TiVo 2004 Annual Report Download - page 74

Table of Contents
Index to Financial Statements
combined common stock and warrant value. The warrants were valued using the Black-Scholes model with a fair market value of the Company's common
stock at the date of issuance of $3.50, a strike price of $5.00, a risk free rate of return of 2.25%, a dividend yield of zero percent, and a volatility of 50%.
Accordingly, the 3 year warrants to purchase 1,323,120 shares of the Company's common stock, which will expire October 7, 2005, were valued at $1.1
million; and the 4 year warrants to purchase 1,323,120 shares of the Company's common stock, which will expire October 7, 2006, were valued at $1.4
million, for a total warrant value of $2.5 million or 10% of the total cash proceeds.
The Company determined that the issuance price of the common stock in the October 8, 2002 offering was $3.23 per share, or 90% of the $3.59
combined per share common stock and warrant purchase price. Effective October 8, 2002, the Company then adjusted the conversion price on the outstanding
convertible notes payable to $3.99 per share so that the "effective" conversion price (as defined in the indenture) of the convertible notes payable (which is
equal to 81% of the conversion price) equaled the $3.23 per share issuance price of the common stock in the October 8, 2002 offering.
This adjustment to the conversion price from $4.21 to $3.99 per share resulted in an increase to the value of the beneficial conversion on the notes of
$3.3 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 $3.99, for a total of 11,090,226 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 10,519,689 shares. The difference of 579,537 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 $3.2 million resulting from the adjustment in
conversion price. The Company recorded additional debt discount of this amount, which will be amortized as interest expense and other over the remaining
term of the notes or upon conversion, if earlier.
During the period from October 8, 2002 through December 29, 2002, two noteholders converted their notes, with a total face value of $1.1 million to
275,438 shares of the Company's common stock at the conversion price then in effect of $3.99 per share. As of December 30, 2002, the Company had
outstanding convertible notes payable at face value of $43,151,000, held by approximately 17 noteholders.
The Company, as an incentive to induce conversions of these notes, temporarily reduced the conversion price of the notes pursuant to the terms of the
indenture governing the notes from $3.99 per share to $3.70 per share for the 20 business day period from December 30, 2002 through January 28, 2003. In
order for noteholders to take advantage of the temporary conversion price reduction and therefore receive additional shares for their converted notes, they
were required to complete a notice of conversion and deliver their physical notes to the trustee for the notes during the conversion price reduction period.
After January 28, 2003, the conversion price returned to $3.99 per share, the conversion price otherwise in effect.
In accordance with the provisions of SFAS No. 84, "Induced Conversions of Convertible Debt" (an Amendment of APB Opinion No. 26), the Company
determined that the treatment of the additional shares issued at the reduced conversion price of $3.70 per share over the number of shares that would have
been issued at the regular conversion price of $3.99 per share, should be accounted for as an expense at the fair market value of the additional shares issued as
of the date of each conversion.
The temporary conversion price reduction implemented as an incentive for early conversions for the 20-business day period beginning December 30,
2002 and ended January 28, 2003 resulted in conversions of $22,701,000 face value of outstanding convertible notes into 6,135,400 shares of the Company's
common stock. The value of the additional shares resulting from the temporary incentive conversion price reduction, that were issued to noteholders
converting during this period was $2.6 million (including $529,400 for a related party noteholder). This amount was expensed as additional debt financing
expense (included in interest expense and other, with related credits to common stock and additional paid in capital) during the period. The value of the
incremental shares issued was calculated by multiplying the number of additional shares issued of 445,936 at the reduced conversion price of $3.70 over that
number of shares that would have been issued at the conversion price of $3.99 by the fair market value of the Company's common stock at the date of each
conversion.
During the fiscal year ended January 31, 2004 the Company issued 2,506,265 shares of common stock as a result of one convertible noteholder, a
related party, converting $10.0 million in face value of convertible notes payable-related parties at the conversion price of $3.99 per share, in accordance with
the terms of the Convertible Notes Payable Indenture. After this conversion, as of January 31, 2004, the Company had outstanding convertible notes payable
at face value of $10.5 million, held by approximately four noteholders.
On November 26, 2004, the Company notified by mail the registered holders of its convertible notes payable that it elected to exercise its option to
redeem all remaining unconverted outstanding notes payable by the redemption date of January 25, 2005. As of November 26, 2004, the aggregate principal
amount of the notes was $10,450,000.
69