TiVo 2003 Annual Report Download - page 76

Table of Contents
The fair value of each option grant under SFAS 123 was estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of
stock options issued to employees and non-employee directors and ESPP offerings were estimated using the Black Scholes option-pricing model assuming no
expected dividends and the following weighted average assumptions:
ESPP Stock Options
Fiscal year ended January 31,
2004
2003 2002 2004 2003 2002
Expected life (in years) 0.5 0.5 0.5 4.0 4.0 4.0
Volatility 52% 50% 50% 51% 50% 50%
Average risk free interest rate 1.38% 1.94% 4.11% 2.45% 4.09% 4.98%
11. 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superseded, replaced and terminated the Product Integration and Marketing Agreement, dated June 9, 2000.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, 2004 and 2003, the Company recognized $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.
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