NetFlix 2004 Annual Report Download - page 77

NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share, per share and percentages)
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 and 2004,
warrants to purchase 44,298 shares of the Company’s common stock remained outstanding.
In November 2000, in connection with an operating lease, the Company issued a warrant that provided the
lessor the right to purchase 40,000 shares of common stock at $3.00 per share. The Company accounted for the
fair value of the warrant of approximately $216 as an increase to additional paid-in capital with a corresponding
increase to other assets. This asset is being amortized over the term of the related operating lease, which is five
years. The warrants were exercised in 2004 and accordingly, as of December 31, 2004, no warrants were
outstanding in connection with the operating lease.
In July 2001, in connection with borrowings under subordinated promissory notes, the Company issued to
the note holders warrants to purchase 13,637,894 shares of the Company’s common stock at $1.50 per share. The
Company accounted for the fair value of the warrants of $10,884 as an increase to additional paid-in capital with
a corresponding discount on subordinated notes payable. As of December 31, 2003, warrants to purchase
9,112,870 shares of the Company’s common stock remained outstanding. Warrants to purchase 12,750 shares
were exercised in 2004 and accordingly, as of December 31, 2004, warrants to purchase 9,100,120 shares of the
Company’s common stock remained outstanding.
In July 2001, in connection with a capital lease agreement, the Company granted warrants to purchase
170,000 shares of common stock at an exercise price of $1.50 per share. The fair value of approximately $172
was recorded as an increase to additional paid-in capital with a corresponding reduction to the capital lease
obligations. The debt discount is being accreted to interest expense over the term of the lease agreement, which is
45 months. As of December 31, 2004, no warrants were outstanding in connection with the capital lease
agreement.
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