TiVo 2004 Annual Report Download - page 73

Table of Contents
Index to Financial Statements
underlying common stock at the date of issuance of $5.61 per share; a risk-free rate of return of 4.42%; dividend yield of zero percent; and a
volatility of 50%.
• Additional Warrants. As part of the private placement, TiVo issued two additional sets of warrants. The first set of warrants, which expire after
one year from date of issuance, unless earlier terminated, gave warrantholders the right to purchase a total of 3,843,582 shares of TiVo common
stock at an exercise price of $6.73 per share. The second set of warrants, which expire after five years from date of issuance, unless earlier
terminated, gave warrantholders the right to purchase a total of 1,268,384 shares of TiVo common stock at an exercise price of $7.85 per share.
These five-year terminable warrants could only be exercised if the one-year warrants had been exercised. The estimated fair value of the warrants
of $4.0 million was determined using the Black-Scholes option-pricing model. The principal assumptions for the one-year warrants were: 1-year
term; fair market value of the underlying common stock at the date of issuance of $5.61 per share; a risk-free rate of return of 3.23%; dividend
yield of zero percent; and a volatility of 50%. The principal assumptions used in the Black-Scholes computation for the five-year terminable
warrants were: 5-year term; fair market value of the underlying common stock at the date of issuance of $5.61 per share; a risk-free rate of return
of 4.42%; dividend yield of zero percent; and a volatility of 50%. None of the one-year warrants was exercised and they expired pursuant to their
terms on August 28, 2002. Because none of the one-year warrants was exercised, the attached five-year terminable warrants also expired pursuant
to their terms on August 28, 2002.
The total value of the warrants issued to convertible noteholders in the private placement was $9.6 million and was recorded as a discount on the
convertible notes payable. This discount was amortized to interest expense and other and accreted to the carrying value of the convertible notes payable over
the five-year life of the notes payable or upon conversion, if earlier.
The convertible notes carried a coupon interest rate of 7%. The effective interest rate of the convertible notes, including coupon interest and
amortization of discount, amortization of the beneficial conversion amount and amortization of prepaid debt issuance costs was approximately 58%. The
discount, the beneficial conversion amount and prepaid issuance costs were amortized using the straight-line method over the term of the notes or upon
conversion, if earlier, which approximates the effective interest rate method.
The Company issued the notes under an indenture, dated August 28, 2001, with the Bank of New York, as trustee. The Company filed a registration
statement with the Securities and Exchange Commission relating to the issuance of the notes, warrants and underlying common stock, which the Commission
declared effective on November 2, 2001. On November 4, 2001, pursuant to the terms of the indenture, the conversion price of the notes was adjusted to $5.45
per share. A beneficial conversion amount of $11.1 million was calculated under EITF Issue No. 00-27 "Application of Issue No. 98-5 to Certain Convertible
Instruments" (EITF 00-27) by taking the outstanding face value of the convertible notes payable at November 4, 2001 of $51,750,000 and dividing it by the
new conversion price of $5.45. This calculation resulted in 9,495,412 shares being issuable upon conversion of the convertible notes payable. These 9,495,412
shares were then multiplied by $5.61, the closing price of the Company's common stock at the commitment date of the convertible debt issuance, August 23,
2001, to arrive at $53.2 million. This amount was compared to the initial carrying value of the convertible notes payable of $42.1 million to determine the
total beneficial conversion amount as of November 4, 2001 of $11.1 million. This $11.1 beneficial conversion amount was recorded as a discount on
convertible notes payable and was amortized as interest expense over the life of the debt or until the notes were converted to stock.
In November 2001, two noteholders converted their notes payable, with a face value of $7.5 million to 1,376,146 shares of the Company's common
stock at the conversion price then in effect of $5.45.
In accordance with the terms of the indenture, on August 23, 2002, the conversion price on the Company's outstanding convertible notes payable was
adjusted from $5.45 to $4.21 per share. The adjustment to the conversion price to $4.21 per share resulted in an increase to the value of the beneficial
conversion on the notes of $13.4 million. This additional beneficial conversion amount was calculated under EITF 00-27 by taking the outstanding convertible
notes face value as of the date of the reset of $44,250,000 and dividing by the new conversion price of $4.21, for a total of 10,510,689 shares to be received by
the holders upon conversion at the new conversion price. This number of shares was compared to the number of shares that the outstanding convertible notes
had been convertible into prior to the reset of 8,119,266 shares. The difference of 2,391,423 shares was then multiplied by the Company's stock price at the
original commitment date of August 23, 2001 of $5.61 to arrive at the additional beneficial conversion amount of $13.4 million resulting from the adjustment
in conversion price. The Company recorded additional debt discount of this amount, which is being amortized as interest expense over the remaining term of
the notes or upon conversion, if earlier.
On October 8, 2002, the Company issued 6,963,788 shares of common stock, 3 year warrants to purchase 1,323,120 shares of common stock and 4 year
warrants to purchase 1,323,120 shares of common stock to institutional investors for $25.0 million in cash. In accordance with the terms of the indenture, the
issuance of these securities triggered a reset to the conversion price on the outstanding convertible notes. Because this transaction was an issuance of common
stock and warrants, the indenture governing the convertible notes required the Company to determine the value attributed to the common stock, which it
calculated by determining the value to be attributed to the warrants using the Black -Scholes option-pricing model and subtracting the value of the warrants
from the
68