TiVo 2013 Annual Report Download - page 98

Table of Contents
incremental monthly fees per DVR subscriber if AT&T's subscriber base exceeds certain pre-determined levels. The initial payment of $51.0
million was paid to TiVo on January 4, 2012 with the remaining $164.0 million due to TiVo 30 days after the end of each calendar quarter in
the amount of $5.0 million for the first four calendar quarters and approximately $6.5 million in subsequent calendar quarters through the
calendar quarter ending June 30, 2018. Any incremental additional per subscriber fees are due to TiVo on the same schedule. The
Agreement expires on July 30, 2018.
The total consideration of $215.0 million was allocated on a relative fair value basis as $54.4 million to the past infringement and
litigation settlement element, $254,000 to interest income related to past infringement and $160.3 million to the future base license royalties
element. The future base license royalties element does not include any incremental monthly fees per DVR subscriber payable if the AT&T
subscriber base exceeds certain pre-determined levels. The amount related to past infringement and settlement was recorded under
“Litigation proceeds” in the fiscal year ended January 31, 2012. The amount related to interest income was recorded under “Interest income”
in the fiscal year ended January 31, 2012. $160.3 million of future license royalties will be recorded as Technology revenues on a straight-
line amortization basis over the term of the agreement through July 30, 2018. Any incremental monthly fees per DVR subscriber payable if
the AT&T's subscriber base exceeds certain pre-determined levels will be recognized as Technology revenues when reported to TiVo by AT&T.
As a result of the settlement and patent cross-licensing agreement, TiVo expensed an estimate of $14.5 million in contingent legal fees
recorded under general and administration expenses in its statement of operations in the fiscal year ended January 31, 2012. TiVo paid $4.3
million in contingent legal fees during the fiscal year ended January 31, 2012. The remaining estimate of $10.2 million was paid during the
fiscal year ended January 31, 2013 upon the favorable resolution of the Microsoft and ITC legal matters.
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On September 21, 2012, TiVo Inc. entered into a Settlement and Patent License Agreement with Verizon Communications, Inc.
(Verizon). Under the terms of the Agreement, Verizon has agreed to pay TiVo a minimum amount of $250.4 million plus incremental
monthly fees per DVR subscriber if Verizon's subscriber base exceeds certain pre-determined levels which increase annually. The initial
payment of $100.0 million was paid to TiVo on September 28, 2012 with the remaining $150.4 million due to TiVo 30 days after the end of
each calendar quarter in the amount of $6.0 million through the calendar quarter ending September 30, 2018. Any incremental additional per
subscriber fees are due to TiVo on the same schedule. The Agreement expires on July 31, 2018.
TiVo and Verzion agreed to dismiss all pending litigation between the companies with prejudice. TiVo granted Verizon a limited license
under its advanced television patents, including the patents that TiVo had asserted against Verizon (U.S. Patent Nos. 6,233,389, 7,493,015,
and 7,529,465), to make, have made, use, sell, offer to sell, and import advanced television technology in connection with Verizon
multichannel video programming services subject to certain limitations and exclusions. Verizon granted TiVo a limited license under its
advanced television patents, including the patents that Verizon had asserted against TiVo (U.S. Patent Nos. 5,410,344, 5,635,979,
5,973,684, 6,367,078, 7,561,214 and 6,381,748), to make, have made, use, sell, offer to sell and import advanced television technology
in connection with TiVo products and services, including products and services provided to other multichannel video programming service
providers, subject to certain limitations and exclusions. TiVo may terminate the rights and licenses granted to Verizon pursuant to the
Agreement under certain circumstances, including but not limited to if Verizon has failed to make timely payment.
The agreement includes multiple elements consisting of: (i) an exchange of licenses to intellectual property, including covenants not
to assert claims of patent infringement for the period from September 21, 2012 until July 31, 2018, (ii) an interest income component related
to the past infringement, and (iii) the settlement of all outstanding litigation and claims between TiVo and Verizon. The proceeds of the
agreement were allocated among the principal elements of the transaction based on relative fair values of each element.
TiVo estimated the fair value of each element using an income approach. The significant inputs and assumptions used in this
valuation included actual past and projected future subscription base, estimated DVR penetration rates, estimated market-based royalty rates,
estimated risk-adjusted discount rates, and useful lives of the technology, among others. The development of a number of these inputs and
assumptions in the model requires a significant amount of management judgment and is based upon a number of factors. Changes in these
assumptions may have a substantial impact on the fair value assigned to each element. These inputs and assumptions represent
management's best estimates at the time of the transaction. The total consideration of $250.4 million was allocated on a relative fair value
basis as $78.4 million to the past infringement and litigation settlement element, $568,000 to interest income related to past infringement
and $171.4 million to the future base license royalties element. The future base license royalties element does not include any incremental
monthly fees
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