NetFlix 2003 Annual Report Download - page 71

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NETFLIX, INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(in thousands, except share, per share and per DVD data)
The Company’s obligation to maintain the studios’ equity interests at 6.02 percent of the Company’s fully
diluted equity securities outstanding terminated immediately prior to its initial public offering in May 2002. The
studios’ Series F Preferred Stock automatically converted into 3,192,830 shares of common stock upon the
closing of the Company’s initial public offering.
The Company measured the original issuances and any subsequent adjustments using the fair value of the
securities at the issuance and any subsequent adjustment dates. The fair value was recorded as intangible assets
with a corresponding credit to additional paid-in capital. The intangible assets are being amortized to cost of
subscription revenues ratably over the remaining term of the agreements which initial terms were three to five
years.
Strategic Marketing Alliance Intangible Assets
During 2001, in connection with a strategic marketing alliance agreement, the Company issued 416,440
shares of Series F Preferred Stock. These shares automatically converted into 277,626 shares of common stock
upon the closing of the Company’s initial public offering. Under the agreement, the strategic partner has
committed to provide, on a best-efforts basis, a stipulated number of impressions to a co-branded Web site and
the Company’s Web site over a period of 24 months. In addition, the Company is allowed to use the partner’s
trademark and logo in marketing the Company’s subscription services. The Company recognized the fair value of
these instruments as intangible assets with a corresponding credit to additional paid-in capital. The intangible
assets have been fully amortized on a straight-line basis to marketing expense over the two-year term of the
agreement.
4. Balance Sheet Components
Property and Equipment, Net
Property and equipment, net consisted of the following:
As of December 31,
2002 2003
Computerandotherequipment ............................... $12,197 $18,371
Internal-use software ....................................... 6,660 7,868
Furnitureandfixtures ....................................... 1,031 1,040
Leasehold improvements .................................... 1,636 2,046
Property and equipment, gross ................................ 21,524 29,325
Less: accumulated depreciation ............................... (15,904) (19,553)
Property and equipment, net .................................. $ 5,620 $ 9,772
Property and equipment included approximately $6,173 of assets under capital leases as of both December
31, 2002 and 2003. Accumulated amortization under these leases totaled $5,176 and $5,901 as of December 31,
2002 and 2003, respectively.
Internal-use software included approximately $3,948 and $4,910 of internally incurred capitalized software
development costs as of December 31, 2002 and 2003, respectively. Accumulated amortization of capitalized
software development costs totaled $3,024 and $4,174 as of December 31, 2002 and 2003, respectively.
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