NetFlix 2007 Annual Report Download - page 66

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NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
4. 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 $10.9 million 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, the remaining warrants were exercised, and
accordingly, there were no warrants outstanding as of December 31, 2006. There were no warrants issued in
2007.
5. 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 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, 2007
are as follows:
Year Ending December 31,
Operating
Leases
(in thousands)
2008 .......................................................... $15,133
2009 .......................................................... 13,603
2010 .......................................................... 10,629
2011 .......................................................... 7,759
2012 .......................................................... 6,408
Thereafter...................................................... 697
Totalminimumpayments ......................................... $54,229
Rent expense associated with the operating leases was $11.9 million, $10.8 million and $7.5 million for the
years ended December 31, 2007, 2006 and 2005, 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 and we cannot reasonably estimate the likelihood or potential dollar amount of any adverse results. The
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