NetFlix 2011 Annual Report Download - page 63

The 8.50% Notes include, among other terms and conditions, limitations on the Company’s ability to create,
incur, assume or be liable for indebtedness (other than specified types of permitted indebtedness); dispose of
assets outside the ordinary course (subject to specified exceptions); acquire, merge or consolidate with or into
another person or entity (other than specified types of permitted acquisitions); create, incur or allow any lien on
any of its property or assign any right to receive income (except for specified permitted liens); make investments
(other than specified types of investments); or pay dividends, make distributions, or purchase or redeem the
Company’s equity interests (each subject to specified exceptions). At December 31, 2011 and 2010, the
Company was in compliance with these covenants.
Based on quoted market prices, the fair value of the 8.50% Notes was approximately $206.5 million and
$225.0 million as of December 31, 2011 and 2010, respectively.
Credit Agreement
In September 2009, the Company entered into a credit agreement which provided for a $100 million three-
year revolving line of credit. Loans under the credit agreement bore interest, at the Company’s option, at either a
base rate determined in accordance with the credit agreement, plus a spread of 1.75% to 2.25%, or an adjusted
LIBOR rate plus a spread of 2.75% to 3.25%. In October 2009, the Company borrowed $20.0 million under the
credit agreement. The proceeds, net of issuance costs, to the Company were approximately $19.0 million. In
connection with the issuance of the 8.50% Notes, the Company repaid all outstanding amounts under and
terminated the credit agreement. Issuance costs related to the line of credit were included in interest expense in
the year ended December 31, 2009.
5. Commitments and Contingencies
Lease obligations
The Company leases facilities under non-cancelable operating leases with various expiration dates through
2018. 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.
Because the terms of the Company’s original facilities lease agreements required the Company’s
involvement in the construction funding of the buildings at its Los Gatos, California headquarters site, the
Company is the “deemed owner” (for accounting purposes only) of these buildings. Accordingly, the Company
recorded an asset of $40.7 million, representing the total costs of the buildings and improvements, including the
costs paid by the lessor (the legal owner of the buildings), with corresponding liabilities. Upon completion of
construction of each building, the Company did not meet the sale-leaseback criteria for de-recognition of the
building assets and liabilities. Therefore the leases are accounted for as financing obligations.
In the first quarter of 2010, the Company extended the facility leases for the Los Gatos buildings for an
additional five year term after the remaining term of the original lease, thus increasing the future minimum
payments under lease financing obligations by approximately $14 million. The leases continue to be accounted
for as financing obligations and no gain or loss was recorded as a result of the lease financing modification. At
December 31, 2011, the lease financing obligation balance was $34.1 million, of which $2.3 million and $31.8
million were recorded in “Accrued expenses” and “Other non-current liabilities,” respectively, on the
61