As filed with the Securities and Exchange Commission on April 18, 2000
Registration No.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NetFlix.com, Inc.
(Exact name of registrant as specified in its charter)
Delaware 7379 77-0467272
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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750 University Avenue, Suite 100
Los Gatos, CA 95032
(408) 399-3700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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W. Barry McCarthy, Jr.
Chief Financial Officer
750 University Avenue, Suite 100
Los Gatos, CA 95032
(408) 399-3700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
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 Goodrich & Rosati Orrick, Herrington & Sutcliffe LLP
Professional Corporation 400 Sansome Street
650 Page Mill Road San Francisco, CA 94111
Palo Alto, California 94304 (415) 392-1122
(650) 493-9300
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this form 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 Rule 434,
check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Title of Each Class of Aggregate Amount of
Securities to be Registered Offering Price(1) Registration Fee
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Common Stock, $0.001 par value............ $86,250,000 $22,770
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(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.
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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), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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]
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Shares
Common Stock
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This is the initial public offering of NetFlix.com, Inc. and we are offering
shares of our common stock. We anticipate that the initial public
offering price will be between $ and $ per share. We are applying
for listing on the Nasdaq National Market under the symbol "NFLX."
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. 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 additional
shares to cover over-allotments.
Deutsche Banc Alex. Brown
SG Cowen
U.S. Bancorp Piper Jaffray
The date of this prospectus is , 2000.
[INSIDE FRONT COVER]
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all the information you
should consider before buying shares in the offering. You should read the
entire prospectus carefully.
NetFlix.com, Inc.
We have created an authoritative 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 Rental
subscription service, purchase DVDs through our e-commerce referral program 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 from 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 movies out at the same time to ensure convenient
selection at home. As of March 31, 2000, we had over 120,000 paying subscribers
to our Unlimited Rental service.
We have benefited from the rapid transition from VHS tape format to DVD
technology. According to Paul Kagan Associates, Inc., a leading entertainment
industry market research firm, DVD player adoption has occurred faster in its
first three years since introduction than audio CD players, digital broadcast
systems or videocassette recorders. Since the introduction of the DVD player in
1997, the domestic installed base has grown to 5.4 million households at the
end of 1999 and is forecast to grow to 39.4 million 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 Rental subscription service into the boxes of DVD players sold in
the U.S. We also have relationships with major consumer electronics retailers,
such as Circuit City and The Good Guys, which provide promotional offers for
our Unlimited Rental subscription service to their customers.
We operate in a large and growing market. Paul Kagan Associates, Inc.
estimates that consumers in the United States spent $25.6 billion on home video
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.
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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.
----------------
We were incorporated in Delaware in August 1997 and changed our name to
NetFlix.com, Inc. in August 1998. Our executive offices are located at 750
University Avenue, Los Gatos, CA 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 at our Web site does not constitute part of this
prospectus.
4
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 used 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
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(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 effective upon the closing of our initial public
offering, as if such conversion occurred on January 1, 1999, or at the date
of issuance of the preferred stock, 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 share because they would be
antidilutive.
(2) The pro forma column gives effect to the conversion of all outstanding
shares of our preferred stock into shares of common stock upon the
closing 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.
5
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;
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. 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. 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. 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 and difficulties in light of our 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.
We have experienced significant net losses and negative cash flow, since our
inception. We incurred net losses of $29.8 million in 1999, and as of December
31, 1999, we had an accumulated deficit of $41.3 million. We expect to continue
to incur significant operating expenses and capital outlays for the foreseeable
future 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 centers 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 negative
cash flow on a quarterly and annual basis for the foreseeable future. To
achieve and sustain profitability, we must accomplish numerous objectives,
including:
. substantially increasing the number of 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.
We cannot assure you that we will be able to achieve these objectives. In
addition, because of the significant operating and capital expenditures
associated with our expansion plan, our operating losses and negative cash flow
are expected to increase significantly from current levels and to continue for
the foreseeable future. If we do achieve profitability, we cannot be certain
that we would be able to sustain 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 estimates of our financial results.
As a result of our limited operating history, it is difficult to accurately
forecast 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, which are
dependent on the growth of our subscriber base and the demand for DVD rentals
by our subscribers. As a result, we may be unable 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 at a steady rate and at a reasonable cost and maintain
new subscriber satisfaction;
. our ability to manage 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 personnel 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;
. our ability to manage effectively the development of new business
segments 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 of 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 may
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. 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
our market opportunities. Several key members of management have joined us only
recently. We may choose to expand our operations by:
. expanding the breadth of product offerings and services offered;
. continuing promotional offers to attract subscribers to our Unlimited
Rental subscription service;
. expanding our market presence through relationships with third parties;
. promoting advertising on our Web site; and
. expanding through the acquisition of other companies.
We have not made any acquisitions of other companies to date, and our
ability as an organization to evaluate and complete acquisitions and to
integrate acquired operations is unproven. Furthermore, any new 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 continuing our current promotional campaigns,
including free trial offers to subscribers referred by our promotional
affiliates, and by conducting advertising campaigns. We believe that the cost
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 perceive 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, our business may suffer.
We cannot assure you that our Personal Movie Finder service will be able to
effectively attract users. In addition, 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 not attract or retain users. In
addition, we believe that in order for CineMatch to function effectively, it
must access a large database 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 number of consumers willing to subscribe to a DVD rental
service may not increase. Factors that may 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.
If we are unable to obtain sufficient selections of DVDs from our key
distributors, our subscriber satisfaction 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. In addition, the movie studios
may not produce enough DVDs for particular movie titles, or generally, which
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.
We may not purchase sufficient numbers of certain DVD titles to meet the
rental demands of our subscribers. If we do not forecast accurately DVD rental
demand, our subscriber satisfaction and operating results will be harmed. In
addition, if we enter into revenue sharing agreements with the movie studios,
we will have only one opportunity to purchase each DVD title directly from the
studios, and we will have to estimate demand for up to a year in advance. If we
underestimate demand for DVDs under any future revenue sharing arrangements,
our subscribers may become dissatisfied and cancel our service, and our results
of operations will suffer. Alternatively, if we overestimate demand and
purchase excess quantities of certain DVD titles, our results of operations
also will be adversely affected.
If we experience increased demand for DVDs on a subscriber-by-subscriber basis,
our expenses and gross margin may be affected adversely.
Under our Unlimited Rental subscription 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 four movies out at a time. If our average
subscriber rents more DVDs per month than we have anticipated, we will incur
increased shipping and fulfillment costs, which will affect our profitability.
Subscriber demand 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.
The market for our services is intensely competitive and subject to rapid
change. Barriers to entry are relatively minimal, and current and new
competitors can launch new Web sites at relatively low cost. Our principal
competitors include, or could include:
. traditional movie rental chains, such as Blockbuster Video 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 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.
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 our
operating margins, market share and brand recognition. In addition, our
competitors may form strategic alliances with suppliers and movie production
studios which could affect adversely our ability to obtain products on
favorable terms. We may be unable to compete successfully against current or
future competitors.
13
If 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 that adoption of
DVD technology will continue to grow. Current DVD manufacturers may not be able
to, 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
base of VHS players, and utilizing the DVD format requires additional
expenditure by consumers. In the event that new storage or player technology is
developed that is either superior to DVD or enjoys greater acceptance, our
revenues will suffer.
We depend on the movie studios to make DVDs available on a for-rental basis
during an exclusive time period following theatrical release.
The DVD and VHS segments of the entertainment industry would lose 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, is the early timing of
the distribution window for these formats. The window for DVD and VHS rental
and consumer 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 window for movie rental
varies, typically ranging from 30 to 90 days for domestic video stores. Our
business would suffer material adverse harm if the movie rental windows were no
longer the first following the theatrical release, the length of these windows
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. The order, length and exclusivity of each window for each
distribution channel is determined solely by the studio releasing the movie 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, our profitability would be affected adversely if the U.S. Postal
Service raised its postage rates, and we were unable to raise our subscription
rental rates on an equivalent basis.
If we do not manage the automation of our order fulfillment system, our
business and results of operations will be affected adversely.
We currently rely on a labor-intensive fulfillment process. 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. If we are unable
to successfully increase the automation of our order fulfillment systems, we
will need more employees and more distribution center space to accomodate the
expected increases in the number of DVDs
14
shipped to and received 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 in our DVD shipments per day may require 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 developing or operating
multiple distribution centers, and we may not be able to add distribution
centers on a cost-effective basis to accomodate our growth. If we are unable to
effectively accommodate substantial increases in subscriber orders, 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. Some of our systems are proprietary and rely on the expertise of
members of our engineering team for their continued performance. If the
developers of our Web site were unavailable in the event of system failure, it
would harm significantly our ability 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 dissatisfied and we could be
inundated with subscriber service queries which we may not be in a position to
manage.
In addition, 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. Any
actions by hackers to disrupt our Web site service or our internal systems
could harm our business, be expensive to remedy and damage our reputation. Our
general business disruption insurance does not cover expenses related to
directed 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 hardware for our delivery systems is maintained in our
San Jose, California distribution center. 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., 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. Any of these problems could result in a loss of subscribers and
could affect adversely our business and results of operations.
15
We currently operate only one distribution center 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, our business and operations would be materially
adversely affected if 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, we may
not be able to effectively shift our fulfillment and delivery operations due to
disruptions in service at the San Jose, California or any other facility. Since
the San Francisco Bay Area is located in an earthquake-sensitive area, we are
particularly susceptible to the risk of damage to, or total destruction of, our
current distribution center and the surrounding transportation infrastructure
caused by earthquakes. 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. We depend on the continued services and performance of our
senior management and other key personnel, particularly Reed Hastings, our
founder, President and Chief Executive Officer. 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 order and
fulfillment systems and have an adverse affect on our ability to grow and
expand our systems. Our future success depends also upon the continued service
of our other key technology, merchandising, marketing and support personnel.
None of our officers or other key employees is bound by an employment
agreement, and our relationships with these officers and key employees are at
will. Additionally, there are currently low levels 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 fund our planned growth, 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 of 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.
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 in 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 countries 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. 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., 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 users browsing and
other habits. Increased regulation of our Personal Movie Finder service,
including self-regulation, 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, 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, address and other personal information about our
subscribers on our computer systems and transmit this information to credit
card companies. The measures we and the credit card companies use to protect
against unauthorized intrusion into our data may prove inadequate to protect
our subscriber's 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 will
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, 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.
Our business is dependent on the development and maintenance of Internet
infrastructure.
The success of our business will depend largely on the development and
maintenance of the Internet infrastructure. This includes maintenance of a
reliable network backbone with the necessary speed, data capacity and security,
as well as the timely development of complementary products such as high speed
modems, for providing reliable Web access 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.
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.
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,
particularly liability that is not covered by our insurance or is 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. 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.
The adoption or modification of laws or regulations relating to the Internet
could 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 and regulations directly applicable to communications or
commerce over the Internet are becoming more prevalent. 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 it may be interpreted
and enforced cannot be fully determined and, therefore, this legislation could
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 might decrease
the rate of growth of Internet use, which in turn could decrease the demand for
our products or 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.
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. These stockholders may have interests that are different from
yours. As a result, these stockholders 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.
Following this offering, our charter documents will authorize 10,000,000
shares of undesignated preferred stock, create a classified board of directors,
eliminate the right of stockholders to call 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. As a Delaware corporation, we are also subject to the
Delaware antitakeover statute contained in Section 203 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.
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 initial offering price of our common stock will be substantially higher
than the pro forma net tangible book value per share 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 will be further dilution.
See "Dilution".
Our stock price could be volatile and could decline following this offering.
The stock market has experienced significant price and volume fluctuations,
and the market prices of Internet and technology companies have been highly
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 volatile and may fluctuate substantially due to factors
such as:
. our historical and anticipated quarterly and annual operating results;
. variations between our actual operating results and the expectations of
investors and the financial community;
. announcements by us or others and developments affecting our business,
systems or expansion plans; and
. conditions and trends in online commerce industries, particularly the
online DVD rental industry.
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 could result in substantial costs and a
diversion of management's attention and resources.
Future sales of our common stock, including those purchased in this offering,
may depress our stock price.
If our existing stockholders sell substantial amounts of our common stock in
the public market following this offering, the market price of our common stock
could fall. Shares issued upon the exercise of outstanding options also may be
sold in the public market. Such sales could create the 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. Of these shares, of
the shares sold in this offering are freely tradable. The remaining 31,105,451
shares will become 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]
We do not intend to pay dividends. You will not receive funds without selling
shares, and you may lose the entire amount 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 ON FORWARD-LOOKING STATEMENTS
BECAUSE THEY ARE INHERENTLY UNCERTAIN
You should not rely 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. Forward 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 6 and elsewhere in this
prospectus. These forward-looking statements speak only as of the date of this
prospectus, and we 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-
commerce and the movie industry. These estimates have been included in studies
published by market research and other firms including Jupiter Communications,
Media Metrix, Inc., The Motion Picture Association of America, Paul Kagan
Associates, Inc., Forrester Research and International Data Corporation. 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 expect to use the net proceeds for general corporate purposes,
principally working capital, capital expenditures and additional sales and
marketing efforts. In addition, we may use a portion of the net proceeds to
acquire complementary products, technologies or businesses; however, we
currently have no commitments or agreements and are not involved in any
negotiations to do so. Pending use of the net proceeds of this offering, we
intend to invest the net proceeds in interest-bearing, investment-grade
securities with maturities of less than 13 months.
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 in the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future. Our existing lease financing agreements prohibit the
payment of dividends.
23
CAPITALIZATION
The following table sets forth the following information as of December 31,
1999:
. our actual capitalization,
. our pro forma capitalization which gives effect to the conversion of all
outstanding shares of convertible preferred stock into 19,428,765 shares
of common stock, and
. our pro forma as adjusted capitalization which gives effect to the sale
of our Series E Preferred Stock in April 2000 and to the sale of
shares of common stock at the estimated initial public
offering price of $ per share in this offering, less the
underwriting discounts and commissions and estimated offering expenses.
As of December 31, 1999
------------------------------
Pro Forma
As
Actual Pro Forma Adjusted
-------- -------- --------
(in thousands, except share
data)
Long-term notes payable--net................... $ 3,959 $ 3,959 $
Capital Lease Obligations-net of current
portion....................................... 811 811
-------- -------- --------
Total debt................................. 4,770 4,770
Mandatorily redeemable convertible preferred
stock and warrants:
Series B Convertible Preferred Stock:
5,776,616 shares authorized; 5,684,024
shares issued and outstanding (actual); no
shares issued or outstanding (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)...................... 15,150 --
Series D 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; $0.001 par value: 5,000,000
shares authorized, no shares issued or
outstanding (pro forma and pro forma as
adjusted)................................... -- --
Convertible preferred stock; 4,444,545 shares
issued and outstanding (actual); no shares
issued or outstanding (pro forma and pro
forma as adjusted).......................... 4 --
Common Stock, $.001 par value: 31,650,000
shares authorized (actual pro forma and pro
forma as adjusted); 6,222,650 shares issued
and outstanding (actual); 25,651,415 shares
issued and outstanding (pro forma); and
shares issued and outstanding
(pro forma as adjusted)..................... 7 26
Additional paid-in capital................... 16,087 67,891
Deferred stock-based compensation............ (6,841) (6,841)
Accumulated deficit.......................... (41,285) (41,285)
-------- -------- --------
Total stockholders' equity (deficit)....... (32,028) 19,791
-------- -------- --------
Total capitalization....................... $ 24,561 $ 24,561 $
======== ======== ========
24
This table excludes the following shares:
. 3,426,922 shares of common stock reserved for issuance under our 1997
Stock Plan,
. 92,592 shares of preferred 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
DILUTION
The pro forma net tangible book value of our common stock on March 31, 2000
was $ , or approximately $ per share. 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.
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 shares of
common stock offered by this prospectus at an estimated price of $ per
share and after deducting the underwriting discounts and commissions and
estimated offering expenses payable by us, our net tangible book value would
have been $ , or approximately $ per share. This represents an immediate
increase in net tangible book value of $ per share to existing stockholders
and an immediate dilution in net tangible book value of $ per share to new
investors.
Estimated public offering price per share......................... $
Pro forma net tangible book value per share
as of March 31, 2000........................................... $
Increase per share attributable to new investors................
Pro forma net tangible book value per share after the offering....
----
Dilution in pro forma net tangible book value per share
to new investors................................................. $
====
This table excludes all options and warrants that will remain outstanding
upon completion of this offering. See Notes 4 and 6 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, as of March 31, 2000, 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 Consideration
----------------- -----------------
Average Price
Number Percentage Amount Percentage Per Share
------ ---------- ------ ---------- -------------
Existing stockholders... % $ % $
New investors........... % %
--- ----- ---- ----- ----
Total................. 100.0% $ 100.0% $
=== ===== ==== ===== ====
If the underwriters 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.
26
SELECTED FINANCIAL 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 the 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 through
December 31, 1997 and the years ended December 31, 1998 and December 31, 1999,
and the unaudited balance sheet data at December 31, 1997 and the audited
balance sheet data at December 31, 1998 and December 31, 1999, are derived
from, and are qualified by reference to, the financial statements of NetFlix
included elsewhere in this prospectus. The historical results are not
necessarily indicative of results to be expected for any future period.
Period from
August 29, 1997 Years ended
(inception) to December 31,
December 31, ------------------
1997 1998 1999
--------------- -------- --------
(in thousands, except share and
per share data)
Statement of Operations Data:
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), net............... 2 72 186
----- -------- --------
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 used
in computing net loss per common share... -- 903 5,328
December 31,
---------------------------
1997
(unaudited) 1998 1999
----------- ------ -------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents........................ $1,582 $1,061 $14,198
Working capital.................................. 1,360 (4,704) 11,028
Total assets..................................... 1,901 4,849 34,773
Capital lease obligations, less current portion.. -- 172 811
Notes payable, less current portion.............. -- -- 3,959
Mandatorily redeemable convertible preferred
stock........................................... -- 6,321 51,819
Stockholders' equity (deficit)................... 1,636 (8,044) (32,028)
27
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 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 6 and elsewhere in this prospectus.
Overview
We have created an authoritative 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 Rental subscription service, purchase DVDs through our e-commerce
referral program and choose theater locations and showtimes.
Our Unlimited Rental 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 movies out at the same time to
ensure convenient selection 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 in the near future. However,
we anticipate that DVD rental subscription fees will still generate
substantially all of our revenues for the foreseeable future.
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, we had an accumulated deficit of $41.3 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. We also expect to incur significant marketing, product
development, and general and administrative expenses. As a result, we will need
to generate significant revenues to achieve profitability and may never achieve
profitability.
Revenues
Substantially all of our revenues are derived currently from monthly
subscription fees related to our Unlimited Rental service. Since launching our
Web site in April 1998 through January 1999, our revenues primarily were
generated from individual DVD rentals, DVD sales
28
and shipping charges to customers. In March 1999, we stopped selling DVDs. From
February 1999 through October 1999, our revenues were generated primarily from
individual DVD rentals and shipping charges to customers. In September 1999, we
launched our DVD subscription rental service. Through February 2000, for a
fixed subscription fee of $15.95 per month, customers could rent up to four
DVDs per month with no due dates or late fees, and any additional DVDs ordered
in the month were charged to the customer at a rate of $3.98 per DVD. In
February 2000, we modified our subscription service to provide unlimited
rentals for a fixed monthly fee with a maximum of four DVDs out at the same
time. Existing subscribers were migrated to the Unlimited Rental service at a
$15.95 per month fee. New subscribers to our Unlimited Rental subscription
service pay 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, we may offer additional pricing and service
subscription options.
Subscription revenues are recognized ratably during each subscriber's
monthly subscription period. Refunds to customers are recorded as a reduction
of revenues. Historically, revenues from DVD sales, individual DVD rentals and
shipping revenues have been recognized when the product was shipped to the
customer from our distribution center.
Cost of Revenues
Cost of revenues, with respect to individual and subscription DVD rentals,
consists of postage, packaging, rental library depreciation and breakage
expense related to paying customers. Historically, cost of revenues also
included cost of merchandise sold to customers.
Due to the fixed monthly fee charged to Unlimited Rental subscribers, an
increase 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.
Since the introduction of our Unlimited Rental service, we have experienced
increases in the average number of DVDs rented per subscriber on a monthly
basis. While this trend has not had a material impact on our business 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 of our
Web site and internal information systems and development of our Personal Movie
Finder service and costs to acquire content.
Sales and marketing expenses. Sales and marketing expenses consist primarily
of the direct subscriber acquisition and retention costs related to our DVD
rental service. These costs include postage, packaging, rental library
depreciation and breakage expense related to our free trial promotion offers to
potential new subscribers. 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. General and administrative expenses consist
primarily of personnel costs and support costs for finance, legal and human
resources functions and other administrative costs.
Non-cash compensation. Stock-based compensation for equity instruments issued
to employees represents the aggregate difference, at the 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
amortized over the vesting period of the underlying options or grant, generally
four years, based on an accelerated amortization method. The total unamortized
stock-based compensation recorded for all option and stock grants through
December 31, 1999 of $6.8 million is expected to be amortized as follows:
$4.2 million in 2000; $1.8 million in 2001; $704,000 in 2002; and $113,000 in
2003.
Other Non-Cash Item
Upon closing of our initial public offering, we will record a charge 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 Stock and the estimated fair value of our
common stock at the date the Series E Non-Voting 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.
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 expenses 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 indicated 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
Revenues increased 274% from $1.3 million in 1998 to $5.0 million in 1999.
The increase primarily was attributable to growth in the number of paying
customers. These increases were offset partially by a decrease in revenues
resulting from our decision to stop selling DVDs in March 1999. Even though
revenues have grown significantly in recent quarters, we are unlikely to
sustain these percentage growth rates in the future.
Cost of Revenues
Cost of revenues increased 234% to $4.4 million in 1999 compared with $1.3
million in 1998, due to increased sales volume, increased outbound and inbound
shipping costs, as well as increased depreciation and scrap expense related to
our larger DVD rental library, partially offset by a reduction in the cost of
merchandise sold. As a percentage of revenue, cost of revenues decreased from
98% in 1998 to 87% in 1999. The decrease primarily was due to a reduction in
the cost of merchandise sold because we stopped selling DVDs. This decrease was
offset partially by increases in outbound and inbound shipping costs, as well
as increased rental library depreciation and breakage expense due to 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. This increase primarily was
due 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.
Sales and marketing expenses. Sales and marketing expenses increased 241%
from $4.8 million in 1998 to $16.4 million in 1999. This increase primarily was
due to the costs of subscriber acquisition, including advertising 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 million in 1998 to $2.1 million in 1999. This increase
was due primarily 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 1998 to $4,566,000 in 1999. This increase was
due primarily to additional grants made in 1999 and an increase in the
difference between the deemed fair market value of our common stock and the
related exercise prices. We also issued 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), Net
Interest and other income, net. Net interest and other income, which
consists primarily of interest earned on 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. Net interest expense, which primarily consists of
interest on capital leases and loans, increased 1,657% from $42,000 in 1998 to
$738,000 in 1999. This net increase was due primarily to asset acquisitions
financed through loans and capital leases.
31
Selected Quarterly Operating Results
The following table sets forth unaudited quarterly statement of operations
data for the four quarters ended December 31, 1999. 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
the operating results for any future period.
Quarter Ended
-------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999
--------- -------- --------- --------
(in thousands)
Statement of Operations
Data:
Revenues.................... $ 847 $ 854 $ 1,170 $ 2,135
Cost of revenues............ 663 670 1,276 1,764
------- ------- ------- --------
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 operating
expenses............... 4,597 6,219 9,004 10,844
------- ------- ------- --------
Operating loss.............. (4,413) (6,035) (9,110) (10,473)
Interest and other income,
net........................ 74 112 351 387
Interest expense, net....... (165) (129) (149) (295)
------- ------- ------- --------
Net loss.................... $(4,504) $(6,052) $(8,908) $(10,381)
======= ======= ======= ========
Quarter Ended
-------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999
--------- -------- --------- --------
As a Percentage of Revenues:
Revenues.................... 100 % 100 % 100 % 100 %
Cost of revenues............ 78 79 109 83
------- ------- ------- --------
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 35 28
Stock-based compensation.. 93 141 128 59
------- ------- ------- --------
Total operating
expenses............... 543 728 770 508
------- ------- ------- --------
Operating loss.............. (521) (707) (779) (491)
Interest and other income,
net........................ 9 13 30 18
Interest expense, net....... (20) (15) (13) (14)
------- ------- ------- --------
Net loss.................... (532)% (709)% (761)% (486)%
======= ======= ======= ========
32
Revenues. Our revenues increased during each quarter presented. Our revenues
increased by $965,000, or 82%, to $2,135,000 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 revenues 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, as well as an increase in the number of
trial offers for a DVD subscription service as well as increased numbers of
sales and marketing personnel and related expenses.
General and administrative expenses. General and administrative 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 decrease 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) changes 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 manage 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 through 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, we have financed our operations
primarily with $54.1 million raised through the private sale of our common and
preferred equity securities. As of December 31, 1999, we had cash, cash
equivalents and short-term investments of $20.5 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, expand our advertising sales capability, expand and
automate fulfillment operations and build the systems necessary to support our
growth. Although we believe that the proceeds of this offering, together with
our current cash and cash equivalents will be sufficient to fund our activities
for at least the next 12 months, there can be no assurance that we will not
require additional financing within this time frame 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 order to consummate potential acquisitions, if any, we may
need additional equity or debt financing.
Year 2000 Compliance
We currently are not aware of any Year 2000 problem in any of our critical
systems and services. However, we cannot guarantee that a Year 2000 problem
will not become apparent in the future. Should we or any third parties upon
which we rely experience any failure in critical systems and services, we might
experience, among other difficulties, operational inconveniences and
inefficiencies 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, the American Institute of Certified Public Accountants issued
Statement of Position, or SOP, No. 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. The adoption of this
standard has not had a material effect on 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 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-
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-
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.
36
BUSINESS
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 of
the world's largest personal movie preference ratings databases with over 8.9
million personal movie ratings contributed by more than 132,000 individual
users as of March 31, 2000. At our Web site, www.netflix.com, users can rent
DVDs through our Unlimited Rental subscription service, purchase DVDs through
our e-commerce referral program and choose theater locations and showtimes.
The primary accelerant to the growth of our Personal Movie Finder database
has been 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 Rental subscription service has been the
result primarily of the rapid consumer adoption of DVD technology and our
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 Rental subscription service into the boxes of DVD players sold in the
U.S. We also have relationships with major consumer electronics retailers, such
as Circuit City and The Good Guys, which provide promotional offers for our
Unlimited Rental service to their customers.
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. 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 Industry
Domestic consumer expenditures for filmed entertainment are large and
growing. Paul Kagan Associates, Inc., estimates that consumers in the United
States spent $25.6 billion on home video and theatrical filmed entertainment in
1999, up from $21.4 billion in 1996, and will grow to $35.0 billion in 2004.
Home video rentals are the largest single source of domestic consumer
expenditures on movies, representing about $8.3 billion, or 32% of such
expenditures in 1999, according to Paul Kagan Associates, Inc.
The home video segment is in the midst of a rapid transition from VHS tape
format to DVD technology. DVD is a digitally recorded format for video, similar
to compact discs in the music industry, which provides a 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., DVD player adoption has occurred
faster in its first three years since introduction than audio CD players,
digital broadcast systems or videocassette recorders. According to Paul Kagan
Associates, Inc., since the introduction of the DVD player in 1997, the
domestic installed base has grown to 5.4 million households at the end of 1999
and is forecast 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 503 million by the end of 2003.
According to Jupiter Communications, Internet advertising is projected to grow
to $11.5 billion in 2003 from $3.2 billion in 1999. Additionally, according to
Forrester Research, Internet commerce is expected to grow to $143.8 billion by
the end of 2003 from $20.3 billion in 1999.
The unique characteristics of the Internet allow businesses to offer a broad
selection of services and products, increased information and enhanced
convenience. For businesses 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 traffic to their sites as a result
of this user generated content. With their resulting critical mass these Web
sites usually become the consumers' destination of choice.
Many online entertainment Web sites are generally focused on content
aggregation and retail commerce and have not effectively harnessed the power 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. We believe that there is an
opportunity to leverage the Internet to enable consumers to select movies based
on their individual preferences and to enable the movie industry to market
movies directly to their target consumer audience.
As technology continues to evolve on the Internet, we expect consumers to be
able to access significantly greater quantities of entertainment content,
including streamed and downloadable video, than ever before. As access to the
number of programming choices grows, we believe consumers 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 is able to more
accurately predict the preferences of individual users.
. Multiple consumption options. Once we have recommended a movie, our
users can pursue any one of several consumption options, including DVD
rental through our Unlimited Rental subscription service, purchase
through a referral to one of our six e-commerce affiliates, and, at the
theater, by selecting location and showtimes on our Web site. 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.
. Compelling value. Our Unlimited Rental service provides users the
ability to rent as many DVDs as they want for between $15.95 and $19.95
per month and to have up to four DVD movies out at the same time without
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.
DVDs are mailed individually to subscribers via the U.S. Postal Service
with 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 Rental subscription service to their customers as a DVD
player purchase incentive. We also have relationships with leading
online retailers Amazon.com,, Buy.com, DVD Express, Reel.com, Sam
Goody.com and 800.com 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 movies and
other video entertainment. Key elements of our strategy include:
Build 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 use
of our Personal Movie Finder recommendation service and the success of our
Unlimited Rental subscription service. As the number of users 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. We believe that building greater awareness of the NetFlix
brand within 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 capability 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 awareness 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, as well as developing new business
alliances and partnerships including co-branded syndication of our Personal
Movie Finder service.
Enhance the user experience. We intend to continuously enhance the features
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. 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 movie 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 and
virtually unlimited online shelf space, we can offer studios enhanced
promotional opportunities for new titles and back catalog.
NetFlix Offerings
We offer a wide range of services designed to help our users identify,
locate, purchase and rent movies they will enjoy at home or in a local theater.
The key features of our Web site include our Personal Movie Finder service, our
Unlimited Rental subscription service, our DVD sales referral program, our
theatrical showtime and information listings, our dynamic presentation of movie
selections and our unique content and customer communications.
Personal Movie Finder Service
The heart of our Personal Movie Finder service is our proprietary CineMatch
technology, which enables us to accurately predict the movie tastes 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 of 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 service to determine which movies to
display to a customer and in which order. For example, a list of new releases
may be ranked by user preference rather than by release date, allowing a user
to more quickly focus on movies he or she is likely to enjoy. In addition,
these ratings will determine which movies to feature in lead page positions on
our Web site to increase customer satisfaction and rental activity.
41
Unlimited Rental Subscription Service
Our Unlimited Rental service is a monthly DVD subscription program offering
a selection of over 5,800 movie titles on DVD, an unlimited number of rentals
each month and no due dates or late fees, for between $15.95 and $19.95 per
month. Users are allowed to have up to four movies out at the same time and may
keep each one for as long as they wish. Subscribers choose their movies online
using our CineMatch technology or 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 queue of movies they would like 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 likely 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 over 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 that the retailers promote our
service on a non-exclusive basis as a means 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 Service
We believe that our ability to establish and maintain long-term
relationships with our customers depends, in part, on the strength of our
customer support and service operations. Furthermore, we encourage and utilize
frequent communication with and feedback from our customers 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. Our customer support and
service operates 18 hours a day seven days a week. We utilize email to
proactively correspond with our customers. We also offer phone support for
customers who prefer to talk directly with a customer service representative.
We have automated certain tools used by our customer support and service staff
and intend to actively pursue further automation and enhancements of our
customer support and service systems and operations. 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.
Competition
The market for our services is intensely competitive and subject to rapid
change. Barriers to entry are relatively low, and current and new competitors
can launch new Web sites at a relatively low cost. Although we believe no
company currently offers the combination and quality of services we offer, our
principal competitors include, or could include:
. traditional movie rental chains, such as Blockbuster Video 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.
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
suppliers and movie production studios which could adversely affect our ability
to obtain products on favorable terms. We may be unable to compete successfully
against current or future competitors.
Intellectual Property
We use a combination of trademark, copyright and trade secret laws and
confidentiality agreements to protect our proprietary technology. We have
applied for several trademarks. Our pending trademark applications may not be
allowed. Even if these applications are allowed, these trademarks may not
provide us a competitive advantage. 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 do not infringe
the intellectual property rights of third parties. However, we cannot assure
you that we will prevail in all 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.
Facilities
Our executive offices are located in Los Gatos, California, where we lease
approximately 12,000 square feet under a lease which expires in January 2001.
We anticipate that we will have to relocate our headquarters within the next
twelve months. We also lease approximately 58,000 square feet of space in San
Jose, California, where we maintain our customer service, IT operations, and
fulfillment operations center under a lease which expires in October 2004. We
are exploring opening additional operations centers, possibly outside the state
of California.
Legal Proceedings
From time 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 a material adverse effect on us.
46
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information with respect to our
executive officers and directors as of March 31, 2000.
Name Age Position
- ---- --- --------
Reed Hastings............ 39 Chief Executive Officer, President and Chairman of the Board
Marc B. Randolph......... 41 Executive Producer and Director
Thomas R. Dillon......... 56 Vice President of Operations
Neil Hunt................ 38 Vice President of Internet Engineering
Leslie J. Kilgore........ 34 Vice President of Marketing
J. Mitchell Lowe......... 47 Vice President of Business Development
W. Barry McCarthy, Jr. .. 46 Chief Financial Officer
Patty McCord............. 46 Vice President of Human Resources
Eric P. Meyer............ 35 Vice President of Database Systems
Deborah J. Pinkston...... 38 Vice President of Sales
Timothy M. Haley......... 45 Director
Jay C. Hoag.............. 41 Director
Samir P. Master.......... 31 Director
Michael N. Schuh......... 56 Director
Messrs. Hoag, Master and Schuh comprise NetFlix's audit committee. Messrs.
Haley and Hoag comprise NetFlix's compensation committee.
Reed Hastings has served as our Chief Executive Officer since September
1998, our President since July 1999 and Chairman of the Board since inception.
From June 1998 to June 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 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. has served as our Chief Financial Officer since April
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. McCord has served as our Vice President of Human Resources since
November 1998. Prior to joining NetFlix, as a principal of Patty McCord
Consulting, Ms. McCord served as a consultant to various startups from January
1998 to November 1998. From June 1994 to July 1997, Ms. McCord served as
Director of Human Resources at Rational Software Corporation, a software
development company. Ms. McCord attended Sonoma State College.
Eric P. Meyer has served as our Vice President of Database Systems since
January 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. Meyer 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., a video
game developer and publisher. From October 1991 to February 1995, Ms. Pinkston
served as Manager, Contract Negotiations and Professional Relations at Syntax
Laboratories Inc. Ms. Pinkston holds a B.A. from the University of California
at Los Angeles and an M.B.A. from the University of Southern California.
Timothy M. Haley 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, from 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. Mr. Haley received his
B.A. from Santa Clara University.
Jay C. Hoag 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,
eLoyalty, a customer loyalty solutions company, iVillage, 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. Master has served as one of our directors since October 1999. Since
June 1999, Dr. Master has served as a Senior Partner of Europ@web B.V., a
global Internet investment group. From December 1996 to December 1998, Dr.
Master was a Managing Director at Comdisco Ventures, a debt 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. Master holds a B.S.M. from Northwestern
University in Evanston, Illinois, an M.D. from Northwestern Medical School and
an M.B.A. from the J.L. Kellogg Graduate School of Management at Northwestern
University.
Michael N. Schuh 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 1995 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 of the board of directors of several private companies. Mr. Schuh holds
a B.S.E.E. from the University of Maryland.
Classified Board
Our certificate of incorporation provides for a classified board of
directors consisting of three classes of directors, each serving staggered
three-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, two of the nominees to the board will be elected
to one-year terms, two will be elected to two-year terms and two will be
elected to three-year terms. Thereafter, directors will be elected for three-
year terms. Messrs. Randolph and Master and have been designated Class I
directors whose term expires at the 2001 annual meeting of stockholders.
Messrs. Schuh and Haley have been designated Class II directors whose term
expires at the 2002 annual meeting of stockholders. Messrs. Hastings and Hoag
have been designated Class III directors whose term expires at the 2003 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."
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 Committees
We established an audit committee and compensation committee in March 2000.
Our audit committee consists of Messrs. Hoag, Master and Schuh. The audit
committee reviews the 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 employees of NetFlix.
Compensation Committee Interlocks and Insider Participation
Prior to establishing the compensation committee, the 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
Directors do not currently receive any cash or equity compensation from us
for their service as members of the board of directors.
Executive Compensation
The table below summarizes the compensation earned for services rendered to
NetFlix in all capacities for the fiscal year ended December 31, 1999 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. These executives are referred to as
the Named Executive Officers elsewhere in this prospectus.
Summary Compensation Table
Annual Long-Term Compensation
Compensation Awards
---------------- -----------------------
Securities
Underlying All Other
Name and Principal Positions Year Salary Bonus Options Compensation
- ---------------------------- ---- -------- ------- ---------- ------------
Reed Hastings.................... 1999 $ 12,698 $ -- -- $ 252
Chief Executive Officer,
President, Chairman of the
Board
Neil Hunt........................ 1999 131,321 -- 210,000 252
Vice President of Internet
Engineering
Omer Malchin..................... 1999 152,512 -- -- 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 -- 25,000 252
Vice President of Database
Systems
Marc B. Randolph................. 1999 156,025 -- -- 252
Executive Producer and Director
- --------
(1) Mr. Malchin's employment with NetFlix ended on September 13, 1999.
(2) Includes a $50,000 severance payment paid to Mr. Malchin.
50
Option Grants During Last Fiscal Year
The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers in the fiscal year
ended December 31, 1999, including the potential realizable value over the ten-
year term of the options, based on 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, we granted options to purchase up to an aggregate of 1,900,116
shares to employees, directors 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 determined in good faith by the board of
directors. All options have a term of ten years. Optionees may pay the exercise
price 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 are 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 vest over four years, with 25% of the option
shares vesting on the date one year after the vesting commencement date, and
1/48th of the remaining option shares vesting each month thereafter.
Individual Grants
-----------------------------------------
% 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 Date 5% 10%
- ---- ---------- --------- --------- ---------- -------- --------
Reed Hastings........... -- -- % $ -- -- $ -- $ --
Neil Hunt............... 210,000 11.1 0.11 01/25/09 38,046 62,533
Omer Malchin............ -- -- -- -- -- --
W. Barry McCarthy, Jr... 330,000 17.4 1.00 04/14/09 477,633 785,042
Eric P. Meyer........... 25,000 1.3 0.11 01/29/09 4,529 7,444
Marc B. Randolph........ -- -- -- -- -- --
51
Aggregate 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 Officers concerning option exercises for the fiscal year ended
December 31, 1999, and exercisable and unexercisable options held as of
December 31, 1999.
The "Value of Unexercised In-the-Money Options at December 31, 1999" is
based on a value 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 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 December 31, 1999 December 31, 1999
on Value --------------------------------- -------------------------
Name Exercise Realized Unexercisable Exercisable Unexercisable Exercisable
- ---- --------- -------- ---------------- ------------- ------------- -----------
Reed Hastings........... 1,550,000 $ -- -- -- $ -- $--
Neil Hunt............... 210,000 -- -- -- -- --
Omer Malchin............ 106,250(1) -- -- -- -- --
W. Barry McCarthy, Jr... -- -- 330,000 -- 330,000 --
Eric P. Meyer........... 325,000 18,000 -- -- -- --
Marc B. Randolph........ -- -- -- -- -- --
- --------
(1) Does not include 318,750 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 Restated 1997 Stock Plan
Our amended and restated 1997 Stock Plan provides for the grant of incentive
stock options 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. This 1997 Stock Plan was adopted by
our board of directors in 1997 and was amended and restated in March 2000.
A total of 6,952,250 shares of our common stock have been reserved for
issuance under our amended and restated 1997 Stock Plan. In addition, annual
increases will be added beginning in January 2001, equal to the lesser 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 3,521,174 shares of currently outstanding common stock, options to
purchase 2,543,097 shares of common stock were outstanding and 887,979 shares
were available for future grant.
Administration. Our board of directors or a committee of our board of
directors administers the amended and restated 1997 Stock Plan. The
administrator has the power to determine, among other things:
. the terms of the options or stock purchase rights granted, including the
exercise price of the option or stock purchase right;
52
. the number of shares subject to each option or stock purchase right;
. the exercisability of each option or stock purchase right; and
. the form of consideration payable upon the exercise of each option or
stock purchase right.
Options. The administrator determines the exercise price of options granted
under the amended and restated 1997 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 must 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, an optionee
may be granted an additional option to purchase up to 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 3 months. However, an option may never be exercised later than the
expiration of its term.
Stock Purchase Rights. The administrator determines the exercise price of
stock purchase rights granted under our amended and restated 1997 Stock Plan.
Unless the administrator determines otherwise, the 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 (including death or 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 1997 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. Our amended and restated 1997 Stock
Plan provides that in the event of our merger with or into another corporation
or a sale of substantially all of our assets, 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 of outstanding options or stock
purchase rights, 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 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. Our
amended and restated 1997 Stock Plan will automatically terminate in April
2010, unless we terminate it sooner. In addition, our board of directors has
the authority to amend, suspend or terminate the amended and restated 1997
Stock Plan provided it does not adversely affect any previously granted option
or stock purchase right or any previously issued shares of common stock.
2000 Employee Stock Purchase Plan
Our 2000 Employee Stock Purchase Plan was adopted by our board of directors
in April 2000. A total of 550,000 shares of our common stock have been reserved
for issuance, plus annual increases beginning in January 2001 equal to the
lesser of 350,000 shares, 1% of the outstanding shares on such date, or an
amount determined by our board of directors. As of the date of this prospectus,
no shares have been issued under our 2000 Employee Stock Purchase Plan.
Structure of the 2000 Employee Stock Purchase Plan. Our 2000 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 2000 Employee
Stock Purchase Plan if such 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
. has rights to purchase stock under all of our employee stock purchase
plans accruing at a rate that exceeds $25,000 worth of stock for each
calendar year.
Purchases. Our 2000 Employee Stock Purchase Plan permits participants to
purchase common stock through payroll deductions of up to 15% of their eligible
compensation which includes a participant's base straight time gross earnings
and commissions, but excludes overtime pay, shift premium, incentive
compensation, incentive payments, bonuses and other compensation. A participant
may purchase a maximum of 1,300 shares during a 6-month purchase period.
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 fair 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
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 will be automatically re-enrolled in the immediately
following 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. A participant may not transfer rights granted
under our 2000 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. In the event of our merger with or into another
corporation or a sale of all or substantially all of our assets, a successor
corporation will 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, a new exercise date will be
set before the date at the proposed sale or merger and the participant's
options shall be exercised automatically on the new exercise date.
Amendment and Termination of our 2000 Employee Stock Purchase Plan. Our
board of directors has the authority to amend or terminate our 2000 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 Plan
On January 1, 1998, we adopted the NetFlix 401(k) Retirement Plan which
covers all of our eligible employees who have attained the age of 21 and have
completed one month of service with us. The 401(k) Plan currently excludes from
participation employees of affiliated employers, collectively bargained
employees 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 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 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. 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 vest fully and become immediately
exercisable. 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 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.
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 directors
of a corporation will not be personally liable 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 unlawful stock repurchases or
redemptions; 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 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 bylaws would permit
indemnification.
We will enter into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors
and executive officers for expenses, judgments, fines 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.
57
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Preferred Stock Sales
Series E Non-Voting Preferred Stock. In April 2000, we sold shares of Series
E Non-Voting Preferred Stock, at a purchase price of $9.38 per share, and sold
warrants to acquire Series E Non-Voting Preferred Stock, at a purchase price of
$0.01 per warrant, to raise capital to finance our operations. The warrants
have an exercise price of $14.07 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 5% stockholders
and certain family members of our officers purchased shares and warrants in
that financing:
Warrants to
Number of Purchase Aggregate
Purchaser Shares Shares Consideration
--------- --------- ----------- -------------
Entities affiliated with Technology
Crossover Ventures................. 4,359,876 435,988 $40,899,996
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
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 Technology Crossover Ventures hold more than 5% of our stock in the
aggregate. Jay Hoag, one of our directors, is a General Partner of Technology
Crossover Ventures. 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 Foundation Capital Management II. 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
Institutional Venture Partners. Muriel Randolph is the mother, and Randolph
Randolph is the brother, of Marc B. Randolph, a director and the Executive
Producer of NetFlix.
Series D Preferred Stock. In June 1999, we sold shares of Series D Preferred
Stock, at a purchase price of $6.52 per share, to raise capital to finance our
operations. The following 5% stockholders purchased shares in that financing:
Number of Aggregate
Purchaser Shares Consideration
--------- --------- -------------
Europ@web B.V................................... 4,081,118 $26,608,889
Entities affiliated with Technology Crossover
Ventures....................................... 366,735 2,391,112
Entities affiliated with Foundation Capital..... 153,374 999,998
Series C Preferred Stock. In February 1999, we sold shares of Series C
Preferred Stock, at a purchase price of $3.27 per share, to raise capital to
finance our operations. The following officers, 5% stockholders and certain of
their family members purchased shares in that financing:
Number of Aggregate
Purchaser Shares Consideration
--------- --------- -------------
Entities affiliated with Technology Crossover
Ventures....................................... 1,834,862 $5,999,999
Entities affiliated with Foundation Capital..... 1,834,863 6,000,002
Entities affiliated with Institutional Venture
Partners....................................... 611,621 2,000,001
Reed Hastings................................... 234,557 767,001
Muriel Randolph................................. 22,936 75,001
Hastings 1996 Irrevocable Trust................. 9,174 29,999
Wil Hastings.................................... 9,174 29,999
Joan Hastings................................... 5,505 18,001
58
Mr. Hastings currently serves as our Chief Executive Officer and chairman of
the board of directors. Wil Hastings is the father and Joan Hastings is the
mother of Reed 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 Sales
In connection with our sale of Series C preferred 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 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 Agreements and Change in Control Agreements."
59
PRINCIPAL STOCKHOLDERS
The table on the following page sets forth information regarding the
beneficial ownership of our common stock as of April 13, 2000, by the following
individuals or groups:
. each person or entity who is known by us to own beneficially more than
5% of our outstanding stock
. each of the Named Executive Officers
. each of our directors; and
. all of our directors and executive officers as a group
Unless otherwise indicated, the address for each stockholder listed in the
following table is c/o NetFlix.com, Inc., 750 University Avenue, Los Gatos, CA
95032. 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.
Applicable percentage ownership in the following table is based on
31,105,451 shares of common stock outstanding as of April 13, 2000, as adjusted
to reflect the conversion of all outstanding shares of preferred stock upon 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.
60
Principal Stockholders Table
Percent of Shares
Outstanding
-----------------
Number of
Shares
Beneficially Before After
Name and Address Owned Offering Offering
- ---------------- ------------ -------- --------
Entities affiliated with Technology Crossover 6,997,461 22.5%
Ventures(1)....................................
575 High Street, Suite 400
Palo Alto, CA 94301
Entities affiliated with Institutional Venture 4,620,840 14.9
Partners(2)....................................
3000 Sand Hill Road
Building 2, Suite 290
Menlo Park, CA 94025
Europ@web B.V.(3)............................... 4,432,930 14.3
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 *
W. Barry McCarthy, Jr.(6)....................... 89,375 *
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 persons) (11).............................. 28,970,519 92.6
- --------
* Less than 1% of our outstanding shares of common stock.
(1) Consists of 36,689 shares held by TCV II, V.O.F., 1,129,410 shares held
by Technology Crossover Ventures II, L.P., 868,307 shares held by TCV II
(Q), L.P., 154,093 shares held by TCV II Strategic Partners, L.P. and
172,439 shares held by 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 Technology Crossover Management II,
L.L.C. which is the General Partner of each of the TCV II Funds, a
Managing Member of Technology Crossover Management IV, L.L.C. which is
the General Partner of the TCV IV
61
Fund and a Managing Member of TCVF Management, L.L.C. which is the General
Partner of the Franchise Fund. Mr. Hoag disclaims beneficial ownership of
such shares except to the extent of his pecuniary interest therein.
(2) Includes 4,482,331 shares and 31,391 shares issuable upon exercise 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.
(3) Includes 31,938 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 exercise of warrants held by Foundation Capital II
Entrepreneurs Fund, L.L.C. and 115,401 shares and 1,599 shares issuable
upon exercise of warrants held by Foundation Capital II Principals Fund,
L.L.C.
(5) Includes 40,000 shares held by Mr. Randolph in his capacity as trustee of
the Marc & Lorraine Randolph 2000 Logan B. Randolph Trust, 40,000 shares
held by Mr. Randolph in his capacity as trustee of the Marc & Lorraine
Randolph 2000 Morgan B. Randolph Trust, and 40,000 shares held by Mr.
Randolph in his capacity as trustee of the Marc & Lorraine Randolph 2000
Hunter B. Randolph Trust. Mr. Randolph disclaims beneficial ownership of
all such shares.
(6) Includes 89,375 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. Mr. Master is a Senior Partner of
Europ@web B.V. He disclaims beneficial ownership of the 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
ownership of the shares held by the Foundation Capital entities, except 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).
(10) Includes 4,482,331 shares and 31,391 shares issuable upon exercise 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 these shares.
(11) Includes 184,167 shares issuable upon the exercise of stock options
exercisable within 60 days of April 13, 2000.
62
DESCRIPTION OF CAPITAL STOCK
Authorized 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. 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 200,000,000 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 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 Stock
As of April 13, 2000, there were 31,105,451 shares of common stock
outstanding which were held of record by approximately 108 stockholders, as
adjusted for conversion of all outstanding shares of convertible preferred
stock into an aggregate of 24,758,788 shares of common stock, which will occur
upon the closing of this offering.
The holders 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 stock
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, the holders of common stock 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 stock have no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock.
Preferred Stock
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges 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 on 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 NetFlix 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
Warrants
At April 13, 2000, warrants to purchase 92,592 shares of our Series B
Preferred Stock and warrants to purchase 533,003 shares of our Series E Non-
Voting Preferred Stock were outstanding.
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 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 two within
any twelve 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 Provisions
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make the following more difficult:
. the acquisition of NetFlix by means of a tender offer;
. acquisition 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 provisions
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
of an unfriendly or unsolicited proposal to acquire or restructure us outweigh
the disadvantages of discouraging such proposals, because 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. 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 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-
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.
Elimination of Stockholder Action By Written Consent. Our certificate of
incorporation eliminates the right of stockholders to act by written consent
without a meeting.
Elimination of Cumulative Voting. Our certificate of incorporation and
bylaws do not provide for cumulative voting in the election of directors.
Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock
with voting or other rights or preferences that could impede the success of any
attempt to change control of NetFlix. These and other provisions may have the
effect of deferring hostile takeovers or delaying changes in control or
management of NetFlix.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is .
Nasdaq National Market Listing
We are applying for listing on the Nasdaq National Market under the symbol
"NFLX."
65
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, 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, 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" as that term is defined in Rule 144. All such Restricted
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. 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 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 Shares will be eligible for sale subject to
volume limitations, beginning April 13, 2001. In addition, as of April 13,
2000, there were outstanding 2,543,097 options to purchase 2,543,097 shares of
common stock and warrants to purchase 625,595 shares of common stock. All such
options and warrants are subject to lock-up agreements. Deutsche Bank
Securities Inc. 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.
Rules 144 and 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 NetFlix 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; or
. 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, is entitled to sell such shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule
144.
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 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 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 or reserved for future issuance under our stock plans. As
of April 13, 2000, options to purchase a total of 2,543,097 shares were
outstanding and 887,979 shares were reserved for future issuance under our
amended and restated 1997 Stock Plan. Common stock issued upon exercise of
outstanding vested options or issued under our 2000 Employee Stock Purchase
Plan, other than common stock issued to affiliates are available for immediate
resale in the open market.
Registration Rights
Also beginning six months after the date of this prospectus, holders of
24,679,206 Restricted 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.
ADDITIONAL 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://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, proxy statements and other information
with the Commission. Such periodic 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.
67
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:
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
Page
----
Independent Accountants' Report............................................ F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Deficit........................................ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
F-1
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors and Stockholders of
NetFlix.com, Inc.
We have audited the accompanying balance sheets of NetFlix.com, Inc. as of
December 31, 1998 and 1999, 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-year
period ended December 31, 1999. 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 generally accepted auditing
standards. 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, Inc. as of
December 31, 1998 and 1999, 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-year period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Mountain View, California
April 4, 2000, except as to Note 8, which is as of
April 13, 2000
NETFLIX.COM, INC.
BALANCE SHEETS
(in thousands, except share data)
Pro Forma
December 31, December 31,
------------------ 1999
1998 1999 (Unaudited)
-------- -------- ------------
ASSETS
Current assets:
Cash and cash equivalents................... $ 1,061 $ 14,198 $ 14,198
Short-term investments...................... -- 6,322 6,322
Prepaids and other current assets........... 635 720 720
-------- -------- --------
Total current assets........................ 1,696 21,240 21,240
Rental library, net.......................... 2,011 8,695 8,695
Property and equipment, net.................. 1,062 4,499 4,499
Deposits and other assets.................... 80 339 339
-------- -------- --------
Total assets................................ $ 4,849 $ 34,773 $ 34,773
======== ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable............................... $ 1,000 $ 625 $ 625
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
-------- -------- --------
Total current liabilities................... 6,400 10,212 10,212
Capital lease obligations.................... 172 811 811
Note payable................................. -- 3,959 3,959
-------- -------- --------
Total liabilities........................... 6,572 14,982 14,982
Commitments and contingency..................
Mandatorily 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 --
-------- -------- --------
Stockholders' (deficit) equity:
Convertible preferred stock, $0.001 par
value; 5,000,000 shares authorized;
4,444,545 shares issued and outstanding in
1998 and 1999, 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 26
Additional paid-in capital................... 8,100 16,087 67,891
Deferred stock-based compensation............ (4,711) (6,841) (6,841)
Accumulated deficit.......................... (11,440) (41,285) (41,285)
-------- -------- --------
Total stockholders' (deficit) equity........ (8,044) (32,028) 19,791
-------- -------- --------
Total liabilities and stockholders'
(deficit) equity........................... $ 4,849 $ 34,773 $ 34,773
======== ======== ========
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, 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)
Convertible
Preferred Stock Common stock Additional Deferred Total
---------------- ----------------- Paid-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................ 4,444,545 4 2,580,250 3 8,100 (4,711) (11,440) (8,044)
Exercise of options and
restricted stock
purchase agreements, net
of repurchases.......... -- -- 3,370,911 3 323 -- -- 326
Issuance of common stock
upon exercise of
warrants................ -- -- 271,489 1 30 -- -- 31
Warrants issued in
connection with debt
financing............... -- -- -- -- 762 -- -- 762
Deferred stock-based
compensation related to
option grants........... -- -- -- -- 6,872 (6,872) -- --
Deferred stock-based
compensation expense.... -- -- -- -- -- 4,742 -- 4,742
Net loss................ -- -- -- -- -- -- (29,845) (29,845)
--------- ----- --------- ----- ------- ------- -------- --------
Balances as of December
31, 1999................ 4,444,545 $ 4 6,222,650 $ 7 $16,087 $(6,841) $(41,285) $(32,028)
========= ===== ========= ===== ======= ======= ======== ========
See accompanying notes to financial statements.
F-5
NETFLIX.COM, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
Period from
August 29, 1997 Years Ended
(Inception) to December 31,
December 31, ------------------
1997 1998 1999
--------------- -------- --------
Cash flows from operating activities:
Net loss.................................. $ (359) $(11,081) $(29,845)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... 5 427 3,745
Noncash write-off of scrapped DVDs...... -- -- 321
Deferred compensation expense........... -- 1,151 4,742
Noncash interest expense................ -- 7 398
Changes in operating assets and
liabilities:
Prepaids and other current assets..... (48) (592) (85)
Accounts payable...................... 121 2,942 2,271
Accrued liabilities................... 20 1,620 1,571
Deferred revenue...................... -- 118 353
------ -------- --------
Net cash used in operating
activities.......................... (261) (5,408) (16,529)
------ -------- --------
Cash flows from investing activities:
Purchases of short-term investments....... -- -- (6,322)
Purchases of property and equipment....... (152) (103) (3,295)
Purchase of rental library................ -- (2,186) (9,866)
Other assets.............................. -- (74) (259)
------ -------- --------
Net cash used in investing
activities.......................... (152) (2,363) (19,742)
------ -------- --------
Cash flows from financing activities:
Proceeds from issuance of convertible
preferred stock, net..................... 1,992 250 --
Proceeds from issuance of mandatorily
redeemable convertible preferred stock... -- 6,000 45,498
Proceeds from issuance of common stock.... 3 -- 357
Borrowings on notes payable............... -- 1,000 5,000
Principal payments on note payable and
capital lease obligations................ -- -- (1,447)
------ -------- --------
Net cash provided by financing
activities.......................... 1,995 7,250 49,408
------ -------- --------
Net increase (decrease) in cash and cash
equivalents............................... 1,582 (521) 13,137
Cash and cash equivalents, beginning of
period.................................... -- 1,582 1,061
------ -------- --------
Cash and cash equivalents, end of period... $1,582 $ 1,061 $ 14,198
====== ======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest.. $ 1 $ 8 $ 283
====== ======== ========
Noncash investing and financial
activities:
Purchase of assets under capital lease
obligations............................. $ 124 $ 1,075 $ 1,026
====== ======== ========
Warrants issued in connection with debt
financing............................... $ -- $ 321 $ 762
====== ======== ========
See accompanying notes to financial statements.
F-6
NETFLIX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Period from 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 operates an Internet-based unlimited rental subscription service for
digital video disc (DVD) formatted movies.
Cash and cash equivalents and short-term investments
The Company considers highly liquid instruments with original maturities of
three months or less, at the date of purchase, to be cash equivalents. Short-
term investments consist of highly liquid debt instruments such as commercial
paper and medium-term corporate notes with maturities of less than one year.
Rental library, net
Rental library comprises of rental DVDs which are carried at cost less
accumulated depreciation. The Company uses an accelerated method (sum of the
years digits method) of depreciating the rental library over an estimated life
of three years in order to more closely match expenses in proportion with
anticipated revenues.
Rental library and accumulated depreciation as of December 31, were as
follows:
1998 1999
------ -------
Rental library............................................ $2,186 $10,882
Less accumulated depreciation............................. (175) (2,187)
------ -------
Rental library, net..................................... $2,011 $ 8,695
====== =======
The Company recorded $175 and $2,861 of depreciation expense on its DVD
rental library in 1998 and 1999, respectively.
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 property and equipment and its
fair value. To date, the Company has made no adjustments to the carrying values
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 share 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
materials 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 of costs related
to 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.
Fair 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
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.
Revenue recognition
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 deferred 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. These amounts are included in revenues in the
accompanying financial statements.
Stock-based compensation
The Company accounts for its stock-based employee compensation plans using
the intrinsic value method. Deferred stock-based compensation is recorded if,
on the date of grant,
F-8
NETFLIX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
the current market value of the underlying stock exceeds the exercise price.
The Company amortizes deferred stock-based compensation on an accelerated basis
in accordance with Financial Accounting Standards Board (FASB) Interpretation
No. 28. Options granted to nonemployees are considered compensatory and are
accounted for 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." The Company uses the Black-
Scholes option pricing model to value options granted to non-employees. The
related expense is recorded over the period in which the related services are
received.
Income taxes
The Company accounts for income taxes using the asset and liability method
pursuant to SFAS No. 109, Accounting for Income Taxes. 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. Net loss, as reported in the statements of operations,
is the Company's only component of comprehensive income during all periods
presented.
Net 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 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. All potential common
stock issuances have been excluded from the computation 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):
Period from
August 29, Years Ended
1997 (Inception) December 31,
to December 31, -------------
1997 1998 1999
---------------- ------ ------
Stock options.................................... -- 4,168 1,594
Warrants......................................... -- 93 93
Common stock subject to repurchase............... 3,200 1,653 1,069
Convertible preferred stock...................... 3,990 10,128 19,429
----- ------ ------
7,190 16,042 22,185
===== ====== ======
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 activities
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets 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 the fair value of the derivative
are recognized in earnings in the period of change. This statement will be
effective for all annual and interim periods beginning after June 15, 1999.
Management does not believe the adoption of SFAS No. 133 will have a material
effect 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-10
NETFLIX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
Until April 1999, 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 accrued 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 terminated 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.
Year ended
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
------ ------
Computer equipment.......................................... $ 996 $4,361
Purchased software and Web site development costs........... 240 710
Furniture and fixtures...................................... 60 405
Leasehold improvements...................................... 21 162
------ ------
1,317 5,638
Less accumulated depreciation............................... 255 1,139
------ ------
$1,062 $4,499
====== ======
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 and $2,101 of assets
under capital leases as of December 31, 1998 and 1999, respectively.
Accumulated depreciation of assets under these leases totaled approximately
$241 and $806 for the years ended December 31, 1998 and 1999, respectively.
3. Accrued Liabilities
Accrued liabilities consisted of the following as of December 31, 1998 and
1999:
1998 1999
------ ------
Obligation to satisfy free rental programs.................. $ 98 $ 595
Obligation to deliver free DVDs............................. 1,031 --
Employee benefits........................................... 181 926
Other....................................................... 330 1,690
------ ------
$1,640 $3,211
====== ======
4. Debt and Warrants
Equipment lines of credit
The Company has entered into financing agreements for the acquisition of
inventory and equipment. Amounts borrowed are collateralized by the related
purchased assets. The Company had outstanding borrowings under these
arrangements of $1,058 and $1,637 as of December 31, 1998 and 1999,
respectively. Such amounts are payable over a four-year period in monthly
installments of principal and interest with interest accruing at rates ranging
between 8.0% and 26.0% per annum.
Notes payable
In February 1999, the Company entered into a loan and security agreement
with a third-party that provides for borrowings of up to $5,000. As of December
31, 1999, $5,000 had been borrowed under this facility. 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 are 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 accrued interest at a rate of
13% per annum. These notes were paid in full in February 1999.
Warrants 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 to
F-12
NETFLIX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
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.
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. 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 fair value of the warrant of
approximately $170. The Company accounted for the fair 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.
In February 1999, in connection with borrowings under notes 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 approximately $762 as an increase
to additional paid-in capital with a corresponding provision to debt discount.
The debt discount is being amortized over the term of the related debt, which
is 24 months.
Unamortized discounts related to these warrants of $307 and $674 as of
December 31, 1998 and 1999, respectively, are included in noncurrent notes
payable and capital lease obligations and are being amortized to interest
expense over the term of the related obligations. The lender exercised this
warrant in February 1999.
5. Lease Commitments
The Company leases its primary facility under a noncancelable operating
lease. The Company also has capital leases with various expiration dates
through December 31, 2002. Future minimum lease payments under noncancelable
capital and operating leases as of December 31, 1999, are as follows:
Capital Operating
Leases Leases
Year ending December 31, ------- ---------
2000.................................................. $ 684 $1,312
2001.................................................. 724 933
2002.................................................. 464 891
2003.................................................. 116 905
2004.................................................. -- 781
Thereafter............................................ -- --
------ ------
Total minimum payments................................ 1,988 $4,822
======
Less interest......................................... 606
------
Present value of net minimum lease payments........... 1,382
Less current portion of capital lease obligations..... 571
------
Capital lease obligation.............................. $ 811
======
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, 1998 and 1999, was approximately
$11, $169, and $783, respectively.
6. Preferred Stock and Common Stock
Preferred Stock
In October 1997, the Company issued 3,990,000 shares of Series A convertible
preferred stock (Series A) for aggregate consideration 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 B preferred stock for aggregate consideration 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.
The rights, preferences, and privileges of the holders of Series A, B, C,
and D preferred stock are as follows:
. Dividends are noncummulative and payable only upon declaration by the
Company's Board of Directors at 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. After payment to
holders of Series A, B, C, and D 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,
and D preferred stock receive aggregate amounts totaling $1.50, $3.24,
$9.81, and $19.56 per share, respectively. Thereafter, all remaining
proceeds are to be allocated to the holders of common stock on a pro
rata basis.
. Series A is convertible into common stock at the option of the holder,
at any time, at a rate of one share of common stock for each share of
Series A preferred stock. Each outstanding share of Series A shall
automatically be converted into one share of common stock immediately
upon the closing of an underwritten 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 with gross
proceeds in excess of $20,000 or affirmative election of the holders of
at least 75% of the outstanding shares the respective series. The
Company has fully reserved shares of common stock for issuance upon the
conversion of Series B, C, and D preferred stock.
. Holders of Series B, C, and D 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 Plan
As of December 31, 1998 and 1999, the Company was authorized to issue up to
5,081,400 and 6,828,083 shares, respectively, of common stock in connection
with its 1997 Stock Plan to directors, employees, and consultants. The plan
provides for the issuance of stock purchase rights, incentive stock options, or
nonstatutory 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 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 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 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 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; 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 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-15
NETFLIX.COM, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
The Company uses the intrinsic-value method to account for its fixed option
plans. Deferred stock-based compensation cost has been recognized for stock
option plan grants to employees when the fair value of the underlying common
stock on the grant date exceeds the exercise price for each stock option.
Deferred stock-based compensation is amortized using the accelerated method set
forth in FASB Interpretation No. 28. 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 December 31, December 31,
---------------- ------------------
1997 1998 1999
---------------- -------- --------
Net loss:
As reported....................... $ (359) $(11,081) $(29,845)
Pro forma......................... (359) (11,093) (29,949)
Basic and diluted net loss per
share:
As reported....................... -- (12.27) (5.60)
Pro forma......................... -- (12.28) (5.62)
The fair value of each option was estimated on the date of grant using the
minimum value method with the following weighted-average assumptions: no
dividend yield; volatility of -0-%; risk-free interest rate of -0-%, 4.95%, and
5.40% for the period from August 29, 1997 (inception) to December 31, 1997, and
for the years ended 1998 and 1999, respectively; and expected life of 3.5 years
for all periods.
A summary of the status of the Company's options for the period from August
29, 1997 (inception) to December 31, 1997, and for the years ended December 31,
1998 and 1999, are as follows:
Options Outstanding
--------------------------
Shares Weighted-
Available Number of Average
for Grant Shares Exercise Price
---------- ---------- --------------
Authorized (inception).................. 2,800,000 -- $ --
---------- ---------- ------
Balances as of December 31, 1997........ 2,800,000 -- --
Authorized.............................. 2,281,400 --
Granted................................. (4,492,483) 4,492,483 0.085
Exercised............................... -- (30,250) 0.098
Canceled or repurchased................. 294,262 (294,262) 0.085
---------- ----------
Balances as of December 31, 1998........ 883,179 4,167,971 0.084
Authorized.............................. 1,746,683 --
Granted................................. (2,001,063) 2,001,063 1.213
Exercised............................... -- (3,370,911) 0.090
Canceled or repurchased................. 1,204,284 (1,204,284) 0.450
---------- ----------
Balances as of December 31, 1999........ 1,833,083 1,593,839 1.347
========== ==========
Options exercisable as of December 31:
1997.................................. -- --
1998.................................. 292,958 0.060
1999.................................. 117,746 0.421
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, and
1999 was $-0-, $1.17, and $4.66, respectively.
As of December 31, 1999, 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
-------- --------- ----------- --------- ----------- ---------
$0.05--$0.11 222,964 8.32 $0.07 96,079 $0.07
1.00 660,875 9.27 1.00 -- --
1.50--1.75 53,500 9.40 1.61 -- --
2.00--2.25 656,500 9.75 2.04 21,667 2.00
--------- -------
$0.05--$2.25 1,593,839 9.36 $1.35 117,746 $0.42
========= =======
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 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 December 31,
December 31, -----------------
1997 1998 1999
--------------- ------- --------
Expected tax benefit at U.S. federal
statutory rate of 34%............... $ (122) $(3,768) $(10,147)
Net operating loss for which no tax
benefit was realized................ 122 3,213 7,800
Deferred stock compensation.......... -- 327 1,496
Other................................ -- 228 851
------ ------- --------
Total tax 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, 1998 and
1999, are presented below:
1998 1999
------- -------
Deferred tax assets:
Net operating loss carryforward......................... $ 4,181 $14,008
Accruals and reserves................................... 398 1,590
Other................................................... 1 1
------- -------
Gross deferred tax assets............................. 4,580 15,599
Less valuation allowance.................................. 4,580 15,599
------- -------
Net deferred tax 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, and 1999 increased, $4,000 and $11,019,
respectively.
As of December 31, 1998 and 1999, the Company has net operating loss
carryforwards for Federal and California income tax purposes of approximately
$9,761 and $32,700, respectively. The net operating loss carryforward expires
beginning in the year 2005.
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. The Company's
ability to utilize its net operating loss carryforwards is subject to
restriction pursuant to these provisions.
8. Subsequent Events
In April 2000, the Company's Board of Directors adopted the 2000 Employee
Stock Purchase Plan, which is subject to stockholder approval. 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 reserved shares of common stock
for issuance upon the conversion of Series E Preferred Stock.
. Holders of Series E Preferred Stock have the option to redeem their shares
after June 12, 2004.
Upon consummation of an initial public offering, the Company will record a
charge to net loss attributable to common stockholders 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, shares of
common stock only in jurisdictions where offers 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
Until , 2000 (25 days after the date of this prospectus), all dealers that
buy, sell or trade in these securities, whether or not participating in this
offering, may be required to deliver a prospectus. Dealers are also obligated
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 Cowen
U.S. Bancorp Piper Jaffray
Prospectus
, 2000
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by NetFlix in connection with
the sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fee.
SEC registration fee................................................... $
NASD filing fee........................................................
Nasdaq National Market listing fee.....................................
Printing and engraving costs...........................................
Legal fees and expenses................................................
Accounting fees and expenses...........................................
Blue Sky fees and expenses.............................................
Transfer Agent and Registrar fees......................................
Miscellaneous expenses.................................................
----
Total................................................................ $
====
Item 14. Indemnification of Directors and Officers
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 Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.
Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the Registrant if
such person acted in good faith and in a manner reasonably believed to be in
and not opposed to the best interest of the Registrant, and, with respect to
any criminal action or proceeding, the indemnified party had no reason to
believe his or her conduct was unlawful.
The Registrant will enter into indemnification agreements with its directors
and executive officers, in addition to indemnification provided for in the
Registrant's Bylaws, and intends to enter into indemnification agreements with
any new directors and executive officers in the future.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification
by the Underwriters of the registrant and its executive officers and directors,
and by the registrant of the underwriters for certain liabilities, including
liabilities arising under the Securities Act, in connection with matters
specifically provided in writing by the Underwriters for inclusion in the
Registration Statement.
Item 15. Recent Sales of Unregistered Securities
During the past two and one-half years, the Registrant has issued
unregistered 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 registration 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) On June 22, 1999 and October 31, 1999, Registrant issued and sold an
aggregate of 4,649,927 shares of Series D Preferred Stock to a total of ten
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) 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 Stock at a
price per share of $9.38, and (ii) warrants to purchase up to an aggregate
of 533,033 shares of common 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 investors,
or an aggregate of $50,025,952. 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.
II-2
(k) As of April 13, 2000, an aggregate of 4,121,624 shares of common
stock had been issued upon exercise of options under the Registrant's
amended and restated 1997 Stock Plan. 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 had adequate access, through their relationships
with the Registrant, to information about the Registrant.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit
Number
1.1 Form of Underwriting Agreement.*
3.1 Restated Certificate of Incorporation of NetFlix.com to be in effect
after the closing of the offering made under this Registration
Statement.
3.2 Restated Bylaws of the Registrant to be in effect after the closing of
the offering made under this Registration Statement.
4.1 Specimen Common Stock Certificate.*
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.*
10.1 Form of Indemnification Agreement between NetFlix.com and each of its
directors and officers.
10.2 2000 Employee Stock Purchase Plan and form of agreements thereunder.
10.3 Amended and Restated 1997 Stock Plan and form of agreements
thereunder.
10.4 Amended and Restated Stockholders' Rights Agreement dated April 13,
2000.
10.5 Sublease dated January 4, 1999 by and between HI/FN, Inc. and
NetFlix.com, Inc.
10.6 Lease Agreement dated as of March 31, 2000 between Barrister Executive
Suites, Inc. and NetFlix.com, Inc.
10.7 Lease Agreement dated August 11, 1999 between Lincoln-Recp Old Oakland
Opco, LLC and NetFlix.com, Inc.
10.8 Offer Letter dated April 19, 1999, with W. Barry McCarthy, Jr., Chief
Financial Officer of NetFlix.com, Inc.
10.9 Founder's Restricted Stock Purchase Agreement between Reed Hastings
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.
23.1 Report on Schedule and Consent of Independent Accountants.
23.2 Consent of Counsel (see Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedules.
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* To be filed by amendment.
II-3
(b) Financial Statement 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.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting 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 a
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 Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus 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 Prospectus 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-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City Of Los Gatos,
State of California, on the 18th day of April, 2000.
NETFLIX.COM, INC.
/s/ Reed Hastings
By: _________________________________
Reed Hastings
Chief 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. each of them acting individually, as his or her
attorney-in-fact, each with full power of substitution, for him or her 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-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.
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
_________________________________
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.
EXHIBIT INDEX
Exhibit
Number
-------
1.1 Form of Underwriting Agreement.*
3.1 Restated Certificate of Incorporation of NetFlix.com, Inc. to be in
effect after the closing of the offering made under this Registration
Statement.
3.2 Restated Bylaws of NetFlix.com, Inc. to be in effect after the closing
of the offering made under this Registration Statement.
4.1 Specimen Common Stock Certificate.*
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.*
10.1 Form of Indemnification Agreement between NetFlix.com, Inc. and each
of its directors and officers.
10.2 2000 Employee Stock Purchase Plan and form of agreements thereunder.
10.3 Amended and Restated 1997 Stock Plan and form of agreements
thereunder.
10.4 Amended and Restated Stockholders' Rights Agreement dated April 13,
2000.
10.5 Sublease dated January 4, 1999 by and between HI/FN, Inc. and
NetFlix.com., Inc.
10.6 Lease Agreement dated as of March 31, 2000 between Barrister Executive
Suites, Inc. and NetFlix.com, Inc.
10.7 Lease Agreement dated August 11, 1999 between Lincoln-Recp Old Oakland
Opco, LLC and NetFlix.com, Inc.
10.8 Offer Letter dated April 19, 1999, with W. Barry McCarthy, Jr., Chief
Financial Officer of NetFlix.com, Inc.
10.9 Founder's Restricted Stock Purchase Agreement between Reed Hastings
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.
23.1 Report on Schedule and Consent of Independent Accountants.
23.2 Consent of Counsel (see Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedules.
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* To be filed by amendment.