UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 September 30, 1999.
____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from _________ to __________
Commission File Number: 000-27141
TIVO INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0463167
--------------------------------------------- --------------------------------
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
894 Ross Drive, Suite 100; Sunnyvale, CA 94089
--------------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
(408) 747-5080
--------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
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 37,718,834 as of November 8, 1999.
TIVO INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Balance Sheets 3
Statements of Operations 4
Statements of Stockholders' Equity 5
Statements of Cash Flows 7
Notes to Financial Statements 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT
MARKET RISK 29
PART II. OTHER INFORMATION 30
Item 1. LEGAL PROCEEDINGS 30
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 30
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 31
ITEM 5. OTHER INFORMATION 32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 33
SIGNATURES 35
EXHIBIT INDEX 36
2
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TIVO INC.
(a development-stage company)
BALANCE SHEETS
Pro forma
December 31, September 30, September 30,
1998 1999 1999
------------ ------------- -------------
ASSETS (unaudited) (unaudited)
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 2,248,000 $ 59,960,000 $ 59,960,000
Short-term investments.......................................... 164,000 8,240,000 8,240,000
Accounts receivable, net of allowance for doubtful accounts of
$143,000 as of September 30, 1999.............................. -- 8,844,000 8,844,000
Receivable from underwriters.................................... -- -- 91,763,000
Inventories..................................................... 120,000 1,066,000 1,066,000
Prepaid expenses and other...................................... 219,000 2,017,000 767,000
------------ ------------ -------------
Total current assets.......................................... 2,751,000 80,127,000 170,640,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $170,000, and $553,000 as of December 31, 1998,
and September 30, 1999, respectively.......................... 792,000 2,255,000 2,255,000
------------ ------------ -------------
Total assets.................................................... $ 3,543,000 $ 82,382,000 $ 172,895,000
============ ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Bank overdraft.................................................. $ 442,000 $ -- $ --
Accounts payable................................................ 305,000 4,685,000 4,685,000
Accrued liabilities............................................. 675,000 8,947,000 8,947,000
Deferred revenue................................................ -- 286,000 286,000
Current portion of obligations under capital lease.............. -- 347,000 347,000
------------ ------------ -------------
Total current liabilities..................................... 1,422,000 14,265,000 14,265,000
Long-term portion of obligations under capital lease............ -- 670,000 670,000
------------ ------------ -------------
Total liabilities............................................... 1,422,000 14,935,000 14,935,000
------------ ------------ -------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, par value $0.001:
Authorized shares at December 31, 1998,
September 30, 1999 (unaudited) and pro forma September 30,
1999 (unaudited), are 13,000,000, 26,538,789 and 26,538,789,
respectively.
Issued and outstanding shares at December 31, 1998,
September 30, 1999 (unaudited) and pro forma September 30,
1999 (unaudited) are 11,174,427, 21,819,444 and 21,819,444,
respectively............................................... $ 12,242,000 $102,814,000 $ 102,814,000
Common stock, par value $0.001:
Authorized shares at December 31, 1998,
September 30, 1999 (unaudited) and pro forma
September 30, 1999 (unaudited) are 25,500,000, 54,000,000 and
54,000,000, respectively.
Issued and outstanding shares at December 31, 1998,
September 30, 1999 (unaudited) and pro forma September 30,
1999 (unaudited), are 5,216,937, 8,489,920 and 14,656,795,
respectively............................................... 5,000 8,000 14,000
Additional paid-in capital...................................... 190,000 39,236,000 129,743,000
Deferred compensation........................................... -- (6,061,000) (6,061,000)
Prepaid marketing expenses...................................... -- (23,740,000) (23,740,000)
Note receivable................................................. -- (2,822,000) (2,822,000)
Losses accumulated during development stage..................... (10,316,000) (41,988,000) (41,988,000)
------------ ------------ -------------
Total stockholders' equity.................................... 2,121,000 67,447,000 157,960,000
------------ ------------ -------------
Total liabilities and stockholders' equity.................... $ 3,543,000 $ 82,382,000 $ 172,895,000
============ ============ =============
The accompanying notes are an integral part of these statements.
3
TIVO INC.
(a development-stage company)
STATEMENTS OF OPERATIONS
Period from
Three Months Ended Nine Months Ended August 4, 1997
------------------------------------ ------------------------------- (Inception), to
September 30, September 30, September 30,
1998 1999 1998 1999 1999
---------------- --------------- -------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
Subscription revenues................. $ -- $ 33,000 $ -- $ 41,000 $ 41,000
Costs and expenses:
Cost of services..................... -- 611,000 -- 1,769,000 1,780,000
Research and development............. 1,659,000 1,977,000 3,468,000 4,975,000 10,946,000
Sales and marketing.................. 354,000 5,150,000 710,000 8,940,000 10,239,000
Sales and marketing--related parties. -- 4,946,000 -- 5,327,000 5,328,000
General and administrative........... 706,000 2,418,000 1,609,000 5,491,000 8,629,000
Stock-based compensation............. -- 501,000 -- 688,000 688,000
Other operating expense, net......... -- 4,808,000 -- 4,999,000 4,997,000
---------------- --------------- -------------- ------------- -------------
Loss from operations................ (2,719,000) (20,378,000) (5,787,000) (32,148,000) (42,566,000)
Interest income....................... 46,000 614,000 81,000 892,000 1,056,000
Interest expense and other............ (7,000) (281,000) (20,000) (416,000) (478,000)
---------------- --------------- -------------- ------------- -------------
Net loss............................ $ (2,680,000) $ (20,045,000) $ (5,726,000) $ (31,672,000) $ (41,988,000)
================ =============== ============== ============= =============
Net loss per share
Basic and diluted.................... $ (0.89) $ (3.44) $ (1.94) $ (6.53) $ (11.60)
================ =============== ============== ============= =============
Weighted average shares.............. 2,995,821 5,833,597 2,954,114 4,848,748 3,619,179
================ =============== ============== ============= =============
Pro forma net loss per share:
Basic and diluted................... $ (3.40) $ (6.50) $ (11.58)
=============== ============= =============
Pro forma weighted average shares.... 5,902,118 4,871,588 3,627,085
=============== ============= =============
The accompanying notes are an integral part of these statements.
4
TIVO INC.
(a development-stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible
Preferred Stock Common stock Additional
------------------------ ---------------------- Paid-In Deferred
Shares Amount Shares Amount Capital Compensation
---------- ---------- --------- ---------- ---------- ------------
BALANCE, AUGUST 4, 1997.......................... -- $ -- -- $ -- $ -- $ --
Issuance of common stock for cash............... -- -- 2,916,664 3,000 7,000 --
Issuance of Series A preferred stock at $0.60
per share for cash............................. 5,000,000 2,990,000 -- -- -- --
Net loss........................................ -- -- -- -- -- --
---------- ----------- --------- ---------- ---------- ------------
BALANCE, DECEMBER 31, 1997....................... 5,000,000 2,990,000 2,916,664 3,000 7,000 --
Issuance of Series B preferred stock at $1.26
per share for cash............................. 3,660,914 4,609,000 -- -- -- --
Issuance of Series C preferred stock at $1.85
per share for cash............................. 2,500,000 4,618,000 -- -- -- --
Exercise of stock options for common stock...... -- -- 2,276,458 2,000 130,000 --
Common stock exchanged for services............. -- -- 198,586 -- 60,000 --
Series C preferred stock exchanged for services. 13,513 25,000 -- -- -- --
Common stock repurchases........................ -- -- (174,771) -- (7,000) --
Net loss........................................ -- -- -- -- -- --
---------- ----------- --------- ---------- ---------- ------------
BALANCE, DECEMBER 31, 1998....................... 11,174,427 12,242,000 5,216,937 5,000 190,000 --
Issuance of Series D preferred stock at $3.68
per share for cash............................. 1,358,695 4,973,000 -- -- -- --
Issuance of Series E preferred stock at $7.40
per share for cash............................. 270,270 1,982,000 -- -- -- --
Issuance of Series F preferred stock at $7.40
per share for cash............................. 405,405 2,960,000 -- -- -- --
Issuance of Series G preferred stock at $7.40
per share for cash............................. 1,013,513 7,431,000 -- -- -- --
Issuance of Series H preferred stock at $7.40
per share for cash............................. 1,351,351 9,992,000 -- -- -- --
Issuance of Series I preferred stock at $10.41
per share for cash............................. 3,121,994 31,494,000 -- -- -- --
Issuance of Series J preferred stock at $10.41
per share for cash............................. 3,123,789 31,740,000 -- -- -- --
Exercise of stock options for common stock...... -- -- 378,970 -- 854,000 --
Common stock exchanged for services............. -- -- 137,983 -- 337,000 --
Losses
Accumulated
Prepaid During The
Marketing Note Development
Expense Receivabl Stage Total
------------ ---------- ------------ -----------
BALANCE, AUGUST 4, 1997.......................... $ -- $ -- $ -- $ --
Issuance of common stock for cash............... -- -- -- 10,000
Issuance of Series A preferred stock at $0.60
per share for cash............................. -- -- -- 2,990,000
Net loss........................................ -- -- (595,000) (595,000)
------------ ---------- ------------ -----------
BALANCE, DECEMBER 31, 1997....................... -- -- (595,000) 2,405,000
Issuance of Series B preferred stock at $1.26
per share for cash............................. -- -- -- 4,609,000
Issuance of Series C preferred stock at $1.85
per share for cash............................. -- -- -- 4,618,000
Exercise of stock options for common stock...... -- -- -- 132,000
Common stock exchanged for services............. -- -- -- 60,000
Series C preferred stock exchanged for services. -- -- -- 25,000
Common stock repurchases........................ -- -- -- (7,000)
Net loss........................................ -- -- (9,721,000) (9,721,000)
------------ ---------- ------------ -----------
BALANCE, DECEMBER 31, 1998....................... -- -- (10,316,000) 2,121,000
Issuance of Series D preferred stock at $3.68
per share for cash............................. -- -- -- 4,973,000
Issuance of Series E preferred stock at $7.40
per share for cash............................. -- -- -- 1,982,000
Issuance of Series F preferred stock at $7.40
per share for cash............................. -- -- -- 2,960,000
Issuance of Series G preferred stock at $7.40
per share for cash............................. -- -- -- 7,431,000
Issuance of Series H preferred stock at $7.40
per share for cash............................. -- -- -- 9,992,000
Issuance of Series I preferred stock at $10.41
per share for cash............................. -- -- -- 31,494,000
Issuance of Series J preferred stock at $10.41
per share for cash............................. -- -- -- 31,740,000
Exercise of stock options for common stock...... -- -- -- 854,000
Common stock exchanged for services............. -- -- -- 337,000
The accompanying notes are an integral part of these statements.
5
Convertible
Preferred Stock Common stock Additional
------------------------- ------------------------ Paid-In Deferred
Shares Amount Shares Amount Capital Compensation
----------- ------------ ----------- ---------- ------------ -------------
Issuance of common stock warrants for services. -- -- -- -- 295,000 --
Issuance of preferred stock warrants for
services....................................... -- -- -- -- 11,126,000 --
Amortization of prepaid marketing expenses...... -- -- -- -- -- --
Amortization of warrants........................ -- -- -- -- 329,000 --
Recognition of deferred compensation............ -- -- -- -- 6,749,000 (6,749,000)
Stock-based compensation........................ -- -- -- -- -- 688,000
Common stock repurchases........................ -- -- (225,166) -- (18,000) --
Issuance of common stock for marketing services. -- -- 1,852,329 2,000 12,038,000 --
Issuance of common stock for marketing services
and note receivable............................ -- -- 1,128,867 1,000 7,336,000 --
Net loss........................................ -- -- -- -- -- --
----------- ------------ ----------- ---------- ------------ -----------
BALANCE, SEPTEMBER 30, 1999
(unaudited).................................... 21,819,444 $102,814,000 8,489,920 $ 8,000 $ 39,236,000 $(6,061,000)
=========== ============ =========== ========== ============ ============
Pro forma:
Issuance of Common stock at $16.00 in initial
public offering for cash, net of offering
costs.......................................... -- -- 6,166,875 6,000 90,507,000 --
BALANCE, SEPTEMBER 30, 1999
Pro forma (unaudited).......................... 21,819,444 $102,814,000 14,656,795 $ 14,000 $129,743,000 $(6,061,000)
=========== ============ =========== ========== ============ ============
Losses
Accumulated
Prepaid During the
Marketing Note Development
Express Receivable Stage Total
------------ ----------- ------------ ------------
Issuance of common stock warrants for services. -- -- -- 295,000
Issuance of preferred stock warrants for
services....................................... (11,096,000) -- -- 30,000
Amortization of prepaid marketing expenses...... 3,911,000 -- -- 3,911,000
Amortization of warrants........................ -- -- -- 329,000
Recognition of deferred compensation............ -- -- -- --
Stock-based compensation........................ -- -- -- 688,000
Common stock repurchases........................ -- -- -- (18,000)
Issuance of common stock for marketing services. (12,040,000) -- -- --
Issuance of common stock for marketing services
and note receivable............................ (4,515,000) (2,822,000) -- --
Net loss........................................ -- -- (31,672,000) (31,672,000)
------------ ----------- ------------ ------------
BALANCE, SEPTEMBER 30, 1999
(unaudited).................................... $(23,740,000) $(2,822,000) $(41,988,000) $ 67,447,000
============ =========== ============ ============
Pro forma:
Issuance of common stock at $16.00 in initial
public offering for cash, net of offering
costs.......................................... -- -- -- 90,513,000
BALANCE, SEPTEMBER 30, 1999
Pro forma (unaudited).......................... $(23,740,000) $(2,822,000) $(41,988,000) $157,960,000
============ =========== ============ ============
The accompanying notes are an integral part of these statements
6
TIVO INC.
(a development-stage company)
STATEMENTS OF CASH FLOWS
For the Nine Months Ended Period from
September 30, August 4, 1997
----------------------------------------------- (Inception), to
Pro forma September 30,
1998 1999 1999 1999
------------- ------------- ------------- ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $ (5,726,000) $ (31,672,000) $ (31,672,000) $ (41,988,000)
Adjustments to reconcile net loss to net cash
used in operating activities: Depreciation and
amortization......................................... 143,000 383,000 383,000 640,000
Stock exchanged for services.......................... -- 337,000 337,000 397,000
Amortization of warrants for services................. -- 285,000 285,000 285,000
Amortization of prepaid marketing expenses............ -- 3,911,000 3,911,000 3,911,000
Stock-based compensation expense...................... -- 688,000 688,000 688,000
Changes in current assets and liabilities:
Receivable from underwriters......................... -- -- (91,763,000) --
Accounts receivable.................................. -- (8,844,000) (8,844,000) (8,844,000)
Inventories.......................................... -- (946,000) (946,000) (1,066,000)
Prepaid expenses and other........................... (108,000) (1,429,000) (179,000) (1,648,000)
Accounts payable..................................... 463,000 4,380,000 4,380,000 (4,685,000)
Deferred revenue..................................... -- 286,000 286,000 286,000
Accrued liabilities.................................. 133,000 8,272,000 8,272,000 8,947,000
------------ ------------- ------------- --------------
Net cash used in operating activities................ (5,095,000) (24,349,000) (114,862,000) (33,707,000)
------------ ------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment, net............ (344,000) (1,846,000) (1,846,000) (2,895,000)
Purchase of short-term investments.................... (1,649,000) (8,076,000) (8,076,000) (8,240,000)
------------ ------------- ------------- --------------
Net cash used in investing activities............... (1,993,000) (9,922,000) (9,922,000) (11,135,000)
------------ ------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred
stock, net of issuance costs......................... 4,609,000 90,572,000 90,572,000 102,814,000
Proceeds from issuance of common stock through initial
public offering, net of issuance costs............... -- -- 90,513,000 --
Net borrowings under capital lease.................... -- 1,017,000 1,017,000 1,017,000
Borrowings under line of credit....................... -- -- -- 610,000
Repayments under line of credit....................... -- -- -- (610,000)
Proceeds from issuance of common stock and exercise of
stock options........................................ 120,000 854,000 854,000 996,000
Repurchase of common stock............................ (7,000) (18,000) (18,000) (25,000)
The accompanying notes are an integral part of these statements.
7
For the Nine Months Ended Period from
September 30, August 4, 1997
--------------------------------------------- (Inception), to
Pro forma September 30,
1998 1999 1999 1999
----------- ------------ ------------ ---------------
Increase (decrease) in bank overdraft........... 257,000 (442,000) (442,000) --
----------- ------------ ------------ ---------------
Net cash provided by financing 4,979,000 91,983,000 182,496,000 104,802,000
activities...................................... ----------- ------------ ------------ ---------------
NET INCREASE (DECREASE) IN CASH AND CASH (2,109,000) 57,712,000 57,712,000 59,960,000
EQUIVALENTS..................................... ----------- ------------ ------------ ---------------
CASH AND CASH EQUIVALENTS:
Balance at beginning of period.................. 2,110,000 2,248,000 2,248,000 --
---------- ----------- ----------- ---------------
Balance at end of period........................ $ 1,000 $59,960,000 $59,960,000 $ 59,960,000
========== =========== =========== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................... $ 19,000 $ 24,000 $ 24,000 $ 43,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Stock issued for a note receivable.............. $ -- $ 2,822,000 $ 2,822,000 $ 2,822,000
Equipment acquired under -- $ 1,099,000 $ 1,099,000 $ 1,099,000
capital lease...................................
Deferred stock-based compensation............... -- $ 6,631,000 $ 6,631,000 $ 6,631,000
The accompanying notes are an integral part of these statements.
8
TIVO INC.
(a development-stage company)
NOTES TO FINANCIAL STATEMENTS
(Information with respect to the three months and nine months ended September
30, 1998 and 1999, and the period from August 4, 1997 (Inception) to September
30, 1999, and as of September 30, 1999 is unaudited)
1. NATURE OF OPERATIONS:
TiVo Inc. (the Company or TiVo) was incorporated in August 1997 as a
Delaware corporation with facilities in Sunnyvale, California. 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 any 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. Beginning in the fourth quarter of 1999, the Company is transitioning
the manufacturing and distribution of the personal video recorder and remote
control to Philips Business Electronics B.V. (Philips). Philips began marketing
the TiVo Service and the personal video recorder that enables the TiVo Service
in retail markets in the third quarter of 1999. The Company stopped selling
personal video recorders directly during the fourth quarter of 1999. Prior to
the transition, the personal video recorder and remote control were manufactured
by a contract manufacturer and, since March 1999, were sold by TiVo through its
web site and toll-free telephone number. The Company conducts its operations
through one reportable segment.
The Company is in the early stages of development and insignificant
subscription revenues have been generated to date. No assurance can be given
that a market for the TiVo Service and products that enable the TiVo Service
will develop, or that significant numbers of customers will be willing to pay
for the TiVo Service and products that enable the TiVo Service. Therefore, the
Company is identified as a development-stage company at this time. However, upon
the transfer of manufacturing and distribution responsibility to Philips and a
successful retail launch of the TiVo Service and products that enable the TiVo
Service, which began in the third quarter of 1999, the Company anticipates that
it will no longer be identified as a development-stage company.
The Company continues to be subject to certain risks common to companies in
similar stages of development, including the uncertainties outlined above, as
well as the uncertainty of availability of additional financing; dependence on
third parties for manufacturing and 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.
The unaudited pro forma balance sheet, statements of operations, statements
of stockholders' equity and statement of cash flows as of September 30, 1999
include a receivable from underwriters for the proceeds and the common stock
from the initial public offering. The common stock is shown as if it was
outstanding on the effective date of the offering, September 29, 1999, instead
of the closing date of the offering, October 5, 1999.
Unaudited Interim Financial Statements
The accompanying balance sheet as of September 30, 1999 and the
accompanying statements of operations, stockholders' equity and cash flows for
the three months and nine months ended September 30, 1998 and 1999 included
herein have been prepared by the Company and are unaudited. The information
furnished in the unaudited financial statements referred to above includes all
normal adjustments that are, in the opinion of management, necessary for a fair
presentation of such financial statements. The results of operations for the
nine
9
months ended September 30, 1999, are not necessarily indicative of the results
to be expected for the entire fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and cash equivalents
The Company classifies financial instruments as cash equivalents if the
original maturity of such instruments is three months or less.
Short-term investments
Short-term investments consist of commercial paper investments and
certificates of deposit with original maturities at date of purchase ranging
between three and six 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.
Inventories
Inventories consist of raw materials, primarily hard-disk drives and
enclosures. Inventory is valued at the lower of cost (first-in, first-out) or
market. Included in inventory costs are direct materials, direct labor and
allocated tooling costs. Once the Company transfers manufacturing responsibility
to Philips, during the fourth quarter of 1999, all inventory will be sold to
Philips. Inventories consist of the following:
December 31, September 30,
1998 1999
------------ -------------
Raw materials.......................... $120,000 $1,066,000
------------ -------------
Net Loss Per Common Share
Historical net loss per common 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 all net loss per
share amounts do not include repurchasable common stock issued to DIRECTV and
unvested, repurchasable common stock issued under the employee stock option
plans.
Diluted net loss per common share is calculated by dividing net loss by the
weighted average number of common shares and dilutive common share equivalents
outstanding. Diluted net loss per share does not include the effect of the
antidulutive common share equivalents.
Pro forma net loss per common share is calculated as if the common stock
from the initial public offering was outstanding at the effective date of the
public offering, September 29, 1999.
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
10
the exercise price. Expense associated with stock-based compensation is being
amortized on an accelerated basis over the vesting period of the individual
award, generally four years. The method of amortization is in accordance with
Financial Accounting Standards Board ("FASB") Interpretation No. 28, under which
the value assigned to options vesting in future periods is ratably amortized
beginning upon issuance of the option rather than at the vesting date. No stock
compensation expense was recorded in 1998. The Company has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."
Revenue Recognition
Subscription revenues represent revenues from customer subscriptions to the
TiVo Service. Subscriptions to the TiVo Service are available on a monthly,
annual or lifetime basis. Subscription fees are generally charged to customers'
credit cards and are generally billed in advance on a monthly basis. A lifetime
subscription covers the life of the particular personal video recorder
purchased. Revenues from subscriptions are recognized ratably over the
subscription period. Subscription revenues from lifetime subscriptions are
recognized ratably over a four-year period, the best estimate of the useful life
of the personal video recorder. Deferred revenue relates to subscription fees
collected but for which revenues have not been recognized.
Sales and Marketing--Related Parties
Sales and marketing--related parties consists of cash and noncash charges
related to the Company's agreements with DIRECTV, Inc. (DIRECTV), Philips and
Quantum Corporation (Quantum), all of which hold stock or warrants in the
Company.
Other Operating Expense, Net
Prior to the transition of manufacturing and distribution to Philips in the
fourth quarter of 1999, the Company sold personal video recorders directly to
consumers. The sales of personal video recorders less the cost of the personal
video recorders are classified as other operating expense, net. Other operating
expense, net is considered incidental to the Company's business. Other operating
expense, net is recognized upon shipment of the personal video recorder to the
customer. The Company records a provision for estimated warranty costs and
returns at the time of sale.
3. COMMITMENTS AND CONTINGENCIES:
The Company leases its office space under operating leases that expire on
March 31 and June 30, 2000. As of December 31, 1998, and September 30, 1999,
future minimum rental payments under this lease are $1,327,000 and $590,000,
respectively. Rent expense under operating leases was approximately $177,000,
$266,000, $427,000 and $749,000 for the three months ended September 30, 1998
and 1999, and the nine months ended September 30, 1998 and 1999, respectively.
Rent expense under operating leases was approximately $1,413,000 for the period
from inception to September 30, 1999.
Future minimum lease payments under capitalized equipment leases are
$1,117,000 as of September 30, 1999.
4. SUBSEQUENT EVENTS
Initial Public Offering
The Company's initial public offering (IPO) of 6,166,875 shares of
common stock with net proceeds of $91.8 million was effective on September 29,
1999 and closed on October 5, 1999. At the closing date, the preferred stock was
converted into common stock on a one-for-one basis and the warrants were
exercised. The following
11
table summarizes the common stock outstanding at September 30, 1999 on an actual
basis, on a pro forma basis assuming the common stock from the initial public
offering was outstanding at the effective date of the initial public offering,
September 29, 1999, and on a pro forma basis as if the common stock from the
initial public offering was outstanding, the preferred stock had converted and
the warrants had been exercised at September 29, 1999.
Pro forma including
IPO shares, preferred
stock and warrants
Pro forma including converted to common
Number of shares Actual IPO shares stock as of
outstanding as of September 30, 1999 as of September 30, 1999 September 30, 1999
Common stock 8,489,920 14,656,795 37,591,392
Stock options 4,147,117 4,147,117 4,147,117
----------------- ---------------- ----------------
Total shares 12,637,037 18,803,912 41,738,509
----------------- ---------------- ----------------
Facilities Lease
In October 1999, the Company entered into a new office lease with WIX/NSJ
Real Estate Limited Partnership. The lease begins on March 10, 2000 and has a
seven-year term. Monthly rent is approximately $116,000 with built-in base rent
escalations periodically throughout the lease term. Future minimum lease
payments under this lease are $22.9 million.
12
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. 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.
Results of Operations
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
Subscription revenues. Subscription revenues for the nine months ended
September 30, 1999 was $41,000, compared to zero for the nine months ended
September 30, 1998. This increase is attributable to customer subscriptions to
the TiVo Service, which began in March 1999. As of September 30, 1999, we had
approximately 2,500 subscribers.
Cost of services. Cost of services consists primarily of employee salaries
and expenses related to providing the TiVo Service to subscribers. Cost of
services for the nine months ended September 30, 1999 was $1.8 million compared
to zero for the nine months ended September 30, 1998. This increase was
primarily attributable to the hiring of content programming and service
operation personnel in connection with the retail release of the TiVo Service
and the personal video recorder that enables the TiVo Service.
Research and development expenses. The Company'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 nine months
ended September 30, 1999 were $5.0 million compared to $3.5 million for the nine
months ended September 30, 1998. This increase was primarily attributable to the
hiring of additional engineering personnel and related costs.
Sales and marketing expenses. Sales and marketing expenses consist
primarily of employee salaries and related expenses, development of media
advertising, public relations activities and special promotions, trade shows and
the production of product related items, including collateral and videos. Sales
and marketing expenses for the nine months ended September 30, 1999 were $8.9
million compared to $710,000 for the nine months ended September 30, 1998. This
increase was primarily attributable to an increase in expenditures for trade
shows, public relations and advertising in connection with the retail release of
the TiVo Service and the personal video recorder that enables the TiVo Service.
We expect our marketing expenses to continue to increase significantly in
connection with the retail launch of the TiVo Service and the personal video
recorder that enables the TiVo Service. The retail launch started in the third
quarter of 1999 and will continue into the fourth quarter of 1999.
Sales and marketing--related parties. Sales and marketing--related parties
consist of cash and non-cash charges related to agreements with DIRECTV, Philips
and Quantum, all of which hold stock or warrants in the Company. Sales and
marketing--related parties for the nine months ended September 30, 1999 was $5.3
million compared to zero for the nine months ended September 30, 1998. The
increase is attributable to shipments of personal video recorders and to related
activations of the TiVo Service, which began in March 1999.
General and administrative expenses. General and administrative expenses
consist primarily of employee salaries and related expenses for executive,
administrative, accounting, information systems, customer service personnel,
facility costs, professional fees and recruiting. General and administrative
expenses for the
13
nine months ended September 30, 1999 were $5.5 million compared to $1.6 million
for the nine months ended September 30, 1998. This increase was primarily
attributable to the hiring of additional administrative personnel and related
expenses and the costs of establishing Information Services and Service
Operations departments, which did not exist during the nine months ended
September 30, 1998.
Stock-based compensation. During 1999, we granted stock options with
exercise prices that were less than the estimated fair market value of the
underlying shares of common stock for accounting purposes on the date of grant.
This will result in stock-based compensation expense over the period that these
options vest. The stock-based compensation expense was approximately $688,000
for the nine months ended September 30, 1999.
Other operating expenses, net. Other operating expenses, net consists of
the proceeds from the sale of personal video recorders net of the cost of the
personal video recorders sold. For the nine months ended September 30, 1999,
other operating expenses, net was $5.0 million compared to zero for the nine
months ended September 30, 1998. We transitioned manufacturing and selling
personal video recorders in the fourth quarter of 1999 to Philips. The revenues
and costs resulting from the sale of personal video recorders are considered
incidental to our business and as such have been classified as other operating
expense, net.
Interest income. Interest income resulting from cash and cash equivalents
held in interest bearing accounts and short term investments was $892,000 for
the nine months ended September 30, 1999 compared to $81,000 for the nine months
ended September 30, 1998, as cash balances increased.
Interest expense and other. Interest expense and other was $416,000 for the
nine months ended September 30, 1999. This includes amortization of the value
assigned to the warrants of $392,000 and interest expense of $24,000 resulting
from borrowings under a capital lease agreement. For the nine months ended
September 30, 1998, interest expense and other was $20,000.
Quarterly Results of Operations
The following table represents certain unaudited statement of operations
data for our seven most recent quarters ended September 30, 1999. In
management's opinion, this unaudited information has been prepared on the same
basis as the audited annual financial statements and includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
representation of the unaudited information for the quarters presented. This
information should be read in conjunction with our financial statements,
including the notes thereto, included elsewhere in this prospectus. The results
of operations for any quarter are not necessarily indicative of results that may
be expected for any future period.
14
Three Months Ended
-----------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30,
1998 1998 1998 1998 1999 1999 1999
-------- -------- ------------- ------------ --------- -------- -------------
(unaudited, in thousands)
-----------------------------------------------------------------------------------------
Subscription revenues................ $ -- $ -- $ -- $ -- $ -- $ 8 $ 33
Costs and expenses
Cost of services.................... -- -- -- -- (618) (552) (611)
Research and development............ (793) (1,016) (1,659) (2,146) (1,369) (1,630) (1,977)
Sales and marketing................. (134) (222) (354) (567) (2,056) (1,728) (5,150)
Sales and marketing--related -- -- -- -- -- (382) (4,946)
parties............................
General and administrative.......... (293) (610) (706) (1,337) (1,535) (1,489) (2,418)
Stock-based compensation............ -- -- -- -- -- (187) (501)
Other operating expense, net........ -- -- -- -- 12 (201) (4,808)
------- ------- ------- ------- ------- ------- --------
Loss from operations................ (1,220) (1,848) (2,719) (4,050) (5,566) (6,161) (20,378)
Interest income...................... 18 17 46 55 53 224 614
Interest expense and other........... (2) (11) (7) -- (2) (176) (281)
------- ------- ------- ------- ------- ------- --------
Net loss........................... $(1,204) $(1,842) $(2,680) $(3,995) $(5,515) $(6,113) $(20,045)
======= ======= ======= ======= ======= ======= ========
We expect sales and marketing expenses to continue to increase
substantially in connection with the retail launch of the TiVo Service, which
began in the third quarter of 1999. To launch the TiVo Service in the retail
channel, we initiated an extensive advertising campaign, hired additional sales
and marketing personnel and began a marketing campaign through television,
radio, print and internet-based advertising and direct mail. We committed a
significant amount of human and financial resources to supplement the sales and
marketing efforts of our strategic partners, to participate in trade shows,
produce commercials and infomercials and create other marketing collateral. We
expect to continue to spend increasing amounts on sales and marketing to attract
subscribers and retailers.
The TiVo Service is enabled through a personal video recorder that is sold
in retail channels like other consumer electronic devices. As a result, we
anticipate that our business will be seasonal and we expect to generate a
significant number of our annual new subscribers during the holiday shopping
season. We also expect to generate a portion of future revenues from television
advertising, which tends to be seasonal and cyclical, reflecting overall
economic conditions as well as budgeting and buying patterns.
Liquidity and Capital Resources
From inception through September 30, 1999, we financed our operations and
met our capital expenditure requirements primarily from proceeds of the private
sale of equity securities totaling approximately $102.8 million, excluding the
net proceeds of our initial public offering of $90.5 million. At September 30,
1999, we had $60.0 million of cash and cash equivalents along with $8.2 million
of short-term investments. The expansion of our business will require
significant additional capital to fund operating losses, capital expenditures
and working capital needs.
Net cash used in operating activities was $24.3 million for the nine months
ended September 30, 1999. Net cash used during this period was primarily a
result of the research and development, sales and marketing and general and
administrative costs to support the development of the TiVo Service and the
personal video recorder that enables the TiVo Service. During the nine months
ended September 30, 1999 we began providing the TiVo Service, incurring a net
loss of $31.7 million. Uses of cash from operating activities included an
increase in accounts receivable of $8.8 million, an increase in prepaid expenses
and other of $1.4 million and an increase in inventory of $946,000. This was
offset by sources of cash from operating activities resulting from an increase
in accrued liabilities of $8.3 million, an increase in accounts payable of $4.4
million, and an increase in deferred revenue of $286,000.
Net cash used in investing activities was $9.9 million for the nine months
ended September 30, 1999. Net cash used in investing activities during the nine
months ended September 30, 1999 included $8.1 million for short term investments
and $1.8 million for the acquisition of property and equipment.
Net cash provided by financing activities was $92.0 million for the nine
months ended September 30, 1999. Of this amount, $90.6 million was received from
the issuance of Series D, E, F, G, H, I and J preferred stock to several
investors, including Vulcan Ventures Incorporated, Showtime Networks, Inc.,
DIRECTV, NBC Multimedia, Inc., Philips Corporate External Ventures B.V.,
Advance/Newhouse, CBS Corporation, Comcast Interactive, Cox Communication,
Discovery Communications, Liberty Media Corporation, TV Guide Interactive,
15
The Walt Disney Company (through its wholly owned subsidiary Catalyst
Investments L.L.C.), America Online, Inc. and Sony Corporation of America, Inc.
Additionally, we obtained $1.0 million of financing through a capital lease and
$854,000 from the issuance of common stock for stock options exercised. Cash was
used to offset a bank overdraft of $442,000 during the period.
In December 1997, we established a $750,000 line of credit with a financial
institution, which expired on August 15, 1999. The line was partially utilized
to secure a letter of credit in the amount of $600,000, which expired in July
1999. No amounts were outstanding at September 30, 1999.
We have commitments under facilities operating leases of $590,000 and
obligations under capital leases of $1.0 million as of September 30, 1999. The
obligations under the capital lease relate to equipment leased under a total
available lease line of $2.5 million, which expires in February 2000.
On April 8, 1999, we entered into a secured convertible debenture purchase
agreement with New Enterprise Associates VII, L.P., Institutional Ventures VII,
L.P. and two other stockholders. In connection with the agreement, we issued
warrants. The value assigned to these warrants is being amortized over the six-
month term of the commitment. As of September 30, 1999, we had no outstanding
amounts under this agreement. All of the warrants issued under the terms of this
agreement expired upon the completion of our initial public offering and were
exercised at the completion of our initial public offering.
Our future capital requirements will depend on a variety of factors,
including market acceptance of personal television and the TiVo Service, the
resources we devote to developing, marketing, selling and supporting our
products and other factors. We expect to devote substantial capital resources:
. to subsidize the sale of personal video recorders;
. to hire and expand our engineering, sales and marketing and customer
support organizations;
. for a new facility; and
. for general corporate purposes.
We believe that our cash and cash equivalents, the net proceeds from the
sale of our preferred stock and the net proceeds from the initial public
offering will be sufficient to fund our operations for at least the next 12
months. Despite our expectations, we may need to raise additional capital before
the end of the next 12 months. Beyond one year, we may need to raise additional
funds in order to:
. fund anticipated growth, including significant increases in personnel,
office facilities and computer systems;
. develop new or enhance existing services or products;
. expand into new markets and respond to competitive pressures; or
. acquire or invest in complementary businesses, technologies, services
or products.
In addition, in order to meet long-term liquidity needs, we may need to
raise additional funds, establish a credit facility or seek other financing
arrangements. Additional funding may not be available on favorable terms or at
all. See "Factors That May Affect Future Operating Results--If we are unable to
raise additional capital on acceptable terms, our ability to effectively manage
growth and build a strong brand could be harmed."
Year 2000 Issue
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs would not properly recognize the year format.
This could result in major system failures or miscalculations that could disrupt
our
16
business. We have formulated a year 2000 plan to assess and address any year
2000 issues and have created a year 2000 task force headed by our chief
information officer to implement the plan.
We use an internal calendar in both the personal video recorder and the
TiVo broadcast service center. The personal video recorder uses an internal
calendar for recording shows as well as to dial into the TiVo broadcast service
center for nightly downloads of program guide data and other content. The TiVo
broadcast service center uses a calendar to distribute program guide data and
content.
State of Readiness
The TiVo Service and the personal video recorder that enables the TiVo
Service have been tested for year 2000 compliance and, at this time, there are
no known issues.
We have completed an initial assessment of the criticality of our
suppliers' technology being year 2000 compliant. We are currently testing the
year 2000 compliance of any vendors' and suppliers' interfaces that have a high
impact on our business. Those third-party interfaces with moderate impact on our
business were assessed by reviewing these third parties' web sites or by
requesting a letter from such parties to prove compliance. We do not intend to
conduct further investigation on those third-party technologies that have a low
impact on our business other than reviewing these parties' web sites.
As we have added strategic partners, we have inquired as to the year 2000
compliance of their systems. To date, all critical partners we are working with
have indicated that their systems are, or will be prior to the end of 1999, year
2000 compliant. We have not required any formal paperwork from, or conducted any
tests with, these partners.
We have completed an assessment of our information technology systems,
which includes, but is not limited to, hardware and software required to support
our broadcast service center as well as our internal business systems. We also
assessed our non-information technology systems, which include facility date
sensitive systems. Most information technology systems have been purchased in
the last six months. Year 2000 compliance has always been a major part of the
selection criteria. Our assessment included the following steps:
. identification of categories of hardware and software that need to be
evaluated;
. listing of all hardware and software by category and rated by
criticality;
. determination of any known year 2000 issues;
. adoption of a proof assessment approach based on criticality to our
business;
. creation of a high level plan for assessment and remediation by item;
and
. implementation of the plan.
We completed our year 2000 assessment in September 1999 and plan to
complete interface testing and remediation by November 30, 1999. At this stage,
we are not aware of any year 2000 issues that would have a material effect on
our business.
Costs
As of September 30, 1999, we have incurred costs of approximately $20,000,
and we expect to incur an additional $15,000, in connection with identifying,
evaluating and addressing year 2000 compliance issues. All of the expenses to
date have related to, and are expected to continue to relate to, operating costs
associated with time spent by our employees in the evaluation process and some
charges related to upgrades identified during our vendor communications or
testing.
17
Risks
Our ongoing attention to year 2000 issues may identify material non-
compliance issues with the TiVo Service or the personal video recorder, our
informational technology systems or the systems of our partners or suppliers. We
may not be able to successfully resolve these issues, or it may be costly to do
so. In addition, we cannot assure you that governmental agencies, utility
companies, third-party service providers and others outside of our control will
be year 2000 compliant. The failure by such entities to be year 2000 compliant
could result in a systemic failure beyond our control, such as a prolonged
telecommunications or electrical failure, which could prevent us from delivering
upgrades and regular downloads to the personal video recorders that enable the
TiVo Service or otherwise impact the functionality of the personal video
recorder. Any of these occurrences would have a material adverse effect on our
business.
Contingency Plans
Year 2000 issues that impair the delivery of the TiVo Service will be
addressed via software upgrades to the TiVo broadcast service center and/or the
personal video recorder via the nightly download of data over the telephone
line. Up to 12 days of program guide data can be stored on the personal video
recorder. The program guide data related to the 12th day into the future is
downloaded onto the personal video recorder every night. If a year 2000 issue
prevents this nightly download of program guide data, there would still be up to
12 days of program guide data on the personal video recorder at that point in
time. Each day a download does not arrive, however, there would be one less day
the subscriber could record in the future. After the 12th day following a year
2000 issue that impacts these nightly downloads, the personal video recorder
could only be used in "non-service mode" until a software fix could be
downloaded. In non-service mode, a subscriber could still use the pause, rewind
and fast forward features, but could only record programs by manually
programming the channel and time into the personal video recorder.
If the personal video recorder's downloading process malfunctioned due to a
year 2000 issue, or if software downloads were unable to remedy the problem, the
personal video recorder would have to be returned and repaired either by TiVo or
its manufacturing partners.
To address potential facility-related year 2000 issues on our most critical
systems, we are moving the TiVo broadcast service center into co-location at
UUnet in November 1999. The UUnet co-location is equipped with generators that
can provide several weeks of back-up power.
The results of our assessment and testing were taken into account in
determining the nature and extent of our contingency plans.
Impact of Inflation
We believe that inflation has not had a significant impact on our operating
results.
Recently Issued Accounting Standards
We have adopted SFAS No. 131, "Disclosure About Segments of an Enterprise
and Related Information" in 1998. SFAS No. 131 established standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related disclosure
about products and services, geographic areas, and major customers. The adoption
of SFAS No. 131 required no additional disclosures in our consolidated financial
statements as we operate in a single reportable segment.
18
Factors That May Affect Future Operating Results
In addition to the other information included in this Report, the following
factors should be considered in evaluating our business and future prospects:
We have recognized very limited revenue, have incurred significant net losses
and may never achieve profitability.
We have recognized limited revenues, have incurred significant losses and
have had substantial negative cash flow. From our inception in August 1997 to
September 30, 1999, we had $41,000 of subscription revenues. As of September 30,
1999, we had an accumulated deficit of $42.0 million. We expect to incur
significant operating expenses over the next several years in connection with
the continued development and expansion of our business. As a result, we expect
to continue to incur losses for the foreseeable future. The size of these net
losses depends in part on the growth in our subscriber base and on our expenses.
With increased expenses, we will need to generate significant additional
revenues to achieve profitability. Consequently, we may never achieve
profitability, and even if we do, we may not sustain or increase profitability
on a quarterly or annual basis in the future.
Our limited operating history may make it difficult for us or investors to
evaluate trends and other factors that affect our business.
We were incorporated in August 1997 and have been obtaining subscribers and
selling personal video recorders only since March 31, 1999. Prior to that time,
our operations consisted primarily of research and development efforts. As of
September 30, 1999, we had sold only a limited number of personal video
recorders and obtained a limited number of subscribers to the TiVo Service.
Sales and subscriptions to date have been generated through limited marketing
campaigns, word-of-mouth and our web site. 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 and prospects 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 retail launch 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 successful retail launch of the TiVo Service and
related personal video recorders, which began in the third quarter of 1999 and
will continue through the 1999 holiday season. During this time, we will rely
principally on Philips to manufacture, market, sell and support the personal
video recorder that enables the TiVo Service. We also will rely on the efforts
of DIRECTV to market, sell and support the TiVo Service to DIRECTV subscribers.
The launch 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 retail distribution; and
. coordinate our own sales, marketing and support activities with those
of Philips, DIRECTV and other strategic partners.
19
We or our strategic partners may not achieve any or all of these
objectives. In addition, the launch may be delayed, consumers may perceive the
TiVo Service and related personal video recorder as too expensive or complex and
our marketing campaign may not effectively attract new subscribers. Because of
competitive offerings or changing preferences, consumers may delay or decline
the purchase of the TiVo Service and related personal video recorder. All of
these events would reduce consumer demand and market acceptance, diminish our
brand and impair our ability to attract subscribers to the TiVo Service.
We have agreed to share a substantial portion of the revenue we generate from
subscription fees with some of our strategic partners. We may be unable to
generate enough revenue to cover these obligations.
We have agreed to share a substantial portion of our subscription and other
fees with some of our strategic partners in exchange for manufacturing,
distribution and marketing support and discounts on key components for personal
video recorders. Given how these amounts are calculated, we may be required to
share substantial portions of the subscription and other fees attributable to
the same subscriber with multiple partners. These agreements require us to share
a portion of our subscription fees whether or not we reduce the price of the
TiVo Service. If we reduce our subscription fees in response to competitive or
other market factors, our operating results would be adversely affected. Our
decision to share subscription revenues is based on our expectation 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 with Philips and other third parties 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
an agreement with Philips to manufacture and distribute the personal video
recorders that enable the TiVo Service. We have transitioned manufacturing of
the personal video recorder from the third-party contract manufacturer to
Philips, and Philips assumed manufacturing responsibility in the fourth quarter
of 1999. However, we have no minimum volume commitments from Philips or any
other manufacturer. The transition to using Philips as sole manufacturer, and
its ability 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,
Philips and any other manufacturer will require substantial lead times to
manufacture anticipated quantities of the personal video recorders that enable
the TiVo Service. Philips may
20
have very little time to remedy unforeseen delays or problems that may arise.
Such delays and other problems could impair our retail launch and brand image
and make it difficult for us to attract subscribers. In addition, the loss of
Philips would require us to identify and contract with alternative sources of
manufacturing, which we may be unable to do and which could prove time-consuming
and expensive. Although we expect to contract with additional consumer
electronics companies for the manufacture of personal video recorders in the
future, we may be unable to establish additional relationships on acceptable
terms.
If our corporate partners fail to perform their obligations, we may be
unable to effectively market and distribute our products and services. As part
of our retail launch, Philips is distributing the personal video recorder that
enables the TiVo Service. We will rely on Philips' sales force, marketing budget
and brand image to promote and support the personal video recorder and the TiVo
Service. After the retail launch, we expect to continue to rely on Philips 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 would require us to undertake more of these activities on our own. As a
result, we would spend significant resources to support personal video recorders
and other devices that enable the TiVo Service. We also expect to rely on
DIRECTV 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.
We cannot be sure that alternative sources for these and other 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 with
Quantum, NEC, Sony or Tribune Media Services were to terminate or expire, or if
we were unable to obtain sufficient quantities of these components or required
program guide data, our search for alternate suppliers could result in
significant delays, added expense or disruption in product availability.
Our ability to generate revenues from subscription fees is unproven and may
fail.
We expect to generate a substantial portion of our revenues from
subscription fees for the TiVo Service. Many of our potential customers already
pay monthly fees for cable or satellite television services. We must convince
these consumers to pay an additional subscription fee to receive the TiVo
Service. The availability of competing services that do not require subscription
fees will harm our ability to effectively attract subscribers. In addition, the
personal video recorder that enables the TiVo Service can be used to record
programs and pause, rewind and fast forward through live or recorded shows
without an active subscription to the TiVo Service. If a significant number of
purchasers of our personal video recorders use these devices without subscribing
to the TiVo Service, our revenue growth will decline and we may not achieve
profitability.
Our business is expanding rapidly and our failure to manage growth could
disrupt our business and impair our ability to generate revenues.
21
Since we began our business in August 1997, we have significantly expanded
our operations. We anticipate continued expansion in our headcount, facilities
and infrastructure to support potential growth in our subscriber base and to
allow us to pursue market opportunities. This expansion has placed, and will
continue to place, a significant strain on our management, operational and
financial resources and systems. Specific risks we face as our business expands
include:
We need to attract and retain qualified personnel, and any failure to do so
may impair our ability to offer new products or grow our business. Our success
will depend on our ability to attract, retain and motivate managerial,
technical, marketing 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 run 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 additional 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 expect to replace our accounting and billing system
within the next year. Delays or problems associated with any improvement or
expansion of our operational systems and controls could adversely impact our
relationships with viewers and cause harm to our reputation and brand. Delays or
problems associated with any improvement or expansion of our operational 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:
22
. advertising;
. revenues from networks; and
. electronic commerce or couch commerce.
In order to derive substantial revenues from these activities, we will need
to attract and retain a large and growing base of subscribers to the TiVo
Service. We also will need to work closely with television advertisers, cable
and satellite network operators, electronic commerce companies and consumer
electronics manufacturers to develop products and services in these areas. We
may not be able to effectively work with these parties to develop products that
generate revenues that are sufficient to justify their costs. In addition, we
are currently obligated to share a portion of these revenues with one 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., America Online, Inc., Replay Networks, Inc. and X-TV.
These companies offer, or have announced their intention to offer, products with
one or more of the TiVo Service's functions or features and, in some instances,
combine these features with Internet browsing or traditional broadcast, cable or
satellite television programming. Many of these companies have greater brand
recognition and market presence and substantially greater financial, marketing
and distribution resources than we do. For example, Microsoft Corporation
controls and provides financial backing to WebTV. Some of these companies also
have established relationships with third party consumer electronic
manufacturers, network operators and programmers, which could make it difficult
for us to establish relationships and enter into agreements with these third
parties. Some of these competitors also have relationships with our strategic
partners. For example, DIRECTV recently formed an alliance with America Online.
Faced with this competition, we may be unable to expand our market share and
attract an increasing number of subscribers to the TiVo Service.
Established competitors in the consumer electronics market. We compete with
consumer electronic products in the television and home entertainment industry.
The television and home entertainment industry is
23
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; 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.
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.
24
Our ability to provide uninterrupted service and high quality customer
support depends on the efficient and uninterrupted operation of our computer and
communications systems. Our computer hardware and other operating systems for
the TiVo Service are vulnerable to damage or interruption from earthquakes,
floods, fires, power loss, telecommunication failures and similar events. They
are also subject to break-ins, sabotage, intentional acts of vandalism and
similar misconduct. These types of interruptions in the TiVo Service may reduce
our revenues and profits. Our business also will be harmed if consumers believe
our service is unreliable. In addition to placing increased burdens on our
engineering staff, service outages will create a flood of customer questions and
complaints that must be responded to by our customer support personnel. Any
frequent or persistent system failures could irreparably damage our reputation
and brand.
We have detected and may continue to detect errors and product defects.
These problems can affect system uptime, result in significant warranty and
repair costs and cause 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 and sales of our products.
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 us to cease
manufacturing the personal video recorder or providing our service, or both,
which would eliminate our ability to generate revenues.
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 recent 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.
25
Our success depends on our ability to secure and protect patents, trademarks
and other proprietary rights.
Our success and ability to compete are substantially dependent upon our
internally developed technology. We rely on patent, trademark and copyright law,
trade secret protection and confidentiality or license agreements with our
employees, customers, partners and others to protect our proprietary rights.
However, the steps we take to protect our proprietary rights may be inadequate.
We have filed patent applications and provisional patent applications covering
substantially all of the technology used to deliver the TiVo Service and its
features and functionality. To date, none of these patents has been granted, and
we cannot assure you that any patents will ever be granted, that any issued
patents will protect our intellectual property or that third parties will not
challenge any issued patents. In addition, other parties may independently
develop similar or competing technologies designed around any patents that may
be issued to us. Our failure to 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.
The personal video recorder collects and stores viewer preferences and
other data that many of our subscribers consider confidential. Any compromise
or breach of the encryption and other security measures that we use to protect
this data could harm our reputation and expose us to potential liability.
Advances in computer capabilities, new discoveries in the field of cryptography,
or other events or developments could compromise or breach the systems we use to
protect our subscribers' confidential information. We may be required to make
significant expenditures to protect against security breaches or to remedy
problems caused by any breaches.
Uncertainty in the marketplace regarding the use of data from subscribers
could reduce demand for the TIVo Service and result in increased expenses.
Consumers may be concerned about the use of personal information gathered
by the TiVo Service and personal video recorder. Under our current policy, we
do not access this data or release it to third parties. Privacy concerns,
however, could create uncertainty in the marketplace for personal television and
our products and services. Changes in our privacy policy could reduce demand
for the TiVo Service, increase the cost of
26
doing business as a result of litigation costs or increased service delivery
costs, or otherwise harm our reputation and business.
We would lose revenues and incur significant costs if our systems or those of
our key partners or suppliers are not year 2000 compliant.
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs do not properly recognize the year. This could
result in major system failures or miscalculations that would disrupt our
business.
We completed our year 2000 assessment in September 1999 and plan to
complete interface testing and remediation by November 30, 1999. At this stage,
we are not aware of any year 2000 issues that would have a material effect on
our business. Our assessment, however, may not have identified material non-
compliance issues with the TiVo Service or the personal video recorder, our
information technology systems or the systems of our partners or suppliers. If
present, we may not be able to successfully resolve these issues, or it may be
costly to do so. In addition, we cannot assure you that governmental agencies,
utility companies, third-party service providers and others outside of our
control will be year 2000 compliant. Such entities' failure to be year 2000
compliant could result in a systemic failure beyond our control. For example, a
prolonged telecommunications or electrical failure, which could prevent us from
delivering upgrades and regular downloads to the personal video recorders that
enable the TiVo Service, could adversely impact the functionality of the
personal video recorder. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Issue."
In the future, our revenues and operating results may fluctuate significantly,
which may adversely affect the market price of our common stock.
We expect our revenues and operating results to fluctuate significantly due
to a number of factors, many of which are outside of our control. Therefore, you
should not rely on period-to-period comparisons of results of operations as an
indication of our future performance. It is possible that in some future periods
our operating results may fall below the expectations of market analysts and
investors. In this event, the market price of our common stock would likely
fall.
Factors that may affect our quarterly operating results include:
. demand for personal video recorders and the TiVo Service;
. the timing and introduction of new services and features on the TiVo
Service;
. seasonality and other consumer and advertising trends;
. changes in revenue sharing arrangements with our strategic partners;
. entering into new or terminating existing strategic partnerships;
. changes in the subsidy payments we make to certain strategic partners;
. changes in our pricing policies, the pricing policies of our
competitors and general pricing trends in the consumer electronics
market;
. loss of subscribers to the TiVo Service; and
. general economic conditions.
Because our expenses precede associated revenues, unanticipated shortfalls
in revenue could adversely affect our results of operations for any given period
and cause the market price of our common stock to fall.
Seasonal trends may cause our quarterly operating results to fluctuate, which
may adversely affect the market price of our common stock.
27
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 will be very difficult, we believe
that sales of personal video recorders and new subscriptions to the TiVo Service
will be disproportionately high during the holiday shopping season when compared
to other times of the year. If we are unable to accurately forecast and respond
to consumer demand for our products, our reputation and brand will suffer and
the market price of our common stock would likely fall.
We expect that a portion of our future revenues will come from targeted
commercials and other forms of television advertising enabled by the TiVo
Service. Expenditures by advertisers tend to be seasonal and cyclical,
reflecting overall economic conditions as well as budgeting and buying patterns.
A decline in the economic prospects of advertisers or the economy in general
could alter current or prospective advertisers' spending priorities or increase
the time it takes to close a sale with our advertisers, which could cause our
revenues from advertisements to decline significantly in any given period.
If we are unable to raise additional capital on acceptable terms, our ability
to effectively manage growth and build a strong brand could be harmed.
We expect that our existing capital resources will be sufficient to meet
our cash requirements through at least the next 12 months. However, as we
continue to grow our business, we may need to raise additional capital, which
may not be available on acceptable terms. If we cannot raise necessary
additional capital on acceptable terms, we may not be able to develop or enhance
our products and services, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements.
If additional capital is raised through the issuance of equity securities,
the percentage ownership of our existing stockholders will decline, stockholders
may experience dilution in net book value per share, or these equity securities
may have rights, preferences or privileges senior to those of the holders of our
common stock. Any debt financing, if available, may involve covenants limiting,
or restricting our operations or future opportunities.
We have agreed to subsidize the cost of manufacturing personal video
recorders, which may adversely affect our operating results and ability to
achieve profitability.
Philips assumed manufacturing responsibility for the personal video
recorders in the fourth quarter of 1999. We have agreed to pay Philips a per
unit subsidy for each personal video recorder that it manufactures and sells. A
portion of the subsidy amount is paid when the personal video recorder is
shipped. The remaining portion is due when the subscriber activates the TiVo
Service. The amount of the payments can vary depending upon Philips'
manufacturing costs and selling prices. In addition, in the event Philips is
unable to manufacture the personal video recorders at the costs currently
estimated or if selling prices are less than anticipated, we will owe additional
amounts to Philips, 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 subscriptions that commit us to provide service for as
long as the original subscriber uses the personal video recorder purchased. We
receive the lifetime subscription fee for the TiVo Service in advance and
amortize it as revenue over four years, which is our estimate of the service
life of the personal video
28
recorder. If these lifetime subscribers use the personal video recorder for
longer than anticipated, we will incur costs without a corresponding revenue
stream. If we spend amounts received from lifetime subscriptions prior to the
end of the lifetime commitment period, we will be required to fund ongoing costs
from other sources.
If we lose key management personnel, we may not be able to successfully
operate our business.
Our future performance will be substantially dependent on the continued
services of our senior management and other key personnel. The loss of any
members of our executive management team and our inability to hire additional
executive management could harm our business and results of operations. In
addition, we do not have employment agreements with, or key man insurance
policies for, any of our key personnel.
We have recently hired several senior executive officers. Any inability by
these individuals to execute our business strategy and manage our growth could
harm our ability to generate revenues and achieve profitability.
Several members of our executive management team were hired in 1999,
including our Chief Financial Officer and Vice President of Finance, our Vice
President of Business Development, our Vice President of Human Resources, our
Vice President of Sales and our Vice President of Information Technology and
Chief Information Officer. These individuals do not have significant experience
working with the other members of our management team, and therefore may require
time to adequately familiarize themselves with the nature of our business and
operations. We cannot assure you that these individuals will be able to
successfully work together or manage any growth we may experience. The process
of integrating these individuals into our management team may detract from the
operation of our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
TiVo's exposure to market risk for interest rate changes relates
primarily to its investment portfolio. TiVo had no derivative financial
instruments as of December 31, 1998 and September 30, 1999. TiVo places its
investment portfolio in high quality credit instruments and the amount of
credit exposure to any one issue, issuer and type of instrument is limited.
TiVo does not expect any material loss with respect to its investment
portfolio.
TiVo's investments are principally confined to our cash and cash
equivalents and short-term investments, which have short maturities and,
therefore, minimal and immaterial market risk.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
TiVo is not currently engaged in any legal proceedings. However, TiVo is
aware that media companies and other organizations may support litigation or
explore legislative solutions unless the members of the personal television
industry agree to obtain license agreements for the use of certain programming.
TiVo has received letters from Time Warner Inc. and Fox Television stating that
these entities believe TiVo's personal television service exploits copyrighted
networks and programs without the necessary licenses and business arrangements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Since July 1, 1999, TiVo has issued and sold unregistered securities as
follows:
(a) Between July 1, 1999 and September 30, 1999, an aggregate of
378,970 shares of common stock were issued to employees upon exercise
of options with exercise prices ranging from $0.13 to $10.50. The
consideration received for such shares was $854,000.
(b) In July 1999, TiVo sold 3,121,994 shares of its Series I
Preferred Stock at $10.41 per share to eight investors for net
proceeds of approximately $31.5 million.
(c) In July 1999, TiVo issued a warrant to purchase up to an
aggregate of 192,123 shares of Series I Preferred Stock at an exercise
price of $10.41 per share to an investor.
(d) In August and September 1999, TiVo sold 3,123,789 shares of its
Series J Preferred Stock at $10.41 per share to two investors for net
proceeds of approximately $31.7 million.
All sales of common stock made pursuant to the exercise of stock options
granted under the Amended and Restated 1997 Equity Incentive Plan and 1999
Equity Incentive Plan to TiVo's officers, directors, employees and consultants
were made in reliance on Rule 701 under the Securities Act of 1933, as amended
("the Securities Act") or on Section 4(2) of the Securities Act. All other
sales were made in reliance on Section 4(2) of the Securities Act and/or
Regulation D promulgated under the Securities Act. These sales were made
without general solicitation or advertising. Each purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment and represented to TiVo that the shares were being acquired for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the securities.
TiVo's Registration Statement on Form S-1 (Registration No. 333-83515)
under the Securities Act of 1933, as amended, for the initial public offering
became effective on September 29, 1999. In the offering, we sold an aggregate of
6,166,875 shares of our common stock for an initial price of $16.00 per share,
including 666,875 shares pursuant to the exercise of the underwriters' over-
allotment option. The net proceeds from the offering were approximately $90.5
million. The managing underwriters were Credit Suisse First Boston, Allen &
Company Incorporated, BancBoston Robertson Stephens and Thomas Weisel Partners
LLC. The aggregate underwriting fees were approximately $6.9 million. Upon the
closing of the initial public offering in October 1999, all outstanding shares
of our preferred stock were automatically converted, on a one-for-one basis,
into shares of common stock. All warrants to purchase common and preferred stock
outstanding immediately prior to the closing of the initial public offering,
were simultaneously exercised and converted into shares of common stock.
Following the closing of the initial public offering, TiVo filed an amendment to
its Amended and Restated Certificate of Incorporation with the Delaware
Secretary of State that authorizes two million (2,000,000) shares of
undesignated preferred stock. For additional information about our capital
stock, please
30
refer to "Description of Capital Stock" in TiVo's Registration Statement (SEC
File No. 333-83515) filed with the Securities and Exchange Commission.
TiVo expects to use the net offering proceeds from its initial public
offering for working capital and general corporate purposes, including
advertising and promotion of the TiVo Service and the TiVo brand, product
development, and expansion of its sales, marketing and service capabilities.
The use of proceeds does not represent a material change in the use of proceeds
as described in TiVo's prospectus dated September 29, 1999 comprising part of
TiVo's Registration Statement on Form S-1, as amended, filed with the Securities
and Exchange Commission (SEC File No. 333-83515). TiVo has not declared or paid
any cash dividends on its capital stock and does not anticipate paying any cash
dividends in the foreseeable future.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Since July 1, 1999, TiVo has submitted the following matters to a vote of
security holders:
(a) In July 1999, in connection with the preparation for its initial
public offering (the "IPO"), TiVo solicited the written consent of its
stockholders with respect to various matters. The matters for which stockholder
consent was solicited were as follows:
PROPOSAL 1: Approval of TiVo's Amended and Restated Certificate of
Incorporation, to be effective upon the closing of the
IPO.
PROPOSAL 2: Approval of the amendment and restatement of TiVo's
Bylaws, to be effective upon the closing of the IPO.
PROPOSAL 3: Approval of the amendment and restatement of TiVo's 1999
Equity Incentive Plan.
PROPOSAL 4: Approval of the adoption of TiVo's 1999 Employee Stock
Purchase Plan.
PROPOSAL 5: Approval of the adoption of TiVo's 1999 Non-Employee
Directors' Stock Option Plan.
PROPOSAL 6: Approval of the form of indemnity agreement to be entered
into between TiVo and its officers and directors.
The voting of stockholders with respect to each of the foregoing proposals
was as follows:
----------------------------------------------------
Consents Received Consents Not Received
----------------------------------------------------
20,367,975 3,521,062
----------------------------------------------------
(b) In July 1999, in connection with its proposed sale of Series I
Preferred Stock, TiVo solicited the written consent of its stockholders with
respect to (i) the amendment and restatement of TiVo's Certificate of
Incorporation, and (ii) increasing the authorized size of TiVo's Board of
Directors. The voting of stockholders with respect to each of the foregoing
proposals was as follows:
31
----------------------------------------------------
Consents Received Consents Not Received
----------------------------------------------------
20,367,975 3,521,062
----------------------------------------------------
(c) In August 1999, in connection with its proposed sale of Series J
Preferred Stock, TiVo solicited the written consent of its stockholders with
respect to the amendment and restatement of TiVo's Certificate of Incorporation.
The voting of stockholders with respect to the foregoing proposal was as
follows:
----------------------------------------------------
Consents Received Consents Not Received
----------------------------------------------------
20,367,975 3,521,062
----------------------------------------------------
Item 5. OTHER INFORMATION
None
32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.2* Amended and Restated Certificate of Incorporation.
3.4* Amended and Restated Bylaws.
4.3* Ninth Amended and Restated Investor Rights Agreement between
TiVo and certain investors, dated as of August 6, 1999.
10.1* Form of Indemnification Agreement between TiVo and its officers
and directors.
10.2* TiVo's 1999 Equity Incentive Plan and related documents.
10.3* TiVo's Amended and Restated 1997 Equity Incentive Plan and
related documents.
10.4* TiVo's 1999 Employee Stock Purchase Plan and related documents.
10.5* TiVo's 1999 Non-Employee Directors' Stock Option Plan and
related documents.
10.6*+ Hard Disk Drive Supply Agreement between Quantum Corporation and
TiVo, dated November 6, 1998.
10.7*+ Master Agreement between Phillips Business Electronic B.V. and
TiVo, dated March 31, 1999.
10.8*+ Marketing Agreement between DIRECTV, Inc. and TiVo, dated April
13, 1999.
10.9*+ Agreement between NBC Multimedia, Inc. and TiVo, dated April 16,
1999.
10.10* Sublease Agreement between Verity, Inc. and TiVo, dated February
23, 1998.
10.11* Amendment to Sublease Agreement between Verity, Inc. and TiVo,
dated November 1998.
10.12* Second Amendment to Sublease Agreement between Verity, Inc. and
TiVo, dated March 1999.
10.13* Consent of Landlord to Sublease between Verity, Inc. and TiVo,
dated February 23, 1998.
10.15* Master Lease Agreement between Comdisco, Inc. and TiVo, dated
February 12, 1999.
10.16*+ Warrant Purchase and Equity Rights Agreement between Quantum
Corporation and TiVo, dated November 6, 1998 and related
documents.
10.17* Warrant to Purchase Shares of Series A Preferred Stock issued to
Randy Komisar, dated March 18, 1998.
10.18* Warrant Agreement between Comdisco, Inc. and TiVo, dated
February 12, 1999.
10.19* Secured Convertible Debenture Purchase Agreement between TiVo
and certain of its investors, dated April 8, 1999, and related
documents.
10.20* First Amendment to Hard Disk Supply Agreement between Quantum
and TiVo, dated June 25, 1999.
33
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.21* TiVo's 401(k) Plan, effective December 1, 1997.
10.22*+ Tribune Media Services Television Listing Agreement between
Tribune Media Services and TiVo, dated June 1, 1998.
10.23*+ Amendment to the Data License Agreement between Teleworld Inc.,
and Tribune Media Services, Inc. between Tribune Media Services
and TiVo, dated November 10, 1998.
10.24 Lease Agreement between WIX/NSJ Real Estate Limited Partnership
and TiVo, dated October 6, 1999.
27.1++ Financial Data Schedule.
_______________________
* Incorporated by reference to the same numbered exhibit previously filed with
TiVo's Registration Statement on Form S-1 (SEC File No. 333-83515).
+ Confidential treatment granted as to portions of this exhibit.
++ Submitted as an exhibit only in the electronic format of this Quarterly
Report on Form 10-Q submitted to the Securities and Exchange Commission.
b. Reports on Form 8-K
TiVo did not file any reports on Form 8-K during the quarter ended
September 30, 1999.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TIVO INC.
Date: November 15, 1999 /s/ Michael Ramsay
------------------
Michael Ramsay
President, Chief Executive Officer, and
Chairman of the Board of Directors
(Principal Executive Officer)
Date: November 15, 1999 /s/ David H. Courtney
---------------------
David H. Courtney
Chief Financial Officer and Vice President of
Finance (Principal Financial and Accounting
Officer)
35
TIVO INC.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.2* Amended and Restated Certificate of Incorporation.
3.4* Amended and Restated Bylaws.
4.3* Ninth Amended and Restated Investor Rights Agreement between TiVo
and certain investors, dated as of August 6, 1999.
10.1* Form of Indemnification Agreement between TiVo and its officers and
directors.
10.2* TiVo's 1999 Equity Incentive Plan and related documents.
10.3* TiVo's Amended and Restated 1997 Equity Incentive Plan and related
documents.
10.4* TiVo's 1999 Employee Stock Purchase Plan and related documents.
10.5* TiVo's 1999 Non-Employee Directors' Stock Option Plan and related
documents.
10.6*+ Hard Disk Drive Supply Agreement between Quantum Corporation and
TiVo, dated November 6, 1998.
10.7*+ Master Agreement between Philips Business Electronics B.V. and
TiVo, dated March 31, 1999.
10.8*+ Marketing Agreement between DIRECTV, Inc. and TiVo, dated April 13,
1999.
10.9*+ Agreement between NBC Multimedia, Inc. and TiVo, dated April 16,
1999.
10.10* Sublease Agreement between Verity, Inc. and TiVo, dated February
23, 1998.
10.11* Amendment to Sublease Agreement between Verity, Inc. and TiVo,
dated November 1998.
10.12* Second Amendment to Sublease Agreement between Verity, Inc. and
TiVo, dated March 1999.
10.13* Consent of Landlord to Sublease between Verity, Inc. and TiVo,
dated February 23, 1998.
10.15* Master Lease Agreement between Comdisco, Inc. and TiVo, dated
February 12, 1999.
10.16*+ Warrant Purchase and Equity Rights Agreement between Quantum
Corporation and TiVo, dated November 6, 1998 and related documents.
10.17* Warrant to Purchase Shares of Series A Preferred Stock issued to
Randy Komisar, dated March 18, 1998.
10.18* Warrant Agreement between Comdisco, Inc. and TiVo, dated February
12, 1999.
10.19* Secured Convertible Debenture Purchase Agreement between TiVo and
certain of its investors, dated April 8, 1999, and related
documents.
10.20* First Amendment to Hard Disk Supply Agreement between Quantum and
TiVo, dated June 25, 1999.
36
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.21* TiVo's 401(k) Plan, effective December 1, 1997.
10.22*+ Tribune Media Services Television Listing Agreement between Tribune
Media Services and TiVo, dated June 1, 1998.
10.23*+ Amendment to the Data License Agreement between Teleworld Inc., and
Tribune Media Services, Inc. between Tribune Media Services and
TiVo, dated November 10, 1998.
10.24 Lease Agreement between WIX/NSJ Real Estate Limited Partnership and
TiVo, dated October 6, 1999.
27.1++ Financial Data Schedule.
- -----------
* Incorporated by reference to the same numbered exhibit previously filed with
the Company's Registration Statement on Form S-1 (SEC File No. 333-83515).
+ Confidential treatment granted as to portions of this exhibit.
++ Submitted as an exhibit only in the electronic format of this Quarterly
Report on Form 10-Q submitted to the Securities and Exchange Commission.
37