As filed with the Securities and Exchange Commission on April 18, 2000
Registration No.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION Washington,ON MARCH 6, 2002
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
NetFlix.com, Inc.
(Exact name of registrant as specified in its charter)----------------
NETFLIX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
Delaware 7379DELAWARE 7841 77-0467272
(State or other jurisdiction of (Primary Standard Industrial(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)EMPLOYER
INCORPORATION OR ORGANIZATION CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
---------------
750 University Avenue, Suite 100
Los Gatos,970 UNIVERSITY AVENUE
LOS GATOS, CA 95032
(408) 399-3700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-------------------------------
W. Barry McCarthy, Jr.
Chief Financial Officer
750 University Avenue, Suite 100
Los Gatos,BARRY MCCARTHY, JR.
CHIEF FINANCIAL OFFICER
970 UNIVERSITY AVENUE
LOS GATOS, CA 95032
(408) 399-3700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:----------------
COPIES TO:
Larry
LARRY W. Sonsini, Esq. Peter Lillevand, Esq.
Robert D. Sanchez, Esq. Scott D. Elliott, Esq.
Peter H. Bergman, Esq. Cynthia L. Mire, Esq.
Bradley L. Finkelstein, Esq. Anne H. Nguyen, Esq.
Wilson Sonsini GoodrichSONSINI, ESQ. ROBERT SANCHEZ, ESQ. JONATHAN A. SCHAFFZIN, ESQ.
WILSON SONSINI GOODRICH & Rosati Orrick, HerringtonROSATI WILSON SONSINI GOODRICH & Sutcliffe LLP
Professional CorporationROSATI CAHILL GORDON & REINDEL
PROFESSIONAL CORPORATION PROFESSIONAL CORPORATION 80 PINE STREET
650 PAGE MILL ROAD 7927 JONES BRANCH DRIVE NEW YORK, NEW YORK 10005
PALO ALTO, CA 94304 LANCASTER BUILDING WESTPARK, (212) 701-3000
(650) 493-9300 SUITE 400
Sansome Street
650 Page Mill Road San Francisco, CA 94111
Palo Alto, California 94304 (415) 392-1122
(650) 493-9300MCLEAN, VIRGINIA 22102
(703) 734-3100
---------------
Approximate date of commencement of proposed sale to the public:----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
---------------
If any of the securities being registered on this formForm are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
____________
If delivery of the prospectus is expected to be made pursuant to Rulerule
434, please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE----------------
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Proposed Maximum
Title of Each Class of Aggregate Amount of
Securities to be Registered Offering Price(1) Registration Fee======================================================================================================
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE(2)
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Common Stock $0.001 par value............ $86,250,000 $22,770
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------value......................... $115,000,000 $10,580
======================================================================================================
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
---------------
The Registrant hereby amends this(2) Amount shall be offset against the registration fee of $22,770 previously
paid by Netflix.com, Inc., our prior name, in connection with Registration
Statement on such date or
dates as may be necessaryForm S-1(No. 333-35014) filed on April 18, 2000 and withdrawn
by Registrant on July 21, 2000 pursuant to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall hereafter become effective in accordance with
Section 8(a)Rule 457(p) of the Securities
Act of 1933.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to such
Section 8(a)OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
may determine.MAY DETERMINE.
================================================================================
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 2002
PROSPECTUS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. These +
+securities may not be sold until the registration statement filed with the +
+Securities and Exchange Commission becomes effective. This preliminary +
+prospectus is not an offer to sell these securities nor does it seek offers +
+to buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated April 18, 2000.
[NETFLIX LOGO]
- --------------------------------------------------------------------------------
Shares
Common Stock
- ------------------------------------------------------------------------------------------
SHARES
[LOGO] NETFLIX.COM, INC.
COMMON STOCK
----------------
This is theNetflix, Inc.'s initial public offering of NetFlix.com, Inc. and we are offering
shares of our common stock. We anticipate thatare
selling all of the initialshares.
We expect the public offering price willto be between $ and $ per
share. We are applyingCurrently, no public market exists for listingthe shares. After pricing of the
offering, we expect that the shares will be quoted on the Nasdaq National
Market under the symbol "NFLX."
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 6.INVESTING IN OUR COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
----------------
PER SHARE TOTAL
--------- -----
Public offering price............................ $ $
Underwriting discount............................ $ $
Proceeds, before expenses, to Netflix, Inc....... $ $
The underwriters may also purchase up to an additional shares from
us at the public offering price, less the underwriting discount, within 30 days
from the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacydetermined if
this prospectus is truthful or accuracy of this prospectus.complete. Any representation to the contrary is
a criminal offense.
Price Underwriting
to Discounts and Proceeds to
Public Commissions NetFlix.com
Per Share $ $ $
Total $ $ $
We have granted the underwriters the right to purchase up to additionalThe shares to cover over-allotments.
Deutsche Banc Alex. Brown
SG Cowenwill be ready for delivery on or about , 2002.
----------------
MERRILL LYNCH & CO.
THOMAS WEISEL PARTNERS LLC
U.S. Bancorp Piper JaffrayBANCORP PIPER JAFFRAY
----------------
The date of this prospectus is , 2000.2002.
[INSIDE FRONT COVER]
PROSPECTUS SUMMARY
This summary highlightsTABLE OF CONTENTS
PAGE
----
Summary.................................................................................. 1
Risk Factors............................................................................. 5
Forward-Looking Statements............................................................... 16
Use of Proceeds.......................................................................... 16
Dividend Policy.......................................................................... 16
Capitalization........................................................................... 17
Dilution................................................................................. 18
Selected Financial and Other Data........................................................ 19
Management's Discussion and Analysis of Financial Condition and Results of Operations.... 20
Business................................................................................. 32
Management............................................................................... 40
Certain Relationships and Related Transactions........................................... 50
Principal Stockholders................................................................... 53
Description of Capital Stock............................................................. 56
Shares Eligible for Future Sale.......................................................... 59
Underwriting............................................................................. 61
Legal Matters............................................................................ 64
Experts.................................................................................. 64
Where You Can Find More Information...................................................... 64
Index To Financial Statements............................................................ F-1
----------------
You should rely only on the information contained elsewhere in this prospectus. This summary isWe
have not, complete and doesthe underwriters have not, contain all theauthorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should consider before buying sharesnot rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offering.offer or sale is not permitted. You should readassume that
the entireinformation appearing in this prospectus carefully.
NetFlix.com, Inc.is accurate only as of the date on
the front cover of this prospectus or other date stated in this prospectus. Our
business, financial condition, results of operations and prospects may have
changed since that date.
Netflix, Netflix.com, CineMatch and Mr. DVD are our trademarks. Each
trademark, trade name or service mark of any other company appearing in this
prospectus belongs to its holder.
SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND
OUR FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL STATEMENTS APPEARING
ELSEWHERE IN THIS PROSPECTUS BEFORE YOU DECIDE TO INVEST IN OUR COMMON STOCK.
OUR COMPANY
We have created an authoritativeare the world's largest online source for movie recommendations and
selection based on personal preferences. We collect preference data from our
users through our Personal Movie Finder service to provide personalized movie
recommendations. Since February 2000, our Personal Movie Finder service has
collected over 8.9 million ratings from over 132,000 individual users. At our
Web site, www.netflix.com, users can rent DVDs through our Unlimited Rentalentertainment subscription service
purchase DVDs through our e-commerce referral programproviding more than 500,000 subscribers access to a comprehensive library of
more than 11,500 movie, television and choose theater locations and showtimes. We operate one of the stickiest sites
on the Internet. According to Media Metrix, during February 2000 visitors to
our Web site spent an average of 40 minutes on our Web site and viewed an
average of 46 pages in a month.
The primary accelerant for the growth of our Personal Movie Finder database
has been the ratings collected fromother filmed entertainment titles. Our
standard subscription plan allows subscribers to our Unlimited Rental
service. Our subscription service offers an unlimited number of DVD rentals
with no due dates or late fees, for between $15.95 and $19.95 per month. Users
are allowed to have up to four moviesthree titles out at the
same time with no due dates, late fees or shipping charges for $19.95 per
month. Subscribers can view as many titles as they want in a month. Subscribers
select titles at our Web site (WWW.NETFLIX.COM) aided by our proprietary
CineMatch technology, receive them on DVD by first-class mail and return them
to ensure convenient
selectionus at home. Astheir convenience using our prepaid mailers. Once a title has been
returned, we mail the next available title in a subscriber's queue.
In 2001, domestic consumers spent more than $32 billion on in-home filmed
entertainment, representing approximately 80% of March 31, 2000, we had over 120,000 paying subscriberstotal filmed entertainment
expenditures, according to our Unlimited Rental service.
We have benefited fromAdams Media Research. Consumer video rentals and
purchases comprised the largest portion of in-home filmed entertainment,
representing $23 billion, or 73% of the market in 2001, according to Adams
Media Research.
The home video segment of the in-home filmed entertainment market is
undergoing a rapid technology transition away from VHS tape formatto DVD. The DVD player
is the fastest selling consumer electronics device in history, according to DVD
technology. According to Paul Kagan Associates, Inc., a leading entertainment
industry market research firm,Entertainment Group. In September 2001, standalone set-top DVD player adoption has occurred fastershipments
outpaced VCR shipments for the first time in its
first three years since introduction than audio CD players, digital broadcast
systems or videocassette recorders. Sincehistory, and this trend continued
throughout the introductionremainder of the DVD player in
1997, the domestic installed base has grown to 5.4 million households at2001. At the end of 1999 and is forecast to2001, approximately 25 million
U.S. households had a standalone set-top DVD player, representing an increase
of 97% in 2001. Adams Media Research estimates that the number of U.S.
households with a DVD player will grow to 39.467 million in 2006, representing
approximately 60% of U.S. television households by the end of
2004, a 49% compound annual growth rate, according to Paul Kagan Associates,
Inc.
We have relationships with leading DVD manufacturers, including Sony,
Toshiba, Panasonic and RCA. These DVD manufacturers, which accounted for over
90% of the DVD players sold in the U.S. in 1999, insert promotional offers to
our Unlimited Rental2006.
Our subscription service into the boxeshas grown rapidly since its launch in September
1999. We believe our growth has been driven primarily by our unrivalled
selection, consistently high levels of customer satisfaction, rapid customer
adoption of DVD players sold inand our increasingly effective marketing strategy. We
primarily use pay-for-performance marketing programs and free trial offers to
acquire new subscribers. In the San Francisco Bay area, where the U.S. Post
Office can make one- or two-day deliveries from our San Jose distribution
center, more than 2.6% of all households subscribe to Netflix.
Our proprietary CineMatch technology enables us to create a customized
store for each subscriber and to generate personalized recommendations which
effectively merchandize our comprehensive library of titles. We provide more
than 18 million personal recommendations daily. In January 2002, more than
10,500 of our 11,500 titles were selected by our subscribers.
We currently provide titles on DVD only. We are focused on rapidly
growing our subscriber base and revenues and utilizing our proprietary
technology to minimize operating costs. Our technology is extensively employed
to manage and integrate our business, including our Web site interface, order
processing, fulfillment operations and customer service. We believe our
technology also have relationships with major consumer electronics retailers,
such as Circuit Cityallows us to maximize our library utilization and The Good Guys, which provide promotional offers forto run our
Unlimited Rental subscription service to their customers.
We operatefulfillment operations in a flexible manner with minimal capital requirements.
Our scalable infrastructure and online interface eliminate the need for
expensive retail outlets and allow us to service our large and growing market. Paul Kagan Associates, Inc.
estimates that consumers inexpanding
subscriber base from a series of low-cost regional distribution centers. We
1
utilize proprietary technology developed in-house to manage the shipping and
receiving of a total of 5.1 million DVDs per month. Our software automates the
process of tracking and routing titles to and from each of our distribution
centers and allocates order responsibilities among them. We plan to operate
low-cost regional distribution centers throughout the United States spent $25.6 billion on home videoto reduce
delivery times and theatrical filmed entertainment in 1999 and forecasts this spending to grow
to $35.0 billion in 2004.
In spite of large amounts spent on marketing, the movie industry has lacked
an effective means to market movies to a targeted audience on a personalized
basis. With our rapidly growing user base and expanding Personal Movie Finder
database we can market movies directly to targeted audiences through e-mail,
banner ads, streamed trailers and other rich media content based on the known
movie tastes of our individual users. We intend to offer this marketing
capability to movie studios to promote new releases. As technology evolves on
the Internet, we intend to use our expertise in personal movie recommendations
as a programming guide to Internet delivered video for our users.
3
The Offering
Common stock offered................ shares
Common stock to be outstanding after
this offering...................... shares
Use of proceeds..................... We plan to use the proceeds for general
corporate purposes, including working
capital, capital expenditures, additional
sales and marketing efforts and potential
acquisitions.
Proposed Nasdaq National Market
symbol............................. NFLX
This information is based on shares outstanding as of April 13, 2000. This
information excludes:
. 2,543,097 shares subject to outstanding options under our amended and
restated 1997 Stock Plan and 887,979 shares available for future grant,
. 550,000 shares reserved for issuance under our 2000 Employee Stock
Purchase Plan, and
. 625,595 shares subject to outstanding warrants to purchase preferred
stock which will convert into warrants to purchase common stock upon
completion of this offering.
----------------
Except as otherwise indicated, all information in this prospectus assumes:
. the conversion of all outstanding shares of our convertible preferred
stock into shares of common stock upon the closing of this
offering,
. the filing of an amended and restated certificate of incorporation after
the closing of this offering, and
. no exercise of the underwriters' over-allotment option to purchase
shares.increase library utilization.
----------------
We were incorporated in Delaware in August 1997 and changed our name to
NetFlix.com,Netflix, Inc. in August 1998.March 2002. Our executive offices are located at 750970
University Avenue, Los Gatos, CACalifornia 95032, and our telephone number at
that address is (408) 399-3700. Our Web site is located at
http://www.netflix.com. The information contained atin our Web site does not
constitute a part of this prospectus.
42
Summary Financial Data
(in thousands, except per share data)
Period from
August 29,
1997 (Inception) Years Ended December 31,
to December 31, ---------------------------
1997 1998 1999
----------------- ------------ --------------
Statement of Operations Data:
Revenues......................... $ -- $ 1,339 $ 5,006
Cost of revenues................. -- 1,311 4,373
-------- -------- --------
Gross profit..................... -- 28 633
Operating loss................... (361) (11,153) (30,031)
Net loss......................... $ (359) $(11,081) $(29,845)
======== ======== ========
Net loss attributable to common
stockholders.................... $ (359) $(11,081) $(29,845)
======== ======== ========
Basic and diluted net loss per
common share.................... $ -- $ (12.27) $ (5.60)
======== ======== ========
Weighted-average shares
outstanding usedTHE OFFERING
Common stock offered by Netflix........ shares
Common stock to be outstanding after
the offering......................... shares
Use of proceeds........................ We estimate that our net proceeds
from this offering will be
approximately $ million. We intend
to use the net proceeds for:
. repayment of approximately $13.7
million of indebtedness under our
subordinated promissory notes,
including accrued interest as of
December 31, 2001; and
. general corporate purposes,
including, among other things,
additional working capital,
financing of capital expenditures
and additional marketing efforts.
Risk factors........................... See "Risk Factors" and other
information included in this
prospectus for a discussion of
factors you should carefully consider
before deciding to invest in computing
net loss per share.............. -- 903 5,328
Pro forma net loss per share
(unaudited)(1).................. $ (1.36)
========
Weighted-average shares
outstanding used in computing
pro forma net loss per share.... 21,913
December 31, 1999
---------------------------------------------
Pro Forma
Actual Pro Forma(2) As Adjusted(3)
----------------- ------------ --------------
Balance Sheet Data:
Cash and cash equivalents........ $ 14,198 $ 14,198
Working capital.................. 11,028 11,028
Total assets..................... 34,773 34,773
Long-term obligations, less
current portion................. 56,589 4,770
Stockholders' (deficit) equity... (32,028) 19,791
- ------------
(1) Pro forma net loss per share for 1999 is computed using the weighted-
average number of common stock outstanding, including the pro forma effect
of the automatic conversion of our convertible preferred stock into shares
of our common stock.
Proposed Nasdaq National Market symbol. NFLX
Unless we indicate otherwise, all information in this prospectus: (1)
assumes no exercise of the over-allotment option granted to the underwriters;
(2) assumes the conversion into common stock effectiveof each outstanding share of our
preferred stock, which will occur automatically upon the closingcompletion of this
offering; (3) is based upon 45,129,402 shares outstanding as of February 28,
2002, including shares to be issued to certain studios immediately prior to
this offering based on our initial public
offering,capitalization as if such conversion occurred on January 1, 1999, or at the date
of issuanceFebruary 28, 2002; (4) does not
give effect to a for reverse stock split to be effected
in 2002; and (5) excludes:
. 12,998,864 shares of the preferred stock, if later. Pro forma common equivalents,
consisting of incremental common stock issuanceissuable upon the exercise of stock
options outstanding as of February 28, 2002, with a weighted average
exercise price of $1.00 per share and 3,331,456 shares of common
stock available for future option grants under our 1997 Stock Plan
and 2002 Stock Plan, each as of February 28, 2002;
. 21,053,931 shares of common stock issuable upon exercise of warrants
with a weighted average exercise price of $1.07 per share; and
. 1,750,000 shares of common stock reserved for issuance under our 2002
Employee Stock Purchase Plan.
3
SUMMARY FINANCIAL AND OTHER DATA
The summary financial data below should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the related notes
included elsewhere in this prospectus.
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 2000 2001
-------- ------------- ---------------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Total revenues................................... $ 5,006 $ 35,894 $ 75,912
Gross profit..................................... 633 11,033 26,005
Operating loss................................... (30,031) (57,557) (36,867)
Net loss......................................... (29,845) (57,363) (38,258)
OTHER DATA:
EBITDA(1) (unaudited)............................ $(21,223) $(28,179) $ (1,716)
Number of subscribers (unaudited)................ 107 292 456
Net cash provided by (used in):
Operating activities.......................... $(16,529) $(22,706) $ 4,847
Investing activities.......................... (19,742) (24,972) (12,670)
Financing activities.......................... 49,408 48,375 9,059
AS OF DECEMBER 31, 2001
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA (2) AS ADJUSTED (3)
-------- ------------- ---------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 16,131 $ 16,131 $
Working capital (deficit)........................ (6,656) (6,656)
Total assets..................................... 41,630 41,630
Long-term debt, less current portion............. 3,856 3,856
Redeemable convertible preferred stock........... 101,830 --
Stockholders' equity (deficit)................... (90,504) 11,326
- --------
(1) EBITDA consists of operating loss before depreciation, amortization,
non-cash charges for equity instruments granted to non-employees and
stock-based compensation. EBITDA provides an alternative measure of cash
flow from operations. You should not consider EBITDA as wella substitute for
operating loss, as shares subjectan indicator of our operating performance or as an
alternative to repurchase agreements,
are not included in pro forma diluted net loss share because they would be
antidilutive.cash flows from operating activities as a measure of
liquidity. We may calculate EBITDA differently from other companies.
(2) The pro forma column gives effect to the conversion of all outstanding
shares of our preferred stock, including shares to be issued to certain
studios immediately prior to this offering, into shares of common stock
automatically upon the
closingcompletion of this offering.
(3) The pro forma as adjusted column gives effect to the sale of our Series E
Preferred Stock in April 2000 and to the sale of shares
of common stock offered by us at an assumed initial public offering price
of $ per share and the application of the net proceeds from the
offering, after deducting underwriting discounts and commissions and
estimated offering expenses.
5expenses, including repayment of our subordinated
promissory notes.
4
RISK FACTORS
You should carefully consider the risks described below before buying shares
in this offering. If any of the following risks actually occur, our business,
financial condition and results of operations could be harmed. In that case,
the trading price of our common stock could decline, and you could lose all or
part of your investment.
Risks Related To Our Business
If we fail to effectively manage our transition to a Web portal, our operating
results, financial condition and future growth will be harmed.
We currently generate substantially all of our revenues from a subscription
service for the online rental of digital video discs, or DVDs. Our strategy is
to expand our content and services as a movie-oriented Web portal. However, we
have limited experience with this business model and the transition may be
difficult. We cannot assure you that we will be able to attract users and
advertisers to our Web portal or operate a Web portal profitability. We
introduced our Personal Movie Finder recommendation service in February 2000,
and expect to introduce a number of new features to our Web site in the future,
such as streaming movie trailers, access to electronic theater ticketing and
other products and services related to movies. This transition could divert
resources and our management's attention from our existing subscription
business. If we experience difficulties in expanding our business model, our
operating results, financial condition and future growth will be harmed.
We will encounter new and additional risks as we introduce new services and
product offerings in connection with our transition to a Web portal and cannot
assure you we will be able to manage these risks.
Our Web portal strategy will require us to introduce new services and
products in adjacent markets to our existing Unlimited Rental subscription
service for DVDs. Each of these new services, products and markets may entail
unique risks which we have limited experience in managing. We cannot assure you
that we will operate any of these new businesses profitably. If we fail to
anticipate or address these risks successfully, our business will be harmed.
For example, if we offer movie showtime listings, we must gather and provide
accurate information on a consistent basis. If we seek to offer electronic
movie ticketing, we must establish relationships with movie theater chains and
independent theaters. Offering streaming video content may require us to
develop the capacity to deliver the content over a high bandwith connection and
license the content, or enter into agreements with third parties who can do so.
In addition, we have not yet sold advertising on our Web site and, in order to
do so, we must build an advertising sales staff and attract advertisers. We
also may face new competitors in each of these businesses.
We depend on our Unlimited Rental subscription business for substantially all
of our revenues, but cannot assure you that this business will be profitable.
We are dependent on our Unlimited Rental subscription service for DVDs for
substantially all of our revenues. We cannot assure you that we will be able to
operate our subscription service profitably. The profitability of our Unlimited
Rental subscription service depends on a number of factors, including:
. widespread acceptance of the Internet as a means of renting DVDs;
. DVD costs and breakage;
. the number of new subscribers to our subscription service;
6
. retention and customer satisfaction of existing subscribers;
. pricing of our product offerings and the sensitivity of our customers to
pricing changes; and
. fulfillment costs.
If we are unable to manage successfully these risks, some of which are not
under our control, we may not achieve profitability.
We rely on promotional offers distributed by DVD player manufacturers for the
majority of our new subscribers and if we fail to maintain our relationships
with these DVD player manufacturers, our business and results of operations
will be affected adversely.
Our future success is highly dependent on an increase in the number of
subscribers to our Unlimited Rental subscription service.YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE BUYING
SHARES IN THIS OFFERING. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE HARMED. IN
THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD
LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE A majority of our new
subscribers are obtained through promotional campaigns with the principal DVD
player manufacturers and certain retailers under short-term promotional
agreements. Our competitors may offer our promotional affiliates better terms
or otherwise provide incentives to them to discontinue their participation in
our marketing campaigns. If our promotional affiliates do not continue to
participate in our marketing campaigns and promote our service in an effective
manner, our subscriber growth will be affected adversely. In addition, while
our promotional affiliates are required to include our free trial offer with
every DVD player they sell, we cannot effectively control what portion of DVD
players sold by them will include the free trial offer. If we are not able to
continue our current or similar promotional campaigns, our business, and
results of operations could be harmed.
We have a limited operating history, and you should evaluate our prospects in
light of our early stage of development and rapidly evolving market.
Our business has grown rapidly, but we cannot assure you that our business
will continue to grow at a similar rate.LIMITED OPERATING HISTORY AND HISTORY OF NET LOSSES, AND WE
ANTICIPATE THAT WE WILL EXPERIENCE NET LOSSES FOR THE FORESEEABLE FUTURE.
You should consider our business and prospects in light of our limited operating history and the changes to our
business that have occurred since we began operations. With the launch of our
Web site in 1998, we began selling and renting DVDs on an individual basis. In
1999, we discontinued the sale of DVDs and introduced our subscription DVD
rental program. Since March 2000, we have rented DVDs exclusively through our
Unlimited Rental subscription service. We also provide referrals to e-commerce
retailers for DVD purchase. We expect to offer new movie-related services in
the future as we continue our transition to a movie-oriented Web portal. Our
business faces several risks,
expenses and difficulties encountered by companies in light of ourtheir early stage of
operations, including the need for:
. continued development of our Web portal business model;
. sufficient new and continued participation in our Personal Movie Finder
service;
. accurate forecasting of the success of new service and product
offerings;
. capital expenditures associated with our DVD inventory, distribution
center, order-management systems, computer network and Web site; and
. successful introduction of new technologies and movie delivery
alternatives.
7
We have a history of net losses and negative cash flow and we anticipate that
we will experience net losses and negative cash flow for the foreseeable
future.development. We have experienced significant net losses and negative cash flow, since our inception.inception
and, given the significant operating and capital expenditures associated with
our business plan, anticipate continuing net losses for the foreseeable future.
If we do achieve profitability, we cannot be certain that we will be able to
sustain or increase such profitability. We incurred net losses of $29.8$38.3 million
in 1999, and asfor the year ended 2001. As of December 31, 1999,2001, we had an accumulatedstockholders' deficit
of $41.3$90.5 million. We expect to continue
to incur significant operating expenses and capital outlays for the foreseeable
futureOnly recently, beginning in connection with our planned expansion, including expenditures for:
. continued promotional offers to attract subscribers to our Unlimited
Rental service;
. brand development, marketing and other promotional activities;
. the continued development of our computer network, Web site, warehouse
management and order fulfillment systems and delivery infrastructure;
. establishment of an advertising sales force;
. the acquisition of DVDs to support the growth of our subscription
business;
. the continued expansion and development of operations at our existing
distribution center and any new distribution centers2001, have we operate;
. continued development of business alliances and partnerships; and
. responses to competitive developments.
As a result, we expect to continue to have operating losses and negativegenerated positive
cash flow on a quarterlyfrom operations, and annual basis forwe cannot be certain that we will be able to
sustain or increase such positive cash flow from operations from period to
period in the foreseeable future.
To achieve and sustain profitability, we must accomplish numerous
objectives, including:
. substantially increasing the number of paying subscribers to our
Unlimited
Rental service;
. maintaining and increasing our subscription retention rates;
. maintaining and achieving more favorable gross and operating margins; and
. selling advertising and promotional space on our Web site.improving operating margins.
We cannot assure you that we will be able to achieve these objectives.
In
addition, becauseIF OUR EFFORTS TO ATTRACT SUBSCRIBERS ARE NOT SUCCESSFUL, OUR REVENUE GROWTH
WILL BE AFFECTED ADVERSELY.
We must continue to attract and retain subscribers. To succeed, we must
continue to attract a large number of the significant operatingsubscribers who have traditionally used
video retailers, video rental outlets, pay cable channels, such as HBO and
capital expenditures
associated withShowtime, and pay-per-view and video-on-demand, or VOD, for in-home filmed
entertainment. Our ability to attract and retain subscribers will depend in
part on our expansion plan,ability to consistently provide our operating lossessubscribers a high quality
experience for selecting, viewing, receiving and negative cash flowreturning titles, including
providing accurate recommendations through our CineMatch technology. If
consumers do not perceive our service offering to be of high quality, or if we
introduce new services that are expected to increase significantly from current levels and to continue for
the foreseeable future. Ifnot favorably received by them, we do achieve profitability, we cannot be certain
that we wouldmay not be
able to sustainattract or increase such profitability on a quarterly
or annual basis in the future.
Our limited operating history makes financial forecasting difficult for us and
for financial analysts that may publish estimatesretain subscribers. In addition, many of our financial results.
As a result ofnew subscribers
originate from word-of-mouth advertising and referrals from existing
subscribers. If our limited operating history, it is difficultefforts to accurately
forecastsatisfy our revenues, gross and operating margins, number of DVD rentals
shipped per day and other financial and operating data. We have a limited
amount of meaningful historical financial data upon which to base planned
operating expenses. We base our current and forecasted expense levels and DVD
purchasing on our operating plans and estimates of future revenues, whichexisting subscribers are dependent on the growth of our subscriber base and the demand for DVD rentals
by our subscribers. As a result,not
successful, we may not be unableable to make accurate financial
forecasts and to adjust our spending in a timely manner to compensate for any
unexpected shortfalls in revenues. We believe that these difficulties in
forecasting are even greater for financial analysts that may
8
publish their own estimates of our financial results. The inability by us or
the financial community to accurately forecast our operating results could
cause our net losses in a given quarter to be greater than expected or could
cause a decline in the trading price of our common stock.
Our quarterly operating results are expected to be volatile and difficult to
predict based on a number of factors that also will affect our long-term
performance.
We expect our quarterly operating results to fluctuate significantly in the
future based on a variety of factors, many of which are outside our control.
These factors also are expected to affect our long-term performance. These
factors include the following:
. our ability to maintain and increase subscriber retention rates, attract new subscribers, and as a result, our
revenue growth will be affected adversely.
WE RELY HEAVILY ON OUR PROPRIETARY TECHNOLOGY AND THE FAILURE OF THIS
TECHNOLOGY TO OPERATE EFFECTIVELY COULD ADVERSELY AFFECT OUR BUSINESS.
We use complex proprietary software to manage the processing and
allocation of deliveries and returns at a steady rate and at a reasonable costour distribution centers. If we are
unable to enhance and maintain new subscriber satisfaction;
. our abilitysoftware to manage the delivery and returns
among our fulfillment processes to handle significant
increases in subscribers and rental orders;
. our ability to improve or maintain gross margins in our existing
business and in future product lines and markets;
. changes to our product and service offerings, including new features on
our Web site such as theater information and other content aggregation;
. changes to the product and service offerings of our competitors;
. price competition;
. our ability to acquire DVDs at a reasonable cost, and breakage and loss
of DVDs;
. our ability to maintain, upgrade and develop our Web site, our internal
computer systems and our fulfillment processes;
. the level of use of the Internet and increasing consumer acceptance of
the Internet for the purchase of consumer goods and services such as
those offered by us;
. the level of traffic on our Web site;
. technical difficulties, system downtime or Internet brownouts;
. our ability to attract new and qualified personneldistribution centers in a timely and effective manner;
. the amount and timing of operating costs and capital expenditures
relating to expansion of our business, operations and infrastructure;
.efficient manner, our ability to
manage effectively the development of new business
segmentsretain existing subscribers and markets;
. our ability to successfully manage the integration of operations and
technology resulting from acquisitions;
. governmental regulation and taxation policies; and
. general economic conditions and economic conditions specific to the
Internet, online commerce and the movie industry.
In addition to these factors, our quarterly operating results are expected
to fluctuate based upon seasonal fluctuations in DVD player sales and in the
use of the Internet. Based on our limited operating history, we expect to
experience stronger seasonal growth in the number ofadd new subscribers during the
late fall and early winter months, reflecting increased purchases of DVD
players and redemptions of new trial offers for our Unlimited Rental service
included with DVD players. The DVD industry is new and growing, and there maywill be shifts in seasonal
9
patterns of DVD player sales. Shifts in seasonal sales cycles may occur due to
changes in the economy or other factors affecting the market for our services.
Due to this wide variety of factors, we expect our operating results to be
volatile and difficult to predict. As a result, quarter-to-quarter comparisons
of our operating results may not be good indicators of our future performance.
If we are not able to manage our growth, our operating results and ability to
sustain growth could be affected adversely.
Any future expansion, internally or through acquisitions, may place
significant demands on our managerial, operational, administrative and
financial resources.impaired.
IF WE ARE NOT ABLE TO MANAGE OUR GROWTH, OUR SUBSCRIBER GROWTH COULD BE
AFFECTED ADVERSELY.
We have expanded rapidly since we launched our Web site in April 1998. From December 31, 1998 to December 31, 1999, we expanded from 46 to
270 full-time employees. We
anticipate that further expansion of our operations will be required to address
any significant growth in our subscriber base to
develop our Web site as a movie-oriented Web portal and to take advantage of
ourfavorable market opportunities. Several key membersAny future expansion may place significant
demands on our
5
managerial, operational, administrative and financial resources. Our primary
distribution center is in San Jose, California. We recently began to open
regional distribution centers outside of management have joined us only
recently.the San Francisco Bay area.
IF WE EXPERIENCE EXCESSIVE RATES OF SUBSCRIBER CHURN, OUR REVENUES AND BUSINESS
WILL BE HARMED.
We may choose to expand our operations by:
. expandingmust minimize the breadthrate of product offerings and services offered;
. continuing promotional offers to attractloss of existing subscribers while adding
new subscribers. Subscribers cancel their subscription to our Unlimited
Rental subscription service;
. expanding our market presence through relationships with third parties;
. promoting advertising on our Web site;service for many
reasons, including a perception that they do not use the service sufficiently,
delivery takes too long, the service is a poor value and . expanding through the acquisition of other companies.customer service
issues are not satisfactorily resolved. We have not made any acquisitions of other companiesmust continually add new subscribers
both to date, and our
ability as an organization to evaluate and complete acquisitionsreplace subscribers who cancel and to integrate acquired operations is unproven. Furthermore, any newcontinue to grow our business
we
launch that is not favorably received could damage our reputation, brand or
results of operations. Our future performance and profitability will depend in
part on our ability to recruit, motivate and retain qualified personnel. We
cannot be certain that our systems, procedures or controls will be adequate to
support our expanding operations or that management will be able to respond
effectively to growth in our business.
If our efforts to build strong brand identity and subscriber loyalty are not
successful, our revenues will be affected adversely.
The NetFlix brand is only three years old, and we must build strong brand
identity and brand loyalty to be successful. We believe that establishing and
maintaining brand identity and brand loyalty is critical to attracting
subscribers and advertisers. We believe that the importance of brand loyalty
will increase with the proliferation of Internet vendors. In order to attract
and retain subscribers, and respond to competitive pressures, we intend to
increase spending substantially to create and maintain brand loyalty. We plan
to accomplish this goal by continuingbeyond our current promotional campaigns,
including free trial offers to subscribers referred by our promotional
affiliates, and by conducting advertising campaigns. We believe that the costsubscriber base. If too many of our marketing campaigns could increase substantially in the future. If our
branding efforts are not successful, our revenues and our ability to attract
and retain subscribers will be affected adversely.
Promotion and enhancement of the NetFlix brand also will depend on our
success in consistently providing a high-quality consumer experience for
selecting movies and renting
10
DVDs, including providing accurate recommendations through our Personal Movie
Finder service. If consumers do not perceivecancel our
service, offerings to be of
high quality, or if we introduce new services that are not favorably received
by consumers, the value of the NetFlix brand could be harmed. Any significant
brand impairment will decrease the attractiveness of NetFlix to consumers,
which will seriously harm our ability to attract and retain subscribers.
If we are unable to provide consistently accurate predictions through our
Personal Movie Finder service or our Personal Movie Finder service is not
widely adopted,attract new subscribers in numbers sufficient
to grow our business, may suffer.
We cannot assure you that our Personal Movie Finder serviceoperating results will be able to
effectively attract users. In addition,adversely affected.
Further, if excessive numbers of subscribers cancel our CineMatch technology which
underlies our Personal Movie Finder service, may not effectively predict movies
that our users will enjoy. Our CineMatch technology uses proprietary algorithms
to generate recommendations. We cannot assure you that these algorithms will be
successful in generating accurate recommendations or that our algorithms are
the most effective in generating accurate recommendations. If our
recommendations are not useful, we may notbe
required to incur significantly higher marketing expenditures than we currently
anticipate to attract or retain users. In
addition, we believe that in order for CineMatch to function effectively, it
must access a large databasenumbers of recommendation information from a large number
of users. Because we introduced our Personal Movie Finder service in February
2000, we cannot assure you that we will be successful in attracting a large
number of users to rate movies.
If we fail to generate sufficient levels of subscriber growth and retention,
our revenues and business will be harmed.
In order to be successful, we must minimize the loss of subscribers and add new subscribers.
The numberIF WE EXPERIENCE DELIVERY PROBLEMS OR IF OUR SUBSCRIBERS OR POTENTIAL
SUBSCRIBERS LOSE CONFIDENCE IN THE U.S. MAIL SYSTEM, WE COULD LOSE SUBSCRIBERS,
WHICH COULD ADVERSELY AFFECT OUR REVENUES.
We rely on the U.S. Postal Service to deliver DVDs from our distribution
centers and for subscribers to return DVDs to us. We are subject to the risks
associated with the public mail system to meet our shipping needs, including
delays caused by bioterrorism, potential labor activism and inclement weather.
For example, in the fall of consumers willing2001 terrorists used the U.S. Postal Service to
subscribedeliver envelopes containing Anthrax, following which mail deliveries around
the United States experienced significant delays. Our DVDs also are subject to
a DVD rental
service may not increase. Factors that mayrisks of breakage during delivery and handling by the U.S. Postal Service. Our
failure to timely deliver DVDs to our subscribers could cause them to become
dissatisfied and cancel our service.
INCREASES IN THE COST OF DELIVERING DVDS WOULD ADVERSELY AFFECT OUR GROSS
MARGINS AND MARKETING EXPENSES.
Increases in postage delivery rates would adversely affect the size of our subscriber
base and subscriber satisfaction include:
. the accuracy of our Personal Movie Finder recommendation service;
. our content offerings, such as movie reviews;
. the ease-of-use of our Web site;
. pricing;
. our ability to fulfill subscription rental orders in a timely manner;
and
. quality of customer service.
We cannot assure you our subscriber base will continue to grow.
Ifgross
margins if we are unable to obtain sufficient selectionsraise our subscription rates to offset the
increase. Currently, most filmed entertainment is packaged on a single DVD. Our
delivery process is designed to accommodate the delivery of one DVD to fulfill
a selection. However, studios occasionally provide additional content on a
second DVD, or may package certain filmed entertainment on two DVDs. Also, DVDs
are generally manufactured on lightweight plastic allowing us to mail one
envelope containing a title using standard first-class postage. If packaging of
filmed entertainment on multiple DVDs were to become more prevalent, or if the
weight of DVDs fromwere to increase, our key
distributors, our subscriber satisfactioncosts of delivery and results of operations will be
affected adversely.
We may experience difficulty in obtaining sufficient selections of DVDs from
our distributors. We rely on a few distributors to obtain a complete and
current selection of DVD rental titles, and there are only a few alternate
suppliers. In 1999, we purchased 49% and 33% of our DVDs from Ingram
Entertainment, Inc. and Amplified.com, Inc., respectively. Our key distributors
also supply products to other companies in the online and offline DVD rental
and sales industries with which we may compete.fulfillment
processing would increase. In addition, we expense shipping costs of free trial
programs to new subscribers as marketing expense. Therefore, if the movie studios
may not produce enough DVDs for particular moviecost of
delivering titles or generally, whichwere to increase, our marketing expense would affect the entire industry including us. For example, during the fourth
quarter of 1999 we were affected by a brief
11
industry-wide shortage of DVDs. If we are unable to obtain sufficient
selections and quantities of DVDs from our key distributors or from alternate
suppliers to meet subscriber demand, our subscriber satisfaction and results of
operations will be adversely
affected.
If the cost of purchasing DVDs on a wholesale basis increases, our gross margin
will be affected adversely.
We currently purchase DVDs on a wholesale basis from distributors. Even if
we enter into revenue sharing arrangements with the movie studios under which
we would purchase DVDs directly from the studios, we will continue to purchase
a portion of our DVD inventory on a wholesale basis from distributors. If the
price of DVDs that we purchase increases, our gross margin will be affected
adversely. The adverse effect of an increase in the purchase price of DVDs will
be greater if we do not enter into revenue sharing arrangements.
If we do not correctly anticipate our short and long term needs for DVD titles,
our subscriber satisfaction and results of operations may be affected
adversely.IF WE DO NOT CORRECTLY ANTICIPATE OUR SHORT AND LONG-TERM NEEDS FOR TITLES, OUR
SUBSCRIBER SATISFACTION AND RESULTS OF OPERATIONS MAY BE AFFECTED ADVERSELY.
We may not purchaseacquire sufficient numbers of certain DVD titles to meet the
rental
demands of our subscribers. If we do not accurately forecast accurately DVD rentalsubscriber demand
for new titles, our subscriber satisfaction and operating results will be
harmed. In
addition, if we enter intoUnder our revenue sharing agreements with studios, the movie studios,number of copies
we will have only one opportunitybuy before the street date of each title must be sufficient to purchase each DVD title directly from the
studios, and we will have to estimatemeet
subscriber demand for up to a year in advance.the revenue sharing life of each title, typically
12 months. If we underestimate demand for DVDsparticular titles under any future revenue
sharing arrangements,agreements, our subscribers may become dissatisfied and cancel our
service, and our results
of operations will suffer.service. Alternatively, if we overestimate demand and purchaseacquire excess quantities
of certain DVD titles our results of operations
also will be adversely affected.
If we experience increased demand for DVDsinventory utilization would become less effective.
6
IF OUR SUBSCRIBERS SELECT MORE NEW RELEASES AS A PERCENTAGE OF TITLES SELECTED,
OR IF WE EXPERIENCE INCREASED DEMAND FOR TITLES ON A SUBSCRIBER-BY-SUBSCRIBER
BASIS, OUR EXPENSES AND GROSS MARGINS MAY BE AFFECTED ADVERSELY.
Depending on a subscriber-by-subscriber basis,
our expenses and gross margin may be affected adversely.
Under our Unlimited Rental subscriptionthe service, our subscribers may rent an
unlimited number of movies monthly with no due date and no late fees.
Subscribers are allowed to have up to fourbetween two and
eight movies out at a time. If our average
subscriber rentssubscribers select new releases more DVDsoften as a
percentage of overall titles selected, we may have to acquire more copies of
each new release. As a result, our costs of DVD acquisition and our revenue
sharing costs may increase. In addition, if our subscribers take more titles
per month than we have anticipated, we will incur increased shipping and
fulfillment costs and will be required to acquire more DVDs, which will
adversely affect our profitability.margins. Subscriber demand for movies, or new releases in
particular, may increase for a variety of reasons beyond our control, including
promotions by movie studios and seasonal variations in movie watching. Our subscriber
growth and retention may be affected adversely if we attempt to increase our
monthly subscription fee to offset increased usage. In
addition, we offer free trial programs to potential subscribers under which we
provide DVDs and pay shipping costs but receive no revenues during the trial
period. If we experience an increase in new trials without a subsequent
increase in new paying subscribers, our profitability will be harmed.
If other technologies become widely available alternatives to DVD rental, our
business may be affected adversely, and we may not be able to offset the effect
on our DVD rental business with our own offering of such alternative
technologies.
Recent advances in direct broadcast satellite and cable technologies and
other alternatives to viewing movies on DVD may adversely affect public demand
for DVD rentals. For example, some digital cable providers and internet
companies have begun testing technology designed to transmit movies on demand
with interactive capabilities such as start, stop and rewind. This is referred
to within our industry and by others as broadband delivery or video-on-demand.
If broadband delivery or video-on-demand were to become widely available and
accepted, and we were unable to offer such viewing alternatives to our
subscribers, our business could be harmed.
12
In addition, direct broadcast satellite providers and cable providers have
the capability to transmit numerous channels of programs to consumers. Because
of this increased availability of channels, direct broadcast satellite and
digital cable providers have been able to enhance their pay-per-view business
by substantially increasing the number and variety of movies they can offer
their subscribers on a pay-per-view basis and by providing more frequent and
convenient start times for the most popular movies. This is referred to within
our industry and by others as near-video-on-demand. If near-video-on-demand
were to become more widely available and accepted, consumer purchases of pay-
per-view programming could significantly increase. Increases in the size of
this pay-per-view market could lead to an earlier distribution window for
movies on pay-per-view, or other adverse changes in the movie studios' support
for the DVD format, if the studios perceive this to be a better way to maximize
their revenue. To offer similar viewing alternatives over the Internet, we
would have to acquire or develop new technology and infrastructure and license
the public performance rights for movies from copyright holders. In addition,
we would be required to develop a strong brand associated with broadband or
other non-DVD delivery. If we were unable to acquire or develop the necessary
technology and infrastructure or if we were unable to build a strong brand
associated with video-on-demand or near video-on-demand, our business and
results of operations may be affected adversely.
We face intense competition from traditional and online companies which could
result in a failure to achieve adequate market share.costs.
WE FACE INTENSE COMPETITION FROM TRADITIONAL AND ONLINE COMPANIES, WHICH COULD
RESULT IN OUR FAILURE TO ACHIEVE ADEQUATE MARKET SHARE.
The market for our servicesin-home filmed entertainment is intensely competitive and
subject to rapid change. BarriersMany consumers maintain simultaneous relationships
with multiple in-home filmed entertainment providers and can easily shift
spending from one provider to entryanother. For example, consumers may subscribe to
HBO, rent a DVD from Blockbuster, buy a DVD from Wal-Mart and subscribe to
Netflix, or some combination thereof, all in the same month. Competitors may be
able to launch new businesses at relatively low cost. DVDs represent only one
of many existing and potential new technologies for viewing filmed
entertainment. In addition, the growth in adoption of DVD technology is not
mutually exclusive from the growth of other technologies. If we are relatively minimal, andunable to
successfully compete with current and new competitors can launch new Web sites at relatively low cost.and technologies, we may
not be able to achieve adequate market share. Our principal competitors
include, or could include:
. traditional movievideo rental chains,outlets, such as Blockbuster Video and Hollywood
Video;Entertainment;
. online local delivery services, such as Kozmo.com;
. online entertainment sites, such as E! Online and Yahoo! Movies;
. online movie review and opinion sites, such as epinions.com and
Amazon.com's IMDB.com;
. online movie theater ticket sellers, such as AOL Moviefone and
Hollywood.com;
. online movie retailers, such as Amazon.com and Reel.com;
. traditional movie retail stores, such as Tower VideoBest Buy, Wal-Mart and Wal-Mart;Amazon.com;
. subscription entertainment services, such as HBO and Showtime;
. pay-per-view and video-on-demand services;
. online DVD sites, such as dvdovernight and Rentmydvd.com;
. Internet movie providers, such as Movielink, backed by Columbia
TriStar, Warner Bros. and a few other studios, Movies.com, backed by
Walt Disney and Twentieth Century Fox, and CinemaNow.com;
. cable providers, such as AOL Time Warner and Comcast; and
. video streaming companies,direct broadcast satellite providers, such as RealNetworks, iFilm.comDirectTV and AtomFilms.com.Echostar.
Many of our current and potential competitors have longer operating histories, larger customer
bases, significantly greater brand recognition and significantly greater financial, marketing
and other resources than we do. Some of our competitors have adopted, and may
continue to adopt, aggressive pricing policies and devote substantially more
resources to Web site and systems development than we do. Increased competition
may adversely impact ourresult in reduced operating margins, loss of market share and diminished
brand recognition. In addition, our competitors may form strategic alliances
with suppliersstudios and movie production
studios whichdistributors that could affect adversely our ability to obtain
productsfilmed entertainment on favorable terms.
We may be unable to compete successfully against current or
future competitors.
13
IfIF CONSUMER ADOPTION OF DVD technology does not continue its growing acceptance or becomes obsolete,
our revenues will be affected adversely.
DVD is a relatively new technology. We cannot assure you thatPLAYERS SLOWS, OUR BUSINESS COULD BE ADVERSELY
AFFECTED.
The rapid adoption of DVD technology will continue to grow. Currentplayers has been fueled by strong retail
support, strong studio support and falling DVD manufacturers may not be able
to,player prices. If retailers or
may decline to, continue to manufacture DVD players at a rate sufficient
to satisfy expected growth. In addition, there is currently a large established
basestudios reduce their support of VHS players, and utilizing the DVD format, requires additional
expenditureor if manufacturers
7
raise prices, continued DVD adoption by consumers. Inconsumers would slow. If new or
existing technologies, such as D-VHS, were to become more popular at the
event thatexpense of the adoption or use of DVD technology, consumers may delay or avoid
purchasing a DVD player. Our subscriber growth will be substantially influenced
by future consumer adoption of DVD players, and if such adoption slows, our
subscriber growth may also slow.
WE DEPEND ON STUDIOS TO RELEASE TITLES ON DVD FOR AN EXCLUSIVE TIME PERIOD
FOLLOWING THEATRICAL RELEASE.
Our ability to attract and retain subscribers is related to our ability
to offer new storage or player technology is
developed that is either superiorreleases of filmed entertainment on DVD prior to DVD or enjoys greater acceptance, our
revenues will suffer.
We depend on the movie studiostheir release to
make DVDs available on a for-rental basis
during an exclusive time period followingother distribution channels. Except for theatrical release.
Therelease, DVD and VHS
segments of the entertainment industry would losecurrently enjoy a significant competitive advantage if the movie studios adversely change their
current distribution practices with respect to these formats. A significant
competitive advantage that the DVD and VHS segments currently enjoy over other movie distribution
channels, except theatrical release, issuch as pay-per-view and VOD, because of the early timing of the
distribution window for these formats.DVD and VHS. The window for DVD and VHS rental and
consumerretail sales is generally exclusive against other forms of non-theatrical movie
distribution, such as pay-per-view, premium television, basic cable and network
and syndicated television. The length of the exclusive window for movie rental
and retail sales varies, typically ranging from 30 to 90 days for domestic video stores.days.
Our business wouldcould suffer material adverse harm ifincreased competition if:
. the moviewindow for rental windows were no longer the first following the
theatrical release,release; or
. the length of these windowsthis window were shortened or the windows were no longer as exclusive as they are now,
since consumers would no longer need to wait until after the movie rental
distribution window to view a newly released movie on these other distribution
channels.shortened.
The order, length and exclusivity of each window for each distribution
channel is determined solely by the studio releasing the movietitle, and we cannot
assure you that the studios will not change their policies in the future in a
manner that would be adverse to our business and result of
operations.
If we experience delivery problems, we could lose subscribers, and our business
could be seriously harmed.
We rely on the U.S. Postal Service to deliver DVDs from our distribution
center to subscribers and for the return of these DVDs to us. We are subject to
the risks associated with the public mail system to meet our shipping needs,
including potential labor activism, or employee strikes and inclement weather.
Our DVDs also are subject to risks of breakage during delivery and handling by
the U.S. Postal Service. Our failure to deliver products to our subscribers in
a timely and accurate manner would harm our reputation and brand, which would
have a material adverse effect on our business and results of operations. In
addition, any conditions that adversely affect the movie industry, including
constraints on capital, financial difficulties, regulatory requirements and
strikes, work stoppages or other disruptions involving writers, actors or other
essential personnel, could affect adversely the availability of new titles,
consumer demand for filmed entertainment and our profitability wouldbusiness.
IF WE ARE UNABLE TO RENEGOTIATE OUR REVENUE SHARING AGREEMENTS WHEN THEY EXPIRE
ON TERMS FAVORABLE TO US, OR IF THE COST TO US OF PURCHASING TITLES ON A
WHOLESALE BASIS INCREASES, OUR GROSS MARGINS MAY BE AFFECTED ADVERSELY.
In 2001, we acquired approximately 80% of our titles through revenue
sharing agreements with studios and distributors. These revenue sharing
agreements generally have terms of up to five years. The length of time we
share revenue on each title ends after a fixed period. As our revenue sharing
agreements expire, we may be affected adversely if the U.S. Postal
Service raised its postage rates, and we were unablerequired to raise our subscription
rental rates on an equivalent basis.
Ifnegotiate new terms that could be
disadvantageous to us.
Titles that we do not manageacquire under a revenue sharing agreement are
purchased on a wholesale basis from studios or other distributors. If the automationprice
of titles that we purchase wholesale increases, our order fulfillment system, our
business and results of operationsgross margin will be
affected adversely.
IF THE SALES PRICE OF DVDS TO RETAIL CONSUMERS DECREASES, OUR ABILITY TO
ATTRACT NEW SUBSCRIBERS MAY BE AFFECTED ADVERSELY.
The cost of manufacturing DVDs is substantially less than the price for
which new DVDs are generally sold in the retail market. Thus, we believe that
studios and other resellers of DVDs have significant flexibility in pricing
DVDs for retail sale. If the retail price of DVDs were to become significantly
lower, consumers may choose to purchase DVDs rather than subscribe to our
service.
IF DISPOSABLE DVDS ARE DEVELOPED, ADOPTED AND SUPPORTED AS A METHOD OF CONTENT
DELIVERY BY THE STUDIOS, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
We are currently aware that certain entities are attempting to develop
disposable DVDs. As currently contemplated, disposable DVDs would allow a
consumer to view a DVD for an unlimited number of times
8
during a given time period, following which the DVD becomes unplayable by a
chemical reaction, and is then disposable.
IF WE ARE UNABLE TO PROVIDE CONSISTENTLY ACCURATE PREDICTIONS THROUGH OUR
PERSONAL MOVIE RECOMMENDATION SERVICE OR OUR PERSONAL MOVIE RECOMMENDATION
SERVICE IS NOT WIDELY ADOPTED, OUR BUSINESS MAY SUFFER.
Our CineMatch technology uses proprietary algorithms to predict and
recommend titles to our subscribers. We rely on this technology to effectively
merchandize our library. We cannot assure you that our personal movie
recommendation service or experts' recommendations will effectively entice
subscribers to select from our back catalogue of titles. In addition, our
CineMatch technology may not effectively predict titles that our subscribers
will enjoy. If our recommendations are not useful, we may not effectively
utilize our library or retain subscribers. In addition, we believe that in
order for CineMatch to function effectively, it must access a labor-intensive fulfillment process. In order to meet
customer demand onlarge database of
recommendation information from a cost-effective basislarge number of users. We cannot assure you
that we will be requiredsuccessful in continuing to introduce
increased levelsattract a large number of automation intousers to
rate movies.
IF WE FAIL TO MAINTAIN OR ADEQUATELY REPLACE OUR RELATIONSHIPS WITH THIRD
PARTIES WITH WHOM WE HAVE MARKETING RELATIONSHIPS AND ON WHOM WE RELY FOR MANY
OF OUR SUBSCRIBERS, OUR SUBSCRIPTION ACQUISITION RATES MAY BE AFFECTED
ADVERSELY.
We rely on third parties, including DVD player manufacturers, Web portals
and online advertising promoters, to aid in our fulfillment process.marketing efforts. If we are
unablenot able to successfully increasecontinue our current or similar promotional campaigns, our ability
to attract new subscribers may be affected adversely. Our competitors may offer
our promotional affiliates better terms or otherwise provide them incentives to
discontinue their participation in our marketing campaigns. In addition, while
the automationDVD player manufacturers with whom we have promotional relationships are
required to include our promotional materials with every DVD player they sell,
we cannot effectively control what portion of DVD players sold by them actually
include the promotional materials.
FOLLOWING THE OFFERING, WE MAY NEED ADDITIONAL CAPITAL, AND WE CANNOT BE SURE
THAT ADDITIONAL FINANCING WILL BE AVAILABLE.
Historically, we have funded our order fulfillment systems,operating losses and capital
expenditures through proceeds from private equity and debt financings and
equipment leases. Although we will need more employeescurrently anticipate that the proceeds of this
offering, together with our available funds and more distribution center space to accomodate the
expected increases in the number of DVDs
14
shipped to and receivedcash flow from our subscribers which may affect adversely our
results of operations.
If we do not manage the development and operation of additional distribution
centers, our business and results of operations, will
be affected adversely.
We currently operate a distribution center in San Jose, California.
Unexpected significant growth insufficient to meet our DVD shipments per daycash needs for the foreseeable future, we may require
additional financing. Our ability to obtain financing will depend, among other
things, on our development efforts, business plans, operating performance and
condition of the capital markets at the time we seek financing. We cannot
assure you that additional financing will be available to us to
develop and operate additional distribution centers in the next few years. In
addition, we may choose to open new distribution centers sooner to facilitate
more efficient delivery. We have no experience in developingon favorable terms
when required, or operating
multiple distribution centers, and we may not be able to add distribution
centers on a cost-effective basis to accomodate our growth.at all. If we are unableraise additional funds through the issuance of
equity, equity-linked or debt securities, those securities may have rights,
preferences or privileges senior to effectively accommodate substantial increasesthe rights of our common stock, and our
stockholders may experience dilution.
ANY SIGNIFICANT DISRUPTION IN SERVICE ON OUR WEB SITE OR IN OUR COMPUTER
SYSTEMS COULD RESULT IN A LOSS OF SUBSCRIBERS.
Subscribers and potential subscribers access our service through our Web
site, where the title selection process is integrated with our delivery
processing systems and software. Our reputation and ability to attract, retain
and serve our subscribers is dependent upon the reliable performance of our Web
site, network infrastructure and fulfillment processes. Interruptions in subscriber orders,these
systems could make our Web site unavailable and hinder our ability to retain existing subscribers and to add new subscribers will be impaired,
which would affect adversely our business and results of operations.
Any significant disruption in service on our Web site or in our computer
systems could result in a loss of subscribers and adversely affect our business
and results of operations.
Our Web site experienced a disruption to service in the first quarter of
2000 due to a directed attack intended to cause a disruption in service. In
addition, our Web site has experienced in the past, and may experience in the
future, slower response times or disruptions in service for a variety of other
reasons including failures or interruptions in our systems, particularly
related to introduction of new services or unexpectedly high levels of user
access. Somefulfill
selections. Much of our systems aresoftware is proprietary, and we rely on the expertise
of members of our engineering teamand software development teams for theirthe continued
performance. Ifperformance of our software and computer systems. Service interruptions or the
developersunavailability of our Web site were unavailable incould diminish the eventoverall attractiveness of system failure, it
would harm significantly our
abilitysubscription service to timely resume service on our Web site.
If our Web site is unavailable for an extended period of time, or experiences
repeated shorter disruptions, our users may be dissatisfiedexisting and we could be
inundated with subscriber service queries which we may not be in a position to
manage.
In addition, ourpotential subscribers.
9
Our servers are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions, which could lead to interruptions and delays
in our service and operations and loss, misuse or theft of data. Our Web site
periodically experiences directed attacks intended to cause a disruption in
service. Any actionsattempts by hackers to disrupt our Web site service or our
internal systems, if successful, could harm our business, be expensive to
remedy and damage our reputation. Our general business disruption insurance
does not cover expenses related to directeddirect attacks on our Web site or internal
systems. Efforts to prevent hackers from entering our computer systems are
expensive to implement and may limit the functionality of our services. Any
significant disruption to our Web site or internal computer systems could
result in a loss of subscribers and adversely affect our business and results
of operations.
Our communications hardware and the computer hardware used to operate our
Web site are hosted at the facilities of Exodus Communications, Inc. in San
Jose, California. The hardwarea third party provider. Hardware for
our delivery systems is maintained in our San Jose, California distribution center.centers. Fires, floods,
earthquakes, power losses, telecommunications failures, break-ins and similar
events could damage these systems and hardware or cause them to fail
completely. Problems faced by Exodus Communications, Inc.,our third party Web hosting provider, with the
telecommunications network providers with whom it contracts or with the systems
by which it allocates capacity among its subscribers, including us, could
impact adversely the experience of users of
our Web site.subscribers. Any of these problems could
result in a loss of subscriberssubscribers.
OUR EXECUTIVE OFFICES AND PRIMARY DISTRIBUTION CENTER ARE LOCATED IN THE SAN
FRANCISCO BAY AREA. IN THE EVENT OF AN EARTHQUAKE, OTHER NATURAL OR MAN-MADE
DISASTER OR POWER LOSS, OUR OPERATIONS WOULD BE AFFECTED ADVERSELY.
Our executive offices and could affect adversely our business and results of operations.
15
We currently operate only oneprimary distribution center are located in the
San Francisco Bay area. In the event of an earthquake or other natural or man-made disaster,
our operations would be affected adversely.
We currently operate only one distribution center, which is located in San
Jose, California. Therefore, ourOur business and operations wouldcould be materially
adversely affected ifin the event of electrical blackouts, fires, floods,
earthquakes, power losses, telecommunications failures, break-ins or similar
events were to damage or shut
down our current distribution center.
In addition, if we had operations at multiple distribution centers, weevents. We may not be able to effectively shift our fulfillment and delivery
operations due to disruptions in service atin the San Jose, CaliforniaFrancisco Bay area or any
other facility. SinceBecause the San Francisco Bay Areaarea is located in an
earthquake-sensitive area, we are particularly susceptible to the risk of
damage to, or total destruction of, our currentprimary distribution center and the
surrounding transportation infrastructure
caused by earthquakes.infrastructure. We are not insured against any
losses or expenses that arise from a disruption to our business due to
earthquakes.
The loss of one or more of our key personnel, or our failure to attract,
assimilate and retain other highly qualified personnel in the future, could
seriously harm our business.
The loss of the services of one or more of our key personnel could harm our
business seriously.THE LOSS OF ONE OR MORE OF OUR EXECUTIVE OFFICERS OR OTHER KEY PERSONNEL, OR
OUR FAILURE TO ATTRACT, ASSIMILATE AND RETAIN OTHER HIGHLY QUALIFIED PERSONNEL
IN THE FUTURE, COULD SERIOUSLY HARM OUR EXISTING BUSINESS AND NEW SERVICE
DEVELOPMENTS.
We depend on the continued services and performance of our senior managementexecutive
officers and other key personnel, particularly Reed Hastings, our
founder, President and Chief Executive Officer.personnel. Much of our key technology and systems are
custom made for our business by our personnel and the loss of our key
technology personnel could disrupt the operation of our ordertitle selection and
fulfillment systems and have an adverse affecteffect on our ability to grow and
expand our systems. Our future success also depends also upon the continued service
of our other key technology, merchandising, marketing, finance and support personnel. None of our officers or other key employees is bound by an employment
agreement, and ourOur
relationships with theseour executive officers and key employees are at will.
Additionally, there are currently low levelsPRIVACY CONCERNS COULD LIMIT OUR ABILITY TO LEVERAGE OUR SUBSCRIBER DATA.
In the ordinary course of unemployment in the San
Francisco Bay area. These low levels of unemployment have led to pressure on
wage rates, which can make it more difficult and costly for us to attract and
retain qualified employees. The loss of key personnel or the failure to attract
additional qualified personnel could affect adversely our business, and results
of operations.
We may need substantial additional capital to fundin particular, in connection with
providing our planned growth,personal movie recommendation service, we collect and we
cannot be sure that additional financing will be available.
We will continue to require substantial amounts of working capital to fund
the planned growth ofutilize
data supplied by our business and DVD rental inventory. If we fail to
establish revenue sharing agreements with the major movie studios under which
we are able to purchase DVDs at a low cost in exchange for a royalty on future
revenues, our short term capital needs will be impacted adversely as we will be
required to pay full wholesale cost for DVDs at the time of purchase. In
addition, in order to meet customer demand on a cost-effective basis we will be
required to introduce increased levels of automation into our fulfillment
process which will require significant additional capital. Continued growth of
our DVD rental business will require us to build additional operating centers
which will require us to expend significant amounts of capital.
In the past, we have funded our operating losses and capital expenditures
through proceeds from equity offerings, debt financing and equipment leases.
Although we currently anticipate that the net proceeds of this offering,
together with our available funds, will be sufficient to meet our anticipated
needs for working capital and capital expenditures for at
16
least the next 12 months, we may require additional financing. We cannot assure
you that additional financing will be available to us on favorable terms when
required, or at all. If we raise additional funds through the issuance of
equity, equity-linked or debt securities, those securities may have rights,
preferences or privileges senior to those of the rights of our common stock,
and our stockholders may experience additional dilution.
If the protection of our trademarks and proprietary rights is inadequate, our
business may be harmed.
We rely or may rely on confidentiality or license agreements with our
employees, subscribers, partners and others, as well as trademark, copyright
and patent law and trade secret protection laws generally, to protect our
proprietary rights. We have filed trademark applications for the NetFlix,
NetFlix.com and CineMatch names, and, from time to time, expect to file patent
applications directed to aspects of our proprietary technology. We cannot
assure you that any of these applications will be approved, that any issued
patents will protect our intellectual property or that any issued patents will
not be challenged by third parties. In addition, other parties may
independently develop similar or competing technology or design around any
patents that may be issued to us. We could incur significant expenses in
preserving our intellectual property rights. Our failure to protect our
proprietary rights could affect adversely our business and competitive
position.
If we are unable to protect our domain names, our reputation and brand could be
affected adversely.subscribers. We currently hold various domain names relating to our brand, including
NetFlix.com. The acquisition and maintenance of domain names generally are
regulated by governmental agencies and their designees. The regulation of
domain names inface certain legal obligations
regarding the United States and in foreign countries may change in the
near future. Governing bodies may establish additional top-level domains,
appoint additional domain name registrars or modify the requirements for
holding domain names. As a result, we may be unable to acquire or maintain
relevant domain names in all countriesmanner in which we conduct business.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. We may be
unable to prevent third parties from acquiring domain names that are similar
to, infringe upon or otherwise decrease the value of our trademarks and other
proprietary rights.
Intellectual property claims against us could be costly and result in the loss
of significant rights.
Trademark, patent and other intellectual property rights are becoming
increasingly important to us and other Internet companies. Many companies are
devoting significant resources to developing patents that could affect many
aspects of our business.treat such information. Other parties may assert infringement or unfair
competition claims against us that could relate to any aspect of our
technologies, business processes or other intellectual property. We have not
exhaustively searched patents relative to our technology. We cannot predict
whether third parties will assert claims of infringement against us, the
subject matter of any of these claims, or whether these assertions or
prosecutions will harm our business. If we are forced to defend ourselves
against any of these claims, whether they are with or without merit or are
determined in our favor, we may face costly litigation, diversion of technical
and management personnel, inability to use our current Web site or CineMatch
technology or product shipment delays. As a result of a dispute, we may have to
develop new, non-infringing technology or enter into royalty or licensing
agreements. These royalty or licensing agreements, if required, may be
unavailable on terms acceptable to us, or at all. If there is a successful
claim of patent
17
infringement against us and we are unable to develop non-infringing technology
or license the infringed or similar technology on a timely basis, our business
and competitive position may be affected materially adversely.
Privacy concerns could limit our ability to leverage our Personal Movie Finder
service.
Our Personal Movie Finder service collects and utilizes data input by our
subscribers. Collecting this data will enable us to deliver targeted
advertising based upon the preferences indicated by our subscribers. Other
firms, including DoubleClick Inc.,businesses have
been criticized by privacy groups and governmental bodies for attempts to link
personal identities and other information to data collected on the Internet
regarding usersusers' browsing and other habits. Increased regulation of our Personal Movie Finder service,data
utilization practices, including self-regulation, as well as increased
enforcement of existing laws could have an adverse effect on our business.
Risks Related to The Internet
If the Internet fails to become a widely accepted medium for finding and
consuming movies,10
OUR REPUTATION AND RELATIONSHIPS WITH SUBSCRIBERS WOULD BE HARMED IF THE ONLINE
SECURITY MEASURES USED BY US OR ANY OTHER MAJOR CONSUMER WEB SITE FAIL OR IF WE
EXPERIENCE PROBLEMS WITH OUR BILLING SOFTWARE.
To secure transmission of our subscribers' confidential information,
including renting DVDs, our subscriber growth rates and
revenues will be affected adversely.
Our success will depend to a substantial extent on the willingness of
consumers to increase their use of online services as a method to find and
consume movies, including renting DVDs. The use of the Internet to find and
consume movies is new and rapidly evolving, and it is uncertain whether this
market will achieve and sustain high levels of demand and market acceptance.
Moreover, our growth will depend on the extent to which an increasing number of
consumers own or have access to personal computers or other systems that can
access the Internet. If use of the Internet to find and consume movies does not
achieve high levels of demand and market acceptance, our business will be
affected adversely.
Our reputation and relationships with subscribers would be harmed if the online
security measures used by us or any other major consumer Web site fail.
We store credit card addressnumbers, we rely on licensed encryption and
other personal information about our
subscribers on our computer systems and transmit this information to credit
card companies. The measures we andauthentication technology. In conjunction with the credit card companies, usewe
take measures to protect against unauthorized intrusion into our data that may
prove inadequate to protect our subscriber'ssubscribers' personal information. To protect against unauthorized
intrusions or to alleviate any problems caused by them, we may need to expend
significant additional capital and management and other resources. If third
parties were able to penetrate our network security to obtain user information,
we could be subject to liability for misuse of the information. In addition, if
another major consumer Web site experienced significant credit card fraud or a
well publicized breach of subscriber data security on the Internet were to
occur, there could be a general public loss of confidence in use of the
Internet, which could affect adversely our business.
Our results of operations will be harmed if we experience significant credit
card fraud or if we are unable to prevent problems with our billing software. A failure to
adequately control fraudulent credit card transactions willwould harm our results
of operations because we do not currently carry insurance against this risk. We
may suffer losses as a result of orders placed with fraudulent credit card data
even though the associated financial institution approved payment of the
orders. Under current credit card practices, we are liable for fraudulent
credit card transactions because we do not obtain a cardholder's signature. In
addition, if another major consumer Web site experienced significant credit
card fraud or a well-publicized breach of subscriber data security on the
Internet were to occur, there could be a general public loss of confidence in
use of the Internet, which could adversely affect our business.
Further, we have occasionally experienced problems with our subscriber
billing software causing us to overbill subscribers or
former subscribers. Problems with our billing
18
software may have an adverse effect on our subscriber satisfaction and may
cause one or more of the major credit companies to disallow our continued use
of their payment products.
IF THE PROTECTION OF OUR TRADEMARKS AND PROPRIETARY RIGHTS IS INADEQUATE, OUR
BRAND MAY BE DIMINISHED, AND WE MAY ENCOUNTER INCREASED COMPETITION.
We rely or may rely on confidentiality or license agreements with our
employees, partners and others, as well as trademark, copyright and patent law
and trade secret protection laws generally, to protect our proprietary rights.
Our failure to protect our proprietary rights could affect adversely our
business and competitive position. We have filed trademark applications in the
United States for the Netflix, Netflix.com, CineMatch and Mr. DVD names, and
have filed a U.S. patent application for aspects of our technology. We filed
for but did not receive approval for the Netflix design logo and thus, intend
to file an amended application for the Netflix design logo. From time to time,
we expect to file additional trademark and patent applications. We cannot
assure you that any of these applications will be approved, that any issued
patents will protect our intellectual property or that third parties will not
challenge any issued patents. Other parties may independently develop similar
or competing technology or design around any patents that may be issued to us.
We could incur significant expenses in preserving and defending our
intellectual property rights.
INTELLECTUAL PROPERTY CLAIMS AGAINST US COULD BE COSTLY AND RESULT IN THE LOSS
OF SIGNIFICANT RIGHTS RELATED TO, AMONG OTHER THINGS, OUR WEB SITE, CINEMATCH
TECHNOLOGY AND TITLE SELECTION PROCESSES.
Trademark, patent and other intellectual property rights are becoming
increasingly important to us and other Internet companies. If there is dependenta
successful claim of patent infringement against us and we are unable to develop
non-infringing technology or license the infringed or similar technology on a
timely basis, our business and competitive position may be affected materially
and adversely. Many companies are devoting significant resources to developing
patents that could potentially affect many aspects of our business. There are
numerous patents that broadly claim means and methods of conducting business on
the developmentInternet. We may be accused of infringing certain of these patents. In
addition, other parties may assert infringement or unfair competition claims
against us that could relate to any aspect of our technology, business
processes or other intellectual property. We have not exhaustively searched
patents relative to our technology. We cannot predict whether third parties
will assert claims of infringement against us, the subject matter of any of
these claims or whether these assertions or prosecutions will adversely affect
our business. If we are forced to defend ourselves against any of these claims,
whether they are with or without merit or are determined in our favor, we may
face costly litigation, diversion of technical and management personnel,
inability to use our current Web site or CineMatch technology or product
shipment delays. As a result of a dispute, we may have to develop
non-infringing technology or enter into royalty
11
or licensing agreements. These royalty or licensing agreements, if required,
may be unavailable on terms acceptable to us, or at all.
IF WE ARE UNABLE TO PROTECT OUR DOMAIN NAMES, OUR REPUTATION AND BRAND COULD BE
AFFECTED ADVERSELY.
We currently hold various domain names relating to our brand, including
Netflix.com. Failure to protect our domain names could affect adversely our
reputation and brand, and make it more difficult for users to find our Web site
and our service. The acquisition and maintenance of Internet
infrastructure.domain names generally are
regulated by governmental agencies and their designees. The successregulation of
domain names in the United States may change in the near future. Governing
bodies may establish additional top-level domains, appoint additional domain
name registrars or modify the requirements for holding domain names. As a
result, we may be unable to acquire or maintain relevant domain names.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. We may be
unable to prevent third parties from acquiring domain names that are similar
to, infringe upon or otherwise decrease the value of our business will depend largely on the developmenttrademarks and maintenance of theother
proprietary rights.
BECAUSE OUR BUSINESS IS ACCESSED OVER THE INTERNET, IF THE INTERNET
INFRASTRUCTURE IS NOT DEVELOPED OR MAINTAINED, WE WILL LOSE SUBSCRIBERS.
The Internet infrastructure. This includes maintenance ofmay not become a reliable network backbone with the necessary speed, data capacity and security,
as well as the timelyviable commercial marketplace for many
potential subscribers due to inadequate development of complementary products such as highnetwork infrastructure
and enabling technologies that address consumer concerns about:
. network performance;
. security;
. reliability;
. speed modems, for providing reliable Web accessof access;
. ease of use; and
services. The Internet has
experienced, and is likely to continue to experience, significant growth in the
number of users and amount of traffic. The performance of the Internet may
decline if the Internet continues to experience increased numbers of users,
increased frequency of use or increased. bandwidth requirements.availability.
The Internet has experienced a variety of outages and delays as a result
of damage to portions of its infrastructure, and it could face outages and
delays in the future. These outages and delays could frustrate public use of
the Internet, including use of our Web site offerings. In addition, the
worldwide
web portion of the Internet could lose its viability due to delays in the development or adoption
of new standards and protocols to handle increased levels of activity or due to
governmental regulation.
We may be subject to liability for the Internet content that we publish or
upload from our users.IF WE BECOME SUBJECT TO LIABILITY FOR THE INTERNET CONTENT THAT WE PUBLISH OR
UPLOAD FROM OUR USERS, OUR RESULTS OF OPERATIONS WOULD BE AFFECTED ADVERSELY IF
SUCH LIABILITY EXCEEDS OUR INSURANCE COVERAGE.
As a publisher of online content, we face potential liability for
negligence, copyright, patent or trademark infringement or other claims based
on the nature and content of materials that we publish or distribute. We also
may face potential liability for content uploaded from our users in connection
with our community-related content or movie reviews. If we face liability,become liable,
particularly liabilityfor claims that isare not covered by our insurance or isare in excess
of our insurance coverage, then our business may suffer. In the past, plaintiffs
have brought these types of claims and sometimes successfully litigated them
against online services. Litigation to defend
these claims could be costly or
result in damages.and harm our results of operations. We cannot
assure you that we are adequately insured to cover claims of these types or to
indemnify us for all liability that may be imposed on us.
Under the Children's Online Privacy Protection Act, which becomes
effective April 21, 2000, we may be required to obtain parents' consents prior
to collecting movie preferences or other information from children under the
age of 13. We cannot assure you that we will be able to effectively obtain
required consents, or regulate the use of our Web site by children without
obtaining required consents.
We may need to change the manner in which we conduct our business, or incur
greater operating expenses, if government regulation of the Internet increases.12
WE MAY NEED TO CHANGE THE MANNER IN WHICH WE CONDUCT OUR BUSINESS, OR INCUR
GREATER OPERATING EXPENSES, IF GOVERNMENT REGULATION OF THE INTERNET INCREASES.
The adoption or modification of laws or regulations relating to the
Internet could limit or otherwise adversely affect the manner in which we
currently conduct our business. In addition, the growth and development of the
market for online commerce may lead to more stringent consumer protection laws,
which may impose additional burdens on us. Laws andIf we are required to comply with
new regulations directly applicableor legislation or new interpretations of existing regulations
or legislation, this compliance could cause us to communicationsincur additional expenses or
commerce over the Internet are becoming more prevalent.alter our business model.
The United States
government recently enacted Internet laws regarding privacy, copyrights,
taxation and the transmission of sexually explicit material. The regulation of
the Internet, however, remains largely unsettled, even in areas where there has
been some legislative action. It may take years to determine whether and how
existing laws and
19
regulations such as those governing intellectual property, privacy, libel and
taxation apply to the Internet.
The nature of this legislation and the manner in which itInternet legislation may be interpreted and enforced
cannot be fully determined and therefore, this legislation couldmay subject either us or our customers to
potential liability, which in turn could have an adverse effect on our
business, results of operations and financial condition. The adoption of any of
these laws or regulations also mightmay decrease the ratepopularity or growth in use of growth ofthe
Internet, use, which in turn could decrease the demand for our products orsubscription service
and increase the cost of doing business or in some other manner have an adverse
effect on our business, results of operations and financial condition.
In addition, applicability to the Internet of existing laws
governing issues such as property ownership, copyrights and other intellectual
property issues, taxation, libel, obscenity and personal privacy is uncertain.
The vast majority of these laws were adopted prior to the advent of the
Internet and related technologies and, as a result, do not contemplate or
address the unique issues of the Internet and related technologies. If we are
required to comply with new regulations or legislation or new interpretations
of existing regulations or legislation, this compliance could cause us to incur
additional expenses or alter our business model.
Taxation of online commerce could reduce demand for our services and increase
our administrative expenses.
Some states are reviewing the appropriate tax treatment of online commerce,
and the application of the law relating to these taxes is unclear. The
imposition of additional sales taxes on transactions conducted through our Web
site could make our service less valuable to subscribers and suppliers and
reduce transaction volume. This would harm our revenues. In addition, the
collection and payment of such taxes may cause us or our subscribers to incur
significant administrative effort and expense.
Federal legislation imposing limitations on the ability of states to tax
Internet access was enacted in 1998. The Internet Tax Freedom Act, as this
legislation is known, exempts specific transactions conducted over the Internet
from multiple or discriminatory state and local taxation through October 21,
2001. It is possible that this legislation will not be renewed beyond its
scheduled termination. Failure to renew this legislation could allow state and
local governments to impose taxes on particular transactions, and these taxes
could decrease the demand for our services or increase our costs of operations.
Risks Related to This Offering
Our officers and directors and their affiliates will exercise significant
control over NetFlix.RISKS RELATED TO THIS OFFERING
OUR OFFICERS AND DIRECTORS AND THEIR AFFILIATES WILL EXERCISE SIGNIFICANT
CONTROL OVER NETFLIX.
After the completion of this offering, our executive officers and
directors, their immediate family members and affiliated venture capital funds
will beneficially own, in the aggregate, approximately % of our
outstanding common stock. In addition, Jay Hoag, one of our directors, will
beneficially own approximately % of our outstanding common stock, Reed
Hastings, our president, chief executive officer, and chairman of our board of
directors will beneficially own approximately % of our outstanding common
stock and Michael Schuh, one of our directors, will beneficially own
approximately % of our outstanding common stock. These stockholders may
have individual interests that are different from yours. As a result, these stockholdersyours and will be able to
exercise significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which could delay or prevent someone from acquiring or merging
with us.
See "Principal
Stockholders".
It may be difficult for a third party to acquire us due to anti-takeover
provisions.PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD DISCOURAGE A
TAKEOVER THAT STOCKHOLDERS MAY CONSIDER FAVORABLE.
Following this offering, our charter documents willmay discourage, delay or
prevent a merger or acquisition that a stockholder may consider favorable
because they:
. authorize our board of directors, without stockholder approval, to
issue up to 10,000,000 shares of undesignated preferred stock, createstock;
. provide for a classified board of directors,
eliminate the right ofdirectors;
. prohibit our stockholders from acting by written consent;
. establish advance notice requirements for proposing matters to callbe
approved by stockholders at stockholder meetings; and
. prohibit stockholders from calling a special meeting of stockholders,
require stockholders to comply with
20
advance notice requirements before raising a matter at a meeting of
stockholders, eliminate the ability of stockholders to take action by written
consent and eliminate the ability of stockholders to cumulate votes in the
election of directors.stockholders.
As a Delaware corporation, we are also subject to certain Delaware
anti-takeover provisions. Under Delaware law, a corporation may not engage in a
business combination with any holder of 15% or more of its capital stock unless
the holder has held the stock for three years or, among other things, the board
of directors has approved the transaction. Our board of directors could rely on
Delaware antitakeover statute contained in Section 203law to prevent or delay an acquisition of the Delaware General
Corporation Law. These provisions could make it more difficult for a third
party to acquire us, even if doing so would be beneficial to our stockholders.us. For a description of our
capital stock, see "Description of Capital Stock."
Investors will incur immediate dilution and may experience further dilution
following the offering.
The initial13
OUR STOCK PRICE COULD BE VOLATILE AND COULD DECLINE FOLLOWING THIS OFFERING.
Prior to this offering, pricethere has been no public market for shares of our
common stock will be substantially higher
than the pro forma net tangible book value per sharestock. An active market may not develop following completion of the outstanding common
stock immediately after the offering. Accordingly, if you purchase common stock
in this
offering, you will incur immediate and substantial dilution in the pro
forma net tangible book value per share of the common stock from the price you
pay for common stock. We also have a large number of outstanding stock options
and warrants to purchase our common stock with exercise prices significantly
below the estimated initial public offering price of the common stock. To the
extent such options or warrants are exercised, there willif developed, may not be further dilution.
See "Dilution".
Our stock price could be volatile and could decline following this offering.maintained.
The stock market has experienced significant price and volume fluctuations,
and the market prices of the securities of Internet and technologytechnology-related
companies have been highlyextremely volatile. You may not be able to resell your shares at or above the initial
public offering price. The price at which our common stock
will trade after this offering could be extremely volatile and may fluctuate
substantially due to the following factors, such as:some of which are beyond our
control:
. variations in our historical and anticipated quarterly and annual operating results;
. variations between our actual operating results and the expectations
of securities analysts, investors and the financial community;
. announcements by us or others andof developments affecting our business, systems or
expansion plans;plans by us or others; and
. conditionsthe operating results of our competitors.
As a result of these and trendsother factors, investors in online commerce industries, particularlyour common stock may
not be able to resell their shares at or above the online DVD rental industry.initial offering price.
In the past, securities class action litigation often has been instituted
against companies following periods of volatility in the market price of their
securities. This type of litigation, if directed at us, could result in
substantial costs and a diversion of management's attention and resources.
Future salesWE WILL RECORD SUBSTANTIAL EXPENSES RELATED TO OUR ISSUANCE OF STOCK OPTIONS
THAT MAY HAVE A MATERIAL NEGATIVE IMPACT ON OUR OPERATING RESULTS FOR THE
FORESEEABLE FUTURE.
We are required to recognize, as a reduction of stockholders' equity,
deferred compensation equal to the difference between the deemed fair market
value of our common stock including those purchasedfor financial reporting purposes and the exercise
price of these options at the date of grant. This deferred compensation is
amortized over the vesting period of the applicable options, generally three to
four years, using the graded vesting method. At December 31, 2001,
approximately $3.6 million of deferred compensation related to employee stock
options remained unamortized. The resulting amortization expense will have a
material negative impact on our operating results in this offering,
may depressfuture periods. In
addition, in August and September 2001 we repriced options to purchase an
aggregate of 2,741,386 shares of our common stock price.
Ifto $1.00 per share. We will
recognize compensation expense for these repriced options for the life of these
options, generally ten years, to the extent that the intrinsic value of the
repriced option exceeds their original intrinsic value. We cannot predict the
amount of compensation expense that we will have to recognize on a quarterly
basis for these repriced options, and it could materially negatively impact our
existing stockholders selloperating results for future periods.
FUTURE SALES OF OUR COMMON STOCK, INCLUDING THOSE PURCHASED IN THIS OFFERING,
MAY DEPRESS OUR STOCK PRICE.
Sales of substantial amounts of our common stock in the public market
following this offering by our existing stockholders may adversely affect the
market price of our common stock
could fall.stock. Shares issued upon the exercise of
outstanding options also may be sold in the public market. Such sales could
create thepublic perception to the public of difficulties or problems with our business. As a
result, these sales might make it more difficult for us to sell securities in
the future at a time and price that we deem necessary or appropriate.
Upon completion of this offering, we will have outstanding shares
of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of 21
outstanding options and warrants after April 13, 2000.February 28,
2002. Of these shares, of
theonly shares sold in this offering to persons not subject
to a lock-up agreement with our underwriters are freely tradable. The remaining 31,105,451tradable without
restriction immediately following this offering.
14
After the lockup agreements pertaining to this offering expire 180 days
from the date of this prospectus, an additional shares will becomebe eligible
for sale in the public market, as follows:
Date Number of Shares
---- ----------------
At the date of this prospectus [0]
181 days after the date of this prospectus [25,775,428]
April 13, 2001 [5,339,023]
of which are currently held by directors,
executive officers and other affiliates and are subject to volume limitations
under Rule 144 of the Securities Act and certain other restrictions. Merrill
Lynch may also, in its sole discretion, permit our officers, directors and
current stockholders to sell shares prior to the expiration of the lockup
agreements. See "Shares Eligible for Future Sale" for more information
regarding shares of our common stock that may be sold by existing stockholders
after the closing of this offering.
FINANCIAL FORECASTING BY US AND FINANCIAL ANALYSTS WHO MAY PUBLISH ESTIMATES OF
OUR FINANCIAL RESULTS WILL BE DIFFICULT BECAUSE OF OUR LIMITED OPERATING
HISTORY, AND OUR ACTUAL RESULTS MAY DIFFER FROM FORECASTS.
As a result of our recent growth and our limited operating history, it is
difficult to accurately forecast our revenues, operating expenses, number of
DVDs shipped per day and other financial and operating data. The inability by
us or the financial community to accurately forecast our operating results
could cause our net losses in a given quarter to be greater than expected,
which could cause a decline in the trading price of our common stock. We have a
limited amount of meaningful historical financial data upon which to base
planned operating expenses. We base our current and forecasted expense levels
and DVD acquisitions on our operating plans and estimates of future revenues,
which are dependent on the growth of our subscriber base and the demand for
titles by our subscribers. As a result, we may be unable to make accurate
financial forecasts or to adjust our spending in a timely manner to compensate
for any unexpected shortfalls in revenues. We believe that these difficulties
in forecasting are even greater for financial analysts that may publish their
own estimates of our financial results.
OUR MANAGEMENT MAY NOT USE THE PROCEEDS OF THIS OFFERING EFFECTIVELY.
Our management has broad discretion over the use of proceeds of this
offering. In addition, our management has not designated a specific use for a
substantial portion of the proceeds of this offering. Accordingly, it is
possible that our management may allocate the proceeds in ways that do not
intendimprove our operating results. In addition, these proceeds may not be invested
to pay dividends. You will not receive funds without selling
shares, and you may lose the entire amountyield a favorable rate of your investment.
We have never declared or paid any cash dividends on our capital stock and
do not intend to pay dividends in the foreseeable future. We intend to invest
our future earnings, if any, to fund our growth. Therefore, you will not
receive any funds without selling your shares. We cannot assure you that you
will receive a return on your investment when you sell your shares or that you
will not lose the entire amount of your investment.
YOU SHOULD NOT RELY ONreturn.
15
FORWARD-LOOKING STATEMENTS
BECAUSE THEY ARE INHERENTLY UNCERTAIN
You should not relyplace undue reliance on forward-looking statements in this
prospectus. This prospectus contains forward-looking statements that involve
risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions. We use words such as "anticipates,"
"believes," "plans," "expects," "future," "intends" and similar expressions to
identify such forward-looking statements. ForwardForward- looking statements include
statements regarding our business strategy, future operating performance, the
size of the market for our services and our prospects. You should not place
undue reliance on these forward-looking statements, which apply only as of the
date of this prospectus. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the
risks faced by us described in "Risk Factors" starting on page 65 and elsewhere
in this prospectus. These forward-looking statements speak only as of the date of this
prospectus, and weWe caution you not to rely on these statements without also
considering the risks and uncertainties associated with these statements and
our business that are addressed in this prospectus.
This prospectus contains various estimates related to the Internet,
e-
commercee-commerce and the moviefilmed entertainment industry. These estimates have been
included in studies published or produced by market research and other firms
including Jupiter Communications,Adams Media Metrix, Inc., The Motion Picture Association of America, Paul Kagan
Associates, Inc., Forrester Research, DVD Entertainment Group and International Data Corporation.the National Cable
Television Association. These estimates have been produced by industry analysts
based on trends to date, their knowledge of technologies and markets, and
customer research, but these are forecasts only and are subject to inherent
uncertainty.
22
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common stock
offered by us are estimated to be $ , after deducting the
underwriting discounts and commissions, estimated offering expenses and
assuming no exercise of the underwriters' over-allotment option to purchase
shares from us.
We expectplan to use the net proceeds from our sale of common stock,
approximately $ million after underwriting discounts and commissions and
expenses, to repay all outstanding indebtedness under our subordinated
promissory notes of approximately $13.7 million, including accrued interest as
of December 31, 2001, and for general corporate purposes, principallyincluding working
capital, capital expenditures and additional sales and
marketing efforts. In addition, we may useOur
subordinated promissory notes, issued in July 2001, accrue interest at a portionstated
rate of 10% per year compounded annually and mature upon the earlier of July
10, 2011 and the completion of this offering. Proceeds from the sale of the
net proceeds to
acquire complementary products, technologies or businesses; however, we
currently have no commitments or agreementsnotes were used for general corporate purposes, including working capital and
are not involved in any
negotiations to do so.capital expenditures. Pending use of the net proceeds of this offering, we
intend to invest the net proceeds in interest-bearing,short-term, investment-grade securities with maturities of less than 13 months.securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock.
We currently expect to retain future earnings, if any, for use into finance the operationgrowth
and expansiondevelopment of our business and do not anticipate paying any cash dividends
in the foreseeable future. Our existing lease financing agreements prohibit the
payment ofus
from paying any dividends.
2316
CAPITALIZATION
The following table sets forth the following informationour cash, cash equivalents and
capitalization as of December 31, 1999:2001:
. ouron an actual capitalization,basis;
. ouron a pro forma capitalization which gives effect tobasis assuming the conversion of all outstanding shares of convertibleour
preferred stock into 19,428,765 shares of common stock automatically upon
completion of this offering and the filing of our amended and
restated certificate of incorporation upon completion of this
offering, including shares to be issued to certain studios
immediately prior to this offering; and
. ouron a pro forma as adjusted capitalization which gives effectbasis to the sale
of our Series E Preferred Stock in April 2000 and toreflect the sale of shares
of our common stock at the estimatedan assumed initial public offering price of
$ per share, in this offering, less the underwriting discounts and commissions and
estimated offering expenses.expenses, and the application of the net proceeds
from this offering.
This information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and
our financial statements and notes to those statements appearing elsewhere in
this prospectus.
As of DecemberAS OF DECEMBER 31, 1999
------------------------------
Pro Forma
As
Actual Pro Forma Adjusted
-------- -------- --------
(in thousands, except share
data)2001
--------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS)
Long-termCash and cash equivalents.............................................................. $ 16,131 $ 16,131
========= ========= =========
Subordinated promissory notes, payable--net...................net of unamortized discount of $10.9 million............ $ 3,9592,799 $ 3,9592,799 $ --
Capital Lease Obligations-netlease obligations, net of current portion....................................... 811 811
-------- -------- --------portion...................................... 1,057 1,057 1,057
--------- --------- ---------
Total debt................................. 4,770 4,770
Mandatorily redeemablelong-term debt............................................................ 3,856 3,856 1,057
Redeemable convertible preferred stock and warrants:
Series B, C, D, E and E-1 Convertible Preferred Stock: 5,776,61626,925,014 shares
authorized; 5,684,02420,316,909 shares issued and outstanding (actual); no shares issued
or outstandingoutstanding.................................................................... 101,479 -- --
Convertible preferred stock warrants............................................... 351 -- --
--------- --------- ---------
Total redeemable convertible preferred stock and warrants....................... 101,830 -- --
Stockholders' equity (deficit):
Preferred stock, $0.001 par value: 10,000,000 shares authorized (pro forma and
pro forma as adjusted)...................... 6,000 --
Series C Convertible Preferred Stock:
4,750,000 shares authorized; 4,650,269
shares issued and outstanding (actual); no shares issued or outstanding (pro forma and pro forma as adjusted)...................... 15,150outstanding.......................... -- -- --
Series DA Convertible Preferred Stock:
4,650,000 shares authorized; 4,649,927
shares issued and outstanding (actual); no
shares issued or outstanding (pro forma and
pro forma as adjusted)...................... 30,318 --
Convertible preferred stock warrants......... 351 --
-------- -------- --------
Total mandatorily redeemable convertible
preferred stock and warrants.............. 51,819 --
-------- -------- --------
Stockholders' equity (deficit):
Preferred Stock;Stock, $0.001 par value: 5,000,000 shares
authorized, no shares issued or
outstanding (pro forma and pro forma as
adjusted)................................... -- --
Convertible preferred stock;authorized; 4,444,545 shares issued and outstanding (actual); no shares issued
or outstanding (pro forma and pro forma as adjusted)........................................................ 4 -- Common--
Series F Convertible Preferred Stock, $.001$0.001 par value: 31,650,0003,500,000 shares
authorized; 1,712,954 outstanding (actual); no shares issued and outstanding
(pro forma and pro forma as adjusted)............................................. 2 -- --
Common stock, $0.001 par value: 100,000,000 shares authorized (actual pro(actual);
150,000,000 shares authorized (pro forma and pro forma as adjusted);
6,222,6506,485,737 shares issued and outstanding (actual); 25,651,41544,849,633 shares issued and
outstanding (pro forma); and shares issued and outstanding (pro forma
as adjusted)........................................................................................... 7 2645 --
Additional paid-in capital................... 16,087 67,891capital............................................................. 49,974 151,772 --
Deferred stock-based compensation............ (6,841) (6,841)compensation...................................................... (3,585) (3,585) (3,585)
Accumulated deficit.......................... (41,285) (41,285)
-------- -------- --------deficit.................................................................... (136,906) (136,906) (147,757)
--------- --------- ---------
Total stockholders' equity (deficit)....... (32,028) 19,791
-------- -------- --------............................................ $ (90,504) $ 11,326 $
--------- --------- ---------
Total capitalization.......................capitalization............................................................ $ 24,56115,182 $ 24,56115,182 $
======== ======== ================= ========= =========
2417
This table excludesDILUTION
If you invest in our stock, your interest will be diluted to the following shares:
. 3,426,922 sharesextent
of the difference between the public offering price per share of our common
stock reserved for issuance underand the pro forma net tangible book value per share of our 1997
Stock Plan,
. 92,592 shares of preferredcommon stock
issuable upon exercise of outstanding
warrants.
See "Management--Compensation Plans," "Description of Capital Stock" and
Notes 4 and 6 of Notes to Financial Statements.
25
DILUTIONafter this offering.
The pro forma net tangible book value of our common stock on MarchDecember 31,
20002001 was $ ,million or approximately $ per share.share of common stock. Pro forma net
tangible book value per share represents the amount of our total tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding.outstanding, after giving effect to the automatic conversion of our preferred
stock into common stock upon the completion of this offering at an assumed
initial public offering price of $ per share. Dilution in net tangible book
value per share represents the difference between the amount per share paid by
purchasers of shares of our common stock in this offering and the net tangible
book value per share of our common stock immediately afterwards. After giving
effect to our sale of million shares of common stock offered by this
prospectus at an estimatedassumed initial public offering price of $ per share and
after deducting the underwriting discounts, and commissions and estimated offering
expenses payable by us, and the application of a portion of the net proceeds to
repay all outstanding indebtedness under our subordinated promissory notes, our
pro forma net tangible book value would have been $ ,million, or
approximately $ per share. This represents an immediate increase in pro
forma net tangible book value of $ per share to existing stockholders and
an immediate dilution in pro forma net tangible book value of $ per share
to new investors. The following table illustrates the per share dilution:
Estimated public offering price per share.........................share...................................... $
--
Pro forma net tangible book value per share as of MarchDecember 31, 2000...........................................2001......... $
--
Increase per share attributable to new investors................investors............................
--
Pro forma net tangible book value per share after the offering....
----this offering................
--
Dilution in pro forma net tangible book value per share to new investors.................................................investors....... $
======
This table excludes all options and warrants that will remain outstanding
upon completion of this offering. See Notes 4, 6 and 67 to Notes to Financial
Statements. The exercise of outstanding options and warrants having an exercise
price less than the offering price would increase the dilutive effect to new
investors.
The following table sets forth on a pro forma basis, as of MarchDecember 31,
2000,2001, the differences between the number of shares of common stock purchased
from us, the total price and average price per share paid by existing
stockholders and by the new investors, before deducting expenses payable by us,
using the estimated public offering price of $ per share.
Total
Shares Purchased Total Consideration Average
----------------- -----------------
Average------------------ Price Per
Number Percentage Amount Percentage Per Share
------------- ---------- ------ ---------- ----------------------
Existing stockholders...stockholders.................. % $ % $
New investors........... % %
--- ----- ---- ----- ----
Total.................investors..........................
------- ------- -- -------
Total............................... 100.0% $ 100.0%
$
=== ===== ==== ===== =========== ======= == =======
If the underwritersunderwriter's over-allotment option is exercised in full, the
number of shares held by new public investors will be increased to or
approximately % of the total number of shares of our common stock outstanding
after this offering.
2618
SELECTED FINANCIAL AND OTHER DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and are qualified by reference to theour financial statements and
notes thereto appearing elsewhere in this prospectus. The audited statement of
operations data set forth below for the period from August 29, 1997 throughyears ended December 31, 19971999, 2000 and
2001 and the audited balance sheet data as of December 31, 2000 and 2001 are
derived from, and are qualified by reference to, the financial statements of
Netflix included elsewhere in this prospectus. The statement of operations data
for the years ended December 31, 1998 and December 31, 1999,
andfor the unaudited balance sheet data atperiod from August 29, 1997
(inception) to December 31, 1997 and the audited
balance sheet data atas of December 31,
1997, 1998 and December 31, 1999 are derived from, and are qualified by reference to, the
financial statements of NetFlixNetflix not included elsewhere in this prospectus. The
historical results are not necessarily indicative of results to be expected for
any future period.
Period from
AugustPERIOD FROM
AUGUST 29, 1997
Years ended
(inception) to December(INCEPTION) TO YEAR ENDED DECEMBER 31,
DecemberDECEMBER 31, --------------------------------------------------------
1997 1998 1999 2000 2001
--------------- -------- -------- (in thousands, except share and
per share data)-------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Revenues..................................
STATEMENT OF OPERATIONS DATA:
Revenues:
Subscription......................................... $ -- $ 585 $ 4,854 $ 35,894 $ 74,255
Sales................................................ -- 754 152 -- 1,657
------- -------- -------- -------- --------
Total revenues........................................ -- 1,339 $ 5,006 35,894 75,912
Cost of revenues..........................revenues:
Subscription......................................... -- 535 4,217 24,861 49,088
Sales................................................ -- 776 156 -- 819
------- -------- -------- -------- --------
Total cost of revenues............................... -- 1,311 4,373 -----24,861 49,907
------- -------- -------- -------- --------
Gross profit..............................profit.......................................... -- 28 633 ----- -------- --------11,033 26,005
Operating expenses:
Product development.....................Fulfillment.......................................... -- 763 2,153 8,267 10,267
Technology and development........................... 100 3,857 7,413 Sales and marketing.....................16,823 17,734
Marketing............................................ 103 4,815 16,4244,052 14,271 27,707 24,216
General and administrative..............administrative........................... 158 1,358 2,085 6,990 4,658
Restructuring charges................................ -- -- -- -- 671
Stock-based compensation................compensation............................. -- 1,151 4,742 -----8,803 5,326
------- -------- -------- -------- --------
Total operating expenses..............expenses............................. 361 11,181 30,664 68,590 62,872
------- -------- -------- -------- --------
Operating loss............................loss........................................ (361) (11,153) (30,031) Other(57,557) (36,867)
------- -------- -------- -------- --------
Interest and other income (expense), net...............net.............. 2 72 186 -----194 (1,391)
------- -------- -------- -------- --------
Net loss..................................loss.............................................. $ (359) (11,081) (29,845)
----- -------- --------
Net loss attributable to common
stockholders............................. $(359) $(11,081) $(29,845) =====$(57,363) $(38,258)
======= ======== ======== ======== ========
Basic and diluted net loss per common
share.................................... $ -- $ (12.27) $ (5.60)
===== ======== ========
Weighted-averageshare..................
Weighted average shares outstanding used in computing net
loss per common share...share.......................................
OTHER DATA:
EBITDA(1) (unaudited)................................. $ (356) $ (9,575) $(21,223) $(28,179) $ (1,716)
Number of subscribers (unaudited)..................... -- 903 5,328
December-- 107 292 456
Net cash provided by (used in):
Operating activities................................. (261) (5,408) $(16,529) $(22,706) $ 4,847
Investing activities................................. (152) (2,363) (19,742) (24,972) (12,670)
Financing activities................................. (1,995) (7,250) 49,408 48,375 9,059
AS OF DECEMBER 31,
---------------------------------------------------------------------------------
1997
(unaudited) 1998 1999 ----------- ------ -------
(in thousands)
Balance Sheet Data:2000 2001
--------------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents........................ $1,582 $1,061 $14,198equivalents............................. $ 1,582 $ 1,061 $ 14,198 $ 14,895 $ 16,131
Working capital..................................capital (deficit)............................. 1,360 (4,704) 11,028 (1,655) (6,656)
Total assets.....................................assets.......................................... 1,901 4,849 34,773 52,488 41,630
Capital lease obligations, less current portion..portion....... -- 172 811 2,024 1,057
Notes payable, less current portion..............portion................... -- -- 3,959 Mandatorily redeemable1,843 --
Subordinated notes payable............................ -- -- -- -- 2,799
Redeemable convertible preferred stock...........................................stock................ -- 6,321 51,819 101,830 101,830
Stockholders' equity (deficit)........................................... 1,636 (8,044) (32,028) (73,267) (90,504)
27- --------
(1) See definition of EBITDA elsewhere in this prospectus.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes. This discussion contains forward-looking statementsTHE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND
RELATED NOTES. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS, THE
ACCURACY OF WHICH INVOLVES RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS
FOR MANY REASONS, INCLUDING THE RISKS FACED BY US DESCRIBED IN "RISK FACTORS"
STARTING ON PAGE 5 AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are the accuracy
of which involves risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including the risks faced by us described in "Risk Factors" starting
on page 6 and elsewhere in this prospectus.
Overview
We have created an authoritativeworld's largest online source for movie recommendations and
selection based on personal preferences. We collect preference data from our
users through our Personal Movie Finder service to provide personalized movie
recommendations. At our Web site, www.netflix.com, users can rent DVDs through
our Unlimited Rentalentertainment subscription service
purchase DVDs through our e-commerce
referral programproviding more than 500,000 subscribers access to a comprehensive library of
more than 11,500 movie, television and choose theater locations and showtimes.other filmed entertainment titles. Our
Unlimited Rentalstandard subscription service offers an unlimited number of DVD
rentals with no due dates or late fees, for between $15.95 and $19.95 per
month. Users are allowedplan allows subscribers to have up to four moviesthree titles out at the
same time to
ensure convenient selectionwith no due dates, late fees or shipping charges for $19.95 per
month. Subscribers can view as many titles as they want in a month. Subscribers
select titles at home. As of March 31, 2000, we had over 120,000
paying subscribers to our Unlimited Rental service.
We currently generate substantially all of our revenue from our Unlimited
Rental subscription service. Fees received from our referral e-commerce
affiliates have not been significant to date. We expect to begin recognizing
revenues from selling advertising on our Web site (WWW.NETFLIX.COM) aided by our proprietary
CineMatch technology, receive them on DVD by first-class mail and return them
to us at their convenience using our prepaid mailers. Once a title has been
returned, we mail the next available title in the near future. However,
we anticipate that DVD rental subscription fees will still generate
substantially all of our revenues for the foreseeable future.a subscriber's queue.
We were organized as a Delaware corporation in August 1997. For the period
from our inception through March 1998, our operations consisted primarily of
start-up activities such as developing our Web site, raising capital, building
our network infrastructure, technology and content development and establishing
supplier relationships. We began recognizing revenues in April 1998, when we
launched our Web site. From launch through March 1999, we were engaged in the
rental and sale of DVDs. Since March 1999, we have been engaged exclusively in
the DVD rental business. In September 1999, we launched a subscription service
for DVD rental. Since March 2000, we have rented DVDs exclusively through our
subscription service. We have
incurred significant losses since our inception. As of December 31, 1999,2001, we
had an accumulateda stockholders' deficit of $41.3$90.5 million. We expect that we will continue
to incur substantial losses for the foreseeable future and that the
rate at which we incur those losses will increase as we expand our customer
acquisition activities and the infrastructure to support the growth in our
subscriber base.future. We also expect to incur
significant marketing, producttechnology and development, and general and
administrative expenses. As a result, we will need to generate significant revenuessignificantly increase
our operating margins to achieve profitability and may never achieve
profitability.
Revenues
SubstantiallyCRITICAL ACCOUNTING POLICIES
We believe our change to the estimated life over which we amortize the
costs of acquiring titles for our library, and the selection of a method of
amortization for the costs we incur to acquire titles for our library, are
critical accounting policies because they involve some of the more significant
judgments and estimates used in the preparation of our financial statements.
CHANGE IN ESTIMATED LIFE OF THE COST OF OUR LIBRARY
In late 2000 and early 2001, we entered into a series of revenue sharing
agreements with studios which substantially changed our business model for
acquiring DVDs and satisfying subscriber demand for titles. These revenue
sharing agreements enable us to acquire DVDs at a lower upfront cost than
traditional buying arrangements. We share a percentage of the net revenues
generated by the use of each particular title with these studios over a fixed
period of time, generally 12 months. Before the change in our business model,
we typically acquired fewer copies of a particular title and utilized each copy
over a longer period of time. The implementation of these revenue sharing
agreements improved our ability to acquire larger quantities of newly released
titles and satisfy a substantial portion of subscriber demand for such titles
over a shorter period of time. On January 1, 2001, we revised the amortization
policy for the cost of our library from an accelerated method using a three
year life to the same accelerated method of amortization using a one year life.
The change in life has been accounted for as a change in accounting
estimate and is accounted for on a prospective basis from January 1, 2001. Had
the DVDs acquired prior to January 1, 2001 been amortized using a three year
life, amortization expense for 2001 would have been $4.7 million lower than the
amount recorded in our financial statements, representing a $0.78 per share
impact on loss per share in 2001.
20
SELECTION OF A METHOD OF AMORTIZATION OF UPFRONT COSTS OF OUR LIBRARY
Under certain revenue sharing agreements, we remit an upfront payment to
acquire titles from the studios. This payment has two elements. The first
element is an initial fixed license fee that is capitalized. The second element
is a prepayment of future revenue sharing obligations. The amount attributable
to the second element is classified as prepaid revenue sharing expense and is
applied against future revenue sharing obligations. A nominal amount is also
capitalized upon acquisition of a particular title for the cost of the
estimated number of DVDs we expect to purchase at the end of the title term.
This cost is amortized with the cost of the initial license fee on an
accelerated basis over one year. We believe the use of an accelerated method is
appropriate because we normally experience heavy initial demand for a title,
which subsides once initial demand has been satisfied.
REVENUES
We derive substantially all of our revenues are derived currently from monthly subscription
fees related to our Unlimited Rental service. Since launchingfees. From the launch of our Web site in April 1998 through January 1999, ourwe
generated revenues primarily were
generated from individual DVD rentals DVDand sales
28
and shipping charges to
customers. In March 1999, we stopped selling new DVDs. From February 1999
through October 1999, ourwe generated revenues were generated primarily from individual DVD
rentals and shipping charges to customers. In September 1999, we launched our DVD subscription rental service. Throughservice,
and through February 2000, for a fixed monthly subscription fee of $15.95,
per month, customerssubscribers could renthave up to four DVDstitles per month with no due dates or late
fees, and anyfor $3.98, could order an additional DVDs ordered
in the month were charged to the customer at a rate of $3.98 per DVD.title. In February 2000, we
modified our standard subscription service to provide subscribers access to an
unlimited rentalsnumber of titles for $19.95 per month, with a maximum of four titles
out at any time. Existing subscribers were switched to our new service, some at
$15.95 per month and the rest at $19.95 per month. In October 2000, we again
modified our standard subscription service to provide subscribers access to an
unlimited number of titles for a fixed monthly fee, with a maximum of four DVDsthree
titles out at the same time.
Existing subscribers were migrated toWe had an insignificant amount of DVD sales in 1999 and no DVD sales in
2000. Beginning in late 2000, as part of the Unlimited Rental service atchange in our business model, we
began acquiring larger quantities of particular titles through our revenue
sharing agreements. As a $15.95 per month fee. New subscribers to our Unlimited Rental subscription
service payresult, once initial demand for a monthly fee of $19.95. We periodically test different price
points to optimize the relationship between DVD usage, subscriber retention and
demand elasticity. In the future,particular title has
been satisfied, we may offer additional pricing and servicehold a number of titles in excess of the quantities
needed to satisfy ongoing subscriber demand. Several studios allow us to sell
the DVDs acquired from them at the end of the revenue sharing term. Before we
sell a particular title, we compare the number of copies we hold to estimated
future demand to determine the number of copies we can sell without
jeopardizing our ability to satisfy future subscriber demand. From time to
time, we expect to make bulk sales of our used DVDs to resellers.
We recognize subscription options.
Subscription revenues are recognized ratably during each subscriber's
monthly subscription period. RefundsWe record refunds to customers are recordedsubscribers as a reduction of
revenues. We recognize revenues from the sale of used DVDs to resellers when
the DVDs are shipped to the reseller from our distribution center.
Historically, revenues from DVD sales, individual DVD rentals and shipping revenues have beenalso were
recognized when the product was shipped to the customer from our distribution
center.
In addition to our standard service, we also offer a lower priced plan in
which subscribers can keep two titles at the same time for $13.95 per month, as
well as higher priced plans offering four, five and eight titles out at the
same time for $24.95, $29.95 and $39.95 per month, respectively. Approximately
91% of our paying subscribers pay $19.95 or more per month.
COST OF REVENUES AND GROSS PROFIT
COST OF SUBSCRIPTION REVENUES
We acquire titles for our library using traditional buying methods and
revenue sharing agreements. Traditional buying methods normally result in
higher upfront costs when compared to titles obtained through revenue sharing
agreements. Cost of Revenuessubscription revenues consists of revenue sharing costs,
amortization of our
21
library, amortization of intangible assets related to equity instruments issued
to certain studios and postage and packaging costs related to shipping titles
to paying subscribers.
REVENUE SHARING COSTS. Many of our revenue sharing agreements commit us
to pay the greater of a minimum fee or a percentage of the net revenue we
realize on a monthly basis from each subscriber for the titles subject to
revenue sharing that are mailed to that subscriber. We characterize these
payments to the studios as revenue sharing costs. As of December 31, 2001, we
had revenue sharing agreements with over 40 studios that expire at various
dates beginning in 2002.
AMORTIZATION OF THE COST OF DVDS. Prior to January 1, 2001, we amortized
our cost of DVDs using an accelerated method over an estimated life of three
years and assumed no salvage value. On January 1, 2001, we revised the
estimated life to one year and assumed a salvage value of $2.00 for the DVDs
that we believe we will eventually sell.
AMORTIZATION OF INTANGIBLE ASSETS RELATED TO EQUITY ISSUED TO
STUDIOS. In 2000, in connection with signing revenue sharing agreements with
three studios, we agreed to issue each of these studios an equity interest
equal to 1.204% of our fully diluted equity securities outstanding. In 2001, in
connection with signing revenue sharing agreements with two additional studios,
we agreed to issue to each of the two studios an equity interest of 1.204% of
our fully diluted equity securities outstanding. As of December 31, 2001, the
aggregate equity interest granted to these five studios equaled 6.02% of our
fully diluted equity securities outstanding. Prior to this offering, these
studios are entitled to receive additional stock grants to maintain their
equity interests at 1.204% of our fully diluted equity securities outstanding.
Consequently, when we grant options or issue stock, we also are obligated to
issue additional equity interests to these studios to maintain their ownership
interest at 6.02% in the aggregate. These securities automatically convert into
our common stock upon consummation of this offering. We recognize our
obligation to grant these equity interests at fair value as an intangible asset
and we increase additional paid-in capital on our balance sheet. We then
amortize the intangible asset on a straight-line basis to cost of subscription
revenues over the term of each revenue sharing agreement with each studio. The
term for the three agreements entered into in 2000 is five years and the term
for the two agreements entered into 2001 is three years. Each time there is a
dilution event prior to the completion of this offering, we will determine the
value of our obligation to issue additional equity interests. The determined
value is added to the intangible asset and amortized to cost of subscription
revenues over the remaining term of the applicable revenue sharing agreement.
POSTAGE AND PACKAGING. Postage and packaging costs consist of the
postage costs to mail titles to and from our paying subscribers, each of which
is $0.34, and the packaging costs for the mailers.
COST OF SALES REVENUES
Cost of revenues with respect to individualfor DVD sales includes the salvage value for used DVDs
sold and, subscription DVD rentals,
consists of postage, packaging, rental library depreciation and breakage
expense related to paying customers. Historically, cost of revenues also
includedhistorically, cost of merchandise sold to customers.
DueOPERATING EXPENSES
FULFILLMENT
Fulfillment expense represents those expenses incurred in operating and
staffing our fulfillment and customer service centers, including costs
attributable to the fixed monthly fee charged to Unlimited Rental subscribers, an
increasereceiving, inspecting and warehousing our library. Through
December 2001, we maintained only one fulfillment center in the number of DVDs rented per subscriber per month would increase
our cost of revenues in absolute dollars and as a percent of revenues.San Jose,
California. Since the introduction of our Unlimited Rental service,then, we have experienced
increasesopened several additional fulfillment centers.
We plan to open more fulfillment centers in 2002 in various locations across
the average numberUnited States. As we open and operate new fulfillment centers, we expect
that our fulfillment costs will increase.
22
TECHNOLOGY AND DEVELOPMENT
Technology and development expense consists of DVDs rented per subscriber on a monthly
basis. While this trend has not had a material impact onpayroll and related
expenses we incur related to testing, maintaining and modifying our businessWeb site,
CineMatch technology, telecommunications systems and infrastructure and other
internal-use software systems. Technology and development expense also includes
depreciation of the computer hardware we use to date,
if it continues our gross margins will decline. We cannot determine if this
trend will continue or how large the impact on our margins will be.
Operating Expenses
Product development expenses. Product development expenses consist
principally of personnel costs for the creation, launch and improvement ofrun our Web site and store our
data. We continuously research and test a variety of potential improvements to
our internal informationhardware and software systems in an effort to improve our
productivity and enhance our subscribers' experience. We expect to continue to
invest in technology and improvements in our Web site and internal-use software
and, as a result, we expect our technology and development expense will
continue to increase. We believe certain costs we have incurred on several
improvement projects have ongoing benefit. Consequently, we capitalized
technology and development related expenses of our Personal Movie
Finder service$0.3 million in 1999, $1.3
million in 2000 and $1.2 million in 2001. The capitalized amounts are amortized
on a straight-line basis over the estimated period of benefit of each
improvement, ranging from one to two years.
MARKETING
Marketing expense consists of marketing expenditures and other
promotional activities, including revenue sharing costs, to acquire content.
Salespostage and marketing expenses. Salespackaging
costs and marketing expenses consist primarily
of the direct subscriber acquisition and retentionlibrary amortization costs related to our DVD
rental service. These costs include postage, packaging, rental library
depreciation and breakage expense related to our free trial promotion offersperiods. In the
second half of 2001, we implemented several new subscriber acquisition
activities which provide incentives in the form of pay-for-performance payments
for each new subscriber provided to potential new subscribers. Freeus. We anticipate that our marketing
expense will increase in future periods as a result of the overall growth in
our subscriber base, free trial offers have been our primary means of
acquiring new customers. We have been promoting aggressively our Unlimited
Rental subscription service and until September 1999, our individual DVD
rentals. As part of this strategy, we offer potential subscribers free rentals
for a one month trial period. The estimated direct costs of providing free
rental trials to potential customers are charged to expense in the month the
potential subscriber registers for the free trial. Other sales and marketing
expenses include the costs of operating and staffing our distribution and
customer service center, advertising, promotional and public relations
expenditures.
29
General and administrative.pay-for-performance arrangements.
GENERAL AND ADMINISTRATIVE
General and administrative expense consists of payroll and related
expenses consist
primarily offor executive, finance, content acquisition and administrative
personnel, costs and support costs for finance, legal and human
resources functionsas well as recruiting, professional fees and other administrative costs.
Non-cash compensation.general corporate
expenses.
STOCK-BASED COMPENSATION
Stock-based compensation for equity instruments issued to employees
represents the aggregate difference, at the grant date, of grant, between the respective
exercise price of stock options or stock grants and the deemed fair market
value of the underlying stock. Stock-based compensation is generally amortized
over the vesting period of the underlying options or grant, generally
four years,grants based on an
accelerated amortization method.
In 2001, we offered our employees and directors the right to exchange
certain stock options. We exchanged employee options to purchase 2.7 million
shares of common stock with varying exercise prices in exchange for options to
purchase 2.7 million shares of common stock with an exercise price of $1.00.
The total unamortized
stock-based compensation recordedstock option exchange resulted in variable award accounting treatment for
all optionof the exchanged options. Variable award accounting will continue until all
options subject to variable accounting are exercised, cancelled or expire.
However, additional non-cash compensation will be recorded only to the extent
the intrinsic value of the repriced awards exceeds the original intrinsic value
of the replaced stock options. Variable accounting treatment will result in
unpredictable and stock grants through
Decemberpotentially significant charges or credits to our operating
expenses from fluctuations in the market price of our common stock.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
REVENUES
SUBSCRIPTION REVENUES. Our subscription revenues increased from $4.9
million in 1999 to $35.9 million in 2000 and $74.3 million in 2001. The 639%
increase from 1999 to 2000 and the 107% increase from 2000 to
23
2001 were attributable to the unrivalled selection offered by our subscription
service, consistently high levels of $6.8customer satisfaction, the rapid consumer
adoption of DVD players and our increasingly effective marketing programs. In
addition, part of the increase in our subscription revenues for 2000 and 2001
was caused by a $4.00 increase in the monthly subscription fee charged to some
of our subscribers beginning in October 2000.
SALES REVENUES. Sales revenues were $0.2 million is expectedin 1999, $0.0 in 2000
and $1.7 million in 2001. The increase in sales revenues in 2001 was due to be amortized as follows:an
increase in the sale of used titles acquired through our revenue sharing
agreements.
COST OF REVENUES AND GROSS PROFIT
COST OF SUBSCRIPTION REVENUES. Cost of subscription revenues increased
from $4.2 million in 2000; $1.81999 to $24.9 million in 2001; $704,0002000 and $49.1 million in 2002; and $113,000 in
2003.
Other Non-Cash Item
Upon closing of our initial public offering, we will record a charge2001.
The 490% increase from 1999 to net
loss attributable to common stockholders of approximately $29,000,000 for the
beneficial conversion feature inherent in the Series E Non-Voting Preferred
Stock. The beneficial conversion feature is equal to the difference between the
price of the Series E Preferred Stock2000 and the estimated fair value97% increase from 2000 to 2001 were
primarily attributable to:
. REVENUE SHARING COSTS. Our revenue sharing costs increased from $0.0
in 1999 to $1.6 million in 2000 and $12.8 million in 2001. Our
revenue sharing costs represented 4% of our
common stock at the date the Series E Non-Voting Preferred Stock was issued.subscription revenues in 2000
and 17% of subscription revenues in 2001. The beneficial conversion feature is similar to a dividend on preferred stock
that increases net loss to arrive at net loss attributable to common
stockholders.
Results of Operations
Period from August 29, 1997 (Inception) to December 31, 1997
As a development stage company prior to December 31, 1997, we did not
generate any revenues or cost of revenues or incur any significant operating
expenses. Operating expensesincrease in 1997 of $361,000 were related primarily to
start-up activities, developing our Web site, raising capital, building our
network infrastructure and establishing supplier relationships.
Fiscal Years Ended December 31, 1998 and 1999
The following table presents operating results for the periods indicatedrevenue
sharing costs as a percentage of revenues.
Years Ended
December 31,
---------------
1998 1999
------ ------
Revenues................................................... 100 % 100 %
Cost of revenues........................................... 98 87
------ ------
Gross profit............................................... 2 13
------ ------
Operating expenses:
Product development...................................... 288 148
Sales and marketing...................................... 360 328
General and administrative............................... 101 42
Stock-based compensation................................. 86 95
------ ------
Total operating expenses............................... 835 613
------ ------
Operating loss............................................. (833) (600)
Other income (expense), net................................ 5 4
------ ------
Net loss................................................... (828)% (596)%
====== ======
30
Revenues
Revenuessubscription revenues from 2000 to
2001 was caused by a substantial increase in the percentage of titles
mailed to our subscribers subject to revenue sharing agreements.
. AMORTIZATION OF DVD COSTS. Our DVD amortization costs increased 274% from
$1.3$1.8 million in 19981999 to $5.0$11.3 million in 1999.2000 and $19.5 million in
2001. Our DVD amortization costs represented 37% of subscription
revenues in 1999, 31% of subscription revenues in 2000 and 26% of
subscription revenues in 2001. The increase primarily was attributablein DVD amortization costs
as a percentage of subscription revenues from 1999 to growth2000 resulted
from building our library at a rate in excess of increases in the
number of paying customers. These increases were offset partially by asubscribers. The decrease in DVD amortization costs
as a percentage of subscription revenues resulting from our decision2000 to stop selling2001 was
primarily attributable to lower upfront prices paid for DVDs in
March 1999. Even though
revenues have grown significantlyconnection with revenue sharing agreements.
. AMORTIZATION OF INTANGIBLE ASSETS RELATED TO EQUITY ISSUED TO CERTAIN
STUDIOS. We recorded deferred costs of $6.1 million in recent quarters, we are unlikely2000 and $4.1
million in 2001 related to sustainour issuance of equity to certain studios.
We recorded related amortization of intangible assets of $0.6 million
in 2000 and $2.1 million in 2001. The increase in amortization of
intangible assets from 2000 to 2001 is attributed to a full year of
amortization in 2001 as compared to a partial year of amortization in
2000, additional deferred charges for two new revenue sharing
agreements in 2001 and increases in deferred charges caused by our
obligation to issue additional equity securities to these percentage growth rates in the future.
Cost of Revenues
Cost of revenuesstudios.
. POSTAGE AND PACKAGING COSTS. Postage and packaging costs increased
234% to $4.4from $2.4 million in 1999 compared with $1.3to $11.4 million in 1998, due2000 and $14.7 million
in 2001. The increases in postage and packaging costs each year were
primarily attributable to increased sales volume, increased outbound and inbound
shipping costs, as well as increased depreciation and scrap expense relatedincreases in the number of DVDs mailed to
our larger DVD rental library, partially offset by a reduction in the cost of
merchandise sold.subscribers. As a percentage of revenue, cost ofsubscription revenues, postage
and packaging costs decreased from 98%49% in 19981999 to 87%32% in 1999.2000 and 20%
in 2001. The decrease in postage and packaging costs as a percentage
of subscription revenues from 1999 to 2000 was primarily wasattributable
to lower postage costs per shipment due to a reduction in the weight
of our packaging materials. The decrease in postage and packaging
costs as a percentage of subscription revenues from 2000 to 2001 was
primarily attributable to a decrease in the postage rate per title.
COST OF SALES REVENUES. Cost of sales revenues was $0.2 million in 1999,
$0.0 in 2000 and $0.8 million in 2001. The increase in cost of merchandisesales revenues
in 2001 was primarily attributable to the increase in the quantity of used DVDs
sold because we stopped selling DVDs. Thisto resellers.
24
GROSS PROFIT
Our gross profit increased from $0.6 million in 1999 to $11.0 million in
2000 and $26.0 million in 2001, representing gross profit percentages of 12% in
1999, 31% in 2000 and 34% in 2001. Our gross profit percentages increased each
year as a result of growth in our subscription revenues and a decrease in our
direct incremental costs of providing those subscription services.
OPERATING EXPENSES
FULFILLMENT. Fulfillment expenses increased from $2.2 million in 1999 to
$8.3 million in 2000 and $10.3 million in 2001. The 284% increase from 1999 to
2000 and the 24% increase from 2000 to 2001 was offset partially byprimarily attributable to
increases in outboundthe overall volume of the activities of our primary fulfillment
center. As a percentage of subscription revenues, fulfillment expenses
decreased from 44% in 1999 to 23% in 2000 and inbound shipping costs,14% in 2001. The decrease each
year in fulfillment expenses as well
as increased rental library depreciationa percentage of subscription revenues results
from a combination of an increasing revenue base and breakage expenseimprovements in our
fulfillment productivity. The improvements in our fulfillment productivity were
due to continuous efforts to refine and streamline our fulfillment operations.
TECHNOLOGY AND DEVELOPMENT. Excluding capitalized software development
costs, our technology and development expense increased shipment volumes.
Operating Expenses
Product development expenses. Product development expenses increased 92%
from $3.9 million in 1998 to $7.4 million in
1999. This1999 to $16.8 million in 2000 and $17.7 million in 2001. The 127% increase in
technology and development expense from 1999 to 2000 and the 5% increase from
2000 to 2001 were primarily was
duethe result of our investments in storing data,
handling large increases in traffic to increased staffing and associated costs related to building and
enhancing the features, content and functionality of our Web site Personal
Movie Finder service and transaction processing systems.
Salesmaintaining and
modifying our software related to our Web Site, CineMatch technology and our
internal-software infrastructure. As a percentage of subscription revenues,
technology and development expenses decreased from 153% in 1999 to 47% in 2000
and 24% in 2001. The decrease in technology and development expense as a
percentage of subscription revenues was primarily attributable to an increase
in our subscriber base.
MARKETING. Our marketing expenses. Sales and marketing expensesexpense increased 241%
from $4.8$14.3 million in 19981999 to
$16.4$27.7 million in 1999. This increase primarily was
due to the costs of subscriber acquisition, including advertising2000 and promotional expenditures, and increased personnel and related expenses required
to implement our marketing strategy and to fulfill the increased DVD rental
volume.
General and administrative expenses. General and administrative expenses
increased 54% from $1.4$24.2 million in 19982001. The 94% increase in marketing
expense from 1999 to $2.1 million in 1999. This increase2000 was due primarily attributable to increased salaries and related expenses associated with
recruiting and hiring additional personnel.
Stock-based compensation expenses. Stock-based compensation for employees
increased 364% from $985,000 in 1998our intensified efforts
to $4,566,000 in 1999. This increase was
due primarily to additional grants made in 1999acquire new subscribers through external advertising agencies, television
commercials and an increase in the difference betweenlength of our free trial period. The 13%
decrease in marketing expense from 2000 to 2001 was primarily attributable to
scaling back the number of free trial offers for part of 2001, and from a
reduction in our free trial period of 30 days to typically 14 days for the
balance of 2001. As a percentage of subscription revenues, marketing expense
decreased from 294% in 1999 to 77% in 2000 and 33% in 2001. The decrease in
marketing expense as a percentage of subscription revenues is primarily
attributable to a larger base of subscription revenues and paying subscribers.
GENERAL AND ADMINISTRATIVE. Our general and administrative expense was
$2.1 million in 1999, $7.0 million in 2000 and $4.7 million in 2001. The 235%
increase in general and administrative expense from 1999 to 2000 was primarily
attributable to increases in personnel and facility-related costs associated
with the expansion of our business and the cost of our withdrawn initial public
offering. The 33% decrease in general and administrative expense from 2000 to
2001 was primarily attributable to cost containment efforts in 2001 and the
one-time cost of the withdrawn public offering in 2000. As a percentage of
subscription revenues, general and administrative expense decreased from 43% in
1999 to 19% in 2000 and 6% in 2001. The decrease in general and administrative
expense as a percentage of subscription revenues is primarily attributable to a
larger base of subscription revenues and paying subscribers.
RESTRUCTURING. In 2001, we recorded a restructuring expense of $0.7
million relating to severance payments made to 45 employees we terminated in an
effort to restructure our organization to streamline our processes and reduce
expenses. We had no restructuring expense in prior years.
STOCK-BASED COMPENSATION. Stock-based compensation expense was $4.7
million in 1999, $8.8 million in 2000 and $5.3 million in 2001. The 86%
increase from 1999 to 2000 was primarily attributable to charges we
25
recorded related to issuing options to employees at exercise prices below the
deemed fair market value at the dates of our commongrant. The 39% decrease from 2000 to 2001 was
primarily attributable to reduced charges caused by utilization of the graded
vesting method of stock andcompensation amortization. The following table shows
the related exercise prices. We also issuedamounts of stock-based awards to consultants.
Stock-based awards granted to consultants are measured at fair value. Stock-
based awards granted to consultants increased 6% from $166,000 in 1998 to
$176,000 in 1999.
Other Income (Expense)compensation expense that would have been recorded
under the following categories of operating expenses had stock-based
compensation expense not been separately stated on the statements of operations:
YEAR ENDED DECEMBER 31,
-----------------------
1999 2000 2001
------ ------ ------
(IN THOUSANDS)
Fulfillment...................................... $ 604 $1,469 $ 705
Technology and development....................... 907 2,855 1,788
Marketing........................................ 1,144 2,679 1,624
General and administrative....................... 2,087 1,800 1,209
------ ------ ------
$4,742 $8,803 $5,326
====== ====== ======
INTEREST AND OTHER INCOME (EXPENSE), NetNET
Interest and other income net. Net interest(expense), net was $0.2 million in 1999, $0.2
million in 2000 and $(1.4) million in 2001. Interest and other income
which(expense), net consists primarily of interest earned on our cash marketable securities and other
investments, increased 711% from $114,000 in 1998 to $924,000 in 1999. This
increase was due primarily to interest earned on the proceeds received from
Series C Preferred Stock issued in February 1999, Series D Preferred Stock
issued in June 1999 and a loan in September 1999.
Interest expense, net. Netcash
equivalents less non-cash interest expense which primarily consistsrelated to accretion of interestdiscounts on
capital leases and loans, increased 1,657%interest-bearing obligations from $42,000 in 1998 to
$738,000 in 1999. This net increase was due primarily to asset acquisitions
financed through loansthe issuance of our subordinated promissory
notes and capital leases.
31lease obligations at an amount less than the face amount of
the debt.
26
Selected Quarterly Operating ResultsSELECTED QUARTERLY OPERATING RESULTS
The following table setstables set forth unaudited quarterly statement of
operations data for the foureight quarters ended December 31, 1999.2001 as well as the
percentage of total revenues represented for selected items. The information
for each of these quarters has been prepared on substantially the same basis as
the audited financial statements included elsewhere in this prospectus and, in
the opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of the results of
operations for such periods. This data should be read in conjunction with the
audited financial statements and the related notes included elsewhere in this
prospectus. These quarterly operating results are not necessarily indicative of
theour operating results for any future period.
Quarter Ended
-------------------------------------------
MarchTHREE MONTHS ENDED
---------------------------------------------------------------------------
MARCH 31 JuneJUNE 30 Sept.SEPT. 30 Dec.DEC. 31 1999 1999 1999 1999
---------MARCH 31 JUNE 30 SEPT. 30 DEC. 31
2000 2000 2000 2000 2001 2001 2001 2001
-------- --------- -------- (in thousands)-------- -------- -------- ------- -------- -------
(IN THOUSANDS)
Statement of Operations
Data:
Revenues....................
Revenues:
Subscription................. $ 8475,174 $ 8547,147 $ 1,17010,182 $ 2,135
Cost of revenues............ 663 670 1,276 1,76413,391 $ 17,057 $17,392 $18,444 $21,362
Sales........................ -- -- -- -- -- 967 434 256
-------- -------- -------- -------- -------- ------- ------- -------
Total revenues............. 5,174 7,147 10,182 13,391 17,057 18,359 18,878 21,618
Cost of revenues:
Subscription................. 3,128 5,150 7,213 9,370 18,177 10,776 9,667 10,468
Sales........................ -- -- -- -- -- 446 176 197
-------- Gross profit................ 184 184 (106) 371
Operating expenses:
Product development....... 1,324 1,533 2,106 2,450
Sales and marketing....... 1,954 2,930 4,994 6,546
General and
administrative........... 532 553 404 596
Stock-based compensation.. 787 1,203 1,500 1,252-------- -------- -------- -------- ------- ------- -------
Total cost of revenues..... 3,128 5,150 7,213 9,370 18,177 11,222 9,843 10,665
-------- Total operating
expenses............... 4,597 6,219 9,004 10,844-------- -------- -------- -------- ------- ------- -------
Gross profit.................... 2,046 1,997 2,969 4,021 (1,120) 7,137 9,035 10,953
Operating expenses:
Fulfillment.................. 1,497 2,057 1,880 2,833 2,791 2,796 2,517 2,163
Technology and development... 3,248 3,959 4,041 5,575 5,474 4,896 4,463 2,901
Marketing.................... 6,448 6,059 7,104 8,096 7,475 4,883 4,210 7,648
General and administrative... 764 1,761 1,863 2,602 1,514 1,031 1,003 1,110
Restructuring charges........ -- -- -- -- -- -- 671 --
Stock-based compensation..... 1,963 2,530 2,073 2,237 2,043 1,436 1,220 627
-------- -------- -------- -------- -------- ------- ------- -------
Total operating expenses... 13,920 16,366 16,961 21,343 19,297 15,042 14,084 14,449
-------- -------- -------- -------- -------- ------- ------- -------
Operating loss.............. (4,413) (6,035) (9,110) (10,473)loss.................. (11,874) (14,369) (13,992) (17,322) (20,417) (7,905) (5,049) (3,496)
-------- -------- -------- -------- -------- ------- ------- -------
Interest and other income
net........................ 74 112 351 387
Interest expense, net....... (165) (129) (149) (295)(expense), net................. (102) 302 210 (216) (181) (96) (505) (609)
-------- -------- -------- -------- -------- ------- ------- -------
--------
Net loss.................... $(4,504) $(6,052) $(8,908) $(10,381)loss........................ $(11,976) $(14,067) $(13,782) $(17,538) $(20,598) $(8,001) $(5,554) $(4,105)
======== ======== ======== ======== ======== ======= ======= =======
========Other Data:
EBITDA (1) (unaudited)....... $ (6,248) $ (7,366) $ (6,175) $ (8,390) $ (3,610) $ (131) $ 623 $ 1,402
Number of subscribers
(unaudited)................. 156 194 239 292 303 308 334 456
- --------
(1) EBITDA consists of operating loss before depreciation, amortization,
non-cash charges for equity instruments granted to non-employees and
stock-based compensation. EBITDA provides an alternative measure of cash
flow from operations. You should not consider EBITDA as a substitute for
operating loss, as an indicator of our operating performance or as an
alternative to cash flows from operating activities as a measure of
liquidity. We may calculate EBITDA differently from other companies.
27
Quarter Ended
-------------------------------------------
MarchTHREE MONTHS ENDED
-----------------------------------------------------------------
MARCH 31 JuneJUNE 30 Sept.SEPT. 30 Dec.DEC. 31 1999 1999 1999 1999
---------MARCH 31 JUNE 30 SEPT. 30 DEC. 31
2000 2000 2000 2000 2001 2001 2001 2001
-------- ---------------- -------- ------- -------- ------- -------- -------
As a Percentage of
Revenues:
Revenues....................Subscription.................. 100% 100% 100% 100% 100% 95% 98% 99%
Sales......................... 0 0 0 0 0 5 2 1
---- ---- ---- ---- ---- --- --- ---
Total revenues............. 100 % 100 % 100 % 100 %100 100 100 100
Cost of revenues............ 78 79 109 83
------- ------- ------- --------revenues:
Subscription.................. 60 72 71 70 107 59 51 48
Sales......................... 0 0 0 0 0 2 1 1
---- ---- ---- ---- ---- --- --- ---
Total cost of revenues..... 60 72 71 70 107 61 52 49
---- ---- ---- ---- ---- --- --- ---
Gross profit................ 22 22 (9) 17
Operating expenses:
Product development....... 156 180 180 115
Sales and marketing....... 231 343 427 307
General and
administrative........... 63 65 35profit..................... 40 28 Stock-based compensation.. 93 141 128 59
------- ------- ------- --------29 30 (7) 39 48 51
Total operating expenses............... 543 728 770 508
------- ------- ------- --------expenses......... 269 229 166 159 113 82 75 67
---- ---- ---- ---- ---- --- --- ---
Operating loss.............. (521) (707) (779) (491)loss................... (229) (201) (137) (129) (120) (43) (27) (16)
---- ---- ---- ---- ---- --- --- ---
Interest and other income,
net........................ 9 13 30 18
Interest expense, net....... (20) (15) (13) (14)
------- ------- ------- --------net.. (2) 4 2 (2) (1) (1) (2) (3)
---- ---- ---- ---- ---- --- --- ---
Net loss.................... (532)loss......................... (231)% (709)(197)% (761)(135)% (486)(131)% ======= ======= ======= ========(121)% (44)% (29)% (19)%
==== ==== ==== ==== ==== === === ===
32
Revenues. OurSUBSCRIPTION REVENUES
The increase in total subscription revenues for all quarters presented
was caused by increases in the number of our paying subscribers. We believe the
number of paying subscribers increased for several reasons including the
unrivalled selection offered by our subscription service, consistently high
levels of customer satisfaction, the rapid consumer adoption of DVD players and
our increasingly effective marketing programs.
COST OF SUBSCRIPTION REVENUES
On January 1, 2001, we revised the estimated life of our library from
three years to one year. Amortization expense for the quarter ended March 31,
2001 includes an increase in amortization caused by the effect of revising the
life of our library. The decrease in DVD amortization expense as a percentage
of subscription revenues between the quarter ended March 31, 2001 and the
quarter ended June 30, 2001 is caused primarily by a decrease in the
amortizable cost of our library.
TECHNOLOGY AND DEVELOPMENT
The decrease between the quarter ended September 30, 2001 and the quarter
ended December 31, 2001 was caused by decreases in personnel costs as a result
of employees terminated as a part of our restructuring during the quarter ended
September 30, 2001.
MARKETING
The decrease during each of the three quarters subsequent to the fourth
quarter presented. Our revenues
increased by $965,000, or 82%,of 2000 is due to $2,135,000scaling back our free trial offers during the first
two quarters of 2001. The increase in marketing expense in the fourth quarter
of 1999
compared to $1,170,000 in the third quarter of 1999. This increase was
attributable primarily to the launch of our subscription rental service in
September 1999. Our subscription revenues accounted for $1.2 million, or 56%,
of revenues in the fourth quarter of 1999 as compared to $17,000, or 1%, of
total revenues in the third quarter of 1999. This increase in subscription
revenue resulted in an increase in revenue per subscription rental DVD in the
fourth quarter of 1999.
Cost of revenues. Our cost of revenues increased during each quarter
presented. The increases were due primarily to an increase in DVD rental volume
and outbound and inbound shipping costs as well as an increase in DVD rental
library depreciation due to the growth of our rental library in each preceding
quarter. Cost of revenues increased as a percentage of revenues2001 results from 79% in the
second quarter of 1999 to 109% in the third quarter of 1999 due primarily to an
increase in outbound and inbound shipping costs. Cost of revenues decreased as
a percentage of revenue from 109% in the third quarter of 1999 to 83% in the
fourth quarter of 1999 primarily due to a decrease in depreciation expense on
subscription rental DVDs.
Operating Expenses
Product development expenses. Product development expenses increased during
each quarter presented. These increases were attributable primarily to an
increase in personnel and professional consulting costs related to the
continued enhancement of our systems and our Web site.
Sales and marketing expenses. Sales and marketing expenses increased during
each quarter presented. These increases were primarily attributable to an
increase in general promotional spending and costs associated with an increase in the number of free DVD rentals,trials offered to new
subscribers as well as an increase in the number of
trial offersexpense we incurred for
a DVD subscription service as well as increased numbers of
salespay-for-performance subscriber referral programs.
GENERAL AND ADMINISTRATIVE
The decrease between the quarter ended December 31, 2000 and marketing personnel and related expenses.
General and administrative expenses. General and administrativethe quarter
ended March 31, 2001 was caused by expenses increased during each quarter presented except for a decrease from the second
quarter of 1999 to the third quarter of 1999. This decrease was primarily
attributed to the decreaseincurred in relocation expenses related to hiring. The
increase in the fourth quarter primarily was attributable to increased salaries
and related expenses associated with the recruiting and hiring of additional
personnel.
Stock-based compensation expense. Stock-based compensation expenses
increased during each quarter presented except for the fourth quarter of 1999.
Stock-based compensation expense declined from the third quarter of 1999 to the
fourth quarter of 1999 as a result of compensation charges taken in the third
quarter of 1999 resulting from a stock grant made in that quarter.
We expect that we will experience significant fluctuations in our future
quarterly operating results due to a variety of factors, many of which are
outside our control. Factors that may adversely affect our quarterly operating
results include: (1) our ability to maintain or improve subscriber retention
rates, attract new users at a steady rate and maintain user satisfaction; (2)
our ability to acquire DVDs and to manage fulfillment operations; (3) our
ability to maintain gross margins in our existing business and in future
product and service areas; (4) the development, announcement, or introduction
of new Web sites, services and products by us and our competitors; (5) price
competition; (6) our ability to upgrade and develop our systems and
infrastructure; (7) the level of use of the Internet and increasing consumer
acceptance of the Internet for the purchase and consumption of consumer
products and services such as those offered by us; (8) our ability to attract
new and qualified personnel in a timely and
33
effective manner; (9) the level of traffic on our Web site; (10) changesrelation to our
service and product offerings or those of our competitors; (11) our ability to
manage effectively our development of new business segments and markets; (12)
our ability to successfully managewithdrawn initial public offering that were expensed during the integration of operations and technology
of acquisitions and other business combinations; (13) technical difficulties,
system downtime or Internet brownouts; (14) the amount and timing of operating
costs and capital expenditures relating to expansion of our business,
operations and infrastructure; (15) governmental regulation and taxation
policies; and (16) general economic conditions and economic conditions specific
to the Internet, e-commerce and the entertainment industry.
In addition to these factors, our quarterly operating results are expected
to fluctuate based upon seasonal fluctuations in DVD player sales and in the
use of the Internet. Based on our limited operating history, we expect to
experience stronger seasonal growth in the number of new subscribers during
late fall and early winter, reflecting increased purchases of DVD players and
redemptions of new trial offers. The DVD industry is new and growing and there
may be shifts in seasonal patterns of DVD player sales. Shifts in seasonal
sales cycles may occur due to changes in the economy or other factors affecting
the market for our services.
Income Taxes
No provision for federal or state income taxes was recorded as we incurred
net operating losses from inception throughquarter ended
December 31, 1999. At December 31,
1999, we had approximately $32.7 million of federal and state operating loss
carryforwards available to offset future taxable income. The state net
operating loss carryforwards begin to expire in 2005 and the federal net
operating loss carryforwards begin to expire in 2012. The Tax Reform Act of
1986 imposes restrictions on the utilization of net operating loss
carryforwards and tax credit carryforwards in the event of an "ownership
change" as defined by the Internal Revenue Code. Our ability to utilize our net
operating loss carryforwards is subject to restrictions pursuant to these
provisions.
Liquidity and Capital Resources
From our inception to December 31, 1999, we2000.
28
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily with $54.1$117.5 million raised
through the private salesales of our common and preferred equity securities.securities and
subordinated promissory notes. As of December 31, 1999,2001, we had cash and cash
equivalents and short-term investments of $20.5$16.1 million.
Net cash used by operating activities was approximately $261,000 in 1997,
$5.4 million in 1998 and $16.5 million in 1999. Cash used by operating
activities in 1997 was primarily attributable to a net loss of $359,000 and
increases in prepaid expenses, partially offset by increases in accounts
payable and accrued liabilities. Cash used by operating activities in 1998 was
primarily attributable to a net loss of $11.1 million and increases in prepaids
and other current assets partially offset by increases in accounts payables,
accrued liabilities, deferred compensation expense, depreciation and
amortization expense, as well as deferred revenue. Cash used by operating
activities in 1999 was primarily attributable to a net loss of $29.8 million
partially offset by increases in deferred compensation expense, depreciation
and amortization expense, accounts payable, accrued liabilities, noncash
interest expense and noncash write-off of broken DVDs, as well as deferred
revenue.
Net cash used by investing activities was approximately $152,000 in 1997,
$2.4 million in 1998, and $19.8 million in 1999. Cash used by investing
activities in 1997 was attributable to purchases of property and equipment.
Cash used by investing activities in 1998 was primarily attributable to
purchases of DVDs for our rental library and property and equipment. Cash used
by investing activities in 1999 was primarily attributable to purchases of DVDs
for our rental library, short-term investments and property and equipment.
34
Net cash provided by financing activities was approximately $2.0 million in
1997, $7.2 million in 1998 and $49.4 million in 1999. Cash provided by
financing activities in 1997 was primarily from proceeds of the sale of our
Series A Preferred Stock. Cash provided by financing activities in 1998 was
primarily from proceeds of the sale of our Series B Preferred Stock, Series A
Preferred Stock, and proceeds from issuance of a note payable. Cash provided by
financing activities in 1999 was primarily from proceeds of the sale of our
Series C and Series D Preferred Stock and from a loan, partially offset by
payment of a note payable.
At December 31, 1999 we have commitments of approximately $2.0 million in
2000, $1.7 million in 2001, $1.4 million in 2002, $1.0 million in 2003 and
$781,000 in 2004. These commitments are primarily for operating leases related
to our corporate headquarters in Los Gatos, California and our operations
center in San Jose, California, as well as capital leases related to the
purchase of property and equipment.
We expect to devote substantial resources to continue development of our
brand and Web site,to expand our
advertising sales capability,subscriber base, expand andour library to meet subscriber demand, automate our
fulfillment operations and buildmaintain and enhance the systems necessary to
support our growth. Although we believeanticipate that the proceeds of this offering,
together with our current cash and cash equivalents and cash flows will be
sufficient to fund our activities for at least the next 12 months there can be no assuranceand the
foreseeable future, we cannot assure you that we will not require additional
financing within this time frameperiod or that additional funding, if needed, will
be available on terms acceptable to us, or at all. In addition, although there
are no present understandings, commitments or agreements with respect to any
acquisition of other businesses, products or technologies, we may, from time to
time, evaluate acquisitions of other businesses, products and technologies. In orderIf
we are unable to consummate potential acquisitions, if any, we may
needraise additional equity or debt financing.
Year 2000 Compliance
We currently are not aware of any Year 2000 problem in anyfinancing, if and when needed,
we could be forced to significantly curtail our operations.
In July 2001, we issued subordinated promissory notes and warrants to
purchase 20,456,866 shares of our critical
systemscommon stock at an exercise price of $1.00
per share for net proceeds of $12.8 million. We allocated $10.9 million of the
proceeds to the warrants and services. However,recorded it as additional paid-in capital and $1.9
million to the notes payable. The resulting discount of $11.1 million is being
accreted to interest expense using an effective annual interest rate of 21%.
Our subordinated promissory notes accrue interest at a stated rate of 10% per
year compounded annually. The subordinated notes and all accrued interest are
due and payable upon the earlier to occur of July 10, 2011 or the completion of
this offering.
At December 31, 2001 our current liabilities exceeded our current assets
by $6.7 million, and we cannot guaranteehad cash of $16.1 million, accounts payable of $13.7
million and accrued expenses of $4.5 million. At December 31, 2001 we also had
commitments to repay a note payable and make payments on capital leases and
operating leases of approximately $5.5 million in 2002, $3.7 million in 2003,
$2.6 million in 2004 and $1.5 million in 2005.
CASH FLOWS
Net cash used in operating activities was $16.5 million in 1999 and $22.7
million in 2000. Net cash provided by operating activities was $4.8 million in
2001. Cash used in operating activities in 1999 was primarily attributable to a
net loss of $29.8 million, partially offset by deferred compensation expense,
depreciation and amortization expense, non-cash interest expense, increases in
accounts payable, accrued expenses, and deferred revenue. Cash used in
operating activities in 2000 was primarily attributable to a net loss of $57.4
million and an increase in prepaid and other current assets, partially offset
by deferred compensation expense, depreciation and amortization expense,
non-cash interest expenses, increases in accounts payable, accrued expenses and
deferred revenue. Cash provided by operating activities in 2001 was primarily
attributable to an increase in revenue, a decrease in operating expenses and an
increase in accounts payable.
Net cash used in investing activities was $19.7 million in 1999, $25.0
million in 2000 and $12.7 million in 2001. Net cash used in investing
activities in 1999 was primarily attributable to our acquisition of titles for
our DVD library, short-term investments and property and equipment. Net cash
used in investing activities in 2000 was primarily attributable to our
acquisition of titles for our library and property and equipment, partially
offset by proceeds from the sale of short-term investments. Net cash used in
investing activities in 2001 was primarily attributable to our acquisition of
titles for our library and property and equipment. The 63% decrease in cash
used to acquire DVDs in 2001 from 2000, primarily reflects the reduced cash
requirements to acquire DVDs under our revenue sharing agreements. While DVD
acquisitive expenditures are classified as cash flows from investing activities
you may wish to consider these together with cash flows from operating
activities.
29
Net cash provided by financing activities was approximately $49.4 million
in 1999, $48.4 million in 2000 and $9.1 million in 2001. Net cash provided by
financing activities in 1999 was primarily attributable to proceeds from the
sale of our Series C and Series D Convertible Preferred Stock and from a loan,
partially offset by payments on a note payable and capital lease obligations.
Net cash provided by financing activities in 2000 was primarily attributable to
proceeds from the sale of our Series E Convertible Preferred Stock, partially
offset by payments on notes payable and capital lease obligations. Net cash
provided by financing activities in 2001 was primarily attributable to proceeds
from the sale of common stock warrants and subordinated promissory notes,
partially offset by payments on notes payable and capital lease obligations.
GENERAL ECONOMIC TRENDS, QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
We anticipate that our business will be affected by general economic and
other consumer trends. Our business may be subject to fluctuations in future
operating periods due to a Year 2000 problemvariety of factors, many of which are outside of our
control. These fluctuations may be caused by, among other things, a distinct
seasonal pattern to the sale of DVD players which accelerates during the
Christmas holiday season.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS, or
SFAS No. 141. The standard concludes that all business combinations within the
scope of the statement will be accounted for using the purchase method.
Previously, the pooling-of-interests method was required whenever certain
criteria were met. Because those criteria did not distinguish economically
dissimilar transactions, similar business combinations were accounted for using
different methods that produced dramatically different financial statement
results. SFAS No. 141 no longer permits the use of pooling-of-interest method
of accounting. In addition, the statement also requires separate recognition of
intangible assets apart from goodwill if they meet one of two criteria: the
contractual-legal criterion or the separability criterion. SFAS No. 141 also
requires the disclosure of the primary reasons for a business combination and
the allocation of the purchase price paid to the assets acquired and
liabilities assumed by major balance sheet caption. The provisions of SFAS No.
141 apply to all business combinations initiated after June 30, 2001. The
adoption of this standard will not become apparentimpact our financial statements.
In June 2001, the FASB also issued SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, or SFAS No. 142. It addressed how intangible assets that are
acquired individually or within a group of assets (but not those acquired in a
business combination) should be accounted for in the future. Should wefinancial statements upon
their acquisition. SFAS No. 142 adopts a more aggregate view of goodwill and
bases the accounting on the units of the combined entity into which an acquired
entity is aggregated. SFAS No. 142 also prescribes that goodwill and intangible
assets that have indefinite useful lives will not be amortized but rather
tested at least annually for impairment. Intangible assets that have definite
lives will continue to be amortized over their useful lives, but no longer with
the constraint of the 40-year ceiling. SFAS No. 142 provides specific guidance
for the testing of goodwill for impairment, which may require re-measurement of
the fair value of the reporting unit. Additional ongoing financial statement
disclosures are also required. The provisions of the statement are required to
be applied starting with fiscal years beginning after December 15, 2001. The
statement is required to be applied at the beginning of the fiscal year and
applied to all goodwill and other intangible assets recognized in the
financials at that date. Impairment losses are to be reported as resulting from
a change in accounting principle. We implemented SFAS No. 142 beginning
January 1, 2002. The adoption of this standard will not impact our financial
statements.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, or any third partiesSFAS No. 144. It supersedes
SFAS No. 121, ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, and APB Opinion No. 30, REPORTING THE EFFECTS OF
DISPOSAL OF A SEGMENT OF A BUSINESS. It establishes a single account model
based upon which we rely experience any failure in critical systemsthe framework of SFAS No. 121. It removes goodwill and services, we might
experience, among other difficulties, operational inconveniencesintangible
assets from its scope. It describes a probability-weighted cash flow estimation
approach to deal with certain situations. It also establishes a "primary asset"
approach to determine the cash flow estimation period for a group of assets and
inefficienciesliabilities that may divert our management's time and attention from
ordinary business activities and could experience harm to our business.
Recent Accounting Pronouncements
In March 1998,represents the American Instituteunit of Certified Public Accountants issued
Statement of Position, or SOP, No. 98-1, "Software for Internal Use," which
provides guidance on accounting for the costa long-lived asset to be
held and
30
used. The provisions of computer software developed or
obtained for internal use. SOP No. 98-1 isSFAS 144 are effective for financial statements for fiscal years beginning after
December 15, 1998.2001. The adoption of this standard haswill not had a material effect onimpact our capitalization policy, results of
operations, financial position or cash flows.
In March 2000, the Financial Accounting Standards Board issued Financial
Accounting Standard Interpretation No. 44 (FIN 44) "Accounting for Certain
Transactions Involving Stock Compensation." This interpretation clarifies the
accounting for certain issues relating to employee stock based compensation
awards, including the definition of employee, the criteria for a non-
compensatory plan and modifications of terms of stock award plans. We do not
expect the application of FIN 44 to have a significant impact on our results of
operations, financial position or cash flows.
We do not expect the adoption of Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
in the third quarter
35
of 2000 to have a significant impact on our results of operations, financial
position or cash flows. This statement deals with accounting for derivative
instruments and hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101. SAB 101 summarizes certain areas of
the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial
statements.
We believe that our current
revenue recognition principles comply with SAB 101.
Qualitative and Quantitative Disclosures about Market RiskQUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve
principal, while at the same time maximizing income we receive from investments
without significantly increased risk. Some of the securities we invest in may
be subject to market risk. This means that a change in prevailing interest
rates may cause the principal amount of the investment to fluctuate. For
example, if we hold a security that was issued with a fixed interest rate at
the then-
prevailingthen-prevailing rate and the prevailing interest rate later rises, the
value of our investment will decline. To minimize this risk in the future, we
intend to maintain our portfolio of cash equivalents and investments in a
variety of securities, including commercial paper, money market funds,
government and non-
governmentnon-government debt securities and certificates of deposit with
maturities of less than thirteen months. In general, money market funds are not
subject to market risk because the interest paid on such funds fluctuates with
the prevailing interest rate.
3631
BUSINESS
OUR COMPANY
We have created an authoritative online source for movie recommendations and
selections based on personal preferences. We use the preference data collected
by our Personal Movie Finder service to guide consumers to movies they will
enjoy viewing at home and in theaters. We believe we currently operate one ofare the world's largest personal movie preference ratings databases with over 8.9
million personal movie ratings contributed byonline entertainment subscription service
providing more than 132,000 individual
users500,000 subscribers access to a comprehensive library of
more than 11,500 movie, television and other filmed entertainment titles. Our
standard subscription plan allows subscribers to have three titles out at the
same time with no due dates, late fees or shipping charges for $19.95 per
month. Subscribers can view as of March 31, 2000. Atmany titles as they want in a month. Subscribers
select titles at our Web site www.netflix.com, users can rent
DVDs through(WWW.NETFLIX.COM) aided by our Unlimited Rental subscription service, purchase DVDs throughproprietary
CineMatch technology, receive them on DVD by first-class mail and return them
to us at their convenience using our e-commerce referral program and choose theater locations and showtimes.
The primary accelerant to the growth of our Personal Movie Finder databaseprepaid mailers. Once a title has been
returned, we mail the ratings collected from subscribers to our Unlimited Rental
service. As of March 31, 2000, we had over 120,000 paying subscribers. The
rapid growth to date of our Unlimited Rentalnext available title in a subscriber's queue.
Our subscription service has grown rapidly since its launch in September
1999. We believe our growth has been the
resultdriven primarily by our unrivalled
selection, consistently high levels of thecustomer satisfaction, rapid consumer
adoption of DVD technologyplayers and our increasingly effective marketing programs. In
the San Francisco Bay area, where we have one- or two-day delivery, more than
2.6% of all households subscribe to Netflix.
Our proprietary CineMatch technology enables us to create a customized
store for each subscriber and to generate personalized recommendations which
effectively merchandize our comprehensive library of titles. We provide more
than 18 million personal recommendations daily. In January 2002, more than
10,500 of our 11,500 titles were selected by our subscribers. In comparison,
most entertainment service providers merchandize a narrow selection of box
office hits. A national video rental chain generates nearly 70% of its rental
revenues from new releases. We generate approximately 70% of our activity from
back catalogue titles. We believe that our CineMatch technology, based on
proprietary algorithms and the more than 70 million movie ratings we have
collected from our users during the past two years, enables us to build deep
subscriber relationships and maintain a high level of library utilization.
We market our service to consumers primarily through pay-for-performance
marketing programs, including online promotions, advertising insertions with
most leading DVD player manufacturers and promotions with electronics and video
software retailers. These programs encourage consumers to subscribe to our
service and include a free trial period of typically 14 days. At the end of the
trial period, subscribers are automatically enrolled as paying subscribers,
unless they cancel their subscription. Approximately 90% of trial subscribers
become paying subscribers. All paying subscribers are billed monthly in advance
by credit card.
We stock almost every title available on DVD, excluding mature and adult
content. We have established revenue sharing relationships with leading DVD manufacturers,more than 50
studios and distributors. These relationships provide us access to titles on
terms attractive to us. We also purchase titles directly from studios,
distributors and independent producers.
We are focused on rapidly growing our subscriber base and revenues and
utilizing our proprietary technology to minimize operating costs. Our
technology is extensively employed to manage and integrate our business,
including Sony, Toshiba,
Panasonicour Web site interface, order processing, fulfillment operations and
RCA. These DVD manufacturers, which accounted for over 90% of the
DVD players soldcustomer service. We believe that our technology also allows us to maximize our
library utilization and to run our fulfillment operations in the U.S. in 1999, insert promotional offersa flexible manner
with minimal capital requirements.
We currently provide titles to our Unlimited Rental subscription service intosubscribers on DVD only. However, we
continue to monitor additional delivery technologies and, when appropriate,
believe that we are well-positioned to offer digital distribution and
additional delivery options to our subscribers.
INDUSTRY OVERVIEW
Filmed entertainment is distributed broadly through a variety of
distribution channels. Out-of-home distribution channels include movie
theaters, airlines and hotels. In-home distribution channels include home
32
video rental and retail outlets, cable and satellite television, pay-per-view,
video-on-demand, or VOD, and broadcast television. Currently, studios
distribute their filmed entertainment content approximately six months after
theatrical release to the boxes of DVD players sold in the
U.S. We also have relationships with major consumer electronics retailers, such
as Circuit Cityhome video market, seven to nine months to
pay-per-view and The Good Guys, which provide promotional offers for our
Unlimited Rental serviceVOD, one year to their customers.
With our rapidly growing user basesatellite and expanding Personal Movie Finder
database we can market movies directlycable and two to targeted audiences through e-mail,
banner ads, streamed trailersthree years to
basic cable and other rich media content based on the known
movie tastes of our individual users. As technology evolves on the Internet, we
intend to use our expertise in personal movie recommendations as a programming
guide to Internet delivered video for our users.
Industry Background
The Movie Industrysyndicated networks.
IN-HOME FILMED ENTERTAINMENT MARKET
Domestic consumer expenditures for in-home filmed entertainment reached
$32 billion in 2001 and are large and
growing. Paul Kagan Associates, Inc., estimates that consumersprojected to grow to $46 billion in the United
States spent $25.6 billion2006, according
to Adams Media Research. This market is vital to studios. Consumer spending on
home video and theatricalin-home filmed entertainment was nearly four times the $8.1 billion consumers
spent at theaters in 1999, up from $21.4 billion in 1996,2001, according to Adams Media Research.
Consumer rentals and will grow to $35.0 billion in 2004.
Home video rentalspurchases of VHS and DVD titles are the largest single
source of domestic consumer expenditures on movies,in-home filmed entertainment,
representing about $8.3approximately $23.4 billion, or 32%73% of such
expendituresthe market in 1999,2001,
according to Paul Kagan Associates, Inc.Adams Media Research. Video rental outlet inventory is generally
heavily weighted toward new releases to satisfy current consumer demand
generated by heavy advertising and promotional spending by the studios.
Consumers access subscription-based services, such as HBO or Showtime,
primarily through cable or satellite providers. According to Adams Media
Research, subscription delivered content is the second largest source of
domestic consumer expenditures on in-home filmed entertainment, representing
approximately $7.5 billion, or 24% of the market in 2001. The National Cable
Television Association estimates that the number of available programming
networks has grown from 82 in 1991 to 231 in 2001.
Pay-per-view and VOD currently represent the smallest segment of the
market. Consumer selection is generally limited to less than 100 titles.
Limited title selection may contribute to the relatively small size of the
pay-per-view and VOD markets. The market for pay-per-view and near-VOD was
$813 million in 2001, representing less than 3% of the in-home filmed
entertainment market, and is expected to grow to $1.3 billion in 2006,
according to Adams Media Research. The market for cable VOD was $85 million in
2001, representing less than 1% of the in-home filmed entertainment market, and
is expected to grow to $1.1 billion in 2006, according to Adams Media Research.
CONSUMER TRANSITION TO DVD
The home video segment of the in-home filmed entertainment market is
in the midst ofundergoing a rapid technology transition away from VHS tape
format to DVD technology. DVDDVD. We believe this
transition is a digitally recorded format for video, similaranalogous to compact discsthe shift in the music industry which providesfrom audio cassettes
to compact discs that resulted in significant additional demand for both new
releases and back catalogue inventory. Specifically, the music industry
benefited from consumers replacing their old library of audio cassettes with
higher quality compact discs. We believe the home video segment is likely to
see a similar trend as consumers rediscover back catalogue titles on higher
resolution
picture and more robust sound than VHS. With every major domestic movie studio
supporting DVD, there are over 5,800 titles currently available in DVD format.
According to Paul Kagan Associates, Inc.,quality DVDs.
The DVD player adoption has occurred
fasteris the fastest selling consumer electronics device in
its first three years since introduction than audio CD players,
digital broadcast systems or videocassette recorders. Accordinghistory, according to Paul Kagan
Associates, Inc., since the introduction of theDVD Entertainment Group. At year-end 2001, there were 25
million U.S. television households with a standalone set-top DVD player,
representing 23% of U.S. television households. The number of homes with a
standalone set-top DVD player increased 97% in 1997,2001, according to Adams Media
Research. In September 2001, DVD player shipments outpaced VCR shipments for
the domestic installed base has grown to 5.4 millionfirst time in history, and this trend continued throughout the remainder of
2001. The number of U.S. households at the end of 1999
andwith a DVD player is forecastexpected to grow to 39.4 million households by the end of 2004, a
49% compound annual growth rate. In addition, the most recent versions of other
consumer devices such as personal computers and entertainment consoles are also
capable of playing DVDs.
37
Movie Marketing
The movie industry spends a large and increasing amount of money to promote
its films. In 1999, members of the Motion Picture Association of America, or
MPAA, excluding member company subsidiaries, spent an average of $21.4 million
per movie to market and promote the theatrical release of new feature films,
according to the MPAA.
In spite of the large amounts spent on marketing, the industry has lacked an
effective means to market movies to targeted audiences on a personalized basis.
The MPAA reports that the major studios rely primarily on mass market media to
advertise and promote new feature films. According to the MPAA, in 1999, 75.6%
of advertising dollars spent by movie studios were directed to newspaper,
television, radio, magazines and billboards. A large portion of the remaining
dollars was devoted to other mass media including film trailers, point-of-sale
promotions in theaters and Internet Web sites. Mass media advertising is
effective for blockbuster films with mass-market appeal. For films with
narrower appeal, mass media is not always cost effective.
Consumer Frustrations
Consumers often are frustrated by their efforts to choose and consume
movies. In the absence of personalized movie marketing, consumers rely on
traditional information sources for movie recommendations such as advertising,
critical reviews and word-of-mouth which may not be reliable predictors of
personal movie tastes. As a result, consumers may spend money on movies which
they do not like based on poor recommendations.
Having selected a movie, consumer demand is often frustrated in attempting
to view that movie. At the rental store, for example, consumer choice can be
limited by shelf space and a focus on new releases, and consumers are
inconvenienced by travel to and from the store to pickup and to drop off movies
to avoid late fees. At the theater, it often can be difficult to see new and
popular releases without significant effort and inconvenience, such as ticket
lines, a sold-out box office and inconvenient showtimes. At retail stores,
consumers are often inconvenienced by limited choice and a lack of competitive
pricing.
Opportunity on the Internet
Rapid growth of the Internet is fundamentally changing the way consumers
communicate, gather information and purchase products and services without
regard to geographical constraints. According to International Data
Corporation, there were 186 million Internet users worldwide at the end of
1999, and this number is forecast to grow to 50367
million by the end of 2003.
According2006, representing approximately 60% of U.S. television
households in 2006, according to Jupiter Communications, Internet advertising is projected to grow
to $11.5Adams Media Research.
Every major domestic movie studio supports the DVD format. DVD rentals
reached $2.3 billion in 2001, up 214% from 2000 and are expected to account for
more than 50% of video rental revenue by 2003, up
33
from $3.2 billion7% in 1999. Additionally,2000, according to Forrester Research, Internet commerceAdams Media Research. We believe this projected
growth in DVD rental revenue is expected to grow to $143.8 billion by
the enddirect result of 2003 from $20.3 billion in 1999.
The unique characteristicsconsumer adoption of the
Internet allow businesses toDVD.
CHALLENGES FACED BY CONSUMERS IN SELECTING IN-HOME FILMED ENTERTAINMENT
The proliferation of new releases available for in-home filmed
entertainment combined with the additional demand for back catalogue titles on
DVD create two primary challenges for consumers in selecting titles.
Despite the large number of titles, consumers lack a deep selection of
titles from existing subscription channels and traditional video rental
outlets. Subscription channels, such as HBO and Showtime, and pay-per-view
services currently offer a broadnarrow selection of servicestitles at specified times due to
programming schedule constraints and products, increased informationtechnological issues relating to channel
capacity. Traditional video rental outlets primarily focus on offering new
releases and enhanced
convenience. For businessesdevote limited space to display and stock back catalogue titles.
Even when consumers have access to the vast number of titles available,
they generally have limited means to effectively sort through the titles. In
2000, over 750 domestic and foreign films were rated for theatrical release in
the United States and over 5,300 new releases and back-catalogue titles,
excluding adult titles, were released on DVD. In addition, consumers are faced
with 161 network and cable television shows covering 126 hours of weekly
television viewing. We believe our CineMatch technology provides our
subscribers the tools to select titles within the vast array of options that
offer a marketplace for services, products or
information on the Internet, there often develops a network effect by which the
most visited Web sites can expand their user generated content faster than
their competitors, and in turn attract more trafficappeal to their sites asindividual preferences.
COMPETITIVE STRENGTHS
We believe that our revenue and subscriber growth are a result of this user generated content. With their resulting critical mass these Web
sites usually become the
consumers' destinationfollowing competitive strengths:
. COMPREHENSIVE LIBRARY OF TITLES. We have developed strategic
relationships with top studios and distributors, enabling us to
establish and maintain a broad and deep selection of choice.
Many online entertainment Web sitestitles. Since
our service is available nationally, we believe that we can
economically acquire and provide subscribers a broader selection of
titles than video rental outlets, video retailers, subscription
channels, pay-per-view and VOD services. We currently offer virtually
every title available from the more than 50 studios and distributors
from whom we acquire titles. To maximize our selection of titles, we
continuously add newly released titles to our library. Our library
contains numerous copies of popular new releases, as well as the many
titles that appeal to more select audiences.
. PERSONALIZED MERCHANDIZING. We utilize our proprietary CineMatch
technology to create a custom interface for each subscriber to
effectively merchandize our library. Titles are generally focused on content
aggregationdynamically presented
based upon proprietary algorithms that compare individual preferences
to our ratings database and retail commerce and have not effectively harnessed the powerprovides each subscriber a personalized
list of the Internet to gather and utilize personal preference information. For
example, many Web sites collect demographic and
38
purchase data about customers as a proxy for user preferences. However, in
certain taste-based product areas, like movies, where people consume the
product before knowing whether they will like it, purchase behavior can often
be a misleading indicator of consumer preference."Best Bets." We believe that there is an
opportunityCineMatch allows us to leverage the Internet to enable consumers to select movies based
on their individual preferencescreate
demand for our entire library and to enable the movie industry to market
movies directly to their target consumer audience.
As technology continues to evolve on the Internet,maximize utilization of each title.
Although we expect consumers to be
able to access significantly greater quantitiesoffer a complete selection of entertainment content,
including streamed and downloadable video,new releases, many
subscriber selections are from back catalogue titles. In January
2002, subscribers selected more than ever before. As access to10,500 of our 11,500 titles,
representing over 90% of all titles in our library. We believe that
as the number of programming choicesour subscribers and ratings database grows,
we believe consumersCineMatch will develop a
compelling need for a personalized programming guide to find entertainment
content compatible with their personal preferences. We believe the limitations
for both consumers and movie industry participants creates an opportunity for a
company to leverage the power and network effects of the Internet to create a
movie portal to solve these needs.
The Netflix Solution
We are developing a comprehensive online portal for personalized movie
recommendations and selection to benefit both consumers and the movie industry
community.
Consumers
NetFlix offers customers:
. Personalized recommendations. Consumers use our Personal Movie Finder
service to help find movies they will enjoy watching. After rating at
least 20 movies on our Web site, any visitor may use the Personal Movie
Finder service to receive recommendations based on his or her individual
tastes and preferences. As the number of users and their movie ratings
increases, we believe our Personal Movie Finder service isbe able to more accurately predict the preferences of individual
users.preferences.
. Multiple consumption options. OnceSCALABLE BUSINESS MODEL. We believe that we have recommended a movie,scalable,
low-cost business model designed to maximize our users can pursue any one of several consumption options, including DVD
rental throughrevenues and
minimize our Unlimited Rental subscription service, purchase
through a referral to onecosts. Subscribers' prepaid monthly credit card payments
and the recurring nature of our six e-commercesubscription business provide working
capital benefits and significant near-term revenue visibility. In
order to manage and contain subscriber acquisition costs, we
primarily utilize pay-for-performance marketing programs with online
affiliates and atuse low-cost inserts in DVD player boxes. We have
entered into revenue sharing agreements with studios and distributors
to lower our upfront cash payments which enhance our ability to expand
34
the theater,depth and breadth of our library. Our library remains active
beyond the new release window. In January 2002, approximately 70% of
the titles we delivered were from our back catalogue. Our scalable
infrastructure and online interface eliminate the need for expensive
retail outlets and allow us to service our large and expanding
subscriber base from a series of low-cost regional distribution
centers. We employ temporary, hourly and part-time workers to contain
labor costs and provide maximum operating flexibility. Finally, we
have low delivery costs through the use of standard first class mail
to ship and return titles to and from subscribers.
. CONVENIENCE, SELECTION AND DELIVERY. Subscribers can conveniently
select titles by selecting locationbuilding and showtimesmodifying a personalized queue of
titles on our Web site. As
technology evolvesWe create a unique experience for subscribers
because most pages on the Internet, we intendour Web site are tailored to useindividual
selection and ratings history. Under our expertise in
personal movie recommendations as a programming guide to Internet
delivered video for our users.
. Compelling value. Our Unlimited Rentalstandard service,
provides users the
ability to rent as many DVDs as they want for between $15.95 and $19.95
per month and tosubscribers can have up to four DVD moviesthree titles out at the same time withoutwith no due
dates or late fees. Subscribers can choose, 24 hours a day, seven
days a week, from a comprehensive selection of over 5,800 DVD titles.
DVDsOnce selected, titles are mailed individuallysent to subscribers viaby
first-class mail and returned to us in pre-paid mailers. Upon receipt
of returned titles, we automatically mail subscribers the U.S. Postal Service
withnext
available title in their queue of selected titles.
GROWTH STRATEGY
Our strategy to provide a pre-addressed postage paid return mailer to enable convenient
return.
Movie Industry Community
Our solution also offers a number of potential benefits for the other
members of the movie industry community, including producers, distributors,
marketers, theaters, retailers and consumer electronics manufacturers. These
benefits include:
. Targeted consumer marketing. We are well positioned to help studios
promote new releases to targeted audiences based on our Personal Movie
Finder preference
39
information. This will enable studios to reach interested consumers more
cost effectively and directly through e-mail, banner ads, streamed
trailers and other rich media content.
. Online theater promotion and ticket sales. We recommend theaters based
on location, showtimes and features such as screen size, seating and
sound systems. We also offer our customers personalized recommendations
for theatrical releases and plan to offer access to e-tickets for those
movies in the future.
. Increased retail sales for our affiliates. We help increase sales at
both online and offline retailers of DVDs and DVD players. We have
relationships with major DVD manufacturers, including Sony, Toshiba,
Panasonic and RCA, which accounted for over 90% of all DVD players sold
in the U.S. in 1999, and with major electronics retailers of DVD
players, including Circuit City and The Good Guys, to offer coupons for
our Unlimited Rentalpremier filmed entertainment subscription
service to their customers asour large and growing loyal subscriber base includes the following
key elements:
. PROVIDING A COMPELLING VALUE PROPOSITION FOR SUBSCRIBERS. We
provide subscribers access to our comprehensive library with no due
dates, late fees or shipping charges for a DVD
player purchase incentive.fixed monthly fee. We
also have relationships with leading
online retailers Amazon.com,, Buy.com, DVD Express, Reel.com, Sam
Goody.com and 800.commerchandize titles in easy to whom we refer our customers who wish to
purchase movies.
The NetFlix Strategy
Our goal is to be the definitive online intermediary for choosing moviesrecognize lists including new releases,
genres and other video entertainment. Key elementstargeted categories. Our convenient, easy to use Web
site allows subscribers to quickly select current titles, reserve
upcoming releases and build an individual queue for future viewing
using our proprietary personalization technology. Our CineMatch
technology provides subscribers with recommendations of titles from
our library. We quickly deliver titles to subscribers from our
regional distribution centers by standard first-class mail.
. UTILIZING TECHNOLOGY TO ENHANCE SUBSCRIBER EXPERIENCE AND OPERATE
EFFICIENTLY. We utilize proprietary technology developed in-house
to manage the processing and distribution of more than 100,000 DVDs
per day from our distribution centers. Our software automates the
process of tracking and routing titles to and from each of our
strategy include:
Builddistribution centers and allocates order responsibilities among them.
We continuously monitor, test and seek to improve the authoritative personal movie recommendation service. We have built
what we believe to be the world's largest movie ratings database that contains
over 8.9 million personal movie ratings from over 132,000 individual consumers.
The large number of personal ratings has been driven by increasing consumer useefficiency of
our Personal Movie Finder recommendation servicedistribution, processing and inventory management systems as our
subscriber base and shipping volume grows. We plan to operate
low-cost regional distribution centers throughout the success of our
Unlimited Rental subscription service. As the number of usersUnited States
to reduce delivery time and their movie
ratings increases, Personal Movie Finder is able to more accurately predict the
preferences of individual users. As our recommendations become better, we
believe we will attract more users, creating a cycle that leverages the
database's network effect. We intend to exploit our first-mover advantage and
to continue to increase the size and robustness of the database by aggressively
marketing our Unlimited Rental subscription service and adding additional
features to our Web site.
Build the NetFlix brand and community. We intend to build the NetFlix brand
as the definitive, trusted Internet intermediary for choosing movie and other
video entertainment.library utilization. We believe
that building greater awarenessshorter delivery time will result in improved customer
acquisition, retention and satisfaction.
. BUILDING MUTUALLY BENEFICIAL RELATIONSHIPS WITH FILMED ENTERTAINMENT
PROVIDERS. We have entered into revenue sharing agreements with
studios that lower our upfront cost of the NetFlix
brand withinacquiring titles, minimize our
inventory risk and beyond the NetFlix community of Unlimited Rental subscribers
is critical to expanding its user base beyond the DVD home video market. The
larger user base also will increase the predictive capabilitydepth and breadth of our Personal
Movie Finder service. Historically we have relied mainly on promotional offers
distributed by DVD manufacturers to promote the Unlimited Rental subscription
service. We intend to broaden our brand awarenesslibrary. Our
growing subscriber base provides studios with an additional
distribution outlet for popular movies and visibility through a
variety of marketing and promotional activities, including advertising in print
and broadcast media and on other leading Internet Web sites, conducting an
ongoing public relations campaign, engaging in cross-promotional activities
with our DVD manufacturer partners,television series, as well
as developing new business
alliancesniche titles and partnerships including co-branded syndication ofprograms. Through our Personal
Movie Finder service.
Enhance the user experience. We intend to continuously enhance the featuresgrowing subscriber and
functionality of our service to improve the user experience on our Web
site. Augmenting the personalization features of our Web site is key to this
endeavor. For instance, most pages the
40
user views on our Web site vary based on the user's preferences and movie
rental history. We will continue to expand the dynamic features of our Web site
in order to enhance our customer's overall satisfaction. Weratings database, we also offer users
content such as movie reviews and streamed trailers. We plan to invest heavily
in technology and customer service to improve the speed and ease-of-use of our
Web site and the overall user experience.
Pursue multiple revenue streams. To date, substantially all of our revenue
has been derived from our Unlimited Rental subscription service and its
predecessor services. We have the opportunity, however, to leverage the traffic
on our Web site to pursue additional revenue streams. For instance, we
currently share in the retail sales resulting from referrals to our six e-
commerce affiliates. We also intend to derive additional revenue from the
introduction of new services such as banner advertisements and sponsored
content areas on our Web site, promotional messaging in connection with the
more than 800,000 DVD mailers we ship monthly, access to theatrical e-ticketing
and marketing programs for theatrical releases. We also are considering
opportunities to leverage our operational infrastructure from our Unlimited
Rental subscription service to pursue additional revenue opportunities.
Build strong studio relationships. We view the moviehelp studios and their
distributors as strategically important and plan to invest in building strong
relationships with them. Our Personal Movie Finder preference data will enable
movie studios and their distributors to reach highly targeted audiences to
promote new theatrical and home video releases.
Through targeted marketing. IMPLEMENTING DIGITAL DELIVERY. We continuously monitor the
development of additional digital distribution technologies.
Historically, new technologies, including the VCR and virtually unlimited online shelf space, we can offermore recently
the DVD player, have led to the creation of additional distribution
channels for filmed entertainment. We intend to utilize our strong
relationships with the studios enhanced
promotional opportunitiesto obtain rights to acquire and
deliver filmed entertainment through emerging digital distribution
platforms as they become economically, commercially and
technologically viable for new titlesthose subscribers who prefer digital
distribution.
35
OUR WEB SITE -- WWW.NETFLIX.COM
We have applied substantial resources to plan, develop and back catalog.
NetFlix Offerings
We offer a wide range of services designedmaintain
proprietary technology to help our users identify,
locate, purchase and rent movies they will enjoy at home or in a local theater.
The keyimplement the features of our Web site, include our Personal Movie Finder service, our
Unlimited Rentalsuch as
subscription service, our DVD sales referral program, our
theatrical showtimeaccount signup and information listings, our dynamic presentation ofmanagement, personalized movie selections and our unique contentmerchandising,
inventory optimization and customer communications.
Personal Movie Finder Service
The heartsupport. Our software is written in a
variety of our Personal Movie Finder service is our proprietarylanguages and runs on industry standard platforms.
Our CineMatch technology whichuses proprietary algorithms to compare
subscriber movie preferences with preferences of other users contained in our
database. This technology enables us to accurately predictprovide personalized predictions and
movie recommendations unique to each subscriber.
We believe our dynamic store software optimizes subscriber satisfaction
and the movie tastesmanagement of our customers. Each user who enters our Web site is given the opportunity to rate
movies. Based on a user's own movie ratings, our Personal Movie Finder service
enables us to recommend "best bets" based on the ratings of thousands oflibrary by integrating CineMatch predictions,
subscribers' current queues and viewing histories, inventory levels and other
users. As the number of users and their movie ratings increases, our Personal
Movie Finder service is able to more accurately predict the preferences of
individual users. Our recommendations are available to anyone, whether or not
an Unlimited Rental subscriber, who has rated at least 20 movies on our Web
site. By aggregating these ratings, we have built what we believe to be the
world's largest personal movie ratings database that contains over 8.9 million
movie ratings from more than 132,000 individual consumers as of March 31, 2000.
Over the ten weeks ended April 7, 2000, our users rated movies at an average
rate of more than 720,000 per week.
We also use our Personal Movie Finder servicefactors to determine which movies to displaymerchandise to each subscriber.
Our proprietary movie search engine indexes our extensive library by
title, actor, director and producer, and sorts them by genre into collections.
Our account signup and management tools provide a subscriber interface
familiar to online shoppers. We use a real-time postal address validator to
help our subscribers enter correct postal addresses and to determine the
additional postal address fields required to assure speedy and accurate
delivery. We use an online credit card authorization service to help our
subscribers avoid typographic errors in their credit card entries. These
features help prevent fraud and subscriber disappointment resulting from
failures to initiate a trial.
Throughout our Web site, we have extensive measurement and testing
capabilities, allowing us to continuously optimize our Web site according to
our needs as well as those of our subscribers. We use random control testing
extensively.
Our Web site is run on hardware and software co-located at a service
provider offering reliable network connections, power, air conditioning and
other essential infrastructure. We manage the Web site 24 hours a day, seven
days a week. We utilize a variety of proprietary software, freely available
tools and commercially supported tools, integrated in a system designed to
rapidly and precisely diagnose and recover from failures. Many of our Web site
systems are redundant, including most of the networking hardware and the Web
servers. We conduct upgrades and installations of software in a manner designed
to minimize disruptions to our subscribers.
MERCHANDIZING
The key to our merchandizing efforts is the personal recommendations
generated by our CineMatch technology. All subscribers and site visitors are
given many opportunities to rate titles. Based on the ratings we collect, we
are able to determine how a particular subscriber will likely feel about other
titles in our library. We can also generate "average" ratings for titles.
CineMatch ratings also determine which titles are displayed to a
customersubscriber and in which order. For example, a list of new releases may be
ranked by user preference rather than by release date, allowing a usersubscribers to
more quickly focus on movies he or she isfind titles they are more likely to enjoy. In addition,
these ratings willRatings also determine which
movies to featuretitles are featured in lead page positions on our Web site to increase customer
satisfaction and rentalselection activity. 41
Unlimited Rental Subscription Service
Our Unlimited Rental serviceFinally, CineMatch data is used to
generate lists of similar titles, which has proved to be a monthly DVD subscription program offeringpowerful method for
catalogue browsing. Subscribers often start from a selection of over 5,800 moviefamiliar title and use our
CineMatch Similars to find other titles they may enjoy.
Recommendations are available to anyone who has rated titles on our Web
site, whether or not they are a subscriber. By aggregating the ratings of our
subscribers and other visitors, we have built what we believe to be the world's
largest personal movie ratings database, containing more than 70 million
ratings.
36
We also provide our subscribers with decision support information about
each title in our library. This information includes:
. factual data, including length, rating, cast and crew, special DVD
features and screen formats;
. editorial perspective, including plot synopses, movie trailers and
reviews written by our editors and by other Netflix subscribers; and
. CineMatch data, including personal rating, average rating and other
similar titles the subscriber may enjoy.
MARKETING
We have multiple marketing channels through which we attract subscribers
to our service. We compensate the majority of our channel partners on a
pay-for-performance basis. We believe that our paid marketing efforts are
significantly enhanced by the benefits of word-of-mouth advertising, our
subscriber referrals and our active public relations program. Approximately 30%
of our subscribers are referrals from existing subscribers or come from other
unpaid marketing channels. We believe that improvements we have made to the
subscriber experience have enhanced our subscriber acquisition efforts. In a
simple random sample conducted in January 2002, approximately 85% of
respondents said they would be likely to recommend our service to a friend. We
focus our paid marketing efforts on the following channels:
ONLINE ADVERTISING
Online advertising is our largest paid source of new subscribers. A
significant portion of our subscribers acquired from this channel come from an
unlimitedaffiliate program managed for us by a third party. In addition to our affiliate
program, online advertising encompasses our relationships with online networks,
online brokers and a number of rentalsWeb sites. We generally pay for our online
advertising based on the success of our affiliates and partners in referring
subscribers to us.
DVD PLAYER MANUFACTURERS
We have agreements with leading DVD player manufacturers requiring them
to place a Netflix insert inside DVD player boxes that describes our service
and offers a free trial. Our insert advertisements were placed in approximately
84% of all standalone set-top DVD player boxes sold in the United States in
2001. Our DVD player manufacturer relationships include Apex Digital, JVC
Corporation of America, Panasonic Consumer Electronics, Philips Consumer
Electronics, RCA, Samsung, Sanyo-Fischer, Sharp, Sony Electronics and Toshiba.
OTHER CHANNELS
We also work with a number of other channels on an opportunistic basis.
We have a relationship with a leading consumer electronics and video retailer,
which uses point-of-sale materials and stickers on product packaging to promote
Netflix in its stores.
CONTENT ACQUISITION
We have entered into revenue sharing arrangements with more than 50
studios and distributors. The arrangements cover six of the top eight studios,
including Buena Vista Home Video, Columbia Tristar Home Entertainment,
Dreamworks International Distribution, Twentieth Century Fox Home
Entertainment, Universal Studios Home Video and Warner Bros. Under these
agreements we generally obtain titles for a low initial cost in exchange for a
commitment to share a percentage of our subscription revenues for a defined
period of time. After the revenue sharing period expires for a title, the
agreements generally grant us the right to acquire for a minimal fee a
percentage of the units for retention or sale by us. The balance of the units
are destroyed or returned to the
37
originating studio. The principal terms of each monthagreement are similar in nature
but are generally unique to each studio. In addition to revenue sharing
agreements, we also purchase titles from various studios and no due dates or late fees, for between $15.95distributors,
including Paramount and $19.95 per
month. UsersMGM, and other suppliers, including Ingram
Entertainment, Inc. and Video Product Distributors, on a purchase order basis.
FULFILLMENT OPERATIONS
We currently stock more than 11,500 titles on more than 2.9 million DVDs.
During January 2002, we shipped to and received from subscribers more than 5.1
million DVDs. We have applied substantial resources developing, maintaining and
testing the proprietary technology that helps us manage the fulfillment of
individual orders and the integration of our Web site, transaction processing
systems, fulfillment operations, inventory levels and coordination of our
distribution centers.
Our primary fulfillment operation is housed in a 50,000 square foot
facility in San Jose, California. In addition, we operate several regional
distribution centers and are allowedin the process of opening and operating additional
facilities. We estimate the set-up cost of a regional center to havebe
approximately $60,000. We believe that we can ship up to four movies out at500,000 DVDs per day
from our San Jose distribution center and an additional 50,000 DVDs per day
from each of our regional distribution centers.
We believe our regional distribution centers allow us to improve the
samesubscription experience for non-San Francisco Bay area subscribers by
shortening the transit time and may
keep each one for as long as they wish. Subscribers choose their movies online
using our CineMatch technology orDVDs in the U.S. Postal Service. Based on
performance standards established by searching for movie titles. The movies are
mailed individually via the U.S. Postal Service with a pre-addressed postage
paid return mailer. Subscribers build a queuefor its postal
zones and our planned roll-out of movies they would likeadditional regional distribution centers, we
expect to see
so that a new movie is automatically shipped, usually within a day after one is
returned. We believe that, based on historical trends, on average more than 85%
of subscribers are active renters in any given month.
Sales Referral Service
A significant percentage of DVD owners choose to purchase DVDs from online
retailers, and there frequently is variability in the pricing, selection and
service levels of these vendors. We offer a DVD shopping service that allows
customers to locate and compare the prices of DVDs among our six e-commerce
affiliates. This service enables the consumer to simultaneously determine
shipping and tax, evaluate shipping and service policies and identify specials.
In addition, we provide editorial reviews and customer ratings of these
affiliates. Customers choosing to purchase a DVD from an affiliate can click-
through directly to the appropriate page on the affiliate's Web site to
complete the purchase.
Theater Services
We recently expanded our Personal Movie Finder service beyond movies
available on DVD to include theatrical releases. In addition to providing
detailed content and editorial for these titles, we offer showtimes and
locations for movies. Our Personal Movie Finder service also can make a theater
recommendation based on a customer's location preference. Our Web site also
helps customers make informed decisions about which theater to attend by
providing detailed descriptions and customer reviews of theaters throughout
North America. Finally, we intend to access to offer e-ticketing services by
which customers will be able to reserve and purchase tickets for specific
theaters and showtimes.
Dynamic Presentation
We personalize the presentation of movies, information and services on our
Web site for each customer. The presentation is adjusted dynamically depending
on a number of factors, including the customer's movie taste and physical
location and our current inventory levels and merchandising requirements. A new
customer would be presented with offers and services likelyprovide one- or two-day delivery service to be attractive to
a first-time visitor, while an existing customer would receive a home page
featuring products and information chosen based on that customer's preferences.
Dynamic merchandising also is used on the Web site as a means to efficiently
manage our inventory and to increase subscriber satisfaction with our service.
For example, a title that becomes temporarily out of stock will no longer be
recommended to a customer and will be replaced on the Web site on a real time
basis with other recommended titles. This dynamic exchange of titles occurs
throughout the day as our systems constantly update inventory levels.
Content and Communication
We offer extensive content to help our customers find movies. In addition to
specific Personal Movie Finder ratings, customers can view DVD box shots,
editorial descriptions of
42
each movie, promotional movie trailers and movie critic recommendations. We
update this content as new movies become available.
We aggressively encourage our customers to contribute reviews of movies,
theaters, online retailers and movie critics through our "You Review It!"
feature. We also provide information and special offers to customers who elect
to receive them by e-mail through our "NetFlix Knows" services, including our
"NetFlix Knows the Buzz" e-mail newsletter, which gives information on movies,
stars, trivia and special offers, "Editor's Choice" which provides customized
recommendations directly to a user's e-mail and "Lights . . . Camera . . .
Action!" which reminds users to visit our Web site in time to receive movies
for the weekend.
Sales and Marketing
We currently focus on bringing users to our Web site through our Unlimited
Rental subscription service, which we promote primarily through our free trial
offer programs in partnership with DVD equipment manufacturers and retailers
and other parties with whom we have relationships.
. DVD Equipment Manufacturers. We have relationships with major DVD
manufacturers, including Sony, Toshiba, Panasonic and RCA, which
accounted for overat least 90%
of all DVD players sold in the U.S. in 1999, to
offer coupons for our Unlimited Rental subscription service to their
customers as a DVD player purchase incentive. Our agreements with these
consumer electronic manufacturers provide thatpopulation by the retailers promote our
service on a non-exclusive basis as a meanssecond half of making their DVD players
more attractive to consumers.
. DVD Equipment Retailers. We have relationships with major electronics
retailers of DVD players, such as Circuit City and The Good Guys, to
offer coupons for our Unlimited Rental subscription service to their
customers as a DVD player purchase incentive. These promotional programs
typically include point-of-sale materials promoting the NetFlix service,
including stickers on product packaging, and inclusion in store
circulars and catalogs.
. DVD Retailers. We provide our promotional offers for the Unlimited
Rental subscription service to purchasers of DVDs at stores such as
Suncoast Video.
. Other Promotions. We also distribute our promotional offers through
other means such as direct mail and online promotions, and through other
companies involved in the movie and DVD industry such as Monster Cable
Products, Inc., an audio component manufacturer.
We intend to broaden our brand awareness and visibility through a variety of
marketing and promotional activities, including advertising in print and
broadcast media and on other leading Web sites, conducting an ongoing public
relations campaign, engaging in cross-promotional activities with our DVD
manufacturer partners, as well as developing new business alliances and
partnerships which could include co-branded syndication of our Personal Movie
Finder service.
Customer Service2002.
CUSTOMER SERVICE
We believe that our ability to establish and maintain long-term
relationships with our customerssubscribers depends, in part, on the strength of our
customer support and service operations. Furthermore, weWe encourage and utilize frequent
communication with and feedback from our customerssubscribers in order to continually
improve our Web site and our services. Our team of customer support
and service personnel is responsible for handling general customer
43
inquiries, answering customer questions about the rental process and
investigating the status of shipments and payments.service. Our customer support and
service center operates 1813
hours a day, seven days a week. We utilize email to proactively correspond with
our customers.subscribers. We also offer phone support for customerssubscribers who prefer to talk
directly with a customer service representative. We have automated certain tools used by ourfocus on eliminating the
causes of customer support calls and service staffautomating certain self-service features
on our Web site, such as the ability to report and intend to actively pursue further automation and enhancements of ourcorrect most shipping
problems. Currently, we support over 10,000 subscribers per customer support
and service systems and operations.representative. Our customer service operations are housed in our San Jose,
California facility.
Fulfillment and Inventory Management
We currently stock more than 5,800 DVD titles and own in excess of 800,000
DVDs. We manage our fulfillment operations for our Unlimited Rental operations
in-house with no outsourcing. During March 2000, we shipped in excess of
800,000 DVDs to our subscribers. Our fulfillment operations are housed in a
58,000 square foot facility in San Jose, California. This same facility
processes all DVDs as they are returned by subscribers. During March 2000, we
processed in excess of 800,000 DVD returns. We believe that we can ship up to
six million DVDs per month from this facility without additional automation and
eight million DVDs per month with planned investments in partial automation.
We use commercially available software programs and invest in the
development of proprietary software programs to manage the fulfillment of
individual orders and the integration of the Web site interface, transaction
processing systems, fulfillment operations, inventory levels and customer
service.
Supplier Relationships
We purchase DVDs from various suppliers based on a combination of factors
including favorable credit terms, cost and depth of inventory. We typically
receive next business day delivery for all DVD new release and catalog titles,
with the exception of titles placed on moratorium by the releasing studio.
Ingram Entertainment, Inc. and Amplified.com, Inc. are our two largest
suppliers and accounted for approximately 49% and 33%, respectively, of our DVD
purchases in 1999. Historically, we have not purchased DVDs directly from major
or independent film studios, nor have we entered into any revenue sharing
agreements with such parties, although we continue to examine such
relationships and engage in revenue sharing discussions with major studios from
time to time. Currently, we do not have long-term written supply agreements
with any studio or other supplier.
Technology
We have implemented a broad array of Web site management, search, customer
interaction, transaction-processing and fulfillment services and systems using
a combination of our own proprietary technologies and commercially available,
licensed technologies. Our current strategy is to focus our development efforts
on creating and enhancing the specialized, proprietary software that is unique
to our business and to license commercially available technology whenever
possible.
Our CineMatch technology, which powers our Personal Movie Finder service,
contains a proprietary set of algorithms to compare a user's movie preferences
with the preferences contained in our database. This collaborative filtering
technology allows us to provide customized recommendations that are unique to
each user.
We use a customized set of applications for managing customer DVD requests,
shipment on a timely basis and the subsequent processing of the customer's DVD
return. These
44
applications also manage the process of accepting, authorizing and charging
customer credit cards. In addition, our systems allow us to maintain ongoing
automated e-mail communications with customers throughout the ordering process
at a negligible incremental cost. These systems fully automate many routine
communications, facilitate management of customer e-mail inquiries and allow
customers to, on a self-service basis, check order status, change their e-mail
address or password and check subscriptions to personal notification services.
Our Web site also incorporates a variety of search and database tools. In
addition, our transaction processing systems are fully integrated with the
remainder of our accounting and financial systems.
A group of systems administrators and network managers monitor and operate
our Web site, network operations and transaction processing systems. The
uninterrupted operation of our Web site and transaction processing systems is
essential to our business, and it is the job of the Web site operations staff
to ensure, to the greatest extent possible, the reliability of our Web site and
transaction processing systems. We use the services of Exodus Communications,
Inc. to obtain connectivity to the Internet over multiple dedicated T1 lines
and to physically house our servers. Exodus has custom designed facilities that
offer redundant power, security, connectivity and environmental controls.
CompetitionCOMPETITION
The market for our servicesin-home filmed entertainment is intensely competitive and
subject to rapid change. BarriersMany consumers maintain simultaneous relationships
with multiple in-home filmed entertainment providers and can easily shift
spending from one provider to entry are relatively low,another. For example, consumers may subscribe to
HBO, rent a DVD from Blockbuster, buy a DVD from Wal-Mart and currentsubscribe to
Netflix, or some combination thereof, all in the same month.
Video rental outlets and new competitors
can launch new Web sites at a relatively low cost. Althoughretailers against whom we believe no
company currently offers the combination and quality of services we offer, our
principal competitorscompete include or could include:
. traditional movie rental chains, such as
Blockbuster Video, Hollywood Entertainment, Amazon.com, Wal-Mart and Hollywood
Video;
. online local delivery services, such as Kozmo.com;
. online entertainment sites, such as E! Online and Yahoo! Movies;
. online movie review and opinion sites, such as epinions.com and
Amazon.com's IMDB.com;
. online movie theater ticket sellers, such as AOL's MovieFone and
Hollywood.com;
. online movie retailers, such as Amazon.com and Reel.com;
. traditional movie retail stores, such as Tower Video and Wal-Mart; and
. video streaming companies, such as RealNetworks, iFilm.com and
AtomFilms.com.
We believe that the principal competitive factors in our market are:
. brand recognition;
. Web site content, including the ability to recommend movies;
. product selection, availability and cost;
. reliable and timely fulfillment;
. ease of use;
. customer service; and
. price.Best Buy.
We believe that we compete favorably with respect to these factors. However,
many of our current and potential competitors have longer operating histories,
larger customer bases,
45
significantly greater brand recognition and significantly greater financial,
marketing and other resources than we do. Some of our competitors have adopted,
and may continue to adopt, aggressive pricing policies and devote substantially
more resources to Web site and systems development than we do. Increased
competition may adversely impact our operating margins, market share and brand
recognition. In addition, our competitors may form strategic alliances with
suppliersvideo rental outlets and movie production studios which could adversely affectretailers
primarily on the basis of title selection, convenience and price. We believe
that our abilitysubscription service with home delivery and access to obtain productsour
comprehensive library of titles competes favorably against traditional video
rental outlets.
We also compete against online DVD sites, such as Rentmydvd.com and
dvdovernight, subscription entertainment services, such as HBO and Showtime,
pay-per-view and VOD providers and cable and satellite
38
providers. We believe we are able to provide greater subscriber satisfaction
due to our vast library, proprietary technology and extensive database of
subscriber preferences.
VOD has received considerable media attention. VOD is now widely deployed
in most major hotels, and has early deployments in many major cable systems.
Within a few years, we believe VOD will become widely available to digital
cable and satellite subscribers. VOD carries as many titles as can be
effectively merchandized on favorable terms. Wea set-top box platform, generally up to 100 recent
releases, plus adult content. For consumers who primarily want the latest big
releases, VOD may be unablea convenient distribution channel. We believe that our
strategy of developing a large and growing subscriber base positions us
favorably to compete successfully
against current or future competitors.
Intellectual Propertyprovide digital distribution of filmed entertainment as that
market develops.
EMPLOYEES
As of December 31, 2001, we had 264 full-time employees. We utilize
part-time and temporary employees to respond to fluctuating seasonal demand for
DVD shipments. Our employees are not covered by a collective bargaining
agreement and we consider our relations with our employees to be good.
INTELLECTUAL PROPERTY
We use a combination of trademark, copyright and trade secret laws and
confidentiality agreements to protect our proprietary technology.intellectual property. We
have applied for several trademarks.trademarks and one patent. Our pending trademark and patent
applications may not be allowed. Even if these applications are allowed, these trademarksthey
may not provide us a competitive advantage. To date, we have relied primarily
on proprietary processes and know-how to protect our intellectual property
related to our Web site and fulfillment processes. Competitors may challenge
successfully the validity and scope of our trademarks.
From time to time, we may encounter disputes over rights and obligations
concerning intellectual property. We believe that our products doservice offering does not
infringe the intellectual property rights of any third parties.party. However, we
cannot assure you that we will prevail in allany intellectual property disputes.
Employees
As of December 31, 1999, we had 270 full-time employees. We utilize part-
time and temporary employees to respond to fluctuating market demand for DVD
shipments. Our employees are not covered by a collective bargaining agreement,
and we consider our relations with our employees to be good.
Facilitiesdispute.
FACILITIES
Our executive offices are located in Los Gatos, California, where we
lease approximately 12,00025,000 square feet under a lease that expires in October
2005, subject to the right of the lessor to terminate our lease which expires
in January 2001.
We anticipate that we will have to relocate our headquarters within the next
twelve months.2003. We also lease approximately 58,00050,000 square feet of space in San Jose,
California, where we maintain our customer service ITcenter, information
technology operations and fulfillment operationsprimary distribution center under a lease whichthat
expires in OctoberDecember 2004. We also lease a total of approximately 20,000 square
feet in five states, where we operate regional distribution centers.
LEGAL PROCEEDINGS
We are exploring opening additional operations centers, possibly outside the state
of California.
Legal Proceedings
From timenot a party to time, we may become involved in litigation relating to clams
arising from our ordinary course of business. We believe there are no claims or
actions pending or threatened against us, the ultimate disposition of which
would have aany material adverse effect on us.
46legal proceedings.
39
MANAGEMENT
Executive Officers and DirectorsEXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information with respect to our
executive officers, directors and directorskey employees as of March 31, 2000.February 28, 2002.
Name Age Position
-NAME AGE POSITION
---- --- --------
EXECUTIVE OFFICERS AND DIRECTORS
Reed Hastings............ 39Hastings................ 41 Chief Executive Officer, President and Chairman of the Board
Marc B. Randolph......... 41 Executive ProducerW. Barry McCarthy, Jr........ 48 Chief Financial Officer and DirectorSecretary
Thomas R. Dillon......... 56Dillon............. 58 Vice President of Operations
Leslie J. Kilgore............ 36 Vice President of Marketing
Timothy M. Haley(1)(2)....... 47 Director
Jay C. Hoag(2)............... 43 Director
A. Robert Pisano(1).......... 58 Director
Michael N. Schuh(1).......... 58 Director
KEY EMPLOYEES
Marc B. Randolph............. 43 Vice President of New Markets
Neil Hunt................ 38Hunt.................... 40 Vice President of Internet Engineering
Leslie J. Kilgore........ 34 Vice President of Marketing
J. Mitchell Lowe......... 47Lowe............. 49 Vice President of Business Development
W. Barry McCarthy, Jr. .. 46 Chief Financial Officer
Patty McCord............. 46Patricia J. McCord........... 48 Vice President of Human Resources
Eric P. Meyer............ 35Michael Osier................ 39 Vice President of Database Systems
Deborah J. Pinkston...... 38IT Operations
Ted Sarandos................. 37 Vice President of Sales
Timothy M. Haley......... 45 Director
Jay C. Hoag.............. 41 Director
Samir P. Master.......... 31 Director
Michael N. Schuh......... 56 DirectorContent Acquisition
David Hyman.................. 36 General Counsel
Messrs. Hoag, Master and Schuh comprise NetFlix's- --------
(1) Member of the audit committee.
Messrs.
Haley and Hoag comprise NetFlix's(2) Member of the compensation committee.
Reed HastingsREED HASTINGS has served as our Chief Executive Officer since September
1998, our President since July 1999 and Chairman of the Board since inception.
Mr. Hastings also currently serves as President of the California State Board
of Education. From June 1998 to JuneJuly 1999, Mr. Hastings served as Chief
Executive Officer of Technology Network, a political service organization for
the technology industry. Mr. Hastings served as Chief Executive Officer of Pure
Atria Software, a maker of software development tools, from its inception in
October 1991 until it was acquired by Rational Software Corporation, a software
development company, in August 1997. Mr. Hastings holds an M.S.C.S. degree from
Stanford University and a B.A. from Bowdoin College.
Marc B. Randolph has served as our Executive Producer since October 1998, as
our President and CEO from August 1997 to September 1998 and as a member of our
board of directors since inception. From October 1996 to August 1997, Mr.
Randolph served as Vice President of Marketing for IntegrityQA, a maker of
software development tools, and its successor, Pure Atria, a developer of bug-
detection, load testing and change management software tools. From February
1995 to September 1996, he served as Vice President of Marketing of Visioneer,
a wholly-owned subsidiary of Primax Electronics Ltd. that develops and markets
imaging products. Mr. Randolph holds a B.A. from Hamilton College.
Thomas R. Dillon has served as our Vice President of Operations since April
1999. From January 1998 to April 1999, Mr. Dillon served as Chief Information
Officer at Candescent Technologies Corp., a manufacturer of flat panel
displays. From May 1987 to December 1997, he served as Chief Information
Officer of Seagate Technology, a maker of computer peripherals. Mr. Dillon
holds a B.S. from the University of Colorado.
Neil Hunt has served as our Vice President of Internet Engineering since
January 1999. Prior to joining NetFlix, Mr. Hunt served as a Director of
Engineering of Rational Software Corporation from August 1997 to January 1999,
and in various engineering roles for its predecessor, Pure Software from April
1992 to August 1997. Mr. Hunt holds a B.S. from the University of Durham, U.K.
and a Ph.D. from the University of Aberdeen, U.K.
47
Leslie J. Kilgore has served as our Vice President of Marketing since March
2000. Prior to joining NetFlix, Ms. Kilgore served as a Director of Marketing
for Amazon.com, an Internet commerce retailer, from February 1999 to March
2000. She served as a brand manager for The Procter & Gamble Company, a
manufacturer and marketer of consumer products, from August 1992 to February
1999. Ms. Kilgore has a B.S. from The Wharton School of Business at the
University of Pennsylvania and an M.B.A. from the Stanford University Graduate
School of Business.
J. Mitchell Lowe has served as our Vice President of Business Development
since February 1998 and was a consultant to NetFlix from October 1997 to
February 1998. Mr. Lowe is a founder of and has served as Chief Executive
Officer and director of Interaction, Inc., a video rental chain, from January
1984 to the present. Mr. Lowe served on the Board of Directors of the Video
Software Dealers Association from 1991 to 1998 and as its Chairman of the Board
from 1996 to 1997.
W. Barry McCarthy, Jr.BARRY MCCARTHY, JR. has served as our Chief Financial Officer since
April 1999 and our Secretary since May 1999. From January 1993 to December
1999, Mr. McCarthy was Senior Vice President and Chief Financial Officer of
Music Choice, a music programming service distributed over direct broadcast
satellite and cable systems. From June 1990 to December 1992, Mr. McCarthy was
Managing Partner of BMP Partners, a financial consulting and advisory firm.
From 1982 to 1990, Mr. McCarthy was an Associate, Vice President and Director
with Credit Suisse First Boston, an investment banking firm. Mr. McCarthy holds
an M.B.A. from The Wharton School of Business at the University of Pennsylvania
and a B.A. from Williams College.
Patricia J. McCordTHOMAS R. DILLON has served as our Vice President of Human ResourcesOperations since
November 1998. Prior to joining NetFlix, as a principal of Patty McCord
Consulting, Ms. McCord served as a consultant to various startups fromApril 1999. From January 1998 to November 1998. From June 1994 to July 1997, Ms. McCordApril 1999, Mr. Dillon served as DirectorChief
Information Officer at Candescent Technologies Corp., a manufacturer of Human Resources at Rational Software Corporation,flat
panel displays. From May 1987 to December 1997, he served as Chief Information
Officer of Seagate Technology, a software
development company. Ms. McCord attended Sonoma State College.
Eric P. Meyermaker of computer peripherals. Mr. Dillon
currently serves on the board of directors of Tricord Systems, Inc., a
designer, developer and marketer of server appliances. Mr. Dillon holds a B.S.
from the University of Colorado.
40
LESLIE J. KILGORE has served as our Vice President of Database SystemsMarketing since
JanuaryMarch 2000. From February 1999 our Vice President of Engineering from April 1998 to January
1999, and our Director of Engineering from October 1997 to March 1998. Prior to
joining NetFlix, Mr. Meyer2000, Ms. Kilgore served as Senior Manager in the Strategic Services
practice of KPMG from August 1995 to September 1997. From January 1993 to July
1995, Mr. Meyer served as Chief Information Officer of Harry's Farmers Market.
Mr. Meyer holds an M.S.C.S. degree from Brown University and a B.S. degree from
Purdue University.
Deborah J. Pinkston has served as our Vice President of Sales since February
2000. Prior to joining NetFlix, Ms. Pinkston served as Vice President of
Advertising Sales for Egghead.com, a software retailer, from March 1998 to
February 2000. From October 1996 to March 1998, Ms. Pinkston served as Director
of Advertising Sales for Hearme Inc., an operator and licensor of real-time
Internet communication tools, and from September 1995 to August 1996, Ms.
Pinkston served as Director
of Marketing Services for Accolade, Inc.,Amazon.com, an Internet retailer. Ms. Kilgore served as a
video
game developerbrand manager for The Procter & Gamble Company, a manufacturer and publisher. From October 1991marketer of
consumer products, from August 1992 to February 1995,1999. Ms. Pinkston
served as Manager, Contract Negotiations and Professional Relations at Syntax
Laboratories Inc. Ms. PinkstonKilgore holds a B.A. from the University of California
at Los Angeles and an
M.B.A. from the Stanford University Graduate School of Business and a B.S. from
The Wharton School of Business at the University of Southern California.
TimothyPennsylvania.
TIMOTHY M. HaleyHALEY has served as one of our directors since June 1998. Mr.
Haley is a co-founder of Redpoint Ventures, a venture capital firm, and has
been a Managing Director of the firm since November 1999. Mr. Haley has been a
Managing Director of Institutional Venture Partners, a venture capital firm,
since February 1998. Prior to joining Institutional Venture
48
Partners, fromFrom June 1986 to February 1998, Mr. Haley was the
President of Haley Associates, an executive recruiting firm in the high
technology industry. Mr. Haley currently serves on the Board of Directors of
ABRA, Inc., HelloBrain.com,
Homestead.com, Octopus.com, Reflect.com and ThemeStream.several private companies. Mr. Haley received hisholds a B.A. from Santa Clara University.
JayJAY C. HoagHOAG has served as one of our directors since June 1999. Since
June 1995, Mr. Hoag has been a General Partner at Technology Crossover
Ventures, a venture capital firm. From 1982 to 1994, Mr. Hoag served in a variety of
capacities at Chancellor Capital Management. Mr. Hoag currently serves on the board of directors of
Autoweb.com, a consumer automotive internet service,EXE Technologies, Inc., eLoyalty a customer loyalty solutions company, iVillage,Corporation, Expedia, Inc., a leading
online women's network, ONYX Software Corporation, a software company, and several private
companies. Mr. Hoag holds a B.A. in economics and political
science from Northwestern University and an M.B.A. from the University of Michigan.
Samir P. MasterMichigan and a B.A.
from Northwestern University.
A. ROBERT PISANO has served as one of our directors since October 1999.April 2000.
Since JuneSeptember 2001, Mr. Pisano has been the National Executive Director and
Chief Executive Officer of the Screen Actors Guild. From August 1993 to April
1999, Dr. Master hasMr. Pisano served as a Senior PartnerExecutive Vice President, and the Vice Chairman and
Director of Europ@web B.V.Metro-Goldwyn-Mayer Inc., a global Internet investment group. From December 1996 to December 1998, Dr.
Master was a Managing Director at Comdisco Ventures, a debtmotion picture and equity venture
capital fund based in Menlo Park, California. From February 1996 to November
1996, he was a strategy consultant with the Managed Care practice of
PriceWaterhouse, LLC. He currently also serves on the board of directors of
Mercata.com, and HealthAllies.com. Dr. Mastertelevision studio.
Mr. Pisano holds a B.S.M. from Northwestern
University in Evanston, Illinois, an M.D. from Northwestern Medical School and
an M.B.A.LL.B. from the J.L. Kellogg GraduateBoalt Hall School of ManagementLaw at Northwesternthe University
of California, Berkeley and a B.A. from San Jose State University.
MichaelMICHAEL N. SchuhSCHUH has served as one of our directors since February 1999.
From August 1998 to the present, Mr. Schuh has served as a member of Foundation
Capital, Management II, a venture capital firm. Prior to joining Foundation Capital, Mr. Schuh
was a founder and Chief Executive Officer of Intrinsa Corporation, a supplier
of productivity solutions for software development organizations from 19951994 to
1998. Mr. Schuh served as Vice President of Sales at
Clarify, Inc., a customer relationship software maker, from 1994 to 1995. Mr.
Schuh is currently the Chairman of the Board of Intrinsa Corporation, and a
member ofserves on the board of directors of several private companies.
Mr. Schuh holds a B.S.E.E. from the University of Maryland.
ClassifiedMARC B. RANDOLPH has served as our Vice President of New Markets since
December 2001, as our Executive Producer since from October 1998 to November
2001, as our President and Chief Executive Officer from August 1997 to
September 1998 and as a member of our board of directors from inception to
February 2002. From October 1996 to August 1997, Mr. Randolph served as Vice
President of Marketing for IntegrityQA, a maker of software development tools,
and its successor, Pure Atria Software. Mr. Randolph holds a B.A. from Hamilton
College.
NEIL HUNT has served as our Vice President of Internet Engineering since
January 1999. From August 1997 to January 1999, Mr. Hunt served as a Director
of Engineering of Rational Software Corporation, and from April 1992 to August
1997, in various engineering roles for its predecessor, Pure Atria Software.
Mr. Hunt holds a Ph.D. from the University of Aberdeen, U.K and a B.S. from the
University of Durham, U.K.
J. MITCHELL LOWE has served as our Vice President of Business Development
since February 1998 and was a consultant to Netflix from October 1997 to
February 1998. Mr. Lowe is a founder of and served as Chief Executive Officer
and director of Interaction, Inc., a video rental chain, from January 1984 to
June 2000. Mr. Lowe served on the Board of Directors of the Video Software
Dealers Association from 1991 to 1998 and as its Chairman of the Board from
1996 to 1997.
PATRICIA J. MCCORD has served as our Vice President of Human Resources
since November 1998. From January 1998 to November 1998, Ms. McCord was a
principal of Patty McCord Consulting, consulting various startup businesses.
From June 1994 to July 1997, Ms. McCord served as Director of Human Resources
at Rational Software Corporation and Pure Atria Software.
41
MICHAEL OSIER has served as our Vice President of IT Operations since
March 2000. From July 1997 to March 2000, Mr. Osier served as Director of
Enterprise Operations for Quantum Corporation, a supplier of tape drives. From
March 1995 to July 1997 Mr. Osier served as Senior Manager for Conner
Peripherals, a storage company and Seagate Technologies.
TED SARANDOS has served as our Vice President of Content Acquisitions
since March 2000. From May 1999 to March 2000, Mr. Sarandos served as Vice
President of Product and Merchandising at Video City, a video rental company.
From 1993 to May 1999, Mr. Sarandos served as Western Regional Director of
Sales and Operations for ETD, a video rental company.
DAVID HYMAN has served as our general counsel since February 2002. From
August 1999 to February 2002, Mr. Hyman served as General Counsel and Senior
Corporate Counsel for Webvan Group, Inc., an Internet retailer. From November
1995 to August 1999, Mr. Hyman served as an associate at Morrison & Foerster
LLP, a law firm. Mr. Hyman holds a J.D. from the University of Virginia School
of Law and a B.A. from the University of Virginia.
CLASSIFIED BOARD OF DIRECTORS
Our certificate of incorporation provideswill provide for a classified board of
directors consisting of three classes of directors, each serving staggered
three-yearthree year terms. As a result, a portion of our board of directors will be
elected each year. To implement the classified structure, prior to the
consummation of the offering, twoone of the nominees to the board will be elected
to one-year terms,a one year term, two will be elected to two-yeartwo year terms and two will be
elected to three-year terms. Thereafter, directors will be elected for three-three
year terms. Messrs. Randolph and Master and haveMr. Pisano has been designated a Class I directorsdirector whose term
expires at the 20012003 annual meeting of stockholders. Messrs. Schuh and Haley
have been designated Class II directors whose term expires at the 20022004 annual
meeting of stockholders. Messrs. Hastings and Hoag have been designated Class
III directors whose term expires at the 20032005 annual meeting of stockholders.
For more information on the classified board, see the
section entitled "Description of Capital Stock--Delaware Antitakeover Law and
Certain Charter and Bylaw Provisions."
ExecutiveOur executive officers are appointed by the board of directors on an
annual basis and serve until their successors have been duly elected and
qualified. There are no family relationships among any of our directors officers or
key
employees.
49
Board Committeesexecutive officers.
BOARD COMMITTEES
We established an audit committee and compensation committee in March
2000.
Our audit committee consists of Messrs. Hoag, MasterHaley, Pisano and Schuh. The
audit committee reviews theour internal accounting procedures of NetFlix and consults with
and reviews the services provided by our independent accountants.
Our compensation committee consists of Messrs. Haley and Hoag. The
compensation committee reviews and recommends to the board of directors the
compensation and benefits of employeesour employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of NetFlix.
Compensation Committee Interlocks and Insider Participation
Prior to establishing the compensation committee, theour board of directors as
a whole performed the functions delegated to the compensation committee. No
member of the board of directors or the compensation committee serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of our board of
directors or compensation committee.
Director Compensation
DirectorsDIRECTOR COMPENSATION
In September 2001, we granted A. Robert Pisano an option to purchase
100,000 shares of our common stock. In June 2000, we granted Mr. Pisano an
option to purchase 100,000 shares of our common stock. This option was repriced
in September 2001. These options now have an exercise price of $1.00 per share
and expire ten years after the date of grant. We do not currently receive any cash or equity compensation from ushave a plan
to compensate our directors for their service as members of the board of
directors.
Executive Compensation42
EXECUTIVE COMPENSATION
The table below summarizes the compensation earned for services rendered
to NetFlixNetflix in all capacities for each of the fiscal yearyears in the three-year period
ended December 31, 19992001 by our Chief Executive Officer and our four next most highly compensated executive
officers who earned more than $100,000 during the fiscal year ended December
31, 1999 and for one individual who would have been one of the most highly
compensated but for the fact that such individual was not serving as an
executive officer as of December 31, 1999.in 2001. These executives are referred to as the Named Executive Officersnamed executive
officers elsewhere in this prospectus.
Summary Compensation TableSUMMARY COMPENSATION TABLE
Annual Long-Term Compensation
Compensation Awards
---------------- -----------------------
Securities
Underlying All Other
Name and Principal Positions Year Salary Bonus Options Compensation
-LONG-TERM
COMPENSATION
AWARDS
------------
SECURITIES ALL
UNDERLYING OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY OPTIONS COMPENSATION
---------------------------- ---- -------- ------- ---------------------- ------------
Reed Hastings.................... 1999Hastings(1)............................................. 2001 $ 12,69813,800 1,500,000 $ -- -- $ 252
Chief Executive Officer, President, Chairman of the Board Neil Hunt........................2000 13,800 -- --
1999 131,32115,510 -- 210,000 252--
W. Barry McCarthy, Jr........................................ 2001 200,000 305,000 3,501(2)
Chief Financial Officer 2000 196,538 -- 64,794(3)
1999 131,540 330,000 32,451(4)
Thomas R. Dillon............................................. 2001 200,000 583,000(5) 5,389(6)
Vice President of Internet
Engineering
Omer Malchin.....................Operations 2000 195,962 50,000 774(7)
1999 152,512131,250 330,000 --
-- 50,108(2)
Former Vice Present of
Marketing (1)
W. Barry McCarthy, Jr............ 1999 129,702 -- 330,000 189
Chief Financial Officer
Eric P. Meyer.................... 1999 143,514 -- 25,000 252Leslie J. Kilgore............................................ 2001 190,000 853,000(8) 3,914(9)
Vice President of Database
SystemsMarketing 2000 141,038 350,000 64,168(10)
1999 -- -- --
Marc B. Randolph.................Randolph(11)......................................... 2001 200,000 500,000 2,315(12)
Vice President of New Markets 2000 196,538 -- 180(7)
1999 156,025169,768 -- -- 252
Executive Producer and Director
- --------
(1) Mr. Malchin's employment with NetFlix ended on September 13, 1999.Hastings' annual salary for 2002 has been increased to $200,000.
(2) Includes a $50,000 severance payment paid$3,231 representing our matching contribution made under our
401(k) plan and $270 for taxable amounts attributable to Mr. Malchin.
50McCarthy
under our group term life insurance policy.
(3) Includes $64,524 representing taxable amounts attributable to Mr. McCarthy
for relocation expenses paid by us and $270 for taxable amounts
attributable to Mr. McCarthy under our group term life insurance policy.
(4) Includes amounts attributable to Mr. McCarthy for relocation expenses paid
by us.
(5) Includes 105,000 shares underlying options that were repriced in January
2001 and 155,000 shares underlying options that were repriced in August
2001. The options repriced in January 2001 were originally granted to Mr.
Dillon in December 1999 and the options repriced in August 2001 include
the options repriced in January 2001 and the options granted to Mr. Dillon
in August 2000.
(6) Includes $4,615 representing our matching contribution made under our
401(k) plan and $774 for taxable amounts attributable to Mr. Dillon under
our group term life insurance policy.
(7) Includes taxable amounts attributable to the employee under our group term
life insurance policy.
(8) Includes 300,000 shares underlying options that were repriced in January
2001 and 350,000 shares underlying options that were repriced in August
2001. The options repriced in January 2001 were originally granted to Ms.
Kilgore in March 2000 and the options repriced in August 2001 include the
options repriced in January 2001 and an additional option granted to Ms.
Kilgore in August 2000.
(9) Includes $3,752 representing our matching contribution made under our
401(k) plan and $162 for taxable amounts attributable to Ms. Kilgore under
our group term life insurance policy.
(10) Includes $64,043 representing amounts attributable to Ms. Kilgore for
relocation expenses paid by us and $125 for taxable amounts attributable
to Ms. Kilgore under our group term life insurance policy.
(11) Mr. Randolph is no longer one of our executive officers.
(12) Includes $2,135 representing our matching contribution made under our
401(k) plan and $180 for taxable amounts attributable to Mr. Randolph
under our group term life insurance policy.
43
Option Grants During Last Fiscal YearOPTION GRANTS DURING LAST FISCAL YEAR
The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officersnamed executive officers in the fiscal year ended
December 31, 1999, including the2001. The potential realizable value overis calculated based on the ten-
year
term of the options, based onoption, which is ten years and an assumed initial public offering
price of $ and assumed rates of stock appreciation of 5% and 10%,
compounded annually. These assumed rates of appreciation comply with the rules
of the Securities and Exchange Commission and do not represent our estimate of
future stock price. Actual gains, if any, on stock option exercises will be
dependent on the future performance of our common stock.
In 1999,2001, we granted options to purchase up to an aggregate of 1,900,11610,372,978 shares
to employees, directorsincluding the repricing of options to purchase 1,354,600 shares
in January 2001 and consultants. All options were granted under
our 1997 Stock Plan at exercise prices at or above the fair market value of our
common stock on the date of grant, as determinedto purchase 2,641,386 shares in good faith by the board of
directors.August 2001. All
options have a term of ten years. Optionees may pay the exercise price of their
options by cash, check, promissory note or delivery of already-owned shares of
our common stock. All options are immediately exercisable upon grant; however,
any unvested shares aregrant for
restricted stock which is subject to repurchase by us at their cost in the event of
the optionee's termination of employment for any reason (including death or
disability). All option shares to the extent our right of repurchase has not lapsed. See
"--Employment Agreements and Change in Control Arrangements." Most options vest
over four years, with 25% of the option
sharesoptions vesting on the date one year after the
vesting commencement date, and 1/48th of the remaining option sharesoptions vesting each
month thereafter.
Individual Grants
-----------------------------------------POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
------------------------------------------------ ---------------------
% of Potential
Total Realizable Value
Options at Assumed Annual
Granted Rates of Stock
Number of to Price
Securities Employees Appreciation for
Underlying In Last Exercise Option Term
Options Fiscal Price Expiration -----------------
Name Granted Year per share DateOF TOTAL
OPTIONS
NUMBER OF GRANTED TO
SECURITIES EMPLOYEES EXERCISE
UNDERLYING IN LAST PRICE EXPIRATION
NAME OPTIONS GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
- ---- ---------- ------------------------ ----------- --------- ---------- -------- --------
Reed Hastings........... -- -- %Hastings................ 1,500,000 14.5% $1.00 07/18/11 $ -- -- $ -- $ --
Neil Hunt............... 210,000 11.1 0.11 01/25/09 38,046 62,533
Omer Malchin............ -- -- -- -- -- --
W. Barry McCarthy, Jr... 330,000 17.4Jr........ 305,000(1) 3.0 1.00 04/14/09 477,633 785,042
Eric P. Meyer........... 25,000 1.3 0.11 01/29/09 4,529 7,44407/18/11
Thomas R. Dillon............. 583,000(2) 5.6 1.00 07/18/11
Leslie J. Kilgore............ 853,000(3) 8.2 1.00 07/18/11
Marc B. Randolph........ -- -- -- -- -- --Randolph............. 500,000 4.8 1.00 07/18/11
51- --------
(1) Mr. McCarthy disclaims beneficial ownership of 23,400 shares of common
stock underlying these options. See "Principal Stockholders."
(2) Includes 105,000 shares underlying options that were repriced in January
2001 and 155,000 shares underlying options that were repriced in August
2001. The options repriced in January 2001 were originally granted to Mr.
Dillon in December 1999 and the options repriced in August 2001 include the
options repriced in January 2001 and the options granted to Mr. Dillon in
August 2000.
(3) Includes 300,000 shares underlying options that were repriced in January
2001 and 350,000 shares underlying options that were repriced in August
2001. The options repriced in January 2001 were originally granted to Ms.
Kilgore in March 2000 and the options repriced in August 2001 include the
options repriced in January 2001 and an additional option granted to Ms.
Kilgore in August 2000.
44
Aggregate Option Exercises During the Last Fiscal Year and Fiscal Year-End
Option ValuesAGGREGATE OPTION EXERCISES DURING THE LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
The following table sets forth information with respect to the Named
Executive Officersnamed
executive officers concerning option exercises for the fiscal year ended December 31,
1999,2001, and exercisable and unexercisable options held as of December 31, 1999.2001.
The "Value of Unexercised In-the-Money Options at December 31, 1999"2001" is
based on a valuean assumed initial public offering price of $2.00$ per share, the fair market value of our common stock
as of December 31, 1999, as determined by the board of directors, less
the per share exercise price of the option multiplied by the number of shares
issued upon exercise of the option.
All options were granted under our 1997 Stock Plan. All options are
immediately exercisable; however, as a condition of exercise, the optionee must
enter into a stock restriction agreement granting us the right to repurchase
the unvested shares issuable by such exercise at their cost in the event of the
optionee's termination of employment. The shares vest over four years, with 25%
of the shares vesting on the first anniversary of the date of grant and the
remaining shares vesting ratably each month thereafter.
Number of Securities Value of Unexercised In-
Shares Underlying Unexercised the-Money Options at
Acquired Options at DecemberNUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31, 1999 December2001 DECEMBER 31, 1999
on Value ---------------------------------2001
- - ON VALUE ------------------------ -------------------------
Name Exercise Realized Unexercisable Exercisable Unexercisable ExercisableNAME EXERCISE REALIZED UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE
- ---- --------- -------- ------------------------ ------------- ----------- ------------- -----------
Reed Hastings........... 1,550,000Hastings................ -- $ -- -- 1,500,000 $ -- $
W. Barry McCarthy, Jr........ 30,000 -- $--
Neil Hunt............... 210,000-- 585,000(1) --
Thomas R. Dillon............. -- -- -- 703,000 --
--
Omer Malchin............ 106,250(1)Leslie J. Kilgore............ -- -- -- 553,000 --
--
W. Barry McCarthy, Jr... -- -- 330,000 -- 330,000 --
Eric P. Meyer........... 325,000 18,000Marc B. Randolph............. -- -- -- --
Marc B. Randolph........ -- -- -- -- --500,000 --
- --------
(1) Does not include 318,750Mr. McCarthy disclaims beneficial ownership of 127,992 shares of common
stock acquired on exercise by Mr.
Malchin and repurchased by us at cost upon Mr. Malchin's termination.
Compensation Plans
Amended and Restatedunderlying these options. See "Principal Stockholders."
COMPENSATION PLANS
1997 STOCK PLAN
Our 1997 Stock Plan Ourwas adopted by our board of directors and approved by
our stockholders in 1997 and was last amended and restated in October 2001. Our
1997 Stock Plan providesprovided for the grant of incentive stock options, within the
meaning of Section 422 of the Internal Revenue Code, to our employees, including our officers and employee directors, and for
the grant of nonstatutory stock options and stock purchase rights to our
employees, directors and consultants. ThisThe number of shares reserved under our
1997 Stock Plan was adopted by
our boardwill be reduced at the effective time of directorsthis offering in 1997 and was amended and restated in March 2000.
A totalan
amount equal to the number of 6,952,250 shares of our common stock have beenthen reserved for issuance, under our amended and restatedbut not yet
granted. Shares returned to the 1997 Stock Plan. In addition, annual
increasesPlan after this offering will be
added beginning in January 2001, equal toavailable for issuance at the lesserdiscretion of
1,550,000 shares, 5% of our then outstanding shares, or an amount determined by our board of directors. As of
April 13, 2000, options were exercised to
purchase 3,521,174February 28, 2002, we had reserved a total of 11,198,864 shares of currently outstandingour common
stock for issuance pursuant to outstanding and unexercised options and an
additional 1,331,456 shares available for future option grants.
Our 1997 Stock Plan provides that in the event of a merger or sale of
substantially all of the assets, the successor corporation will assume or
substitute each option or stock purchase right. If the outstanding options or
stock purchase rights are not assumed or substituted, the administrator will
provide notice to the optionee that he or she has the right to exercise the
option or stock purchase 2,543,097right as to all of the shares subject to the option or
stock purchase right, including shares which would not otherwise be
exercisable, for a period of 15 days from the date of the notice. The option or
stock purchase right will terminate upon the expiration of the 15-day period.
In addition, if, within 12 months of a merger or sale of assets, a holder of an
option under our 1997 Stock Plan is terminated involuntarily other than for
cause, the vesting schedule for such holder's option will accelerate with
respect to an amount of shares equal to the number of shares that would
otherwise vest within 12 months after the date of the termination of such
holder.
2002 STOCK PLAN
Our board of directors adopted the 2002 Stock Plan in February 2002 and
our stockholders approved the 2002 Stock Plan in 2002. The 2002 Stock Plan
provides for the grant of incentive stock options, within the meaning of
Section 422 of the Internal Revenue Code, to our employees, and for the grant
of nonstatutory stock options and stock purchase rights to our employees,
directors and consultants.
45
NUMBER OF SHARES OF COMMON STOCK AVAILABLE UNDER THE 2002 STOCK PLAN. We
have reserved 2,000,000 shares of our common stock for issuance pursuant to the
2002 Stock Plan, in addition to the number of shares which have been reserved
but not issued under our 1997 Stock Plan as of the effective date of this
offering. In addition, our 2002 Stock Plan provides for annual increases in the
number of shares available for issuance under our 2002 Stock Plan on the first
day of each fiscal year, beginning with our fiscal year 2003, equal to the
lesser of 5% of the outstanding shares of common stock were outstandingon the first day of the
applicable fiscal year, 3,000,000 shares, and 887,979 shares
were available for future grant.
Administration.another amount as our board of
directors may determine.
ADMINISTRATION OF THE 2002 STOCK PLAN. Our board of directors or, a committeewith
respect to different groups of optionees, different committees appointed by our
board, of
directors administerswill administer the amended and restated 19972002 Stock Plan. In the case of options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Internal Revenue Code, the committee will consist of two or more
"outside directors" within the meaning of Section 162(m). The administrator has
the power to determine among other things:
. the terms of the options orand stock purchase rights
granted, not inconsistent with the terms of the 2002 Stock Plan, including the
exercise price (which may be reduced by the administrator after the date of
the option or stock purchase right;
52
.grant), the number of shares subject to each option or stock purchase right;
.right,
the exercisability of each option orthe options and stock purchase right;rights and
. the form of
consideration payable upon the exercise of each option or
stock purchase right.
Options.exercise.
OPTIONS. The administrator determineswill determine the exercise price of options
granted under the amended and restated 19972002 Stock Plan, but with respect to all incentive stock
options and nonstatutory stock options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Internal Revenue Code, the exercise price must at least equal the fair market
value of our common stock on the date of grant. The term of an incentive stock
option may not exceed ten years, except that with respect to any participant
who owns 10% of the voting power of all classes of our outstanding capital
stock, the term mustmay not exceed five years and the exercise price must equal at
least 110% of the fair market value on the grant date. The administrator
determines the term of all other options.
No optionee may be granted an option to purchase more than 1,500,000
shares in any fiscal year. In connection with his or her initial service as an
employee, an optionee may be granted an additional option to purchase up to an additional
500,000 shares.
After termination of employment, a participant may exercise his or her
option for the period of time stated in the option agreement. Generally, if
termination is due to death or disability, the option will remain exercisable
for 12 months. In all other cases, the option will generally remain exercisable
for 3three months. However, an option may never be exercised later than the
expiration of its term.
STOCK PURCHASE RIGHTS. Stock Purchase Rights.purchase rights, which represent the right
to purchase our common stock, may be issued under our 2002 Stock Plan. The
administrator determineswill determine the exercisepurchase price of stock purchase rights
granted under our amended and restated 19972002 Stock Plan. Unless the administrator determines
otherwise, thea restricted stock purchase agreement will grant us a repurchase
option that we may exercise upon the voluntary or involuntary termination of
the purchaser's service with us for any reason, (includingincluding death or disability).disability.
The purchase price for shares we repurchase will generally be the original
price paid by the purchaser and may be paid by cancellation of any indebtedness
of the purchaser to us. The administrator determines the rate at which our
repurchase option will lapse.
Transferability of Options and Stock Purchase Rights. Our amended and
restated 1997TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Unless otherwise
determined by the administrator, our 2002 Stock Plan generally does not allow
for the transfer of options or stock purchase rights and only the optionee may
exercise an option or stock purchase right during his or her lifetime.
Adjustments upon Merger or Asset Sale.ADJUSTMENTS UPON CHANGE IN CONTROL. Our amended and restated 19972002 Stock Plan provides that in
the event of our merger with or into another corporation
or a sale of substantially all of our assets,change in control, the successor corporation will assume or
substitute an equivalent option or right for each outstanding option or stock purchase right. If there is no assumption or substitution ofthe outstanding options or
stock purchase rights are not assumed or substituted, the administrator will
provide notice to the optionee that he or she has the right to exercise the
option or stock purchase right as to all of the shares subject to the option
46
or stock purchase right, including shares which would not otherwise be
exercisable, for a period of 15 days from the date of the notice. The option or
stock purchase right will terminate upon the expiration of the 15-day period.
In addition, if, within twelve months of a merger or sale of assets, a
holder of an option under our amended and restated 1997 Stock Plan is
terminated involuntarily other than for
53
cause, the vesting schedule for such holder's option will accelerate with
respect to an amount of shares equal to the number of shares that would
otherwise vest over the following twelve months.
Amendment and Termination of the Amended and Restated 1997 Stock Plan.AMENDMENT AND TERMINATION OF THE 2002 STOCK PLAN. Our amended and restated 19972002 Stock Plan
will automatically terminate in April
2010,2012, unless we terminate it sooner. In
addition, our board of directors has the authority to amend, suspend or
terminate the amended and restated 19972002 Stock Plan provided it does not adversely affectimpair the rights of any
previously granted option
oroptionee.
2002 EMPLOYEE STOCK PURCHASE PLAN
Concurrently with this offering, we intend to implement an employee stock
purchase right or any previously issued sharesplan. Our board of common stock.
2000directors adopted the 2002 Employee Stock Purchase
Plan Our 2000in February 2002 and our stockholders approved our 2002 Employee Stock
Purchase Plan was adopted by our board of directors
in April 2000.2002.
NUMBER OF SHARES OF COMMON STOCK AVAILABLE UNDER THE 2002 EMPLOYEE STOCK
PURCHASE PLAN. A total of 550,0001,750,000 shares of our common stock have been reservedwill be made
available for sale under the 2002 Employee Stock Purchase Plan. In addition,
the plan provides for annual increases in the number of shares available for
issuance plus annual increasesunder the 2002 Employee Stock Purchase Plan on the first day of each
fiscal year, beginning in January 2001with our fiscal year 2003, equal to the lesser of 350,000 shares, 1%of:
. 2% of the outstanding shares of our common stock on the first day of
the applicable fiscal year;
. 1,000,000 shares; and
. such date,other amount as our board may determine.
ADMINISTRATION OF THE 2002 EMPLOYEE STOCK PURCHASE PLAN. Our board of
directors or an
amount determineda committee established by our board of directors. As ofwill administer the date of this prospectus,
no shares have been issued under our 2000 Employee Stock Purchase Plan.
Structure of the 20002002
Employee Stock Purchase Plan. Our 2000board of directors or its committee has full
and exclusive authority to interpret the terms of the plan and determine
eligibility.
ELIGIBILITY TO PARTICIPATE. Our employees and employees of future
designated subsidiaries are eligible to participate in the 2002 Employee Stock
Purchase Plan is intended to qualify under Section 423 of the Internal Revenue
Code and contains consecutive, overlapping 24-month offering periods. Each
offering period includes four 6-month purchase periods. The offering periods
generally start on the first trading day on or after April 15 and October 15 of
each year and terminate on the first trading day on or after the April 15 or
October 15 offering period commencement date 24 months later, except for the
first such offering period which will commence on the first trading day on or
after the effective date of this offering and will end on the first trading day
on or after October 15, 2002.
Eligibility. All of our employees are eligible to participate if they are customarily employed by us or any participating subsidiary for at least 20 hours per week
and more than five months in any calendar year. However, an employee may not be
granted an option to purchase stock under the 20002002 Employee Stock Purchase Plan
if such employee:if:
. the employee immediately after grant owns stock possessing 5% or more
of the total combined voting power or value of all classes of our
capital stock, or
. hasthe employee's rights to purchase stock under all of our employee
stock purchase plans accruingaccrues at a rate that exceeds $25,000 worth of
stock for each calendar year.
Purchases.OFFERING PERIODS AND CONTRIBUTIONS. Our 20002002 Employee Stock Purchase
Plan is intended to qualify under Section 423 of the Internal Revenue Code and
contains consecutive, overlapping 24-month offering periods. Each offering
period includes four six-month purchase periods. The offering periods generally
start on the first trading day on or after May 1 and November 1 of each year,
except for the first such offering period which will commence on the first
trading day on or after the effective date of this offering and most likely
will end on the first trading day on or after May 1, 2004 and the second
offering period which will commence on November 1, 2002. All eligible employees
automatically will be enrolled in the first offering period, but payroll
deductions and continued participation in the first offering period will not be
determined until after the effective date of the Form S-8 registration
statement which is intended to register the shares reserved for issuance under
the plan. The plan permits participants to purchase common stock through
payroll deductions of up to 15% of their eligible compensation which generally
includes a participant's base straight time gross earnings
andsalary, commissions, but excludes overtime pay, shift premium,
incentive compensation, incentive payments and bonuses, andbut excludes all other
compensation. A participant may purchase a maximum of 1,30012,500 shares during a
6-monthsix-month purchase period.
PURCHASE OF SHARES. Amounts deducted and accumulated by the participant
are used to purchase shares of our common stock at the end of each six-month
purchase period. The purchase price is 85% of the lower of the fair
47
market value of our common stock either:
. at the beginning of an offering period or . at
the end of a purchase period, whichever is lower.
54
period. If the fair market value at the end of a purchase
period is less than the fair market value at the beginning of the offering
period, participants will be withdrawn from the current offering period
following their purchase of shares on the purchase date and automatically will
be automatically re-enrolled in the immediately
followinga new offering period. Participants may end their
participation at any time during an offering period, and will be paid their
payroll deductions to date. Participation ends automatically upon termination
of employment with us.
Transferability of Rights.TRANSFERABILITY OF RIGHTS. A participant may not transfer rights granted
under our 2000the 2002 Employee Stock Purchase Plan other than by will, the laws of
descent and distribution or as otherwise provided under the 2000 Employee Stock
Purchase Plan.
Merger or Asset Sale.plan.
ADJUSTMENTS UPON CHANGE IN CONTROL. In the event of our merger with or into another
corporation or a sale of all or substantially all of our assets,change in control,
a successor corporation willmay assume or substitute each outstanding option. If
the successor corporation refuses to assume or substitute for the outstanding
options, the offering period then in progress will be shortened, and a new
exercise date will be set, which shall be before the date atof the proposed
sale or merger andchange in control. In such event, the participant's
options shall be exercised automatically onadministrator will provide notice of the
new exercise date to each optionee at least ten business days before the new
exercise date.
Amendment and Termination of our 2000 Employee Stock Purchase Plan. Our
board of directorsAMENDMENT AND TERMINATION OF THE 2002 EMPLOYEE STOCK PURCHASE PLAN. The
administrator has the authority to amend or terminate our 2000plan, except that,
subject to certain exceptions described in the 2002 Employee Stock Purchase
Plan, except that no such action may adversely affect any outstanding rights to purchase
stock under our 2000 Employee Stock Purchase
Plan.
401(k) Retirement Planthe plan.
401(K) RETIREMENT PLAN
On January 1, 1998, we adopted the NetFlixNetflix 401(k) Retirement Plan which
covers all of our eligible employees who have attained the age ofare at least 21 years old and have
completed one month of service with us. The 401(k) Plan currently excludes from
participation employees of affiliated employers, collectively bargained
employees under a collective
bargaining agreement and nonresident alien employees. The 401(k) Plan is
intended to qualify under Sections 401(a), 401(m) and 401(k) of the Internal
Revenue Code and the 401(k) Plan trust is intended to qualify under Section
501(a) of the Internal Revenue Code. All contributions to the 401(k) Plan by
eligible employees, and the investment earnings thereon, are not taxable to
such employees until withdrawn and are 100% vested immediately. Our eligible
employees may elect to reduce their current compensation up to the maximum
statutorily prescribed annual limit and to have such salary reductions
contributed on their behalf to the 401(k) Plan.
Employment Agreements and Change in Control ArrangementsEMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
In October 1997, Reed Hastings purchased 500,000 shares of our common stock
under a founder's restricted stock purchase agreement. This agreement contains
vesting provisions that give us the option to repurchase unvested shares at the
original purchase price if Mr. Hastings' service with us is terminated. Each
month, 1/48 of the total shares purchased by Mr. Hastings becomes vested. All
of Mr. Hastings' shares will be fully vested on October 20, 2001, subject to
Mr. Hastings continuing to be our employee through that date. Under an
amendment to this agreement entered into in June 1998, upon a change ofin control,
of NetFlix, 50% of his shares that have not yet vested will vest and will no
longer be subject to repurchase by us. In addition, if Mr. Hastings' employment
with the surviving corporation is terminated without cause within twelve months
following the change of control, then all of his shares that have not yet
vested will vest and will no longer be subject to repurchase.
In October 1997, Marc B. Randolph purchased 2,700,000 shares of our common
stock under a founder's restricted stock purchase agreement. This agreement
contains vesting
55
provisions that give us the option to repurchase unvested shares at the
original purchase price if Mr. Randolph's service to us is terminated. Under an
amendment to this agreement entered into in June 1998, upon a change of control
of NetFlix, 50% of his shares that have not yet vested will vest and will no
longer be subject to repurchase by us. In addition, if Mr. Randolph's
employment with the surviving corporation is terminated without cause within
twelve months following the change of control, then all of his shares that have
not yet vested will vest and will no longer be subject to repurchase. Under an
agreement entered into in October 1998, in connection with his resignation as
our chief executive officer, Mr. Randolph returned 650,000 of his unvested
shares to us. Immediately following this contribution, Mr. Randolph held
675,000 vested and 1,375,000 unvested shares of common stock of NetFlix. Each
month, 1/36 of the unvested shares held by Mr. Randolph following this
contribution of shares to the company becomes vested. All of Mr. Randolph's
shares will be fully vested on October 8, 2001, subject to Mr. Randolph
continuing to be our employee through that date.
In April 1999, our board of directors awarded W. Barry McCarthy, Jr. an
option to purchase 330,000 shares of our common stock under a stock option
agreement. One-quarter of the shares underlying Mr. McCarthy's options will
vest in April 2000, and 1/48 of the total shares will vest each month
thereafter. Pursuant to an offer letter from us to Mr. McCarthy, upon a change
of control of NetFlix, the vesting schedule will accelerate with respect to an
amount of shares equal to the number of shares that would otherwise vest over
the following twelve months or 50% of the unvested options, whichever is
greater. All of the shares underlying Mr. McCarthy's option will be fully
vested on April 14, 2003, subject to Mr. McCarthy continuing to be our employee
through that date.
In a merger or a sale of substantially all of our assets, if the options under our amended and restated
1997 Stock Plan are not assumed or substituted for, each outstanding option
will fully vest fully and become immediately exercisable. In addition, if, within twelve12
months of a merger or sale of
assets,change in control, a holder of an option under our amended and
restated 1997 Stock Plan is terminated involuntarily other than for cause, the
vesting schedule for such holder's option will accelerate with respect to an
amount of shares equal to the number of shares that would otherwise vest over
the following twelve12 months.
LimitationsIn April 1999, our board of directors awarded W. Barry McCarthy, Jr. an
option to purchase 330,000 shares of our common stock under a stock option
agreement. One-quarter of the shares underlying Mr. McCarthy's option vested in
April 2000 and 1/48 of the total shares vest each month thereafter. Pursuant to
an offer letter from us to Mr. McCarthy, upon a change of control of Netflix,
the vesting schedule will accelerate with respect to an amount of shares equal
to the number of shares that would otherwise vest over the following 12 months
or 50% of the unvested options, whichever is greater. All of the shares
underlying this option will be fully vested on Directors' LiabilityApril 14, 2003, subject to Mr.
McCarthy continuing to be our employee through that date.
In March 1999, our board of directors awarded Tom Dillon an option to
purchase 225,000 shares of our common stock under a stock option agreement.
One-quarter of the shares underlying Mr. Dillon's option vested
48
in March 2000 and Indemnification1/48th of the total shares vest each month thereafter.
Pursuant to an offer letter from us to Mr. Dillon, if, upon a change of control
of Netflix, Mr. Dillon is terminated, the vesting schedule will accelerate with
respect to an amount of shares equal to the number of shares that would
otherwise vest over the following 12 months. In the event that Mr. Dillon's
employment is terminated by us not for cause, Mr. Dillon will be entitled to
severance of three months continued salary and benefits. In addition, Mr.
Dillon is entitled to an annual bonus targeted at $15,000 based on our
performance.
In March 2000, our board of directors awarded Leslie Kilgore an option to
purchase 300,000 shares of our common stock under a stock option agreement.
One-quarter of the shares underlying Ms. Kilgore's option were to vest in March
2001 and 1/48 of the total shares each month thereafter. In January 2001,
Ms. Kilgore's options were repriced and the terms adjusted such that
one-quarter of the shares underlying Ms. Kilgore's option vested in December
2000 and 1/48 of the total shares vest each month thereafter. Pursuant to an
offer letter from us to Ms. Kilgore, if, upon a change of control of Netflix,
Ms. Kilgore is involuntarily terminated or her role within the subsequent
company is substantially and materially altered without her consent, the
vesting schedule will accelerate with respect to an amount of shares equal to
the number of shares that would otherwise vest over the following 12 months.
All of the shares underlying Ms. Kilgore's option will be fully vested on
December 20, 2004, subject to Ms. Kilgore continuing to be our employee through
that date. In the event that Ms. Kilgore's employment is terminated by us not
for cause, Ms. Kilgore will be entitled to severance of three months continued
salary and benefits.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that our directors
of a corporation will not be
personally liable to us or our stockholders for monetary damages for breach of
their fiduciary duties as directors, except liability for any of the following:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawfulapproval of stock repurchases or redemptions;redemptions
that are prohibited by Delaware law; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws will provide that we shall
indemnify our directors, and executive officers, and may indemnify our other officers and employees and other agents to the fullest
extent permitted by law. We believe that indemnification under our bylaws
56
covers at least negligence and gross negligence on the part of indemnified
parties. Our bylaws also permit us to secure insurance on behalf of any
officer, director, employee or other agent for any liability arising out of his
or her actions in such capacity, regardless of whether the bylawsDelaware law would
permit indemnification.
We will enterhave entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our certificate of
incorporation and bylaws. These agreements, among other things, provide for
indemnification of our directors and executive officers for expenses, judgments, fines,
penalties and settlement amounts incurred by any such person in any action or
proceeding arising out of such person's services as a director or executive officer or at
our request.
We believe that these provisions and agreements are necessary to attract
and retain qualified persons as directors and executive officers. 57There is no
pending litigation or proceeding involving any of our directors, officers,
employees or agents. We are not aware of any pending or threatened litigation
or proceeding that might result in a claim for indemnification by a director,
officer, employee or agent.
49
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Preferred Stock Sales
Series E Non-Voting Preferred Stock.SUBORDINATED PROMISSORY NOTE AND WARRANT FINANCING
In April 2000,July 2001, we sold sharesissued $13.0 million aggregate original principal amount
of Series
E Non-Voting Preferred Stock, at a purchase price of $9.38 per share,subordinated promissory notes and sold warrants to acquire Series E Non-Voting Preferred Stock, at a purchase pricean aggregate of
$0.01 per warrant,20,456,866 shares of common stock to raise capital to finance our operations.
The warrants were sold for $0.001 per underlying share of common stock and have
an exercise price of $14.07$1.00 per share. If we sell shares in this offering
below a certain price, holders of our Series E Non-Voting Preferred Stock will
receive additional shares of our common stock. The following executive officers, 5%
stockholders and certain family members of our executive officers purchased shares and warrantsdirectors
participated in thatthe subordinated promissory note and warrant financing:
Warrants to
Number of Purchase Aggregate
Purchaser Shares Shares ConsiderationPRINCIPAL
AMOUNT OF UNDERLYING AGGREGATE
PURCHASER NOTES WARRANTS CONSIDERATION
- --------- --------- --------------------- ---------- -------------
Entities affiliated with Technology Crossover Ventures................. 4,359,876 435,988 $40,899,996Ventures/(1)/ $8,290,287 13,815,411 $8,304,102
Entities affiliated with Foundation Capital............................ 319,829 31,983 3,000,316Capital................ 2,772,388 4,620,067 2,777,008
Entities affiliated with Institutional Venture Partners..... 319,829 31,983 3,000,316
Europ@web B.V. ..................... 319,829 31,983 3,000,316
MurielPartners.... 1,670,667 1,670,666 1,672,337
W. Barry McCarthy, Jr...................................... 30,000 30,000 30,030
Randolph .................... 5,330 533 50,001
Randolph Randolph................... 5,330 533 50,001Randolph.......................................... 2,500 2,842 2,503
Europ@web B.V. is a holder of more than 5% of our stock. Samir P. Master,
one of our directors, is a Senior Partner of Europ@web B.V. Entities affiliated
with- --------
(1)Consists of: (i) TCV II, VOF; (ii) Technology Crossover Ventures II, C.V.;
(iii) TCV II Strategic Partners, L.P.; (iv) TCV II (Q), L.P.; (v) Technology
Crossover Ventures II, L.P.; (vi) TCV IV, L.P.; (vii) TCV IV Strategic
Partners, L.P.; and (viii) TCV Franchise Fund, L.P. These entities hold more
than 5% of our stock in the aggregate. Jay C. Hoag, one of our directors, is
a General Partnerthe managing member of Technology Crossover Ventures.Management II, LLC, Technology
Crossover Management IV, LLC and TCVF Management, LLC. Technology Crossover
VentureTechnology Crossover Management IV, LLC is the sole general partner
of Technology Crossover Ventures II, L.P., TCV II (Q), L.P. and TCV II
Strategic Partners, L.P. and the investment general partner of TCV II, VOF
and Technology Crossover Ventures II, C.V. Technology Crossover Management
IV, LLC is the general partner of CV IV, L.P. and TCV IV Strategic Partners,
L.P. TCVF Management, LLC is the general partner of TCV Franchise Fund, L.P.
Entities affiliated with Foundation Capital hold more than 5% of our
stock in the aggregate. Michael N. Schuh, one of our directors, is a member of
the limited liability companies that serve as the investment advisers for
certain funds affiliated with Foundation Capital Management II.Capital. Entities and persons
affiliated with Institutional Venture Partners hold more than 5% of our stock
in the aggregate. Timothy M. Haley, one of our directors, is a Managing
Director of the limited liability company that serves as the investment adviser
for certain funds related to Institutional Venture Partners. Muriel Randolph is the mother, and Randolph Randolph
is the brother of Marc B. Randolph, a former director and our Vice President of
New Markets.
PREFERRED STOCK SALES
SERIES E PREFERRED STOCK. In April 2000, we sold 5,332,689 shares of
Series E Preferred Stock, at a purchase price of $9.38 per share, and sold
warrants to acquire Series E Preferred Stock, at a purchase price of $0.01 per
underlying share of Series E Preferred Stock, to raise capital to finance our
operations. The warrants have an exercise price of $14.07 per share. Each share
of Series E Preferred Stock will convert into 2.0441 shares of common stock and
each warrant to purchase shares of Series E Preferred Stock will represent a
warrant to purchase such number of shares of common stock multiplied by 2.0441
upon completion of this offering. The following 5% stockholders and certain
family members of our executive officers and directors purchased shares and
warrants in that financing:
SHARES
NUMBER UNDERLYING AGGREGATE
PURCHASER OF SHARES WARRANTS CONSIDERATION
- --------- --------- ---------- -------------
Entities affiliated with Technology Crossover Ventures/(1)/ 4,359,876 435,988 $40,899,997
Entities affiliated with Foundation Capital................ 319,829 31,983 3,000,316
Entities affiliated with Institutional Venture Partners.... 319,829 31,983 3,000,316
Europ@web B.V.............................................. 319,829 31,983 3,000,316
Muriel Randolph............................................ 5,330 533 50,001
Randolph Randolph.......................................... 5,330 533 50,001
50
- --------
(1)Consists of: (i) TCV II, VOF; (ii) Technology Crossover Ventures II, C.V.;
(iii) TCV II Strategic Partners, L.P.; (iv) TCV II (Q), L.P.; (v) Technology
Crossover Ventures II, L.P.; (vi) TCV IV, L.P.; and (vii) TCV Franchise
Fund, L.P. Of the Executive
Producershares acquired by TCV IV, L.P., 147,690 of NetFlix.such shares
were subsequently transferred to TCV IV Strategic Partners, L.P. by TCV IV,
L.P.
Europ@web B.V. was a holder of more than 5% of our stock. The shares
purchased by Europ@web were transferred to Finanzas B.V., an affiliate of
Europ@web. Muriel Randolph is the mother of Marc B. Randolph. The shares of
Series E Preferred Stock held by Finanzas, B.V. and Muriel Randolph were
converted into shares of Series E-1 Preferred Stock in connection with our
subordinated promissory note and warrant financing. Other than the warrants to
purchase Series E Preferred Stock held by Finanzas, B.V. and Muriel Randolph,
all warrants to purchase shares of Series E Preferred Stock have been
cancelled. Each share of Series E-1 Preferred Stock will convert into one share
of common stock upon completion of this offering.
SERIES D Preferred Stock.PREFERRED STOCK. In June 1999 and October 1999, we sold an
aggregate of 4,649,927 shares of Series D Preferred Stock, at a purchase price
of $6.52 per share, to raise capital to finance our operations. Each share of
Series D Preferred Stock will convert into 1.4209 shares of common stock upon
completion of this offering. The following 5% stockholders purchased shares in
that financing:
Number of Aggregate
Purchaser Shares ConsiderationNUMBER AGGREGATE
PURCHASER OF SHARES CONSIDERATION
- --------- --------- -------------
Europ@web B.V...................................Forum Holding Amsterdam B.V................................ 4,081,118 $26,608,889
Entities affiliated with Technology Crossover Ventures.......................................Ventures/(1)/ 366,735 2,391,112
Entities affiliated with Foundation Capital.....Capital................ 153,374 999,998
- --------
(1)Consists of: (i) TCV II, VOF; (ii) Technology Crossover Ventures II, C.V.;
(iii) TCV II Strategic Partners, L.P.; (iv) TCV II (Q), L.P.; and (v)
Technology Crossover Ventures II, L.P.
The shares of Series D Preferred Stock acquired by Forum Holding
Amsterdam B.V. have been transferred to Finanzas, B.V.
SERIES C Preferred Stock.PREFERRED STOCK. In February 1999 and June 1999, we sold an
aggregate of 4,650,269 shares of Series C Preferred Stock, at a purchase price
of $3.27 per share, to raise capital to finance our operations. Each share of
Series C Preferred Stock will convert into 1.3207 shares of common stock upon
completion of this offering. The following officers, 5% stockholders, directors,
executive officers and certain of their family members purchased shares in that
financing:
Number of Aggregate
Purchaser Shares ConsiderationNUMBER AGGREGATE
PURCHASER OF SHARES CONSIDERATION
- --------- --------- -------------
Entities affiliated with Technology Crossover
Ventures....................................... 1,834,862 $5,999,999Foundation Capital................ 1,834,863 $6,000,002
Entities affiliated with Foundation Capital..... 1,834,863 6,000,002Technology Crossover Ventures/(1)/ 1,834,862 5,999,999
Entities affiliated with Institutional Venture Partners.......................................Partners.... 611,621 2,000,001
Reed Hastings...................................Hastings.............................................. 234,557 767,001
Muriel Randolph.................................Randolph............................................ 22,936 75,001
Hastings 1996 Irrevocable Trust.................Trust............................ 9,174 29,999
Wil Hastings....................................Hastings............................................... 9,174 29,999
Joan Hastings...................................Hastings.............................................. 5,505 18,001
58
Mr.- --------
(1)Consists of: (i) TCV II, VOF; (ii) Technology Crossover Ventures II, C.V.;
(iii) TCV II Strategic Partners, L.P.; (iv) TCV II (Q), L.P.; and (v)
Technology Crossover Ventures II, L.P.
Reed Hastings currently serves as our Chief Executive Officer, President
and chairmanChairman of the board of directors.Board. Wil Hastings is the father and Joan Hastings is the
mother of ReedMr. Hastings. Wil and Joan Hastings are the trustees of the Hastings
1996 Irrevocable Trust.
Series B Preferred Stock. In June 1998, we sold shares of Series B Preferred
Stock, at a purchase price of $1.08 per share, except as described below, to
raise capital to finance our operations. The following officers, 5%
stockholders and their respective family members purchased shares in that
financing:
Number of Aggregate
Purchaser Shares Consideration
--------- --------- -------------
Entities affiliated with Institutional
Venture Partners............................ 3,703,703 $3,999,999.24
Reed Hastings................................ 1,655,092 1,674,999.48(1)
Joan Hastings................................ 46,296 50,000
Muriel Randolph.............................. 23,148 25,000
- --------
(1) 798,611 shares were purchased pursuant to the conversion of a convertible
promissory note at a price of $0.939 per share.
Series A Preferred Stock. In October 1997 and January 1998, we sold shares
of Series A Preferred Stock, at a purchase price of $0.50 per share, to raise
capital to finance our operations. The following officers, 5% stockholders and
their respective family members purchased shares in that financing:
Number of Aggregate
Purchaser Shares Consideration
--------- --------- -------------
Reed Hastings..................................... 3,800,000 $1,900,000
Muriel Randolph................................... 50,000 25,000
Common Stock Sales51
LETTER AGREEMENT WITH CERTAIN STOCKHOLDERS
In connection with our sale of Series C preferred stockPreferred Stock in February 1999,
we entered into a letter agreement with Technology Crossover Ventures,
Institutional Venture Partners and Foundation Capital, and in connection with
our sale of Series D preferred stockPreferred Stock in June 1999, we entered into an amendment
to that letter agreement to add Europ@web as a party. Under this agreement, as
amended, we have agreed to require the managing underwriters in this offering
to offer up to 10% of the shares in this offering to these Series C and Series
D preferred stockholders, subject to compliance with applicable law.
See "Employment AgreementsCOMMON STOCK SALES
Since December 31, 1998, we have issued an aggregate of 2,062,000 shares
of our common stock to our executive officers and Change in Control Agreements."
59directors for an aggregate
consideration of $241,100.
52
PRINCIPAL STOCKHOLDERS
The table on the following pagebelow sets forth information regarding the beneficial ownership
of our common stock as of April 13, 2000,February 28, 2002, by the following individuals or
groups:
. each person or entity who is known by us to own beneficially more
than 5% of our outstanding stockstock;
. each of the Named Executive Officersnamed executive officers;
. each of our directors; and
. all of our directors and executive officers as a group
Unless otherwise indicated,group.
Beneficial ownership is determined in accordance with the address for each stockholder listed inrules of the
following table is c/o NetFlix.com, Inc., 750 University Avenue, Los Gatos, CA
95032.Securities and Exchange Commission and generally includes voting or investment
power with respect to the securities. Except as otherwise indicated, and
subject to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of common
stock held by them. Shares of common stock subject to options or warrants that
are currently exercisable or exercisable within 60 days are deemed to be
outstanding and beneficially owned for the purpose of computing the percentage
ownership of that person but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person. Because all options
granted under our 1997 Stock Plan are exercisable upon grant for restricted
stock, all of the shares of our common stock underlying options held by our
executive officers and directors are deemed to be beneficially owned by such
person. Unless otherwise indicated, the address for each stockholder listed in
the following table is c/o Netflix, Inc., 970 University Avenue, Los Gatos, CA
95032.
Applicable percentage ownership in the following table is based on
31,105,45145,129,402 shares of common stock outstanding as of April 13, 2000, as adjustedFebruary 28, 2002, pro
forma to reflect the conversion of all outstanding shares of preferred stock
into common stock upon the closing of this offering and the issuance of
additional shares to certain studios immediately prior to the closing of this
offering.
To the extent that any shares are issued upon exercise of options,
warrants or other rights to acquire our capital stock that are presently
outstanding or granted in the future or reserved for future issuance under our
stock plans, there will be further dilution to new public investors.
6053
Principal Stockholders Table
Percent of Shares
OutstandingPERCENT OF SHARES
NUMBER OUTSTANDING
OF SHARES -----------------
Number of
Shares
Beneficially Before After
Name and Address Owned Offering Offering
-BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OWNED OFFERING OFFERING
---------------- ------------ -------- --------
EntitiesJay C. Hoag and entities affiliated with Technology Crossover 6,997,461 22.5%
Ventures(1)....................................
575 High... 25,671,830 43.6%
528 Ramona Street Suite 400
Palo Alto, CA 94301
Reed Hastings(2)............................................................ 9,452,794 20.1
Michael N. Schuh and entities affiliated with Foundation Capital(3)......... 7,915,062 15.9
70 Willow Road, Suite 200
Menlo Park, CA 94025
Entities affiliated with Institutional Venture 4,620,840 14.9
Partners(2)....................................Partners(4).................. 6,789,603 14.5
3000 Sand Hill Road
Building 2, Suite 290
Menlo Park, CA 94025
Europ@webTimothy M. Haley(5)......................................................... 6,753,029 14.4
c/o Redpoint Ventures
3000 Sand Hill Road
Building 2, Suite 290
Menlo Park, CA 94025
Finanzas B.V.(3)............................... 4,432,930 14.3(6)............................................................ 6,184,065 13.7
Locatellikade 1
Parnassustoren
1076 AZ Amsterdam
The Netherlands
Entities affiliated with Foundation Capital(4) 2,340,049 7.5
...............................................
70 Willow Road, Suite 200
Menlo Park, CA 94025
Reed Hastings................................... 7,577,572 24.4
Marc B. Randolph(5)............................. 2,042,500 6.6
Omer Malchin.................................... 106,250 *Randolph(7)......................................................... 2,522,000 5.5
Leslie J. Kilgore(8)........................................................ 962,000 2.1
W. Barry McCarthy, Jr.(6)....................... 89,375(9)................................................... 957,000 2.1
Thomas R. Dillon(10)........................................................ 946,000 2.1
A. Robert Pisano(11)........................................................ 200,000 *
Neil Hunt....................................... 210,000 *
Eric P. Meyer................................... 325,000 1.0
Samir P. Master(7).............................. 4,432,930 14.3
Michael N. Schuh(8)............................. 2,340,049 7.5
Jay C. Hoag(9).................................. 6,997,461 22.5
Timothy M. Haley(10)............................ 4,620,840 14.9
All directors and executive officers as a group (14(8 persons) (11).............................. 28,970,519 92.6(12)............. 52,857,715 75.4%
- --------
* Less than 1% of our outstanding shares of common stock.
(1) Consists of 36,689of: (i) 1,550,166 shares held by TCV II, V.O.F., 1,129,410and a warrant to purchase 1,307,371
shares held by Technology Crossover Ventures II, L.P., 868,307; (ii) 211,500 shares
and a warrant to purchase 178,374 shares held by TCV II Strategic
Partners, L.P.; (iii) 236,681 shares and a warrant to purchase 199,610
shares held by Technology Crossover Ventures II, C.V.; (iv) 1,191,790
shares and a warrant to purchase 1,005,125 shares held by TCV II (Q),
L.P., 154,093; (v) 50,357 shares and a warrant to purchase 42,470 shares held by
TCV II, V.O.F.; (vi) 8,096,134 shares and a warrant to purchase 10,413,867
shares held by TCV IV, L.P.; (vii) 301,893 shares and a warrant to
purchase 388,319 shares held by TCV IV Strategic Partners, L.P.; and
(viii) 217,897 shares and a warrant to purchase 280,275 shares held by TCV
Franchise Fund, L.P. Mr. Hoag is the Managing Member of: (a) Technology
Crossover Management II, LLC, the General Partner of TCV II (Q), L.P., TCV
II Strategic Partners, L.P. and 172,439 shares held byTechnology Crossover Ventures II, L.P. and
the Investment General Partner of TCV II, V.O.F. and Technology Crossover
Ventures II, C.V. (the
foregoing five entities, collectively, the "TCV II Funds"); 4,519,265 shares held by TCV IV, L.P. (the "TCV IV Fund") and 117,258
shares held by the TCV Franchise Fund, L.P. (the "Franchise Fund")
(together the TCV II Funds, TCV IV Fund and the Franchise Fund are the
"TCV Funds") which includes an aggregate of 435,988 shares issuable upon
exercise of warrants held by the TCV Funds. Mr. Hoag, one of our
directors, is a Managing Member of(b) Technology Crossover Management II,
L.L.C. which isIV, LLC, the
General Partner of each of the TCV II Funds, a
Managing Member of Technology CrossoverIV, L.P. and TCV IV Strategic Partners, L.P.; and
(c) TCVF Management, IV, L.L.C. which isLLC the General Partner of the TCV IV
61
Franchise Fund, and a Managing Member of TCVF Management, L.L.C. which is the General
Partner of the Franchise Fund.L.P.
Mr. Hoag disclaims beneficial ownership of suchthe shares and warrants held by
the affiliated entities of Technology Crossover Ventures, except to the
extent of his pecuniary interest therein.
(2) Includes 4,482,331options to purchase an aggregate of 1,800,000 shares.
54
(3) Consists of: (i) 2,800,750 shares held by Foundation Capital II, L.P.;
(ii) 329,498 shares held by Foundation Capital II Entrepreneurs Fund, LLC;
(iii) 164,746 shares held by Foundation Capital II Principals, LLC; (iv) a
warrant to purchase 4,500,065 shares held by Foundation Capital Leadership
Fund, L.P.; and (v) a warrant to purchase 120,002 shares held by
Foundation Capital Leadership Principals Fund, LLC. Mr. Schuh is a Member
of (a) Foundation Capital Management Co. II, LLC, the Manager of
Foundation Capital II Entrepreneurs Fund, LLC, the Manager of Foundation
Capital II Principals Fund, LLC and the General Partner of Foundation
Capital II, L.P. and (b) FC Leadership Management Co., LLC, the General
Partner of Foundation Capital Leadership Fund, L.P. and the Manager of
Foundation Capital Leadership Principals Fund, LLC. Mr. Schuh disclaims
beneficial ownership of the shares and 31,391warrants held by the affiliated
entities of Foundation Capital, except to the extent of his pecuniary
interest therein.
(4) Consists of: (i) 5,003,292 shares issuable upon exercise of
warrantsand a warrant to purchase 1,639,759
shares held by Institutional Venture Partners VIII, L.P., 53,494; (ii) 62,614
shares and 592a warrant to purchase 30,907 shares issuable upon exercise of warrants held by IVM Investment Fund
VIII, L.L.C.,LLC; (iii) 36,574 shares held by IVP Founders Fund I, L.P.; and (iv)
16,458 shares held by IVM Investment Fund VIII-A, LLC. Institutional
Venture Management VIII, LLC is the General Partner of Institutional
Venture Partners VIII, L.P. and the Manager of IVM Investment Fund VIII,
LLC and IVM Investment Fund VIII-A, LLC. Institutional Venture Management
VI, L.P. is the General Partner of IVP Founders Fund I, L.P.
(5) Includes the shares and warrants listed in footnote (4) above, except for
the 36,574 shares held by IVP Founders Fund I, L.P. (3) Includes 31,938Mr. Haley is the Managing
Director of Institutional Venture Management VIII, LLC, the General
Partner of Institutional Venture Partners VIII, L.P. and the Manager of
IVM Investment Fund VIII, LLC and IVM Investment Fund VIII-A, LLC. Mr.
Haley disclaims beneficial ownership of the shares issuable upon exercise of warrants.
(4) Includes 1,961,859 shares and 27,186 shares issuable upon exercise of warrants held by
Foundation Capital II, L.P., 230,806 shares and 3,198
shares issuable upon exercisethe affiliated entities of warrants held by Foundation Capital II
Entrepreneurs Fund, L.L.C. and 115,401 shares and 1,599 shares issuable
upon exerciseInstitutional Venture Partners, except to the
extent of warrants held by Foundation Capital II Principals Fund,
L.L.C.
(5)his pecuniary interest therein.
(6) Includes 40,000a warrant to purchase 65,376 shares.
(7) Includes: (i) 65,000 shares held by Mr. Randolph in his capacity as
trustee of the Marc & Lorraine Randolph 2000 Logan B. Randolph Trust, 40,000Trust; (ii)
65,000 shares held by Mr. Randolph in his capacity as trustee of the Marc
& Lorraine Randolph 2000 Morgan B. Randolph Trust, and 40,000Trust; (iii) 65,000 shares
held by Mr. Randolph in his capacity as trustee of the Marc & Lorraine
Randolph 2000 Hunter B. Randolph Trust.Trust; and (iv) options to purchase an
aggregate of 500,000 shares. Mr. Randolph disclaims beneficial ownership
of all suchthe shares of common stock held of record by each of Marc Randolph,
Trustee of the Marc & Lorraine Randolph 2000 Logan B. Randolph Trust, Marc
Randolph, Trustee of the Marc & Lorraine Randolph 2000 Hunter B. Randolph
Trust and Marc Randolph, Trustee of the Marc & Lorraine Randolph 2000
Morgan B. Randolph Trust.
(8) Includes options to purchase an aggregate of 962,000 shares.
(6) Includes 89,375(9) Includes: (i) options to purchase an aggregate of 893,000 shares; (ii) a
warrant to purchase 30,000 shares; and (iii) 20,000 shares issuable upon stock options exercisable within 60
days of April 13, 2000.
(7) Includes 4,400,947 shares and 31,983 shares issuable upon exercise of
warrants held by Europ@web B.V.W.
Barry McCarthy, Jr., Trustee of the Peter Dudley McCarthy Trust--2001 u/i
dtd. December 31, 2001. Mr. Master is a Senior Partner of
Europ@web B.V. HeMcCarthy disclaims beneficial ownership of the
20,000 shares held by
Europ@web B.V., except to the extent of his pecuniary interest in these
shares.
(8) Includes 1,961,859 shares and 27,186 shares issuable upon exercise of
warrants held by Foundation Capital II, L.P., 230,806 shares and 3,198
shares issuable upon exercise of warrants held by Foundation Capital II
Entrepreneur's Fund, LLC and 115,401 shares and 1,599 shares issuable upon
exercise of warrants held by Foundation Capital II Principals Fund LLC.
Mr. Schuh is currently a member of Foundation Capital Management II, which
is the General Partner of Foundation Capital II L.P. and the managing
member of both Foundation Capital II Entrepreneur Fund L.L.C. and
Foundation Capital II Principals Fund L.L.C. He disclaims beneficial
ownershiphe holds as Trustee of the Peter Dudley McCarthy Trust--2001
u/i dtd. December 31, 2001 and 117,992 shares held by the Foundation Capital entities, exceptunderlying options for which
he has agreed to the extent of his pecuniary interest in these shares.
(9) Includes 6,997,461 shares and shares issuable upon exercise of warrants
held by entities affiliated with Technology Crossover Ventures. See note
(3).transfer investment power.
(10) Includes 4,482,331 shares and 31,391 shares issuable upon exerciseoptions to purchase an aggregate of warrants held by Institutional Venture Partners VIII, L.P., 53,494 shares
and 592 shares issuable upon exercise of warrants held by IVM Investment
Fund VIII, L.L.C., 16,458 shares held by IVM Investment Fund VIII-A, LLC
and 36,574 shares held by IVP Founders Fund I, L.P. Mr. Haley is a
Managing Director of Institutional Venture Partners. He disclaims
beneficial ownership of the shares held by the IVP entities, except to the
extent of his pecuniary interest in these946,000 shares.
(11) Includes 184,167options to purchase an aggregate of 200,000 shares.
(12) Includes the shares, issuable upon the exercise of stock options exercisable within 60 days of April 13, 2000.
62and warrants listed in footnotes (1) through
(3), (5) and (8) through (11) above.
55
DESCRIPTION OF CAPITAL STOCK
Authorized and Outstanding Capital StockAUTHORIZED AND OUTSTANDING CAPITAL STOCK
Our preferred stock outstanding prior to this offering will automatically
be converted into common stock upon the closing of this offering according to the
terms of our certificate of incorporation.offering. We will file
an amended certificate of incorporation to be effective upon the closing of
this offering that creates a new class of preferred stock. No shares of the new
preferred stock will be outstanding upon completion of this offering. Upon the
completion of this offering, we will be authorized to issue 200,000,000150,000,000 shares
of common stock, $0.001 par value, and 10,000,000 shares of undesignated
preferred stock, $0.001 par value. The following description of our capital
stock is only a summary and is subject to and qualified in its entirety by our
amended certificate of incorporation and bylaws, which are included as exhibits
to the registration statement of which this prospectus forms a part, and by the
applicable provisions of Delaware law.
Common StockCOMMON STOCK
As of April 13, 2000,February 28, 2002, there were 31,105,45145,129,402 shares of common stock
outstanding which were held of record by approximately 108159 stockholders, as
adjustedpro
forma for conversion of all outstanding shares of convertible preferred stock
upon completion of this offering into an aggregate of 24,758,78838,621,521 shares of
common stock, which will occur upon the closing of this offering.
The holdersHolders of common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stockstockholders are entitled
to receive ratably such dividends, if any, as may be declared from time to time
by the board of directors out of funds legally available for that purpose. See "Dividend Policy." In
the event of a liquidation, dissolution or winding up of us,Netflix, the holders of common
stockstockholders are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred
stock, if any, then outstanding. The holders
of common stockCommon stockholders have no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock.
Preferred StockPREFERRED STOCK
The board of directors has the authority,is authorized, without action by the stockholders,
to designate and issue preferred stock in one or more series and to designate
the rights,powers, preferences and privilegesrights of each series, which may be greater than
the rights of the common stock. It is not possible to state the actual effect
of the issuance of any shares of preferred stock upon the rights of holders of
the common stock until the board of directors determines the specific rights of
the holders of such preferred stock. However, the effects might include, among
other things:
. restricting dividends onimpairing dividend rights of the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; and
. delaying or preventing a change in control of NetFlixus without further
action by the stockholders.
Upon the completion of this offering, no shares of preferred stock will
be outstanding, and we have no present plans to issue any shares of preferred
stock.
63
WarrantsWARRANTS
At April 13, 2000,February 28, 2002, warrants to purchase 92,59221,053,931 shares of our
Series B
Preferred Stock and warrants to purchase 533,003 shares of our Series E Non-
Voting Preferred Stockcommon stock were outstanding. Registration RightsThese warrants generally expire five years from
the date of issue and have an average weighted exercise price of $1.07 per
share.
56
REGISTRATION RIGHTS
Following this offering, the holders of 24,679,206 shares of common stock
and holders of warrants to purchase 533,003 shares of common stock are
entitled to the following rights with respect to registration of such shares
under the Securities Act. These rights are provided under the terms of an
agreement between us and the holders of our registrable securities. Beginning
six months following the date of this prospectus, if holders of at least 50% of
the then outstanding registrable securities request that an amount of
registrable securities having a reasonably anticipated aggregate offering price
to the public, before deduction of underwriter discounts and commissions, of at
least $20,000,000 be registered, we may be required, on up to two occasions, to
register their shares for public resale. Also, holders of registrable
securities may require on four separate occasions, but no more than twotwice
within any twelve month12-month period, that we register their shares for public resale on,
if available, Form S-3 or similar short-form registration if the value of the
securities to be registered is at least $2,000,000. Depending on market
conditions, however, we may defer such registration for up to 90 days.
Furthermore, in the event we elect to register any of our shares of common
stock for purposes of effecting any public offering, the holders of the
registrable securities described above are entitled to include a portion of
their shares of common stock in the registration, but we may reduce the number
of shares proposed to be registered in view of market conditions. We have
obtained waivers of these registration rights with respect to this offering.
All expenses
in connection with any registration, other than underwriting discounts and
commissions, will be borne by us. All registration rights will terminate five
years following the consummation of this offering, or, with respect to each
holder of registrable securities, at such time as the holder is entitled to
sell all of its shares in any three month period under Rule 144 of the
Securities Act.
Delaware Anti-Takeover Law and Certain Charter and Bylaw ProvisionsANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law and our certificate of incorporation
and bylaws could make the following more difficult:
. the acquisition of NetFlixNetflix by means of a tender offer;
. acquisition of NetFlixcontrol of Netflix by means of a proxy contest or
otherwise; and
. the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids. These provisionsbids, and are also
designed to encourage persons seeking to acquire control of us to
first negotiate
with our board of directors. We believe that the benefits of increased
protection of our potential ability to negotiate with the proponent
ofagainst an unfriendly or unsolicited proposal to acquire or
restructure us outweigh the disadvantages of discouraging such proposals, becauseproposals. Among
other things, negotiation of such proposals could result in an improvement of
their terms.
Election and Removal of Directors. Our board of directors is divided into
three classes. The directors in each class will serve for a three-year term,
one class being elected each year by our stockholders. See "Management--
Executive Officers and Directors." This system of electing directors may tend
to discourage a third party from making a tender offer or otherwise attempting
to obtain control of us, because it generally makes it more difficult for
stockholders to replace a majority of the directors.
64
Stockholder Meetings. Under our bylaws, only the board of directors, the
chairman of the board and the president may call special meetings of
stockholders.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board.
Delaware Anti-Takeover Law.DELAWARE ANTI-TAKEOVER LAW. We are subject to Section 203 of the
Delaware General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless the
"business combination" or the transaction in which the person became an
interested stockholder is approved by our board of directors in a prescribed
manner. Generally, a "business combination" includes a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns or, within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an
anti-
takeoveranti-takeover effect with respect to transactions not approved in advance by
the board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
EliminationELECTION AND REMOVAL OF DIRECTORS. Our board of Stockholder Action By Written Consent.directors is divided
into three classes. The directors in each class will serve for a three-year
term, one class being elected each year by our stockholders. Directors may be
removed only for cause and with the approval of the holders of two-thirds of
our outstanding stock. The board of directors has the exclusive right to
increase or decrease the size of the board and to fill vacancies on the
57
board. This system of electing directors may tend to discourage a third party
from making a tender offer or otherwise attempting to obtain control of us,
because it generally makes it more difficult for stockholders to replace a
majority of the directors.
STOCKHOLDER MEETINGS. Under our bylaws, only the board of directors, the
chairman of the board, the chief executive officer and the president may call
special meetings of stockholders.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. Our bylaws contain advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board.
ELIMINATION OF STOCKHOLDER ACTION BY WRITTEN CONSENT. Our certificate of
incorporation eliminates the right of stockholders to act by written consent
without a meeting. EliminationThis provision will make it more difficult for stockholders
to take action opposed by the board of Cumulative Voting.directors
NO CUMULATIVE VOTING. Our certificate of incorporation and bylaws do not
provide for cumulative voting in the election of directors.
Undesignated Preferred Stock.UNDESIGNATED PREFERRED STOCK. The authorization of undesignated
preferred stock makes it possible for the board of directors without
stockholder approval to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to changeobtain control of
NetFlix.us. These and other provisions may have the effect of deferring hostile
takeovers or delaying changes in control or management of NetFlix.
Transfer AgentNetflix.
AMENDMENT OF PROVISIONS IN THE CERTIFICATE OF INCORPORATION. The
certificate of incorporation will generally require the affirmative vote of the
holders of at least two-thirds of the outstanding voting stock in order to
amend any provisions of the certificate of incorporation concerning:
. the required vote to amend the certificate of incorporation;
. management of the business by the board of directors;
. the authority of stockholders to act by written consent;
. calling of a special meeting of stockholders;
. procedure and Registrarcontent of stockholder proposals concerning business to
be conducted at a meeting of stockholders;
. number of directors and structure of the board of directors;
. removal and appointment of directors;
. director nominations by stockholders;
. personal liability of directors to us and our stockholders; and
. indemnification of our directors, officers, employees and agents.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for theour common stock is .
Nasdaq National Market ListingEquiserve Trust
Company, N.A.
NASDAQ NATIONAL MARKET LISTING
We are applyinghave applied for listing on the Nasdaq National Market under the
symbol "NFLX."
6558
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock,
and there can be no assurance that a significant public market for the common
stock will develop or be sustained after this offering. Future sales of
substantial amounts of common stock, including shares issued upon exercise of
outstanding options and warrants, in the public market following this offering
could adversely affect market prices prevailing from time to time and could
impair our ability to raise capital through sale of our equity securities. As
described below, no shares currently outstanding will be available for sale
immediately after this offering because of certain contractual restrictions on
resale. Sales of substantial amounts of our common stock in the public market
after the restrictions lapse could adversely affect the prevailing market price
and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding shares
of common stock based upon shares outstanding as of April 13, 2000,February 28, 2002, assuming
no exercise of the underwriters' over-allotment option and no exercise of
outstanding options or warrants after that date of this offering. Of these
shares, shares together with the shares sold in this offering will be
freely tradable without restriction under the Securities Act, except for any
shares purchased by our "affiliates" as that term is defined in Rule 144 under
the Securities Act. The remaining shares of common stock held by existing
stockholders are "Restricted Shares""restricted shares" as that term is defined in Rule 144.
All% of such Restricted
Sharesrestricted shares are subject to lock-up agreements providing
that, with certain limited exceptions, the stockholder will not offer, sell,
contract to sell or otherwise dispose of any common stock or any securities
that are convertible into common stock for a period of 180 days after the date
of this prospectus without the prior written consent of Deutsche Bank Securities Inc.Merrill Lynch. As a
result of these lock-up agreements, notwithstanding possible earlier
eligibility for sale under the provisions of Rules 144, 144(k) or 701, none of
these shares will be resellable until 181 days after the date of this
prospectus. Beginning 181 days after the date of this prospectus, approximately
25,775,428 Restricted Sharesrestricted shares will be eligible for sale in the public market, all of
which are subject to volume limitations under Rule 144, except 598,760 shares
eligible for sale under Rule 144(k) and 3,521,234 shares eligible for sale under
Rule 701. An additional 5,330,023 Restricted Sharesrestricted shares will be eligible for sale
subject to volume limitations, beginning April 13, 2001.. In addition, as of April 13,
2000,February
28, 2002, there were outstanding 2,543,097 options to purchase 2,543,09712,998,864 shares of
common stock and warrants to purchase 625,59521,053,931 shares of common stock.
All% of the shares of common stock underlying such options and warrants are
subject to lock-up agreements. Deutsche Bank
Securities Inc.Merrill Lynch may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject
to lock-up agreements.
However, any release shall apply pro-rata to all stockholders subject to the
lock-up agreements.
RulesRULES 144 andAND 701
In general, under Rule 144 as currently in effect, beginning 90 days
after the date of this prospectus, a person who has beneficially owned
Restricted Shares for at least one year including the holding period of any
prior owner except an affiliate of NetFlixNetflix would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding which
will equal to approximately shares immediately after this offering;
orand
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to
such sale.
Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have
been our affiliate at any time during the three months preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least 66
two
years including the holding period of any prior owner except an affiliate of
NetFlix,Netflix, is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
59
Rule 701, as currently in effect, permits resales of shares in reliance
upon Rule 144 but without compliance with certain restrictions. Any employee,
officer, director or consultant who purchased shares under a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders of
Rule 701 shares are required to wait until 90 days after the date of this
prospectus before selling such shares. However, in this offering all% of
Rule 701 shares are subject to lock-up agreements and will only become eligible
for sale at the earlier of the expiration of the 180-day lock-up agreements or
no sooner than 90 days after the offering upon obtaining the prior written
consent of Deutsche Bank Securities Inc.
Stock OptionsMerrill Lynch.
STOCK OPTIONS
Following the effectiveness of this offering, we will file a registration
statement on Form S-8 registering 7,502,250 shares of common stock subject to outstanding
options orand reserved for future issuance under our stock plans. As of April 13, 2000,February
28, 2002, options to purchase a total of 2,543,09712,998,864 shares were outstanding and 887,979outstanding. In
addition, a total of 5,081,456 shares were reserved for future issuance under
our amended1997 Stock Plan, 2002 Stock Plan and restated 19972002 Employee Stock Purchase Plan.
Common stock issued upon exercise of outstanding vested options or issued under
our 20002002 Employee Stock Purchase Plan, other than common stock issued to
affiliates are available for immediate resale in the open market.
Registration RightsREGISTRATION RIGHTS
Also beginning six months after the date of this prospectus, holders of
24,679,206 Restricted Sharesrestricted shares and holders of warrants to purchase 533,003 shares of
common stock will be entitled to certain demand registration rights for sale in
the public market. See "Description of Capital Stock--Registration Rights." Registration of such shares under the Securities Act would
result in such shares becoming freely tradable without restriction under the
Securities Act, except for shares purchased by demand affiliates, immediately upon the
effectiveness of such registration.
ADDITIONAL60
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Thomas Weisel
Partners LLC and U.S. Bancorp Piper Jaffray, Inc. are acting as representatives
of each of the underwriters named below. Subject to the terms and conditions
set forth in a purchase agreement among us and the underwriters, we have agreed
to sell to the underwriters, and each of the underwriters has agreed, severally
and not jointly, to purchase from us, the number of shares of common stock set
forth opposite its name below.
NUMBER
UNDERWRITER OF SHARES
----------- ---------
Merrill Lynch Pierce Fenner & Smith
Incorporated.....................................
Thomas Weisel Partners LLC................................
U.S. Bancorp Piper Jaffray, Inc...........................
-------
Total............................................
=======
Subject to the terms and conditions set forth in the purchase agreement,
the underwriters have agreed, severally and not jointly, to purchase all of the
shares sold under the purchase agreement if any of these shares are purchased.
If an underwriter defaults, the purchase agreement provides that the purchase
commitments of the nondefaulting underwriters may be increased or the purchase
agreement may be terminated.
We have agreed to indemnify the underwriters against specified
liabilities, including some liabilities under the Securities Act, or to
contribute to payments the underwriters may be required to make in respect of
those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right
to withdraw, cancel or modify offers to the public and to reject orders in
whole or in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that they propose initially to offer
the shares to the public at the initial public offering price set forth on the
cover page of this prospectus and to dealers at that price less a concession
not in excess of $ per share. The underwriters may allow, and the dealers
may reallow, a discount not in excess of $ per share to other dealers.
After the initial public offering, the public offering price, concession and
discount may be changed.
The following table shows the public offering price, underwriting
discount and proceeds before expenses to us. The information assumes either no
exercise or full exercise by the underwriters of their over-allotment options.
PER WITHOUT WITH
SHARE OPTION OPTION
----- ------- ------
Public offering price............................ $ $ $
Underwriting discount............................ $ $ $
Proceeds, before expenses, to Netflix............ $ $ $
The total expenses of the offering, not including the underwriting
discount, are estimated at approximately $ and are payable by us.
61
OVER-ALLOTMENT OPTION
We have granted an option to the underwriters to purchase up to
additional shares at the public offering price less the underwriting discount.
The underwriters may exercise this option for 30 days from the date of this
prospectus solely to cover any over-allotments. If the underwriters exercise
this option, each will be obligated, subject to conditions contained in the
purchase agreement, to purchase a number of additional shares proportionate to
that underwriter's initial amount reflected in the above table.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to % of the shares offered hereby to be sold to
some of our directors, officers, employees, distributors, dealers, business
associates and related persons. The number of shares of common stock available
for sale to the general public will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares which are not orally
confirmed for purchase within one day of the pricing of this offering will be
offered by the underwriters to the general public on the same terms as the
other shares offered in this prospectus.
In connection with the purchase of our Series C Preferred Stock, we
entered into a letter agreement with Foundation Capital II, L.P., Technology
Crossover Ventures II, L.P. and Institutional Venture Partners VIII, L.P.,
dated February 16, 1999, pursuant to which we agreed to require the managing
underwriter or underwriters of our initial public offering to offer to each of
the foregoing parties the right to purchase, in the aggregate, 10% of the total
shares to be issued by us in this offering. In connection with the purchase of
our Series D Preferred Stock, we amended the letter agreement to add Forum
Holding Amsterdam B.V. as a party. At our request, the underwriters will offer
% of the shares available for sale in this offering to these investors.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors and certain existing
stockholders have agreed, subject to limited exceptions, not to sell or
transfer any common stock or securities convertible into, exchangeable for
exercisable for, or repayable with common stock, for 180 days after the date of
this prospectus without first obtaining the written consent of Merrill Lynch.
Specifically, we and these other persons have agreed not to directly or
indirectly:
. offer, pledge, sell or contract to sell any common stock;
. sell any option or contract to purchase any common stock;
. purchase any option or contract to sell any common stock;
. grant any option, right or warrant for the sale of any common stock;
. lend or otherwise dispose of or transfer any common stock;
. request or demand that we file a registration statement related to
the common stock; or
. enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock
whether any such swap or transaction is to be settled by delivery of
shares or other securities, in cash or otherwise.
QUOTATION ON THE NASDAQ NATIONAL MARKET LISTING
We have applied to list our common stock for quotation on the Nasdaq
National Market under the symbol "NFLX."
62
Before this offering, there has been no public market for our common
stock. The initial public offering price was determined through negotiations
among us and the representatives. In addition to prevailing market conditions,
the factors considered in determining the initial public offering price are:
. the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us;
. our financial information;
. the history of, and the prospects for, its past and present
operations, and the prospects for, and timing of, our future revenues;
. an assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues;
. the present state of our development; and
. the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price. The underwriters do not expect
to sell more than five percent of the shares being offered in this offering to
accounts over which they exercise discretionary authority.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, Securities and
Exchange Commission rules may limit underwriters and selling group members from
bidding for and purchasing our common stock. However, the representatives may
engage in transactions that stabilize the price of the common stock, such as
bids or purchases to peg, fix or maintain that price.
The underwriters may purchase and sell the common stock in the open
market. These transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Short sales involve
the sale by the underwriters of a greater number of shares than they are
required to purchase in the offering. "Covered" short sales are sales made in
an amount not greater than the underwriters' option to purchase additional
shares from the issuer in the offering. The underwriters may close out any
covered short position by either exercising their option to purchase additional
shares or purchasing shares in the open market. In determining the source of
shares to close out the covered short position, the underwriters will consider,
among other things, the price of shares available for purchase in the open
market as compared to the price at which they may purchase shares through the
over-allotment option. "Naked" short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the common shares in the open market after pricing that could
adversely affect investors who purchase in the offering. Stabilizing
transactions consist of various bids for or purchases of common shares made by
the underwriters in the open market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.
Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of the common stock or preventing or retarding a decline in
the market price of the common stock. As a result, the price of the common
stock may be higher than the price that might otherwise exist in the open
market.
63
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the representatives make any representation that the
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters will be passed upon for the Underwriters by
Cahill Gordon & Reindel, New York, New York. As of the date of this prospectus,
WS Investment Company 99A, WS Investment Company 98A and WS Investments '97B,
investment partnerships composed of certain current and former members of and
persons associated with Wilson Sonsini Goodrich & Rosati, Professional
Corporation, as well as certain individual attorneys of this firm, beneficially
own an aggregate of 126,640 shares of our common stock.
EXPERTS
The financial statements of Netflix, Inc. as of December 31, 2000 and
2001 and for each of the years in the three-year period ended December 31, 2001
appearing in this prospectus and registration statement have been audited by
KPMG LLP, independent auditors, as set forth in their report thereon, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the
registration statement or the exhibits and schedules which are part of the
registration statement. For further information with respect to us and our
common stock, see the registration statement and the exhibits and schedules
thereto. Any document we file may be read and copied at the Commission's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the Commission at 1-800-SEC-0330 for further information about the
public reference rooms. Our filings with the Commission are also available to
the public from the Commission's Web site at http:HTTP://www.sec.gov.WWW.SEC.GOV.
Upon completion of this offering, we will become subject to the
information and periodic reporting requirements of the Securities Exchange Act of 1934
and, accordingly, will file periodic reports, other reports, proxy statements
and other information with the Commission. Such periodic reports, other
reports, proxy statements and other information will be available for
inspection and copying at the Commission's public reference rooms, and the Web
site of the Commission referred to above.
6764
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Bank
Securities Inc., SG Cowen Securities Corporation and U.S. Bancorp Piper Jaffray
Inc., have severally agreed to purchase from NetFlix.com, Inc. the following
respective number of shares of our common stock at a public offering price less
the underwriting discounts and commissions set forth on the cover page of this
prospectus:NETFLIX, INC.
INDEX TO FINANCIAL STATEMENTS
Number
of
Underwriter Shares
----------- ------
Deutsche Bank Securities Inc..........................................
SG Cowen Securities Corporation.......................................
U.S. Bancorp Piper Jaffray Inc. ......................................
Total Underwriters ( ).............................................
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock offered hereby are subject
to certain conditions precedent and that the underwriters will purchase all
shares of the common stock offered hereby, other than those covered by the
over-allotment option described below, if any of these shares are purchased.
The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover of this prospectus and to
dealers at a price that represents a concession not in excess of $ per
share under the public offering price. The underwriters may allow, and these
dealers may re-allow, a concession of not more than $ per share to other
dealers. After the initial public offering, representatives of the underwriters
may change the offering price and other selling terms.
We have granted to the underwriters an option, exercisable not later than 30
days after the date of this prospectus, to purchase up to additional shares of
common stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus. The underwriters
may exercise this option only to cover over-allotments made in connection with
the sale of the common stock offered hereby. To the extent that the
underwriters exercise this option, each of the underwriters will become
obligated, subject to conditions, to purchase approximately the same percentage
of additional shares of common stock as the number of shares of common stock to
be purchased by it in the above table bears to the total number of shares of
common stock offered hereby. We will be obligated, pursuant to the option, to
sell these additional shares of common stock to the underwriters to the extent
the option is exercised. If any additional shares of common stock are
purchased, the underwriters will offer the additional shares on the same terms
as those on which the shares are being offered.
The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. The underwriting fee is currently expected to be approximately 7% of the
initial public offering price. We have agreed
68
to pay the underwriters the following fees, assuming either no exercise or full
exercise by the underwriters of the underwriters' over-allotment option:
Total Fees
-----------------------------
Without With
Per Share Over-Allotment Over-Allotment
--------- -------------- --------------
Fees paid by us......................... $ $ $
In addition, we estimate that our share of the total expenses of this
offering, excluding the underwriting fee, will be approximately $ .
We have agreed to indemnify the underwriters against some specified types of
liabilities, including liabilities under the Securities Act, and to contribute
to payments the underwriters may be required to make in respect of any of these
liabilities.
Holders of 96% of our stock, options and warrants to purchase stock, have
agreed not to offer, sell, contract to sell or otherwise dispose of, or enter
into any transaction that is designed to, or could be expected to, result in
the disposition of any shares of our common stock or other securities
convertible into or exchangeable or exercisable for shares of our common stock
or derivatives of our common stock for a period of 180 days after the date of
this prospectus without the prior written consent of Deutsche Bank Securities
Inc. This consent may be given at any time without public notice.
At our request, the underwriters will offer 10% of the shares available for
sale in this offering to certain holders of our Series C and Series D preferred
stock. In addition, the underwriters have reserved for sale, at the initial
offering price up to shares of common stock for employees and other persons
associated with us who have expressed an interest in purchasing common stock in
the offering. The number of shares of common stock available for sale to the
general public in the offering will be reduced to the extent these persons
purchase the reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the
other shares.
In April 2000, we sold shares of our Series E Preferred Stock in a private
placement at a price of $9.38 per share. Each of the shares of Series E
Preferred Stock is convertible into one share of common stock upon an initial
offering of our common stock with gross proceeds in excess of $20,000,000 or
affirmative election of the holders of at least 75% of the outstanding shares.
In this private placement, an employee of Deutsche Bank Securities Inc.
purchased 2,666 shares of Series E Preferred Stock for an aggregate purchase
price of $25,007. He purchased the shares on the same terms as the other
investors in the private placement. Upon conversion of these shares into common
stock, based upon the initial public offering price of $ , the value of
these shares is $ . The difference between the amount that the Deutsche
Bank Securities Inc. employee originally paid for the Series E Preferred Stock
and the value of the Series E Preferred Stock based upon the initial public
offering price is $ .
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of our common stock. Specifically, the underwriters may over-allot
shares of our common stock in connection with this offering, thus creating a
short position in our common stock for their own account. A short position
results when an underwriter sells more shares of common stock than that
underwriter is committed to purchase. Additionally, to cover these over-
allotments or to stabilize the market price of our common stock, the
underwriters may bid for, and purchase,
69
shares of our common stock in the open market. Finally, the representatives, on
behalf of the underwriters, may also reclaim selling concessions allowed to an
underwriter or dealer if the underwriting syndicate repurchases shares
distributed by that underwriter or dealer. Any of these activities may maintain
the market price of our common stock at a level above that which might
otherwise prevail in the open market. These transactions may be effected on the
Nasdaq National Market or otherwise. The underwriters are not required to
engage in these activities and, if commenced, may end any of these activities
at any time.
Pricing of this Offering
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock has
been determined by negotiation among us and the representatives of the
underwriters. Among the primary factors considered in determining the public
offering price were:
. prevailing market conditions;
. our results of operations in recent periods;
. the present stage of our development;
. the market capitalization and stage of development of other companies
that we and the representatives of the underwriters believe to be
comparable to our business; and
. estimates of our business potential.
The estimated initial public offering price range set forth on the cover of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters will be passed upon for the Underwriters by
Orrick, Herrington & Sutcliffe LLP, San Francisco, California. As of the date
of this prospectus, WS Investment Company 99A, WS Investment Company 98A and WS
Investment Company 97B, investment partnerships composed of certain current and
former members of and persons associated with Wilson Sonsini Goodrich & Rosati,
Professional Corporation, as well as certain individual attorneys of this firm,
beneficially own an aggregate of 120,755 shares of our common stock.
EXPERTS
The financial statements and schedule of NetFlix.com, Inc. as of December
31, 1998 and 1999, and for the period from August 29, 1997 (inception) to
December 31, 1997 and for each of the years in the two-year period ended
December 31, 1999 have been included in this prospectus in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
70
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
In November 1999, we dismissed PricewaterhouseCoopers LLP as our independent
public accountants. The former independent accountants' report on our financial
statements for the period from August 29, 1997 (inception) through and as
December 31, 1997 and as of and for the year ended December 31, 1998 did not
contain an adverse opinion, a disclaimer of opinion or any qualifications or
modifications related to uncertainty, limitation of audit scope or application
of accounting principles. The former independent public accountants' report
does not cover any of our financial statements in this registration statement.
The former independent public accountants did not issue an audit opinion on our
financial statements for any other period. There were no disagreements with the
former independent public accountants on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure with
respect to our financial statements up through the time of dismissal that, if
not resolved to the former independent public accountant's satisfaction, would
have caused them to make reference to the subject matter of the disagreement in
connection with their report. Our board of directors approved the dismissal of
PricewaterhouseCoopers LLP. In February 2000, we retained KPMG LLP as our
independent public accountants. The decision to retain KPMG LLP was approved by
resolution of the board of directors. Prior to retaining KPMG LLP, we had not
consulted with KPMG LLP regarding accounting principles.
71
NETFLIX.COM, INC.
TABLE OF CONTENTS
PagePAGE
----
Independent Accountants' Report............................................Auditors' Report............................................................. F-2
Balance Sheets.............................................................Sheets as of December 31, 2000 and 2001.......................................... F-3
Statements of Operations...................................................Operations for the three years ended December 31, 2001..................... F-4
Statements of Stockholders' Deficit........................................Deficit for the three years ended December 31, 2001.......... F-5
Statements of Cash Flows...................................................Flows for the three years ended December 31, 2001..................... F-6
Notes to Financial Statements..............................................Statements............................................................ F-7
F-1
INDEPENDENT ACCOUNTANTS'AUDITORS' REPORT
The Board of Directors and Stockholders of
NetFlix.com, Inc.THE BOARD OF DIRECTORS AND STOCKHOLDERS
NETFLIX, INC.
We have audited the accompanying balance sheets of Netflix, Inc.
(formerly known as NetFlix.com, Inc.) as of December 31, 19982000 and 1999,2001, and the
related statements of operations, stockholders' deficit, and cash flows for
the period from August 29, 1997
(inception) to December 31, 1997, and for each of the years in the two-yearthree-year period ended December 31, 1999.2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted auditing
standards.in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of NetFlix.com,Netflix, Inc. as of
December 31, 19982000 and 1999,2001, and its results of operations and its cash flows
for the period from August 29, 1997 (inception) to December 31, 1997, and for
each of the years in the two-yearthree-year period ended December 31, 1999,2001, in
conformity with accounting principles generally accepted accounting principles.in the United States
of America.
/s/ KPMG LLP
Mountain View, California
April 4, 2000, except as to Note 8, which is as of
April 13, 2000February 27, 2002
F-2
NETFLIX.COM,NETFLIX, INC.
BALANCE SHEETS
(in thousands, except share data)(IN THOUSANDS, EXCEPT SHARE DATA)
Pro Forma
DecemberAS OF DECEMBER 31,
December 31,
------------------ 1999
1998 1999 (Unaudited)
-------- -------- --------------------------------
2000 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents...................equivalents.................................................................... $ 1,06114,895 $ 14,198 $ 14,198
Short-term investments...................... -- 6,322 6,322
Prepaids and other16,131
Prepaid expenses ............................................................................ 2,738 1,019
Prepaid revenue sharing expense.............................................................. 636 732
Other current assets........... 635 720 720
-------- -------- --------assets......................................................................... 32 1,670
--------- ---------
Total current assets........................ 1,696 21,240 21,240
Rentalassets...................................................................... 18,301 19,552
DVD library, net.......................... 2,011 8,695 8,695net................................................................................. 16,909 3,633
Intangible assets, net........................................................................... 5,582 7,917
Property and equipment, net.................. 1,062 4,499 4,499
Deposits and other assets.................... 80 339 339
-------- -------- --------net...................................................................... 9,959 8,205
Deposits......................................................................................... 643 1,677
Other assets..................................................................................... 1,094 646
--------- ---------
Total assets................................assets.............................................................................. $ 4,84952,488 $ 34,773 $ 34,773
======== ======== ========41,630
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable...............................Accounts payable............................................................................. $ 1,0007,690 $ 625 $ 62513,715
Accrued expenses............................................................................. 5,919 4,544
Deferred revenue............................................................................. 2,773 4,937
Current portion of capital lease obligations................................ 579 571 571
Accounts payable............................ 3,063 5,334 5,334
Accrued liabilities......................... 1,640 3,211 3,211
Deferred revenue............................ 118 471 471
-------- -------- --------obligations................................................. 1,282 1,345
Notes payable................................................................................ 2,292 1,667
--------- ---------
Total current liabilities................... 6,400 10,212 10,212liabilities................................................................. 19,956 26,208
Deferred rent.................................................................................... 102 240
Capital lease obligations.................... 172 811 811obligations, less current portion.................................................. 2,024 1,057
Note payable.................................payable..................................................................................... 1,843 --
3,959 3,959
-------- -------- --------Subordinated notes payable, net of unamortized discount of $10,851 at December 31, 2001.......... -- 2,799
--------- ---------
Total liabilities........................... 6,572 14,982 14,982liabilities......................................................................... 23,925 30,304
Commitments and contingency..................
Mandatorily redeemablecontingency (notes 4 and 5)
Redeemable convertible preferred stock; 15,176,616 authorized; 5,684,024 and
14,984,220 issued and outstanding in 1998
and 1999, respectively; aggregate
liquidation preference of $6,139 and $51,662
in 1998 and 1999, respectively.............. 6,321 51,819 --
-------- -------- --------stock (note 6).................................................. 101,830 101,830
Stockholders' (deficit) equity:deficit (note 7):
Convertible preferred stock, $0.001 par value; 5,000,0008,500,000 shares authorized; 4,444,545 and
6,157,499 shares issued and outstanding at 2000 and 2001, respectively; aggregate liquidation
preference of $2,222.......................................................................... 4 6
Common stock, $0.001 par value; 100,000,000 shares authorized; 6,407,476 and 6,485,737 shares
issued and outstanding in 19982000 and 1999,2001, respectively; aggregate
liquidation preference of $2,222 in 1998 and
1999........................................ 4 4 --
Common stock, $0.001 par value; 31,650,000
shares authorized; 2,580,250 and 6,222,650
shares issued and outstanding in 1998 and
1999, respectively; 25,651,415 shares issued
pro forma................................... 3........................................ 7 267
Additional paid-in capital................... 8,100 16,087 67,891capital..................................................................... 34,636 49,974
Deferred stock-based compensation............ (4,711) (6,841) (6,841)compensation.............................................................. (9,266) (3,585)
Accumulated deficit.......................... (11,440) (41,285) (41,285)deficit............................................................................ (98,648) (136,906)
--------- ---------
Total stockholders' deficit............................................................... (73,267) (90,504)
--------- ---------
Total liabilities and stockholders' deficit............................................... $ 52,488 $ 41,630
========= =========
See accompanying notes to financial statements.
F-3
NETFLIX, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------
1999 2000 2001
-------- -------- --------
Revenues:
Subscription............................................................. $ 4,854 $ 35,894 $ 74,255
Sales.................................................................... 152 -- 1,657
-------- -------- --------
Total stockholders' (deficit) equity........ (8,044) (32,028) 19,791revenues....................................................... 5,006 35,894 75,912
-------- -------- --------
Cost of revenues:
Subscription............................................................. 4,217 24,861 49,088
Sales.................................................................... 156 -- 819
-------- -------- --------
Total liabilitiescost of revenues............................................... 4,373 24,861 49,907
-------- -------- --------
Gross profit................................................................ 633 11,033 26,005
-------- -------- --------
Operating expenses:
Fulfillment*............................................................. 2,153 8,267 10,267
Technology and stockholders'
(deficit) equity...........................development*.............................................. 7,413 16,823 17,734
Marketing*............................................................... 14,271 27,707 24,216
General and administrative*.............................................. 2,085 6,990 4,658
Restructuring charges.................................................... -- -- 671
Stock-based compensation*................................................ 4,742 8,803 5,326
-------- -------- --------
Total operating expenses............................................. 30,664 68,590 62,872
-------- -------- --------
Operating loss.............................................................. (30,031) (57,557) (36,867)
-------- -------- --------
Other income (expense):
Interest and other income................................................ 924 1,645 461
Interest expense......................................................... (738) (1,451) (1,852)
-------- -------- --------
Net loss.................................................................... $(29,845) $(57,363) $(38,258)
======== ======== ========
Net loss per share--basic and diluted....................................... $ 4,849(5.60) $ 34,773(9.71) $ 34,773(6.34)
======== ======== ========
Weighted average shares--basic and diluted.................................. 5,328 5,907 6,033
*Amortization of stock-based compensation not included in expense line-item:
Fulfillment.............................................................. $ 604 $ 1,469 $ 705
Technology and development............................................... 907 2,855 1,788
Marketing................................................................ 1,144 2,679 1,624
General and administrative............................................... 2,087 1,800 1,209
-------- -------- --------
$ 4,742 $ 8,803 $ 5,326
======== ======== ========
See accompanying notes to financial statements.
F-3
NETFLIX.COM, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended
December 31,
------------------
Period from
August 29, 1997
(Inception) to
December 31,
1997 1998 1999
--------------- -------- --------
Revenues.................................. $ -- $ 1,339 $ 5,006
Cost of revenues.......................... -- 1,311 4,373
----- -------- --------
Gross profit.............................. -- 28 633
----- -------- --------
Operating expenses:
Product development...................... 100 3,857 7,413
Sales and marketing...................... 103 4,815 16,424
General and administrative............... 158 1,358 2,085
Stock-based compensation................. -- 1,151 4,742
----- -------- --------
Total operating expenses................ 361 11,181 30,664
----- -------- --------
Operating loss............................ (361) (11,153) (30,031)
----- -------- --------
Other income (expense):
Interest and other income, net............ 3 114 924
Interest expense, net..................... (1) (42) (738)
----- -------- --------
Net loss.................................. $(359) $(11,081) $(29,845)
===== ======== ========
Net loss per share--basic and diluted..... $ -- $ (12.27) $ (5.60)
===== ======== ========
Weighted average shares--basic and diluted
......................................... -- 903 5,328
See accompanying notes to financial statements.
F-4
NETFLIX.COM,NETFLIX, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
Period From August 29, 1997 (Inception) To December 31, 1997 And For The Years
Ended December 31, 1998 And 1999
(in thousands, except share data)(IN THOUSANDS, EXCEPT SHARE DATA)
Convertible
Preferred Stock Common stock Additional Deferred TotalCONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED TOTAL
---------------- ----------------- Paid-in Stock-Based Accumulated Stockholders'
Shares Amount Shares Amount Capital Compensation Deficit DeficitPAID-IN STOCK-BASED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT DEFICIT
--------- ------ --------- ------ ---------- ------------ ----------- -------------
Balances at inception... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock................... -- -- 3,200,000 3 -- -- -- 3
Issuance of convertible
preferred stock......... 3,990,000 4 -- -- 1,988 -- -- 1,992
Net loss................ (359) (359)
--------- ----- --------- ----- ------- ------- -------- --------
Balances as of December
31, 1997................ 3,990,000 4 3,200,000 3 1,988 -- (359) 1,636
Issuance of Series A
preferred stock, net.... 454,545 -- -- -- 250 -- -- 250
Forfeiture of common
stock................... -- -- (650,000) -- -- -- -- --
Exercise of options and
restricted stock
purchase agreements..... -- -- 30,250 -- -- -- -- --
Deferred stock-based
compensation related to
option grants........... -- -- -- -- 5,862 (5,862) -- --
Deferred stock-based
compensation expense.... -- -- -- -- -- 1,151 -- 1,151
Net loss................ -- -- -- -- -- -- (11,081) (11,081)
--------- ----- --------- ----- ------- ------- -------- --------
Balances as of December
31, 1998................January 1, 1999........... 4,444,545 $ 4 2,580,250 $ 3 $ 8,100 $ (4,711) $ (11,440) $ (8,044)
Exercise of options and repurchases of
restricted stock
purchase agreements, net
of repurchases..........stock...................... -- -- 3,370,911 3 323 -- -- 326
Issuance of common stock upon exercise
of warrants................warrants........................... -- -- 271,489 1 30 -- -- 31
Warrants issued in connection with debt
financing...............financing............................. -- -- -- -- 762 -- -- 762
Deferred stock-based compensation related to
option grants...........compensation....... -- -- -- -- 6,872 (6,872) -- --
Deferred stock-basedStock-based compensation expense....expense........ -- -- -- -- -- 4,742 -- 4,742
Net loss................loss................................ -- -- -- -- -- -- (29,845) (29,845)
--------- -------- --------- -------- ------- ------- -------- --------- --------
Balances as of December 31, 1999................1999......... 4,444,545 $ 4 6,222,650 $ 7 $16,087 $(6,841) $(41,285)$ (6,841) $ (41,285) $(32,028)
Exercise of options and issuance of
restricted stock...................... -- -- 243,009 -- 422 -- -- 422
Repurchase of restricted stock.......... -- -- (79,960) -- (141) -- -- (141)
Issuance of common stock for services
rendered.............................. -- -- 21,777 -- 306 -- -- 306
Warrants issued in connection with
operating lease....................... -- -- -- -- 216 -- -- 216
Warrants issued in connection with
services rendered..................... -- -- -- -- 285 -- -- 285
Warrants issued in connection with debt
financing............................. -- -- -- -- 105 -- -- 105
Subscribed Series F non-voting preferred
stock................................. -- -- -- -- 6,128 -- -- 6,128
Deferred stock-based compensation....... -- -- -- -- 11,228 (11,228) -- --
Stock-based compensation expense........ -- -- -- -- -- 8,803 -- 8,803
Net loss................................ -- -- -- -- -- -- (57,363) (57,363)
--------- --- --------- --- ------- -------- --------- --------
Balances as of December 31, 2000......... 4,444,545 $ 4 6,407,476 $ 7 $34,636 $ (9,266) $ (98,648) $(73,267)
Exercise of options..................... -- -- 90,137 -- 125 -- -- 125
Repurchases of restricted common stock.. -- -- (16,876) -- (12) -- -- (12)
Issuance of common stock in exchange for
services rendered..................... -- -- 5,000 -- 10 -- -- 10
Warrants issued in connection with
subordinated notes payable............ -- -- -- -- 10,884 -- -- 10,884
Warrants issued in connection with
capital lease obligation.............. -- -- -- -- 172 -- -- 172
Warrants issued in exchange for services
rendered.............................. -- -- -- -- 18 -- -- 18
Issued Series F non-voting preferred
stock................................. 1,712,954 2 -- -- 4,279 -- -- 4,281
Subscribed Series F non-voting preferred
stock................................. -- -- -- -- 217 -- -- 217
Deferred stock-based compensation
(forfeitures) net..................... -- -- -- -- (355) 355 -- --
Stock-based compensation expense........ -- -- -- -- -- 5,326 -- 5,326
Net loss................................ -- -- -- -- -- -- (38,258) (38,258)
--------- --- --------- --- ------- -------- --------- --------
Balances as of December 31, 2001......... 6,157,499 $ 6 6,485,737 $ 7 $49,974 $ (3,585) $(136,906) $(90,504)
========= ======== ========= ===== ========== ======= ======== ========= ========
See accompanying notes to financial statements.
F-5
NETFLIX.COM,NETFLIX, INC.
STATEMENTS OF CASH FLOWS
(in thousands)(IN THOUSANDS)
Period from
August 29, 1997 Years Ended
(Inception) to DecemberYEARS ENDED DECEMBER 31,
December 31, ------------------
1997 1998----------------------------
1999 ---------------2000 2001
-------- -------- --------
Cash flows from operating activities:CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................. $ (359) $(11,081)loss........................................................................... $(29,845) $(57,363) $(38,258)
Adjustments to reconcile net loss to net cash used in(used in) provided by operating
activities:
Depreciation of property and amortization........... 5 427 3,745equipment.......................................... 884 3,605 5,507
Amortization of DVD library..................................................... 3,182 15,681 22,127
Amortization of intangible assets............................................... -- 546 2,163
Noncash write-offcharges for equity instruments granted to non-employees................. -- 598 28
Stock-based compensation expense................................................ 4,742 8,803 5,326
Loss on disposal of scrapped DVDs......property and equipment...................................... -- 145 -- 321
Deferred compensation expense........... -- 1,151 4,742
Noncash interest expense................ -- 7expense........................................................ 398 497 1,017
Changes in operating assets and liabilities:
PrepaidsPrepaid expenses and other current assets..... (48) (592)assets.................................... (85) (2,686) (15)
Accounts payable...................... 121 2,942payable............................................................. 2,271 2,356 6,025
Accrued liabilities................... 20 1,620expenses............................................................. 1,571 2,708 (1,375)
Deferred revenue......................revenue............................................................. 353 2,302 2,164
Deferred rent................................................................ -- 118 353
------102 138
-------- -------- --------
Net cash used in(used in) provided by operating activities.......................... (261) (5,408)activities...................... (16,529) ------(22,706) 4,847
-------- -------- Cash flows from investing activities:--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments.......investments................................................ (6,322) -- --
(6,322)Proceeds from sale of short-term investments....................................... -- 6,322 --
Purchases of property and equipment....... (152) (103)equipment................................................ (3,295) Purchase(6,210) (3,233)
Acquisitions of rental library................ -- (2,186)DVD library........................................................ (9,866) Other assets.............................. -- (74)(23,895) (8,851)
Deposits and other assets.......................................................... (259) ------(1,189) (586)
-------- -------- --------
Net cash used in investing activities.......................... (152) (2,363)activities.................................... (19,742) ------(24,972) (12,670)
-------- -------- Cash flows from financing activities:--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of redeemable convertible preferred stock, net..................... 1,992 250stock................... 45,498 50,011 --
Proceeds from issuance of mandatorily
redeemable convertible preferred stock...common stock............................................. 357 422 125
Net proceeds from issuance of subordinated notes payable and detachable warrants... -- 6,000 45,498-- 12,831
Repurchases of common stock........................................................ -- (141) (12)
Proceeds from issuance of common stock.... 3notes payable............................................ 5,000 -- 357
Borrowings on notes payable............... -- 1,000 5,000
Principal payments on notenotes payable and capital lease obligations................ -- --obligations.................. (1,447) ------(1,917) (3,885)
-------- -------- --------
Net cash provided by financing activities.......................... 1,995 7,250activities................................ 49,408 ------48,375 9,059
-------- -------- --------
Net increase (decrease) in cash and cash equivalents............................... 1,582 (521)equivalents................................................. 13,137 697 1,236
Cash and cash equivalents, beginning of period.................................... -- 1,582year........................................... 1,061 ------14,198 14,895
-------- -------- --------
Cash and cash equivalents, end of period... $1,582 $ 1,061year................................................. $ 14,198 ======$ 14,895 $ 16,131
======== ======== Supplemental disclosures of cash flow
information:========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for interest.. $ 1 $ 8interest............................................................. $ 283 ======$ 948 $ 860
======== ======== ========
Noncash investing and financialfinancing activities:
Purchase of assets under capital lease obligations............................. $ 124 $ 1,075obligations................................. $ 1,026 ======$ 3,000 $ 520
======== ======== ========
Discount on capital lease obligation............................................... $ 762 $ 105 $ 172
======== ======== ========
Warrants issued in connection with debt
financing...............................as a deposit on an operating lease................................. $ -- $ 321216 $ 762
======--
======== ======== ========
Exchange of Series F non-voting convertible preferred stock for intangible asset... $ -- $ 6,128 $ 4,498
======== ======== ========
See accompanying notes to financial statements.statements
F-6
NETFLIX.COM,NETFLIX, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Period from(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Netflix, Inc. (the Company), was incorporated on August 29, 1997
to December 31, 1997, and for each
of the years in the two-year period ended December 31, 1999
1. Organization and Significant Accounting Policies
Description of business
NetFlix.com, Inc. (the Company), formerly Kibble, Inc., was incorporated
August 29, 1997 (inception), and began operations on April 14, 1998. The Company operatesprovides an
Internet-based unlimited rentalonline entertainment subscription service forproviding subscribers access to a
comprehensive library of filmed entertainment titles formatted on digital video
discdisk (DVD) formatted movies.
Cash and cash equivalents and short-term investments. The standard subscription plan provides subscribers access to an
unlimited number of titles for $19.95 per month with no due dates or late fees.
The subscribers select titles at the Company's website at www.netflix.com.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid instruments with original maturities
of three months or less, at the date of purchase, to be cash equivalents. Short-The
Company's cash and cash equivalents are principally on deposit in short-term
asset management accounts at three large financial institutions.
DVD LIBRARY
Historically, the Company purchased DVDs from studios and distributors.
In 2000 and 2001, the Company completed a series of revenue sharing agreements
with several studios which changed the business model for acquiring DVDs and
satisfying subscribers' demand. These revenue sharing agreements enable the
Company to obtain DVDs at a lower up front cost than under traditional buying
arrangements. 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, which is typically 12 months for each DVD title (hereinafter
referred to as the "title term"). At the end of the title term, investments consistthe Company has
the option of highly liquid debt instrumentseither returning the DVD title to the studio or purchasing the
title. Before the change in business model, the Company typically acquired
fewer copies of a particular title upfront and utilized each copy acquired over
a longer period of time. The implementation of these revenue sharing agreements
improved the Company's ability to obtain larger quantities of newly released
titles and satisfy subscriber demand for such as commercial
paper and medium-term corporate notestitles over a shorter period of
time.
In connection with maturitiesthe change in business model, on January 1, 2001, the
Company revised the amortization policy for the cost of less thanits DVD library from an
accelerated method using a three year life to the same accelerated method of
amortization over one year. RentalThe change in life has been accounted for as a
change in accounting estimate and is accounted for on a prospective basis from
January 1, 2001. Had the DVDs acquired prior to January 1, 2001 been amortized
using the three year life, amortization expense for 2001 would have been $4.7
million lower than the amount recorded in the accompanying financial
statements, which represents a $0.78 per share impact on loss per share in 2001.
Under certain revenue sharing agreements the Company remits an upfront
payment to acquire titles from the studios. This payment has two elements. The
first element is an initial fixed license fee that is capitalized and amortized
in accordance with the Company's DVD library net
Rental library comprisesamortization policy. The second
element is a prepayment of rentalfuture revenue sharing obligations. The amount
attributable to the second element is classified as prepaid revenue sharing
expense and is applied against future revenue sharing obligations. A nominal
amount is also capitalized upon acquisition of a particular title for the cost
of the estimated number of DVDs which are carriedthe Company expects to purchase at the end of
the title term. This cost less
accumulated depreciation.is amortized with the cost of the initial license fee
on an accelerated basis over one year.
Several studios permit the Company to sell used DVDs upon the expiration
of the title term. For those DVDs that the Company estimates it will sell at
the end of the title term, a salvage value of two-dollars per DVD is provided.
For those DVDs that the Company does not expect to sell, no salvage value is
provided. The
F-7
NETFLIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Company usescurrently estimates that approximately 15% of DVDs acquired will be
sold at the end of the title term. As of December 31, 2001, the aggregate
salvage value provided was $578.
During 1999 and 2000, the Company's DVDs were amortized on an accelerated
method (sum of the years digits method) of depreciating the rental library over an estimated lifea period of three years in order to more closely match expenses in proportion with anticipated revenues.
Rentalno
salvage value.
DVD library and accumulated depreciationamortization as of December 31 wereare as follows:
1998 1999
------AS OF DECEMBER 31,
------------------
2000 2001
------- -------
Rental library............................................ $2,186 $10,882DVD library...................................... $26,188 $35,039
Less accumulated depreciation............................. (175) (2,187)
------amortization.................... 9,279 31,406
------- Rental-------
DVD library, net..................................... $2,011net................................. $16,909 $ 8,695
======3,633
======= =======
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% of its 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 of 1.204% of its fully
diluted equity securities outstanding in the form of Series F Preferred Stock.
As of December 31, 2001, the aggregate equity interests of these five
studios equaled 6.02% of the outstanding fully diluted equity interests. If, at
any time prior to the effective date of an initial public offering, these
interests represent less than 6.02% of the Company's outstanding fully diluted
equity securities, then the Company is obligated to issue additional shares of
Series F Preferred Stock for no additional consideration to maintain those
studios' aggregate fully diluted equity interest at 6.02%. The Series F
Preferred Stock automatically converts into common stock on a one-for-one basis
just prior to the effective date of an initial public offering with at least
$20 million in aggregate gross proceeds. Upon conversion, the Company's
obligation to maintain the studios' equity interests at 6.02% expires.
The Company measures the original issuances and any subsequent
adjustments using the deemed fair value of the securities at the issuance and
any subsequent adjustment dates. The deemed value is recorded $175as an intangible
asset and $2,861is amortized to cost of depreciationsubscription revenues ratably over the
remaining term of the agreements which are either three or five years. Total
gross intangible assets related to these agreements as of December 31, 2000 and
2001 was $6,128 and $10,210, respectively. Accumulated amortization as of
December 31, 2000 and 2001 was $546 and $2,622, respectively.
During 2001, in connection with a strategic marketing alliance agreement,
the Company issued 416,440 shares of Series F Preferred Stock. Under the
agreement, the strategic partner has committed to provide, on a best-efforts
basis, a stipulated number of impressions to a co-branded Web site and the
Company's Web site over a period of 24 months. In addition, the Company is
allowed to use the partner's trademark and logo in marketing the Company's
subscription services. The Company recognized the deemed fair value of these
instruments as an intangible asset with a corresponding credit to additional
paid-in capital. The intangible asset is being amortized on a straight-line
basis to marketing expense on its DVD
rental library in 1998over the two year term of the strategic marketing
alliance. The gross intangible asset and 1999,accumulated amortization related to
this agreement as of December 31, 2001 was $416 and $87, respectively.
Property and equipmentF-8
NETFLIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the shorter of
the estimated useful lives of the respective assets, generally up to three
years, or the lease term, if applicable.
The Company evaluates long-lived assets (including rental library) for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If such assets are considered to be impaired, the impairment to
be recognized is measured as the difference between the carrying amount of the
long-lived asset and its fair value. Fair value for impairment purposes is
measured based on quoted market prices in active markets; where quoted prices
in active markets are not available, fair value is estimated using undiscounted
estimated cash flows over the remaining life of the respective asset.
CAPITALIZED SOFTWARE COSTS
The Company capitalizes costs related to developing or obtaining
internal-use software. Capitalization of costs begins after the conceptual
formulation stage has been completed. Capitalized software costs are included
in internal-use software in property and equipment and its
fair value. To date,amortized over the
Company has made no adjustmentsestimated useful life of the software, which ranges from one to two years.
REVENUE SHARING
Revenue sharing expense is recorded as DVD's subject to revenue sharing
are shipped to subscribers.
REVENUE RECOGNITION
Subscription revenues are recognized ratably during each subscriber's
monthly subscription period. Refunds to customers are recorded as a reduction
of revenues. Revenues from sales of DVDs are recorded upon shipment. Prior to
adopting a subscription model, revenues from individual DVD rentals were
recorded upon shipment.
COST OF REVENUES
Cost of subscription revenues consists of revenue sharing costs,
amortization of the carrying valuesDVD library, amortization of its long-lived assets.
Capitalized software costs
In 1999, the Company adopted Statement of Position 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 requires
F-7
NETFLIX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except shareintangible assets related to
equity instruments issued to studios and per share data)
the capitalization of direct costs incurred in connection with developing or
obtaining software for internal use, including external direct costs of
materialspostage and services and payroll and payroll related costs for employees who
are directly associated with and devote time to an internal-use software
development project. During 1999, the Company capitalized $350 ofpackaging costs related to
DVDs provided to paying subscribers. Cost of revenues for DVD sales includes
the implementation of internal-use software which is included in computer
software in Property and Equipment at December 31, 1999.
Concentrations of credit risk
The Company's cash and cash equivalents are principally on deposit in a
short-term asset management account at two large financial institutions.
In 1999, the Company purchased approximately 82% of its DVDs from two
suppliers.
Fairsalvage value of financial instruments
The fair value of the Company's cash, accounts receivable, accounts payable,
and borrowings approximate their carrying values due to their short maturity or
fixed-rate structure.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptionsused DVDs that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognitionhave been sold.
SUBSCRIBER ACQUISITION AND ADVERTISING EXPENSES
The Company sold DVD's to customers through March 31, 1999. Revenue from
those DVD sales was recorded upon shipment. Revenues from DVD rentals have been
recorded using several methods which are described below:
. The Company has offered various rental programs that provide the
customer a certain number of DVD rentals in return for a fee for a
specified term. Revenue under these rental programs is deferredexpenses subscriber acquisition and recognized ratably over the term of the program.
. For DVD's that are not rented under the framework of a program, rental
revenue is recognized upon shipment. Revenues collected in advance are
deferred and recognized upon DVD shipment.
During 1998 and 1999, the Company charged $280 and $1,510 to customers for
shipping and handling.advertising costs as
incurred. These amounts are included in revenuesmarketing expenses in the accompanying
financial statements. Stock-based compensationSubscriber acquisition and advertising expenses were
approximately $3,913, $10,424, and $12,041 for the years ended December 31,
1999, 2000 and 2001, respectively.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation plans
using the intrinsic valueintrinsic-value method. Deferred stock-based compensation expense is
recorded if, on the date of grant, F-8the current market value
F-9
NETFLIX.COM,NETFLIX, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
the current market value(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
of the underlying stock exceeds the exercise price. The Company amortizes
deferred stock-based compensation on an accelerated basis
in accordance withusing the graded vesting method which is
prescribed by Financial Accounting Standards Board (FASB) Interpretation No. 28
("FIN 28"). Deferred compensation resulting from repriced options is calculated
pursuant to FASB Interpretation No. 44 and amortized using FIN 28. Options
granted to nonemployees are considered compensatory and are accounted for at
fair value pursuant to Statement of Financial Accounting Standards (SFAS) No.
123 and Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."123. The Company usesdiscloses the Black-
Scholes option pricing model topro forma effect of using the fair value options granted to non-employees. The
related expense is recorded over the periodmethod
of accounting for all employee stock-based compensation arrangements in
which the related services are
received.
Income taxesaccordance with SFAS No. 123.
INCOME TAXES
The Company accounts for income taxes using the asset and liability
method
pursuant to SFAS No. 109, Accounting for Income Taxes.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 loss
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. SFAS No. 130 requires additional disclosures in the
financial statements, but does not affect the Company's financial position or
results of operations.COMPREHENSIVE LOSS
Net loss, as reported in the statements of operations, is the Company's
only component of comprehensive incomeloss during all periods presented.
Net loss per shareNET LOSS PER SHARE
Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock, excluding common stock subject to
repurchase. Diluted net loss per share is computed using the weighted-average
number of outstanding shares of common stock and, when dilutive, potential
common stock from outstanding options and warrants to purchase common stock,
and common
stock subject to repurchase using the treasury stock method, and from
convertible securities using the
"as-if-converted" basis."if-converted" method. All potential common stock issuances have been excluded
from the computationcomputations of diluted net loss per share for all periods presented
because the effect would be antidilutive.
F-9
NETFLIX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
Diluted net loss per share does not include the effect of the following
antidilutive common equivalent shares (in thousands)(rounded to nearest thousand):
Period from
August 29, Years Ended
1997 (Inception) DecemberAS OF DECEMBER 31,
to December 31, -------------
1997 1998--------------------------------
1999 ---------------- ------ ------2000 2001
---------- ---------- ----------
Stock options.................................... -- 4,168 1,594
Warrants......................................... -- 93 93options............................... 1,594,000 3,418,000 8,999,000
Warrants.................................... 93,000 708,000 21,054,000
Common stock subject to repurchase............... 3,200 1,653 1,069repurchase.......... 1,069,000 486,000 419,000
Redeemable convertible preferred stock...... 14,984,000 20,317,000 28,994,000
Convertible preferred stock...................... 3,990 10,128 19,429
----- ------ ------
7,190 16,042 22,185
===== ====== ======stock................. 4,445,000 4,445,000 6,157,000
Subscribed preferred stock.................. -- 1,321,000 3,213,000
---------- ---------- ----------
22,185,000 30,695,000 68,836,000
========== ========== ==========
SegmentFAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash, accounts payable and borrowings
approximates their carrying values due to their short maturity or fixed-rate
structure.
F-10
NETFLIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
SEGMENT REPORTING
The Company is organized in a single operating segment for purposes of
making operating decisions and assessing performance. The chief operating
decision maker evaluates performance, makes operating decisions and allocates
resources based on financial data consistent with the presentation in the
accompanying financial statements.
Accounting for derivative instruments and hedging activitiesRECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998,July 2001, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments141, BUSINESS COMBINATIONS, and Hedging Activities.
SFAS No. 133 establishes142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 addresses the
accounting for and reporting of business combinations and requires that all
business combinations be accounted for using the purchase method of accounting.
SFAS No. 141 is effective for all business combinations initiated after June
30, 2001. The adoption of SFAS No. 141 did not have any effect on the Company's
financial statements.
SFAS No. 142 addresses financial accounting and reporting standards for derivative instruments,acquired
goodwill and other intangible assets. SFAS No. 142 changes the accounting for
goodwill from amortization method to an impairment-only method. The
amortization of goodwill, including certain derivative
instruments embeddedgoodwill recorded in other contracts, (collectively referredpast business
combinations, will cease upon adoption of SFAS No. 142. For goodwill acquired
by June 30, 2001, SFAS No. 142 is effective for all fiscal years beginning
after December 15, 2001. Goodwill and intangible assets acquired after June 30,
2001, will be subject to as
derivatives)immediate adoption of SFAS No. 142. The adoption of
SFAS No. 142 will not have any effect on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (SFAS No. 144). SFAS No. 144
addresses financial accounting and reporting for hedging activities. Itthe impairment or disposal of
long-lived assets. This statement requires that an entity recognize
all derivatives as eitherlong-lived assets be reviewed
for impairment whenever events or liabilities in the statement of financial
position and measure those instruments at fair value. For a derivative not
designated as a hedging instrument, changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the derivativeasset. SFAS No. 144 requires companies to
separately report discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. Assets to be
disposed of are recognized in earnings inreported at the periodlower of change. This statement willthe carrying amount or fair value less
costs to sell. The Company is required to adopt SFAS No. 144 on January 1,
2002. The provisions of SFAS No. 144 for assets held for sale or other disposal
generally are required to be effective for all annual and interim periods beginningapplied prospectively after June 15, 1999.the adoption date to
newly initiated disposal activities. Management does not believeexpect the adoption of
SFAS No. 133 will144 to have a material effectimpact on the Company's financial position or results of operations.
Subscriber acquisition and advertising costs
The Company expenses subscriber acquisition and advertising costs as
incurred. These amounts are included in sales and marketing expenses in the
accompanying financial statements.
Advertising expense was approximately $40,
$2,154 and $3,913 for the period from August 29, 1997 (inception) to December
31, 1997, and for the years ended December 31, 1998 and 1999, respectively.
The Company offers an initial period of free DVD use to new customers. At
the end of the free period, the customer has no obligation to continue to do
business with the Company and the customer can elect to opt out of continuing a
relationship at no cost. The Company accrues the estimated direct costs of
fulfilling the obligations under free programs based upon the estimated number
of DVDs that are expected to be rented by those potential customers that are
participating in the free program at any point in time. The Company does not
record any revenue in connection with any free DVD rental programs.
F-10F-11
NETFLIX.COM,NETFLIX, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except share(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. PROPERTY AND EQUIPMENT, NET
Property and per share data)
Until April 1999,equipment consisted of the Company offered coupons for free DVDs to consumers
who purchase certain DVD players from retailers. As of December 31, 1998, the
Company had accrued the estimated cost of satisfying the outstanding
obligations under this program of approximately $1,031. The amount accrued
includes the estimated cost of DVDs to be delivered under the program and
estimated shipping and handling costs. The amount accruedfollowing as of December 31, 1998, is offset by an amount of approximately $730 of reimbursement from a DVD
player manufacturer. During 1999, this program was terminated2000
and as of
December 31, 1999, the Company had no obligation to deliver free DVDs. The
Company did not record any revenue in connection with this free DVD program.
Unaudited pro forma financial statement balance sheet
The pro forma balance sheet as of December 31, 1999, includes (i) the
assumed automatic conversion of all outstanding shares of Series A, B, C, and
D convertible preferred stock upon the closing of the Company's planned
initial public offering into 19,428,765 shares of common stock.
Pro forma net loss per share (unaudited)
Pro forma net loss per share for the year ended December 31, 1999, is
computed using the weighted-average number of common stock outstanding and
common stock to be issued from the automatic conversion of convertible
preferred stock effective upon the closing of the Company's initial public
offering, as if such conversion occurred on January 1, 1999, or at the date of
issuance, if later. Pro forma common equivalents, consisting of incremental
common stock issuance upon the exercise of stock options and warrants, as well
as shares subject to repurchase agreements are not included in pro forma
diluted net loss per share.2001:
Year ended
DecemberAS OF DECEMBER 31,
1999
------------
Pro forma net loss per share basic and diluted
(unaudited)............................................... $ (1.36)
===========
Weighted-average shares used in computation................ 21,913,000
===========
2. Property and Equipment, Net
Property and equipment as of December 31, 1998 and 1999, consisted of the
following:
1998 1999
------ ------------------------
2000 2001
------- -------
Computer equipment..........................................equipment............................... $ 996 $4,361
Purchased software and Web site development costs........... 240 7108,644 $ 9,245
Internal-use software............................ 3,500 5,285
Furniture and fixtures...................................... 60 405fixtures........................... 1,608 2,033
Leasehold improvements...................................... 21 162
------ ------
1,317 5,638improvements........................... 868 1,627
------- -------
14,620 18,190
Less accumulated depreciation............................... 255 1,139
------ ------
$1,062 $4,499
====== ======depreciation.................... 4,661 9,985
------- -------
$ 9,959 $ 8,205
======= =======
F-11
NETFLIX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
Property and equipment includes approximately $1,075$5,101 and $2,101$5,500 of assets
under capital leases as of December 31, 19982000 and 1999,2001, respectively.
Accumulated depreciation of assets under these leases totaled approximately
$241$2,185 and $806 for the years ended$2,276
as of December 31, 19982000 and 1999,2001, respectively. Internal-use software includes
approximately $1,595 and $2,795 of internally incurred capitalized software
development costs as of December 31, 2000 and 2001, respectively. Accumulated
amortization of capitalized software development costs totaled $1,080 and
$1,835 as of December 31, 2000 and 2001, respectively.
3. ACCRUED EXPENSES
Accrued Liabilities
Accrued liabilitiesexpenses consisted of the following as of December 31, 19982000 and
1999:2001:
1998 1999AS OF DECEMBER 31,
------------------
2000 2001
------ ------
Obligation to satisfy free rental programs.................. $ 98 $ 595
Obligation to deliver free DVDs............................. 1,031 --Accrued state sales and use tax.................. $2,663 $2,379
Employee benefits........................................... 181 926
Other....................................................... 330 1,690benefits................................ 1,918 1,476
Other............................................ 1,338 689
------ ------
$1,640 $3,211$5,919 $4,544
====== ======
4. Debt and Warrants
Equipment lines of creditDEBT AND RELATED WARRANTS
CAPITAL LEASE OBLIGATIONS
The Company has entered into financing agreementscapital leases for the acquisition of
inventory and equipment. Amounts borrowed are collateralized by the related
purchased assets. The Company hadhas outstanding borrowingscapitalized lease obligations under
these arrangements of $1,058$3,306 and $1,637$2,402 as of December 31, 19982000 and 1999,2001,
respectively. Such amounts are payable over a four-year period in monthly installments of principal and
interest with effective interest accruing at rates ranging between 8.0%16.3% and 26.0%27.4% per
annum.
NotesNOTES PAYABLE
The Company has a note payable In February 1999, the Company entered into a loanwith an unpaid balance of $4,135 and
security agreement
with a third-party that provides for borrowings of up to $5,000. As$1,667 as of December 31, 1999, $5,000 had been borrowed under this facility.2000 and 2001, respectively. The loan accrues
interest equal to the prime rate, on the date of funding, plus 3.5%, and has a
36-month repayment period. Borrowings arenote payable is
secured by the assets of the Company.
Principal payments of $625, $2,500, and $1,875 are due in the years ended
December 31, 2000, 2001, and 2002, respectively.
In December 1998, the Company, entered into promissory notes in the amount of
$1,000. These notes were subordinated to bank debt, lease financing agreements,
and any other forms of institutional debt, and accruedaccrues interest at a rate12% per annum and is
payable in monthly installments of 13% per annum. These notes were paid in full in February 1999.
Warrantsprincipal and common stock issued with debt instruments
In October 1998, in connection with borrowings under an equipment line of
credit, the Company issued a warrant that provided the lender the right to
purchase 92,592 shares of Series B mandatorily redeemable convertible preferred
stock at $1.08 per share. The Company accounted for the fair value of the
warrant of approximately $182 as an increase tointerest through September
2002.
F-12
NETFLIX.COM,NETFLIX, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except share(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SUBORDINATED NOTES PAYABLE
In July 2001, the Company issued subordinated promissory notes and
warrants to purchase 20,456,866 shares of its common stock at an exercise price
of $1.00 per share data)
mandatorily redeemable preferred stock with a corresponding provisionfor net proceeds of $12,831. The subordinated notes have an
aggregate face value of $13,000 and stated interest rate of 10%. Approximately
$10,884 of the proceeds was allocated to debt
discount.the warrants as additional paid-in
capital and $1,947 was allocated to the subordinated notes payable. The
debtresulting discount of $11,053 is being amortizedaccreted to interest expense over the
termusing an
effective annual interest rate of the related debt which is 48 months.
In December 1998, in connection with borrowings under an equipment line of
credit, the Company issued a warrant that provided the lender the right to
purchase a variable number of shares of mandatorily redeemable convertible
preferred stock at a variable price.21%. The Company estimated the fair value of
this warrant to be approximately $138 at the December issuance date. In
February 1999, this warrant was modified and the number of shares (58,626) and
price ($2.31) were fixed resulting in an estimated fairface value of the warrantsubordinated notes
and all accrued interest are due and payable upon the earlier of approximately $170. The Company accounted forJuly 2011 or
the fairconsummation of a qualified initial public offering. As of December 31,
2001, accrued unpaid interest of $650 is included in the carrying amount of the
subordinated notes payable balance of $2,799 in the accompanying financial
statements. Upon a change in control, as defined, the subordinated note holders
are entitled to consideration equal to three times the face value of the warrant as
an increase to mandatorily redeemable preferred stock with a corresponding
provision to debt discount. The debt discount is being amortized to interest
expense over the term of the related debt, which is 48 months. The lender
exercised this warrant in February 1999.notes
plus accrued interest.
WARRANTS AND COMMON STOCK ISSUED WITH DEBT INSTRUMENTS
In February 1999, in connection with borrowings under notesa note payable, the
Company issued to the lender 271,489 shares of common stock at $0.11 per share.
The Company accounted for the fair value of the common stock of approximately
$762 as an increase to additional paid-in capital with a corresponding
provision to debt discount. The debt discount was accreted to interest expense
over 24 months.
In May 2000, in connection with a capital lease, the Company issued a
warrant that provided the lender the right to purchase 23,007 shares of common
stock at $6.52 per share. The Company accounted for the fair value of the
warrant of approximately $105 as an increase to additional paid-in capital with
a corresponding provision to debt discount. The debt discount is being accreted
to interest expense over the term of the related debt, which is 36 months.
In July 2001, in connection with borrowings under subordinated promissory
notes, the Company issued to the note holders warrants to purchase 20,456,866
shares of common stock. The Company accounted for the fair value of the
warrants of $10,884 as an increase to additional paid-in capital with a
corresponding discount on subordinated notes payable.
In July 2001, in connection with a capital lease agreement, the Company
granted warrants to purchase 255,000 shares of common stock at an exercise
price of $1.00 per share. The fair value of approximately $172 was recorded as
an increase to additional paid-in capital with a corresponding reduction to the
capitalized lease obligation. The debt discount is being accreted to interest
expense over the term of the lease agreement which is 45 months.
The fair values of warrants were estimated at the date of issuance of
each warrant using the Black-Scholes valuation model with the following
assumptions: the term of the warrant; risk-free rates between 4.92% to 6.37%;
volatility of 80% for all periods; and a dividend yield of 0.0%.
WARRANTS, OPTIONS AND COMMON STOCK ISSUED IN EXCHANGE FOR CASH AND SERVICES
RENDERED
In March 2000, in consideration for employee recruiting and placement
services rendered, the Company issued 21,777 shares of common stock to a
consultant. The Company recorded the deemed fair value of the common stock
issued of $306 as marketing expense.
F-13
NETFLIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Also in March 2000, in consideration for marketing services rendered, the
Company issued an option to a consultant to purchase 15,000 shares of common
stock at $4.50 per share. The Company recorded the fair value of the option of
approximately $195 as marketing expense.
In April 2000, in connection with the sale of Series E preferred stock,
the Company sold warrants to purchase 533,003 shares of Series E preferred
stock at a price of $0.01 per share. The warrants have an exercise price of
$14.07 per share. The proceeds from the sale of these warrants were recorded as
part of the issuance of Series E preferred stock in the accompanying statement
of stockholders' deficit. In July 2001, in connection with a modification of
the terms of the Series E preferred stock, certain Series E warrant holders
agreed to the cancellation of warrants to purchase 500,487 of Series E
preferred stock. The remaining warrants to purchase 32,516 shares are
exercisable at $14.07 per share.
In November 2000, in connection with an operating lease, the Company
issued a warrant that provided the lessor the right to purchase 60,000 shares
of common stock at $2.00 per share. The Company also issued an option, in
connection with the lease to a consultant to purchase 25,000 shares of common
stock at $2.00 per share. The Company accounted for the fair value of the
warrant of approximately $216 as an increase to additional paid-in capital with
a corresponding increase to other assets. This asset is being amortized over
the term of the related debt,operating lease, which is 24 months.
Unamortized discounts relatedfive years. The Company
recorded the fair value of the option of approximately $90 as general and
administrative expense.
In July 2001, the Company issued a warrant to thesepurchase 100,000 shares of
Series F non-voting preferred stock at $9.38 per share to a Web portal company
in connection with an integration and distribution agreement. The fair market
value of the warrants of $307approximately $18 was recorded as sales and $674 asmarketing
expense and an increase to additional paid-in capital.
The Company calculated the fair value of December 31, 1998the warrants and 1999, respectively, are included in noncurrent notes
payable and capital lease obligations and are being amortized to interest
expense overnonemployee
stock options using the Black-Scholes valuation model with the following
assumptions: the term of the related obligations. The lender exercised this
warrant in February 1999.or option; risk-free rates between 5.83%
to 6.37%; volatility of 80% for all periods; and dividend yield of 0.0%.
F-14
NETFLIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. Lease CommitmentsCOMMITMENTS
LEASE COMMITMENTS
The Company leases its primary facilityfacilities under a noncancelable operating
lease.noncancelable-operating
leases. The Company also has capital leases with various expiration dates
through December 31, 2002.October 1, 2004. Future minimum lease payments under noncancelable
capital and operating leases as of December 31, 1999,2001, are as follows:
Capital Operating
Leases Leases
Year ending DecemberCAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ ------- ---------
2000..................................................2002....................................................... $ 684 $1,312
2001.................................................. 724 933
2002.................................................. 464 891
2003.................................................. 116 905
2004..................................................1,763 $ 2,473
2003....................................................... 1,267 2,543
2004....................................................... 176 2,484
2005....................................................... -- 781
Thereafter............................................1,466
Thereafter................................................. -- --
------ ------------- -------
Total minimum payments................................ 1,988 $4,822
======payments..................................... $ 3,206 $ 8,966
=======
Less interest......................................... 606
------interest and unamortized discount..................... (804)
-------
Present value of net minimum lease payments........... 1,382payments................ 2,402
Less current portion of capital lease obligations..... 571
------obligations.......... (1,345)
-------
Capital lease obligation..............................obligations, noncurrent...................... $ 811
======1,057
=======
F-13
NETFLIX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
Rent expense for the period from August 29, 1997 (inception) to December 31,
1997, and for the years ended December 31, 19981999, 2000 and 1999,2001 was
approximately
$11, $169,$783, $1,533 and $783,$2,450, respectively. 6. Preferred StockRent expense is computed using the
straight-line method and Common Stock
Preferred Stockthe minimum operating lease payments required over the
lease term.
OTHER COMMITMENTS
In October 1997,2001, the Company issued 3,990,000entered into two strategic marketing alliances for
the primary purpose of generating new subscribers. The first alliance provides
that the Company will pay a specified bounty in cash for each referred
subscriber as well as an ongoing share of revenues for every new subscriber
referral for the two year term of the agreement. In addition, after a minimum
threshold of subscribers has been referred, the Company is obligated to issue
additional shares of Series AF Preferred Stock for every subscriber referred.
Under the second alliance, the Company will pay a specified bounty for every
new referred subscriber in excess of a specified minimum. In addition, the
Company will share a portion of revenues for the term of the agreement for each
referred subscriber. Through December 31, 2001, the Company had paid $415 under
these agreements. Also, through December 31, 2001, no amounts of Series F
Preferred Stock had been earned or issued under the first alliance.
F-15
NETFLIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
The redeemable convertible preferred stock (Series A) for aggregate considerationat December 31, 2000 consists
of $1,992. In March
1998, the Company sold an additional 454,545 shares of Series A for aggregate
consideration of $250. In June 1998, the Company sold 5,684,024 shares of
Series Bfollowing:
NUMBER OF REDEMPTION AND
NUMBER OF SHARES ISSUED LIQUIDATION
SHARES AND DIVIDENDS VALUE TOTAL LIQUIDATION
PAR VALUE AUTHORIZED OUTSTANDING PER SHARE PER SHARE VALUE
--------- ---------- ------------- --------- -------------- -----------------
Series B........... $0.001 5,776,616 5,684,024 $0.0864 $1.08 $ 6,139
Series C........... 0.001 4,750,000 4,650,269 0.2616 3.27 15,205
Series D........... 0.001 4,650,000 4,649,927 0.5216 6.52 30,318
Series E........... 0.001 5,874,199 5,332,689 0.7500 9.38 50,021
---------- ---------- --------
21,050,815 20,316,909 $101,683
========== ========== ========
The redeemable convertible preferred stock for aggregate considerationat December 31, 2001 consists
of $6,000. In February
1999, the Company sold 4,650,269 shares of Series C preferred stock for
aggregate consideration of $15,150. In June 1999, the Company sold 4,649,927
shares of Series D preferred stock for aggregate consideration of $30,318.following:
NUMBER OF REDEMPTION AND
NUMBER OF SHARES ISSUED LIQUIDATION
SHARES AND DIVIDENDS VALUE TOTAL LIQUIDATION
PAR VALUE AUTHORIZED OUTSTANDING PER SHARE PER SHARE VALUE
--------- ---------- ------------- --------- -------------- -----------------
Series B........... $0.001 5,776,616 5,684,024 $0.0864 $1.08 $ 6,139
Series C........... 0.001 4,750,000 4,650,269 0.2616 3.27 15,205
Series D........... 0.001 4,650,000 4,649,927 0.5216 6.52 30,318
Series E........... 0.001 5,874,199 5,007,530 0.7500 9.38 46,971
Series E-1......... 0.001 5,874,199 325,159 0.7500 9.38 3,050
---------- ---------- --------
26,925,014 20,316,909 $101,683
========== ========== ========
The rights, preferences and privileges of the preferred stockholders are
as follows:
DIVIDENDS
The holders of Series A, B, C,
and Dredeemable convertible preferred stock are as follows:
. Dividendsentitled to
receive annual dividends per share at the rates stated above. Such dividends,
which are noncummulativein preference to any dividends on common stock, are payable whenever
funds are legally available and payable only upon declarationwhen declared by the Company's Board of Directors atDirectors. The
right of the holders of the redeemable convertible preferred stock to receive
dividends is not cumulative. No dividends on redeemable convertible preferred
stock have been declared from inception through December 31, 2001.
REDEMPTION
The holders of redeemable convertible preferred stock have the option to
redeem their shares for cash during a rate of $0.05, $0.0864, $0.2616, and
$0.516 per share for Series A, B, C, and D, respectively.
. Holders of Series A, B, C, and D have a liquidation preference of $0.50,
$1.08, $3.27, and $6.52 per share, respectively.60-day period commencing June 12, 2004.
LIQUIDATION
After payment to holders of Series A, B, C, D, E and DE-1 convertible
preferred stock, each share of common stock and preferred stock is entitled to
receive pro rata any remaining assets of the Company until such time as the
holders of Series A, B, C, D, E and DE-1 convertible preferred stock receive
aggregate amounts totaling $1.50, $3.24, $9.81, $19.56, $28.14 and $19.56$28.14 per
share, respectively. Thereafter, all remaining proceeds are to be allocated to
the holders of common stock and Series F Preferred Stock on a pro rata basis.
F-16
NETFLIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONVERSION
At December 31, 2000, each share of Series C, D and E redeemable
convertible preferred stock was convertible into one share of common stock.
At December 31, 2001, each share of Series B and E-1 redeemable
convertible preferred stock was convertible into one share of common stock.
In July 2001, the conversion rates for the Series C and D preferred stock
were adjusted in accordance with the anti-dilution provisions as set forth in
the Company's Certificate of Incorporation such that each share of the Series C
and D preferred stock converts into 1.3207 and 1.4209 shares of common stock,
respectively.
The original terms of the Series E preferred stock contained a special
anti-dilution provision that guaranteed a value of $14.07 per share in the
event of an initial public offering. The unrecorded measured value of this
contingent beneficial conversion feature was $30,120. This conversion feature
was cancelled in July 2001. At the same time the conversion rate for Series E
preferred stock was modified to 1.4387 shares of common stock for each share of
Series E preferred stock. In addition, in accordance with the antidilution
right included in the Certificate of Incorporation, the conversion rate for
Series E preferred stock was further changed, resulting in a conversion rate of
2.0441 shares of common stock for each share of Series E preferred stock. The
cancellation of the beneficial conversion feature and the modification of the
conversion rate of the Series E preferred stock had no financial accounting
effect because the holders of these shares received no net benefit.
Conversion of each share of Series B, C and D preferred stock is
automatic upon closing of a public offering of the Company's common stock for
aggregate gross proceeds of at least $20 million. Conversion of each share of
Series E and E-1 redeemable convertible preferred stock is automatic upon
closing of a public offering of the Company's common stock for aggregate
proceeds of at least $40 million and a minimum price per share of $5.00. Series
B, C and D preferred stock may be automatically converted by an affirmative
vote of 75% of the then outstanding shares of each respective series. Each
share of Series E and E-1 redeemable convertible stock may be automatically
converted by a vote of 75% of the then outstanding shares of Series E and E-1
(voting together as a single class on an if-converted basis).
VOTING RIGHTS
The holders of each share of redeemable convertible preferred stock are
entitled to the number of votes equal to the number of shares of common stock
on an if-converted-basis. The holders of Series E and E-1 redeemable
convertible preferred stock do not have the right to vote with respect to such
shares for the election of directors of the Company. The holders of Series B, C
and D, redeemable convertible preferred stock voting as separate classes are
each entitled to elect one director of the Company's Board of Directors.
7. STOCKHOLDERS' EQUITY AND CONVERTIBLE PREFERRED STOCK
DIVIDENDS
The holders of Series A convertible preferred stock are entitled to
receive annual dividends per share of $0.05. Such dividends, which are in
preference to any dividends on common stock are payable whenever funds are
legally available and when declared by the Board of Directors. The right of the
holders of Series A convertible preferred stock to receive dividends is not
cumulative. No dividends on convertible preferred stock have been declared from
inception through December 31, 2001. Series F Non-Voting convertible preferred
stock is not entitled to any preferred dividends.
F-17
NETFLIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
LIQUIDATION
The liquidation value of one share of Series A convertible preferred
stock is $0.50, resulting in a total liquidation value of $2,222. After payment
to holders of Series A, B, C, D, E and E-1 convertible preferred stock, each
share of common stock and preferred stock is entitled to receive pro rata any
remaining assets of the Company until such time as the holders of Series A
convertible preferred stock receive aggregate amounts totaling $1.50 per share,
respectively. Thereafter, all remaining proceeds are to be allocated to the
holders of common stock and Series F Preferred Stock on a pro rata basis.
CONVERSION
Each share of Series A convertible preferred stock is convertible, into common stock at the
option of the holder, at any time, at a rate ofinto one share of common stock. Series F
Preferred Stock may not be converted into common stock foruntil the earlier of (1)
immediately prior to a change in control, or (2) such time as such shares have
been sold or transferred to a third party not affiliated with the initial
holders of Series F Preferred Stock. Conversion of each share of Series A
convertible preferred stock. Each outstanding share ofstock and Series A shall
automatically be converted into one share of common stock immediatelyF Preferred Stock is automatic upon the
closing of an underwrittena public offering pursuant to an
effective registration statement of which the gross proceeds equal or
exceed $20,000 or affirmative election of the holders of at least 50% of
the outstanding shares.
. Each share of Series B, C, and D mandatorily redeemable outstanding
preferred stock automatically converts into one share of common stock
upon an initial offering of the Company's common stock withfor aggregate gross
proceeds in excess of $20,000 or affirmative election of the holders of at least 75%$20 million. Each share of Series A convertible preferred
stock shall be automatically converted by a vote of a majority of the then
outstanding shares of Series A preferred stock.
VOTING RIGHTS
The holders of each share of Series A convertible preferred stock shall
be entitled to the respective series. The
Company has fully reservednumber of votes equal to the number of shares of common
stock for issuance upon the
conversionon an if-converted-basis. The holders of Series B, C, and D preferred stock.
. Holders of Series B, C, and D preferred stockF Preferred Stock have the option to redeem
their shares after June 12, 2004 at $1.08, $3.27, and $6.52 per share,
respectively.
F-14
NETFLIX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
Common Stock
At December 31, 1999, the Company had 2,550,000 shares of common stock
outstanding to founders and employees that were issued under restricted stock
purchase agreements. Pursuant to the agreements, the Company has the right to
repurchase the unvested common stock at its original purchase price in the
event of voluntary or involuntary termination of employment of the stockholder
for any reason. The repurchase rights expire generally through the year 2001.
Shares subject to repurchase totaled approximately 1,653,000 and 1,069,000 as
of December 31, 1998 and 1999, respectively.
1997 Stock Planno
voting rights.
STOCK OPTION PLAN
As of December 31, 1998 and 1999,2001, the Company was authorized to issue up to
5,081,400 and 6,828,08314,639,935 shares respectively, of common stock in connection with its 1997 Stock Plan tostock option plan
for directors, employees and consultants. The 1997 stock option plan provides
for the issuance of stock purchase rights, incentive stock options or
nonstatutorynon-statutory stock options.
Stock purchase rights are subject to a restricted stock purchase
agreement whereby the Company has the right to repurchase the stock at the
original issue price upon the voluntary or involuntary termination of the
purchaser's employment with the Company. The repurchase rights will lapse at a rate
determined by the stock plan administrator but at a minimum rate of 25% per
year.
The exercise price for incentive stock options is at least 100% of the
stock's deemed fair market value on the date of grant for employees owning less than
10% of the voting power of all classes of stock, and at least 110% of the
deemed fair
market value on the date of grant for employees owning more than 10% of
the voting power of all classes of stock. For nonstatutory stock options, the
exercise price is also at least 110% of the deemed fair market value on the date of
grant for service providers owning more than 10% of the voting power of all
classes of stock and no less than 85% of the deemed fair market value on the date of
grant for service providers owning less than 10% of the voting power of all
classes of stock.
Options generally expire in 10 years;years however, they may be limited to 5
years if the optionee owns stock representing more than 10% of the Company.
Vesting periods are determined by the stock plan administrator and generally
provide for shares to vest ratably over a 4-year period, with 25% of the award vesting
after one year from the date of grant and then ratably vesting each month
thereafter.
F-15three or four years.
F-18
NETFLIX.COM,NETFLIX, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
The Company uses(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Generally, the intrinsic-value method to account for its fixed option
plans. Deferred stock-based compensation cost has been recognized for stock
option planCompany's Board of Directors grants to employees whenoptions at an exercise
price of not less than the deemed fair value of the underlyingCompany's common stock onat
the grant date of grant. In 2001, the Company offered its employees the right to
exchange certain employee stock options. The exchange resulted in the
cancellation of employee stock options to purchase 2.7 million shares of common
stock with varying exercise prices in exchange for 2.7 million employee stock
options with an exercise price of $1.00. The option exchange resulted in
variable award accounting treatment for all of the exchanged options. Variable
award accounting will continue until all options subject to variable accounting
are exercised, cancelled or expired. However, additional non-cash compensation
will be recorded only to the extent the intrinsic value of the repriced awards
exceeds the exercise priceoriginal intrinsic value of the replaced stock options.
SFAS No. 123 requires the disclosure of net loss as if the Company had
adopted the fair value method for each stock option.
Deferredits stock-based compensation is amortized usingarrangements for
employees since the accelerated method set
forth in FASB Interpretation No. 28.inception of the Company. Had compensation cost for the Company's
stock-based compensation plan been
determined consistent with SFAS No. 123, for
all of the Company's stock-based compensation plans, net loss and basic and
diluted net loss
per share would have been as follows:
Period From
August 29,
1997 (Inception) Years Ended
to DecemberYEAR ENDED DECEMBER 31,
December 31,
---------------- ------------------
1997 1998----------------------------
1999 ----------------2000 2001
-------- -------- --------
Net loss:
As reported....................... $ (359) $(11,081)reported................................... $(29,845) $(57,363) $(38,258)
Pro forma......................... (359) (11,093)forma..................................... (29,949) (58,274) (39,209)
Basic and diluted net loss per share:
As reported....................... -- (12.27)reported................................... (5.60) (9.71) (6.34)
Pro forma......................... -- (12.28)forma..................................... (5.62) (9.87) (6.50)
The fair value of each option was estimated on the date of grant using
the minimum valueminimum-value method with the following weighted-average assumptions: no
dividend yield; volatility of -0-%0%; risk-free interest rate of -0-%5.40%, 4.95%,6.24% and
5.40% for the period from August 29, 1997 (inception) to December 31, 1997, and4.14% for the years ended 19981999, 2000 and 1999,2001, respectively; and expected life
of 3.5 years for all periods.
F-19
NETFLIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A summary of the status ofactivities related to the Company's options for the period from August
29, 1997 (inception) to December 31, 1997, and for the
years ended December 31, 19981999, 2000 and 1999, are2001 is as follows:
Options Outstanding
--------------------------
Shares Weighted-
Available Number of Average
for Grant Shares Exercise PriceOPTIONS OUTSTANDING
---------------------
WEIGHTED-
SHARES AVERAGE
AVAILABLE NUMBER EXERCISE
FOR GRANT OF SHARES PRICE
----------- ---------- ---------- -----------------------
Authorized (inception).................. 2,800,000Balances as of January 1, 1999........ 883,179 4,167,971 $0.084
Authorized......................... 1,746,683 --
$Granted............................ (2,001,063) 2,001,063 1.213
Exercised.......................... -- ----------(3,971,361) 0.090
Canceled........................... 603,834 (603,834) 0.450
Repurchased........................ 600,450 --
----------- ---------- ------
Balances as of December 31, 1997........ 2,800,0001999...... 1,833,083 1,593,839 1.347
Authorized......................... 1,761,852 -- --
Authorized.............................. 2,281,400Granted............................ (2,548,397) 2,548,397 3.126
Exercised.......................... -- Granted................................. (4,492,483) 4,492,483 0.085
Exercised...............................(243,009) 1.743
Canceled........................... 481,425 (481,425) 2.515
Repurchased........................ 79,960 -- (30,250) 0.098
Canceled or repurchased................. 294,262 (294,262) 0.0851.770
----------- ---------- ----------------
Balances as of December 31, 1998........ 883,179 4,167,971 0.084
Authorized.............................. 1,746,6832000...... 1,607,923 3,417,802 2.481
Authorized......................... 9,400,000 -- Granted................................. (2,001,063) 2,001,063 1.213
Exercised............................... --
(3,370,911) 0.090
Canceled or repurchased................. 1,204,284 (1,204,284) 0.450Granted............................ (10,372,978) 10,372,978 1.068
Exercised.......................... -- (90,137) 1.382
Canceled........................... 4,701,477 (4,701,477) 2.445
Repurchased........................ 16,876 --
----------- ---------- ----------------
Balances as of December 31, 1999........ 1,833,083 1,593,839 1.3472001...... 5,353,298 8,999,166 $0.994
=========== ========== ================
Options exercisable as of December 31:
1997.................................. -- --
1998.................................. 292,958 0.060
1999..................................1999........................... 117,746 0.421$0.421
2000........................... 557,053 $1.250
2001........................... 2,754,755 $0.979
F-16
NETFLIX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
The weighted-average fair value of options granted in fiscal 1997, 1998,1999, 2000,
and 19992001 was $-0-, $1.17,$4.66, $8.55 and $4.66,$0.14, respectively.
F-20
NETFLIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
As of December 31, 1999,2001, the range of exercise prices and
weighted-average remaining contractual life of outstanding options were as
follows:
Options outstanding Options exercisable
------------------------------- ---------------------
Weighted-
Average
Remaining Weighted- Weighted-
Contractual Average Number of Average
Exercise Number of Life Exercise Shares Exercise
prices Options (Years) Price Exercisable Price
--------OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES OPTIONS LIFE (YEARS) PRICES OPTIONS PRICES
--------------- --------- ----------------------- --------- -------------------- ---------
$0.05--$0.11 222,964 8.32 $0.07 96,079 $0.07$0.055 to $0.110 167,137 6.22 $0.059 167,012 $0.059
$1.000 8,769,800 9.26 1.00 660,875 9.272,525,754 1.00
-- --
1.50--1.75 53,500 9.40 1.61 -- --
2.00--2.25 656,500 9.75 2.04 21,667$2.000 to $2.250 47,229 8.55 2.00 46,989 2.00
$4.500 15,000 8.25 4.50 15,000 4.50
--------- -------
$0.05--$2.25 1,593,839 9.36 $1.35 117,746 $0.42---------
8,999,166 2,754,755
========= ================
Deferred Compensation
In connection with certain stock option grants made to employees and
consultants during the years ended December 31, 1998 and 1999, the Company
recognized deferred compensation totaling $5,862 and $6,872, which is being
amortized over the four year vesting period of the related options.
Amortization expense recognized during the years ended December 31, 1998 and
1999, totaled approximately $1,151 and $4,742, respectively.
7. Income Taxes8. INCOME TAXES
Income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 34% to pretax loss as a result of the following:
Period from
August 29, 1997 Years Ended
(Inception) to DecemberYEAR ENDED DECEMBER 31,
December 31, -----------------
1997 1998----------------------------
1999 --------------- -------2000 2001
-------- -------- --------
Expected tax benefit at U.S. federal statutory rate of 34%............... $ (122) $(3,768)..................... $(10,147) Net$(19,503) $(13,307)
Current year net operating losslosses for which no tax benefit was realized................ 122 3,213is recognized....... 7,800 Deferred stock compensation.......... -- 32716,574 11,507
Stock based compensation....................................................... 1,496 Other................................ -- 2282,957 1,864
Other.......................................................................... 851 ------ -------(28) (64)
-------- -------- --------
Total income tax expense..................expense.................................................... $ -- $ -- $ --
====== =============== ======== ========
F-17
NETFLIX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 19982000 and
1999,2001, are presented below:
1998 1999
------- -------AS OF DECEMBER 31,
------------------
2000 2001
-------- --------
Deferred tax assets:
Net operating loss carryforward.........................carryforward............... $ 4,181 $14,00826,824 $ 32,626
Accruals and reserves................................... 398 1,590
Other...................................................reserves......................... 6,993 13,885
Other......................................... 1 1
------- -------20
-------- --------
Gross deferred tax assets............................. 4,580 15,599assets................. 33,818 46,531
Less valuation allowance.................................. 4,580 15,599
------- -------allowance......................... (33,818) (46,531)
-------- --------
Net deferred tax assets...............................assets................... $ -- $ --
======= =============== ========
Management has established a valuation allowance for the portion of
deferred tax assets for which realization is uncertain. The total valuation
allowance for the years ended December 31, 1998,2000 and 19992001 increased $4,000$18,219 and
$11,019,$12,713, respectively.
As of December 31, 1998 and 1999,2001, the Company hashad net operating loss carryforwardscarry
forwards for Federalfederal and California income tax purposes of approximately
$9,761$83,699 and $32,700, respectively.$56,260, respectively, to reduce future income subject to
F-21
NETFLIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
income tax. The federal net operating loss carryforward expirescarry forward will expire beginning
in 2012 to 2021 and the year 2005.California net operating loss carry forwards expire
beginning in 2002 to 2011, if not utilized.
The Tax Reform Act of 1986, imposes restrictions on the utilization of
net operating loss carryforwards and tax credit carryforwards in the event of
an "ownership change"change," as defined by the Internal Revenue Code. The Company's
ability to utilize its net operating loss carryforwardscarry forwards is subject to
restrictionrestrictions pursuant to these provisions.
8. Subsequent Events
In April 2000,9. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) savings plan covering substantially all of
its employees. Eligible employees may contribute through payroll deductions.
The Company matches employee contributions at the discretion of the Company's
Board of DirectorsDirectors. In the years ended December 31, 1999, 2000 and 2001, the
Company has matched a total of $0, $0 and $304, respectively.
10. SUBSEQUENT EVENTS
In February 2002, the Company adopted the 2000 Employee2002 Stock PurchasePlan. The 2002 Stock
Plan which is subjectprovides for the grant of incentive stock options to stockholder approval. Aemployees and for the
grant of nonstatutory stock options and stock purchase rights to employees,
directors and consultants. The Company reserved a total of 550,000 shares of the Company's common stock have been reserved for issuance,
and additional shares will be reserved on an annual basis beginning in January
2001. As of the date of this prospectus, no shares have been issued under the
Company's 2000 Employee Stock Purchase Plan.
On April 13, 2000, the Company sold 5,330,023 shares of Series E Preferred
Stock to existing preferred stockholders for aggregate consideration of
$49,996. In connection with the sale, the Company sold warrants to purchase
533,003 shares of Series E Preferred Stock at a price of $0.01 per warrant. The
warrants have an exercise price of $14.07 per share. The rights, preferences,
and privileges of the Series E Preferred Stock are as follows:
. Dividends are not cumulative and payable only upon declaration by the
Company's board of directors at a rate of $.759 per share per annum.
. Holders of Series E Preferred Stock have a liquidation preference of $9.38
per share. After payment to holders of all series of preferred stock, each
share of common and preferred stock is entitled to receive pro rata any
remaining assets of the Company until such time as the holders of Series E
Preferred Stock receive an aggregate amount totaling $28.14 per share.
Thereafter, all remaining proceeds are to be allocated to the holders of
common stock on a pro rata basis.
F-18
NETFLIX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
. Each share of Series E Mandatorily Redeemable Preferred Stock
automatically converts into one share of common stock upon an initial
offering of the Company's common stock with gross proceeds in excess of
$20,000 or affirmative election of the holders of at least 75% of the
outstanding shares. The Company has fully reserved2,000,000 shares of
common stock for issuance uponunder the conversion2002 Stock Plan. Any remaining shares
reserved but not yet issued under the 1997 plan as of Series E Preferred Stock.
. Holders of Series E Preferred Stock have the option to redeem their shares
after June 12, 2004.
Upon consummationeffective date of an
initial public offering will be added to the total reserved shares under the
2002 Stock Plan.
In February 2002, the Company will recordadopted the 2002 Employee Stock Purchase
Plan. The Company reserved a charge to net loss attributable to common stockholderstotal of approximately $29,000
for the beneficial conversion feature inherent in the Series E Preferred Stock.
The beneficial conversion feature is equal to the difference between the price
of the Series E Preferred Stock and the estimated fair value of the Company's
common stock at the date the Series E Preferred Stock was issued. The
beneficial conversion feature is similar to a dividend on preferred stock that
increases net loss to arrive at net loss attributable to common stockholders.
F-19
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide information different from that contained in
this prospectus. We are offering to sell, and seeking offers to buy,1,750,000 shares of common stock only in jurisdictions where offersfor
issuance under the 2002 Employee Stock Purchase Plan.
F-22
[INSIDE BACK COVER]
================================================================================
Through and sales are permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of
any sale of our common stock.
TABLE OF CONTENTS
Page
----
Prospectus Summary....................................................... 3
Summary Financial Data................................................... 5
Risk Factors............................................................. 6
You Should Not Rely on Forward-Looking Statements Because They Are
Inherently Uncertain.................................................... 22
Use of Proceeds.......................................................... 23
Dividend Policy.......................................................... 23
Capitalization........................................................... 24
Dilution................................................................. 26
Selected Financial Data.................................................. 27
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 28
Business................................................................. 37
Management............................................................... 47
Certain Relationships and Related Transactions........................... 58
Principal Stockholders................................................... 60
Description of Capital Stock............................................. 63
Shares Eligible for Future Sale.......................................... 66
Additional Information................................................... 67
Underwriting............................................................. 68
Legal Matters............................................................ 70
Experts.................................................................. 70
Change in Independent Public Accountants................................. 71
Index to Financial Statements............................................ F-1
Untilincluding , 2000 (25 days2002 (the 25th day after the date of this
prospectus), all dealers that
buy, sell or tradeeffecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
Dealers are also obligatedThis is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
[NETFLIX LOGO]
Shares
Common Stock
Deutsche Banc Alex. Brown
SG CowenSHARES
[LOGO] NETFLIX.COM, INC.
COMMON STOCK
-------------
PROSPECTUS
-------------
MERRILL LYNCH & CO.
THOMAS WEISEL PARTNERS LLC
U.S. Bancorp Piper Jaffray
ProspectusBANCORP PIPER JAFFRAY
, 20002002
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ItemITEM 13. Other Expenses of Issuance and DistributionOTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by NetFlixNetflix in connection with
the sale and distribution of common stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fee.
SEC registration fee...................................................fee....................................... $
NASD filing fee........................................................fee............................................
Nasdaq National Market listing fee.....................................
Printing and engraving costs...........................................
Legal fees and expenses................................................
Accounting fees and expenses...........................................fee.........................
Blue Sky fees and expenses.............................................expenses.................................
Printing and engraving costs...............................
Legal fees and expenses....................................
Accounting fees and expenses...............................
Transfer Agent and Registrar fees......................................fees..........................
Insurance Premiums.........................................
Miscellaneous expenses.................................................
----
Total................................................................expenses.....................................
--
Total............................................... $
======
ItemITEM 14. Indemnification of Directors and OfficersINDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 ("Section 145") of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article V of the Registrant's Amended and Restated CertificateState
of IncorporationDelaware, as the same exists or may hereafter be amended (the "General
Corporation Law") provides forthat a Delaware corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the indemnificationright of
directors to the fullest
extent permissible under Delaware law.
Article VIsuch corporation) by reason of the Registrant's Bylaws provides forfact that such person is or was a director,
officer, employee or agent of such corporation, or is or was serving at the
indemnificationrequest of officers, directorssuch corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and third parties acting on behalf of the Registrant ifamounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in andor not opposed to the corporation's best interest of the Registrant,interests
and, with respect to any criminal action or proceeding, the indemnified party had no reasonreasonable cause
to believe that his or her conduct was unlawful.
Theillegal.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against such person and incurred by
such person in any such capacity, arising out of such person's status as such,
whether or not the corporation would otherwise have the power to indemnify such
person against such liability under Section 145.
Registrant's Amended and Restated Certificate of Incorporation and Bylaws
provide that Registrant will enterindemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director, officer or employee of
Registrant or any predecessor of Registrant, or serves or served at any other
corporation, partnership, joint venture, trust or other enterprise as a
director, officer, employee or agent at the request of Registrant or any
predecessor of Registrant.
Registrant's Bylaws provide for mandatory indemnification to the fullest
extent permitted by General Corporation Law against all expense, liability and
loss including attorney's fees, judgments, fines, ERISA excise
II-1
taxes or penalties and amounts paid in settlements, provided that Registrant
shall not be required to indemnify unless the proceeding in which
indemnification is sought was authorized in advance by our board of directors.
Registrant's directors and officers are covered by insurance maintained
by Registrant against specified liabilities for actions taken in their
capacities as such, including liabilities under the Securities Act of 1933, as
amended. In addition, the Registrant has entered into indemnification agreementscontracts with its
directors and executive officers in addition toproviding indemnification provided for in the
Registrant's Bylaws, and intends to enter into indemnification agreements with
any newof such directors and executive officers
inby the future.Registrant to the fullest extent permitted by law, subject to certain
limited exceptions.
The UnderwritingPurchase Agreement (Exhibit 1.1 hereto) provides for indemnification
by the Underwriters of the registrantRegistrant and its executive officers and directors, and by
the registrantRegistrant of the underwriters, for certain liabilities including
liabilities arising under the
Securities Act or otherwise in connection with matters
specifically provided in writing bythis offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of Registrant's transactions within the Underwriters for inclusion in the
Registration Statement.
Item 15. Recent Saleslast
three years, involving sales of Unregistered Securities
During the past two and one-half years, the Registrant has issued
unregisteredRegistrant's securities to a limited number of persons as described below:
(a) On September 1, 1997, Registrant issued an aggregate of 3,200,000
shares of common stock to two founding officers and directors of the
Registrant in exchange for a business plan with a stated value of $160,000.
The foregoing purchase and sale was
II-1
exempt from registrationthat were not
registered under the Securities Act pursuant to Section 4(2)
thereof on the basis that the transaction did not involve a public
offering.
(b) On October 17, 1997, Registrant issued and sold an aggregate of
3,990,000 shares of Series A Preferred Stock to five investors for $0.50
per share or an aggregate of $1,992,000. The foregoing purchases and sales
were exempt from registration under the Securities Act pursuant to Section
4(2) thereof on the basis that the transaction did not involve a public
offering.
(c) On January 26, 1998, Registrant issued and sold an aggregate of
454,545 shares of Series A Preferred Stock to one investor for $0.55 per
share or an aggregate of $250,000. The foregoing purchases and sales were
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof on the basis that the transaction did not involve a public
offering.
(d) On June 12, 1998, Registrant issued and sold an aggregate of
5,684,024 shares of Series B Preferred Stock to a total of 19 investors for
$1.08 per share, or an aggregate of $5,999,997. The foregoing purchases and
sales were exempt from registration under the Securities Act pursuant to
Section 4(2) thereof on the basis that the transaction did not involve a
public offering.
(e) On October 1, 1998, Registrant issued and sold a warrant to purchase
up to 92,592 shares of Series B Preferred Stock at an exercise price of
$1.08 per share to Comdisco, Inc. The foregoing purchase and sale was
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof on the basis that the transaction did not involve a public
offering.
(f) On February 17, 1999, Registrant issued and sold an aggregate of
4,650,269 shares of Series C Preferred Stock to a total of 28 investors for
$3.27 per share, or an aggregate of $15,150,000. The foregoing purchases
and sales were exempt from registration under the Securities Act pursuant
to Section 4(2) thereof on the basis that the transaction did not involve a
public offering.
(g) On December 16, 1998, Registrant issued and sold a warrant to
purchase up to 58,526 shares of Series C Preferred Stock at an exercise
price of $2.31 per share to Comdisco, Inc. The foregoing purchases and
sales were exempt from registration under the Securities Act pursuant to
Section 4(2) thereof on the basis that the transaction did not involve a
public offering.
(h) On February 26, 1999, Comdisco, Inc. exercised its Series C warrant
for cash. The foregoing purchase and sale was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof on the basis that
the transaction did not involve a public offering.
(i)Act:
(a) On June 22, 1999 and October 31, 1999, Registrant issued and
sold an aggregate of 4,649,927 shares of Series D Preferred Stockpreferred stock to a
total of ten10 private investors for $6.52 per share, or an aggregate of
$30,317,524. The foregoing purchase and sale was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof on the basis
that the transaction did not involve a public offering.
(j)(b) On April 13 and April 17, 2000, Registrant issued and sold (i)
an aggregate of 5,332,689 shares of Series E Non-Voting Preferred Stocknon-voting preferred stock
at a price per share of $9.38, and (ii) warrants to purchase up to an
aggregate of 533,033533,003 shares of commonSeries E non-voting preferred stock each
with an exercise price of $14.07 per share, at a price per warrant share
of $0.01, to a total of 16 private investors orfor an aggregate of
$50,025,952.$50,025,619. The foregoing purchases and sales were exempt from
registration under the Securities Act pursuant to Section 4(2) thereof on
the basis that the transactions did not involve a public offering.
(c) On May 19, 2000, Registrant issued and sold a warrant to
purchase 23,007 shares of common stock to a private investor at an
exercise price of $6.52 per share, in connection with a lease agreement.
The foregoing purchase and sale was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.
(d) On October 26, 2000, Registrant issued 436,393 shares of
Series F non-voting preferred stock to a movie studio in connection with
a revenue sharing agreement. The foregoing was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof on the basis
that the transaction did not involve a public offering.
(e) On October 31, 2000, Registrant issued a warrant to purchase
60,000 shares of common stock to a private investor at an exercise price
of $2.00 per share, in connection with a real estate lease. The foregoing
was exempt from registration under the Securities Act pursuant to Section
4(2) thereof on the basis that the transaction did not involve a public
offering.
(f) On February 22, 2001, Registrant issued an aggregate of
860,121 shares of Series F non-voting preferred stock to certain movie
studios, in connection with certain revenue share agreements. The
foregoing was exempt from registration under the Securities Act pursuant
to Section 4(2) thereof on the basis that the transaction did not involve
a public offering.
(g) On April 2, 2001, Registrant issued 436,393 shares of Series F
non-voting preferred stock to a movie studio, in connection with a
revenue share agreement. The foregoing was exempt from registration under
the Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.
II-2
(k) As of April 13, 2000, an aggregate of 4,121,624(h) On June 1, 2001, Registrant issued and sold a warrant to
purchase 255,000 shares of common stock had beento a private investor at an
exercise price of $1.00 per share, in connection with an equipment lease
agreement. The foregoing purchase and sale was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof on the basis
that the transaction did not involve a public offering.
(i) On June 5, 2001, Registrant issued and sold a warrant to
purchase 100,000 shares of Series F Preferred Stock to a private investor
at an exercise price of $9.38 per share, in connection with an
integration and distribution agreement. The foregoing purchase and sale
was exempt from registration under the Securities Act pursuant to Section
4(2) thereof on the basis that the transaction did not involve a public
offering.
(j) On July 10, 2001, Registrant issued and sold (i) an aggregate
of $13 million of subordinated promissory notes, and (ii) warrants to
purchase an aggregate of 20,456,866 shares of common stock each with an
exercise price of $1.00 per share, at a price per warrant share of $0.01,
to a total of 23 private investors for an aggregate of $13,020,456.88.
The foregoing purchases and sales were exempt from registration under the
Securities Act pursuant to Section 4(2) thereof on the basis that the
transactions did not involve a public offering.
(k) On August 21, 2001, Registrant issued 416,440 shares of Series
F non-voting preferred stock to a consumer electronics retailer, in
connection with a strategic marketing agreement. The foregoing was exempt
from registration under the Securities Act pursuant to Section 4(2)
thereof on the basis that the transaction did not involve a public
offering.
(l) On March , 2002, Registrant issued 423,415 shares of Series F
non-voting preferred stock to a movie studio in connection with a revenue
sharing agreement. The foregoing was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering
(m) On , 2002, Registrant issued an aggregate of
shares of Series F non-voting preferred stock to certain movie studios
holding Series F non-voting preferred stock of Registrant pursuant to
certain anti-dilution provisions for the benefit of such studios. The
foregoing were exempt from registration under the Securities Act pursuant
to Section 4(2) thereof on the basis that the transaction did not involve
a public offering.
(n) As of , Registrant has issued and sold an aggregate of
shares of common stock upon exercise of options issued to
certain employees and consultants under the Registrant's amended and restated
1997 Stock Plan.Plan for an aggregate consideration of $ . The foregoing
purchases and sales were exempt from registration under the Securities
Act pursuant to Rule 701 of the Securities Act.
Except as indicated above, none of the foregoing transactions involved
any underwriters, underwriting discounts or commissions, or any public
offering, and the Registrant believes that each transaction was exempt from the
registration requirements of the Securities Act by virtue of Section 4(2)
thereof, Regulation D promulgated thereunder or Rule 701 pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under such Rule 701. The recipients in such transactions represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate
legends were affixed to the share certificates and instruments issued in such
transactions. All recipients either received adequate information about
Registrant or had adequate access, through their relationships with the Registrant, to information about the Registrant.
Itemsuch
information.
II-3
ITEM 16. Exhibits and Financial Statement Schedules
(a) ExhibitsEXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
Exhibit
NumberEXHIBIT
NUMBER DESCRIPTION
- ------ -----------
1.11.1* Form of UnderwritingPurchase Agreement.*
3.1
3.1* Amended and Restated Certificate of Incorporation of NetFlix.com to be in effect
after the closingRegistrant.
3.2 Proposed Amended and Restated Certificate of the offering made under this Registration
Statement.
3.2Incorporation of Registrant.
3.3 Amended and Restated Bylaws of the Registrant to be in effect after the closingRegistrant.
3.4* Proposed Amended and Restated Bylaws of the offering made under this Registration Statement.
4.1 SpecimenRegistrant.
4.1* Form of Registrant's Common Stock Certificate.*
5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.*
10.1
10.1* Form of Indemnification Agreement between NetFlix.comRegistrant and each of its directors and officers.
10.2 20002002 Employee Stock Purchase Plan and form of agreements thereunder.Plan.
10.3 Amended and Restated 1997 Stock Plan and form of agreements
thereunder.Plan.
10.4 2002 Stock Plan.
10.5 Amended and Restated Stockholders' Rights Agreement dated April 13,
2000.
10.5 SubleaseJuly 10, 2001.
10.6 Amended and Restated Agreement Concerning the Right to Participate dated January 4, 1999 by and between HI/FN, Inc. and
NetFlix.com, Inc.
10.6June 22, 1999.
10.7 Office Lease Agreement dated as of March 31,October 27, 2000 between Barrister Executive
Suites, Inc.Registrant and NetFlix.com, Inc.
10.7BR3 Partners.
10.8 Lease Agreement dated August 11, 1999 between Registrant and Lincoln-Recp Old Oakland Opco,
LLCLLC; First Amendment to Lease Agreement dated December 3, 1999; Second Amendment to
Lease Agreement dated January 4, 2000; Third Amendment to Lease Agreement dated June 12,
2001 between Registrant and NetFlix.com, Inc.
10.8Joseph Sully.
10.9 Offer Letterletter dated April 19, 1999 with W. Barry McCarthy, Jr., Chief Financial Officer of
NetFlix.com,Registrant.
10.10 Offer letter dated March 25, 1999 with Tom Dillon, Vice President of Operations of Registrant.
10.11 Offer letter dated March 13, 2000 with Leslie J. Kilgore, Vice President of Marketing of Registrant.
10.12* Letter Agreement dated May 1, 2000 between Registrant and Columbia TriStar Home
Entertainment, Inc.
10.9 Founder's Restricted Stock Purchase Agreement10.13* Revenue Sharing Output License Terms between Reed HastingsRegistrant and Kibble, Inc. (now NetFlix.com, Inc.), and amendment No. 1 thereto.
10.10 Founder's Restricted Stock Purchase Agreement between Marc Randolph
and Kibble, Inc. (now NetFlix.com, Inc.), and amendment No. 1 thereto.
16.1 Letter from PricewaterhouseCoopers LLP regarding change in certifying
accountant.Warner Home Video.
23.1 Report on Schedule and Consent of Independent Accountants.KPMG LLP.
23.2 Consent of Counsel (seeWilson Sonsini Goodrich & Rosati, Professional Corporation (contained in Exhibit 5.1).
24.1 Power of Attorney (see(See page II-5)II-6).
27.1 Financial Data Schedules.
- --------
* To be filed by amendment.
II-3
(b) Financial Statement(B) FINANCIAL STATEMENT SCHEDULES
Schedules
Schedules not listed above have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or
notes thereto.
ItemII-4
ITEM 17. UndertakingsUNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the UnderwritingPurchase Agreement certificates in
such denominations and registered in such names as required by the Underwriters
to permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions referenced in Item 14 of this
Registration Statement or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or paid
by a director, officer, or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by asuch director,
officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectusprospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectusprospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
Prospectusprospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-4II-5
SIGNATURES
Pursuant to the requirements of the Securities Act, of 1933, as amended, the
registrantRegistrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City Ofof Los Gatos, State of
California, on the 18th6th day of April, 2000.
NETFLIX.COM,March, 2002.
NETFLIX, INC.
/s/By: /S/ REED HASTINGS
-----------------------------------
Reed Hastings
By: _________________________________
Reed Hastings
Chief Executive OfficerCHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, Reed
Hastings and W. Barry McCarthy, Jr., and each of them acting individually, as
his or her attorney-in-fact, each with full power of substitution, for him or herin any and
all capacities, to sign any and all amendments (including, without limitation,
post-effective Amendments and any amendments or abbreviated registration
statements increasing the amount of securities for which registration is being
sought) to this Registration Statement, with all exhibits and any and all
documents required to be filed with respect thereto, with the Securities and
Exchange Commission or any regulatory authority, granting unto such
attorneys-
in-factattorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
order to effectuate the same as fully to all intents and purposes as he or she
might or could do if personally present, hereby ratifying and confirming all
that such attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.done by virtue hereof. This Power
of Attorney may be signed in several counterparts.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.
Signature Title Date
--------- ----- ----
/s/ Reed Hastings President, Chief Executive Officer April 18, 2000
_________________________________ and Director (Principal Executive
Reed Hastings Officer)
/s/ W. Barry McCarthy, Jr. Chief Financial Officer (Principal April 18, 2000
_________________________________ Financial Officer and Principal
W. Barry McCarthy, Jr. Accounting Officer)
/s/ Marc B. Randolph Director April 18, 2000
_________________________________
Marc B. Randolph
/s/ Tim Haley Director April 18, 2000
_________________________________
Tim Haley
/s/ Jay C. Hoag Director April 18, 2000
_________________________________
Jay C. Hoag
/s/ Samir Master Director April 18, 2000
_________________________________
Samir Master
/s/ Michael N. Schuh Director April 18, 2000
_________________________________SIGNATURE TITLE DATE
--------- ----- ----
/S/ REED HASTINGS President, Chief Executive Officer March 6, 2002
- --------------------------- and Director (principal executive
Reed Hastings officer)
/S/ W. BARRY MCCARTHY, JR. Chief Financial Officer (principal March 6, 2002
- --------------------------- financial and accounting officer)
W. Barry McCarthy, Jr.
/S/ TIMOTHY M. HALEY Director March 6, 2002
- ---------------------------
Timothy M. Haley
/S/ JAY C. HOAG Director March 6, 2002
- ---------------------------
Jay C. Hoag
/S/ A. ROBERT PISANO Director March 6, 2002
- ---------------------------
A. Robert Pisano
/S/ MICHAEL N. SCHUH Director March 6, 2002
- ---------------------------
Michael N. Schuh
II-5
NetFlix.com
Schedule II--Valuation and Qualifying Accounts
(in thousands)
Balance at
Beginning Charged to Balance at
of the Costs and End of the
Period Expenses Deductions(1) Period
---------- ---------- ------------- ----------
Period from August 29, 1997 to
December 31, 1997............. $-- $-- $-- $--
Year Ended December 31, 1998... $-- $ 20 $-- $ 20
Year Ended December 31, 1999... $ 20 $ 91 $ 26 $ 85
- --------
(1) Represents write-offs of uncollectible accounts receivable.II-6
EXHIBIT INDEX
Exhibit
Number
-------EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
1.11.1* Form of UnderwritingPurchase Agreement.*
3.1
3.1* Amended and Restated Certificate of Incorporation of NetFlix.com, Inc. to be in
effect after the closingRegistrant.
3.2 Proposed Amended and Restated Certificate of the offering made under this Registration
Statement.
3.2Incorporation of Registrant.
3.3 Amended and Restated Bylaws of NetFlix.com, Inc. to be in effect after the closingRegistrant.
3.4* Proposed Amended and Restated Bylaws of the offering made under this Registration Statement.
4.1 SpecimenRegistrant.
4.1* Form of Registrant's Common Stock Certificate.*
5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.*
10.1
10.1* Form of Indemnification Agreement between NetFlix.com, Inc.Registrant and each of its directors and officers.
10.2 20002002 Employee Stock Purchase Plan and form of agreements thereunder.Plan.
10.3 Amended and Restated 1997 Stock Plan and form of agreements
thereunder.Plan.
10.4 2002 Stock Plan.
10.5 Amended and Restated Stockholders' Rights Agreement dated April 13,
2000.
10.5 SubleaseJuly 10, 2001.
10.6 Amended and Restated Agreement Concerning the Right to Participate dated January 4, 1999 by and between HI/FN, Inc. and
NetFlix.com., Inc.
10.6June 22, 1999.
10.7 Office Lease Agreement dated as of March 31,October 27, 2000 between Barrister Executive
Suites, Inc.Registrant and NetFlix.com, Inc.
10.7BR3 Partners.
10.8 Lease Agreement dated August 11, 1999 between Registrant and Lincoln-Recp Old Oakland Opco,
LLCLLC; First Amendment to Lease Agreement dated December 3, 1999; Second Amendment to
Lease Agreement dated January 4, 2000; Third Amendment to Lease Agreement dated June 12,
2001 between Registrant and NetFlix.com, Inc.
10.8Joseph Sully.
10.9 Offer Letterletter dated April 19, 1999 with W. Barry McCarthy, Jr., Chief Financial Officer of
NetFlix.com,Registrant.
10.10 Offer letter dated March 25, 1999 with Tom Dillon, Vice President of Operations of Registrant.
10.11 Offer letter dated March 13, 2000 with Leslie J. Kilgore, Vice President of Marketing of Registrant.
10.12* Letter Agreement dated May 1, 2000 between Registrant and Columbia TriStar Home
Entertainment, Inc.
10.9 Founder's Restricted Stock Purchase Agreement10.13* Revenue Sharing Output License Terms between Reed HastingsRegistrant and Kibble, Inc. (now NetFlix.com, Inc.), and amendment No.1 thereto.
10.10 Founder's Restricted Stock Purchase Agreement between Marc Randolph
and Kibble, Inc. (now NetFlix.com, Inc.), and amendment No. 1 thereto.
16.1 Letter from PricewaterhouseCoopers LLP re: change in the certifying
accountant.Warner Home Video.
23.1 Report on Schedule and Consent of Independent Accountants.KPMG LLP.
23.2 Consent of Counsel (seeWilson Sonsini Goodrich & Rosati, Professional Corporation (contained in Exhibit 5.1).
24.1 Power of Attorney (see(See page II-5)II-6).
27.1 Financial Data Schedules.
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* To be filed by amendment.