NetFlix 2005 Annual Report Download - page 81

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NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share and per share data and percentages)
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 and December 31, 2005, no warrants were outstanding in connection with
the capital lease agreement.
In July 2001, the Company issued a warrant to purchase 100,000 shares of Series F preferred stock at $9.38
per share to a Web portal company in connection with an integration and distribution agreement. The fair market
value of the warrants of approximately $18 was recorded as marketing expense and an increase to additional
paid-in capital. These shares automatically converted into 66,666 shares of the Company’s common stock at
$14.07 per share upon the closing of the initial public offering in May 2002. The warrant was exercised in 2004
and accordingly, as of December 31, 2004 and December 31, 2005, no warrants were outstanding in connection
with the integration and distribution agreement.
The Company calculated the fair value of the warrants using the Black-Scholes valuation model with the
following assumptions: the terms of the warrants ranging from 4 to 10 years; risk-free rates between 4.92% to
6.37%; volatility of 80%; and dividend yield of 0.0%.
6. Commitments and Contingencies
Lease Commitments
The Company leases facilities under non-cancelable operating leases with various expiration dates through
2012. The facilities generally require the Company to pay property taxes, insurance and maintenance costs.
Further, several lease agreements contain rent escalation clauses and/or rent holidays. For purposes of
recognizing minimum rental expenses on a straight-line basis over the terms of the leases, the Company uses the
date of initial possession to begin amortization, which is generally when the Company enters the space and
begins to make improvements in preparation of intended use. For scheduled rent escalation clauses during the
lease terms or for rental payments commencing at a date other than the date of initial occupancy, the Company
records minimum rental expenses on a straight-line basis over the terms of the leases on the consolidated
statements of earnings. The Company has the option to extend or renew most of its leases which may increase the
future minimum lease commitments.
Future minimum lease payments under non-cancelable capital and operating leases as of December 31, 2005
are as follows:
Year Ending December 31,
Operating
Leases
2006 ............................................................. $ 9,555
2007 ............................................................. $ 6,299
2008 ............................................................. $ 5,279
2009 ............................................................. $ 3,736
2010 ............................................................. $ 2,740
Thereafter ........................................................ $ 5,073
Total minimum payments ............................................ $32,682
F-21