- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
Amendment No. 2
[X]Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the quarterly period ended September 30, 2000.
[_]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 000-27141
TIVO INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0463167
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
2160 Gold Street, PO Box 2160, Alviso, CA 95002
(Address of principal executive offices) (Zip Code)
(408) 519-9100
(Registrant's telephone number including area code)
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 [_]
The number of outstanding shares of the registrant's Common Stock, $0.001
par value, was 43,408,910 as of November 8, 2000.
EXPLANATORY NOTE
This Amendment No. 2 to the Quarterly Report on Form-10 Q for TiVo Inc.
(the "Company") for the quarter ended September 30, 2000 as filed with the
Securities and Exchange Commission on November 14, 2000 is being amended and
restated in its entirety to provide additional disclosure in Part 1 "Financial
Information", Item 1 "Notes to Financial Statements" and Item 2 "Management's
Discussion and Analysis of Financial Condition and Result of Operations".
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION 3
Item 1. Financial Statements............................................ 3
Consolidated Balance Sheets..................................... 3
Consolidated Statements of Operations........................... 5
Consolidated Statements of Redeemable Convertible Preferred
Stock and Redeemable Common Stock............................... 6
Consolidated Statements of Stockholders' Equity................. 7
Consolidated Statements of Cash Flows........................... 9
Notes to Financial Statements................................... 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 17
Item 3. Quantitative and Qualitative Disclosure About Market Risk....... 35
PART II: OTHER INFORMATION 36
Item 1. Legal Proceedings............................................... 36
Item 2. Changes in Securities and Use of Proceeds....................... 36
Item 3. Defaults Upon Senior Securities................................. 37
Item 4. Submission of Matters to a Vote of Security Holders............. 37
Item 5. Other Information............................................... 37
Item 6. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K........................................................ 38
Signatures .............................................................. 40
2
PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TIVO INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................ $148,622,000 $139,687,000
Short-term investments........................... 11,328,000 6,168,000
Restricted cash.................................. 91,758,000 --
Accounts receivable, net of allowance for
doubtful accounts of $120,000 and zero as of
September 30, 2000 and 1999, respectively....... 273,000 127,000
Accounts receivable from related parties......... 3,082,000 210,000
Prepaid expenses and other....................... 8,327,000 2,589,000
------------ ------------
Total current assets........................... 263,390,000 148,781,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $2,950,000 and $831,000 as of
September 30, 2000 and December 31, 1999,
respectively...................................... 19,754,000 4,061,000
------------ ------------
Total assets................................... $283,144,000 $152,842,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable................................. $ 11,933,000 $ 8,432,000
Accrued liabilities.............................. 22,149,000 4,778,000
Accrued marketing-related parties................ 25,478,000 2,349,000
Deferred interest income on restricted cash...... 258,000 --
Deferred revenue................................. 2,782,000 2,271,000
Current portion of obligations under capital
lease........................................... 777,000 624,000
------------ ------------
Total current liabilities...................... 63,377,000 18,454,000
Long-term portion of obligations under capital
lease........................................... 810,000 1,141,000
Long-term deferred revenue....................... 5,588,000 --
Other long-term liabilities...................... 1,241,000 --
------------ ------------
Total long-term liabilities.................... 7,639,000 1,141,000
------------ ------------
Total liabilities............................ $ 71,016,000 $ 19,595,000
============ ============
The accompanying notes are an integral part of these statements.
3
TIVO INC.
CONSOLIDATED BALANCE SHEETS--(Continued)
September 30, December 31,
2000 1999
------------- ------------
REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
REDEEMABLE COMMON STOCK
Series A Redeemable convertible preferred stock,
par value $0.001:
Authorized shares at September 30, 2000 and
December 31, 1999 are 10,000,000 and zero,
respectively...................................
Issued and outstanding shares at September 30,
2000 and December 31, 1999 are 2,711,861 and
zero, respectively............................. $ 3,000 $ --
Redeemable common stock, par value $0.001:
Issued and outstanding shares at September 30,
2000 and December 31, 1999 are 806,889 and
zero, respectively........................... 1,000 --
Dividends payable............................... 240,000 --
Additional paid-in capital...................... 97,238,000 --
------------- ------------
Total redeemable convertible preferred stock
and redeemable common stock................ 97,482,000 --
STOCKHOLDERS' EQUITY
Common stock, par value $0.001:
Authorized shares at September 30, 2000 and
December 31, 1999 are 150,000,000 and
75,000,000, respectively.....................
Issued and outstanding shares at September 30,
2000 and December 31, 1999 are 42,421,417 and
37,746,391, respectively..................... $ 42,000 $ 38,000
Additional paid-in capital...................... 348,759,000 235,423,000
Deferred compensation........................... (3,631,000) (6,170,000)
Prepaid marketing expenses...................... (33,684,000) (16,341,000)
Note receivable................................. (2,822,000) (2,822,000)
Retained deficit................................ (194,018,000) (76,881,000)
------------- ------------
Total stockholders' equity.................. 114,646,000 133,247,000
------------- ------------
Total liabilities, redeemable convertible
preferred stock and redeemable common stock
and stockholders' equity................... $ 283,144,000 $152,842,000
============= ============
The accompanying notes are an integral part of these statements.
4
TIVO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------- ------------
Revenues................ $ 1,002,000 $ 33,000 $ 2,145,000 $ 41,000
Costs and expenses
Cost of services...... 4,019,000 749,000 13,175,000 2,074,000
Research and
development.......... 8,318,000 2,327,000 18,675,000 5,782,000
Sales and marketing... 30,262,000 5,323,000 50,826,000 9,338,000
Sales and marketing-
related parties...... 18,998,000 4,946,000 28,894,000 5,328,000
General and
administrative....... 3,526,000 1,757,000 9,848,000 3,939,000
Stock-based
compensation......... 657,000 501,000 2,545,000 688,000
Other operating
expense, net......... -- 4,808,000 -- 4,997,000
------------ ------------ ------------- ------------
Loss from
operations.......... (64,778,000) (20,378,000) (121,818,000) (32,105,000)
Interest income..... 1,625,000 614,000 5,356,000 891,000
Interest expense and
other.............. (253,000) (281,000) (435,000) (459,000)
------------ ------------ ------------- ------------
Net loss............. (63,406,000) (20,045,000) (116,897,000) (31,673,000)
Less: Series A
redeemable
convertible
preferred stock
dividend............ (240,000) -- (240,000) --
------------ ------------ ------------- ------------
Net loss attributable to
common stock........... $(63,646,000) $(20,045,000) $(117,137,000) $(31,673,000)
============ ============ ============= ============
Net loss per common
share basic and
diluted.............. $ (1.72) $ (3.44) $ (3.25) $ (6.53)
============ ============ ============= ============
Weighted average
common shares
outstanding--basic
and diluted.......... 36,923,633 5,833,597 36,006,651 4,848,748
============ ============ ============= ============
The accompanying notes are an integral part of these statements.
5
TIVO INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND REDEEMABLE COMMON STOCK
Redeemable Convertible Redeemable
Preferred Stock Common Stock
------------------------------------- Additional Dividends
Shares Amount Shares Amount Paid-In Capital Payable Total
------------ ----------------- ------ --------------- --------- -----------
BALANCE, DECEMBER 31,
1999................... -- $ -- -- $ -- $ -- $ -- $ --
------------ --------- ------- ------ ----------- -------- -----------
BALANCE, MARCH 31,
2000................... -- -- -- -- -- -- --
------------ --------- ------- ------ ----------- -------- -----------
BALANCE, JUNE 30, 2000.. -- -- -- -- -- -- --
------------ --------- ------- ------ ----------- -------- -----------
Issuance of Series A
redeemable
convertible preferred
stock................ 2,711,861 3,000 -- -- 81,353,000 -- 81,356,000
Declaration of Series
A redeemable
convertible preferred
dividend............. -- -- -- -- -- 240,000 240,000
Issuance of common
stock with
redemption........... -- -- 806,889 1,000 18,643,000 -- 18,644,000
Issuance costs........ -- -- -- -- (2,758,000) -- (2,758,000)
------------ --------- ------- ------ ----------- -------- -----------
BALANCE, SEPTEMBER 30,
2000................... 2,711,861 $ 3,000 806,889 $1,000 $97,238,000 $240,000 $97,482,000
============ ========= ======= ====== =========== ======== ===========
The accompanying notes are an integral part of these statements.
6
TIVO INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Prepaid
------------------- Paid-In Deferred Marketing Note Retained
Shares Amount Capital Compensation Expense Receivable Deficit Total
---------- ------- ------------ ------------ ------------ ----------- ------------ ------------
BALANCE, DECEMBER 31,
1999................ 37,746,391 $38,000 $235,423,000 $(6,170,000) $(16,341,000) $(2,822,000) $(76,881,000) $133,247,000
Exercise of stock
options........... 60,712 -- 49,000 -- -- -- -- 49,000
Common stock
repurchases....... (20,834) -- (1,000) -- -- -- -- (1,000)
Recognition of
deferred
compensation...... -- -- 365,000 (365,000) -- -- -- --
Stock-based
compensation
expense........... -- -- -- 969,000 -- -- -- 969,000
Amortization of
prepaid marketing
expenses.......... -- -- -- -- 2,513,000 -- -- 2,513,000
Net loss......... -- -- -- -- -- -- (24,055,000) (24,055,000)
---------- ------- ------------ ----------- ------------ ----------- ------------ ------------
BALANCE, MARCH 31,
2000................ 37,786,269 38,000 235,836,000 (5,566,000) (13,828,000) (2,822,000) (100,936,000) 112,722,000
Issuance of common
stock warrants for
services.......... -- -- 193,000 -- -- -- -- 193,000
Amortization of
warrants for
services.......... -- -- (36,000) -- -- -- -- (36,000)
Issuance of common
stock--employee
stock purchase
plan.............. 83,967 -- 1,142,000 -- -- -- -- 1,142,000
Exercise of stock
options........... 119,816 -- 107,000 -- -- -- -- 107,000
Common stock
repurchases....... (12,782) -- (2,000) -- -- -- -- (2,000)
Reversal of
deferred
compensation...... -- -- (60,000) 60,000 -- -- -- --
Stock-based
compensation
expense........... -- -- -- 919,000 -- -- -- 919,000
Amortization of
prepaid marketing
expenses.......... -- -- -- -- 1,482,000 -- -- 1,482,000
Reversal to prepaid
marketing
expenses.......... -- -- (635,000) -- 635,000 -- -- --
Net loss......... -- -- -- -- -- -- (29,436,000) (29,436,000)
---------- ------- ------------ ----------- ------------ ----------- ------------ ------------
BALANCE, JUNE 30,
2000................ 37,977,270 38,000 236,545,000 (4,587,000) (11,711,000) (2,822,000) (130,372,000) 87,091,000
The accompanying notes are an integral part of these statements.
7
TIVO INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)
Common Stock Additional Prepaid
------------------ Paid-In Deferred Marketing Note Retained
Shares Amount Capital Compensation Expense Receivable Deficit Total
---------- ------- ------------ ------------ ------------ ----------- ------------- ------------
Series A redeemable
convertible
preferred stock
dividend........... -- -- -- -- -- -- (240,000) (240,000)
Issuance of common
stock.............. 4,327,833 4,000 99,996,000 -- -- -- -- 100,000,000
Recognition of
prepaid marketing
expenses........... -- -- -- -- (8,500,000) -- -- (8,500,000)
Issuance costs..... -- -- (3,797,000) -- -- -- -- (3,797,000)
Issuance of common
stock warrants for
marketing
expenses........... -- -- 15,999,000 -- (15,999,000) -- -- --
Amortization of
prepaid marketing
expenses........... -- -- -- -- 2,526,000 -- -- 2,526,000
Cancellation of
common stock
warrants for
services........... -- -- (193,000) -- -- -- -- (193,000)
Exercise of stock
options for common
stock.............. 116,314 -- 508,000 -- -- -- -- 508,000
Reversal of deferred
compensation....... -- -- (299,000) 299,000 -- -- -- --
Stock-based
compensation
expense............ -- -- -- 657,000 -- -- -- 657,000
Net loss............ -- -- -- -- -- -- (63,406,000) (63,406,000)
---------- ------- ------------ ----------- ------------ ----------- ------------- ------------
BALANCE, SEPTEMBER
30, 2000............ 42,421,417 $42,000 $348,759,000 $(3,631,000) $(33,684,000) $(2,822,000) $(194,018,000) $114,646,000
========== ======= ============ =========== ============ =========== ============= ============
The accompanying notes are an integral part of these statements.
8
TIVO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
---------------------------
2000 1999
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................ $(117,137,000) $(31,672,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 2,119,000 383,000
Stock exchanged for services.................. -- 337,000
Amortization of prepaid marketing expenses.... 6,521,000 3,911,000
Amortization of warrants for services......... 104,000 285,000
Stock-based compensation expense.............. 2,545,000 688,000
Changes in assets and liabilities:
Accounts receivable........................... (146,000) (8,844,000)
Accounts receivable-related parties........... (2,872,000) --
Inventories................................... -- (946,000)
Prepaid expenses and other.................... (5,878,000) (1,429,000)
Accounts payable.............................. 3,501,000 4,380,000
Accrued liabilities........................... 10,816,000 8,272,000
Accrued marketing-related parties............. 23,129,000 --
Dividends payable............................. 240,000 --
Other long-term liability..................... 1,241,000 --
Deferred revenue.............................. 511,000 286,000
Long-term deferred revenue.................... 5,588,000 --
------------- ------------
Net cash used in operating activities.......... (69,718,000) (24,349,000)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment, net...... (17,812,000) (1,846,000)
Sale (purchase) of short-term investments, net.. (5,160,000) (8,076,000)
------------- ------------
Net cash used in investing activities.......... (22,972,000) (9,922,000)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible preferred
stock, net of issuance costs................... -- 90,572,000
Proceeds from issuance of common stock.......... 100,000,000 --
Proceeds from issuance of common stock--employee
stock purchase plan............................ 1,142,000 --
Proceeds from exercise of common stock options.. 664,000 854,000
Repurchase of common stock...................... (3,000) (18,000)
Net borrowings (payments) under capital lease... (178,000) 1,017,000
Increase (decrease) in bank overdraft........... -- (442,000)
------------- ------------
Net cash provided by financing activities...... 101,625,000 91,983,000
------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... 8,935,000 57,712,000
------------- ------------
The accompanying notes are an integral part of these statements.
9
TIVO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Nine Months Ended
September 30,
-------------------------
2000 1999
------------ -----------
CASH AND CASH EQUIVALENTS:
Balance at beginning of period..................... 139,687,000 2,248,000
------------ -----------
Balance at end of period........................... $148,622,000 $59,960,000
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest............................. $ 89,000 $ 24,000
Deferred stock-based compensation.................. 6,000 6,631,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
INFORMATION
Restricted cash received from issuance of
redeemable convertible preferred stock............ $ 81,356,000 $ --
Restricted cash received from issuance of
redeemable common stock........................... 18,644,000 --
Restricted cash used for prepaid marketing
expenses.......................................... (8,500,000) --
Interest earned on restricted cash................. 258,000 --
Issuance of common stock warrants for prepaid
marketing expenses................................ (15,999,000) --
Stock issued for a note receivable................. -- 2,822,000
Equipment acquired under capital lease............. 367,000 1,099,000
The accompanying notes are an integral part of these statements.
10
TIVO INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
TiVo Inc. (the "Company" or "TiVo") was incorporated in August 1997 as a
Delaware corporation with facilities in California. On August 21, 2000, TiVo
(UK) Ltd., a wholly owned subsidiary of TiVo Inc., was incorporated in the
United Kingdom. The Company has developed a subscription-based personal
television service (the "TiVo Service") that provides viewers with the ability
to pause, rewind and play back live or recorded television broadcasts, as well
as to search for, watch and record programs. The TiVo Service also provides
television listings, daily suggestions and special viewing packages. The TiVo
Service relies on three key components: the personal video recorder, the TiVo
remote control and the TiVo Broadcast Center. The Company conducts its
operations through one reportable segment.
The Company continues to be subject to certain risks, including the
uncertainty of availability of additional financing; dependence on third
parties for manufacturing, marketing and sales support; the uncertainty of the
market for personal television; dependence on key management; limited
manufacturing, marketing and sales experience and the uncertainty of future
profitability.
Unaudited Interim Consolidated Financial Statements
The accompanying consolidated balance sheet as of September 30, 2000 and the
accompanying consolidated statements of operations, consolidated statements of
redeemable convertible preferred stock and redeemable common stock,
consolidated statements of stockholders' equity and consolidated statements of
cash flows for the three months and nine months ended September 30, 2000 and
1999 included herein have been prepared by the Company and are unaudited. The
information furnished in the unaudited financial statements referred to above
includes all normal adjustments that are, in the opinion of management,
necessary for a fair presentation of such financial statements. The results of
operations for the three months and nine months ended September 30, 2000 are
not necessarily indicative of results for the entire fiscal year or future
periods.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company classifies financial instruments as cash equivalents if the
original maturity of such instruments is three months or less.
Short-term Investments
Short-term investments consist of commercial paper investments and
certificates of deposit with original maturities at the date of purchase
ranging between three and twelve months. The Company classifies these
investments as held to maturity and records the instruments at amortized cost,
which approximates fair value due to the short maturities.
Deferred Rent
Deferred rent of $684,000 included in other long-term liabilities results
from the recognition of rent expense under facilities lease amortized on a
straight line basis over 7 years, the life of the related lease.
Revenue Recognition
Revenue arises from two sources, subscription revenue and non-subscription
revenue. Subscription revenues represent revenues from customer subscriptions
to the TiVo Service. Subscriptions to the TiVo Service
11
TIVO INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
are available on a monthly, annual or lifetime basis. Subscription fees are
generally charged to customers' credit cards and are generally billed in
advance on a monthly basis. A lifetime subscription covers the life of the
particular personal video recorder purchased. Revenues from subscriptions are
recognized ratably over the subscription period. Subscription revenues from
lifetime subscriptions are recognized ratably over a four-year period, the best
estimate of the useful life of the personal video recorder. Deferred revenue
relates to subscription fees collected but for which service has not yet been
provided
Non subscription revenue primarily includes Charter Advertising and
Sponsorship revenue. From consumer companies and media networks who have
provided content on the TiVo Service. Customers are billed on a net terms basis
and the revenue is recognized as the advertising and content is delivered.
Sales and Marketing Expense--Related Parties
Sales and marketing--related parties consists of cash and non-cash charges
related to the Company's agreements with DIRECTV, Inc. ("DIRECTV"), Philips
Business Electronics B.V. ("Philips"), Quantum Corporation ("Quantum"), Sony
Corporation of America ("Sony"), AOL and Creative Artists Agency, LLC ("CAA"),
all of which hold stock in the Company.
Stock-based Compensation and Stock Exchanged for Services
The Company has elected to follow Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock options. Under APB 25,
when the exercise price of employee stock options is less than the market price
of the underlying stock on the date of grant, compensation expense is recorded
for the difference between fair value and the exercise price. Expense
associated with stock-based compensation is being amortized on an accelerated
basis over the vesting period of the individual award, generally four years.
The method of amortization is in accordance with Financial Accounting Standards
Board ("FASB") Interpretation No. 28, under which value assigned to options
vesting in future periods is ratably amortized beginning upon issuance of the
option rather than at the vesting date. The Company has recorded stock-based
compensation expense of $2.5 million for the nine months ended September 30,
2000. The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation."
The value of warrants, options or stock exchanged for services is expensed
over the period benefited. The warrants and options are valued using the Black-
Scholes option pricing model. To calculate the expense, the Company uses either
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
Other Operating Expense, Net
Prior to the transition of manufacturing and distribution responsibility to
Philips in the fourth quarter of 1999, the Company sold personal video
recorders directly to consumers. The Company's direct sales of personal video
recorders, less the cost of the personal video recorders sold is classified as
other operating expense, net. Other operating expense, net is considered
incidental to the Company's business and is recognized upon shipment to the
customer. The Company records a provision for estimated warranty costs and
returns at the time of sale.
Net Loss Per Common Share
Net loss per share is calculated in accordance with SFAS No. 128, "Earnings
Per Share," and SEC Staff Accounting Bulletin No. 98 (SAB No. 98). Under the
provisions of SFAS No. 128 and SAB No. 98, basic and diluted net loss per
common share is computed by dividing net loss by the weighted average number of
12
TIVO INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
common shares outstanding. Shares used in the computation of all net loss per
share amounts do not include repurchasable common stock issued to DIRECTV,
redeemable common stock issued to AOL and unvested, repurchasable common stock
issued under the employee stock option plans.
Reclassifications
Certain prior year amounts have been reclassified for consistency with
current year financial statement presentation.
3. COMMITMENTS AND CONTINGENCIES
Facilities Leases
In October 1999, the Company entered into an office lease with WIX/NSJ Real
Estate Limited Partnership for two buildings totaling approximately 127,000
square feet located in Alviso, CA. The lease began on March 10, 2000 and has a
seven-year term. Future minimum lease payments under this lease are $19.3
million as of September 30, 2000.
In March 2000, the Company entered into an office lease with Embassy Group
Associates for approximately 1,400 square feet located in Beverly Hills, CA.
The lease began on March 1, 2000 and has a twenty-six month term. Future
minimum lease payments under this lease are $50,000 as of September 30, 2000.
In June 2000, the Company entered into an office lease with Regus Business
Center for approximately 1,200 square feet located in Middlesex, United
Kingdom. The lease began on June 20, 2000 and has a six month term. Future
minimum lease payments under this lease are $60,000 as of September 30, 2000.
In August 2000, the Company entered into an office lease with Arden Realty
Ltd. for approximately 1,700 square feet located in Beverly Hills, CA. The
lease began on August 30, 2000 and has a thirty-six month term. Future minimum
lease payments under this lease are $141,000 as of September 30, 2000.
Rent expense for the three months ended September 30, 1999 and 2000 was
$266,000 and $936,000, respectively. Rent expense for the nine months ended
September 30, 1999 and 2000 was $749,000 and $2.1 million, respectively.
Including abatement from sublease income, rent expense for the three and
nine months ended September 30, 2000 was reduced to $590,000 and $1,781,000,
respectively.
Equipment Lease Line
As of September 30, 2000, $2.3 million of an equipment lease line had been
used and has been accounted for as a capital lease. The unused equipment lease
line expired February 2000. The future minimum lease payments under capitalized
equipment leases are $1.7 million as of September 30, 2000.
4. AMERICA ONLINE, INC. INVESTMENT
On September 13, 2000, the Company closed the Investment Agreement with AOL
for $200 million. Under the terms of the Investment Agreement between AOL and
TiVo, dated June 6, 2000 and the First Amendment to the Investment Agreement
dated September 11, 2000 (the "Investment Agreement"), the Company issued
2,711,861 shares of redeemable convertible preferred stock at $30.00 per share,
806,889 shares of redeemable common stock at $23.11 per share, 4,327,833 shares
of common stock at $23.11 per share, two initial warrants to purchase an
aggregate of 2,603,903 shares of the Company's common
13
TIVO INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
stock and two performance warrants to purchase an aggregate of up to 5,207,806
shares of common stock. The two performance warrants are contingent upon future
performance. The AOL investment is part of a three-year strategic Production
Integration and Marketing Agreement between AOL and TiVo, (the "Commercial
Agreement"), in which TiVo became an AOL TV programming partner, offering AOL
TV subscribers access to features of TiVo's Personal TV Service.
Restricted Cash
Under the terms of the Investment Agreement, the Company deposited $91.5
million of the proceeds received from the AOL investment and the associated
interest income earned of $258,000 in an escrow account as restricted cash. In
accordance with the Commercial Agreement, $91.5 million of the restricted cash
is intended to be used as subsidy payments to manufacturer(s). However, the
restricted cash would be used in the event AOL exercises their put option to
repurchase Series A redeemable convertible preferred stock and redeemable
common stock. The terms of the put option are described below.
Series A Redeemable Convertible Preferred Stock
In September 2000, the Company issued 2,711,861 shares of Series A
redeemable convertible preferred stock at $30.00 per share to AOL in exchange
for $81.4 million, before issuance costs of $2.2 million. Each share of the
Series A redeemable convertible preferred stock is initially convertible into
one share of common stock, subject to adjustment for stock splits, dividends,
combinations, reclassifications or similar transactions, as provided in the
Company's Amended and Restated Certificate of Incorporation. The Series A
redeemable convertible preferred stock is convertible upon AOL's option or is
mandatorily convertible if the price of the Company's common stock exceeds
$30.00 per share for any 30 consecutive trading day period. The Series A
redeemable convertible preferred stock was issued with a put option that under
certain conditions will require the Company to repurchase the number of
preferred shares having an initial liquidation value of $91.5 million. If the
set-top box launch of the Integrated Product has not occurred by December 31,
2001 and AOL has not committed a material breach of the Commercial Agreement or
the Company breaches its obligations with respect to the financial covenants,
then AOL shall have a put option exercisable for a period of ninety days. In
the event that the set-top box launch occurs after the planned launch date, but
prior to the exercise of the put option, the put option shall immediately
expire.
Series A Redeemable Convertible Preferred Stock Dividend
Under the terms of the Investment Agreement between AOL and TiVo, the
Company issued Series A redeemable convertible preferred stock, with dividend
and voting rights. Dividends on the Series A redeemable convertible preferred
stock are calculated by multiplying the Non-Government Institutional Funds
Simple Average Rate by $30.00 per shares times the number of shares of Series A
redeemable convertible preferred stock outstanding. Dividends are payable
quarterly as declared by the Company's Board of Directors.
Redeemable Common Stock
In September 2000, the Company issued 806,889 shares of redeemable common
stock at $23.11 per share to AOL in exchange for $18.6 million, before issuance
costs of $514,000. The redeemable common stock is common stock that was issued
with a put option. The terms of the put option are the same as described above.
Common Stock
In September 2000, the Company issued 4,327,833 shares of common stock at
$23.11 per share to AOL in exchange for $100.0 million, before issuance costsof
$3.8 million.
14
TIVO INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Initial Common Stock Warrants A and B
In conjunction with AOL's investment, the Company issued two initial
warrants to AOL to purchase common stock. The initial warrants are vested
immediately and exercisable as follows:
. Initial Warrant A--AOL was issued warrants to purchase 2,308,475 shares
of common stock at $23.11 per share. The Company will expense the
estimated fair value of the warrants of $13.5 million over 3 years, the
term of the Commercial Agreement. The estimated fair value of the
warrants was determined using the Black-Scholes option pricing model. The
principal assumptions used in the computation are: 16-month term; fair
market value at the date of issuance of $20.00 per share; a risk-free
rate of return of 6.05%; dividend yield of zero percent; and a volatility
of 70%.
. Initial Warrant B--AOL was issued warrants to purchase 295,428 shares of
common stock at $30.00 per share. The Company will expense the estimated
fair value of the warrants of $2.5 million over 3 years, the term of the
Commercial Agreement. The estimated fair value of the warrants was
determined using the Black-Scholes option pricing model. The principal
assumptions used in the computation are: 40-month term; fair market value
at the date of issuance of $20.00 per share; a risk-free rate of return
of 6.05%; dividend yield of zero percent; and a volatility of 70%.
The expiration of Initial Warrant A is December 31, 2001 and Initial Warrant B
expires December 31, 2003. The estimated value of the warrants of $16.0 million
was recorded as prepaid marketing expense (contra-equity) when issued.
Performance Warrants
In conjunction with AOL's investment, the Company issued two performance
warrants to AOL to purchase common stock. If AOL meets certain performance
criteria, they may exercise these two performance warrants to purchase common
stock. The warrants are exercisable as follows:
. Performance Warrant A--AOL was issued warrants to purchase up to
2,603,903 shares of common stock at the exercise price described below.
Performance Warrant A may be exercised within six months following the
execution of the Launch Commitment. The Launch Commitment is a binding
contractual commitment to market Integrated Service to have 1,500,000
activated users on Time Warner cable systems.
. Performance Warrant B--AOL was issued warrants to purchase up to
2,603,903 shares of common stock at the exercise price described below.
Performance Warrant B may be exercised within the six month period
following the date on which AOL notifies the Company that 1,500,000
activated users of the Integrated Service existed at one time.
Performance Warrants A and B shall be valued at the date that AOL meets the
performance criteria. The exercise price for each performance warrant is equal
to 90% of the average of the last reported trading prices of the Common Stock
on the Nasdaq for the ten consecutive trading days preceding the date of AOL's
Notice of Exercise.
The method of accounting for each performance warrant is to value using the
Black-Scholes option pricing model based on the terms existing at the time AOL
meets performance. The Company will expense the performance warrants over the
remaining term of the Commercial Agreement.
Additionally, Performance Warrants A and B shall also become exercisable
immediately upon the occurrence of either a material breach of the Commercial
Agreement by the Company or the Company enters
15
TIVO INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
into a definitive agreement for a change of control of the Company. The
performance warrants expire on the earlier of September 11, 2003 or in the
event that AOL commits a material breach of the Commercial Agreement.
AOL Advertising Insertion Order
Under the terms of the Investment Agreement, the Company has agreed to pay
$12.0 million to AOL for advertising media under the AOL Advertising Insertion
Order. On the closing date of the Investment Agreement, $8.5 million of this
amount was paid to AOL. The Company has recorded this payment as prepaid
marketing expense (contra equity). As of September 30, 2000 we have incurred
$1.0 million of advertising expense. The balance of $3.5 million has not been
incurred and is not due as of September 30, 2000.
Financial Convenants
Under the terms of the Investment Agreement, the Company must maintain a
positive net cash position in excess of $25.0 million at the end of each fiscal
quarter. Net cash is defined as consolidated current assets (excluding deferred
tax assets and escrowed funds) minus consolidated current liabilities
(excluding deferred revenue, deferred interest income on escrowed funds,
sublessee prepaid rent and leasing obligations). The Company will, on an
informational basis, advise AOL monthly of the Company's net cash position. The
financial covenants shall terminate from the earlier of the date of the set-top
box launch, (so long as the such set-top box launch occurs before the planned
launch date), the expiration of the put option or the day following the first
anniversary of the planned launch date.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains trend analysis and other forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements The discussion in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains trend analysis and other forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. These forward-looking
statements include, without limitation, statements containing the words
"believes," "anticipates," "expects," and words of similar import. Such
forward-looking statements will have known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Actual results could differ materially from those set forth
in such forward-looking statements as a result of the "Factors That May Affect
Future Operating Results" and other risks detailed in the Company's reports
filed with the Securities and Exchange Commission.
During the three months ended September 30, 2000, the Company made several
key announcements:
. TiVo announced a partnership with ASI Entertainment and Nielsen Media
Research to join forces in a project that will create a national TV
sample through the National In-Home TV Lab, designed to forecast the
future impact of personal television on television programming and
advertising.
. TiVo announced a partnership with Comcast Cable to jointly deliver
personal video recorders with the TiVo Service.
. TiVo announced the launch of TiVo Service in the United Kingdom in
cooperation with British Sky Broadcast. Consumer electronic manufacturer,
Thomson, will manufacture the TiVo Recorder under the Thomson SCENIUM
brand. The TiVo Recorder became available in October 2000 at Dixons,
Curry's and selected electrical retailers. In an effort to support this
partnership, TiVo has established a presence in the United Kingdom by
both incorporating TiVo (UK) Ltd. and establishing an office in
Middlesex, UK. Additionally, the BBC signed an agreement as a network
partner to showcase its content on the TiVo Personal Television Service
in the UK.
. TiVo introduced "TiVo Direct", an innovative, new marketing and
merchandising product. This new content product is comprised of 30
minutes of video advertising and marketing programming pre-loaded into
the hard drive before a TiVo enabled unit is shipped from the factory."
This content is produced by an advertiser. It may include advertisements
for purchase of advertiser merchandise or other goods and services
selected by the advertiser. The content resides on the hard drive until
the consumer deletes it. TiVo will receive a percentage revenue share of
specified products sold through this medium. As of December 31, 2000 TiVo
has recognized no revenue for TiVo Direct.
. On September 13, 2000, TiVo closed the Investment Agreement with AOL,
pursuant to which AOL paid TiVo $200 million. Under the terms of the
Investment Agreement between AOL and TiVo, dated June 6, 2000, as amended
by the First Amendment to the Investment Agreement dated September 11,
2000, TiVo issued 2,711,861 shares of redeemable convertible preferred
stock at $30.00 per share, 806,889 shares of redeemable common stock at
$23.11 per share, 4,327,833 shares of common stock at $23.11 per share,
two initial warrants to purchase an aggregate of 2,603,903 shares of
TiVo's common stock and two performance warrants to purchase an aggregate
of up to5,207,806 shares of common stock. The two performance warrants
are contingent upon future performance. The AOL investment is part of a
three-year strategic Production Integration and Marketing Agreement
between AOL and TiVo, in which TiVo became an AOL TV programming partner,
offering AOL TV subscribers access to features of TiVo's Personal TV
Service.
17
Restricted Cash
Under the terms of the Investment Agreement, TiVo deposited $91.5 million of
the proceeds received from the AOL investment and the associated interest
income earned of $258,000 in an escrow account as restricted cash. In
accordance with the Commercial Agreement, $91.5 million of the restricted cash
is intended to be used as subsidy payments to manufacturer(s). However, the
restricted cash would be used in the event AOL exercises its put option to
repurchase Series A redeemable convertible preferred stock and redeemable
common stock. The terms of the put option are described below.
Series A Redeemable Convertible Preferred Stock
In September 2000, TiVo issued 2,711,861 shares of Series A redeemable
convertible preferred stock at $30.00 per share to AOL in exchange for $81.4
million, before issuance costs of $2.2 million. Each share of the Series A
redeemable convertible preferred stock is initially convertible into one share
of common stock, subject to adjustment for stock splits, dividends,
combinations, reclassifications or similar transactions, as provided in TiVo's
Amended and Restated Certificate of Incorporation. The Series A redeemable
convertible preferred stock is convertible upon AOL's option or is mandatorily
convertible if the price of TiVo's common stock exceeds $30.00 per share for
any 30 consecutive trading day period. The Series A redeemable convertible
preferred stock was issued with a put option that under certain conditions will
require TiVo to repurchase the number of preferred shares having an initial
liquidation value of $91.5 million. If the set-top box launch of the Integrated
Product has not occurred by December 31, 2001 and AOL has not committed a
material breach of the Commercial Agreement or TiVo breaches its obligations
with respect to the financial covenants, then AOL shall have a put option
exercisable for a period of ninety days. In the event that the set-top box
launch occurs after the planned launch date, but prior to the exercise of the
put option, the put option shall immediately expire.
Series A Redeemable Convertible Preferred Stock Dividend
Under the terms of the Investment Agreement between AOL and TiVo, TiVo
issued Series A redeemable convertible preferred stock, with dividend and
voting rights. Dividends on the Series A redeemable convertible preferred stock
are calculated by multiplying the Non-Government Institutional Funds Simple
Average Rate by $30.00 per shares times the number of shares of Series A
redeemable convertible preferred stock outstanding. Dividends are payable
quarterly as declared by TiVo's Board of Directors.
Redeemable Common Stock
In September 2000, TiVo issued 806,889 shares of redeemable common stock at
$23.11 per share to AOL in exchange for $18.6 million, before issuance costs of
$514,000. The redeemable common stock is common stock that was issued with a
put option. The terms of the put option are the same as described above.
Common Stock
In September 2000, TiVo issued 4,327,833 shares of common stock at $23.11
per share to AOL in exchange for $100.0 million, before issuance costs of $3.8
million.
Initial Common Stock Warrants A and B
In conjunction with AOL's investment, TiVo issued two initial warrants to
AOL to purchase common stock. The initial warrants are vested immediately and
exercisable as follows:
. Initial Warrant A--AOL was issued warrants to purchase 2,308,475 shares
of common stock at $23.11 per share. TiVo will expense the estimated fair
value of the warrants of $13.5 million over 3 years, the term of the
Commercial Agreement. The estimated fair value of the warrants was
determined using the Black-Scholes option pricing model. The principal
assumptions used in the
18
computation are: 16-month term; fair market value at the date of issuance
of $20.00 per share; a risk-free rate of return of 6.05%; dividend yield
of zero percent; and a volatility of 70%.
. Initial Warrant B--AOL was issued warrants to purchase 295,428 shares of
common stock at $30.00 per share. TiVo will expense the estimated fair
value of the warrants of $2.5 million over 3 years, the term of the
Commercial Agreement. The estimated fair value of the warrants was
determined using the Black-Scholes option pricing model. The principal
assumptions used in the computation are: 40-month term; fair market
value at the date of issuance of $20.00 per share; a risk-free rate of
return of 6.05%; dividend yield of zero percent; and a volatility of
70%.
The expiration of Initial Warrant A is December 31, 2001 and Initial Warrant
B expires December 31, 2003. The estimated value of the warrants of $16.0
million was recorded as prepaid marketing expense (contra-equity) when issued.
Performance Warrants
Under the terms of the Investment Agreement two performance warrants were
issued. If AOL meets certain performance criteria, they may exercise these two
performance warrants to purchase up to an aggregate of 5,207,806 shares of
common stock at an exercise price per share which is a function of the market
price of the common stock. The first warrant is contingent and exercisable upon
a written binding commitment for the set-top box launch during the term of the
Commercial Agreement. The second performance warrant is contingent and
exercisable upon notification that there are 1.5 million activated users of the
Integrated Service existing at one time, excluding users of the Integrated
Service for whom the Integrated Service is enabled by hardware and equipment
developed to receive the DIRECTV service. These warrants are exercisable for a
six month period following the time they become exercisable. Additionally,
these warrants shall also become exercisable immediately upon the occurrence of
either a material breach of the Commercial Agreement by TiVo or TiVo enters
into a definitive agreement for a change of control. The performance warrants
expire on the earlier of September 11, 2003 or in the event that AOL commits a
material breach of the Commercial Agreement.
AOL Advertising Insertion Order
Under the terms of the Investment Agreement, TiVo has agreed to pay $12.0
million to AOL for advertising media under the AOL Advertising Insertion Order.
On the closing date of the Investment Agreement, $8.5 million of this amount
was paid to AOL. TiVo has recorded this payment as prepaid marketing expense
(contra equity). As of September 30, 2000 we have incurred $1.0 million of
advertising expense. The balance of $3.5 million has not been incurred and is
not due as of September 30, 2000.
Financial Convenants
Under the terms of the Investment Agreement, TiVo must maintain a positive
net cash position in excess of $25.0 million at the end of each fiscal quarter.
Net cash is defined as consolidated current assets (excluding deferred tax
assets and escrowed funds) minus consolidated current liabilities (excluding
deferred revenue, deferred interest income on escrowed funds, sublessee prepaid
rent and leasing obligations). TiVo will, on an informational basis, advise AOL
monthly of TiVo's net cash position. The financial covenants shall terminate
from the earlier of the date of the set-top box launch, (so long as the such
set-top box launch occurs before the planned launch date), the expiration of
the put option or the day following the first anniversary of the planned launch
date.
Results of Operations
Revenues. Revenues for the three months and nine months ended September 30,
2000 were $1.0 million and $2.1 million compared to $33,000 and $41,000 for
prior year comparable periods. The increase was
19
attributable to an increase in customer subscriptions to the TiVo Service,
which began in March 1999. As of September 30, 2000, we had approximately
73,000 subscribers. Additionally, other revenues comprised of Charter
Advertising Revenue and Charter Sponsorship Revenue were recognized during
2000.
Cost of services. Cost of services consists primarily of employee salaries,
telephone expenses, call center and other expenses related to providing the
TiVo Service to subscribers. Cost of services for the three and nine months
ended September 30, 2000 were $4.0 million and $13.2 million compared to
$749,000 and $2.1 million for the same periods ended September 30, 1999. The
increases were primarily attributable to variable costs, such as telephone
charges, that increased with the increase of subscribers. Additionally, costs
increased due to creating and distributing TiVo Takes, original programming
content, as part of the TiVo Service.
Research and development expenses. The Company's research and development
expenses consist primarily of employee salaries and related expenses,
consulting fees and prototype expenses relating to the design of the personal
video recorder that enables the TiVo Service. Research and development expenses
for the three and nine months ended September 30, 2000 were $8.3 million and
$18.7 million. Prior year research and development expenses were $2.3 million
and $5.8 million for the three and nine months ended September 30, 1999. The
increases were primarily attributable to the hiring of additional engineering
personnel and costs related to the improvement and addition of features and
functionality of current products as well as the design of new platforms.
Sales and marketing expenses. Sales and marketing expenses consist primarily
of employee salaries and related expenses, media advertising, public relations
activities, special promotions, trade shows and the production of product
related items, including collateral and videos. Sales and marketing expenses
for the three and nine months ended September 30, 2000 were $30.3 million and
$50.8 million compared to $5.3 million and $9.3 million from respective prior
year periods. The increases were primarily attributable to an increase in
expenditures for advertising, public relations and trade shows in connection
with the continued retail marketing campaign of the TiVo Service and the
personal video recorder that enables the TiVo Service. We expect our marketing
expenses to continue to increase significantly in connection with the continued
retail marketing campaign for the TiVo Service and the personal video recorder
that enables the TiVo Service.
Sales and marketing--related parties. Sales and marketing--related parties
consist of cash and non-cash charges related primarily to agreements with
DIRECTV, Philips, Quantum, Sony, AOL and CAA, all of which hold stock in the
Company. Sales and marketing--related parties for the three and nine months
ended September 30, 2000 were $19.0 million and $28.9 million compared to $4.9
million and $5.3 million for the three and nine months ended September 30,
1999, respectively. The increases in sales and marketing--related parties
expenses are attributable to the ongoing amortization of deferred marketing
charges, the increases in manufacturing and shipments of personal video
recorders and the related activations of subscribers to the TiVo Service.
General and administrative expenses. General and administrative expenses
consist primarily of employee salaries and related expenses for executive,
administrative, accounting, information systems, customer operations personnel,
facility costs and professional fees. General and administrative expenses for
the three and nine months ended September 30, 2000 were $3.5 million and $9.8
million compared to $1.8 million and $3.9 million for the prior year comparable
periods. The increases were primarily attributable to increased travel, legal
and facilities expenses.
Stock-based compensation. During 1999 and 2000, we granted stock options
with exercise prices that were less than the estimated fair value of the
underlying shares of common stock on the date of grant. As a result, stock-
based compensation expense is being recognized over the period that these stock
options vest. The stock-based compensation expense was approximately $657,000
and $2.5 million for the three and nine months ended September 30, 2000. For
the three and nine months ended September 30, 1999, stock-based compensation
was $501,000 and $688,000, respectively. The increases are due to increased
numbers of
20
employees and the expense being amortized on an accelerated basis over the
vesting periods of the individual awards, usually 4 years for all nine months
in 2000. During 1999, stock-based compensation was expensed beginning in the
second quarter.
Other operating expenses, net. Other operating expenses, net consists of the
revenues from the sale of personal video recorders manufactured and sold by
TiVo, less the cost of the personal video recorders sold. For the three and
nine months ended September 30, 2000, other operating expenses, net was zero
compared to $4.8 million and $5.0 million for the three and nine months ended
September 30, 1999. We transitioned manufacturing and selling personal video
recorders in the fourth quarter of 1999 to Philips. The revenues and costs
resulting from the sale of personal video recorders were not expected to be
recurring and were therefore considered incidental to our business and as such
were classified as other operating expense, net.
Interest income. Interest income resulting from cash and cash equivalents
held in interest bearing accounts and short-term investments was $1.6 million
and $5.4 million for the three and nine months ended September 30, 2000
compared to $614,000 and $891,000 for prior year periods. The increases are as
a result of increased cash balances due to the capital raised during 1999 and
the AOL investment received in September 2000.
Interest expense and other. Interest expense and other was $253,000 and
$435,000 for the three and nine months ended September 30, 2000. Interest
expense accounted for $31,000 and $100,000 of the total respective amounts.
Other consists of a gain on the sale of an asset and amortization of the value
assigned to the Comdisco warrants. For prior year periods, interest expense and
other was $281,000 and $459,000, respectively.
Series A redeemable convertible preferred stock dividend. Under the terms of
the Investment Agreement between AOL and TiVo, the Company is required to pay
dividends to the Series A redeemable convertible preferred stockholders. The
dividend payable for the three and nine months ended September 30, 2000 was
$240,000. The dividends are payable quarterly as declared by the Board of
Directors.
21
Quarterly Results of Operations
The following table represents certain unaudited statements of operations
data for our eight most recent quarters ended September 30, 2000. In
management's opinion, this unaudited information has been prepared on the same
basis as the audited annual financial statements and includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
representation of the unaudited information for the quarters presented. This
information should be read in conjunction with our financial statements,
including notes thereto, included elsewhere in this Form 10-Q. The results of
operations for any quarter are not necessarily indicative of results that may
be expected for any future period.
Three Months Ended
----------------------------------------------------------------------------------------------
December 31, March 31, June 30, September 30, December 31, March 31, June 30, September 30,
1998 1999 1999 1999 1999 2000 2000 2000
------------ --------- -------- ------------- ------------ --------- -------- -------------
(unaudited, in thousands)
Revenues................ $ -- $ -- $ 8 $ 33 $ 182 $ 424 $ 719 $ 1,002
Costs and expenses
Cost of services........ -- (689) (636) (749) (1,993) (4,168) (4,988) (4,019)
Research and
development............ (2,146) (1,596) (1,859) (2,327) (3,945) (4,678) (5,679) (8,318)
Sales and marketing..... (567) (2,168) (1,847) (5,323) (15,164) (9,180) (11,384) (30,262)
Sales and marketing--
related parties........ -- -- (382) (4,946) (9,844) (4,547) (5,349) (18,998)
General and
administrative......... (1,337) (1,125) (1,057) (1,757) (3,088) (2,691) (3,631) (3,526)
Stock-based
compensation........... -- -- (187) (501) (842) (969) (919) (657)
Other operating expense,
net.................... -- 12 (201) (4,808) (2,213) -- -- --
------- ------- ------- -------- -------- -------- -------- --------
Loss from operations.... (4,050) (5,566) (6,161) (20,378) (36,907) (25,809) (31,231) (64,778)
Interest income......... 55 53 224 614 2,022 1,824 1,907 1,625
Interest expense and
other.................. -- (2) (176) (281) (7) (70) (112) (253)
------- ------- ------- -------- -------- -------- -------- --------
Net loss................ (3,995) (5,515) (6,113) (20,045) (34,892) (24,055) (29,436) (63,406)
Less: Series A
redeemable convertible
preferred stock
dividend............... -- -- -- -- -- -- -- (240)
------- ------- ------- -------- -------- -------- -------- --------
Net loss................ $(3,995) $(5,515) $(6,113) $(20,045) $(34,892) $(24,055) $(29,436) $(63,646)
======= ======= ======= ======== ======== ======== ======== ========
The TiVo Service is enabled through a personal video recorder that is sold
in retail channels like other consumer electronic devices. As a result, we
anticipate that our business will be seasonal and we expect to generate a
significant number of our annual new subscribers during the holiday shopping
season. We also expect to generate a portion of future revenues from television
advertising, which tends to be seasonal and cyclical, reflecting overall
economic conditions as well as budgeting and buying patterns.
Liquidity and Capital Resources
From inception through September 30, 2000, we financed our operations and
met our capital expenditure requirements primarily from the proceeds of the
private sale of equity securities and the proceeds from our initial public
offering. At September 30, 2000, we had $148.6 million of cash and cash
equivalents, $91.8 million of restricted cash as well as $11.3 million of
short-term investments. As of September 30, 1999, we had $60.0 million
of cash and cash equivalents along with $8.2 million of short-term investments.
The expansion of our business will require significant additional capital to
fund operations, capital expenditures and working capital needs. Accordingly,
we may choose to raise additional capital through debt or equity financing
within the next twelve months.
22
Net cash used in operating activities was $69.7 million for the nine months
ended September 30, 2000. During the nine months ended September 30, 2000, we
incurred a net loss of $117.1 million, of which $11.3 million is related to
non-cash charges. Uses of cash from operating activities also included an
increase in prepaid expenses and other of $5.9 million, an increase in accounts
receivable-related parties of $2.9 million and an increase in accounts
receivable of $146,000. These uses were offset by sources of cash provided from
operating activities consisting of an increase in accrued marketing--related
parties of $23.1 million, an increase in accrued liabilities of $10.8 million,
an increase in long-term deferred revenue of $5.6 million, an increase in
accounts payable of $3.5 million, an increase in deferred rent of $684,000 and
an increase in rental deposit received from tenant of $557,000. Additional
sources of cash were deferred revenue of $511,000 and dividends payable on
Series A redeemable convertible preferred stock of $240,000.
Net cash used by investing activities was $23.0 million for the nine months
ended September 30, 2000. Net cash provided in investing activities during the
nine months ended September 30, 2000 included $17.8 million used for the
acquisition of property and equipment and $5.2 million for the purchase of
short-term investments.
Net cash provided by financing activities was $101.6 million for the nine
months ended September 30, 2000. Of this amount, $100.0 million was received
from the issuance of common stock before issuance costs to AOL. We also
received $1.1 million in proceeds from the issuance of common stock through the
employee stock purchase plan and $664,000 in proceeds from the exercise of
common stock.
Net cash used in operating activities was $24.3 million for the nine months
ended September 30, 1999. Net cash used during this period was primarily a
result of the research and development, sales and marketing and general and
administrative costs to support the development of the TiVo Service and the
personal video recorder that enables the TiVo Service. During the nine months
ended September 30, 1999, we began providing the TiVo Service, incurring a net
loss of $31.7 million of which $5.6 million was related to non-cash charges.
Uses of cash from operating activities included an increase in accounts
receivable of $8.8 million, an increase in prepaid expenses and other of $1.4
million and an increase in inventory of $946,000. This was offset by sources of
cash from operating activities resulting from an increase in accrued
liabilities of $8.3 million, an increase in accounts payable of $4.4million,
and an increase in deferred revenue of $286,000.
Net cash used in investing activities was $9.9 million for the nine months
ended September 30, 1999. Net cash used during this period included $8.1
million from the purchase of short-term investments and $1.8 million for the
purchase of property and equipment.
Net cash provided by financing activities was $92.0 million for the nine
months ended September 30, 1999. Of this amount, $90.6 million was received
from the issuance of Series D, E, F, G, H, I and J preferred stock to several
investors, including Vulcan Ventures Incorporated, Showtime Networks, Inc.,
DIRECTV, NBC Multimedia, Inc., Philips Corporate External Ventures B.V.,
Advance/Newhouse, CBS Corporation, Comcast Interactive, Cox Communication,
Discovery Communications, Liberty Media Corporation, TV Guide Interactive, The
Walt Disney Company (through its wholly owned subsidiary Catalyst Investments
L.L.C.), America Online, Inc. and Sony Corporation of America, Inc.
Additionally, we obtained $1.0 million of financing through a capital lease and
$854,000 from the issuance of common stock for stock options exercised. Cash
was used to offset a bank overdraft of $442,000 during the period.
We have commitments for future lease payments under our facilities'
operating leases of $19.5 million and obligations under capital leases of $1.7
million as of September 30, 2000. The obligations under the capital lease
relate to equipment leased under a total available lease line of $2.5 million,
which expired in February 2000.
23
Our future capital requirements will depend on a variety of factors,
including market acceptance of the personal video recorder and the TiVo
Service, the resources we devote to developing, marketing, selling and
supporting our products and other factors. We expect to devote substantial
capital resources:
. to subsidize the sale of personal video recorders;
. to advertise our brand and market our product;
. to hire and expand our engineering, sales and marketing and customer
support organizations;
. to expand into the European market;
. to acquire new computer hardware to support increased service operations;
and
. for general corporate purposes.
We believe that our cash and cash equivalents will be sufficient to fund our
operations for at least the next 12 months. Despite our expectations, we may
need to raise additional capital before the end of the next 12 months. Beyond
one year, we may need to raise additional funds in order to:
. fund anticipated growth, including significant increases in personnel,
office facilities and computer systems;
. develop new or enhance existing services or products;
. expand into new markets and respond to competitive pressures; or
. acquire or invest in complementary businesses, technologies, services or
products.
In addition, in order to meet long-term liquidity needs, we may need to
raise additional funds, establish a credit facility or seek other financing
arrangements. Additional funding may not be available on favorable terms or at
all. See "Factors That May Affect Future Operating Results-If we are unable to
raise additional capital on acceptable terms, our ability to effectively manage
growth and build a strong brand could be harmed."
Impact of Inflation
We believe that inflation has not had a significant impact on our operating
results.
Factors that May Affect Future Operating Results
In addition to the other information included in this Report, the following
factors should be considered in evaluating our business and future prospects:
We have recognized very limited revenue, have incurred significant net
losses and may never achieve profitability.
We have recognized limited revenues, have incurred significant losses and
have had substantial negative cash flow. During the three months ended
September 30, 2000, we recognized revenues of $1.0 million. As of September 30,
2000, we had an accumulated deficit of $194.0 million. We expect to incur
significant operating expenses over the next several years in connection with
the continued development and expansion of our business. As a result, we expect
to continue to incur losses for the foreseeable future. The size of these net
losses depends in part on the growth in our subscriber base and on our
expenses. With increased expenses, we will need to generate significant
additional revenues to achieve profitability. Consequently, we may never
achieve profitability, and even if we do, we may not sustain or increase
profitability on a quarterly or annual basis in the future.
24
Our limited operating history may make it difficult for us or investors to
evaluate trends and other factors that affect our business.
We were incorporated in August 1997 and have been obtaining subscribers and
selling personal video recorders only since March 31, 1999. Prior to that time,
our operations consisted primarily of research and development efforts. As of
September 30, 2000, only a limited number of personal video recorders had been
sold and we obtained only a limited number of subscribers to the TiVo Service.
As a result of our limited operating history, our historical financial and
operating information is of limited value in evaluating our future operating
results. In addition, any evaluation of our business must be made in light of
the risks and difficulties encountered by companies offering products or
services in new and rapidly evolving markets. For example, it may be difficult
to accurately predict our future revenues, costs of revenues, expenses or
results of operations. Personal television is a new product category for
consumers and it may be difficult to predict the future growth rate, if any, or
size of the market for our products and services. We may be unable to
accurately forecast customer behavior and recognize or respond to emerging
trends, changing preferences or competitive factors facing us. As a result, we
may be unable to make accurate financial forecasts and adjust our spending in a
timely manner to compensate for any unexpected revenue shortfall. This
inability could cause our net losses in a given quarter to be greater than
expected, which could cause the price of our stock to decline.
If our marketing in the retail channel is not successful, consumers and
consumer electronics manufacturers may not accept the TiVo Service and products
that enable the TiVo Service.
Our success depends upon a continually successful retail marketing campaign
for the TiVo Service and related personal video recorders, which began in the
third quarter of 1999. We will rely principally on our consumer electronics
partners, such as Philips, Sony and Thomson, to manufacture, market, sell and
support the personal video recorder that enables the TiVo Service. We also will
rely on the efforts of DIRECTV to market, sell and support the TiVo Service to
DIRECTV subscribers. The ongoing marketing campaign requires, among other
things, that we:
. educate consumers on the benefits of the TiVo Service and related
personal video recorder, which will require an extensive marketing
campaign;
. commit a substantial amount of human and financial resources to achieve
continued, successful retail distribution; and
. coordinate our own sales, marketing and support activities with those of
Philips, DIRECTV, Sony, Thomson and other strategic partners.
We or our strategic partners may not achieve any or all of these objectives.
In addition, consumers may perceive the TiVo Service and related personal video
recorder as too expensive or complex and our marketing campaign may not
effectively attract new subscribers. Because of competitive offerings or
changing preferences, consumers may delay or decline the purchase of the TiVo
Service and related personal video recorder. All of these events would reduce
consumer demand and market acceptance, diminish our brand and impair our
ability to attract subscribers to the TiVo Service.
We have agreed to share a substantial portion of the revenue we generate
from subscription fees with some of our strategic partners. We may be unable to
generate enough revenue to cover these obligations.
We have agreed to share a substantial portion of our subscription and other
fees with some of our strategic partners in exchange for manufacturing,
distribution and marketing support and discounts on key components for personal
video recorders. Given how these amounts are calculated, we may be required to
share substantial portions of the subscription and other fees attributable to
the same subscriber with multiple partners. These agreements require us to
share a portion of our subscription fees whether or not we reduce the price of
the TiVo Service. If we reduce our subscription fees in response to competitive
or other market factors, our operating results would be adversely affected. Our
decision to share subscription revenues is based on our expectation
25
that our partnerships will help us obtain subscribers, broaden market
acceptance of personal television and increase our future revenues. If these
expectations are not met, we may be unable to generate sufficient revenue to
cover our expenses and obligations.
We depend on a limited number of third parties to manufacture, distribute
and supply critical components and services for the personal video recorders
that enable the TiVo Service. We may be unable to operate our business if these
parties do not perform their obligations.
The TiVo Service is enabled through the use of a personal video recorder
made available by a limited number of third parties. In addition, we rely on
sole suppliers for a number of key components for the personal video recorders.
We do not control the time and resources that these third parties devote to our
business. We cannot be sure that these parties will perform their obligations
as expected or that any revenue, cost savings or other benefits will be derived
from the efforts of these parties. If any of these parties breaches or
terminates its agreement with us or otherwise fails to perform their
obligations in a timely manner, we may be delayed or prevented from
commercializing our products and services. Because our relationships with these
parties are non-exclusive, they may also support products and services that
compete directly with us, or offer similar or greater support to our
competitors. Any of these events could require us to undertake unforeseen
additional responsibilities or devote additional resources to commercialize our
products and services. This outcome would harm our ability to compete
effectively and quickly achieve market acceptance and brand recognition.
In addition, we face the following risks in relying on these third parties:
If our manufacturing partnerships are not successful, we may be unable to
establish a market for our products and services. We initially manufactured the
personal video recorders that enable the TiVo Service through a third-party
contract manufacturer. We have entered into agreements with AOL, Philips, Sony
and Thomson to manufacture and distribute the personal video recorders that
enable the TiVo Service. We have transitioned manufacturing of the personal
video recorder from our third-party contract manufacturer to Philips, who
assumed manufacturing responsibility in the fourth quarter of 1999. However, we
have no minimum volume commitments from Philips, Sony, Thomson or any other
manufacturer. The ability of our manufacturing partners to provide sufficient
production volume of the personal video recorder to satisfy demand, is subject
to delays and unforeseen problems such as defects, shortages of critical
components and cost overruns. Moreover, they will require substantial lead
times to manufacture anticipated quantities of the personal video recorders
that enable the TiVo Service. Delays and other problems could impair the retail
distribution and brand image and make it difficult for us to attract
subscribers. In addition, the loss of a manufacturing partner would require us
to identify and contract with alternative sources of manufacturing, which we
may be unable to do and which could prove time-consuming and expensive.
Although we expect to continue to contract with additional consumer electronics
companies for the manufacture of personal video recorders in the future, we may
be unable to establish additional relationships on acceptable terms.
If our corporate partners fail to perform their obligations, we may be
unable to effectively market and distribute our products and services. Our
manufacturing partners distribute the personal video recorder that enables the
TiVo Service. We rely on their sales forces, marketing budgets and brand images
to promote and support the personal video recorder and the TiVo Service. We
expect to continue to rely on our manufacturing partners and other strategic
partners to promote and support the personal video recorder and other devices
that enable the TiVo Service. The loss of one or more of these partners could
require us to undertake more of these activities on our own. As a result, we
would spend significant resources to support personal video recorders and other
devices that enable the TiVo Service. We also expect to rely on DIRECTV,
British Sky Broadcast and other partners to provide marketing support for the
TiVo Service. The failure of one or more of these partners to provide
anticipated marketing support will require us to divert more of our limited
resources to marketing the TiVo Service. If we are unable to provide adequate
marketing support for the personal video recorder and the TiVo Service, our
ability to attract subscribers to the TiVo Service will be limited.
26
We are dependent on single suppliers for several key components and
services. If these suppliers fail to perform their obligations, we may be
unable to find alternative suppliers or deliver our products and services to
our customers on time. We currently rely on sole suppliers for a number of the
key components and services used in the personal video recorders and the TiVo
Service. For example:
. Quantum is the sole supplier of the hard disk drives;
. NEC is the sole supplier of the application specific integrated circuit,
a semiconductor device;
. Sony is the sole supplier of the MPEG2 encoder semiconductor device; and
. Tribune Media Services is the sole supplier of program guide data.
In addition to the above, we have several sole suppliers for key components
of our products currently under development.
We cannot be sure that alternative sources for key components and services
used in the personal video recorders and the TiVo Service will be available
when needed or, if available, that these components and services will be
available on favorable terms. If our agreements or our manufacturing partners'
agreements with Quantum, NEC, Sony or Tribune Media Services were to terminate
or expire, or if we or our manufacturing partners were unable to obtain
sufficient quantities of these components or required program guide data, our
search for alternate suppliers could result in significant delays, added
expense or disruption in product availability.
Our ability to generate revenues from subscription fees is unproven and may
fail.
We expect to generate a substantial portion of our revenues from
subscription fees for the TiVo Service. Many of our potential customers already
pay monthly fees for cable or satellite television services. We must convince
these consumers to pay an additional subscription fee to receive the TiVo
Service. The availability of competing services that do not require
subscription fees will harm our ability to effectively attract subscribers. In
addition, the personal video recorder that enables the TiVo Service can be used
to record programs and pause, rewind and fast forward through live or recorded
shows without an active subscription to the TiVo Service. If a significant
number of purchasers of our personal video recorders use these devices without
subscribing to the TiVo Service, our revenue growth will decline and we may not
achieve profitability.
Our business is expanding rapidly and our failure to manage growth could
disrupt our business and impair our ability to generate revenues.
Since we began our business in August 1997, we have significantly expanded
our operations. We anticipate continued expansion in our headcount, facilities
and infrastructure to support potential growth in our subscriber base and to
allow us to pursue market opportunities. This expansion has placed, and will
continue to place, a significant strain on our management, operational and
financial resources and systems. Specific risks we face as our business expands
include:
We need to attract and retain qualified personnel, and any failure to do so
may impair our ability to offer new products or grow our business. Our success
will depend on our ability to attract, retain and motivate managerial,
technical, marketing, financial, administrative and customer support personnel.
Competition for such employees is intense, especially for engineers in the San
Francisco Bay Area, and we may be unable to successfully attract, integrate or
retain sufficiently qualified personnel. If we are unable to hire, train,
retain and manage required personnel, we may be unable to successfully
introduce new products or otherwise implement our business strategy.
Any inability of our systems to accommodate our expected subscriber growth
may cause service interruptions or delay our introduction of new services. We
internally developed many of the systems we use to provide the TiVo Service and
perform other processing functions. The ability of these systems to scale as we
27
rapidly add new subscribers is unproven. We must continually improve these
systems to accommodate subscriber growth and add features and functionality to
the TiVo Service. Our inability to add software and hardware or to upgrade our
technology, systems or network infrastructure could adversely affect our
business, cause service interruptions or delay the introduction of new
services.
We will need to provide acceptable customer support, and any inability to do
so will harm our brand and ability to generate and retain new subscribers. Our
ability to increase sales, retain current and future subscribers and strengthen
our brand will depend in part upon the quality of our customer support
operations. Some customers require significant support when installing the
personal video recorder and becoming acquainted with the features and
functionality of the TiVo Service. We have limited experience with widespread
deployment of our products and services to a diverse customer base, and we may
not have adequate personnel to provide the levels of support that our customers
require. In addition, we have entered into agreements with third parties to
provide this support and will rely on them for a substantial portion of our
customer support functions. Our failure to provide adequate customer support
for the TiVo Service and personal video recorder will damage our reputation in
the personal television and consumer electronics marketplace and strain our
relationships with customers and strategic partners. This could prevent us from
gaining new or retaining existing subscribers and could cause harm to our
reputation and brand.
We will need to improve our operational and financial systems to support our
expected growth, and any inability to do so will adversely impact our billing
and reporting. To manage the expected growth of our operations and personnel,
we will need to improve our operational and financial systems, procedures and
controls. Our current and planned systems, procedures and controls may not be
adequate to support our future operations and expected growth. For example, we
replaced our accounting and billing system at the beginning of August 2000.
Delays or problems associated with any improvement or expansion of our
operational and financial systems and controls could adversely impact our
relationships with subscribers and cause harm to our reputation and brand.
Delays or problems associated with any improvement or expansion of our
operational and financial systems and controls could also result in errors in
our financial and other reporting.
If we are unable to create multiple revenue streams, we may not be able to
cover our expenses or meet our obligations to strategic partners and other
third parties.
Although our initial success will depend on building a significant customer
base and generating subscription fees from the TiVo Service, our long-term
success will depend on securing additional revenue streams such as:
. advertising;
. revenues from networks; and
. electronic commerce or couch commerce.
In order to derive substantial revenues from these activities, we will need
to attract and retain a large and growing base of subscribers to the TiVo
Service. We also will need to work closely with television advertisers, cable
and satellite network operators, electronic commerce companies and consumer
electronics manufacturers to develop products and services in these areas. We
may not be able to effectively work with these parties to develop products that
generate revenues that are sufficient to justify their costs. In addition, we
are currently obligated to share a portion of these revenues with several of
our strategic partners. Any inability to attract and retain a large and growing
group of subscribers and strategic partners will seriously harm our ability to
support new services and develop new revenue streams.
It will take a substantial amount of time and resources to achieve broad
market acceptance of the TiVo Service and products that enable the TiVo Service
and we cannot be sure that these efforts will generate a broad enough
subscriber base to sustain our business.
Personal television products and services represent a new, untested consumer
electronics category. The TiVo Service is in an early stage of development and
many consumers are not aware of its benefits. As a result,
28
it is uncertain whether the market will demand and accept the TiVo Service and
products that enable the TiVo Service. Retailers, consumers and potential
partners may perceive little or no benefit from personal television products
and services. Likewise, consumers may not value, and may be unwilling to pay
for the TiVo Service and products that enable the TiVo Service. To develop this
market and obtain subscribers to the TiVo Service, we will need to devote a
substantial amount of time and resources to educate consumers and promote our
products. We may fail to obtain subscribers, encourage the development of new
devices that enable the TiVo Service and develop and offer new content and
services. We cannot be sure that a broad base of consumers will ultimately
subscribe to the TiVo Service or purchase the products that enable the TiVo
Service.
We face intense competition from a number of sources, which may impair our
revenues and ability to generate subscribers.
The personal television market is new and rapidly evolving and we expect
competition from a number of sources, including:
Internet-related companies and companies offering similar products and
services. We are likely to face intense direct competition from companies such
as WebTV Networks Inc., ReplayTV, Inc. and X-TV. These companies offer, or have
announced their intention to offer, products with one or more of the TiVo
Service's functions or features and, in some instances, combine these features
with Internet browsing or traditional broadcast, cable or satellite television
programming. Many of these companies have greater brand recognition and market
presence and substantially greater financial, marketing and distribution
resources than we do. For example, Microsoft Corporation controls and provides
financial backing to WebTV. Some of these companies also have established
relationships with third party consumer electronic manufacturers, network
operators and programmers, which could make it difficult for us to establish
relationships and enter into agreements with these third parties. Some of these
competitors also have relationships with our strategic partners. For example,
DIRECTV recently formed an alliance with America Online. Faced with this
competition, we may be unable to expand our market share and attract an
increasing number of subscribers to the TiVo Service.
Established competitors in the consumer electronics market. We compete with
consumer electronic products in the television and home entertainment industry.
The television and home entertainment industry is characterized by rapid
technological innovation, a small number of dominant manufacturers and intense
price competition. As a new product category, personal television enters a
market that is crowded with several established products and services. The
competition for consumer spending in the television and home entertainment
market is intense, and our products and services will compete with:
. satellite television systems;
. video on demand services;
. digital video disc players; and
. laser disc players.
Most of these technologies or devices have established markets, a broad
subscriber base and proven consumer acceptance. In addition, many of the
manufacturers and distributors of these competing devices have substantially
greater brand recognition, market presence, distribution channels, advertising
and marketing budgets and promotional and other strategic partners. Faced with
this competition, we may be unable to effectively differentiate the personal
video recorder or the TiVo Service from these devices.
Established competition for advertising budgets. Personal television, in
general, and TiVo, specifically, also compete with traditional advertising
media such as print, radio and television for a share of advertisers' total
advertising budgets. If advertisers do not perceive personal television as an
effective advertising medium, they may be reluctant to devote a significant
portion of their advertising budget to promotions on the TiVo Service.
29
If we are unable to introduce new products or services, or if our new
products and services are unsuccessful, the growth in our subscriber base and
revenues may suffer.
To attract and retain subscribers and generate revenues, we must continue
to add functionality and content and introduce products and services which
embody new technologies and, in some instances, new industry standards. This
challenge will require hardware and software improvements, as well as new
collaborations with programmers, advertisers, network operators, hardware
manufacturers and other strategic partners. These activities require
significant time and resources and may require us to develop and promote new
ways of generating revenue with established companies in the television
industry. These companies include television advertisers, cable and satellite
network operators, electronic commerce companies and consumer electronics
manufacturers. In each of these examples, a small number of large companies
dominate a major portion of the market and may be reluctant to work with us to
develop new products and services for personal television. If we are unable to
further develop and improve the TiVo Service or expand our operations in a
cost-effective or timely manner, our ability to attract and retain subscribers
and generate revenue will suffer.
If we do not successfully establish strong brand identity in the personal
television market, we may be unable to achieve widespread acceptance of our
products.
We believe that establishing and strengthening the TiVo brand is critical
to achieving widespread acceptance of our products and services and to
establishing key strategic partnerships. The importance of brand recognition
will increase as current and potential competitors enter the personal
television market with competing products and services. Our ability to promote
and position our brand depends largely on the success of our marketing efforts
and our ability to provide high quality services and customer support. These
activities are expensive and we may not generate a corresponding increase in
subscribers or revenues to justify these costs. If we fail to establish and
maintain our brand, or if our brand value is damaged or diluted, we may be
unable to attract subscribers and effectively compete in the personal
television market.
Product defects, system failures or interruptions to the TiVo Service may
have a negative impact on our revenues, damage our reputation and decrease our
ability to attract new subscribers.
Our ability to provide uninterrupted service and high quality customer
support depends on the efficient and uninterrupted operation of our computer
and communications systems. Our computer hardware and other operating systems
for the TiVo Service are vulnerable to damage or interruption from
earthquakes, floods, fires, power loss, telecommunication failures and similar
events. They are also subject to break-ins, sabotage, intentional acts of
vandalism and similar misconduct. These types of interruptions in the TiVo
Service may reduce our revenues and profits. Our business also will be harmed
if consumers believe our service is unreliable. In addition to placing
increased burdens on our engineering staff, service outages will create a
flood of customer questions and complaints that must be responded to by our
customer support personnel. Any frequent or persistent system failures could
irreparably damage our reputation and brand.
We have detected and may continue to detect errors and product
defects. These problems can affect system uptime, result in significant
warranty and repair problems, which could cause customer service and customer
relations problems. Correcting errors in our software requires significant
time and resources, which could delay product releases and affect market
acceptance of the TiVo Service. Any delivery by us of products or upgrades
with undetected material product defects or software errors could harm our
credibility and market acceptance of the personal video recorders and the TiVo
Service.
Intellectual property claims against us can be costly and could result in
the loss of significant rights.
From time to time, we may be subject to intellectual property litigation,
which could:
. be time-consuming and expensive;
. divert management's attention and resources away from our business;
30
. cause delays in product delivery and new service introduction;
. cause the cancellation of new products or services; or
. require us to pay significant royalties or licensing fees.
The emerging enhanced-television industry is highly litigious, particularly
in the area of on-screen program guides. Additionally, many patents covering
interactive television technologies have been granted but have not been
commercialized. For example, we are aware of at least seven patents for pausing
live television. A number of companies in the enhanced-television industry earn
substantial profits from technology licensing, and the introduction of new
technologies such as ours is likely to provoke lawsuits from such companies. A
successful claim of infringement against us, our inability to obtain an
acceptable license from the holder of the patent or other right or our
inability to design around an asserted patent or other right could cause our
manufacturing partners to cease manufacturing the personal video recorder or us
to cease providing our service, or both, which would eliminate our ability to
generate revenues.
On January 18, 2000, StarSight Telecast Inc., a subsidiary of Gemstar
International Group Limited filed a lawsuit against us in the U.S. District
Court for the Northern District of California alleging that the TiVo Service
violates a patent held by StarSight. This lawsuit also seeks unspecified
monetary damages and an injunction against our operations. The suit also seeks
attorneys' fees and costs. To defend this lawsuit, we could be forced to incur
material expenses. Additionally, in the event that we were to lose this lawsuit
our business would be harmed.
In addition, we are aware that some media companies may attempt to form
organizations to develop standards and practices in the personal television
industry. These organizations or individual media companies may attempt to
require companies in the personal television industry to obtain copyright or
other licenses. A number of articles have appeared in the press regarding the
formation of a consortium of broadcast and cable television networks called the
Advanced Television Copyright Coalition. Some of those articles have indicated
that the coalition is prepared to support litigation and to explore legislative
solutions unless the members of the personal television industry agree to
obtain license agreements for use of the companies' programming. We have
received letters from Time Warner Inc. and Fox Television stating that these
entities believe our personal television service exploits copyrighted networks
and programs without the necessary licenses and business arrangements. Lawsuits
or other actions taken by these types of organizations or companies could make
it more difficult for us to introduce new services, delay widespread consumer
acceptance of our products and services, restrict our use of some television
content, increase our costs and adversely affect our business.
Our success depends on our ability to secure and protect patents, trademarks
and other proprietary rights.
Our success and ability to compete are substantially dependent upon our
internally developed technology. We rely on patent, trademark and copyright
law, trade secret protection and confidentiality or license agreements with our
employees, customers, partners and others to protect our proprietary rights.
However, the steps we take to protect our proprietary rights may be inadequate.
We have filed patent applications and provisional patent applications covering
substantially all of the technology used to deliver the TiVo Service and its
features and functionality. To date, none of these patents has been granted,
and we cannot assure you that any patents will ever be granted, that any issued
patents will protect our intellectual property or that third parties will not
challenge any issued patents. In addition, other parties may independently
develop similar or competing technologies designed around any patents that may
be issued to us. Our failure to secure and protect our proprietary rights could
have a material adverse effect on our business.
31
Laws or regulations that govern the television industry and the delivery of
programming could expose us to legal action if we fail to comply or could
require us to change our business.
Personal television and the delivery of television programming through the
TiVo Service and a personal video recorder represents a new category in the
television and home entertainment industries. As such, it is difficult to
predict what laws or regulations will govern our business. Changes in the
regulatory climate or the enforcement or interpretation of existing laws could
expose us to additional costs and expenses and could require changes to our
business. For example, copyright laws could be applied to restrict the capture
of television programming, which would adversely affect our business. It is
unknown whether existing laws and regulations will apply to the personal
television market. Therefore, it is difficult to anticipate the impact of
current or future laws and regulations on our business.
The Federal Communications Commission has broad jurisdiction over the
telecommunications and cable industries. The majority of FCC regulations, while
not directly affecting us, do affect many of the strategic partners on whom we
substantially rely for the marketing and distribution of the personal video
recorder and the TiVo Service. As such, the indirect effect of these
regulations may adversely affect our business. In addition, the FCC could
promulgate new regulations, or interpret existing regulations in a manner that
would cause us to incur significant compliance costs or force us to alter the
features or functionality of the TiVo Service.
We need to safeguard the security and privacy of our subscribers'
confidential data, and any inability to do so may harm our reputation and brand
and expose us to legal action.
The personal video recorder collects and stores viewer preferences and other
data that many of our subscribers consider confidential. Any compromise or
breach of the encryption and other security measures that we use to protect
this data could harm our reputation and expose us to potential liability.
Advances in computer capabilities, new discoveries in the field of
cryptography, or other events or developments could compromise or breach the
systems we use to protect our subscribers' confidential information. We may be
required to make significant expenditures to protect against security breaches
or to remedy problems caused by any breaches.
Uncertainty in the marketplace regarding the use of data from subscribers
could reduce demand for the TiVo Service and result in increased expenses.
Consumers may be concerned about the use of personal information gathered by
the TiVo Service and personal video recorder. Under our current policy, we do
not access this data or release it to third parties. Privacy concerns, however,
could create uncertainty in the marketplace for personal television and our
products and services. Changes in our privacy policy could reduce demand for
the TiVo Service, increase the cost of doing business as a result of litigation
costs or increased service delivery costs, or otherwise harm our reputation and
business.
We would lose revenues and incur significant costs if our systems or those
of our key partners or suppliers are not year 2000 compliant.
Many computer programs have been written using two digits rather than four
to define the applicable year. This posed a problem at the end of the century
because these computer programs do not properly recognize the year. Although
there was no interruption of our systems or other problems related to Year 2000
issues at the turn of the year, there may still be Year 2000 related problems
during the year caused by systems that have not yet been triggered by the Year
2000 date. This could result in major system failures or miscalculations that
would disrupt our business.
We completed our year 2000 assessment in September 1999 and completed
interface testing and remediation in December 1999. We are not aware of any
year 2000 issues, at this time, that would have a
32
material effect on our business. Our assessment, however, may not have
identified material non-compliance issues with the TiVo Service or the personal
video recorder, our information technology systems or the systems of our
partners or suppliers. If present, we may not be able to successfully resolve
these issues, or it may be costly to do so. In addition, we cannot assure you
that governmental agencies, utility companies, third-party service providers
and others outside of our control will be year 2000 compliant. Such entities'
failure to be year 2000 compliant throughout the year 2000 could result in a
systemic failure beyond our control. For example, a prolonged
telecommunications or electrical failure, due to equipment being shut down if
maintenance is not performed by a specific date during the year 2000, could
prevent us from delivering upgrades and regular downloads to the personal video
recorders that enable the TiVo Service and could adversely impact the
functionality of the personal video recorder. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000 Issue."
In the future, our revenues and operating results may fluctuate
significantly, which may adversely affect the market price of our common stock.
We expect our revenues and operating results to fluctuate significantly due
to a number of factors, many of which are outside of our control. Therefore,
you should not rely on period-to-period comparisons of results of operations as
an indication of our future performance. It is possible that in some future
periods our operating results may fall below the expectations of market
analysts and investors. In this event, the market price of our common stock
would likely fall.
Factors that may affect our quarterly operating results include:
. demand for personal video recorders and the TiVo Service;
. the timing and introduction of new services and features on the TiVo
Service;
. seasonality and other consumer and advertising trends;
. changes in revenue sharing arrangements with our strategic partners;
. entering into new or terminating existing strategic partnerships;
. changes in the subsidy payments we make to certain strategic partners;
. changes in our pricing policies, the pricing policies of our competitors
and general pricing trends in the consumer electronics market;
. loss of subscribers to the TiVo Service; and
. general economic conditions.
Because our expenses precede associated revenues, unanticipated shortfalls
in revenue could adversely affect our results of operations for any given
period and cause the market price of our common stock to fall.
Seasonal trends may cause our quarterly operating results to fluctuate and
our inability to forecast these trends may adversely affect the market price of
our common stock.
Consumer electronic product sales have traditionally been much higher during
the holiday shopping season than during other times of the year. Although
predicting consumer demand for our products is very difficult, we believe that
sales of personal video recorders and new subscriptions to the TiVo Service
will be disproportionately high during the holiday shopping season when
compared to other times of the year. If we are unable to accurately forecast
and respond to consumer demand for our products, our reputation and brand will
suffer and the market price of our common stock would likely fall.
We expect that a portion of our future revenues will come from targeted
commercials and other forms of television advertising enabled by the TiVo
Service. Expenditures by advertisers tend to be seasonal and
33
cyclical, reflecting overall economic conditions as well as budgeting and
buying patterns. A decline in the economic prospects of advertisers or the
economy in general could alter current or prospective advertisers' spending
priorities or increase the time it takes to close a sale with our advertisers,
which could cause our revenues from advertisements to decline significantly in
any given period.
If we are unable to raise additional capital on acceptable terms, our
ability to effectively manage growth and build a strong brand could be harmed.
We expect that our existing capital resources will be sufficient to meet our
cash requirements through at least the next 12 months. However, as we continue
to grow our business, we may need to raise additional capital, which may not be
available on acceptable terms. If we cannot raise necessary 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.
If additional capital is raised through the issuance of equity securities,
the percentage ownership of our existing stockholders will decline,
stockholders may experience dilution in net book value per share, or these
equity securities may have rights, preferences or privileges senior to those of
the holders of our common stock. Any debt financing, if available, may involve
covenants limiting, or restricting our operations or future opportunities.
We have agreed to subsidize the cost of manufacturing personal video
recorders, which may adversely affect our operating results and ability to
achieve profitability.
We have agreements with our consumer electronic manufacturing partners to
manufacture the personal video recorder that enables the TiVo Service. We have
agreed to pay our manufacturing partners a per-unit subsidy for each personal
video recorder that they manufacture and sell. A portion of the subsidy amount
is paid when the personal video recorder is shipped. The remaining portion is
due when the subscriber activates the TiVo Service. The amount of the payments
can vary depending upon the manufacturing costs and selling prices. In
addition, in the event our manufacturing partners are unable to manufacture the
personal video recorders at the costs currently estimated or if selling prices
are less than anticipated, we may owe additional amounts to them, which could
adversely affect our operating results. We are obligated to pay a portion of
the subsidy when the personal video recorder is shipped, and we will not
receive any revenues related to the unit until the unit is sold and the
purchaser activates the TiVo Service. We may make additional subsidy payments
in the future to consumer electronic and other manufacturers in an effort to
maintain a commercially viable retail price for the personal video recorders
and other devices that enable the TiVo Service.
The lifetime subscriptions to the TiVo Service that we currently offer
commit us to providing services for an indefinite period. The revenue we
generate from these subscriptions may be insufficient to cover future costs.
We currently offer lifetime subscriptions that commit us to provide service
for as long as the subscription to the TiVo Service is active for the personal
video recorder. We receive the lifetime subscription fee for the TiVo Service
in advance and amortize it as subscription revenue over four years, which is
our estimate of the service life of the personal video recorder. If these
lifetime subscribers use the personal video recorder for longer than
anticipated, we will incur costs without a corresponding revenue stream and
therefore will be required to fund ongoing costs of service from other sources.
If we lose key management personnel, we may not be able to successfully
operate our business.
Our future performance will be substantially dependent on the continued
services of our senior management and other key personnel. The loss of any
members of our executive management team and our inability to hire additional
executive management could harm our business and results of operations. In
addition, we do not have employment agreements with, or key man insurance
policies for, any of our key personnel.
34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio and conduct all transactions in U.S. dollars. Our
investment portfolio only includes highly liquid instruments with original
maturities of less than one year.
We are subject to fluctuating interest rates that may impact, adversely or
otherwise, our results of operations or cash flows for our cash and cash
equivalents and our short-term investments.
Although payments under the operating lease for our facility are tied to
market indices, we are not exposed to material interest rate risk associated
with the operating lease. Our capital lease obligations are not subject to
changes in the interest rate and, therefore, are not exposed to interest rate
risk.
35
PART II : OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 2000, StarSight Telecast, Inc. filed a patent infringement suit
against TiVo in the U.S. District Court of California, San Jose Division.
TiVo's legal counsel is currently researching the patents, which were
referenced in the complaint.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities.
On September 13, 2000, pursuant to the Investment Agreement between the
Company and AOL, dated as of June 9, 2000 and amended as of September 11,
2000, in exchange for an aggregate amount of $200 million, we issued to AOL
the following securities:
1. 5,134,722 shares of common stock;
2. 2,711,861 shares of TiVo Series A redeemable convertible preferred
stock, each share of which is initially convertible into one share of
common stock, subject to adjustment for stock splits, dividends,
combinations, reclassifications or similar transactions, as provided in the
Company's Amended and Restated Certificate of Incorporation; and
3. Four warrants to purchase up to an aggregate of 7,811,709 shares of
common stock, including:
. Initial Warrant A to purchase up to 2,308,475 shares of common
stock at $23.11 per share (such right to expire on December 31,
2001);
. Initial Warrant B to purchase up to 295,428 shares of common stock
at $30.00 per share (such right to expire on December 31, 2003);
. Performance Warrants A and B to purchase up to an aggregate of
5,207,806 shares of common stock contingent upon future performance
at an exercise price per share which varies with the market price
of the common stock (such rights to expire on September 11, 2003).
The sale of such securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, as
amended, or Regulation D promulgated thereunder. The recipient of such
securities represented its intentions to acquire the securities for investment
purposes only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the instruments
representing such securities issued.
(d) Use of Proceeds from Sales of Registered Securities.
TiVo's Registration Statement on Form S-1 (Registration No. 333-83515)
under the Securities Act of 1933, as amended, for the initial public offering
became effective on September 29, 1999.
TiVo has used the net offering proceeds from its initial public offering
for working capital and general corporate purposes, including advertising and
promotion of the TiVo Service and the TiVo brand, product development,
expansion of its sales, marketing and service capabilities and facilities. The
use of proceeds does not represent a material change in the use of proceeds as
described in TiVo's prospectus dated September 29, 1999 comprising part of
TiVo's Registration Statement on Form S-1, as amended, filed with the
Securities and Exchange Commission (SEC File No. 333-83515).
36
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of TiVo Inc. was held at the principal
office of the Company at 2160 Gold Street, Alviso, California 95002 on July 26,
2000. Of the 37,945,151 shares of common stock entitled to vote at the meeting,
25,975,921 shares were present in person or by proxy.
. Proposal 1
The vote for nominated directors, Michael Ramsay, Geoffrey Yang and
Randy Komisar to hold office until the 2003 Annual Meeting of
Stockholders was as follows:
In Favor Withheld
---------- --------
Michael Ramsay......................................... 25,959,500 16,421
Geoffrey Yang.......................................... 25,959,770 16,151
Randy Komisar.......................................... 25,960,206 15,715
Directors continuing in office are James Barton, Michael J. Homer,
Stewart Alsop, Larry N. Chapman, Jan P. Oosterveld, John S. Hendricks
and Howard Stringer.
. Proposal 2
Ratification of Arthur Andersen LLP as the independent auditors of the
Company for its fiscal year ending December 31,2000.
In Favor Opposed Abstain
---------- ------- -------
Ratification of Auditors........................ 25,955,119 10,160 10,642
. Proposal 3
Issuance of securities exceeding 20% of the Company's common stock to
America Online, Inc.
In Favor Opposed Abstain
---------- ------- -------
Issuance of Securities........................ 20,776,393 22,749 20,387
. Proposal 4
An amendment and restatement of the Company's Amended and Restated
Certificate of Incorporation to increase the number of authorized
shares of common stock from 75 million shares to 150 million shares and
the number of authorized shares of preferred stock from 2 million
shares to 10 million shares and make certain other changes.
In Favor Opposed Abstain
---------- ------- -------
Amendment and Restatement....................... 20,484,598 311,826 23,105
ITEM 5. OTHER INFORMATION
During the third quarter of 2000, Barry Schuler and David M. Zaslav were
elected to the Company's Board of Directors as the AOL and NBC Cable
representatives, respectively. Under the terms of the Company's 1999 Non-
Employee Directors' Stock Option Plan, Messrs. Schuler and Zaslav were each
automatically granted an option to purchase an aggregate of 20,000 shares of
common stock.
37
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Exhibits
Exhibit
Number Description
------- -----------
3.2****** Amended and Restated Certificate of Incorporation.
3.4* Amended and Restated Bylaws.
4.3* Ninth Amended and Restated Investor Rights Agreement between TiVo
and certain investors, dated as of August 6, 1999.
4.4***** Stockholders and Registration Rights Agreement by and between TiVo
Inc. and America Online, Inc., dated as of June 9, 2000.
10.1* Form of Indemnification Agreement between TiVo and its officers and
directors.
10.2* TiVo's 1999 Equity Incentive Plan and related documents.
10.3* TiVo's Amended and Restated 1997 Equity Incentive Plan and related
documents.
10.4* TiVo's 1999 Employee Stock Purchase Plan and related documents.
10.5**** TiVo's 1999 Non-Employee Directors' Stock Option Plan and related
documents.
10.6*+ Hard Disk Drive Supply Agreement between Quantum Corporation and
TiVo, dated November 6, 1998.
10.7*+ Master Agreement between Philips Business Electronics B.V. and TiVo,
dated March 31, 1999.
10.8*+ Marketing Agreement between DIRECTV, Inc. and TiVo, dated April 13,
1999.
10.9*+ Agreement between NBC Multimedia, Inc. and TiVo, dated April 16,
1999.
10.10* Sublease Agreement between Verity, Inc. and TiVo, dated February 23,
1998.
10.11* Amendment to Sublease Agreement between Verity, Inc. and TiVo, dated
November 1998.
10.12* Second Amendment to Sublease Agreement between Verity, Inc. and
TiVo, dated March 1999.
10.13* Consent of Landlord to Sublease between Verity, Inc. and TiVo, dated
February 23, 1998.
10.15* Master Lease Agreement between Comdisco, Inc. and TiVo, dated
February 12, 1999.
10.16*+ Warrant Purchase and Equity Rights Agreement between Quantum
Corporation and TiVo, dated November 6, 1998 and related documents.
10.17* Warrant to Purchase Shares of Series A Preferred Stock issued to
Randy Komisar, dated March 18, 1998.
10.18* Warrant Agreement between Comdisco, Inc. and TiVo, dated February
12, 1999.
10.19* Secured Convertible Debenture Purchase Agreement between TiVo and
certain of its investors, dated April 8, 1999, and related
documents.
10.20* First Amendment to Hard Disk Supply Agreement between Quantum and
TiVo, dated June 25, 1999.
10.21* TiVo's 401(k) Plan, effective December 1, 1997.
10.22*+ Tribune Media Services Television Listing Agreement between Tribune
Media Services and TiVo, dated June 1, 1998.
10.23*+ Amendment to the Data License Agreement between Teleworld Inc., and
Tribune Media Services, Inc. between Tribune Media Services and
TiVo, dated November 10, 1998.
10.24** Lease Agreement between WIX/NSJ Real Estate Limited Partnership and
TiVo, dated October 6, 1999.
38
Exhibit
Number Description
------- -----------
10.25***** Investment Agreement between America Online, Inc. and TiVo, dated
June 9, 2000.
10.26*****+ Product Integration and Marketing Agreement between America
Online, Inc.and TiVo, dated June 9, 2000.
10.27****** First Amendment to the Investment Agreement between America
Online, Inc. and TiVo, dated September 11, 2000.
10.28****** Escrow Agreement, dated as of September 13, 2000, by and among
AOL, TiVo and U.S. Trust Company, National Association
27.1**** Financial Data Schedule.
99.5*** Form of Stock Option Grant used in connection with an option
granted outside of TiVo's stock option plans and related
documents
- --------
* Incorporated by reference to the same numbered exhibit previously filed
with TiVo's Registration Statement on Form S-1 (SEC File No. 333-83515),
originally filed on July 22, 1999.
** Incorporated by reference to the same numbered exhibit previously filed
with TiVo's Quarterly report on Form 10-Q filed on November 15, 1999.
*** Incorporated by reference to the same numbered exhibit previously filed
with TiVo's Registration Statement on Form S-8 (SEC File No. 333-94629),
filed on January 13, 2000.
**** Incorporated by reference to the same numbered exhibit previously filed
with TiVo's Annual report on Form 10-K filed on March 30, 2000.
***** Incorporated by reference to the same numbered exhibit previously filed
with TiVo's Quarterly report on Form 10-Q filed on August 14, 2000.
****** Incorporated by reference to the same numbered exhibit previously filed
with TiVo's Quarterly report on Form 10-Q filed on November 14, 2000.
++ Submitted as an exhibit only in the electronic format of this Quarterly
Report on Form 10-Q submitted to the Securities and Exchange Commission.
Reports on Form 8-K
TiVo did not file any reports on Form 8-K during the quarter ended September
30, 2000.
Trademark Acknowledgments
"Active Preview", "Can't Miss TV", "DIRECTIVO", Instant Replay logo,
"Ipreview", Jump logo, "Life's too short for bad TV", "Network Showcase",
"Personal TV", "Personal Video Recorder", "Primetime Anytime", "Season Pass",
"See it, want it, get it", "The New Face of Television", "The way TV is meant
to be", "Thumbs Down" (logo and text), "Thumbs Up" (logo and text), "TiVo
Central", "TiVo" (logo, name and character), "TiVolution", "What you want, when
you want it", and "You run the shows" are trademarks of TiVo Inc. All other
trademarks or trade names appearing in this report are the property of their
respective owners.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TIVO INC.
Date: January 23, 2001 /s/ Michael Ramsay
By: _________________________________
Michael Ramsay
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
Date: January 23, 2001 /s/ David H. Courtney
By: _________________________________
David H. Courtney
Chief Financial Officer and Sr.
Vice President of Finance and
Administration
(Principal Financial and
Accounting Officer)
40