TiVo 2007 Annual Report Download - page 49

Table of Contents
our cost of revenue at the time of such determination. Conversely, if we find our estimates are too pessimistic and/or circumstances beyond our control change
and we subsequently sell product that has previously been written down, our gross margin in the period of sale will be favorably impacted. For example, due
to lower than expected sales of standard definition DVRs and the resulting changes in our sales forecast, we impaired $7.5 million in raw materials and
finished goods inventory and reserved an additional $3.7 million for excess non-cancelable purchase commitments in the quarter ended July 31, 2007. In the
quarter ended October 31, 2007, we consumed $696,000 of previously impaired inventory and in the quarter ended January 31, 2008, we consumed $4.1
million of previously impaired inventory, due to better than expected sales of our standard definition DVR. Should our standard definition product sell at a
level that is better than originally anticipated at the time the inventory related charges were recorded, our hardware gross margin may also be benefited in the
fiscal year ending January 31, 2009.
Valuation of Stock-Based Compensation. We recognize expense related to our stock-based compensation awards under the fair-value provisions of
FAS 123R. The fair value of our restricted stock awards was calculated based on the fair market value of our stock at the grant date. We use the Black Scholes
option pricing model to determine the fair value of our stock options and ESPP awards which requires 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 stock options granted prior to December 31, 2007 was based on the simplified calculation of expected life as defined by
Staff Accounting Bulletin (SAB) 107, "Share-Based Payment". The expected life of stock options granted after January 1, 2008 is based on historical
employee exercise patterns associated with prior similar option grants. 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.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157, "Fair Value Measurements" (SFAS 157). SFAS 157
defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years for financial instruments and for fiscal years beginning after November 15, 2008 for non-financial assets and liabilities. The Company is currently
evaluating the impact of SFAS 157, but does not expect the adoption of SFAS 157 to have a material effect on the Company's results of operation and
financial position.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "Establishing the Fair Value Option for Financial Assets
and Liabilities" (SFAS 159). The FASB has issued SFAS 159 to permit all entities to elect, at specified election dates, to measure eligible financial
instruments at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each
subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as incurred and not deferred. SFAS 159 applies to fiscal
years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS 157. An entity is
prohibited from retrospectively applying SFAS 159, unless it chooses early adoption. SFAS 159 also applies to eligible items existing at November 15, 2007
(or early adoption date). The Company does not expect the adoption of SFAS 159 to have a material effect on the Company's results of operations and
financial position.
In June 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 07-3, "Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development Activities" (EITF 07-3). EITF 07-3 requires non-refundable advance payments for goods and
services to be used in future research and development activities to be recorded as an asset and expensing the payments when the research and development
activities are performed. EITF 07-3 applies prospectively for new contractual arrangements entered into in fiscal years beginning after December 15, 2007.
The adoption of EITF 07-3 is not expected to have a significant impact on TiVo's consolidated financial statements or financial position.
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