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OpenTV 10-K 2009
Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

 

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission file number 001-15473

 

 

OpenTV Corp.

(Exact name of Registrant as specified in its charter)

 

 

 

British Virgin Islands   98-0212376

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

275 Sacramento Street

San Francisco, California

  94111
(Address of principal executive offices)   (Zip Code)

 

 

Registrant’s telephone number, including area code:

(415) 962-5000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Class A ordinary shares, no par value

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d).    Yes  ¨    No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for at least the past 90 days.    Yes  þ    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨

  Accelerated filer  þ                
Non-accelerated filer  ¨     Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

The aggregate market value of the Class A ordinary shares of the registrant held of record by non-affiliates of the registrant as of June 30, 2008, computed by reference to the last sales price of such Class A ordinary shares on The NASDAQ Global Market as of the close of trading on June 30, 2008, was approximately $107,477,366. For purposes of this calculation, the directors and executive officers of the registrant as of June 30, 2008 and the holders of record of 10% or more of any class of the registrant’s ordinary shares outstanding as of June 30, 2008 (excluding Cede & Co., nominee of the Depository Trust Company) are deemed to be affiliates of the registrant. Treasury shares are also excluded. The determination of affiliate status for this calculation is not necessarily a conclusive determination for other purposes.

As of February 27, 2009, the registrant had outstanding:

107,864,339 Class A ordinary shares; and

30,206,154 Class B ordinary shares.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant’s proxy statement for its 2009 Annual Meeting of Shareholders (Part III).

 

 

 


Table of Contents

OPENTV CORP.

2008 ANNUAL REPORT ON FORM 10-K

 

          Page
   Part I   

Item 1.

  

Business

   3

Item 1A.

  

Risk Factors

   12

Item 1B.

  

Unresolved Staff Comments

   22

Item 2.

  

Properties

   22

Item 3.

  

Legal Proceedings

   22

Item 4.

  

Submission of Matters to a Vote of Security Holders

   24
   Part II   

Item 5.

  

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

   25

Item 6.

  

Selected Financial Data

   27

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   28

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   52

Item 8.

  

Financial Statements and Supplementary Data

   53

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   53

Item 9A.

  

Controls and Procedures

   53

Item 9B.

  

Other Information

   56
   Part III   

Item 10.

  

Directors, Executive Officers and Corporate Governance

   56

Item 11.

  

Executive Compensation

   56

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

   56

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

   56

Item 14.

  

Principal Accounting Fees and Services

   56
   Part IV   

Item 15.

  

Exhibits, Financial Statement Schedules

   57

OpenTV, the OpenTV logo and our product names are trademarks or registered trademarks of OpenTV Corp. or its subsidiaries in the United States and other countries. Other product names mentioned herein may be trademarks or registered trademarks of their respective owners.


Table of Contents

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains forward-looking statements that involve risks and uncertainties, as well as assumptions, that, if they never materialize or prove incorrect, could cause the results of OpenTV Corp. and its consolidated subsidiaries to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including any: projections of revenue, gross margin, expenses, earnings or losses from operations; statements of the plans, strategies and objectives of management for future operations; statements concerning developments, performance or market conditions relating to products or services; statements regarding future economic conditions or performance; statements of expectation or belief; and statements of assumptions underlying any of the foregoing. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. All these forward-looking statements are based on information available to us at this time, and we assume no obligation to update any of these statements. Actual results could differ materially from those projected in these forward-looking statements as a result of many factors, including those identified in Item 1A “Risk Factors” and elsewhere. We urge you to review and consider the various disclosures made by us in this report, and those detailed from time to time in our filings with the Securities and Exchange Commission, that attempt to advise you of the risks and factors that may affect our future results.

PART I

 

Item 1. Business

Overview

We are one of the world’s leading providers of advanced digital television solutions dedicated to creating and delivering compelling viewing experiences to consumers of digital content worldwide. Our software enables cable, satellite, telecommunications, and digital terrestrial operators, which we refer to as “network operators,” to offer enhanced television experiences to their viewers. We sell our software solutions principally to network operators and manufacturers of digital set-top boxes and digital televisions. We also sell related software solutions to broadcasters, programmers and advertisers that enable them to offer interactive and enhanced television experiences. Historically, our software licensing arrangements have been made directly with the network operator or set-top box manufacturer. In 2008, we began licensing our middleware solutions indirectly through distribution arrangements with other key partners such as Nagravision SA and Irdeto Access B.V., and we expect that distribution of our products and solutions through these types of arrangements will increase in the future. As of December 31, 2008, more than 58 network operators had deployed our middleware solutions and 13 network operators had deployed our advertising solutions. To date, our software has been shipped in more than 121 million digital devices worldwide.

Our software solutions enable our customers to differentiate their video service offerings from their competitors by delivering a flexible and manageable platform from which they can easily and efficiently launch new digital television and interactive services that help them attract and retain viewers. Our software solutions also help enable viewer participation in the television experience through the use of commerce, information retrieval, entertainment, games and other applications delivered via television networks. By leveraging our international footprint, with the millions of set-top boxes in which our software has been deployed, we believe we are well-positioned to continue to develop and offer compelling solutions for television, including support for personal video recorders (PVR), high definition (HD) digital television, next-generation user interfaces, revenue-generating applications, advanced advertising solutions and other solutions designed to make our customers’ video service offerings more compelling and profitable.

With our middleware solutions, network operators are able to manage the creation and delivery of advanced digital television services to their subscribers across a variety of set-top boxes provided by multiple manufacturers and within numerous network infrastructures. Major set-top box manufacturers incorporate our software directly into hundreds of set-top box models, which allows our solutions to be easily activated by network operators upon deployment. Our “core” technology platform for set-top boxes, which we refer to as

 

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“middleware,” permits network operators to maintain a consistent user experience for their subscribers irrespective of the set-top box or boxes that may be deployed within a subscriber’s home and the source of the video signal transmitted to that subscriber’s home, whether transmitted over cable, satellite, digital terrestrial, or IP (Internet protocol). Our middleware also allows our customers, including programmers and advertisers, to develop applications once, without the need to rewrite those applications for different hardware environments, and offers network operators the ability to effectively and efficiently manage their business and launch new services to their viewers. We continue to evolve our middleware by enhancing and adding new features. We have developed enhancements to our PVR solutions that retain interactive content for future playback simultaneously with the recorded broadcast. We have also developed PVR enhancements that will enable recording of high definition television and are developing solutions for distribution of protected content to other devices in the home network.

As part of our advertising solutions, we offer campaign management solutions that allow network operators to manage the traffic and billing of advertisements, provide targeted and addressable advertising capabilities and integrate measurement technologies that detail how viewers engage and interact with programs and advertisements. We have developed applications that enable viewers to engage in commerce transactions, retrieve information such as product brochures and news updates, and other interactive services. In addition, we have developed a solution that enables network operators as well as broadcasters and programmers to establish and manage relationships with their viewers on a real-time basis as they interact with content across multiple devices, including television, mobile and the Internet, in order to record viewer preferences, voting and other desired metrics.

For both our middleware and advertising solutions, we offer professional engineering and consulting services to help implement and coordinate the launch, integration and customization of the technologies and products that we provide. We can manage entire digital television launch projects, with complete end-to-end digital programming solutions, or simply provide assistance with discrete projects relating to integration, customization, development or training activities. We also offer a robust maintenance and support program covering our products and solutions, ensuring that our customers get timely support and advice concerning the products they license from us. We believe that our extensive experience in the digital television sector makes these services especially attractive to our customers as they seek to leverage our institutional knowledge and practical perspective.

We have invested significant resources in developing our software solutions and believe that our intellectual property portfolio protects many of the key elements necessary to support digital interactive and enhanced television. As of December 31, 2008, we own 108 patents issued in the United States and 582 patents issued outside of the United States, and an additional 343 patent applications are pending throughout the world. This patent portfolio establishes what we believe to be an industry-leading technology position for OpenTV.

We are incorporated in the British Virgin Islands. Kudelski SA, directly and indirectly through its subsidiaries, beneficially owns Class A and Class B ordinary shares of our company collectively representing an economic interest of approximately 32.3% and a voting interest of approximately 77.2% in our company, based on the number of our ordinary shares outstanding as of December 31, 2008.

Recent Events

On February 27, 2009, we received a non-binding proposal from Kudelski SA to acquire all of our Class A ordinary shares that are not currently owned by Kudelski or its affiliates. On March 4, 2009, our board of directors appointed a special committee consisting of three independent directors to review the proposal.

Our Operating Businesses

We manage our businesses geographically and in accordance with two primary operating segments. From a line-of-business standpoint, we manage our reporting units within the following two operating segments: Middleware Solutions and Advertising Solutions. From a geographic standpoint, we group customers within the

 

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following regions: Americas; Europe, Middle East and Africa (EMEA); and Asia Pacific. Financial information related to our operating segments and according to geographic area can be found in Note 21 to our Consolidated Financial Statements, which appear in Part IV of this Annual Report on Form 10-K.

Middleware Solutions

Our middleware solutions segment is composed of set-top box middleware and embedded browser technologies, as well as software components that are deployed at the network operator’s headend.

Our set-top box middleware and embedded browser software provide a common platform for network operators, set-top box manufacturers, manufacturers of other consumer electronics devices, programmers, content producers, advertisers, and interactive application developers to create, deliver, and manage advanced digital television services across the various digital television environments and network architectures. These technologies enable advanced digital television services to operate on cable, satellite, digital terrestrial, and telecommunications networks providing network operators the ability to cost effectively deploy consistent advanced digital television services across set-top boxes and through other products manufactured by a multitude of vendors.

Most of our revenues are currently derived from the licensing of our set-top box middleware and embedded browser technologies. We have historically realized these revenues through one-time royalty payments and ongoing support fees. We have also entered into subscription-based licensing arrangements with some of our network operator customers, pursuant to which we are paid a monthly fee for each set-top box that is deployed by the network operator for so long as that set-top box remains in use by the end-user. We expect to continue offering this licensing model in the future to our customers and expect to derive more of our revenues from subscriber-based fees. Historically, our software licensing arrangements have been made directly with the network operator or set-top box manufacturer. In 2008, we extended our licensing model to include the licensing of our technology and services indirectly through distribution arrangements with other key partners such as Nagravision and Irdeto.

As of December 31, 2008, our set-top box middleware and embedded browser technologies had been deployed by more than 58 network operators and collectively had been shipped in more than 121 million digital devices around the world.

In addition to the software we integrate on set-top boxes, we also offer software components that are deployed at the network operator’s headend, including OpenTV Streamer, Account, Notify and Automate. These headend solutions enable more effective integration of the set-top box software with the network operator’s infrastructure. Additionally, we offer development tools that permit broadcasters, programmers and developers to create, test, and deliver interactive content and applications. Through Ruzz TV Pty Ltd., which we acquired in September 2008, we also provide digital television technologies that enable broadcasters to manage their workflow and content processes more efficiently.

Our set-top box middleware and embedded browser technologies consist of the following solutions:

OpenTV Core Middleware. This set-top box software technology for advanced digital television services is our primary offering. OpenTV Core supports a wide range of services, including electronic program guides, video-on-demand (VOD), PVR, customer care applications, and other interactive and enhanced applications. Our latest, fifth generation release of middleware is OpenTV Core2.

The following features and functions are supported by OpenTV Core:

 

   

Support for Basic and Advanced Digital Set-top Boxes. OpenTV Core can operate with the relatively limited processing power and memory found in most mass-market digital set-top boxes currently deployed by network operators. OpenTV Core is also suitable for more advanced digital set-top boxes

 

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that contain increased processing power and memory. This permits us to offer technical solutions that address the limited capabilities of many set-top boxes that are currently deployed by various network operators while simultaneously offering a solution that will enable network operators to take advantage of more powerful set-top boxes in the future.

 

   

High Definition Content. OpenTV Core supports HD standards and graphics for external displays and peripherals, such as HDMI (High Definition Multimedia Interface) and HDCP (High-Bandwidth Digital Content Protection).

 

   

On-Demand Content. OpenTV Core supports a variety of on-demand services, including PVR as well as Push, Pull, and Streamed VOD, that enable media-rich user interfaces for browsing content that is requested on-demand by the user, either from a local hard drive or from the network operator’s headend, and includes the underlying protocols to establish sessions and control streams via easy-to-use navigational controls.

 

   

HTML Support. The HTML (HyperText Markup Language) browser integrated with OpenTV Core allows the utilization of HTML and JavaScript elements in the creation of user experiences for digital television as well as the ability to deliver existing web-based content to subscribers through a digital set-top box.

 

   

Connectivity. OpenTV Core provides solutions for broadcast or point-to-multipoint networks as well as high bandwidth, bi-directional, point-to-point networks. OpenTV Core includes modules that support common digital television-related communication protocols, such as DOCSIS (Data Over Cable Service Interface Specification), which provides a data return channel for cable modem set-top boxes, and Digital Living Network Alliance (DLNA), which supports home networking and the ability of users to retrieve data at broadband speeds from a variety of devices within the home.

 

   

Localization. OpenTV Core supports text input and presentation of substantially all languages in common use, including double byte Asian languages, and allows for localization of interactive television services for different countries.

 

   

Measurement. OpenTV Core provides the support for network operators, programmers, and advertisers to collect information and data regarding viewer preferences, viewing habits, and other analytical information that helps assess the efficacy of programming and advertising.

OpenTV PVR. OpenTV PVR enables network operators to deliver advanced personal video recording services to their subscribers, including the ability to record multiple broadcast or on-demand programs simultaneously and play back those programs via easy-to-use navigational controls such as pause, fast forward and rewind, on set-top boxes that contain either internal or USB connected hard drives. Our PVR solution also enables both series recording and the recording of an interactive TV broadcast that retains interactive content for future playback simultaneously with the recorded broadcast.

OpenTV Spyglass. OpenTV Spyglass is a customizable HTML browser designed specifically for information appliances other than personal computers and is deployed independently from OpenTV Core. OpenTV Spyglass supports key Internet standards and is optimized and designed for advanced digital television services. A version of OpenTV Spyglass, known as the OpenTV Integrated Browser, has been developed for the Japanese consumer electronics market with support for Broadcast Markup Language, or BML. The OpenTV Integrated Browser was developed in partnership with Panasonic Corporation (formerly known as Matsushita Electric Company), one of Japan’s largest consumer electronics companies, and has been shipped on more than 11 million Panasonic and JVC branded digital television sets within Japan since September 2003.

OpenTV Enterprise Solutions. OpenTV Enterprise Solutions are software components that are installed at a network operator’s broadcast facility, headend, or back office to enable the creation, management, and delivery of advanced digital television services to OpenTV-enabled set-top boxes and include products such as:

 

   

OpenTV Streamer. OpenTV Streamer enables network operators to integrate applications and data with audio and video signals for reception on set-top boxes enabled with OpenTV Core. OpenTV Streamer relies on hardware architecture that is capable of interfacing with any standard digital broadcast system.

 

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OpenTV Account. OpenTV Account enables electronic commerce features within interactive television applications and gives network operators the opportunity to develop commerce-related interactive television revenue streams. Key features of OpenTV Account include single sign-on management, electronic-receipt management, electronic wallet and address book management, and security.

 

   

OpenTV Notify. OpenTV Notify enables network operators to send broadcast notifications to individual or multiple set-top boxes allowing network operators to deliver convenient messaging, such as email, instant messaging, order confirmation and news alerts to their subscribers.

 

   

OpenTV Automate. OpenTV Automate provides content management, scheduling, and synchronization for interactive television applications, including enhanced television, interactive advertising and broadcast virtual channels.

OpenTV Enhanced Content. We develop and offer interactive applications for programmers and network operators that deliver compelling interactive content. We have also worked in conjunction with several of our network operators to develop video-mosaic applications for sports, news and other content. In addition, we continue to work with programmers and broadcasters around the world to develop unique user experiences and interactive and enhanced applications to extend their brands and engage with viewers.

OpenTV Development Tools and Support for Third Party Application Developers. We encourage content developers to design and create applications on OpenTV-enabled networks by offering a series of application development tools and support tool sets that enable them to develop and market applications directly to network operators. The tools can be used alone or in combination with other third party tools to meet virtually any interactive television development need, such as creating virtual channels, building interactive advertisements, enhancing existing programs with interactive features, and testing interactive television content through a simulated broadcast environment.

Advertising Solutions

We provide software solutions that enable the sales and management of traditional linear advertising as well as solutions for the creation, integration and delivery of addressable and interactive advertising for digital television systems. In addition, we offer measurement technologies that enable our network operator customers to detail how viewers engage and interact with programs and advertisements.

Our advertising solutions are designed to provide our customers with an integrated solution to address key challenges in the advertising market. Technology advancements are changing the way viewers watch television. Technologies, such as PVR and VOD, allow viewers to time-shift and receive programming in an on-demand and commercial-free manner; those types of services have changed the television viewing experience and created new advertising opportunities. These advancements are expediting the need for advertising that is more relevant to individual viewers and for advertising that more deeply engages viewers. Our advertising solutions offer network operators the ability to sell, manage, bill and deliver multiple advertisements across an operator’s network; to deliver advertisements with more relevance to viewers based on a variety of demographic and other information; and to enable television viewers to interact with advertisements including, for example, requesting brochures and finding local retail outlets. The market for these types of solutions is still developing, and there are many issues that will need to be resolved over time, including technical and privacy issues, before these solutions become extensively deployed.

Our advertising solutions currently consist of the following technologies and services:

 

   

OpenTV EclipsePlus. OpenTV EclipsePlus is our advertising campaign management system, also known as sales and inventory management or traffic and billing, that manages distribution of advertising content across various media platforms and outlets, providing network operators the tools to schedule and monitor the display of advertising content on their networks and to bill the advertisers based upon such monitoring. Previously, we offered other campaign management systems known as

 

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OpenTV Eclipse and OpenTV AdVision, but in 2008, we completed the end-of-life process for OpenTV AdVision and initiated the end-of-life process for OpenTV Eclipse. As a part of those processes, we are migrating many of our OpenTV AdVision and OpenTV Eclipse customers to OpenTV EclipsePlus. Our campaign management solutions are currently deployed by six network operators in 15 of the top 25 United States cable television markets. Our campaign management solutions are not dependent on a network operator deploying OpenTV’s middleware solutions.

 

   

OpenTV iAd. OpenTV iAd is a suite of products that enables our customers to create, enable and display interactive advertising applications as an overlay to broadcast advertising content. The overlays can link to a variety of content, such as long-form advertising, requests for information, and other alternatives. This suite of products is integrated with our middleware and currently consists of the following products:

 

   

OpenTV Ad Producer. OpenTV Ad Producer is a template-based tool that allows a third party, such as an advertising agency, to create interactive advertising content by assembling graphic assets following a step-by-step process. OpenTV Ad Producer creates Extensible Markup Language (XML) that can be easily interpreted by the OpenTV Ad Manager system.

 

   

OpenTV Ad Manager. OpenTV Ad Manager is a Windows-based software tool that enables network operators to use the XML file generated by the OpenTV Ad Producer in order to verify, authenticate and preview the application content, trans-code the content to binary code that each set-top box can interpret and schedule the application for broadcast.

 

   

OpenTV Inject. OpenTV Inject is a post-production video editing tool that enables producers to easily insert “triggers” into an analog or digital video stream. The trigger is detected by a set-top box when the video plays. An on-screen prompt is automatically displayed, alerting the viewer that additional interactive content is available.

 

   

OpenTV SpotOn. OpenTV SpotOn is an addressable advertising solution that includes both set-top box “client software” as well as back-office components for planning, copy development, scheduling and managing addressable advertising audience profiles, and specific copy delivery. Addressable advertising provides the opportunity for viewers of telecast programming to receive different advertisements simultaneously in the program based on their geographic, demographic, or psychographic profiles. Back office components of this system may be integrated with OpenTV EclipsePlus or other traffic and billing solutions or may be used independently. Set-top box components are typically deployed as independent applications but can be integrated as a middleware component.

 

   

OpenTV Participate. OpenTV Participate is a scalable platform that enables the creation and real-time management of mass participation events synchronized with live or pre-recorded television shows. It allows programmers to offer viewers competitions, quizzes, auctions, voting, and games using a variety of input devices, including mobile phone, personal computer, and television. Additionally, this functionality can be used to provide the same level of interaction with commercial advertising content. This solution provides interaction via the traditional set-top box deployed by a network operator as well as synchronous linkage to Internet and cell phone applications.

Professional Services and Support

To complement our various businesses, we provide a comprehensive suite of professional engineering and consulting services on a worldwide basis to network operators, set-top box manufacturers, and content and application developers in support of our product offerings. The services that we provide include business consulting, porting and integration, application customization and localization, launch management, and technology training services. These services allow us to manage various advanced digital television and advertising projects, from discrete integration or development assignments to complete end-to-end digital programming solutions for network operators. Our services include maintenance and support for our products

 

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after they have been installed and commercially deployed by our network operators and set-top box manufacturers, including the provision of product updates. Services are generally provided on a paid engagement basis and are either executed on a time and materials or fixed price basis, except that maintenance and support is generally subject to an annual fee.

Customer and Industry Relationships

We have established significant relationships with many of the leading network operators, set-top box manufacturers, chipset manufacturers, programming networks, and conditional access providers around the world. Our customer and industry relationships include the following:

 

   

Network Operators. Over 58 network operators around the world have launched our middleware platform, including Essel Group with Dish TV in India; Austar Entertainment Pty. Ltd. and FOXTEL in Australia; Bell TV and StarChoice in Canada; British Sky Broadcasting (BSkyB) in the United Kingdom; DISH Network in the United States; MultiChoice in Africa, Europe and the Middle East; Numericable in France; Sky Italia in Italy; UPC Broadband (UGC), Ziggo B.V. (which acquired Casema in 2008) and Canal Digitaal in The Netherlands; TV Cabo and Portugal Telecom in Portugal; NET in Brazil; and Digiturk in Turkey. The number of network operators that have deployed our software may change from year to year as network operators continue to consolidate or merge.

 

   

Set-Top Box Manufacturers. Our software has been ported by more than 40 manufacturers on hundreds of set-top box models, including models produced by Advanced Digital Broadcast, Amino, Amstrad, EchoStar, Panasonic, Motorola, Pace Micro Technology (which acquired Philips’ set-top box business in 2008), Sagem, Samsung, Cisco (which acquired Scientific-Atlanta in 2006), Thomson, and UEC Technologies (Pty) Ltd.

 

   

Chipset Manufacturers. OpenTV middleware has been ported to most of the major chipset vendors for set-top boxes, including Broadcom, Conexant, NEC, and ST Microelectronics. OpenTV middleware has also been ported to the latest generation of chipsets supporting MPEG-4 AVC.

 

   

Conditional Access Providers. We have integrated our middleware with conditional access software provided by Conax, Irdeto, Motorola, Nagravision (which is controlled by Kudelski SA), NDS Group, Verimatrix, and Viaccess.

 

   

Programming Networks. We have worked with numerous programming networks, including NBC Universal, Inc., American Broadcasting Company, Turner Broadcasting System, Discovery Communications, QVC Shopping Network, Playboy Enterprises, and Showtime Networks, to enhance their programming and advertising content.

BSkyB, directly and indirectly, accounted for approximately 17% of our revenues during 2008 in the form of set-top box royalties and licenses paid for by its manufacturers and other direct services and support fees.

Sales and Marketing

We promote and sell the majority of our products and services through our direct sales organization to corporate enterprises, including network operators, programmers, advertisers, and set-top box manufacturers. Historically, our software licensing arrangements have been made directly with the network operator or set-top box manufacturer. In 2008, we extended our licensing model to include the licensing of our technology and services indirectly through distribution arrangements with other key partners such as Nagravision and Irdeto. We have regional sales and marketing groups that are generally responsible for customers within their geographic areas: Americas; EMEA; and Asia Pacific.

 

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Competition

The markets in which we compete are intensely competitive and rapidly changing. Current and potential competitors in one or more areas of our business include digital television technology companies and companies developing interactive television content and applications. The principal competitive factors in our industry include product functionality, speed of product integration, breadth of network and platform coverage, scalability, price, possession of adequate intellectual property rights, and sales and marketing efforts. The following is a competitive analysis of our business segments.

Middleware Solutions

Competitors offering middleware solutions include NDS Group, Microsoft Corporation, Osmosys S.A., IDWay SAS (which was acquired by Irdeto in 2007), SeaChange International (which acquired the European assets of Liberate Technologies in 2007), and Cisco (which acquired Scientific-Atlanta, Inc. in 2006). NDS Group historically provided conditional access and limited interactive application technologies to its customers. However, in 2003, NDS Group extended its interactive services offerings with its acquisition of MediaHighway from Thomson Multimedia and today offers a bundled solution, including a conditional access system and middleware, that competes with our middleware offering. We do not offer a bundled solution that includes a conditional access system, but have recently entered into distribution arrangements with conditional access vendors in order to enable them to bundle our middleware offering with their conditional access systems. News Corporation holds a significant interest in NDS Group. News Corporation also controls, directly and indirectly, or exerts significant influence over, several satellite network operators around the world, including BSkyB, Sky Italia, FOXTEL and Sky Network Television, which are satellite operators in the United Kingdom, Italy, Australia and New Zealand, respectively. While we continue to work with, and provide technology and services to, many affiliates of News Corporation, including BSkyB, Sky Italia, FOXTEL and Sky Network Television, News Corporation’s interest in NDS Group, and any extension by NDS Group of its product offering, may significantly increase competitive pressures and affect the willingness of News Corporation affiliates to work with us or to obtain products or services from us. We cannot, therefore, be certain of the long-term implications of News Corporation’s interest in NDS Group or the effects that such interest may have upon our relationships and opportunities to work with the many satellite operators throughout the world that are controlled by News Corporation.

In April 2005, TVWorks, LLC, a joint venture between Comcast Corporation and Cox Communications, acquired substantially all of the North American assets of Liberate Technologies, which included technologies that compete with ours. It remains uncertain how TVWorks will develop and deploy those technologies, including whether TVWorks intends to sell those technologies and related products to other cable operators in competition with us.

Cisco, through its acquisition of Scientific-Atlanta, develops and markets in the United States a product line known as PowerTV, which includes an operating system and middleware for advanced digital interactive cable television markets. Cisco is also a major manufacturer of set-top boxes, and many of our customers or potential customers may seek to deploy set-top boxes manufactured by Cisco. We historically competed with Scientific-Atlanta in the United States, though in markets outside the United States we have cooperated more closely with Cisco to integrate and distribute our solutions in their digital set-top boxes.

For several years, Microsoft Corporation has been working to create interactive television solutions. Microsoft has several deployments of its interactive television solutions and, in particular, its internet protocol television (IPTV) solutions, and we expect that Microsoft may become a strong competitor in the market for advanced digital television solutions.

In the IPTV market, we expect to face competition from other middleware providers who have partnered with leading systems integrators and telecommunications equipment manufacturers to provide end-to-end IPTV

 

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solutions for cable, satellite, and telecommunications operators. Our competition includes Microsoft and Alcatel, who have entered into a joint development, integration, and marketing agreement to deliver IPTV solutions worldwide. Other competitive IPTV offerings that deliver middleware solutions include Alcatel-Lucent, Nokia Siemens Networks, and NDS.

The primary competition for OpenTV PVR comes from other middleware vendors including Microsoft, NDS Group, Guideworks LLC, a joint venture between Comcast and Gemstar-TV Guide International, Osmosys, Digeo, and Motorola, which include PVR functionality either with their electronic program guide, or EPG, or as an additional feature. Other PVR technology providers targeting the integrated PVR space include set-top box manufacturers, such as Pioneer, Pace, Humax, UEC, Motorola, and Cisco, and dedicated PVR solution providers including TiVo and ReplayTV, which was acquired by DirecTV Group, Inc. in 2007.

Advertising Solutions

In the markets for our advertising solutions, our primary competition comes from Visible World Corporation, NDS Group, Invidi Corporation, Navic Networks (acquired by Microsoft in 2008), Harris Corporation, and Tandberg Television. The market for addressable and interactive technology is still developing, and we expect additional competitors to appear as the market continues to develop. Visible World provides a suite of services enabling advertisers and agencies to develop and deliver content and advertising that can be geographically and demographically customized as well as dynamically updated based on business parameters and market trends and demands. Navic Networks provides technology that enables the delivery and placement of targeted interactive media. In the area of campaign management, Harris Corporation, which offers a competitive solution through its Novar division, represents our primary competitor for traditional traffic and billing solutions. As the need for more advanced solutions develops, we expect to see increased competition from other companies, such as WideOrbit, which currently provides a campaign management solution to the broadcasting industry.

Regulations

The telecommunications, media, broadcast, and cable television industries are subject to extensive regulation by governmental agencies around the world. These governmental agencies continue to oversee and adopt legislation and regulation over these industries, particularly in the areas of user privacy, consumer protection, the online distribution of content, and the characteristics and quality of online products and services, which may affect our business, the development of our products, the decisions by market participants to adopt our products and services or the acceptance of interactive television by the marketplace in general.

Intellectual Property and Research and Development

As of December 31, 2008, we had 108 patents issued in the United States, 582 patents issued outside of the United States, and 343 patent applications pending throughout the world. We believe that our patent portfolio protects many of the key elements necessary to support digital interactive and enhanced television. Our research and development expenses relating to continuing operations, determined in accordance with accounting principles generally accepted in the United States of America (GAAP), for the years ended December 31, 2008, 2007 and 2006 were $34.4 million, $32.7 million and $30.7 million, respectively.

Employees

As of December 31, 2008, we had 521 full-time employees, with 388 in our middleware solutions segment, 64 in our advertising solutions segment and 69 employed in corporate and administrative functions.

Available Information

Our Internet website is located at http://www.opentv.com, but the information contained on our website is not deemed to be incorporated herein. We make available free of charge on the investor relations page of our

 

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website this Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC.

The public may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC’s Internet site is located at http://www.sec.gov, but the information contained on that website is not deemed to be incorporated herein.

 

Item 1A. Risk Factors

Factors That May Affect Future Results

In addition to the other information contained in this 2008 Annual Report on Form 10-K, you should consider carefully the following factors in evaluating OpenTV and our business.

We have a history of net losses, and we may experience net losses in the future.

We have incurred significant net losses since our inception. For example, our net losses for the years ended December 31, 2007, 2006 and 2005 were approximately $5.2 million, $10.8 million and $8.5 million, respectively. Although we achieved net income for the year ended December 31, 2008, there can be no guarantee that we will be successful in achieving, sustaining or increasing profitability in 2009 or beyond. The severity of the current economic downturn has created a volatile and challenging business climate, which could negatively impact our customers and their spending and investment decisions. If that happens, then we may not be able to generate the level of revenue necessary to achieve and maintain sustainable profitability, particularly as we continue to incur significant research and development, sales and marketing and administrative expenses. Any failure to significantly increase revenue as we implement our product and distribution strategies would adversely affect our business, financial condition and operating results.

We have historically derived a significant percentage of our revenues from licensing our middleware to network operators. Our opportunities for future revenue growth with middleware are limited by the actual number of worldwide network operators and by technology decisions they make from time to time.

We have historically derived a significant percentage of our total revenues from royalties associated with the deployment of our middleware solutions and fees charged for services rendered in support of those deployments. Historically, the number of network operators worldwide has not grown significantly. In light of recent economic conditions, consolidation among network operators may increase, resulting in fewer independent network operators in many countries. Over 58 network operators around the world have already deployed our middleware solutions. To the extent that we have already achieved deployments in those networks, the opportunities for future growth of our middleware solutions may be limited, typically by the subscriber growth of our customers and their schedule for upgrading the technology deployed in their networks. Although new markets are emerging from the conversion of analog to digital networks required in many countries and the growth of IPTV and digital terrestrial television (DTT) networks, we may not be successful in marketing and selling our middleware to these new markets, in which case our revenue growth and results of operations will be negatively impacted.

Our capacity to generate future revenues associated with our middleware may also be limited due to a number of reasons, including:

 

   

network operators that have selected our middleware may switch to a competing platform for the provision of interactive services, experience lower or even negative subscriber growth that reduces

 

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their demand for our middleware, stop deploying set-top boxes enabled with our middleware, decrease or stop their use of our support services, or choose not to upgrade or add additional features to the version of our middleware running on their networks;

 

   

network operators that have not selected our middleware may choose a competing platform for the provision of interactive services, which could include the selection of standards-based solutions such as the Multimedia Home Platform, or MHP, and tru2way, formerly known as the OpenCable Applications Platform, or OCAP;

 

   

third party distributors of our middleware solutions, such as set-top box manufacturers and conditional access vendors, may not be successful in marketing or selling our software as part of their bundled solutions or they may experience downward pricing pressure on their bundled solutions, which in turn may impact the prices at which they are able to sell our middleware solutions; or

 

   

a meaningful opportunity to deploy our middleware in the markets that have not yet adopted interactive digital television on a large scale may never develop or may develop at a slower pace than expected.

Any of these eventualities would have an adverse effect on our future revenues and results of operations.

We offer volume discounts to some customers and sometimes face downward pricing pressures as a result of competition and the general economic climate. Such discounts and pricing pressures may limit the rate of our royalty growth in the future, which could negatively impact our financial results.

In certain instances, we provide volume discounts to customers based on the number of copies of our software they deploy or the amount of business they do with us. In addition, some of our customers may demand reductions in the prices they pay for our products and services, whether as a result of competitive pressure, the general economic downturn or otherwise. As a result, although we may experience continued growth in product deployments, the average price for our products may decline over time, which could limit the growth of our revenues in the future. We expect that volume discounting and pricing pressures will continue to be factors affecting our business in the future. Unless we are able to offset the anticipated effects of these factors through a change in product mix, upgrades to our software or other methods that typically enable us to charge higher fees, we may experience slower royalty growth in the future as a result of discounting and downward pricing pressures.

We expect a more significant portion of our revenue growth in the future to be derived from advertising solutions that we develop and market. If we are not successful in developing and marketing these advertising solutions, our future revenue growth may be limited.

We expect to accelerate the development of our suite of advertising solutions, including a significant upgrade to our campaign management product and more advanced targeted and addressable advertising solutions. These efforts will involve significant investment and time and attention of management. Historically, we have derived a relatively small percentage of our total revenue from these offerings, and the market for these offerings, particularly for targeted and addressable advertising and participation-based offerings, is still nascent and evolving. We cannot be certain that the demand for, or the market acceptance of, our advertising solutions will develop as we anticipate or that we will be able to market these solutions effectively. If network operators determine that our advertising solutions do not meet their business or operational expectations, they may choose a competitive solution. To the extent that network operators fail to renew or enter into new or expanded contracts with us for our advertising solutions, our revenue growth will be impacted negatively. Moreover, due to global economic conditions, network operators may slow down their deployment of new technologies, and such actions would also negatively impact our revenue growth. Accordingly, our ability to generate significant revenues from our advertising solutions in the future is uncertain.

 

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Our future growth may be limited if we are unable to sell our middleware solutions to North American cable customers.

In February 2008, we announced that we had jointly decided with Time Warner Cable, or TWC, to put our middleware project with TWC on indefinite hold. That project commenced in 2006 with the goal of providing a common user interface and interactive services platform based on OpenTV’s middleware across certain low-end set-top boxes deployed by TWC in the United States. In addition, in April 2005, TVWorks LLC (formerly known as Double C Technologies), a joint venture formed by Cox Communications and Comcast Corporation, acquired substantially all of the assets of the North American business of Liberate Technologies, a former competitor of ours. Historically, our middleware competed with the middleware software included with the assets sold to TVWorks. To date, while we have licensed certain of our advertising solutions to Comcast, and expect to pursue additional advertising opportunities with both Cox and Comcast, we have not licensed our middleware solutions to either of these companies. It also remains unclear whether TVWorks will attempt to license the competing technology to other North American cable operators. Based on our current understanding, we would not expect Cox or Comcast, in light of the assets that they acquired from Liberate, to license middleware or related solutions from us. As a result of both this and the TWC development, our opportunity to sell our middleware solutions to cable operators in the United States, and in particular to TWC, Comcast and Cox, is limited, which adversely affects our ability for future revenue growth in this market.

A significant percentage of our revenues is currently generated from network operators that are affiliated with News Corporation, which maintains a significant ownership stake in NDS Group, one of our primary competitors in the middleware market. Over the long-term, this situation may make it more difficult for us to sell our products, technologies or services to these network operator affiliates, in which case our revenues may be negatively impacted.

News Corporation maintains a significant ownership stake in NDS Group, which competes with us in the middleware market. News Corporation also controls, directly or indirectly, or exerts significant influence over, a number of our customers, including BSkyB, Sky Italia, FOXTEL and Sky Network Television. For the year ended December 31, 2008, BSkyB, Sky Italia, FOXTEL and Sky Network Television, directly and indirectly through their set-top box manufacturers, accounted for 29%, in the aggregate, of our revenues. While we believe that our relationship with each of these customers is good, the long-term implications of News Corporation’s ownership stake in NDS is difficult to assess. We may be at a disadvantage in selling our middleware to News Corporation affiliates over the long-term when in direct competition with NDS, and if we were to lose one or more of these customers, our revenues would be negatively impacted.

A significant percentage of our revenues is generated from a relatively small number of customers. The loss of one or more of these customers would severely and negatively impact our revenues.

Although our middleware solutions have been deployed by more than 58 network operators worldwide, a small number of large network operators accounts for a disproportionately large percentage of our revenues. For the year ended December 31, 2008, network operators over which News Corporation controls or exerts significant influence, including BSkyB, Sky Italia, FOXTEL and Sky Network Television, accounted for approximately 29% of our revenues in the aggregate. Liberty Global, Inc. (Liberty Global), which controls or exerts significant influence over UGC, Austar and Jupiter Telecommunications Co., Ltd. (JCOM), accounted for approximately 10% of our 2008 revenues in the aggregate. Finally, we generated approximately 4% of our revenues in 2008 from EchoStar. The loss of any of the foregoing individual network operators as customers would negatively impact our financial results and future prospects. In addition, if either News Corporation or Liberty Global decided to replace our middleware solution as part of a group-wide effort that encompassed all or a significant portion of their respective affiliated network operators, then the impact on our financial results and future prospects would be severe.

We may be unable in the future to raise additional capital required to support our operating activities.

We expect to be able to fund our capital requirements for at least the next twelve months by using existing cash balances and short-term and long-term marketable debt securities if our assumptions about our revenues,

 

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expenses and cash commitments are generally accurate. Nevertheless, we have incurred to date and we expect that we will continue to incur in the near term significant expenses as we continue to invest in research and development, sales and marketing and other efforts. As of December 31, 2008, we had over $102 million of cash, cash equivalents and marketable debt securities. While we continue to monitor our operating expenses and seek to bring them in line with our revenues, there can be no assurance that we will be successful in doing so or that we will be able to continue to generate positive cash flow from operating activities in the future. If we are not successful in those endeavors, we might need to raise additional capital.

To the extent we are required to raise additional capital, current capital market conditions may prevent us from doing so or may result in us being able to do so only on unacceptable terms. If we cannot raise additional capital on acceptable terms, we may not be able to develop or enhance our products and services, take advantage of future strategic or commercial opportunities or respond effectively to competitive pressures or unanticipated requirements, any of which could have an adverse effect on our business, results of operations and future prospects.

The market for our products and services is subject to significant competition, which could adversely affect our business.

We face competition from a number of companies, including many that have significantly greater financial, technical and marketing resources and better recognized brand names than we do. Current and potential competitors in one or more aspects of our business include interactive technology companies, companies developing interactive television content and entertainment, and, in the professional services area, third party system integrators and internal information technology staffs at our network operator customers. Some of our customers or their affiliates offer products or services that compete with our products and services. If any of our competitors achieves significant market penetration or other success within the markets upon which we rely as a significant source of revenue, or in new markets that we may enter in the future, our ability to maintain market share and sustain our revenues may be materially and adversely affected.

The trend of consolidation among industry participants may adversely impact our business, results of operations and future prospects.

There has been a worldwide trend of consolidation in the industries that provide services to cable, direct broadcast satellite and telecommunications companies. We believe this trend is likely to continue due to competitive concerns, especially in light of the current economic environment and resulting market instability. This trend also includes other companies involved in the interactive television industry. For example, in May 2008, Macrovision acquired Gemstar-TV Guide International, a provider of electronic program guide technology. In July 2007, Irdeto, a provider of conditional access systems, acquired IDway SAS, a software company providing open software solutions for digital television consumer devices. In February 2006, Cisco acquired Scientific-Atlanta, the set-top box manufacturer, and in April 2007, the Ericsson Group, Inc. acquired Tandberg Television, a provider of digital media solutions. We expect additional consolidation to occur throughout the industry. While the full impact of this trend is uncertain at the present time, we will need to adapt to changing relationships with industry participants and address concerns that may arise relating to competition and conflicts of interest as companies consolidate. If we are unable to successfully manage these changing relationships and address competitive and conflict issues, we may lose existing customers and fail to secure new customers.

We depend upon key personnel, including our senior executives and technical and engineering staff, to operate our business effectively, and we may be unable to attract or retain such personnel.

Our future success depends largely upon the continued service of our senior executive officers and other key management and technical personnel. In 2007, we twice experienced a change in our Chief Executive Officer, and there were additional changes among our senior management team. We also implemented a significant reorganization of our worldwide business operations, which resulted in the implementation of a new reporting

 

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structure. Organizational change can disrupt our operations and require significant management time and attention, which can place us at a competitive disadvantage in the fast moving markets in which we operate. In addition, we may need to increase our technical, consulting and support staff to support new customers and the expanding needs of our existing customers. We have, in the past, experienced difficulty in recruiting qualified personnel. If we are not successful in recruiting and retaining our key personnel, our business may be adversely affected.

We continue to evaluate our business operations and may implement structural and other changes that affect the conduct of our worldwide business operations. As we continue to align our resources appropriately with our evolving business, we may face unintended consequences or suffer adverse effects on our operations or personnel.

We review our operations on an ongoing basis with a view towards improving our business performance. As a result of these business reviews, we may undertake changes to operations and personnel. From time to time, we also may initiate efforts to consolidate our operations, close and relocate various offices around the world and divest non-strategic assets, such as the sale of our PlayJam unit in December 2007. There is a risk that, as new business strategies and administrative processes are developed and implemented, the changes we adopt will be unduly disruptive or less effective than our previous strategies and processes. This may adversely affect our business, results of operations and future prospects.

Interactive television remains an emerging business and it may not attract widespread market acceptance or demand.

Our success will depend upon, among other things, the broad acceptance of interactive television by industry participants, including network operators and manufacturers of televisions and set-top boxes, as well as by television programmers, viewers and advertisers. Because the market for interactive television remains an emerging market, the potential size of the market opportunity and the timing of its development are uncertain. The growth and future success of our business will depend in part upon our ability to penetrate new markets, such as IPTV and DTT, and convince network operators, television programmers, viewers and advertisers to adopt and maintain their use of our products and services.

Because much of our success and value lies in our ownership and use of our intellectual property, our failure to protect our intellectual property and develop new proprietary technology may negatively affect us.

Our ability to effectively conduct our business will be dependent in part upon the maintenance and protection of our intellectual property. We rely on patent, trademark, trade secret and copyright law, as well as confidentiality and licensing arrangements, to establish and protect our rights in and to our technology. We have typically entered into confidentiality or license agreements with our employees, consultants, customers, strategic partners and vendors in an effort to control access to, and distribution of, our software, related documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy, reverse engineer or otherwise obtain and use our software and other proprietary information without authorization.

Policing unauthorized use of our software and proprietary information is difficult and expensive. The steps we take may not prevent misappropriation of our intellectual property and the agreements we enter into may not be enforceable in some instances. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited in certain foreign countries or, alternatively, such protection may be difficult to enforce. Litigation may be necessary in the future to enforce or protect our intellectual property rights or to determine the validity and scope of our intellectual property rights and the proprietary rights of others. Any such litigation could cause us to incur substantial costs and diversion of resources, which in turn could adversely affect our business.

 

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Intellectual property infringement claims may be asserted against us, which could disrupt our business.

We may be the subject of claims by third parties alleging that we infringe their intellectual property. The defense of any such claims could cause us to incur significant costs and could result in the diversion of resources with respect to the defense of any claims brought, which could adversely affect our financial condition and operating results. As a result of such infringement claims, a court could issue an injunction preventing us from distributing certain products, which could adversely affect our business. If any claims or actions are asserted against us, we may seek to obtain a license under a third party’s intellectual property rights in order to avoid any litigation. However, a license under such circumstances may not be available on commercially reasonable terms, if at all.

We grant certain indemnification rights to our customers when we license our software technologies. We may, therefore, become subject to third party infringement claims through those commercial arrangements. In addition, the damages to which we are subject may be increased by the use of our technologies in our customers’ products.

Many of our and our subsidiaries’ agreements with customers contain an indemnification obligation, which could be triggered in the event that a customer is named in an infringement suit involving their products or involving the customer’s products or services that incorporate or use our products. If it is determined that our products infringe any of the asserted claims in such a suit, we may be prevented from distributing certain of our products and we may incur significant indemnification liabilities, which may adversely affect our business, financial condition and operating results.

In addition, while damages claims in respect of an alleged infringement may, in many cases, be based upon a presumed royalty rate that the patent holder would have otherwise been entitled to, it is possible that our liability may increase as a result of the incorporation of our technology with our customer’s products or as a result of any finding of willful infringement. In some cases, potential damages against us could be based on the profits derived from a product that infringes through the use of our software even though we receive a relatively moderate economic benefit from the licensing arrangement.

The adoption of industry-wide standards for interactive television could adversely affect our ability to sell our products and services or place downward pressure on our pricing.

Ongoing efforts to establish industry-wide standards for interactive television software include a commitment by cable network operators in the United States to deploy a uniform platform for interactive television based on a jointly developed specification known as “tru2way” (or OCAP) and an initiative by European television industry participants to create a similar platform called MHP. We are a participant in both standards bodies and have agreed to license our intellectual property in connection with the implementation of tru2way and MHP. The establishment of these standards or other similar standards could adversely affect the pricing of our products and services, significantly reduce the value of our intellectual property and the competitive advantage our proprietary technology provides, cause us to incur substantial expenditures to adapt our products or services to respond to these developments, or otherwise hurt our business, particularly if our products require significant redevelopment in order to conform to the newly established standards.

Rapid technological advances could render our products and services obsolete or non-competitive.

The migration of television from analog to digital transmission, the convergence of television, the Internet, communications and other media, and other emerging trends, such as the deployment of high definition television and multicasting, are creating a dynamic and unpredictable environment in which to operate. Our ability to anticipate trends and adapt to new technologies and evolving standards is critical to our success, and if we fail to do so in a cost-effective manner, then our future growth prospects will be diminished and our results of operations will be negatively impacted.

 

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The deployment of new digital television technologies, such as high definition television and multicasting multiple television programs through a single channel, may compete directly with our products and services for broadcast distribution capacity. To the extent that such capacity cannot accommodate all of the applications that a cable or direct broadcast satellite system operator wants to distribute, then there is a risk that other applications will be deployed to the exclusion of our content and applications. If this occurs, our results of operations could be adversely affected.

Any delay or failure on our part to respond quickly, cost-effectively and sufficiently to these developments could render our products and services obsolete or non-competitive and have an adverse effect on our business, financial condition and operating results. In addition, we must stay abreast of cutting-edge technological developments and evolving service offerings to remain competitive and increase the utility of our services, and we must be able to incorporate new technologies into our products in order to address the increasingly complex and varied needs of our customer base. There can be no assurance that we will be able to do so successfully or cost-effectively, and any failure to do so may adversely affect us.

Government regulations may adversely affect our business.

The telecommunications, media, broadcast and cable television industries are subject to extensive regulation by governmental agencies. These governmental agencies continue to oversee and adopt legislation and regulation over these industries, particularly in the areas of user privacy, consumer protection, the online distribution of content and the characteristics and quality of online products and services, which may affect our business, the development of our products, the decisions by market participants to adopt our products and services or the acceptance of interactive television by the marketplace in general. In particular, governmental laws or regulations restricting or burdening the exchange of personally identifiable information could delay the implementation of interactive services such as targeted and addressable advertising or create liability for us or any other manufacturer of software that facilitates information exchange. These governmental agencies may also seek to regulate interactive television directly. Future developments relating to any of these regulatory matters may adversely affect our business.

Changes to current accounting policies or in how such policies are interpreted or applied to our business could have a significant effect on our reported financial results or the way in which we conduct our business and could make it difficult for investors to assess properly our financial condition or operating results.

We prepare our financial statements in conformity with accounting principles generally accepted in the United States, which are subject to interpretation by the American Institute of Certified Public Accountants, the Public Company Accounting Oversight Board, the Securities and Exchange Commission and various other bodies formed to interpret and create appropriate accounting policies. A change in these policies or in how such policies are interpreted or applied to our business could have a significant effect on our reported results and may even retroactively affect previously reported transactions. Our accounting policies that recently have been or may in the future be affected by changes in the accounting rules are as follows:

 

   

Revenue recognition;

 

   

Accounting for income taxes; and

 

   

Accounting for business combinations, related goodwill and other intangible assets.

As a software company, our revenue recognition policy, in particular, is a key component of our results of operations and is based on complex rules that require us to make judgments and estimates. In applying our revenue recognition policy, we must determine which portions of our revenue are recognized currently and which portions must be deferred. As a result, we may receive cash from a customer, or bill that customer, but not be able to recognize the revenue associated with that cash, or billing, for some period of time under applicable accounting rules. This results in our recording the billing as “deferred revenue” on our balance sheet. There are

 

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also complex accounting rules associated with the treatment of internal contract costs, and whether those costs should be deferred or expensed as incurred. A determination whether to defer or expense certain costs may materially affect our financial presentation. Because different contracts may require different accounting treatment, it may be difficult for investors to properly assess our financial condition or operating results unless they carefully review all of our financial information, including our statement of operations, balance sheet and statement of cash flows.

We may be required to record a significant charge to earnings if our goodwill or amortizable assets become impaired.

Under accounting principles generally accepted in the United States, we review our goodwill and amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually and potentially more frequently depending upon actual events and circumstances. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include a sustained decline in our stock price, market capitalization or future cash flows, slower growth rates in our industry, termination of contracts assumed in connection with a merger or acquisition and obsolescence of acquired technology. In particular, the severity of the current worldwide economic downturn and the potential impact of this downturn on our business and our stock price could require us to record a significant charge to earnings in our financial statements due to impairment of our goodwill or amortizable intangible assets. If that happens, then our results of operations will be negatively impacted for the period in which such determination was made.

Through the use of our technology we have the ability to collect personal and confidential information from set-top boxes. If we fail to protect this information from security breaches or misuse this information, then our operations could be disrupted and we could be subject to litigation and liability under privacy laws.

Through the technology that we license for use in set-top boxes, we have the ability, when requested by our customers, to collect and store personal information from users of our applications. We may also have access to that type of information as we deploy our interactive advertising platforms. Subject to applicable laws, and the agreement of our customers and consumers, we may seek to use such information to help develop addressable and targeted advertising businesses. Storage and use of such information is subject to laws and regulations and may also subject us to privacy claims relating to its use and dissemination. In addition, a third party might be able to breach our security measures and gain unauthorized access to our servers where such information is stored and misappropriate such information or cause interruptions to our business operations. We may be required to expend significant capital and other resources to monitor the laws applicable to privacy matters, to protect against security breaches or to deal with the consequences of any breach. A breach of privacy rights by us, network operators or others could expose us to liability. Any compromise of security or misuse of private information could materially and adversely affect our business, reputation, operating results and financial condition and expose us to costly litigation and regulatory action. Concerns over the security of personal information transmitted through our applications and the potential misuse of such information might also inhibit market acceptance of our applications, and if this occurs, our business and operating results will be adversely affected.

Our multinational operations expose us to special risks that could increase our expenses, adversely affect our operating results and require increased time and attention of management.

We derive a substantial portion of our revenue from customers located outside of the United States and have significant operations in a number of countries around the world. Our international operations are subject to special risks, including:

 

   

differing legal and regulatory requirements and changes in those requirements;

 

   

potential loss of proprietary information due to piracy, misappropriation or weaker laws regarding intellectual property protection;

 

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export and import restrictions, tariffs and other trade barriers;

 

   

the costs associated with the maintenance of multiple office facilities around the world;

 

   

currency fluctuations and devaluations;

 

   

difficulties in staffing and managing offices as a result of, among other things, distance, language and cultural differences;

 

   

longer payment cycles and problems in collecting accounts receivable;

 

   

political and economic instability; and

 

   

potentially adverse tax consequences.

Any of these factors could have an adverse effect on our business, financial condition and operating results.

Our software products may contain errors, which could cause us to lose revenue and incur unexpected expenses.

Software development is an inherently complex process that frequently results in products that contain errors as well as defective features and functions. Moreover, our technology is integrated into other products and services deployed by our network operator customers. Accordingly, a defect, error, or performance problem with our technology could cause the systems of our network operator customers to fail for a period of time or to be impaired in certain respects. Any such failure could subject us to damage claims and claims for indemnification by our customers and result in severe customer relations problems and harm to our reputation.

While our agreements with customers typically contain provisions designed to limit or exclude our exposure to potential liability claims in those circumstances, those provisions may not be effective, in all respects, under the laws of some jurisdictions. As a result, we could be required to pay substantial amounts of damages upon adjudication or settlement of any of these types of claims.

The interests of our majority owner may differ from yours and may result in OpenTV acting in a manner inconsistent with your general interests.

Kudelski SA beneficially owned Class A and Class B ordinary shares representing approximately 32.3% of the economic interest and 77.2% of the voting interest of our ordinary shares outstanding as of December 31, 2008. As a result of its ownership of our ordinary shares, Kudelski has sufficient voting power, without the vote of any other shareholder, to determine the outcome of any action presented to a vote of our shareholders, including amendments of our amended and restated memorandum of association and articles of association for any purpose (which could include increasing or reducing our authorized capital or authorizing the issuance of additional shares). The interests of Kudelski, which owns or controls a variety of companies and technologies relating to digital television, may diverge from your interests, and Kudelski may be in a position, subject to general fiduciary obligations, to cause or require us to act in a way that is inconsistent with the general interests of the non-affiliated holders of our Class A ordinary shares.

Because we are controlled by Kudelski, we are exempt from certain listing requirements of The NASDAQ Global Market relating to corporate governance matters.

Over the past several years, the Financial Industry Regulatory Authority (FINRA) has adopted certain listing requirements for The NASDAQ Global Market designed to enhance corporate governance standards of the companies who are listed thereon. As a result of Kudelski’s beneficial ownership of our Class A and Class B ordinary shares, we are not subject to some of these requirements, including the requirement that a majority of our board of directors be “independent” under the guidelines established by FINRA and certain requirements regarding the determination of our Chief Executive Officer’s compensation and our director nominees. While we do not believe that our exemption from those requirements affects the manner and method by which we manage and operate the company, investors should be aware that we are not subject to those provisions and may have no obligation to comply with those requirements in the future unless our ownership profile changes.

 

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Unanticipated fluctuations in our quarterly operating results could affect our share price.

We believe that quarter-to-quarter comparisons of our financial results are not necessarily meaningful indicators of our future operating results and should not be relied on as an indication of future performance. If our quarterly operating results fail to meet the expectations of analysts, the market price of our publicly-traded securities could be negatively affected. Our quarterly operating results have varied substantially in the past and they may vary substantially in the future depending upon a number of factors described below, including many that are beyond our control.

Our operating results may vary from quarter to quarter as a result of a number of factors, including:

 

   

Changes in the rate of capital spending and the rollout of interactive television-related products and services by network operators;

 

   

The number, size and scope of network operators deploying OpenTV-enabled interactive services and the associated rollout to subscribers;

 

   

Changes in our operating expenses necessary to meet business and customer requirements;

 

   

Increased competition in general and any changes in our pricing policies that may result from increased competitive pressures;

 

   

Potential downturns in our customers’ businesses or in the domestic or international markets for our products and services;

 

   

Our ability to develop and market successfully our advertising solutions business;

 

   

Changes in technology, whether or not developed by us;

 

   

Our ability to develop and introduce on a timely basis new or enhanced versions of our products that can compete favorably in the marketplace; and

 

   

The timing of revenue recognition associated with major licensing and services agreements.

Any of the factors listed above could cause significant variations in our earnings on a quarter-to-quarter basis. You should not rely on the results of prior periods as an indication of our future performance. Any decline in revenues or a greater than expected loss for any quarter could cause the market price of our publicly-traded securities to decline.

Our shares may be at risk for delisting from The NASDAQ Global Market. If our shares are delisted, our share price and your liquidity may be impacted.

Our Class A ordinary shares are currently listed on The NASDAQ Global Market. NASDAQ has requirements that a company must meet in order to remain listed on The NASDAQ Global Market. These requirements include maintaining a minimum closing bid price of $1.00 per share, though NASDAQ has temporarily suspended this requirement until April 20, 2009. Our closing bid price on December 31, 2008 was $1.23 per share. Although we currently meet all of the minimum continued listing requirements for The NASDAQ Global Market, should our share price decline, our ordinary shares could be subject to potential delisting from The NASDAQ Global Market.

If we fail to maintain the standards necessary to be quoted on NASDAQ and our shares are delisted, trading in our shares would be conducted on the OTC Bulletin Board as long as we continue to file reports required by the Securities and Exchange Commission. The OTC Bulletin Board is generally considered to be a less efficient market than NASDAQ, and our share price, as well as the liquidity of our ordinary shares, may be adversely impacted as a result.

 

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Because we are a British Virgin Islands company, you may not be able to enforce judgments against us that are obtained in United States courts.

We are incorporated under the laws of the British Virgin Islands. As a result, it may be difficult for investors to effect service of process upon us within the United States or to enforce against us judgments obtained in the United States courts, including judgments predicated upon the civil liability provisions of the federal securities laws of the United States.

We have been advised by British Virgin Islands counsel that judgments of United States courts predicated upon the civil liability provisions of the federal securities laws of the United States may be difficult to enforce in British Virgin Islands courts and that there is doubt as to whether British Virgin Islands courts will enter judgments in original actions brought in British Virgin Islands courts predicated solely upon the civil liability provisions of the federal securities laws of the United States.

Because we are a British Virgin Islands company, your rights as a shareholder may be less clearly established as compared to the rights of shareholders of companies incorporated in other jurisdictions.

Our corporate affairs are governed by our amended and restated memorandum of association and articles of association and by the BVI Business Companies Act, 2004. Principles of law relating to such matters as the validity of corporate procedures, the fiduciary duties of management and the rights of our shareholders may differ from those that would apply if we were incorporated in the United States or another jurisdiction. The rights of shareholders under British Virgin Islands law are not as clearly established as are the rights of shareholders in many other jurisdictions. Thus, our shareholders may have more difficulty protecting their interests in the face of actions by our board of directors or our controlling shareholder than they would have as shareholders of a corporation incorporated in another jurisdiction.

Certain provisions contained in our charter documents could deter a change of control of us.

Certain provisions of our amended and restated memorandum of association and articles of association may discourage attempts by other companies to acquire or merge with us, which could reduce the market value of our Class A ordinary shares. For example, our amended and restated our memorandum of association allows us to issue additional super voting Class B ordinary shares. In addition, the amended and restated memorandum of association does not require that each Class B ordinary share to automatically convert into a Class A ordinary share under certain circumstances, including upon the transfer of any Class B ordinary shares to a person who was not a shareholder, or an affiliate of a shareholder, prior to our initial public offering. The comparatively low voting rights of our Class A ordinary shares as compared to our Class B ordinary shares, all of which were beneficially owned by Kudelski as of December 31, 2008, as well as other provisions of our amended and restated memorandum of association and articles of association, may delay, deter or prevent other persons from attempting to acquire control of us.

 

Item 1B. Unresolved Staff Comments

None.

 

Item 2. Properties

Our corporate headquarters and principal executive offices are presently located at 275 Sacramento Street, San Francisco, California 94111, where we occupy 60,458 square feet of space under a lease that expires on January 31, 2010. In addition to our corporate headquarters, we have leased regional office space elsewhere in the United States, Europe, Asia and Australia.

 

Item 3. Legal Proceedings

Claims by Former Chief Executive Officer. In November 2007, we received a demand from attorneys for Alan A. Guggenheim, our former Chief Executive Officer, claiming that the company was withholding severance

 

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and certain other benefits due him under his employment agreement following termination of his employment in August 2007. We responded that we intended to provide Mr. Guggenheim with all pay and benefits due him under the employment agreement. Thereafter, in December 2007, we were notified by the Occupational Safety and Health Administration (OSHA) of the United States Department of Labor that we had been named in an administrative complaint filed by Mr. Guggenheim alleging violations of Section 806 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1514A. In the complaint, Mr. Guggenheim claims that the company terminated him for reporting conduct that he alleged to be illegal or unethical and seeks money damages, fees and costs, reinstatement and any other available relief. We filed a written statement of position with OSHA denying all of Mr. Guggenheim’s allegations. OSHA has indicated it will conduct some limited interviews, but to date no substantive administrative proceedings have occurred. We intend to defend ourselves vigorously in any administrative proceedings and in any subsequent legal proceedings that may be filed by Mr. Guggenheim. We have established a reserve for the severance and other benefits we believe are due to Mr. Guggenheim under the terms of his employment agreement. That reserve is an estimate only and actual costs may be materially different.

Initial Public Offering Securities Litigation. In July 2001, the first of a series of putative securities class actions was filed in the United States District Court for the Southern District of New York against certain investment banks which acted as underwriters for our initial public offering, us and various of our officers and directors. In November 2001, a similar securities class action was filed in the United States District Court for the Southern District of New York against Wink Communications and two of its officers and directors and certain investment banks which acted as underwriters for Wink Communications’ initial public offering. We acquired Wink Communications in October 2002. The complaints allege undisclosed and improper practices concerning the allocation of initial public offering shares, in violation of the federal securities laws, and seek unspecified damages on behalf of persons who purchased our Class A ordinary shares during the period from November 23, 1999 through December 6, 2000 and Wink Communications’ common stock during the period from August 19, 1999 through December 6, 2000. Other actions have been filed making similar allegations regarding the initial public offerings of more than 300 other companies. All of these lawsuits have been coordinated for pretrial purposes as In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS). Defendants in these cases filed an omnibus motion to dismiss on common pleading issues. All claims against our and Wink Communications’ officers and directors have been dismissed without prejudice in this litigation pursuant to the parties’ stipulation approved by the Court on October 9, 2002. On February 19, 2003, the Court denied in part and granted in part the omnibus motion to dismiss filed on behalf of defendants, including us and Wink Communications. The Court’s order dismissed all claims against us and Wink Communications except for a claim brought under Section 11 of the Securities Act of 1933.

In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including us and Wink Communications, was submitted to the court for approval. On August 31, 2005, the court preliminarily approved the settlement. In December 2006, the appellate court overturned the certification of classes in the six test cases that were selected by the underwriter defendants and plaintiffs in the coordinated proceedings. Neither OpenTV nor Wink Communications is one of the test cases.

Because class certification was a condition of the settlement, it was unlikely that the settlement would receive final Court approval. On June 25, 2007, the Court entered an order terminating the proposed settlement based upon a stipulation among the parties to the settlement. Plaintiffs have filed amended master allegations and amended complaints in the six test cases, which the defendants in those cases have moved to dismiss. Plaintiffs have also moved for class certification in the six test cases, which the defendants in those cases have opposed.

In February 2009, the parties reached a global settlement of the litigation and have so advised the Court. Under the settlement, which remains subject to Court approval, the insurers would pay the full amount of settlement share allocated to us, and we would bear no financial liability. We, as well as the officer and director defendants who were previously dismissed from the action pursuant to tolling agreements, would receive complete dismissals from the case. It is uncertain whether the settlement will receive final Court approval. If the settlement does not receive final Court approval and litigation against us and Wink Communications continues,

 

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we believe we have meritorious defenses and intend to defend ourselves vigorously. No provision has been made in our consolidated financial statements for this matter. We are unable to predict the likelihood of an unfavorable outcome or estimate our potential liability, if any.

Broadcast Innovation Matter. On November 30, 2001, a suit was filed in the United States District Court for the District of Colorado by Broadcast Innovation, L.L.C., or BI, alleging that DIRECTV, Inc., EchoStar Communications Corporation, Hughes Electronics Corporation, Thomson Multimedia, Inc., Dotcast, Inc. and Pegasus Satellite Television, Inc. are infringing certain claims of United States patent no. 6,076,094, assigned to or licensed by BI. DIRECTV and certain other defendants settled with BI on July 17, 2003. We are unaware of the specific terms of that settlement. Though we are not currently a defendant in the suit, BI may allege that certain of our products, possibly in combination with the products provided by some of the defendants, infringe BI’s patent. The agreement between OpenTV, Inc. and EchoStar includes indemnification obligations that may be triggered by the litigation. If liability is found against EchoStar in this matter, and if such a decision implicates our technology or products, EchoStar has notified OpenTV, Inc. of its expectation of indemnification, in which case our business performance, financial position, results of operations or cash flows may be adversely affected. Likewise, if OpenTV, Inc. were to be named as a defendant and it is determined that the products of OpenTV, Inc. infringe any of the asserted claims, and/or it is determined that OpenTV, Inc. is obligated to defend EchoStar in this matter, our business performance, financial position, results of operations or cash flows may be adversely affected. On November 7, 2003, BI filed suit against Charter Communications, Inc. and Comcast Corporation in United States District Court for the District of Colorado, alleging that Charter and Comcast also infringe the ‘094 patent. The agreements between Wink Communications and Charter Communications include indemnification obligations of Wink Communications that may be triggered by the litigation. While reserving all of our rights in respect of this matter, we have conditionally reimbursed Charter for certain reasonable legal expenses that it incurred in connection with this litigation. On August 4, 2004, the District Court found the ‘094 patent invalid. After various procedural matters, including interim appeals, in November 2005, the United States Court of Appeals for the Federal Circuit remanded the case back to the District Court for disposition. On March 8, 2006, the defendants filed a writ of certiorari in this matter with the Supreme Court of the United States to review the decision of the United States Court of Appeals for the Federal Circuit, which had overturned the District Court’s order for summary judgment in favor of the defendants. That writ of certiorari was denied. Charter filed a request with the United States Patent and Trademark Office on June 8, 2006 to re-examine the patent based on prior art references. On July 11, 2006, the District Court ordered a stay of the proceedings pending notice as to whether the re-examination request is accepted by the United States Patent and Trademark Office. On June 21, 2006, Charter filed a motion to stay the litigation pending completion of the Patent Office’s reexamination of the ‘094 patent. On July 11, 2006, the Court granted Charter’s motion and entered an order staying the case. On August 5, 2006, the United States Patent and Trademark Office ordered a re-examination of all of the patent’s claims. The case remains stayed. Based on the information available to us, we have established a reserve for costs and fees that may be incurred in connection with this matter. That reserve is an estimate only and actual costs may be materially different.

Other Matters. From time to time in the ordinary course of our business, we are also party to other legal proceedings or receive correspondence regarding potential or threatened legal proceedings. While we currently believe that the ultimate outcome of these other proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position or overall trends in our results of operations, legal proceedings are subject to inherent uncertainties.

 

Item 4. Submission of Matters to a Vote of Security Holders

None.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Market Information

Our Class A ordinary shares trade on The NASDAQ Global Market under the symbol “OPTV.” Our Class B ordinary shares are not publicly traded.

The following table lists the high and low sales prices for our Class A ordinary shares on The NASDAQ Global Market for the periods indicated.

 

     The NASDAQ
Global Market
     Low    High

2007

     

First Quarter

   $ 2.29    $ 2.85

Second Quarter

     2.00      2.65

Third Quarter

     1.19      2.25

Fourth Quarter

     0.93      1.68

2008

     

First Quarter

   $ 0.99    $ 1.49

Second Quarter

     1.07      1.65

Third Quarter

     1.10      2.11

Fourth Quarter

     0.87      1.44

Holders

As of February 27, 2009, there were approximately 728 holders of record of our Class A ordinary shares and one holder of record of our Class B ordinary shares. Banks, brokers and other institutions hold many of our Class A ordinary shares on behalf of our shareholders. The holder of our Class B ordinary shares is an affiliate of Kudelski SA.

Issuer Purchases of Equity Securities (1)

 

Period

   Total Number
of Shares
Purchased
   Average
Price Paid
per Share
   Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
   Maximum Dollar
Value of Shares that
May Yet Be
Purchased Under
the Plans or
Programs

November 2008

   481,382    $ 1.06    —      —  

December 2008

   874,242    $ 1.17    —      —  
                 

Total

   1,355,624    $ 1.13    —      —  
                 

 

(1) In order to offset the dilutive effect of potential future equity issuances to our employees, our board of directors authorized a limited repurchase of Class A ordinary shares in open market transactions on The NASDAQ Global Market. We completed the repurchase of an aggregate of 1,355,624 Class A ordinary shares in November and December 2008 in accordance with the authority granted by our board. These repurchases were not made pursuant to a publicly announced plan or program.

Dividends

We have never paid any cash dividends on our ordinary shares. We anticipate that any earnings in the foreseeable future will be retained to finance our business, and we have no current intention to pay cash

 

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dividends on our ordinary shares. The payment of dividends is within the discretion of our board of directors and will be dependent upon, among other factors, our results of operations, financial condition, capital requirements, legal requirements and any restrictions imposed by financing arrangements.

Stock Performance Graph

The following performance graph and related information shall not be deemed “soliciting material” or “filed” with the SEC, nor shall such information be incorporated by reference into any further filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent we specifically incorporate it by reference into such filing.

The graph below compares the cumulative total shareholder return on our Class A ordinary shares from December 31, 2003 through December 31, 2008, with the cumulative total return of The NASDAQ Composite Index and The NASDAQ Computer & Data Processing Index over the same period. These returns assume the investment of $100 in our Class A ordinary shares and in each of the other indices on December 31, 2003 and reinvestment of any dividends (of which we paid none during that period).

The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of our ordinary shares.

LOGO

 

     12/03    12/04    12/05    12/06    12/07    12/08

OpenTV Corp.

   100.00    114.97    67.07    69.46    39.52    36.83

NASDAQ Composite (1)

   100.00    110.08    112.88    126.51    138.13    80.47

NASDAQ Computer & Data Processing

   100.00    115.62    118.29    133.40    158.91    90.83

 

(1) In prior years, we used the NASDAQ Stock Market (U.S. Index), which was discontinued in 2006. Accordingly, we now use the NASDAQ Composite Index as a replacement for the discontinued index.

 

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Recent Sales of Unregistered Securities

We did not sell any securities during the year ended December 31, 2008 that were not registered under the Securities Act of 1933, as amended.

 

Item 6. Selected Financial Data

The selected consolidated financial data set forth below should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and notes thereto, included elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of results to be expected for any future period.

 

     Year Ended December 31,  
     2008    2007     2006     2005     2004  
     (In thousands, except per share amounts)  

Results of operations:

           

Revenues

   $ 116,474    $ 109,977     $ 95,210     $ 78,215     $ 66,101  

Cost of revenues

     44,053      48,059       40,996       27,782       30,433  
                                       

Gross profit

     72,421      61,918       54,214       50,433       35,668  

Operating expenses (1)

     66,146      66,995       64,435       61,692       58,918  
                                       

Profit (loss) from operations

   $ 6,275    $ (5,077 )   $ (10,221 )   $ (11,259 )   $ (23,250 )
                                       

Net income (loss) from continuing operations (2)

   $ 9,613    $ (306 )   $ (9,657 )   $ (6,869 )   $ (20,665 )

Net loss from discontinued operations (3)

     —        (4,855 )     (1,161 )     (1,604 )     (1,297 )
                                       

Net income (loss) from continuing operations (2)

   $ 9,613    $ (5,161 )   $ (10,818 )   $ (8,473 )   $ (21,962 )
                                       

Net income (loss) per share from continuing operations, basic and diluted (2)

   $ 0.07    $ —       $ (0.07 )   $ (0.06 )   $ (0.17 )

Net loss per share from discontinued operations, basic and diluted (3)

     —        (0.04 )     (0.01 )     (0.01 )     (0.01 )
                                       

Net income (loss) per share, basic and diluted

   $ 0.07    $ (0.04 )   $ (0.08 )   $ (0.07 )   $ (0.18 )
                                       

 

(1) 2008 included $575 for restructuring and impairment costs, $767 for impairment of intangible assets and $2,516 for share-based compensation;
   2007 included $267 for restructuring and impairment cost, and $3,267 for share-based compensation;
   2006 included $1,021 for restructuring and impairment cost, $747 for impairment of goodwill and $3,274 for share-based compensation;
   2005 included $2,545 for restructuring and impairment costs;
   2004 included $(4,600) for NASCAR amendment and $893 for restructuring and impairment costs.

 

(2) 2008 included a gain of $220 for the sale of a cost investment;
   2007 included a gain of $1,739 for the sale of a cost investment.

 

(3) 2007 included $66 of restructuring and impairment costs and $3,626 for impairment of goodwill of discontinued operations;
   2006 included $303 for restructuring and impairment costs.

 

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     As of December 31,
     2008    2007    2006    2005    2004
          (In thousands)     

Financial position:

              

Cash, cash equivalents and marketable securities

   $ 102,833    $ 81,814    $ 64,918    $ 63,510    $ 62,509

Working capital of continuing operations

   $ 97,301    $ 65,201    $ 48,427    $ 37,058    $ 19,282

Total assets of discontinued operations

   $ —      $ —      $ 6,673    $ 8,480    $ 8,914

Total assets

   $ 248,950    $ 220,055    $ 220,764    $ 202,065    $ 192,411

Total shareholders’ equity

   $ 192,864    $ 170,479    $ 167,831    $ 152,512    $ 145,175

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides information concerning our financial condition and results of operations for the year ended December 31, 2008. This discussion should be read in conjunction with our Consolidated Financial Statements and the notes thereto. Segment information appearing below in this discussion and analysis, and in Note 21 of our Consolidated Financial Statements, is presented in accordance with Financial Accounting Standards (SFAS) No.131 “Disclosures about Segments of an Enterprise and Related Information” (SFAS 131).

Overview of Our Business

We are one of the world’s leading providers of advanced digital television solutions dedicated to creating and delivering compelling viewing experiences to consumers of digital content worldwide. Our software enables cable, satellite, telecommunications and digital terrestrial operators, which we refer to as network operators, to offer enhanced television experiences to their viewers.

The majority of our revenue typically comes from one-time royalty fees paid by network operators or manufacturers of set-top boxes once a set-top box, which incorporates our software, has been shipped to or activated by the network operator. We also derive revenue from the licensing of related software and interactive content and applications associated with the delivery of digital and interactive television, as well as from licensing products that enable advanced advertising solutions. In addition, we receive professional services fees from consulting, systems integration and training engagements, fees for the maintenance and support of our products and fees from revenue sharing arrangements related to the use of our interactive content and applications.

Our revenue model may change over time. For example, we have signed subscription-based licensing agreements under which we receive monthly payments for each set-top box that includes our software that our customers deploy, for so long as those set-top boxes remain active. In addition, our technology and services are provided indirectly through distribution arrangements with key partners other than network operators and set-top box manufacturers, such as conditional access vendors, and we expect revenues generated from such distribution arrangements to increase over time.

Kudelski SA, directly and indirectly through its subsidiaries, beneficially owns Class A and Class B ordinary shares of our company collectively representing approximately 32.3% of the economic interest and approximately 77.2% of the voting interest in our company, based on the number of our ordinary shares outstanding as of December 31, 2008.

Recent Events

On February 27, 2009, we received a non-binding proposal from Kudelski SA to acquire all of our Class A ordinary shares that are not currently owned by Kudelski or its affiliates. On March 4, 2009, our board of directors appointed a special committee consisting of three independent directors to review the proposal.

 

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Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. In preparing these Consolidated Financial Statements, we made our best estimates and judgments, which are normally based on knowledge and experience with regard to past and current events and assumptions about future events, giving due consideration to materiality. Actual results could differ materially from these estimates under different assumptions or conditions.

We believe the following critical accounting policies and estimates have the greatest potential impact on our Consolidated Financial Statements: revenue recognition, valuation allowances (specifically the allowance for doubtful accounts and deferred tax assets), impairment of goodwill and long-lived assets, restructuring costs, share-based compensation and fair value measurement. All of these accounting policies and estimates, together with their underlying assumptions, and their impact on our financial statements, have been discussed with the audit committee of our board of directors.

Revenue Recognition

We recognize revenue in accordance with GAAP as has been prescribed for the software industry, the principal policies of which are reflected in American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, “Software Revenue Recognition” (SOP 97-2), SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (SOP 81-1) and Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition” (SAB 104). Revenue recognition requirements in the software industry are very complex and are subject to change. Our revenue recognition policy is one of our critical accounting policies because revenue is a key component of our results of operations and is based on complex rules that require us to make judgments and estimates. The application of SOP 97-2 requires judgment about a number of matters, including whether a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence of fair value of the elements of the arrangement exists. In applying our revenue recognition policy, we must determine which portions of our revenue to recognize currently and which portions to defer and recognize in later periods. In some cases, we may be required to record the costs incurred in connection with our performance of a software licensing arrangement before we are able to recognize the revenue generated by such arrangement, even if we have invoiced the customer or received payment from the customer. In other cases, we may be required to record costs incurred in connection with our performance of a software licensing arrangement in the same manner as we would for cost of inventory, in which case we would charge those costs to operations over time as the related revenue is recognized. In order to determine current and deferred revenue, we make judgments and estimates with regard to products and services that constitute future deliverables and the appropriate valuation for those products and services. Our judgments and estimates regarding future deliverables could differ from actual events. Because the terms of our licensing arrangements may differ by customer, including subscription-based or one-time royalty payment arrangements, we may apply different revenue recognition policies to different customer contracts depending upon those particular terms.

For fixed bid contracts under the percentage of completion method, the extent of progress towards completion is measured based on actual costs incurred to total estimated costs. The actual results could differ from the percentage estimates by the time a project is complete.

In addition, the recognition of revenues is impacted by our assessment of the probability of collection of the resulting accounts receivable, which is based on, among other things, the commercial and financial condition of the relevant customer, payment history and general economic conditions. As a result, depending upon the particular facts and circumstances surrounding the particular accounts receivable, the timing or amount of revenue recognized may differ depending upon our assessment of the probability of collection at the time the associated transaction is recorded in revenue.

 

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Valuation Allowances

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

We also record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We consider our potential future taxable income and ongoing prudent and feasible tax planning strategies in assessing the amount of our valuation allowance. Currently, we maintain a partial valuation allowance on deferred tax assets. Adjustments may be required in the future if our estimate of the realizable amount of deferred tax assets changes.

Impairment of Goodwill and Long-lived Assets

Our long-lived assets include goodwill, property and equipment, other assets and other intangible assets, which are reviewed for impairment whenever facts and circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill is reviewed for impairment at least annually. In estimating the fair value of our reporting units and assessing the recoverability of our long-lived assets, we consider changes in economic conditions and make assumptions regarding estimated future cash flows and other factors. The most significant assumption impacting estimated future cash flows is revenue. Estimates of future cash flows are highly subjective judgments that can be significantly impacted by changes in global and local business and economic conditions, operating costs, competition and demographic trends. If our estimates or underlying assumptions change in the future, we may be required to record additional impairment charges.

Restructuring Costs

We continuously monitor our organizational structure and associated operating expenses. Depending upon events and circumstances, actions may be taken periodically to restructure the business. Restructuring activities may include terminating employees, abandoning excess office space and incurring other exit costs. Any resulting restructuring costs depend on numerous estimates made by us based on our knowledge of the activity being affected, the cost to exit existing commitments and fair value estimates. These estimates could differ from actual results. We monitor the initial estimates periodically and record an adjustment for any significant changes in estimates.

Share-Based Compensation

We use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of share-based compensation awards on the date of grant using an option pricing model is affected by our share price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected share price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. While we believe that our assumptions are reasonable, actual experience may differ materially from our assumptions. If factors change and we employ different assumptions for estimating share-based compensation expense in future periods or if we decide to use a different valuation model, the expense in future periods may differ significantly from what we have recorded in the current period and could materially affect our operating income, net income and net income per share.

The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not present in our option grants. Existing valuation models, including the Black-Scholes and binomial lattice models, may not provide reliable measures of the fair values of our share-based compensation. Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may bear little resemblance to the

 

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actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based awards in the future. Certain share-based awards, such as employee stock options, may expire without any value having been realized by the employee, notwithstanding the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, values may be realized from these instruments that are significantly higher than the fair values originally estimated on the grant date and reported in our financial statements. There is currently no widely accepted market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values.

The guidance in SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)) and SAB No. 107, “Interaction Between FASB Statement No. 123(R), and Certain SEC Rules and Regulations Regarding the Valuation of Share-based Payment Arrangement for Public Companies,” (SAB 107) is relatively new. The application of these principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models in the future. This may materially affect the fair value estimates of future share-based awards, which may result in a lack of consistency with prior periods. It may also result in a lack of comparability with other companies that use different models, methods and assumptions.

See Note 14 of our Consolidated Financial Statements contained in Part IV of this Annual Report on Form 10-K for further information regarding the impact of SFAS 123(R) on our financial statements.

Fair Value Measurement

The reported amounts of our financial instruments, including cash and cash equivalents, short-term marketable debt securities, accounts receivable (net of the allowance for doubtful accounts), accounts payable and accrued liabilities, approximate fair value due to their short maturities.

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, “Fair Value Measures” (SFAS 157). SFAS 157 provides guidance for using fair value to measure assets and liabilities and applies whenever other standards require or permit assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. SFAS 157 is effective for fiscal years that began after November 15, 2007 and interim periods within those fiscal years.

In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, “Effective Date of FASB Statement No. 157” (FSP FAS 157-2). FSP FAS 157-2 defers the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years and interim periods within those fiscal years beginning after November 15, 2008.

We adopted SFAS 157 as of January 1, 2008, with the exception of the application of the statement to non-recurring nonfinancial assets and nonfinancial liabilities. The adoption of SFAS 157 did not have a significant impact on our financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 provides the option to report certain financial assets and liabilities at fair value, with the intent to mitigate volatility in financial reporting that can occur when related assets and liabilities are recorded on different bases. Unrealized gains and losses on items for which the fair value option is elected would be reported in earnings. SFAS 159 is effective for fiscal years that began after November 15, 2007. We adopted SFAS 159 as of January 1, 2008. We currently do not have any additional financial instruments or other items that are eligible for election of the fair value option. Therefore, the adoption of SFAS 159 did not have a significant impact on our financial statements.

 

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In October 2008, the FASB issued FSP FAS 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP FAS 157-3). FSP FAS 157-3 clarifies the application of SFAS No. 157 in a market that is not active and addresses application issues such as the use of internal assumptions when relevant observable data does not exist, the use of observable market information when the market is not active and the use of market quotes when assessing the relevance of observable and unobservable data. FSP FAS 157-3 is effective for all periods presented in accordance with SFAS 157. The guidance in FSP FAS 157-3 is effective immediately and did not have an impact on our financial statements upon adoption.

Recent Accounting Pronouncements

In January 2009, the FASB issued FSP Emerging Issues Task Force (EITF) 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20” (FSP EITF 99-20-1). FSP EITF 99-20-1 amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets.” The FASB believes this guidance will achieve a more consistent determination of whether an other-than-temporary impairment has occurred. FSP EITF 99-20-1 also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and other related guidance. FSP EITF 99-20-1 is effective for interim and annual reporting periods ending after December 15, 2008 and shall be applied prospectively. Retrospective application to a prior interim or annual reporting period is not permitted. The adoption of FSP EITF 99-20-1 did not have a material impact on our financial statements.

In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF 03-6-1). FSP EITF 03-6-1 provides that unvested share-based compensation awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform to the provisions in FSP EITF 03-6-1. Early application of FSP EITF 03-6-1 is prohibited. We do not expect FSP EITF 03-6-1 to have a material impact on our financial statements.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets” (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). The intent of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (Revised 2007), “Business Combinations” (SFAS 141(R)) and other related rules under GAAP. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Early adoption is prohibited. We continue to evaluate the impact of the adoption of FSP FAS 142-3 on our financial statements.

In December 2007, the FASB issued SFAS 141(R). Under SFAS 141(R), an acquiring entity will be required to recognize all of the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141(R) will significantly change the accounting for business combinations. SFAS 141(R) also includes a substantial number of new disclosure requirements. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after commencement of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. We continue to evaluate the impact of the adoption of SFAS 141(R) on our financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial StatementsAn Amendment of ARB No. 51” (SFAS 160). SFAS 160 establishes new accounting and reporting

 

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standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years. Early adoption is prohibited. We do not expect SFAS 160 to have a material impact on our financial statements.

In December 2007, the EITF issued Issue No. 07-1, “Accounting for Collaborative Arrangements” (EITF 07-1). EITF 07-1 requires that transactions with other parties in connection with qualifying collaborative arrangements (i.e., revenue generated and costs incurred by such parties) be reported in the appropriate line item in each company’s financial statements pursuant to the guidance in EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” EITF 07-1 also includes enhanced disclosure requirements regarding the nature and purpose of the arrangement, rights and obligations under the arrangement, applicable accounting policies, amounts involved and income statement classification of transactions between the parties. EITF 07-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and shall be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. We continue to evaluate the impact of the adoption of EITF 07-1 on our financial statements.

Management’s Assessment of Internal Control Over Financial Reporting and Disclosure Controls

In connection with the preparation of our year-end financial statements, we have prepared a report, as required by the Sarbanes-Oxley Act of 2002, which evaluates our internal control over financial reporting as of December 31, 2008. That complete report, as well as our conclusions regarding the effectiveness of our disclosure controls and our remediation efforts, if any, are included under Item 9A of this Annual Report on Form 10-K, which investors should read in its entirety.

We are required to establish and maintain adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934, as amended. Those controls are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. While those controls may be expected to provide reasonable assurances regarding the reliability of our financial reporting, we do not expect that such controls will prevent all errors and fraud. We monitor our controls and maintain those controls as dynamic systems that change (including improvements and corrections) as conditions warrant.

As we assessed our internal control over financial reporting, we sought to identify various deficiencies or weaknesses that we may have and, if any were identified, to correct those deficiencies or weaknesses as promptly as practicable. We are required to disclose any material weaknesses that we have identified. The Public Company Accounting Oversight Board, which was established under the Sarbanes-Oxley Act, defines a “material weakness” as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

We also maintain a system of disclosure controls that have been designed with the objective of ensuring that information required to be disclosed in the reports we file under the Securities Exchange Act of 1934, as amended, including this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.

As more fully described in Item 9A of this Annual Report on Form 10-K, based on our assessment, we have concluded that our internal control over financial reporting and our system of disclosure controls were effective as of December 31, 2008 and 2007, respectively.

 

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Results of Operations for the Years Ended December 31, 2008, 2007 and 2006

Revenues

We have entered into commercial arrangements involving both product licenses and service elements that are bundled together. Under GAAP, revenues from such bundled offerings have been allocated to the “Royalties and licenses” and “Services and other” revenue line items based on the relative fair values of the product and service elements in each of the contracts. Our determination of the relative fair values of these elements is based on the relative amounts of the fees we charge our customers for the product licenses and service elements, as set forth in each of the applicable contracts.

Revenues for the year ended December 31, 2008 were $116.5 million, an increase of $6.5 million, or 6%, from $110.0 million in 2007. Revenues for the year ended December 31, 2007 were $110.0 million, an increase of $14.8 million, or 16%, from $95.2 million in 2006.

Revenues by line item were as follows (in millions, except percentages):

 

     Year Ended December 31,   Change
     2008    2007    2006  

2008 versus 2007

   2007 versus 2006

Royalties and licenses

   $ 77.1    $ 73.7    $ 65.9   $ 3.4          5%    $ 7.8     12% 

Services and other

     39.4      36.3      29.3     3.1    9%      7.0    24% 
                                       

Total revenues

   $ 116.5    $ 110.0    $ 95.2   $ 6.5    6%    $ 14.8    16% 
                                       

Royalties and licenses

We generally derive royalties from the sale of set-top boxes and other products that incorporate our software. Royalties are typically paid by either the network operator or the set-top box manufacturer depending upon our payment arrangements with those customers, and we have historically recognized revenues through one-time royalty payments or ongoing license fees. We recognize royalties upon receipt of royalty reports reflecting unit shipments or activation of our software by network operators or manufacturers. Royalty reports are generally received one quarter in arrears. For non-refundable prepaid royalties, we recognize revenues upon initial delivery of the software to our customers. We also license our technology and services indirectly through distribution arrangements with key partners other than network operators and set-top box manufacturers, such as conditional access vendors, who pay the applicable license and royalty fees directly to us on behalf of the network operator or set-top box manufacturer. We have also entered into license agreements with network operators who pay us under a subscription-based model pursuant to which we are paid a monthly fee for each set-top box that is shipped or deployed commercially by the network operator for so long as that box remains in use by the network operator. We expect to continue offering this licensing model in the future and expect to derive a greater percentage of our revenues from subscriber-based fees.

The aggregate amount of royalties we receive from our customers during a quarterly period is influenced by a number of factors. In the case of our set-top box software, these include: initial deployments by new customers, the activation of new subscribers by existing customers, the shipment of additional set-top boxes as replacements for older or defective set-top boxes or for purposes of simply upgrading existing set-top boxes, and sales of new products or services by the network operators that require new or updated set-top boxes. We have historically provided various types of prospective volume discounts on optional future deployments of our licensed middleware products based on the volume of the customer’s previous deployments of the particular licensed products, and we expect to continue to do so in the future. Unless we are able to offset anticipated discounts through a change in product mix, upgrades to our software or other methods which enable us to charge higher fees, we may experience slower royalty growth as discounting is triggered.

A significant portion of our revenues is dependent upon our customers’ subscriber base, the growth in their subscriber base, and the related quantities of set-top boxes deployed with our software. Specific royalty trends

 

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associated with set-top box deployments by our customers are difficult to discern in many cases as we do not control or directly influence actual deployment schedules of our customers. However, our general experience in the past suggests that set-top box deployments by our customers tend to be stronger in the third and fourth quarters of the calendar year, though many factors, such as the general economic climate and the specific financial condition of our customers, can influence the actual level of set-top box deployments at any given time. Because we receive most of our royalty reports one quarter in arrears, our royalty revenues in the past have generally been higher in the first and fourth quarters of the calendar year, though our revenues in 2009 and beyond may be negatively impacted if our customers reduce deployments of our products due to the recent deterioration in worldwide economic conditions.

We also derive fees from the licensing of other software products, such as OpenTV Streamer, our campaign management solution known as EclipsePlus, and OpenTV Participate. These license fees can be in the form of one-time, upfront payments by our customers, the total of which can vary significantly from quarter to quarter, or can be in the form of a recurring license fee, the total of which is less likely to vary significantly from quarter to quarter.

Royalties and licenses revenues by region were as follows (in millions, except percentages):

 

     Year Ended December 31,     Change
     2008     2007     2006     2008 versus 2007    2007 versus 2006

Europe, Middle East and Africa

   $ 39.1     $ 42.4     $ 32.3     $ (3.3 )   (8)%    $ 10.1     31% 

Americas

     18.3       18.3       23.3       —       —  %       (5.0 )   (21)%

Asia Pacific

     19.7       13.0       10.3       6.7     52%       2.7     26% 
                                             

Total royalties and licenses revenues

   $ 77.1     $ 73.7     $ 65.9     $ 3.4     5%     $ 7.8     12% 
                                             

As percentage of total revenues

     66 %     67 %     69 %         

2008 versus 2007. Royalties and licenses revenues in 2008 increased $3.4 million, or 5%, to $77.1 million.

 

   

Europe, Middle East and Africa accounted for $39.1 million in royalties and licenses revenue in 2008, a decrease of $3.3 million, or 8%, as compared to 2007.

BSkyB, directly and indirectly through our set-top box manufacturer customers who sell set-top boxes to BSkyB, accounted for $17.9 million, or 23%, of our total worldwide royalties and licenses revenues for 2008. BSkyB royalties and licenses revenues increased by $0.7 million compared to 2007, primarily as a result of increased deployments by BSkyB of our PVR software. We typically generate higher royalty rates from set-top boxes that include our PVR software, and we generally expect the number of PVR shipments to increase over time as network operators around the world seek to deploy more PVR functionality. Royalties and licenses revenues from UPC Broadband Holdings, or UGC, decreased $7.4 million in 2008 as compared to 2007. During the fourth quarter of 2007, we amended some of the commercial and other terms of our license agreement with UGC and, in addition, delivered the final remaining licensed products, which allowed us to recognize $6.0 million of revenue from deferred revenue that has been deferred since 2004. In addition, during 2008 UGC maintained an inventory of set-top boxes containing our software, which negatively impacted new shipments to this customer for which we would receive royalties. We expect the impact of inventory levels at UGC on our royalties and licenses revenues to diminish beginning in 2009. Royalties and licenses revenues from Sky Italia increased $1.9 million as compared to 2007, primarily due to an increase in set-top box deployments by this customer. Royalties and licenses revenues from Multichoice Africa increased $1.8 million as compared to 2007, primarily due to a recent upgrade by this customer to our latest OpenTV Core2 middleware product and increased deployments of set-top boxes containing this product. The remaining decrease in royalties and licenses revenues of $0.3 million resulted from lower volumes of deployments of our products by other customers.

 

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The Americas region accounted for $18.3 million in royalties and licenses revenue in 2008, consistent with 2007.

EchoStar, including DISH Network and EchoStar Technologies LLC, accounted for $4.4 million, or 6%, of our total worldwide royalties and licenses revenues for 2008. Royalties and licenses revenues from EchoStar declined $3.4 million as compared to 2007, primarily due to reduced deployments by DISH Network of set-top boxes containing our software, as well as the receipt of a late royalty report from EchoStar during the first quarter of 2009 for set-top boxes that were shipped during 2008. Royalties and licenses revenues from Bell TV (formerly Bell ExpressVu) in Canada decreased $0.5 million as compared to 2007. This decrease was primarily due to an amendment to our license agreement with Bell TV entered into during the first quarter of 2007 that converted the pricing model from an upfront royalty to a recurring subscription fee per set-top box, payable over the term of the customer’s use of the set-top box incorporating our middleware. We expect the cumulative per set-top box subscription fees paid by Bell TV over the expected period of use of the set-top box to more than compensate for the relative difference between the amount of the prior upfront royalty and the recurring subscription fee. These reductions in royalties and licenses revenues were partially offset by increased royalties and licenses revenues from NET in Brazil of $2.1 million, as compared to 2007, reflecting increased deployments of middleware-related products by this customer, and an increase of $1.1 million in license fees resulting from increased deployments by our customers of our advertising campaign management product. Royalties and licenses revenues from other customers in the region accounted for a net increase of $0.7 million compared to 2007 due to higher volumes of deployments of our products.

 

   

The Asia Pacific region accounted for $19.7 million in royalties and licenses revenues in 2008, an increase of $6.7 million, or 52%, as compared to 2007.

Royalties and licenses revenues from Reliance in India, which we started to receive in 2008 through our license and distribution agreement with Nagravision, totaled $6.1 million in 2008 and was comprised of royalty payments and a one-time license fee for our enterprise software. Royalties and licenses revenues from Austar in Australia increased $1.6 million in 2008 as compared to 2007, primarily due to the receipt of a late royalty report during the first quarter of 2008 for set-top boxes that were shipped during 2007 but not previously reported to us. Royalties and licenses revenues from JCOM in Japan decreased $0.8 million compared to 2007 due to a royalty prepayment in 2007 for deployments of our video-on-demand product. Royalties and licenses revenues from other customers accounted for a net decrease of $0.2 million due to lower volumes of deployments of our products.

2007 versus 2006. Royalties and licenses revenues for 2007 increased $7.8 million, or 12%, to $73.7 million.

 

   

Europe, Middle East and Africa accounted for $42.4 million in royalties and licenses revenue in 2007, an increase of $10.1 million, or 31%, compared to 2006.

During the fourth quarter of 2007, we delivered the final remaining licensed products to UGC and amended some of the commercial and other terms of our license agreement with this customer, which resulted in the recognition of $9.9 million in royalties and licenses revenue from UGC, including $6.0 million of previously deferred revenue. UGC revenues accounted for 13% of our total worldwide royalties and licenses revenues in 2007. BSkyB directly and indirectly, primarily through three of our customers who sell set-top boxes to BSkyB, accounted for $17.2 million, or 23%, of our total worldwide royalties and licenses revenues in 2007. BSkyB royalties and licenses revenues increased by $3.6 million compared to 2006, primarily as a result of increased shipments of our software, particularly our PVR software, to this customer. These increases were partially offset by a decrease in royalties and licenses revenues from other customers of $3.4 million, resulting from lower volumes of deployments by such customers.

 

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The Americas region accounted for $18.3 million in royalties and licenses revenues in 2007, a decrease of $5.0 million, or 21%, compared to 2006.

EchoStar, including DISH Network and EchoStar Technologies Corporation, accounted for $7.7 million, or 10%, of our total worldwide royalties and licenses revenues in 2007. EchoStar royalties and licenses revenues declined $4.2 million as compared to 2006 due to reduced set-top box shipments and a reduction in amortization of deferred royalties as compared to 2006. Our 2006 revenues had included the amortization of historic royalty payments we had received from EchoStar, which were being amortized over the original seven-year term of the middleware license agreement. The middleware license agreement is currently renewable on an annual basis, and we now amortize revenues from EchoStar over the applicable one-year renewal term. Royalties and licenses revenues from Bell TV in Canada declined $2.8 million as compared to 2006, primarily as a result of an amendment to our license agreement with Bell TV entered into during the first quarter of 2007 that converted the pricing model from an upfront royalty to a recurring subscription fee per set-top box. These reductions in royalties and licenses revenues were partially offset by increased royalties and licenses revenues from NET in Brazil of $1.8 million, as compared to 2006, reflecting increased deployments of our middleware products as well as an increase of $0.7 million from increased deployment of our advertising campaign management solution in the United States. Royalties and licenses revenues from other customers in the region accounted for a net decrease of $0.5 million compared to 2006 due to lower volumes of deployments of our products.

 

   

The Asia Pacific region accounted for $13.0 million in royalties and licenses revenues in 2007, an increase of $2.7 million, or 26%, compared to 2006.

Royalties and licenses revenues from JCOM increased $1.3 million due to additional deployments of our video-on-demand products by JCOM beginning in the second quarter of 2007. Sales of our OpenTV Integrated Browser product increased $1.6 million in 2007, as compared to 2006, reflecting increased device sales by our customers. Increased royalty revenues from FOXTEL, for whom we first started recognizing revenues from middleware shipments during the second quarter of 2006, accounted for an increase of $1.5 million in 2007. These increases were partially offset by the one-time recognition of $1.2 million in license revenues from PartiTV during 2006 pursuant to a contract that was terminated in the third quarter of 2006. Royalties and licenses revenues from other customers accounted for a net decrease of $0.5 million due to fewer deployments of our products.

Services and other

Services and other revenues are primarily generated from professional services, maintenance and support, training, service usage fees, revenue sharing arrangements, and programming fees. Professional services revenues are generally derived from deployment and integration consulting engagements for network operators, set-top box manufacturers, and systems integrators. Service usage fees and revenue sharing arrangements were historically derived from our PlayMonteCarlo gaming channel, which was sold in the fourth quarter of 2006, and from revenue sharing arrangements for our advertising and other interactive services. We also derived programming fees in 2006 from our NASCAR service agreement, which was not renewed for the 2007 season, and from other programmers.

Maintenance and support and training revenues are generally realized as services are provided to network operators and set-top box manufacturers. A set-top box manufacturer’s decision to purchase maintenance and support from us depends largely on whether such manufacturer is actively shipping set-top boxes with our software or reasonably expects to do so in quantities large enough to justify payment of these amounts, which, in both cases, is dependent upon such manufacturer’s supply contracts with network operators and set-top box demand by the network operator.

 

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Services and other revenues were as follows (in millions, except percentages):

 

     Year Ended December 31,     Change
     2008     2007     2006     2008 versus 2007    2007 versus 2006

Total services and other revenues

   $ 39.4     $ 36.3     $ 29.3      $ 3.1      9%      $ 7.0      24%

As percentage of total revenues

     34 %     33 %     31 %           

2008 versus 2007. Services and other revenues for 2008 increased $3.1 million, or 9%, to $39.4 million.

Services and other revenues from Multichoice Africa, Numericable, Reliance and SKY Perfect increased by $3.8 million, $1.8 million, $0.8 million and $0.6 million, respectively, primarily due to an increase in professional services engagements with those customers during 2008. Maintenance and support revenues increased by $4.3 million as compared to 2007, which included an increase of $2.2 million as a result of increased deployments in the United States of our advertising campaign management product. The increases were offset by a decrease of $7.6 million from UGC due to a decrease in professional services engagements with this customer during 2008 and a decrease of $0.6 million from other customers.

2007 versus 2006. Services and other revenues for 2007 increased $7.0 million, or 24%, to $36.3 million.

Services and other revenues from UGC increased $7.9 million in 2007, of which $4.8 million represented amounts deferred since 2004 and recognized as a result of the contract amendment entered into between the parties and final delivery of all remaining licensed products during the fourth quarter of 2007. The remainder of the increase was generated from discrete professional service projects in 2007 and maintenance and support contracts. Professional services and maintenance and support revenues from JCOM increased $3.0 million from 2006 resulting from a new project that began during 2007. Professional services and maintenance and support revenues from FOXTEL increased $1.1 million from 2006 as a result of increased professional services projects and a full year of maintenance and support revenues recognized in 2007. Maintenance and support revenues relating to our advertising campaign management product increased $0.5 million as compared to 2006 due to increased deployments of that product. These increases were offset by a decrease of $1.1 million from other customers due to the completion of some significant development and integration service engagements in 2006, a decrease of $1.9 million in NASCAR service revenue as our service agreement was not renewed for the 2007 season, and a decrease of $2.5 million in PlayMonteCarlo revenue resulting from the sale of our PlayMonteCarlo betting and gaming channel in the fourth quarter of 2006.

Cost of Royalties and Licenses

Cost of royalties and licenses consists primarily of materials and shipping costs, cost of revenue share payments, amortization of developed technology and patents, and patent-related legal costs. Cost of royalties and licenses was as follows (in millions, except percentages):

 

     Year Ended December 31,     Change
     2008     2007     2006     2008 versus 2007    2007 versus 2006

Cost of royalties and licenses

   $ 5.0     $ 5.1     $ 7.8     $ (0.1)    (2)%    $ (2.7)    (35)%

As percentage of total revenues

     4 %     5 %     8 %           

2008 versus 2007. Cost of royalties and licenses for 2008 decreased $0.1 million, or 2%, to $5.0 million. As a percentage of revenues, cost of royalties and licenses decreased to 4% in 2008 compared to 5% in 2007. The decreases were primarily due to a decrease of $1.7 million in the amortization of developed technologies and patents reflecting the full amortization of some of our developed technologies and patents, and a $0.6 million decrease in revenue share payments made by us. These decreases were partially offset by a $0.7 million increase in patent-related legal costs. In addition, patent-related legal costs in 2007 were favorably impacted by a litigation settlement during the fourth quarter of 2007 that resulted in a $1.5 million payment to us.

 

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2007 versus 2006. Cost of royalties and licenses for 2007 decreased $2.7 million, or 35%, to $5.1 million. As a percentage of revenues, cost of royalties and licenses decreased to 5% in 2007 compared to 8% in 2006. The decreases were primarily due to the impact on our patent-related legal costs of a $1.5 million favorable litigation settlement received in the fourth quarter of 2007 and a $0.6 million decrease in the amortization of developed technologies and patents reflecting the full amortization of some of our developed technologies and patents.

Cost of Services and Other

Cost of services and other consists primarily of personnel and personnel-related support costs associated with maintenance and support, professional services engagements, consulting and subcontractor costs, third party material costs, depreciation and network infrastructure and bandwidth costs of our PlayMonteCarlo gaming business, which was sold in the fourth quarter of 2006. Cost of services and other was as follows (in millions, except percentages):

 

     Year Ended December 31,     Change
     2008     2007     2006     2008 versus 2007    2007 versus 2006

Cost of services and other

   $ 39.1     $ 42.9     $ 33.2     $ (3.8)    (9)%    $9.7      29%

As percentage of total revenues

     34 %     39 %     35 %           

2008 versus 2007. Cost of services and other for 2008 decreased $3.8 million, or 9%, to $39.1 million. As a percentage of revenues, cost of services and other decreased to 34% in 2008 as compared to 39% in 2007. The decreased expenses were primarily due to a decrease of $6.3 million in consulting and subcontractor costs, which was partially offset by an increase of $1.8 million in personnel and personnel-related support costs, reflecting the effect of management’s efforts to reduce overall costs for outside consultants and subcontractors. The increased personnel and personnel-related support costs included the impact of foreign currency translation on our costs that are denominated in foreign currencies, which was due to the weakening of the United States dollar during a significant portion of 2008. The decrease was further offset by a $0.6 million reserve that we recorded in the fourth quarter of 2008 in connection with a contract dispute with a customer.

2007 versus 2006. Cost of services and other for 2007 increased $9.7 million, or 29%, to $42.9 million. As a percentage of revenues, cost of services and other increased to 39% in 2007 as compared to 35% in 2006. An increase in personnel and personnel-related support costs accounted for $4.6 million of the total increase, resulting from the need to increase staffing for new and ongoing projects in 2007. In addition, we experienced an increase of $6.1 million in consulting and subcontractor costs in 2007 associated with staffing professional service engagements. These increases were offset by a decrease of $1.2 million in network infrastructure and bandwidth costs in 2007, which reflected the sale of our PlayMonteCarlo gaming business in the fourth quarter of 2006 and the non-renewal of our NASCAR contract in 2007.

Research and Development

Research and development expenses consist primarily of personnel and personnel-related support costs and consulting and subcontractor costs incurred for both new product development and enhancements to our existing software products and applications. Research and development remains important to our long-term growth strategy. We will continue to focus on the timely development of new and enhanced interactive television and advanced advertising products for our customers, and we plan to continue investing at levels that we believe are sufficient to develop our technologies and product offerings.

Research and development expenses were as follows (in millions, except percentages):

 

     Year Ended December 31,     Change
     2008     2007     2006     2008 versus 2007    2007 versus 2006

Research and development

   $ 34.4     $ 32.7     $ 30.7     $1.7         5%    $2.0        7%

As percentage of total revenues

     30 %     30 %     32 %           

 

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2008 versus 2007. Research and development expenses for 2008 increased $1.7 million, or 5%, to $34.4 million. As a percentage of revenues, research and development expenses remained consistent with 2007 at 30%. The increased expenses were primarily due to an increase of $1.9 million in personnel and personnel-related support costs, which included the impact of foreign currency translation on our costs denominated in foreign currencies due to the overall weakening of the United States dollar during a significant portion of 2008. The increase was partially offset by a decrease of $0.2 million in other non-personnel costs.

2007 versus 2006. Research and development expenses for 2007 increased $2.0 million, or 7%, to $32.7 million. As a percentage of revenues, research and development expenses decreased to 30% in 2007 as compared to 32% in 2006. The increased expenses were primarily due to an increase of $1.4 million in personnel and personnel-related support costs associated with increased staffing, and an increase of $0.6 million in other non-personnel costs.

Sales and Marketing

Sales and marketing expenses consist primarily of personnel and personnel-related support costs, consulting and subcontractor costs, and marketing-related expenses. Sales and marketing expenses were as follows (in millions, except percentages):

 

     Year Ended December 31,     Change
     2008     2007     2006     2008 versus 2007    2007 versus 2006

Sales and marketing

   $ 9.4     $ 10.8     $ 11.9     $ (1.4 )   (13)%    $ (1.1)    (9)%

As percentage of total revenues

     8 %     10 %     13 %          

2008 versus 2007. Sales and marketing expenses in 2008 decreased $1.4 million, or 13%, to $9.4 million. As a percentage of revenues, sales and marketing expenses decreased to 8% in 2008 as compared to 10% in 2007. The decrease resulted from a decrease of $0.8 million in personnel and personnel-related support costs, a decrease of $0.3 million in marketing program costs, a decrease of $0.1 million in consulting and subcontractor costs, and a decrease of $0.2 million in other costs.

2007 versus 2006. Sales and marketing expenses in 2007 decreased $1.1 million, or 9%, to $10.8 million. As a percentage of revenues, sales and marketing expenses decreased to 10% in 2007 as compared to 13% in 2006. The decrease was primarily due to a decrease of $0.4 million in personnel and personnel-related support costs and a decrease of $0.7 million in marketing program costs.

General and Administrative

General and administrative expenses consist primarily of personnel and personnel-related support costs, including for our executives and our board of directors, consulting and subcontractor costs, fees for professional services, including legal and accounting fees, and provision for doubtful accounts. General and administrative expenses were as follows (in millions, except percentages):

 

     Year Ended December 31,     Change
     2008     2007     2006     2008 versus 2007    2007 versus 2006

General and administrative

   $ 20.3     $ 21.6     $ 18.0     $ (1.3)    (6)%    $3.6       20%

As percentage of total revenues

     17 %     20 %     19 %           

2008 versus 2007. General and administrative expenses for 2008 decreased $1.3 million, or 6%, to $20.3 million. As a percentage of revenues, general and administrative expenses decreased to 17% in 2008 as compared to 20% in 2007. The decrease was primarily due to a decrease of $1.5 million in personnel and personnel-related support costs. 2007 was impacted by one-time severance and other costs of $2.0 million that were recorded in connection with the departure of some of our former senior executive officers. The decrease in

 

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2008 also reflected a decrease of $0.2 million in provisions for doubtful accounts. The decreases were partially offset by an increase of $0.4 million in consulting and subcontractor costs and fees for professional services.

2007 versus 2006. General and administrative expenses for 2007 increased $3.6 million, or 20%, to $21.6 million. As a percentage of revenues, general and administrative expenses increased to 20% in 2007 as compared to 19% in 2006. The increase was primarily due to an increase of $2.4 million in personnel and personnel-related support costs, which included severance and other costs of $2.0 million recorded in connection with the departure of some of our former senior executive officers. 2007 was also impacted by an increase of $0.6 million in provisions for doubtful accounts and an increase of $0.5 million related to administrative fees.

Restructuring and Impairment Costs

Restructuring and impairment costs were as follows (in millions, except percentages):

 

     Year Ended December 31,     Change
     2008     2007     2006     2008 versus 2007    2007 versus 2006

Restructuring and impairment costs

   $ 0.6     $ 0.3     $ 1.0     $ 0.3    100%    $ (0.7)    (70)%

As percentage of total revenues

     1 %     —   %     1 %           

During the last three years, we have undertaken several initiatives to reduce operating expenses around the world. As a result of these actions, 31 employees were included in workforce reduction plans in 2008, eight employees in 2007, and five employees in 2006. We recorded restructuring charges of $0.6 million in 2008, which reflected a second quarter workforce reduction in the United States, Singapore and Israel. In 2007, we recorded restructuring charges of $0.3 million, which reflected a fourth quarter workforce reduction in the United States and the United Kingdom. In 2006, we recorded restructuring charges of $1.0 million, which included a fourth quarter restructuring provision of $0.1 million related to the workforce reduction of our PlayMonteCarlo operations in the United Kingdom and $0.9 million related to a plan to terminate three senior executives in our United States corporate headquarters.

Amortization of Intangible Assets

Intangible assets are amortized on a straight-line basis over the estimated useful life of three to 13 years. As noted above, cost of royalties and licenses includes amounts relating to the amortization of developed technologies and patents. Amortization of intangible assets, excluding these developed technologies and patents, was as follows (in millions, except percentages):

 

     Year Ended December 31,     Change
     2008     2007     2006     2008 versus 2007    2007 versus 2006

Amortization of intangible assets

   $ 0.7     $ 1.6     $ 2.1     $ (0.9)    (56)%    $ (0.5)    (24)%

As percentage of total revenues

     1 %     1 %     2 %           

2008 versus 2007. Amortization of intangible assets for 2008 decreased $0.9 million, or 56%, to $0.7 million. The decrease resulted from the expiration of the amortization period during the third quarter of 2007 for some intangible assets relating to Wink Communications, Inc., which we acquired in the fourth quarter of 2002.

2007 versus 2006. Amortization of intangible assets for 2007 decreased $0.5 million, or 24%, to $1.6 million. The decrease resulted from the expiration of the amortization period during the third quarter of 2007 for some intangible assets relating to Wink Communications, Inc.

 

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Impairment of goodwill

Impairment of goodwill was as follows (in millions, except percentages):

 

     Year Ended December 31,     Change
     2008     2007     2006     2008 versus 2007    2007 versus 2006

Impairment of goodwill

   $  —       $  —       $ 0.8     $  —      —  %    $ (0.8)    100%

As percentage of total revenues

     —   %     —   %     1 %           

During the fourth quarter of 2006, we were informed by iN DEMAND that NASCAR would not be renewing their distribution arrangement with them, and that as a result, iN DEMAND would not be renewing our production agreement. As a result, we recorded an impairment charge of $0.8 million in our advertising solutions segment representing the entire goodwill balance for this reporting unit.

Impairment of Intangible Assets

Impairment of intangible assets was as follows (in millions, except percentages):

 

     Year Ended December 31,     Change
     2008     2007     2006     2008 versus 2007    2007 versus 2006

Impairment of intangible assets

   $ 0.8     $  —       $  —       $ 0.8    100%    $  —      —  %

As percentage of total revenues

     1 %     —   %     —   %           

During the fourth quarter of 2008, we determined that an impairment had occurred with respect to the value of one of the customer contracts we assumed as part of our acquisition of CAM Systems in September 2005. The customer did not renew its contract with us upon expiration of the contract in December 2008, and we recorded an $0.8 million impairment charge for the unamortized balance of such intangible assets.

Interest Income

Interest income consists primarily of interest earned on our cash and cash equivalents, and marketable debt securities, net of interest expense. Interest income was as follows (in millions):

 

     Year Ended December 31,    Change  
     2008    2007    2006    2008 versus 2007    2007 versus 2006  

Interest income

   $ 2.2    $ 3.2    $ 3.0    $ (1.0 )   (31)%     $ 0.2    7 %

2008 versus 2007. Interest income for 2008 decreased $1.0 million, or 31%, to $2.2 million. Interest income for 2008 included $0.4 million related to the capital contribution made to us by Liberty Media Corporation (Liberty Media) in connection with its sale of shares to Kudelski SA in January 2007. Interest income decreased in 2008 due to the lower effective yield on our investment portfolio, which was partially offset by an overall increase in the size of our portfolio.

2007 versus 2006. Interest income for 2007 increased $0.2 million, or 7%, to $3.2 million, primarily due to the increase in our investment portfolio and cash position, which was partially offset by decreasing effective interest rates.

Other Income and Expense Items

Other income and expense items consist primarily of gains or losses from foreign currency exchange, gains or losses on the disposal of capital assets, miscellaneous income, and other unusual items. The net of other income and expense items was as follows (in millions):

 

     Year Ended December 31,    Change
     2008    2007    2006    2008 versus 2007    2007 versus 2006

Other income

   $ 1.6    $ 2.8    $ 0.4    $ (1.2 )   (43)%     $ 2.4    600%

 

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For 2008, net other income included approximately $1.2 million, which represented contingent consideration received in connection with the sale of our PlayMonteCarlo gaming business in the fourth quarter of 2006, and approximately $0.2 million received as a result of the sale of a cost investment in the fourth quarter of 2007. Net other income in 2008 benefited by approximately $0.2 million from the overall weakening of the United States dollar relative to the foreign currencies in which a portion of our cash balance was denominated.

For 2007, net other income primarily reflected a gain from the sale of a cost investment.

Minority Interest

In November 2000, we established Spyglass Integration, Inc., a joint venture with Motorola. We recorded a gain with respect to Motorola’s share of losses in this venture. Minority interest was as follows (in millions):

 

     Year Ended December 31,    Change
     2008    2007    2006    2008 versus 2007    2007 versus 2006

Minority interest

   $  —      $  —      $ 0.1    $  —      —  %    $ (0.1 )   (100)%

Minority interest recorded during 2008 and 2007 was nominal.

Income Taxes

Effective January 1, 2007, we adopted the provisions of FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which included a two-step approach to recognizing, de-recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes” (SFAS 109). As a result of the implementation of FIN 48, we recognized an increase of approximately $2.6 million in liability for unrecognized tax benefits and a decrease in the related reserve of the same amount. No material adjustment to the balance of retained earnings as of January 1, 2007 was required. As of December 31, 2008, unrecognized tax benefits approximated $1.4 million, $1.3 million of which would affect the effective tax rate if recognized.

We estimate that we had net United States federal income tax loss carryforwards of approximately $184.7 million at the end of 2008, although our ability to make use of those tax loss carryforwards may be limited under applicable tax regulations. The calculation of those tax loss carryforwards is a complex matter and may require a reassessment from time to time, which could result in changes to that estimate. For all periods presented, substantially all federal tax benefits related to our losses have been offset by an increase in the valuation allowance against the resulting deferred tax assets. Notwithstanding those federal income tax loss carryforwards, we are subject to income taxes in certain state and foreign jurisdictions, and we have foreign taxes withheld from certain royalty payments.

Income tax expense consists primarily of foreign taxes, state taxes, tax benefits or refunds, and changes to reserves for identified potential foreign tax exposures. Incomes taxes were as follows (in millions):

 

     Year Ended December 31,    Change
     2008    2007    2006    2008 versus 2007    2007 versus 2006

Income tax expense

   $ 0.5    $ 1.2    $ 2.9    $ (0.7 )   (58)%    (1.7)    (59)%

Our income tax expense was $0.5 million for 2008, primarily attributable to income taxes in foreign jurisdictions in which we generate revenue and a release of tax reserves following the expiration of the applicable statute of limitations.

Our income tax expense was $1.2 million for 2007, primarily attributable to foreign and state taxes and offset by decreases to reserves for identified potential foreign tax exposures.

 

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Our income tax expense was $2.9 million for 2006, primarily attributable to state taxes and increases to reserves for identified potential foreign tax exposures. This amount was net of a tax refund of $0.5 million obtained in Australia in 2006 and tax benefits of $0.7 million in 2006 attributable to a Swiss ruling on our intercompany cost-sharing arrangements.

Discontinued Operations

In December 2007, we sold Static 2358 Holdings Ltd., which operated our PlayJam games business. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets” (SFAS 144), the business unit has been reclassified as a discontinued operation.

As a result of reassessment of the carrying value of the long-lived assets of the discontinued operations in accordance with SFAS 144 and SFAS 142, during 2007 we recorded an impairment charge to goodwill of $3.6 million, an impairment charge to property and equipment of $0.2 million, and a $1.4 million loss on the sale of the subsidiary. See Note 6 (Discontinued Operations) to the Consolidated Financial Statement for further information.

Business Segment Results

In March 2008, Nigel (Ben) Bennett was appointed as Chief Executive Officer after having served as Chief Operating Officer and Acting Chief Executive Officer since August 2007. Accordingly, Mr. Bennett is our chief operating decision maker, or CODM. As part of a management change in August 2007, we reorganized our reporting units in an effort to provide management with better information for allocating the company’s resources and assessing performance in accordance with the new management team’s strategic focus. Our CODM currently assesses our results and financial performance and reviews our internal budgeting reports on the basis of two segments: middleware solutions and advertising solutions. We have prepared this segment analysis in accordance with SFAS 131, and accordingly, we have restated the segment information for the prior periods presented in our financial statements.

Middleware solutions is composed of set-top box middleware and embedded browser technologies, such as OpenTV Spyglass and Integrated Browser, as well as software components that are deployed at the network operator’s headend.

Advertising solutions has included our OpenTV EclipsePlus, Eclipse and Advision products, our PlayJam business, our NASCAR service and related technologies, our PlayMonteCarlo betting and gaming channel, and our OpenTV Participate product. Beginning in 2007, we ceased operating our NASCAR service and our PlayMonteCarlo betting and gaming channel. In December 2007, we sold Static, which operated our PlayJam games business. In accordance with SFAS 144, the financial results of our PlayJam games business have been reclassified as a discontinued operation in our financial statements for all periods presented.

Our management reviews and assesses the “contribution margin” of each of these segments, which is not a financial measure calculated in accordance with GAAP. We define contribution margin for these purposes as segment revenues less related direct or indirect allocable costs, including personnel and personnel-related support costs, communications, facilities, maintenance and support, consulting and subcontractor costs, travel, marketing and network infrastructure and bandwidth costs. There are significant judgments management makes with respect to the direct and indirect allocation of costs that may affect the calculation of contribution margins. While management believes these and other related judgments are reasonable and appropriate, others could assess such matters differently.

Contribution margin is a non-GAAP financial measure that excludes unallocated corporate support, interest, taxes, depreciation and amortization, amortization of intangible assets, share-based compensation, impairment of goodwill, impairment of intangibles, other income, minority interest, restructuring provisions, and unusual items

 

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such as contract amendments that mitigate potential loss positions. These exclusions reflect costs not considered directly allocable to individual business segments and result in a definition of contribution margin that does not take into account some of the substantial costs of doing business. Management believes that segment contribution margin is a helpful measure in evaluating the performance of our business segments. While our management may consider contribution margin to be an important measure of comparative operating performance, this measure should be considered in addition to, but not as a substitute for, profit (loss) from operations, net income (loss), cash flow and other measures of financial performance prepared in accordance with GAAP that are presented in our financial statements. In addition, our calculation of contribution margin may be different from, and not comparable to, the calculation used by other companies.

Because these segments reflect the manner in which management reviews our business, they necessarily involve judgments that management believes are reasonable in light of the circumstances under which they are made. These judgments may change over time or may be modified to reflect new facts or circumstances. Segments may also be changed or modified to reflect technologies and applications that are newly created, or that change over time, or other business conditions that evolve, each of which may result in reassessing specific segments and the elements included within each of those segments. Recent events may affect the manner in which we present segments in the future.

Middleware Solutions

Revenues and contribution margin of our middleware solutions segment were as follows (in millions, except percentages):

 

     Year Ended December 31,     Change  
     2008     2007     2006     2008 versus 2007    2007 versus 2006  

Royalties and licenses

   $ 71.1     $ 68.7     $ 60.7     $ 2.4      3%    $ 8.0    13 %

Services and other

     32.1       29.0       18.2       3.1      11%      10.8    59 %
                                           

Total middleware solutions

   $ 103.2     $ 97.7     $ 78.9     $ 5.5      6%    $ 18.8    24 %
                                           

As percentage of total revenues

     89 %     89 %     83 %           

Contribution margin—middleware solutions

   $ 40.8     $ 32.1     $ 27.7     $ 8.7      27%    $ 4.4    16 %
                                   

2008 versus 2007. Total revenues from the middleware solutions segment in 2008 increased $5.5 million, or 6%, to $103.2 million.

Royalties and licenses revenues from the middleware solutions segment increased $2.4 million, or 3%, to $71.1 million in 2008 and accounts for the majority of our overall revenues. Royalties and licenses revenues from set-top box shipments and other product sales accounted for 69% and 70% of segment revenues for the years ended December 31, 2008 and 2007, respectively. As described under “Royalties and licenses” in “Revenues” above, BSkyB, directly and indirectly through our set-top box manufacturer customers who sell set-top boxes to BSkyB, accounted for $17.9 million, or 23%, of our total worldwide royalties and licenses revenues for 2008. BSkyB royalties and licenses revenues increased by $0.7 million compared to 2007, primarily as a result of increased deployments by BSkyB of our software products, particularly our PVR software. Royalties and licenses revenues from Reliance in India, which we started to receive in 2008 through our license and distribution agreement with Nagravision, totaled $6.1 million in 2008 and was comprised of royalty payments and a one-time license fee for our enterprise software. Royalties and licenses revenues from NET in Brazil increased by $2.1 million as compared to 2007, which reflected increased deployments of middleware-related products by this customer. Royalties and licenses revenues from Multichoice Africa increased by $1.8 million as compared to 2007, primarily due to a recent upgrade by this customer to our latest OpenTV Core2 middleware product and increased deployments of set-top boxes containing this product. Royalties and licenses revenues increases were partially offset by lower royalties and licenses revenues of $7.4 million from

 

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UGC. During the fourth quarter of 2007, we amended some of the commercial and other terms of our license agreement with UGC and, in addition, delivered the final remaining licensed products, which allowed us to recognize $6.0 million of revenue that had been deferred since 2004. In addition, during 2008, UGC maintained an inventory of set-top-boxes containing our software, which negatively impacted new shipments to this customer for which we would receive royalties. We expect the impact of inventory levels at UGC on our royalties and licenses revenues to diminish beginning in 2009. Royalties and licenses revenues from EchoStar, including DISH Network and EchoStar Technologies LLC, decreased $3.4 million as compared to 2007. The decrease was primarily due to reduced deployments by DISH Network of set-top boxes containing our software, as well as the receipt of a late royalty report from EchoStar during the first quarter of 2009 for set-top boxes that were shipped during 2008. Royalties and licenses revenues from JCOM in Japan decreased $0.8 million compared to 2007 as the prior year period included a royalty prepayment for deployments of our video-on-demand product. Royalties and licenses revenues from Bell TV in Canada declined $0.5 million compared to 2007. This decrease was primarily due to an amendment to our license agreement with Bell TV entered into during the first quarter of 2007 that converted the pricing model from an upfront royalty to a recurring subscription fee per set-top box, payable over the term of the customer’s use of the set-top box incorporating our middleware. We expect the cumulative per set-top box subscription fees paid by Bell TV over the expected period of use of the set-top box to more than compensate for the relative difference between the amount of the prior upfront royalty and the recurring subscription fee. Royalties and licenses revenues from other customers accounted for a net increase of $3.8 million compared to 2007 due to higher volumes of deployments of our product.

Services and other revenues accounted for 31% and 30% of segment revenues in 2008 and 2007, respectively. Services and other revenues from the middleware solutions segment in 2008 increased $3.1 million, or 11%, to $32.1 million. As described under “Services and other” in “Revenues” above, services and other revenues from Multichoice Africa, Numericable, Reliance and SKY Perfect increased $3.8 million, $1.8 million, $0.8 million and $0.6 million, respectively, primarily due to an increase in professional services engagements with those customers during 2008. The remaining increase of $3.7 million was generated from other discrete professional services pertaining to 2008 activities and an increase in maintenance and support revenues. The increases were partially offset by a decrease of $7.6 million from UGC primarily due to a decrease in professional services engagements with this customer during 2008.

Middleware solutions costs consist primarily of personnel and personnel-related support costs and consulting and subcontractor costs associated with professional services engagements. Total contribution margin for the middleware solutions segment for 2008 increased $8.7 million, or 27%, to $40.8 million, resulting from increased revenues generated in this segment, and decreased consulting and subcontractor costs primarily due to management’s efforts to reduce overall costs for outside consultants and subcontractors. The decrease was partially offset by increased personnel and personnel-related support costs, which included the impact of foreign currency translation on our costs denominated in foreign currencies due to the overall weakening of the United States dollar during a significant portion of 2008.

2007 versus 2006. Total revenues from the middleware solutions segment in 2007 increased $18.8 million, or 24%, to $97.7 million.

Royalties and licenses from set-top box shipments and other product sales accounted for 70% and 77% of segment revenues for the years ended December 31, 2007 and 2006, respectively. Royalties and licenses revenues from the middleware solutions for 2007 increased $8.0 million, or 13%, to $68.7 million. As described under “Royalties and licenses” in “Revenues” above, the increases were primarily due to the recognition in the fourth quarter of 2007 of $9.9 million in royalties and licenses revenues from UGC, an increase of $1.8 million from NET in Brazil reflecting increased deployments of our products, an increase of $3.6 million in royalties and licenses revenues from BSkyB resulting primarily from increased shipments of our PVR software, an increase of $1.3 million in royalties from JCOM relating to deployments of our video-on-demand product that began during the second quarter of 2007, and an increase of $1.5 million from FOXTEL, for whom we first started recognizing

 

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revenues from middleware shipments during the second quarter of 2006. These increases were offset by a decrease of $4.2 million in revenues from EchoStar due to reduced set-top box shipments and a reduction in amortization, a decrease of $2.8 million from Bell TV due to the conversion in the first quarter of 2007 from an upfront royalty model to a recurring subscription fee per set-top box and a net decrease of $3.1 million received from other middleware customers.

Services and other revenues accounted for 30% and 23% of segment revenues in 2007 and 2006, respectively. Services and other revenues from the middleware solutions segment in 2007 increased $10.8 million, or 59%, to $29.0 million. As described under “Services and other” in “Revenues” above, the increase in 2007 was due to an increase of $7.9 million in professional services and maintenance and support revenues from UGC, an increase of $3.0 million from professional services and maintenance and support revenues from JCOM due to a new project that began during 2007, and an increase of $1.1 million in professional services and maintenance and support revenues from FOXTEL as a result of increased professional service work and reflecting a full year of maintenance and support revenue. The increases were offset by decreased services and other revenues from other customers of $1.2 million.

Total contribution margin for our middleware solutions segment for 2007 increased $4.4 million, or 16%, to $32.1 million, resulting from increased revenues generated in this segment and $1.5 million from a favorable litigation settlement as mentioned in “Cost of Royalties and Licenses” above, which were partially offset by other increased costs in the segment.

Advertising Solutions

Revenues and contribution margin of our advertising solutions segment were as follows (in millions, except percentages):

 

     Year Ended December 31,     Change
     2008     2007     2006     2008 versus 2007    2007 versus 2006

Royalties and licenses

   $ 6.0     $ 5.0     $ 5.2     $ 1.0    20%    $ (0.2)    (4)%

Services and other

     7.3       7.3       11.1       —      0%      (3.8)    (34)%
                                           

Total advertising solutions revenues

   $ 13.3     $ 12.3     $ 16.3     $ 1.0    8%    $ (4.0)    (25)%
                                           

As percentage of total revenues

     11 %     11 %     17 %           

Contribution margin—advertising solutions

   $ 1.0     $ (0.4 )   $ (1.4 )   $ 1.4    350%    $ 1.0    71%
                                   

2008 versus 2007. Total revenues from the advertising solutions segment in 2008 increased $1.0 million, or 8%, to $13.3 million.

Royalties and licenses from our advertising solutions products in 2008 increased $1.0 million, or 20%, to $6.0 million. As described under “Royalties and licenses” in “Revenues” above, the increase was primarily due to increased deployments of our EclipsePlus advertising campaign management product in the United States.

Services and other revenues from our advertising solutions segment in 2008 remained consistent with 2007 at $7.3 million. Maintenance and support revenues derived from our EclipsePlus software product in 2008 increased $2.2 million due to increased deployments of that product, which was offset by a decline in professional services revenue in 2008.

Total contribution margin for the advertising solutions segment improved in 2008 by $1.4 million, primarily resulting from increased revenues generated in this segment and decreased personnel and personnel-related support costs.

 

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2007 versus 2006. Total revenues from the advertising solutions segment for 2007 decreased $4.0 million, or 25%, to $12.3 million.

Royalties and licenses revenues from the advertising solutions segment in 2007 decreased $0.2 million, or 4%, to $5.0 million. As described under “Royalties and licenses” in “Revenues” above, the decrease was primarily due to the one-time recognition of $1.2 million in licensing revenue from PartiTV in 2006 pursuant to a contract that was terminated in the third quarter of 2006, which was partially offset by an increase of $0.7 million in revenues from additional deployments of our advertising campaign management product. Royalties and license revenues from other customers in the advertising solutions segment accounted for a net increase of $0.3 million in 2007.

Services and other revenues from the advertising solutions segment in 2007 decreased $3.8 million, or 34%, to $7.3 million. As described under “Services and other” in “Revenues” above, this was primarily due to a decrease of $1.9 million in revenues from our NASCAR service as our service agreement was not renewed for the 2007 season, and a decrease of $2.5 million in PlayMonteCarlo revenue resulting from the sale of our PlayMonteCarlo betting and gaming channel in the fourth quarter of 2006. These decreases were partially offset by an increase of $0.5 million in maintenance and support revenues associated with increased deployments of our advertising campaign management product. Services and other revenues from other customers in the advertising solutions segment accounted for a net increase of $0.1 million in 2007.

Total contribution margin for the advertising solutions segment in 2007 improved by $1.0 million, or 71%, over 2006 to a loss of $0.4 million, primarily as a result of the sale in the fourth quarter of 2006 of our PlayMonteCarlo betting and gaming channel, which generated a negative contribution margin of $1.0 million in 2006.

Reconciliation of Contribution Margin to Net Loss

Total contribution margin reconciled to net loss on a GAAP basis was as follows (in millions):

 

    Year Ended December 31,     Change
    2008     2007     2006     2008 versus 2007   2007 versus 2006

Total contribution margin

  $ 41.8     $ 31.7     $ 26.3     $ 10.1   32%   $ 5.4     21%

Unallocated corporate overhead

    (24.1 )     (23.4 )     (21.3 )        

Restructuring and impairment costs

    (0.6 )     (0.3 )     (1.0 )        

Depreciation and amortization

    (4.2 )     (3.8 )     (3.1 )        

Amortization of intangible assets

    (3.3 )     (5.9 )     (7.0 )        

Share-based and non-cash compensation

    (2.5 )     (3.4 )     (3.4 )        

Interest income

    2.2       3.2       3.0          

Other income

    1.6       2.8       0.4          

Minority interest

    —         —         0.1          

Impairment of goodwill

    —         —         (0.8 )        

Impairment of intangible assets

    (0.8 )     —         —            
                               

Profit (loss) before income taxes

    10.1       0.9       (6.8 )        

Income tax expense

    0.5       1.2       2.9          
                               

Net income (loss) from continuing operations

    9.6       (0.3 )     (9.7 )        

Net loss from discontinued operations

    —         (4.9 )     (1.1 )        
                               

Net income (loss) from continuing operations

  $ 9.6     $ (5.2 )   $ (10.8 )        
                               

 

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Deferred Revenue

When we apply our revenue recognition policy, we must determine which portions of our revenue are recognized currently and which portions must be deferred, principally in accordance with SOP 97-2, SOP 81-1 and SAB 104. In order to determine current and deferred revenue, we make judgments and estimates with regard to future product and services deliverables and the appropriate valuation for those deliverables.

Some of our contractual arrangements with our customers involve multiple elements that impact the timing of recognition of revenues received from such customers, including, for example, our arrangements with Essel Group (which operates the DishTV network in India), FOXTEL in Australia and Comcast and Time Warner in the United States. At the time that a multiple-element arrangement is entered into, we make a determination as to whether vendor specific objective evidence, or VSOE, of fair value exists for each of the elements involved in the arrangement. To the extent VSOE does not exist for any undelivered elements, then all or portions of the amounts that we invoice under the applicable arrangement are generally deferred and recognized as revenue over time. For example, some of our arrangements provide for the delivery of future specified products and services, for which VSOE of fair value does not exist. In addition, some of our contracts include maintenance and support offerings, for which VSOE of fair value does not exist. In instances where VSOE of fair value for maintenance and support does not exist, we will generally recognize all revenues from the arrangement either over the remaining contractual period of support or over the remaining period during which maintenance and support is expected to be provided, once all other specified deliverables have been delivered. In instances where VSOE of fair value for maintenance and support exists and there are future specified products and services for which VSOE of fair value does not exist, we will generally recognize all revenues upon the final delivery of the future specified products and services, except for the fair value of the revenues relating to the remaining undelivered maintenance and support, which will be recognized over the remaining period of support.

As of December 31, 2008, we recorded a balance of $33.2 million in deferred revenue compared with $24.1 million as of December 31, 2007. Based on our current estimates, we expect the following recognition of this deferred revenue balance (in millions):

 

Year Ending December 31,

   Expected Recognition
of Deferred Revenue

2009

   $ 16.1

2010

     9.6

Thereafter

     7.5
      
   $ 33.2
      

In order to determine the expected recognition of deferred revenue set forth in the foregoing table, we make judgments and estimates regarding, among other things, future product and services deliverables, the appropriate valuation of those products and services and expected changes in customer requirements. These judgments and estimates could differ from actual events, particularly those that involve factors outside of our control. As a result, the actual revenue recognized from these arrangements and the timing of that recognition may differ from the amounts identified in this table. While management believes that this information is a helpful measure in evaluating the company’s performance, investors should understand that unless and until the company is actually able to recognize these amounts as revenue in accordance with GAAP, there can be no assurance that the conditions to recognizing that revenue will be satisfied.

Liquidity and Capital Resources

We expect to be able to fund our operating and capital requirements for at least the next twelve months by using existing cash balances and short-term and long-term marketable debt securities if our assumptions about

 

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our revenues, expenses and cash commitments are generally accurate. Because we cannot be certain that our assumptions about our business or the interactive television and advertising solutions markets in general will prove to be accurate, our funding requirements may differ from our current expectations.

Our primary source of cash from operations is royalty payments from customers. The primary uses of cash are personnel and personnel-related costs, subcontractor and consulting costs, facilities costs, and capital expenditures. In February 2008, we received $14.3 million in cash from Liberty Media after the expiration of the indemnity period specified in the stock purchase agreement between Liberty Media and Kudelski.

The mix of cash and short-term and long-term investments may change in the future as we make decisions regarding the composition of our investment portfolio. We use professional investment management firms to manage a significant portion of our invested cash. The portfolio consists of highly liquid, high-quality investment grade securities of the United States government and agencies, corporate notes and bonds and certificates of deposit that predominantly have maturities of less than three years. All investments are made in accordance with our written investment policy, which has been approved by our board of directors.

The mix of cash and short-term and long-term securities was as follows, which may change in the future as we make decisions regarding the composition of our investment portfolio (in millions, except percentages):

 

     December 31,
2008
   December 31,
2007
   Change  

Cash and cash equivalents

   $ 93.9    $ 58.6    $ 35.3     60 %

Short-term marketable debt securities

     7.7      20.4      (12.7 )   (62 )%

Long-term marketable debt securities

     1.2      2.8      (1.6 )   (57 )%
                        

Total cash portfolio

   $ 102.8    $ 81.8    $ 21.0     26 %
                        

 

     Year Ended December 31,     Change  
     2008    2007      2006     2008 versus 2007     2007 versus 2006  

Cash provided by operating activities for continuing operations

   $ 14.2    $ 16.2      $ 3.9     $ (2.0 )   $ 12.3  

Cash provided by (used in) investing activities for continuing operations

   $ 10.5    $ (9.9 )    $ (3.9 )   $ 20.4     $ (6.0 )

Cash provided by financing activities for continuing operations

   $ 12.5    $ 4.2      $ 2.4     $ 8.3     $ 1.8  

Cash provided by operating activities

2008 versus 2007. The decrease of $2.0 million in net cash provided by operating activities for continuing operations during 2008 compared to 2007 was primarily attributable to a decrease of $12.4 million in the changes in accounts receivable. The decrease was partially offset by an increase of $10.6 million in the changes in deferred revenues and an improvement of $8.7 million in net income (loss), net of non-cash items. Other current assets and liabilities accounted for a net decrease of $8.9 million.

2007 versus 2006. The increase of $12.3 million in net cash provided by operating activities for continuing operations during 2007 compared to 2006 was primarily attributable to a decrease of $7.4 million in net loss, net of non-cash items, and an increase of $6.2 million in the changes in accounts receivable. The increase in net cash was partially offset by a decrease of $4.5 million in the changes in deferred revenues. Other current assets and liabilities accounted for a net increase of $3.2 million.

Cash provided by (used in) investing activities

2008 versus 2007. The increase of $20.4 million in net cash provided by (used in) investing activities for continuing operations during 2008 as compared to 2007 reflects an increase of $20.5 million in net proceeds from

 

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the sales of marketable debt securities and $2.0 million in cash received from the sale of a cost investment, which were partially offset by an increase of $1.8 million in capital expenditures and $0.2 million used for the acquisition of Ruzz TV, net of cash acquired.

2007 versus 2006. The increase of $6.0 million in net cash used in investing activities for continuing operations during 2007 as compared to 2006 was primarily due to net additional investments of $7.3 million in marketable debt securities. This increase was offset by a decrease of $1.3 million in capital expenditures.

Cash provided by financing activities

2008 versus 2007. The increase of $8.3 million in net cash provided by financing activities during 2008 compared to 2007 was primarily due to a $14.3 million capital contribution received from Liberty Media in February 2008, which was partially offset by a decrease of $0.3 million in proceeds received in 2008 from employee stock option exercises. During 2008, we paid $0.5 million to repurchase restricted Class A ordinary shares held by employees in order to satisfy applicable withholding taxes upon lapsing of the restrictions on such shares. During 2007, we repurchased 1,150,000 stock options for $0.2 million from a former executive officer in connection with his departure.

2007 versus 2006. The increase of $1.8 million in net cash provided by financing activities during 2007 compared to 2006 was primarily due to a $5.4 million capital contribution received from Liberty Media in connection with its sale of shares to Kudelski, which was partially offset by $1.3 million used to repurchase our Class A ordinary shares in December 2007, $0.2 million used to repurchase 1,150,000 stock options from a former executive officer in connection with his departure, and a decrease of $2.1 million in proceeds from employee stock option exercises.

Commitments and Contractual Obligations

Information as of December 31, 2008 concerning the amount and timing of required payments under our contractual obligations is summarized below (in millions):

 

     Total    Due in
2009
   Due in 2010-
2011
   Due in 2012-
2013
   Due in 2014
or after

Operating leases obligations

   $ 8.0    $ 4.4    $ 3.5    $ 0.1    $  —  

Noncancellable purchase obligations

     0.2      0.2      —        —        —  
                                  

Total contractual obligations

   $ 8.2    $ 4.6    $ 3.5    $ 0.1    $ —  
                                  

We have the right to terminate, without penalty, one of our operating leases prior to its scheduled expiration. If we exercised this early termination right in 2009, our future minimum lease commitments would be reduced by an aggregate of $0.6 million over the current remaining life of that lease. We have not yet made any determination as to whether we intend to exercise such right. If we did exercise such right, while our commitments under this specific lease would be reduced, we might also be required to lease additional space to conduct our business and we cannot be certain at this time whether any such actions would possibly result in a net increase in our future minimum lease commitments.

In the ordinary course of business, we enter into various arrangements with vendors and other business partners for marketing and other services. Future minimum commitments under these arrangements as of December 31, 2008 were $0.2 million for the year ending December 31, 2009, and insignificant for the years ending December 31, 2010 and 2011. In addition, we also have arrangements with certain parties that provide for revenue sharing payments.

As of December 31, 2008, we had three standby letters of credit aggregating approximately $1.2 million, two of which were issued to landlords of our leased properties, and one of which was issued to a sublessee at our

 

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New York facility, which we vacated in the second quarter of 2005. We pledged two certificates of deposit aggregating approximately $1.3 million, which were included under short-term marketable debt securities, as collateral in respect of these standby letters of credit.

Indemnification

In the ordinary course of our business, we provide indemnification to customers, subject to limitations, against claims of intellectual property infringement made by third parties arising from the use of our products. Costs related to these indemnification provisions are sometimes difficult to estimate. While we have not historically experienced significant costs for these matters, there may be occasions in the ordinary course of our business where we assume litigation and other costs on behalf of our customers that could have an adverse effect on our financial position. We ordinarily seek to limit our liability in these indemnification arrangements in various respects, including monetarily, but the costs associated with any type of intellectual property indemnification arrangement can be significant, particularly in the technology sector.

As permitted under the laws of the British Virgin Islands, we have agreed to indemnify our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that mitigates our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is not material.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risks. This exposure relates to our holdings of fixed income investment securities and assets and liabilities denominated in foreign currencies.

Fixed Income Investment Risk

We own a fixed income investment portfolio with various holdings, types and maturities. These investments are generally classified as available-for-sale. Available-for-sale securities are recorded on the balance sheet at fair value with unrealized gains or losses, net of tax, included as a separate component of the balance sheet line item titled “accumulated other comprehensive income (loss).”

Most of these investments consist of a diversified portfolio of highly liquid United States dollar-denominated debt securities classified by maturity as cash equivalents, short-term investments or long-term investments. These debt securities are not leveraged and are held for purposes other than trading. Our investment policy limits the maximum maturity of securities in this portfolio to three years and weighted-average maturity to 15 months. Although we expect that market value fluctuations of our investments in short-term debt obligations will not be significant, a sharp rise in interest rates could have a material adverse effect on the value of securities with longer maturities in the portfolio. Alternatively, a sharp decline in interest rates could have a material positive effect on the value of securities with longer maturities in the portfolio. We do not currently hedge interest rate exposures.

Our investment policy limits investment concentration in any one issuer (other than with respect to United States Treasury and agency securities) and also restricts this part of our portfolio to investment grade obligations based on the assessments of rating agencies. There have been instances in the past where the assessments of rating agencies have failed to anticipate significant defaults by issuers. It is possible that we could lose most or all of the value in an individual debt obligation as a result of a default. A loss through a default may have a material impact on our earnings even though our policy limits investments in the obligations of a single issuer to no more than five percent of the value of our portfolio.

 

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The following table presents the hypothetical changes in fair values in our portfolio of investment securities with original maturities greater than 90 days as of December 31, 2008 using a model that assumes immediate sustained parallel changes in interest rates across the range of maturities (in thousands):

 

     Fair Value as
of December 31,
2008
   Valuation of
Securities if
Interest Rates
Decrease 1%
   Valuation of
Securities if
Interest Rates
Increase 1%
   Valuation of
Securities if
Interest Rates
Decrease 2%
   Valuation of
Securities if
Interest Rates
Increase 2%

Marketable debt securities

   $ 8,946    $ 8,957    $ 8,935    $ 8,969    $ 8,923

The modeling technique used in the above table estimates fair values based on changes in interest rates assuming static maturities. The fair value of individual securities in our investment portfolio is likely to be affected by other factors including changes in ratings, market perception of the financial strength of the issuers of such securities and the relative attractiveness of other investments. Accordingly, the fair value of our individual securities could also vary significantly in the future from the amounts indicated above.

Foreign Currency Exchange Rate Risk

We transact business in various foreign countries. We incur a substantial majority of our expenses, and earn most of our revenues, in United States dollars. Although a majority of our worldwide customers are invoiced and make payments in United States dollars, some of our customer contracts provide for payments to be remitted in local currency. As of December 31, 2008, we held approximately $10.7 million of various foreign currencies as a result of our worldwide operations.

We have a foreign currency exchange exposure management policy. The policy permits the use of foreign currency forward exchange contracts and foreign currency option contracts and the use of other hedging procedures in connection with hedging foreign currency exposures. The policy requires that the use of derivatives and other procedures qualify for hedge treatment under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” During the year ended December 31, 2008, we did not use foreign currency forward exchange contracts, options in hedging foreign currency exposures, or other hedging procedures. However, we regularly assess our foreign currency exchange rate risk that results from our global operations, and we may in the future elect to make use of appropriate hedging strategies.

 

Item 8. Financial Statements and Supplementary Data

The Consolidated Financial Statements and Supplementary Data required by this Item are set forth at the pages indicated in Item 15(a).

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not Applicable.

 

Item 9A. Controls and Procedures

a. Disclosure Controls and Procedures

Our management carried out an evaluation as of December 31, 2008 under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, and concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended) were effective.

b. Management Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934, as amended. Our

 

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management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2008 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of this assessment, management concluded that, as of December 31, 2008, our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

c. Limitations on Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

d. Significant Changes in Internal Control over Financial Reporting.

There were no additional changes in our internal control over financial reporting implemented during the fourth quarter of fiscal 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

OpenTV Corp. and subsidiaries

We have audited OpenTV Corp. and subsidiaries’ internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). OpenTV Corp. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on OpenTV Corp. and subsidiaries’ internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, OpenTV Corp. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of OpenTV Corp. and subsidiaries as of December 31, 2008 and 2007 and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 2008 and our report dated March 6, 2009 expressed an unqualified opinion thereon.

/s/    GRANT THORNTON LLP

San Francisco, California

March 6, 2009

 

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Item 9B. Other information

None.

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

The information regarding our directors and executive officers required by this Item is incorporated by reference to the information set forth in the sections entitled “Information Concerning Our Current Directors and Executive Officers” and “Corporate Governance and Board Matters” in the definitive proxy statement for our 2009 annual meeting of shareholders to be filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K (the “Proxy Statement”).

Information required by this Item with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the information set forth in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.

 

Item 11. Executive Compensation

The information required by this Item is incorporated by reference to the information set forth in the section entitled “Executive Compensation” in the Proxy Statement.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

The information required by this Item regarding security ownership of certain beneficial owners is incorporated by reference to the information set forth in the section entitled “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is incorporated by reference to the information set forth in the sections entitled “Corporate Governance and Board Matters” and “Certain Relationships and Related Transactions” in the Proxy Statement.

 

Item 14. Principal Accountant Fees and Services

The information required by this Item is incorporated by reference to the information set forth in the section entitled “Audit Fees and All Other Fees” in the Proxy Statement.

 

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PART IV

 

Item 15. Exhibits, Financial Statement Schedules

(a)(1) Financial Statements Included in Part II of this Report:

 

     Page

Index to Consolidated Financial Statements

   F-1

Report of Independent Registered Public Accounting Firm

   F-2

Consolidated Balance Sheets as of December 31, 2008 and 2007

   F-3

Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006

   F-4

Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the years ended December  31, 2008, 2007 and 2006

   F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006

   F-7

Notes to the Consolidated Financial Statements

   F-8

(2) Financial Statement Schedule

Schedule II—Valuation and Qualifying Accounts

 

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(3) Exhibits

 

  2.1   Asset Purchase Agreement, dated as of September 7, 2005, by and among OpenTV Corp., OpenTV Advertising Holdings, Inc., CAM Systems, L.L.C., StarNet, L.P., StarNet Management, L.L.C., H. Chase Lenfest, H.F. Lenfest and HCL Family Holdings, L.P. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of OpenTV Corp., as filed with the Securities and Exchange Commission on September 9, 2005).
  3.1   Amended and Restated Memorandum of Association of OpenTV Corp. (incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K of OpenTV Corp., as filed with the Securities and Exchange Commission on March 30, 2006).
  3.2   Articles of Association of OpenTV Corp. (incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K of OpenTV Corp., as filed with the Securities and Exchange Commission on March 15, 2007 (the “2006 10-K”)).
  4.1   Specimen Certificate for Class A ordinary shares of OpenTV Corp. (incorporated by reference to Exhibit 4.1 of Amendment No. 1 (the “First F-1 Amendment”) to the F-1 Registration Statement, as filed with the Securities and Exchange Commission on November 10, 1999).
10.1   Form of Indemnification Agreement for directors and officers of OpenTV Corp. (incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K of OpenTV Corp., as filed with the Securities and Exchange Commission on March 16, 2005 (the “2004 10-K”)).
10.2†*   OpenTV Corp.’s Amended and Restated 1999 Employee Stock Purchase Plan.
10.3†   OpenTV Corp.’s Amended and Restated 1999 Share Option/Share Issuance Plan (incorporated by reference to Exhibit 10.3 of Amendment No. 3 (the “Third F-1 Amendment”) to the F-1 Registration Statement, as filed with the Securities and Exchange Commission on November 19, 1999).
10.4   Shareholder’s Agreement among OTV Holdings Limited, OpenTV Corp. and Sun TSI Subsidiary, Inc. dated October 23, 1999 (incorporated by reference to Exhibit 10.4 to the Third F-1 Amendment).
10.5   Trademark License Agreement between Sun Microsystems, Inc. and OpenTV, Inc. dated March 20, 1998 (incorporated by reference to Exhibit 10.5 to the Third F-1 Amendment).
10.6   Technology License and Distribution Agreement between Sun Microsystems, Inc. and OpenTV, Inc. dated March 20, 1998 (incorporated by reference to Exhibit 10.6 to the Third F-1 Amendment).
10 .7   First Amendment to Technology License and Distribution Agreement between Sun Microsystems, Inc. and OpenTV, Inc. dated June 30, 1999 (incorporated by reference to Exhibit 10.7 to the Third F-1 Amendment).
10.8   Source Code License and Binary Distribution Agreement between Sun Microsystems, Inc. and OpenTV, Inc. effective July 1, 1996 (incorporated by reference to Exhibit 10.10 to the Third F-1 Amendment).
10 .9   Source Code License and Binary Distribution Agreement between Sun Microsystems, Inc. and OpenTV, Inc. effective April 1, 1998 (incorporated by reference to Exhibit 10.9 to the Third F-1 Amendment).
10.10*   OpenTV’s Amended and Restated 2000 Exchange Plan.
10.11*+   Second Amendment to Technology License and Distribution Agreement between Sun Microsystems, Inc. and OpenTV, Inc. dated December 20, 2000.
10.12   Third Amendment to Technology License and Distribution Agreement between Sun Microsystems, Inc. and OpenTV, Inc. dated June 30, 2005 (incorporated by reference to Exhibit 10.33 to the 2006 10-K).

 

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10.13†    OpenTV’s 2001 Nonstatutory Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-8 of OpenTV Corp. (File No. 333-74026), as filed with the Securities and Exchange Commission on November 27, 2001).
10.14    License Agreement for OpenTV Interactive Applications and Enterprise and Network Solutions, dated as of August 16, 2002 by and among OpenTV, Inc., MultiChoice Africa Limited and MIH Limited (incorporated by reference to Exhibit 10.31 to the Registration Statement on Form S-4 of OpenTV Corp. (File No. 333-102944), as filed with the Securities and Exchange Commission on February 4, 2003).
10.15†    OpenTV Corp. 2003 Incentive Plan (incorporated by reference to Exhibit 10.32 to Amendment No. 1 to the Registration Statement on Form S-4 of OpenTV Corp. (File No. 333-102944), as filed with the Securities and Exchange Commission on April 25, 2003).
10.16†    Form of Incentive Stock Option Agreement for OpenTV Corp. Amended and Restated 1999 Share Option/Share Issuance Plan. (incorporated by reference to Exhibit 10.25 to the 2004 10-K).
10.17†    Form of Nonstatutory Stock Option Agreement for OpenTV Corp. 2001 Nonstatutory Stock Option Plan (incorporated by reference to Exhibit 10.26 to the 2004 10-K).
10.18†    Form of Incentive Stock Option Agreement for OpenTV Corp. 2003 Incentive Plan. (incorporated by reference to Exhibit 10.27 to the 2004 10-K).
10.19†    OpenTV Corp. 2005 Incentive Plan (incorporated by reference to Annex A to the 2005 Proxy Statement on Schedule 14A of OpenTV Corp., as filed with the Securities and Exchange Commission on October 14, 2005).
10.20†    Form of Incentive Stock Option Agreement for OpenTV Corp. 2005 Incentive Plan (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-8 of OpenTV Corp., as filed with the Securities and Exchange Commission on December 21, 2005 (the “2005 S-8”)).
10.21†    Form of Non-Qualified Stock Option Agreement for OpenTV Corp. 2005 Incentive Plan (incorporated by reference to Exhibit 4.4 to the 2005 S-8).
10.22†    Form of Independent Director Stock Option Agreement for OpenTV Corp. 2005 Incentive Plan (incorporated by reference to Exhibit 4.5 to the 2005 S-8).
10.23†    Form of Restricted Share Agreement for the 2007 Management Bonus and Equity Issuance Plan under the OpenTV Corp. 2005 Incentive Plan (incorporated by reference to Exhibit 4.6 to the Registration Statement on Form S-8 of OpenTV Corp., as filed with the Securities and Exchange Commission on August 27, 2007 (the “2007 S-8”)).
10.24†    Form of Restricted Share Agreement for December 2007 restricted share grants under the OpenTV Corp. 2005 Incentive Plan (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of OpenTV Corp., as filed with the Securities and Exchange Commission on December 14, 2007).
10.25†    Offer Letter to Shum Mukherjee dated May 27, 2005 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of OpenTV Corp., as filed with the Securities and Exchange Commission on May 31, 2005).
10.26†    Employment Agreement dated as of March 13, 2007 between OpenTV Corp. and Alan Guggenheim (incorporated by reference to Exhibit 10.36 to the Current Report on Form 8-K of OpenTV Corp., as filed with the Securities and Exchange Commission on March 15, 2007).
10.27†    Separation Agreement dated as of June 27, 2007 between OpenTV Corp. and James Chiddix (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of OpenTV Corp., as filed with the Securities and Exchange Commission on July 3, 2007).

 

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10.28†    Separation Agreement dated as of March 13, 2007 between OpenTV Corp. and Scott Wornow (incorporated by reference to Exhibit 10.37 to the Current Report on Form 8-K of OpenTV Corp., as filed with the Securities and Exchange Commission on March 15, 2007).
10.29†    Separation Agreement dated as of March 13, 2007 between OpenTV Corp. and Mazin Jadallah (incorporated by reference to Exhibit 10.38 to the Current Report on Form 8-K of OpenTV Corp., as filed with the Securities and Exchange Commission on March 15, 2007).
10.30†    Letter Agreement with Nigel W. Bennett dated December 10, 2007 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of OpenTV Corp., as filed with the Securities and Exchange Commission on December 14, 2007).
10.31†    Employment Agreement with Nigel W. Bennett dated November 5, 2008 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of OpenTV Corp., as filed with the Securities and Exchange Commission on November 6, 2008).
10.32†    Form of Restricted Share Agreement with Nigel W. Bennett relating to restricted shares granted pursuant to Mr. Bennett’s Employment Agreement dated November 5, 2008 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of OpenTV Corp., as filed with the Securities and Exchange Commission on November 6, 2008).
10.33†*    Form of Offer Letter entered into with Senior Vice Presidents.
10.34†*    Form of Letter Agreement relating to Section 409A of the Internal Revenue Code entered into with Shum Mukherjee, Mark Beariault and Tracy Geist on December 19, 2008.
10.35    Registration Rights Agreement dated as of September 7, 2005 by and among OpenTV Corp., CAM Systems, L.L.C. and StarNet, L.P. (incorporated by reference to Exhibit 10.34 to Quarterly Report on Form 10-Q of OpenTV Corp. for the quarterly period ended September 30, 2005, as filed with the Securities and Exchange Commission on November 7, 2005).
10.36    Letter Agreement dated February 10, 2006 between OpenTV Corp. and Liberty Media Corporation (incorporated by reference to Exhibit 10.41 to the Current Report on Form 8-K of OpenTV Corp., as filed with the Securities and Exchange Commission on February 13, 2006).
21.1*    List of Subsidiaries.
23.1*    Consent of Independent Registered Public Accounting Firm.
31.1*    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*    Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

* Filed herewith

 

Management contract or compensatory plan or arrangement required to be filed pursuant to Item 15(b) of Form 10-K

 

+ Confidential treatment was granted for portions of this exhibit

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    OPENTV CORP.
Dated: March 9, 2009    

/s/    NIGEL W. BENNETT        

   

Nigel W. Bennett

Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Nigel W. Bennett and Mark Beariault his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

 

Name

  

Title

 

Date

/s/    ANDRÉ KUDELSKI        

André Kudelski

   Chairman of the Board of Directors   March 9, 2009

/s/    NIGEL W. BENNETT        

Nigel W. Bennett

   Chief Executive Officer and Director
(Principal Executive Officer)
  March 9, 2009

/s/    JAMES A. CHIDDIX        

James A. Chiddix

   Vice Chairman   March 9, 2009

/s/    JOSEPH DEISS        

Joseph Deiss

   Director   March 9, 2009

/s/    LUCIEN GANI        

Lucien Gani

   Director   March 9, 2009

/s/    JERRY MACHOVINA        

Jerry Machovina

   Director   March 9, 2009

/s/    PIERRE ROY        

Pierre Roy

   Director   March 9, 2009

/s/    MAURO SALADINI        

Mauro Saladini

   Director   March 9, 2009

/s/    CLAUDE SMADJA        

Claude Smadja

   Director   March 9, 2009

/s/    ERIC TVETER        

Eric Tveter

   Director   March 9, 2009

/s/    SHUM MUKHERJEE        

Shum Mukherjee

   Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
  March 9, 2009

 

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PART IV

OPENTV CORP.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page No.

Report of Independent Registered Public Accounting Firm

   F-2

Consolidated Balance Sheets as of December 31, 2008 and 2007

   F-3

Consolidated Statements of Operations for the years ended December 31, 2008, 2007, and 2006

   F-4

Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the years ended December  31, 2008, 2007 and 2006

   F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006

   F-7

Notes to the Consolidated Financial Statements

   F-8

Schedule II—Valuation and Qualifying Accounts

   F-44

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

OpenTV Corp. and Subsidiaries

We have audited the accompanying consolidated balance sheets of OpenTV Corp. and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2008. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Schedule II. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of OpenTV Corp. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material aspects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), OpenTV Corp. and subsidiaries’ internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 6, 2009 expressed an unqualified opinion thereon.

/s/    GRANT THORNTON LLP

San Francisco, California

March 6, 2009

 

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OPENTV CORP.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

     December 31,
2008
    December 31,
2007
 
ASSETS    

Current assets:

   

Cash and cash equivalents

  $ 93,887     $ 58,599  

Short-term marketable debt securities

    7,768       20,404  

Accounts receivable, net of allowance for doubtful accounts of $1,076 and $565 at December 31, 2008 and 2007, respectively

    27,275       16,655  

Prepaid expenses and other current assets

    4,628       5,465  
               

Total current assets

    133,558       101,123  

Long-term marketable debt securities

    1,178       2,811  

Property and equipment, net

    7,974       6,554  

Goodwill

    95,250       95,082  

Intangible assets, net

    8,519       12,589  

Other assets

    2,471       1,896  
               

Total assets

  $ 248,950     $ 220,055  
               
   
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS’ EQUITY    

Current liabilities:

   

Accounts payable

  $ 2,287     $ 2,687  

Accrued liabilities

    17,602       17,360  

Accrued restructuring

    238       883  

Deferred revenue

    16,130       14,992  
               

Total current liabilities

    36,257       35,922  

Accrued liabilities, net of current portion

    1,160       2,764  

Accrued restructuring, net of current portion

    1,146       1,297  

Deferred revenue, net of current portion

    17,092       9,142  
               

Total liabilities

    55,655       49,125  

Commitments and contingencies (Note 19)

   

Minority interest

    431       451  

Shareholders’ equity:

   

Preference shares, no par value, 500,000,000 shares authorized; none issued and outstanding

    —         —    

Class A ordinary shares, no par value, 500,000,000 shares authorized; 108,385,176 and 109,657,613 shares issued and outstanding, including treasury shares, at December 31, 2008 and 2007, respectively

    2,234,687       2,234,614  

Class B ordinary shares, no par value, 200,000,000 shares authorized; 30,206,154 shares issued and outstanding at December 31, 2008 and 2007

    35,953       35,953  

Additional paid-in capital

    515,506       500,162  

Treasury shares at cost, 523,647 and zero shares at December 31, 2008 and 2007, respectively

    (623 )     —    

Accumulated other comprehensive loss

    (2,163 )     (141 )

Accumulated deficit

    (2,590,496 )     (2,600,109 )
               

Total shareholders’ equity

    192,864       170,479  
               

Total liabilities, minority interest and shareholders’ equity

  $ 248,950     $ 220,055  
               

The accompanying notes are an integral part of these consolidated financial statements.

 

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OPENTV CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

 

    Year Ended December 31,  
    2008   2007     2006  

Revenues:

     

Royalties and licenses

  $ 77,133   $ 73,735     $ 65,886  

Services and other

    39,341     36,242       29,324  
                     

Total revenues

    116,474     109,977       95,210  

Cost of revenues:

     

Royalties and licenses

    4,994     5,115       7,788  

Services and other

    39,059     42,944       33,208  
                     

Total cost of revenues

    44,053     48,059       40,996  
                     

Gross profit

    72,421     61,918       54,214  

Operating expenses:

     

Research and development

    34,400     32,718       30,687  

Sales and marketing

    9,371     10,829       11,857  

General and administrative

    20,299     21,563       18,041  

Restructuring and impairment costs

    575     267       1,021  

Amortization of intangible assets

    734     1,618       2,082  

Impairment of goodwill

    —       —         747  

Impairment of intangible assets

    767     —         —    
                     

Total operating expenses

    66,146     66,995       64,435  
                     

Profit (loss) from operations

    6,275     (5,077 )     (10,221 )

Interest income

    2,230     3,195       3,016  

Other income

    1,561     2,789       407  

Minority interest

    20     35       37  
                     

Profit (loss) before income taxes

    10,086     942       (6,761 )

Income tax expense

    473     1,248       2,896  
                     

Net income (loss) from continuing operations

    9,613     (306 )     (9,657 )

Discontinued operations:

     

Loss from discontinued operations, net of tax

    —       (1,091 )     (1,161 )

Impairment of assets of discontinued operations, net of tax

    —       (3,764 )     —    
                     

Net loss from discontinued operations

    —       (4,855 )     (1,161 )
                     

Net income (loss)

  $ 9,613   $ (5,161 )   $ (10,818 )
                     

Net income (loss) per share from continuing operations, basic

  $ 0.07   $ —       $ (0.07 )

Net loss per share from discontinued operations, basic

    —       (0.04 )     (0.01 )
                     

Net income (loss) per share, basic

  $ 0.07   $ (0.04 )   $ (0.08 )
                     

Net income (loss) per share from continuing operations, diluted

  $ 0.07   $ —       $ (0.07 )

Net loss per share from discontinued operations, diluted

    —       (0.04 )     (0.01 )
                     

Net income (loss) per share, diluted

  $ 0.07   $ (0.04 )   $ (0.08 )
                     

Shares used in per share calculation, basic

    139,496,297     139,012,431       137,242,329  
                     

Shares used in per share calculation, diluted

    140,211,084     139,012,431       137,242,329  
                     

The accompanying notes are an integral part of these consolidated financial statements.

 

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OPENTV CORP.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share amounts)

 

     Class A     Class B   Additional
Paid-In
Capital
    Treasury
Shares
    Deferred
Share-based
Compensation
    Accumulated
Other
Comprehensive
Income (Loss)
    Accumulated
Deficit
    Total     Other
Comprehensive
Income (Loss)
 
     Shares     Amount     Shares     Amount              

Balances, December 31, 2005

  98,105,119     $ 2,230,398     30,631,746     $ 35,953   $ 470,596     $ (38 )   $ (2 )   $ (265 )   $ (2,584,130 )   $ 152,512    

Share options exercised

  1,214,519       2,439     —         —       15       —         —         —         —         2,454    

Shares issued for employee bonus

  935,664       2,658     —         —       —         —         —         —         —         2,658    

Share-based and non-cash employee and director compensation

  —         —       —         —       3,443       —         —         —         —         3,443    

Shares issued in exchange for OpenTV, Inc. shares

  7,651,658       —       —         —       17,576       —         —         —         —         17,576    

Amortization of deferred share-based compensation

  —         —       —         —       —         —         2       —         —         2    

Unrealized gains on investments, net of income taxes

  —         —       —         —       —         —         —         37       —         37     $ 37  

Foreign currency translation losses

  —         —       —         —       —         —         —         (33 )     —         (33 )     (33 )

Net loss

  —         —       —         —       —         —         —         —         (10,818 )     (10,818 )     (10,818 )
                                                                                 

Balances, December 31, 2006

  107,906,960       2,235,495     30,631,746       35,953     491,630       (38 )     —         (261 )     (2,594,948 )     167,831     $ (10,814 )
                           

Share options exercised

  275,906       303     —         —       18       —         —         —         —         321    

Share-based and non-cash employee and director compensation, including stock options and restricted share grants

  2,291,482       159     —         —       3,223       —         —         —         —         3,382    

Shares issued in exchange for OpenTV, Inc. shares

  34,000       —       —         —       63       —         —         —         —         63    

Conversion of Class B shares to Class A shares

  425,592       —       (425,592 )     —       —         —         —         —         —         —      

Capital contribution from the controlling shareholder

  —         —       —         —       5,395       —         —         —         —         5,395    

Share options repurchased

  —         —       —         —       (167 )     —         —         —         —         (167 )  

Treasury shares repurchased

  —         —       —         —       —         (1,305 )     —         —         —         (1,305 )  

Treasury shares retired

  (1,276,327 )     (1,343 )   —         —       —         1,343       —         —         —         —      

Unrealized gains on investments, net of income taxes

  —         —       —         —       —         —         —         17       —         17     $ 17  

Foreign currency translation gains

  —         —       —         —       —         —         —         103       —         103       103  

Net loss

  —         —       —         —       —         —         —         —         (5,161 )     (5,161 )     (5,161 )
                                                                                 

Balances, December 31, 2007

  109,657,613       2,234,614     30,206,154       35,953     500,162       —         —         (141 )     (2,600,109 )     170,479     $ (5,041 )
                           

 

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OPENTV CORP.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)—(Continued)

(In thousands, except share amounts)

 

     Class A     Class B   Additional
Paid-In
Capital
    Treasury
Shares
    Deferred
Share-based

Compensation
  Accumulated
Other
Comprehensive
Income (Loss)
    Accumulated
Deficit
    Total     Other
Comprehensive
Income (Loss)
 
     Shares     Amount     Shares   Amount              

Share options exercised

  39,464       17     —       —       —         —         —       —         —         17    

Share-based and non-cash employee and director compensation, including stock options and restricted share grants

  (60,833 )     —       —       —       2,528       —         —       —         —         2,528    

Restricted shares with restrictions lapsed and shares withheld to satisfy applicable withholding tax liabilities

  (419,091 )     968     —       —       (1,519 )     —         —       —         —         (551 )  

Shares issued in exchange for OpenTV, Inc. shares

  —         —       —       —       2       —         —       —         —         2    

Capital contribution from the controlling shareholder

  —         —       —       —       14,333       —         —       —         —         14,333    

Treasury shares repurchased

  —         —       —       —       —         (1,535 )     —       —         —         (1,535 )  

Treasury shares retired

  (831,977 )     (912 )   —       —       —         912       —       —         —         —      

Unrealized losses on investments, net of income taxes

  —         —       —       —       —         —         —       (257 )     —         (257 )   $ (257 )

Foreign currency translation losses

  —         —       —       —       —         —         —       (1,765 )     —         (1,765 )     (1,765 )

Net income

  —         —       —       —       —         —         —       —         9,613       9,613       9,613  
                                                                             

Balances, December 31, 2008

  108,385,176     $ 2,234,687     30,206,154   $ 35,953   $ 515,506     $ (623 )   $   —     $ (2,163 )   $ (2,590,496 )   $ 192,864     $ 7,591  
                                                                             

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

OPENTV CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

      Year Ended December 31,  
      2008     2007     2006  

Cash flows from operating activities:

      

Net income (loss)

   $ 9,613     $ (5,161 )   $ (10,818 )

Less: Loss from discontinued operations

     —         (4,855 )     (1,161 )
                        

Net income (loss) from continuing operations

     9,613       (306 )     (9,657 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

      

Depreciation and amortization of property and equipment

     4,193       3,819       3,059  

Amortization of intangible assets

     3,303       5,888       6,981  

Share-based compensation

     2,516       3,267       3,274  

Non-cash employee compensation

     12       88       121  

Provision for doubtful accounts

     511       700       82  

Impairment costs

     767       —         747  

Gain on sale of cost investment

     (220 )     (1,739 )     —    

Loss on disposal of fixed assets

     5       346       24  

Loss on investment in marketable debt securities

     58       —         —    

Minority interest

     (20 )     (35 )     (37 )

Changes in operating assets and liabilities:

      

Accounts receivable

     (11,052 )     1,329       (4,829 )

Prepaid expenses and other current assets

     (1,087 )     1,752       (1,115 )

Other assets

     (547 )     2,737       (1,909 )

Accounts payable

     (505 )     (1,192 )     811  

Accrued liabilities

     (1,682 )     1,187       2,844  

Accrued restructuring

     (796 )     (190 )     439  

Deferred revenue

     9,088       (1,467 )     3,017  
                        

Net cash provided by operating activities of continuing operations

     14,157       16,184       3,852  

Net cash provided by (used in) operating activities of discontinued operations

     —         403       (879 )
                        

Total net cash provided by operating activities

     14,157       16,587       2,973  

Cash flows from investing activities:

      

Purchase of property and equipment

     (5,198 )     (3,378 )     (4,610 )

Cash used in acquisition, net of cash acquired (Note 5)

     (228 )     —         —    

Proceeds from sale of cost investment

     1,959       —         —    

Proceeds from disposal of property and equipment

     —         27       —    

Proceeds from sale of marketable debt securities

     20,334       17,646       12,448  

Purchase of marketable debt securities

     (6,380 )     (24,235 )     (11,777 )
                        

Net cash provided by (used in) investing activities of continuing operations

     10,487       (9,940 )     (3,939 )

Net cash provided by (used in) investing activities of discontinued operations

     225       (573 )     (32 )
                        

Total net cash provided by (used in) investing activities

     10,712       (10,513 )     (3,971 )

Cash flows from financing activities:

      

Repurchase of employee stock options

     —         (167 )     —    

Repurchase of restricted shares

     (532 )     —         —    

Repurchase of treasury shares

     (1,307 )     (1,305 )     —    

Capital contribution from the former controlling shareholder

     14,333       5,395       —    

Proceeds from issuance of ordinary shares

     17       321       2,454  
                        

Net cash provided by financing activities of continuing operations

     12,511       4,244       2,454  

Effect of exchange rate changes on cash and cash equivalents of continuing operations

     (2,092 )     (198 )     (325 )

Effect of exchange rate changes on cash and cash equivalents of discontinued operations

     —         (137 )     256  
                        

Total effect of exchange rate changes on cash and cash equivalents

     (2,092 )     (335 )     (69 )

Net increase in cash and cash equivalents of continuing operations

     35,288       10,290       2,042  

Net decrease in cash and cash equivalents of discontinued operations

     —         (307 )     (655 )
                        

Net increase in cash and cash equivalents

     35,288       9,983       1,387  

Cash and cash equivalents, beginning of period, of continuing operations

     58,599       48,309       46,267  

Cash and cash equivalents, beginning of period, of discontinued operations

     —         307       962  
                        

Cash and cash equivalents, beginning of period

     58,599       48,616       47,229  

Cash and cash equivalents, end of period, of continuing operations

     93,887       58,599       48,309  

Cash and cash equivalents, end of period, of discontinued operations

     —         —         307  
                        

Cash and cash equivalents, end of period

   $ 93,887     $ 58,599     $ 48,616  
                        

Supplemental disclosure of cash flow information:

      

Cash paid for income taxes

   $ (1,528 )   $ (1,617 )   $ (1,415 )
                        

Non-cash investing and financing activities:

      

Conversion of exchangeable shares

   $ 2     $ 63     $ 17,576  
                        

Value of bonus shares issued to employees

   $ —       $ —       $ 2,658  
                        

Retirement of treasury shares

   $ 912     $ 1,343     $ —    
                        

The accompanying notes are an integral part of these consolidated financial statements.

 

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OPENTV CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008

Note 1. Ownership and Business of OpenTV

We were formed as an international business company incorporated under the International Business Companies Act of the British Virgin Islands in September 1999 to act as a holding company for OpenTV, Inc., which then became our principal operating subsidiary. As of January 1, 2007, the International Business Companies Act was repealed and we are now governed by the provisions of the BVI Business Companies Act, 2004.

On January 16, 2007, Kudelski SA and certain of its subsidiaries (collectively referred to as “Kudelski”) completed a stock purchase transaction, pursuant to which Kudelski acquired a controlling interest in our company from Liberty Media Corporation (Liberty Media), our former controlling shareholder. As of December 31, 2008, Kudelski’s total ownership represented approximately 32.3% of the economic interest and approximately 77.2% of the voting interest of our ordinary shares on an undiluted basis. We were not a direct party to that transaction. However, we received a total of approximately $19.7 million in cash from Liberty in connection with that transaction, which represents the total capital contribution due to us pursuant to an agreement we previously had entered into with Liberty in February 2006 that provided for us to receive a portion of any premium received by Liberty in any sale of its stake in OpenTV. We also received approximately $0.1 million and $0.4 million during the years ended December 31, 2008 and 2007, respectively, in interest income related to this capital contribution. No further amounts are due to us under the terms of the agreement between us and Liberty.

We provide advanced digital television solutions dedicated to creating and delivering compelling viewing experiences to consumers of digital content worldwide. Our software enables cable, satellite, telecommunications and digital terrestrial operators, which we refer to as network operators, to offer enhanced television experiences to their viewers.

Note 2. Basis of Presentation

The consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of OpenTV Corp., sometimes referred to herein as OpenTV, together with its wholly-owned and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from these estimates. Significant estimates and assumptions include matters related to revenue recognition, valuation allowances, impairments, restructuring costs and share-based compensation.

Discontinued Operations

In December 2007, we completed the sale of Static 2358 Holdings Ltd. (Static), our subsidiary that operated our PlayJam games business (PlayJam). In accordance with Statement of Financial Accounting Standards

 

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(SFAS) No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets” (SFAS 144), the financial results of the disposal group have been classified as a discontinued operation. Unless noted otherwise, discussions in the footnotes below pertain to continuing operations.

Note 3. Summary of Significant Accounting Policies

Cash and Cash Equivalents

Cash and cash equivalents are stated at cost, which approximates fair value. We consider all highly liquid instruments with original or remaining maturities of three months or less at the date of purchase and money market funds to be cash equivalents. As of December 31, 2008 and 2007, we had approximately $38.8 million and $36.5 million, respectively, of cash and cash equivalents in financial institutions in foreign jurisdictions, of which, respectively, $28.4 million and $18.0 million were denominated in United States dollars.

Marketable Debt Securities

Our policy is to minimize risk by investing in investment grade securities which earn returns based on current interest rates.

We classify all marketable debt securities as available-for-sale in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS 115). Accordingly, our marketable debt securities are carried at fair value as of the balance sheet date. Short-term marketable debt securities are those with remaining maturities at the balance sheet date of one year or less. Long-term marketable debt securities have remaining maturities at the balance sheet date of greater than one year.

Unrealized gains and losses are reported as accumulated other comprehensive income (loss) in the statement of shareholders’ equity. Additionally, realized gains and losses on sales of all such investments are reported in results of operations and computed using the specific identification method. It is our policy to review our marketable debt securities investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. If we determine that an other-than-temporary decline exists in any of our marketable debt securities, it is our policy to write such debt investments down to the market value and record the related write-down as an investment loss in our consolidated statements of operations.

Fair Value Measurement

The reported amounts of our financial instruments, including cash and cash equivalents, short-term marketable debt securities, accounts receivable (net of the allowance for doubtful accounts), accounts payable and accrued liabilities, approximate fair value due to their short maturities.

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, “Fair Value Measures” (SFAS 157). SFAS 157 provides guidance for using fair value to measure assets and liabilities and applies whenever other standards require or permit assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. SFAS 157 is effective for fiscal years that began after November 15, 2007 and interim periods within those fiscal years.

In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, “Effective Date of FASB Statement No. 157” (FSP FAS 157-2). FSP FAS 157-2 defers the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years and interim periods within those fiscal years beginning after November 15, 2008.

We adopted SFAS 157 as of January 1, 2008, with the exception of the application of the statement to non-recurring nonfinancial assets and nonfinancial liabilities. The adoption of SFAS 157 did not have a significant impact on our financial statements.

 

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In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 provides the option to report certain financial assets and liabilities at fair value, with the intent to mitigate volatility in financial reporting that can occur when related assets and liabilities are recorded on different bases. Unrealized gains and losses on items for which the fair value option is elected would be reported in earnings. SFAS 159 is effective for fiscal years that began after November 15, 2007. We adopted SFAS 159 as of January 1, 2008. We currently do not have any additional financial instruments or other items that are eligible for election of the fair value option. Therefore, the adoption of SFAS 159 did not have a significant impact on our financial statements.

In October 2008, the FASB issued FSP FAS 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP FAS 157-3). FSP FAS 157-3 clarifies the application of SFAS No. 157 in a market that is not active and addresses application issues such as the use of internal assumptions when relevant observable data does not exist, the use of observable market information when the market is not active and the use of market quotes when assessing the relevance of observable and unobservable data. FSP FAS 157-3 is effective for all periods presented in accordance with SFAS 157. The guidance in FSP FAS 157-3 did not have an impact on our financial statements upon adoption.

Concentration of Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash and cash equivalents, accounts receivable and marketable debt securities. Cash and cash equivalents are primarily invested in a diverse portfolio of money market securities and money market funds in accordance with our investment policy. With respect to accounts receivable, our customer base is dispersed across many geographic areas and we generally do not require collateral. We analyze historic collection experience, customer credit-worthiness, current economic trends in each country where our customers are located, and customer payment history when evaluating the adequacy of the allowance for doubtful accounts. We disclose accounts receivable net of the allowance for doubtful accounts on the face of the consolidated balance sheet.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets of three to seven years. Leasehold improvements are amortized on a straight-line basis over the life of the lease, or the estimated useful life of the asset, whichever is shorter.

Major additions and improvements are capitalized, while replacements, maintenance, and repairs that do not improve or extend the life of the assets are charged to expense. In the period assets are retired or otherwise disposed of, the costs and related accumulated depreciation and amortization are removed from the accounts, and any gain or loss on disposal is included in results of operations.

Goodwill and Intangible Assets

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), we review our goodwill for impairment annually, or more frequently if facts and circumstances warrant a review. The provisions of SFAS 142 require that a two-step test be performed to assess goodwill for impairment. First, the fair value of each reporting unit is compared to its carrying value. If the fair value exceeds the carrying value, goodwill is not impaired and no further testing is performed. The second step is performed if the carrying value exceeds the fair value. In this case, the implied fair value of the reporting unit’s goodwill is determined and compared to the carrying value of the goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss equal to the difference will be recorded.

We completed our annual goodwill impairment test during the fourth quarter of fiscal 2008 and determined that there was no impairment.

 

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SFAS 142 also requires that intangible assets with definite lives be amortized over their estimated useful life and reviewed for impairment in accordance with SFAS 144.

Intangible assets are stated at cost less accumulated amortization. Amortization of intangible assets is computed on a straight-line basis over the estimated benefit periods. The estimated benefit period ranges from four to thirteen years.

Long-Lived Assets

We account for long-lived assets under SFAS 144, which requires us to review for the impairment of long-lived assets, including intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. When such an event occurs, we estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the undiscounted expected future cash flows are less than the carrying amount of the asset, an impairment loss is recognized for the difference between the asset’s fair value and its carrying value. We recognized an intangible asset impairment loss of $0.8 million for the year ended December 31, 2008.

Revenue Recognition

We derive revenue from two primary sources: (i) royalties and licenses and (ii) services and other.

Royalties and licenses. In accordance with Statement of Position (SOP) 97-2, “Software Revenue Recognition” (SOP 97-2), we generally recognize royalties upon notification of shipment or activation of our software in set-top boxes and other products by licensees if a signed contract exists, delivery has occurred, the fee is fixed or determinable and collection of the resulting receivable is probable. For non-refundable prepaid royalties, we recognize revenue upon delivery of our software provided that all other requirements of SOP 97-2 have been met. In accordance with SOP 97-2, we recognize license fees if a signed contract exists, delivery has occurred, the fee is fixed or determinable and collection of the resulting receivable is probable.

Services and other. Professional services revenues related to software development contracts and arrangements for customization and implementation support are generally recognized using contract accounting and the percentage of completion basis in accordance with the provisions of SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (SOP 81-1). If a revenue contract involves the provision of multiple elements, total estimated contract revenues are allocated to each element based on the relative fair value of each element. In the event that fair value is not determinable for each element of a multiple-element contract, the contract is considered to be one accounting unit. If it is reasonably assured that no loss will be incurred under the arrangement, we recognize service revenues using the percentage of completion method using a zero-profit methodology until the services subject to contract accounting are complete. If the arrangement includes the future delivery of specified software products, we recognize revenue upon delivery of the services and such specified deliverables based on the completed contract method. If total costs are estimated to exceed the relative fair value for the arrangement, then a provision for the estimated loss is made in the period in which the loss first becomes apparent.

We also receive services fees and revenue shares in connection with our advertising solutions and interactive content and applications. These revenues are recognized in accordance with Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition” (SAB 104). Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectibility of the resulting receivable is reasonably assured.

Revenue shares include arrangements whereby our licensees pay us a percentage of the interactive revenues they earn from their customers. When we have delivered all of the software under such arrangements, we recognize the revenue as the licensee reports our revenue share to us, which is usually done on a quarterly basis.

 

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For contracts with multiple obligations (for example, maintenance and support sold together with other professional services), and for which vendor-specific objective evidence (VSOE) of fair value of the undelivered elements exists, we recognize revenue for the delivered elements based upon the residual method as prescribed by SOP No. 98-9, “Modification of SOP No. 97-2 with Respect to Certain Transactions.” Generally, we have VSOE of fair value for the maintenance element of software arrangements based on the renewal rates for maintenance in future years as specified in the contracts. In such cases, we defer the maintenance revenue at the outset of the arrangement and recognize it ratably over the period during which the maintenance is to be provided, which generally commences on the date the software is delivered. Payments for maintenance and support are generally made in advance and are non-refundable. VSOE of fair value of the service element is determined based on the price charged when those services are sold separately. For revenue allocated to consulting services and for consulting services sold separately, we recognize revenue as the related services are performed.

Under multiple-element arrangements where the customer receives rights for unspecified products or services when they are made available, we recognize the entire arrangement fee ratably over the term of the arrangement, in the appropriate respective revenue categories. Under multiple-element arrangements where the customer receives rights for specified future products and VSOE of fair value does not exist, we defer all revenue until the earlier of the point at which sufficient VSOE exists for all undelivered elements, or until all elements of the arrangement have been delivered.

Under multiple-element arrangements where the only undelivered element is maintenance and support and VSOE does not exist, the entire arrangement fee is recognized ratably over either the contractual maintenance and support period, or the period during which maintenance and support is expected to be provided.

We have entered into commercial arrangements involving both product licenses and service elements that are bundled together. Revenues from such bundled offerings under GAAP have been allocated to the “Royalties and licenses” and “Services and other” revenue line items based on the relative fair values of the product and service elements in each of the contracts. Our determination of the relative fair values of these elements is based on the relative amounts of the fees we charge our customers for the product licenses and service elements, as set forth in each of the applicable contracts.

Other Revenue Accounting Policies

In the normal course of business, we act as or use an intermediary or agent in executing transactions with third parties. The determination of whether revenue should be reported as gross or net is based on an assessment of whether we are acting as the principal or acting as an agent in the transaction. In determining whether we serve as principal or agent, we follow the guidance in Emerging Issues Task Force (EITF) 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent” (EITF 99-19).

In November 2001, the EITF reached consensus on EITF No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products” (EITF 01-09). In accordance with EITF 01-09, we account for cash consideration given to customers, for which we do not receive a separately identifiable benefit and cannot reasonably estimate fair value, as a reduction of revenue rather than as an expense.

Sales and use tax collected from customers and remitted to governmental authorities are reported on a net basis and are excluded from revenues.

Deferred Revenue and Contract Costs

Deferred revenue consists primarily of billings for royalties, services and licenses to customers with multiple-element arrangements where VSOE of fair value for certain undelivered elements does not exist, and for undelivered products or services which are generally amortized over the term of the arrangement or as such products or services are delivered.

 

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