TiVo 2005 Annual Report Download - page 32

Table of Contents
We have limited experience in overseeing manufacturing processes, managing inventory, or engaging in the outsourcing of engineering work
and failure to do so effectively may result in supply imbalances or product recalls that could harm our business or the loss of valuable intellectual
property that could harm our business.
We have contracted for the manufacture of certain TiVo-enabled DVRs with a contract manufacturer. We sell these units to retailers and distributors, as
well as through our own online sales efforts. As part of this effort, we expect to maintain some finished goods inventory of the units throughout the year.
Overseeing manufacturing processes and managing inventory are outside of our core business and our experience in these areas is limited. If we fail to
effectively oversee the manufacturing process and manage inventory, we may suffer from insufficient inventory to meet consumer demand or excess
inventory. Ineffective oversight of the manufacturing process could also result in product recalls. We record adjustments to our inventory, when appropriate,
to reflect inventory at lower of cost or market. As of January 31, 2006, we had $218,000 in our inventory reserves. In the future, we may be required to record
additional write-downs of inventory as a result of future assessments.
We have from time-to-time engaged in the outsourcing of engineering work related to the design, development, and manufacturing of our products. We
have and expect to in the future work with companies located in jurisdictions outside of the United States, including, but not limited to, China, South Korea,
India, Ukraine and Mexico. We have limited experience in the outsourcing of engineering, manufacturing and other work to third parties located
internationally that operate under different laws and regulations than those in the United States. If we are unable to properly manage and oversee the
outsourcing of this engineering, manufacturing and other work related to our products, we could suffer the loss of valuable intellectual property, including
patents, trademarks, trade secrets, and copyrights and as a result our business could be harmed.
Product defects, system failures or interruptions to the TiVo service may have a negative impact on our revenues, damage our reputation and
decrease our ability to attract new customers.
Our ability to provide uninterrupted service and high quality customer support depends on the efficient and uninterrupted operation of our computer and
communications systems. Our computer hardware and other operating systems for the TiVo service are vulnerable to damage or interruption from
earthquakes, floods, fires, power loss, telecommunication failures and similar events. They are also subject to break-ins, sabotage, intentional acts of
vandalism and similar misconduct. These types of interruptions in the TiVo service may reduce our revenues and profits. We currently house the server
hardware that delivers the TiVo service at only one location and continue to explore the benefits of establishing a backup facility. Our business also will be
harmed if consumers believe our service is unreliable. In addition to placing increased burdens on our engineering staff, service outages will create a flood of
customer questions and complaints that must be responded to by our customer support personnel. Any frequent or persistent system failures could irreparably
damage our reputation and brand and possibly trigger requests for refunds on subscriptions fees and hardware purchases and possible consumer litigation.
We have detected and may continue to detect errors and product defects. These problems can affect system uptime and result in significant warranty
and repair problems, which could cause customer service and customer relations problems. Correcting errors in our software or fixing defects in our products
requires significant time and resources, which could delay product releases and affect market acceptance of the TiVo service. Any delivery by us of products
or upgrades with undetected material product defects or software errors could harm our credibility and market acceptance of the DVRs and the TiVo service.
In addition, defective products could cause a risk of injury that may subject us to litigation or cause us to have to undertake a product recall. For example, we
have become aware of occasions where a part has come loose from the remote control device that comes with the DVRs that enable the TiVo service,
including occurrences where a young child has gagged on or ingested a part of the remote control device. While we are unaware of any injuries resulting from
the use of our products, we may be subject to products liability litigation in the future. Additionally, if we are required to repair or replace any of our products,
we could incur significant costs, which would have a negative impact on our financial condition and results of operations.
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