8-K/A

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 8-K/A

(AMENDMENT No. 1)

 

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported): April 2, 2018

 

 

Shutterfly, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   001-33031   94-3330068

(State or Other Jurisdiction

of Incorporation)

 

(Commission

File Number)

 

(IRS Employer

Identification No.)

 

2800 Bridge Parkway, Redwood City, California   94065
(Address of Principal Executive Offices)   (Zip Code)

(650) 610-5200

(Registrant’s Telephone Number, Including Area Code)

(Former Name or Former Address, If Changed Since Last Report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company  ☐.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐.

 

 

 


Explanatory Note

On April 2, 2018, Shutterfly, Inc. (the “Company”), completed its previously announced acquisition of Lifetouch Inc. (“Lifetouch”), pursuant to the terms of a Stock Purchase Agreement dated as of January 30, 2018 by and among the Company, Lifetouch and Lifetouch Inc. Employee Stock Ownership Trust. The Company filed a Current Report on Form 8-K with the Securities and Exchange Commission on April 2, 2018 announcing the closing of the acquisition of Lifetouch (the “Original Form 8-K”).

This Amendment to the Original Form 8-K (“Amendment No. 1”) is being filed solely to amend and supplement the Original Form 8-K to include the unaudited pro forma condensed combined consolidated balance sheet as of December 31, 2017, the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017 and the notes related thereto. This Amendment No. 1 effects no other changes to the Original Form 8-K. The unaudited pro forma condensed combined consolidated balance sheet and unaudited pro forma condensed combined statement of operations described in Item 9.01(b) below should be read in conjunction with the Original Form 8-K and this Amendment No. 1.

Item 9.01. Financial Statements and Exhibits

 

(b) Pro forma financial information.

The Company’s unaudited pro forma condensed combined consolidated balance sheet as of December 31, 2017, the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017, and related notes thereto, are attached hereto as Exhibit 99.1 and incorporated herein by reference.

 

(d) Exhibits.

 

Exhibit

Number

  

Description

23.1    Consent of Boulay PLLP.
99.1    Unaudited pro forma condensed combined consolidated balance sheet as of December 31, 2017 and unaudited pro forma condensed combined statement of operations for the year ended December  31, 2017, and the notes related thereto.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

SHUTTERFLY, INC.

 

By:  

/s/ Jason Sebring

 

Jason Sebring

Vice President and General Counsel

Date: June 8, 2018

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-218438, No. 333-211706, No. 333-208793, No. 333-207616, No. 333-202142, No. 333-193941, No. 333-186675, No. 333-178986, No. 333-173939, No. 333-171632, No. 333-164268, No. 333-156659, No. 3333-148487, No. 333-137676) of Shutterfly, Inc. of our report dated August 9, 2017, except as to Note 12, which is as of January 19, 2018, relating to our audits of the consolidated financial statements of Lifetouch Inc. as of June 30, 2017, 2016 and 2015 and for the fiscal years then ended included in the Current Report on Form 8-K/A.

/s/ Boulay PLLP

Minneapolis, Minnesota

June 8, 2018

EX-99.1

Exhibit 99.1

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information is based upon the audited and unaudited historical financial information of Shutterfly, Inc. (“Shutterfly” or the “Company”) and Lifetouch Inc. (“Lifetouch”) as adjusted to give effect to the following transaction (the “Transaction”):

The Transaction and Debt Financing. On January 30, 2018, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Lifetouch and Lifetouch Inc. Employee Stock Ownership Trust (the “Seller”). On April 2, 2018 (the “Transaction Date”), pursuant to the Purchase Agreement, the Company completed the acquisition of 100% of the issued and outstanding shares of common stock of Lifetouch from the Seller. Under the terms of the Purchase Agreement, the consideration for the acquisition consisted of an all-cash purchase price of $825.0 million subject to certain adjustments based on a determination of closing net working capital, transaction expenses, cash and indebtedness.

The Company financed the all-cash purchase price with an incremental $825.0 million term loan issuance pursuant to an amendment of the Company’s existing credit agreement with Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent, which closed simultaneous with the acquisition. Pursuant to the amended agreement, the lenders thereunder provided a secured incremental term loan facility in an aggregate principal amount of $825.0 million on the terms and conditions set forth in the Original Form 8-K filed on April 2, 2018.

A related escrow agreement entered into at the closing of the Transaction established an escrow amount of $10.0 million in respect of any post-closing adjustments to the purchase price that are determined to be owed to Shutterfly, and an indemnity escrow amount of $8.0 million to satisfy indemnity claims by Shutterfly. The Purchase Agreement also provides that the parties will indemnify one another for certain liabilities arising under the Purchase Agreement, subject to various limitations, including, among other things, deductibles, caps and time limitations. Shutterfly also obtained representation and warranty insurance (the “RWI Policy”) that provides coverage for certain breaches of, and inaccuracies in, representations and warranties made by Lifetouch and Seller in the Purchase Agreement, subject to exclusions, deductibles, and other terms and conditions.

The unaudited pro forma condensed combined balance sheet gives effect to the Transaction as if it occurred on December 31, 2017, and the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017 is presented as if the Transaction occurred on January 1, 2017. The unaudited pro forma condensed combined balance sheet was derived from Shutterfly’s audited consolidated balance sheet and Lifetouch’s unaudited condensed consolidated balance sheet as of December 31, 2017.

The unaudited pro forma condensed combined financial information has been prepared for illustrative purposes only and is not necessarily indicative of what the combined company’s condensed consolidated financial position or results of operations actually would have been had the Transaction been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future financial position or operating results of the combined company.


UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF DECEMBER 31, 2017

(in thousands)

 

     Historical     Reclassified                              Consolidated  
           Note 2(b)                                 
     Shutterfly, Inc.     Lifetouch Inc.     Financing
Adjustments
           Pro Forma
Adjustments
          Pro Forma
Combined
 

ASSETS

               

Current assets:

               

Cash and cash equivalents

   $ 489,894     $ 85,194     $ 806,775        5 (a)    $ (983,628     5 (a)    $ 398,235  

Short-term investments

     178,021       44,623       —            —           222,644  

Accounts receivable, net

     82,317       17,726       —            —           100,043  

Inventories

     11,019       9,949       —            13,351       5 (b)      34,319  

Prepaid expenses and other current assets

     41,383       38,686       —            —           80,069  
  

 

 

   

 

 

   

 

 

      

 

 

     

 

 

 

Total current assets

     802,634       196,178       806,775          (970,277       835,310  

Long-term assets:

               

Long-term investments

     9,242       86,859       —            —           96,101  

Property and equipment, net

     266,860       153,994       —            11,869       5 (c)      432,723  

Intangible assets, net

     29,671       9,403       —            299,097       5 (d)      338,171  

Goodwill

     408,975       170,850       —            209,261       5 (e)      789,086  

Other assets

     17,418       6,476       —            —           23,894  
  

 

 

   

 

 

   

 

 

      

 

 

     

 

 

 

Total assets

   $ 1,534,800     $ 623,760     $ 806,775        $ (450,050     $ 2,515,285  
  

 

 

   

 

 

   

 

 

      

 

 

     

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Current portion of long-term debt

   $ 297,054     $ 4,575     $ 3,146        5 (a)    $ —         $ 304,775  

Accounts payable

     91,473       8,717       —            —           100,190  

Accrued liabilities

     159,248       97,066       —            23,894       5 (f), 5(g)      280,208  

Deferred revenue, current portion

     24,649       26,734       —            (14,394     5 (h)      36,989  
  

 

 

   

 

 

   

 

 

      

 

 

     

 

 

 

Total current liabilities

     572,424       137,092       3,146          9,500         722,162  

Long-term liabilities:

               

Long-term debt

     292,457       7,254       803,629        5 (a)      —           1,103,340  

Other liabilities

     119,195       28,800       —            2,268       5 (i)      150,263  
  

 

 

   

 

 

   

 

 

      

 

 

     

 

 

 

Total liabilities

     984,076       173,146       806,775          11,768         1,975,765  

Commitments and contingencies

               

Stockholders’ equity:

               

Common stock

     3       584       —            (584     5 (j)      3  

Additional paid-in capital

     996,301       130,984       —            (130,984     5 (j)      996,301  

Accumulated other comprehensive income (loss)

     1,778       (34,098     —            34,098       5 (j)      1,778  

Retained earnings (accumulated deficit)

     (447,358     353,144       —            (364,348     5 (j)      (458,562
  

 

 

   

 

 

   

 

 

      

 

 

     

 

 

 

Total stockholders’ equity

     550,724       450,614       —            (461,818       539,520  
  

 

 

   

 

 

   

 

 

      

 

 

     

 

 

 

Total liabilities and stockholders’ equity

   $ 1,534,800     $ 623,760     $ 806,775        $ (450,050     $ 2,515,285  
  

 

 

   

 

 

   

 

 

      

 

 

     

 

 

 

See accompanying notes to unaudited pro forma condensed combined financial information.


UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2017

(In thousands, except for per share data)

 

     Historical     Reclassified                             Consolidated  
           Note 2(b)                                
     Shutterfly, Inc.     Lifetouch Inc.     Financing
Adjustments
          Pro Forma
Adjustments
          Pro Forma
Combined
 

Revenues:

              

Net revenues

   $ 1,190,202     $ 950,769     $ —         $ —         $ 2,140,971  

Cost of net revenues

     619,650       377,630       —           (1,525    
6
(a), 6(b) 
    995,755

Restructuring

     1,475       —         —               1,475  
  

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Gross profit

     569,077       573,139       —           1,525         1,143,741  

Operating expenses:

              

Technology and development

     168,383       31,349       —           3,936       6 (b)      203,668  

Sales and marketing

     197,708       374,603       —           23,026       6 (a), 6(b)      595,337  

General and administrative

     117,797       147,541       —           (8,381     6 (a), 6(c)      256,957  

Capital lease termination

     8,098       —         —           —           8,098  

Restructuring

     15,491       12,219       —           —           27,710  
  

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total operating expenses

     507,477       565,712       —           18,581         1,091,770  
  

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Income from operations

     61,600       7,427           (17,056       51,971  

Interest expense

     (27,836     (592     (38,183     6 (d)      —           (66,611

Interest and other income, net

     1,481       2,737       —           —           4,218  
  

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Income (loss) before income taxes

     35,245       9,572       (38,183       (17,056       (10,422

(Provision for) benefit from income taxes

     (5,160     1,607       14,204       6 (e)      21,175       6 (e)      31,826  
  

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Net income (loss)

   $ 30,085     $ 11,179     $ (23,979     $ 4,119       $ 21,404  
  

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Net income per share:

              

Basis

   $ 0.91               $ 0.65  

Diluted

   $ 0.88               $ 0.63  

Weighted-average shares outstanding:

              

Basic

     33,113                 33,113  

Diluted

     34,106                 34,106  

See accompanying notes to unaudited pro forma condensed combined financial information.


NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

1. BASIS OF PRO FORMA PRESENTATION

The unaudited pro forma condensed combined financial information has been prepared using Shutterfly’s and Lifetouch’s historical consolidated financial information and presents the pro forma effects of the Transaction and certain adjustments described herein in accordance with Article 11 of Regulation S-X. The historical financial information of Shutterfly and Lifetouch has been prepared in accordance with accounting principles generally accepted in the United States.

The unaudited pro forma condensed combined balance sheet as of December 31, 2017 gives effect to the Transaction as if it occurred on December 31, 2017, and the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017 is presented as if the Transaction occurred on January 1, 2017. The unaudited pro forma condensed combined balance sheet was derived from Shutterfly’s audited consolidated balance sheet and Lifetouch’s unaudited condensed consolidated balance sheet as of December 31, 2017. As Lifetouch had a June 30 fiscal year end, the historical consolidated statement of operations was reclassified to be presented in accordance with Shutterfly’s December 31 fiscal year end. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017 was derived from Shutterfly’s audited and Lifetouch’s unaudited consolidated statements of operations for the year ended December 31, 2017. Lifetouch’s reclassified “unaudited” statement of operations for the year ended December 31, 2017 was derived by adding the “audited” consolidated statement of operations for the year ended June 30, 2017 and the “unaudited” consolidated statement of operations for the six months ended December 31, 2017 and subtracting the “unaudited” consolidated statement of operations for the six months ended December 31, 2016. Certain reclassification adjustments have been made to the Lifetouch financial statements to conform to the Shutterfly financial statement presentation.

The unaudited pro forma condensed combined financial information has been prepared using the acquisition method of accounting in accordance with Accounting Standards Codification 805, Business Combinations, (ASC 805) with Shutterfly deemed as the accounting acquirer. The unaudited pro forma condensed combined financial information will differ from the final purchase accounting for a number of reasons, including the fact that the estimates of fair values of assets and liabilities acquired are preliminary and subject to change when the formal valuation and other analyses are finalized. The differences between the preliminary estimates and the final purchase accounting could have a material impact on the accompanying unaudited pro forma condensed combined financial information.

The historical financial information has been adjusted to give effect to matters that are (i) directly attributable to the Transaction, (ii) factually supportable and (iii) with respect to the statements of operations, expected to have a continuing impact on the operating results of the combined company. The unaudited pro forma condensed combined statement of operations excludes non-recurring items directly related to the Transaction.

The unaudited pro forma condensed combined financial information has been prepared for illustrative purposes only and is not necessarily indicative of what the combined company’s condensed consolidated financial position or results of operations actually would have been had the Transaction been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future financial position or operating results of the combined company.

The unaudited pro forma condensed combined financial information does not include any realization of cost savings from operating efficiencies, revenue synergies or restructuring costs expected to result from the Transaction.

This unaudited pro forma condensed combined financial information should be read in conjunction with Shutterfly’s and Lifetouch’s financial statements noted below:

 

    the separate historical audited consolidated financial statements of Shutterfly as of and for the year ended December 31, 2017 included in Shutterfly’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 20, 2018;


    the separate historical audited consolidated financial statements of Lifetouch as of and for the years ended June 30, 2017, 2016 and 2015 included in Exhibit 99.3 to Shutterfly’s Current Report on Form 8-K filed with the SEC on April 2, 2018; and

 

    the separate historical unaudited condensed consolidated financial statements of Lifetouch as of and for the six month periods ended December 31, 2017 and 2016 included in Exhibit 99.4 to Shutterfly’s Current Report on Form 8-K filed with the SEC on April 2, 2018.

This unaudited pro forma condensed combined financial information should also be read in conjunction with the Purchase Agreement filed as Exhibit 2.1 to Shutterfly’s Current Report on Form 8-K filed with the SEC on January 30, 2018.


2. ADJUSTMENTS TO LIFETOUCH’S HISTORICAL FINANCIAL STATEMENTS

The financial statements below illustrate the impact of the reclassification of Lifetouch historical accounting presentations to Shutterfly accounting presentations.


LIFETOUCH INC. RECLASSIFIED UNAUDITED BALANCE SHEET

AS OF DECEMBER 31, 2017

Unaudited

(in thousands)

 

    

Historical

Lifetouch Inc.

   

Reclassifications

Note 2(b)

   

Reclassified

Lifetouch Inc.

 

ASSETS

      

Current assets:

      

Cash and cash equivalents

   $ 85,194     $ —       $ 85,194  

Restricted investments

     19,307       (19,307     —    

Short-term investments

     44,623       —         44,623  

Accounts receivable, net

     17,726       —         17,726  

Inventories

     7,770       2,179       9,949  

Deferred costs of unsold products

     2,179       (2,179     —    

Prepaid expenses and other current assets

     19,379       19,307       38,686  
  

 

 

   

 

 

   

 

 

 

Total current assets

     196,178       —         196,178  

Long-term assets:

      

Long-term investments

     86,859       —         86,859  

Property and equipment, net

     153,994       —         153,994  

Intangible assets, net

     9,403       —         9,403  

Goodwill

     170,850       —         170,850  

Other assets

     —         6,476       6,476  

Deposits and other

     6,476       (6,476     —    
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 623,760     $ —       $ 623,760  
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Current liabilities:

      

Current portion of long-term debt

   $ 9,385     $ (4,810   $ 4,575  

Accounts payable

     16,935       (8,218     8,717  

Customer deposits

     26,734       (26,734     —    

Accrued salaries and commissions

     32,126       (32,126     —    

Accrued liabilities

     49,775       47,291       97,066  

Deferred revenue, current portion

     —         26,734       26,734  

Income taxes payable

     2,137       (2,137     —    
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     137,092       —         137,092  

Long-term liabilities:

      

Long-term debt

     7,539       (285     7,254  

Deferred income taxes

     3,678       (3,678     —    

Deferred obligations

     7,038       (7,038     —    

Other liabilities

     17,799       11,001       28,800  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     173,146       —         173,146  
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies

      

Stockholders’ equity:

      

Common stock

     584       —         584  

Additional paid-in capital

     130,984       —         130,984  

Accumulated other comprehensive loss

     (5,311     (28,787     (34,098

Retained earnings

     353,144       —         353,144  

Unearned ESOP compensation

     (28,787     28,787       —    
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     450,614       —         450,614  
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 623,760     $ —       $ 623,760  
  

 

 

   

 

 

   

 

 

 


LIFETOUCH INC. RECLASSIFIED UNAUDITED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2017

Unaudited

(In thousands)

 

    

Historical

Lifetouch Inc.

Note 2(a)

   

Reclassifications

Note 2(b)

         

Reclassified

Lifetouch Inc.

 

Revenues:

        

Net revenues

   $ 950,769     $ —         $ 950,769  

Cost of net revenues

     —         377,630       2 (c)      377,630  
        

 

 

 

Gross profit

           573,139  
        

 

 

 

Operating expenses:

        

Technology and development

     7,813       23,536         31,349  

Sales and marketing

     577,819       (203,216       374,603  

General and administrative

     80,297       67,244         147,541  

Restructuring

     —         12,219         12,219  

Materials, labor and processing

     179,768       (179,768       —    

Amortization of intangible assets

     4,509       (4,509       —    

Restructuring and acquisition-related costs

     20,136       (20,136       —    
        

 

 

 

Total operating expenses

           565,712  
        

 

 

 

Operating income before contributions

     80,427       (73,000       7,427  

Contributions to ESOP

     (72,638     72,638         —    
  

 

 

   

 

 

     

 

 

 

Income from operations

     7,789       (362       7,427  

Other income (expenses):

        

Investment income

     2,740       (2,740       —    

Interest expense

     (592     —           (592

Interest and other income, net

     (365     3,102         2,737  
  

 

 

   

 

 

     

 

 

 

Income before income taxes

     9,572       —           9,572  

Benefit from income taxes

     1,607       —           1,607  
  

 

 

   

 

 

     

 

 

 

Net income

   $ 11,179     $ —         $ 11,179  
  

 

 

   

 

 

     

 

 

 

 

(a) The recalculated statement of operations was derived by adding audited consolidated statement of operations for the year ended June 30, 2017 and unaudited consolidated statement of operations for the six months ended December 31, 2017 and subtracting unaudited consolidated statement of operations for the six months ended December 31, 2016.
(b) The classification of certain items presented by Lifetouch have been modified in order to align with the presentation used by Shutterfly. Specifically, the statement of operations has been modified to present costs on a functional basis rather than a single line item for operating expenses, in addition to other classification changes.
(c) The amount reported in the materials, labor and processing line item in the Lifetouch historical statement of operations was reclassified to the cost of net revenues line item. The remaining reclassifications primarily relate to salaries and benefits for photographers and depreciation on camera equipment which was primarily presented in the sales and marketing line item in the Lifetouch historical statement of operations.


3. PRELIMINARY PURCHASE CONSIDERATION

The total estimated preliminary purchase consideration as of April 2, 2018 is as follows (in millions):

 

Cash consideration at closing

   $ 825,000  
  

 

 

 

Less: closing indebtedness

     (27,785

Less: net working capital adjustment

     (14,482

Less: transaction adjustments

     (17,431

Add: closing cash

     218,326  
  

 

 

 

Purchase price adjustments

     158,628  
  

 

 

 

Total estimated purchase consideration

   $ 983,628  
  

 

 

 

The foregoing description in this footnote of certain terms of the Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Purchase Agreement, which was filed as Exhibit 2.1 to the Current Report on Form 8-K filed by the Company with the SEC on January 30, 2018.

 

4. PRELIMINARY PURCHASE PRICE ALLOCATION

Under the acquisition method of accounting, the identifiable assets acquired and liabilities assumed of Lifetouch are recorded at the acquisition date fair values. The amounts are preliminary and based on estimates of the fair values and useful lives of the assets acquired and liabilities assumed and have been prepared to illustrate the estimated effect of the Transaction. The allocation is dependent upon certain valuation and other analyses that have not yet been finalized. Accordingly, the pro forma purchase price allocation is considered provisional and is subject to further adjustment as additional information becomes available and as additional analyses and final valuations are completed.

The following table sets forth the preliminary allocation of the estimated purchase consideration to the identifiable tangible and intangible assets acquired and liabilities assumed of Lifetouch based on Lifetouch’s December 31, 2017 unaudited condensed combined balance sheet, with the excess recorded as goodwill. Such goodwill is deductible for income tax purposes due to bilateral tax election made to treat the Transaction as a deemed asset purchase and represents the assembled workforce of Lifetouch and the value of future acquisition of customers.

 

     (Dollars in thousands)  

Cash and cash equivalents

   $ 85,194  

Short-term investments

     44,623  

Accounts receivable, net

     17,726  

Inventories

     23,300  

Prepaid expenses and other current assets

     38,686  

Long-term investments

     86,859  

Property and equipment, net

     165,863  

Intangible assets, net

     308,500  

Other assets

     6,476  
  

 

 

 

Total assets

     777,227  
  

 

 

 

Current portion of long-term debt

     4,575  

Accounts payable

     8,717  

Accrued liabilities

     109,756  

Deferred revenue, current portion

     12,340  

Long-term debt

     7,254  

Other liabilities

     31,068  
  

 

 

 

Total liabilities

     173,710  
  

 

 

 

Net assets acquired (a)

     603,517  
  

 

 

 

Estimated purchase consideration (b)

     983,628  
  

 

 

 

Estimated goodwill (b) — (a)

   $ 380,111  
  

 

 

 

 

5. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

 

(a) This adjustment represents the $825.0 million principal amount of the term loan incurred to finance the Transaction of Lifetouch net of $18.2 million of debt issuance costs. $3.1 million was recorded as current portion of long-term debt and $803.6 million was recorded as long-term debt. The decrease of $983.6 million in cash reflects the cash purchase price of $825.0 million plus the additional purchase price consideration of $158.6 million consisting of closing cash of $218.3 million net of closing indebtedness of $27.8 million, transaction expenses of $17.4 million and net working capital of $14.5 million.


(b) This adjustment represents the estimated adjustment to step up Lifetouch’s inventory to a fair value of $23.3 million, an increase of $13.4 million from the carrying value. The fair value calculation is preliminary and subject to change. This increase is not reflected in the unaudited pro forma condensed combined statements of operations as it does not have a continuing impact.

 

(c) Reflects the net adjustment of property and equipment acquired by the Company to their estimated fair values. The following table summarizes the estimated fair values of Lifetouch’s identifiable tangible assets and their estimated remaining useful lives of the assets. The Company uses the straight-line method of depreciation.

 

     Approximate Fair
Value

(dollars in thousands)
     Estimated Useful Life
(in years)
 

Land

   $ 18,100        N/A  

Building and improvements

     56,000        27 

Equipment, furniture and fixtures

     85,604        5  

Construction in progress

     6,159        N/A  
  

 

 

    

Fair value of property and equipment

     165,863     
  

 

 

    

Historical property and equipment

     (153,994   
  

 

 

    

Pro forma adjustment

   $ 11,869     
  

 

 

    

 

* Weighted average of remaining useful life of building and site improvements based on building and site cost, excluding land cost

 

(d) Reflects the net adjustment of intangible assets acquired by the Company. The preliminary fair values of intangible assets were determined based on the provisions of ASC 805, which defines fair value in accordance with ASC 820, Fair Value Measurement (“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. Intangible assets were identified that met either the separability criterion or the contractual-legal criterion described in ASC 805. Since all information required to perform a detailed valuation analysis of Lifetouch’s intangible assets could not be obtained as of the date of this filing, for purposes of these unaudited pro forma condensed combined financial statements, the Company used certain assumptions based on publicly available transaction data for the industry. As discussed above, the amount that will ultimately be allocated to identifiable intangible assets and liabilities, and the related amount of amortization, may differ materially from this preliminary allocation. In addition, the periods the amortization impacts will be based upon the use of the straight-line method. Therefore, the amount of amortization following the Transaction may differ significantly between periods based upon the final value assigned and amortization methodology used for each identifiable intangible asset and liability. The following table summarizes the estimated fair values of Lifetouch’s identifiable intangible assets and their estimated useful lives:

 

Intangible Assets

   Approximate Fair
Value

(dollars in thousands)
     Estimated Useful Life
(in years)
 

Customer contracts and related relationships

   $ 189,400        2-10  

Trade names / trademarks / domain name

     57,600        5  

Developed technology

     61,100        5  

Favorable/unfavorable leases

     400        7  
  

 

 

    
     308,500     
  

 

 

    

Historical Intangible Asset

     (9,403   
  

 

 

    

Pro Forma Adjustment

   $ 299,097     
  

 

 

    

 

(e) Reflects the elimination of historical goodwill of $170.9 million and recognition of new goodwill resulting from the Transaction of $380.1 million.

 

(f) This represents the adjustment for estimated transaction costs not yet accrued on the balance sheet of $11.2 million and $10.2 million for Shutterfly and Lifetouch, respectively.

 

(g) Adjustment to reflect additional estimated state income tax liability of $2.5 million on the pre-Transaction entity-level state taxes in connection with a bilateral tax election made to treat the U.S. acquisition as a deemed asset purchase.

 

(h) This adjustment represents the decrease in deferred revenue to fair value of $12.3 million, a reduction of $14.4 million from the carrying value. The calculation of fair value is preliminary and subject to change. This decrease is not reflected in the unaudited pro forma condensed combined statements of operations as it does not have a continuing impact.

 

(i) Adjustment to record a $2.3 million deferred tax liability related to intellectual property allocated to Canada at a 27.0% statutory tax rate.

 

(j) These adjustments represent the elimination of Lifetouch’s historical shareholder’s equity and the recognition of Shutterfly’s transaction costs of $11.2 million.


6. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

 

(a) Represents the elimination of historical depreciation expense of $35.9 million ($20.3 million allocated to cost of net revenue, $8.0 million to sales and marketing, and $7.6 million to general and administrative expenses, respectively) and recognition of $19.2 million of new depreciation expense ($10.9 million allocated to cost of net revenue, $4.3 million to sales and marketing, and $4.0 million to general and administrative expenses, respectively). Depreciation is based on the fair value of property and equipment and estimated remaining useful lives of the assets.

 

(b) Reflects the elimination of the historical amortization expense of $4.5 million and recognition of $7.9 million, $3.9 million, and $31.3 million new amortization expense allocated among cost of net revenues, technology and development, and sales and marketing expenses, respectively. Amortization expense is based on the fair value of intangible assets and estimated useful lives of the assets.

 

(c) Reflects the reversal of $2.1 million and $2.8 million of Shutterfly’s and Lifetouch’s actual incurred transaction costs, respectively, for the year ended December 31, 2017.

 

(d) The increase of $38.2 million in interest expense resulted from interest on the new debt to finance the Transaction. The incremental term loan bears interest at LIBOR, subject to a floor of 0.0%, plus an applicable margin of 275 basis points and matures on August 17, 2024. A sensitivity analysis on interest expense for the year ended December 31, 2017 has been performed for the $825.0 million term loan to assess the effect that a change of 12.5 basis points of the hypothetical interest rates would have on the debt financing. The following table shows the change in interest expense for the debt financing (in thousands):

 

Interest expense assuming

   Twelve month ended
December 31, 2017
 

Increase of 0.125%

   $ 1,020  

Decrease of 0.125%

   $ (1,020

 

(e) A blended statutory tax rate of 37.2% and 27.0% for the United States and Canada, respectively, for the year ended December 31, 2017, has been assumed for the pro forma adjustments. The blended statutory tax rate is not necessarily indicative of the effective tax rate of the combined company. The effective tax rate of the combined company could be significantly different (either higher or lower) depending on post-acquisition, repatriation decisions, cash needs, the geographical mix of income and changes in tax law. Lifetouch operated as an S Corporation for income tax purposes prior to the Transaction and as such, the pro forma adjustments related to the pre-Transaction period do not reflect tax effects because its pre-Transaction income and expenses flowed through directly to its shareholders and thus were not subject to entity-level tax with the exception of certain state income taxes. In addition, U.S. tax reform was enacted on December 22, 2017, and the Company’s adjustments may have a material impact during the one-year measurement period under SAB 118.