NetFlix 2005 Annual Report Download - page 86

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NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share and per share data and percentages)
The following table summarizes information on outstanding and exercisable options as of December 31,
2005:
Options Outstanding
Options Exercisable
Exercise Price
Number of
Options
Weighted-
Average
Remaining
Contractual
Life (Years)
Weighted-
Average
Exercise
Price
Number of
Options
Weighted-
Average
Exercise
Price
$0.08–$1.50 2,680,827 5.76 $ 1.50 2,590,865 $ 1.50
$1.51–$10.83 717,346 8.00 $ 7.90 639,811 $ 8.20
$10.84–$14.27 741,913 8.77 $12.03 727,761 $12.05
$14.28–$21.45 748,434 9.05 $17.70 748,434 $17.70
$21.46–$34.75 741,232 8.70 $28.48 741,232 $28.48
$34.76–$36.38 225,064 8.25 $35.87 225,064 $35.87
5,854,816 7.31 $10.43 5,673,167 $10.65
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 using the accelerated multiple-option approach.
The fair value of employee stock options granted 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 to value option grants:
Stock Options Employee Stock Option Plan
2003 2004 2005 2003 2004 2005
Dividend yield ............. 0% 0% 0% 0% 0% 0%
Expected volatility ......... 69% 78% 59% 68% 77% 45%
Risk-free interest rate ....... 1.59% 2.23% 3.67% 1.34% 1.83% 3.80%
Expected life (in years) ...... 1.95 1.85 3.08 1.3 1.3 1.3
F-26