NetFlix 2005 Annual Report Download - page 74

NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share and per share data and percentages)
Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred income taxes are
recognized by applying enacted statutory tax rates applicable to future years to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and
tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance for any tax benefits for which future realization is uncertain.
Comprehensive Income (Loss)
The Company reports comprehensive income or loss in accordance with the provisions of SFAS No. 130,
“Reporting Comprehensive Income”, which establishes standards for reporting comprehensive income and its
components in the financial statements. The components of other comprehensive income (loss) consist of
unrealized gains and losses on available-for-sale securities and cumulative translation adjustments. Total
comprehensive loss and the components of accumulated other comprehensive income are presented in the
accompanying consolidated statements of stockholders’ equity (deficit). Tax effects of other comprehensive
income (loss) are not material for any period presented.
Net Income Per Share
Basic net income per share is computed using the weighted-average number of outstanding shares of
common stock during the period. Diluted net income per share is computed using the weighted-average number
of outstanding shares of common stock and, when dilutive, potential common shares outstanding during the
period. Potential common shares consist primarily of incremental shares issuable upon the assumed exercise of
stock options, warrants to purchase common stock and shares currently purchasable pursuant to our employee
stock purchase plan using the treasury stock method.
The shares used in the computation of net income per share are as follows (rounded to the nearest thousand):
Year Ended December 31,
2003 2004 2005
Weighted-average shares outstanding—basic ...... 47,786,000 51,988,000 53,528,000
Effect of dilutive potential common shares:
Warrants. .............................. 9,972,000 8,571,000 8,354,000
Employee stock options .................. 5,126,000 4,154,000 3,636,000
Weighted-average shares outstanding—diluted. .... 62,884,000 64,713,000 65,518,000
Employee stock options with exercises prices greater than the average market price of the common stock were
excluded from the diluted calculation as their inclusion would have been anti-dilutive. The following table
summarizes the potential common shares excluded from the diluted calculation (rounded to the nearest thousand):
Year Ended December 31,
2003 2004 2005
Employee stock options ......................... 113,000 676,000 1,023,000
The weighted average exercise price of excluded outstanding stock options was $17.03, $30.71 and $28.39
for the years ended December 31, 2003, 2004 and 2005, respectively.
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