TiVo 2004 Annual Report Download - page 85

Table of Contents
Index to Financial Statements
TiVo service. The Company also granted Philips a limited license to TiVo technology for the purpose of manufacturing digital video recorders that enable the
TiVo service.
The Company agreed to pay Philips a subsidy on each digital video recorder manufactured and sold by Philips under this agreement. A portion of the
subsidy amount paid to Philips was due when the digital video recorder was shipped. The remaining portion was due when the subscriber activated the TiVo
service. The Company recorded the subsidy as sales and marketing—related parties expense. In addition to these amounts, the Company agreed to pay Philips
a fixed amount per month for each Philips-branded digital video recorder that had a subscription to the TiVo service.
The Philips agreement terminated on July 30, 2003.
Sony Agreement
On August 6, 1999, the Company entered into a Letter of Intent with Sony for the manufacture, marketing and distribution of digital video recorders
that enable the TiVo service. Subject to certain limitations, this agreement grants Sony the right to manufacture, market, and sell digital video recorders that
enable the TiVo service in North America. Sony was also granted the right to manufacture, market, and sell digital video recorders in North America that
incorporates both DIRECTV's satellite receiver and the TiVo service. The Company also granted Sony a limited license to TiVo technology for the purpose of
developing and manufacturing digital video recorders and other devices that enable the TiVo service.
The Company had agreed to pay Sony a subsidy on each digital video recorder manufactured and sold by Sony under this agreement. The amount of the
subsidy is periodically adjusted based on Sony's manufacturing costs and selling prices. The subsidy amount paid to Sony is due when the digital video
recorder is shipped. The Company records the subsidy as sales and marketing—related parties expense upon shipment. In addition to these amounts, the
Company has agreed to pay Sony a calculated amount per month for each Sony-branded digital video recorder that has a subscription to the TiVo service.
17. COMMITMENTS AND CONTINGENCIES
Legal Matters
In September 1999, TiVo received letters from Time Warner, Inc. and Fox Television stating that TiVo's personal television service exploits these
companies' copyrights without the necessary licenses. The Company believes that the TiVo service does not infringe on these copyrights and believes that
there will not be an adverse impact as a result of these letters.
On June 12, 2001, a securities class action lawsuit in which the Company and certain of its officers and directors are named as defendants was filed in
the United States District Court for the Southern District of New York. This action, which is captioned Wercberger v. TiVo et al., also names several of the
underwriters involved in the Company's initial public offering as defendants. This class action was brought on behalf of a purported class of purchasers of the
Company's common stock from September 30, 1999, the time of its initial public offering, through December 6, 2000. The central allegation in this action is
that the underwriters in the initial public offering solicited and received undisclosed commissions from, and entered into undisclosed arrangements with,
certain investors who purchased TiVo common stock in the initial public offering and the after-market. The complaint also alleges that the TiVo defendants
violated the federal securities laws by failing to disclose in the initial public offering prospectus that the underwriters had engaged in these alleged
arrangements. More than 150 issuers have been named in similar lawsuits. In July 2002, an omnibus motion to dismiss all complaints against issuers and
individual defendants affiliated with issuers (including the TiVo defendants) was filed by the entire group of issuer defendants in these similar actions. On
October 8, 2002, TiVo's officers were dismissed as defendants in the lawsuit. On February 19, 2003, the court in this action issued its decision on defendants'
omnibus motion to dismiss. This decision dismissed the Section 10(b) claim as to TiVo but denied the motion to dismiss the Section 11 claim as to TiVo and
virtually all of the other issuer-defendants.
On June 26, 2003, the plaintiffs announced a proposed settlement with the Company and the other issuer defendants. The proposed settlement provides
that the plaintiffs will be guaranteed $1.0 billion dollars in recoveries by the insurers of the Company and other issuer defendants. Accordingly, any direct
financial impact of the proposed settlement is expected to be borne by the Company's insurers in accordance with the proposed settlement. In addition, the
Company and the other settling issuer defendants will assign to the plaintiffs certain claims that they may have against the underwriters. If recoveries in
excess of $1.0 billion dollars are obtained by the plaintiffs from the underwriters, the Company's and the other issuer defendants' monetary obligations to the
class plaintiffs will be satisfied. Furthermore, the settlement is subject to a hearing on fairness and approval by the Federal District Court overseeing the IPO
Litigation. On February 15, 2005, the Court issued an order preliminarily approving the terms of the proposed settlement. The Court also certified the
settlement classes and class representatives for purposes of the proposed settlement only. Due to the inherent uncertainties of litigation and assignment of
claims against the underwriters, and because the settlement has not yet been finally approved by the Federal District Court, the ultimate outcome of the matter
cannot be predicted. In accordance with the Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies", the Company believes any
contingent liability
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