TiVo 2004 Annual Report Download - page 72

Table of Contents
Index to Financial Statements
The tax effects of temporary differences that give rise to significant portions of the Company's deferred tax assets are presented below:
Fiscal Year Ended January 31,
2005
2004
(In thousands)
Deferred tax assets:
Net operating loss & credits $ 178,192 $ 165,758
Deferred revenue and rent 43,130 33,131
Capitalized research 18,003 12,253
Convertible notes payable — 1,912
Prepaid marketing expense — 1,861
Other 3,892 2,589
Total deferred tax assets 243,217 217,504
Valuation allowance (243,217) (217,504)
Net deferred tax assets (liabilities) $ — $ —
Management has established a valuation allowance for the portion of deferred tax assets for which realization is uncertain. The net change in the total
valuation allowance for the years ended January 31, 2005, 2004, and 2003 was an increase of $25.7 million, $6.5 million, and $23.1 million, respectively.
As of January 31, 2005, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $427.0 million
and $284.0 million, respectively, available to reduce future income subject to income taxes. The federal net operating loss carryforwards expire beginning in
2012 through 2025. State net operating loss carryforwards expire beginning in 2007 through 2015.
As of January 31, 2005, unused research and development tax credits of approximately $7.1 million and $8.0 million are available to reduce future
federal and California income taxes, respectively. The federal research credit carryforwards will begin to expire, if not utilized by 2012. California research
and experimental tax credits carryforward indefinitely until utilized.
Approximately $4.8 million of the valuation allowance for deferred tax assets is attributable to employee stock option deductions, the benefit from
which will be allocated to paid-in capital rather than current earnings if subsequently recognized.
Federal and state laws impose substantial restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an "ownership
change," as defined in Section 382 of the Internal Revenue Code. The Company has not yet determined whether an ownership change occurred due to
significant stock transactions in each of the reporting years disclosed. If an ownership change has occurred, utilization of the net operating loss and tax credit
carryforwards could be significantly reduced.
9. CONVERTIBLE NOTES PAYABLE
On August 28, 2001, the Company closed a private placement of $51.8 million in face value of 7% convertible notes payable due August 15, 2006 and
warrants and received cash proceeds, net of issuance costs, of approximately $40.1 million from accredited investors. TiVo received gross cash proceeds of
approximately $36.8 million from non-related party noteholders and $6.9 million from existing stockholders for a total of $43.7 million. In addition, the
Company received non-cash proceeds of $8.1 million in the form of advertising and promotional services from Discovery and NBC, who were existing
stockholders. Debt issuance costs were approximately $3.6 million, resulting in net cash proceeds of approximately $40.1 million. Of the total gross proceeds
of $51.8 million, $8.1 million was recorded as prepaid advertising and promotional services. As part of the transaction, the Company also paid $5.0 million in
October 2001 to NBC for prepaid advertising. Such advertising was expensed as it ran in the period from October 1, 2001 through March 31, 2002.
The August 2001 private placement consisted of the following securities:
• $51,750,000 of 7% Convertible Senior Notes due 2006. The notes were convertible at any time, unless earlier redeemed pursuant to their terms,
into TiVo common stock at the current conversion price of $3.99 per share. The total value of the beneficial conversion of $27.8 million as of
January 31, 2003 was recorded as a discount on the convertible notes payable. This discount is being amortized to interest expense and accreted
to the carrying value of the convertible notes payable over the five year life of the convertible notes payable or upon conversion, if earlier.
• Warrants to purchase TiVo common stock. Warrants were issued to noteholders and bankers to purchase a total of 2,536,766 shares and 145,834
shares of TiVo common stock, at an exercise price of $7.85 per share. The warrants expire in 2006. The estimated fair value of the warrants of
$5.6 million was determined using the Black-Scholes option-pricing model. The principal assumptions used in the Black-Scholes computation
were: 5-year term; fair market value of the
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