TiVo 2004 Annual Report Download - page 81

Table of Contents
Index to Financial Statements
13. AOL RELATIONSHIP
Development and Distribution Agreement
On April 30, 2002, the Company entered into a Development and Distribution Agreement with America Online, Inc. ("AOL"). This new agreement
superseded, replaced and terminated the Product Integration and Marketing Agreement, dated June 9, 2000. Under the terms of the new agreement, AOL
agreed to pay TiVo a technology development fee to develop an application that works in conjunction with the AOL service and the Company's Series2
digital video recording technology platform. AOL made an up-front payment of $4 million under this agreement of which $2.7 million was included in
deferred revenue as of January 31, 2003. Under the agreement, AOL additionally had the option to purchase a non-exclusive license of the Company's digital
video recording technology. In connection with its exercise of this option, AOL would be required to pay TiVo an up-front fee, per-unit royalties and other
fees. Under the agreement, AOL agreed to fund certain research and development at TiVo. AOL may also choose to have the Company develop the AOL
service as a premium application on the Company's Series2 platform, in which case the Company will receive additional development funds, revenue share
from subscriptions of the AOL service on the TiVo platform and reimbursement from AOL for certain operating costs related to the AOL application. The
term of the Development and Distribution Agreement is four years. The Company recognized the revenue using the percentage-of-completion methodology
(see Note 2. "Revenue Recognition and Deferred Revenue"). During the fiscal years ended January 31, 2005, 2004, and 2003, the Company recognized zero,
$2.7 million, and $1.3 million in revenues—related parties for engineering professional services.
The Company developed a web scheduling service for AOL that would require a DVR and the TiVo service. The future premium service described is
AOLTV running on a TiVo-enabled DVR. AOL has publicly announced that it has shut down AOLTV so there will be no further development under this
agreement.
Investment Agreement
On April 29, 2002, the Company entered into a Funds Release Agreement, which terminated the Investment Agreement between AOL and TiVo, dated
June 9, 2000. Under the terms of the Investment Agreement, AOL and TiVo set aside $48.0 million of AOL's $200.0 million investment to subsidize the
production of a jointly developed specialized AOL-TiVo set-top box. AOL has adopted TiVo's existing Series2 platform for the deployment of the AOL
application, thereby eliminating the need for funds to subsidize a specialized AOL-TiVo set-top box. Therefore, per the terms of the existing agreements,
AOL exercised its put option and TiVo and AOL released $48.0 million of the restricted funds to AOL during the fiscal year 2003 for the repurchase of 1.6
million shares of Series A redeemable convertible preferred stock. AOL held a remaining 1,111,861 shares of Series A convertible preferred shares. AOL
converted its remaining shares of Series A convertible preferred stock into 1,111,861 shares of common stock on September 13, 2002.
The interest earned on the restricted funds, which totaled approximately $3.9 million, was released to TiVo and recognized as interest income in the
fiscal year ended January 31, 2003.
Stockholder and Registration Rights Agreement
In conjunction with the Investment Agreement, TiVo also entered into a Stockholders and Registration Rights Agreement with AOL, dated as of June 9,
2000. Under the Stockholders and Registration Rights Agreement, as amended by the Funds Release Agreement, TiVo was obligated, upon the request of
AOL, to register for resale under the Securities Act of 1933, as amended, the shares of common stock and Series A convertible preferred stock sold to AOL
pursuant to the Investment Agreement, including the shares of common stock issuable upon exercise of the warrants, under the circumstances described
below. AOL's registration rights expired on September 9, 2002.
Pursuant to the Stockholders and Registration Rights Agreement, AOL also agreed to certain limitations on its rights as a TiVo stockholder until the
earlier of eight years from the date of the agreement or until AOL no longer holds 10.0% of the outstanding shares of TiVo common stock. As of January 31,
2005, AOL held less than 10.0% of the outstanding shares of TiVo common stock. The limitations include:
• AOL will be entitled to vote at its discretion the stock it owns representing up to 19.9% of the Company's outstanding voting securities, but,
subject certain limitations, will be required to vote all of the stock that it owns representing in excess of 19.9% of TiVo's outstanding voting
securities in accordance with the recommendation of the Company's Board of Directors;
• Without TiVo's prior written consent, AOL is not permitted to sell the Company's securities to a transferee that, to AOL's knowledge, would
thereafter own or have the right to acquire in excess of 5.0% of the Company's outstanding capital stock, except in the event of a third party
acquisition proposal, following a change of control or in other limited circumstances. In addition, TiVo has a right of first offer with respect to
any sales of its securities by AOL other than sales pursuant to a third party acquisition proposal, following a change of control or pursuant to a
bona fide underwritten public offering or Rule 144 under the Securities Act. AOL also has the right to transfer the Company's securities to its
affiliates,
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