TiVo 2003 Annual Report Download - page 78

Table of Contents
Pursuant to the Second Amendment to the Investment Agreement, on January 30, 2001 the Company issued amended initial warrants to AOL which
reduced the per share exercise price of both initial warrants to $7.29 per share.
The initial warrant exercisable for 2,308,475 shares expired unexercised on December 31, 2001. The initial warrant exercisable for 295,428 shares
expired unexercised on December 31, 2003. The estimated fair value of the initial warrants and the incremental fair value of the warrants as a result of the
reduction in the per share exercise price was recognized as prepaid marketing expense within stockholders deficit and was being amortized over the term of
the Product Integration and Marketing Agreement. The remaining unamortized portion of this prepaid marketing expense of $11.6 million at January 31,
2002, was expensed as sales and marketing—related parties expense during the quarter ended April 30, 2002 since the June 2000 Investment Agreement was
terminated by the April 2002 Funds Release Agreement.
12. DEVELOPMENT AGREEMENT AND SERVICES AGREEMENT WITH DIRECTV, INC.
On February 15, 2002, the Company entered into a product development agreement (the "Development Agreement") and a services agreement (the
"Services Agreement") with DIRECTV, Inc., with whom it jointly introduced the first DIRECTV receiver with the Company's digital video recording
technology in October of 2000. The Development Agreement provides for the development of the next generation DIRECTV-TiVo combination receiver,
based on the Company's Series2 digital video recording technology platform, to be known as the "Provo receiver" and for software upgrades to the existing
combination receivers, known as "Reno receivers," to enable customers to receive the upgraded DVR functionality.
Under the Development Agreement, DIRECTV assumed primary responsibility for customer acquisition and support for all next-generation DIRECTV
receivers, as well as packaging and branding of DIRECTV's digital video recording services. The revenue share provision on the Reno receivers was
discontinued and replaced by a per-household monthly fee that DIRECTV pays to TiVo. The per-household monthly fee also applies to the Provo receivers.
Therefore, under this new agreement, the relationship with the consumer was changed so that DIRECTV provides primary customer service and support to
DIRECTV subscribers with TiVo service. Additionally, DIRECTV is obligated to absorb all customer acquisition costs. The Company provides server
support and limited customer support. The monthly per-household fees paid by DIRECTV for the Company to provide server support and limited customer
support are recognized as service revenues as the services are provided.
The term of the Development Agreement is five years and includes a minimum volume commitment from DIRECTV to deploy next-generation
DIRECTV receivers with the Company's digital video recording technology. Under the terms of the agreement, DIRECTV has the option to fulfill its
obligations under the minimum volume commitment with a one-time cash payment to the Company. Under the agreement, DIRECTV additionally has the
option to purchase a non-exclusive license of the Company's digital video recording technology. In connection with its exercise of this option, DIRECTV
would be required to pay TiVo an up-front fee, per-unit royalties and other fees. The technology license that DIRECTV has the election of exercising is
similar in price and structure to other client and server technology source licenses sold to one customer and offered to other customers.
The Services Agreement provides DIRECTV the option to license certain authoring tools from TiVo that would allow DIRECTV to distribute
automatic recording capabilities and delivery of promotional video to a receiver's hard-disk drive. In exchange for the Company's license to use the software
tools that allow DIRECTV to distribute these services directly, DIRECTV has agreed to pay TiVo a fee. The license would be granted to DIRECTV in
exchange for the fee on an annual basis and would be renewable up to four times. The term of the Services Agreement is three years.
The Company also signed an Amendment to Marketing Agreement and Tax Agreement with DIRECTV on February 15, 2002. The Amendment to
Marketing Agreement and Tax Agreement amends the Marketing Agreement dated April 13, 1999 and the Tax Agreement dated July 24, 2001. The
amendment provides that several terms of the Marketing Agreement, including those relating to, among other things, the billing system, customer service and
customer data, be replaced by the terms set forth in the Development Agreement. In conjunction with
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