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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 March 31, 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 March 31, 2004, the Registrant had outstanding (not including 76,327
Class A ordinary shares held in treasury): 90,205,494 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 PagePART I.
    
    FINANCIAL INFORMATION
    
    
    3Item 1.
    
    Financial Statements (unaudited)
    
    
    3Condensed Consolidated Balance Sheets at March 31, 2004 and December 31, 2003
    
    
    3Condensed
Consolidated Statements of Operations for the quarters ended March 31, 2004 and 2003
    
    
    4Condensed
Consolidated Statements of Cash Flows for the quarters ended March 31, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4.
    
    Controls and Procedures
    
    
    33PART II.
    
    OTHER INFORMATION
    
    
    34Item 1.
    
    Legal Proceedings
    
    
    34Item 2.
    
    Changes in Securities and Use of Proceeds
    
    
    37Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    37SignatureExhibit IndexEMPLOYMENT AGREEMENTCERTIFICATIONCERTIFICATIONCERTIFICATIONS
 2




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS OPENTV CORP. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 March 31,
    
    December 31,2004
    
    2003*(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    43,182
    
    
    $
    47,747Short-term marketable debt securities
    
    
    8,508
    
    
    
    10,577Accounts receivable, net of allowance for doubtful accounts of $718 and
$789 at March 31, 2004 and December 31, 2003, respectively
    
    
    12,198
    
    
    
    12,536Prepaid expenses and other current assets
    
    
    3,383
    
    
    
    4,722Total current assets
    
    
    67,271
    
    
    
    75,582Long-term marketable debt securities
    
    
    13,810
    
    
    
    15,172Property and equipment, net
    
    
    10,297
    
    
    
    11,689Goodwill
    
    
    70,451
    
    
    
    70,398Intangible assets, net
    
    
    30,490
    
    
    
    33,336Other assets
    
    
    13,375
    
    
    
    13,378Total assets
    
    $
    205,694
    
    
    $
    219,555LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,669
    
    
    $
    5,854Accrued liabilities
    
    
    29,431
    
    
    
    32,174Accrued restructuring
    
    
    6,004
    
    
    
    7,789Due to Liberty Media entities
    
    
    761
    
    
    
    630Current portion of deferred revenue
    
    
    9,750
    
    
    
    9,740Total current liabilities
    
    
    48,615
    
    
    
    56,187Deferred revenue, less current portion
    
    
    5,069
    
    
    
    5,310Total liabilities
    
    
    53,684
    
    
    
    61,497Commitments and contingencies (Note 9)Minority interest
    
    
    1,014
    
    
    
    1,075Shareholders equity:Class A ordinary shares, no par value, 500,000,000 shares authorized;
90,281,821 and 88,969,550 shares issued and outstanding, including
treasury shares, at March 31, 2004 and December 31, 2003, respectively
    
    
    2,211,374
    
    
    
    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
    
    
    466,051
    
    
    
    466,228Treasury shares at cost, 76,327 shares
    
    
    (38
    )
    
    
    (38
    )Deferred share-based compensation
    
    
    (27
    )
    
    
    (36
    )Accumulated other comprehensive income
    
    
    315
    
    
    
    201Accumulated deficit
    
    
    (2,562,632
    )
    
    
    (2,553,695
    )Total shareholders equity
    
    
    150,996
    
    
    
    156,983Total liabilities, minority interest and shareholders equity
    
    $
    205,694
    
    
    $
    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. 3




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OPENTV CORP. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
 Quarter Ended March 31,2004
    
    2003Revenues:Royalties
    
    $
    9,105
    
    
    $
    6,126Services, support and other
    
    
    4,105
    
    
    
    5,166Fees and revenue shares
    
    
    3,190
    
    
    
    3,030License fees
    
    
    998
    
    
    
    1,024Total revenues
    
    
    17,398
    
    
    
    15,346Operating expenses:Cost of revenues(1)
    
    
    10,248
    
    
    
    12,640Research and development(2)
    
    
    7,139
    
    
    
    5,152Sales and marketing(3)
    
    
    3,449
    
    
    
    4,908General and administrative(4)
    
    
    4,228
    
    
    
    4,704Restructuring costs
    
    
    
    
    
    
    6,927Amortization of intangible assets
    
    
    1,207
    
    
    
    1,307Total operating expenses
    
    
    26,271
    
    
    
    35,638Loss from operations
    
    
    (8,873
    )
    
    
    (20,292
    )Interest income
    
    
    218
    
    
    
    459Other expense, net
    
    
    (42
    )
    
    
    (19
    )Minority interest
    
    
    61
    
    
    
    48Loss before income taxes
    
    
    (8,636
    )
    
    
    (19,804
    )Income tax expense
    
    
    (301
    )
    
    
    (261
    )Net loss
    
    $
    (8,937
    )
    
    $
    (20,065
    )Net loss per share, basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.28
    )Shares used in per share calculation, basic and diluted
    
    
    120,004,281
    
    
    
    72,275,480
   (1)
    
    Inclusive of $8 and $40 of share-based
compensation for the quarters ended
March 31, 2004 and 2003, respectively.(2)
    
    Inclusive of $1 and $25 of share-based
compensation for the quarters ended
March 31, 2004 and 2003, respectively.(3)
    
    Inclusive of $11 of share-based compensation for the quarter ended March 31,
2003.(4)
    
    Inclusive of $18 of share-based compensation for the quarter ended March 31,
2003. The accompanying notes are integral part of these condensed consolidated financial statements. 4




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OPENTV CORP. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Quarter Ended March 31,2004
    
    2003Cash flows used in operating activities:Net loss
    
    $
    (8,937
    )
    
    $
    (20,065
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization of property and equipment
    
    
    1,698
    
    
    
    1,968Amortization of intangible assets
    
    
    2,846
    
    
    
    3,807Amortization
of deferred share-based compensation
    
    
    9
    
    
    
    94Non-cash employee compensation
    
    
    467
    
    
    
    188Provision for doubtful accounts
    
    
    (253
    )
    
    
    105Non-cash restructuring costs
    
    
    
    
    
    
    532Minority interest
    
    
    (61
    )
    
    
    (48
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    338
    
    
    
    (3,125
    )Prepaid expenses and other current assets
    
    
    1,026
    
    
    
    442Other assets
    
    
    3
    
    
    
    2,045Accounts payable
    
    
    (3,177
    )
    
    
    (2,063
    )Accrued liabilities
    
    
    (819
    )
    
    
    2,132Accrued restructuring
    
    
    (1,785
    )
    
    
    904Due to Liberty Media entities
    
    
    131
    
    
    
    Deferred revenue
    
    
    (231
    )
    
    
    553Net cash used in operating activities
    
    
    (8,745
    )
    
    
    (12,531
    )Cash flows provided from investing activities:Purchase of property and equipment
    
    
    (261
    )
    
    
    (396
    )Cash used for acquisitions, net of cash acquired
    
    
    
    
    
    
    (994
    )Proceeds from sale of marketable debt securities
    
    
    3,494
    
    
    
    25,335Purchase of marketable debt securities
    
    
    (22
    )
    
    
    (7,800
    )Net cash provided from investing activities
    
    
    3,211
    
    
    
    16,145Cash flows provided from financing activities:Proceeds from issuance of ordinary shares
    
    
    949
    
    
    
    Capital contribution from MIH Limited
    
    
    
    
    
    
    419Net cash provided from financing activities
    
    
    949
    
    
    
    419Effect of exchange rate changes on cash and cash equivalents
    
    
    20
    
    
    
    (27
    )Net increase (decrease) in cash and cash equivalents
    
    
    (4,565
    )
    
    
    4,006Cash and cash equivalents, beginning of period
    
    
    47,747
    
    
    
    38,568Cash and cash equivalents, end of period
    
    $
    43,182
    
    
    $
    42,574
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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OPENTV CORP. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 Accounting Principles Board, or APB, Opinion
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 148, our net loss would have been
increased to the pro-forma amounts indicated below (amounts in millions, except
per share amounts): 6




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Quarter Ended March 31,2004
    
    2003Net loss, as reported
    
    $
    (8.9
    )
    
    $
    (20.1
    )Add: Share-based employee compensation expense
included in reported net loss, net of related tax effects
    
    
    
    
    
    
    0.1Deduct: Share-based employee compensation expense
determined under fair value-based method for all awards,
net of related tax effects
    
    
    (0.6
    )
    
    
    (1.5
    )Pro-forma net loss
    
    $
    (9.5
    )
    
    $
    (21.5
    )Net loss per share, basic and diluted:As reported
    
    $
    (0.07
    )
    
    $
    (0.28
    )Pro-forma
    
    $
    (0.08
    )
    
    $
    (0.30
    )
 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: Quarter Ended March 31,2004Risk-free interest rate
    
    2.69%-3.36%Average expected life (months)
    
    60Volatility
    
    113%-115%Dividend yield
    
    
 The weighted average fair value of options granted during the quarter
ended March 31, 2004 was $2.45. There were no options granted during the
quarter ended March 31, 2003. Recent Accounting Pronouncements 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 March 31, 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 Staff of the Securities and Exchange Commission
issued SAB 104, Revenue Recognition, which amends SAB 101, Revenue
Recognition in Financial Statements. SAB 104 rescinds accounting guidance
contained in SAB 101 related to multiple element revenue arrangements,
superseded as a result of the issuance of EITF 00-21. Additionally, SAB 104
rescinds the SECs Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers issued with SAB 101 that had been codified in SEC Topic
13, Revenue Recognition. The adoption of SAB 104 did not have a material impact
on our financial position, results of operations, or cash flows. 7




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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 March 31, 2004 and 2003 were not included
in the computation of diluted net loss per share because the effect would be
anti-dilutive: Quarter Ended March 31,2004
    
    2003Class A ordinary shares issuable upon exercise of stock options
    
    
    10,535,486
    
    
    
    4,314,712Class A ordinary shares issuable upon exercise of warrants
    
    
    
    
    
    
    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)
    
    
    760,844
    
    
    
    900,094Class B ordinary shares issuable for shares of OpenTV, Inc.
Class B common stock
    
    
    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 10.5 million and 8.5 million during the quarters ended March 31,
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 quarter ended March 31, 2004. Note 5. Intangible Assets, Net The components of intangible assets, excluding goodwill, were as follows
(in millions): March 31, 2004
    
    Dec 31, 2003Useful
    
    Gross
    
    
    
    
    
    Net
    
    Netlife in
    
    Carrying
    
    Accumulated
    
    Carrying
    
    Carryingyears
    
    Amount
    
    Amortization
    
    Amount
    
    AmountIntangible assets:Patents
    
    
    5-13
    
    
    $
    20.7
    
    
    $
    (2.3
    )
    
    $
    18.4
    
    
    $
    18.9Developed technologies
    
    
    3-5
    
    
    
    12.2
    
    
    
    (6.1
    )
    
    
    6.1
    
    
    
    7.1Contracts and relationships
    
    
    2-5
    
    
    
    15.4
    
    
    
    (10.0
    )
    
    
    5.4
    
    
    
    6.6Trademarks
    
    
    3-5
    
    
    
    1.2
    
    
    
    (0.8
    )
    
    
    0.4
    
    
    
    0.5Purchased technologies
    
    
    5
    
    
    
    0.4
    
    
    
    (0.2
    )
    
    
    0.2
    
    
    
    0.2$
    49.9
    
    
    $
    (19.4
    )
    
    $
    30.5
    
    
    $
    33.3
 8




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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 $2.8 million and $3.8 million for the
quarters ended March 31, 2004 and 2003, respectively. The future annual
amortization expense is expected to be as follows (in millions): AmortizationYear ending December 31,
    

    Expense2004 (remaining nine months)
    
    $
    5.12005
    
    
    5.12006
    
    
    5.02007
    
    
    4.02008
    
    
    1.8Thereafter
    
    
    9.5$
    30.5
 Note 6. 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 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. The following sets forth the payments made during the quarter ended March
31, 2004, relating to various restructuring activities initiated in 2002 and
2003 (in millions): EmployeeSeverance
    
    ExcessAnd Benefits
    
    Facilities
    
    TotalBalance, December 31, 2003
    
    $
    1.5
    
    
    $
    6.3
    
    
    $
    7.8Cash payments
    
    
    (0.2
    )
    
    
    (1.6
    )
    
    
    (1.8
    )Balance, March 31, 2004
    
    $
    1.3
    
    
    $
    4.7
    
    
    $
    6.0
 The outstanding accrual for employee severance and benefits is expected to
be paid in 2004 and the accrual for excess facilities relates to operating
lease obligations that continue through 2006. Note 7. Employee Bonus During the quarter 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 quarter ended March 31, 2004. The compensation committee of our Board
of Directors approved a similar bonus plan for 2004, which will be based on
corporate and individual performance objectives. 9




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Note 8. Comprehensive Loss The components of comprehensive loss, net of tax, were as follows (in
thousands): Quarter Ended March 31,2004
    
    2003Net loss
    
    $
    (8,937
    )
    
    $
    (20,065
    )Other comprehensive income (loss):Foreign currency translation gains (losses)
    
    
    73
    
    
    
    (44
    )Unrealized gains (losses) on investments, net
of income taxes
    
    
    41
    
    
    
    (79
    )Reclassification for realized gains from sale of
marketable debt securities, net of income taxes
    
    
    
    
    
    
    (90
    )Comprehensive loss
    
    $
    (8,823
    )
    
    $
    (20,278
    )
 Note 9. 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 May 2004 and March 2016. Total rent
expense was $1.5 million and $2.1 million for the quarters ended March 31, 2004
and 2003, respectively. There was no sublease income. Future minimum payments under non-cancelable operating leases as of March
31, 2004 were as follows (in millions): MinimumYear ending March 31,
    

    Commitments2004 (remaining nine months)
    
    $
    4.02005
    
    
    5.12006
    
    
    3.72007
    
    
    3.12008
    
    
    3.3Thereafter
    
    
    6.5$
    25.7
 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 March 31, 2004 were $2.3 million for the remaining nine months of the
year ending December 31, 2004 and $1.6 million and $0.1 million for the years
ending December 31, 2005 and 2006, respectively. In addition, we have a
variable commitment with a cable provider that is based on households that
receive our OpenTV ProSync service. Based on current expectations, we believe
that this commitment may aggregate up to approximately $0.8 million for the
remaining nine months of the year ending December 31, 2004. 10




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As of March 31, 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 Royalty Dispute.In March 2004, we received notice from a set-top box
manufacturer that licenses software from us indicating that it believed it had
inadvertently over-reported royalties by $1.1 million for the period beginning
in the fourth quarter of 2002 through December 2003, and had, therefore,
incorrectly made payments to us in that amount over that period. We have
notified the customer of our intention to invoke our audit rights under the
agreement to verify its claim. We are, therefore, unable to predict the
outcome of this matter, and whether we may be required to pay a
refund to that customer, credit certain of those amounts against future
payments or simply take no action with respect to this claim. Based on current
information, we are unable effectively to assess the likelihood of any outcome
or to estimate the amount of a refund if that were to be required upon
conclusion of our investigation. As a result, we have made no provision in our
consolidated financial statements at this time in respect of this matter. In
addition, this customer has also indicated that it inadvertently over-reported
royalties by $0.2 million for the quarter ended March 31, 2004, and had,
therefore, incorrectly made payments to us in that amount in the first quarter
of 2004. In light of the notification we have received, we have deferred
recognition of this amount and have not included it in our revenue for the
quarter pending a resolution of our audit. 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. In early March 2004, Liberate produced in excess of
200,000 pages of materials in response to various outstanding discovery
requests by OpenTV. The parties subsequently filed a joint motion requesting
an extension of the courts calendar for the case. The District Court granted
the parties motion on March 15, 2004 and the trial date has now been set for
February 7, 2005. We believe that our lawsuit is meritorious, and, subject to
the bankruptcy stay referred to in the next paragraph, we intend to vigorously
pursue 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. 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. As a result of that filing, our litigation with Liberate
Technologies has been stayed. 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. 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 11




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##### Table of Contents



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. A proposal has been made for the
settlement and release of claims against the issuer defendants, including us, in exchange for a guaranteed
recovery to be paid by the insurance carriers of the issuer defendants and an
assignment of certain claims. We have approved the settlement proposal and are
awaiting definitive documentation. The settlement is subject to a number of
conditions, including approval of the proposed settling parties and the Court.
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. As
described above, a proposal has been made for the settlement and release of
claims against the issuer defendants. Wink Communications has approved the
settlement proposal and is awaiting definitive documentation. The settlement is
subject to a number of conditions, including approval of the proposed settling
parties and the Court. 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. 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 agreements between (1) OpenTV, Inc. and
EchoStar and (2) Wink Communications and DIRECTV include indemnification
obligations of OpenTV, Inc. and Wink Communications, respectively, 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. Based
on publicly available information, we believe that certain of the defendants in
the suit, including DIRECTV, reached agreement with BI to 12




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settle the litigation on July 17, 2003. We are unaware of the specific terms of that settlement and
are unable to assess the implications of that settlement, if any, on Wink
Communications. 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. If liability is found against Charter in
this matter, and if such a decision implicates our technology or products,
Charter could notify Wink of its expectation of indemnification, in which case
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 these matters. We are unable to estimate
our potential liability, if any. 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. 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. We
believe the estimated fair value of these indemnification agreements in excess
of applicable insurance coverage is not material. In the ordinary course of our business, we encounter certain
circumstances, from time to time, in which layoffs, dismissals or other forms
of separation with employees result in settlements between certain employees
and the company to address claims that we or our employee may allegedly have
against the other party. We recently reached a tentative settlement with a
former employee to resolve various claims that, if it becomes effective, will
result in a payment by us of approximately $550,000. We would expect to make
that payment in the second quarter of 2004. 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. 13




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Note 10. 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 March 31, 2004, Liberty Medias total ownership represented approximately 32.6% of
the economic interest and approximately 79.2% 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. 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 reimbursed them for an
allocated portion of their administrative costs. Total management charges from
Liberty Media for compensation and general administrative costs were $0.3
million and $0.5 million for the quarters ended March 31, 2004 and 2003,
respectively. In February 2004, our management relationship with that
subsidiary was terminated. Beginning in January 2004, we participated in the Liberty Media medical
insurance program for employees in the United States at a cost of $0.4 million
for the quarter ended March 31, 2004. The services and support revenue from Liberty Media entities was nominal
during the quarter ended March 31, 2004. We recorded $0.5 million in services
and support revenue from Liberty Media entities for the quarter ended March 31,
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 Executive
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 quarter ended March 31, 2004. In June 2000, we entered into an employment agreement with James Ackerman,
our 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. Note 11. 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): 14




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##### Table of Contents



Quarter EndedMarch 31,2004
    
    2003Europe, Middle East and Africa
    
    $
    9.3
    
    
    $
    7.6Americas
    
    
    6.1
    
    
    
    5.8Asia Pacific
    
    
    2.0
    
    
    
    1.9$
    17.4
    
    
    $
    15.3
 Americas include United States revenue of $5.3 million and $4.6 million
for the quarters ended March 31, 2004 and 2003, respectively. Four major customers accounted for the following percentages of revenues: Quarter EndedMarch 31,Customer
    
    2004
    
    2003A
    
    
    14
    %
    
    
    11
    %B
    
    
    12
    %
    
    
    11
    %C
    
    
    12
    %
    
    
    7
    %D
    
    
    4
    %
    
    
    11
    %
 British Sky Broadcasting, or BskyB, directly and indirectly accounted for
15% and 14% of total revenues for the quarter ended March 31, 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 11% of net accounts receivable as of March 31,
2004. Additional summarized information by geographic area was as follows (in
millions): Quarter Ended March 31,Capital expenditures, net:
    
    2004
    
    2003United States
    
    $
    0.2
    
    
    $
    0.4Other countries
    
    
    0.1
    
    
    
    $
    0.3
    
    
    $
    0.4
 15




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March 31,
    
    December 31,2004
    
    2003Long-lived assets:United States
    
    $
    105.7
    
    
    $
    108.0Other countries
    
    
    14.9
    
    
    
    16.8$
    120.6
    
    
    $
    124.8
   (1)
    
    Long-lived assets include property and equipment, goodwill, intangible
assets and other assets. 
 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 or 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. 16




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Our operating results have been affected by the acquisition of ACTV, Inc.
in July 2003 and substantially all of the assets of BettingCorp Limited in
August 2003. As of March 31, 2004, Liberty Media Corporations total ownership
represented approximately 32.6% of the economic interest and 79.2% 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. 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 products and services and the
appropriate pricing for those products and services. Our assumptions and
judgments regarding future products and 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. 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 ongoing prudent and feasible tax planning strategies
in assessing the amount of our valuation allowance. Currently we have a full
valuation allowance on 17




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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 long-lived assets include goodwill and other intangible assets, which
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 long-lived
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. 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 Ended March 31, 2004 and 2003 Revenues Revenues for the three months ended March 31, 2004 were $17.4 million, an
increase of 14% or $2.1 million, from $15.3 million in 2003. Revenues by line
item were as follows (in millions): Three Months Ended March 31,2004
    
    %
    
    2003
    
    %Royalties
    
    $
    9.1
    
    
    
    52
    %
    
    $
    6.1
    
    
    
    40
    %Services, support and other
    
    
    4.1
    
    
    
    24
    %
    
    
    5.2
    
    
    
    34
    %Fees and revenue shares
    
    
    3.2
    
    
    
    18
    %
    
    
    3.0
    
    
    
    20
    %License fees
    
    
    1.0
    
    
    
    6
    %
    
    
    1.0
    
    
    
    6
    %Total Revenues
    
    $
    17.4
    
    
    
    100
    %
    
    $
    15.3
    
    
    
    100
    %
 Royalties.We derive royalties from the sale of set-top boxes and other
products that incorporate our software to manufacturers and network operators
around the world. Royalty revenues are dependent on continued deployment of
set-top boxes by existing 18




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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 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 March 31, 2004 were $9.1 million, an
increase of 49% or $3.0 million, from $6.1 million in 2003. Growth was
experienced in all regions. Europe had an increase of $1.2 million, of which BSkyB accounted for half of the increase; Americas had an
increase of $1.2 million, of which EchoStar accounted for half of the increase;
and Asia Pacific had an increase of $0.6 million. Four of our customers sell set-top boxes to BSkyB, which accounted for
$2.5 million, or 27%, of royalties for the three months ended March 31, 2004.
EchoStar accounted for $2.3 million, or 25%, of royalties for the three months
ended March 31, 2004. The EchoStar royalty revenue is being 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 on our balance sheet. 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 March 31, 2004 revenues in this category were $4.1
million, a decline of 21% or $1.1 million, from $5.2 million in 2003. This
decrease was attributable to a lower level of services provided to one of our
customers, Motorola, Inc. We expect our professional services revenues to
continue to decline in 2004 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 March 31, 2004, revenues in this
category were $3.2 million, an increase of 7% or
$0.2 million, from $3.0 million in 2003. Betting and gaming
fees derived from BettingCorp, which we acquired in 2003, accounted
for $0.3 million of that increase. Digital Interactive Television Group, or DITG, a British
telecommunications company that supports the collection from end users of
premium rate telephony fees for the PlayJam channel on BSkyB, accounted for
$2.1 million of our total fees and revenue shares for the three months ended
March 31, 2004. Individuals who play games on the PlayJam channel make
payments to their telecommunications provider. However, we receive our
revenues from DITG, which acts as the payment intermediary. 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 March 31, 2004, revenues in this category were $1.0
million, the same as the first quarter of 2003. Operating Expenses Our total operating expenses for the three months ended March 31, 2004
were $26.3 million, a decrease of 26% or $9.3 million, from $35.6 million in
2003. In the three months ended March 31, 2003, we initiated a restructuring
of our French operations, which accounted for a restructuring provision of $6.9
million. ACTV and BettingCorp, both of which we acquired in 2003, accounted
for $3.4 million of operating expenses for the three months ended March 31,
2004. Operating expenses by line item were as follows (in millions): 19




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Three Months Ended March 31,% of
    
    
    
    
    
    % of2004
    
    Revenue
    
    2003
    
    RevenueCost of revenues
    
    $
    10.3
    
    
    
    59
    %
    
    $
    12.6
    
    
    
    82
    %Research and development
    
    
    7.1
    
    
    
    41
    %
    
    
    5.2
    
    
    
    34
    %Sales and marketing
    
    
    3.5
    
    
    
    20
    %
    
    
    4.9
    
    
    
    32
    %General and administrative
    
    
    4.2
    
    
    
    24
    %
    
    
    4.7
    
    
    
    31
    %Restructuring costs
    
    
    
    
    
    
    
    
    
    
    6.9
    
    
    
    45
    %Amortization of intangible assets
    
    
    1.2
    
    
    
    7
    %
    
    
    1.3
    
    
    
    8
    %Total Operating Expenses
    
    $
    26.3
    
    
    
    151
    %
    
    $
    35.6
    
    
    
    233
    %
 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 March 31, 2004 were $10.3
million, a decrease of 18% or $2.3 million, from $12.6 million in 2003.
Although ACTV and BettingCorp accounted for an increase of $1.4 million in
2004, that increase was offset by a decrease of $1.5 million in partner
payments required of our subsidiary, Wink Communications, and a decrease of
$2.2 million in costs resulting from the reallocation of some staff from
operations to research and development upon the expiration of our DirecTV
contract in December 2003 and also generally lower overhead costs. 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 March 31,
2004 were $7.1 million, an increase of 37% or $1.9 million, from $5.2 million
in 2003. ACTV and BettingCorp accounted for an increase of $1.5 million. The
remaining increase of $0.4 million was attributable to the reallocation of
some staff from operations to research and development, as discussed above,
offset by generally lower overhead costs. We believe that research and development spending is critical to remain
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 March 31, 2004
were $3.5 million, a decrease of 29% or $1.4 million, from $4.9 million in
2003. There was a decrease of $1.2 million in market development funds as a
result of the expiration of the agreement with DirecTV in December 2003. The
remaining decrease of $0.2 million was due to a reduction in overhead costs of
$0.4 million, offset by an increase of $0.2 million resulting from our
ownership of ACTV and BettingCorp. General and Administrative. General and administrative expenses consist
primarily of compensation-related expenses and related overhead costs,
provision for doubtful accounts and fees for professional services. General and administrative expenses for the three months ended March 31,
2004 were $4.2 million, a decrease of 11% or $0.5 million, from $4.7 million
in 2003. As a result of the confirmation in February 2004 of the bankruptcy
plan of our customer DirecTV Latin America, we reversed a provision for
doubtful accounts which we had previously established for this customer; that
reversal decreased our bad debt provision by $0.3 million in 20




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2004. The remaining decrease of $0.2 million was due to a reduction in overhead costs of
$0.4 million, offset by an increase of $0.2 million resulting from our
ownership of ACTV and BettingCorp. Restructuring Costs. In the quarter ended March 31, 2003, we implemented
a reduction of approximately 70 people in our office in Paris, France. This
action also included the abandonment of an office lease and the write-down of
fixed assets. Total costs from this restructuring were estimated to be $6.9
million. Amortization of Intangible Assets. For the three months ended March 31,
2004, amortization of intangible assets was $1.2 million, a decrease of 8% or
$0.1 million, from $1.3 million in 2003. The decrease was due to some
intangible assets being fully amortized in 2003. Interest 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 March 31, 2004 was $0.2 million compared with
$0.5 million in 2003. The changes in other expense and minority
interest between periods were not significant. Income Taxes We have United States federal tax loss carryforwards of approximately $300
million. However, we are subject to income taxes in certain state and foreign
jurisdictions and we have foreign taxes withheld from certain royalty payments.
Income tax provision was $0.3 million for both periods. 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. Since 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 March 31, 2004, we had cash and cash equivalents of $43.2 million,
which was a decrease of $4.6 million from the balance at December 31, 2003.
Taking into account short-term and long-term marketable debt securities of
$22.3 million, our cash, cash equivalents and marketable debt securities were
$65.5 million as of March 31, 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, cash used in operating activities
was $8.7 million for the three months ended March 31, 2004, compared with $12.5
million for the three months ended March 31, 2003. Cash provided from investing activities was $3.2 million for the three
months ended March 31, 2004, primarily due to the net sale of marketable debt
securities. For the three months ended March 31, 2003, the cash provided from
investing activities was $16.1 million. Cash provided from financing activities was $0.9 million for the three
months ended March 31, 2004, compared with $0.4 million for the three months
ended March 31, 2003. 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. 21




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Commitments and Contractual Obligations Information as of March 31, 2004 concerning the amount and timing of
required payments under our contractual obligations is summarized below (in
millions): April 2004 toDecember
    
    
    
    
    
    
    
    
    
    OverTotal
    
    2004
    
    1-3 Years
    
    4-5 Years
    
    5 YearsOperating leases
    
    $
    25.7
    
    
    $
    4.0
    
    
    $
    8.8
    
    
    $
    6.4
    
    
    $
    6.5Purchase obligations
    
    
    8.8
    
    
    
    3.1
    
    
    
    1.7
    
    
    
    4.0
    
    
    
    Total contractual obligations
    
    $
    34.5
    
    
    $
    7.1
    
    
    $
    10.5
    
    
    $
    10.4
    
    
    $
    6.5
 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 March 31,
2004 were $2.3 million for the remaining nine months of the year ending
December 31, 2004 and $1.6 million and $0.1 million for the years ending
December 31, 2005 and 2006, respectively. In addition, we have a variable
commitment with a cable provider that is based on households that receive our
OpenTV ProSync service. Based on current expectations, we believe that this
commitment may aggregate up to approximately $0.8 million for the remaining
nine months of the year ending December 31, 2004. As of March 31, 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. Indemnifications 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.
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 22




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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. 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, especially outside of the United
States, may be limited. 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. Accordingly, our ability to generate significant
additional core middleware-related revenues from customers outside of the
United States may be limited. In addition, to meet the different needs of our customers, we have
deployed multiple versions of our core middleware platform to network operators
around the world. Maintaining and supporting multiple platforms concurrently is
expensive because it requires us to devote significant resources, including
engineering and technical support, to older platforms that may not have
significant distribution. We intend, over time, to migrate our network operator
customers to a standard middleware platform in order to reduce our costs.
However, it is difficult to predict the timing of network upgrades by
operators, and when they do decide to upgrade, there can be no guarantee that
they will choose to license our standard middleware platform or require certain
customization. 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 23




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by network operators. If network operators determine that our interactive content and applications do not meet
their business or operational expectations, the operators 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
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. 24




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We continue to pursue restructuring initiatives that we initiated in 2002.
While we have accomplished many of the objectives we established for that
process, we continue to seek to align our resources appropriately as our
business evolves. That ongoing process may result in unanticipated consequences
and may not be as successful in reducing expenses as we had anticipated. In addition to the integration and consolidation efforts that we have
undertaken in response to our various acquisitions, we began to implement
several restructuring initiatives in 2002 in an effort 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 restructuring 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. We may be unable in the future to raise additional capital required to support
our operating activities. We expect that our capital resources will be sufficient to meet our cash
requirements through at least the next twelve months. 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 March 31, 2004, we had $65.5 million of cash, cash
equivalents and marketable debt securities. We used approximately $8.7 million
in cash for operating activities during the fiscal quarter ended March 31, 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. 25




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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, The News Corporation Ltd. recently completed its acquisition of a
controlling stake in Hughes Electronics, the parent of DirecTV, and NDS Group
plc, an affiliate of News Corporation, recently completed its acquisition of
the MediaHighway interactive television business from Thomson. 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
trading price of our Class A ordinary shares could be negatively affected. Our
quarterly operating results have varied substantially in the past and they may
vary substantially in the future depending upon a number of factors described
below, including many that are beyond our control. Our operating results may vary from quarter to quarter as a result of a
number of factors, including:  
    
    Changes in the rate of capital spending and the rollout of
interactive television-related products and services by network
operators;
    
    The number, size and scope of network operators deploying
OpenTV-enabled interactive services and the associated rollout to
subscribers;
    
    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 Class A ordinary shares 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 several months. In March 2004,
James A. Chiddix was appointed Chairman of our Board of Directors. In addition, our Chief
Operating Officer, 26




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Chief Financial Officer, General Counsel and several other senior executives in important operational roles joined us in 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
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 27




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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 Wink Communications, ACTVs and our 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 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. 28




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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. 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 law and regulations and may
also subject us to privacy claims relating to its use and dissemination. In
addition, a third party might be able to breach our security measures and gain
unauthorized access to our servers where such information is stored and
misappropriate such information or cause interruptions to our business
operations. We may be required to expend significant capital and other
resources to monitor the laws applicable to privacy matters, to protect against
security breaches or to deal with the consequences of any breach. A breach of
privacy rights by us, network operators or 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 expect to 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. 29




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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. 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 32.6% of the economic interest and
79.2% of the voting power of our ordinary shares outstanding as of March 31,
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 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 30




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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 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 March 31, 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. 31




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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 March 31, 2004 using a model that assumes immediate sustained
parallel changes in interest rates across the range of maturities (in
thousands): Valuation of
    
    Fair Value
    
    Valuation of
    
    Valuation ofSecurities if
    
    as of
    
    Securities if
    
    Securities ifInterest Rates
    
    March 31,
    
    Interest Rates
    
    Interest RatesIssuer
    
    Decrease 1%
    
    2004
    
    Increase 1%
    
    Increase 2%United States government
and agencies
    
    $
    15,252
    
    
    $
    15,093
    
    
    $
    14,894
    
    
    $
    14,721Corporate notes and bonds
    
    
    5,343
    
    
    
    5,225
    
    
    
    5,140
    
    
    
    5,043Certificates of deposit
    
    
    2,040
    
    
    
    2,000
    
    
    
    1,961
    
    
    
    1,924Total
    
    $
    22,635
    
    
    $
    22,318
    
    
    $
    21,995
    
    
    $
    21,688
 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 March 31, 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 32




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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 March
31, 2004. There were no foreign exchange forward contracts or other procedures
implemented to hedge foreign currency exposures outstanding as of March 31,
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 March 31, 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. There has been no change in our internal controls over financial reporting
that occurred during the three months ended March 31, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting. 33




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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. In early March 2004, Liberate produced in excess of
200,000 pages of materials in response to various outstanding discovery
requests by OpenTV. The parties subsequently filed a joint motion requesting
an extension of the courts calendar for the case. The District Court granted
the parties motion on March 15, 2004 and the trial date has now been set for
February 7, 2005. We believe that our lawsuit is meritorious, and, subject to
the bankruptcy stay referred to in the next paragraph, we intend to vigorously
pursue 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. 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. As a result of that
filing, our litigation with Liberate Technologies has been stayed. 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. Walt Disney Litigation.On December 20, 2000, ACTV, Inc. and its wholly
owned subsidiary HyperTV Networks, Inc. filed a lawsuit in the United States
District Court for the Southern District of New York against The Walt Disney
Company and certain of its affiliates, which we collectively refer to as Walt
Disney. We acquired ACTV, Inc. in July 2003. Walt Disney filed counterclaims
against ACTV that sought a declaration that ACTVs patents in the suit have not
been infringed, are invalid and are unenforceable. On May 24, 2002, the
District Court granted Walt Disneys motion for summary judgment of
non-infringement with respect to the three patents in suit. On July 3, 2002,
ACTV appealed the District Court decision to the U.S. Court of Appeals for the
Federal Circuit. On October 8, 2003, the Court of Appeals vacated the District
Courts grant of summary judgment, reversed the District Courts claim
construction for the term uniform resource locator, and remanded the case to
the District Court for further proceedings. The District Court proceedings have
now resumed. We believe that ACTVs lawsuit is meritorious and intend to
vigorously pursue prosecution of ACTVs claims against Walt Disney. In
addition, we believe that ACTV has meritorious defenses to the counterclaims
brought against it and that ACTV will defend itself vigorously against such
counterclaims. We are unable to predict the likelihood of an unfavorable
outcome or estimate our potential liability, if any. 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 34




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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. A proposal has been made
for the settlement and release of claims against the issuer defendants,
including us, in exchange for a guaranteed recovery to be paid by the insurance
carriers of the issuer defendants and an assignment of certain claims. We have
approved the settlement proposal and are awaiting definitive documentation. The
settlement is subject to a number of conditions, including approval of the
proposed settling parties and the Court. 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 proposal has been made for
the settlement and release of claims against the issuer defendants. Wink
Communications has approved the settlement proposal and is awaiting the
definitive documentation. The settlement is subject to a number of conditions,
including approval of the proposed settlement parties and the Court. 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. 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 agreements 35




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between (1) OpenTV, Inc. and EchoStar and (2) Wink Communications and
DIRECTV include indemnification obligations of OpenTV, Inc. and Wink
Communications, respectively, 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. Based on publicly
available information, we believe that certain of the defendants in the suit,
including DIRECTV, reached agreement with BI to settle the litigation on July
17, 2003. We are unaware of the specific terms of that settlement and are
unable to assess the implications of that settlement, if any, on Wink
Communications. 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. If liability is found
against Charter in this matter, and if such a decision implicates our
technology or products, Charter could notify Wink of its expectation of
indemnification, in which case our business performance, financial position,
results of operations or cash flows may be adversely affected. No provision
has been made in our condensed consolidated financial statements for these
matters. We are unable to estimate our potential liability, if any. 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. 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. We
believe the estimated fair value of these indemnification agreements in excess
of applicable insurance coverage is not material. In the ordinary course of our business, we encounter certain
circumstances, from time to time, in which layoffs, dismissals or other forms
of separation with employees result in settlements between certain employees
and the company to address claims that we or our employee may allegedly have
against the other party. We recently reached a tentative settlement with a
former employee to resolve various claims that, if it becomes effective, will
result in a payment by us of approximately $550,000. We would expect to make
that payment in the second quarter of 2004. 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 36




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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 in this section could change in the future. 
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 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 Executive
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). These securities were issued without registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof, as a transaction not
involving a public offering. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits: ExhibitNumber
    
    Description3.1(a)
    
    Memorandum of Association of OpenTV Corp.3.2(b)
    
    Articles of Association of OpenTV Corp.4.1(c)
    
    Specimen Certificate for Class A ordinary shares of OpenTV Corp.10.1
    
    Employment Agreement dated as of March 23, 2004 by and between
OpenTV Corp. and James A. Chiddix31.1
    
    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
   (a)
    
    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. (b)
    
    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. (c)
    
    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.  (b)
    
    Reports on Form 8-K and Form 8-K/A filed during the quarter ended March
31, 2004: Date Filed or Furnished
    
    Item(s) Reported
    
    Financial Statements FiledMarch 18, 2004
    
    Items 12*
    
    NoMarch 25, 2004
    
    Items 5 and 7
    
    No
   *
    
    This Report on Form 8-K was furnished to the Securities and Exchange
Commission, and is not to be deemed (1) filed for purposes of Section 18
of the Securities Exchange Act of 1934, as amended, or otherwise subject
to the liabilities of that Section or (2) incorporated by reference into
any filing by the Company under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended. 37




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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: May 10, 2004
    By:
    /s/ Richard HornsteinRichard HornsteinSenior Vice President and
Chief Financial Officer




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##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    Description3.1(a)
    
    Memorandum of Association of OpenTV Corp.3.2(b)
    
    Articles of Association of OpenTV Corp.4.1(c)
    
    Specimen Certificate for Class A ordinary shares of OpenTV Corp.10.1
    
    Employment Agreement dated as of March 23, 2004 by and between OpenTV Corp. and James A. Chiddix31.1
    
    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
   (a)
    
    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. (b)
    
    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. (c)
    
    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.