NetFlix 2004 Annual Report Download - page 75

NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share, per share and percentages)
3. Intangible Assets
Intangible assets and accumulated amortization consisted of the following:
As of December 31, 2003 As of December 31, 2004
Gross carrying
amount
Accumulated
amortization Net
Gross carrying
amount
Accumulated
amortization Net
Studio intangible assets ............ $11,528 $(8,580) $2,948 $11,528 $(10,567) $961
Strategic marketing alliance intangible
assets ........................ 416 (416) — 416 (416) —
Total .......................... $11,944 $(8,996) $2,948 $11,944 $(10,983) $961
Studio Intangible Assets
During 2000, in connection with revenue sharing agreements with three studios, the Company agreed to
issue each studio an equity interest equal to 1.204 percent of the Company’s fully diluted equity securities
outstanding in the form of Series F Non-Voting Convertible Preferred Stock (“Series F Preferred Stock”). In
2001, in connection with revenue sharing agreements with two additional studios, the Company agreed to issue
each studio an equity interest equal to 1.204 percent of the Company’s fully diluted equity securities outstanding
in the form of Series F Preferred Stock. 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. The unamortized balance of the Studio intangible assets will be fully amortized in 2005.
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.
F-15