<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- ---
Act of 1934. For the quarterly period ended March 31, 2000.
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the transition period from ________________ to _______________
Commission file number 000-27141
---------
TIVO INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0463167
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2160 Gold Street, PO Box 649101, San Jose, CA 95164-9101
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(408) 519-9100
---------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
The number of outstanding shares of the registrant's Common Stock, $0.001 par
value, was 37,861,602 as of April 30, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I : FINANCIAL INFORMATION............................................................................. 3
Item 1. Financial Statements............................................................................ 3
Balance Sheets.................................................................................. 3
Statements Of Operations........................................................................ 4
Statements Of Stockholders' Equity.............................................................. 5
Statements Of Cash Flows........................................................................ 6
Notes To Financial Statements................................................................... 7
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations........................................................................... 10
Item 3. Quantitative And Qualitative Disclosure About Market Risk....................................... 24
PART II : OTHER INFORMATION................................................................................ 25
Item 1. Legal Proceedings............................................................................... 25
Item 2. Changes In Securities And Use Of Proceeds....................................................... 25
Item 3. Defaults Upon Senior Securities................................................................. 26
Item 4. Submission Of Matters To A Vote Of Security Holders............................................. 26
Item 5. Other Information............................................................................... 26
Item 6. Exhibits, Financial Statement Schedules, And Reports On Form 8-k................................ 27
Signatures............................................................................................... 29
</TABLE>
2
<PAGE>
PART I : FINANCIAL INFORMATION
Item 1. Financial Statements
TIVO INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------------- --------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $122,035,000 $139,687,000
Short-term investments.................................... -- 6,168,000
Accounts receivable....................................... 826,000 127,000
Accounts receivable from related parties.................. 1,692,000 210,000
Prepaid expenses and other................................ 5,713,000 2,589,000
---------------- -------------------
Total current assets.................................... 130,266,000 148,781,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$1,202,000 and $831,000 as of March 31, 2000 and
December 31, 1999, respectively......................... 8,820,000 4,061,000
-------------- -------------------
Total assets................................... $139,086,000 $152,842,000
============== ===================
LIABILITIES AND
STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable.......................................... $ 9,135,000 $ 8,432,000
Accrued liabilities....................................... 5,398,000 4,778,000
Accrued marketing-related parties......................... 6,210,000 2,349,000
Deferred revenue.......................................... 3,666,000 2,271,000
Current portion of obligations under capital lease........ 750,000 624,000
-------------- -------------------
Total current liabilities............................... 25,159,000 18,454,000
Long-term portion of obligations under capital lease...... 1,205,000 1,141,000
-------------- -------------------
Total liabilities.............................. 26,364,000 19,595,000
-------------- -------------------
STOCKHOLDERS' EQUITY
Common stock, par value $0.001:
Authorized shares at March 31, 2000 and December 31,
1999 are 75,000,000.
Issued and outstanding shares at March 31, 2000 and
December 31, 1999 are 37,786,269 and 37,746,391,
respectively........................................ $ 38,000 $ 38,000
Additional paid-in capital................................ 235,836,000 235,423,000
Deferred compensation..................................... (5,566,000) (6,170,000)
Prepaid marketing expenses................................ (13,828,000) (16,341,000)
Note receivable........................................... (2,822,000) (2,822,000)
Retained deficit.......................................... (100,936,000) (76,881,000)
-------------- -------------------
Total stockholders' equity..................... 112,722,000 133,247,000
-------------- -------------------
Total liabilities and stockholders' equity..... $139,086,000 $ 152,842,000
============== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
TIVO INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------------
2000 1999
---------------- --------------------
<S> <C> <C>
Subscription revenues.......................... $ 424,000 $ --
Costs and expenses
Cost of services............................ 4,168,000 689,000
Research and development.................... 4,678,000 1,596,000
Sales and marketing......................... 9,180,000 2,168,000
Sales and marketing-related parties......... 4,547,000 --
General and administrative.................. 2,691,000 1,125,000
Stock-based compensation.................... 969,000 --
Other operating expense, net................ -- (12,000)
----------------- -----------------
Loss from operations...................... (25,809,000) (5,566,000)
Interest income....................... 1,824,000 53,000
Interest expense and other............ (70,000) (2,000)
----------------- -----------------
Net loss.................................. $ (24,055,000) $ (5,515,000)
================= =================
Net loss per share
Basic and diluted......................... $ (0.68) $ (1.62)
----------------- -----------------
Weighted average common shares outstanding
Basic and diluted......................... 35,353,442 3,401,035
================== =================
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
TIVO INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Prepaid
Common Stock Paid-In Deferred Marketing
-------------------------
Shares Amount Capital Compensation Expense
----------- ----------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1999....... 37,746,391 $ 38,000 $235,423,000 $ (6,170,000) $ (16,341,000)
Exercise of stock options....... 60,712 -- 49,000 -- --
Common stock repurchases........ (20,834) -- (1,000) -- --
Recognition of deferred
compensation.................. -- -- 365,000 (365,000) --
Stock-based compensation
expense....................... -- -- -- 969,000 --
Amortization of prepaid
marketing expenses............ -- -- -- -- 2,513,000
Net loss........................ -- -- -- -- --
----------- ----------- ------------ --------------- -------------
BALANCE, MARCH 31, 2000.......... 37,786,269 $ 38,000 $235,836,000 $ (5,566,000 $ (13,828,000)
=========== =========== ============ =============== =============
<CAPTION>
Note Retained
Receivable Deficit Total
-------------- ------------- ------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1999....... $ (2,822,000) $ (76,881,000) $133,247,000
Exercise of stock options....... -- -- 49,000
Common stock repurchases........ -- -- (1,000)
Recognition of deferred
compensation.................. -- -- --
Stock-based compensation
expense....................... -- -- 969,000
Amortization of prepaid
marketing expenses............ -- -- 2,513,000
Net loss........................ -- (24,055,000) (24,055,000)
-------------- ------------- ------------
BALANCE, MARCH 31, 2000.......... $ (2,822,000) $(100,936,000) $112,722,000
============== ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
TIVO INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
2000 1999
------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................... $ (24,055,000) $ (5,515,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 371,000 96,000
Common stock exchanged for services.................... -- 118,000
Amortization of prepaid marketing expenses............. 2,513,000 --
Amortization of warrants for services.................. 25,000 --
Stock-based compensation expense....................... 969,000 --
Changes in current assets and liabilities:
Accounts receivable.................................... (2,181,000) (78,000)
Inventories............................................ -- (443,000)
Prepaid expenses and other............................. (3,149,000) (23,000)
Accounts payable....................................... 703,000 455,000
Accrued liabilities.................................... 620,000 1,300,000
Accrued marketing-related parties ..................... 3,861,000 --
Deferred revenue....................................... 1,395,000 4,000
-------------- -------------
Net cash used in operating activities ................... (18,928,000) (4,086,000)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment, net................. (5,130,000) (559,000)
Proceeds from sale of short-term investments, net.......... 6,168,000 --
-------------- -------------
Net cash used in investing activities.................... 1,038,000 (559,000)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible preferred stock, net
of issuance costs........................................ -- 6,955,000
Proceeds from issuance of common stock and exercise of
stock options............................................ 49,000 121,000
Repurchase of common stock................................. (1,000) (2,000)
Net borrowings under capital lease......................... 190,000 --
Increase in bank overdraft................................. -- 23,000
-------------- -------------
Net cash provided by financing activities................ 238,000 7,097,000
-------------- -------------
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS............ (17,652,000) 2,452,000
-------------- -------------
CASH AND CASH EQUIVALENTS:
Balance at beginning of period............................. 139,687,000 2,248,000
-------------- -------------
Balance at end of period................................... $ 122,035,000 $ 4,700,000
============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest..................................... $ 24,000 $ --
Equipment acquired under capital lease..................... 367,000 --
Deferred stock-based compensation.......................... 365,000 1,151,000
</TABLE>
The accompanying notes are an integral part of these statements.
6
<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 San Jose, California. The Company has
developed a subscription-based personal television service (the "TiVo Service")
that provides viewers with the ability to pause, rewind and play back live or
recorded television broadcasts, as well as to search for, watch and record
programs. The TiVo Service also provides television listings, daily suggestions
and special viewing packages. The TiVo Service relies on three key components:
the personal video recorder, the TiVo remote control and the TiVo Broadcast
Center. The Company conducts its operations through one reportable segment.
The Company continues to be subject to certain risks, including the
uncertainty of availability of additional financing; dependence on third parties
for manufacturing, marketing and sales support; the uncertainty of the market
for personal television; dependence on key management; limited manufacturing,
marketing and sales experience; and the uncertainty of future profitability.
Unaudited Interim Financial Statements
The accompanying balance sheet as of March 31, 2000 and the
accompanying statements of operations, statements of stockholder's equity and
statements of cash flows for the three months ended March 31, 1999 and 2000
included herein have been prepared by the Company and are unaudited. The
information furnished in the unaudited financial statements referred to above
includes all normal adjustments that are, in the opinion of management,
necessary and a fair presentation of such financial statements. The results of
operations for the three months ended March 31, 2000 are not necessarily
indicative of results for the entire fiscal year or future periods.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents
The Company classifies financial instruments as cash equivalents if the
original maturity of such instruments is three months or less.
Short-term investments
Short-term investments consist of commercial paper investments and
certificates of deposit with original maturities at the date of purchase ranging
between three and twelve months. The Company classifies these investments as
held to maturity and records the instruments at amortized cost, which
approximates fair value due to the short maturities.
Net Loss Per Common Share
Net loss per share is calculated in accordance with SFAS No. 128,
"Earnings Per Share," and SEC Staff Accounting Bulletin No. 98 (SAB No. 98).
Under the provisions of SFAS No. 128 and SAB No. 98, basic net loss per common
share is computed by dividing net loss by the weighted average number of common
shares outstanding. Shares used in the computation of all net loss per share
amounts do not include repurchasable common stock issued to DIRECTV and
unvested, repurchasable common stock issued under the employee stock option
plans.
7
<PAGE>
Diluted net loss per common share is calculated by dividing net loss by
the weighted average number of common shares and dilutive common share
equivalents outstanding. Diluted net loss per share does not include the effect
of the antidilutive common share equivalents.
Stock-Based Compensation and Stock Exchanged for Services
The Company has elected to follow Accounting Principles Board Opinion
No. 25 (APB 25), "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock options. Under APB 25, when
the exercise price of employee stock options is less than the market price of
the underlying stock on the date of grant, compensation expense is recorded for
the difference between fair value and the exercise price. Expense associated
with stock-based compensation is being amortized on an accelerated basis over
the vesting period of the individual award, generally four years. The method of
amortization is in accordance with Financial Accounting Standards Board ("FASB")
Interpretation No. 28, under which value assigned to options vesting in future
periods is ratably amortized beginning upon issuance of the option rather than
at the vesting date. The Company has recorded stock-based compensation expense
of $969,000 for the three months ended March 31, 2000. The Company has adopted
the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."
The value of warrants, options or stock exchanged for services is
expensed over the period benefited. The warrants and options are valued using
the Black-Scholes option pricing model. To calculate the expense, the Company
uses either the fair value of the consideration received or the fair value of
the equity instruments issued, whichever is more reliably measurable.
Revenue Recognition
Subscription revenues represent revenues from customer subscriptions to
the TiVo Service. Subscriptions to the TiVo Service are available on a monthly,
annual or lifetime basis. Subscription fees are generally charged to customers'
credit cards and are generally billed in advance on a monthly basis. A lifetime
subscription covers the life of the particular personal video recorder
purchased. Revenues from subscriptions are recognized ratably over the
subscription period. Subscription revenues from lifetime subscriptions are
recognized ratably over a four-year period, the best estimate of the useful life
of the personal video recorder. Deferred revenue relates to subscription fees
collected but for which service has not yet been provided.
Sales and Marketing--Related Parties
Sales and marketing--related parties consists of cash and non-cash
charges related to the Company's agreements with DIRECTV, Inc. ("DIRECTV"),
Philips Business Electronics B.V. ("Philips"), Quantum Corporation ("Quantum")
and Creative Artists Agency, LLC ("CAA"), all of which hold stock in the
Company.
Other Operating Expense, Net
Prior to the transition of manufacturing and distribution
responsibility to Philips in the fourth quarter of 1999, the Company sold
personal video recorders directly to consumers. The Company's direct sales of
personal video recorders, less the cost of the personal video recorders sold is
classified as other operating expense, net. Other operating expense, net is
considered incidental to the Company's business and is recognized upon shipment
to the customer. The Company records a provision for estimated warranty costs
and returns at the time of sale.
Reclassifications
Certain prior year amounts have been reclassified for consistency with
current year financial statement presentation.
8
<PAGE>
3. COMMITMENTS AND CONTINGENCIES
Facilities Leases
The Company leased office space in Sunnyvale under operating leases
that expire June 30, 2000. As of March 31, 2000 future minimum lease payments
were $29,000.
In October 1999, the company entered into an office lease with WIX/NSJ
Real Estate Limited Partnership. The lease began on March 10, 2000 and has a
seven-year term. Future minimum lease payments under this lease are $20.1
million as of March 31, 2000.
In March 2000, the Company entered into an office lease with Embassy
Group Associates. The lease began on March 1, 2000 and has a twenty-six month
term. Future minimum lease payments under this lease are $66,000 as of March 31,
2000.
Rent expense for the three months ended March 31, 1999 and 2000 was
$223,000 and $521,000, respectively.
Equipment Lease Line
As of March 31, 2000, $2.3 million of the available lease line had used
and has been accounted for as a capital lease. The unused equipment lease line
expired February 2000. The future minimum lease payments under capitalized
equipment leases are $2.1 million as of March 31, 2000.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements include, without limitation,
statements containing the words "believes," "anticipates," "expects," and words
of similar import. Such forward-looking statements will have known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. The Company assumes no
obligation to update any forward-looking statements contained herein. Actual
results could differ materially from those set forth in such forward-looking
statements as a result of the "Factors That May Affect Future Operating Results"
and other risks detailed in the Company's reports filed with the Securities and
Exchange Commission.
Results of Operations
Three Months Ended March 31, 2000 Compared to the Three Months Ended March 31,
1999
Subscription revenues. Subscription revenues for the three months ended
March 31, 2000 were $424,000, compared to zero for the three months ended March
31, 1999. The increase is attributable to customer subscriptions to the TiVo
Service, which began in March 1999. As of March 31, 2000, we had approximately
32,000 subscribers.
Cost of services. Cost of services consists primarily of employee
salaries, telephone expenses, call center and other expenses related to
providing the TiVo Service to subscribers. Cost of services for the three months
ended March 31, 2000 was $4.2 million compared to $0.7 million for the same
period ended March 31, 1999. This increase was primarily attributable to the
hiring of content programming and service operation personnel and establishing a
customer call center in connection with the retail release of the TiVo Service
and the personal video recorder that enables the TiVo Service. Additionally, as
subscribers increased there were other variable costs, such as telephone charges
that increased.
Research and development expenses. The Company's research and
development expenses consist primarily of employee salaries and related expenses
and consulting fees relating to the design of the personal video recorder that
enables the TiVo Service. Research and development expenses for the three months
ended March 31, 2000 were $4.7 million compared to $1.6 million for the three
months ended March 31, 1999. The increase was primarily attributable to the
hiring of additional engineering personnel and costs related to the improvement
and addition of features and functionality of current products as well as the
design of new platforms.
Sales and marketing expenses. Sales and marketing expenses consist
primarily of employee salaries and related expenses, media advertising, public
relations activities, special promotions, trade shows and the production of
product related items, including collateral and videos. Sales and marketing
expenses for the three months ended March 31, 2000 were $9.2 million compared to
$2.2 million for the three months ended March 31, 1999. The increase was
primarily attributable to an increase in expenditures for advertising, public
relations and trade shows in connection with the continued retail marketing
campaign of the TiVo Service and the personal video recorder that enables the
TiVo Service. We expect our marketing expenses to continue to increase
significantly in connection with the continued retail marketing campaign for the
TiVo Service and the personal video recorder that enables the TiVo Service.
Sales and marketing--related parties. Sales and marketing--related
parties consist of cash and non-cash charges related primarily to agreements
with DIRECTV, Philips, Quantum and Creative Artists Agency, LLC, all of which
hold stock in the Company. Sales and marketing--related parties for the three
months ended March 31, 2000 was $4.5 million compared to zero for the three
months ended March 31, 1999. The increase in sales and marketing--related
parties expenses is
10
<PAGE>
attributable to the manufacturing and shipments of personal video recorders and
to the related activations of subscribers to the TiVo Service.
General and administrative expenses. General and administrative
expenses consist primarily of employee salaries and related expenses for
executive, administrative, accounting, information systems, customer service
personnel, facility costs and professional fees. General and administrative
expenses for the three months ended March 31, 2000 were $2.7 million compared to
$1.1 million for the three months ended March 31, 1999. The increase was
primarily attributable to the hiring of additional personnel and related
expenses and the costs of expanding Information Services and Service Operations
departments.
Stock-based compensation. During 1999 and 2000, we granted stock
options with exercise prices that were less than the estimated fair value of the
underlying shares of common stock on the date of grant. As a result, stock-based
compensation expense is being recognized over the period that these stock
options vest. The stock-based compensation expense was approximately $1.0
million for the three months ended March 31, 2000 and zero for the three months
ended March 31, 1999.
Other operating expenses, net. Other operating expenses, net consists
of the revenues from the sale of personal video recorders sold directly by TiVo,
less the cost of the personal video recorders sold. For the three months ended
March 31, 2000, other operating expenses, net was zero compared to $12,000 for
the three months ended March 31, 1999. We transitioned manufacturing and selling
personal video recorders in the fourth quarter of 1999 to Philips. The revenues
and costs resulting from the sale of personal video recorders were not expected
to be recurring and are therefore considered incidental to our business and as
such have been classified as other operating expense, net.
Interest income. Interest income resulting from cash and cash
equivalents held in interest bearing accounts and short term investments was
$1.8 million for the three months ended March 31, 2000 compared to $53,000 for
the three months ended March 31, 1999, as cash balances have increased due to
the capital raised during 1999.
Interest expense and other. Interest expense and other was $70,000 for
the three months ended March 31, 2000. Of this amount, $34,000 was interest
expense. Other consists of a gain on a sale of an asset and amortization of the
value assigned to the Comdisco warrants.
11
<PAGE>
Quarterly Results of Operations
The following table represents certain unaudited statements of
operations data for our eight most recent quarters ended March 31, 2000. In
management's opinion, this unaudited information has been prepared on the same
basis as the audited annual financial statements and includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
representation of the unaudited information for the quarters presented. This
information should be read in conjunction with our financial statements,
including notes thereto, included elsewhere in this Form 10-Q. The results of
operations for any quarter are not necessarily indicative of results that may be
expected for any future period. The three months ended March 31, 1999, June 30,
1999 and September 30, 1999 have been reclassified in order to conform to 1998
and current quarter classifications
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------------------------
June 30, September 30, December 31, March 31, June 30, September 30, December 31, March 31,
1998 1998 1998 1999 1999 1999 1999 2000
---------------------------------------------------------------------------------------------------
(unaudited, in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Subscription revenues......... $ -- $ -- $ -- $ -- $ 8 $ 33 $ 182 $ 424
Costs and expenses
Cost of services.............. -- -- -- (689) (636) (749) (1,993) (4,168)
Research and development...... (1,016) (1,659) (2,146) (1,596) (1,859) (2,327) (3,945) (4,678)
Sales and marketing........... (222) (354) (567) (2,168) (1,847) (5,323) (15,164) (9,180)
Sales and marketing--related
parties..................... -- -- -- -- (382) (4,946) (9,844) (4,547)
General and administrative.... (610) (706) (1,337) (1,125) (1,057) (1,757) (3,088) (2,691)
Stock-based compensation...... -- -- -- -- (187) (501) (842) (969)
Other operating expense,
net......................... -- -- -- 12 (201) (4,808) (2,213) --
-------- ---------- ---------- -------- -------- ----------- ---------- ---------
Loss from operations.......... (1,848) (2,719) (4,050) (5,566) (6,161) (20,378) (36,907) (25,809)
Interest income............... 17 46 55 53 224 614 2,022 1,824
Interest expense and other.... (11) (7) -- (2) (176) (281) (7) (70)
-------- ---------- ---------- -------- -------- ----------- ---------- ---------
Net loss...................... $(1,842) $(2,680) $ (3,995) $(5,515) $(6,113) $(20,045) $(34,892) $(24,055)
======== ========== ========== ======== ======== =========== ========== =========
</TABLE>
The TiVo Service is enabled through a personal video recorder that is
sold in retail channels like other consumer electronic devices. As a result, we
anticipate that our business will be seasonal and we expect to generate a
significant number of our annual new subscribers during the holiday shopping
season. We also expect to generate a portion of future revenues from television
advertising, which tends to be seasonal and cyclical, reflecting overall
economic conditions as well as budgeting and buying patterns.
Liquidity and Capital Resources
From inception through March 31, 2000, we financed our operations and
met our capital expenditure requirements primarily from the proceeds of the
private sale of equity securities and the proceeds from our initial public
offering. At March 31, 2000, we had $122.0 million of cash and cash equivalents.
As of March 31, 1999, we had $4.9 million of cash and cash equivalents. The
expansion of our business will require significant additional capital to fund
operations, capital expenditures and working capital needs. Accordingly, we may
choose to raise additional capital through debt or equity financing prior to the
end of 2000.
Net cash used in operating activities was $18.9 million for the three
months ended March 31, 2000. During the three months ended March 31, 2000, we
incurred a net loss of $24.1 million, of which $3.5 million is related to non-
cash charges. Uses of cash from operating activities also included an increase
in prepaid expenses and other of $3.1 million and an increase in accounts
receivable of $2.2 million. These uses were offset by sources of cash provided
from operating activities
12
<PAGE>
consisting of an increase in accrued marketing--related parties of $3.9 million,
an increase in deferred revenue of $1.4 million, an increase in accounts payable
of $703,000 and an increase in accrued liabilities of $620,000.
Net cash provided by investing activities was $1.0 million for the
three months ended March 31, 2000. Net cash provided in investing activities
during the three months ended March 31, 2000 included $6.2 million from the sale
of short-term investments offset by $5.1 million used for the acquisition of
property and equipment.
Net cash provided by financing activities was $238,000 for the three
months ended March 31, 2000. Of this amount, $190,000 was received from
financing through a capital lease and $49,000 from the issuance of common stock
for stock options exercised. Additionally cash was used to repurchase unvested
common stock options, which had been exercised for $1,000.
Net cash used in operating activities was $4.1 million for the three
months ended March 31, 1999. Net cash used during this period was primarily a
result of the research and development, sales and marketing and general and
administrative expenses to support the development of the TiVo Service and the
personal video recorder that enables the TiVo Service incurring a loss of $5.5
million.
Net cash used in investing activities was $559,000 for the three months
ended March 31, 1999. Net cash used during this period was for the acquisition
of property and equipment.
Net cash provided by financing activities was $7.1 million for the
three months ended March 31, 1999. This financing was received primarily from
the issuance of $7.0 million of Series D and E preferred stock to several
investors, including Vulcan Ventures and Showtime and the issuance of $121,000
of common stock.
We have commitments for future lease payments under facilities
operating leases of $20.2 million and obligations under capital leases of $2.1
million as of March 31, 2000. The obligations under the capital lease relate to
equipment leased under a total available lease line of $2.5 million, which
expired in February 2000.
Our future capital requirements will depend on a variety of factors,
including market acceptance of the personal video recorder and the TiVo Service,
the resources we devote to developing, marketing, selling and supporting our
products and other factors. We expect to devote substantial capital resources:
. to subsidize the sale of personal video recorders;
. to advertise our brand and market our product;
. to hire and expand our engineering, sales and marketing and
customer support organizations;
. to expand into the European market;
. for a new facility; and
. for general corporate purposes.
We believe that our cash and cash equivalents, the net proceeds from
the sale of our preferred stock and the net proceeds from the initial public
offering will be sufficient to fund our operations for at least the next 12
months. Despite our expectations, we may need to raise additional capital before
the end of the next 12 months. Beyond one year, we may need to raise additional
funds in order to:
. fund anticipated growth, including significant increases in
personnel, office facilities and computer systems;
13
<PAGE>
. develop new or enhance existing services or products;
. expand into new markets and respond to competitive pressures;
or
. acquire or invest in complementary businesses, technologies,
services or products.
In addition, in order to meet long-term liquidity needs, we may need to
raise additional funds, establish a credit facility or seek other financing
arrangements. Additional funding may not be available on favorable terms or at
all. See "Factors That May Affect Future Operating Results-If we are unable to
raise additional capital on acceptable terms, our ability to effectively manage
growth and build a strong brand could be harmed."
Impact of Inflation
We believe that inflation has not had a significant impact on our
operating results.
Year 2000 Issue
As of March 31, 2000, we have not experienced any material Year 2000
related disruptions in our operations. While we believe most Year 2000 problems
should have become evident on January 1, 2000, additional Year 2000 related
problems may only become evident after that date. Our phased program to
inventory, assess, remediate, test, implement and develop contingency plans for
all mission-critical applications and products potentially affected by the Year
2000 issue ("Y2K Program") was described in our 1999 Form 10-K. This program was
substantially completed prior to the calendar year end. Our total incremental
spending over the life of the Y2K Program was approximately $35,000, which we
funded from operating cash flows.
Factors that May Affect Future Operating Results
In addition to the other information included in this Report, the
following factors should be considered in evaluating our business and future
prospects:
We have recognized very limited revenue, have incurred significant net
losses and may never achieve profitability.
We have recognized limited revenues, have incurred significant losses
and have had substantial negative cash flow. During the three months ended March
31, 2000, we recognized subscription revenues of $424,000. As of March 31, 2000,
we had an accumulated deficit of $100.9 million. We expect to incur significant
operating expenses over the next several years in connection with the continued
development and expansion of our business. As a result, we expect to continue to
incur losses for the foreseeable future. The size of these net losses depends in
part on the growth in our subscriber base and on our expenses. With increased
expenses, we will need to generate significant additional revenues to achieve
profitability. Consequently, we may never achieve profitability, and even if we
do, we may not sustain or increase profitability on a quarterly or annual basis
in the future.
Our limited operating history may make it difficult for us or investors to
evaluate trends and other factors that affect our business.
We were incorporated in August 1997 and have been obtaining subscribers
and selling personal video recorders only since March 31, 1999. Prior to that
time, our operations consisted primarily of research and development efforts. As
of March 31, 2000, only a limited number of personal video recorders had been
sold and we obtained only a limited number of subscribers to the TiVo Service.
As a result of our limited operating history, our historical financial and
operating information is of limited value in evaluating our future operating
results. In addition, any evaluation of our business must be made in light of
the risks and difficulties encountered by companies offering products or
services in new and rapidly evolving markets. For example, it may be difficult
to accurately predict our future revenues, costs of revenues, expenses or
results of
14
<PAGE>
operations. Personal television is a new product category for consumers and it
may be difficult to predict the future growth rate, if any, or size of the
market for our products and services. We may be unable to accurately forecast
customer behavior and recognize or respond to emerging trends, changing
preferences or competitive factors facing us. As a result, we may be unable to
make accurate financial forecasts and adjust our spending in a timely manner to
compensate for any unexpected revenue shortfall. This inability could cause our
net losses in a given quarter to be greater than expected, which could cause the
price of our stock to decline.
If our marketing in the retail channel is not successful, consumers and
consumer electronics manufacturers may not accept the TiVo Service and products
that enable the TiVo Service.
Our success depends upon a continually successful retail marketing
campaign for the TiVo Service and related personal video recorders, which began
in the third quarter of 1999. We will rely principally on our consumer
electronics partners, such as Philips and Sony, to manufacture, market, sell and
support the personal video recorder that enables the TiVo Service. We also will
rely on the efforts of DIRECTV to market, sell and support the TiVo Service to
DIRECTV subscribers. The ongoing marketing campaign requires, among other
things, that we:
. educate consumers on the benefits of the TiVo Service and
related personal video recorder, which will require an
extensive marketing campaign;
. commit a substantial amount of human and financial resources
to achieve continued, successful retail distribution; and
. coordinate our own sales, marketing and support activities
with those of Philips, DIRECTV and other strategic partners.
We or our strategic partners may not achieve any or all of these
objectives. In addition, consumers may perceive the TiVo Service and related
personal video recorder as too expensive or complex and our marketing campaign
may not effectively attract new subscribers. Because of competitive offerings or
changing preferences, consumers may delay or decline the purchase of the TiVo
Service and related personal video recorder. All of these events would reduce
consumer demand and market acceptance, diminish our brand and impair our ability
to attract subscribers to the TiVo Service.
We have agreed to share a substantial portion of the revenue we generate
from subscription fees with some of our strategic partners. We may be unable to
generate enough revenue to cover these obligations.
We have agreed to share a substantial portion of our subscription and
other fees with some of our strategic partners in exchange for manufacturing,
distribution and marketing support and discounts on key components for personal
video recorders. Given how these amounts are calculated, we may be required to
share substantial portions of the subscription and other fees attributable to
the same subscriber with multiple partners. These agreements require us to share
a portion of our subscription fees whether or not we reduce the price of the
TiVo Service. If we reduce our subscription fees in response to competitive or
other market factors, our operating results would be adversely affected. Our
decision to share subscription revenues is based on our expectation that our
partnerships will help us obtain subscribers, broaden market acceptance of
personal television and increase our future revenues. If these expectations are
not met, we may be unable to generate sufficient revenue to cover our expenses
and obligations.
We depend on a limited number of third parties to manufacture, distribute
and supply critical components and services for the personal video recorders
that enable the TiVo Service. We may be unable to operate our business if these
parties do not perform their obligations.
The TiVo Service is enabled through the use of a personal video
recorder made available by a limited number of third parties. In addition, we
rely on sole suppliers for a number of key components for the personal video
recorders. We do not control the time and resources that these third parties
devote to our business. We cannot be sure that these parties will
15
<PAGE>
perform their obligations as expected or that any revenue, cost savings or other
benefits will be derived from the efforts of these parties. If any of these
parties breaches or terminates its agreement with us or otherwise fails to
perform their obligations in a timely manner, we may be delayed or prevented
from commercializing our products and services. Because our relationships with
these parties are non-exclusive, they may also support products and services
that compete directly with us, or offer similar or greater support to our
competitors. Any of these events could require us to undertake unforeseen
additional responsibilities or devote additional resources to commercialize our
products and services. This outcome would harm our ability to compete
effectively and quickly achieve market acceptance and brand recognition.
In addition, we face the following risks in relying on these third
parties:
If our manufacturing partnerships are not successful, we may be unable
to establish a market for our products and services. We initially manufactured
the personal video recorders that enable the TiVo Service through a third-party
contract manufacturer. We have entered into agreements with Philips and Sony to
manufacture and distribute the personal video recorders that enable the TiVo
Service. We have transitioned manufacturing of the personal video recorder from
our third-party contract manufacturer to Philips, who assumed manufacturing
responsibility in the fourth quarter of 1999. However, we have no minimum volume
commitments from Philips, Sony or any other manufacturer. The ability of our
manufacturing partners to provide sufficient production volume of the personal
video recorder to satisfy demand, is subject to delays and unforeseen problems
such as defects, shortages of critical components and cost overruns. Moreover,
they will require substantial lead times to manufacture anticipated quantities
of the personal video recorders that enable the TiVo Service. Delays and other
problems could impair the retail distribution and brand image and make it
difficult for us to attract subscribers. In addition, the loss of a
manufacturing partner would require us to identify and contract with alternative
sources of manufacturing, which we may be unable to do and which could prove
time-consuming and expensive. Although we expect to continue to contract with
additional consumer electronics companies for the manufacture of personal video
recorders in the future, we may be unable to establish additional relationships
on acceptable terms.
If our corporate partners fail to perform their obligations, we may be
unable to effectively market and distribute our products and services. Our
manufacturing partners distribute the personal video recorder that enables the
TiVo Service. We rely on their sales forces, marketing budgets and brand images
to promote and support the personal video recorder and the TiVo Service. We
expect to continue to rely on our manufacturing partners and other strategic
partners to promote and support the personal video recorder and other devices
that enable the TiVo Service. The loss of one or more of these partners could
require us to undertake more of these activities on our own. As a result, we
would spend significant resources to support personal video recorders and other
devices that enable the TiVo Service. We also expect to rely on DIRECTV and
other partners to provide marketing support for the TiVo Service. The failure of
one or more of these partners to provide anticipated marketing support will
require us to divert more of our limited resources to marketing the TiVo
Service. If we are unable to provide adequate marketing support for the personal
video recorder and the TiVo Service, our ability to attract subscribers to the
TiVo Service will be limited.
We are dependent on single suppliers for several key components and
services. If these suppliers fail to perform their obligations, we may be unable
to find alternative suppliers or deliver our products and services to our
customers on time. We currently rely on sole suppliers for a number of the key
components and services used in the personal video recorders and the TiVo
Service. For example:
. Quantum is the sole supplier of the hard disk drives;
. NEC is the sole supplier of the application specific
integrated circuit, a semiconductor device;
. Sony is the sole supplier of the MPEG2 encoder semiconductor
device; and
. Tribune Media Services is the sole supplier of program guide
data.
16
<PAGE>
In addition to the above, we have several sole suppliers for key
components of our products currently under development.
We cannot be sure that alternative sources for key components and
services used in the personal video recorders and the TiVo Service will be
available when needed or, if available, that these components and services will
be available on favorable terms. If our agreements or our manufacturing
partners' agreements with Quantum, NEC, Sony or Tribune Media Services were to
terminate or expire, or if we or our manufacturing partners were unable to
obtain sufficient quantities of these components or required program guide data,
our search for alternate suppliers could result in significant delays, added
expense or disruption in product availability.
Our ability to generate revenues from subscription fees is unproven and may
fail.
We expect to generate a substantial portion of our revenues from
subscription fees for the TiVo Service. Many of our potential customers already
pay monthly fees for cable or satellite television services. We must convince
these consumers to pay an additional subscription fee to receive the TiVo
Service. The availability of competing services that do not require subscription
fees will harm our ability to effectively attract subscribers. In addition, the
personal video recorder that enables the TiVo Service can be used to record
programs and pause, rewind and fast forward through live or recorded shows
without an active subscription to the TiVo Service. If a significant number of
purchasers of our personal video recorders use these devices without subscribing
to the TiVo Service, our revenue growth will decline and we may not achieve
profitability.
Our business is expanding rapidly and our failure to manage growth could
disrupt our business and impair our ability to generate revenues.
Since we began our business in August 1997, we have significantly
expanded our operations. We anticipate continued expansion in our headcount,
facilities and infrastructure to support potential growth in our subscriber base
and to allow us to pursue market opportunities. This expansion has placed, and
will continue to place, a significant strain on our management, operational and
financial resources and systems. Specific risks we face as our business expands
include:
We need to attract and retain qualified personnel, and any failure to
do so may impair our ability to offer new products or grow our business. Our
success will depend on our ability to attract, retain and motivate managerial,
technical, marketing, financial, administrative and customer support personnel.
Competition for such employees is intense, especially for engineers in the San
Francisco Bay Area, and we may be unable to successfully attract, integrate or
retain sufficiently qualified personnel. If we are unable to hire, train, retain
and manage required personnel, we may be unable to successfully introduce new
products or otherwise implement our business strategy.
Any inability of our systems to accommodate our expected subscriber
growth may cause service interruptions or delay our introduction of new
services. We internally developed many of the systems we use to provide the TiVo
Service and perform other processing functions. The ability of these systems to
scale as we rapidly add new subscribers is unproven. We must continually improve
these systems to accommodate subscriber growth and add features and
functionality to the TiVo Service. Our inability to add software and hardware or
to upgrade our technology, systems or network infrastructure could adversely
affect our business, cause service interruptions or delay the introduction of
new services.
We will need to provide acceptable customer support, and any inability
to do so will harm our brand and ability to generate and retain new subscribers.
Our ability to increase sales, retain current and future subscribers and
strengthen our brand will depend in part upon the quality of our customer
support operations. Some customers require significant support when installing
the personal video recorder and becoming acquainted with the features and
functionality of the TiVo Service. We have limited experience with widespread
deployment of our products and services to a diverse customer base, and we may
not have adequate personnel to provide the levels of support that our customers
require. In addition, we have entered into agreements with third parties to
provide this support and will rely on them for a substantial portion of our
customer support functions. Our failure to provide adequate customer support for
the TiVo Service and personal video recorder will damage our reputation in the
personal television and consumer electronics marketplace and strain our
relationships with
17
<PAGE>
customers and strategic partners. This could prevent us from gaining new or
retaining existing subscribers and could cause harm to our reputation and brand.
We will need to improve our operational and financial systems to
support our expected growth, and any inability to do so will adversely impact
our billing and reporting. To manage the expected growth of our operations and
personnel, we will need to improve our operational and financial systems,
procedures and controls. Our current and planned systems, procedures and
controls may not be adequate to support our future operations and expected
growth. For example, we expect to replace our accounting and billing system in
2000. Delays or problems associated with any improvement or expansion of our
operational and financial systems and controls could adversely impact our
relationships with subscribers and cause harm to our reputation and brand.
Delays or problems associated with any improvement or expansion of our
operational and financial systems and controls could also result in errors in
our financial and other reporting.
If we are unable to create multiple revenue streams, we may not be able to
cover our expenses or meet our obligations to strategic partners and other third
parties.
Although our initial success will depend on building a significant
customer base and generating subscription fees from the TiVo Service, our
long-term success will depend on securing additional revenue streams such as:
. advertising;
. revenues from networks; and
. electronic commerce or couch commerce.
In order to derive substantial revenues from these activities, we will
need to attract and retain a large and growing base of subscribers to the TiVo
Service. We also will need to work closely with television advertisers, cable
and satellite network operators, electronic commerce companies and consumer
electronics manufacturers to develop products and services in these areas. We
may not be able to effectively work with these parties to develop products that
generate revenues that are sufficient to justify their costs. In addition, we
are currently obligated to share a portion of these revenues with several of our
strategic partners. Any inability to attract and retain a large and growing
group of subscribers and strategic partners will seriously harm our ability to
support new services and develop new revenue streams.
It will take a substantial amount of time and resources to achieve broad
market acceptance of the TiVo Service and products that enable the TiVo Service
and we cannot be sure that these efforts will generate a broad enough subscriber
base to sustain our business.
Personal television products and services represent a new, untested
consumer electronics category. The TiVo Service is in an early stage of
development and many consumers are not aware of its benefits. As a result, it is
uncertain whether the market will demand and accept the TiVo Service and
products that enable the TiVo Service. Retailers, consumers and potential
partners may perceive little or no benefit from personal television products and
services. Likewise, consumers may not value, and may be unwilling to pay for the
TiVo Service and products that enable the TiVo Service. To develop this market
and obtain subscribers to the TiVo Service, we will need to devote a substantial
amount of time and resources to educate consumers and promote our products. We
may fail to obtain subscribers, encourage the development of new devices that
enable the TiVo Service and develop and offer new content and services. We
cannot be sure that a broad base of consumers will ultimately subscribe to the
TiVo Service or purchase the products that enable the TiVo Service.
We face intense competition from a number of sources, which may impair our
revenues and ability to generate subscribers.
The personal television market is new and rapidly evolving and we
expect competition from a number of sources, including:
18
<PAGE>
Internet-related companies and companies offering similar products and
services. We are likely to face intense direct competition from companies such
as WebTV Networks Inc., ReplayTV, Inc. and X-TV. These companies offer, or have
announced their intention to offer, products with one or more of the TiVo
Service's functions or features and, in some instances, combine these features
with Internet browsing or traditional broadcast, cable or satellite television
programming. Many of these companies have greater brand recognition and market
presence and substantially greater financial, marketing and distribution
resources than we do. For example, Microsoft Corporation controls and provides
financial backing to WebTV. Some of these companies also have established
relationships with third party consumer electronic manufacturers, network
operators and programmers, which could make it difficult for us to establish
relationships and enter into agreements with these third parties. Some of these
competitors also have relationships with our strategic partners. For example,
DIRECTV recently formed an alliance with America Online. Faced with this
competition, we may be unable to expand our market share and attract an
increasing number of subscribers to the TiVo Service.
Established competitors in the consumer electronics market. We compete
with consumer electronic products in the television and home entertainment
industry. The television and home entertainment industry is characterized by
rapid technological innovation, a small number of dominant manufacturers and
intense price competition. As a new product category, personal television enters
a market that is crowded with several established products and services. The
competition for consumer spending in the television and home entertainment
market is intense, and our products and services will compete with:
. satellite television systems;
. video on demand services;
. digital video disc players; and
. laser disc players.
Most of these technologies or devices have established markets, a broad
subscriber base and proven consumer acceptance. In addition, many of the
manufacturers and distributors of these competing devices have substantially
greater brand recognition, market presence, distribution channels, advertising
and marketing budgets and promotional and other strategic partners. Faced with
this competition, we may be unable to effectively differentiate the personal
video recorder or the TiVo Service from these devices.
Established competition for advertising budgets. Personal television,
in general, and TiVo, specifically, also compete with traditional advertising
media such as print, radio and television for a share of advertisers' total
advertising budgets. If advertisers do not perceive personal television as an
effective advertising medium, they may be reluctant to devote a significant
portion of their advertising budget to promotions on the TiVo Service.
If we are unable to introduce new products or services, or if our new
products and services are unsuccessful, the growth in our subscriber base and
revenues may suffer.
To attract and retain subscribers and generate revenues, we must
continue to add functionality and content and introduce products and services
which embody new technologies and, in some instances, new industry standards.
This challenge will require hardware and software improvements, as well as new
collaborations with programmers, advertisers, network operators, hardware
manufacturers and other strategic partners. These activities require significant
time and resources and may require us to develop and promote new ways of
generating revenue with established companies in the television industry. These
companies include television advertisers, cable and satellite network operators,
electronic commerce companies and consumer electronics manufacturers. In each of
these examples, a small number of large companies dominate a major portion of
the market and may be reluctant to work with us to develop new products and
services for personal television. If we are unable to further develop and
improve the TiVo Service or expand our operations in a cost-effective or timely
manner, our ability to attract and retain subscribers and generate revenue will
suffer.
19
<PAGE>
If we do not successfully establish strong brand identity in the personal
television market, we may be unable to achieve widespread acceptance of our
products.
We believe that establishing and strengthening the TiVo brand is
critical to achieving widespread acceptance of our products and services and to
establishing key strategic partnerships. The importance of brand recognition
will increase as current and potential competitors enter the personal television
market with competing products and services. Our ability to promote and position
our brand depends largely on the success of our marketing efforts and our
ability to provide high quality services and customer support. These activities
are expensive and we may not generate a corresponding increase in subscribers or
revenues to justify these costs. If we fail to establish and maintain our brand,
or if our brand value is damaged or diluted, we may be unable to attract
subscribers and effectively compete in the personal television market.
Product defects, system failures or interruptions to the TiVo Service may
have a negative impact on our revenues, damage our reputation and decrease our
ability to attract new subscribers.
Our ability to provide uninterrupted service and high quality customer
support depends on the efficient and uninterrupted operation of our computer and
communications systems. Our computer hardware and other operating systems for
the TiVo Service are vulnerable to damage or interruption from earthquakes,
floods, fires, power loss, telecommunication failures and similar events. They
are also subject to break-ins, sabotage, intentional acts of vandalism and
similar misconduct. These types of interruptions in the TiVo Service may reduce
our revenues and profits. Our business also will be harmed if consumers believe
our service is unreliable. In addition to placing increased burdens on our
engineering staff, service outages will create a flood of customer questions and
complaints that must be responded to by our customer support personnel. Any
frequent or persistent system failures could irreparably damage our reputation
and brand.
We have detected and may continue to detect errors and product defects.
These problems can affect system uptime, result in significant warranty and
repair problems, which could cause customer service and customer relations
problems. Correcting errors in our software requires significant time and
resources, which could delay product releases and affect market acceptance of
the TiVo Service. Any delivery by us of products or upgrades with undetected
material product defects or software errors could harm our credibility and
market acceptance of the personal video recorders and the TiVo Service.
Intellectual property claims against us can be costly and could result in
the loss of significant rights.
From time to time, we may be subject to intellectual property
litigation, which could:
. be time-consuming and expensive;
. divert management's attention and resources away from our
business;
. cause delays in product delivery and new service introduction;
. cause the cancellation of new products or services; or
. require us to pay significant royalties or licensing fees.
The emerging enhanced-television industry is highly litigious,
particularly in the area of on-screen program guides. Additionally, many patents
covering interactive television technologies have been granted but have not been
commercialized. For example, we are aware of at least seven patents for pausing
live television. A number of companies in the enhanced-television industry earn
substantial profits from technology licensing, and the introduction of new
technologies such as ours is likely to provoke lawsuits from such companies. A
successful claim of infringement against us, our inability to obtain an
acceptable license from the holder of the patent or other right or our inability
to design around an asserted patent
20
<PAGE>
or other right could cause our manufacturing partners to cease manufacturing the
personal video recorder or us to cease providing our service, or both, which
would eliminate our ability to generate revenues.
On January 6, 2000 PhoneTel Communications, Inc. filed a lawsuit
against us in the U.S. District Court for the Northern District of Texas
alleging that the TiVo Service violates a patent held by PhoneTel. The lawsuit
seeks unspecified monetary damages as well as an injunction against our
operations. It also seeks attorneys' fees and costs. On April 17, 2000, this
suit was voluntarily dismissed by PhoneTel. If this suit is re-filed by
PhoneTel, TiVo believes that it has meritorious defenses against the claims and
intends to vigorously defend itself against such claims made by PhoneTel. In
the event the suit is re-filed, TiVo could be forced to incur material expenses
and in the event it were to lose such a suit its business would be harmed.
On January 18, 2000, StarSight Telecast Inc., a subsidiary of Gemstar
International Group Limited filed a lawsuit against us in the U.S. District
Court for the Northern District of California alleging that the TiVo Service
violates a patent held by StarSight. This lawsuit also seeks unspecified
monetary damages and an injunction against our operations. The suit also seeks
attorneys' fees and costs. To defend this lawsuit, we could be forced to incur
material expenses. Additionally, in the event that we were to lose this lawsuit
our business would be harmed.
In addition, we are aware that some media companies may attempt to form
organizations to develop standards and practices in the personal television
industry. These organizations or individual media companies may attempt to
require companies in the personal television industry to obtain copyright or
other licenses. A number of articles have appeared in the press regarding the
formation of a consortium of broadcast and cable television networks called the
Advanced Television Copyright Coalition. Some of those articles have indicated
that the coalition is prepared to support litigation and to explore legislative
solutions unless the members of the personal television industry agree to obtain
license agreements for use of the companies' programming. We have received
letters from Time Warner Inc. and Fox Television stating that these entities
believe our personal television service exploits copyrighted networks and
programs without the necessary licenses and business arrangements. Lawsuits or
other actions taken by these types of organizations or companies could make it
more difficult for us to introduce new services, delay widespread consumer
acceptance of our products and services, restrict our use of some television
content, increase our costs and adversely affect our business.
Our success depends on our ability to secure and protect patents,
trademarks and other proprietary rights.
Our success and ability to compete are substantially dependent upon our
internally developed technology. We rely on patent, trademark and copyright law,
trade secret protection and confidentiality or license agreements with our
employees, customers, partners and others to protect our proprietary rights.
However, the steps we take to protect our proprietary rights may be inadequate.
We have filed patent applications and provisional patent applications covering
substantially all of the technology used to deliver the TiVo Service and its
features and functionality. To date, none of these patents has been granted, and
we cannot assure you that any patents will ever be granted, that any issued
patents will protect our intellectual property or that third parties will not
challenge any issued patents. In addition, other parties may independently
develop similar or competing technologies designed around any patents that may
be issued to us. Our failure to secure and protect our proprietary rights could
have a material adverse effect on our business.
Laws or regulations that govern the television industry and the delivery of
programming could expose us to legal action if we fail to comply or could
require us to change our business.
Personal television and the delivery of television programming through
the TiVo Service and a personal video recorder represents a new category in the
television and home entertainment industries. As such, it is difficult to
predict what laws or regulations will govern our business. Changes in the
regulatory climate or the enforcement or interpretation of existing laws could
expose us to additional costs and expenses and could require changes to our
business. For example, copyright laws could be applied to restrict the capture
of television programming, which would adversely affect our business. It is
unknown whether existing laws and regulations will apply to the personal
television market. Therefore, it is difficult to anticipate the impact of
current or future laws and regulations on our business.
21
<PAGE>
The Federal Communications Commission has broad jurisdiction over the
telecommunications and cable industries. The majority of FCC regulations, while
not directly affecting us, do affect many of the strategic partners on whom we
substantially rely for the marketing and distribution of the personal video
recorder and the TiVo Service. As such, the indirect effect of these regulations
may adversely affect our business. In addition, the FCC could promulgate new
regulations, or interpret existing regulations in a manner that would cause us
to incur significant compliance costs or force us to alter the features or
functionality of the TiVo Service.
We need to safeguard the security and privacy of our subscribers'
confidential data, and any inability to do so may harm our reputation and brand
and expose us to legal action.
The personal video recorder collects and stores viewer preferences and
other data that many of our subscribers consider confidential. Any compromise or
breach of the encryption and other security measures that we use to protect this
data could harm our reputation and expose us to potential liability. Advances in
computer capabilities, new discoveries in the field of cryptography, or other
events or developments could compromise or breach the systems we use to protect
our subscribers' confidential information. We may be required to make
significant expenditures to protect against security breaches or to remedy
problems caused by any breaches.
Uncertainty in the marketplace regarding the use of data from subscribers
could reduce demand for the TiVo Service and result in increased expenses.
Consumers may be concerned about the use of personal information
gathered by the TiVo Service and personal video recorder. Under our current
policy, we do not access this data or release it to third parties. Privacy
concerns, however, could create uncertainty in the marketplace for personal
television and our products and services. Changes in our privacy policy could
reduce demand for the TiVo Service, increase the cost of doing business as a
result of litigation costs or increased service delivery costs, or otherwise
harm our reputation and business.
We would lose revenues and incur significant costs if our systems or those
of our key partners or suppliers are not year 2000 compliant.
Many computer programs have been written using two digits rather than
four to define the applicable year. This posed a problem at the end of the
century because these computer programs do not properly recognize the year.
Although there was no interruption of our systems or other problems related to
Year 2000 issues at the turn of the year, there may still be Year 2000 related
problems during the year caused by systems that have not yet been triggered by
the Year 2000 date. This could result in major system failures or
miscalculations that would disrupt our business.
We completed our year 2000 assessment in September 1999 and completed
interface testing and remediation in December 1999. We are not aware of any year
2000 issues, at this time, that would have a material effect on our business.
Our assessment, however, may not have identified material non-compliance issues
with the TiVo Service or the personal video recorder, our information technology
systems or the systems of our partners or suppliers. If present, we may not be
able to successfully resolve these issues, or it may be costly to do so. In
addition, we cannot assure you that governmental agencies, utility companies,
third-party service providers and others outside of our control will be year
2000 compliant. Such entities' failure to be year 2000 compliant throughout the
year 2000 could result in a systemic failure beyond our control. For example, a
prolonged telecommunications or electrical failure, due to equipment being shut
down if maintenance is not performed by a specific date during the year 2000,
could prevent us from delivering upgrades and regular downloads to the personal
video recorders that enable the TiVo Service and could adversely impact the
functionality of the personal video recorder. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000 Issue."
In the future, our revenues and operating results may fluctuate
significantly, which may adversely affect the market price of our common stock.
22
<PAGE>
We expect our revenues and operating results to fluctuate significantly
due to a number of factors, many of which are outside of our control. Therefore,
you should not rely on period-to-period comparisons of results of operations as
an indication of our future performance. It is possible that in some future
periods our operating results may fall below the expectations of market analysts
and investors. In this event, the market price of our common stock would likely
fall.
Factors that may affect our quarterly operating results include:
. demand for personal video recorders and the TiVo Service;
. the timing and introduction of new services and features on the
TiVo Service;
. seasonality and other consumer and advertising trends;
. changes in revenue sharing arrangements with our strategic
partners;
. entering into new or terminating existing strategic
partnerships;
. changes in the subsidy payments we make to certain strategic
partners;
. changes in our pricing policies, the pricing policies of our
competitors and general pricing trends in the consumer
electronics market;
. loss of subscribers to the TiVo Service; and
. general economic conditions.
Because our expenses precede associated revenues, unanticipated
shortfalls in revenue could adversely affect our results of operations for any
given period and cause the market price of our common stock to fall.
Seasonal trends may cause our quarterly operating results to fluctuate and
our inability to forecast these trends may adversely affect the market price of
our common stock.
Consumer electronic product sales have traditionally been much higher
during the holiday shopping season than during other times of the year. Although
predicting consumer demand for our products is very difficult, we believe that
sales of personal video recorders and new subscriptions to the TiVo Service will
be disproportionately high during the holiday shopping season when compared to
other times of the year. If we are unable to accurately forecast and respond to
consumer demand for our products, our reputation and brand will suffer and the
market price of our common stock would likely fall.
We expect that a portion of our future revenues will come from targeted
commercials and other forms of television advertising enabled by the TiVo
Service. Expenditures by advertisers tend to be seasonal and cyclical,
reflecting overall economic conditions as well as budgeting and buying patterns.
A decline in the economic prospects of advertisers or the economy in general
could alter current or prospective advertisers' spending priorities or increase
the time it takes to close a sale with our advertisers, which could cause our
revenues from advertisements to decline significantly in any given period.
If we are unable to raise additional capital on acceptable terms, our
ability to effectively manage growth and build a strong brand could be harmed.
We expect that our existing capital resources will be sufficient to meet
our cash requirements through at least the next 12 months. However, as we
continue to grow our business, we may need to raise additional capital, which
may not be available on acceptable terms. If we cannot raise necessary
additional capital on acceptable terms, we may not be able to develop or enhance
our products and services, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements.
23
<PAGE>
If additional capital is raised through the issuance of equity
securities, the percentage ownership of our existing stockholders will decline,
stockholders may experience dilution in net book value per share, or these
equity securities may have rights, preferences or privileges senior to those of
the holders of our common stock. Any debt financing, if available, may involve
covenants limiting, or restricting our operations or future opportunities.
We have agreed to subsidize the cost of manufacturing personal video
recorders, which may adversely affect our operating results and ability to
achieve profitability.
We have agreements with our consumer electronic manufacturing partners
to manufacture the personal video recorder that enables the TiVo Service. We
have agreed to pay our manufacturing partners a per-unit subsidy for each
personal video recorder that they manufacture and sell. A portion of the subsidy
amount is paid when the personal video recorder is shipped. The remaining
portion is due when the subscriber activates the TiVo Service. The amount of the
payments can vary depending upon the manufacturing costs and selling prices. In
addition, in the event our manufacturing partners are unable to manufacture the
personal video recorders at the costs currently estimated or if selling prices
are less than anticipated, we may owe additional amounts to them, which could
adversely affect our operating results. We are obligated to pay a portion of the
subsidy when the personal video recorder is shipped, and we will not receive any
revenues related to the unit until the unit is sold and the purchaser activates
the TiVo Service. We may make additional subsidy payments in the future to
consumer electronic and other manufacturers in an effort to maintain a
commercially viable retail price for the personal video recorders and other
devices that enable the TiVo Service.
The lifetime subscriptions to the TiVo Service that we currently offer
commit us to providing services for an indefinite period. The revenue we
generate from these subscriptions may be insufficient to cover future costs.
We currently offer lifetime subscriptions that commit us to provide
service for as long as the subscription to the TiVo Service is active for the
personal video recorder. We receive the lifetime subscription fee for the TiVo
Service in advance and amortize it as subscription revenue over four years,
which is our estimate of the service life of the personal video recorder. If
these lifetime subscribers use the personal video recorder for longer than
anticipated, we will incur costs without a corresponding revenue stream and
therefore will be required to fund ongoing costs of service from other sources.
If we lose key management personnel, we may not be able to successfully
operate our business.
Our future performance will be substantially dependent on the continued
services of our senior management and other key personnel. The loss of any
members of our executive management team and our inability to hire additional
executive management could harm our business and results of operations. In
addition, we do not have employment agreements with, or key man insurance
policies for, any of our key personnel.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Our exposure to market risk for changes in interest rates relates
primarily to our investment portfolio. We do not use derivative financial
instruments in our investment portfolio and conduct all transactions in U.S.
dollars. Our investment portfolio only includes highly liquid instruments with
original maturities of less than one year.
We are subject to fluctuating interest rates that may impact, adversely
or otherwise, our results of operations or cash flows for our cash and cash
equivalents and our short-term investments.
Although payments under the operating lease for our facility are tied
to market indices, we are not exposed to material interest rate risk associated
with the operating lease. Our capital lease obligations are not subject to
changes in the interest rate and, therefore, are not exposed to interest rate
risk.
24
<PAGE>
PART II : Other Information
Item 1. Legal Proceedings
In January 2000, patent infringement suits were filed against TiVo by
StarSight Telecast, Inc. TiVo's legal counsel is currently researching the
patents, which were referenced in the complaints.
On January 6, 2000, a suit was filed against TiVo by PhoneTel
Communications, Inc. ("PhoneTel") in the U.S. District Court for the Northern
District of Texas alleging willful and deliberate violation of a patent held by
PhoneTel. The suit sought unspecified monetary damages as well as an injunction
against TiVo's operations. The suit also sought attorneys' fees and costs. On
April 17, 2000, this suit was voluntarily dismissed by PhoneTel. While the suit
could be re-filed by PhoneTel, TiVo believes that it has meritorious defenses
against the claims and intends to vigorously defend itself against such claims
made by PhoneTel. In the event the suit is re-filed, TiVo could be forced to
incur material expenses and in the event it were to lose such a suit its
business would be harmed.
Item 2. Changes in Securities and Use of Proceeds
Since July 1, 1999, TiVo has issued and sold unregistered securities as
follows:
(a) Between July 1, 1999 and September 30, 1999, an aggregate of
378,970 shares of common stock were issued to employees upon
exercise of options with exercise prices ranging from $0.13 to
$10.50. The consideration received for such shares was $854,000.
(b) In July 1999, TiVo sold 3,121,994 shares of its Series I
Preferred Stock at $10.41 per share to eight investors for net
proceeds of approximately $31.5 million.
(c) In July 1999, TiVo issued a warrant to purchase up to an
aggregate of 192,123 shares of Series I Preferred Stock at an
exercise price of $10.41 per share to an investor.
(d) In August and September 1999, TiVo sold 3,123,789 shares of its
Series J Preferred Stock at $10.41 per share to two investors for
net proceeds of approximately $31.7 million.
All sales of common stock made pursuant to the exercise of stock
options granted under the Amended and Restated 1997 Equity Incentive Plan and
1999 Equity Incentive Plan to TiVo's officers, directors, employees and
consultants were made in reliance on Rule 701 under the Securities Act of 1933,
as amended ("the Securities Act") or on Section 4(2) of the Securities Act. All
other sales were made in reliance on Section 4(2) of the Securities Act and/or
Regulation D promulgated under the Securities Act. These sales were made without
general solicitation or advertising. Each purchaser was a sophisticated investor
with access to all relevant information necessary to evaluate the investment and
represented to TiVo that the shares were being acquired for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the securities.
TiVo's Registration Statement on Form S-1 (Registration No. 333-83515)
under the Securities Act of 1933, as amended, for the initial public offering
became effective on September 29, 1999. In the offering, we sold an aggregate of
6,166,875 shares of our common stock for an initial price of $16.00 per share,
including 666,875 shares pursuant to the exercise of the underwriters'
over-allotment option. The net proceeds from the offering were approximately
$90.5 million. The managing underwriters were Credit Suisse First Boston, Allen
& Company Incorporated, BancBoston Robertson Stephens and Thomas Weisel Partners
LLC. The aggregate underwriting fees were approximately $6.9 million. Upon the
closing of the initial public offering in October 1999, all outstanding shares
of our preferred stock were automatically converted, on a one-for-one basis,
into shares of common stock. All warrants to purchase common and preferred stock
outstanding immediately prior to the closing of the initial public offering,
were simultaneously exercised and converted into
25
<PAGE>
shares of common stock. Following the closing of the initial public offering,
TiVo filed an amendment to its Amended and Restated Certificate of Incorporation
with the Delaware Secretary of State that authorizes two million (2,000,000)
shares of undesignated preferred stock. For additional information about our
capital stock, please refer to "Description of Capital Stock" in TiVo's
Registration Statement (SEC File No. 333-83515) filed with the Securities and
Exchange Commission.
TiVo expects to use the net offering proceeds from its initial public
offering for working capital and general corporate purposes, including
advertising and promotion of the TiVo Service and the TiVo brand, product
development, expansion of its sales, marketing and service capabilities and
facilities. The use of proceeds does not represent a material change in the use
of proceeds as described in TiVo's prospectus dated September 29, 1999
comprising part of TiVo's Registration Statement on Form S-1, as amended, filed
with the Securities and Exchange Commission (SEC File No. 333-83515). TiVo has
not declared or paid any cash dividends on its capital stock and does not
anticipate paying any cash dividends in the foreseeable future.
Item 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
26
<PAGE>
Item 6. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.2* Amended and Restated Certificate of Incorporation.
3.4* Amended and Restated Bylaws.
4.3* Ninth Amended and Restated Investor Rights Agreement between
TiVo and certain investors, dated as of August 6, 1999.
10.1* Form of Indemnification Agreement between TiVo and its
officers and directors.
10.2* TiVo's 1999 Equity Incentive Plan and related documents.
10.3* TiVo's Amended and Restated 1997 Equity Incentive Plan and
related documents.
10.4* TiVo's 1999 Employee Stock Purchase Plan and related
documents.
10.5**** TiVo's 1999 Non-Employee Directors' Stock Option Plan and
related documents.
10.6*+ Hard Disk Drive Supply Agreement between Quantum Corporation
and TiVo, dated November 6, 1998.
10.7*+ Master Agreement between Philips Business Electronics B.V.
and TiVo, dated March 31, 1999.
10.8*+ Marketing Agreement between DIRECTV, Inc. and TiVo, dated
April 13, 1999.
10.9*+ Agreement between NBC Multimedia, Inc. and TiVo, dated April
16, 1999.
10.10* Sublease Agreement between Verity, Inc. and TiVo, dated
February 23, 1998.
10.11* Amendment to Sublease Agreement between Verity, Inc. and
TiVo, dated November 1998.
10.12* Second Amendment to Sublease Agreement between Verity, Inc.
and TiVo, dated March 1999.
10.13* Consent of Landlord to Sublease between Verity, Inc. and
TiVo, dated February 23, 1998.
10.15* Master Lease Agreement between Comdisco, Inc. and TiVo,
dated February 12, 1999.
10.16*+ Warrant Purchase and Equity Rights Agreement between Quantum
Corporation and TiVo, dated November 6, 1998 and related
documents.
10.17* Warrant to Purchase Shares of Series A Preferred Stock
issued to Randy Komisar dated March 18, 1998.
10.18* Warrant Agreement between Comdisco, Inc. and TiVo, dated
February 12, 1999.
10.19* Secured Convertible Debenture Purchase Agreement between
TiVo and certain of its investors, dated April 8, 1999, and
related documents.
10.20* First Amendment to Hard Disk Supply Agreement between
Quantum and TiVo, dated June 25, 1999.
10.21* TiVo's 401(k) Plan, effective December 1, 1997.
10.22*+ Tribune Media Services Television Listing Agreement between
Tribune Media Services and TiVo, dated June 1, 1998.
10.23*+ Amendment to the Data License Agreement between Teleworld
Inc., and Tribune Media Services, Inc. between Tribune Media
Services and TiVo, dated November 10, 1998.
10.24** Lease Agreement between WIX/NSJ Real Estate Limited
Partnership and TiVo, dated October 6, 1999.
99.5*** Form of Stock Option Grant used in connection with an option
granted outside of TiVo's stock option plans and related
documents
27.1++ Financial Data Schedule.
27
<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 file March 30, 2000.
+ Confidential treatment granted as to portions of this exhibit.
++ Submitted as an exhibit only in the electronic format of this
Quarterly Report on Form 10-Q submitted to the Securities and Exchange
Commission.
Reports on Form 8-K
TiVo did not file any reports on Form 8-K during the quarter ended
March 31, 2000.
Trademark Acknowledgments
"Active Preview", "Can't Miss TV", "DIRECTIVO", Instant Replay logo,
"Ipreview", Jump logo, "Life's too short for bad TV", "Network Showcase",
"Personal TV", "Personal Video Recorder", "Primetime Anytime", "Season Pass",
"See it, want it, get it", "The New Face of Television", "The way TV is meant to
be", "Thumbs Down" (logo and text), "Thumbs Up" (logo and text), "TiVo Central",
"TiVo" (logo, name and character), "TiVolution", "What you want, when you want
it", and "You run the shows" are trademarks of TiVo Inc. All other trademarks or
trade names appearing in this report are the property of their respective
owners.
28
<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: May 15, 2000 By: /s/ Michael Ramsay
_____________________
Michael Ramsay
Chief Executive Officer and Chairman
of the Board of Directors
(Principal Executive Officer)
Date: May 15, 2000 By: /s/ David H. Courtney
_____________________
David H. Courtney
Chief Financial Officer and Sr. Vice
President of Finance and
Administration (Principal Financial
and Accounting Officer)
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 122,035
<SECURITIES> 0
<RECEIVABLES> 2,518
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 130,266
<PP&E> 8,820
<DEPRECIATION> 1,202,000
<TOTAL-ASSETS> 139,086
<CURRENT-LIABILITIES> 25,159
<BONDS> 1,205
0
0
<COMMON> 38
<OTHER-SE> 213,620
<TOTAL-LIABILITY-AND-EQUITY> 139,086
<SALES> 424
<TOTAL-REVENUES> 424
<CGS> 0
<TOTAL-COSTS> 4,168
<OTHER-EXPENSES> 22,065
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70
<INCOME-PRETAX> (24,055)
<INCOME-TAX> 0
<INCOME-CONTINUING> (24,055)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,055)
<EPS-BASIC> (0.68)
<EPS-DILUTED> (0.68)
</TABLE>
