TiVo 2006 Annual Report Download - page 53

Table of Contents
amount was lowered to $150 for a dual tuner DVR unit and $170 for a single tuner DVR unit. During the fiscal year ended January 31, 2007, we recorded a
total charge of $29.5 million, of which $9.2 million related to our earlier $150 rebate programs and $20.3 million related to the rebate programs announced in
November 2006 and February 2007. As of January 31, 2007, $14.5 million remains accrued on the Company's balance sheet. A one-percentage point
deviation in our redemption rebate estimate would have resulted in an increase or decrease in our rebate liability as of January 31, 2007 of approximately
$140,000. Upon full completion of consumer rebate programs, any unredeemed consumer rebate expense will be reversed. These consumer rebates and sales
incentives programs are recognized as "rebates, revenue share, and other payments to channel" in our consolidated financial statements.
Valuation of Inventory. We value inventory at the lower of cost or market with cost determined on the first-in, first-out method. We base write-downs
of inventories upon current facts and circumstances and determine net realizable value on an aggregate pool basis. We perform a detailed assessment of
excess and obsolete inventory and purchase commitments at each balance sheet date, which includes a review of, among other factors, demand requirements
and market conditions. Based on this analysis, we record adjustments, when appropriate, to reflect inventory of finished products and materials on hand at
lower of cost or market and to reserve for products or materials which are not forecasted to be used. We also record accruals for charges that represent
Management's estimate of the Company's exposure to the contract manufacturer for excess non-cancelable purchase commitments. As of January 31, 2007,
we impaired $2.0 million in inventory and reserved approximately $500,000 for excess non-cancelable purchase commitments. Although we make every
effort to ensure the accuracy of our forecasts of product demand and pricing assumptions, any significant unanticipated changes in demand or technological
developments would significantly impact the value of our inventory and our reported operating results. In the future, if we find that our estimates are too
optimistic and determine that our inventory needs to be written down further, we will be required to recognize such costs in our cost of revenue at the time of
such determination. Conversely, if we find our estimates are too pessimistic and we subsequently sell product that has previously been written down, our
gross margin in that period will be favorably impacted.
Valuation of Stock-Based Compensation. On February 1, 2006, we adopted the provisions of SFAS 123R, "Share-Based Payment", requiring us to
recognize expense related to the fair value of our stock-based compensation awards. SFAS No. 123R eliminates the option to account for stock-based
compensation transactions with employees using the intrinsic value method under Accounting Principle Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees", and instead requires that such transactions be accounted for using a fair-value based method. The fair value of our restricted stock
awards was calculated based on the fair market value of our stock at the grant date. SFAS No. 123R requires the use of a valuation model to calculate the fair
value of stock-based awards. We have elected to use the Black-Scholes option pricing model to determine the fair value of our stock options and ESPP
awards. This model requires the input of highly subjective assumptions, including expected stock price volatility and the estimated life of each award and
interest rates.
The expected volatility is based on a combination of historical volatility of our common stock and implied volatility in market traded options on our
common stock. The expected life of an award is based on the simplified calculation of expected life as defined by Staff Accounting Bulletin (SAB) 107,
"Share-Based Payment". The interest rate is based on the average of U.S. Treasury yield curve on investments with lives approximating the term during the
fiscal quarter an option is granted.
In addition, SFAS No. 123R requires us to develop an estimate of the number of share-based awards which will be forfeited due to employee turnover.
We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
Quarterly changes in the estimated forfeiture rate can affect our gross margin, research and development expenses, sales and marketing expenses, and general
and administrative expenses. The expense we recognize in future periods could also differ from the current period and/or our forecasts due to adjustments in
the assumed forfeiture rates.
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