UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- ---
Act of 1934. For the quarterly period ended July 31, 2001.
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 (IRS Employer
incorporation or organization) Identification No.)
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 43,654,241 as of September 10, 2001.
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 Stockholders' Equity (Deficit).......... 6
Consolidated Statements of Cash Flows.............................. 7
Notes to Financial Statements...................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 19
Item 3. Quantitative and Qualitative Disclosure About Market Risk.......... 36
PART II : OTHER INFORMATION.................................................... 37
Item 1. Legal Proceedings.................................................. 37
Item 2. Changes in Securities and Use of Proceeds.......................... 38
Item 3. Defaults Upon Senior Securities.................................... 38
Item 4. Submission of Matters to a Vote of Security Holders................ 38
Item 5. Other Information.................................................. 39
Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 39
Signatures.................................................................. 43
The accompanying notes are an integral part of these statements.
2
PART I: FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
TIVO INC.
CONSOLIDATED BALANCE SHEETS
Pro Forma
July 31, July 31, January 31,
2001 2001 2001
------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ........................................ $ 79,098,000 $ 38,298,000 $124,474,000
Short-term investments ........................................... 1,989,000 1,989,000 --
Restricted cash .................................................. 51,156,000 51,156,000 50,104,000
Accounts receivable, net of allowance for doubtful accounts of
$294,000 and $201,000, as of July 31, 2001 and January 31, 2001 657,000 657,000 1,834,000
Accounts receivable-related parties, net of allowance for doubtful
accounts of $62,000 and $62,000, as of July 31, 2001 and January
31, 2001 ....................................................... 3,301,000 3,301,000 4,816,000
Prepaid expenses and other ....................................... 9,368,000 4,983,000 6,693,000
Prepaid expenses and other-related parties ....................... 17,419,000 4,319,000 1,698,000
------------ ------------ ------------
Total current assets ........................................... 162,988,000 104,703,000 189,619,000
ACCOUNTS RECEIVABLE-RELATED PARTIES, long-term ...................... 560,000 560,000 --
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $8,133,000
and $4,813,000 as of July 31, 2001 and January 31, 2001 ....... 21,599,000 21,599,000 21,924,000
------------ ------------ ------------
Total assets .......................................... $185,147,000 $126,862,000 $211,543,000
============ ============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES
CURRENT LIABILITIES
Accounts payable ................................................. $ 6,679,000 $ 6,679,000 $ 21,971,000
Accrued liabilities .............................................. 17,144,000 17,144,000 19,863,000
Accrued liabilities-related parties .............................. 30,285,000 25,285,000 49,839,000
Deferred interest income on restricted cash ...................... 3,156,000 3,156,000 2,104,000
Deferred revenue, short-term ..................................... 9,127,000 9,127,000 6,210,000
Current portion of obligations under capital lease ............... 786,000 786,000 796,000
------------ ------------ ------------
Total current liabilities ...................................... 67,177,000 62,177,000 100,783,000
LONG-TERM LIABILITIES
Long-term portion of obligations under capital lease ............. 157,000 157,000 538,000
Accrued liabilities-related parties .............................. 3,126,000 3,126,000 --
Convertible notes payable ........................................ 29,927,000 -- --
Convertible notes payable-related parties ........................ 12,215,000 -- --
Deferred revenue ................................................. 16,795,000 16,795,000 12,113,000
Other long-term liabilities ...................................... 908,000 908,000 1,217,000
------------ ------------ ------------
Total long-term liabilities .................................... 63,128,000 20,986,000 13,868,000
------------ ------------ ------------
Total liabilities ..................................... 130,305,000 83,163,000 114,651,000
------------ ------------ ------------
The accompanying notes are an integral part of these statements.
3
TIVO INC.
CONSOLIDATED BALANCE SHEETS (continued)
Pro Forma
July 31, July 31, January 31,
2001 2001 2001
-----------------------------------------------
REDEEMABLE CONVERTIBLE PREFERRED STOCK
Series A Redeemable convertible preferred stock,
par value $0.001:
Issued and outstanding shares at July 31, 2001 and January 31,
2001 are 1,600,000 ........................................... $ 2,000 $ 2,000 $ 2,000
Additional paid-in capital ..................................... 46,553,000 46,553,000 46,553,000
------------- ------------- -------------
Total redeemable convertible preferred stock ......... 46,555,000 46,555,000 46,555,000
STOCKHOLDERS' EQUITY (DEFICIT)
Series A Convertible preferred stock, par value $0.001:
Authorized shares at July 31, 2001 and January 31, 2001 are
10,000,000
Issued and outstanding shares at July 31, 2001 and January 31,
2001 are 1,111,861 ....................................... $ 1,000 $ 1,000 $ 1,000
Common stock, par value $0.001:
Authorized shares at July 31, 2001 and January 31, 2001 are
150,000,000
Issued and outstanding shares at July 31, 2001 and January 31,
2001 are 43,648,918 and 43,430,023 ....................... 44,000 44,000 43,000
Additional paid-in capital ..................................... 418,344,000 407,201,000 406,294,000
Deferred compensation .......................................... (1,771,000) (1,771,000) (2,786,000)
Prepaid marketing expenses ..................................... (19,400,000) (19,400,000) (48,458,000)
Note receivable ................................................ (2,038,000) (2,038,000) (2,509,000)
Retained deficit ............................................... (386,893,000) (386,893,000) (302,248,000)
------------- ------------- -------------
Total stockholders' equity (deficit) ................. 8,287,000 (2,856,000) 50,337,000
------------- ------------- -------------
Total liabilities, redeemable convertible preferred
stock and stockholders' equity (deficit) ............. $ 185,147,000 $ 126,862,000 $ 211,543,000
============= ============= =============
The accompanying notes are an integral part of these statements.
4
TIVO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
July 31, July 31,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues .................................................................. $ 4,106,000 $ 869,000 $ 7,302,000 $ 1,368,000
Costs and expenses
Cost of services (excludes ($7,000) and $32,000 of amortization of
stock-based compensation for the quarters ended July 31, 2001 and July
31, 2000, respectively and ($37,000) and $77,000 for the six months
ended July 31, 2001 and July 31, 2000, respectively) ................. 4,415,000 4,295,000 9,911,000 9,289,000
Research and development (excludes $112,000 and
$201,000 of amortization of stock-based compensation for the quarters
ended July 31, 2001 and July 31, 2000, respectively and $208,000 and
$464,000 for the six months ended July 31, 2001 and July 31, 2000,
respectively) ........................................................ 6,786,000 6,788,000 13,613,000 11,632,000
Sales and marketing (excludes $143,000 and
$280,000 of amortization of stock-based compensation for the quarters
ended July 31, 2001 and July 31, 2000, respectively and $291,000 and
$548,000 for the six months ended July 31, 2001 and July 31, 2000,
respectively) ........................................................ 5,756,000 16,422,000 18,776,000 24,901,000
Sales and marketing-related parties .................................... 16,146,000 9,293,000 39,634,000 12,635,000
General and administrative (excludes $91,000 and
$295,000 of amortization of stock-based compensation for the quarters
ended July 31, 2001 and July 31, 2000, respectively and $166,000 and
$693,000 for the six months ended July 31, 2001 and July 31, 2000,
respectively) ........................................................ 4,288,000 3,720,000 8,796,000 6,698,000
Stock-based compensation ............................................... 339,000 808,000 628,000 1,782,000
------------ ------------ ------------ ------------
Loss from operations ................................................. (33,624,000) (40,457,000) (84,056,000) (65,569,000)
Interest income .................................................. 607,000 1,752,000 1,998,000 3,518,000
Interest expense and other ....................................... (604,000) (276,000) (655,000) (377,000)
------------ ------------ ------------ ------------
Net loss ............................................................. (33,621,000) (38,981,000) (82,713,000) (62,428,000)
Less: Series A redeemable convertible
preferred stock dividend ........................................... (840,000) -- (1,932,000) --
------------ ------------ ------------ ------------
Net loss attributable to common stock ..................................... $(34,461,000) $(38,981,000) $(84,645,000) $(62,428,000)
============ ============ ============ ============
Net loss per common share
basic and diluted .................................................... $ (0.82) $ (1.09) $ (2.02) $ (1.75)
============ ============ ============ ============
Weighted average common shares outstanding
basic and diluted .................................................... 42,094,554 35,864,820 41,940,982 35,663,178
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
5
TIVO INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Convertible Additional
Preferred Stock Common Stock Paid-In
----------------------------- -----------------------------
Shares Amount Shares Amount Capital
------------- ------------- ------------ ------------- -------------
BALANCE, JANUARY 31, 2001.......................... 1,111,861 $ 1,000 43,430,023 $ 43,000 $ 406,294,000
Series A redeemable convertible preferred stock
dividend declared, $0.40 per share............. -- -- -- -- --
Issuance of common stock-employee stock purchase
plan........................................... -- -- 193,840 -- 746,000
Exercise of stock options for common stock....... -- -- 8,741 -- 15,000
Common stock repurchases......................... -- -- (52,545) -- (20,000)
Issuance of common stock warrants for marketing
expenses....................................... -- -- -- -- 120,000
Recognition of prepaid marketing expenses........ -- -- -- -- --
Amortization of value of warrants................ -- -- -- -- --
Amortization of prepaid marketing expenses....... -- -- -- -- --
Reversal of deferred compensation................ -- -- -- -- (336,000)
Recognition of stock-based compensation expense.. -- -- -- -- --
Amortization of note receivable.................. -- -- -- -- --
Net loss......................................... -- -- -- -- --
------------- ------------- ------------ ------------- -------------
BALANCE, APRIL 30, 2001.......................... 1,111,861 $ 1,000 43,580,059 43,000 406,819,000
Series A redeemable convertible preferred stock
dividend declared, $0.31 per share............. -- -- -- -- --
Exercise of stock options for common stock....... -- -- 68,859 1000 217,000
Issuance of common stock warrants for marketing
expenses....................................... -- -- -- -- 216,000
Recognition of prepaid marketing expenses....... -- -- -- -- --
Amortization of value of warrants................ -- -- -- -- --
Amortization of prepaid marketing expenses....... -- -- -- -- --
Reversal of deferred compensation................ -- -- -- -- (51,000)
Recognition of stock-based compensation expense.. -- -- -- -- --
Amortization of note receivable.................. -- -- -- -- --
Net loss......................................... -- -- -- -- --
------------- ------------- ------------ ------------- -------------
BALANCE, JULY 31, 2001........................... 1,111,861 $ 1,000 43,648,918 $ 44,000 $ 407,201,000
============= ============= ============ ============= =============
Prepaid
Deferred Marketing Note Retained
Compensation Expense Receivable Deficit Total
------------- ------------- ------------ ------------- -------------
BALANCE, JANUARY 31, 2001.......................... $ (2,786,000) (48,458,000) $ (2,509,000) $(302,248,000) $ 50,337,000
Series A redeemable convertible preferred stock
dividend declared, $0.40 per share............. -- -- -- (1,092,000) (1,092,000)
Issuance of common stock-employee stock purchase
plan........................................... -- -- -- -- 746,000
Exercise of stock options for common stock....... -- -- -- -- 15,000
Common stock repurchases......................... -- -- -- -- (20,000)
Issuance of common stock warrants for marketing
expenses...................................... -- -- -- -- 120,000
Recognition of prepaid marketing expenses........ -- 14,116,000 14,116,000
Amortization of value of warrants................ -- 1,755,000 -- -- 1,755,000
Amortization of prepaid marketing expenses....... -- 1,881,000 -- -- 1,881,000
Reversal of deferred compensation................ 336,000 -- -- -- --
Recognition of stock-based compensation expense.. 289,000 -- -- -- 289,000
Amortization of note receivable.................. -- -- 236,000 -- 236,000
Net loss......................................... -- -- -- (49,092,000) (49,092,000)
------------- ------------- ------------ ------------- -------------
BALANCE, APRIL 30, 2001.......................... (2,161,000) (30,706,000) (2,273,000) (352,432,000) 19,291,000
Series A redeemable convertible preferred stock
dividend declared, $0.31 per share............. -- -- -- (840,000) (840,000)
Exercise of stock options for common stock....... -- -- -- -- 218,000
Issuance of common stock warrants for marketing
expenses....................................... -- -- -- -- 216,000
Recognition of prepaid marketing expenses........ -- 7,611,000 7,611,000
Amortization of value of warrants................ -- 1,814,000 -- -- 1,814,000
Amortization of prepaid marketing expenses....... -- 1,881,000 -- -- 1,881,000
Reversal of deferred compensation................ 51,000 -- -- -- --
Recognition of stock-based compensation expense.. 339,000 -- -- -- 339,000
Amortization of note receivable.................. -- -- 235,000 -- 235,000
Net loss......................................... -- -- -- (33,621,000) (33,621,000)
------------- ------------- ------------ ------------- -------------
BALANCE, JULY 31, 2001........................... $ (1,771,000) $ (19,400,000) $ (2,038,000) $(386,893,000) $ (2,856,000)
============= ============= ============ ============= =============
The accompanying notes are an integral part of these statements.
6
TIVO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
July 31,
----------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................................... $(82,713,000) $(62,428,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .......................... 3,320,000 1,238,000
Issuance of common stock warrants for services ......... 336,000 193,000
Amortization of prepaid marketing expenses ............. 3,762,000 4,089,000
Amortization of warrants for services .................. 3,569,000 19,000
Recognition of prepaid marketing expense ............... 21,727,000 --
Stock-based compensation expense ....................... 628,000 1,782,000
Amortization of note receivable ........................ 471,000 --
Changes in assets and liabilities:
Accounts receivable .................................... 1,177,000 (32,000)
Accounts receivable-related parties .................... 1,515,000 (2,588,000)
Prepaid expenses and other ............................. 1,710,000 (1,122,000)
Prepaid expenses and other-related parties ............. (2,621,000) (454,000)
Accounts receivable-related parties, long-term ......... (560,000) --
Accounts payable ....................................... (15,292,000) 5,380,000
Accrued liabilities .................................... (2,719,000) (3,208,000)
Accrued liabilities-related parties .................... (24,554,000) 8,963,000
Deferred revenue ....................................... 2,917,000 3,426,000
Accrued liabilities-related parties, long term ......... 3,126,000 --
Deferred revenue, long term ............................ 4,682,000 --
Other long-term liabilities ............................ (309,000) 1,436,000
------------ ------------
Net cash used in operating activities ................... (79,828,000) (43,306,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment ...................... (2,995,000) (13,075,000)
(Purchase) of short-term investments, net .................. (1,989,000) (2,327,000)
------------ ------------
Net cash used in investing activities .................... (4,984,000) (15,402,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Series A convertible preferred stock dividend .............. (1,932,000) --
Proceeds from issuance of common stock - employee stock
purchase plan .......................................... 746,000 1,142,000
Proceeds from exercise of common stock options .......... 233,000 475,000
Issuance costs related to issuance of common stock through
initial public offering .................................... (14,000)
Repurchases of common stock ................................ (20,000) 7,000
Net borrowings (payments) under capital lease .............. (391,000) (242,000)
------------ ------------
Net cash (used in) provided by financing activities ...... (1,364,000) 1,368,000
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............ (86,176,000) (57,340,000)
------------ ------------
The accompanying notes are an integral part of these statements.
7
TIVO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six Months Ended
July 31,
----------------------------
2001 2000
------------ ------------
CASH AND CASH EQUIVALENTS:
Balance at beginning of period ............................. 124,474,000 137,658,000
------------ ------------
Balance at end of period ................................... $ 38,298,000 $ 80,318,000
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ..................................... $ 601,000 $ 69,000
SUPPLEMENTAL DISCLOSURE OF RESTRICTED CASH AND OTHER NON-CASH
FINANCING INFORMATION
Interest earned on restricted cash ......................... 1,052,000 --
Equipment acquired under capital lease ..................... -- 121,000
The accompanying notes are an integral part of these statements.
8
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 and is located in Alviso, California. On August 21, 2000,
TiVo (UK) Limited, 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 and
positive cash flow.
TiVo has recognized limited revenue, has incurred significant losses
and has had substantial negative cash flow. During the quarter ended July 31,
2001, TiVo recognized revenues of $4.1 million. As of July 31, 2001, TiVo had an
accumulated deficit of $386.9 million. On August 28, 2001, the Company closed a
private placement of $51.8 million of convertible debt with net proceeds of
approximately $40.8 million to accredited investors. The Company intends to use
the net proceeds from the sales of these notes with warrants for marketing and
promotion, customer service and general corporate purposes.
The unaudited pro forma consolidated balance sheet as of July 31, 2001
shows the effect as if the private placement of convertible debt of $51.8
million had closed as of July 31, 2001, instead of the closing date of the
offering, August 28, 2001. TiVo received cash proceeds of approximately $43.7
million and non-cash proceeds of $8.1 million in the form of advertising and
promotional services from Discovery Communications, Inc. ("Discovery") and the
National Broadcasting Company, Inc. ("NBC"), who are existing shareholders. TiVo
anticipates its issuance cost to be approximately $2.9 million resulting in net
proceeds of approximately $40.8 million. Additionally, as part of the agreement
for convertible debt, TiVo entered into a non-cancelable commitment to pay $5.0
million on or before October 1, 2001, to NBC for advertising that will run
during the period beginning October 1, 2001 and ending December 31, 2001 (see
Note 5).
Unaudited Interim Consolidated Financial Statements
The accompanying consolidated balance sheets as of July 31, 2001 and
the accompanying consolidated statements of operations, consolidated statements
of stockholders' equity (deficit) and consolidated statements of cash flows for
the six months ended July 31, 2001 and 2000 included herein have been prepared
by the Company and are unaudited.
The information furnished in the unaudited financial statements
referred to above include 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 and six months ended July 31, 2001 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.
9
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.
Restricted Cash
Under the terms of the Investment Agreement between America Online,
Inc. ("AOL") and TiVo, dated June 9, 2000 and the First Amendment to the
Investment Agreement dated September 11, 2000 (the "Investment Agreement"), the
Company deposited $91.5 million into an interest bearing escrow account as
restricted cash. The $91.5 million in restricted cash is intended to be used for
subsidy payments to manufacturer(s) in accordance with the Production
Integration and Marketing Agreement between AOL and TiVo, (the "Commercial
Agreement"). On January 30, 2001, the Company entered into the Second Amendment
to the Investment Agreement with AOL (the "Second Amendment"). The Second
Amendment provided for, among other things, an amendment to the Escrow
Agreement, dated as of September 11, 2000, by and among the Company, AOL and
U.S. Trust Company, National Association, as escrow agent, pursuant to which the
Company had deposited a portion of the proceeds it received from AOL in
connection with AOL's purchase of shares of the Company's Series A redeemable
convertible preferred stock. The First Amendment to the Escrow Agreement, dated
as of January 30, 2001, authorized the release to the Company of $43.5 million
in restricted funds previously held in escrow pursuant to the Escrow Agreement
(see Note 4).
Accounts Receivable - Related Parties
Accounts Receivable-related parties consist of amounts owed to the
Company from the Company's strategic partners such as DIRECTV, Inc. ("DIRECTV"),
Philips Business Electronics B.V. ("Philips"), Quantum Corporation ("Quantum")
and Sony Corporation of America ("Sony"). These receivables are comprised of
monies collected from subscribers on the Company's behalf, volume discounts and
amounts owed for reimbursement of a portion of the Company's development costs.
Prepaid Expenses and Other
Prepaid expenses consist of payments made in advance of recognizing
the expense, including primarily marketing expenses related to media purchases
and trade show expenses. Other consists primarily of TiVo stand-alone recorders
and DIRECTV receivers with TiVo Service held for future marketing programs.
Prepaid Expenses and Other - Related Parties
Prepaid expenses and other-related parties consist of payments made to
our partners in advance of recognizing the expense primarily resulting from the
Company's revenue share arrangements. Other consists primarily of prepaid joint
advertising with our partners.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over estimated useful lives as follows:
Furniture and fixtures................ 3-5 years
Computer and office equipment......... 3-5 years
Lab equipment......................... 3 years
Leasehold improvements................ 7 years or the life of the
lease
Capitalized software.................. 1-5 years
Maintenance and repair expenditures are expensed as incurred.
10
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109).
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets or liabilities of a change in tax rates is recognized in the period in
which the rate change occurs. Valuation allowances have been established when
necessary to reduce deferred tax assets to the amounts expected to be recovered.
Accrued Liabilities - Related Parties, Long-Term
Accrued liabilities -related parties, long-term consist of the
long-term portion of negotiated deferred payment of payables due as of March 31,
2001 with our partners who are existing shareholders.
Pro Forma Convertible Notes Payable, Long-Term
Convertible notes payable, long-term consist of the long-term portion
of the notes issued as a result of the private placement which closed on August
28, 2001 (see Note 5).
Pro Forma Convertible Notes Payable - Related Parties, Long-Term
Convertible notes payable, long-term consist of the long-term portion
of the notes issued to our existing shareholders as a result of the private
placement which closed on August 28, 2001 (see Note 5).
Other Long-Term Liabilities
Other long-term liabilities consist of deferred rent. Deferred rent of
$908,000 results from the recognition of rent expense under the facilities lease
amortized on a straight line basis over 7 years, the life of the related lease.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term
investments, accounts receivable, and accounts payable approximate fair value
due to the short-term maturity of these instruments.
Business Concentrations and Credit Risk
Financial instruments that subject the Company to concentrations of
credit risk consist primarily of cash. The Company maintains cash with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The majority of the Company's
customers are concentrated in the United States. The Company is subject to a
minimal amount of credit risk related to these customers as subscription revenue
is primarily obtained through credit card sales. The reserve for doubtful
accounts at July 31, 2001 was $294,000 and $62,000 for accounts receivable and
accounts receivable--related parties, respectively. The Company does not
consider credit risk associated with accounts receivable-related parties
(DIRECTV, Philips, Sony, AOL and Quantum) to be significant
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
11
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 expenses
of $339,000 for the quarter ended July 31, 2001. 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.
Revenue Recognition
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition." SAB 101
clarifies the SEC staff's views on application of generally accepted accounting
principles to revenue recognition. The Company has concluded its revenue
recognition policy continues to be appropriate and in accordance with generally
accepted accounting principles and SAB 101.
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 are
available on a monthly 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. Revenue is recognized as the advertising and
content is delivered.
Research and Development
Research and development expenses consist primarily of employee
salaries and related expenses and consulting fees relating to the development of
the TiVo Service and products that enable the TiVo Service. Research and
development costs are expensed as incurred.
Sales and Marketing--Related Parties Expense
Sales and marketing--related parties expense consists of cash and
non-cash charges related to the Company's agreements with DIRECTV, Philips,
Quantum, Sony, AOL and Creative Artists Agency, LLC ("CAA"), all of which hold
stock in the Company.
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 of $13.5 million, less the cost of the personal video
recorders sold of $20.7 million for the year ended December 31, 1999 was
classified as other operating expense, net. Other operating expense, net is
considered incidental to the Company's business and was recognized upon shipment
to the customer.
12
Advertising Costs
In accordance with Statement of Position 93-7, "Reporting on
Advertising Costs," the Company expensed advertising costs as incurred.
Advertising expenses were $8.9 million for the three months ended July 31, 2001
including expenses related to a portion of the AOL media insertion orders (See
Note 4).
Comprehensive Income
The Company has no material components of other comprehensive income
or loss and, accordingly, the comprehensive loss is the same as the net loss for
all periods presented.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior years' financial
information to conform with the current period presentation.
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 net loss per common
share is computed by dividing net loss by the weighted average number of common
shares outstanding. Shares used in the computation of the three and six months
ended July 31, 2001, net loss per share amount do not include repurchasable
common stock issued to DIRECTV, options and warrants to purchase common stock,
Series A convertible preferred stock and Series A redeemable convertible
preferred stock (see Note 4) and unvested, repurchasable common stock issued
under the employee stock option plans.
3. COMMITMENTS AND CONTINGENCIES
Facilities Leases
In April 2001, the Company entered into a new office lease for its UK
office with Thomas Lawrence & Sons (Bracknell) Limited for Prince Leopold House
in Windsor, Berkshire. The lease has a five-year term. Monthly rent is
approximately $8,000.
4. AOL RELATIONSHIP
On September 13, 2000, the Company closed the Investment Agreement
with AOL for $200 million. Under the terms of the Investment, the Company issued
2,711,861 shares of Series A redeemable convertible preferred stock at $30.00
per share, 5,134,722 shares of common stock at $23.11 per share, 806,889 shares
of which were subject to redemption as of December 31, 2000, two initial
warrants to purchase an aggregate of 2,603,903 shares of the Company's common
stock and two performance warrants to purchase an aggregate of up to 5,207,806
shares of common stock. The portion of common stock subject to redemption is
shown as redeemable common stock on the Company's consolidated financial
statements. The two performance warrants are contingent upon future performance.
The AOL investment is part of a three-year Commercial Agreement, in which TiVo
became an AOL TV programming partner, offering AOL TV subscribers access to
features of TiVo's Personal TV Service.
13
On January 30, 2001, the Company entered into the Second Amendment to
the Investment Agreement with AOL, dated as of June 9, 2000, as amended by the
First Amendment to the Investment Agreement, dated as of September 11, 2000. The
Second Amendment provided for, among other things, an amendment to the Escrow
Agreement, dated as of September 11, 2000, by and between the Company and AOL in
which the Company had deposited a portion of the proceeds it received from AOL
in connection with AOL's purchase of shares of the Company's Series A redeemable
convertible preferred stock.
Restricted Cash
Under the terms of the Investment Agreement, the Company deposited
$91.5 million of the proceeds received from the AOL investment 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) of set-top boxes that enable the TiVo Service. However, the
restricted cash would be used in the event AOL exercises its put option to
repurchase Series A redeemable convertible preferred stock and their portion of
common stock subject to redemption. The terms of the put option are described
below. The interest income earned on this restricted cash is shown on the
consolidated balance sheets as deferred interest income on restricted cash until
such time as the cash is no longer restricted. For the quarter ended July 31,
2001, $459,000 was deferred as interest income.
The First Amendment to the Escrow Agreement, dated as of January 30,
2001, authorized the release to the Company of $43.5 million in restricted funds
previously held in escrow pursuant to the Escrow Agreement.
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 $2.4 million. In January 2001, under
the terms of the Second Amendment, 1,111,861 shares of Series A redeemable
convertible preferred had their redemption feature removed. As of January 31,
2001, each of the 1,600,000 shares 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 18 trading days
in any 20 consecutive trading day period.
Put Option
Under the terms of the First Amendment to the Investment Agreement, if
the set-top box launch of the Integrated Product does not occur by December 31,
2001, and AOL has not committed a material breach of the Commercial Agreement or
the Company has breached its obligations with respect to the financial
covenants, then AOL would have a put option pursuant to which AOL could require
the Company to repurchase from AOL the number of shares of Series A redeemable
convertible preferred stock which have an initial liquidation value of $91.5
million. If all the shares of Series A redeemable convertible preferred stock
have an aggregate initial liquidation value of less than $91.5 million, then AOL
could require the Company to repurchase the number of shares of common stock
having a value equal to the difference between that aggregate initial
liquidation value and $91.5 million. In the event that the set-top box launch
occurred after the planned launch date, but prior to the exercise of the put
option, the put option would immediately expire.
The Second Amendment to the Investment Agreement modified the terms of
AOL's put option with respect to the Series A redeemable convertible preferred
stock held by AOL. Under the Second Amendment, the Company could be required to
repurchase that number of shares of Series A redeemable convertible preferred
stock having a liquidation value of $48.0 million, which is equal to the amount
of the funds remaining in the restricted cash account, following AOL's release
of $43.5 million of restricted cash in January 2001, excluding any interest
earned on such funds.
14
Series A Redeemable Convertible Preferred Stock Dividend
Under the terms of the Investment Agreement between AOL and the
Company, the Company issued Series A redeemable convertible preferred stock,
with certain dividend and voting rights. Dividends on the Series A convertible
preferred stock are calculated by multiplying the Non-Government Institutional
Funds Simple Average Rate by $30.00 per share times the number of shares of
Series A convertible preferred stock outstanding. Dividends are payable
quarterly as declared by the Company's Board of Directors. As of July 31, 2001,
$256,000 was payable.
Common Stock
In September 2000, the Company issued 5,134,722 shares of common stock
at $23.11 per share, of which 806,889 shares were subject to redemption as of
December 31, 2000, to AOL in exchange for $118.6 million, before issuance costs
of $4.4 million. As of July 31, 2001, there were no shares of common stock
subject to redemption under the Second Amendment to the Investment Agreement
signed in January 2001.
Initial Common Stock Warrants A and B
In September 2000, in conjunction with AOL's investment, the Company
issued two initial warrants to AOL to purchase common stock. The initial
warrants were 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 is
expensing 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 is
expensing 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%.
In January 2001, the Second Amendment to the Investment Agreement
provided for the reduction in the exercise price of the two initial warrants.
The Company issued amended warrants to AOL, which reduced the per share exercise
price of AOL's warrant to purchase 2,308,475 shares of common stock from $23.11
to $7.29, and reduced the per share exercise price of AOL's warrant to purchase
295,428 shares of common stock from $30.00 to $7.29. 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 $7.29 per share. The Company is
expensing the estimated incremental fair value of the repriced
warrants of $4.2 million over the remaining term of the
Commercial Agreement (original term of 3 years). The estimated
fair value of the warrants was determined using the Black-Scholes
option pricing model. The principal assumptions used in the
computation are: 9-month remaining life of the warrant; fair
market value at the date of issuance of $7.13 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 $7.29 per share. The Company is
expensing the estimated incremental fair value of the repriced
warrants of $720,000 over the remaining term of the Commercial
Agreement (original term of 3 years). The estimated fair value of
the warrants was determined using the Black-Scholes option
pricing model. The principal assumptions used in the computation
are: 33-month remaining life of the warrant; fair market value at
the date of issuance of $7.13 per share; a risk-free rate of
return of 6.05%; dividend yield of zero percent; and a volatility
of 70%.
15
The expiration of Initial Warrant A is December 31, 2001 and Initial
Warrant B expires December 31, 2003. The estimated incremental fair value of the
warrants of $4.9 million was recorded as prepaid marketing expense
(contra-equity) as of January 31, 2001.
Performance Warrants
In conjunction with AOL's investment in September 2000, the Company
issued two performance warrants to AOL to purchase common stock. If AOL meets
certain performance criteria, it 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 the
Integrated Service to 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 exist 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.
Performance Warrant A shall be valued at the date that TiVo receives a
written binding contractual commitment from AOL for the set- top box launch to
occur on cable television systems owned or controlled by Time Warner or its
affiliates in markets where TiVo has the potential to acquire at least 1.5
million activated users in the aggregate on such cable systems. Performance
Warrant B shall be valued at the date that it is probable that AOL will meet the
performance criteria of notifying the Company that 1,500,000 activated users of
the Integrated Service exist at one time.
If the Company were to value the performance warrants as of July 31,
2001, it would record the estimated value of the performance warrants of $3.7
million as prepaid marketing expense (contra-equity). If market conditions at
the time that AOL earns the performance warrants are different than those at
July 31, 2001 than the valuation of the warrants could significantly increase or
decrease from the following calculated valuation:
. Performance Warrant A - AOL would be issued warrants to purchase
up to 2,603,903 shares of common stock at $6.57 per share.
Performance Warrant A would be valued when it is earned by AOL.
The Company would expense the estimated fair value of the
warrants of $1.9 million over 3 years, the term of the Commercial
Agreement. The estimated fair value of the warrants would be
determined using the Black-Scholes option pricing model. The
principal assumptions that would be used in the computation are:
6-month term; fair market value at the date of issuance of $7.30
per share; a risk-free rate of return of 3.44%; dividend yield of
zero percent; and a volatility of 50%.
. Performance Warrant B - AOL would be issued warrants to purchase
up to 2,603,903 shares of common stock at $6.57 per share.
Performance Warrant B would be valued when it is probable of
being earned by AOL. The Company would expense the estimated fair
value of the warrants of $1.9 million over 3 years, the term of
the Commercial Agreement. The estimated fair value of the
warrants would be determined using the Black-Scholes option
pricing model. The principal assumptions that would be used in
the computation are: 6-month term; fair market value at the date
of issuance of $7.30 per share; a risk-free rate of return of
3.44%; dividend yield of zero percent; and a volatility of 50%.
Additionally, Performance Warrants A and B would also become
exercisable immediately upon the occurrence of either a material breach of the
Commercial Agreement by the Company or if the Company enters into a definitive
agreement for a change of control of the Company. The performance warrants would
expire on the earlier of September 11, 2003 or in the event that AOL commits a
material breach of the Commercial Agreement.
16
Since these warrants are contingent on AOL's performance or probable
performance and the criteria have not been met at this time, the Company has not
recorded nor valued the performance warrants at this time in the financial
statements. If market conditions at the time that AOL earns the performance
warrants are different than those at July 31, 2001 than the valuation of the
warrants could significantly increase or decrease from the above amount.
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 September 13, 2000, $8.5 million of this amount was paid to
AOL. The Company recorded this payment as prepaid marketing expense (contra
equity).
On January 30, 2001, the Company signed an additional media insertion
order with AOL Time Warner for $21.5 million in advertising programs to promote
the TiVo Service on AOL Time Warner properties. The $21.5 million media
insertion order was comprised of $3.5 million, the balance of the original AOL
Insertion Order, and 18.0 million. As of July 31, 2001, the Company recorded
$27.0 million of advertising expense.
Financial Covenants
Under the terms of the Investment Agreement, the Company must maintain
a positive net cash position in excess of $25.0 million measured, 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 advises AOL
monthly, on an informational basis, of the Company's net cash position. Per the
agreement, if the Company falls below the $25.0 million net cash position at the
end of a quarter, AOL has the right to exercise its put option. The Company was
not in compliance with this covenant as of the end of the second quarter of this
fiscal year. On July 22, 2001, AOL agreed to waive its right to exercise its put
option as of the July 31, 2001 measurement date and instead measure such minimum
capital requirement and have such right to exercise its put option as of August
31, 2001. On August 28, 2001, the Company closed a private placement of $51.8
million of convertible debt and warrants to accredited investors. With the
completion of the private placement, the Company was in compliance with the net
cash position requirement as of August 31, 2001.
The financial covenants shall terminate upon the earlier of the date
of the set-top box launch, so long as 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.
5. SUBSEQUENT EVENTS
Private Placement Financing
On August 28, 2001, the Company closed a private placement of $51.8
million of convertible debt with warrants to accredited investors. The
consolidated balance sheets as of July 31, 2001 includes a pro forma column that
shows the effect as if the private placement of $51.8 million had closed as of
July 31, 2001, instead of the closing date of the offering, August 28, 2001.
The pro forma balance sheet data has been calculated based upon the
following assumptions and estimates:
. Cash and cash equivalents have increased by $40.8 million for the
estimated net cash proceeds from this offering. The $40.8 million
is estimated to be the aggregate purchase price of the securities
offered of $51.8 million, less the cash issuance costs of an
estimated $2.9 million and the non-cash advertising and
promotional services consideration of an estimated $8.1 million
from NBC and Discovery, who are existing shareholders.
17
. Prepaid expenses and other have increased by $4.4 million for
cash and non-cash financing costs and the value of beneficial
conversion.
. Prepaid expenses and other -related parties have increased by
$13.1 million for prepaid advertising. A total of $8.1 million of
the $13.1 million is for prepaid advertising media that will be
provided by our existing shareholders, Discovery and NBC.
Additionally, as part of the agreement for convertible debt, TiVo
has entered into a non-cancelable commitment to pay NBC $5.0
million on or before October 1, 2001 for advertising that will
run during the period beginning October 1, 2001 and ending
December 31, 2001.
. Accrued liabilities -related parties have increased by $5.0
million due to an advertising commitment to a certain existing
shareholder. As part of the agreement for convertible debt, TiVo
has entered into a non-cancelable commitment to pay NBC $5.0
million on or before October 1, 2001 for advertising that will
run during the period beginning October 1, 2001 and ending
December 31, 2001.
. Convertible notes payable, long-term increased by $29.9 million
as a result of the face value of the notes less the value of the
warrants issued to note holders.
. Convertible notes payable-related parties, long-term increased by
$12.2 million as a result of the face value of the notes less the
value of the warrants issued to existing shareholders.
. Additional paid-in capital increased by $11.1 million for the
value of the warrants issued to note holders, the non-cash
financing costs and the value of beneficial conversion.
The private placement consisted of the following securities:
. $51,750,000 of 7% Convertible Senior Notes due 2006. The notes
---------------------------------------------------
are convertible at any time, unless earlier redeemed pursuant to
their terms, into TiVo common stock at an initial conversion
price of $6.73 per share, which is calculated as 120% of $5.61
the fair market value of TiVo common stock on the pricing date of
August 23, 2001. A beneficial conversion amount of $983,000 will
be recorded as additional interest expense over the life of the
debt.
. Warrants to purchase TiVo common stock over the next five years.
---------------------------------------------------------------
These warrants give investors the right to purchase a total of
approximately 2.5 million additional shares at an exercise price
of $7.85 per share. The warrants expire in five years. The
estimated fair value of the warrants was determined using both
the Black-Scholes and binomial option pricing models. The
principal assumptions that would be used in the Black-Scholes
computation are: 5 - year term; fair market value at the date of
issuance of $7.85 per share; a risk-free rate of return of 4.42%;
dividend yield of zero percent; and a volatility of 50%.
. Additional Warrants. As part of the private placement, TiVo
-------------------
issued two additional sets of warrants. One set of warrants,
which expire after one year unless earlier terminated, gives
investors the right to purchase a total of approximately 3.8
million additional shares of TiVo common stock at a cash price of
$6.73 per share. The other set of warrants, which expire after
five years unless earlier terminated, gives investors the right
to purchase a total of approximately 1.3 million additional
shares of TiVo common stock at a price of $7.85 per share. These
five-year terminable warrants may only be exercised if the
one-year warrants have been exercised. The estimated fair value
of the warrants was determined using both the Black-Scholes and
binomial option pricing models. The principal assumptions that
would be used in the Black-Scholes computation for the one year
warrants are: 1-year term; fair market value at the date of
issuance of $6.73 per share; a risk-free rate of return of 4.42%;
dividend yield of zero percent; and a volatility of 50%. The
principal assumptions that would be used in the Black-Scholes
computation for the five-year warrants are: 5-year term; fair
market value at the date of issuance of $7.85 per share; a risk-
free rate of return of 4.42%; dividend yield of zero percent; and
a volatility of 50%.
The value of the warrants will be accreted expense over the five-year
life of the notes payable.
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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 include, without limitation,
statements regarding our anticipated financial results, revenues, subscribers,
use of funds and business plan. You can recognize forward-looking statements by
use of the words "believes," "anticipates," "expects," and words of similar
import or the negative of those terms or expressions. 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 quarter ended July 31, 2001, TiVo maintained continued
interest from the advertising community in using TiVo as an advertising
platform. TiVo's Charter Advertising partners include companies such as Lexus,
Miller Brewing and Pfizer. During this quarter, BMW and Coca Cola signed up as
TiVo's latest partners. While minimal revenue has been earned to date, by the
end of the quarter, TiVo had accumulated over $1.1 million of backlog for future
advertising revenues.
On August 28, 2001, the Company closed a private placement of $51.8
million of convertible debt with warrants to accredited investors. The unaudited
pro forma consolidated balance sheet as of July 31, 2001 shows the effect as if
the private placement of $51.8 million had closed as of July 31, 2001, instead
of the closing date of the offering, August 28, 2001. TiVo received cash
proceeds of approximately $43.7 million and non-cash proceeds of $8.1 million in
the form of advertising and promotional services from Discovery and NBC, who are
existing shareholders. TiVo anticipates its issuance cost to be approximately
$2.9 million resulting in net proceeds of approximately $40.8 million.
Additionally, as part of the agreement for convertible debt, TiVo entered into a
non-cancelable commitment to pay $5.0 million on or before October 1, 2001, to
NBC for advertising that will run during the period beginning October 1, 2001
and ending December 31, 2001 (see Note 5).
Results of Operations
Revenues. Revenues for the three and six months ended July 31, 2001
were $4.1 million and $7.3 million compared to $869,000 and $1.4 million for
prior year comparable periods. The increase is largely attributable to increased
customer subscriptions to the TiVo Service. TiVo activated approximately 40,000
new subscribers to the TiVo Service during the three-month period ended July 31,
2001 compared to approximately 15,000 subscribers activated during the prior
year comparable period. A large part of the increase for comparable six-month
periods was due to TiVo's existing monthly subscribers upgrading to lifetime
subscriptions for $199 before the new price increase. This promotion generated
an additional $1 million in cash for the quarter ended April 2001. As of July
31, 2001, the total installed subscriber base had grown to approximately 229,000
subscribers.
Cost of services. Cost of services consists primarily of
telecommunication and network expenses, employee salaries, call center and other
expenses related to providing the TiVo Service to subscribers. Cost of services
for the three and six months ended July 31, 2001 was $4.4 million and $9.9
million compared to $4.3 million and $9.3 million for the three and six months
ended July 31,2000. This increase was primarily attributable to increased
salaries and benefits and service center expenses. Total salaries and benefits
accounted for the majority of the total increase due to the expansion and
staffing of the
19
Broadcast Operations department. Additionally, telecommunications and network
expense decreased by 29%, from the six months ended July 31, 2000 to the six
months ended July 31, 2001. This decrease was a result of reducing the service
cost per subscriber by using satellite transmission of the Service for
subscribers using the DIRECT Receiver with TiVo.
Research and development expenses. TiVo's research and development
expenses consist primarily of employee salaries and related expenses and
consulting fees relating to the design of the personal video recorder that
enables the TiVo Service. Research and development expenses for the three and
six months ended July 31, 2001 were $6.8 million and $13.6 million compared to
$6.8 million and $11.6 million for the three and six months ended July 31, 2000.
Salaries and related benefits increased approximately 37% for the six-month
period and was due to the hiring of additional engineers to help support the
improvement and addition of features and functionality of current products as
well as the design of new platforms. Other outside services decreased for the
six-month period by 64% because employees were hired to perform work previously
done by outside services.
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 six months ended July 31, 2001 were $5.8 million and
$18.8 million compared to $16.4 million and $24.9 million for the three and six
months ended July 31, 2000. The significant decrease for the six-month period
was primarily attributable to a 45% decrease in expenditures for advertising,
public relations and trade shows. This is due to the initiatives we have put in
place with our partners to maximize our joint marketing effectiveness with much
lower levels of cash investment by TiVo. Although the marketing expenses have
decreased over prior periods we expect our marketing expenses to continue to be
a large portion of our total company expenses for fiscal year 2002. Advertising
expense for fiscal year 2002 will be comprised mostly of marketing campaigns
focused on consumer education.
Sales and marketing--related parties. Sales and marketing--related
parties expense consist of cash and non-cash charges related primarily to
agreements with AOL, DIRECTV, Philips, Sony, Quantum, and Creative Artists
Agency, LLC ("CAA"),all of which hold stock in TiVo. Sales and
marketing--related parties expense for the three and six months ended July 31,
2001 was $16.1 million and $39.6 million compared to $9.3 million and $12.6
million for the three and six months ended July 31, 2000. The increase in sales
and marketing--related parties expense is primarily attributable to the
activations of subscribers to the TiVo Service and AOL media insertion orders.
Sales and marketing--related parties expense for the three and six
months ended July 31, 2001, consists of cash charges of $12.0 million and $31.5
million, respectively and non-cash charges of $4.1 million and $8.1 million,
respectively. Sales and marketing--related parties expense for the same periods
in the prior year consisted of cash charges of $8.1 million and $8.5 million,
respectively and non-cash charges of $1.2 million and $4.1 million,
respectively. The non-cash portion is related to the amortization of warrants or
common stock issued for services that we issued to AOL and DIRECTV. We amortize
the valuation of the warrants and common stock issued for services on a
straight-line basis over the period that the services are provided.
The cash portion of sales and marketing--related parties expense is
comprised of revenue share and manufacturing subsidy payments to Philips, Sony,
Quantum and DIRECTV. Additionally included are media insertion orders paid to
AOL. Subsidies are formula based payments to our partners in exchange for key
activities and results. The formulas are periodically adjusted based on our
partners' manufacturing costs and selling prices. A portion of the subsidy is
payable after shipment and the balance is payable after the subscription is
activated. We have also agreed to share a portion of our revenues with some of
our strategic partners in order to promote the TiVo Service and encourage the
manufacture and distribution of the personal video recorders that enable the
TiVo Service. Revenue share is calculated as an agreed upon percentage of
revenue for a specified group of TiVo subscribers. We anticipate that our
business will continue to grow and, as such, we expect the revenue share and
manufacturing subsidy amounts to continue to be large for the foreseeable
future. We have negotiated deferred payment schedules of payables due as of
March 31, 2001 with certain partners in the amount of $15.6 million reflected in
accrued liabilities--related parties. In general, interest started accruing from
March 31, 2001 and beginning in October, we anticipate that we will make
payments including interest for the deferred amounts as well as continue to pay
20
current payables on a timely basis. Additionally, we expect to continue to work
with our partners to manage manufacturing costs. By decreasing manufacturing
costs per unit, we expect this will decrease subsidy costs on a per unit basis.
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 six months ended July 31, 2001 were $4.3 million and
$8.8 million compared to $3.7 million and $6.7 million for the three and six
months ended July 31, 2000. Salaries and related expenses increased over 73%
primarily due to the hiring of additional information systems, legal and
accounting personnel. Also contributing to the increase were consulting and
temporary expenses totaling 22% of the total increase.
Stock-based compensation. During calendar years 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 for accounting purposes on
the date of grant. As a result, stock-based compensation expense is being
recognized over the period that these stock options vest on an accelerated
basis. The stock-based compensation expense was approximately $339,000 and
$628,000 for the three and six months ended July 31, 2001and $808,000 and $1.8
million for the prior year comparable period.
Interest income. Interest income resulting from cash and cash
equivalents held in interest bearing accounts and short- term investments was
$607,000 million and $2.0 million for the three and six months ended July 31,
2001 compared to $1.8 million and $3.5 million for the three and six months
ended July 31, 2000. The decrease is a result of cash balances decreasing
largely due to a declining cash balance.
Interest expense and other. Interest expense and other was $604,000
and $655,000 for the three and six months ended July 31, 2001. This includes
$544,000 for both the three-month and six-month periods for interest expense
payable to our strategic partners according to negotiated deferred payment
schedules. Additionally included is the amortization of the value assigned
primarily to the Comdisco warrant for interest expense of $25,000. For the three
and six months ended July 31, 2000, interest expense and other was $276,000 and
$377,000, 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 dividends payable for the three and six months ended July 31, 2001 were
$840,000 and $1.9 million, respectively. The dividends are payable quarterly as
declared by our board of directors.
Quarterly Results of Operations
The following table represents certain unaudited statement of
operations data for our eight most recent quarters ended July 31, 2001. 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 consolidated financial
statements, including the 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. Prior quarters have been
reclassified in order to conform to current quarter classifications.
21
Three Months Ended
-----------------------------------------------------------------------------------------------
October 31, January 31, April 30, July 31, October 31, January 31, April 30, July 31,
1999 2000 2000 2000 2000 2001 2001 2001
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited, in thousands except per share data)
Revenues.......................... $ 53 $ 287 $ 499 $ 869 $ 1,102 $ 2,166 $ 3,196 $ 4,106
Costs and expenses
Cost of services.................. 1,032 2,746 4,994 4,295 4,149 5,661 5,497 4,415
Research and
development..................... 2,684 4,626 4,844 6,788 7,572 5,888 6,827 6,786
Sales and
marketing....................... 10,341 12,215 8,479 16,422 34,638 46,905 13,020 5,756
Sales and marketing--related
parties......................... 9,049 7,323 3,342 9,293 24,283 21,093 23,488 16,146
General and administrative........ 2,140 2,888 2,978 3,720 3,876 4,483 4,507 4,288
Stock-based compensation.......... 632 878 974 808 624 562 289 339
Other operating expense, net...... 5,947 (69) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Loss from operations.............. (31,772) (30,320) (25,112) (40,457) (74,040) (82,426) (50,432) (33,624)
Interest income................... 1,132 2,097 1,766 1,752 2,056 2,305 1,390 607
Interest expense and other........ (362) 110 (101) (276) (46) (86) (50) (604)
-------- -------- -------- -------- -------- -------- -------- --------
Net loss.......................... (31,002) (28,113) (23,447) (38,981) (72,030) (80,207) (49,092) (33,621)
Less: Series A redeemable
convertible preferred stock
dividend.......................... -- -- -- -- (665) (1,272) (1,092) (840)
-------- -------- -------- -------- -------- -------- -------- --------
Net loss attributable to
common stock...................... $(31,002) $(28,113) $(23,447) $(38,981) $(72,695) $(81,479) $(50,184) $(34,461)
======== ======== ======== ======== ======== ======== ======== ========
Net loss per share
Basic and diluted............ $ (2.15) $ (0.80) $ (0.66) $ (1.09) $ (1.89) $ (2.00) $ (1.20) $ (0.82)
Weighted average shares...... 14,426 35,215 35,462 35,865 38,461 40,774 41,787 42,095
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 new subscribers during the holiday shopping season.
Although advertising revenue to date has been minimal, 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 July 31, 2001, 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 July 31, 2001, we had $40.3 million of cash and cash equivalents.
On August 28, 2001, the Company closed a private placement of $51.8 million of
convertible debt with warrants to accredited investors. The Company intends to
use the net proceeds estimated to be $40.8 million from the sale of these notes
with warrants for marketing and promotion, customer services and general
corporate purposes.
Net cash used in operating activities was $79.8 million for the six
months ended July 31, 2001. During this period we continued to provide the TiVo
Service, incurring a net loss of $82.7 million. Uses of cash from operating
activities also included a decrease in accrued liabilities--related parties of
$24.6 million, a decrease in accounts payable of $15.3 million and a decrease in
accrued liabilities of $2.7 million, an increase in prepaid expenses--related
parties of $2.6 million, an increase in accounts receivable related parties,
long-term of $560,000 and a decrease in other long-term liabilities of $309,000.
These uses were offset by sources of cash provided from operating activities
consisting of an increase in long-term deferred revenue of $4.7 million, an
increase in accrued liabilities--related parties, long term of $3.1 million, an
increase in
22
deferred revenue of $2.9 million, a decrease in accounts receivable of $1.2
million, a decrease in prepaid expenses of $1.7 million and a decrease in
accounts receivable-related parties of $1.5 million.
Net cash used in investing activities was $5.0 million for the six
months ended July 31, 2001 of which $3.0 million was for the acquisition of
property and equipment and $2.0 million was for the purchase of short-term
investments.
Net cash used for financing activities was $1.4 million for the six
months ended July 31, 2001. Of this amount, $1.9 million was used for payment of
the Series A redeemable convertible preferred stock dividend and $391,000 for
payment on a capital lease. We obtained $746,000 of financing as proceeds from
the issuance of common stock through our employee stock purchase plan and
$233,000 from the issuance of common stock for stock options exercised.
We have commitments for future lease payments under facilities
operating leases of $17.6 million and obligations under a capital lease of
$987,000 as of July 31, 2001. 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.
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 develop new or enhance existing services or products;
. to continue support of our customer call center
. to subsidize the sale of personal video recorders;
. for advertising to educated consumers;
. to continue to support our existing efforts in the United
Kingdom market; and
. for general corporate purposes.
We believe that our cash and cash equivalents, the net proceeds from
the sale of our Series A redeemable convertible preferred stock, the private
sales of equity securities, the net proceeds from the initial public offering
and the private placement of convertible debt with warrants that we have raised
to date will be sufficient to fund our operations through our fiscal year ending
January 31, 2002. Despite our expectations, we may choose to raise additional
capital before the end of the next 12 months 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."
23
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 revenue, have incurred significant losses
and have had substantial negative cash flow. During the six months ended July
31, 2001 we recognized revenues of $7.3 million. As of July 31, 2001, we had an
accumulated deficit of $386.9 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.
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 only since March 31, 1999. Prior to that time, our operations
consisted primarily of research and development efforts. As of July 31, 2001,
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 calendar year 1999. We will rely principally on our
consumer electronics partners, such as Philips and Sony, to manufacture, market,
sell and support the personal video recorder that enables the TiVo Service. We
also will rely on the efforts of DIRECTV and BSkyB to market, sell and support
the TiVo Service to DIRECTV and BSkyB 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
24
. coordinate our own sales, marketing and support activities
with those of Philips, Sony, BSkyB, DIRECTV, AOL 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 increase or decrease the
price of the TiVo Service. If we change 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 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 Philips, Sony,
Hughes and Thomson UK to manufacture and distribute the personal video recorders
that enable the TiVo Service. However, we have no minimum volume commitments
from Philips, Sony, Hughes, Thomson UK or any other manufacturer. The ability of
our manufacturing partners to reach sufficient production volume of the personal
video recorder to satisfy anticipated 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
ime-consuming and expensive. Although we expect to continue to contract
25
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 AOL, DIRECTV 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.
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 the 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.
26
Since we began our business in August 1997, we have significantly
expanded our operations. We anticipate continued expansion in our headcount 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 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.
27
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, 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., SonicBlue 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 Microsoft. 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;
28
. 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.
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.
29
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;
. 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 willful and deliberate
violation of U.S. Patent Number 4,706,121, entitled "TV Schedule System and
Process," held by StarSight. The complaint alleged that we infringed the patent
by, among other things, making, using, selling, offering to sell and/or
importing our TV schedule systems and processes without a license from
StarSight. Starsight seeks unspecified monetary damages and an injunction
against our operations. The suit also seeks attorneys' fees and costs. We
believe that we have meritorious defenses against the suit and intend to
vigorously defend ourselves. On February 25, 2000, we counterclaimed against
StarSight, Gemstar Development Corporation and Gemstar International Group
Limited seeking damages for federal antitrust violations and state unfair
business practices claims, as well as declaratory relief of non-infringement,
invalidity and unenforceability with respect to the
30
patent. We could be forced to incur material expenses during this litigation,
and in the event we were to lose this suit, 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, several of these patents have been granted,
and we cannot assure you that any additional 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.
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
31
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 viewing information
gathered by the TiVo Service and personal video recorder. Currently, we gather
anonymous information about our subscribers' viewing choices while using the
TiVo Service, unless a subscriber affirmatively consents to the collection of
personally identifiable viewing information. This anonymous viewing information
does not identify the individual subscriber. 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.
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
32
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 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 our fiscal year end. However, as we continue
to grow our business, we may need to raise additional capital, which may not be
available on acceptable terms or at all. 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. 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 product lifetime subscriptions that commit us to
provide service for as long as the personal video recorder is in service. 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.
33
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.
If there is an adverse outcome in the class action litigation that has been
filed against TiVo, our business may be harmed.
On June 12, 2001, a securities class action lawsuit was filed in the
United States District Court for the Southern District of New York on behalf of
all persons who acquired our stock between September 30, 1999 and December 6,
2000. TiVo, certain of our executive officers, and certain underwriters involved
in our initial public offering are named as defendants in the complaint. Six
other complaints that are virtually identical were filed in the same court in
June through August 2001. These complaints allege that certain of the
underwriters of our initial public offering violated the federal securities laws
by failing to disclose that they had solicited and received undisclosed
commissions from, and entered into undisclosed arrangements with, certain
investors who purchased restricted stock in our initial public offering, and had
entered into undisclosed arrangements with certain investors whereby the
underwriters allocated shares in our initial public offering to those investors
in exchange for their agreement to purchase our shares in the after-market at
pre-determined prices. The complaints also allege that the defendants violated
the federal securities laws by issuing a registration statement in connection
with our initial public offering that contained material misstatements and/or
omissions because it did not disclose that these allegedly undisclosed
arrangements had occurred. The complaints seek damages on behalf of all those
who purchased or otherwise acquired our securities during the period covered by
the complaint. The deadline for defendants to respond to the complaints has not
yet expired. We believe we have meritorious defenses and intend to defend this
action vigorously. However, we could be forced to incur material expenses in the
litigation, and in the event there is an adverse outcome, our business could be
harmed.
On March 15, 2001, Ezra Birnbaum, an individual resident in the state
of New York, filed, on behalf of himself and all similarly situated purchasers
of the TiVo Service and the personal video recorder, a class action complaint
against us in the Supreme Court of the State of New York, Kings County, alleging
violation of New York's consumer protection act, breach of implied warranties of
merchantability and fitness under the Uniform Commercial Code, breach of
contract and fraud. The complaint states that Mr. Birnbaum experienced continued
problems with the system he had purchased, specifically stating that the screen
image froze and preprogrammed channels were lost. He alleges, among other
things, that we knew or had reason to know of these malfunctions and had
therefore misrepresented or failed to disclose material information regarding
our product to consumers. The complaint seeks repayment of the amount spent to
purchase our product to each member of the class of purchasers, plus interest
from the date of purchase, as well as unspecified punitive damages, attorneys'
and expert witness fees and other costs. The complaint additionally seeks broad
equitable relief, requesting that we be enjoined from continuing the practices
described in the complaint. On May 3, 2001, we answered the complaint. After
an initial exchange of discovery requests and answers between the parties, on
August 2, 2001, Mr. Birnbaum filed a motion for class certification and, on
August 10, 2001, we filed a motion for summary judgment. Based on the
information available, we are unable to form a conclusion regarding the amount,
materiality or range of potential loss, if any, which might result if the
outcome of this matter were unfavorable; however, we could be forced to incur
material expenses in the litigation, and in the event there is an adverse
outcome, our business could be harmed.
On August 13, 2001, Alan Federbush, an individual resident in the
state of New York, and Mitchell Brink, an individual resident in the state of
Illinois, filed, on behalf of themselves and all similarly situated purchasers
of Sony or Philips digital television recorders and the TiVo Service, a class
action complaint against us in the Superior Court of the State of California,
Santa Clara County, alleging violation of California's Consumers' Legal Remedies
Act, California's Unfair Practices Act, and fraudulent concealment. The
complaint states that Mr. Federbush and Mr. Brink each experienced problems with
the modem contained in the digital television recorders. The complaint alleges,
among other things, that we knew or had reason to know of these malfunctions and
therefore misrepresented or failed to disclose material information about the
digital television recorders to consumers. The complaint seeks an award of
actual damages, as well as unspecified punitive damages, interest, attorneys'
fees and other costs. The complaint additionally seeks broad equitable relief,
34
requesting that we be enjoined from continuing the practices described in the
complaint and engaging in false and misleading advertising regarding the digital
television recorders. Under the applicable rules, we have not been required to
answer the complaint. In addition, discovery, through which we would seek to
investigate the plaintiff's claims, has not commenced. Based on the information
available, we are unable to form a conclusion regarding the amount, materiality
or range of potential loss, if any, which might result if the outcome of this
matter were unfavorable; however, we could be forced to incur material expenses
in the litigation, and in the event there is an adverse outcome, our business
could be harmed.
We expect to experience volatility in our stock price.
The market price of our common stock is highly volatile. Since our
initial public offering in September 1999 through September 10, 2001, our common
stock has closed between $71.50 per share and $4.00 per share, closing at $4.30
on September 10, 2001. The market price of our common stock may be subject to
significant fluctuations in response to, among other things, the factors
discussed in this section and the following factors:
. Changes in estimates of our financial performance or changes
in recommendations by securities analysts;
. Our failure to meet the expectations of securities analysts
or investors;
. Release of new or enhanced products or introduction of new
marketing initiatives by us or our competitors;
. Announcements by us or our competitors of the creation,
developments under or termination of significant strategic
partnerships, joint ventures, significant contracts or
acquisitions;
. Fluctuations in the market prices generally for
technology-related stocks;
. Fluctuations in general economic conditions;
. Fluctuations in interest rates;
. Market conditions affecting the television and home
entertainment industry;
. Fluctuations in operating results; and
. Additions or departures of key personnel.
The stock market has from time to time experienced extreme price and
volume fluctuations, which have particularly affected the market prices for
emerging companies, and which have often been unrelated to their operating
performance. These broad market fluctuations may adversely affect the market
price of our common stock.
Our Certificate of Incorporation, Bylaws, Rights Agreement and Delaware law
could discourage a third party from acquiring us and consequently decrease the
market value of our common stock.
We may become the subject of an unsolicited attempted takeover of our
company. Although an unsolicited takeover could be in the best interests of our
stockholders, certain provisions of Delaware law, our organizational documents
and our Rights Agreement could be impediments to such a takeover.
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, the statute prohibits a
publicly held Delaware corporation from engaging in a business combination with
an interested stockholder for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. Our Amended and
Restated Certificate of Incorporation and Bylaws also require that any action
required or permitted to be taken by our stockholders must be effected
35
at a duly called annual or special meeting of the stockholders and may not be
effected by a consent in writing. In addition, special meetings of our
stockholders may be called only by our board of directors, the chairman of the
board or the chief executive officer. Our Amended and Restated Certificate of
Incorporation and Bylaws also provide that directors may be removed only for
cause by a vote of a majority of the stockholders and that vacancies on the
board of directors created either by resignation, death, disqualification,
removal or by an increase in the size of the board of directors may be filled by
a majority of the directors in office, although less than a quorum. Our Amended
and Restated Certificate of Incorporation also provides for a classified board
of directors and specifies that the authorized number of directors may be
changed only by resolution of the board of directors.
On January 9, 2001, our board of directors adopted a Rights Agreement. Each
share of our common stock has attached to it a right to purchase one
one-hundredth of a share of our Series B Junior Participating Preferred Stock at
a price of $60 per one one-hundredth of a preferred share in the event that the
rights become exercisable. The rights become exercisable upon the earlier to
occur of (i) ten days following a public announcement that a person or group of
affiliated or associated persons has acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of our common stock, subject to limited
exceptions, or (ii) ten business days (or such later date as may be determined
by action of our board of directors prior to such time as any person or group of
affiliated persons becomes an acquiring person as described in the preceding
clause) following the commencement or announcement of an intention to make a
tender offer or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of 15% or more of our common stock,
subject to limited exceptions.
These provisions of Delaware law, our Amended and Restated Certificate of
Incorporation and Bylaws and our Rights Agreement could make it more difficult
for us to be acquired by another company, even if our acquisition is in the best
interests of our stockholders. Any delay or prevention of a change of control or
change in management could cause the market price of our common stock to
decline.
The nature of some of our strategic relationships may restrict our ability
to operate freely in the future.
From time to time, we may engage in discussions with other parties
concerning strategic relationships, which may include equity investments by such
parties in our company. We currently have such relationships with a number of
our strategic partners, including AOL, DIRECTV, Sony and Philips. While we
believe that such relationships have enhanced our ability to finance and develop
our business model, the terms and conditions of such relationships may place
some restrictions on our freedom to operate in the future.
Certain provisions of the notes issued in the private placement could cause
a reduction in the conversion price on the notes and result in dilution to the
existing holders of our common stock.
The conversion price on the notes issued in the private placement will be
reduced:
. on the date that is two days after the SEC declares effective our
registration statement covering the resale of the notes, warrants and underlying
common stock, if the average closing price of our common stock for the ten
trading days preceding that date is less than the conversion price then in
effect;
. on August 23, 2002, if the average closing price of our common stock for
the ten trading days preceding that date is less than the conversion price then
in effect; and
. in the event that we issue common stock or common stock equivalents at
an issuance price per share (or, with respect to common stock equivalents, with
a conversion price or exercise price per share) that is lower than the
conversion price then in effect immediately prior to the issuance.
If the conversion price on the notes is reduced as a result of these
adjustments, holders of the notes will receive a greater number of shares of our
common stock in connection with the conversion of their notes, thereby resulting
in dilution to the existing holders of our common stock.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
36
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 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.
PART II : Other Information
Item 1. Legal Proceedings
On June 12, 2001, a securities class action lawsuit was filed in the
United States District Court for the Southern District of New York on behalf of
all persons who acquired our stock between September 30, 1999 and December 6,
2000. TiVo, certain of our executive officers, and certain underwriters involved
in our initial public offering are named as defendants in the complaint. Six
other complaints that are virtually identical were filed in the same court in
June through August 2001. These complaints allege that certain of the
underwriters of our initial public offering violated the federal securities laws
by failing to disclose that they had solicited and received undisclosed
commissions from, and entered into undisclosed arrangements with, certain
investors who purchased restricted stock in our initial public offering, and had
entered into undisclosed arrangements with certain investors whereby the
underwriters allocated shares in our initial public offering to those investors
in exchange for their agreement to purchase our shares in the after-market at
pre-determined prices. The complaints also allege that the defendants violated
the federal securities laws by issuing a registration statement in connection
with our initial public offering that contained material misstatements and/or
omissions because it did not disclose that these allegedly undisclosed
arrangements had occurred. The complaints seek damages on behalf of all those
who purchased or otherwise acquired our securities during the period covered by
the complaint. The deadline for defendants to respond to the complaints has not
yet expired. We believe we have meritorious defenses and intend to defend this
action vigorously. However, we could be forced to incur material expenses in the
litigation, and in the event there is an adverse outcome, our business could be
harmed.
Ezra Birnbaum. On March 15, 2001, Ezra Birnbaum, an individual
resident in the state of New York, filed, on behalf of himself and all similarly
situated purchasers of the TiVo Service and the personal video recorder, a class
action complaint against us in the Supreme Court of the State of New York, Kings
County, alleging violation of New York's consumer protection act, breach of
implied warranties of merchantability and fitness under the Uniform Commercial
Code, breach of contract and fraud. The complaint states that Mr. Birnbaum
experienced continued problems with the system he had purchased, specifically
stating that the screen image froze and preprogrammed channels were lost. He
alleges, among other things, that we knew or had reason to know of these
malfunctions and had therefore misrepresented or failed to disclose material
information regarding our product to consumers. The complaint seeks repayment of
the amount spent to purchase our product to each member of the class of
purchasers, plus interest from the date of purchase, as well as unspecified
punitive damages, attorneys' and expert witness fees and other costs. The
complaint additionally seeks broad equitable relief, requesting that we be
enjoined from continuing the practices described in the complaint. On May 3,
2001, we answered the complaint. After an initial exchange of discovery
requests and answers between the parties, on August 2, 2001, Mr. Birnbaum filed
a motion for class certification and, on August 10, 2001, we filed a motion for
summary judgment. Based on the information available, we are unable to form a
conclusion regarding the amount, materiality or range of potential loss, if any,
which might result if the outcome of this matter were unfavorable; however, we
could be forced to incur material expenses in the litigation, and in the event
there is an adverse outcome, our business could be harmed.
Alan Federbush and Mitchell Brink. On August 13, 2001, Alan Federbush,
an individual resident in the state of New York, and Mitchell Brink, an
individual resident in the state of Illinois, filed, on behalf of themselves and
all similarly
37
situated purchasers of Sony or Philips digital television recorders and the TiVo
Service, a class action complaint against us in the Superior Court of the State
of California, Santa Clara County, alleging violation of California's Consumers'
Legal Remedies Act, California's Unfair Practices Act, and fraudulent
concealment. The complaint states that Mr. Federbush and Mr. Brink each
experienced problems with the modem contained in the digital television
recorders. The complaint alleges, among other things, that we knew or had reason
to know of these malfunctions and therefore misrepresented or failed to disclose
material information about the digital television recorders to consumers. The
complaint seeks an award of actual damages, as well as unspecified punitive
damages, interest, attorneys' fees and other costs. The complaint additionally
seeks broad equitable relief, requesting that we be enjoined from continuing the
practices described in the complaint and engaging in false and misleading
advertising regarding the digital television recorders. Under the applicable
rules, we have not been required to answer the complaint. In addition,
discovery, through which we would seek to investigate the plaintiff's claims,
has not commenced. Based on the information available, we are unable to form a
conclusion regarding the amount, materiality or range of potential loss, if any,
which might result if the outcome of this matter were unfavorable; however, we
could be forced to incur material expenses in the litigation, and in the event
there is an adverse outcome, our business could be harmed.
Item 2. Changes in Securities and Use of Proceeds
None.
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
offices of Latham & Watkins, 135 Commonwealth Drive, Menlo Park, California,
94025, on June 15, 2001. Of the 44,833,643 shares of common stock entitled to
vote at the meeting, 24,420,580 shares were represented at the meeting.
. Proposal 1
The vote for nominated directors James Barton, Michael J. Homer,
Stewart Alsop and David M. Zaslav to hold office until the 2004
Annual Meeting of Stockholders was as follows:
In Favor Withheld
-------- --------
James Barton 24,290,504 130,076
Michael J. Homer 24,349,957 70,623
Stewart Alsop 24,352,349 68,231
David M. Zaslav 24,359,063 61,517
Directors continuing in office are Michael Ramsay, Geoffrey Y. Yang,
Randy Komisar, Larry N. Chapman, Jan P. Oosterveld and John S.
Hendricks.
. Proposal 2
The vote for ratification of Arthur Andersen LLP as the independent
auditors of the Company for its fiscal year ending January 31, 2002
was as follows:
In Favor Abstain
38
Ratification of
Auditors 24,375,464 15,493
Item 5. Other Information
Private Placement of Convertible Debt and Warrants
On August 28, 2001, the Company closed a private placement of $51.8
million of convertible debt with warrants to accredited investors. The private
placement consisted of the following securities:
. $51,750,000 of 7% Convertible Senior Notes due 2006. The notes
---------------------------------------------------
are convertible at any time, unless earlier redeemed pursuant to
their terms, into TiVo common stock at an initial conversion
price of $6.73 per share.
. Warrants to purchase TiVo common stock over the next five years.
---------------------------------------------------------------
These warrants give investors the right to purchase a total of
approximately 2.5 million additional shares at an exercise price
of $7.85 per share and expire in five years.
. Additional Warrants. As part of the private placement, TiVo
-------------------
issued two additional sets of warrants. One set of warrants,
which expire after one year unless earlier terminated, gives
investors the right to purchase a total of approximately 3.8
million additional shares of TiVo common stock at a cash price of
$6.73 per share. If exercised in full, these one-year warrants
would generate approximately $25.9 million in additional cash
proceeds for TiVo over the next year. The other set of warrants,
which expire after five years unless earlier terminated, gives
investors the right to purchase a total of approximately 1.3
million additional shares of TiVo common stock at a price of
$7.85 per share. These five-year terminable warrants may only be
exercised if the one-year warrants have been exercised.
TiVo received cash proceeds of $43.7 million and non-cash proceeds of
$8.1 million in the form of advertising and promotional services from Discovery
and NBC. TiVo anticipates its issuance cost to be approximately $2.9 million,
resulting in net proceeds of approximately $40.8 million. Additionally, as part
of the agreement for convertible debt, TiVo entered into a non-cancelable
commitment to pay $5.0 million on or before October 1, 2001, to NBC for
advertising that will run during the period beginning October 1, 2001 and ending
December 31, 2001 (see Note 5). The Company intends to use the net proceeds from
the sales of these notes with warrants for marketing and promotion, customer
service and general corporate purposes.
Board Approval of New Stock Option Agreement
On August 8, 2001, our board of directors approved a new form of stock
option agreement for future grants subsequent to August 8, 2001. The new
agreement provides that grants be exercised according to the vesting schedule
and not be exercised prior to vesting. This change does not affect options
granted prior to August 8, 2001.
Item 6. Exhibits, Financial Statement Schedules,
and Reports On Form 8-K
Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ -----------
39
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.2 of the registrant's
Quarterly Report on Form 10-Q filed on November 14, 2000).
3.2 Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.4 of the registrant's Quarterly Report on Form 10-Q
filed on November 15, 1999).
4.1 Form of 7% Convertible Senior Note (filed herewith).
4.2 Form of Five-Year Warrant (filed herewith).
4.3 Form of One-Year Warrant (filed herewith).
4.4 Form of Five-Year Terminable Warrant (filed herewith).
5+ Warrant and Registration Rights Agreement, dated as of October
6, 2000, by and between DIRECTV, Inc. (incorporated by
reference to Exhibit 4.1 of the registrant's Annual Report on
Form 10-K filed on April 2, 2001).
6 Stockholders and Registration Rights Agreement, dated as of
June 9, 2000, between TiVo and America Online, Inc.
(incorporated by reference to Exhibit 4.4 of the registrant's
Quarterly Report on Form 10-Q filed on November 14, 2000).
7 Ninth Amended and Restated Investor Rights Agreement by and
among TiVo and certain investors, dated as of August 6, 1999
(incorporated by reference to Exhibit 4.3 of the registrant's
Registration Statement on Form S-1 (SEC File No. 333-83515)).
8 Certificate of Designations of the Series B Junior
Participating Preferred Stock of TiVo (incorporated by
reference to Exhibit 4.1 of the registrant's Current Report on
Form 8-K/A filed on January 19, 2001).
9 Certificate of Correction to the Certificate of Designations
of the Series B Junior Participating Preferred Stock of TiVo
(incorporated by reference to Exhibit 4.2 of the Registrant's
Current Report on Form 8-K/A filed on January 19, 2001).
10.1 Rights Agreement, dated as of January 16, 2001, between TiVo
and Wells Fargo Shareowner Services, as Rights Agent
(incorporated by reference to Exhibit 10.1 of the registrant's
Current Report on Form 8-K/A filed on January 19, 2001).
10.2 First Amendment to Rights Agreement, dated as of February 20,
2001, between TiVo Inc. and Wells Fargo Shareowner Services,
as Rights Agent (incorporated by reference to Exhibit 10. of
the registrant's Current Report on Form 8-K filed on February
28, 2001).
10.3 Form of Indemnification Agreement between TiVo and its
officers and directors (incorporated by reference to Exhibit
10.1 of the registrant's Registration Statement on Form S-1
(SEC File No. 333-83515)).
10.4 TiVo's 1999 Equity Incentive Plan and related documents
(incorporated by reference to Exhibit 10.2 of the registrant's
Registration Statement on Form S-1 (SEC File No. 333-83515)).
10.5 TiVo's Amended and Restated 1997 Equity Incentive Plan and
related documents (incorporated by reference to Exhibit 10.3
of the registrant's Registration Statement on Form S-1 (SEC
File No. 333-83515)).
10.6 TiVo's 1999 Employee Stock Purchase Plan and related documents
(incorporated by reference to Exhibit 10.4 of the registrant's
Registration Statement on Form S-1 (SEC File No. 333-83515)).
10.7 TiVo's 1999 Non-Employee Directors' Stock Option Plan and
related documents (incorporated by reference to Exhibit 10.5
of the registrant's Annual Report on Form 10-K filed on March
30, 2000).
10.8+ Hard Disk Drive Supply Agreement between Quantum Corporation
and TiVo, dated November 6, 1998 (incorporated by by reference
to Exhibit 10.6 of the registrant's Registration Statement on
Form S-1 (SEC File No. 333-83515)).
10.9 First Amendment to Hard Disk Supply Agreement between Quantum
and TiVo, dated June 25, 1999 (incorporated by reference to
Exhibit 10.20 of the registrant's Registration Statement on
Form S-1 (SEC File No. 333-83515)).
40
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.10+ Warrant Purchase and Equity Rights Agreement between Quantum
Corporation and TiVo, dated November 6, 1998 and related
documents (incorporated by reference to Exhibit 10.16 of the
registrant's Registration Statement on Form S-1 (SEC File No.
333-83515)).
10.11+ Master Agreement between Philips Business Electronics B.V. and
TiVo, dated March 31, 1999 (incorporated by reference to
Exhibit 10.7 of the registrant's Registration Statement on
Form S-1 (SEC File No. 333-83515)).
10.12+ Marketing Agreement between DIRECTV, Inc. and TiVo, dated
April 13, 1999 (incorporated by reference to Exhibit 10.8 of
the registrant's Registration Statement on Form S-1 (SEC File
No. 333-83515)).
10.13+ Agreement between NBC Multimedia, Inc. and TiVo, dated April
16, 1999 (incorporated by reference to Exhibit 10.9 of the
registrant's Registration Statement on Form S-1 (SEC File No.
333-83515)).
10.14 Sublease Agreement between Verity, Inc. and TiVo, dated
February 23, 1998 (incorporated by reference to Exhibit 10.10
of the registrant's Registration Statement on Form S-1 (SEC
File No. 333-83515)).
10.15 Amendment to Sublease Agreement between Verity, Inc. and TiVo,
dated November 1998 (incorporated by reference to Exhibit
10.11 of the registrant's Registration Statement on Form S-1
(SEC File No. 333-83515)).
10.16 Second Amendment to Sublease Agreement between Verity, Inc.
and TiVo, dated March 1999 (incorporated by reference to
Exhibit 10.12 of the registrant's Registration Statement on
Form S-1 (SEC File No. 333-83515)).
10.17 Consent of Landlord to Sublease between Verity, Inc. and TiVo,
dated February 23, 1998 (incorporated by reference to Exhibit
10.13 of the registrant's Registration Statement on Form S-1
(SEC File No. 333-83515)).
10.18 Master Lease Agreement between Comdisco, Inc. and TiVo, dated
February 12, 1999 (incorporated by reference to Exhibit 10.15
of the registrant's Registration Statement on Form S-1 (SEC
File No. 333-83515)).
10.19 Warrant to Purchase Shares of Series A Preferred Stock issued
to Randy Komisar, dated March 18, 1998 (incorporated by
reference to Exhibit 10.17 of the registrant's Registration
Statement on Form S-1 (SEC File No. 333-83515)).
10.20 Warrant Agreement between Comdisco, Inc. and TiVo, dated
February 12, 1999 (incorporated by reference to Exhibit 10.18
of the registrant's Registration Statement on Form S-1 (SEC
File No. 333-83515)).
10.21 Secured Convertible Debenture Purchase Agreement between TiVo
and certain of its investors, dated April 8, 1999, and related
documents (incorporated by reference to Exhibit 10.19 of the
registrant's Registration Statement on Form S-1 (SEC File No.
333-83515)).
10.22 TiVo's 401(k) Plan, effective December 1, 1997 (incorporated
by reference to Exhibit 10.21 of the registrant's Registration
Statement on Form S-1 (SEC File No. 333-83515)).
10.23+ Tribune Media Services Television Listing Agreement between
Tribune Media Services and TiVo, dated June 1, 1998
(incorporated by reference to Exhibit 10.22 of the
registrant's Registration Statement on Form S-1 (SEC File No.
333-83515)).
10.24+ Amendment to the Data License Agreement between Teleworld
Inc., and Tribune Media Services, Inc. between Tribune Media
Services and TiVo, dated November 10, 1998 (incorporated by
reference to Exhibit 10.23 of the registrant's Registration
Statement on Form S-1 (SEC File No. 333-83515)).
10.25 Lease Agreement between WIX/NSJ Real Estate Limited
Partnership and TiVo, dated October 6, 1999 (incorporated by
reference to Exhibit 10.24 of the Quarterly Report on
41
EXHIBIT
NUMBER DESCRIPTION
------ -----------
Form 10-Q filed on November 15, 1999).
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 Exhibit 99.5 of the
registrant's Registration Statement on Form S-1 (SEC File No.
333-83515)).
____________
+ Confidential treatment granted as to portions of this exhibit.
REPORTS ON FORM 8-K
The registrant filed the following reports on Form 8-K during the
quarter ended July 31, 2001:
. Current Report on Form 8-K on July 24, 2001, regarding the agreement of AOL
Time Warner, Inc. to waive its repurchase right at July 31, 2001, and
instead measure such minimum capital requirement and have such repurchase
right as of August 31, 2001.
Trademark Acknowledgments
TiVo is a registered trademark of TiVo Inc.
"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 the registrant. All other
trademarks or trade names appearing in this report are the property of their
respective owners.
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.
42
TIVO INC.
Date: September 14, 2001 By: /s/ Michael Ramsay
----------------------------------
Michael Ramsay
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
Date: September 14, 2001 By: /s/ David H. Courtney
----------------------------------
David H. Courtney
Chief Financial Officer and Sr.
Vice President of Finance and
Administration
(Principal Financial and
Accounting Officer)
43