NetFlix 2004 Annual Report Download - page 83

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NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share, per share and percentages)
The following table summarizes information on outstanding and exercisable options as of December 31,
2004:
Options Outstanding
Exercise Price
Number of
Options
Weighted-
Average
Remaining
Contractual
Life (Years)
Weighted-
Average
Exercise
Price
Options Exercisable
Number of
Options
Weighted-
Average
Exercise
Price
$0.08–$1.50 3,570,180 6.70 $ 1.50 2,842,958 $ 1.50
$1.51–$9.43 577,659 8.46 $ 6.35 387,172 $ 7.27
$9.44–$14.27 552,375 9.28 $12.25 499,575 $12.39
$14.28–$26.90 532,519 9.26 $20.47 532,519 $20.47
$26.91–$36.37 583,019 9.18 $33.09 583,019 $33.09
5,815,752 7.60 $ 7.91 4,845,243 $ 8.97
Stock-Based Compensation
Prior to the second quarter of 2003, the Company accounted for its stock-based employee compensation
plans using the intrinsic-value method. During the second quarter of 2003, the Company adopted the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No.
148, Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment of FASB Statement
No. 123, for all stock-based compensation. The Company elected to apply the retroactive restatement method
under SFAS No. 148 and all prior periods presented have been restated to reflect the compensation costs that
would have been recognized had the fair value recognition provisions of SFAS No. 123 been applied to all
awards granted.
During the third quarter of 2003, the Company began granting stock options to its employees on a monthly
basis. Such stock options are designated as non-qualified stock options and vest immediately, in comparison with
the three to four-year vesting periods for stock options granted prior to the third quarter of 2003. As a result of
immediate vesting, stock-based compensation expense determined under SFAS No. 123 is fully recognized upon
the stock option grants. For those stock options granted prior to the third quarter of 2003 with three to four-year
vesting periods, the Company continues to amortize the deferred compensation related to the stock options over
their remaining vesting periods.
The fair value of employee stock options was estimated on the date of grant using the minimum-value
method prior to the Company’s initial public offering in May 2002. The fair value of employee stock options
granted after the initial public offering, as well as the fair value of shares issued under the employee stock
purchase plan, was estimated using the Black-Scholes option pricing model. The following table summarizes the
weighted-average assumptions used:
Stock Options
Employee Stock
Option Plan
2002 2003 2004 2003 2004
Dividend yield ......... 0% 0% 0% 0% 0%
Expected volatility ...... 0%-69% 66%-70% 65%-89% 68% 77%
Risk-free interest rate .... 2.78%-3.99% 1.21%-2.36% 1.47%-2.85% 1.34% 1.83%
Expected life (in years) . . . 3.5 1.5-3.5 1–2.5 1.3 1.3
In estimating expected volatility, the Company considered historical volatility, volatility in market-traded
options on its common stock and other relevant factors in accordance with SFAS No. 123. The Company will
F-23