NetFlix 2005 Annual Report Download - page 78

NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share and per share data and percentages)
The revenue sharing agreements enable the Company to obtain DVDs at a lower upfront cost than under
traditional direct purchase arrangements. Under the revenue sharing agreements, the Company shares a
percentage of the actual net revenues generated by the use of each particular title with the studios over a fixed
period of time, or the Title Term, which is typically twelve months for each DVD title. The revenue sharing
expense associated with the use of each title is expensed to cost of revenues and is reflected in cash flows from
operating activities on the Company’s Consolidated Statements of Cash Flows. At the end of the Title Term, the
Company generally has the option of either returning the DVD title to the studio, destroying the title or
purchasing the title. In addition, the Company remits an upfront non-refundable payment to acquire titles from
the studios and distributors under revenue sharing agreements. This payment includes a contractually specified
initial fixed license fee that is capitalized and amortized in accordance with the Company’s DVD library
amortization policy. This payment may also include a contractually specified prepayment of future revenue
sharing obligations that is classified as prepaid revenue sharing expense and is charged to expense as future
revenue sharing obligations are incurred.
DVD library and accumulated amortization consisted of the following:
As of December 31,
2004 2005
DVD library .......................................... $198,216 $ 304,490
Less accumulated amortization ........................... (156,058) (247,458)
DVD library, net. ...................................... $ 42,158 $ 57,032
3. Intangible Assets
Intangible assets and accumulated amortization consisted of the following:
As of December 31, 2004 As of December 31, 2005
Gross carrying
amount
Accumulated
amortization Net
Gross carrying
amount
Accumulated
amortization Net
Studio intangible assets ............. $11,528 $(10,567) $961 $11,528 $(11,528) $—
Strategic marketing alliance intangible
assets ......................... 416 (416) — 416 (416) —
Patents .......................... — — — 481 (24) 457
Total ............................ $11,944 $(10,983) $961 $12,425 $(11,968) $457
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.
F-18