NetFlix 2005 Annual Report Download - page 83

NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share and per share data and percentages)
On October 19, 2004, Doris Staehr and Steve Staehr, shareholders claiming to be acting on the Company’s
behalf, filed a shareholder derivative suit in the Superior Court of the State of California for the County of Santa
Clara against certain officers and certain current and former members of the board of directors, specifically Reed
Hastings, Barry McCarthy, Thomas R. Dillon, Leslie J. Kilgore, Richard Barton, Timothy Haley, Jay Hoag, A.
Robert Pisano, Michael Schuh and Michael Ramsay. The plaintiffs claim that the named defendants breached
their fiduciary duties by allowing allegedly false and misleading statements to be made regarding, among other
things, churn. They also claim that the named defendants illegally traded the Company’s stock while in
possession of material nonpublic information. In addition, the plaintiffs assert claims for abuse of control, gross
mismanagement, waste and unjust enrichment. The lawsuit seeks, on the Company’s behalf, unspecified
compensatory and enhanced damages, disgorgement of profits earned through alleged insider trading, recovery of
attorneys’ fees and costs, and other relief. Following a request for dismissal by the plaintiffs, the Court dismissed
the action without prejudice on January 18, 2006.
7. Guarantees—Intellectual Property Indemnification Obligations
In the ordinary course of business, the Company has entered into contractual arrangements under which it
has agreed to provide indemnification of varying scope and terms to business partners and other parties with
respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such
agreements and out of intellectual property infringement claims made by third parties. In these circumstances,
payment by the Company is conditional on the other party making a claim pursuant to the procedures specified in
the particular contract, which procedures typically allow the Company to challenge the other party’s claims.
Further, the Company’s obligations under these agreements may be limited in terms of time and/or amount, and
in some instances, the Company may have recourse against third parties for certain payments made by it under
these agreements. In addition, the Company has entered into indemnification agreements with its directors and
certain of its officers that will require it, among other things, to indemnify them against certain liabilities that
may arise by reason of their status or service as directors or officers. The terms of such obligations vary.
It is not possible to make a reasonable estimate of the maximum potential amount of future payments under
these or similar agreements due to the conditional nature of the Company’s obligations and the unique facts and
circumstances involved in each particular agreement. No amount has been accrued in the accompanying financial
statements with respect to these indemnification guarantees.
8. Stockholders’ Equity
Preferred Stock
The Company has authorized 10 million shares of undesignated preferred stock with par value of $0.001 per
share. None of the preferred shares were issued and outstanding at December 31, 2004 and 2005.
Stock Split
On January 16, 2004, the Company’s Board of Directors approved a two-for-one split in the form of a stock
dividend on all outstanding shares of its common stock. As a result of the stock split, the Company’s
stockholders received one additional share for each share of common stock held on the record date of February 2,
2004. The additional shares of common stock were distributed on February 11, 2004. All common share and
per-share amounts in the consolidated financial statements and related notes have been retroactively adjusted to
reflect the stock split for all periods presented. In addition, the Company has reclassified $26 from additional
paid-in capital to common stock as of December 31, 2003.
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