-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WPD22GuYq7EYeK9+JCP1dRyVLw/AARjtK1lo98jJDoX+nLdw+LLm3HDAHc7ifYyb Z6Zam/LO4TTcRnP+8kicaQ== 0001012870-00-002865.txt : 20000516 0001012870-00-002865.hdr.sgml : 20000516 ACCESSION NUMBER: 0001012870-00-002865 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIVO INC CENTRAL INDEX KEY: 0001088825 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 770453167 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27141 FILM NUMBER: 634042 BUSINESS ADDRESS: STREET 1: C/O COOLEY GODWARD LLP STREET 2: FIVE PALO ALTO SQUARE 3000 EL CAMINO REA CITY: PALO ALTO STATE: CA ZIP: 94306-2155 BUSINESS PHONE: 4087476080 MAIL ADDRESS: STREET 1: 894 ROSS DRIVE STREET 2: SUITE 100 CITY: SUNNYVALE STATE: CA ZIP: 94089 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange - --- Act of 1934. For the quarterly period ended March 31, 2000. Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ________________ to _______________ Commission file number 000-27141 --------- TIVO INC. (Exact name of registrant as specified in its charter) Delaware 77-0463167 -------- ---------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 2160 Gold Street, PO Box 649101, San Jose, CA 95164-9101 - --------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (408) 519-9100 --------------------------------------------------- (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of outstanding shares of the registrant's Common Stock, $0.001 par value, was 37,861,602 as of April 30, 2000. TABLE OF CONTENTS PART I : FINANCIAL INFORMATION............................................................................. 3 Item 1. Financial Statements............................................................................ 3 Balance Sheets.................................................................................. 3 Statements Of Operations........................................................................ 4 Statements Of Stockholders' Equity.............................................................. 5 Statements Of Cash Flows........................................................................ 6 Notes To Financial Statements................................................................... 7 Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations........................................................................... 10 Item 3. Quantitative And Qualitative Disclosure About Market Risk....................................... 24 PART II : OTHER INFORMATION................................................................................ 25 Item 1. Legal Proceedings............................................................................... 25 Item 2. Changes In Securities And Use Of Proceeds....................................................... 25 Item 3. Defaults Upon Senior Securities................................................................. 26 Item 4. Submission Of Matters To A Vote Of Security Holders............................................. 26 Item 5. Other Information............................................................................... 26 Item 6. Exhibits, Financial Statement Schedules, And Reports On Form 8-k................................ 27 Signatures............................................................................................... 29
2 PART I : FINANCIAL INFORMATION Item 1. Financial Statements TIVO INC. BALANCE SHEETS
March 31, December 31, 2000 1999 --------------- -------------------- ASSETS CURRENT ASSETS Cash and cash equivalents................................. $122,035,000 $139,687,000 Short-term investments.................................... -- 6,168,000 Accounts receivable....................................... 826,000 127,000 Accounts receivable from related parties.................. 1,692,000 210,000 Prepaid expenses and other................................ 5,713,000 2,589,000 ---------------- ------------------- Total current assets.................................... 130,266,000 148,781,000 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,202,000 and $831,000 as of March 31, 2000 and December 31, 1999, respectively......................... 8,820,000 4,061,000 -------------- ------------------- Total assets................................... $139,086,000 $152,842,000 ============== =================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accounts payable.......................................... $ 9,135,000 $ 8,432,000 Accrued liabilities....................................... 5,398,000 4,778,000 Accrued marketing-related parties......................... 6,210,000 2,349,000 Deferred revenue.......................................... 3,666,000 2,271,000 Current portion of obligations under capital lease........ 750,000 624,000 -------------- ------------------- Total current liabilities............................... 25,159,000 18,454,000 Long-term portion of obligations under capital lease...... 1,205,000 1,141,000 -------------- ------------------- Total liabilities.............................. 26,364,000 19,595,000 -------------- ------------------- STOCKHOLDERS' EQUITY Common stock, par value $0.001: Authorized shares at March 31, 2000 and December 31, 1999 are 75,000,000. Issued and outstanding shares at March 31, 2000 and December 31, 1999 are 37,786,269 and 37,746,391, respectively........................................ $ 38,000 $ 38,000 Additional paid-in capital................................ 235,836,000 235,423,000 Deferred compensation..................................... (5,566,000) (6,170,000) Prepaid marketing expenses................................ (13,828,000) (16,341,000) Note receivable........................................... (2,822,000) (2,822,000) Retained deficit.......................................... (100,936,000) (76,881,000) -------------- ------------------- Total stockholders' equity..................... 112,722,000 133,247,000 -------------- ------------------- Total liabilities and stockholders' equity..... $139,086,000 $ 152,842,000 ============== ===================
The accompanying notes are an integral part of these statements. 3 TIVO INC. STATEMENTS OF OPERATIONS
Three Months Ended March 31, --------------------------------------- 2000 1999 ---------------- -------------------- Subscription revenues.......................... $ 424,000 $ -- Costs and expenses Cost of services............................ 4,168,000 689,000 Research and development.................... 4,678,000 1,596,000 Sales and marketing......................... 9,180,000 2,168,000 Sales and marketing-related parties......... 4,547,000 -- General and administrative.................. 2,691,000 1,125,000 Stock-based compensation.................... 969,000 -- Other operating expense, net................ -- (12,000) ----------------- ----------------- Loss from operations...................... (25,809,000) (5,566,000) Interest income....................... 1,824,000 53,000 Interest expense and other............ (70,000) (2,000) ----------------- ----------------- Net loss.................................. $ (24,055,000) $ (5,515,000) ================= ================= Net loss per share Basic and diluted......................... $ (0.68) $ (1.62) ----------------- ----------------- Weighted average common shares outstanding Basic and diluted......................... 35,353,442 3,401,035 ================== =================
The accompanying notes are an integral part of these statements. 4 TIVO INC. STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Prepaid Common Stock Paid-In Deferred Marketing ------------------------- Shares Amount Capital Compensation Expense ----------- ----------- ------------ --------------- ------------- BALANCE, DECEMBER 31, 1999....... 37,746,391 $ 38,000 $235,423,000 $ (6,170,000) $ (16,341,000) Exercise of stock options....... 60,712 -- 49,000 -- -- Common stock repurchases........ (20,834) -- (1,000) -- -- Recognition of deferred compensation.................. -- -- 365,000 (365,000) -- Stock-based compensation expense....................... -- -- -- 969,000 -- Amortization of prepaid marketing expenses............ -- -- -- -- 2,513,000 Net loss........................ -- -- -- -- -- ----------- ----------- ------------ --------------- ------------- BALANCE, MARCH 31, 2000.......... 37,786,269 $ 38,000 $235,836,000 $ (5,566,000 $ (13,828,000) =========== =========== ============ =============== ============= Note Retained Receivable Deficit Total -------------- ------------- ------------ BALANCE, DECEMBER 31, 1999....... $ (2,822,000) $ (76,881,000) $133,247,000 Exercise of stock options....... -- -- 49,000 Common stock repurchases........ -- -- (1,000) Recognition of deferred compensation.................. -- -- -- Stock-based compensation expense....................... -- -- 969,000 Amortization of prepaid marketing expenses............ -- -- 2,513,000 Net loss........................ -- (24,055,000) (24,055,000) -------------- ------------- ------------ BALANCE, MARCH 31, 2000.......... $ (2,822,000) $(100,936,000) $112,722,000 ============== ============= ============
The accompanying notes are an integral part of these statements. 5 TIVO INC. STATEMENTS OF CASH FLOWS
Three Months Ended March 31, ------------------------------ 2000 1999 ------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss................................................... $ (24,055,000) $ (5,515,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.......................... 371,000 96,000 Common stock exchanged for services.................... -- 118,000 Amortization of prepaid marketing expenses............. 2,513,000 -- Amortization of warrants for services.................. 25,000 -- Stock-based compensation expense....................... 969,000 -- Changes in current assets and liabilities: Accounts receivable.................................... (2,181,000) (78,000) Inventories............................................ -- (443,000) Prepaid expenses and other............................. (3,149,000) (23,000) Accounts payable....................................... 703,000 455,000 Accrued liabilities.................................... 620,000 1,300,000 Accrued marketing-related parties ..................... 3,861,000 -- Deferred revenue....................................... 1,395,000 4,000 -------------- ------------- Net cash used in operating activities ................... (18,928,000) (4,086,000) -------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment, net................. (5,130,000) (559,000) Proceeds from sale of short-term investments, net.......... 6,168,000 -- -------------- ------------- Net cash used in investing activities.................... 1,038,000 (559,000) -------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of convertible preferred stock, net of issuance costs........................................ -- 6,955,000 Proceeds from issuance of common stock and exercise of stock options............................................ 49,000 121,000 Repurchase of common stock................................. (1,000) (2,000) Net borrowings under capital lease......................... 190,000 -- Increase in bank overdraft................................. -- 23,000 -------------- ------------- Net cash provided by financing activities................ 238,000 7,097,000 -------------- ------------- NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS............ (17,652,000) 2,452,000 -------------- ------------- CASH AND CASH EQUIVALENTS: Balance at beginning of period............................. 139,687,000 2,248,000 -------------- ------------- Balance at end of period................................... $ 122,035,000 $ 4,700,000 ============== ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest..................................... $ 24,000 $ -- Equipment acquired under capital lease..................... 367,000 -- Deferred stock-based compensation.......................... 365,000 1,151,000
The accompanying notes are an integral part of these statements. 6 TIVO INC. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS TiVo Inc. (the "Company" or "TiVo") was incorporated in August 1997 as a Delaware corporation with facilities in San Jose, 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 live or recorded television broadcasts, as well as to search for, watch and record programs. The TiVo Service also provides television listings, daily suggestions and special viewing packages. The TiVo Service relies on three key components: the personal video recorder, the TiVo remote control and the TiVo Broadcast Center. The Company conducts its operations through one reportable segment. The Company continues to be subject to certain risks, including the uncertainty of availability of additional financing; dependence on third parties for manufacturing, marketing and sales support; the uncertainty of the market for personal television; dependence on key management; limited manufacturing, marketing and sales experience; and the uncertainty of future profitability. Unaudited Interim Financial Statements The accompanying balance sheet as of March 31, 2000 and the accompanying statements of operations, statements of stockholder's equity and statements of cash flows for the three months ended March 31, 1999 and 2000 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 and a fair presentation of such financial statements. The results of operations for the three months ended March 31, 2000 are not necessarily indicative of results for the entire fiscal year or future periods. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and cash equivalents The Company classifies financial instruments as cash equivalents if the original maturity of such instruments is three months or less. Short-term investments Short-term investments consist of commercial paper investments and certificates of deposit with original maturities at the date of purchase ranging between three and twelve months. The Company classifies these investments as held to maturity and records the instruments at amortized cost, which approximates fair value due to the short maturities. Net Loss Per Common Share Net loss per share is calculated in accordance with SFAS No. 128, "Earnings Per Share," and SEC Staff Accounting Bulletin No. 98 (SAB No. 98). Under the provisions of SFAS No. 128 and SAB No. 98, basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding. Shares used in the computation of 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. 7 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 antidilutive common share equivalents. Stock-Based Compensation and Stock Exchanged for Services The Company has elected to follow Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," and related interpretations in accounting for its employee stock options. Under APB 25, when the exercise price of employee stock options is less than the market price of the underlying stock on the date of grant, compensation expense is recorded for the difference between fair value and the exercise price. Expense associated with stock-based compensation is being amortized on an accelerated basis over the vesting period of the individual award, generally four years. The method of amortization is in accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 28, under which value assigned to options vesting in future periods is ratably amortized beginning upon issuance of the option rather than at the vesting date. The Company has recorded stock-based compensation expense of $969,000 for the three months ended March 31, 2000. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The value of warrants, options or stock exchanged for services is expensed over the period benefited. The warrants and options are valued using the Black-Scholes option pricing model. To calculate the expense, the Company uses either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. 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 service has not yet been provided. Sales and Marketing--Related Parties Sales and marketing--related parties consists of cash and non-cash charges related to the Company's agreements with DIRECTV, Inc. ("DIRECTV"), Philips Business Electronics B.V. ("Philips"), Quantum Corporation ("Quantum") and Creative Artists Agency, LLC ("CAA"), all of which hold stock in the Company. Other Operating Expense, Net Prior to the transition of manufacturing and distribution responsibility to Philips in the fourth quarter of 1999, the Company sold personal video recorders directly to consumers. The Company's direct sales of personal video recorders, less the cost of the personal video recorders sold is classified as other operating expense, net. Other operating expense, net is considered incidental to the Company's business and is recognized upon shipment to the customer. The Company records a provision for estimated warranty costs and returns at the time of sale. Reclassifications Certain prior year amounts have been reclassified for consistency with current year financial statement presentation. 8 3. COMMITMENTS AND CONTINGENCIES Facilities Leases The Company leased office space in Sunnyvale under operating leases that expire June 30, 2000. As of March 31, 2000 future minimum lease payments were $29,000. In October 1999, the company entered into an office lease with WIX/NSJ Real Estate Limited Partnership. The lease began on March 10, 2000 and has a seven-year term. Future minimum lease payments under this lease are $20.1 million as of March 31, 2000. In March 2000, the Company entered into an office lease with Embassy Group Associates. The lease began on March 1, 2000 and has a twenty-six month term. Future minimum lease payments under this lease are $66,000 as of March 31, 2000. Rent expense for the three months ended March 31, 1999 and 2000 was $223,000 and $521,000, respectively. Equipment Lease Line As of March 31, 2000, $2.3 million of the available lease line had used and has been accounted for as a capital lease. The unused equipment lease line expired February 2000. The future minimum lease payments under capitalized equipment leases are $2.1 million as of March 31, 2000. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains trend analysis and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, without limitation, statements containing the words "believes," "anticipates," "expects," and words of similar import. Such forward-looking statements will have known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The Company assumes no obligation to update any forward-looking statements contained herein. 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 Three Months Ended March 31, 2000 Compared to the Three Months Ended March 31, 1999 Subscription revenues. Subscription revenues for the three months ended March 31, 2000 were $424,000, compared to zero for the three months ended March 31, 1999. The increase is attributable to customer subscriptions to the TiVo Service, which began in March 1999. As of March 31, 2000, we had approximately 32,000 subscribers. Cost of services. Cost of services consists primarily of employee salaries, telephone expenses, call center and other expenses related to providing the TiVo Service to subscribers. Cost of services for the three months ended March 31, 2000 was $4.2 million compared to $0.7 million for the same period ended March 31, 1999. This increase was primarily attributable to the hiring of content programming and service operation personnel and establishing a customer call center in connection with the retail release of the TiVo Service and the personal video recorder that enables the TiVo Service. Additionally, as subscribers increased there were other variable costs, such as telephone charges that increased. 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 three months ended March 31, 2000 were $4.7 million compared to $1.6 million for the three months ended March 31, 1999. The increase was primarily attributable to the hiring of additional engineering personnel and costs related to the improvement and addition of features and functionality of current products as well as the design of new platforms. Sales and marketing expenses. Sales and marketing expenses consist primarily of employee salaries and related expenses, media advertising, public relations activities, special promotions, trade shows and the production of product related items, including collateral and videos. Sales and marketing expenses for the three months ended March 31, 2000 were $9.2 million compared to $2.2 million for the three months ended March 31, 1999. The increase was primarily attributable to an increase in expenditures for advertising, public relations and trade shows in connection with the continued retail marketing campaign of the TiVo Service and the personal video recorder that enables the TiVo Service. We expect our marketing expenses to continue to increase significantly in connection with the continued retail marketing campaign for the TiVo Service and the personal video recorder that enables the TiVo Service. Sales and marketing--related parties. Sales and marketing--related parties consist of cash and non-cash charges related primarily to agreements with DIRECTV, Philips, Quantum and Creative Artists Agency, LLC, all of which hold stock in the Company. Sales and marketing--related parties for the three months ended March 31, 2000 was $4.5 million compared to zero for the three months ended March 31, 1999. The increase in sales and marketing--related parties expenses is 10 attributable to the manufacturing and shipments of personal video recorders and to the related activations of subscribers to the TiVo Service. General and administrative expenses. General and administrative expenses consist primarily of employee salaries and related expenses for executive, administrative, accounting, information systems, customer service personnel, facility costs and professional fees. General and administrative expenses for the three months ended March 31, 2000 were $2.7 million compared to $1.1 million for the three months ended March 31, 1999. The increase was primarily attributable to the hiring of additional personnel and related expenses and the costs of expanding Information Services and Service Operations departments. Stock-based compensation. During 1999 and 2000, we granted stock options with exercise prices that were less than the estimated fair value of the underlying shares of common stock on the date of grant. As a result, stock-based compensation expense is being recognized over the period that these stock options vest. The stock-based compensation expense was approximately $1.0 million for the three months ended March 31, 2000 and zero for the three months ended March 31, 1999. Other operating expenses, net. Other operating expenses, net consists of the revenues from the sale of personal video recorders sold directly by TiVo, less the cost of the personal video recorders sold. For the three months ended March 31, 2000, other operating expenses, net was zero compared to $12,000 for the three months ended March 31, 1999. We transitioned manufacturing and selling personal video recorders in the fourth quarter of 1999 to Philips. The revenues and costs resulting from the sale of personal video recorders were not expected to be recurring and are therefore 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 $1.8 million for the three months ended March 31, 2000 compared to $53,000 for the three months ended March 31, 1999, as cash balances have increased due to the capital raised during 1999. Interest expense and other. Interest expense and other was $70,000 for the three months ended March 31, 2000. Of this amount, $34,000 was interest expense. Other consists of a gain on a sale of an asset and amortization of the value assigned to the Comdisco warrants. 11 Quarterly Results of Operations The following table represents certain unaudited statements of operations data for our eight most recent quarters ended March 31, 2000. In management's opinion, this unaudited information has been prepared on the same basis as the audited annual financial statements and includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair representation of the unaudited information for the quarters presented. This information should be read in conjunction with our financial statements, including notes thereto, included elsewhere in this Form 10-Q. The results of operations for any quarter are not necessarily indicative of results that may be expected for any future period. The three months ended March 31, 1999, June 30, 1999 and September 30, 1999 have been reclassified in order to conform to 1998 and current quarter classifications
Three Months Ended --------------------------------------------------------------------------------------------------- June 30, September 30, December 31, March 31, June 30, September 30, December 31, March 31, 1998 1998 1998 1999 1999 1999 1999 2000 --------------------------------------------------------------------------------------------------- (unaudited, in thousands) Subscription revenues......... $ -- $ -- $ -- $ -- $ 8 $ 33 $ 182 $ 424 Costs and expenses Cost of services.............. -- -- -- (689) (636) (749) (1,993) (4,168) Research and development...... (1,016) (1,659) (2,146) (1,596) (1,859) (2,327) (3,945) (4,678) Sales and marketing........... (222) (354) (567) (2,168) (1,847) (5,323) (15,164) (9,180) Sales and marketing--related parties..................... -- -- -- -- (382) (4,946) (9,844) (4,547) General and administrative.... (610) (706) (1,337) (1,125) (1,057) (1,757) (3,088) (2,691) Stock-based compensation...... -- -- -- -- (187) (501) (842) (969) Other operating expense, net......................... -- -- -- 12 (201) (4,808) (2,213) -- -------- ---------- ---------- -------- -------- ----------- ---------- --------- Loss from operations.......... (1,848) (2,719) (4,050) (5,566) (6,161) (20,378) (36,907) (25,809) Interest income............... 17 46 55 53 224 614 2,022 1,824 Interest expense and other.... (11) (7) -- (2) (176) (281) (7) (70) -------- ---------- ---------- -------- -------- ----------- ---------- --------- Net loss...................... $(1,842) $(2,680) $ (3,995) $(5,515) $(6,113) $(20,045) $(34,892) $(24,055) ======== ========== ========== ======== ======== =========== ========== =========
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 March 31, 2000, we financed our operations and met our capital expenditure requirements primarily from the proceeds of the private sale of equity securities and the proceeds from our initial public offering. At March 31, 2000, we had $122.0 million of cash and cash equivalents. As of March 31, 1999, we had $4.9 million of cash and cash equivalents. The expansion of our business will require significant additional capital to fund operations, capital expenditures and working capital needs. Accordingly, we may choose to raise additional capital through debt or equity financing prior to the end of 2000. Net cash used in operating activities was $18.9 million for the three months ended March 31, 2000. During the three months ended March 31, 2000, we incurred a net loss of $24.1 million, of which $3.5 million is related to non- cash charges. Uses of cash from operating activities also included an increase in prepaid expenses and other of $3.1 million and an increase in accounts receivable of $2.2 million. These uses were offset by sources of cash provided from operating activities 12 consisting of an increase in accrued marketing--related parties of $3.9 million, an increase in deferred revenue of $1.4 million, an increase in accounts payable of $703,000 and an increase in accrued liabilities of $620,000. Net cash provided by investing activities was $1.0 million for the three months ended March 31, 2000. Net cash provided in investing activities during the three months ended March 31, 2000 included $6.2 million from the sale of short-term investments offset by $5.1 million used for the acquisition of property and equipment. Net cash provided by financing activities was $238,000 for the three months ended March 31, 2000. Of this amount, $190,000 was received from financing through a capital lease and $49,000 from the issuance of common stock for stock options exercised. Additionally cash was used to repurchase unvested common stock options, which had been exercised for $1,000. Net cash used in operating activities was $4.1 million for the three months ended March 31, 1999. Net cash used during this period was primarily a result of the research and development, sales and marketing and general and administrative expenses to support the development of the TiVo Service and the personal video recorder that enables the TiVo Service incurring a loss of $5.5 million. Net cash used in investing activities was $559,000 for the three months ended March 31, 1999. Net cash used during this period was for the acquisition of property and equipment. Net cash provided by financing activities was $7.1 million for the three months ended March 31, 1999. This financing was received primarily from the issuance of $7.0 million of Series D and E preferred stock to several investors, including Vulcan Ventures and Showtime and the issuance of $121,000 of common stock. We have commitments for future lease payments under facilities operating leases of $20.2 million and obligations under capital leases of $2.1 million as of March 31, 2000. The obligations under the capital lease relate to equipment leased under a total available lease line of $2.5 million, which expired in February 2000. Our future capital requirements will depend on a variety of factors, including market acceptance of the personal video recorder and the TiVo Service, the resources we devote to developing, marketing, selling and supporting our products and other factors. We expect to devote substantial capital resources: . to subsidize the sale of personal video recorders; . to advertise our brand and market our product; . to hire and expand our engineering, sales and marketing and customer support organizations; . to expand into the European market; . 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; 13 . develop new or enhance existing services or products; . expand into new markets and respond to competitive pressures; or . acquire or invest in complementary businesses, technologies, services or products. In addition, in order to meet long-term liquidity needs, we may need to raise additional funds, establish a credit facility or seek other financing arrangements. Additional funding may not be available on favorable terms or at all. See "Factors That May Affect Future Operating Results-If we are unable to raise additional capital on acceptable terms, our ability to effectively manage growth and build a strong brand could be harmed." Impact of Inflation We believe that inflation has not had a significant impact on our operating results. Year 2000 Issue As of March 31, 2000, we have not experienced any material Year 2000 related disruptions in our operations. While we believe most Year 2000 problems should have become evident on January 1, 2000, additional Year 2000 related problems may only become evident after that date. Our phased program to inventory, assess, remediate, test, implement and develop contingency plans for all mission-critical applications and products potentially affected by the Year 2000 issue ("Y2K Program") was described in our 1999 Form 10-K. This program was substantially completed prior to the calendar year end. Our total incremental spending over the life of the Y2K Program was approximately $35,000, which we funded from operating cash flows. Factors that May Affect Future Operating Results In addition to the other information included in this Report, the following factors should be considered in evaluating our business and future prospects: We have recognized very limited revenue, have incurred significant net losses and may never achieve profitability. We have recognized limited revenues, have incurred significant losses and have had substantial negative cash flow. During the three months ended March 31, 2000, we recognized subscription revenues of $424,000. As of March 31, 2000, we had an accumulated deficit of $100.9 million. We expect to incur significant operating expenses over the next several years in connection with the continued development and expansion of our business. As a result, we expect to continue to incur losses for the foreseeable future. The size of these net losses depends in part on the growth in our subscriber base and on our expenses. With increased expenses, we will need to generate significant additional revenues to achieve profitability. Consequently, we may never achieve profitability, and even if we do, we may not sustain or increase profitability on a quarterly or annual basis in the future. Our limited operating history may make it difficult for us or investors to evaluate trends and other factors that affect our business. We were incorporated in August 1997 and have been obtaining subscribers 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 March 31, 2000, only a limited number of personal video recorders had been sold and we obtained only a limited number of subscribers to the TiVo Service. As a result of our limited operating history, our historical financial and operating information is of limited value in evaluating our future operating results. In addition, any evaluation of our business must be made in light of the risks and difficulties encountered by companies offering products or services in new and rapidly evolving markets. For example, it may be difficult to accurately predict our future revenues, costs of revenues, expenses or results of 14 operations. Personal television is a new product category for consumers and it may be difficult to predict the future growth rate, if any, or size of the market for our products and services. We may be unable to accurately forecast customer behavior and recognize or respond to emerging trends, changing preferences or competitive factors facing us. As a result, we may be unable to make accurate financial forecasts and adjust our spending in a timely manner to compensate for any unexpected revenue shortfall. This inability could cause our net losses in a given quarter to be greater than expected, which could cause the price of our stock to decline. If our marketing in the retail channel is not successful, consumers and consumer electronics manufacturers may not accept the TiVo Service and products that enable the TiVo Service. Our success depends upon a continually successful retail marketing campaign for the TiVo Service and related personal video recorders, which began in the third quarter of 1999. We will rely principally on our consumer electronics partners, such as Philips and Sony, to manufacture, market, sell and support the personal video recorder that enables the TiVo Service. We also will rely on the efforts of DIRECTV to market, sell and support the TiVo Service to DIRECTV subscribers. The ongoing marketing campaign requires, among other things, that we: . educate consumers on the benefits of the TiVo Service and related personal video recorder, which will require an extensive marketing campaign; . commit a substantial amount of human and financial resources to achieve continued, successful retail distribution; and . coordinate our own sales, marketing and support activities with those of Philips, DIRECTV and other strategic partners. We or our strategic partners may not achieve any or all of these objectives. In addition, consumers may perceive the TiVo Service and related personal video recorder as too expensive or complex and our marketing campaign may not effectively attract new subscribers. Because of competitive offerings or changing preferences, consumers may delay or decline the purchase of the TiVo Service and related personal video recorder. All of these events would reduce consumer demand and market acceptance, diminish our brand and impair our ability to attract subscribers to the TiVo Service. We have agreed to share a substantial portion of the revenue we generate from subscription fees with some of our strategic partners. We may be unable to generate enough revenue to cover these obligations. We have agreed to share a substantial portion of our subscription and other fees with some of our strategic partners in exchange for manufacturing, distribution and marketing support and discounts on key components for personal video recorders. Given how these amounts are calculated, we may be required to share substantial portions of the subscription and other fees attributable to the same subscriber with multiple partners. These agreements require us to share a portion of our subscription fees whether or not we reduce the price of the TiVo Service. If we reduce our subscription fees in response to competitive or other market factors, our operating results would be adversely affected. Our decision to share subscription revenues is based on our expectation 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 15 perform their obligations as expected or that any revenue, cost savings or other benefits will be derived from the efforts of these parties. If any of these parties breaches or terminates its agreement with us or otherwise fails to perform their obligations in a timely manner, we may be delayed or prevented from commercializing our products and services. Because our relationships with these parties are non-exclusive, they may also support products and services that compete directly with us, or offer similar or greater support to our competitors. Any of these events could require us to undertake unforeseen additional responsibilities or devote additional resources to commercialize our products and services. This outcome would harm our ability to compete effectively and quickly achieve market acceptance and brand recognition. In addition, we face the following risks in relying on these third parties: If our manufacturing partnerships are not successful, we may be unable to establish a market for our products and services. We initially manufactured the personal video recorders that enable the TiVo Service through a third-party contract manufacturer. We have entered into agreements with Philips and Sony to manufacture and distribute the personal video recorders that enable the TiVo Service. We have transitioned manufacturing of the personal video recorder from our third-party contract manufacturer to Philips, who assumed manufacturing responsibility in the fourth quarter of 1999. However, we have no minimum volume commitments from Philips, Sony or any other manufacturer. The ability of our manufacturing partners to provide sufficient production volume of the personal video recorder to satisfy demand, is subject to delays and unforeseen problems such as defects, shortages of critical components and cost overruns. Moreover, they will require substantial lead times to manufacture anticipated quantities of the personal video recorders that enable the TiVo Service. Delays and other problems could impair the retail distribution and brand image and make it difficult for us to attract subscribers. In addition, the loss of a manufacturing partner would require us to identify and contract with alternative sources of manufacturing, which we may be unable to do and which could prove time-consuming and expensive. Although we expect to continue to contract with additional consumer electronics companies for the manufacture of personal video recorders in the future, we may be unable to establish additional relationships on acceptable terms. If our corporate partners fail to perform their obligations, we may be unable to effectively market and distribute our products and services. Our manufacturing partners distribute the personal video recorder that enables the TiVo Service. We rely on their sales forces, marketing budgets and brand images to promote and support the personal video recorder and the TiVo Service. We expect to continue to rely on our manufacturing partners and other strategic partners to promote and support the personal video recorder and other devices that enable the TiVo Service. The loss of one or more of these partners could require us to undertake more of these activities on our own. As a result, we would spend significant resources to support personal video recorders and other devices that enable the TiVo Service. We also expect to rely on DIRECTV 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. 16 In addition to the above, we have several sole suppliers for key components of our products currently under development. We cannot be sure that alternative sources for key components and services used in the personal video recorders and the TiVo Service will be available when needed or, if available, that these components and services will be available on favorable terms. If our agreements or our manufacturing partners' agreements with Quantum, NEC, Sony or Tribune Media Services were to terminate or expire, or if we or our manufacturing partners were unable to obtain sufficient quantities of these components or required program guide data, our search for alternate suppliers could result in significant delays, added expense or disruption in product availability. Our ability to generate revenues from subscription fees is unproven and may fail. We expect to generate a substantial portion of our revenues from subscription fees for the TiVo Service. Many of our potential customers already pay monthly fees for cable or satellite television services. We must convince these consumers to pay an additional subscription fee to receive the TiVo Service. The availability of competing services that do not require subscription fees will harm our ability to effectively attract subscribers. In addition, the personal video recorder that enables the TiVo Service can be used to record programs and pause, rewind and fast forward through live or recorded shows without an active subscription to the TiVo Service. If a significant number of purchasers of our personal video recorders use these devices without subscribing to the TiVo Service, our revenue growth will decline and we may not achieve profitability. Our business is expanding rapidly and our failure to manage growth could disrupt our business and impair our ability to generate revenues. Since we began our business in August 1997, we have significantly expanded our operations. We anticipate continued expansion in our headcount, facilities and infrastructure to support potential growth in our subscriber base and to allow us to pursue market opportunities. This expansion has placed, and will continue to place, a significant strain on our management, operational and financial resources and systems. Specific risks we face as our business expands include: We need to attract and retain qualified personnel, and any failure to do so may impair our ability to offer new products or grow our business. Our success will depend on our ability to attract, retain and motivate managerial, technical, marketing, financial, administrative and customer support personnel. Competition for such employees is intense, especially for engineers in the San Francisco Bay Area, and we may be unable to successfully attract, integrate or retain sufficiently qualified personnel. If we are unable to hire, train, retain and manage required personnel, we may be unable to successfully introduce new products or otherwise implement our business strategy. Any inability of our systems to accommodate our expected subscriber growth may cause service interruptions or delay our introduction of new services. We internally developed many of the systems we use to provide the TiVo Service and perform other processing functions. The ability of these systems to scale as we rapidly add new subscribers is unproven. We must continually improve these systems to accommodate subscriber growth and add features and functionality to the TiVo Service. Our inability to add software and hardware or to upgrade our technology, systems or network infrastructure could adversely affect our business, cause service interruptions or delay the introduction of new services. We will need to provide acceptable customer support, and any inability to do so will harm our brand and ability to generate and retain new subscribers. Our ability to increase sales, retain current and future subscribers and strengthen our brand will depend in part upon the quality of our customer support operations. Some customers require significant support when installing the personal video recorder and becoming acquainted with the features and functionality of the TiVo Service. We have limited experience with widespread deployment of our products and services to a diverse customer base, and we may not have adequate personnel to provide the levels of support that our customers require. In addition, we have entered into agreements with third parties to provide this support and will rely on them for a substantial portion of our customer support functions. Our failure to provide adequate customer support for the TiVo Service and personal video recorder will damage our reputation in the personal television and consumer electronics marketplace and strain our relationships with 17 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 in 2000. Delays or problems associated with any improvement or expansion of our operational and financial systems and controls could adversely impact our relationships with subscribers and cause harm to our reputation and brand. Delays or problems associated with any improvement or expansion of our operational and financial systems and controls could also result in errors in our financial and other reporting. If we are unable to create multiple revenue streams, we may not be able to cover our expenses or meet our obligations to strategic partners and other third parties. Although our initial success will depend on building a significant customer base and generating subscription fees from the TiVo Service, our long-term success will depend on securing additional revenue streams such as: . advertising; . revenues from networks; and . electronic commerce or couch commerce. In order to derive substantial revenues from these activities, we will need to attract and retain a large and growing base of subscribers to the TiVo Service. We also will need to work closely with television advertisers, cable and satellite network operators, electronic commerce companies and consumer electronics manufacturers to develop products and services in these areas. We may not be able to effectively work with these parties to develop products that generate revenues that are sufficient to justify their costs. In addition, we are currently obligated to share a portion of these revenues with several of our strategic partners. Any inability to attract and retain a large and growing group of subscribers and strategic partners will seriously harm our ability to support new services and develop new revenue streams. It will take a substantial amount of time and resources to achieve broad market acceptance of the TiVo Service and products that enable the TiVo Service and we cannot be sure that these efforts will generate a broad enough subscriber base to sustain our business. Personal television products and services represent a new, untested consumer electronics category. The TiVo Service is in an early stage of development and many consumers are not aware of its benefits. As a result, 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: 18 Internet-related companies and companies offering similar products and services. We are likely to face intense direct competition from companies such as WebTV Networks Inc., ReplayTV, Inc. and X-TV. These companies offer, or have announced their intention to offer, products with one or more of the TiVo Service's functions or features and, in some instances, combine these features with Internet browsing or traditional broadcast, cable or satellite television programming. Many of these companies have greater brand recognition and market presence and substantially greater financial, marketing and distribution resources than we do. For example, Microsoft Corporation controls and provides financial backing to WebTV. Some of these companies also have established relationships with third party consumer electronic manufacturers, network operators and programmers, which could make it difficult for us to establish relationships and enter into agreements with these third parties. Some of these competitors also have relationships with our strategic partners. For example, DIRECTV recently formed an alliance with America Online. Faced with this competition, we may be unable to expand our market share and attract an increasing number of subscribers to the TiVo Service. Established competitors in the consumer electronics market. We compete with consumer electronic products in the television and home entertainment industry. The television and home entertainment industry is characterized by rapid technological innovation, a small number of dominant manufacturers and intense price competition. As a new product category, personal television enters a market that is crowded with several established products and services. The competition for consumer spending in the television and home entertainment market is intense, and our products and services will compete with: . satellite television systems; . video on demand services; . digital video disc players; and . laser disc players. Most of these technologies or devices have established markets, a broad subscriber base and proven consumer acceptance. In addition, many of the manufacturers and distributors of these competing devices have substantially greater brand recognition, market presence, distribution channels, advertising and marketing budgets and promotional and other strategic partners. Faced with this competition, we may be unable to effectively differentiate the personal video recorder or the TiVo Service from these devices. Established competition for advertising budgets. Personal television, in general, and TiVo, specifically, also compete with traditional advertising media such as print, radio and television for a share of advertisers' total advertising budgets. If advertisers do not perceive personal television as an effective advertising medium, they may be reluctant to devote a significant portion of their advertising budget to promotions on the TiVo Service. 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. 19 If we do not successfully establish strong brand identity in the personal television market, we may be unable to achieve widespread acceptance of our products. We believe that establishing and strengthening the TiVo brand is critical to achieving widespread acceptance of our products and services and to establishing key strategic partnerships. The importance of brand recognition will increase as current and potential competitors enter the personal television market with competing products and services. Our ability to promote and position our brand depends largely on the success of our marketing efforts and our ability to provide high quality services and customer support. These activities are expensive and we may not generate a corresponding increase in subscribers or revenues to justify these costs. If we fail to establish and maintain our brand, or if our brand value is damaged or diluted, we may be unable to attract subscribers and effectively compete in the personal television market. Product defects, system failures or interruptions to the TiVo Service may have a negative impact on our revenues, damage our reputation and decrease our ability to attract new subscribers. Our ability to provide uninterrupted service and high quality customer support depends on the efficient and uninterrupted operation of our computer and communications systems. Our computer hardware and other operating systems for the TiVo Service are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures and similar events. They are also subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. These types of interruptions in the TiVo Service may reduce our revenues and profits. Our business also will be harmed if consumers believe our service is unreliable. In addition to placing increased burdens on our engineering staff, service outages will create a flood of customer questions and complaints that must be responded to by our customer support personnel. Any frequent or persistent system failures could irreparably damage our reputation and brand. We have detected and may continue to detect errors and product defects. These problems can affect system uptime, result in significant warranty and repair problems, which could cause customer service and customer relations problems. Correcting errors in our software requires significant time and resources, which could delay product releases and affect market acceptance of the TiVo Service. Any delivery by us of products or upgrades with undetected material product defects or software errors could harm our credibility and market acceptance of the personal video recorders and the TiVo Service. Intellectual property claims against us can be costly and could result in the loss of significant rights. From time to time, we may be subject to intellectual property litigation, which could: . be time-consuming and expensive; . divert management's attention and resources away from our business; . 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 20 or other right could cause our manufacturing partners to cease manufacturing the personal video recorder or us to cease providing our service, or both, which would eliminate our ability to generate revenues. On January 6, 2000 PhoneTel Communications, Inc. filed a lawsuit against us in the U.S. District Court for the Northern District of Texas alleging that the TiVo Service violates a patent held by PhoneTel. The lawsuit seeks unspecified monetary damages as well as an injunction against our operations. It also seeks attorneys' fees and costs. On April 17, 2000, this suit was voluntarily dismissed by PhoneTel. If this suit is re-filed by PhoneTel, TiVo believes that it has meritorious defenses against the claims and intends to vigorously defend itself against such claims made by PhoneTel. In the event the suit is re-filed, TiVo could be forced to incur material expenses and in the event it were to lose such a suit its business would be harmed. On January 18, 2000, StarSight Telecast Inc., a subsidiary of Gemstar International Group Limited filed a lawsuit against us in the U.S. District Court for the Northern District of California alleging that the TiVo Service violates a patent held by StarSight. This lawsuit also seeks unspecified monetary damages and an injunction against our operations. The suit also seeks attorneys' fees and costs. To defend this lawsuit, we could be forced to incur material expenses. Additionally, in the event that we were to lose this lawsuit our business would be harmed. In addition, we are aware that some media companies may attempt to form organizations to develop standards and practices in the personal television industry. These organizations or individual media companies may attempt to require companies in the personal television industry to obtain copyright or other licenses. A number of articles have appeared in the press regarding the formation of a consortium of broadcast and cable television networks called the Advanced Television Copyright Coalition. Some of those articles have indicated that the coalition is prepared to support litigation and to explore legislative solutions unless the members of the personal television industry agree to obtain license agreements for use of the companies' programming. We have received letters from Time Warner Inc. and Fox Television stating that these entities believe our personal television service exploits copyrighted networks and programs without the necessary licenses and business arrangements. Lawsuits or other actions taken by these types of organizations or companies could make it more difficult for us to introduce new services, delay widespread consumer acceptance of our products and services, restrict our use of some television content, increase our costs and adversely affect our business. Our success depends on our ability to secure and protect patents, trademarks and other proprietary rights. Our success and ability to compete are substantially dependent upon our internally developed technology. We rely on patent, trademark and copyright law, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our proprietary rights. However, the steps we take to protect our proprietary rights may be inadequate. We have filed patent applications and provisional patent applications covering substantially all of the technology used to deliver the TiVo Service and its features and functionality. To date, none of these patents has been granted, and we cannot assure you that any patents will ever be granted, that any issued patents will protect our intellectual property or that third parties will not challenge any issued patents. In addition, other parties may independently develop similar or competing technologies designed around any patents that may be issued to us. Our failure to secure and protect our proprietary rights could have a material adverse effect on our business. 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. 21 The Federal Communications Commission has broad jurisdiction over the telecommunications and cable industries. The majority of FCC regulations, while not directly affecting us, do affect many of the strategic partners on whom we substantially rely for the marketing and distribution of the personal video recorder and the TiVo Service. As such, the indirect effect of these regulations may adversely affect our business. In addition, the FCC could promulgate new regulations, or interpret existing regulations in a manner that would cause us to incur significant compliance costs or force us to alter the features or functionality of the TiVo Service. We need to safeguard the security and privacy of our subscribers' confidential data, and any inability to do so may harm our reputation and brand and expose us to legal action. The personal video recorder collects and stores viewer preferences and other data that many of our subscribers consider confidential. Any compromise or breach of the encryption and other security measures that we use to protect this data could harm our reputation and expose us to potential liability. Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments could compromise or breach the systems we use to protect our subscribers' confidential information. We may be required to make significant expenditures to protect against security breaches or to remedy problems caused by any breaches. Uncertainty in the marketplace regarding the use of data from subscribers could reduce demand for the TiVo Service and result in increased expenses. Consumers may be concerned about the use of personal information gathered by the TiVo Service and personal video recorder. Under our current policy, we do not access this data or release it to third parties. Privacy concerns, however, could create uncertainty in the marketplace for personal television and our products and services. Changes in our privacy policy could reduce demand for the TiVo Service, increase the cost of doing business as a result of litigation costs or increased service delivery costs, or otherwise harm our reputation and business. We would lose revenues and incur significant costs if our systems or those of our key partners or suppliers are not year 2000 compliant. Many computer programs have been written using two digits rather than four to define the applicable year. This posed a problem at the end of the century because these computer programs do not properly recognize the year. Although there was no interruption of our systems or other problems related to Year 2000 issues at the turn of the year, there may still be Year 2000 related problems during the year caused by systems that have not yet been triggered by the Year 2000 date. This could result in major system failures or miscalculations that would disrupt our business. We completed our year 2000 assessment in September 1999 and completed interface testing and remediation in December 1999. We are not aware of any year 2000 issues, at this time, that would have a material effect on our business. Our assessment, however, may not have identified material non-compliance issues with the TiVo Service or the personal video recorder, our information technology systems or the systems of our partners or suppliers. If present, we may not be able to successfully resolve these issues, or it may be costly to do so. In addition, we cannot assure you that governmental agencies, utility companies, third-party service providers and others outside of our control will be year 2000 compliant. Such entities' failure to be year 2000 compliant throughout the year 2000 could result in a systemic failure beyond our control. For example, a prolonged telecommunications or electrical failure, due to equipment being shut down if maintenance is not performed by a specific date during the year 2000, could prevent us from delivering upgrades and regular downloads to the personal video recorders that enable the TiVo Service and could adversely impact the functionality of the personal video recorder. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Issue." In the future, our revenues and operating results may fluctuate significantly, which may adversely affect the market price of our common stock. 22 We expect our revenues and operating results to fluctuate significantly due to a number of factors, many of which are outside of our control. Therefore, you should not rely on period-to-period comparisons of results of operations as an indication of our future performance. It is possible that in some future periods our operating results may fall below the expectations of market analysts and investors. In this event, the market price of our common stock would likely fall. Factors that may affect our quarterly operating results include: . demand for personal video recorders and the TiVo Service; . the timing and introduction of new services and features on the TiVo Service; . seasonality and other consumer and advertising trends; . changes in revenue sharing arrangements with our strategic partners; . entering into new or terminating existing strategic partnerships; . changes in the subsidy payments we make to certain strategic partners; . changes in our pricing policies, the pricing policies of our competitors and general pricing trends in the consumer electronics market; . loss of subscribers to the TiVo Service; and . general economic conditions. Because our expenses precede associated revenues, unanticipated shortfalls in revenue could adversely affect our results of operations for any given period and cause the market price of our common stock to fall. Seasonal trends may cause our quarterly operating results to fluctuate and our inability to forecast these trends may adversely affect the market price of our common stock. Consumer electronic product sales have traditionally been much higher during the holiday shopping season than during other times of the year. Although predicting consumer demand for our products is very difficult, we believe that sales of personal video recorders and new subscriptions to the TiVo Service will be disproportionately high during the holiday shopping season when compared to other times of the year. If we are unable to accurately forecast and respond to consumer demand for our products, our reputation and brand will suffer and the market price of our common stock would likely fall. We expect that a portion of our future revenues will come from targeted commercials and other forms of television advertising enabled by the TiVo Service. Expenditures by advertisers tend to be seasonal and 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. 23 If additional capital is raised through the issuance of equity securities, the percentage ownership of our existing stockholders will decline, stockholders may experience dilution in net book value per share, or these equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. Any debt financing, if available, may involve covenants limiting, or restricting our operations or future opportunities. We have agreed to subsidize the cost of manufacturing personal video recorders, which may adversely affect our operating results and ability to achieve profitability. We have agreements with our consumer electronic manufacturing partners to manufacture the personal video recorder that enables the TiVo Service. We have agreed to pay our manufacturing partners a per-unit subsidy for each personal video recorder that they manufacture and sell. A portion of the subsidy amount is paid when the personal video recorder is shipped. The remaining portion is due when the subscriber activates the TiVo Service. The amount of the payments can vary depending upon the manufacturing costs and selling prices. In addition, in the event our manufacturing partners are unable to manufacture the personal video recorders at the costs currently estimated or if selling prices are less than anticipated, we may owe additional amounts to them, which could adversely affect our operating results. We are obligated to pay a portion of the subsidy when the personal video recorder is shipped, and we will not receive any revenues related to the unit until the unit is sold and the purchaser activates the TiVo Service. We may make additional subsidy payments in the future to consumer electronic and other manufacturers in an effort to maintain a commercially viable retail price for the personal video recorders and other devices that enable the TiVo Service. The lifetime subscriptions to the TiVo Service that we currently offer commit us to providing services for an indefinite period. The revenue we generate from these subscriptions may be insufficient to cover future costs. We currently offer lifetime subscriptions that commit us to provide service for as long as the subscription to the TiVo Service is active for the personal video recorder. We receive the lifetime subscription fee for the TiVo Service in advance and amortize it as subscription revenue over four years, which is our estimate of the service life of the personal video recorder. If these lifetime subscribers use the personal video recorder for longer than anticipated, we will incur costs without a corresponding revenue stream and therefore will be required to fund ongoing costs of service from other sources. If we lose key management personnel, we may not be able to successfully operate our business. Our future performance will be substantially dependent on the continued services of our senior management and other key personnel. The loss of any members of our executive management team and our inability to hire additional executive management could harm our business and results of operations. In addition, we do not have employment agreements with, or key man insurance policies for, any of our key personnel. Item 3. Quantitative and Qualitative Disclosure About Market Risk Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio and conduct all transactions in U.S. dollars. Our investment portfolio only includes highly liquid instruments with original maturities of less than one year. We are subject to fluctuating interest rates that may impact, adversely or otherwise, our results of operations or cash flows for our cash and cash equivalents and our short-term investments. Although payments under the operating lease for our facility are tied to market indices, we are not exposed to material interest rate risk associated with the operating lease. Our capital lease obligations are not subject to changes in the interest rate and, therefore, are not exposed to interest rate risk. 24 PART II : Other Information Item 1. Legal Proceedings In January 2000, patent infringement suits were filed against TiVo by StarSight Telecast, Inc. TiVo's legal counsel is currently researching the patents, which were referenced in the complaints. On January 6, 2000, a suit was filed against TiVo by PhoneTel Communications, Inc. ("PhoneTel") in the U.S. District Court for the Northern District of Texas alleging willful and deliberate violation of a patent held by PhoneTel. The suit sought unspecified monetary damages as well as an injunction against TiVo's operations. The suit also sought attorneys' fees and costs. On April 17, 2000, this suit was voluntarily dismissed by PhoneTel. While the suit could be re-filed by PhoneTel, TiVo believes that it has meritorious defenses against the claims and intends to vigorously defend itself against such claims made by PhoneTel. In the event the suit is re-filed, TiVo could be forced to incur material expenses and in the event it were to lose such a suit its business would be harmed. 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 25 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 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, expansion of its sales, marketing and service capabilities and facilities. The use of proceeds does not represent a material change in the use of proceeds as described in TiVo's prospectus dated September 29, 1999 comprising part of TiVo's Registration Statement on Form S-1, as amended, filed with the Securities and Exchange Commission (SEC File No. 333-83515). 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 None. ITEM 5. Other Information None. 26 Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Exhibits EXHIBIT NUMBER DESCRIPTION ------ ----------- 3.2* Amended and Restated Certificate of Incorporation. 3.4* Amended and Restated Bylaws. 4.3* Ninth Amended and Restated Investor Rights Agreement between TiVo and certain investors, dated as of August 6, 1999. 10.1* Form of Indemnification Agreement between TiVo and its officers and directors. 10.2* TiVo's 1999 Equity Incentive Plan and related documents. 10.3* TiVo's Amended and Restated 1997 Equity Incentive Plan and related documents. 10.4* TiVo's 1999 Employee Stock Purchase Plan and related documents. 10.5**** TiVo's 1999 Non-Employee Directors' Stock Option Plan and related documents. 10.6*+ Hard Disk Drive Supply Agreement between Quantum Corporation and TiVo, dated November 6, 1998. 10.7*+ Master Agreement between Philips Business Electronics B.V. and TiVo, dated March 31, 1999. 10.8*+ Marketing Agreement between DIRECTV, Inc. and TiVo, dated April 13, 1999. 10.9*+ Agreement between NBC Multimedia, Inc. and TiVo, dated April 16, 1999. 10.10* Sublease Agreement between Verity, Inc. and TiVo, dated February 23, 1998. 10.11* Amendment to Sublease Agreement between Verity, Inc. and TiVo, dated November 1998. 10.12* Second Amendment to Sublease Agreement between Verity, Inc. and TiVo, dated March 1999. 10.13* Consent of Landlord to Sublease between Verity, Inc. and TiVo, dated February 23, 1998. 10.15* Master Lease Agreement between Comdisco, Inc. and TiVo, dated February 12, 1999. 10.16*+ Warrant Purchase and Equity Rights Agreement between Quantum Corporation and TiVo, dated November 6, 1998 and related documents. 10.17* Warrant to Purchase Shares of Series A Preferred Stock issued to Randy Komisar dated March 18, 1998. 10.18* Warrant Agreement between Comdisco, Inc. and TiVo, dated February 12, 1999. 10.19* Secured Convertible Debenture Purchase Agreement between TiVo and certain of its investors, dated April 8, 1999, and related documents. 10.20* First Amendment to Hard Disk Supply Agreement between Quantum and TiVo, dated June 25, 1999. 10.21* TiVo's 401(k) Plan, effective December 1, 1997. 10.22*+ Tribune Media Services Television Listing Agreement between Tribune Media Services and TiVo, dated June 1, 1998. 10.23*+ Amendment to the Data License Agreement between Teleworld Inc., and Tribune Media Services, Inc. between Tribune Media Services and TiVo, dated November 10, 1998. 10.24** Lease Agreement between WIX/NSJ Real Estate Limited Partnership and TiVo, dated October 6, 1999. 99.5*** Form of Stock Option Grant used in connection with an option granted outside of TiVo's stock option plans and related documents 27.1++ Financial Data Schedule. 27 ----------------------- * Incorporated by reference to the same numbered exhibit previously filed with TiVo's Registration Statement on Form S-1 (SEC File No. 333- 83515), originally filed on July 22, 1999. ** Incorporated by reference to the same numbered exhibit previously filed with TiVo's Quarterly report on Form 10-Q filed November 15, 1999. *** Incorporated by reference to the same numbered exhibit previously filed with TiVo's Registration Statement on Form S-8 (SEC File No. 333- 94629), filed on January 13, 2000. **** Incorporated by reference to the same numbered exhibit previously filed with TiVo's Annual report on Form 10-K file March 30, 2000. + 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. Reports on Form 8-K TiVo did not file any reports on Form 8-K during the quarter ended March 31, 2000. Trademark Acknowledgments "Active Preview", "Can't Miss TV", "DIRECTIVO", Instant Replay logo, "Ipreview", Jump logo, "Life's too short for bad TV", "Network Showcase", "Personal TV", "Personal Video Recorder", "Primetime Anytime", "Season Pass", "See it, want it, get it", "The New Face of Television", "The way TV is meant to be", "Thumbs Down" (logo and text), "Thumbs Up" (logo and text), "TiVo Central", "TiVo" (logo, name and character), "TiVolution", "What you want, when you want it", and "You run the shows" are trademarks of TiVo Inc. All other trademarks or trade names appearing in this report are the property of their respective owners. 28 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. TIVO INC. Date: May 15, 2000 By: /s/ Michael Ramsay _____________________ Michael Ramsay Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) Date: May 15, 2000 By: /s/ David H. Courtney _____________________ David H. Courtney Chief Financial Officer and Sr. Vice President of Finance and Administration (Principal Financial and Accounting Officer) 29 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 122,035 0 2,518 0 0 130,266 8,820 1,202,000 139,086 25,159 1,205 0 0 38 213,620 139,086 424 424 0 4,168 22,065 0 70 (24,055) 0 (24,055) 0 0 0 (24,055) (0.68) (0.68)
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