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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) [x]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004 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
(Jurisdiction of incorporation)
    
    98-0212376
(I.R.S. Employer Identification No.)
 275 Sacramento Street
San Francisco, California 94111
(415) 962-5000
(Address, including zip code, and telephone number,
including area code, of registrants principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [x] No [  ] As of September 30, 2004, the Registrant had outstanding (not including
76,327 Class A ordinary shares held in treasury): 91,213,541 Class A ordinary shares, no par value; and
30,631,746 Class B ordinary shares, no par value




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##### Table of Contents



TABLE OF CONTENTS PagePART I.FINANCIAL INFORMATIONItem 1.Condensed Consolidated Financial Statements (unaudited)
    
    
    2Condensed Consolidated Balance Sheets at September 30,
2004 and December 31, 2003
    
    
    2Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2004 and 2003
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2.Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    16Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4.Controls and Procedures
    
    
    34PART II.OTHER INFORMATIONItem 1.Legal Proceedings
    
    
    36Item 6.Exhibits
    
    
    38Signatures
    
    
    39Exhibit Index
    
    
    40EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATION
 1




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS OPENTV CORP. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share amounts)
 September 30,
    
    December 31,2004
    
    2003*(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    41,300
    
    
    $
    47,747Short-term marketable debt securities
    
    
    3,601
    
    
    
    10,577Accounts receivable, net of allowance for doubtful accounts of $608
at September 30, 2004 and $789 at December 31, 2003
    
    
    15,567
    
    
    
    12,536Prepaid expenses and other current assets
    
    
    3,312
    
    
    
    4,722Total current assets
    
    
    63,780
    
    
    
    75,582Long-term marketable debt securities
    
    
    7,012
    
    
    
    15,172Property and equipment, net
    
    
    8,418
    
    
    
    11,689Goodwill
    
    
    70,466
    
    
    
    70,398Intangible assets, net
    
    
    26,395
    
    
    
    33,336Other assets
    
    
    13,361
    
    
    
    13,378Total assets
    
    $
    189,432
    
    
    $
    219,555LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,114
    
    
    $
    5,854Accrued liabilities
    
    
    20,274
    
    
    
    32,174Accrued restructuring
    
    
    1,056
    
    
    
    7,789Due to Liberty Media entities
    
    
    1,230
    
    
    
    630Current portion of deferred revenue
    
    
    9,855
    
    
    
    9,740Total current liabilities
    
    
    38,529
    
    
    
    56,187Deferred revenue, less current portion
    
    
    3,736
    
    
    
    5,310Total liabilities
    
    
    42,265
    
    
    
    61,497Commitments and contingencies (Note 10)Minority interest
    
    
    881
    
    
    
    1,075Shareholders equity:Class A ordinary shares, no par value, 500,000,000 shares authorized;
91,289,868 and 88,969,550 shares issued and outstanding, including
treasury shares, at September 30, 2004 and December 31, 2003,
respectively
    
    
    2,213,450
    
    
    
    2,208,370Class B ordinary shares, no par value, 200,000,000 shares authorized;
30,631,746 shares issued and outstanding
    
    
    35,953
    
    
    
    35,953Additional paid-in capital
    
    
    466,251
    
    
    
    466,228Treasury shares at cost, 76,327 shares
    
    
    (38
    )
    
    
    (38
    )Deferred share-based compensation
    
    
    (13
    )
    
    
    (36
    )Accumulated other comprehensive income
    
    
    40
    
    
    
    201Accumulated deficit
    
    
    (2,569,357
    )
    
    
    (2,553,695
    )Total shareholders equity
    
    
    146,286
    
    
    
    156,983Total liabilities, minority interest and shareholders equity
    
    $
    189,432
    
    
    $
    219,555
 * The consolidated balance sheet at December 31, 2003 has been derived from the
Companys audited consolidated financial statements at that date, but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The accompanying notes are an integral part of these condensed consolidated financial statements. 2




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OPENTV CORP. 
 CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
 (In thousands, except share and per share amounts)
(Unaudited)
 Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Revenues:Royalties
    
    $
    9,264
    
    
    $
    6,758
    
    
    $
    28,882
    
    
    $
    18,677Services, support and other
    
    
    3,026
    
    
    
    6,693
    
    
    
    11,952
    
    
    
    17,315Fees and revenue shares
    
    
    3,313
    
    
    
    2,991
    
    
    
    9,944
    
    
    
    9,233License fees
    
    
    974
    
    
    
    631
    
    
    
    2,294
    
    
    
    2,932Total revenues
    
    
    16,577
    
    
    
    17,073
    
    
    
    53,072
    
    
    
    48,157Operating expenses:Cost of revenues
    
    
    8,076
    
    
    
    13,511
    
    
    
    27,372
    
    
    
    36,616NASCAR Amendment (Note 6)
    
    
    
    
    
    
    
    
    
    
    (4,600
    )
    
    
    Research and development
    
    
    7,243
    
    
    
    5,738
    
    
    
    21,244
    
    
    
    15,221Sales and marketing
    
    
    3,516
    
    
    
    4,280
    
    
    
    11,221
    
    
    
    13,436General and administrative
    
    
    3,696
    
    
    
    4,180
    
    
    
    13,883
    
    
    
    12,779Restructuring costs
    
    
    (575
    )
    
    
    147
    
    
    
    (1,092
    )
    
    
    7,074Amortization of intangible assets
    
    
    711
    
    
    
    1,174
    
    
    
    3,108
    
    
    
    3,656Total operating expenses
    
    
    22,667
    
    
    
    29,030
    
    
    
    71,136
    
    
    
    88,782Loss from operations
    
    
    (6,090
    )
    
    
    (11,957
    )
    
    
    (18,064
    )
    
    
    (40,625
    )Interest income
    
    
    201
    
    
    
    439
    
    
    
    611
    
    
    
    1,331Other income (expense), net
    
    
    562
    
    
    
    (136
    )
    
    
    536
    
    
    
    (1,120
    )Minority interest
    
    
    64
    
    
    
    13
    
    
    
    194
    
    
    
    113Loss before income taxes
    
    
    (5,263
    )
    
    
    (11,641
    )
    
    
    (16,723
    )
    
    
    (40,301
    )Income tax benefit (expense)
    
    
    500
    
    
    
    (277
    )
    
    
    1,061
    
    
    
    (918
    )Net loss
    
    $
    (4,763
    )
    
    $
    (11,918
    )
    
    $
    (15,662
    )
    
    $
    (41,219
    )Net loss per share, basic and diluted
    
    $
    (0.04
    )
    
    $
    (0.10
    )
    
    $
    (0.13
    )
    
    $
    (0.47
    )Shares used in per share calculation, basic and diluted
    
    
    121,830,392
    
    
    
    116,157,971
    
    
    
    121,084,985
    
    
    
    86,930,601
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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OPENTV CORP. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
(Unaudited)
 Nine Months Ended September 30,2004
    
    2003Cash flows used in operating activities:Net loss
    
    $
    (15,662
    )
    
    $
    (41,219
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization of property and equipment
    
    
    4,751
    
    
    
    5,511Amortization of intangible assets
    
    
    6,941
    
    
    
    11,499Amortization of share-based compensation
    
    
    22
    
    
    
    233Non-cash employee compensation
    
    
    1,025
    
    
    
    570Provision
(Reduction of) allowance  for doubtful accounts
    
    
    (353
    )
    
    
    385Non-cash restructuring costs
    
    
    
    
    
    
    532Minority interest
    
    
    (194
    )
    
    
    (113
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,931
    )
    
    
    (2,816
    )Prepaid expenses and other current assets
    
    
    785
    
    
    
    881Other assets
    
    
    17
    
    
    
    2,537Accounts payable
    
    
    268
    
    
    
    (1,587
    )Accrued liabilities
    
    
    (5,365
    )
    
    
    (3,136
    )NASCAR amendment
    
    
    (4,600
    )
    
    
    Accrued restructuring
    
    
    (6,733
    )
    
    
    (9,222
    )Due to Liberty Media entities
    
    
    600
    
    
    
    (428
    )Deferred revenue
    
    
    (1,459
    )
    
    
    2,756Net cash used in operating activities
    
    
    (22,888
    )
    
    
    (33,617
    )Cash flows provided from investing activities:Purchase of property and equipment
    
    
    (1,485
    )
    
    
    (2,167
    )Cash used
for acquisitions, net of cash acquired
    
    
    
    
    
    
    (10,297
    )Proceeds from sale of marketable debt securities
    
    
    18,415
    
    
    
    98,728Purchase of marketable debt securities
    
    
    (3,377
    )
    
    
    (47,336
    )Net cash provided from investing activities
    
    
    13,553
    
    
    
    38,928Cash flows provided from financing activities:Proceeds from issuance of ordinary shares
    
    
    2,953
    
    
    
    56Capital contribution from MIH Limited
    
    
    
    
    
    
    704Net cash provided from financing activities
    
    
    2,953
    
    
    
    760Effect of exchange rate changes on cash and cash equivalents
    
    
    (65
    )
    
    
    56Net decrease in cash and cash equivalents
    
    
    (6,447
    )
    
    
    6,127Cash and cash equivalents, beginning of period
    
    
    47,747
    
    
    
    38,568Cash and cash equivalents, end of period
    
    $
    41,300
    
    
    $
    44,695
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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OPENTV CORP. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004
 (Unaudited)
 Note 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements
included herein have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission and reflect all adjustments that in the
opinion of management are necessary for a fair presentation of the results of
operations, financial position and cash flows as of, and for, the periods
shown. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The results of operations for such period are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004, or for any future period. These condensed consolidated financial
statements should be read in conjunction with our audited consolidated
financial statements and notes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2003. The accompanying condensed 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. Certain amounts in the 2003 financial
statements have been reclassified to conform to the 2004 presentation. Preparation of the accompanying condensed consolidated financial
statements in conformity with generally accepted accounting principles 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 condensed consolidated financial statements and
the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates. Note 2. Summary of Significant Accounting Policies Share-Based Compensation We account for share-based employee compensation arrangements in
accordance with the provisions of APB No. 25, Accounting for Stock Issued to
Employees, and comply with the disclosure provisions of SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure, which
was effective for the year ended December 31, 2003. Under APB No. 25,
compensation expense is based on the difference, if any, on the date of the
grant, between the fair value of our shares and the exercise price of the
option or purchase right. Had compensation cost for options plans been
determined based on the fair value at the grant dates for the awards under a
method prescribed by SFAS 123, Accounting for Stock-Based
Compensation, our
net loss would have been increased to the pro-forma amounts indicated below
(amounts in millions, except per share amounts): Three Month Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net loss, as reported
    
    $
    (4.8
    )
    
    $
    (11.9
    )
    
    $
    (15.7
    )
    
    $
    (41.2
    )Add: Share-based employee compensation expense
included in reported net loss, net of related tax effects
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.2Add (deduct): Share-based employee compensation expense
determined under fair value-based method for all awards,
net of related tax effects
    
    
    (1.0
    )
    
    
    0.5
    
    
    
    (2.6
    )
    
    
    1.2
 5




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Three Month Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Pro-forma net loss
    
    $
    (5.8
    )
    
    $
    (11.3
    )
    
    $
    (18.3
    )
    
    $
    (39.8
    )Net loss per share, basic and diluted:As reported
    
    $
    (0.04
    )
    
    $
    (0.10
    )
    
    $
    (0.13
    )
    
    $
    (0.47
    )Pro-forma
    
    $
    (0.05
    )
    
    $
    (0.10
    )
    
    $
    (0.15
    )
    
    $
    (0.46
    )
 These pro-forma amounts may not be representative of the effects on
reported net loss for future years as options vest over several years and
additional awards are generally made each year. We calculated the fair value of each option grant on the date of the grant
using the Black-Scholes option pricing model with the following assumptions: Three Months
    
    Three Months
    
    Nine Months
    
    Nine MonthsEnded September
    
    Ended September
    
    Ended September
    
    Ended September30, 2004
    
    30, 2003
    
    30, 2004
    
    30, 2003Risk-free interest rate
    
    
    3.69-3.74
    %
    
    
    2.48%-3.63
    %
    
    
    2.65-3.74
    %
    
    
    2.19%-3.63
    %Average expected life (months)
    
    
    60
    
    
    
    60
    
    
    
    60
    
    
    
    60Volatility
    
    
    111
    %
    
    
    131
    %
    
    
    111-115
    %
    
    
    131%-132
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 The weighted average fair value of options granted during the three months
ended September 30, 2004 and 2003 was $1.98 and $2.11, respectively. The
weighted average fair value of options granted during the nine months ended
September 30, 2004 and 2003 was $2.45 and $1.75, respectively. Recent Accounting Pronouncements In June 2004, the Financial Accounting Standards Board (FASB) issued
Emerging Issues Task Force Issue No. 02-14, Whether an Investor Should Apply
the Equity Method of Accounting to Investments Other Than Common Stock. EITF
02-14 addresses whether the equity method of accounting applies when an
investor does not have an investment in voting common stock of an investee but
exercises significant influence through other means. EITF 02-14 states that an
investor should only apply the equity method of accounting when it has
investments in either common stock or in-substance common stock of a
corporation, provided that the investor has the ability to exercise significant
influence over the operating and financial policies of the investee. The
accounting provisions of EITF 02-14 are effective for reporting periods
beginning after September 15, 2004. We do not expect the adoption of EITF 02-14
to have a material impact on our consolidated financial position, results of
operations or cash flows. In March 2004, the FASB issued EITF Issue No. 03-01, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments
which provides new guidance for assessing impairment losses on investments.
Additionally, EITF 03-1 includes new disclosure requirements for investments
that are deemed to be temporarily impaired. In September 2004, the FASB delayed
the accounting provisions of EITF 03-1; however the disclosure requirements
remain effective for annual periods ending after June 15, 2004. We will
evaluate the impact of EITF 03-1 once final guidance is issued. In
March 2004, the FASB issued an exposure draft on the Proposed
Statement of Financial Accounting Standards, Share-Based Payment -
an amendment of FASB Statements No. 123 and 95. The
proposed statement addresses the accounting for share-based payment
transactions with employees and other third-parties. The proposed
standard would eliminate the ability to account for share-based
compensation transactions using Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to
Employees, and generally would require that such transactions
be accounted for using a fair-value-based method. If the final
standard is approved as currently drafted in the exposure draft, it
would have a material impact on the amount of earnings we report
beginning in the third quarter of fiscal 2005. In December 2003, the FASB issued Interpretation No. 46R, or FIN 46R, a
revision to FIN 46. FIN 46R clarifies some of the provisions of FIN 46 and
exempts certain entities from its requirements. FIN 46R is effective for the
first reporting period ending after March 15, 2004. We do not have any
ownership in any variable interest entities as of September 30, 2004. We will
apply the consolidation requirements of FIN 46R in future periods if we should
acquire any interest in any variable interest entity. In December 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 104, Revenue Recognition, which supercedes Staff
Accounting Bulleting No. 101, Revenue Recognition in Financial Statements.
The primary purpose of SAB 104 is to rescind accounting guidance contained in
SAB 101 related to 6




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multiple element revenue arrangements, which was superseded as a result of
the issuance of EITF 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables. While the wording of SAB 104 has changed to reflect the
issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain
largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not
have a material impact on our consolidated financial position, results of
operations, or cash flows. Note 3. Net Loss Per Share Basic and diluted net loss per share were computed using the weighted
average number of ordinary shares outstanding during the periods presented. The
following items as of September 30, 2004 and 2003 were not included in the
computation of diluted net loss per share because the effect would be
anti-dilutive: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Class A ordinary shares issuable upon exercise of
stock
options
    
    
    9,163,936
    
    
    
    11,093,811
    
    
    
    9,712,680
    
    
    
    6,687,180Class A ordinary shares issuable upon exercise of
warrants
    
    
    
    
    
    
    506,520
    
    
    
    
    
    
    
    506,520Class A ordinary shares issuable for shares of
OpenTV,
Inc. Class A common stock (including shares of
OpenTV, Inc. Class A common stock issuable upon
exercise of stock options)
    
    
    755,428
    
    
    
    787,094
    
    
    
    759,039
    
    
    
    862,427Class B ordinary shares issuable for shares of
OpenTV,
Inc. Class B common stock
    
    
    7,594,796
    
    
    
    7,594,796
    
    
    
    7,594,796
    
    
    
    7,594,796
 Had such items been included in the calculation of diluted net loss per
share, shares used in the calculation would have been increased by
approximately 9.8 million and 12.2 million for the three months ended September
30, 2004 and 2003, respectively, and 9.7 million and 9.8 million for the nine
months ended September 30, 2004 and 2003, respectively. Note 4. Goodwill Minority shareholders of OpenTV, Inc., which is a subsidiary of ours, have
the ability, under certain arrangements, to exchange their shares of OpenTV,
Inc. for our shares, generally on a one-for-one basis. As the shares are
exchanged, they are accounted for at fair value. This accounting effectively
provides that at each exchange date, the exchange is accounted for as a
purchase of a minority interest in OpenTV, Inc., valued at the number of our
Class A ordinary shares issued to effect the exchange multiplied by the market
price of a Class A ordinary share on that date. As a result of applying
purchase accounting to the exchanges, we recorded $0.1 million in additional
goodwill during the nine months ended September 30, 2004. Note 5. Intangible Assets, Net The components of intangible assets, excluding goodwill, were as follows
(in millions): 7




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September 30, 2004Dec 31, 2003Useful
    
    Gross
    
    
    
    
    
    Net
    
    Netlife in
    
    Carrying
    
    Accumulated
    
    Carrying
    
    Carryingyears
    
    Amount
    
    Amortization
    
    Amount
    
    AmountIntangible assets:Patents
    
    
    5-13
    
    
    $
    20.7
    
    
    $
    (3.3
    )
    
    $
    17.4
    
    
    $
    18.9Developed technologies
    
    
    3-5
    
    
    
    7.1
    
    
    
    (2.2
    )
    
    
    4.9
    
    
    
    7.1Contracts and relationships
    
    
    2-5
    
    
    
    6.9
    
    
    
    (3.0
    )
    
    
    3.9
    
    
    
    6.6Trademarks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.5Purchased technologies
    
    
    5
    
    
    
    0.4
    
    
    
    (0.2
    )
    
    
    0.2
    
    
    
    0.2$
    35.1
    
    
    $
    (8.7
    )
    
    $
    26.4
    
    
    $
    33.3
 The intangible assets are being amortized on a straight-line basis over
their estimated useful lives. Amortization of intangible assets (including
amounts reported in cost of revenues) was $1.6 million and $4.0 million for the
three months ended September 30, 2004 and 2003, respectively, and $6.9 million
and $11.5 million for the nine months ended September 30, 2004 and 2003,
respectively. The future annual amortization expense is expected to be as
follows (in millions): AmortizationYear ending December 31,
    
    Expense2004 (Remaining three months)
    
    $
    1.32005
    
    
    5.02006
    
    
    4.92007
    
    
    3.92008
    
    
    1.8Thereafter
    
    
    9.5$
    26.4
 Note 6. NASCAR Amendment During the nine months ended September 30, 2004, we renegotiated an
existing contract that our subsidiary, ACTV, had with iNDEMAND relating to the
production of interactive programming for the 2004 NASCAR season. As a result
of this renegotiation, we reduced the estimated loss for that contract by $4.6
million from the amount which had been accrued by ACTV in 2003 prior to its
acquisition by OpenTV. This item has been shown as a separate line item in our
consolidated statement of operations. Note 7. Restructuring Costs We monitor our organizational structure and associated operating expenses
periodically. Depending upon events and circumstances, actions may be taken to
restructure the business, including terminating employees, abandoning excess
lease space and incurring other exit costs. Restructuring costs are recorded in
accordance with SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. SFAS 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized at fair value when the
liability is incurred. Any resulting restructuring accrual includes numerous
estimates made by management, which are developed based on managements
knowledge of the activity being affected and the cost to exit existing
commitments. These estimates could differ from actual results. We monitor the
initial estimates periodically and record an adjustment for any significant
changes in estimates. During the three months ended September 30, 2004, we reversed
over-accruals relating to leases from prior restructuring provisions in 2002 by
$0.6 million. The following sets forth the payments made during the nine months ended
September 30, 2004, relating to various restructuring activities (in millions): 8




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EmployeeSeveranceAnd
    
    ExcessBenefits
    
    Facilities
    
    TotalBalance, December 31, 2003
    
    $
    1.5
    
    
    $
    6.3
    
    
    $
    7.8Restructuring provision
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.4Cash payments
    
    
    (1.2
    )
    
    
    (4.4
    )
    
    
    (5.6
    )Reversal of excess provision
    
    
    (0.6
    )
    
    
    (0.9
    )
    
    
    (1.5
    )Balance, September 30, 2004
    
    $
    
    
    
    $
    1.1
    
    
    $
    1.1
 The outstanding accrual for excess facilities relates to operating lease
obligations that continue through 2006. Note 8. Employee Bonus During the three months ended March 31, 2004, we issued 558,640 of our
Class A ordinary shares to employees in the United States and the United
Kingdom pursuant to our 2003 bonus plan and also made certain cash equivalent
bonus payments to employees in other foreign jurisdictions. The final bonus
amount actually paid to all employees was less than the bonus accrual provided
in fiscal 2003, and so a credit of $0.5 million was recorded in operating
expenses in the three months ended March 31, 2004. The compensation committee
of our Board of Directors approved a similar bonus plan for 2004, which is
based on corporate and individual performance objectives and is being accrued
throughout the year. Note 9. Comprehensive Loss The components of comprehensive loss, net of tax, were as follows (in
millions): Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (4.8
    )
    
    $
    (11.9
    )
    
    $
    (15.7
    )
    
    $
    (41.2
    )Other comprehensive loss:Foreign currency translation gains
    
    
    0.2
    
    
    
    0.1
    
    
    
    
    
    
    
    Unrealized (losses) gains on investments
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (0.2
    )Reclassification for realized gains from sale of
marketable debt securities, net of income taxes
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.3
    )Comprehensive loss
    
    $
    (4.5
    )
    
    $
    (12.0
    )
    
    $
    (15.8
    )
    
    $
    (41.7
    )
 Note 10. Commitments and Contingencies Operating Leases We lease our facilities from third parties under operating lease
agreements or sublease agreements in the United States, Europe and Asia
Pacific. These leases expire between December 2004 and March 2016. Total rent
expense was $1.4 million and $1.2 million for the three months ended September
30, 2004 and 2003, respectively, and $4.1
million and $4.6 million for the nine months ended September 30, 2004 and
2003, respectively. There was no sublease income. Future minimum payments under non-cancelable operating leases as of
September 30, 2004 were as follows (in millions): 9




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##### Table of Contents



MinimumYear ending September 30,
    
    Commitments2004 (remaining three months)
    
    $
    1.62005
    
    
    6.02006
    
    
    4.62007
    
    
    3.52008
    
    
    3.5Thereafter
    
    
    8.6$
    27.8
 Other Commitments In the ordinary course of business we enter into various arrangements with
vendors and other business partners for bandwidth, marketing, and other
services. Future minimum commitments under these arrangements as of September
30, 2004 were $1.2 million for the remaining three months of 2004 and $3.8
million and $0.1 million for the years ending December 31, 2005 and 2006,
respectively. As of September 30, 2004, we had two standby letters of credit aggregating
approximately $2.0 million that were issued to landlords at two of our leased
properties and we had $10.0 million of marketable debt securities pledged with
a bank for foreign exchange facilities. In March 1998, we entered into a licensing and distribution agreement with
Sun Microsystems, Inc. under which Sun Microsystems granted us a non-exclusive,
non-transferable license to develop and distribute products based upon Sun
Microsystemss Java technology. Subsequent amendments extended our license
through December 2006. As amended, the agreement requires us to make a payment
of $4.0 million to Sun Microsystems in February 2007, less any amounts
previously paid for support and royalty fees, which have been nominal to date. Contingencies OpenTV, Inc. v. Liberate Technologies, Inc.On February 7, 2002, OpenTV,
Inc., our subsidiary, filed a lawsuit against Liberate Technologies, Inc.
alleging patent infringement in connection with two patents held by OpenTV,
Inc. relating to interactive technology. The lawsuit is pending in the United
States District Court for the Northern District of California. On March 21,
2002, Liberate Technologies filed a counterclaim against OpenTV, Inc. for
alleged infringement of four patents allegedly owned by Liberate Technologies.
Liberate Technologies has since dismissed its claims of infringement on two of
those patents. In January 2003, the District Court granted two of OpenTV,
Inc.s motions for summary judgment pursuant to which the court dismissed
Liberate Technologies claim of infringement on one of the remaining patents
and dismissed a defense asserted by Liberate Technologies to OpenTV, Inc.s
infringement claims, resulting in only one patent of Liberate Technologies
remaining in the counterclaim. The District Court issued a claims construction
ruling for the two OpenTV patents and one Liberate patent remaining in the suit
on December 2, 2003. The trial date was set for February 7, 2005. On May 3, 2004, Liberate Technologies filed a voluntary bankruptcy
petition under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware. The case was subsequently
removed to the United States Bankruptcy Court for the Northern District of
California. As a result of that filing, our litigation with Liberate
Technologies was stayed and the trial schedule was vacated. On September 8,
2004, the Bankruptcy Court issued a ruling dismissing Liberate
Technologies bankruptcy case. Liberate Technologies has
appealed this ruling. We believe that our lawsuit against Liberate
Technologies is meritorious, and with the dismissal of the bankruptcy case, we
intend to continue vigorously pursuing prosecution of our claims against
Liberate Technologies. In addition, we believe that we have meritorious
defenses to the counterclaims brought against OpenTV, Inc. and will defend
ourselves vigorously. No provision has been made in our consolidated financial
statements for this matter. We are unable to predict the likelihood of a
favorable outcome or estimate our potential liability, if any, in respect of
any potential counterclaims if litigated to conclusion. Initial Public Offering Securities Litigation.In July 2001, the first of
a series of putative securities class actions, 10




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Brody v. OpenTV Corp., et al.,
was filed in 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. These lawsuits
were consolidated and are captioned In re OpenTV Corp. Initial Public Offering
Securities Litigation.The complaints allege undisclosed and improper practices
concerning the allocation of our initial public offering shares, in violation
of the federal securities laws, and seek unspecified damages on behalf of
persons who purchased OpenTV Class A ordinary shares during the period from
November 23, 1999 through December 6, 2000. The Court has appointed a lead
plaintiff for the consolidated cases. On April 19, 2002, the plaintiffs filed
an amended complaint. Other actions have been filed making similar allegations
regarding the initial public offerings of more than 300 other companies,
including Wink Communications as discussed in greater detail below. All of
these lawsuits have been coordinated for pretrial purposes as In re Initial
Public Offering Securities Litigation.Defendants in these cases filed an
omnibus motion to dismiss on common pleading issues. Oral argument on the
omnibus motion to dismiss was held on November 1, 2002. All claims against our
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. The Courts
Order dismissed all claims against us except for a claim brought under Section
11 of the Securities Act of 1933. The Court has given plaintiffs an opportunity
to amend their claims in order to state a claim. Plaintiffs have not yet filed
an amended complaint. Plaintiffs and the issuer defendants, including us, have
agreed to a settlement, in which plaintiffs will dismiss and release their
claims in exchange for a guaranteed recovery to be paid by the insurance
carriers of the issuer defendants and an assignment of certain claims. A
stipulation of settlement for the claims against the issuer-defendants,
including us, has been submitted to the Court. There is no guarantee that the
settlement will become effective, as it is subject to a number of conditions,
including approval of the Court, which cannot be assured. If the settlement
does not occur, and the litigation against us continues, we believe that we
have meritorious defenses to the claims asserted against us and will 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. In November 2001, a putative securities class action was filed in 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 lawsuit is now
captioned In re Wink Communications, Inc. Initial Public Offering Securities
Litigation.The operative amended complaint alleges undisclosed and improper
practices concerning the allocation of Wink Communications initial public
offering shares in violation of the federal securities laws, and seeks
unspecified damages on behalf of persons who purchased Wink Communications
common stock during the period from August 19, 1999 through December 6, 2000.
This action is among the over 300 lawsuits that have been consolidated for
pretrial purposes as In re Initial Public Offering Securities Litigation.On
February 19, 2003, the Court ruled on the motions to dismiss filed by all
defendants in the consolidated cases. The Court denied the motions to dismiss
the claims under the Securities Act of 1933, granted the motion to dismiss the
claims under Section 10(b) of the Securities Exchange Act of 1934 against Wink
Communications and one individual defendant, and denied that motion against the
other individual defendant. As described above, a stipulation of settlement for
the claims against the issuer defendants has been submitted to the Court. There
is no guarantee that the settlement will become effective, as it is subject to
a number of conditions, including approval of the Court, which cannot be
assured. If the settlement does not occur, and the litigation against Wink
Communications continues, we believe that Wink Communications has meritorious
defenses to the claims brought against it and that Wink Communications will
defend itself 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. Litigation Relating to the Acquisition of ACTV, Inc.On November 18, 2002,
a purported class action complaint was filed in the Court of Chancery of the
State of Delaware in and for the County of New Castle against ACTV, Inc., its
directors and us. The complaint generally alleges that the directors of ACTV
breached their fiduciary duties to the ACTV shareholders in approving the ACTV
merger agreement pursuant to which we acquired ACTV on July 1, 2003, and that,
in approving the ACTV merger agreement, ACTVs directors failed to take steps
to maximize the value of ACTV to its shareholders. The complaint further
alleges that we aided and abetted the purported breaches of fiduciary duties
committed by ACTVs directors on the theory that the merger could not occur
without our participation. No proceedings on the merits have occurred with
respect to this action, and the case is dormant. We believe that the
allegations are without merit and intend to defend against the complaint
vigorously. No 11




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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,
Broadcast Innovation 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. We have reimbursed Charter for legal expenses that it has incurred
in connection with this litigation. On August 4, 2004, the District Court found
the 094 patent invalid. On August 5, 2004, BI filed a motion for
reconsideration in the case. On September 17, 2004, the District Court entered
its summary judgment order based on the invalidity of the patent in suit
without specifically commenting on BIs motion. In the order, the Court
awarded costs to the defendants. On September 27, 2004, BI appealed the
District Courts summary judgment order to the United States Court of Appeals
for the Federal Circuit. On October 4, 2004, Charter filed a motion for its
attorneys fees in addition to the costs already awarded by the Court. Based
on the information available to us, we have established a reserve for costs
that we expect may be incurred in connection with this matter; that reserve is
an estimate only and actual costs may be materially different. Personalized Media Communications, LLC.On December 4, 2000, a suit was
filed in the United States District Court for the District of Delaware by
Pegasus Development Corporation and Personalized Media Communications, LLC
alleging that DIRECTV, Inc., Hughes Electronics Corp., Thomson Consumer
Electronics and Philips Electronics North America, Inc. are willfully
infringing certain claims of seven U.S. patents assigned or licensed to
Personalized Media Communications. Based on publicly available information, we
believe that the case has been stayed in the District Court pending
re-examination by the United States Patent and Trademark Office. Though Wink
Communications is not a defendant in the suit, Personalized Media
Communications may allege that certain products of Wink Communications,
possibly in combination with products provided by the defendants, infringe
Personalized Media Communications patents. The agreements between Wink
Communications and each of the defendants include indemnification obligations
that may be triggered by this litigation. If it is determined that Wink
Communications is obligated to defend any defendant in this matter, and/or that
the products of Wink Communications infringe any of the asserted claims, our
business performance, financial position, results of operations or cash flows
may be adversely affected. No provision has been made in our consolidated
financial statements for this matter. We are unable to estimate our potential
liability, if any. Other Matters. In the normal course of our business, we provide
indemnification to customers against claims of intellectual property
infringement made by third parties arising from the use of our products.
Historically, costs
related to these indemnification provisions have not been significant and
we are unable to estimate the maximum potential impact of these indemnification
provisions on our future results of operations, although our liabilities in
those arrangements are customarily limited in various respects, including
monetarily. During the three months ended September 30, 2004, we agreed to
reimburse Charter Communications for legal expenses which it had incurred in
connection with certain patent litigation. We intend to seek recovery of these
legal fees in connection with the invalidation of the patent-in-suit. 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 12




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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 limits 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. 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, litigation is subject to inherent uncertainties.
Were an unfavorable ruling to occur, there exists the possibility of a material
adverse impact on the results of operations of the period in which the ruling
occurs. The estimate of the potential impact on our financial position or
overall results of operations for any of the legal proceedings described above
could change in the future. Note 11. Related Party Transactions On August 27, 2002, Liberty Media Corporation and one of its subsidiaries
(collectively, Liberty Media) completed a transaction in which Liberty Media
acquired a controlling ownership stake in us. As of September 30, 2004, Liberty
Medias total ownership represented approximately 32.3% of the economic
interest and approximately 79.0% of the voting power of our ordinary shares on
an undiluted basis. Commencing in August 2002, a subsidiary of Liberty Media provided certain
management services for us; this relationship was terminated in February 2004.
We reimbursed them for the services based on the estimated percentage of time
that various individuals dedicated to the performance of services for us. In
addition, we also reimburse them for an allocated portion of their travel and
administrative costs and certain specific costs related to OpenTV. We expect
in the future that such costs will be primarily related to reimbursement of
lease payments for an office facility used by our employees. Total management
and other charges from Liberty Media were $0.1 million and $0.7 million for the
three months ended September 30, 2004 and 2003, respectively, and $0.7 million
and $1.7 million for the nine months ended September 30, 2004 and 2003,
respectively. Since January 2004, we have participated in the Liberty Media medical
insurance program for employees in the United States at a cost of $0.5 million
for the three months ended September 30, 2004 and $1.3 million for the nine
months ended September 30, 2004. We believe that this participation provides
us with better economic terms than we would otherwise be able to achieve
independent of Liberty Media. The services and support revenue from Liberty Media entities was nominal
during the three and nine months ended September 30, 2004. We recorded a
nominal amount in services and support revenue from Liberty Media entities for
the three months ended September 30, 2003 and $1.0 million for the nine months
ended September 30, 2003. On March 23, 2004, in consideration for the issuance by Liberty Media to
James Chiddix of options to purchase 50,000 shares of Liberty Media Series A
common stock as an inducement to Mr. Chiddix agreeing to serve as Chairman of
our Board of Directors, we issued to Liberty Media an aggregate of 76,982 of
our Class A ordinary shares. The number of our Class A ordinary shares issued
to Liberty Media was determined by multiplying the Black-Scholes value per
option to purchase a share of Liberty Media Series A common stock ($4.603495)
by 50,000, and dividing the resulting number by the closing sale price of our
Class A ordinary share on the Nasdaq National Market on March 23, 2004 ($2.99).
We accounted for the issuance of our shares to Liberty Media as a dividend
equal to the fair value of the shares of $0.2 million during the three months
ended March 31, 2004. In June 2000, we entered into an employment agreement with James Ackerman,
our then current Chief Executive Officer and a member of our Board of
Directors, pursuant to which we agreed, among other things, (a) to provide an
interest-free loan of approximately $2.4 million to be forgiven in annual
installments over a period of four years and (b) to issue Class A ordinary
shares having an aggregate fair market value of approximately $0.6 million in
annual installments over the same four-year period. The final 25% of the loan
was forgiven in January 2004 and 43,662 Class A ordinary shares were issued.
The amounts forgiven annually were reported as compensation expense. The annual
grants of Class A ordinary shares were also reported as compensation expense.
In May 2004, we and Mr. Ackerman agreed not to renew his employment agreement
and Mr. Ackerman stepped 13




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down as Chief Executive Officer. As part of that
change, Mr. Ackerman agreed to serve as a special advisor to our Chairman for a
transitional period during 2004. Note 12. Segment Information SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, requires enterprises to report information about operating
segments and it establishes standards for related disclosures about products,
geographic areas and major customers. The method for determining what
information to report is based upon the management approach. Our Chief
Executive Officer reviews revenues by both geography and customer, and we do
not have separately reportable operating segments. Our revenues by geographic area based on the location of customers were as
follows (in millions): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Europe, Africa and Middle East
    
    $
    10.4
    
    
    $
    7.6
    
    
    $
    31.1
    
    
    $
    23.3Americas
    
    
    3.3
    
    
    
    6.9
    
    
    
    14.6
    
    
    
    18.2Asia Pacific
    
    
    2.9
    
    
    
    2.6
    
    
    
    7.4
    
    
    
    6.7$
    16.6
    
    
    $
    17.1
    
    
    $
    53.1
    
    
    $
    48.2
 Americas include United States revenue of $2.5 million and $6.1 million
for the three months ended September 30, 2004 and 2003, respectively, and $12.2
million and $15.0 million for the nine months ended September 30, 2004 and
2003, respectively. Five major customers accounted for the following percentages of revenues: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Customer
    
    2004
    
    2003
    
    2004
    
    2003A
    
    
    3
    %
    
    
    10
    %
    
    
    3
    %
    
    
    11
    %B
    
    
    0
    %
    
    
    10
    %
    
    
    5
    %
    
    
    11
    %C
    
    
    8
    %
    
    
    11
    %
    
    
    13
    %
    
    
    11
    %D
    
    
    14
    %
    
    
    0
    %
    
    
    15
    %
    
    
    0
    %E
    
    
    10
    %
    
    
    4
    %
    
    
    9
    %
    
    
    5
    %
 In addition, British Sky Broadcasting, or BSkyB, directly and indirectly
accounted for 28% and 10% of total revenues for the three months ended
September 30, 2004 and 2003, respectively, and 17% and 11% of total revenues
for the nine months ended September 30, 2004 and 2003, respectively, taking
into account the royalties which are paid by four manufacturers who sell
set-top boxes to BSkyB. One customer accounted for 19% of net accounts receivable as of September
30, 2004. Additional summarized information by geographic area was as follows (in
millions): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Capital expenditures, net:United States
    
    $
    0.2
    
    
    $
    0.2
    
    
    $
    1.1
    
    
    $
    1.3Other countries
    
    
    0.1
    
    
    
    0.6
    
    
    
    0.4
    
    
    
    0.9$
    0.3
    
    
    $
    0.8
    
    
    $
    1.5
    
    
    $
    2.2
 14




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##### Table of Contents



September 30,
    
    December 31,2004
    
    2003Long-lived assets:United States
    
    $
    102.1
    
    
    $
    108.0Other countries
    
    
    12.5
    
    
    
    16.8$
    114.6
    
    
    $
    124.8
   (1)
    
    Long-lived assets include property and equipment, goodwill, intangible
assets and other assets. 15




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report onForm 10-Qcontains 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, expenses,
earnings or losses from operations; any statements of the plans, strategies and
objectives of management for future operation; any statements concerning
developments, performance or market conditions relating to products or
services; any statements regarding future economic conditions or performance;
any statements of expectation or belief; and any 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 Quarterly
Report onForm 10-Q. 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 the section titled Factors That May Affect
Future Results 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. The following discussion should be read together with the Unaudited
Condensed Consolidated Financial Statements and the notes thereto included
elsewhere in this Quarterly Report onForm 10-Qand with our audited financial
statements, the notes thereto and the section titled Managements Discussion
and Analysis of Financial Condition and Results of Operations included in our
Annual Report onForm 10-Kfor the fiscal year ended December 31, 2003, as
filed with the Securities and Exchange Commission. Overview We are one of the worlds leading providers of software and solutions for
interactive and enhanced television. We derive our revenues from the licensing of our core software and related
technologies, the licensing and distribution of our content and applications
and the delivery of professional services. We typically receive one-time
royalty fees from manufacturers of set-top boxes or cable, satellite and
terrestrial network operators once a set-top box, which incorporates our
software, has been shipped to, or activated by, the network operator. We also
receive professional services fees from consulting, engineering 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. In addition, we also receive ongoing licensing fees for various
software products that we sell. As of September 30, 2004, Liberty Media Corporations total ownership
represented approximately 32.3% of the economic interest and 79.0% of the
voting interest of our ordinary shares on an undiluted basis. Critical Accounting Policies and Estimates Our financial statements and accompanying notes have been prepared in
accordance with accounting principles generally accepted in the United States.
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 regards 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 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; valuation of investments in privately-held companies;
impairment of goodwill and intangible assets; and restructuring costs. All of
these accounting policies, estimates and assumptions, as well as the resulting
impact to our financial statements, have been discussed with our audit
committee. 16




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Revenue Recognition We recognize revenue in accordance with current generally accepted
accounting principles that have been prescribed for the software industry.
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. In applying our revenue recognition policy we must determine what
portions of our revenue are recognized currently and which portions must be
deferred. In order to determine current and deferred revenue, we make judgments
and estimates with regard to future deliverable services and the appropriate
pricing for those services. Our assumptions and judgments regarding future
services could differ from actual events. Professional services revenues from software development contracts,
customization services and implementation support are recognized generally on
the percentage of completion method. 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 subject to
milestones and deliverables as stated in the contracts. The actual results
could differ from the percentage estimates by the time a project is completed. The recognition of revenues is partly based on our assessment of the
probability of collection of the resulting accounts receivable balance. As a
result, the timing or amount of revenue recognition may have been different if
different assessments of the probability of collection of accounts receivable
had been made at the time the transactions were recorded in revenue. Valuation Allowances We maintain allowances 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 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 feasible tax planning strategies in assessing the
amount of our valuation allowance. Currently we have a full valuation allowance
on deferred tax assets in excess of deferred tax liabilities. Adjustments may
be required in the future if we determine that an amount of deferred tax assets
can be realized. Valuation of Investments in Privately-Held Companies We invest in equity and debt instruments of privately-held companies for
business and strategic objectives, and typically we do not attempt to reduce or
eliminate the inherent market risks of these investments. We perform periodic
reviews of these investments for impairment. Our investments in privately-held
companies are considered impaired when a review of the investees operations
and other indicators of impairment indicate that there has been a decline in
the fair value that is other than temporary and that the carrying value of the
investment is not likely to be recoverable. Such indicators include, but are
not limited to, limited capital resources, need for additional financing, and
prospects for liquidity of the related securities. Impaired investments in
privately-held companies are written down to estimated fair value, which is the
amount we believe is recoverable from the investment. Impairment of Goodwill and Other Intangible Assets Our
goodwill and other intangible assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable and in the
case of goodwill, annually. In assessing the recoverability of our goodwill and other intangible assets, we consider changes in economic conditions and make assumptions
regarding estimated future cash flows and other factors. The biggest assumption
impacting estimated future cash flows is revenue growth. 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. 17




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Restructuring Costs We monitor our organization structure and associated operating expenses
periodically. Depending upon events and circumstances, actions may be taken to
restructure the business, including terminating employees, abandoning excess
lease space and incurring other exit costs. Any resulting restructuring costs
include numerous estimates made by us based on our knowledge of the activity
being affected and the cost to exit existing commitments. These estimates could
differ from actual results. We monitor the initial estimates periodically and
record an adjustment for any significant changes in estimates. Three Months and Nine Months Ended September 30, 2004 and 2003 Revenues Revenues for the three months ended September 30, 2004 were $16.6 million,
a decrease of 3%, or $0.5 million, from $17.1 million in 2003. Revenues for the
nine months ended September 30, 2004 were $53.1 million, an increase of 10%, or
$4.9 million, from $48.2 million for the same period in 2003. Revenues by line
item were as follows (in millions): Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    %
    
    2003
    
    %
    
    2004
    
    %
    
    2003
    
    %Royalties
    
    $
    9.3
    
    
    
    56
    %
    
    $
    6.8
    
    
    
    40
    %
    
    $
    28.9
    
    
    
    54
    %
    
    $
    18.7
    
    
    
    39
    %Services, support and other
    
    
    3.0
    
    
    
    18
    %
    
    
    6.7
    
    
    
    39
    %
    
    
    12.0
    
    
    
    23
    %
    
    
    17.3
    
    
    
    36
    %Fees and revenue shares
    
    
    3.3
    
    
    
    20
    %
    
    
    3.0
    
    
    
    18
    %
    
    
    9.9
    
    
    
    19
    %
    
    
    9.3
    
    
    
    19
    %License fees
    
    
    1.0
    
    
    
    6
    %
    
    
    0.6
    
    
    
    3
    %
    
    
    2.3
    
    
    
    4
    %
    
    
    2.9
    
    
    
    6
    %Total Revenues
    
    $
    16.6
    
    
    
    100
    %
    
    $
    17.1
    
    
    
    100
    %
    
    $
    53.1
    
    
    
    100
    %
    
    $
    48.2
    
    
    
    100
    %
 Royalties.We derive royalties from the sale of set-top boxes and other
products that incorporate our software. These royalty payments are typically
paid to us either by the set-top box manufacturers or the network operators
around the world that use or deploy that software. Royalty revenues are
dependent on continued deployment of set-top boxes by existing customers,
upgrades to newer versions of our software by existing customers and new
customers launching our technologies in their systems. Should set-top box
deployments and software upgrades by existing customers slow or the acquisition
of new customers not occur, our royalty revenues would be negatively impacted
in future years. As there are a limited number of network operators capable of
deploying interactive television on a large-scale basis, we expect that our
ability to achieve incremental royalty revenues could diminish in future years. We typically recognize royalties upon notification of unit shipments or
activation of our software by manufacturers or network operators. Royalty
reports are generally received one quarter in arrears. For non-refundable
prepaid royalties, we recognize revenues upon delivery of the software. Royalties for the three months ended September 30, 2004 were $9.3 million,
an increase of 37%, or $2.5 million, from $6.8 million in 2003. Sky Italia,
the largest pay-per-view operator in Italy, with which we signed a network
license agreement in the prior quarter, accounted for an increase of $1.8
million and royalties from manufacturers that sell set-top boxes to BSkyB
accounted for an increase of $0.9 million. Royalties from our integrated
browser, which is incorporated in certain digital TV sets distributed within
Japan, accounted for an increase of $0.9 million. Revenues from a significant
customer were $0.8 million less in the three months ended September 30, 2004
compared to the same period in the prior year. That decline resulted from a
timing difference caused by a late royalty report If the report had been
received prior to September 30, 2004, royalties for the third quarter of 2004
would have been $1.6 million higher. We will recognize that revenue in the
fourth quarter of 2004. In addition, other manufacturers accounted for a
decrease in royalties of $0.3 million. Royalties for the nine months ended September 30, 2004 were $28.9 million,
an increase of 55%, or $10.2 million, from $18.7 million in 2003. Sky Italia
accounted for $6.8 million of that increase. Royalties from our integrated
digital TV browser accounted for an increase of $1.9 million. The
manufacturers that sell set-top boxes to 18




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BSkyB accounted for an increase of $0.1 million, after taking into account
a credit of approximately $1.3 million for the nine months ended September 30,
2004 for the over-reporting by one of these manufacturers of shipments relating
to 2002 and 2003. EchoStar accounted for an increase of $0.9 million and other
manufacturers accounted for an increase of $0.5 million. Royalty revenue from
EchoStar is deferred and amortized over the seven-year term of our EchoStar
agreements because EchoStar has a right to receive unspecified future
applications when they are made available. Until we are able to recognize that
royalty revenue, amounts that we receive from EchoStar are recorded as deferred
revenue in our consolidated balance sheet. Sky Italia accounted for $7.5 million, or 26%, of royalties for the nine
months ended September 30, 2004; EchoStar accounted for $5.9 million, or 20%,
and four of our customers who sell set-top boxes to BSkyB accounted for $5.1
million, or 18%. Services, Support and Other.Services, support and other revenue consist
primarily of professional services consulting engagements for set-top box
manufacturers, network operators and system integrators and maintenance,
support and training for set-top box manufacturers and network operators. For
the three months ended September 30, 2004, revenues in this category were $3.0
million, a decline of 55%, or $3.7 million, from $6.7 million in 2003. Service
revenues from one of our customers declined by $1.0 million from the same
period in the prior year as a result of the expiration of certain minimum
commitments we had for providing professional services. The remaining decrease
was attributable to decreased consulting work for several customers and the
termination of maintenance and support payments by some customers. For the nine months ended September 30, 2004, revenues in this category
were $12.0 million, a decline of 31%, or $5.3 million, from $17.3 million in
2003. Service revenues from one of our customers declined by $3.0 million from
the same period in the prior year as a result of the expiration of certain
minimum commitments we had for providing professional services. There was also
decreased work for other customers and lower maintenance and support payments.
The remaining decrease was attributable to decreased consulting work for
several customers and the termination of maintenance and support payments by
some customers. We currently expect our revenues in this category to continue to decline
unless we are successful in obtaining additional professional services
engagements. Fees and Revenue Shares.Fees and revenue shares consist of PlayJam games
channel fees, interactive advertising fees, net betting and gaming revenues,
and revenue shares received for advertising and other interactive services. For
the three months ended September 30, 2004, revenues in this category were $3.3
million, an increase of 10%, or $0.3 million, from $3.0 million in 2003. Net
betting and gaming revenues, resulting from the acquisition of BettingCorp in
the third quarter of 2003, accounted for an increase of $0.4 million, while
other items decreased by $0.1 million. For the nine months ended September 30, 2004, revenues in this category
were $9.9 million, an increase of 6%, or $0.6 million, from $9.3 million in
2003. Net betting and gaming revenues derived from BettingCorp accounted for
an increase of $1.2 million, while advertising decreased by $0.5 million. License Fees.We derive license fees from the licensing of products such
as OpenTV Streamer, OpenTV Software Developers Kit and various applications.
For the three months ended September 30, 2004, revenues in this category were
$1.0 million, an increase of 67%, or $0.4 million, from $0.6 million for the
same period in 2003. For the nine months ended September 30, 2004, revenues in
this category were $2.3 million, a decrease of 21%, or $0.6 million, from $2.9
million for the same period in 2003. License fees are generally one-time
purchases by our customers and can vary significantly from quarter to quarter. Operating Expenses Our total operating expenses for the three months ended September 30, 2004
were $22.7 million, a decrease of 22%, or $6.3 million, from $29.0 million for
the same period in 2003. Our total operating expenses for the nine months
ended September 30, 2004 were $71.1 million, a decrease of 20%, or
$17.7 million, from $88.8 million for the same period in 2003. ACTV and
BettingCorp, which we acquired in July and August 2003, respectively, 19




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collectively accounted for $2.9 million and $9.6 million of operating
expenses for the three months and nine months ended September 30, 2004. Operating expenses by line item were as follows (in millions): Three Months Ended September 30,
    
    Nine Months Ended September 30,% of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % of2004
    
    Revenue
    
    2003
    
    Revenue
    
    2004
    
    Revenue
    
    2003
    
    RevenueCost of revenues
    
    $
    8.1
    
    
    
    49
    %
    
    $
    13.5
    
    
    
    79
    %
    
    $
    27.4
    
    
    
    52
    %
    
    $
    36.6
    
    
    
    76
    %NASCAR Amendment
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    (4.6
    )
    
    
    (9
    %)
    
    
    
    
    
    
    0
    %Research and development
    
    
    7.3
    
    
    
    44
    %
    
    
    5.7
    
    
    
    33
    %
    
    
    21.2
    
    
    
    40
    %
    
    
    15.2
    
    
    
    31
    %Sales and marketing
    
    
    3.5
    
    
    
    21
    %
    
    
    4.3
    
    
    
    25
    %
    
    
    11.2
    
    
    
    21
    %
    
    
    13.4
    
    
    
    28
    %General and administrative
    
    
    3.7
    
    
    
    22
    %
    
    
    4.2
    
    
    
    25
    %
    
    
    13.9
    
    
    
    26
    %
    
    
    12.8
    
    
    
    26
    %Restructuring costs
    
    
    (0.6
    )
    
    
    (3
    %)
    
    
    0.1
    
    
    
    1
    %
    
    
    (1.1
    )
    
    
    (2
    %)
    
    
    7.1
    
    
    
    15
    %Amortization of
intangible assets
    
    
    0.7
    
    
    
    4
    %
    
    
    1.2
    
    
    
    7
    %
    
    
    3.1
    
    
    
    6
    %
    
    
    3.7
    
    
    
    8
    %Total Operating Expenses
    
    $
    22.7
    
    
    
    137
    %
    
    $
    29.0
    
    
    
    170
    %
    
    $
    71.1
    
    
    
    134
    %
    
    $
    88.8
    
    
    
    184
    %
 Cost of revenues. Cost of revenues consist primarily of
compensation-related expenses and related overhead costs associated with
professional services engagements, network infrastructure and bandwidth costs
of our interactive games and betting channels, amortization of developed and
purchased technology, and amortization of patents. Cost of revenues for the three months ended September 30, 2004 were $8.1
million, a decrease of 40%, or $5.4 million, from $13.5 million for the same
period in 2003. ACTV and BettingCorp collectively accounted for a decrease of
$0.8 million and Wink Communications accounted for a decrease of $2.0 million.
The amortization period for certain patents and developed technology expired
during the period, accounting for a decrease in amortization of patents and
developed technology of $2.3 million. Other costs accounted for the remaining
decrease of $0.3 million. Cost of revenues for the nine months ended September 30, 2004 were $27.4
million, a decrease of 25%, or $9.2 million, from $36.6 million for the same
period in 2003. ACTV and BettingCorp collectively accounted for an increase of
$1.9 million. That increase was offset by a decrease of $5.4 million in costs
related to Wink Communications and a decrease of $5.2 million related to
patents and developed technology which had been fully amortized. Cost of
revenues for the nine months ended September 30, 2003 included a credit of $1.2
million in respect of a contract settlement with BSkyB for bandwidth. Other
costs accounted for a decrease of $1.7 million. NASCAR Amendment.During the nine months ended September 30, 2004, we
renegotiated an existing contract that our subsidiary, ACTV, had with iNDEMAND
relating to the production of interactive programming for the 2004 NASCAR
season. As a result of this renegotiation, we reduced the estimated loss for
that contract by $4.6 million from the amount which had been accrued by ACTV in
2003 prior to its acquisition by us. This item has been shown as a separate
line item in our condensed consolidated statement of operations. Research and Development. Research and development expenses consist
primarily of compensation-related expenses and related overhead costs incurred
for both new product development and enhancements to our range of software and
applications products. Research and development expenses for the three months ended September 30,
2004 were $7.3 million, an increase of 28%, or $1.6 million, from $5.7 million
for the same period in 2003. ACTV and BettingCorp collectively accounted for a
decrease of $0.5 million. The remaining increase of $2.1 million was
attributable to a reallocation of staff from operations to research and
development and also to certain salary increases. Research and development expenses for the nine months ended September 30,
2004 were $21.2 million, an increase of 39%, or $6.0 million, from $15.2
million for the same period in 2003. ACTV and BettingCorp 20




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collectively accounted for an increase of $2.2 million. The remaining
increase of $3.8 million was attributable to a reallocation of staff from
operations to research and development and also to salary increases. We believe that research and development spending is critical to remaining
competitive in the marketplace. We will continue to focus on the timely
development of new and enhanced interactive television products for our
customers, and we plan to continue investing at levels that are adequate to
develop our technologies and product offerings. Sales and Marketing. Sales and marketing expenses consist primarily of
advertising and other marketing-related expenses, compensation-related expenses
and related overhead costs, and travel costs. Sales and marketing expenses for the three months ended September 30, 2004
were $3.5 million, a decrease of 19%, or $0.8 million, from $4.3 million for
the same period in 2003. There was a decrease of $1.4 million in market
development funds primarily as a result of the expiration of an agreement with
DirecTV in December 2003. ACTV and BettingCorp collectively accounted for an
increase of $0.1 million and trade shows and other marketing programs accounted
for an increase of $0.5 million. Sales and marketing expenses for the nine months ended September 30, 2004
were $11.2 million, a decrease of 16%, or $2.2 million, from $13.4 million for
the same period in 2003. There was a decrease of $3.1 million in market
development funds primarily as a result of the expiration of an agreement with
DirecTV. ACTV and BettingCorp collectively accounted for an increase of $0.7
million and there were increases in other marketing programs of $0.2 million. General and Administrative. General and administrative expenses consist
primarily of compensation-related expenses and related overhead costs,
litigation, provision for doubtful accounts and fees for professional services. General and administrative expenses for the three months ended September
30, 2004 were $3.7 million, a decrease of 12%, or $0.5 million, from $4.2
million in 2003. The provision for doubtful accounts accounted for a decrease
of $0.2 million and other expenses accounted for a decrease of $0.3 million. General and administrative expenses for the nine months ended September
30, 2004 were $13.9 million, an increase of 9%, or $1.1 million, from $12.8
million for the same period in 2003. Litigation costs accounted for an
increase of $2.6 million. There was a reduction in the provision for doubtful
accounts of $0.7 million and other expenses accounted for a decrease of $0.8
million. Restructuring Costs. For the three months ended September 30, 2004, we
reversed over-accruals relating to leases from prior restructuring provisions
in 2002 by $0.6 million. For the three months ended September 30, 2004, we
reversed over-accruals from prior restructuring provisions by $1.5 million and
had a provision of $0.4 million for a workforce reduction of 5 people in our
PlayJam operations in France, resulting in a net credit for restructuring of
$1.1 million. For the nine months ended September 30, 2003, total restructuring costs
were $7.1 million. We reduced our workforce in France by approximately 70
people, abandoned an office lease and wrote-down fixed assets. Amortization of Intangible Assets. For the three months ended September
30, 2004, amortization of intangible assets was $0.7 million, a decrease of 42
% or $0.5 million, from $1.2 for the same period in 2003. For the nine months
ended September 30, 2004, amortization of intangible assets was $3.1 million, a
decrease of 16% or $0.6 million, from $3.7 million for the same period in 2003.
The decreases were due to the expiration of the amortization period for
certain intangibles. Interest Income, Other
Income, Other Expense and Minority Interest As a result of continued low interest rates in the United States, coupled
with a decrease in our investment portfolio, interest income for the three
months ended September 30, 2004 was $0.2 million compared with $0.4 million for
the same period in 2003. Interest income for the nine months ended September
30, 2004 was $0.6 million compared with $1.3 million for the same period in
2003. 21




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For the three months ended September 30, 2004, other income was $0.6
million due to the settlement of certain litigation. For the nine months ended
September 30, 2004, other income was $0.5 million compared with other expense
of $1.1 million for the same period in 2003. In the prior year there was a
settlement of a dispute we assumed in connection with our acquisition of Wink,
which resulted in other expense of $0.9 million. Income Taxes We had United States federal tax loss carryforwards of approximately $300
million as of December 31, 2003. However, we are subject to income taxes in
certain state and foreign jurisdictions and we have foreign taxes withheld from
certain royalty payments. For the three months ended September 30, 2004, we
recorded an income tax benefit of $0.5 million primarily due to a tax refund in
the United Kingdom and the reversal of a previously recorded tax liability
following the expiration of the statute of limitations. This compares with a
tax provision of $0.3 million for the three months ended September 30, 2003.
For the nine months ended September 30, 2004, we recorded an income tax benefit
of $1.1 million primarily due to tax refunds in the United Kingdom, a favorable
settlement of a tax audit in France, and the reversal of a previously recorded
tax liability following the expiration of the statute of limitations. This
compares with a tax provision of $0.9 million for the nine months ended
September 30, 2003. Liquidity and Capital Resources 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, expenses and
cash commitments are generally accurate. Because we cannot be certain that our
assumptions about our business or the interactive television market in general
will prove to be accurate, our capital requirements may differ from our current
expectations. As of September 30, 2004, we had cash and cash equivalents of $41.3
million, which was a decrease of $6.4 million from the balance at December 31,
2003. Taking into account short-term and long-term marketable debt securities
of $10.6 million, our cash, cash equivalents and marketable debt securities
were $51.9 million as of September 30, 2004, compared with $73.5 million as of
December 31, 2003. Our primary source of cash is receipts from revenues. The
primary uses of cash are payroll, general operating expenses and cost of
revenues. Due to our continuing operating losses and increases in accounts
receivable, cash used in operating activities was $22.9 million for the nine
months ended September 30, 2004, a reduction of $10.7 million from the $33.6
million of cash we used in operating activities for the nine months ended
September 30, 2003. Cash provided from investing activities was $13.6 million for the nine
months ended September 30, 2004, primarily due to the net sale of marketable
debt securities. For the nine months ended September 30, 2003, the cash
provided from investing activities was $38.9 million. Capital expenditures
were $1.5 million for the nine months ended September 30, 2004 compared with
$2.2 million for the nine months ended September 30, 2003. Cash provided from financing activities was $3.0 million for the nine
months ended September 30, 2004, compared with $0.8 million for nine months
ended September 30, 2003. The amount for 2004 represented proceeds from
issuance of ordinary shares from exercise of stock options. The amount for 2003 primarily represented a
capital contribution. We use a professional investment management firm to manage most 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 according to our investment
policy, which has been approved by our Board of Directors. Commitments and Contractual Obligations Information as of September 30, 2004 concerning the amount and timing of
required payments under our contractual obligations is summarized below (in
millions): 22




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Payments due by periodDue inDue in
    
    Due in
    
    2009Total
    
    Due in 2004
    
    2005-2006
    
    2007-2008
    
    or afterOperating lease obligations
    
    $
    27.8
    
    
    $
    1.6
    
    
    $
    10.6
    
    
    $
    7.0
    
    
    $
    8.6Non-cancelable purchase obligations
    
    
    9.1
    
    
    
    1.2
    
    
    
    3.9
    
    
    
    4.0
    
    
    
    Total contractual obligations
    
    $
    36.9
    
    
    $
    2.8
    
    
    $
    14.5
    
    
    $
    11.0
    
    
    $
    8.6
 In the ordinary course of business, we enter into various arrangements
with vendors and other business partners for bandwidth, marketing, and other
services. Future minimum commitments under these arrangements as of September
30, 2004 were $1.2 million for the remaining three months of 2004 and $3.8
million and $0.1 million for the years ending December 31, 2005 and 2006,
respectively. As of September 30, 2004, we had two standby letters of credit aggregating
approximately $2.0 million that were issued to landlords at two of our leased
properties and we had $10.0 million of marketable debt securities pledged with
a bank for foreign exchange facilities. In March 1998, we entered into a licensing and distribution agreement with
Sun Microsystems, Inc. under which Sun Microsystems granted us a non-exclusive,
non-transferable license to develop and distribute products based upon Sun
Microsystemss Java technology. Subsequent amendments extended our license
through December 2006. As amended, the agreement requires us to make a payment
of $4.0 million to Sun Microsystems in February 2007, less any amounts
previously paid for support and royalty fees, which have been nominal to date. Indemnification In the normal course of our business, we provide indemnification to
customers against claims of intellectual property infringement made by third
parties arising from the use of our products. Historically, costs related to
these indemnification provisions have not been significant and we are unable to
estimate the maximum potential impact of these indemnification provisions on
our future results of operations, although our liabilities in those
arrangements are customarily limited in various respects, including monetarily.
During the three months ended September 30, 2004, we agreed to reimburse
Charter Communications for legal expenses which it had incurred in connection
with certain patent litigation. We intend to seek recovery of these legal fees
in connection with the invalidation of the patent-in-suit. For further details
see Note 10 to the condensed consolidated financial statements. 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 limits our exposure and enables us to
recover a portion of any future amounts paid. Factors That May Affect Future Results In addition to the other information contained in this quarterly report on
Form 10-Q, you should consider carefully the following factors in evaluating
OpenTV and our business. We have a history of net losses, and we may continue to experience net losses
in the future. We have incurred significant net losses since our inception. Our net
losses for the years ended December 31, 2001, 2002 and 2003 were approximately
$1,304.3 million, $802.6 million and $54.1 million, respectively. We expect to
continue to incur significant sales and marketing, product development and
administrative expenses and expect to continue to suffer net losses in the near
term. We will need to generate significant revenue to achieve and maintain
profitability. We cannot be certain that we will achieve, sustain or increase
profitability in the future. Any failure to significantly increase revenue as
we implement our product and distribution strategies would adversely affect our
business, financial condition and operating results. 23




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We have historically derived a significant percentage of our revenues from
licensing our core middleware product to network operators. Our opportunities
for future revenue growth with that product are limited by the actual number of
worldwide network operators and by technology decisions they make from time to
time. We have on a historic basis derived a significant percentage of our total
revenues from royalties associated with the deployment of our core middleware
and fees charged for services rendered in support of our middleware
deployments. Only a limited number of network operators worldwide currently
deploy interactive products and services in a meaningful way. While we continue
to seek deployments within the United States, we have a significant number of
customers outside of the United States that have deployed our core middleware.
In most cases, the number of network operators in any particular country is
relatively small, and to the extent that we have already achieved deployments
in those countries, the opportunities for future growth of our middleware
business may be limited. Our capacity to generate future revenues associated with our core
middleware may also be limited due to a number of reasons, including:  network operators that have selected our core middleware may switch to
another middleware platform for the provision of interactive services, reduce
their pace of set-top box deployment or stop deploying set-top boxes enabled
with our core middleware, decrease or stop their use of our support services,
or choose not to upgrade or add additional features to the version of our core
middleware running on their networks;  network operators that have not selected our core middleware may choose
another middleware platform for the provision of interactive services; or  a meaningful opportunity to deploy our core middleware in the markets
that have not yet adopted interactive television on a large scale may never
develop or may develop at a very slow pace. Any of these eventualities would have an adverse effect on our results of
operations. We expect a more significant portion of our revenue growth in the future to be
derived from interactive content and applications that we develop and market.
If we are not successful in developing and marketing that interactive content
and those applications, our future revenue growth may be limited. We expect over the next several years to develop extensive interactive
content and applications, including gaming channels, addressable and targeted
advertising and programming synchronous applications. The market for
interactive content and applications is still nascent and evolving.
Historically, we have derived only a relatively small percentage of our total
revenue from these offerings. We cannot be certain that the demand for or the
market acceptance of interactive content and applications will develop as we
anticipate, and even if they do, we cannot be certain that we will be able to
market that content and those applications effectively and successfully respond
to changes in consumer preferences. In addition, our ability to market those
products will be affected to a large degree by network operators. If network
operators determine that our interactive content and applications do not meet
their business or operational expectations, they may choose not to offer our
applications to their customers. To the extent that network operators fail to
renew or enter into new or expanded contracts with us for provision of
interactive content (such as our enhanced interactive television service) and
applications (such as the PlayJam channel), we will be unable to maintain or
increase the level of distribution of our interactive content and applications
and the associated revenue from those offerings. Moreover, due to global
economic conditions, network operators may slow down their deployment of new
content and applications offerings, and such actions would negatively impact
our revenue. Accordingly, our ability to generate substantial revenues from our
interactive content and applications offerings is uncertain. We may seek to generate a significantly greater percentage of our revenue
growth in the future from revenue sharing and subscription based arrangements.
If we are unsuccessful in developing those revenue models, then our future
revenue growth may be limited and our results of operations will be adversely
affected. We have historically generated a substantial portion of our revenue from
royalty and licensing fees related to the licensing of our core middleware
products and from fees for professional services that we provide. We believe
that our capacity to generate future revenues in this manner may be limited,
and if we are unsuccessful in evolving our revenue model, our opportunities for
future revenue growth, particularly outside of the United States, may be 24




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limited. We expect, over time, that we may need to seek an increasing
percentage of our revenues from revenue sharing arrangements with network
operators, programmers and advertisers. In those instances, we would typically
receive a percentage of the payments that a network operator, programmer or
advertiser may receive from transactions that make use of our interactive
content or applications. We also expect, over time, that we may need to seek an
increasing percentage of our revenues from subscription-based fee arrangements.
In those instances, we would typically receive a fixed payment, over a period
of time, based on the number of subscribers or viewers that use or access our
technologies, content or applications. There can no guarantee that we will be
successful in entering into future revenue sharing or subscription-based
arrangements with network operators, programmers or advertisers or that we will
be able to generate a substantial amount of revenue from these sources. If our
efforts are unsuccessful, then our future results of operations will be
adversely affected. We have acquired several businesses since October 2002. We continue to
implement initiatives designed to enhance the integration of those businesses
and to seek further consolidation of our worldwide operations. Our failure to
effectively integrate those acquired businesses, or to streamline our
operations, may adversely affect our business, financial condition and results
of operations. We acquired Wink Communications, Inc., a provider of interactive and
enhanced television services, in October 2002. We acquired ACTV, Inc., a
provider of addressable advertising and related products and services, in July
2003. In addition, in August 2003, we acquired substantially all of the assets
of BettingCorp Limited, a provider of gaming and gambling technologies and
services. We face many risks and challenges associated with integrating these
acquisitions, including:  difficulties related to the integration of operations and personnel of
acquired companies into our existing business, especially outside the United
States as with BettingCorp;  diversion of managements attention from our business;  incorporation of acquired products and business technology into our
existing product lines; and  adoption and maintenance of uniform standards, controls, procedures and
policies. While we believe that we have made progress in integrating those
businesses, and their personnel and technologies, with ours, we have not
completed those efforts. If we are not successful in integrating those
businesses with ours, we may not realize the full benefits of the assets that
we acquired. Moreover, if we do not successfully complete such integration and
consolidation in a timely manner, the increased demands on managements time,
and the increased costs associated with that process may also have an adverse
effect on our business, financial condition and results of operations. We continue to evaluate our business opportunities and to 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. In addition to the integration and consolidation efforts that we have
undertaken in response to our various acquisitions, we continue our efforts to
streamline our worldwide operations and reduce our operating expenses. In this
regard, we continue to undertake efforts to consolidate our operations, close
and relocate various offices around the world, divest non-strategic assets and
reduce our headcount. These initiatives may yield unanticipated consequences,
such as attrition beyond our planned reduction in workforce and loss of
employee morale and diminished performance. Reductions in personnel, both
anticipated and unanticipated, could materially and adversely impact our sales
and marketing efforts, research and development efforts, and our professional
services and general and administrative functions. In conjunction with these initiatives, we have engaged and are continuing
to engage in a review of our operations with a view towards improving our
business performance. 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 old strategies and
processes. This may adversely affect our business, results of operations and
future prospects. 25




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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, expenses and
cash commitments are generally accurate. Nevertheless, we have incurred to date
and we expect that we will continue to incur in the future significant
expenses, many of which result from non-cancelable operating commitments. As of
September 30, 2004, we had $51.9 million of cash, cash equivalents and
marketable debt securities. We used approximately $22.9 million in cash for
operating activities during the nine months ended September 30, 2004 and $42.5
million during the fiscal year ended December 31, 2003. We may need to raise
additional capital in the future if our revenue growth does not meet our
expectations or we are unable to reduce substantially the amount of cash used
in our operating activities. 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. To the extent we are required to raise additional capital, we may not be
able to do so at all or we may be 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
opportunities or respond to competitive pressures or unanticipated
requirements, any of which could have an adverse effect on our business,
results of operations or 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 a better
recognized brand name 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. For example, in addition to our PlayJam and
PlayMonteCarlo applications, British Sky Broadcasting also offers its own
competitive gaming and gambling applications through its broadcast network. If
any of these competitors achieves significant market penetration or other
significant 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 cable and direct
broadcast satellite industries. We believe this trend is likely to continue due
to economic and competitive concerns. This trend appears to be expanding to
include other companies involved with the interactive television industry. For
example, Comcast Corp., a cable network operator, and Gemstar-TV Guide
International Inc., a media and technology company, recently formed a joint
venture called Guideworks to develop an interactive programming guide for the
cable television 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 competitive concerns that may arise as companies
consolidate. If we are unable to successfully manage these changing
relationships and address these competitive concerns, our business and results
of operations may be adversely affected. Unanticipated fluctuations in our quarterly operating results could affect our
stock 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. 26




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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;  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;  The ability to generate applications-related revenue from existing and
potential customers;  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. Because a high percentage of our expenses, particularly compensation, is
fixed in advance of any particular quarter, 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. A significant portion of our senior management team is new. If they are unable
to work together effectively, we may not be able to execute our business plan. Our business is highly dependent on the ability of our senior management
team to work together effectively to execute our business plan. Our management
team has changed significantly over the past year. In March 2004, James Chiddix
was appointed Chairman of our board of directors and assumed the additional
role of Chief Executive Officer in May 2004. In addition, several of our other
senior executives in important operational and administrative roles joined us
since the last half of 2003. These individuals and our existing management team
have not previously worked together. If they are unable to effectively
integrate themselves into our business or work together as a management team,
we may not be able to manage our business effectively. We depend upon key technical, consulting and support personnel to operate our
business, and we may be unable to attract or retain such personnel. Our business requires highly trained technical, consulting and support
personnel to assist customers with launch and deployment of our products. In
the future, we may need to increase our technical, consulting and support staff
to support new customers and the expanding needs of our existing customers.
Notwithstanding the current economic climate, hiring consulting and support
personnel has remained very competitive in our industry due to the limited
number of people available with the necessary technical skills and
understanding of the interactive television market, and we have experienced
difficulty in recruiting qualified personnel in the past. Even if we invest
significant resources in attempting to attract, train and retain these
qualified personnel, we may not be successful in our efforts, which may have a
negative effect on our business and results of operations. 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 operators of
broadcast and pay television networks, network operators and manufacturers of
televisions and set-top boxes, as well as by television 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 27




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development are uncertain. The growth and future success of our business
will depend in part upon our ability to penetrate new markets and convince
network operators, television viewers and advertisers to adopt and maintain
their use of our products and services. Because much of our success and value lie 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
procedures 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 or otherwise
obtain and use our software and other proprietary information without
authorization. Policing unauthorized use of our software and proprietary information will
be difficult. 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. Intellectual property infringement claims may be asserted against us, which
could have the effect of disrupting 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 their 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. 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 incompatible standards by our industry and 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 28




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anticipate trends and adapt to new technologies and evolving standards is
critical to our success. Recent attempts to establish industry-wide standards for interactive
television software include an initiative by cable network operators in the
United States to create a uniform platform for interactive television called
Open Cable and an initiative by European television industry participants to
create a platform called Multimedia Home Platform. 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. The deployment of new digital television applications, 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, 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 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:  
    
    Software revenue recognition;
    
    Accounting for stock-based compensation; and
    
    Accounting for goodwill and other intangible assets. 29




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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 what portions of our revenue are
recognized currently and which portions must be deferred. As a result, we may
receive cash from a customer but not be able to recognize the revenue
associated with that cash for some period of time under applicable accounting rules. This results
in our recording the cash as deferred revenue on our balance sheet. 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, our balance sheet and our statement of
cash flows. We are engaged in a comprehensive effort to comply with various aspects of
Section 404 of the Sarbanes-Oxley Act of 2002 concerning internal control over
financial reporting. In the event we are unable to satisfy completely the
regulatory requirements of such act, or if, upon implementation, our internal
control over financial reporting is not effective, the reliability of our
financial statements could be implicated and, ultimately, our financial results
and our stock price could suffer. Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to do a
comprehensive evaluation of their internal control over financial reporting.
To comply with this new statute, our management must assess and issue a report
concerning our internal control over financial reporting, and our independent
registered public accountant must issue an opinion on managements assessment of
those matters, including potentially identifying weaknesses. The
rules governing the standards that must be met for management to assess the
internal control over financial reporting are new and complex and require
significant documentation, testing and possible remediation to meet the
detailed standards under the rules. We have prepared an internal plan of
action for compliance, which includes a timeline and schedule for completing our
evaluation. Our efforts to comply with the rules and regulations have
required, and will continue to require, the commitment of significant financial
and managerial resources. As we evaluate our controls and procedures, and introduce
new or revised ones, the testing of those controls and procedures or
remediation efforts, if any, that may be required may take significant time and
require significant managerial effort which could extend beyond December 31,
2004. Financial reports issued for fiscal years ending
after November 15, 2004 will be the first reports issued under this new
oversight regime. We do not have extensive insight, or any historical
experience, as to the precise nature and content of these reports or
the nature and content of the opinions on managements' assessments
that accountants may deliver. As
a result, we cannot be certain of the possible effects the issuance
of these reports or opinions, or the ongoing implementation of Section 404
may have on public companies, including our own, or financial markets in general. While we anticipate being able to fully implement the requirements
relating to internal control over financial reporting and all other aspects of
Section 404 in a timely fashion, we cannot be certain, because
of the absence of precedent, as to the timing of the
completion of our evaluation, testing and remediation actions or the impact of
those matters on our operations. We continue to evaluate our internal control over
financial reporting with the assistance of the independent consultants we have engaged to help us
establish and document appropriate procedures. In connection with this
process, we have discovered certain aspects of our internal control over
financial reporting that we intend to address and modify, although we do not believe that
any of these matters, to date, indicate a material weakness based on
information available to us as of the date of this report. As we
complete our assessment of our internal control over financial
reporting for the year 2004, some or all of these, or other matters,
may rise to the level of a significant deficiency or a material
weakness. In addition, as we complete our assessment of our internal
control over financial reporting, internal control deficiencies may
be identified through our assessment process. Our
evaluation of our internal control over financial reporting remains ongoing,
and, accordingly, we, including our Chief Executive Officer and Chief Financial
Officer, who are responsible for certifying our financial statements, may make
additional conclusions and take additional actions, from time to time, as we
may deem necessary or desirable. If we fail to timely complete our evaluation under the Sarbanes-Oxley Act,
or if we cannot favorably assess the effectiveness of our internal control over financial
reporting or we or our independent registered public accountant identify material weaknesses in those
controls, investor confidence and share value may be adversely affected. 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. Subject to applicable laws, and the
agreement of our customers and consumers, we may also 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 30




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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 other third parties 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. There are many regulations and restrictions that affect gaming and gambling
activities throughout the world. As we develop and seek to market gaming and
gambling applications, we must assess the legality of these types of activities
in different jurisdictions. Our inability to legally launch these applications,
the uncertain regulatory landscape for these applications and the significant
costs associated with ongoing evaluations regarding the state of gaming and
gambling laws around the world may adversely affect our business. We develop and market gaming and gambling applications for interactive
television based on technologies and know-how that we acquired through
BettingCorp. In many jurisdictions throughout the world, the laws regulating
gaming and gambling, particularly through media such as interactive television
and the Internet, are highly uncertain and subject to frequent change. The
penalties in many jurisdictions include both civil and criminal penalties.
While we continually assess the laws and regulations regarding gaming and
gambling ventures, and engage special outside legal counsel to assist in that
process, we cannot be certain that our interpretation of, or the advice that we
receive from outside professionals with respect to, those laws will necessarily
be the only possible interpretation. The costs associated with that evaluative
process are not, and will not be, insignificant. In the event, that we are
incorrect in our interpretation of certain laws or regulations, we may be
subject to penalties. Moreover, we may be required to make significant changes
to our business, if those laws or regulations change in ways that we do not
anticipate or expect. The uncertainty inherent in these matters, the changing
nature of these laws and regulations, and the significant costs associated with
our ongoing evaluation of those laws and regulations, may adversely affect our
business over time. If we do not believe that we can legally and effectively
launch gaming and gambling applications, our future growth may be impaired. 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;  export and import restrictions, tariffs and other trade barriers;  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. 31




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Software development is an inherently complex and subjective process,
which frequently results in products that contain errors, as well as defective
features and functions. Moreover, our technology is integrated into the
products and services of 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 in settlement or
upon the determination 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. Liberty Media Corporation beneficially owns our Class A and Class B
ordinary shares representing approximately 32.3% of the economic interest and
79.0% of the voting power of our ordinary shares outstanding as of September
30, 2004. As a result of its ownership of our ordinary shares, Liberty Media
has sufficient voting power, without the vote of any other stockholder, to
determine the outcome of any action presented to a vote of our stockholders,
including amendments of our 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 Liberty Media may diverge from your interests, and Liberty Media
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 holders of our Class A ordinary shares. Because we are controlled by Liberty Media, we are exempt from certain listing
requirements of the Nasdaq National Market relating to corporate governance
matters. Over the past several years, the National Association of Securities
Dealers has adopted certain listing requirements for the Nasdaq National Market
System designed to enhance corporate governance standards of the companies who
are listed thereon. As a result of Liberty Media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 the National
Association of Securities Dealers 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. 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 our British Virgin Islands counsel, Harney
Westwood Riegels, 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 stockholder
may be less clearly established as compared to the rights of stockholders of
companies incorporated in other jurisdictions. Our corporate affairs are governed by our memorandum of association and
articles of association and by the International Business Companies Act of the
British Virgin Islands. Principles of law relating to such matters as the
validity of corporate procedures, the fiduciary duties of management and the
rights of our stockholders may differ 32




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from those that would apply if we were incorporated in the United States
or another jurisdiction. The rights of stockholders under British Virgin
Islands law are not as clearly established as are the rights of stockholders in
many other jurisdictions. Thus, our stockholders may have more difficulty
protecting their interests in the face of actions by our board of directors or
our controlling stockholder than they would have as stockholders 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 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. The
comparatively low voting rights of our Class A ordinary shares as compared to
our Class B ordinary shares, approximately 99.6% of which are beneficially
owned by Liberty Media as of September 30, 2004, as well as other provisions of
our memorandum of association and articles of association, may delay, deter or
prevent other persons from attempting to acquire control of us. 
 ITEM 3. 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, investments in privately held
companies 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. 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 September 30, 2004 using a model that assumes immediate sustained
parallel changes in interest rates across the range of maturities (in
thousands): 33




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Valuation of
    
    Fair Value
    
    Valuation of
    
    Valuation ofSecurities if
    
    as of
    
    Securities if
    
    Securities ifInterest Rates
    
    September
    
    Interest Rates
    
    Interest RatesIssuer
    
    Decrease 1%
    
    30, 2004
    
    Increase 1%
    
    Increase 2%U.S. government and agencies
    
    $
    5,074
    
    
    $
    5,012
    
    
    $
    4,899
    
    
    $
    4,814State and local governments
in the U.S.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate notes and bonds
    
    
    3,681
    
    
    
    3,601
    
    
    
    3,532
    
    
    
    3,461Non-U.S. government
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Certificate of deposit
    
    
    2,039
    
    
    
    2,000
    
    
    
    1,962
    
    
    
    1,925$
    10,794
    
    
    $
    10,613
    
    
    $
    10,393
    
    
    $
    10,200
 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, call provisions, 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. Private Investment Risk We have historically invested in equity securities and debt obligations of
certain privately-held companies that are in the start-up or development
stages. These investments are inherently risky as the market for the
technologies, products and services these companies have under development may
never materialize, and we could incur the loss of a portion or all of our
investments in these privately-held companies. As part of the ACTV acquisition,
we acquired a private equity investment with a value of $4 million. The total
of our private equity investments as of September 30, 2004 consisted of this
single investment that continued to be valued at $4 million. 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. A majority of our worldwide customers are invoiced and make payments
in United States dollars. A minority of our worldwide customers are invoiced by
our non-United States business units under contracts that require payments to
be remitted in local currency. 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. We regularly
assess foreign currency exchange rate risk that results from our global
operations. We did not use foreign currency forward exchange contracts or
options in hedging foreign currency exposures during the quarter ending
September 30, 2004. There were no foreign exchange forward contracts or other
procedures implemented to hedge foreign currency exposures outstanding as of
September 30, 2004. 
 ITEM 4. CONTROLS AND PROCEDURES In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our Chief Executive
Officer and our Chief Financial Officer concluded that our disclosure controls
and procedures were effective as of September 30, 2004 to provide reasonable
assurance that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commissions rules and forms. We regularly review and implement improvements to our systems of internal
control over financial reporting. There was no change in our internal control
over financial reporting that occurred during the three months ended September
30, 2004 that materially affected, or was reasonably likely to materially
affect, our internal control over financial reporting. We continue to evaluate
our internal control over financial reporting with the assistance of the independent consultants we
have engaged to help us establish and document appropriate procedures. In
connection with this process, we have discovered certain 34




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aspects of our internal control
over financial reporting that we intend to
address and modify, although we do not believe that any of these, to date, indicates a
material weakness based on
information available to us as of the date of this report. As we
complete our assessment of our internal control over financial
reporting for the year 2004, some or all of these, or other matters,
may rise to the level of a significant deficiency or a material
weakness. In addition, as we complete our assessment of our internal
control over financial reporting, internal control deficiencies may
be identified through our assessment process. As we evaluate our controls and procedures, and introduce
new or revised ones, the testing of those controls and procedures or
remediation efforts, if any, that may be required may take significant time and
require significant managerial effort which could extend beyond December 31,
2004. We provide updates to our Audit
Committee with respect to each of these matters. Our evaluation of our
internal control over financial reporting remains ongoing, and, accordingly,
we, including our Chief Executive Officer and Chief Financial Officer, who are
responsible for certifying our financial statements, may make additional
conclusions and take additional actions, from time to time, as we may deem
necessary or desirable. 35




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PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS OpenTV, Inc. v. Liberate Technologies, Inc.On February 7, 2002, OpenTV,
Inc., our subsidiary, filed a lawsuit against Liberate Technologies, Inc.
alleging patent infringement in connection with two patents held by OpenTV,
Inc. relating to interactive technology. The lawsuit is pending in the United
States District Court for the Northern District of California. On March 21,
2002, Liberate Technologies filed a counterclaim against OpenTV, Inc. for
alleged infringement of four patents allegedly owned by Liberate Technologies.
Liberate Technologies has since dismissed its claims of infringement on two of
those patents. In January 2003, the District Court granted two of OpenTV,
Inc.s motions for summary judgment pursuant to which the court dismissed
Liberate Technologies claim of infringement on one of the remaining patents
and dismissed a defense asserted by Liberate Technologies to OpenTV, Inc.s
infringement claims, resulting in only one patent of Liberate Technologies
remaining in the counterclaim. The District Court issued a claims construction
ruling for the two OpenTV patents and one Liberate patent remaining in the suit
on December 2, 2003. The trial date was set for February 7, 2005. On May 3, 2004, Liberate Technologies filed a voluntary bankruptcy
petition under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware. The case was subsequently
removed to the United States Bankruptcy Court for the Northern District of
California. As a result of that filing, our litigation with Liberate
Technologies was stayed and the trial schedule was vacated. On September 8,
2004, the Bankruptcy Court issued a ruling dismissing Liberate Technologies
bankruptcy case. Liberate Technologies has appealed this ruling. We believe that our lawsuit against Liberate Technologies is
meritorious, and with the dismissal of the bankruptcy case, we intend to
continue vigorously pursuing prosecution of our claims against Liberate
Technologies. In addition, we believe that we have meritorious defenses to the
counterclaims brought against OpenTV, Inc. and will defend ourselves
vigorously. No provision has been made in our consolidated financial
statements for this matter. We are unable to predict the likelihood of a
favorable outcome or estimate our potential liability, if any, in respect of
any potential counterclaims if litigated to conclusion. Initial Public Offering Securities Litigation.In July 2001, the first of
a series of putative securities class actions, Brody v. OpenTV Corp., et al.,
was filed in 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. These lawsuits
were consolidated and are captioned In re OpenTV Corp. Initial Public Offering
Securities Litigation.The complaints allege undisclosed and improper practices
concerning the allocation of our initial public offering shares, in violation
of the federal securities laws, and seek unspecified damages on behalf of
persons who purchased OpenTV Class A ordinary shares during the period from
November 23, 1999 through December 6, 2000. The Court has appointed a lead
plaintiff for the consolidated cases. On April 19, 2002, the plaintiffs filed
an amended complaint. Other actions have been filed making similar allegations
regarding the initial public offerings of more than 300 other companies,
including Wink Communications as discussed in greater detail below. All of
these lawsuits have been coordinated for pretrial purposes as In re Initial
Public Offering Securities Litigation.Defendants in these cases filed an
omnibus motion to dismiss on common pleading issues. Oral argument on the
omnibus motion to dismiss was held on November 1, 2002. All claims against our
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. The Courts
Order dismissed all claims against us except for a claim brought under Section
11 of the Securities Act of 1933. The Court has given plaintiffs an opportunity
to amend their claims in order to state a claim. Plaintiffs have not yet filed
an amended complaint. Plaintiffs and the issuer defendants, including us, have
agreed to a settlement, in which plaintiffs will dismiss and release their
claims in exchange for a guaranteed recovery to be paid by the insurance
carriers of the issuer defendants and an assignment of certain claims. A
stipulation of settlement for the claims against the issuer-defendants,
including us, has been submitted to the Court. There is no guarantee that the
settlement will become effective, as it is subject to a number of conditions,
including approval of the Court, which cannot be assured. If the settlement
does not occur, and the litigation against us continues, we believe that we
have meritorious defenses to the claims asserted against us and will 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. In November 2001, a putative securities class action was filed in United
States District Court for the Southern 36




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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 lawsuit is now captioned In re Wink Communications, Inc.
Initial Public Offering Securities Litigation.The operative amended complaint
alleges undisclosed and improper practices concerning the allocation of Wink
Communications initial public offering shares in violation of the federal
securities laws, and seeks unspecified damages on behalf of persons who
purchased Wink Communications common stock during the period from August 19,
1999 through December 6, 2000. This action is among the over 300 lawsuits that
have been consolidated for pretrial purposes as In re Initial Public Offering
Securities Litigation.On February 19, 2003, the Court ruled on the motions to
dismiss filed by all defendants in the consolidated cases. The Court denied the
motions to dismiss the claims under the Securities Act of 1933, granted the
motion to dismiss the claims under Section 10(b) of the Securities Exchange Act
of 1934 against Wink Communications and one individual defendant, and denied
that motion against the other individual defendant. As described above, a
stipulation of settlement for the claims against the issuer defendants has been
submitted to the Court. There is no guarantee that the settlement will become
effective, as it is subject to a number of conditions, including approval of
the Court, which cannot be assured. If the settlement does not occur, and the
litigation against Wink Communications continues, we believe that Wink
Communications has meritorious defenses to the claims brought against it and
that Wink Communications will defend itself 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. Litigation Relating to the Acquisition of ACTV, Inc.On November 18, 2002,
a purported class action complaint was filed in the Court of Chancery of the
State of Delaware in and for the County of New Castle against ACTV, Inc., its
directors and us. The complaint generally alleges that the directors of ACTV
breached their fiduciary duties to the ACTV shareholders in approving the ACTV
merger agreement pursuant to which we acquired ACTV on July 1, 2003, and that,
in approving the ACTV merger agreement, ACTVs directors failed to take steps
to maximize the value of ACTV to its shareholders. The complaint further
alleges that we aided and abetted the purported breaches of fiduciary duties
committed by ACTVs directors on the theory that the merger could not occur
without our participation. No proceedings on the merits have occurred with
respect to this action, and the case is dormant. We believe that the
allegations are without merit and intend to defend against the complaint
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,
Broadcast Innovation 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.. We have reimbursed Charter for legal expenses that it has incurred
in connection with this litigation. On August 4, 2004, the District Court found
the 094 patent invalid. On August 5, 2004, BI filed a motion for
reconsideration in the case. On September 17, 2004, the District Court entered
its summary judgment order based on the invalidity of the patent in suit
without specifically commenting on BIs motion. In the order, the Court
awarded costs to the defendants. On September 27, 2004, BI appealed the
District Courts summary judgment order to the United States Court of Appeals
for the Federal Circuit. On October 4, 2004, Charter filed a motion for its
attorneys fees in addition to the costs already awarded by the 37




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Court. Based on the information available to us, we have established a
reserve for costs that we anticipate may be incurred in connection with this
matter; that reserve is an estimate only and actual costs may be materially
different. Personalized Media Communications, LLC.On December 4, 2000, a suit was
filed in the United States District Court for the District of Delaware by
Pegasus Development Corporation and Personalized Media Communications, LLC
alleging that DIRECTV, Inc., Hughes Electronics Corp., Thomson Consumer
Electronics and Philips Electronics North America, Inc. are willfully
infringing certain claims of seven U.S. patents assigned or licensed to
Personalized Media Communications. Based on publicly available information, we
believe that the case has been stayed in the District Court pending
re-examination by the United States Patent and Trademark Office. Though Wink
Communications is not a defendant in the suit, Personalized Media
Communications may allege that certain products of Wink Communications,
possibly in combination with products provided by the defendants, infringe
Personalized Media Communications patents. The agreements between Wink
Communications and each of the defendants include indemnification obligations
that may be triggered by this litigation. If it is determined that Wink
Communications is obligated to defend any defendant in this matter, and/or that
the products of Wink Communications infringe any of the asserted claims, our
business performance, financial position, results of operations or cash flows
may be adversely affected. No provision has been made in our consolidated
financial statements for this matter. We are unable to estimate our potential
liability, if any. 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. Were an unfavorable ruling to occur, there exists the
possibility of a material adverse impact on the results of operations of the
period in which the ruling occurs. The estimate of the potential impact on our financial position or overall
results of operations for any of the legal proceedings described in this
section could change in the future. 
 ITEM 6. EXHIBITS (a) Exhibits: ExhibitNumber
    
    Description3.1*
    
    Memorandum of Association of OpenTV Corp.3.2**
    
    Articles of Association of OpenTV Corp.4.1***
    
    Specimen Certificate for Class A ordinary shares of OpenTV Corp.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002*
    
    Incorporated by reference to Exhibit 3.1 to OpenTV Corp.s Registration Statement on Form F-1 as
amended (Registration No. 333-89609), which the Securities and Exchange Commission declared
effective on November 23, 1999.**
    
    Incorporated by reference to Exhibit 3(ii) to OpenTV Corp.s Quarterly Report on Form 10-Q, as
filed with the Securities and Exchange Commission on November 11, 2002.***
    
    Incorporated by reference to Exhibit 4.1 to OpenTV Corp.s Registration Statement on Form F-1 as
amended (Registration No. 333-89609), which the Securities and Exchange Commission declared
effective on November 23, 1999.
 38




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SIGNATURE Pursuant to the requirements 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.Date: November 9, 2004
    By:
    /s/ Richard HornsteinRichard HornsteinSenior Vice President and Chief Financial Officer 
 39




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EXHIBIT INDEX ExhibitNumber
    
    Description3.1*
    
    Memorandum of Association of OpenTV Corp.3.2**
    
    Articles of Association of OpenTV Corp.4.1***
    
    Specimen Certificate for Class A ordinary shares of OpenTV Corp.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002*
    
    Incorporated by reference to Exhibit 3.1 to OpenTV Corp.s Registration Statement on Form F-1 as
amended (Registration No. 333-89609), which the Securities and Exchange Commission declared
effective on November 23, 1999.**
    
    Incorporated by reference to Exhibit 3(ii) to OpenTV Corp.s Quarterly Report on Form 10-Q, as
filed with the Securities and Exchange Commission on November 11, 2002.***
    
    Incorporated by reference to Exhibit 4.1 to OpenTV Corp.s Registration Statement on Form F-1 as
amended (Registration No. 333-89609), which the Securities and Exchange Commission declared
effective on November 23, 1999.
 40