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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
Amendment No. 1
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1999
Commission file number 000-27141
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TIVO INC.
(Exact name of registrant as specified in its charter)
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Delaware 77-0463167
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(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
2160 Gold Street, PO Box 649101, San Jose, CA 95164-9101
(Address of principal executive offices) (Zip Code)
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(408) 519-9100
(Registrant's telephone number including area code)
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE PER SHARE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
As of March 15, 2000 there were 16,204,153 shares of registrant's common
stock outstanding, and the aggregate market value of such shares held by non-
affiliates of the registrant (based upon the closing sale price of such shares
on the NASDAQ National Market on March 15, 2000) was approximately $583.3
million. Shares of the registrant's common stock held by each executive
officer, director and holder of five percent or more of the registrant's common
stock outstanding as of March 15, 1999 have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
EXPLANATORY NOTE
This Amendment No. 1 to the Annual Report on Form 10-K for TiVo Inc. (the
"Company") for the fiscal year ended December 31, 1999 as filed with the
Securities and Exchange Commission on March 29, 2000 is being filed to provide
the information required by Part III, rather than to incorporate the same by
reference.
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TABLE OF CONTENTS
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PART I.................................................................. 3
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 19
Item 3. Legal Proceedings............................................. 19
Item 4. Submission of Matters to a Vote of Security Holders........... 19
PART II................................................................. 20
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters....................................................... 20
Item 6. Selected Financial Data....................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 22
Item 7A. Quantitative and Qualitative Disclosure About Market Risk..... 40
Item 8. Financial Statements and Supplementary Data................... 41
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 60
PART III................................................................ 60
Item 10. Directors and Executive Officers of the Company............... 60
Item 11. Executive Compensation........................................ 63
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 67
Item 13. Certain Relationships and Related Transactions................ 69
PART IV................................................................. 72
Item 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K...................................................... 72
Signatures............................................................. 74
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PART I
ITEM 1. BUSINESS
The Business of the Company
This Annual Report on Form 10-K (the "Annual Report") contains certain
forward-looking statements within the meaning of section 21E of the Securities
Exchange Act of 1934 as amended, (the "Exchange Act"), including statements
that indicate what the Company "believes," "expects" and "anticipates" or
similar expressions. These statements involve known and unknown risks,
uncertainties and other factors, which may cause actual results, performance or
achievements of the Company to differ materially from those expressed or
implied by such forward-looking statements. Such factors include, among others,
the information contained under the captions "Part I, Item 1. Business," and
"Part II, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" in this Annual Report. The reader is cautioned not
to place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date of this Annual Report. The Company
undertakes no obligation to publicly release the results of any revision of
these forward-looking statements. The reader is strongly urged to read the
information set forth under the captions "Part I, Item 1, Business," and "Part
II, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a more detailed description of these significant
risks and uncertainties.
Overview
TiVo Inc. ("TiVo" or the "Company") is a pioneer in the personal television
industry. TiVo has created a unique personal television service that allows
viewers to watch what they want when they want. The TiVo Service creates a
richer and more enjoyable television experience by offering viewers greater
control, choice, and convenience. TiVo believes that the TiVo Service also
allows television programmers and advertisers to reach a broader audience by
making shows more accessible and easier to record and to target their
programming and advertising to specific viewers. The TiVo Service is a
subscription-based service enabled by a personal video recorder designed and
developed by TiVo.
TiVo commenced its retail launch in the second half of 1999. Philips
Business Electronics B.V. ("Philips") currently manufactures, markets and sells
the personal video recorder enabling the TiVo Service, allowing TiVo to focus
its resources on promoting and enhancing the TiVo Service. DIRECTV, Inc., a
unit of Hughes Electronics Corporation ("DIRECTV"), provides marketing
resources that allows TiVo to target DIRECTV subscribers and provides sales
support in the retail channel.
Industry Background
The television is a truly ubiquitous consumer product. According to the
market research firm Nielsen Media Research, 98.0 million, or more than 98% of
all U.S. households, owned at least one television at the end of 1998. Nielsen
also reports that in 1998, U.S. households owned, on average, 2.4 televisions
and spent an average of 7 hours and 15 minutes per day viewing television.
The reach and popularity of television has been facilitated by the emergence
of new technologies and delivery systems for television programming. These new
technologies have enhanced the clarity, color and sound of television and, as a
result, have increased the entertainment value of watching television. In
addition, new delivery systems, including cable and satellite systems, now
offer a large number of programming choices and specialized programming such as
pay-per-view promotions. According to Paul Kagan Associates, 66.1 million U.S.
households spent $30.9 billion to receive subscription-based cable television
services in 1998. In addition, according to Skytrends, 10.6 million U.S.
households spent $5.3 billion to receive subscription-based satellite
television services in 1998.
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These statistics have not been lost on advertisers, who have made television
their largest, most popular medium for reaching consumers. McCann-Erickson,
Inc., a market research firm, estimates that $47.4 billion was spent on
television advertising in 1998. This represents over 23% of total advertising
spending.
As the reach and popularity of television has grown, so too has the amount
of programming available to viewers. Cable and home satellite television
systems have dramatically increased the number of networks and channels
available to today's television viewer. According to the Television & Cable
Fact Book, in 1998, over 60% of U.S. cable subscribers had access to more than
53 channels, compared to less than 10% in 1985. The explosive growth in
available channels has led to an overwhelmingly diverse selection of
programming and content. This is due in large part to the emergence of
specialized television channels and networks, which are formed around a given
subject, theme or category of interest. For example, channels have been created
to deliver programming to targeted groups, such as women or children, or to
deliver specialized content, such as news, cartoons, classic movies, golf,
comedy or educational programming. Subscription-based premium channels, such as
HBO and Showtime, also offer specialized programming, including major motion
pictures, made-for-television movies and sporting events. Clearly, there is
more television programming to choose from now than ever before.
The Need For Personal Television
From the introduction of color television and remote controls to the
proliferation of cable and satellite programming and home theater systems,
improvements in the television experience have been aimed at meeting viewer
demand for richer programming and a more enjoyable viewing experience. However,
the dramatic increase in the volume and diversity of television programming has
fragmented viewing audiences and created new challenges for viewers, television
programmers, network operators and advertisers.
Challenges Faced by Viewers. TiVo believes that today's television viewer
wants greater control, choice and convenience when watching television. Today's
television viewers:
. are unable to easily navigate through hundreds of channels and thousands
of programs;
. are unable to easily identify programs of interest;
. are limited to either watching shows at the time they are broadcast or
recording shows by using a VCR; and
. are often forced to miss portions of shows due to interruptions.
Challenges Faced by Television Programmers. Although the television has
become a ubiquitous product, the dramatic increase in the volume and diversity
of channels and programming has drawbacks for networks and other television
programmers. The major networks have been particularly affected by the
proliferation of channels and specialized programming, and are suffering from:
. brand dilution and declining viewer loyalty;
. greater fragmentation of their audience base; and
. the inability to effectively evaluate viewing habits, preferences and
demand.
The TV International Sourcebook for 1999 reports that networks have steadily
lost market share to other content providers, from 60% market share in 1993 to
approximately 45% in 1998. As television becomes more fragmented and the
competition for viewers increases, networks and other television programmers
must find new ways to attract viewers and increase viewer loyalty.
Challenges Faced by Advertisers. Similarly, TiVo believes that today's
television advertisers face new challenges as they seek greater effectiveness
and efficiency in targeting specific viewers and establishing brand identity
and loyalty. For example, advertisers must:
. spend increasing amounts of time and money to target desired demographic
groups;
. spread their advertising budgets over an ever-expanding number of
channels and programs; and
. find new ways to identify, monitor and respond to viewers' programming
and advertising preferences.
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As viewer fragmentation has increased, so too has the cost of advertising.
Prime time advertisements on the major television networks are more expensive
today than ever before, yet ratings and market share for these networks are
declining. According to the Television Bureau of Advertising and Nielsen Media
Research, the average cost of a 30-second night-time commercial has increased
from $92,700 in 1993 to $121,300 in 1998. Like television programmers,
advertisers must find new ways to reach their targeted audience and to
establish brand identity and loyalty among viewers.
Challenges Faced by Cable and Satellite Network Operators. As a result of
increased competition, cable and satellite network operators have begun placing
greater emphasis on acquiring and retaining subscribers and finding ways to
increase the monthly revenue they receive from these subscribers. In order to
successfully accomplish this, they must:
. improve customer satisfaction;
. enhance programming choice; and
. provide new features and functionality, such as electronic commerce.
TiVo Solution
TiVo has created a personal television service that it believes meets the
challenges faced by viewers, television programmers, advertisers and network
operators. The TiVo Service provides viewers with greater control, easier
navigation and a wider range of viewing options when watching television than
what was formerly available. The TiVo Service creates a richer and more
enjoyable viewing experience by allowing viewers to watch what they want when
they want. The TiVo Service also creates a new platform that enables television
programmers, advertisers, and network operators to deliver television
programming, advertising, and in-home commerce. TiVo believes that its service
allows television programmers and advertisers to reach a broader audience by
making shows more accessible and easier to record and to target their
programming and advertising to specific viewers. The TiVo Service is a
subscription-based service enabled by a personal video recorder designed and
developed by TiVo. The personal video recorder is a device that includes a hard
disk drive for recording shows and accessing the content available on the TiVo
Service.
The TiVo Service has many features that distinguish it from traditional
television viewing, including:
Locate and Record Multiple Shows Quickly and Easily. The TiVo Service offers
a variety of easy-to-use navigation and recording features that allow viewers
to easily locate and record their favorite shows. Viewers can record and play
back a single show or schedule a customized line-up of several shows to be
recorded without entering specialized codes, setting a timer or using a video
tape. With the Season Pass feature, the TiVo Service automatically records all
episodes of viewers' favorite shows.
Control Live Television. Using the TiVo Service and the personal video
recorder, viewers have more control over live television. For example, viewers
can utilize advanced viewing commands, such as pause, rewind, fast forward and
frame-by-frame. When a viewer pauses live television, the personal video
recorder continues to record the program that the viewer is watching. The
viewer can then resume viewing in normal mode, fast forward to catch up to the
live telecast, or execute any of the other advanced viewing commands. Prior to
the introduction of TiVo, the ability to control live television in this manner
was not available.
Viewing Preferences and Suggested Programming. The TiVo Service allows
viewers to create viewing preferences around particular shows or categories of
interest. Using the Thumbs Up and Thumbs Down buttons on the TiVo remote,
viewers can express their preferences for a particular type of show. These
preferences accumulate over time and are stored locally on the personal video
recorder. Based on the viewer's stored preferences, TiVo recommends programming
that viewers are likely to enjoy and, when storage space is available, the TiVo
Service will automatically record shows that are most likely to match viewers'
individual preferences.
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Specialized Content. The TiVo Service also includes a variety of specialized
content. For example, the TiVo Service allows television programmers to develop
and deliver Network Showcases that feature selected programming, such as an
upcoming movie, special event or mini-series, on easy-to-use interactive
screens. Currently, Network Showcases available on the TiVo Service include
directories of simplified recording options for groups of related shows of
particular programmers. In the future, television programmers could use the
TiVo Service to directly offer viewers special programming packages and pay-
per-view promotions such as movies, sporting events, news headlines and other
programming. Subscribers to the TiVo Service also have access to TiVolution
Magazine, which features theme-based collections of shows compiled by TiVo's
editorial staff.
Menu-Driven Navigation and Viewer Interface. The TiVo Service employs a
menu-driven interface and easy-to-use navigation system. TiVo Central, the main
screen of the TiVo Service, allows viewers to access their customized lineup of
shows, Network Showcases, TiVolution Magazine and other TiVo services and
features. The Pick Programs to Record feature, located on the TiVo Central
screen, allows viewers to search for shows to record by subject, title, channel
or time of showing. Using the on-air guide, viewers can quickly and efficiently
browse through a schedule of up to two weeks of available television
programming and descriptions for each show.
Benefits of the TiVo Service
For viewers, television programmers, advertisers and network operators, the
TiVo Service offers several benefits over traditional television viewing.
Benefits to Viewers. TiVo believes that its service offers an enhanced
television viewing experience. Key benefits offered to viewers include the
following:
Greater Control, Choice and Convenience. The TiVo Service provides viewers
with greater control, choice and convenience in watching television. Using the
search and navigation features and variety of recording options, viewers can:
. automatically record all episodes of their favorite shows;
. quickly and easily create a customized lineup of shows to be recorded up
to two weeks in advance;
. pause, rewind and fast-forward live television;
. skip through programming that they do not want to see; and
. access their customized lineup of recorded shows and other specialized
content.
Making Sense of Available Content. The TiVo Service assists viewers in
navigating through the hundreds of channels and thousands of programs available
for viewing. Using the TiVo Service, viewers can browse pre-set categories of
programming, such as sports or action/adventure, and select a desired show for
viewing or recording simply by entering the title, channel or time. With the
TiVo Service, viewers can easily organize their television viewing around shows
they want to watch and receive suggestions for programming that they are likely
to enjoy.
Programming that Matches Viewers' Preferences. The TiVo Service ranks and
recommends programming according to viewers' preferences. This functionality
not only gives viewers access to programming that meets their personal tastes,
but also displays programming, based on viewer preferences, that they might
otherwise never have known was being broadcast.
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Benefits to Television Programmers. TiVo believes its TiVo Service offers
television programmers a new and exciting way to reach the viewing audience.
Key benefits offered to television programmers include the following:
Enhanced Viewer Loyalty and Retention. By making it easy for viewers to find
and record the shows they want to watch, the TiVo Service enables programmers
to make their shows accessible to a broader audience. TiVo believes that these
easy to use features, especially the Season Pass feature, will increase the
likelihood that viewers will continue viewing new episodes of a particular
series or show. Viewers also can easily play back the shows they have recorded
long after they have aired, enhancing viewer retention and loyalty.
More Effective Promotions and Previews. The TiVo Service provides television
programmers with an opportunity to create more effective promotions and
previews such as Network Showcases for selected programming and pay-per-view
events. TiVo is also currently developing a service, called Ipreview, that
consists of active previews and promotions that allow a viewer to easily record
featured programming at the touch of a button. TiVo believes these promotions
will be effective in attracting viewers and increasing a network's brand
presence because they allow viewers to "impulse record" featured programming
and to watch these programs at a more convenient time. TiVo also believes that
by taking advantage of these features, television programmers have a greater
opportunity to reach a larger viewing audience.
New Platform for Content Delivery. TiVo anticipates that television
programmers will embrace the TiVo Service as a new way to reach audiences with
programming, products and services and as a way to enable couch commerce. For
example, the TiVo Service can enable television programmers to allow viewers to
order and automatically record special programming packages, including bundled
episodes of previously run shows and pay-per-view promotions. TiVo anticipates
that viewers would be able to simply "point and click" to order movies, sports
events, programming packages, games and other products and services.
Benefits to Advertisers. TiVo believes that its TiVo Service will offer
advertisers a new platform with more efficient and effective ways to reach
their targeted audience. Key benefits offered to advertisers include the
following:
Targeting Consumers. In the future, the TiVo Service will allow advertisers
to offer advertising that is related to the viewing preferences stored on the
personal video recorder. For example, working with its network partners TiVo
could download and store several commercials on the personal video recorder and
select which of these commercials to show based on the viewer's preferences.
For example, an automobile advertiser may want to advertise one of several
models during the airing of a particular program, depending on each viewer's
preferences. If the viewer's preferences suggest that the viewer is an outdoor
enthusiast, the commercial might feature a sport utility vehicle.
Platform for New Advertising Opportunities. The TiVo Service provides
advertisers with a new platform to offer advertisements to viewers. For
example, advertisers may be able to combine new advertising with recorded shows
and special promotions to reach new and existing viewers. TiVo also intends to
offer advertisers a new service that will allow viewers to get more information
about and possibly purchase a featured product or service using the TiVo
remote. In this way, TiVo expects to create an interactive on-air shopping
experience for the viewer.
Benefits to Cable and Satellite Network Operators. The TiVo Service provides
a unique platform for network operators to reduce subscriber turnover and
create new sources of revenue. Key benefits offered to cable and satellite
network operators include the following:
Ability to Differentiate Services. The TiVo Service allows network operators
to differentiate and enhance their service offerings by making available
programming more accessible to viewers, and enhancing viewer loyalty by
offering subscribers the ability to customize their viewing experience.
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Platform for New Service Opportunities. The TiVo Service can also provide
new sources of revenue for network operators. For example, the TiVo Service
provides a platform upon which network operators can record a number of pay-
per-view movies onto the personal video recorder from which subscribers can
choose to purchase and view at their convenience, with the added ability to
pause rewind, skip and fast forward.
TiVo Strategy
TiVo's objective is to establish the TiVo Service as the platform for
delivering richer television programming, advertising and in-home commerce. The
key elements of TiVo's strategy are:
Establish the TiVo Service as the Market Leader in Personal Television. TiVo
is a pioneer in the personal television industry. As the personal television
industry develops, TiVo intends to aggressively grow its subscriber base,
create specialized content to enhance the value of the TiVo Service, and
develop new ways to deliver effective targeted advertising. TiVo also intends
to augment these efforts through strategic partnerships with cable and
satellite network operators, television programmers, advertisers and consumer
electronics manufacturers. TiVo believes that establishing and maintaining a
market leadership position in personal television is critical to establishing
new sources of revenues and the overall growth of its business.
Establish and Promote the TiVo Brand. TiVo believes that establishing the
TiVo brand is critical to attracting subscribers, advertisers and strategic
partners. TiVo intends to dedicate substantial resources to promoting its brand
through multiple advertising and marketing channels, participating in trade
shows, sponsoring events, merchandising and by leveraging existing and future
strategic partnerships.
Leverage Partnerships to Accelerate Market Acceptance. TiVo believes that
leveraging the market presence, brand recognition and distribution resources of
established television industry participants will help it establish broad
consumer awareness and acceptance of the TiVo Service and personal television.
TiVo intends to continue to establish partnerships with leading television
industry participants to expand its subscriber base, provide content and
develop and distribute a wide variety of devices that enable the TiVo Service.
Such partnerships may include:
Network Operators and Other Content Distributors. TiVo intends to continue
to establish partnerships with an increasing number of network operators,
including cable and satellite operators. TiVo believes that agreements with
these companies will provide access to a large and established base of viewers
who are likely to purchase the TiVo Service. Relationships with these companies
will also provide opportunities to develop additional devices that enable the
TiVo Service and provide specialized programming to viewers. For example,
TiVo's agreement with DIRECTV provides for a variety of assisted and joint
marketing activities targeting DIRECTV's installed base of subscribers.
Networks and Other Television Programmers. TiVo intends to continue to
establish partnerships with an increasing number of television programmers,
including broadcast and premium-service providers. TiVo believes that
partnerships with these companies can increase the amount and diversity of
customized content available on the TiVo Service and provide a significant
opportunity to offer specialized programming to viewers. Partnerships with
these companies also provide TiVo with opportunities to develop new interactive
services for. Currently, TiVo has relationships with NBC, HBO, Showtime, FliX,
E! Entertainment and The Movie Channel. Many of these relationships provide for
the delivery of Network Showcases and other specialized programming to viewers.
Consumer Electronics Manufacturers. TiVo intends to continue to establish
partnerships with consumer electronic and other device manufacturers for the
development, manufacture and marketing of devices that enable the TiVo Service.
TiVo believes this strategy will accelerate the growth of the market for
personal television. TiVo has a strategic relationship with Philips, who
launched the personal video recorder into the retail channel in the third
quarter of 1999 and who currently manufactures it. Additionally, TiVo has
entered into an agreement with Sony to manufacture and distribute the personal
video recorder.
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Advertisers. TiVo intends to pursue partnerships with advertisers in an
effort to generate new sources of revenue. TiVo believes that garnering
advertiser support for the TiVo Service will accelerate the market acceptance
for personal television. TiVo also believes that its proprietary software and
other technology embedded in the personal video recorder and the TiVo Service
will enable advertisers to reach desired viewers more effectively. Not only
will advertisers be better equipped to reach consumers with specific tastes or
preferences, viewers will receive more information about products in which they
are likely to be interested.
Offer an Increasing Range of Programming and Features. TiVo intends to
continue to offer new programming and features in order to enhance the value of
the TiVo Service and create new sources of revenue. TiVo's technology allows
for frequent updates and improvements to the programming and features offered
on the TiVo Service. TiVo intends to develop other features, such as sports
highlights, condensed news programs and other specialized programming. TiVo
believes that the TiVo Service allows television programmers and advertisers to
reach a broader audience by making shows more accessible and easier to record
and to target their programming and advertising to specific viewers. Potential
future services include:
Active Promotions. TiVo anticipates that programmers will be able to use the
TiVo Service to allow viewers to easily record a variety of programming such as
movies, sports events, television series and other products and services. For
example, TiVo is currently developing Ipreview, a service that allows viewers
to schedule and record featured programming using a point and click feature
during previews.
Active Ads. TiVo anticipates that advertisers will be able to use special
coding, called "data tags," to allow viewers to interact with commercials. For
example, when viewing a commercial, viewers may be able to click a button on
their remote control to request a longer infomercial about the product, to
request a brochure or ask for the nearest retailer. TiVo is currently
developing a service that allows viewers to get more information about and
possibly purchase featured products or services using the TiVo remote control.
Targeted Ads. TiVo anticipates that advertisers will be able to use the TiVo
Service to reach a broader base of consumers and offer commercials that better
match viewers' interests. For example, based on the viewers' preferences stored
on the personal video recorder, an automobile advertiser can feature a sport
utility vehicle in one household and a minivan in another. This is accomplished
by a software program utilizing data stored on the personal video recorder.
Individual viewing preferences will not be released to advertisers or other
third parties.
Encourage the Development of New Devices Enabling the TiVo Service. TiVo has
continued to work in partnership with consumer electronics manufacturers and
others in developing new and complementary products that enable the TiVo
Service, such as televisions, DVD players and satellite television receivers.
This strategy is based on TiVo's belief that the TiVo Service enhances the
value of other television, entertainment and home theater products and
services. In pursuing these relationships, TiVo expects to continue to grant
broad licensing rights to its technology and intends to create a set of
standards that will allow consumer electronics manufacturers to embed the
technology that enables the TiVo Service in home entertainment products. TiVo
anticipates that the broad licensing of its technology will accelerate its
subscriber growth, enhance its market position and strengthen the TiVo brand.
What Viewers Experience Using the TiVo Service
The TiVo Service is designed to appeal to a broad consumer base by being
easy-to-use and intuitive. The TiVo Service gives viewers the ability to
control and personalize television by letting them watch what they want when
they want. Navigation through the TiVo Service's menu-driven interface starts
from the TiVo Central screen.
TiVo Central. TiVo Central is the main screen on the TiVo Service and is the
first screen seen by the viewer when the television is turned on. TiVo Central
can also be accessed from anywhere in the TiVo Service
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by pushing the TiVo button on the TiVo remote. Most of the recording and
viewing features available on the TiVo Service can be accessed through this
screen.
Now Showing. The Now Showing screen allows viewers to easily choose from
their customized lineup of shows, which have been recorded and are stored on
the personal video recorder. For each show, viewers can get detailed
information, including a description of the show and its recorded time. Viewers
can also see when the program will be deleted from the personal video recorder
and can change the deletion time if desired.
Network Showcases Screen. The Network Showcases screen can be used by
television programmers and advertisers to feature selected programming and
products. Network Showcases are separately categorized by each programmer.
Within their own Network Showcase, programmers can customize the manner in
which they highlight and package shows. In the future, we believe that
programmers will create a unique look and feel for their Network Showcases and
may include promotional video clips and trailers.
Pick Programs to Record. Pick Programs to Record allows viewers to easily
select shows to be recorded. Viewers can choose to select shows by name,
channel or time. In addition, viewers can choose from a list of shows
recommended by the TiVo Service based upon their individual preferences.
On-Air Program Guide. The TiVo Service includes an easy-to-use on-air
program guide that allows viewers to browse through available programming and
receive information about upcoming shows. The on-air program guide includes a
brief description of the program and the time and channel for viewing.
TiVolution Magazine. TiVolution Magazine features theme-based collections of
shows and other content compiled by TiVo's editorial staff.
How TiVo Works
The TiVo Service relies on three key components: the personal video
recorder, the TiVo remote control and the TiVo Broadcast Center. Individually,
each of these components serves a vital function in the TiVo Service.
The Personal Video Recorder. The personal video recorder was initially
designed and developed by TiVo, and enables the basic functionality of the TiVo
Service. The personal video recorder automatically records live television
while the viewer is watching, which allows the viewer to control live
television. The current version of the personal video recorder, however, cannot
record a different show while concurrently watching live television. Two models
of the personal video recorder are currently available, one supporting up to 14
hours of recorded programming and one supporting up to 30 hours of recorded
programming. The personal video recorder works with analog broadcast, cable and
digital satellite systems. TiVo expects that future versions of the personal
video recorder will be incorporated with cable or satellite receivers into a
single device.
After the initial set-up, the personal video recorder will automatically
dial into the TiVo Broadcast Center via a telephone line on a nightly basis to
download the program guide data, Network Showcases and other programs or
features of the TiVo Service. Software upgrades to the personal video recorder
are also delivered directly to the personal video recorder via the phone line
at no charge. The program guide data downloaded from the TiVo Broadcast Center
does not decrease the amount of programming that can be recorded by the
subscriber on the personal video recorder.
When enabled with the TiVo Service, the personal video recorder stores the
subscribers' viewing preferences. Based on these preferences, the TiVo Service
ranks every show listed in the on-air program guide and then recommends the
highest ranked shows to the viewer. If there is available storage capacity in
the personal video recorder, the personal video recorder may automatically
record the show or shows with the highest ranking.
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The TiVo Service uses an advanced disk scheduling technique, which manages
the recording and deletion of programs on the system. This allows viewers to
select programming to record well in advance of airing and receive confirmation
that the selected program will be recorded, even if the length of the
programming selected for recording exceeds the then available storage capacity
on the recorder.
TiVo expects that the vast majority of purchasers of the personal video
recorder will activate the TiVo Service. However, if the TiVo Service is not
enabled or is subsequently cancelled, the personal video recorder provides
viewers with several basic capabilities, including pause, rewind and fast
forward navigation of live or recorded television, and the ability to record
selected programs by manually programming the personal video recorder without
the aid of the TiVo Service.
The TiVo Remote Control. The TiVo remote control can operate both the
personal video recorder and the viewer's television. Using the TiVo remote
control, a viewer is able to take advantage of the functionality of the TiVo
Service, including navigation of programming, selection of shows to be recorded
and advanced viewing features. The TiVo remote control also enables viewers to
indicate personal preferences through the use of the Thumbs Up or Thumbs Down
buttons. As the TiVo Service is expanded, the TiVo remote control will
accommodate expanded functionality associated with new features, services,
promotions and programming options.
The TiVo Broadcast Center. The TiVo Broadcast Center is a series of computer
servers that manage all of TiVo's programming and service data. The TiVo
Broadcast Center distributes proprietary services and specialized content such
as TiVo's on-air program guides, Network Showcases, TiVolution Magazine and
other content provided by TiVo and its partners. The TiVo Broadcast Center is
designed to be a platform for future interactive services. Presently, data
contained in the TiVo Broadcast Center is communicated to each personal video
recorder automatically on a nightly basis through the subscriber's phone line.
Upgrades to the software that enables the TiVo Service are also provided
automatically over this phone line. In the future, TiVo expects to utilize
satellite and cable bandwidth to transmit data and communicate information from
the TiVo Broadcast Center to the personal video recorder.
Strategic Partnerships
TiVo's success depends on its ability to quickly build a large subscriber
base, integrate TiVo functionality into a broad range of consumer electronics
products, and develop new services and programming to enhance the TiVo Service.
In order to achieve these goals, TiVo has chosen to aggressively pursue
strategic partnerships with:
. cable and satellite network operators;
. television programmers;
. consumer electronics manufacturers;
. marketing support partners; and
. suppliers of key components of the TiVo technology.
By working with strategic partners to develop a business model that
complements the businesses of other industry stakeholders, TiVo is seeking to
aggressively develop personal television as a major category of home
entertainment.
Through its partnerships, TiVo's personal video recorders and other devices
will be manufactured and distributed through retail and other channels. These
partners will also provide access to a large number of potential subscribers
and the resources to effectively market and promote the TiVo Service. In
addition, these partnerships will allow TiVo to provide its subscribers with
richer content, including Network Showcases, previews and promotions of
upcoming shows and other specialized viewing options on the TiVo Service. Some
of TiVo's major partnerships include:
DIRECTV. DIRECTV is promoting TiVo and the TiVo Service to its eight million
subscribers. DIRECTV will provide a variety of marketing and sales support,
including commercial air time on the
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DIRECTV system, access to DIRECTV subscribers for targeted mailings and
placement on its web site and in its on-air magazine. DIRECTV will also make a
portion of the high bandwidth capacity of DIRECTV's satellite network available
to TiVo. TiVo intends to use this capacity to expand and enrich the TiVo
Service offered to DIRECTV subscribers.
In connection with this agreement, DIRECTV also made an equity investment in
TiVo. Additionally, DIRECTV will share in specified revenues TiVo receives that
relate to subscribers to the TiVo Service who also subscribe to the DIRECTV
satellite service.
NBC Multimedia. TiVo will work with NBC to produce weekly Network Showcases
and other programming packages that highlight current and upcoming NBC
programs. These NBC programming packages and specials will also be featured in
TiVolution Magazine. TiVo also granted NBC preferential placement on its
Network Showcases screen. TiVo and NBC have agreed to feature each other as
partners on their respective web sites.
In connection with this agreement, NBC also made an equity investment in
TiVo. In addition, NBC will receive certain rights with respect to TiVo's couch
commerce and Internet services if such services are enabled on the TiVo
Service.
Philips. Philips has agreed to manufacture, market and distribute personal
video recorders that enable the TiVo Service. Philips will continue to market
co-branded personal video recorders with TiVo and support the TiVo Service in
retail channels. Philips has also licensed TiVo's technology to develop, market
and promote other products that enable the TiVo Service.
TiVo has agreed to offset a portion of Philips' manufacturing costs by
paying a subsidy to Philips for each personal video recorder that Philips
manufactures and sells. TiVo has also agreed to share a portion of the TiVo
Service subscription revenues it receives from purchasers of the personal video
recorders and other devices manufactured by Philips that enables the TiVo
Service. Philips is also a stockholder of TiVo.
Quantum. Quantum Corporation ("Quantum") has agreed to develop and supply
the hard disk drives used in personal video recorders that enable the TiVo
Service. Under the agreement, TiVo or a designated third-party buyer may
purchase from Quantum up to an agreed number of hard disk drives at a discount.
In addition, Quantum has agreed to work with TiVo to customize its hard disk
drives for devices that enable the TiVo Service. Quantum and TiVo have also
agreed to work together in promoting TiVo and the TiVo Service. Quantum has
acquired shares of TiVo's stock in connection with this agreement. TiVo has
also agreed to share a portion of the TiVo Service subscription revenues it
receives from the subscribers who have purchased personal video recorders and
other devices equipped with Quantum hard disk drives on which TiVo received a
discount from Quantum.
Sales and Marketing
TiVo is building a team of sales and marketing professionals whose efforts
are focused on establishing the TiVo brand, educating consumers on the features
and benefits of the TiVo Service and personal television, and promoting sales
of personal video recorders and other devices that enable the TiVo Service.
TiVo anticipates that retail stores will be the dominant distribution
channel for its products and services and is establishing direct relationships
with potential retail partners. TiVo's marketing team maintains an ongoing
dialogue with viewers via research and other consumer response vehicles to
ensure that TiVo continues to deliver services that match viewers' needs.
TiVo began selling personal video recorders and subscriptions to the TiVo
Service on March 31, 1999 directly to consumers, principally through TiVo's web
site, www.tivo.com and its toll-free telephone number, 1-877-FOR-TIVO. Philips
------------
began distributing co-branded personal video recorders to national retail
chains and regional retail stores and distributors and online e-tailers in the
fourth quarter of 1999.
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Philips began selling personal video recorders to retailers and supporting
the retail channel through marketing efforts, in-store display materials and
sales force training. TiVo, with the assistance of DIRECTV, will support
Philips' efforts by educating retailers about personal video recorders and the
TiVo Service and providing training where necessary. In addition, DIRECTV
incorporated the TiVo logo in certain of its in-store promotional materials
starting in the first quarter of 2000. Philips and DIRECTV also encourage their
existing and prospective customers to subscribe to the TiVo Service by offering
promotional incentives such as coupons or discounts.
TiVo initiated a marketing campaign in support of the retail launch of the
personal video recorder that utilized print, outdoor, web and television
advertising. TiVo also targeted certain DIRECTV subscribers with direct mail
and bill inserts. The goal of these efforts is to increase awareness of the
personal television category and to promote the TiVo brand as the leader in
this category. TiVo's marketing campaign was augmented by a significant
advertising effort by Philips
Privacy Policy
TiVo has adopted a privacy policy, which it makes available on its web site
and delivers to each new subscriber to the TiVo Service. This policy provides
that all information that identifies a viewer as a specific person, including a
viewer's name and address, will not be disclosed to anyone without the viewer's
consent.
All information about viewers' preferences and how they use the TiVo Service
is separated from information that identifies a viewer personally, so that the
information becomes anonymous. TiVo may be able to use this anonymous
information to tell a broadcaster the percentage of TiVo viewers that recorded
a particular program, but TiVo will not know, nor be able to tell the
broadcaster, which of its viewers did so, unless a viewer decides to provide
that information. No one at TiVo or anywhere else will ever know the kinds of
programs a viewer watches or how they use the TiVo Service unless the viewer
chooses to provide that information. If a specific viewer does not want the way
in which they use their personal video recorder to be part of the anonymous
information that TiVo gathers and shares with other companies, they can ask for
a block on the release of this anonymous data.
TiVo is able to send information to viewers' personal video recorders that
allows TiVo and other companies to customize viewers' television experience.
Neither TiVo nor the company supplying the customizing options will know which
options viewers' personal video recorders select to show. If a viewer does not
want this customizing information sent to their personal video recorder, they
can simply ask for a block on such customized information.
Competition
The market for home entertainment goods and services is intensely
competitive, rapidly evolving and subject to rapid technological change. The
delivery of video and television programming is particularly competitive as new
products and services continue to be introduced and marketed. TiVo believes
that the principal competitive factors in these markets are name recognition,
performance, pricing, ease of use and functionality. Because the personal
television market is new and rapidly evolving, TiVo expects it will face
significant barriers in its efforts to secure broad market acceptance, and
intense competition at several different levels.
Established competitors in the consumer electronics market. Personal
television competes in a consumer electronics market that is crowded with
several established products and services, especially products delivering
television programming and other home video entertainment. Personal video
recorders and the TiVo Service compete with products and technologies that have
established markets and proven consumer support, such as VCRs, DVD players and
cable and satellite television systems. In addition, many of the manufacturers
13
<PAGE>
and distributors of these established products have greater brand recognition,
market presence, distribution channels and advertising and marketing budgets,
and more strategic partners than we do. To be successful, TiVo believes it will
need to spend significant resources to develop consumer awareness of TiVo and
the personal television product category.
TiVo's initial success will depend not only on consumers agreeing to
purchase a personal video recorder, but also paying a monthly subscription fee
to receive the TiVo Service. This is a significant cost, and many consumers who
have purchased VCRs, DVDs or other home video entertainment products may be
reluctant to purchase personal television systems and services. The TiVo
personal video recorder and the TiVo Service do, however, offer several
advantages over competing home video entertainment products, including:
. an on-air guide to up to 12 days of television programming, updated on a
nightly basis;
. the ability to pause, rewind and fast-forward live television;
. the ability to record every episode of a given show at the click of a
button;
. the ability to recommend television shows to viewers based upon their
particular preferences; and
. specialized content, including Network Showcases and TiVolution Magazine.
Although the personal video recorder is not well-suited as an archival
system for recorded television shows, the TiVo System does contain a feature
that allows viewers to off-load recorded programming to a VCR. While the
personal video recorder and TiVo Service allow viewers to control live
television, the current version of the personal video recorder does not permit
viewers to record a show on one channel and watch a show being broadcast at the
same time on another channel.
Internet-related companies and companies offering similar products and
services. TiVo faces competition from Internet service providers and other
Internet companies such as WebTV and X-TV. These competitors are seeking to
meld Internet browsing and traditional broadcast, cable or satellite television
programming into a single medium. For example, WebTV and EchoStar
Communications have released the DishPlayer, which is a product that combines
Internet access with a program guide and the ability to pause live television.
While many of these products offer fewer services than the TiVo Service, TiVo
does not presently offer Internet browsing capability.
TiVo's primary competitor in the personal television market is ReplayTV,
Inc. ("Replay"). Replay manufactures and markets a personal television recorder
that includes a hard disk drive and functionality similar to that of our
personal video recorder. While Replay's personal video recorder is more
expensive than our personal video recorder, Replay does not charge a monthly
subscription fee for its service.
Research and Product Development
From TiVo's inception until March 1999, TiVo's research and development
efforts were focused on designing and developing the personal video recorder
and the TiVo remote control, the TiVo Service and the TiVo Broadcast Center.
These activities included both hardware and software development. TiVo's
engineering staff is now focused on research and development in the following
three areas:
Performance engineering. TiVo will continue to devote considerable
engineering resources to improve TiVo's essential technologies. TiVo's
engineers and customer support personnel work together to quickly identify and
correct potential performance errors. TiVo also continually works to identify,
develop and implement features that improve performance in areas such as video
and audio quality, speed, ease of use and additional features and
functionality.
Platform engineering. Although TiVo does not intend to manufacture the
personal video recorder or other hardware products, the evolution of hardware
technology that enables the TiVo Service is a crucial
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<PAGE>
element of TiVo's future success. TiVo's hardware engineers are working with
consumer electronics manufacturers, component suppliers, and data storage
suppliers to reduce the manufacturing cost of the personal video recorder and
integrate TiVo functionality into other consumer electronics goods. For
example, TiVo is currently working with DIRECTV to develop a DIRECTV satellite
receiver that enables the TiVo Service. Similarly, TiVo intends to integrate
the TiVo Service into components such as cable set-top boxes, televisions and
other consumer electronics products. TiVo intends to work with a broad range of
partners to develop its technology platforms and establish TiVo as the
prominent technology in the personal television market.
Service engineering. TiVo intends to continue to develop the TiVo Service,
offering new features and programming. TiVo has assembled a group of
experienced television and multimedia professionals to create specialized
programming for the TiVo Service. As part of this effort, the programming team
is currently in the process of building software and video development tools
that will enable networks and other content providers to create specialized
programming for the TiVo Service.
Patents and Intellectual Property
TiVo has adopted a proactive patent and trademark strategy designed to
protect all important aspects of its technology and intellectual property. TiVo
has filed fifteen patent applications and seven provisional patents. TiVo has
also jointly filed a patent application with Quantum. The patent applications
that TiVo has filed are broad in nature and are tied to fundamental inventions
rather than small, unrelated features or applications. These patent
applications cover substantially all of TiVo's technology, including hardware,
software, the TiVo Service functionality and appearance, network architecture,
manufacturing and international patent rights. TiVo has also filed patent
applications that cover technologies it intends to incorporate in future
versions of the TiVo Service and hardware. To date, none of these patents have
been granted, and there can be no assurance that any of these patents will ever
be granted.
TiVo has filed many trademark applications covering substantially all of its
trade dress, logos and slogans, including:
. 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
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. 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
. You run the shows
These applications are currently pending with the U.S. Patent and Trademark
Office. Additionally, TiVo has international trademark applications pending for
its TiVo logo. TiVo has licensed the use of its name and logo to some of its
strategic partners. See "Factors That May Affect Future Operating Results--Our
success depends on our ability to secure and protect patents, trademarks and
other proprietary rights."
Recent Developments
On January 6, 2000, TiVo and DIRECTV announced a new integrated device that
would deliver DIRECTV's television programming and the TiVo Service, and store
up to 30 hours of recorded programming.
On January 7, 2000, TiVo formed an alliance with Blockbuster, Inc. to
deliver an entertainment service through the TiVo Service that would allow TiVo
subscribers to obtain a selection of movies for viewing through their personal
video recorders. The alliance includes cross-promotional opportunities that
TiVo believes will benefit each company's customers.
On January 6, 2000, TiVo agreed to license and incorporate Liberate
Technologies'("Liberate") TV Navigator software into future versions of TiVo's
personal television reference platform, thus integrating Liberate's platform
for interactive TV with the TiVo Service. Additionally, this license agreement
allows America Online, Inc. to partner with TiVo to enhance AOLTV.
On February 29, 2000, TiVo formed an exclusive alliance with British Sky
Broadcasting Group PLC ("BSkyB") to introduce the personal television service
in the United Kingdom. Under this agreement TiVo and BSkyB will co-brand and
co-market the sale of personal video recorders in the United Kingdom.
Employees
At December 31, 1999, we employed a total of 181 employees, including 28 in
service operations, 82 in research and development, 37 in sales and marketing
and 34 in general and administration. We also employ, from time to time, a
number of temporary and part-time employees as well as consultants on a
contract basis. At December 31, 1999, we employed 17 such persons. We intend to
hire additional personnel during the next twelve months in each of these areas.
Our future success will depend in part on our ability to attract, train, retain
and motivate highly qualified employees, who are in great demand. We may not be
successful in attracting and retaining such personnel. Our employees are not
represented by a collective bargaining organization and we have never
experienced a work stoppage or strike. We consider our employee relations to be
good.
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Executive Officers and Key Employees
Our executive officers and key employees and their ages are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
Executive Officers
<S> <C> <C>
Michael Ramsay......... 50 Chairman of the Board, Chief Executive Officer and President
James Barton........... 42 Sr. Vice President of Research and Development, Chief Technical Officer
David H. Courtney...... 41 Sr. Vice President of Finance and Administration and Chief Financial Officer
Key Employees
Susan Cashen........... 39 Vice President of Corporate Communications
Ta-Wei Chien........... 45 Sr. Vice President of Engineering and Operations
Morgan P. Guenther..... 46 Vice President of Business Development
Stacy Jolna............ 48 Vice President of Programming and Media Relations
Brodie Keast........... 44 Vice President of Sales and Marketing
Michael A. Mutz........ 48 Vice President of Sales
Karrin Nicol........... 40 Vice President of Human Resources
Mark A. Roberts........ 39 Vice President of Information Technology and Chief Information Officer
Robert P. Vallone...... 42 Vice President of Service Operations and Customer Service
</TABLE>
Michael Ramsay is a co-founder of TiVo and has served as TiVo's Chairman of
the Board of Directors, Chief Executive Officer and President since its
inception in August 1997. From April 1996 to July 1997, Mr. Ramsay was the
Senior Vice President of the Silicon Desktop Group for SGI, a manufacturer of
advanced graphics computers. From August 1994 to April 1996, Mr. Ramsay was
President of Silicon Studio, Inc., a wholly owned subsidiary of SGI focused on
enabling applications development for emerging interactive media markets. From
July 1991 to August 1994, Mr. Ramsay served as the Senior Vice President and
General Manager of SGI's Visual Systems Group. Mr. Ramsay also held the
positions of vice president and general manager for the Entry Systems Division
of SGI. Prior to 1986, Mr. Ramsay held research & development and engineering
management positions at Hewlett-Packard and Convergent Technologies. Mr. Ramsay
holds a B.S. degree in Electrical Engineering from the University of Edinburgh,
Scotland.
James Barton is a co-founder of TiVo and has served as TiVo's Vice President
of Research and Development, Chief Technical Officer and Director since its
inception. From June 1996 to August 1997, Mr. Barton was President and Chief
Executive Officer of Network Age Software, Inc., a company that he founded to
develop software products targeted at managed electronic distribution. From
November 1994 to May 1996, Mr. Barton served as Chief Technical Officer of
Interactive Digital Solutions Company, a joint venture of SGI and AT&T Network
Systems created to develop interactive television systems. From June 1993 to
November 1994, Mr. Barton served as Vice President and General Manager of the
Media Systems Division of SGI. From January 1990 to May 1991, Mr. Barton served
as Vice President and General Manager for the Systems Software Division of SGI.
Prior to joining SGI, Mr. Barton held technical and management positions with
Hewlett-Packard and Bell Laboratories. Mr. Barton holds a B.S. degree in
Electrical Engineering and an M.S. degree in Computer Science from the
University of Colorado at Boulder.
David H. Courtney joined TiVo in March 1999 as Chief Financial Officer and
is currently Sr. Vice President of Finance and Administration and Chief
Financial Officer. From May 1995 to July 1998, Mr. Courtney served as a
Managing Director at J.P. Morgan, an investment banking firm, where he was
responsible for building and expanding the firm's high technology investment
banking business in the United States. From 1986 to 1995, Mr. Courtney was a
member of the high technology investment banking group at Goldman, Sachs & Co.,
most recently serving as Vice President. Mr. Courtney currently serves as a
Director of KQED Television, a non-profit affiliate of the Public Broadcasting
System in San Francisco, California. Mr. Courtney holds a B.A. degree in
Economics from Dartmouth College and an M.B.A. degree from Stanford University.
17
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Susan Cashen joined TiVo in March 2000 as Vice President of Corporate
Communications. From November 1994 to March 2000, Ms. Cashen was employed at
Blanc & Otus, a leading technology public relations firm based in San
Francisco, California and most recently served as Senior Vice President and
Partner from March 1999 to March 2000. Prior to joining Blanc & Otus, Ms.
Cashen managed her own consulting practice. Ms. Cashen holds a B.A. degree in
Russian Studies from Hamilton College.
Ta-Wei Chien has served as Vice President of Engineering and Operations
since February 1998 and is currently Sr. Vice President of Engineering and
Operations. From December 1996 to February 1998, Mr. Chien served as Vice
President of Engineering in the Desktop Workstations group at SGI, where he
managed engineering projects for desktop workstations. From April 1991 to
December 1996, Mr. Chien was a director of digital media and VLSI engineering
at SGI. Mr. Chien holds a B.S. degree in Electrical Engineering from National
Taiwan University and an M.S. degree in Electrical Engineering from the
University of California, Los Angeles.
Morgan P. Guenther has served as Vice President of Business Development
since June 1999. From March 1998 to June 1999, Mr. Guenther was a partner of
the law firm of Paul, Hastings, Janofsky & Walker LLP. From 1990 to March 1998,
Mr. Guenther was a partner of the law firm of Farella Braun & Martel. Mr.
Guenther also serves on the board of directors of Tier Technologies, Inc., an
information technology consulting company. Mr. Guenther holds J.D. and B.A.
degrees from the University of Colorado and an M.B.A.degree from the University
of San Francisco.
Stacy Jolna has served as Vice President of Programming and Media Relations
since May 1998. Prior to joining TiVo, Mr. Jolna had served as a Vice President
at WebTV Networks Inc., an Internet services company and subsidiary of
Microsoft Corp., since May 1997. From December 1981 to February 1996, Mr. Jolna
was employed by Cable News Network, most recently serving as a Vice President.
Mr. Jolna holds a B.S. degree from State University of New York and an M.S.
degree in Journalism from Boston University.
Brodie Keast joined TiVo in December 1999 as Vice President of Sales and
Marketing. Prior to joining TiVo, Mr. Keast was employed with Quantum
Corporation from 1996 through 1999; most recently serving as Vice President and
General Manager for Quantum's DLT Tape Division. Prior to joining Quantum, he
spent ten years at Apple Computer where he held a number of executive marketing
positions. Mr. Keast holds a B.S. degree in Computer Science from California
State University, Chico.
Michael A. Mutz has served as Vice President of Sales since June 1999. Prior
to joining TiVo, Mr. Mutz served as Vice President of Operations at U.S.
Cellular Corporation, a wireless services provider, since January 1995. From
1983 to December 1994, Mr. Mutz was employed with AT&T Corporation. Mr. Mutz
holds a B.S. degree in Electrical Engineering from the United States Military
Academy and a Master of Management degree from J.L. Kellogg Graduate School of
Management.
Karrin Nicol joined TiVo in July 1999 as Vice President of Human Resources.
From 1987 to 1999, Ms. Nicol was employed with SGI, most recently as Director
of Human Resources. Prior to that, Ms. Nicol served in various positions at
Fairchild Semiconductor Corporation. Ms. Nicol holds a B.S. degree in Food and
Nutrition from California State University, Chico and a Masters in Human
Resources and Organizational Development from University of San Francisco.
Mark A. Roberts has served as Chief Information Officer since March 1999 and
Vice President of Information Technology since July 1999. Prior to joining
TiVo, he served as Vice President of Information Technology at Acuson
Corporation, a medical ultrasound company, from March 1996 to March 1999. From
July 1990 to March 1996, Mr. Roberts was Director of Information Systems at
SGI. Mr. Roberts holds a B.S. degree in Economics from Santa Clara University.
Robert P. Vallone has served as Vice President of Service Operations and
Customer Service since March 1999. From November 1998 to April 1999, Mr.
Vallone served as Director of Operations for TiVo. Prior to joining TiVo, Mr.
Vallone served as Director of Engineering at SGI since October 1993. Mr.
Vallone holds a B.S.degree in Experimental Psychology from Cornell University.
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ITEM 2. PROPERTIES
In March 2000, TiVo moved its corporate headquarters, which houses its
administrative, sales and marketing, customer service and product development
activities, to a leased facility at 2160 Gold Street, PO Box 649101, San Jose,
California 95164-9101. TiVo believes that its new corporate facilities of
approximately 127,000 square feet, will be adequate to meet its office space
needs for the next several years. The lease for this space expires in 2007.
ITEM 3. LEGAL PROCEEDINGS
PhoneTel Communications. 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 seeks unspecified monetary damages as well as
an injunction against TiVo's operations. It also seeks attorneys' fees and
costs. TiVo believes that it has meritorious defenses against this suit and
intends to vigorously defend itself. TiVo could be forced to incur material
expenses during this defense, and in the event it were to lose this suit, its
business would be harmed.
StarSight Telecast. On January 18, 2000, a suit was filed against TiVo by
StarSight Telecast Inc, a subsidiary of Gemstar International Group Limited
("StarSight"), in the U.S. District Court for the Northern District of
California alleging willful and deliberate violation of a patent held by
StarSight. The suit seeks unspecified monetary damages as well as an injunction
against TiVo's operations. It also seeks attorneys' fees and costs. TiVo
believes that it has meritorious defenses against this suit and intends to
vigorously defend itself. TiVo could be forced to incur material expenses
during this defense, and in the event it were to lose this suit its business
would be harmed. See "Factors that May Affect Future Operating Results--
Intellectual property claims against us can be costly and could result in the
loss of significant rights."
TiVo is aware that media companies and other organizations may support
litigation or explore legislative solutions unless the members of the personal
television industry agree to obtain license agreements for the use of certain
programming. TiVo has received letters from Time Warner Inc. and Fox Television
stating that these entities believe TiVo's personal television service exploits
copyrighted networks and programs without the necessary licenses and business
arrangements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information for Common Equity
TiVo's common stock is traded on the National Association of Securities
Dealers Automated Quote system, ("NASDAQ") under the symbol "TIVO". The number
of record holders of the Company's common stock as of March 15, 2000 was
approximately 212.
The following table sets forth, for the periods indicated, the high and low
per-share closing prices for TiVo's common stock as reported by the NASDAQ
National Market:
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal Year 2000
----------------
First Quarter through March 15, 2000....................... $71.50 $30.50
Fiscal Year 1999
----------------
Fourth Quarter ended December 31, 1999..................... $51.00 $25.13
Third Quarter ended September 30, 1999..................... $29.94 $29.94
</TABLE>
On March 15, 2000, the per-share closing price as reported by the NASDAQ
National Market for TiVo's common stock was $36.00 per share.
Dividend Policy
The Company expects to continue its current policy of paying no cash
dividends to holders of common stock for the foreseeable future.
Recent Sales of Unregistered Securities
None.
Transfer Agent and Registrar
The Transfer Agent and Registrar for TiVo's common stock is Norwest Bank
Minnesota, N.A. Their address is 161 North Concord Exchange, PO Box 738, South
St. Paul, Minnesota 55075-0738, and their telephone number is 1-800-767-3330.
20
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the years ended December
31, 1999 and December 31, 1998 and for the period from August 4, 1997
(Inception) to December 31, 1997 have been derived from and are qualified by
reference to, our financial statements audited by Arthur Andersen LLP,
independent accountants. These historical results are not necessarily
indicative of the results of operations to be expected for any future period.
The data set forth below (in thousands, except for per share data) are
qualified by reference to, and should be read in conjunction with Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements included in Item 8. "Financial
Statements and Supplementary Data."
<TABLE>
<CAPTION>
Year Ended Period from
December 31, August 4, 1997
-------------------- (Inception), to
1999 1998 December 31, 1997
--------- --------- -----------------
(in thousands, except per-share data)
<S> <C> <C> <C>
Statement of Operations Data:
Subscription revenues.................. $ 223 $ -- $ --
Costs and expenses
Cost of services..................... (4,067) -- --
Research and development............. (9,727) (5,614) (356)
Sales and marketing.................. (24,502) (1,277) (28)
Sales and marketing-related parties.. (15,172) -- --
General and administrative........... (7,027) (2,946) (241)
Stock-based compensation............. (1,530) -- --
Other operating expense, net......... (7,210) -- --
--------- -------- ------
Loss from operations................... (69,012) (9,837) (625)
--------- -------- ------
Interest income...................... 2,913 136 49
Interest expense and other........... (466) (20) (19)
--------- -------- ------
Net loss............................... $ (66,565) $ (9,721) $ (595)
========= ======== ======
Net loss per share
Basic and diluted.................... $ (5.49) $ (3.25) $(0.20)
Weighted average shares.............. 12,129 2,990 2,917
<CAPTION>
As of December 31,
--------------------
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............. $ 139,687 $ 2,248
Working capital........................ 130,327 1,329
Total assets........................... 152,842 3,543
Long-term portion of obligations under
capital lease......................... 1,141 --
Total stockholders' equity............. 133,247 2,121
</TABLE>
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the Notes thereto included in Item 8 of this Form 10-K.
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.
Overview
We were incorporated in August 1997, as a Delaware corporation and are
currently located in San Jose, California. The TiVo Service is a subscription-
based television service that provides viewers with greater control, easier
navigation and a wider range of viewing options when watching television. The
TiVo Service also provides television content providers and advertisers with a
new platform for content delivery, interactive viewing options and in-home
commerce. The TiVo Service is enabled through a personal video recorder
designed and developed by TiVo.
We have generated a limited amount of revenues to date and expect to incur
significant operating expenses over the next several years in connection with
the continued development and expansion of our business. In particular, we
expect our sales and marketing expenses to increase significantly as personal
video recorders gain market acceptance in the retail channel with the consumer
and as we establish the TiVo brand and attract subscribers. We launched the
personal video recorder and service into the retail channel in the second half
of 1999. We incurred losses of $66.6 million in 1999 and we expect to continue
to incur losses for the foreseeable future.
We currently generate revenues from subscriptions to the TiVo Service.
Subscriptions to the TiVo Service are available on a monthly, annual or
lifetime basis. The current price for a monthly subscription to the TiVo
Service is $9.95 per month, an annual subscription is $99.00 per year and a
lifetime subscription is $199.00. A lifetime subscription allows access to the
TiVo Service for the life of the personal video recorder. Subscription fees are
paid by the viewer when activating the TiVo Service. Subscription revenues from
lifetime subscriptions are recognized ratably over a four-year period.
We began selling personal video recorders and subscriptions to the TiVo
Service on March 31, 1999. We transitioned manufacturing to Philips, our
manufacturing partner, in the fourth quarter of 1999. The sales of personal
video recorders in 1999 were not expected to be recurring for TiVo, and were
therefore considered incidental to our business. The sales less the cost of
sales for the personal video recorders sold directly by TiVo for the year ended
December 31, 1999 were recorded as "other operating expense, net."
Since the TiVo Service is enabled through a personal video recorder that is
sold in retail channels like other consumer electronic devices, we anticipate
that our business will be seasonal and we expect to generate a significant
number of our annual new subscriptions during the holiday shopping season.
22
<PAGE>
We anticipate that the sources of our revenues will change over time. In the
future, we may generate revenue from other sources such as:
. advertising shown on the TiVo Service;
. revenues from networks; and
. electronic commerce or couch commerce.
We have agreed to share a substantial portion of our subscription and other
fees with some of our strategic partners in order to promote the TiVo Service
and encourage the manufacture and distribution of the personal video recorders
that enable the TiVo Service. These agreements may require us to share
substantial portions of the subscription and other fees attributable to the
same subscriber with multiple partners. 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 have agreed to make monthly, formula-based payments to Quantum, Philips,
and DIRECTV in exchange for key activities and results. Quantum provided us a
discount payment for hard disk drives purchased by our manufacturing partners
for use in the personal video recorder from Quantum. We have agreed to pay to
Philips a per-unit subsidy for each personal video recorder that they
manufacture and sell. A portion of the subsidy amount paid to Philips is due
when the personal video recorder is shipped. The remaining portion is due when
the subscriber activates the TiVo Service enabled by the personal video
recorder. The amount of the payments can vary depending on Philips'
manufacturing costs and selling prices. 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. Subsidy payments are
renegotiated on an annual basis. We pay DIRECTV a revenue share for our
subscription revenues generated from DIRECTV subscribers in exchange for
DIRECTV's marketing efforts. Payments made to our strategic partners in
exchange for these services are recognized as "sales and marketing expenses--
related parties."
In the past, we have issued stock in exchange for services to our strategic
partners. For example, we issued shares of our common stock to DIRECTV in
exchange for marketing support and a note which will be reduced as bandwidth
capacity is made available to TiVo on DIRECTV's satellite television system. We
also issued warrants, which were exercised for shares of our common stock to
Quantum in exchange for a discount on hard disk drives used in the personal
video recorders that enable the TiVo Service. We recorded prepaid marketing
expenses resulting from the issuance of this equity to DIRECTV and Quantum.
These prepaid marketing expenses are amortized as services are provided to us
and charged to "sales and marketing expenses--related parties."
Prior to our initial public offering, we granted stock options to employees,
consultants and directors at prices that were less than the estimated fair
value of our common stock at the date of grant. We recorded deferred
compensation related to these options, which is amortized over the vesting
period of each option as "stock-based compensation."
Results of Operations
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998 and
the period from August 4, 1997 (Inception) to December 31, 1997.
Subscription revenues. Subscription revenues for the year ended December 31,
1999 were $223,000, compared to zero for the year ended December 31, 1998 and
zero for the period from August 4, 1997 (Inception) to December 31, 1997. The
increase is attributable to customer subscriptions to the TiVo Service, which
began in March 1999. As of December 31, 1999, we had approximately 18,000
subscribers.
23
<PAGE>
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 year ended December 31,
1999 was $4.1 million compared to zero for the year ended December 31, 1998 and
zero for the period from August 4, 1997 (Inception) to December 31, 1997. 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 year ended
December 31, 1999 were $9.7 million compared to $5.6 million for the year ended
December 31, 1998 and $356,000 for the period from August 4, 1997 (Inception)
to December 31, 1997. 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 year ended December 31, 1999 were $24.5 million compared to $1.3
million for the year ended December 31, 1998 and $28,000 for the period from
August 4, 1997 (Inception) to December 31, 1997. 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, which began with
the retail launch in the third quarter of 1999.
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 ("CAA") all of
which hold stock in the Company. Sales and marketing--related parties for the
year ended December 31, 1999 was $15.2 million compared to zero for the year
ended December 31, 1998 and zero for the period from August 4, 1997 (Inception)
to December 31, 1997. The increase in sales and marketing--related parties
expenses is attributable to the manufacturing and shipments of personal video
recorders and to the related activations of subscribers to the TiVo Service,
which began in March 1999.
General and administrative expenses. General and administrative expenses
consist primarily of employee salaries and related expenses for executive,
administrative, accounting, information systems, customer service personnel,
facility costs, and professional fees. General and administrative expenses for
the year ended December 31, 1999 were $7.0 million compared to $2.9 million for
the year ended December 31, 1998 and $241,000 for the period from August 4,
1997 (Inception) to December 31, 1997. The increase was primarily attributable
to the hiring of additional personnel and related expenses and the costs of
establishing Information Services and Service Operations departments, which did
not exist during the year ended December 31, 1998 or prior.
Stock-based compensation. During 1999, 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 $1.5
million for the year ended December 31, 1999, zero for the year ended December
31, 1998 and zero for the period from August 4, 1997 (Inception) to December
31, 1997.
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 year
24
<PAGE>
ended December 31, 1999, other operating expenses, net was $7.2 million
compared to zero for the year ended December 31, 1998 and zero for the period
from August 4, 1997 (Inception) to December 31, 1997. 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 $2.9 million
for the year ended December 31, 1999 compared to $136,000 for the year ended
December 31, 1998 and $49,000 for the period from August 4, 1997 (Inception) to
December 31, 1997, as cash balances have increased.
Interest expense and other. Interest expense and other was $466,000 for the
year ended December 31, 1999. This includes amortization of the value assigned
primarily to the Comdisco and convertible debt warrants of $432,000 and
interest expense of $34,000 resulting from borrowings under the capital lease
obligation. For the year ended December 31, 1998 and the period from August 4,
1997 (Inception) to December 31, 1997, interest expense and other was $20,000
and $19,000, respectively.
Quarterly Results of Operations
The following table represents certain unaudited statement of operations
data for our eight most recent quarters ended December 31, 1999. In
management's opinion, this unaudited information has been prepared on the same
basis as the audited annual financial statements and includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
representation of the unaudited information for the quarters presented. This
information should be read in conjunction with our financial statements,
including the notes thereto, included elsewhere in this Annual Report. 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.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- ------------- ------------ --------- -------- ------------- ------------
(unaudited, in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Subscription revenues... $ -- $ -- $ -- $ -- $ -- $ 8 $ 33 $ 182
Costs and expenses
Cost of services....... -- -- -- -- (689) (636) (749) (1,993)
Research and
development........... (793) (1,016) (1,659) (2,146) (1,596) (1,859) (2,327) (3,945)
Sales and marketing.... (134) (222) (354) (567) (2,168) (1,847) (5,323) (15,164)
Sales and marketing --
related parties....... -- -- -- -- -- (382) (4,946) (9,844)
General and
administrative........ (293) (610) (706) (1,337) (1,125) (1,057) (1,757) (3,088)
Stock-based
compensation.......... -- -- -- -- -- (187) (501) (842)
Other operating
expense, net.......... -- -- -- -- 12 (201) (4,808) (2,213)
------- ------- ------- ------- ------- ------- -------- --------
Loss from operations.... (1,220) (1,848) (2,719) (4,050) (5,566) (6,161) (20,378) (36,907)
Interest income........ 18 17 46 55 53 224 614 2,022
Interest expense and
other................. (2) (11) (7) -- (2) (176) (281) (7)
------- ------- ------- ------- ------- ------- -------- --------
Net loss................ $(1,204) $(1,842) $(2,680) $(3,995) $(5,515) $(6,113) $(20,045) $(34,892)
======= ======= ======= ======= ======= ======= ======== ========
</TABLE>
25
<PAGE>
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 December 31, 1999, 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
December 31, 1999, we had $139.7 million of cash and cash equivalents and $6.2
million of short-term investments. As of December 31, 1998, we had $2.2 million
of cash and cash equivalents and $164,000 of short-term investments. The
expansion of our business will require significant additional capital to fund
operations, capital expenditures and working capital needs. Accordingly, we may
choose to raise additional capital through debt or equity financing prior to
the end of 2000.
Net cash used in operating activities was $35.9 million for the year ended
December 31, 1999. During the year ended December 31, 1999, we began providing
the TiVo Service, incurring a net loss of $66.6 million. Uses of cash from
operating activities also included an increase in prepaid expenses and other of
$2.5 million and an increase in accounts receivable of $337,000. These uses
were offset by sources of cash provided from operating activities consisting of
an increase in accounts payable of $8.1 million, an increase in accrued
liabilities of $4.1 million, an increase in accrued marketing--related parties
of $2.3 million, an increase in deferred revenue of $2.3 million and a decrease
in inventories of $120,000.
Net cash used in investing activities was $9.9 million for the year ended
December 31, 1999. Net cash used in investing activities during the year ended
December 31, 1999 included $6.0 million to purchase short-term investments and
$3.9 million for the acquisition of property and equipment.
Net cash provided by financing activities was $183.3 million for the year
ended December 31, 1999. Of this amount, $90.6 million was received from the
issuance of Series D, E, F, G, H, I and J preferred stock to several investors,
including Vulcan Ventures Incorporated, Showtime Networks, Inc., DIRECTV, NBC
Multimedia, Inc., Philips Corporate External Ventures B.V., Advance/Newhouse,
CBS Corporation, Comcast Interactive, Cox Communication, Discovery
Communications, Liberty Media Corporation, TV Guide Interactive, The Walt
Disney Company (through its wholly owned subsidiary Catalyst Investments
L.L.C.), America Online, Inc. and Sony Corporation of America, Inc.
Additionally, we received $90.3 million in proceeds from the issuance of common
stock through our initial public offering, net of issuance costs. We obtained
$1.8 million of financing through a capital lease and $1.2 million from the
issuance of common stock for stock options exercised. Cash was used to offset a
bank overdraft of $442,000 during the period and was used to repurchase
unvested common stock options, which had been exercised for $28,000.
In December 1997, we established a $750,000 line of credit with a financial
institution, which expired on August 15, 1999. The line was partially utilized
to secure a letter of credit in the amount of $600,000, which expired in July
1999. No amounts were outstanding at December 31, 1999 and December 31, 1998.
Net cash used in operating activities was $8.8 million for the year ended
December 31, 1998 and $494,000 for the period from August 4, 1997 (Inception)
to December 31, 1997. Net cash used during these periods 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.
Net cash used in investing activities was $817,000 for the year ended
December 31, 1998 and $396,000 for the period from August 4, 1997 (Inception)
to December 31, 1997. Net cash used during these periods was for the
acquisition of property and the purchase of short-term investments.
26
<PAGE>
Net cash provided by financing activities was $9.8 million for the year
ended December 31, 1998. This financing was received primarily from the
issuance of $9.2 million of Series B and C preferred stock to New Enterprise
Associates, Institutional Venture Partners, Comdisco, Odyssey and other private
and institutional investors and the issuance of $132,000 of common stock.
Additionally, we obtained financing through a bank overdraft of $442,000. Net
cash provided by financing activities was $3.0 million for the period from
August 4, 1997 (Inception) to December 31, 1997. This financing was received
primarily from the issuance of Series A preferred stock to several investors,
including entities affiliated with New Enterprise Associates and Institutional
Venture Partners.
We have commitments for future lease payments under facilities operating
leases of $20.5 million and obligations under capital leases of $1.8 million as
of December 31, 1999. 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.
On April 8, 1999, we entered into a secured convertible debenture purchase
agreement with New Enterprise Associates VII, L.P., Institutional Ventures VII,
L.P. and two other stockholders. In connection with the agreement, we issued
warrants. The value assigned to these warrants has been fully amortized as of
December 31, 1999. As of December 31, 1999, we had no outstanding amounts under
this agreement. All of the warrants issued under the terms of this agreement
were exercised at the completion of our initial public offering.
Our future capital requirements will depend on a variety of factors,
including market acceptance of 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 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;
. 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."
27
<PAGE>
Impact of Inflation
We believe that inflation has not had a significant impact on our operating
results.
Year 2000 Issue
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs would not properly recognize the year format.
This could result in major system failures or miscalculations that could
disrupt our business. We formulated a year 2000 plan to assess and address any
year 2000 issues and created a year 2000 task force headed by our chief
information officer to implement the plan. This plan was implemented and we did
not experience any problems due to year 2000 issues at the turn of the year.
State of Readiness. We use an internal calendar in both the personal video
recorder and the TiVo broadcast service center. The personal video recorder
uses an internal calendar for recording shows as well as to dial into the TiVo
broadcast service center for nightly downloads of program guide data and other
content. The TiVo broadcast service center uses a calendar to distribute
program guide data and content. The TiVo Service and the personal video
recorder that enables the TiVo Service were tested for year 2000 compliance
and, at this time, there are no known issues nor did we experience any problems
at the turn of the year.
We completed an initial assessment of the criticality of our suppliers'
technology being year 2000 compliant. We tested the year 2000 compliance of any
vendors' and suppliers' interfaces that have a high impact on our business.
Those third-party interfaces with moderate impact on our business were assessed
by reviewing these third parties' web sites or by requesting a letter from such
parties to prove compliance. We did not conduct further investigation on those
third-party technologies that have a low impact on our business other than
reviewing these parties' web sites.
As we added strategic partners, we inquired as to the year 2000 compliance
of their systems. To date, all critical partners we are working with have
indicated that their systems are year 2000 compliant. We have not required any
formal paperwork from, or conducted any tests with, these partners. We did not
experience any problems at the turn of the year due to our partners' systems.
We completed an assessment of our information technology systems, which
includes, but is not limited to, hardware and software required to support our
broadcast service center as well as our internal business systems. We also
assessed our non-information technology systems, which included facility date
sensitive systems. Most information technology systems were purchased in the
last nine months. Year 2000 compliance was a major part of the selection
criteria. Our assessment included the following steps:
. identification of categories of hardware and software that need to be
evaluated;
. listing of all hardware and software by category and rated by
criticality;
. determination of any known year 2000 issues;
. adoption of a proof assessment approach based on criticality to our
business;
. creation of a high level plan for assessment and remediation by item; and
. implementation of the plan.
We completed our year 2000 assessment in September 1999 and completed
interface testing and remediation prior to the end of 1999. We are not aware of
any year 2000 issues that have not yet surfaced or that would have a material
effect on our business, nor did we experience any problems at the turn of the
year.
Costs. As of December 31, 1999, we had incurred costs of approximately
$35,000, in connection with identifying, evaluating and addressing year 2000
compliance issues. All of the expenses have related to operating costs
associated with time spent by our employees in the evaluation process and some
charges related to upgrades identified during our vendor communications or
testing.
28
<PAGE>
Risks. Our ongoing attention to year 2000 issues may identify material non-
compliance issues with the TiVo Service or the personal video recorder, our
informational technology systems or the systems of our partners or suppliers.
We may not be able to successfully resolve these issues, or it may be costly to
do so. In addition, we cannot assure you that governmental agencies, utility
companies, third-party service providers and others outside of our control will
be year 2000 compliant. The failure by such entities to be year 2000 compliant
could result in a systemic failure beyond our control, such as a prolonged
telecommunications or electrical failure, which could prevent us from
delivering upgrades and regular downloads to the personal video recorders that
enable the TiVo Service or otherwise impact the functionality of the personal
video recorder. Any of these occurrences would have a material adverse effect
on our business.
Contingency Plans. The results of our assessment and testing were taken into
account in determining the nature and extent of our contingency plans.
Year 2000 issues that impair the delivery of the TiVo Service have been
addressed via software upgrades to the TiVo broadcast service center and/or the
personal video recorder via the nightly download of data over the telephone
line. Up to 12 days of program guide data can be stored on the personal video
recorder. The program guide data related to the 12th day into the future is
downloaded onto the personal video recorder every night. If a year 2000 issue
prevents this nightly download of program guide data, there would still be up
to 12 days of program guide data on the personal video recorder at that point
in time. Each day a download does not arrive, however, there would be one less
day the subscriber could record in the future. After the 12th day following a
year 2000 issue that impacts these nightly downloads, the personal video
recorder could only be used in "non-service mode" until a software fix could be
downloaded. In non-service mode, a subscriber could still use the pause, rewind
and fast forward features, but could only record programs by manually
programming the channel and time into the personal video recorder.
If the personal video recorder's downloading process malfunctioned due to a
year 2000 issue, or if software downloads were unable to remedy the problem,
the personal video recorder would have to be returned and repaired either by
TiVo or our manufacturing partners.
To address potential facility-related year 2000 issues on our most critical
systems, we moved the TiVo broadcast service center into co-location at UUnet
in November 1999. The UUnet co-location is equipped with generators that can
provide several weeks of back-up power.
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 year ended December 31,
1999, we recognized subscription revenues of $223,000. As of December 31, 1999,
we had an accumulated deficit of $76.9 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.
29
<PAGE>
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
December 31, 1999, only a limited number of personal video recorders had been
sold and we obtained only a limited number of subscribers to the TiVo Service.
As a result of our limited operating history, our historical financial and
operating information is of limited value in evaluating our future operating
results. In addition, any evaluation of our business must be made in light of
the risks and difficulties encountered by companies offering products or
services in new and rapidly evolving markets. For example, it may be difficult
to accurately predict our future revenues, costs of revenues, expenses or
results of operations. Personal television is a new product category for
consumers and it may be difficult to predict the future growth rate, if any, or
size of the market for our products and services. We may be unable to
accurately forecast customer behavior and recognize or respond to emerging
trends, changing preferences or competitive factors facing us. As a result, we
may be unable to make accurate financial forecasts and adjust our spending in a
timely manner to compensate for any unexpected revenue shortfall. This
inability could cause our net losses in a given quarter to be greater than
expected, which could cause the price of our stock to decline.
If our marketing in the retail channel is not successful, consumers and
consumer electronics manufacturers may not accept the TiVo Service and products
that enable the TiVo Service.
Our success depends upon a continually successful retail marketing campaign
for the TiVo Service and related personal video recorders, which began in the
third quarter of 1999. We will rely principally on our consumer electronics
partners, such as Philips 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
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expectation that our partnerships will help us obtain subscribers, broaden
market acceptance of personal television and increase our future revenues. If
these expectations are not met, we may be unable to generate sufficient revenue
to cover our expenses and obligations.
We depend on a limited number of third parties to manufacture, distribute
and supply critical components and services for the personal video recorders
that enable the TiVo Service. We may be unable to operate our business if these
parties do not perform their obligations.
The TiVo Service is enabled through the use of a personal video recorder
made available by a limited number of third parties. In addition, we rely on
sole suppliers for a number of key components for the personal video recorders.
We do not control the time and resources that these third parties devote to our
business. We cannot be sure that these parties will perform their obligations
as expected or that any revenue, cost savings or other benefits will be derived
from the efforts of these parties. If any of these parties breaches or
terminates its agreement with us or otherwise fails to perform their
obligations in a timely manner, we may be delayed or prevented from
commercializing our products and services. Because our relationships with these
parties are non-exclusive, they may also support products and services that
compete directly with us, or offer similar or greater support to our
competitors. Any of these events could require us to undertake unforeseen
additional responsibilities or devote additional resources to commercialize our
products and services. This outcome would harm our ability to compete
effectively and quickly achieve market acceptance and brand recognition.
In addition, we face the following risks in relying on these third parties:
If our manufacturing partnerships are not successful, we may be unable to
establish a market for our products and services. We initially manufactured the
personal video recorders that enable the TiVo Service through a third-party
contract manufacturer. We have entered into agreements with Philips 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 reach sufficient production volume of the
personal video recorder to satisfy anticipated demand, is subject to delays and
unforeseen problems such as defects, shortages of critical components and cost
overruns. Moreover, they will require substantial lead times to manufacture
anticipated quantities of the personal video recorders that enable the TiVo
Service. Delays and other problems could impair the retail distribution and
brand image and make it difficult for us to attract subscribers. In addition,
the loss of a manufacturing partner would require us to identify and contract
with alternative sources of manufacturing, which we may be unable to do and
which could prove 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.
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We are dependent on single suppliers for several key components and
services. If these suppliers fail to perform their obligations, we may be
unable to find alternative suppliers or deliver our products and services to
our customers on time. We currently rely on sole suppliers for a number of the
key components and services used in the personal video recorders and the TiVo
Service. For example:
. Quantum is the sole supplier of the hard disk drives;
. NEC is the sole supplier of the application specific integrated circuit,
a semiconductor device;
. Sony is the sole supplier of the MPEG2 encoder semiconductor device; and
. Tribune Media Services is the sole supplier of program guide data.
In addition to the above, we have several sole suppliers for key components
of our products currently under development.
We cannot be sure that alternative sources for key components and services
used in the personal video recorders and the TiVo Service will be available
when needed or, if available, that these components and services will be
available on favorable terms. If our agreements or our manufacturing partners'
agreements with Quantum, NEC, Sony or Tribune Media Services were to terminate
or expire, or if we or our manufacturing partners were unable to obtain
sufficient quantities of these components or required program guide data, our
search for alternate suppliers could result in significant delays, added
expense or disruption in product availability.
Our ability to generate revenues from subscription fees is unproven and may
fail.
We expect to generate a substantial portion of our revenues from
subscription fees for the TiVo Service. Many of our potential customers already
pay monthly fees for cable or satellite television services. We must convince
these consumers to pay an additional subscription fee to receive the TiVo
Service. The availability of competing services that do not require
subscription fees will harm our ability to effectively attract subscribers. In
addition, the personal video recorder that enables the TiVo Service can be used
to record programs and pause, rewind and fast forward through live or recorded
shows without an active subscription to the TiVo Service. If a significant
number of purchasers of our personal video recorders use these devices without
subscribing to the TiVo Service, our revenue growth will decline and we may not
achieve profitability.
Our business is expanding rapidly and our failure to manage growth could
disrupt our business and impair our ability to generate revenues.
Since we began our business in August 1997, we have significantly expanded
our operations. We anticipate continued expansion in our headcount, facilities
and infrastructure to support potential growth in our subscriber base and to
allow us to pursue market opportunities. This expansion has placed, and will
continue to place, a significant strain on our management, operational and
financial resources and systems. Specific risks we face as our business expands
include:
We need to attract and retain qualified personnel, and any failure to do so
may impair our ability to offer new products or grow our business. Our success
will depend on our ability to attract, retain and motivate managerial,
technical, marketing, financial, administrative and customer support personnel.
Competition for such employees is intense, especially for engineers in the San
Francisco Bay Area, and we may be unable to successfully attract, integrate or
retain sufficiently qualified personnel. If we are unable to hire, train,
retain and manage required personnel, we may be unable to successfully
introduce new products or otherwise implement our business strategy.
Any inability of our systems to accommodate our expected subscriber growth
may cause service interruptions or delay our introduction of new services. We
internally developed many of the systems we use to provide the TiVo Service and
perform other processing functions. The ability of these systems to scale
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as we rapidly add new subscribers is unproven. We must continually improve
these systems to accommodate subscriber growth and add features and
functionality to the TiVo Service. Our inability to add software and hardware
or to upgrade our technology, systems or network infrastructure could adversely
affect our business, cause service interruptions or delay the introduction of
new services.
We will need to provide acceptable customer support, and any inability to do
so will harm our brand and ability to generate and retain new subscribers. Our
ability to increase sales, retain current and future subscribers and strengthen
our brand will depend in part upon the quality of our customer support
operations. Some customers require significant support when installing the
personal video recorder and becoming acquainted with the features and
functionality of the TiVo Service. We have limited experience with widespread
deployment of our products and services to a diverse customer base, and we may
not have adequate personnel to provide the levels of support that our customers
require. In addition, we have entered into agreements with third parties to
provide this support and will rely on them for a substantial portion of our
customer support functions. Our failure to provide adequate customer support
for the TiVo Service and personal video recorder will damage our reputation in
the personal television and consumer electronics marketplace and strain our
relationships with customers and strategic partners. This could prevent us from
gaining new or retaining existing subscribers and could cause harm to our
reputation and brand.
We will need to improve our operational and financial systems to support our
expected growth, and any inability to do so will adversely impact our billing
and reporting. To manage the expected growth of our operations and personnel,
we will need to improve our operational and financial systems, procedures and
controls. Our current and planned systems, procedures and controls may not be
adequate to support our future operations and expected growth. For example, we
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.
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It will take a substantial amount of time and resources to achieve broad
market acceptance of the TiVo Service and products that enable the TiVo Service
and we cannot be sure that these efforts will generate a broad enough
subscriber base to sustain our business.
Personal television products and services represent a new, untested consumer
electronics category. The TiVo Service is in an early stage of development and
many consumers are not aware of its benefits. As a result, it is uncertain
whether the market will demand and accept the TiVo Service and products that
enable the TiVo Service. Retailers, consumers and potential partners may
perceive little or no benefit from personal television products and services.
Likewise, consumers may not value, and may be unwilling to pay for the TiVo
Service and products that enable the TiVo Service. To develop this market and
obtain subscribers to the TiVo Service, we will need to devote a substantial
amount of time and resources to educate consumers and promote our products. We
may fail to obtain subscribers, encourage the development of new devices that
enable the TiVo Service and develop and offer new content and services. We
cannot be sure that a broad base of consumers will ultimately subscribe to the
TiVo Service or purchase the products that enable the TiVo Service.
We face intense competition from a number of sources, which may impair our
revenues and ability to generate subscribers.
The personal television market is new and rapidly evolving and we expect
competition from a number of sources, including:
Internet-related companies and companies offering similar products and
services. We are likely to face intense direct competition from companies such
as WebTV Networks Inc., 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.
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Established competition for advertising budgets. Personal television, in
general, and TiVo, specifically, also compete with traditional advertising
media such as print, radio and television for a share of advertisers' total
advertising budgets. If advertisers do not perceive personal television as an
effective advertising medium, they may be reluctant to devote a significant
portion of their advertising budget to promotions on the TiVo Service.
If we are unable to introduce new products or services, or if our new
products and services are unsuccessful, the growth in our subscriber base and
revenues may suffer.
To attract and retain subscribers and generate revenues, we must continue to
add functionality and content and introduce products and services which embody
new technologies and, in some instances, new industry standards. This challenge
will require hardware and software improvements, as well as new collaborations
with programmers, advertisers, network operators, hardware manufacturers and
other strategic partners. These activities require significant time and
resources and may require us to develop and promote new ways of generating
revenue with established companies in the television industry. These companies
include television advertisers, cable and satellite network operators,
electronic commerce companies and consumer electronics manufacturers. In each
of these examples, a small number of large companies dominate a major portion
of the market and may be reluctant to work with us to develop new products and
services for personal television. If we are unable to further develop and
improve the TiVo Service or expand our operations in a cost-effective or timely
manner, our ability to attract and retain subscribers and generate revenue will
suffer.
If we do not successfully establish strong brand identity in the personal
television market, we may be unable to achieve widespread acceptance of our
products.
We believe that establishing and strengthening the TiVo brand is critical to
achieving widespread acceptance of our products and services and to
establishing key strategic partnerships. The importance of brand recognition
will increase as current and potential competitors enter the personal
television market with competing products and services. Our ability to promote
and position our brand depends largely on the success of our marketing efforts
and our ability to provide high quality services and customer support. These
activities are expensive and we may not generate a corresponding increase in
subscribers or revenues to justify these costs. If we fail to establish and
maintain our brand, or if our brand value is damaged or diluted, we may be
unable to attract subscribers and effectively compete in the personal
television market.
Product defects, system failures or interruptions to the TiVo Service may
have a negative impact on our revenues, damage our reputation and decrease our
ability to attract new subscribers.
Our ability to provide uninterrupted service and high quality customer
support depends on the efficient and uninterrupted operation of our computer
and communications systems. Our computer hardware and other operating systems
for the TiVo Service are vulnerable to damage or interruption from earthquakes,
floods, fires, power loss, telecommunication failures and similar events. They
are also subject to break-ins, sabotage, intentional acts of vandalism and
similar misconduct. These types of interruptions in the TiVo Service may reduce
our revenues and profits. Our business also will be harmed if consumers believe
our service is unreliable. In addition to placing increased burdens on our
engineering staff, service outages will create a flood of customer questions
and complaints that must be responded to by our customer support personnel. Any
frequent or persistent system failures could irreparably damage our reputation
and brand.
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.
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Intellectual property claims against us can be costly and could result in
the loss of significant rights.
From time to time, we may be subject to intellectual property litigation,
which could:
. be time-consuming and expensive;
. divert management's attention and resources away from our business;
. cause delays in product delivery and new service introduction;
. cause the cancellation of new products or services; or
. require us to pay significant royalties or licensing fees.
The emerging enhanced-television industry is highly litigious, particularly
in the area of on-screen program guides. Additionally, many patents covering
interactive television technologies have been granted but have not been
commercialized. For example, we are aware of at least seven patents for
pausing live television. A number of companies in the enhanced-television
industry earn substantial profits from technology licensing, and the
introduction of new technologies such as ours is likely to provoke lawsuits
from such companies. A successful claim of infringement against us, our
inability to obtain an acceptable license from the holder of the patent or
other right or our inability to design around an asserted patent or other
right could cause our manufacturing partners to cease manufacturing the
personal video recorder or us to cease providing our service, or both, which
would eliminate our ability to generate revenues.
On January 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. We could be forced to incur material
expenses to defend this suit, and in the event that we were to lose this
lawsuit our 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
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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.
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
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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.
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
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believe that sales of personal video recorders and new subscriptions to the
TiVo Service will be disproportionately high during the holiday shopping season
when compared to other times of the year. If we are unable to accurately
forecast and respond to consumer demand for our products, our reputation and
brand will suffer and the market price of our common stock would likely fall.
We expect that a portion of our future revenues will come from targeted
commercials and other forms of television advertising enabled by the TiVo
Service. Expenditures by advertisers tend to be seasonal and cyclical,
reflecting overall economic conditions as well as budgeting and buying
patterns. A decline in the economic prospects of advertisers or the economy in
general could alter current or prospective advertisers' spending priorities or
increase the time it takes to close a sale with our advertisers, which could
cause our revenues from advertisements to decline significantly in any given
period.
If we are unable to raise additional capital on acceptable terms, our
ability to effectively manage growth and build a strong brand could be harmed.
We expect that our existing capital resources will be sufficient to meet our
cash requirements through at least the next 12 months. However, as we continue
to grow our business, we may need to raise additional capital, which may not be
available on acceptable terms. If we cannot raise necessary additional capital
on acceptable terms, we may not be able to develop or enhance our products and
services, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements.
If additional capital is raised through the issuance of equity securities,
the percentage ownership of our existing stockholders will decline,
stockholders may experience dilution in net book value per share, or these
equity securities may have rights, preferences or privileges senior to those of
the holders of our common stock. Any debt financing, if available, may involve
covenants limiting, or restricting our operations or future opportunities.
We have agreed to subsidize the cost of manufacturing personal video
recorders, which may adversely affect our operating results and ability to
achieve profitability.
We have agreements with our consumer electronic manufacturing partners to
manufacture the personal video recorder that enables the TiVo Service. Philips
began manufacturing the personal video recorders in the fourth quarter of 1999.
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.
39
<PAGE>
If we lose key management personnel, we may not be able to successfully
operate our business.
Our future performance will be substantially dependent on the continued
services of our senior management and other key personnel. The loss of any
members of our executive management team and our inability to hire additional
executive management could harm our business and results of operations. In
addition, we do not have employment agreements with, or key man insurance
policies for, any of our key personnel.
We have recently hired several senior executive officers. Any inability by
these individuals to execute our business strategy and manage our growth could
harm our ability to generate revenues and achieve profitability.
Several members of our executive management team were hired in 1999,
including our Chief Financial Officer and Sr. Vice President of Finance, our
Vice President of Business Development, our Vice President of Human Resources,
our Vice President of Sales, our Vice President of Information Technology and
Chief Information Officer, and our Vice President of Sales and Marketing. Our
Vice President of Corporate Communications was hired in March 2000. These
individuals do not have significant experience working with the other members
of our management team, and therefore may require time to adequately
familiarize themselves with the nature of our business and operations. We
cannot assure you that these individuals will be able to successfully work
together or manage any growth we may experience. The process of integrating
these individuals into our management team may detract from the operation of
our business.
ITEM 7A. 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.
The table below presents principal amounts and related weighted average
interest rates as of December 31, 1999 for our cash and cash equivalents and
our investment portfolio. All amounts mature in fiscal year 2000.
<TABLE>
<S> <C>
Cash and cash equivalents................................... $139,687,000
Average interest rate..................................... 5.80%
Short-term investments...................................... $ 6,168,000
Average interest rate..................................... 6.22%
</TABLE>
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.
40
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and notes thereto appear on pages 42 to
59 of this Form 10-K.
Index to Financial Statements
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................... 42
Balance Sheets.............................................................. 43
Statements of Operations.................................................... 44
Statements of Stockholders' Equity.......................................... 45
Statements of Cash Flows.................................................... 46
Notes to Financial Statements............................................... 47
</TABLE>
41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of TiVo Inc.:
We have audited the accompanying balance sheets of TiVo Inc. (a Delaware
corporation) as of December 31, 1999 and 1998, and the related statements of
operations, stockholders' equity and cash flows for each of the two years in
the period ended December 31, 1999 and for the period from August 4, 1997
(Inception) to December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TiVo Inc. as of December
31, 1999 and 1998, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1999 and for the period
from August 4, 1997 (Inception) to December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
San Francisco, California
January 17, 2000
42
<PAGE>
TIVO INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................ $139,687,000 $ 2,248,000
Short-term investments........................... 6,168,000 164,000
Accounts receivable.............................. 127,000 --
Accounts receivable from related parties......... 210,000 --
Inventories...................................... -- 120,000
Prepaid expenses and other....................... 2,589,000 219,000
------------ ------------
Total current assets........................... 148,781,000 2,751,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $831,000 and $170,000 as of
December 31, 1999 and 1998, respectively.......... 4,061,000 792,000
------------ ------------
Total assets................................... $152,842,000 $ 3,543,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Bank overdraft................................... $ -- $ 442,000
Accounts payable................................. 8,432,000 305,000
Accrued liabilities.............................. 4,778,000 675,000
Accrued marketing--related parties............... 2,349,000 --
Deferred revenue................................. 2,271,000 --
Current portion of obligations under capital
lease........................................... 624,000 --
------------ ------------
Total current liabilities...................... 18,454,000 1,422,000
Long-term portion of obligations under capital
lease........................................... 1,141,000 --
------------ ------------
Total liabilities.............................. 19,595,000 1,422,000
------------ ------------
STOCKHOLDERS' EQUITY
Convertible preferred stock, par value $0.001:
Authorized shares at December 31, 1999 and 1998
are 2,000,000 and 13,000,000, respectively.....
Issued and outstanding shares at December 31,
1999 and 1998 are zero and 11,174,427,
respectively................................... $ -- $ 12,242,000
Common stock, par value $0.001:
Authorized shares at December 31, 1999 and 1998
are 75,000,000 and 25,500,000, respectively....
Issued and outstanding shares at December 31,
1999 and 1998 are 37,746,391 and 5,216,937,
respectively................................... 38,000 5,000
Additional paid-in capital....................... 235,423,000 190,000
Deferred compensation............................ (6,170,000) --
Prepaid marketing expenses....................... (16,341,000) --
Note receivable.................................. (2,822,000) --
Retained deficit................................. (76,881,000) (10,316,000)
------------ ------------
Total stockholders' equity..................... 133,247,000 2,121,000
------------ ------------
Total liabilities and stockholders' equity..... $152,842,000 $ 3,543,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
43
<PAGE>
TIVO INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Year Ended December 31, August 4, 1997
------------------------- (Inception), to
1999 1998 December 31, 1997
------------ ----------- -----------------
<S> <C> <C> <C>
Subscription revenues............. $ 223,000 $ -- $ --
Costs and expenses
Cost of services................ 4,067,000 -- --
Research and development........ 9,727,000 5,614,000 356,000
Sales and marketing............. 24,502,000 1,277,000 28,000
Sales and marketing--related
parties........................ 15,172,000 -- --
General and administrative...... 7,027,000 2,946,000 241,000
Stock-based compensation........ 1,530,000 -- --
Other operating expense, net.... 7,210,000 -- --
------------ ----------- ----------
Loss from operations............ (69,012,000) (9,837,000) (625,000)
Interest income............... 2,913,000 136,000 49,000
Interest expense and other.... (466,000) (20,000) (19,000)
------------ ----------- ----------
Net loss........................ $(66,565,000) $(9,721,000) $ (595,000)
============ =========== ==========
Net loss per share
Basic and diluted............. $ (5.49) $ (3.25) $ (0.20)
============ =========== ==========
Weighted average common shares
outstanding
Basic and diluted............. 12,128,560 2,989,717 2,916,664
============ =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
44
<PAGE>
TIVO INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
-------------------------- -------------------
Additional Prepaid
Paid-In Deferred Marketing Note
Shares Amount Shares Amount Capital Compensation Expense Receivable
----------- ------------- ---------- ------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST
4, 1997........ -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of
common stock for
cash............ -- -- 2,916,664 3,000 7,000 -- -- --
Issuance of
Series A
preferred stock
at $0.60 per
share for cash.. 5,000,000 2,990,000 -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- --
----------- ------------- ---------- ------- ------------ ----------- ------------ -----------
BALANCE,
DECEMBER 31,
1997........... 5,000,000 $ 2,990,000 2,916,664 $ 3,000 $ 7,000 $ -- $ -- $ --
Issuance of
Series B
preferred stock
at $1.26 per
share for cash.. 3,660,914 4,609,000 -- -- -- -- -- --
Issuance of
Series C
preferred stock
at $1.85 per
share for cash.. 2,500,000 4,618,000 -- -- -- -- -- --
Exercise of
stock options
for common
stock........... -- -- 2,276,458 2,000 130,000 -- -- --
Common stock
exchanged for
services........ -- -- 198,586 -- 60,000 -- -- --
Series C
preferred stock
exchanged for
services........ 13,513 25,000 -- -- -- -- -- --
Common stock
repurchases..... -- -- (174,771) -- (7,000) -- -- --
Net loss........ -- -- -- -- -- -- -- --
----------- ------------- ---------- ------- ------------ ----------- ------------ -----------
BALANCE,
DECEMBER 31,
1998........... 11,174,427 $ 12,242,000 5,216,937 $ 5,000 $ 190,000 $ -- $ -- $ --
Issuance of
Series D
preferred stock
at $3.68 per
share for cash.. 1,358,695 4,973,000 -- -- -- -- -- --
Issuance of
Series E
preferred stock
at $7.40 per
share for cash.. 270,270 1,982,000 -- -- -- -- -- --
Issuance of
Series F
preferred stock
at $7.40 per
share for cash.. 405,405 2,960,000 -- -- -- -- -- --
Issuance of
Series G
preferred stock
at $7.40 per
share for cash.. 1,013,513 7,431,000 -- -- -- -- -- --
Issuance of
Series H
preferred stock
at $7.40 per
share for cash.. 1,351,351 9,992,000 -- -- -- -- -- --
Issuance of
Series I
preferred stock
at $10.41 per
share for cash.. 3,121,994 31,494,000 -- -- -- -- -- --
Issuance of
Series J
preferred stock
at $10.41 per
share for cash.. 3,123,789 31,740,000 -- -- -- -- -- --
Conversion of
preferred stock
to common
stock........... (21,819,444) (102,814,000) 21,819,444 22,000 102,792,000 -- -- --
Issuance of
preferred stock
warrants for
services........ -- -- -- -- 12,828,000 -- (12,454,000) --
Issuance of
common stock
through initial
public offering,
net of issuance
costs........... -- -- 6,166,875 6,000 90,249,000 -- -- --
Issuance of
common stock for
marketing
services........ -- -- 1,852,329 2,000 12,038,000 -- (12,040,000) --
Issuance of
common stock for
marketing
services and
note
receivable...... -- -- 1,128,867 1,000 7,336,000 -- (4,515,000) (2,822,000)
Issuance of
common stock
warrants for
services........ -- -- -- -- 498,000 -- -- --
Exercise of
stock options
for common
stock........... -- -- 525,064 1,000 1,191,000 -- -- --
Exercise of
warrants for
common stock.... -- -- 1,125,234 1,000 (1,000) -- -- --
Common stock
exchanged for
services........ -- -- 137,983 -- 605,000 -- -- --
Common stock
repurchases..... -- -- (226,342) -- (28,000) -- -- --
Amortization of
prepaid
marketing
expenses........ -- -- -- -- -- -- 12,668,000 --
Amortization of
warrants for
services........ -- -- -- -- 25,000 -- -- --
Recognition of
deferred
compensation.... -- -- -- -- 7,700,000 (7,700,000) -- --
Stock-based
compensation
expense......... -- -- -- -- -- 1,530,000 -- --
Net loss........ -- -- -- -- -- -- -- --
----------- ------------- ---------- ------- ------------ ----------- ------------ -----------
BALANCE,
DECEMBER 31,
1999........... -- $ -- 37,746,391 $38,000 $235,423,000 $(6,170,000) $(16,341,000) $(2,822,000)
=========== ============= ========== ======= ============ =========== ============ ===========
<CAPTION>
Retained
Deficit Total
------------- -------------
<S> <C> <C>
BALANCE, AUGUST
4, 1997........ $ -- $ --
Issuance of
common stock for
cash............ -- 10,000
Issuance of
Series A
preferred stock
at $0.60 per
share for cash.. -- 2,990,000
Net loss........ (595,000) (595,000)
------------- -------------
BALANCE,
DECEMBER 31,
1997........... $ (595,000) $ 2,405,000
Issuance of
Series B
preferred stock
at $1.26 per
share for cash.. -- 4,609,000
Issuance of
Series C
preferred stock
at $1.85 per
share for cash.. -- 4,618,000
Exercise of
stock options
for common
stock........... -- 132,000
Common stock
exchanged for
services........ -- 60,000
Series C
preferred stock
exchanged for
services........ -- 25,000
Common stock
repurchases..... -- (7,000)
Net loss........ (9,721,000) (9,721,000)
------------- -------------
BALANCE,
DECEMBER 31,
1998........... $(10,316,000) $ 2,121,000
Issuance of
Series D
preferred stock
at $3.68 per
share for cash.. -- 4,973,000
Issuance of
Series E
preferred stock
at $7.40 per
share for cash.. -- 1,982,000
Issuance of
Series F
preferred stock
at $7.40 per
share for cash.. -- 2,960,000
Issuance of
Series G
preferred stock
at $7.40 per
share for cash.. -- 7,431,000
Issuance of
Series H
preferred stock
at $7.40 per
share for cash.. -- 9,992,000
Issuance of
Series I
preferred stock
at $10.41 per
share for cash.. -- 31,494,000
Issuance of
Series J
preferred stock
at $10.41 per
share for cash.. -- 31,740,000
Conversion of
preferred stock
to common
stock........... -- --
Issuance of
preferred stock
warrants for
services........ -- 374,000
Issuance of
common stock
through initial
public offering,
net of issuance
costs........... -- 90,255,000
Issuance of
common stock for
marketing
services........ -- --
Issuance of
common stock for
marketing
services and
note
receivable...... -- --
Issuance of
common stock
warrants for
services........ -- 498,000
Exercise of
stock options
for common
stock........... -- 1,192,000
Exercise of
warrants for
common stock.... -- --
Common stock
exchanged for
services........ -- 605,000
Common stock
repurchases..... -- (28,000)
Amortization of
prepaid
marketing
expenses........ -- 12,668,000
Amortization of
warrants for
services........ -- 25,000
Recognition of
deferred
compensation.... -- --
Stock-based
compensation
expense......... -- 1,530,000
Net loss........ (66,565,000) (66,565,000)
------------- -------------
BALANCE,
DECEMBER 31,
1999........... $(76,881,000) $133,247,000
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
45
<PAGE>
TIVO INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Year Ended December 31, August 4, 1997
------------------------- (Inception), to
1999 1998 December 31, 1997
------------ ----------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss......................... $(66,565,000) $(9,721,000) $ (595,000)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization.. 661,000 242,000 15,000
Issuance of preferred stock
warrants for services......... 374,000 -- --
Issuance of common stock
warrants for services......... 498,000 -- --
Common stock exchanged for
services...................... 605,000 85,000 --
Amortization of prepaid
marketing expenses............ 12,668,000 -- --
Amortization of warrants for
services...................... 110,000 -- --
Stock-based compensation
expense....................... 1,530,000 -- --
Changes in current assets and
liabilities:
Accounts receivable............ (337,000) -- --
Inventories.................... 120,000 (120,000) --
Prepaid expenses and other..... (2,455,000) (162,000) (57,000)
Accounts payable............... 8,127,000 188,000 117,000
Accrued liabilities............ 4,103,000 649,000 26,000
Accrued marketing--related
parties....................... 2,349,000 -- --
Deferred revenue............... 2,271,000 -- --
------------ ----------- ----------
Net cash used in operating
activities.................. (35,941,000) (8,839,000) (494,000)
------------ ----------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Acquisition of property and
equipment, net................ (3,930,000) (673,000) (376,000)
Purchase of short-term
investments................... (6,004,000) (144,000) (20,000)
------------ ----------- ----------
Net cash used in investing
activities.................. (9,934,000) (817,000) (396,000)
------------ ----------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from issuance of
convertible preferred stock,
net of issuance costs........... 90,572,000 9,227,000 2,990,000
Proceeds from issuance of common
stock through initial public
offering, net of issuance
costs........................... 90,255,000 -- --
Proceeds from issuance of common
stock and exercise of stock
options......................... 1,192,000 132,000 10,000
Repurchase of common stock....... (28,000) (7,000) --
Net borrowings under capital
lease........................... 1,765,000 -- --
Borrowings under line of
credit.......................... -- 610,000 --
Repayments under line of
credit.......................... -- (610,000) --
(Decrease) increase in bank
overdraft....................... (442,000) 442,000 --
------------ ----------- ----------
Net cash provided by
financing activities........ 183,314,000 9,794,000 3,000,000
------------ ----------- ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS...................... 137,439,000 138,000 2,110,000
CASH AND CASH EQUIVALENTS:
Balance at beginning of period... 2,248,000 2,110,000 --
------------ ----------- ----------
Balance at end of period......... $139,687,000 $ 2,248,000 $2,110,000
============ =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for interest........... $ 41,000 $ 19,000 $ --
Stock issued for a note
receivable...................... 2,822,000 -- --
Equipment acquired under capital
lease........................... 1,978,000 -- --
Deferred stock-based
compensation.................... 7,700,000 -- --
</TABLE>
The accompanying notes are an integral part of these statements.
46
<PAGE>
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 Sunnyvale, California. The Company has
developed a subscription-based personal television service (the "TiVo Service")
that provides viewers with the ability to pause, rewind and play back 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. In the fourth quarter of 1999, the Company transitioned the
manufacturing and distribution of the personal video recorder and remote
control to Philips Business Electronics B.V. ("Philips"). Philips began
marketing the TiVo Service and the personal video recorder that enables the
TiVo Service in retail markets in the third quarter of 1999. The Company
stopped selling personal video recorders directly during the fourth quarter of
1999. Prior to the transition, the personal video recorder and remote control
were manufactured by a contract manufacturer and, since March 1999, were sold
by TiVo through its web site and toll-free telephone number. The Company
conducts its operations through one reportable segment.
Upon the transfer of manufacturing and distribution responsibility to
Philips and a successful retail launch of the TiVo Service and products that
enable the TiVo Service, which began in the third quarter of 1999, the Company
was no longer identified as a development-stage company. 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.
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.
Inventories
Inventories consist of raw materials, primarily hard-disk drives and
enclosures. Inventory is valued at the lower of cost (first-in, first-out) or
market. Upon the transfer of manufacturing responsibilities to Philips during
the fourth quarter of 1999, all inventory was sold to Philips.
47
<PAGE>
TIVO INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are stated at cost. For financial reporting purposes,
depreciation is computed using the straight-line method over estimated useful
lives as follows:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures.......................................... 3-5 years
Computer and office equipment................................... 3-5 years
Lab equipment................................................... 3 years
Leasehold improvements.......................................... 7 years
Capitalized software............................................ 1-5 years
</TABLE>
Maintenance and repair expenditures are expensed as incurred.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109).
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets or liabilities of a change in tax rates is recognized in the period in
which the rate change occurs. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be
recovered.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, certificates of deposit,
short-term investments, accounts receivable, and accounts payable approximate
fair value due to the short-term maturity of these instruments.
Business Concentrations and Credit Risk
Financial instruments that subject the Company to concentrations of credit
risk consist primarily of cash. The Company maintains cash with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's customers are
concentrated in the United States. The Company is not subject to significant
credit risk of these customers as subscription revenue is primarily obtained
through credit cards, therefore as of December 31, 1999 the Company has
recorded no allowance for doubtful accounts.
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 (see Note 10) and
unvested, repurchasable common stock issued under the employee stock option
plans (see Notes 7 and 8).
48
<PAGE>
TIVO INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
following antidilutive common share equivalents:
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
--------- ----------
<S> <C> <C>
Repurchasable common stock........................... 1,364,366 2,024,187
Options to purchase common stock..................... 4,346,522 1,235,000
Warrants to purchase common stock.................... -- --
Convertible preferred stock warrants................. -- 52,083
Convertible preferred stock.......................... -- 11,174,427
--------- ----------
5,710,888 14,485,697
========= ==========
</TABLE>
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. No stock compensation expense was
recorded in 1998 and 1997. The Company has recorded stock-based compensation
expense of $1.5 million for the year ended December 31, 1999. 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.
Research and Development
Research and development expenses consist primarily of employee salaries and
related expenses and consulting fees relating to the development of the TiVo
Service and products that enable the TiVo Service. Research and development
costs are expensed as incurred.
49
<PAGE>
TIVO INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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,
Quantum Corporation ("Quantum"), and Creative Artists Agency, LLC ("CAA"), all
of which hold stock in the Company (see Note 10).
Other Operating Expense, Net
Prior to the transition of manufacturing and distribution responsibility to
Philips in the fourth quarter of 1999, the Company sold personal video
recorders directly to consumers. The Company's direct sales of personal video
recorders of $13.5 million, less the cost of the personal video recorders sold
of $20.7 million for the year ended December 31, 1999 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. This reserve was $30,000 at December 31, 1999.
Advertising Costs
In accordance with Statement of Position 93-7, "Reporting on Advertising
Costs", the Company expensed advertising costs as incurred. Advertising
expenses were $13.4 million for the year ended December 31, 1999, zero for the
year ended December 31, 1998 and zero for the period from August 4, 1997
(Inception) to December 31, 1997.
Comprehensive Income
The Company has no material components of other comprehensive income or loss
and, accordingly, the comprehensive loss is the same as the net loss for all
periods presented.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1999
presentation.
3. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ---------
<S> <C> <C>
Furniture and fixtures............................. $ 184,000 $ 16,000
Computer and office equipment...................... 3,384,000 946,000
Lab equipment...................................... 559,000 --
Leasehold improvements............................. 287,000 --
Capitalized software............................... 478,000 --
---------- ---------
4,892,000 962,000
Accumulated depreciation........................... (831,000) (170,000)
---------- ---------
Property and equipment, net........................ $4,061,000 $ 792,000
========== =========
</TABLE>
50
<PAGE>
TIVO INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Equipment under capital leases was $1,978,000 and zero as of December 31,
1999 and 1998. Depreciation and amortization expense was $661,000, $155,000 and
$15,000 for the years ended December 31, 1999 and 1998 and the period from
August 4, 1997 (Inception) to December 31, 1997, respectively.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
---------- --------
<S> <C> <C>
Marketing and promotions............................. $2,012,000 $223,000
Consulting and outside services...................... 750,000 11,000
Compensation and vacation............................ 626,000 213,000
Commissions.......................................... 227,000 --
Employee stock purchase plan......................... 491,000 --
Legal and accounting................................. 188,000 86,000
Other................................................ 484,000 142,000
---------- --------
$4,778,000 $675,000
========== ========
</TABLE>
5. LINE OF CREDIT
In December 1997, the Company established a $750,000 line of credit with a
financial institution, which expired on August 15, 1999. The line was partially
utilized to secure a letter of credit in the amount of $600,000, which expired
in July 1999. No amounts were outstanding at December 31, 1999 and 1998.
6. INCOME TAXES
There was no provision or benefit for income taxes for the years ended
December 31, 1999 and 1998 and the period from August 4, 1997 (Inception) to
December 31, 1997.
Significant components of deferred tax assets were as follows as of December
31, 1999:
<TABLE>
<S> <C>
Net operating loss carryforwards............................ $ 30,081,834
Tax credit carryforwards.................................... 269,287
Temporary differences, net.................................. 654,733
------------
Gross deferred tax assets................................... 31,005,854
Valuation allowance......................................... (31,005,854)
------------
Net deferred tax assets................................... $ --
============
</TABLE>
As of December 31, 1999, the Company had a tax net operating loss (NOL)
carryforward of approximately $75.2 million for federal and California
purposes. The federal NOL expires beginning in 2017, and the California NOL
expires beginning in 2005. A significant change in ownership of the Company may
limit the Company's ability to utilize these NOL carryforwards. SFAS No. 109
requires that the tax benefit of such NOL be recorded as an asset. A valuation
allowance for the entire amount has been provided because of uncertainties
about the Company's ability to realize the value of the deferred tax assets.
51
<PAGE>
TIVO INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. STOCKHOLDERS' EQUITY
Common Stock
In August 1997, the Company issued 2,800,000 shares of common stock to the
founders for $10,000. On September 24, 1997, the Company declared a stock split
of 1.04167 to 1, which resulted in 2,916,664 founders shares outstanding after
the split. No shares were subject to repurchase as of December 31, 1997.
In 1998, the Company issued 2,276,458 shares of common stock as a result of
the exercise of stock options. During 1998, 174,771 shares of common stock were
repurchased in accordance with the terms the Company's stock option plan (see
Note 8). As of December 31, 1998, the Company had the right to repurchase
2,024,187 unvested shares at the stock issuance price, if the holders' service
with the Company terminated.
In 1999, the Company issued 525,064 shares of common stock as a result of
the exercise of stock options. During 1999, 226,342 shares of common stock were
repurchased in accordance with the terms the Company's stock option plan (see
Note 8). The Company has the right to repurchase 1,364,366 unvested shares as
of December 31, 1999, at the stock issuance price, if the holders' service with
the Company terminates. See Note 10 for a description of DIRECTV shares subject
to repurchase.
In 1998, the Company issued 198,586 shares of common stock to consultants
and vendors in exchange for services. In 1999, the Company issued 137,983
shares of common stock to consultants and vendors in exchange for services. The
common stock issued was recorded at the estimated fair value of the common
stock at the time the services were performed and the related expense was
recorded. The Company's management believes that the value of the common stock
issued approximates the value of services received.
In 1999, the Company issued 1,852,329 shares of common stock in exchange for
marketing services under the DIRECTV Agreement and 1,128,867 shares of common
stock in exchange for a $2.8 million promissory note due at the end of a three-
year service period.
The Company's initial public offering ("IPO") of 6,166,875 shares of common
stock with net proceeds of $90.3 million was effective on September 29, 1999
and closed on October 5, 1999. At the closing date, the preferred stock was
converted into common stock on a one-for-one basis and the warrants were
exercised. The Company issued 1,125,234 shares of common stock as a result of
the exercise of common stock warrants.
Convertible Preferred Stock
In September and October 1997, the Company issued 5,000,000 shares of Series
A preferred stock at $0.60 per share. In May, June and July 1998, the Company
issued 3,660,914 shares of Series B preferred stock at $1.26 per share. In
October 1998, the Company issued 2,500,000 shares of Series C preferred stock
at $1.85 per share. In December 1998, the Company issued 13,513 shares of
Series C preferred stock at $1.85 per share in exchange for services received.
In January 1999, the Company issued 1,358,695 shares of Series D preferred
stock at $3.68 per share. In March 1999, the Company issued 270,270 shares of
Series E preferred stock at $7.40 per share. In April 1999, the Company issued
405,405, 1,013,513, and 1,351,351 shares of Series F, G and H preferred stock,
respectively, at $7.40 per share. In July 1999, the Company issued 3,121,994
shares of Series I preferred stock at $10.41 per share. In August 1999, the
Company issued 480,307 shares of Series J preferred stock at $10.41 per share.
In September 1999, the Company issued 2,643,482 shares of Series J preferred
stock at $10.41 per share.
On October 5, 1999, 21,819,444 shares of the outstanding preferred stock
converted into common stock on a one-for-one basis, therefore, no shares of
preferred stock were outstanding as of December 31, 1999.
52
<PAGE>
TIVO INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. EQUITY INCENTIVE PLANS
1997 Equity Incentive Plan
Under the terms of the Company's 1997 Equity Incentive Plan, adopted in 1997
and amended and restated in 1999 (the "1997 Plan"), options to purchase shares
of the Company's common stock may be granted to employees and other individuals
at a price equal to the fair market value of the common stock at the date of
grant. The options vest 25 percent after the first year of service, and the
remaining 75 percent vest ratably over the next 36 months. Options expire 10
years after the grant date. The terms of the 1997 Plan allow individuals to
exercise their options prior to full vesting. In the event that the individual
terminates their service to the Company before becoming fully vested, the
Company has the right to repurchase the unvested shares at the original option
price. The number of shares authorized for option grants under the 1997 Plan is
4,000,000. As of December 31, 1999, options to purchase 985,482 shares of
common stock remain outstanding.
1999 Equity Incentive Plan
In April 1999, the Company's stockholders approved the 1999 Equity Incentive
Plan (the "1999 Plan"). Amendments to the 1999 Plan were adopted in July 1999.
The 1999 Plan allows the grant of options to purchase shares of the Company's
common stock to employees and other individuals at a price equal to the fair
market value of the common stock at the date of grant. The options vest 25
percent after the first year of service, and the remaining 75 percent vest
ratably over the next 36 months. Options expire 10 years after the grant date.
The terms of the 1999 Plan allow individuals to exercise their options prior to
full vesting. In the event that the individual terminates their service to the
Company before becoming fully vested, the Company has the right to repurchase
the unvested shares at the original option price. The number of shares
authorized for option grants under the 1999 Plan is 4,200,000 subject to an
annual increase of the greater of 7% of outstanding shares or 4,000,000 shares,
up to a maximum of 40,000,000 shares. As of December 31, 1999, options to
purchase 3,201,040 shares of common stock remain outstanding.
1999 Non-Employee Directors' Stock Option Plan
In July 1999, the Company adopted the 1999 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan"). The Directors' Plan provides for the
automatic grant of options to purchase shares of the Company's common stock to
non-employee directors at a price equal to the fair market value of the stock
at the date of the grant. The options vest monthly over two years from the date
of grant. The option term is ten years after the grant date but terminates
three months after a director's service terminates. The number of shares
authorized for option grants under the Directors' Plan is 500,000, subject to
an annual increase of 100,000 shares. Options to purchase 160,000 shares of
common stock are outstanding as of December 31, 1999.
1999 Employee Stock Purchase Plan
In July 1999, the Company adopted the 1999 Employee Stock Purchase Plan (the
"Employee Stock Purchase Plan"). The Employee Stock Purchase Plan provides a
means for employees to purchase TiVo common stock through payroll deductions of
up to 15 percent of their base compensation. The Company offers the common
stock purchase rights to eligible employees, generally all full-time employees
who have been employed for at least 10 days. This plan allows for common stock
purchase rights to be granted to employees of TiVo at a price equal to the
lower of 85% of the fair market value on the first day of the offering period
or on the common stock purchase date. Under the purchase plan, the board may
specify offerings up to 27
53
<PAGE>
TIVO INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
months. The number of shares reserved for issuance under this plan is 600,000
subject to automatic annual increase by the lesser of (i) 5 percent of the
outstanding shares of common stock on a diluted basis, (ii) 500,000 shares, or
(iii) a smaller number as determined by the board of directors.
The Company accounts for stock options under APB Opinion No. 25, under
which, for the period from August 4, 1997 (Inception) to December 31, 1997 and
for the year ended December 31, 1998, no compensation cost was recognized when
the awards were granted to employees or directors. The Company has recorded
deferred compensation of approximately $7.7 million as a contra-equity account
and stock-based compensation expense of $1.5 million for the year ended
December 31, 1999. Had compensation cost for the stock options been determined
consistently with SFAS No. 123, the effect on the Company's net loss and basic
and diluted loss per share would have been changed to the following pro forma
amounts:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------
Period from
August 4, 1997
(Inception), to
1999 1998 December 31, 1997
------------ ----------- -----------------
<S> <C> <C> <C>
Net loss, as reported..... $(66,565,000) $(9,721,000) $(595,000)
Pro forma effect of SFAS
No. 123.................. (4,100,000) (10,000) --
------------ ----------- ---------
Net loss, pro forma....... $(70,665,000) $(9,731,000) $(595,000)
============ =========== =========
Basic and diluted loss per
share, as reported....... $ (5.49) $ (3.25) $ (0.20)
============ =========== =========
Basic and diluted loss per
share, pro forma......... $ (5.83) $ (3.25) $ (0.20)
============ =========== =========
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants: weighted average risk-free interest rates of
between 4.45% and 6.14%; expected dividend yield of zero percent; expected
lives of four years for the options; and expected volatility of 50%.
A summary of the status of the 1997 Plan, the 1999 Plan and the
Director's Plan is presented in the table and narrative below:
<TABLE>
<CAPTION>
Range of Weighted Average
Shares Exercise Prices Exercise Price
---------- --------------- ----------------
<S> <C> <C> <C>
Outstanding at December 31,
1997........................ 700,000 $ .04
---------- -----
Granted...................... 3,006,458 $.04--$.45 .15
Exercised.................... (2,276,458) .06
Canceled..................... (195,000) .04
---------- -----
Outstanding at December 31,
1998........................ 1,235,000 $ .27
---------- -----
Granted...................... 4,307,087 $1.00--$39.94 8.46
Exercised.................... (525,064) 2.29
Canceled..................... (670,501) 5.25
---------- -----
Outstanding at December 31,
1999........................ 4,346,522 $7.37
---------- -----
</TABLE>
The weighted average fair value of options granted during 1999 and 1998 is
$10.15 and $.02, respectively. Of the options outstanding at December 31, 1999
and 1998, 1,270,888 and 93,542 are vested, respectively. The Company
repurchased 226,342 and 174,771 unvested options during 1999 and 1998,
respectively, upon the optionees' terminating employment with the Company.
54
<PAGE>
TIVO INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The options outstanding have the following contractual lives:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
- ---------------------------------------- -------------------------------------
Number of Weighted Number of Weighted
Options Average Options Average
Outstanding Range of Remaining Outstanding Remaining
and Exercise Contractual and Exercise Contractual
Exercisable Prices Life Exercisable Prices Life
- ----------- ------------ ----------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
55,000 $ 0.04 7.75 years 55,000 $0.04 9.25 years
217,250 0.13 8.51 years 504,000 0.13 9.50 years
142,250 0.20 8.76 years 169,000 0.20 9.75 years
264,700 0.45 8.91 years 507,000 0.45 10.00 years
299,282 1.00 9.16 years
240,500 2.50 9.20 years
299,700 4.00--5.00 9.34 years
2,193,817 6.50--9.50 9.51 years
319,523 10.50--11.00 9.72 years
75,000 16.00 9.95 years
203,500 25.13--37.63 9.93 years
36,000 38.93--39.94 9.91 years
- --------- ---------
4,346,522 1,235,000
========= =========
</TABLE>
9. WARRANTS
In addition to receiving 156,250 options to purchase common stock under the
1997 Plan, in March 1998, a member of the Company's board of directors received
warrants to purchase a total of 52,083 shares of Series A preferred stock at an
exercise price of $0.60 per share, the estimated fair market value of the
Series A preferred stock at the date of issuance. These warrants were exercised
and converted to common stock on a one-for-one basis upon the closing of the
initial public offering of the Company's common stock. The value of the above
warrants has been included in the calculation of pro forma net loss for the
year ended December 31, 1998 under SFAS No. 123, discussed in Note 8.
See Note 10 for a description of Series C and Series D preferred stock
warrants issued to Quantum under a hard disk drive supply agreement.
10. MARKETING AND MANUFACTURING AGREEMENTS
Quantum Agreement
In November 1998, the Company entered into a hard disk supply agreement with
Quantum to allow the Company or certain third-party manufacturers (the buyer)
to purchase up to an agreed-upon number of hard disk drives used in the
personal video recorder and other devices that enable the TiVo Service. Under
the terms of the agreement, the Company is entitled to a discounted purchase
price if certain milestones are met. TiVo has agreed to share with Quantum a
portion of the TiVo Service subscription fees it receives from the personal
video recorders and other devices equipped with these hard disk drives.
In addition, the Company issued a warrant to Quantum to purchase 324,325
shares of Series C preferred stock and 543,478 shares of Series D preferred
stock at an exercise price of $0.01 per share. The Series C and D warrants vest
and are exercisable upon the meeting of certain milestones which allow a
discounted purchase price on an agreed upon number of hard disk drives, or upon
the closing of an initial public offering of the
55
<PAGE>
TIVO INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Company's common stock. As of December 31, 1998, Quantum had not vested in the
warrants because the Company had not met the required performance milestones
and therefore had not received the discounted price on its hard-disk drive
purchases. In April 1999, the warrants to purchase Series C preferred stock
vested and the Company recorded as a contra-equity account a prepaid marketing
expense of $2.4 million related to the 324,325 shares of Series C preferred
stock warrants. In September 1999, the warrants to purchase Series D preferred
stock vested and the Company recorded as a contra-equity account a prepaid
marketing expense of $8.7 million related to the 543,478 shares of Series D
preferred stock warrants. The $2.4 million and the $8.7 million are being
amortized as sales and marketing expense--related parties as the specified
number of hard disk drives related to this agreement are shipped from Quantum.
The fair value of the Series C and Series D vested warrants were estimated
using the Black-Scholes option pricing model with the following assumptions:
weighted average risk-free interest rate of 5.07%; expected dividend yield of
zero percent; expected life of four years; expected volatility of 50%; and
market price of preferred stock of $7.40 per share for Series C and $16.00 per
share for Series D. These warrants were exercised and converted to common stock
on a one-for-one basis upon the closing of the initial public offering.
The Company recognized $10.4 million of sales and marketing expense--related
parties for the year ended December 31, 1999 related to these warrants.
DIRECTV Agreement
The Company entered into an agreement with DIRECTV to promote and offer
support for the TiVo Service and products that enable the TiVo Service (the
"DIRECTV Agreement"). Under the DIRECTV Agreement, DIRECTV will provide a
variety of marketing and sales support to promote TiVo and the TiVo Service,
collaborate on certain product development efforts and make a portion of the
bandwidth capacity of DIRECTV's satellite network available to TiVo.
In April 1999, the Company issued 1,852,329 shares of common stock in
exchange for marketing services under the DIRECTV Agreement. The shares are
non-forfeitable and were valued at an estimated fair value of $6.50 per share.
The Company recorded prepaid marketing expenses classified as a contra-equity
account related to the issuance of these shares of common stock of $12.0
million. These prepaid marketing expenses are expensed as the marketing
services are provided over the two-year service period.
Additionally, in April 1999, the Company issued 1,128,867 shares of common
stock in exchange for a $2.8 million promissory note due at the end of a three-
year service period. The shares were valued at an estimated fair value of $6.50
per share. The $4.5 million of estimated fair value in excess of the balance of
the note was recorded as a prepaid marketing expense contra-equity account.
This $4.5 million prepaid marketing expense is amortized into sales and
marketing--related parties expense as the bandwidth services are provided over
the three year service period. As of December 31, 1999, the three-year service
period had not yet begun. DIRECTV may repay the note either by providing
bandwidth capacity at no additional charge or by paying in cash. At the end of
the three year service period, if specified milestones are not achieved, TiVo
will have the right to repurchase some or all of these shares at $.001 per
share.
The value of the common stock issued to DIRECTV and recorded as prepaid
marketing expense of $16.5 million is recognized as a sales and marketing--
related parties expense ratably as the services are provided to TiVo over the
contractual service periods under the agreement.
In addition to the equity consideration for DIRECTV's marketing services
described above, DIRECTV will receive a percentage of TiVo's subscription
revenues attributable to DIRECTV/TiVo subscribers. These amounts are expensed
as earned and included in sales and marketing expense--related parties.
56
<PAGE>
TIVO INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In April 1999, TiVo sold 405,405 shares of Series F preferred stock to
DIRECTV at $7.40 per share which were converted to common stock on a one-for-
one basis upon the closing of the initial public offering.
Philips Agreement
On March 31, 1999, the Company entered into an agreement with Philips for
the manufacture, marketing and distribution of personal video recorders that
enable the TiVo Service. Subject to certain limitations, this agreement grants
Philips the right to manufacture, market and sell personal video recorders that
enable the TiVo Service in North America. Philips was also granted the right to
manufacture, market and sell personal video recorders in North America that
incorporates both DIRECTV's satellite receiver and the TiVo Service. The
Company also granted Philips a license to TiVo technology for the purpose of
developing and manufacturing personal video recorders and other devices that
enable the TiVo Service.
The Company has agreed to pay Philips a subsidy on each personal video
recorder that is manufactured and sold by Philips. The amount of the subsidy is
periodically adjusted based on Philips manufacturing costs and selling prices.
A portion of the subsidy amount paid to Philips is due when the personal video
recorder is shipped. The remaining portion is due when the subscriber activates
the TiVo Service. The Company will record the subsidy as sales and marketing--
related parties expense upon shipment of the personal video recorder by
Philips. In addition to these amounts, the Company has agreed to pay Philips a
fixed amount per month for each Philips-branded personal video recorder that
has an active subscription to the TiVo Service.
Under the terms of the agreement, Philips has committed to provide a
specified amount of marketing activities related to Philips-branded personal
video recorders that enable the TiVo Service.
In April 1999, Philips purchased 1,351,351 shares of Series H preferred
stock for $7.40 per share which were converted to common stock on a one-for-one
basis upon the closing of the initial public offering.
Creative Artists Agency Agreement
In July 1999, the Company entered into an agreement with Creative Artists
Agency, LLC, ("CAA"), for the marketing and promotional support of the personal
video recorder. CAA was issued warrants to purchase 192,123 shares of Series I
preferred stock for $10.41 per share. The Company expenses the estimated fair
value of the warrants of $1.4 million over one year. The estimated fair value
of the warrants was determined using the Black-Scholes option pricing model.
The principal assumptions used in the computation are: one year term; deemed
fair value at the date of issuance of $8.50 per share; a risk-free rate of
return of 5.07%; dividend yield of zero percent; and a volatility of 50%. As a
result of CAA's exercise of these warrants, upon the closing of the initial
public offering, TiVo issued 67,122 shares of preferred stock. The 67,122
shares of preferred stock were converted to common stock on a one-for-one basis
upon the closing of the initial public offering.
11. COMMITMENTS AND CONTINGENCIES
Facilities Leases
The Company leases its current office space under operating leases that
expire on March 31 and June 30, 2000. As of December 31, 1999 and 1998, future
minimum rental payments under this lease are $309,000 and $1,327,000,
respectively. Rent expense under operating leases was approximately $1,040,000,
$619,000 and $45,000 for the years ended December 31, 1999 and 1998 and the
period from August 4, 1997 (Inception) to December 31, 1997, respectively.
57
<PAGE>
TIVO INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In October 1999, the company entered into a new office lease with WIX/NSJ
Real Estate Limited Partnership. The lease begins on March 10, 2000 and has a
seven-year term. Monthly rent is approximately $116,000 with built-in base rent
escalations periodically throughout the lease term. Future minimum lease
payments under this lease are $20.2 million.
Equipment Lease Line
In March 1999, the Company entered into an equipment lease line for $2.5
million over the 12 months following the date of the lease. The annual interest
rate is 7.25%, and the line is repayable over 36 months. The lessor received a
warrant for 60,814 shares of the Company's Series B preferred stock at an
exercise price of $1.26 per share. The Company expenses the estimated fair
value of the warrants of $304,000 over the life of the lease. The estimated
fair value of the warrants was determined using the Black-Scholes option
pricing model. The principal assumptions used in the computation are: ten year
term, deemed fair value at the date of issuance of $5.50 per share, a risk-free
rate of return of 5.07%, dividend yield of zero percent and a volatility of
50%. As of December 31, 1999, $1.8 million of the available lease line has been
used and has been accounted for as a capital lease. The current portion of the
capital lease obligation at December 31, 1999 is $624,000. The unused equipment
lease line expires February 2000.
Future minimum lease payments as of December 31, 1999, by year are as
follows:
<TABLE>
<CAPTION>
Capital
Year Facilities Leases Equipment Lease Total
---- ----------------- --------------- -----------
<S> <C> <C> <C>
2000........................ $ 1,802,000 $ 624,000 $ 2,426,000
2001........................ 2,814,000 670,000 3,484,000
2002........................ 2,899,000 471,000 3,370,000
2003........................ 2,987,000 -- 2,987,000
2004 and thereafter......... 10,055,000 -- 10,055,000
----------- ---------- -----------
Total..................... $20,557,000 $1,765,000 $22,322,000
=========== ========== ===========
</TABLE>
Convertible Debt
In April 1999, the Company entered into a secured convertible debenture
purchase agreement with certain stockholders, which terminated on December 31,
1999. Under the terms of the agreement, TiVo could borrow up to $3.0 million at
an interest rate of 4.67% per annum. The debentures delivered by TiVo for any
loan made under this agreement were convertible into common stock on a one-for-
one basis and secured by substantially all of the Company's assets other than
intellectual property.
In conjunction with the agreement, TiVo issued warrants to purchase 81,522
shares of common stock at an exercise price of $2.50 per share. Deferred
financing costs of $341,000 were recorded using the estimated fair value of the
warrants at the date of issuance. The estimated fair value of the warrants was
determined using the Black-Scholes option pricing model. The principal
assumptions used in the computation were: five year term; deemed fair value at
the date of issuance of $5.50 per share; a risk free rate of return of 5.07%;
dividend yield of zero percent; and a volatility of 50%. During the year ended
December 31, 1999, the entire value of the warrants of $341,000 was expensed.
The Company issued 81,522 shares of common stock as a result of the exercise of
the warrants upon the closing of the initial public offering of the Company's
common stock.
Legal Matters
In September 1999, TiVo received letters from Time Warner, Inc. and Fox
Television stating that TiVo's personal television service exploits these
companies' copyrights without the necessary licenses. The Company believes that
the TiVo Service does not infringe on these copyrights and believes that there
will not be an adverse impact as a result of these letters.
58
<PAGE>
TIVO INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
12. RETIREMENT PLAN
In December 1997, the Company established a 401(k) Retirement Plan (the
"Retirement Plan") available to employees who meet the plan's eligibility
requirements. Participants may elect to contribute a percentage of their
compensation to the Retirement Plan up to a statutory limit. Participants are
fully vested in their contributions. The Company may make discretionary
contributions to the Retirement Plan as a percentage of participant
contributions, subject to established limits. The Company has not made any
contributions to the Retirement Plan through December 31, 1999.
13. SUBSEQUENT EVENTS (unaudited)
Agreements
In January 2000, TiVo entered into a strategic alliance with Blockbuster,
Inc. ("Blockbuster") to jointly develop and deploy a service that will enable
TiVo subscribers to access a selection of movies for viewing through their
personal television recorders.
In January 2000, TiVo entered into a licensing agreement with Liberate
Technologies ("Liberate") to incorporate Liberate's TV Navigator software on
future versions of TiVo's Personal TV reference platform.
In February 2000, TiVo entered into a strategic alliance with British Sky
Broadcasting Limited ("BSkyB") under which a version of the TiVo Service and
the TiVo personal television recorder now offered in the United States will be
adapted and made available in the United Kingdom.
Legal Matters
In January 2000, patent infringement suits were filed against TiVo by
StarSight Telecast, Inc. and PhoneTel Communications, Inc. TiVo's legal counsel
is currently researching the patents, which were referenced in the complaints.
59
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Identification of Executive Officers and Directors
The Company's Amended and Restated Certificate of Incorporation and Bylaws
provide that the Board of Directors shall be divided into three classes, each
class consisting, as nearly as possible, of one-third of the total number of
directors, with each class having a three-year term. Vacancies on the Board may
be filled only by persons elected by a majority of the remaining directors. A
director elected by the Board to fill a vacancy (including a vacancy created by
an increase in the number of directors) shall serve for the remainder of the
full term of the class of directors in which the vacancy occurred and until
such director's successor is elected and qualified.
The Board of Directors is presently composed of eleven members. The names of
the executive officers and directors, their ages as of March 31, 2000 and
certain other information about them are set forth below:
<TABLE>
<CAPTION>
Director
Name Age Position Since
---- --- -------- --------
<C> <C> <S> <C>
Executive Officers
Michael Ramsay(1).......... 50 Chairman, Chief Executive Officer 1997
and President of the Company
James Barton(1)............ 42 Vice President of Research and 1997
Development and
Chief Technical Officer of the
Company
David H. Courtney.......... 41 Vice President of Finance and
Administration and Chief Financial
Officer of the Company
Directors
Stewart Alsop(1)(3)........ 47 General Partner, New Enterprise 1997
Associates
Larry N. Chapman(2)........ 45 Executive Vice President, DIRECTV, 1999
Inc.
John S. Hendricks.......... 47 Chairman, Chief Executive Officer, 1999
Discovery Communications, Inc.
Michael J. Homer(2)........ 41 Senior Vice President -America 1999
Online, Inc.
Randy Komisar(1)(3)........ 45 Strategic advisor to various start 1998
up companies
Margaret Murphy............ 33 Vice President Business 1999
Development, NBC Interactive Media
Jan P. Oosterveld.......... 55 Senior Director of Corporate 1999
Strategy for Royal Philips
Electronics Group of Companies
Howard Stringer............ 57 Chairman, Chief Executive Officer, 1999
Sony Corporation of America, Inc.
Geoffrey Y. Yang(1)(2)(3).. 40 General partner, Institutional 1997
Venture Partners
</TABLE>
- --------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
60
<PAGE>
There are no family relationships among any of the directors, executive
officers or key employees of the Company.
Michael Ramsay is a co-founder of TiVo and has served as TiVo's Chairman of
the Board of Directors, Chief Executive Officer and President since its
inception in August 1997. From April 1996 to July 1997, Mr. Ramsay was the
Senior Vice President of the Silicon Desktop Group for SGI, a manufacturer of
advanced graphics computers. From August 1994 to April 1996, Mr. Ramsay was
President of Silicon Studio, Inc., a wholly owned subsidiary of SGI focused on
enabling applications development for emerging interactive media markets. From
July 1991 to August 1994, Mr. Ramsay served as the Senior Vice President and
General Manager of SGI's Visual Systems Group. Mr. Ramsay also held the
positions of vice president and general manager for the Entry Systems Division
of SGI. Prior to 1986, Mr. Ramsay held research & development and engineering
management positions at Hewlett-Packard and Convergent Technologies. Mr. Ramsay
holds a B.S. degree in Electrical Engineering from the University of Edinburgh,
Scotland.
James Barton is a co-founder of TiVo and has served as TiVo's Vice President
of Research and Development, Chief Technical Officer and director since its
inception. From June 1996 to August 1997, Mr. Barton was President and Chief
Executive Officer of Network Age Software, Inc., a company that he founded to
develop software products targeted at managed electronic distribution. From
November 1994 to May 1996, Mr. Barton served as Chief Technical Officer of
Interactive Digital Solutions Company, a joint venture of SGI and AT&T Network
Systems created to develop interactive television systems. From June 1993 to
November 1994, Mr. Barton served as Vice President and General Manager of the
Media Systems Division of SGI. From January 1990 to May 1991, Mr. Barton served
as Vice President and General Manager of the Systems Software Division of SGI.
Prior to joining SGI, Mr. Barton held technical and management positions with
Hewlett-Packard and Bell Laboratories. Mr. Barton holds a B.S. degree in
Electrical Engineering and an M.S. degree in Computer Science from the
University of Colorado at Boulder.
David H. Courtney joined TiVo in March 1999 as Chief Financial Officer and
is currently Sr. Vice President of Finance and Administration and Chief
Financial Officer. From May 1995 to July 1998, Mr. Courtney served as a
Managing Director at J.P. Morgan, an investment banking firm, where he was
responsible for building and expanding the firm's high technology investment
banking business in the United States. From 1986 to 1995, Mr. Courtney was a
member of the high technology investment banking group at Goldman, Sachs & Co.,
most recently serving as Vice President. Mr. Courtney currently serves as a
Director of KQED Television, a non-profit affiliate of the Public Broadcasting
System in San Francisco, California. Mr. Courtney holds a B.A. degree in
Economics from Dartmouth College and an M.B.A. degree from Stanford University.
Stewart Alsop has served as a director of TiVo since October 1997. Since
1998, Mr. Alsop has served as a general partner at New Enterprise Associates, a
venture capital investment firm. Mr. Alsop was a venture partner at New
Enterprise Associates from 1996 to 1998. Mr. Alsop is also a columnist for
Fortune magazine. From June 1991 to 1996, Mr. Alsop served as Senior Vice
President and Editor-in-Chief of InfoWorld Media Group, Inc., which publishes
InfoWorld, a weekly newspaper for information-technology professionals.
Mr. Alsop also serves on the board of directors of Be Inc., a manufacturer of
computer operating systems; Egreetings Network, a provider of internet
services; and Netcentives, a provider of online direct marketing products and
services. He holds a B.A. degree in English from Occidental College.
Larry N. Chapman has served as a director of TiVo since April 1999. Since
1998, Mr. Chapman has been the Executive Vice President of DIRECTV, Inc., a
leading digital television service provider and a unit of Hughes Electronics
Corporation. Prior to serving as Executive Vice President of DIRECTV, Mr.
Chapman served in a number of capacities for DIRECTV since its inception in
1990, including Senior Vice President of Special Markets and Distribution,
Senior Vice President of Programming, and Vice President of Business Affairs
and Development. Mr. Chapman holds a B.S. degree and M.S. degree in Electrical
Engineering from the University of Florida.
61
<PAGE>
John S. Hendricks has served as a director of TiVo since September 1999. Mr.
Hendricks is the Chairman and Chief Executive Officer of Discovery
Communications, Inc., a privately held, diversified media company, which he
founded in 1982. He is also a member of the board of directors of Excalibur
Technologies Corporation, a software solutions company; Interactive Pictures
Corporation, an interactive photography and imaging company; the National
Museum of Natural History, Smithsonian Institution; the James Madison Council,
the Library of Congress; and the National Cable Television Association. Mr.
Hendricks is a member of the advisory board of the Lowell Observatory, Chairman
of the board of trustees of the Walter Kaltz Foundation and Co-chair of the CEO
Forum on Education and Technology. Mr. Hendricks holds a B.A. degree and an
honorary doctorate from the University of Alabama.
Michael J. Homer has served as a director of TiVo since July 1999. Mr. Homer
has been employed with Netscape Communications Corporation, an Internet
software company, since October 1994 and has served as a Senior Vice President
of AOL since March 1998. From July 1997 to March 1998, he was Executive Vice
President of Sales and Marketing for Netscape, and from October 1994 to July
1997, he served as Netscape's Vice President of Marketing. Prior to joining
Netscape, Mr. Homer served as Vice President of Engineering for GO Corporation.
Mr. Homer holds a B.S. degree in Finance from the University of California at
Berkeley.
Randy Komisar has served as a director of TiVo since March 1998. Since 1996,
Mr. Komisar has been a strategic business advisor to various startup companies.
Since November 1997, Mr. Komisar has served as a director of IQ.commerce Corp.,
an online promotions and merchandising services company. Mr. Komisar was
President and Chief Executive Officer of Crystal Dynamics Inc., a video game
development and publishing company, between May 1995 and June 1996. He served
as President and Chief Executive Officer of LucasArts Entertainment Company, a
digital entertainment company, between January 1994 and May 1995. Mr. Komisar
holds a B.A. degree in Economics from Brown University and a J.D. degree from
Harvard Law School.
Margaret Murphy has served as a director of TiVo since September 1999. Ms.
Murphy is Vice President for Business Development for NBC Interactive Media,
with responsibility for investments in Internet and Interactive TV companies
and for managing a production group that develops the National Broadcasting
Company's ("NBC") Interactive TV programming. NBC Multimedia, Inc., an owner of
common stock of TiVo, is the legal entity for NBC's Interactive Media division.
Ms. Murphy has been employed by NBC since March 1996. Before that time, Murphy
worked in the business development group at Reuters New Media Inc., where she
managed new acquisition and joint venture projects starting in August 1994. Ms.
Murphy received a BA in Economics from Georgetown University and an MBA from
New York University.
Jan P. Oosterveld has served as a director of TiVo since September 1999.
Since 1972, Mr. Oosterveld has been employed with the Royal Philips Electronics
Group of Companies, an electronics company. Since May 1997, he has served as
Senior Director of Corporate Strategy of Philips and a member of Royal Philips
Electronics' Group Management Committee. Since April 1999, he also has served
as a director of Philips Venture Capital Fund B.V. Prior to 1997, Mr.
Oosterveld was involved in the management of Philips' Key Modules division. Mr.
Oosterveld holds a Masters degree in Business Administration from the Instituto
de Estudios Superiors de la Empresa in Barcelona, Spain.
Howard Stringer has served as a director of TiVo since September 1999. Mr.
Stringer has been Chairman and Chief Executive Officer of Sony Corporation of
America, Inc., an entertainment, media and consumer goods company, since
December 1998, with Sony Music Entertainment Inc., Sony Pictures Entertainment,
Sony Online Entertainment, and Sony Development reporting to him. He joined
Sony in May 1997, and was named to the board of directors of Sony Corporation,
a consumer electronics and entertainment company, in June 1999. From March 1995
to April 1997, Mr. Stringer was Chairman and CEO of TELE-TV, a company formed
by Bell Atlantic, Nynex and Pacific Telesis. Prior to that, Mr. Stringer had
been President of the CBS Broadcast Group from 1988 to 1995. Mr. Stringer also
serves on the board of directors of Applied Graphics Technologies, Inc., a
provider of digital pre-press services to publishers, and Loews Cineplex
Entertainment Corp., a theatre exhibition company. Mr. Stringer holds a B.A.
and an M.A. degree in Modern History from Oxford University.
62
<PAGE>
Geoffrey Y. Yang has served as a director of TiVo since October 1997. Since
1989, Mr. Yang has been a general partner of Institutional Venture Partners, a
venture capital firm. Mr. Yang is a director of MMC Networks, Inc., a developer
of network processors, Ask Jeeves, Inc., a provider of natural-language
question answering services on the Internet, and Turnstone Systems, Inc., a
provider of products that enable DSL services. Mr. Yang holds a B.A. degree in
economics from Princeton University, a B.S.E. degree in Engineering and
Management Systems from Princeton University and an M.B.A. degree from Stanford
University
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires the Company's directors and executive officers and persons who own
more than ten percent of a registered class of the Company's equity securities
(collectively, "Reporting Persons"), to file with the SEC initial reports of
ownership and reports of changes in ownership of common stock and other equity
securities of the Company. Reporting Persons are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations from certain
Reporting Persons that no other reports were required, the Company believes
that during its fiscal year ended December 31, 1999 all Reporting Persons
complied with all applicable filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Directors
Each non-employee director of the Company is eligible for reimbursement for
their expenses incurred in connection with attendance at Board meetings in
accordance with Company policy. Directors who are also executive officers do
not receive any additional compensation for serving as members of the Board or
any committee of the Board.
Each non-employee director of the Company also receives stock option grants
under the 1999 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan"). Only non-employee directors of the Company or an affiliate of such
directors (as defined in the Code) are eligible to receive options under the
Directors' Plan. Options granted under the Directors' Plan are intended by the
Company not to qualify as incentive stock options under the Code.
Option grants under the Directors' Plan are non-discretionary. Under the
Director's Plan, non-employee directors are granted a nonstatutory option to
purchase 20,000 shares of common stock on the date on which such person is
first elected or appointed a director. Options initially granted under the
Directors' Plan vest over a two year period at a rate of 1/24th per month. In
addition, on the day after each of our annual meetings of stockholders,
starting with the annual meeting in 2001, each non-employee director will
automatically receive an option for 10,000 shares if the director has been a
non-employee director for at least the prior eighteen months. This option will
be fully vested upon its grant. The exercise price of options under the
Directors' Plan will be equal to the fair market value of the common stock on
the date of grant.
Options granted under the Director's Plan have a term of 10 years, but
options terminate three months after the optionholder's service as a director,
an employee or a consultant to the Company or its affiliates terminates. If
such termination is due to the optionholder's disability, the exercise period
is extended to 12 months. If such termination is due to the optionholder's
death or if the optionholder dies within three months after his or her service
terminates, the exercise period is extended to 18 months following death. The
optionholder may transfer the option by gift to immediate family or for estate-
planning purposes. The optionholder also may designate a beneficiary to
exercise the option following the optionholder's death. Otherwise, the option
exercise rights will pass by the optionholder's will or by the laws of descent
and
63
<PAGE>
distribution. Upon a change in control of the Company, the vesting and
exercisability of outstanding options will accelerate, and the options will
terminate unless an acquiring corporation assumes or replaces outstanding
options.
During the last fiscal year, the Company granted options covering 20,000
shares to each non-employee director of the Company (in one case to an
affiliate of a non-employee director), at exercise prices per share ranging
from $8.50 to $11.00. As of March 31, 2000, options to purchase 21,667 shares
had been exercised under the Directors' Plan.
Compensation of Executive Officers
The following table shows for the fiscal years ended December 31, 1999 and
1998 compensation awarded or paid to, or earned by, the Company's Chief
Executive Officer and its two executive officers at December 31, 1999.
Summary of Executive Compensation
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------ ------------
Securities
Other Annual Underlying All Other
Name and Principal Salary Bonus Compensation Options/SARs Compensation
Position Year ($) ($) ($) (#) ($)
------------------ ---- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Michael Ramsay.......... 1999 $218,750 $ -- $-- 650,000 $--
Chairman of the Board, 1998 $150,000 $ -- $-- -- $--
President and Chief
Executive Officer
James Barton............ 1999 $195,833 $ -- $-- 100,000 $--
Vice President of 1998 $148,000 $ -- $-- -- $--
Research and
Development, Chief
Technical Officer and
Director
David H. Courtney....... 1999 $187,500* $69,000 $-- 305,782 $--
Vice President of 1998 $ -- $ -- $-- -- $--
Finance and
Administration and
Chief Financial Officer
</TABLE>
- --------
* Mr. Courtney joined TiVo in 1999. His annualized 1999 salary was $225,000.
Stock Option Grants and Exercises
The Company grants options to its executive officers under its 1997 Equity
Incentive Plan and 1999 Equity Incentive Plan. As of March 31, 2000, options to
purchase a total of 4,469,933 shares were outstanding under the 1997 and 1999
Equity Incentive Plans and options to purchase 4,889,499 shares remained
available for grant thereunder.
The following tables show, for the fiscal year ended December 31, 1999,
certain information regarding options granted to, exercised by, and held at
year-end by, the executive officers listed on the "Summary of Executive
Compensation" table above. The exercise price of each option was equal to the
fair value of our common stock as valued by the Board of Directors on the date
of grant. The exercise price may be paid in cash, in shares of our common stock
valued at fair value on the exercise date or through a cashless exercise
procedure involving same-day sale of the purchased shares.
64
<PAGE>
The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the SEC and does not represent our
prediction of our stock price performance. The potential realizable values at
5% or 10% appreciation are calculated by:
. mulitiplying the number of shares of common stock subject to a given
option by the exercise price per share;
. assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table until the
expiriation of the options; and
. subtracting from that result the aggregate option exercise price.
The shares listed in the following table under "Number of Securities
Underlying Options/SARs Granted" are subject to vesting. The stock options
listed in the table vest ratably over forty-eight months. Each of the options
has a ten-year term, subject to earlier termination if the optionee's service
with us ceases. Under certain circumstances following a change of control, the
vesting of such option grants may accelerate and become immediately
exercisable. See the section below entitled "Certain Relationships and Related
Transactions" for a description of the stock options that have been granted to
Mr. Ramsay, Mr. Barton and Mr. Courtney.
Percentages shown under "Percent of Total Options / SARs Granted to
Employees in 1999" are based on 4,307,487 options granted to our employees
during the year ended December 31, 1999.
Option / SAR Grants During the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Individual Grants
-------------------------
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options/SARs Exercise Price Appreciation
Underlying Granted to or Base for Option Term
Options/SARs Employees in Price Expiration ---------------------
Name Granted (#) 1999 ($/Share) Date 5% ($) 10% ($)
---- ------------ ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael Ramsay.......... 650,000 15.09% $6.50 6/15/09 $2,657,080 $6,733,562
James Barton............ 100,000 2.32% $6.50 6/15/09 $ 408,782 $1,035,933
David H. Courtney....... 305,782 7.10% $1.00 3/11/09 $ 192,305 $ 487,338
</TABLE>
65
<PAGE>
The following table sets forth the number and value of securities underlying
unexercised options that are held by the executive officers listed on the
"Summary of Executive Compensation" table above. Amounts shown under the column
"Value Realized" include the proceeds received from the options exercised,
which is calculated by multiplying the deemed fair value per share on the date
of exercise less the option exercise price per share times the number of shares
exercised. Amounts shown under the column "Value of Unexercised In-the-Money
Options / SARs at December 31, 1999" are based on the closing price of our
common stock ($33.75) on December 31, 1999, as reported on the NASDAQ Stock
Market, without taking into account any taxes that may be payable in connection
with the transaction, multiplied by the number of shares underlying the option,
less the exercise price payable for these shares. The Company's stock option
plans allow for the early exercise of options granted to employees. All options
exercised early are subject to repurchase by the Company at the original
exercise price, upon the optionholder's cessation of service prior to the
vesting of the shares.
Aggregated Option/SAR Exercises during the Year Ended December 31, 1999,
and Option/SAR Values as of December 31, 1999
<TABLE>
<CAPTION>
Value of
Number of Securities Unexercised,
Underlying Unexercised In-the-Money
Options/SARs at Options/SARs at
Value December 31, 1999 December 31, 1999
Shares Acquired Realized (#) Exercisable/ ($) Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable
---- --------------- -------- ---------------------- -------------------
<S> <C> <C> <C> <C>
Michael Ramsay.......... -- $ -- 650,000 / -- $17,712,500 / $ --
James Barton............ -- $ -- 100,000 / -- $ 2,725,000 / $ --
David H. Courtney....... 75,000 $262,500 230,782 / -- $ 7,558,110 / $ --
</TABLE>
Employment, Severance and Change of Control Agreements
The Board of Directors has approved change of control provisions for stock
options granted to all employees, including our executive officers. Pursuant to
the change of control provisions, employees are entitled to acceleration of
vesting on a portion of stock options held by them in the event the employee is
terminated or his or her job is materially changed following a change of
control of the company. If change of control provisions are triggered, non-
executive officer employees are entitled to acceleration of 25% of their
unvested options and executive officer employees are entitled to acceleration
of 50% of their unvested options. Under stock options granted to them, Mr.
Ramsay and Mr. Barton are entitled to accelerated vesting on all of their
outstanding options if the change of control provisions of their option grants
are triggered.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's common stock as of April 5, 2000 by: (i) each director; (ii)
each of the executive officers named in the "Summary of Executive Compensation"
table; (iii) all executive officers and directors of the Company as a group;
and (iv) all those known by the Company to be beneficial owners of more than
five percent of its common stock.
<TABLE>
<CAPTION>
Beneficial Owner Beneficial Ownership(1)
---------------- -----------------------
Number of Percent of
Executive Officers and Directors Shares Total
-------------------------------- -------------- ------------
<S> <C> <C>
Michael Ramsay (2)............................. 2,764,999 7.3%
James Barton (3)............................... 1,724,999 4.6%
David Courtney (4)............................. 305,782 *
Geoffrey Y. Yang (5)........................... 4,237,204 11.2%
Stewart Alsop (6).............................. 4,237,204 11.2%
Larry N. Chapman (8)........................... 3,406,601 9.0%
Howard Stringer (12)........................... 2,663,482 7.0%
Jan P. Oosterveld (10)......................... 1,371,351 3.6%
Margaret Murphy (13)........................... 1,033,513 2.7%
John S. Hendricks (11)......................... 740,461 2.0%
Randy Komisar (7).............................. 253,133 *
Michael J. Homer (9)........................... 20,000 *
<CAPTION>
5% Stockholders
---------------
<S> <C> <C>
Entities Affiliated with Institutional Venture 4,217,204 11.2%
Partners (5)..................................
3000 Sand Hill Road
Building 2, Suite 290
Menlo Park, CA 94025
Entities Affiliated with New Enterprise 4,217,204 11.2%
Associates (6)................................
2490 Sand Hill Road
Menlo Park, CA 94025
DIRECTV, Inc. (8).............................. 3,386,601 9.0%
2230 East Imperial Highway
El Segundo, CA 90245
Sony Corporation of America, Inc. (12)......... 2,643,482 7.0%
550 Madison Avenue
New York, NY 10022
All executive officers and directors as a group 22,758,729 60.3%
(12 persons) (14).............................
</TABLE>
- --------
* Less than one percent
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Securities
and Exchange Commission (the "SEC"). Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, the Company believes that each of the stockholders named in
this table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based on
37,758,777 shares outstanding on April 5, 2000 adjusted as required by
rules promulgated by the SEC.
(2) Includes 364,592 shares subject to repurchase by the Company within 60 days
of April 5, 2000 and also includes 650,000 shares Mr. Ramsay has the right
to acquire pursuant to outstanding options exercisable within 60 days, none
of which will have vested.
(3) Includes 364,592 shares subject to repurchase by the Company within 60 days
of April 5, 2000 and also includes 100,000 shares Mr. Barton has the right
to acquire pursuant to outstanding options exercisable within 60 days, none
of which will have vested.
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<PAGE>
(4) Includes 679 shares subject to repurchase by the Company within 60 days of
April 5, 2000 and also includes 230,782 shares Mr. Courtney has the right
to acquire pursuant to outstanding options exercisable within 60 days,
8,494 shares of which will have vested.
(5) Includes 4,041,747 shares of stock owned by Institutional Venture Partners
VII, L.P. ("IVP"), 83,638 shares of stock owned by Institutional Venture
Management VII, L.P. ("IVM VII") and 91,819 shares of stock owned by IVP
Founders Fund I, L.P. ("FFI"). Mr. Yang, one of our directors, is a general
partner of IVM VII, the general partner of IVP, and a general partner of
Institutional Venture Management VI, L.P., the general partner of FFI. Mr.
Yang disclaims beneficial ownership of these shares except to the extent of
his individual partnership interests, but exercises sole voting and
investment power with respect to 13,700 shares and shared voting and
investment power with respect to the remainder of these shares. Also
includes 20,000 shares subject to stock options exercisable within 60 days
of April 5, 2000, 11,667 shares of which will not have vested.
(6) Represents (a) 41,667 shares held by NEA Presidents Fund, L.P., (b) 8,333
shares held by NEA Ventures 1997, L.P., and (c) 4,167,204 shares held by
New Enterprise Associates VII, L.P. Mr. Alsop, one of our directors, is a
limited partner of NEA Partners VII, which is the general partner of New
Enterprise Associates VII, L.P. Mr. Alsop disclaims beneficial ownership of
such shares except to the extent of his pecuniary interests therein. Mr.
Alsop is not a partner of NEA Presidents Fund L.P. or NEA Ventures 1997,
L.P. Also includes 20,000 shares subject to stock options exercisable
within 60 days of April 5, 2000, 11,667 shares of which will not have
vested.
(7) Includes 156,250 shares Mr. Komisar acquired pursuant to the exercise of
stock options, 84,635 shares of which will be vested within 60 days. Also
includes 20,000 shares subject to stock options exercisable within 60 days
of April 5, 2000, 11,667 shares of which will not have vested.
(8) Includes 3,386,601 shares held by DIRECTV, Inc. Mr. Chapman is an officer
of DIRECTV, Inc. and is a member of our board of directors. Mr. Chapman
disclaims beneficial ownership of such shares. Also includes 20,000 shares
subject to stock options exercisable within 60 days of April 5, 2000,
11,667 shares of which will not have vested.
(9) Includes 11,667 shares subject to repurchase by the Company within 60 days
of April 5, 2000.
(10) Includes 1,351,351 shares held by Philips Venture Capital Fund B.V. Mr.
Oosterveld is an officer of Royal Philips Electronics B.V., an affiliate
of Philips Venture Capital Fund B.V., and is a member of our board of
directors. Mr. Oosterveld disclaims beneficial ownership of such shares.
Also includes 20,000 shares subject to stock options exercisable within 60
days of April 5, 2000, 11,667 shares of which will not have vested.
(11) Includes 720,461 shares held by Discovery Communications, Inc. Mr.
Hendricks is an officer of Discovery Communications, Inc. and is a member
of our board of directors. Mr. Hendricks disclaims beneficial ownership of
such shares. Also includes 20,000 shares subject to stock options
exercisable within 60 days of April 5, 2000, 13,334 shares of which will
not have vested.
(12) Includes 2,643,482 shares held by Sony Corporation of America, Inc. Mr.
Stringer is an officer of Sony Corporation of America, Inc. and a member
of our board of directors. Mr. Stringer disclaims beneficial ownership of
such shares. Also includes 20,000 shares subject to stock options
exercisable within 60 days of April 5, 2000, all of which have been
assigned by Mr. Stringer to Sony Corporation of America and 13,333 shares
of which will not have vested.
(13) Includes 1,013,513 shares held by NBC Multimedia, Inc., a wholly owned
subsidiary of National Broadcasting Company, Inc. Ms. Murphy is an officer
of National Broadcasting Company, Inc. and is a member of our board of
directors. Ms. Murphy disclaims beneficial ownership of such shares. Also
includes 20,000 shares subject to stock options exercisable within 60 days
of April 5, 2000, 13,333 shares of which will not have vested.
(14) Includes 1,140,782 shares subject to options exercisable within 60 days of
April 5, 2000, 70,160 of which will have vested. Also includes 251,250
shares acquired pursuant to the exercise of stock options, 167,289 shares
of which will be vested within 60 days.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1999, we sold an aggregate of 10,645,017 shares of
preferred stock in the following rounds of private financings:
. on January 20, 1999, we sold 1,358,695 shares of Series D preferred
stock at a per share price of $3.68;
. on March 19, 1999, we sold 270,270 shares of Series E preferred stock at
a per share price of $7.40;
. on April 13, 1999, we sold 405,405 shares of Series F preferred stock at
a per share price of $7.40;
. on April 16, 1999, we sold 1,013,513 shares of Series G preferred stock
at a per share price of $7.40;
. on April 23, 1999, we sold 1,351,351 shares of Series H preferred stock
at a per share price of $7.40;
. on July 21, 1999 we sold 3,121,994 shares of Series I preferred stock at
a per share price of $10.41;
. on August 10, 1999 and September 9, 1999, we sold an aggregate of
3,123,789 shares of Series J preferred stock at a per share price of
$10.41.
Each of the foregoing private financings was made pursuant to preferred
stock purchase agreements and investor rights agreements. The terms of those
agreements (with the exception of amount and price) were substantially similar
for the Series D through Series J financings, under which we made standard
representations, warranties and covenants, and which provided the purchasers
with rights of first offer and registrations rights. All of the material terms
of the Series D through Series J agreements, with the exception of the
registration rights, terminated upon the effective date of our initial public
offering in September 1999. The purchasers of the preferred stock included,
among others, the following directors, entities associated with directors, and
holders of 5% or more of the our common stock:
<TABLE>
<CAPTION>
Common Common Common Common Common
equivalent equivalent equivalent equivalent equivalent
shares of shares of shares of shares of shares of
Series F Series G Series H Series I Series J
preferred preferred preferred preferred preferred
Investor stock stock stock stock stock
-------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
DIRECTV, Inc. .......... 405,405
(Larry N. Chapman)
NBC Multimedia, Inc..... 1,013,513
(Margaret P. Murphy)
Philips Venture Capital 1,351,351
Fund B.V...............
(Jan P. Oosterveld)
Discovery 720,461
Communications, Inc. ..
(John S. Hendricks)
Sony Corporation of 2,643,482
America, Inc. .........
(Howard Stringer)
</TABLE>
Option Grants to Executive Officers
On March 12, 1999, we granted an option to purchase 254,818 shares of our
common stock to our Chief Financial Officer, David H. Courtney. This option is
subject to vesting as follows: 25% of the shares vest twelve months after the
date of grant and 2.083% of the shares vest each month thereafter. On March 12,
1999, we also granted Mr. Courtney an option to purchase 50,964 shares of our
common stock. This option vests
monthly over a four-year period that began upon the completion of our initial
public offering in September 1999. The exercise prices of both of these options
is $1.00 per share. These options will expire ten years from their date of
grant.
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<PAGE>
On June 16, 1999, we granted an option to purchase 650,000 shares of common
stock to our Chief Executive Officer, Michael Ramsay, and an option to purchase
100,000 shares of common stock to our Chief Technical Officer, James Barton.
These options are subject to vesting as follows: 25% of the shares vest twelve
months after the date of grant and 2.083% of the shares vest each month
thereafter. The exercise price of these options is $6.50 per share. We recorded
$675,000 in deferred compensation in connection with these options. The
deferred compensation reflects the difference between the exercise price and
the deemed fair market value of the common stock on the date of grant. These
options will expire ten years from their date of grant.
Other Transactions with Executive Officers and Directors
We have entered into indemnity agreements with our directors that provide,
among other things, that we will indemnify these persons, under circumstances
and to the extent provided for therein, for expenses, damages, judgments, fines
and settlements he or she may be required to pay in actions or proceedings to
which he or she is or may be a party by reason of his or her position as a
director, and otherwise to the full extent permitted under Delaware law and our
Bylaws.
On April 8, 1999, we entered into a secured convertible debenture purchase
agreement with certain stockholders, including the following 5% stockholders:
(1) New Enterprise Associates VII, L.P., and (2) Institutional Venture Partners
VII, L.P. Under the terms of this agreement, we received the right to borrow up
to $3,000,000 at an interest rate of 4.67% per annum. The debentures to be
delivered by us for any loan made under this agreement are convertible into
common stock on a one-for-one basis and are secured by substantially all of our
assets other than intellectual property. The debentures mature on June 30,
2000. In connection with the agreement, we issued warrants to purchase 81,522
shares of our common stock at an exercise price of $2.50 per share, including
warrants to purchase 35,307 shares of common stock to New Enterprise Associates
VII, L.P. and warrants to purchase 35,307 shares of common stock to
Institutional Ventures VII, L.P. These warrants were exercised and converted to
common stock on a one-for-one basis upon the closing of our initial public
offering.
On April 13, 1999, in connection with the issuance and sale of Series F
preferred stock to DIRECTV, we issued an aggregate of 2,981,196 shares of our
common stock to DIRECTV, Inc. at a per share purchase price of $2.50. Pursuant
to the terms of a marketing agreement with DIRECTV, Inc., $2,822,168 of the
common stock purchase price was paid by a promissory note maturing in 36
months, $2,981 of the purchase price was paid in past services and $4,627,841
of the purchase price was to be paid by future services. Of the 2,981,196
shares granted to DIRECTV in connection with the marketing agreement, 1,128,867
shares are subject to a right of repurchase held by us. Under the terms of the
marketing agreement, we have the right to repurchase a portion of these shares
in certain circumstances.
Our marketing agreement with DIRECTV provides for the promotion and support
of our products and the TiVo Service on the DIRECTV satellite system. DIRECTV
has agreed to give us access to its subscribers and will actively market and
promote TiVo and the TiVo Service. Specifically, DIRECTV has agreed to use its
commercially reasonable efforts to encourage retailers to distribute our
products and the TiVo Service. DIRECTV also has agreed to make broadcast time
available via its DIRECTV Service infomercials and commercials that promote the
TiVo Service and our products. DIRECTV has agreed to provide us with access to
DIRECTV subscribers for the purpose of mailing promotional materials relating
to the TiVo Service and products that enable the TiVo Service. Further, DIRECTV
has agreed to include advertising relating to our products and the TiVo Service
on DIRECTV's website and in DIRECTV's On and See magazines. DIRECTV has also
agreed to make available to us a specified level of bandwidth on the DIRECTV
system to expand and enrich the TiVo Service offered to DIRECTV subscribers.
Finally, DIRECTV and TiVo have agreed to work
together with Philips or other manufacturers to develop a combination
DIRECTV/TiVo set-top receiver. In exchange for these marketing and advertising
obligations, DIRECTV will receive a percentage of TiVo's revenue attributable
to DIRECTV subscribers.
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<PAGE>
On March 31, 1999, we entered into an agreement with Philips Business
Electronics B.V., an affiliate of one of our stockholders, for the manufacture,
marketing and distribution of personal video recorders that enable the TiVo
Service. This agreement grants Philips the right to manufacture, market and
sell personal video recorders that enable the TiVo Service in North America. We
also granted Philips the right to manufacture, market and sell personal video
recorders in North America that incorporate both DIRECTV's satellite receiver
and the TiVo Service. We also granted Philips a license to our technology for
the purpose of manufacturing personal video recorders and other devices that
enable the TiVo Service. In addition, we have agreed to subsidize Philips'
manufacture and sale of the personal video recorders. The amount of the subsidy
is formula-based and periodically adjusted based on Philips' manufacturing
costs and selling prices. A portion of the subsidy is payable after shipment by
Philips and the balance is payable after the subscription is activated. In
addition to the manufacturing subsidy, we have agreed to pay Philips a fixed
amount per month for each Philips-branded personal video recorder that is owned
by an active TiVo Service subscriber. Finally, our agreement with Philips
provides that Philips will spend a specified amount on marketing activities
related to Philips-branded personal video recorders that enable the TiVo
Service.
On April 16, 1999, in connection with the issuance and sale of Series G
preferred stock to NBC Multimedia, Inc., we entered into an agreement with NBC
relating to the TiVo Service. Under the agreement, we granted NBC preferential
"anchor" placement on the Showcase screen of the TiVo Service. In addition, NBC
programming packages and specials will be featured in TiVolution Magazine and
NBC may include NBC promotions and/or featured programs for inclusion on the
materials packaged with each personal video recorder. Under the agreement, the
parties will feature each other as partners on their respective Internet
websites with a link to the other's website. We have also agreed to work with
NBC to produce weekly showcases and special programming packages that highlight
current and upcoming NBC programs. NBC also received the right to sell NBC
merchandise through our couch commerce service and the right to include links
to websites and other Internet content should such services be enabled on the
TiVo Service during the term of our agreement with NBC. After our couch
commerce area is launched, NBC will receive free placement in such area to sell
NBC merchandise. In the event that we enable Internet connection for the TiVo
Service during the term of the NBC agreement, we will ensure that any links
and/or web content incorporated within NBC signals will be passed through to
TiVo Service viewers.
We believe that each of the foregoing transactions was in our best interest.
As a matter of policy, the transactions were, and all future transactions
between us and any of our officers, directors or principal stockholders, will
be approved by a majority of the independent and disinterested members of the
board of directors, will be on terms no less favorable to us than could be
obtained from unaffiliated third parties and will be in connection with bona
fide business purposes.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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
23.1 Consent of Independent Public Accountants
27.1++ Financial Data Schedule.
</TABLE>
72
<PAGE>
- --------
* 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 filed on March 29, 2000.
+ Confidential treatment granted as to portions of this exhibit.
++ Submitted as an exhibit only in the electronic format of TiVo's Annual
Report on Form 10-K submitted to the Securities and Exchange Commission on
March 29, 2000.
Reports on Form 8-K
TiVo did not file any reports on Form 8-K during the year ended December 31,
1999.
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.
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<PAGE>
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: April 28, 2000
/s/ Michael Ramsay
By: _________________________________
Michael Ramsay
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Amendment
to Form 10-K has been signed by the following persons in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Michael Ramsay President, Chief Executive Officer April 28, 2000
____________________________________ and Chairman of the Board
Michael Ramsay (Principal Executive Officer)
/s/ David H. Courtney Sr. Vice President of Finance and April 28, 2000
____________________________________ Administration and Chief Financial
David H. Courtney Officer (Principal Financial and
Accounting Officer)
* Sr. Vice President of Research and April 28, 2000
____________________________________ Development, Chief Technical
James Barton Officer and Director
* Director April 28, 2000
____________________________________
Geoffrey Y. Yang
* Director April 28, 2000
____________________________________
Stewart Alsop
* Director April 28, 2000
____________________________________
Randy Komisar
* Director April 28, 2000
____________________________________
Michael Homer
* Director April 28, 2000
____________________________________
Larry N. Chapman
* Director April 28, 2000
____________________________________
Jan P. Oosterveld
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
* Director April 28, 2000
____________________________________
John S. Hendricks
* Director April 28, 2000
____________________________________
Margaret Murphy
* Director April 28, 2000
____________________________________
Howard Stringer
/s/ David H. Courtney
*By: _______________________________ Attorney-in-Fact April 28, 2000
David H. Courtney
</TABLE>
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<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation of our report dated January 17, 2000
included in this Form 10-K into the Company's previously filed Registration
Statements on Form S-8 (No. 333-94629). It should be noted that we have not
audited any financial statements of the company subsequent to December 31, 1999
or performed any audit procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
San Francisco, California
March 29, 2000
