NetFlix 2003 Annual Report Download - page 72

NETFLIX, INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(in thousands, except share, per share and per DVD data)
Accrued Expenses
Accrued expenses consisted of the following:
As of December 31,
2002 2003
Accrued state sales and use tax .................................. $2,999 $ 3,751
Employee benefits ............................................ 2,592 3,695
Other ...................................................... 3,511 4,179
Total accrued expenses ........................................ $9,102 $11,625
5. Debt and Warrants
Note Payable
The Company had a note payable to Lighthouse Capital Partners II, L.P. with an unpaid balance of $1,667
as of December 31, 2001. The note payable was secured by substantially all of the Company’s assets and accrued
interest at 12 percent per annum. The note payable was fully paid off in August 2002.
Subordinated Notes Payable
In July 2001, the Company issued subordinated promissory notes and warrants to purchase 13,637,894
shares of its common stock at an exercise price of $1.50 per share for net proceeds of $12,831. The subordinated
notes had an aggregate face value of $13,000 and stated interest rate of 10 percent. Approximately $10,884 of the
proceeds was allocated to the warrants as additional paid-in capital and $1,947 was allocated to the subordinated
notes payable. The resulting discount of $11,053 was accreted to interest expense using an effective annual
interest rate of 21 percent. The face value of the subordinated notes and all accrued interest were due and payable
upon the earlier of July 2011 or the consummation of a qualified initial public offering. The Company
consummated a qualified initial public offering on May 29, 2002 and repaid the face value and all accrued
interest on the subordinated promissory notes. In April 2002, the FASB issued SFAS No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, which
eliminates the requirement that gains and losses from the extinguishment of debt be presented as an extraordinary
item, net of the related income tax effect. The Company adopted SFAS No. 145 during 2002, and as a result, has
classified the charge related to the unamortized discount upon repayment of the subordinated notes payable as
interest and other expense, instead of extraordinary loss on extinguishment of debt, in the accompanying
statement of operations.
Warrants
In April 2000, in connection with the sale of Series E preferred stock, the Company sold warrants to
purchase 533,003 shares of Series E preferred stock at a price of $0.01 per share. The warrants had an exercise
price of $14.07 per share. In July 2001, in connection with a modification of the terms of the Series E preferred
stock, certain Series E warrant holders agreed to the cancellation of warrants to purchase 500,487 shares of Series
E preferred stock. The remaining warrants to purchase 32,516 shares of Series E preferred stock were exercisable
at $14.07 per share. These shares automatically converted into 44,298 shares of the Company’s common stock at
$10.33 per share upon the closing of the initial public offering in May 2002. As of December 31, 2003, warrants
to purchase 44,298 shares of the Company’s common stock remained outstanding.
F-14