TiVo 2003 Annual Report Download - page 68

Table of Contents
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 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.
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