NetFlix 2006 Annual Report Download - page 70

NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share and per share data and percentages)
5. Warrants
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, 2004, warrants to purchase
9,100,120 shares of the Company’s common stock remained outstanding. Warrants to purchase 1,894 shares
were exercised in 2005 and accordingly, as of December 31, 2005, warrants to purchase 9,098,226 shares of the
Company’s common stock remained outstanding. In 2006, warrants to purchase 9,098,226 shares were exercised,
and accordingly, there were no warrants outstanding as of December 31, 2006.
6. Commitments and Contingencies
Lease Commitments
The Company leases facilities under non-cancelable operating leases with various expiration dates through
2013. 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 in the Consolidated
Statements of Operations. 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, 2006
are as follows:
Year Ending December 31,
Operating
Leases
2007 ............................................................. $ 9,760
2008 ............................................................. 10,920
2009 ............................................................. 9,321
2010 ............................................................. 7,348
2011 ............................................................. 7,128
Thereafter ........................................................ 6,729
Total minimum payments ............................................ $51,206
Rent expense associated with the operating leases was $6,871, $7,465 and $10,805 for the years ended
December 31, 2004, 2005 and 2006, respectively.
Litigation
From time to time, in the normal course of its operations, the Company is a party to litigation matters and
claims, including claims relating to employee relations and business practices. Litigation can be expensive and
disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to
predict. The Company expenses legal fees as incurred. Listed below are material legal proceedings to which the
Company is a party. An unfavorable outcome of any of these matters could have a material adverse effect on the
Company’s financial position, liquidity or results of operations.
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