our control.
Restated Certificate of Incorporation and Restated Bylaw
Provisions. Our restated certificate of incorporation
and our restated bylaws include a number of provisions that may
have the effect of deterring hostile takeovers or delaying or
preventing changes in control of our management team, including
the following:
•
Board of directors vacancies. Our restated certificate of
incorporation and restated bylaws authorize only our board of
directors to fill vacant directorships occurring on the board
until the next annual meeting of stockholders. In addition, the
number of directors constituting our board of directors may be
fixed exclusively by resolution of our board of directors. These
provisions prevent a stockholder from increasing the size of our
board of directors and gaining control of our board of directors
by filling the resulting vacancies with its own nominees.
•
Classified board. Our restated certificate of
incorporation and restated bylaws provide that our board is
classified into three classes of directors. The existence of a
classified board could delay a successful tender offeror from
obtaining majority control of our board, and the prospect of
such delay may deter a potential offeror.
•
Stockholder action; special meeting of stockholders. Our
restated certificate of incorporation provides that our
stockholders may not take action by written consent, but may
only take action at annual or special meetings of our
stockholders. Stockholders will not be permitted to cumulate
their votes for the election of directors. Our restated bylaws
further provide that special meetings of our stockholders may be
called only by a majority of our board of directors, the
chairman of our board of directors, our chief executive officer
or our president.
•
Advance notice requirements for stockholder proposals and
director nominations. Our restated bylaws provide advance
notice procedures for stockholders seeking to bring business
before our annual meeting of stockholders, or to nominate
candidates for election as directors at our annual meeting of
stockholders. Our restated bylaws also specify certain
requirements as to the form and content of a stockholder’s
notice. These provisions may preclude our stockholders from
bringing matters before our annual meeting of stockholders or
from making nominations for directors at our annual meeting of
stockholders.
•
Issuance of undesignated preferred stock. After the
filing of our restated certificate of incorporation, our board
of directors will have the authority, without further action by
the stockholders, to issue up to 5,000,000 shares of
undesignated preferred stock with rights and preferences,
including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, designated
from time to time by the board of directors. The existence of
authorized but unissued shares of preferred stock enables our
board of directors to render more difficult or to discourage an
attempt to obtain control of us by means of a merger, tender
offer, proxy contest or otherwise.
NASDAQ Global Market Listing
We have applied for listing of our common stock on The NASDAQ
Global Market under the symbol “SFLY.”
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Mellon
Investor Services.
Prior to this offering, there has been no public market for our
common stock, and we cannot predict the effect, if any, that
market sales of shares of our common stock or the availability
of shares of our common stock for sale will have on the market
price of our common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of our common stock,
including shares issued upon exercise of outstanding warrants or
options, in the public market after this offering could
adversely affect market prices prevailing from time to time and
could impair our ability to raise capital through the sale of
our equity securities.
Upon the completion of this offering, based on the number of
shares outstanding as of June 30, 2006, we will
have shares
of common stock outstanding. Of these outstanding shares, all of
the shares
sold in this offering will be freely tradable, except that any
shares held by our affiliates, as that term is defined in
Rule 144 under the Securities Act, may only be sold in
compliance with the limitations described below.
The remaining 17,811,128 outstanding shares of our common
stock will be deemed restricted securities as defined under
Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption
from registration under Rule 144 or 701 promulgated under
the Securities Act, which rules are summarized below. In
addition, all of our stockholders, except for the two
stockholders specifically noted below under the heading
“Lock-Up
Agreements,” have entered into market standoff agreements
with us or lock-up
agreements with the underwriters under which they agreed,
subject to specific exceptions, not to sell any of their stock
for at least 180 days following the date of this
prospectus. Subject to the provisions of Rule 144 or
Rule 701, shares will be available for sale in the public
market as follows:
•
Beginning on the date of this prospectus,
the shares
sold in this offering will be immediately available for sale in
the public market.
•
After 45 days following the date of this
prospectus, additional
shares will become eligible for sale in the public market, all
of
which shares
will be freely tradable under Rule 144(k).
•
After 90 days following the date of this
prospectus, additional
shares will become eligible for sale in the public market, all
of
which shares
will be freely tradable under Rule 144(k).
•
After 180 days following the date of this prospectus, the
remaining shares
will become eligible for sale in the public market, of
which shares
will be freely tradable under Rule 144(k)
and shares
will be held by affiliates and subject to the volume and other
restrictions of Rule 144, as described below.
Lock-Up Agreements
All of our directors and officers and all of our security
holders are subject to
lock-up agreements or
market standoff provisions that prohibit them from offering for
sale, selling, contracting to sell, granting any option for the
sale of, transferring or otherwise disposing of or hedging any
shares of our common stock, options or warrants to acquire
shares of our common stock or any security or instrument related
to such common stock, option or warrant for a period of at least
180 days following the date of this prospectus without the
prior written consent of Goldman, Sachs & Co., except
for two stockholders, Dan Baum and Eva Manolis, two of our
founders, who held a total of 391,700 shares as of
June 30, 2006, who may sell their shares of our common
stock without such prior written consent as follows pursuant to
individual agreements with us: up to 1/3rd of such shares
starting 45 days after the date of this prospectus; up to
2/3rd of such shares starting 90 days after the date of
this prospectus; and all of such shares starting 180 days
after the date of this prospectus.
In general, under Rule 144 as currently in effect,
beginning 90 days after the date of this prospectus, a
person, or group of persons whose shares are required to be
aggregated, including affiliates of Shutterfly, who has
beneficially owned shares for at least one year, is entitled to
sell within any three-month period a number of shares that does
not exceed the greater of one percent of the then outstanding
shares of our common stock, or the average weekly trading volume
in our common stock during the four calendar weeks preceding the
date on which notice of the sale is filed. In addition, a person
who is not deemed to have been an affiliate at any time during
the three months preceding a sale and who has beneficially owned
the shares proposed to be sold for at least two years would be
entitled to sell those shares under Rule 144(k) without
regard to the requirements described above. When a person
acquires shares from one of our affiliates, that person’s
holding period for the purpose of effecting a sale under
Rule 144 would commence on the date of transfer from the
affiliate. However, any such shares that are eligible for sale
under Rule 144 are subject to the
lock-up agreements
described above and will only become eligible for sale upon the
expiration or waiver of those agreements.
Rule 701
In general, under Rule 701 of the Securities Act, an
employee, officer, director, consultant or advisor who purchased
shares from us in connection with a compensatory stock or option
plan or other written agreement in compliance with Rule 701
is eligible, 90 days after the issuer becomes subject to
the reporting requirements of the Exchange Act, to resell those
shares in reliance on Rule 144, but without compliance with
certain restrictions, including the holding period, contained in
Rule 144. However, the shares issued pursuant to
Rule 701 are subject to the
lock-up agreements
described above and will only become eligible for sale upon the
expiration or waiver of those agreements.
Registration of Shares Issued Pursuant to Benefits Plans
We intend to file a registration statement under the Securities
Act as promptly as possible after the effective date of this
offering to register shares to be issued pursuant to our
employee benefit plans. As a result, any options or rights
exercised under our 1999 Stock Plan, our 2006 Equity Incentive
Plan or any other benefit plan after the effectiveness of the
registration statement will also be freely tradable in the
public market, subject to the market stand-off and
lock-up agreements
discussed above. However, such shares held by affiliates will
still be subject to the volume limitation, manner of sale,
notice and public information requirements of Rule 144. As
of June 30, 2006, there were outstanding options under our
1999 Stock Plan for the purchase of 4,733,392 shares of
common stock, with a weighted-average exercise price of
approximately $6.68 per share.
Registration Rights
Pursuant to the terms of our fifth amended and restated
investors’ rights agreement, holders of approximately
13,732,545 shares of common stock outstanding as of
June 30, 2006 or subject to warrants outstanding as of
June 30, 2006 have registration rights with respect to
those shares of common stock, which number will be reduced
to shares
if the underwriters exercise their over-allotment option in
full. For a discussion of these rights please see
“Description of Capital Stock — Registration
Rights.” After such shares are registered, they will be
freely tradable without restriction under the Securities Act.
Shutterfly, the selling stockholders and the underwriters named
below have entered into an underwriting agreement with respect
to the shares being offered. Subject to certain conditions, each
underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman,
Sachs & Co., J.P. Morgan Securities Inc., Piper
Jaffray & Co. and Jefferies & Company, Inc.
are the representatives of the underwriters.
Underwriters
Number of Shares
Goldman, Sachs &
Co.
J.P. Morgan Securities
Inc.
Piper Jaffray &
Co.
Jefferies & Company, Inc.
Total
The underwriters are committed to take and pay for all of the
shares being offered, if any are taken, other than the shares
covered by the option described below unless and until this
option is exercised.
If the underwriters sell more shares than the total number set
forth in the table above, the underwriters have an option to buy
up to an
additional shares
from the selling stockholders to cover such sales. They may
exercise that option for 30 days. If any shares are
purchased pursuant to this option, the underwriters will
severally purchase shares in approximately the same proportion
as set forth in the table above.
The following tables show the per share and total underwriting
discounts and commissions to be paid to the underwriters by
Shutterfly and the selling stockholders. Such amounts are shown
assuming both no exercise and full exercise of the
underwriters’ option to
purchase additional
shares.
Paid by Shutterfly
No Exercise
Full Exercise
Per Share
$
$
Total
$
$
Paid by the selling stockholders
No Exercise
Full Exercise
Per Share
$
$
Total
$
$
Shares sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the
cover of this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at a discount of up to
$ per
share from the initial public offering price. If all the shares
are not sold at the initial public offering price, the
representatives may change the offering price and the other
selling terms.
Shutterfly and its officers, directors, the selling stockholders
and holders of substantially all of its common stock (or
securities convertible into or exercisable for its common stock)
have agreed with the underwriters, subject to certain
exceptions, not to dispose of or hedge any of its common stock
or securities convertible into or exchangeable for shares of its
common stock during the period from the date of this prospectus
continuing through the date 180 days after the public
offering date set forth in this prospectus, except with the
prior written consent of Goldman, Sachs & Co., on
behalf of the representatives. This agreement does not apply to
any existing employee benefit plans. See “Shares Eligible
for Future Sale — Lock-Up Agreements” for a
discussion of certain transfer restrictions.
The 180-day restricted
period described in the preceding paragraph will be
automatically extended if: (1) during the last 17 days
of the 180-day
restricted period Shutterfly issues an earnings release or
announces material news or a material event; or (2) prior
to the expiration of the
180-day
restricted period, Shutterfly announces that it will release
earnings results during the
15-day period following
the last day of the
180-day period, in
which case the restrictions described in the preceding paragraph
will continue to apply until the expiration of the
18-day period beginning
on the issuance of the earnings release of the announcement of
the material news or material event, unless Goldman,
Sachs & Co. waives, in writing, such extension.
Prior to the offering, there has been no public market for the
shares. The initial public offering price will be negotiated
among Shutterfly and the representatives. Among the factors to
be considered in determining the initial public offering price
of the shares, in addition to prevailing market conditions, will
be Shutterfly’s historical performance, estimates of
Shutterfly’s business potential and earnings prospects, an
assessment of Shutterfly’s management and the consideration
of the above factors in relation to market valuation of
companies in related businesses.
An application has been made for quotation of Shutterfly’s
common stock on The NASDAQ Global Market under the symbol
“SFLY.”
In connection with the offering, the underwriters may purchase
and sell shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Short
sales involve the sale by the underwriters of a greater number
of shares than they are required to purchase in the offering.
“Covered” short sales are sales made in an amount not
greater than the underwriters’ option to purchase
additional shares from Shutterfly in the offering. The
underwriters may close out any covered short position by either
exercising their option to purchase additional shares or
purchasing shares in the open market. In determining the source
of shares to close out the covered short position, the
underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to
the price at which they may purchase additional shares pursuant
to the option granted to them. “Naked” short sales are
any sales in excess of such option. The underwriters must close
out any naked short position by purchasing shares in the open
market. A naked short position is more likely to be created if
the underwriters are concerned that there may be downward
pressure on the price of the common stock in the open market
after pricing that could adversely affect investors who purchase
in the offering. Stabilizing transactions consist of various
bids for or purchases of shares of common stock made by the
underwriters in the open market prior to the completion of the
offering.
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing
transactions, as well as other purchases by the underwriters for
their own accounts, may have the effect of preventing or
retarding a decline in the market price of the shares, and
together with the imposition of the penalty bid, may stabilize,
maintain or otherwise affect the market price of the common
stock. As a result, the price of the common stock may be higher
than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued at any
time. These transactions may be effected on The NASDAQ Global
Market, in the
over-the-counter market
or otherwise.
Each of the underwriters has represented and agreed that:
(a) it has not made or will not make an offer of shares to
the public in the United Kingdom within the meaning of
section 102B of the Financial Services and Markets Act 2000
(as amended) (“FSMA”) except to legal entities which
are authorized or regulated to operate in the financial markets
or, if not so authorized or regulated, whose corporate purpose
is solely to invest in securities or otherwise in circumstances
which do not require the publication by us of a prospectus
pursuant to the Prospectus Rules of the Financial Services
Authority (“FSA”);
(b) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of section 21 of FSMA) to persons who
have professional experience in matters relating to investments
falling within Article 19(5) of the Financial Services and
Markets Act 2000 (Financial Promotion) Order 2005 or in
circumstances in which section 21 of FSMA does not apply to
Shutterfly; and
(c) it has complied with, and will comply with all
applicable provisions of FSMA with respect to anything done by
it in relation to the shares in, from or otherwise involving the
United Kingdom.
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a Relevant
Member State), each underwriter has represented and agreed that
with effect from and including the date on which the Prospectus
Directive is implemented in that Relevant Member State (the
Relevant Implementation Date) it has not made and will not make
an offer of shares to the public in that Relevant Member State
prior to the publication of a prospectus in relation to the
shares which has been approved by the competent authority in
that Relevant Member State or, where appropriate, approved in
another Relevant Member State and notified to the competent
authority in that Relevant Member State, all in accordance with
the Prospectus Directive, except that it may, with effect from
and including the Relevant Implementation Date, make an offer of
shares to the public in that Relevant Member State at any time:
(a) to legal entities which are authorised or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the
last financial year; (2) a total balance sheet of more than
€43,000,000 and
(3) an annual net turnover of more than
€50,000,000, as shown
in its last annual or consolidated accounts; or
(c) in any other circumstances which do not require the
publication by Shutterfly of a prospectus pursuant to
Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an
“offer of shares to the public” in relation to any
shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the shares to be offered so as to enable an
investor to decide to purchase or subscribe the shares, as the
same may be varied in that Relevant Member State by any measure
implementing the Prospectus Directive in that Relevant Member
State and the expression Prospectus Directive means Directive
2003/71/EC and includes any relevant implementing measure in
each Relevant Member State.
The shares may not be offered or sold by means of any document
other (i) in circumstances which do not constitute an offer
to the public within the meaning of the Companies Ordinance
(Cap. 32, Laws of Hong Kong), or (ii) to
“professional investors” within the meaning of the
Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong)
and any rules made thereunder, or (iii) in other
circumstances which do not result in the document being a
“prospectus” within the meaning of the Companies
Ordinance (Cap. 32, Laws of Hong Kong), and no advertisement,
invitation or document relating to the shares may be issued or
may be in the possession of any person for the purpose of issue
(in each case whether in Hong Kong or elsewhere), which is
directed at, or the contents of which are likely to be accessed
or read by, the public in Hong Kong (except if permitted to do
so under the laws of Hong Kong) other than with respect to
shares which are or are intended to be disposed of only to
persons outside Hong Kong or only to “professional
investors” within the meaning of the Securities and Futures
Ordinance (Cap. 571, Laws of Hong Kong) and any rules made
thereunder.
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the
offer or sale, or invitation for subscription or purchase, of
the shares may not be circulated or distributed, nor may the
shares be offered or sold, or be made the subject of an
invitation for subscription or purchase, whether directly or
indirectly, to persons in Singapore other than (i) to an
institutional investor under Section 274 of the Securities
and Futures Act, Chapter 289 of Singapore (the
“SFA”), (ii) to a relevant person, or any person
pursuant to Section 275(1A), and in accordance with the
conditions, specified in Section 275 of the SFA or
(iii) otherwise pursuant to, and in accordance with the
conditions of, any other applicable provision of the SFA.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries’ rights and interest in
that trust shall not be transferable for 6 months after
that corporation or that trust has acquired the shares under
Section 275 except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person, or
any person pursuant to Section 275(1A), and in accordance
with the conditions, specified in Section 275 of the SFA;
(2) where no consideration is given for the transfer; or
(3) by operation of law.
The securities have not been and will not be registered under
the Securities and Exchange Law of Japan (the “Securities
and Exchange Law”) and each underwriter has agreed that it
will not offer or sell any securities, directly or indirectly,
in Japan or to, or for the benefit of, any resident of Japan
(which term as used herein means any person resident in Japan,
including any corporation or other entity organized under the
laws of Japan), or to others for re-offering or resale, directly
or indirectly, in Japan or to a resident of Japan, except
pursuant to an exemption from the registration requirements of,
and otherwise in compliance with, the Securities and Exchange
Law and any other applicable laws, regulations and ministerial
guidelines of Japan.
A prospectus in electronic format may be made available on
Internet sites or through other online services maintained by
one or more of the underwriters or by their affiliates. In those
cases, prospective investors may view the preliminary prospectus
and the final prospectus online and, depending upon the
particular underwriter, prospective investors may be allowed to
place orders online. The underwriters may agree with Shutterfly
to allocate a specific number of shares for sale to online
brokerage account holders. Any such allocation for online
distributions will be made by the representatives on the same
basis as other allocations. In addition, one or more of the
underwriters participating in this offering may distribute
prospectuses electronically.
Other than the prospectus in electronic format, information on
any underwriter’s website and any information contained in
any other website maintained by an underwriter is not part of
this prospectus or the registration statement of which this
prospectus forms a part, has not been approved and/or endorsed
by Shutterfly or any underwriter in its capacity as underwriter
and should not be relied on by investors.
The underwriters do not expect sales to discretionary accounts
to exceed five percent of the total number of shares offered.
Shutterfly estimates that its share of the total expenses of the
offering, excluding underwriting discounts and commissions, will
be approximately
$ .
Shutterfly and the selling stockholders have agreed to indemnify
the several underwriters against certain liabilities, including
liabilities under the Securities Act of 1933.
Fenwick & West LLP, Mountain View, California will pass
upon the validity of the issuance of the shares of common stock
offered by this prospectus. Certain legal matters in connection
with this offering will be passed upon for the underwriters by
Simpson Thacher & Bartlett LLP, Palo Alto, California.
EXPERTS
Our consolidated financial statements as of December 31,2004 and 2005, and for each of the three years in the period
ended December 31, 2005, included in this prospectus have
been so included in reliance on the report of
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, given on the authority of said firm as experts
in auditing and accounting.
C:
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on
Form S-1 under the
Securities Act with respect to the common stock. This
prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in
the registration statement, some items of which are contained in
exhibits to the registration statement as permitted by the rules
and regulations of the SEC. For further information with respect
to us and our common stock, we refer you to the registration
statement, including the exhibits filed as a part of the
registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other document
are not necessarily complete. If a contract or document has been
filed as an exhibit to the registration statement, please see
the copy of the contract or document that has been filed. Each
statement in this prospectus relating to a contract or document
filed as an exhibit is qualified in all respects by the filed
exhibit. The exhibits to the registration statement should be
referenced for the complete contents of these contracts and
documents. A copy of the registration statement, including the
exhibits filed as a part of the registration statement, may be
inspected without charge at the SEC’s Public Reference Room
at 100 F Street, N.E., Washington, D.C. 20549, and
copies of all or any part of the registration statement may be
obtained from the SEC upon the payment of fees prescribed by it.
You may call the SEC at
1-800-SEC-0330 for more
information on the operation of the public reference facilities.
The SEC maintains a website at http://www.sec.gov that contains
reports, proxy and information statements and other information
regarding companies that file electronically with it.
As a result of this offering, we will become subject to the
information and reporting requirements of the Securities
Exchange Act and, in accordance with this law, will file
periodic reports, proxy statements and other information with
the SEC. These periodic reports, proxy statements and other
information will be available for inspection and copying at the
SEC’s public reference facilities and the website of the
SEC referred to above.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Shutterfly, Inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, of redeemable
convertible preferred stock and stockholders’ equity
(deficit) and of cash flows present fairly, in all material
respects, the financial position of Shutterfly, Inc. and its
subsidiary (the “Company”) at December 31, 2005
and 2004, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial
statements, the Company adopted FASB Staff Position 150-5
(“FSP 150-5”), Issuer’s Accounting under FASB
Statement No. 150 for Free-standing Warrants and Other
Instruments on Shares that are Redeemable, during the year
ended December 31, 2005.
LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(DEFICIT)
Current liabilities:
Accounts payable
$
3,583
$
3,871
$
2,471
Accrued liabilities
6,402
11,520
5,257
Deferred revenue
3,995
4,564
5,061
Current portion of capital lease
obligations
1,488
1,503
2,011
Total current liabilities
15,468
21,458
14,800
Other liabilities
1,434
523
585
Capital lease obligations, less
current portion
2,709
3,646
2,392
Preferred stock warrant liability
—
1,535
1,662
—
Total liabilities
19,611
27,162
19,439
Commitments and contingencies
(Note 6)
Redeemable convertible preferred
stock, $0.0001 par value; 14,635 shares authorized at
December 31, 2004, 15,454 shares authorized at
December 31, 2005 and June 30, 2006 (unaudited),
respectively; 12,448 shares issued and outstanding at
December 31, 2004, 13,802 shares issued and
outstanding at December 31, 2005 and June 30, 2006
(unaudited), respectively; (liquidation preference: $131,367 at
December 31, 2005 and June 30, 2006 (unaudited)); no
shares issued and outstanding pro forma (unaudited)
69,822
89,652
89,652
—
Stockholders’ equity (deficit)
Common stock, $0.0001 par
value; 35,365 shares authorized at December 31, 2004,
38,251 shares authorized at December 31, 2005 and at
June 30, 2006 (unaudited); 2,827, 3,790 and
3,914 shares issued and outstanding at December 31,2004 and 2005, and at June 30, 2006 (unaudited),
respectively; 17,716 shares issued and outstanding pro
forma (unaudited)
—
—
—
2
Additional paid-in capital
7,505
10,501
10,859
102,171
Deferred stock-based compensation
(2,003
)
(1,625
)
(1,039
)
(1,039
)
Accumulated deficit
(65,070
)
(36,138
)
(39,796
)
(39,796
)
Total stockholders’ equity
(deficit)
(59,568
)
(27,262
)
(29,976
)
$
61,338
Total liabilities, redeemable
convertible preferred stock and stockholders’ equity
(deficit)
$
29,865
$
89,552
$
79,115
The accompanying notes are an integral part of these
consolidated financial statements.
Shutterfly, Inc., (the “Company”) was incorporated in
the state of Delaware in 1999 and began its services in December
1999. The Company is an Internet-based social expression and
personal publishing service that enables customers to share,
print and preserve their memories by leveraging a
technology-based platform and manufacturing processes. The
Company provides customers a full range of products and services
to organize and archive digital images; share pictures; order
prints and create an assortment of personalized items such as
cards, calendars and photo books. The Company is headquartered
in Redwood City, California.
Note 2 — Summary of Significant Accounting
Policies
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary acquired
in 2005 (see Note 5). All intercompany transactions and
balances have been eliminated.
Unaudited Interim Financial Information
The accompanying consolidated balance sheet as of June 30,2006, the consolidated statements of operations and of cash
flows for the six months ended June 30, 2005 and 2006 and
the consolidated statement of redeemable convertible preferred
stock and stockholders’ equity (deficit) for the six months
ended June, 2006 are unaudited. The unaudited interim financial
statements have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect
all adjustments, which include only normal recurring
adjustments, necessary to present fairly the Company’s
financial position and results of operations and cash flows for
the six months ended June 30, 2005 and 2006. The financial
data and other information disclosed in these notes to the
financial statements related to the six-month periods are
unaudited. The results of the six months ended June 30,2006 are not necessarily indicative of the results to be
expected for the year ending December 31, 2006 or for any
other interim period or for any other future year.
Pro Forma Statement of Stockholders’ Equity (Deficit)
(Unaudited)
Upon the consummation of the initial public offering
contemplated herein, all of the outstanding shares of redeemable
convertible preferred stock automatically convert into common
stock. The June 30, 2006 unaudited pro forma balance sheet
data have been prepared assuming the conversion of the
redeemable convertible preferred stock outstanding into
13,802 shares of common stock and the reclassification of
redeemable convertible preferred stock warrants from liabilities
to stockholders’ equity (deficit).
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported amounts of
revenues and expenses during the reporting period. Significant
items subject to such estimates and assumptions include
intangible assets valuation, deferred tax asset valuation
allowance, and the valuation of equity instruments. Actual
results could differ from these estimates.
(In thousands, except per share
amounts) — (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased
with original maturities of three months or less to be cash
equivalents. Cash equivalents include various money market
accounts, which are readily convertible to cash and are stated
at cost, which approximates market. Cash equivalents amounted to
$11,092 and $22,122 at December 31, 2004 and 2005,
respectively, and $22,654 (unaudited) at June 30, 2006.
Fair Value of Financial Instruments
The carrying amount of certain of the Company’s financial
instruments, including cash, cash equivalents, accounts
receivable and accounts payable, are carried at cost, which
approximates their fair value because of their short-term
maturities. Based on borrowing rates available to the Company
for loans with similar terms, the carrying value of borrowings,
including capital lease obligations, approximates fair value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
credit risk consist principally of cash, cash equivalents and
accounts receivable. Most of the Company’s cash and cash
equivalents as of December 31, 2005 were deposited with
financial institutions in the United States and Company policy
restricts the amount of credit exposure to any one issuer and to
any one type of investment. Deposits held with financial
institutions may exceed federally insured limits.
The Company’s accounts receivable are derived primarily
from sales to customers located in the United States who make
payments through credit cards. Credit card receivables settle
relatively quickly. The Company maintains allowances for
potential credit losses on customer accounts when deemed
necessary. To date, such losses have not been material and have
been within management’s expectations.
As of December 31, 2004, one customer from the
Company’s photo processing fulfillment service accounted
for 66% of its net accounts receivable. As of December 31,2005 and June 30, 2006, another customer from the
Company’s photo processing fulfillment service accounted
for 18% and 13% (unaudited), respectively, of its net accounts
receivable.
Inventories
Inventories are stated at the lower of cost on a
first-in, first-out
basis or market value. The value of inventories is reduced by
estimates for excess and obsolete inventories. The estimate for
excess and obsolete inventories is based upon management’s
review of utilization of inventories in light of projected
sales, current market conditions and market trends. Inventories
are primarily raw materials and consist principally of photo
finishing supplies.
Property and Equipment
Property and equipment, including equipment under capital
leases, are stated at historical cost, less accumulated
depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the estimated lives
of the assets, generally three to five years. Amortization of
equipment acquired under capital lease obligations is computed
using the straight-line method over the shorter of the remaining
lease term or the estimated useful life of the related assets,
generally three to four years. Leasehold improvements are
amortized over their estimated useful lives, or the lease term
if shorter, generally three to five years. Upon retirement or
sale, the
(In thousands, except per share
amounts) — (Continued)
cost and related accumulated depreciation are removed from the
balance sheet and the resulting gain or loss is reflected in
operating expenses. Major additions and improvements are
capitalized, while replacements, maintenance and repairs that do
not extend the life of the asset are charged to expense as
incurred.
The Company capitalizes eligible costs associated with software
developed or obtained for internal use in accordance with AICPA
Statement of
Position 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, and
EITF 00-02,
Accounting for Web Site Development Costs. Accordingly,
the Company expenses all costs that relate to the planning and
post implementation phases. Costs incurred in the development
phase are capitalized and amortized over the product’s
estimated useful life. The Company has capitalized website
development costs incurred in the application development phase
and unamortized cost is included in property and equipment and
totaled approximately $649 and $2,187 at December 31, 2004
and 2005, respectively, and $2,227 (unaudited) at June 30,2006. Capitalized costs are amortized over the useful life,
which is generally three years. Amortization of capitalized
costs totaled approximately $151, $204 and $404 for the years
ended December 31, 2003, 2004 and 2005, respectively, and
$156 (unaudited) and $414 (unaudited) for the six months ended
June 30, 2005 and 2006, respectively. Costs associated with
minor enhancements and maintenance for the Company’s
website are expensed as incurred.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable in accordance with
Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (“SFAS No. 144”). Recoverability
is measured by comparison of the carrying amount to the future
net cash flows which the assets are expected to generate. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the assets exceeds the projected discounted future
cash flows arising from the asset using a discount rate
determined by management to be commensurate with the risk
inherent to the Company’s current business model.
Intangible Assets
The Company accounts for intangible assets in accordance with
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets
(“SFAS No. 142”). Goodwill and
intangible assets with indefinite lives are not amortized but
are tested for impairment on an annual basis or whenever events
or changes in circumstances indicate that the carrying amount of
these assets may not be recoverable. Intangible assets with
finite useful lives are amortized using the straight-line method
over their useful lives and are reviewed for impairment in
accordance with SFAS No. 144.
In May 2005, the Company entered into a settlement and license
agreement (the “Agreement”) to resolve litigation
brought by a third party with respect to alleged infringement of
certain processes under U.S. patents. Under the terms of
the Agreement, the Company agreed to pay a total of $2,000,
$1,000 of which was paid in 2005, and the remaining $1,000 was
paid in January 2006. The Agreement provides the Company with a
license to the third party’s patents, including a non-
exclusive, fully paid-up, royalty-free, worldwide license to the
patents underlying the litigation. In
(In thousands, except per share
amounts) — (Continued)
conjunction with the agreement, the third party and the Company
agreed to a mutual release of claims. The Company recorded the
total value of the settlement as an intangible asset. The
intangible asset is amortized ratably over its estimated life
beginning with the alleged infringement date, which was
January 1, 2002 through 2017, the expiration dates of the
patents-in-suit. The Company recorded amortization expense of
$379 in 2004 and $126 in 2005.
Intangible assets related to acquired workforce are being
amortized on a straight-line basis over the estimated useful
life of one year (Note 5).
Freestanding Preferred Stock Warrants
Freestanding warrants and other similar instruments related to
shares that are redeemable are accounted for in accordance with
SFAS No. 150. Under SFAS No. 150, the
freestanding warrants that are related to the Company’s
convertible preferred stock are classified as liabilities on the
consolidated balance sheet. The warrants will be subject to
re-measurement at each balance sheet date and any change in fair
value will be recognized as a component of other income
(expense), net. The Company will continue to adjust the
liability for changes in fair value until the earlier of the
exercise or expiration of the warrants or the completion of a
liquidation event, including the completion of an initial public
offering, at which time all preferred stock warrants will be
converted into warrants to purchase common stock and,
accordingly, the liability will be reclassified as common stock
and additional
paid-in-capital.
Revenue Recognition
The Company generally recognizes revenue from product sales upon
shipment when persuasive evidence of an arrangement exists, the
selling price is fixed or determinable and collection of
resulting receivables is reasonably assured. Revenues from
amounts billed to customers, including prepaid orders, are
deferred until shipment of fulfilled orders.
The Company provides its customers with a 100% satisfaction
guarantee whereby products can be returned within a
30-day period for a
reprint or refund. The Company maintains an allowance for
estimated future returns based on historical data. The provision
for estimated returns is included in accrued liabilities. During
the years ended December 31, 2003, 2004 and 2005, returns
totaled less than 1% of net revenues and have been within
management’s expectations.
The Company periodically provides incentive offers to its
customers in exchange for setting up an account and to encourage
purchases. Such offers include free products and percentage
discounts on current purchases. Discounts, when accepted by
customers, are treated as a reduction to the purchase price of
the related transaction and are presented in net revenues.
Production costs related to free products are included in cost
of revenues upon redemption.
Shipping charged to customers is recognized as revenue.
Cost of Revenues
Cost of revenues consist primarily of direct materials, the
majority of which consists of paper, payroll and related
expenses for direct labor, shipping charges, packaging supplies,
distribution and fulfillment activities, rent for production
facilities, depreciation of production equipment and third-party
costs for photo-based merchandise. Cost of revenues also
includes payroll and related expenses for personnel engaged in
customer service. In addition, cost of revenues includes any
third-party software or patents licensed, as well as the
amortization of capitalized website development costs.
(In thousands, except per share
amounts) — (Continued)
Technology and Development Expense
Technology and development expense consists primarily of payroll
and related expenses for the development and ongoing maintenance
of the Company’s website, infrastructure and software.
These expenses include depreciation of the computer and network
hardware used to run the Company’s website and store the
customer data that the Company maintains, as well as
amortization of purchased software. Technology and development
expense also includes colocation and bandwidth costs. Technology
and development costs are charged to operations as incurred.
Sales and Marketing Expense
Sales and marketing expense consists of costs incurred for
marketing programs and personnel and related expenses for
customer acquisition, product marketing, business development
and public relations activities. The Company’s marketing
efforts consist of various online and offline media programs,
such as e-mail and direct mail promotions, the purchase of
keyword search terms and various strategic alliances. Fees paid
to third parties who drive new customers to our website are
charged to expense as incurred.
Advertising costs are expensed as incurred. Such costs are
included in selling and marketing expenses and totaled
approximately $1,068, $2,361 and $4,878 during the years ended
December 31, 2003, 2004 and 2005, respectively, and $1,605
(unaudited) and $1,827 (unaudited) for the six months
ended June,30, 2005 and 2006, respectively.
Stock-Based Compensation
Prior to January 1, 2006, the Company accounted for
stock-based employee compensation arrangements in accordance
with the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees
(“APB No. 25”), and related interpretations, and
followed the disclosure provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation (“SFAS No. 123”). Under APB
No. 25, compensation expense is based on the difference, if
any, on the date of the grant, between the fair value of the
Company’s stock and the exercise price. Employee
stock-based compensation determined under APB No. 25 is
recognized based on guidance provided in Financial Accounting
Standards Board Interpretation No. 28, Accounting for
Stock Appreciation Rights and Other Variable Stock Option or
Award Plans (“FIN 28”), which provides for
accelerated expensing over the option vesting period.
The Company accounts for equity instruments issued to
non-employees in accordance with the provisions of
SFAS No. 123, Emerging Issues Task Force Abstract
No. 96-18, Accounting for Equity Instruments that are
Issued to Other than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services
(“EITF 96-18”), and FIN 28.
(In thousands, except per share
amounts) — (Continued)
Under the disclosure requirements of Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure
(“SFAS No. 148”), the following table
presents the effect on net income (loss) if the Company had
applied the fair value recognition provision of
SFAS No. 123:
Add: Stock-based compensation
recognized under APB 25
169
1,839
3,310
1,094
Less: Total stock-based employee
compensation expense determined under fair value based method
for all awards, net of tax effect
(191
)
(1,847
)
(4,072
)
(1,506
)
Net income (loss) — pro
forma
$
2,022
$
3,701
$
28,170
$
(1,704
)
Basic net income (loss) per share
As reported
$
—
$
—
$
1.45
$
(0.41
)
Pro forma
$
—
$
—
$
1.40
$
(0.55
)
Diluted net income (loss) per share
As reported
$
—
$
—
$
1.02
$
(0.41
)
Pro forma
$
—
$
—
$
0.99
$
(0.55
)
For disclosure purposes under SFAS No. 123, the fair
value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions:
The weighted average grant date fair value per share of options
granted during the years ended December 31, 2003, 2004 and
2005 was $0.51, $3.48 and $1.43, respectively.
Effective January 1, 2006, the Company adopted the fair
value provisions of Statement of Financial Accounting Standards
No. 123R, Share-Based Payment
(“SFAS No. 123R”), which supersedes its
previous accounting under APB 25. SFAS No. 123R
requires the recognition of compensation expense, using a
fair-value based method, for costs related to all share-based
payments including stock options. SFAS No. 123R requires
companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The
Company adopted SFAS No. 123R using the prospective
transition method, which requires that for nonpublic entities
that used the minimum value method for either pro forma or
financial statement recognition purposes, SFAS No. 123R
shall be applied to option grants after the required effective
date. For options granted prior to the SFAS No. 123R
effective date, which the requisite service period has not been
performed as of January 1, 2006, the Company will continue
to recognize compensation expense on the remaining unvested
awards under the intrinsic-value method of APB 25. In
addition,
(In thousands, except per share
amounts) — (Continued)
the Company will continue amortizing those awards valued prior
to January 1, 2006 utilizing an accelerated amortization
schedule while all option grants valued after January 1,2006 will be expensed on a straight-line basis.
Income Taxes
The Company accounts for income taxes under the liability
method. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial
statement and tax basis of assets and liabilities and net
operating loss and credit carryforwards using enacted tax rates
in effect for the year in which the differences are expected to
reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be
realized.
Net Income (Loss) Per Share
Basic net income (loss) per share attributed to common shares is
computed by dividing the net income (loss) attributable to
common shares for the period by the weighted average number of
common shares outstanding during the period as reduced by the
weighted average unvested common shares subject to repurchase by
the Company. Net income (loss) available to common stockholders
is calculated using the two class method as the net income
(loss) less preferred stock dividends for the period and amounts
allocated to preferred stock to reflect the rights of the
preferred stock to receive dividends in preference to common
stock.
Diluted net income (loss) per share attributed to common shares
is computed by dividing the net income (loss) attributable to
common shares for the period by the weighted average number of
common and potential common shares outstanding during the
period, if the effect of each class of potential common shares
is dilutive. Potential common shares include restricted common
stock, common stock subject to repurchase rights, and
incremental shares of common stock issuable upon the exercise of
stock options and warrants and upon conversion of preferred
stock.
Net income (loss) allocable to
common stockholders
$
—
$
—
$
4,720
$
(1,292
)
$
(3,658
)
Denominator
Weighted-average common shares
outstanding
1,628
2,904
3,619
3,493
4,016
Less: Weighted-average unvested
common shares subject to repurchase
(54
)
(673
)
(364
)
(368
)
(158
)
Denominator for basic net income
(loss) per share
1,574
2,231
3,255
3,125
3,858
Dilutive effect of stock options
and shares subject to repurchase
—
—
1,307
—
—
Dilutive effect of outstanding
preferred stock warrants
—
—
47
—
—
Denominator for diluted net income
(loss) per share
1,574
2,231
4,609
3,125
3,858
Basic net income (loss) per share
$
—
$
—
$
1.45
$
(0.41
)
$
(0.95
)
Diluted net income (loss) per share
$
—
$
—
$
1.02
$
(0.41
)
$
(0.95
)
Pro forma net income (loss) per
share (unaudited):
Numerator
Net income (loss)
$
28,932
$
(3,658
)
Denominator
Shares used above
3,255
3,858
Pro forma adjustments to reflect
assumed weighted average effect of conversion of preferred stock
12,633
13,802
Denominator for pro forma basic net
income (loss) per share
15,888
17,660
Pro forma adjustments to reflect
assumed weighted average effect of conversion of common stock
options and shares subject to repurchase
1,307
—
Pro forma adjustments to reflect
assumed net exercise of outstanding warrants
47
—
Denominator for pro forma diluted
net income (loss) per share
17,242
17,660
Basic net income (loss) per share
$
1.82
$
(0.21
)
Diluted net income (loss) per share
$
1.68
$
(0.21
)
The following weighted-average outstanding options, common stock
subject to repurchase and convertible preferred stock warrants
were excluded from the computation of diluted net income (loss)
SFAS No. 130, Reporting Comprehensive Income,
requires an enterprise to report, by major components and as a
single total, the change in net assets during the period from
non-owner sources. For the years ended December 31, 2003,
2004 and 2005, and the six months ended June 30, 2005 and
2006, there was no difference between the Company’s
comprehensive income (loss) and net income (loss).
Segment Reporting
The Company operates in one industry segment — digital
photofinishing services. The Company operates in one geographic
area, being the United States of America.
FASB Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information, establishes standards
for reporting information about operating segments. Operating
segments are defined as components of an enterprise about which
separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision
making group, in deciding how to allocate resources and in
assessing performance. The Company’s chief operating
decision maker is its Chief Executive Officer. The
Company’s Chief Executive Officer reviews financial
information presented on a consolidated basis for purposes of
allocating resources and evaluating financial performance. The
Company has one business activity and there are no segment
managers who are held accountable for operations, operating
results and plans for products or components below the
consolidated unit level. Accordingly, the Company reports as a
single operating segment.
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, an amendment of ARB No. 43,
Chapter 4 (“SFAS No. 151”).
SFAS No. 151 amends the guidance in ARB No. 43,
Chapter 4, to clarify the accounting for abnormal amounts
of idle facility expense, handling costs and wasted material
(spoilage). Among other provisions, the new rule requires that
such items be recognized as current-period charges, regardless
of whether they meet the criterion of “so abnormal” as
stated in ARB No. 43. SFAS No. 151 was adopted as
of January 1, 2006, and did not have a material effect on
the Company’s financial position, results of operations, or
liquidity.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, which replaces
Accounting Principles Board Opinion, or APB, No. 20,
Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial
Statements (“SFAS No. 154”). This
statement requires retrospective application, unless
impracticable, for changes in accounting
(In thousands, except per share
amounts) — (Continued)
principles in the absence of transition requirements specific to
newly adopted accounting principles. The provisions of SFAS
No. 154 will be effective for the Company beginning on
September 1, 2006. The Company is currently evaluating the
impact, if any, of this statement on the Company’s
financial position and results of operations.
In November 2005, the FASB issued FSP SFAS 115-1 and
SFAS 124-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments
(“FSP 115-1 and 124-1”), which clarifies when an
investment is considered impaired, whether the impairment is
other than temporary, and the measurement of an impairment loss.
It also includes accounting considerations subsequent to the
recognition of an other-than-temporary impairment and requires
certain related disclosures. FSP 115-1 and 124-1 was effective
for all reporting periods beginning after December 15, 2005
and did not have a material impact on our financial statements.
Note 3 — Change in Accounting Policy
On June 29, 2005, the FASB issued Staff Position 150-5,
Issuer’s Accounting under FASB Statement No. 150
(“SFAS 150”) for Freestanding Warrants and Other
Similar Instruments on Shares That Are Redeemable (“FSP
150-5”). FSP 150-5 affirms that such warrants are subject
to the requirements in SFAS 150, regardless of the timing
of the redemption feature or the redemption price. Therefore,
under SFAS 150, the freestanding warrants that are related
to the Company’s convertible preferred stock are
liabilities that should be recorded at fair value. The Company
previously accounted for freestanding warrants for the purchase
of convertible preferred stock under EITF Issue No. 96-18,
Accounting for Equity Instruments that are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services (“EITF 96-18”).
The Company adopted FSP 150-5 and accounted for the cumulative
effect of the change in accounting principle as of July 1,2005. For the year ended December 31, 2005, the impact of
the change in accounting principle was to increase net income by
$442, or $0.14 per share. There was $464 of additional
expense recorded in other income (expense), net to reflect the
increase in fair value between July 1, 2005 and
December 31, 2005. In the six months ended June 30,2006, the Company recorded $127 (unaudited) of additional
expense reflected as other income (expense), net to reflect the
increase in fair value between January 1, 2006 and
June 30, 2006.
The pro forma effect of the adoption SFAS No. 150 on the
Company’s results of operations for 2003, 2004 and 2005, if
applied retroactively, assuming SFAS No. 150 had been
adopted in those years, has not been disclosed, as these amounts
would not be materially different from the reported amounts.
Property and equipment includes $5,598 and $7,050 of equipment
and software under capital leases at December 31, 2004 and
2005, respectively, and $7,032 (unaudited) at June 30,2006. Accumulated depreciation of assets under capital leases
totaled $2,320 and $2,703 at December 31, 2004 and 2005,
respectively, and $3,471 (unaudited) at June 30, 2006.
Depreciation and amortization expense for the years ended
December 31, 2003, 2004 and 2005 was $2,761, $3,769 and
$6,246, respectively, and for the six months ended June 30,2005 and 2006 was $2,650 (unaudited) and $4,556
(unaudited), respectively.
On June 1, 2005, the Company acquired 100% of Memory
Matrix, Inc., (“Memory Matrix”) a Nevada corporation,
in exchange for 109 shares of common stock. The acquisition
was effected using a “reverse triangular” merger in
which a wholly owned Shutterfly subsidiary was merged with and
into Memory Matrix, resulting in Memory Matrix becoming a wholly
owned subsidiary of Shutterfly. Memory Matrix was considered to
be a “developmental stage” enterprise and did not meet
the definition of a “business” under
SFAS No. 141, Business Combinations, for
business combination purposes. In accordance with
SFAS No. 141, the acquisition of Memory Matrix was
accounted for as an acquisition of assets.
As additional consideration for the acquisition, the Company
also issued 121 shares of common stock to the employees of
Memory Matrix, subject to vesting and repurchase rights over a
period of 18 months. $671 of deferred stock-based
compensation was recorded based on the intrinsic value of the
shares at the time of the acquisition. The Company recognized
$500 and $71 (unaudited) of stock-based compensation
expense for the year ended December 31, 2005 and the six
months ended June 30, 2006, respectively, relating to the
vesting of the restricted shares. As of December 31, 2005
and June 30, 2006 (unaudited), 73 and 38 shares were
unvested, respectively.
The total purchase price was $690, based on an estimated per
share fair value of $6.00 on the date of the transaction, and
was allocated to various tangible and intangible assets, which
consisted of $239 of cash, $9 of prepaids, $35 of fixed assets,
$279 of acquired workforce, $564 of core technology, related
deferred tax liability of $336 and assumed liabilities of $100.
In addition, we recorded a deferred tax asset on the date of
acquisition of $201, which was offset in full by a
(In thousands, except per share
amounts) — (Continued)
valuation allowance. In the fourth quarter of 2005, the
valuation allowance was released, which reduced non-current
intangibles accordingly.
The acquired workforce intangible asset is being amortized on a
straight-line basis over one year. The net core technology asset
will be amortized on a straight-line basis over the asset’s
life, which is estimated as three years, when placed into
service.
Note 6 — Commitments and Contingencies
Leases
The Company leases office and production space under various
noncancelable operating leases that expire no later than July
2010. Rent expense was $918, $1,131 and $1,181, for the years
ended December 31, 2003, 2004 and 2005, respectively, and
$540 (unaudited) and $622 (unaudited) for the six
months ended June 30, 2005 and 2006, respectively.
Rent expense is recorded on a straight-line basis over the lease
term. When a lease provides for fixed escalations of the minimum
rental payments, the difference between the straight-line rent
charged to expense, and the amount payable under the lease is
recognized as deferred rent.
During 2002, the Company accrued $209 for lease costs pertaining
to the estimated future obligations for noncancelable lease
payments for excess office facilities that were vacated. The
Company estimated minimum sublease income in determining the
lease loss reserve. In 2003, the Company reversed $89 of
previously accrued building lease costs due to a change in the
intended use of its production facility. The lease for the
vacated office facilities expired in August 2004.
The Company leases certain equipment, software and colocation
services under non-cancellable capital leases, operating leases
or long-term agreements that expire at various dates through the
year 2010. The leased equipment is subject to a security
interest. The total outstanding obligation under capital leases
at December 31, 2005 and June 30, 2006 was $5,149 and
$4,403 (unaudited), respectively.
At December 31, 2005, the total future minimum payments
under non-cancelable scheduled rentals are as follows:
Purchase
Operating
Capital
Obligations
Leases
Leases
Year Ending:
2006
$
1,820
$
1,132
$
1,669
2007
—
1,303
2,110
2008
—
1,349
1,364
2009
—
1,396
483
2010 and thereafter
—
817
—
Total minimum lease payments
$
1,820
$
5,997
5,626
Less: amount representing interest
(477
)
Present value of future minimum
lease payments
5,149
Less: current portion
(1,503
)
Noncurrent portion of capital lease
obligations
$
3,646
Purchase obligations consist of non-cancellable marketing
agreements and colocation services.
(In thousands, except per share
amounts) — (Continued)
In October 2001, the Company entered into an agreement with a
leasing company to establish a line of credit which enabled the
Company to finance up to $1,000 in equipment purchases under
capital leases (the “Lease Line”).
Under the Lease Line, the Company was required to maintain
certain financial and non-financial covenants. In May 2002, a
stockholder of the Company provided the lessor with a guarantee
and compliance with the covenants was waived by the lessor. The
guarantee included a call option that the guarantor was able to
exercise at any time during the lease term. The exercise of the
option would have resulted in payment of all due amounts to the
lessor at the time of exercise and transferring of all rights
and obligations under the lease line to the guarantor. In
connection with the guarantee, the Company entered into a
warrant purchase agreement with the stockholder and issued
warrants to purchase 60 shares of Series D
convertible preferred stock (See Note 8). The agreement
included, among other things, a right of the stockholder to
convert any outstanding amount of the assumed loan, given that
the call option included in the guarantee agreement was
exercised, into shares of convertible preferred stock at a
conversion rate of $0.6123 per share.
In February 2003, the Company’s stockholder exercised its
call option. In July 2003, the stockholder converted the then
outstanding assumed loan in the amount of $439 into
718 shares of Series E convertible preferred stock.
Indemnifications
In the normal course of business, the Company enters into
contracts and agreements that contain a variety of
representation and warranties and provide for general
indemnifications. The Company’s exposure under these
agreements is unknown because it involves future claims that may
be made against the Company in the future, but have not yet been
made. To date, the Company has not paid any claims or been
required to defend any action related to its indemnification
obligations. However, the Company may record charges in the
future as a result of these indemnification obligations.
In accordance with its bylaws, the Company has indemnification
obligations to its officers and directors for certain events or
occurrences, subject to certain limits, while they are serving
at the Company’s request in such a capacity. There have
been no claims to date and the Company has a director and
officer insurance policy that enables it to recover a portion of
any amounts paid for future claims.
Contingencies
From time to time, the Company may have certain contingent
liabilities that arise in the ordinary course of its business
activities. The Company accrues contingent liabilities when it
is probable that future expenditures will be made and such
expenditures can be reasonably estimated.
Note 7 — Loan Payable
In February 2003, the Company received a $2,500 loan from a
stockholder to finance working capital. The loan was repayable
commencing March 2004, based on a
36-month repayment
schedule. Any remaining outstanding balance was due and
immediately payable at the end of February 2006. The loan bore
an annual interest rate of 5% above the Prime Rate, as published
in the Wall Street Journal, and not to exceed 12%. The Prime
Rate was adjusted on a monthly basis. The Company granted the
lender a continuing security interest in all of its assets. The
loan
(In thousands, except per share
amounts) — (Continued)
agreement provided for certain financial and non-financial
covenants, the breach of which could have resulted in an
increase in the interest rate or the loan being immediately
callable.
In connection with this loan, the Company issued warrants to
purchase 138 and 113 shares of Series D and E
convertible preferred stock, respectively. The warrants each had
an exercise price of $0.615 per share. The fair value of the
warrants was estimated at an aggregate of $115 using the
Black-Scholes valuation model with the following assumptions:
expected volatility of 70%, risk free interest rate of 4.24%,
expected life of 10 years and no dividends. The fair value
of the warrants was recorded as a discount to the loan and was
amortized to interest expense using the effective interest rate
method over the loan term. The Company repaid the entire amount
of the loan during 2004. A total of $31 and $83 was recognized
as interest expense during the periods ended December 31,2003 and 2004, respectively. The warrants were fully exercised
in 2004.
In August 2005, the Company entered into a $7,000 term loan
agreement with Silicon Valley Bank to finance equipment
purchases. The loan was repayable commencing September 2005,
based on a 36-month repayment schedule. Any remaining
outstanding balance would have been due and immediately payable
at the beginning of August 2008. The loan bore an annual
interest rate on the outstanding principal amount from the date
when made until paid in full at a rate per annum equal to the
Prime Rate plus the Applicable Term Margin. The Applicable Term
Margin was based on the Cash Flow Leverage Ratio, and ranged
from 0.50% to 1.0%. The loan agreement provided for certain
financial and non-financial covenants, the breach of which could
have resulted in an increased interest rate or the loan being
immediately callable.
The Company borrowed $2,571 on this loan in August 2005, and
repaid the full balance in November 2005. A total of $125 was
recognized as interest expense during the year ended
December 31, 2005.
Note 8 — Redeemable Convertible Preferred
Stock
Under the Company’s Certificate of Incorporation, as
amended, the Company is authorized to issue 15,454 shares
of preferred stock, which have been designated as Series A
convertible preferred stock, Series B convertible preferred
stock, Series C convertible preferred stock, Series D
convertible preferred stock, Series E convertible preferred
stock and Series F convertible preferred stock,
respectively.
Redeemable convertible preferred stock at December 31, 2005
consists of the following:
(In thousands, except per share
amounts) — (Continued)
The holders of convertible preferred stock have the rights and
preferences as follows:
Dividends
The holders of shares of Series A, Series B,
Series C, Series D, Series E and Series F
convertible preferred stock are entitled to receive dividends,
out of any assets legally available, prior to and in preference
to any declaration or payment of any dividend on the common
stock of the Company, at the rate of $0.214, $1.96, $2.12,
$0.285, $0.049 and $1.182 (as adjusted for any stock dividends,
stock splits or recapitalization), respectively, per share per
annum. Additionally, the holders of shares of Series A,
Series B, Series C, Series D, Series E, and
Series F convertible preferred stock are entitled to
participate in any additional dividends on a per share
as-if-converted basis with shares of common stock. Such
dividends are payable when, as and if declared by the
Company’s Board of Directors (“the Board”), and
are not cumulative. As of December 31, 2005, no dividends
had been declared.
Liquidation
In the event of any liquidation, dissolution or winding up of
the Company, either voluntary or involuntary, the holders of
Series E and Series F convertible preferred stock are
entitled to receive, prior and in preference to any distribution
of any assets of the Company to the holders of common stock,
Series A, Series B, Series C and Series D
convertible preferred stock by reason of their ownership, an
amount per share equal to (A) in the case of the
Series E convertible preferred stock: $0.6123 plus an
amount equal to 300% of the Series E issue price (as
adjusted for any stock dividends, stock splits or
recapitalizations), plus any declared, but unpaid dividends on
such shares, and (B) in the case of the Series F
convertible preferred stock: $14.774, plus any declared, but
unpaid dividends on such shares. After the payment to the
holders of the Series F and Series E convertible
preferred stock, the holders of Series D convertible
preferred stock are entitled to receive, prior and in preference
to any distribution of any assets of the Company to the holders
of common stock, Series A, Series B and Series C
convertible preferred stock by reason of their ownership, an
amount per share equal to $3.56 plus an amount equal to 300% of
the issue price (as adjusted for any stock dividends, stock
splits or recapitalizations), plus any declared, but unpaid
dividends on such shares. After the payment to the holders of
Series F, Series E and Series D convertible
preferred stock, the holders of Series A, Series B and
Series C convertible preferred stock are entitled to
receive, prior and in preference to any distribution of any of
the assets of the Company to the holders of common stock by
reason of their ownership, an amount per share equal to $2.675,
$24.50 and $26.50 for each outstanding share of Series A,
Series B, and Series C convertible preferred stock (as
adjusted for any stock dividends, stock splits or
recapitalizations), respectively, plus any declared, but unpaid
dividends on such shares.
After payment has been made to the holders of Series A,
Series B, Series C, Series D, Series E and
Series F convertible preferred stock, any remaining assets
and funds are to be distributed among the holders of common
stock ratably based on the number of shares of common stock held
by each stockholder.
A merger, reorganization or sale of all or substantially all of
the assets of the Company in which the stockholders of the
Company immediately prior to the transaction possess less than
50% of the voting power of the surviving entity (or its parent)
immediately after the transaction shall be deemed to be a
liquidation, dissolution or winding up.
(In thousands, except per share
amounts) — (Continued)
Voting Rights
The holder of each share of Series A, Series B,
Series C, Series D, Series E and Series F
convertible preferred stock is entitled to the number of votes
equal to the number of shares of common stock into which each
share of the Series A, Series B, Series C,
Series D, Series E and Series F convertible
preferred stock could be converted on the record date for the
vote or consent of stockholders, except as otherwise required by
law, and has voting rights and powers equal to the voting rights
and powers of common stock.
Conversion
Each share of Series A, Series B, Series C,
Series D, Series E and Series F convertible
preferred stock, at the option of the holder, is convertible
into the number of fully paid and nonassessable shares of common
stock which results from dividing the per share conversion price
in effect for the convertible preferred stock at the time of
conversion by the per share conversion value of such shares. The
initial per share conversion price of Series A,
Series B, Series C, Series D, Series E and
Series F convertible preferred stock is $2.675, $24.50,
$26.50, $3.56, $0.6123 and $14.774, respectively.
Conversion is automatic at its then effective conversion rate
(i) immediately upon the closing of a firm commitment
underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of common stock in which
(a) the public offering price equals or exceeds
$20 per share (as adjusted for any stock dividends, stock
splits or recapitalizations) and (b) the aggregate proceeds
raised equal or exceed $25 million, or (ii) at the
election of the holders of a majority of the outstanding
preferred stock voting together as a single class on an
as-converted basis. The price at which shares of the
Company’s redeemable convertible preferred stock convert
into common stock upon completion of an underwritten public
offering was subsequently modified in June 2006 from $20 to $12
per share (see Note 13).
Warrants for Convertible Preferred Stock
In connection with various financings and other commercial
arrangements, the Company has issued warrants to purchase shares
of its convertible preferred stock. Amortization expense
relating to warrants for the years ended December 31, 2003
and 2004 was $31 and $83, respectively.
As of December 31, 2005, outstanding preferred stock
warrants consisted of:
(In thousands, except per share
amounts) — (Continued)
As discussed in Note 3, in 2005 we reclassified the
freestanding preferred stock warrants as a liability and began
adjusting the warrants to fair value at each reporting period.
Conversion of Series A
convertible preferred stock
3,461
Conversion of Series B
convertible preferred stock
1,143
Conversion of Series C
convertible preferred stock
928
Conversion of Series D
convertible preferred stock
3,083
Conversion of Series E
convertible preferred stock
4,132
Conversion of Series F
convertible preferred stock
2,707
22,680
Incentive Stock Plan
In September 1999, the Company adopted the 1999 Stock Plan (the
“Plan”). Under the Plan, the Company may issue shares
of common stock and options to purchase common stock to
employees, directors and consultants. Options granted under the
Plan may be incentive stock options or non-qualified stock
options. Incentive stock options (“ISO”) may be
granted only to Company employees, which includes officers and
directors of the Company. Non-qualified stock options
(“NSO”) and stock purchase rights may be granted to
employees and consultants. Options under the Plan may be granted
at prices not less than 85% of the deemed fair value of the
shares on the date of the grant as determined by the Board,
provided, however, that (i) the exercise price of an ISO
and NSO shall not be less than 100% and 85% of the deemed fair
value of the shares on the date of grant, respectively, and
(ii) the exercise price of an ISO and NSO granted to a 10%
stockholder shall not be less than 110% of the deemed fair value
of the shares on the date of grant. The Board determines the
period over which options become exercisable. The term of the
options is no longer than five years for ISOs for which the
grantee owns greater than 10% of the voting power of all classes
of stock and no longer than ten years for all other options.
Options granted to date generally vest over four years.
(In thousands, except per share
amounts) — (Continued)
Stock Option Activity
A summary of the status of the Company’s stock option plans
at June 30, 2006 and changes during the period then ended
is presented in the table below (share numbers and aggregate
intrinsic value in thousands):
In October 2001, the Company granted an NSO option to purchase
139 shares of common stock to a Board member outside of the
Plan. The Board member exercised this option in December 2003.
During the six months ended June 30, 2006, the Company
granted stock options to purchase an aggregate of
1,875 shares of common stock with an estimated
weighted-average grant-date fair value of $4.67. The total fair
value of options that vested during the six months ended
June 30, 2006 was $586 (unaudited). The total intrinsic
value of options exercised during the six months ended
June 30, 2006 was $401 (unaudited). Net cash proceeds from
the exercise of stock options were $59 (unaudited) for the
six months ended June 30, 2006. As permitted by
SFAS No. 123R, we have deferred the recognition of our
excess tax benefit.
(In thousands, except per share
amounts) — (Continued)
The following table summarizes information about stock options
outstanding, vested and exercisable at December 31, 2005:
Options Vested and
Options Outstanding
Exercisable
Weighted Avg.
Shares Underlying
Remaining
Range of Exercise
Outstanding Options
Contractual
Weighted Avg.
As of
Weighted Avg.
Prices
as of 12/31/05
Term
Ex Price
12/31/05
Ex Price
$
0.10
—
$
0.10
84
7.18
$
0.10
68
$
0.10
$
0.30
—
$
0.30
463
8.34
$
0.30
136
$
0.30
$
0.50
—
$
0.50
269
5.79
$
0.50
268
$
0.50
$
3.50
—
$
3.50
14
4.28
$
3.50
14
$
3.50
$
5.00
—
$
5.00
1,344
9.08
$
5.00
3
$
5.00
$
5.50
—
$
5.50
823
9.51
$
5.50
—
—
$
10.00
—
$
10.00
21
9.93
$
10.00
—
—
$
0.10
—
$
10.00
3,018
8.72
$
3.91
489
$
0.50
As of December 31, 2004, options to purchase
645 shares were vested and exercisable with a weighted
average exercise price of $0.48.
Early Exercise of Employee Options
Stock options granted under the Company’s stock option plan
provide employee option holders the right to elect to exercise
unvested options in exchange for restricted common stock.
Unvested shares, which amounted to 698 and 138 at
December 31, 2004 and 2005, respectively, and 57
(unaudited) at June 30, 2006, were subject to a repurchase
right held by the Company at the original issuance price in the
event the optionees’ employment is terminated either
voluntarily or involuntarily. For exercises of employee options,
this right lapses 25% on the first anniversary of the vesting
start date and in 36 equal monthly amounts thereafter. These
repurchase terms are considered to be a forfeiture provision and
do not result in variable accounting. In accordance with EITF
No. 00-23,
Issues Related to the Accounting for Stock Compensation under
APB No. 25, the shares purchased by the employees
pursuant to the early exercise of stock options are not deemed
to be outstanding until those shares vest. In addition, cash
received from employees for exercise of unvested options is
treated as a refundable deposit shown as a liability in the
Company’s financial statements. As of December 31,2004 and 2005, and June 30, 2006, cash received for early
exercise of options of $123, $38, and $15 (unaudited), was
included in refundable deposits, respectively. Amounts so
recorded are transferred into common stock and additional
paid-in capital as the shares vest.
The activity of nonvested shares for the three months ended
June 30, 2006 as a result of early exercise of options
granted to employees is as follows:
(In thousands, except per share
amounts) — (Continued)
Non-Employee Stock Options
During 2003, the Company granted options to purchase
10 shares of common stock, at an exercise price of
$0.10 per share to consultants in consideration for their
services rendered to the Company. The Company recognizes
stock-based compensation expense associated with these options
as they vest and estimates their fair value based on the
Black-Scholes option pricing model and its applicable
assumptions at each reporting period. Accordingly, in 2003 the
Company recorded stock-based compensation expense totaling $4.
The following assumptions were utilized: expected dividend yield
of 0%; risk-free interest rate ranging from 2.45% to 2.66%;
expected volatility of 70%; and remaining contractual life of
10 years.
Stock-based Compensation Associated with Awards to
Employees
All options granted were intended to be exercisable at a price
per share not less than fair market value of the shares of the
Company’s stock underlying those options on their
respective dates of grant. The Board determined these fair
market values in good faith based on the best information
available to the Board and Company’s management at the time
of the grant. Although the Company believes these determinations
accurately reflect the historical value of the Company’s
common stock, management has retroactively revised the valuation
of its common stock for the purpose of calculating stock-based
compensation expense. Accordingly, in the periods ending
December 31, 2003, 2004 and 2005 for such stock and options
issued to employees, the Company has recorded deferred
stock-based compensation of $564, $2,299 and $1,225,
respectively, net of cancellations, of which the Company
amortized $166, $858, $1,547 and $438 (unaudited) of
stock-based compensation in the years ended December 31,2003, 2004 and 2005, and the six months ended June 30,2006, respectively.
Information on employee stock options granted in 2005 and the
six months ended June 30, 2006 is summarized as
follows:
At December 31, 2005, the Company had deferred stock-based
compensation under APB 25, as shown in the consolidated
statement of redeemable convertible preferred stock and
stockholders’
(In thousands, except per share
amounts) — (Continued)
equity (deficit) of $1,625 of which $1,132 is expected to be
amortized in 2006, $371 in 2007, $112 in 2008 and $10 in 2009.
On July 28, 2004, the Company entered into a transition
agreement with one of its executive officers whereby vesting of
previously granted options was accelerated resulting in a new
measurement date at the date of modification. This executive
officer resigned effective January 31, 2005. A total of
316 shares would have been forfeited under the original
option terms resulting in total compensation expense of $1,145.
The total compensation expense was measured in accordance with
guidance provided by Financial Accounting Standards Board
Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of
APB Opinion No. 25 (“FIN 44”), as the
intrinsic value of the modified award at the date of
modification in excess of the amount measured at the original
measurement date. A total of $981 and $164 was recognized in the
years ended December 31, 2004 and 2005, respectively.
On August 13, 2004the Company entered into a transition
agreement with one of its executive officers. Upon termination,
the agreement provided for acceleration of 25% of the
officer’s unvested options. The agreement also provided for
an extension of the time to exercise any vested options, from
90 days to 270 days from the date of the
officer’s termination. In February 2005, this executive
officer resigned and 17 shares that would have been
forfeited under the original option terms were accelerated,
resulting in total stock-based compensation expense of $65. In
November 2005, this executive officer exercised options for
293 shares. As expense recognition for the additional
276 shares was contingent on whether this executive officer
took the benefit of the vesting extension, additional
stock-based compensation expense was not recognized until the
November exercise when $1,035 was recorded. Stock-based
compensation expense for the February and November 2005 charges
was measured in accordance with guidance provided by FIN 44
as the intrinsic value of the modified award at the date of
modification in excess of the amount measured at the original
measurement date.
In March 2005, the Company entered into a settlement agreement
with a former employee, whereby the Company allowed the former
employee to retain 65 shares of common stock and
repurchased 29 shares of common stock at its original
purchase price. These shares were previously deemed repurchased
by the Company. In connection with this settlement, the Company
recorded $352 as stock-based compensation as of
December 31, 2004, computed at the fair value of the common
stock at the date of settlement, in accordance with guidance
provided by FIN 44.
Adoption of SFAS No. 123R (Unaudited)
The Company adopted SFAS No. 123R on January 1, 2006.
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 using 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
Employee stock-based compensation expense recognized in the six
months ended June 30, 2006 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.
As a result of adopting SFAS No. 123R on January 1,2006, the Company’s net loss for the six months ended
June, 2006, was higher by $268 (unaudited), net of tax effect,
than if the Company had continued to account for stock-based
compensation under APB 25. Basic and diluted net loss per
share for the six months ended June, 2006 would have been
lower by $0.07 (unaudited), than if the Company had not adopted
SFAS No. 123R. At June 30, 2006, the Company had
$7,477 (unaudited) of total unrecognized compensation
expense under SFAS No. 123R, net of estimated
forfeitures, related to stock option plans that will be
recognized over a weighted-average period of approximately four
years. In accordance with SFAS No. 123R, unamortized
compensation expense on stock option grants after
January 1, 2006 is not included in deferred stock-based
compensation. The balance in deferred stock-based compensation
as of June 30, 2006 is $1,039 (unaudited), which is
comprised primarily of employee stock option grants prior to
December 31, 2005, as well as stock-based compensation
relating to restricted stock issued as additional consideration
to Memory Matrix employees, subject to vesting.
Historically, the Company has recorded a valuation allowance on
deferred tax assets, the majority of which relate to net
operating loss carryforwards generated before it achieved
profitability. During the fourth quarter of 2005, the Company
concluded that it was more likely than not that the tax benefit
associated with these deferred tax assets would be realized,
resulting in a net tax benefit of $24,060 resulting primarily
from the release of the deferred tax valuation allowance. The
valuation allowance increased by $620 and decreased by $3,050
and $25,008 during the years ended December 31, 2003, 2004
and 2005, respectively.
At December 31, 2005, the Company had approximately $57,000
and $53,000 of federal and state net operating loss
carryforwards, respectively, to reduce future regular taxable
income. These carryforwards will expire at various dates
beginning in the year 2020 for federal and 2008 for state
purposes, if not utilized.
The Tax Reform Act of 1986 limits the use of net operating loss
and tax credit carryforwards in the case of an “ownership
change” of a corporation or separate return loss year
limitations. Any ownership changes, as defined, may restrict
utilization of carryforwards.
(In thousands, except per share
amounts) — (Continued)
The Company also had federal and state research and development
credit carryforwards of approximately $500 and $400 for federal
and state income tax purposes, respectively, at
December 31, 2005. The research and development credits may
be carried forward over a period of 20 years for federal
tax purposes, and indefinitely for California tax purposes.
The components of the net deferred tax assets as of
December 31, 2005 are:
In 2000, the Company established a 401(k) plan under the
provisions of which eligible employees may contribute an amount
up to 15% of their compensation on a pre-tax basis. The Company
matches employees’ contributions at the discretion of the
Board. To date, no matching contributions have been made by the
Company.
Note 12 — Related Party Transactions
During the years ended December 31, 2003 and 2004, the
Company entered into several transactions with one of its
stockholders. The transactions involved issuance of warrants and
conversion of certain loans into Series E Convertible
preferred stock (see Note 7) and entering into a debt
financing agreement (see Note 6). During the years ended
December 31, 2003 and 2004, the Company recorded $189 and
$206 of interest expense related to these loans.
On June 1, 2005, the Company acquired Memory Matrix (see
Note 5). Monaco Partners, L.P., a beneficial owner of the
Company’s capital stock, owned 14.1% of Memory Matrix
immediately prior to the closing of the acquisition.
James H. Clark, who is a director and stockholder of the
Company, controls Monaco Partners, L.P. Mr. Clark was a
member of the board of directors of Memory Matrix immediately
prior to the acquisition.
Note 13 — Subsequent Events (Unaudited)
On March 16, 2006, the Board increased the number of shares
of the Company’s common stock that are reserved and
available for issuance under the Company’s 1999 Stock Plan
by 596 shares.
(In thousands, except per share
amounts) — (Continued)
In January 2006, the Company signed a non-cancellable service
agreement with a third-party data center for colocation
services. The agreement has $4,300 of non-cancelable scheduled
rentals over a three-year period ending in 2009.
In May 2006, the Company extended an existing production space
operating lease by one year and entered into a new noncancelable
production space operating lease. The aggregate future minimum
payments resulting from the incremental rent from the amendment
and the new lease are $66 and $141 in 2006 and 2007,
respectively.
In June, 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, options
to purchase 1,789 shares 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. The transaction was deemed a modification
under SFAS No. 123R, but did not result in any incremental
stock-based compensation charges. No other terms of the option
grants were modified.
On June 20, 2006, the Board approved the 2006 Equity Incentive
Plan. A total of 1,358 shares of common stock were reserved
for future issuance under the plan, which will become effective
upon the completion of the Company’s planned initial public
offering.
The Company’s Restated Certificate of Incorporation was
amended effective June 20, 2006 to reduce the price at
which shares of the Company’s redeemable convertible
preferred stock convert into common stock upon completion of an
underwritten public offering from $20 to $12 per share.
On June 20, 2006, the Board approved the filing of a
registration statement with the Securities and Exchange
Commission for an initial public offering of the Company’s
common stock.
On July 20, 2006, the Board approved the establishment of a
charitable foundation, to be administered by a third party. The
Board additionally approved the initial funding of the
charitable foundation by a donation of approximately
65,000 shares of the Company’s common stock.
On July 20, 2006, the Company granted 102 options to
purchase shares of common stock to new and existing employees at
an exercise price of $14.20 per share.
No dealer, salesperson or
other person is authorized to give any information or to
represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations.
This prospectus is an offer to sell only the shares offered
hereby, and only under circumstances and in jurisdictions where
it is lawful to do so. The information contained in this
prospectus is current only as of its date.
Through and
including ,
2006 (the 25th day after the date of this prospectus), all
dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer’s obligation to
deliver a prospectus when acting as an underwriter and with
respect to an unsold allotment or subscription.
The following table sets forth the costs and expenses to be paid
by Shutterfly in connection with the sale of the shares of
common stock being registered hereby. All amounts are estimates
except for the SEC registration fee, the NASD filing fee and The
NASDAQ Global Market listing fee.
SEC registration fee
$
9,844
NASD filing fee
9,700
NASDAQ Global Market listing fee
100,000
Printing and engraving
*
Legal fees and expenses
*
Accounting fees and expenses
*
Blue sky fees and expenses
*
Transfer agent and registrar fees
and expenses
*
Miscellaneous
*
Total
$
*
*
To be filed by amendment.
ITEM 14.
Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law
authorizes a court to award, or a corporation’s board of
directors to grant, indemnity to directors and officers under
certain circumstances and subject to certain limitations. The
terms of Section 145 of the Delaware General Corporation
Law are sufficiently broad to permit indemnification under
certain circumstances for liabilities, including reimbursement
of expenses incurred, arising under the Securities Act of 1933.
As permitted by the Delaware General Corporation Law, the
Registrant’s restated certificate of incorporation includes
a provision that eliminates the personal liability of its
directors for monetary damages for breach of fiduciary duty as a
director, except for liability:
•
for any breach of the director’s duty of loyalty to the
Registrant or its stockholders;
•
for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
•
under section 174 of the Delaware General Corporation Law
(regarding unlawful dividends and stock purchases); or
•
for any transaction from which the director derived an improper
personal benefit.
As permitted by the Delaware General Corporation Law, the
Registrant’s restated bylaws provide that:
•
the Registrant is required to indemnify its directors and
officers to the fullest extent permitted by the Delaware General
Corporation Law, subject to very limited exceptions;
•
the Registrant may indemnify its other employees and agents as
set forth in the Delaware General Corporation Law;
•
the Registrant is required to advance expenses, as incurred, to
its directors and officers in connection with a legal proceeding
to the fullest extent permitted by the Delaware General
Corporation Law, subject to very limited exceptions; and
•
the rights conferred in the bylaws are not exclusive.
Prior to the completion of the offering, the Registrant intends
to enter into indemnification agreements with each of its
current directors and officers to provide such directors and
officers additional contractual assurances regarding the scope
of the indemnification set forth in the Registrant’s
restated certificate of incorporation and restated bylaws and to
provide additional procedural protections. At present, there is
no pending litigation or proceeding involving a director,
officer or employee of the Registrant regarding which
indemnification is sought. Reference is also made to
Section 9 of the Underwriting Agreement, which provides for
the indemnification of officers, directors and controlling
persons of the Registrant against certain liabilities. The
indemnification provision in the Registrant’s restated
certificate of incorporation, restated bylaws and the
indemnification agreements entered into or to be entered into
between the Registrant and each of its directors and officers
may be sufficiently broad to permit indemnification of the
Registrant’s directors and officers for liabilities arising
under the Securities Act.
The Registrant has directors’ and officers’ liability
insurance for securities matters.
Reference is made to the following documents filed as exhibits
to this Registration Statement regarding relevant
indemnification provisions described above and elsewhere herein:
Since June 30, 2003, we have issued and sold the following
securities:
1. On July 31, 2003, we issued 717,545 shares of
our Series E Preferred Stock to Monaco Partners, L.P. upon
Monaco’s exercise of its right to convert approximately
$439,000 in debt from us, which debt was incurred as a result of
Monaco’s payment of certain amounts originally owed by us
to Silicon Valley Bank, as further described in the section
entitled “Certain Relationships and Related Party
Transactions.”
2. On December 30, 2004, Monaco Partners, L.P.
exercised warrants to purchase 137,500 shares of our
Series D preferred stock and 112,500 shares of our
Series E preferred stock. These warrants were issued in
connection with a loan made by Monaco to the Company in
February 2003. The Company paid the balance due on this
loan in full in December 2004.
3. From June 30, 2003 through July 31, 2006, we
issued options to purchase an aggregate of 5,257,995 shares
of our common stock under our 1999 Stock Plan.
4. On November 11, 2005, we issued
1,353,730 shares of our Series F preferred stock to
Sutter Hill Ventures at a price of $14.774 per share.
5. On June 1, 2005, we issued 229,994 shares of
our common stock to the shareholders of Memory Matrix, Inc., in
connection with our acquisition of Memory Matrix.
6. From June 30, 2003 through July 31, 2006, we
issued 2,316,061 shares of our common stock to our
employees, directors, consultants and other service providers
upon exercise of options granted by us, with exercise prices
ranging from $0.10 to $5.50 per share.
Unless otherwise stated, the sales of the above securities were
deemed to be exempt from registration under the Securities Act
in reliance upon Section 4(2) of the Securities Act or
Regulation D promulgated under Sections 3(b) and 4(2)
of the Securities Act or Rule 701
promulgated under Section 3(b) and Section 28 of the
Securities Act as transactions by an issuer not involving any
public offering or pursuant to benefit plans and contracts
relating to compensation as provided under Rule 701. The
recipients of such securities in each of these transactions
represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were
placed upon the share certificates issued in such transactions.
All recipients had adequate access, through their relationships
with us, to information about Registrant.
Opinion of Fenwick & West
LLP regarding the legality of the securities being registered.
10
.01**
Form of Indemnity Agreement.
10
.02**
1999 Stock Plan and forms of stock
option agreement and stock option exercise agreement.
10
.03
2006 Equity Incentive Plan and
forms of stock option agreement and stock option exercise
agreement, restricted stock agreement, restricted stock unit
agreement, stock appreciation right agreement and stock bonus
agreement.
10
.04
Lease Agreement, as amended, dated
July 5, 1999, by and between the Registrant and Westport
Joint Venture, as amended to date.
10
.05
Agreement of Lease, dated as of
August 1, 2005, by and between the Registrant and DCT-CA
2004 RN Portfolio L, LP, as amended to date.
10
.06
Lease, dated as of March 7,2000, by and between the Registrant and 3168 Corporate
Place Associates, LLC, as amended to date.
10
.07
Lease, dated as of April 6,2000, by and between the Registrant and 3168 Corporate
Place Associates, LLC, as amended to date.
10
.08
Offer letter dated January 5,2005 for Jeffrey T. Housenbold.
Certain portions of this agreement have been omitted pursuant to
a request for confidential treatment and have been filed
separately with the Securities and Exchange Commission.
(b) Financial Statement Schedules.
Below is Schedule II — Valuation and Qualifying
Accounts. All other financial statement schedules are omitted
because they are not applicable or the information is included
in the financial statements or related notes.
Report of Independent Registered Public Accounting Firm
on
Financial Statement Schedule
To the Board of Directors and Stockholders
of Shutterfly, Inc.:
Our audits of the consolidated financial statements referred to
in our report dated June 27, 2006 appearing in the
registration statement on
Form S-1 of
Shutterfly, Inc. also included an audit of the financial
statement schedule listed in Schedule II of this
registration statement on
Form S-1. In our
opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when
read in conjunction with the related consolidated financial
statements.
Increase in the valuation allowance is due to an increase in
deferred tax assets
(2)
Decrease in the valuation allowance is due to a decrease in
deferred tax assets
(3)
Reflects amounts related to items with no income statement effect
(4)
Decrease in the valuation allowance is due to the reversal of
the valuation allowance in the fourth quarter of 2005.
ITEM 17.
Undertakings.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons pursuant to provisions described in
Item 14 above, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Pursuant to the requirements of the Securities Act, the
Registrant has duly caused this Amendment No. 1 to
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Redwood
City, State of California, on August 17, 2006.
Pursuant to the requirements of the Securities Act, this
Amendment No. 1 to Registration Statement has been signed
by the following persons in the capacities and on the dates
indicated:
Opinion of Fenwick & West
LLP regarding the legality of the securities being registered.
10
.01**
Form of Indemnity Agreement.
10
.02**
1999 Stock Plan and forms of stock
option agreement and stock option exercise agreement.
10
.03
2006 Equity Incentive Plan and
forms of stock option agreement and stock option exercise
agreement, restricted stock agreement, restricted stock unit
agreement, stock appreciation right agreement and stock bonus
agreement.
10
.04
Lease Agreement, as amended, dated
July 5, 1999, by and between the Registrant and Westport
Joint Venture, as amended to date.
10
.05
Agreement of Lease, dated as of
August 1, 2005, by and between the Registrant and DCT-CA
2004 RN Portfolio L, LP, as amended to date.
10
.06
Lease, dated as of March 7,2000, by and between the Registrant and 3168 Corporate
Place Associates, LLC, as amended to date.
10
.07
Lease, dated as of April 6,2000, by and between the Registrant and 3168 Corporate
Place Associates, LLC, as amended to date.
10
.08
Offer letter dated January 5,2005 for Jeffrey T. Housenbold.
Certain portions of this agreement have been omitted pursuant to
a request for confidential treatment and have been filed
separately with the Securities and Exchange Commission.
Dates Referenced Herein and Documents Incorporated by Reference